Annual Report 2012 - Ahli United Bank

ahliunited.com

Annual Report 2012 - Ahli United Bank

BAHRAIN KUWAIT OMAN EGYPT IRAQ LIBYA UNITED KINGDOM


At the core of

AUB's continued

success is a

focused strategy

of building a

strong, diversified

regional bank,

underpinned by

the resilience of

rigorous risk and

cost discipline.


Contents


06 Group mission statement

07 AUB operating divisions

08 Financial highlights

16 Board of Directors’ report

18 Board of Directors

20 Chairman’s statement

22 Group Chief Executive Officer & Managing Director’s statement

24 Corporate governance

32 Group business and risk review

38 Group organisation

39 Group management

40 Contact details

43 Auditors’ report to the shareholders and consolidated financial statements

89 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 Shari'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.

6 Ahli United Bank


Annual Report

2012

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

• Shari'a Compliant 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

• Shari'a Compliant Banking

Retail Banking

This division covers both conventional and Shari'a Compliant 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 on-going

business activities of the Group, as well as support the Group’s expansion

through mergers and acquisitions.

• Finance

• Strategic Development

• Information Technology

• Operations

• Services

• Human Resources

Ahli United Bank

7


Financial

Highlights US $ ‘000s

300,000

250,000

255,723

200,718

265,499

310,610

335,703

30,000,000

25,000,000

23,582,727

23,573,983

26,457,461

28,329,762

29,896,422

200,000

20,000,000

150,000

15,000,000

100,000

10,000,000

50,000

5,000,000

0

0

2008 2009 2010

2011

2012 2008 2009 2010 2011 2012

15,000,000

13,632,220

13,299,999

14,477,713

15,495,961

15,972,219

2,500,000

2,000,000

1,995,435

2,213,523

2,392,181

2.537,431

2,810,959

12,000,000

1,500,000

9,000,00

1,000,00

3,000,000

500,000

0

2008 2009 2010 2011 2012

2008 2009 2010 2011

0

2012

8 Ahli United Bank


Consolidated

Performance Summary

Annual Report

2012

Ahli United Bank B.S.C.

Dec 12

Dec 11

Dec 10

Dec 09

Dec 08

US $ ‘000s

US $ ‘000s

US $ ‘000s

US $ ‘000s

US $ ‘000s

Net profit*

335,703

310,610

265,499

200,718

255,723

Total assets

29,896,422

28,329,762

26,457,461

23,573,983

23,582,727

Total loans

15,972,219

15,495,961

14,477,713

13,299,999

13,632,220

Total liabilities

26,699,593

25,418,621

23,705,286

20,992,552

21,187,950

Shareholders' equity

2,810,959

2,537,431

2,392,181

2,213,523

1,995,435

Non-controlling interest

385,870

373,710

359,994

367,908

399,342

Return on average assets

1.3%

1.2%

1.2%

0.9%

1.3%

Return on average equity

13.0%

12.7%

12.0%

9.6%

11.4%

Cost to income ratio

29.9%

32.4%

33.6%

31.5%

32.1%

Financial leverage

8.4

8.7

8.6

8.1

8.8

Risk asset ratio**

15.6%

16.0%

14.1%

15.1%

13.8%

Net interest margin

2.20%

2.10%

2.30%

2.36%

2.19%

Earning per share (US cents) - basic

6.4

5.9

5.2

4.0

5.1

Earning per share (US cents) - diluted

6.3

5.8

5.1

4.0

5.0

* Attributable to Bank’s equity shareholders

** Under BASEL II

Ahli United Bank

9


Principal

Subsidiaries Continued

Kuwait: Ahli United Bank K.S.C.

Dec 12

Dec 11

Dec 10

Dec 09

Dec 08

KD’ 000s

KD’ 000s

KD’ 000s

KD’ 000s

KD’ 000s

Net profit*

38,539

31,544

27,444

14,262

51,365

Total assets

2,632,922

2,627,839

2,454,337

2,260,533

2,237,018

Total loans (financing receivables)

1,728,082

1,617,722

1,609,986

1,561,104

1,472,932

Total liabilities

2,337,541

2,352,808

2,189,041

2,023,197

1,965,126

Shareholders’ equity

282,809

262,190

245,679

213,159

243,066

Non-controlling interest

12,572

12,841

19,616

24,177

28,826

Return on average assets

1.4%

1.3%

1.1%

0.6%

2.2%

Return on average equity

14.5%

12.7%

12.2%

6.2%

20.2%

Cost to income ratio

34.2%

39.7%

38.7%

33.4%

32.0%

Financial leverage

7.9

8.6

8.3

8.5

7.2

Risk asset ratio **

19.7%

21.3%

18.8%

16.8%

14.8%

Earning per share (fils)

36.2

29.6

25.8

13.4

48.2

* Attributable to Bank’s equity shareholders

** Under BASEL II

10 Ahli United Bank


Annual Report

2012

United Kingdom: Ahli United Bank (UK) PLC

Dec 12

Dec 11

Dec 10

Dec 09

Dec 08

US $ ‘000s

US $ ‘000s

US $ ‘000s

US $ ‘000s

US $ ‘000s

Net profit

36,102

36,380

20,760

7,164

7,088

Total assets

3,452,278

3,419,561

2,718,253

2,030,367

2,305,646

Total loans

1,609,390

1,767,372

1,560,955

1,309,903

1,095,061

Total liabilities

3,157,319

3,158,780

2,478,638

1,813,063

2,101,818

Shareholders’ equity

294,959

260,781

239,615

217,304

203,828

Return on average assets

1.1%

1.2%

0.9%

0.3%

0.3%

Return on average equity

13.0%

14.5%

9.1%

3.4%

3.4%

Cost to income ratio

36.0%

30.4%

38.1%

41.3%

48.3%

Financial leverage

10.7

12.1

10.3

8.3

10.3

Risk asset ratio *

18.9%

17.5%

15.3%

16.5%

15.6%

Earning per share (US cents)

18.1

18.2

10.4

3.6

3.5

* Under BASEL II

Ahli United Bank

11


Principal

Subsidiaries Continued

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

Dec 12 *

Dec 11

Dec 10

Dec 09

Dec 08

IQD Millions

IQD Millions

IQD Millions

IQD Millions

IQD Millions

Net profit

14,310

7,980

13,934

4,288

4,263

Total assets

293,437

247,446

204,164

208,304

191,124

Total loans

18,291

12,889

13,845

17,567

16,904

Total liabilities

112,078

83,430

80,272

86,897

89,338

Shareholders’ equity

143,200

135,185

94,539

84,151

67,053

Return on average assets

5.3%

3.5%

6.8%

2.1%

2.2%

Return on average equity

10.3%

6.9%

15.6%

5.7%

6.4%

Cost to income ratio

41.0%

48.4%

50.5%

74.0%

27.2%

Financial leverage

0.8

0.6

0.8

1.0

1.3

Risk asset ratio

414.5%

566.3%

577.4%

351.5%

348.1%

Earnings per share (fils)

143.1

95.3

206.4

71.5

71.1

Based on financial statements under local GAAP.

* 2012 information are subject to approval at Annual General Meeting

12 Ahli United Bank


Annual Report

2012

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

Dec 12

Dec 11

Dec 10

Dec 09

Dec 08

EGP’ 000s

EGP’ 000s

EGP’ 000s

EGP’ 000s

EGP’ 000s

Net profit *

244,946

195,868

164,348

128,245

183,056

Total assets

15,602,707

12,854,828

10,012,348

7,604,071

7,282,769

Total loans

7,456,483

5,802,342

5,443,987

4,444,684

4,105,418

Total liabilities

14,040,037

11,749,022

8,985,425

6,660,982

6,418,411

Shareholders’ equity

1,552,780

1,096,322

1,017,506

933,701

864,358

Return on average assets

1.7%

1.7%

1.9%

1.8%

2.8%

Return on average equity

19.6%

18.8%

17.0%

12.9%

21.8%

Cost to income ratio

30.9%

34.9%

39.4%

44.8%

41.9%

Financial leverage

9.0

10.6

8.7

7.1

7.4

Risk asset ratio **

15.3%

13.1%

14.0%

16.2%

17.4%

Earnings per share (EGP)

2.2

2.4

2.0

1.5

2.2

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

* Attributable to Bank’s equity shareholders

** Under Basel I

Ahli United Bank

13


Principal

Associate

Annual Report

2012

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

Dec 12

Dec 11

Dec 10

Dec 09

Dec 08

OMR’ 000s

OMR’ 000s

OMR’ 000s

OMR’ 000s

OMR’ 000s

Net profit

21,743

18,224

14,100

8,541

5,933

Total assets

1,099,230

929,604

805,594

616,058

456,405

Total loans

927,392

768,606

656,413

443,562

375,298

Total liabilities

931,716

809,392

703,488

523,440

369,349

Shareholders’ equity

167,514

120,212

102,106

92,618

87,056

Return on average assets

2.1%

2.1%

2.0%

1.6%

1.6%

Return on average equity

15.1%

16.4%

14.5%

9.5%

7.1%

Cost to income ratio

31.4%

30.1%

35.9%

44.3%

54.0%

Financial leverage

5.6

6.7

6.9

5.7

4.2

Risk assets ratio *

16.9%

17.5%

19.7%

17.6%

23.4%

Earnings per share (Baiza)

19.9

18.0

13.9

8.4

5.9

* Under Basel II

14 Ahli United Bank


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 2012.

General Operating Environment

After a marked slowdown in 2011, global economic trends remained

weak throughout 2012 with the operating environment characterised

as challenging and volatile. While the US economy witnessed indications

of a gradual turnaround during the year, the Euro zone continued to

experience recessionary conditions. The rest of the world has generally

seen contraction in economic growth rates during 2012 with certain

major emerging economies like China and India achieving positive GDP

growth rates, albeit at reduced rates.

MENA/GCC oil economies benefited from continuing average high crude

oil prices in funding their fiscal and social spending problems. Non-oil

MENA economies faced greater social, political and economic pressures

which impacted budgetary performances and contributed to the

continuing social unrest prevailing in these markets.

Performance Overview

Despite adverse operating conditions in the majority of its markets, AUB

successfully delivered yet another resilient and record performance in 2012,

clearly demonstrating the success and viability of its core business model

based on prudent risk management, focused marketing and intelligent

spend practices. The key highlights of its performance were:

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

US$ 335.7 million as against US$ 310.6 million in 2011, a growth of 8.1%.

• Total operating income increased by 6.0% to US$ 892.8 million from

US$ 842.1 million in 2011 supported by a higher Net Interest Income

(+12.3%).

• Improved results from associates resulted in a net US$ 4.8 million higher

profit share from Associates (+8.5% over 2011).

• Asset quality was sustained with the NPL ratio contained at 2.4%

(2011:2.5%). The Group also enhanced its coverage ratio of total

provisions to impaired loans to 149.8% at the end of the year (2011:

135.3%). This was achieved through higher collective impairment

provisions (US$ 53.4 million) which represented 36.1% of the net loan

loss and other provisions charge of US$ 148.1 million raised during the

year. This was 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 5.5% to US$ 29.9 billion (2011: US$ 28.3 billion)

due to:

iii) Inter-bank placements increased from US$ 3.1 billion as at 31 December

2011 to US$ 3.8 billion as at 31 December 2012 reflecting the increase in

the inter-bank liabilities by US$ 0.7 billion primarily to maintain liquidity

levels.

• Customers’ deposits were up by 5.1% to US$ 18.2 billion (2011: US$ 17.3

billion) to fund the measured incremental loans and advances growth of

3.1%. This is reflected in the year-end loans/total deposits ratio of 68.3%

(2011:71.1%).

• Higher priced term debts of US$ 768 million were repaid on maturity

during the year. A subordinated liability of US$ 50 million was repaid

ahead of its original maturity of 2013 taking into account remaining

regulatory eligibility with a resultant effective management of its funding

costs.

• Continued focus on intelligent cost spends and enhancing productivity

resulted in the improvement of cost to income ratio during the year to

29.9% (2011: 32.4%).

• Return on average equity further improved to 13.0% for 2012 compared

to 12.7% for 2011 while the return on average assets was marginally

higher at 1.3% in 2012 (2011: 1.2%).

Business & Strategic Diversification

During the year, AUB participated in a US$ denominated rights issue

tranche launched by AUBE, by subscribing to its pro-rated share of 31.9

million common shares for a consideration of US$ 53.0 million. AUB further

acquired an additional 259,946 unsubscribed common shares under the

AUBE rights issue for a purchase consideration of US$ 0.4 million which

resulted in its equity stake in AUBE increasing to 85.4%. AUB also increased

its effective shareholding stake in CBIQ to 68.9% (59.7% at 31 December

2011) by year-end.

Subsequent to the balance sheet date, AUB divested its diluted stake of 29.4%

in Ahli Bank Qatar (ABQ) to the Qatar Foundation for Education, Science &

Community Development at a price of QR 60 per share, generating a net

exceptional profit of US$ 212.9 million which will be recognised in the 2013

consolidated financial statements. The decision to sell was triggered by

AUB’s inability, due to legal factors, to maintain its shareholding above the

minimum levels required for ABQ to qualify as a strategic core investment

involving management and reputational exposure as per the AUB Group

Investments Policy.

The sale does not represent a reversal of our regional investment strategy

and is solely driven by the specific legal constraints linked to this investment.

AUB will continue to seek attractive opportunities to develop its banking

franchise in the region through new acquisitions and the development of

our existing banks to service our client base and enhance our shareholder

value.

i) Loans and advances portfolio, which increased by 3.1% to US$ 16.0

billion (2011: US$ 15.5 billion).

ii) Increase in the Non-trading Investments portfolio by 17.2% to support

business growth requirements and to comply with liquidity regimes

imposed by regulators.

16 Ahli United Bank


Annual Report

2012

Recognition

Consistent with its reputation over the years as a leading regional bank,

AUB has been the recipient of a number of prestigious banking awards

during the year:

• Best Bank in the Middle East 2012 – Euromoney (second award)

• Best Bank in Bahrain 2012 – Euromoney (seventh consecutive year)

• Best Bank in Bahrain 2012 - Global Finance (seventh consecutive year)

• Best Private Bank in Bahrain 2012 – Euromoney (second award)

Bank of the Year, Bahrain 2012 - The Banker magazine (seventh

consecutive year)

• Best Local Bank, Bahrain 2012 - EMEA Finance magazine (third

consecutive year)

• Best Trade Finance Provider for Bahrain 2012 – Global Finance (second

consecutive year)

• Elite Quality Recognition Award by J P Morgan Chase (fourteenth

consecutive year) and STP Award by Commerzbank AG (fifth

consecutive year).

Directors’ Shareholdings & Remuneration

As at 31 December 2012, Directors held directly and through related

parties 711,612,349 ordinary shares (2011: 702,835,575). The Directors also

held 98,631,221 convertible notes (2011: 98,631,221 convertible notes)

that are subject to vesting and other criteria.

Directors’ fees, allowances, expenses, salaries and remuneration totalled

to US$ 4,101,285 (2011: US$ 3,679,038). As at 31 December 2012, senior

management held 18,237,650 convertible notes (2011: 31,951,134 notes)

that are subject to vesting and other criteria.

Appropriations

On the basis of the results of the Bank for the year ended 31 December

2012, the Board of Directors recommends the following appropriations

of the Bank’s net profit of US$ 335,703 thousand for approval by the

shareholders:

US$'000

Net profit attributable to bank’s equity shareholders 335,703

Transfer to statutory reserve 33,570

IFC mandatorily convertible preference shares dividend 4,538

Proposed cash dividend – ordinary shares at US cents

4.0 per share 209,342

Proposed donations 1,000

Transfer to retained earnings 87,253

Conclusion

In my capacity as the Chairman of the Board, it is once again my pleasure

to thank our shareholders and investors for their continuing support and

confidence reposed in AUB. It is needless to state that our achievements

during 2012 were only made possible thanks to the guidance from all

our regulators and the support and trust of our business partners and

customers and the dedication, professionalism and resilience of our staff.

Despite clear expected challenges in 2013, AUB is well positioned to

successfully navigate through a difficult operating environment again and

to exploit with a prudent approach the opportunities arising to enable

us to satisfy the aspirations of all our stakeholders in a balanced and

sustainable manner.

Fahad Al- Rajaan

Chairman

19 February 2013

Ahli United Bank

17


Board

of Directors

Fahad Al- Rajaan

Hamad A. Al Marzouq Rashid Ismail Al- Meer Mohammed Saleh

Abdulla MH Al-Sumait

Herschel Post

Behbehani

Fahad Al-Rajaan

Chairman and Chairman of the Executive Committee and Compensation

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); Chairman,

Ahli United Bank (Egypt) S.A.E.; Board Member, National Industries Group

(Kuwait); Board Member, Fransabank, Lebanon.

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

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

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

Chairman, Kuwait & Middle East Financial Investment Company, 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; Chairman, Social Insurance

Organisation Asset Management Co.; Deputy Chairman, Esterad Investment

Co.; Deputy Chairman of the Board of Directors, Solidarity Group Holding

and Chairman of Nomination & Compensation Committee; Former, Director

General, Pension Fund Commission; Former, Asst. Undersecretary for Financial

Affairs, Ministry of Finance & National Economy; Former, Asst. Undersecretary

for Economic Affairs, Ministry of Finance & National Economy; Former,

Director of Investment; Various Positions, Central Bank of Bahrain; Former,

Head of Statistics Section, Ministry of Health.

Mohammed Saleh Behbehani

Director and Member of the Compensation Committee; Independent

Director

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

Yousuf Behbehani Co.; Partner & President, Shereen Travels, Kuwait.; Partner

& President, Behbehani Jeep Motors Co. W.L.L.; Partner & President, Shereen

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

& President, Shereen Real Estate Co.; Partner & President, Shereen Investment

Co.; Partner Mohammed Saleh Behbehani & Co. W.L.L.: Partner, Behbehani

Bros., W.L.L, Bahrain; Partner, Al Mulla & Behbehani Motor Co. W.L.L.; Board

& Executive Committee Member, Ahli United Bank, K.S.C.; Chairman, Kuwait

Insurance Co. S.A.K.; Chairman, Maersk Kuwait Co. W.L.L.; Chairman, Maersk

Logistics Co. W.L.L.; Vice Chairman, United Beverage Co.; Former Director,

Purchase & Imports, Public Works Dept., Govt. of Kuwait; Former Deputy

Chairman, Al Ahli Bank of Kuwait K.S.C.; Former Board & Executive Committee

Member, Ahli United Bank (UK) PLC; Former Director, Swiss Kuwaiti Bank.;

Former Director, UBAF (Hong Kong) Limited.

Abdulla MH Al-Sumait

Director, Member of the Audit and Compliance Committee and

Nominating 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.

Herschel Post

Director, Chairman of the Audit & Compliance Committee and

Nominating Committee & Member of the Compensation 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 (KMEFIC); Director,

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

Threadneedle Asset Management Holdings S.A.R.L.; Director, Program

Planning Professionals 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; Former

Director, Euroclear SA/NV, Euroclear PLC; Euroclear UK & Ireland Ltd.

18 Ahli United Bank


Annual Report

2012

Mohammed Jassim

Al-Marzouk

Mohammed Al-Ghanim

Turki Bin Mohammed

Al-Khater

Michael Essex

Adel A. El-Labban

Mohammed Jassim Al-Marzouk

Director and Member of the Executive Committee;

Non-Executive Director

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

Finance Kuwait University, 1991. Chairman & CEO, Tamdeen Real Estate

Co.; Chairman of Tamdeen Bahraini Real Estate Co., Bahrain; Board Member,

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

Bahrain; Former: Board Member of Global Omani Development & Investment

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

Former Board Member, Bank of Kuwait & The Middle East, Kuwait; Former, Vice

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

Bank of Kuwait, 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, Member of the Audit & Compliance Committee and Nominating

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 Ghanaem 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, Fluor Kuwait Co., KSC, Kuwait .

Turki Bin Mohammed Al-Khater

Director, Member of the Audit & Compliance Committee and Nominating

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, Masraf Al Rayan, Qatar;

Board Member of Qatar Telecommunication Co. (Qtel), Qatar.

Michael Essex

Director, Member of the Audit & Compliance Committee and Nominating

Committee; Independent Director

Director since 28 March 2012, holds an Executive Development Program

Certificate from Harvard Business School, Boston-USA, 1997, M.A. Public

Administration from Carleton University, Ottawa-Canada, 1975, B.A.

Economics & Political Science from The University of Western Ontario

London- Canada 1972. Board Member, Member of the Investment

Committee, Member of the Investor Review Committee of Macquarie Bank

India Infrastructure Fund; Senior Advisor to Abraaj Capital; Board Member

designate of Karachi Electricity Supply Company; Former Senior Advisor to

International Finance Corporation’s Asset Management Company and IFC

Director of Investment & Advisory operations for 20 countries- Pakistan to

Morocco in the MENA region.

Adel A. El-Labban

Director and Executive Committee Member; Executive Director

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

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

University, Cairo, 1977 and a General Certificate of Education from

London University, 1973. Director, Ahli United Bank (UK) PLC; Director,

Ahli United Bank K.S.C., Kuwait; 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, 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.

(The present Board was elected by the shareholders on 28 March 2012 for

a period of 3 years).

Ahli United Bank

19


Chairman’s

Statement

AUB remains intent on seeking attractive opportunities to regionally develop

its banking franchise through new acquisitions to better service our client

base and enhance our shareholder value.

20 Ahli United Bank


Annual Report

2012

2012 was another testing year for the banking and financial

services sector, with the operating environment remaining

volatile and global economic conditions remaining predominantly

weak. Despite the turbulent environment, AUB witnessed record

profitability and healthy growth across business lines which bear

testimony to the focused growth strategy of the Bank and to its

entrenched culture of strong risk management and cost discipline.

For the fiscal year 2012, I am pleased to report that net profits grew to

US$ 335.7 million, an increase of 8.1% over 2011, principally due to

improved performances across all business segments (commercial,

retail and private banking). The continued success of AUB during

2012 has demonstrated the success and viability of its strategy of

creating a regional bank providing a strong local presence in each

of its markets as well as targeting cross border flows between them

while applying prudent risk management frameworks, focused

business growth and intelligent cost spend.

On the basis of the excellent results achieved in 2012, I am pleased to

advise that the Board of Directors has recommended a cash dividend

of US cents 4.0 per share (2011: US cents 3.0), together with a

bonus ordinary share issue of 5% (2011: 5%) to further increase the

Bank’s share capital and support its growth in coming years.

In parallel with reinforcing the Bank’s capital base, the Board of

Directors has taken steps to ensure best Corporate Governance

practices by implementing rigorous review processes and assessment

cycles across AUB Group’s operating areas and businesses for

early detection and remedial treatment of any potential issues. Our

goal is to ensure compliance with best international standards and

applicable local regulatory requirements.

Despite the recent sale, due to specific legal constraints, of our 29.4%

shareholding in Ahli Bank, Qatar (ABQ) to the Qatar Foundation for

Education, Science & Community Development, AUB remains intent

on seeking attractive opportunities to regionally develop its banking

franchise through new acquisitions so as to better service our client

base and enhance our shareholder value.

Continued recognition of AUB’s performance by the banking industry

is both gratifying and appreciated. Among several accolades received

this year, “Best Bank in the Middle East 2012” by Euromoney bears

testimony to AUB’s culture of excellence and an impressive record in

navigating one of the most turbulent years in banking history. AUB

had previously won the same award in 2007.

Similar operational and market challenges can be expected in 2013.

Nonetheless, AUB continues to remain confident in its resilience

and ability to maintain its performance underpinned by a focused

strategy, strong client centric fundamentals and prudent, proactive

approach to management of risks. In delivering shareholder value

and enhancing customer satisfaction, the Bank will continue to

seek, identify and maximise organic as well as inorganic growth

opportunities within an appropriate risk-return framework.

In my capacity as Chairman of the Board, it is once again my

pleasure to thank our shareholders and clients for their continuing

support and for the trust shown in our ability to service their needs

across the AUB Group. The achievements of 2012 would not have

been possible without the guidance and support received from our

regulators, the commitment of our business partners and clients, and

the hard work and dedication of our staff at all levels throughout the

AUB Group.

Fahad Al-Rajaan

Chairman

Ahli United Bank

21


Group Chief Executive Officer &

Managing Director’s Statement

AUB's focused approach has enabled it to emerge as a stronger regional

bank with a diversified, tested and prudent business model capable of

withstanding singular as well as multiple market disturbances.

22 Ahli United Bank


Annual Report

2012

The turbulence and volatility which characterized economic and political

environments in 2011 reverberated throughout 2012. While not as severe

and unexpected, 2012 presented its own major challenges, in terms of

weak overall global economic conditions with Far Eastern growth offset

by semi recessionary conditions in most major Western economies. In the

region, the pressures of political change and social unrest in some of the

markets where AUB operates continued.

Despite these challenges, AUB remained totally focused on its core

strategy of building a regional bank committed to sustainable product

growth. This focused approach enabled AUB to emerge as a stronger

regional bank with a diversified, tested and prudent business model

capable of withstanding singular as well as multiple market disturbances,

as evidenced by the Bank’s strong performance in the year 2012.

Against the backdrop of a very challenging operating environment, AUB

reported a net profit of US$ 335.7 million, representing an 8.1% increase

over the 2011 result. Total operating income grew by 6.0% to US$ 892.8

million over 2011, driven by a 12.3% increase in net interest income, a 3.5%

improvement in fee based income and an 8.5% increase in share of profit

from associates and joint venture investments. Effective asset liability

management helped improve the net interest margin from 2.1% in 2011

to 2.2% in 2012.

Key drivers of the increase in operating income were a 3.1% growth

in net loans and advances together with a 17.2% growth in the nontrading

investments portfolio over December 2011, funded by a 5.1%

increase in customers’ deposits. This growth, particularly on the loan

side, reflects AUB’s commitment to be a consistent partner to its client

under all conditions and to benefit from the reluctance of some of its

competitors to act similarly. Exposures under L/Cs and L/Gs achieved a

very commendable surge of 28.4% going from US$ 2,168 million to US$

2,783 million. The ongoing adoption of an intelligent spend culture

within the AUB Group further improved the cost income ratio to 29.9%

(2011: 32.4%) and positively contributed to profitability. Operating costs

decreased to US$ 267 million from US$ 273 million in the previous year.

AUB continued to pursue a market responsive, prudent credit philosophy

backed by a conservative provisioning approach. As a result, credit quality

of the loan portfolio was maintained with a non-performing loans level of

2.4% comparable to 2.5% in 2011 with a very solid total provision coverage

ratio of 150% at 31 December 2012 (2011: 135%). Specific provision

coverage improved from 86.0% in 2011 to 87.7% in 2012.

Return on average equity for the year stood at 13.0%, an increase over

the 12.7% achieved in 2011 and the Group’s return on average assets

increased to 1.3% in 2012 (2011: 1.2%).

During the year, the Bank’s strong financial performance was

complemented by notable progress in several of our operating markets.

In Kuwait, AUB continued to consolidate its position as a leading provider

of Shari'a compliant financial products and services as was reflected in the

profit growth achieved by AUB Kuwait.

In Egypt, the share capital of AUB Egypt (AUBE) was enhanced through a

rights issue of US$ 62.2 million, reinforcing AUB commitment to the Egyptian

market in view of its long-term growth prospects. In early 2012, AUBE’s new

state of the art headquarters was officially inaugurated, coinciding with

significant growth in the scope of AUBE’s service offering and client base.

In Oman, AUB’s management agreement with Ahli Bank Oman

(ABO) was renewed for a further 5 years, demonstrating the success

achieved through a model joint venture arrangement. During 2012,

the share capital of ABO was reinforced through a rights issue of US$

64.9 million with a view to benefit from the high growth prospects

of the Omani banking sector and to lay the foundation for capitalizing

the launch of ABO’s Shari’a compliant operations in Oman to seize

the opportunities in this potentially high growth untapped sector.

Based on AUB’s demonstrated capability to deliver successful results

in adverse market conditions, I am reassured that the Group can move

forward with increased confidence in meeting the challenges of the

future while maintaining steady growth, absolute customer focus and

rigorous cost and risk discipline.

In closing, I would like to express my gratitude to the Board of Directors for

their active support and guidance. My sincere thanks are also due to the

management team and staff of the AUB Group whose professionalism,

dedication and commitment have been fundamental to our continued

growth and performance this year.

Adel A. El-Labban

Group Chief Executive Officer & Managing Director

Ahli United Bank

23


Corporate

Governance

Good Corporate Governance practice is an important function in creating

and sustaining shareholder value and ensuring appropriate disclosure

and transparency. The Bank’s Corporate Governance Policy provides the

framework for the principles of effective Corporate Governance standards

across the AUB Group.

The Board of Directors is committed to adhering to strong Corporate

Governance practices and to continually review and align these practices

with international best practices.

The Bank’s management are 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 AUB Group.

Shareholder Information

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

Exchange. The Bank has issued 5,233,555,603 ordinary shares, each with a

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

The Annual General Ordinary and Extraordinary Meetings were held on

28 March 2012.

Ordinary Shareholders at 31 December 2012 (holding 5% and above)

Name

Public Institution For

Social Security

Social Insurance

Organization

Tamdeen Investment

Company

Country

of origin

No. of

shares

%

Holding

Kuwait 967,660,314 18.5%

Bahrain 524,393,861 10.0%

Kuwait 412,899,809 7.9%

Al-Mazaya Company B.S.C. (c) Bahrain 309,050,017 5.9%

Sh. Salim Al-Nasser Al-Sabah Kuwait 282,798,691 5.4%

Distribution of Shares

Table 1- Distribution of Ordinary Shares at 31 December 2012

% of

Category

No. of shares

No. of

shareholders

Total

shares

50 and above - - -

20% up to less than 50% - - -

10% up to less than 20% 1,492,054,175 2 28.5%

5% up to less than 10% 1,004,748,517 3 19.2%

1% up to less than 5% 1,183,285,899 12 22.6%

Less than 1% 1,553,467,012 3,285 29.7%

TOTAL 5,233,555,603 3,302 100.0%

Table 2- Distribution of Preference Shares at 31 December 2012

(i) Non- Cumulative Preference Shares - Class A

Category

No. of shares

No. of

shareholders

% of

Total

shares

50% and above - - -

20% up to

less than 50%

101,256,515 1 20.8%

10% up to less than

20%

164,454,735 2 33.8%

5% up to less than

10%

57,383,498 2 11.8%

1% up to less than 5% 121,743,093 10 25.0%

Less than 1% 41,851,928 361 8.6%

TOTAL 486,689,769 376 100.0%

(II) Mandatorily Convertible Preference Shares

Category

No. of shares

No. of

shareholders

% of

Total

shares

50% and above 500,000,000 1 100.0%

Table 3- Government Holdings and the distribution of Ordinary Shares

by Nationality

No. Name No. of Shares

% of

Total

shares

1

Kuwait Quasi

Government

967,660,314 18.5%

2

Bahrain Quasi

Government

530,136,659 10.1%

3

Qatar Quasi

Government

86,075,308 1.6%

4

Kuwait Individuals and

Corporates

2,581,169,670 49.3%

5

Bahrain Individuals and

Corporates

865,843,981 16.6%

6 Others 202,669,671 3.9%

Total 5,233,555,603 100.0%

Board

The Board represents an appropriate mix of professional skills and expertise.

The current Board of Directors was elected at the Annual General meeting

held on 28 March 2012, for a period of three years. The Board periodically

reviews its composition and the contribution of Directors. The names and

classification of the Directors’ are listed on the next page:

24 Ahli United Bank


Annual Report

2012

Directors

Fahad Al-Rajaan - Chairman

Hamad A. Al Marzouq - Deputy Chairman

Rashid Ismail Al-Meer - Deputy Chairman

Turki Bin Mohamed Al-Khater

Mohammed Fouad Al-Ghanim

Abdulla MH Al-Sumait

Mohammed Jassim Al-Marzouk

Mohammed Saleh Behbehani

Herschel Post

Michael Essex

Adel A. El-Labban

Classification

Non-Executive

Executive

Non-Executive

Independent

Independent

Non-Executive

Non-Executive

Independent

Independent

Independent

Executive

In compliance with the Central Bank of Bahrain (CBB) Corporate

Governance requirements, the Board of Directors has outlined its criteria

and materiality thresholds for the definition of “Independence” in relation

to Directors. The independence criteria are reassessed annually by the

Board and the 11 Directors comprising the Board are classified as follows:

· 5 Independent Directors

· 4 Non-Executive Directors

· 2 Executive Directors, including the Group CEO & Managing Director

The CBB Rulebook Module HC-1.4.6 recommends that the Chairman of

the Board of Directors should be an Independent Director. While the

AUB Chairman is currently classified as a Non-Executive Director, 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.

The Role and Responsibilities of the Board of Directors

The Board is responsible to shareholders for creating and delivering

sustainable shareholder value through the prudent management of the

Bank’s business.

The Board, as a whole, is collectively responsible to ensure that an effective,

comprehensive and transparent corporate governance framework is in

place. The Board’s role is to:

1. ensure adherence to prevailing laws and regulations and to best

business ethics;

2. provide entrepreneurial leadership of the Bank within a framework

of prudent and effective controls, which enable all types of relevant

risks to be assessed and managed;

3. set the Bank’s strategic goals, ensure that the necessary financial and

human resources are in place for the Bank to meet its objectives, and

review management performance; and

4. set the Bank’s values and standards and ensure that its obligations to

its shareholders and others are understood and met.

In carrying out these responsibilities, the Board must ensure that

management strikes an appropriate balance between promoting long

term growth and delivering short term objectives and have 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.

All Directors must act in the way they consider, in good faith, would

be most likely to promote the success of the Bank for the benefit of its

shareholders as a whole. In doing so, each director, must have regard

(among other matters) to the:

1. likely consequences of any decision in the long term;

2. interests of the Bank’s employees and shareholders;

3. need to foster the Bank’s business relationships with suppliers,

customers and others;

4. impact of the Bank’s operations on the community and the

environment;

5. desirability of the Bank maintaining a reputation for high standards of

business conduct and ethics; and

6. need to act fairly as between the shareholders of the Bank.

When carrying out their responsibilities, Directors must

1. act with integrity;

2. act with due skill, care and attention;

3. observe proper standards of market conduct;

4. deal with the regulatory authorities in an open and co-operative

way and must disclose appropriately any information of which the

regulator would reasonably expect notice.

Ahli United Bank

25


Corporate

Governance Continued

Board Meetings and Attendance

The Board is required to meet at least four times per year.

The Board convenes upon the invitation of the Chairman or upon the request of at least two Directors. All Directors are expected to attend each meeting,

unless there are exceptional circumstances that prevent them from doing so.

A summary of the Board meetings held during 2012 and attendance of each Director are detailed below:

Name of Board

Committees

Board of Directors

Members’ Names

Fahad Al-Rajaan - Chairman

No. of

Meetings

Meeting Dates

Meetings

Attended

Hamad A. Al-Marzouq 5

Rashid Ismail Al-Meer 5

Turki Bin Mohammed Al-Khater 3

Mohammed Fouad Al-Ghanim

Mohammed Jassim Al-Marzouk

Abdulla MH Al-Sumait

5

21 Feb 2012

28 Mar 2012

15 May 2012

18 Sept 2012

04 Dec 2012

4

4

5

Mohammed Saleh Behbehani 4

Herschel Post 5

Michael Essex* 4

Adel A. El-Labban 5

4

*Michael Essex was appointed on 28 March 2012.

All members of the Board, except one, have attended at least 75% of all

Board meetings in the year. Mr. Turki Bin Mohammed Al-Khater did not

attend 2 of the five meetings held in 2012, due to other obligations and

requirements to attend key ministerial meetings in Qatar in his capacity as

the President of General Retirement and Social Insurance Authority, Qatar.

The attendance of all Directors at the Board meetings is reported to the

Central Bank of Bahrain on an annual basis.

Meeting papers are prepared and circulated to be received in advance

of meetings and include minutes of meetings of Board Committees held

since the previous Board meeting.

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 Bahrain Commercial

Companies Law and the CBB Rulebook. There is no maximum age limit at

which a Director must retire from the Board. Each Director’s membership

shall terminate upon the expiry of his term, pursuant to the terms of his

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

Induction and Training of Directors

The Bank has an induction programme in place which is designed

for each new Director to ensure his contribution to the Board from

the beginning of his 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 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.

Ongoing professional development for Directors was conducted during

2012.

Board Evaluation

Evaluations of the performance of the Board and the performance of each

Director, for 2012, have been conducted. Applying a scoring methodology

proposed by Ernst & Young, rating of “Good” was achieved for the

performance of the Board and a rating of “Excellent” was achieved for the

performance of each director, indicating that the views of the majority of

the Directors are similar and that the Board is functioning as per its stated

role and responsibilities.

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 required

to declare any conflict of interest or any potential conflict of interest that

exists 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.

26 Ahli United Bank


Annual Report

2012

The Bank has a process for dealing with transactions involving Directors

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

Board, 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 with respect to conflicts of interest

or potential conflict of interest, the Director should consult the Chairman

prior to doing anything that might compromise the Bank.

All Directors and other Approved Persons have declared all of their

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) in writing to the Board.

The number of shares owned by Directors as at 31 December 2012, are

as follows:

No. Name No. of Shares * Volume Traded

1 Fahad Al-Rajaan 164,849 -

2 Hamad A. Al-Marzouq 85,302,274 (1,300,000)

3 Rashid Ismail Al-Meer 293,437 -

4 Turki Bin Mohammed Al-Khater - -

5 Mohammed Fouad Al-Ghanim 462,196 -

6 Abdulla MH Al-Sumait - -

7 Mohammed Jassim Al-Marzouk 151,653 -

8 Mohammed Saleh Behbehani 119,230,220 -

9 Herschel Post - -

10 Michael Essex - -

11 Adel A. El-Labban - -

Total 205,604,629 -

Percentage 3.93% -

*Includes 5% bonus shares issued during the year.

The numbers of shares owned by Senior Management as at 31 December 2012 are as follows:

No. Name/Entity 31-Dec-2012 Volume Traded

1 Keith Henry Gale 682,351 -

2 Sawsan Abulhassan - 877,158

3 Shafqat Anwar - 795,513

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.

Ahli United Bank

27


Corporate

Governance Continued

Board Committees

The Board may, where appropriate, delegate certain of its powers to an

individual Director or to a Committee of Directors and other persons,

constituted in the manner most appropriate to those tasks.

The Board has constituted 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.

Each Committee has access to independent expert advice at the Bank’s

expense.

The Board committees represent an appropriate mix of professional

skills and expertise. The Board periodically reviews the contribution

of the Committees. The names of the committee members and their

memberships in the Board Committees and attendance at meetings held

during 2012 are detailed below:

All Committee members are expected to attend each Committee

meeting, unless there are exceptional circumstances that prevent them

from doing so.

Board

Committees

Members

Classification

No. of

Meetings

Meeting Dates

Meetings

attended

Executive

Committee

Audit and

Compliance

Committee

Compensation

Committee

Nominating

Committee

Fahad Al-Rajaan - Chairman

Non-Executive

3

Hamad A. Al-Marzouq Executive 21 Feb 2012

4

Rashid Ismail Al-Meer Non-Executive 4

15 May 2012

18 Sept 2012

4

Mohammed Jassim Al-Marzouk Non-Executive 04 Dec 2012

3

Adel A. El-Labban Executive 4

Herschel Post - Chairman

Independent

4

Mohammed Fouad Al-Ghanim Independent 20 Feb 2012

3

Abdulla MH Al-Sumait Non- Executive 4

18 May 2012

21 Sept 2012

4

Turki Bin Mohammed Al-Khater Independent 30 Nov 2012

2

Michael Essex Independent 3

Fahad Al-Rajaan- Chairman

Non-Executive

2

Herschel Post Independent 22 Mar 2012

2

2

04 Dec 2012

Hamad Al- Marzouq* Executive 1

Mohammed Saleh Behbehani* Independent 0

Herschel Post - Chairman

Independent

2

Mohammed Fouad Al-Ghanim Independent 2

2

Abdulla MH Al-Sumait Non- Executive

20 Feb 2012

18 Sept 2012

2

Turki Bin Mohamed Al-Khater Independent 1

Michael Essex Independent 1

*Mohammed Saleh Behbehani, Independent Director was appointed on 28 March 2012 to replace Hamad Al-Marzouq.

28 Ahli United Bank


Annual Report

2012

The principal Board Committees are:

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 5 members comprising 3 Non-

Executive Directors and 2 Executive Directors, including the Group CEO

& Managing Director.

Audit and Compliance Committee

The Audit and Compliance Committee assists the Board in discharging

its responsibilities relating to the Bank’s accounting, financial reporting,

corporate governance, internal audit, compliance and risk management

systems to ensure compliance with all relevant regulatory requirements

and consistency with best market practices.

The Audit and Compliance Committee consists of 5 members comprising

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

Director.

Compensation Committee

The Compensation Committee provides an efficient mechanism for

reviewing the Bank’s compensation arrangements for its staff and

Directors and making recommendations for the Board’s own approval on

these matters.

The Compensation Committee consists of 3 members comprising 2

Independent Directors and 1 Non- Executive Director, who is the Chairman.

The Compensation Committee, amongst other things, sets the

remuneration framework for the Bank’s Directors, senior management and

staff. The AUB Employee Remuneration Policy provides a remuneration

framework to attract, retain and motivate employees, to achieve Board

approved objectives. The policy focuses on creating a performance driven

culture and on achieving sustainable growth and ensures a meritocratic

management structure with profit related incentives.

Nominating Committee

The Nominating Committee supports the Corporate Governance regime

of the Bank and instills a best practice approach to the matters assigned

to its responsibilities, at all times acting within the criteria set by the CBB

Rulebook, the relevant sections of the Bahrain Commercial Companies

Law and any other applicable legislation, following a fair and balanced

approach.

The principal responsibilities of the Nominating Committee include,

identifying and recommending to the Board persons qualified to become

a Director of the Board, or any other officer of the Bank, as considered

appropriate by the Board. The Committee also oversees the Director’s

corporate governance educational activities in the form of a formal

induction program and on-going orientation activities and programs.

The Nominating Committee consists of 5 members comprising 4

independent Directors, including the Chairman and 1 Non-Executive

Director.

Board Committee Evaluation

Evaluations of the Board Committees have been conducted. Applying a scoring methodology proposed by Ernst & Young, a rating of “Excellent” was

achieved for each, indicating that the Board Committees continue to operate with a high degree of effectiveness.

Senior Management

Names

Adel A. El-Labban

Sanjeev Baijal

Keith Gale

Shafqat Anwar

Abdulla Al-Raeesi

Sawsan Abulhassan

Lloyd Maddock

James Forster

Nevine El-Messeery

Abdulaziz Al-Balushi

Nouri Aldubaysi

Ayman El-Gammal

Hamad Al-Sanee

Title

Group CEO & Managing Director

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

Deputy Group CEO - Corporate Banking

CEO - Ahli United Bank (UK) P.L.C.

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

CEO - Ahli Bank S.A.O.G.

CEO - Commercial Bank of Iraq P.S.C.

CEO - United Bank for Commerce & Investment S.A.C.

Chairman & MD - Kuwait & Middle East Financial Investments Company K.S.C.C.

Ahli United Bank

29


Corporate

Governance Continued

Management Committees

The Board has established a management structure with clearly defined

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. 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 AUB 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, that

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 eleven other members,

including all Deputy Group CEO’s and CEO’s of subsidiary and affiliated

banks.

Group Asset and Liability Committee

The Group Asset and Liability Committee sets, reviews and manages the

liquidity, market risk and funding strategy of the AUB 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 AUB Group. The committee

assesses all related reputational, operational, credit, liquidity and market

risk, IT, legal, compliance, control, staffing and capital/profit allocation

issues related to approving new products. The approval by the Group New

Product 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 eight

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 AUB 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 six 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 the Bank or its subsidiaries

and affiliates resulting in reputational or financial loss to the AUB Group. It

also oversees the operation of the Group 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 the Bank, providing a formal framework for effective consultation and

transparent decision-making on cross-organisational matters. Appropriate

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

The committee operates in a flexible way with a minimum of formality and

a broad mandate encompassing both Bank-wide and unit specific issues

as determined by the GCEO & Managing Director and its other members

in relation to the business of the 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 of Treasury and has six other members.

Other Governance Measures

In addition to the Board and management committee structures, the

Board has approved a number of AUB 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.

30 Ahli United Bank


Annual Report

2012

Underpinning these policies is the Board approved Group Code of

Business Conduct which prescribes standards of ethical business behavior

and personal conduct for the Bank’s Directors, its senior management

(officers) and its staff.

The Banking Integrity Policy, which includes detailed policy and procedures

on whistle blowing is specifically designed to facilitate concerns raised

with regard to misconduct occurring within, or associated with, the AUB

Group.

The Board 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

stakeholders.

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,

quarterly financial statements and Corporate Governance policies are

published on the website.

As a supporting governance measure, the Board also relies on the ongoing

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

internal control functions. These reviews are conducted in order to

identify any weaknesses, which then enable management to immediately

put remedial action plans in place.

Ahli United Bank

31


Group Business

& Risk Review

Private Banking & Wealth Management

The division, which has significant stakes and activities in both the UK and

the Middle East, was impacted by both global and regional headwinds,

generated by events encountered in 2012. In the wake of the economic

and political turbulence resulting from the Arab Spring and Euro zone

crisis, client behaviour underwent change, in various phases, which has

created significant challenges for Private Banking.

In difficult market conditions, our strategy focused on providing specific

expertise in the areas of risk profiling, asset allocation, product selection,

and due diligence. We were successful in achieving our objectives

by adopting measures which proved both prudent and successful in

negating the effects of clients’ changeable behaviour due to financial

market volatility and adverse economic and political conditions.

A major development during the year was AUB’s adoption of the Retail

distribution review (RDR) for activities carried out by UK relationship

managers. RDR, a legal requirement in the UK, was established as a key

part of the investor protection strategy. The procedures put in place

by AUB to achieve RDR compliance have been considered for broader

deployment across the Group Private Banking in order to enhance the

consistency and quality of the sales process and service to clients.

In addressing client demand for high-performing investment products,

a clear focus on business strategy coupled with the appropriate set of

offerings, proved successful in negating the effects of market volatility

while meeting investors’ attitude to risk, capacity of loss and investment

objectives. Clients were well rewarded by investing in income-producing

portfolios, by striking the right balance between potential reward, risk, and

their future financial needs. In addition, in line with market demand, a new

real estate product with underlying investments in the commercial sector

in the UK was introduced.

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 being awarded the

Best Private Bank in Bahrain - 2012 by Euromoney.

The division remains 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, enabling AUB to deliver distinctive solutions to realise

clients’ desired outcomes. In meeting this objective, AUB enhances its

investments proposition while developing the quality of service offerings

to clients across the Group will continue to be a key priority.

Retail Banking

The retail banking division leveraged its successful business model across

all markets with the aim of establishing a standard suite of products with

centralization of back office functions in order to enhance sales and

service and deliver balance sheet growth and profitability across the

regional network.

During 2012, in pursuit of prudent and sustained asset growth, Retail

Banking introduced innovative products and services in the areas of

consumer and mortgage finance, targeting growth in the higher income

segments.

AUB continued to focus on developing the MyGlobal banking proposition

which offers seamless banking services for those clients with multi-entity

banking requirements in markets where AUB operates. As part of that

development, the Bank enhanced its e-banking platform to facilitate real

time funds transfers between MyGlobal customer accounts. The Bank also

launched mortgage finance in Egypt for cross border clients as well as

investment products to cater to the needs of MyGlobal customers.

During the year Point of Sale Acquiring (POS) was launched in Bahrain

with state-of-the-art systems and terminals, and supported by innovative

features to meet the growing needs and expectations of retail chains,

hospitality, travel, telecom, utility services, commercial establishments

and other sectors. The POS platform is supported by a dedicated sales and

service team, a 24/7 help desk and systems that provide real time fraud

monitoring and control enabling AUB to deliver enhanced merchant

solutions in Bahrain which will subsequently be extended to cover other

key AUB markets in the region.

Notable progress was also made in enhancing AUB’s Al Hilal Islamic

Banking offering to include new products and services while the Bank

established the necessary systems, products, policies and procedures for

the introduction of Islamic Banking in Oman.

AUB continued to consolidate and grow liability relationships through

its flagship product, the MyHassad Savings scheme in Bahrain, Kuwait

and Qatar. The scheme, which offers the biggest prize pool in the region,

witnessed significant growth and provides a stable base of low cost

funds to improve retail profitability as well as increase AUB’s household

penetration and the opportunity to cross sell other bank products.

Among major IT enhancements were the launch of self-service kiosks,

implementation of new security features for online internet banking

transactions, enhancement of the e-Banking service range, and the launch

of 3D secure services for credit cards in association with MasterCard and

Visa.

The Bank also finalised a mobile commerce solution for implementation

and a more advanced front-end branch banking system which will further

enhance branch service capability.

Further growth in the coming year will continue to be driven by efforts

aimed at expanding market share through the launch of new product

offerings that are aligned to changes in the market environment as well

as addressing emerging market segments. Other new initiatives, which

include distribution of general insurance products through the branch

network with alliance partners and an expanded service offering in the

area of remittances, will support continued growth in new customer

acquisition and retail fee income streams.

32 Ahli United Bank


Annual Report

2012

Corporate Banking

Corporate Banking continued to be organized around SMEs and

specialized industry groups. Lending remained cash flow driven and

secured or focused on large regional corporates and government entities.

The business unit maintained its focus on strengthening relationship

banking with selective loan growth and cross-selling in cooperation with

other divisions, mainly treasury, private and retail banking. The group also

continued to develop internet banking and cash management products

for corporates.

Despite the challenging operating environment, notable progress was

achieved in selectively financing those infrastructure projects critical to

the economic development of the MENA region countries. The unit was

also successful in acquiring operating accounts and liability business from

its corporate clients and maximising cross-border opportunities in AUB

Group locations. The ongoing implementation of business to business

integration and internet banking continued to enhance transaction

volumes and provided clients with one-stop solutions. With selective

expansion and re pricing of the loan book, profitability growth was also

supported by income from trade finance and syndication fees.

Going forward, prospects for domestic growth in Kuwait and Oman

appear positive compared with the relatively mature market in Bahrain.

Potential opportunities for growth are clearly evident in the domestic

markets of Egypt, Libya and Iraq as well as cross-border business; however,

progress will depend on local socio-political developments. Cross-border

financing and trade finance remain core activities and will continue to

support the expansion of corporate relationships throughout the region.

Islamic banking will also continue to be a key growth area.

Regional events in 2012, together with the global financial uncertainty,

have led the department to adopt a more cautious approach, with focus

on improving cost efficiency and reducing the overall risk profile of the loan

book. Whilst loan growth is expected to be modest in 2013, profitability

should improve due to rigorous cost control, lower impairment charges

and increased fee based activities.

Treasury

2012 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 to address political developments

and government policies towards austerity, especially in the US and Euro

zone, and the risks associated in running huge public sector deficits.

The strategy for Treasury continued to prioritize 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.

Despite persistently tight liquidity conditions, Treasury maintained liquidity

at constant costs throughout the year while achieving profitability targets.

Profitability in investments exceeded targets despite declining spreads

and continued focus on credits generated strong gains in portfolio

valuations.

Among significant developments was the establishment of an online

trading platform for equities, foreign exchange and commodities, via both

web and handheld applications, enabling AUB to offer customers full 24/7

access to both regional and international markets.

Although market volumes continued to decline throughout 2012, mainly

due to the global slowdown and the continued effects of the Arab Spring,

AUB’s market share remained secure by being able to offer clients very

competitive pricing in an exceptionally difficult trading environment.

It was gratifying to note that, for the sixth consecutive year, Treasury was

named as ‘Best Foreign Exchange Provider in the Middle East & Bahrain,

2012’ by a leading global finance magazine.

In anticipation of a broader economic recovery in 2013, the Bank will

adopt a more dynamic approach to further strengthen client focus and

expand its range of product offerings for both risk and asset management.

Going forward, Treasury will actively source new products in order to

enhance customers’ returns on deposits and reduce risk on their loan

portfolios while the Group’s extensive regional presence will continue to

be leveraged, enabling Treasury to provide a one stop shop for portfolio

management.

Information Technology

The Information Technology division delivers technological excellence

that aligns with the Group’s business strategies to provide customer

centric, innovative and industry benchmarked secure solutions in

meeting customers’ banking needs on an operationally robust and

efficient technology platform through its target application systems and

infrastructure architecture.

The strategy continued to focus on the standardization of services,

uniformly applied across the AUB Group wherever possible, to achieve

economies of scale and a common customer experience across all the

areas of its operating presence covering the breadth of the banking

network.

The Group is committed to being at the forefront of the latest innovations

and developments in the provision of technology based products and

services in the banking and financial services industry. A key strategic

initiative during 2012 was the continued enhancement and adoption of

the Group’s electronic banking services.

Ahli United Bank

33


Group Business

& Risk Review Continued

In providing a seamless electronic banking channel to our Corporate

Banking customers, the Business to Business (B2B) platform has been

successfully rolled out to corporate customers in Bahrain, Oman and

Kuwait to complement our corporate internet banking service. As our

eBanking services offer products that are continually benchmarked and

enriched in comparison to the best available competition across the

region, the ability to originate trade finance transactions has become an

additional feature for the corporate internet banking service.

In the retail sector, a new Remit to India service was launched through

the retail internet banking platform which delivers an online, real time

integrated transfer capability enabling customers to execute remittances

to India with the entire Indian banking network accessible in partnership

with a leading Indian bank. In a further initiative, customers with accounts

across the AUB franchise now benefit from the ability to execute real time

transfers for accounts held in the Group’s Bahrain, UK and Egypt branches,

without the need for external payment generation through the Group’s

internet banking platform.

Retail customer services were further enhanced in Bahrain with the

introduction of automated teller kiosks facilitating bulk cash deposits,

bill payments and service requests in a seamless manner, initially, across

select branches in Bahrain. This programme will be rolled out extensively

in 2013 aiming to upgrade our remote teller services across Bahrain and

other Group entities.

In addition, as a leading provider of Treasury services across the region, an

online foreign exchange trading platform was introduced.

The Group’s ongoing initiative to provide market leading management

information systems saw the integration of modules for financial

performance management and credit risk management with the

enterprise-wide data management platform, thus providing local and

consolidated management information capabilities across the Group.

Additional new initiatives in the deployment of high-end, sophisticated

retail customer analytics are planned for 2013.

The bank continued to invest judiciously in its technology infrastructure

to keep pace with the latest technological innovations that will further

benefit the provision of technology services to our customers and improve

operational effectiveness. During the year notable progress was made

in server consolidation with virtualization which lowers the total cost of

ownership (TCO) and improves energy efficiency by optimising resources

throughout the server environment in a sustainable manner.

Information security forms a central pillar of AUB’s technology platform

and architecture. It is essential that Bank’s customers are continuously

assured of integrity and confidentiality in the execution of their financial

transactions. The Bank remains committed to sustaining the highest

standards of information security with a view to providing independently

certified assurance to our stakeholders on a continuing basis. In underlining

this commitment, the Bank has once again, through an annual review/

certification process, maintained ISO 27001 and PCI DSS certification for

its information processing capabilities within the recognized international

standards for information security.

Human Resources

2012 was a challenging year for Group Human Resources with some

labour markets experiencing fragility and others rigidity. In spite of the

underlying uncertainties, HR continued to move forward with important

projects and Training & Development in particular made significant

progress.

During the third quarter a bespoke in-house Group credit programme

in Egypt was launched which saw 35 candidates from entities in Egypt,

Bahrain, Oman, Kuwait and Libya coming together for a course lasting 28

weeks. E-learning targets were exceeded by 45 per cent with over 2100

programmes being completed on line. Off line, over 3000 participants

attended more than 360 courses held in house, on site, locally or abroad.

Control over expenditure remained an ongoing commitment in both

day-to-day and project based activities. The department maintained

its undertaking to leverage IT based solutions for inter entity reporting

and control. Sizeable IT projects to improve efficiency and to achieve

economies of scale continue to be planned for the future.

HR maintained its full commitment to ISO 9001 and participated in a

significant number of other audits both as a peripheral and subject

department. Without exception the outcome of these reviews proved or

exceeded “satisfactory”.

In supporting the communities in which AUB operates, HR continued

to facilitate the Bank’s contribution to social and charitable concerns, in

particular sponsorship of HE the Crown Prince’s Educational Trust; and

maintained the Bank’s consistent patronage of the Bahrain Institute for

Banking and Finance. In addition to support for educational programmes,

the Bank also underlined its commitment to the needs of the disabled,

and to initiatives supporting the rights of women.

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 Risk management function provides an oversight and advice on

the Board sanctioned risk appetite and strategy, development and

maintenance of a supportive system for management of risks through

procedures and training.

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.

34 Ahli United Bank


Annual Report

2012

While risks that are embedded in the banking business cannot be

completely eliminated, the risk management function aims to effectively

manage these risks with the objective of earning competitive returns

over the degree of assumed risk. Risk is evaluated based on 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 policies and 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 and 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 approvals are

obtained and a uniform risk management standard including objective 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 financial loss due to the failure of a counter party

to perform according to agreed terms. It arises principally from lending,

trade finance and treasury activities. The credit process is consistent for

all forms of credit risk to a single obligor. Overall exposure is evaluated on

an ongoing basis to ensure a broad diversification of credit risk. Potential

concentrations by country, product, industry, and risk grade are regularly

reviewed to avoid excessive exposure and ensure a broad diversification.

Credit risk within the Group is actively managed by a rigorous process

from initiation to approval to disbursement. All day-to-day management

is in accordance with well-defined credit policies and procedures (CP&P)

that detail all credit approval requirements and are designed to identify

at an early stage exposures which require more detailed review and

closer monitoring. Specific impairment provisions are made against credit

exposures where whole or a portion of the credit is considered doubtful

of recovery. If an asset is considered unrecoverable, a mandatory writeoff

takes place. This is conducted by a risk management process, which

is completely independent in reporting terms from the asset generating

departments.

Risk rating of individual counterparties plays an important role in the

approval and maintenance of credit limits. The risk rating process ensures

that the quality of the credit portfolio of the Bank is maintained at the

highest possible level and stays within board approved risk limits. The CP&P

includes a robust risk rating system developed by a leading international

rating agency, which provides a credit rating for each individual credit

based on an extensive set of financial and non-financial parameters. This

risk rating system is essential for the Bank to progress towards Basel II’s

more advanced requirements.

The risk management function 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 Assets 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.

Ahli United Bank

35


Group Business

& Risk Review Continued

Annual Report

2012

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. A robust control

process incorporating well defined limits is applied to effectively manage

market risks and monitor daily position limits and stop losses. 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.

Value at Risk

2012 2011

US$ millions US$ millions

Average 0.20 0.37

Minimum 0.09 0.09

Maximum 0.44 0.97

VaR limits are delegated by the Board to the Group Asset and Liability

Committee (GALCO) and sub-delegated to the Group’s subsidiary ALCO.

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, supplementary risk management

techniques such as stress testing form a core part of the Group’s risk

control processes.

Liquidity Risk

Liquidity risk is the risk of being unable to meet the Bank’s cash

commitments without having to raise funds at unreasonable prices or sell

assets on a forced basis. It is measured by estimating the Group’s potential

liquidity and funding requirements under different stress scenarios.

The Group’s liquidity management policies and procedures are designed

to ensure that funds are available under all circumstances to meet the

funding requirements of the Group not only under adverse conditions but

at sufficient levels to capitalize on opportunities for business expansion.

Prudent liquidity controls ensure access to liquidity without unexpected

cost effects. Liquidity projections based on both normal and stressed

scenarios are performed regularly. The control framework also provides

for the maintenance of a prudential buffer of liquid, marketable assets and

an adequately diversified deposit base in terms of maturity profile and

number of counter parties.

The Group Risk Management function continuously monitors liquidity

risk and actively manages the balance sheet to control liquidity. At the

subsidiary level, the respective treasury function manages this risk with

monitoring by the Risk Management department and jurisdiction of its

Assets and Liabilities Committee (ALCO). At the Group level liquidity risk is

managed by the Group Assets and Liabilities Committee (GALCO), which

is vested with the overall day-to-day responsibility for all matters relating

to Group liquidity.

Operational Risk

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.

36 Ahli United Bank


Group

Organisation

committee

CEO

ABO

CEO

AUBK

CEO

AUBUK

CEO

CBIQ

CEO

AUBE

CEO

UBCI

DGCEO

treasury &

investment

DGCEO

corporate

banking

group head

legal, gulf

(corporate

secretary)


Group

Management

Annual Report

2012

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

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

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: 34 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 Executive

Committee, Ahli United Bank K.S.C., Kuwait; Director and Member of

the Audit Committee, Kuwait and Middle East Financial Investment Co.,

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

Oman; Previous experience as Group Head of Finance, Ahli United Bank

B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain;

Held various positions at Ernst & Young, Bahrain and Price Waterhouse in

India; Chartered Global Management Accountant under Association of

International Certified Professional Accountants; 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: 29 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) and holds a BA (Hons) in

Accounting and Finance from the University of Lancaster, UK.

(Total years of experience: 32 years)

Shafqat Anwar

Deputy Group Chief Executive Officer - Operations and Technology

Director, Ahli Bank S.A.O.G., Oman; Former 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: 29 years)

Abdulla Al-Raeesi

Deputy Group Chief Executive Officer - Retail Banking

Deputy Chairman, Ahli United Finance Company, Egypt (since May

2012); 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; 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 Business

Administration from the United Kingdom.

(Total years of experience: 29 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 Member of the Investment Committee, Securities & Investment

Company (SICO), Bahrain; Director and Member of the Executive

Committee, The Family Bank, 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 (with distinction) and a B.Sc. in Management

from the University of Bahrain.

(Total years of experience: 21 years)

Lloyd Maddock

Deputy Group Chief Executive Officer – Corporate Banking

Former CEO, HSBC, Pakistan; Former CEO, HSBC, Kuwait; Former Head,

Wholesale Credit & Risk, HSBC Middle East; Former Regional Planning

Manager, HSBC Middle East; Former Head of Corporate & Institutional

Banking, Saudi Arabia. Held various positions in HSBC Hong Kong, Asia

Pacific, Vancouver, and Mumbai. Holds a B. Eng. (Hons) in Civil & Mining

Engineering from University of Exeter, UK.

(Total years of experience: 22 years)

Ahli United Bank

39


Contact Details

Annual Report

2012

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: aubuk.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

COMMERCIAL BANK OF IRAQ P.S.C.

Al Sadoon Street, Baghdad, Iraq

Telephone : +964 17 405 583

Telephone : +973 17 566 468/9

Facsimile : +964 17 184 312

AHLI UNITED BANK (EGYPT) S.A.E.

81 El-Tesseen Street

Sector A, Fifth Settlement

Cairo, Egypt

Telephone : +20 2 26149500

+20 2 26149600

+20 2 26149700

Facsimile : +20 2 26135160

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@ahlibank-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-libya.com

KUWAIT AND MIDDLE EAST

FINANCIAL INVESTMENT COMPANY K.S.C.(c)

P.O. Box 819, Safat 13009, Kuwait

Telephone : +965 22255000

Facsimile : +965 22252563

Email: info@kmefic.com.kw

www.kmefic.com.kw

40 Ahli United Bank


Annual Report

2012


AUDITORS’ REPORT TO THE SHAREHOLDERS AND

CONSOLIDATED FINANCIAL STATEMENTS 2012

Annual Report

2012

Independent auditors’ report to the shareholders of Ahli United Bank B.S.C ................................................................................................................................................................................... 44

Consolidated Statement of Income......................................................................................................................................................................................................................................................................................... 45

Consolidated Statement of Comprehensive Income............................................................................................................................................................................................................................................... 46

Consolidated Balance Sheet............................................................................................................................................................................................................................................................................................................ 47

Consolidated Statement of Cash Flows................................................................................................................................................................................................................................................................................ 48

Consolidated Statement of Changes in Equity............................................................................................................................................................................................................................................................... 49

Notes to the Consolidated Financial Statements......................................................................................................................................................................................................................................................... 51

1 Corporate information.................................................................................................................................................................................................................................................................................................................. 52

2 Basis of consolidation.................................................................................................................................................................................................................................................................................................................... 52

3 Accounting policies......................................................................................................................................................................................................................................................................................................................... 52

3.1 Basis of preparation......................................................................................................................................................................................................................................................................................................................... 52

3.2 Significant accounting judgements and estimates............................................................................................................................................................................................................................................ 55

3.3 Summary of significant accounting policies............................................................................................................................................................................................................................................................. 55

4a Interest income................................................................................................................................................................................................................................................................................................................................... 60

4b Interest expense................................................................................................................................................................................................................................................................................................................................. 60

5 Fees and commissions.................................................................................................................................................................................................................................................................................................................. 60

6 Trading income................................................................................................................................................................................................................................................................................................................................... 60

7a Cash and balances with central banks........................................................................................................................................................................................................................................................................... 60

7b Treasury bills and deposits with central banks....................................................................................................................................................................................................................................................... 61

8 Loans and advances......................................................................................................................................................................................................................................................................................................................... 61

9 Non-trading investments........................................................................................................................................................................................................................................................................................................... 63

10 Investment in associates and joint venture............................................................................................................................................................................................................................................................... 65

11 Premises and equipment........................................................................................................................................................................................................................................................................................................... 65

12 Interest receivable and other assets.................................................................................................................................................................................................................................................................................. 65

13 Goodwill and other intangible asets............................................................................................................................................................................................................................................................................... 65

14 Deposits from banks and other financial institutions....................................................................................................................................................................................................................................... 66

15 Borrowings under repurchase agreements................................................................................................................................................................................................................................................................ 66

16 Customers’ deposits........................................................................................................................................................................................................................................................................................................................ 66

17 Term debts............................................................................................................................................................................................................................................................................................................................................... 66

18 Interest payable and other liabilities................................................................................................................................................................................................................................................................................. 66

19 Subordinated liabilities................................................................................................................................................................................................................................................................................................................. 67

20 Share capital........................................................................................................................................................................................................................................................................................................................................... 67

21 Reserves...................................................................................................................................................................................................................................................................................................................................................... 68

22 Taxation..................................................................................................................................................................................................................................................................................................................................................... 71

23 Earnings per share............................................................................................................................................................................................................................................................................................................................. 71

24 Cash and cash equivalents....................................................................................................................................................................................................................................................................................................... 72

25 Related party transactions......................................................................................................................................................................................................................................................................................................... 72

26 Employee benefits............................................................................................................................................................................................................................................................................................................................ 73

27 Managed funds................................................................................................................................................................................................................................................................................................................................... 73

28 Derivatives............................................................................................................................................................................................................................................................................................................................................... 73

29 Commitments and contingent liabilities...................................................................................................................................................................................................................................................................... 75

30 Segment information.................................................................................................................................................................................................................................................................................................................... 75

31 Credit risk.................................................................................................................................................................................................................................................................................................................................................. 78

32 Concentration analysis................................................................................................................................................................................................................................................................................................................. 80

33 Market risk................................................................................................................................................................................................................................................................................................................................................ 81

34 Fair value of financial instruments...................................................................................................................................................................................................................................................................................... 82

35 Liquidity risk............................................................................................................................................................................................................................................................................................................................................ 82

36 Capital adequacy............................................................................................................................................................................................................................................................................................................................... 86

37 Deposit protection scheme..................................................................................................................................................................................................................................................................................................... 86

38 Islamic banking................................................................................................................................................................................................................................................................................................................................... 86


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 2012, 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.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial

statements based on our audit. We conducted our audit in accordance

with International Standards on Auditing. Those standards require that we

comply with ethical requirements and plan and perform the audit to obtain

reasonable assurance about whether the consolidated financial statements

are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about

the amounts and disclosures in the consolidated financial statements.

The procedures selected depend on the auditors’ judgement, including

the assessment of the risks of material misstatement of the consolidated

financial statements, whether due to fraud or error. In making those risk

assessments, the auditor considers internal control relevant to the entity’s

preparation and fair presentation of the consolidated financial statements in

order to design audit procedures that are appropriate in the circumstances,

but not for the purpose of expressing an opinion on the effectiveness

of the entity's internal control. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of

accounting estimates made by the Board of Directors, as well as evaluating

the overall presentation of the consolidated financial statements.

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

2012 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:

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 2012 that might have

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

position. Satisfactory explanations and information have been provided to

us by management in response to all our requests.

19 February 2013

Manama, Kingdom of Bahrain.

44 Ahli United Bank


CONSOLIDATED STATEMENT OF INCOME

For the year ended 31 December 2012

Annual Report

2012

2012 2011

Note US$ ’000 US$ ’000

Interest income 4a 1,070,638 973,936

Interest expense 4b 434,265 407,009

Net interest income 636,373 566,927

Fees and commissions 5 126,709 122,422

Trading income 6 26,616 28,221

Net gains on investments 19,899 43,471

Share of profit from associates and joint venture 61,535 56,703

Other operating income 21,674 24,368

Fees and other income 256,433 275,185

OPERATING INCOME 892,806 842,112

Net provision for loan losses and others 8f 148,100 129,847

Provision for non-trading investments 9 61,800 73,376

Total provisions 209,900 203,223

NET OPERATING INCOME 682,906 638,889

Staff costs 148,869 145,608

Depreciation and impairment 25,786 39,123

Other operating expenses 92,523 88,503

OPERATING EXPENSES 267,178 273,234

PROFIT BEFORE TAX 415,728 365,655

Tax expense 22 37,993 29,842

NET PROFIT FOR THE YEAR 377,735 335,813

Attributable to:

Owners of the Bank 335,703 310,610

Non-controlling interest 42,032 25,203

377,735 335,813

EARNINGS PER SHARE ATTRIBUTABLE TO THE

OWNERS OF THE BANK FOR THE YEAR:

Basic earnings per share (US cents) 23 6.4 5.9

Diluted earnings per share (US cents) 23 6.3 5.8

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

Ahli United Bank

45


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2012

2012 2011

US$ ’000 US$ ’000

Net profit for the year 377,735 335,813

Other comprehensive income (OCI)

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

Foreign currency translation adjustments (28,571) (10,115)

Available-for-sale investments - (164,108)

Net change in fair value of financial assets measured at fair value through OCI 6,273 -

Cash flow hedges

Net change in fair value (7,661) 5,427

Transfers to consolidated statement of income 25,962 1,662

Revaluation of freehold land (23,313) (6,595)

Share of other comprehensive income of associates - 2,411

Other comprehensive income for the year (28,310) (172,318)

Total comprehensive income for the year 349,425 163,495

Total comprehensive income attributable to:

Owners of the Bank 313,831 143,065

Non-controlling interest 35,594 20,430

349,425 163,495

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

46 Ahli United Bank


CONSOLIDATED BALANCE SHEET

At 31 December 2012

Annual Report

2012

2012 2011

Note US$ ’000 US$ ’000

ASSETS

Cash and balances with central banks 7a 735,528 673,800

Treasury bills and deposits with central banks 7b 1,986,236 2,612,287

Deposits with banks and other financial institutions 3,750,771 3,068,879

Loans and advances 8 15,972,219 15,495,961

Financial assets at fair value through profit or loss 27,399 84

Non-trading investments 9 5,120,421 4,370,357

Investments in associates and joint venture 10 278,125 629,843

Investment property 171,798 66,665

Premises and equipment 11 266,830 285,055

Interest receivable and other assets 12 509,214 435,484

Goodwill and other intangible assets 13 679,922 691,347

Investment held for sale 10 397,959 -

TOTAL ASSETS 29,896,422 28,329,762

LIABILITIES AND EQUITY

LIABILITIES

Deposits from banks and other financial institutions 14 5,145,255 4,434,645

Borrowings under repurchase agreements 15 1,861,357 1,352,601

Customers’ deposits 16 18,231,131 17,345,034

Term debts 17 - 768,000

Interest payable and other liabilities 18 774,971 745,056

Subordinated liabilities 19 686,879 773,285

TOTAL LIABILITIES 26,699,593 25,418,621

EQUITY

Ordinary share capital 20 1,303,164 1,242,135

Preference share capital 20 125,000 125,000

Reserves 1,382,795 1,170,296

Equity attributable to the owners of the Bank 2,810,959 2,537,431

Non-controlling interest 385,870 373,710

TOTAL EQUITY 3,196,829 2,911,141

TOTAL LIABILITIES AND EQUITY 29,896,422 28,329,762

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

Ahli United Bank

47


CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2012

2012 2011

Note US$ ’000 US$ ’000

OPERATING ACTIVITIES

Profit before tax 415,728 365,655

Adjustments for:

Depreciation 25,786 39,123

Net gains on investments (19,899) (43,471)

Net provision for loan losses and others 8f 148,100 129,847

Provision for non-trading investments 9 61,800 73,376

Gain on sub debt disposal (799) (1,165)

Share of profit from associates and joint venture (61,535) (56,703)

Staff costs - fair value amortisation of share based transactions 242 578

Operating profit before changes in operating assets and liabilities 569,423 507,240

Changes in:

Mandatory reserve deposits with central banks (9,711) (34,511)

Treasury bills and deposits with central banks 289,883 523,279

Deposits with banks and other financial institutions (839,523) (510,450)

Loans and advances (597,602) (1,123,446)

Interest receivable and other assets (73,730) 5,483

Deposits from banks and other financial institutions 710,610 (530,578)

Borrowings under repurchase agreements 508,756 (292,460)

Customers’ deposits 886,097 2,509,238

Interest payables and other liabilities 29,915 51,367

Cash from operations 1,474,118 1,105,162

Income tax paid (28,552) (22,097)

Net cash from operating activities 1,445,566 1,083,065

INVESTING ACTIVITIES

Purchase of non-trading investments (1,537,993) (1,030,222)

Proceeds from sale or redemption of non-trading investments 903,564 906,651

Net increase in investment property (105,133) (9,086)

Net increase in premises and equipment (30,874) (15,257)

Dividends received from associates - 32,087

Net cash used in investing activities (770,436) (115,827)

FINANCING ACTIVITIES

Additional investment in subsidiaries 2 (63,201) (18,967)

Proceeds from issue of preference shares - 125,000

Proceeds from issue of subordinated liabilities - 165,000

Buy back/repayment of subordinated liabilities (86,406) (10,670)

Repayment of term debt (768,000) (178,562)

Dividends and other appropriations paid (170,734) (135,985)

Net cash used in financing activities (1,088,341) (54,184)

Foreign currency translation adjustments (28,571) (10,115)

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (441,782) 902,939

Cash and cash equivalents at 1 January 3,866,097 2,963,158

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 3,424,315 3,866,097

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

48 Ahli United Bank


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2012

Annual Report

2012

Ordinary

share

capital

US$ ’000

Preference

share

capital

US$’000

Attributable to the owners of the Bank

Share

premium

US$ ’000

Statutory

reserve

US$ ’000

Reserves

Retained

earnings

US$ ’000

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 2012 1,242,135 125,000 540,006 204,307 499,122 153,430 (226,569) 1,170,296 373,710 2,911,141

Impact of adopting IFRS 9 at

1 January 2012 (note 3.1 (iii)) - - - - (133,378) - 246,278 112,900 (455) 112,445

At 1 January 2012 - restated 1,242,135 125,000 540,006 204,307 365,744 153,430 19,709 1,283,196 373,255 3,023,586

Mandatorily Convertible

Preference Shares dividend paid - - - - - (2,900) - (2,900) - (2,900)

Ordinary share dividend paid

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

Dividends of subsidiaries - - - - - - - - (19,121) (19,121)

Bonus shares issued 62,304 - - - (62,304) - - (62,304) - -

Arising on additional

acquisition of a subsidiary

- - 1,216 - - - - 1,216 (3,330) (2,114)

Other equity movements of

a subsidiary - - - - - - - - (528) (528)

Equity shares surrendered (1,275) - (714) - - - - (714) - (1,989)

Total comprehensive income

for the year - - - - 335,703 (1,000) (20,872) 313,831 35,594 349,425

Transfer to statutory reserve

(note 21(c)) - - - 33,570 (33,570) - - - - -

Proposed dividend on

IFC Capitalization (Equity) Fund L.P.

Preference shares (note 21(j)) - - - - (4,538) 4,538 - - - -

Proposed dividend on ordinary

shares (note 21(j)) - - - - (209,342) 209,342 - - - -

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

Balance at 31 December 2012 1,303,164 125,000 540,508 237,877 390,693 214,880 (1,163) 1,382,795 385,870 3,196,829

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

Ahli United Bank

49


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2012

Attributable to the owners of the Bank

Reserves

Ordinary

share

capital

US$ ’000

Preference

share

capital

US$’000

Share

premium

US$ ’000

Statutory

reserve

US$ ’000

Retained

earnings

US$ ’000

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

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 (c)) 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 (d)) - 125,000 - - - - - - - 125,000

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

IFC Capitalization (Equity) Fund L.P.

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

50 Ahli United Bank


Notes to the

Consolidated

Financial

Statements

31 December 2012


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

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 91 branches,

as at 31 December 2012, in the Kingdom of Bahrain (21 branches), the

State of Kuwait (29 branches), the Arab Republic of Egypt (29 branches),

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

also operates through its managed associates in the State of Qatar (17

branches), Sultanate of Oman (12 branches) and Libya (11 branches) with

a total network of 40 branches as at 31 December 2012. 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

2012 were authorised for issue in accordance with a resolution of the

directors on 19 February 2013.

2 Basis of Consolidation

The consolidated financial statements comprise the financial statements

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

31 December 2012 and 2011. 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

Ahli United Bank (U.K.)

PLC (AUBUK)

Ahli United Bank K.S.C.

(AUBK)

Kuwait and Middle East

Financial Investment

Co. K.S.C. (closed) (KMEFIC),

a subsidiary

of AUBK*

Ahli United Bank (Egypt)

S.A.E. (AUBE)

Commercial Bank of Iraq

P.S.C. (CBIQ)

* Adjusted for subsidiary's holdings

Country of

incorporation

United

Kingdom

Nominal holding

31 December

2012

31 December

2011

100.0% 100.0%

State of Kuwait 74.9% 74.9%

State of Kuwait 75.3% 75.3%

Arab Republic 85.4% 85.1%

of Egypt

Republic of Iraq 68.9% 59.7%

During the year, AUB's equity stake in CBIQ increased to 68.9% following

acquisition of additional shares at a purchase consideration of US$ 9.8

million (2011: AUB's equity stake in CBIQ increased to 59.7% following

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

million).

During the year, AUB participated in a rights issue by AUBE, by subscribing

to 31.9 million equity shares for a consideration of US$ 53.0 million.

Further AUB acquired additional 259,946 shares under this rights issue in

AUBE for a purchase consideration of US$ 0.4 million which resulted in its

equity stake in AUBE increasing to 85.4%.

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, certain financial investments (as detailed below in 3.1(i) and (ii) 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 2012:

• 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 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.

• IAS 32 Offsetting Financial Assets and Financial Liabilities - Amendments

to IAS 32: effective for annual periods commencing 1 January 2014.

52 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

• IFRS 13 Fair Value Measurement: effective annual periods commencing

1 January 2013.

• IFRS 7 Financial Instruments: Disclosures Offsetting Financial Assets

and Financial Liabilities - Amendments to IFRS 7: effective for 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.

(i) Early Adoption of IFRS 9

• IFRS 9 Financial Instruments: Recognition and Measurement

With effect from 1 January 2012, the Group has adopted IFRS 9 “Financial

Instruments”: Recognition and Measurement, in advance of its mandatory

effective date of 1 January 2015, as permitted by the Standard, to provide

a better presentation of its performance and operations. The Central Bank

of Bahrain approved the early adoption of the standard.

The standard has been applied retrospectively and, as permitted by

transitional provision of IFRS 9, comparative amounts have not been

restated but the adjustments relating to early adoption of IFRS 9 as at 1

January 2012 have been recognised in the opening retained earnings.

IFRS 9 (phase 1) requires all financial assets to be classified in their entirety

on the basis of the entity's business model for managing the financial assets

and the contractual cash flow characteristics of the financial assets. Financial

assets are measured either at amortised cost or fair value.

(ii) Accounting Treatment under IFRS 9:

IFRS 9 introduces new classification and measurement requirements for

financial assets that are within the scope of IAS 39 Financial Instruments:

Recognition and measurement. The key changes relating to accounting

treatment of financial assets under IFRS 9 are noted below:

a. Debt Instruments:

Under IFRS 9, debt instruments are measured at amortised cost using the

effective interest rate method if:

(i) the assets are held within a business model whose objective is to hold

assets in order to collect contractual cash flows and

(ii) the contractual terms of the financial assets give rise on specified

dates to cash flows that are solely payments of principal and interest

on the principal amount outstanding.

If either of these two criteria is not met, the financial assets are classified

and measured at fair value through the profit or loss (FVTPL). Additionally,

even if the financial asset meets the amortised cost criteria the entity

may choose at initial recognition to designate the financial asset at FVTPL

based on business model.

The Group accounts for any changes in the fair value in the consolidated

statement of income for assets classified as “FVTPL”. The change in value is

not recognized for assets carried at cost or amortised cost.

b. Equity investments

Investments in equity instruments are classified as FVTPL, unless the Group

designates an equity investment that is not held for trading as Fair Value

through Other Comprehensive Income (FVTOCI) on initial recognition.

At initial recognition, the Group can make irrevocable election on an

instrument by instrument basis to designate equity instrument as FVTOCI.

If an equity investment is designated as FVTOCI, all gains and losses, except

for dividend income, are recognised in other comprehensive income and

are not subsequently included in the consolidated statement of income.

c. Other financial instruments:

The accounting policies for other financial instruments are detailed under

note 3.3 (c).

d. Impairment and Hedge Accounting

IAS 39 is still being followed for impairment of financial assets and hedge

accounting, as these will be covered through phase 2 and phase 3 of

IFRS 9, respectively, which have not yet been issued by the International

Accounting Standards Board (IASB). The Group’s existing financial

investments at the date of the initial application of IFRS 9 on 1 January

2012 have been reviewed and assessed and as a result significant part of

non-trading investments of the Group meeting the required criteria have

been designated as financial assets at amortised cost.

The classification categories for financial instruments which were carried

under IAS 39 until the previous year are listed below, the detailed accounting

policies for which have been provided in consolidated financial statements

for the year ended 31 December 2011. The accounting policies up to 31

December 2011 followed under IAS 39 for the principal financials instrument

categories whose classification was changed pursuant to adoption of IFRS

9 are given below.

a. Available-for-sale

Non-trading investments that are not classified as held-to-maturity, heldfor-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.

b. 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”.

Ahli United Bank

53


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

3 Accounting Policies (continued)

3.1 Basis of preparation (continued)

(iii) Impact of early adoption of IFRS 9

The impact on the carrying value of non-trading investments arising from a change in measurement attributable on transition to IFRS 9 is USD 112.9 million

as disclosed in the table below:

Impact on

Financial asset

Original

classification

New classification

IAS 39

US$ ‘000

Retained

Earnings

US$ ‘000

Fair value

reserve

US$ ‘000

IFRS 9

US$ ‘000

Cash and balances with central banks

Treasury bills and deposits with central

banks

Deposits with banks and other financial

institutions

Loans and advances

Held to maturity

Held to maturity

Held to maturity

Loans and

advances

Financial assets at

amortised cost 673,800 - - 673,800

Financial assets at

amortised cost 2,612,287 - - 2,612,287

Financial assets at

amortised cost 3,068,879 - - 3,068,879

Loans and

advances 15,495,961 - - 15,495,961

Financial assets at fair value through profit

or loss Held for trading FVTPL 84 - - 84

Non-trading investments Available for sale FVTPL 193,481 (19,735) 19,735 193,481

Non-trading investments

Non-trading investments

Non-trading investments

Loans and

receivables FVTPL 517,955 (75,313) 13,787 456,429

Available for sale

Loans and

receivables

Financial assets at

amortised cost 2,559,026 - 63,805 2,622,831

Financial assets at

amortised cost 770,657 (38,330) 148,951 881,278

Non-trading investments Available for sale FVTOCI 504,071 - - 504,071

Non-trading investments

Held to maturity

Financial assets at

amortised cost 19,957 - - 19,957

(133,378) 246,278

Had IFRS 9 not been adopted during the current year, a positive fair value movement of US$ 138.7 million would have been recorded in the Other

Comprehensive Income on the instruments reclassified to amortised cost. The effective interest rate on these instruments at the date of reclassification

was between 4% - 7%.

54 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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 financial instruments into

fair value and amortised cost based on business model. 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.

Business Model - applicable from 1 January 2012

In making an assessment of whether a business model’s objective is to

hold assets in order to collect contractual cash flows, the Group considers

at which level of its business activities such assessment should be made.

Generally, a business model is a matter of fact which can be evidenced

by the way business is managed and the information provided to

Management.

In determining whether its business model for managing financial assets is

to hold assets in order to collect contractual cash flows, the Group considers:

• Management’s stated policies and objectives for the portfolio and

the operation of those policies in practice;

• Management’s evaluation of the performance of the portfolio;

• Management’s strategy in terms of earning contractual interest

revenues or generating capital gains.

Classifications - applicable up to 31 December 2011

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.

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).

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, besides those detailed in note 3.1 are

set out below. These policies have been consistently applied to all the

years presented, except for those resulting from early adoption of IFRS 9

as stated in note 3.1.

(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.

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 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 designated as FVTPL 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.

Ahli United Bank

55


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

3 Accounting Policies (continued)

3.3 Summary of significant accounting policies (continued)

(b) Foreign currency translation (continued)

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 FVTPL 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.

(i) Date of recognition

All “regular way” purchases and sales of financial assets are recognised on

the settlement date, i.e. the date that the Group receives or delivers the

asset. Regular way purchases or sales are purchases or sales of financial

assets that require delivery of assets within the timeframe generally

established by regulation or convention in the market place.

(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.

(iii) 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.

(iv) Derivatives (other than hedging instruments)

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

the consolidated statement of income under “trading income“.

Further to the adoption of IFRS 9, derivatives embedded in other financial

instruments are not separated from the host contract and the entire

contract is considered in order to determine its classification. Where such

a contract has been classified as FVTPL, the changes in fair value of the

entire hybrid contract are recognised in the consolidated statement of

income. Under IAS 39, derivatives embedded in other financial instruments

were treated as separate derivatives and recorded at fair value, when their

economic characteristics and risks were not closely related to those of the

host contract and the host contract was not carried as held for trading.

Further, the changes in fair value of such embedded derivatives were

recognised in the consolidated statement of income.

(v) Deposits, term debts and subordinated liabilities.

These financial liabilities are carried at amortised cost, less amounts repaid.

(d) Derecognition of financial assets and financial liabilities

A financial asset (or where applicable, a part of a financial asset or part of a

group of similar financial assets) is derecognised where:

• the rights to receive cash flows from the asset have expired;

• the Group has transferred its rights to receive cash flows from the

asset or has assumed an obligation to pay the received cash flows

in full without material delay to a third party under a ‘pass-through’

arrangement; or

• the Group has transferred its rights to receive cash flows from the

asset and either (i) has transferred substantially all the risks and

rewards of the asset, or (ii) has neither transferred nor retained

substantially all the risks and rewards of the asset, but has transferred

control of the asset.

A financial liability is derecognised when the obligation under the liability

is discharged, cancelled or expires.

(e) Repurchase agreements

Where investments 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.

56 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

(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.

Objective evidence that financial assets 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.

The present value of the estimated future cash flows for loans and other

interest bearing financial assets is discounted at the financial asset’s original

effective interest rate. If a loan has a variable interest rate, the discount rate

for measuring any impairment loss is the current effective interest rate.

The calculation of the present value of the estimated future cash flows of

a collateralised financial asset reflects the cash flows that may result from

foreclosure less costs for obtaining and selling the collateral, whether or

not foreclosure is probable.

In addition to specific provisions against individually significant financial

assets, the Group also makes collective impairment provisions on

groups of financial assets, which although not identified as requiring

a specific provision, have a greater risk of default than the risk at initial

recognition. Financial assets are grouped on the basis of similar credit risk

characteristics that are indicative of the debtors’ ability to pay all amounts

due according to the contractual terms and the collective impairment

provision is estimated for any such group where credit risk characteristics

of the group of financial assets has deteriorated. Factors such as any

deterioration in country risk, industry, technological obsolescence as

well as identified structural weaknesses or deterioration in cash flows are

taken into consideration and the amount of the provision is based on

the historical loss pattern within each group, adjusted to reflect current

economic changes.

Loans together with the associated allowance are written off when there

is no realistic prospect of future recovery and all collateral has been

realised or has been transferred to the Group. If, in a subsequent year, the

amount of the estimated impairment loss increases or decreases because

of an event occurring after the impairment was recognised, the previously

recognised impairment loss is increased or reduced by adjusting the

allowance account. If a write-off is later recovered, the recovery is credited

to the ‘provision for loan losses and 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

Ahli United Bank

57


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

3 Accounting Policies (continued)

3.3 Summary of significant accounting policies (continued)

(h) Hedge accounting (continued)

loss on the hedging instrument recognised in equity remains in equity

until the forecasted transaction occurs, unless the hedged transaction is

no longer expected to occur, in which case the net cumulative gain or

loss recognised in equity is transferred to the consolidated statement of

income for the year.

(i) Offsetting financial instruments

Financial assets and financial liabilities are only offset and the net amount

reported in the consolidated balance sheet when there is a currently

enforceable legal right to offset the recognised amounts and the Group

intends to settle on a net basis.

(j) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic

benefits will flow to the Group and the revenue can be reliably measured.

The following specific recognition criteria must also be met before

revenue is recognised:

(i) Interest income and expense

For all interest bearing financial instruments, 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 25 to 40 years

• Leasehold land and buildings Over the lease period

• Other premises and equipment Up to 10 years

(m) Investment Property

Land and buildings held for the purpose of capital appreciation or

for long term rental yields and not occupied by the Group is classified

as investment properties. Investment properties are measured at

cost less accumulated depreciation (based on an estimated useful

life of 30-40 years using the straight line method) and accumulated

impairment. Any gains or losses on the retirement or disposal of an

investment property are recognised in the consolidated statement

of income in the period of retirement or when sale is completed.

58 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with central banks,

excluding mandatory reserve deposits, together with those deposits with

banks and other financial institutions and treasury bills having an original

maturity of three months or less.

(o) 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.

(p) 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.

(q) 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.

(r) Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the

Group and, accordingly, are not incorporated in the consolidated balance

sheet.

(s) Non-controlling interests

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

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

(t) 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.

(u) 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.

(v) 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.

(w) 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.

(x) Islamic banking

The Islamic banking activities of the group are conducted in accordance

with Islamic Shari'a principles, as approved by the Shari'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.

(y) Islamic products

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 Group acts as Mudarib when accepting funds from

depositors and as Rab-Ul-Mal when investing such funds on a Mudaraba

basis.

Dividends for the period that are approved after the balance sheet date are

shown as an appropriation and reported in the consolidated statement of

changes in equity, as an event after the balance sheet date.

Ahli United Bank

59


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

3 Accounting Policies (continued)

3.3 Summary of significant accounting policies (continued)

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.

Istisna’a

Istisna’a is a sale contract between a contract owner and a contractor

whereby the contractor based on an order from the contract owner

undertakes to manufacture or otherwise acquire the subject matter of

the contract according to specifications, and sells it to the contract owner

for an agreed upon price and method of settlement whether that be in

advance, by installments or deferred to a specific future time.

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.

(z) 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 Shari'a regulations.

4. Net Interest Income

(a) Interest Income

2012 2011

US$’000 US$’000

Treasury bills 35,331 30,240

Deposits with banks and other

financial institutions 51,291 49,464

Loans and advances 798,521 756,118

Non-trading investments 185,495 138,114

1,070,638 973,936

During the year, the Bank repurchased a portion of its subordinated

liabilities with a nominal value of US$ 5.9 million (2011 : US$ 7.5 million).

The resultant net gain on the repurchase amounting to US$ 0.8 million

(2011 : US$ 1.2 million) is included as a part of "interest income" above.

(b) Interest Expense

2012 2011

US$’000 US$’000

Deposits from banks and other

financial institutions

(including repurchase agreements) 113,437 94,677

Customers' deposits 289,996 278,325

Term debts 9,164 14,402

Subordinated liabilities 21,668 19,605

434,265 407,009

Net Interest Income 636,373 566,927

5. Fees and Commissions

2012 2011

US$’000 US$’000

Fees and commissions income

- Transaction banking services 101,817 90,631

- Management, performance and

brokerage fees 29,518 36,148

Fees and commissions expense (4,626) (4,357)

126,709 122,422

Included in ’management, performance and brokerage fees’ is US$ 9.2

million (2011: US$ 9.8 million) of fee income relating to trust and other

fiduciary activities.

6. Trading Income

2012 2011

US$’000 US$’000

Foreign exchange 28,413 29,548

Other trading activities (1,797) (1,327)

26,616 28,221

Trading income includes a gain of US$ 0.2 million (2011: nil) on instruments

classified as FVTPL attributable to credit risk.

7 (a) Cash and Balances with Central Banks

2012 2011

US$’000 US$’000

Cash and balances with central banks,

excluding mandatory reserve deposits

(note 24) 513,067 461,050

Mandatory reserve deposits with

central banks 222,461 212,750

735,528 673,800

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

operations.

60 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

7 (b) Treasury Bills and Deposits with Central Banks

2012 2011

US$’000

US$’000

Central Bank of Bahrain 241,268 209,354

Central Bank of Kuwait 1,341,696 2,187,432

Central Bank of Egypt 271,412 146,956

Central Bank of Iraq 131,860 68,545

1,986,236 2,612,287

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

countries.

8. Loans and Advances

2012 2011

US$ ’000 % US$ ’000 %

a) By industry sector

Consumer/

personal 3,624,602 21.9 3,609,266 22.5

Residential

mortgage 1,518,607 9.2 1,346,456 8.4

Trading and

manufacturing 3,305,154 19.9 2,790,304 17.4

Real estate 3,357,200 20.2 3,238,376 20.2

Banks and other

financial

institutions 1,020,386 6.2 1,167,184 7.3

Services 3,081,802 18.6 3,042,080 19.0

Government/

public sector 484,112 2.9 476,101 2.9

Others 188,410 1.1 376,609 2.3

16,580,273 100.0 16,046,376 100.0

Less: Specific

impairment

provision (356,012) (349,786)

Less: Collective

impairment

provision (252,042) (200,629)

15,972,219 15,495,961

2012 2011

US$ ’000 % US$ ’000 %

b) By geographic region

Kingdom of

Bahrain 3,266,799 19.7 3,101,216 19.3

State of Kuwait 7,006,607 42.3 6,871,381 42.8

Other GCC

countries 2,022,007 12.2 2,248,577 14.0

United Kingdom 1,857,792 11.2 1,701,748 10.7

Arab Republic of

Egypt 1,740,302 10.5 1,494,578 9.3

Europe (excluding

United Kingdom) 365,612 2.2 373,342 2.3

Asia (excluding

GCC countries) 232,081 1.4 218,016 1.4

Rest of the world 89,073 0.5 37,518 0.2

16,580,273 100.0 16,046,376 100.0

Less: Specific

impairment

provision (356,012) (349,786)

Less: Collective

impairment

provision (252,042) (200,629)

15,972,219 15,495,961

Other GCC countries comprise the members of the Gulf Cooperation

Council being Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia

and the United Arab Emirates.

Please refer note 31 (c) for disclosure of credit quality of loans and

advances.

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

Up to 30

days

US$ ’000

31 to 60

days

US$ ’000

2012

61 to 89

days

US$ ’000

Total

US$ ’000

Loans and

advances

Retail 69,035 33,685 15,737 118,457

Corporate 107,939 21,101 10,690 139,730

176,974 54,786 26,427 258,187

Ahli United Bank

61


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

8. Loans and Advances (continued)

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

Up to 30

days

US$ ’000

31 to 60

days

US$ ’000

2011

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

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

2012

Retail

US$ ’000

Corporate

US$ ’000

Total

US$ ’000

Gross impaired loans 90,780 315,184 405,964

Specific impairment

provisions (77,335) (278,677) (356,012)

13,445 36,507 49,952

Impaired loan

coverage 85.2 % 88.4 % 87.7 %

Gross loans 2,683,703 13,896,570 16,580,273

Impaired loan ratio 3.4 % 2.3 % 2.4 %

2011

Retail

US$ ’000

Corporate

US$ ’000

Total

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%

e) Impairment allowance for loans and advances

A reconciliation of the allowance for impairment losses for loans and

advances by class is as follows:

2012

Retail

US$ ’000

Corporate

US$ ’000

Total

US$ ’000

At 1 January 104,331 446,084 550,415

Add/(Less):

Amounts written off

during the year (14,830) (71,160) (85,990)

Charge for the year 26,675 146,108 172,783

Recoveries during the

year (7,664) (14,379) (22,043)

Interest suspended

during the year (net) 901 (4,508) (3,607)

Exchange rate and

other adjustments (702) (2,802) (3,504)

At 31 December 108,711 499,343 608,054

2011

Retail

US$ ’000

Corporate

US$ ’000

Total

US$ ’000

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

Add/(Less):

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

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

Impaired loan ratio 3.2% 2.4% 2.5%

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

determined to be impaired at 31 December 2012 amounts to US$ 214.1

million (2011: US$ 151.8 million). The collateral consists of cash, securities

and properties.

62 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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:

2012 2011

US$ ’000 US$ ’000

Impairment charge for the year on loans and advances (note 8(e)) 172,783 172,476

Recoveries from loans and advances during the year

(including from fully provided loans written off in previous years) (51,439) (67,281)

Net charge for others 26,756 24,652

Net provision for loan losses and others 148,100 129,847

9. Non-Trading Investments

2012

Quoted investments

Held at

amortised cost

US$’000

Held at

FVTOCI

US$’000

Total

US$’000

GCC government bonds and debt securities 567,823 - 567,823

Other government bonds and debt securities 840,589 - 840,589

GCC government entities’ securities 624,912 - 624,912

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions 1,930,233 - 1,930,233

- issued by corporate bodies 778,582 - 778,582

Equity shares - 8,891 8,891

Funds at net asset value - 65,141 65,141

4,742,139 74,032 4,816,171

Unquoted investments

GCC government bonds 120,211 - 120,211

Other government bonds and debt securities 14,587 - 14,587

Equity shares - 144,616 144,616

Funds at net asset value - 136,603 136,603

Other investments - 56,870 56,870

134,798 338,089 472,887

Total 4,876,937 412,121 5,289,058

Less: Allowance for impairment (168,637)

5,120,421

Ahli United Bank

63


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

9. Non-Trading Investments (continued)

Held-tomaturity

US$’000

2011 (As per IAS 39)

Availablefor-sale

US$’000

Loans and

receivables

US$’000

Total

US$’000

Quoted investments

GCC government bonds and debt securities - 383,127 14,733 397,860

Other government bonds and debt securities - 371,179 25,158 396,337

GCC government entities’ securities - 172,557 365,206 537,763

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions - 1,249,506 697,077 1,946,583

- issued by corporate bodies 19,957 443,216 186,438 649,611

Equity shares - 7,975 - 7,975

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

19,957 2,777,700 1,288,612 4,086,269

Unquoted investments

GCC government bonds - 100,347 - 100,347

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

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions - - - -

- issued by corporate bodies - - - -

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

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

Other investments - 74,919 - 74,919

- 478,878 - 478,878

Total 19,957 3,256,578 1,288,612 4,565,147

Less: Allowance for impairment (194,790)

4,370,357

64 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

As at 31 December 2012, the Group does not have any sovereign

exposures towards Eurozone countries comprising Greece, Italy, Ireland,

Portugal and Spain. (31 December 2011: nil)

The fair value of the assets reclassified at amortised cost as a result of the

transition to IFRS 9 is US$ 4,952.9 million as at 31 December 2012.

Please refer note 31 (c) for disclosure of credit quality of non-trading

investments.

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

2012 2011

US$ ’000 US$ ’000

At 1 January 194,790 123,565

Add/(Less)

Charge for the year 61,800 73,376

Amounts written off during the year (82,380) (3,040)

Exchange rate and other adjustments (5,573) 889

At 31 December 168,637 194,790

10. Investments In Associates And Joint Venture

The principal associates and joint venture of the Group are:

a) Associates

Name

Country of

incorporation

Holding

2012 2011

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

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%

* Subsequent to the balance sheet date, AUB divested its diluted stake

of 29.4% in Ahli Bank Qatar (ABQ) to the Qatar Foundation for Education,

Science and Community Development at a price of QR 60 per share,

generating a net exceptional profit of US$ 212.9 million which will be

recognised in the 2013 consolidated financial statements.

ABQ's contribution to AUB's net profit (inclusive of management fees) was

US$ 44.1 million in 2012 (2011: US$ 43.1 million).

b) Joint venture

Name

Country of

incorporation

Holding

2012 2011

Legal & General Gulf

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

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

venture was as follows:

2012 2011

US$ ’000 US$ ’000

Assets 3,225,486 7,591,984

Liabilities 2,698,862 6,498,781

Revenues 135,332 301,900

Net profit for the year 55,079 159,359

11. Premises and Equipment

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

2012 2011

US$ ’000 US$ ’000

Freehold land 116,682 126,052

Freehold buildings 45,139 23,312

Leasehold land and buildings 29,315 33,711

IT equipment and others 57,560 60,557

Capital work-in-progress 18,134 41,423

266,830 285,055

12. Interest Receivable and Other Assets

2012 2011

US$ ’000 US$ ’000

Tax assets (note 22) - 1,991

Interest receivable 169,703 131,539

Derivative assets (note 28) 83,353 98,610

Prepayments and others 256,158 203,344

509,214 435,484

13. Goodwill and Other Intangible Assets

2012

Goodwill

US$’000

Intangible

assets

US$’000

Total

US$’000

At 1 January 500,831 190,516 691,347

Acquisitions during

the year - - -

Exchange rate and

other adjustments (3,283) (8,142) (11,425)

At 31 December 497,548 182,374 679,922

* Provides conventional and takaful life and health insurance.

Ahli United Bank

65


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

13. Goodwill and Other Intangible Assets (continued)

Goodwill

US$'000

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

Goodwill:

Goodwill acquired through business combinations has been allocated to

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

purposes. The carrying amount of goodwill and intangible assets allocated

to each of the cash-generating units is 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 8.9 % (2011: 9.4%). The key assumptions used

in estimating recoverable amounts of cash generating units were

sensitised to test the resilience of value-in-use calculations. On this basis,

management believes that reasonable changes in the key assumptions

used to determine the recoverable amount of the Group's cash-generating

units will not result in an impairment.

Intangible assets:

Intangible assets comprises primarily the Group’s banking licenses 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

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

2011: 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 2012, the borrowings under these agreements were

US$ 1,861 million (31 December 2011: US$ 1,353 million) and the fair

value of investment securities that had been pledged as collateral was

US$ 2,235 million (2011: US$ 1,534 million).

16. Customers’ Deposits

2012 2011

US$ ’000 US$ ’000

Current and call accounts 3,371,038 3,325,333

Saving accounts 1,837,025 1,678,475

Time deposits 13,023,068 12,341,226

18,231,131 17,345,034

17. Term Debts

2012 2011

US$ ’000 US$ ’000

Medium Term Syndicated Deposit

(Repaid on maturity in April 2012) - 618,000

Long term debt

(Repaid on maturity in September

2012) - 150,000

- 768,000

18. Interest Payable and Other Liabilities

2012 2011

US$ ’000 US$ ’000

Accruals 87,905 83,766

Interest payable 138,943 122,359

Derivative liabilities (note 28) 293,810 285,616

Other credit balances 225,034 240,807

Tax liabilities (note 22) 29,279 12,508

774,971 745,056

2012 2011

US$ ’000 US$ ’000

Demand and call 1,540,129 1,460,618

Time deposits 2,942,342 2,725,640

Other deposits 662,784 248,387

5,145,255 4,434,645

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

66 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

19. Subordinated Liabilities

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

the respective banks.

2012 2011

Maturity US$ ’000 US$ ’000

International Finance Corporation (IFC):

Convertible into ordinary shares

at the holder’s option at the rate

of US 92.95 cents (2011: US 97.6

cents) per share between the

third and eighth anniversary ending

on 17 November 2014 from

the loan agreement dated

18 November 2006, as amended. 2018 200,000 200,000

Repayable in four equal semiannual

installments commencing

on 15 April 2019 and falling

on each Interest Payment Date

falling thereafter up to and

including 15 October 2020 (note

20 (d)). 2020 165,000 165,000

365,000 365,000

Others:

Repayable at maturity 2012 - 30,842

Repayable in 2013 with issuer

option to extend for a further

period of 5 years and one day 2013 - 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 219,010 225,000

Issuer option to redeem after

2 December 2010 subject to one

month notice. 2015 67,528 67,528

10 year subordinated debt

repayable at maturity 2020 17,997 17,997

Repayable at maturity

5 years

& one

day

notice 12,480 12,174

Repayable at maturity 2013 4,864 4,744

321,879 408,285

686,879 773,285

20. Share Capital

2012 2011

US$ ’000 US$ ’000

(a) Authorised :

- Share capital 8,000 million shares

(2011: 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

(b) Issued and fully paid:

2012 2011

US$ ’000 US$ ’000

Ordinary share capital (US$ 0.25 each) 1,303,164 1,242,135

Number of shares (millions)

(note 20 (c)) 5,233.5 4,984.3

Movement in ordinary shares

2012 2011

(number in millions)

Opening balance as at 1 January 4,984.3 4,907.9

Add: issuance of shares upon

conversion of Class B preference shares

(note 20 (c)) - 76.4

Add: bonus share issue 249.2 -

Closing balance as at 31 December 5,233.5 4,984.3

On 23 July 2012, AUB prepaid the US$ 50 million subordinated liability

ahead of its original contractual maturity on 20 February 2013.

Ahli United Bank

67


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

20. Share Capital (continued)

Movement in Class B preference shares

2012 2011

(number in millions)

Opening balance as at 1 January - 55.7

Less: Conversion of tranche III to

ordinary shares (note 20 (c)) - (55.7)

Closing balance as at 31 December - -

2012 2011

US$ ’000 US$ ’000

IFC Mandatory Convertible preference

shares (US$ 0.25 each) (note 20 (d)) 125,000 125,000

Number of shares (millions) 500.0 500.0

(c) 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. Consequent to the above conversion, the total number of ordinary

shares was 4,984.3 million (note 20 (b)).

(d) During 2011, 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 10 year subordinated

debt facility (Refer note 19). The mandatorily convertible preference

shares are convertible at a bonus adjusted issue price of US 78.57 cents

per share (note 21 (j)).

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 (i) Other comprehensive income reserve (OCI Reserve)

This reserve represents changes in the fair values of equity investments

that have been classified as Fair Value Through Other Comprehensive

Income.

(ii) Available-for-sale reserve

This reserve represents changes in the fair values of available-for-sale

investments under IAS 39 up to 31 December 2011.

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, as detailed under note 20(c) and (d) of

2011 consolidated financial statements 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.

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.

68 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

i) Movements in other reserves

Capital

reserve

Property

revaluation

reserve

Foreign

exchange

translation

reserve

OCI

reserve

Cumulative changes in

Cash flow

hedge

reserve

ESPP

reserve

Total

other

reserves

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

Balance at 1 January 2012 425 47,690 (13,733) (234,367) (26,584) - (226,569)

Impact of adopting IFRS 9 at 1

January 2012 (note 3.1 (iii)) - - - 246,278 - - 246,278

At 1 January 2012 425 47,690 (13,733) 11,911 (26,584) - 19,709

Currency translation adjustments - - (23,087) - - - (23,087)

Transfers to consolidated

statement of income - - - (305) 25,962 - 25,657

Net fair value movements during

the year - - - 5,172 (7,661) - (2,489)

Revaluation of freehold land - (20,953) - - - - (20,953)

Balance at 31 December 2012 425 26,737 (36,820) 16,778 (8,283) - (1,163)

Capital

reserve

Property

revaluation

reserve

Foreign

exchange

translation

reserve

Availablefor-sale

reserve

Cumulative changes in

Cash flow

hedge

reserve

ESPP

reserve

Total

other

reserves

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

Balance at 1 January 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

Conversion of preference shares

(note 20(c)) - - - - - (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)

Ahli United Bank

69


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

21. Reserves ( continued)

j) Dividends paid and proposed

2012

US$’000

Proposed for approval at the forthcoming Annual General Assembly of Shareholders Meeting

Cash dividend on IFC Capitalization (Equity) Fund L.P. Preference shares 4,538

Cash dividend on the Ordinary shares @ US cents 4.0 per share 209,342

Bonus share issue 5%

2011

US$’000

Declared and paid during the year

Cash dividend on IFC Capitalization (Equity) Fund L.P. Preference shares (2011: nil) 2,900

Cash dividend on the Ordinary shares @ US cents 3.0 per share (2011: US cents 2.5 per share) 149,530

Bonus share issue (2011: nil) 5%

70 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

22. Taxation

2012 2011

US$’000

US$’000

Consolidated balance sheet

(note 12 and note 18):

- Current tax asset - 1,991

- Deferred tax liability (4,920) (3,718)

- Current tax liability (24,359) (8,790)

(29,279) (10,517)

Consolidated statement of income

- Current tax expense on

foreign operations 36,791 28,940

- Deferred tax expense on

foreign operations 1,202 902

37,993 29,842

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 countries

of incorporation, in accordance with the tax laws prevailing in those

jurisdictions. Consequently, it is not practical to provide a reconciliation

between the accounting and taxable profits together with the details of

effective tax rates. Tax expense primarily relates to AUBUK, AUBE, AUBK

and CBIQ.

23. Earnings Per Share

Basic earnings per share is calculated by dividing the net profit for the

year attributable to the Bank’s ordinary equity shareholders less Class B

preference share dividends, by the weighted average number of ordinary

shares outstanding during the period.

Diluted earnings per share amounts are calculated by dividing the net

profit attributable to the Bank's ordinary equity shareholders by the

weighted average number of ordinary shares outstanding during the

year plus the weighted average number of ordinary shares that would be

issued on the conversion of Class B preference shares into ordinary shares

and IFC mandatorily convertible preference shares.

The convertible subordinated debt issued (note 19) is anti-dilutive for 2012

and 2011 and therefore ignored in calculating diluted earnings per share.

The number of ordinary shares potentially issuable upon conversion of

this debt amounts to 215.2 million shares as at 31 December 2012 (2011:

204.9 million shares).

The following reflects the income and share data used in basic and diluted

earnings per share computations:

2012 2011

US$’000 US$’000

Net profit for basic earnings per

share computation

Net profit attributable to Bank's equity

shareholders 335,703 310,610

(Less): IFC mandatorily convertible

preference shares dividend (note

21(j)) (4,538) (2,900)

Adjusted net profit attributable to

Bank's ordinary equity shareholders

for basic earnings per share 331,165 307,710

Net profit for diluted earnings per

share computation

Net profit attributable to Bank's equity

shareholders before preference

share dividend 335,703 310,610

Add: Staff costs - fair value amortisation

of share based transactions - -

Adjusted net profit attributable to

Bank's ordinary equity shareholders

for diluted earnings per share 335,703 310,610

Number of shares (in millions)

2012 2011

Weighted average ordinary shares

outstanding during the period

adjusted for bonus shares 5,203 5,211

Net weighted average number of

ordinary shares for basic earnings

per share 5,203 5,211

Add: Effect of dilution – IFC

mandatorily convertible preference

shares (note 20(d)) 159 159

Weighted average number of

ordinary shares for diluted earnings

per share 5,362 5,370

Issued and fully paid ordinary shares

of US$ 0.25 each (in million) 5,233 4,984

Ahli United Bank

71


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

24. Cash And Cash Equivalents

Cash and cash equivalents included in the consolidated statement of cash flows include the following balance sheet amounts:

2012 2011

US$ ’000 US$ ’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 7(a)) 513,067 461,050

Deposits with Central banks, other banks and financial institutions - with an original maturity of

three months or less 2,911,248 3,405,047

3,424,315 3,866,097

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:

2012

US$ ’000

Directors

Major

shareholders

Associates

and senior

management

Total

Interest income - 553 7,385 7,938

Interest expense 76,041 265 34 76,340

Fees and commissions (net) - 5,161 - 5,161

Deposits with banks and other financial institutions - 83,797 - 83,797

Loans and advances - - 239,600 239,600

Deposits from banks and other financial institutions - 6,691 - 6,691

Customers’ deposits (a) 5,278,911 3,228 10,832 5,292,971

Subordinated liabilities 10,942 - - 10,942

Commitments and contingent liabilities (notional) - 96,742 24,725 121,467

Derivatives (notional) - 230,186 - 230,186

72 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

Major

shareholders

Associates

2011

US$ ’000

Directors

and senior

management

Interest income - 1,841 4,797 6,638

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 - - 198,581 198,581

Deposits from banks and other financial institutions - 89,860 - 89,860

Customers’ deposits (a) 5,499,793 9,142 6,621 5,515,556

Subordinated liabilities 91,516 - - 91,516

Commitments and contingent liabilities (notional) - 57,885 21,822 79,707

Derivatives (notional) - 191,938 - 191,938

(a) Customers’ deposits include deposits from GCC government-owned institutions totaling US$ 5,262 million (31 December 2011: US$ 5,496 million).

The compensation of key management personnel of the Group included under staff costs was as follows:

Total

2012 2011

US$ ’000 US$ ’000

Short term employee benefits 14,652 14,997

End of service benefits 1,232 1,004

Post employment benefits 330 294

Total benefits 16,214 16,295

Fair value amortisation charge relating to share based transactions for key management personnel during 2012 is nil. (2011: US$ 0.3 million included in

short term employee benefits).

26. Employee Benefits

The Group operates Defined Benefit and Defined Contribution retirement

benefit schemes for its employees in accordance with the local laws and

regulations in the countries in which it operates. The costs of providing

retirement benefits including current contributions, are charged to the

consolidated statement of income.

Defined benefit plans

The charge to the consolidated statement of income on account of

end of service benefits for the year amounted to US$ 8,158 thousand

(2011: US$ 7,722 thousand). There are no material differences between

the carrying amount of the provision for end of service benefits at both

31 December 2012 and 2011 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$ 5,884 thousand (2011: US$ 5,718 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 2012 was US$ 4,077

million (2011: US$ 4,033 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.

Ahli United Bank

73


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

28. Derivatives ( continued)

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

2012

Derivative

liabilities

US$ ’000 US$ ’000

Derivatives held for risk management:

Interest rate swaps 39,466 26,309

Forward foreign exchange contracts 33,050 24,936

Forward rate agreements 4,249 368

Options 1,532 1,617

Interest rate futures - 1,932

Credit derivatives - 1

Derivatives held as fair value hedges:

Interest rate swaps 5,010 226,581

Currency swaps - 3,783

Options 46 -

Derivatives held as cash flow hedges:

Interest rate swaps - 8,283

83,353 293,810

2011

Derivative

assets

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

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:

At 31 December 2012

3

months

or less

More

than

3

months

up to 1

year

More

than

1 year

up to 5

years Total

US$'000 US$'000 US$'000 US$'000

Cash outflows from

liabilities 1,125 439 18,016 19,580

At 31 December 2011

Cash outflows from

liabilities 216 2,490 34,871 37,577

No hedge ineffectiveness on cash flow hedges was recognised in 2012

and 2011.

Fair value hedges

Losses arising from fair value hedge instruments during 2012 were US$

20.3 million (2011 : US$ 91.8 million) while the gains on the hedged items

attributable to the hedged risk were US$ 20.3 million (2011 : US$ 91.8

million). These gains and losses are included in “trading income-net” in the

consolidated statement of income during 2012 and 2011.

74 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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:

2012 2011

US$ ’000 US$ ’000

Contingent liabilities and commitments

Guarantees 1,760,266 1,651,977

Acceptances 64,531 44,302

Letters of credit 958,693 472,173

2,783,490 2,168,452

Irrevocable commitments:

Undrawn loan commitments 535,325 634,798

The Group’s commitments in respect of non-cancellable operating leases

were as follows:

2012 2011

US$ ’000 US$ ’000

Within one year 1,993 1,893

Between one to five years 8,008 7,490

Over five years 7,670 9,147

17,671 18,530

30. Segment Information

For management purposes the Group is organised into three major business

segments:

Retail banking

Corporate banking, treasury

and investments

Private banking and wealth

management

Principally handling individual

customers’ deposit and current

accounts, providing consumer

loans, residential mortgages,

overdrafts, credit cards and

fund transfer facilities.

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.

Ahli United Bank

75


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

30. Segment Information ( continued)

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 year 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 2012:

Net interest income 129,298 457,678 49,397 636,373

Fees and commissions - net 31,441 71,496 23,772 126,709

Share of profits from associates and joint venture 14,697 45,707 1,131 61,535

Other operating income 1,223 66,990 (24) 68,189

OPERATING INCOME 176,659 641,871 74,276 892,806

Net provision for loan losses and others (7,646) 145,098 10,648 148,100

Provision for non-trading investments - 61,800 - 61,800

NET OPERATING INCOME 184,305 434,973 63,628 682,906

Operating expenses 102,746 131,677 32,755 267,178

PROFIT BEFORE TAX 81,559 303,296 30,873 415,728

Tax expense 4,691 31,155 2,147 37,993

NET PROFIT FOR THE YEAR 76,868 272,141 28,726 377,735

Less : Attributable to non-controlling interest 42,032

NET PROFIT ATTRIBUTABLE TO THE OWNERS' OF THE BANK 335,703

Segment assets 2,872,930 23,081,392 1,721,604 27,675,926

Goodwill 165,843 264,049 67,656 497,548

Other intangible assets 60,183 93,010 29,181 182,374

Investment in associates and joint venture 278,125

Investment held for sale 397,959

Unallocated assets 864,490

TOTAL ASSETS 29,896,422

Segment liabilities 4,702,240 18,552,275 2,670,107 25,924,622

Unallocated liabilities 774,971

TOTAL LIABILITIES 26,699,593

76 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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 121,226 407,190 38,511 566,927

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 OWNERS' OF THE BANK 310,610

Segment assets 3,031,087 21,796,546 1,492,345 26,319,978

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

Investment held for sale -

Unallocated assets 688,594

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

Ahli United Bank

77


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

30. Segment Information ( continued)

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

2012 2011 2012 2011

US$ ’000 US$ ’000 US$ ’000 US$ ’000

GCC Countries 695,423 625,068 19,441,634 19,196,034

Rest of the World 197,383 217,044 10,454,788 9,133,728

Total 892,806 842,112 29,896,422 28,329,762

Net profit from Bahrain onshore operations included above is US$ 44.0

million (2011: US$ 38.2 million) amounting to 13.1% (2011: 12.3%) of the

Group's net profit attributable to equity shareholders.

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 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 notes 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

The table below shows the maximum exposure to credit risk for the

components of the balance sheet. The maximum exposure is shown gross,

before the effect of mitigation through the use of master netting and

collateral agreements, but after provision for impairment where applicable.

Gross

maximum

exposure

2012

Gross

maximum

exposure

2011

US$ ’000 US$ ’000

Balances with central banks 643,431 531,583

Treasury bills and deposits with

central banks 1,986,236 2,612,287

Deposits with banks and

other financial institutions 3,750,771 3,068,879

Loans and advances 15,972,219 15,495,961

Financial assets at fair value

through profit or loss 25,639 -

Non-trading investments 4,708,300 4,005,854

Interest receivable and other assets 492,454 415,228

Total 27,579,050 26,129,792

Contingent liabilities 2,783,490 2,168,452

Undrawn loan commitments 535,325 634,798

Total credit related commitments 3,318,815 2,803,250

Total credit risk exposure 30,897,865 28,933,042

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.

• In the personal sector – cash, mortgages over residential properties

and assignments over salary income;

78 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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 2012

Balances with central

banks 582,422 61,009 643,431

Treasury bills and

deposits with

central banks 1,986,236 - 1,986,236

Deposits with banks and

other financial

institutions 3,250,145 500,626 3,750,771

Loans and advances

Retail 593,768 1,880,698 2,474,466

Corporate 7,936,915 5,504,741 13,441,656

Financial assets at fair

value through profit or loss 25,639 - 25,639

Non trading investments 4,643,645 233,292 4,876,937

Interest receivable and

other assets 219,269 189,832 409,101

Other assets - derivatives 83,353 - 83,353

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

Interest receivable and

other assets 177,865 138,753 316,618

Other assets - derivatives 98,610 - 98,610

It is the Group's policy to maintain consistent internal risk ratings

across the credit portfolio. The credit quality of the portfolio of loans

and advances that were neither past due nor impaired can be

assessed by reference to the Group’s internal credit rating system.

This facilitates focused portfolio management of the inherent

level of risk across all lines of business. The credit quality ratings

disclosed above can be equated to the following risk rating grades:

Credit quality rating Risk rating Definition

High standard Risk rating 1 to 4

Undoubted through

to good credit risk

Standard Risk rating 5 to 7

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.

There are no financial assets which are past due but not impaired as at

31 December 2012 and 2011 other than those disclosed under note 8(c).

Ahli United Bank

79


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

32. Concentration Analysis

The distribution of assets, liabilities and commitments on behalf of

customers by geographic region and industry sector was as follows:

2012

Assets Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Geographic region:

Kingdom of Bahrain 5,183,876 5,116,367 594,434

State of Kuwait 9,626,483 12,198,721 934,376

Other GCC countries 4,631,275 2,602,589 817,266

United Kingdom (UK) 3,001,191 1,046,904 10,019

Arab Republic of Egypt 3,044,871 2,471,287 321,237

Europe (excluding UK) 1,754,942 747,221 44,754

Asia (excluding GCC) 1,361,288 1,607,053 22,146

United States of America 794,674 582,406 17,119

Rest of the World 497,822 327,045 22,139

29,896,422 26,699,593 2,783,490

2011

Assets Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Geographic region:

Kingdom of Bahrain 4,736,657 4,855,420 600,448

State of Kuwait 9,752,340 12,846,076 835,252

Other GCC countries 4,707,037 1,756,269 189,564

United Kingdom (UK) 2,865,365 904,091 78,015

Arab Republic of Egypt 2,581,326 1,707,082 308,034

Europe (excluding UK) 1,800,800 1,068,054 98,749

Asia (excluding GCC) 929,692 1,465,078 35,699

United States of America 512,257 522,165 15,542

Rest of the World 444,288 294,386 7,149

28,329,762 25,418,621 2,168,452

Assets

2012

Liabilities

Contingent

liabilities &

commitments

on behalf of

customers

US$ ’000 US$ ’000 US$ ’000

Industry sector:

Banks and other

financial

institutions 11,825,491 9,888,649 560,997

Consumer/personal 3,481,775 5,980,433 24,274

Residential

mortgage 1,489,545 1,265 1,618

Trading and

manufacturing 3,518,547 1,774,442 663,828

Real estate 3,532,179 531,851 9,581

Services 3,052,181 3,036,022 845,865

Government/public

sector 2,123,198 4,284,213 578,030

Others 873,506 1,202,718 99,297

29,896,422 26,699,593 2,783,490

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 3,009,766 2,305,023 707,049

Real estate 3,220,283 486,819 3,477

Services 3,290,654 2,601,665 701,890

Government/public

sector 2,085,477 3,606,963 31,785

Others 850,117 1,126,181 76,588

28,329,762 25,418,621 2,168,452

80 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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

2012 - 31 December 44 181 1 226

2011 - 31 December 15 86 1 102

b. Market risk-non-trading

Interest rate risk

Sensitivity analysis- interest rate risk

2012 2011

US$ ’000 US$ ’000

at 10 bps - increase (+)/decrease (-) +/- 928 940

at 25 bps - increase (+)/decrease (-) +/- 2,321 2,349

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 Fair Value Through Other Comprehensive

Income) due to a reasonably possible change in equity indices, with all

other variables held constant is as follows:

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 2012 and 31 December 2011 including the

effect of hedging instruments.

Ahli United Bank

81


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

33. Market Risk (continued)

b. Market risk-non-trading (continued)

2012 2011

Change

in

equity

indices

Effect on

OCI

Effect on

OCI

Market indices % US$ ’000 US$ ’000

Doha Securities Market (DSM) +/- 10% +/- 570 581

Muscat Stock Exchange (MSCI) +/- 10% +/- 608 422

Kuwait Stock Exchange (KSE) +/- 10% +/- 1,670 1,948

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 non-trading

investments that are carried at amortised cost, approximate their carrying

values. Please refer note 9 for the fair value of non-trading investments

carried at amortised cost.

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 Group uses the following hierarchy for determining and disclosing

the fair value of financial instruments by valuation technique:-

Level 1 : Quoted (unadjusted) prices in active markets for identical

assets or liabilities.

Level 2:

Other techniques for which all inputs which have a significant

effect on the recorded fair value are observable, either directly

or indirectly.

Level 3 : Techniques which use inputs which have a significant effect on

the recorded fair value that are not based on observable

market data.

2012

Level 1 Level 2 Total

US$ ’000 US$ ’000 US$ ’000

Financial assets at FVTPL 1,760 25,639 27,399

Equities & funds (As per IAS 39) - - -

Financial assets at FVTOCI 74,032 338,089 412,121

Derivative assets 32,496 50,857 83,353

Derivative liabilities (30,143) (263,667) (293,810)

78,145 150,918 229,063

2011

Level 1 Level 2 Total

US$ ’000 US$ ’000 US$ ’000

Financial assets at FVTPL 84 - 84

Equities & funds (As per IAS 39) 158,199 210,588 368,787

Financial assets at FVTOCI - - -

Derivative assets 44,749 53,861 98,610

Derivative liabilities (21,635) (263,981) (285,616)

181,397 468 181,865

There are no financial instruments that qualify for classification under

Level 3 as at 31 December 2012 and 2011. During the year 2012 and 2011

there have been no transfers between Levels 1, 2 and 3.

For an explanation of valuation techniques used to value these financial

instruments please refer to note 3.3 (f ).

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

co-ordinated and controlled.

The Group maintains a stable funding base comprising core retail and

corporate customer deposits and institutional balances, augmented

by wholesale funding and portfolios of highly liquid assets which are

diversified by currency and maturity, in order to enable the Group to

respond quickly to any unforeseen liquidity requirements.

The Group subsidiaries and affiliates maintain a strong individual liquidity

position and manage their liquidity profiles so that cash flows are balanced

and funding obligations can be met when due.

Treasury limits are set by the GALCO and allocated as required across the

various group entities. Specifically GALCO and the Group Treasurer are

responsible for:

• projecting cash flows by major currency under various stress scenarios

and considering the level of liquid assets necessary in relation thereto;

• monitoring balance sheet liquidity ratios against internal and regulatory

requirements;

• maintaining a diverse range of funding sources with adequate back-up

facilities;

• managing the concentration and profile of debt maturities;

• managing contingent liquidity commitment exposures within

predetermined caps;

• monitoring depositor concentration in order to avoid undue reliance

on large individual depositors and ensure a satisfactory overall funding

mix; and

82 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

• 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 2012 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.

ASSETS

Less

than

1 year

US$ ’000

Above

1 year Undated Total

Cash and balances with central banks 735,528 - - 735,528

Treasury bills and deposits with central banks 1,986,236 - - 1,986,236

Deposits with banks and other

financial institutions 3,302,115 448,656 - 3,750,771

Loans and advances 6,638,134 9,334,085 - 15,972,219

Financial assets at fair value through profit or loss 11,697 15,702 - 27,399

Non-trading investments 336,256 4,784,165 - 5,120,421

Investments in associates and joint venture - - 278,125 278,125

Investment property - - 171,798 171,798

Premises and equipment - - 266,830 266,830

Interest receivable and other assets 298,827 210,387 - 509,214

Goodwill and other intangible assets - - 679,922 679,922

Investment held for sale 397,959 - - 397,959

Total 13,706,752 14,792,995 1,396,675 29,896,422

LIABILITIES

Deposits from banks and other

financial institutions 5,054,070 91,185 - 5,145,255

Borrowings under repurchase agreements 1,820,708 40,649 - 1,861,357

Customers’ deposits 9,469,474 8,761,657 - 18,231,131

Term debts - - - -

Interest payable and other liabilities 440,974 333,997 - 774,971

Subordinated liabilities 4,864 682,015 - 686,879

Total 16,790,090 9,909,503 - 26,699,593

Net liquidity gap (3,083,338) 4,883,492 1,396,675 3,196,829

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 2011: US$ 2.4 billion). Please refer note 15 for further details.

Ahli United Bank

83


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

35. Liquidity Risk (continued)

The maturity profile of the assets and liabilities at 31 December 2011 was as follows:

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

Financial assets at fair value through profit or loss 84 - - 84

Non-trading investments 520,696 3,849,661 - 4,370,357

Investments in associates and joint venture - - 629,843 629,843

Investment property - - 66,665 66,665

Premises and equipment - - 285,055 285,055

Interest receivable and other assets 301,732 133,752 - 435,484

Goodwill and other intangible assets - - 691,347 691,347

Investment held for sale - - - -

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

84 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

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.

Less

than

1 year

US$' 000

Above

1 year Total

As at 31 December 2012

Deposits from banks and other financial institutions 5,065,076 93,155 5,158,231

Borrowings under repurchase agreements 1,825,751 40,722 1,866,473

Customers’ deposits 16,686,482 1,632,862 18,319,344

Term debts - - -

Subordinated liabilities 4,950 759,238 764,188

Total

23,582,259 2,525,977 26,108,236

Credit related commitments 213,964 321,361 535,325

Derivatives - net outflow 14,200 202,497 216,697

Less

than 1 year

US$' 000

Above 1

year

Total

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

Ahli United Bank

85


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

36. Capital Adequacy

The primary objectives of the Group's capital management policies

are to ensure that the Group complies with externally imposed capital

requirements and that the Group maintains strong credit ratings and

healthy capital ratios in order to support its business and to maximise

shareholders’ value. Capital adequacy for each of the group companies is

also managed separately at individual company level.

In order to maintain or adjust the capital structure, the Group may adjust

the amount of dividend payment to shareholders or issue capital securities.

No changes were made in the objectives, policies and processes from the

previous years.

The risk asset ratio, calculated in accordance with the capital adequacy

guidelines, under Basel II, issued 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 15.6% as of 31 December 2012 (2011: 16.0%).

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.

Bahrain : Customers' deposits held with the Bank in the Kingdom of Bahrain

are covered by the Regulation Protecting Deposits and Unrestricted

Investment Accounts issued by the Central Bank of Bahrain in accordance

with Resolution No. (34) of 2010.

UK: Customers' deposits in AUBUK are covered under the Financial

Services Compensation Scheme, up to a limit of GBP 85,000 per customer.

No up-front contribution is currently required under these 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 Shari'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.

2012 2011

US$ ’000 US$ ’000

ASSETS

Cash and balances with central banks 320,356 163,753

Deposits with central banks 1,341,695 2,187,432

Deposits with banks and other financial institutions (a) 1,491,214 1,278,669

Receivable balances from Islamic financing activities (b) 7,055,089 6,676,306

Financial investments 334,118 327,804

Investment property 114,322 8,949

Premises and equipment 132,960 146,376

Profit receivable and other assets 92,891 139,591

TOTAL ASSETS 10,882,645 10,928,880

LIABILITIES

Deposits from banks and other financial institutions (c) 2,303,310 2,444,353

Customers' deposits (d) 7,041,014 7,131,933

Profit payable and other liabilities 161,726 164,555

Restricted investment accounts 7,435 12,920

9,513,485 9,753,761

Unrestricted investment accounts (URIA) 468,894 385,333

TOTAL LIABILITIES AND URIA 9,982,379 10,139,094

TOTAL EQUITY 900,266 789,786

TOTAL LIABILITIES, URIA AND EQUITY 10,882,645 10,928,880

86 Ahli United Bank


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

Annual Report

2012

Statement of income for the year ended 31 December

2012 2011

US$ ’000 US$ ’000

Net income from Islamic financing activities (e) 286,823 265,477

286,823 265,477

Fees and commissions 24,455 26,356

Other operating income 2,266 2,185

Foreign exchange gains 13,508 11,887

OPERATING INCOME 327,052 305,905

Provision for impairment 64,365 52,376

NET OPERATING INCOME 262,687 253,529

Staff costs 54,603 53,547

Depreciation 10,527 9,311

Other operating expenses 31,856 29,905

OPERATING EXPENSES 96,986 92,763

PROFIT FOR THE YEAR BEFORE THE

TAX EXPENSE 165,701 160,766

Tax expense 6,711 5,315

PROFIT FOR THE YEAR BEFORE THE

SHARE OF PROFIT OF UNRESTRICTED

INVESTMENT ACCOUNT HOLDERS 158,990 155,451

Less : Share of profit of unrestricted

investment account holders (1,177) (1,473)

NET PROFIT FOR THE YEAR 157,813 153,978

Attributable to:

Owners of the Bank 124,149 121,944

Non-controlling interest 33,664 32,034

157,813 153,978

Notes 2012 2011

US$ ’000 US$ ’000

(a) Deposits with banks and other

financial institutions

Murabaha finance with other banks

and financial institutions 1,201,042 1,098,274

Wakala with banks and financial

institutions 124,271 63,960

Current account and others 165,901 116,435

1,491,214 1,278,669

2012 2011

US$ ’000 US$ ’000

(b) Receivable balances from

Islamic financing activities

Tawarruq receivables 5,535,898 4,946,985

Murabaha receivables 960,695 1,399,557

Ijara receivables 780,410 558,817

Others 63,201 23,399

Less: Allowance for impairment (285,115) (252,452)

7,055,089 6,676,306

Ahli United Bank

87


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 December 2012

2012 2011

US$ ’000 US$ ’000

(c) Deposits from banks and other

financial institutions

Murabaha 1,279,828 1,385,546

Wakala 877,605 992,740

Current accounts 74,283 38,041

Mudaraba 71,594 28,026

2,303,310 2,444,353

2012 2011

US$ ’000 US$ ’000

(d) Customers' deposits

Wakala 3,503,866 3,273,251

Mudaraba 1,057,417 936,960

Current accounts 1,202,562 889,315

Murabaha 1,277,169 2,032,407

7,041,014 7,131,933

(e) Net income from Islamic

financing activities

2012 2011

US$ ’000 US$ ’000

Income from Murabaha 93,426 76,017

Income from Ijara 35,662 28,604

Income from Tawarruq 264,309 288,022

Income from Financial Investments 14,724 15,014

Income from Islamic financing

activities 408,121 407,657

Profit expenses on Wakala 58,140 51,712

Profit expenses on Mudaraba 18,998 33,938

Profit expenses on Murabaha 44,160 56,530

Less: Distribution to depositors 121,298 142,180

Net income from Islamic

financing activities 286,823 265,477

88 Ahli United Bank


Annual Report

2012

Pillar III

Disclosures

Basel II

31 December 2012


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

Introduction to the Central Bank of Bahrain's Basel II guidelines 92

Pillar III quantitative & qualitative disclosures

01. Capital structure

Table 1. Capital structure 93

02 . Group risk governance structure 94

03 . Credit risk management

Table 2. Gross credit risk exposures 97

Table 3. Exposures secured by eligible financial collateral and guarantees 97

Table 4. Risk exposure post CRM and credit conversion 97

Table 5. Capital requirements for credit, market and operational risks 98

Table 6. Geographic distribution of gross credit exposures 99

Table 7. Sectoral classification of gross credit exposures 100

Table 8. Residual contractual maturity of gross credit exposures 100

Table 9. Sectoral breakdown of impaired loans and impairment provisions 101

Table 10. Geographical distribution of impairment provisions for loans and advances 102

Table 11. Movement in impairment provision for loans and advances 102

Table 12. Past due and impaired loans - age analysis 103

Table 13. Restructured credit facilities 104

Table 14. Counterparty credit risk in derivative transactions 104

Table 15. Related party transactions 104

04. Market risk

Table 16. Capital requirement for components of market risk 105

Table 17. Interest rate risk 106

Table 18. Equity position in banking book 107

Table 19. Gains on equity instruments 107

05. Liquidity risk and funding management 107

06. Operational risk 107

07. Information technology risk 107

08. Strategic risk 108

09. Legal, compliance, regulatory and reputational risks 108

10. Environmental risk 108


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Introduction to The Central Bank of

Bahrain’s Basel II Guidelines

The Central Bank of Bahrain (CBB) Basel II Guidelines, based upon the

Bank of International Settlements (BIS) Revised Framework – ‘International

Convergence of Capital Measurement and Capital Standards’, were

introduced on 1 January 2008. Basel II is structured around three ‘Pillars’:

Pillar I - Minimum Capital Requirements; Pillar II – the Supervisory Review

Process and the Internal Capital Adequacy Assessment Process (ICAAP);

and Pillar III - Market Discipline.

Group Structure

The public disclosures under this section have been prepared in

accordance with the CBB Rules concerning Public Disclosure Module

("PD"), section PD-1: Annual Disclosure Requirements. The disclosures

under this section are applicable to Ahli United Bank B.S.C. (the "Bank"),

which is the parent bank incorporated in Bahrain. The Bank operates under

a retail banking license issued by the CBB. The Bank and its subsidiaries (as

detailed under note 2 to the audited consolidated financial statements)

are collectively known as the "Group".

Pillar I – Minimum Capital Requirements

Pillar I deals with the basis for the computation of the regulatory capital

ratio. It defines the various classes and the calculation of Risk Weighted

Assets (RWAs) in respect of credit risk, market risk and operational risk, as

well as deriving the regulatory capital base. The capital adequacy ratio

is then calculated as the ratio of the Bank’s regulatory capital to its total

RWAs. All Bahrain incorporated banks are currently required to maintain

a minimum capital adequacy ratio of 12%. In addition, the CBB requires

banks to maintain an additional 0.5% buffer above the minimum capital

adequacy ratio.

The Group ensures that each subsidiary maintains sufficient capital levels

for their respective legal and compliance purposes.

Credit risk

Basel II provides three approaches to the calculation of credit risk regulatory

capital. The Standardised approach which the Bank has adopted, requires

banks to use external credit ratings to determine the risk weightings

applied to rated counterparties, and groups other counterparties into

broad categories and applies standardised risk weightings to these

categories.

Market risk

The Bank has adopted the Standardised approach for determining the

market risk capital requirement.

Operational risk

Under the basic indicator approach, which the Bank has adopted for

operational risk, the regulatory capital requirement for operational risk is

calculated by applying a co-efficient of 15 per cent to the average gross

income for the preceding three financial years.

Pillar II – The Supervisory Review and Evaluation Process

Pillar II involves the process of supervisory review of a financial institution’s

risk management framework and its capital adequacy.

Accordingly, this involves both, the Bank and its regulators taking a view

on whether additional capital should be held against risks not covered

in Pillar I. Part of the Pillar II process is the Internal Capital Adequacy

Assessment Process (ICAAP) which is the Bank’s self assessment of risks

not captured by Pillar I.

As part of the CBB’s Pillar II guidelines, each bank is required to be

individually reviewed and assessed by the CBB with the intention of

setting individual minimum capital adequacy ratios. The Bank is currently

required to maintain a 12 percent 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 2012.

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.

92 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

1. Capital Structure

Table - 1

Tier 1 Tier 2

US$ ’000 US$ ’000

A. NET AVAILABLE CAPITAL

Paid-up share capital 1,428,164

Less: Loans against Employee Stock Purchase Plan (18,192)

Reserves:

Share premium 540,508

Capital reserve 425

Statutory reserve 204,307

Others (36,820)

Retained earnings 303,440

Minority interest in the equity of subsidiaries 385,870

Less: Goodwill (497,548)

Less: Unrealized gross losses arising from fair valuing equities (961)

Current year profit 335,703

Asset revaluation reserve-property, plant and equipment (45% only) 12,032

Unrealized gains arising from fair valuing equities (45% only) 7,724

Collective impairment provisions 253,954

Eligible subordinated term debt 522,960

TOTAL CAPITAL BEFORE REGULATORY DEDUCTIONS 2,309,193 1,132,373

Less: Regulatory deductions:

Material holdings of equities 153,283 153,283

2,155,910 979,090

Add: Proportionate aggregation 158,562 35,585

NET AVAILABLE CAPITAL 2,314,472 1,014,675

TOTAL ELIGIBLE CAPITAL BASE (Tier 1 + Tier 2) 3,329,147

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 2012.

B. Capital Adequacy Ratio

As at 31 December 2012, 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. (AUBUK)

Ahli United Bank

(Egypt) S.A.E. (AUBE)

Tier 1 - Capital Adequacy Ratio 10.8% 17.8% 17.0% 13.7%

Total - Capital Adequacy Ratio 15.6% 19.7% 18.9% 15.3%

Ahli United Bank

93


PILLAR III DISCLOSURES - BASEL II

31 December 2012

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.

The Board and its Executive Committee receive quarterly risk updates

including detailed risk exposures analysis reports.

The Board approves all risk policies as well as the Group risk 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, regulatory and compliance related issues.

Systems and procedures are in place to identify, control and report on all

major risks.

94 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

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.

The Group has policies and procedures in place to monitor and manage

these risks and the Group Risk Management function provides highlevel

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.

Counterparty Exposure Classes

The CBB’s capital adequacy framework for the standardised approach to

credit risk sets the following counterparty exposure classes and the risk

weightings to be applied to determine the risk weighted assets:

Exposure Class

Sovereign Portfolio

Public Sector Entity

[PSE] Portfolio

Banks Portfolio

Investment Company

Portfolio

Corporate Portfolio

Regulatory Retail

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.

Eligible regulatory retail exposures are

risk weighted at 75%.

Ahli United Bank

95


PILLAR III DISCLOSURES - BASEL II

31 December 2012

3. Credit Risk Management (continued)

Basel II Reporting of Credit Risk Exposures

Residential Property

Portfolio

Commercial Property

Portfolio

Equities and Funds

Investment Portfolio

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.

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.

Past Due Portfolio

Holdings of Real Estate

Other Assets

External Rating Agencies

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%.

All holdings (directly or indirectly) of

real estate in the form of real estate

companies, subsidiaries or associate

companies or other arrangements such

as trusts, funds or REITs are risk-weighted

at 200%. Premises occupied by the bank

are weighted at 100%.

All other assets not classified above are

risk weighted at 100%.

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.

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)

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.

96 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

Table - 2 Gross Credit Risk Exposures

As at

31 December

2012

Average

monthly

balance

US$ ’000 US$ ’000

Balances with central banks 643,431 575,656

Treasury bills and deposits

with central banks 1,986,236 2,303,012

Deposits with banks and other

financial institutions 3,750,771 3,479,233

Loans and advances 15,972,219 15,747,046

Financial assets at fair value

through profit or loss 25,639 25,333

Non-trading investments 4,708,300 4,407,403

Interest receivable and

other assets 492,454 502,483

TOTAL FUNDED EXPOSURES 27,579,050 27,040,166

Contingent liabilities 2,783,490 2,306,269

Undrawn loan commitments 535,325 561,299

TOTAL UNFUNDED EXPOSURES 3,318,815 2,867,568

TOTAL CREDIT RISK EXPOSURE 30,897,865 29,907,734

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 4,115,093 -

Claims on public sector entities 900,342 1,414

Claims on banks 6,705,501 150,398

Claims on corporates 13,747,004 1,997,702

Regulatory retail exposures 1,738,269 32,575

Residential retail exposures 1,366,795 -

Equity 522,790 -

Investments in funds 181,230 -

Other exposures 1,706,399 43,826

TOTAL 30,983,423 2,225,915

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 Risk Exposure Post CRM and Credit Conversion

The following table details group risk weighted exposures after applying

risk mitigation.

US$ ’000

Claims on sovereigns 156,164

Claims on public sector entities 694,177

Claims on banks 2,148,325

Claims on corporates 11,058,382

Regulatory retail exposures 1,279,270

Residential retail exposures 478,378

Equity 563,667

Investments in funds 271,845

Other exposures 1,801,112

18,451,320

Add : Proportionate aggregation 1,009,318

TOTAL 19,460,638

TOTAL CREDIT RISK CAPITAL REQUIREMENT 2,335,276

Ahli United Bank

97


PILLAR III DISCLOSURES - BASEL II

31 December 2012

3. Credit Risk Management (continued)

Table - 5 Capital Requirements for Credit, Market and

Operational Risks

Capital

requirement

US$ ’000

Claims on sovereigns 18,740

Claims on public sector entities 83,301

Claims on banks 257,799

Claims on corporates 1,327,006

Regulatory retail exposures 153,512

Residential retail exposures 57,405

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 percent of the regulatory capital base. As at 31 December 2012 the

Group had no single obligor exposures which exceeded 15 percent of the

Group’s regulatory capital base (i.e. exceeded US$ 499.4 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 2012.

Equity 67,640

Investments in funds 32,621

Other exposures 216,134

2,214,158

Add : Proportionate aggregation 121,118

TOTAL CREDIT RISK CAPITAL REQUIREMENT

(STANDARDISED APPROACH)

2,335,276

TOTAL MARKET RISK CAPITAL REQUIREMENT

(STANDARDISED APPROACH)

58,985

TOTAL OPERATIONAL RISK CAPITAL

REQUIREMENT (BASIC INDICATOR APPROACH)

168,394

TOTAL 2,562,655

98 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

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 143,300 280,583 3,891 1,100 - 153,548 61,009 - 643,431

Treasury bills and

deposits with

central banks 241,269 1,341,695 - - - 271,412 131,860 - 1,986,236

Deposits with

banks and other

financial

institutions 27,404 337,909 539,577 789,384 1,002,070 238,291 431,761 384,375 3,750,771

Total

Loans and advances 3,179,159 6,679,242 1,935,229 1,817,451 359,327 1,697,411 216,196 88,204 15,972,219

Financial assets at

fair value through

profit or loss - - - 10,105 - - 10,590 4,944 25,639

Non-trading

investments 691,591 - 1,642,439 319,076 297,267 554,582 488,011 715,334 4,708,300

Interest receivable

and other assets 273,425 41,375 36,874 52,596 11,245 62,775 8,378 5,786 492,454

Total funded

exposures 4,556,148 8,680,804 4,158,010 2,989,712 1,669,909 2,978,019 1,347,805 1,198,643 27,579,050

Contingent liabilities 594,434 934,376 817,266 10,019 44,754 321,237 22,146 39,258 2,783,490

Undrawn loan

commitments 75,301 28,248 66,467 55,654 28,760 268,293 8,814 3,788 535,325

Total unfunded

exposures 669,735 962,624 883,733 65,673 73,514 589,530 30,960 43,046 3,318,815

TOTAL 5,225,883 9,643,428 5,041,743 3,055,385 1,743,423 3,567,549 1,378,765 1,241,689 30,897,865

16.9% 31.2% 16.3% 9.9% 5.6% 11.5% 4.5% 4.1% 100.0%

* Other GCC countries are countries which are part of the Gulf Cooperation 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.

Ahli United Bank

99


PILLAR III DISCLOSURES - BASEL II

31 December 2012

3. Credit Risk Management (continued)

Table - 7 Sectoral Classification of Gross Credit Exposures

Funded Unfunded Total %

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balances with central banks 2,629,667 - 2,629,667 8.5

Banks and other financial institutions 7,426,243 610,853 8,037,096 26.0

Consumer/personal 3,481,775 30,998 3,512,773 11.4

Residential mortgage 1,489,545 54,313 1,543,858 5.0

Trading and manufacturing 3,514,679 856,221 4,370,900 14.1

Real estate 3,487,234 54,353 3,541,587 11.5

Services 3,042,777 1,018,863 4,061,640 13.1

Government/public sector 2,123,198 582,098 2,705,296 8.8

Others 383,932 111,116 495,048 1.6

TOTAL 27,579,050 3,318,815 30,897,865 100.0

Table - 8 Residual Contractual Maturity of Gross Credit Exposures

89.3% 10.7% 100.0%

Up to

one

month

One

month

to three

months

Over three

months to

one year

Over one

year to

five years

Over

five to

ten years

Over ten

to twenty

years

Over

twenty

years

Total

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

Balances with central

banks 643,431 - - - - - - 643,431

Treasury bills and deposits

with central banks 869,601 627,896 488,739 - - - - 1,986,236

Deposits with banks and

other financial institutions 2,291,012 625,203 385,900 448,656 - - - 3,750,771

Loans and advances 1,906,786 2,345,641 2,385,707 4,664,564 3,572,867 929,067 167,587 15,972,219

Financial assets at fair

value through

profit or loss - - 10,105 15,534 - - - 25,639

Non-trading investments 40,914 27,558 267,784 2,993,930 906,267 210,764 261,083 4,708,300

Interest receivable and

other assets 123,170 94,856 70,775 155,523 48,130 - - 492,454

Total funded exposures 5,874,914 3,721,154 3,609,010 8,278,207 4,527,264 1,139,831 428,670 27,579,050

Contingent liabilities 502,613 249,603 746,159 1,267,636 15,573 1,906 - 2,783,490

Undrawn loan

commitments 22,612 100,672 90,680 304,704 16,657 - - 535,325

Total unfunded exposures 525,225 350,275 836,839 1,572,340 32,230 1,906 - 3,318,815

TOTAL 6,400,139 4,071,429 4,445,849 9,850,547 4,559,494 1,141,737 428,670 30,897,865

100 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

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.

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

2012

Write off during

the year ended

31 December

2012

Collective

impairment

provision

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

Consumer/personal 103,395 87,885 28,473 22,181 54,943

Trading and manufacturing 41,412 36,862 12,846 23,489 50,773

Real estate 85,214 72,541 22,412 - 51,027

Residential mortgage 6,694 5,556 (11) 1,240 23,505

Banks and other financial institutions 36,632 31,602 12,318 - 15,361

Services 92,872 84,460 19,628 34,058 46,563

Government/public sector - - - - 7,520

Others 39,745 37,106 1,695 5,022 2,350

TOTAL 405,964 356,012 97,361 85,990 252,042

Ahli United Bank

101


PILLAR III DISCLOSURES - BASEL II

31 December 2012

3. Credit Risk Management (continued)

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 55,679 174,584 67,750 22,844 - 21,394 13,761 - 356,012

Collective impairment

provision 31,961 152,781 19,028 17,497 6,285 21,495 2,123 872 252,042

TOTAL 87,640 327,365 86,778 40,341 6,285 42,889 15,884 872 608,054

Table - 11 Movement in Impairment Provision for Loans and Advances

Rest

of the

world

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 2012 74,291 30,040 104,331 275,495 170,589 446,084 349,786 200,629

Amounts written off

during the year (14,830) - (14,830) (71,160) - (71,160) (85,990) -

Net charge for the year 18,803 208 19,011 78,558 53,171 131,729 97,361 53,379

Interest suspended

during the year (net) 901 - 901 (4,508) - (4,508) (3,607) -

Exchange rate adjustments /

other movements (458) (244) (702) (1,080) (1,722) (2,802) (1,538) (1,966)

Balance at 31 December 2012 78,707 30,004 108,711 277,305 222,038 499,343 356,012 252,042

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:

Refer to notes 8(a) to 8(d) and note 31(c) to the audited consolidated

financial statements for the year ended 31 December 2012 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.

• 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.

102 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

Table - 12 Past Due and Impaired Loans - Age Analysis

i) By Geographical area

Three

months to

one year

One

to three

years

Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Kingdom of Bahrain 42,082 18,907 3,702 64,691

State of Kuwait 110,362 35,879 52,851 199,092

Other GCC Countries - 3,000 64,750 67,750

United Kingdom 12,790 62 21,384 34,236

Arab Republic of Egypt 5,103 2,560 18,811 26,474

Asia (excluding GCC countries) - - 13,721 13,721

TOTAL 170,337 60,408 175,219 405,964

Over

three

years

ii) By Sector

42.0% 14.9% 43.1% 100.0%

Three

months to

one year

One

to three

years

Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Consumer/personal 64,555 7,026 31,814 103,395

Trading and manufacturing 9,726 5,472 26,214 41,412

Real estate 53,180 10,650 21,384 85,214

Residential mortgage 11 6,683 - 6,694

Banks and other financial institutions 9,984 26,648 - 36,632

Services 32,881 2,644 57,347 92,872

Others - 1,285 38,460 39,745

TOTAL 170,337 60,408 175,219 405,964

Over

three

years

42.0% 14.9% 43.1% 100.0%

Ahli United Bank

103


PILLAR III DISCLOSURES - BASEL II

31 December 2012

3. Credit Risk Management (continued)

Table - 13 Restructured Credit Facilities

US$ ’000

Balance of any restructured credit facilities as at year end 161,718

Loans restructured during the year 141,910

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 6,620,582 33,050 100,210

Interest rate related 9,542,347 48,725 108,801

Options 53,852 1,578 55,431

Derivatives credit exposure 16,216,781 83,353 264,442

Gross positive fair value represents the replacement cost of the derivatives

US$ ’000

ii) Amounts of collateral 26,380

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 2012.

104 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

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 at amortised cost

and fair value through other comprehensive income statement.

Each Group operating entity has an independent market risk function

which is responsible for measuring market risk exposures in accordance

with the Group Trading Book Policy and the Interest Rate Risk in the

Banking Book Policy, and monitoring these exposures against prescribed

limits.

Market risk reports covering Trading Book risk exposures and profit and loss

are published daily to the Bank’s senior management. A risk presentation

covering both Trading and Banking Book is also compiled monthly and

discussed at the GALCO.

The measurement techniques used to measure and control market risk

include:

• Value at Risk (VaR); and

• Stress tests

• Sensitivities and position size related metrics

Daily Value at Risk (VaR)

The Group VaR is an estimate of the potential loss which might arise from

unfavourable market movements:

VaR Type

Sample

Size

Holding

Period

Confidence

Interval

Frequency of

Calculation

“Management” VaR 260 days 1 day 95% Daily

“Regulatory” VaR 260 days 10 day 99% Daily

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 2012 204 86 445

Table - 16 Capital Requirement for Components of

Market Risk

Capital

requirement

as at 31

December

2012

Maximum

value

Minimum

value

US$ ’000 US$ ’000 US$ ’000

Interest rate risk 8,241 9,643 4,185

Equity position risk 19 20 19

Foreign exchange risk 46,033 47,590 46,033

Options 1,115 3,864 472

TOTAL MARKET RISK

CAPITAL REQUIREMENT

BEFORE PROPORTIONATE

AGGREGATION OF

ASSOCIATES 55,408

Add : Proportionate

aggregation 3,577 10,265 1,473

TOTAL MARKET RISK

CAPITAL REQUIREMENT

(STANDARDISED

APPROACH) 58,985

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.

Ahli United Bank

105


PILLAR III DISCLOSURES - BASEL II

31 December 2012

4. Market Risk (continued)

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 2012.

Table - 17 Interest Rate Risk

Less than

three

months

Three

months to

one year

Over one

year

ASSETS

Total

US$'000 US$'000 US$'000 US$'000

Treasury bills and deposits with central banks 1,476,278 509,958 - 1,986,236

Deposits with banks and other financial institutions 2,750,320 385,899 448,656 3,584,875

Loans and advances 9,418,750 2,529,654 3,174,031 15,122,435

Financial assets at fair value through profit or loss - 10,105 15,534 25,639

Non-trading investments 602,082 365,105 3,741,113 4,708,300

14,247,430 3,800,721 7,379,334 25,427,485

LIABILITIES

Deposits from banks and other financial institutions 3,696,658 1,371,891 - 5,068,549

Borrowings under repurchase agreements 1,190,435 670,922 - 1,861,357

Customers' deposits 11,338,592 5,300,856 307,159 16,946,607

Subordinated liabilities 321,879 365,000 - 686,879

16,547,564 7,708,669 307,159 24,563,392

On balance sheet gap (2,300,134) (3,907,948) 7,072,175

Off balance sheet gap 3,569,219 439,065 (4,008,284)

Total interest sensitivity gap 1,269,085 (3,468,883) 3,063,891

Cumulative interest sensitivity gap 1,269,085 (2,199,798) 864,093

106 Ahli United Bank


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

Interest rate risk sensitivity analysis

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 2012.

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) Other equity investments

After initial recognition, equity 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.

For accounting policies on equity instruments please refer to note 3.1(ii)

(b) of the consolidated financial statements.

Table - 18 Equity Position In Banking Book

Gross

exposures

Risk-weighted

weighted

exposures

Capital

requirement

US$ ’000 US$ ’000 US$ ’000

Listed 441,036 441,036 52,924

Unlisted 81,754 122,631 14,716

TOTAL 522,790 563,667 67,640

Table - 19 Gains on Equity Instruments

US$ ’000

Unrealised (loss) gains recognised in the balance sheet:

- Tier one (eligible portion) (961)

- Tier two (eligible portion) 7,724

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 2012.

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 2012.

6. Operational Risk

Operational risk is the risk of loss arising from inadequate or failed

internal processes, people and systems or from external events, whether

intentional, unintentional or natural. It is an inherent risk faced by all

businesses and covers a large number of operational risk events including

business interruption and systems failures, internal and external fraud,

employment practices and workplace safety, customer and business

practices, transaction execution and process management, and damage

to physical assets.

The Board acknowledges that it has ultimate responsibility for operational

risk. Oversight rests with the Group Risk Committee, whilst day to day

monitoring is carried out by the Group Operational Risk Committee.

The Board has approved the operational risk framework and reviews it

annually.

The operational risk management framework has been in place for a

number of years and is ingrained in the Bank’s culture and processes. The

Bank has developed a comprehensive 'operational risk self assessment'

(ORSA) process.

7. Information Technology Risk

All computer system developments and operations are centrally

controlled and common systems are employed across the Group

wherever possible. Information security is defined through the AUB Group

Information Security framework and is executed through the various

information security processes and controls that support the framework.

The Group follows an enterprise wide approach to business continuity

to ensure that all identified critical operations, services and systems are

recovered in time in the event of a disruption. The Business Continuity

Policy is updated annually while the Disaster Recovery and Business

Continuity capabilities are each tested twice per year and critical systems

are continuously replicated at the disaster recovery site.

Ahli United Bank

107


PILLAR III DISCLOSURES - BASEL II

31 December 2012

Annual Report

2012

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 Legal, Compliance, Regulatory and Reputational Risks of

the Group is of paramount importance and all management and staff are

expected to apply highest standards of business conduct and professional

ethics at all times.

The Board approved policies, including AUB Group Reputation Risk policy,

Communications Policy, Personal Account Dealing Policy, Compliance

Policy, Anti Money Laundering policy, Banking Integrity Policy and Code

of Business conduct policy, prescribes the required standards of ethical

behavior and personal conduct for all staff (including the Bank’s Directors),

and the Board exercises an oversight of these risks through various

management functions, including Legal, Risk Management, Compliance,

Human Resources and Internal Audit Department.

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.

108 Ahli United Bank


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

Email: info@ahliunited.com, www.ahliunited.com

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