Ahli United Bank Annual Report 2010

ahliunited.com

Ahli United Bank Annual Report 2010

the

first

decade

2010

annual report


The story of our success

is grounded in a simple

philosophy: “A merger of minds.

A merger of markets.”

Now, 10 years later, we operate

successfully across 7 MENA

markets and in the UK. Inspired

by our local heritage, our

ambition knows no boundaries.


ahli united bank

2010 annual report continued

contents

2 Group mission statement

3 AUB operating divisions

4 Financial highlights

14 Board of Directors’ report

18 Board of Directors

20 Chairman’s statement

22 Group Chief Executive Officer & Managing Director’s statement

24 Corporate governance

28 Group business and risk review

36 Group organisation and shareholding

37 Group management

38 Contact details

40 Auditors’ report to the shareholders and consolidated financial statements

Auditors’ report to the shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Consolidated statement of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

Consolidated statement of comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Consolidated balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

Consolidated statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Consolidated statement of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

47 Notes to the consolidated financial statements

69 Pillar III disclosures - Basel II

1


ahli united bank

2

2010 annual report

group

mission

statement

To create an unrivalled ability to meet customer

needs, provide fulfillment and development for our

staff and deliver outstanding shareholder value.

Objectives

• to maximize shareholder value on a sustainable basis .

• to maintain the highest international standards of corporate governance and regulatory compliance .

• to maintain solid capital adequacy and liquidity ratios .

• to entrench a disciplined risk and cost management culture .

• to develop a cross-cultural meritocratic management structure .

• to optimise staff development through business driven training and profit related incentive .

• to contribute to the social and economic advancement of the communities in which the group operates .

AUB vision & strategy

• Develop an integrated pan regional financial services group model centered on commercial & retail banking, private banking, asset management

and life insurance with an enhanced Sharia’a compliant business focus and contribution .

• Acquire banks and related regulated financial institutions in the Gulf countries (core markets) with minimum targeted 10% market share to be

achieved through mergers, acquisitions and organic growth .

• Acquire complementary banking platforms in secondary markets enjoying strong cross border business flows with Gulf countries or with

economic structures similar to the Gulf countries .


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2010 annual report group mission statement continued

Corporate Banking, Treasury & Investments

This division covers all the Bank’s capital-intensive activities in risk asset generation and funding regionally and internationally.

• Corporate and Trade Finance

• Treasury

• Commercial Property Finance

• Residential Property Finance

• Acquisition and Structured Finance

• Correspondent Banking

• Islamic Banking

Private Banking & Wealth Management

This division generally includes all the low capital-intensive sectors of the business, offering wealth management services to

individuals and institutions based on performance and a balanced product mix.

• Private Banking and Asset Management

• Real Estate Fund Management

• Islamic Banking

Retail Banking

This division covers both conventional and islamic individual customers’ deposits, loans, overdrafts, credit cards and residential mortgages.

Risk Management

This division is responsible for the identification, assessment and ongoing control of all material risks that could affect the Group’s

businesses & operations.

• Risk Management

• Legal

• Compliance

• Audit

Support Services

These divisions provide back end banking services to support on-going business activities of the Group, as well as supporting the

Group’s expansion through mergers and acquisitions.

• Finance

• Strategic Development

• Information Technology

• Operations

• Services

• Human Resources

3

“Operating divisions


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4

2010 annual report financial highlights continued

financial

highlights

US$ ‘000

net

profit

total

loans

300,000

240,000

180,000

120,000

60,000

14,000,000

11,200,000

8,400,000

5,600,000

2,800,000

0

0

207,480

296,317

255,723

200,718

265,499

06 07 08 09 10

8,873,357

12,035,153

13,632,220

13,299,999

14,477,713

06 07 08 09 10

27,000,000

21,600,000

16,200,000

10,800,000

5,400,000

total

assets

2,400,000

1,920,000

1,440,000

960,000

480,000

0

0

20,798,907

23,049,852

shareholders’

equity

23,582,727

23,573,983

26,457,461

06 07 08 09 10

1,543,118

2,309,720

1,995,435

2,213,523

2,392,181

06 07 08 09 10


8

2000:2

countries in

which we operate

2010:

bahrain

kuwait

qatar

oman

egypt

iraq

libya

uk


ahli united bank

Net profit for the year

6

2010 annual report financial highlights continued

consolidated

performance

summary

US$ 265.5million

2010 2009 2008 2007 2006

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

Net profit * 265,499 200,718 255,723 296,317 207,480

Total assets 26,457,461 23,573,983 23,582,727 23,049,852 20,798,907

Total loans 14,477,713 13,299,999 13,632,220 12,035,153 8,873,357

Total liabilities (including subordinated liabilities) 23,705,286 20,992,552 21,187,950 20,401,731 18,972,235

Shareholders’ equity 2,392,181 2,213,523 1,995,435 2,309,720 1,543,118

Non-Controlling interests 359,994 367,908 399,342 338,401 283,554

Return on average assets 1.2% 0.9% 1.3% 1.7% 1.7%

Return on average equity 12.0% 9.6% 11.4% 18.0% 15.1%

Cost to income ratio 35.5% 33.8% 39.1% 37.5% 40.1%

Financial leverage 9.6 9.2 10.2 8.5 12.0

Risk asset ratio ** 14.1% 15.1% 13.8% 16.2% 14.8%

Net interest margin 2.3% 2.4% 2.2% 2.2% 1.8%

Earning per share (US cents) - basic 5.4 4.2 5.3 7.9 5.5

Earning per share (US cents) - diluted 5.4 4.2 5.3 6.9 4.9

* Attributable to Bank’s equity shareholders.

** Under Basel II from 2008.


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2010 annual report financial highlights continued

principal

subsidiaries

United Kingdom: Ahli United Bank (UK) PLC

2010 2009 2008 2007 2006

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

Net profit 20,760 7,164 7,088 25,370 15,152

Total assets 2,718,253 2,030,367 2,305,646 2,541,853 3,445,908

Total loans 1,560,955 1,309,903 1,095,061 1,210,724 1,089,040

Total liabilities 2,478,638 1,813,063 2,101,818 2,323,757 3,220,410

Shareholders’ equity 239,615 217,304 203,828 218,096 225,498

Return on average assets 0.9% 0.3% 0.3% 0.8% 0.5%

Return on average equity 9.1% 3.4% 3.4% 11.1% 6.8%

Cost to income ratio 38.1% 41.3% 48.3% 44.1% 70.3%

Financial leverage 10.1 8.2 10.0 10.4 14.0

Risk asset ratio * 15.3% 16.5% 15.6% 14.6% 13.9%

Earning per share (US cents) 10.4 3.6 3.5 12.3 7.6

* Under Basel II from 2008.

7


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2010 annual report financial highlights continued

principal

subsidiaries

continued

Kuwait: Ahli United Bank K.S.C.

2010 2009 2008 2007 2006

KD’ 000 KD’ 000 KD’ 000 KD’ 000 KD’ 000

Net profit * 27,444 14,262 51,365 48,179 45,111

Total assets 2,454,337 2,260,533 2,237,018 2,238,549 1,929,406

Total loans (financing receivables) 1,609,986 1,561,104 1,472,932 1,251,476 922,987

Total liabilities 2,189,042 2,023,197 1,965,126 1,935,285 1,672,475

Shareholders’ equity 245,679 213,159 243,066 269,884 235,097

Return on average assets 1.1% 0.6% 2.2% 2.5% 2.7%

Return on average equity 12.2% 6.2% 20.2% 20.5% 21.5%

Cost to income ratio 38.7% 33.4% 32.0% 34.5% 34.2%

Financial leverage 8.7 9.3 7.9 7.0 6.9

Risk asset ratio ** 18.8% 16.8% 14.8% 15.6% 18.1%

Earning per share (fils) 28.4 14.8 53.1 49.9 46.7

* Attributable to Bank’s equity shareholders.

** Under Basel II.


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2010 annual report financial highlights continued

Kuwait continued:

Kuwait and Middle East Financial Investment Company K.S.C.(c)

2010 2009 2008 2007 2006

KD’ 000 KD’ 000 KD’ 000 KD’ 000 KD’ 000

Net (loss) profit (8,912) (9,443) 3,934 13,262 8,610

Total assets 64,895 86,236 95,107 112,869 81,106

Total loans 9,391 14,418 15,486 13,719 10,129

Total liabilities 27,343 39,607 39,900 48,258 38,367

Shareholders’ equity 35,742 44,797 52,565 62,184 40,792

Return on average assets (12.7%) (10.1%) 3.8% 13.7% 12.4%

Return on average equity (20.5%) (18.0%) 6.9% 27.4% 20.8%

Cost to income ratio 186.7% 114.7% 62.4% 38.1% 46.9%

Earning per share (fils) - basic (34.1) (36.2) 15.1 51.7 34.3

9


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10

2010 annual report financial highlights continued

principal

subsidiaries

continued

Iraq: Commercial Bank of Iraq P.S.C.

2009 2008 2007 2006 2005

IQD millions IQD millions IQD millions IQD millions IQD millions

Net profit 4,288 4,263 2,407 2,101 1,660

Total assets 208,304 191,124 191,015 164,594 155,585

Total loans 18,127 16,904 29,961 25,706 25,044

Total liabilities 86,893 89,338 96,559 78,864 92,943

Shareholders’ equity 84,151 67,053 65,304 63,777 62,642

Return on average assets 2.1% 2.2% 1.4% 1.3% 1.8%

Return on average equity 5.7% 6.4% 3.7% 3.3% 11.3%

Cost to income ratio 74.0% 27.2% 26.4% 24.7% 41.6%

Financial leverage 1.0 1.3 1.5 1.2 1.3

Risk asset ratio 351.5% 348.1% 201.5% 114.8% 101.3%

Earnings per share (fils) 71.5 71.1 40.1 35.0 117.1

2010 financial statements are under audit.

Based on financial statements under local GAAP.


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2010 annual report financial highlights continued

Egypt: Ahli United Bank (Egypt) S.A.E.

2010 2009 2008 2007 2006

EGP’ 000 EGP’ 000 EGP’ 000 EGP’ 000 EGP’ 000

Net profit* 164,348 128,245 183,056 146,756 222

Total assets 10,012,348 7,604,071 7,282,769 5,773,037 4,029,218

Total loans 5,443,987 4,444,684 4,105,418 2,521,147 1,075,300

Total liabilities 8,985,425 6,660,982 6,418,411 4,956,500 3,359,437

Shareholders’ equity 1,017,506 933,701 864,358 816,537 669,781

Return on average assets 2.0% 1.8% 2.8% 3.0% 0.0%

Return on average equity 15.9% 12.9% 21.8% 21.0% 0.0%

Cost to income ratio 42.1% 44.8% 41.9% 36.2% 54.7%

Financial leverage 8.6 6.9 7.3 5.9 4.8

Risk asset ratio ** 14.0% 16.2% 17.4% 20.4% 46.8%

Earnings per share (EGP) 2.7 2.1 2.8 2.2 -

Based on financial statements under Egyptian Accounting Standards up to 2008 and IFRS from 2009.

* Attributable to Bank’s equity shareholders.

** Under Basel I.

11


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2010 annual report financial highlights continued

principal

associates

Qatar: Ahli Bank Q.S.C.

2010 2009 2008 2007 2006

QR’ 000 QR’ 000 QR’ 000 QR’ 000 QR’ 000

Net profit 412,329 300,515 425,781 302,652 202,241

Total assets 17,965,718 18,449,561 17,799,276 15,576,381 9,556,360

Total loans 11,338,854 12,407,056 11,547,061 10,105,785 6,294,372

Total liabilities 15,901,448 16,496,986 16,158,893 14,052,534 8,373,890

Shareholders’ equity 2,064,270 1,952,575 1,640,383 1,523,847 1,182,470

Return on average assets 2.3% 1.7% 2.6% 2.7% 2.7%

Return on average equity 21.0% 17.5% 26.0% 24.6% 18.5%

Cost to income ratio 26.9% 31.4% 25.3% 30.0% 37.7%

Financial leverage 7.5 8.3 9.6 9.1 6.9

Risk asset ratio * 14.9% 15.2% 12.0% 12.9% 13.2%

Earnings per share (QR) 6.5 4.9 7.3 5.2 3.5

* Under Basel II.


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2010 annual report financial highlights continued

Oman: Ahli Bank S.A.O.G.

2010 2009 2008 2007 2006

RO’ 000 RO’ 000 RO’ 000 RO’ 000 RO’ 000

Net profit 14,100 8,541 5,933 2,219 3,914

Total assets 805,594 616,058 456,405 305,967 175,178

Total loans 656,413 443,562 375,298 239,413 150,717

Total liabilities 703,488 523,440 369,349 224,978 143,512

Shareholders’ equity 102,106 92,618 87,056 80,988 31,666

Return on average assets 2.0% 1.6% 1.6% 0.9% 2.4%

Return on average equity 14.5% 9.5% 7.1% 3.9% 12.3%

Cost to income ratio 35.9% 44.3% 54.0% 56.0% 36.7%

Financial leverage 6.7 5.5 4.2 2.7 4.4

Risk assets ratio * 19.7% 17.6% 23.4% 40.9% 33.1%

Earnings per share (Baiza) 19.8 12.0 8.3 4.6 8.5

* Under Basel II from 2007.

13


ahli united bank

14

2010 annual report

board of

directors’

report

The Directors of Ahli United Bank (“AUB” or the “Bank”) are pleased to submit the Annual Report and accompanying consolidated Financial Statements

for the year ended 31 December 2010.

General operating environment

Economic growth in the Middle East and North Africa (MENA) region showed signs of recovery in 2010 boosted by higher average oil prices in the midst

of early signs of revival in the USA and continuing strong growth in China and other major emerging markets. The contagion effects of sovereign debt

crisis in the Euro Zone are a potential threat but appear for now to have been mitigated by European Monetary Union fiscal support packages. The

banking industry in the Middle East showed some signs of recovery. However, the adverse real estate market conditions, lacklustre performances by

regional stock markets, limited retail and corporate growth opportunities together with asset quality and provisioning concerns present challenges to a

robust turnaround in 2011.

Performance overview

In line with the Bank’s continuing core regional commercial banking business model, AUB continues to place its emphasis in the following areas:

• Prudent asset liability management framework with a view to further diversifying its funding base, elongating maturities where necessary and

maintaining sufficient liquidity levels to meet any foreseeable contingencies;

• Closer monitoring of risk exposures, proactive recognition of non performing loans with a prudent provisioning approach;

• Balanced asset growth with prudent risk parameters focusing mainly on stable business segments supported by cash flows and appropriate

collaterals with conservative loan to value levels;

• Continuing operational streamlining and disciplined cost control with an intelligent spend approach .

While the challenges in operating environment continued, the below section highlights key performance achievements during the financial year 2010:

• Consolidated net profit, attributable to the Bank’s equity shareholders, of US$ 265.5 million as against US$ 200.7 million in 2009, reflecting a strong

growth of 32.3%.

• Net interest income increased by 9.0% to US$ 508.8 million.

• Share of profits from all managed associates increased by 26.5% to US$ 51.6 million over 2009.

• Total operating income increased to US$ 714.1 million (2009: US$ 696.4 million).

• Overall provision charge for loan losses and contingencies was contained at US$ 151.7 million, 33.5% lower versus US$ 228.1 million in 2009 with non

performing loans reducing to 2.4% of gross loans and advances (2009:2.8%).

• Return on average equity was 12.0% for 2010 compared to 9.6% for 2009 and return on average assets was 1.2% in 2010 (2009: 0.9%).

• Total assets increased by 12.2% to US$ 26.5 billion (2009: US$ 23.6 billion) with loans and advances increasing by 8.9% (+US$ 1.2 billion) to

US$ 14.5 billion (2009: US$ 13.3 billion).

• Customers’ deposits were up by 12.0% (+US$ 1.6 billion) to US$ 14.8 billion (2009: US$ 13.2 billion), driven by strong focus on sourcing low cost

deposits and diversification of liabilities.

• Higher operating costs associated with the conversion of: AUB’s subsidiary Bank of Kuwait and the Middle East “BKME” (now known as Ahli United

Bank K.S.C.) into a full-fledged Sharia’a compliant Islamic bank as well as necessary incremental IT infrastructure and project spends resulted in an

increased cost to income ratio of 35.5% (2009:33.8%).


ahli united bank

2010 annual report board of directors' report continued

Business & strategic diversification

In April 2010, the Bank’s major subsidiary, BKME in Kuwait, successfully converted into a full-fledged Islamic bank with effect from 1 April 2010. Pursuant

to the conversion, BKME was also re-branded as Ahli United Bank K.S.C. (“AUBK”). This conversion has added an important dimension to the AUB

Group’s product offerings and services and is well poised to take advantage of the growth projected for Islamic banking in the region.

The Group also increased its equity stake in Ahli United Bank (Egypt) S.A.E. (“AUBE”) to 85.1% following Tender Offers to AUBE’s shareholders during

2010. Following consummation of the second tender offer on 8 July 2010, AUBE shares have now been voluntarily delisted from the Egyptian Exchange

(EGX).

In line with the Board approved strategic expansion directives, the Bank also acquired a 40% stake in United Bank for Commerce & Investment (UBCI)

based in Libya through an increase in capital for US$ 53.5 million completed in March 2010. Following the acquisition, AUB also signed a ten year

renewable technical and management services agreement to provide management services to UBCI. Through this strategic acquisition, the AUB Group is

now well poised to tap the potential of cross border flows between its core markets in the Gulf and Egypt with Libya.

The re-affirmation of AUB credit ratings by S&P, Fitch and Capital Intelligence at A-, A- & A respectively with a Stable outlook reflects the success of

AUB’s prudent business and controls stance.

Recognition

The Bank continued to be recognized as a leading bank in the region as evidenced by its receipt of the following prestigious awards during the year:

• Best Bank in Bahrain 2010 - Global Finance (fifth consecutive year)

• Best Bank in Bahrain 2010 - Euromoney

Bank of the Year Bahrain 2010 - The Banker Magazine (fifth consecutive year)

• Best Foreign Exchange Bank – Middle East 2011 – Global Finance (fifth consecutive year)

• Best Local Bank – Bahrain 2010 from Emea Finance magazine.

• Elite Quality Recognition Award by J P Morgan Chase (12th consecutive year) and STP Award by Commerzbank AG (3rd consecutive year) as an

acknowledgement of the Bank’s outstanding track record in maintaining highest quality operational performance standards covering funds transfers

and trade finance activities.

• Best Private Bank in Bahrain 2010 by Euromoney

Directors’ shareholdings & remuneration

As at 31 December 2010, Directors held 271,788,142 ordinary shares (2009:270,694,339), 45,302,513 Class-A preference shares (2009: 45,302,513)

and 98,631,221 Class-B preference shares equivalent to 135,305,351 ordinary shares on conversion (2009: 73,933,904 Class-B preference shares

equivalent to 101,424,832 ordinary shares on conversion) .

Directors’ fees, allowances, expenses, salaries and remuneration totaled to US$ 3,630,594 (2009: US$ 3,535,949) . As at 31 December 2010, senior

management held 31,513,761 Class-B preference shares equivalent to 43,231,424 ordinary shares on conversion (2009: 24,828,772 Class-B

preference shares equivalent to 34,060,820 ordinary shares on conversion) .

15


total assets

in billion US$

2000:

3.5

2010:

26.5

net profit

in million US$

2000:

40.1

2010:

265.5


ahli united bank

18

2010 annual report

board of

directors

Fahad Al-Rajaan

Mohammed Saleh Behbehani

Turki Bin Mohammed Al-Khater

Adel A. El-Labban

Hamad A. Al Marzouq

Abdulla MH Al-Sumait

Mohammed Jassim Al-Marzouk

Rashid Ismail Al-Meer

Herschel Post

Mohammed Al-Ghanim


ahli united bank

Fahad Al-Rajaan

2010 annual report board of directors continued

Chairman and Chairman of the Executive Committee;

Non-Executive Director

Director since 30 July 2000, holds a BA in Business Administration from the

American University of Washington DC, 1975. Director General, The Public

Institution for Social Security, Kuwait; Chairman, Ahli United Bank (UK) PLC;

Chairman, Wafra Investment Advisory Group, New York; Board Member, National

Industries Group, Kuwait; Chairman, Ahli United Bank (Egypt) S.A.E.

Hamad A. Al Marzouq

Deputy Chairman and Member of the Executive Committee;

Executive Director

Director since 30 July 2000, holds an MBA in Finance & International Business from

Claremont Graduate School, 1987 and a BS in Industrial & System Engineering

from University of Southern California, 1985. Chairman & Managing Director, Ahli

United Bank K.S.C., Kuwait; Chairman, Kuwait Banking Association, Kuwait;

Deputy Chairman, Ahli United Bank (UK) PLC; Deputy Chairman, Ahli United Bank

(Egypt) S.A.E.; Deputy Chairman, Ahli Bank Q.S.C., Qatar; Deputy Chairman,

Ahli Bank S.A.O.G., Oman; Deputy Chairman, Commercial Bank of Iraq P.S.C.,

Iraq; Deputy Chairman, United Bank for Commerce & Investment S.A.L., Libya;

Deputy Chairman, Kuwait & Middle East Financial Investment Company, Kuwait;

Board Member, Middle East Financial Investment Company, Kingdom of Saudi

Arabia; Board Member, Institute of Banking Studies, Kuwait; Board Member, Public

Authority for Higher Education & Training, Kuwait.

Rashid Ismail Al-Meer

Deputy Chairman and Member of the Executive Committee;

Non-Executive Director

Director since 29 March 2003, holds a High Diploma in Statistics from the University

of Alexandria-Egypt, 1973 and a B.Com from Baghdad University, Iraq, 1969.

Director, Ahli United Bank (UK) PLC; Director, Social Insurance Organisation &

Member of Investment Committee; Director, Deputy Chairman and Member of the

Board Investment Committee, Esterad Investment Co.; Deputy Chairman of the

Board of Directors, Solidarity Group Holding and Chairman of Audit Committee;

Formerly Director General, Pension Fund Commission; Formerly, Assistant

Undersecretary for Financial Affairs, Ministry of Finance & National Economy;

Formerly, Assistant Undersecretary for Economic Affairs, Ministry of Finance &

National Economy. Formerly, Director of Investment and various positions, Central

Bank of Bahrain; Formerly, Head of Statistics Section, Ministry of Health.

Mohammed Saleh Behbehani

Director and Member of the Executive Committee; Independent Director

Director since 30 July 2000. Partner & President, Mohammad Saleh & Reza Yousuf

Behbehani Co.; Partner, Mohammad Saleh Behbehani & Co. W.L.L.; Partner &

President, Shereen Travels, Kuwait.; Partner, Behbehani Bros. W.L.L. Bahrain.;

President, Shereen Real Estate Co.; Chairman, Maersk Kuwait Co. W.L.L.;

Chairman, Kuwait Insurance Co. S.A.K.; Partner & President, Behbehani Jeep

Motors Co. W.L.L.; President, Shereen Investment Co.; Chairman, Maersk Logistics

Co. W.L.L.; Vice Chairman, United Beverage Co.; Director and Executive Committee

Member, Ahli United Bank, K.S.C., Kuwait; President, Shereen Motor Co. W.L.L.;

President, Behbehani Automall Co. W.L.L.; Partner, Al Mulla & Behbehani Motor Co.

W.L.L.; Former Deputy Chairman, Al Ahli Bank of Kuwait K.S.C.; Former Board &

Executive Committee Member, Ahli United Bank (UK) PLC; Former Director, Swiss

Kuwaiti Bank; Former Director, U.B.A.F. (Hong Kong) Limited; Director, Purchase &

Imports, Public Works Dept., Government of Kuwait.

Abdulla MH Al-Sumait

Director and Member of the Audit Committee;

Executive Director

Director since 16 May 2001, holds a B.A. in Law from Kuwait University, 1976. Head

of Legal Department, Public Institution for Social Security, Kuwait; Director, Kuwait

Commercial Facilities Company; Director, Ahli United Bank (Egypt) S.A.E.

(The present Board was elected by the shareholders on 11 March

2009 for a period of 3 years).

Herschel Post

Director and Chairman of the Audit Committee; Independent Director

Director since 25 December 2001, holds a Financial Advisers Certificate from The

Chartered Institute of Bankers, 2000, a BA & MA (Rhodes Scholar) from Oxford

University, LLB from Harvard Law School, 1966 and a Bachelor of Arts from Yale

University, 1961. Director and Chairman of the Audit Committee, Ahli United Bank

(UK) PLC; Director and Chairman of the Audit Committee, Ahli United Bank (Egypt)

S.A.E.; Director and Chairman of the Audit Committee, Ahli United Bank K.S.C.,

Kuwait ; Director and Chairman of the Audit Committee, Kuwait & Middle East

Financial Investment Company; Director Euroclear S.A. / N.V. & Euroclear PLC;

Director and Chairman of the Audit Committee, Euroclear UK and Ireland Limited;

Director, Investors Capital Trust PLC; Director and Chairman of the Audit Committee,

Threadneedle Asset Management Holdings S.A.R.L.; Trustee, Earthwatch Institute

(Europe); Former Deputy Chairman of the London Stock Exchange; Former Chief

Executive Officer and Deputy Chairman, Coutts & Co.; Former Chief Operating

Officer, Lehman Brothers International Limited; Former Director, Christie’s

International Limited.

Turki Bin Mohammed Al-Khater

Director and Member of the Audit Committee; Independent Director

Director since 29 July 2009, holds a BSC in Economics & Social Science from

Portland State University, USA, 1982. President, General Retirement and Social

Insurance Authority, Qatar; Chairman of Dlala Holding Co., Qatar; Board Member,

Masraf Al Rayan, Qatar; Board Member, Qatar Telecommunication Co., Qatar.

Mohammed Jassim Al-Marzouk

Director and Member of the Executive Committee;

Non-Executive Director

Director since 27 March 2006, holds a Bachelor of Commerce from Major Finance

Kuwait University, 1991. Chairman & Chief Executive Officer, Tamdeen Real Estate

Co., Kuwait; Board Member, Fateh Al Khear Holding Co., Kuwait; Board Member

of Al Maalem Holding Co., Bahrain; Chairman, Tamdeen Bahraini Real Estate

Co., Bahrain; Former Board Member, Global Omani Development & Investment

Co., Oman; Former Deputy Chairman, Tamdeen Shopping Centres Co., Kuwait;

Former Board Member, Ahli United Bank, K.S.C., Kuwait; Former Deputy

Chairman, Tamdeen Investment Co., Kuwait; Former Board Member, Al Ahli Bank

of Kuwait, Former Board Member, Kuwait National Cinema Co., Kuwait; Former

Board Member, Arab Financial Consulting Co., Kuwait; Former Chief of Executive

Staff, Real Estate Investment Fund, Kuwait; Former Board Member, The Public

Warehousing Co., Kuwait.

Mohammed Al-Ghanim

Director and Member of the Audit Committee; Independent Director

Director since 29 March 2003, holds a degree in Business Administration from

Kuwait University, 1993. Vice Chairman and Managing Director, Fouad Alghanim

& Sons Group of Companies, Kuwait; Chairman, AlGhanayem Industrial Company

K.S.C., Kuwait; Board Member, Tamdeen Real Estate Company K.S.C.C., Kuwait;

Member, Supervisory Board, Jet Alliance Holding A.G., Austria; Chairman, Fluor

Kuwait Co. K.S.C., Kuwait.

Adel A. El-Labban

Director and Executive Committee Member; Executive Director

Director since 30 July 2000, holds a Masters in Economics from the American

University, Cairo, 1980, Bachelors in Economics from American University, Cairo,

1977 and a General Certificate of Education from London University, 1973. Group

Chief Executive Officer and Managing Director, Ahli United Bank B.S.C., Bahrain;

Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank K.S.C., Kuwait;

Director, Ahli Bank Q.S.C., Qatar; Director, Ahli United Bank (Egypt) S.A.E.; Director,

Ahli Bank S.A.O.G., Oman; Director, Commercial Bank of Iraq P.S.C., Iraq; Director,

Middle East Financial Investment Co., Saudi Arabia; Director, United Bank for

Commerce & Investment S.A.L., Libya; Director, Bahrain Association of Banks,

Bahrain; Former Chief Executive Officer and Director of the United Bank of Kuwait

PLC, UK; Former Managing Director, Commercial International Bank of Egypt,

Egypt; Former Chairman, Commercial International Investment Company, Egypt;

Former Vice President, Corporate Finance, Morgan Stanley, USA; Former Assistant

Vice President, Arab Banking Corporation, Bahrain.

19


ahli united bank

20

2010 annual report

chairman’s

statement


If the story of our first decade was largely of

impressive growth, it was no less one

of remarkable resilience.

““


ahli united bank

22

2010 annual report

group chief executive

officer and managing

director’s statement

The year began with an outlook suggesting the world economy had

reached a floor in 2009 and was poised for renewed growth in 2010.

While fears of a double dip recession have largely subsided, it was

too early to say markets have turned a corner as recovery remained

subdued and tentative in most advanced economies, tempered only by

a stronger than expected double digit growth in China with other major

emerging markets not lagging far behind. Middle Eastern economies

likewise showed signs of partial recovery in 2010, spurred by high oil

prices, increased government spending and a more positive outlook

worldwide. However, the operating environment remained challenging,

weighed down by generally weak real estate and stock market sectors,

sluggish volumes in many business segments and concerns over further

deterioration in credit quality.

In spite of the considerable challenges in the operating environment,

AUB was successful in delivering robust financial results while continuing

to invest in its future. Profitability grew by a solid 32% over 2009 to US$

265.5 million, lifting earnings per share for the year to US$ cents 5.4

from US$ cents 4.2 in 2009, and in line with its strategic objectives, AUB

succeeded in expanding its geographic footprint and increased its stakes

in key subsidiaries.


ahli united bank

24

2010 annual report

corporate

governance

Board of Directors

The Board is collectively accountable to and reports to the collective body of shareholders of Ahli United Bank B.S.C. in respect of the overall

governance, direction and control of the Bank’s affairs on behalf of the shareholders. It has ultimate authority for the management of the Bank, but

in practice delegates this duty to the Group Chief Executive Officer and Managing Director. It also delegates certain other of its responsibilities to

committees it establishes with defined mandates.

audit and

compliance

committee

(4 members comprising

3 independent Directors

and 1 executive Director)

The Executive Committee assists the board in discharging the Board’s responsibilities relating to matters including credit and market risk matters.

The Audit & Compliance Committee assists the board in discharging the Board’s responsibilities relating to the bank’s accounting policies, internal

audit and controls, compliance procedures, risk management system, financial reporting functions besides developing and reviewing effectiveness of the

corporate governance framework and liaison with the bank’s external auditors and regulators. The committee does not oversee the day to day work of

management and has no executive powers.

board of

directors

executive

committee

(10 members in total comprising 4 independent

Directors, 3 non-executive Directors and 3 executive

Directors including the Group CEO and MD)

(6 members comprising

1 independent Director,

3 non-executive Directors

and 2 executive Directors

including the Group CEO

and MD)

The Compensation Committee has been established to provide an efficient mechanism for reviewing the bank’s compensation arrangements for its

management, staff and directors and making recommendations for the Board’s approval on these matters.

compensation

committee

(3 members comprising

1 independent Director

1 non-executive and

1 executive Director)


ahli united bank

2010 annual report corporate governance continued

Compensation Committee

The Compensation Committee has been established to provide an efficient mechanism for reviewing the Bank’s compensation arrangements for

its management, staff and Directors and making recommendations for the Board’s approval on these matters. The Chairman and members of the

Committee are appointed by the Board from amongst its Directors. The Committee comprises 3 members including one Independent Director.

The Group Head - Human Resources & Development acts as the Secretary to the Committee.

Principal responsibilities

• Consider and approve guidelines, structure and quantum for the Group’s fixed and variable compensation arrangements, including cash and

share performance related incentive remuneration .

• Consider and recommend for Board approval the form and amount of compensation for all Directors .

• Consider and approve the annual fixed cash and performance related compensation of the Group Chief Executive Officer & Managing Director

and the senior executives who report directly to the Group Chief Executive Officer & Managing Director .

• Consider, review and approve the design of all equity/equity linked performance related compensation plans for approval by the Board .

• Consider, review and approve any major changes in other employee benefits structures throughout the Group .

• Review and note annually the remuneration trends across the Group .

Management

The Bank’s management monitors the performance of the parent bank and each of the subsidiaries and associates on an ongoing basis and advises the

Board. The monitoring of performance is carried out through a regular assessment of performance trends against budget, prior periods and peer banks in

each of the markets and collectively through Group Committees and Sub Committees. The minutes of all management committees are sent to the Audit

and Compliance Committee who assess the effectiveness of the committees.

The Group Management Committee (GMC) is the collective group management forum providing a formal framework for effective consultation and

transparent decision-making by the Group Chief Executive Officer & Managing Director and senior management on cross-organisational matters.

Appropriate checks and balances ensure the “four eyes” regulatory requirement is met. The committee operates in a flexible way with a minimum of

formality and a broad mandate encompassing group wide as well as bank and unit specific issues as determined by the Group Chief Executive Officer &

Managing Director and other members of the committee. It is chaired by the Group Chief Executive Officer & Managing Director and comprises of twelve

other members.

The Group Asset and Liability Committee (GALCO) sets, reviews and manages the liquidity, market risk and funding strategy of the Group and reviews

and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by the Sr. DGCEO-

Banking Group and has seven other members.

The Group New Product Committee (GNPC) reviews and approves new products, processes and services for wealth management, treasury, retail,

commercial banking and other areas of the Group. GNPC assesses all related reputational, operational, credit, liquidity and market risk, IT, legal,

compliance, control, staffing and capital/profit allocation issues related to approving new products. The approval by the GNPC follows the new product

or process development according to the New Product Approval and Development Procedure. It is chaired by Sr. DGCEO-Banking Group and has seven

other members.

25


ahli united bank

26

2010 annual report corporate governance continued

corporate

governance

continued

The Group Information Technology Steering Committee (GITSC) oversees the information technology role, strategy formulation, prioritized implementation

and delivery of IT projects of the Group within an acceptable, secure and standardised framework. It recommends the annual IT budget to the Group

Chief Executive Officer & Managing Director in response to and part of the annual business planning/budgetary exercise for submission, on finalisation,

to the Board of Directors for review and approval. It supervises the implementation of the approved IT annual plan within set deadlines and budgetary/

Board approved allocations within the Bank’s CAPEX policy. The Group operates in compliance with regulatory requirements in the respective operating

jurisdictions. It is chaired by the DGCEO-Finance & Strategic Development and comprises of seven other members.

The Group Risk Committee (GRC), reviews and manages the risk asset policies, approvals, exposures and recoveries related to credit, operational and

compliance risks. It acts as a general forum for the discussions of any aspect of risk facing or which could potentially face AUB or its subsidiaries and

affiliated banks resulting in reputational or financial loss to the Group. It also oversees the operation of the Operational Risk Sub-Committee and Group

Special Assets Sub-Committee. It is chaired by the DGCEO- Risk, Legal & Compliance and has five other members.

The Group Operational Risk Sub-Committee (GORC) administers the management of operational risk throughout the AUB Group. It is chaired by the

Group Head of Risk Management and has eight other members.

The Group Special Assets Committee (GSAC) is responsible for the management of the criticized and non-performing assets of the bank. It has

responsibility for monitoring accounts downgraded to watch list and criticized asset status and ensuring that a focused and disciplined recovery strategy

is adopted to maximize recoveries. It is chaired by DGCEO Risk, Legal & Compliance and has seven other members.

The Management Committee (MC) is the senior collective management forum of AUB, the parent Bank, providing a formal framework for effective

consultation and transparent decision-making on cross-organisational matters. Appropriate checks and balances ensure the “four eyes” regulatory

requirement is met. The Committee operates in a flexible way with a minimum of formality and a broad mandate encompassing both bank-wide and unit

specific issues as determined by the Group Chief Executive Officer & Managing Director and its other members in relation to the business of Ahli United

Bank, as a legal entity. It is chaired by the Sr. DGCEO-Banking Group and has six other members.

AUB Solo Assets and Liability Committee (ALCO) sets, reviews and manages the liquidity, market risk and funding strategy of AUB Bahrain and reviews

and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by Group Head Treasury

and has six other members.

Additional governance measures

In addition to the Board and management committee structures, the Board of Directors has approved a number of group policies to support clarity

and consistency in the operations of the AUB Group. These policies, which are communicated to staff, cover issues such as the prevention of money

laundering, confidentiality, personal share dealing, communications, legal issues and human resources related issues. Underpinning these policies is the

Group Code of Business Conduct which was introduced by the Board in 2005 to establish standards of ethical business behaviour and personal conduct

for the Bank’s Directors, its senior management (officers) and its employees.

As a supporting governance measure, the Board is able to rely on the ongoing reviews performed by internal and external auditors on the AUB Group’s

internal control functions. These reviews are conducted in order to identify any weaknesses, which then enables management to immediately put

remedial action plans in place. It is important to highlight that the AUB Group maintains adequate insurance coverage and contingency plans for systems

failure including back-up systems with off -site data storage.

The Board of Directors and management believe that these high standards of corporate governance will continue to enhance the AUB Group’s

performance and hence shareholder value over the long-term, as well as provide confidence to all shareholders, customers, regulators, rating agencies

and current and future staff.


2000:

1.8

2010:

total loans

in billion US$

14.5

2000:

1.8

14.8

2010:

customers’ deposits

in billion US$


ahli united bank

28

2010 annual report

group business

& risk review

Private Banking and Wealth Management

With markets lacking sustained direction, investor appetite remained subdued in the face of continued volatility. Against this background Private Banking

continued to perform successfully in an increasingly competitive marketplace, while maintaining and growing share of client mind and wallet.

AUB’s unique facility to leverage its broad capabilities across various alliances and to deliver investment strategies that span a range of asset classes,

enabled Private Banking to provide distinctive solutions for meeting clients’ needs.

Clients, faced with the increased challenges in volatile global markets, continued to seek stability in their financial portfolios. We believe that opportunities

for growing the Group’s Private Banking Wealth Management are facilitated by AUB’s total relationship approach which offers solutions the clients’

financial needs, including leveraging on cross border offerings.

Significant progress was achieved during the year in several key areas, most notably in catering to a fuller spectrum of clients’ needs with both

conventional and Sharia’a compliant products, following the conversion of our subsidiary bank in Kuwait to a full-fledged Islamic bank; also in contributing

along with the UK Residential Mortgages team to exceed the US$ 1 billion mark and in upgrading the AUB UK business platform to offer the Premium

and Private Banking proposition. With the proposition focused on high net worth individuals and related parties, the objective is to increase the targeted

client base by offering prime quality relationship services.

In addition, with the institutional wealth management business continuing to play a key role in contributing to overall assets under management and

profitability, team members based in AUB UK were increased during the year.

In developing solutions to address the challenging market conditions, a number of new initiatives were taken. The UK Student Accommodation Fund

was launched successfully which capitalizes on the favourable demand/supply imbalance between universities’ needs and the market’s ability to deliver

new purpose built student accommodation. A Sharia’a compliant Tracker Fund was introduced that tracks the AUB Al-Hilal Islamic index and was further

expanded with three structured products linked to the Tracker Fund. Private Banking Wealth Management also offered various types of global bond

issues, providing investors with enhanced security compared to direct equity and other forms of equity related investments.

During the year, market awareness of Private Banking in Egypt and Oman increased with the introduction of offshore private banking services to the

existing client base and referrals to potential clients.

Going forward, planning is focused on the continuous development of the client centric model for private banking and wealth management through the

introduction of a clearly defined, systematic investment process, utilizing customer profiling and specific needs. Our long-term focus is on delivering

products to investors that generate favourable risk-adjusted returns independent of market cycles.

Emphasis will also be placed on developing a sustainable business mix, aligned with AUB Group objectives, to focus on improving fee and annuity

revenue streams; expanding the client base across different markets and increasing respective market share; as well as reaching out to Gulf countries

with no current AUB presence.

Retail Banking

Supporting growth and profitability, Retail Banking is mandated to leverage Group strengths in building a commanding regional retail banking platform.

With ongoing expansion to the Bank’s branch and remote banking network, AUB has established a robust retail presence with 130 branches across 8

markets, supported by a commanding ATM and remote banking network.

Significant achievements in 2010 included major progress in AUB’s Islamic Banking offering, following the full conversion of the AUB network in Kuwait

and the introduction of a wide range of Sharia’a compliant banking services. The Bank also expanded its Islamic presence and product range in Bahrain,

Qatar and the United Kingdom and aims to offer these services in other markets in the coming years.


ahli united bank

2010 annual report group business & risk review continued

Retail banking in 2010 was driven by a prudent asset strategy and focus on recoveries. Net yields showed significant improvement as a result of higher

margins through effective management of funding costs, lower provisioning requirements and improved recoveries. The Bank also introduced new asset

products linked to variable rates, enhancing customer value and improving acquisition of quality assets.

To enhance sales and service, balance sheet growth and profitability throughout the distribution network, the retail banking division leveraged its

successful business model across its span of territories with the aim of establishing a standard suite of products in various markets with centralization of

all back office functions.

Successful growth in liabilities was consolidated mainly through development of its flagship product, MyHassad Savings across Group entities.

The scheme which supports the largest prize pool in the region, witnessed significant growth and offers a stable base of cost effective funds to improve

retail profitability as well as increasing AUB’s household penetration and opportunities to cross sell other products.

Ongoing technology enhancements included the launch of an improved e-banking platform, partnership with e-Government, SMS banking services,

mobile remit and advancements in the Bank’s contact centres. AUB customers can now access the full range of banking services from the convenience

of their home or office. Further enhancements were also made to the functionality of AUB’s global online trading platform, the first of its kind to be

launched by a regional bank in the Middle East.

With the advantage of a strong regional network, the regional banking requirements of high net worth clients were addressed through the launch of

MyGlobal services, supported by a team of relationship managers fully conversant with the local markets in which AUB operates. The launch of a range

of Bancassurance products, through a joint venture with the UK based Legal & General Group, further complemented the wide array of products and

services available through the AUB network.

In the UK, we continue to extend our market position through delivering a best-in-class customer experience differentiated on advice, dedicated service

and value for money. In the specialised area of Residential Lending, AUB UK continued to make good progress during 2010 whilst maintaining portfolio

quality and increasing facilities through cross-border relationships. Residential Lending, with its focus on acquiring quality mortgage business, recorded a

notable 35% growth in assets.

Further growth in the coming years will continue to be driven by efforts aimed at expanding market share through cost efficient acquisitions, and by

maintaining market leadership in being the first to launch unique product offerings that are aligned to changes in the market environment and the

emergence of new market opportunities.

Corporate Banking

Regional markets posted a considerable recovery during 2010 compared with the turbulence of the previous year. Progress was driven by government

intervention, improvement in liquidity and significant infrastructure spending by regional governments.

For Corporate Banking the key attributes of geographic reach, product innovation, and service excellence enabled us to grow our loan portfolio while

maintaining high asset quality. The recent launch of an Internet Banking service for Corporate clients was notable in providing greater flexibility and

reliability for clients within a secure environment while also enabling us to improve transaction volumes.

Growth in the lending portfolio was driven by large, well-structured transactions and from expansion of the client base. Cross-border business also

witnessed a significant increase due to the level of referrals from entities within the AUB group. During the year, the Corporate Banking structure was

further strengthened with the conversion of Bank of Kuwait and the Middle East (BKME) into a full-fledged Islamic finance institution (AUB Kuwait), with

the increase of ownership stake in Group entities especially in Egypt and the commencement of operations in Libya, providing access to significant future

business potential.

29


ahli united bank

30

2010 annual report group business & risk review continued

group business

& risk review

continued

As AUB Group continued to grow its regional footprint, Corporate Banking was successful in consolidating its dominant market share by expanding

relationships with local and international companies and by mapping our clients’ geographical reach. An increased stake in Group entities facilitated

improvement in our lending capability to local companies as well as developing cross-border engagement.

Future growth will focus on selectively financing major infrastructure projects critical to the economic development of MENA region countries, operating

accounts and liability business from our corporate clients and cross-border opportunities in AUB Group locations. Emphasis on technological

engagement through Business to Business integration and Internet Banking will continue to enhance transaction volumes and provide one-stop solutions

to our clients.

Treasury

2010 continued where 2009 ended, with Central Bank policies continuing to focus on providing liquidity and maintaining historic low levels of interest

rates. During H2 2010, the market’s concerns shifted away from the problems that had pressured Banks into restructuring their balance sheets and

focused on Government finances and the risks associated with running huge public sector deficits.

Throughout this challenging period, Treasury continued its focus on broadening AUB’s liability base and further reducing the dependence on wholesale

funding. Proactive and cost effective management of the liability base enabled the Group to maintain high liquidity levels throughout the year, meeting all

of its financial obligations while acting as a net provider of funds to the wholesale market.

The high level of Treasury’s excellence and consistency was again recognized as ‘Best Foreign Exchange Provider in the Middle East - 2010’ by the

leading Global Finance magazine for the fifth consecutive year.

Following the significant challenges experienced in global markets since October 2008, a more positive trend in global growth is expected during 2011

with markets adjusting to the removal of liquidity measures imposed by Central Banks during the financial crisis. AUB will continue to source new

products to enhance customers’ returns on deposits and reduce risk on their loan portfolios.

In anticipation of a broader economic recovery, the Bank will adopt a more dynamic approach to further strengthen our client focus and expand our range

of product offerings for both risk and asset management. The Group’s extensive regional presence will continue to be leveraged in enabling Treasury to

provide a one-stop shop for portfolio management.

Information Technology

The Information Technology division aligns its target application systems and infrastructure architecture with the Group’s business strategies to deliver

customer services and business support of the highest standard within a secure and robust operational platform.

The strategy of offering standardized customer services across the Group continued with the roll out of an enhanced fully integrated Trade Finance

system at AUB Egypt and Ahli Bank Qatar which followed similar implementation at AUB Bahrain. Commercial Bank of Iraq began to issue MasterCard

debit cards to strengthen the payment services offered to its customers. Core Banking systems for UBCI Libya, the latest addition to the AUB Group, are

already being implemented to improve operational efficiency and realize the benefits of Group wide standardized applications.

Our corporate clients saw the launch of a new Internet Banking service and a Business to Business (B2B) integration solution at AUB. The B2B solution

provides straight through and secured transaction processing from the ERP systems of the corporate clients to AUB banking systems thereby reducing

cost, improving efficiency and enhancing cash flow management processes for corporate customers.

Treasury services in Bahrain were enhanced with the introduction of a sales and relationship management solution. A new Islamic core banking system

was implemented to support the conversion of AUB Kuwait to a fully Islamic banking institution.

Information security is a core requirement in the provision of services to our customers and the protection of our information assets. The implementation

of an Information Security Management System in accordance with internationally recognized standards (ISO 27001) was a key objective in 2010 to


ahli united bank

2010 annual report group business & risk review continued

demonstrate our commitment to Information Security. This involved the systematic examination of the Bank’s information security risks, a comprehensive

suite of security controls and a robust management process to ensure controls continue to meet the Bank’s information security needs. AUB Bahrain

achieved external certification of compliance to ISO 27001 during 2010. AUB Bahrain is also one of very few banks in the Middle East to be certified for

both ISO 27001 and the Payment Card Industry Data Security Standard (PCI-DSS).

In terms of IT infrastructure, the strategy for 2010 saw a continuation in the implementation of cost effective resilient communications architecture,

processing capacity and disaster recovery capabilities. These included the initiation of upgrades to the core network backbone that supports the Group

communications network. A new disaster management system allowing centralized control of all critical banking systems was implemented at our newly

relocated premises. Migration to the next generation of resilient communication networks and the development of a Group server infrastructure strategy

through the adoption of new integrated blade technology hardware platforms were the major improvements in IT infrastructure during the year.

2011 will see continued investment in our information technology platform capability and technological products and services, in line with global and

local trends. This will include the implementation of a full range of system upgrades at UBCI Libya, commensurate with the rebuild of a new technology

infrastructure in line with the Group’s standards and protocols.

Human Resources

AUB maintains a strong commitment to the development of human capital throughout the organization in its mission to become the employer of choice in

the region.

In 2010, Human Resources (HR) focused on supporting the Bank’s overall strategic, tactical and operational goals by providing quality HR services in a

cost-effective manner. During the year, significant progress was achieved in enhancing key HR processes namely, recruitment, performance management

and staff development.

The standardization of documentation and procedures for all HR related mega processes was implemented across the Group. In recruitment, best-in-

class selection tools, including aptitude and psychometric tests, were applied; the AUB Group Assessment Centre for Sales and Management skills was

launched for use in both internal and external recruitment and fast track development programs were initiated for new graduates joining AUB in risk,

credit, private banking and wealth management.

Compensation and benefits structures were revised to align with the employment environment in local markets. In its second year of introduction, AUB’s

corporate branded e-learning solutions gathered momentum with effective utilization across selected entities. A new software toolkit was launched

enabling managers to identify levels of required competencies in staff and training needs. Together with the rigorous evaluation of HR service & delivery

platforms across the group and updating of the HR Business Continuity Plan, progress was made in incorporating UBCI into the Group culture through

standardized implementation of HR mega processes.

During the year, HR continued to fulfil its Corporate Social Responsibility mandate, contributing to a myriad of projects and communities where it

operates, including a major donation to Isa Cultural Centre, Bahrain’s preeminent cultural landmark and one of the largest national libraries in the region.

HR delivery was restructured during the year to facilitate the development of new initiatives including launch of a dedicated HR Relationship Management

and Organizational Development Unit to build strategic relationships with business units, a Staff Services Unit to provide a single point of contact and

internal information service for all staff, and instituting a Quality Manager role responsible for performing self-audits periodically across the Group in order

to address staff issues and monitor adherence to performance levels and standards.

Going forward, HR will focus on strengthening the capacity to realize service quality enhancement and develop metrics that will assist in quantifying HR

performance and the quality of its service deliverables. Active participation in the development of a strong organizational capacity for Corporate Social

Responsibility is a key priority along with unifying elements of corporate behavior to ensure an epitomized working environment and implementing the

necessary measures for successfully sourcing qualified candidates in specialized areas.

31


ahli united bank

Risk Management

32

2010 annual report group business & risk review continued

group business

& risk review

continued

Risk management involves the identification, analysis, evaluation, acceptance and management of all financial and non-financial risks that could have a

negative impact on the Group’s performance and reputation.

The major risks associated with AUB’s business are credit risk, market risk which includes foreign exchange, interest rate and equity price risk, liquidity

risk, operational risk and reputational risk.

AUB’s risk management policies have been developed to:

• identify and analyse these risks,

• set appropriate risk limits and controls,

• monitor the risks and adherence to limits .

The risk management function is not responsible for eliminating risks that are embedded in any banking business, but aims to effectively manage these

risks with the objective of earning competitive returns over the degree of assumed risk. Risk is financially evaluated as the potential impact on income and

asset value, taking into consideration changes in political, economic and market conditions, and the creditworthiness of the Bank’s clients.

The risk management function relies on the competence, experience and dedication of its professional staff, sound risk management policies and

procedures, and ongoing investment in technology and training.

The Board of Directors and senior management are involved in the establishment of all risk processes and the periodic oversight and guidance of the risk

management function. The Board of Directors reviews and approves at least annually the Bank’s key Risk Management policies. The Risk Management

processes are subject to additional scrutiny by independent internal and external auditors and the Bank’s regulators which help further strengthen the risk

management practices.

The risk management control process is based on detailed policies and procedures that encompass:

• business line accountability for all risks taken . Each business line is responsible for developing a plan that includes adequate risk/return

parameters, as well as risk acceptance criteria;

• a credit function that understands, monitors and independently controls each credit relationship ensuring that the appropriate approval

authorities are obtained and a uniform risk management standard including risk ratings have been correctly assigned to each and every credit

relationship;

• product and business policies, which are clearly understood, monitored and are in agreement with the overall credit policy and the Board

approved risk framework;

• the ongoing assessment of portfolio credit risk and approval of new products; and

• an integrated limits structure that permits management to control exposures and monitor the assumption of risk against predetermined approved

tolerances . The Board of Directors establishes global limits for each major type of risk which are sub allocated to individual business units .


ahli united bank

Credit Risk

2010 annual report group business & risk review continued

Credit risk is the risk of potential financial loss due to the failure of a counter party to perform according to agreed terms. It arises principally from lending,

trade finance and treasury activities. The credit process is consistent for all forms of credit risk to a single obligor. Overall exposure is evaluated on an

ongoing basis to ensure a broad diversification of credit risk. Potential concentrations by country, product, industry, and risk grade are regularly reviewed

to avoid excessive exposure and ensure a broad diversification.

Credit risk within the Group is actively managed by a rigorous process from initiation to approval to disbursement. All day-to-day management is in

accordance with well-defined credit policies and procedures (CP&P) that detail all credit approval requirements and are designed to identify at an early

stage exposures which require more detailed review and closer monitoring. Specific impairment provisions are made against credit exposures where

whole or a portion of the credit is considered doubtful of recovery. If an asset is considered unrecoverable, a mandatory write-off takes place.

This is conducted by a risk management process, which is completely independent in reporting terms from the asset generating departments.

The CP&P includes a robust risk rating system that stratifies the credit portfolio by level of risk to monitor the credit quality and to be able to assess the

pricing and aid in the prompt identification of problem exposures. Management of material problem exposures is vested with Special Exposure Groups

in the respective Group operating entities, all of which report to the Group Risk Management area. All exposures are subject to quarterly and in certain

cases monthly reviews.

In addition to the Group Risk Management function, credit risk is overseen by the Group Risk Committee (GRC) which is vested with the overall day-to-

day responsibility for all matters relating to group credit risk. Its responsibilities include the following:

• formulating and implementation of credit policies and monitoring compliance,

• acts as a credit approval body for credits within its delegated authority,

• recommends to the Executive Committee all policy issue changes related to credit risk as well as credits falling outside its discretion,

• determines appropriate pricing and security guidelines for all risk asset products,

• reviews the ongoing risk profile of the Group as a whole and by individual products, business sectors and countries,

• ensures the adequacy of impairment provisions and makes appropriate recommendations to the Executive Committee .

Market Risk

Market risk is the risk that adverse movements in market risk factors including foreign exchange rates, interest rates, credit spreads, commodity prices

and equity prices will reduce the Bank’s income or the value of its portfolios.

Given the Group’s ongoing low risk strategy, aggregate market risk levels are low relative to the size of the Bank’s balance sheet. The Group utilizes Value-

at-Risk (VaR) models to estimate potential losses that may arise from adverse market movements in addition to other quantitative and non-quantitative

risk management techniques.

The Group calculates VaR using a one-day holding period at a confidence level of 95%, which takes into account the actual correlations observed

historically between different markets and rates.

33


ahli united bank

Market Risk continued

34

2010 annual report group business & risk review continued

group business

& risk review

continued

Value at risk 2010 2009

US$ millions US$ millions

Average 0.48 0.46

Minimum 0.18 0.19

Maximum 1.45 1.82

VaR limits are delegated by the Board to the Group Asset and Liability Committee (GALCO) and sub-delegated to the Group’s subsidiaries.

The Group recognizes that VaR is based on the assumption of normal market conditions and that certain market shocks can result in losses greater than

anticipated. Therefore, a strict limit structure and control process is adopted to effectively manage market risks and monitor daily position limits and stop

losses. Additionally, supplementary risk management techniques such as stress testing form a core part of the Group’s risk control processes.

Liquidity Risk

Liquidity risk is the risk of being unable to meet the Bank’s cash commitments without having to raise funds at unreasonable prices or sell assets on a forced

basis. It is measured by estimating the Group’s potential liquidity and funding requirements under different stress scenarios.

The Group’s liquidity management policies and procedures are designed to ensure that funds are available under all circumstances to meet the funding

requirements of the Group not only under adverse conditions but at sufficient levels to capitalize on opportunities for business expansion.

Prudent liquidity controls ensure access to liquidity without unexpected cost effects. Liquidity projections based on both normal and stressed scenarios are

performed regularly. The control framework also provides for the maintenance of a prudential buffer of liquid, marketable assets and an adequately diversified

deposit base in terms of maturity profile and number of counter parties.

The Group Risk Management function continuously monitors liquidity risk and actively manages the balance sheet to control liquidity. At the subsidiary level,

the respective treasury function manages this risk with monitoring by the Risk Management department and under the jurisdiction of its Assets and Liabilities

Committee (ALCO). At the Group level liquidity risk is managed by the Group Assets and Liabilities Committee (GALCO), which is vested with the overall day-

to-day responsibility for all matters relating to Group liquidity.

Operational Risk

AUB defines Operational Risk as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.”

Operational risk is managed by the Group Operational Risk Committee (GORC). The Group adopts an ongoing Operational Risk Self-Assessment (ORSA)

process. Assessments are made of the operational risks facing each function within the Bank and these are reviewed regularly to monitor significant

changes and the adequacy of controls. Operational risk loss data is collected and reported to senior management on a regular basis.

The Group’s independent audit function regularly evaluates operational procedures and advises senior management and the Board of any potential

problems. Additionally, the Group maintains adequate insurance coverage and business continuity contingency plans utilizing off site date storage and

backup systems. The adequacy of the Bank’s business continuity plans are confirmed by a programme of regular testing with oversight being

provided by GORC.


our staff

2000:

478

2010:

3317

2010:

2000:11

branches

across

the region

130


ahli united bank

AUBK

board of

directors

CEO

AUBK

36

ABQ

board of

directors

CEO

ABQ

2010 annual report group business & risk review continued

group

organisation and

shareholding

AUBE

board of

directors

ABO

board of

directors

CEO

ABO

CBIQ

board of

directors

for business areas (corporate banking, treasury, retail, pb & wm)

CEO

AUBE

distribution

of ordinary

shares as on

31.12.10

distribution

of preference

shares as on

31.12.10

list of major

shareholders

(5% and

above)

CEO

CBIQ

UBCI

board of

directors

CEO

UBCI

executive

committee

compensation

committee

AUBUK

board of

directors

CEO

AUBUK

DGCEO

commercial

banking &

treasury

aub

board of

directors

group CEO and

Managing Director

senior

DGCEO

banking

group

DGCEO

retail

banking

DGCEO

pb & wm

DGCEO

finance

& strategic

development

developmnt.

sharia’a advisory

and supervisory

board

audit committee

DGCEO

operations

&

technology

DGCEO

risk,

legal &

compliance

group head

compliance

sharia’a

compliance

officer

group head

human

resources &

developmnt.

group

head

audit

group head

legal &

corporate

affairs

(corporate

secretary)

Categories No. of Shares No. of Shareholders Percentage of Total Shares

50% and above 0 0 0.00

20% up to less than 50% 0 0 0.00

10% up to less than 20% 1,419,494,344 2 28.93

5% up to less than 10% 696,379,524 2 14.19

1% up to less than 5% 1,324,420,982 12 26.99

Less than 1% 1,467,565,836 3,201 29.89

Total 4,907,860,686 3,217 100.00

Categories No. of Shares No. of Shareholders Percentage of Total Shares

50% and above 0 0 0

20% up to less than 50% 101,256,515 1 20 .25

10% up to less than 20% 164,454,735 2 32 .89

5% up to less than 10% 57,383,498 2 11 .48

1% up to less than 5% 134,528,093 11 26 .91

Less than 1% 42,377,159 346 8 .47

Total 500,000,000 362 100 .00

Categories Nationality No. of Shares %

Public Institution for Social Security Kuwait 921,581,251 18 .78

Social Insurance Organization Bahrain 497,913,093 10 .15

Tamdeen Investment Company Kuwait 427,047,437 8 .70

Sh . Salim Al-Nasser Al-Sabah Kuwait 269,332,087 5 .49


ahli united bank

2010 annual report group business & risk review continued

group

management

Adel A. El-Labban

Director and Executive Committee Member; Executive Director

Director since 30 July 2000, holds a Masters in Economics from the American

University, Cairo, 1980, Bachelors in Economics from American University, Cairo,

1977 and a General Certificate of Education from London University, 1973.

Group Chief Executive Officer and Managing Director, Ahli United Bank B.S.C.,

Bahrain; Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank K.S.C.,

Kuwait; Director, Ahli Bank Q.S.C., Qatar; Director, Ahli United Bank (Egypt)

S.A.E., Director, Ahli Bank S.A.O.G., Oman; Director, Commercial Bank of Iraq

P.S.C., Iraq; Director Middle East Financial Investment Co. (MEFIC), Saudi Arabia;

Director, United Bank for Commerce & Investment L.S.C., Libya; Director, Bahrain

Association of Banks, Bahrain; Former Chief Executive Officer and Director of

the United Bank of Kuwait PLC, UK; Former Managing Director, Commercial

International Bank of Egypt; Former Chairman, Commercial International Investment

Company, Egypt; Former Vice President, Corporate Finance, Morgan Stanley, USA;

Former Assistant Vice President, Arab Banking Corporation, Bahrain.

(Total years of experience: 32 years)

Bassel Gamal

Senior Deputy Group Chief Executive Officer - Banking Group

Director, Ahli Bank Q.S.C., Qatar; Director, Ahli United Bank K.S.C., Kuwait;

Director, Ahli United Bank (Egypt) S.A.E.; Director, United Bank for Commerce

and Investment S.A.L., Libya; Director, Ahli United Bank Finance Company, Egypt;

Director, Enjaz Property Development B.S.C.(c); Former Chief Executive Officer, Ahli

Bank Q.S.C, Qatar; Former DCEO-Risk, Finance & Operations, Ahli Bank Q.S.C,

Qatar; Former Deputy Group Head of Risk Management, Ahli United Bank B.S.C.,

Bahrain; Former Senior Manager, Corporate Banking-Commercial International

Bank, Egypt. Holds a B.SC. in Economics from the Faculty of Economics and

Political Science, Cairo University, Egypt.

(Total years of experience: 20 years)

Sawsan Abulhassan

Deputy Group Chief Executive Officer - Private Banking

and Wealth Management

Director, Ahli United Bank PLC, UK; Director, AUB Nominees Ltd.; Director and

Chairperson of Audit Committee, Securities & Investment Company (SICO), Bahrain;

Director and Member of the Executive Committee, The Family Bank, Bahrain;

Director, National Social Work Fund, Bahrain; Previously with Citibank N.A. Bahrain,

Resident Vice President, Wealth Management and Distribution; and Head of Wealth

Management, Standard Chartered Bank, Bahrain. Holds an MBA in Finance and a

B.Sc. in Management from the University of Bahrain.

(Total years of experience: 19 years)

Abdulla Al-Raeesi

Deputy Group Chief Executive Officer - Retail Banking

Member of the Board of Directors and Member of Audit, Compliance & Risk

Committee and Policies and Procedures Committee, Ahli Bank Q.S.C., Qatar;

Director, Legal and General Gulf B.S.C.(c) & Legal & General Takaful B.S.C.(c),

Bahrain since March 2009; Former Director, International Chamber of Commerce,

Bahrain; Former Director, Benefit Company, Bahrain; Former: Acting Chief Executive

Officer, Ahli Bank Q.S.C, Qatar; Deputy Chief Executive Officer Retail Banking, Ahli

United Bank B.S.C., Bahrain; AGM & Head of Delivery Channels, Commercial Bank

of Qatar, Qatar; AGM, Support Group, Doha Bank, Qatar; Head of Business &

Technology Consulting Group, Arthur Andersen.

(Total years of experience: 27 years)

Sanjeev Baijal

Deputy Group Chief Executive Officer - Finance and

Strategic Development

Deputy Chairman, Legal and General Gulf B.S.C.(c) & Legal and General Gulf

Takaful B.S.C.(c), Bahrain; Director and Member of the Audit Committee, Ahli

Bank S.A.O.G., Oman; Member of the Audit Committee and Director, Kuwait and

Middle East Financial Investment Co., Kuwait; Director, Ahli United Bank K.S.C.,

Kuwait; Previously Group Head of Finance, Ahli United Bank B.S.C., Bahrain;

Financial Controller, Al-Ahli Commercial Bank, Bahrain; Ernst & Young, Bahrain

and Price Waterhouse in India; Member of the American Institute of Certified

Public Accountants (AICPA) and Associate Member of the Institute of Chartered

Accountants of India (ACA).

(Total years of experience: 27 years)

Keith Gale

Deputy Group Chief Executive Officer - Risk, Legal and Compliance

Director, Ahli Bank S.A.O.G., Oman; Previously Group Head of Risk Management,

Ahli United Bank, Bahrain; Former Head of Credit and Risk at ABC International

Bank PLC; Former Assistant Vice President, Internal Audit Department, Arab

Banking Corporation, Bahrain. Held various positions in the UK with KPMG and

Ernst & Young. Associate Member of the Institute of Chartered Accountants England

& Wales (ACA).

(Total years of experience: 30 years)

Shafqat Anwar

Deputy Group Chief Executive Officer - Operations and Technology

Director, Ahli Bank S.A.O.G., Oman; Director, Ahli United Finance Company,

Egypt; Former Director, Ahli United Bank (Egypt) S.A.E.; Former Deputy Chief

Executive Officer, Finance, Risk and Operations, Ahli United Bank (Egypt) S.A.E.;

Former Group Head of Operations, Ahli United Bank B.S.C., Bahrain; Former

Chief Operating Officer, Commercial Bank of Bahrain, Bahrain; Former Chief

Operating Officer, Grindlays Bahrain Bank, Bahrain; Former Operations Manager

Gulf, ANZ Grindlays Bank, UAE. Held various management positions with ANZ

Banking Group in Bangladesh, the UK, the UAE and Australia. Holds a Master of

Business Administration, a Master of Public Administration and a Bachelor of Social

Sciences (BSS) with Honours in Public Administration from the University of Dhaka,

Bangladesh.

(Total years of experience: 27 years)

37


ahli united bank

38

2010 annual report

contact

details

Ahli United Bank B.S.C., Bahrain

Bldg. 2495, Road 2832

Al Seef District 428

P.O. Box 2424, Manama

Kingdom of Bahrain

Telephone : +973 17 585 858

Facsimile : +973 17 580 569

Email: info@ahliunited.com

www .ahliunited .com

Ahli United Bank (UK) PLC

35 Portman Square

London W1H 6LR

United Kingdom

Telephone: +44 20 7487 6500

Facsimile: +44 20 7487 6808

Email: info@ahliunited.com

www .ahliunited .com

Ahli United Bank K.S.C., Kuwait

P.O. Box 71 Safat

12168

Kuwait

Telephone : +965 1802000

Facsimile : +965 22461430

Email: contact@ahliunited.com

www .ahliunited .com

Ahli Bank Q.S.C., Qatar

Suhaim Bin Hamad St.

Al Sadd Area

PO Box 2309

Doha, Qatar

Telephone: +974 4232222

Facsimile: +974 4444562

www .ahlibank .com .qa

Commercial Bank Of Iraq P.S.C.

Al Sadoon Street

Baghdad, Iraq

Telephone: +964 1 7405583

Telephone: +973 17566468/9

Facsimile: +964 1 7184312

Ahli United Bank (Egypt) S.A.E.

World Trade Center, 9th Floor

1191 Corniche El Nil

P.O. Box 1159

Cairo, Egypt

Telephone: +20 2 25801200

Facsimile: +20 2 25757052

www .ahliunited .com

Ahli Bank S.A.O.G., Oman

P.O. Box 545

Postal Code 116

Mina Al Fahal

Sultanate of Oman

Telephone: +968 24577000

Facsimile: +968 24568001

Email: info@ahlibak-oman.com

www.ahlibank-oman.com

United Bank for Commerce &

Investment S.A.L., Libya

Gumhouria Street - Mansoura Area

Tripoli, Libya

Telephone: +00218 213345602/3/4

Facsimile: +00218 213345601

Email: contact@ubci.ly

www.ubci.ly

Kuwait and Middle East Financial

Investment Company K.S.C.(c)

PO Box 819

Safat 13009, Kuwait

Telephone: +965 2245000

Facsimile: +965 2440627

Email: info@kmefic.com.kw

www .kmefic .com .kw


ahli united bank

auditors’ report and

consolidated financial

statements 2010

41 Auditors’ report to the shareholders

42 Consolidated financial statements

Consolidated statement of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Consolidated statement of comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Consolidated balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Consolidated statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Consolidated statement of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

47 Notes to the consolidated financial statements

1 Corporate information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

2 Basis of consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3 Accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3.1 Basis of preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

3.2 Significant accounting judgements and estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

3.3 Summary of significant accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

4 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

5 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

6 Fees and commissions - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

7 Trading income - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

8 Net loss on available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

9 Cash and balances with central banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

10 Loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

11 Non-trading investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

12 Investment in associates and joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

13 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

14 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

15 Goodwill and other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

16 Customers’ deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

17 Term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

18 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

19 Subordinated liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

20 Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

21 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

22 Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

23 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

24 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

25 Related party transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

26 Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

27 Managed funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

28 Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

29 Commitments and contingent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

30 Segment information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

31 Credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

32 Concentration analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

33 Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

34 Fair value of financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

35 Liquidity risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

36 Capital adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

37 Deposit protection scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

38 Islamic banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

69 Pillar III disclosures - Basel II

40

2010 annual report consolidated financial statements continued


ahli united bank

independent

auditors’

report

Report on the Financial Statements

We have audited the accompanying financial statements of Ahli United

Bank B.S.C. (“the Bank”) and its subsidiaries (“the Group”), which

comprise the consolidated balance sheet as at 31 December 2010,

and the related 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

information.

Directors’ Responsibility for the Consolidated Financial Statements

The Bank’s Board of Directors is responsible for the preparation and fair

presentation of these consolidated financial statements in accordance

with International Financial Reporting Standards, and for such internal

control as management determines is necessary to enable the

preparation of the consolidated financial statements that are free from

material misstatement, whether due to fraud or error.

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 about 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 consolidated financial statements.

The procedures selected depend on the auditors’ judgement, including

the assessment of the risks of material misstatement of the consolidated

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 consolidated financial

statements in order to design audit procedures that are appropriate in

the circumstances, but not for the purpose of expressing an opinion on

the effectiveness of the 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 consolidated financial

statements.

2010 annual report consolidated financial statements continued

We believe that the audit evidence we have obtained is sufficient and

appropriate to provide a basis for our audit opinion.

Opinion

P.O. Box 140

14th Floor - The Tower

Bahrain Commercial Complex

Manama, Kingdom of Bahrain

Tel: +973 1753 5455 Fax: +973 1753 5405

manama@bh.ey.com

www.ey.com/me

C.R. No. 6700

to the shareholders of Ahli United Bank B.S.C.

In our opinion, the consolidated financial statements present fairly, in all

material respects, the financial position of the Group as at 31 December

2010 and its financial performance and its cash flows for the year then

ended in accordance with International Financial Reporting Standards.

Report on Other Regulatory Requirements

We confirm that, in our opinion, proper accounting records have been

kept by the Bank and the consolidated financial statements, and the

contents of the Report of the Board of Directors 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 2010 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 term’s of its banking licence.

20 February 2011

Manama, Kingdom of Bahrain .

41


ahli united bank

42

2010 annual report

consolidated financial statements continued

consolidated

statement of income

Year ended 31 December 2010

The attached notes 1 to 38 form part of these consolidated financial statements

2010 2009

Note US$ ‘000 US$ ‘000

Interest income 4 893,498 934,283

Interest expense 5 384,724 467,698

Net interest income 508,774 466,585

Fees and commissions - net 6 123,319 138,530

Trading income - net 7 28,219 39,439

Net loss on available-for-sale investments 8 (22,110) (14,064)

Share of profit from associates and joint venture 51,554 40,744

Other operating income 24,303 25,152

205,285 229,801

OPERATING INCOME 714,059 696,386

Provision for loan losses and contingencies - net 10f 151,671 228,136

NET OPERATING INCOME 562,388 468,250

Staff costs 142,290 142,151

Depreciation 24,046 20,233

Other operating expenses 87,079 73,024

OPERATING EXPENSES 253,415 235,408

PROFIT BEFORE TAX 308,973 232,842

Tax expense 22 16,774 6,756

NET PROFIT FOR THE YEAR 292,199 226,086

Attributable to:

Bank’s equity shareholders 265,499 200,718

Non-controlling interests 26,700 25,368

EARNINGS PER SHARE ATTRIBUTABLE TO THE

BANK’S EQUITY SHAREHOLDERS FOR THE YEAR:

292,199 226,086

Basic and diluted earnings per share (US cents) 23 5.4 4.2


ahli united bank

2010 annual report

consolidated financial statements continued

consolidated statement

of comprehensive income

Year ended 31 December 2010

2010 2009

US$ ‘000 US$ ‘000

Net profit for the year 292,199 226,086

Other comprehensive income

Directors’ fees paid (1,211) (1,168)

Donations approved (1,000) (1,000)

Currency translation adjustments (11,315) (39,377)

Available-for-sale investments:

Gains arising during the year 19,197 134,119

Transfers to consolidated statement of income on sale of available-for-sale investments 808 23,827

Cash flow hedges:

(Losses) gains arising during the year (6,303) 17,166

Transfers to consolidated statement of income 2,455 38,661

Revaluation of freehold land (19,439) (53,874)

Share of other comprehensive income of associates 1,335 (1,236)

Other comprehensive (loss) income for the year (15,473) 117,118

Total comprehensive income for the year 276,726 343,204

Total comprehensive income attributable to:

Bank’s equity shareholders 240,490 341,706

Non-controlling interests 36,236 1,498

276,726 343,204

The attached notes 1 to 38 form part of these consolidated financial statements

43


ahli united bank

44

2010 annual report

consolidated financial statements continued

consolidated

balance sheet

31 December 2010

ASSETS

Fahad Al-Rajaan

Chairman

The attached notes 1 to 38 form part of these consolidated financial statements

Hamad Al-Marzouq

Deputy Chairman

2010 2009

Note US$ ‘000 US$ ‘000

Cash and balances with central banks 9 361,376 304,164

Treasury bills and bonds 301,127 969,114

Trading securities 130 376

Deposits with banks and other financial institutions 4,767,843 3,100,446

Loans and advances 10 14,477,713 13,299,999

Non-trading investments 11 4,413,172 3,898,592

Investments in associates and joint venture 12 605,679 537,099

Premises and equipment 13 373,094 355,956

Other assets 14 440,969 483,951

Goodwill and other intangible assets 15 716,358 624,286

TOTAL ASSETS 26,457,461 23,573,983

LIABILITIES AND EQUITY

LIABILITIES

Deposits from banks and other financial institutions 6,610,284 5,549,518

Customers’ deposits 16 14,835,796 13,241,266

Term debts 17 946,562 950,054

Other liabilities 18 693,689 649,498

Subordinated liabilities 19 618,955 602,216

TOTAL LIABILITIES 23,705,286 20,992,552

EQUITY

Ordinary share capital 20 1,223,188 1,193,589

Preference share capital 20 13,937 6,321

Reserves 21 1,155,056 1,013,613

Attributable to the Bank’s equity shareholders 2,392,181 2,213,523

Non-controlling interests 359,994 367,908

TOTAL EQUITY 2,752,175 2,581,431

TOTAL LIABILITIES AND EQUITY 26,457,461 23,573,983

Adel A. El-Labban

Group Chief Executive Officer

& Managing Director


ahli united bank

2010 annual report

consolidated financial statements continued

consolidated statement

of cash flows

Year ended 31 December 2010

OPERATING ACTIVITIES

2010 2009

Note US$ ‘000 US$ ‘000

Profit before tax 308,973 232,842

Adjustments for: Depreciation 24,046 20,233

Net loss on available-for-sale investments 8 22,110 14,064

Provision for loan losses and contingencies - net 10f 151,671 228,136

Share of profit from associates (51,554) (40,744)

Staff costs - fair value amortisation of share based transactions 23 1,689 1,108

Operating profit before changes in operating assets and liabilities 456,935 455,639

Changes in: Mandatory reserve deposits with central banks 39,217 17,713

Treasury bills and bonds 667,987 267,883

Trading securities 246 22,988

Deposits with banks and other financial institutions (980,143) (429,548)

Loans and advances (1,329,385) 96,939

Other assets 42,982 33,920

Deposits from banks and other financial institutions 1,060,766 396,004

Customers’ deposits 1,594,530 63,187

Other liabilities 44,191 (235,725)

Cash from operations 1,597,326 689,000

Income tax paid (3,090) (5,184)

Net cash from operating activities 1,594,236 683,816

INVESTING ACTIVITIES

Purchase of non-trading investments (1,089,896) (1,151,162)

Proceeds from sale or redemption of non-trading investments 596,991 807,290

Investments in associates and joint venture (53,533) -

Increase in premises and equipment (60,623) (41,052)

Dividends received from associates 36,405 38,786

Net cash used in investing activities (570,656) (346,138)

FINANCING ACTIVITIES

Additional investment in subsidiaries 2 (149,004) -

Proceeds from issue of Class-B preference shares 20,125 -

Decrease in subordinated liabilities (1,258) (21,360)

Repayment of term debt - (399,946)

Dividends and other appropriations paid (100,229) (142,762)

Treasury shares sold (purchased) 1,783 (1,665)

Net cash used in financing activities (228,583) (565,733)

Foreign currency translation adjustments (11,315) (39,377)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 783,682 (267,432)

Cash and cash equivalents at 1 January 2,179,476 2,446,908

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 2,963,158 2,179,476

The attached notes 1 to 38 form part of these consolidated financial statements

45


ahli united bank

46

2010 annual report

consolidated financial statements continued

consolidated statement

of changes in equity

Year ended 31 December 2010

Balance at 31 December 2008

Ordinary

share

capital

Preference

share

capital

The attached notes 1 to 38 form part of these consolidated financial statements

Treasury

shares

Attributable to Bank’s equity shareholders

Share

premium

1,126,561 17,128 - 540,029 126,624 237,887 118,319 (171,113) 851,746 399,342

2,394,777

Class-B preference share dividend paid (note 21(j)) - - - - - - (3,493) - (3,493) - (3,493)

Ordinary share dividend paid (note 21(j)) - - - - - - (112,658) - (112,658) - (112,658)

Dividends of subsidiaries - - - - - - - - - (26,611) (26,611)

Bonus shares issued 56,917 - - - - (56,917) - - (56,917) - -

Arising on acquisition of a subsidiary - - - - - - - - - (6,321) (6,321)

Conversion of preference shares (note 20 (d) and (g)) 11,756 (8,998) - 2,281 - - - (5,039) (2,758) - -

Class-B preference shares (surrendered) issued 20 (1,809) - (4,013) - - - - (4,013) - (5,802)

Treasury shares purchased - - (1,665) - - - - - - - (1,665)

Total comprehensive income for the year - - - - - 200,718 (2,168) 143,156 341,706 1,498 343,204

Transfer to statutory reserve (note 21(c)) - - - - 20,072 (20,072) - - - - -

Proposed dividend on Class-B

preference shares (note 21(j)) - - - - - (1,129) 1,129 - - - -

Proposed dividend on ordinary shares (note 21(j)) - - - - - (97,043) 97,043 - - - -

Proposed directors’ fees - - - - - (1,211) 1,211 - - - -

Proposed donations - - - - - (1,000) 1,000 - - - -

Balance at 31 December 2009 1,195,254 6,321 (1,665) 538,297 146,696 261,233 100,383 (32,996) 1,013,613 367,908 2,581,431

Statutory

reserve

Reserves

Retained

earnings

Proposed

appropriations

Other

reserves

(Note 21(i))

Total

reserves

Noncontrolling

interests Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balance at 31 December 2009 1,195,254 6,321 (1,665) 538,297 146,696 261,233 100,383 (32,996) 1,013,613 367,908 2,581,431

Issue of shares on AUBE acquisition (note 2) 18,540 - - 16,882 - - - - 16,882 - 35,422

Class-B preference shares issued (note 20(f)) - 13,937 - 7,806 - - - - 7,806 - 21,743

Class-B preference share dividend paid (note 21(j)) - - - - - - (1,129) - (1,129) - (1,129)

Ordinary share dividend paid (note 21(j)) - - - - - - (97,043) - (97,043) - (97,043)

Dividends of subsidiaries - - - - - - - - - (2,057) (2,057)

Bonus shares issued - - - - - - - - - - -

Arising on additional acquisition

of a subsidiary (note 2) - - - (18,422) - - - - (18,422) (36,427) (54,849)

Conversion of preference shares (note 20 (d) and (g)) 13,172 (9,601) - (1,174) - - - (2,397) (3,571) - -

Other equity movements of a subsidiary - - - - - (2,450) - - (2,450) (5,666) (8,116)

Sale of treasury shares - - 1,665 - - - - - - - 1,665

Equity shares surrendered (3,778) 3,280 - (1,120) - - - - (1,120) - (1,618)

Total comprehensive income for the year - - - - - 265,499 (2,211) (22,798) 240,490 36,236 276,726

Transfer to statutory reserve (note 21(c)) - - - - 26,550 (26,550) - - - - -

Proposed dividend on Class-B

preference shares (note 21(j)) - - - - - (149) 149 - - - -

Proposed dividend on ordinary shares (note 21(j)) - - - - - (122,697) 122,697 - - - -

Proposed donations - - - - - (1,000) 1,000 - - - -

Balance at 31 December 2010 1,223,188 13,937 - 542,269 173,246 373,886 123,846 (58,191) 1,155,056 359,994 2,752,175


ahli united bank

2010 annual report notes to the consolidated financial statements continued

notes to the consolidated

financial statements

31 December 2010

1. Corporate information

The parent company, Ahli United Bank B.S.C. (AUB or the Bank) was incorporated

in the Kingdom of Bahrain on 31 May 2000 originally as a closed company and

changed on 12 July 2000 to a public shareholding company by Amiri Decree

number 16/2000. The Bank and its subsidiaries as detailed below (collectively

known as the Group) are engaged in retail, commercial, Islamic and investment

banking business, global fund management and private banking services through

88 branches, as at 31 December 2010, in the Kingdom of Bahrain, the State of

Kuwait, the Arab Republic of Egypt, Republic of Iraq and the United Kingdom. It

also operates in the State of Qatar, Sultanate of Oman and Great Socialist People’s

Libyan Arab Jamahiriya (Libya) through its associates with a network of 42 branches

as at 31 December 2010. The Bank operates under a retail banking licence issued

by the Central Bank of Bahrain. The Bank’s registered office is located at Building

2495, Road 2832, Al Seef District 428, Kingdom of Bahrain.

The consolidated financial statements for the year ended 31 December 2010 were

authorised for issue in accordance with a resolution of the directors on 20 February

2011.

2. Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank

and its subsidiaries as at and for the year ended 31 December 2010 and 2009. The

financial statements of the subsidiaries are prepared for the same reporting year as

the Bank, using consistent accounting policies.

All material intra-group balances, transactions, income and expenses and profits

and losses resulting from intra-group transactions are eliminated on consolidation.

Subsidiaries are fully consolidated from the date on which control is transferred to

the Group. Control is achieved where the Bank has the power to govern the financial

and operating policies of an entity so as to obtain benefits from its activities. The

results of subsidiaries acquired are included in the consolidated statement of income

from the date of acquisition.

The following are the Bank’s principal subsidiaries:

Name

Country of

incorporation

Nominal holding*

31

December

2010

31

December

2009

Ahli United Bank (UK) PLC, (AUBUK) United Kingdom 100.0% 100.0%

Ahli United Bank K.S.C. (Formerly The

Bank of Kuwait and the Middle East

K.S.C.), (AUBK) State of Kuwait 74.9% 74.9%

Kuwait and Middle East Financial

Investment Co. K.S.C. (closed)

(KMEFIC), a subsidiary of AUBK State of Kuwait 75.2% 75.2%

Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 85.1% 50.7%

Commercial Bank of Iraq P.S.C. (CBIQ) Republic of Iraq 56.1% 51.5%

* Adjusted for subsidiaries’ holdings

During the year, AUB’s equity stake in AUBE initially increased to 79.6% following

a Mandatory Dual Tender Offer to AUBE’s shareholders which concluded on 17

January 2010. This resulted in AUB acquiring 26.6 million shares of AUBE at

Egyptian Pounds (LE) 37 per share. The purchase consideration was settled by

payment in cash of LE 688.8 million (under the cash offer), the issue of 74.2 million

AUB ordinary shares at market value and the issue of US$ 18.0 million subordinated

bonds under the securities offer. The excess of the purchase consideration over the

share of net asset value acquired was debited to shareholders’ equity during the

year as prescribed under IAS 27 - Consolidated and Separate Financial Statements.

Further to the above, AUB’s equity stake in AUBE further increased from 79.6% to

85.1% following a second tender offer to AUBE’s shareholders which concluded

on 8 July 2010. This resulted in AUB acquiring an additional 3.3 million shares in

AUBE at Egyptian Pounds (LE) 37 per share. Following consummation of the tender

offer, AUBE shares have now been voluntarily delisted from The Egyptian Stock

Exchange.

After receiving final approval from the Central Bank of Kuwait, shareholders and

other regulatory authorities, AUBK, with effect from 1 April 2010 converted its

business in accordance with Islamic Sharia’a. As a result, AUBK converted its

conventional banking products into Islamic banking products after negotiation and

agreement with its customers.

3. Accounting policies

3.1 Basis of preparation

The consolidated financial statements have been prepared on a historical cost

basis as modified for the re-measurement at fair value of freehold land, trading

and available-for-sale financial assets and all derivatives. In addition, as more fully

discussed below in note 3.3(h)(i), assets and liabilities that are fair value hedged are

adjusted to the extent of the fair value of the risk being hedged. The consolidated

financial statements are presented in US Dollars which is the Group’s functional

currency, and all values are rounded to the nearest thousand (US Dollars thousand)

except where otherwise indicated.

Statement of compliance

The consolidated financial statements of the Group have been prepared in

accordance with International Financial Reporting Standards (IFRS) and in

conformity with the Bahrain Commercial Companies Law and the Central Bank of

Bahrain and Financial Institutions Law.

New standards and interpretations issued but not yet effective

• IAS 32 Financial Instruments (Revised): Presentation - Classification of Rights

Issues effective annual periods commencing 1 February 2010.

• IAS 24 Related Party Disclosures (Revised): effective annual periods commencing

1 January 2011.

• IFRS 9: Financial Instruments: Classification and Measurement effective annual

periods commencing 1 January 2013.

The application of the above standards other than IFRS 9 is not expected to have a

material impact on the consolidated financial statements as and when they become

effective. IFRS 9 was issued in November 2009 and replaces the parts of IAS 39

relating to the classification and measurement of financial assets. The standard is

effective for annual periods beginning on or after 1 January 2013. The Group is

assessing the impact and timing of application of IFRS 9 on the Group’s financial

statements.

47


ahli united bank

3. Accounting policies continued

3.1 Basis of preparation continued

48

2010 annual report notes to the consolidated financial statements continued

The Group has adopted the following new and amended International Accounting

Standards/International Financial Reporting Standards as of 1 January 2010.

IFRS 3 - Business Combinations (Revised) and IAS 27 Consolidated and Separate

Financial statements (Amended) effective 1 July 2009 including consequential

amendments to IFRS 7, IAS 21, IAS 28, IAS 31 and IAS 39.

Refer to note 2 for the impact of application of this standard to the Group’s

additional investments in Ahli United Bank (Egypt) S.A.E. (AUBE).

3.2 Significant accounting judgements and estimates

The preparation of the consolidated financial statements requires management

to make judgements and estimates that affect the reported amount of financial

assets and liabilities and disclosure of contingent liabilities. These judgements and

estimates also affect the revenues and expenses and the resultant provisions as well

as fair value changes reported in equity.

Judgements

Judgements are made in the classification of available-for-sale, held-for-trading and

held-to-maturity investments based on management’s intention at acquisition of the

financial asset, and the allocation and impairment testing of goodwill and intangible

assets with indefinite lives to cash generating units. Judgements are also made in

determination of the objective evidence that a financial asset is impaired.

Estimates

Pension plans

Estimates and assumptions are used in determining the Group’s pension liabilities.

The principal actuarial assumptions used for the defined benefit plan are set out in

note 26 to the consolidated financial statements.

Impairment losses on loans and advances and non-trading investments

Estimates are made regarding the amount and timing of future cash flows when

measuring the level of provisions required for non-performing loans, portfolios

of performing loans with similar risk characteristics where the risk of default has

increased, as well as provisions for non-trading investments. These are more fully

described in note 3.3 (g).

Fair value of financial instruments

Estimates are also made in determining the fair values of financial assets and

derivatives that are not quoted in an active market. Such estimates are necessarily

based on assumptions about several factors involving varying degrees of uncertainty

and actual results may differ resulting in future changes in such provisions.

The methodology and assumptions used for estimating future cash flows are

reviewed regularly to reduce any differences between loss estimates and actual loss

experience.

3.3 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated

financial statements are set out below. These policies have been consistently

applied to all the years presented.

(a) Investments in associates and joint venture

Associated companies are companies in which the Group exercises significant

influence but does not control, normally represented by an interest of between

20% and 50% in the voting capital. The Group classifies an investment as “joint

venture” when it is a party to a contractual joint venture agreement. Investments

in associated companies and joint ventures are accounted for using the equity

method.

The reporting dates of the associates and joint venture and the Group are identical

and the associates’ and joint ventures’ accounting policies materially conform to

those used by the Group for like transactions and events in similar circumstances.

Adjustments are made to bring into line any dissimilar accounting policies that may

exist.

(b) Foreign currency translation

(i) Transactions and balances

Transactions in foreign currencies are initially recorded in the relevant functional

currency rate of exchange ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at

the relevant functional currency rate of exchange ruling at the balance sheet date.

All differences are taken to “trading income - net” in 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 available-for-sale items measured at fair value in a

foreign currency are translated using the exchange rates at the date when the fair

value was determined and the differences are included in equity as part of the fair

value adjustment of the respective items, unless these items are part of trading

securities as explained in note 3.3(c)(iii) or are part of an effective hedging strategy, in

which case it is recorded in the consolidated statement of income.

(ii) Group companies

Assets and liabilities of foreign subsidiaries are translated into US Dollars at the

rates of exchange prevailing at the balance sheet date. Income and expense items

are translated at average exchange rates prevailing for the period. Any exchange

differences arising on translation are taken to “foreign exchange translation reserve”

forming part of equity.

(c) Financial instruments

The classification of financial instruments at initial recognition depends on the

purpose for which the financial instruments were acquired and their characteristics.

All financial instruments are initially recognised at the fair value of consideration

given, including acquisition costs associated with the investment, except in the case

of trading securities, the acquisition costs of which are expensed. Premiums and

discounts are amortised on a systematic basis to maturity using the effective interest

method and taken to interest income or interest expense as appropriate.

(i) Date of recognition

All “regular way” purchases and sales of financial assets are recognised on the

settlement date, i.e. the date that the Group receives or delivers the asset. Regular

way purchases or sales are purchases or sales of financial assets that require

delivery of assets within the time frame generally established by regulation or

convention in the market place.

The Group accounts for any changes in the fair value of the asset to be received

during the period between the trade date and the settlement date in the same way

as it accounts for the acquired asset. The change in fair value is recognised in the

consolidated statement of income for assets classified as “trading securities” and it

is recognized in equity for assets classified as available-for-sale. The change in value

is not recognized for assets carried at cost or amortised cost.

(ii) Treasury bills and bonds

Treasury bills and bonds are initially recognised at cost. Premiums and discounts are

amortised on a systematic basis to their maturity. These treasury bonds are issued

by the respective Central Banks on behalf of the Governments of Kuwait, Iraq and

Egypt and are held to maturity.

(iii) Trading securities

A financial asset is classified as “held-for-trading” if it is acquired or incurred

principally for the purpose of generating profit from short term fluctuations in

price. Trading securities are initially recognised at cost, being the fair value of

the consideration given and are subsequently measured at fair value. Resultant

unrealised gains and losses arising from changes in fair value are included in the

consolidated statement of income under “trading income - net” while dividend

income is recorded in “dividend income” when the right of the payment has been

established.


ahli united bank

3. Accounting policies continued

(iv) Held-to-maturity

2010 annual report notes to the consolidated financial statements continued

3.2 Summary of significant accounting policies continued

Non-trading investments with fixed or determinable payments and fixed maturities

and which the Group has the intention and ability to hold to maturity are classified

as held-to-maturity. After initial measurement, these are subsequently measured

at amortised cost using the effective interest rate method, less allowance for

impairment. The losses arising from impairment of such investments are recognised

in the consolidated statement of income line “net loss on available-for-sale

investments”.

(v) 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. This accounting policy

relates to the balance sheet captions “deposits with banks and other financial

institutions” and “loans and advances”. After initial measurement, the loans and

advances are subsequently measured at amortised cost using the effective interest

rate method, adjusted for effective fair value hedges, 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 “provision for

loan losses and contingencies-net” and in an impairment allowance account in the

consolidated balance sheet. 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 included in “interest income” in the consolidated

statement of income.

(vi) Available-for-sale

Non-trading investments that are not classified as held-to-maturity, held-for-trading

or loans and advances are classified as available-for-sale. After initial recognition,

available-for-sale investments are remeasured at fair value. For investments in

equity instruments, where a reasonable estimate of the fair value cannot be

determined, the investment is carried at cost less impairment provision. Unless

unrealised gains and losses on remeasurement to fair value are part of an effective

hedging relationship, they are reported as a separate component of equity until the

investment is sold, settled or otherwise disposed of, or the investment is determined

to be impaired, at which time the cumulative gain or loss previously reported in

equity is included in the consolidated statement of income for the period.

Any gain or loss arising from a change in fair value of available-for-sale investments,

which is part of an effective hedging relationship, is recognised directly in the

consolidated statement of income to the extent of the changes in fair value being

hedged.

(vii) Derivatives

Changes in fair values of the derivatives held for trading are included in the

consolidated statement of income under “trading income - net”.

Derivatives embedded in other financial instruments are treated as separate

derivatives and recorded at fair value, when their economic characteristics and risks

are not closely related to those of the host contract and the host contract is not

carried as held for trading. The changes in fair value of such embedded derivatives

are recognised in the consolidated statement of income.

(viii) Deposits, term debts and subordinated liabilities

These financial liabilities are carried at amortised cost, less amounts repaid.

(ix) Reclassification of financial assets

As permitted by Reclassification of Financial Assets: Amendments to IAS 39 -

Recognition and Measurement and IFRS 7: Disclosures, the Group made the

following reclassifications with effect from 1 July 2008:

(i) Certain investments classified initially as “available-for-sale” investments into

“loans and receivables” category within “non-trading investments”; and

(ii) Certain investments classified initially as “trading securities” into “available-for-

sale” category.

Refer notes 11(i) and 11(ii) for further details.

(d) 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;

• 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; or

• the Group has transferred its rights to receive cash flows from the asset and

either (i) has transferred substantially all the risks and rewards of the asset, or (ii)

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, cancelled or expires.

(e) Repurchase and resale agreements

Where investments, including those reclassified into “loans and receivables”,

are sold subject to a commitment to repurchase them at a predetermined price,

they remain on the consolidated balance sheet and the consideration received is

classified as “deposits from banks and other financial institutions”. The difference

between the sale price and repurchase price is treated as interest expense and is

accrued over the life of the agreement using the effective interest rate method.

Conversely, securities purchased under similar commitments to resell are not

recognised on the consolidated balance sheet and the consideration paid is

recorded in “deposits with banks and other financial institutions”. The difference

between the purchase price and resale price is treated as interest income and is

accrued over the life of the agreement using the effective interest rate method.

(f) Determination of fair value

The fair value of financial instruments that are quoted in an active market is

determined by reference to market bid prices respectively at the close of business

on the balance sheet date.

The fair value of liabilities with a demand feature is the amount payable on demand.

The fair value of interest-bearing financial assets and financial liabilities that are

not quoted in an active market and are not payable on demand is determined by

a discounted cash flow model using the current market interest rates for financial

instruments with similar terms and risk characteristics.

For equity investments that are not quoted in an active market, a reasonable

estimate of the fair value is determined by reference to the current market value of

another instrument that is substantially similar, or is determined using net present

valuation techniques.

Investments in funds are stated at net asset values provided by the fund managers.

The fair value of unquoted derivatives is determined either by discounted cash flows

or option-pricing models.

(g) Impairment of financial assets

An assessment is made at each balance sheet date to determine whether there is

any objective evidence that a specific financial asset or a group of financial assets

may be impaired. If such evidence exists, the estimated recoverable amount of

that asset or a group of financial assets is determined and any impairment loss,

based on the net present value of future anticipated cash flows, is recognised in

the consolidated statement of income and credited to an allowance account. In the

case of equity investments, impairment is reflected directly as a write down of the

financial asset. Impairment losses on equity investments are not reversed through

the consolidated statement of income while any subsequent increases in their fair

value are recognised directly in equity.

49


ahli united bank

3. Accounting policies continued

50

2010 annual report notes to the consolidated financial statements continued

3.3 Summary of significant accounting policies continued

(g) Impairment of financial assets continued

Objective evidence that financial assets (including equity securities) are impaired can

include default or delinquency by a borrower, restructuring of a loan or advance by

the Group on terms that the Group would not otherwise consider, indications that a

borrower or issuer will enter bankruptcy, the disappearance of an active market for

a security, or other observable data relating to a group of assets such as adverse

changes in the payment status of borrowers or issuers in the group, or economic

conditions that correlate with defaults in the group. In addition, for an investment in

an equity security, a significant or prolonged decline in its fair value below its cost is

objective evidence of impairment.

The present value of the estimated future cash flows for loans and other interest

bearing financial assets 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. 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.

In addition to specific provisions against individually significant financial assets, the

Group also makes collective impairment provisions on groups of financial assets,

which although not identified as requiring a specific provision, have a greater risk of

default than the risk at initial recognition. Financial assets are grouped on the basis

of similar credit risk characteristics that are indicative of the debtors’ ability to pay

all amounts due according to the contractual terms and the collective impairment

provision is estimated for any such group where credit risk characteristics of the

group of financial assets has deteriorated. Factors such as any deterioration in

country risk, industry, technological obsolescence as well as identified structural

weaknesses or deterioration in cash flows are taken into consideration and the

amount of the provision is based on the historical loss pattern within each group,

adjusted to reflect current economic changes.

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 allowance account. If a write-off is later recovered, the

recovery is credited to the ‘provision for loan losses and contingencies - net’ in the

consolidated statement of income.

(h) Hedge accounting

The Group enters into derivative instruments including futures, forwards, swaps and

options to manage exposures to interest rate and foreign currency risks, including

exposures arising from forecast transactions. In order to manage particular risks, the

Group applies hedge accounting for transactions which meet the specified criteria.

Derivatives are stated at fair value. Derivatives with positive market values are

included in “other assets” and derivatives with negative market values are included

in “other liabilities” in the consolidated balance sheet.

At inception of the hedge relationship, the Group formally documents the

relationship between the hedged item and the hedging instrument, including

the nature of the risk, management objectives and strategy for undertaking the

hedge. The methods that will be used to assess the effectiveness of the hedging

relationship form part of the Group’s documentation.

Also at the inception of the hedge relationship, a formal assessment is undertaken

to ensure the hedging instrument is expected to be highly effective in offsetting

the designated risk in the hedged item. Hedges are formally assessed at each

reporting date. A hedge is regarded as highly effective if the changes in fair value or

cash flows attributable to the hedged risk during the period for which the hedge is

designated were offset in a range of 80% to 125%. For situations where the hedged

item is a forecast transaction, the Group assesses whether the transaction is highly

probable and presents an exposure to variations in cash flows that could ultimately

affect the consolidated statement of income.

For the purposes of hedge accounting, hedges are classified into two categories:

(i) fair value hedges which hedge the exposure to changes in the fair value of a

recognised asset or liability; and (ii) cash flow hedges which hedge exposure to

variability in cash flows that is attributable to a particular risk associated with a

recognised asset or liability or a forecasted transaction.

(i) Fair value hedges

For fair value hedges which meet the conditions for hedge accounting, any gain or

loss from remeasuring the hedging instrument at fair value is recognised immediately

in the consolidated statement of income. The hedged item is adjusted for fair value

changes relating to the risk being hedged and the difference is recognised in the

consolidated statement of income.

If the hedging instrument expires or is sold, terminated or exercised, or where the

hedge no longer meets the criteria for hedge accounting, the hedge relationship is

terminated. For hedged items recorded at amortised cost, the difference between

the carrying value of the hedged item on termination and the value at which it would

have been carried without being hedged is amortised over the remaining term of

the original hedge. If the hedged item is derecognised, the unamortised fair value

adjustment is recognised immediately in the consolidated statement of income.

(ii) Cash flow hedges

For cash flow hedges which meet the conditions for hedge accounting, the portion

of the gain or loss on the hedging instrument which is determined to be an effective

hedge is recognised initially in equity. The ineffective portion of the gain or loss,

if any, on the hedging instrument is recognised immediately in the consolidated

statement of income as ”trading income - net”.

The gains or losses on effective cash flow hedges recognised initially in equity are

either transferred to the consolidated statement of income in the period in which the

hedged transaction impacts the consolidated statement of income or included in the

initial measurement of the related asset or liability.

For hedges which do not qualify for hedge accounting, any gains or losses arising

from changes in the fair value of the hedging instrument are taken directly to the

consolidated statement of income for the year.

Hedge accounting is discontinued when the hedging instrument expires or is sold,

terminated or exercised, or no longer qualifies for hedge accounting. In the case of

cash flow hedges, the cumulative gain or loss on the hedging instrument recognised

in equity remains in equity until the forecasted transaction occurs, unless the hedged

transaction is no longer expected to occur, in which case the net cumulative gain or

loss recognised in equity is transferred to the consolidated statement of income for

the year.

(i) Offsetting financial instruments

Financial assets and financial liabilities are only offset and the net amount reported

in the consolidated balance sheet when there is a currently enforceable legal right to

offset the recognised amounts and the Group intends to settle on a net basis.

(j) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits

will flow to the Group and the revenue can be reliably measured. The following

specific recognition criteria must also be met before revenue is recognised:

(i) Interest income

Interest income is recognised using the effective interest method, taking account of

the principal outstanding and the rate applicable. Interest that is 90 days or more

overdue is excluded from income. Notional interest is recognised on impaired loans

and advances and other financial assets based on the rate used to discount future

cash flows to their net present values.

(ii) Fees and commissions income

Credit origination fees are treated as an integral part of the effective interest rate of

financial instruments and are recognised over their lives, except when the underlying

risk is sold to a third party at which time it is recognised immediately. Other fees and

commissions income are recognised when earned.

(iii) Dividend income

Dividend income is recognised when the right to receive payment is established.


ahli united bank

3. Accounting policies continued

2010 annual report notes to the consolidated financial statements continued

3.3 Summary of significant accounting policies continued

(k) Business combinations, goodwill and other intangible assets

Business combinations are accounted for using the purchase method of accounting.

Assets and liabilities acquired are recognised at the acquisition date fair values with

any excess of the cost of acquisition over the net assets acquired being recognised

as goodwill.

Goodwill acquired in a business combination is initially measured at cost being the

excess of the cost of the business combination over the Group’s interest in the

net fair value of the identifiable assets, liabilities and contingent liabilities acquired.

Following initial recognition, goodwill is reviewed for impairment annually or more

frequently if events or changes in circumstances indicate that the carrying value

may be impaired. After initial recognition, goodwill is measured at cost less any

accumulated impairment losses.

Intangible assets are measured on initial recognition at their fair values on the date

of recognition. Following initial recognition, intangible assets are carried at originally

recognised values less any accumulated impairment losses.

Impairment of goodwill and intangible assets is determined by assessing the

recoverable amount of the cash-generating unit (or group of cash-generating units),

to which the goodwill relates. Where the recoverable amount of the cash-generating

unit (or group of cash-generating units) is less than the carrying amount, an

impairment loss is recognised immediately in the consolidated statement of income.

For the purpose of impairment testing, goodwill acquired in a business combination

is, from the acquisition date, allocated to each of the Group’s cash-generating units,

or groups of cash-generating units, that are expected to benefit from the synergies

of the combination, irrespective of whether other assets or liabilities of the Group are

assigned to those units or groups of units. Each unit or group of units to which the

goodwill is allocated:

• represents the lowest level within the Group at which the goodwill is monitored

for internal management purposes; and

• is not larger than a segment based on either the Group’s primary or the Group’s

geographic segment reporting format determined in accordance with IFRS 8

Operating Segments.

(l) Premises and equipment

Freehold land is initially recognised at cost. After initial recognition, freehold land

is carried at the revalued amount. The revaluation is carried out periodically by

independent professional property valuers. Fair value is determined by reference

to market-based evidence. The resultant revaluation surplus is recognised, as

a separate component under equity. Revaluation deficit, if any, is recognised in

the consolidated statement of income, except that a deficit directly offsetting a

previously recognised surplus on the same asset is directly offset against the surplus

in the revaluation reserve.

Premises and equipment are stated at cost, less accumulated depreciation.

Depreciation on buildings and other premises and equipment is provided on a

straight-line basis over their estimated useful lives.

The estimated useful lives of the assets for the calculation of depreciation are as

follows:

- Freehold buildings 15 to 30 years

- Leasehold land and buildings Over the lease period

- Other premises and equipment 2 to 5 years

(m) Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with central banks,

excluding mandatory reserve deposits, together with those deposits with banks

and other financial institutions and treasury bills having an original maturity of three

months or less.

(n) Provisions

Provisions are recognised when the Group has a present obligation arising from a

past event, and the costs to settle the obligation are both probable and able to be

reliably estimated.

(o) Employee benefits

Defined benefit pension plan

Pension costs are recognised on a systematic basis so that the costs of providing

retirement benefits to employees are evenly matched, so far as possible, to the

service lives of the employees concerned. Any excess or deficiency of the actuarial

value of assets over the actuarial value of liabilities of the pension scheme, outside

of a defined corridor, is charged to the consolidated statement of income over the

remaining service lives of the scheme members.

Defined contribution plans

The Group also operates a defined contribution plan, the costs of which are

recognised in the period to which they relate.

(p) Taxes

There is no tax on corporate income in the Kingdom of Bahrain. Taxation on income

from foreign entities is provided for in accordance with the fiscal regulations of the

countries in which the respective Group entities operate.

Deferred taxation is provided for using the liability method on all temporary

differences calculated at the rate at which it is expected to be payable. Deferred tax

assets are only recognised if recovery is probable.

(q) Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the Group

and, accordingly, are not incorporated in the consolidated balance sheet.

(r) Non-controlling interests

Non-controlling interests represents the portion of profit or loss and net assets in the

subsidiaries not attributable to the Bank’s equity shareholders.

(s) Redeemable preference shares

Preference shares which carry a mandatory coupon, and are redeemable at a

fixed future date, are recognised as liabilities in the consolidated balance sheet,

at amortised cost. The corresponding dividends on those shares are charged as

interest expense in the consolidated statement of income.

(t) Dividends on ordinary shares

Dividends on ordinary shares are recognised as liability and deducted from equity

when they are approved by the Bank’s shareholders.

Dividends for the period that are approved after the balance sheet date are shown

as an appropriation and reported in the consolidated statement of changes in equity,

as an event after the balance sheet date.

(u) Employees’ share purchase plan

The Group operates an employees’ share purchase plan for certain eligible

employees. The difference between the issue price and the fair value of the shares

at the grant date is amortised over the vesting period in the consolidated statement

of income with a corresponding effect to equity.

(v) 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, being the commission received. Subsequent to initial recognition, the

Group’s liability under each guarantee is measured at the higher of the amortised

commission and the best estimate of expenditure required to settle any financial

obligation arising as a result of the guarantee.

(w) Islamic banking

The Islamic banking activities of the group are conducted in accordance with Islamic

Sharia’a principles, as approved by the Sharia’a Supervisory Board. The financial

statements relating to these activities are prepared in accordance with the Financial

Accounting Standards issued by the Accounting and Auditing Organization for

Islamic Financial Institutions (AAOIFI), IFRS and Central Bank of Bahrain regulations,

as applicable.

51


ahli united bank

3. Accounting policies continued

(x) Islamic products

Murabaha

52

2010 annual report notes to the consolidated financial statements continued

3.3 Summary of significant accounting policies continued

An agreement whereby the Group sells to a customer commodities, real estate and

certain other assets at cost plus an agreed profit mark up whereby the Group (seller)

informs the purchaser of the price at which the asset had been purchased and also

stipulates the amount of profit to be recognized.

Istisna’a

A sales contract between the Group (contract owner) and a customer (contractor)

whereby the customer, based on an order from the Group, undertakes to

manufacture or otherwise acquire the subject matter of the contract according to

specifications, and sells it to the Group for an agreed-upon price and method of

settlement, whether that be in advance, by instalments or deferred to a specific

future date.

Ijara

A lease agreement between the Group (lessor) and the customer (lessee), whereby

the Group earns profit by charging rentals on assets leased to customers.

Tawarruq

A sales agreement whereby a customer buys commodities from the Group on

a deferred payment basis and then immediately resells them for cash to a third party.

Mudaraba

An agreement between two parties; one of them provides the funds and is called

Rab-Ul-Mal and the other provides efforts and expertise and is called the Mudarib

and is responsible for investing such funds in a specific enterprise or activity in

return for a pre-agreed percentage of the Mudaraba income. In case of normal loss;

the Rab-Ul-Mal would bear the loss of its funds while the Mudarib would bear the

loss of its efforts. However, in case of default, negligence or violation of any of the

terms and conditions of the Mudaraba agreement, only the Mudarib would bear the

losses. The Group acts as Mudarib when accepting funds from depositors and as

Rab-Ul-Mal when investing such funds on a Mudaraba basis.

Wakala

An agreement whereby the Group provides a certain sum of money to an agent who

invests it according to specific conditions in return for a certain fee (a lump sum of

money or a percentage of the amount invested). The agent is obliged to return the

invested amount in case of default, negligence or violation of any of the terms and

conditions of the Wakala.

Revenue recognition

Revenue is recognised on the above Islamic products as follows:

Income from Murabaha, Tawarruq and Istisna’a are recognised on an effective yield

basis which is established on the initial recognition of the asset and is not revised

subsequently.

Income from Ijara is recognized over the term of the Ijara agreement so as to yield a

constant rate of return on the net investment outstanding.

Income (loss) on Mudaraba financing is based on expected results adjusted for

actual experience as applicable, while similarly the losses are charged to income.

Estimated income from Wakala is recognised on an accrual basis over the period,

adjusted by actual income when received. Losses are accounted for on the date of

declaration by the agent.

(y) Unrestricted investment accounts’ share of profit

The profit computed after taking into account all income and expenses at the end

of a financial year is distributed between unrestricted investment account holders

which include Mudaraba depositers and the Bank’s shareholders. The share of profit

of the unrestricted account holders is calculated on the basis of their daily deposit

balances over the year, after reducing the agreed and declared Mudaraba fee.

In the case of expenses, which arise out of issues relating to non compliance with

Sharia’a regulations, then such expenses are not to be borne by the unrestricted

investment account holders.

4. Interest income

2010 2009

US$ ’000 US$ ’000

Treasury bills and bonds 42,425 54,022

Deposits with banks and other financial institutions 38,017 41,446

Loans and advances 706,837 730,497

Non-trading investments 106,219 108,318

5. Interest expense

893,498 934,283

2010 2009

US$ ’000 US$ ’000

Deposits from banks and other financial institutions 91,760 85,110

Customers’ deposits 265,997 343,716

Term debts 12,029 18,836

Subordinated liabilities 14,938 20,036

6. Fees and commissions - net

Fees and commissions income

384,724 467,698

2010 2009

US$ ’000 US$ ’000

- Retail and corporate banking 88,296 95,325

- Management, performance and brokerage fees 39,303 47,199

Fees and commissions expense (4,280) (3,994)

123,319 138,530

Included in ‘management, performance and brokerage fees’ is US$ 9.9 million

(2009: US$ 12.4 million) of fee income relating to trust and other fiduciary activities.

7. Trading income - net

2010 2009

US$ ’000 US$ ’000

Foreign exchange gains 27,690 34,336

Loss on trading securities - (819)

Others 529 5,922

8. Net loss on available-for-sale investments

28,219 39,439

2010 2009

US$ ’000 US$ ’000

Realised gains - net 18,500 35,984

(Less): impairment losses - net (40,610) (50,048)

9. Cash and balances with central banks

(22,110) (14,064)

2010 2009

US$ ’000 US$ ’000

Cash and balances with central banks, excluding

mandatory reserve deposits (note 24) 183,137 86,708

Mandatory reserve deposits with central banks 178,239 217,456

361,376 304,164

Mandatory reserve deposits are not available for use in day-to-day operations.


ahli united bank

10. Loans and advances

(a) By industry sector

2010 annual report notes to the consolidated financial statements continued

2010 2009

US$ ’000 % US$ ’000 %

Consumer / personal 3,538,629 23.7 3,442,657 25.2

Real estate 4,423,194 29.7 3,908,086 28.6

Trading, manufacturing and services 4,042,613 27.1 3,681,371 26.9

Banks and other financial institutions 967,754 6.5 911,976 6.7

Construction 642,498 4.3 539,889 4.0

Government / public sector 415,291 2.8 425,296 3.1

Others 880,302 5.9 754,919 5.5

14,910,281 100.0 13,664,194 100.0

(Less): Impairment allowance for loan

losses (note 10(e)) (432,568) (364,195)

(b) By geographic region

14,477,713 13,299,999

2010 2009

US$ ’000 % US$ ’000 %

GCC countries 11,793,296 79.1 11,104,185 81.3

Arab Republic of Egypt 1,386,131 9.3 881,271 6.4

United Kingdom 799,778 5.4 670,695 4.9

Europe (excluding United Kingdom) 626,786 4.2 782,021 5.7

Asia (excluding GCC countries) 85,888 0.6 64,923 0.5

Rest of the world 218,402 1.4 161,099 1.2

14,910,281 100.0 13,664,194 100.0

(Less): Impairment allowance for loan

losses (note 10(e)) (432,568) (364,195)

14,477,713 13,299,999

GCC countries comprise the members of the Gulf Co-operation Council being

Kingdom of Bahrain, State of Kuwait, Sultanate of Oman, State of Qatar, Kingdom

of Saudi Arabia and the United Arab Emirates.

Refer note 31 (c) for disclosure of credit quality of loans and advances.

(c) Age analysis of past due but not impaired loans and advances

Loans and advances

2010

Up to 30 days 31 to 60 days 61 to 89 days Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Retail 45,022 47,201 36,664 128,887

Corporate 34,258 20,981 60,939 116,178

Loans and advances

79,280 68,182 97,603 245,065

2009

Up to 30 days 31 to 60 days 61 to 89 days Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Retail 26,551 43,456 36,283 106,290

Corporate 46,274 30,609 99,737 176,620

72,825 74,065 136,020 282,910

The past due loans and advances up to 30 days include those that are only

past due by a few days. None of the above past due loans are considered to be

impaired.

(d) Individually impaired loans and advances

2010

Retail Corporate Total

US$ ’000 US$ ’000 US$ ’000

Gross impaired loans 85,785 276,320 362,105

Specific impairment provisions (73,078) (234,890) (307,968)

12,707 41,430 54,137

Impaired loan coverage 85.2% 85.0% 85.0%

2009

Retail Corporate Total

US$ ’000 US$ ’000 US$ ’000

Gross impaired loans 147,216 237,023 384,239

Specific impairment provisions (113,876) (173,836) (287,712)

33,340 63,187 96,527

Impaired loan coverage 77.4% 73.3% 74.9%

The fair value of collateral that the Group holds relating to loans individually

determined to be impaired at 31 December 2010 amounts to US$ 130.2 million

(2009: US$ 71.4 million). The collateral consists of securities, letters of guarantee

and properties.

The carrying amount of renegotiated loans as at 31 December 2010 is US$ 97.2

million (2009: US$ 81.6 million).

(e) Impairment allowance for loans and advances

A reconciliation of the allowance for impairment losses for loans and advances by

class is as follows:

2010

Retail Corporate Total

US$ ’000 US$ ’000 US$ ’000

At 1 January 138,531 225,664 364,195

Add / (Less):

Arising on IFRS transition of subsidiary - 18,339 18,339

Amounts written off during the year (63,311) (52,173) (115,484)

Charge for the year 26,234 129,148 155,382

Recoveries during the year (3,374) (16,462) (19,836)

Interest suspended during the year (net) 3,628 5,828 9,456

Exchange rate and other adjustments 409 20,107 20,516

At 31 December 102,117 330,451 432,568

2009

Retail Corporate Total

US$ ’000 US$ ’000 US$ ’000

At 1 January 131,830 158,419 290,249

Add / (Less):

Arising on IFRS transition of subsidiary - - -

Amounts written off during the year (14,907) (149,237) (164,144)

Charge for the year 35,901 201,751 237,652

Recoveries during the year (6,981) (9,561) (16,542)

Interest suspended during the year (net) 4,702 15,387 20,089

Exchange rate and other adjustments (12,014) 8,905 (3,109)

At 31 December 138,531 225,664 364,195

(f) Provision for loan losses and contingencies - net

The net charge for the year for provision for loan losses and contingencies in the

consolidated statement of income is determined as follows:

2010 2009

US$ ’000 US$ ’000

Impairment charge for the year on loans and advances (note

10(e)) 155,382 237,652

Recoveries from loans and advances during the year (including

from fully provided loans written off in previous years) (25,748) (19,424)

Net charge for contingencies 22,037 9,908

Provision for loan losses and contingencies - net 151,671 228,136

53


ahli united bank

11. Non-trading investments

Quoted investments

54

2010 annual report notes to the consolidated financial statements continued

Held-to-

maturity

Available-

for-sale

2010 2009

Loans and

receivables Total Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

GCC government bonds and debt securities - 428,418 152,247 580,665 400,047

Other government bonds and debt securities - 258,006 25,564 283,570 157,724

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions - 1,143,578 892,915 2,036,493 1,878,989

- issued by corporate bodies 21,220 501,253 467,751 990,224 901,832

Equity shares - 2,351 - 2,351 16,737

Funds at net asset value - 152,984 - 152,984 158,603

Unquoted investments

21,220 2,486,590 1,538,477 4,046,287 3,513,932

GCC government bonds - 109,588 - 109,588 138,547

Other government bonds and debt securities - 35,575 - 35,575 30,544

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions - 10,995 - 10,995 -

Equity shares at cost - 136,305 - 136,305 123,847

Funds at net asset value - 122,643 - 122,643 119,423

Other investments - 75,344 - 75,344 59,157

- 490,450 - 490,450 471,518

Total 21,220 2,977,040 1,538,477 4,536,737 3,985,450

(Less): Allowance for impairment - (123,565) - (123,565) (86,858)

Refer note 31 (c) for disclosure of credit quality of non-trading investments.

Non-trading investments of US$ 1,992 million (2009: US$ 1,042 million) have been

sold under agreements to repurchase, against which the Group had borrowings of

US$ 1,645 million (2009: US$ 878 million), included under “deposits from banks and

other financial institutions”.

The movements in provision for impairment on available-for-sale investments were

as follows:

2010 2009

US$ ’000 US$ ’000

At 1 January 86,858 88,244

Add / (Less):

Charge for the year 40,610 35,975

Amounts written off during the year - (30,722)

Exchange rate and other adjustments (3,903) (6,639)

At 31 December 123,565 86,858

The deterioration in the financial markets in the third quarter of 2008 was viewed

globally as a rare circumstance to have occurred in the financial sector. The

IASB has issued “Reclassification of Financial Assets: Amendments to IAS

39 - Recognition and Measurement and IFRS 7: Disclosures” which permits

the reclassification of certain financial assets under such rare circumstances.

Accordingly, the Group had performed the following reclassifications:

(i) Financial assets reclassified into the “loans and receivables”

category from “available-for-sale” category

The carrying value of the financial assets reclassified into the loans and receivables

category from available-for-sale category as at the date of reclassification of 1 July

2008 was US$ 1,991,712 thousand and the fair value losses recognised in the

cumulative changes in available-for-sale reserve up to that date was US$ 108,527

thousand.

21,220 2,853,475 1,538,477 4,413,172 3,898,592

2010 2009

US$ ’000 US$ ’000

Carrying value as at 31 December 1,538,477 1,688,534

Fair value as at 31 December 1,455,024 1,571,622

Fair value losses that would have been recognised

in the cumulative changes in available-for-sale

reserve had the non-trading investments not been

reclassified. (83,453) (116,912)

The Group earned interest income on these investments at an effective interest rate

of 3.7% (2009: 4.3%) and the carrying values of these financial instruments reflect

the cash flows expected to be recovered at the date of reclassification of these

financial assets.

(ii) Financial assets reclassified into the “available-for-

sale” category from “trading securities” category

The carrying value of the financial assets reclassified into the available-for-sale

category from trading securities category as at the date of reclassification of

1 July 2008 was US$ 86,901 thousand and the fair value losses recognised in the

consolidated statement of income up to that date was US$ 3,823 thousand.

2010 2009

US$ ’000 US$ ’000

Carrying value and fair value as at 31 December 44,036 47,336

Fair value gains that would have been recognised in

the consolidated statement of income for the year had

the financial assets not been reclassified. 2,857 739


ahli united bank

2010 annual report notes to the consolidated financial statements continued

12. Investments in associates and joint venture

The principal associates and joint venture of the Group are:

(a) Associates

Name

Country of

incorporation Holding

2010 2009

Ahli Bank Q.S.C. (ABQ) State of Qatar 36.4% 38.1%

Ahli Bank S.A.O.G. (ABO) Sultanate of Oman 35.0% 35.0%

United Bank for Commerce and

Investment S.A.L. (UBCI) Libya 40.0% -

On completion of registration of 2.92 million shares due to a private placement

subscription by the Qatar Investment Authority in Ahli Bank Q.S.C., AUB’s holding

was diluted to 36.4% as of 31 December 2010. Further, during 2011, on completion

of registration of an additional 5.84 million shares due to a private placement

subscription by the Qatar Investment Authority in Ahli Bank Q.S.C., AUB’s holding

will be diluted to 33.3%.

During 2010, the Bank acquired a 40% stake in UBCI at a purchase consideration of

LYD 68.2 million (US$ 53.5 million).

(b) Joint venture

Name

Country of

incorporation Holding

2010 2009

Legal & General Gulf B.S.C. (c)* Kingdom of Bahrain 50% 50%

* Provides conventional and takaful life and health insurance.

The summarised financial information of the Group’s associates and joint venture

was as follows:

2010 2009

US$ ’000 US$ ’000

Assets 7,333,159 6,705,223

Liabilities 6,413,921 5,904,854

Revenues 287,741 226,847

Net profit for the year 148,640 103,123

13. Premises and equipment

The net book values of the Group’s premises and equipment are:

2010 2009

US$ ’000 US$ ’000

Freehold land 130,449 138,101

Freehold buildings 25,471 22,987

Leasehold land and buildings 105,762 83,953

Capital work-in-progress 31,301 55,927

Others 80,111 54,988

14. Other assets

373,094 355,956

2010 2009

US$ ’000 US$ ’000

Tax assets (note 22) 331 4,605

Interest receivable 123,410 85,332

Derivative assets (note 28) 148,247 191,329

Prepayments and others 168,981 202,685

440,969 483,951

15. Goodwill and other intangible assets

Goodwill

2010

Intangible

assets Total

US$ '000 US$ '000 US$ '000

At 1 January 505,251 119,035 624,286

Acquisitions during the year - 85,138 85,138

Exchange rate and other adjustments 14,619 (7,685) 6,934

At 31 December 519,870 196,488 716,358

Goodwill

2009

Intangible

assets Total

US$ '000 US$ '000 US$ '000

At 1 January 514,517 120,053 634,570

Acquisitions during the year 151 - 151

Exchange rate and other adjustments (9,417) (1,018) (10,435)

At 31 December 505,251 119,035 624,286

Goodwill

Goodwill acquired through business combinations has been allocated to the cash-

generating units of the acquired entities for impairment testing purposes.

The carrying amount of goodwill and intangible assets allocated to each of the cash-

generating units is as follows:

Goodwill

2010 2009

Intangible

assets Goodwill

Intangible

assets

US$ '000 US$ '000 US$ '000 US$ '000

Retail banking 182,803 64,841 177,912 39,282

Corporate banking, treasury

and investments 222,012 100,209 215,392 60,709

Private banking and wealth

management 115,055 31,438 111,947 19,044

519,870 196,488 505,251 119,035

Key assumptions used in estimating recoverable amounts of cash-generating units

The recoverable amount of each cash-generating unit’s goodwill is based on value-

in-use calculations using cash flow projections from financial budgets approved

by senior management, extrapolated for five year projections using nominal Gross

Domestic Product growth rate in the respective countries in which they operate. The

discount rate applied to cash flow projections represent the cost of capital adjusted

for an appropriate risk premium for these business segments. The discount rate

used in relation to the significant portion of the goodwill requiring impairment testing

was 9.8 % (2009: 10.9%). The key assumptions used in estimating recoverable

amounts of cash generating units were sensitised to test the resilience of value-

in-use calculations. On this basis, management believes that reasonable changes

in the key assumptions used to determine the recoverable amount of the Group’s

cash-generating units will not result in an impairment.

Intangible assets

Intangible assets comprises primarily the Group's banking licenses, including the

current year's addition, which have indefinite lives. Based on an annual impairment

assessments of the intangible assets, no indications of impairment were identified.

The fair value of a banking license is determined at the time of acquisition by

discounting the future expected profits from its acquisition and its projected terminal

value.

16. Customers’ deposits

2010 2009

US$ ’000 US$ ’000

Current and call accounts 2,636,332 2,221,678

Saving accounts 1,168,211 857,831

Time deposits 11,031,253 10,161,757

14,835,796 13,241,266

55


ahli united bank

17. Term debts

56

2010 annual report notes to the consolidated financial statements continued

2010 2009

US$ ’000 US$ ’000

Medium Term Syndicated Deposit 796,562 800,054

(carrying interest rate of three-month LIBOR plus

0.85% per annum, repayable in October 2011)

Long term debt 150,000 150,000

(carrying interest rate of six-month LIBOR plus 0.275%

per annum, repayable in September 2012)

946,562 950,054

Of the above medium term syndicated deposit, US$ 618 million has been extended

for a further period up to 30 April 2012 at LIBOR plus 0.85% per annum.

18. Other liabilities

2010 2009

US$ ’000 US$ ’000

Accruals 95,896 79,010

Interest payable 136,674 127,540

Derivative liabilities (note 28) 243,582 243,287

Other credit balances 217,537 199,661

19. Subordinated liabilities

693,689 649,498

These borrowings are subordinated to the claims of all other creditors of the

respective banks.

(a) Ahli United Bank B.S.C.

2010 2009

US$ ’000 ’000

US Dollars – non-convertible portion (50%) of Class A noncumulative

preference shares carrying interest at 1.50% over

twelve-month LIBOR, repayable on 2 January 2015, with an

issuer option to redeem after 1 January 2010 subject to three

months notice (also refer note 20 (d)). 225,000 225,000

US Dollars – interest at three-month LIBOR plus a margin of

0.95% up to 2 December 2010 and margin of 1.45% thereafter,

repayable on 2 December 2015 with an issuer option to redeem

after 2 December 2010 subject to one month notice. 75,000 75,000

Great Britain Pounds – interest at six-month LIBOR plus

1.00%, repayable in 2012. 30,910 31,849

US Dollars - interest at six-month LIBOR plus a margin of

0.82%, repayable on 15 December 2016, convertible into

ordinary shares at the holder's option at the rate of US$ 1.24

per share between the third and sixth anniversary from the loan

agreement dated 18 November 2006 (also refer note 23). 200,000 200,000

US Dollars - interest at 6.5% p.a., repayable at 5 years and

one day with an issuer option to extendable for a further period

of 5 years and one day at 7% per annum. 50,000 50,000

US Dollars - interest at three-month LIBOR plus a margin

of 1% up to 15 March 2015, and three-month LIBOR, plus

a margin of 1.5% from 16 March 2015 until maturity date,

repayable 10 years from the issue date of 20 January 2010

(note 2). 17,997 -

(b) Ahli United Bank (UK) PLC

US Dollars – interest at six-month LIBOR plus ¾%, repayable in 2013. 2,267 2,267

Great Britain Pounds - interest at six-month LIBOR plus ¾%,

repayable in 2013. 2,483 2,558

Great Britain Pounds - interest at six-month LIBOR plus ¾%,

repayable in 2011. 1,625 1,675

US Dollars - interest at six-month LIBOR plus ¾%, repayable in

2011. 1,485 1,485

Great Britain Pounds - interest at six-month LIBOR plus ¾%,

repayable at 5 years and one day notice. 6,371 6,565

US Dollars - interest at six-month LIBOR plus ¾%, repayable at 5

years and one day notice. 5,817 5,817

618,955 602,216

20. Share capital

(a) Authorised :

2010 2009

US$ ’000 US$ ’000

Ordinary share capital

8,000 million shares (2009: 8,000 million shares) of

US$ 0.25 each 2,000,000 2,000,000

Preference share capital

1,000 million (2009:1000 million shares) Class A

preference shares of US$ 0.25 each 250,000 250,000

300 million (2009: 250 million) Non-Cumulative Fully

Convertible Class B preference shares

of US$ 0.25 each 75,000 62,500

(b) Issued and fully paid:

Ordinary share capital

4,907.9 million shares of US$ 0.25 each ( 2009:

4,781.0 million shares of US$ 0.25 each) During the

year, the Bank issued 52.7 million ordinary shares

of US$ 0.25 each upon conversion of Tranche III of

Class B preference shares (notes 20 (e) and (f)) and the

issue of 74.2 million shares as part of the dual tender

offer (note 2) 1,223,188 1,195,254

As at 31 December 2010, the Group held no treasury shares (2009: 3 million at a

cost of US$ 1,665 thousand).

Preference share capital

55.7 million Non-Cumulative Fully Convertible Class

B preference shares of US$ 0.25 each (2009 : 25.3

million Non-Cumulative Fully Convertible Class B

preference shares) (note 20 (f)). 13,937 6,321

(c) Conversion of Class A preference shares

As per the terms of issue of the Class A preference shares, 577.5 million ordinary

shares were issued, on 1 January 2008, upon conversion of 50% of Class A

preference shares, including the bonus adjustment for the years 2005 and 2006.

(d) The remaining 50% of the Class A preference shares are redeemable in cash on

1 January 2015, or at an earlier date after 1 January 2010 if exercised by the Bank,

at US$ 0.45 per share. These preference shares not subject to conversion (recorded

as subordinated liabilities) would receive preferential treatment over holders of

ordinary shares and Class B preference shares, but shall be subordinated to all other

liabilities of the Bank. The redeemable portion of the Class A preference shares

amounting to US$ 225 million (31 December 2009: US$ 225 million) is included in

subordinated liabilities (note 19(a)).

(e) An Employee Share Purchase Plan (“ESPP”) was established in accordance with

the Board of Directors’ approval and the subsequent approval of the Extraordinary

General Assembly of Shareholders meeting dated 5 October 2004 and further

regulatory approvals obtained from:

(i) Capital Markets Supervision Directorate of CBB vide their letters dated 2

September 2004, 9 November 2004 and 18 April 2005;

(ii) Banking Supervision Directorate of CBB vide their letters dated 5 September

2004 and 17 April 2005; and

(iii) Ministry of Commerce vide their letters dated 8 September 2004 and 9 April

2005.

Subsequent amendments were duly approved by the regulatory authorities.

As per the approved plan, the Non-Cumulative Fully Convertible Class B preference

shares (“Class B preference shares”) were authorised for issuance to the employees

of the Bank and its subsidiary in UK, in five annual tranches over a five-year period

commencing 1 January 2005 at prices determined by the Board of Directors within

set parameters. The Class B Preference Shares are mandatorily convertible into an

equivalent number of ordinary shares adjusted for any bonus share issues on the

conversion date of each tranche.


ahli united bank

20. Share capital continued

2010 annual report notes to the consolidated financial statements continued

The details of Class B preference shares issued, conversion dates of respective

issues and the resultant conversion effect duly adjusted for bonus share issues for

the years 2005, 2006, 2007 and 2008 and the rights issue adjustment factor for

2007 are as follows:

Number of Class B preference shares issued :

Conversion date Numbers in million

2010 2009

Tranche - I 1 January 2008 119.9 119.9

Tranche - II 1 January 2009 36.0 36.0

Tranche - III 1 January 2010 38.4 38.4

Tranche - IV, V and VI 1 January 2011 55.7 -

Total Issue Class B preference shares :

31 December 2007 250.0 194.3

Add: Bonus shares @ 5% for 2005 as approved at the Bank’s

Annual General Assembly of Shareholders’ meeting held on

27 March 2006. 12.5 9.7

262.5 204.0

Add: Bonus shares @ 10% for 2006 as approved at the Bank’s

Annual General Assembly of Shareholders’ meeting held on

25 March 2007. 26.2 20.4

288.7 224.4

Add: Rights issue conversion adjustment factor @ 2.834% as

approved at the Bank’s Extraordinary General Assembly of

Shareholders’ meeting held on 18 October 2007. 8.2 6.3

296.9 230.7

Less : Conversion of Tranche I of Class B preference shares (refer

(f) below). (142.3) (142.3)

154.6 88.4

Add: Bonus shares @ 10% for 2007 as approved at the Bank’s

Annual General Assembly of Shareholders’ meeting held on

3 March 2008. 15.5 8.8

170.1 97.2

Less : Conversion of Tranche II of Class B preference shares (refer

(f) below). (47.0) (47.0)

123.1 50.2

Add: Bonus shares @ 5% for 2008 as approved at the Bank’s

Annual General Assembly of Shareholders’ meeting held on

18 March 2009. 6.1 2.5

129.2 52.7

Less : Conversion of Tranche III of Class B preference shares (refer

(f) below). (52.7) -

Total number of ordinary shares when

converted (refer (g) below) 76.5 52.7

(f) Conversion of Tranche I, II and III of Class B preference shares

As per the terms of the issue of the Employee Share Purchase Plan (ESPP), upon

conversion of Tranche-I of the Class B preference shares on 1 January 2008,

Tranche II of the Class B preference shares on 1 January 2009 and Tranche III of the

Class B preference shares on 1 January 2010, 142.3 million ordinary shares, 47.0

million ordinary shares and 52.7 million ordinary shares respectively were issued,

including the bonus adjustment for the years 2005, 2006, 2007 and 2008 and the

rights issue adjustment factor for 2007.

Issue of Tranche IV, V and VI of Class B preference shares

During the year, following the recommendation of the Board of Directors and

Extraordinary General Assembly and regulatory approvals, the Bank issued 55.7

million Class B non-cumulative fully convertible preference shares (Class B shares)

under Tranches IV, V and VI at prices of US$ 1.12, US$ 0.63 and US$ 0.39 per

share respectively. These shares are mandatorily convertible into an equal number of

ordinary shares adjusted for any bonus share issues on the conversion date of each

tranche. The fair values of the Tranches, estimated as of the grant date, were US$

1.39, US$ 0.63 and US$ 0.435 per share respectively. The difference between issue

price and fair value is amortised over the vesting period and included under “staff

costs” in the consolidated statement of income.

(g) On 1 January 2011, the 55.7 million Class B non-cumulative fully convertible

preference shares were converted, including the effect of prior year ordinary bonus share

issues, to 76.5 million ordinary shares. These ordinary shares will rank pari-passu with

the other ordinary shares in issue (refer (f) above). Consequent to the above conversion,

the total number of ordinary shares in issue as on 1 January 2011 is 4,984.3 million.

21. Reserves

a) Share premium

The share premium arising on the issue of ordinary and preference shares is not

distributable except in such circumstances as stipulated in the Bahrain Commercial

Companies Law.

b) Capital reserve

As required by the Bahrain Commercial Companies Law, any profit on the sale of

treasury stock is transferred to a capital reserve. The reserve is not distributable except

in such circumstances as stipulated in the Bahrain Commercial Companies Law.

c) Statutory reserve

As required by the Bahrain Commercial Companies Law and the Bank’s Articles

of Association, 10% of the net profit is transferred to a statutory reserve on an

annual basis. The Bank may resolve to discontinue such transfers when the reserve

totals 50% of the paid up capital. The reserve is not distributable except in such

circumstances as stipulated in the Bahrain Commercial Companies Law.

d) Property revaluation reserve

The revaluation reserve arising on revaluation of freehold land is not distributable except

in such circumstances as stipulated in the Bahrain Commercial Companies Law.

e) Foreign exchange translation reserve

It comprises of translation effects arising on consolidation of subsidiaries, non-

monetary equity investments and investments in associates.

f) Available-for-sale reserve

This reserve represents changes in the fair values of available-for-sale investments.

g) Cash flow hedge reserve

This reserve represents the effective portion of gain or loss on the Group’s cash flow

hedging instruments.

h) Employee share purchase plan reserve

The Group operates an employees’ share purchase plan (ESPP) for certain eligible

employees through the issuance of Non-Cumulative Fully Convertible Class B

Preference Shares. The difference between the issue price and the fair value of the

shares at the grant date is amortised over the vesting period in the consolidated

statement of income with a corresponding effect to ESPP reserve under

consolidated statement of changes in equity. Upon conversion of these shares, the

fair value reserve is transferred to share premium.

57


ahli united bank

21. Reserves continued

i) Movements in other reserves

58

2010 annual report notes to the consolidated financial statements continued

Capital

reserve

Property

revaluation

reserve

Foreign

exchange

translation

reserve

Available-

for-sale

reserve

Cumulative changes in

Cash flow

hedge

reserve ESPP reserve

Total other

reserves

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balance at 1 January 2010 307 73,384 11,628 (90,887) (29,825) 2,397 (32,996)

Currency translation adjustments - - (16,034) - - - (16,034)

Share of changes in fair value reserve of associates - - - 1,335 - - 1,335

Transfers to consolidated statement of income - - - 956 2,455 - 3,411

Net fair value movements during the year - - - 12,528 (6,303) - 6,225

Fair value amortisation of share based transactions (note 23) - - - - - 1,689 1,689

Sale of treasury shares 118 - - - - - 118

Conversion of preference shares (note 20(f)) - - - - - (2,397) (2,397)

Revaluation of freehold land - (19,542) - - - - (19,542)

Balance at 31 December 2010 425 53,842 (4,406) (76,068) (33,673) 1,689 (58,191)

Balance at 1 January 2009 307 121,106 38,419 (251,621) (85,652) 6,328 (171,113)

Currency translation adjustments - - (26,791) - - - (26,791)

Share of changes in fair value reserve of associates - - - (1,236) - - (1,236)

Transfers to consolidated statement of income on

sale / impairment of available-for-sale investments - - - 21,785 - - 21,785

Transfers to consolidated statement of income - - - - 38,661 - 38,661

Net fair value movements during the year - - - 140,185 17,166 - 157,351

Fair value amortisation of share based transactions (note 23) - - - - - 1,108 1,108

Conversion of preference shares (note 20(f)) - - - - - (5,039) (5,039)

Revaluation of freehold land - (47,722) - - - - (47,722)

Balance at 31 December 2009 307 73,384 11,628 (90,887) (29,825) 2,397 (32,996)

j) Dividends paid and proposed

Proposed for approval at the forthcoming Annual

General Assembly of Shareholders Meeting

2010

US$ ’000

Cash dividend on the Class B Preference shares @ 12 month

LIBOR plus 1.5% margin as per terms 149

Cash dividend on the Ordinary shares @ US cents 2.5 per share 122,697

Bonus share issue None

Declared and paid during the year

2009

US$ ’000

Cash dividend on the Class B Preference shares @ US cents 2.9

per share (2009: US cents 4.7 per share) 1,129

Cash dividend on the Ordinary shares @ US cents 2.0 per share

(2009: US cents 2.5 per share) 97,043

Bonus share issue None

22. Taxation

Consolidated balance sheet (note 14):

2010 2009

US$ ’000 US$ ’000

- Current tax asset 3,147 5,810

- Deferred tax liability (2,816) (1,205)

Consolidated statement of income

331 4,605

- Current tax expense on foreign operations 15,163 5,444

- Deferred tax expense on foreign operations 1,611 1,312

16,774 6,756

The Group’s tax expense includes all direct taxes that are accrued and paid on

taxable profits of entities to the authorities in the respective country of incorporation,

in accordance with the tax laws prevailing in those jurisdictions. Consequently, it is

not practical to provide a reconciliation between the accounting and taxable profits

together with the details of effective tax rates. Tax expense primarily relates to

AUBUK, AUBE, AUBK and CBIQ.

23. Earnings per share

Basic earnings per share is calculated by dividing the net profit for the year

attributable to the Bank’s ordinary equity shareholders less Class B preference share

dividends, by the weighted average number of ordinary shares outstanding during

the period.

Diluted earnings per share amounts are calculated by dividing the net profit

attributable to the Bank’s ordinary equity shareholders by the weighted average

number of ordinary shares outstanding during the year plus the weighted average

number of ordinary shares that would be issued on the conversion of Class B

preference shares into ordinary shares.

The convertible subordinated debt issued (note 19(a)) is anti-dilutive for 2010 and

2009 and therefore ignored in calculating diluted earnings per share. The number of

ordinary shares potentially issuable upon conversion of this debt amounts to 161.3

million shares as at 31 December 2010 ( 2009: 161.3 million).

The following reflects the income and share data used in basic and diluted earnings

per share computations :

Net profit for basic earnings per share computation

2010 2009

US$ ’000 US$ ’000

Net profit attributable to Bank's equity shareholders 265,499 200,718

(Less): Class B preference share dividend (note 21(j)) (149) (1,129)

Adjusted net profit attributable to Bank’s ordinary

equity shareholders for basic earnings per share 265,350 199,589


ahli united bank

23. Earnings per share continued

2010 annual report notes to the consolidated financial statements continued

Net profit for diluted earnings per share computation

2010 2009

US$ ’000 US$ ’000

Net profit attributable to Bank’s equity shareholders

before preference share dividend 265,499 200,718

Add: Staff costs - fair value amortisation of share

based transactions (note 21 (i)) 1,689 1,108

Adjusted net profit attributable to Bank’s ordinary

equity shareholders for diluted earnings per share 267,188 201,826

2010 2009

Number of shares

(in millions)

Weighted average ordinary shares outstanding during

the period adjusted for bonus shares 4,887 4,781

Less :- Weighted average treasury shares (1) (2)

Net weighted average number of ordinary shares for

basic earnings per share 4,886 4,779

Add: Effect of dilution – Class B preference shares

(note 20(e)) 77 40

Weighted average number of ordinary shares for

diluted earnings per share 4,963 4,819

24. Cash and cash equivalents

Cash and cash equivalents included in the consolidated statement of cash flows

include the following balance sheet amounts:

2010 2009

US$ ’000 US$ ’000

Cash and balances with central banks, excluding

mandatory reserve deposits (note 9) 183,137 86,708

Deposits with banks and other financial institutions -

with an original maturity of three months or less 2,780,021 2,092,768

25. Related party transactions

2,963,158 2,179,476

The Group enters into transactions with major shareholders, associates, directors,

senior management and companies which are controlled, jointly controlled or

significantly influenced by such parties in the ordinary course of business at arm’s

length. All the loans and advances to related parties are performing and are free of

any provision for possible loan losses.

The income, expense and the period end balances in respect of related parties

included in the consolidated financial statements were as follows:

2010

Major

shareholders Associates

Directors

and senior

management Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Interest income - 773 3,010 3,783

Interest expense 84,389 375 3 84,767

Fees and commissions (net) - 4,075 - 4,075

Deposits with banks and other

financial institutions 25 78,409 - 78,434

Loans and advances - - 214,409 214,409

Deposits from banks and other

financial institutions - 28,444 - 28,444

Customers’ deposits (a) 4,734,309 17,206 14,816 4,766,331

Subordinated liabilities 91,596 - - 91,596

Commitments and contingent

liabilities (notional) - 5,456 2,779 8,235

Derivatives (notional) - 158,028 - 158,028

2009

Major

shareholders Associates

Directors

and senior

management Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Interest income - 809 4,731 5,540

Interest expense 124,875 28 58 124,961

Fees and commissions (net) - 3,103 - 3,103

Deposits with banks and other

financial institutions 24 162,859 - 162,883

Loans and advances - - 196,597 196,597

Deposits from banks and other

financial institutions - 28,499 - 28,499

Customers’ deposits (a) 4,097,106 21,341 15,555 4,134,002

Subordinated liabilities 92,705 - - 92,705

Commitments and contingent

liabilities (notional) - 5,000 12,034 17,034

Derivatives (notional) - 165,941 - 165,941

(a) Customers’ deposits include deposits from GCC government-owned institutions

totaling to US$ 4,710 million (31 December 2009: US$ 4,091 million).

The compensation of key management personnel of the Group included under staff

costs was as follows:

2010 2009

US$ ’000 US$ ’000

Short term employee benefits 14,240 14,078

End of service benefits 947 831

Post employment benefits 261 358

Total benefits 15,448 15,267

Included in short term employee benefits is the fair value amortisation charge relating

to share based transactions of US$ 0.6 million (2009: US$ 0.3 million).

26. Employee benefits

The Group operates Defined Benefit and Defined Contribution retirement benefit

schemes for its employees in accordance with the local laws and regulations in the

countries in which it operates. The costs of providing retirement benefits including

current contributions, are charged to the consolidated statement of income.

Defined benefit plans

The charge to the consolidated statement of income on account of end of

service benefits for the year amounted to US$ 8,486 thousand (2009: US$ 7,095

thousand). There are no material differences between the carrying amount of the

provision for end of service benefits at both 31 December 2010 and 2009 and the

amount arising from an actuarial computation thereof.

AUBUK’s defined benefit pension scheme was closed to future service accruals on

31 March 2010. The charge to consolidated statement of income is calculated in

accordance with IAS 19 corridor method, which is the deficit of the actuarial value of

assets over the actuarial value of liabilities, outside of the defined corridor, over the

average remaining service lives of the scheme.

Defined contribution plans

The Group contributed US$ 5,481 thousand (2009: US$ 6,898 thousand) during the

year towards defined contribution plans. The Group’s obligations are limited to the

amounts contributed to various schemes.

27. Managed funds

Funds administrated on behalf of customers to which the Group does not have legal

title are not included in the consolidated balance sheet. The total market value of all

such funds at 31 December 2010 was US$ 4,422 million (2009: US$ 4,190 million).

59


ahli united bank

28. Derivatives

60

2010 annual report notes to the consolidated financial statements continued

In the ordinary course of business the Group enters into various types of

transactions that involve derivative financial instruments. A derivative financial

instrument is a financial contract between two parties where payments are

dependent upon movements in price in one or more underlying financial

instruments, reference rates or indices.

Derivatives include financial options, futures and forwards, interest rate swaps

and currency swaps, which create rights and obligations that have the effect of

transferring between the parties of the instrument one or more of the financial risks

inherent in an underlying primary financial instrument. On inception, a derivative

financial instrument gives one party a contractual right to exchange financial

assets or financial liabilities with another party under conditions that are potential

favourable, or a contractual obligation to exchange financial assets or financial

liabilities with another party under conditions that are potentially unfavourable.

However, they generally do not result in a transfer of the underlying primary financial

instrument on inception of the contract, nor does such a transfer necessarily take

place on maturity of the contract. Some instruments embody both a right and an

obligation to make an exchange. Because the term of the exchange are determined

on inception of the derivative instruments, as prices in financial markets change

those terms may become either favourable or unfavourable.

The table below shows the net fair values of derivative financial instruments together

with the notional amounts. The notional amount is the amount 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 neither indicative of the market risk nor

credit risk.

Derivatives held for trading:

Notional

amount

2010

Derivative

assets

Derivative

liabilities

US$ ’000 US$ ’000 US$ ’000

Interest rate swaps 1,432,793 46,294 44,661

Forward foreign exchange contracts 5,372,623 72,999 62,971

Forward rate agreements 1,300,000 1,277 205

Options 1,705,243 1,802 998

Interest rate futures 3,136,375 432 370

Credit derivatives 125,000 50 863

Derivatives held as fair value hedges:

Interest rate swaps 2,079,385 12,219 97,645

Currency swaps 150,000 6,420 -

Options 50,535 4,558 -

Derivatives held as cash flow hedges:

Interest rate swaps 2,110,601 2,196 35,869

Derivatives held for trading:

17,462,555 148,247 243,582

Notional

amount

2009

Derivative

assets

Derivative

liabilities

US$ ’000 US$ ’000 US$ ’000

Interest rate swaps 1,634,354 44,967 44,957

Forward foreign exchange contracts 5,070,261 106,652 99,003

Forward rate agreements 1,250,000 3,922 254

Options 226,721 52 170

Interest rate futures 1,500,000 216 216

Credit derivatives 135,000 55 2,524

Derivatives held as fair value hedges:

Interest rate swaps 2,186,812 25,346 61,154

Currency swaps 165,871 2,379 3,417

Options 142,014 5,973 -

Derivatives held as cash flow hedges:

Interest rate swaps 654,084 1,767 31,592

12,965,117 191,329 243,287

Cash flow hedges

The schedule of forecast principal balances on which the expected interest cash

flows arise and their impact on the consolidated financial statements as at 31

December 2010 and 2009 is as follows:

At 31 December 2010

3 months

or less

More than

3 months up

to 1 year

More than

1 year up

to 5 years

More than

5 years Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Cash outflows from

liabilities 21,725 11,174 59,803 9,483 102,185

At 31 December 2009

Cash outflows from

liabilities 11,129 1,367 57,311 34,387 104,194

No hedge ineffectiveness on cash flow hedges was recognised in 2010 and 2009.

Fair value hedges

(Losses) gains arising from fair value hedge instruments during 2010 were (US$

51,489) thousand (2009 : US$ 95,304 thousand) while the gains (losses) on the

hedged items attributable to risk were US$ 51,489 thousand (2009 : US$ (95,304)

thousand). These gains and losses are included in “trading income-net” in the

consolidated statement of income during 2010 and 2009.

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-the-counter 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 differentials 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.

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.

Derivatives held for trading purposes

Most of the Group’s derivative trading activities relate to customer driven

transactions as well as positioning and arbitrage. Positioning involves managing

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.

Derivatives held for hedging purposes

The Group has adopted a comprehensive system for the measurement and

management of risk.

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 movements.

This is achieved by hedging specific financial instruments and forecasted

transactions, as well as strategic hedging against overall balance sheet exposures.

The Group uses options and currency swaps to hedge against specifically

identified currency and equity risks. In addition, the Group uses interest rate swaps

and forward rate agreements to hedge against the interest rate risk arising from

specifically identified, or a portfolio of, fixed interest rate investments and loans. The

Group also uses interest rate swaps to hedge against the cash flow risks arising

on certain floating rate deposits. 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 fair value hedges.


ahli united bank

28. Derivatives continued

2010 annual report notes to the consolidated financial statements continued

Hedging of interest rate risk is also carried out by monitoring the duration of

assets and liabilities and entering into interest rate swaps to hedge net interest

rate exposures. Since hedging of net positions does not qualify for special hedge

accounting, related derivatives are accounted for the same way as trading

instruments.

29. Commitments and contingent liabilities

Credit-related commitments

Credit-related commitments include commitments to extend credit, standby letters

of credit, guarantees and acceptances which are designed to meet the requirements

of the Group’s customers.

Commitments to extend credit represent contractual commitments to make loans

and revolving credits available and generally have fixed expiration dates or other

termination clauses. Since commitments may expire without being drawn upon, the

total contract amounts do not necessarily represent future cash requirements.

Standby letters of credit, guarantees and acceptances (standby facilities) commit

the Group to make payments on behalf of customers contingent upon their failure to

perform under the terms of the contract. Standby facilities would have market risk if

issued or extended at a fixed rate of interest. However, these contracts are primarily

made at floating rates.

The Group has the following credit related commitments:

Commitments on behalf of customers:

2010 2009

US$ ’000 US$ ’000

Guarantees 1,448,486 1,395,462

Acceptances 70,196 45,394

Letters of credit 372,315 248,337

Irrevocable commitments:

1,890,997 1,689,193

Undrawn loan commitments 1,054,589 892,493

The Group’s commitments in respect of non-cancellable operating leases were as follows:

2010 2009

US$ ’000 US$ ’000

Within one year 1,877 2,017

Between one to five years 7,363 7,652

Over five years 11,001 13,066

30. Segment information

20,241 22,735

For management purposes the Group is organised into three major business

segments:

Retail Banking Principally handling individual customers’ deposit and

current accounts, providing consumer loans, residential

mortgages, overdrafts, credit cards and fund transfer

facilities.

Corporate Banking,

Treasury and Investments

Private Banking and

Wealth Management

Principally handling loans and other credit facilities,

and deposit and current accounts for corporate and

institutional customers and providing money market,

trading and treasury services, as well as management of

the Group’s funding.

Principally servicing high net worth clients through a range

of investment products, funds, credit facilities, trusts and

alternative investments.

These segments are the basis on which the Group reports its primary segment

information. Transactions between segments are conducted at approximate market

rates on an arm’s length basis. Interest is charged/credited to business segments

based on a pool rate which approximates the cost of funds.

Segmental information for the period was as follows:

Year ended 31 December 2010:

Retail

Banking

Corporate

Banking,

Treasury and

Investments

Private

Banking

and Wealth

Management Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Net interest income 107,855 365,958 34,961 508,774

Intersegment interest 14,209 (11,301) (2,908) -

Fees and commissions - net 33,403 67,882 22,034 123,319

Other operating income 3,778 78,159 29 81,966

OPERATING INCOME 159,245 500,698 54,116 714,059

Provision for loan losses and

contingencies - net 14,331 132,946 4,394 151,671

NET OPERATING INCOME 144,914 367,752 49,722 562,388

Operating expenses 95,972 130,067 27,376 253,415

PROFIT BEFORE TAX 48,942 237,685 22,346 308,973

Tax expense 4,231 9,837 2,706 16,774

NET PROFIT FOR THE YEAR 44,711 227,848 19,640 292,199

Less : Attributable to non-controlling interests 26,700

NET PROFIT ATTRIBUTABLE TO THE BANK’S EQUITY SHAREHOLDERS 265,499

Segment assets 2,793,495 20,467,566 1,060,300 24,321,361

Goodwill and other intangible

assets (note 15) 247,644 322,221 146,493 716,358

Investment in associates and

joint venture 605,679

Unallocated assets 814,063

TOTAL ASSETS 26,457,461

Segment liabilities 3,176,812 17,602,918 2,231,867 23,011,597

Unallocated liabilities 693,689

TOTAL LIABILITIES 23,705,286

Year ended 31 December 2009:

Retail

Banking

Corporate

Banking,

Treasury and

Investments

Private

Banking

and Wealth

Management Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Net interest income 142,088 292,972 31,525 466,585

Intersegment interest (5,352) 10,716 (5,364) -

Fees and commissions - net 50,138 64,381 24,011 138,530

Other operating income 4,044 86,902 325 91,271

OPERATING INCOME 190,918 454,971 50,497 696,386

Provision for loan losses and

contingencies - net 36,784 191,261 91 228,136

NET OPERATING INCOME 154,134 263,710 50,406 468,250

Operating expenses 104,296 105,768 25,344 235,408

PROFIT BEFORE TAX 49,838 157,942 25,062 232,842

Tax expense 1,861 3,107 1,788 6,756

NET PROFIT FOR THE YEAR 47,977 154,835 23,274 226,086

Less : Attributable to non-controlling interests 25,368

NET PROFIT ATTRIBUTABLE TO THE BANK’S EQUITY SHAREHOLDERS 200,718

Segment assets 3,076,821 17,285,982 1,418,954 21,781,757

Goodwill and other intangible

assets (note 15) 217,194 276,101 130,991 624,286

Investment in associates and

joint venture 537,099

Unallocated assets 630,841

TOTAL ASSETS 23,573,983

Segment liabilities 2,901,758 15,684,112 1,813,731 20,399,601

Unallocated liabilities 592,951

TOTAL LIABILITIES 20,992,552

61


ahli united bank

Geographic segmentation

62

2010 annual report notes to the consolidated financial statements continued

30. Segment information continued

Although the management of the Group is based primarily on business segments,

the Group’s geographic segmentation is based on the countries where the Bank and

its subsidiaries are incorporated. Thus, the operating income generated by the Bank

and its subsidiaries based in the GCC are grouped together, while those generated

by the Bank’s subsidiaries located outside the GCC region is grouped under “Rest

of the World”. Similar segmentation is followed for the distribution of total assets.

The following table shows the distribution of the Group’s operating income and total

assets by geographical segment:

GCC Rest of the World Total

2010 2009 2010 2009 2010 2009

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Operating income 559,219 574,571 154,840 121,815 714,059 696,386

Total assets 18,837,923 16,700,194 7,619,538 6,873,789 26,457,461 23,573,983

Risk Management

31. Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge a

financial obligation and cause the other party to incur a financial loss. In the case

of derivatives this is limited to positive fair values. The Group attempts to control

credit risk by monitoring credit exposures, limiting transactions with specific

counterparties, and continually assessing the creditworthiness of counterparties.

a) Concentration risk

Concentrations of credit risk arise when a number of counterparties are engaged in

similar business activities, or activities in the same geographic region, or have similar

economic features that would cause their ability to meet contractual obligations to

be similarly affected by changes in economic, political or other conditions.

Concentrations of credit risk indicate the relative sensitivity of the Group’s

performance to developments affecting a particular industry or geographic location.

The Group manages its credit risk exposure so as to avoid over concentration

to any sector or geographic location. It also obtains security where appropriate.

Guidelines are in place regarding the acceptability of types of collateral and valuation

parameters.

The principal collateral types are as follows:

• In the personal sector – mortgages over residential properties and assignments

over salary income;

• In the commercial sector – charges over business assets such as premises,

inventories, receivables and corporate or bank guarantees;

• In the commercial real estate sector – charges over the properties being financed;

and

• In the financial sector – charges over financial instruments, such as debt

securities and equities.

The Group monitors the market value of collateral and requests additional collateral

when necessary in accordance with the underlying agreement.

Details of the concentration of the loans and advances by industry sector and

geographic region are disclosed in note 10(a) and 10(b) respectively.

Details of the industry sector analysis and the geographical distribution of the

assets, liabilities and commitments on behalf of customers are set out in note 32.

b) 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. The maximum exposure is shown gross, before the effect of

mitigation through the use of master netting and collateral agreements, but after

provision for impairment where applicable.

Gross

maximum

exposure

Gross

maximum

exposure

2010 2009

US$ ’000 US$ ’000

Balances with central banks 280,389 289,533

Treasury bills and bonds 301,127 969,114

Deposits with banks and other financial institutions 4,767,843 3,100,446

Loans and advances 14,477,713 13,299,999

Non-trading investments 4,047,110 3,481,447

Other assets 410,670 415,225

Total 24,284,852 21,555,764

Contingent liabilities 1,890,997 1,689,193

Undrawn loan commitments 1,054,589 892,493

Total credit related commitments 2,945,586 2,581,686

Total credit risk exposure 27,230,438 24,137,450

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.

c) Credit quality per class of financial assets

The table below shows distribution of financial assets neither past due nor impaired.

At 31 December 2010

High

standard

grade

Neither past due nor impaired

Standard

grade Total

US$ ’000 US$ ’000 US$ ’000

Balances with central banks 259,406 20,983 280,389

Treasury bills and bonds 301,127 - 301,127

Deposits with banks and other

financial institutions 4,368,961 398,882 4,767,843

Loans and advances

Retail 750,335 2,024,543 2,774,878

Corporate 7,137,208 4,391,025 11,528,233

Non trading investments

Available-for-sale 2,303,491 183,922 2,487,413

Held to maturity - 21,220 21,220

Loans and receivables 1,394,785 143,692 1,538,477

Other assets - derivatives 148,247 - 148,247


ahli united bank

31. Credit risk continued

2010 annual report notes to the consolidated financial statements continued

The table below shows distribution of financial assets neither past due nor impaired.

At 31 December 2009

High

standard

grade

Neither past due nor impaired

Standard

grade Total

US$ ’000 US$ ’000 US$ ’000

Balances with central banks 289,533 - 289,533

Treasury bills and bonds 863,210 105,904 969,114

Deposits with banks and other

financial institutions 3,018,249 82,197 3,100,446

Loans and advances

Retail 654,746 2,338,258 2,993,004

Corporate 6,401,794 3,602,247 10,004,041

Non trading investments

Available-for-sale 1,646,099 157,123 1,803,222

Held to maturity - 15,927 15,927

Loans and receivables 1,554,874 133,660 1,688,534

Other assets - derivatives 191,329 - 191,329

It is the Group’s policy to maintain consistent internal risk ratings across the credit

portfolio. The credit quality of the portfolio of loans and advances that were neither

past due nor impaired can be assessed by reference to the Group’s internal credit

rating system. This facilitates focused portfolio management of the inherent level of

risk across all lines of business. The credit quality ratings disclosed above can be

equated to the following risk rating grades:

Credit quality rating Risk rating Definition

High standard Risk rating 1 to 4 Undoubted through to good credit

Standard Risk rating 5 to 7 Satisfactory through to adequate

risk

credit risk

The risk rating system is supported by a various financial analytics and qualitative

market information for the measurement of counterparty risk.

There are no financial assets which are past due but not impaired as at 31

December 2010 and 2009 other than those disclosed under note 10(c).

32. Concentration analysis

The distribution of assets, liabilities and commitments on behalf of customers by

geographic region and industry sector was as follows:

Geographic region:

2010

Assets Liabilities

Commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

GCC countries 18,837,923 17,814,006 1,564,830

United Kingdom (UK) 1,795,535 468,540 2,120

Europe (excluding UK) 1,502,777 1,023,124 80,476

United States of America 787,733 251,977 17,330

Asia (excluding GCC) 832,533 2,133,461 17,526

Rest of the world (including Arab

Republic of Egypt) 2,700,960 2,014,178 208,715

Geographic region:

26,457,461 23,705,286 1,890,997

GCC countries 16,700,194 14,703,507 1,423,469

United Kingdom (UK) 1,404,250 797,392 5,690

Europe (excluding UK) 1,815,378 587,931 32,488

United States of America 795,051 224,055 18,619

Asia (excluding GCC) 576,650 2,317,334 12,845

Rest of the world (including Arab

Republic of Egypt) 2,282,460 2,362,333 196,082

2009

23,573,983 20,992,552 1,689,193

Industry sector:

2010

Assets Liabilities

Commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Banks and other financial institutions 10,014,756 10,270,624 422,891

Consumer / Personal 3,343,687 3,603,717 33,572

Trading, manufacturing and services 4,087,068 1,487,980 585,455

Real estate / construction 5,053,331 433,685 293,165

Government / public sector 1,263,028 3,572,867 7,877

Others 2,695,591 4,336,413 548,037

Industry sector:

26,457,461 23,705,286 1,890,997

Banks and other financial institutions 8,212,699 7,809,843 471,520

Consumer / Personal 3,301,674 3,100,701 24,894

Trading, manufacturing and services 3,917,353 974,854 518,325

Real estate / construction 4,503,192 375,195 181,345

Government / public sector 1,166,639 4,557,428 -

Others 2,472,426 4,174,531 493,109

33. Market risk

2009

23,573,983 20,992,552 1,689,193

Market risk is the risk of potential financial loss that may arise from adverse changes

in the value of a financial instrument or portfolio of financial instruments due to

movements in interest rates, foreign exchange rates, equity prices, commodity

prices and derivatives. This risk arises from asset - liability mismatches, changes

that occur in the yield curve, foreign exchange rates and changes in volatilities/

implied volatilities in the market value of derivatives. The Group classifies exposures

to market risk into either trading or non-trading portfolios. Given the Group's low

risk strategy, aggregate market risk levels are considered low. The Group utilises

Value-at-Risk (VaR) models to assist in estimating potential losses that may arise

from adverse market movements in addition to non-quantitative risk management

techniques. The market risk for the trading portfolio is managed and monitored on

a VaR methodology which reflects the inter-dependency between risk variables.

Non-trading portfolios are managed and monitored using stop loss limits and other

sensitivity analyses. The data given below is representative of the information during

the year.

(a) Market risk-trading

The Group calculates Historical Simulation VaR using a one day holding period at a

confidence level of 95%, which takes into account the actual correlations observed

historically between different markets and rates.

Since VaR is an integral part of the Group's market risk management, VaR limits

have been established for all trading operations and exposures are reviewed daily

against the limits by management. Actual outcomes are compared to the VaR model

derived predictions on a regular basis as a means of validating the assumptions and

parameters used in the VaR calculation.

The table below summarises the risk factor composition of the VaR including the

correlative effects intrinsic to the trading book:

Foreign

exchange

Interest

rate

Effects of

correlation Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

2010 - 31 December 549 (7) 6 548

2009 - 31 December (30) 506 1 477

63


ahli united bank

33. Market risk continued

(b) Market risk-non-trading

Interest rate risk

64

2010 annual report notes to the consolidated financial statements continued

Interest rate risk arises from the possibility that changes in interest rates will affect

the value of financial instruments or the future profitability of the Group. The Group

is exposed to interest rate risk as a result of mismatches or gaps in the amounts of

assets and liabilities and off balance sheet instruments that mature or reprice in a

given period. The Group measures and manages interest rate risk by establishing

levels of interest rate risk by setting limits on the interest rate gaps for stipulated

periods. Interest rate gaps on assets and liabilities are reviewed on a weekly basis

and hedging strategies used to reduce the interest rate gaps to within the limits

established by the Bank's Board of Directors.

The following table demonstrates the sensitivity of the Group's net interest income

to a change in interest rates, with all other variables held constant. The sensitivity

is based on the floating rate financial assets and financial liabilities held at 31

December 2010 including the effect of hedging instruments. Equity is not sensitive

to changes in interest rates as there are no fixed rate instruments held in the

available-for-sale portfolio.

Sensitivity analysis - interest rate risk

2010 2009

US$ ’000 US$ ’000

at 10 bps - increase (+) / decrease (-) + / - 1,021 958

at 25 bps - increase (+) / decrease (-) + / - 2,552 2,396

Currency risk

Currency risk is the risk that the functional currency value of a financial instrument

will fluctuate due to changes in foreign exchange rates.

The risk management process manages the Group’s exposure to fluctuations in

foreign exchange rates (currency risk) through the asset and liability management

process. It is the Group’s policy to reduce its exposure to currency fluctuations

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 a daily basis and hedging strategies used to ensure

positions are maintained within established limits.

Sensitivity analysis - currency risk

All foreign currency exposures with the exception of investments in subsidiaries

and associates are captured as part of the trading book. The risk of the exposures

are subject to quantification via a daily VaR calculation, the results of which are

disclosed in note 33 (a).

The effect of foreign currency translation on the Group's investments in subsidiaries

and associates are reported under the "foreign exchange translation reserve" under

the note 21(i).

Equity price risk

Equity price risk arises from fluctuations in equity indices and prices. The Board

has set limits on the amount and type of investments that may be accepted. This

is monitored on an ongoing basis by the Group Risk Committee. The non-trading

equity price risk exposure arises from the Group's investment portfolio.

The effect on equity valuations (as a result of a change in the fair value of equity

investments held as available-for-sale) due to a reasonably possible change in equity

indices, with all other variables held constant is as follows:

Change in

equity

indices

2010 2009

Effect on

equity

Effect on

equity

Market indices % US$ ’000 US$ ’000

Doha Securities Market +10% - 606

Kuwait Stock Exchange +10% 2,475 1,616

Sensitivity to equity price movements will be on a symmetric basis, as financial

instruments giving rise to non-symmetric movements are not significant.

34. Fair value of financial instruments

The fair value of financial instruments, with the exception of unquoted equity

investments that are carried at cost and held to maturity investments, approximate

their carrying values.

The Group's primary medium and long-term financial liabilities are the term debts

and subordinated liabilities. The fair values of these financial liabilities are not

materially different from their carrying values, since these liabilities are repriced

at intervals of three or six months, depending on the terms and conditions of the

instrument and the resultant applicable margins approximate the current spreads

that would apply for borrowings with similar maturities.

The fair value of unquoted equity investments cannot be determined with sufficient

accuracy, as future cash flows are not determinable. The Group has unquoted

equity investments carried at cost amounting to US$ 136.3 million (2009: US$ 123.8

million) where the impact of changes in equity prices will only be reflected when the

investment is sold or deemed to be impaired, when the consolidated statement of

income will be impacted; or when a material third party transaction in the investment

gives a reliable indication of fair value which will be reflected in equity.

The Group uses the following hierarchy for determining and disclosing the fair value

of financial instruments by valuation technique:-

Level 1 : Quoted (unadjusted) prices in active markets for identical assets or liabilities

Level 2: Other techniques for which all inputs which have a significant effect on the

recorded fair value are observable, either directly or indirectly.

Level 3 : techniques which use inputs which have a significant effect on the

recorded fair value that are not based on observable market data.

2010

Level 1 Level 2 Total

US$ ’000 US$ ’000 US$ ’000

Trading securities 130 - 130

Bonds 2,185,704 301,709 2,487,413

Equities and funds 155,335 197,987 353,322

Derivative assets 79,851 68,396 148,247

Derivative liabilities (63,342) (180,240) (243,582)

2,357,678 387,852 2,745,530

2009

Level 1 Level 2 Total

US$ ’000 US$ ’000 US$ ’000

Trading securities 376 - 376

Bonds 1,505,648 297,574 1,803,222

Equities and funds 175,340 178,580 353,920

Derivative assets 107,063 84,266 191,329

Derivative liabilities (98,247) (145,040) (243,287)

1,690,180 415,380 2,105,560

There are no financial instruments that qualify for classification under Level 3 as at

31 December 2010 and 2009. During the year 2010 there have been no transfers

between Levels 1, 2 and 3.

For an explanation of valuation techniques used to value these financial instruments

refer to note 3.3 (f).

Investments in associates include quoted equity investments of Ahli Bank Q.S.C.

on the Doha Securities Market, and Ahli Bank S.A.O.G. on the Muscat Securities

Market. The table below shows the market value based on closing price as at 31

December 2010 and carrying value of these investments :

2010 2009

US$ (millions) US$ (millions)

Market value 591 433

Carrying value 499 483

Impairment testing of the Group’s investments in associates was carried out as

required under IAS 28 and IAS 36 and the results indicated no impairment.


ahli united bank

35. Liquidity risk

2010 annual report notes to the consolidated financial statements continued

Liquidity risk is the risk that an institution will be unable to meet its funding

requirements in an orderly and cost efficient manner. Market disruptions or a credit

downgrade, for example, may reduce the availability of certain sources of funding.

To guard against this risk, management has diversified funding sources and assets

are managed with liquidity in mind, maintaining a healthy balance of cash, cash

equivalents and readily marketable securities.

The Group Asset and Liability Committee (GALCO) monitors the maturity profile

on an overall basis with ongoing liquidity monitoring by the Group's treasury

Assets

department. The Group's standards for the governance of liquidity risk are

documented in the Group Liquidity Policy and Group Liquidity Contingency Plan.

The maturity profile of the assets and liabilities at 31 December 2010 given below

reflects management's best estimates of the maturities of assets and liabilities.

These have been determined on the basis of the remaining period at the balance

sheet date to the contractual maturity date, except in the case of customer

deposits. The liquidity profile of customer deposits has been determined on the

basis of the effective maturities indicated by the Group’s deposit retention history.

Less than

1 year

Above

1 year Undated Total

US$ '000 US$ ‘000 US$ ‘000 US$ ‘000

Cash and balances with central banks 361,376 - - 361,376

Treasury bills and bonds 301,127 - - 301,127

Trading securities 130 - - 130

Deposits with banks and other financial institutions 4,766,355 1,488 - 4,767,843

Loans and advances 5,223,277 9,254,436 - 14,477,713

Non-trading investments 849,819 3,563,353 - 4,413,172

Investments in associates and joint venture - - 605,679 605,679

Premises and equipment - - 373,094 373,094

Other assets 359,347 81,622 - 440,969

Goodwill and other intangible assets - - 716,358 716,358

Total 11,861,431 12,900,899 1,695,131 26,457,461

Liabilities

Deposits from banks and other financial institutions 6,370,790 239,494 - 6,610,284

Customers’ deposits 7,349,573 7,486,223 - 14,835,796

Term debts 178,562 768,000 - 946,562

Other liabilities 631,565 62,124 - 693,689

Subordinated liabilities 3,110 615,845 - 618,955

Total 14,533,600 9,171,686 - 23,705,286

Net liquidity gap (2,672,169) 3,729,213 1,695,131 2,752,175

The maturity profile of the assets and liabilities at 31 December 2009

Assets

Less than

1 year

Above

1 year Undated Total

US$ '000 US$ ‘000 US$ ‘000 US$ ‘000

Cash and balances with central banks 304,164 - - 304,164

Treasury bills and bonds 831,394 137,720 - 969,114

Trading securities 376 - - 376

Deposits with banks and other financial institutions 3,100,446 - - 3,100,446

Loans and advances 5,358,096 7,941,903 - 13,299,999

Non-trading investments 590,542 3,308,050 - 3,898,592

Investments in associates and joint venture - - 537,099 537,099

Premises and equipment - - 355,956 355,956

Other assets 389,906 94,045 - 483,951

Goodwill and other intangible assets - - 624,286 624,286

Total 10,574,924 11,481,718 1,517,341 23,573,983

Liabilities

Deposits from banks and other financial institutions 5,473,485 76,033 - 5,549,518

Customers’ deposits 6,107,355 7,133,911 - 13,241,266

Term debts - 950,054 - 950,054

Other liabilities 582,972 66,526 - 649,498

Subordinated liabilities - 602,216 - 602,216

Total 12,163,812 8,828,740 - 20,992,552

Net liquidity gap (1,588,888) 2,652,978 1,517,341 2,581,431

65


ahli united bank

35. Liquidity risk continued

66

2010 annual report notes to the consolidated financial statements continued

Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Group’s financial liabilities

(including interest) based on contractual undiscounted repayment obligations.

As at 31 December 2010

Less

than

1 year

Above

1 year Total

US$ ‘000 US$ ‘000 US$ ‘000

Deposits from banks and other financial

institutions 6,299,535 327,852 6,627,387

Customers’ deposits 14,534,105 406,739 14,940,844

Term debts 801,571 154,716 956,287

Subordinated liabilities 3,149 666,885 670,034

Total 21,638,360 1,556,192 23,194,552

Credit related commitments and

contingencies 1,884,364 1,061,222 2,945,586

Derivatives - net outflow 4,440 113,026 117,466

As at 31 December 2009

Less

than

1 year

Above

1 year Total

US$ ‘000 US$ ‘000 US$ ‘000

Deposits from banks and other financial

institutions 5,496,432 80,995 5,577,427

Customers’ deposits 12,952,964 366,134 13,319,098

Term debts 2,100 1,018,358 1,020,458

Subordinated liabilities 26,330 701,552 727,882

Total 18,477,826 2,167,039 20,644,865

Credit related commitments and

contingencies 1,768,989 812,697 2,581,686

Derivatives - net outflow (2,408) (50,102) (52,510)

36. Capital adequacy

The primary objectives of the Group's capital management policies 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. Capital adequacy for each of the

group companies is also managed separately at individual company level.

In order to maintain or adjust the capital structure, the Group may adjust the amount

of dividend payment to shareholders or issue capital securities. No changes were

made in the objectives, policies and processes from the previous years.

The risk asset ratio, calculated in accordance with the capital adequacy guidelines,

under Basel II, approved by the Central Bank of Bahrain, for the Group, is disclosed

under Pillar III Table 1, which is included in the annual report. The risk asset ratio is

14.1% as of 31 December 2010 (2009: 15.1%).

37. Deposit protection scheme

Certain customers’ deposits of the Group are covered by deposit protection

schemes established by the Central Bank of Bahrain (CBB) and the Financial

Services Compensation Scheme, UK. The schemes apply to all non-bank private

sector deposits subject to specific exclusions mainly relating to maximum deposit

amounts, maximum total amount covered in one calendar year and maximum total

amount of the Deposit Protection Board’s financial resources. Eligible depositors

are covered by the CBB to the extent of the lower of 75% of the combined total

of eligible deposits held by the depositor and BD 15,000. In the case of AUBUK,

the entire amount of the customer deposit is covered under the Financial Services

Compensation Scheme, subject to a maximum limit of GBP 50,000 per customer.

No up-front contribution is currently required under the schemes and no liability is

due unless any member bank of the Deposit Protection Scheme is unable to meet

its depository obligations.

38. Islamic banking

The balance sheet and statement of income of the Group's Sharia’a compliant

Islamic activities which are incorporated into the consolidated balance sheet and

consolidated statement of income, are presented below:

Balance sheet as at 31 December

ASSETS

2010 2009

US$ ’000 US$ ’000

Cash in hand 38,118 2,828

Due from banks and other financial institutions a 3,569,767 291,696

Receivable balances from islamic financing activities b 7,441,805 774,808

Property, furniture and equipment 140,302 1,166

Other assets 90,671 4,407

TOTAL ASSETS 11,280,663 1,074,905

LIABILITIES

Due to banks c 5,449,568 791,590

Customers' deposits d 4,580,079 164,728

Other liabilities 161,496 18,099

Restricted investment accounts 24,898 13,992

10,216,041 988,409

Unrestricted investment accounts (URIA) 484,979 59,867

TOTAL LIABILITIES AND URIA

10,701,020 1,048,276

CAPITAL AND RESERVES 447,118 26,629

Non-controlling interests 132,525 -

TOTAL EQUITY 579,643 26,629

TOTAL LIABILITIES, UNRESTRICTED

INVESTMENT ACCOUNTS AND EQUITY 11,280,663 1,074,905

Statement of income for the year ended 31 December

2010 2009

US$ ’000 US$ ’000

Net income from Islamic financing activities e 176,485 12,410

176,485 12,410

Fees and commissions - net 18,487 1,389

Foreign exchange gains 8,451 -

OPERATING INCOME 203,423 13,799

Provision for impairment 8,709 -

NET OPERATING INCOME 194,714 13,799

Staff costs 34,588 949

Depreciation 6,181 241

Other operating expenses 19,796 730

OPERATING EXPENSES 60,565 1,920

PROFIT FOR THE YEAR BEFORE THE SHARE

OF PROFIT OF UNRESTRICTED INVESTMENT

ACCOUNT HOLDERS 134,149 11,879

Less : share of profit of unrestricted investment

account holders (2,470) (538)

NET PROFIT FOR THE YEAR 131,679 11,341

Attributable to:

Bank’s equity shareholders 104,373 11,341

Non-controlling interests 27,306 -

131,679 11,341


ahli united bank

38. Islamic banking continued

Notes

2010 annual report notes to the consolidated financial statements continued

(a) Due from banks and other financial institutions

2010 2009

US$ ’000 US$ ’000

Murabaha finance with Central Bank of Kuwait 1,491,523 -

Murabaha finance with other banks and financial

institutions 1,686,110 291,696

Wakala with banks and financial institutions 191,793 -

Deposits with banks 92,315 -

Current account and others 108,026 -

(b) Receivable balances from Islamic financing activities

3,569,767 291,696

2010 2009

US$ ’000 US$ ’000

Tawarruq receivables 5,696,485 130

Murabaha receivables 1,442,746 510,373

Ijara receivables 460,753 264,305

Others 3,450 -

Less: Allowance for impairment (161,629) -

(c) Due to banks

7,441,805 774,808

2010 2009

US$ ’000 US$ ’000

Murabaha 4,007,323 791,590

Wakala 1,345,529 -

Deposits from banks 36,562 -

Current accounts 51,450 -

Mudaraba 8,704 -

(d) Deposit from customers

5,449,568 791,590

2010 2009

US$ ’000 US$ ’000

Wakala 2,541,790 -

Mudaraba 503,231 -

Current account 553,683 -

Murabaha 981,375 164,728

(e) Net income from Islamic financing activities

4,580,079 164,728

2010 2009

US$ ’000 US$ ’000

Income from Murabaha 10,884 10,078

Income from Ijara 14,937 5,665

Income from Tawarruq 255,155 6

Income from Islamic financing activities 280,976 15,749

Profit expenses on Wakala 71,990 -

Profit expenses on Mudaraba 6,632 -

Profit expenses on Murabaha 25,869 3,339

Less: Distribution to depositors 104,491 3,339

Net income from Islamic financing activities 176,485 12,410

67


ahli united bank

71 Introduction to the Central Bank of Bahrain’s Basel II guidelines

71 Pillar III quantitative & qualitative disclosures

72 Capital structure

Table 1 . Capital structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

73 Group risk governance structure

73 Credit risk management

Table 2 . Gross credit risk exposures subject to Credit Risk Mitigants (CRM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Table 3 . Eligible financial collateral and guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Table 4 . Credit risk exposure post CRM and credit conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Table 5 . Capital requirement for credit,market and operational risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Table 6 . Geographic distribution of gross credit exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Table 7 . Sectoral classification of gross credit exposures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Table 8 . Residual contractual maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Table 9 . Sectoral breakdown of impaired loans and impairment provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Table 10 . Geographical distribution of impairment provisions for loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Table 11 . Movement in impairment provision for loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Table 12 . Past due loans - age analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Table 13 . Restructured credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Table 14 . Counterparty credit risk in derivative transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Table 15 . Related party transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

79 Market risk

Table 16 . Capital requirement for components of market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Table 17 . Interest rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Table 18 . Equity position in banking book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Table 19 . Gains on equity instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

81 Liquidity risk and funding management

81 Operational risk

81 Information technology risk

81 Strategic risk

2010 annual report pillar III disclosures - basel II continued

pillar III disclosures

- basel II

81 Legal, compliance, regulatory and reputational risks

81 Environmental risk

69


ahli united bank

2010 annual report pillar III disclosures - basel II continued

pillar III disclosures

- basel II

continued

Introduction to the Central Bank of

Bahrain’s Basel II Guidelines

The Central Bank of Bahrain (CBB) Basel II Guidelines, based upon the Bank of

International Settlements (BIS) Revised Framework – ‘International Convergence of

Capital Measurement and Capital Standards’, were introduced on 1 January 2008.

Basel II is structured around three ‘pillars’: Pillar I - Minimum Capital Requirements;

Pillar II – the Supervisory Review Process and the Internal Capital Adequacy

Assessment Process (ICAAP); and Pillar III - Market Discipline.

Group structure

The public disclosures under this section have been prepared in accordance with

the CBB Rules concerning Public Disclosure Module ("PD"), section PD-1: Annual

Disclosure Requirements. The disclosures under this section are applicable to Ahli

United Bank B.S.C. (the "Bank"), which is the parent bank incorporated in Bahrain.

The Bank operates under a retail banking license issued by the CBB. The Bank

and its subsidiaries (as detailed under note 2 to the audited consolidated financial

statements) are collectively known as the "Group".

Pillar I – Minimum capital requirements

Pillar I deals with the basis for the computation of the regulatory capital ratio. It

defines the various classes and the calculation of Risk Weighted Assets (RWAs)

in respect of credit risk, market risk and operational risk, as well as deriving the

regulatory capital base. The capital adequacy ratio is then calculated as the ratio of

the Bank’s regulatory capital to its total RWAs. All Bahrain incorporated banks are

currently required to maintain a minimum capital adequacy ratio of 12%. In addition,

the CBB requires banks to maintain an additional 0.5% buffer above the minimum

capital adequacy ratio.

The Group ensures that each subsidiary maintains sufficient capital levels for their

respective legal and compliance purposes.

Credit risk

Basel II provides three approaches to the calculation of credit risk regulatory

capital. The Standardised approach which the Bank has adopted, requires banks

to use external credit ratings to determine the risk weightings applied to rated

counterparties, and groups other counterparties into broad categories and applies

standardised risk weightings to these categories.

Market risk

The Bank has adopted the Standardised approach for determining the market risk

capital requirement.

Operational risk

Under the basic indicator approach, which the Bank has adopted for operational

risk, the regulatory capital requirement for operational risk is calculated by applying

a co-efficient of 15 per cent to the average gross income for the preceding three

financial years.

Pillar II – the supervisory review and evaluation process

Pillar II involves the process of supervisory review of a financial institution’s risk

management framework and its capital adequacy.

Accordingly, this involves both, the Bank and its regulators taking a view on whether

additional capital should be held against risks not covered in Pillar I. Part of the Pillar

II process is the Internal Capital Adequacy Assessment Process (ICAAP) which is

the Bank’s self assessment of risks not captured by Pillar I.

As part of the CBB’s Pillar II guidelines, each bank is required to be individually

reviewed and assessed by the CBB with the intention of setting individual minimum

capital adequacy ratios. The CBB is currently in the process of individually assessing

the financial strength and risk management practices of each institution. Until

finalised, we will be required to continue to maintain a 12 per cent minimum capital

adequacy ratio.

Pillar III – Market discipline

The third pillar is related to market discipline and requires the Bank to publish

detailed qualitative and quantitative information of its risk management and capital

adequacy policies and processes to complement the first two pillars and the

associated supervisory review process. The disclosures in this report are in addition

to the disclosures set out in the audited consolidated financial statements of the

Group for the year ended 31 December 2010.

Pillar III quantitative and qualitative disclosures

For the purpose of computing regulatory minimum capital requirements, the Group

follows the rules as laid out under the CBB Rulebook module PCD: Prudential

Consolidation and Deduction Requirements, PCD-1 and PCD-2 and the Capital

Adequacy (CA) Module. Accordingly,

a) All subsidiaries as per note 2 to the audited consolidated financial statements

are consolidated on a line by line basis in accordance with International Financial

Reporting Standards (IFRS). Non-controlling interest arising on consolidation is

reported as part of Tier 1 capital;

b) Investments in associates as reported under note 12 to the audited consolidated

financial statements are pro-rata consolidated for the purpose of regulatory

minimum capital requirements and capital deducted from Tier 1 and 2. The

prorated capital is included under Tier 1 and Tier 2 respectively as aggregation;

c) Goodwill is deducted from Tier 1 capital;

d) Subordinated term debts, as reported under liabilities in the consolidated balance

sheet, are reported as part of Tier 2 capital, subject to maximum thresholds and

adjusted for remaining life;

e) Unrealized gains arising from fair valuing equities is reported only to the extent of

45%;

f) Property revaluation reserve is included under Tier 2 capital to the extent of 45%;

and

g) Collective impairment provisions to the extent of maximum threshold of 1.25% of

total Credit Risk Weighted Assets are included under Tier 2 capital.

There are no restrictions on the transfer of funds or regulatory capital within the

Group and all investments are made fully complying with CBB approval instructions.

71


ahli united bank

1. Capital structure

Table 1.

72

2010 annual report pillar III disclosures - basel II continued

A. Net available capital Tier 1 Tier 2

Paid-up share capital 1,237,125

Less: Loans against Employee Stock Purchase Plan (34,958)

Reserves:

Share premium 542,269

Capital reserve -

Statutory reserve 147,120

Others (2,716)

Retained earnings 258,783

Minority interest in the equity of subsidiaries 359,994

Less: Goodwill (519,870)

Less: Unrealized gross losses arising from fair valuing equities (214)

US$ ’000 US$ ’000

Current year profit 265,499

Asset revaluation reserve-property, plant and equipment (45% only) 24,229

Unrealized gains arising from fair valuing equities (45% only) 12,205

Collective impairment provisions 152,760

Eligible subordinated term debt 517,921

TOTAL CAPITAL BEFORE REGULATORY DEDUCTIONS 1,987,533 972,614

Less: Regulatory deductions:

Material holdings of equities 274,038 274,038

1,713,495 698,576

Add: Proportionate aggregation 263,736 78,098

NET AVAILABLE CAPITAL 1,977,231 776,674

TOTAL ELIGIBLE CAPITAL BASE (TIER 1 + TIER 2) 2,753,905

The terms and conditions and main features of the capital instruments listed above as part of the Tier 1 and Tier 2 capital are explained in note 19 and note 20 to the audited

consolidated financial statements of the Group for the year ended 31 December 2010.

B. Capital adequacy ratio

As at 31 December 2010, the capital adequacy ratio of the Group and significant subsidiaries were:

Consolidated

Ahli United Bank

K.S.C. (AUBK)

Subsidiaries

Ahli United Bank (UK)

PLC (AUB UK)

Ahli United Bank

(Egypt) S.A.E. (AUBE)

Tier 1 - Capital Adequacy Ratio 10.1% 17.0% 13.3% 12.6%

Total - Capital Adequacy Ratio 14.1% 18.8% 15.3% 14.0%


ahli united bank

2010 annual report pillar III disclosures - basel II continued

2. Group risk governance structure

Risk governance

The Group Board seeks to optimise the Bank’s performance by enabling the various group business units to realize the Group’s business strategy and meet agreed business

performance targets by operating within the agreed capital and risk parameters and Group risk policy framework.

AUB Group risk governance structure

Group

Executive

Committee

Head of

Special Assets

The Board approves the risk appetite and the Group Risk Committee monitors the

Group’s risk profile against this appetite.

The Deputy Group Chief Executive Officer – Risk, Legal and Compliance under

the delegated authority of the Group Chief Executive Officer & Managing Director,

supported by the Group Head of Risk Management and the Group Head of Credit

Risk have responsibility for ensuring effective risk management and control. Within

Group Risk Management specialist risk-type heads and their teams are responsible

for risk oversight and establishing appropriate risk control frameworks.

Internal Audit is responsible for the independent review of risk management and the

Group’s risk control environment.

The Board and its Executive Committee receive quarterly risk updates including

detailed Risk Exposures Analysis reports.

The Board approves all risk policies as well as the Group risk profile and control

framework at least annually.

Group Asset

& Liability

Committee

Group Head

of Risk

Management

Head of

Market Risk

The Group Audit Committee considers the adequacy and effectiveness of the

Group risk control framework and receives quarterly updates on any control issues,

impairment provisions, regulatory and compliance related issues.

Group Risk

Committee

Head of

Operational

Risk

Systems and procedures are in place to identify, control and report on all major risks.

aub group board

Group CEO

& MD

Deputy Group

CEO Risk, Legal

& Compliance

Group Head

of Credit Risk

Head of

Credit

Risk

3. Credit risk management

Compensation

Committee

Group Head of

Compliance

Group Audit

& Compliance

Committee

Group Head

of Audit

Sharia

Compliance

Officer

Sharia Advisory

& Supervisory

Board

Credit risk is the risk of financial loss if a customer or counterparty fails to meet

an obligation under a contract. It arises principally from lending, trade finance and

treasury activities. Credit risk also arises where assets are held in the form of debt

securities, the value of which may fall.

The Group has policies and procedures in place to monitor and manage these

risks and the Group Risk Management function provides high-level centralized

oversight and management of credit risk. The specific responsibilities of Group Risk

Management are to:

• Set credit policy, risk appetite for credit risk exposure to specific market sectors;

• Control exposures to sovereign entities, banks and other financial institutions

and set risk ratings for individual exposures. Credit and settlement risk limits

to counterparties in these sectors are approved and managed by Group

Risk Management, to optimise the use of credit availability and avoid risk

concentration;

• Control cross-border exposures, through the centralized setting of country limits

with sub-limits by maturity and type of business;

• Manage large credit exposures, ensuring that concentrations of exposure by

counterparty, sector or geography remain within internal and regulatory limits in

relation to the Group’s capital base;

• Maintain the Bank’s Internal Risk Rating framework;

• Manage watchlisted and criticised asset portfolios and recommend appropriate

level of provisioning and write-offs;

73


ahli united bank

74

2010 annual report pillar III disclosures - basel II continued

3. Credit risk management continued

Report to the Group Risk Committee, Audit Committee and the Board of

Directors on all relevant aspects of the Group’s credit risk portfolio. Regular

reports include detailed analysis of:

risk concentrations

corporate and retail portfolio performance

specific higher-risk portfolio segments, e.g. real estate

individual large impaired accounts, and details of impairment charges

country limits, cross-border exposures.

• Specialised management and control of all non-performing assets;

• Manage and direct credit risk management systems initiatives; and

• Interface, for credit-related issues, with external parties including the CBB, rating

agencies, investment analysts, etc.

All credit proposals are subjected to a thorough comprehensive risk assessment

which examines the customer’s financial condition and trading performance, nature

of the business, quality of management and market position. In addition our internal

risk rating model scores these quantitative and qualitative factors. The credit

approval decision is then made and terms and conditions set. Exposure limits are

based on the aggregate exposure to the counterparty and any connected entities

across the AUB Group. All credit exposures are reviewed at least annually.

Counterparty exposure classes

The CBB’s capital adequacy framework for the standardised approach to credit

risk sets the following counterparty exposure classes and the risk weightings to be

applied to determine the risk weighted assets:

Exposure class Risk weighting criteria

Sovereign Portfolio Exposures to governments of GCC (refer table 6 for definition

Public Sector

Entity [PSE]

Portfolio

of GCC) member states and their central banks are zero %

risk weighted. Other sovereign exposures denominated in the

relevant domestic currency are also zero % risk weighted. All

other sovereign exposures are risk weighted based on their

external credit ratings.

Bahrain PSEs and domestic currency claims on other PSEs

[which are assigned a zero % risk weighting by their own

national regulator] are assigned a zero % risk weighting. Other

PSEs are risk weighted based on their external credit ratings.

Banks Portfolio Exposures to banks are risk weighted based on their external

Investment

Company Portfolio

Corporate

Portfolio

Regulatory Retail

Portfolio

Residential

Property Portfolio

credit ratings, with a preferential weighting given to short term

exposures (i.e. with an original tenor of 3 months or less).

Exposures to investment companies which are supervised by

the CBB are treated in the same way as exposures to banks

but without the preferential short term exposure weighting.

Other exposures will be treated as a corporate exposure for

risk weighting purposes.

Exposures to corporates are risk weighted based on their

external credit rating. Unrated corporates are 100% risk

weighted. A number of corporates owned by the Kingdom

of Bahrain have been assigned a preferential zero % risk

weighting.

Regulatory retail exposures are risk weighted at 75%.

Exposures fully secured by first mortgages on owner

occupied residential property are generally 75% risk weighted.

Commercial

Property Portfolio

Equities and

Funds Investment

Portfolio

Exposures secured by mortgages on commercial real estate

are subject to a minimum 100% risk weighting, except where

the borrower has an external rating below BB- in which case

the rating risk weighting applies.

Investments in listed equities carry a 100% risk weighting.

Unlisted equities are 150% risk weighted.

Investments in rated instruments are risk weighted according

to their external rating and treated as a corporate exposure.

If not rated the investment is treated as an equity investment

and risk weighted 100% for listed and 150% for others.

Past Due Portfolio The unsecured portion of any exposure [other than a

residential mortgage loan] that is past due for more than 90

days is:

External rating agencies

• 150% risk weighted when specific provisions are less than

20% of the outstanding amount; and

• 100% risk weighted when specific provisions are greater

than 20%.

The Group uses the following external credit assessment institutions (ECAI’s):

Moody’s, Standard & Poors and Fitch. The external rating of each ECAI is mapped

to the prescribed internal risk rating that in turn produces standard risk weightings.

Basel II reporting of credit risk exposures

As a result of the methodologies applied credit risk exposures presented under

Basel II reporting differs in a number of respects from the exposures reported in the

consolidated financial statements.

1. As per the CBB Basel II framework, off balance sheet exposures are converted,

by applying a credit conversion factor (CCF), into direct credit exposure

equivalents.

2. Under the Basel II capital adequacy framework eligible collateral is applied to

reduce exposure.

Credit risk mitigation

The Group’s first priority when making loans is to establish the borrower’s capacity

to repay and not rely principally on security / collateral. Where the customer’s

financial standing is strong facilities may be granted on an unsecured basis, but

when necessary collateral is an essential credit risk mitigant.

Acceptable forms of collateral are defined within the Group risk framework and

conservative valuation parameters are also pre-set and regularly reviewed to reflect

any changes in market conditions. Security structures and legal covenants are also

subject to regular review to ensure that they continue to fulfil their intended purpose

and remain in line with the CBB’s prescribed minimum requirements set out in their

capital adequacy regulations.

The principal collateral types are as follows:

• in the retail / personal sector, mortgages over residential properties, charges over

investment portfolios, assignment of salaries;

• in the corporate / commercial sector, charges over business assets such as

premises, stock and debtors, financial guarantees from acceptable third parties;

and

• in the commercial real estate sector, charges over the properties being financed.

Valuation of collateral

The type and amount of collateral taken is based upon the credit risk assessment

of the borrower. The market or fair value of collateral held is closely monitored and

when necessary top-up requests are made or liquidation initiated as per the terms of

the underlying credit agreements.


ahli united bank

2010 annual report pillar III disclosures - basel II continued

3. Credit risk management continued

Gross credit risk exposures subject to Credit Risk Mitigants (CRM)

The following table details the Group gross credit risk exposures before the application

of eligible Basel II CRM techniques. The CBB’s Basel II guidelines details which types

of collateral and which issuers of guarantees are eligible for preferential risk weighting.

The guidelines also specify the minimum collateral management processes and

collateral documentation requirements necessary to achieve eligibility.

Table 2.

Gross credit risk exposures subject to credit risk mitigants (CRM)

As at 31

December 2010

Average

monthly balance

US$ ’000 US$ ’000

Balances with central banks 280,389 218,600

Treasury bills 301,127 233,097

Deposits with banks and other financial institutions 4,767,843 3,828,601

Loans and advances 14,477,713 13,932,302

Non-trading investments 4,047,110 3,772,823

Other assets 410,670 450,966

TOTAL FUNDED EXPOSURES 24,284,852 22,436,389

Contingent liabilities 1,890,997 1,573,551

Undrawn loan commitments 1,054,589 1,013,784

TOTAL UNFUNDED EXPOSURES 2,945,586 2,587,335

TOTAL CREDIT RISK EXPOSURE 27,230,438 25,023,724

The gross credit exposures reported above are as per the consolidated balance

sheet as reduced by exposures which do not carry credit risk.

Under the CBB Basel II Guidelines, banks may choose between two options when

calculating credit risk mitigation capital relief. The simple approach which substitutes

the risk weighting of the collateral for the risk weighting of the counterparty or the

comprehensive approach whereby the exposure amount is adjusted by the actual

value ascribed to the collateral. The Bank has selected to use the comprehensive

method where collateral is in the form of cash or bonds or equities. The Bank uses

a range of risk mitigation tools including collateral, guarantees, credit derivatives,

netting agreements and financial covenants to reduce credit risk.

Table 3.

Eligible financial collateral and guarantees

Gross exposure Eligible CRM

US$ ’000 US$ ’000

Claims on sovereigns 3,428,250 -

Claims on public sector entities 917,176 140,925

Claims on banks 5,680,126 172,968

Claims on corporates 11,864,294 1,451,492

Regulatory retail exposures 1,741,970 39,904

Residential retail exposures 1,022,135 -

Equity 82,036 -

Investments in funds 239,420 -

Other exposures 1,662,767 18,485

Total 26,638,174 1,823,774

The gross exposure in the above table represents the on and off balance sheet

credit exposures before CRM, determined in accordance with the CBB issued Pillar

III guidelines. The off balance sheet exposures are computed using the relevant

conversion factors.

Table 4.

Credit risk exposure post CRM and credit conversion

The following table details group credit exposures after applying risk mitigation.

US$ ’000

Claims on sovereigns 108,447

Claims on public sector entities 449,956

Claims on banks 1,980,055

Claims on corporates 9,827,125

Regulatory retail exposures 1,276,549

Residential retail exposures 357,747

Equity 104,726

Investments in funds 359,131

Other exposures 1,575,873

16,039,609

Add : Proportionate aggregation 1,674,612

Total 17,714,221

TOTAL CREDIT RISK CAPITAL REQUIREMENT 2,125,707

Table 5.

Capital requirement for credit, market and operational risks

Capital

requirement

US$ ’000

Claims on sovereigns 13,014

Claims on public sector entities 53,995

Claims on banks 237,607

Claims on corporates 1,179,255

Regulatory retail exposures 153,186

Residential retail exposures 42,930

Equity 12,567

Investments in funds 43,095

Other exposures 189,105

1,924,754

Add : Proportionate aggregation 200,953

TOTAL CREDIT RISK CAPITAL REQUIREMENT

(STANDARDISED APPROACH) 2,125,707

TOTAL MARKET RISK CAPITAL REQUIREMENT

(STANDARDISED APPROACH) 63,902

TOTAL OPERATIONAL RISK CAPITAL REQUIREMENT

(BASIC INDICATOR APPROACH) 151,026

Total 2,340,635

Concentration risk

Refer note 31(a) to the audited consolidated financial statements for definition and

policies for management of concentration risk.

As per 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 per cent of the

regulatory capital base. As at 31 December 2010 the Group had no single obligor

exposures which exceeded 15 per cent of the Group’s regulatory capital base (i.e.

exceeded US$ 413.1 million).

Geographic distribution of gross credit exposures

The geographic distribution of credit exposures is monitored on an ongoing basis by

Group Risk Management and reported to the Board on a quarterly basis.

The following table details the Group’s geographic distribution of gross credit

exposures as at 31 December 2010.

75


ahli united bank

Table 6.

76

2010 annual report pillar III disclosures - basel II continued

3. Credit risk management continued

Geographic distribution of gross credit exposures

GCC *

countries

United

Kingdom

Europe

(excluding United

Kingdom)

Arab Republic

of Egypt

Asia

(excluding GCC

countries)

Rest of

the World Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balances with central banks 166,664 538 - 92,155 20,984 48 280,389

Treasury bills 23,710 - - 192,742 84,675 - 301,127

Deposits with banks and financial institutions 3,253,370 545,097 497,997 46,461 269,625 155,293 4,767,843

Loans and advances 11,456,580 775,937 617,553 1,334,510 76,014 217,119 14,477,713

Non-trading investments 2,047,863 268,458 380,902 279,810 289,494 780,583 4,047,110

Other assets 337,257 41,094 - 30,168 2,151 - 410,670

Total funded exposures 17,285,444 1,631,124 1,496,452 1,975,846 742,943 1,153,043 24,284,852

Contingent liabilities 1,564,830 2,120 80,476 175,317 17,526 50,728 1,890,997

Undrawn loan commitments 661,048 246,183 120,047 6,597 9,529 11,185 1,054,589

Total unfunded exposures 2,225,878 248,303 200,523 181,914 27,055 61,913 2,945,586

Total 19,511,322 1,879,427 1,696,975 2,157,760 769,998 1,214,956 27,230,438

71.7% 6.9% 6.2% 7.9% 2.8% 4.5% 100.0%

* GCC countries are countries which are part of the Gulf Co-operation Council comprising Kingdom of Bahrain, State of Kuwait, Sultanate of Oman, State of Qatar, Kingdom of

Saudi Arabia and the United Arab Emirates.

Table 7.

Sectoral classification of gross credit exposures

Funded Unfunded Total %

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Banks and other financial institutions 8,446,926 559,830 9,006,756 33.1

Consumer / personal 3,343,687 133,241 3,476,928 12.8

Real estate and construction 4,865,477 1,010,015 5,875,492 21.6

Trading, manufacturing and services 4,077,682 964,302 5,041,984 18.5

Government / public sector 1,263,028 32,875 1,295,903 4.7

Others 2,288,052 245,323 2,533,375 9.3

Total 24,284,852 2,945,586 27,230,438 100.0

Table 8.

Residual contractual maturity

Up to

one month

One month

to three

months

Over three

months to

one year

Over one

year to

five years

89.2% 10.8% 100.0%

Over

five to

ten years

Over ten

to twenty

years

Over

twenty

years Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balances with central banks 230,694 49,695 - - - - - 280,389

Treasury bills 73,323 76,985 150,819 - - - - 301,127

Deposits with banks and other

financial institutions 3,588,320 780,098 397,937 1,488 - - - 4,767,843

Loans and advances 1,889,738 1,506,073 1,827,466 4,251,651 3,654,127 1,260,131 88,527 14,477,713

Non-trading investments 31,619 53,831 457,981 2,166,145 873,544 232,890 231,100 4,047,110

Other assets 121,348 145,502 71,285 32,415 33,269 6,694 157 410,670

Total funded exposures 5,935,042 2,612,184 2,905,488 6,451,699 4,560,940 1,499,715 319,784 24,284,852

Contingent liabilities 475,897 260,623 496,830 605,011 47,247 5,389 - 1,890,997

Undrawn loan commitments 13,194 460,699 177,120 384,434 19,142 - - 1,054,589

Total unfunded exposures 489,091 721,322 673,950 989,445 66,389 5,389 - 2,945,586

Total 6,424,133 3,333,506 3,579,438 7,441,144 4,627,329 1,505,104 319,784 27,230,438


ahli united bank

2010 annual report pillar III disclosures - basel II continued

3. Credit risk management continued

Impairment provisions

The Group Risk Committee regularly evaluates the adequacy of the established

allowances for impaired loans.

Two types of impairment allowance are in place:

Individually assessed impairment provisions

These are determined by evaluating the exposure to loss, case by case, on all

individually significant accounts based upon the following factors:

• aggregate exposure to the customer;

• the viability of the customer’s business model and its capacity to trade

successfully out of financial difficulties, generating sufficient cash flow to service

debt obligations;

• the amount and timing of expected receipts and recoveries;

• the extent of other creditors’ commitments ranking ahead of, or pari passu

with the Bank, and the likelihood of other creditors continuing to support the

company;

• the realisable value of security (or other credit mitigants) and likelihood of

successful repossession;

• the likely dividend available on liquidation or bankruptcy;

• the likely costs involved in recovering amounts outstanding, and

• when available, the secondary market price of the debt.

Table 9.

Sectoral breakdown of impaired loans and impairment provision

Impaired and

past due loans

Specific

impairment

provision

Net specific

charge for the

year ended 31

December 2010

Write off during

the year ended

31 December

2010

Collective

impairment

provision

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Consumer / personal 112,869 92,551 26,315 99,180 26,816

Trading, manufacturing and services 59,577 50,648 4,898 8,838 34,324

Real estate 64,127 59,755 35,250 5,757 28,678

Banks and other financial institutions 22,156 6,834 11,577 - 9,220

Construction 61,188 59,459 9,762 1,709 9,041

Government / public sector - - - - 2,571

Others 42,188 38,721 11,633 - 13,950

Total 362,105 307,968 99,435 115,484 124,600

Table 10.

Geographical distribution of impairment provisions for loans and advances

GCC

countries

United

Kingdom

Europe

(excluding

United

Kingdom)

Arab

Republic

of Egypt

Asia

(excluding GCC

countries)

Rest

of the

world Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Specific impairment provision 251,266 9,412 - 37,580 9,710 - 307,968

Collective impairment provision 85,450 14,429 9,233 14,041 164 1,283 124,600

Total 336,716 23,841 9,233 51,621 9,874 1,283 432,568

Table 11.

Movement in impairment provision for loans and advances

Individually assessed impairment allowances are only reversed when there is

reasonable and reliable evidence of a reduction in the established loss estimate.

Collectively assessed impairment provisions

Impairment is assessed on a collective basis in two circumstances:

Incurred but not yet identified impairment:

Individually assessed loans for which no evidence of impairment has been

specifically identified on an individual basis are grouped together according to their

credit risk characteristics. A collective loan loss allowance is calculated to reflect

impairment losses incurred at the balance sheet date which will only be individually

identified in the future.

The collective impairment provision is determined based upon:

• historical loss experience in portfolios of similar credit risk characteristics (for

example, by industry sector, risk rating or product segment); and

• judgement as to whether current economic and credit conditions are such

that the actual level of inherent losses is likely to be greater or less than that

suggested by historical experience.

Homogeneous groups of loans

Collective impairment provision has been established in respect of homogeneous

groups of loans such as unsecured retail lending products. Collectively assessed

allowances are generally calculated quarterly and charges for new allowances, or

reversals of existing allowances, are determined for each separately identified portfolio.

Retail Corporate Total

Specific Collective Total Specific Collective Total Specific Collective

US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balance at 1 January 2010 113,877 24,654 138,531 173,835 51,829 225,664 287,712 76,483

Arising on IFRS transition of subsidiary - - - 6,631 11,708 18,339 6,631 11,708

Amounts written off during the year (63,311) - (63,311) (52,173) - (52,173) (115,484) -

Net charge for the year 18,475 4,385 22,860 80,960 31,726 112,686 99,435 36,111

Interest suspended during the year (net) 3,628 - 3,628 5,828 - 5,828 9,456 -

Exchange rate adjustments / other movements 409 - 409 19,809 298 20,107 20,218 298

Balance at 31 December 2010 73,078 29,039 102,117 234,890 95,561 330,451 307,968 124,600

77


ahli united bank

Past Due and Impaired Credit Facilities

78

2010 annual report pillar III disclosures - basel II continued

3. Credit risk management continued

As per CBB guidelines, credit facilities are placed on non-accrual status and

interest income suspended when either principal or interest is overdue by 90 days

whereupon unpaid and accrued interest is reversed from income. Interest on non-

accrual facilities is included in income only when received. Credit facilities classified

as past due are assessed for impairment in accordance with IFRS guidelines. A

specific provision is established where there is objective evidence that a credit facility

is impaired.

Impaired credit facilities comprise those facilities where there is objective evidence

that the Bank will not collect all amounts due, including both principal and interest.

Objective evidence would include:

• a breach of contract, such as default or delinquency in interest or principal

payments,

• the granting of a concession that, for economic or legal reasons relating to the

borrower’s financial difficulties, would not otherwise be considered,

• indications that it is probable that the borrower will enter bankruptcy or other

financial reorganisation,

• for equity securities classified as available-for-sale, a significant or prolonged

decline in fair value below cost is considered in determining whether a security is

impaired.

Refer to notes 10(a) to 10(d) and note 31(c) to the audited consolidated financial

statements for the year ended 31 December 2010 for the distribution of the loans

and advances portfolio by quality.

Ratings 1 - 4 comprise of corporate facilities demonstrating financial condition, risk

factors and capacity to repay that are good to excellent and retail borrowers where

cash collateral [or equivalent such as pledged investment funds] has been provided.

Ratings 5 and 6 represents satisfactory risk and includes corporate facilities that

require closer monitoring, and retail accounts which are maintained within generally

applicable product parameters.

Table 12.

Past due and impaired loans - age analysis

i) By geographical area

Three

months to

one year

One

to three

years

Over

three

years Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

GCC Countries 106,140 146,010 36,723 288,873

United Kingdom - 19,159 - 19,159

Asia (excluding GCC countries) - - 9,711 9,711

Arab Republic of Egypt 3,949 38,730 1,683 44,362

Total 110,089 203,899 48,117 362,105

ii) By sector

30.4% 56.3% 13.3% 100.0%

Three

months to

one year

One

to three

years

Over

three

years Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Consumer / personal 68,329 41,231 3,309 112,869

Trading, manufacturing

and services 3,891 54,002 1,684 59,577

Real estate 36,189 27,758 180 64,127

Banks and other financial

institutions - 22,156 - 22,156

Construction - 53,428 7,760 61,188

Others 1,680 5,324 35,184 42,188

Total 110,089 203,899 48,117 362,105

30.4% 56.3% 13.3% 100.0%

Table 13.

Restructured credit facilities

US$ ’000

Balance of any restructured credit facilities as at year end 97,245

Loans restructured during the year 77,520

The above restructurings did not have any significant impact on the present or future

earnings and were primarily extensions of the loan tenor.

Table 14.

Counterparty credit risk in derivative transactions

i) Breakdown of the credit exposure

Notional

amount

Gross

positive

fair value

Credit

conversion

factor

US$ ’000 US$ ’000 US$ ’000

Foreign exchange related 5,372,623 72,999 102,994

Interest rate related 4,840,975 75,532 101,862

Options 123,721 - 8,859

Derivatives credit exposure 10,337,319 148,531 213,715

Gross positive fair value represents the replacement cost of the derivatives

US$ ’000

ii) Amounts of collateral 35,918

iii) Notional value of credit derivative

exposures

US$ ’000

Protection sold 5,000

Table 15.

Related party transactions

Refer note 25 to the audited consolidated financial statements of the Group for the

year ended 31 December 2010.


ahli united bank

4. Market risk

2010 annual report pillar III disclosures - basel II continued

Market risk is the risk that movements in market risk factors, including foreign

exchange rates, interest rates, credit spreads and equity prices will reduce the

Group’s income or the value of its portfolios. The Group is also exposed to interest

rate and potential foreign exchange risks arising from financial assets and liabilities

not held for trading.

Market risk management, measurement and control responsibilities

The Board approves the overall market risk appetite and delegates responsibility

for providing oversight on the Bank's market risk exposures and the sub allocation

of Board limits to the Group Asset and Liability Committee (GALCO). Group Risk

Management is responsible for the market risk control framework and for monitoring

compliance with the GALCO limit framework.

The Group separates market risk exposures into either trading or non-trading

portfolios. Trading portfolios include those positions arising from market-making,

proprietary position-taking and other marked-to-market positions. Non-trading

portfolios include positions that arise from the interest rate management of the

Group’s retail and commercial banking assets and liabilities, and financial assets

designated as available-for-sale and held-to-maturity.

Each Group operating entity has an independent market risk function which is

responsible for measuring market risk exposures in accordance with the Group

Trading Book Policy and the Interest Rate Risk in the Banking Book Policy, and

monitoring these exposures against prescribed limits.

Market risk reports covering Trading Book risk exposures and profit and loss are

published daily to the Bank’s senior management. A risk presentation covering both

Trading and Banking Book is also compiled monthly and discussed at the GALCO.

The measurement techniques used to measure and control market risk include:

• Value at Risk (VaR); and

• Stress tests

• Sensitivities and position size related metrics

Daily Value at Risk (VaR)

The Group VaR is an estimate of the potential loss which might arise from

unfavourable market movements:

VaR Type Sample Size

Holding

Period

Confidence

Interval

Frequency of

Calculation

“Management” VaR 260 days 1 day 95% Daily

“Regulatory” VaR 260 days 10 day 99% Daily

Daily losses exceeding the VaR figure are likely to occur, on average, either once

or five times in every 100 business days depending on the confidence interval

employed in the VaR calculation (per the above). The Group routinely validates the

accuracy of its VaR models by back testing the actual daily profit and loss results.

The actual number of excesses over a given period can be used to gauge how well

the models are performing.

Although a useful guide to risk, VaR should always be viewed in the context of its

limitations. For example:

• the use of historical data as a proxy for estimating future events may not

encompass all potential events, particularly those which are extreme in nature;

• the use of a 1-day holding period assumes that all positions can be liquidated or

hedged in one day. This may not fully reflect the market risk arising at times of

severe illiquidity, when a 1-day holding period may be insufficient to liquidate or

hedge all positions fully;

• the use of a confidence level, by definition, does not take into account losses that

might occur beyond the applied level of confidence; and

• VaR is calculated on the basis of exposures outstanding at the close of business

and therefore does not necessarily reflect intra-day exposures.

The VaR for the Group was as follows:

Average Minimum Maximum

US$ ’000 US$ ’000 US$ ’000

As at 31 December 2010 482 180 1,447

Table 16.

Capital requirement for components of market risk

Capital

requirement

Maximum

value

Minimum

value

US$ ’000 US$ ’000 US$ ’000

Interest rate risk 1,148 12,709 1,148

Equity position risk 31 82 31

Foreign exchange risk 46,937 49,706 45,895

Options 157 379 -

TOTAL MARKET RISK CAPITAL

REQUIREMENT BEFORE

PROPORTIONATE AGGREGATION OF

ASSOCIATES 48,273

Add : Proportionate aggregation 15,628 16,280 6,507

TOTAL MARKET RISK CAPITAL

REQUIREMENT (STANDARDISED

APPROACH) 63,901

Interest Rate Risk (non-trading)

Interest rate risk is the risk that the earnings or capital of the Group, or its ability to

meet business objectives, will be adversely affected by movements in interest rates.

Accepting this risk is a normal part of banking and can be an important source of

profitability and shareholder value. Changes in interest rates can affect a bank's

earnings by changing its net interest income and the level of other interest sensitive

income and operating expenses. Changes in interest rates also affect the underlying

value of the Group's assets, liabilities and off-balance sheet instruments because

the present value of future cash flows and/or the cash flows themselves change

when interest rates change. The Bank employs a risk management process that

maintains interest rate risk within prudent levels.

The Board recognises that it has responsibility for understanding the nature and

the level of interest rate risk taken by the Bank, and has defined a risk framework

pertaining to the management of non trading interest rate risk and has identified

lines of authority and responsibility for managing interest rate risk exposures.

The Board has delegated the responsibility for the management of interest rate risk

to the GALCO, is responsible for setting and monitoring the interest rate risk strategy

of the Group, for the implementation of the interest rate risk framework and ensuring

that the management process is in place to maintain interest rate risk within prudent

levels.

GALCO reviews the interest rate risk framework annually and submits

recommendations for changes to the Executive Committee and Board as applicable.

The responsibility for the implementation of the Bank’s interest rate risk policies

resides with the Group Treasurer. An independent review of all interest exposure

present in the Banking Book is undertaken by the Group Market Risk team and

communicated to GALCO on a monthly basis.

Interest rate re-pricing reports are based on each product's contractual re-pricing

characteristics overlaid where appropriate by behavioural adjustments. Behavioural

adjustments are derived by an analysis of customer behaviour over time augmented

by input from the business units.

Reports detailing the interest rate risk exposure of the Bank are reviewed by GALCO

and the Board on a regular basis.

The following table summarises the repricing profiles of the Group’s assets and

liabilities as at 31 December 2010.

79


ahli united bank

4. Market risk continued

Table 17.

Interest rate risk

ASSETS

Interest rate risk sensitivity analysis

80

2010 annual report pillar III disclosures - basel II continued

The Group’s interest rate risk sensitivity is analysed in note 33(b) to the consolidated

financial statements of the Group for the year ended 31 December 2010.

Equity Risk

Equity risk is the risk of changes in the fair value of an equity instrument. AUB Group

is exposed to equity risk on non-trading equity positions that are primarily focused

on the GCC stock markets. The Board has set limits on the amount and type of

investments that may be made by the Bank. This is monitored on an ongoing basis

by the Group Risk Committee with pre approved loss thresholds. The Bank's equity

risk appetite is minimal.

Valuation and accounting policies:

a) Equity investments held for strategic reasons - investments in associates

and joint venture

Associated companies are companies in which the Group exerts significant influence

but does not control, normally represented by an interest of between 20% and 50%

in the voting capital. The Group classifies its investments as joint venture where

it is a party to a contractual joint venture agreement. Investments in associated

companies and joint ventures are accounted for using the equity method.

b) Equity investments held for capital gains

After initial recognition, equity investments that are held as available-for-sale

investments are remeasured at fair value. For investments in equity instruments,

where a reasonable estimate of the fair value cannot be determined, the investment

is carried at cost less impairment provision.

The fair value of equity instruments that are quoted in an active market is determined

by reference to market bid prices respectively at the close of business on the

balance sheet date. For equity investments that are not quoted in an active market,

a reasonable estimate of the fair value is determined by reference to the current

market value of another instruments that is substantially similar, or is determined

using net present valuation techniques.

An assessment is made at each balance sheet date to determine whether there is

any objective evidence that an equity instrument security may be impaired. For an

investment in an equity security, a significant or prolonged decline in its fair value

below its cost is objective evidence of impairment.

Any impairment recognised is reflected directly as a write down of the financial

asset. Impairment losses on equity investments are not reversed through the

consolidated statement of income while any subsequent increase in their fair value

are recognised directly in equity.

Table 18.

Equity position in Banking Book

Gross

exposures

Risk-weighted

weighted

exposures

Capital

requirement

US$ ’000 US$ ’000 US$ ’000

Listed 36,657 36,657 4,399

Unlisted 45,380 68,070 8,168

Total 82,037 104,727 12,567

Table 19.

Less than

three

months

Gains on equity instruments

Three

months to

one year

US$ ’000

Realised gains recognised in the statement of income 2,740

Unrealised (loss) gains recognised in the balance sheet:

Over

one

year Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Treasury bills 174,018 127,109 - 301,127

Deposits with banks and other financial institutions 4,288,357 396,441 1,487 4,686,285

Loans and advances 10,110,168 1,967,693 2,317,107 14,394,968

Non-trading investments 1,119,435 580,640 2,352,038 4,052,113

LIABILITIES

15,691,978 3,071,883 4,670,632 23,434,493

Deposits from banks and other financial institutions 5,702,874 633,372 239,071 6,575,317

Customers' deposits 7,900,428 5,163,389 1,209,170 14,272,987

Term debt 796,562 150,000 - 946,562

Subordinated liabilities 338,045 280,910 - 618,955

14,737,909 6,227,671 1,448,241 22,413,821

On - balance sheet gap 954,069 (3,155,788) 3,222,391

Off - balance sheet gap 2,560,995 (580,463) (1,980,532)

Total interest sensitivity gap 3,515,064 (3,736,251) 1,241,859

Cumulative interest sensitivity gap 3,515,064 (221,187) 1,020,672

- Tier one (eligible portion) (214)

- Tier two (eligible portion) 12,205


ahli united bank

2010 annual report pillar III disclosures - basel II continued

5. Liquidity risk and funding management

Liquidity risk is the risk that the Group does not have sufficient financial resources to

meet its obligations as they fall due, or will have to do so at an excessive cost. This

risk arises from mismatches in the timing of cash flows. Funding risk arises when

the necessary liquidity to fund illiquid asset positions cannot be obtained at the

expected terms and when required.

The management of the Group’s liquidity and funding management is the

responsibility of the GALCO under the chairmanship of the Senior Deputy Group

Chief Executive Officer Banking Group supported by the Group Treasurer, and

is responsible for ensuring that all foreseeable funding commitments, including

deposit withdrawals, can be met when due, and that wholesale market access is

co-ordinated and controlled.

The Group maintains a stable funding base comprising core retail and corporate

customer deposits and institutional balances, augmented by wholesale funding

and portfolios of highly liquid assets which are diversified by currency and maturity,

in order to enable the Group to respond quickly to any unforeseen liquidity

requirements.

The Group subsidiaries and affiliates maintain a strong individual liquidity position

and manage their liquidity profiles so that cash flows are balanced and funding

obligations can be met when due.

Treasury limits are set by the GALCO and allocated as required across the various

group entities. Specifically GALCO and the Group Treasurer are responsible for:

• projecting cash flows by major currency under various stress scenarios and

considering the level of liquid assets necessary in relation thereto;

• monitoring balance sheet liquidity ratios against internal and regulatory

requirements;

• maintaining a diverse range of funding sources with adequate back-up facilities;

• managing the concentration and profile of debt maturities;

• managing contingent liquidity commitment exposures within predetermined caps;

• monitoring depositor concentration in order to avoid undue reliance on large

individual depositors and ensure a satisfactory overall funding mix; and

• maintaining liquidity and funding contingency plans. These plans must identify

early indicators of stress conditions and describe actions to be taken in the event

of difficulties arising from systemic or other crises while minimising adverse longterm

implications for the business.

Maturity Analysis of Assets and Liabilities

A maturity analysis of cash flows payable by the Group under financial liabilities by

remaining contractual maturities at the balance sheet date is shown in note 35 to

the audited consolidated financial statements of the Group for the year ended 31

December 2010.

6. Operational risk

Operational risk is the risk of loss arising from inadequate or failed internal

processes, people and systems or from external events, whether intentional,

unintentional or natural. It is an inherent risk faced by all businesses and covers a

large number of operational risk events including business interruption and systems

failures, internal and external fraud, employment practices and workplace safety,

customer and business practices, transaction execution and process management,

and damage to physical assets.

The Board acknowledges that it has ultimate responsibility for operational risk.

Oversight rests with the Group Risk Committee, whilst day to day monitoring is

carried out by the Group Operational Risk Committee. The Board has approved the

operational risk framework and reviews it annually.

The operational risk management framework has been in place for a number

of years and is ingrained in the Bank’s processes. The Bank has developed a

comprehensive ‘operational risk self assessment (ORSA) process.

7. Information technology risk

All computer system developments and operations are centrally controlled and

common systems are employed across the Group wherever possible.

8. Strategic risk

The Board supported by Strategic Development Unit and the Group Finance

manages strategic risk on an ongoing basis. The Board receives regular

performance reports with details of strategic / regulatory issues as they arise.

9. Legal, compliance, regulatory and reputational risks

Protecting the reputation of the Group is of paramount importance and all

management and staff are expected to apply the highest standards of business

conduct and professional ethics at all times.

Regulatory and Reputational Risk is jointly managed by the Compliance, Risk

Management, and Legal departments.

10. Environmental risk

The Bank recognises the importance of environmental and social issues within

its risk framework, and has established a Social and Environmental Management

System (SEMS) which details the policy, procedures and workflow that will be

followed by the Bank and its subsidiaries / affiliates in respect of environmental risk.

The Bank continually endeavours to implement effective social and environmental

management practices in all its activities, products and services with a focus on the

applicable national laws on environmental, health, safety and social issues.

As such the Bank will finance projects only when they are expected to be designed,

built, operated and maintained in a manner consistent with the applicable national

laws.

81


Ahli United Bank B.S.C.

Building 2495, Road 2832, Al-Seef District, P .O . Box 2424, Manama, Kingdom of Bahrain

Telephone: +973 17 585 858, Facsimile: +973 17 580 569, E-mail: info@ahliunited.com

www.ahliunited.com

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