pdf -3 MB - Ahli United Bank

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pdf -3 MB - Ahli United Bank

Navigating Turbulence

Annual Report 2011

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Despite the tremendous challenges and the turbulence

of recent years, AUB’s performance was characterised by

resilience in our balance sheet and adaptability in our

approach which sets the Bank on the right course to

sustained growth in the years ahead.

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Contents


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79

Group mission statement

AUB operating divisions

Financial highlights

Board of Directors’ report

Board of Directors

Chairman’s statement

Group Chief Executive Officer & Managing Director’s statement

Corporate governance

Group business and risk review

Group organisation

Group management

Contact details

Auditors’ report to the shareholders and consolidated financial statements

Pillar III disclosures - Basel II


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.

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 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.

• to contribute to the social and economic advancement of the

communities in which the Group operates.

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Operating Divisions

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 business &

operations.

• Risk Management

• Legal

• Compliance

Audit

This division is an integral part of the control environment of the Group.

The role of audit is to understand the key risks of the Bank and examine

and evaluate the adequacy and effectiveness of the system of risk

management and internal control in order to identify legal, regulatory or

policy shortcomings.

Support Services

These divisions provide back end banking services to support ongoing

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

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FINANCIAL HIGHLIGHTS

US $ ‘000s

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CONSOLIDATED PERFORMANCE SUMMARY

Ahli United Bank B.S.C.

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

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

Net profit* 310,610 265,499 200,718 255,723 296,317

Total assets 28,329,762 26,457,461 23,573,983 23,582,727 23,049,852

Total loans 15,495,961 14,477,713 13,299,999 13,632,220 12,035,153

Total liabilities (including subordinated liabilities) 25,418,621 23,705,286 20,992,552 21,187,950 20,401,731

Shareholders’ equity* 2,537,431 2,392,181 2,213,523 1,995,435 2,309,720

Non-controlling interest 373,710 359,994 367,908 399,342 338,401

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

Return on average equity 12.7% 12.0% 9.6% 11.4% 18.0%

Cost to income ratio 32.4% 33.6% 31.5% 32.1% 35.0%

Financial leverage 8.7 8.6 8.1 8.8 7.7

Risk asset ratio** 16.0% 14.1% 15.1% 13.8% 16.2%

Net interest margin 2.10% 2.30% 2.36% 2.19% 2.20%

Earnings per share (US cents) - basic 6.2 5.4 4.2 5.3 7.9

Earnings per share (US cents) - diluted 6.1 5.4 4.2 5.3 6.9

* Attributable to Bank’s equity shareholders

** Under BASEL II from 2008

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PRINCIPAL SUBSIDIARIES

Kuwait: Ahli United Bank K.S.C.

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

KD’ 000s KD’ 000s KD’ 000s KD’ 000s KD’ 000s

Net profit* 31,544 27,444 14,262 51,365 48,179

Total assets 2,627,839 2,454,337 2,260,533 2,237,018 2,238,549

Total loans (financing receivables) 1,617,722 1,609,986 1,561,104 1,472,932 1,251,476

Total liabilities 2,352,808 2,189,041 2,023,197 1,965,126 1,935,285

Shareholders’ equity* 262,190 245,679 213,159 243,066 269,884

Non-controlling interest 12,841 19,616 24,177 28,826 33,380

Return on average assets 1.3% 1.1% 0.6% 2.2% 2.5%

Return on average equity 12.7% 12.2% 6.2% 20.2% 20.5%

Cost to income ratio 39.7% 38.7% 33.4% 32.0% 34.5%

Financial leverage 8.6 8.3 8.5 7.2 6.4

Risk asset ratio ** 21.3% 18.8% 16.8% 14.8% 15.6%

Earnings per share (fils) 31.1 27.0 14.1 50.6 47.5

* Attributable to Bank’s equity shareholders

** Under BASEL II

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United Kingdom: Ahli United Bank (UK) PLC

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

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

Net profit 36,380 20,760 7,164 7,088 25,370

Total assets 3,419,561 2,718,253 2,030,367 2,305,646 2,541,853

Total loans 1,767,372 1,560,955 1,309,903 1,095,061 1,210,724

Total liabilities 3,158,780 2,478,638 1,813,063 2,101,818 2,323,757

Shareholders’ equity 260,781 239,615 217,304 203,828 218,096

Return on average assets 1.2% 0.9% 0.3% 0.3% 0.8%

Return on average equity 14.5% 9.1% 3.4% 3.4% 11.1%

Cost to income ratio 30.4% 38.1% 41.3% 48.3% 44.1%

Financial leverage 12.1 10.3 8.3 10.3 10.7

Risk asset ratio* 17.5% 15.3% 16.5% 15.6% 14.6%

Earnings per share (US cents) 18.2 10.4 3.6 3.5 12.3

* Under BASEL II from 2008

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PRINCIPAL SUBSIDIARIES Continued

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

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

KD ’000s KD ’000s KD ’000s KD ’000s KD ’000s

Net (loss) profit* (11,839) (8,912) (9,443) 3,934 13,262

Total assets 53,534 64,895 86,236 95,107 112,869

Total loans 8,854 9,391 14,418 15,486 13,719

Total liabilities 29,364 27,343 39,607 39,900 48,258

Shareholders’ equity* 22,576 35,742 44,797 52,565 62,184

Return on average assets (18.7%) (12.7%) (10.1%) 3.8% 13.7%

Return on average equity (34.9%) (20.5%) (18.0%) 6.9% 27.4%

Cost to income ratio 226.0% 186.7% 114.7% 62.4% 38.1%

(Loss) earnings per share (fils) (45.3) (34.1) (36.2) 15.1 51.7

* Attributable to Company’s equity shareholders

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

Dec 11* Dec 10 Dec 09 Dec 08 Dec 07

IQD Millions IQD Millions IQD Millions IQD Millions IQD Millions

Net profit 7,980 13,934 4,288 4,263 2,407

Total assets 247,446 204,164 208,304 191,124 191,015

Total loans 12,889 13,845 17,567 16,904 29,961

Total liabilities 83,430 80,272 86,897 89,338 96,559

Shareholders’ equity 135,185 94,539 84,151 67,053 65,304

Return on average assets 3.5% 6.8% 2.1% 2.2% 1.4%

Return on average equity 6.9% 15.6% 5.7% 6.4% 3.7%

Cost to income ratio 48.4% 50.5% 74.0% 27.2% 26.4%

Financial leverage 0.6 0.8 1.0 1.3 1.5

Risk asset ratio 566.3% 577.4% 351.5% 348.1% 201.5%

Earnings per share (fils) 95.3 206.4 71.5 71.1 40.1

Based on financial statements under local GAAP.

* 2011 information are subject to approval at Annual General Meeting

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PRINCIPAL SUBSIDIARIES Continued

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

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

EGP’ 000s EGP’ 000s EGP’ 000s EGP’ 000s EGP’ 000s

Net profit * 195,868 164,348 128,245 183,056 146,756

Total assets 12,854,828 10,012,348 7,604,071 7,282,769 5,773,037

Total loans 5,802,342 5,443,987 4,444,684 4,105,418 2,521,147

Total liabilities 11,749,022 8,985,425 6,660,982 6,418,411 4,956,500

Shareholders’ equity* 1,096,322 1,017,506 933,701 864,358 816,537

Non-controlling interest 9,484 9,417 9,388 - -

Return on average assets 1.7% 1.9% 1.8% 2.8% 3.0%

Return on average equity 18.8% 17.0% 12.9% 21.8% 21.0%

Cost to income ratio 34.9% 39.4% 44.8% 41.9% 36.2%

Financial leverage 10.6 8.7 7.1 7.4 6.1

Risk asset ratio ** 13.1% 14.0% 16.2% 17.4% 20.4%

Earnings per share (EGP) 2.4 2.0 1.5 2.2 2.0

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

* Attributable to Bank’s equity shareholders

** Under Basel I

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PRINCIPAL ASSOCIATES

Qatar: Ahli Bank Q.S.C.

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

QR’ 000s QR’ 000s QR’ 000s QR’ 000s QR’ 000s

Net profit 442,245 412,329 300,515 425,781 302,652

Total assets 17,734,145 17,965,718 18,449,561 17,799,276 15,576,381

Total loans 12,154,725 11,338,854 12,407,056 11,547,061 10,105,785

Total liabilities 15,221,099 15,901,448 16,496,986 16,158,893 14,052,534

Shareholders’ equity 2,513,046 2,064,270 1,952,575 1,640,383 1,523,847

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

Return on average equity 19.2% 21.0% 17.5% 26.0% 24.6%

Cost to income ratio 28.7% 26.9% 31.4% 25.3% 30.0%

Financial leverage 6.1 7.7 8.4 9.9 9.2

Risk asset ratio * 22.1% 14.9% 15.2% 12.0% 12.9%

Earnings per share (QR) 6.4 6.5 4.9 7.3 5.2

* Under BASEL II

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PRINCIPAL ASSOCIATES Continued

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

Dec 11 Dec 10 Dec 09 Dec 08 Dec 07

RO’ 000s RO’ 000s RO’ 000s RO’ 000s RO’ 000s

Net profit 18,224 14,100 8,541 5,933 2,219

Total assets 929,604 805,594 616,058 456,405 305,967

Total loans 768,606 656,413 443,562 375,298 239,413

Total liabilities 809,392 703,488 523,440 369,349 224,978

Shareholders’ equity 120,212 102,106 92,618 87,056 80,988

Return on average assets 2.1% 2.0% 1.6% 1.6% 0.9%

Return on average equity 16.4% 14.5% 9.5% 7.1% 3.9%

Cost to income ratio 30.1% 35.9% 44.3% 54.0% 56.0%

Financial leverage 6.7 6.9 5.7 4.2 2.8

Risk assets ratio * 17.5% 19.7% 17.6% 23.4% 40.9%

Earnings per share (Baiza) 22.7 17.6 10.7 7.4 4.1

* Under Basel II

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Any business model is best tested under real life stress

scenarios. 2011 provided ample opportunities to test and

validate AUB’s resilience in the face of strong headwinds.


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 2011.

General Operating Environment

The geo-political developments in the MENA landscape since the advent

of the Arab Spring in the first quarter of 2011, together with the broader

uncertainties prevailing in the global economy, particularly Eurozone, have

had a significant negative impact on the business climate and prospects

for sustaining economic growth rates in the region. The full impact of

these developments has been evolving during 2011 and continues to

do so. Their main economic ramifications have been a marked drop in

consumer and business confidence from both the domestic and external

sectors resulting in a significant drop in growth rates in a number of

countries. This has been cushioned by expansionary fiscal policies and

lax monetary parameters adopted by Governments in an attempt to

reflate their economies and support growth. The benefits of these policies

however, require time and are affected by prevailing political uncertainties

in a number of countries and in the region as a whole.

Performance Overview

AUB’s response to this very challenging political and economic environment

was governed by two key principles; prudence and a commitment to the

long term interests of its clients, counterparties, shareholders and staff.

Major focus was on ensuring adequate liquidity at AUB Bahrain and all

operating banks. This has been achieved through additional deposit

mobilisations as reflected in the incremental loans/total deposits ratio of

51.5% and by the substantial increase in our unused funding limits and

Repo capacity.

Capital preservation and enhancement was demonstrated by the IFC/IFC

Capitalization Funds deal which increased AUB’s capitalization by US$ 290

million and elongated the maturity and capital eligibility of the existing

US$ 200 million subordinated debt facility as described below in greater detail.

Solid profitability and a continuing prudent dividend distribution policy

will further solidify the robustness of our capital position.

In terms of our obligation to all our clients and counterparties, our main

thrust has been to ensure continuous uninterrupted services at all points,

despite turbulent events which disrupted normal operations in some

of our markets. It has also been reflected in our sustained willingness to

support viable business and retail needs by increasing our loan portfolio in

a very disciplined and prudent manner taking into account the increased

prevailing risks.

Last but not least, our commitment to security of our staff and infrastructure

has been rigorously maintained with AUB’s systems and staff strongly

tested by past events and proven to be resilient and effective under a very

strong actual stress scenario which proved our ability to maintain business

continuity and provide client service.

As a result and despite the challenges faced during 2011, the Bank

continued to demonstrate the success and viability of its core business

model through another improved performance over 2010 with the

following key highlights:

• Consolidated net profit, attributable to the Bank’s equity shareholders, of

US$ 310.6 million as against US$ 265.5 million in 2010, a growth of 17.0%.

• Total operating income increased by 11.6% to US$ 842.1 million from US$

754.7 million in 2010, supported by a higher Net Interest Income (+11.4%).

• Improved results from associates in Qatar and Oman resulted in a net

US$ 5.1MM higher profit share (10.0% over 2010).

• Despite a difficult operating environment for the Bank and its clients,

asset quality levels were contained with a non-performing level at 2.5%

(2010: 2.4%). Overall net loan loss provision charge of US$ 129.8 million

was lower than last year (US$ 151.7 million). Total Loan Loss Provisions

coverage at the year-end was 135% of total impaired loans (2010: 120%).

• It should be highlighted that US$ 79.1 million of loan loss provisions,

representing 60.9% of the total loan loss and other provisions charge

raised, were collective impairment provisions primarily allocated to

comply with the general guidance and requirements of the applied

regulatory framework in different AUB markets and unrelated to any

specific counterparty impairments.

• Total assets increased by 7.1% to US$ 28.3 billion (2010 – US$ 26.5 billion).

Primary contributors to this growth were:

i) Loans and advances portfolio, which increased by 7.0% to US$ 15.5 billion

(2010: US$ 14.5 billion).

ii) Treasury bills and deposits with Central Banks, increased from US$

2.2 billion as at 31 December 2010 to US$ 2.6 billion as at 31 December

2011.

• Customers’ deposits were up by 16.9% to US$ 17.3 billion (2010: US$

14.8 billion), driven by continuing focus on sourcing low cost deposits

to reduce cost of funding.

• Cost discipline measures and higher staff productivity levels

contributed to the improvement of cost to income ratio during the

year to 32.4% (2010: 33.6%).

• Return on average equity further improved to 12.7% for 2011 compared

to 12.0% for 2010 while the return on average assets was sustained at

1.2% in 2011 (2010: 1.2%) attributable essentially to maintenance of

surplus liquidity levels invested in short term liquid instruments as a

contingency measure.

Business & Strategic Diversification

On 31 March 2011, the IFC Capitalization Equity Fund and the IFC

Capitalization Debt Fund (a joint venture between IFC and the Japan Bank

for International Cooperation “JBIC”) signed landmark capital raising deals

to provide AUB with US$ 125 million in new Tier-1 capital and US$ 165

million in new Tier-2 sub-debt facility. In addition, IFC also agreed to the

elongation of its existing US$ 200 million optionally convertible sub-debt

facility to increase its capital effectiveness for AUB. These deals represent

clear testimony of AUB’s credentials among prime international investors as

evidenced by a major long term capital commitment, effectively totaling

US$ 490 million, completed in the midst of the prevailing regional turmoil

and at very competitive market terms.

2011 was the first full year of operations following AUB Kuwait’s transition

to a fully-fledged Sharia’a compliant Islamic banking entity. It has further

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BOARD OF DIRECTORS


Fahad Al-Rajaan

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 D.C., 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.C.,

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

K.S.C. Kuwait; Vice Chairman, 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), Esterad Investment Co. and Member of the Board Investment

Committee; Deputy Chairman of the Board of Directors, Solidarity

Group Holding and Chairman of Audit Committee; Formerly Director

General, Pension Fund Commission; Formerly, Asst. Undersecretary for

Financial Affairs, Ministry of Finance & National Economy; Formerly, Asst.

Undersecretary for Economic Affairs, Ministry of Finance & National

Economy. Formerly, Director of Investment,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.; Board & Executive Committee

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

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

Former Dy. 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, UBAF (Hong Kong) Limited.; Former Director, Purchase &

Imports, Public Works Dept., Govt. of Kuwait.

Abdulla MH Al-Sumait

Director and Member of the Audit Committee; Non-Executive Director

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

Legal Consultant for Director General, The Public Institution for Social

Security, (Kuwait); Director, Kuwait Commercial Facilities Company; Director,

Ahli United Bank (Egypt) SAE.

(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 B.A. & M.A. (Rhodes Scholar) from

Oxford University, L.L.B 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) SAE.; Director and Chairman of the Audit Committee,

Ahli United Bank KSC, Kuwait ; Director and Chairman of the Audit Committee,

Kuwait & Middle East Financial Investment Company. Director Euroclear SA/

NV & Euroclear PLC; Director and Chairman of the Audit Committee, Euroclear UK

and Ireland Ltd; Director, Investors Capital Trust PLC.; Director and Chairman

of the Audit Committee, Threadneedle Asset Management Holdings S.A.R.L.;

Director, Program Planning Management Inc.; Trustee, Earthwatch Institute

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

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

Lehman Brothers International Ltd.; Former Director, Christie’s International

Limited.

Turki Bin Mohammed Al-Khater

Board of 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, U.S.A., 1982. President, General Retirement and Social

Insurance Authority, Qatar; Board Member, Al Masraf Al Rayan, Qatar; Board

Member of Qatar Telecommunication Co.(Qtel), 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 with Major in

Finance from Kuwait University, 1991. Chairman & CEO, 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 Bank of Kuwait & The Middle East, 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, Fouad Alghanim & Sons Group of

Companies, Kuwait; Chairman, Al Ghanayem Industrial Company KSC, Kuwait;

Member of the Board of Directors, Tamdeen Real Estate Company KSCC,

Kuwait; Member of the Supervisory Board, Jet Alliance Holding AG, Austria.;

Chairman, Flour Kuwait Co. KSC, Kuwait .

Adel A. El-Labban

Board of 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 BSC,

Bahrain; Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank KSC,

Kuwait; Director, Ahli Bank QSC, Qatar; Director, Ahli United Bank (Egypt) SAE,

Egypt; Director, Ahli Bank SAOG, Oman; Director, Commercial Bank of Iraq P.S.C:

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

for Commerce & Investment S.A.C., Libya; Board of Trustees, Bahrain Association

of Banks, Bahrain; Formerly: Chief Executive Officer and Director of the United

Bank of Kuwait PLC, UK; Managing Director, Commercial International Bank

of Egypt, (Egypt); Chairman, Commercial International Investment Company,

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

President, Arab Banking Corporation, Bahrain.

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CHAIRMAN’S STATEMENT

While the ground was shifting regionally and globally, the Bank

continued to be guided by values that do not change and remain

focused on safeguarding the interests of our shareholders, clients and

counterparties.

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GROUP CHIEF EXECUTIVE OFFICER &

MANAGING DIRECTOR’S STATEMENT

Over the years, AUB has focused on building a prudent bank that

balances growth and profitability in an adaptive manner while

remaining customer-centric and risk averse at its core

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CORPORATE GOVERNANCE

Good Corporate Governance practice is an important function in creating

and sustaining shareholder value and ensuring that organizational behavior

is ethical, legal and transparent. The Bank’s Corporate Governance Policy

provides a framework for setting the principles of effective Corporate

Governance standards across the Group.

The Board of Directors is committed to adhering to strong Corporate

Governance practices and to continually review these practices to align

compliance with international best practices, and provide a basis for high

quality services, a solid and sound financial standing as well as sustainable

growth.

The Bank’s management is committed to ensuring that appropriate

procedures and processes are in place to reflect and support the

Board approved policies to ensure the highest standards of Corporate

Governance throughout the organization, including conflict of interest

disclosure and management.

Shareholder Information

The Bank’s shares are listed on the Bahrain Bourse and the Kuwait Stock

Exchange. The Bank has issued 4,984,338,670 equity shares, each with a

nominal value of US$0.25. All shares are fully paid up.

The Annual General Ordinary and Extraordinary Meetings were held on

8 March 2011. The present Board of Directors was elected at the Annual

General Meeting held in 2009 and their term expires at the Annual General

Meeting to be held in 2012.

Table 1- Distribution of Ordinary Shares at 31 December 2011

(i) Ordinary Shareholders at 31 December 2011 (holding 5% and above)

Name

Public Institution For

Social Security

Country of

origin

No. of

shares

% Holding

Kuwait 921,581,251 18.49 %

Social Insurance Organization Bahrain 497,744,169 9.98%

Tamdeen Investment Company Kuwait 417,047,437 8.37%

Al-Mazaya Company B.S.C. ( C) Bahrain 310,862,422 6.24%

Sh. Salim Al-Nasser Al-Sabah Kuwait 269,332,087 5.40 %

(ii) Distribution of Ordinary Shares at 31 December 2011

Category

No. of shares

No. of

shareholders

% of Total

shares

50% and above - - -

Table 2- Distribution of Preference Shares at 31 December 2011

(i) Non Cumulative Preference Shares

Category

No. of shares

No. of

shareholders

% of Total

shares

50% and above - - -

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 26.90%

Less than 1% 42,377,159 358 8.48%

TOTAL 500,000,000 374 100.00%

(ii) Mandatorily Convertible Preference Shares

Category

No. of shares

No. of

shareholders

% of Total

shares

50% and above 500,000,0000 1 100%

Table 3- Government Holdings and the distribution of Ordinary Shares

by Nationality

No.

Name

No. of

Shares

% of Total

shares

1 Kuwait Quasi Government 921,581,251 18.49%

2 Bahrain Quasi Government 503,213,503 10.10%

3 Qatar Quasi Government 81,976,484 1.64%

4 Kuwait Individuals and Corporates 2,812,365,081 56.42%

5 Bahrain Individuals and Corporates 527,688,921 10.59%

6 Others 137,513,430 2.76%

TOTAL 4,984,338,670 100.00%

Board and Board Committees

The Board and its committees represent an appropriate mix of

professional skills and expertise. The Board periodically reviews its

composition and the contribution of Directors and Committees.

20% up to less than 50% - - -

10% up to less than 20% 921,581,251 1 18.49%

5% up to less than 10% 1,494,986,115 4 29.99%

1% up to less than 5% 1,083,896,710 11 21.75%

Less than 1% 1,483,874,594 3,219 29.77%

TOTAL 4,984,338,670 3,235 100.00%

22


Board of Directors and Board Committees

Board of Directors

Fahad Al-Rajaan

Hamad A. Al Marzouq

Rashid Ismail Al-Meer

Turki Bin Mohamed Al-Khater

Mohammed Fouad Al-Ghanim

Abdulla MH Al-Sumait

Mohammed Jassim Al-Marzouk

Mohammed Saleh Behbehani

Herschel Post

Adel A. El-Labban

Non-Executive / Chairman

Executive / Deputy Chairman

Non-Executive / Deputy Chairman

Independent Non-Executive

Independent Non-Executive

Non-Executive

Non-Executive

Independent Non-Executive

Independent Non-Executive

Executive

Executive Committee

Fahad Al-Rajaan

Hamad A. Al Marzouq

Rashid Ismail Al-Meer

Mohammed Jassim Al-Marzouk

Mohammed Saleh Behbehani

Adel A. El-Labban

Non-Executive / Chairman

Executive

Non-Executive

Non-Executive

Independent Non-Executive

Executive

Audit and Compliance Committee

Herschel Post

Turki Bin Mohamed Al-Khater

Mohammed Fouad Al-Ghanim

Abdulla MH Al-Sumait

Independent Non-Executive / Chairman

Independent Non-Executive

Independent Non-Executive

Non-Executive

Compensation Committee

Fahad Al-Rajaan

Hamad A. Al Marzouq*

Herschel Post

Non-Executive / Chairman

Executive

Independent Non-Executive

Nominating Committee

Herschel Post

Turki Bin Mohamed Al-Khater

Mohammed Fouad Al-Ghanim

Abdulla MH Al-Sumait

Independent Non-Executive / Chairman

Independent Non-Executive

Independent Non-Executive

Non-Executive

* The Board of Directors has approved the appointment of Mr. Mohammed Saleh Behbehani (Independent Director) to replace Mr. Hamad Al Marzouq as

of 28 March 2012.

23


CORPORATE GOVERNANCE Continued

The Role of the Board

The Board of Directors is responsible to shareholders for creating

and delivering sustainable shareholder value through the prudent

management of the Bank’s business. The Board of Directors therefore

determines the strategic objectives and policies of the Bank to deliver such

long term value, providing overall strategic direction within a framework

of rewards, incentives and controls. The Board of Directors ensures that

management strikes an appropriate balance between promoting long

term growth and delivering short term objectives.

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

presentation of the consolidated financial statements in accordance with

International Financial Reporting Standards. The Board of Directors is also

responsible for ensuring that management maintains a system of internal

controls which provides assurance of effective and efficient operations,

internal financial controls and compliance with laws and regulations.

In carrying out these responsibilities, the Board has regard to what is

appropriate for the Bank’s business and reputation, the materiality of the

financial and other risks inherent in the business and the relative costs and

benefits of implementing specific controls.

Director Classification and Board Composition

In compliance with the CBB Corporate Governance requirements, the Board of

Directors has outlined its criteria and materiality thres holds for the definition

of “Independence” in relation to Directors. The independence criteria are

reassessed annually by the Board of Directors and consequently, the 10

Directors comprising the Board are classified as follows:

• 4 Independent Non-Executive Directors

• 4 Non-Executive Directors; and

• 2 Executive Directors including the Group CEO &

Managing Director.

HC-1.4.6 in the CBB rulebook recommends that the Chairman of the

Board of Directors should be an independent Director. The AUB Chairman

is currently not classified as independent due to his position as Director

General of Public Institution For Social Security, a major shareholder of the

Bank. This does not compromise the Bank’s high standards of Corporate

Governance as the Bank follows strict policies to manage conflict of

interests in Board decisions and the Chairman maintains a Non-Executive

Director status.

Board Meetings and Attendance

A summary of the Board and Board Committee meetings held during

2011 and attendance of each Director are detailed below:

Name of Board /

Committees

Members’ Names No. of Meetings Meetings Dates Meetings Attended

Fahad Al-Rajaan

4

Hamad A. Al Marzouq 4

Rashid Ismail Al-Meer 4

Board of

Directors

Turki Bin Mohamed Al-Khater

Mohammed Fouad Al-Ghanim

Mohammed Jassim Al-Marzouk

Abdulla MH Al-Sumait

4

20 Feb 2011

18 May 2011

21 Sept 2011

30 Nov2011

1

3

3

4

Mohammed Saleh Behbehani 3

Herschel Post 4

Adel A. El-Labban 4

Fahad Al-Rajaan

4

Executive

Committee

Hamad A. Al Marzouq

Rashid Ismail Al-Meer

Mohammed Jassim Al Marzouk

Mohammed Saleh Behbehani

4

20 Feb 2011

18 May 2011

21 Sept 2011

30 Nov 2011

4

4

3

3

Adel A El-Labban 4

Audit and Compliance

Committee

Compensation

Committee

Herschel Post

20 Feb 2011

4

Mohammed Al-Ghanim 18 May 2011

3

4

Abdulla MH Al-Sumait 21 Sept 2011

4

30 Nov 2011

Turki Bin Mohamed Al-Khater 2

Fahad Al Rajaan

1

Hamad A. Al Marzouq 1

8 March 2011

1

Herschel Post 1

24


All members of the Board of Directors, except one, have attended at

least 75% of all Board meetings in the year. Mr. Turki Bin Mohammed Al-

Khater did not attend three of the four meetings held in 2011, due to

unscheduled requirements to attend key ministerial meetings in Qatar in

his capacity as the President of General Retirement and Social Insurance

Authority, Qatar . In the event a Director has not attended at least 75%

of Board meetings in any given financial year, the Terms of Reference of

the Board requires Directors to immediately notify the Bank with details

of any mitigating circumstances affecting his non-attendance for onward

notification to CBB. This procedure was duly followed and an explanation

submitted.

Papers relevant to the Agenda of each Board meeting are sent to Director’s

as appropriate, before each meeting and when necessary, between

meetings.

Election and Termination of Appointment of Directors

Directors are elected for a 3 year term. Elections take place in accordance with

the Memorandum and Articles of the Bank, the Commercial Companies Law

and the CBB Rulebook. There is no maximum age limit at which a Director

must retire from the Board of Directors. Each Director’s membership shall

terminate upon the expiry of his/her term, pursuant to the terms of his/her

Letter of Appointment and/or the provisions of the law.

Induction of Directors

The Bank has an induction programme in place which is designed for

each new Director to ensure his/her contribution to the Board from the

beginning of his/her term. The induction programme includes: i) an

introductory pack containing, amongst other things, the Group Overview,

Group Organisational Chart, Terms of Reference of the Board and Board

Committees and certain key policies; ii) presentations on significant

financial, strategic and risk issues; and iii) orientation meetings with key

management as may be required. As a standing procedure, all continuing

Directors will be invited to attend orientation meetings.

Evaluations

The Board, Individual Director and Board Committee evaluations were

carried out through the completion of a structured questionnaire on

their effectiveness and contribution against certain pre-defined criteria as

per the Board and Board Committees mandates and other requirements

as prescribed in the CBB’s High Level Controls Module. The evaluation

methodology was determined by applying a scoring methodology,

and their results indicated that the Board, Individual Directors, as well

as the Board Committees, continue to operate with a high degree of

effectiveness.

Directors’ and Related Parties’ Interests

No Director has entered into, either directly or indirectly, any material

contract with the Bank or any of its subsidiaries, nor does any Director

have any material conflict of interest with the Bank. The Directors are

further required to declare any conflict of interest or any potential conflict

of interest that exist or that Directors become aware of, to the Chairman

and Corporate Secretary as soon as they become aware of them. This

disclosure must include all relevant material facts.

The Bank has a process for dealing with transactions involving Directors

and related parties. Any such transaction will require the approval of the

Board of Directors, excluding the conflicted Director(s).

The Terms of Reference of the Board require that all Directors, whether

Non-Executive or Executive, should exercise independence in their

decision-making and should abstain from any decisions involving any

actual or potential conflicts of interest.

Should any Director have any doubts about a conflict of interest or

potential conflict of interest, he / she should consult the Chairman prior to

doing anything that might compromise the Bank.

All Directors (and other approved persons) have declared in writing all

of their other interests in other enterprises or activities (whether as a

shareholder of above 5% of the voting capital of a company, a manager, or

other form of significant participation) to the Board of Directors.

The number of shares held by Directors as of 31 December 2011 are as

follows:

No. Name No. of Shares

1 Fahad Al-Rajaan 157,000

2 Hamad A. Al Marzouq 82,540,262

3 Rashid Ismail Al-Meer 279,464

4 Turki Bin Mohamed Al-Khater -

5 Mohammed Fouad Al-Ghanim 440,187

6 Abdulla MH Al-Sumait -

7 Mohammed Jassim Al-Marzouk 144,431

8 Mohammed Saleh Behbehani 113,552,593

9 Herschel Post -

10 Adel A. El-Labban -

TOTAL 197,113,937

Percentage 3.95%

None of the Directors carried out any trading in the Bank’s shares during

the year 2011.

The number of shares held by Senior Management as of 31 December

2011 are as follows:

No

Name/Entity

No. of

Shares

Volume

Traded

1 Shafqat Anwar 61,766 -

2 Salah Jassim Murad* 474,370 -

3 Murad Investment Co, W.L.L. / Salah Murad* 2,235,493 -

*Resigned from AUB Group as of 16 February 2012.

No member of senior management carried out any trading in the Bank’s

shares during the year 2011.

Material Transactions

Besides large credit transactions that require Board approval as per the

Credit Policy, the Board also approves senior unsecured medium term

(greater than 1 year) funding initiatives, strategic investments decisions, as

well as any other decisions which have or could have a material financial

or reputational impact on the Bank.

25


CORPORATE GOVERNANCE Continued

Board Committees

The Board has put in place a number of Board Committees, membership

of which is drawn from the Directors and to which it has delegated specific

responsibilities through Terms of Reference approved by the Board on an

annual basis. The principal Board Committees are:

Audit & Compliance Committee

The Audit and Compliance Committee assists the Board in discharging its

responsibilities relating to the Bank’s accounting, corporate governance

and key persons dealings and market abuse practices, internal audit

controls, compliance procedures, risk management systems, financial

reporting functions and in liaising with the Bank’s external auditors and

regulators to ensure compliance with all relevant regulatory requirements

and consistency with best market practices.

The Audit and Compliance Committee consists of 4 members comprising

3 Independent Directors, including the Chairman and 1 Non-executive

Director.

Executive Committee

The Executive Committee assists the Board in discharging the Board’s

responsibilities relating to matters including credit and market risk matters.

The Executive Committee consists of 6 members comprising 1

Independent Director, 3 Non-Executive Directors and 2 Executive

Directors, including the Group CEO & Managing Director.

Nominating Committee

The Nominating Committee was established by the Board on 21

September 2011.

The Nominating Committee supports the Corporate Governance regime

of the Bank, aligns it with the regulations of the CBB and instills a best

practice approach to the matters assigned to it, at all times acting within

the criteria set by the CBB Rulebook and the relevant sections of the

Bahrain Commercial Companies Law, and any other applicable legislation

and following a fair and balanced approach.

.

The Nominating Committee consists of 4 members comprising 3

independent Directors, including the Chairman and 1 Non-Executive

Director. The Bank is accordingly in full compliance with the CBB Corporate

Governance requirement.

The Nominating Committee held its first meeting on 21 February 2012.

Compensation Committee

The Compensation Committee provides a 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 Compensation Committee consists of 3 members comprising

one Independent Director, one Non- Executive Director, including the

Chairman and one Executive Director. While the composition of this

committee is not fully consistent with the recommendation under the

corporate governance guidelines, this has not resulted in any conflict

of interest as the Executive Director involved has abstained from voting

on issues, where any conflict or potential conflict of interest existed. The

Committee was reconstituted on 28 March 2012, with its membership

changed to be in line with corporate governance guidelines.

The Compensation Committee also sets the remuneration policy for

the Bank’s Directors, senior management and staff. The AUB employee

remuneration policy provides a framework for remuneration to attract,

retain and motivate employees to achieve Board approved objectives.

This ensures a meritocratic management structure with profit related

incentives and focuses on creating a performance driven culture and on

achieving sustainable growth.

Senior Management

Names

Adel A. El-Labban

Bassel Gamal

Sanjeev Baijal

Keith Gale

Shafqat Anwar

Abdulla Al-Raeesi

Sawsan Abulhassan

Title

Management Committees

Group CEO & Managing Director

Senior Deputy Group CEO - Banking Group

Deputy Group CEO - Finance & Strategic Development

Deputy Group CEO - Risk, Legal & Compliance

Deputy Group CEO – Operations & Technology

Deputy Group CEO - Retail Banking

Deputy Group CEO - Private Banking &

Wealth Management

The Board has established a management structure that clearly defines

roles, responsibilities and reporting lines. The Bank’s management

monitors the performance of the Bank and each of its subsidiaries and

associates on an ongoing basis and reports this performance to the

Board of Directors. The monitoring of performance is carried out through

a regular assessment of performance trends against budget, and prior

periods and peer Banks in each of the markets and collectively through

Group Committees and Sub-Committees at the parent bank and its

subsidiary / affiliated banks’ level. Specific responsibilities as explained

below, have been delegated to each Committee, and the minutes of

all management committees are sent to the Audit and Compliance

Committee which assesses the effectiveness of these committees.

Group Management Committee

The Group Management Committee is the collective group management

forum providing a formal framework for effective consultation and

transparent decision-making by the Group CEO & Managing Director

and senior management on cross-organisational matters. Appropriate

checks and balances ensure the “four eyes” regulatory requirement is

met. The committee has broad mandate encompassing group wide as

well as Bank and unit specific issues as determined by the Group CEO &

Managing Director and other members of the committee. It is chaired

by the Group CEO & Managing Director and comprises of twelve other

members, including all Deputy Group CEOs and CEOs of subsidiary and

affiliated banks.

26


Group Asset and Liability Committee

The Group Asset and Liability Committee 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 Senior

DGCEO-Banking Group and has seven other members.

Group New Product Committee

The Group New Product Committee reviews and approves new products,

processes and services for wealth management, treasury, retail, commercial

banking and other areas of the Group. The committee assesses all related

reputational, operational, credit, liquidity and market risk as well as IT, legal,

compliance, control, staffing and capital/profit allocation issues related to

approving new products. The approval by the committee follows the new

product or process development requirements according to the New

Product Approval and Development Procedure. It is chaired by Senior

DGCEO-Banking Group and has nine other members.

Group Information Technology Steering Committee

The Group Information Technology Steering Committee 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 CEO & Managing Director as part of the

annual business planning/budgetary exercise for submission to the Board

of Directors for review and final approval. It supervises the implementation

of the approved IT annual plan within set deadlines and budgetary/Board

approved allocations within the Bank’s overall capital expenditure policy. It

is chaired by the DGCEO-Finance & Strategic Development and comprises

of seven other members.

Group Risk Committee

The Group Risk Committee, 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.

Group Operational Risk Sub-Committee

Group Operational Risk Sub-Committee 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.

Group Special Assets Sub-Committee

The Group Special Assets Sub-Committee 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.

Management Committee

The Management Committee 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 Bankwide

and unit specific issues as determined by the GCEO & Managing

Director and its other members in relation to the business of Ahli United

Bank, as a legal entity. It is chaired by the Senior DGCEO-Banking Group

and has six other members.

AUB Assets and Liability Committee

AUB Assets and Liability Committee sets, reviews and manages the

liquidity, market risk and funding strategy of AUB, the parent bank 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.

Other Governance Measures

In addition to the Board and management committee structures, the

Board of Directors has approved a number of group policies to ensure

clarity and consistency in the operations of the AUB Group. These policies,

which are communicated to staff, include Credit, Anti-money laundering,

Corporate Governance, Personal account dealing, Key Persons Dealings,

Banking Integrity, Compliance, Legal and Human Resources policies.

Underpinning these policies is the Board approved Group Code of Business

Conduct which prescribes standards of ethical business behaviour and

personal conduct for the Bank’s Directors, its senior management (officers)

and its employees.

The Banking Integrity Policy, which sets out the Bank’s policy on whistle

blowing is specifically designed to enable staff at all levels to raise

concerns in confidence regarding any malpractice or irregularity within

the AUB Group.

The Board of Directors has also adopted a Group Communications Policy.

This policy sets out the authority of AUB Group employees with respect to

the communication of information to third parties in the course and scope

of their employment. The Bank has an open policy on communication

with its stakeholders and has adopted a communication disclosure policy

consistent with Basel II requirements. Shareholders are invited by the

Chairman to attend the AGM. The Chairman and other Directors attend

the AGM and are available to answer any questions. The Bank is at all

times mindful and conscious of its regulatory and statutory obligations

regarding dissemination of information to its stake holders.

The Bank provides information on all events that merit announcement,

either on its website – www.ahliunited.com, Bahrain Bourse, and other

forms of publications, such as press releases, the Bank’s annual report

and quarterly financial statements, and key policies are published on the

Bank's internal portal.

The Board monitors compliance with its policies through periodic reviews

performed by internal and external auditors on the AUB Group’s business

and control functions. These reviews are conducted in order to identify any

weaknesses, which then enable management to take appropriate action.

27


GROUP BUSINESS & RISK REVIEW

Private Banking & Wealth Management

The private banking and wealth management business has experienced

major changes in the wake of the global financial and economic crisis.

During 2011 wealth management performance across the world was

impacted by tighter financial market regulation, stiffer competition and

uncertainty in the financial markets.

In difficult market conditions, AUB strategy focused on providing

maximum reassurance and support to our investors. Markets and products

were evaluated in a manner enabling investors to see beyond short-term

fluctuations in financial markets. The process of investor risk profiling was

enhanced and innovative products were launched to cater to various

levels of investors’ risk appetite. Such measures proved both prudent and

successful in negating the effects of financial market volatility and adverse

economic conditions.

Achieving growth in both assets under management and revenue, while

managing profitability, proved highly challenging in an unfavourable

environment. However, targets were accomplished largely through the

division’s capability in developing innovative products, commensurate

with the needs and limitations of the marketplace.

With the objective of growing the business, the number of private bankers

in UK and Egypt increased, facilitating market penetration by the onshore

centre locally and by the offshore centre in UK. During the year, two

capital protected products were launched, one linked to Asian equities

and the other to agricultural commodities, and two structures were

introduced linked to our newly developed proprietary indices, the AUB

Twister Strategy Index and the AUB Super Strategy Commodity Index. The

four new structured products were clearly validated by achieving sales

in excess of USD174 million. In addition, and following the successful

introduction of the AUB Student Accommodation Fund in 2010, a second

launch was initiated in 2011 which resulted in a GBP 60 million equity

increase to close the fund at GBP100 million.

AUB has become established as an important player in the private banking

business. In continuing to seize opportunities and gain market share,

AUB’s progress received further recognition by winning the Best Private

Bank in Bahrain - 2011 from Euromoney.

In the long-term the division is focused on increasing the client base

within the countries where the Group operates, by delivering products

to investors that generate favourable risk-adjusted returns independent

of market cycles, which will enable AUB to provide distinctive solutions

to realize clients’ desired outcomes. In doing so, developing the quality

of service offerings to clients across the Group will continue to be a key

priority.

Retail Banking

In 2011, Retail Banking continued to focus on developing new market

opportunities and improving penetration levels across product and

market segments with focus on the higher income segments and clients

with regional banking requirements.

AUB has established a robust regional retail presence through 129

branches across 8 markets, supported by a commanding ATM and remote

banking network. With its strong pan-regional network across the GCC,

Egypt, Iraq, Libya and UK, AUB is geared to offer customers a wealth of

local knowledge, experience and support across these markets. AUB has

encouraged customers to have relationships across entities to best meet

their dual banking needs at country of residence and their home country.

MyGlobal, the Bank’s leading cross-border product, now enables clients

to access AUB network and services from any location, with dedicated

Relationship Managers providing strong local knowledge to support their

banking requirements. With the recently launched online viewing of the

MyGlobal consolidated statement customers are now able to view their

consolidated relationship across the AUB network through AUB’s internet

banking platform.

In meeting the objective of increasing low cost liability to improve overall

retail profitability, AUB consolidated the continued success of liability

growth mainly through the marketing of its flagship product, MyHassad

savings, across the AUB network. In 2011 the scheme that supports the

largest prize pool in the region witnessed significant growth as well as

enabling AUB to improve household penetration and initiate further

opportunities to cross sell other products.

In confronting future challenges to lending across the region, Retail

Banking operations were reviewed to identify avenues that would

ensure sustained growth going forward. As a result, the asset portfolio

was increased through the introduction of products and services which

included attractive consumer finance to capitalize on low market rates.

With continued focus on Islamic Banking during 2011, AUB was successful

in introducing a personal finance product and loan enhancement facility

which increased the overall Islamic asset portfolio.

Customer service levels were raised further with ongoing technology

enhancements including the launch of Islamic internet banking in Bahrain.

Al Hilal customers now have access online to the full range of banking

services and MyGlobal customers can view their consolidated statements

on internet banking. Further security improvements on password and

email registration will facilitate online credit and debit transactions during

2012.

In addition, a range of Bancassurance products was introduced in Qatar,

Oman and Kuwait through a joint venture with the UK based Legal &

General Group, further complementing the products and services offering

through the AUB network.

Further growth in the coming year 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. Additionally, new point of sale

services are scheduled for launch to meet our existing corporate customer

needs, facilitate new customer acquisition and enhance AUB’s fee income.

Corporate Banking

While prospects for 2011 were encouraging, progress was curtailed

by geopolitical developments in the region, which had an impact on

Corporate and Trade Finance business. In Bahrain, local disturbances had

limited effect on banking operations, with negligible impact on asset

quality but some slowdown in new projects. In Egypt, there were shortterm

challenges due to disruption and closures imposed by the Central

Bank and in Libya, where AUB’s corporate banking business is still relatively

small, security and sanctions issues had a more serious impact generally,

although most bank branches remained open for business.

28


AUB’s Corporate Banking business continued to be derived from SMEs

and specialised industry groups. Lending remained driven by cash flow

requirements, being secured or focused on large regional corporates and

government entities. The business unit maintained focus on relationship

banking with selective loan growth and cross-selling in cooperation

with other divisions, mainly treasury. The group was also successful in

introducing internet banking facilities and cash management products

for corporates.

Despite the challenging operating environment, notable progress

was achieved in selectively financing infrastructure projects critical to

the economic development of MENA region countries. By providing

clients with support and assistance in overcoming deteriorating

economic conditions, relationships were further strengthened without

compromising the quality of the AUB loan portfolio. Positive growth

was noted in acquiring operating accounts and liability business from

corporate clients and cross-border opportunities in AUB Group locations.

The implementation of business-to-business integration and internet

banking enhanced transaction volumes and provided clients with onestop

banking solutions. While the loan book was expanded selectively,

focus was placed on export oriented trade finance transactions and

growth in profitability was achieved through repricing of the loan book

and realigning the currency mix.

Looking ahead, Corporate Banking will continue its focus on liquidity,

actively increasing customer deposits with selective loan growth. Growth

prospects in the domestic markets of several countries across the region

remain strong although progress will depend upon local socio-political

developments. Cross-border financing and trade finance will continue

to be a core activity supporting the expansion of corporate relationships

throughout the region.

With the conversion of AUB (Kuwait) to Islamic banking and the continued

extension of Sharia-compliant products to other operations, Islamic

Banking continues to provide a core focus for growth going forward.

The increased Islamic banking opportunities arising in Oman should

compensate for the regulatory restrictions on conventional banks in Qatar.

The regional events in 2011 and the global financial uncertainty has

resulted in Corporate Banking adopting a more cautious approach,

focusing on improving cost efficiency and reducing the overall risk profile

of the loan book.

Treasury

2011 presented another year of unprecedented challenges, with central

banks’ policies continuing to focus on providing liquidity and maintaining

historic low levels of interest rates. During the latter part of the year,

market focus shifted away from the problems that had pressured Banks

into restructuring their balance sheets and addressed government

policies, especially in the Euro zone and the risks associated in running

huge public sector deficits.

The strategy for Treasury continued to prioritise 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 continuing to remain a net provider of funds

to the wholesale market.

Market volumes declined generally throughout 2011, mainly due to the

events of the Arab Spring earlier in the year. However, our market share

remained secure as we continued to offer our clients very competitive

pricing in an exceptionally difficult trading environment. In further

expanding Treasury services, the online trading unit became fully

functional under the Treasury umbrella, enabling AUB to offer its customer

base full access to both regional and international equity markets. It was

gratifying to note that, for the sixth consecutive year, AUB was named as

‘Best Foreign Exchange Bank & Provider in the Middle East & Bahrain’ by

Global Finance magazine.

Following significant challenges in the global markets over the past three

years, 2012 is expected to see global growth at minimal levels, as markets

adjust to an increase in market volatility from the European debt crisis and

the additional measures of liquidity which central banks are expected to

provide. Going forward, Treasury will continue to source new products in

order to enhance customers’ returns on deposits and reduce risk on their

loan portfolios.

In anticipation of a broader economic recovery in 2012, the Bank will

adopt a more dynamic approach to further strengthen our client focused

approach 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 supports the Group’s business strategies

by delivering customer centric, innovative and industry-benchmarked secure

solutions, meeting customers’ banking needs on an operationally robust basis

and through its target application systems and infrastructure architecture.

During 2011, the strategy continued to focus on standardization of services,

applied uniformly across the Group wherever possible, to achieve economies

of scale and a common customer experience irrespective of location within

the AUB banking network.

In line with the Bank’s strategy to expand electronic banking delivery

channels across the Group, enhanced corporate internet banking services

were introduced in AUB Egypt and AUB UK, complementing existing internet

banking services offered in AUB Bahrain, Ahli Bank S.A.O.G., Oman and Ahli

Bank Q.S.C., Qatar. Phone banking services were also extended through roll

outs to AUB UK and Ahli Bank S.A.O.G., Oman.

Electronic banking channels, which continued to provide efficient and

effective banking services across corporate, retail and private banking

segments, experienced increased customer enrolment and transaction

volumes during 2011. The newly introduced business-to-business

integration solution for corporate enterprise resource planning enabled

customers to automate various business processes including vendor

payments, funds transfer, accounts receivable, accounts payable,

reconciliation and human resources payroll systems. In addition to

savings in processing times, this B2B solution provided a significant basis

for realizing in-house synergies and increasing productivity.

In line with our strategy of standardization, the Group’s Islamic Banking

franchise made further progress with the successful implementation of

a new Islamic Banking version of the Treasury systems platform in AUB

Kuwait. Ahli Brokerage Company, a wholly owned subsidiary of Ahli Bank

Q.S.C., Qatar, implemented a state- of-the-art brokerage system to enable

straight through execution of securities transactions. The system, which is

fully integrated with the Qatar Securities Exchange for quotations, order

placement and securities transfers, is currently the only brokerage service

29


GROUP BUSINESS & RISK REVIEW Continued

in Qatar that offers financial institutional workflow and algorithmic trading

to support advanced and complex order processing.

In Bahrain, as mandated by the Central Bank of Bahrain (CBB), AUB

achieved full readiness for implementation of International Bank Account

Number (IBAN) which will further facilitate straight-through processing

for customers’ inward and outward remittances. Also in line with CBB

directives, AUB implemented all systems necessary to process and provide

customer services for the Bank’s retail customers and investors seeking to

participate in Government Securities issuances.

Information security forms a cornerstone of AUB’s technology platform

and architecture. It is considered of paramount importance that

AUB customers should be fully assured of the utmost integrity and

confidentiality in the execution of their financial transactions. In line with

the Bank’s continued commitment to sustaining the highest standards of

information security, providing independently certified assurance to its

stakeholders on a continuing basis remains a key priority. Application of

an annual review and certification process enabled AUB to maintain ISO

27001 and PCI DSS certification for its information processing capabilities

within the recognized international standards for information security.

This obligation included establishing and maintaining an integrated

security framework and executing a security programme that supports

the accomplishment of the Bank’s strategic goals and priorities.

Human Resources

The strategic focus for Group Human Resources in 2011 saw a significant

change in the HR landscape to include ISO 9001 quality service indicators

and increased customer engagement in the HR self-development cycle,

through solicitation and incorporation of customer feedback.

Group Human Resources during the year focused on a number of

initiatives which targeted enhancements to service quality. Among notable

achievements were attainment of the upgraded ISO 9001 certification and

the development of balanced scorecard metrics for specific use in HR self

assessment and development.

Emphasis was also placed on upgrading the bank-wide succession and

career development plans in order to identify talent and ability and nurture

growth. The Group HR self-audit was launched during this year which,

through an internal self correcting mechanism, provides the capability to

deal proactively with any potential audit findings related to operational

processes.

2011 also witnessed the development and implementation of

comprehensive assessment centers for retail staff as well as identification

of potential candidates for leadership posts across the Bank. With the

automation of ability and technical competency testing included among

AUB’s assessment center tools, the Bank became the first financial

institution in the MENA banking sector to implement this capability.

The launch and activation of the Group HR MIS solution (OHR system) and

related component modules was completed across the Group, enabling the

secure use of a shared staff information database and shared services that

support the centralization of HR functions in Bahrain. Successful utilization

of the OHR system also facilitated several key benefits, namely, improving

the accuracy and precision of data generated, upon which management

decisions are based; improving process efficiency and consequent speed

of quality service delivery and optimizing the function of shared services

which eliminates process and functional redundancy within Group HR,

ultimately reducing cost.

Notable progress on a Group-wide basis was also achieved in the coordinated

mobilization and reactivation of United Bank of Commerce and Investment

secondees and a Group-branded customized AML course was introduced. HR

processes and procedures continued to be streamlined and compensation

policies in key markets were reviewed relative to updated and current market

trends with a focus on cost-reduction while maintaining a competitive

compensation scheme. Development of a customized and fully integrated

AUB-branded credit program forged ahead with implementation scheduled

in 2012.

In an important structural improvement, AUB Group’s commitment to

upgrading training and development practices across all entities was

further underlined with the reconfiguration of the Group training and

development function which will oversee and coordinate all development

related activities across the Group.

Going forward, strategic focus will prioritise the development and execution

of Group-branded training programs which will enhance AUB’s ability to

attract, retain and develop new talent across the Group. A branded credit

program and fast track leadership programs for private banking and wealth

management will form part of this project as well as establishing a retail

academy for the development of talent within the retail banking arena.

Integral to realization and success will be the development of a branded

career channel, enabling AUB Group to source high caliber candidates for

recruitment through a specialized and secure database while marketing the

Group’s recruitment portal to candidates across the MENA region.

In anticipation of future challenges to the retention of nationals in GCC

markets, Group HR moved proactively to develop contingency plans

which include more flexible work schedules for local students in customer

service roles which have been successfully pioneered in the AUB business

environment.

Human Resources continued to support and strengthen the Bank’s mission

to contribute to the social and economic advancement of the communities

in which the Bank operates through charitable donations. During the

year, the Bank contributed financial support to a wide range of charities

and causes such as support of the disabled, development of women and

educational scholarships. The Bank also maintained funding of various civic

initiatives through programs centrally run by Bahrain’s Ministry of Human

Rights & Social Development and the Ministry of Justice and Islamic Affairs.

Risk Management

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.

30


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.

Credit Risk

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.

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 writeoff

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 specific and collective 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.

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)

31


GROUP BUSINESS & RISK REVIEW Continued

Value at Risk

US$ millions

2011 2010

US$ millions

Average 0.37 0.48

Minimum 0.09 0.18

Maximum 0.97 1.45

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.

Operational Risk

Operational Risk is “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 offsite

data 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.

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 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.

32


Throughout 2011, AUB succeeded in remaining open for

business, delivering uninterrupted service and support

to all despite the exceptional events in several of our

operating markets.


GROUP ORGANISATION

34


GROUP MANAGEMENT

Adel A. El-Labban

Director and Executive Committee Member; Executive Director

Group Chief Executive Officer and Managing 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. 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.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: 33 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.C., 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: 21 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: 28 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: 31 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: 28 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 (since September 2004); 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. Holds an MBA in General

Business Administration from the University of Hull, United Kingdom.

(Total years of experience: 28 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: 20 years)

35


CONTACT DETAILS

Ahli United Bank B.S.C.

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) P.L.C.

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.

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.

Suhaim Bin Hamad St.

Al Sadd Area

P.O. 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.

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.C.

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)

P.O. Box 819

Safat 13009, Kuwait

Telephone : +965 2245000

Facsimile : +965 2440627

Email: info@kmefic.com.kw

www.kmefic.com.kw

36


AUB’s presence as a truly regional bank in the Middle East

has resulted in a natural hedge against any particular

market disturbances.


AUDITORS’ REPORT TO THE SHAREHOLDERS AND

CONSOLIDATED FINANCIAL STATEMENTS 2011

Independent auditors’ report to the shareholders of Ahli United Bank B.S.C ........................................................................................................................................................ 40

Consolidated Statement of Income.............................................................................................................................................................................................................................................................. 41

Consolidated Statement of Comprehensive Income.................................................................................................................................................................................................................... 42

Consolidated Balance Sheet................................................................................................................................................................................................................................................................................. 43

Consolidated Statement of Cash Flows..................................................................................................................................................................................................................................................... 44

Consolidated Statement of Changes in Equity................................................................................................................................................................................................................................... 45

Notes to the Consolidated Financial Statements.............................................................................................................................................................................................................................. 47

1 Corporate information.................................................................................................................................................................................................................................................................................. 48

2 Basis of consolidation..................................................................................................................................................................................................................................................................................... 48

3 Accounting policies......................................................................................................................................................................................................................................................................................... 48

3.1 Basis of preparation.......................................................................................................................................................................................................................................................................................... 48

3.2 Significant accounting judgements and estimates............................................................................................................................................................................................................ 49

3.3 Summary of significant accounting policies............................................................................................................................................................................................................................. 49

4a Interest income.................................................................................................................................................................................................................................................................................................... 55

4b Interest expense.................................................................................................................................................................................................................................................................................................. 55

5 Fees and commissions.................................................................................................................................................................................................................................................................................. 55

6 Trading income.................................................................................................................................................................................................................................................................................................... 55

7a Cash and balances with central banks............................................................................................................................................................................................................................................ 56

7b Treasury bills and deposits with central banks........................................................................................................................................................................................................................ 56

8 Loans and advances........................................................................................................................................................................................................................................................................................ 56

9 Non-trading investments........................................................................................................................................................................................................................................................................... 58

10 Investment in associates and joint venture................................................................................................................................................................................................................................ 59

11 Premises and equipment............................................................................................................................................................................................................................................................................ 60

12 Interest receivable and other assets.................................................................................................................................................................................................................................................. 60

13 Goodwill and other intangible assets................................................................................................................................................................................................................................................. 60

14 Deposits from banks and other financial institutions........................................................................................................................................................................................................ 60

15 Borrowings under repurchase agreements................................................................................................................................................................................................................................ 60

16 Customers’ deposits......................................................................................................................................................................................................................................................................................... 61

17 Term debts............................................................................................................................................................................................................................................................................................................... 61

18 Interest payable and other liabilities................................................................................................................................................................................................................................................. 61

19 Subordinated liabilities................................................................................................................................................................................................................................................................................. 61

20 Share capital........................................................................................................................................................................................................................................................................................................... 61

21 Reserves...................................................................................................................................................................................................................................................................................................................... 63

22 Taxation...................................................................................................................................................................................................................................................................................................................... 64

23 Earnings per share............................................................................................................................................................................................................................................................................................ 65

24 Cash and cash equivalents....................................................................................................................................................................................................................................................................... 65

25 Related party transactions......................................................................................................................................................................................................................................................................... 65

26 Employee benefits............................................................................................................................................................................................................................................................................................ 67

27 Managed funds................................................................................................................................................................................................................................................................................................... 67

28 Derivatives................................................................................................................................................................................................................................................................................................................ 67

29 Commitments and contingent liabilities...................................................................................................................................................................................................................................... 68

30 Segment information...................................................................................................................................................................................................................................................................................... 69

31 Credit risk................................................................................................................................................................................................................................................................................................................... 71

32 Concentration analysis.................................................................................................................................................................................................................................................................................. 72

33 Market risk................................................................................................................................................................................................................................................................................................................ 73

34 Fair value of financial instruments...................................................................................................................................................................................................................................................... 74

35 Liquidity risk............................................................................................................................................................................................................................................................................................................ 75

36 Capital adequacy................................................................................................................................................................................................................................................................................................ 76

37 Deposit protection scheme...................................................................................................................................................................................................................................................................... 77

38 Islamic banking.................................................................................................................................................................................................................................................................................................... 77

39


INDEPENDENT AUDITORS’ REPORT

TO THE SHAREHOLDERS OF AHLI UNITED BANK B.S.C.

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

Report on the financial statements

We have audited the accompanying consolidated 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 2011, 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.

Board of 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 the Board of Directors determines is necessary to enable the

preparation of the consolidated financial statements that are free from

material misstatement, whether due to fraud or error.

a) the Bank has maintained proper accounting records and the

consolidated financial statements are in agreement therewith; and

b) the financial information contained in the Report of the Board of

Directors is consistent with the consolidated financial statements.

We are not aware of any violations of the Bahrain Commercial Companies

Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB

Rule Book (Volume 1 and applicable provisions of Volume 6) and CBB

directives, regulations and associated resolutions, rules and procedures of

the Bahrain Bourse or the terms of the Bank’s memorandum and articles

of association during the year ended 31 December 2011 that might

have had a material adverse effect on the business of the Bank or on its

consolidated financial position. Satisfactory explanations and information

have been provided to us by management in response to all our requests.

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.

21 February 2012

Manama, Kingdom of Bahrain.

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.

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

appropriate to provide a basis for our audit opinion.

Opinion

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

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

2011 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

As required by the Bahrain Commercial Companies Law and the Central

Bank of Bahrain (CBB) Rule Book (Volume 1), we report that:

40


CONSOLIDATED STATEMENT OF INCOME

For the year ended 31 December 2011

Note

2011

US$ ’000

2010

US$ ’000

Interest income 4a 973,936 893,498

Interest expense 4b 407,009 384,724

Net interest income 566,927 508,774

Fees and commissions 5 122,422 123,319

Trading income 6 28,221 28,219

Net gains on investments 43,471 18,500

Share of profit from associates and joint venture 56,703 51,554

Other operating income 24,368 24,303

Fees and other income 275,185 245,895

OPERATING INCOME 842,112 754,669

Net provision for loan losses and others 8f 129,847 151,671

Provision for non-trading investments 9 73,376 40,610

Total provisions 203,223 192,281

NET OPERATING INCOME 638,889 562,388

Staff costs 145,608 142,290

Depreciation and impairment 39,123 24,046

Other operating expenses 88,503 87,079

OPERATING EXPENSES 273,234 253,415

PROFIT BEFORE TAX 365,655 308,973

Tax expense 22 29,842 16,774

NET PROFIT FOR THE YEAR 335,813 292,199

Attributable to:

Bank’s equity shareholders 310,610 265,499

Non-controlling interest 25,203 26,700

335,813 292,199

EARNINGS PER SHARE ATTRIBUTABLE TO THE

BANK’S EQUITY SHAREHOLDERS FOR THE YEAR:

Basic earnings per share (US cents) 23 6.2 5.4

Diluted earnings per share (US cents) 23 6.1 5.4

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

41


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2011

2011

US$ ’000

2010

US$ ’000

Net profit for the year 335,813 292,199

Other comprehensive income

Directors’ fees paid - (1,211)

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

Foreign currency translation adjustments (10,115) (11,315)

Available-for-sale investments:

Net change in fair value (167,870) 19,197

Transfers to consolidated statement of income 3,762 808

Cash flow hedges:

Net change in fair value 5,427 (6,303)

Transfers to consolidated statement of income 1,662 2,455

Revaluation of freehold land (6,595) (19,439)

Share of other comprehensive income of associates 2,411 1,335

Other comprehensive income for the year (172,318) (15,473)

Total comprehensive income for the year 163,495 276,726

Total comprehensive income attributable to:

Bank’s equity shareholders 143,065 240,490

Non-controlling interest 20,430 36,236

163,495 276,726

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

42


CONSOLIDATED BALANCE SHEET

At 31 December 2011

ASSETS

Note

2011

US$ ’000

2010

US$ ’000

Cash and balances with central banks 7a 673,800 361,376

Treasury bills and deposits with central banks 7b 2,612,287 2,153,711

Deposits with banks and other financial institutions 3,068,879 2,915,259

Loans and advances 8 15,495,961 14,477,713

Non-trading investments 9 4,370,441 4,413,302

Investments in associates and joint venture 10 629,843 605,679

Premises and equipment 11 351,720 373,094

Interest receivable and other assets 12 435,484 440,969

Goodwill and other intangible assets 13 691,347 716,358

TOTAL ASSETS 28,329,762 26,457,461

LIABILITIES AND EQUITY

LIABILITIES

Deposits from banks and other financial institutions 14 4,434,645 4,965,223

Borrowings under repurchase agreements 15 1,352,601 1,645,061

Customers’ deposits 16 17,345,034 14,835,796

Term debts 17 768,000 946,562

Interest payable and other liabilities 18 745,056 693,689

Subordinated liabilities 19 773,285 618,955

TOTAL LIABILITIES 25,418,621 23,705,286

EQUITY

Ordinary share capital 20 1,242,135 1,223,188

Preference share capital 20 125,000 13,937

Reserves 1,170,296 1,155,056

Attributable to the Bank’s equity shareholders 2,537,431 2,392,181

Non-controlling interest 373,710 359,994

TOTAL EQUITY 2,911,141 2,752,175

TOTAL LIABILITIES AND EQUITY 28,329,762 26,457,461

Fahad Al-Rajaan

Chairman

Hamad Al-Marzouq

Deputy Chairman

Adel A. El-Labban

Group Chief Executive Officer

& Managing Director

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

43


CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2011

Note

2011

US$ ’000

2010

US$ ’000

OPERATING ACTIVITIES

Profit before tax 365,655 308,973

Adjustments for:

Depreciation 39,123 24,046

Net gains on investments (43,471) (18,500)

Net provision for loan losses and contingencies 8f 129,847 151,671

Provision for non-trading investments 9 73,376 40,610

Gain on sub debt disposal (1,165) -

Share of profit from associates and joint venture (56,703) (51,554)

Staff costs - fair value amortisation of share based transactions 578 1,689

Operating profit before changes in operating assets and liabilities 507,240 456,935

Changes in:

Mandatory reserve deposits with central banks (34,511) 39,217

Treasury bills and deposits with central banks 523,279 652,868

Deposits with banks and other financial institutions (510,450) (965,024)

Loans and advances (1,123,446) (1,329,385)

Interest receivable and other assets 5,483 42,982

Deposits from banks and other financial institutions (530,578) 293,462

Borrowings under repurchase agreements (292,460) 767,304

Customers’ deposits 2,509,238 1,594,530

Interest payables and other liabilities 51,367 44,191

Cash from operations 1,105,162 1,597,080

Income tax paid (22,097) (3,090)

Net cash from operating activities 1,083,065 1,593,990

INVESTING ACTIVITIES

Purchase of non-trading investments (1,030,222) (1,089,650)

Proceeds from sale or redemption of non-trading investments 906,651 596,991

Acquisition of associates and joint venture - (53,533)

Net increase in premises and equipment (24,343) (60,623)

Dividends received from associates 32,087 36,405

Net cash used in investing activities (115,827) (570,410)

FINANCING ACTIVITIES

Additional investment in subsidiaries (18,967) (149,004)

Proceeds from issue of preference shares 125,000 20,125

Proceeds from issue of subordinated debts 165,000 -

Buy back/repayment of subordinated liabilities (10,670) (1,258)

Repayment of term debt (178,562) -

Dividends and other appropriations paid (135,985) (100,229)

Treasury shares sold - 1,783

Net cash used in financing activities (54,184) (228,583)

Foreign currency translation adjustments (10,115) (11,315)

INCREASE IN CASH AND CASH EQUIVALENTS 902,939 783,682

Cash and cash equivalents at 1 January 2,963,158 2,179,476

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 3,866,097 2,963,158

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

44


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2011

Ordinary

share

capital

US$ ’000

Preference

share

capital

US$ ’000

Treasury

shares

US$ ’000

Attributable to Bank’s equity shareholders

Share

premium

US$ ’000

Statutory

reserve

US$ ’000

Retained

earnings

US$ ’000

Reserves

Proposed

appropriations

US$ ’000

Other

reserves

(Note 21(i))

US$ ’000

Total

reserves

US$ ’000

Noncontrolling

interest

US$ ’000

Total

US$ ’000

Balance at 1 January 2011 1,223,188 13,937 - 542,269 173,246 373,886 123,846 (58,191) 1,155,056 359,994 2,752,175

Issue of shares on AUBE

acquisition (note 20(b)) - - - - - - - - - - -

Class B preference shares

issued (note 20(d)) - - - - - - - - - - -

Class B preference share

dividend paid (note 21(j)) - - - - - - (149) - (149) - (149)

Ordinary share dividend

paid (note 21(j)) - - - - - - (122,697) - (122,697) - (122,697)

Dividends of subsidiaries - - - - - - - - - (13,775) (13,775)

Arising on additional

acquisition of a subsidiary - - - 529 - - - - 529 (3,139) (2,610)

Conversion of preference

shares (note 20 (d) and 20 (e)) 19,119 (13,937) - (2,674) - - - (1,833) (4,507) - 675

Other equity movements

of a subsidiary - - - - - (883) - - (883) 10,200 9,317

Preference shares

issued (note 20 (f ))

- 125,000 - - - - - - - - 125,000

Sale of treasury shares - - - - - - - - - - -

Equity shares surrendered (172) - - (118) - - - - (118) - (290)

Total comprehensive

income for the year - - - - - 310,610 (1,000) (166,545) 143,065 20,430 163,495

Transfer to statutory

reserve (note 21(c)) - - - - 31,061 (31,061) - - - - -

Proposed dividend on Class B

preference shares (note 21(j))

Proposed dividend on

IFC Mandatorily convertible

preference shares (note 21(j))

- - - - - - - - - - -

- - - - - (2,900) 2,900 - - - -

Proposed dividend on ordinary

shares (note 21(j)) - - - - - (149,530) 149,530 - - - -

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

Balance at 31 December 2011 1,242,135 125,000 - 540,006 204,307 499,122 153,430 (226,569) 1,170,296 373,710 2,911,141

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

45


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2011

Ordinary

share

capital

US$ ’000

Preference

share

capital

US$ ’000

Treasury

shares

US$ ’000

Attributable to Bank’s equity shareholders

Share

premium

US$ ’000

Statutory

reserve

US$ ’000

Retained

earnings

US$ ’000

Reserves

Proposed

appropriations

US$ ’000

Other

reserves

(Note 21(i))

US$ ’000

Total

reserves

US$ ’000

Noncontrolling

interest

US$ ’000

Total

US$ ’000

Balance at 1 January 2010 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 20(b)) 18,540 - - 16,882 - - - - 16,882 - 35,422

Class B preference shares

issued (note 20(d)) - 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)

Arising on additional

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

Conversion of preference

shares (note 20 (d) and 20 (e)) 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

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

46


Notes to the

Consolidated

Financial

Statements

31 December 2011

47


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

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 89 branches, as at 31

December 2011, in the Kingdom of Bahrain (21 branches), the State of

Kuwait (28 branches), the Arab Republic of Egypt (28 branches), Republic

of Iraq (10 branches) and the United Kingdom (2 branches). It also operates

through its managed associates in the State of Qatar (18 branches),

Sultanate of Oman (12 branches) and Great Socialist People’s Libyan Arab

Jamahiriya (Libya) (10 branches) with a total network of 40 branches as

at 31 December 2011. 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 2011 were authorised for issue in accordance with a resolution

of the directors on 21 February 2012.

2. Basis of Consolidation

The consolidated financial statements comprise the financial statements

of the Bank and its controlled subsidiaries as at and for the year ended

31 December 2011 and 2010. The results of subsidiaries acquired are

included in the consolidated financial statements from the date that

control commences until the date that control ceases. 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 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.

The following are the Bank’s principal subsidiaries:

Name

Country of

incorporation

Nominal holding*

31 December

2011

31 December

2010

Ahli United Bank (U.K.)

PLC (AUBUK) United Kingdom 100.0% 100.0%

Ahli United Bank 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 75.3% 75.3%

Ahli United Bank (Egypt)

S.A.E. (AUBE)

Arab Republic of

Egypt

85.1% 85.1%

Commercial Bank of Iraq P.S.C.

(CBIQ) Republic of Iraq 59.7% 56.1%

* Adjusted for subsidiaries’ holdings

During the year, AUB’s equity stake in CBIQ increased to 59.7% following

acquisition of additional shares at a purchase consideration of US$ 19.0

million (2010: AUB’s equity stake in CBIQ increased to 56.1% following

acquisition of additional shares at a purchase consideration of US$ 3.6

million).

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 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

The following new standards and amendments have been issued by

the International Accounting Standards Board (IASB) but are not yet

mandatory for the year ended 31 December 2011:

• IAS 1 Financial Statement Presentation: effective for annual

periods commencing 1 July 2012.

• IAS 19 Employee Benefits: effective for annual periods

commencing 1 January 2013.

• IFRS 9 Financial Instruments: Classification and Measurement:

effective annual periods commencing 1 January 2015.

• IFRS 10 Consolidated Financial Statements: effective annual

periods commencing 1 January 2013.

• IFRS 11 Joint Arrangements: effective annual periods

commencing 1 January 2013.

• IFRS 12 Disclosure of Interest in Other Entities: effective

annual periods commencing 1 January 2013.

• IAS 27 Separate Financial Statements (Revised): effective for

annual periods commencing 1 January 2013.

• IAS 28 Investments in Associates and Joint Ventures Separate

Financial Statements: effective for annual periods

commencing 1 January 2013.

48


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

• IFRS 13 Fair Value Measurement: effective annual periods

commencing 1 January 2013.

The management is considering the implications of these standards and

amendments, their impact on the Group’s financial position and results

and the timing of their adoption by the Group.

IFRS 9 as issued reflects the first phase of the IASBs work on the replacement

of IAS 39 and applies to classification and measurement of financial assets

and financial liabilities as defined in IAS 39. The standard is effective for

annual periods beginning on or after 1 January 2015. In subsequent phases,

the IASB will address hedge accounting and impairment of financial assets.

The completion of this project is expected over the course of the first

half of 2012. The adoption of the first phase of IFRS 9 will have an effect

on the classification and measurement of the Group’s financial assets, but

will potentially have no impact on classification and measurements of

financial liabilities. The Group will quantify the effect in conjunction with

the other phases, when issued, to present a comprehensive picture.

The Group has adopted the following new and amended International

Accounting Standards/International Financial Reporting Standards as of

1 January 2011.

IAS 24 - Related Party Disclosure (Revised).

The amended standard clarified the definition of a related party and laid

down additional requirement for disclosure of outstanding commitments

to related parties. The adoption of the amendment did not have any

impact on the financial position or performance of the Group.

Improvements to IFRSs

IFRS 3 Business Combinations

IFRS 7 Financial Instruments – Disclosures

IAS 1 Presentation of Financial Statements

The adoption of the above amendments did not have any significant

impact on the financial position or performance of the Group.

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, heldfor-trading

and held-to-maturity investments based on management’s

intention at acquisition of the financial asset. Further goodwill and

intangible assets with indefinite lives have been allocated to cash

generating units for impairment testing. 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.

Impairment losses on loans and advances, non-trading investments

and other assets

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 and other assets. These are more fully described in note 3.3

(g) and note 13.

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

Associate 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 associate 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 venture’s 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 at the rate of exchange prevailing on the date of the

transaction.

Monetary assets and liabilities denominated in foreign currencies are

translated into the functional currency at the rate of exchange ruling at

the balance sheet date. Any resulting exchange differences are included

in “trading income” in the consolidated statement of income.

49


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

3. Accounting Policies (continued)

3.3 Summary of significant accounting policies (continued)

Non-monetary assets and liabilities that are measured at 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

investments measured at fair value in a foreign currency are translated

using the exchange rates at the date when the fair value is determined

and the differences are included in other comprehensive income 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 whose functional currency

is not US Dollars 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 reporting period.

Any exchange differences arising on translation are included in “foreign

exchange translation reserve” forming part of other comprehensive

income. On disposal of foreign operations, exchange differences relating

thereto and previously recognised in other comprehensive income are

recognised in the consolidated statement of income.

(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, where the

acquisition costs are expensed. Premiums and discounts are amortised on

a systematic basis to maturity using the effective interest rate method and

taken to interest income or interest expense as appropriate.

(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” while dividend income is recorded in “dividend income”

when the right of the payment has been established.

(iv) Deposits with banks and other financial institutions and

loans and advances

Deposits with banks and other financial institutions and loans and

advances are financial assets with fixed or determinable payments and

fixed maturities that are not quoted in an active market. After initial

recognition, these 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 these assets are recognised in the

consolidated statement of income in “provision for loan losses and others”

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.

(v)

Held-to-maturity

Non-trading investments with fixed or determinable payments, fixed

maturities and which the Group has the intention and ability to hold

to maturity are classified as held-to-maturity. After initial recognition,

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 under “Provision for non-trading investments”.

(i)

Date of recognition

(vi) Available-for-sale

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 timeframe 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 deposits with central banks

Treasury bills and deposits with central banks are initially recognised at

cost. Premiums and discounts are amortised on a systematic basis to their

maturity.

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 investments are

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-forsale

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.

50


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

(vii) Derivatives

Changes in fair values of the derivatives held for trading are included in

the consolidated statement of income under “trading income “.

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 “availablefor-sale”

category.

Refer notes 9 (i) and 9 (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 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 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 included in “Borrowings under repurchase

agreements”. 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.

(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.

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

51


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

3. Accounting Policies (continued)

3.3 Summary of significant accounting policies (continued)

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 others’ 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 “Interest

receivable and other assets” and derivatives with negative market values

are included in “interest payable and 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”.

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.

52


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

(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 and expense

For all financial instruments measured at amortised cost and interest

bearing financial assets classified as available -for-sale and financial

instruments designated at fair value through profit or loss, interest income

or expense is recorded using the effective interest rate, which is the rate

that exactly discounts estimated future cash payments or receipts through

the expected life of the financial instrument or a short period, where

appropriate, to the net carrying amount of the financial assets or financial

liability. Interest that is 90 days or more overdue is excluded from income.

Interest on impaired loans and advances and other financial assets is not

recognised in consolidated statement of income.

(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.

(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. Changes in parent’s

ownership interest in a subsidiary that do not result in loss of control are

treated as transactions between equity holders and are reported in equity.

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 cashgenerating

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

• Leasehold land and buildings

• Other premises and equipment

(m) Cash and cash equivalents

25 to 40 years

Over the lease period

Up to 10 years

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.

53


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

3. Accounting Policies (continued)

3.3 Summary of significant accounting policies (continued)

(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.

(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 extracts 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.

(q) Fiduciary assets

(x)

Islamic products

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 interest

Non-controlling interest represents the portion of profit or loss and net

assets in the subsidiaries not attributable to the Bank’s equity shareholders.

(s)

Mandatory convertible preference shares

Mandatory convertible preference shares which carry a mandatory

coupon, and are redeemable at a fixed future date, are recognised under

equity in the consolidated balance sheet. The corresponding dividends

on those shares are accounted as appropriation of profits for the

corresponding year.

(t)

Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted

from equity when they are approved by the Bank’s shareholders.

Diviends 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.

Murabaha

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.

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 the 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 the

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

54


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

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 the 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 depositors 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.

Unrestricted investment account holders do not bear the expenses

relating to non compliance with Sharia’a regulations.

4. Net Interest Income

(b) Interest Expense

2011 2010

US$ ’000 US$ ’000

Deposits from banks and other

financial institutions

(including Repurchase agreements) 94,677 91,760

Customers’ deposits 278,325 265,997

Term debts 14,402 12,029

Subordinated liabilities 19,605 14,938

407,009 384,724

Net Interest Income 566,927 508,774

5. Fees and Commissions

2011 2010

US$ ’000 US$ ’000

Fees and commissions income

- Transaction banking services 90,631 88,296

- Management, performance and

brokerage fees 36,148 39,303

Fees and commissions expense (4,357) (4,280)

122,422 123,319

Included in ‘management, performance and brokerage fees’ is US$ 9.8

million (2010: US$ 9.9 million) of fee income relating to trust and other

fiduciary activities.

6. Trading Income

2011 2010

US$ ’000 US$ ’000

Foreign exchange 29,548 27,690

Other trading activities (1,327) 529

28,221 28,219

(a)

Interest Income

2011 2010

US$ ’000 US$ ’000

Treasury bills 30,240 23,847

Deposits with banks and

other financial institutions 49,464 38,017

Loans and advances 756,118 706,837

Non-trading investments 138,114 124,797

973,936 893,498

55


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

7 (a) Cash and Balances with Central Banks

2011 2010

US$ ’000 US$ ’000

Cash and balances with central

banks, excluding mandatory

reserve deposits (note 24) 461,050 183,137

Mandatory reserve deposits with

central banks 212,750 178,239

673,800 361,376

Mandatory reserve deposits are not available for use in day-to-day operations

7 (b) Treasury Bills and Deposits with Central Banks

2011 2010

US$ ’000 US$ ’000

Central Bank of Bahrain 209,354 384,718

Central Bank of Kuwait 2,187,432 1,491,576

Central Bank of Egypt 146,956 192,742

Central Bank of Iraq 68,545 84,675

2,612,287 2,153,711

All the above deposits are in the local currencies of the respective countries .

The above includes deposits with central banks amounting to US$ 2,343.9

million (31 December 2010: US$ 1,852.6 million ) which were included

under ’Deposits with banks and other financial institutions’ in prior years.

8. Loans and Advances

2011 2010

US$ ’000 % US$ ’000 %

a) By industry sector

Consumer/personal 3,609,266 22.5 3,538,629 23.7

Residential mortgage 1,346,456 8.4 1,088,321 7.3

Trading and manufacturing 2,790,304 17.4 3,012,994 20.2

Real estate 3,238,376 20.2 3,334,873 22.4

Banks and other

financial institutions 1,167,184 7.3 967,754 6.5

Services 3,042,080 19.0 2,003,136 13.4

Government/public sector 476,101 2.9 415,291 2.8

Others 376,609 2.3 549,283 3.7

16,046,376 100.0 14,910,281 100.0

Less: Specific impairment

provisions (349,786) (307,968)

Less: Collective impairment

provisions (200,629) (124,600)

15,495,961 14,477,713

2011 2010

US$ ’000 % US$ ’000 %

b) By geographic region

Kingdom of Bahrain 3,101,216 19.3 3,042,139 20.4

State of Kuwait 6,871,381 42.8 6,650,412 44.6

Other GCC countries 2,248,577 14.0 1,862,880 12.5

United Kingdom 1,701,748 10.7 1,467,196 9.8

Arab Republic of Egypt 1,494,578 9.3 1,422,994 9.5

Europe (excluding

United Kingdom) 373,342 2.3 400,134 2.7

Asia (excluding GCC

countries) 218,016 1.4 59,388 0.4

Rest of the world 37,518 0.2 5,138 0.1

16,046,376 100.0 14,910,281 100.0

Less: Specific impairment

provisions (349,786) (307,968)

Less: Collective impairment

provisions (200,629) (124,600)

15,495,961 14,477,713

Other GCC countries comprise the members of the Gulf Co-operation

Council being 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.

56


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

8. Loans and Advances (Continued)

c) Age analysis of past due but not impaired loans and advances

Up to

30 days

US$ ’000

2011

31 to 60

days

US$ ’000

61 to 89

days

US$ ’000

Total

US$ ’000

Loans and

advances

Retail 29,598 44,749 27,140 101,487

Corporate 36,889 29,380 71,432 137,701

66,487 74,129 98,572 239,188

Up to 30

days

US$ ’000

2010

31 to 60

days

US$ ’000

61 to 89

days

US$ ’000

Total

US$ ’000

Loans and

advances

Retail 45,022 47,201 36,664 128,887

Corporate 34,258 20,981 60,939 116,178

79,280 68,182 97,603 245,065

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

2011

Retail Corporate Total

US$ ’000 US$ ’000 US$ ’000

Gross impaired loans 94,002 312,740 406,742

Specific impairment

provisions (74,290) (275,496) (349,786)

19,712 37,244 56,956

Impaired loan coverage 79.0% 88.1% 86.0%

Gross loans 2,937,510 13,108,866 16,046,376

Impaired loan ratio 3.2% 2.4% 2.5%

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%

Gross loans 2,989,550 11,920,731 14,910,281

Impaired loan ratio 2.9% 2.3% 2.4%

The fair value of collateral that the Group holds relating to loans individually

determined to be impaired at 31 December 2011 amounts to US$ 151.8

million (2010: US$ 130.2 million). The collateral consists of cash, securities

and properties.

e) Impairment allowance for loans and advances

A reconciliation of the allowance for impairment losses for loans and

advances by class is as follows:

2011

Retail

US$ ’000

Corporate

US$ ’000

Total

US$ ’000

At 1 January 102,117 330,451 432,568

Add/(Less):Arising on IFRS transition of

subsidiary - - -

Amounts written off during the year (16,096) (21,356) (37,452)

Charge for the year 25,345 147,131 172,476

Recoveries during the year (9,241) (17,893) (27,134)

Interest suspended

during the year (net) 415 4,841 5,256

Exchange rate and other adjustments 1,791 2,910 4,701

At 31 December 104,331 446,084 550,415

2010

Retail

US$ ’000

Corporate

US$ ’000

Total

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

f) Net provision for loan losses and others

The net charge for the year for provision for loan losses and others in the

consolidated statement of income is determined as follows:

2011 2010

US$ ’000 US$ ’000

Impairment charge for the year on

loans and advances (note 8(e)) 172,476 155,382

Recoveries from loans and advances during the year

(including from fully provided loans written off in

previous years) (67,281) (25,748)

Net charge for others (refer note 13) 24,652 22,037

Net provision for loan losses and others 129,847 151,671

57


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

9. Non-Trading Investments

Held-tomaturity

Availablefor-sale

2011 2010

Loans and

receivables Total Total

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

Quoted investments

GCC government bonds and debt securities - 482,599 152,853 635,452 580,665

Other government bonds and debt securities - 367,508 25,158 392,666 283,570

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions - 1,298,192 697,077 1,995,269 2,036,493

- issued by corporate bodies 19,957 471,286 413,524 904,767 990,224

Equity shares - 8,059 - 8,059 2,481

Funds at net asset value - 150,140 - 150,140 152,984

19,957 2,777,784 1,288,612 4,086,353 4,046,417

Unquoted investments

GCC government bonds - 100,347 - 100,347 109,588

Other government bonds and debt securities - 32,575 - 32,575 35,575

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions - - - - 10,995

Equity shares at cost - 135,368 - 135,368 136,305

Funds at net asset value - 135,669 - 135,669 122,643

Other investments - 74,919 - 74,919 75,344

- 478,878 - 478,878 490,450

Total 19,957 3,256,662 1,288,612 4,565,231 4,536,867

Less: Allowance for impairment - (173,412) (21,378) (194,790) (123,565)

19,957 3,083,250 1,267,234 4,370,441 4,413,302

As at 31 December 2011, the Group does not have any sovereign exposures towards troubled Eurozone countries comprising Greece, Italy, Ireland, Portugal and

Spain. (31 December 2010: nil)

Refer note 31 (c) for disclosure of credit quality of non-trading investments.

58


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

9. Non-Trading Investments (continued)

The movements in provision for impairment on investments were as follows:

2011 2010

US$ ’000 US$ ’000

At 1 January 123,565 86,858

Add/(Less):

Charge for the year 73,376 40,610

Amounts written off during the year (3,040) -

Exchange rate and other adjustments 889 (3,903)

At 31 December 194,790 123,565

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 issued ‘Reclassification of Financial Assets: Amendments

to IAS 39 - Recognition and Measurement and IFRS 7: Disclosures’ which

permitted the reclassification of certain financial assets under such

rare circumstances. Accordingly, the Group carried out 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.

2011 2010

US$ ’000 US$ ’000

Carrying value as at 31 December 1,288,612 1,538,477

Fair value as at 31 December 1,240,189 1,517,914

Incremental 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 (48,423) (20,563)

The Group earned interest income on these investments at an effective

interest rate of 4.6% (2010: 3.7%) 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 availablefor-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.

2011 2010

US$ ’000 US$ ’000

Carrying value and fair value as at

31 December 35,792 44,036

Fair value (loss) gains that would have been

recognised in the consolidated

statement of income for the year

had the financial assets not been reclassified. (4,992) 2,857

10. Investments In Associates and Joint Venture

The principal associates and joint venture of the Group are:

a) Associates

Name Country of incorporation Holding

2011 2010

Ahli Bank Q.S.C. State of Qatar 33.3% 36.4%

Ahli Bank S.A.O.G. Sultanate of Oman 35.0% 35.0%

United Bank for

Commerce and

Investment S.A.C. (UBCI) Libya 40.0% 40.0%

AUB’s holding in Ahli Bank Q.S.C. was diluted to 33.3% effective

27 February 2011 upon completion of registration of 5.84 million shares

due to a private placement subscription by the Qatar Investment

Authority. In 2010 AUB’s holding in Ahli Bank Q.S.C.,was diluted to 36.4%

on completion of registration of 2.92 million shares due to a private

placement subscription by the Qatar Investment Authority.

b) Joint venture

Name Country of incorporation Holding

2011 2010

Legal & General

Gulf B.S.C. (c) * Kingdom of Bahrain 50.0% 50.0%

* Provides conventional and takaful life and health insurance.

The summarised financial information of the Group’s associates and joint

venture was as follows:

2011 2010

US$ ’000 US$ ’000

Assets 7,591,984 7,333,159

Liabilities 6,498,781 6,413,921

Revenues 301,900 287,741

Net profit for the year 159,359 148,640

59


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

11. Premises and Equipment

The net book values of the Group’s premises and equipment are:

2011 2010

US$ ’000 US$ ’000

Freehold land 131,281 130,449

Freehold buildings 23,312 25,471

Leasehold land and buildings 112,526 105,762

IT equipment and others 60,557 80,111

Capital work-in-progress 24,044 31,301

12. Interest Receivable and Other Assets

351,720 373,094

2011 2010

US$ ’000 US$ ’000

Tax assets (note 22) 1,991 3,147

Interest receivable 131,539 123,410

Derivative assets (note 28) 98,610 148,247

Prepayments and others 203,344 166,165

13. Goodwill and Other Intangible Assets

Goodwill

US$ ’000

435,484 440,969

2011

Intangible

assets

US$ ’000

Total

US$ ’000

At 1 January 519,870 196,488 716,358

Acquisitions during

the year - - -

Exchange rate and other

adjustments (19,039) (5,972) (25,011)

At 31 December 500,831 190,516 691,347

purposes. The carrying amount of goodwill and intangible assets allocated

to each of the cash-generating units is shown under note 30.

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 the Board of Directors, 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 9.4 % (2010: 9.8%). The key assumptions used in

estimating recoverable amounts of cash generating units were sensitised

to test the resilience of value-in-use calculations resulting in an adjustment

to goodwill amounting to US$ 21.5 million which is included under

“exchange rate and other adjustments” in the above table and under ‘Net

provision for loan losses and others’ in the consolidated statement of

income.

Intangible assets

Intangible assets comprises primarily the Group’s banking licenses which

have indefinite lives. Based on an annual impairment assessment 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.

14. Deposits From Banks and Other Financial Institutions

2011 2010

US$ ’000 US$ ’000

Demand and call 1,460,618 1,046,442

Time deposits 2,725,640 3,672,264

Other deposits 248,387 246,517

4,434,645 4,965,223

Other deposits relate to bilateral arrangements with a term of 364 days.

2010

Goodwill

US$ ’000

Intangible

assets

US$ ’000

Total

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

15. Borrowings Under Repurchase Agreements

The Group has collateralized borrowing lines of credit with various financial

institutions through Global Master Repurchase Agreements (GMRA), under

which it can borrow up to US$ 2.4 billion (31 December 2010: US$ 2.4

billion). Collateral is provided in the form of investment grade securities held

within the non-trading investments portfolio.

As at 31 December 2011, the borrowings under these agreements were

US$ 1,353 million (31 December 2010: US$ 1,645 million) and the fair

value of investment securities that had been pledged as collateral

was US$ 1,534 million (2010:US$ 1,992 million). These borrowings under

repurchase agreements were included under ‘Deposits from banks and

other financial institutions’ in prior years.

Goodwill acquired through business combinations has been allocated to

the cash-generating units of the acquired entities for impairment testing

60


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

16. Customers’ Deposits

19. Subordinated Liabilities

2011 2010

US$ ’000 US$ ’000

Current and call accounts 3,325,333 2,636,332

Saving accounts 2,007,347 1,168,211

Time deposits 12,012,354 11,031,253

17. Term Debts

17,345,034 14,835,796

2011 2010

US$ ’000 US$ ’000

Medium Term Syndicated Deposit

[(Repayable in April 2012)

(2010: Repayable in April 2012)] 618,000 618,000

Medium Term Syndicated Deposit

(2010: Repayable in October 2011) - 178,562

Long term debt

(Repayable in September 2012) 150,000 150,000

768,000 946,562

18. Interest Payable and Other Liabilities

2011 2010

US$ ’000 US$ ’000

Accruals 83,766 95,896

Interest payable 122,359 136,674

Derivative liabilities (note 28) 285,616 243,582

Other credit balances 240,807 207,242

Tax liabilities (refer note 22) 12,508 10,295

745,056 693,689

These borrowings are subordinated to the claims of all other creditors of the

respective banks.

2011 2010

Maturity US$ ’000 US$ ’000

International Finance Corporation (IFC):

-Convertible into ordinary shares at

the holder’s option at the rate of

US 97.6 cents (2010: US 97.6 cents)

per share between the third and

eighth anniversary (2010: between the

third and sixth anniversary) from the

loan agreement dated 18 November

2006 (also refer note 23).

(2010: maturing in 2016) 2018 200,000 200,000

-Repayable in four equal semi-annual

installments commencing on

April 15, 2019 and falling on each

Interest Payment Date falling

thereafter up to and including

October 15, 2020 (refer note 20 (f )). 2020 165,000 -

365,000 200,000

Others:

-Repayable at maturity 2012 30,842 30,910

-Issuer option to extend for a further

period of 5 years and one day 2013 50,000 50,000

-Non-convertible portion

(50%) of Class A non-cumulative

preference share, with an issuer option to

redeem after 1 January 2010, at

US$ 0.45 per share,

subject to three months notice 2015 225,000 225,000

-Issuer option to redeem after

2 December 2010 subject to

one month notice. 2015 67,528 75,000

-10 year subordinated debt

repayable at maturity 2020 17,997 17,997

-Repayable at maturity

5 years &

one day

notice 12,174 12,188

-Repayable at maturity Various 4,744 7,860

408,285 418,955

773,285 618,955

20. Share Capital

2011 2010

US$ ’000 US$ ’000

(a) Authorised :

- Share capital

8,000 million shares (2010: 8,000 million

shares) of US$ 0.25 each 2,000,000 2,000,000

Available for issuance of ordinary shares and various classes of preference shares

61


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

20. Share Capital (continued)

(b) Issued and fully paid:

2011 2010

US$ ’000 US$ ’000

Ordinary share capital (US$ 0.25 each) 1,242,135 1,223,188

Number of shares (millions)

(refer note 20 (e)) 4,984.3 4,907.9

Movement in ordinary shares 2011 2010

(number in millions)

Opening balance as at 1 January 4,907.9 4,781.0

Add: issuance of shares upon conversion of

Class B preference shares 76.4 52.7

Add: issuance of shares upon AUBE

acquisition - 74.2

Closing balance as at 31 December 4,984.3 4,907.9

2011 2010

US$ ’000 US$ ’000

Class B preference shares (US$ 0.25 each) - 13,937

Number of shares (millions)

(refer note 20 (d) and 20 (e)) - 55.7

Movement in Class B preference shares 2011 2010

(number in millions)

Opening balance as at 1 January 55.7 38.4

Less: Conversion of tranche III to

ordinary shares (55.7) (38.4)

Add: issuance of tranche IV, V and VI of

class B preference shares - 55.7

Closing balance as at 31 December - 55.7

2011 2010

US$ ’000 US$ ’000

IFC Mandatory Convertible preference

shares (US$ 0.25 each) (refer note 20 (f )) 125,000 -

Number of shares (millions) 500.0 -

(c) 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 the 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.

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:

Conversion

date

Numbers in

million

Number of Class B preference shares issued : 2011 2010

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 55.7

Total Issue Class B preference shares 250.0 250.0

Total number of ordinary shares after

conversion (refer (d) and (e) below) 342.8 266.3

(d) Issue of Tranche IV, V and VI of Class B preference shares

During 2010, 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.

(e) 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 76.4 million ordinary shares.

These ordinary shares will rank pari-passu with the other ordinary

shares in issue (refer (d) above). Consequent to the above conversion,

the total number of ordinary shares was 4,984.3 million (refer 20 (b)).

(f) During the year, with regulatory consents and approval by the

shareholders at the Extraordinary General Assembly held on 8 March

2011, the Bank concluded agreements with IFC Capitalization (Equity)

Fund L.P. and IFC Capitalization (Subordinated Debt) Fund L.P. (jointly

launched by International Finance Corporation “IFC” and the Japan

Bank for International Cooperation “JBIC”) to raise US$ 125 million

Tier-I qualifying capital through a fully paid Mandatorily Convertible

Preference Shares (MCPS) issue and US$ 165 million Tier-II qualifying

62


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

10 year subordinated debt facility (Refer note 19). The mandatorily

convertible preference shares are entitled to an annual, noncumulative,

preference dividend at twelve-month LIBOR fixed at the

beginning of each year plus a margin of 2.5% and are convertible at a

price of US$ 82.5 cents per share (note 21 (j)).

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.

i) Movements in other reserves

Capital

reserve

Property

revaluation

reserve

Foreign

exchange

translation

reserve

Available

for-sale

reserve

Cumulative changes in

Cash flow

hedge

reserve

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

Balance at 1 January 2011 425 53,842 (4,406) (76,068) (33,673) 1,689 (58,191)

Currency translation adjustments - - (9,327) - - - (9,327)

Share of changes in fair value

reserve of associates - - - 2,411 - - 2,411

Transfers to consolidated

statement of income - - - 3,795 1,662 - 5,457

Net fair value movements during

the year - - - (164,505) 5,427 - (159,078)

Fair value amortisation of share

based transactions - - - - - 144 144

Sale of treasury shares - - - - - - -

Conversion of preference shares

(note 20(d)) - - - - - (1,833) (1,833)

Revaluation of freehold land - (6,152) - - - - (6,152)

Balance at 31 December 2011 425 47,690 (13,733) (234,367) (26,584) - (226,569)

ESPP

reserve

Total

other

reserve

63


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

21. Reserves (continued)

i) Movements in other reserves (continued)

The net fair value movements during the year have arisen due to a

temporary decline in valuations of the Group’s investments in securities,

as a result of the global/Eurozone crisis, its effect on global markets

and resultant valuations. These adverse movements assessed as at 31

December 2011 are temporary in nature and any impairment provisions

required have been provided for and recognised in the consolidated

statement of income.

Capital

reserve

Property

revaluation

reserve

Foreign

exchange

translation

reserve

Available

for-sale

reserve

Cumulative changes in

Cash flow

hedge

reserve

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 - - - - - 1,689 1,689

Sale of treasury shares 118 - - - 118

Conversion of preference shares

(note 20(d)) - - - - - (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)

ESPP

reserve

Total

other

reserve

j) Dividends paid and proposed

Proposed for approval at the forthcoming Annual General

Assembly of Shareholders Meeting

Cash dividend on the IFC Mandatorily Convertible

Preference shares @ 12 month LIBOR plus 2.5% margin

as per terms

Cash dividend on the Ordinary shares @ US cents 3.0

per share

2011

US$’000

2,900

149,530

Bonus share issue 5%

Declared and paid during the year

Cash dividend on the Class B Preference shares @

US cents 2.9 per share (2009: US cents 4.7 per share)

Cash dividend on the Ordinary shares @ US cents 2.0

per share (2009: US cents 2.5 per share)

Bonus share issue

2010

US$’000

149

122,697

None

22. Taxation

2011 2010

US$’000

US$’000

Consolidated balance sheet (note 12

and note 18):

- Current tax asset 1,991 3,147

- Deferred tax liability (3,718) (2,816)

- Current tax liability (8,790) (7,479)

(10,517) (7,148)

Consolidated statement of income

- Current tax rate expense on

- -

domestic operations

- Current tax expense on foreign

28,940 15,163

operations

- Deferred tax expense on foreign

902 1,611

operations

29,842 16,774

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.

64


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

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 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

and IFC mandatorily convertible preference shares.

The convertible subordinated debt issued (note 19) is anti-dilutive for

2011 and 2010 and therefore ignored in calculating diluted earnings per

share. The number of ordinary shares potentially issuable upon conversion

of this debt amounts to 204.9 million shares as at 31 December 2011

(2010: 204.9 million shares).

The following reflects the income and share data used in basic and diluted

earnings per share computations :

Number of shares (in millions)

2011 2010

Weighted average ordinary shares

outstanding during the period adjusted for

bonus shares 4,963 4,887

Less :- Weighted average treasury shares - (1)

Net weighted average number of ordinary

shares for basic earnings per share 4,963 4,886

Add: Effect of dilution – Class B preference

shares (note 20(e)) - 77

Add: Effect of dilution – IFC mandatorily

convertible preference shares (note 20(f )) 152 -

Weighted average number of ordinary shares

for diluted earnings per share 5,115 4,963

Issued and fully paid ordinary shares of

US$ 0.25 each (in million) 4,984 4,908

24. Cash and Cash Equivalents

Cash and cash equivalents included in the consolidated statement of cash

flows include the following balance sheet amounts:

2011 2010

US$’000

US$’000

Net profit for basic earnings per

share computation

Net profit attributable to Bank’s

equity shareholders 310,610 265,499

(Less): Class B preference share

dividend (note 21(j)) - (149)

(Less): IFC mandatorily convertible

preference shares dividend

(note 21(j)) (2,900) -

Adjusted net profit attributable to

Bank’s ordinary equity shareholders

for basic earnings per share 307,710 265,350

Net profit for diluted earnings per

share computation

Net profit attributable to Bank’s

equity shareholders before

preference share dividend 310,610 265,499

Add: Staff costs - fair value

amortisation of share based

transactions - 1,689

Adjusted net profit attributable to

Bank’s ordinary equity

shareholders for diluted earnings

per share 310,610 267,188

2011 2010

US$ ’000 US$ ’000

Cash and balances with central banks, excluding

mandatory reserve deposits (note 7a) 461,050 183,137

Deposits with Central banks, other banks

and financial institutions -with an original

maturity of three months or less 3,405,047 2,780,021

3,866,097 2,963,158

25. Related Party Transactions

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:

65


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

25. Related Party Transactions (continued)

Major

shareholders

Associates

2011

US$ ’000

Directors

and senior

management

Interest income - 1,841 3,203 5,044

Interest expense 77,926 161 21 78,108

Fees and commissions (net) - 5,123 - 5,123

Deposits with banks and other financial institutions - 86,800 - 86,800

Loans and advances - - 220,403 220,403

Deposits from banks and other financial institutions - 89,860 - 89,860

Customers’ deposits (a) 5,499,793 9,142 9,408 5,518,343

Subordinated liabilities 91,516 - - 91,516

Commitments and contingent liabilities (notional) - 57,885 1,819 59,704

Derivatives (notional) - 191,938 - 191,938

Total

Major

shareholders

Associates

2010

US$ ’000

Directors

and senior

management

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 - 78,409 - 78,409

Loans and advances - - 214,409 214,409

Deposits from banks and other financial institutions - 28,444 - 28,444

Customers’ deposits (a) 5,185,424 17,206 14,816 5,217,446

Subordinated liabilities 91,596 - - 91,596

Commitments and contingent liabilities (notional) - 5,456 2,779 8,235

Derivatives (notional) - 158,028 - 158,028

(a) Customers’ deposits include deposits from GCC government-owned institutions totaling US$ 5,496 million (31 December 2010: US$ 5,161 million).

The compensation of key management personnel of the Group included under staff costs was as follows:

Total

2011 2010

US$ ’000 US$ ’000

Short term employee benefits 14,997 14,240

End of service benefits 1,004 947

Post employment benefits 294 261

Total benefits 16,295 15,448

Included in short term employee benefits is the fair value amortisation charge relating to share based transactions of US$ 0.3 million (2010: US$ 0.6 million).

66


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

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$ 7,722 thousand (2010: US$

8,486 thousand). There are no material differences between the carrying

amount of the provision for end of service benefits at both 31 December

2011 and 2010 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 the 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$ 5,718 thousand (2010: US$ 5,481 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 2011 was US$ 4,033

million (2010: US$ 4,422 million).

28. Derivatives

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 terms 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.

Derivative

assets

2011

Derivative

liabilities

US$ ’000 US$ ’000

Derivatives held for

risk management:

Interest rate swaps 43,040 29,409

Forward foreign exchange contracts 37,321 21,187

Forward rate agreements 1,435 538

Options 703 5

Interest rate futures 1,297 1,038

Credit derivatives 70 290

Derivatives held as fair value hedges:

Interest rate swaps 7,795 206,345

Currency swaps 6,442 -

Options 287 -

Derivatives held as cash flow hedges:

Interest rate swaps 220 26,804

98,610 285,616

2010

Derivative

assets

Derivative

liabilities

US$ ’000 US$ ’000

Derivatives held for

risk management:

Interest rate swaps 46,294 44,661

Forward foreign exchange contracts 72,999 62,971

Forward rate agreements 1,277 205

Options 1,802 998

Interest rate futures 432 370

Credit derivatives 50 863

Derivatives held as fair value hedges:

Interest rate swaps 12,219 97,645

Currency swaps 6,420 -

Options 4,558 -

Derivatives held as cash flow hedges:

Interest rate swaps 2,196 35,869

148,247 243,582

67


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

28. Derivatives (continued)

Cash flow hedges

The time periods in which the hedged cash flows are expected to occur

and their impact on the consolidated statement of income is as follows:

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

At 31 December

2011

Cash outflows from

liabilities 216 2,490 34,871 - 37,577

At 31 December

2010

Cash outflows from

liabilities 21,725 11,174 59,803 9,483 102,185

No hedge ineffectiveness on cash flow hedges was recognised in 2011

and 2010.

Fair value hedges

Losses arising from fair value hedge instruments during 2011 were US$

91.8 million (2010 : US$ 51.5 million) while the gains on the hedged items

attributable to the hedged risk were US$ 91.8 million (2010 : US$ 51.5

million). These gains and losses are included in “trading income-net” in the

consolidated statement of income during 2011 and 2010.

Derivatives held for risk management 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.

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:

2011 2010

US$ ’000 US$ ’000

Contingent liabilities and commitments

Guarantees 1,651,977 1,448,486

Acceptances 44,302 70,196

Letters of credit 472,173 372,315

2,168,452 1,890,997

Irrevocable commitments:

Undrawn loan commitments 634,798 1,054,589

The Group’s commitments in respect of non-cancellable operating leases

were as follows:

2011 2010

US$ ’000 US$ ’000

Within one year 1,893 1,877

Between one to five years 7,490 7,363

Over five years 9,147 11,001

18,530 20,241

68


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

30. Segment Information

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,

over drafts, 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:

Retail

banking

Corporate

banking,

treasury and

investments

Private

banking

and wealth

management

Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Year ended 31 December 2011:

Net interest income 80,014 450,686 36,227 566,927

Intersegment interest 41,212 (43,496) 2,284 -

Fees and commissions - net 33,427 64,472 24,523 122,422

Share of profits from associates and joint venture 15,302 38,994 2,407 56,703

Other operating income 2,418 93,588 54 96,060

OPERATING INCOME 172,373 604,244 65,495 842,112

Net provision for loan losses and others (4,031) 132,714 1,164 129,847

Provision for non-trading investments - 73,376 - 73,376

NET OPERATING INCOME 176,404 398,154 64,331 638,889

Operating expenses 95,494 145,238 32,502 273,234

PROFIT BEFORE TAX 80,910 252,916 31,829 365,655

Tax expense 5,516 20,218 4,108 29,842

NET PROFIT FOR THE YEAR 75,394 232,698 27,721 335,813

Less : Attributable to non-controlling interest 25,203

NET PROFIT ATTRIBUTABLE TO THE BANK’S EQUITY SHAREHOLDERS 310,610

Segment assets 3,031,087 21,697,936 1,492,345 26,221,368

Goodwill 178,018 220,652 102,161 500,831

Other intangible assets 62,870 97,164 30,482 190,516

Investment in associates and joint venture 629,843

Unallocated assets 787,204

TOTAL ASSETS 28,329,762

Segment liabilities 4,333,971 17,688,750 2,650,844 24,673,565

Unallocated liabilities 745,056

TOTAL LIABILITIES 25,418,621

69


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

30. Segment Information (continued)

Retail

banking

Corporate

banking,

treasury and

investments

Private

banking

and wealth

management

Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Year ended 31 December 2010:

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

Share of profits from associates and joint venture 11,525 38,900 1,129 51,554

Other operating income 3,778 67,215 29 71,022

OPERATING INCOME 170,770 528,654 55,245 754,669

Net provision for loan losses and others 14,331 132,946 4,394 151,671

Provision for non-trading investments - 40,610 - 40,610

NET OPERATING INCOME 156,439 355,098 50,851 562,388

Operating expenses 95,972 130,067 27,376 253,415

PROFIT BEFORE TAX 60,467 225,031 23,475 308,973

Tax expense 4,231 9,837 2,706 16,774

NET PROFIT FOR THE YEAR 56,236 215,194 20,769 292,199

Less : Attributable to non-controlling interest 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 182,803 222,012 115,055 519,870

Other intangible assets 64,841 100,209 31,438 196,488

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

Geographic segmentation

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 as “GCC Countries”, 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:

Operating income

Total assets

2011 2010 2011 2010

US$ ’000 US$ ’000 US$ ’000 US$ ’000

GCC Countries 625,068 599,829 19,196,034 18,600,057

Rest of the World 217,044 154,840 9,133,728 7,857,404

Total 842,112 754,669 28,329,762 26,457,461

Net profit from Bahrain onshore operations included above is US$ 38.2

million (2010: US$33.4 million) amounting to 12.3% (2010: 12.6%) of the

Group’s net profit attributable to equity shareholders.

70


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

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 a particular 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 – cash, mortgages over residential properties

and assignments over salary income;

• In the commercial sector – cash, charges over business assets such as

premises, inventories, receivables, debt securities and 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 8(a) and 8(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

Gross

maximum

exposure

2011

Gross

maximum

exposure

2010

US$ ’000 US$ ’000

Balances with central banks 531,583 280,389

Treasury bills and deposits

with central banks 2,612,287 2,153,711

Deposits with banks and other

financial institutions 3,068,879 2,915,259

Loans and advances 15,495,961 14,477,713

Non-trading investments 4,005,854 4,047,110

Interest receivable and other assets 415,228 410,670

Total 26,129,792 24,284,852

Contingent liabilities 2,168,452 1,890,997

Undrawn loan commitments 634,798 1,054,589

Total credit related commitments 2,803,250 2,945,586

Total credit risk exposure 28,933,042 27,230,438

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.

Neither past due nor impaired

High

standard

grade

Standard

grade

Total

US$ ’000 US$ ’000 US$ ’000

At 31 December 2011

Balances with central banks 437,854 93,729 531,583

Treasury bills and deposits

with central banks 2,612,287 - 2,612,287

Deposits with banks and

other financial institutions 2,751,827 317,052 3,068,879

Loans and advances

Retail 910,561 1,831,461 2,742,022

Corporate 7,740,888 4,917,536 12,658,424

Non trading investments

Available-for-sale 2,703,960 48,547 2,752,507

Held to maturity - 19,957 19,957

Loans and receivables 1,201,899 86,713 1,288,612

Other assets - derivatives 98,610 - 98,610

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.

71


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

31. Credit Risk (continued)

c) Credit quality per class of financial assets (continued)

The table below shows distribution of financial assets neither past due

nor impaired.

At 31 December 2010

Neither past due nor impaired

High

standard

grade

Standard

grade

Total

US$ ’000 US$ ’000 US$ ’000

Balances with central banks 259,406 20,983 280,389

Treasury bills and deposits

with central banks 2,153,711 - 2,153,711

Deposits with banks and

other financial institutions 2,516,377 398,882 2,915,259

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

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

Standard Risk rating 5

to 7

Undoubted through to good credit

risk

Satisfactory through to adequate

credit risk

The risk rating system is supported by various financial analytics and

qualitative market information for the measurement of counterparty risk.

32. Concentration Analysis

The distribution of assets, liabilities and commitments on behalf of

customers by geographic region and industry sector was as follows:

2011

Assets Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Geographic region:

Kingdom of Bahrain 4,736,657 4,770,420 600,448

State of Kuwait 9,752,340 12,846,076 835,252

Other GCC countries 4,707,037 1,676,269 189,564

United Kingdom (UK) 2,865,365 814,091 78,015

Arab Republic of Egypt 2,581,326 1,707,082 308,034

Europe (excluding UK) 1,800,800 895,054 98,749

Asia (excluding GCC) 929,692 1,355,078 35,699

United States of America 512,257 482,165 15,542

Rest of the world 444,288 872,386 7,149

28,329,762 25,418,621 2,168,452

2010

Assets Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Geographic region:

Kingdom of Bahrain 4,905,615 4,429,992 665,239

State of Kuwait 9,358,364 11,122,802 704,639

Other GCC countries 4,336,078 2,261,213 194,952

United Kingdom (UK) 2,462,954 468,540 2,120

Arab Republic of Egypt 2,127,269 1,641,945 175,317

Europe (excluding UK) 1,276,125 1,023,124 80,476

Asia (excluding GCC) 806,033 2,133,461 17,526

United States of America 611,332 251,977 17,330

Rest of the world 573,691 372,232 33,398

26,457,461 23,705,286 1,890,997

There are no financial assets which are past due but not impaired as at

31 December 2011 and 2010 other than those disclosed under note 8 (c).

72


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

32. Concentration Analysis (continued)

Assets

2011

Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Industry sector:

Banks and other financial

institutions 11,089,273 10,432,256 624,140

Consumer/personal 3,440,612 4,857,841 22,645

Residential mortgage 1,343,580 1,873 878

Trading and

manufacturing 3,236,852 2,305,023 707,049

Real estate 3,153,618 486,819 3,477

Services 3,387,091 2,601,665 701,890

Government/public

sector 1,761,954 3,606,963 31,785

Others 916,782 1,126,181 76,588

28,329,762 25,418,621 2,168,452

2010

Assets Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Industry sector:

Banks and other financial

institutions 10,014,756 10,270,624 422,891

Consumer/personal 3,343,687 3,603,717 33,572

Residential mortgage 1,088,321 4,734 4,049

Trading and

manufacturing 4,087,068 1,487,980 585,455

Real estate 3,322,513 428,952 48,885

Services 2,151,628 2,154,064 700,078

Government/public

sector 1,263,028 3,572,867 7,877

Others 1,186,460 2,182,348 88,190

26,457,461 23,705,286 1,890,997

33. Market Risk

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 interdependency

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

2011 - 31 December 15 86 1 102

2010 - 31 December 549 (7) 6 548

b. Market risk-non-trading

Interest rate risk

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 are 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 2011 and 31 December 2010 including the

effect of hedging instruments.

Sensitivity analysis - interest rate risk

2011 2010

US$ ’000 US$ ’000

at 10 bps - increase (+)/decrease (-) +/- 413 1,021

at 25 bps - increase (+)/decrease (-) +/- 1,032 2,552

73


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

33. Market Risk (Continued)

b. Market risk-non-trading (continued)

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

2011 2010

Effect on

equity

Effect on

equity

% US$ ’000 US$ ’000

Market indices

Doha Securities Market +10% 2,115 -

Muscat stock exchange (MSCI) +10% 422 913

Kuwait Stock Exchange +10% 1,948 2,475

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, reclassified available for sale investments

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$ 135.3

million (2010: US$ 136.3 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 as

sets 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.

2011

Level 1 Level 2 Total

US$ ’000 US$ ’000 US$ ’000

Bonds 2,350,373 402,134 2,752,507

Equities and funds 158,199 210,588 368,787

Derivative assets 44,749 53,861 98,610

Derivative liabilities (21,635) (263,981) (285,616)

2,531,686 402,602 2,934,288

2010

Level 1 Level 2 Total

US$ ’000 US$ ’000 US$ ’000

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)

2,357,548 387,852 2,745,400

There are no financial instruments that qualify for classification under

Level 3 as at 31 December 2011 and 2010. During the year 2011 and 2010

there have been no transfers between Levels 1, 2 and 3.

74


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

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 Ahil Bank S.A.O.G. on the Muscat

Securities Market. The table below shows the value based on closing price

as at 31 December 2011 and carrying value of these investments:

US$ (million)

2011 2010

US$ (million)

Market value 732 591

Carrying value 526 499

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.

35. Liquidity Risk

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 Group Asset and Liability Committee (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

coordinated 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 obligation can be met when due.

Treasury limits are set by 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 long-term implications for the

business.

The maturity profile of the assets and liabilities at 31 December 2011 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

US$ ‘000

Above

1 year Undated Total

ASSETS

Cash and balances

with central banks 673,800 - - 673,800

Treasury bills and

deposits with

central banks 2,612,287 - - 2,612,287

Deposits with banks

and other financial

institutions 3,068,879 - - 3,068,879

Loans and advances 6,078,356 9,417,605 - 15,495,961

Non-trading

investments 520,780 3,849,661 - 4,370,441

Investments in

associates and

joint venture - - 629,843 629,843

Premises and

equipment - - 351,720 351,720

Interest receivable

and other assets 301,732 133,752 - 435,484

Goodwill and other

intangible assets - - 691,347 691,347

Total 13,255,834 13,401,018 1,672,910 28,329,762

LIABILITIES

Deposits from banks

and other financial

institutions 4,434,645 - - 4,434,645

Borrowings under

repurchase

agreements 1,352,601 - - 1,352,601

Customers’ deposits 9,402,145 7,942,889 - 17,345,034

Term debts 768,000 - - 768,000

Interest payable and

other liabilities 674,475 70,581 - 745,056

Subordinated

liabilities 30,842 742,443 - 773,285

Total 16,662,708 8,755,913 - 25,418,621

Net liquidity gap (3,406,874) 4,645,105 1,672,910 2,911,141

75


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

35. Liquidity Risk (Continued)

The Group has collateralized borrowing lines of credit with various

financial institutions through Global Master Repurchase Agreements

(GMRA), under which it can borrow up to US$ 2.4 billion (31 December

2010: US$ 2.4 billion). Refer note 15 for further details.

The maturity profile of the assets and liabilities at 31 December 2010 was

as follows:

Less

than

1 year

US$ ’000

Above

1 year Undated Total

ASSETS

Cash and balances with

central banks 361,376 - - 361,376

Treasury bills and

deposits with central

banks 2,153,711 - - 2,153,711

Deposits with banks

and other financial

institutions 2,913,771 1,488 - 2,915,259

Loans and advances 5,223,277 9,254,436 - 14,477,713

Non-trading

investments 849,949 3,563,353 - 4,413,302

Investments in associates

and joint venture - - 605,679 605,679

Premises and

equipment - - 373,094 373,094

Interest receivable and

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 4,924,318 40,905 - 4,965,223

Borrowings under

repurchase agreements 1,446,472 198,589 - 1,645,061

Customers’ deposits 7,349,573 7,486,223 - 14,835,796

Term debts 178,562 768,000 - 946,562

Interest payable and

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

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.

US$ ‘000

Less than Above Total

1 year 1 year

As at 31 December 2011

Deposits from banks and other

financial institutions 4,444,239 - 4,444,239

Borrowings under repurchase

agreements 1,355,564 - 1,355,564

Customers’ deposits 16,559,260 899,888 17,459,148

Term debts 774,579 - 774,579

Subordinated liabilities 31,357 818,297 849,654

Total 23,164,999 1,718,185 24,883,184

Credit related commitments 127,036 507,762 634,798

Derivatives - net outflow 7,014 204,490 211,504

Less

than

1 year

US$ ‘000

Above

1 year Total

As at 31 December 2010

Deposits from banks and other

financial institutions 4,852,114 129,133 4,981,247

Borrowings under repurchase

agreements 1,447,421 198,719 1,646,140

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 651,014 403,575 1,054,589

Derivatives - net outflow 4,440 113,026 117,466

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.

76


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

36. Capital Adequacy (Continued)

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 16.0% as of 31 December 2011 (2010: 14.1%).

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 Group’s Sharia’a compliant Islamic banking activities are offered

through its fully fledged Islamic Banking subsidiary AUBK and Islamic

banking window at AUB Bahrain. The results of its Islamic banking activity,

which is included in the consolidated financial statements, is presented

below.

2011 2010

US$ ’000 US$ ’000

ASSETS

Cash and balances with central banks 163,753 76,858

Deposits with central banks 2,187,432 1,491,523

Deposits with banks and

other financial institutions a 1,444,981 2,039,504

Receivable balances from

Islamic financing activities b 7,246,862 7,441,805

Financial investments 327,804 -

Premises and equipment 155,325 140,302

Other assets 147,413 90,671

TOTAL ASSETS 11,673,570 11,280,663

LIABILITIES

Due to banks c 3,005,139 3,111,621

Customers’ deposits d 7,131,933 6,918,026

Other liabilities 155,954 161,496

Restricted investment accounts 12,920 24,898

10,305,946 10,216,041

Unrestricted investment accounts (URIA) 551,645 484,979

TOTAL LIABILITIES AND URIA 10,857,591 10,701,020

TOTAL EQUITY 815,979 579,643

TOTAL LIABILITIES, URIA AND EQUITY 11,673,570 11,280,663

Statement of income for the year ended 31 December

2011 2010

US$ ’000 US$ ’000

Net income from Islamic financing activities e 278,242 176,485

278,242 176,485

Fees and commissions 26,356 18,487

Other operating income 2,185 -

Foreign exchange gains 11,887 8,451

OPERATING INCOME 318,670 203,423

Provision for impairment 42,605 8,709

NET OPERATING INCOME 276,065 194,714

Staff costs 53,547 34,588

Depreciation 9,311 6,181

Other operating expenses 26,247 16,334

OPERATING EXPENSES 89,105 57,103

PROFIT FOR THE YEAR BEFORE THE

TAX EXPENSE 186,960 137,611

Tax expense 5,315 3,462

PROFIT FOR THE YEAR BEFORE THE

SHARE OF PROFIT OF UNRESTRICTED

INVESTMENT ACCOUNT HOLDERS 181,645 134,149

Less : Share of profit of unrestricted

investment account holders (1,473) (2,470)

NET PROFIT FOR THE YEAR 180,172 131,679

Attributable to:

Bank’s equity shareholders 148,138 104,373

Non-controlling interests 32,034 27,306

180,172 131,679

Notes 2011 2010

US$ ’000 US$ ’000

(a) Deposits with banks and other

financial institutions

Murabaha finance with other banks and

financial institutions 1,239,429 1,686,110

Wakala with banks and financial institutions 63,960 191,793

Deposits with banks 25,157 92,315

Current account and others 116,435 69,286

1,444,981 2,039,504

77


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2011

38. Islamic Banking (Continued)

Notes (continued)

2011 2010

US$ ’000 US$ ’000

(b) Receivable balances from Islamic financing activities

Tawarruq receivables 5,517,541 5,696,485

Murabaha receivables 1,399,557 1,442,746

Ijara receivables 558,817 460,753

Others 23,399 3,450

Less: Allowance for impairment (252,452) (161,629)

7,246,862 7,441,805

2011 2010

US$ ’000 US$ ’000

(c) Due to banks

Murabaha 1,946,332 2,547,595

Wakala 992,740 468,567

Deposits from banks - 36,562

Current accounts 38,041 50,192

Mudaraba 28,026 8,705

3,005,139 3,111,621

2011 2010

US$ ’000 US$ ’000

(d) Customers’ deposits

Wakala 3,273,251 3,418,752

Mudaraba 936,960 503,231

Current account 889,315 554,939

Murabaha 2,032,407 2,441,104

7,131,933 6,918,026

2011 2010

US$ ’000 US$ ’000

(e) Net income from Islamic financing activities

Income from Murabaha 76,017 10,884

Income from Ijara 28,604 14,937

Income from Tawarruq 288,022 255,155

Income from Financial Investments 22,836 -

Income from Islamic financing activities 415,479 280,976

Profit expenses on Wakala 51,712 71,990

Profit expenses on Mudaraba 28,995 6,632

Profit expenses on Murabaha 56,530 25,869

Less: Distribution to depositors 137,237 104,491

Net income from Islamic financing activities 278,242 176,485

78


Pillar III

Disclosures

Basel II

31 December 2011

79


PILLAR III DISCLOSURES - BASEL II

31 December 2011

Introduction to the Central Bank of Bahrain’s Basel II guidelines 83

Pillar III quantitative & qualitative disclosures

01. Capital structure 84

Table 1. Capital structure 84

02. Group risk governance structure 85

03. Credit risk management 86

Table 2. Gross credit risk exposures 88

Table 3. Exposures secured by eligible financial collateral and guarantees 88

Table 4. Credit risk exposure post CRM and credit conversion 88

Table 5. Capital requirements for credit,market and operational risks 89

Table 6. Geographic distribution of gross credit exposures 90

Table 7. Sectoral classification of gross credit exposures 90

Table 8. Residual contractual maturity of gross credit exposures 91

Table 9. Sectoral breakdown of impaired loans and impairment provisions 92

Table 10. Geographical distribution of impairment provisions for loans and advances 92

Table 11. Movement in impairment provision for loans and advances 92

Table 12. Past due and impaired loans - age analysis 93

Table 13. Restructured credit facilities 94

Table 14. Counterparty credit risk in derivative transactions 94

Table 15. Related party transactions 94

04. Market risk 94

Table 16. Capital requirement for components of market risk 95

Table 17. Interest rate risk 96

Table 18. Equity position in banking book 97

Table 19. Gains on equity instrument 97

05. Liquidity risk and funding management 97

06. Operational risk 97

07. Information technology risk 97

08. Strategic risk 97

09. Legal, compliance, regulatory and reputational risk 97

10. Environmental risk 97

81


PILLAR III DISCLOSURES - BASEL II

31 December 2011

Introduction to the Central Bank of

Bahrain’s Basel Il 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 Standard’s, 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 Bank is currently

required to maintain a 12 per cent minimum capital adequacy ratio at

group level.

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 2011.

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 10 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 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.

83


PILLAR III DISCLOSURES - BASEL II

31 December 2011

1. Capital Structure

Table - 1

Tier 1 Tier 2

US$ ’000 US$ ’000

A. NET AVAILABLE CAPITAL

Paid-up share capital 1,367,135

Less: Loans against Employee Stock Purchase Plan (32,664)

Reserves:

Share premium 540,006

Capital reserve 425

Statutory reserve 173,246

Others (13,733)

Retained earnings 373,003

Minority interest in the equity of subsidiaries 373,710

Less: Goodwill (500,831)

Less: Unrealized gross losses arising from fair valuing equities (680)

Current year profit 310,610

Asset revaluation reserve-property, plant and equipment (45% only) 21,461

Unrealized gains arising from fair valuing equities (45% only) 8,845

Collective impairment provisions 233,517

Eligible subordinated term debt 599,294

TOTAL CAPITAL BEFORE REGULATORY DEDUCTIONS 2,279,617 1,173,727

Less: Regulatory deductions:

Material holdings of equities 275,912 275,912

2,003,705 897,815

Add: Proportionate aggregation 302,539 70,519

NET AVAILABLE CAPITAL 2,306,244 968,334

TOTAL ELIGIBLE CAPITAL BASE (Tier 1 + Tier 2) 3,274,578

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 2011.

B. Capital Adequacy Ratio

As at 31 December 2011, the capital adequacy ratio of the Group and significant subsidiaries were:

Subsidiaries

Consolidated Ahli United Bank

K.S.C. (AUBK)

Ahli United Bank (U.K.)

P.L.C. (AUB UK)

Ahli United Bank

(Egypt) S.A.E. (AUBE)

Tier 1 - Capital Adequacy Ratio 11.3% 19.4% 15.6% 12.0%

Total - Capital Adequacy Ratio 16.0% 21.4% 17.5% 13.1%

84


PILLAR III DISCLOSURES - BASEL II

31 December 2011

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 Board Risk Governance Structure

The above Group committees are set up as part of the Group board risk governance structure. The terms of reference for these committees are approved

by the Board.

AUB Group Management Risk Governance Structure

The Board approves the risk parameters and the Group Risk Committee

monitors the Group’s risk profile against these parameters.

The Deputy Group CEO – Risk, Legal and Compliance, under the delegated

authority of the Group CEO & MD, supported by the Group Head of

Risk Management and the Group Head of Credit Risk has 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.

including detailed risk exposures analysis reports.

The Board approves all risk policies as well as the Group risk framework on

an annual basis.

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.

Systems and procedures are in place to identify, control and report on all

major risks.

The Board and its Executive Committee receive quarterly risk updates

85


PILLAR III DISCLOSURES - BASEL II

31 December 2011

3. Credit Risk Management

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.

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:

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 optimize 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;

• 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.

Exposure Class

Sovereign Portfolio

Public Sector Entity [PSE]

Portfolio

Banks Portfolio

Investment Company Portfolio

Corporate Portfolio

Risk Weighting Criteria

Exposures to governments of

GCC (refer table 6 for definition

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.

Exposures to banks are risk

weighted based on their

external 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.

86


PILLAR III DISCLOSURES - BASEL II

31 December 2011

Regulatory Retail Portfolio

Residential Property Portfolio

Commercial Property Portfolio

Equities and Funds Investment

Portfolio

Past Due Portfolio

Eligible regulatory retail

exposures are risk weighted at

75%.

Exposures fully secured by first

mortgages on owner occupied

residential property are risk

weighted between 35%-100%

based on applicable regulatory

guidance.

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.

The unsecured portion of

any exposure [other than a

residential mortgage loan] that

is past due for more than 90

days is:

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%.

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

mitigations.

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 fulfill 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 personal sector – cash, mortgages over residential properties

and assignments over salary income;

• in the commercial sector – cash, charges over business assets such

as premises, inventories, receivables, debt securities and 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.

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.

Gross Credit Risk Exposures subject to Credit Risk

Mitigations (CRM)

External Rating Agencies

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.

The following table details the Group’s gross credit risk exposures before

the application of eligible Basel II CRM techniques. The CBB’s Basel II

guidelines detail 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.

87


PILLAR III DISCLOSURES - BASEL II

31 December 2011

3. Credit Risk Management (continued)

Table - 2

Gross Credit Risk Exposures

As at

31 December

2011

Average

monthly

balance

US$ ’000 US$ ’000

Balances with central banks 531,583 414,727

Treasury bills and deposits with

central banks 2,612,287 2,376,207

Deposits with banks and other

financial institutions 3,068,879 3,326,129

Loans and advances 15,495,961 15,008,724

Non-trading investments 4,005,854 3,995,507

Interest receivable and

other assets 415,228 433,346

TOTAL FUNDED EXPOSURES 26,129,792 25,554,640

Contingent liabilities 2,168,452 2,037,139

Undrawn loan commitments 634,798 726,961

TOTAL UNFUNDED EXPOSURES 2,803,250 2,764,100

TOTAL CREDIT RISK EXPOSURE 28,933,042 28,318,740

The gross credit exposures reported above are as per the consolidated

balance sheet as reduced by exposures which do not carry credit risk.

Table - 3

Exposures Secured by Eligible Financial Collateral and

Guarantees

Gross

exposure

Secured by

eligible CRM

US$ ’000 US$ ’000

Claims on sovereigns 4,256,596 -

Claims on public sector entities 1,047,268 111,862

Claims on banks 5,913,528 158,753

Claims on corporates 12,855,446 2,034,653

Regulatory retail exposures 1,748,252 24,293

Residential retail exposures 1,250,490 -

Equity 145,390 -

Investments in funds 162,887 -

Other exposures 1,394,729 24,805

TOTAL 28,774,586 2,354,366

The gross exposure in the above table represents the on and off balance

sheet credit exposures before credit risks mitigations (CRM), determined

in accordance with the CBB issued Pillar III guidelines. The off balance

sheet exposures are computed using the relevant conversion factors.

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 - 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 123,686

Claims on public sector entities 709,881

Claims on banks 2,219,181

Claims on corporates 10,361,255

Regulatory retail exposures 1,292,969

Residential retail exposures 437,672

Equity 196,963

Investments in funds 244,330

Other exposures 1,297,385

16,883,322

Add : Proportionate aggregation 1,745,712

TOTAL 18,629,034

TOTAL CREDIT RISK CAPITAL REQUIREMENT 2,235,485

88


PILLAR III DISCLOSURES - BASEL II

31 December 2011

Table - 5

Capital Requirements for Credit, Market and Operational Risks

Capital

requirement

US$ ’000

Claims on sovereigns 14,842

Claims on public sector entities 85,186

Claims on banks 266,302

Claims on corporates 1,243,351

Regulatory retail exposures 155,156

Residential retail exposures 52,521

Equity 23,636

Investments in funds 29,320

Other exposures 155,686

2,026,000

Add : Proportionate aggregation 209,485

TOTAL CREDIT RISK CAPITAL REQUIREMENT

(STANDARDISED APPROACH) 2,235,485

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 2011 the

Group had no single obligor exposures which exceeded 15 per cent of the

Group’s regulatory capital base (i.e. exceeded US$ 491.2 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 2011.

TOTAL MARKET RISK CAPITAL REQUIREMENT

(STANDARDISED APPROACH) 61,898

TOTAL OPERATIONAL RISK CAPITAL

REQUIREMENT (BASIC INDICATOR APPROACH) 160,006

TOTAL 2,457,389

89


PILLAR III DISCLOSURES - BASEL II

31 December 2011

3. Credit Risk Management (continued)

Table - 6

Geographic Distribution of Gross Credit Exposures

Kingdom

of Bahrain

State of

Kuwait

Other GCC

countries *

United

Kingdom

Europe

(excluding

United

Kingdom)

Arab

Republic of

Egypt

Asia (excluding

GCC countries)

Rest of the

World

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

Balances with central banks 157,480 129,851 3,111 923 - 146,486 93,732 - 531,583

Treasury bills and deposits with

central banks 209,355 2,187,432 - - - 146,956 68,544 - 2,612,287

Deposits with banks and other

financial institutions 193,726 32,778 579,550 565,796 1,136,269 229,137 172,823 158,800 3,068,879

Loans and advances 3,024,918 6,618,859 2,149,605 1,653,794 360,077 1,449,308 202,073 37,327 15,495,961

Non-trading investments 438,743 458 1,515,989 486,713 255,876 377,364 383,753 546,958 4,005,854

Interest receivable and

other assets 236,838 55,191 30,607 35,775 4,834 42,630 4,983 4,370 415,228

Total funded exposures 4,261,060 9,024,569 4,278,862 2,743,001 1,757,056 2,391,881 925,908 747,455 26,129,792

Contingent liabilities 583,929 824,015 196,357 72,986 98,749 327,946 36,750 27,720 2,168,452

Undrawn loan commitments 43,464 68,842 177,264 71,309 58,760 178,978 26,945 9,236 634,798

Total unfunded exposures 627,393 892,857 373,621 144,295 157,509 506,924 63,695 36,956 2,803,250

TOTAL 4,888,453 9,917,426 4,652,483 2,887,296 1,914,565 2,898,805 989,603 784,411 28,933,042

Total

16.9% 34.3% 16.1% 10.0% 6.6% 10.0% 3.4% 2.7% 100.0%

* Other GCC countries are countries which are part of the Gulf Co-operation Council comprising Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia

and the United Arab Emirates apart from Kingdom of Bahrain and State of Kuwait which are disclosed separately.

Table - 7

Sectoral Classification of Gross Credit Exposures

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Funded Unfunded Total %

Balances with central banks 3,241,008 - 3,241,008 11.2

Banks and other financial institutions 6,079,008 740,504 6,819,512 23.6

Consumer/personal 3,440,612 30,664 3,471,276 12.0

Residential mortgage 1,343,580 40,871 1,384,451 4.8

Trading and manufacturing 3,234,589 825,360 4,059,949 14.0

Real estate 3,127,072 122,756 3,249,828 11.2

Services 3,379,034 876,761 4,255,795 14.7

Government/public sector 1,761,954 60,767 1,822,721 6.3

Others 522,935 105,567 628,502 2.2

TOTAL 26,129,792 2,803,250 28,933,042 100.0

90.3% 9.7% 100.0%

90


PILLAR III DISCLOSURES - BASEL II

31 December 2011

Table - 8

Residual Contractual Maturity of Gross Credit Exposures

Up to

one month

One month

to three

Over three

months to

Over one

year to

Over

five to

Over ten

to twenty

Over

twenty

months one year five years ten years years years

Total

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

Balances with central banks 466,997 64,586 - - - - - 531,583

Treasury bills and deposits

with central banks 1,386,807 391,654 833,826 - - - - 2,612,287

Deposits with banks and

other financial institutions 2,310,841 741,329 16,709 - - - - 3,068,879

Loans and advances 2,059,552 1,867,257 2,151,547 4,723,876 3,547,006 1,034,003 112,720 15,495,961

Non-trading investments 45,268 129,561 345,951 2,381,136 676,085 248,443 179,410 4,005,854

Interest receivable and

other assets 64,288 154,717 146,129 28,263 21,831 - - 415,228

Total funded exposures 6,333,753 3,349,104 3,494,162 7,133,275 4,244,922 1,282,446 292,130 26,129,792

Contingent liabilities 528,879 228,177 731,632 655,823 19,910 4,031 - 2,168,452

Undrawn loan commitments 7,967 1,839 117,226 180,373 261,760 54,732 10,901 634,798

Total unfunded exposures 536,846 230,016 848,858 836,196 281,670 58,763 10,901 2,803,250

TOTAL 6,870,599 3,579,120 4,343,020 7,969,471 4,526,592 1,341,209 303,031 28,933,042

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;

Collectively assessed impairment provisions

Impairment is assessed on a collective basis as follows:

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 potential impairment losses estimated at

the balance sheet date which may 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

• judgment 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.

• the realisable value of security (or other credit mitigations) 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.

91


PILLAR III DISCLOSURES - BASEL II

31 December 2011

3. Credit Risk Management (continued)

Table - 9

Sectoral Breakdown of Impaired Loans and Impairment Provisions

Impaired and

past due loans

Specific

impairment

provision

Net specific charge

for the year

ended 31

December 2011

Write off

during the year

ended 31

December 2011

Collective

impairment

provision

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

Consumer/personal 114,308 97,162 31,611 18,845 45,127

Trading and manufacturing 53,795 44,412 10,098 - 34,887

Real estate 56,944 49,513 5,861 - 40,490

Residential mortgage 9,919 6,046 2,941 - 16,835

Banks and other financial institutions 31,370 23,442 (523) - 14,593

Services 97,218 88,791 15,813 18,154 38,035

Government/public sector - - - - 5,953

Others 43,188 40,420 421 453 4,709

TOTAL 406,742 349,786 66,222 37,452 200,629

Table - 10

Geographical Distribution of Impairment Provisions for Loans and Advances

Kingdom of

Bahrain

State of

Kuwait

Other GCC

countries

United

Kingdom

Europe

(excluding)

United

Kingdom)

Arab

Republic

of Egypt

Asia

(excluding

GCC

countries)

Total

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

Specific impairment provision 45,562 149,708 77,697 34,648 - 28,183 13,988 - 349,786

Collective impairment provision 30,736 102,814 21,275 13,305 13,265 17,087 1,956 191 200,629

TOTAL 76,298 252,522 98,972 47,953 13,265 45,270 15,944 191 550,415

Rest

of the

world

Table - 11

Movement in Impairment Provision for Loans and Advances

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 2011 73,078 29,038 102,116 234,890 95,562 330,452 307,968 124,600

Amounts written off during the year (16,096) - (16,096) (21,356) - (21,356) (37,452) -

Net charge for the year 15,369 735 16,104 50,853 78,385 129,238 66,222 79,120

Interest suspended during the year (net) 415 - 415 4,841 - 4,841 5,256 -

Exchange rate adjustments / other

movements 1,524 267 1,791 6,268 (3,358) 2,910 7,792 (3,091)

Balance at 31 December 2011 74,290 30,040 104,330 275,496 170,589 446,085 349,786 200,629

92


PILLAR III DISCLOSURES - BASEL II

31 December 2011

Past Due and Impaired Credit Facilities

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 8(a) to 8(d) and note 31(c) to the audited consolidated

financial statements for the year ended 31 December 2011 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 - 7 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

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Kingdom of Bahrain 21,873 23,214 2,664 47,751

State of Kuwait 93,622 40,581 42,236 176,439

Other GCC Countries 19,924 64,750 - 84,674

United Kingdom 29,286 19,435 - 48,721

Arab Republic of Egypt 11,684 22,715 - 34,399

Asia (excluding GCC countries) - - 14,758 14,758

TOTAL 176,389 170,695 59,658 406,742

Over

three

years

Total

43.4% 42.0% 14.6% 100.0%

ii) By Sector

Consumer/personal 76,383 25,109 12,816 114,308

Trading and manufacturing 19,046 34,749 - 53,795

Real estate 21,063 35,881 - 56,944

Residential mortgage 3,585 6,334 - 9,919

Banks and other financial institutions 26,954 4,416 - 31,370

Services 29,233 60,120 7,865 97,218

Others 125 4,086 38,977 43,188

TOTAL 176,389 170,695 59,658 406,742

43.4% 42.0% 14.6% 100.0%

93


PILLAR III DISCLOSURES - BASEL II

31 December 2011

3. Credit Risk Management (continued)

Table - 13

Restructured Credit Facilities

US$ ’000

Balance of any restructured credit facilities as at year end 104,908

Loans restructured during the year 92,385

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 5,499,968 38,024 98,953

Interest rate related 6,690,934 60,586 94,005

Options 92,361 - 6,529

Derivatives credit exposure 12,283,263 98,610 199,487

Gross positive fair value represents the replacement cost of the derivatives

US$ ’000

ii) Amounts of collateral 35,815

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 2011.

4. Market Risk

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.

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 nontrading

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:

94


PILLAR III DISCLOSURES - BASEL II

31 December 2011

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 2011 369 90 970

Table - 16

Capital Requirement For Components of Market Risk

Capital

requirement

as at 31

December

2011

Maximum

value

Minimum

value

US$ ’000 US$ ’000 US$ ’000

Interest rate risk 8,667 8,785 853

Equity position risk 20 31 20

Foreign exchange risk 47,440 48,758 47,440

Options - 876 -

TOTAL MARKET RISK CAPITAL

REQUIREMENT BEFORE

PROPORTIONATE AGGREGATION

OF ASSOCIATES 56,127

Add : Proportionate aggregation 5,771 8,478 5,719

TOTAL MARKET RISK CAPITAL

REQUIREMENT (STANDARDISED

APPROACH) 61,898

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

practice 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 Group Assets Liability Committee (GALCO). 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 2011.

95


PILLAR III DISCLOSURES - BASEL II

31 December 2011

4. Market Risk (continued)

Table - 17

Interest Rate Risk

Less than

three months

Three

months to

one year

Over one

year

Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

ASSETS

Treasury bills and deposits with central banks 1,778,462 833,825 - 2,612,287

Deposits with banks and other financial institutions 3,052,168 16,711 - 3,068,879

Loans and advances 10,335,098 2,396,439 2,719,122 15,450,659

Non-trading investments 900,329 415,296 2,681,578 3,997,203

16,066,057 3,662,271 5,400,700 25,129,028

LIABILITIES

Deposits from banks and other financial institutions 3,313,852 1,040,197 - 4,354,049

Borrowings under repurchase agreements 1,352,601 - - 1,352,601

Customers’ deposits 11,318,366 5,122,473 862,453 17,303,292

Term debt 150,000 618,000 - 768,000

Subordinated liabilities 259,915 513,370 - 773,285

16,394,734 7,294,040 862,453 24,551,227

On - balance sheet gap (328,677) (3,631,769) 4,538,247

Off - balance sheet gap 2,073,626 5,227 (2,078,853)

Total interest sensitivity gap 1,744,949 (3,626,542) 2,459,394

Cumulative interest sensitivity gap 1,744,949 (1,881,593) 577,801

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 2011.

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-forsale

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 prices 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 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.

96


PILLAR III DISCLOSURES - BASEL II

31 December 2011

TABLE - 18

Equity Position in Banking Book

Gross

exposures

Riskweighted

exposures

Capital

requirement

US$ ’000 US$ ’000 US$ ’000

Listed 42,245 42,245 5,069

Unlisted 103,145 154,718 18,566

TOTAL 145,390 196,963 23,635

TABLE - 19

Gains on Equity Instruments

US$ ’000

Realised gains recognised in the statement of income 361

Unrealised (loss) gains recognised in the balance sheet:

- Tier one (eligible portion) (680)

- Tier two (eligible portion) 8,845

5. Liquidity Risk And Funding Management

Liquidity risk and funding management of the Group have been explained

in note 35 of audited consolidated financial statements for the year ended

31 December 2011.

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 2011.

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.

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.

The Bank has adopted the Equator Principles (EP), a globally recognized

benchmark for managing social and environmental risks in project finance.

EP is an arrangement by financial institutions worldwide to adhere to the

environmental, health and safety standards while financing projects.

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.

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 culture and processes. The

Bank has developed a comprehensive “operational risk self assessment”

(ORSA) process.

97


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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