The Saudi Investment Bank Interim Condensed Consolidated Financial Statements For The Three-Month Period Ended March 31, 2017

Transcription

1. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS For the three-month period ended March 31, 2017 (Unaudited)
2. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION Amounts in SAR’000 (Unaudited) Dec. 31, 2016 (Audited) Restated 7,844,243 5,684,338 4,287,465 15 1,592,439 2,302,293 7,838,566 5,15 21,308,580 21,447,894 18,992,307 6,15 60,290,073 60,249,052 61,615,260 7 1,028,085 1,000,337 978,028 974,041 987,600 1,012,599 3,866,111 1,914,717 1,175,178 Other real estate 418,723 418,724 152,836 Other assets 223,707 243,833 341,261 Total assets 97,546,002 94,248,788 96,393,500 15 11,329,298 8,996,716 8,217,662 Customers’ deposits 8,15 64,437,295 65,640,325 70,686,569 Term loans 9,15 1,998,347 2,032,187 2,020,518 Subordinated debt 10,15 2,021,180 2,002,373 2,013,674 Negative fair values of derivatives 11,15 3,393,281 1,424,927 921,270 653,484 767,718 665,262 83,832,885 80,864,246 84,524,955 7,000,000 7,000,000 6,500,000 4,210,000 4,210,000 3,946,000 5 517,515 509,651 22 1,205,352 877,775 1,185,162 16,22 350,000 350,000 487,500 20 (69,750) (62,884) (68,267) Mar. 31, 2017 Notes Mar. 31, 2016 (Unaudited) Restated ASSETS Cash and balances with SAMA Due from banks and other financial institutions Investments, net Loans and advances, net Investments in associates Property, equipment, and intangibles, net Positive fair values of derivatives 11,15 LIABILITIES AND TOTAL EQUITY Liabilities Due to banks and other financial institutions Other liabilities Total liabilities Equity Share capital 16,22 Statutory reserve Other reserves Retained earnings Proposed dividends Shares held for employee options, net of share based provisions Shareholders’ equity (181,850) 13,213,117 12,884,542 11,868,545 500,000 500,000 - Total equity 13,713,117 13,384,542 11,868,545 Total liabilities and equity 97,546,002 94,248,788 96,393,500 Tier I Sukuk 19 The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. 1
3. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) INTERIM CONSOLIDATED INCOME STATEMENT (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31 Notes 2017 2016 Special commission income 876,564 717,238 Special commission expense 413,547 304,435 Net special commission income 463,017 412,803 Fee income from banking services, net 110,293 106,713 32,436 31,912 - 2,838 19,216 36,879 Exchange income, net Dividend income Gains on investments, net - Other operating loss (401) Total operating income 624,962 590,744 Salaries and employee-related expenses 147,621 145,264 Rent and premises-related expenses 38,835 34,449 Depreciation and amortization 23,027 22,169 Other general and administrative expenses 53,285 55,868 Impairment charge for credit losses 45,000 118,000 Impairment charge for investments - 42,000 Total operating expenses 307,768 417,750 Income from operating activities 317,194 172,994 27,748 37,006 344,942 210,000 0.49 0.30 Share in earnings of associates 7 Net income Basic and diluted earnings per share (expressed in SAR per share) 16 The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. 2
4. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31 Notes 2017 2016 344,942 210,000 - Net change in fair value 16,080 (187,629) - Fair value gains transferred to interim consolidated income statement on disposal (8,216) Net income Other comprehensive income-items that are or may be reclassified to consolidated income statement in subsequent periods: Available for sale investments: Share in other comprehensive income of associates 7 7,864 Total other comprehensive income (loss) Total comprehensive income 352,806 (7,989) 2,000 (193,618) 16,382 The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. . 3
5. THE SAUDI INVESTMENT BANK INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the three-month periods ended March 31 2017 (SAR’000) Shares held for employee options, net Proposed of share based dividends provisions Shareholders’ equity Tier 1 Sukuk Total equity (62,884) 13,043,188 500,000 13,543,188 - (158,646) - (158,646) 350,000 (62,884) 12,884,542 500,000 13,384,542 344,942 - - 344,942 - 344,942 7,864 - - - 7,864 - 7,864 - 7,864 344,942 - - 352,806 - 352,806 - - - (9,045) - - (9,045) - (9,045) Income Tax for current period - - - (6,229) - - (6,229) - (6,229) Income Tax for prior periods - - - (2,091) - - (2,091) - (2,091) - - - - - (6,866) (6,866) - (6,866) 7,000,000 4,210,000 517,515 1,205,352 350,000 (69,750) 13,213,117 500,000 13,713,117 Notes Share capital Statutory reserve Other reserves Retained earnings Balances at the beginning of the period as previously reported 22 7,000,000 4,210,000 509,651 966,421 420,000 Effect of the retroactive application of the new Zakat and Income Tax Policy 22 - - - (88,646) (70,000) Balances at the beginning of the period as restated 22 7,000,000 4,210,000 509,651 877,775 Net income - - - Total other comprehensive income - - Total comprehensive income - Zakat for current period Net movement in shares held for employee options Balances at the end of the period 20 The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. 4
6. THE SAUDI INVESTMENT BANK INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the three-month periods ended March 31 2016 (SAR’000) Notes Share capital Statutory reserve Other reserves Balances at the beginning of the period as previously reported 22 6,500,000 3,946,000 11,768 Effect of the retroactive application of the new Zakat and Income Tax Policy 22 - - - Balances at the beginning of the period as restated 22 6,500,000 3,946,000 Net income - Total other comprehensive income (loss) Retained earnings 1,100,949 Shares held for employee options, net Proposed of share based dividends provisions 534,500 Total Shareholders’ equity Tier 1 Sukuk Total equity (56,755) 12,036,462 - 12,036,462 - (156,426) - (156,426) (109,426) (47,000) 11,768 991,523 487,500 (56,755) 11,880,036 - 11,880,036 - - - - - 210,000 - 210,000 - - (193,618) - - - (193,618) - (193,618) Total comprehensive income (loss) - - (193,618) 210,000 - - 16,382 - 16,382 Zakat for current period - - - (7,906) - - (7,906) - (7,906) Zakat for prior periods - - - (1,281) - - (1,281) - (1,281) Income Tax for current period - - - (5,454) - - (5,454) - (5,454) Income Tax for prior periods - - - (1,720) - - (1,720) - (1,720) - - - - - (11,512) (11,512) - (11,512) 6,500,000 3,946,000 (181,850) 1,185,162 (68,267) 11,868,545 - 11,868,545 Net movement in shares held for employee options Balances at the end of the period 20 487,500 The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. 5
7. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31 Notes 2017 2016 344,942 210,000 14,322 (57,342) (81,623) 31,364 (19,216) (17,365) 23,027 45,000 (27,748) 4,316 259,677 16,555 (97,376) 76,104 21,119 (36,879) (16,361) 22,169 118,000 42,000 (37,006) 7,749 326,074 275,211 48,942 OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from (used in) operating activities: Net amortization of premiums (accretion of discounts) on investments Net change in accrued special commission receivable Net change in accrued special commission payable Net change in deferred loan fees Gain on investments, net Impact of Zakat and Tax transfer to retained earnings Depreciation and amortization Impairment charge for credit losses Impairment charge for investments Share in earnings of associates Share based provisions 14 7 20 Net (increase) decrease in operating assets: Statutory deposit with SAMA Due from banks and other financial institutions maturing after ninety days from acquisition date Loans and advances, net Positive fair values of derivatives Other assets (2,992) (70,775) (1,960,503) 20,127 (10,299) (1,388,645) 123,426 (21,805) Net increase (decrease) in operating liabilities: Due to banks and other financial institutions Customers’ deposits Negative fair values of derivatives Other liabilities 2,322,213 (1,111,162) 1,953,445 (107,842) 2,882,638 135,292 (93,664) (53,968) Net cash from operating activities 1,577,399 1,947,991 INVESTING ACTIVITIES Proceeds from sales and maturities of investments Purchases of investments Purchases of property, equipment, and intangibles Proceeds from sale of property, equipment, and intangibles 1,148,930 (974,078) (9,468) - 438,783 (675,051) (13,205) 1 165,384 (249,472) (17,574) (33,225) (17,574) (33,225) 14 Net cash from (used in) investing activities FINANCING ACTIVITIES Purchases of shares for employee options Net cash used in financing activities Increase in cash and cash equivalents 20 1,725,209 1,665,294 Continued. The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. 6
8. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31 Notes 2017 2016 Cash and cash equivalents at the beginning of the period 4,382,652 7,103,969 Increase in cash and cash equivalents 1,725,209 1,665,294 6,107,861 8,769,263 Special commission received 819,222 616,356 Special commission paid 495,707 228,818 Cash and cash equivalents Cash and cash equivalents at the end of the period 13 Supplemental special commission information Supplemental non-cash information Total other comprehensive income (loss) 7,864 (193,618) The accompanying notes 1 to 23 form an integral part of these interim condensed consolidated financial statements. 7
9. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 1. General The Saudi Investment Bank (the “Bank”), a Saudi joint stock company, was formed pursuant to Royal Decree No. M/31 dated 25 Jumada II 1396H, corresponding to June 23, 1976 in the Kingdom of Saudi Arabia. The Bank operates under Commercial Registration No. 1010011570 dated 25 Rabie Awwal 1397H, corresponding to March 16, 1977 through its 49 branches (December 31, 2016: 48 branches; and March 31, 2016: 48 branches) in the Kingdom of Saudi Arabia. The address of the Bank’s Head Office is as follows: The Saudi Investment Bank Head Office P.O. Box 3533 Riyadh 11481, Kingdom of Saudi Arabia The Bank offers a full range of commercial and retail banking services. The Bank also offers Shariah compliant (non-interest based) banking products and services, which are approved and supervised by an independent Shariah Board. 2. Basis of preparation On April 11, 2017, the Saudi Arabian Monetary Authority (SAMA) issued Circular no. 381000074519 with amendments regarding certain clarifications relating to the accounting for Zakat and Income tax. The impact of the Circular and amendments are as follows:  The Accounting Standards for Commercial Banks promulgated by SAMA are no longer applicable from January 1, 2017; and  Zakat and Income Tax are to be accrued on a quarterly basis and recognized in the consolidated statement of equity with a corresponding liability recognized in the consolidated statement of financial position. Applying the above SAMA circular and amendments to the framework, these interim condensed consolidated financial statements as of and for the three month period ended March 31, 2017 have been prepared using International Accounting Standard (IAS) 34 – “Interim Financial Reporting”, and SAMA guidance for the accounting of Zakat and Income Tax. Until December 31, 2016, the consolidated financial statements were prepared in accordance with the Accounting Standards for Commercial Banks promulgated by SAMA and IFRS. This change in framework resulted in a change in the accounting policy for Zakat and Income Tax, as disclosed in note 4. The effects of this change are disclosed in note 22. These interim condensed consolidated financial statements do not include all information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the annual consolidated financial statements as of and for the year ended December 31, 2016. These interim condensed consolidated financial statements are expressed in Saudi Arabian Riyals (SAR) and are rounded off to the nearest thousand. The preparation of these interim condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities and income and expense. Actual results may differ from these estimates. In preparing these interim condensed consolidated financial statements, the significant judgments made by management in applying the Group’s accounting policies and the key sources of estimation of uncertainty were the same as those that applied to the annual consolidated financial statements as of and for the year ended December 31, 2016. These interim condensed consolidated financial statements were approved by the Bank’s Board of Directors on May 11, 2017. 8
10. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 3. Basis of consolidation These interim condensed consolidated financial statements are comprised of the financial statements of the Bank and the financial statements of the following subsidiaries (collectively referred to as the “Group”): a) “Alistithmar for Financial Securities and Brokerage Company” (Alistithmar Capital), a Saudi closed joint stock company, which is registered in the Kingdom of Saudi Arabia under Commercial Registration No. 1010235995 issued on 8 Rajab 1428H (corresponding to July 22, 2007), and is 100% owned by the Bank. The principal activities of Alistithmar Capital include dealing in securities as principal and agent, underwriting, management of investment funds and private investment portfolios on behalf of customers, and arrangement, advisory, and custody services relating to financial securities. b) “Saudi Investment Real Estate Company”, a limited liability company, which is registered in the Kingdom of Saudi Arabia under commercial registration No.1010268297 issued on 29 Jumada Awal 1430H (corresponding to May 25, 2009), and is owned 100% by the Bank. The Company has not commenced any significant operations. c) “Saudi Investment First Company”, a limited liability company, which is registered in the Kingdom of Saudi Arabia under commercial registration No. 1010427836 issued on 16 Muharram 1436H (corresponding to November 9, 2014), and is owned 100% by the Bank. The Company has not commenced any significant operations. References to the “Bank” hereafter in these interim condensed consolidated financial statements refer to disclosures that are relevant only to the Bank and not collectively to the “Group”. The financial statements of the subsidiaries are prepared for the same reporting period as that of the Bank, using consistent accounting policies. Changes are made to the accounting policies of the subsidiaries when necessary to align with the accounting policies of the Bank. Subsidiaries are investees controlled by the Group. The Group controls an investee when 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. The financial statements of the subsidiaries are included in the interim condensed consolidated financial statements from the date the Group obtains control of the investee and ceases when the Group loses control of the investee. A structured entity is an entity designed so that its activities are not governed by way of voting rights. In assessing whether the Group has power over such investees in which it has an interest, the Group considers factors such as purpose and design of the investee, its practical ability to direct the relevant activities of the investee, the nature of its relationship with the investee, and the size of its exposure to the variability of returns of the investee. The financial statements of any such structured entities are consolidated from the date the Group obtains control and until the date when the Group ceases to control the investee. These interim condensed consolidated financial statements have been prepared using uniform accounting policies and valuation methods for similar transactions and other events in similar circumstances. The Group manages assets held in investment entities on behalf of investors. The financial statements of these entities are not included in these interim condensed consolidated financial statements except when the Group controls the entity. Balances between the Bank and its subsidiaries, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the interim condensed consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. 9
11. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three month-periods ended March 31, 2017 and 2016 4. Significant accounting policies The accounting policies used in the preparation of these interim condensed consolidated financial statements are consistent with those used in the preparation of the consolidated financial statements for the year ended December 31, 2016, except for the adoption of the following amendments to existing standards.  Amendments to IASs’-Disclosure Initiative” applicable from January 1, 2017.  Amendments to IAS 12 – “Income taxes” applicable from January 1, 2017. These amendments clarify how to account for deferred tax assets related to debt instruments measured at fair value.  Amendments to IAS 7 – “Statement of Cash Flows”, which is applicable for annual periods beginning on or after January 1, 2017. The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities,, including both changes arising from cash flow and non-cash changes. The adoption of the above amendments to existing standards have not had a significant impact on the current period or prior period interim condensed consolidated financial statements of the Group. As described in note 2, the Group amended its accounting policy relating to Zakat and Income Tax effective on January 1, 2017. The effect of the new Zakat and Income Tax Policy is accounted for in these interim condensed consolidated financial statements retroactively. The superceded Zakat and Income Tax Policy required only payments of Zakat and Income Tax to be recorded as an other asset until such amounts were reimbursed by a Bank’s shareholders either through cash payments or by withholding the amounts from shareholder dividend payments. In addition, the superceded Zakat and Income Tax Standard did not require the accrual of Zakat and Income Tax in other liabilities. The new Zakat and Income Tax Policy requires payments of Zakat and Income Tax previously included in other assets, and also accruals for Zakat and Income Tax to be included in other liabilities, with the corresponding amounts to be accounted for as a direct charge to Retained earnings. See note 22 for further disclosures. 5. Investments, net Investments are classified as available for sale and are summarized as follows: Fixed rate securities Floating rate securities Total special commission earning investments Equities and others Mutual funds Total available for sale investments Allowance for impairment Investments, net Mar. 31, 2017 (Unaudited) 15,445,897 4,813,629 20,259,526 884,366 168,688 21,312,580 (4,000) 21,308,580 Dec. 31, 2016 (Audited) 15,186,836 5,079,496 20,266,332 1,017,747 167,815 21,451,894 (4,000) 21,447,894 Mar. 31, 2016 (Unaudited) 12,578,037 5,264,341 17,842,378 1,021,028 242,901 19,106,307 (114,000) 18,992,307 10
12. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 5. Investments, net (continued) Other reserves classified in shareholders’ equity are comprised of the following: 6. Mar. 31, 2017 (Unaudited) Dec. 31, 2016 (Audited) Mar. 31, 2016 (Unaudited) Unrealized gains on revaluation of available for sale investments. 515,923 508,059 (181,601) Share of other comprehensive income (loss) of associates Other reserves 1,592 517,515 1,592 509,651 (249) (181,850) Loans and advances, net Loans and advances, net are comprised of the following: Mar. 31, 2017 (Unaudited) Dec. 31, 2016 (Audited) Mar. 31, 2016 (Unaudited) Performing loans and advances: Consumer loans 16,613,529 16,566,115 15,445,308 Commercial loans and overdrafts 43,314,067 43,307,810 46,386,098 298,280 300,358 282,133 Total performing loans and advances 60,225,876 60,174,283 62,113,539 Non performing loans and advances 1,086,916 1,069,613 450,707 Total loans and advances 61,312,792 61,243,896 62,564,246 Allowance for credit losses (1,022,719) Loans and advances, net 60,290,073 Others 7. (994,844) 60,249,052 (948,986) 61,615,260 Investments in associates Investments in associates as of March 31, 2017, December 31, 2016 and March 31, 2016 include the Bank’s ownership interest in American Express Saudi Arabia (AMEX) of 50%, in Saudi Orix Leasing Company (ORIX) of 38%, and in Amlak International for Finance and Real Estate Development Co. (AMLAK) of 32%. The movement of investments in associates for the three-month periods ended March 31, 2017 and 2016, and for the year ended December 31, 2016, is summarized as follows: Balance at the beginning of the period / year Share in earnings Dividends received Share in other comprehensive income Balance at the end of the period / year Mar. 31, 2017 (Unaudited) Dec. 31, 2016 (Audited) Mar. 31, 2016 (Unaudited) 1,000,337 939,022 939,022 27,748 150,634 37,006 - (92,917) - 1,028,085 3,598 1,000,337 2,000 978,028 11
13. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 7. Investments in associates – (continued) The Bank’s share in the associates’ assets, liabilities, and equity as of March 31, 2017 and 2016, and the income and expense for the three-month periods then ended, is summarized below: Mar. 31, 2017 Mar. 31, 2016 AMEX ORIX AMLAK AMEX ORIX AMLAK Total assets 435,719 608,294 1,059,590 458,949 761,903 1,028,016 Total Liabilities 221,312 286,468 687,143 268,344 448,176 666,461 Total equity 214,407 321,826 372,447 190,605 313,727 361,555 Total income 47,883 15,957 11,458 52,035 19,944 14,833 Total expenses 27,982 11,543 5,511 26,449 12,552 7,102 The head office of each associate company is located in Riyadh in the Kingdom of Saudi Arabia, with all operations conducted entirely in the Kingdom of Saudi Arabia. One of the associate companies above has a potential additional Zakat liability as of December 31, 2016. If the method of the Zakat assessment by the General Authority for Zakat and Tax is upheld through all levels of the appeal process, the Group has agreed with the associate company that it is unconditionally liable for its share amounting to approximately SAR 63.6 million as of December 31, 2016. 8. Customers’ deposits Customers’ deposits are comprised of the following: Mar. 31, 2017 (Unaudited) Time deposits Savings deposits Total special commission bearing deposits Demand deposits Other deposits Customers’ deposits 34,708,719 4,729,508 39,438,227 23,961,010 1,038,058 64,437,295 Dec. 31, 2016 (Audited) 36,677,689 4,073,660 40,751,349 23,955,017 933,959 65,640,325 Mar. 31, 2016 (Unaudited) 42,951,074 5,075,764 48,026,838 21,783,250 876,481 70,686,569 9. Term loans On May 30, 2011, the Bank entered into a five-year medium term loan facility agreement for an amount of SAR 1.0 billion for general corporate purposes. The facility was due and repaid on May 30, 2016. On June 24, 2012, the Bank entered into another five-year medium term loan facility agreement also for an amount of SAR 1.0 billion for general corporate purposes. The facility has been fully utilized and is repayable on September 5, 2017. On June 19, 2016, the Bank entered into another five year medium term loan facility agreement for an amount of SAR 1.0 billion for general corporate purposes. The facility has been fully utilized and is repayable on June 19, 2021. The term loans bear commission at market based variable rates. The Bank has an option to effect early repayment of the term loans subject to the terms and conditions of the related facility agreements. The facility agreements above include covenants which require maintenance of certain financial ratios and other requirements, with which the Bank is in compliance. The Bank also has not had any defaults of principal or commission on the term loans. 12
14. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 10. Subordinated debt On June 5, 2014 the Bank concluded the issuance of a SAR 2.0 billion subordinated debt issue through a private placement of a Shariah compliant Tier II Sukuk in the Kingdom of Saudi Arabia. The Sukuk carries a half yearly profit equal to six month SIBOR plus 1.45%. The Sukuk has a tenor of ten years with the Bank retaining the right to call the Sukuk at the end of the first five year period, subject to certain regulatory approvals. The Bank has not had any defaults of principal or commission on the subordinated debt. 11. Derivatives The table below sets out the positive and negative fair values of derivative financial instruments together with their notional amounts. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the end of the period / year, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are not indicative of market risk nor of the Group’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives. Mar. 31, 2017 (Unaudited) Dec. 31, 2016 (Audited) Fair value Positive Negative Notional amount Fair value Positive Negative 74,012 48,091 8,212,294 Mar. 31, 2016 (Unaudited) Fair value Positive Negative Notional amount Notional amount Held for trading: Forward foreign exchange contracts Currency options Commission rate swaps 82,847 53,125 9,464,413 24,538 16,014 4,030,296 8,955 8,955 1,487,060 25,256 25,256 1,648,630 66,100 66,100 2,163,366 2,572,550 2,574,366 9,281,234 805,345 813,420 6,788,527 553,073 554,369 5,024,611 813,173 761,869 5,437,790 614,848 533,126 4,521,160 203,417 284,787 2,719,548 397,421 - - 386,421 - - 328,050 - - 3,866,111 3,393,281 24,418,378 1,914,717 1,424,927 22,422,730 1,175,178 921,270 13,937,821 Held as fair value hedges: Commission rate swaps Associated company put option Totals The Bank, as part of its derivative management activities, has entered into a master agreement in accordance with the International Swaps and Derivatives Association (ISDA) directives. Under this agreement, the terms and conditions for derivative products purchased or sold by the Bank 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 favor of the Bank or the counterparty. As of March 31, 2017, the net cash collateral amounts held by the Bank totals SAR 34.3 million (December 31, 2016: SAR 46.7 million). As of March 31, 2016, the net cash collateral held by counterparties totals SAR 54.9 million. The associated company put option included in the table above represents the estimated fair value of an option arising from an existing master agreement entered into by the Bank relating to an associated company. The terms of the agreement give the Bank a put option that is exercizable for the remaining term of the agreement. The put option grants the Bank the right to receive a payment in exchange for its shares one year after the option is exercized, based on pre-determined formulas included in the agreement. 13
15. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 12. Commitments and contingencies The Group’s credit-related commitments and contingencies are as follows: Mar. 31, 2017 (Unaudited) Dec. 31, 2016 (Audited) Mar. 31, 2016 (Unaudited) Letters of credit 2,015,159 1,882,749 2,206,454 Letters of guarantee 8,037,391 8,412,455 8,175,872 Acceptances 461,964 656,091 717,614 Irrevocable commitments to extend credit 306,027 313,205 256,024 10,820,541 11,264,500 11,355,964 Credit-related commitments and contingencies The Bank has received final assessments for additional Zakat, Income tax, and withholding tax totalling approximately SAR 277 million relating to the Bank’s 2003 to 2009 Zakat, Income tax, and withholding tax filings. Also refer to note 7 to these consolidated financial statements for pending Zakat assessments related to an associate company. The Bank has also received partial assessments for additional Zakat totalling approximately SAR 383 million relating to its 2010, 2011 and 2013 Zakat filings. These final and partial assessments include approximately SAR 573 million in Zakat assessments which are primarily due to the disallowance of deductions for certain long-term investments from the Zakat base of the Bank. The Bank, in consultation with its professional Tax and Zakat advisors, has filed appeals for the above final and partial assessments with the General Authority for Zakat and Tax, and while management is confident of a favorable outcome on the basis of the appeals filed, it is awaiting responses and final decisions from the appeal and other available processes. Accordingly, no provisions for these amounts have been made in the Group’s interim condensed consolidated financial statements as of March 31, 2017. Further assessments, if any, for the years 2012, 2014, 2015, and 2016 are yet to be raised by the General Authority for Zakat and Tax. However, if the deductions for certain long-term investments from the Zakat base of the Bank are disallowed for these years, in line with the assessments already made, it would result in a significant additional Zakat exposure. This remains an industry wide issue and disclosure of such amounts might affect the Bank’s position in this matter. The Group is subject to legal proceedings in the ordinary course of business. No provision has been made in cases where professional legal advice indicates that it is not probable that any significant loss will arise. However, provisions are made for legal cases where management foresees the probability of an adverse outcome based on professional advice. 14
16. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 13. Cash and cash equivalents Cash and cash equivalents included in the interim consolidated statement of cash flows are comprised of the following: Mar. 31, 2017 (Unaudited) Dec. 31, 2016 (Audited) Mar. 31, 2016 (Unaudited) Cash and balances with SAMA excluding statutory deposit 4,543,691 2,108,575 951,679 Due from banks and other financial institutions maturing within ninety days from the date of placement 1,564,170 2,274,077 7,817,584 Cash and cash equivalents 6,107,861 4,382,652 8,769,263 14. Operating segments Operating segments are identified based on internal reports about components of the Group that are regularly reviewed by the Bank’s Board of Directors in its function as the Chief Operating Decision Maker to allocate resources to the segments and to assess their performance. Performance is measured based on segment profit as management believes that this indicator is the most relevant in evaluating the results of certain segments relative to other entities that operate within these sectors. Transactions between the operating segments are on normal commercial terms and conditions as approved by management. The revenue from external parties reported to the Board is measured in a manner consistent with that in the interim consolidated income statement. Segment assets and liabilities are comprised of operating assets and liabilities. The Group’s primary business is conducted in the Kingdom of Saudi Arabia. The Group’s reportable segments are as follows: Retail banking. Loans, deposits, and other credit products for individuals and small to medium-sized businesses. Corporate banking. Loans, deposits and other credit products for corporate and institutional customers. Treasury and Investments. Money market, investments and treasury services. Business partners. Investments in associates and related activities. Asset management and brokerage. Dealing, managing, advising and custody of securities services. Other. Support functions, special credit, and other management and control units. Commission is charged to operating segments based on Funds Transfer Price (FTP) rates. The net FTP contribution included in the segment information below includes the segmental net special commission income after FTP asset charges and liability credits (FTP net transfers). All other segment income is from external customers. The segment information provided to the Bank’s Board of Directors for the reportable segments for the Bank’s total assets and liabilities as of March 31, 2017 and 2016, and its total operating income, expenses, and net income for the three-month periods then ended, are as follows: 15
17. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 14. Operating segments (continued) March 31, 2017 (Unaudited) Retail Banking Corporate Banking Treasury and Investments Total assets 28,489,845 35,752,721 30,368,109 1,028,086 Total liabilities 46,904,638 17,447,153 18,743,408 97 56,396 Net special commission income 68,226 326,988 FTP net transfers 154,305 (124,369) Net FTP contribution 222,531 25,262 Fee income (loss) from banking services, net Other operating income (loss) Business Partners 331,149 (28,530) - 3,869 83,832,885 7,538 463,017 202,619 56,396 (24,857) 3,869 2,459 463,017 68,995 19,098 - 23,904 (26,966) 110,293 11,024 40,896 5,500 116,390 (19,357) 93,070 62,084 17,230 43,355 6,229 18,606 Impairment charges, net 22,502 22,498 - Total operating expenses 177,656 83,083 24,835 85,295 199,555 91,555 Share in earnings of associates 766,119 - 282,638 Income (loss) from operating activities Total 97,546,002 (24,857) 15,158 Direct operating expenses Indirect operating expenses Other 1,576,092 - 262,951 Total operating income Asset Management and Brokerage (243) 27,530 679 679 (20,036) (5,079) - (20,683) 51,652 (45,190) 624,962 21,515 - - - - 45,000 21,515 - 307,768 6,015 (45,190) 317,194 - - - 27,748 - Net income for the period 85,295 199,555 91,555 7,712 6,015 (45,190) 344,942 Property, equipment, and intangibles additions 299 - - - 371 8,798 9,468 11,665 312 45 - 974 10,031 23,027 Asset Management and Brokerage Other Total Depreciation and amortization - 138,723 124,045 27,748 March 31, 2016 (Unaudited) Retail Banking Corporate Banking Treasury and Investments Business Partners Total assets 27,836,603 38,160,774 27,942,757 978,028 394,048 1,081,290 96,393,500 Total liabilities 50,799,367 18,632,690 13,173,889 97 42,922 1,875,990 84,524,955 78,080 253,936 98,395 - 4,565 (22,173) 412,803 Net special commission income FTP net transfers 95,570 (161,332) 88,576 (25,343) - 2,529 - 173,650 92,604 186,971 (25,343) 4,565 (19,644) 412,803 Fee income from banking services, net 39,174 43,175 195 - 17,411 6,758 106,713 Other operating income (loss) 21,764 18,510 42,643 14,445 100 (26,234) 71,228 234,588 154,289 229,809 (10,898) 22,076 (39,120) 590,744 93,679 59,445 17,513 41,524 5,494 17,818 21,033 - 546 138,417 119,333 - - 160,000 21,033 546 417,750 Net FTP contribution Total operating income Direct operating expenses Indirect operating expenses 698 - Impairment charges, net 62,002 55,998 42,000 Total operating expenses 215,126 115,035 65,312 19,462 39,254 164,497 - - - 37,006 - 19,462 39,254 164,497 25,410 1,043 4,962 623 - - 11,705 325 45 - Income (loss) from operating activities Share in earnings of associates Net income for the period Property, equipment, and intangibles additions Depreciation and amortization 698 (11,596) 1,043 (39,666) - 172,994 37,006 (39,666) 210,000 33 7,587 13,205 1,239 8,855 22,169 16
18. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 15. Fair values of financial instruments The Group measures certain financial instruments, including derivatives and available for sale investments, at fair value at each interim consolidated statement of financial position date. 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 Group. 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 Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, while maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the interim condensed consolidated financial statements are categorized within a 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 prices in active markets for the same or identical instrument that an entity can access at the measurement date (i.e., without modification or proxy); 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. For assets and liabilities that are recognised in the interim condensed consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each financial reporting period. The Group determines the policies and procedures for both recurring fair value measurement, such as unquoted available for sale financial assets, and for any non-recurring measurement, such as assets held for distribution in discontinued operations. External valuers are involved from time to time in the valuation of certain assets. Involvement of external valuers is decided upon annually. Selection criteria include market knowledge, reputation, independence, and whether professional standards are maintained. At each financial reporting date, the Group analyzes the movements in the values of assets and liabilities which are required to be re-measured or re-assessed as per the Group’s accounting policies. For this analysis, the Group verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents. The Group also compares the changes in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable. 17
19. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 15. Fair values of financial instruments (continued) For the purpose of fair value disclosures, the Group has determined the classes of assets and liabilities on the basis of the nature, characteristics, and the related risks of the asset or liability, and the level of the fair value hierarchy as explained above. The following table summarizes the fair values of financial assets and financial liabilities by level of fair value hierarchy for financial instruments carried at fair value. It does not include fair value information for financial assets and liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. March 31, 2017 (Unaudited) Level 1 Level 2 Level 3 Total - 3,468,690 397,421 3,866,111 Available for sale investments 13,143,905 7,640,746 523,929 21,308,580 Total 13,143,905 11,109,436 921,350 25,174,691 Derivative financial instruments - 3,393,281 3,393,281 Total - 3,393,281 3,393,281 Level 1 Level 2 Level 3 Total - 1,528,296 386,421 1,914,717 Available for sale investments 13,398,792 7,520,053 529,049 21,447,894 Total 13,398,792 9,048,349 915,470 23,362,611 Derivative financial instruments - 1,424,927 - 1,424,927 Total - 1,424,927 - 1,424,927 Level 1 Level 2 Level 3 Total - 847,128 328,050 1,175,178 Available for sale financial investments 12,137,364 6,319,278 535,665 18,992,307 Total 12,137,364 7,166,406 863,715 20,167,485 Derivative financial instruments - 921,270 - 921,270 Total - 921,270 - 921,270 Financial assets measured at fair value: Derivative financial instruments Financial liabilities carried at fair value: December 31, 2016 (Audited) Financial assets measured at fair value: Derivative financial instruments Financial liabilities carried at fair value: March 31, 2016 (Unaudited) Financial assets measured at fair value: Derivative financial instruments Financial liabilities carried at fair value: 18
20. THE SAUDI INVESTMENT BANK (A Saudi joint stock company) NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Amounts in SAR’000 For the three-month periods ended March 31, 2017 and 2016 15. Fair values of financial instruments (continued) The value obtained from any relevant valuation model may differ with a transaction price of a financial instrument. The difference between the transaction price and the value derived by the model is commonly referred to as ‘day one profit and loss’. It is either amortized over the life of the transaction, deferred until the instrument’s fair value can be determined using market observable data, or realized through disposal. Subsequent changes in fair value are recognized immediately in the consolidated income statement without reversal of deferred day one profits and losses. The total amount of the changes in fair value recognized in the March 31, 2017 interim consolidated income statement, which was estimated using valuation models, is a gain of SAR 11.0 million (2016: SAR 37.6 million). Level 2 available for sale financial investments include debt securities which are comprised of Saudi corporate and bank securities, and Saudi Arabian Government securities. These securities are generally unquoted. In the absence of a quoted price in an active market, these securities are valued using observable inputs such as yield information for similar instruments or last executed transaction prices in securities of the same issuer or based on indicative market quotes. Adjustments are also considered as part of the valuations when necessary to account for the different features of the instruments including difference in tenors. Because the significant inputs for these investments are observable, the Bank categorizes these investments within Level 2. Level 2 derivative financial instruments include various derivatives contracts including forward foreign exchange contracts, foreign exchange options, currency swaps, and commission rate swaps. These derivatives are valued using widely recognized valuation models. The most frequently applied valuation techniques include the use of forward pricing standard models using present value calculations and wellrecognized Black - Scholes option pricing models. These models incorporate various market observable inputs including foreign exchange rates, forward rates, and yield curves, and are therefore included within Level 2. Level 3 available for sale financial investments include Gulf Cooperation Council Government securities, and also investments in hedge funds, private equity funds, and asset backed securities. These securities are generally not quoted in an active market, and therefore are valued using indicative market quotes from an issuer / counter-party or valued at cost in the absence of any such alternative reliable indicative estimate. Level 3 derivative financial instruments include the embedded derivative put option arising from an existing master agreement entered into by the Bank relating to its investment in an associated company (see note 11). For purposes of determining the fair value of the put option, the Bank uses a well-recognized and frequently used Binomial Option Pricing Model. This model requires certain inputs which are not observable in the current market place. Certain inputs are specifically stated within the master agreement with the associated company. Other inputs are based on the historical results of the associated company. These other inputs may require management’s judgement including estimations about the future results of the associated company, the detrimental effects on the operating results of the associated company which may arise from an exercise of the option, and an estimate of the fair value of the underlying investment. Several of the inputs are also interdependent. Should the net effect of significant estimations of inputs vary by plus or minus ten percent, the fair value could increase or decrease by approximately SAR 107.7 million as of March 31, 2017 (March 31, 2016: SAR 102.9 million and December 31, 2016: SAR 107.7 million) due to estimating operating results of the associated company, could increase or decrease by approximately SAR 54.7 million as of March 31, 2017 (March 31, 2016: SAR 54.8 million and December 31, 2016: SAR 57.4 million) due to estimating the detrimental effects on the operating results of the associated company which may arise from an exercize of the option, and could increase or decrease by approximately SAR 27.5 million as of March 31, 2017 (March 31, 2016: SAR 27.5 million and December 31, 2016: SAR 27.5 million) due to estimating the fair value of the underlying investment. 19