Saudi British Bank (SABB): Annual Report 2020

Transcription

1. POSITIONING FOR GROWTH ANNUAL REPORT 2020
2. S A B B | A N N U A L R E P O R T 2020
3. The Custodian of the Two Holy Mosques King Salman Bin Abdulaziz Al Saud His Royal Highness Crown Prince Mohammad Bin Salman Bin Abdulaziz Al Saud P O S IT I O N I N G F O R G ROW T H 3
4. In a year when the world faced unprecedented challenges , we maintained our progress in the integration of SABB and Alawwal Bank. With the merger of our institutions approaching completion, and the conclusion of the Strategy 2025 we have positioned ourselves for growth. Ms. Lubna S. Olayan Board Chair S A B B | A N N U A L R E P O R T 2020
5. A JOINT HISTORY OF OVER 160 YEARS 1926 1928 1939 1977 Netherlands Trading Society opens in Jeddah Assists the Kingdom in issuing its first independent currency Facilitates payment for first oil export Saudi Hollandi Bank established as a JV bank 2017 2016 2004 2003 Launches first digital branch IBDA Rebrands to Alawwal Bank Best Digital Bank in Saudi Arabia (Banker Middle East) Bank of the Year in KSA (The Banker) Issues first subordinated bond in the Kingdom Issues first smart credit card in the Kingdom 2018 2019 2018 Best Trade Finance Provider (Euromoney) Merger Most Innovative Bank in KSA (Banker Middle East) Best Treasury and Cash Management Provider (Global Finance) SABB 1991 2002 2005 2016 Issuance of SABB’s first credit card First Saudi bank to launch a Home Finance Programme First Saudi bank to issue international bonds Best Bank in Saudi Arabia (Asiamoney) 1990 1978 1950 SABB’s first ATM launched Royal Decree establishing SABB SABB’s origins begin at a branch of BBME in Alkhobar P O S IT I O N I N G F O R G ROW T H 5
6. AT A GLANCE TOTAL ASSETS (SAR mln) NET INCOME AFTER ZAKAT AND INCOME TAX 1 (SAR mln) 2020 276,452 2020 2,790 2019 265,987 2019 2,736 420 2018 174,677 2018 2,698 878 2017 187,615 99,870 2017 3,575 950 2016 186,055 104,990 2016 3,521 945 SABB 82,028 Alawwal Bank SABB Alawwal Bank LOANS AND ADVANCES, NET (SAR mln) CUSTOMER DEPOSITS (SAR mln) 2020 153,243 2020 189,110 2019 152,075 2019 192,167 2018 110,326 2018 130,507 2017 117,006 2017 140,240 2016 120,965 2016 140,640 SABB 57,767 63,639 72,743 Alawwal Bank SABB 64,573 78,275 85,359 Alawwal Bank SHAREHOLDERS’ EQUITY (SAR mln) DIVIDEND PER SHARE (SAR) 2020 50,707 2020 2019 55,994 2019 1.20 2018 32,467 2018 1.96 2017 33,345 2017 1.42 2016 31,279 2016 0.70 SABB Excludes goodwill impairment and associated tax impact 1 S A B B | A N N U A L R E P O R T 2020 - SABB
7. CUSTOMER LENDING BY BUSINESS 24 % SAR 160.4 bln GROSS LOANS RBWM VS. CIB Retail Banking and Wealth Management 76% Corporate and Institutional Banking 9.2% SAR (2.01) Underlying return on tangible equity EPS 18.96% 21.82% CET1 ratio Total Capital Adequacy ratio 1.7 mln retail customers 6% 8.8k corporate customers Mortgage market share 23% 10% Trade market share FX market share Top 3 8% corporate bank by revenue POS market share 2 Excludes Micro, Small and Medium-sized Enterprises (‘MSME’) 2 P O S IT I O N I N G F O R G ROW T H 7
8. MORE AWARDS FROM 2020 Global Finance Best Foreign Exchange Provider Best Private Bank Best Trade Finance Provider Best Treasury and Cash Management Provider Best Bank in KSA Best Consumer Digital Bank Best Mobile Banking App Safest Bank in KSA Euromoney No 1 Bank in KSA for Mega High Net Worth Clients No 1 Bank in KSA for Philanthropic Advice No .1 Rank for Market Leader No. 1 Rank for Best Service Market Leader Best Service Saudi Trade Finance Best Trade Finance Bank Best Supply Chain Finance Bank GTR Leader in Trade MENA Product of the Year MENA – SABB Waafer Account Best Domestic Bank in KSA Best Bank for Customer Experience in KSA S A B B | A N N U A L R E P O R T 2020
9. 12 TABLE OF CONTENTS At a glance About SABB 06 10 BANK PROFILE Business model Year in review Our market SABB and Vision 2030 Investment case 14 16 18 20 22 STRATEGIC REPORT 24 Board Chair ’s statement Strategy & KPIs Managing Director’s message Positioning for growth Customer experience and digital banking Environmental, Social and Governance focus Chief Financial Officer’s review Operating review Capital overview Supporting Micro, Small and Medium-sized Enterprises 26 28 30 32 34 36 42 44 58 60 GOVERNANCE 62 The Board of Directors Biographies of Board members Biographies of Executive Management Changes to the Board during 2020 Board sub-committees Risk governance Internal controls Board assurance SABB General meetings Directors’ and Senior Executives’ interests Remuneration Legal Entity structure Appointment of external auditors Debt securities in issue and other borrowings Statutory payments Penalties 64 66 70 74 75 82 87 90 93 94 95 99 100 101 102 103 FINANCIAL STATEMENTS 104 Independent auditors’ report Consolidated statement of financial position Consolidated statement of income Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements P O S IT I O N I N G F O R G ROW T H 106 116 117 118 119 120 123 9
10. ABOUT SABB Our vision To bring a world of financial opportunities to an ambitious Kingdom We enjoy a unique position as the leading international bank in the Kingdom of Saudi Arabia . We give our customers the highest quality service and an unmatchable breadth and depth of experience and know-how from local and international best practice, delivered through digital and personalised service driven by customer preference. Our strategic partnership with HSBC Group, one of the world’s leading financial institutions, positions us as a preferred banking partner. As a leader in key segments of the financial sector, we will be where the growth is in Saudi Arabia. Our staff will see SABB as the best place to work in Saudi Arabia, offering the best training and development, unparalleled access to international best practices and the most progressive working standards in tune with the evolution of the Kingdom. Our business Saudi British Bank (‘SABB’ or the ‘Bank’) was established in 1978 as a Saudi Joint Stock Company. Today the Bank has in issue SAR 38.1 billion of share capital and share premium, equating to 2,055 million shares with a nominal value of SAR 10. SABB provides a comprehensive range of banking services to retail, corporate and institutional customers throughout the Kingdom. Since its foundation, SABB has maintained its strategic partnership with HSBC Group, one of the world’s largest and most geographically diverse financial services corporations. The partnership has provided SABB with a vital competitive advantage, affording customers access to the best international services available in the Saudi market. HSBC Group currently retains a 31% stake in SABB. S A B B | A N N U A L R E P O R T 2020 Our merger with Alawwal Bank The merger between SABB and Alawwal Bank, completed in June 2019, brought together two of Saudi Arabia’s best established and most trusted financial institutions, and was a milestone moment for the Saudi capital market. The merger was a compelling opportunity to create an institution with enhanced scale and balance sheet strength to support and play an instrumental role in the Vision 2030 economic transformation programme, supporting the financing of infrastructure projects, the development of the capital market, the prioritisation of public services and assets, and the creation and build out of new sectors of the economy. The merged Bank has cemented its position as a top-tier Saudi financial institution, with total revenue in 2020 amounting to SAR 8.9 billion, more than 1.7 million retail customers and over 8.8k corporate and institutional customers. The combination of the two banks has created a substantial retail and wealth management business, with increased resource to innovate and connect with a young and tech-savvy customer base. SABB continues to be one of the leading corporate banks in the Kingdom and the bank of choice for international customers. SABB has SAR 276.5 billion of total assets, SAR 160.4 billion of gross customer loans and SAR 189.1 billion of customer deposits. As at 31 December 2020, the market capitalisation of the Bank was SAR 50.8 billion.
11. P O S IT I O N I N G F O R G ROW T H 11
12. BANK PROFILE 14 Business model 16 Year in review 18 Our market 20 SABB and Vision 2030 22 Investment case S A B B | A N N U A L R E P O R T 2020
13. P O S IT I O N I N G F O R G ROW T H 13
14. BUSINESS MODEL Following the SABB-Alawwal merger , the business model of our unified institution has been designed to ensure the Bank delivers value to customers, employees and shareholders, while delivering on our strategic priorities for supporting Saudi Arabia’s Vision 2030 development programme. The business model serves to build and deepen sustainable relationships between the Bank and its stakeholders, taking advantage of the opportunities that have been created by the union of the two institutions. Creating stakeholder value Scale ST RO N • Broader customer base • Larger market position • Size to support growth GL OC Diversity AL FR • International network • Conventional and Islamic product suite across retail1, corporate and treasury segments • Access for local and global customers AN CH Digital IS • Market leading digital banking capabilities E Resource • First-class human capital and development • People drive innovation and customer service LIS ING SYNE RGI ES STAKEHOLDER VALUE CREATION REA • Creation of a stronger franchise with significant potential for material synergies • EPS accretive for both SABB and Alawwal Bank shareholders • Capacity and resource to directly support the social and economic agenda of Saudi Vision 2030 Cost • Expected annual run-rate cost synergies of 15-20% of combined cost base Revenue • Revenue synergies of 2-3% from crossselling, deeper customer penetration, diversified funding Integration • Integration cost in range of 1.5-1.8x annual run-rate cost synergies Delivery • Synergies to be fully realised 3 years post-integration completion R T GLO B S AL U O PP HSBC Group • Continued support of HSBC Group through Technical Services Agreement that runs through 2027 • Provides unique global connectivity and customer access / value-added not offered by any bank in Saudi Arabia • Continued right to use HSBC’s well-known hexagon logo SABB offers only Shariah-compliant products to its retail customers. 1 S A B B | A N N U A L R E P O R T 2020
15. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE CASE STUDY Client Founded in 1977, Almarai Company (‘Almarai’ or the ‘Company’) is the world’s largest vertically integrated dairy company and the region’s largest food and beverage manufacturing and distribution company. Headquartered in the Kingdom of Saudi Arabia, Almarai is ranked as the number one FMCG brand in the MENA region and a market leader in all its categories across the GCC. In addition to its high quality dairy products, the Company has diversified its product portfolio to include juices, bakery, poultry and others. Almarai also has successful joint ventures with Chipita and PepsiCo. With more than 40 years of sustainable growth, Almarai continues to provide nutritious and healthy products to consumers of all ages with growth stemming from its bedrock principle, ‘Quality you can trust’. The challenge Almarai ran a decentralised treasury operation across multiple markets in the MENA region, using multiple banking relationships, currencies and numerous payable and receivable accounts. This resulted in higher operating costs and reduced ability to optimally manage working capital across these markets. How SABB collaborated Almarai embarked on a major treasury transformation project where SABB provided a strategic advisory role in collaboration with the HSBC Group. The Company looked to revamp their entire treasury operations from a decentralised to a more centralised environment, leveraging the significant investment Almarai had made over the years in deploying their market-leading resource planning, treasury and supply chain management systems. Working closely with Almarai’s treasury team, SABB shared best practices from established multinational clients across the consumer brands and retail sector, taking a holistic view of Almarai’s business across the region. In conjunction with Almarai, we devised a range of solutions using our Global Liquidity and Cash Management (GLCM) product suite that best served to further optimise their treasury and cash management efficiency goals in the region. Almarai settled on a Shared Service Centre approach using a range of digital tools that improved straight-through processing (STP) of payments, enhanced back-office processes to significantly reduce the number of accounts, and improved efficiency and reconciliation. On the payments front, based on the variety of digital payment methods on offer, Almarai rolled out a cheque outsourcing solution in the region, reduced cash as they expanded the handheld point-of-sale devices to wider teams for improved collections efficiency and also scaled out the payroll card programme. The GLCM suite of digital collections and payments delivered improved payments, collections, liquidity management and reporting, thereby further improving Almarai’s overall treasury management and working capital efficiency. The successes 1. Significant reduction in the number of accounts, simplified reconciliation activity, and bank account / relationship management. 2. Consolidated accounts into a single bank agnostic delivery platform. 3. Improved liquidity management and visibility across the region for better forecasting. 4. Standardisation of processes and functions through the Shared Service Centre, reducing costs and minimising the risk of manual errors. 5. Improved digitisation of receivables and payables reducing float across key regional sites. 6. Reduction in cash transactions on the back of expanded handheld point-of-sale device network across collection team. 7. Received ‘Best in class Treasury Solution in MENA, 2020’ award from Adam Smith Treasury Management awards. P O S IT I O N I N G F O R G ROW T H 15
16. YEAR IN REVIEW Business as usual SABB was recognised by Euromoney as ‘Best Service Trade Finance’ in Saudi Arabia and as ‘Market Leader Trade Finance’ for 2020 Ministry of Labor and Social Development honoured SABB for its contributions to support orphans in the Kingdom JAN FEB Integration Integration Completed HR system integration Consolidated cash centres for the Eastern province Business as usual KAUST and SABB launched the fourth TAQADAM Accelerator Programme for Young Entrepreneurs MAR APR Integration Finalised the endstate organisation structure Commenced cultural evolution workshops Responding to COVID-19 S A B B | A N N U A L R E P O R T 2020
17. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Business as usual SABB issued SAR 5 billion Tier II Sukuk - the first such transaction by the merged bank in the debt capital market, the joint largest Tier II issuance by a Saudi bank in history, and the largest local issuance by a bank since the introduction of the Kingdom’s national growth agenda under Vision 2030 Business as usual Business as usual SABB joined the Securities Clearing Center Company (‘Muqassa’) as a General Clearing Member SABB completed first phase with ‘Wethaq’ to automate bank guarantee services MAY JUNE SABB’s revolutionary ‘Waafer’ savings account was voted product of the year by consumers JUL AUG Integration Celebrated the first anniversary of the legal merger The Bank completed the co-location of SABB and Alawwal Bank staff in the Eastern province Business as usual King Abdullah Economic City (KAEC) announced the signing of a cooperation agreement with SABB, which aims to provide various ShariahCompliant financing solutions from SABB for clients who wish to benefit from the housing offers and purchase ready-made housing units in the residential neighbourhoods of the Economic City, by the terms and financing criteria approved by the Bank DEC Business as usual Business as usual SABB signed supply chain financing agreement with the Ministry of Finance SABB participated as a platinum sponsor at the 8th Annual Saudi Trade Finance Summit NOV SABB continued its efforts in supporting the elderly by providing medical care in the Kingdom Business as usual KAUST and SABB doubled grant funding for each start-up to SAR 150,000 and doubled the number of start-ups accepted to the TAQADAM programme SABB won ‘Best Bank App in the Kingdom’ and ‘Best Bank in Saudi Arabia for 2020’ awards from Global Finance magazine OCT SEP Integration Integration Integration Integration SABB completed the successful migration of 2,300 corporate customers delivered through cross-business, crossfunction and cross-product teams SABB launched its ‘Merger hub’ to support Alawwal Bank customers with the transition to the merged bank. Completed data centre expansion The Bank completed the colocation of SABB and Alawwal Bank staff in the Central, and Western provinces Process began to combine SABB and Alawwal Bank ATMs into a larger network for all customers SABB commenced the semi-automated migration of Corporate customers Relaunched virtual cultural evolution workshops Completed the migration of static Corporate customer data As a result of the COVID-19 pandemic, 2020 was a profoundly challenging year for the Kingdom, its banking sector and economy. We experienced periods of lockdown, global benchmark interest rates fell, and the price of oil turned negative as the global economic outlook worsened. SABB’s response was direct and swift, to maintain critical services and support stakeholders while keeping customers and staff safe. We implemented stringent health and safety policies in line with regulations set by the local authorities, and at the same time significantly upgraded stress testing activity to position the Bank to navigate worst-case-scenario conditions. Operational resilience was crucial, and our business continuity protocols proved their value throughout the crisis – particularly as staff transitioned to remote working. Together with the Ministry of Health and guidance from SAMA, we flexed our branch network to avoid unnecessary visits and reduce the risk of spreading the virus. We provided staff working in branches with the necessary protective equipment, and non-branch staff were provided with the tools to work from home where processes allowed. SABB regularly reviews its business continuity plans and continues to deliver operational excellence throughout this challenging time. P O S IT I O N I N G F O R G ROW T H 17
18. OUR MARKET Saudi Arabia : macro narrative Budget 2021: looking ahead COVID-19 and lower oil production levels and prices have heavily impacted the Saudi economy and the Kingdom’s fiscal position, despite its hard-hitting countermeasures. Medium-term recovery is dependent on global economic recovery and on the successful containment of the pandemic. The public debt trajectory is also expected to steepen due to medium-term fiscal deficits. The likelihood of successful diversification is complementary to a steady fiscal framework that is targeted towards the private sector. Nonoil sector growth is expected to decrease due to substantial capital spending cutbacks, the impact of social restriction measures, and household adjustments to the hike in VAT (from 5% to 15%). The Kingdom’s 2021 budget continues to support the implementation of the 2030 Vision Realisation Programmes, achieving sustainable economic growth with a focus on increasing non-oil GDP and enhancing the role of the private sector, stimulating investment in promising industries such as manufacturing, mining, financial services, IT, tourism, entertainment and sports. The gradual lifting of strict public health measures in the second half of the year allowed for an increase in economic activity. Another spike in new cases would likely lead to further implementation of containment measures, although some optimism is returning to the market in light of the rollout of approved vaccines. Oil prices have seen some improvement since April due mainly to the resurgence in global demand, while supply remains constrained through the OPEC+ agreement. The Saudi banking sector As highlighted in SAMA’s 2020 Financial Stability Report, it was foreseen that the pandemic would result in a negative impact on the Kingdom’s economy. This was mitigated by a range of protective measures taken by various Saudi authorities. Overall, Saudi Arabia’s macro financial position remained stable, supported by a resilient banking sector that demonstrated its durability and capacity to cope with economic shocks. Economic uncertainty remains across the Kingdom, and despite the lower for longer expected interest rate environment, the banking sector remains a well-capitalised sector. S A B B | A N N U A L R E P O R T 2020 Considering the negative impact of COVID-19 on global economic growth, public finances and oil prices, the Kingdom has helped lead efforts with OPEC+ countries towards restoring the stability of oil markets. It has also encouraged international coordination in the adoption of policies to support global economic growth and reduce negative effects of the crisis on developing countries. The budget deficit for 2021 is estimated to reach SAR 141 billion, or 4.9% of GDP, with revenues expected at SAR 849 billion before increasing to SAR 864 billion by 2022. Non-oil revenues are expected to improve in the medium-term, due to increased economic activity. Total expenditure in 2021 is expected to reach SAR 990 billion.
19. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Largest MENA economy: GDP1 World’s largest USD 793 billion Government debt to GDP ratio of 2 oil exporter c. 34% Tadawul market cap3 FX reserves4 Unemployment5 USD 2.4 trillion USD 445 billion 8.5% 2019 1 2020 estimate from MoF Pre-budget statement 2 31 Dec 2020 3 30 Nov 2020 4 30 Sep 2020 5 P O S IT I O N I N G F O R G ROW T H 19
20. SABB AND VISION 2030 SABB ’s strategic positioning and competitive strengths ensure that it will both contribute to and benefit from the national economic growth agenda that is embodied in the government’s Vision 2030 programme. The Vision is built on three themes: A VIBRANT SOCIETY A THRIVING ECONOMY AN AMBITIOUS NATION is vital to achieving the Vision and establishing a strong foundation for economic prosperity. The goal is to create a society in which every citizen enjoys a happy, fulfilling lifestyle complemented by a standard of living which provides a safe and secure environment for families, and access to world class healthcare and education provides opportunities for all by building an education system aligned with market needs to equip youth with the skills for the jobs of the future, creating economic opportunities for the entrepreneur and the small enterprise, as well as the large corporation applies efficiency and responsibility at all levels in order to deliver the Vision, including building an effective, transparent, accountable, enabling and high performing government Spotlight on: Financial Sector Development Programme The Financial Sector Development Programme aims to create a diversified and effective financial sector to support the development of the national economy, diversify its sources of income, and stimulate savings and investment. The Programme intends to achieve this ambition by enabling financial institutions to support private sector growth, ensuring the formation of an advanced capital market, and promoting and enabling financial planning, while maintaining the stability and solidity of the sector. Ensure the formation of an advanced capital market S A B B | A N N U A L R E P O R T 2020 Enable financial institutions to support private sector growth Promote and enable financial planning
21. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Key themes for SABB • Support development of new sectors (e.g. entertainment, tourism, technology) and development of major government projects. • Support the privatisation programme to transfer a significant portion of government assets to the private sector, to improve economic efficiency. • Develop key industries by localising manufacturing, developing adjacent oil and gas sectors, expanding mining, using renewable energy, and improving logistics infrastructure. • Expanding contribution of SMEs to the economy, with the expectation of growth in bank lending to the sector. • Increasing inflows of foreign direct investment and improving the flow of capital by advancing capital markets. • Increasing the rate of savings and savings options for Saudi citizens. • Improve the financial literacy of the population. • Significant growth in home ownership and related financing. • Build a digital economy moving to a cashless society, increasing FinTech presence and alternative banking opportunities. • A clear focus on labour participation to improve employment opportunities for local citizens, women, those with disabilities, and improve the readiness of youth to enter the workplace. P O S IT I O N I N G F O R G ROW T H 21
22. INVESTMENT CASE FIVE REASONS TO INVEST IN SABB : 1. Leading international bank in the Kingdom 2. Increased scale to support Vision 2030 growth aspirations Our institution has developed into the leading international bank in the Kingdom through a deep understanding of the needs of our customers and a bespoke product suite that delivers intrinsic value. Our unique partnership with HSBC Group enables us to bring international connectivity to our customer base and aligns our approach with global best practice. We are the ‘go-to’ bank for inbound and outbound multinational corporates and institutions operating into or from Saudi Arabia, and the number one bank in the Kingdom for trade. The Kingdom is navigating its path through undoubtedly its biggest economic transformation programme, bringing a wealth of opportunity to every family and enterprise domestically, but also playing to international opportunities. SABB, following its merger with Alawwal Bank, created a top tier banking institution. Through its robust balance sheet and market-leading suite of products, the Bank possesses the scale and capability to support such an ambitious programme. S A B B | A N N U A L R E P O R T 2020
23. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE 3. Financial strength Historically, we have delivered top tier financial performance from a strong balance sheet, robust funding and liquidity dynamics, and a solid capital position. Following the merger with Alawwal Bank, we have taken the necessary steps to protect our balance sheet and conservatively manage the provisioning of our portfolio. We are in a position of strength to meet the demands of our customers. 4. Positioned for growth Integration has been a key focus for the Bank in 2020, following the landmark merger in 2019 between SABB and Alawwal Bank. Integration continues at pace and extracting the synergies for the combined organisation remains on track. We are suitably positioned for growth and ready to begin the journey of ‘Strategy 2025’ – our ambitious growth plan – which we will provide further details on during 2021. 5. We are safe, sustainable and dependable A robust approach to corporate governance is a key strength for any organisation and SABB ensures it adopts best practices in this field to create value for all the Bank’s stakeholders. The Board sets the Bank’s strategy and risk appetite with the aim of achieving sustainable value and promoting a culture of openness and debate. Our Board brings a successful balance of international banking best practices, together with local, commercial and institutional insight and experience. Our business decisions are made in the interests of all concerned stakeholders and we will always act responsibly and in a sustainable manner. P O S IT I O N I N G F O R G ROW T H 23
24. STRATEGIC REPORT 26 Board Chair ’s statement 28 Strategy & KPIs 30 Managing Director’s message 32 Positioning for growth 34 Customer experience and digital banking 36 Environmental, Social and Governance focus 42 Chief Financial Officer’s review 44 Operating review 58 Capital overview 60 Supporting Micro, Small and Medium-sized Enterprises S A B B | A N N U A L R E P O R T 2020
25. P O S IT I O N I N G F O R G ROW T H 25
26. BOARD CHAIR ’S STATEMENT “ In 2020, we completed the integration of our Corporate & Institutional Banking and Treasury businesses. Our Retail & Wealth Management business will complete its customer integration, referred to as ‘Customer Day 1’, in the first quarter of 2021. Following Customer Day 1, we will be one bank, with one branch network, one IT system, one website and one shared culture. It is my pleasure to introduce the SABB Annual Report for the year ended 31 December 2020. It would be an understatement to say that 2020 was an eventful year, both regionally and globally. It was a truly extraordinary year that will certainly remain in our memories for some time to come. The COVID-19 pandemic has created, and continues to create, challenges and uncertainty for the Kingdom, the global economy and the banking sector. We experienced periods of lockdown and curfews, travel to and from the Kingdom was impacted, the price of oil turned negative for the first time ever, and we transitioned to operating remotely, an entirely new way of working. S A B B | A N N U A L R E P O R T 2020 I am proud of how our Bank dealt with the challenges and navigated the uncertainty, while continuing to pursue our 2020 priorities. Much of our effort focused on advancing our integration efforts in the midst of one of the most globally challenging crises and on supporting our staff, who had to adjust to working remotely while continuing to put our customers first, supporting and serving their needs. Our management and staff stayed focused and often sacrificed, brilliantly exploiting the investments in our technological know-how to shift much of our business to a digital platform seamlessly and efficiently. And the board and management completed the task of finalising our new strategic plan: ‘Strategy 2025’. As a result, SABB entered 2021 well positioned for the many opportunities that lie ahead as we anticipate emerging from the shadow of the pandemic over the course of the year. Positioning for growth In 2020, we completed the integration of our Corporate & Institutional Banking and Treasury businesses. Our Retail & Wealth Management business will complete its customer integration, referred to as ‘Customer Day 1’, in the first quarter of 2021.
27. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Following Customer Day 1, we will be one bank, with one branch network, one IT system, one website and one shared culture. As we transition to life as truly one bank, our Strategy 2025 provides a roadmap to deliver on our Vision of ‘bringing a world of financial opportunities to an ambitious Kingdom.’ We are especially eager to continue supporting the ambitious growth plans of the Kingdom’s Vision 2030 transformation plan. Our operating environment The onset of COVID-19 and the measures taken around the world to contain the virus led to a sharp fall in the global price of oil. As a result, GDP growth in the Kingdom decelerated. While showing remarkable leadership throughout its 2020 Presidency of the G20, culminating in a very successful first ever virtual G20 Summit, the Saudi government also implemented wideranging countermeasures to protect the economy and mitigate the negative impact of the COVID pandemic, with significant fiscal support for the private sector and monetary support for the financial sector. These measures have proven very effective by global standards. Although progress against Vision 2030 came under pressure in light of difficult macroeconomic conditions, its fundamental soundness was further evidenced by its close alignment with the G20’s core objectives of macroeconomic stability, sustainable development, empowerment of women, enhanced human capital and increased flow of trade and investment. Our country’s commitment to reform and growth clearly remains undimmed, and so does that of SABB. Excluding this impairment, net income before Zakat and income tax for 2020 was SAR 3.1 bln. While disappointing that we were required to take the impairment charge, it is worth noting that this was a one-off accounting event under unprecedented circumstances. It does not affect the Bank’s capital, liquidity, or funding; nor does it affect our strategic strengths and competitive advantages, our ability to lend to customers, or our customer service standards. In light of the reported loss for the period due to the impairment, the Board has not recommended a dividend for 2020. Sustainability In December, SABB published its first ever ‘Environmental, Social and Governance Focus’, which is available on our website, to highlight the importance of sustainability to our Bank and our accomplishments to date in that area. ESG will be an important focus of our Strategy 2025, and we look forward to reporting more on it in the future. Board governance Following best governance practices, our Board brings together considerable local and international expertise and included four independent members at the end of 2020. Financial performance In a year that necessitated many more meetings and discussions than in previous years, I am especially grateful for the diligence and professionalism of my board colleagues. They each devoted much time and effort to ensuring we met regularly to discuss key matters, such as integration, strategy, risk management, culture, talent, and customer experience, while dealing with the challenges and demands of the unprecedented pandemic crisis we faced in 2020. Against the backdrop of a challenging year, SABB once again has proved resilient. However, headline financial results for the year were disappointing, with a loss before Zakat and income tax of SAR 4.3 bln, which included our non-cash impairment of goodwill of SAR 7.4 bln during the second quarter. I would like to thank Maria Ramos who joined our new Board at its inception in June 2019, and who stepped down as a member of our Board at year end. In addition to her Board position, Maria chaired our Nomination and Remuneration Committee. As we grappled with integration and other issues in the midst of the pandemic’s challenges, she provided the Board with wise counsel and insightful advice. Some additional notes of gratitude I would like to express my sincere gratitude and appreciation to our customers, shareholders, management, staff, and our longstanding global partner, HSBC Group, for their continued support. We are equally grateful to Saudi regulators and government agencies for the support they have shown during these difficult times, and to the government of Saudi Arabia for implementing measures that prioritise our safety and mitigate the headwinds faced by our economy. Finally, we announced in February that, after leading SABB for 11 years as Managing Director, David Dew has decided to retire, effective from May 2021. We are pleased, though, that David has agreed to remain as an advisor to the Board until May of 2022. The Board has approved the appointment of Tony Cripps as David’s successor; Tony has enjoyed a long and successful career with HSBC, joining us from his most recent position as CEO of HSBC, Singapore. I would like to pay tribute to David’s invaluable contributions to SABB’s growth and success over his long career and to welcome and congratulate Tony on his appointment. With SABB on a solid footing and with its strategic direction clear, we approach 2021 with confidence, and with the same heightened level of commitment and determined perseverance that SABB, its management and all its staff have consistently shown in meeting the many challenges of the past year and serving our clients’ needs. Ms. Lubna S. Olayan Board Chair P O S IT I O N I N G F O R G ROW T H 27
28. STRATEGY AND KPIs Strategy 2025 During 2020 , the Board embarked on a detailed review of the go-forward strategy and the steps that need to be taken. The new strategy will enable SABB to build on our market share, improve financial performance and see a return to top tier performance on key ratios while supporting and benefitting from the Kingdom’s Vision 2030 economic transformation programme. The strategy gained Board support at the end of 2020 and we look forward to sharing our detailed vision and targets for the medium-term in 2021. The strategy looks to build further on our traditional focuses and areas of strength but also looks to expand in those target areas which complement the Vision 2030 plan. Best in class universal banking serving all customer groups in the Kingdom Be the leading international bank in the Kingdom, accessing an unrivalled global network through HSBC Offer a leading online and mobile digital banking experience Our people We bring a world of financial opportunities to an ambitious Kingdom The best place to work Digital excellence VISION • Bank of choice for Large Corporates • Reinforce leadership in Trade and Payments • Maintain leadership in Wealth Maximise our participation in key growth areas • Fastest growing Mid-Corporate business • Digital SME focus • Mortgage expansion through REDF • Reinforce our position in Cards Transform the organisation • Lead in digital innovation and evolve the IT architecture • Transforming HR and developing the right talent • Revamp operating model through automation and digitisation RETURNS Increase Return on Tangible Equity (RoTE) and Earnings per Share (EPS) S A B B | A N N U A L R E P O R T 2020 Improve Cost to Income ratio (CER) Maintain strong Capital and Liquidity Maintain Dividend payout Be where the growth is Build on our core strengths Leverage our HSBC partnership THE STEPS WE WILL TAKE
29. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE KEY PERFORMANCE INDICATORS (KPIS) To ensure the delivery of the Bank’s strategic priorities, SABB uses a set of key performance indicators (KPIs) that enable Management and the Board to track progress. The KPIs measure: KPI DESCRIPTION FY20 FY191 Underlying Return on tangible equity (RoTE) 2 Measures how effectively management are using the tangible equity in the Bank to generate profits 9.2% 10.4% Earnings per share (EPS) Measures how much profit the Bank makes for each share of its stock SAR (2.01) SAR 1.53 Underlying Cost Efficiency ratio2 Measures how well the Bank is managing its cost base in relation to revenue. It is calculated by dividing costs or operating expenses by revenue 39.4% 33.6% Common Equity tier 1 (CET1) ratio Measures the Bank’s capital strength. Calculated as CET1 capital divided by riskweighted assets 18.96% 17.00% Liquidity coverage ratio (LCR) Measures the sufficiency of a bank’s unencumbered high-quality liquid assets (`HQLAs’) to meet its liquidity needs in a 30-calendar-day liquidity stress scenario 299% 223% Dividend per share (DPS) Dividend paid for each share of the Bank’s stock - 1.20 BUSINESS STRENGTHS AND COMPETITIVENESS Corporate lending market share The Bank’s corporate lending as a proportion of the market 13% 15% The Bank regularly measures its competitive positioning in a dynamic and rapidly evolving market and given the muted credit appetite for the last few years, key market share KPIs remain pivotal to tracking performance. Market shares are tracked across all our different business units Retail lending market share The Bank’s retail lending as a proportion of the market 5% 7% FX market share The Bank’s FX income as a proportion of the market 10% 12% Trade market share The Bank’s trade activities as a proportion of the market c. 23% c.20% FINANCIAL RETURNS, RESILIENCE AND EFFICIENCY These KPIs are used to measure and evaluate how effectively Management are using a company’s assets to create profits and make returns to Shareholders Pro forma basis where relevant Underlying measure excludes i) goodwill impairment, ii) merger-related expenses and iii) non-recurring expenses 1 2 SABB also monitors the value generated by its strategic partnership with HSBC. Our sustainable competitive strengths are enabled by our digital excellence and our people. We aim to be not only the best place to bank with a leading digital offering, but to provide the best career and training opportunities for our people. We use a number of KPIs to track this performance, including: Over Top mobile app downloads app store ratings (Apple and Android) 692k 2 91% Saudisation ratio 20% Female employment ratio P O S IT I O N I N G F O R G ROW T H 29
30. MANAGING DIRECTOR ’S MESSAGE “ A key driver for the merger was the unlocking of both revenue and cost synergies which are on track, having achieved SAR 0.6 bln of annualised synergies as at the end of 2020, through a range of measures from actively optimising our funding base, procurement expenditure, operating model, and real estate footprint. Planned total integration spend is within previously guided target. As a single institution we are now leaner and more agile to embark on the next stage in our journey. We concluded the legal merger of SABB and Alawwal Bank in 2019. The merger rationale included the creation of a wealth of opportunities for the Bank, its customers and staff. The increased scale, balance sheet and capital improves our competitiveness and our positioning to benefit from and contribute to the economic opportunities of Vision 2030. This year S A B B | A N N U A L R E P O R T 2020 was equally notable, as we made significant progress towards the integration of the two banks into one institution, one suite of IT systems, one website, one branch network and one culture. We will have completed this within two years since legally merging, which included a year of unprecedented uncertainty created by the COVID-19 pandemic, with the final and important milestone in the first quarter of 2021 when our retail bank will integrate its technology infrastructure.
31. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Performance overview Our underlying financial performance during 2020 was resilient, but headline profits were disappointing as they included a one-off, non-cash impairment of our goodwill in the second quarter. Balance sheet growth at the start of 2020 was encouraging, however the global pandemic put the brakes on much of the anticipated corporate credit growth of 2020 and the pressure of lower benchmark interest rates was reflected in our decreasing margins in the second half of the year. Total assets as at 31 December 2020 stood at SAR 276.5 bln with SAR 160.4 bln of gross loans and we held SAR 189.1 bln of customer deposits. We recorded a net loss before Zakat and income tax of SAR 4.3 bln for the year including the aforementioned impairment in goodwill of SAR 7.4 bln. Total operating income was SAR 8.9 bln with contributions from our businesses in Corporate and Institutional Banking at 44%, Retail Banking and Wealth Management at 37% and Treasury at 19%. Positioned for growth In 2020, a core focus for SABB has been to make significant progress with our merger integration plan, which has been no small feat given the difficulties caused by the COVID-19 pandemic. During 2020, we completed the co-location of all staff, agreed and implemented the IT systems architecture and migrated the vast majority of the Alawwal Bank corporate portfolio onto the SABB system. Having agreed on our target culture in 2019, we rolled out culture workshops in 2020. We continued to support our customers by creating a number of hybrid branches allowing customers of both the SABB and Alawwal Bank portfolios to access services at common locations. A key driver for the merger was the unlocking of both revenue and cost synergies which are on track, having achieved SAR 0.6 bln of annualised synergies as at the end of 2020, through a range of measures from actively optimising our funding base, procurement expenditure, operating model, and real estate footprint. Planned total integration spend is within previously guided target. As a single institution we are now leaner and more agile to embark on the next stage in our journey. The Board has agreed on ‘Strategy 2025’, which provides the roadmap for ambitious growth and top tier returns. Our strategy will build on the positions of strength that we have built over time while expanding into new areas that are congruent with the opportunities of Vision 2030. With integration nearing completion, a strong balance sheet, and Strategy 2025 ready, we are in a strong position for the future. Operational resilience The challenges faced this year both regionally and globally have been unprecedented. During this time, we supported our customers with a range of measures from the deferral of payments to the waiving of fees. What is particularly notable is the excellent operational resilience we demonstrated despite all the obstacles. We remained open for business, maintaining all services, whilst keeping our customers and staff safe. This focus to ‘get the job done’ provides good reason for optimism for the future, and I am excited to see what we can achieve. Our digital engagement has increased with both customers and staff, and operational resilience has remained strong throughout the year. The Bank quickly deployed over 2,500 laptops, increased remote connectivity by 300% which involved expansion of our Virtual Private Network (‘VPN’) capacity by 12x. This allowed the Bank to continue operations throughout. Digital penetration of our customer base has increased to 73% with close to a 2.5x increase in SABB mobile app downloads during 2020. Our ongoing investment has also translated into recognition for excellence, with SABB recently being awarded Best Mobile Banking App and Best Consumer Digital Bank by Global Finance magazine. With thanks Our task is now to maximise the benefit of the strategic advantages we have created and to make good on our promise to ‘bring a world of financial opportunities to an ambitious Kingdom’. Management and staff deserve enormous praise for their efforts in arguably the most challenging year of recent times. On behalf of all the Bank staff, I would like to thank the Board of Directors for their wise counsel, and our customers and shareholders for the trust that they have placed in us. I would also wish to thank our regulators and government agencies for their strong support throughout. We will continue to earn that trust in 2021, as we transition to a new chapter in our journey. And on that final note, it is approaching the time for me to bid my farewell as Managing Director of SABB as I will retire later this year. It has been an enormous privilege for me to lead the bank over the past 11 years, the longestserving MD in the history of the bank, but it has only been possible with the unstinting support of my colleagues and every member of the SABB team for which I am truly grateful. I leave the bank in good hands and I have no doubt that it will continue to prosper under the capable leadership of Tony Cripps. Mr. David Dew Managing Director With integration nearing completion, a strong balance sheet, and Strategy 2025 ready, we are in a strong position for the future. P O S IT I O N I N G F O R G ROW T H 31
32. POSITIONING FOR GROWTH SABB and Alawwal Bank merged in 2019 , and the compelling rationale for the merger created many opportunities for the Bank, its customers and staff. The merger created a broader institution, with greater scale, and an increased balance sheet and levels of capital to position us well for the economic opportunities of Vision 2030. Since the legal merger and notably during 2020, we have made significant progress with our integration plan. The Corporate and Institutional business enters 2021 operating as a single bank, having substantially completed its integration. The Retail business will soon complete its customer data integration, referred to as Customer Day 1, in the first quarter of 2021. Following this, we will be one harmonised bank, with one branch network, one IT system, one website and a shared culture. We have achieved this by working collaboratively across the Bank and with a range of industry experts. With the onset of the COVID-19 crisis, we adapted to achieve much of this work remotely. As we approach Customer Day 1 and transition to a fully integrated organisation, the Board approved ‘Strategy 2025’ in the fourth quarter, which provides our new institution with the roadmap to deliver on the growth aspirations of Vision 2030. Head office integration 800+ achieved staff co-located – colocation complete 97% CIB SAR 0.6 bln Merger-related expenses – in line with customer migration substantially complete 4,000 tasks since Legal Day 1 S A B B | A N N U A L R E P O R T 2020 annualised synergies achieved up to the end of 2020 26 hybrid branches opened attendance at culture workshops – culture harmonised guidance Online merger hub launched
33. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE As at 31 December 2020 CD1 Preparations and integration planning Customer migration Co-locating staff Developing a best-in-class system architecture Brand and identity Developing the right culture and sharing best practice Realise synergies 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 OUR INTEGRATION PLAN IS ON TRACK. 1. Customer migration 4. Brand and identity Having completed final preparations, our retail customers are ready to be migrated in the first quarter of 2021. We launched our online merger hub to support Alawwal Bank customers with the transition to the merged bank. The hub is an online one-stop-shop for customers to learn about the changes ahead and the benefits of their new, improved banking proposition. The future brand identity will be confirmed post-Customer Day 1. Corporate customer migration is substantially complete with over 98% of Alawwal Bank corporate assets migrated. 2. Co-locating staff Staff co-location is complete, with the exception of contingency sites for COVID-19. The head office has been fully integrated, with all SABB and Alawwal Bank staff members harmonised into their key business areas and functional teams. 5. Developing the right culture We have completed our culture framework, having reached over 97% of employees through our staff culture workshops. Following the onset of COVID-19, we swiftly moved the workshops to a remote delivery. We are one bank with one shared culture. 6. Realising synergies We have made strides unlocking both funding and cost synergies. We have achieved SAR 0.6 billion of annualised synergies as at the end of 2020, through a range of measures, by actively optimising our funding base, procurement spend, operating model and real estate footprint. 3. Developing a best-in-class system architecture We have amalgamated the SABB and Alawwal systems by selecting the best technology from both organisations and making it available to all our customers. Early in the integration journey, we had selected the SABB architecture due to its compatibility to connect with other systems. In 2021, we will move the Alawwal system data to the SABB system and decommission Alawwal data centres. P O S IT I O N I N G F O R G ROW T H 33
34. CUSTOMER EXPERIENCE AND DIGITAL BANKING Customer experience Staff training Customer experience is at the heart of SABB ’s vision and is critical to delivering our goal of being the best place to bank in the Kingdom. We have a solid record for excellent service and best-in-class customer experience. Staff training plays an important role in delivering best-in-class customer experience. We require our staff at all levels to undertake regular training that develops a wide range of abilities, from the soft skills necessary for customerfacing staff, to understanding our risk management framework and antimoney laundering (AML) guidelines. As the Bank embarked on its integration journey in 2020, the Customer Experience team continued to align best practice processes, policies and procedures of SABB and Alawwal Bank with the aim of creating a harmonised experience. With the onset of the COVID-19 pandemic, our priorities shifted towards ensuring customer wellbeing and safety, and minimising the disruption of services and operations. This included an accelerated shift towards digital activities whilst flexing branch availability. 94 Customer Recommendation Index (‘CRI’) Score as at 31 December 2020 Voice of customer Listening to the market is vital to the success of SABB’s customer experience strategy. We continue to develop our VOC programme which covers a broad range of customer surveys and opinions, including specific transactions to specific complaints. With respect to the latter, detailed analysis allows us to identify the relevant stakeholders, the triggers for the relevant issue and suggested solutions. It is a critical part of the feedback loop to ultimately improve our products and services, and provide the action plans for businesses and support functions to deliver on improvements and capture a holistic view of performance. S A B B | A N N U A L R E P O R T 2020 SABB offers a comprehensive range of training. With the onset of COVID-19, subject matters such as Treating customers fairly, Improved customer communication and Customer consideration were valuable for ensuring that we interacted with our customer base with empathy, and with their interests at the centre of our decision-making process. Performance In 2020, SABB was ranked as the number one bank in the Kingdom based on 94 customers’ recommendation index. Other key performance indicators reflected the Bank’s strengths: • Branch customer satisfaction, measured using customer surveys, improved to 92% in 2020 (90% in 2019) • Average branch waiting time improved to under six minutes in 2020 • Average ATM availability was among the highest in the market at over 98% • Average number of complaints decreased by 16% in 2020 and our registered complaints are lower than the industry average (2.9 vs. 3.2) • Branch tracker on overall experience returned scores of 90 for Mass, 93 for Advance, 93 for Premier and an overall score of 91 out of 100. This maintained a trend of strong performance from 2019 and compared favourably with the market. As SABB and Alawwal Bank have progressed their integration journey, it has been extremely important to unify and harmonise customer experience for all retail and corporate customers. Over 90% of corporate customers were migrated in 2020, with the retail customer base to be migrated in early 2021. We launched an online merger hub in late 2020 to assist Alawwal Bank customers with the switch to the merged bank. The merger hub acts as a one-stop shop for customers to learn about potential changes to their services and the benefits of their new, improved banking proposition. While the switch to SABB will be mostly automated for our customers, the hub provides each customer with a unique journey and guidance on when they will need to activate services such as digital banking and re-carding. Using data for insight A significant amount of thought and analysis goes into providing leading levels of customer experience. At SABB, we have developed a range of analyses, insight tools and reporting methods that allow us to drill down into the detail of customer interactions to learn and improve our capabilities. Via a Survey Live Dashboard, staff members are able to monitor survey scores, ratings and overall experience, with the ability to delve into specific events, branches, customer journeys, products and even related staff members. Access to this rich information creates insight that provides options to improve service quality.
35. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE The financial services industry is transforming rapidly with the adoption of new technology, and our priority is to accelerate our digital transformation plan to offer a growing number of banking services through online and mobile channels. Digitalisation of banking services is one of SABB’s four strategic enablers and is vital to its competitive advantage. With the aim of being a digital leader in the Kingdom’s banking sector, our approach is driven by customer-centricity and innovation. At the front-end, the Bank is investing to deliver best-in-class customer journeys across channels, and at the back-end to build a highly efficient, streamlined and secure core banking infrastructure. The strategy is designed to enable SABB to reach a level of digital maturity that will place it among the best of its peers. The digital shift continues SABB’s retail mobile banking application continued to gather momentum and won ‘Best Mobile Banking App’ from Global Finance Magazine. The app was downloaded over 692k times during 2020, an increase of 245%, and was the top rated app on both the Android and Apple app stores. Downloads increased significantly following the onset of COVID-19, as customers swiftly moved to more digital channels, in part due to a targeted campaign to reduce branch visits. We launched ‘Live chat’ functionality, initially for our Premier segment, to encourage further online interaction and reduce branch visits. During 2020, we also enhanced our interactive voice response (IVR) services, and online ‘Digital account opening’ and ‘Know Your Customer’ (KYC) processes driving an increase in online transactions and interactions. Global Finance Magazine also awarded SABB the much coveted ‘Best Consumer Digital Bank’ award in recognition of our leading digital offering. Our Global Liquidity and Cash Management (GLCM) and Global Trade and Receivables Finance (GTRF) propositions are digitally led, making the transition to digital for our corporate customers easy. During 2020, CIB launched an online banking platform focused on MSME customers, given the importance of the segment to the Bank and the wider aspirations of Vision 2030. We also delivered the first Saudihosted, cloud-based supply chain solution that helps our clients improve working capital efficiency. Committed to customers’ security Cyber security remains a focus for SABB and is a key component of our risk management process. The Bank ensures that it has the right level of governance and scrutiny at senior management and Board levels. SABB and other banks operate in an environment with a continuously evolving cyber threat, and we constantly review and invest in capabilities to mitigate risk. Cyber security is not just a technical issue, but a business priority at the heart of the risk management architecture. All new systems, changes and upgrades are designed and implemented with a focus on cyber security, and we continuously monitor for live threats and cyber-attacks. We have in place response and recovery plans that have been developed according to international best practice and use independent parties to periodically test technology for weaknesses. We maintain dialogue with national authorities to share best practice and use domestic and international incidents to improve cyber security in Saudi Arabia. P O S IT I O N I N G F O R G ROW T H 35
36. ENVIRONMENTAL , SOCIAL AND GOVERNANCE FOCUS In December 2020, we released our first-ever Environmental, Social and Governance Focus. We understand that the global environment is changing at a fast pace, and all organisations will need to adapt in order to succeed. We all have a duty of care to act responsibly and in a sustainable manner. Doing the right thing is a core value of our Bank and something that has supported our success during a proud history. Going forward, we intend to build on these foundations by ensuring that Environmental, Social and Governance (ESG) factors are fundamental to our business. We want to be balanced, open and honest about our progress and transparent when it comes to the areas we need to develop. In 2021, we will be making further efforts to improve our ESG reporting framework. Sustainable approach to the environment Operationally, the Bank has implemented a range of programmes and initiatives that make a tangible and positive impact. Eco-friendly features and smart recycling techniques are designed and built into our facilities. Recycling aims to reduce our wastage and includes the use of recycled building materials and recycling stations in all our offices and branches. The Bank has an ongoing programme for reducing paper, plastic, water and power usage, and actively supports international initiatives including the WWF’s ‘Earth Hour’ and World Environment Day. Business travel is kept to a minimum, with video conferencing used for meetings wherever feasible. Our use of video conferencing technology accelerated as a direct impact of COVID-19 and a positive to be taken from this is our ability to deliver business-as-usual seamlessly, especially in relation to our integration work. Notwithstanding our achievements, we will always look to continuously improve and better understand our impact on the environment, and develop a better understanding of our customers’ supply chains. We will look at alternative ways of supporting our customers with new products which, at their heart, encourage a positive impact on the environment. A socially responsible bank Our social responsibility encompasses our obligations to all stakeholders, both external and internal. Our focus historically has been towards our customers and employees and to wider society. More recently, we have started to improve our communications with the investment community. As our stakeholders evolve, so will our approach. S A B B | A N N U A L R E P O R T 2020 Ensuring we have the right culture will drive appropriate decision making and ultimately ensure the right outcomes for stakeholders. One of the first steps the Bank took following the 2019 legal merger was identifying the target culture of the organisation, emphasising the importance of culture to the Bank and its staff. We foster an environment that allows our people to feel valued and empowered to share their views, enables us to fulfil our collective potential and guarantee the right outcomes for customers. We have developed a set of values to enable us to fulfil our strategic priorities: • • • • Think customer Work together Do the right thing Be innovative These values are at the heart of everything we do. From helping a customer make their first home purchase to making senior leadership appointments; from choosing the right vendor for a future IT system to appraising the performance of an employee – we will employ these values in all our decision making. Ultimately all these decisions, and the active demonstration of our values, is what ensures the delivery of our promises to stakeholders.
37. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE 94 customer recommendation index 20% female employment ratio 91% Saudisation 90% staff retention rate Customers Rewards and recognition Our aim is to grow in a sustainable, yet responsible fashion where the customer is at the heart of what we do. By creating value for our customers, we build sustainability into the relationship. We continue to listen to our customer base through our improved Voice of the Customer programme and we use the output from these sessions to hone and improve our product offer. SABB was awarded a Customer Recommendation Index (CRI) score of 94 at the end of 2020, ranking the Bank as no.1 in its peer group in the Kingdom. SABB’s reward strategy recognises sustainable performance. Total compensation is a key component of recruitment and retention activities. Our reward proposition is continually enhanced to reflect qualitative parameters with a focus on enhancing customer experience and management of risk. Incentive and bonus structures have been improved to better align individual rewards with a focus on best outcomes for our customers, and are in line with SAMA’s rules on compensation and Financial Stability Board guidelines. Our people An important part of SABB’s vision is to be the best place to work in Saudi Arabia, and we are proud to offer a leading standard of development and career opportunity with a focus on nurturing the talent of Saudi nationals and women. We have two female members in the Executive Management Committee and a female Board Chair, which places us at the top end of diversity regionally. A core facet of the integration following the legal merger with Alawwal Bank was to align the culture of the go-forward organisation and a successful communication campaign for employees through a series of ‘culture change’ workshops led by Management in 2020. Fostering an environment with regular dialogue provides a culture of empowerment and ultimately enables us to fulfil our collective potential and guarantee the right outcomes for our customers. We have introduced a series of development programmes designed to support every business segment and function. SABB has used its partnership with HSBC Banking Group to provide employees with access to a suite of development courses. International training opportunities and secondments available to SABB employees cover areas including leadership, communication skills, anti-money laundering, IT skills, digital excellence and management essentials, among others. GENDER DIVERSITY STATISTICS Board 82% 18% 73% Executive management Senior management Middle management 27% 94% 6% 84% 16% 78% Junior management 22% Male Female SABB in the community SABB has developed long-standing partnerships with government agencies and charities and participates in an extensive range of social programmes to improve quality of life for Saudi citizens and communities. P O S IT I O N I N G F O R G ROW T H 37
38. During 2020 , together with the King Abdullah University of Science and Technology (KAUST), we launched the fourth phase of the incubator programme ‘TAQADAM’, which supports, trains and challenges young entrepreneurs. In the past four years, approximately 150 teams have benefited from this programme, and a number have been successfully short-listed at international tech and entrepreneurship competitions. TAQADAM is an example of SABB’s support for this burgeoning area of development, which looks to build the SMEs of the future, and is a vital ingredient in the Kingdom’s Vision 2030 aspirations to support the SME sector in Saudi Arabia. As part of its commitment to the community, SABB is keen to raise the level of financial literacy among Saudi nationals. The Riyali programme is one of the Bank’s initiatives in this area, to educate the community and motivate them to take educational courses that qualify them with skills and knowledge of the basics of financial planning and savings. Our focus on ‘Youth Ambition’ through our sponsorship of the Riyali programme has benefitted more than 90,000 people during 2020. This took place despite school closures following lockdown measures introduced by the government to curb the spread of COVID-19. The SABB Academy provides a combination of technical knowledge and ‘soft skills’ training to graduate trainees. The Bank also teamed up with Alnahda Society for the second year to support women as part of a Kingdom-wide strategy to improve financial literacy. Support during COVID-19 This year, in response to the pandemic, we implemented SAMA’s various initiatives to support the private sector and in particular the MSME segment. Following the launch of SAMA’s Private Sector Financing Support Programme (PSFSP), which provides support to Micro, Small and Medium Enterprises (MSME), SABB has provided eligible customers with a 12-month payment deferral. In addition, the Bank has waived fees associated with digital payments and transfers for corporate customers for six months. For retail customers working in the healthcare sector, we provided a 3-month payment deferral that has benefited over 27,000 customers. S A B B | A N N U A L R E P O R T 2020 Across the Bank we have waived fees and charges, notably for digital payments, again demonstrating our aims to create the best outcomes for our customers. SABB contributed SAR 27 million across the Ministry of Health’s COVID-19 fund and the Ministry of Human Resources Development Fund. We also provided food baskets to over 9,000 families through 14 charitable organisations. We also partnered with transport apps including Careem and Uber to deliver groceries free of charge, with an additional discount when using SABB payment cards. High standards of governance A rigorous approach to corporate governance is a key strength for any organisation. SABB ensures it adopts best practice in applying a transparent approach that creates value for stakeholders. Led by the Chair, the Board sets the Bank’s strategy and risk appetite with the aim of achieving sustainable value for shareholders and promoting a culture of openness and debate. The Board also approves the capital and operating plans for achieving the Bank’s strategic direction, on the recommendation of Executive Management (MANCOM). Our Board at the end of 2020, was comprised of 11 members. Led by the Chair, the Board enjoys a broad mix of local and international expertise from a wide spectrum of industry experience. The Board has established four sub-committees, the construction of which is in line with all regulatory requirements issued by the relevant authorities. The diversity in experience of the Board is further complemented by gender diversity including the first female Board Chair of a listed company in Saudi Arabia. Gender diversity is prevalent across the organisation.
39. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Vice Chair Mr. Saad Abdulmohsen Al Fadly Chair Ms. Lubna S Olayan Eng. Khalid Abdullah Al Molhelm Mr. Stuart Gulliver Mr. Martin Powell Managing Director Mr. David Dew Board of Directors Mr. Stephen Moss Mr. Ahmed Farid Al Aulaqi Ms. Maria Ramos1 Mr. Samir Assaf Mr. Mohammed Bin Omran Al Omran Independent Executive committee (‘EXCOM’) Other key committees and risk management tools 1 Audit committee (‘AUCOM’) Board Risk committee (‘BRC’) Nomination and remuneration committee (‘NRC’) Asset and Liability Committee (‘ALCO’) Reviews risks associated with the balance sheet, asset and liability management, and liquidity and funding Risk Management Committee (‘RMC’) Reviews risk appetite, emerging risks and risk policy Risk map We maintain a risk map that covers current and anticipated financial and non-financial risks Stress testing Regular stress testing occurs to gauge the Bank’s vulnerability to exceptional but plausible events Internal controls A range of internal controls to manage the risk of failure to achieve SABB’s strategic objectives Maria Ramos resigned from the Board during 2020, effective from 31 December 2020 P O S IT I O N I N G F O R G ROW T H 39
40. Risk management SABB has a strong risk culture , which is embedded throughout business units, enablement and control functions. Clear communication and a structured risk training programme is provided to all employees. The Bank operates to the principle that all staff are responsible for identifying and managing risk within the scope of their role, whilst providing effective oversight by control functions and internal audit, as Risks defined by the ‘three lines of defence’ model. Adherence to risk management is a key performance indicator applied in the performance management of all Executive Management and staff. A strict policy of consequence management is applied where failures occur. Management of risk 1st line of defence The first line consists of risk and control owners. Risk owners are responsible for the end to end management of risks that they own. They are supported by control owners who are responsible for carrying out control activities with the object of ensuring risks are managed within policy and appetite. Typically, this applies to all units of the Bank with the exception of Internal Audit. 2nd line of defence The second line of defence is comprised of the Bank’s operational risk management function and risk stewards within the Bank’s Risk Management, Finance, Compliance, Legal and other functions that own policy and provide guidance and oversight to ensure proper management of the risks that they steward. 3rd line of defence The third line of defence consists of an independent internal audit function which provides assurance with regard to the design and implementation of the Bank’s controls and risk management practices. The Internal Audit function reports directly to the Board’s Audit Committee. A well-established risk governance and ownership structure ensures oversight of, and accountability for, the effective management of risk. The Board approves the Bank’s risk framework, plans and performance targets, which include the establishment of management-level risk governance committees, bank-wide and business risk appetite statements, the delegation of authorities for acceptance of credit and other risks and the establishment of effective control procedures. The Risk Management Committee (RMC) and the Asset and Liability Committee (ALCO) are two critical risk governance committees that support the BRC and EXCOM respectively in setting the Bank’s overall risk appetite. The RMC review risk appetite, emerging risks and risk policy and is chaired by the Chief Risk Officer. ALCO reviews the risks associated S A B B | A N N U A L R E P O R T 2020 with the Bank’s balance sheet including asset and liability management, and liquidity and funding, and is chaired by the Chief Financial Officer. Enterprise-wide risk management SABB’s risk appetite is documented and defines our desired risk profile and tolerances within which risk should be managed. The risk appetite covers risks which we actively accept and engage in, such as credit, market, operational, liquidity and funding, and regulatory risks. SABB maintains a risk map, covering an assessment of current and anticipated levels of risk across all major financial and non-financial risk types.
41. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE SABB’s stress testing programme is performed at an enterprise-wide level and focuses on the key risk types to which the Bank is exposed. Stress testing refers to various quantitative and qualitative techniques used to gauge the Bank’s vulnerability to exceptional but plausible events. The Bank’s stress testing programme incorporates the guidelines set out by SAMA, the principles set out by the Basel Committee and is a key component of the Bank’s risk management approach. Cyber security Cyber security remains a focus for SABB and is a key component of our risk management framework. We continue to invest in this rapidly evolving area, and our approach is in line with global best practice. Financial crime compliance Anti-bribery and corruption SABB is committed to high standards of ethical behaviour and operates a zero-tolerance approach to bribery and corruption, in line with Saudi Anti-Bribery and Corruption Law. We continue to invest in technology to detect and deter such activities, and provide mandatory e-learning courses to all employees. Whistleblowing We believe it is essential to have a culture where people feel able to raise concerns about potential wrongdoing or unethical practices. Regular reporting channels exist, but if an employee feels unable to use these then their issues can be raised in a more discreet manner. SABB has a whistleblowing policy ensuring that concerns are captured, assessed and investigated thoroughly and that employees can raise concerns without fear of reprisal. In order to protect the integrity of the Saudi and global financial system, we continue to invest in our ability to detect, deter and prevent financial crime in what is an increasingly digital landscape. P O S IT I O N I N G F O R G ROW T H 41
42. CHIEF FINANCIAL OFFICER ’S REVIEW “ We ended the year with a strong capital position reporting a common equity tier 1 ratio of 18.96% and a total capital ratio of 21.82%, with the latter bolstered by the issuance of a SAR 5.0 billion Tier II Sukuk. This was the first such transaction by the merged Bank in the debt capital market, the joint-largest Tier II issuance by a Saudi bank in history, and the largest local issuance by a bank since the introduction of the Kingdom’s national growth agenda under Vision 2030. S A B B | A N N U A L R E P O R T 2020
43. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE It has been a challenging year for the banking sector. Despite minimal disruption to operations during the pandemic, and strong progress made towards integration and planned synergies,our bottom-line performance in 2020 was less positive. It was impacted by a significant accounting charge as we impaired the goodwill created following the legal merger in 2019. 2020 marks the first full year of combined results since the legal merger in June 2019, although this is far from representative of a typical year. For the year ended 31 December 2020, SABB recorded a net loss before Zakat and income taxes of SAR 4.3 billion, which included a SAR 7.4 billion goodwill impairment in the second quarter, relating to the goodwill created following the merger with Alawwal Bank. The need to impair was driven by a temporary inflation in the Bank’s share price, which was used as the basis for the valuation at the time of the legal merger. The unexpected emergence of the COVID-19 pandemic and its impact on the economy also contributed to the impairment assessment. The accounting charge was a one-off, non-cash impairment, that has no effect on our capital, liquidity or funding. A full description of this charge can be found on page 46. Excluding the goodwill impairment, SABB recorded a net income before Zakat and income tax of SAR 3.1 billion. items that may potentially distort period-on-period comparisons, was SAR 0.6 billion lower than 2019 mainly from lower revenue partly offset by lower expected credit losses and reduced operating expenses. Revenue was largely affected by the cuts in benchmark rates in response to the global pandemic, and the weak economic conditions caused by the latter led to reduced customer flows. Given the uncertainty caused by COVID-19, the Bank adjusted its risk management accordingly, resulting in modest loan growth. Expected credit losses of SAR 1.6 billion were 44% lower than 2019 pro forma, but still reflective of a weak macroeconomic environment. Underlying costs, which remove integration-related costs and other costs that are one-off in nature were 4% lower, continuing the strong trajectory on cost management. Integration costs have peaked in 2020 and will come to an end fully in early 2021. We ended the year with a strong capital position reporting a common equity tier 1 ratio of 18.96% and a total capital ratio of 21.82%, with the latter bolstered by the issuance of a SAR 5.0 billion Tier II Sukuk. This was the first such transaction by the merged Bank in the debt capital market, the joint-largest Tier II issuance by a Saudi bank in history, and the largest local issuance by a bank since the introduction of the Kingdom’s national growth agenda under Vision 2030. SAR 5.0 BILLION TIER II SUKUK Our balance sheet remains healthy, with gross lending balances of SAR 160.4 billion and deposit balances of SAR 189.1 billion at the end of the year. Loan growth was modest in 2020 with early optimism at the start of the year curtailed by the Bank’s risk management approach during the emergence of COVID-19. The Bank has a stable and low cost funding base, with 71% of our deposit base in the form of demand deposits. With this strong funding base, a conservatively provisioned portfolio, and one that is well-positioned across key sectors that will benefit from the Vision 2030 economic transformation programme, we are well positioned for growth. We remain optimistic as we embark on our new strategic path in 2021. Mathew Pearce Chief Financial Officer Underlying net income of SAR 3.8 billion which strips out non-recurring 2020 marks the first full year of combined results since the legal merger in June 2019 P O S IT I O N I N G F O R G ROW T H 43
44. OPERATING REVIEW Reported historical financial results (SAR mln) Investments, net Loans and advances, net 2020 20191 2018 2017 2016 60,831 60,484 34,570 26,977 29,273 153,243 152,075 110,326 117,006 120,965 Customer deposits 189,110 192,167 130,507 140,240 140,640 Total assets 276,452 265,987 174,677 187,615 186,056 Total liabilities 225,690 209,903 142,101 154,145 154,777 Shareholders’ equity 50,707 55,994 32,467 33,345 31,279 Net (loss) / income before Zakat and income tax (4,302) 3,195 4,929 3,955 3,895 1 On 16 June 2019, SABB merged with Alawwal Bank. Financial results reported before this date are based on the pre-merger SABB entity and as such are not directly comparable to the results reported after that date. Total operating income (‘revenue’) by geography The Bank generates its operating income from activities in the Kingdom of Saudi Arabia and has no branches, material subsidiaries or associates established or operating outside of the Kingdom. The following table shows the distribution of operating income in accordance with the geographical classification of the Kingdom’s regions. Central province 2020 5,255 2019 5,239 Western province 2020 2,012 2019 2,364 Eastern province 2020 1,611 2019 1,611 Total 2020 8,878 2019 9,213 SABB legally merged with Alawwal Bank on 16 June 2019. Results for the 12 months ended 31 December 2020 reflect the results of the combined entity, whereas the results for the 12 months ended 31 December 2019 reflect the results of SABB up to the merger date and the results of the combined entity for the remaining period. A clearer understanding of the underlying trends compared to history is best achieved through a review of our pro forma results as set out in the section titled ‘Pro forma results’ on page 47. S A B B | A N N U A L R E P O R T 2020
45. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Reported performance SABB recorded a loss before Zakat and income tax of SAR 4,302 million for 2020 and this included a goodwill impairment of SAR 7,418 million, recorded in the second quarter, relating to the goodwill created following the merger with Alawwal Bank. The goodwill impairment charge is a non-cash item and a one-time accounting charge. Further information on this is provided on page 46. Excluding this charge, net income before Zakat and income tax was SAR 3,116 million which was 2% lower than 2019 from higher operating expenses and reduced revenue partly offset by lower expected credit losses. • Operating expenses of SAR 4,213 million were SAR 563 million or 15% higher than 2019 and included SAR 500 million in merger-related expenses (2019: SAR 417 million). The merger-related expenses are temporary and will cease once the integration has completed. • Expected credit losses of SAR 1,631 million were SAR 870 million or 35% lower than 2019 mainly from lower charges in our corporate business, and because 2019 included a number of one-off expected credit losses in respect of the acquired loan portfolio through the merger with Alawwal Bank. • Revenue of SAR 8,878 million was SAR 335 million or 4% lower than 2019 largely from reduced Net special commission income reflecting lower lending balances and repricing as a result of the cuts in benchmark interest rates. Income statement highlights (SAR mln) Total operating income (‘revenue’) 2020 2019 8,878 9,213 Provision for expected credit losses, net )1,631( )2,501( Goodwill impairment )7,418( - Total operating expenses )4,213( )3,649( 82 133 )4,302( 3,195 3,116 3,195 Share in earnings of associates and a joint venture Net (loss) / income before Zakat and income tax Net income before Zakat and income tax excl. goodwill impairment P O S IT I O N I N G F O R G ROW T H 45
46. Reported results by business segment (SAR mln) 2020 Total operating income (‘revenue’) Provision for expected credit losses, net Goodwill impairment Total operating expenses Share in earnings of associates and a joint venture Net income before Zakat and income tax Retail banking and wealth management Corporate and institutional banking Treasury Other Total 3,318 )239( )2,127( 952 3,878 )1,376( )7,418( (1,221) )6,137( 1,674 )16( )179( 1,478 9 )686( 82 )595( 8,878 )1,631( )7,418( )4,213( 82 )4,302( 3,469 )444( )1,731( 1,295 4,446 )2,049( )1,080( 1,318 1,155 )9( )195( 951 143 )644( 133 )369( 9,213 )2,501( )3,649( 133 3,195 2019 Total operating income (‘revenue’) Provision for expected credit losses, net Goodwill impairment Total operating expenses Share in earnings of associates and a joint venture Net income before Zakat and income tax Completion of Purchase Price Allocation (PPA) exercise The Bank completed the accounting for the merger in the second quarter of 2020. As per IFRS 3 Business Combinations, SABB had up to 12 months from the date of the merger to complete the exercise and assign a fair value to the assets and liabilities acquired through the merger. The purchase consideration transferred to Alawwal Bank shareholders was based on the closing market SABB share price on the Tadawul All Share Index on the last trading day before 16 June 2019. SABB shares were valued at SAR 41.70 per share at this date which resulted in a consideration of SAR 23.1 billion. The PPA exercise resulted in a fair value of net assets of SAR 4.8 billion with goodwill of SAR 16.2 billion (before goodwill impairment), and other intangibles of SAR 2.0 billion. Goodwill impairment SABB recorded a goodwill impairment of SAR 7,418 million in SABB SHARE PRICE DURING 2019 AND 2020 The impairment charge was a non-cash item and is expected to be a one-time accounting charge. It did not affect the Bank’s capital, liquidity or funding; or strategic strengths and competitive advantages. Our ability to lend to and support our customers, our products and services and our focus on our people all remain unaffected by this accounting charge. Further information can be found in our 1H20 Interim Report. SHARE PRICE IS THE MAIN DRIVER OF THE SIZE OF THE RECORDED WILL 28/05/2019 MSCI Inclusion tranche 1 35.00 30.00 17.7 10.8 2.0 25.00 1-Jan-18 1-Jul-18 14/05/2018 Non binding agreement 1-Jan-19 03/10/2018 Binding merger announcement S A B B | A N N U A L R E P O R T 2020 1-Jul-19 16/06/2019 SABB and AAB legal merger date 1-Jan-20 Consideration = SAR 23.1 bln 23.1 34% 40.00 20.00 • The temporary inflation of the Bank’s share price at the time of the merger caused by Saudi Arabia’s inclusion in the MSCI Emerging Market Index • The unprecedented and unexpected emergence of the COVID-19 pandemic and its impact on the economy has contributed to the outcome of the impairment assessment’s expectation of future returns Consideration = SAR 17.7 bln 45.00 20/06/2018 MSCI announcement the second quarter relating to the goodwill created following the merger with Alawwal Bank. The need to impair was driven by two factors: 0.1 16.2 0.1 2.0 4.8 4.8 SAR 31.90 share price as included in the binding agreement documentation 16-Jun-19 31.90 41.70 The size of goodwill increased by c.SAR 5.4 bln
47. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Pro forma performance Pro forma financial results have been calculated for illustrative purposes only for 2019, to enable an understanding of the period-on-period performance of the combined entity. It assumes SABB and Alawwal Bank merged on 1 January 2018. Because of its nature, the pro forma financial information addresses a hypothetical situation and therefore does not represent SABB’s actual financial results. Pro forma income statement highlights (SAR mln) Total operating income (‘revenue’) 2020 2019 8,878 10,819 Special commission income, net 6,873 8,414 Fee and commission income, net 1,283 1,530 519 566 Exchange income, net 203 309 Provision for expected credit losses, net Other income )1,631( )2,912( Goodwill impairment )7,418( - Operating expenses )4,213( )4,312( 82 133 )4,302( 3,728 Share in earnings of associates and a joint venture Net (loss) / income before Zakat and income tax Net income before Zakat and income tax: 2020 vs. 2019 (13)% 4,410 3,728 682 136 3,835 51 1,541 719 399 7,418 GOODWILL IMPAIRMENT 1,281 (4,302) 2019 2019 Notable items 2019 Underlying Net income Lower NSCI Lower nonfunds income Lower impairments Lower costs Income from JVs 2020 Underlying Net income 2020 Notable items 2020 P O S IT I O N I N G F O R G ROW T H 47
48. SABB recorded a net loss before Zakat and income tax of SAR 4 ,302 million for 2020 and this included the SAR 7,418 million goodwill impairment mentioned earlier. Excluding this impairment, SABB had net income before Zakat and income tax of SAR 3,116 million. Underlying net income before Zakat and income tax of SAR 3,835 million, which strips out nonrecurring items that may potentially distort period-on-period comparisons, was SAR 575 million lower than 2019. A list of notable items is below: Notable items (SAR mln) 2020 1 Goodwill impairment 2019 (Pro forma) )7,418( - Merger-related expense )500( )450( One-off expenses )219( )232( )8,137( )682( Total During previous reporting periods in 2020, SABB included the unwind of the fair value adjustment and intangible amortisation. Given these will be ongoing in the medium-term, we will include these items in our underlying performance. However, details are provided in the following commentary. 1 Revenue of SAR 8,878 million was SAR 1,941 million or 18% lower than 2019 largely from reduced net special commission income reflecting lower average lending balances and repricing as a result of the cuts in benchmark interest rates. Net fee income also fell from a reduction in trade fees together with lower loan origination fees and lower net fees from credit cards and merchant acquiring, as a result of increased competition and challenging economic activity. Exchange income fell 8% from reduced customer flows. Unwind of the fair value adjustment Revenue included the impact of the unwind of the fair value adjustment (2020: SAR 403 million; 2019: SAR 347 million). The need for this accounting approach is explained below: • Alawwal Bank loan portfolio recognised at fair value on merger date • The fair value is a discounted amount to the contractual amounts due of the underlying loans • The discount applied will be unwound over time to the contractual maturity date of the loans • The unwind will be recognised mainly in NSCI using the effective interest rate (EIR) method • The amount recognised in the future will be on a declining basis, in line with the EIR method • Expect this to total c. SAR 2.3 billion across the life of the loans Operating expenses of SAR 4,213 million were SAR 99 million or 2% lower than 2019 and included SAR 500 million in merger-related expenses (2019: SAR 450 million) and SAR 219 million in expenses that are one-off in nature (2019: SAR 232 million). Underlying costs fell 4% as SABB started to see the synergy benefits to the cost base from the initial actions taken to integrate the banks. This benefit was partly offset by higher intangible amortisation (2020: SAR 156 million; 2019: SAR 78 million), the increase in the rate of value-added tax and inflationary pressures. Despite a promising trajectory on underlying costs, underlying cost efficiency ratio for the year was 39.4% which was more reflective of the challenging revenue environment. S A B B | A N N U A L R E P O R T 2020 Approximate timelines of the unwind c.50% c.25% 2019 to 2022 2023 to 2026 c.25% 2026 onwards Charges for provisions for expected credit losses of SAR 1,631 million were SAR 1,281 million lower than 2019 mainly from lower charges in our corporate business, and because 2019 included a number of one-off expected credit losses in respect of the acquired loan portfolio through the merger with Alawwal Bank
49. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Balance sheet Total assets of SAR 276.5 billion increased by SAR 10.5 bln mainly from an increase in cash and balances held with SAMA. Gross customer advances of SAR 160.4 billion increased SAR 2.3 billion or 1% compared with 2019. Customer lending increased in our corporate portfolio by Balance sheet highlights (SAR bln) SAR 3.4 billion but fell SAR 1.1 billion in our retail portfolio. Customer deposits of SAR 189.1 billion fell SAR 3.1 billion or 2%. Overall funding remains strong and we continued to optimise our funding base as expensive surplus deposits matured. SABB’s demand deposit ratio improved to 71% (2019: 64%). 2020 2019 Total assets 276.5 266.0 Gross customer advances 160.4 158.1 Customer deposits 189.1 192.2 Demand deposits 134.2 122.5 The integration journey The integration of the two banks is progressing well, with Board and senior management focused on delivering a successful integration while continuing to create value by helping customers achieve their financial goals. The Integration Management Office (IMO) continues to drive forward the integration, in collaboration with partnerships built with top-tier consultants for project management, IT, HR and other critical areas. During 2020, SABB substantially completed the integration of the Corporate & Institutional Banking and Treasury businesses, which enter 2021 operating as a single bank. The Retail & Wealth Management business will also soon complete its customer data integration of the SABB and Alawwal Bank infrastructure, referred to as ‘Customer Day 1’ in the first quarter of 2021. The progress made during 2020 has been no small feat given the onset of the COVID-19 pandemic, which resulted in a swift move to remote delivery by the execution team. Notwithstanding these challenges, during 2020, we completed the co-location of all staff, agreed and implemented the IT systems architecture and migrated the vast majority of the Alawwal Bank corporate portfolio onto the SABB system. Having agreed on our target culture in 2019, we rolled out culture workshops in early 2020. We continued to support our customers by creating a number of hybrid branches allowing customers of both SABB and Alawwal Bank to access services at common locations. We launched an online merger hub in late 2020 to assist Alawwal Bank customers with the switch to the merged bank. The merger hub acts as a one-stop shop for customers to learn about potential changes to their services and the benefits of their new, improved banking proposition. While the switch to SABB will be mostly automated for our customers, the hub provides each customer with a unique journey and guidance on when they will need to activate services such as digital banking and new cards. Reported merger-related integration and transaction costs were SAR 500 million during 2020. Achieving cost and revenue synergies is currently on track and as at the end of 2020, we had achieved SAR 0.6 billion of annualised synergies from optimising our funding base, procurement expenditure, operating model, and real estate footprint. P O S IT I O N I N G F O R G ROW T H 49
50. Retail Banking and Wealth Management (RBWM) 37% 2020 2019 (pro forma) Total operating income (‘revenue’) 3,318 4,133 Provision for expected credit losses, net )239( )521( )2,127( )2,098( 952 1,514 Performance highlights (SAR mln) % OF SABB REVENEUE SAR 8.9 BLN Operating expenses Net income before Zakat and income tax Operating highlights SABB’s retail bank has 5% market share of customer lending, 8% share in deposits, and our branch network makes up 5% of total branches in the Kingdom. The retail business is due to complete its customer migration integration in the first quarter of 2021. From this point in time, we will be one retail bank, with one branch network, one IT system, one website and one culture. As part of these plans during 2020, we created a number of hybrid branches allowing SABB and Alawwal Bank customers access to services at common locations. In the second half of the year, we launched an online merger hub to help Alawwal Bank customers with the switch to the merged bank. The merger hub acts as a onestop shop for customers to learn about potential changes to their services and the benefits of their new, improved banking proposition. With the onset of COVID-19 early in the year, the Bank swiftly flexed the size of its branch network, and incorporated social distancing measures and the use of protective equipment for those branches that remained open. Our goal was simple: to maintain critical services whilst keeping staff and customers safe. The Bank supported its customers with a variety of measures including the waiving of certain fees and a 3-month deferral of payments for over 27,000 customers who work in the Healthcare sector. Through a targeted campaign to encourage customers to avoid unnecessary branch visits, we increased online and mobile interactions with our overall digital penetration of active retail customers reaching 73% during the year. service, which helped migrate 39% of eligible transactions from branch to digital. Our digital capability has helped customers open accounts remotely via digital channels, with 80% of new accounts opened through a digital channel by the end of 2020. Growth in credit appetite continues to be dominated by mortgage demand with the market growing rapidly yearon- year. SABB’s mortgage market share fell, given the well-seasoned nature of the portfolio, the Bank’s customer segmentation and risk appetite, despite a healthy level of new sales volume particularly in the second half of the year. During the year, SABB launched a two-in-one mortgage-focused product called ‘Flexi’, which provides customers with both a personal finance and mortgage finance advance in order to purchase a home. SABB also offers a complete range of Real Estate Development Finance (REDF) products and features, to support our customers’ ambitions of home ownership – a key strand in the Vision 2030 economic transformation plan. From a savings perspective, our Shariah-compliant Waafer product has increased in popularity and was recognised as ‘Product of the Year – 2020’ by POTY. Financial performance Net income of SAR 952 million before Zakat and income tax was SAR 561 million or 37% lower than the previous year, mainly driven by lower revenue partly offset by an improvement in expected credit losses. Over 692k mobile app downloads Revenue of SAR 3,318 million was 20% lower from the cuts in benchmark interest rates at the start of 2020 together with increased competition and lower average lending balances. In addition, revenue also fell from reduced fee income mainly relating to credit cards, loan origination and other service charges. The retail bank’s mobile app gathered momentum in 2020 having been downloaded over 692k times, achieving top rankings in both the Apple and Android app stores, and won ‘Best Mobile Banking App’ in Saudi Arabia and MENA from Global Finance Magazine. During 2020, we enhanced our interactive voice response (IVR) services, and continued to the see the benefits of our fully online ‘Digital account opening’ and ‘Know Your Customer’ (KYC) processes. SABB was the first bank in the Kingdom to launch an online KYC Gross customer lending of SAR 37.8 billion fell by SAR 1.1 billion or 3%, mainly due to a reduction in personal lending balances; mortgage balances also fell marginally compared with December 2019, despite growth in originations in the second half of 2020. Customer deposits of SAR 87.9 billion increased 3%, with the proportion of demand deposits at 83%, a notable strength of the retail franchise. S A B B | A N N U A L R E P O R T 2020
51. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Snapshot: best-in-class e-remittances SABB continues to enhance its cross-border e-remittance technology with new functionality including instant notification and digital tracking. New payment corridors were launched in the year including to South Africa and Bangladesh, alongside the Philippines and Pakistan which were launched the previous year. In order to do this, we have partnered with some of the largest and leading wallet providers in each country. P O S IT I O N I N G F O R G ROW T H 51
52. Corporate and Institutional Banking (CIB) 44% Performance highlights (SAR mln) Total operating income (‘revenue’) 2020 2019 (pro forma) 3,878 5,208 % OF SABB Provision for expected credit losses, net )1,376( )2,364( REVENEUE Goodwill impairment )7,418( - SAR 8.9 BLN Operating expenses )1,221( )1,329( Net (loss) / income before Zakat and income tax )6,137( 1,516 1,281 1,516 Net income before Zakat and income tax excl. goodwill impairment Operating highlights The SABB-Alawwal Bank merger has created one of the largest corporate banks in the Kingdom with c.13% of corporate lending market share. Its unique position as the leading international bank in Saudi Arabia, bolstered by a strong partnership with HSBC Group, enables SABB’s customers to access services and opportunities globally, and allows global corporates to access the Kingdom. During 2020, integration was a top priority and SABB substantially completed the integration of the Corporate & Institutional Banking business having migrated the vast majority of the Alawwal Bank corporate portfolio onto the SABB system, and the business enters 2021 operating as a single bank. Top 3 Corporate Bank by revenue 2020 started with signs of promising growth in corporate credit, however this was constrained by the onset of the COVID-19 pandemic, which then largely remained muted for the remainder of the year. To support our customers in these challenging times, the business worked diligently to implement SAMA’s various initiatives to support the financial sector and in particular the Micro, Small and Medium Enterprises (MSME) segment. Following the launch of SAMA’s Private Sector Financing Support Program (PSFSP) which provides support to MSMEs, SABB provided eligible customers with a payment deferral that has continued into 2021. In addition, the Bank waived fees associated with digital payments and transfers for corporate customers. Our Global Liquidity and Cash Management (GLCM) business offers a range of cash management, payments and liquidity solutions to our customers. ‘HSBCnet’, the online tool used by our corporate customers, developed in collaboration with HSBC, has benefitted from a number of improvements during 2020. These include an improved interface, helping customers fulfill payments with ease and improved analytics for liquidity tracking, together with enhanced authentication processes including biometric access for mobile users. In 2020, SABB also launched an online banking platform focused for MSME S A B B | A N N U A L R E P O R T 2020 customers, given the importance of the segment to the Bank and the wider aspirations of Vision 2030. In recognition of our leadership position in payments and cash management, SABB was recognised as ‘Market Leader’ and ‘Best Service Provider’ in the 2020 Euromoney Cash Management Survey. Our Global Trade and Receivables Finance (GTRF) business remains the primary trade finance provider of choice for the market, in both conventional and Shariah-compliant financing. During 2020, we continued developing our digital capabilities. Building on our track-record of delivering ‘firsts’, we delivered the first Saudi-hosted cloud-based supply chain solution that helps our clients improve working capital efficiency. Despite a challenging global macro-environment, we remain the leading provider of ‘letters of credit’ and have also become the largest provider of guarantees in Saudi Arabia. SABB was awarded ‘Best Service Trade Finance’ in Saudi Arabia and ‘Market Leader Trade Finance’ for 2020 in the Euromoney awards, and ‘Best Trade Finance Provider’ for 2020 at the MEA Awards. Both businesses, which form the cornerstone of our corporate offering have digital capability at their core, which was and continues to be of increasing importance during the pandemic. Towards the end of the year, the Bank signed an agreement with the Ministry of Finance to support the Ministry’s supply chain in collaboration with the National Debt Management Centre. Together with two other leading banks, this agreement will speed up transactions between buyers and suppliers to boost economic growth. Financial performance The CIB business recorded a net loss before Zakat and income tax of SAR 6,137 million which included the impairment of goodwill of SAR 7,418 million in the second quarter. Further information on the goodwill impairment can be found on page 46. Excluding this, the CIB business recorded net income of SAR 1,280 million which was 16% lower than 2019 from lower revenue partly offset by lower expected credit losses and reduced costs.
53. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Revenue of SAR 3,878 million was 26% lower than 2019, mainly due to cuts to benchmark interest rates in the first quarter of 2020 and the second half of 2019, and from lower average lending balances. Non-funds income also reduced, mainly from lower fee income from reduced trade activity and lower loan origination fees. Margins were affected by increased competition. Revenue from the GLCM business was more resilient and showed a marginal increase in 2020 compared with the previous year. Gross customer lending balances as at 31 December 2020 of SAR 122.6 billion were SAR 3.4 billion higher than the previous year. Much of this growth occurred in the first quarter before being curtailed by COVID-19, and our market share has been adversely affected by increased competition, although the fourth quarter has seen a return to growth for the CIB business. Customer deposits of SAR 92.9 billion fell 8% as we continued the optimisation of the funding base. P O S IT I O N I N G F O R G ROW T H 53
54. Treasury 19 % % OF SABB REVENEUE SAR 8.9 BLN Performance highlights (SAR mln) 2020 2019 (pro forma) Total operating income (‘revenue’) 1,674 1,281 )16( )27( Provision for expected credit losses, net Operating expenses Net income before Zakat and income tax Operating highlights The integration process is being delivered successfully, and by the end of 2020, we had substantially integrated the Treasury businesses from SABB and Alawwal Bank into a harmonised unit. Treasury enjoys a breadth of products and services, from simple foreign exchange trading to derivatives across asset classes – including Islamic; as well as an innovative digital platform for customers to execute their own trades. At the heart of Treasury’s strategy is its support for SABB’s role in the development of the Saudi capital market, as per the Vision 2030 agenda. This is achieved by SABB’s role as a Primary Dealer, and the development of a repo market, while at the same time partnering with the Bank’s business segments to develop a focused and attractive proposition for customers. In July, SABB was granted approval by Muqassa to act as a General Clearing Member. Muqassa was established as the central counterparty clearer in the Saudi financial markets, in line with international standards, which illustrates our leadership position in the local capital market. SAR 5 billion Tier II Sukuk One of the three general clearing members of Muqassa S A B B | A N N U A L R E P O R T 2020 )179( )231( 1,478 1,023 In volatile markets caused by the COVID-19 pandemic, our business has continued to support customers with their foreign exchange and interest rate hedging needs. Despite unprecedented uncertainty, we delivered on our landmark SAR 5 billion Tier II Sukuk. This was the first such transaction by the merged bank in the debt capital markets, the joint largest Tier II issuance by a Saudi bank in history, and the largest local issuance by a local bank since the introduction of Vision 2030. Both achievements demonstrate our role in the Financial Sector Development Programme to develop a more diversified and effective financial sector in the Kingdom. The Bank has maintained its leadership position with foreign exchange and trading income, ranking in the top 3 of all local banks, and was awarded ‘Best Foreign Exchange Provider’ by Global Finance. Financial performance Net income before Zakat and income tax of SAR 1,478 million was 45% higher than the previous year, mainly from increased revenue and, to a lesser extent, lower costs. Revenue of SAR 1,674 million was 31% higher than 2019 primarily from increased NSCI in part from the optimising of our funding base following the merger.
55. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE Other 2020 2019 (pro forma) Total operating income (‘revenue’) 9 197 Provision for expected credit losses, net - - )686( )654( 82 133 )595( )324( Performance highlights (SAR mln) Operating expenses Share in earnings of associates and a joint venture Net income before Zakat and income tax The ‘Other’ segment includes the activities of the Bank’s insurance subsidiary and associate, SABB Takaful and Wataniya, a subsidiary and joint venture for investment banking and brokerage, Alawwal Invest and HSBC Saudi Arabia, and equity investments. In addition, merger-related expenses are reported in ‘Other’. It also includes elimination of inter-group income and expense items. HSBC Saudi Arabia (HSBC SA) HSBC SA provides a full range of securities business services including investment banking advisory, debt capital market and syndicated finance advisory, project and export finance advisory, and custody and funds securities services. It also manages mutual funds and discretionary portfolios and provides brokerage services. The Company serves a wide range of clients including but not limited to corporates, financial institutions, non-bank financial institutions and individuals. SABB Takaful Takaful means ‘guaranteeing each other’ in Arabic. It is an Islamic system of mutual insurance built on the concept of ‘tabarru’ or donation or gift. SABB Takaful offers a wide range of Shariah-compliant family and general insurance products to meet the needs of customers, both individuals and corporates. P O S IT I O N I N G F O R G ROW T H 55
56. Our response to COVID-19 Clear priorities during challenging times • Maintain critical services • Keep our staff and customers safe Operational resilience has been strong 1. Our staff 4. Treasury • Flexed the size of the branch network • Deployed over 2,500 laptops, increased remote connectivity by 300% and expanded our Virtual Private Network (‘VPN’) capacity by 12x, allowing the Bank to continue operations seamlessly • Over 2 million Zoom meeting minutes and 45,000 virtual meetings • Held over 50 webinars on mental health, productivity and mindfulness • Preventative social distancing initiatives, protective equipment rollout and deep cleaning across branches and offices • In notably volatile markets, Treasury continued to support our customers with their foreign exchange and interest rate hedging needs • Completed the issuance of a SAR 5 bln Tier II Sukuk, enhancing our Capital position. This is the first such transaction by the merged bank in the debt capital market, the largest joint Tier II issuance by a Saudi bank in history, and the largest local issuance by a bank since the introduction of the Kingdom’s national growth agenda under Vision 2030. • Primary Dealers are playing a proactive role in the issuance of government debt by actively participating in the primary debt market and also supporting the secondary market 2. Retail customers • Drive to mobile and online with a targeted campaign to encourage customers to avoid unnecessary branch visits, resulting in increased app downloads and improved digital penetration; also waived digital fees • Waived certain fees and charges • 3-month payment deferral for workers in the health sector, benefiting over 27k customers • Deferrals for Saudi workers covered by SANED programme • Reimbursed all FX fees charged on credit, Mada or prepaid cards for customers wishing to cancel travel reservations 3. Corporate and Institutional customers • Following the launch of SAMA’s Private Sector Financing Support Programme (‘PSFSP’) which provides support to Micro, Small and Medium Enterprises (‘MSME’), we have provided eligible customers with a 12-month payment deferral • Waived certain fees and other charges • Exempted certain MSME customers from the cost of the ‘Funding Guarantee’ programme - Kzafalah • Encouraging customers to move certain transactions online with our Global Liquidity and Cash Management (‘GLCM’) and Global Trade and Receivables Finance (‘GTRF’) propositions S A B B | A N N U A L R E P O R T 2020 5. Society • SABB has contributed SAR 17 mln to the Ministry of Health’s COVID-19 fund and donated over SAR10 mln for the social welfare fund to support pandemic relief • Provided food baskets to over 9,000 families through various charities • Partnered with transport apps including Careem and Uber to deliver groceries free of charge with an additional discount when using SABB payment cards
57. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE P O S IT I O N I N G F O R G ROW T H 57
58. CAPITAL OVERVIEW Capital management is critical for the longevity of the Bank . SABB ensures that it possesses an appropriate level of regulatory capital to meet minimum levels required by its regulator and to support business growth and dividend distribution, even under stressed scenarios. The Bank’s policy on capital management is underpinned by a capital management framework and our internal capital adequacy assessment process (ICAAP). Capital adequacy and utilisation of regulatory capital are monitored regularly by the Bank’s senior management. SABB’s assessment of capital adequacy is aligned to its assessment of risks, including credit, liquidity, Shariah and other operational risks as detailed on page 82 within the Risk overview. 31 Dec 2020 % 31 Dec 2019 % Common equity tier 1 ratio 18.96% 17.00% Tier 1 ratio 18.96% 17.00% Total capital ratio 21.82% 18.24% Capital (SAR mln) 31 Dec 2020 31 Dec 2019 41,775 38,450 Capital ratio Common equity tier 1 capital Additional tier 1 capital - - 6,303 2,819 48,078 41,269 Tier 2 capital Total regulatory capital RWA (SAR mln) 31 Dec 2020 31 Dec 2019 Credit risk 199,268 205,119 Market risk 19,065 19,266 1,988 1,830 220,321 226,214 Operational risk Total RWAs Core Tier 1 ratio: 31 December 2020 vs. 30 September 2020 vs. 31 December 2019 18.59% 0.1 0.1 18.96% 0.3 0.4 17.00% 31 December 2019 1.2 9M20 net income 0.5 0.5 Dividend 2019 paid Change in RWAs S A B B | A N N U A L R E P O R T 2020 Impact of SAMA regulatory treatment of COVID-19 Extraordinary Support Measures 30 September 2020 4Q20 net income Change in RWAs Other 31 December 2020
59. BANKING FROFILE | STRATEGICBANK REPORT PROFILE | GOVERNANCE | STRATEGIC| REPORT FINANCIAL | GOVERNANCE STATEMENTS P O S IT I O N I N G F O R G ROW T H 59
60. SUPPORTING MICRO SMALL AND MEDIUM ENTERPRISES The Kingdom ’s Vision 2030 strategy sets out a target to increase the contribution of Micro, Small and Medium Enterprises (MSME) to the economy. In support of the Kingdom’s strategy, SABB is proud to support over 20,000 active MSME customers throughout the Kingdom. MSME segment definitions SABB defines its MSME segments as follows: Corporate Segments Annual Sales Turnover Business Banking Mass-Micro Below SAR 3 mln Business Banking Mass-Small Between SAR 3 mln to 40 mln Business Banking Upper (Medium) Between SAR 40 mln to 200 mln SABB has eight Business Banking Centres to serve MSME clients, including presence in Riyadh, Jeddah, Alkhobar and Dammam, and to provide a wide range of solutions, including shariah-compliant products. A dedicated relationship manager (‘RM’) is assigned to each customer to assess their banking needs and provide solutions to meet their requirements. SABB possesses a bespoke Monsha’at Established in 2016, Monsha’at, the General Authority for Small and Medium Enterprises, works on supporting, developing and nurturing the SME sector. SABB continued to support a number of Monsha’at initiatives and signed an agreement during the Biban event in 2020, to help develop a new financing gateway that enables MSME customers to gain access to financing opportunities. We also signed a memorandum of understanding to further improve our collaboration. 2020 initiatives team of 55 focussed relationship managers focussed on assisting its MSME customers, as well as the larger SABB infrastructure. During 2020, SABB has continued to develop its MSME provision through regular training, with each RM undertaking over 4 days bespoke MSME training alongside the standardised training provided to all SABB employees. The Kafalah programme, which is now included under the Monsha’at series of initiatives, aims to provide financing to MSMEs that is secured with a guarantee from Monsha’at. All Kafalah programme financing applications are handled by dedicated RMs within specialised teams, and detailed reporting provides weekly progress updates to RMs and the business on our progress. An agreement signed with Monsha’at during 2020 will further accelerate our involvement. SABB offers a comprehensive Shariah-compliant receivables finance product, and supply chain finance solutions to larger companies to help MSMEs manage their cash flows efficiently, and reduce funding costs. terminals. Sadad and other national payment gateway solutions are also used. In addition, we are working in collaboration with the Tamwelk platform which provides new customer referrals to our RMs, an innovative solution to access the growing number of Fin-Tech organisations. Our market leading corporate service enables SABB to bring best-in-class digital solutions to its MSME customer base. During 2020, SABB has improved customer experience by migrating over-the-counter transactions towards digital channels, including online banking, interactive teller machines, cash deposit machines, and point-of-sale (POS) On customer experience for the MSME sector, SABB is developing a new platform for SMEs that will be faster and easier to use, as well as developing a digital on-boarding tool for account opening, targeting a completely end-to-end online customer journey. S A B B | A N N U A L R E P O R T 2020
61. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE SABB recently signed an agreement with S&P to use their MSME scorecard model which is an off-the-shelf product that leverages their expertise in credit assessment, ratings, sector specific knowledge and ongoing research and development. The Microsoft Excel-based tool, which is used globally, was also selected due to its ease of implementation. SAMA programmes to support customers affected by COVID-19: Following the onset of the COVID-19 pandemic, the Bank worked diligently to implement SAMA’s various initiatives to support the financial sector and the MSME segment. 1- Deferred payment programme Following the launch of SAMA’s Private Sector Financing Support Programme (PSFSP), SABB provided eligible customers, (Stage 1 and Stage 2 as per IFRS9: Financial Instruments standard), with a payment deferral for all outstanding installments and accrued special commission income. The deferrals occurred in the following three phases: • Phase one: Loans due from 14 March 2020 to 14 September 2020 will be deferred for 6 months. • Phase two: Loans due from 15 September 2020 to14 December 2020 will be deferred for 3 months. • Phase three: Loans due from 15 December 2020 to 31 March 2021 will be deferred for 3.5 months. 2- Secured lending programme The programme aims at granting subsidised loans to SMEs for a maximum period of 36 months. This programme, which was effective from 14 March 2020, is valid initially for a single year, but can be extended. 3- Loan guarantee programme This programme supports our Kafalah customers and was available between 14 March 2020 and the end of the year. Beneficiaries of the programme may forgo payment of fees associated with issuance, renewal, extending and rescheduling of facilities. Beneficiaries’ applications are submitted to the Kafalah programme and an official relief notice must be provided to the beneficiary. The financing entity must provide SAMA with a statement with the total fees paid for the Kafalah programme on a monthly basis. 4- Supporting fees of POS & e-commerce With SAMA’s support, SABB waived a number of digital fees relating to POS terminals and e-commerce for a period of three months, to reduce unnecessary travel during the national lockdown and to encourage more online transactions. Loans and off-balance positions to MSME customers December 2020 (SAR’000s) Micro Small Medium Total Loans to MSMEs 992,135 1,930,640 5,265,884 8,188,658 Off Balance Sheet positions to MSMEs 779,003 1,301,718 6,366,148 8,446,868 Loans to MSMEs as a % of total SABB Loans 0.6% 1.2% 3.3% 5.1% Off Balance Sheet positions to MSMEs as a % of total SABB off balance sheet positions 0.9% 1.4% 7.1% 9.4% Number of credit facilities 1,127 2,377 7,735 11,239 303 519 761 1,583 Number of credit facilities guaranteed by Kafalah programme Number of customers with credit facilities 3 599 1,122 1,724 Amount of credit facilities guaranteed by Kafalah programme 1,832 445,718 851,776 1,299,326 December 2019 (SAR’000s) Micro Small Medium Total Loans to MSMEs 38,451 884,472 4,697,471 5,620,393 Off Balance Sheet positions to MSMEs 59,042 671,698 3,981,371 4,712,112 Loans to MSMEs as a % of total SABB Loans 0.0% 0.6% 3.0% 3.6% Off Balance Sheet positions to MSMEs as a % of total SABB off balance sheet positions 0.1% 0.6% 3.5% 4.2% Number of credit facilities 260 2,112 7,083 9,455 Number of customers with credit facilities 141 515 615 1,271 Number of credit facilities guaranteed by Kafalah programme 60 404 340 804 Amount of credit facilities guaranteed by Kafalah programme 18,771 133,483 212,033 364,286 P O S IT I O N I N G F O R G ROW T H 61
62. GOVERNANCE 64 The Board of Directors (the ‘Board’) 66 Biographies of Board Members 70 Biographies of Executive Management 74 Changes to the Board during 2020 75 Board sub-committees 82 Risk governance 87 Internal controls 90 Board assurance 93 SABB General meetings 94 Directors’ and Senior Executives’ interests 95 Remuneration 99 Legal Entity structure 100 Appointment of external auditors 101 Debt securities in issue and other borrowings 102 Statutory payments 103 Penalties S A B B | A N N U A L R E P O R T 2020
63. P O S IT I O N I N G F O R G ROW T H 63
64. THE BOARD OF DIRECTORS (THE ‘BOARD’) Led by the Chair, the Board sets the Bank’s strategy and risk appetite with the aim of achieving sustainable value to shareholders and promote a culture of openness and debate. The Board also approves the capital and operating plans for achieving the strategic direction on the recommendation of the Executive Management (‘MANCOM’). The Board, as at 31 December 2020, consisted of 11 members who bring together a wealth of local and international experience across a spectrum of industries. On 18 December 2019, The General Assembly of the Bank convened and elected the Directors of the Board, eight (8) of whom were elected by the shareholders and three (3) of whom were appointed by HSBC Holding B.V through the Ordinary General Meeting (OGM) for a term of 3 years which commenced from 01 January 2020 to 31 December 2022. The General Assembly approved the election and appointment of directors by way of accumulative voting. All Directors may be reappointed for new terms. Chair As of 01 January 2020, Ms. Lubna S. Olayan was appointed the Chair of SABB as a non-executive Chair. Vice Chair As of 01 January 2020, Mr. Saad A. Al Fadly was appointed the Vice Chair of SABB as non-executive Vice Chair. Executive Directors SABB’s Managing Director (MGD), Mr. David Dew is a representative of HSBC Holdings B.V. Non-Executive Directors and Independent Non-Executive Directors Excluding the Chair and the MGD, the Board as at 31 December 2020 consisted of 4 Non-Executive Directors who are not deemed to be independent. The remaining 4 Directors are all Independent Non-Executive Directors. The Board is responsible for the Bank’s strategy and risk appetite. The Board reviews the performance of management in meeting the Bank’s strategic targets and monitors the Bank’s risk appetite and profile. All the Independent Directors are considered to be independent of SABB and there are no relationships or circumstances that are likely to affect their decisions. The Bank possesses a written policy, which is regularly updated, on potential conflicts of interest that could arise for the Board together with a policy that handles the disclosure mechanism. Board responsibilities The roles of the Chair and the MGD are separate, with a clear division of responsibilities between the Chair managing the Board and developing the strategy, and the MGD responsible for running SABB. The Board is responsible for supervising the senior management. S A B B | A N N U A L R E P O R T 2020
65. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE The following items are reserved for the Board: the review and approval of strategy, annual operating plans, risk appetite and limits, performance targets, M&A activity, significant capital expenditure, specified senior appointments and any substantial changes in asset and liability management. Ms. Lubna Suliman Olayan1 Mr. Saad Abdulmohsen Al Fadly Non-Executive Chair 2 Non-Executive Vice-Chair Eng. Khalid Abdullah Al Molhelm Non-Executive Eng. Mohammed Omran Al Omran Non-Executive Mr. Samir Assaf Non-Executive Mr. David Dew Executive Mr. Stephen Moss Non-Executive Mr. Ahmed Farid Al Aulaqi Independent Ms. Maria Ramos3 Independent Mr. Martin Edward Powell Independent Mr. Stuart Gulliver Independent 1. 2. 3. Ms. Lubna S. Olayan was appointed as Chair of the Board of Directors commencing 1 January 2020 for a 3-year term. Mr. Saad Al Fadly was appointed as Vice Chair of the Board of Directors commencing 1 January 2020 for a 3-year term. Ms. Maria Ramos resigned from the position as an independent Board Member as of 31 December 2020 Corporate governance best practice A robust approach to corporate governance is a key strength for any organisation and the Bank ensures it adopts best practices in this field in order to ultimately create value for all the Bank’s stakeholders. The Bank regularly conducts internal reviews to assess compliance with all regulatory requirements issued by the Capital Market Authority (CMA) and the Saudi Central Bank (SAMA), as well as local and international best practice. SABB’s corporate governance policies include statements on the following areas: • • • • • • • • Disclosure Conflicts of interest Criteria for the selection of Directors Relationship with stakeholders Related parties’ transaction Remuneration and compensation for Directors and Board sub-committees and Executive Management Corporate Governance Document. Code of Conduct principles for Board of Directors and Committee Members Diversity Diversity is another key strand to both local and international governance best practice. SABB is particularly proud of the diversity within its Board. The Board includes 2 females, one of which is the Chair, which is a strong signal of the Bank’s vision. In addition, the Board is a mixture of local and international expertise from a wide spectrum of industry experience, both within the financial services sector and broader non-financial services experience. Training and development Training and development is provided for each Board Director, with the support of the Group Company Secretary. NonExecutive Directors develop and refresh their skills through periodic interaction with senior management across the Bank. SABB maintains a bespoke training programme that covers all aspects of the banking industry and corporate governance best practice. In addition, the Board also undertakes mandatory training on a wide range of subjects, including: anti-money laundering; anti-bribery and corruption; conduct; cyber security and sanctions. P O S IT I O N I N G F O R G ROW T H 65
66. BIOGRAPHIES OF BOARD MEMBERS AS AT 31 DECEMBER 2020 Ms . Lubna Suliman Olayan Mr. Saad Abdulmohsen Al Fadly Eng. Khalid Abdullah Al Molhem Non-Executive Chair Non-Executive Vice-Chair Non-Executive Director Current position Current position Current position Board member of: • Olayan Financing Company (Saudi Arabia) • Schlumberger Company (Saudi Arabia) • Olayan Holding Company (Saudi Arabia) • Health Water Bottling Company (Saudi Arabia) • The Coca-Cola Company (Saudi Arabia) Senior position: • Chief Executive Officer of Hassanah Investment Company (Saudi Arabia) Board member of: • Saudi White Cement Company (Listed / Saudi Arabia) • Ittefaq Steel Company (Saudi Arabia) Board member of: • National Medical Care Company (Listed / Saudi Arabia) • Almarai Company (Listed / Saudi Arabia) • GEMS Company (Saudi Arabia) • Ma’arif Education and Training Company (Saudi Arabia) Former position Former position Former position Senior position: • Chief Executive Officer of Olayan Financing Company (Saudi Arabia) Board member of: • Saudi Arabian Mining Company (Listed / Saudi Arabia) • Alawwal Bank (Saudi Arabia) Qualifications • Honorary PhD in Law from Trinity College, Dublin, Ireland • Master of Business Administration (MBA) from Indiana University, USA • Bachelor of Science from Cornell University, USA Experience • Over 35 years of experience in investment, banking and business management S A B B | A N N U A L R E P O R T 2020 Senior position: • Chief of Staff and Senior Officer Central & Eastern Regions of the NCB Capital Company (Saudi Arabia) • Vice President in Morgan Stanley (Saudi Arabia) Qualifications • Bachelor of Science in Accounting, King Saud University, KSA • Master’s Degree in Financial Economics, Boston University, USA Experience • Experience in investment management and banking services at a number of financial and regulatory institutions, for more than 20 years Senior position: • General Director of Saudi Airlines (Saudi Arabia) • Chief Executive Officer of the Saudi Telecom Company (STC) (Listed / Saudi Arabia) • Chief Executive Officer of Almarai Company (Listed / Saudi Arabia) Board member of: • United Electronics Company (Extra) (Listed / Saudi Arabia) • Knowledge Economic City Company (Listed / Saudi Arabia) • King Abdullah Port Rabigh (Saudi Arabia) • HSBC Middle East Ltd (United Arab Emirates) • King Abdullah Economic City Company (Emaar) (Listed / Saudi Arabia) • Aseer Trading, Tourism and Manufacturing Company (Listed / Saudi Arabia) Qualifications • Bachelor of Science in Electrical Engineering from the University of Evansville, USA • Bachelor of Engineering Management from the University of Evansville, USA Experience • Experience in the business of banks and companies and has taken the lead in the privatisation of a number of major Saudi companies
67. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Eng. Mohammed Omran Al Omran Mr. Samir Assaf Mr. David Dew Non-Executive Director Non-Executive Director (Representing HSBC Holdings B.V.) Executive Director (Representing HSBC Holdings B.V.) Current position Current position Current position Senior position: • General Manager of Omran Muhammad Al Omran and Partners Company (Saudi Arabia) Board member of: • Saudi Orix Leasing Company (Saudi Arabia) • Tarabot Investment and Development Company (Saudi Arabia) • Tourism Development Fund (Saudi Arabia) Former position Board member of: • Al-Rajhi Company for Cooperative Insurance (Alrajhi Takaful) (Listed / Saudi Arabia) • Saudi Arabia Credit Suisse (Saudi Arabia) • Saudi Telecom Company (STC) (Listed / Saudi Arabia) Qualifications • Bachelor of Science in Civil Engineering from King Saud University, KSA • Master‘s Degree in Construction Management from the University of South California, USA Experience • Experience in the business and investment sectors Senior position: • Chairman Corporate and Institutional Banking (Listed / United Kingdom) Board member of: • HSBC France (Listed / France) • Montaigne London (United Kingdom) • Alfanar Charity Arm (United Kingdom) Former position Senior position: • Group Managing Director, member of the Group Management Board, and Chief Executive of Global Banking and Markets, HSBC (Listed / United Kingdom) Board member of: • HSBC Egypt (Egypt) • HSBC Asset Management Limited (United Kingdom) • Global Financial Markets Association (United States of America) • HSBC Trinkhaus and Burkhardt AG (Listed / Germany) Qualifications • Master’s Degree in Economics from USJ, Lebanon • Master’s Degree in Economics and International Finance from La Sorbonne University, France • An Honorary Master’s Degree in Finance from Sc. PO(IEP), France • Bachelor’s Degree in Finance from L’ Institut d’Etudes Politiques, France Senior position: • Managing Director of SABB (Listed / Saudi Arabia) Board member of: • HSBC Bank Middle East Limited (United Arab Emirates) • HSBC Saudi Arabia Limited (Saudi Arabia) Former position Senior position: • Deputy Managing Director and Chief Operating Officer of SABB (Listed / Saudi Arabia) • Deputy Chief Executive of HSBC Amanah and Chief of Administration, Global Banking and Markets, Middle East HSBC (MENA) Qualifications • Master’s Degree in Economics from Cambridge University, UK • Associate of the Institute of Bankers Experience • Management and financial experience gained during his over 40-year career with HSBC in a number of regions and roles Experience • Experience in the banking and global financial markets field acquired from working at HSBC Group, where he held several leading roles P O S IT I O N I N G F O R G ROW T H 67
68. BIOGRAPHIES OF BOARD MEMBERS AS AT 31 DECEMBER 2020 (continued) Mr. Stephen Moss Mr. Ahmed Farid Al Aulaqi Ms. Maria Ramos Non-Executive Director (Representing HSBC Holdings B.V.) Independent Director Independent Director Current position Current position • Co-founder and President of Aspect Investment Partners Limited (United Arab Emirates) Board member of: • Compagnie Financier Richemont SA (Listed / Switzerland) • AngloGold Ashanti Limited (Listed / South Africa) • Public Investment Corporation (South Africa) Current position Senior position: • Group Managing Director, Regional Chief Executive for Europe, MENAT, LATAM and HSBC (Listed / United Kingdom) Board member of: • HSBC Middle East Holdings (Netherlands) B.V • HSBC Latin America Holdings Limited (United Kigdom) • HSBC Bank plc • HSBC Bank Middle East Limited • HSBC Bank Canada (Canada) Former position Senior position: • Group Managing Director, Group Chief of Staff, HSBC (Listed / United Kingdom) Board member of: • HSBC Asia Holdings B.V (United Kingdom) • Serai Limited (United Kingdom) • HSBC Asset Management Limited (United Kingdom) Qualifications • Qualified Chartered Accountant and Member of the Institute of Chartered Accountants in England and Wales Experience • Management and financial experience gained during his over 27 years career with HSBC Chief of Staff to the Group Chief Executive. Leads Group Strategy and Planning, Group Mergers and Acquisitions, Global Communications, Global Events, Group Public Affairs and Group Corporate Sustainability S A B B | A N N U A L R E P O R T 2020 Former position Senior position: • President of Safanad International Company (United Arab Emirates) • Held various positions in the National Commercial Bank in Saudi Arabia and the United Kingdom, the latest of which was the Chief Executive Officer of NCB Capital Company (Listed / Saudi Arabia) Board member of: • Alawwal Bank (Saudi Arabia) • Safanad Investment Company (United Arab Emirates) • The Company for Cooperative Insurance (Tawuniya) (Listed / Saudi Arabia) • Tunisian Saudi Bank (Tunisia) Former position Senior position: • Chief Executive Officer of ABSA Group Limited (Listed / South Africa) • Chief Executive Officer of Transnet Limited (South Africa) • Director General of National Treasury (South Africa) Board member of: • Transnet Limited (South Africa) • Sanlam Limited (Listed / South Africa) • Remgro Limited (Listed / South Africa) • SABMiller (Listed / United Kingdom) Qualifications • Master of Business Administration (MBA) from the University of Stirling, UK • Bachelor’s Degree in Business Administration from King Abdulaziz University (KAU) Qualifications • Master’s Degree in Economics, University of London (SAOS) • Bachelor of Commerce (Honours) in Economics, University of Witwatersrand • Diploma, Institute of Bankers (CAIB) Experience • Over 30 years of experience in business management, banking, treasury, capital markets, investment services and brokerage Experience • Experience in executive positions in public finance and Government Treasury, infrastructure and logistics, and banking with listed companies and has taken the lead in the privatisation of a number of major international companies
69. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Mr. Martin Edward Powell Mr. Stuart Gulliver Independent Director Non-Executive Director Former position Current position Senior position: • Senior executive role in Royal Bank of Scotland PLC (RBS) since 1973, the latest of which was the Chief Risk Officer Capital Resolution Group (Listed / United Kingdom) Board member of: • Hong Kong Airport Authority (Hong Kong) • Jardine Matheson Holdings Limited (Hong Kong) Former position Board member of: • Alawwal Bank (Saudi Arabia) Qualifications • ACIB - The Chartered Institute of Bankers Experience • Over 40 years of senior management expertise in banking, financial services and risk management Senior position: • Executive Director and Group Chief Executive of HSBC Holdings plc (Listed / United Kingdom) • Chairman of The Hong Kong and Shanghai Banking Corporation Limited Qualifications • Master’s Degree in Law from Oxford University, UK Experience • More than 37 Years experience in international banking in a variety of executive roles including Group Chief Officer of HSBC Holdings plc P O S IT I O N I N G F O R G ROW T H 69
70. BIOGRAPHIES OF EXECUTIVE MANAGEMENT AS AT 31 DECEMBER 2020 Mr . David Dew Mr. Majed Najm Mr. Bashaar Al Qunaibet Current position Current position Current position • Executive Director and Managing Director of SABB • Deputy Managing Director Corporate and Institutional Banking • Deputy Managing Director Retail Banking & Wealth Management Board member of: • HSBC Bank Middle East Limited (United Arab Emirates) • HSBC Saudi Arabia Limited (Saudi Arabia) Former position Former position • Chief Executive Officer and Board member of HSBC Saudi Arabia • Chief Human Resources Officer, SABB • General Manager Branches and Sales, SABB Executive Director Former position Senior position: • Deputy Managing Director and Chief Operating Officer of SABB (Listed / Saudi Arabia) • Deputy Chief Executive of HSBC Amanah and Chief of Administration, Global Banking and Markets, Middle East HSBC (MENA) Qualifications • Master’s Degree in Economics from Cambridge University, UK • Associate of the Institute of Bankers Experience • Management and financial experience gained during his over 40 year career with HSBC in a number of regions and roles S A B B | A N N U A L R E P O R T 2020 Qualifications • Bachelor of Science in Management Experience • Joined SABB and HSBC Group in 1992. He has held leadership positions as General Manager of Retail Banking and Wealth Management at SABB, Head of International at HSBC Middle East (Dubai) and the Chief Executive Officer of HSBC Bahrain Qualifications • Bachelor’s Degree in Business Administration Experience • Over 21 years’ management and financial experience gained working in the Saudi banking sector, including roles at SABB, Alawwal Bank and NCB, and also as Business Development Director at SAMA’s SADAD Payment System
71. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Mr. Mohammed Abdullatif Al Shaikh Ms. Maha Al Sudairi Dr. Nawaf Alhusseini Current position Current position Current position • Deputy Managing Director for Treasury • Chief Compliance Officer • Chief Human Resources Officer Former position Former position • Chief Compliance and Governance Officer, Alawwal Bank • General Manager Human Resources, The Saudi Investment Bank • Head of Human Resources, Arab National Bank • General Manager Human Resources, Alawwal Bank Former position • General Manager Treasury, Alawwal Bank Qualifications • Bachelor of Science in Finance Experience • Joined Alawwal Bank in 2012 as the General Manager of Treasury. Prior to joining Alawwal, he held various treasury roles at Samba from 1994, with extensive experience across functions and was a member of the Group’s Executive Management Committee Qualifications • Master of Science in International Finance (Honours) from Kingston University, United Kingdom • BA in English Translation from King Saud University, Saudi Arabia Experience • Over 10 years of experience in the Saudi banking system, compliance and corporate governance, acquired through formal training locally and abroad Qualifications • PhD Business Administration – Human Resources Management from Temple University – Fox School of Business and Management • Master of Business Administration (MBA) from San Francisco State University • Bachelor of Business Administration from King Saud University Experience • Seasoned Human Resources professional with rich leadership experience spanning several Saudi banks and the International Monetary Fund (IMF), with consulting and academic experience P O S IT I O N I N G F O R G ROW T H 71
72. BIOGRAPHIES OF EXECUTIVE MANAGEMENT AS AT 31 DECEMBER 2020 (continued) Mr. Richard Hinchley Mr. Mathew Pearce Ms. Ghada Al Jarbou Current position Current position Current position • Chief Risk Officer • Chief Financial Officer • Chief Operating Officer Former position Former position Former position • Chief Risk Officer, HSBC Saudi Arabia • Chief Financial Officer, HSBC Japan • General Manager of Global Liquidity and Cash Management, SABB Bank Qualifications • Bachelor of Science in Business from University of Bradford Management Centre, UK Qualifications • Chartered Accountant with Institute of Chartered Accountants in England and Wales • Bachelor of Science (Honours) in Business Studies and Japanese, Cardiff University, UK Experience • A seasoned and experienced Risk professional with 27 years of executive experience in HSBC, including 15 years at Senior Management levels, across the UK, USA, South America, Asia and Middle East S A B B | A N N U A L R E P O R T 2020 Experience • 20 years of experience in Banking and Finance, with PricewaterhouseCoopers and HSBC in a number of senior roles in Europe, Asia and the Middle East Qualifications • Master of Business Administration (MBA) from University of Bath • Bachelor’s Degree in Computer Science from Kind Saud University Experience • Over 22 years of experience in banking. Joined SABB in 1998 and worked in different departments; IT, HR, Retail Banking, and Corporate Banking
73. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Ms. Faten Abalkhail Mr. Musaifer Alosaimi Current position Current position • Company Secretary • Chief Information Officer Former position Former position • Integration Management Office / Head of Planning & Control, Strategy Department & Finance Department, Alawwal Bank • Head of information Technology Development, SABB Bank Qualifications • Bachelor’s Degree in Home Economics and Nutrition • Diploma in Computer Sciences / Programming & Information Systems Experience • Over 21 years of banking experience with in-depth knowledge in planning, governance of strategic initiatives, execution and process. Held various posts in Business, Operations and Control functions including; Treasury, Retail, Strategy and Finance groups Qualifications • Diploma In Computer Engineering Experience • Over 26 years of experience in the fields of Banking and Technology. Started his career with Saudi Arabian Monitoring Authority and was there for more than 10 years. In 2005, he joined SABB and progressed through different roles in the Information Technoilogy department P O S IT I O N I N G F O R G ROW T H 73
74. CHANGES TO THE BOARD DURING 2020 Appointment , retirement and re-election of Directors Appointments to the Board are made on merit and a rigorous selection process is followed in order to appoint a Director. The process also ensures that SABB maintains diversity across its Board. Non-Executive Directors are appointed for an initial 3-year term and may be reappointed for new terms. The Ordinary General Assembly meeting on 18 December 2019 approved election of the Board of Directors for a term of 3 years, started from 1 January 2020 until 31 December 2022. Board meetings During 2020, the Board held 10 meetings. The following table shows details of those meetings and the respected attendance. Meeting dates 02 Apr 22 Apr 11 Jun 14 Jul 16 Jul 10 Dec 16 Dec 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 Ms. Lubna S. Olayan           Mr. Saad A. Al Fadly           Eng. Mohammed Omran Al Omran           Ms. Maria Ramos1           Mr. Martin E. Powell           Mr. Stuart Gulliver    -       Eng. Khalid A. Al Molhem           Mr. Ahmed F. Al Aulaqi           Mr. Stephen Moss           Mr. Samir Assaf           Mr. David Dew           1. Ms. Maria Ramos resigned from her position and the effective date was 31 December 2020 S A B B | A N N U A L R E P O R T 2020 16 Jul 13 Aug 21 Sep
75. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE BOARD SUB-COMMITTEES The Board has established 4 sub-committees: • • • • Executive Committee (‘EXCOM’) Audit Committee (‘AUCOM’) Nomination and Remuneration Committee (‘NRC’) Board Risk Committee (‘BRC’) The Bank’s approach with the construct of its Board sub-committees is in line with all regulatory requirements issued by the various supervisory authorities, the Bank’s by-laws and governance documents. The Chair of each sub-committee will report matters of significance to the Board and minutes of all meetings are shared with all Board members. Detailed roles and responsibilities for each committee are produced. Terms of reference During the past few years, the Bank has prepared the terms of reference of all Board sub-committees in line with the principles of governance, membership criteria, Banking Control law, corporate governance rules and the Companies - Law. SABB’s Board has endorsed the terms of reference of all Board sub-committees, while the meeting of the General Assembly has approved terms of reference of the Audit Committee (‘AUCOM’) and the Nomination and Remuneration Committee (‘NRC’) as per regulatory directives. As per their terms of reference, all the Board sub-committees must review their performance, status and terms of reference on an annual basis to ensure that the Committee is operating effectively including compliance with regulatory requirements, and to recommend any changes deemed appropriate for the Board’s approval, and subsequently, the General Assembly Meeting’s approval, where applicable. Assessment of the effectiveness of the Board, Directors and Board Sub-Committees In line with the regulatory requirements of the Governance Principles and Corporate Governance Rules and SABB Corporate Governance Document, SABB Board of Directors annually conducts a self-assessment of its performance as well as of the performance of its members and sub-committees. P O S IT I O N I N G F O R G ROW T H 75
76. BOARD SUB-COMMITTEES (continued) Board and sub-committee attendance during 2020 Independent Board EXCOM AUCOM NRC BRC 10 10 8 4 6 - 10/10 10/10 - - - - 10/10 - - 4/4 - - 10/10 10/10 - - - - 10/10 10/10 - - - Mr. Ahmed F. Al Aulaqi  10/10 10/10 - 4/4 - Ms. Maria Ramos  10/10 - - 4/4 -  10/10 - 8/8 - 5/6 - 10/10 9/10 - - - Number of meetings held Chair Ms. Lubna S. Olayan Vice-Chair Mr. Saad A. Al Fadly Executive Director Mr. David Dew Non-Executive Directors Eng. Khalid A. Al Molhelm 1 Mr. Martin E. Powell2 Eng. Mohammed Omran Al Omran Mr. Stephen Moss - 10/10 - - - 5/6 Mr. Samir Assaf - 10/10 - - 4/4 -  10/10 - 6/8 - 6/6 - - - 6/8 - - - - - 8/8 - - Mr. Stuart Gulliver 3 Other Board sub-committee members Mr. Andrew Jackson3 Mr. Khalid S. Al Subayel 2 - - - 8/8 - - Mr. Abdulhameed Almuhaidib - - - - - 6/6 Ms. Christine Lynch - - - - - 6/6 Mr. Saad Saleh Al Sabti 1. 2. 3. 2 Ms. Maria Ramos resigned from her position during 2020 with an effective date of 31 December 2020 Mr. Khalid S. Al Subayel, Mr. Saad Saleh Al Sabti and Mr. Martin E. Powell were appointed to AUCOM on 28 January 2020 Mr. Stuart Gulliver and Mr. Andrew Jackson were appointed to AUCOM on 22 April 2020 Executive Committee (‘EXCOM’) Members • • • • • Mr. David Dew (Chair– Executive Director) Ms. Lubna S. Olayan (Non-Executive Chair) Eng. Khalid A. Al Molhelm (Non-Executive Director) Mr. Mohammed O. Al Omran (Non-Executive Director) Mr. Ahmed F. Al Aulaqi (Independent Director) Roles and responsibilities The principal objective of the committee is to assist the MGD, within the scope determined by the Board to deal with matters referred by the MGD or by the Board. In addition, EXCOM reviews and considers all monthly reports submitted by different functional heads and business segments of the Bank, and meets at least 6 times during the year. S A B B | A N N U A L R E P O R T 2020
77. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE In line with the corporate governance requirements and best practice, the terms of reference of the Committee were revised and approved by the Board on 15 December 2016. The committee consists of 3 to 5 members with MGD as the Chair and at least 2 of the other members selected from the Board. In 2020, the Committee held 10 meetings. The table below shows details of those meetings and the record of attendance of members during the year. EXCOM meetings during 2020 Mr. David Dew Ms. Lubna Olayan Eng. Khalid Mr. Mohammed Al Molhelm Al Omran Mr. Ahmed Al Aulaqi 28-Jan      25-Feb      24-Mar    -  21-Apr      23-Jun      14-Jul      20-Sep      29-Oct      25-Nov      13-Dec      Audit Committee (‘AUCOM’) Members • • • • • Mr. Martin E. Powell (Chair - Independent Director) Mr. Stuart Gulliver (Independent Director) Mr. Andrew Jackson (Non-Board member) Mr. Saad Saleh Al Sabti (Non-Board member) Mr. Khalid S. Al Sebayel (Non-Board member) Roles and responsibilities The AUCOM monitors the Bank’s internal audit function, supervises external auditors, reviews control weaknesses and system deficiencies, supervises the Compliance Function and monitors its effectiveness. It is also responsible for the review of interim and annual financial statements including compliance with accounting policies, and provides the Board with its comments and feedback. The Committee reviews all audit reports and provides its recommendations and actions. AUCOM also makes recommendations to the Board on the appointment of the Bank’s auditors and their respective fees, the review of the audit plan, follow-up on the auditors’ work and the review of the auditors’ comments, whilst also approving any work beyond normal audit business. The Chief Internal Auditor reports to AUCOM. On 28 January 2020 the Ordinary General Assembly of the Bank convened and approved the formation of the Audit Committee (AUCOM) for a term of 3 years which commenced on 28 January 2020 to 31 December 2022, and the shareholders approved the appointment of Mr. Martin Powell as Chair, Mr. Saad Al Sabti and Mr. Khalid Al Sebayel as Audit Committee members starting from 28 January 2020. The General Assembly of the Bank convened on 22 April 2020 and appointed Mr. Stuart Gulliver and Mr. Andrew Jackson as additional members of the Audit Committee starting from 22 April 2020 until the end of the current committee term, being 31 December 2022. In line with the Bank’s plan to comply with corporate governance requirements, the terms of reference of the Committee were revised and approved by the AGM on 28 March 2018. P O S IT I O N I N G F O R G ROW T H 77
78. BOARD SUB-COMMITTEES (continued) AUCOM meets at least 4 times a year and in 2020, held 8 meetings. The following table shows details of those meetings and the record of attendance of members during the year. AUCOM meetings during 2020 Mr. Martin Powell1 Mr. Stuart Gulliver2 Mr. Andrew Jackson2 Mr. Saad Al Sabti1 Mr. Khalid Al Sebayel1 23-Feb  - -   19-Apr  - -   15-Jul      17-Aug      19-Aug      22-Sep      27-Oct      15-Dec      1. 2. The noted members were appointed to the Audit Committee from 28 January 2020 The noted members were appointed to the Audit Committee from 22 April 2020 Nomination and Remuneration Committee (‘NRC’) Members • • • • Ms. Maria Ramos (Chair - Independent Director) resigned during 2020 with an effective date of 31 December 2020 Mr. Saad Al Fadly (Non-Executive Vice Chair) Mr. Samir Assaf (Non-Executive Director) Mr. Ahmed Al Aulaqi (Independent Director) Roles and responsibilities The NRC recommends the nominations for Board membership in line with SABB Board membership policies and criteria and, annually reviews the skills and capabilities required of those suitable for Board membership, including the time needed by a Board member for Board business. The sub-committee also evaluates the effectiveness of the members, sub-committees and the Board holistically and reviews the structure of the Board. An equally critical element of responsibility is to ensure the independence of those members that are considered independent and evaluate potential conflicts of interest that might arise. It also reviews the scope and limits of SABB’s governance in addition to drawing-up and approving the compensation and remuneration policies and schemes. In line with the corporate governance requirements and best practice, the terms of reference of the Committee were revised and approved by the AGM on 22 April 2020. NRC meets at least twice a year and in 2020, the committee held 4 meetings. The following table shows details of those meetings and the record of attendance of members during the year. NRC meetings during 2020 Ms. Maria Ramos1 Mr. Saad Al Fadly Mr. Samir Assaf Mr. Ahmed Al Aulaqi 27-Mar     21-Apr     16-Sep     16-Dec     1. Ms. Maria Ramos resigned from her position during 2020 with an effective date of 31 December 2020 S A B B | A N N U A L R E P O R T 2020
79. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Board Risk Committee (‘BRC’) Members • • • • • Mr. Stuart Gulliver (Chair) Mr. Martin Powell (Independent Director) Mr. Stephen Moss (Non-Executive Director) Ms. Christine Lynch (Non-Board member) Mr. Abdulhameed Almuhaidib (Non-Board member) Roles and responsibilities The BRC has the responsibility for the oversight of enterprise risk management, risk governance and internal control systems. It provides advice to the Board on all key and emerging risks to the Bank and sets the risk appetite and risk strategy. In line with the corporate governance requirements and best practice, the terms of reference of the Committee were revised and approved by the Board on 01 April 2019. The Committee consists of 3 to 5 Non-Executive Directors or non-Director members and reports directly to the Board. It meets at least 4 times a year. In 2020, the Committee held 6 meetings. The following table shows details of those meetings and the record of attendance of members during the year. BRC meetings during 2020 Mr. Stuart Gulliver Mr. Martin Powell Ms. Christine Lynch Mr. Stephen Moss Mr. Abdulhameed Almuhaidib 23-Feb      2-Jun      15-Jul      22-Sep      9-Dec   - -  15-Dec  -    P O S IT I O N I N G F O R G ROW T H 79
80. BOARD SUB-COMMITTEES (continued) Profile of Board sub-committee members (non-Director members) Mr. Khalid Saleh Al Subayel Mr. Saad Saleh Al Sabti Mr. Andrew Jackson AUCOM member AUCOM member AUCOM member Current position Current position Current position • NAS Holding - Audit Committee Member • National Housing Company – Audit and Risk Committee member • Protiviti – Executive Partner • Member of Shura Council • Partner in Alsabti ecovis company • Board and Audit Committee member in Riyadh School • Board and Audit Committee member in Riyadh Chamber of Commerce and Industry • Chief Executive Officer of Jackson Consultants Ltd Former position • Saudi Central Bank Director of the Banking Inspection Department • The Mediterranean & Gulf Insurance & Reinsurance - Audit Committee Member Qualifications • Bachelor’s Degree in Literature from King Saud University in KSA • Master’s Degree in Accounting from University of Illinois at US, Chicago • Banking Diploma from IPA, KSA • Professional certificates CPA Experience • 26 years of experience in a number of leadership positions in the Saudi Central Bank (SAMA) Former position • Al Sabti & Bannaga – RSM Managing Partner • Al Faisaliah Group – Chief Internal Auditor • Saudi Venture Capital - Audit Committee Member Qualifications • Bachelor’s Degree in Accounting from King Saud University in KSA • Master’s Degree in Accounting from Welch University, USA • Professional certificates including CPA, IIA, and SOCPA Experience • Experience in the financial and accounting sector, especially in the internal audit field at SAMA’s SADAD Payment System S A B B | A N N U A L R E P O R T 2020 Former position • KPMG Gulf Holdings (Saudi Arabia, Kuwait, Jordan) - CEO • KPMG ELLP (Europe) - member of the Executive Committee and Remuneration Committee • KPMG East Africa – Executive Committee (the highest body of the firm) and Chairman of the Governance Committee Qualifications • Bachelor’s Degree in Computer Science and Accountancy from Manchester University, UK Experience • Specialised in emerging markets, and has worked in over 40 different countries
81. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Ms. Christine Lynch Mr. Abdulhameed Almuhaidib BRC Member BRC Member Current position Current position Board member of: • HSBC Bank Oman SAOG • Executive Managing Director Noor Energy (UAE) • Foremost developer of privately owned power and water project (Saudi Arabia and United Arab of Emiratis) • Board member in HSBC Saudi Arabia (Saudi Arabia) Former position • HSBC Trust Company AG • Fondation de prevoyance des entites suisses du Groupe HSBC Qualifications • BA in Modern Languages & European Studies from University of Bath, UK • Bachelor of Science in Financial Services from University of Manchester Institute of Science & Technology, UK Experience • Experience of over 20 years in leading positions in the Risk Management sector Former position • Shuaa Energy 1 PSC – Board Member • First National Operation & Maintenance Co. (NOMAC) • ShuqaiqArabian Water & Electricity Company – Internal Audit Committee Chairman • International Bowarege Co. for Water Desalination Ltd – Board Member Qualifications • BBA Major in Finance from the University of Miami, USA • Master of Business Administration (MBA), Pepperdine University Graziadio School of Business and Management from Malibu, California, USA Experience • Business leader with over a decade of progressive experience in projects and corporate management across different business sectors P O S IT I O N I N G F O R G ROW T H 81
82. RISK GOVERNANCE SABB has a consistently strong risk culture across the organisation , which is embedded throughout business units, enablement and control functions. Ultimate accountability belongs to the Board which exercises active governance through its Board sub-committees. Clear communication, guidance and online risk training is provided to all employees. The Bank operates to the principle that all staff are responsible for identifying and managing risk within the scope of their role, whilst providing effective oversight by control functions and internal audit, as defined by the three lines of defense model. Adherence to risk management is a key performance indicator applied in the performance management of all Executive Management and staff across the organisations. A strict policy of consequence management is applied where failures occur. A well-established risk governance and ownership structure ensures oversight of, and accountability for, the effective management of risk. The Board approves the Bank’s risk framework, plans and performance targets, which include the establishment of management-level risk governance committees, bank-wide and business risk appetite statements, the delegation of authorities for acceptance of credit and other risks and the establishment of effective control procedures. Three lines of defence 1st line of defence The first line consists of risk and control owners. Risk owners are responsible for the end to end management of risks that they own. They are supported by control owners who are responsible for carrying out control activities with the object of ensuring risks are managed within policy and appetite. Typically, this applies to all units of the Bank with the exception of Internal Audit. 2nd line of defence The second line of defence is comprised of the Bank’s operational risk management function and risk stewards within the Bank’s Risk Management, Finance, Compliance, Legal and other functions that own policy and provide guidance and oversight to ensure proper management of the risks that they steward. 3rd line of defence The third line of defence consists of an independent internal audit function which provides assurance with regard to the design and implementation of the Bank’s controls and risk management practices. The Internal Audit function reports directly to the Board’s Audit Committee. The Risk Management Committee (‘RMC’) and the Asset and Liability Committee (‘ALCO’) are two critical risk governance committees that support the BRC in setting the Bank’s overall risk appetite and managing the Bank’s activities within it. The RMC review risk appetite, emerging risks and risk policy and is chaired by the Chief Risk Officer. ALCO reviews the risks associated with the Bank’s balance sheet including asset and liability management, and liquidity and funding. Both RMC and ALCO meet at least 10 times a year and the BRC and EXCOM respectively provides oversight of these committees, reviewing key performance metrics against risk appetite statements, discussing emerging risk matters, and incorporating learnings from international best practice. Enterprise-wide risk management tools Risk appetite SABB’s risk appetite is documented and defines our desired risk profile and tolerances within which risk should be managed. The risk appetite covers both risks which we actively accept and engage in as well as risks that are an inevitable function of doing business. Risks covered include, credit, market, operational, interest rate, liquidity and funding, and regulatory risks. Risk appetite statements (‘RAS’) are deployed at the Bank level for all key risk categories and at the business level to document appropriate risk appetite and limits for major lines of business. SABB’s risk appetite is reviewed and approved by the Board at least annually. The risk appetite is central to an integrated approach to risk, capital and business management and supports the Bank in achieving its strategy, as well as being a key element in meeting the Bank’s obligations under Pillar 2 of the Basel Accord. Risk Map S A B B | A N N U A L R E P O R T 2020
83. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE SABB maintains a risk map, covering an assessment of current and anticipated levels of risk across all major financial and nonfinancial risk types. The risk map is reviewed by the Bank’s Risk Management Committee and any risk identified as being at an “amber” or “red” level is investigated further and actions to mitigate the elevated level of risk are determined. Stress testing SABB’s stress testing programme is performed at an enterprise-wide level and focuses on the key risk types to which the Bank is exposed. Stress testing refers to various quantitative and qualitative techniques used to gauge the Bank’s vulnerability to exceptional but plausible events. The Bank’s stress testing programme incorporates the guidelines set out by SAMA, the principles set out by the Basel Committee and is a key component of the Bank’s risk management approach. A major objective of stress testing is to provide assurance that the Bank is adequately capitalised and sufficiently liquid to withstand a stress event and, in particular, would be able to restore its financial standing and operations to normal levels without undue reliance on external parties. Sensitivities that are identified during the stress testing process are followed up with management actions with the intention of mitigating their potential impact in the event of an actual stress event. During the year the Bank has conducted multiple regulatory and internally initiated stress tests to evaluate potential outcomes of the COVID-19 pandemic on key economic indicators and consequently to the Bank’s risk profile. This stress testing informed management actions through the year. The Bank’s stress testing shows the Bank is adequately capitalised and sufficiently liquid to weather severe but plausible stress events. Principal Risk types Risk type Definition and management Credit Risk is the risk of loss resulting from the failure of a borrower or counterparty to honour its financial or contractual obligations to the Bank. Credit Risk arises from the Bank’s direct lending operations, its issuance of guarantees, bonds and like instruments, trade finance activities and its investment and trading activities. The granting of credit to customers is a core business of the Bank and accounts for a major portion of the Bank’s balance sheet and profitability. The quality of the credit portfolio has a direct and important impact on the Bank’s performance and strength. The Bank maintains credit policies, manuals and procedures specify lending guidelines to manage credit risk across the Bank’s portfolios, within approved risk appetite. The Bank operates an independent credit risk function which provides high-level oversight and management of credit risk for SABB, aligned with SAMA Rules on Credit Risk Management in Banks. Its primary responsibilities include: independent risk assessment to ensure applications conform with SABB’s credit policy and local applicable regulations; guiding business segments on the Bank’s appetite for credit exposure to specified industry sectors, activities and banking products; and controlling exposures to sovereign entities, banks and other financial institutions. Credit risk Credit risk is monitored using a variety of credit risk management techniques such as assigning credit ratings, setting limits, monitoring credit exposures, limiting transactions with specific counterparties, continually assessing the creditworthiness of counterparties and through the appropriate structuring of transactions including the use of collateral Specific reviews engaging all these techniques were initiated, as the potential economic effects of the COVID-19 pandemic became apparent, to identify and mitigate unfolding risks. The Bank manages credit exposure relating to its treasury trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and by limiting the duration of exposure. The Bank’s credit risk exposure through derivatives represents the potential cost of replacing the derivative contracts if counterparties fail to fulfill their obligations. To control the level of credit risk taken, management assesses counterparties using the same techniques as for lending activities. Concentrations of credit risk arise when a number of obligors are engaged in similar business activities or have similar attributes that would cause their ability to meet contractual obligations to be similarly affected by a particular change in economic, political or other conditions. Concentration Risk can also arise from large exposures to a single borrower or group of related borrowers. Management seeks to manage concentration of Credit Risk through the diversification of lending activities and through the use of internal and regulatory limits and capital models. P O S IT I O N I N G F O R G ROW T H 83
84. RISK GOVERNANCE (continued) Risk type Definition and management Market Risk is the risk that movements in market factors, including foreign exchange rates, special commission rates, credit spreads and equity prices, will reduce our income or the value of our portfolios. Exposure to market risk is separated into two portfolios: Market risk • Trading portfolios - comprise positions arising from market making and warehousing of customer-derived positions. • Non-trading portfolios - comprise positions that primarily arise from the special commission rate management of our retail and commercial banking assets and liabilities and financial investments designated as ‘Held to collect and sell’ and ‘Held to collect’. Market risk is monitored and measured using limits and metrics approved by the BRC. The exposure and limits are monitored by an independent risk function. SABB uses a range of control measures to manage market risk ranging from specific stop loss control limits, sensitivity analysis, stress testing and Value at risk (VaR). Liquidity risk is the risk that SABB does not have sufficient financial resources to meet its obligations as they fall due or that it can only do so at an excessive cost. Liquidity risk arises from mismatches in the timing of cash flows. Funding risk is the risk that funding considered to be sustainable, and therefore used to fund assets, is not sustainable over time. Funding risk arises when illiquid asset positions cannot be funded at the expected terms and when required. To support adherence to the RAS on an ongoing basis, SABB has established a range of key monitoring metrics, including but not limited to the Liquidity Coverage Ratio and the Net Stable Funds Ratio. All metrics are closely monitored against RAS limits in the ALCO and RMC and reported to the BRC. Liquidity risk SABB conducts cash flow stress testing for liquidity and funding risk. The stress test takes into consideration a number of market wide and idiosyncratic scenarios and time periods, to assess the Bank’s ability to continue to operate effectively in support of its customers throughout the stress period and beyond. The stress tests are conducted semi-annually. The Bank has established a mechanism for charging the cost of liquidity within the organisation to support the management of the balance sheet structure for liquidity and funding risk purposes. SABB maintains a Liquidity Contingency Funding Plan (CFP) to provide guidance for the senior management who constitute its Liquidity Crisis Management Team (LCMT) during a period of liquidity stress. The CFP establishes early warning monitoring metrics to forewarn management of an impending stress, sets out responsibilities, and describes the approach management may take during various stages of severity of a crisis. The CFP is updated and subject to scenario testing at least annually. S A B B | A N N U A L R E P O R T 2020
85. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Risk type Definition and management Shariah risk is the risk of financial loss, regulatory sanction and/or reputational damage to SABB as a result of either a failure to comply with the pronouncements, guidelines and resolutions issued by SABB’s Shariah Committees in respect of the development, execution, delivery and marketing of Islamic Products, or of an opinion of the Shariah Committee being disputed by another body. Shariah risk Shariah rules are open to different interpretations; hence, there are potential risks that a SABB product can be interpreted as non-compliant by another Shariah body. To mitigate this, SABB has ensured that its Shariah Committee members are of high standing. Further, SABB has a dedicated Shariah Affairs team specialising in advisory, risk management and review training and awareness seminars are undertaken on Islamic banking principles, product and specific processing requirements. Finally, SABB has a Technology platform that facilitates compliance with Shariah requirements to further reduce the risk of operational error or oversight. Shariah risk is identified as a distinct risk in the Bank’s risk heat map, both at business and the dedicated Islamic Financial level. Status is monitored through the appropriate governance committees. The Head of Islamic Financial Services reports directly to the Chief Risk Officer to oversee the development and independent control of Shariah products and services. IFS maintains a strong interaction with the Shariah Committee with respect to all Shariah related affairs which impact business and risk management. The Shariah Committee reports directly to the Bank’s Board. Operational risk is the risk to achieving the Bank’s strategy or objectives as a result of inadequate or failed internal processes, people and systems, or from external events. The Risk Appetite for Operational Risk is established annually and approved by the Board. This is reviewed at the Operational Risk Committee and the RMC with quarterly updates to the BRC. In order to ensure continuous assessment of adequacy of control over operational risks, risk and control assessments are made and the controls identified are tested periodically by Control Owners and Business Risk Control Managers. Issues identified are entered in the Risk Repository System and the resolution of issues is monitored and followed up by management and the status communicated to and monitored by governance committees. In addition, issues identified in other reviews including those conducted by internal audit, external audit and regulatory authorities are also communicated and followed up by the governance committees. Amongst a number of types of operational risk, the protection of the Bank’s technology infrastructure and our customers’ data is a key focus as more and more banking is digitalised. Operational risk As part of its core business processes, SABB handles various types of customer information and data relating to its customers. Handling of information and data includes its storage, processing and transmission. The Bank has established an Information Security Risk unit reporting to the Chief Risk Officer. This unit provides assurance that the Bank’s network is secure and is in compliance with Information Security Policies by undertaking monitoring of information flows, data risk management and access management over SABB’s core systems. Cybersecurity risk is the probability of exposure or loss resulting from a cyber-attack or data breach on SABB. We continue to strengthen our cyber-control framework and improve our resilience and cybersecurity capabilities, including threat detection and analysis, access control, payment systems controls, data protection, network controls and back-up and recovery. Cyber risk is a priority area for the Bank and is routinely reported at both the RMC and BRC to ensure appropriate visibility, governance and executive support for our ongoing cybersecurity programme. As a result of measures taken to contain the COVID-19 pandemic, the Bank moved to remote working arrangements at an unprecedented scale and with unprecedented speed in the first half. The bank took measures to mitigate the inevitable operational risks arising from this change in working practices and operational risks have been managed to an acceptable level during the year. P O S IT I O N I N G F O R G ROW T H 85
86. RISK GOVERNANCE (continued) Risk type Definition and management Reputational risk relates to stakeholders’ perceptions, whether based on fact or otherwise. As stakeholders’ expectations are constantly changing, reputational risk is dynamic. Therefore, SABB’s approach to reputational risk management must be upheld at all times and across all businesses and functions. SABB has built a strong image and reputation within the Saudi market, and maintains an unwavering commitment to operate, and be seen to be operating, to the highest standards set for itself. Reputational risk The reputation of SABB is critical to its success. Any financial services organisation stands or falls by its reputation and the customers’ confidence in it, and the reputation can be severely damaged by non-compliance with relevant regulations or by inappropriate actions or comments to the media or in the public domain. The maintenance of customer confidence is a prime objective of management and can be achieved through a strong and healthy financial position and by exhibiting successful risk management. SABB has zero tolerance for knowingly engaging in any business or activity where foreseeable reputational risk and/or damage has not been considered and/or mitigated. SABB tolerates a limited degree of reputational risk arising from activities where the risk has been carefully considered and/or mitigated and determined to fall below the risk threshold. Regulatory Compliance and Financial Crime Compliance (‘FCC’) Risks Compliance Risk is the risk leading to statutory, legal sanctions, material financial loss, or damage to the reputation of SABB that may be suffered as a result of failure to comply with all applicable laws, rules and regulations. The aim of compliance is to protect the reputation and credibility of SABB and protect the interest of shareholders and depositors, and safeguard the institution against legal and regulatory consequences. Compliance is a specialised activity with a great degree of complexity managing the risks of financial crime and regulatory compliance capturing sanctions, money laundering, terrorist financing, fraud, and anti-bribery and corruption. SABB has continued to make significant investments in people and compliance infrastructure including monitoring systems, internal reporting tools and training in order to better control the compliance risks across the organisation. All identified risks and breaches to local regulations are reported to the management and Board committees along with corrective actions. S A B B | A N N U A L R E P O R T 2020
87. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE INTERNAL CONTROLS The ultimate responsibility for the system of internal controls resides with the Board. SABB’s Internal Control System is designed to manage the risk of failure to achieve the Bank’s strategic objectives. SABB’s management have established and maintain an adequate and effective framework of internal control in support of the policies approved by the Board. The Internal Control System ensures quality of external and internal reporting, maintenance of proper records, design and operational effectiveness of processes, compliance with applicable laws and regulations, and internal policies with respect to the conduct of business. Regulatory compliance The Internal Control System is compliant with the Guidelines on Internal Controls issued by SAMA. This includes ensuring there is an ongoing process for the identification, evaluation and management of significant risks faced by the Bank. Observations made by external and internal auditors, and SAMA’s inspection team are promptly reviewed and addressed by management and subject to oversight by the Board and its Audit Committee. SABB’s assessment is that the Internal Control System in place provides reasonable assurance as to the integrity and reliability of the controls established and the management information produced. AUCOM assessment of the adequacy of the Bank’s internal control system During 2020, AUCOM reviewed various reports on the adequacy of internal controls and systems including the financial statements and risk reports. AUCOM reviews the minutes of the various management committees, for example, Risk Management Committee, and Compliance Committee. The AUCOM discussions and decisions are documented in the meetings’ minutes and matters requiring attention are escalated to the Board. During this year, the AUCOM members met with the Chief Internal Auditor, Chief Operations Officer, Chief Risk Officer, Chief Compliance Officer, Chief Finance Officer, and External Auditors; and have obtained updates on matters that require AUCOM’s attention. AUCOM also received internal audit reports, regulatory reports and external auditors’ management letters issued during the year and reviewed the management action plans for the issues raised. AUCOM also reviewed the effectiveness of the system of internal control and procedures for compliance with SABB’s internal policies, relevant regulatory and legal requirements in the Kingdom of Saudi Arabia and whether management has fulfilled its duty in having an effective internal control system, seeking independent assurance from internal audit to assess the adequacy and effectiveness of such internal controls. AUCOM assures the Board and shareholders that to the best of its knowledge and in all material aspects that SABB’s internal control system is adequately designed and operating effectively; and its recommendation pertaining to the appointment, dismissal, assessment or determining the remuneration of the external auditors or appointing Chief Internal Auditor were adopted by the Board. Annual review of the effectiveness of internal control procedures The Board is responsible for maintaining and reviewing the effectiveness of risk management. The framework of standards, policies and key procedures that the Directors have established is designed to provide effective internal control within SABB for managing risks within the accepted risk appetite of the Bank; for safeguarding assets against unauthorised use or disposal; for maintaining proper accounting records; and for the reliability and usefulness of financial information used within the business or for publication. Such procedures are designed to manage and mitigate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement, errors, losses or fraud. Such procedures for the ongoing identification, evaluation and management of the significant risks faced by SABB have been in place throughout the year. SABB’s management is responsible for implementing and reviewing the effectiveness of the Bank’s internal control framework as approved by the Board. All employees are responsible for identifying and managing risk within the scope of their role as part of the Three Lines of Defense model, which is an activity-based model to delineate management accountabilities and responsibilities for risk management and the control environment. The second line of defence sets the policy and guidelines for managing specific risk areas, provides advice and guidance in relation to the risk, and challenges the first line of defence (the risk owners) on effective risk management. P O S IT I O N I N G F O R G ROW T H 87
88. INTERNAL CONTROLS (continued) The Risk function, under the Chief Risk Officer, is responsible for maintaining oversight of the management of various risks across the Bank. The Compliance function maintains oversight of business operations and management action to ensure conformity with regulatory requirements. The risk management process is fully integrated with strategic planning, the annual operating plan and the capital planning cycle. Results are communicated for the information of the directors by means of periodic reports provided to the AUCOM and BRC members. Summary of key internal controls Control Description SABB standards SABB has established clear standards that should be met by employees, departments and the Bank as a whole. Functional, operating and financial reporting standards are established for application across the whole of SABB. Policies & Procedure framework SABB has a strong policies and procedures framework governed by the “Procedures of SABB Manuals”. SABB Standards Manuals set out the core principles within which SABB must operate. Functional Instructions Manuals (FIMs) articulate the key policies related to all major activities of the Bank besides standalone policies on the key regulations. All policies are approved by the Board and are subject to periodic review to ensure they adequately cover the Bank and its operating environment including alignment with regulation and the international best practices. Delegation of authority within limits set by the Board Authority to carry out various activities and responsibilities for financial performance against plan are delegated to SABB management within limits set by the Board. Delegation of authority from the Board to individuals requires those individuals to maintain a clear and appropriate apportionment of significant responsibilities and to oversee the establishment and maintenance of a system of controls appropriate to the business. Authorities to enter into credit and market risk exposures are delegated with limits to line management. Outside of these limits, including for credit proposals with specified higher risk characteristics, the concurrence of the Executive Committee is required. Credit and market risks are measured and aggregated for review and management of risk concentrations. The appointment of executives to the most senior positions within SABB requires the approval of the Board and concurrence from SAMA. Risk identification and monitoring Systems and procedures are in place in SABB to identify, monitor, control and report on the major risks including credit, market, liquidity, capital, financial management, model, reputational, strategic, sustainability, compliance, other operational risks and any emerging risks. Exposure to these risks is monitored by various management Governance Committees. These include: the Asset and Liability Committee, the Risk Management Committee, the Compliance Committee, the Fraud High Committee, the IT Steering Committee, the Customer Experience Steering Committee, the Audit Tracker Committee and their various sub-committees. Governance Committees The effectiveness, membership and terms of reference are reviewed annually and minutes of meetings are submitted to the Board sub-committees, and through these sub-committees to the Board. Risk & Control Assessment (‘RCA’) All significant operational risks, together with the associated controls are identified through a RCA process conducted by risk owners with input from subject matter experts in the second line of defence. The design and operating effectiveness of controls is tested at several levels including by dedicated Business Risk & Control Managers (within the first line of defence), the relevant risk stewards (second line of defence) and by Internal Audit (the third line of defence) to provide reasonable assurance to the management about the adequacy of the controls. Financial reporting SABB’s financial reporting process for preparing the consolidated Annual Report and Accounts 2020 is controlled using documented accounting policies and reporting formats. The submission of financial information is subject to certification by the Chief Financial Officer. S A B B | A N N U A L R E P O R T 2020
89. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Control Description Changes in operations, market conditions and practices Processes are in place to identify new risks arising from changes in market conditions and practices and customer behaviour. During 2020, attention was naturally focused on the merger with Alawwal Bank and the integration process. In addition, due to the COVID-19 pandemic the Bank operated under contingency plans, with staff working from home and the office – this was effective and enabled the Bank to continue to operate and serve customers effectively. Preparation for the integration of SABB and Alawwal Bank entities commenced in October 2018 with the creation of a dedicated Integration Management Office (IMO) and 18 distinct business/functional work streams spanning the two organisations. Such work streams were jointly resourced and initially tasked with creating integration plans for actions prior to and at the legal completion date which occurred on 16 June 2019. Subsequently, plans for integration from the legal completion date were prepared to ensure that full integration takes place. An important milestone still to be achieved is the integration of all technology systems when all customers will have a common experience engaging with the merged bank. This is due to take place within 2 years of the legal completion date. Merger with Alawwal Bank, governance of integration process Integration risks exist in many forms, e.g., the disruption to normal operations as a consequence of conflicting priorities, execution risk in terms of changes to policy and process, technology risk in terms of system migration, information security risk in the form of data migration, etc. SABB manages these risks through a formal governance process which extends from the Board, through the Executive Management to dedicated working groups. For all critical work-streams, SABB has engaged experienced consultant firms to ensure delivery is of high quality, with best practices learnt from similar integrations. The Board and Management also get comfort from a quality assurance process at each key step. Constant monitoring, communication, and action-oriented responses to help ensure risks are well managed and in a timely manner. Recognising the importance of this objective and the need to ensure it is delivered to a high standard, the Board has allocated a dedicated budget for integration which is subject to ongoing monitoring. The realisation of economic synergies from the merger is a key component of the strategic rationale behind the merger decision. The Board has set synergy targets to Executive Management and the delivery to target is supported by an independent and experienced consultant firm. Annual operating plans Annual operating plans, informed by detailed analysis of risk appetite describing the types and quantum of risk that SABB is prepared to take in executing its strategy, are prepared at business and functional levels and set out the key business initiatives and the likely financial effects of those initiatives. Governance arrangements Governance arrangements are in place to provide oversight of, and advice to the Board on, material risk related matters. These are effected through the Board sub-committees as well as management sub-committees which oversee the effectiveness of risk management and report to the Board sub-committees. Internal Audit Internal Audit (INA) represents the Third Line of Defence and monitors the effectiveness of the internal control framework across the whole of SABB focusing on the areas of greatest risk to the Bank as determined by a risk-based audit approach. INA accomplishes this by independently reviewing the design and operating effectiveness of internal control systems and policies established by first and second line functions to ensure that the Bank is operating within its stated risk appetite and in compliance with the regulatory framework. The Chief Internal Auditor (CIA) reports to AUCOM on all audit related matters. The SABB Internal Audit Activity Charter sets out the accountability, independence, responsibility and authority of the INA function, while the SABB Audit Instruction Manual (AIM) prescribes the standards and procedures adhered to by the INA function. Both documents are reviewed and approved by AUCOM, acting on behalf of the Board on an annual basis. Executive management is responsible for ensuring that Management Action Plans agreed by the INA function are implemented within an appropriate and agreed timetable. Confirmation to this effect must be provided to INA. During 2020, INA reviewed a number of activities and processes of SABB following a risk-based approach. Reports of these audits have been submitted to the AUCOM highlighting areas where the effectiveness of controls or management’s effectiveness in addressing control deficiencies was found to be less than satisfactory. On an overall basis, audits of the effectiveness of the internal control environment conducted during 2020 confirmed that systems and procedures for the ongoing identification, evaluation and management of significant risks faced by SABB were in place throughout the year. These procedures enabled SABB to discharge its obligations under the rules and regulations issued by SAMA and the standards established by the Board. P O S IT I O N I N G F O R G ROW T H 89
90. BOARD ASSURANCE The Board assures shareholders and other interested parties that to the best of its knowledge and in all material aspects : • Proper books of account have been maintained. • The system of internal controls is sound in design and has been effectively implemented. • It has no evidence that suggested the Bank is unable to continue as a going concern. The Board has reached this view and is able to make this assurance based on its ongoing oversight of and involvement in the Bank’s control framework directly and through its sub-committees. The Board further mandates management to conduct an annual review of effectiveness of internal control procedure. Related parties Transactions with related parties and the information relating to any business or contract to which the Bank is a party and in which there were substantial interests for one of the Board Members, Managing Director, Chief Financial Officer or any person who has a relationship with them, are disclosed below and in note 36 of the 2020 audited consolidated financial statements. (SAR) Duration of the business Nature of the business No. Related party Name of the party with direct or indirect interest or major shareholding 1. Al-Bustan Company Limited Ms. Lubna S. Olayan (Chair) 1,594,393 Annual Staff housing 2. Schindler Olayan Elevator Company Ms. Lubna S. Olayan (Chair) 126,776 Annual Elevator maintenance 3. Arabian Business Machines Company Ms. Lubna S. Olayan (Chair) 1,253,446 Annual X-Ray machine maintenance 4. Saudi Xerox Agencies Company Ms. Lubna S. Olayan (Chair) 4,884,498 Annual Printer services and maintenance 5. Olayan Real Estate Company Ms. Lubna S. Olayan (Chair) 792,000 Annual Branches site rental 6. HSBC Saudi Arabia (HBSA SA) Mr. David Dew Mr. Stephen Moss Mr. Samir Assaf 17,250,000 One Time SAR 5B Local Sukuk programme 7. Alawwal Invest Eng. Khalid A. Al Molhem Mr. Bashar Al Qunaibit Ms. Maha M. Al Sudairi 271,827 Annual Professional service 8. SABB Takaful Mr. Mohammad Al Shayea Mr. Bashar Al Quinabit Ms. Maha M. Al Sudairi Mr. Faris F. Al Shareef Mr. Yasir Al Barrak 9,719,135 Annual Professional service 9. SIMAH Mr. Naif Alabdulkareem 6,048,320 Annual Professional service Note: The above contracts were entered into as business-as-usual activity, without any preferential conditions or benefits. S A B B | A N N U A L R E P O R T 2020
91. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE Arrangements for shareholders’ waiver of rights to dividends The Bank is not aware of any information on any arrangements or agreements for the waiver by any shareholder of the Bank of any of their rights to dividends. Notification relating to substantial shareholdings During the year, the Bank did not receive any notification from shareholders or relevant persons with regard to the change in their ownership of the Bank’s shares in accordance with the disclosure requirements of the Listing Rules issued by the Capital Market Authority. Below are schedules of share ownership of major shareholders, Directors of the Board and Senior Executives or their spouses and minor children in shares or equity. Description of any interest, option rights and subscription rights of major shareholders No. of shares Name of Stakeholder Change 1 Jan 2020 31 Dec 2020 Shares % HSBC Holdings B.V 600,000,000 636,986,300 36,986,300 6.2 Olayan Saudi Investment Company Ltd. 374,936,698 418,026,857 43,090,159 11.5 General Organisation for Social Insurance (GOSI) 109,012,330 109,012,330 - - Rights of the shareholders In line with the relevant regulations, and as a general rule, the Bank ensures that the shareholders have the ability to exercise their rights completely, including their right to give feedback about the Bank and its performance through General meetings and the Share Registry unit. Bank requests for shareholders’ register The Bank regularly requests information on the constituents of the shareholder base from the Tadawul Stock Exchange. The requests are detailed below: Date Reason 1 01-Jan-20 Update of Shareholder Records 2 30-Jan-20 Update of Shareholder Records 3 27-Febr-20 Update of Shareholder Records 4 31-Mar-20 Update of Shareholder Records 5 22-Apr-20 AGM 6 26-Apr-20 Dividend Entitlement 7 30-Apr-20 Update of Shareholder Records 8 30-Jun-20 Update of Shareholder Records 9 30-Jul-20 Update of Shareholder Records 10 24-Aug-20 Update of Shareholder Records 11 31-Aug-20 Update of Shareholder Records 12 30-Sep-20 Update of Shareholder Records 13 29-Oct-20 Update of Shareholder Records 14 30-Nov-20 Update of Shareholder Records 15 03-Dec-20 Update of Shareholder Records 16 31-Dec-20 End Year Shareholder Records P O S IT I O N I N G F O R G ROW T H 91
92. BOARD ASSURANCE (continued) SABB complies in form and content with all corporate governance guidelines included in the Corporate Governance Regulations issued by the CMA with the exception of Article 95 (more details can be found below). This commitment has resulted in the inclusion of the compulsory requirements in the Bank’s bylaws and the Terms of Reference of Board Committees as well as in internal policies and guidelines. These include establishment of the rights of shareholders to purchase and own shares and to participate in General Meetings; the provision of all information that ensures shareholders can exercise their rights; the disclosure of financial and non-financial information and the complete observance of transparency requirements in line with the regulatory requirements; and the definition of the liabilities of the Board of Directors and formation of its various committees under Terms of Reference that are in line with the regulatory guidelines. Article Requirement Reason for non-compliance by the Bank 95 Formation of a Corporate Governance Committee (Guiding Article) The Nomination and Remuneration Committee, in line with its terms of reference, is entrusted with the periodical revisions to ensure consistency of the applications and structures of governance adopted by the Bank and to present their recommendations to the Board on such matters. S A B B | A N N U A L R E P O R T 2020
93. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE SABB GENERAL MEETINGS During 2020, SABB held two General meetings as follows: Ordinary General meeting 28 January 2020 (Formation of Audit Committee) In line with the regulatory guidelines, SABB held an Ordinary General Meeting on 28 January 2020 at SABB Head Office with the required quorum and attendance of 66.78 % of shareholders were present. Ordinary General Meeting 22 April 2020 (Annual General Meeting) In line with the regulatory guidelines, SABB held an Ordinary General Meeting on 22 April 2020 at SABB Head Office with the required quorum and attendance of 72.45% of shareholders. The resolutions of all the meetings are publicly available on the Tadawul stock exchange website (www.tadawul.com.sa). General meeting Board attendance The following table shows the details of meetings and the attendance of directors during the year: 28 Jan 2020 22 Apr 2020 Ms. Lubna S. Olayan -  Mr. Saad A. Al Fadly   Eng. Khalid A. Al Molhem   Mr. Mohammed O. Al Omran -  Mr. Ahmed F. Al Aulaqi   Ms. Maria Ramos - - Mr. Martin E. Powell - - Mr. David Dew   Mr. Samir Assaf -  Mr. Stephen Moss - - Mr. Stuart Gulliver - - P O S IT I O N I N G F O R G ROW T H 93
94. DIRECTORS ’ AND SENIOR EXECUTIVES’ INTERESTS Directors’ interests (including relatives) No. of shares Name of Stakeholder Change 1 Jan 2020 31 Dec 2020 Shares % Ms. Lubna S. Olayan 29,563 43,087 13,524 0.46 Eng. Khaled A. Al Molhem 53,119 53,119 - - Mr. Mohammed O. Al Omran 14,060,540 14,060,540 - - Mr. Saad A. Al Fadly - - - - Mr. David Dew - - - - - - - - Mr. Samir Assaf - - - - 1,677 1,677 - - Mr. Martin E. Powell - - - - Mr. Stephen Moss - - - - Mr. Stuart Gulliver - - - - Ms. Maria Ramos 1 Mr. Ahmed F. Al Aulaqi 1. Ms. Maria Ramos resigned from her position during 2020 with an effective date of 31 December 2020. Senior executives’ interests (including relatives) No. of shares Name of Stakeholder Change 1 Jan 2020 31 Dec 2020 Shares % Mr. David Dew - - - - Mr. Mathew Pearce - - - - 4,440 - )4,440( -100.0 Mr. Faten A. Abalkhail Mr. Majed Najm 124,236 124,236 - - Mr. Mohammed Al Shaikh 161,657 208,705 47,048 29.1 90,349 157,354 67,005 74.2 11,797 48,927 37,130 314.7 Mr. Naif Alabdulkareem1 Mr. Bashaar Y. Al Qunaibit 2 1. 2. Mr. Naif Alabdulkareem resigned on 31 October 2020. Mr. Bashaar Y. Al Qunaibit was appointed on 01 November 2020. S A B B | A N N U A L R E P O R T 2020
95. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE REMUNERATION SABB policy to determine the compensation paid to members of the Board of Directors of the Bank or members from outside the Board is determined in accordance with the frameworks issued by the supervisory authorities and governed by prime principles of governance of banks operating in the Kingdom and the compensation regulations issued by SAMA including SAMA Circular that sets the maximum amount of remuneration and compensation and in-kind benefits paid to the Directors and the Board sub-committee members annually including attendance fees. Also, the Corporate Governance Regulation issued by the Capital Market Authority of Saudi Arabia (CMA) the provisions of the Companies Law, SABB’s bylaws; the SABB Corporate Governance Document and SABB’s Compensation Policy. Directors’ fees for their membership of the Board and participation in the Banks’ operations, during 2020 amounted to SAR 4,131,011 including SAR 960,000 in attendance fees at Board meetings and Board sub-committees and special committees, namely: Executive Committee, Audit Committee, Nomination and Remuneration Committee, Board Risk Committee, Strategy Committee and Integration Committee respectively. The compensation is paid towards the end of the year. During 2020, none of the Board or sub-committee members have assumed any work of technical or advisory role, and therefore they did not obtain any consideration or special benefits in this respect. The table below shows details of remuneration paid to Board and sub-committee members and senior executives of the Bank during the year. Remuneration Non-Executive Board members Independent Board members Senior executive appointments where SAMA ‘no objection’ is required 2,955 2,136 25,501 - - 11,587 Annual and periodic bonuses - - 34,485 Incentive schemes - - 4,097 Other remuneration or benefits in kind paid monthly or annually2 - - 5,325 Salaries and remuneration Allowances 1 1. 2. Includes both cash and deferred bonus Includes end of service benefit for resigned senior executives, education benefit and accommodation P O S IT I O N I N G F O R G ROW T H 95
96. REMUNERATION (continued) Top Five Senior Executive Remunerations (Including CEO4 and CFO) Fixed remunerations Senior Executives 1 1. 2. 3. 4. Salaries Allowances In-kind benefits2 Total 8,169 3,656 1,466 13,291 Total (SAR’000s) Includes both cash and deferred bonus Includes end of service benefit for resigned Senior Executives, education benefit and accommodation rent Long Term incentive Plans include the Talent Retention Schemes The CEO is also an Executive Director Committee remuneration The following amounts are received by all Board sub-committee members Fixed remuneration Allowance for attending Board meetings Total EXCOM members 200 195 395 AUCOM members 463 180 643 NRC members 200 80 280 BRC members 450 140 590 Special committee for Strategic plan - 75 75 Special committee for Integration - 95 95 S A B B | A N N U A L R E P O R T 2020
97. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE End-of-service award Variable remunerations Periodic remunerations1 Profits Shortterm incentive plans 12,705 - - Longterm incentive plans3 Granted shares (insert the value) Total 1,600 7,445 21,750 Total remunerations for Board executives, if any4 Aggregate Amount 864 - 35,905 P O S IT I O N I N G F O R G ROW T H 97
98. REMUNERATION (continued) Arrangements for directors’ or senior executives’ waiver of salaries or remuneration The Bank is not aware of information on any arrangements or agreements for the waiver by any director of the Board or any senior executive of any salaries, awards or remuneration. Staff benefits and schemes An annual independent review of SABB’s compensation structure is conducted by an external consultant and submitted to the Nomination and Remuneration Committee and subsequently to SAMA along with management reports. This is in line with the guidance issued by SAMA and the Financial Stability Board. According to the Labour Law of the Kingdom of Saudi Arabia and SABB’s internal policies, employee end of service benefits become due for payment at the end of an employee’s period of service. The end of service benefits outstanding at the end of 2020 amount to SAR 399 million. SABB also operates three share based schemes for certain employees. These schemes reflect the number of committed shares for performance years 2017, 2018 and 2019 as of 31 December 2020 with a total market value of SAR 26.8 million. Under the terms of these schemes, eligible employees of the Bank are offered shares at a predetermined price for a fixed period of time. At the vesting dates determined under the terms of the plan, the Bank delivers the underlying allotted shares to the employees, subject to the satisfactory completion of the vesting conditions. The cost of the plan is recognised over the period in which the service condition is fulfilled, ending on the date on which the relevant employees become fully entitled to the shares (‘the vesting date’). The cumulative expense recognised for these plans at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the Bank’s best estimate of the number of equity instruments that will ultimately vest. Movement in the number of shares under the Share based equity settled bonus payment plans 1 January Addition through business combination 2020 2019 1,462,631 1,063,521 - 837,934 Forfeited (294,099) - Exercised or expired (819,241) (796,850) 736,532 358,026 1,085,913 1,462,631 Granted during the year 31 December The weighted average price of shares granted during the year was SAR 25.3 (2019: SAR 36.1) Disclosure of details of the treasury stocks held by the Bank and details of uses of these stocks No. of treasury stocks 1,850,154 Market value (SAR) 45,735,807 S A B B | A N N U A L R E P O R T 2020 Date of holding 31 Dec 2020 Detail of uses The Bank acquires its own shares in connection with the actual 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 / non-vested shares are treated as treasury shares to be used to fund future employee long-term incentive plans.
99. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE LEGAL ENTITY STRUCTURE Company name Relationship Ownership interest Business activity Share capital Country of incorporation SABB Insurance Agency Subsidiary 100% Insurance agency SAR 500,000 Saudi Arabia Arabian Real Estate Company Limited Subsidiary 100% Engaged in the purchase, sale and lease of land and real estate for investment purposes SAR 1,000,000 Saudi Arabia SABB Real Estate Company Limited1 Subsidiary 100% Registration of real estate SAR 500,000 Saudi Arabia SABB Markets Limited Subsidiary 100% Engaged in derivatives trading and repo activities USD 50,000 Cayman Island SABB Takaful Subsidiary 65% Engaged in Shariah compliant insurance activities and to offer family and general Takaful products SAR 340,000,000 Saudi Arabia Alawwal Invest Subsidiary 100% Engaged in investment services and asset management activities SAR 400,000,000 Saudi Arabia Alawwal Real Estate Company Subsidiary 100% Registration of real estate assets under its name on behalf of SABB SAR 500,000 Saudi Arabia Alawwal Insurance Agency Company1 Subsidiary 100% Insurance agency SAR 500,000 Saudi Arabia Alawwal Financial Markets Limited1 Subsidiary 100% Engaged in derivatives trading and repo activities USD 50,000 Cayman Island Wataniya Insurance Company Associate 20% Engaged in Shariah compliant insurance activities and to offer family and general Takaful products SAR 200,000,000 Saudi Arabia HSBC Saudi Arabia Associate 49% Engaged in investment banking, advisory services and asset management activities SAR 500,000,000 Saudi Arabia Saudi Kayan Assets Leasing Company Special purpose vehicle 50% SAR 500,000 Saudi Arabia Rabigh Asset Leasing Company Special purpose vehicle 50% SAR 500,000 Saudi Arabia Yanbu Asset Leasing Company Special purpose vehicle 100% SAR 500,000 Saudi Arabia SIMAH Associate 22% Credit information industry SAR 200,000,000 Saudi Arabia Saudi Finance Lease Contract Registration Company (Sijil) Associate 5% Provide services and solutions for financial lease registrations. SAR 38,392,850 Saudi Arabia 20% Transfer of cash, precious metals and valuable documents, management and operation of cash centres, provision of payment services for PoS and smart and secure e-outlets, ATMs, CDMs, wholesale of banking and cash machinery and SAR 25,000,000 equipment, installation and maintenance of bank and cash equipment, provide financial and travelers cheque services, payment systems, financial settlements and related services Saudi Arabia Saudi Financial Support Services Co. (SANID) Associate SABB has participated in the three structured entities for the purpose of effecting syndicated loan transactions in the Kingdom of Saudi Arabia and securing collateral rights over specific assets of the borrowers of those facilities under Islamic financing structures Note: The Bank assures there is no debt securities in issue for any of these subsidiaries. 1. The Companies under process for closure. P O S IT I O N I N G F O R G ROW T H 99
100. APPOINTMENT OF EXTERNAL AUDITORS The Extraordinary General Meeting of the Bank held on 22 April 2020 , endorsed the selection of both KPMG Al Fozan & Partners and Ernst & Young as external auditors to audit the Bank’s annual financial statements and review quarterly interim condensed financial statements for the year ended 31 December 2020, in line with recommendations of AUCOM. Accounting standards The consolidated financial statements have been prepared in accordance with the applicable accounting standards and other requirements as disclosed in the basis of preparation in note 1.1 of the 2020 audited consolidated financial statements. S A B B | A N N U A L R E P O R T 2020
101. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE DEBT SECURITIES IN ISSUE AND OTHER BORROWINGS In line with the Bank’s continued efforts to enhance its capital adequacy position, diversification of sources of funds and reducing its asset-liability maturity mismatch, the Bank has issued the following debt securities: SAR 000 5,000 million 10 year subordinated Sukuk - 2020 31 Dec 2020 31 Dec 2019 Change 5,000,000 1,500,000 3,500,000 The Sukuk was issued by SABB on 22 July 2020 and matures in July 2030. This is a Basel III compliant issuance and SABB has an option to repay the Sukuk after 5 years, subject to prior approval of SAMA and terms and conditions of the agreement. The Sukuk carries effective special commission income rate at 6M SAIBOR plus 195 bps payable semi-annually. The Sukuk is unsecured and is registered on the Tadawul Stock Exchange. Syndicated loan There are no outstanding Syndicated Loans and no new Syndicated Loans were issued during the year. P O S IT I O N I N G F O R G ROW T H 101
102. STATUTORY PAYMENTS Statutory payments payable by the Bank during 2020 consist of Zakat payable by Saudi shareholders , tax payable by foreign partners, and the amounts payable to the General Organisation for Social Insurance (GOSI). SAR 000 Zakat attributable to the Saudi shareholders for the year 2020 126,952 Zakat paid to GAZT to settle Zakat claims pertaining to previous fiscal years and up to the fiscal year 2020 320,407 Income tax attributable to the shares of the non-Saudi shareholders for the year 2020 95,374 GOSI payments 150,082 Withholding tax 32,890 Other payments 20,914 S A B B | A N N U A L R E P O R T 2020
103. BANKING FROFILE | STRATEGIC REPORT | GOVERNANCE PENALTIES The table below includes penalties imposed by SAMA on SABB during 2020 and 2019: 2020 2019 Number of penalties Fine (SAR) Number of penalties Fine (SAR) 19 1,858,000 16 520,500 Violation of SAMA's instructions for customer protection 3 10,890,400 2 15,000 Violation of SAMA’s instructions regarding the level of performance of ATMs and POS - - - - Violation of SAMA’s instructions for due diligence in AML & CTF - - 1 135,000 22 12,748,400 19 670,500 Subject of violation Violation of SAMA’s supervisory instructions Total Various corrective and preventative measures have been taken with respect to changes in processes, policies and procedures to avoid such violations and ensure compliance with the SAMA regulations. Penalties Imposed by Other Regulatory Authorities Reason for penalty Delay in GOSI payments Authority GOSI Delay in providing information to GAZT GAZT Non-compliance with municipality instructions Different Municipalities Total Amount (SAR) 441,251.96 Measures undertaken to remedy and avoid the penalties imposed Various corrective and preventative measures have been taken with respect to changes in processes, policies and procedures to avoid such violations and ensure compliance with GOSI requirements. 10,000.00 Various corrective and preventative measures have been taken with respect to changes in processes, policies and procedures to avoid such violations and ensure compliance with the pertinent regulations. 714,000.00 Various corrective and preventative measures have been taken with respect to changes in processes, policies and procedures to avoid such violations and ensure compliance with the pertinent regulations. 1,165,251.96 P O S IT I O N I N G F O R G ROW T H 103
104. FINANCIAL STATEMENTS 106 Independent auditors ’ report 116 Consolidated statement of financial position 117 Consolidated statement of income 118 Consolidated statement of comprehensive income 119 Consolidated statement of changes in equity 120 Consolidated statement of changes of cash flows 123 Notes to the consolidated financial statements S A B B | A N N U A L R E P O R T 2020
105. P O S IT I O N I N G F O R G ROW T H 105
106. S A B B | A N N U A L R E P O R T 2020
107. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS P O S IT I O N I N G F O R G ROW T H 107
108. S A B B | A N N U A L R E P O R T 2020
109. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS P O S IT I O N I N G F O R G ROW T H 109
110. S A B B | A N N U A L R E P O R T 2020
111. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS P O S IT I O N I N G F O R G ROW T H 111
112. S A B B | A N N U A L R E P O R T 2020
113. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS P O S IT I O N I N G F O R G ROW T H 113
114. S A B B | A N N U A L R E P O R T 2020
115. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS P O S IT I O N I N G F O R G ROW T H 115
116. The Saudi British Bank Consolidated statement of financial position As on 31 December 2020 Notes 2020 SAR ’ 000 2019 SAR’ 000 (Restated) Cash and balances with SAMA 3 36,449,415 21,266,892 Due from banks and other financial institutions, net 4 5,105,498 4,987,766 11 1,961,306 970,526 ASSETS Positive fair value derivatives, net Investments held at fair value through other comprehensive income 5 13,703,233 13,937,673 Investments held at fair value through statement of income 5 1,237,760 1,142,573 Investments held at amortised cost 5 45,890,014 45,403,580 Loans and advances, net 6 153,243,078 152,075,086 Investments in associates 7 619,232 660,198 Property and equipment and right of use assets, net Goodwill and other intangibles Other assets 8 3,169,427 3,308,278 9 & 19 10,982,536 18,462,065 10 4,090,172 3,772,092 276,451,671 265,986,729 Total assets LIABILITIES AND EQUITY Liabilities Due to banks and other financial institutions 12 17,620,956 3,652,686 Customers’ deposits 13 189,110,140 192,166,524 Debt securities in issue 14 5,066,610 1,499,752 Negative fair value derivatives, net 11 2,819,086 1,317,640 Other liabilities 15 11,073,139 11,265,936 225,689,931 209,902,538 Total liabilities Equity Equity attributable to equity holders of the Bank Share capital 16 20,547,945 20,547,945 Share premium 19 17,586,986 17,586,986 Statutory reserve 17 11,485,841 11,485,841 Other reserves 18 324,937 237,429 760,954 4,901,004 Retained earnings Proposed dividends Total equity attributable to equity holders of the Bank Non-controlling interest Total equity Total liabilities and equity The accompanying notes 1 to 40 form an integral part of these consolidated financial statements. S A B B | A N N U A L R E P O R T 2020 - 1,234,454 50,706,663 55,993,659 55,077 90,532 50,761,740 56,084,191 276,451,671 265,986,729
117. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Consolidated statement of income For the year ended 31 December Notes 2020 SAR’000 2019 SAR’000 (Restated) Special commission income 21 7,811,575 8,743,676 Special commission expense 21 (938,869) (1,564,048) 6,872,706 7,179,628 1,283,151 1,301,619 519,442 508,837 158,205 109,999 Dividend income 25,284 72,239 Gains on FVOCI debt instruments, net 31,200 40,033 Other operating (losses) / income, net (12,022) 964 8,877,966 9,213,319 6(d) (1,630,931) (2,501,175) 9 & 19 (7,417,776) - 24 (1,846,897) (1,789,486) (58,221) (77,165) 8&9 (677,658) (432,120) Net special commission income Fee and commission income, net 22 Exchange income, net Trading income, net 23 Total operating income Provision for expected credit losses, net Goodwill impairment Operating expenses: Salaries and employee related expenses Rent and premises related expenses Depreciation and amortisation General and administrative expenses (1,630,006) (1,350,636) Total operating expenses (4,212,782) (3,649,407) (Loss) / Income from operating activities (4,383,523) 3,062,737 81,936 132,618 (4,301,587) 3,195,355 (222,325) (446,368) Share in earnings of associates 7 Net (loss) / income for the year before Zakat and income tax Provision for Zakat and income tax - Current 26 Reversal / (provision) for income tax - Deferred 27 Net (loss) / income for the year after Zakat and income tax 356,316 (12,935) (4,167,596) 2,736,052 (4,132,141) 2,754,260 (35,455) (18,208) (4,167,596) 2,736,052 (2.01) 1.53 Attributable to: Equity holders of the Bank Non-controlling interest Net (loss) / income for the year after Zakat and income tax Basic and diluted earnings per share (in SAR) 25 The accompanying notes 1 to 40 form an integral part of these consolidated financial statements. P O S IT I O N I N G F O R G ROW T H 117
118. The Saudi British Bank Consolidated statement of comprehensive income For the year ended 31 December Notes Net (loss) / income for the year after Zakat and income tax 2020 SAR’ 000 2019 SAR’ 000 (Restated) (4,167,596) 2,736,052 Other comprehensive income for the year Items that cannot be reclassified to consolidated statement of income in subsequent periods Net changes in fair value (FVOCI equity instruments) 18 (69,349) 27,876 Re-measurement of defined benefit liability 29 (16,160) 18,651 Net changes in fair value 18 157,710 279,148 Transfer to consolidated statement of income, net 18 (31,200) (40,033) Net changes in fair value 18 (4,964) 19,611 Transfer to consolidated statement of income, net 18 (1,867) (1,166) 34,170 304,087 (4,133,426) 3,040,139 (4,097,971) 3,058,347 Items that can be reclassified to consolidated statement of income in subsequent periods Debt instrument at FVOCI Cash flow hedges Total other comprehensive income for the year Total comprehensive (loss) / income for the year Attributable to: Equity holders of the Bank Non-controlling interest Total The accompanying notes 1 to 40 form an integral part of these consolidated financial statements. S A B B | A N N U A L R E P O R T 2020 (35,455) (18,208) (4,133,426) 3,040,139
119. 18 18 Net changes in fair value of FVOCI equity instruments Net changes in fair value of FVOCI debt instruments Transfer to consolidated statement of income P O S IT I O N I N G F O R G ROW T H Balance at the end of the year 20 ,547,945 - - 2019 interim dividend paid net of Zakat and income tax 2019 final dividend proposed, net of Zakat and income tax 17,586,986 - - - - 17,586,986 - - - - - - - - 17,586,986 - - - - - - - - - 17,586,986 - 17,586,986 11,485,841 - - - 707,580 - - - - - - - - - 10,778,261 11,485,841 - - - - - - - - - 11,485,841 - 11,485,841 237,429 - - - - 22,283 (72,646) (13,172) 4,901,004 (1,234,454) (1,185,320) - (707,580) - - 13,172 2,754,260 (41,199) - - - - 2,754,260 5,260,926 760,954 (11,534) - 3,625 304,087 279,148 27,876 18,651 19,611 - (3,123) 324,937 - 56,963 (3,625) 1,234,454 1,234,454 - (1,430,954) - - - - - - - - - - - 1,430,954 - (1,234,454) - - 55,993,659 - (1,185,320) (1,430,954) - 22,283 23,062,285 - 3,058,347 (41,199) 279,148 27,876 18,651 19,611 2,754,260 32,467,018 50,706,663 (1,245,988) 56,963 - (4,097,971) - 34,170 (4,132,141) 157,710 (69,349) (16,160) (4,964) (4,132,141) 55,993,659 (76,060) 56,069,719 (76,060) 56,160,251 (33,067) 157,710 (69,349) (16,160) (4,964) (4,167,596) 56,963 - 90,532 - - - - - - - (18,208) - - - - - (18,208) 108,740 55,077 56,084,191 - (1,185,320) (1,430,954) - 22,283 23,062,285 - 3,040,139 (41,199) 279,148 27,876 18,651 19,611 2,736,052 32,575,758 50,761,740 - (1,245,988) - - (35,455) (4,133,426) - - - - - (35,455) 90,532 56,084,191 - 90,532 Noncontrolling Total interest Total Equity SAR‘000 SAR‘000 SAR‘000 (33,067) - - - - - 1,234,454 - 1,234,454 Proposed dividends SAR‘000 - - - - - (4,132,141) 4,901,004 (76,060) 4,977,064 Retained earnings SAR‘000 - (33,067) 157,710 (69,349) (16,160) (4,964) - 237,429 - 237,429 Statutory Other reserve reserves SAR‘000 SAR‘000 Attributable to equity holders of the Bank Share premium SAR’000 - 2018 final dividend paid net of Zakat and income tax - 17 Transfer to statutory reserve 5,547,945 19 - Business combination Employee share plan reserve - - - - - - - 15,000,000 18 18 Transfer to consolidated statement of income Transfer of gain on disposal of equity instruments at FVOCI to retained earnings 18 18 Net changes in fair value of FVOCI equity instruments Net changes in fair value of FVOCI debt instruments 18 29 Net changes in fair value of cash flow hedges Re-measurement of defined benefit liability (restated) Net income for the year after Zakat and income tax Total comprehensive income for the year Balance at the beginning of the year 2019 (Restated) 20,547,945 - Balance at the end of the year - 2019 final dividend paid, net of Zakat and income tax - - - - - Employee share plan reserve 18 18 Re-measurement of defined benefit liability Transfer of gain on disposal of equity instruments at FVOCI to retained earnings 18 29 Net changes in fair value of cash flow hedges - 20,547,945 - 20,547,945 - 19 Notes Net loss for the year after Zakat and income tax Total comprehensive income for the year Restated balance as at 1 January 2020 Effect of restatements Balance at the beginning of the year as reported 2020 Share capital SAR‘000 BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Consolidated statement of changes in equity For the year ended 31 December The accompanying notes 1 to 40 form an integral part of these consolidated financial statements. 119
120. The Saudi British Bank Consolidated statement of cash flows For the year ended 31 December Notes OPERATING ACTIVITIES Net (loss) / income for the year before Zakat and income tax Adjustments to reconcile net income after Zakat and income tax to net cash from / (used in) operating activities: Amortisation of premium on investments not held as FVTPL investments, net Depreciation and amortisation Income from FVTPL financial instruments, net Gains on FVOCI debt instruments, net Gain on disposal of shareholding in a joint venture Cash flow hedge gain transfer to consolidated statement of income Share in earnings of associates Provision for expected credit losses, net Goodwill impairment Employee share plan reserve 8&9 18 7 18 7 6(d) 9 & 19 Change in operating assets: Statutory deposit with SAMA Due from banks and other financial institutions Investments held as FVTPL Loans and advances, net Other assets and derivatives Change in operating liabilities: Due to banks and other financial institutions Customers’ deposits Payment of lease liabilities Other liabilities and derivatives, net Zakat and income tax paid Net cash generated from operating activities INVESTING ACTIVITIES Proceeds from sale and maturity of investments not held as FVTPL Purchase of investments not held as FVTPL Dividend received from investments in associates Proceeds from disposal of shareholding in an associate Cash and cash equivalents acquired through business combination Purchase of property and equipment and right of use assets, net Net cash used in investing activities FINANCING ACTIVITIES Debt securities in issue Borrowings Dividends paid Net cash generated from/ (used in) financing activities Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at end of the year Special commission received during the year Special commission paid during the year Supplemental non cash information ROU assets Lease liabilities Net changes in fair value and transfers to consolidated statement of income The accompanying notes 1 to 40 form an integral part of these consolidated financial statements. S A B B | A N N U A L R E P O R T 2020 7 7 19 28 28 8 15 2020 SAR’000 2019 SAR’000 (Restated) (4,301,587) 3,195,355 44,328 677,658 (7,102) (31,200) (1,867) (81,936) 1,630,931 7,417,776 56,963 5,403,964 4,545 432,120 (14,692) (40,033) (13,419) (1,166) (132,618) 2,501,175 22,283 5,953,550 (741,618) (50,128) (263,641) (2,669,499) (1,592,432) (90,476) 1,642,531 (421,424) 1,993,327 (852,154) 13,968,269 (3,053,307) (634,629) 2,707,818 13,074,797 (739,708) 12,335,089 1,776,261 784,013 (403,233) 636,607 11,019,002 (1,110,628) 9,908,374 10,742,404 (10,582,837) 122,902 (472,659) (190,190) 3,969,310 (13,573,045) 62,640 36,000 2,632,553 (291,780) (7,164,322) 3,566,858 (1,201,834) 2,365,024 14,509,923 15,198,771 29,708,694 7,815,140 1,183,908 470 (1,695,308) (2,652,015) (4,346,853) (1,602,801) 16,801,572 15,198,771 8,249,275 1,666,003 897,633 911,723 34,170 1,098,807 1,101,764 304,087
121. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS P O S IT I O N I N G F O R G ROW T H 121
122. Notes to the consolidated financial statements 1 . General 123 21. Net special commission income 172 2. Summary of significant accounting policies 128 22. Fees and commission income, net 173 3. Cash and balances with SAMA 142 23. Trading income, net 174 4. Due from banks and other financial institutions, net 142 24. Salaries and employee related expenses 174 5. Investments, net 143 25. Basic and diluted earnings per share 177 6. Loans and advances, net 147 26. Zakat and income tax 177 7. Investment in associates 152 27. Deferred tax 178 8. Property and equipment and right of use assets, net 153 28. Cash and cash equivalents 178 9. Goodwill and other intangibles 154 29. Employee benefit obligation 178 10. Other assets 157 30. Operating segments 180 11. Derivatives 157 31. Financial risk management 183 12. Due to banks and other financial institutions 161 32. Market risk 192 13. Customers’ deposits 162 33. Liquidity risk 197 14. Debt securities in issue 162 34. Offsetting of financial liabilities 201 15. Other liabilities 163 35. Fair values of financial instruments 201 16. Share capital 163 36. Related party transactions 203 17. Statutory reserve 163 37. Capital adequacy 205 18. Other reserves 164 19. Business combination 164 38. Impact of Coronavirus (“COVID-19”) on Expected Credit Losses (“ECL”) and SAMA Programs 206 20. Commitments and contingencies 167 39. Prospective changes in accounting standards 208 40. Board of Directors’ approval 209 S A B B | A N N U A L R E P O R T 2020
123. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements For the year ended 31 December 2020 1. General The Saudi British Bank (‘SABB’) is a joint stock company incorporated in the Kingdom of Saudi Arabia and was established by Royal Decree No. M/4 dated 12 Safar 1398H (21 January 1978). SABB formally commenced business on 26 Rajab 1398H (1 July 1978) by taking over of the operations of The British Bank of the Middle East in the Kingdom of Saudi Arabia. SABB operates under Commercial Registration No. 1010025779 dated 22 Dhul Qadah 1399H (13 October 1979) as a commercial bank through a network of 113 branches (2019: 136 branches) in the Kingdom of Saudi Arabia. SABB employed 4,156 staff as at 31 December 2020 (2019: 4,537). The address of SABB’s head office is as follows: The Saudi British Bank P.O. Box 9084 Riyadh 11413 Kingdom of Saudi Arabia The objectives of SABB are to provide a range of banking services. SABB also provides Shariah-compliant products, which are approved and supervised by an independent Shariah Board established by SABB. Further to receipt of regulatory approvals, the shareholders of SABB and Alawwal Bank (“AAB”) approved the merger of the two banks at Extraordinary General Meetings held on 15 May 2019 pursuant to Articles 191-193 of the Companies Law issued under Royal Decree No. M3 dated 28/1/1437H (corresponding to 10/11/2015G) (the “Companies Law”), and Article 49 (a) (1) of the Merger and Acquisitions Regulations issued by the Capital Markets Authority of the Kingdom of Saudi Arabia (the “CMA”). Please refer to note 19 for details. SABB has 100% (31 December 2019: 100%) ownership interest in a subsidiary, SABB Insurance Agency Limited (“SIAL”), a limited liability company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010235187 dated 18 Jumada II 1428H (3 July 2007). SABB holds 98% of its interest in SIAL directly and 2% indirect ownership interest through another subsidiary (“Arabian Real Estate Company Limited”) incorporated in the Kingdom of Saudi Arabia. SIAL’s principal activity is to act as an exclusive insurance agent for SABB Takaful Company (“SABB Takaful”) (also a subsidiary company of SABB) within the Kingdom of Saudi Arabia. SABB has 100% (31 December 2019: 100%) ownership interest in a subsidiary, Arabian Real Estate Company Limited (“ARECO”), a limited liability company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010188350 dated 12 Jumada I 1424H (12 July 2003). SABB holds 99% of its interest in ARECO directly and 1% indirect ownership interest through another subsidiary (”SABB Insurance Agency”) incorporated in the Kingdom of Saudi Arabia. ARECO is engaged in the purchase, sale and lease of land and real estate for investment purposes. SABB has 100% (31 December 2019: 100%) ownership interest in a subsidiary, SABB Real Estate Company Limited (“SRECO”), a limited liability company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010428580 dated 12 Safar 1436H (4 December 2014), (the company is currently under liquidation). SABB holds 99.8% of its interest in SRECO directly and 0.2% indirect ownership interest through another subsidiary (”Arabian Real Estate Company Limited”) incorporated in the Kingdom of Saudi Arabia. SRECO’s principal activity is the registration of real estate and to hold and manage collateral on behalf of SABB. SABB has 100% (31 December 2019: 100%) directly held ownership interest in a subsidiary, SABB Markets Limited (“SABB Markets”), a limited liability company incorporated in the Cayman Islands. SABB Markets is engaged in derivatives trading and repo activities. SABB has 65% (31 December 2019: 65%) directly held ownership interest in a subsidiary, SABB Takaful, a joint stock company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010234032 dated 20 Jumada Awal 1428H (6 June 2007). SABB Takaful’s principal activity is to engage in Shariah compliant insurance activities and to offer family and general Takaful products to individuals and corporates in the Kingdom of Saudi Arabia. P O S IT I O N I N G F O R G ROW T H 123
124. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 SABB has 100% (31 December 2019: 100%) directly held ownership interest in a subsidiary, Alawwal Invest (“AI”), a closed joint stock company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010242378 dated 30 Dhul Hijjah 1428H (9 January 2008). Alawwal Invest was formed in accordance with the CMA’s Resolution No. 1 39 2007. Alawwal Invest’s principal activity is to engage in investment services and asset management activities regulated by the CMA related to dealing, managing, arranging, advising and taking custody of securities. SABB has 100% (31 December 2019: 100%) directly held ownership interest in a subsidiary, Alawwal Real Estate Company (“AREC”), a limited liability company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010250772 dated 21 Jumada I 1429H (26 May 2008). AREC’s principal activity is the registration of real estate assets under its name which are received by the Bank from its borrowers as collaterals and to hold and manage collateral on behalf of SABB. SABB has 100% (31 December 2019: 100%) directly held ownership interest in a subsidiary, Alawwal Insurance Agency Company (“AIAC”), a limited liability company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010300250 dated 29 Muharram 1432H (4 January 2011). AIAC’s principal activity is to act as an insurance agent for Wataniya Insurance Company (WIC), an associate, to sell its insurance products (the company is currently under liquidation). SABB had a 100% (31 December 2019: 100%) directly held ownership interest in a subsidiary, Alawwal Financial Markets Limited (“AFM”), a limited liability company incorporated in the Cayman Islands. AFM was engaged in derivatives trading and repo activities and was liquidated on 31 December 2020. SABB has 49% (31 December 2019: 49%) directly held ownership interest in HSBC Saudi Arabia, a closed joint stock company incorporated in the Kingdom of Saudi Arabia under commercial registration No. 1010221555 dated 27 Jumada Al-Akhirah 1427H (23 July 2006). HSBC Saudi Arabia was formed in accordance with the Resolution No. 37-05008 of the CMA dated 05/12/1426H corresponding to 05/01/2006G. HSBC Saudi Arabia’s principal activity is to engage in the full range of investment banking and advisory services and asset management activities regulated by the CMA related to brokerage, dealing, managing, arranging, advising and taking custody of securities. HSBC Saudi Arabia is an associate of SABB with HSBC Asia Holdings B.V. a related party and shareholder in SABB. SABB has participated in the following three structured entities for the purpose of effecting syndicated loan transactions in the Kingdom of Saudi Arabia and securing collateral rights over specific assets of the borrowers of those facilities under Islamic financing structures. These entities have no other business operations. 1. Saudi Kayan Assets Leasing Company. 2. Rabigh Asset Leasing Company. 3. Yanbu Asset Leasing Company. SABB directly owns a 50% (31 December 2019: 50%) share in Saudi Kayan Assets Leasing Company and Rabigh Asset Leasing Company and directly owns a 100% (31 December 2019: 100%) share in Yanbu Asset Leasing Company as a result of SABB’s merger with AAB in June 2019 (the company is currently under liquidation). SABB does not consolidate these entities as it does not have the right to variable returns from its involvement with the entities or the ability to affect those returns through its power over the entities excluding Yanbu Asset Leasing Company. The related underlying funding to the relevant borrowers are recorded on SABB’s interim consolidated statement of financial position. SABB has 20% (31 December 2019: 20%) directly held ownership interest in an associate, Wataniya Insurance Company (“WIC”), a joint stock company incorporated in the Kingdom of Saudi Arabia formed pursuant to Royal Decree No. M/53 dated Shawwal 21, 1430H (10 October 2009). WIC’s principal activity is to engage in Shariah compliant insurance activities and to offer family and general Takaful products to individuals and corporates in the Kingdom of Saudi Arabia. S A B B | A N N U A L R E P O R T 2020
125. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 1.1. Basis of preparation a) Statement of compliance The consolidated financial statements of the Bank have been prepared: • in accordance with International Financial Reporting Standards (IFRS) as endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by the Saudi Organisation for Certified Public Accountants (‘SOCPA’); and • in compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and By-laws of the Bank. b) Basis of measurement These consolidated financial statements have been prepared under the historical cost convention except for the measurement at fair value of derivatives, financial instruments held at fair value through Profit or Loss (‘FVTPL’), FVOCI investments and employee benefits which are stated at present value of their obligation. In addition, assets and liabilities that are hedged in a fair value hedging relationship are carried at fair value to the extent of the risks that are being hedged. c) Functional and presentation currency These consolidated financial statements are expressed in Saudi Arabian Riyals (SAR), which is the functional currency of SABB, and are rounded off to the nearest thousand, except where otherwise indicated. d) Presentation of consolidated financial statements The Bank presents its consolidated statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non–current) is presented in note 33(b). e) Basis of consolidation The consolidated financial statements comprise the financial statements of SABB and its subsidiaries (as mentioned in note 1 collectively referred to as ‘the Bank’). The financial statements of the subsidiaries are prepared for the same reporting year as that of SABB, using consistent accounting policies, except for SABB Takaful and certain immaterial subsidiaries where the latest interim reviewed financial statements or latest annual audited financial statements, respectively have been used for consolidation purpose to meet the Bank reporting timetable. Subsidiaries are entities which are directly or indirectly controlled by SABB. SABB controls an entity (the ‘investee’) over which it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are consolidated from the date on which control is transferred to SABB and cease to be consolidated from the date on which the control is transferred from SABB. Intra-group transactions and balances have been eliminated upon consolidation. f) Critical accounting judgements and estimates The preparation of consolidated financial statements in conformity with IFRS as endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements endorsed by SOCPA requires the use of certain critical accounting judgements, estimates, and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. Such estimates, assumptions and judgements 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. The COVID-19 pandemic continues to disrupt global markets as many geographies are experiencing a “second wave” of infections despite having previously controlled the outbreak through aggressive precautionary measures such as imposing restrictions on travel, lockdowns and strict social distancing rules. The Government of the Kingdom of Saudi Arabia (“the Government”) however has managed to successfully control the outbreak to date, owing primarily to the unprecedented yet effective measures taken by the Government, following which the Government has ended the lockdowns and has taken phased measures towards normalization. P O S IT I O N I N G F O R G ROW T H 125
126. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Recently, a number of COVID-19 vaccines have been developed and approved for mass distribution by various governments around the world. The Government has also approved a vaccine which is currently available for healthcare workers and certain other categories of people and it will be available to the masses in general during 2021. The Bank continues to be cognisant of both the micro and macroeconomic challenges that COVID-19 has posed, the teething effects of which may be felt for some time, and is closely monitoring its exposures at a granular level. The Bank has made various accounting estimates in these financial statements based on forecasts of economic conditions which reflect expectations and assumptions as at 31 December 2020 about future events that the Bank believes are reasonable in the circumstances. There is a considerable degree of judgement involved in preparing these estimates. The underlying assumptions are also subject to uncertainties which are often outside the control of the Bank. Accordingly, actual economic conditions are likely to be different from those forecast since anticipated events frequently do not occur as expected, and the effect of those differences may significantly impact accounting estimates included in these financial statements. The significant accounting estimates impacted by these forecasts and associated uncertainties are predominantly related to expected credit losses, fair value measurement, and the assessment of the recoverable amount of non-financial assets. The impact of the COVID-19 pandemic on each of these estimates is discussed further in the relevant note of these financial statements. Revisions to accounting estimates are recognised in the period in which the estimate is revised, if the revision affects only that period, or in the period of revision and in future periods if the revision affects both current and future periods. Significant areas where management has used estimates, assumptions or exercised judgements are as follows: i. Expected credit losses (“ECL”) on financial assets ECL methodology The measurement of impairment losses under IFRS 9 on the applicable categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances. The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgements and estimates include: • the Bank’s internal credit grading model, which assigns PDs to the individual grades; • the Bank’s criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a Lifetime ECL basis and the qualitative assessment; • the segmentation of financial assets when their ECL is assessed on a collective basis; • development of ECL models, including the various formulas and the choice of inputs; • determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs; and • selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models. Collateral and other credit enhancements held The Bank’s practice is to lend on the basis of customers’ ability to meet their obligations out of cash flow resources rather than rely on the value of security offered. Depending on a customer’s standing and the type of product, facilities may be provided without security. For other lending, a charge over collateral is obtained and considered in determining the credit decision and pricing. In the event of default, the Bank may utilise the collateral as a source of repayment. Depending on its form, collateral can have a significant financial effect in mitigating our exposure to credit risk. Additionally, risk may be managed by employing other types of collateral and credit risk enhancements such as second charges, other liens and unsupported guarantees, but the valuation of such mitigants is less certain and their financial effect has not been quantified. S A B B | A N N U A L R E P O R T 2020
127. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 ii. Fair value measurement The Bank measures financial instruments, such as, derivatives, at fair value at each reporting date. Also, fair values of financial instruments measured at amortised cost are disclosed in Note 35 to these consolidated financial statements. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • in the principal market for the asset or liability; or • in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to by the Bank. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Bank determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (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 Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. iii. Impairment of goodwill For impairment testing, goodwill acquired through business combination is allocated to the cash generating units (CGUs) Retail Banking & Wealth Management (RBWM), Corporate & Institutional Banking (CIB), and Treasury, which are also operating and reportable segments. The impairment test is performed by comparing the estimated recoverable amount of the Bank’s CGUs that carry goodwill, as determined through a Value-In-Use (VIU) model, with the carrying amount of net assets of each CGU. Refer to note 9 for key assumption used for VIU calculation. iv. Impairment of debt investments (refer to note 2B(v)) v. Classification of investments at amortised cost (refer to note 2B(i)) vi. Determination of control over investees The control indicators set out in note 1.1 (e) are subject to management’s judgements. P O S IT I O N I N G F O R G ROW T H 127
128. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 vii. Depreciation and amortisation (refer to note 2K and 2L) viii. Defined benefit plan (refer to note 2S) ix. Provisions for liabilities and charges (refer to note 2M) The Bank receives legal claims against it in the normal course of business. Management has made judgements as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due process being followed as per law. g) Going concern The Bank’s management has made an assessment of the Bank’s ability to continue as a going concern and is satisfied that the Bank 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 Bank’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. 2. Summary of significant accounting policies The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below. A) 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 annual consolidated financial statements for the year ended 31 December 2019. In consideration of the current economic environment, the following accounting policies are applicable effective 1 January 2020 replacing, amending or adding to the corresponding accounting policies set out in the 2019 annual consolidated financial statements. The below are amended reporting standards that became applicable for annual reporting periods commencing on 1 January 2020: • Definition of a Business (Amendments to IFRS 3) The amendment to IFRS 3 Business Combinations clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that, together, significantly contribute to the ability to create output. Furthermore, it clarifies that a business can exist without including all of the inputs and processes needed to create outputs. These amendments had no impact on the consolidated financial statements of the Bank, but may impact future periods should the Bank enter into any business combinations. • Definition of Material (Amendments to IAS 1 and IAS 8) The amendments provide a new definition of material that states, “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. These amendments had no impact on the consolidated financial statements of the Bank, nor is it expected to impact the Bank in future. • Amendments to References to the Conceptual Framework in IFRS Standards The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no impact on the consolidated financial statements of the Bank. S A B B | A N N U A L R E P O R T 2020
129. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 • Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) A fundamental review and reform of major interest rate benchmarks is being undertaken globally. The International Accounting Standards Board (“IASB”) is engaged in a two-phase process of amending its guidance to assist in a smoother transition away from inter-bank offered rates (IBOR). Phase 1 – The first phase of amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures focused on hedge accounting issues. The final amendments, issued in September 2019, amended specific hedge accounting requirements to provide relief from the potential effects of the uncertainty caused by IBOR reform. The amendments are effective from 1 January 2020 and are mandatory for all hedge relationships directly affected by IBOR reform. Phase 2 – The second phase relates to the replacement of benchmark rates (IBOR) with alternative risk-free rates (RFR). The Phase 2 amendments are effective for annual periods beginning on or after 1 January 2021 and early application is permitted. Now that the Phase 2 Amendments have been finalised, the Bank will complete its assessment of the accounting implications of the scenarios it expects to encounter as the transition from IBORs to RFRs in order to accelerate its programmes to implement the new requirements. The Phase 2 Amendments introduce new areas of judgement, the Bank needs to ensure it has appropriate accounting policies and governance in place. For the additional disclosures, the Bank will have to assess and implement required updates in the financial reporting systems and processes to gather and present the information required. Management is running a project on the Bank’s overall transition activities and continues to engage with various stakeholders to support an orderly transition and believes that the project is not significant in terms of scale and complexity and will have no major impact on its products, internal systems and processes. B) Financial assets and financial liabilities i) Classification of financial assets The Bank on initial recognition classifies all of its financial assets based on the business model. Following are the three classifications: Amortised Cost (AC): Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest (SPPI), and that are not designated at FVTPL, are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognised. Fair value through other comprehensive income (FVOCI): Debt instruments: a debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at 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 and losses are recognised in profit or loss. Equity Instruments: on initial recognition, for an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. Equity instruments at FVOCI are not subject to an impairment assessment. Fair value through profit or loss (FVPL): Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in the consolidated statement of income in the period in which it arises. P O S IT I O N I N G F O R G ROW T H 129
130. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Business model assessment The Bank 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; • how the performance of the portfolio is evaluated and reported to the Bank’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 – e.g 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 Bank’s stated objective for managing the financial assets is achieved and how cash flows are realised. Financial assets that are held for trading and whose performance is evaluated on a fair value basis are measured at FVTPL 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. In assessing whether the contractual cash flows are solely payments of principal and interest, the Bank 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 Bank considers: • • • • • contingent events that would change the amount and timing of cash flows; leverage features; prepayment and extension terms; terms that limit the Bank’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. Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets. ii) Classification of financial liabilities The Bank classifies its financial liabilities as measured at amortised cost except for financial liabilities at fair value through profit or loss. Such liabilities, including derivatives that are liabilities, shall be subsequently measured at fair value. iii) Derecognition a. Financial assets 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 expires. In instances where the Bank is assessed to have transferred a financial asset, the asset is derecognised if the Bank has transferred substantially all the risks and rewards of ownership. Where the Bank has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognised only if the Bank has not retained control of the financial asset. The Bank recognises separately as assets or liabilities any rights and obligations created or retained in the process. On derecognition, any cumulative gain or loss previously recognised in the consolidated statement of comprehensive income is included in the consolidated statement of income for the period. S A B B | A N N U A L R E P O R T 2020
131. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss on derecognition of such securities. b. Financial liabilities The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. iv) Modifications of financial assets and financial liabilities a. Financial assets If the terms of a financial asset are modified, the Bank evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised with the difference recognised as a derecognition gain or loss and a new financial asset is recognised at fair value. In case the modification of asset does not result in de-recognition, the Bank will recalculate the gross carrying amount of the asset by discounting the modified contractual cash-flows using EIR prior to the modification. Any difference between the recalculated amount and the existing gross carrying amount will be recognised in the consolidated statement of income for asset modification. b. Financial liabilities The Bank derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in the consolidated statement of income. v) Impairment The Bank recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL: • • • • financial assets that are measured at amortised cost; debt instruments measured at FVOCI; financial guarantee contracts issued; and loan commitments issued. No impairment loss is recognised on equity investments. The Bank measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12 month ECL: • debt investment securities that are determined to have low credit risk at the reporting date; and • other financial instruments on which credit risk has not increased significantly since their initial recognition. The Bank considers a debt security to have low credit risk when their credit risk rating is equivalent to the globally understood definition of ‘investment grade’. 12 month ECL are the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. P O S IT I O N I N G F O R G ROW T H 131
132. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows: • financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (e.g the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Bank expects to receive); • financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; • undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Bank if the commitment is drawn down and the cash flows that the Bank expects to receive; and • financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Bank expects to recover. Restructured financial assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows: • if the expected restructuring will not result in derecognition of the existing asset, and then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset; • if the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. Credit-impaired financial assets At each reporting date, the Bank assesses whether financial assets carried at amortised cost and FVOCI are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data: • • • • • significant financial difficulty of the borrower or issuer; a breach of contract such as a default or past due event; the restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise; it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or the disappearance of an active market for a security because of financial difficulties. A loan that has been renegotiated due to deterioration in the borrower’s condition is usually considered to be credit-impaired unless there is evidence that the risk of not receiving contractual cash flows has reduced significantly and there are no other indicators of impairment. In addition, a retail loan that is overdue for 90 days or more is considered impaired. In making an assessment of whether an investment in sovereign debt is credit-impaired, the Bank considers the following factors: • • • • the market’s assessment of creditworthiness as reflected in the bond yields; the rating agencies’ assessments of creditworthiness; the country’s ability to access the capital markets for new debt issuance; and the probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. S A B B | A N N U A L R E P O R T 2020
133. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Presentation of allowance for ECL in the consolidated statement of financial position Loss allowances for ECL are presented in the consolidated statement of financial position as follows: • financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets; • loan commitments and financial guarantee contracts: generally, as a provision in other liabilities; • where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision; and • debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position because the carrying amount of these assets is their fair value. However, the loss allowance is disclosed and is recognised in the fair value reserve. Impairment losses are recognised in profit and loss and changes between the amortised cost of the assets and their fair value are recognised in OCI. Write-off Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due. If the amount to be written off is greater than the accumulated loss allowance, the difference is first treated as an addition to the allowance that is then applied against the gross carrying amount. Any subsequent recoveries are credited to credit loss expense. Collateral valuation To mitigate its credit risks on financial assets, the Bank seeks to use collateral, where possible. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. Collateral, unless repossessed, is not recorded on the Bank’s statement of financial position. However, the fair value of collateral affects the calculation of ECLs. It is generally assessed, at a minimum, at inception and re-assessed on a periodic basis. However, some collateral, for example, cash or securities relating to margining requirements, is valued daily. To the extent possible, the Bank uses active market data for valuing financial assets, held as collateral. Other financial assets which do not have a readily determinable market value are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as mortgage brokers, housing price indices, audited financial statements, and other independent sources. Collateral repossessed The Bank’s policy is to determine whether a repossessed asset can be best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset. Assets for which selling is determined to be a better option are transferred to assets held for sale at their fair value (if financial assets) and fair value less cost to sell for non-financial assets at the repossession date in line with the Bank’s policy. In its normal course of business, the Bank does not physically repossess properties or other assets in its retail portfolio, but engages external agents to recover funds, generally at auction, to settle outstanding debt. Any surplus funds are returned to the customers/obligors. As a result of this practice, the residential properties under legal repossession processes are not recorded on the consolidated statement of financial position. P O S IT I O N I N G F O R G ROW T H 133
134. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 vi) Financial guarantees and loan commitments Financial guarantees are initially recognised in the consolidated financial statements at fair value in other liabilities, being the value of the premium received. Subsequent to the initial recognition, the Bank’s liability under each guarantee is measured at higher of the unamortised amount and the loss allowance. The premium received is recognised in the consolidated statement of income in ‘Fees and commission income, net’ on a straight-line basis over the life of the guarantee. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. The Bank has issued no loan commitments that are measured at FVTPL. For loan commitments, the Bank recognises loss allowance. vii) Rendering of services The Bank provides various services to its customers. These services are either rendered separately or bundled together with rendering of other services. The Bank has concluded that revenue from rendering of various services related to share trading and fund management, trade finance, corporate finance and advisory and other banking services, should be recognised at the point when services are rendered e.g when performance obligation is satisfied. Whereas for free services related to credit card, the Bank recognises revenue over the period of time. viii) Customer Loyalty Programme The Bank offers customer loyalty programme (reward points / air miles herein referred to as ‘reward points’), which allows card members to earn points that can be redeemed for certain Partner outlets. The Bank allocates a portion of transaction price (interchange fee) to the reward points awarded to card members, based on the relative stand-alone selling price. The amount of revenue allocated to reward points is deferred and released to the income statement when reward points are redeemed. The cumulative amount of contract liability related unredeemed reward points is adjusted over time based on actual experience and current trends with respect to redemption. C) Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at the acquisition date fair value and the amount of any noncontrolling interest in the acquiree. For each business combination, the Bank 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. When the Bank acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. All contingent consideration (except that which is classified as equity) is measured at fair value with the changes in fair value in consolidated income statement. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests) and any previous interest held, over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Bank reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in profit or loss. S A B B | A N N U A L R E P O R T 2020
135. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Any goodwill arising from initial consolidation is tested for impairment at least once a year and whenever events or changes in circumstances indicate the need for impairment, they are written down if required. D) Trade date accounting All regular way purchases and sales of financial assets are recognised and derecognised on the trade date e.g the date on which the Bank becomes a party to the contractual provisions of the instrument. Regular way purchases and sales are purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. E) 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, currency and special commission rate options (both written and purchased), are measured at fair value (premium received for written options). All derivatives are carried at their fair value as assets where the fair value is positive and as liabilities where the fair value is negative. Fair values are generally obtained by reference to quoted market prices, discounted cash flow models or pricing models, as appropriate. The treatment of changes in their fair value depends on their classification into the following categories: i) 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. Derivatives held for trading also include those derivatives which do not qualify for hedge accounting. ii) Embedded derivatives 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 income statement. The embedded derivatives separated from the host are carried at fair value in the trading derivatives portfolio with changes in fair value recognised in the consolidated statement of income. iii) Hedge accounting The Bank designates certain derivatives as hedging instruments in qualifying hedging relationships. For the purpose of hedge accounting, hedges are classified into 2 categories; (a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability, 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 a highly probable forecasted transaction that will affect the reported net gain or loss. In order to qualify for hedge accounting, it is required that the hedge should be expected to be highly effective e.g 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 the 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 Bank will assess the effectiveness of the hedging relationship. Subsequently, the effectiveness of the hedge is assessed on an ongoing basis. 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. The related portion of the hedged item is recognised in the consolidated statement of income. 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. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated statement of income. P O S IT I O N I N G F O R G ROW T H 135
136. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 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 in the consolidated statement of comprehensive income. 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. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. On discontinuation of hedge accounting on cash flow hedges any cumulative gain or loss that was recognised in other reserves, is retained in Shareholders’ equity until the forecasted transaction occurs. Where the hedged forecasted transaction is no longer expected to occur, the net cumulative gain or loss recognised in other reserves is transferred to the consolidated statement of income for the year. F) Foreign currencies The consolidated financial statements are denominated and presented in Saudi Arabian Riyals, which is also the functional currency of the Bank. Transactions in foreign currencies are translated into Saudi Arabian Riyals at the spot exchange rates prevailing at transaction dates. Monetary assets and liabilities at year-end, denominated in foreign currencies, are translated into Saudi Arabian Riyals at the exchange rates prevailing at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. All differences arising on non-trading activities are transferred to exchange income in the consolidated statement of income, with the exception of differences on foreign currency borrowings that provide an effective hedge against a net investment in foreign entity. Foreign exchange gains or losses on translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income, except for differences arising on the retranslation of FVOCI equity instruments or when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges to the extent hedges are effective. Translation gains or losses on non-monetary items carried at fair value are included as part of the fair value adjustment either in the consolidated statement of income or in equity depending on the underlying financial asset. G) Offsetting financial instruments Financial assets and liabilities are offset and are reported net in the consolidated statement of financial position when there is a currently legally enforceable right to set off the recognised amounts and when the Bank 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 Bank. H) Revenue/expenses recognition i. Special commission income and expense Special commission income and expense for all commission-bearing financial instruments is recognised in the consolidated statement of income on an effective yield basis. The effective commission rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective commission rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective commission rate and the change in carrying amount is recorded as special commission income or expense. If 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 original effective commission rate applied to the new carrying amount. The calculation of the effective yield takes into account all contractual terms of the financial instruments (prepayment, options etc.) and includes all fees paid or received related transaction costs, and discounts or premiums that are an integral part of S A B B | A N N U A L R E P O R T 2020
137. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 the effective commission rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial asset or liability. When the Bank enters into special commission rate swap to change special commission from fixed to floating (or vice versa) the amount of special commission income or expense is adjusted by the net special commission on the swap. Special commission income on Shariah approved products received but not earned is netted off against the related assets. ii. Exchange income/ loss Exchange income/loss is recognised when earned/incurred. iii. Dividend income Dividend income is recognised when the right to receive income is established. iv. Fees and commission income and expenses Fee and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the effective interest rate. Other fee and commission income – including account servicing fees, investment management fees, sales commission, placement fees and syndication fees – is recognised as the related services are performed. Loan commitment fees for loans that are likely to be drawn down are deferred and, together with the related direct cost are recognised as an adjustment to the effective yield on the loan. Portfolio and other management advisory and service fees are recognised based on the applicable service contract, usually on a time proportionate basis. Fees received on asset management, wealth management, financial planning, custody services and other similar services that are provided over an extended period of time are recognised over the period when the related service is being performed. When a loan commitment is not expected to result in the drawdown of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the service is received. Any fee income received but not earned is classified under other liabilities. v. Net trading income Results arising from trading activities include all gains and losses from changes in fair value and related special commission income or expense, dividends from financial assets and financial liabilities held for trading and foreign exchange differences. This includes any ineffectiveness recorded in hedging transactions. vi. Day one profit Where the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Bank immediately recognises the difference between the transaction price and fair value (a ‘Day 1’ profit) in the consolidated statement of income in ‘Net trading income’. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognised in the consolidated statement of income when the inputs become observable, or when the instrument is derecognised. I) Sale and repurchase agreements 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 Bank retains substantially all the risks and reward of ownership and continued to be measured in accordance with related accounting policies for the underlying financial assets held as ‘FVTPL’, ‘FVOCI’ and amortised cost. The counterparty liability for amounts received under these agreements is included in ‘due to banks and other financial institutions’ or ‘customers’ deposits’, as appropriate. The difference between sale and repurchase price is treated as special commission expense and amortised over the life of the repo agreement, using the effective yield method. 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 Bank 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 ‘Loans and advances’, as appropriate. The difference between purchase and resale price is treated as special commission income and amortised over the life of the reverse repo agreement, using the effective yield method. P O S IT I O N I N G F O R G ROW T H 137
138. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 J) Investment in equity-accounted investees The Bank’s interests in equity-accounted investees comprise interests in associates. Associate is an entity in which the Bank has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Bank has joint control, whereby the Bank has rights to the net assets of the arrangement, rather than rights to its assets and obligation for its liabilities. Interests in an associate is accounted for using the equity method. It is initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Bank’s share of the profit or loss and Other Comprehensive Income (‘OCI’) of equity-accounted investees, until the date on which significant influence ceases. The statement of income reflects the Bank’s share of the results of operations of the associate. The reporting dates of the associates is identical to the Bank and their accounting policies conform to those used by the Bank for like transactions and events in similar circumstances. Unrealised profits and losses resulting from transactions between the Bank and its associates are eliminated to the extent of the Bank’s interest in the associate. K) Property and equipment Property and equipment are stated at cost and presented net of accumulated depreciation and impairment loss. Freehold land is not depreciated. The cost of other property and equipment is depreciated on the straight-line method over the estimated useful lives of the assets as follows: Buildings 33 years Leasehold improvements over period of the lease contract Furniture, equipment and vehicles 3 to 10 years Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the consolidated statement of income. The assets’ residual values and useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Any carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. L) Intangible assets i. Goodwill Goodwill acquired in a business combination represents the excess of the cost of the business combination over the Bank’s interest in the net fair value of the identifiable assets, including intangibles, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in the Bank’s consolidated income statement. Measurement Goodwill is initially measured at cost. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Bank’s 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. S A B B | A N N U A L R E P O R T 2020
139. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The cash-generating unit to which goodwill has been allocated is tested for impairment annually and whenever there is an indication that the cash-generating unit may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised in the income statement. Impairment losses recognised for goodwill are not reversed in subsequent periods. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss of disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operations disposed of and the portion of the cash-generating unit retained. ii. Capitalised software Software acquired by the Bank is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in the Bank’s consolidated statement of income on a straight-line basis over the estimated useful life of the software, from the date that it is available for use. iii. Other intangible assets Intangibles acquired separately are measured on initial recognition at cost. The cost of the intangibles acquired in a business combination is at fair value as at the date of acquisition. Following initial recognition, intangibles are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangibles with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangibles may be impaired. Intangible assets with an indefinite useful life are subject to an impairment test at least annually. The amortisation period and amortisation method for intangibles with finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in an accounting estimate. The amortisation expense on intangibles with finite lives is recognised in the consolidated statement of income in the expense category consistent with the function of the intangibles. M) Provisions Provisions are recognised when a reliable estimate can be made by the Bank of a present legal or constructive obligation as a result of past events and it is more likely than not that an outflow of resources will be required to settle the obligation. The expense relating to any provision is presented in the consolidated statement of income net of any reimbursement. N) Accounting for leases Right of use asset / Lease liabilities On initial recognition, at inception of the contract, the Bank shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is identified if most of the benefits are flowing to the Bank and the Bank can direct the usage of such assets. The Bank has elected not to separate non-lease components and account for the lease and non-lease components as a single lease component. Right of use assets Bank applies cost model, and measure right of use asset at cost; • less any accumulated depreciation and any accumulated impairment losses; and • adjusted for any re-measurement of the lease liability for lease modifications. P O S IT I O N I N G F O R G ROW T H 139
140. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Lease Liability On initial recognition, the lease liability is the present value of all remaining payments to the lessor, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Bank’s incremental borrowing rate. Generally, the Bank uses its incremental borrowing rate as the discount rate. After the commencement date, the Bank measures the lease liability by: 1. increasing the carrying amount to reflect interest on the lease liability; 2. reducing the carrying amount to reflect the lease payments made; and 3. re-measuring the carrying amount to reflect any re-assessment or lease modification. The lease liability is measured at amortised cost using the effective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Bank’s estimate of the amount expected to be payable under a residual value guarantee, or if the Bank changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-ofuse asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. O) Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash, balances with SAMA and placements with SAMA excluding the statutory deposit, and due from banks and other financial institutions with an original maturity of 3 months or less from date of acquisition. P) Assets held in trust or in fiduciary capacity Assets held in trust or in a fiduciary capacity are not treated as assets of the Bank and, accordingly, are not included in the accompanying consolidated financial statements. Q) End of service benefits The provision for end of service benefits is made based on actuarial valuation in accordance with Saudi Arabian Labour Laws. Net obligation, with respect to end of service benefits, to the Bank is reviewed by using a projected unit credit method. The assumptions used to calculate the scheme obligations include assumptions such as expected future salaries growth, expected employee resignation rates, and discount rate to discount the future cash flows. R) Share based payments Under the terms of the Equity Based Long Term Bonus Plan, eligible employees of the Bank are offered shares at a predetermined price for a fixed period of time. At the vesting dates determined under the terms of the plan, the Bank delivers the underlying allotted shares to the employees, subject to the satisfactory completion of the vesting conditions. The cost of the plans is recognised over the period in which the service condition is fulfilled, ending on the date on which the relevant employees become fully entitled to the shares (‘the vesting date’). The cumulative expense recognised for these plans at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the Bank’s best estimate of the number of equity instruments that will ultimately vest. S) Government grant The Bank recognises a government grant related to income, if there is a reasonable assurance that it will be received and the Bank will comply with the conditions associated with the grant. The benefit of a government deposit at a below-market rate of interest is treated as a government grant related to income. The below-market rate deposit is recognised and measured in accordance with IFRS 9 Financial Instruments. The benefit of the below-market rate of interest is measured as the difference between the initial fair value of the deposit determined in accordance with IFRS 9 and the proceeds received. The benefit is accounted for in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. The government grant is recognised in the consolidated statement of income on a systematic basis over the periods in which the Bank recognises as expenses the related costs for which the grant is intended to compensate. The grant income is only recognised when the ultimate beneficiary is the Bank. Where the customer is the ultimate beneficiary, the bank only records the respective receivable and payable amounts. S A B B | A N N U A L R E P O R T 2020
141. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 T) Zakat and Income tax The Bank is subject to Zakat in accordance with the regulations of the General Authority of Zakat and Income Tax (“GAZT”). Zakat expense is charged to the consolidated statement of income. Zakat is not accounted for as income tax and as such no deferred tax is calculated relating to Zakat. The income tax expense for the year is the tax payable on the current year’s taxable income, based on the applicable income tax rate in Saudi Arabia, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Bank and its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities. Adjustments arising from the final income tax assessments are recorded in the period in which such assessments are made. Deferred income tax Deferred income tax is provided using the liability method on temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amounts of assets and liabilities using the tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available and the credits can be utilised. U) Islamic banking products In addition to conventional banking, the Bank also provides Shariah-compliant products, which are approved and supervised by an independent Shariah Board established by SABB. All Shariah approved banking products are accounted for using IFRS and are in conformity with the accounting policies described in these consolidated financial statements. Major non-special commission based Islamic products are as follow: (i) Murabaha is an agreement whereby the Bank sells to a customer a commodity or an asset, which the Bank has purchased and acquired based on a promise received from the customer to buy. The selling price comprises the cost plus an agreed profit margin. (ii) Istisna’a is an agreement between the Bank and a customer whereby the Bank sells to the customer a developed asset according to agreed upon specifications, for an agreed upon price. (iii) Ijarah is an agreement whereby the Bank, acting as a lessor, purchases or constructs an asset for lease according to the customer request (lessee), based on his promise to lease the asset for an agreed rent and specific period that could end by transferring the ownership of the leased asset to the lessee. (iv) Musharaka is an agreement between the Bank and a customer to contribute to a certain investment enterprise or the ownership of a certain property ending up with the acquisition by the customer of the full ownership. The profit or loss is shared as per the terms of the agreement. (v) Tawaraq is a form of Murabaha transactions where the Bank purchases a commodity and sells it to the customer. The customer sells the underlying commodity at spot and uses the proceeds for his financing requirements. These non-commission based banking products are included in “loans and advances” and are in conformity with the related accounting policies described in these consolidated financial statements. P O S IT I O N I N G F O R G ROW T H 141
142. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 3. Cash and balances with SAMA 2020 Cash in hand 2019 2,252,471 2,375,158 Statutory deposit 11,683,700 10,942,082 Placements with SAMA 21,841,129 7,653,718 672,115 295,934 36,449,415 21,266,892 Other balances Total In accordance with the Banking Control Law and regulations issued by SAMA, SABB is required to maintain a statutory deposit with SAMA at stipulated percentages of its deposit liabilities calculated at the end of each month. The statutory deposit with SAMA is not available to finance SABB’s day-to-day operations and therefore is not part of cash and cash equivalents (note 28). Placements with SAMA represents securities purchased under an agreement to re-sell (reverse repo) with SAMA. 4. Due from banks and other financial institutions, net a) Due from banks and other financial institutions are classified as follows: Current accounts Money market placements Total 2020 2019 4,887,672 4,473,830 217,826 513,936 5,105,498 4,987,766 b) Movement in gross carrying amount The following table further explains changes in gross carrying amount of the due from banks and other financial institutions to help explain their significance to the changes in the loss allowance for the same portfolio. Non-credit impaired 2020 Balance at 1 January 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 4,988,191 - - - 4,988,191 Transfer to Stage 1 (821) 821 - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Net change for the year Balance as at 31 December 2020 119,269 - - - 119,269 5,106,639 821 - - 5,107,460 Non-credit impaired 2019 (Restated) Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 12,041,294 - - - 12,041,294 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Balance at 1 January 2019 Transfer to Stage 3 - - - - - Net change for the year (7,053,103) - - - (7,053,103) Balance as at 31 December 2019 4,988,191 - - - 4,988,191 S A B B | A N N U A L R E P O R T 2020
143. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 c) Credit quality analysis The following table sets out information about the credit quality of due from banks and other financial institutions, net: 12 month Lifetime ECL not ECL credit impaired Lifetime ECL Purchased credit credit impaired Impaired Total 31 December 2020 5,105,010 488 - - 5,105,498 31 December 2019 4,987,766 - - - 4,987,766 d) Movement in provision for expected credit losses The following table shows reconciliations from the opening to the closing balance of the provision for expected credit losses against due from banks and other financial institutions: 31 December 2020 12 month ECL Lifetime ECL not credit impaired Lifetime ECL credit impaired Total 425 - - 425 Net charge for the year 1,204 333 - 1,537 Balance as at 31 December 2019 1,629 333 - 1,962 Balance at 1 January 2019 31 December 2019 12 month ECL Lifetime ECL not credit impaired Lifetime ECL credit impaired Total 98 - - 98 Net charge for the year 327 - - 327 Balance as at 31 December 2019 425 - - 425 Balance at 1 January 2019 5. Investments, net a) Investment securities are classified as follows: FVOCI – Debt FVOCI – Equity FVTPL 2020 2019 12,574,317 12,708,906 1,128,916 1,228,767 1,237,760 1,142,573 Held at amortised cost 45,890,014 45,403,580 Total 60,831,007 60,483,826 P O S IT I O N I N G F O R G ROW T H 143
144. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 b) Movement in gross carrying amount The following table further explains changes in gross carrying amount of the investments to help explain their significance to the changes in the loss allowance for the same portfolio: • FVOCI - Debt Non-credit impaired 2020 Balance at 1 January 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 12,521,450 191,134 - - 12,712,584 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - 60,562 (191,134) - - (130,572) 12,582,012 - - - 12,582,012 Net change for the year Balance as at 31 December 2020 Non-credit impaired 2019 Balance at 1 January 2019 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 11,428,410 214,045 - - 11,642,455 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 Net change for the year Balance as at 31 December 2019 - - - - - 1,093,040 (22,911) - - 1,070,129 12,521,450 191,134 - - 12,712,584 • Held at amortised cost Non-credit impaired 2020 Balance at 1 January 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 45,410,968 - - - 45,410,968 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Net change for the year Balance as at 31 December 2020 497,051 - - - 497,051 45,908,019 - - - 45,908,019 POCI Total Non-credit impaired 2019 Balance at 1 January 2019 Credit impaired Stage 1 Stage 2 Stage 3 21,162,689 - - - 21,162,689 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Net change for the year 24,248,279 - - - 24,248,279 Balance as at 31 December 2019 45,410,968 - - - 45,410,968 S A B B | A N N U A L R E P O R T 2020
145. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 c) Investments by type of securities Domestic International Total 2020 2019 2020 2019 2020 2019 Fixed rate securities 43,911,832 41,334,882 1,515,165 2,701,360 45,426,997 44,036,242 Floating rate securities 13,478,653 13,844,263 427,602 895,832 13,906,255 14,740,095 Equities and others Total 1,484,126 1,689,989 13,629 17,500 1,497,755 1,707,489 58,874,611 56,869,134 1,956,396 3,614,692 60,831,007 60,483,826 d) Credit quality analysis The following table sets out information about the credit quality of debt instruments measured at amortised cost and FVOCI. 12 month Lifetime ECL not Lifetime ECL Purchased ECL credit impaired credit impaired credit impaired Total 2020 Debt instruments at amortised cost, net 45,890,014 - - - 45,890,014 Debt instruments at FVOCI, net 12,574,317 - - - 12,574,317 12 month Lifetime ECL not Lifetime ECL Purchased ECL credit impaired credit impaired credit impaired Total 2019 Debt instruments at amortised cost, net Debt instruments at FVOCI, net 45,403,580 - - - 45,403,580 12,517,887 191,019 - - 12,708,906 e) Movement in provision for expected credit losses An analysis of changes in loss allowance for debt instruments not measured at fair value through profit or loss, is as follows: 12 month Lifetime ECL not Lifetime ECL ECL credit impaired credit impaired Balance as at 1 January 2020 - Total 10,951 115 11,066 Net charge for the year 14,749 (115) - 14,634 Balance as at 31 December 2020 25,700 - - 25,700 12 month Lifetime ECL not Lifetime ECL ECL credit impaired credit impaired Total Balance as at 1 January 2019 2,581 148 16,571 19,300 Net charge for the year 8,370 (33) - 8,337 - - (16,571) (16,571) 10,951 115 - 11,066 Write-offs Loss allowance as at 31 December 2019 P O S IT I O N I N G F O R G ROW T H 145
146. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 f) The analysis of the composition of investments is as follows: 2020 2019 Quoted Unquoted Total Quoted Unquoted Total 43,199,266 2,227,731 45,426,997 41,278,808 2,757,434 44,036,242 Floating rate securities 8,994,642 4,911,613 13,906,255 9,336,487 5,403,608 14,740,095 Equities and mutual funds 1,472,289 25,466 1,497,755 1,680,822 26,667 1,707,489 53,666,197 7,164,810 60,831,007 52,296,117 8,187,709 60,483,826 Fixed rate securities Investments, net g) Shariah-compliant investments FVOCI – Debt FVTPL 2020 2019 5,900,060 5,498,488 630,765 567,016 Held at amortised cost 36,721,198 27,523,024 Total 43,252,023 33,588,528 2020 2019 h) The analysis of investments by counterparty is as follows: 56,391,516 53,492,409 Corporate Government and quasi government 1,480,119 3,881,408 Banks and other financial institutions 2,945,616 3,095,165 Others Total S A B B | A N N U A L R E P O R T 2020 13,756 14,844 60,831,007 60,483,826
147. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 6. Loans and advances, net a) Loans and advances are comprised of the following: 2020 12 month ECL Credit cards Other retail lending Corporate and institutional lending Total 1,941,419 33,240,125 89,775,444 124,956,988 Lifetime ECL not credit impaired 63,171 886,598 24,630,710 25,580,479 Lifetime ECL credit impaired 66,244 1,469,304 4,467,919 6,003,467 135 172,724 3,704,746 3,877,605 Purchased or originated credit impaired Total loans and advances, gross 2,070,969 35,768,751 122,578,819 160,418,539 Provision for expected credit losses, net (234,704) (1,364,496) (5,576,261) (7,175,461) Loans and advances, net 1,836,265 34,404,255 117,002,558 153,243,078 Credit cards Other retail lending Corporate and institutional lending Total 2019 (Restated) 12 month ECL 2,326,426 33,755,819 95,746,566 131,828,811 Lifetime ECL not credit impaired 74,200 1,461,519 15,354,378 16,890,097 Lifetime ECL credit impaired 67,267 862,131 4,199,973 5,129,371 Purchased or originated credit impaired 1,113 370,131 3,858,563 4,229,807 Total loans and advances, gross 2,469,006 36,449,600 119,159,480 158,078,086 Provision for expected credit losses, net (275,927) (1,190,942) (4,536,131) (6,003,000) Loans and advances, net 2,193,079 35,258,658 114,623,349 152,075,086 Lifetime ECL credit impaired includes non-performing loans and advances of SAR 5,377 million (31 December 2019: SAR 4,247 million). It also includes exposures that are now performing but have yet to complete a period of 12 months of performance (‘the curing period’) to be eligible to be upgraded to a not-impaired category. The financial assets recorded in each stage have the following characteristics: • 12 month ECL not credit impaired (stage 1): without significant increase in credit risk on which a 12 month allowance for ECL is recognised; • Lifetime ECL not credit impaired (stage 2): a significant increase in credit risk has been experienced since initial recognition on which a lifetime ECL is recognised; • Lifetime ECL credit impaired (stage 3): objective evidence of impairment, and are therefore considered to be in default or otherwise credit impaired on which a lifetime ECL is recognised; and • Purchased or originated credit impaired (‘POCI’): purchased or originated at a deep discount that reflects the incurred credit losses on which a lifetime ECL is recognised. POCI includes non-performing loans and advances acquired through the merger with AAB that are recorded at written down value and therefore do not carry a provision for expected credit loss. It also includes recognition of previously written off loans of SABB where the expectation of recovery has improved. P O S IT I O N I N G F O R G ROW T H 147
148. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 b) Movement in gross carrying amount The following table further explains changes in gross carrying amount of the loans to help explain their significance to the changes in the loss allowance for the same portfolio: • Credit cards Non-credit impaired 2020 Balance at 1 January 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 2,326,426 74,200 67,267 1,113 2,469,006 Transfer to Stage 1 8,927 (8,927) - - - Transfer to Stage 2 (40,050) 40,050 - - - Transfer to Stage 3 (36,823) (6,506) 43,329 - - Net change for the year (317,061) (35,646) 78,921 (978) (274,764) - - (123,273) - (123,273) 1,941,419 63,171 66,244 135 2,070,969 Write-offs Balance as at 31 December 2020 Non-credit impaired 2019 (Restated) Balance at 1 January 2019 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 2,051,745 63,406 71,065 - 2,186,216 Transfer to Stage 1 10,740 (7,166) (3,574) - - Transfer to Stage 2 (40,386) 43,442 (3,056) - - Transfer to Stage 3 (33,404) (5,355) 38,759 - - Net change for the year 337,731 (20,127) 90,879 1,113 409,596 - - (126,806) - (126,806) 2,326,426 74,200 67,267 1,113 2,469,006 Write-offs Balance as at 31 December 2019 • Other retail lending Non-credit impaired 2020 Balance at 1 January 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 33,755,819 1,461,519 862,131 370,131 36,449,600 Transfer to Stage 1 95,390 (88,320) (7,070) - - Transfer to Stage 2 (182,525) 217,576 (35,051) - - Transfer to Stage 3 (142,950) (57,473) 200,423 - - Net change for the year (285,609) (646,704) 740,224 (197,407) (389,496) Write-offs Balance as at 31 December 2020 - - (291,353) - (291,353) 33,240,125 886,598 1,469,304 172,724 35,768,751 Non-credit impaired 2019 (Restated) Balance at 1 January 2019 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 20,427,583 1,316,404 776,614 58,583 22,579,184 Transfer to Stage 1 92,664 (83,783) (8,881) - - Transfer to Stage 2 (158,558) 213,004 (54,446) - - Transfer to Stage 3 (96,255) (60,849) 157,104 - - 13,490,385 76,743 297,645 311,548 14,176,321 - - (305,905) - (305,905) 33,755,819 1,461,519 862,131 370,131 36,449,600 Net change for the year Write-offs Balance as at 31 December 2019 S A B B | A N N U A L R E P O R T 2020
149. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 • Corporate and institutional lending Non-credit impaired 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 95,746,566 15,354,378 4,199,973 3,858,563 119,159,480 Transfer to Stage 1 84,075 (84,065) (10) - - Transfer to Stage 2 (892,970) 892,970 - - - Transfer to Stage 3 (255) (351,690) 351,945 - - (5,161,972) 8,819,117 367,541 (153,817) 3,870,869 - - (451,531) - (451,531) 89,775,444 24,630,710 4,467,918 3,704,746 122,578,818 Balance at 1 January 2020 Net change for the year Write-offs Balance as at 31 December 2020 Non-credit impaired 2019 (Restated) Balance at 1 January 2019 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 74,751,086 15,181,771 2,923,703 - 92,856,560 Transfer to Stage 1 726,300 (718,663) (7,637) - - Transfer to Stage 2 (204,613) 204,613 - - - Transfer to Stage 3 Net change for the year Write-offs Balance as at 31 December 2019 (32,300) (816,724) 849,024 - - 20,506,093 1,503,381 1,323,700 3,858,563 27,191,737 - - (888,817) - (888,817) 95,746,566 15,354,378 4,199,973 3,858,563 119,159,480 c) Movement in provision for credit losses The following table shows reconciliations from the opening to the closing balance of the provision for credit losses against loans and advances: Non-credit impaired Credit impaired 2020 Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2020 644,297 2,156,103 3,142,098 60,502 6,003,000 Transfer to Stage 1 38,332 (31,938) (6,394) - - Transfer to Stage 2 (7,856) 28,552 (20,696) - - Transfer to Stage 3 (5,400) (35,293) 40,693 - - 173,926 333,554 1,124,194 (7,684) 1,623,990 - - (451,529) - (451,529) 843,299 2,450,978 3,828,366 52,818 7,175,461 Net re-measurement of loss allowance Write-offs Balance as at 31 December 2020 Non-credit impaired Credit impaired 2019 (Restated) Stage 1 Stage 2 Stage 3 POCI Total Balance at 1 January 2019 366,723 1,624,813 2,716,152 42,924 4,750,612 Transfer to Stage 1 52,816 (42,156) (10,660) - - Transfer to Stage 2 (5,690) 27,070 (21,380) - - Transfer to Stage 3 Net re-measurement of loss allowance Write-offs Balance as at 31 December 2019 (3,630) (258,312) 261,942 - - 234,078 804,688 1,084,861 17,578 2,141,205 - - (888,817) - (888,817) 644,297 2,156,103 3,142,098 60,502 6,003,000 P O S IT I O N I N G F O R G ROW T H 149
150. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 d) Provision for credit losses, net The following table shows the provision for expected credit losses for due from banks and other financial institutions, investments, loans and advances and off balance sheet exposures: Notes 2020 2019 (Restated) Due from banks and other financial institutions, net 4 1,537 327 Investments 5 14,634 8,337 6 1,623,990 2,141,205 20 26,500 210,969 (35,730) 140,337 1,630,931 2,501,175 Net provision for expected credit losses: Loans and advances Off balance sheet exposures Write-offs net of recoveries of debts previously written-off Net charge for the year e) Economic sector risk concentrations for the loans and advances and provision for credit losses are as follows: 2020 Performing Nonperforming Government and quasi government 16,389,258 189,570 5,964,688 - 641,207 - Finance Agriculture and fishing Manufacturing Provision for credit losses Loans and advances, net - (6,651) 16,572,177 - (118,702) 5,845,986 133,946 (4,353) 770,800 POCI 18,937,478 621,009 956,035 (1,569,304) 18,945,218 Mining and quarrying 3,483,790 - - (7,315) 3,476,475 Electricity, water, gas and health services 6,278,850 194,879 614,759 (256,727) 6,831,761 Building and construction 10,240,692 1,659,209 776,212 (1,391,515) 11,284,598 Commerce 35,959,403 706,422 917,204 (1,467,283) 36,115,746 8,134,357 28,421 195,854 (67,797) 8,290,835 Transportation and communication Services Credit cards and other retail lending Others 7,403,147 4,313 25,238 (172,836) 7,259,862 36,547,021 1,119,840 172,859 (1,599,200) 36,240,520 1,183,670 853,690 85,498 (513,778) 1,609,080 151,163,561 5,377,353 3,877,605 (7,175,461) 153,243,058 2019 (Restated) Performing Nonperforming POCI Provision for credit losses Loans and advances, net Government and quasi government 11,343,218 189,570 - (2,998) 11,529,790 6,006,276 - - (163,060) 5,843,216 Total Finance Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services 556,832 - 226,351 (1,709) 781,474 22,714,036 568,972 949,600 (1,454,684) 22,777,924 2,783,633 - - (3,169) 2,780,464 5,526,593 166,741 484,642 (177,109) 6,000,867 Building and construction 12,233,992 1,799,436 758,088 (1,374,563) 13,416,953 Commerce 33,036,220 538,750 986,676 (1,007,236) 33,554,410 8,739,517 4,933 224,297 (29,398) 8,939,349 7,807,241 20,579 29,154 (156,671) 7,700,303 Transportation and communication Services Credit cards and other retail lending 37,804,169 743,193 371,244 (1,466,869) 37,451,737 Others 1,049,850 214,528 199,755 (165,534) 1,298,599 149,601,577 4,246,702 4,229,807 (6,003,000) 152,075,086 Total S A B B | A N N U A L R E P O R T 2020
151. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 f) The following table sets out information about the credit quality of loans and advances. The amounts in the table represent gross carrying amounts: 2020 Stage 1 Stage 2 Stage 3 POCI Total Strong 23,415,171 - - - 23,415,171 Good 52,094,570 1,550,408 15,012 - 53,659,990 Satisfactory 14,233,022 17,323,149 193 - 31,556,364 Unrated Loans and advances to customers at amortised cost 35,181,543 949,769 415,707 - 36,547,019 Special mention 32,682 5,757,153 195,202 - 5,985,037 Non-performing - - 5,377,353 - 5,377,353 Others - - - 3,877,605 3,877,605 124,956,988 25,580,479 6,003,467 3,877,605 160,418,539 Stage 1 Stage 2 Stage 3 POCI Total Strong 16,495,481 - - - 16,495,481 Good 64,238,986 1,372,016 238 - 65,611,240 Satisfactory 14,635,541 9,472,211 16,558 - 24,124,310 Unrated 36,089,691 1,546,857 167,621 - 37,804,169 Special mention 369,112 4,499,013 698,252 - 5,566,377 Non-performing - - 4,246,702 - 4,246,702 Total 2019 (Restated) Loans and advances to customers at amortised cost Others Total - - - 4,229,807 4,229,807 131,828,811 16,890,097 5,129,371 4,229,807 158,078,086 Strong: Financial status, capitalisation, earnings, liquidity, cash generation and management will all be of highest quality. A strong capacity to meet longer-term and short-term financial commitments. Good: Financial condition exhibits no major adverse trends prevalent. Capacity to meet medium and short-term financial commitments is considered fair, but more sensitive to external changes or market conditions. Satisfactory: A counterparty whose financial position is average but not strong. The overall position will not be causing any immediate concern but more regular monitoring will be necessary as a result of susceptibilities to external changes or market conditions. Special mention: Financial condition weak and capacity, or inclination, to repay, is in doubt. The financial status of the borrower requires close monitoring and ongoing assessment. Non-performing: A counterparty who is classified as in default. Unrated: Represents performing retail loans and advances that are not rated. P O S IT I O N I N G F O R G ROW T H 151
152. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 g) Shariah-compliant loans Included in loans and advances are the following Shariah-compliant products: Tawaruq Murabaha Others Total 2020 2019 (Restated) 91,174,726 93,655,189 5,565,020 6,262,813 19,915,008 14,220,762 116,654,754 114,138,764 h) Collateral The Bank in the ordinary course of lending activities holds collateral as security to mitigate credit risk in the loans and advances. This collateral mostly includes time, demand, and other cash deposits, financial guarantees, local and international equities, real estate and other fixed assets. The collateral are held mainly against commercial and consumer loans and are managed against relevant exposures at their net realisable values. For financial assets that are credit impaired at the reporting period, quantitative information about the collateral held as security is needed to the extent that such collateral mitigates credit risk. As of 31 December 2020, the carrying amount of gross non-performing loans and advances amounted to SAR 5,377 million (2019: SAR 4,247 million) and the value of identifiable collateral held against those loans and advances amount to SAR 3,485 million (2019: SAR 2,354 million). 7. Investment in associates 2020 2019 585,987 532,597 HSBC Saudi Arabia Balance at beginning of the year Share in earnings 79,870 138,611 Dividend received (122,902) (62,640) - (22,581) 542,955 585,987 74,211 - Disposal Balance at end of the year Wataniya Balance at beginning of the year Acquired through business combination Share in earnings/ (loss) Balance at end of the year Total - 80,204 2,066 (5,993) 76,277 74,211 619,232 660,198 SABB owns 49% (2019: 49%) of the shares of HSBC Saudi Arabia, an associate. The main activities of HSBC Saudi Arabia are to provide a full range of investment banking services including investment banking advisory, brokerage, debt and project finance as well as Islamic finance. It also manages mutual funds and discretionary portfolios. HSBC Saudi Arabia is an authorised person licensed by the CMA to carry out securities business activities. SABB owns 20% (2019: 20%) of the shares of Wataniya, an associate. The primary activity of Wataniya is to offer products to as an extension to the Bank’s existing retail banking offering. S A B B | A N N U A L R E P O R T 2020
153. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 8. Property and equipment and right of use assets, net Land and buildings Leasehold improvements and ROU Equipment, furniture and vehicles 2020 Total 2019 Total 1,630,164 1,895,689 776,534 4,302,387 2,835,797 34,618 (18,705) 177,068 192,981 2,944 - - - - 1,477,933 Cost As at 1 January Additions / re-measurement Acquired through business combination (note 19) Disposals As at 31 December (467) (34,744) (97,322) (132,533) (14,287) 1,664,315 1,842,240 856,280 4,362,835 4,302,387 406,176 638,723 598,254 1,643,153 1,386,813 16,614 208,897 118,423 343,934 266,371 Accumulated depreciation As at 1 January Charge for the year Disposals As at 31 December (230) (18,353) (26,854) (45,437) (10,031) 422,560 829,267 689,823 1,941,650 1,643,153 2,421,185 Net book value As at 31 December 2020 1,241,755 1,012,973 166,457 As at 31 December 2019 1,223,988 1,256,966 178,280 Capital work in progress Total 2,659,234 748,242 649,044 3,169,427 3,308,278 Leasehold improvements opening balance include Right of Use (‘ROU’) leased asset that is recognised upon implementation of IFRS 16 – Leases. The movement of ROU is as below: 2020 Cost Accumulated depreciation Net book value ROU Balance at beginning of the year 1,217,300 (118,493) 1,098,807 Additions/ re-measurement (27,767) - (27,767) Disposals (34,431) 18,042 (16,389) Depreciation - (157,018) (157,018) 1,155,102 (257,469) 897,633 Cost Accumulated depreciation Net book value Balance at beginning of the year 706,822 - 706,822 Additions/ re-measurement (39,472) - (39,472) Acquired through business combination (note 19) 559,685 - 559,685 (9,735) 9,735 - - (128,228) (128,228) 1,217,300 (118,493) 1,098,807 Balance as at 31 December 2020 2019 Disposals Depreciation Balance as at 31 December 2019 P O S IT I O N I N G F O R G ROW T H 153
154. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 9. Goodwill and other intangibles Intangibles are comprised of the following: 2020 2019 Goodwill 8,778,091 16,195,867 Other intangibles 1,787,484 1,943,561 13,806 13,806 403,155 308,831 10,982,536 18,462,065 Amounts arising from business combination (note 19) Goodwill arising from acquisition of SABB Takaful Software Total Goodwill Customer Core deposit intangible relationship - CDI - PCCR Software Brand 2020 Total 2019 Total (Restated) Cost 16,209,673 520,027 71,200 1,875,400 75,000 18,751,300 193,389 Additions As at 1 January - 315,365 - - - 315,365 127,294 Acquired through business combination (note 19) - - - - - - 18,434,683 Disposals - (44,269) - - - (44,269) (4,066) 16,209,673 791,123 71,200 1,875,400 75,000 19,022,396 18,751,300 - 211,196 3,560 66,979 7,500 289,235 123,745 As at 31 December Accumulated amortisation As at 1 January Charge for the year - 177,647 7,120 133,957 15,000 333,724 165,749 7,417,776 - - - - 7,417,776 - - (875) - - - (875) (259) 7,417,776 387,968 10,680 200,936 22,500 8,039,860 289,235 As at 31 December 2020 8,791,897 403,155 60,520 1,674,464 52,500 10,982,536 As at 31 December 2019 16,209,673 308,831 67,640 1,808,421 67,500 Impairment loss Disposals As at 31 December Net book value 18,462,065 Impairment testing of goodwill The goodwill acquired through business combination is reviewed annually for impairment. At each reporting period, an assessment is made for indicators of impairment. If indicators exist, an impairment test is required. The impairment test compares the estimated recoverable amount of the Bank’s CGUs that carry goodwill, as determined through a Value-In-Use (VIU) model, with the carrying amount of net assets of each CGU. The goodwill has been allocated to the following cash-generating units: • • • • Retail banking Corporate and institutional banking Treasury Others Key assumptions in value-in-use calculation The recoverable amount of the cash-generating units has been determined based on a value in use calculation. The VIU model used projected cash flows in perpetuity through a five-year forward period of projections, and thereafter applying a (long-term) terminal growth rate. S A B B | A N N U A L R E P O R T 2020
155. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The calculation of VIU in the CGUs is mainly driven by the following assumptions: • • • • • • • Economic outlook, notably the projected nominal Gross Domestic Product (“GDP”); Discount rates; Long-term growth rates; Benchmark interest rates and net special commission income margins; Future cost of risk from expected credit losses Local inflation rates; and Target Capital ratio and profit retention The following key assumptions were used in the calculation of the VIU: • Discount rate of 10.08%, which is derived using a capital asset pricing model and comparing it with cost of capital rates produced by external sources. • Long-term asset growth rate of 4.0%, derived from economists’ forecasts of nominal GDP for KSA, applied to projected periods beyond 2024. • Long-term profit growth rate of 4.8%, derived from economists’ forecasts of nominal GDP for KSA adjusted for expected changes in benchmark interest rates and sector growth rates over time, applied to projected periods beyond 2024. A sensitivity analysis of the VIU to changes in key assumptions of long-term growth rates and discount rates is set out below. Key assumptions used in impairment testing for goodwill The calculation of value in use in the cash-generating units is most sensitive to the following assumptions: • • • • interest margins; discount rates; projected growth rates used to extrapolate cash flows beyond the projection period; and current local Gross Domestic Product (‘GDP’) Interest margins Interest margins are based on prevailing market rates at the start of the budget period. These are changed over the budget period for anticipated market conditions. Discount rates Discount rates reflect management’s estimate of Return on Capital Employed (‘ROCE’) required in each business. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. Discount rates are calculated by using a capital asset pricing model. Projected growth rate, GDP and local inflation rates Assumptions are based on published industry research. At 30 June 2020, it was determined that indicators of impairment existed and it was determined that the Goodwill allocated to CIB was impaired by SAR 7.4 billion versus a carrying amount of SAR 8.19 billion. The impairment charge was recorded in the Interim Consolidated Statement of Income for the period ended 30 June 2020. The decrease in VIU as at that date was based on a prediction of the short to medium-term impact of COVID-19 on the economy and the Bank, and thereafter based on long-term economic projections. The model assumed an economic recovery benefit from 2023 onwards. In the current environment, the ability to predict the future is more challenging than ever, which makes the determination of VIU sensitive to changes in input assumptions. P O S IT I O N I N G F O R G ROW T H 155
156. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 At 31 December 2020, the Goodwill impairment test determined there was no impairment required to any of the CGUs and goodwill is allocated to the following CGUs: Goodwill allocated (SAR million) Cash generating units (CGUs) 2020 Retail banking 4,650 Corporate and institutional banking 772 Treasury 3,356 Others 14 The forecast cash flows have been discounted using the discount rate mentioned above. A 1% point increase in the discount rate or decrease in the terminal growth rate keeping other factors constant would reduce the recoverable amount of the CGUs as mentioned in the table below: 31 December 2020 Impact on the recoverable amount of CGUs One percentage increase in discount rate (SAR million) One percentage increase in terminal growth rate (SAR million) Retail banking (3,655) (3,089) Corporate and institutional banking (6,625) (5,572) Treasury (3,138) (2,625) Cash generating units (CGUs) 31 December 2019 Impact on the recoverable amount of CGUs Cash generating units (CGUs) One percentage increase in discount rate (SAR million) One percentage increase in terminal growth rate (SAR million) Retail banking (3,597) (7,228) Corporate and institutional banking (4,510) (4,144) Treasury (5,267) (3,054) Other intangibles Acquired other intangibles are recognised at their ‘fair value’ upon initial recognition. The specific criteria which needs to be satisfied for an intangible asset to be recognised separately from goodwill in an acquisition is that the intangible asset must be clearly identifiable, in that it either: • be separable, that is, be capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or • arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Other intangibles are amortised using the straight-line method over the useful life of the asset, which is estimated to be 10 years for customer relationships – PCCR, 14 years for core deposit intangible – CDI and 5 years for brand. If an indication of impairment arises, the recoverable amount is estimated and an impairment loss is recognised if the recoverable amount is lower than the carrying amount. The banking license has an indefinite life and is tested for impairment annually. For impairment testing purposes, the banking license is allocated to the relevant cash generating unit. S A B B | A N N U A L R E P O R T 2020
157. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 10. Other assets Accounts receivable Advance tax Others Total 2020 2019 1,432,492 1,795,006 139,918 275,750 2,517,762 1,701,336 4,090,172 3,772,092 11. Derivatives In the ordinary course of business, the Bank uses the following derivative financial instruments for both trading and hedging purposes: a) 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 customised contracts transacted in the over-the-counter market. Foreign currency and special commission rate futures are transacted in standardised amounts on regulated exchanges, and changes in futures contract values are settled daily. b) 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 predetermined price. c) 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 cross currency special commission rate swaps, principal, fixed and floating special commission payments are exchanged in different currencies. d) Forward rate agreements Forward rate agreements are over-the-counter 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. Risk-related adjustments Bid-offer: IFRS 13 requires use of the price within the bid-offer spread that is most representative of fair value. Valuation models will typically generate mid-market values. The bid-offer adjustment reflects the extent to which bid-offer cost would be incurred if substantially all residual net portfolio market risks were closed using available hedging instruments or by disposing of or unwinding the position. Credit valuation adjustment (‘CVA’): The credit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that the counterparty may default and that SABB may not receive the full market value of the transactions. Debit valuation adjustment (‘DVA’): The debit valuation adjustment is an adjustment to the valuation of OTC derivative contracts to reflect within fair value the possibility that SABB may default, and that SABB may not pay the full market value of the transactions. P O S IT I O N I N G F O R G ROW T H 157
158. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Credit valuation adjustment/debit valuation adjustment methodology: SABB calculates a separate CVA and DVA for each counterparty to which the entity has exposure. SABB calculates the CVA by applying the probability of default (‘PD’) of the counterparty conditional on the non-default of SABB to the expected positive exposure to the counterparty and multiplying the result by the loss expected in the event of default. Conversely, SABB calculates the DVA by applying the PD of SABB, conditional on the non-default of the counterparty, to the expected positive exposure of the counterparty to SABB and multiplying by the loss expected in the event of default. Both calculations are performed over the life of the potential exposure. Derivatives held for trading purposes Most of the Bank’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers 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 favourable movements in prices, rates or indices. Arbitrage involves identifying, with the expectation of profiting from price differentials between markets or products. Derivatives held for hedging purposes The Bank has adopted a comprehensive system for the measurement and management of risk (see note 31 – financial risk management, note 32 - market risk and note 33 - liquidity risk). Part of the risk management process involves managing the Bank’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 the levels of currency risk by setting limits on 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 also established the levels 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 maintain special commission rate gaps within the established limits. As part of its asset and liability management process, the Bank uses derivatives for hedging purposes in order to adjust its exposure to currency and special commission rate risks. This is generally achieved by hedging specific transactions as well as by strategic hedging against overall statement of financial position exposures. Strategic hedging other than portfolio hedging does not qualify for hedge accounting and the related derivatives are accounted for as held for trading. The Bank uses forward foreign exchange contracts and currency swaps to hedge against specifically identified currency risks. In addition, the Bank uses special commission rate swaps to hedge against the special commission rate risk arising from specifically identified fixed special commission rate exposures. The Bank 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 the details of the hedged items and hedging instruments, are formally documented and the transactions are accounted for as fair value or cash flow hedges. Hedge effectiveness testing To qualify for hedge accounting, SABB requires that at the inception of the hedge and throughout its life, each hedge must be expected to be highly effective both prospectively and retrospectively, on an ongoing basis. The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed and the method adopted by an entity to assess hedge effectiveness will depend on its risk management strategy. For prospective effectiveness, the hedging instrument must be expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated, with the effectiveness range being defined as 80% to 125%. Hedge ineffectiveness is recognised in the consolidated statement of income ‘Trading income, net’. S A B B | A N N U A L R E P O R T 2020
159. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Cash flow hedges The Bank is exposed to variability in future special commission cash flows on non-trading assets and liabilities which bear special commission income at a variable rate. The Bank uses commission rate swaps as cash flow hedges of these special commission rate risks. 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 statement of income: Within 1 year 1-3 years 3-5 years Over 5 years Cash inflows (assets) 31,286 47,208 1,635 - Cash out flows (liabilities) (1,687) - - - Net cash inflow 29,599 47,208 1,635 - Cash inflows (assets) 55,449 123,327 33,173 3,792 Cash out flows (liabilities) (6,318) (1,686) - - Net cash inflow 49,131 121,641 33,173 3,792 2020 2019 The schedule reflects special commission income cash flows expected to arise on the hedged items in cash flow hedges based on the repricing profile of the hedged assets and liabilities. The tables below show the positive and negative fair values of derivative financial instruments held, together with their notional amounts as at 31 December, analysed by the term to maturity. 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 Bank’s exposure to market risk nor credit risk, which is generally limited to the positive fair value of the derivatives. Notional amounts by term to maturity Notional amount total Within 3 months 3-12 months 1-5 years Over 5 years 38,492,765 1,106,388 5,199,257 20,929,295 11,257,825 16,791,558 476,120 3,097,608 7,967,830 5,250,000 1,534,616 1,245,515 289,101 - - 153,968 403,480 88,445 - 3,825,000 375,000 300,000 3,150,000 - 10,110,416 93,750 487,500 6,057,125 3,472,041 Positive fair value Negative fair value 1,172,441 (1,175,729) 677,038 (724,737) 68,766 (68,162) Currency options 1,852 (1,852) 645,893 Currency swaps 15,418 (7,806) - (834,505) 18,581 (6,295) 90,000 - - 90,000 - 7,210 - 1,031,250 - 712,500 318,750 - (2,819,086) 72,521,498 3,450,741 10,489,446 2020 Derivatives held for trading: Special commission rate swaps Special commission rate options Forward foreign exchange contracts Derivatives held as fair value hedges: Special commission rate swaps Derivatives held as cash flow hedges: Special commission rate swaps Currency swaps Total Fair values of netting arrangements 1,961,306 27,278 (1,665,900) Cash collateral received (29,775) 1,979,400 Fair values after netting (2,497) 313,500 38,601,445 19,979,866 P O S IT I O N I N G F O R G ROW T H 159
160. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Notional amounts by term to maturity Positive fair value Negative fair value Notional amount total Within 3 months 3-12 months 1-5 years Over 5 years 8,869,076 35,669,796 11,373,711 2019 Derivatives held for trading: Special commission rate swaps 732,749 (709,194) 59,941,010 4,028,427 Special commission rate options 124,349 (128,907) 13,661,863 180,894 1,683,600 11,797,369 - 33,028 (22,491) 9,290,855 7,204,009 2,086,846 - - Currency options 1,102 (982) 1,673,918 549,946 1,123,972 - - Currency swaps 6,995 (6,995) 487,500 - - 487,500 - 11,090 (11,090) 352,773 332,358 20,415 - - 15,189 (425,325) 11,205,022 262,500 656,250 5,470,625 4,815,647 Forward foreign exchange contracts Others Derivatives held as fair value hedges: Special commission rate swaps Derivatives held as cash flow hedges: Special commission rate swaps Currency swaps Total Fair values of netting arrangements 9,195 (454) 440,000 150,000 200,000 90,000 - 36,829 (12,202) 1,668,750 187,500 262,500 1,031,250 187,500 970,526 (1,317,640) 98,721,691 12,895,634 14,902,659 54,546,540 16,376,858 43,599 (701,565) Cash collateral received (41,438) 816,578 Fair values after netting 2,161 115,013 The Bank enters into structured currency option products with clients which involve 1 or more derivatives included in the structure. In such instances, the fair value of the individual structured product represents a net valuation of the underlying derivatives. The sum of all option notionals included in each structure as of the reporting date is disclosed in the table above. The tables below show a summary of the hedged items, the nature of the risk being hedged, the hedging instruments and their fair values. Fair value Hedge inception value Risk Hedging instrument Positive fair value Negative fair value Special commission rate swap - (834,505) Special commission rate swap 18,581 (6,295) 2020 Description of the hedged items: Fixed commission rate investments Floating commission rate investments Fixed commission rate investments Fixed commission rate deposits S A B B | A N N U A L R E P O R T 2020 10,322,413 10,110,416 Fair value 89,999 90,000 Cash flow 1,028,107 1,031,250 Cash flow Currency swap 7,209 - - - Cash flow Currency swap - -
161. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Fair value Hedge inception value Risk Hedging instrument Positive fair value Negative fair value 2019 Description of the hedged items: Fixed commission rate investments Floating commission rate investments Fixed commission rate investments Fixed commission rate deposits 11,670,647 11,205,022 Fair value Special commission rate swap 15,189 (425,325) 443,721 440,000 Cash flow Special commission rate swap 9,195 (454) 1,431,620 1,481,250 Cash flow Currency swap 36,829 (11,525) 187,500 187,500 Cash flow Currency swap - (677) The hedge inception value has been adjusted, where necessary, to reflect book values. The net losses on the hedging instruments for fair value hedges are SAR 424.3 million (2019: net losses of SAR 402 million). The net gains on the hedged item attributable to the hedged risk are SAR 237.6 million (2019: net losses of SAR 519 million). Approximately 20% (2019: 42%) of the positive fair value of the Bank’s derivatives are entered into with financial institutions and out of which 15.7% (2019: 7%) of the positive fair value contracts are with any individual counterparty at the year end. The Bank, as part of its derivative management activities, has entered into a master agreement in accordance with the International Swaps and Derivative Association (ISDA) directives. Under this agreement, the terms and conditions for derivative products purchased or sold by the SABB Group are unified. As part of the master agreement, a credit support annex (CSA) has also been signed. The CSA allows the Bank to receive improved pricing by way of exchange of mark to market amounts in cash as collateral whether in favour of the Bank or the counter party. For commission rate swaps entered into with European counterparties, the SABB Bank and the European counterparty both comply with the European Market Infrastructure Regulation (EMIR). EMIR is a body of European legislation for the central clearing and regulation of Over the Counter (OTC) derivatives. The regulation includes requirements for reporting of derivatives contracts and implementation of risk management standards, and establishes common rules for central counterparties and trade repositories. Accordingly, all such standardised OTC derivatives contracts are traded on exchanges and cleared through a Central Counter Party (CCP) through netting arrangements and exchanges of cash to reduce counter party credit and liquidity risk. The positive and negative fair values of derivatives including CSA and EMIR cash margins have been netted/offset when there is a legally enforceable right to set off the recognised amounts and when the Bank intends to settle on a net basis, or to realise the assets and settle the liability simultaneously. 12. Due to banks and other financial institutions Current accounts Money market deposits Repo with banks 2020 2019 2,559,207 3,633,774 5,596 18,912 567,906 - Others 14,488,247 - Total 17,620,956 3,652,686 Others represents government grant from SAMA. P O S IT I O N I N G F O R G ROW T H 161
162. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 13. Customers’ deposits Demand Savings Time Margin and others Total 2020 2019 134,240,503 122,517,724 1,829,933 1,691,003 51,636,767 51,825,874 1,402,937 16,131,923 189,110,140 192,166,524 The above deposits include the following deposits in foreign currency: Demand Savings Time Margin and others Total 2020 2019 12,442,367 12,802,166 27,620 51,820 4,597,935 6,426,796 170,582 240,836 17,238,504 19,521,618 2020 2019 79,646,852 66,291,455 1,410,786 1,320,878 32,361,141 31,232,181 455,794 551,518 113,874,573 99,396,032 Customers’ deposits include the following deposits under Shariah approved product contracts. Shariah-compliant deposits Demand Savings Time Margin and others Total 14. Debt securities in issue SAR 5 Billion 10 year Sukuk – 2020 SABB completed issuance of its SAR 5 billion Tier II Sukuk on 22 July 2020. The Sukuk issuance is under the Bank’s local Sukuk Programme (the “Local Programme”) and is due in 2030, with SABB having an option to repay the Sukuk after 5 years, subject to prior approval of SAMA and terms and conditions of the Local Programme. The structure of the Sukuk was approved by SABB’s Shari’ah committee. The Sukuk is unsecured and was offered by way of private placement in the Kingdom of Saudi Arabia carrying effective special commission income at six months’ SAIBOR plus margin of 195 bps payable semi-annually. SAR 1,500 million 10 year Sukuk – 2015 The Sukuk was issued by SABB on 28 May 2015 having maturity in May 2025. This was a Basel III compliant issuance and SABB had an option to repay the Sukuk after 5 years, subject to prior approval of SAMA and the terms and conditions of the agreement. The Sukuk was repaid on 31 May 2020. S A B B | A N N U A L R E P O R T 2020
163. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 15. Other liabilities 2020 2019 (Restated) Accounts payable 2,976,103 3,728,430 Drawings payable 1,102,668 522,951 Dividends payable 183,986 190,217 End of service benefits (note 29) 803,426 744,767 Provision against off balance sheet exposure (note 20) 662,565 636,065 Lease liability 911,723 1,101,764 Others Total 4,432,668 4,341,742 11,073,139 11,265,936 16. Share capital The authorised, issued and fully paid share capital of SABB consists of 2,054,794,522 shares of SAR 10 each (2019: 2,054,794,522 shares of SAR 10 each). The ownership of the SABB’s share capital is as follows: 2020 2019 Saudi shareholders 60.50% 57.78% Foreign shareholders 39.50% 42.22% 17. Statutory reserve In accordance with the Banking Control Law of the Kingdom of Saudi Arabia, a minimum of 25% of the net income for the year is required to be transferred to a statutory reserve until this reserve is equal to the paid up capital of SABB. During the year ended 31 December 2020 no amount was transferred to statutory reserve (2019: SAR 708 million). The statutory reserve is not currently available for distribution. P O S IT I O N I N G F O R G ROW T H 163
164. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 18. Other reserves Cash Flow hedges and FVOCIS investments Cash flow hedges FVOCI Total Balance at beginning of the year 27,347 258,512 285,859 Net change in fair value (4,964) 88,361 83,397 - (3,625) (3,625) Transfer to consolidated statement of income (1,867) (31,200) (33,067) Net movement during the year (6,831) 53,536 46,705 Sub total 20,516 312,048 332,564 2020 Transfer to retained earnings Treasury shares (96,293) Employee share plan reserve 86,175 Re-measurement of defined benefit liability 2,491 Sub total (7,627) Balance as at 31 December 2020 2019 Balance at beginning of the year 324,937 Cash flow hedges FVOCI Total 8,902 4,693 13,595 19,611 307,024 326,635 - (13,172) (13,172) Transfer to consolidated statement of income (1,166) (40,033) (41,199) Net movement during the year 18,445 253,819 272,264 Sub total 27,347 258,512 285,859 Net change in fair value Transfer to retained earnings Treasury shares (104,350) Employee share plan reserve 37,269 Re-measurement of defined benefit liability 18,651 Sub total (48,430) Balance as at 31 December 2019 237,429 The discontinuation of hedge accounting during the year resulted in reclassification of the associated cumulative gains of SAR 1.9 million (2019: SAR 1.2 million) from consolidated statement of changes in equity to the consolidated statement of income included in the above numbers under cash flow hedges. 19. Business combination Further to receipt of regulatory approvals, on 16 June 2019 SABB completed a statutory merger with AAB. On this date, the net assets and business activities of AAB were transferred to SABB in exchange for newly issued shares of SABB. The AAB legal entity ceased to exist following the transfer. Shares of AAB were cancelled and the new shares in SABB were issued to shareholders of AAB at an exchange ratio of 0.48535396 new SABB shares for each AAB share. The issue of new shares has increased SABB’s paid-up capital by 37% from SAR 15,000,000,000 to SAR 20,547,945,220 and the number of its issued shares have increased from 1,500,000,000 to 2,054,794,522. SABB and AAB’s original shareholders owned 73% and 27% respectively, of the combined bank on a fully diluted basis on the merger date. The merger has been accounted for using the acquisition method under IFRS 3 – Business Combinations (the “Standard”) with SABB being the acquirer and AAB being the acquiree. As required by the Standard, SABB has allocated the purchase consideration to the identifiable assets, liabilities and contingent liabilities acquired. S A B B | A N N U A L R E P O R T 2020
165. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The Merger has created the Kingdom’s fourth-largest bank (according to the total assets as of 31 December 2019), a top-tier retail and corporate bank, and provides access to a global banking network to facilitate the flow of investment capital into the Kingdom of Saudi Arabia and the growth of international trade. SABB is better positioned to support the Saudi economy, Saudi residents and Saudi companies in Saudi Arabia and internationally. The benefits of the merger created post completion of the transaction are expected to be fully realised in the earnings of the merged bank two to three years subsequent to the completion of the transaction on 16 June 2019. a) Purchase consideration The purchase consideration was determined to be SAR 23,140,991 thousand which consisted of the issue of 554,794,522 new shares to the shareholders of AAB. This is inclusive of SAR 6,060 thousands representing SABB’s grant of shares to AAB employees under its legacy Share Based Equity Settled Bonus and SAR 78,706 thousands representing AAB converted Treasury Shares (new shares issuance included 1,887,445 treasury shares). Following the conversion of treasury shares, an increase of SAR 23,062,285 thousands in Shareholders’ equity was recorded. The fair value of the new issued shares of SABB was determined on the basis of the closing market price of the ordinary shares of SAR 41.70 per share on the Tadawul on the last trading date prior to the acquisition date of 16 June 2019. Issue costs which were directly attributable to the issue of the shares were not material. As a result, there was an increase in share capital and share premium of SAR 5,547,945 thousands and SAR 17,586,986 thousands, respectively. b) Merger related costs During the year ended 31 December 2020, the Bank incurred merger related integration and transaction costs on account of fees paid to third parties for legal, valuation and transaction services as well as costs of in-house staff and third party consultants working on the merger amounting to SAR 500 million (2019: SAR 417 million). These costs have been included in ‘Salaries and employee related expenses’ and ‘General and administrative expenses’ in the consolidated statement of income amounting to SAR 101 million (2019: SAR 78 million) and SAR 399 million (2019: SAR 339 million), respectively. c) Valuation approach and methodologies – other intangibles: • Customer relationship - Purchase Credit Card Receivable The Bank has estimated the value of Purchased Credit Card Receivables (“PCCR”) using an income approach, specifically the Multi-period Excess Earnings Method (“MEEM”), which is a commonly accepted method for valuing customer relationships. • Core Deposits Intangible - CDI The Bank has adopted the discounted cost savings method, a form of the income approach, in valuation of the core deposit intangible on the difference between the cost of the Bank’s core deposits (both special commission and servicing costs net of fee and commission income) and the cost of the Bank’s alternative source of funds. The value of the core deposit intangible is the difference between the present value of the current source of funds and the alternate funding source. The analysis has considered demand, savings and time deposits. The assumed attrition and special commission rates and assumptions for fees and commissions are based on a historical analysis of deposit balances from existing customers. The assumption with regard to alternate source of funds is based on replacing the deposits with time deposits based on the behavioral maturity of the existing deposit base. • Brand The Bank has followed Relief-from-Royalty approach, a form of income approach, to value Alawwal’s brand. P O S IT I O N I N G F O R G ROW T H 165
166. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 d) Identifiable assets acquired and liabilities assumed The following table summarises the fair value of assets acquired and liabilities assumed at the date of acquisition: 16 June 2019 Assets Cash and balances with SAMA 4,933,326 Due from banks and other financial institutions, net 966,284 Positive fair value derivatives, net 165,849 Investments, net 15,560,922 Loans and advances, net 45,904,064 Investment in an associate 80,204 Property and equipment, net 1,464,093 Other assets 1,545,806 Total assets 70,620,548 Liabilities Due to banks and other financial institutions 863,192 Customers’ deposits 60,910,930 Negative fair value derivatives, net 132,810 Other liabilities 3,868,798 Total liabilities 65,775,730 Alawwal Bank net assets as at acquisition date 4,844,818 Amounts arising from the acquisition: Retirement of AAB treasury shares 78,706 Goodwill 16,195,867 Other intangibles 2,021,600 Total purchase consideration 23,140,991 e) Acquired receivables For each class of acquired receivables, the fair value, gross contractual amounts receivable and the best estimate of the contractual cash flows not expected to be collected are as follows: Fair value of the acquired receivable Due from banks and other financial institutions Gross contractual amount receivable The contracted cash flows not expected to be collected 966,284 966,343 59 Investments, net 15,560,922 15,597,717 36,795 Loans and advances, net 45,904,064 58,339,024 12,434,960 80,204 54,204 - 62,511,474 74,957,288 12,471,814 Other financial assets Total S A B B | A N N U A L R E P O R T 2020
167. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 f) Purchase price allocation The Bank has completed a comprehensive purchase price allocation focusing on, but not limited to, valuation adjustments to the following: • • • • recognition of intangible assets including brand, core deposits and purchased credit card relationships; loans and advances; properties and equipment; and other recognised financial and non-financial assets and liabilities. The purchase price allocation has been included in the consolidated financial statements. The goodwill is primarily attributable to the expected future earnings of the acquired business and synergies created. The goodwill recognised is deductible for income tax purposes. The completion of the purchase price allocation exercise within twelve months from the acquisition date, including restatement of provisional fair values at which the net assets were acquired from AAB, has had the following impact on the line items of the consolidated statements of financial position, income, and changes in equity for the year ended 31 December 2019: Financial statements impacted Description Consolidated Statement of Financial Position Loans and advances, net Consolidated Statement of Financial Position Goodwill and other intangibles Consolidated Statement of Financial Position Total assets Restated – As previously reported as at Effect of 31 December 2019 31 December 2019 restatement 154,676,970 (2,601,884) 152,075,086 15,345,896 3,116,169 18,462,065 265,472,444 514,285 265,986,729 Consolidated Statement of Financial Position Other liabilities 10,675,591 590,345 11,265,936 Consolidated Statement of Financial Position Total liabilities 209,312,193 590,345 209,902,538 4,977,064 (76,060) 4,901,004 56,160,251 (76,060) 56,084,191 8,928,004 (184,328) 8,743,676 (2,609,443) 108,268 (2,501,175) 2,812,112 (76,060) 2,736,052 1.57 (0.04) 1.53 Consolidated Statement of Financial Position Retained earnings Consolidated Statement of Financial Position Total equity Consolidated Statement of Income Special commission income Consolidated Statement of Income Provision for expected credit losses, net Consolidated Statement of Income Net income for the year after Zakat and tax Consolidated Statement of Income EPS 20. Commitments and contingencies a) Legal proceedings There are no material outstanding legal matters against the Bank. b) Capital commitments As at 31 December 2020, the Bank has capital commitments of SAR 878.53 million (2019: SAR 752.42 million) in respect of land, buildings and equipment purchases. P O S IT I O N I N G F O R G ROW T H 167
168. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 c) Credit related commitments and contingencies Credit related commitments and contingencies mainly comprise guarantee letters of credit acceptances and commitments to extend credit. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans and advances. Documentary letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are generally collateralized by the underlying shipments of goods to which they relate and therefore have significantly less risk. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The cash requirement under these instruments is considerably less than the amount of the related commitment because the Bank generally expects the customers to fulfil their primary obligation. Commitments to extend credit represent the unutilised portion of authorisations to extend credit, principally in the form of loans and advances, guarantees and letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to a loss in an amount equal to the total unutilised commitments. However, the likely amount of loss, which cannot readily be quantified, is expected to be considerably less than the total unutilised commitment as 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 the commitments could expire or be terminated without being funded. Credit related commitments and contingencies are as follows: 2020 Stage 1 Stage 2 Stage 3 POCI Total Letters of credit 13,908,396 1,247,896 - 92,043 15,248,335 Letters of guarantee 55,770,431 8,546,379 1,219,019 2,176,805 67,712,634 Acceptances 2,316,644 744,637 - 51,765 3,113,046 Irrevocable commitments to extend credit 3,969,165 219,348 - - 4,188,513 75,964,636 10,758,260 1,219,019 2,320,613 90,262,528 2019 (Restated) Stage 1 Stage 2 Stage 3 POCI Total Letters of credit 15,901,096 1,492,562 6,787 162,373 17,562,818 Letters of guarantee 74,774,803 7,752,440 1,558,202 2,234,429 86,319,874 Acceptances 2,923,447 420,773 382 33,931 3,378,533 Irrevocable commitments to extend credit 5,907,107 179,584 - - 6,086,691 99,506,453 9,845,359 1,565,371 2,430,733 113,347,916 Total Total S A B B | A N N U A L R E P O R T 2020
169. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The following table further explains changes in gross carrying amount of the credit related commitments and contingencies to help explain their significance to the changes in the loss allowance for the same portfolio: • Letters of credit Non-credit impaired 2020 Balance at 1 January 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 15,901,096 1,492,562 6,787 162,373 17,562,818 Transfer to Stage 1 465,000 (465,000) - - - Transfer to Stage 2 (237,127) 237,127 - - - Transfer to Stage 3 - - - - - Net change for the year (2,220,573) (16,793) (6,787) (70,330) (2,314,483) Balance as at 31 December 2020 13,908,396 1,247,896 - 92,043 15,248,335 Non-credit impaired 2019 (Restated) Balance at 1 January 2019 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 10,710,328 1,064,271 1,006 - 11,775,605 Transfer to Stage 1 9,248 (9,248) - - - Transfer to Stage 2 (470,999) 470,999 - - - Transfer to Stage 3 - - - - - 5,652,519 (33,460) 5,781 162,373 5,787,213 15,901,096 1,492,562 6,787 162,373 17,562,818 Net change for the year Balance as at 31 December 2019 • Letters of guarantee Non-credit impaired 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 74,774,803 7,752,440 1,558,202 2,234,429 86,319,874 Transfer to Stage 1 117,031 (117,031) - - - Transfer to Stage 2 (3,687,672) 3,687,672 - - - Transfer to Stage 3 (23,566) (294,843) 318,409 - - (15,410,165) (2,481,859) (657,592) (57,624) (18,607,240) 55,770,431 8,546,379 1,219,019 2,176,805 67,712,634 Balance at 1 January 2020 Net change for the year Balance as at 31 December 2020 Non-credit impaired 2019 (Restated) Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 46,405,235 6,502,071 353,931 - 53,261,237 Transfer to Stage 1 1,128,662 (1,127,879) (783) - - Transfer to Stage 2 (1,116,502) 1,117,497 (995) - - Transfer to Stage 3 - (609,070) 609,070 - - Net change for the year 28,357,408 1,869,821 596,979 2,234,429 33,058,637 Balance as at 31 December 2019 74,774,803 7,752,440 1,558,202 2,234,429 86,319,874 Balance at 1 January 2019 P O S IT I O N I N G F O R G ROW T H 169
170. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 • Acceptances Non-credit impaired 2020 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 2,923,447 420,773 382 33,931 3,378,533 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Net change for the year (606,803) 323,864 (382) 17,834 (265,487) Balance as at 31 December 2020 2,316,644 744,637 - 51,765 3,113,046 Balance at 1 January 2020 Non-credit impaired 2019 (Restated) Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 2,359,214 625,588 - - 2,984,802 Transfer to Stage 1 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - 564,233 (204,815) 382 33,931 393,731 2,923,447 420,773 382 33,931 3,378,533 Balance at 1 January 2019 Net change for the year Balance as at 31 December 2019 • Irrevocable commitments to extend credit Non-credit impaired 2020 Balance at 1 January 2020 Transfer to Stage 1 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 5,907,107 179,584 - - 6,086,691 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Net change for the year Balance as at 31 December 2020 (1,937,942) 39,764 - - (1,898,178) 3,969,165 219,348 - - 4,188,513 Non-credit impaired 2019 (Restated) Balance at 1 January 2019 Transfer to Stage 1 Credit impaired Stage 1 Stage 2 Stage 3 POCI Total 2,836,679 112,493 585,415 - 3,534,587 - - - - - Transfer to Stage 2 - - - - - Transfer to Stage 3 - - - - - Net change for the year 3,070,428 67,091 (585,415) - 2,552,104 Balance as at 31 December 2019 5,907,107 179,584 - - 6,086,691 S A B B | A N N U A L R E P O R T 2020
171. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The following table shows reconciliations from the opening to the closing balance of the provision for expected credit losses against off balance sheet exposures: 2020 Stage 1 Stage 2 Stage 3 Total Balance at 1 January 2020 28,129 126,322 481,614 636,065 Transfer to 12 month ECL 1,546 (1,426) (120) - Transfer to lifetime ECL not credit impaired (2,051) 2,051 - - (350) (2,002) 2,352 - Net charge for the year 11,581 11,709 3,210 26,500 Balance as at 31 December 2020 38,855 136,654 487,056 662,565 Stage 1 Stage 2 Stage 3 Total Transfer to lifetime ECL credit impaired 2019 (Restated) Balance at 1 January 2019 31,331 237,530 156,235 425,096 Transfer to 12 month ECL 13,811 (13,373) (438) - (636) 1,192 (556) - Transfer to lifetime ECL not credit impaired Transfer to lifetime ECL credit impaired - (26,405) 26,405 - Net charge / (reversals) for the year (16,377) (72,622) 299,968 210,969 Balance as at 31 December 2019 28,129 126,322 481,614 636,065 d) The contractual maturity structure of the Bank’s credit related commitments and contingencies is as follows: 2020 Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit Total 2019 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 6,222,093 6,607,604 406,958 2,006,685 4,995 15,248,335 9,216,920 22,532,729 1,761,458 67,712,634 11,255,854 22,945,673 2,390,711 718,239 4,096 - - 3,113,046 - 1,024,102 1,303,643 1,860,768 - 4,188,513 10,931,617 26,400,182 1,766,453 90,262,528 19,868,658 31,295,618 Within 3 months 3-12 months 4,978,703 Letters of credit 9,345,719 Letters of guarantee 8,423,873 26,608,406 Acceptances 2,572,187 Irrevocable commitments to extend credit Total 780,028 1-5 years Over 5 years No fixed maturity 936,117 2,210,463 91,816 17,562,818 12,993,037 36,989,581 1,304,977 86,319,874 7,860 612,728 61,137 2,094,999 20,954,507 32,428,274 16,032,013 Total - 18,458 3,378,533 3,317,827 - 6,086,691 42,517,871 1,415,251 113,347,916 The unutilised portion of non-firm commitments, which can be revoked unilaterally at any time by the Bank, is SAR 77,009 million (2019: SAR 60,897 million). P O S IT I O N I N G F O R G ROW T H 171
172. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 e) The analysis of credit related commitments and contingencies by counterparty is as follows: 2020 Government and quasi government Corporate Banks and other financial institutions Others Total 2019 3,564,876 4,824,478 70,926,256 90,542,556 15,740,274 17,920,995 31,122 59,887 90,262,528 113,347,916 2020 2019 (Restated) 239,219 414,311 21. Net special commission income Special commission income Investments FVOCI Held at amortised cost Due from banks and other financial institutions 1,192,701 1,039,387 1,431,920 1,453,698 78,073 267,049 Loans and advances 6,301,582 7,022,929 Total 7,811,575 8,743,676 Special commission expense Due to banks and other financial institutions 151,697 31,144 Customers’ deposits 656,711 1,385,501 96,091 69,077 - 55,203 34,370 23,123 938,869 1,564,048 6,872,706 7,179,628 Debt securities in issue Borrowings Others Total Net special commission income S A B B | A N N U A L R E P O R T 2020
173. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Special commission income includes income from Shariah-compliant investments and loans and advance contracts and special commission expense includes expense from Shariah-compliant customer deposits as follows: 2020 2019 (Restated) 166,079 101,122 Special commission income Investments FVOCI Held at amortised cost Total 718,974 698,082 885,053 799,204 3,299,425 4,213,156 295,498 219,273 Loans and advances Tawaruq Murabaha Others Total 1,041,842 744,456 4,636,765 5,176,885 438,513 847,901 9,919 13,270 448,432 861,171 2020 2019 31,965 20,219 Special commission expense Customers’ deposits Murabaha Others Total 22. Fees and commission income, net Fee and commission income Fund management fees Trade finance 674,994 678,736 Corporate finance and advisory 141,039 140,931 Card products 859,130 685,453 Other banking services Total fee and commission income 406,780 451,049 2,113,908 1,976,388 780,959 564,239 5,782 659 44,016 109,871 Fee and commission expense Card products Custodial services Other banking services Total fee and commission expense 830,757 674,769 Fees and commission income, net 1,283,151 1,301,619 P O S IT I O N I N G F O R G ROW T H 173
174. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 23. Trading income, net 2020 2019 Foreign exchange income, net 87,184 70,453 Derivatives 49,480 23,913 Debt securities 20,370 11,670 1,171 3,963 158,205 109,999 2020 2019 1,094,386 999,831 170,030 153,922 Others Total 24. Salaries and employee related expenses Salaries and allowances Housing allowances End of service benefits 95,619 137,284 486,862 498,449 1,846,897 1,789,486 Others Total a) Quantitative disclosure The following table summarises the Bank’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 2020 and 31 December 2019, and the forms of such payments. 2020 Number of Fixed employees* compensation Category Senior executives requiring SAMA no objection Employees engaged in risk taking activities Employees engaged in control functions Other employees Outsourced employees Total Variable compensation accrued in 2020 Other employee related benefits ** Total salaries and employee related expenses S A B B | A N N U A L R E P O R T 2020 Variable compensation paid in 2020 Cash Shares Total 44 51,538 24,701 7,427 32,128 699 348,780 87,198 11,057 98,255 407 109,301 18,949 134 19,083 3,391 652,057 59,834 496 60,330 747 81,196 16,194 - 16,194 5,288 1,242,872 206,876 19,114 225,990 308,815 295,210 1,846,897
175. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 2019 Number of Fixed employees* compensation Category Senior executives requiring SAMA no objection Employees engaged in risk taking activities Employees engaged in control functions Other employees Cash Shares Total 46 65,316 28,997 17,695 46,692 683 269,297 79,677 7,646 87,323 530 157,371 29,192 1,338 30,530 3,629 605,946 69,382 - 69,382 Outsourced employees Total Variable compensation paid in 2019 977 54,520 27,678 - 27,678 5,865 1,152,450 234,926 26,679 261,605 Variable compensation accrued in 2019 296,626 Other employee related benefits ** Total salaries and employee related expenses 340,410 1,789,486 * Represent all employees who worked for the Bank and were compensated during the year 2020 or 2019, whether they are still active or no longer employed by the Bank. ** Other employee related benefits include insurance premium paid, GOSI contribution, recruitment expenses and certain other non-recurring employee related costs. Senior executives (requiring SAMA no objection): This comprises senior management having responsibility and authority for formulating strategies, directing and controlling the activities of the Bank whose appointment requires no objection from SAMA. This covers the Managing Director and other executives directly reporting to him. Employees engaged in risk taking activities: This comprises of management staff within the business lines (Corporate, Trade Services, Private Banking and Treasury employees), who are responsible for executing and implementing the business strategy on behalf of the Bank. This also includes those involved in recommending and evaluating credit limits and credit worthiness, pricing of loans, undertaking and executing business proposals and treasury dealing activities. Employees engaged in control functions: This refers to employees working in divisions that are not involved in risk taking activities but engaged in review functions (Risk Management, Compliance, Internal Audit, Treasury Operation, Amanah Islamic Banking Services, Finance and Accounting). These functions are fully independent from risk taking units. Other employees: This includes all other employees of the Bank, excluding those already reported under categories mentioned above. Outsourced employees: This includes staff employed by various agencies who supply services to the Bank on a full-time basis in non-critical roles. None of these roles require risk undertaking or control. b) Qualitative disclosure Compensation disclosure for the annual financial statements SAMA being the Banking industry regulator for the Kingdom of Saudi Arabia has issued its Rules on compensation practices. In compliance with the SAMA rules on compensation practices, a compensation policy endorsed by the Nomination and Remuneration Committee and approved by the Board of Directors has been formulated and implemented. SABB compensation policy i. Policy objectives The policy sets the guidelines as to how both fixed and variable pay will be managed at SABB. The scope of policy covers the following: all categories of employees; its subsidiaries; all compensation elements; key determinants of compensation; approval process; reporting processes; bonus deferral process; share retention and relevant stakeholder’s roles and responsibilities. P O S IT I O N I N G F O R G ROW T H 175
176. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The objectives of the policy are to: align the reward practices with the Bank’s strategy and values so as to support the successful execution of the strategy in a risk compliant manner; offer an attractive employee value proposition to attract, retain and motivate competent and committed people; and ensure the financial sustainability of SABB. ii. Compensation structure SABB’s compensation operates on a Total Package basis that is benchmarked to market data from peers in the appropriate industry. Total Package comprises of the following blend of fixed and variable compensation elements: salaries, allowances; benefits; annual bonuses; short-term incentives; and long-term incentives. iii. Performance management system The performance of all employees is evaluated against agreed targets using a Performance Scorecard methodology, financial, customer, process and people. A calibration process is applied to ensure fair and equitable performance evaluation. The performance management methodology at SABB focuses on the differentiation of individual performance and drives the variable reward strategy which encourages high performance within a risk compliant manner. iv. Risk-adjustment for variable pay schemes The Bank has reviewed all its variable pay schemes, with the assistance of external remuneration consultants, to ensure that any bonus pay pools have taken into account all relevant risks. The determination of bonus pools is based on appropriate performance factors adjusted for risk. The bonus pool for the Control functions have been ring fenced from short-term profits in alignment with SAMA regulations. v. Bonus deferral Bonus deferral in the form of equity applies to all employees who are either subject to SAMA ‘No Objection’ and /or undertake or control significant risk undertaking by the Bank. Bonuses of all these employees will be subject to deferral over a 3 year vesting period. The vesting will be subject to malus conditions. vi. Nomination and Remuneration Committee The Nomination and Remuneration Committee has oversight of the remuneration structures and policies for all employees to ensure that: all performance based bonuses are adjusted for risk, compensation structures are regulatory compliant, and effective in achieving its stated objectives. c) Share based bonus payments The Bank has Share Based Equity settled Bonus payment plans outstanding at the end of the year. Under the terms of these plans, SABB’s eligible employees are offered shares at a predetermined price. At the vesting dates determined under the terms of the plan, SABB delivers the underlying allotted shares to the employees, subject to the satisfactory completion of the vesting conditions. The cost of the plans is recognised over the period in which the service condition is fulfilled, ending on the date on which the relevant employees become fully entitled to the shares (‘the vesting date’). The cumulative expense recognised for these plans at each reporting date until the vesting date, reflects the extent to which the vesting period has expired and the Bank’s best estimate of the number of equity instruments that will ultimately vest. The Bank has currently one Share Based Equity Plan, under which the grant was made at various dates during 2018, 2019 and 2020 with a maturity period of three years from the respective grant dates and shares vesting is 33%, 33% and 34% for the first, second and third year respectively. As per the settlement method, the ownership of these shares will pass to the employees at the respective vesting dates, subject to satisfactory completion of the vesting conditions. As part of the merger, SABB has continued AAB share based payment plan with the same terms and conditions. Employees entitled to shares under the AAB equity settled share-based payment plan shall be granted shares of SABB on the same exchange ratio of 0.48535396 SABB share for each AAB share that was applied to the merger transaction. S A B B | A N N U A L R E P O R T 2020
177. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The movement in the number of shares under Share Based Equity settled Bonus payment plans is as follows: Number of shares Beginning of the year Addition through business combination (refer note 19) 2020 2019 (Restated) 1,462,631 1,063,521 - 837,934 Forfeited (294,009) - Exercised / Expired (819,241) (796,850) Granted during the year End of the year 736,532 358,026 1,085,913 1,462,631 The weighted average price of shares granted during the year was SAR 25.3 (2019: SAR 36.1). 25. Basic and diluted earnings per share Basic and diluted earnings per share for the years ended 31 December 2020 and 2019 are calculated by dividing the net income after Zakat and tax for the years by the weighted average number of shares 2,055 million (2019: 1,802 million) outstanding during the year. 26. Zakat and income tax In March 2019, new Zakat Regulations were issued by GAZT under resolution No. 2215 dated 7 Rajab 1440 (14 March 2019) (the “Zakat Regulations”), which provided a new basis for calculation of Zakat for companies engaged in financing activities. The Zakat base computed in accordance with the formula specified in the Zakat Regulations is also subject to thresholds for minimum and maximum liability. SABB is subject to pay corporate income tax to reflect the portion of the shareholder base that is non-Saudi. Corporate income tax is calculated at a rate of 20%, applied to the share of taxable income of the non-Saudi shareholders. The remaining balance of the 2018 Zakat settlement agreement with GAZT is SAR 961.2 million and is in other liabilities. Tax assessments for the years 2010 to 2013 for SABB has been finalised. SABB has received tax assessments for fiscal years 2005 to 2009 in which the GAZT raised additional demands for income tax and withholding tax. Together with assessments relating to AAB for fiscal years from 2006 to 2013, SABB will continue to contest the appeals before the Appellate Committee for Resolution of Tax Disputes and expects a favourable outcome. The amounts are not material. During the current year, SABB has received assessments for the years from 2014 to 2018 raising additional demands for corporate tax and an assessment relating to AAB for years 2015 to 2018 raising additional withholding tax on dividend payments to foreign shareholders, however, tax assessments for the years from 2014 onwards for AAB and 2019 for SABB are still under GAZT review. SABB has filed appeals against these assessments and expects a favourable outcome. The amounts are not material. The below table represents the movements in the current Zakat and income tax liability: Opening Zakat and income tax liability Charge for the year Acquired through business combination (note 19) 2020 2019 1,464,820 1,736,447 222,325 446,368 - 392,633 Payment of Zakat and income tax liability (739,708) (1,110,628) Closing Zakat and income tax liability 947,437 1,464,820 P O S IT I O N I N G F O R G ROW T H 177
178. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 27. Deferred tax Deferred tax arises on end of service benefits, ECL allowance, unrecognised losses, etc. Deferred income tax is provided using the liability method on temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for taxation purposes. The following table shows the movement in deferred tax: 2020 2019 Opening deferred tax asset 130,732 112,661 Reversal / (provision) for deferred tax 356,316 (12,935) Acquired through business combination (note 19) Closing deferred tax asset - 31,006 487,048 130,732 28. Cash and cash equivalents Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: Cash and balances with SAMA excluding the statutory deposit amounting to SAR 11,684 million (2019: SAR 10,942 million) (note 3) Due from banks and other financial institutions with an original maturity of three months or less from date of the acquisition Total 2020 2019 (Restated) 24,765,715 10,324,810 4,942,979 4,873,961 29,708,694 15,198,771 29. Employee benefit obligation a) General description The Bank operates an End of Service Benefit Plan for its employees based on the prevailing Saudi Labour Laws. Accruals are made in accordance with the actuarial valuation under projected unit credit method while the benefit payments obligation is discharged as and when it falls due. b) The amounts recognised in the consolidated statement of financial position and movement in the obligation during the year based on its present value are as follows: Defined benefit obligation at the beginning of the year Charge for the year Benefits paid Re-measurement of defined benefit liability Acquired through business combination (note 19) Defined benefit obligation at the end of the year S A B B | A N N U A L R E P O R T 2020 2020 2019 744,767 459,316 95,619 137,284 (53,120) (64,616) 16,160 (18,651) - 231,434 803,426 744,767
179. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 c) Charge for the year Current service cost Past service cost 2020 2019 70,535 58,663 2,001 53,314 Interest cost 23,083 25,307 Total 95,619 137,284 d) Principal actuarial assumptions (in respect of the employee benefit scheme) 2020 2019 Discount rate 2.05% 3.20% pa Expected rate of salary increase 2.05% 3.00% pa 60 years 60 years Normal retirement age e) Sensitivity of actuarial assumptions The table below illustrates the sensitivity of the defined benefit obligation valuation as at 31 December 2020 to the discount rate 2.05% (December 2019: 3.20%), salary escalation rate 2.05% (December 2019: 3.00%) and retirement age. Impact on defined benefit obligation – increase/ (decrease) Base Scenario Change in assumption Increase in assumption Decrease in assumption 1% (59,027) 65,554 2020 Discount rate Expected rate of salary increase 1% 66,858 (61,286) 1 year 788 (889) Discount rate 1% (47,887) 58,111 Expected rate of salary increase 1% 59,583 (53,112) 1 year (71) 70 Normal retirement age 2019 Normal retirement age The above sensitivity analyses are based on a change in an assumption holding all other assumptions constant. P O S IT I O N I N G F O R G ROW T H 179
180. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 f) Expected maturity Expected maturity analysis of undiscounted define benefit obligation for the end of service plan is as follows: 2020 803,426 2019 744,767 Less than a year 1-2 years 2-5 years Over 5 years Total 103,368 59,439 182,159 605,826 950,792 Less than a year 1-2 years 2-5 years Over 5 years Total 82,211 63,215 170,726 557,630 873,782 The weighted average duration of the defined benefit obligation is 7.78 years (2019: 6.92 years). 30. Operating segments The Bank’s primary business is conducted in Saudi Arabia. Transactions between the operating segments are on normal commercial terms and conditions. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance. The Bank’s reportable segments are as follows: Retail Banking – caters mainly to the banking requirements of personal and private banking customers. Corporate and Institutional Banking – caters mainly to the banking requirements of corporate and institutional banking customers. Treasury – manages the Bank’s liquidity, currency and special commission rate risks. It is also responsible for funding the Bank’s operations and managing the Bank’s investment portfolio and liquidity position. Others – includes activities of the Bank’s investment in its insurance subsidiary and associate, SABB Takaful and Wataniya, as well as a subsidiary for investment banking and brokerage, Alawwal Invest and HSBC Saudi Arabia, equity investments, and merger-related expenses. It also includes elimination of inter-group income and expense items. S A B B | A N N U A L R E P O R T 2020
181. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Transactions between the operating segments are reported as recorded by the Bank’s transfer pricing system. The Bank’s total assets and liabilities as at 31 December 2020 and 2019, its total operating income and expenses, and the results for the years then ended, by operating segment, are as follows: 2020 Total assets Loans and advances, net Investments Total liabilities Customer deposits Investments in associates Others (including intergroup eliminations) Treasury Retail Banking Corporate and Institutional Banking 46,084,136 121,710,736 36,240,520 117,002,558 - - 91,716,290 98,374,832 35,346,775 87,872,012 92,874,865 - - 105,782,069 Total 2,874,730 276,451,671 - - 153,243,078 59,042,187 1,788,820 60,831,007 252,034 225,689,931 8,363,263 - 189,110,140 - 619,232 619,232 Total operating income, of which: 3,317,872 3,877,552 1,673,664 8,878 8,877,966 Special commission income, net 2,849,789 2,719,669 1,296,157 7,091 6,872,706 297,737 964,992 (5,756) 26,178 1,283,151 Fees and commission income, net Trading income, net Provision for expected credit losses, net Goodwill impairment Total operating expenses Share in earnings of associates Net income for the year before Zakat and income tax 2019 (Restated) Total assets Loans and advances, net Investments Total liabilities Customer deposits Investments in associates 75 6,899 148,670 2,561 158,205 (238,515) (1,376,326) (16,090) - (1,630,931) - (7,417,776) - - (7,417,776) (2,126,963) (1,220,874) (179,168) (685,777) (4,212,782) - - - 81,936 81,936 952,394 (6,137,424) 1,478,406 (594,963) (4,301,587) Retail Banking Corporate and Institutional Banking Others (including intergroup eliminations) Treasury Total 48,153,527 126,387,847 87,679,552 3,765,803 265,986,729 37,451,737 114,623,349 - - 152,075,086 - - 58,673,820 1,810,006 60,483,826 89,260,791 106,703,602 13,383,688 554,457 209,902,538 85,393,606 100,637,434 6,135,484 - 192,166,524 - - - 660,198 660,198 Total operating income, of which: 3,469,346 4,446,016 1,154,987 142,970 9,213,319 Special commission income, net 2,869,312 3,380,136 855,310 74,870 7,179,628 332,334 956,299 (1,245) 14,231 1,301,619 Fees and commission income, net Trading income, net Provision for expected credit losses, net Total operating expenses Share in earnings of associates Net income for the year before Zakat and income tax 92 12,848 95,105 1,954 109,999 (443,533) (2,048,979) (8,663) - (2,501,175) (1,730,553) (1,079,533) (194,975) (644,346) (3,649,407) - - - 132,618 132,618 1,295,260 1,317,504 951,349 (368,758) 3,195,355 P O S IT I O N I N G F O R G ROW T H 181
182. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 a) Total operating income by operating segments Others (including intergroup eliminations) Treasury Retail Banking Corporate and Institutional Banking External 2,646,406 4,777,627 1,441,831 12,102 8,877,966 Internal 671,466 (900,075) 231,833 (3,224) - 3,317,872 3,877,552 1,673,664 8,878 8,877,966 Retail Banking Corporate and Institutional Banking Others (including intergroup eliminations) Treasury Total 2,558,397 5,230,967 2020 Total operating income 2019 External Internal Total operating income 1,337,103 86,852 Total 9,213,319 910,949 (784,951) (182,116) 56,118 - 3,469,346 4,446,016 1,154,987 142,970 9,213,319 Others (including intergroup eliminations) Treasury Total b) The Bank’s credit exposure by operating segment is as follows: 2020 Retail Banking Corporate and Institutional Banking 36,237,205 111,387,361 94,966,938 9,928,084 252,519,588 63,217 43,943,590 - - 44,006,807 - - 1,803,823 - 1,803,823 36,300,422 155,330,951 96,770,761 9,928,084 298,330,218 Retail Banking Corporate and Institutional Banking Others (including intergroup eliminations) Treasury Total 36,930,695 117,746,276 93,289,976 431,714 248,398,661 1,027 55,147,151 - - 55,148,178 - - 1,282,171 - 1,282,171 36,931,722 172,893,427 94,572,147 431,714 304,829,010 Assets Commitments and contingencies Derivatives Total 2019 (Restated) Assets Commitments and contingencies Derivatives Total Credit exposure comprises the carrying value of assets excluding cash, property and equipment, other assets, investment in associates and equity investments, and the credit equivalent value for commitments, contingencies and derivatives based on the credit conversion factor as prescribed by the SAMA. S A B B | A N N U A L R E P O R T 2020
183. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 31. Financial risk management i) Credit risk The Board of Directors is responsible for the overall risk management approach within SABB and for reviewing its effectiveness. The Board’s designated committee for risk matters is the Board Risk Committee which approves and provides oversight for the Bank’s risk framework, plans and performance targets, which include the establishment of risk appetite statements, risk management strategies, the appointment of senior officers, the delegation of authorities for credit and other risks and the establishment of effective control procedures. The Bank manages exposure to credit risk, which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Credit exposures arise principally in lending activities that lead to loans and advances, and investment activities. There is also credit risk on credit related commitments and contingencies and derivatives. The Bank assesses the probability of default of counterparties using internal rating tools. Also the Bank uses external ratings, of major rating agencies, where available. The Bank attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. The Bank’s risk management policies are designed to identify and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored daily. In addition to monitoring credit limits, the Bank manages the credit exposure relating to its trading activities by entering into master netting agreements and collateral arrangements with counterparties in appropriate circumstances, and limiting the duration of exposure. In certain cases the Bank may also close out transactions to mitigate credit risk. The Bank’s credit risk for derivatives, represents the potential cost to replace the derivative contracts if counterparties fail to fulfil their obligation. To control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities. 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 Bank’s performance to developments affecting a particular industry or geographical location. The Bank seeks to manage its credit risk exposure through diversification of lending activities to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or market sector. It also takes security when appropriate. The Bank also seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Management monitors the market value of collateral and requests additional collateral in accordance with the underlying agreements. It also monitors the market value of collateral obtained during its review of the adequacy of the provision for credit losses. The Bank regularly reviews its risk management policies and systems to reflect changes in the market’s products and emerging best practice. P O S IT I O N I N G F O R G ROW T H 183
184. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 a) Geographical concentration of assets, liabilities, commitments and contingencies, and credit exposure 2020 Kingdom of GCC and North Other Saudi Arabia Middle East Europe America Countries Total Assets Cash and balances with SAMA Cash in hand Balances with SAMA Other balances 2,252,471 - - - - 2,252,471 33,524,829 - - - - 33,524,829 672,115 - - - - 672,115 Due from banks and other financial institutions, net Current accounts Money market placements 1,002 150,925 2,616,599 2,044,059 75,087 4,887,672 180,330 - 37,496 - - 217,826 1,935,515 Positive fair value derivatives, net Held for trading 1,176,300 22,078 737,137 - - Held as fair value hedges - - - - - - Held as cash flow hedges - 8,821 16,970 - - 25,791 FVOCI 12,174,439 1,515,165 1,920 11,709 - 13,703,233 FVTPL 1,054,510 - 183,250 - - 1,237,760 45,645,662 244,352 - - - 45,890,014 Investments, net Amortised cost Loans and advances, net Credit cards Other retail lending Corporate and institutional lending Investments in associates Property and equipment and right of use,net Goodwill and other intangibles Other assets Total 1,836,265 - - - - 1,836,265 34,404,255 - - - - 34,404,255 116,693,901 308,657 - - - 117,002,558 619,232 - - - - 619,232 3,169,427 - - - - 3,169,427 10,982,536 10,982,536 - - - - 4,090,044 73 8 - 47 4,090,172 268,477,318 2,250,071 3,593,380 2,055,768 75,134 276,451,671 2,559,207 Liabilities Due to banks and other financial institutions Current accounts 334,988 1,760,174 226,307 192,397 45,341 Money market deposits - - 5,596 - - 5,596 Repo with banks - - 567,906 - - 567,906 14,488,247 - - - - 14,488,247 133,996,234 18,618 209,432 16,037 182 134,240,503 1,829,933 - - - - 1,829,933 51,633,400 3,364 3 - - 51,636,767 1,402,937 - - - - 1,402,937 5,066,610 - - - - 5,066,610 Others Customer deposits Demand Saving Time Margin and other deposits Debt securities in issue Negative fair value derivatives, net Held for trading 301,748 4,226 1,672,312 - - 1,978,286 Held as fair value hedges - 6,736 827,769 - - 834,505 Held as cash flow hedges - - 6,295 - - 6,295 11,069,418 - 3,721 - - 11,073,139 Other liabilities Total Commitments and contingencies 220,123,515 1,793,118 3,519,341 208,434 45,523 225,689,931 75,774,692 1,962,804 5,285,504 1,233,329 6,006,199 90,262,528 245,342,644 2,220,104 2,618,516 2,044,059 294,265 252,519,588 37,708,846 932,914 2,197,536 512,363 2,655,148 44,006,807 1,541,131 118,661 144,031 - - 1,803,823 284,592,621 3,271,679 4,960,083 2,556,422 2,949,413 298,330,218 Credit exposure (stated at credit equivalent amounts) Assets Commitments and contingencies Derivatives Total credit exposure S A B B | A N N U A L R E P O R T 2020
185. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 2019 (Restated) Kingdom of GCC and North Other Saudi Arabia Middle East Europe America Countries Total Assets Cash and balances with SAMA Cash in hand Balances with SAMA 2,375,158 - - - - 2,375,158 18,595,800 - - - - 18,595,800 295,934 - - - - 295,934 Other balances Due from banks and other financial institutions, net Current accounts Money market placements 541 104,900 1,492,640 2,813,421 62,328 4,473,830 476,065 - 37,871 - - 513,936 909,313 Positive fair value derivatives, net Held for trading 431,335 40,935 436,988 - 55 Held as fair value hedges - 550 14,639 - - 15,189 Held as cash flow hedges - 24,487 21,537 - - 46,024 FVOCI 11,218,813 2,249,964 381,530 11,824 75,542 13,937,673 FVTPL 965,539 - 177,034 - - 1,142,573 44,684,782 437,035 - - 281,763 45,403,580 Investments, net Amortised cost Loans and advances, net Credit cards Other retail lending Corporate and institutional lending Investments in associates Property and equipment and right of use,net Goodwill and other intangibles 2,193,079 - - - - 2,193,079 35,258,658 - - - - 35,258,658 114,188,806 434,543 - - - 114,623,349 660,198 - - - - 660,198 3,308,278 - - - - 3,308,278 18,462,065 18,462,065 - - - - 2,970,704 7,756 788,114 5,474 44 3,772,092 256,085,755 3,300,170 3,350,353 2,830,719 419,732 265,986,729 1,092,793 1,256,568 416,385 815,423 52,605 3,633,774 5,594 5,000 8,318 - - 18,912 Repo with banks - - - - - - Others - - - - - - 121,820,596 17,015 605,316 59,584 15,213 122,517,724 1,682,017 8,353 633 - - 1,691,003 Time 51,719,310 - 22,212 4,006 80,346 51,825,874 Margin and other deposits 16,131,923 - - - - 16,131,923 1,499,752 - - - - 1,499,752 Other assets Total Liabilities Due to banks and other financial institutions Current accounts Money market deposits Customer deposits Demand Saving Debt securities in issue Negative fair value derivatives, net Held for trading 90,323 33,295 756,023 - 18 879,659 Held as fair value hedges - 27,236 398,089 - - 425,325 Held as cash flow hedges - 1,766 10,890 - - 12,656 11,178,529 51,779 33,835 1,793 - 11,265,936 205,220,837 1,401,012 2,251,701 880,806 148,182 209,902,538 96,928,461 1,796,885 5,754,746 1,468,692 7,399,132 113,347,916 Other liabilities Total Commitments and contingencies Credit exposure (stated at credit equivalent amounts) Assets Commitments and contingencies Derivatives Total credit exposure 239,773,843 3,226,442 2,165,341 2,813,421 419,614 248,398,661 47,265,826 887,066 2,773,852 706,678 3,514,756 55,148,178 789,032 100,390 392,707 - 42 1,282,171 287,828,701 4,213,898 5,331,900 3,520,099 3,934,412 304,829,010 P O S IT I O N I N G F O R G ROW T H 185
186. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 b) The distributions by geographical concentration of non-performing loans and advances and provision for credit losses are as follows: 2020 Kingdom of Saudi Arabia GCC and Middle East Europe North Other America countries Total Non-performing loans and advances 5,187,783 189,570 - - - 5,377,353 Provision for credit losses 7,175,288 173 - - - 7,175,461 North Other America countries Total 2019 (Restated) Non-performing loans and advances Provision for credit losses Kingdom of Saudi Arabia GCC and Middle East Europe 4,057,132 189,570 - - - 4,246,702 6,003,000 - - - - 6,003,000 ii) Credit quality analysis Amounts arising from ECL – Significant increase in credit risk When determining whether the probability of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing: • the probability of default at the reporting date; with • the probability of default estimated at the time of initial recognition of the exposure. In addition to the above, other major quantitative considerations include days past due and rating of customer. Consideration due to COVID-19: In response to the impacts of COVID-19, various support programmes have been offered to the customers either voluntarily by the Bank or on account of SAMA initiatives, such as customers eligible under Deferred Payments Programme (refer note 38 for further details). The exercise of the deferment option by a customer, in its own, is not considered by the Bank as triggering SICR and as a consequence impact on ECL for those customers were determined based on their existing staging. However, as part of the Bank’s credit evaluation process especially given the current economic situation due to after effects of lock down, the Bank obtained further information from the customer to understand their financial position and ability to repay the amount and in cases where indicators of significant deterioration were noted, the customers’ credit ratings and accordingly exposure staging were adjusted, where applicable. No change has been made in the backstop criteria for all types of exposures. Credit risk grades The Bank allocates each exposure to a credit risk grade based on a variety of data that is determined to be predictive of the probability of default and applying experienced credit judgement. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Credit risk grades are defined and calibrated such that the probability of default occurring increases exponentially as the credit risk deteriorates so, for example, the difference in probability of default between credit risk grades 1 and 2 is smaller than the difference between credit risk grades 2 and 3. Each corporate 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 moved to a different credit risk grade. The monitoring of exposures involves use of the following data: S A B B | A N N U A L R E P O R T 2020
187. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Corporate exposures Retail exposures All exposures • Internally collected data and • Information obtained during periodic review of customer behaviour – e.g customer files – e.g audited financial statements, utilisation of credit card management accounts, budgets and projections. facilities Examples of areas of particular focus are: gross profit margins, financial leverage ratios, debt service • Affordability metrics • External data from credit coverage, compliance with covenants, quality reference agencies including management, and senior management changes industry-standard credit • Data from credit reference agencies, press articles, scores changes in external credit ratings • Quoted bond and credit default swap (CDS) prices for the borrower where available • Actual and expected significant changes in the political, regulatory and technological environment of the borrower or in its business activities • Payment record – this includes overdue status as well as a range of variables about payment ratios • Utilisation of the granted limit • Requests for and granting of forbearance • Existing and forecast changes in business, financial and economic conditions a) Generating the term structure of PD Credit risk grades are a primary input into the determination of the term structure of PD for exposures. Generating the PD term structure includes: • computation of central tendency and shift in assigned rating grade PDs, such that the rating grades reflect the current economic scenario implied portfolio PDs; and • macroeconomic adjustments of portfolio Central Tendency (CT). Historical data of portfolio default rates is used to arrive at 1 year forward looking central tendency (CT) for the portfolio and a link between forward looking macroeconomic parameters and 1 year forward-looking CTs are established. The derived macroeconomic adjusted CT is then used to calibrate PIT PDs for each rating grade. b) Determining whether credit risk has increased significantly The criteria for determining whether credit risk has increased significantly vary by portfolio and include quantitative changes in PDs and qualitative factors, including a backstop based on delinquency. The assessment of significant increase in credit risk, is assessed taking into account: • • • • days past due; change in probability of default occurring since initial recognition; expected life of the financial instrument; and reasonable and supportable information, that is available without undue cost or effort that may affect credit risk. Lifetime expected credit losses are recognised against any material facility which has experienced significant increase in credit risk since initial recognition. Recognition of lifetime expected credit losses will be made if any facility is past due for more than 30 days for Corporate and Retail Exposures and more than 7 days for Treasury investment. The Bank monitors the effectiveness of the criteria used to identify significant increases in credit risk by regular reviews to confirm that: • the criteria are capable of identifying significant increases in credit risk before an exposure is in default; • the criteria do not align with the point in time when an asset becomes 30 days past due; and • there is no unwarranted volatility in loss allowance from transfers between 12 month PD (stage 1) and lifetime PD (stage 2). P O S IT I O N I N G F O R G ROW T H 187
188. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 c) 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 derecognised and the renegotiated loan recognised as a new loan at fair value in accordance with the accounting policy. When the terms of the financial assets are modified that does not result into de-recognition, the Bank will recalculate the gross carrying amount of the asset by discounting the modified contractual cash flows using EIR prior to the modification. Any difference between the recalculated amount and the existing gross carrying amount will be recognised in statement of income for Asset Modification. To measure the significant increase in credit risk (for financial assets not de-recognised during the course of modification), the Bank will compare the probability of default occurring at the reporting date based on modified contract terms and the default risk occurring at initial recognition based on original and unmodified contract terms. Appropriate ECL will be recorded according to the identified staging after Asset Modification e.g 12 Month ECL for Stage 1, Lifetime ECL for Stage 2 and Default for Stage 3. The Bank renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities’) to maximise collection opportunities and minimise the risk of default. Under the Bank’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. Both retail and corporate loans are subject to the forbearance policy. The Bank Audit Committee regularly reviews reports on forbearance activities. The asset will be provided appropriate treatment according to the identified staging after Asset Modification e.g 12 Month ECL for Stage 1, Lifetime ECL for Stage 2 and Default for Stage 3. No Asset Modification to be considered if the same were not driven by Credit Distress situation of Obligor. d) Definition of ‘default’ The Bank considers a financial asset to be in default when: • the borrower is unlikely to pay its credit obligations to the Bank in full, without recourse by the Bank to actions such as realising security (if any is held); or • the borrower is past due more than 90 days on any material credit obligation to the Bank. Overdrafts are considered as being past due once the customer has breached an advised limit or been advised of a limit smaller than the current amount outstanding. In the case of financial institutions including Bank and Sovereign past due more than 15 working days consider to be in default. In assessing whether a borrower is in default, the Bank 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 Bank; and • based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Bank for regulatory capital purposes. S A B B | A N N U A L R E P O R T 2020
189. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Incorporation of forward looking information The Bank incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. Based on advice from economic experts discussed at the relevant governance forum, the Bank agrees on 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 agreeing on two or more additional economic scenarios 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. The base case represents a most-likely outcome and is aligned with information used by the Bank for other purposes such as strategic planning and budgeting. The other scenarios represent more optimistic and more pessimistic outcomes. Periodically, the Bank carries out stress testing of more extreme shocks scenarios. The Bank 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 macroeconomic variables and credit risk and credit losses for exposures of given tenor and rating. The economic scenarios used as at 31 December included the following ranges of key indicators: Economic Indicators 2020 2019 Government revenue, oil (SAR in millions) Upside: 418,277 Base case: 415,906 Downside: 413,901 Indicator not used for 2019 ECL model GDP per capita (constant LCU) Upside: 69,650 Base case: 69,080 Downside: 68,515 Upside: 79,720 Base case: 79,080 Downside: 78,630 Government debt, gross, LCU/GDP, nominal, LCU*100 Upside: 33.9 Base case: 34.6 Downside: 36.3 Upside: 21.1 Base case: 24.2 Downside: 27.0 3 Month Cash Deposit Mid Rate (% p.a.) Upside: 1.27 Base case: 1.25 Downside: 1.19 Upside: 3.14 Base case: 3.04 Downside:2.78 Consideration due to COVID-19: 1. Types of forward looking: There have been no changes to the types of forward-looking variables (key economic drivers) used as model inputs in the current year as a result of COVID-19 2. Scenario assumptions: As at 31 December 2020, the scenario assumptions are updated to reflect the expected macroeconomic environment, which amongst other factors considers the current situation of COVID-19. This included an assessment of the support of the Government’s actions, the response of business and customers (such as repayment deferrals). These are considered in determining the length and severity of the forecast economic downturn. 3. Probability weightings The Bank considered the probability weightings to provide the best estimate of the possible loss outcomes. Probability weighting of each scenario is agreed by management considering the expert view from a third party on risks and uncertainties surrounding the base case economic scenario. A key consideration for probability weightings in the current period is the continuing impact of COVID-19. In addition to the base case forecast which reflects the negative economic impact as compared to last year as a consequence of COVID-19, risks remain skewed to the downside. Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 10 years. The Bank has used below base case forecast in its ECL model, which is based on updated information available as at the reporting date: P O S IT I O N I N G F O R G ROW T H 189
190. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Forecast calendar years used in 2020 ECL model Economic Indicators Government revenue, oil [SAR in millions] GDP per capita (constant LCU) 2021 2022 2023 501,003 548,085 583,525 Forecast calendar years used in 2019 ECL model 2021 2022 2023 Variable not used for 2019 ECL model 69,915 70,491 71,443 79,181 79,645 80,046 Government debt, gross, LCU/GDP, nominal, LCU*100 33.1 32.2 30.9 30.2 32.8 34.7 3 Month Cash Deposit Mid Rate (% p.a.) 0.90 1.03 1.34 3.75 3.74 3.73 COVID-19 overlays The prevailing economic conditions require the Bank to continue to revise certain inputs and assumptions used for the determination of ECL. As the situation continues to be fluid, the management considers certain effects cannot be fully incorporated into the ECL model calculations at this point in time. In particular, the effect on borrower credit quality after current deferrals expire is not known with certainty. Accordingly, management’s ECL assessment includes analysis of expected credit behavior of accounts benefitting from deferrals at a portfolio level, segmented by credit rating and borrower type. This analysis gave rise to the Bank taking an overlay of SAR 48 million for the retail portfolios and SAR 151 million for the corporate portfolios as at 31 December 2020. The Bank will continue to reassess as more reliable data becomes available and accordingly determine if any adjustment in the ECL is required in subsequent reporting periods. e) Measurement of ECL The following risk parameters, that are part of the Basel framework, have been used by the Bank to measure the ECL: • Probability of default (PD); • Loss given default (LGD); and • Exposure at default (EAD). These parameters are derived from internally developed statistical models and other historical data. PD is the predicted probability that a pool of obligors will default over the predefined future time horizon. For each portfolio of financial instruments, PDs have been estimated at a certain date using robust statistical models. These statistical models are based on internally and externally compiled data comprising both quantitative and qualitative factors. Default rates provided by authorised external rating agencies have been used to derive the PD for the portfolios where internal defaults are not available. Macroeconomic adjustment of the PD has been carried out as described above to reflect forward-looking information. Also, the Bank has adjusted the PDs to incorporate the effect of downgrades and upgrades of borrowers over time. LGD is the amount of the credit that is lost when a borrower defaults. For each portfolio, the Bank estimates the LGD parameters using the workout approach based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For mortgage loans secured by retail property, LTV ratios and current value of the property are key parameters in determining LGD. LGD are calculated on a discounted cash flow basis using the contractual interest rate as the discounting factor. EAD is an estimate of the Bank’s exposure to its counterparty at the time of default. For defaulted accounts, EAD is simply the amount outstanding at the point of default. However, for performing accounts, the following elements are considered for computation of EAD at the instrument/facility level: • time horizon over which EAD needs to be estimated; • projected cash flows until the estimated default point; and • residual maturity. S A B B | A N N U A L R E P O R T 2020
191. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 EAD for the amortised loans considers Contractual pay down; Impact of missed payments and subsequent interest accrual between reporting date and default occurrence; Expected drawdown amount on the unutilised balance. For lending 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 historical observations. For portfolios in respect of which the Bank has limited historical data, external benchmark information is used to supplement the internally available data. The portfolios for which external benchmark information represents a significant input into measurement of ECL are Treasury Investments, Bank and Non-Banking Financial institutions and money market placements. Sensitivity of ECL allowance: The uncertainty of the impact of COVID-19 introduces significant estimation uncertainty in relation to the measurement of the Bank’s allowance for expected credit losses. The changing COVID-19 circumstances and the Government, business and consumer responses could result in significant adjustments to the allowance in future financial years. Given current economic uncertainties and the judgement applied to factors used in determining the expected default of borrowers in future periods, expected credit losses reported by the Bank should be considered as a best estimate within a range of possible estimates. The table below illustrates the sensitivity of ECL to key factors used in determining it as at the year end, noting that the macroeconomic factors present dynamic relationships between them. PL Impact 2020 Assumptions sensitised Macroeconomic factors (Base scenario 2021): Government revenue, oil (SAR millions) increase by 11.49% GDP per capita (constant LCU) reduction by 7.27% 69,944 Government debt, gross, LCU/GDP, nominal, LCU*100 reduction by 8.5% 3 Month Cash Deposit Mid Rate (% p.a.) reduction by 33.53% Scenario weightages: Base scenario sensitised by +/- 5% with corresponding change in downside 12,837 Base scenario sensitised by +/- 5% with corresponding change in upside 12,099 Where modeling of a parameter is carried out on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics that include: • • • • • • • • instrument type; credit risk grading; collateral type; LTV ratio for retail mortgages; date of initial recognition; remaining term to maturity; industry; and geographic location of the borrower. The grouping is subject to regular review to ensure that exposures within a particular Bank remain appropriately homogeneous. For portfolios in respect of which the Bank has limited historical data, external benchmark information is used to supplement the internally available data. Consideration due to COVID-19: The PD, EAD and LGD models are subject to the Bank’s model risk policy that stipulates periodic model monitoring, periodic revalidation and defines approval procedures and authorities according to model materiality. During the period, the Bank has made no material changes in its ECL methodology due to COVID-19. P O S IT I O N I N G F O R G ROW T H 191
192. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 32. Market risk Market Risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as special commission rates, foreign exchange rates, and equity prices. The Bank classifies exposures to market risk into either trading and non-trading or banking-book. Market Risk exposures in the trading book result from instruments classified as held for trading as disclosed in these consolidated financial statements. Market Risk exposures in the non-trading or banking-book arise on special commission rate risk and equity price risk as disclosed in part b) of this disclosure. The market risk for both the trading book and the non-trading book is managed and monitored using a combination of VAR, stress testing and sensitivity analysis. a) Market risk-trading book The Board has set limits for the acceptable level of risks in managing the trading book. The Bank applies a VAR methodology to assess the market risk positions held and to estimate the potential economic loss based upon a number of parameters and assumptions for change in market conditions. A VAR methodology estimates the potential negative change in market value of a portfolio at a given confidence level and over a specified time horizon. The Bank uses simulation models to assess the possible changes in the market value of the trading book based on historical data. VAR models are usually designed to measure the market risk in a normal market environment and therefore the use of VAR has limitations because it is based on historical correlations and volatilities in market prices and assumes that the future movements will follow a statistical distribution. The VAR that the Bank measures is an estimate, using a confidence level of 99% of the potential loss that is not expected to be exceeded if the current market positions were to be held unchanged for one day. The use of 99% confidence level depicts that within a one day horizon, losses exceeding VAR figure should occur, on average, not more than once every hundred days. The VAR represents the risk of portfolios at the close of a business day, and it does not account for any losses that may occur beyond the defined confidence interval. The actual trading results however, may differ from the VAR calculations and, in particular, the calculation does not provide a meaningful indication of profits and losses in stressed market conditions. In addition to VAR, the Bank also carries out stress testing of its portfolio to simulate conditions outside normal confidence intervals. The potential losses occurring under stress test conditions are reported regularly to the Bank’s Risk Management Committee (RMC) for their review. The Bank’s VAR related information is as follows: Foreign exchange Special commission rate Overall risk VAR as at 31 December 2020 504 1,738 2,121 Average VAR for 2020 509 1,417 1,602 2020 Minimum VAR for 2020 53 554 677 Maximum VAR for 2020 1,193 3,567 3,585 Foreign exchange Special commission rate Overall risk VAR as at 31 December 2019 102 1,572 1,624 Average VAR for 2019 250 1,457 1,546 2019 Minimum VAR for 2019 38 429 431 Maximum VAR for 2019 2,053 3,312 3,615 S A B B | A N N U A L R E P O R T 2020
193. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 b) Market risk – non-trading or banking-book Market risk on non-trading or banking positions mainly arises from the special commission rate, foreign currency exposures and equity price changes. i) Special commission rate risk Special commission rate risk arises from the possibility that the changes in commission rates will affect either the fair values or the future cash flows of the financial instruments. The Board has established commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses hedging strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonably possible change in commission rates, with other variables held constant, on the Bank’s consolidated statement of income or equity. The sensitivity of the income is the effect of the assumed changes in commission rates on the net special commission income for one year, based on the floating rate non-trading financial assets and financial liabilities repricing as at 31 December 2020 including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing the fixed rate FVOCI assets including the effect of any associated hedges as at 31 December 2020 for the effect of assumed changes in commission rates. The sensitivity of equity is analysed by maturity period of the asset or swap and represents only those exposures that directly impact OCI of the Bank. 2020 Sensitivity of Equity Currency Increase in basis points Sensitivity of special 6 months 1 year or commission income or less less 1-5 years Over 5 years Total SAR +100 655,020 (23,969) (51,215) (683,933) USD +100 238,340 (2,823) (12,451) (94,567) (205,067) (869,973) (1,629,090) (314,908) EUR +100 (4,998) - - - - - Others +100 (5,205) - - - - - Over 5 years Total 2020 Sensitivity of Equity Currency Decrease in basis points Sensitivity of special 6 months 1 year or commission income or less less 1-5 years SAR - 100 (984,589) 23,969 51,215 683,933 869,973 1,629,090 USD - 100 (117,971) 2,823 12,451 94,567 205,067 314,908 EUR - 100 - - -- - - - Others - 100 353 - -- - - - P O S IT I O N I N G F O R G ROW T H 193
194. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 2019 Sensitivity of Equity Currency Increase in basis points Sensitivity of special 6 months 1 year or commission income or less less 1-5 years Over 5 years Total SAR +100 576,065 (47,922) (45,461) (666,714) (542,148) (1,302,245) USD +100 (4,757) (4,286) (7,556) (137,728) (220,275) (369,845) EUR +100 (4,408) - - - - Others +100 (4,436) - - - - Over 5 years Total 2019 Sensitivity of Equity Currency Decrease in basis points Sensitivity of special 6 months 1 year or commission income or less less 1-5 years SAR - 100 (690,905) 47,922 45,461 666,714 542,148 1,302,245 USD - 100 2,533 4,286 7,556 137,728 220,275 369,845 EUR - 100 - - - - - - Others - 100 1,777 - - - - - The Bank is exposed to risks associated with fluctuations in the levels of market special commission rates. The following table summarises the Bank’s exposure to special commission rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier of the contractual repricing or the maturity dates. The Bank is exposed to special commission rate risks as a result of mismatches or gaps in the amounts of assets and liabilities and derivative financial instruments that reprice or mature in a given period. The Bank manages this risk by matching the repricing of assets and liabilities through risk management strategies. S A B B | A N N U A L R E P O R T 2020
195. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Non special 2020 Within 3 3-12 1-5 commission months months years Over 5 years bearing Total Assets Cash and balances with SAMA Cash in hand - - - - 2,252,471 2,252,471 21,841,129 - - - 11,683,700 33,524,829 - - - - 672,115 672,115 4,010,579 - - - 877,093 4,887,672 190,359 27,467 - - - 217,826 Held for trading - - - - 1,935,515 1,935,515 Held as fair value hedges - - - - - - Held as cash flow hedges - - - - 25,791 25,791 FVOCI 2,963,953 1,236,775 5,189,265 4,310,160 3,080 13,703,233 FVTPL - - 53,959 305,280 878,521 1,237,760 9,109,985 1,591,947 21,485,293 13,702,789 - 45,890,014 Balances with SAMA Other balances Due from banks and other financial institutions, net Current accounts Money market placements Positive fair value derivatives, net Investments, net Amortised cost Loans and advances, net Credit cards 1,592,275 - 204,752 - 39,238 1,836,265 Other retail lending 5,073,687 3,433,189 13,305,169 11,927,127 665,083 34,404,255 81,061,334 28,290,396 2,542,695 - 5,108,133 117,002,558 Investments in associates Corporate and institutional lending - - - - 619,232 619,232 Property and equipment and right of use, net - - - - 3,169,427 3,169,427 Goodwill and other intangibles - - - - 10,982,536 10,982,536 Other assets - - - - 4,090,172 4,090,172 Total assets 125,843,301 34,579,774 42,781,133 30,245,356 43,002,107 276,451,671 2,559,207 Liabilities and equity Due to banks and other financial institutions Current accounts - - - - 2,559,207 5,596 - - - - 5,596 Repo with banks - - 567,906 - - 567,906 Others - 8,537,416 5,950,831 - - 14,488,247 134,240,503 Money market deposits Customer deposits Demand Saving Time Margin and other deposits 78,954 - - - 134,161,549 1,829,933 - - - - 1,829,933 41,144,134 9,970,277 522,356 - - 51,636,767 168 - - - 1,402,769 1,402,937 66,785 4,999,825 - - - 5,066,610 Held for trading - - - - 1,978,286 1,978,286 Held as fair value hedges - - - - 834,505 834,505 Held as cash flow hedges - - - - 6,295 6,295 - - - - 11,073,139 11,073,139 Debt securities in issue Negative fair value derivatives, net Other liabilities Equity - - - - 50,761,740 50,761,740 Total liabilities and equity 43,125,570 23,507,518 7,041,093 - 202,777,490 276,451,671 Commission rate sensitivity on assets and liabilities 82,707,708 11,082,275 35,740,040 30,245,356 (159,775,379) Commission rate sensitivity on derivative financial instruments 8,401,454 132,618 (4,103,666) (4,430,406) - Total special commission rate sensitivity gap 91,109,162 11,214,893 31,636,374 25,814,950 (159,775,379) Cumulative special commission rate sensitivity gap 91,109,162 102,324,055 133,960,429 159,775,379 - P O S IT I O N I N G F O R G ROW T H 195
196. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Non special 2019 (Restated) Within 3 3-12 1-5 commission months months years Over 5 years bearing Total Assets Cash and balances with SAMA Cash in hand Balances with SAMA - - - - 2,375,158 2,375,158 7,653,718 - - - 10,942,082 18,595,800 - - - - 295,934 295,934 3,734,881 - - - 738,949 4,473,830 476,436 - 37,500 - - 513,936 909,313 Other balances Due from banks and other financial institutions, net Current accounts Money market placements Positive fair value derivatives, net Held for trading 15,808 11,138 159,632 11,235 711,500 Held as fair value hedges - - - - 15,189 15,189 Held as cash flow hedges - - - - 46,024 46,024 FVOCI 1,370,846 1,508,882 6,422,170 3,407,007 1,228,768 13,937,673 FVTPL 177,034 - 31,953 86,011 847,575 1,142,573 10,484,937 11,014,090 14,339,126 9,565,427 - 45,403,580 Investments, net Amortised cost Loans and advances, net Credit cards 1,910,362 - 278,535 - 4,182 2,193,079 Other retail lending 7,134,587 3,282,958 13,566,932 10,934,360 339,821 35,258,658 93,896,686 14,615,017 1,934,279 312,747 3,864,620 114,623,349 Investments in associates Corporate and institutional lending - - - - 660,198 660,198 Property and equipment and right of use, net - - - - 3,308,278 3,308,278 Goodwill and other intangibles - - - - 18,462,065 18,462,065 Other assets - - - - 3,772,092 3,772,092 Total assets 126,855,295 30,432,085 36,770,127 24,316,787 47,612,435 265,986,729 Liabilities and equity Due to banks and other financial institutions Current accounts Money market deposits - - - - 3,633,774 3,633,774 5,244 9,416 4,252 - - 18,912 122,517,724 Customer deposits Demand Saving Time Margin and other deposits Debt securities in issue 331,403 - - - 122,186,321 1,691,003 - - - - 1,691,003 42,022,303 8,614,360 1,189,211 - - 51,825,874 176 - - - 16,131,747 16,131,923 5,033 1,494,719 - - - 1,499,752 Negative fair value derivatives, net Held for trading 14,919 6,661 135,028 11,445 711,606 879,659 Held as fair value hedges - - - - 425,325 425,325 Held as cash flow hedges - - - - 12,656 12,656 - - - - 11,265,936 11,265,936 Other liabilities Equity - - - - 56,084,191 56,084,191 Total liabilities and equity 44,070,081 10,125,156 1,328,491 11,445 210,451,556 265,986,729 Commission rate sensitivity on assets and liabilities 86,761,295 20,359,453 35,441,636 24,305,342 (166,867,726) Commission rate sensitivity on derivative financial instruments 10,409,094 (534,812) (5,060,270) (4,814,012) - Total special commission rate sensitivity gap 97,170,389 19,824,641 30,381,366 19,491,330 (166,867,726) Cumulative special commission rate sensitivity gap 97,170,389 116,995,030 147,376,396 166,867,726 - The net gap between derivative financial instruments represents the net notional amounts of derivative financial instruments, which are used to manage the special commission rate risk. S A B B | A N N U A L R E P O R T 2020
197. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 ii) Currency risk Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The Bank does not maintain material non-trading open currency positions. Foreign currency exposures that arise in the nontrading book are transferred to the trading book and are managed as part of the trading portfolio. The foreign exchange risk VAR disclosed in note 32(a) reflects the Bank’s total exposure to currency risk. The Bank is exposed to fluctuations in foreign currency exchange rates. The Board of Directors sets limits on the level of exposure by currency, and in total for both overnight and intraday positions, which are monitored daily. At the end of the year, the Bank had the following significant net exposures denominated in foreign currencies: US Dollar Euro Sterling Pounds Other 2020 Long (short) 2019 Long (short) (929,719) (675,799) 12,716 2,459 1,775 (4,629) (2,146) (2,341) iii) Equity price risk Equity price risk is the risk that the fair value of equities decreases as the result of changes in the level of equity indices and individual stocks. The non-trading equity price risk exposure arises from equity securities classified as FVOCI. A 10% increase or decrease in the value of the Bank’s FVOCI at 31 December 2020 would have correspondingly increased or decreased equity by SAR 112.9 million (2019: SAR 122.8 million). 33. Liquidity risk Liquidity risk is the risk that the Bank 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 Bank also has committed lines of credit 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 securities. The following table summarises the maturity profile of the Bank’s financial liabilities. The contractual maturities of liabilities have been determined on the basis of the remaining period at the reporting date to the contractual maturity date and does not take account of effective maturities as indicated by the Bank’s deposit retention history. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the inherent liquidity risk based on expected undiscounted cash inflows. All derivatives used for hedging purposes are shown by maturity based on their contractual, undiscounted repayment obligations. As the major portion of the derivatives trading book comprises of back to back transactions and consequently the open derivatives trading exposures are small, the management believes that the inclusion of trading derivatives in the contractual maturity table is not relevant for an understanding of the timing of cash flows and hence these have been excluded. Management monitors the maturity profile to ensure that adequate liquidity is maintained. The weekly liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by ALCO. A summary report, covering the Bank and operating subsidiaries, including any exceptions and remedial action taken, is submitted monthly to ALCO. P O S IT I O N I N G F O R G ROW T H 197
198. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 a) Analysis of undiscounted financial liabilities by remaining contractual maturities The table below sets out the Bank’s undiscounted financial liabilities by remaining contractual maturities. 2020 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 2,559,206 - - - - 2,559,206 6,960 - - - - 6,960 Financial liabilities Due to banks and other financial institutions Current accounts Money market deposits Repo with banks - - 567,906 - - 567,906 Others - 8,537,417 5,950,830 - - 14,488,247 - - - - 134,240,501 134,240,501 1,829,933 - - - - 1,829,933 41,162,214 10,012,367 535,710 - - 51,710,291 413,950 244,158 549,835 194,995 - 1,402,938 Debt securities in issue 35,250 105,750 564,000 5,728,526 - 6,433,526 Lease liability 99,118 52,801 593,770 286,972 - 1,032,661 3,024 615 302,711 551,606 - 857,956 46,109,655 18,953,108 9,064,762 6,762,099 134,240,501 215,130,125 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 2,326,343 - - - 1,307,431 3,633,774 5,400 9,656 4,639 - - 19,695 Repo with banks - - - - - - Others - - - - - - - - - - 122,517,724 122,517,724 1,691,002 - - - - 1,691,002 Time 42,173,415 8,736,097 1,258,251 - - 52,167,763 Margin and other deposits 14,510,869 200,985 411,214 269,254 739,601 16,131,923 12,703 38,109 203,250 1,519,455 - 1,773,517 103,225 58,942 566,330 533,014 - 1,261,511 5,432 329 180,457 214,387 - 400,605 Total undiscounted financial liabilities 60,828,389 9,044,118 2,624,141 2,536,110 124,564,756 199,597,514 Customer deposits Demand Saving Time Margin and other deposits Derivatives: Special commission contractual amounts, net Total undiscounted financial liabilities 2019 Financial liabilities Due to banks and other financial institutions Current accounts Money market deposits Customer deposits Demand Saving Debt securities in issue Lease liability Derivatives: Special commission contractual amounts, net S A B B | A N N U A L R E P O R T 2020
199. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 b) Maturity analysis of assets and liabilities The table below shows an analysis of assets and liabilities analysed according to when they are expected to be recovered or settled. 2020 Within 3 3-12 1-5 Over 5 No fixed months months Years years maturity Total Assets Cash and balances with SAMA Cash in hand Balances with SAMA Other balances 2,252,471 - - - - 2,252,471 21,841,129 - - - 11,683,700 33,524,829 672,115 - - - - 672,115 4,010,579 - - - 877,093 4,887,672 180,341 37,485 - - - 217,826 Due from banks and other financial institutions, net Current accounts Money market placements Positive fair value derivatives, net Held for trading 90,624 58,933 831,418 954,264 276 1,935,515 Held as fair value hedges - - - - - - Held as cash flow hedges - 5,296 20,495 - - 25,791 FVOCI 211,728 1,242,001 6,769,060 4,351,529 1,128,915 13,703,233 FVTPL - - 53,959 305,280 878,521 1,237,760 294,361 271,286 23,548,782 21,775,585 - 45,890,014 1,797,027 - - - 39,238 1,836,265 Investments, net Amortised cost Loans and advances, net Credit cards Other retail lending 2,570,662 1,760,577 14,736,933 14,671,000 665,083 34,404,255 40,302,099 23,410,129 21,787,152 26,395,045 5,108,133 117,002,558 Investments in associates - - - - 619,232 619,232 Property and equipment and right of use, net - - - - 3,169,427 3,169,427 10,982,536 Corporate and institutional lending Goodwill and other intangible - - - - 10,982,536 Other assets 530,766 971,219 - - 2,588,187 4,090,172 Total assets 74,753,902 27,756,926 67,747,799 68,452,703 37,740,341 276,451,671 1,963,096 - - - 596,111 2,559,207 Liabilities and equity Due to banks and other financial institutions Current accounts Money market deposits 5,596 - - - - 5,596 Repo with banks - - 567,906 - - 567,906 Others - 8,537,416 5,950,831 - - 14,488,247 134,240,503 Customer deposits Demand 78,954 - - - 134,161,549 1,829,933 - - - - 1,829,933 41,144,134 9,970,277 522,356 - - 51,636,767 148,266 244,158 549,835 194,995 265,683 1,402,937 66,785 - - 4,999,825 - 5,066,610 73,104 55,618 843,536 1,005,927 101 1,978,286 Held as fair value hedges 115 9,197 322,293 502,900 - 834,505 Held as cash flow hedges 6,295 - - - - 6,295 1,848,578 398,890 1,006,148 572,958 7,246,565 11,073,139 Saving Time Margin and other deposits Debt securities in issue Negative fair value derivatives, net Held for trading Other liabilities Equity Total liabilities and equity - - - - 50,761,740 50,761,740 47,164,856 19,215,556 9,762,905 7,276,605 193,031,749 276,451,671 P O S IT I O N I N G F O R G ROW T H 199
200. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Within 3 months 3-12 months 1-5 Years Over 5 years Cash in hand 2,375,158 - - - - 2,375,158 Balances with SAMA 7,653,718 - - - 10,942,082 18,595,800 295,934 - - - - 295,934 3,734,881 - - - 738,949 4,473,830 476,436 - 37,500 - - 513,936 2019 (Restated) No fixed maturity Total Assets Cash and balances with SAMA Other balances Due from banks and other financial institutions, net Current accounts Money market placements Positive fair value derivatives, net Held for trading 42,739 47,520 567,963 251,091 - 909,313 Held as fair value hedges - 577 3,030 11,582 - 15,189 Held as cash flow hedges 167 4,987 28,883 11,987 - 46,024 624,055 643,504 7,951,748 3,489,598 1,228,768 13,937,673 Investments, net FVOCI FVTPL Amortised cost - - 31,953 263,045 847,575 1,142,573 1,078,141 7,858,963 17,722,030 18,744,446 - 45,403,580 2,147,874 - - - 45,205 2,193,079 Loans and advances, net Credit cards Other retail lending Corporate and institutional lending 1,913,110 3,387,669 14,501,521 14,827,578 628,780 35,258,658 23,041,231 33,782,990 24,156,270 29,820,297 3,822,561 114,623,349 Investments in associates and a joint venture - - - - 660,198 660,198 Property and equipment and right of use, net - - - - 3,308,278 3,308,278 18,462,065 Goodwill and other intangible - - - - 18,462,065 Other assets 320,824 1,076,093 - - 2,375,175 3,772,092 Total assets 43,704,268 46,802,303 65,000,898 67,419,624 43,059,636 265,986,729 Liabilities and equity Due to banks and other financial institutions Current accounts Money market deposits 2,326,343 - - - 1,307,431 3,633,774 5,244 9,416 4,252 - - 18,912 - - - - 122,517,724 122,517,724 Customer deposits Demand 1,691,003 - - - - 1,691,003 Time Saving 42,022,303 8,614,360 1,189,211 - - 51,825,874 Margin and other deposits 14,510,869 200,985 411,214 269,254 739,601 16,131,923 5,033 - - 1,494,719 - 1,499,752 36,686 35,554 557,186 250,233 - 879,659 522 224 186,533 238,046 - 425,325 Debt securities in issue Negative fair value derivatives, net Held for trading Held as fair value hedges Held as cash flow hedges Other liabilities 1,889 3,444 5,213 2,110 - 12,656 1,189,320 822,452 1,551,085 471,500 7,231,579 11,265,936 Equity Total liabilities and equity 61,789,212 9,686,435 3,904,694 2,725,862 56,084,191 187,880,526 56,084,191 265,986,729 Assets available to meet all of the liabilities and to cover outstanding loan commitments include cash, balances with SAMA, items in the course of collection; loans and advances to banks; and loans and advances to customers. The maturities of commitments and contingencies are given in note 20(d) of the consolidated financial statements. S A B B | A N N U A L R E P O R T 2020
201. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 34. Offsetting of financial liabilities Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements. Amount not set off in the consolidated statement of financial position Gross amounts Gross offset in the amounts of consolidated recognised statement of financial liabilities financial position Amounts presented in the consolidated statement of financial position Amounts subject to enforceable master netting arrangement Cash collateral pledged Net amount 2020 Derivatives 2,819,086 - 2,819,086 - (1,979,400) 839,686 1,317,640 - 1,317,640 - (816,578) 501,062 2019 Derivatives 35. 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 in the principal (or the most advantageous) market between market participants at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. Consequently, differences can arise between the carrying values and fair value estimates. The fair values of recognised financial instruments are not materially different from their carrying values. Determination of fair value and fair value hierarchy The Bank 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 (e.g, without modification or repacking); • Level 2: 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 • Level 3: valuation techniques for which any significant input is not based on observable market data. P O S IT I O N I N G F O R G ROW T H 201
202. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 31 December 2020 Fair value Carrying value Level 1 Level 2 Level 3 Total 1,961,306 - 1,961,306 - 1,961,306 Financial assets measured at fair value Derivative financial instruments Investments held as FVTPL Investments held as FVOCI – Debt Investments held as FVOCI – Equity 1,237,760 878,521 359,239 - 1,237,760 12,574,317 - 12,574,317 - 12,574,317 1,128,916 1,103,450 - 25,466 1,128,916 5,105,498 - 5,105,498 - 5,105,498 Financial assets not measured at fair value Due from banks and other financial institutions Investments held at amortised cost Loans and advances 45,890,014 - 47,794,071 - 47,794,071 153,243,078 - - 152,050,680 152,050,680 2,819,086 - 2,819,086 - 2,819,086 Financial liabilities measured at fair value Derivative financial instruments Financial liabilities not measured at fair value Due to banks and other financial institutions Customers deposits Debt securities in issue 31 December 2019 17,620,956 - 17,620,956 - 17,620,956 189,110,140 - 189,231,025 - 189,231,025 5,066,610 - 5,066,610 - 5,066,610 Fair value Carrying value Level 1 Level 2 Level 3 Total 970,526 - 970,526 - 970,526 Financial assets measured at fair value Derivative financial instruments Investments held as FVTPL Investments held as FVOCI – Debt Investments held as FVOCI – Equity 1,142,573 847,573 295,000 - 1,142,573 12,708,906 - 12,708,906 - 12,708,906 1,228,767 1,202,100 - 26,667 1,228,767 4,987,766 - 4,987,766 - 4,987,766 Financial assets not measured at fair value Due from banks and other financial institutions Investments held at amortised cost Loans and advances 45,403,580 - 46,172,171 - 46,172,171 152,075,086 - - 150,797,694 150,797,694 1,317,640 - 1,317,640 - 1,317,640 Financial liabilities measured at fair value Derivative financial instruments Financial liabilities not measured at fair value Due to banks and other financial institutions Customers deposits Debt securities in issue 3,652,686 - 3,652,686 - 3,652,686 192,166,524 - 192,261,356 - 192,261,356 1,499,752 - 1,499,752 - 1,499,752 Derivatives classified as Level 2 comprise over the counter special commission rate swaps, currency swaps, special commission rate options, forward foreign exchange contracts, currency options and other derivative financial instruments. These derivatives 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 relevant to the markets in which they are traded and are sourced from widely used market data service providers. S A B B | A N N U A L R E P O R T 2020
203. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 FVOCI investments classified as Level 2 include bonds for which market quotes are not available. These are fair valued using simple discounted cash flow techniques that use observable market data inputs for yield curves and credit spreads. FVOCI investments classified as Level 3 include Private Equity Funds, the fair value of which is determined based on the fund’s latest reported net assets value as at the reporting date. The movement in Level 3 financial instruments during the period relates to fair value and capital repayment movements only. Fair values of listed investments are determined using bid marked prices. Fair values of unlisted investments are determined using valuation techniques that incorporate the prices and future earning streams of equivalent quoted securities. Loans and advances are classified as Level 3, the fair value of which is determined by discounting future cash flows using risk adjusted expected SAIBOR rates. The fair values of due from and due to banks and other financial institutions which are carried at amortised cost, are not significantly different from the carrying values included in the interim condensed consolidated financial statements, since these are short dated and the current market special commission rates for similar financial instruments are not significantly different from the contracted rates. The fair values of demand deposits are approximated by their carrying value. For deposits with longer-term maturities, fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. Debt securities in issue and borrowings are floating rate instruments that re-price within a year and accordingly, the fair value of this portfolio approximates the carrying value. The fair value of the remaining portfolio is not significantly different from its carrying value. There were no transfers between the levels of fair value hierarchies during the period. The values obtained from valuation models may be different from the transaction price of financial instruments on transaction date. The difference between the transaction price and the model value is commonly referred to as ‘day one profit and loss’. It is either amortised over the life of the transaction or deferred until the instrument’s fair value can be determined using market observable data or realised through disposal. Subsequent changes in fair value are recognised immediately in the Interim consolidated statement of income without reversal of deferred day one profits and losses. Valuation techniques include net present value and discounted cash flow models, and comparison with similar instruments for which market observable prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premiums used in estimating discount rates, bond and equity prices and foreign currency exchange rates. The Bank uses widely recognised valuation models for determining the fair value of common and simpler financial instruments. Observable prices or model inputs are usually available in the market for listed debt and equity securities, exchange-traded derivatives and simple over-the-counter derivatives such as interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgement and estimation and also reduces the uncertainty associated with determining fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. 36. Related party transactions Managerial and specialised expertise is provided under a technical services agreement with HSBC Holdings plc, the parent company of HSBC Holdings BV. This agreement was amended on 3 October 2018 and renewed for a period of 10 years, commencing on 30 September 2017. 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 limits set by the Banking Control Law and the regulations issued by SAMA. P O S IT I O N I N G F O R G ROW T H 203
204. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 The year end balances included in the consolidated financial statements resulting from such transactions are as follows: 2020 2019 1,819,706 1,525,639 111,709 111,824 20,812 41,164 677,738 265,733 3,374,514 3,895,443 2020 2019 619,232 660,198 The HSBC Group: Due from banks and other financial institutions Investments Negative fair value derivatives, net Due to banks and other financial institutions Commitments and contingencies Associates: Investments Loans and advances Other assets Customer deposits Other liabilities Commitments and contingencies 1,501 175,900 21,923 155 476,738 482,496 37 54,486 1,503,428 1,501,000 2020 2019 Directors, board committees, other major Shareholders, key management personnel and their affiliates: Investments 664,344 1,367,341 Loans and advances 5,680,310 14,339,076 Customers’ deposits 7,606,791 5,411,005 Positive fair value derivatives, net Debt securities issued Other liabilities Commitments and contingencies 56,962 33,139 750,000 375,000 14,532 7,592 787,214 2,614,504 Other major Shareholders represent shareholdings (excluding the non-Saudi shareholder) of more than 5% of the Bank’s issued share capital. 2020 2019 361,673 357,160 47,546 26,842 200,000 32,000 2020 2019 34,000 34,000 516,848 490,413 Related mutual funds: Investments Customers’ deposits Debt securities issued Subsidiaries: Other assets Related mutual funds: Investments S A B B | A N N U A L R E P O R T 2020
205. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 Transactions with related parties included in the consolidated financial statements are as follows: 2020 2019 Special commission income 149,269 727,467 Special commission expense 94,684 298,493 Fees and commission income 40,040 99,239 General and administrative expenses 54,708 33,817 Service charges paid to HSBC Group 29,906 30,001 Service charges recovered from associate 25,227 25,420 Proceeds from sale of HSBC Saudi Arabia shareholding - 36,000 24,653 13,860 5,943 5,244 2020 2019 45,117 55,529 Termination benefits 3,081 11,131 Other long-term benefits 17,069 4,600 Share-based payments 8,681 8,197 Profit share paid to associate relating to investment banking activities Directors’ and Board committees’ remuneration The total amount of compensation paid to key management personnel during the year is as follows: Short-term employee benefits * * Short-Term Employee benefits includes: Salaries, Allowances, Benefits, Cash bonus paid during the year Key management personnel are those persons, including an executive director, having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. 37. Capital adequacy The Bank’s objectives when managing capital are, to comply with the capital requirements set by SAMA; to safeguard the Bank’s ability to continue as a going concern; and to maintain a strong capital base. The Bank monitors the adequacy of its capital using the methodology and ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its assets, commitments and contingencies, and notional amounts of derivatives at a weighted amount to reflect their relative risk. SAMA through its Circular Number 391000029731 dated 15 Rabi Al-Awwal 1439H (3 December 2017), 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 9 shall be transitioned over five years. As part of the latest SAMA guidance on Accounting and Regulatory Treatment of COVID-19 Extraordinary Support Measures, Banks are now allowed to add-back up to 100% of the transitional adjustment amount to Common Equity Tier 1 (CET1) for the full two year period comprising 2020 and 2021 effective from 31 March 2020 financial statement reporting. The add-back amount must be then phased-out on a straight-line basis over the subsequent 3 years. The impact of these revised transitional arrangements to the Bank’s Tier 1 and Tier 1 + 2 ratio have been an improvement of 43bps for the year ended 31 December 2020. P O S IT I O N I N G F O R G ROW T H 205
206. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 2020 2019 (Restated) 199,268,399 205,118,642 19,064,614 19,265,850 1,988,398 1,829,683 220,321,411 226,214,175 Tier I Capital 41,774,973 38,450,069 Tier II Capital 6,303,054 2,819,213 48,078,027 41,269,282 Tier I ratio 18.96% 17.00% Tier I + Tier II ratio 21.82% 18.24% Risk Weighted Assets (RWA) Credit Risk RWA Operational Risk RWA Market Risk RWA Total RWA Total I and II Capital Capital Adequacy Ratio % 38. Impact of Coronavirus (“COVID-19”) on Expected Credit Losses (“ECL”) and SAMA Programmes The Bank continues to be cognisant of both the micro and macroeconomic challenges that COVID-19 has posed, the teething effects of which may be felt for some time, and is closely monitoring its exposures at a granular level. This has entailed reviewing specific economic sectors, regions, counterparties and collateral protection and taking appropriate customer credit rating actions and initiating restructuring of loans, where required. The Bank has also revised certain inputs and assumptions used for the determination of expected credit losses (“ECL”). The revisions mainly revolved around: • adjusting macroeconomic factors/inputs used by the Bank in its ECL model including observed default rates; and • applying of staging criteria in light of the SAMA support measures and to effectively identify exposures where lifetime ECL losses may have been triggered despite repayment holidays. The Bank’s ECL model continues to be sensitive to the above assumptions and are continually reassessed as part of its business as usual model refinement exercise. As with any forecasts, the projections and likelihoods of occurrence are underpinned by significant judgement and uncertainty and therefore, the actual outcomes may be different to those projected. The exercise of the deferment option by a customer, on its own, is not considered by the Bank as triggering SICR and as a consequence the impact on ECL for those customers were determined based on their existing staging. However, as part of the Bank’s credit evaluation process, especially given the current economic situation due to after effects of lock down, the Bank obtained further information from the customers to understand their financial position and ability to repay the amount and in cases where indicators of significant deterioration were noted, the customers’ credit ratings and accordingly exposure staging were adjusted, where applicable. SAMA programmes and initiatives In response to COVID-19, SAMA launched the Private Sector Financing Support Programme (“PSFSP”) in March 2020 to provide the necessary support to the Micro Small and Medium Enterprises (“MSME”) as per the definition issued by SAMA via Circular No. 381000064902 dated 16 Jumada II 1438H. The PSFSP mainly encompasses the following programmes: • • • • Deferred payments programme (‘DPP’); Funding for lending programme; Facility guarantee programme; and Point of sale (“POS”) and e-commerce service fee support program. S A B B | A N N U A L R E P O R T 2020
207. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 As part of the deferred payments programme launched by SAMA, the Bank was required to initially defer payments for six months on lending facilities to eligible MSMEs. The payment reliefs were considered as short-term liquidity support to address the borrower’s potential cash flow issues. The Bank effected the payment reliefs by extending the tenure of the applicable loans granted with no additional costs to be borne by the customer by deferring the instalments falling due within the period from 14 March 2020 to 14 September 2020 for a period of six months and then further deferring the installments falling due within the period from 15 September 2020 to 14 December 2020 for a period of three months without increasing the facility tenure. The accounting impact of these changes in terms of the credit facilities has been assessed and were treated as per the requirements of IFRS 9 as modification in terms of arrangement. This resulted in modification losses which have been presented as part of net financing income. The Bank continues to believe that in the absence of other factors, participation in the deferment programme on its own, is not considered a significant increase in credit risk. Further to the above, on 15 December 2020, SAMA extended the deferred payments programme by allowing additional threemonth payment deferrals for eligible MSMEs until 31 March 2021. The Bank has effected the payment reliefs by extending the tenure of the applicable loans granted with no additional costs to be borne by the customer. The accounting impact of these changes in terms of the credit facilities has been assessed and are treated as per the requirements of IFRS 9 as modification in terms of the arrangement. This resulted in the Bank recognising an additional modification loss of SAR 69 million during the period ended 31 December 2020. As a result of the above programme and related extensions, the Bank has deferred the payments of SAR 6.2 billion on MSMEs portfolio and accordingly, has recognised total modification losses of SAR 329 million during the year of which SAR 270 million have been unwound. The total exposures against these customers amounted to SAR 5.1 billion as at the year end. The Bank generally considered the deferral of payments in hardship arrangements as an indication of a SICR but the deferral of payments under the current COVID-19 support packages have not, in isolation, been treated as an indication of SICR. The Bank continues to monitor the lending portfolios closely and reassess the provisioning levels as the situation around COVID-19 evolves; however, management has taken SAR 199 million of overlays to reflect potential further credit deterioration. The Bank has booked SAR 151 million incremental total ECL for the MSME portfolio eligible for DPP having total exposure of SAR 8.3 billion. If the balance of COVID-19 support packages in stage 1 move to stage 2, an additional ECL provision would be provided during 2021 based on the credit facility - level assessment and the ability to repay amounts due after the deferral period ends. In order to compensate the related cost that the Bank is expected to incur under the SAMA and other public authorities programme, during the year 2020, the Bank received profit free deposits from SAMA amounting to SAR 6.3 billion with varying maturities, which qualify as government grants. Management has determined based on the communication from SAMA, that the government grant primarily relates to compensation for the modification loss incurred on the deferral of payments. On 30 December 2020, SAMA has extended SAR 2.8 billion of the above-mentioned deposits for an additional 21 months from original maturities. This resulted in an additional gain of SAR 90 million which has been deferred. The management has exercised certain judgements in the recognition and measurement of this grant income. The benefit of the subsidised funding rate has been accounted for on a systematic basis, in accordance with government grant accounting requirements. By the end of the year 2020, total income of SAR 351 million has been recognised in the statement of income and SAR 109 million deferred. The management has exercised certain judgements in the recognition and measurement of this grant income. During the year ended 31 December 2020, SAR 22 million has been recognised in the consolidated statement of income relating to unwinding of deferred income. As at 31 December 2020, the Bank has participated in SAMA’s funding for lending and facility guarantee programmes and the accounting impact for the period is immaterial. Furthermore, during the current year, the Bank received an amount of SAR 54 million on account of reimbursement from SAMA for POS and e-commerce services P O S IT I O N I N G F O R G ROW T H 207
208. The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 SAMA liquidity support for the Saudi banking sector amounting to SAR 50 billion In line with its monetary and financial stability mandate, SAMA injected an amount of SAR 50 billion in order to: • enhance the liquidity in the banking sector and enable it to continue its role in providing credit facilities to private sector companies; • restructure current credit facilities without any additional fees; • support plans to maintain employment levels in the private sector; and • provide relief for a number of banking fees that have been waived for customers. In this regard, during the current year, the Bank received SAR 6.1 billion profit free deposit with one year maturity. Management has determined based on the communication received from SAMA, that this government grant primarily relates to liquidity support. The benefit of the subsidised funding rate has been accounted for on a systematic basis, in accordance with government grant accounting requirements. This resulted in a total income of SAR 70 million which has been recognised in the consolidated statement of income for the year ending 31 December 2020. Health care sector support In recognition of the significant efforts that our healthcare workers are putting in to safeguard the health of our citizens and residents in response to the COVID-19 outbreak, the Bank has decided to voluntarily postpone payments for all public and private health care workers who have credit facilities with the Bank for three months. This resulted in the Bank recognizing a day 1 modification loss of SAR 76 million in March 2020, which was presented as part of Other Operating income. As the three-month period for this voluntarily postponed payments ended; therefore, the Bank has completely unwounded the impact until Q3 2020. 39. Prospective changes in accounting standards The Bank has chosen not to early adopt the following new standards and amendments to IFRS which have been issued but not yet effective for the Bank’s accounting years beginning on or after 1 January 2021 and is currently assessing their impact. Following is a brief on the new IFRS and amendments to ‘IFRS’ • Amendments to IFRS 16: Leases for COVID-19 rent related concessions. On 28 May 2020, the IASB issued COVID-19-Related Rent Concessions - amendment to IFRS 16 Leases The amendments provide relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the COVID-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a COVID-19 related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 related rent concession the same way it would account for the change under IFRS 16, if the change were not a lease modification. The amendment applies to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted. This amendment had no impact on the consolidated financial statements of the Bank. • IFRS 17 – “Insurance contracts”, applicable for the period beginning on or after 1 January 2023. In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS 17), a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core of IFRS 17 is the general model, supplemented by: S A B B | A N N U A L R E P O R T 2020
209. BANK PROFILE | STRATEGIC REPORT | GOVERNANCE | FINANCIAL STATEMENTS The Saudi British Bank Notes to the consolidated financial statements (continued) For the year ended 31 December 2020 • A specific adaptation for contracts with direct participation features (the variable fee approach) • A simplified approach (the premium allocation approach) mainly for short-duration contracts IFRS 17 is effective for reporting periods beginning on or after 1 January 2023, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. This standard is not applicable to the Bank. • Amendments to IAS 1 – “Classification of Liabilities as Current or Non-current”, applicable for the period beginning on or after 1 January 2022 In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify: • • • • What is meant by a right to defer settlement That a right to defer must exist at the end of the reporting period That classification is unaffected by the likelihood that an entity will exercise its deferral right That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification The amendments are effective for annual reporting periods beginning on or after 1 January 2023 and must be applied retrospectively. The Bank is currently assessing the impact the amendments will have on current practice and whether existing loan agreements may require renegotiation. • • • • Onerous contracts – Cost of Fulfilling a contract (Amendments to IAS 37) Interest Rate Benchmark Reform – Phase 2 (amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) Reference to Conceptual Framework (Amendments to IFRS 3) 40. Board of Directors’ approval The consolidated financial statements were approved by the Board of Directors on 11 Rajab 1442AH (Corresponding 23 February 2021). P O S IT I O N I N G F O R G ROW T H 209
210. P .O. Box 9084 Riyadh 11413 Kingdom of Saudi Arabia Phone:+966 (0)920007222 Fax:+966 (0) 11 405 0660 Email:sabb@sabb.com www.sabb.com