ABC Bahrain AR09 front_vs2 3.indd

Transcription

FOCUSING
ON BUILDING
PARTNERSHIPS
ANNUAL REPORT
2009
Arab Banking Corporation, popularly known as ABC, is an international Universal Bank headquartered in Manama,
Kingdom of Bahrain. Our network is spread over 21 countries in the MENA and GCC, Europe, the Americas and
Asia. ABC, founded in 1980, is listed on the Bahrain stock exchange and our major shareholders are the Kuwait
Investment Authority, Central Bank of Libya and Abu Dhabi Investment Authority.
ABC is a leading regional bank in Trade Finance, Treasury, Project & Structured Finance, Corporate Banking &
Financial Institutions, Syndications as well as Islamic Banking. We also provide Retail Banking services in the
MENA region. ABC’s strategy of diversified growth led to the development of its widespread network of branches,
representative offices and subsidiaries in Arab world countries and international financial centres, including
London, Paris, Milan, Frankfurt, Madrid, Stockholm, New York, Moscow, Grand Cayman, Sao Paulo, Singapore,
Istanbul, Tehran, Bahrain, Abu Dhabi, Baghdad, Amman, Beirut, Cairo, Tripoli, Tunis and Algiers.
CONTENTS
Our Vision
Board of Directors
Organisation Chart
Head Office Management
Directors’ Report
Global Network
Financial Highlights
Review of Operations
Corporate Governance
Group Financial Review
Independent Auditors’ Report
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Cash Flows
Consolidated Statement of
changes in Equity
Notes to the Consolidated
Financial Statements
Head Office Directory
International Directory
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2
4
6
8
11
12
14
30
60
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112
113
Focusing on building partnerships
At ABC Group, we’re building closer relationships with customers by listening, creating and delivering tailor-made
products and services that suit every customer, partner and investor. We believe this approach will build long
lasting and mutually rewarding partnerships.
ABC Group Annual Report 2009
ARAB BANKING CORPORATION
Annual Report 2009
Steps taken to improve efficiency
have borne fruit with the Group
springing back into profit in 2009.
VISION
To become a leading Universal Bank in MENA that delivers
superior shareholder returns, provides distinctive service
and products to its customers and is able to attract,
develop and retain top talent.
1
BOARD OF DIRECTORS
Mohammed Hussain Layas
Hilal Mishari Al-Mutairi
Hareb Masood Al-Darmaki
Dr. Anwar Ali Al-Mudhaf
Eissa Mohammed Al Suwaidi
Hassan Ali Juma
Mr. Mohammed Hussain Layas EC RC ‡
Chairman - Libyan citizen
B.A. Accounting and Business Management, University of Benghazi, Libya;
Diploma of the Institute of Economic Development, Washington, U.S.A.
Executive Chairman of Libyan Investment Authority; former Executive
Chairman and General Manager of Libyan Foreign Bank; former Deputy
Chairman of British Arab Commercial Bank, London, U.K.; Banque
Intercontinentale Arabe, Paris, France and Arab International Bank, Cairo,
Egypt. Mr. Layas joined the Board of Arab Banking Corporation (B.S.C.) in
2001 with over 35 years’ experience in international banking.
Mr. Hilal Mishari Al-Mutairi EC‡
Deputy Chairman - Kuwaiti citizen
B.Sc. in Economics, Alexandria University, Egypt.
First Vice Chairman, Kuwait Chamber of Commerce & Industry. Director
of Kuwait Investment Authority. Past offices include Minister of Trade
and Industry of Kuwait; General Manager of Kuwait Investment
Company and Chairman of Kuwait Clearing Company. Mr. Al-Mutairi
is also a Director of ABC International Bank plc, U.K. He has been a
Director of Arab Banking Corporation (B.S.C.) since 2001 and has more
than 35 years of commercial and financial industry experience.
Mr. Hareb Masood Al-Darmaki EC RC ‡
Deputy Chairman - U.A.E. citizen
B.Sc. in Economics and Politics, Bristol University, England and Master
of Arts in International Studies, School of Advanced International
Studies of John Hopkins University, U.S.A.
Executive Director, Private Equities Department at Abu Dhabi Investment
Authority. Mr. Al-Darmaki is also the incumbent Chairman of Gulf Capital
and director of Qatar Telecom (Qtel) (amongst other companies). He
joined the Board of Arab Banking Corporation (B.S.C.) in March 2007
with over 30 years’ experience in international finance.
Mr. Abdallah Saud Al Humaidhi EC GC NC ‡
Director - Kuwaiti citizen
M.S. American University of Beirut.
Chairman and Managing Director, Commercial Facilities Company,
Kuwait and Member of the Board and the Executive Committee of
Kuwait Investment Authority. Mr. Al Humaidhi is also a Member of
the Board of Kuwait Chamber of Commerce & Industry and Director
of ABCIB. He has been a Director of Arab Banking Corporation (B.S.C.)
since 2001 and has over 20 years’ experience in the banking and
investment sectors.
2
Abdallah Saud Al Humaidhi
Dr. Anwar Ali Al-Mudhaf AC RC ‡
Director - Kuwaiti citizen
M.B.A. and Ph.D. in Finance, Peter F. Drucker Graduate School of
Management, Claremont Graduate University, California, U.S.A.
Chairman & CEO of Al-Razzi Holding Company; a Director of the
Board of Governors of the Oxford Institute for Energy Studies and
Chairman of Banco ABC Brasil S.A. He is also a lecturer in corporate
finance; investment management and financial institutions at Kuwait
University. Dr. Al-Mudhaf has formerly served as Director of the
Board of the Public Institution for Social Security (PIFSS), advisor to
the Finance and Economic Affairs Committee at Kuwait’s Parliament,
Vice Chairman in AlMal Investment Company, former Chairman of
International Bank of Asia in Hong Kong, and a Director of Al-Ahli
Bank of Kuwait. Dr. Anwar is a member of the economic task force
set up to deal with the implications of the global financial crises in
Kuwait. He is also a member of the Board of Directors of the Public
Authority for Applied Education. Dr. Al-Mudhaf joined Arab Banking
Corporation (B.S.C.)’s Board in December 1999 and has over 15 years’
experience in banking and finance.
Mr. Eissa Mohammed Al Suwaidi AC GC ‡
Director - U.A.E. citizen
B.Sc. in Economics, Northeastern University of Boston, U.S.A.
Executive Director of Abu Dhabi Investment Council. He is also a
Director of Abu Dhabi National Oil Company for Distribution (ADNOC
Distribution), International Petroleum Investment Company, Abu
Dhabi Fund for Development, Emirates Investment Authority and
Emirates Integrated Telecommunications Company “du”. He is also
the Chairman of Abu Dhabi Commercial Bank and also serves as the
Vice Chairman of Arab Banking Corporation – Egypt (S.A.E.). He has
been a Director of Arab Banking Corporation (B.S.C.) since 1995, with
over 23 years in investment banking.
Mr. Hassan Ali Juma AC RC æ
Director - Bahraini citizen
Fellow of the Chartered Institute of Management Accountants
(FCMA), U.K.
President and Chief Executive of Arab Banking Corporation (B.S.C.);
Chairman of Arab Banking Corporation - Egypt (S.A.E.); Arab Banking
Corporation Jordan; Arab Financial Services Co. (E.C.); ABC Islamic Bank
and Deputy Chairman of ABC International Bank plc, U.K. Former
Managing Director of National Bank of Bahrain; former Chairman of
Bahrain Telecommunications Company. Mr. Juma has been a Director
of Arab Banking Corporation (B.S.C.) since 1994. He has more than 34
years’ experience as a commercial banker.
Dr. Mohammed A. Abusneina
Dr. Saleh Helwan Al Humaidan
Yousef Abdelmaula
Saeed Al-Hajeri
Dr. Khaled S. Kawan
Dr. Saleh Helwan Al Humaidan NC §
Director - Saudi citizen
Ph.D. in Agricultural Economics, Oklahoma State University, U.S.A.
General Manager, Arab Investment Company, Riyadh; Member of
the Boards of Saudi International Petrochemical Company, Jubail and
Saudi Investment Fund, London, U.K.; Chairman, Financial Investment
Bank, Sudan. Dr. Humaidan is also the Deputy Chairman of Arab
Banking Corporation (Jordan). He has over 26 years of experience
in the economic and investment fields gained through his work at
the Saudi Arabian Ministry of Planning, the Saudi Development
Fund, and the Arab Investment Company. Dr. Humaidan joined Arab
Banking Corporation (B.S.C.) as a Director in 2001.
Mr. Yousef Abdelmaula EC GC §
Director - Libyan citizen
M.B.A. Hartford University, U.S.A.
Mr. Abdelmaula is the Vice Chairman of Corinthia Group of Companies,
former Executive Director of the Libyan Foreign Investment Board. He
serves also as Director on the boards of Libyan Foreign Bank and Arab
Banking Corporation (Jordan). Mr. Abdelmaula has more than 20 years of
banking experience.
Mr. Mohamed Abdel Salam Shokri EC AC ‡
Masters Degree in Accounting Science, Oklahoma City University, U.S.A.
Deputy Governor, Central Bank of Libya. Chairman of Arab Banking
Corporation (Algeria). Past offices include Deputy Chief Executive,
General Manager of British Arab Commercial Bank, London, UK.;
Chairman and General Manager of Gumhouria Bank, Libya; Deputy
General Manager and Director of Libyan Arab Tunisian Bank;
Chairman of the Libyan Banks Association and Director of a number
of other banks and financial institutions across the region. Mr. Shokri
has been a Director of Arab Banking Corporation (B.S.C.) since April,
2006 and has over 30 years’ experience as a banker.
Mohamed Abdel
Salam Shokri
Dr. Mohammed A. Abusneina NC GC ‡
Ph.D in Economics, Indiana University, U.S.A.
Director of the Banking Supervision and Exchange Control
Department of the Central Bank of Libya. Director of Arab Banking
Corporation - Egypt (S.A.E.). Previously, Dr. Abusneina was the
Chairman and member of the Board of Directors of the National
Banking Corporation (Libya) and served as Dean of the Faculty
of Economics & Commerce of Garyounis University. Dr. Abusneina
is also a member of the Board of Directors of Arab Yemen
Libya Holding Company. He joined the Board of Arab Banking
Corporation (B.S.C.) in February 2007 and has more than 20 years’
experience in international economics and banking.
Mr. Saeed Al-Hajeri EC NC ‡
Director - U.A.E. citizen
B.A. from Lewis and Clark College, USA, and Chartered Financial
Analyst (CFA).
Mr. Saeed Al Hajeri is a Board Member of ADIA, and heads its
Emerging Markets Department. Mr. Al Hajeri is also a Board Member
of Abu Dhabi Tourism Development and Investment Company (TDIC);
Zayed University; the Higher Corporation for Specialised Economic
Zones (HCSEZ) and Dubai Cable Company (DUCAB). Mr. Al Hajeri is
a member of the CFA Institute Board of Governors and MSCI Barra
Executive Advisory Board. Mr. Al Hajeri joined the Board of Arab
Banking Corporation (B.S.C.) in March 2007, with over 15 years
experience in international finance.
Dr. Khaled S. Kawan
Secretary to the Board & Deputy Chief Executive – Libyan citizen
Ph.D. (Doctorat D'Etat) in Banking Laws, University of Paris (Sorbonne),
France.
Dr. Kawan joined ABC in June 1991, having previously spent some
time with a prime French Law firm in Paris. He had been Group
Legal Counsel until January 2010, when he was appointed as Deputy
Chief Executive. Dr. Kawan also represents ABC as a Director on the
boards of Arab Banking Corporation – Egypt (S.A.E.) and Arab Banking
Corporation (Jordan).
Member of the Executive Committee
Member of the Audit Committee
GC
Member of the Corporate Governance Committee
RC
Member of the Risk Committee
NC
Member of the Nomination & Compensation Committee
EC
AC
Non-Executive
Executive
§
Independent
‡
æ
3
ORGANISATION CHART
Board Secretary: Dr. Khaled Kawan
Board of Directors
Audit Committee
President & Chief Executive
Hassan A. Juma
Group Audit:
Jehangir Jawanmardi
Deputy Chief Executive
Dr. Khaled Kawan
Group Chief Operating Officer
Sael Al Waary
Global Corporate Communications
Group Chief Financial Officer
Roy Gardner
Global Information Technology
Group Planning & Financial Control
Group Policies & Procedures
Office of Strategy Management
Group Legal
Treasury Balance Sheet Management
Group Compliance
Operations
Accounts & Expenses Management
Premises & Engineering
International Wholesale Banking
Bahrain-based Global Products
New York Branch
Grand Cayman Branch
Baghdad Branch
Tunis Branch (OBU)
Group Treasury
Amr Gadallah
Bahrain Treasury
Other Treasury Units in the Group
Chief Credit & Risk Officer
Vijay Srivastava (Acting Chief Credit &
Risk Officer)
Credit Department
Remedial Loans & Recovery
Risk Management
ABC International Bank plc
Branches:
London, Frankfurt, Milan, Paris
Group Human Resources
Marketing Offices:
Istanbul, Madrid, Rossendale (U.K.), Stockholm, Moscow
ABC Islamic Bank (E.C.), Bahrain
Representative Offices:
Abu Dhabi, Singapore, Tehran, Tripoli (Libya),
Beirut (Lebanon)
MENA Subsidiaries
Arab Banking Corporation - Algeria
Arab Banking Corporation - Egypt (S.A.E.)
Arab Banking Corporation - Tunisie, S.A.
Arab Banking Corporation (Jordan)
Group Retail
R. Sethu Venkateswaran
4
Banco ABC Brasil, S.A
Arab Financial Services BSC(c)
The Group focused on creating a robust
balance sheet through a deleveraging
and de-risking process.
5
HEAD OFFICE MANAGEMENT
Mr. Hassan Ali Juma | President & Chief Executive
Fellow of the Chartered Institute of Management Accountants (FCIMA), U.K.
Mr. Juma assumed the position of President & Chief Executive of ABC on 1 April 2008, having previously served as
Chief Executive Officer of National Bank of Bahrain since 1984 and Managing Director of NBB since 1997. Mr. Juma has
been a director of Arab Banking Corporation (B.S.C.) since 1994, and is deputy chairman of ABC International Bank plc,
U.K., chairman of Arab Banking Corporation – Egypt (S.A.E.), chairman of Arab Banking Corporation – (Jordan), chairman
of Arab Financial Services BSC (c), and a director of National Bank of Bahrain. He was formerly chairman of Bahrain
Telecommunications Company and Umniah Mobile Company, Jordan. Mr. Juma has more than 35 years' experience as a
commercial banker.
Dr. Khaled S. Kawan | Deputy Chief Executive
Ph.D. (Doctorat D'Etat) in Banking Laws, University of Paris (Sorbonne), France.
Dr. Kawan joined ABC in June 1991, having previously spent some time with a prime French Law firm in Paris. He had been
Group Legal Counsel until January 2010, when he was appointed Deputy Chief Executive. Dr. Kawan also represents ABC as
a Director on the boards of Arab Banking Corporation – Egypt (S.A.E.) and Arab Banking Corporation (Jordan).
Mr. Sael Al Waary | Group Chief Operating Officer
B.Sc. (Hons) degree in Computer Sciences from the University of Reading, United Kingdom.
Mr. Al Waary was appointed to the role of Group Chief Operating Officer for ABC Group in 2006. Prior to that, he was Senior
Vice President and Head of Group Support. In 1997, Mr. Al Waary relocated from London to the Bahrain Head Office to
direct ABC’s Global Information Technology functions. Mr. Al Waary originally joined the ABC Group in 1981 and, from 1986,
was the General Manager of ABC (IT) Services Ltd., the wholly-owned subsidiary and technology arm of the ABC Group.
He has over 29 years of experience in banking. Mr. Al Waary is a Director of Banco ABC Brasil B.S.C (c) S.A., Arab Banking
Corporation Egypt (S.A.E.), Arab Banking Corporation (Jordan) and Bahrain-based Arab Financial Services (AFS).
Mr. Roy Gardner | Group Chief Financial Officer
Member of the Institute of Chartered Accountants of Scotland.
Mr. Roy Gardner joined ABC in May 2009. Previously he held a number of senior posts with Citigroup including Chief
Financial Officer for Global Treasury and Trade Solutions, Chief Financial Officer for Russia and the CIS, Chief Financial
Officer for Emerging Markets Corporate Banking and Head of Strategic Planning for Corporate and Investment Banking
activities in CEEMEA. He has worked for 20 years in the Middle East as a finance professional and a corporate finance
banker, including a number of years with Saudi American Bank where latterly he held the post of Chief Financial Strategist.
Mr. Amr Gadallah | Group Treasurer
MA in Economics, American University, Cairo, Egypt; MA in International Economics, George Washington University,
Washington D.C., U.S.A.
Before joining ABC in 1990, Mr. Gadallah spent 5 years working for Arab International Bank, Cairo, Egypt and Dean
Witter, Chicago U.S.A. Since 1999 he served as ABC’s Assistant Group Treasurer, responsible for Money Markets,
Derivatives, Structured Products and Treasury Support. Mr. Gadallah was appointed Group Treasurer in January 2007. He
is a director of ABC Islamic Bank (E.C.), Bahrain and ABC Investments, Jordan.
6
Mr. Jehangir Jawanmardi | Group Chief Auditor
B.A. in Economics and Accounting, University College London, Fellow of the Institute of Chartered Accountants in
England and Wales, U.K.
Mr. Jawanmardi trained as a chartered accountant with KPMG in London. He joined Hill Samuel Group in 1976 and was
appointed a Director of Hill Samuel Bank in 1986, where he spent over 20 years developing his expertise in various
aspects of internal audit in the investment banking and asset management arena. He transferred to Lloyds TSB Group in
the UK in January 1997 where he was Head of Audit, Wholesale and International Banking, prior to joining ABC Group in
May 2004 as Group Chief Auditor.
Mr. Souheil Badro | Head of Global Financial Institutions
MBA in Finance, American University, Washington, D.C., U.S.A.; MSc in Economics, St. Joseph University, Lebanon
Mr. Badro who joined ABC as Arab World Division Head in 2006 was appointed Head of Universal Banking in October
2008. He is a director of Arab Banking Corporation – Algeria, Arab Banking Corporation – Tunisie and ABC Islamic Bank
(E.C.). Mr. Badro began his banking career at Credit Libanais in 1975, before moving to Manufacturers Hanover Trust,
where he held various senior positions in New York., Paris and Bahrain. In 1992, he moved to Chemical Bank, Bahrain
and in 1996 to Chase Manhattan Bank as Vice President and Head of Financial Institutions. In 1998, Mr. Badro joined
Société Générale, where he was seconded to the Dubai Regional Representative Office Managing Director, Corporate
and Investment Banking - MENA.
Mr. Vijay Srivastava | Acting Chief Credit & Risk Officer
B. Com, Bombay University; Chartered Accountant, Institute of Chartered Accountants of India.
Mr. Srivastava who joined Arab Banking Corporation in September 2009, started his banking career with HSBC, India, in
1984 working in Operations and Corporate Banking. He joined ABN AMRO Bank in 1992 and for six years was based in
Dubai as a senior relationship banker, heading Corporate Banking for the last two years. In 1998 Mr. Srivastava moved
to the Risk Management Division at ABN AMRO’s headquarters in Amsterdam where he worked with credit teams
covering Asia, the Americas and subsequently – on an industry basis – Integrated Energy. In 2004, as Chief Credit Officer,
he helped set up the dedicated risk function for the Global Transaction Services Division(GTS). Mr. Srivastava has also
taught at the ABN AMRO Academy in Amsterdam.
7
DIRECTORS' REPORT
Mr. Mohammed Layas, Chairman
(All figures stated in US dollars)
In 2009 ABC Group successfully weathered continuing adverse market conditions to return
to profitability, with a consolidated net profit of $122 million compared with a loss of
$880 million the previous year.
ABC’s rights issue of June 2008, which increased its issued share capital by $1 billion, laid the foundation for the Group’s
good performance in 2009. These additional resources enabled it to make full provision against the Group’s weaker assets,
which had been impacted by the deteriorating financial markets. The performance of ABC Group, in spite of the extremely
unfavourable operating environment, also demonstrated well the inherent stability and resilience of its core earnings
streams, both from its international and regional trade finance, project finance, corporate banking, Islamic finance and
Treasury activities, in addition to its growing retail banking network across North Africa and the Levant.
The Group’s total operating income rose by nearly 6% to $641 million. This was achieved largely on the back of a 42%
increase in its non-interest operating income, which expanded to $250 million, as net interest income at $391 million was
9% lower than in 2008, reflecting the reduced size of the lending and securities portfolios combined with the impact of
generally lower international interest rates. Net impairment provisions were $115 million, compared with the $1,055 million
in aggregate in 2008, which had been necessitated chiefly by the deterioration in the securities portfolios that year. The
Group’s operating expenses were meanwhile successfully managed down to $326 million, a 7% reduction on 2008, despite
absorbing additional costs related to business expansion and restructuring.
ABC is working to achieve its new vision - to become a leading MENA-based Universal Bank – primarily through the increase
of its retail-based revenues. The transformation plan formulated by the Group for it to achieve these ends, however,
comprises a number of strategic initiatives, of which the foremost is the substantial expansion of the retail banking
businesses. The International Wholesale Banking division is to refocus on developing relationship banking and cross-selling
capabilities in order to maximise the client profitability. Efficiency initiatives are being implemented, aimed at reducing the
Group’s cost: income ratio in steady steps. The Group’s risk appetite is being better aligned to its operational plans. A new
Group HR function is being set up and will shortly begin the process of fully integrating human resources into the plan.
In pursuit of these initiatives, in 2009 the Group brought its senior people together in a series of workshops and strategic
planning meetings to consider ways in which implementation of its transformation plan could be achieved as quickly as
possible. The consensus that emerged as a result of this intensive series of meetings led in turn to the creation of a united,
collaborative approach amongst management to the task at hand, the results of which were immediately apparent. The
retail banking units in North Africa and the Levant have expanded their delivery platforms by almost a quarter in terms
8
To fund its expansion and acquisition strategy,
ABC increased its paid-up capital from
$2.0 billion to $3.11 billion.
of total number of branches, whilst achieving significant advances in total revenues. Wholesale Banking is now more
streamlined, while the steps taken to improve efficiency are already bearing fruit, with the Group’s cost: income ratio at
the end of 2009 down to 51%. Credit risk and business management are meanwhile working together towards achieving
greater and speedier responsiveness to clients’ needs, whilst focusing account managers on the Group’s risk strategy.
During the year the Group focused on creating a robust balance sheet through a deleveraging and de-risking process
combined with a strict credit stance - particularly for longer term credits. This change resulted in a reduction in total assets
of about 9%, reflected primarily in an 8% fall in the loans and advances portfolio as run offs were only partially replaced,
together with a 10% reduction in the non-trading securities portfolio. The Group is well capitalised and its liquidity position
remains comfortable.
Given the size of its existing operations in MENA, ABC has been researching opportunities in the region for potential
expansion, both through new start ups and by acquisition - provided that a suitable banking operation complementing
the Group’s current profile, and at attractive valuation, is identified. To fund its expansion and acquisition strategy ABC’s
shareholders approved, on 28 January 2010, an increase in its paid-up capital from $2.0 billion to $3.11 billion by way of a
priority rights share offering.
As is usual at this time, we would like to express our thanks to the Group’s management and staff worldwide for all their
hard work, loyalty and dedication over the past year. We would also like to thank the regulatory authorities in all the
jurisdictions in which our various units operate, and in particular the Central Bank of Bahrain, for their support and guidance.
Finally, 2010 marks the end of your Board of Directors’ customary three-year tenure of office as representatives of the
shareholders of ABC. A new Board will be appointed at the next Annual General Meeting. I should therefore like to take this
opportunity, on behalf of the Board, to express our gratitude to our shareholders for allowing us to serve the ABC Group,
which has been both an immense privilege and a pleasure.
Mohammed Layas
Chairman
9
DIRECTORS' REPORT
Note: In compliance with the Central Bank of Bahrain Rulebook Volume 1 Chapter PD1.4.3 set out below are the
interests of Directors and Senior Managers in the shares of Arab Banking Corporation (B.S.C.) and the distribution of
shareholding for the year ended 31 December 2009.
Directors’ Shares
31-Dec-09
1-Jan-09
192,330
192,330
Senior Managers’ Shares
Total
-
-
192,330
192,330
Directors’ remuneration allowances and expenses for attendance at Board meetings for 2009 amounted to US$2,148,000
(2008: US$2,287,000).
2009
% of shares held
No. of shares
Less than 1%
100,012,010
1,338
1% up to less than 5%
164,561,080
4
2008
No. of
% of total
shareholders outstanding
shares
No. of shares
No. of
shareholders
% of total
outstanding
shares
5.0
100,012,010
1,346
5.0
8.2
164,561,080
4
8.2
-
-
-
-
-
-
-
-
-
-
-
-
1,735,426,910
3
86.8
1,735,426,910
3
86.8
-
-
-
-
-
-
2,000,000,000
1,345
100.0
2,000,000,000
1,353
100.0
50% and above
Total
10 ABC Group Annual Report 2009
GLOBAL NETWORK
31 December 2009
ABC is expanding in the MENA.
THE ABC GROUP
US$ millions
2009 Highlights
ABC Parent (ABC BSC)
ABC Group
17,050
25,965
7,818
9,552
Total assets
Total non-trading securities
Total loans and advances
Total deposits
Shareholders' funds
4,230
10,949
12,433
20,246
2,191
2,191
ARAB WORLD DIVISION
US$ millions
ABC Algeria
ABC Islamic
Bank
588
-
ABC Jordan
AFS
ABC Egypt
ABC Tunisie
1,318
862
73
921
160
369
213
8
11
-
195
894
401
-
269
19
Total deposits
367
1,133
681
2
725
133
Shareholders’ funds
155
177
136
60
150
19
Number of branches
12
-
19
-
23
4
2009 Highlights
Total assets
OTHER SUBSIDIARIES
US$ millions
2009 Highlights
Total assets
Banco ABC Brasil
4,025
4,214
633
459
1,759
2,928
Total deposits
2,863
3,360
Shareholders' funds
464
700
Number of branches
4
6
11
FINANCIAL HIGHLIGHTS
2009
2008
2007
2006
2005
Net interest income
391
431
298
249
193
Other operating income
250
176
393
235
159
Total operating income
641
607
691
484
352
416
222
141
-
14
Earnings (US$ million)
Profit before provisions, taxation and non-controlling interests
Impairment provisions - net
315
(115)
255
(1,055)
(230)
Profit before taxation and non-controlling interests
200
(800)
186
222
155
Net profit (loss) for the year from continuing operations
122
(880)
125
202
129
Financial Position (US$ million)
Total assets
25,965
28,486
32,744
22,402
17,588
Loans and advances
10,949
11,931
12,329
8,622
6,833
3,949
4,017
5,268
4,160
3,264
135
126
747
757
593
Non-trading securities
9,552
10,623
12,890
7,828
6,003
Shareholders’ funds
2,191
1,793
1,867
2,068
1,926
Placements with banks and other financial institutions
Trading securities
Ratios (%)
Profitability
Cost: Income ratio (costs as % of gross operating income)
51
40
54
60
Net profit (loss) as % of average shareholders' funds
5.9
(51.6)
6.2
10.2
6.8
0.46
(2.88)
Net profit (loss) as % of average assets
58
0.45
0.94
0.81
-
-
-
2.0
1.8
19,863
19,537
20,893
14,107
10,476
3,347
3,159
3,006
2,225
2,089
Risk asset ratio - Tier 1
13.4
12.8
10.9
13.5
17.6
Risk asset ratio – Total
16.9
16.2
14.4
15.8
19.9
Average shareholders’ funds as % of average total assets
7.8
5.6
7.2
8.7
11.9
Loans and advances as a multiple of shareholders’ funds (times)
5.0
6.7
6.6
4.2
3.5
Total debt as a multiple of shareholders’ funds (times)
10.9
14.7
16.4
9.8
8.1
Term financing as multiple of shareholders’ funds (times)
1.07
1.39
1.38
0.93
0.82
Dividend cover (times)
Capital
Risk weighted assets (US$ million)
Capital base (US$ million)
2009
2008
2007
2006
2005
Loans and advances as % of total assets
42.2
41.9
37.7
38.5
38.9
Securities as % of total assets
37.3
37.7
41.6
38.3
37.5
3.5
1.9
1.3
2.0
3.6
131.1
181.6
196.9
208.2
154.6
4.6
3.5
2.5
4.2
5.6
-
Assets
Non-accrual loans as % of gross loans
Loan loss provisions as % of non-accrual loans
Loan loss provisions as % of gross loans
6.0
10.6
5.5
-
Securities provisions as a % of impaired securities
Impaired securities as a % of gross non-trading securities
91.3
93.9
41.5
-
-
Securities provisions as a % of gross non-trading securities
5.50
9.98
2.3
-
-
55.0
54.7
58.8
58.1
57.8
1.5
1.9
2.2
2.0
2.0
$0.13
Liquidity
Liquid assets ratio
Deposits to loans cover (times)
Share Information
Basic Earnings per share
- Profit for the year
Dividends per share
- Cash
$0.13
$0.20
-
-
-
$0.10
$0.07
$1.10
$0.90
$1.87
$2.07
$1.93
Authorised
2,500
2,500
1,500
1,500
1,500
Issued, Subscribed and fully paid-up
2,000
2,000
1,000
1,000
1,000
Net asset value per share
$0.06
($0.57)
Capitalisation (US$ million)
*At an extraordinary general meeting of the shareholders of the Bank held on 28 March 2006, it was resolved to change
the nominal value of the shares of the Bank from US$10 per share to US$1 per share. The number of shares has been
amended to reflect this change for all the years.
Principal shareholders
Kuwait Investment Authority (Kuwait)
Central Bank of Libya (Libya)
Abu Dhabi Investment Authority (UAE)
Individual and Institutional Investors
%
29.687
29.525
27.557
13.231
Registered address
Arab Banking Corporation (B.S.C.)
ABC Tower, Diplomatic Area
P.O. Box 5698, Manama
Kingdom of Bahrain
Publicly quoted company listed
on Bahrain Stock Exchange.
(Commercial Registration
Number 10299)
13
REVIEW OF OPERATIONS
Mr. Hassan Ali Juma, President & Chief Executive
(All figures stated in US dollars unless otherwise indicated)
The ABC Group is focusing on expanding universal banking operations via its units
in the MENA region. These units offer retail, corporate and treasury services, while
wholesale services (corporate and structured finance, trade finance, Islamic banking
services, syndications and treasury) fall under International Wholesale Banking. The
long term objective is to expand through a combination of organic expansion and
acquisition in the region.
Considering the general downturn in domestic and regional economies and the drop in international oil prices, the Group’s
retail business in North Africa and the Levant performed well and even exceeded expectations. Also, the continued
exercise of prudent credit policies led to loan loss provisions at these subsidiaries being below market averages.
GEOGRAPHIES: MENA SUBSIDIARIES
In spite of the fall in international hydrocarbon prices the Algerian economy grew by an estimated 2.1%, compared
with 3.8% in 2008. Although the hydrocarbons sector remains by far the economy’s main economic driver and principal
contributor to the traditional trade and current account surpluses, the government has been making strenuous efforts in
recent years to stimulate growth in other sectors. In 2009 it adopted a number of measures to discourage imports and
promote domestic production, amongst which was a new requirement for all imports to be paid for by means of letter
of credit, sweeping aside the more traditional methods such as documentary collections and open account payments.
New legislation also brought the development of the consumer credit market to a standstill by banning all forms of
consumer finance other than housing loans. Another reform removed the longstanding requirement for state-owned
companies to bank only with state-owned financial institutions, permitting domestic and foreign private sector banks for
the first time to compete for business from the public sector. Finally, the government introduced tough new minimum
capital requirements for banks. These measures together had a marked impact on the Algerian banking industry.
The measure most affecting ABC Algeria was the requirement for a substantial increase in its equity capital. As ABC
opted to contribute more than its proportionate share of the increase, its ownership in ABC Algeria increased from
70% to 88%, evidencing its strong commitment to the Algerian market. The increase in paid up capital, bringing it
up to $142 million, combined with the adoption of an aggressive new branch expansion programme, marked a new
The aim of ABC's transformation plan:
Improving profitability through an
integrated approach to business
development across all product lines.
and exciting chapter in the evolution of ABC Algeria. Following the capital increase the bank took the opportunity to
strengthen its equity participation in ALC, the leading Algerian leasing company, from 34% to 41%.
In a year when ABC Algeria recorded steady growth in its customer numbers and business portfolio, it introduced a
number of new products and services designed to generate revenues to replace those previously earned from its car
and personal loans businesses. It focused mainly on the smaller enterprise and professional and self-employed sectors,
potentially lucrative alternative revenue earners. At the same time it has developed a new housing loan product
intended to place it in the forefront of the housing market, which it will be launching in 2010 along with a series of
new savings packages.
At $33.7 million, ABC Algeria’s total operating income was 19% higher than 2008’s $28.4 million, as non-interest
income soared by 45% to $15.4 million while net interest margin increased by 3% to $18.3 million. As operating
expenses were marginally lower at $15.6 million, net operating income was 46% higher at $18.1 million. After specific
and general provisions and taxation for the year, net profit was $12.8 million, 27% higher than in 2008.
Two new branches were inaugurated during the year, with 8 more anticipated to be opened in each of the three years
2010-13. Its ATM network is likewise to be expanded over a 3-year period. The bank is meanwhile working towards
introducing the Group’s ABC Online product, enabling it to deliver the full range of e-banking services to its customers.
ABC Algeria’s continuing progress in introducing modern, efficient banking to the Algerian market was duly recognised
when it was awarded the accolade “The Best Bank in Algeria for 2009” by Global Finance magazine.
Although the Egyptian economy did experience some secondary repercussions from the recession in the developed
world, its growth slowed only to around 4.7% in fiscal year 2008-09, from 7.2% in 2008. The current account balance,
however, fell into deficit (2.4% of GDP) for the first time since 2001.
ABC Egypt was successful in minimising the negative impact on its assets of the reduced economic growth by developing
and diversifying its credit portfolio into new sectors and attracting a wider client base. While its total operating income
rose slightly in 2009 to $35.1 million, its operating expenses were well contained at $21.0 million, 8% lower than in 2008,
resulting in a net operating income of $14.1 million. However, after setting aside provisions and allowing for taxation, the
bank recorded a 19% lower net profit of $9.0 million, compared with $11.1 million recorded in 2008.
15
An aggressive new branch expansion
programme marked an exciting chapter
in the evolution of the retail network.
ABC Egypt’s retail branch expansion continued apace, as it opened 4 more branches over the course of the year. For
2010, it anticipates further branch openings, with the network expected to reach 28 branches in all.
Despite Jordan experiencing an estimated 7% GDP growth in 2009, in the face of growing uncertainty in local and
regional markets ABC Jordan’s management concentrated on preserving asset quality and managing growth in
its targeted sectors. The overriding theme was expansion of retail banking operations, while seeking to extend the
reach of existing services and simultaneously introducing new products to the market aimed at segments unaffected
by market conditions such as public sector employees. The bank also sought to improve and upgrade its investment
services and brokerage franchise, despite poor conditions in the stock market. It was a year of minimal growth on the
corporate front, however, as the bank’s conservative risk appetite, combined with reduced corporate lending demand in
the Jordanian market generally, dampened expansionary prospect at least for the time being.
ABC Jordan’s total assets rose slightly to $866 million compared with $831 million at year end 2008. Off-balance sheet
assets fell somewhat, ending the year at $179 million. The bank’s brokerage offshoot, ABC Investments, experienced
a substantial fall in both operating and net income as a result of a 57% drop in trading volume on the Amman Stock
Exchange, which was the main cause of ABC Jordan recording a lower total operating income of $43.2 million compared
with $45.7 million in 2008. However, at $22.8 million its operating expenses were also lower than in 2008 and its net
operating income of $20.4 million was therefore only 8% below the $22.2 million achieved the year before. The net
profit of $13.0 million was 7% less than the 2008 result.
In line with the Group’s retail banking expansion strategy, the bank opened 6 new branches and installed 14 new ATMs. Its joint
campaigns with major car retailers proved successful, as was its credit card and personal loan products advertising campaigns.
The IT department successfully completed the migration of the bank’s Euronet ATM connection from Bahrain to the new and
much larger location in India. It also finalised the development of a new system for tracking collection cheques for corporate
customers and made preparations for a new online trading service at ABC Investments, scheduled for launch early in 2010.
For 2010, ABC Jordan plans to re-launch its financing facilities designed for SMEs and to introduce its new capital leasing
product. A client segmentation exercise is being undertaken jointly with the International Wholesale Banking Division in
Bahrain to ensure that marketing and customer service efforts are targeted towards the most valuable relationships. A
major push towards streamlining operations and managing costs is also planned.
A key objective is expansion via aquisition and organic growth.
Arab Banking Corporation - Tunisia
Although Tunisia’s GDP growth rate is estimated to have remained positive in 2009 at around 3.0%, compared with
4.6% in 2008, the economic downturn in Europe nevertheless continued to impact its export sector. ABC’s offshore
branch in Tunisia responded to the less positive economic environment by permitting its loan book to decline steadily
while concentrating any new lending on shorter tenor loans. This, together with the impact of lower international and
domestic interest rates, resulted in reduced net interest margin earnings. However, this fall was partly compensated
by increased revenues from documentary credits and guarantees, resulting in a healthy increase in commission and
other income over that for 2008. Thus its total income fell by only about 8% overall. Its operating expenses were well
contained which, with a net recovery of loan loss provisions, helped to produce an increased net income for the year.
The position at ABC Tunisie, the Group’s onshore banking unit, was not dissimilar, its total assets reducing marginally
to $160 million. With a total operating income of $3.3 million and operating expenses of $4.8 million, the bank’s net
operating loss was $1.5 million. After some recovery of past years’ provisions, however, the bank reported a net loss of
$1.2 million, with the combined net result for the Tunisian operations being $2.3 million.
ABC Tunisie opened its fourth branch in Tunisia, Le Belvédère branch located in the central business district of the capital,
focusing mainly on retail activities. It plans to continue expansion of the retail branch network in 2010, concentrating on
promoting consumer-oriented products such as its enhanced car loan and personal loan products and e-banking services,
to add to its traditional trade finance and cash management services targeted at its commercial customers.
GROUP PRODUCTS
a) International Wholesale Banking
International Wholesale Banking comprises Corporate & Structured Finance, Global Trade Finance, Islamic Financial
Services and Syndications, spread across the Bahrain and London Hubs, together with ABC’s New York and Baghdad
branches. The Division is focused on delivery of ABC’s suite of wholesale banking products, while working closely with
Treasury to offer client-oriented risk management solutions, such as foreign exchange, interest rate and commodity
price hedging, and investment products, including structured investments.
For International Wholesale Banking, ABC’s transformation plan is aimed at improving profitability through an integrated
approach to business development across all product lines, while improving the Group’s ability to source and win
business through cross-product training and skills development for all Relationship and Product Managers.
17
An active advisory role for ABC's (P&SF) team in the landmark Disi Water Project (Jordan)...
CORPORATE & STRUCTURED FINANCE
In April 2009 the Corporate Banking & Financial Institutions (CB&FI) and Project & Structured Finance (P&SF) departments
were aligned under common management. Corporate & Structured Finance group’s mission is to exploit the synergies,
efficiencies and capabilities of these two departments, capturing and maximising the benefit of ABC’s multi-product
marketing and relationship management platform to deliver the whole gamut of debt based products – from the provision
of simple working capital facilities, through financial advisory, to the structuring and arranging of finance for complex
investment projects.
C&SF is at the heart of ABC’s International Wholesale Banking transformation plan, working closely with other specialist
global product teams at Head Office and through ABC banking subsidiaries worldwide to maximise cross-selling and
offer banking products and services tailored to each individual client.
CORPORATE BANKING & FINANCIAL INSTITUTIONS
CB&FI is the primary relationship management and marketing unit for the Group in the GCC area. Its experienced senior
relationship managers act as country coordination managers, developing client relationships for the Group, a platform
closely aligned with the Group’s transformation plan, emphasising cross-selling of appropriate Group products to each
client. CB&FI actively markets all the Group’s products for delivery by specialist product groups while also delivering
core credit products directly to its corporate and institutional customers. It additionally covers international financial
institutions and multinational corporations active in the GCC area which offer suitable opportunities to ABC’s Bahrainbased business units or MENA-based retail banking subsidiaries.
During the year CB&FI maintained its focus on developing new MENA region relationships and servicing existing
government, financial institution and corporate clients based in the GCC area and multinational companies operating
there, emphasising the Group’s ability to deliver multiple product solutions to all aspects of their businesses.
CB&FI looks forward to renewed growth and opportunities in the GCC, as the region’s economies and capital markets
are expected to emerge from the recent downturn more quickly than other regions, underpinned by the combination of
strong hydrocarbon based revenues, the industrialisation and employment related policies of regional governments and
continuing investment interest from both the private and public sectors.
and the financing of Emirates Steel at the Industrial City of Abu Dhabi (ICAD).
PROJECT & STRUCTURED FINANCE
The P&SF team, based in Bahrain and in Europe, offers integrated financial solutions to its regional and international
clientele throughout the MENA region, combining financial advisory seamlessly with project, structured and asset
based lending services. Its activities serve a wide range of important regional industries, chief among which are the
petrochemicals, oil and gas, power and water, mining and metals, infrastructure development, shipping, aviation and
telecommunications sectors.
2009 witnessed further retrenchment in the project and structured finance market in the MENA region. In such an
environment, ABC adopted a cautious approach to new transactions, focusing on consolidating relationships. However,
the team continued to expand its financial advisory services and secured a number of advisory mandates over the
year, of which the Cairo Waste Water project in Egypt and the Djerba Desalination project in Tunisia were particularly
noteworthy. ABC’s advisory assignment for Gama Enerji of Turkey on the landmark Disi Water Conveyance project in
Jordan was duly completed when the $1.1 billion financing was successfully closed in June 2009 – here ABC assisted
Gama Enerji in securing 21-year debt financing from a number of multilateral and development agencies, at the same
time structuring an innovative synthetic interest rate swap which enabled the Government of Jordan to manage its
interest rate exposure while also providing lenders their required interest stream.
The team undertook selective new lending business with sponsor groups having a strong existing relationship with the
Group. Successful closures included the $700 million Emirates Steel financing, several asset backed financings and ABC’s
participation in the financing arranged for a group of investors led by the Corinthia Group for the new 5 star Metropole
Hotel in London.
P&SF believes that the improving global economic environment should filter down to the regional project and
structured finance market in time. However, project funding will remain challenging, with financings trending towards
shorter tenors and tighter structures in order to achieve successful closures. Indeed, many projects now tend to win
governmental approval conditioned specifically on the encouragement of downstream economic activity as a means of
ensuring spinoff benefits to the home economy, and these smaller downstream projects will increasingly themselves
require funding assistance. With such financings playing a vital role in ongoing economic development, P&SF foresees
that there will be increasing opportunities to develop its advisory franchise, while also building on ABC’s successful lead
arranger reputation to generate more small to medium-sized transactions, thus consolidating its premier position in
project and structured finance in the MENA region.
19
Global Trade Finance produced outstanding
results in 2009, delivering record revenues
and an increase in net profit over 2008.
GLOBAL TRADE FINANCE
Global Trade Finance (GTF) produced outstanding results in 2009, delivering record total revenues and an increase in
net profit over 2008. Whilst ABCIB’s European network spearheaded this strong performance, Group units worldwide,
including GTF’s Bahrain Hub and ABC’s New York branch, were also important contributors. Moreover, these results were
achieved within a broadly static cost base and head count, contributing significantly to improved Groupwide operating
efficiency. A combination of buoyant MENA region import demand, partly reflecting the maintenance – albeit with some
cutbacks – of public sector spending programmes in certain countries, together with generally elevated pricing levels,
provided a supportive background for revenue generation, although this was tempered by intensified competition
among banks.
The credit crunch affected GTF in a number of, sometimes conflicting, ways. On the one hand, with the MENA region
outperforming the global economy in terms of growth and trade flows, business opportunities continued to present
themselves. On the other, generally tighter liquidity and scarcer capital resource availability across the banking sector
tended to constrain business operations, necessitating an appropriate use of risk mitigants, selective marketing and
careful management of clients’ expectations and the prioritising of core client relationships. The tighter and more
uncertain market environment led to a general upward re-pricing of risk, which also aided bottom line performance.
GTF progressed towards meeting one of the Group’s main strategic aims: raising its market share in MENA-related
international trade financing, advancing in three critical areas:
• expansion of the Group’s geographical reach and ability to originate and source trade flows to the MENA region;
• cooperation with other ABC product groups and operating entities so as to maximise opportunities for internal
business leverage;
• ongoing product development, aimed at both extending and improving existing business structures and providing
innovative trade financing solutions.
The new Moscow representative office, set to open in early 2010, aims to identify exporters based in Russia, Ukraine
and Belarus trading with the MENA region and produce opportunities to assist in financing the trade flows. It is
anticipated that this initiative will provide a significant boost to the Group’s non-MENA geographic reach.
GTF played an outstanding role as a provider of innovative tailored trade finance solutions.
Looking to 2010 and beyond, GTF’s ability to increase the Group’s market share in MENA region trade flow financing
will remain sensitive to underlying trends in growth, trade and the global operating environment. The MENA region is
however expected to continue to outperform global growth averages and MENA region countries remain in the forefront
of those undertaking large scale, concerted, anti-cyclical public spending programmes.
ISLAMIC FINANCIAL SERVICES
The Group offers its Shari’a-compliant products through four gateways: ABC Islamic Bank, ABCIB’s Islamic Asset
Management (IAM) unit, ABCIB’s alburaq brand retail financial services and Group Treasury.
2009 was a tough and challenging year for Islamic Financial Services. With a severe recessionary backdrop and markets suffering
from credit and demand contraction, the focus shifted away from marketing growth towards portfolio and account management.
The first challenge was to manage, in a transparent manner, the increased cost of funding which had affected regional
markets. In cases where there were market disruption provisions in financing agreements, it was essential to work in
cooperation with other banks to ensure standardisation of treatment across the industry. Where no such provisions were
incorporated into documentation, it was important to build trust in bilateral negotiations to solve the problem to both
parties’ mutual satisfaction. ABC Islamic Bank and ABCIB’s IAM consequently spent much of the year working through
their asset portfolios, managing in the end successfully to re-price the affected facilities.
IAM was successful in 2009 in structuring an important murabaha facility for a major European multinational company
for the import of equipment into the Middle East. It also introduced, in conjunction with ABCIB’s Treasury, a new deposit
product aimed at attracting Islamic liabilities from institutional and corporate depositors, and arranged the Islamic
financing of a number of prime residential properties in London for high net worth investors.
2010 looks promising for the growth of Islamic finance. Several European countries have recently introduced, or are in
the process of introducing, enabling legislation that will further the expansion of Islamic financial products. IFS intends
to continue to integrate its products into the range offered by the Group business platform and its fellow product groups,
both in Europe and elsewhere. Its focus will continue to be the provision of Islamic financing solutions for its target
market customers, working closely with the Group’s non-Islamic business units, and on developing tailored corporate
and trade related products. It will also seek to develop MENA-based corporate and individual business relationships and
attract Islamic liabilities in conjunction with the Treasury teams.
21
SYNDICATIONS
The regional syndicated loan market was significantly impacted over the year, as the low levels of activity across much
of the global marketplace affected even the relatively stable MENA region. Banks in the region approached new lending
warily, favouring the stronger rated corporate names, although even in such cases terms were much less favourable than
in prior years and usually conditional on ancillary business being obtained. Loans typically carried maturities of 1-3 years
compared with 3-5 years in the past. Additional challenges arose from a decline in cross-border lending, the restructuring
of Kuwaiti syndicated facilities and the defaults under syndicated facilities provided to regional corporations.
ABC’s Syndications group took steps early on to redeploy several members of the team to other Group units in
anticipation of the declining lending activity, choosing instead to focus on working with each relationship unit in
support of existing relationships able to offer attractive commercial terms and good prospects of reciprocal business.
A good example was the highly successful syndication, with ABC acting as mandated lead arranger, for African ExportImport Bank, Cairo in its one year dual tranche $180 million and €85 million syndicated term loan, which was closed in
December and was marked by its significant oversubscription from a diverse group of syndicate lenders.
b) Group Retail
The retail business maintained its growth momentum throughout the year, as the distribution network continued to
expand across the existing operational areas, widening customer target segments whilst continuing to offer customers
seamless and convenient access to all the Group’s services.
With 11 new branches opened across the region, the distribution network grew to 58 branches in 2009. Further expansion
is planned for 2010 under the Group’s strategic plan to establish an 80+ regional branch network, subject to regulatory
approvals, over the medium term. The ATM network will also grow in line with branch openings, ensuring availability of
service and convenience for the expanding customer base. Distribution channels have been further strengthened through
an expanded sales force of well trained direct sales teams with a mission focused on one-to-one selling.
A regional Call Centre should be fully established in 2010, to further enhance service quality and extend communication
channels for customers. A regional Collection System is also planned, aimed at improving profitability and ensuring
asset portfolio quality through enhanced collection and follow up capabilities.
In 2008 the Group launched a project to create a unique, common brand identity across the geographies where it operates.
As part of this exercise, in 2009 a number of workshops were held in Bahrain to emphasise the Group’s customer-centric
approach to business development and delivery and encourage the design and launch of innovative products.
c) Group Treasury
The year saw Group Treasury playing a pivotal role coordinating the Bahrain, New York and London Treasury
departments in ensuring the availability at all times of the liquidity necessary for the smooth functioning of all the
Group’s business units. During the year a number of bilateral agreements with financial institutions and investors
resulted in the raising of significant amounts of medium term deposits, extending the Group’s liabilities structure.
Group Treasury directs the Bahrain and London Treasury Hubs and treasury offices of all ABC branches and subsidiaries.
Bahrain Hub is active in most treasury related products, including foreign exchange, derivatives (interest rate and
currencies), Arab world currency markets, structured products, money markets, Islamic murabaha, fixed income
proprietary portfolio trading and investments and customer portfolio management. It also plays a crucial role in the
development and introduction of new products, including innovative Islamic products for sophisticated treasury hedging
and yield enhancement strategies, such as Islamic forwards, Islamic options and Islamic structured funding risk hedges.
London Hub - whilst also managing smaller proprietary investment portfolios for ABCIB and catering to GCC and MENA
customers that prefer to deal with a UK-based entity - focuses on developing financial institutions and corporate
customer related business in Europe and seeking out business in emerging Eastern European countries, particularly with
institutions having Middle East and Arab world dealings.
The treasury departments of New York and Tunis branches meanwhile concentrate on funding their assets and on
providing customer related services. ABC subsidiaries’ treasury departments likewise focus on self-funding, managing
local currency proprietary portfolios and developing customer business.
Looking ahead, and in anticipation of reduced availability of medium-term money through the syndication and bond
markets at least for the foreseeable future, Group Treasury will continue to build customer deposits through intensified
joint marketing with the business units, whilst continuing to work on diversifying and lengthening the maturity profile
of ABC’s liabilities.
While concentrating most attention on the prime objective of maintaining ample liquidity, Group Treasury also pursues
the strategic objective of achieving rising and consistent profitability by building a strong customer relationship base
and a diversified income mix. Despite the challenges that undoubtedly lay ahead, Group Treasury remains positive as
regards the future. A new dedicated Treasury Sales function is to be created in early 2010, tasked with diversifying and
expanding the Group’s liabilities sources as well as lengthening their maturities profile.
OTHER SUBSIDIARIES AND BRANCHES
The UK economy was among the hardest hit in the OECD over the recessionary period, which inevitably impacted on
ABCIB’s operations. On the other hand, the MENA region countries, on which most of the business of ABCIB is focused,
managed to avoid the worst of the effects of global recession, although the average rate of growth across the region
dropped to only 1.5%.
ABCIB managed its liquidity and funding in a prudent manner, benefiting from its stable and reliable customer base
which allowed it to strengthen its liquidity by reducing the mismatch in each maturity band and at the same time
increase its medium and long term funding. However, its deliberately conservative policy of maintaining a substantial
daily long position came at a significant cost, as surplus funds had to be placed out on the inter-bank market at very
low yields.
In US dollar terms, ABCIB’s total assets remained almost unchanged at $4.0 billion. However, its loans and advances
portfolio grew by 11% to $1.8 billion. Its total operating income at $90.7 million was 18% down from last year and was
negatively impacted by declining sterling pound foreign exchange rate and interest rates. While there was a 33% fall in
its net interest income to $42.0 million, a 19% growth in its fees and commissions revenues to $52.7 million partially
offset it. As before, the Trade Finance business line was the main contributor, with 69% of total revenues. Treasury and
Project & Structured Finance contributed 14% and 13% respectively, while Islamic Financial Services contributed 3%,
down from 5% the year before, a consequence of the bank’s decision to reduce medium term risk and improve liquidity.
Operating expenses amounted to $58.8 million, therefore resulting in a net operating income of $31.9 million compared
with $52.1 million in 2008. After loan loss provisions and taxation, however, ABCIB recorded a net profit of $15.2 million,
11% below 2008’s performance.
A restructuring of ABCIB’s corporate structure during the year resulted in its ownership now being held directly by ABC
rather than indirectly through a UK-based holding company as hitherto. One of the benefits of the restructuring was a
£96 million ($155 million) increase in ABCIB’s regulatory capital, lifting its capital ratio to a healthy 18.0%, well above
the minimum mandated requirement.
23
Focus will be on the continued provision of
Islamic financing solutions for target market
customers, and the development of tailored
corporate and trade related products.
For the future, the MENA region is expected to continue to outperform global growth averages, providing opportunities
for ABCIB in all business areas. In a move towards securing an expanding share of MENA-related trade flow servicing,
ABCIB opened a representative office in Moscow in early 2010 – the first Arab bank in the Russian market – providing
the Group with an expanded non-MENA geographical reach and an enhanced ability to originate and source commercial
flows to the MENA region.
Banco ABC Brasil S.A.
Brazil was one of the first countries in the world to emerge from the global downturn, closing the year with an
annualised GDP growth rate close to 8.0%.
ABC Brasil is what is known in Brazil as a multiple bank, specialising in the extension of credit to medium sized to large
corporates – those with annual revenues of $15 million - $1 billion. It has one of the most diversified customer portfolios
of all the mid-sized banks. Over its 19-year existence it has built up a solid customer base by providing its customers
with value added products tailored to their individual needs. Since its 2007 initial public offering on the Sao Paulo
Stock Exchange, the bank has focused on a combination of organic and regional growth in bringing about its steady
expansion. In the case of medium sized companies its strategy has been based on geographical expansion, opening
new agencies and offices in support of its operations, while in the case of major corporations it has concentrated on
organic growth through strengthening and deepening existing relationships while prospecting for new clients.
In 2009, Brazilian bank mergers together with the withdrawal from the market of several foreign banks combined to
bring about a change in the dynamics of the credit markets, to ABC Brasil’s advantage, as the demand from corporates
for sophisticated financial services of the kind in which the bank specialises has intensified.
Banco ABC Brasil’s total assets rose over the year to $4.3 billion as its total loan portfolio expanded by 60% to $3.2 billion.
However, its total operating income fell by 10% to $194.6 million from $216.6 million. Its operating expenses rose slightly to
$83.8 million, producing an operating profit of $110.8 million, 17% less than the previous year’s $133.8 million. After loan
loss provisions of $27.1 million and taxation charge of $35.3 million, the bank’s net profit for the year was $47.2 million, 43%
down on 2008.
For 2010, the government’s core economic policies are likely to remain in place and credit should start expanding once
more. ABC Brasil is therefore confidently planning for future growth.
ABC Islamic re-examines its portfolio.
ABC Islamic Bank (E.C.)
With the changing economic environment, ABC Islamic Bank, like all Islamic banks in the region, was compelled to
re-examine its portfolio and work closely with customers and other banks in re-pricing facilities and in some cases
deferring drawdown as projects were themselves deferred.
ABC Islamic Bank’s balance sheet reduced by some $143 million over the year. Net margin income was reduced from
$25.9 million in 2008 to $20 million in 2009 as a result of lower yields on the existing portfolio which came under
pressure due to higher funding costs. Fees and commission income was also lower, decreasing from $5.9 million in
2008 to $0.3 million in 2009 due to the decline in new facilities being closed. Nevertheless, a few quality transactions
with sovereign and quasi-sovereign issuers were booked. Despite conservative provisioning reflecting recent problems
in the regional corporate market, the year ended with the bank returning a net profit of $10.1 million compared with
$25.6 million in 2008.
Another challenge for ABC Islamic Bank in this difficult year was to maintain, and indeed broaden if possible, its liability
base, in an environment of high volatility in money markets and severe liquidity dislocation, exacerbated by the
downgrading of regional risk ratings. The bank’s response was a concerted and geographically broad based liability
marketing effort, focusing on product differentiation. As a consequence of this effort the liability base was successfully
maintained while the number of relationships increased.
Arab Financial Services B.S.C.(c)
AFS is the leading Arab company for electronic banking, personal payments instruments and related services.
Established in Bahrain in 1984, it pioneered the concept of outsourcing card processing in the region and was the
first company to set up an end-to-end card outsourcing environment in Bahrain. Euronet Middle East, a joint venture
between AFS and Euronet Worldwide, provides a range of services complementing AFS’ own, including debit card
management, ATM/POS outsourcing services, gateway service and bill payment.
Its gross revenues increased by 6% to $19.8 million from $18.7 million in 2008, as its card centre revenues grew by
16%. Its success was partly due to EMV migration among its bank clients, while its conservative investment policy
helped to minimise losses on its investment portfolio. Its provision against investment losses of $1.0 million in 2009
was well below the $2.2 million provision taken in 2008. Its focus on cost optimisation led to a reduction in operating
expenses, enabling it to achieve a net profit of $4.3 million, significantly above 2008’s $1.1 million.
25
TOTAL ASSETS
SHORT & LONG TERM LOANS
$ MILLIONS
$ MILLIONS
35,000
7,000
30,000
6,000
25,000
5,000
20,000
4,000
15,000
3,000
10,000
2,000
5,000
1,000
0
0
2008
28,486
2009
25,965
2009
2008
Short Term Loans
6,758
Short Term Loans
Long Term Loans
5,173
Long Term Loans
5,484
Total Loans
11,931
Total Loans
10,949
5,465
BRANCHES
ABC New York Branch maintains an emphasis on supporting US-MENA trade, offering a wide range of trade finance
products spanning documentary credit issuance and confirmation, contract bonding, receivables financing and financing
in conjunction with US government agencies and multilateral export agencies. The branch also actively cross-sells the
services of the specialist product groups as it develops its relationships with prime corporate customers.
ABC Baghdad branch focuses on the provision of trade finance related facilities, including import documentary credits for
government ministries and state-owned companies, guarantees and oil export credit confirmations. As Iraq continues to
move towards internal stability its oil and other resources are set to be increasingly exploited, benefiting the economy
and in turn generating liquidity for much needed infrastructure development. The branch looks forward to contributing
the Group’s expertise in assisting the country’s future economic growth.
CREDIT & RISK GROUP
During the year CRG embarked on a number of initiatives:
Credit Risk
ABC engaged external consultants to independently review the credit process and procedures and recommend how
they may be optimised. Their recommendations are currently being implemented.
A tool to calculate economic capital and RAROC at portfolio level was implemented, while the model for RAROC measurement
at the transactional level was further enhanced to more appropriately price risk by factoring in the impact of global recession
on probability of default and loss given default.
SHAREHOLDERS' FUNDS
DEPOSITS
$ MILLIONS
$ MILLIONS
30,000
2,500
25,000
2,000
20,000
1,500
15,000
1,000
10,000
500
5,000
0
0
2008
1,793
2009
2,191
2008
22,790
2009
20,246
Market Risk
The Market Risk/ALM platform provided by Quantitative Risk Management (QRM) moved from test to production
environment. The model is being used for:
•
•
•
•
calculating VaR for all trading and available for sale portfolios;
conducting hypothetical and scenario stress tests for both trading and available for sale portfolios;
calculating component VaR across all portfolios;
applying ad hoc prepayment sensitivity stress test scenarios to the ABS securities sensitive to prepayment and
extension risk; and
• decomposing total diversified VaR into non-sub-additive asset class components with the resulting diversification effect.
Market Risk Management department conducted a due diligence review of the trading activities and the risk
management function at ABC Brasil, as the first step towards an integrated Groupwide risk oversight.
Operational Risk
ABC’s operational risk management system’s capabilities were enhanced, with key improvements including framework
integration and reporting.
In line with the Group’s decentralised approach, the responsibility for day-to-day management of operational risk
was transferred to the business unit operational risk managers, although ABC continued to implement enhancements
to the operational risk management framework and process. A central risk register was created and a control library
established to further improve the analytical capabilities and risk reporting. Linking of the framework components, such
as Risk & Control Self Assessments (RCSA), Key Indicators (KIs) and operational loss data, was initiated to provide an
integrated view of operational risk for senior management.
While the Group has adopted the Standardised Approach under Basel II for operational risk capital measurement and
allocation, it continues to build the basis for advanced measurement capabilities, including collection of operational loss
data and key indicators.
27
BREAKDOWN OF ASSETS BY REGION - 2009
BREAKDOWN OF ASSETS BY REGION - 2008
PERCENTAGE
PERCENTAGE
Arab World 40%
North America 24%
Arab World 42%
North America 27%
Western Europe 16%
Latin America 16%
Western Europe 16%
Latin America 11%
Asia 2%
Other 2%
Asia 2%
Other 2%
Retail Risk
The Group’s proprietary scorecard by retail product was rolled out to all units.
The Group Retail Policy was exhaustively reviewed and a revised Policy launched.
In coordination with Retail Banking, a project to implement a world class retail collection system was launched.
Remedial Loans Unit
Non-Performing Loans as a percentage of gross loans increased from 1.9% in 2008 to 3.5% in 2009, reflecting the
adverse global market conditions. Due to the deteriorating economic and credit environment ABC increased its total
loan provisions by $121 million to cover further asset weakening. The provisions coverage ratio (total provisions as a
percentage of non-performing loans) fell from 181.6% in 2008 to 131.1% in 2009. However, non-performing loans as a
percentage of equity was 18.5%, compared with 13.1% at the end of 2008.
In 2008 and 2009, the RLU Policy was fully revised and reissued, expanding and upgrading the provisioning policy and
management of impaired assets so as to be consistent across the Group.
A new Head Office based Recovery & Support unit has been set up to assist retail subsidiaries in remedial loan
management and relationship banking. As a first step the unit plans the creation of a centralised MIS database for
corporate remedial loans, accessible to all retail units, allowing the sharing of experience in this area.
GLOBAL INFORMATION TECHNOLOGY
During 2009, GIT was predominantly engaged in the Group Retail Core Systems Standardisation Programme where
significant progress was made on this major strategic initiative supporting the Group’s transformation strategy, in
particular with the implementation of the Group Retail Core Banking Systems for ABC Egypt, covering all business lines
across all 23 branches. The go-live is scheduled for mid-February 2010, marking a significant phase in the Group’s
overall strategic focus on universal banking. GIT has also established the necessary local disaster recovery centres as
well as a global disaster recovery centre in London. GIT will kick off the next major phase in 2010 with the launch of
the Group Retail Core Banking Systems for ABC Jordan. ABC Algeria and ABC Jordan achieved the completion of EMV
compliance in 2009, while the year also saw the deployment of informational ABC Online capability at ABC Egypt and
ABC Global Information Technology set up local and global disaster recovery centres.
ABC Algeria. A project to implement a universal banking Call/Contact Centre will be launched in 2010 in support of the
Group’s business direction.
A key part of the Group’s transformational strategy involves enhancing existing IT decision support capabilities. In 2009,
the Group Data Warehouse, an in-house solution, was developed to extend the existing repository, providing ‘on-thefly’ reporting for all information related to customer balance sheet and P&L consolidation, profile summary, placement
profile summary, customer exposure profile, etc. In addition, GIT completed another in-house system, the Account
Planning tool, to assist relationship managers to create detailed account plans by providing relevant information in real
time, significantly reducing manual inputs and checks. This was rolled out to all wholesale units, and there are further
plans to roll it out to corporate clients of the retail units in early 2010.
The new market risk system was successfully implemented and the liquidity risk compliance project was launched in
preparation for the new reporting regulatory requirements of the CBB and the UK’s FSA, with stress testing planned in 2010.
Operational efficiencies for ABCIB London and Frankfurt were achieved through the introduction of greater automated
functionality through real time interfaces and set up of participations and reimbursements, balance check, postings and contracts.
As part of its programme of continuous review and enhancement of all regulatory compliance systems and procedures,
GIT initiated the second phase of the Anti-Money Laundering project. A new system with more advanced AML detection,
transaction monitoring and profiling functionality, complementing the existing system and further strengthening Group
capabilities, was implemented in Bahrain. Rollout to other units will continue in 2010.
Enterprise messaging and continuous security enhancements were the main focus in 2009 for the technology
infrastructure projects covering global telecommunications and enterprise-wide systems. In 2010, GIT will continue
with security enhancements as well as focusing on operational efficiencies in the area of SWIFT technical infrastructure
centralisation and expanding server virtualisation technology.
29
CORPORATE GOVERNANCE
(All figures stated in US dollars unless otherwise indicated)
Arab Banking Corporation (B.S.C.) was incorporated in 1980 as a Bahrain joint stock company. Following various changes
to, and increases in, its capital ABC is now licensed by the Central Bank of Bahrain (CBB) as a Conventional Wholesale
Bank with an authorised capital of $2,500 million and a paid-up capital of $2,000 million. Ownership of its shares,
which have been listed on the Bahrain Stock Exchange since 1990, is spread between its founding shareholders - the
Kuwait Investment Authority, the Central Bank of Libya and the Abu Dhabi Investment Authority - and international and
regional private investors.
Historically, ABC has long been a pioneer among its Bahrain-based peers in good Corporate Governance principles and
practices. These principles and practices were formalised in May 2004 when ABC adopted internationally recognised
best practice Corporate Governance Principles and Guidelines, an integral part of which commits ABC to communicate all
relevant information to its stakeholders on time, clearly and through a variety of channels including a well-maintained
and up-to-date website.
BOARD OF DIRECTORS
The Board of Directors is responsible for the overall direction, supervision and control of the Group. It is also responsible
for monitoring management performance, causing financial statements to be prepared which accurately disclose
the Group’s financial position, convening and preparing the agenda for shareholder meetings, monitoring conflicts of
interest, preventing abusive related party transactions and assuring equitable treatment of all shareholders. The Board
meets regularly (usually six times a year) to consider key aspects of the Group's affairs, strategy and operations.
The shareholders appoint the Board for a specific term of three years. The Board has adopted a formal charter specifying
the matters reserved to it, including the specific requirements and responsibilities of the Directors. There are currently
12 Directors on the Board, with varied backgrounds and experience and who individually and collectively exercise
independent and objective judgement in meeting their responsibilities. Other than the President & Chief Executive all
Directors are non-executive and currently 2 are independent non-executive directors as defined in the CBB’s Rule Book.
The posts of Chairman and President & Chief Executive are held by different Directors and each has separate, clearly
defined responsibilities. As a rule Directors do not have, and in 2009 no Director at any time during the year had, any
direct or indirect material interest in any contract of significance with ABC or any of its subsidiaries.
The Board and its Committees are supplied with full and timely information to enable them to discharge their
responsibilities. In this respect, the Board, its Committees and all Directors have access to senior management, external
ABC has long been seen as a pioneer in
Corporate Governance matters among
Bahrain-based financial institutions.
consultants and advisors and to the Board Secretary, who is responsible for ensuring that the Board procedures and
applicable rules and regulations are observed.
There are a number of Board Committees to which specific responsibilities have been delegated by the Board. Each
such Committee has its own formal written charter. The main such Committees are:
• The Executive Committee, which is responsible for exercising the powers of the Board in the management of the
business and affairs of the Group when the Board is not in service, save for those which the Board expressly reserves
for itself.
• The Audit Committee, which is responsible to the Board for ensuring the integrity and effectiveness of the Group’s
system of financial, accounting and risk management controls and practices and for monitoring compliance with the
requirements of the regulatory authorities in the various countries in which the Group operates. The Committee is
also responsible for recommending the appointment, compensation and oversight of the external auditors and the
appointment of the internal auditor.
• The Corporate Governance Committee, which assists the Board in shaping and monitoring the Corporate Governance
policies and practices of the Group and evaluating compliance with policies and procedures; the Committee also
reviews and assesses the adequacy of the Group’s policies and practices on corporate governance.
• The Board Risk Committee, which is responsible for the continual review and approval of the Group’s Credit and Risk
Policies and the consideration and approval of related limit applications and those matters that are beyond senior
management’s delegated authority. The Committee reviews and makes recommendations to the Board regarding
the Medium Term and Annual Risk Strategy/Appetite, within which business strategy, objectives and targets are
formulated. The Committee delegates authority to senior management to conduct day-to-day business within the
prescribed policy and strategy parameters, whilst ensuring that processes and controls are adequate to manage the
Group’s Risk Policies and Strategy.
• The Nominations and Compensation Committee is responsible for the formulation of the Group’s executive and
staff remuneration policy as well as senior management appointments.
31
INTERNAL CONTROLS
The Board of Directors is responsible for the establishment and review of the Group’s system of internal control. In
addition to minutes and reports submitted to it by the Board Risk Committee (BRC) and the Audit Committee
identifying any significant issues relating to the adequacy of the Group’s risk management policies and procedures,
the Board receives reports and recommendations from its Corporate Governance Committee and its Nominations and
Compensation Committee for its consideration. The Board also receives regular reports from management identifying
performance versus budget, major business issues and the impact of the external business and economic environment
on its areas of responsibility.
Day-to-day responsibility for internal control rests with management. There is in place a process of identifying,
evaluating and managing the significant risks faced by the Group, the key elements of which can be summarised as:
• A well-defined management structure with clear authorities and delegation of responsibilities, documented
procedures and authority levels to ensure that all material risks are properly assessed and controlled.
• Internal Control Policies that require management to identify major risks and monitor the effectiveness of internal
procedures in controlling and reporting on them.
• A robust Compliance function including, but not limited to, Anti-Money Laundering and Anti-Insider Trading policies.
• An internal audit function, exercised through Group Audit, which reports to the Audit Committee on the effectiveness
of key internal controls in relation to the major risks faced by the Group and conducts reviews of the efficacy of
management oversight in regard to delegated responsibilities as part of its regular audits of Group departments and
business units.
• A comprehensive planning and budgeting process that delivers detailed annual financial forecasts and targets for
Board approval.
• A Group Risk Management function, comprising overarching Head Office risk management committees and a
dedicated risk management support group.
MANAGEMENT COMMITTEE
The Management Committee is responsible for ensuring the ongoing, enduring performance and health of the Group
by making decisions and sponsoring activities that create the right environment for the Group to operate in and provide
oversight of the Group’s day-to-day operations. In addition to any required ad hoc meetings to consider urgent and
important matters, the Committee meets regularly to consider the following matters:
•
•
•
•
High level reviews of the Group’s financial condition
Monthly Business Reviews of performance versus budget
High level planning for the following month
Detailed analysis of selected themes (depending on the time of the year) such as budgets, portfolio review, marketing campaigns
Quarterly:
• Reviews of quarterly performance
• Reviews of strategy
• Team building
COMPLIANCE
Compliance risk is the risk of legal or regulatory sanctions, material or financial loss or loss to reputation that a bank
may suffer as a result of its failure to comply with laws, regulations, rules, reporting requirements, codes of conduct and
standards applicable to its activities.
In accordance with CBB rules, ABC has appointed a Compliance Officer, who also performs the role of Group Compliance
Officer and is responsible for:
•
•
•
•
•
Proactively identifying and evaluating compliance risks;
Monitoring, managing, mitigating and reporting compliance risks;
Investigating and reporting all compliance breaches;
Assessing the appropriateness of ABC’s compliance policies and procedures;
Advising management and staff on compliance and regulatory matters.
Throughout its network of offices, the Group has developed written guidelines for staff on the appropriate implementation
of laws, regulations, rules and standards through policies and procedures, including Code of Conduct, Market Conduct and
Compliance Policy, which are approved by the Board of Directors and are updated on a regular basis.
The compliance function provides an independent oversight on behalf of the Board of Directors and senior management and
thus is independent from any other business, support or control functions, in order to allow it to carry out its work freely and
objectively. From an organisational viewpoint, the compliance function reports directly to senior management and the Audit
Committee, with direct access to the Board of Directors if necessary. In addition, in case of need the Group Compliance Officer
has the right and the authority to contact the CBB or the appropriate local regulator in any country where the Group operates.
Each operating entity in the Group, to the extent required by applicable laws and regulations, has appointed a local Compliance
Officer to ensure adherence to local requirements and regulatory issues. At the Group level the Compliance Officer is also
responsible for coordinating the identification and management of the Group’s compliance risk in collaboration with the
local heads of compliance in Group units.
ABC has appointed a Money Laundering Reporting Officer (MLRO), who also performs the role of Group MLRO and who
reports to the Group Compliance Officer. The MLRO is responsible for ensuring compliance with laws and regulations with
respect to Anti-Money Laundering (AML) throughout ABC’s network of branches and subsidiaries. The Group is committed to
ensuring adherence to these regulations and to the recommendations of the Basel Committee and Financial Action Task Force
which they incorporate and which are in turn reflected in ABC’s own Group AML Manual which has been approved by the
Board of Directors. The Group has strict Know Your Customer policies which include detailed requirements for identification
and verification of customers. These policies preclude all operating units from establishing a new business relationship until
all relevant parties to the relationship have been identified, the nature of the business they expect to conduct has been
established and satisfactory evidence of identity has been obtained.
The MLRO appointed in each unit is responsible for supervising the unit’s AML activities and for maintaining appropriate and
effective systems, controls and records to ensure compliance with local AML regulations and the provisions of the Group AML
Manual. Each MLRO is also responsible for reviewing and reporting to the respective unit’s regulator and senior management
any suspicions concerning a customer or a transaction.
The responsibilities of the Group MLRO include formulating, issuing and implementing the Group’s AML strategies and policies
on an ongoing basis, overseeing appropriate AML training of all relevant staff, supervising and coordinating the activities of
each unit’s MLRO and reporting to the senior management, the Audit Committee and the Board of Directors on critical money
laundering issues.
33
Figure 1:
Board and Senior Management Oversight
Monitoring
Risk Identification
Ex ante control
Quality Assurance
Process (all stages)
Quantification of
Risk and capital
Aggregation
INSIDER TRADING POLICY
ABC has an established Insider Trading Policy to ensure that Insiders are aware of the legal and administrative
requirements regarding holding and trading in securities and to prevent abuse of inside information.
It is ABC’s policy that no Insider who is aware of material inside information relating to ABC may trade the ordinary
shares, any preferred stock, options to purchase shares or warrants, convertible debentures or derivative securities of
ABC other than with the prior approval of the Board’s trading committee, or engage in any other action to take personal
advantage of such information, or pass that information on to others outside ABC. It is also ABC’s policy that no Insider
who, in the course of working for ABC, learns of material inside information about a company with which ABC does
business, including a subsidiary or affiliate of ABC, may trade in the securities of such a company until such information
is made available to the public or is no longer material.
In order to reduce the chances of tipping of inside information and avoid circumstances where an Insider may fall into
breach of the Insider Trading Policy, a number of restrictions on trading as well as prohibitions are in place that must be
observed by Insiders at all times.
COMPENSATION
The Nominations and Compensation Committee of the Board of Directors is responsible for reviewing ABC’s human
resources and compensation policies and making the necessary recommendations to the Board for its approval. The
Committee ensures that ABC’s remuneration levels remain competitive so as to enable it to continue to attract, develop
and retain skilled staff to meet its strategic objectives. The Committee also ensures that effective procedures are in
place to enable it and senior management to monitor and evaluate the performance of staff.
ABC has in place comprehensive policies regarding the remuneration and benefits provided to members of the Board of
Directors and its Committees, senior management and staff. In regard to Directors, compensation comprises fixed annual
remuneration fees and attendance allowances, while for senior management and staff, compensation comprises a number
of fixed elements, covering salary, allowances and benefits, in addition to variable, performance-related elements.
Figure 2: Risk Management Structure
Board Committees
Executive Committee
Audit
Committee
Nomination &
Compensation Committee
Corporate Governance
Committee
Board Risk Committee
Risk Management Committees
Risk Management
Committee (RMC)
Head Office Credit
Committee (HOCC)
Asset & Liability
Committee (ALCO)
Operational Risk
Management
Committee (ORCO)
Head Office
Consumer Credit
Committee (HOCCC)
RISK MANAGEMENT
Risk is inherent in the Group's activities and is managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. The Group is exposed to credit risk, market risk, liquidity risk, interest
rate risk, operational risk, legal and strategic risks as well as other forms of risk inherent in its financial operations.
Over the last few years the Group has invested heavily in developing a comprehensive and robust risk management
infrastructure. This includes risk identification processes under credit, market and operational risk spectrums, risk
measurement models and rating systems as well as a strong business process to monitor and control these risks. Figure
1 outlines the various congruous stages of the risk process.
Executive Management is responsible for implementing the Group’s Risk Strategy/Appetite and Policy Guidelines set
by the Board Risk Committee (BRC), including the identification and evaluation on a continuous basis of all significant
risks to the business and the design and implementation of appropriate internal controls to minimise them. This is done
through the BRC, senior management committees as shown above and the Credit & Risk Group in Head Office.
Within the broader governance infrastructure, the Board Committees carry the main responsibility for best practice
management and risk oversight. At this level, the BRC oversees the definition of risk appetite, risk tolerance standards
and risk process standards to be kept in place. The BRC is also responsible for coordinating with other Board Committees
in monitoring compliance with the requirements of the regulatory authorities in the various countries in which the
Group operates.
The Risk Management Committee (RMC) reviews risk methodology and parameters including credit, market,
operational, liquidity and retail risks.
The Head Office Credit Committee (HOCC) is responsible for credit decisions at the higher levels of the Group’s lending
portfolio, setting country and other high level Group limits, dealing with impaired assets, provisioning and general credit
policy matters.
The Asset and Liability Committee (ALCO) is mainly responsible for defining long-term strategic plans and shortterm tactical initiatives for directing asset and liability allocation prudently for the achievement of the Group’s strategic
goals. ALCO monitors the Group’s liquidity and market risks and the Group’s risk profile in the context of economic
35
RISK MANAGEMENT (Continued)
developments and market fluctuations to ensure that the Group’s ongoing activities are compatible with the risk/
reward guidelines as approved by the BRC.
As part of its overall risk management, the Group also uses derivatives and other instruments to manage exposures
resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from
forecast transactions. The risk profile is assessed before entering into hedge transactions, which are authorised by the
appropriate level of seniority within the Group. The effectiveness of hedges is monitored monthly by the Group.
The Operational Risk Management Committee (ORCO) is responsible for defining long-term strategic plans and shortterm tactical initiatives for operational risk, and for monitoring and prudently managing exposure to operational risks
including strategic and reputation risk.
The Head Office Consumer Credit Committee (HOCCC) is responsible for credit decisions at the higher levels of the
Group’s consumer lending portfolio, setting country and other high level Group limits, dealing with impaired assets and
general credit policy matters.
The Credit & Risk Group (CRG) has overall responsibility for centralised credit policy and procedure formulation, country
risk and counterparty analysis, approval/review and exposure reporting, control and risk-related regulatory compliance,
remedial loans management and the provision of analytical resources to senior management. It is also responsible
for identifying market and operational risks arising from the Group's activities, recommending to the relevant central
committees appropriate policies and procedures for managing exposure to such risks and establishing the systems
necessary to implement effective controls.
The management structure explained above, supported by teams of risk and credit analysts and the Group’s IT systems,
therefore provides a coherent infrastructure for the management of the Group’s credit and risk functions.
Each ABC subsidiary is responsible for managing its own risks and has its own Subsidiary Board Risk Committee, Credit
Committee and (in the case of major subsidiaries) ALCO, or equivalent, with responsibilities generally analogous to the
Group committees.
The CBB requirements, which act as a common framework for the implementation of the Basel II Accord in the Kingdom
of Bahrain, came into effect on 1 January 2008.
The Basel II Accord is built on three pillars:
• Pillar I defines the regulatory minimum capital requirements by providing rules and regulations for
measurement of credit risk, market risk and operational risk. The requirement of capital has to be covered by a
bank’s own regulatory funds.
• Pillar II addresses the bank’s internal processes for assessing overall capital adequacy in relation to risks (ICAAP). Pillar II
also introduces the Supervisory Review and Evaluation Process (SREP), which assesses the internal capital adequacy.
• Pillar III complements the other two pillars and focuses on enhanced transparency in information disclosure, covering
risk and capital management, including capital adequacy.
The Group has adopted the Standardised approach for credit risk, market risk and operational risk for regulatory
reporting purposes. The Group’s risk-weighted capital requirements for credit, market and operational risks are described
herein. The disclosures in this section are in addition to the consolidated financial statements presented in accordance
with International Financial Reporting Standards (IFRS) and other sections of the annual report. However the credit
risk exposures as detailed in this section differ from the credit risk exposures as reported in the consolidated financial
statements due to the application of different methodologies under Basel II and IFRS 7. Differences arise primarily due
to the following:
• Under the Basel II framework, for credit-related contingent items, the nominal value is converted to an exposure
through the application of a credit conversion factor (CCF). The CCF is at 20%, 50% or 100% depending on the type of
contingent item, and is used to convert off-balance sheet notional amounts into an equivalent statement of financial
position exposure. In the consolidated financial statements, the nominal values of credit-related contingent items are
considered off-balance sheet.
• In this section, the credit exposures are classified as per the Standard Portfolio Approach mentioned in the CBB’s
Basel II capital adequacy framework covering the Standardised Approach for credit risk. In the case of guaranteed
exposures, the exposures would normally be reported based on the guarantor; however in the consolidated financial
statements the assets are presented based on asset class (i.e. securities, loans and advances etc.).
• Under the Basel II framework, eligible collateral is taken into consideration when arriving at the net exposure,
whereas collateral is not netted in the consolidated financial statements.
• Under the Basel II framework, securities in the non-trading securities portfolio are considered at cost, whereas they
are considered at fair value in the consolidated financial statements.
• Under the Basel II framework, certain items are considered as a part of the regulatory capital base, whereas these
items are netted off against assets in the consolidated financial statements.
CREDIT RISK
ABC Group’s portfolio and credit exposures are managed in accordance with the Group Credit Policy, which applies
Groupwide qualitative and quantitative guidelines, with particular emphasis on avoiding undue concentrations or
aggregations of risk. ABC's banking subsidiaries are governed by specific credit policies that, whilst closely following
and subject to the Group Credit Policy, may be adapted to suit local practices and regulatory requirements as well as
individual units' product and sectoral needs. The Credit Risk section of the CRG’s Risk Management Department (RMD)
coordinates all technology development related to credit risk management and provides senior management with
consolidated information on Group exposures to counterparties, countries, industries, etc.
The first level of protection against undue credit risk is through the Group’s counterparty, country, industry, customer
and customer group credit threshold limits, set by the BRC and the HOCC and allocated between ABC and its banking
subsidiaries. Credit exposure to individual customers or customer groups is then controlled through a tiered hierarchy of
delegated approval authorities based on the risk rating of the customer under the Group’s internal credit rating system.
Where unsecured facilities sought are considered to be beyond prudential limits, Group policies require collateral
to mitigate the credit risk in the form of cash, securities and legal charges over the customer's assets or third-party
guarantees. The amount and type of collateral depends on an assessment of the credit risk of the counterparty.
Management monitors the market value of collateral, requesting additional collateral where required in
accordance with the underlying agreement. Management also monitors the market value of collateral held during its
review of the adequacy of the allowance for impairment losses. The Group also makes use of master netting
agreements with counterparties.
37
CREDIT RISK (Continued)
The Group employs a Risk Adjusted Return on Capital (RAROC) measure to evaluate the risk/reward relationship at
the transaction approval stage. RAROC analysis is also conducted on a portfolio basis, aggregated for each business
segment, business unit and for the Group as a whole.
Day-to-day management of existing credit exposure is the responsibility of the business unit account officers who, in
turn, must adhere to the detailed requirements for regular review of the customers and analysis of their financial and
economic condition, under the oversight of the CRG’s Head Office Credit Department in the case of customers with
limits exceeding the relevant business unit’s authority. Senior management and the BRC review quarterly the exposure
profile of the Group from the various risk parameters. Group Audit meanwhile carries out separate Risk Asset Reviews
of business units to assess and provide an independent opinion on the quality of their credit exposures and adherence
to credit policies and procedures. These measures collectively constitute the main lines of defence against undue risk for
the Group.
Credit exposures found to rank below a satisfactory risk rating are segregated and more actively supervised as impaired
assets under the guidance or supervision of the CRG’s Remedial Loans Unit (RLU). Impaired assets are reviewed regularly
by the respective business units, with progress reports submitted at least quarterly to the RLU, who in turn reports their
progress to senior management and regulators. Subject to minimum loan loss provision levels mandated under the
Group Credit Policy, specific provisions in respect of impaired assets are based on estimated potential losses, through
a quarterly portfolio review and adequacy of provisioning exercise compliant with IAS 39 reporting. An unencumbered
portfolio provision (Collective Impairment Provision) is also maintained to cover unidentified possible future losses.
Concentrations 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 indicate the
relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical location.
In order to avoid excessive concentrations of risk, Group policies and procedures include specific guidelines which focus
on country and counterparty limits and the importance of maintaining a diversified portfolio. Identified concentrations of
credit risks are controlled and managed accordingly.
Single name concentrations are monitored on an individual basis. The Group’s internal economic capital methodology
for credit risk addresses concentration risk through the application of single-name concentration add-on. Under the
CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB’s approval for any planned
exposure to a single counterparty, or group of connected counterparties, exceeding 15% of their regulatory capital base.
As at 31 December 2009, the Group’s exposures in excess of 15% of the obligor limits to individual counterparties were
as shown below:
On balance
sheet exposure
Off balance
sheet exposure
Total exposure
Counterparty A
1,639
-
1,639
Counterparty B
1,428
-
1,428
Counterparty C
1
842
843
$ million
Definition of exposure classes per Standard Portfolio
The Group has a diversified funded and unfunded credit portfolio. The exposures are classified as per the Standard Portfolio
approach under the CBB’s Basel II Capital Adequacy Framework covering the Standardised approach for credit risk.
The descriptions of the counterparty classes along with the risk weights to be used to derive the risk weighted assets
are as follows:
a.
Claims on sovereigns
These pertain to exposures to governments and their central banks. Claims on Bahrain and other GCC sovereigns
are risk weighted at 0%. Claims on all other sovereigns are given a risk weighting of 0% where such claims are
denominated and funded in the relevant domestic currency of that sovereign. Claims on sovereigns other than
those mentioned above are risk weighted based on their credit ratings.
b.
Claims on public sector entities (PSEs)
Listed Bahrain PSEs are assigned a 0% risk weighting. Other sovereign PSEs, where claims are denominated
in the relevant domestic currency and for which the local regulator has assigned a risk weighting of 0%, are
assigned 0% risk weighting by the CBB. PSEs other than those mentioned above are risk weighted based on
their credit ratings.
c.
Claims on multilateral development banks (MDBs)
All MDBs are risk weighted in accordance with ABC's credit rating except for those members listed in the World
Bank Group which are risk weighted at 0%.
d.
Claims on banks
Claims on banks are risk weighted based on the ratings assigned to them by external rating agencies, however
short-term claims on locally incorporated banks may be assigned a risk weighting of 20% where such claims
on the banks are of an original maturity of three months or less and are denominated and funded in either
Bahraini Dinars or US Dollars.
Preferential risk weights that are one category more favourable than the standard risk weighting are
assigned to claims on foreign banks licensed in Bahrain with an original maturity of three months or less and
denominated and funded in the relevant domestic currency. Such preferential risk weights for short-term claims
on banks licensed in other jurisdictions are allowed only if the relevant supervisor also allows this preferential
risk weighting to short-term claims on its banks.
No claim on an unrated bank may receive a risk weight lower than that applied to claims on its sovereign of
incorporation.
Investments in subordinated debt of banking, securities and financial entities are risk weighted at a minimum
risk weight of 100% for listed entities or 150% for unlisted entities, unless such investments exceed 20% of the
eligible capital of the investee entity, in which case they are deducted from ABC's capital.
e.
Claims on the corporate portfolio
Claims on the corporate portfolio are risk weighted based on credit ratings. Risk weightings for unrated
corporate claims are assigned at 100%.
39
Definition of exposure classes per Standard Portfolio (Continued)
f.
Claims on regulatory retail exposures
Retail claims that are included in the regulatory retail portfolio are assigned risk weights of 75% (except for past
due loans), provided they meet the criteria stipulated in the CBB’s Rule Book.
g.
Past due exposures
The unsecured portion of any loan (other than a qualifying residential mortgage loan) that is past due for more
than 90 days, net of specific provisions (including partial write-offs), is risk-weighted as follows:
(a) 150% risk weighting when specific provisions are less than 20% of the outstanding amount of the loan;
(b) 100% risk weighting when specific provisions are greater than 20% of the outstanding amount of the loan.
h.
Residential retail portfolio
Lending fully secured by first mortgages on residential property that is or will be occupied by the borrower, or
that is leased, is risk weighted at 75%. However, where foreclosure or repossession in respect of a claim can be
justified, the risk weighting is 35%.
i.
Equity portfolios
Investments in listed equities are risk weighted at 100% while those in unlisted equities are risk weighted at 150%.
j.
Other exposures
These are risk weighted at 100%.
Credit exposure and risk weighted assets
$ million
Cash
Claims on sovereigns*
Claims on public sector
entities **
Claims on multilateral
development banks
Claims on banks
Claims on corporate
portfolio
Regulatory retail
exposures
Past due exposures
Equity portfolios
Other exposures
Gross
credit
exposure
36
4,430
Funded Unfunded
exposure exposure
36
4,060
370
Cash
Eligible
collateral guarantees
19
Riskweighted
assets
459
Capital
charge
55
5,535
5,436
99
62
-
2,867
344
132
8,880
132
7,019
1,861
918
368
4,291
515
10,691
8,737
1,954
1,060
149
8,915
1,070
235
140
17
70
207
232
140
17
70
207
3
-
17
-
-
176
150
6
93
207
21
18
1
11
25
30,373
26,086
4,287
2,057
536
17,164
2,060
* Includes Ginnie Mae & Small Business Administration Pools
** Includes exposures to Collateralized Mortgage Obligations (CMOs) of Freddie Mac and Fannie Mae both of which are
deemed to be Government Sponsored Enterprises (GSE).
Monthly average gross exposures and the risk weighted assets for 2009 were $30,072 million and $17,113 million
respectively.
Geographical distribution of exposures
The geographical distribution of exposures, impaired assets and the related impairment provisions can be analysed as follows:
$ million
Gross credit
exposure
Impaired
loans
Specific provision
impaired loans
6,910
5,051
46
12,257
5
1,151
195
4,758
49
333
23
32
213
20
540
58
10
-
512
34
10
-
30,373
405
265
608
556
North America
Western Europe
Other Europe
Arab World
Other Africa
Asia
Australia/New Zealand
Latin America
Impaired
Specific provision
securities impaired securities
In addition to the above specific provisions, the Group has collective impairment provisions amounting to $166 million .
The geographical distribution of gross credit exposures by major type of credit exposures can be analysed as follows:
$ million
Cash
North
America
Western
Europe
Other
Europe
Arab
World
Other
Africa
Asia
Australia/
New Zealand
Latin
America
Total
-
-
-
36
-
-
-
-
36
Claims on sovereigns*
1,621
462
-
1,871
-
92
-
384
4,430
Claims on public sector entities **
3,202
94
-
2,223
-
6
-
10
5,535
-
37
-
95
-
-
-
-
132
952
3,322
4
3,211
2
545
190
654
8,880
Claims on multilateral
development banks
Claims on banks
Claims on corporate portfolio
1,087
997
42
4,424
3
498
5
3,635
10,691
Regulatory retail exposures
-
1
-
168
-
-
-
66
235
Past due exposures
-
10
-
130
-
-
-
-
140
-
15
-
2
-
-
-
-
17
Equity portfolios
33
1
-
26
-
10
-
-
70
Other exposures
15
112
-
71
-
-
-
9
207
6,910
5,051
46
12,257
5
1,151
195
4,758
30,373
* Includes Ginnie Mae & and Small Business Administration pools.
** Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSE.
41
Industrial sector analysis of exposures
The industrial sector analysis of exposures, impaired assets and the related impairment provisions can be analysed as follows:
$ million
Manufacturing
Mining and quarrying
Agriculture, fishing and forestry
Gross
exposure
Funded
exposure
Unfunded
exposure
Impaired
loans
Specific
provision
impaired
loans
Impaired
securities
Specific
provision
impaired
securities
4,407
3,359
1,048
90
63
1
-
62
44
18
4
3
-
-
39
35
4
1
1
-
-
867
615
252
3
2
-
-
11,695
9,733
1,962
166
93
574
527
Trade
481
410
71
82
49
-
-
Personal / Consumer finance
631
592
39
13
9
-
-
Commercial real estate financing
259
258
1
-
-
-
-
Construction
Financial
Residential mortgage
Government
Technology, media &
telecommunications
Transport
Other sectors
17
17
-
-
-
-
-
7,577
7,207
370
30
30
10
10
386
298
88
2
1
3
2
711
622
89
1
1
-
-
3,241
2,896
345
13
13
20
17
30,373
26,086
4,287
405
265
608
556
RISK MANAGEMENT (Continued)
The industrial sector analysis of gross credit exposures by major types of credit exposures can be analysed as follows:
Residential
mortgage
Government
Technology,
media &
Telcommunications
-
-
-
-
-
36
36
-
-
-
4,336
-
3
-
4,430
Manufacturing
Mining
and
quarrying
Agriculture,
fishing
and
forestry
-
-
-
-
-
-
-
Claims on
sovereigns*
53
-
-
-
38
-
Claims on
public sector
entities **
$ million
Cash
Commercial
real
estate
financing
Construction
Financial
Trade
Personal
/ Consumer
finance
Transport
Other
sectors
Total
825
-
-
-
1,077
57
-
-
-
3,223
8
71
274
5,535
Claims on
multilateral
development
banks
-
-
-
-
132
-
-
-
-
-
-
-
-
132
Claims on
banks
-
-
-
-
8,880
-
-
-
-
-
-
-
Claims on
corporate
portfolio
3,497
62
39
864
1,458
388
399
259
-
-
375
637
2,713
10,691
1
-
-
3
-
1
226
-
-
-
1
-
3
235
30
-
-
-
49
35
6
-
-
18
-
-
2
140
Residential
retail portfolio
-
-
-
-
-
-
-
-
17
-
-
-
-
17
Equity portfolios
1
-
-
-
61
-
-
-
-
-
2
-
6
70
Other exposures
-
-
-
-
-
-
-
-
-
-
-
-
207
207
4,407
62
39
867
11,695
481
631
259
17
7,577
386
711
3,241
30,373
Regulatory retail exposures
Past due
exposures
8,880
* Includes Ginnie Mae & and Small Business Administration pools.
** Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSE.
43
Exposure by external credit rating
The Group uses external ratings from Standard & Poor’s, Moody’s, Fitch Ratings and Capital Intelligence (accredited
External Credit Assessment Institutions) [ECAIs]. The breakdown of the Group’s exposure into rated and unrated
categories is as follows:
Net credit
exposure (after
credit risk
mitigation)
Rated exposure
Unrated exposure
36
-
36
Claims on sovereigns
4,430
4,057
373
Claims on public sector entities*
5,473
3,427
2,046
132
132
-
Claims on banks
7,962
6,327
1,635
Claims on corporate portfolio
9,631
1,356
8,275
$ million
Cash
Claims on multilateral development banks
Regulatory retail exposure
235
-
235
Past due exposures
140
5
135
Equity portfolios
70
-
70
Other exposures
207
-
207
28,316
15,304
13,012
* Includes Ginnie Mae & Small Business Administration pools.
** Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSEs.
It is the Group's policy to maintain accurate and consistent risk ratings across the credit portfolio through an internal
risk rating system. Risk ratings are supported by a variety of financial analytics, combined with processed market
information, to provide the main inputs for the measurement of counterparty credit risk. All internal ratings are tailored
to the various categories and are derived in accordance with the Group's Credit Policy, and are assessed and updated
regularly. Each risk rating class is mapped to grades equivalent to Standard & Poor’s, Moody’s, Fitch Ratings and Capital
Intelligence rating agencies.
The Group uses a 23-point rating scale to grade corporate and financial institution obligors, of which 20 are performing
grades. The Group’s vendor and internally developed rating tools use financial and non-financial factors besides
peer and sector comparisons in arriving at counterparty obligor ratings and may be notched up or down based upon
contingents or credit support as appropriate.
Maturity analysis of funded exposures
Residual contractual maturity of the Group’s major types of funded credit exposures, except for CMOs and Small Business
Administration pools amounting to $4,760 million and the FRN portfolio of $3,138 million, based on expected to be realised or
settled, is as follows:
$ million
Cash
within
1
month
1-3
months
3-6
months
6 - 12
months
Total
within 12
months
1–5
years
5-10 10 - 20
years
years
Over
20
years
Un- Total over
dated 12 months
Total
36
-
-
-
36
-
-
-
-
-
-
36
Claims on
sovereigns*
3,082
181
98
287
3,648
284
114
2
2
10
412
4,060
Claims on public
sector entities**
4,104
63
55
90
4,312
257
384
465
1
17
1,124
5,436
95
37
-
-
132
-
-
-
-
-
-
132
4,234
376
816
404
5,830
532
627
-
-
30
1,189
7,019
837
1,133
982
967
3,919
3,327
929
201
2
359
4,818
8,737
-
12
3
5
20
98
70
2
-
42
212
232
Claims on
multilateral
development
banks
Claims on banks
Claims on
corporate
portfolio
Regulatory retail
exposures
Past due
exposures
57
38
37
1
133
4
1
-
1
1
7
140
Residential retail
portfolio
-
-
-
-
-
-
-
14
3
-
17
17
Equity portfolios
-
-
-
-
-
-
-
-
-
70
70
70
Other exposures
-
-
-
-
-
-
-
-
-
207
207
207
12,445
1,840
1,991
1,754
18,030
4,502
2,125
684
9
736
8,056 26,086
* Includes exposures to Ginnie Mae and Small Business Administration pools.
* * Includes exposures to CMOs of Freddie Mac and Fannie Mae both of which are deemed to be GSEs.
45
Maturity analysis of unfunded exposures
The residual contractual maturity analysis of unfunded exposures is as follows:
$ million
Claims on
sovereigns
within
1
month
1-3
months
3-6
months
6 - 12
months
Total
within 12
months
1–5
years
18
27
22
27
94
275
Over
20
years
38
14
1
-
-
53
99
476
13
-
7
-
496
1,861
632
78
10
20
-
740
1,954
2
1
-
-
-
-
1
3
2,721
1,422
106
11
27
-
1,566
4,287
6
5
29
6
46
293
416
244
412
1,365
Claims on
corporate
portfolio
141
410
208
455
1,214
-
2
-
-
458
860
503
900
-
276
Total
-
Claims on banks
-
Un- Total over
dated 12 months
1
Claims on public
sector entities
Regulatory retail
exposures
5-10 10 - 20
years
years
370
Unfunded exposures are divided into the following exposure types in accordance with the calculation of credit risk weighted
assets in the CBB’s Basel II capital adequacy framework:
(a)
Credit-related contingent items comprising letters of credit, acceptances, guarantees and commitments.
(b)
Derivatives, which are contracts the values of which are derived from one or more underlying financial instruments or
indices and include futures, forwards, swaps and options in the interest rate, foreign exchange, equity and credit markets.
In addition to counterparty credit risk, in accordance with the Basel II accord derivatives are also exposed to market risk, which
requires a separate capital charge.
Credit-related contingent items
As mentioned above, for credit-related contingent items, the nominal value is converted to an exposure through the application
of a credit conversion factor (CCF). The CCF is at 20%, 50% or 100% depending on the type of contingent item, and is used to
convert off-balance sheet notional amounts into an equivalent on-balance sheet exposure.
Undrawn loans and other commitments represent commitments that have not been drawn down or utilised at the reporting
date. The nominal amount is the base upon which a CCF is applied for calculating the exposure. CCF ranges between 20%
and 50%, for commitments with original maturity of up to one year and over one year respectively, and 0%, applicable to
commitments which can be unconditionally cancelled at any time.
The table below summarises the notional principal amounts and the relative exposure before the application of credit
risk mitigation:
Notional
Principal
Credit exposure*
Short-term self-liquidating trade and transaction-related contingent items
5,987
2,820
Direct credit substitutes, guarantees and acceptances
1,913
911
894
408
8,794
4,139
$ million
Undrawn loans and other commitments
RWA
2,725
* Credit exposure is after applying CCF.
At 31 December 2009, the Group held eligible guarantees as collateral in relation to credit-related contingent items
amounting to $328 million.
Derivatives
Most of the Group’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve
offering products to customers. Positioning involves managing market risk positions with the expectation of profiting
from favourable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price
differentials between markets or products. Also included under this heading are those derivatives which do not meet
IAS 39 hedging requirements.
The Group uses forward foreign exchange contracts and currency swaps to hedge against specifically identified currency
risks. In addition, the Group uses interest rate swaps and interest rate futures to hedge against the interest rate risk
arising from specifically identified loans and securities bearing fixed interest rates. The Group participates in both
exchange traded and over-the-counter derivative markets.
Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on
its contractual obligations and is limited to the positive fair value of instruments that are favourable to the Group.
The majority of the Group’s derivative contracts are entered into with other financial institutions and there was no
significant concentration of credit risk in respect of contracts with positive fair value with any individual counterparty
as at 31 December 2009.
The counterparty credit risk for derivative and foreign exchange instruments is subject to credit limits on the same basis
as other credit exposures. Counterparty credit risk arises in both the trading book and the banking book.
For regulatory capital adequacy purposes, the Group uses the current exposure method to calculate the counterparty
credit risk of derivative and foreign exchange instruments in accordance with the credit risk framework in the CBB’s
Basel II capital adequacy framework. Counterparty credit exposure comprises the sum of replacement cost and potential
future exposure. The potential future exposure is an estimate that reflects possible changes in the market value of the
individual contract during the remaining life of the contract and is measured as the notional principal amount multiplied
by an add-on factor.
47
The aggregate notional amounts for interest rate and foreign exchange contracts as at 31 December 2009 were
as follows:
Derivatives
Interest rate contracts
Foreign
exchange
contracts
Total
3,777
5,623
9,400
514
70
584
4,291
5,693
9,984
Credit RWA (replacement cost plus potential future exposure)
106
42
148
Market RWA
102
1,392
1,494
$ million
Notional – Trading book
Notional – Banking book
IMPAIRMENT OF ASSETS
Impairment and uncollectability of financial assets
An assessment is made at each quarter to determine whether there is objective evidence that a specific financial
asset or group of financial assets may be impaired. If such evidence exists, an impairment loss is recognised in the
consolidated statement of income.
In respect of a borrower or a group of borrowers, evidence of impairment may include indications of:
(a)
(b)
(c)
significant financial difficulty, default or delinquency in interest or principal payments;
the probability that it will enter bankruptcy or other financial reorganisation; and
based on observable data, a measurable decrease in estimated future cash flows, such as changes
in arrears or economic conditions, which correlate with defaults.
Impairment is determined as follows:
(a)
(b)
(c)
for assets carried at amortised cost, impairment is based on the present value of estimated future cash flows
discounted at the original effective interest rate;
for assets carried at fair value, impairment is the difference between cost and fair value; and
for assets carried at cost, impairment is based on the present value of estimated future cash flows discounted at
the current market rate of return for a similar financial asset.
The Group uses the provision account to record impairments except for equity and similar investments, which are
written down, with future increases in their fair value being recognised directly in equity.
Impairment losses on financial assets
On a quarterly basis the Group assesses whether any provision for impairment should be recorded in the consolidated
statement of income. In particular, considerable judgement by management is required in the estimation of the amount
and timing of future cash flows when determining the level of provision required. Such estimates are necessarily based
on assumptions about several factors involving varying degrees of judgement and uncertainty, and actual results may
differ, resulting in future changes in such provisions.
Impairment against specific groups of financial assets
In addition to specific provisions against individually significant loans and advances and securities, the Group also
makes a provision to cover impairment against specific groups of financial assets where there is a measurable decrease
in estimated future cash flows. This provision is based on deterioration of the financial assets decided by putting the
portfolio through rigorous credit risk scenario testing and averaging the existing Expected Loss (EL) with a severely
stressed scenario EL. Further, the amount of provision is also based on the historical loss pattern for loans within each
grading and is adjusted to reflect current economic changes.
The internal grading process takes into consideration factors such as collateral held, deterioration in country risk,
industry and technological obsolescence as well as identified structural weakness or deterioration in cash flows.
Industry sector analysis of the specific and collective impairment provisions charges
$ million
Manufacturing
37
Financial
45
Trade
31
Personal / Consumer finance
Government
Commercial real estate financing
2
(6)
6
115
MARKET RISK
Market risk is the risk that the Group’s earnings or capital or its ability to support its business strategy will be impacted
by changes in market rates or prices related to interest rates, equity prices, credit spreads, foreign exchange rates and
commodity prices.
The Group has established risk management policies and limits within which exposure to market risk is monitored,
measured and controlled by the RMD with strategic oversight exercised by ALCO. The RMD’s Market Risk Management
(MRM) Unit is responsible for developing and implementing market risk policy and risk measuring/monitoring
methodology and for reviewing all new trading and investment products and product limits prior to ALCO approval.
MRM’s core responsibility is to measure, report, monitor and control market risk. For further explanation please refer to
Note 24 to the Financial Statements.
The Group classifies market risk into the following:
• Trading Market Risk arises from movements in market risk factors in trading transactions where the main strategy is
to trade in the short term.
• Non-Trading Market Risk in Securities arises from market factors impacting securities that are held for long-term
investment.
• Non-Trading Asset and Liability Risk exposures arise where the re-pricing characteristics of the Group’s assets do
not match with those of its liabilities.
49
MARKET RISK (Continued)
As there is no specific measure that reflects all aspects of market risk, the Group analyses risk using various risk
measures and reports the results to senior management.
The measurement techniques used to measure and control market risk are:
•
•
•
•
Value-at-Risk (VaR)
Basis Point Value (BPV)
Stress Testing
Non-Technical Risk Measures
On an annual basis, the BRC reviews and approves VaR Trading Guidance, BPV Trading and Investment Limits, Options
Stress Testing Trading Limits and Non-Technical Trading and Investment Limits.
The Group is exposed to Foreign Exchange Rate Risk through both its trading portfolios and its structural positions.
Foreign exchange rate risk is managed by appropriate limits and stop loss parameters determined by each subsidiary's
local ALCO and approved by its Board of Directors. ABC's structural balance sheet positions, which relate to its net
investment in its foreign subsidiaries, are reviewed regularly by ALCO in accordance with the Group's strategic plans and
managed on a dynamic basis by Group Treasury, hedging such exposures as appropriate.
Interest Rate Risk arises from the possibility that changes in interest rates will affect future profitability or the fair
values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate
re-pricing of assets and liabilities. The most prominent market risk factor for the Group is interest rates. This risk is
minimised as the Group’s rate sensitive assets and liabilities are mostly floating rate, where the duration risk is lower.
In general, the Group uses matched currency funding and translates fixed rate instruments to floating rate to better
manage the duration in the asset book.
INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)
The Group uses the Basis Point Value (BPV) approach to control the IRRBB. BPV measures changes in economic value
resulting from changes in interest rates. In the BPV methodology, the modified duration and, for some products, the
effective duration approach is used to measure the IRRBB. Modified duration is a good measure of linear risk for interest
rate sensitive products. Effective duration takes into consideration the fact that any embedded option has an impact on
the sensitivity. The effective duration is typically a better representation of interest sensitivity than modified duration
with products that have embedded options.
The BPV measure incorporates the entire rate sensitive segment of the balance sheet for the Group and is classified
into appropriate buckets. Non-maturity interest rate sensitive assets and liabilities are bucketed in the short term. Equity
is considered a non-interest sensitive component and is excluded from these computations. As at 31 December 2009,
an immediate shift up by 25 basis points in interest rates would potentially impact the Group’s economic value by (-)
$30 million.
As a normal part of its treasury trading activities, the Group may also be exposed to Equity, Debt Securities,
Commodity and Volatility Risk. These risks are also monitored by MRM against Board approved limits.
The Group’s capital charge in respect of market risk in accordance with the Standardised methodology is as follows:
RWA
Year end Capital
Charge
Capital charge
–Minimum*
Capital charge
–Maximum*
- Specific interest rate risk
4
-
-
-
- General interest rate risk
102
12
12
18
12
1
1
9
1,386
166
77
166
6
1
-
1
1,510
180
$ million
Interest rate risk
Equity position risk
Foreign exchange risk
Options risk
Total market risk
* The information in these columns shows the minimum and maximum capital charge of each of the market risk
categories during the twelve-month period ended 31 December 2009.
EQUITY POSITION RISK
Equity position risk arises from the possibility that changes in the prices of equities or equity indices will affect future
profitability or the fair values of financial instruments. The Group is exposed to equity risk in the trading position and
investment portfolio, primarily in its core international and GCC markets.
Equity positions in the banking book
$ million
Quoted Equities
26
Unquoted Equities
55
81
Realised gains during the year
-
Unrealised gains as at 31 December 2009 in equity
6
LIQUIDITY RISK
The Group maintains liquid assets at prudential levels to ensure that cash can quickly be made available to honour
all its obligations, even under adverse conditions. The Group is generally in a position of excess liquidity, its principal
sources of liquidity being its deposit base, liquidity derived from its operations and inter-bank borrowings. It has specific
policies regarding liquid assets coverage of short-term wholesale deposits and in particular the potential risk impact
of withdrawals by large single depositors, ensuring that there is no reliance on any one customer or small group of
customers. The Minimum Liquidity Guideline (MLG) is used to manage and monitor daily liquidity. The MLG represents
the minimum number of days the Group can survive the combined outflow of all deposits and contractual drawdowns,
under market value driven encashability scenarios. In addition, an internal liquidity/maturity profile is generated to
summarise the actual liquidity gaps versus the revised gaps based on internal assumptions. The maturity profile of the
Group’s assets, liabilities and off-balance sheet items is given in Note 24 to the Financial Statements.
51
CURRENCY RISK
The Group is exposed to foreign exchange rate risk through both its trading portfolios and its structural positions. Foreign
exchange rate risk is managed by appropriate limits and stop loss parameters determined by each subsidiary's local
ALCO and approved by its Board. The Group's structural balance sheet positions, which relate to its net investment in its
foreign subsidiaries, are reviewed regularly by ALCO in accordance with the Group's strategic plans and managed on a
dynamic basis by Group Treasury, hedging such exposures as appropriate.
OPERATIONAL RISK
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems
or from external events. Operational risk is inherent in all business activities and can never be eliminated entirely;
however shareholder value can be preserved and enhanced by managing, mitigating and, in some cases, insuring
against operational risk. Operational risk includes regulatory, reputational and documentation risk.
To manage Operational risk, a framework has been implemented across the Group which includes identification,
measurement, management, monitoring and risk control/mitigation elements. A variety of underlying processes and
controls have also been put in place to support this framework. These include risk and control self-assessments, key risk
indicators, event management, new product review and approval process and business contingency plans.
Operational risks are identified and assessed through the Risk & Control Self-Assessment (RCSA) process. Once identified
the potential impact of the risks is assessed through a combination of likelihood and impact before (inherent risk) and
after (residual risk) considering the effectiveness of the controls in place to manage the risks identified. Monitoring
of risks and controls is done through the use of key indicators (KIs), where appropriate, against thresholds/escalation
triggers, to ensure timely management action when a trigger is breached. Where required, corrective action plans are also
formulated to address risks and control issues. A process to capture operational loss events has also been put in place.
The Group’s intention is to make operational risk transparent throughout the enterprise. As such, processes for
regular quarterly reporting of relevant operational risk management information to business management, senior
management, ORCO, BRC and the Board of Directors are in place.
The Group is currently following the Standardised Approach (TSA) for operational risk capital. As such, a detailed
mapping of the Group’s business lines and gross income to the Basel II Business Line Framework has been completed
and implemented.
Group policy dictates that the operational functions of booking, recording and monitoring of transactions are carried
out by staff that are independent of the individuals initiating the transactions. Each business line – for these purposes
including Operations, Information Technology, Human Resources, Legal & Compliance and Financial Control – is further
responsible for employing the aforementioned framework process and control programmes to manage its operational
risk within the guidelines established by Group policy and to develop internal procedures that comply with Group
policies. To ensure that all operational risks to which the Group is exposed are adequately managed, support functions
are also involved in the identification, measurement, management, monitoring and control/mitigation of operational
risk as appropriate.
In accordance with the Standardised methodology, as at 31 December 2009 the total capital charge in respect of
operational risk was $143 million. This capital charge was computed by categorising the Group's activities into eight
business lines (as defined by the Basel II framework) and multiplying each business line's three-year average gross
income by a pre-defined beta factor.
BUSINESS RISK
Business risk represents the earnings volatility inherent in all business activities due to the uncertainty of revenues and costs
associated with changes in the economic and competitive environment. Business risk is evaluated through a Business and
Strategy Development process. A Risk Budget is developed at the start of each year along with a Business Plan by each unit.
Subsequently, the actual quarterly performance is compared with that budgeted, including the historical volatility in earnings
and detailed financial budget which supports both the decision making and the planning process.
BUSINESS CONTINUITY
As part of ABC’s aim to meet local and international regulatory obligations as well as to protect the Group’s business
functions, assets and employees, it has in place robust Business Continuity Plans across the Group. These plans are
designed to provide each ABC subsidiary with the necessary guidelines and procedures to be used in case of an
emergency. The plans were designed employing best practice methodology BS25999 as used by most UK and other
European financial institutions. The business continuity plans cover local and regional risk scenarios which might impact
on any business unit in ABC Group. To address local disaster events the Group has established business continuity
centres within the geographic location of each of the business units. To address a regional disaster scenario affecting
Bahrain, ABC has established a licensed branch in the UK which is maintained in full operational status and with the
capability of carrying out the majority of ABC’s activities. As regards certain activities relating to marketable securities,
brokerage and client-related businesses, the alternative site selected is ABC’s subsidiary in Jordan, approval for which
has been obtained from the Central Bank of Jordan. These two licenses will enable ABC Head Office to carry out all of
its functions from these two countries. These plans are being stress tested to ensure that the guidelines and procedures
are fully effective. Continuous updates of these plans are performed on an annual basis, to ensure that they are kept up
to date with changes in each ABC unit.
LEGAL RISK
Inadequate documentation, legal and regulatory incapacity or insufficient authority of a counterparty and contract invalidity
or unenforceability are all examples of legal risk. Identification and management of this risk are the responsibilities of the
Head Office Legal & Compliance Department and are carried out through consultation with internal and external legal
counsels, together with close monitoring of the litigation cases involving the Group. All major Group subsidiaries have
their own in-house legal departments, acting under the guidance of the Legal & Compliance Department, which aims to
facilitate the business of the Group by providing proactive, business oriented and creative advice.
CAPITAL STRUCTURE
The Group’s capital base comprises (a) Tier 1 capital which includes share capital, reserves, retained earnings and
minority interests and (b) Tier 2 capital which consists of the subordinated term debt, collective impairment provisions,
profit for the current period and equity revaluation.
ABC’s issued and paid up share capital was $2,000 million at 31 December 2009, comprising 2,000 million shares of
$1 each.
The subordinated term debt, amounting to $500 million, was raised under ABC’s $2,500,000,000 Euro Medium Term
Deposit Note Programme and represents unsecured obligations of the Group and is subordinated in the right of
payment to the claims of all depositors and creditors of the Group. These are issued for ten years with a call option
which can only be exercised after five years. During the year, ABC repurchased a portion of its subordinated liabilities
with a nominal value of $88 million. The resultant net gain amounting to $34 million is included in the consolidated
53
CAPITAL STRUCTURE (Continued)
statement of income for the year ended 31 December 2009. The inclusion of the subordinated term debt in the Tier 2
capital base and the subsequent buy back has been approved by the CBB.
The Group’s capital base of $3,347 million comprises Tier 1 capital of $2,664 million and Tier 2 capital of $683 million as
detailed below:
Breakdown of Capital Base
$ million
Tier 1
Tier 2
Total
Share capital
2,000
-
2,000
Share premium
110
-
110
Statutory reserve
309
-
309
General reserve
150
-
150
-
(261)
Retained earnings brought forward
Profit for the year
(261)
-
122
122
Non- controlling interests in consolidated subsidiaries
390
-
390
Foreign currency translation adjustment
(16)
-
(16)
Unrealized net gains from fair value of equity securities
-
1
1
Collective impairment provisions
-
166
166
Subordinated term debt
-
412
412
2,682
701
3,383
Tier 1 and Tier 2 capital before deductions
Significant minority investments in banking, securities and other financial entities
Other deductions – Unamortized IT costs
Tier 1 and Tier 2 capital base
(16)
(16)
(32)
(2)
(2)
(4)
2,664
683
3,347
Risk weighted assets (RWA)
Credit risk
17,164
Market risk
1,511
Operational risk
1,188
19,863
Tier 1 ratio
13.4%
Capital adequacy ratio
16.9%
CAPITAL ADEQUACY RATIOS (CAR)
The objective of capital management at the Group is to ensure the efficient utilisation of capital in relation to business
requirements and growth, risk profile and shareholders’ returns and expectations.
The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions
and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may issue
capital/Tier 2 securities or adjust the amount of dividend payment to shareholders. No changes have been made in the
objectives, policies and processes from the previous year.
In order to augment the Group’s capital resources, the Board of Directors at its meeting held on 23 December 2009
resolved to convene an Extraordinary General Meeting to increase the authorised, issued and paid up share capital of
the Bank from US$2,000 million to US$3,110 million by way of a priority rights offer to existing shareholders. This was
approved by the shareholders at an Extraordinary General Meeting held on 28 January 2010.
The Group’s total capital adequacy ratio as at 31 December 2009 was 16.9% compared with the minimum regulatory
requirement of 12%. The Tier 1 ratio was 13.4% for the Group. The Group ensures adherence to the CBB’s requirements
by monitoring its capital adequacy against higher internal limits.
Each banking subsidiary in the Group is directly regulated by its local banking supervisor which sets and monitors
local capital adequacy requirements. ABC ensures that each subsidiary maintains sufficient capital levels for legal and
regulatory compliance purposes. There have been no instances of deficiencies in the banking subsidiaries’ local capital
adequacy requirements.
The Tier 1 and total capital adequacy ratio of the significant banking subsidiaries (those whose regulatory capital
amounts to over 5% of the Group’s consolidated regulatory capital) under the local regulations were as follows:
Subsidiaries (over 5% of Group’s consolidated regulatory capital)
Tier 1 ratio
CAR (total)
23.0%
24.1%
ABC International Bank plc*
14.3%
17.7%
Banco ABC Brasil S.A.*
14.6%
14.6%
* CAR has been computed after mandatory deductions from the total of Tier 1 and Tier 2 capital.
Other than restrictions over transfers to ensure minimum regulatory capital requirements at the local level,
management believes that there are no impediments on the transfer of funds or reallocation of regulatory capital
within the Group.
CAPITAL MANAGEMENT
Internal Capital Adequacy Assessment Process (ICAAP)
The Group’s capital management aims to maintain an optimum level of capital to enable it to pursue strategies that
build long term shareholder value, whilst always meeting minimum regulatory ratio requirements.
Among the key principles driving capital management at the Group are:
• Adequate capital is maintained as a buffer for unexpected losses to protect stakeholders i.e. shareholders and
depositors;
• Maximise return on capital and generate sustainable return above the cost of capital.
The Group seeks to achieve the following goals by implementing an effective capital management framework:
•
•
•
•
•
Maintain an effective internal capital adequacy;
Meet the regulatory capital adequacy ratios and maintain a prudent buffer;
Maintain a strong credit rating;
Generate sufficient capital to support overall business strategy;
Integrate capital allocation decisions with the strategic and financial planning process.
55
CAPITAL MANAGEMENT (Continued)
In addition, as the Group prepares itself for compliance with the Foundation Internal Ratings Based (FIRB) requirements
it has developed an ICAAP framework. The purpose of the ICAAP framework is to document the Group’s structured
process for the ongoing assessment of its overall capital adequacy in relation to its risk profile and a strategy for capital
management as set out in Principle 1 of Basel II Pillar II.
This framework outlines the Group’s risk strategy, capital objectives, methodology used to measure internal capital, the
related assumptions underpinning the methodologies and a set of processes for capital management such as reviewing,
monitoring and controlling capital usage and allocation including:
• In January 2008 the CBB issued ICAAP guidelines for capital management. Within this framework the risk strategy as
approved by the Board of Directors is incorporated, underscoring Board and senior management responsibility and
oversight. The risk strategy document outlines the Group’s risk appetite, capital adequacy goals and risk targets;
• The Group has an integrated approach to risk strategy and business strategy which analyses current and future capital
requirements in relation to strategic objectives as part of the annual business planning process. The Business Plan is
used in estimating the economic capital projections. In addition, throughout the year, as part of the process, actual
usage is monitored against the projections;
• Comprehensive assessment of economic capital, i.e. credit, market and operational risks, and processes relating to
other risks such as liquidity, interest rate risk in the banking book, strategic and reputational risks;
• The processes in place for monitoring, reporting and internal audit review.
The methodologies for internally estimating capital for the Group’s key risks are as follows:
a.
Credit Risk: Assessed on the basis of Foundation IRB Risk Weights (FIRB). This supports the internal estimation
of Economic Capital per Business Segment, Business Unit and aggregated at the Group level.
b.
Market Risk: Computed for both the Trading and the Banking books using the Internal Model approach.
VaR measures the worst expected loss over a given horizon under normal market conditions at a given confidence
interval. It provides an aggregate view of the portfolio’s risk that accounts for leverage, correlations, and current
positions. The Group uses the historical simulation approach to measure VaR. The key model assumptions for the trading
portfolio are:
• 2 year historical simulation
• 1 day VaR
• 99% (one tail) or 98% (two tail) confidence interval
The historical simulation method provides a full valuation going back in time, such as over the last 500 days, by
applying current weights to a time series of historical returns.
The Group uses the stress testing methodology to review its exposures against historical and Group-specific extreme scenarios.
c.
Operational Risk: Applied on the Standardised Approach basis.
CAPITAL ALLOCATION
The output of the ICAAP gives senior management and the Board an improved view of the risks the Group faces and the
impact of these risks. The Group’s ICAAP process computes the following metrics:
1)
2)
3)
4)
5)
Expected Loss
Credit Risk Capital
Market Risk Capital
Operational Risk Capital
Total Economic Capital
Other risks such as Liquidity, Strategic and Reputational risks are currently captured by providing a capital buffer.
The results of the ICAAP are subject to stress testing to take account of the breakdown of the underlying assumptions.
Specific stress tests for both credit and market risks have been developed to focus on the key risks the Group faces
based on its risk exposure, portfolio and strategic objectives.
The Group currently conducts stress tests covering 14 stress cases, of which examples include:
•
•
•
•
•
•
Investment grade / sub-investment grade ratings stressed;
Investment grade / sub-investment grade Probability of Default (PD) stressed;
Sub-investment stressed both for ratings and PD;
Total portfolio PD stressed;
Total portfolio ratings stressed; and
Total portfolio ratings and PD stressed.
The Group is in the process of designing and implementing an advanced tool for estimating economic capital under
stress scenarios as follows:
1. Global Recession
• This scenario stresses the PDs and Loss Given Default (LGDs) by time period and distinguishes between
on-and-off balance sheet exposures.
2. Escalated Regional Political Tension
• PDs and LGDs for entities in the region are stressed individually.
3. Middle East Recession
• As for Global Recession above but for Arab world exposures only.
4. European Recession
• As for Global Recession above but for Europe exposures only
57
CAPITAL ALLOCATION (Continued)
The Group has also designed three broad families of STS for market risk:
1.
Sensitivity STS: These STS are mostly applied as instantaneous, parallel and non-parallel shocks of fixed,
predetermined quanta to the current levels of market reference interest rates. Examples of these Sensitivity
STS include:
• Parallel shocks for all market reference interest rates; and
• Non-parallel shocks applied sequentially to the term structures of interest rates.
2.
Hypothetical STS: This family of STS is designed to quantify the likely impact of unlikely but not improbable
relevant events which have not been observed before in the financial markets but which might materialize at
short notice. Examples of the Hypothetical STS include:
• Revaluation or devaluation scenarios for currencies in which the Group has material, significant open FX
positions; and
• Instantaneous shock scenarios designed to gauge the tilt / curvature / convexity impact of bar-bell and
asymmetric movements in the levels of reference market interest rates.
3.
Historical STS: These STS replicate the observed behaviour of reference market data across IR, FX and Equity
classes of risk factors during particular historical periods of elevated market turbulence. Examples include the
following:
•
•
•
•
The US and European Bond markets crisis of 1994;
The Asian Crisis of 1997;
The LTCM and Russian Crisis of 1998; and
The Lehman default of 2008
In addition to the above STS, and with a view to correctly gauging the risk of non-linear positions in the Group’s
Trading Book which might be sensitive to instantaneous, synchronous changes in the level of two or more
classes of risk factors – such as interest rates and implied volatilities or of FX rates and implied volatilities –
the MRM has created a particular subset of hypothetical STS, the so-called “Doomsday” STS, which are applied
daily in the Group’s main trading and position-keeping systems to produce scenario-based revaluations and then
compared against appropriate limits set by the bank’s senior management.
SUPERVISORY REVIEW AND EVALUATION PROCESS (SERP)
The CBB is the lead regulator for the Group and sets and monitors capital requirements on both a consolidated and
an unconsolidated basis. Individual banking subsidiaries are regulated directly by their local banking supervisors, who
set and monitor their capital adequacy requirements. The CBB requires each Bahrain-based bank or banking group
to maintain a minimum ratio of total capital to risk-weighted assets of 12%, taking into account both on- and offbalance sheet transactions. However, under the SERP guidelines the CBB would also make an individual risk profile
assessment of all banks and, instead of applying a standard minimum capital adequacy requirement, the supervisor
may allow a lower capital adequacy ratio (but in excess of 8%) for a bank with sound risk management capabilities.
The CBB initiated this assessment process in first quarter of 2008. The Group’s capital management strategy is currently
to maintain a buffer over the 12% minimum regulatory capital requirement to account for liquidity, concentration,
reputation, strategic, country and other risks while enhancing its risk management and risk control infrastructure.
This would ultimately allow the Group to achieve a successful assessment and pursue possible lower capital
requirements from the CBB. At the same time, senior management strongly believes in the economic value of capital
and is committed to maximising intrinsic value for all stakeholders. Details of risk weighted assets, capital base and the
risk asset ratio are provided in Note 32 to the Financial Statements.
Related party transactions
Related parties represent associated companies, major shareholders, directors and key management personnel of the
Group and entities controlled, jointly controlled or significantly influenced by such parties. Pricing policies and terms of
these transactions are approved by the Group's senior management and are based on arms length rationale.
a. Exposures to related parties
$ million
Claims on shareholders
-
Claims on directors & senior management
3
Claims on staff
22
b. Liabilities to related parties
$ million
Connected deposits
1,579
Restructured facilities
Facilities restructured during the year ended 31 December 2009 amounted to $11 million. The carrying amount of
restructured facilities amounted to $59 million as at 31 December 2009.
Assets sold under recourse agreements
The Group has not entered into any recourse agreement during the year ended 31 December 2009.
Movement in specific and collective impairment provisions
Specific Provisions
Collective
Impairment
provision
Loans*
Securities
Other assets and offbalance sheet items
At beginning of the year
213
1,178
17
162
Amounts written off
(29)
(610)
-
-
Write backs / cancellation due to improvement
(10)
(23)
(2)
-
Additional provisions made
127
17
-
4
12
(6)
$ million
Exchange adjustment and other movements
Balance at 31 December 2009
313
556
(11)
4
-
166
*In addition to the above, specific provision on loans include $52 million towards country exposures.
59
GROUP FINANCIAL REVIEW
(All figures stated in US dollars)
INCOME STATEMENT
In 2009, the Group reported a net profit for the year of $122 million compared with a net loss of $880 million in 2008.
Net interest income was 9% lower than 2008, at $391 million (2008: $431 million), while non-interest income rose by 42%
to $250 million (2008: $176 million). Net impairment provisions amounted to $115 million, compared with $1,055 million
put aside in 2008 mainly to cover deterioration in the market value of the Group’s holding of non-trading securities. The net
operating income was $526 million, as against a net operating loss of $448 million in 2008.
Operating expenses decreased by 7% to $326 million (2008: $352 million). Profit before taxation and income attributable
to non-controlling interests was therefore $200 million, compared with a loss of $800 million in 2008. After taxation
on operations outside Bahrain of $46 million (2008: $36 million) and income attributable to non-controlling interests of
$32 million (2008: $44 million), the net profit for the year was $122 million, compared with a net loss for 2008 of
$880 million.
SOURCES AND USES OF FUNDS
The Group’s asset profile is predominantly made up of securities, loans and placements. Non-trading securities stood at
$9,552 million (2008: $10,623 million), money market placements at $3,949 million (2008: $4,017 million) and liquid funds
and trading securities at $781 million (2008: $949 million). The loans and advances portfolio stood at $10,949 million (2008:
$11,931 million) while interest receivable, premises and equipment and other assets, in aggregate standing at $734 million
(2008: $966 million), made up the remainder of total assets. Placements, together with liquid funds of $646 million (2008:
$823 million), represented 17.7% (2008: 17.0%) of total assets.
These assets were funded by deposits from customers of $9,909 million (2008: $10,728 million), deposits from banks and
other financial institutions totalling $10,303 million (2008: $12,024 million), term notes, bonds and other term financings of
$2,344 million (2008: $2,498 million) and certificates of deposit of $34 million (2008: $38 million). Interest payable, taxation
and other liabilities amounted in aggregate to $794 million (2008: $1,110 million). Total deposits included $4,079 million
(2008: $5,814 million) relating to sale and repurchase agreements.
The total assets of the Group in 2009 amounted to $25,965 million (2008: $28,486 million). Average assets were $26,629 million
(2008: $30,512 million) while average liabilities, excluding shareholders’ equity, amounted to $24,560 million
(2008: $28,805 million).
In 2009, the Group reported a net profit for the
year of $122 million compared with a net loss of
$880 million in 2008.
CREDIT COMMITMENTS, CONTINGENT ITEMS AND DERIVATIVES
At the end of 2009, the Group’s consolidated off-balance sheet items stood at $18,778 million (2008: $22,637 million)
including credit commitments and contingencies of $8,794 million (2008: $8,788 million). The total credit risk-weighted
asset equivalent of commitments and contingent items and derivatives was $2,827 million (2008: $3,535 million).
The Group uses a range of derivative products for the purposes of hedging and servicing customer-related requirements,
as well as for proprietary trading purposes. The total market risk-weighted equivalent of the exposures under these
categories at the end of 2009 was $1,494 million (2008: $791 million).
No significant credit derivative trading activities were undertaken during the year.
GEOGRAPHICAL AND MATURITY DISTRIBUTION OF THE BALANCE SHEET
In 2009, while the proportion of ABC Group’s financial assets in the Arab world and North America decreased from 42% to 39%
and 27% to 24% respectively, the proportion of assets in Latin America increased from 11% to 16%, while that in Western
Europe remained the same at 16%. The proportion of liabilities to the Arab world and Latin America increased from 64% to 65%
and 8% to 12% respectively, and that to North America reduced from 19% to 14% whilst that to Western Europe remained the
same at 8%.
Financial Assets
(%)
Liabilities & Equity
Loans & Advances
2009
2008
2009
2008
2009
2008
Arab world
39
42
65
64
55
68
Western Europe
16
16
8
8
6
6
3
2
1
1
7
6
North America
24
27
14
19
1
1
Latin America
16
11
12
8
30
18
Asia
Others
2
2
-
-
1
1
100
100
100
100
100
100
61
GEOGRAPHICAL AND MATURITY DISTRIBUTION OF THE BALANCE SHEET - CONTINUED
An analysis of the maturity profile of financial assets according to when they are expected to be recovered or settled or
when they could be realised shows that, at the end of 2009, 72% (2008: 73%) did not exceed one year’s maturity. Loans
and advances maturing within one year amounted to 50% (2008: 57%) of all loans and advances. The proportion of
liabilities maturing within one year was 70% (2008: 73%) of all liabilities and equity.
Financial Assets
(%)
Within 1 month
Liabilities & Equity
2009
2008
2009
2008
50
49
39
37
1-3 months
7
8
21
24
3-6 months
9
10
3
8
6-12 months
6
6
7
4
Over 1 year
26
25
17
16
2
2
13
11
100
100
100
100
Undated
DISTRIBUTION OF CREDIT EXPOSURE
ABC Group’s credit exposure (defined as the gross credit risk to which the Group is potentially exposed) as at 31 December
2009 is given below.
$ million
Funded Exposure
Credit Commitments &
Contingent Items
Derivatives*
2009
2008
2009
2008
2009
2008
7,690
10,636
2,450
2,229
377
565
Customer type
Banks
Non-banks
10,072
9,235
4,130
3,975
50
139
Sovereign
7,634
7,744
2,214
2,584
-
-
25,396
27,615
8,794
8,788
427
704
1 = Exceptional
5,932
8,456
67
293
-
-
2 = Excellent
1,026
2,561
612
513
129
296
3 = Superior
5,643
6,298
1,109
978
161
81
Risk rating
4 = Good
3,746
2,561
2,048
1,421
70
65
5 = Satisfactory
6,650
6,008
3,757
4,272
29
231
6 = Adequate
1,444
1,064
500
534
1
3
631
547
513
619
14
28
7 = Marginal
8 = Special Mention
134
59
4
10
-
-
9 = Substandard
133
24
115
30
-
-
51
32
69
118
23
-
10 = Doubtful
11 = Loss
6
5
-
-
-
-
25,396
27,615
8,794
8,788
427
704
* Derivative exposures are computed as the cost of replacing derivative contracts represented by mark-to-market values
where they are positive, and an estimate of the potential change in market values reflecting the volatilities that affect them.
CLASSIFIED EXPOSURES AND IMPAIRMENT PROVISIONS
Non-performing loans and off-balance sheet credits are formally defined as those in default on contractual repayments of
principal or on payment of interest in excess of 90 days. In practice, however, all credits that give rise to reasonable doubt
as to timely collection, whether or not they are in default as so defined, are treated as non-performing. Such credits are
immediately placed on non-accrual status and all past due interest reversed, and any release of the accumulated unpaid
interest thereafter is made only as permitted by International Financial Reporting Standards (IFRS).
The total of all loans on non-accrual as at the end of 2009 was $405 million (2008: $235 million). Aggregate provisions
at the end of 2009 stood at $531 million (2008: $427 million) and constituted 131% (2008: 182%) of all non-performing
loans and 4.6% (2008: 3.5%) of gross loans and advances.
The total of all impaired securities as at the end of 2009 was $608 million (2008: $1,254 million). Aggregate provisions at
the end of 2009 stood at $556 million (2008: $1,178 million) and constituted 91% (2008: 94%) of all securities on nonaccrual and 5.5% (2008: 10.0%) of gross non-trading securities.
An ageing analysis is given below in respect of all loans and advances and securities on non-accrual, together with their
related provisions:
Loans
$ million
Principal
Provisions
Net book value
5
3
2
3 months to 1 year
195
105
90
1 to 3 years
119
71
48
Over 3 years
86
86
-
405
265
140
Principal
Provisions
Net book value
13
3
10
Less than 3 months
Securities
$ million
Less than 3 months
3 months to 1 year
31
12
19
1 to 3 years
540
521
19
Over 3 years
24
20
4
608
556
52
63
GROUP CAPITAL STRUCTURE AND CAPITAL ADEQUACY RATIOS
The Group’s capital base of $3,347 million comprises Tier 1 capital of $2,664 million (2008: $2,509 million) and Tier 2
capital of $683 million (2008: $650 million). The consolidated capital adequacy ratio as at 31 December 2009 was 16.9%
(2008: 16.2%), well above the 12% minimum set by the Central Bank of Bahrain and the 8% guideline under the Basel II
Accord for international banks.
All ABC Group subsidiaries meet the capital adequacy requirements of their respective regulatory authorities.
FACTORS AFFECTING HISTORICAL OR FUTURE PERFORMANCE
The Group’s primary financial goal is the delivery of consistent and rising value for its shareholders through sustainable
earnings and assets growth. Despite recent market turbulence, management remains optimistic that the Group will be
able to achieve this goal, based on its evaluation of the following factors which may have an impact on performance.
Political stability – Management believes that the Group’s activities and assets are sufficiently widely diversified to
provide a cushion against major losses from isolated cases of political instability. The Group has in place rigorous, regularly
tested, disaster recovery procedures to face eventualities arising from political or other disruptions. The Group has no
significant risk exposures outside the Arab world, the USA, Brazil and Europe.
Energy prices – Global prices of hydrocarbons have had a direct impact on the economies of many of the countries in
the Arab world, as well as on those of OECD countries. High hydrocarbon prices lead to an inflow of revenues to producing
countries and an increase in their demand for capital equipment and construction services for infrastructure building and
development projects, as well as for consumer goods. OECD-based capital exporters and project contractors likewise
prosper. Lower energy prices benefit residents of developed countries, increasing demand for developing countries’ goods
and tourism services. As its main activities are focused on the trade flows between MENA region and OECD countries, the
Group’s revenues benefit from both scenarios. The prognosis is for hydrocarbon prices to remain unstable over the medium
term, with periods of relative stability interspersed with spikes following periods of excessively cold winters, political
instability in oil producing states or other eventualities leading to concerns over assurance of supply.
Volatility in securities markets – The global credit crunch in 2008 and the losses suffered by many international banks
subsequently, together with the downturn experienced by all major economies, have severely impacted the market values
of securities. Further worsening could negatively affect the value of the Group’s securities portfolios, although the Group
has taken care to make adequate provisions against securities considered to be impaired.
Foreign currency values – Where its subsidiaries are capitalised with currencies other than the US dollar, ABC is exposed
to fluctuations in the values of those currencies. ABC takes all appropriate steps to hedge against such fluctuations where
deemed practicable and desirable.
Volatility of currency markets – Foreign exchange risk volatility can affect the Group’s foreign exchange trading
revenues. The Group believes that, overall, it benefits from currency volatility in view of the opportunities for profitable
proprietary trading thus generated.
Interest rates – Although the Group’s net interest revenue can be negatively affected by interest rate changes, the
impact of such changes is mainly on its equity earnings, since its lending and marketable securities holdings are based
predominantly on floating or short-term interest rates and therefore largely insulated from interest rate swings.
65
FINANCIAL STATEMENTS CONTENTS
Independent Auditors’ Report
Consolidated Statement of Financial Position
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
67
68
69
70
71
72
73
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF
ARAB BANKING CORPORATION (B.S.C.)
We have audited the accompanying consolidated financial statements of Arab Banking Corporation (B.S.C).
[the Bank] and its subsidiaries [the Group] which comprise the consolidated statement of financial position
as at 31 December 2009 and the consolidated statements of income, comprehensive income, cash flows
and changes in equity for the year then ended, and a summary of significant accounting policies and other
explanatory notes.
BOARD OF DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards. This responsibility includes: designing,
implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying
appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
AUDITORS’ RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We
conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the
risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate for the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made
by the Board of Directors as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
OPINION
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated
financial position of the Group as of 31 December 2009 and of its financial performance and its cash flows for the
year then ended in accordance with International Financial Reporting Standards.
OTHER REGULATORY MATTERS
We confirm that, in our opinion, proper accounting records have been kept by the Group and the consolidated
financial statements, and the contents of the Board of Directors’ report relating to these consolidated financial
statements, are in agreement therewith. We further report, to the best of our knowledge and belief, that
no violations of the Bahrain Commercial Companies Law, nor of the Central Bank of Bahrain and Financial
Institutions Law, nor of the memorandum and articles of association of the Bank have occurred during the year
ended 31 December 2009 that might have had a material adverse effect on the business of the Bank or on its
consolidated financial position and that the Bank has complied with the terms of its banking license.
28 January 2010
Manama, Kingdom of Bahrain
67
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
31 December 2009
(All figures in US$ Million)
Note
2009
2008
646
823
135
126
3,949
4,017
ASSETS
Liquid funds
Trading securities
6
7
9,552
10,623
Loans and advances
9
10,949
11,931
181
256
430
596
123
114
25,965
28,486
Deposits from customers
9,909
10,728
Deposits from banks and other financial institutions
6,224
6,210
34
38
4,079
5,814
Interest receivable
Other assets
11
Premises and equipment
TOTAL ASSETS
LIABILITIES
Certificates of deposit
Securities sold under repurchase agreements
26
Interest payable
139
213
Taxation
12
116
31
Other liabilities
13
539
866
TERM NOTES, BONDS AND OTHER TERM FINANCING
14
2,344
2,498
23,384
26,398
2,000
2,000
TOTAL LIABILITIES
EQUITY
15
Share capital
Reserves
191
EQUITY ATTRIBUTABLE TO THE SHAREHOLDERS OF THE PARENT
Non-controlling interests
Total equity
TOTAL LIABILITIES AND EQUITY
2,191
(207)
1,793
390
295
2,581
2,088
25,965
28,486
These consolidated financial statements were authorised for issue by the Board of Directors on 28 January 2010 and
signed on their behalf by the Chairman and the President & Chief Executive.
Mohammed Layas
Chairman
The attached notes 1 to 32 form part of these consolidated financial statements.
Hassan Ali Juma
CONSOLIDATED STATEMENT OF INCOME
Year ended 31 December 2009
Note
2009
2008
Interest and similar income
16
1,105
1,816
Interest and similar expense
17
OPERATING INCOME
Net interest income
18
10
NET OPERATING INCOME (LOSS) AFTER PROVISIONS
(714)
(1,385)
391
431
250
176
641
607
(115)
(1,055)
526
(448)
216
235
31
29
Other
79
88
Total operating expenses
326
352
PROFIT (LOSS) BEFORE TAXATION
200
(800)
(46)
(36)
PROFIT (LOSS) FOR THE YEAR
154
(836)
Income attributable to non-controlling interests
(32)
(44)
PROFIT (LOSS) ATTRIBUTABLE TO THE SHAREHOLDERS
OF THE PARENT
122
(880)
0.06
(0.57)
OPERATING EXPENSES
Staff
Taxation on foreign operations
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
(EXPRESSED IN US$)
12
31
69
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Note
PROFIT (LOSS) FOR THE YEAR
2009
2008
154
(836)
Other Comprehensive Income (loss)
Net fair value movements during the year after impairment effect
15
181
(219)
Amortisation of fair value shortfall on reclassified securities
15
30
26
Unrealised gain (loss) on exchange translation in foreign subsidiaries
128
(177)
Total other comprehensive income (loss)
for the year
339
(370)
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR
493
(1,206)
Comprehensive (income) loss attributable to non-controlling interests
(95)
Comprehensive income (loss) attributable to shareholders
of the parent
398
22
(1,184)
CONSOLIDATED STATEMENT OF CASH FLOWS
Note
2009
2008
122
(880)
OPERATING ACTIVITIES
Profit (loss) attributable to the shareholders of the parent
Items not involving cash flow:
10
115
1,055
17
19
15
30
26
18
-
20
21
598
285
751
Depreciation and amortisation
Amortisation of fair value shortfall on reclassified securities
Items considered separately:
Losses on non-trading securities - net
Changes in operating assets and liabilities:
Trading securities
Loans and advances
1,768
Interest receivable and other assets
351
(1,214)
Interest payable and other liabilities
Other non-cash movements
Net cash used in operating activities
(965)
41
535
(646)
(1,684)
(1,735)
(384)
(386)
154
(13)
162
(1,285)
(552)
INVESTING ACTIVITIES
Purchase of non-trading securities
(1,005)
Sale and redemption of non-trading securities
2,309
Purchase of premises and equipment
Sale of premises and equipment
Additional investment in an associate
Controlling interest in an associate
19
Net cash from investing activities
(800)
1,936
(38)
(39)
1
6
(16)
-
-
(6)
1,251
1,097
-
1,110
(3)
(1,039)
FINANCING ACTIVITIES
Increase in share capital - rights issue
15
Redemption of certificates of deposit - net
Repurchase of subordinated debt
Repayment of other term notes, bonds and other term financing - net
14
(88)
-
(72)
(58)
Net cash (used in) from financing activities
(163)
13
(Decrease) increase in liquid funds
(197)
558
20
(70)
Liquid funds at beginning of the year
823
335
LIQUID FUNDS AT THE END OF THE YEAR
646
823
Effect of exchange rate changes on liquid funds
71
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Noncontrolling Total
interests equity
Equity attributable to shareholders of the parent
Share
Share Statutory General Retained
capital premium reserve reserve earnings*
At 1 January 2008
Total
-
309
150
Loss for the year
-
-
-
-
Other comprehensive loss for the year
-
-
-
-
Total comprehensive loss for the year
-
-
-
-
1,000
110
-
-
-
-
-
1,110
-
1,110
-
-
-
-
-
-
-
-
27
27
2,000
110
309
150
(434) 1,793
295
2,088
Profit for the year
-
-
-
Other comprehensive income for the year
-
-
Total comprehensive income for the year
-
Transfers during the year
Controlling interest acquired (note 19)
AT 31 DECEMBER 2008
AT 31 DECEMBER 2009
(880)
(880)
30
Cumulative
changes in
fair values
1,000
Issue of share capital (note 15)
619
Foreign
exchange
translation
-
(241) 1,867
-
290
2,157
(880)
44
(836)
(304)
(66)
(370)
(111)
(193)
(111)
(193) (1,184)
(22) (1,206)
(261)
(81)
-
122
-
-
122
32
154
-
-
-
65
211
276
63
339
-
-
-
122
65
211
398
95
493
-
-
12
-
(12)
-
-
-
-
2,000
110
321
150
(151)
(223) 2,191
390 2,581
(16)
* Retained earnings include non-distributable reserves arising from consolidation of subsidiaries amounting to US$418 million
(2008: US$389 million).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31 December 2009
1 INCORPORATION AND ACTIVITIES
The parent bank, Arab Banking Corporation (B.S.C.), [the Bank] is incorporated in the Kingdom of Bahrain by an
Amiri decree and operates under a wholesale banking licence issued by the Central Bank of Bahrain.
The Bank’s registered office is at ABC Tower, Diplomatic Area, P.O. Box 5698, Manama, Kingdom of Bahrain. The
shares of the Bank are listed on the Bahrain Stock Exchange.
2 BASIS OF PREPARATION
These consolidated financial statements are prepared under the historical cost convention, as modified by the
measurement at fair value of derivatives, trading and available-for-sale financial assets. In addition, as more fully
discussed below, assets and liabilities that are hedged items in fair value hedges, and are otherwise carried at cost,
are adjusted to record changes in fair values attributable to the risk being hedged.
The consolidated financial statements have been presented in United States Dollars, rounded to the nearest million
unless otherwise stated, which is the functional currency of the Group.
Statement of compliance
The consolidated financial statements of Arab Banking Corporation (B.S.C.) and its subsidiaries together [the Group]
are prepared in accordance with International Financial Reporting Standards [IFRS] issued by the International
Accounting Standards Board [IASB] and the relevant provisions of the Bahrain Commercial Companies Law and the
Central Bank of Bahrain and Financial Institutions Law.
Basis of consolidation
The consolidated financial statements comprise the financial statements of the Group as at and for the year ended
31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as
the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses and
profits and losses resulting from intra-group transactions are eliminated in full.
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of the Group.
Acquisition of non-controlling interests and partial/deemed disposals of subsidiaries are accounted for using the
parent entity extension method, whereby:
a)
the difference between the consideration and the book value of the share of net assets is recognised
as goodwill;
b)
in the case of partial disposals, the difference between the proceeds received and the book value of the
share of net assets sold is recognised as profit or loss in the consolidated statement of income; and
c)
in the case of deemed partial disposals resulting from a capital increase, the difference between the book
value of the share of net assets in the subsidiary after and before the capital increase is recognised as
profit or loss in the consolidated statement of income.
Non-controlling interests represent the portion of profit or loss and net assets not owned, directly or indirectly,
by the Group and are presented separately in the consolidated statement of income and within equity in the
consolidated statement of financial position, separately from consolidated equity attributable to the shareholders of
the Bank.
3 CHANGES IN ACCOUNTING POLICIES
The accounting policies are consistent with those used in the previous year except for the following accounting
policies adopted during the year as noted below:
IAS 1 Presentation of Financial Statements (Revised)
This standard requires an entity to present all owner changes in equity and all non-owner changes to be presented
in either in one statement of comprehensive income or in two separate statements of income and comprehensive
income. The revised standard also requires that the income tax effect of each component of comprehensive income
be disclosed. In addition, it requires entities to present a comparative statement of financial position as at the
73
31 December 2009
3 CHANGES IN ACCOUNTING POLICIES (Continued)
beginning of the earliest comparative period when the entity has applied an accounting policy retrospectively,
makes a retrospective restatement, or reclassifies items in the financial statements.
The Group has elected to present comprehensive income in two separate consolidated statements of income and
comprehensive income. Information about the individual components of comprehensive income as well as the tax
effects have been disclosed in the notes to the consolidated financial statements. The Group has not provided a
restated comparative set of financial position for the earliest comparative period, as it has not adopted any new
accounting policy retrospectively, or has made a retrospective restatement, or retrospectively reclassified items in
the consolidated financial statements.
IFRS 8 Operating Segments
This standard requires disclosure of information about the Group’s operating segments and replaced the
requirement to determine primary (business) and secondary (geographical) reporting segments of the Group. It
requires a ‘management approach’ under which segment information is presented on the same basis as that used
for internal reporting purposes. This has resulted in a change to the reportable segments presented. As a result, the
operating segments are reported in a manner that is consistent with the internal reporting provided to the senior
management and the Board of Directors and are set out in Note 25.
Amendments to IFRS 7 Financial Instruments: Disclosures - Improving Disclosures about Financial Instruments
The amendments to IFRS 7 were issued in March 2009 to enhance fair value and liquidity disclosures. With
respect to fair value, the amendments require disclosure of a three-level fair value hierarchy, by class, for all
financial instruments recognised at fair value and specific disclosures related to the transfers between levels in
the hierarchy and detailed disclosures related to level 3 of the fair value hierarchy. In addition, the amendments
modify the required liquidity disclosures with respect to derivative transactions and assets used for liquidity
management. Comparative information has not been represented as this is not required by the transition provisions
of the amendment.
The adoption of these standards and amendments did not have any effect on the financial performance or position
of the Group. They did, however, give rise to additional disclosures.
IFRS 9 Financial Instruments
IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and
measurement of financial assets. The standard is effective for the annual period beginning on or after 1 January
2013. The Group is considering the implications of the standard, the impact on the Group and the timing of its
adoption by the Group.
4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Liquid funds
Liquid funds comprise of cash, nostro balances and balances with central banks.
Trading securities
Trading securities are initially recorded at fair value. Gains and losses arising from changes in fair values are included
in the consolidated statement of income in the period in which they arise. Interest earned and dividends received
are included in interest income and other operating income respectively.
Placements with banks and other financial institutions are stated at amortised cost net of any amounts written off
and provision for impairment. The carrying values of such assets which are being effectively hedged for changes in
fair value are adjusted to the extent of the changes in fair value being hedged, with the resultant changes being
recognised in the consolidated statement of income.
31 December 2009
4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
These are classified as follows:
-
Held to maturity
Available-for-sale
Other non-trading securities
All non-trading securities are initially recognised at cost, being the fair value of the consideration given including
incremental acquisition charges associated with the security.
Held to maturity
Securities which have fixed or determinable payments, fixed maturities and are intended to be held to maturity, are
subsequently measured at amortised cost, less provision for impairment in value.
Available-for-sale
Available-for-sale investments are those which are designated as such or do not qualify to be classified as fair value
through profit or loss, held to maturity or loans and advances. They include equity instruments and other debt
instruments.
After initial recognition, these are remeasured at fair value, unless fair value cannot be reliably determined
in which case they are measured at cost less impairment. That portion of any fair value changes relating to an
effective hedging relationship is recognised directly in the consolidated statement of income. Fair value changes
which are not part of an effective hedging relationship, are reported under fair value movements during the year
in the consolidated statement of comprehensive income until the investment is derecognised or the investment
is determined to be impaired. On derecognition or impairment the cumulative gain or loss previously reported as
“cumulative changes in fair values” within equity, is included in consolidated statement of income for the year.
Other non-trading securities are financial assets with fixed or determinable payments and fixed maturities that are
not quoted in the active market. These instruments are not being held with the intent of sale in the near term. These
investments are valued at fair value as at 1 July 2008, in accordance with the amendments to IAS 39 ‘Reclassification
of Financial Assets’. Through the effective interest method, the new cost is amortised to the security’s expected
recoverable amount over the expected remaining life.
Derecognition of financial assets and financial liabilities
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is
derecognised where the rights to receive cash flows from the asset have expired, or the Group has transferred
its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in
full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has
transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained
substantially all the risks and rewards of the asset, but has transferred control of the asset.
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Loans and advances
Loans and advances are financial assets with fixed or determinable payments and fixed maturities that are not
quoted in an active market. After initial measurement, the loans and advances are subsequantly measured at
amortised cost using the effective interest rate method, adjusted for effective fair value hedge less any amounts
written off and provision for impairment. The losses arising from impairment of such loans and advances
are recognised in the consolidated statement of income in ‘impairment provisions - net’ and in an impairment
allowance account in the consolidated statement of financial position. Amortised cost is calculated by taking into
account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The
amortisation is recognised as ‘interest and similar income’ in the consolidated statement of income.
75
31 December 2009
In relation to loans and advances which are part of an effective hedging relationship any gain or loss arising from a
change in fair value is recognised directly in the consolidated statement of income. The carrying values of loans and
advances which are being effectively hedged for changes in fair value are adjusted to the extent of the changes in
fair value being hedged.
Investments in associates
Investments in associates are accounted for by the equity method. Associates are enterprises in which the Group
exercises significant influence but not control, normally where it holds 20% to 50% of the voting power.
Premises and equipment are stated at cost, less accumulated depreciation and provision for impairment in value,
if any.
Freehold land is not depreciated. Depreciation on other premises and equipment is provided on a straight-line basis
over their estimated useful lives.
Impairment and uncollectability of financial assets
An assessment is made at each statement of financial position date to determine whether there is objective
evidence that a specific financial asset or group of financial assets may be impaired. If such evidence exists, an
impairment loss is recognised in the consolidated statement of income.
Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing
significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will
enter bankruptcy or other financial reorganisation and where observable data indicates that there is a measurable
decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate
with defaults.
Financial assets carried at amortised cost and loans and receivables
For financial assets carried at amortised cost (such as amounts due from banks, loans and advances as well as
held-to-maturity investments), the Group first assesses individually whether objective evidence of impairment
exists individually for financial assets that are individually significant, or collectively for financial assets that are not
individually significant. If the Group determines that no objective evidence of impairment exists for an individually
assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and
collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an
impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the
difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding
future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through
the use of an ‘impairment provisions - net’ and the amount of the loss is recognised in the consolidated statement
of income. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate
of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest
income is recorded as part of ‘interest and similar income’. Loans together with the associated allowance are
written off when there is no realistic prospect of future recovery and all collateral has been realised or has been
transferred to the Group.
If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event
occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced
by adjusting the ‘impairment provisions - net’ . If a future write-off is later recovered, the recovery is credited to the
‘impairments provision - net’.
The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate.
If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest
rate. If the Group has reclassified trading assets to loans and advances, the discount rate for measuring any impairment
loss is the new effective interest rate determined at the reclassification date. The calculation of the present value of the
estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less
costs for obtaining and selling the collateral, whether or not foreclosure is probable.
31 December 2009
Impairment and uncollectability of financial assets (Continued)
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’s
internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical
location, collateral type, past-due status and other relevant factors.
Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the
basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical
loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on
which the historical loss experience is based and to remove the effects of conditions in the historical period that do
not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes
in related observable data from year to year (such as changes in unemployment rates, property prices, commodity
prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude).
The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience.
Available-for-sale financial assets
For available-for-sale financial assets, the Group assesses at each statement of financial position date whether there
is an objective evidence that an investment is impaired.
In the case of debt instruments classified as available-for-sale, the Group assesses individually whether there is
objective evidence of impairment based on the same criteria as financial assets carried at amortised cost. However,
the amount recorded for impairment is the cumulative loss measured as the difference between the amortised
cost and the current fair value, less any impairment loss on that asset previously recognised in the consolidated
statement of income. Future interest income is based on the reduced carrying amount and is accrued using the rate
of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest
income is recorded as part of ‘interest and similar income’. If, in a subsequent period, the fair value of a debt
instrument increases and the increase can be objectively related to a credit event occurring after the impairment
loss was recognised in the consolidated statement of income, the impairment loss is reversed through the
consolidated statement of income.
In the case of equity investments classified as available-for-sale, objective evidence would also include a
‘significant’ or ‘prolonged’ decline in the fair value of the investment below its cost. Where there is evidence
of impairment, the cumulative loss measured as the difference between the acquisition cost and the current
fair value, less any impairment loss on that investment previously recognised in the consolidated statement of
income is removed from equity and recognised in the consolidated statement of income. Impairment losses on
equity investments are not reversed through the consolidated statement of income. Increases in the fair value after
impairment are recognised directly in equity.
Deposits
All money market and customer deposits are carried at amortised cost. An adjustment is made to these, if part of
an effective fair value hedging strategy, to adjust the value of the deposit for the fair value being hedged with the
resultant changes being recognised in the consolidated statement of income.
Repurchase and resale agreements
Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised.
The counterparty liability for amounts received under these agreements are shown as sale of securities under
repurchase agreement in the consolidated statement of financial position. The difference between sale and
repurchase price is treated as interest expense using effective yield method. Assets purchased with a corresponding
commitment to resell at a specified future date (reverse repos) are not recognised in the consolidated statement
of financial position, as the Group does not obtain control over the assets. Amounts paid under these agreements
are included in placements with banks and other financial institutions or loans and advances, as appropriate. The
difference between purchase and resale price is treated as interest income using effective yield method.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event
and the costs to settle the obligation are both probable and able to be reliably measured.
77
31 December 2009
Financial guarantees
In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees
and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value,
in ‘other liabilities’, being the premium received. Subsequent to initial recognition, the Group’s liability under each
guarantee is measured at the higher of the amortised premium and the best estimate of expenditure required to
settle any financial obligation arising as a result of the guarantee.
Any increase in the liability relating to financial guarantees is taken to the consolidated statement of income in
‘impairment provision - net’. The premium received is recognised in the consolidated statement of income in ‘other
income’ on a straight line basis over the life of the guarantee.
Employee pension and other end of service benefits
Costs relating to employee pension and other end of service benefits are generally accrued in accordance with
actuarial valuations based on prevailing regulations applicable in each location.
Recognition of income and expenses
For all financial instruments measured at amortised cost and interest bearing financial instruments classified as
available-for-sale, interest income or expense is recorded at the effective interest rate, which is the rate that
exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument
or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The
calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental
costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not
future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises
its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective
interest rate and the change in carrying amount is recorded as interest income or expense. Other fee income and
expense are recognised when earned or incurred.
Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an
impairment loss, interest income continues to be recognised using the original effective interest rate applied to the
new carrying amount.
Where the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the
amount of interest income or expense is adjusted by the net interest on the swap.
Fees earned for the provision of services over a period of time are accrued over that period. These fees include
commission income and asset management, custody and other management and advisory fees. Loan commitment
fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any
incremental costs) and recognised as an adjustment to the effective interest rate on the loan. When it is unlikely
that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a
straight line basis.
Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the
arrangement of the acquisition of shares or other securities are recognised on completion of the underlying
transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the
corresponding criteria.
Fair values
The fair value for financial instruments traded in active markets at the statement of financial position date is
based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short
positions), without any deduction for transaction costs.
For all other financial instruments not listed in an active market, the fair value is determined by using appropriate
valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments
for which market observable prices exist, options pricing models and other relevant valuation models.
For externally managed funds, the fair value is determined by reference to the net asset values provided by the
fund administrators.
31 December 2009
Significant accounting judgments and estimates
Judgments
In the process of applying the Group’s accounting policies, management has made the following judgements,
apart from those involving estimations, which have the most significant effect in the amounts recognised in the
consolidated financial statements:
Classification of securities
Upon acquisition of a security, management decides whether it should be classified as held to maturity, held for
trading or available-for-sale.
The Group classifies securities investments as trading if they are acquired primarily for the purpose of making short
term profit.
Securities which are eligible for reclassification per IAS 39 amendments and the Group has an intention and ability
to hold for a foreseeable future are reclassified as other non-trading securities.
Securities which are not held with the intent of sale in the near term and are eligible per IAS 39 amendments are
reclassified as other non-trading securities.
Estimation uncertainty
The key assumptions concerning the future and other key sources of estimation at the statement of financial
position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are discussed below:
Going concern
The Bank’s management has made an assessment of the Group’s ability to continue as a going concern and is
satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the
management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability
to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern
basis.
Impairment losses on loans and advances
The Group reviews its individually significant loans and advances at each statement of financial position date to
assess whether an impairment loss should be recorded in the consolidated statement of income. In particular,
judgment by management is required in the estimation of the amount and timing of future cash flows when
determining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower’s
financial situation and the net realisable value of collateral. These estimates are based on assumptions about a
number of factors and actual results may differ, resulting in future changes to the allowance.
Loans and advances that have been assessed individually and found not to be impaired and all individually
insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics,
to determine whether provision should be made due to incurred loss events for which there is objective evidence
but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio
(such as credit quality, levels of arrears, credit utilisation, loan to collateral ratios etc.), concentrations of risks and
economic data (including levels of unemployment, real estate prices indices, country risk and the performance of
different individual groups).
The impairment loss on loans and advances is disclosed in more detail in note 9.
Impairment losses on available-for-sale investments
The Group reviews its debt securities classified as available-for-sale investments at each statement of financial
position date to assess whether they are impaired. This requires similar judgment as applied to the individual
assessment of loans and advances.
The internal grading process takes into consideration factors such as collateral held, deterioration in country risk,
industry, technological obsolescence as well as identified structural weakness or deterioration in cash flows.
79
31 December 2009
There is no tax on corporate income in the Kingdom of Bahrain. Taxation on foreign operations is provided for in
accordance with the fiscal regulations applicable in each location. No provision is made for any liability that may
arise in the event of distribution of the reserves of subsidiaries. A substantial portion of such reserves is required to
be retained to meet local regulatory requirements.
Foreign currencies
Monetary assets and liabilities in foreign currencies are translated into the Group’s functional currency at the rates of
exchange ruling at the date of the statement of financial position. Any gains or losses are taken to the consolidated
statement of income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the
exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates at the date when the fair value was determined.
The assets and liabilities of foreign operations are translated into the Group’s functional currency at rates of
exchange ruling at the date of the statement of financial position. Income and expense items are translated
at average exchange rates for the period. Foreign exchange translation gains and losses arising from
translating the financial statements of the subsidiaries into functional currency, being US dollars, are recorded
directly in the consolidated statement of comprehensive income under unrealised gain (loss) on exchange
translation in foreign subsidiaries.
Trade and settlement date accounting
All “regular way” purchases and sales of financial assets are recognised on the trade date, i.e. the date that the
Group commits to purchase or sell the asset.
Derivatives and hedge accounting
The Group enters into derivative instruments including forwards, futures, forward rate agreements, swaps and
options in the foreign exchange, interest rate and capital markets. These are stated at fair value. Derivatives with
positive market values (unrealised gains) are included in other assets and derivatives with negative market values
(unrealised losses) are included in other liabilities in the consolidated statement of financial position.
Changes in the fair values of derivatives held for trading activities or to offset other trading positions or do not
qualify for hedge accounting are included in other operating income in the consolidated statement of income.
For the purposes of hedge accounting, hedges are classified into three categories: (a) fair value hedges which
hedge the exposure to changes in the fair value of a recognised asset or liability; (b) cash flow hedges which hedge
the exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or
liability or a forecasted transaction; and (c) net investment hedges which hedge the exposure to net investment in
foreign operation.
Changes in the fair value of derivatives that are designated, and qualify, as fair value hedges and that prove to be
highly effective in relation to the hedged risk, are included in other operating income along with the corresponding
changes in the fair value of the hedged assets or liabilities which are attributable to the risk being hedged.
Changes in the fair value of derivatives that are designated, and qualify, as cash flow hedges and that prove to be
highly effective in relation to the hedged risk are recognised in the statement of comprehensive income and the
ineffective portion recognised in the consolidated statement of income. The gains or losses on cash flow hedges
recognised initially in equity are transferred to the consolidated statement of income in the period in which the
hedged transaction impacts the income. Where the hedged transaction results in the recognition of an asset or a
liability the associated gain or loss that had been initially recognised in equity is included in the initial measurement
of the cost of the related asset or liability.
Change in fair value of derivative or non-derivatives that are designated and qualify, as net investment hedges
and that prove to be highly effective in relation to the hedged risk are accounted for in a way similar to cash
flow hedges.
31 December 2009
Derivatives and hedge accounting (Continued)
Hedge accounting is discontinued when the derivative hedging instrument either expires or is sold, terminated or
exercised, no longer qualifies for hedge accounting or is revoked. Upon such discontinuance:
-
in the case of fair value hedges of interest-bearing financial instruments any adjustment to the carrying amount
relating to the hedged risk is amortised in the consolidated statement of income over the remaining term to
maturity.
-
in the case of cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity is
retained in equity until the forecasted transaction occurs. When such transaction occurs the gain or loss retained
in equity is recognised in the consolidated statement of income or included in the initial measurement of the
cost of the related asset or liability, as appropriate. Where the hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income.
Certain derivatives embedded in other financial instruments are treated as separate derivatives when their
economic characteristics and risks are not closely related to those of the host contract and the host contract is not
carried at fair value through the consolidated statement of income. These embedded derivatives are measured at
fair value with the changes in fair value recognised in the consolidated statement of income.
Fiduciary assets
Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included
in the consolidated statement of financial position.
Offsetting
Financial assets and financial liabilities are only offset and the net amount reported in the statement of financial
position when there is a legally enforceable right to offset the recognised amounts and the Group intends to
settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case
with the master netting agreements, and the related assets and liabilities are presented gross in the statement of
financial position.
Term notes, bonds and other term financing
Issued financial instruments (or their components) are classified as liabilities under ‘Term notes, bonds and other
term financing’, where the substance of the contractual arrangement results in the Group having an obligation
either to deliver cash or another financial asset to the holder.
After initial measurement, the term notes, bonds and other term financing are subsequently measured at amortised
cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount or
premium on the issue and costs that are an integral part of the effective interest rate.
81
31 December 2009
5 CLASSIFICATION OF FINANCIAL INSTRUMENTS
As at 31 December 2009, financial instruments have been classified for the purpose of measurement under
International Accounting Standard 39 Financial Instruments: Recognition and Measurement as follows:
Held for Available-fortrading
sale
Amortised
cost/
Loans and
receivables
Total
ASSETS
Liquid funds
Trading securities
Non-trading securities *
Loans and advances
135
-
5,632
89
646
3,949
3,920
10,860
646
135
3,949
9,552
10,949
-
-
590
590
135
5,721
19,965
25,821
Held for Available-fortrading
sale
Amortised cost
Total
LIABILITIES
Interest taxation other liabilities
-
-
9,909
6,224
34
4,079
794
2,344
9,909
6,224
34
4,079
794
2,344
-
-
23,384
23,384
As at 31 December 2008, financial instruments have been classified for the purpose of measurement under
International Accounting Standard 39 Financial Instruments: Recognition and Measurement as follows:
Held for
trading
Available-forsale
Amortised
cost/ Loans and
receivables
Total
126
-
6,504
105
-
823
4,017
4,119
11,826
847
823
126
4,017
10,623
11,931
847
126
6,609
21,632
28,367
Held for
trading
Available-forsale
Amortised cost
Total
-
-
10,728
6,210
38
5,814
1,110
2,498
10,728
6,210
38
5,814
1,110
2,498
-
-
26,398
26,398
ASSETS
Liquid funds
Trading securities
Non-trading securities*
Loans and advances
LIABILITIES
Interest taxation other liabilities
*Included in the above are other non-trading securities amounting to US$ 3,903 million (2008: US$ 4,087 million)
which were reclassified, effective 1 July 2008. Refer note 8 for details.
31 December 2009
6 TRADING SECURITIES
2009
2008
Externally managed funds
Debt securities
Equities
6
31
129
81
-
14
135
126
Externally managed funds represent investments in hedge funds (fund of funds) managed by internationally
renowned asset managers. In 2007, the Group gave notice to the fund managers of the externally managed funds
to exit the funds.
7 NON-TRADING SECURITIES
2009
2008
Quoted
Unquoted
Total
Quoted
Unquoted
Total
5,675
400
6,075
6,585
991
7,576
34
79
113
25
81
106
-
17
17
-
32
32
Available-for-sale
Debt securities
Equity securities *
Held to maturity
Debt securities
Other non-trading
securities carried at
amortised cost **
Provision against nontrading securities
3,903
-
3,903
4,087
-
4,087
9,612
496
10,108
10,697
1,104
11,801
(1,017)
(1,178)
(146)
9,466
(410)
86
(556)
9,552
(161)
10,536
87
10,623
* Includes unquoted equity securities of US$ 55 million (2008: US$ 55 million) carried at cost. This is due to the
unpredictable nature of future cash flows and lack of suitable alternative methods to arrive at a reliable fair value.
There is no market for these investments and the Group intends to hold them for the long term.
All other available-for-sale securities and other non-trading securities have been valued using observable
market inputs.
**As explained in note 8, the Group has identified assets, eligible under the amendment to IAS 39, for which it
has a clear intent to hold for the foreseeable future and are no longer quoted in an active market. The assets
were reclassified with retrospective effect as on 1 July 2008 in accordance with the amendment to IAS 39 and are
reflected as other non-trading securities carried at amortised cost.
Provisions against non-trading securities are primarily on collateralized debt obligations and for failed banks on
account of market dislocations, mainly in North America and Europe.
83
31 December 2009
7 NON-TRADING SECURITIES (Continued)
The ratings distribution of non-trading securities is given below:
2009
2008
AAA rated debt securities
4,727
5,826
AA to A rated debt securities
2,671
3,253
Other investment grade debt securities
1,198
687
Other non-investment grade debt securities
944
1,620
Unrated debt securities
455
309
Equity securities
113
106
10,108
11,801
Provisions against non-trading securities
(556)
9,552
(1,178)
10,623
The movements in provisions against non-trading securities during the year were as follows:
At 1 January
Charge for the year
Write backs / recoveries
Write-offs
Foreign exchange translation and other adjustments
At 31 December
2009
2008
1,178
318
17
899
(23)
-
(610)
(28)
(6)
(11)
556
1,178
Gross amount of non-trading securities individually determined to be impaired before deducting any individually
assessed impairment losses was US$ 608 million (2008: US$ 1,254 million). Interest income received during the
year on impaired securities was US$ 6 million (2008: US$ 9 million).
8 RECLASSIFICATION OF FINANCIAL ASSETS
In October 2008, the IASB issued amendments to IAS 39 “Financial Instruments: Recognition and Measurement”
and IFRS 7 “Financial Instruments: Disclosures” titled “Reclassification of Financial Assets”. The amendments to
IAS 39 permit reclassification of financial assets from the available-for-sale category to the other non-trading
securities category in certain circumstances.
The amendments to IFRS 7 introduce additional disclosure requirements if an entity has reclassified financial assets
in accordance with the IAS 39 amendments. The amendments were effective retrospectively to 1 July 2008.
Per the amendments to IAS 39 and IFRS 7, “Reclassification of Financial Assets”, the Group reclassified certain
available-for-sale securities assets to other non-trading securities carried at amortised cost. The Group identified
assets, eligible under the amendments, for which it had a clear intent to hold for the foreseeable future. The assets
were reclassified with retrospective effect as on 1 July 2008. The significant market dislocations witnessed in the
financial sector in 2008 is considered as a rare event.
The carrying values and fair values of the assets reclassified are as follows:
2009
2008
Carrying value
3,903
4,087
Fair value
3,751
3,662
31 December 2009
8 RECLASSIFICATION OF FINANCIAL ASSETS (Continued)
Fair value gains that would have been recognised in other comprehensive income for the year ended 31 December 2009
had the other non-trading securities not been reclassified amounts to US$ 273 million (2008: loss of US$ 425 million).
The Group earns an effective interest rate of 1% to 8% (2008: 1% to 9%) on these investments and the carrying
values reflect the cash flows expected to be recovered as of year end. Reclassified available-for-sale financial assets
at cost include US$ 276 million (2008: US$ 316 million) which have been hedged for changes in fair value, on
account of change in interest rates.
9 LOANS AND ADVANCES
2009
2008
Financial services
2,239
3,828
Other services
3,108
3,052
Manufacturing
3,702
2,990
Construction
624
660
456
283
Personal
309
468
Trade
306
472
299
148
Consumer
221
192
i) By industrial sector
Government
Loan loss provisions
216
265
11,480
12,358
(531)
(427)
10,949
11,931
2009
2008
ii) Loan loss provisions by industrial sector
Financial services
154
93
Other services
23
17
Manufacturing
70
47
2
3
Construction
Personal
2
3
42
32
2
3
Consumer
7
5
Trade
Government
Collective impairment
63
62
166
162
531
427
85
31 December 2009
The movements in loan loss provisions during the year were as follows:
Specific
impairment
2009
Specific
Collective
impairment impairment
2008
2009
Collective
impairment
2008
At 1 January
265
206
162
113
Charge for the year
127
116
4
51
Write backs / recoveries
(10)
(10)
-
(1)
Write-offs
(29)
(21)
-
-
12
(26)
-
(1)
Foreign exchange translation and other adjustments
At 31 December
365
265
166
162
The gross amount of loans, individually determined to be impaired before deducting any individually assessed
impairment allowance amounted to US$ 405 million (2008: US$ 235 million).
The fair value of tangible collateral that the Group holds relating to loans individually determined to be impaired at
31 December 2009 amounts to US$ 20 million (2008: US$ 25 million).
At 31 December 2009, interest in suspense on past due loans amounted to US$ 205 million (2008: US$ 194 million).
10 IMPAIRMENT PROVISIONS - NET
During the year the Group has made the following provisions for impairment - net:
2009
Non-trading securities (note 7)
Loans and advances (note 9)
6
2008
(899)
(121)
(156)
(115)
(1,055)
2009
2008
Positive fair value of derivatives (note 20)
94
244
Margin dealing accounts
76
51
Bank owned life insurance
29
28
Staff loans
22
23
Investments in associates
21
5
9
15
11 OTHER ASSETS
Assets acquired on debt settlement
Securities sold awaiting value
Others
5
55
174
175
430
596
The negative fair value of derivatives amounting to US$ 122 million (2008: US$ 299 million) is included in other
liabilities (note 13). Details of derivatives are given in note 20.
31 December 2009
12 TAXATION ON FOREIGN OPERATIONS
2009
2008
102
28
14
3
116
31
Current tax on foreign operations
50
53
Deferred tax on foreign operations
(4)
(17)
46
36
-
-
On profits of subsidiaries operating in other jurisdictions
46
36
Income tax expense reported in the consolidated statement of income
46
36
Consolidated statement of financial position
Current tax liability
Deferred tax liability
Consolidated statement of income
Analysis of tax charge
At Bahrain (income tax rate of nil)
In view of the operations of the Group being subject to various tax jurisdictions and regulations, it is not practical to
provide a reconciliation between the accounting and taxable profits together with the details of the effective tax rates.
13 OTHER LIABILITIES
Negative fair value of derivatives (note 20)
2009
2008
122
299
Margin deposits including cash collateral
60
73
Cash export and credit assignment payables
58
131
Employee related payables
54
58
Deferred income
21
19
Cheques for collection
18
30
8
9
198
247
539
866
Non-corporate tax payable
Accrued charges and other payables
The positive fair value of derivatives amounting to US$ 94 million (2008: US$ 244 million) is included in other
assets (note 11). Details of derivatives are given in note 20.
87
31 December 2009
14 TERM NOTES, BONDS AND OTHER TERM FINANCING
In the ordinary course of business, the Bank and certain subsidiaries raise term financing through various capital
markets at commercial rates.
Total obligations outstanding at 31 December 2009
Parent bank
Subsidiaries
Total
2010
384
-
384
2011
292
200
492
2012
1,000
-
1,000
2014
56
-
56
2017
412
-
412
2,144
200
2,344
2,239
259
2,498
Aggregate maturities
Total obligations outstanding at 31 December 2008
All obligations bear floating rates of interest.
During the year, the Bank repurchased a portion of its subordinated liabilities with a nominal value of US$ 88 million
(2008: nil). The resultant net gain on the repurchase amounting to US$ 34 million (2008: Nil) is included as a part of
“other operating income” in the consolidated statement of income (note 18).
15 EQUITY
a) Share capital
2009
2008
Authorised – 2,500 million shares of US$ 1 each
(2008: 2,500 million shares of US$ 1 each)
2,500
2,500
Issued, subscribed and fully paid – 2,000 million shares of US$ 1
each (2008: 2,000 million shares of US$ 1 each)
2,000
2,000
Rights issue
The Board of Directors at its meeting held on 23 December 2009 resolved to convene an Extraordinary General
Meeting to increase the authorised, issued and paid up share capital of the Bank from US$ 2,000 million to
US$ 3,110 million by way of a priority rights offer to existing shareholders. This is subject to approval of the
shareholders at an Extraordinary General Meeting to be held on 28 January 2010.
The Board of Directors at its meeting held on 25 March 2008 resolved to increase the authorised, issued and
paid up capital of the Bank. The authorised share capital of the Bank was increased from US$ 1,500 million to
US$ 2,500 million and the issued share capital from US$ 1,000 million to US$ 2,000 million through a priority
rights offering of 1,000 million shares (nominal value US$ 1 per share) to existing shareholders. These shares
were issued at a premium of US$ 0.11 per share and the allotment was completed on 18 June 2008.
The Board of Directors has not recommended a dividend relating to the year ended 31 December 2009 (2008: Nil)
31 December 2009
b) Statutory reserve
As required by the Articles of Association of the Bank and the Bahrain Commercial Companies Law, 10% of the
profit for the year is transferred to the statutory reserve. Such annual transfers will cease when the reserve totals
50% of the paid up share capital. No transfer was made in the previous year on account of the loss incurred. The
reserve is not available except in such circumstances as stipulated in the Bahrain Commercial Companies Law and
following the approval of the Central Bank of Bahrain.
c) General reserve
The general reserve underlines the shareholders’ commitment to enhance the strong equity base of the Bank.
There are no restrictions on the distribution of this reserve after obtaining CBB approval.
d) Cumulative changes in fair values
At 1 January
Transferred to consolidated statement of income on impairment
Transferred to consolidated statement of income on disposal
Net movement in fair value during the year
2009
2008
(434)
(241)
11
171
-
2
170
(392)
30
26
(223)
(434)
2009
2008
Loans and advances
794
1,083
Securities
Amortisation of fair value short-fall on reclassified securities
At 31 December
16 INTEREST AND SIMILAR INCOME
233
502
59
200
Others
19
31
1,105
1,816
2009
2008
482
934
174
314
17 INTEREST AND SIMILAR EXPENSE
52
119
Others
5
1
1
17
714
1,385
89
31 December 2009
18 OTHER OPERATING INCOME
2009
2008
Fee and commission income
187
192
Fee and commission expense
(30)
(50)
Losses on non-trading securities - net
-
Gains on dealing in foreign currencies - net
(20)
20
26
Gains on dealing in derivatives - net
9
17
Gains (losses) on trading securities - net
1
(32)
Gain on repurchase of subordinated debt (note 14)
34
-
Other – net
29
43
250
176
Included in the fee and commission income is US$ 12 million (2008: US$ 11 million) is fee income relating to trust
and other fiduciary activities.
19 SUBSIDIARIES
The principal subsidiaries, all of which have 31 December as their year end, are as follows:
Country of
incorporation
Arab Banking Corporation (ABC) - Jordan
ABC Algeria*
Arab Banking Corporation - Egypt [S.A.E.]
ABC Tunisie
Arab Financial Services Company B.S.C. (c)**
Interest % of Arab Banking
Corporation (B.S.C.)
2009
2008
United Kingdom
100
100
Bahrain
100
100
Jordan
87
87
Brazil
56
56
Algeria
88
70
Egypt
98
98
Tunisia
100
100
Bahrain
55
55
* During the year, the Group increased its shareholding in ABC Algeria to 87.62% from 70% held previously through
participation in a rights issue.
** In May 2008, the Group increased its shareholding in Arab Financial Services Company B.S.C. (c) [AFS] to 54.6%
from 45.7% held previously, resulting in the Group acquiring a controlling interest in AFS at book value.
The financial statements of AFS have been consolidated in the financial statements of the Group from the date
control was transferred to the Group.
31 December 2009
20 DERIVATIVES AND HEDGING
In the ordinary course of business the Group enters into various types of transactions that involve derivative
financial instruments.
The table below shows the positive and negative fair values of derivative financial instruments. The notional
amount is that of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the
value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year
end and are not indicative of either market or credit risk.
2009
2008
Positive
fair value
Negative
fair value
Notional Positive fair
amount
value
Negative
fair value
Notional
amount
Derivatives held for trading
65
62
1,475
120
95
2,692
Currency swaps
Interest rate swaps
1
-
14
21
5
165
Forward foreign exchange
contracts
7
6
3,144
39
13
2,907
Options
21
24
3,053
37
69
2,647
Futures
-
-
1,714
26
73
2,507
94
92
9,400
243
255
10,918
Interest rate swaps
-
29
514
1
42
913
Currency swaps
-
1
26
-
2
27
Forward foreign exchange
contracts
-
-
44
-
-
491
Derivatives held as hedges
Options
Risk weighted equivalents (credit
and market risk)
-
-
-
-
-
1,500
-
30
584
1
44
2,931
94
122
9,984
244
299
13,849
1,596
1,006
Derivatives are carried at fair value using valuation techniques based on observable market inputs.
Derivatives held as hedges include:
a)
Fair value hedges which are predominantly used to hedge fair value changes arising from interest rate
fluctuations in loans and advances, placements, deposits and available-for-sale debt securities.
For the year ended 31 December 2009, the Group recognised a net gain of US$ 12 million (2008: loss of
US$ 53 million), on hedging instruments. The total loss on hedged items attributable to the hedged risk
amounted to US$ 13 million. (2008: gain of US$ 55 million).
b)
Net investment hedges comprise forward foreign exchange contracts of US$ 15 million (2008: US$ 256 million).
As at 31 December 2009, the fair value of the forward foreign exchange contracts was immaterial.
In addition to the forward foreign exchange contracts, the Group uses deposits which are accounted for as
hedges of net investment in foreign operations. As at 31 December 2009, the Group had deposits amounting
to US$ 298 million (2008: US$ 202 million) which were designated as net investment hedges.
91
31 December 2009
20 DERIVATIVES AND HEDGING (Continued)
Derivative product types
Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial
instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-thecounter market. Foreign currency and interest rate futures are transacted in standardised amounts on regulated
exchanges and are subject to daily cash margin requirements. Forward rate agreements are effectively tailor-made
interest rate futures which fix a forward rate of interest on a notional loan, for an agreed period of time starting on
a specified future date.
Swaps are contractual agreements between two parties to exchange interest or foreign currency amounts based
on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate
interest payments based on a notional value in a single currency. For cross-currency swaps, notional amounts are
exchanged in different currencies. For cross-currency interest rate swaps, notional amounts and fixed and floating
interest payments are exchanged in different currencies.
Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific
amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at any time within a
specified period.
Derivative related credit risk
Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on
its contractual obligations and is limited to the positive fair value of instruments that are favorable to the Group.
The majority of the Group’s derivative contracts are entered into with other financial institutions and there is no
significant concentration of credit risk in respect of contracts with positive fair value with any individual counterparty
at the date of the statement of financial position.
Derivatives held or issued for trading purposes
Most of the Group’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve
offering products to customers. Positioning involves managing market risk positions with the expectation of
profiting from favorable movements in prices, rates or indices. Arbitrage involves identifying and profiting from
price differentials between markets or products. Also included under this heading are any derivatives which do not
meet IAS 39 hedging requirements.
Derivatives held or issued for hedging purposes
The Group has adopted a comprehensive system for the measurement and management of risk. Part of the risk
management process involves managing the Group’s exposure to fluctuations in foreign exchange rates (currency
risk) and interest rates through asset and liability management activities. It is the Group’s policy to reduce its
exposure to currency and interest rate risks to acceptable levels as determined by the Board of Directors. The Board
has established levels of currency risk by setting limits on currency position exposures. Positions are monitored on
an ongoing basis and hedging strategies used to ensure positions are maintained within established limits. The
Board has established levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods.
Interest rate gaps are reviewed on an ongoing basis and hedging strategies used to reduce the interest rate gaps to
within the limits established by the Board of Directors.
As part of its asset and liability management the Group uses derivatives for hedging purposes in order to reduce its
exposure to currency and interest rate risks. This is achieved by hedging specific financial instruments, forecasted
transactions as well as strategic hedging against overall statement of financial position exposures. For interest
rate risk this is carried out by monitoring the duration of assets and liabilities using simulations to estimate the
level of interest rate risk and entering into interest rate swaps and futures to hedge a proportion of the interest
rate exposure, where appropriate. Since strategic hedging does not qualify for special hedge accounting related
derivatives are accounted for as trading instruments.
The Group uses forward foreign exchange contracts and currency swaps to hedge against specifically identified
currency risks. In addition, the Group uses interest rate swaps and interest rate futures to hedge against the interest
rate risk arising from specifically identified loans and securities bearing fixed interest rates. In all such cases the
hedging relationship and objective, including details of the hedged item and hedging instrument, are formally
documented and the transactions are accounted for as hedges.
31 December 2009
21 CREDIT COMMITMENTS AND CONTINGENT ITEMS
Credit commitments and contingent items include commitments to extend credit, standby letters of credit,
acceptances and guarantees, which are structured to meet the various requirements of customers.
At the statement of financial position date, the principal outstanding and the risk weighted equivalents were as follows:
2009
2008
Short-term self-liquidating trade and transaction-related contingent items
5,987
6,036
Direct credit substitutes, guarantees and acceptances
1,913
1,351
894
1,401
8,794
8,788
2,725
3,321
Undrawn loans and other commitments
Risk weighted equivalents
The table below shows the contractual expiry by maturity of the Group’s credit commitments and contingent items:
2009
2008
937
1,478
1 - 6 months
2,701
1,867
6 - 12 months
2,107
1,666
1 - 5 years
2,813
3,352
236
425
8,794
8,788
On demand
Over 5 years
The Group expects that not all of the contingent liabilities or commitments will be drawn before expiry of the commitments.
The Group is engaged in litigation in various jurisdictions. The litigation involves claims by and against the Group
which have arisen in the ordinary course of business. The Directors of the Bank, after reviewing the claims pending
against Group companies and based on the advice of relevant professional legal advisors, are satisfied that the
outcome of these claims will not have a material adverse effect on the financial position of the Group.
93
31 December 2009
22 SIGNIFICANT NET FOREIGN CURRENCY EXPOSURES
Significant net foreign currency exposures, arising mainly from investments in subsidiaries, are as follows:
2009
Long (short)
Currency
2008
US$ equivalent
Currency
US$ equivalent
Brazilian Real
663
377
64
27
Egyptian Pound
808
147
640
116
Jordanian Dinar
85
120
78
110
Pound Sterling
107
174
29
42
Algerian Dinar
9,331
130
2,911
41
4
1
59
16
1,292
352
-
-
Saudi Riyal
UAE Dirham
The UAE Dirham exposure arising from net trading position is entirely covered by currency options to minimise the
risk of loss from adverse movements in the foreign currency rates.
23 FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is an amount for which an asset could be exchanged or a liability settled between knowledgable and
willing parties in an arm’s length transaction. Consequently, differences can arise between carrying values and fair
value estimates.
The fair values of financial assets and financial liabilities which are not carried at fair value are not materially
different from their carrying value except for the following:
2009
2008
Carrying
value
Fair
value
Carrying
value
Fair
Value
3,903
3,751
4,087
3,662
1,089
932
1,184
809
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by
valuation technique:
Level 1 valuation: Directly observable quotes for the same instrument (market prices).
Level 2 valuation: Directly observable proxies for the same instrument acessible at valuation date (mark-to-model
with market data).
Level 3 valuation: Derived proxies (interpolation of proxies) for similar instruments that have not been observed
(mark-to-model with deducted proxies).
31 December 2009
As at 31 December 2009 the Group has used the following hierarchy for determining and disclosing the fair value of
financial instruments by valuation technique:
23 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Level 1
Level 2
Total
-
6
6
123
6
129
123
12
135
1,039
4,512
5,551
26
55
81
1,065
4,567
5,632
Loans and advances - available-for-sale
-
89
89
-
94
94
-
92
92
Derivatives held as hedges
-
30
30
FINANCIAL ASSETS
Trading securities
Externally managed funds
Debt securities
NON-TRADING SECURITES
Available-for-Sale
Debt securities
Equity securities
Financial liabilities
Financial instruments recorded at fair value
The description of the determination of fair value for financial instruments recorded at fair value using valuation
techniques is discussed in note 4, which incorporate the Group's estimate of assumptions that a market participant
would make when valuing the instruments.
Transfers between level 1 and level 2
None of the financial instruments were transferred from level 1 to level 2 during the year ended 31 December 2009.
24 RISK MANAGEMENT
Introduction
Risk is inherent in the Group’s activities and is managed through a process of ongoing identification, measurement and
monitoring, subject to risk limits and other controls. The Group is exposed to credit risk, liquidity risk, operational and
market risk, legal risk and strategic risk as well as other forms of risk inherent in its financial operations.
Over the last few years the Group has invested heavily into developing a comprehensive and robust risk
management infrastructure. This includes risk identification processes under credit, market and operational risk
spectrums, risk measurement models and rating systems as well as a strong business process to monitor and
control these risks.
Risk management structure
Executive Management is responsible for implementing the Group’s Risk Strategy/Appetite and Policy Guidelines
set by the Board Risk Committee (BRC), including the identification and evaluation on a continuous basis of all
95
31 December 2009
24 RISK MANAGEMENT (Continued)
significant risks to the business and the design and implementation of appropriate internal controls to minimise
them. This is done through the following board committees, senior management committees and the Credit & Risk
Group in Head Office.
Within the broader governance infrastructure, the board committees carry the main responsibility of best practice
management and risk oversight. At this level, the BRC oversees the definition of risk appetite, risk tolerance
standards, and risk process standards to be kept in place. The BRC is also responsible to coordinate with other board
committees for monitoring compliance with the requirements of the regulatory authorities in the various countries
in which the Group operates.
The Group Audit Committee is responsible to the Board for ensuring that the Group maintains an effective system
of financial, accounting and risk management controls and for monitoring compliance with the requirements of the
regulatory authorities in the various countries in which the Group operates.
The Group’s Head Office Credit Committee (HOCC) is responsible for credit decisions at the higher levels of Group’s
lending portfolio, setting country and other high level Group limits, dealing with impaired assets and general credit
policy matters.
Each subsidiary is responsible for managing its own risks and has its own Board Risk Committee, Credit Committee
and (in the case of major subsidiaries) Asset and Liability Committee (ALCO), or equivalent, with responsibilities
generally analogous to the Group committees.
The ALCO is chiefly responsible for defining long-term strategic plans and short-term tactical initiatives for directing
asset and liability allocation prudently for the achievement of the Group’s strategic goals. ALCO monitors the
Group’s liquidity and market risks and the Group’s risk profile in the context of economic developments and market
fluctuations, to ensure that the Group’s ongoing activities are compatible with the risk/reward guidelines approved
by the BRC. The above management structure, supported by teams or risk and credit analysts, as well as the IT
systems provide a coherent infrastructure to carry credit and risk functions in a seamless manner.
The Operational Risk Management Committee (ORCO) is responsible for defining long-term strategic plans and
short-term tactical initiatives for operational risk. It also has the overall responsibility to monitor and prudently
manage exposure to operational risks including strategic and reputation risks.
Risk measurement and reporting system
Risk mitigation
As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures
resulting from changes in interest rates, foreign currencies, equity risks, credit risks, and exposures arising from
forecast transactions.
The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level
of seniority within the Group. The effectiveness of hedges is monitored monthly by the Group. In situations of
ineffectiveness, the Group will enter into a new hedge relationship to mitigate risk on a continuous basis.
The Group actively uses collateral to reduce its credit risk (see below for details).
Excessive risk concentration
Concentrations 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
indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or
geographical location.
In order to avoid excessive concentrations of risk, the Group policies and procedures include specific guidelines to
focus on country and counter party limits and maintaining a diversified portfolio. Identified concentrations of credit
risks are controlled and managed accordingly.
31 December 2009
Credit risk
Credit risk is the risk that the Group will incur a loss because its customers, clients and counterparties failed to
discharge their contractual obligations. The Group manages and controls credit risk by setting limits on the amount
of risk it is willing to accept for individual counterparties and for geographical and industry concentration, and by
monitoring exposures in relation to such limits.
The first level of protection against undue credit risk is through country, industry and other risk threshold limits,
together with customer and customer group credit limits, set by the BRC and the HOCC and allocated between the
Bank and its banking subsidiaries. Credit exposure to individual customers or customer groups is then controlled
through a tiered hierarchy of delegated approval authorities based on the risk rating of the customer under the
Group’s internal credit rating system. Where unsecured facilities sought are considered to be beyond prudential
limits, Group policies require collateral to mitigate the credit risk in the form of cash, securities, legal charges over
the customer’s assets or third-party guarantees. The Group also employs Risk Adjusted Return on Capital (RAROC)
as a measure to evaluate the risk/reward relationship at the transaction approval stage. RAROC analysis is also
conducted on a portfolio basis, aggregated for each business segment, business unit and for the whole Group.
Maximum exposure to credit risk without taking account of any collateral and other credit enhancements
The table below shows the maximum exposure to credit risk for the components of the balance sheet, including
credit commitments and contingent items. The maximum exposure is shown gross, before the effect of mitigation
through the use of master netting and collateral agreements.
Gross maximum exposure
2009
2008
Liquid funds
610
704
Trading debt securities
129
81
Placement with banks and other financial institutions
3,949
4,017
Non-trading debt securities
9,471
10,543
10,949
11,931
590
847
25,698
28,123
8,794
8,788
34,492
36,911
Loans and advances
Other credit exposures
Credit commitments and contingent items (note 21)
Total
Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk
exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.
For more detail on the maximum exposure to credit risk for each class of financial instrument, references should be
made to the specific notes. The effect of collateral and other risk mitigation techniques is shown below.
97
31 December 2009
Risk concentration of the maximum exposure to credit risk
The Group’s assets (before taking into account any collateral held or other credit enhancements), liabilities and
equity and commitments and contingencies can be analysed by the following geographical regions:
Assets
Liabilities and equity
Credit commitment and
contingent items
2009
2008
2009
2008
2009
2008
4,077
4,496
2,020
2,421
1,746
1,467
10,126
11,833
16,583
17,833
3,860
4,800
639
691
268
363
148
135
North America
6,248
7,488
3,609
5,300
1,015
1,194
Latin America
4,079
2,990
3,202
2,142
1,675
674
529
625
16
64
350
518
25,698
28,123
25,698
28,123
8,794
8,788
Western Europe
Arab World
Asia
Other
Total
An industry sector analysis of the Group’s financial assets, before and after taking into account collateral held or
other credit enhancements, is as follows:
Gross maximum
exposure
Net maximum
exposure
Gross maximum
exposure
Net maximum
exposure
2009
2009
2008
2008
Financial services
9,712
8,620
11,601
9,077
Other services
3,790
3,433
3,760
3,570
Manufacturing
3,693
3,283
2,987
2,755
Construction
693
548
719
608
468
457
297
289
300
300
151
151
Trade
269
206
454
339
Consumer
Government
Personal
Total
214
214
188
188
6,231
6,214
7,483
7,465
328
158
483
357
25,698
23,433
28,123
24,799
31 December 2009
An industry sector analysis of the Group’s credit commitments and contingent items, before and after taking into
account collateral held or other credit enhancements, is as follows:
Gross maximum
exposure
Net maximum
exposure
Gross maximum
exposure
Net maximum
exposure
2009
2009
2008
2008
Financial services
4,168
3,869
4,563
4,132
Other services
1,040
1,039
629
605
Manufacturing
1,983
1,961
2,176
2,162
Construction
795
793
572
571
308
308
212
212
30
30
13
13
413
412
442
442
Government
34
34
166
164
Other
23
20
15
15
8,794
8,466
8,788
8,316
Trade
Total
Credit quality per class of financial assets
The credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows
the credit quality by class of financial asset, based on the Group’s credit rating system.
31 December 2009
Neither past due nor impaired
High grade
Standard
grade
Substandard
grade
Past due or
individually
impaired
Total
Liquid funds
610
-
-
-
610
Trading securities
129
-
-
-
129
Placements with banks and other
financial institutions
2,948
994
7
-
3,949
8,358
1,090
-
23
9,471
Loans and advances
4,676
6,133
-
140
10,949
510
80
-
-
590
17,231
8,297
7
163
25,698
Past due or
individually
impaired
Total
31 December 2008
Neither past due nor impaired
High grade
Liquid funds
Standard Sub- standard
grade
grade
704
-
-
-
704
81
-
-
-
81
2,983
1,027
7
-
4,017
9,758
719
-
66
10,543
Loans and advances
6,746
5,113
-
72
11,931
772
75
-
-
847
21,044
6,934
7
138
28,123
Trading securities
99
31 December 2009
Credit quality per class of financial assets (continued)
As at 31 December 2009 and 2008, the total amount of past due but not impaired assets was immaterial.
It is the Group’s policy to maintain accurate and consistent risk ratings across the credit portfolio through risk rating
system. This facilitated focused management of the applicable risks and the comparison of credit exposures across
all lines of business, geographic regions and products. The rating is supported by a variety of financial analytics,
combined with the processed market information to provide the main inputs for the measurement of counterparty
credit risk. All internal ratings are tailored to the various categories and are derived in accordance with Bank’s credit
policy. The attributable risk ratings are assessed and updated regularly. Each risk rating class has grades equivalent
to Moody’s, S&P and Fitch rating agencies.
Carrying amount per class of financial assets whose terms have been renegotiated as at year end
Loans and advances
2009
2008
59
48
Collateral and other credit enhancements
The amount and type of collateral depends on an assessment of the credit risk of the counterparty. The types of
collateral mainly includes cash and guarantees from banks.
Management monitors the market value of collateral, requests additional collateral in accordance with the
underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of
the allowance for impairment losses. The Group also makes use of master netting agreements with counterparties.
Settlement risk
Settlement risk is the risk of loss due to the failure of a counterparty to honour its obligations to deliver cash,
securities or other assets as contractually agreed. For certain types of transactions, the Group mitigates this
risk through a settlement agent to ensure that a trade is settled only when both parties fulfill their settlement
obligations. Settlement approvals form a part of credit approval and limit monitoring procedure.
Market risk
Market risk is the risk that the Group’s earnings or capital, or its ability to support business strategy, will be impacted
by the change in market rates or prices related to interest rates, equity prices, credit spreads, foreign exchange
rates, and commodity prices.
The Group has established risk management policies and limits within which exposure to market risk is monitored,
measured and controlled by the Risk Management Department (RMD) with strategic oversight exercised by ALCO.
The RMD’s Market Risk Management (MRM) unit is responsible for developing and implementing market risk policy
and risk measuring/monitoring methodology and for reviewing all new trading products and product limits prior to
ALCO approval. MRM’s core responsibility is to measure and report market risk against limits throughout the Group.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair
values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate
re-pricing of assets and liabilities. The most prominent market risk factor for the Group is interest rates. This risk is
minimized as the Group rate sensitive assets and liabilities are mostly floating rate, where the duration risk is lower.
In general, the Group uses matched currency funding and translates fixed rate instruments to floating rate to better
manage the duration in the asset book.
The following table demonstrates the sensitivity to a reasonable possible change in interest rates, with all other
variables held constant, of the Group’s consolidated statement of income.
31 December 2009
Interest rate risk (Continued)
The sensitivity of the consolidated statement of income is the effect of the assumed changes in interest rates on
the net interest income for one year, based on financial assets and financial liabilities held at 31 December 2009,
including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing fixed rate availablefor-sale financial assets, including the effect of any associated hedges and swaps. Substantially all the availablefor-sale non-trading securities held by the Group are floating rate assets. Hence, the sensitivity to changes in equity
due to interest rate changes is insignificant.
Increase in
basis
points
Sensitivity
statement of
income
Decrease in
basis
points
Sensitivity
statement of
income
2009
2009
2009
2009
USD
25
22
25
(22)
Euro
25
1
25
(1)
GBP
25
2
25
(2)
BRL
25
2
25
(2)
Others
25
3
25
(3)
Increase in
basis
points
Sensitivity
statement of
income
Decrease in
basis
points
Sensitivity
statement of
income
2008
2008
2008
2008
USD
25
33
25
Euro
25
-
25
-
GBP
25
1
25
(1)
Others
25
(2)
25
2
(33)
Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign
exchange rates.
The table on the next page indicates the currencies to which the Group had significant exposure at 31 December
2009 on its monetary assets and liabilities and its forecast cash flows. The analysis calculates the effect of a
reasonably possible movement of the currency rate against the US$, with all other variables held constant on the
consolidated statement of income (due to the fair value of currency sensitive trading and non-trading monetary
assets and liabilities) and equity (due to the change in fair value of currency swaps and forward foreign exchange
contracts used as cash flow hedges) and the effect of impact of foreign currency movements on the structured
positions of the Bank in its subsidiaries. A negative amount in the table reflects a potential net reduction in the
consolidated statement of income or equity, while a positive amount reflects a potential net increase.
101
31 December 2009
Currency risk (Continued)
Change in
currency rate
in %
Effect on
profit
before tax
2009
2009
2009
Brazilian Real
+/- 5%
+/-1
GBP
+/- 5%
Egyptian Pound
+/- 5%
Jordanian Dinar
Algerian Dinar
Saudi Riyal
Currency
Change in
Effect on currency rate
equity
in %
Effect on
profit
before tax
Effect on
equity
2008
2008
2008
+/-18
+/- 5%
-
+/-1
+/-1
+/-9
+/- 5%
-
+/-3
-
+/-7
+/- 5%
-
+/-6
+/- 5%
-
+/-6
+/- 5%
-
+/-5
+/- 5%
-
+/-6
+/- 5%
-
+/-2
+/- 5%
-
-
+/- 5%
+/-8
-
Equity price risk
Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity
indices and the value of individual stocks. The non-trading equity price risk exposure arises from the Group’s
securities portfolio.
The effect on equity (as a result of a change in the fair value of trading equity instruments and equity instruments
held as available for sale) due to a reasonably possible change in equity indices or the net asset values, with all
other variables held constant, is as follows:
Effect on
% Change in
statement of
equity price income/ equity
% Change in
equity price
Effect on
statement of
income/equity
2008
2009
2009
2008
Change in NAVs of fund of funds in
North America and Europe
+/- 5%
-
+/- 5%
+/-2
Other equities
+/- 5%
-
+/- 5%
+/-1
Available-for-sale equities
+/- 5%
+/-4
+/- 5%
+/-4
Trading securities
Operational risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes or systems or
from external events. Operational risk is inherent in all business activities and can never be eliminated entirely;
however shareholder value can be preserved and enhanced by managing, mitigating and, in some cases, insuring
against operational risk. To achieve this goal the Operational Risk Management Unit has developed an operational
risk framework, which includes identification, measurement, management, and monitoring and risk control/
mitigation elements. A variety of underlying processes are being deployed across the Group including risk and
control self-assessments, Key Risk Indicators (KRI), event management, new product review and approval processes
and business contingency plans.
The Group intends to make operational risk transparent throughout the enterprise, to which end processes are
being developed to provide for regular reporting of relevant operational risk management information to business
management, senior management, the ORCO, the BRC and the Board of Directors generally.
Group policy dictates that the operational functions of booking, recording and monitoring of transactions
are carried out by staff that are independent of the individuals initiating the transactions. Each business line –
including Operations, Information Technology, Human Resources, Legal & Compliance and Financial Control - is
further responsible for employing the aforementioned framework processes and control programmes to manage
its operational risk within the guidelines established by the Group’s policy and procedures. To ensure that all
operational risks to which the Group is exposed are adequately managed, support functions are also involved in the
identification, measurement, management, monitoring and control/mitigation of operational risk, as appropriate.
31 December 2009
The maturity analysis of assets and liabilities analysed according to when they are expected to be recovered or settled or when they
could be realised.
At 31 December 2009
Total
Within 1
1-3
3-6
6 - 12 within 12
months
month months months months
1-5
years
5 - 10
years
Total
over 12
10 - 20 Over 20
years
years Undated months
Total
ASSETS
Liquid funds
Trading securities
407
239
-
-
646
-
-
-
-
-
-
646
-
-
-
-
-
-
135
-
-
30
105
135
3,457
64
428
-
3,949
7,339
65
722
167
8,293
1,038
125
14
1
81
1,259
9,552
Loans and advances
1,586
1,517
1,198
1,164
5,465
3,508
1,304
666
6
-
5,484
10,949
-
-
-
-
-
-
-
-
-
734
734
734
12,789
1,885
2,378
1,436
18,488
4,546
1,429
680
7
815
7,477
25,965
5,274
2,203
380
363
8,220
1,685
4
-
-
-
1,689
9,909
Deposits from banks and other
3,098
1,328
475
392
5,293
914
17
-
-
-
931
6,224
7
5
1
9
22
12
-
-
-
-
12
34
1,666
1,826
-
587
4,079
-
-
-
-
-
-
4,079
Term notes, bonds and other term
financing
-
-
-
384
384
1,548
412
-
-
-
1,960
2,344
Others
-
-
-
-
-
-
-
-
-
794
794
794
Shareholders’ equity and minority
interests
-
-
-
-
-
-
-
-
-
2,581
2,581
2,581
10,045
5,362
856
1,735
17,998
4,159
433
-
-
3,375
7,967
25,965
Net liquidity gap
2,744
(3,477)
490
387
996
680
7
(2,560)
-
-
Cumulative net liquidity gap
2,744
(733)
877
1,873
2,553
2,560
Others
Total assets
3,949
LIABILITIES, SHAREHOLDERS’
EQUITY AND NON-CONTROLLING
INTERESTS
Securities sold under repurchase
agreement
Total liabilities, shareholders’
equity and non-controlling
interests
1,522
789
(299)
490
-
Within 1 month are primarily liquid securities that can be sold under repurchase agreements. Deposits are continuously replaced with
other new deposits or rollover from the same or different counterparties, based on available lines of credit.
103
31 December 2009
At 31 December 2008
Within 1
month
1-3
months
3-6
months
6 - 12
months
Total
within 12
months
1-5
years
5 - 10
years
10 - 20
years
588
235
-
-
823
-
-
-
-
38
80
126
-
-
-
-
Total
over 12
months
Total
-
-
823
-
-
126
Over 20
years Undated
ASSETS
Liquid funds
Trading securities
8
-
3,607
400
9
1
4,017
-
-
-
-
-
-
4,017
7,824
29
557
177
8,587
1,227
608
121
-
80
2,036
10,623
Loans and advances
1,664
1,646
2,104
1,344
6,758
3,324
1,161
674
14
-
5,173
11,931
-
-
-
-
-
-
-
-
-
966
966
966
13,691
2,310
2,708
1,602
20,311
4,551
1,769
795
14
1,046
8,175
28,486
3,788
3,700
909
284
8,681
2,044
3
-
-
-
2,047
10,728
3,120
1,298
1,243
247
5,908
301
1
-
-
-
302
6,210
4
-
34
-
38
-
-
-
-
-
-
38
3,600
1,661
-
553
5,814
-
-
-
-
-
-
5,814
financing
-
59
-
-
59
1,884
555
-
-
-
2,439
2,498
Others
-
-
-
-
-
-
-
-
-
1,110
1,110
1,110
Shareholders’ equity and minority
interests
-
-
-
-
-
-
-
-
-
2,088
2,088
2,088
10,512
6,718
2,186
1,084
20,500
4,229
559
-
-
3,198
7,986
28,486
Net liquidity gap
3,179
(4,408)
522
518
322
1,210
795
14
-
-
Cumulative net liquidity gap
3,179
(1,229)
(707)
(189)
133
1,343
2,138
2,152
Others
Total assets
LIABILITIES, SHAREHOLDERS’
EQUITY AND NON-CONTROLLING
INTERESTS
agreement
Total liabilities, shareholders’ equity
and non-controlling interests
(189)
(2,152)
-
31 December 2009
Liquidity risk
Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal
and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core
deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This
incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to
secure additional funding if required.
The Group maintains liquid assets at prudential levels to ensure that cash can quickly be made available to honor all
its obligations, even under adverse conditions. The Group is generally in a position of excess liquidity, its principal
sources of liquidity being its deposit base, liquidity derived from its operations and inter-bank borrowings. The Minimum
Liquidity Guideline (MLG) is used to manage and monitor daily liquidity. The MLG represents the minimum number of
days the Group can survive the combined outflow of all deposits and contractual drawdowns, under market value driven
encashability scenarios.
In addition, the internal liquidity/maturity profile is generated to summarize the actual liquidity gaps versus the revised
gaps based on internal assumptions.
The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2009 based
on contractual undiscounted repayment obligations. See the previous table for the expected maturities of
these liabilities. Repayments which are subjected to notice are treated as if notice were to be given immediately.
However, the Group expects that many customers will not request repayment on the earliest date the Group could be
required to pay and the table does not reflect the expected cash flows indicated by the Group’s deposit retention history.
On
demand
1-3
months
3-6
months
6 - 12
months
1-5
years
5-10
years
10 - 20
years
Over 20
years
Total
6,351
2,429
395
394
512
4
-
-
10,085
3,100
1,338
485
424
1,089
29
-
-
6,465
agreements
1,666
1,828
-
589
-
-
-
-
4,083
Certificates of deposits
7
4
1
9
14
-
-
-
35
financing
-
-
-
395
1,583
443
-
-
2,421
11,124
5,599
881
1,811
3,198
476
-
-
23,089
1,394
933
301
586
2
-
11
-
3,227
107
360
410
696
202
16
15
-
1,806
At 31 December 2009
Total non-derivative undiscounted
financial liabilities on statement
of financial position
ITEMS OFF STATEMENT OF
FINANCIAL POSITION
Gross settled foreign currency derivatives
Guarantees
105
31 December 2009
Liquidity risk (Continued)
On
demand
1-3
months
3-6
months
6 - 12
months
1-5
years
5 - 10
years
10 - 20
years
Over 20
years
Total
4,801
4,336
1,007
304
380
3
-
-
10,831
3,123
1,307
1,278
265
388
1
-
-
6,362
agreements
3,600
1,671
-
571
-
-
-
-
5,842
Certificates of deposits
5
-
34
-
-
-
-
-
39
financing
-
64
-
-
2,156
706
-
-
2,926
Total non-derivative undiscounted
financial liabilities on statement
of financial position
11,529
7,378
2,319
1,140
2,924
710
-
-
26,000
2,043
710
312
393
121
-
11
-
3,590
336
230
121
325
132
47
46
-
1,237
At 31 December 2008
ITEMS OFF STATEMENT OF
FINANCIAL POSITION
Gross settled foreign currency derivatives
Guarantees
25 OPERATING SEGMENTS
For management purposes, the Group is organised into four operating segments which are based on business units and
their activities. The Group has accordingly been structured to place its activities under the distinct divisions which are as
follows:
-
Universal Banking covers Retail and SME banking activities of the Group in the Arab World;
International Wholesale Banking encompasses Project and Structured Finance, Trade Finance and Forfaiting,
Islamic Financial Services, Corporate Banking & Financial Institutions, Syndications and Corporate Finance;
Treasury comprises the activities of Treasury in Bahrain Head Office; and
Others include activities of Banco ABC Brasil S.A and Arab Financial Services Company B.S.C. (c).
31 December 2009
25 OPERATING SEGMENTS (Continued)
2009
Universal
Banking
International
Wholesale
Banking
Treasury
Other
Total
Net interest income
77
75
73
166
391
44
104
22
80
250
121
179
95
246
641
Profit before impairment provisions
54
91
84
146
375
(4)
(88)
6
(29)
(115)
Profit before taxation
50
3
90
117
260
(12)
-
-
(34)
(46)
Unallocated operating expenses
(60)
Profit for the year
154
Total Assets
2,460
9,769
8,851
4,885
25,965
2008
Universal
Banking
International
Wholesale
Banking
Treasury
Other
Total
Net interest income
80
95
60
196
431
39
114
15
8
176
119
209
75
204
607
50
120
63
103
336
1
(135)
(833)
(88)
Profit (loss) before taxation
51
(15)
(770)
15
(719)
(25)
(36)
Profit before impairment provisions
(11)
-
-
Unallocated operating expenses
(81)
Loss for the year
Total Assets
(1,055)
(836)
2,369
12,177
9,914
4,026
28,486
107
31 December 2009
25 OPERATING SEGMENTS (Continued)
Geographical information
The Group operates in six geographic markets: Middle East and North Africa, Western Europe, Asia, North America,
Latin America and others. The following table show the external total operating income of the major units within
the Group, based on the country of domicile of the entity for the years ended 31 December 2009 and 2008:
2009
Bahrain
ABCIB
Banco ABC
Brasil
Other
Total
145
100
194
202
641
147
110
217
133
607
2008
There were no revenues derived from transactions with a single external customer that amounted to 10% or more
of the Group’s revenue.
Non-current assets consist of premises and equipment and are not material to the Group.
26 REPURCHASE AND RESALE AGREEMENTS
Proceeds from assets sold under repurchase agreements at the year end amounted to US$ 4,079 million (2008:
US$ 5,814 million). The carrying value of securities sold under repurchase agreements at the year end amounted to
US$ 4,358 million (2008: US$ 6,756 million).
Amounts paid for assets purchased under resale agreements at the year end amounted to US$ 64 million (2008:
US$ 271 million) and relate to customer product and treasury activities. The market value of the securities
purchased under resale agreements at the year end amounted to US$ 64 million (2008: US$ 272 million).
31 December 2009
27 TRANSACTIONS WITH RELATED PARTIES
Related parties represent major shareholders, associates, directors and key management personnel of the Group
and entities controlled, jointly controlled or significantly influenced by such parties. Pricing policies and terms of
these transactions are approved by the Group’s management.
The year end balances in respect of related parties included in the consolidated financial statements are as follows:
Major
shareholders
Directors
2009
2008
1,535
1
1,536
1,883
The expenses in respect of related parties included in the consolidated financial statements are as follows:
Interest expense
3
9
2009
2008
Compensation of the key management personnel is as follows:
Short term employee benefits
Post employment benefits
13
18
8
10
21
28
28 FIDUCIARY ASSETS
Funds under management at the year end amounted to US$ 10,103 million (2008: US$ 5,324 million). These assets
are held in a fiduciary capacity and are not included in the consolidated statement of financial position.
29 ISLAMIC DEPOSITS AND ASSETS
Deposits from customers and banks and financial institutions include Islamic deposits of US$ 741 million (2008:
US$ 652 million). Loans and advances and non-trading securities include Islamic assets of US$ 894 million (2008:
US$ 1,091 million) and US$ 401 million (2008: US$ 368 million).
30 ASSETS PLEDGED AS SECURITY
At the statement of financial position date, in addition to the items mentioned in note 26, assets amounting
to US$ 266 million (2008: US$ 313 million) have been pledged as security for borrowings and other banking
operations.
31 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is calculated by dividing the profit (loss) for the year by the weighted average
number of shares during the year. No figures for diluted earnings per share have been presented, as the
Bank has not issued any capital based instruments which would have any impact on earnings (loss) per share,
when exercised.
109
31 December 2009
31 BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Continued)
The Group’s earnings (loss) for the year are as follows:
2009
Profit (loss) for the year
2008
122
Weighted average number of shares outstanding during the year (millions)
Basic and diluted earnings (loss) per share (US$)
(880)
2,000
1,538
0.06
(0.57)
32 CAPITAL ADEQUACY
The primary objectives of the Group’s capital management are to ensure that the Group complies with externally
imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order
to support its business and to maximise shareholders’ value.
The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions
and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust
the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No
changes were made in the objectives, policies and processes from the previous years.
The risk asset ratio calculations as at 31 December are based on standardised measurement methodology and in
accordance with the CBB Basel II guidelines.
Basel II
CAPITAL BASE
2009
2008
Tier 1 capital
2,664
2,509
Tier 2 capital
683
650
3,347
3,159
Credit risk weighted assets and off balance sheet items
17,164
17,625
Market risk weighted assets and off balance sheet items
1,511
882
Operational risk weighted assets
1,188
1,030
[b]
19,863
19,537
[a/b*100]
16.9%
16.2%
12.0%
12.0%
Total capital base
[a]
RISK WEIGHTED EXPOSURES
Total risk weighted assets
Risk asset ratio
Minimum Requirement
Regulatory capital consists of Tier 1 capital, which comprises share capital, retained earnings, statutory reserve,
general reserve, minority interests, foreign currency translation adjustments in equity and Tier 2 capital, which
includes subordinated long term debt and collective provisions.
The Group has complied with all the requirements as set by the Central Bank of Bahrain.
ABC GROUP DIRECTORY
Head Office Directory
International Directory
112
113
111
HEAD OFFICE DIRECTORY
HEAD OFFICE
PO Box 5698, Manama
Kingdom of Bahrain
Tel: (973) 17 543 000
Fax:(973) 17 533 163 / 17 533 062
http://www.arabbanking.com
webmaster@arabbanking.com
Hassan. A. Juma
Dr. Khaled Kawan
Deputy Chief Executive
Sael Al Waary
GLOBAL FINANCIAL
INSTITUTIONS
Souheil Badro
Tel: (973) 17 543 272
GROUP RETAIL
GROUP SUPPORT
Global Corporate
Communications
Nadia Mehdid
Tel: (973) 17 543 204
Global Information Technology
Tel: (973) 17 543 710
Stuart Rennie
Tel: (973) 17 543 249
GROUP TREASURY
Group Policies & Procedures
R. Sethu Venkateswaran
Amr Gadallah
K. Krithivasan
Tel: (973) 17 543 382
Group Treasurer
Tel: (973) 17 543 375 / 17 532 933
Group Legal Counsel
Group Chief Operating Officer
Ali Mirza
Vernon Handley
Tel: (973) 17 543 564
Roy Gardner
Assistant Group Treasurer
Tel: (973) 17 543 241
Group Compliance
Group Chief Financial Officer
INTERNATIONAL WHOLESALE
BANKING
TREASURY & MARKETABLE
SECURITIES
Bahrain Treasurer
Global Products
Kareem Dashti
Tel: (973) 17 543 775
Global Corporate & Structured
Finance
Group Marketable Securities
Graham Scopes
Tel: (973) 17 543 622
Project & Structured Finance
Geoff Biron
Tel: (973) 17 543 316
Global Trade Finance
Arif Mumtaz
Tel: (973) 17 533 169
Asset Management
Mahmoud Zewam
Tel: (973) 17 533 169
CREDIT & RISK GROUP
Paul Jennings
Global Head
Tel: (44) (20) 7776 4040
Vijay Srivastava
Amr El Ashmawi
Tel: (973) 17 543 516
Risk Management
Syndications
John McWall
Tel: (973) 17 543 967
Acting Chief Credit & Risk Officer
Tel: (973) 17 543 288
Meghnath Shaw
Tel: (973) 17 543 396
Head Office Credit Dept.
Gareth Jarvis
Tel: (973) 17 543 228
Remedial Loans Unit
Stephen Jenkins
Tel: (973) 17 543 713
Qutub Yousafali
Tel: (973) 17 543 273
Operations
Andrew Wilson
Tel: (973) 17 543 714
Premises & Engineering
Samer Marouf
Tel: (973) 17 543 609
Group Planning & Financial
Controls
Dilip Kumar
Tel: (973) 17 543 320
Human Resources
Adel Al Abbasi
Tel: (973) 17 543 598
GROUP AUDIT
Jehangir Jawanmardi
Group Chief Auditor
Tel: (973) 17 543 387
INTERNATIONAL DIRECTORY
MENA SUBSIDIARIES
PO Box 367,
54 Avenue des Trois Freres Bouaddou
Bir Mourad Rais, Algiers, Algeria
Tel: (213) (21) 449 000 / 449 007 / 449 003
Fax: (213) (21) 541 122
information@arabbanking.com.dz
Swift: ABCODZAL
Ahmed Redha Kara-Terki
Chief Executive Officer
(ABC Bank, Egypt)
PO Box 2808, Manama
Kingdom of Bahrain
Tel: (973) 17 543 342
Fax: (973) 17 536 379 / 17 533 972
Naveed Khan
Global Head of Islamic Banking & Managing Director
Arab Financial Services Company B.S.C. (c)
PO Box 2152, Manama
Kingdom of Bahrain
Tel: (973) 17 290 333
Fax: (973) 17 291 122
1, El Saleh Ayoub St., Zamalek, Cairo, Egypt
Tel: (202) 2736 2684 (10 lines)/
Fax: (202) 27363614 /43
abcegypt@arabbanking.com.eg
Shankar Sharma
Mohamed Sherif Sharaf
Head Office and London Branch
Managing Director & CEO
ABC Securities (Egypt) S.A.E.
1, El Saleh Ayoub St. Zamalek, Cairo, Egypt
Tel: (202) 2736 2684 (10 lines)/
Fax: (202) 2736 3643 / 14
Mohamed Sherif Sharaf
Chairman
P.O. Box 926691, Amman 11190, Jordan
Tel: (962) (6)5664 183 (General)
Tel: (962) (6)5692 713/(962) (6) 5692 723 (Dealing Room)
Fax: (962) (6) 5686291
info@arabbanking.com.jo
Simona Sabella Bishouty
General Manager
Arab Banking Corporation Tunisie
ABC Building, Rue du Lac d’Annecy
Les Berges du Lac, 1053 Tunis, Tunisia
Tel: (216) (71) 861 861
(216) (71) 861 110 (Treasury)
Fax: (216) (71) 960 427 / 960 406 / 860 921
Tlx: 12505 ABCTU TN
abc.tunis@arabbanking.com
Direct Dealing Reuters Code: ABCT
Swift: ABCOTNTT 001
Mohamed Ben Othman
Acting General Manager
Chief Executive Officer
INTERNATIONAL SUBSIDIARIES
Arab Banking Corporation House
1-5 Moorgate, London EC2R 6AB, UK
Tel: (44) (20) 7776 4000 (General)
Fax: (44) (20) 7606 9987 (General)
Treasury:
Tel: (44) (20) 7726 4091 (Dealing Room)
Fax: (44) (20) 7606 1710 (Dealing Room)
Reuters Code: ABCL
Swift: ABCE GB 2L
Nofal Barbar
CEO & Managing Director
(Paris Branch)
4 rue Auber
75009 Paris
France
Tel: (33) (1) 4952 5400
Fax: (33) (1) 4720 7469
Tlx: 648343 ABC F (General)
Alexander Ashton
General Manager
(Frankfurt Branch)
Neue Mainzer Strasse 75
60311 Frankfurt am Main
Germany
Tel: (49) (69) 7140 30
Fax: (49) (69) 7140 3240
Swift: ABCA DE FF
abcib.fra@arabbanking.com
Gerald Bumharter
General Manager
113
INTERNATIONAL SUBSIDIARIES (CONTINUED)
(Milan Branch)
Via Amedei, 8
20123 Milan
Italy
Tel: (39) (02) 863 331
Fax: (39) (02) 8645 0117
Swift: ABCO IT MM
Paolo Provera
General Manager
ABC INTERNATIONAL BANK PLC
MARKETING OFFICES
UK & Ireland
Station House, Station Court, Rawtenstall
Rossendale
Lancashire
BB4 6AJ, UK
Tel: (44) (1706) 237 900
Fax: (44) (1706) 237 909
Moscow - Representative Office
4th floor, 10 block C
Presnenskaya naberezhnaya
Moscow 123317, Russia
Tel: (7) 495 651 6649
Fax: (7) 495 651 6696
moscow@arabbanking.com
Dmitry Kuryshev
ABC (IT) Services Ltd.
Arab Banking Corporation House
1-5 Moorgate, London EC2R 6AB, UK
Tel: (44) (20) 7776 4050
Fax: (44) (20) 7606 2708
abcits@arabbanking.com
John Bates
General Manager
David Beeley
Av. Pres. Juscelino Kubitschek, 1400
04543-000 Itaim Bibi
São Paulo – SP, Brazil
Tel: (55) (11) 317 02000
Fax: (55) (11) 317 02001
Iberia – Representative Office
Tito Enrique da Silva Neto
Paseo de la Castellana 153
2° Dcha, Madrid 28046, Spain
Tel: (34) (91) 5672822
Fax: (34) (91) 5672829
President
Usama Zenaty
Nordic Region
Stortorget 18-20
SE-111 29 Stockholm
Sweden
Tel: (46) 823 0450
Fax: (46) 823 0523
Klas Henrikson
Turkey – Representative Office
Eski Büyükdere Cad. Ayazaga Yolu Sk.
Iz Plaza No: 9 Kat:19 D:69
34398 Maslak
Istanbul
Turkey
Tel: (90) (212) 329 8000
Fax: (90) (212) 290 6891
FABR 173
Muzaffer Aksoy
BRANCHES
REPRESENTATIVE OFFICES
Tunis (OBU)
Abu Dhabi
ABC Building, Rue du Lac d’Annecy
Les Berges du Lac, 1053 Tunis
Tunisia
Tel: (216) (71) 861 861
(216) (71) 861 110 (Treasury)
Fax: (216) (71) 860 921/ 960 406/ 960 427
Tlx: 12505 ABCTU TN
abc.tunis@arabbanking.com
Direct Dealing Reuters Code: ABCT
Swift: ABCOTNTT
10th Floor, East Tower at the Trade Centre
2nd Street, Abu Dhabi Mall
PO Box 6689, Abu Dhabi, UAE
Tel: (971) (2) 644 7666
Fax: (971) (2) 644 4429
abcrep@eim.ae
Mohamed El Calamawy
Chief Representative
Beirut
Nour Nahawi
Resident Country Manager & General Manager
Baghdad
Al Saadon St., Al Firdaws Square
National Bank of Iraq Building
Baghdad, Iraq
Tel: (964) (1) 7173774 /
7173776/717 3779
info.iraq@arabbanking.com
Berytus Parks
Block B, 2nd Floor
Minet El Hosn, Solidere
PO Box 11-5225
Beirut, Lebanon
Tel: (961) (1) 970770 / 970432
Fax: (961) (1) 985809
Mobile: (961) (3) 724644
Ghina Haddad
Mowafaq H. Mahmood
General Manager
Mobile: (964) 790 161 8048
New York
600 Third Avenue
New York, NY 10016, USA
Tel: (1) (212) 583 4720
Fax: (1) (212) 583 0921
Tlx: 661978/427531 ABCNY (General);
421911/661979 ABCFX (Dealing Room)
Direct Dealing Reuters Code: ABCN
Tehran
4th Floor West
No. 17 Haghani Expressway
Tehran 15188, Iran
Tel: (98) (21) 8879 1105 / 8879 1106
Fax: (98) (21) 8888 2198
arabbanking.teh@parsonline.net
Aziz Farrashi
Tripoli
Robert Ivosevich
General Manager
Tel: (1) (212) 583 4774
Grand Cayman
c/o ABC New York Branch
That Emad Administrative Centre Tower 5,
16th Floor, PO Box 3578, Tripoli, Libya
Tel: (218) (21) 335 0226/
335 0227 / 335 0228
Fax: (218) (21) 335 0229
abc_rep_ly@lttnet.net
Saddek El Kaber
Singapore
9 Raffles Place, #60-03 Republic Plaza
Singapore 048619
Tel: (65) 653 59339
Fax: (65) 653 26288
Kah Eng Leaw
REGISTERED ADDRESS
Arab Banking Corporation (B.S.C.)
PO Box 5698, Manama
Kingdom of Bahrain
(Commercial Registration Number 10299)
www.arabbanking.com

ABC Bahrain AR09 front_vs2 3.indd

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