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Annual Report 2017

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Annual Report 2017


Annual Report 2017


Annual Report 2017

Group Mission Statement 06 AUB Operating Divisions 08Financial Highlights 10Board of Directors' Report 22Board of Directors 24Chairman's Statement 28 Group Chief Executive Officer & Managing Director’s Statement 30 Corporate Governance 34Group Business and Risk Review 52 Group Management Organization Structure 58 Group Management 59Contact Details 63Consolidated Financial Statements 64Pillar III Disclosures - Basel III 132

CONTENTS


Annual Report 2017


Annual Report 2017

To create an unrivalled ability to meet customer needs, provide fulfillment and development for our staff and deliver outstanding shareholder value.

GROUP MISSION STATEMENT


Annual Report 2017

Objectives• to maximise shareholder value on a sustainable basis.

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

• to maintain solid capital adequacy and liquidity ratios.

• to entrench a disciplined risk and cost management culture.

• to develop a cross-cultural meritocratic management structure.

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

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

AUB Vision & Strategy• Develop an integrated pan regional financial services group

model centered on commercial & retail banking, private banking, asset management and life insurance with an enhanced 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.

GROUP MISSION STATEMENT (continued)


Annual Report 2017

CORPORATE BANKING

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

• Corporate and Trade Finance

• 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.

TREASURY AND INVESTMENTS

This division provides money market, trading and treasury services and is also responsible for the management of the Group’s funding.

• Money Market Services

• Foreign Exchange Services

• Hedging and Trading Solutions

• Structured Products

• Investment Management

• Shari’a Compliant Treasury Products

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

AUB OPERATING DIVISIONS


Annual Report 2017

AUDIT

This division is an integral part of the control environment of the Group. The role of audit is to understand the key risks of the Bank and examine and evaluate the adequacy and effectiveness of the system of risk management and internal control in order to identify legal, regulatory or policy shortcomings.

SUPPORT SERVICES

These divisions provide back end banking services to support ongoing business activities of the Group, as well as supporting the Group’s expansion through mergers and acquisitions.

• Finance

• Strategic Development

• Information Technology

• Operations

• Services

• Human Resources

AUB OPERATING DIVISIONS (continued)


Annual Report 2017

AUBUnited Kingdom

100%AUBEgypt

85.5%

UBCILibya

40.0% 100%

74.9%AUBBahrain

CBIQIraq

AUBUAE

AUBKuwait

75%

100%

FINANCIAL HIGHLIGHTS

35.0%

Ahli BankOman

OWNERSHIP IN GROUP ENTITIES


Annual Report 2017

Ahli United Bank is well on course to achieving itsgrowth and regional

expansion objectivesthrough the combined

resources of experiencedstaff, solid capital andadvanced technologies


Annual Report 2017FINANCIAL HIGHLIGHTS (continued)


Annual Report 2017


Annual Report 2017

2017

2017

33,241,885

618,715

2016

2016

31,322,484

570,640

2015

2015

33,965,317

537,248

2014

2014

33,444,888

482,529

2013

2013

32,651,893

579,374*

2012

2012

29,872,574

335,703

618,715

33,241,885

NET PROFIT US$ ‘000s

TOTAL ASSETS US$ ‘000s

FINANCIAL HIGHLIGHTS (continued)

* Net profit excluding exceptional non-recurring gain was US$ 366,464 thousands.


Annual Report 2017

2017

3,815,622

2016

3,500,827

2015

3,517,737

2014

3,390,874

2013

3,148,824

2012

2,776,209

19,498,702

3,815,622

LOANS AND ADVANCES US$ ‘000s

SHAREHOLDERS’ EQUITY US$ ‘000s

2017

19,498,702

2016

18,606,883

2015

19,353,181

2014

18,464,536

2013

17,305,682

2012

15,972,219



Annual Report 2017

AHLI UNITED BANK B.S.C.

US $ ‘000s

Dec 17 Dec 16 Dec 15 Dec 14 Dec 13 Dec 12

Net profit* 618,715 570,640 537,248 482,529 579,374+ 335,703

Total assets 33,241,885 31,322,484 33,965,317 33,444,888 32,651,893 29,872,574

Loans and advances 19,498,702 18,606,883 19,353,181 18,464,536 17,305,682 15,972,219

Total liabilities 28,353,731 26,782,982 29,605,103 29,614,669 29,086,790 26,711,067

Shareholders' equity 3,815,622 3,500,827 3,517,737 3,390,874 3,148,824 2,776,209

Non-controlling interest 472,532 438,675 442,477 439,345 416,279 385,298

Return on average assets (ROAA) 2.1% 1.8% 1.7% 1.6% 1.3%+ 1.3%

Return on average equity (ROAE) 16.5% 15.6% 15.6% 15.2% 13.4%+ 13.0%

Cost to income ratio 28.8% 27.6% 28.3% 29.2% 30.0% 31.5%

Financial leverage 6.6 6.8 7.5 7.7 8.2 8.4

Risk assets ratio** 17.0% 17.1% 16.7% 15.5% 16.2% 15.6%

Net interest margin 2.79% 2.56% 2.54% 2.40% 2.32% 2.20%

Earnings per share (US cents) - basic 7.7 7.2 7.0 6.6 8.2 4.8

Earnings per share (US cents) - diluted 7.7 7.2 7.0 6.6 8.2 4.7

* Attributable to Bank’s equity shareholders ** Under BASEL III from 2015 + Net profit excluding exceptional non-recurring gain related to divested ABQ stake was US$ 366,464 thousands (2013 Total ROAA including gain related to the divested ABQ stake was 2.0%) (2013 Total ROAE including gain related to the divested ABQ stake was 20.1%)



Annual Report 2017

PRINCIPAL SUBSIDIARIES

KUWAIT:AHLI UNITED BANK K.S.C.P.

KD’ 000s


Net profit* 44,463 40,348 42,805 47,008 42,459 38,539

Total assets 3,665,579 3,692,161 3,904,303 3,596,928 3,164,976 2,632,922

Financing receivables 2,672,832 2,706,054 2,680,334 2,480,431 2,140,922 1,728,082


Shareholders' equity 406,948 385,048 356,158 326,868 309,792 282,809

Non-controlling interest - - 4,677 12,452 13,363 12,572

Return on average assets 1.2% 1.0% 1.2% 1.4% 1.5% 1.4%

Return on average equity 11.4% 11.0% 12.7% 15.1% 14.9% 14.5%



Risk assets ratio ** 18.0% 18.2% 15.5% 16.3% 19.2% 19.7%

Earnings per share (KD - fils) 24.4 24.0 25.4 27.9 25.2 22.9

* Attributable to Bank’s equity shareholders ** Under BASEL III from 2014



Annual Report 2017


UNITED KINGDOM:AHLI UNITED BANK (UK) PLC

US $ ‘000s


Net profit 39,102 32,782 40,328 49,028 41,216 36,376

Total assets 2,785,254 2,580,972 2,723,683 3,671,428 4,151,944 3,434,061








Risk assets ratio* 24.0% 25.7% 27.4% 19.5% 17.5% 18.9%

Earnings per share (US cents) 19.5 16.4 20.2 24.5 20.6 18.2

* Under BASEL III from 2015



Annual Report 2017


IRAQ:COMMERCIAL BANK OF IRAQ P.S.C.

IQD Millions

Dec 17* Dec 16* Dec 15 Dec 14 Dec 13 Dec 12

Net profit 10,050 7,578 8,109 10,462 10,689 14,310

Total assets 460,616 423,819 414,889 449,273 334,843 293,437

Loans and advances 10,789 9,904 28,334 23,976 20,230 18,295

Total liabilities 168,808 141,878 140,688 164,888 138,264 150,237






Risk assets ratio 594.1% 728.8% 535.8% 760.4% 489.7% 414.5%

Earnings per share (IQD - fils) 40.2 30.3 32.4 41.8 42.8 57.2

Based on financial statements under local GAAP, 2017 & 2016 financial statements based on IFRS *2017 & 2016 information are subject to approval at Annual General Meeting



Annual Report 2017


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

EGP’ 000s


Net profit * 1,205,027 2,389,921 475,728 365,425 285,846 244,946

Total assets 46,988,647 42,354,094 30,614,671 24,983,857 19,972,167 15,602,707



Shareholders' equity 6,512,192 5,177,254 2,893,243 2,113,922 1,865,685 1,552,780





Risk assets ratio ** 18.1% 13.6% 12.7% 12.4% 13.7% 14.6%

Earnings per share (EGP) 4.4 8.1 1.6 1.4 1.1 1.0

* Attributable to Bank’s equity shareholders ** Under Basel II



Annual Report 2017

PRINCIPAL ASSOCIATE

OMAN:AHLI BANK S.A.O.G.

OMR’ 000s


Net profit 26,667 29,552 27,727 25,127 23,030 21,743

Total assets 2,014,582 1,899,654 1,898,265 1,644,811 1,339,485 1,099,230

Loans and advances 1,634,458 1,522,106 1,518,052 1,388,871 1,104,917 927,392

Total liabilities 1,709,755 1,656,706 1,670,982 1,445,281 1,154,590 931,716






Risk assets ratio * 16.7% 15.0% 14.5% 14.0% 14.6% 16.9%

Earnings per share (Baiza) 18.7 20.7 19.5 17.6 16.2 15.3

* Under Basel III from 2013



Annual Report 2017

The Directors of Ahli United Bank (“AUB” or the “Bank”) are pleased to submit the Annual Report and the accompanying consolidated Financial Statements for the year ended 31 December 2017.

General Operating Environment

The global economy is experiencing a turnaround in economic growth parameters arising from a rebound in investments, manufacturing activity and trade. Global GDP growth is estimated by the World Bank to rise to 3.0% in 2017 from 2.4% in 2016 driven by a broad based pickup in economic activity in both the advanced and emerging market and developing economies (EMDE). This improvement comes against the backdrop of generally accommodative monetary policies, rising consumer confidence, demand driven rise in commodity prices and the resultant resurgence of global equity markets. Of the above, EMDE’s growth is estimated to have increased from 3.7% in 2016 to 4.3 percent in 2017. Given the momentum seen in 2017, a gradual decline in Quantitative Easing (QE) measures by major central banks is already underway as global economic growth is projected at 3.1% in 2018 and 3.0% in 2019.

In contrast, the Middle East and North Africa (MENA) region witnessed a decline in growth estimated at 1.8% in 2017 from 5.0% in 2016, contributed by hydrocarbon sector-led decelerations among regional oil exporters driven by the combined impact of low average oil prices reaching a low of US$ 46 per barrel in mid-2017 and the strong adherence to OPEC led production cuts. The implementation discipline of oil production cut agreements among the OPEC members supplemented by co-operation from certain non-OPEC producers, led to a 24% rise in average oil prices to US$53 per barrel in 2017 from 2016. With increasing general demand and the renewal of the oil production cut agreement until the end of 2018, oil prices have further climbed to around US$60 per barrel by the end of 2017. Subject to above, oil prices are estimated by the World Bank to average US$58 per barrel in 2018. On the back of these higher oil price projections, socio-economic reforms together with economic diversification and planned infrastructural investments, GCC economies are estimated to grow from 0.7% in 2017 to 2.0% in 2018 and further to 2.7% in 2019/2020.

The main disruptive risks to this improving scenario continues to be a resurgence in shale oil and gas production fueled by the escalating selling prices or any significant regional political disturbances.

Performance Overview

Despite a very difficult and challenging operating environment in the midst of volatile global and regional developments, AUB achieved another strong performance in 2017 reporting a net profit growth of 8.4% over 2016. Our earnings growth was under pinned by a prudent risk taking approach, focused risk management, effective asset and liability controls with resultant improved margins and continuing intelligent spend focus.

BOARD OF DIRECTORS’ REPORT

The key highlights of the AUB Group’s consolidated financial performance for 2017 were:

• Consolidated net profit, attributable to the Bank’s equity shareholders, of US$ 618.7 million was achieved showing a rise of 8.4% versus US$ 570.6 million in 2016.

• Net operating income increased by 4.4% over 2016 to US$ 1,030.4 million during 2017. The increase in net operating income was broad based across the different AUB Group banks. Net Interest Income rose by US$ 48.2 million (+5.8%) attributable to higher spreads and prudent growth in assets. Net interest margins increased by 30 basis points to 2.8% (2016:2.5%).

• Focused recovery efforts and effective remedial management resulted in the non-performing loans (NPL) ratio improving to 1.9% as at 31 December 2017 (31 December 2016: 2.3%). Prudent risk provisioning continued resulting in the NPL coverage increasing from 84.9% in December 2016 to 85.1% as at 31 December 2017. Moreover, the total provision coverage ratio stood at 154.3% (2016: 155.6%), excluding marketable collaterals of US$ 357.7 million (2016: $ 443.9 million) in value. The overall cost of risk for 2017 improved to 0.3% of the average gross loan book (2016: 0.7%).

• AUB Group’s total assets at 31 December 2017 increased to US$ 33.2 billion (31 December 2016: US$ 31.3 billion) representing a 6.1% growth. This is attributable to the loan portfolio growth by 4.8% resulting from diversified deployments in the trading, manufacturing and services sectors within the overall risk framework and a 7.8% rise in the non-trading investments portfolio to provide a broader allocation of liquidity on a sectoral and geographic basis. Credit growth (+US$ 0.9 billion) was funded from an increase in customer deposits (+US$ 0.3billion) and through borrowings under repurchase arrangements (+US$ 0.6 billion).

• Business driven cost control and management resulted in containing the cost to income ratio at 28.8% (2016: 27.6%).

• Overall improved profitability of the Bank generated a higher Return on Average Assets of 2.1% (2016: 1.8%) and a higher Return on Average Equity of 16.5% (2016: 15.6%).

Strategic & Corporate Development

• During April 2017, the paid up share capital of Ahli United Bank Limited (AUBL), UAE was increased from US$ 50 million to US$ 75 million through infusion of additional capital by AUB. The capital increase was undertaken to support the growth plans of AUBL.


Annual Report 2017BOARD OF DIRECTORS’ REPORT(continued)

• During October 2017, Ahli Bank S.A.O.G completed the raising of RO 50.0 million (US$ 129.9 million) Perpetual Subordinated Bonds (Additional Tier I Capital Instrument) through a rights issue. The Perpetual Bonds issue will enable the bank to meet increased capital requirements and support its growth plans in an equity efficient manner.

Recognition

From 2017 to-date, AUB Group has been a recipient of a number of prestigious banking awards and includes the following:

• Best Bank in Bahrain – 2017 awarded by Euromoney

• Best Bank in Bahrain – 2017 awarded by Global Finance

• Best Local Bank in Bahrain – 2017 awarded by Emea Finance magazine

• Private Bank of the Year, Bahrain – 2017 awarded by The Banker and PWM

• Best FX provider in Bahrain – 2018 awarded by Global Finance

• Best Private Bank in Bahrain – 2018 awarded by Global Finance

• Best Trade Finance Provider in Bahrain – 2018 awarded by Global Finance

Directors’ Shareholdings & Remuneration

The number of shares held by directors, senior management and their related parties as at 31 December 2017 is disclosed in the Corporate Governance Report.

For Directors’ fees and related expenses, salaries and other benefits, please refer to Note 25 of the consolidated financial statements.

Appropriations

On the basis of the results of the Bank for the year ended 31 December 2017, the Board of Directors recommends the following appropriations for approval by the shareholders:

• Cash dividend - ordinary shares at 4.5 US cents per share (2016: 4.5 US cents per share) and a bonus issue of one ordinary share for every twenty ordinary shares held (2016: bonus of one ordinary share for every ten ordinary shares held)

• Transfer to statutory reserve of US$ 61.9 million

• Donations of US$ 1.0 million

Conclusion

As the Chairman of the Board, it is my pleasure to thank our shareholders for their continuing confidence in AUB. Our performance during 2017 was only made possible through the support and trust of our clients, business partners, customers and through the dedication and professionalism of our staff and under the guidance of regulators in our operating markets.

While operating challenges are expected to remain in 2018, we will continue to implement our strategy of focused and balanced growth in a prudent manner with a full commitment to client servicing and to meet the aspirations of all our stakeholders.

Hamad M. Al-HumaidhiChairman 20 February 2018


Annual Report 2017

Chairman since 31 March 2015, holds a Bachelor of Art (Law) degree from University of Kuwait, 1975.

Chairman, Ahli United Bank (UK) plc; Chairman, Ahli United Bank Limited, Dubai; Director General, The Public Institution for Social Security, Kuwait; Chairman, Wafra Intervest Corporation; Chairman, Kuwait Medical City, Kuwait. Formerly: Deputy Director General, The Public Institution for Social Security, Kuwait ; Legal Advisor, National Bank of Kuwait; Legal Department Manager, Administration Department Manager, Legal Researcher in Legal Department, The Public Institution for Social Security, Kuwait ; Legal Researcher, The Civil Service Commission.

43 years of experience covering financial services (social security), legal, and real estate sectors.Hamad Mishari Al-Humaidhi (Non-Executive Director)Chairman of the Board and Chairman of the Executive Committee

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.

Deputy Chairman, Ahli United Bank (UK) plc; Director; Ahli United Bank Limited, Dubai; Chairman, Osool Assets Management Co.; Chairman, Solidarity Group Holding Co.; Chairman, Al Ahli Real Estate Co. SPC, Bahrain; Board Member, Social Insurance Organisation, Bahrain; Formerly: Director General, Pension Fund Commission; Asst. Undersecretary for Financial Affairs, Ministry of Finance & National Economy; Asst. Undersecretary for Economic Affairs, Ministry of Finance & National Economy; Director of Investment, Central Bank of Bahrain; Chairman of Esterad Investment Co., Vice Chairman and Chairman of Executive Committee, National Bank of Bahrain; Board Member, Bahrain Petroleum Co. (Bapco); Board Member, Gulf International Bank; Board Member, Gulf Investment Corporation, Board Member, Arab Investment Co.; Board Member, General Organization for Social Insurance (GOSI) and Chairman, Audit Committee.

40 years of experience covering financial services and national economic sectors.Rashed Ismaeel Al-Meer (Non-Executive Director)Deputy Chairman and Member of the Executive Committee

Director since, 27 March 2006, holds a Bachelor of Commerce-Finance Major from Kuwait University, 1991.

Deputy Chairman of Ahli United Bank Limited, Dubai, Member of the Audit & Compliance Committee of Ahli United Bank Limited, Dubai; Chairman, Tamdeen Holding Group, Kuwait; Deputy Chairman & Member of the Executive Committee, Ahli United Bank, Bahrain; Chairman, Tamdeen Shopping Centers Co., Kuwait; Chairman, Tamdeen Bahraini Real Estate Co., Bahrain; Honorary Chairman of Arabian Horse Centre (Kuwait State Stud), Kuwait; and Member of the Board of trustees of Al-Hareer & Islands Authority. Formerly: Member, The Supreme Council for planning and Development, Kuwait; Chairman of the Board of Trustees Arabian Horse Centre (Kuwait State Stud), Kuwait; CEO, Tamdeen Real Estate Co.; Chairman and CEO, Tamdeen Real Estate Co.; Board Member, Global Omani Development & Investment Co., Sultanate of Oman; Board Member, Al Maalem Holding Co., Bahrain; Board Member, Fateh Al Khear Holding Co., Kuwait; Board Member, Ahli United Bank, Bahrain; Deputy Chairman, Tamdeen Shopping Centers Co., Kuwait; Vice Chairman, Tamdeen Investment Co., Kuwait; Board Member, Ahli United Bank (Former Bank Of Kuwait and Middle East), Kuwait; Board Member, Al Ahli Bank of Kuwait, Kuwait; Board Member, Kuwait National Cinema Co., Kuwait; Board Member of Arab Financial Consulting Co., Kuwait; Chairman and Managing Director, Tamdeen Real Estate Co., Kuwait; CEO, Real Estate Investment Fund, Kuwait; and Board Member, The Public Warehousing Co., Kuwait.

26 years of experience, covering financial services and real estate sectors.

Mohammad Jassim Al-Marzooq (Non-Executive Director)Deputy Chairman and Member of the Executive Committee

BOARD OF DIRECTORS


Annual Report 2017

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

Formerly: Director, Commercial Facilities Company, Kuwait; Director, Ahli United Bank (Egypt) SAE; Legal Consultant for Director General, The Public Institution for Social Security, (Kuwait).

35 years of experience in the financial and legal sectors.

Abdulla MH Al-Sumait (Independent Director)Member of the Audit & Compliance Committee, Nominating Committee and Compensation Committee

Director since 29 March 2003, holds a degree, in Business Administration from Kuwait University, 1993.

Chairman, Ahli United Bank (Egypt) SAE; Chairman, Fluor Kuwait Co. KSC, Kuwait; Board Member, Ahli United Bank Limited, Dubai; Board Member, Tamdeen Real Estate Company KSCC, Kuwait; Vice Chairman and Group Chief Executive Officer of the Fouad Alghanim & Sons Group of Companies, Chairman, AlGhanaem Industrial Company KSC, Kuwait; Member of the Supervisory Board, Jet Alliance Holding AG, Austria.

28 years of experience covering financial services, manufacturing, trading, real estate and contracting sectors.

Mohammed Fouad Al-Ghanim (Independent Director)Member of the Executive Committee

Director since, 25 March 2014, holds a Bachelors Degree in Industrial Systems Engineering from University of Southern California, 1981.

Chairman, Al-Marzouq Company for Import & Export, Kuwait; Board Member, Ahli United Bank (UK) Plc.; Formerly: Vice Chairman, Rouyah Investment & Leasing Co., Kuwait; Chairman, The Kuwaiti Manager Company, Kuwait; Board Member, Kuwait Finance House, Kuwait; Manager Treasury, Gulf Investment Corporation, Kuwait ; Asst. Manager-Treasury, National Bank of Kuwait.

35 years of experience covering financial services and real estate sectors.

Adnan Al-Marzouq (Independent Director)Member of the Executive Committee

BOARD OF DIRECTORS (continued)


Annual Report 2017

Director since 29th March 2016. Holds a Bachelor of Science-Mechanical Engineering from Kuwait University, 1984.

Chairman, Noor Jordan Kuwait Financial Investment Co., Jordan; Vice Chairman, Noor Financial Investment Co. KSCC, Kuwait; Chairman, Hotels Global Group, Jordan; Director, Mohammad Saleh & Reza Yousuf Behbehani Co. W.L.L, Kuwait; Director, Behbehani Capital Co. for Selling & Purchasing Shares & Bonds W.L.L, Kuwait; Board Member, Noor Telecommunications Co. KSCC, Kuwait; Board Member, Al-Alfain Printing, Publishing & Distribution Co. KSCC, Kuwait; Board Member, Kuwait Insurance Co. SAK; Board Member United Beverage Co. KSCC, Kuwait; Former Board Member, Al-Ahli Bank of Kuwait KSCP.

34 years of experience covering financial services, trade, engineering and real estate sectors.Abdulghani M.S.Y Behbehani (Independent Director)Member of the Audit & Compliance Committee and Nominating Committee

Director since, 29 March 2016. Holds a Master’s Certificate in Project Management from The George Washington University, School of Business, 2009; Certified Investment and Derivatives Auditor, 2009; Certified International Financial Accountant, 2014; Certified Professional Internal Auditor, 2015; Certified Merger & Acquisition Specialist, 2016; Investment Diploma from American University of London, 2009; Bachelor of Political Science from Kuwait University, 1999; Associate’s Certificate in Project Management from The George Washington University, School of Business, 2008. Financial Advisor to Director General, The Public Institution for Social Security, Kuwait; Board Member, Petro Link Holding Co. (K.S.C.C), Kuwait; Board Member, Kuwait Medical City Co. (K.S.C.C), Kuwait. Formerly: Advisory Board Member, Markaz Real Estate Fund, Kuwait; Board Member, Al Salmiya Group for Enterprise Development Co. (K.S.C.C), Kuwait; Chairman, United Marketing and Organizing Exhibitions (K.S.C.C), Kuwait; Vice Chairman, Arab Gulf Company for Food & Supermarket (S.A.K.C), Kuwait.

19 years of experience covering financial services, trading, real estate and manufacturing sectors.

Ahmed Ghazi Al-Abduljaleel (Non-Executive Director)Member of the Audit & Compliance Committee and Nominating Committee

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. Director, Ahli United Bank (Egypt) S.A.E., Director, Ahli United Bank K.S.C.P, Kuwait; Director, Ahli United Bank Limited, Dubai; Director, KMEFIC, Kuwait; Director, Macquarie Bank India Infrastructure Fund, Singapore & Bombay; Member of the Investment Committee, APIS Growth Fund; Formerly: International Finance Corporation’s (IFC) Director of Investment & Advisory Operations for the MENA region-20 Countries, Pakistan to Morocco; IFC-Deputy Director for Global Industry & Service Investments, Risk Supervisor, Asia, Bank of Nova Scotia.

43 years of experience covering financial services, manufacturing, trading and real estate sectors.Michael Essex (Independent Director)Chairman of the Audit & Compliance Committee, Nominating Committee and Compensation Committee



Annual Report 2017

Director since 1 October 2016, holds a Banking Diploma from Institute of Bankers 1970 and certification from Chartered Institute of Bankers, Kent, 1991.

Financial Service Advisory Board of Price Waterhouse Coopers (PwC); Chairman, The Services Family Ltd, UK; Director, Ahli United Bank (UK) Plc; Director, Hirslanden Corniche Ltd. Formerly; Chairman, Allied Irish Banks, Plc; Member of KSA Advisory Board, BAE Systems Plc; Sr. Advisor to Board, HSBC Holding Plc; Group Managing Director & COO, HSBC Holding Plc, London; Chairman: HSBC Middle East Ltd; HSBC Bank Turkey A/S; Arabian Gulf Investments (Far East) Ltd; Director: HSBC Bank Egypt, Bank of Bermuda, HSBC Trinkaus & Burkhardt, Germany; Saudi British Bank, Saudi Arabia; HSBC Holding, Group Management Board.

48 years of experience in international financial services sector.David Hodgkinson (Independent Director)Member of the Audit & Compliance Committee, Nominating Committee and Compensation Committee

Director since 30 July 2000, holds a Masters in Economics (Highest Honors) from the American University, Cairo, 1980, Bachelors in Economics (Highest Honors) from American University, Cairo, 1977 and a General Certificate of Education from London University, 1973.

Group Chief Executive Officer & Managing Director, Ahli United Bank BSC, Bahrain; First Deputy Chairman, Ahli Bank SAOG, Oman; Deputy Chairman, United Bank for Commerce & Investment S.A.C. Libya; Deputy Chairman, Middle East Financial Investment Co, Saudi Arabia; Director, Ahli United Bank (UK) Plc; Director, Ahli United Bank KSCP, Kuwait; Director, Ahli United Bank Limited, UAE; Director, Bahrain Association of Banks, Bahrain.

Formerly: Deputy Chairman, Commercial Bank of Iraq; Deputy Chairman, Ahli United Bank (Egypt), Chief Executive Officer and Director, United Bank of Kuwait PLC, UK; Managing Director, Commercial International Bank (Egypt) SAE; Chairman, Commercial International Investment Company, Egypt; Vice President, Corporate Finance, Morgan Stanley, USA; Assistant Vice President, Arab Banking Corporation, Bahrain; Director, Bahrain Stock Exchange; Director, Kuwait & Middle East Financial Investment Co, Kuwait.

39 years of experience in financial service sector.

Adel A. El-Labban (Executive Director)Member of the Executive Committee



Annual Report 2017


Annual Report 2017CHAIRMAN’S STATEMENT

In a year characterised by a rebound in the global economy and continued regional volatility, I am pleased to report that AUB has delivered a record performance which maintained solid and sustainable growth momentum in its earnings.

While global GDP continued to rise during 2017, supported by improved business conditions, growth in the MENA region economy was impacted by an OPEC-led decrease in oil production, continued fiscal austerity applied by regional governments and prevailing geo-political uncertainties. In the latter half of the year, as the oil price stabilised, liquidity positions were strengthened by growth in government deposits and growth prospects were supported by the increased pace of new government project spending.

In these challenging business conditions, the AUB Group achieved a record net consolidated profit of US$ 618.7 million in 2017, representing an increase of 8.4 % over the net profit of US$ 570.6 million in 2016. AUB’s ability to sustain growth in net profit demonstrated the Group’s strong underlying financial base and the resilience of its well diversified business and geographic model. The Bank’s robust performance was further complemented by the success of prudent business development initiatives in target markets, supported by effective risk management and judicious cost control. In acknowledging the dynamic economic and business climate in which AUB operates, transformation has become imperative to shaping the future and enhancing the Bank’s ability to exceed customer expectations. During 2017, significant progress was achieved in planning the most suitable route for the digital transformation of systems and procedures to enable AUB to broaden and deepen its client penetration and cross-selling capabilities. Major effort was also undertaken in terms of reviewing our cyber security infrastructure groupwide and enhancing its capabilities to meet future challenges. A major benefit of this exercise was the increase in Board and staff awareness and understanding of the cyber security threat and of the available remedies to handle it.

Looking ahead, the prospects for improved regional conditions are supported by ongoing government reforms and the potential relaxation of fiscal constraints as oil prices stabilise. The implementation of value added tax (VAT) in the GCC region should further enhance government revenues, increasing infrastructure and project spending and reducing austerity measures. Whilst the operating environment will continue to present challenges, AUB is both positioned and prepared to tap opportunities arising out of evolving market conditions, regionally and globally, and to maintain growth momentum in its operating and net profits going forward.

As Chairman of the Board, it is my pleasure to convey my sincere thanks to our esteemed shareholders for their continuing confidence in AUB. The Bank’s record performance and sustained growth during 2017 was only made possible by the valued support and trust of our clients, business partners and customers and by the commitment and professionalism of the management and staff across the AUB Group as well as by the guidance of our regulators and other related government entities in the markets in which we operate.

In times of significant change, at both the regional and international levels, we are committed to shaping a Bank which is fit, not just for current purposes but for the future, guided by a well-defined vision and business strategy, delivering added value to both shareholders and clients and embracing the technological imperatives which face the banking industry in a prudent and effective manner.

Hamad M. Al-HumaidhiChairman

AUB Group achieved a record net consolidated profit of US$ 618.7 million in 2017, representing an increase of 8.4 % over the net profit of US$ 570.6 million in 2016.


Annual Report 2017


Annual Report 2017GROUP CHIEF EXECUTIVE OFFICER & MANAGING DIRECTOR’S STATEMENT

AUB reported a record net profit of US$ 618.7 million in 2017, representing an 8.4% increase over the net profit of US$ 570.6 million in 2016. AUB’s solid performance across a geographically diversified franchise was driven by a strong focus to enhance core earnings and revenue streams while maintaining sound asset quality and a strong liquidity and capital adequacy position.

In line with the Group’s continued growth trajectory, net operating income grew by 4.4% from US$ 986.6 million to US$ 1,030.4 million in 2017, contributed largely by a 5.8% increase in net interest income which rose to US$ 876.5 million from US$ 828.2 million the previous year. The increase was achieved through a disciplined approach to pricing together with prudent growth in asset volumes within a conservative risk framework. The intelligent cost spend culture embedded within the AUB Group resulted in maintaining a very efficient cost income ratio of 28.8% (2016: 27.6%).

The Group’s total assets advanced by 6.1% rising to US$ 33.2 billion at year-end 2017. The increase in total assets was attributable to a 4.8% growth in the loans portfolio which rose to US$ 19.5 billion (2016: US$18.6 billion) and a 7.8% growth in the investments portfolio to US$ 6.0 billion ( 2016: US$ 5.6 billion). Asset growth was funded through focused balance sheet management and effective liquidity deployment to optimise yields and ensure funding stability in terms of quantum and duration.

Despite continued volatility in market conditions, asset quality improved during 2017 due to a combination of prudent credit strategy and focused recovery initiatives. As a result, the non-performing loan ratio fell to 1.9% at year-end 2017 as compared with 2.3% at the prior year-end while the specific provision coverage ratio was maintained at the very solid level of 85.1% (2016: 84.9%). The total provision coverage, excluding existing available securities and collaterals of US$ 357.7million, stood at 154.3% (2016: 155.6%) underlining the Bank’s conservative cash based provisioning approach.

Key financial indicators reflected AUB’s continuing upward momentum with overall return on average equity (ROAE) increasing to 16.5% ( 2016: 15.6%) and return on average assets rising to 2.1% (2016: 1.8%). As a result, the basic earnings per share were US cents 7.7 for the year ended 31 December 2017 (2016: US cents 7.2). In acknowledging the positive results achieved in 2017,

the Board of Directors recommended distribution comprising a cash dividend of US cents 4.5 per share (2016: US cents 4.5 per share) together with a bonus ordinary share issue of 5% (2016: 10%).

AUB’s overall performance in 2017 was testament to its focused and resilient business model based on leveraging targeted markets, characterised by significant flows of cross border retail, trade and investment business. During the year, both customers’ deposits and loans & advances achieved steady growth. Assets under management also increased by 3.1%. Relationships with corporate clients grew and continued to be strengthened through the e-Banking platform, innovative deal structuring and increased product cross-selling. Cross-border investment and trade flows continued to be a very important source of business across the Group.

Going forward, AUB will remain focused on its core strategy to pursue business growth through geographic diversification and cross border flows. Operationally, digital transformation will be imperative in enhancing the Bank’s competitive edge while continued focus on business integration will extend and expand cross-selling capabilities.

Finally, I would like to express my gratitude to the Board of Directors for their continued support and guidance. Sincere gratitude and appreciation are also justly due to all my colleagues in the management and staff of the AUB Group whose professionalism, commitment to excellence and team work, under challenging circumstances, have been, as usual, instrumental in delivering the record performance levels of the past year and in placing AUB in a very strong position to meet and prevail over future challenges.

Adel A. El-LabbanGroup Chief Executive Officer & Managing Director

Key financial indicators reflected AUB’s continuing upward momentum with overall return on average equity increasing to 16.5% and return on average assets rising to 2.1%.


Annual Report 2017


Annual Report 2017


Annual Report 2017CORPORATE GOVERNANCE

Good Corporate Governance practices are important 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 (the Board) is committed to implementing robust Corporate Governance practices and to continually review and align these practices with international best practices, where appropriate.

The Bank’s management is committed to ensuring that procedures and processes are in place to reflect and support the Board approved Corporate Governance related 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 Boursa Kuwait. As at 31 December 2017, the Bank had issued 7,556,852,904 ordinary shares, each with a nominal value of US$0.25. All ordinary shares are fully paid up.

Shareholders are invited by the AUB Chairman to attend the AGM. The AUB Chairman and other Directors attend the AGM and are available to answer any questions.

The Annual General Ordinary Meeting was held on 29 March 2017, and the two Extraordinary General Meetings were held on 29 March 2017 and 20 December 2017, respectively.

Ordinary Shareholders as at 31 December 2017 (holding 5% and above)

No. Name/Entity Country of Origin Direct & Indirect

Ownership % Ownership

1 Public Institution For Social Security Kuwait 1,404,058,650 18.58%

2 Social Insurance Organization Bahrain 760,267,305 10.06%

3 Tamdeen Investment Company Kuwait 607,437,576 8.04%

4 Sh. Salem Sabah Al Naser Al Sabah Kuwait 404,859,071 5.36%

Distribution of Shares

Table 1- Distribution of Ordinary Shares as at 31 December 2017

Category No. of Shares No. of Shareholders

50% and above - -

20% up to less than 50% - -

10% up to less than 20% 2,164,325,955 2

5% up to less than 10% 1,012,296,647 2

1% up to less than 5% 2,066,752,248 13

Less than 1% 2,313,478,054 3,629

Total 7,556,852,904 3,646


Annual Report 2017CORPORATE GOVERNANCE(continued)

Table 2 - Government and Quasi Government Holdings and the distribution of Ordinary Shares by Nationality

No. Name No. of Shares % of Total Shares

1 Kuwait Government & Quasi Government 1,408,288,650 18.64%

2 Bahrain Government & Quasi Government 769,035,613 10.18%

3 Qatar Government & Quasi Government 34,195,139 0.45%

4 Others - Government & Quasi Government 29,626,228 0.39%

5 Kuwait Individuals and Corporates 3,523,102,032 46.62%

6 Bahrain Individuals and Corporates 1,142,537,452 15.12%

7 Others - Individuals and Corporates 650,067,790 8.60%

Total 7,556,852,904 100%

Board

The Board of Directors composition represents an appropriate mix of professional skills and expertise. A general election for Board membership was held on 31 March 2015. The Board periodically reviews its composition and performance as well as the performance of each Director. In compliance with the Central Bank of Bahrain (CBB) Corporate Governance requirements, the Board 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 for the year 2017, the 11 Directors comprising the Board were classified as follows:

• 6 Independent Directors • 4 Non-Executive Directors• 1 Executive Director

The name and classification of each Director as at 31 December 2017 is set out below:

Directors Classification

Hamad Mishari Al-Humaidhi - Chairman Non-Executive

Rashed Al-Meer - Deputy Chairman Non-Executive

Mohammad Al-Marzooq - Deputy Chairman Non-Executive

Abdulla Al-Sumait Independent

Mohammed Fouad Al-Ghanim Independent

Adnan Al-Marzouq Independent

Abdulghani Behbehani Independent

Ahmed Ghazi Al-Abduljaleel Non-Executive

Michael Essex Independent

David Hodgkinson Independent

Adel A. El-Labban Executive

The CBB Rulebook Module HC-1.4.6 recommends that the Chairman of the Board of Directors should be an Independent Director. Although the AUB Chairman was 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 did 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 the 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 risk to be assessed and managed;

3. set the Bank’s strategic aims, 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 the 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 good faith and in a way that promotes the success of the Bank for the benefit of its shareholders as a whole. In doing so, each Director, must have regard to:

1. the likely consequences of any decision in the long term; 2. the interests of the Bank as well as the Bank’s employees

and shareholders;

3. the need to foster the Bank’s business relationships with suppliers, customers and others;

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

5. the desirability of the Bank maintaining a reputation for high standards of business conduct; and

6. the need to act fairly between the members of the Bank.

When carrying out their responsibilities, Directors are required to:

1. act with integrity;

2. act with due skill, care and attention;

3. observe proper standards of market conduct; and

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.

Board of Directors Meetings and Attendance

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

A schedule for the Board’s regular meetings, are agreed annually in advance. Additional meetings may be convened on an ad hoc basis at the invitation of the Chairman or otherwise in accordance with the provisions of the Commercial Companies Law.

All Directors are expected to physically attend all Board and Shareholder meetings, unless there are exceptional circumstances that prevent them from doing so. Directors, who cannot physically attend Board meetings, may attend by video or telephone conference. Meeting papers are prepared and circulated in advance of Board meetings and include minutes of meetings of Board Committees held since the previous Board meeting.



Board meetings held during 2017 and attendance of each Director are detailed below:

Board of Directors Meetings

Meeting Dates

Directors 21/2/2017 29/3/2017 9/5/2017 12/9/2017 28/11/2017

Hamad Al-Humaidhi P P P P P

Rashed Al-Meer P P P P P

Mohammad Al-Marzooq P P X P P

Abdulla Al-Sumait P P P P P

Mohammed Al-Ghanim P P P P P

Adnan Al-Marzouq P P P P P

Abdulghani Behbehani P P P P P

Ahmed Ghazi Al-Abduljaleel P P P P X

Michael Essex P P P P P

David Hodgkinson P P P P P

Adel A. El-Labban P P P P P

The CBB Rulebook Module HC - 1.3.4 requires individual Directors to attend at least 75% of all Board meetings in a given financial year. During the year all directors have complied with this requirement. The attendance of all Directors at the Board meetings is reported to the CBB on an annual basis.

Election and Termination of Appointment of Directors

Directors are elected for a three year term. Elections take place in accordance with the Memorandum and Articles of Association 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 term of appointment terminates, 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 program in place, which is designed for each new Director. The induction program includes: i) an introductory pack containing, amongst other things, the AUB Group Overview, AUB 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 are invited to attend orientation meetings.

Ongoing professional development for Directors was conducted during the year in accordance with the requirements of the TC Module 1.2.1. An annual comprehensive training plan in compliance with the CBB Rule Book High Level Controls Module for the AUB Board of Directors (BoD) for the continuous professional education of the BoD members is managed by Group HR through a combination of face-to-face training sessions which are based on industry relevant topics and delivered by international speakers, online learning and the dissemination of relevant industry driven articles. The training plan incorporates a blended learning methodology across e-learning, instructor-led face to face workshops and reading material to comply with the CBB requirement that all Directors must continually educate themselves as to the licensee’s business and corporate governance for a minimum of 15 hours annually.

Board Evaluation

Evaluations of the performance of the Board and the performance of each Director for 2017, were conducted. Applying a scoring methodology proposed by Professional Advisors, a 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.



Access to Advice and Information

Individual Directors are authorized to obtain independent legal or other professional advice at the Bank’s reasonable expense, whenever they judge this necessary to discharge their responsibilities as Directors.

Non-Executive Directors have access to and are authorised to seek any information they require from any employee. Such access should be coordinated through the Chairman of the Audit & Compliance Committee or the GCEO & MD.

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.

The Bank has a procedure for dealing with transactions involving Directors and related parties. Any such transaction will require the approval of the Board, with the conflicted Director abstaining.

Note 25 to the audited consolidated financial statements of the AUB Group for the year ended 31 December 2017, sets out the relevant disclosures of related party transactions.

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 is requested to consult the Chairman prior to taking any action 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 2017 are as follows:

No Directors Purchased SoldNo. of shares as of

31-Dec-2017

1. Hamad Al-Humaidhi - - -

2. Rashed Al-Meer - - 392,339

3. Mohammad Al-Marzooq - - 202,766

4. Abdulla Al-Sumait - - 133,402

5. Mohammed Al-Ghanim - - 617,980

6. Adnan Al-Marzouq - - 140,071

7. Abdulghani Behbehani - - 231,000

8. Ahmed Ghazi Al-Abduljaleel - - -

9. Michael Essex - - -

10. David Hodgkinson - - -

11. Adel A. El-Labban - - -

Total 1,717,558

Percentage 0.02%



The numbers of shares owned by Approved Persons as at 31 December 2017 are as follows:

Name Purchased SoldNo. of shares as of

31-Dec-2017

Adel A. El Labban - - -

Abdulla Ahmed Ali Al Raeesi - 850,000 4,484,626

Keith Henry Gale - 3,257,093 2,000,000

Sanjeev Baijal - - 2,328,747

Mustafa Shafqat Anwar - - 603,081

Derek Paul Lunt - - -

David Arthur O’ Loan - - -

Mark Andrew Ogilvie Hirst - - -

Iman Wajeeh Al-Madani - - -

Robert Jones 3,766,942 2,600,000 1,506,342

Andre Roos 753,198 700,000 1,343,775

Srinivasan Rathinam - 435,248 -

Ravindranath R Mehra 630,774 368,910 1,100,000

Chandramohan Ganapathy - - -

Mahmood Hassan Khursheed 159,525 180,914 267,477

Peter David Mutti 250,249 250,249 -

Employment of Relatives

The Bank does not encourage the employment of relatives. However, under exceptional conditions and based on specific requests and needs, the Bank may decide in favour of employing relatives, on a temporary or permanent basis, subject to a comprehensive review and only in cases where there is no conflict of interest or operational risk to the Bank involved. The Board of Directors has approved a policy on the employment of relatives on 19 July 2016 which has established a recruitment committee to review the recruitment requests of relatives of Bank employees of up to the third degree and recommend the hiring of relatives of Approved Persons occupying Controlled Functions to the GCEO & MD. Human Resources discloses to the Board of Directors on an annual basis, the names of all relatives of any Approved Persons occupying Controlled Functions, last disclosed on 28 December 2017.

The recruitment committee reviews the recruitment requests on the following considerations:

• No relatives shall work in the same business unit/department.

• No relatives shall report to each other or allowed to supervise each other.

• No relatives shall work in business units/departments which have a conflict of interest or would create an operational risk for the Bank.

• No relatives shall share a dual signature/ approval in the Bank and have dual access control to any Bank property (Physical & IT).

Material Transactions

In addition to 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.


Annual Report 2017

Board Committees

The Board may, where appropriate, delegate certain of its powers to an individual Director or to a Committee comprised of Directors and/or 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, which are reviewed and adopted by the Board on an annual basis.

All Board Committee members are expected to attend each Committee meeting unless there are exceptional circumstances

CORPORATE GOVERNANCE(continued)

that prevent them from doing so. Members who cannot physically attend the meeting may attend by video or telephone conference.

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

The Board Committees are each comprised of an appropriate mix of professional skills and expertise. The Chairman of each Board Committee periodically evaluates the performance of the Board Committees and reports the results to the Board. The names of the Committee members and their memberships in the Board Committees and attendance at meetings held during 2017 are detailed below:

Executive Committee Meetings

Meeting Dates

Members Classification 21/2/2017 9/5/2017 12/9/2017 28/11/2017

Hamad Al-Humaidhi- Chairman Non-Executive P P P P

Rashed Al-Meer Non-Executive P P P P

Mohammad Al-Marzooq Non-Executive P X P P

Mohammed Al-Ghanim Independent P P P P

Adnan Al-Marzouq Independent P P P P

Adel A. El-Labban Executive P P P P

Audit and Compliance Committee Meetings

Meeting Dates

Members Classification 20/2/2017 9/5/2017 11/9/2017 28/11/2017

Michael Essex - Chairman Independent P P P P

Abdulla Al-Sumait Independent P P P P

Abdulghani Behbehani Independent P P P P

Ahmed Ghazi Al-Abduljaleel Non-Executive P P P X

David Hodgkinson Independent P P P P


Annual Report 2017

Nominating Committee Meetings

Meeting Dates

Members Classification 21/8/2017 20/12/2017

Michael Essex - Chairman Independent P P

Abdulla Al-Sumait Independent P P

Abdulghani Behbehani Independent P P

Ahmed Ghazi Al-Abduljaleel Non-Executive P P

David Hodgkinson Independent P P

Compensation Committee Meetings

Meeting Dates

Members Classification 21/1/2017 19/12/2017

Michael Essex - Chairman Independent P P

Abdulla Al-Sumait Independent P P

David Hodgkinson Independent P P


The principal Responsibilities of the Board Committees are detailed below:

Executive Committee

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

The Executive Committee consists of 6 members, comprising 2 Independent Directors, 3 Non-Executive Directors and 1 Executive Director.

Audit & Compliance Committee

The Audit and Compliance Committee is combined with the Corporate Governance Committee and assists the Board in discharging its responsibilities relating to the Bank’s accounting, corporate governance and key persons dealings and market abuse practices, internal audit controls, compliance procedures, risk management systems, financial reporting functions and in liaising with the Bank’s external auditors and regulators to ensure compliance with all relevant regulatory requirements and consistency with best market practices.

The Audit and Compliance Committee consists of 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 makes recommendations on compensation related matters for the Board’s approval in line with CBB guidelines. The Compensation Committee, amongst other things, sets the remuneration framework for the Bank’s Directors, senior management and staff.

The Compensation Committee consists of 3 members, comprising 3 Independent Directors including the Chairman.


Annual Report 2017

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 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 performance of the Board Committees have been conducted. Applying a scoring methodology proposed by Professional Advisors, a rating of “Excellent” was achieved for each of the committees, indicating that the Board Committees continue to operate with a high degree of effectiveness and functioning as per their stated role and responsibilities.

Senior Management:

Names Title

Adel A. El-Labban Group CEO & Managing Director

Sanjeev Baijal Deputy Group CEO - Finance & Strategic Development

Keith Gale Deputy Group CEO - Risk, Legal & Compliance

Abdulla Al-Raeesi Deputy Group CEO - Retail Banking

Shafqat Anwar Deputy Group CEO - Operations & Technology

David O’ Loan Deputy Group CEO - Treasury & Investments

Derek Lunt Deputy Group CEO - Corporate Banking

Mark Hirst Deputy Group CEO – Private Banking & Wealth Management

Robert Jones Group Head of Audit

Iman Al-Madani Group Head Human Resources & Development

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

Richard Groves CEO - Ahli United Bank K.S.C.P

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

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

Ayman El-Gammal CEO - United Bank for Commerce & Investment S.A.L.

C.B. Ganesh CEO - Ahli Bank Limited

Nouri Aldubaysi CEO - Commercial Bank of Iraq - Iraq

Said Hathout Acting CEO - Al Hilal Life B.S.C (c) & Al Hilal Takaful B.S.C. (c)


Annual Report 2017

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 managed affiliates 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, to assess the effectiveness of these committees.

Group Management Committee

The Group Management Committee (GMC) is the collective AUB 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 fourteen other members, including all the Deputy Group CEO’s and the CEO’s of subsidiary and affiliated banks.

Group Asset and Liability Committee

The Group Asset and Liability Committee (GALCO) sets, reviews and manages the liquidity, interest rate risk, 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 DGCEO-Treasury & Investment and has eight other members.

Group New Product Committee

The Group New Product Committee (GNPC) reviews and approves new products, processes and services for Private Banking and 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 GNPC follows the new product or process development requirements


according to the New Product Approval and Development Procedure. It is chaired by the Group CEO & Managing Director and has eight other members.

Group Information Technology Steering Committee

The Group Information Technology Steering Committee (GITSC) 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 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-Retail Banking and comprises of eight other members.

Group Risk Committee

The Group Risk Committee (GRC) reviews and manages the risk asset policies, approvals, exposures and recoveries related to credit, operational and compliance risks. It acts as a general forum for the discussions of any aspect of risk facing or which could potentially face 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, the Client On-boarding & AML Sub-committee and the Working Committee on IFRS9 impairment provisioning. It is chaired by the DGCEO-Risk, Legal & Compliance and has four other members.

Group Operational Risk Committee

Group Operational Risk Committee (GORC) is a sub-committee of the GRC, and administers the management of operational risk throughout the AUB Group. It is chaired by the DGCEO-Operations & Technology and has nine other members.

Group Investment Committee

The Group Investment Committee (GIC) approves, reviews and manages AUB Group’s proprietary investment portfolio of bonds, equities and funds. It acts as a general forum for the discussion of any aspect of investment risk faced by AUB or its subsidiary and affiliated banks resulting in financial loss to the Group. It is chaired by the DGCEO Risk, Legal & Compliance and has six other members.


Annual Report 2017

Management Committee

The Management Committee (MC) is the senior collective management forum of the Bank, providing a formal framework for effective consultation and transparent decision-making on cross organizational 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 Chairman and its other members in relation to the business of the Bank, as a legal entity. It is chaired by the DGCEO Finance & Strategic Development and has six other members.

AUB Solo Assets and Liability Committee

AUB Solo Asset and Liability Committee (ALCO) sets, reviews and manages the liquidity, interest rate risk, market risk and funding strategy of AUB Bahrain, and reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by the DGCEO Treasury & Investment and has nine other members.

Other Governance Measures

In addition to the Board and Management Committee structures, the Board of Directors has approved a number of AUB Group policies to ensure clarity and consistency in the operation of the AUB Group. These policies, which are communicated to staff, include Credit, Anti-money Laundering, Corporate Governance, Personal Account Dealing, Key Persons Dealings, Banking Integrity, Compliance, Legal and Human Resources policies.

Underpinning these policies is the Board approved Group Code of Business Conduct which prescribes standards of ethical business behaviour and personal conduct for the Bank’s Directors, its senior management (officers) and its staff.

The Board annually reviews and adopts compensation and related policies and closely monitors the implementation of these policies and processes with respect to the Bank’s staff and Directors. The AUB Compensation Policy provides the remuneration framework for motivating employees and directors with financial motivation to deliver optimum Group performance. The policy aims at rewarding performance by individual contribution within a team oriented approach, remunerating individuals who achieve personal, divisional and Group results and providing a long term incentive to performing 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, which includes:

(i) The disclosure of all relevant information to stakeholders on a timely basis in a timely manner; and

(ii) The provision of the last five years of financial data on the Bank’s website.

The Bank is at all times mindful 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 and quarterly financial statements, and the Corporate Governance Policy are all published on its 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 take remedial action.

Compensation Disclosures

Ahli United Bank’s Compensation Policy (the “Policy”) provides the compensation framework that is designed to attract, motivate and retain employees and to align their interests and direct their efforts towards achieving the short and medium term objectives of the AUB Group as set by the Board of Directors. Performance is measured not only on achievements but the effective control of all risks that is in the long-term interests of all stakeholders of a financial institution.

The effective governance of the framework and the application of AUB’s compensation principles is maintained through the Board of Directors who review and approve on a regular basis, the HR policy including, the compensation and related policies and oversee the implementation and administration of these policies and processes with respect to the Bank’s employees and directors directly or thorough delegation to the Compensation Committee.

The Compensation Policy

The Compensation Policy is annually reviewed by the Board of Directors which approved its last version in November 2017. The policy incorporates the mandatory regulations issued by the


Annual Report 2017

CBB on Sound Remuneration Practices [HC-5 Remuneration of Approved Persons and Material Risk-Takers], which are applicable to Approved Persons and Material Risk-Takers whose total annual remuneration (including all benefits) is in excess of BD100,000 equivalent. The Policy and related schemes have been approved by the shareholders of the Bank at the Annual General Meeting held on 31 March 2015 and have been applied to performance related employee compensation payments made for each financial year. The salient features of the Bank’s Policy are summarized below:

The policy outlines the basis and methodology for arriving at variable compensation, making allocations, implementing risk adjustments to compensation, the framework for compensation of Approved Persons and Material Risk-Takers, conditions for deferral, malus and claw-back clauses, compliance and disclosure requirements. It also establishes the terms of the Mandatory Share Plan (MSP) scheme and the extension of the existing Employee Share Purchase Plan (ESPP) scheme to comply with CBB regulations and deliver deferred variable compensation in equity/ shares. All equity scheme awards being limited so as not to exceed an aggregate 10% of the total issued outstanding ordinary share capital of the Bank, at any given time.

Compensation levels for each grade/ role are determined by industry measurable statistics, relative to size of operations, business needs, cost control and long term business goals which attracts the appropriate talent to the Bank. Compensation is determined through job evaluation, market benchmarks, performance outcome and aligned to long-term value creation and prudent risk-taking. The Bank ensures that compensation is equitable and team oriented, clearly communicated and adjusted for all types of risk, including reputation risk, liquidity risk and costs of capital. Annual performance and compensation reviews


are conducted after the end of the financial year and in the first quarter of each year. Employees are not entitled to any additional compensation from their membership of or attendance at Board or Board Committee meetings as a nominee or representative of the Bank. All such fees are assigned to the Bank.

The Compensation System

The compensation system includes a fixed component (consisting of cash salary, allowances and benefits) that rewards the capacity to hold a role/ position in a satisfactory manner through the employee displaying the required skills and a variable component (consisting of performance related compensation) that aims to reward collective and individual performance, depending on objectives defined at the beginning of the year and conditional on meeting said objectives, according to performance standards and risk parameters defined by the Bank.

The compensation system is aligned to supporting the Bank’s short term and medium term performance objectives and to controlling and reducing the full gamut of associated risks. The system links and adjusts compensation with all types of risks in the Bank to reduce the incentive for individuals to take excessive and undue risk. It specifies the proportion of fixed and variable remuneration to be consistent with the Board approved Risk Framework. It defers portions of the variable compensation awards for the financial year 2017 and subsequent years for the designated Approved Persons and Material Risk-Takers of the Bank over a period of 3 years as required by the CBB. It reduces the awarded deferred variable remuneration in case of losses by the Bank and/ or business line during and after the exercise/ vesting period of the deferred variable compensation as a result of malus and clawback arrangements.

Component Key Features

Fixed Compensation • Rewards the capacity to hold a role/ position in a satisfactory manner through the employee displaying the required skills.

• Consists of cash salary and allowances.• Payments are fixed and do not vary with performance.

Benefits • Ensure market competitiveness and provide benefits in accordance with local market practice.• Consists of contributions to pension, social insurance, medical insurance, life insurance and health

and wellness.• Contributions are fixed and do not vary with performance.

Variable Compensation • Aims to reward collective and individual performance achieved for objectives defined at the beginning of the year and discretionary on extent to which objectives are achieved.

• Consists of cash and/ or share-based performance related compensation (MSP) paid partly over the short-term and partly deferred long-term for at least three years.

• Payments are linked to performance standards and maintaining risk and control parameters defined by the Bank.

Others • Employee Share Purchase Plan (ESPP) awards to motivate and retain employees with sustainable performance through the use of both pre- and post- award performance measures.

• Operated by Trustees independent of the management of the Bank.• Awards are subject to malus and clawback with Trustees having the discretion to assess the

triggering of malus/ clawback conditions.


Annual Report 2017

Role of the Compensation Committee in Governance and oversight over Remuneration

The Compensation Committee (the “Committee”) is vested by the Board of Directors through its Terms of Reference with the essential responsibility, inter alia, to provide effective oversight and assure governance over the compensation strategy, structure and systems, to ensure that they are properly implemented. Such responsibilities include, but are not limited to, review and oversight of AUB’s compensation and related policies and arrangements for its employees and directors and ensures that any amendments or updates are annually applied to meet the Bank’s objectives and aligned to CBB regulations, the Kingdom of Bahrain Labour Law for the Private Sector (“Labour Law”) and the Bahrain Commercial Companies Law, 2001 (the “Companies Law”), where necessary.

The Chairman and members of the Committee are appointed by the Board from amongst its Directors. The Committee comprises at least 3 members, which should include only Independent Directors or, alternatively, only Non-Executive Directors, of whom a majority are Independent Directors. Committee details and meeting dates in 2017 are reproduced in the Corporate Governance Report in this Annual Report. The aggregate compensation/ fees paid to the Committee members for 2017 amounted to US$ 10,500 (2016: US$10,500).


The Committee approves the annual aggregate amounts payable under fixed and performance related variable compensation schemes for employees. The Committee reviews and approves any material changes in employee benefits as per market competitive trends and cost considerations and makes recommendations with regard to any other employee matters, as brought before it. The Committee reviews compensation payable to the members of the Board of Directors and makes recommendations to the Board of Directors in this regard in line with applicable regulations.

The Committee reviews and tests at least on an annual basis, the Policy and framework to ensure that compensation arrangements comply with regulations and internal policies and to ensure that the compensation system operates as intended and that effective controls exist through testing of compensation outcomes as per the Bank’s risk framework with any breaches of the risk framework used in the evaluation of malus and/ or clawback clauses on deferred compensation by the Committee.

The authority matrix for compensation approvals are as follows:

Action Approved by

a) Approve the Bank’s annual performance bonus pool funding model based on KPI and KRI adjustments. Compensation Committee

b) Approve the Bank’s annual performance bonus amount pool. Compensation Committee

c) Approve the criteria for performance management and distribution of the Bank’s annual performance bonus. Compensation Committee

d) Approve the list of designated “Approved Persons and Material Risk Takers” for the financial year 2017. Compensation Committee

e) Approve the performance scores, annual increment and annual performance bonus amounts for the GCEO&MD and his direct reports. Compensation Committee

f) Approve the performance scores, annual increment and annual performance bonus amounts for the Group Head of Audit and Group Head of Compliance.

Audit & Compliance Committee and Compensation Committee

g) Approve the aggregate performance scores, annual increment and annual performance bonus amounts for all other bank employees. Compensation Committee

Types of Compensation

Compensation for employees includes fixed compensation, benefits and performance related incentives (short-term and long-term variable compensation) in cash or shares each as defined and approved by the Compensation Committee. Compensation for the Board of Directors is explained later in this report.

External Consultants

Consultants were appointed during the year to advise the Bank on revisions to the Policy, if any and alignment to regulations and market best practices including providing consulting advice for the deferred share/ equity-linked schemes.


Annual Report 2017

Compensation of the Board of Directors

The Committee annually reviews the compensation for the Board of Directors and its related Committees to ensure compliance with the CBB Rule Book, within relevant Commercial Companies Law requirements and with the Articles of Association of the Bank. The Bank is in compliance with the CBB Rule Book High Level Controls Module Article No.5.2.1 (c) requiring that compensation of the Board of Directors is linked to attendance and performance. Board of Directors compensation is pro-rated and paid on the basis of actual attendance of Board and related committee meetings and membership. Compensation for the Board of Directors and its related committees for 2017 have been approved by the shareholders in the Annual General Meeting on 29 March 2018.

The Bank is in compliance with its Articles of Association requiring that total compensation for Directors (excluding sitting fees) is capped at 10% of the Bank’s NPAT for 2017, after all the required deductions outlined in Article 188 of the Bahrain Commercial Companies Law, 2001.

The compensation of Non-Executive Directors in 2017 does not include any performance-related elements such as shares, share options or other deferred stock-related incentive schemes, bonuses or pension benefits, in compliance with the CBB Rule Book High Level Controls Module Article No.5.5.1.

AUB Management Directors (Employees) who represent or are nominated by AUB or of any of its subsidiaries or affiliates on the Boards or their related Committees are excluded from receiving compensation/ fees as per their contractual arrangements. Employees do not receive any additional compensation from their membership of or attendance at Board or related Committee meetings as a nominee or representative of the Bank or for their participation in any management committees.

The designated Approved Persons and Material Risk Takers of the Bank (as all AUB employees) do not take compensation, incentives, performance payments, commission, fees, shares, consideration in kind or other direct benefits of any kind from any projects or investments managed by the Bank or promoted to its customers or potential customers. This applies to all Approved Persons including those appointed as members of the BoD of any special purpose vehicles or other operating companies set up by the Bank for projects or investments.

All Board of Directors’ and related Committee fees or other terms of compensation (except actual expenses) related to representation as AUB nominated Directors are fully credited to AUB. Directors are reimbursed reasonable and customary expenses for communication, transportation, boarding and lodging as per AUB HR policy.


Variable Compensation (Performance Bonus) Pool and Risk Adjustment Framework

Performance-related variable compensation aims at recognizing and rewarding employee’s contribution beyond their regular job requirements, particularly those contributions that increase Bank’s productivity and profitability in a prudent and sustainable manner. The variable compensation pool is aligned to and accrued based on the Bank’s short or long term financial performance and adjusted for compliance to the risk framework.

The Committee reviews the accrual of the Variable Compensation pool for the Bank and ensures it is based on the overall performance of the Bank and is accrued as a percentage of Net Profit after Tax (the “NPAT”) for the preceding financial year and is in compliance to the risk-adjusted performance as per the Board approved Risk Framework.

The Committee reviews and ensures the framework linking individual performance to the Bank’s performance adjusts the annual accrual of the Variable Compensation pool for the Bank based on achievement of specified Key Performance Indicators (“KPI”) which reflects Bank Performance for FY 2017 and Key Risk Indicators (“KRI”) which reflects the compliance of the Bank as per the Board approved Risk Framework.

KPI’s and KRI’s measure the actual financial and operational performance against budgets and as per the Board approved Risk Framework and may include: Net Profit after Tax (NPAT)/ Return on average assets (ROAA)/ Return on average equity (ROAE) / Cost to income ratio/ Audit ratings/ Non-performing loans (NPL) as % of gross loans and/ or capital adequacy ratio.

The Committee at its discretion may propose to reduce or reduce to nil the bonus accrual for the Bank and each line of business and/ or the allocation pool of accrued bonus to businesses if there is a material reduction in the profitability of the Bank or the individual line of business. The Committee shall use its discretion to determine whether the particular business is incurring losses due to a start-up or turnaround situation, in which case, bonus accrual, allocation and pay-out may be allowed to occur.

The Bank does not provide any form of guaranteed bonus as part of the employment offer or contract to any employee. Severance compensation (except notice period for a maximum period of 3 months) is prohibited except when the Bank provides for it on liquidation of a particular business or on closure of a unit.

The Bank takes formal commitments from employees to not use personal hedging strategies or compensation and liability-related insurance to undermine the risk alignment effects embedded in their compensation arrangements by providing a signed adherence to the prohibitions on hedging.


Annual Report 2017

Variable compensation for employees is payable at the end of the performance (financial) year in the following manner:

Type of Variable Compensation Regulated Roles (Approved Persons and Material Risk Takers) All Other Employees

Cash• 40% for Approved Persons in business lines, direct reports to the GCEO & MD & material risk takers.• 50% for Approved Persons in control functions

• 100% immediate

Equity instruments/ Shares

• 60% for Approved Persons in business lines, direct reports to the GCEO & MD & material risk takers deferred in shares over 3 years.• 50% for Approved Persons in control functions deferred in shares over 3 years.

• Nil

* Deferred equity instruments/ shares are vested over a 3 year period subject to a minimum retention period of 6 months.


Compensation of Control Functions

Performance assessment of the Bank’s Approved Persons in the functions of Risk Management, Internal Audit, Operations, Finance, Shari’a review/ audit and AML functions has been discussed by the Committee and measured primarily on the achievement of the objectives and targets of their functions, ensuring their independence from business areas.

The Committee has reviewed and ensured that the performance measures, evaluation and compensation of regulated roles in the control functions of Risk Management, Internal Audit, Operations, Finance and AML functions are evaluated in co-ordination with the Audit and Compliance Committee to ensure independence of their functions/ job roles from business areas.

The performance evaluation, fixed and variable compensation proposals for the Group Heads of Audit and Compliance are specifically recommended by the Chairman of the Audit & Compliance Committee and approved by the Committee.

Compensation of Approved Persons and Material Risk Takers

The performance measurement and the compensation arrangements for designated Approved Persons and Material Risk Takers of the Bank for 2017 is reviewed and approved by the Compensation Committee and is subject to periodic change depending on the changes in total individual compensation and/ or to changes in the organizational structure and business model. Performance assessment of regulated roles is as per the following framework:

Level Area Group Objectives Function Objectives

Group CEO & Managing Director (Business) 100% -

Approved Persons(Business)

60% 40%(Support)

The above performance framework ensures that adequate focus is employed by personnel on their core objectives with Business Heads being measured for business performance with a majority on group performance and the rest on development of their function, while control and function heads being measured with majority of their objectives on the development of their functions and the rest on group objectives related to their respective responsibilities.

The performance measurement and the compensation arrangements for designated Approved Persons and Material Risk Takers of the Bank for 2017 is reviewed and approved by the Compensation Committee and is subject to periodic change

depending on the changes in total individual compensation and/ or to changes in the organizational structure and business model. Variable compensation awarded to individuals holding designated roles in the list are as per the approved compensation policy. The list of designated Approved Persons and Material Risk Takers includes the Group CEO & Managing Director, Direct Reports to the GCEO & MD and other designated Approved Persons. The regulated roles are approved by the Committee based on the position/ responsibility level of the individual role, the type of business risk undertaken and the material impact of risk exposure based on authority limits for credit and/ or market risk on the Bank’s risk profile and the minimum threshold level of total fixed and variable compensation.


Annual Report 2017

The Committee evaluates the designated Approved Persons and Material Risk-Takers performance as per their agreed performance objectives, Bank and/or business strategy, maintenance and/ or improvement of the Board approved risk profile of the Bank and linked to improvement in the Bank’s profit performance and share-holder return.

The individual allocations of variable compensation components for the designated roles are correlated with the annual individual performance appraisal that takes into account the extent to which quantitative and qualitative objectives have been met. The objectives for these individuals are clearly identified and can be assessed by indicators that are known to the employee.

The qualitative objectives are tailored to the individual employee, in relation to the employee’s professional activity and adapted to the position held. These objectives include the quality of risk management, the means and behaviors used to achieve results such as co-operation, teamwork and human resources management.

The performance appraisal process and the subsequent performance bonus allocation process is managed and documented by group human resources and its conclusions are submitted for approval to the Committee.

The affected individuals are informed that their position is considered regulated and their performance is subject to specific adjustments related to adherence risk and compliance parameters.

In addition, the competitive context of the particular job in the market place is taken into account by data from compensation surveys, which benchmark job compensation levels with relevant comparators.

The Committee reviews and approves all fixed and variable compensation including all benefits for the designated Approved Persons and Material Risk Takers in regulated roles of the Bank to ensure that payments made are fair to the individual and the Bank, that failure is not rewarded and that the duty to maximize performance and mitigate loss is fully recognized.

The variable compensation awarded to the Approved Persons and Material Risk-Takers is based on the Bank’s short or long term financial performance adjusted for all types of risk, and shall be subject to reduction in case of the Bank’s poor or negative financial performance. The compensation report for the Bank includes the regulated roles for 2017 who are Approved Persons in business lines – 7 (2016: 5), Approved Persons in control functions – 10 (2016: 10) and no other material risk takers. Other employees in Bahrain – 640 (2016: 632) and employees in subsidiaries of the Bank – 2,275 (2016: 2,330).

Awards of deferred variable compensation for the designated Approved Persons and Material Risk Takers of the Bank shall be reduced in case of losses by the Bank and/ or business line during


the vesting period of deferred compensation awards as a result of Malus and/or Clawback.

Malus and Clawback Policy

The Bank has adopted a malus policy where deferred variable compensation may be partially reduced or reduced to nil, by the Committee, before the vesting or exercise of any deferred performance bonus is received by an individual employee and a clawback policy where deferred variable compensation may be partially reduced or reduced to nil, by the Compensation Committee, after the vesting or exercise date on specific conditions which include circumstances where:

a) The annual reports and accounts being materially restated, in an adverse manner, including but not limited to a reduction in profit or diminution of capital and reserves, as a result of the willful or gross negligent conduct of the Participant during the performance period. This excludes any restatement due to a change in accounting policy, in compliance with applicable IFRS and other legal provisions, or to rectify minor errors.

b) The Employee has deliberately misled the Board or the management of the Bank or the market or the Bank’s shareholders regarding the financial performance of the Bank or of any operating unit regarding the returns, operations and risks of the employee’s business or support unit at any time before the vesting/ exercise Date.

c) The Employee’s actions have caused harm or may cause potential harm to the good name or reputation of the Bank or of any operating unit or to the participant’s reporting unit.

d) The Employee has been terminated or ceases to be employed by the Bank for causes as under Article 107 of the Bahrain Labour Law or the Bank’s table of gross misconduct. Normal resignation shall not affect the rights of departing employees to receive their rights.

e) The Employee directly or indirectly, solicits, employs, entices away, or endeavours to solicit, employ, or entice away from the Bank or any of its’ operating units, any person who is employed by the Bank or its affiliates;

f) The Employee directly or indirectly, discloses any confidential information of the Bank or its operating units to anyone without prior written approval or uses, exploits or permits the use of such confidential information for any purpose whatsoever;

g) The Employee acts or makes any representations in bad faith contrary to the interests of the Bank.


Annual Report 2017

Details of Compensation Paid to Members of the Board of Directors

Total Value of Compensation for the fiscal year:2017

(Amounts in US$’ 000)2016

(Amounts in US$’ 000)

Compensation for Membership of the Board of Directors and related committees 2,057 2,069

Others (Expenses for the Board) 169 112

Details of Compensation Paid to Employees

Amounts in US$ 000

2017

Fixed Compensation Variable Compensation

Total Compensation

Unrestricted cash and

allowancesUnrestricted

others 1 Cash

Deferred Equity

Instruments/ Shares 2

Approved persons - business lines 4,453 2,483 1,175 1,761 9,872

Approved persons – control 3,271 1,427 759 820 6,277

Other staff – Bahrain operations 33,833 14,790 8,207 - 56,830

Staff in subsidiaries 80,147 24,838 15,867 - 120,852

Total 121,704 43,538 26,008 2,581 193,831

Amounts in US$ 000

2016

Fixed Compensation Variable Compensation

Total Compensation

Unrestricted cash and

allowancesUnrestricted

others 1 Cash

Deferred Equity

Instruments/ Shares 2

Approved persons - business lines 3,828 2,195 928 1,391 8,342

Approved persons – control 3,043 1,060 663 757 5,523

Other staff – Bahrain operations 31,595 19,642 8,279 - 59,516

Staff in subsidiaries 78,972 21,796 14,402 - 115,170

Total 117,438 44,693 24,272 2,148 188,551

1 Others include direct charges such as social security contributions, end of service indemnity accrual charges, life insurance and medical premiums, club memberships, house lease rentals, school fees, vacation air fare, fair value charges for the employee share purchase program and indirect employee expenses such as training, recruitment, Government levies and other costs.

2 Deferred share awards are subject to the malus and clawback policy.



Annual Report 2017

No guaranteed or sign-on bonuses and/ or separation payments have been paid. These tables include employees in service for part of the year.

Deferred Performance Bonus Awards

AwardsCash Shares Others Total

(US$’000) Nos. (US$’000) * (US$’000) (US$’000)

Opening balance - 11,223,828 3,562 - 3,562

Awarded during the year - 6,208,326 2,148 - 2,148

Exercised/ Sold during the year - (4,097,279) (1,300) - (1,300)

Risk Adjustments - - - - -

Closing balance - 13,334,875 4,410 - 4,410

* Based on price at award date



Annual Report 2017GROUP BUSINESS AND RISK REVIEW

Corporate Banking

Market conditions remained challenging throughout the year due to continued low oil prices and pressure on government finances, resulting in tightened liquidity and slower payment processing. While geopolitical tensions also impacted GCC markets, conditions in Egypt improved gradually following devaluation of the local currency. Increases in US dollar interest rates, together with sovereign downgrades, placed upward pressure on the cost of debt across the region and pricing differentials continued to widen according to credit quality.

In a difficult environment, Corporate Banking maintained a strategic focus broadly in line with the previous year. Market conditions made it challenging to increase pricing for better quality credits except where supported by sovereign downgrades. The Division continued to be successful in raising liquidity from corporate clients, through leveraging the e-banking platform, and in increased cross-selling of non-asset products. Cross border investment and trade provided a productive source of new business across the Group, supported by continued growth in UAE business. While business focus encompassed all market segments, a cautious approach was adopted in evaluating new or additional exposure in the real estate and contracting sectors.

Overall, the Division achieved asset and revenue growth in line with target expectations while continuing to add new relationships across all markets.

Despite an increase in the oil price towards year end, liquidity across the region is forecast to remain relatively tight and, in several Gulf markets, little change is expected in the processing of government payments. Going forward, the Division will actively seek opportunities to add new, quality lending business across all markets, while continuing to increase liabilities and focus on broadening and deepening cross-selling initiatives.

Retail Banking

AUB’s Retail Banking division continued to pioneer the delivery of world-class financial services, enabling customers to realize their financial goals.

During the year increased competition, regulatory restrictions and rising credit costs were among key challenges emanating from a tough economic and operating environment. AUB was successful in mitigating adverse conditions by focusing on service excellence, driving volume growth in selected customer segments and by applying digital innovation to transform the customer experience. Despite the challenging and competitive environment, AUB retail continued to grow.

As a trendsetter in the retail banking space, several AUB products and services have been recognised for excellence in innovation. By placing digital technology at the core to its strategy, AUB has developed solutions that have made banking simpler and more efficient. As a result, the Bank has become integral to the lives of its customers, in meeting their increasingly diverse needs.

The Bank continued to optimize it branch network in line with the ongoing migration of transactions to digital channels. It was notable that a significant number of transactions were conducted outside the branch, typified by cash deposit facilities at AUB ATMs, enabling instant credit to bank account, replacing manual deposits made at the teller counter. Digital channels were also harnessed effectively to further customer acquisition, stimulate customer interaction and promote product cross-selling.

Despite tighter liquidity conditions, retail liabilities increased with current and savings account balances continuing to grow. Focusing on the higher value sector, the Retail division was successful in sourcing an increased number of high net worth and mass affluent customers.

Growth in retail assets remained moderate during the year reflecting the Bank’s emphasis on booking prime quality assets.

Treasury & Investments

Regional and GCC markets remained challenging throughout most of 2017. Subdued oil prices, weaker credit ratings and continuing geo-political tensions presented significant challenges for all Banks conducting business in the MENA and Gulf countries. The operating environment in Egypt remained difficult, as the Central Bank tightened monetary policy following the prior year’s devaluation of the Egyptian pound, implemented required IMF reforms. As the year progressed, a gradual improvement in the oil price, together with a degree of fiscal reform by GCC Governments began to create a modest improvement in the economic environment.

During 2017, a strong Treasury performance was driven by primary focus on the GCC and MENA markets, which continued to offer meaningful treasury and investment opportunities. Treasury maintained an active role in the G10 and GCC foreign exchange and interest rate markets for clients. Overall performance was enhanced by increased efficiency in pricing discipline, conservative market risk positioning and continued focus to serve our clients well. Considerable emphasis was placed on leveraging the Bank’s regional presence and growing the Treasury capabilities to meet client needs, especially in those products and markets where the Bank can offer clients competitive advantages from a structuring and pricing perspective.


Annual Report 2017GROUP BUSINESS AND RISK REVIEW(continued)

The Group continued to build and manage a diversified and comprehensive portfolio in line with the Bank’s targeted returns. This is against a backdrop of both rising interest rates and tight credit spreads. In this regard, our approach has been one of positioning for rising global rates and remaining very alert to the potential widening of credit spreads and potentially defaults in global credit markets. Nonetheless, performance of the portfolio remained satisfactory during 2017.

AUB’s extensive regional footprint enabled Treasury to maintain a strong liquidity position. The Group continued to focus on growing and diversify funding sources while managing the Group cost of funding in a cost efficient manner, helping protect the Bank’s net interest margin. Overall, 2017 proved to be a satisfactory performance for Treasury, and we remain cautiously optimistic for 2018.

Private Banking & Wealth Management In 2017 most of the world’s major economies continued on the path to recovery with both the euro zone and the US economies experiencing good levels of growth simultaneously. While inflation levels remained low, both the US and EU central banks moved to reduce asset purchasing programmes, indicating a shift towards normalising their monetary policy positions. In equity markets, the global index realised a total return, including dividends, close to 25% with significant gains recorded in emerging markets, European equities and Japan. Both corporate and government bond markets remained buoyant, posting positive returns.

In a robust environment, the Division maintained a focused approach to expanding the wealth management product offering and providing comprehensive financial solutions to clients across a range of asset classes and investment instruments. Growth in investment assets was further supported by delivering well researched, opportunistic investment deals aligned with client criteria. In broadening market coverage , the Division continued to be successful in extending investment services to relevant client segments within the AUB group.

Building on progress achieved in previous years at the AUB Group level asset under management continued to grow overall, with both customer deposits and loans and advances recording 7% growth. The Division’s performance in 2017, coupled with feedback from clients, culminated in AUB being recognised as ‘Best Private Bank’ in both Bahrain and Kuwait by several leading financial publications.

The Bank continued to strengthen the Private Bank, providing additional human resources to enhance the team in various locations and at multiple levels. The appointment of a Deputy Group CEO to lead future growth and development further underlined AUB’s commitment to the private banking and wealth management business.

In continuing to develop products that meet clients’ investment and diversification needs, the Division was successful in launching the US Multifamily Real Estate Private Equity fund and in marketing the Ahli Bank Oman bond that raised in excess of $100 million.

Going forward, elevated prices across all asset classes coupled with the risk of market corrections remains one of the key challenges in the wealth management environment. In mitigating risk, AUB Private Bank is committed to engage fully with clients, ensuring that portfolios are well diversified and overall positions enhanced by investments uncorrelated with traditional asset classes.

Strategy will continue to focus on strengthening the product platform, developing close relationships with both the client base and leading investment firms and experts. This will enable the Division to deliver solutions that grow the wealth of our clients while managing market volatility. Continued growth in both the client base and assets under management will be underpinned by the ability to deliver outstanding customer service. Additionally, access to the Group’s extensive geographical footprint will provide significant advantage in sourcing cross border business, commercial opportunities and investment flows within the MENA region for clients. Information Technology

In line with AUB’s transformation imperative, IT strategy continued to focus on strengthening the Bank’s capability to deliver uniformity of services across the Group, facilitating economies of scale while providing a consistent customer experience throughout the banking network. During 2017, IT was successful in delivering innovative and secured solutions to support the Bank’s businesses, management processes and security framework aligned to meet customers’ requirements through a diversified network of delivery channels.

The electronic funds transfer system was enhanced in compliance with regulatory mandates, enabling customers to perform bill payments in a timely manner across all banking channels. Bill payment features were added to corporate internet banking services which provide seamless integration with the Bank’s B2B cash management platform. As a result of the Bank’s initiatives to encourage electronic payment processing, the total transaction value through the B2B platform exceeded US$ 5.4 billion for the AUB Group, of which over US$ 2.7 billion was processed in Bahrain and US$ 2.1 billion in Kuwait. During the year the total number of transactions crossed the 1 million mark while further enhancements to the B2B platform were made to support Fintech banking in Bahrain.



Fully integrated support for electronic wallet business from payment service providers was made ready for launch in 2017 and the trade finance system was upgraded significantly, further strengthening the Bank’s B2B capabilities. The suite of electronic banking products was further expanded with the implementation of a cash deposit capability across all ATMs and, in streamlining business processes, business workflow automation was launched to facilitate improved processes for corporate credit approval and other business functions.

In recognising the value and importance of access to management information, AUB Group continued to invest in the enterprise-wide data management solution which, this year, was extended to support Ahli United Bank Limited in the Dubai International Financial Centre. The data warehousing function was further developed to improve centralized information and decision making capabilities and the underlying software upgraded to enhance data delivery time. The Bank also successfully implemented IFRS9 impairment system while initiated the implementation, Basel III and Enterprise Wide Reconciliation projects, in alignment with banking industry standards and regulatory requirements.

In driving AUB’s digital transformation, other major initiatives included completion of an upgraded anti-money laundering platform across Group entities, expanding the asset liability management system into Egypt and Kuwait, strengthening data quality and reporting processes and opening a new data centre for disaster recovery and business continuity planning located in Bahrain. The operational and customer service capabilities of several Group entities were also enhanced by the implementation of automated payment and deposit facilities.

As part of the capacity and performance management initiative, the bank continued to upgrade IT infrastructure for all key systems. A new state-of-the-art Tier3 Data centre with the latest technology infrastructure for Disaster Recovery and Business Continuity Planning was made operational at Hidd in Bahrain.

In 2017, the Bank successfully implemented ‘BenefitPay’ as a participating Bank in the ‘National E-organizer’, mobile payment initiative for instant micro payments. Across the AUB Group, the other initiatives included the Issuance of Visa contactless debit cards (Visa PayWave) for AUBUK and implementation of cardless cash deposits on AUB Egypt ATMs.

Information Security remained integral to the IT framework across the Group. In compliance with industry best practice, accreditation to the highest standards for payment card security and ISO information security were maintained. A comprehensive independent Information Security assessment to evaluate the security posture of the Group was undertaken by Group management resulting in significant enhancement to the information security framework.

Human Resources

Human Resources has made significant progress during 2017 in streamlining HR processes, strengthening HR partnerships with the Bank’s businesses and reinforcing a common culture across the AUB Group through effective implementation of an Integrated Talent Management System.

HR strategy focused on increasing automation across all HR functions and improving speed of response while continuing to build the competencies of the HR team. The implementation of AUB’s Learn and Lead platform, based on the SAP Successfactors System, was instrumental in establishing an effective HR in terface that provides readily accessible tools to employees to manage their work and careers as well as streamlining key areas of HR operations.

The performan ce management and goal management tool benchmarks ac hievements and competencies against SMART objectives. The Learning Management System upgraded training and developm ent planning for staff while Employee Central automated HR processes covering all employee business and personal data. The HR platform also delivered significant efficiencies in succession planning and in recruitment and onboarding where automated processes facilitate full visibility to hiring managers. Increased levels of employee collaboration and teamwork is being achieved through the Social Collaboration@Work tool while HR and management decision-making is set to improve significantly with the use of the Employee Analytics tool.

Key areas of development and performance centred on maximising efficiency and effectiveness in HR processes and service delivery, with emphasis on developing and enhancing training programs and upgr ading technology systems to serve staff at all levels more efficiently. Further integration of HR resources and systems placed the employee at the centre of HR activity.

Investment in the professional development of employees continued to be a key objective, with over 88% of AUB employees registered for training in entities across the Group. An online learning platform was successfully launched across the Group providing employees with online access to over 500 state-of-the-art finance related courses.

In compliance with Central Bank guidelines, Group HR managed the annual training plan for the continuous professional education of the AUB Board of Directors with topics including corporate governance, risk management, cyber economics, innovation and the Fintech Landscape, based on current international industry bench-marks and best practice.



Succession planning and career development was further strengthened with the completion of the first Group talent development program in Bahrain and Kuwait, preparing selected participants for future roles in senior management. In addition, a structured internship program was developed at the country level, not only providing educational support to local communities but also identifying talented graduates for future employment.

With the increased importance of physical and cyber security, HR worked closely with the security and information security teams in developing and executing training programs to ensure that all employees exercise continuous vigilance in mitigating security risks in their daily work. In alignment with international standards, AUB Bahrain and Kuwait HR departments successfully renewed their ISO 9001 quality accreditation in 2017. Internally, HR’s alignment with the Bank’s business needs was further enhanced with the introduction of HR Business Partnerships which support the business functions.

At year-end 2017, AUB Group staff totalled 3,754 incorporating 44 different nationalities with women accounting for over one third of the workforce. 375 new employees were hired across the Group in 2017 and the turnover rate decreased to 10.7% compared to 13% the previous year. The average length of service per employee remained at 8 years reflecting AUB’s ability in recruiting and retaining talented professionals.

Going forward, HR strategy will continue to focus on developing initiatives that enhance employee engagement, health and well-being and strengthen relationships between line managers and staff; attributes that are critical in differentiating AUB in the market for human capital and retaining the Bank’s reputation as a regional employer of choice with a robust management capability.

Future success will be defined by AUB’s ability in adapting to the changing economic environment and the dynamic technology landscape.

Compliance

AUB continuously strives to improve the level of compliance in all its activities. The Bank has an independent Compliance function and reports to the Audit and Compliance Committee. The Compliance function acts as a focal point for all regulatory compliance and for adapting any best practice compliance principles. The Compliance Department has the responsibility to monitor and, on a regular basis, to assess the adequacy and effectiveness of the measures and procedures put in place and the actions taken to address any deficiencies in the Bank’s compliance with its obligations; and to advise and assist the relevant persons responsible for carrying out regulated activities to comply with the stated obligations under the regulatory system.

Implementing appropriate systems, processes and controls to combat Anti-money laundering and terrorist financing activities form an important activity of the AML Unit within the compliance function. AUB has deployed a risk based automated transaction monitoring system and implemented relevant procedures and controls to facilitate appropriate monitoring and detection mechanism. AUB also has appropriate AML and Compliance policies and monitoring programs. These policies and monitoring programs are reviewed and updated annually and approved by the Board of Directors. The Bank’s anti-money laundering measures are regularly audited by the internal auditors who report to the Audit & Compliance Committee of the Board. Additionally, the Bank’s anti-money laundering measures are audited by independent external auditors every year and their report is submitted to the CBB. The Central Bank also performs periodic inspections of the Bank’s compliance with anti-money laundering regulations.

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 oversight and advice on the Board approved 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,

• measure, monitor and report the risks against approved limits.

While risks that are inherent in the banking business cannot be completely eliminated, the risk management function aims to effectively manage these risks within the tolerance levels approved by the Board while earning competitive returns commensurate to the degree of risk assumed. Risk is evaluated based on the potential impact on income and capital, taking into consideration changes in political, economic and market conditions, and the idiosyncratic factors that impact the risk exposures.


Annual Report 2017

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 approves at least annually the Bank’s key Risk Management policies based on reviews and recommendations of the risk management function and the relevant management committees. 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 risk function that understands, monitors and independently controls each risk exposure ensuring that the appropriate approvals are obtained and a uniform risk management standard, including objective risk measurement, has been correctly applied to all risk exposures;

• product and business policies, which are clearly understood, monitored and are in agreement with the overall Board approved risk framework;

• the ongoing assessment of the portfolio against various risk parameters; and

• an integrated limits structure that permits management to monitor, control and assume exposures within approved

tolerances.

Credit Risk

Credit risk is the risk of financial loss due to the failure of a counterparty to perform its obligations 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 rating 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

GROUP BUSINESS AND RISK REVIEW(continued)

requirements and are designed to identify at an early stage, exposures which require close 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 assessed to be irrecoverable, a mandatory write-off takes place. This is conducted by a risk management process, which is completely independent in reporting terms from the asset generating departments.

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 has been validated and calibrated to meet the requirements of Expected Credit Loss computation under IFRS 9. The Group has implemented the necessary automated systems, quantitative models and governance processes to be compliant with IFRS 9.

The risk management function categorizes 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 function.

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. The GRC responsibilities include the following:

• formulation and implementation of credit policies and monitoring compliance,

• act as a credit approval authority for credits within its delegated limits,

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

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

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

• ensure the adequacy of specific and collective impairment provisions and make appropriate recommendations to the Executive Committee.



Market Risk

Market risk is the risk that adverse movements in market risk factors including foreign exchange rates, interest rates, credit spreads, commodity prices and equity prices will reduce the Group’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 qualitative risk management techniques.

The Group calculates VaR using a one-day holding period at a confidence level of 99%, which takes into account the actual correlations observed historically between different markets and rates.

Value at Risk

2017US$ ’000

2016US$ ’000

Average 672 310

Minimum 315 82

Maximum 1,291 770

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

The Group recognizes that VaR is based on the assumption of normal market conditions and that certain market shocks can result in losses greater than anticipated. Therefore, 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 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. 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. The treasury function at each subsidiary manages this risk with monitoring by the Risk Management department and oversight by its Assets and Liabilities Committee (ALCO). At the Group level, the liquidity risk is managed by the 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 has adopted an ongoing Operational Risk Self-Assessment (ORSA) process. Assessments are made of the operational risks identified within each function of the Bank and these are reviewed regularly to monitor significant changes and the adequacy of controls. Operational risk incident and loss data is collected and reported to senior management on a regular basis. The Group also collates and reviews various key risk indicators (KRIs) to facilitate detection of deficiencies or potential failures in controls and procedures.

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.


Annual Report 2017

UBCI Board of Directors

CBIQ Board of Directors

ABO Board ofDirectors

AUBL Board ofDirectors

AUBE Board ofDirectors

AUBUK Board of Directors

AUBK Board ofDirectors

AlHilal Life Board of Directors

CEOAUBK

CEOAlHilal Life

CEOAUBL

CEOAUBUK

CEOABO

CEOAUBE

CEOUBCI

CEOCBIQ

DGCEOTreasury &

Investments

DGCEORetail

Banking

DGCEOFinance &Strategic

Development

Group HeadHuman

Resources &Development

Group HeadAudit

DGCEOCorporateBanking

DGCEOPB & WM

DGCEOOperations

&Technology

DGCEORisk, Legal &Compliance

GroupHead

Compliance

Sharia Compliance

Officer

Group Head Legal & Corporate

Affairs (Corporate Secretary)

NominatingCommittee

CompensationCommittee

AUBBoard ofDirectors

Group CEO &Managing Director

Audit & Compliance Committee

Executive Committee

Sharia Advisory& Supervisory Board

GROUP MANAGEMENT ORGANIZATION STRUCTURE


Annual Report 2017GROUP MANAGEMENT

Adel A. El-Labban

Group Chief Executive Officer and Managing Director

Director since 30 July 2000, holds a Masters in Economics (Highest Honors) from the American University, Cairo, 1980, Bachelors in Economics (Highest Honors) from American University, Cairo, 1977 and a General Certificate of Education from London University, 1973.

Group Chief Executive Officer & Managing Director, Ahli United Bank BSC, Bahrain; First Deputy Chairman, Ahli Bank SAOG, Oman; Deputy Chairman, United Bank for Commerce & Investment S.A.C., Libya; Deputy Chairman, Middle East Financial Investment Co, Saudi Arabia; Director, Ahli United Bank (UK) Plc; Director, Ahli United Bank KSCP, Kuwait; Director, Ahli United Bank Limited, UAE; Director, Bahrain Association of Banks, Bahrain.

Formerly: Deputy Chairman, Commercial Bank of Iraq; Deputy Chairman, Ahli United Bank (Egypt), Chief Executive Officer and Director, United Bank of Kuwait PLC, UK; Managing Director, Commercial International Bank (Egypt) SAE; Chairman, Commercial International Investment Company, Egypt; Vice President, Corporate Finance, Morgan Stanley, USA; Assistant Vice President, Arab Banking Corporation, Bahrain; Director, Bahrain Stock Exchange; Director, Kuwait & Middle East Financial Investment Co, Kuwait.

(Total years of experience: 39 years)

Sanjeev Baijal

Deputy Group Chief Executive Officer - Finance and Strategic Development

Chairman Al Hilal Life B.S.C.(c) & Al Hilal Takaful B.S.C.(c), Bahrain; Director, Ahli United Bank K.S.C.P., Kuwait; Director, 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).


Keith Gale

Deputy Group Chief Executive Officer - Risk, Legal and Compliance

Director, Ahli United Bank K.S.C.P. Kuwait; Director, Ahli United Bank S.A.E., Egypt; Director, Ahli United Bank (UK) P.L.C.; 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 P.L.C.; 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.


Abdulla AlRaeesi

Deputy Group Chief Executive Officer – Retail Banking

Director and Member of the Board Risk Committee and Member of Corporate Governance Committee of Ahli United Bank K.S.C.P., Kuwait; Deputy Chairman, Al Hilal Life B.S.C.(c), Bahrain; Deputy Chairman, Al Hilal Takaful B.S.C.(c), Bahrain. Chairman of Ahli United Bank Group IT Steering Committee, Member of Group Assets and Liabilities Committee, Member of Group Management Committee and Member of Group Operation Risk Committee. Former Director, Ahli United Bank (Egypt) S.A.E.; Former Director, International Chamber of Commerce, Bahrain; Former Director, The Benefit Company, Bahrain. Former Chairman, Ahli Man Investment Committee, Bahrain. Former Vice Chairman, Ahli United Finance Company, Egypt; Former Vice Chairman, Charity Committee of Ahli United Bank B.S.C., Bahrain; Former Head of Business & Technology Consulting Group at Arthur Andersen and Assistant General Manager at Commercial Bank of Qatar. Holds an MBA in Business Administration from the United Kingdom.



Annual Report 2017

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.


David O’Loan

Deputy Group Chief Executive Officer - Treasury and Investments

Former: Group Treasurer for J. Sainsbury Plc, UK; Deputy Group Treasurer, RBS Group, UK; Senior Vice President, Swiss Re Asset Management, Switzerland; Investment Director, Standard Life Investments, UK; Head of Treasury, BGB (Ireland) plc, Ireland; Manager, Citibank N.A, Ireland. Fellow of the Association of Chartered Certified Accountants, holds a Master of Science degree in Treasury & Investment (Dublin City University) and an MBA from University of Edinburgh.


GROUP MANAGEMENT (continued)

Derek Lunt

Deputy Group Chief Executive Officer – Corporate Banking

Director, Al Hilal Life B.S.C. (c) & Al Hilal Takaful B.S.C. (c). Previous experience as Regional Chief of Staff, HSBC Bank Middle East; Regional Head of Corporate and International, HSBC Bank Middle East; Deputy Head, International and Strategy, HSBC Bank Middle East; Senior Executive, International, HSBC Europe; Area Director, Milton Keynes, HSBC UK; Head of Trade Services, HSBC Europe; Director, International Trading Division, HSBC Hong Kong; Deputy Head, Consumer Industries, HSBC Corporate and Institutional Banking, London; Relationship Manager/Director, Consumer Products Team, Midland Bank Corporate and Institutional Banking, London; Various Roles, Forward Trust Group, UK. Holds a BA (Hons) in Human Sciences from St. Catherine’s College, Oxford; Postgraduate – General Management Programme, CEDEP from INSEAD.


Mark Hirst

Deputy Group Chief Executive Officer - Private Banking and Wealth Management

Former: Chief Executive Officer & Head of Private Banking, Standard Chartered Bank, Switzerland; Chairman of CS UK Ltd & Market Area Head UK/ International - Credit Suisse Group, Switzerland; Executive Board Member & Market Area Head Middle East & Africa - Deutsche Bank, Switzerland; CEO - Deutsche Bank International Ltd, Channel Islands; CEO & Chief Investment Officer – RBC Global Asset Management UK Ltd; Head of Asset Allocation & Senior Portfolio Manager - Manufactures Life International Investment Office, UK. Economist - Confederation of British Industry, UK. Holds a Masters in International Management from McGill University in Canada, Diploma in International Practicing Management from INSEAD, Bachelor of Science from University of Swansea and is a Chartered Fellow of the Institute of Directors, member of the CFA Institute and STEP.



Annual Report 2017GROUP MANAGEMENT (continued)

Robert Jones

Group Head – Audit

Former Deputy Chief Executive Officer, Finance, Risk, Operations and Technology at Ahli United Bank (UK) P.L.C., Former Head of Audit for AUB Bahrain, Former Audit Manager in the National Commercial Bank (Saudi Arabia). Has qualified the Information Systems Audit and Control Association (CISA) and the Institute of Chartered Secretaries & Administrators (ACIS) examinations.


Iman Al-Madani

Group Head – Human Resources & Development, CGM

Former Group Head of Human Resources & Head of Human Resources, Bank of Kuwait & Middle East (BKME). Former Assistant General Manager Human Resources, Burgan Bank, Kuwait. Certified Corporate Governance Officer (CCGO) from the London Business School. Holds a Bachelor of Science in Mathematics from theUniversity of Denver, USA and an Associate Degree in Computer Science, Lane College, Oregon State, USA.


Sami Tamim

Acting Chief Executive Officer – AUBUK

Former: Deputy CEO – Private Banking and Wealth Management, Ahli United Bank UK; Executive Director, UBS, London; Director, Citibank, UK; Senior Vice President, Couttes Bank, London; Managing Director, Bank of Beirut, UK; Head of Private Banking, SAMBA, UK. Holds a Bachelor Degree in Economics from the American University of Beirut.


Richard Groves

Chief Executive Officer - Ahli United Bank, Kuwait

Former CEO and Board Member of various banks within the HSBC Group including CEO – HSBC Greece, CEO – HSBC Oman and Managing Director – Saudi British Bank (SABB), HSBC’s 40% owned affiliate in Saudi Arabia. Previously working in Hong Kong, Indonesia, Australia, the Philippines, Malaysia and the UK in a variety of investment banking, corporate and transactional roles. Holds a BA (Hons.) in Economic & Social History from the University of Hull, UK and has completed an Advanced Executive Programme from the Kellogg School of Management, USA.


Nevine El Messeery

Chief Executive Officer & Managing Director - Ahli United Bank, Egypt

Director, Ahli United Bank (Egypt) S.A.E. Former General Manager, Corporate Banking at Commercial International Bank (CIB), Egypt, Former Chair of the Credit Committee, Former Chair of the Concession Tariff Committee, Former Member of the ALCO Committee, Former Board Member of the CIB Life Insurance Company. Has held several roles as Chair of the Board of Directors in several investment companies and subsidiaries of CIB. Former General Manager, Egyptian American Bank (Credit Agricole). Holds a Graduate Degree, Faculty of Commerce from Cairo University, Egypt.


Nouri Aldubaysi

Chief Executive Officer - Commercial Bank of Iraq

Director, Commercial Bank of Iraq P.S.C., Iraq. Former Deputy General Manager, Al Rasheed Bank, Iraq. Held senior management positions with Rafidain Bank and Al Rasheed Bank, Iraq. Holds a degree in Accounting from International Institute of Accountancy in Lebanon.



Annual Report 2017GROUP MANAGEMENT (continued)

Lloyd Maddock

Chief Executive Officer - Ahli Bank S.A.O.G, Oman

Treasurer & Board Member, Oman Banks Association; Chairman Al-Hilal MENA Fund; Former Deputy Group Chief Executive Officer, Corporate Banking, Ahli United Bank; Former Chief Executive Officer, HSBC Pakistan; Former Chief Executive Officer, HSBC Kuwait; Former Head of Wholesale Credit & Risk, HSBC MENA region, subsequent to working in various senior management roles with HSBC covering Corporate Banking, Strategy & Risk Management. Holds a Bachelor in Mining Engineering 1990 from the University of Exeter, UK.


Ayman El Gammal

Chief Executive Officer - United Bank for Commerce &Investment, Libya

Former Assistant Managing Director and Head of Investments, National Investment Bank, Egypt, Former Managing Director, Asset Management - Private Equity, NAEEM Holdings, Egypt, Former Managing Director, EFG Hermes Private Equity, Egypt, Former Executive Director, Commercial International Investment Company, Former Assistant General Manager, Commercial International Bank (CIB), Egypt. Former board member in various companies and banks representing employers’ investments. Holds a BA in Business from Cairo University, Egypt.


CB Ganesh

Chief Executive Officer – Ahli United Bank Limited

Former Deputy CEO – Banking Group, Ahli Bank SAOG, Oman. Former Deputy CEO & Head of Wholesale Banking, ICICI Bank Ltd, North Asia (Hong Kong). Former Head of Trade Finance, ICICI Bank Ltd, India; Former Regional Head, Corporate Banking ( South India), ICICI Bank Ltd. Holds Master in Commerce from MK University India. Holds a Master in Bank Management from Alagappa University in India, EPGM from MIT Sloan School, USA, EPBM from IIM Calcutta and CAIIB from the Indian Institute of Bankers in India.

( Total years of experience: 27 years)

Said Hathout

Acting Chief Executive Officer – Al Hilal Life & Al Hilal Takaful

Former Chief Operating Officer, Al Hilal Life B.S.C.(c) and Al Hilal Takaful B.S.C.(c), Bahrain; Former Operations and IT Director, Al Hilal Life B.S.C.(c) and Al Hilal Takaful B.S.C.(c), Bahrain; Former Regional Operations Director, ACE Life Insurance Company, UAE & Egypt; Former Life Administration Manager, Arabia Insurance Company S.A.L.; Lebanon. Holds a Master’s Degree in Business Administration and a Bachelor Degree in Business Marketing from the Lebanese American University in Lebanon.



Annual Report 2017CONTACT DETAILS

AHLI UNITED BANK B.S.C.

Bldg. 2495, Road 2832, Al Seef District 428P.O. Box 2424, ManamaKingdom of Bahrain

Telephone: +973 17 585 858Facsimile: +973 17 580 569Email: [email protected]

AHLI UNITED BANK (UK) PLC

35 Portman Square, London W1H 6LRUnited Kingdom


AHLI UNITED BANK K.S.C.P.

P.O. Box 71 Safat , 12168, Kuwait

Telephone: +965 1802000Facsimile: +965 22461430Email: [email protected]

AHLI UNITED BANK LIMITED

1402 Al Fattan Currency HouseTower 2, 14th floor, P.O. Box 507055DIFC, Dubai, UAE


COMMERCIAL BANK OF IRAQ P.S.C.

Al Sadoon Street, Baghdad, Iraq

Telephone: +964 7830164484 +964 7818834366Email: [email protected]

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

81 El-Tesseen Street Sector A, Fifth SettlementCairo, Egypt

Telephone: +20 2 22499500 +20 2 22499900 +20 2 22499700Facsimile: +20 2 26135160Email: [email protected]

AHLI BANK S.A.O.G.

P.O. Box 545Postal Code 116Mina Al FahalSultanate of Oman

Telephone: +968 24577000Facsimile: +968 24568001Email: [email protected]

UNITED BANK FOR COMMERCE & INVESTMENT S.A.L.

Gumhouria Street - Mansoura District Tripoli, Libya

Telephone: +218 213345602/3/4Facsimile: +218 213345601Email: [email protected]

AL HILAL LIFE B.S.C. (C)

5th Floor, Office 52, Bldg 680, Road 2811Al Seef District 428, P.O. Box 5832, ManamaKingdom of Bahrain

Telephone: +973 17 589 800www.alhilal.life


Annual Report 2017


Annual Report 2017

CONSOLIDATEDFINANCIAL STATEMENTS

31 DECEMBER 2017

Independent Auditors' Report to the Shareholders of Ahli United Bank B.S.C. 66Consolidated Statement of Income 71Consolidated Statement of Comprehensive Income 72Consolidated Balance Sheet 73Consolidated Statement of Cash Flows 74Consolidated Statement of Changes in Equity 75Notes to the Consolidated Financial Statements 77


Annual Report 2017INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK B.S.C.

Report on the Audit of the Consolidated Financial Statements

OpinionWe have audited the accompanying consolidated financial statements of Ahli United Bank B.S.C. (“the Bank”) and its subsidiaries (together “the Group”), which comprise the consolidated balance sheet as at 31 December 2017, and the consolidated statements of income, comprehensive income, cash flows and changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended 31 December 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

Ernst & Young P.O. Box 140

10th Floor, East TowerBahrain World Trade Center

ManamaKingdom of Bahrain

Tel: +973 1753 5455Fax: +973 1753 [email protected]

ey.com/menaC.R.No. 6700/29977


Annual Report 2017INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERSOF AHLI UNITED BANK B.S.C. (continued)

1. Impairment of carrying value of loans and advances

Risk How the key audit matter was addressed in the audit

The Bank exercises significant judgment using subjective assumptions when determining both the timing and the amounts of the impairment provision for loans and advances. Because loans and advances form major portion of the Group’s assets and due to the significance of judgment used in estimating both the specific and collective provisions for loans and advances, this audit area is considered a key audit risk. As at 31 December 2017, the gross loans and advances amounted to US$ 20,087,770 thousand and related impairment provision amounted to US$ 589,068 thousand. The basis of the impairment provision policy is presented in the accounting policies and further analysed in Note 8 to the Consolidated Financial Statements.

We have performed tests of controls over the monitoring process of loans and advances to assess the operating effectiveness of the key controls in place which identify the impaired loans and advances against which provisions are required. We also performed tests of controls over the rating system adopted by the Group.

Where specific impairment provision was individually calculated, we tested a sample of loans and advances to assess whether an event of impairment has been identified through performing substantive audit procedures in connection with impairment provisions recognized. We also tested the assumptions and underlining data used by management in estimating the required provisions.

For the collective impairment provision, we obtained an understanding of the methodology used by the Group to determine the collective provisions, assessed the reasonableness of underlying assumptions and sufficiency of the data used by management.

We also assessed whether the financial statement disclosures appropriately reflect the requirements of IFRS.

Refer to the critical accounting estimates and judgements, disclosures of loans and advances and credit risk management in note 3.3(g), Note 8 and Note 31 to the Consolidated Financial Statements.

2. Impairment of goodwill

Risk How the key audit matter was addressed in the audit

Goodwill is allocated to cash generating units (‘CGUs’) for the purpose of impairment testing. Goodwill impairment testing of CGUs relies on estimates of value-in- use based on estimated future cash flows. Due to the subjectivity involved in forecasting and discounting of future cash flows and the significance of the Group’s recognised goodwill (US$ 431,299 thousand) as at 31 December 2017, this audit area is considered a key audit risk. Subjectivity is typically highest for those CGUs where headroom between value-in-use and carrying value is limited and where the value-in-use is most sensitive to the assumption used in the calculation of value-in-use.

Our audit procedures included the assessment of reasonableness of key inputs, such as the discount rates and growth rates, by comparison to externally available industry, economic and financial data and the Group’s own historical data and performance. With the assistance of our own specialists, we assessed the reasonableness of assumptions and methodologies used to calculate value-in-use for those CGUs where goodwill was found to be sensitive to changes in those assumptions.

Additionally we considered whether the Group’s disclosures of the application of judgement in estimating CGU cash flows and the sensitivity of the results of those estimates adequately reflect the risks associated with goodwill impairment.

Refer to the critical accounting estimates and judgements and disclosures of goodwill in Note 14, and allocation of goodwill to CGUs in Note 30 to the Consolidated Financial Statements.

Report on the Audit of the Consolidated Financial Statements (continued)Key audit matters (continued)


Annual Report 2017

Other information included in the Group’s 2017 Annual Report Other information consists of the information included in the Group’s 2017 Annual Report, other than the consolidated financial statements and our auditor’s report thereon. The Board of Directors is responsible for the other information. Prior to the date of this auditors’ report, we obtained the Board of Directors’ report which forms part of the annual report, and the remaining sections of the annual report are expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information obtained prior to the date of the auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Board of Directors for the Consolidated Financial StatementsThe Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Consolidated Financial StatementsOur objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.

• Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERSOF AHLI UNITED BANK B.S.C. (continued)

Report on the Audit of the Consolidated Financial Statements (continued)


Annual Report 2017

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

As required by the Bahrain Commercial Companies Law and (Volume 1) of the Central Bank of Bahrain (CBB) Rule Book, we report that:

a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith;

b) the financial information contained in the Report of the Board of Directors is consistent with the consolidated financial statements;

c) 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 2017 that might have had a material adverse effect on the business of the Bank or on its consolidated financial position; and

d) satisfactory explanations and information have been provided to us by Management in response to all our requests.

The partner in charge of the audit resulting in this independent auditor’s report is Mr. Ashwani Siotia.

Partner’s registration no. 11720 February 2018Manama, Kingdom of Bahrain

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERSOF AHLI UNITED BANK B.S.C. (continued)

Report on the Audit of the Consolidated Financial Statements (continued)Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements (continued)


Annual Report 2017


Annual Report 2017CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2017

Note2017

US$ ’0002016

US$ ’000

Interest income 4a 1,379,174 1,319,798

Interest expense 4b 502,704 491,566

Net interest income 876,470 828,232

Fees, commissions and others 5 145,013 169,735

Trading income 6 35,239 48,288

Investment income 39,399 72,605

Share of profit from associates 23,251 26,626

Fees and other income 242,902 317,254

OPERATING INCOME 1,119,372 1,145,486

Net provision for loan losses and others 8f 86,670 149,562

Provision for investments 9 2,280 9,279

Total provisions 88,950 158,841

NET OPERATING INCOME 1,030,422 986,645

Staff costs 193,831 188,551

Depreciation 20,824 22,242

Other operating expenses 108,245 105,427

OPERATING EXPENSES 322,900 316,220

PROFIT BEFORE TAX 707,522 670,425

Tax expense 22 41,008 46,115

NET PROFIT FOR THE YEAR 666,514 624,310

Net profit attributable to non-controlling interest 47,799 53,670

NET PROFIT ATTRIBUTABLE TO THE OWNERS OF THE BANK 618,715 570,640

EARNINGS PER SHARE ATTRIBUTABLE TO THE OWNERS OF THE BANK FOR THE YEAR:

Basic & diluted earnings per ordinary share (US cents) 23 7.7 7.2

Hamad M. Al-Humaidhi Chairman

Mohammad J. Al-MarzooqDeputy Chairman

Adel A. El-Labban Group Chief Executive Officer

& Managing DirectorThe attached notes 1 to 39 form part of these consolidated financial statements


Annual Report 2017CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2017

2017US$ ’000

2016US$ ’000

Net profit for the year 666,514 624,310

Other comprehensive income (OCI)

Items that will not be reclassified to consolidated statement of income

Net change in fair value of financial assets measured at fair value through OCI (2,289) 2,683

Net change in pension fund reserve 2,410 (15,492)

Net change in property revaluation reserve (750) 113

Items that may be reclassified subsequently to consolidated statement of income

Foreign currency translation adjustments 37,424 (309,231)

Net change in fair value of cash flow hedges (2,876) 4,265

Other comprehensive income for the year 33,919 (317,662)

Total comprehensive income for the year 700,433 306,648

Total comprehensive income attributable to non-controlling interest 53,652 2,429

Total comprehensive income attributable to owners of the Bank 646,781 304,219

The attached notes 1 to 39 form part of these consolidated financial statements


Annual Report 2017CONSOLIDATED BALANCE SHEETAt 31 December 2017

Note2017

US$ ’0002016

US$ ’000

ASSETS

Cash and balances with central banks 7a 809,986 912,924

Treasury bills and deposits with central banks 7b 2,576,352 2,464,846

Deposits with banks 2,469,751 1,884,493

Loans and advances 8 19,498,702 18,606,883

Non-trading investments 9 6,002,410 5,570,447

Investment in associates 10 304,020 326,874

Investment properties 11 256,242 132,021

Premises and equipment 12 226,672 211,209

Interest receivable and other assets 13 616,920 738,155

Goodwill and other intangible assets 14 480,830 474,632

TOTAL ASSETS 33,241,885 31,322,484

LIABILITIES AND EQUITY

LIABILITIES

Deposits from banks 15 3,943,233 3,279,038

Borrowings under repurchase agreements 16 1,272,758 698,228

Customers’ deposits 17 22,009,857 21,703,358

Interest payable and other liabilities 18 912,679 865,376

Subordinated liabilities 19 215,204 236,982

TOTAL LIABILITIES 28,353,731 26,782,982

EQUITY

Ordinary share capital 20 1,889,213 1,711,322

Treasury shares (11,661) (11,497)

Reserves 1,938,070 1,801,002

Equity attributable to the owners 3,815,622 3,500,827

Perpetual Tier 1 Capital Securities 20d 600,000 600,000

Non-controlling interest 472,532 438,675

TOTAL EQUITY 4,888,154 4,539,502

TOTAL LIABILITIES AND EQUITY 33,241,885 31,322,484

Hamad M. Al-Humaidhi Chairman

Mohammad J. Al-MarzooqDeputy Chairman

Adel A. El-Labban Group Chief Executive Officer

& Managing DirectorThe attached notes 1 to 39 form part of these consolidated financial statements


Annual Report 2017CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2017

Note2017

US$ ’0002016

US$ ’000OPERATING ACTIVITIESProfit before tax 707,522 670,425 Adjustments for: Depreciation 20,824 22,242 Investment income (39,399) (72,605) Net provision for loan losses and others 8f 86,670 149,562 Provision for investments 9 2,280 9,279 Fair Value of ESPP charge 21h 3,921 5,224 Share of profit from associates 10 (23,251) (26,626)Operating profit before changes in operating assets and liabilities 758,567 757,501 Changes in:Mandatory reserve deposits with central banks (78,832) 142,510 Treasury bills and deposits with central banks (111,506) (346,901)Deposits with banks (183,879) 696,363 Loans and advances (978,489) 596,736 Interest receivable and other assets 121,235 (147,326)Deposits from banks 664,195 (962,153)Borrowings under repurchase agreements 574,530 (102,770)Customers’ deposits 306,499 (1,791,869)Interest payables and other liabilities 66,038 17,080 Cash from (used in) operations 1,138,358 (1,140,829)Income tax paid (30,997) (25,581)Net cash from (used in) operating activities 1,107,361 (1,166,410)

INVESTING ACTIVITIESPurchase of non-trading investments (2,220,817) (2,749,131)Proceeds from sale or redemption of non-trading investments 1,817,326 2,562,141 Net (increase) decrease in investment properties (124,221) 51,145 Net (increase) decrease in premises and equipment (36,732) 5,476 Dividends received from associates 12,955 12,955 Net cash used in investing activities (551,489) (117,414)

FINANCING ACTIVITIESAdditional investment in subsidiary 2 (1,490) - Proceeds from issue of Perpetual Tier 1 Capital Securities 20d - 200,000 Payment of expenses related to Perpetual Tier 1 Capital Securities - (1,351)Distribution on Perpetual Tier 1 Capital Securities 21j (38,500) (27,500)Repayment of subordinated liabilities (21,778) (24,612)Dividends and other appropriations paid (302,647) (287,226)Dividends paid to non-controlling interest (15,414) (5,892)Capital increase from issuance of ESPP & MSP shares 20c 12,517 14,677 Purchase of treasury shares (164) (4,188)Net cash used in financing activities (367,476) (136,092)Net foreign exchange difference 31,213 (211,611)INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 219,609 (1,631,527)Cash and cash equivalents at 1 January 2,309,113 3,940,640 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 2,528,722 2,309,113 Additional cash flow information:Interest received 1,398,430 1,321,741 Interest paid 518,651 452,133



Annual Report 2017CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2017

Attributable to the owners

Reserves

Ordinaryshare

capitalUS$ ’000

Treasury shares

US$ ’000

SharepremiumUS$ ’000

Statutoryreserve

US$ ’000

Retainedearnings

US$ ’000

Proposedappro-

priationsUS$ ’000

Other reserves

(Note 21(h))

US$ ’000

TotalreservesUS$’000

Perpetual Tier 1

Capital Securities

US$’000

Non-controlling

interestUS$’000

TotalUS$’000

Balance at 1 January 2017 1,711,322 (11,497) 747,583 454,856 791,395 310,144 (502,976) 1,801,002 600,000 438,675 4,539,502

Distribution on Perpetual Tier 1 Capital Securities [note 21(j)] - - - - (27,500) - - (27,500) - - (27,500)

Ordinary share dividend paid [note 21(i)] - - - - 733 (309,144) - (308,411) - - (308,411)

Dividends of subsidiary - - - - - - - - - (15,414) (15,414)

Donations paid - - - - - (1,000) - (1,000) - - (1,000)

Bonus shares issued 171,747 - - - (171,747) - - (171,747) - - -

Additional shares issued 6,144 - 6,373 - - - - 6,373 - - 12,517

Purchase of treasury shares - (164) - - - - - - - - (164)

Distribution related to Perpetual Tier 1 Sukuk [note 21(j)] - - - - (8,240) - - (8,240) - (2,760) (11,000)

Transfer of property revaluation reserve on sale of property - - - - 243 - - 243 - - 243

Fair value amortisation of share based transactions - - - - 3,921 - - 3,921 - - 3,921

Transfer from OCI reserve - - - - (3,704) - - (3,704) - - (3,704)

Movement in subsidiaries - - 352 - - - - 352 - (1,621) (1,269)

Total comprehensive income for the year - - - - 618,715 - 28,066 646,781 - 53,652 700,433

Transfer to statutory reserve [note 21(c)] - - - 61,872 (61,872) - - - - - -

Proposed dividend on ordinary shares [note 21(i)] - - - - (341,578) 341,578 - - - - -

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

Balance at 31 December 2017 1,889,213 (11,661) 754,308 516,728 799,366 342,578 (474,910) 1,938,070 600,000 472,532 4,888,154



Annual Report 2017CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2017

Attributable to the owners

Reserves

Ordinaryshare

capitalUS$ ’000

Treasury shares

US$ ’000

SharepremiumUS$ ’000

Statutoryreserve

US$ ’000

Retainedearnings

US$ ’000

Proposedappro-

priationsUS$ ’000

Other reserves

(Note 21(h))

US$ ’000

TotalreservesUS$’000

Perpetual Tier 1

Capital SecuritiesUS$’000

Non-controlling

interestUS$’000

TotalUS$’000

Balance at 1 January 2016 1,623,030 (7,309) 739,781 397,792 694,312 294,099 (223,968) 1,902,016 400,000 442,477 4,360,214

Distribution on Perpetual Tier 1 Capital Securities [note 21(j)] - - - - (27,500) - - (27,500) - - (27,500)

Ordinary share dividend paid [note 21(i)] - - - - 698 (293,099) - (292,401) - - (292,401)

Dividends of subsidiaries - - - - - - - - - (5,892) (5,892)

Donations paid - - - - - (1,000) - (1,000) - - (1,000)

Bonus shares issued 81,417 - - - (81,417) - - (81,417) - - -

Additional shares issued 6,875 - 7,802 - - - - 7,802 - - 14,677

Purchase of treasury shares - (4,188) - - - - - - - - (4,188)

Perpetual Tier 1 Sukukissued by a subsidiary [note 20(d)] - - - - - - - - 200,000 - 200,000

Expenses related to Perpetual Tier 1 Sukuk issued by a subsidiary - - - - (1,012) - - (1,012) - (339) (1,351)

Fair value amortisation of share based transactions - - - - 17,811 - (12,587) 5,224 - - 5,224

Transfer from OCI reserve - - - - (14,929) - - (14,929) - - (14,929)

Total comprehensive income for the year - - - - 570,640 - (266,421) 304,219 - 2,429 306,648

Transfer to statutory reserve[note 21(c)] - - - 57,064 (57,064) - - - - - -

Proposed dividend on ordinary shares [note 21(i)] - - - - (309,144) 309,144 - - - - -

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

Balance at 31 December 2016 1,711,322 (11,497) 747,583 454,856 791,395 310,144 (502,976) 1,801,002 600,000 438,675 4,539,502



Annual Report 2017NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS31 December 2017

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 in note 2 below (collectively known as “the Group”) are engaged in retail, commercial, islamic and investment banking business, global fund management, private banking services and life insurance business through 109 branches, as at 31 December 2017, in the Kingdom of Bahrain (22 branches), the State of Kuwait (37 branches), the Arab Republic of Egypt (37 branches), Republic of Iraq (11 branches), Dubai International Financial Centre (Authorised Firm) and the United Kingdom (1 branch). During 2017, it also operated through its managed associates in the Sultanate of Oman (20 branches) and Libya (11 branches) with a total network of 31 branches as at 31 December 2017. The Bank operates under a retail banking license 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 2017 were authorised for issue in accordance with a resolution of the directors dated 20 February 2018.

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 2017 and 2016. The results of subsidiaries 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 is exposed, or has rights, to variable returns from its involvement from its investee and has the ability to affect those returns through its power over the investee. The Bank re-assesses whether or not it controls an investee if facts and circumstances indicates that there are any change to elements of control. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. Adjustments are made to the consolidated financial statements to bring into line any dissimilar accounting policies that may exist.

All material intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated on consolidation. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities. The following are the Bank›s principal subsidiaries:

Group’s nominal holding

Name Incorporation in31 December

201731 December

2016

Ahli United Bank (U.K.) PLC (AUBUK) United Kingdom 100.0% 100.0%

Ahli United Bank K.S.C.P. (AUBK)* State of Kuwait 67.3% 67.3%

Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 85.5% 85.5%

Commercial Bank of Iraq P.S.C. (CBIQ) Republic of Iraq 75.0% 74.3%

Al Hilal Life B.S.C. (c) (AHL) Kingdom of Bahrain 100.0% 100.0%

Al Ahli Real Estate Company S.P.C. (AREC) Kingdom of Bahrain 100.0% 100.0%

Ahli United Bank Limited (AUBL) DIFC - United Arab Emirates 100.0% 100.0%

During the year, AUBL’s paid up capital was increased to USD 75 million from USD 50 million. Moreover, the Bank also increased its direct holding in the voting capital of CBIQ from 74.3% to 75.0%.

* Effective holding 74.9% (31 December 2016: 74.9%)



Financial information of a subsidiary that has material non-controlling interest is provided below. Proportion of equity interest held by non-controlling interests are provided below:

Name Country of incorporation31 December

201731 December

2016

Ahli United Bank K.S.C.P. (AUBK) State of Kuwait 25.1% 25.1%

Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 14.5% 14.5%

US$ ’000 US$ ’000

Accumulated non-controlling interest as at:

Ahli United Bank K.S.C.P. (AUBK) 352,741 330,634

Ahli United Bank (Egypt) S.A.E. (AUBE) 58,073 46,376

Profit allocated to material non-controlling interest:

Ahli United Bank K.S.C.P. (AUBK) 36,815 33,484

Ahli United Bank (Egypt) S.A.E. (AUBE) 8,821 22,902

2 BASIS OF CONSOLIDATION (continued)


Annual Report 2017

Summarised financial information of AUBK and AUBE is provided below. The information is based on amounts as reported in consolidated financial statements before inter-company eliminations and adjustments.

31 December 2017

US$ ’000

31 December2016

US$ ’000

Ahli United Bank K.S.C.P. (AUBK)

Balance sheet related information of AUBK

Loans and advances 8,844,108 8,854,889

Non- trading investments 719,728 667,451

Total assets 12,131,348 12,081,679

Customers' deposits 9,793,292 10,024,287

Total liabilities 10,583,044 10,623,276

Income statement related information of AUBK

Total operating income 397,779 367,036

Net profit attributable to shareholders 146,602 133,352

Total comprehensive income attributable to shareholders 144,924 120,281

Dividends paid to non-controlling interest 15,414 5,892

Cash flow related information of AUBK

Net cash from (used in) operating activities 218,998 (1,553,163)

Net cash used in investing activities (111,487) (194,327)

Net cash (used in) from financing activities (72,716) 175,621

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

Balance sheet related information of AUBE


Non- trading investments 474,229 221,429

Total assets 2,652,834 2,306,182



Income statement related information of AUBE


Net profit attributable to shareholders 67,588 175,409

Cash flow related information of AUBE

Net cash from operating activities 182,750 44,306


Net cash used in financing activities (4,575) (3,499)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS31 December 2017

2 BASIS OF CONSOLIDATION (continued)



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 instruments (as detailed below in note 3.3(c)) and all derivative financial instruments. In addition, as fully discussed below in note 3.3(h)(i), carrying values of recognised assets that are designated as hedged items in fair value hedges are adjusted to the extent of the fair value attributable to 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) as issued by International Accounting Standards Board (IASB) 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 as of 31 December 2017: - IFRS 9 – Financial Instruments (effective for annual periods beginning on or after 1 January 2018) The IASB issued IFRS 9 ‘Financial Instruments’ in its final form in July 2014 and is effective for annual periods beginning on or after 1 January 2018 with option to early adopt. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non- financial assets, impairment of financial assets and hedge accounting. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. a. Classification and measurement During 2012, the Group early adopted the phase 1 of IFRS 9 – “Classification and Measurement” b. Hedge accountingHedge accounting model introduced under IFRS 9 are designed to better align hedge accounting with risk management activities. It also has provided using more broadly to a greater variety of hedging instruments and risks eligible for hedge accounting. Moreover, it has removed rule based thresholds for testing hedge effectiveness by bringing principle based criteria. Current accounting treatments of fair value, cashflow and net investment hedge accounting have been retained. IFRS 9 provides an accounting choice to continue to apply IAS 39 hedge accounting rules until the IASB finalizes its macro hedge accounting project. The Group has determined that all existing hedge relationships that are currently designated in effective hedging relationships would continue to qualify for hedge accounting under IFRS 9 and accordingly will apply IFRS 9 hedge accounting effective 1 January 2018.

c. Impairment of financial assets IFRS 9 will also fundamentally change the loan loss impairment methodology. The Standard will replace IAS 39’s incurred loss approach with a forward-looking expected credit loss (ECL) approach. The Group will be required to record an allowance for ECL for all loans and other debt financial assets not held at fair value through profit or loss (FVTPL), together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the life of the asset.The Group has developed a framework to perform an assessment at the end of each reporting period of whether credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instrument.

- To calculate ECL, the Group will estimate the risk of a default occurring on the financial instrument during its expected life. ECLs are estimated based on the present value of all cash shortfalls over the remaining expected life of the financial asset, i.e., the difference between: the contractual cash flows that are due to the Group under the contract, and

- the cash flows that the Group expects to receive, discounted at the effective interest rate of the financial instrument.


Annual Report 2017

The ECL model contains a three stage approach which is based on the change in credit quality of financial assets since initial recognition. Under Stage 1, where there has not been a significant increase in credit risk since initial recognition, an amount equal to 12 months ECL will be recorded. Under Stage 2, where there has been a significant increase in credit risk since initial recognition but the financial instruments are not considered credit impaired, an amount equal to the default probability weighted lifetime ECL will be recorded. Under the Stage 3, where there is objective evidence of impairment at the reporting date these financial instruments will be classified as credit impaired and an amount equal to the lifetime ECL will be recorded for the financial assets. In addition, in Stage 3 the Group recognises interest income on a receipt basis.

Transition adjustments The adoption of the final form of IFRS 9 issued in July 2014 is expected to result in certain differences in the classification and measurement of financial assets. Transition adjustments are summarised below:

Attributable to owners

Retained earningsUS $ millions

Fair value reservesUS $ millions

Total equityUS $ millions

Balance at 31 December 2017 1,203.8 (13.0) 3,815.6

Expected credit losses under IFRS 9 for all loans and other debt financial assets together with loan commitments and financial guarantee contracts (249.8) - (249.8)

Impact of classification of debt instruments from amortised cost to fair value through other comprehensive income category - 54.9 54.9

Net impact of adoption of IFRS 9 as at 1 January 2018 (249.8) 54.9 (194.9)

Balance as at 1 January 2018 upon adoption of IFRS 9 954.0 41.9 3,620.7

Impact of IFRS 9 adoption on equity attributable to the owners 5.1%

- IFRS 15 - Revenue from Contracts with Customers. IFRS 15 was issued by IASB on 28 May 2014, effective for annual periods beginning on or after 1 January 2018. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue along with related IFRIC 13, IFRIC 15, IFRIC 18 and SIC 31 from the effective date. This new Standard removes inconsistencies and weaknesses in previous revenue recognition requirements, provides a more robust framework for addressing revenue issues and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. - IFRS 16 Leases. In January 2016, the IASB issued IFRS 16 ‘Leases’ with an effective date of annual periods beginning on or after 1 January 2019. IFRS 16 results in lessees accounting for most leases within the scope of the Standard in a manner similar to the way in which finance leases are currently accounted for under IAS 17 ‘Leases’. Lessees will recognise a ‘right of use’ asset and a corresponding financial liability on the balance sheet. The asset will be amortised over the length of the lease and the financial liability measured at amortised cost. The Group does not expect any significant impact on the Groups’ financial position and results, resulting from the application of IFRS 15 & IFRS 16.

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 amounts of income, expenses, financial assets, liabilities, the accompanying disclosures and disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.


3 ACCOUNTING POLICIES (continued)3.1 Basis of preparation (continued)New Standards and Interpretations issued but not yet effective (continued)


Annual Report 2017

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 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. Estimates Pension plans Estimates and assumptions are used in determining the Group’s pension liabilities. The cost of the defined benefit pension plan and the present value of pension obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Going concern The management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis. 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. Impairment of goodwill and intangible assets The Group determines whether Goodwill and Intangibles with indefinite useful lives are impaired at least on an annual basis. Impairment exists when carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The key assumptions and estimates used to determine the recoverable amount for the different CGUs, are disclosed and further explained in note 14. 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.


3 ACCOUNTING POLICIES (continued)3.2 Significant accounting judgements and estimates (continued)


Annual Report 2017

(a) Investments in associates Associate companies are companies in which the Group exercises significant influence but does not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Investments in associate companies are accounted for using the equity method. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value, and then recognises the loss in the statement of income. The reporting dates of the associates and the Group are identical and the associates’ accounting policies materially conform to those used by the Group for like transactions and events in similar circumstances. Adjustments are made to the consolidated financial statements to bring into line any dissimilar accounting policies that may exist. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities. (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 classified as fair value through other comprehensive income (FVTOCI) 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. Any exchange differences arising on translation are included in “foreign exchange translation reserve” forming part of other comprehensive income except to the extent that the translation difference is allocated to the non-controlling interest. 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 plus, for an item not recorded at FVTPL, transaction costs that are directly attributable to its acquisition or issue. 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.

3 ACCOUNTING POLICIES (continued) 3.3 Summary of significant accounting policies (continued)



Annual Report 2017

(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 to their maturity using the effective interest rate method.

(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. Loans with renegotiated terms are loans, the repayment plan of which have been revised as part of ongoing customer relationship to align with change in cash flows of the borrower, in some instances with improved security and with no other concessions. These assets are risk rated in accordance with the Group’s policy on internal credit rating as explained in note 31 (c).

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 “net 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) Debt instruments

Debt instruments are measured at amortised cost using the effective interest rate method if:

- the assets are held within a business model whose objective is to hold assets in order to collect contractual cash flows; and - the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding.

For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as profit margin. In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. If either of these two criteria is not met, the financial assets are classified and measured at FVTPL. Additionally, even if the financial asset meets the amortised cost criteria the Group may choose at initial recognition to designate the financial asset at FVTPL based on the 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.

(v) Equity investments

Investments in equity instruments are classified as FVTPL, unless the Group designates an equity investment that is not held for trading as FVTOCI on initial recognition. At initial recognition, the Group can make irrevocable election on an instrument by instrument basis to designate an 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.

(vi) Other financial instruments

A financial asset is classified as held for trading if: - it has been acquired principally for the purpose of selling in the near term; - on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is a recent actual pattern of short term profitability; or - it is a derivative and not designated and effective as a hedging instrument or a financial guarantee.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(c) Financial instruments (continued)


Annual Report 2017

(vii) 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”. 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. These financial instruments are classified as FVTPL and the changes in fair value of the entire hybrid contract are recognised in the consolidated statement of income.

(viii) Deposits 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 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell an asset or transfer a liability takes place either in the principal market, or in the absence of a principal market, in the most advantageous market. 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. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. 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.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(c) Financial instruments (continued)


Annual Report 2017

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the assets or liabilities. For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period disclosed in note 34. (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 designates and 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.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(f) Determination of fair value (continued)


Annual Report 2017

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 OCI. The ineffective portion of the fair value of the derivative is recognised immediately in the consolidated statement of income as “trading income”.

The gains or losses on effective cash flow hedges recognised initially in OCI 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 recognised in the consolidated statement of income for the year. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. In the case of cash flow hedges, the cumulative gain or loss on the hedging instrument recognised in OCI remains in OCI 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:


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(h) Hedge accounting (continued)


Annual Report 2017

(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 the 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 with indefinite life is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognised immediately in the consolidated statement of income. For the purpose of impairment testing, goodwill and intangible assets with indefinite life 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 in equity.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(j) Revenue recognition (continued)


Annual Report 2017

Premises and equipment are stated at cost, less accumulated depreciation and impairment. 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 40 to 50 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 are classified as investment properties. Investment properties are remeasured at cost less accumulated depreciation (depreciation for buildings based on an estimated useful life of 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.

(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. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets and the effect of the asset ceiling (if any) both excluding interest are recognised immediately in OCI. 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.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(l) Premises and equipment (continued)


Annual Report 2017

(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. Any change in Group’s ownership interest in the subsidiary that does not result in a loss of control is accounted for as an equity transaction.

(t) Perpetual Tier 1 capital securities Perpetual Tier 1 capital securities of the Group are recognised under equity in the consolidated balance sheet and the corresponding distribution on those securities are accounted as a debit to retained earnings. (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. 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.

(v) Treasury shares Own equity instruments that are acquired are recognised at cost and deducted from equity. Any surplus/deficit arising from the subsequent sale of treasury shares is included in capital reserve under equity. (w) 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. (x) Financial guarantees and loan commitments In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are contracts that require the Group to make specified payments to reimburse the holders for a loss that is incurred because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. Financial guarantees are initially recognised in the consolidated financial statements at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. 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. (y) Repossessed assets Repossessed assets are assets acquired in settlement of debt. These assets are carried at the lower of their repossessed value or their fair value and reported under “other assets”. (z) 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.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)


Annual Report 2017

- Earnings prohibited by Sharia The Islamic operation is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is credited to the charity account where the Islamic operation uses these funds for charitable purposes. - Commingling of funds The funds of Islamic operation are not commingled with the funds of the conventional operations of the Group. (aa) 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. 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 instalments or deferred to a specific future time. Revenue recognitionRevenue 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.


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)(z) Islamic banking (continued)


Annual Report 2017

(ab) Equity of unrestricted investment account holders’ share of profit The profit computed after taking into account all income and expenses at the end of a financial year is distributed between Equity of unrestricted investment account holders which include Mudaraba depositors and the Group’s shareholders. The share of profit of the Equity of unrestricted investment account holders is calculated on the basis of their daily deposit balances over the year, after reducing the agreed and declared Mudaraba fee. Equity of unrestricted investment account holders do not bear the expenses relating to non compliance with Shari’a regulations.

4 NET INTEREST INCOME

(a) INTEREST INCOME

2017US$ ’000

2016US$ ’000

Treasury bills 101,032 109,939

Deposits with banks 42,432 36,331

Loans and advances 998,161 946,358

Non-trading investments 237,549 227,170

1,379,174 1,319,798

(b) INTEREST EXPENSE

2017US$ ’000

2016US$ ’000

Deposits from banks (including repurchase agreements) 54,766 52,009

Customers' deposits 437,711 429,629

Subordinated liabilities 10,227 9,928

502,704 491,566

NET INTEREST INCOME 876,470 828,232


3 ACCOUNTING POLICIES (continued)3.3 Summary of significant accounting policies (continued)


Annual Report 2017

5 FEES, COMMISSIONS AND OTHERS

2017US$ ’000

2016US$ ’000

Fees and commission income

- Transaction banking services 112,881 117,217

- Management, performance and brokerage fees 28,336 29,122

Fees and commission expense (9,450) (8,568)

Others 13,246 31,964

145,013 169,735

Included in ‘management, performance and brokerage fees’ is US$ 12.6 million (2016: US$ 9.9 million) of fee income relating to trust and other fiduciary activities.

6 TRADING INCOME

2017US$ ’000

2016US$ ’000

Foreign exchange - customer transactions 29,198 41,383

Proprietary trading 6,041 6,905

35,239 48,288

7 (a) CASH AND BALANCES WITH CENTRAL BANKS

2017US$ ’000

2016US$ ’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 24) 484,124 665,894

Mandatory reserve deposits with central banks 325,862 247,030

809,986 912,924

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

7 (b) TREASURY BILLS AND DEPOSITS WITH CENTRAL BANKS

2017US$ ’000

2016US$ ’000

Central Bank of Bahrain 610,952 151,026

Central Bank of Kuwait 1,376,244 1,396,752

Central Bank of Egypt 407,909 716,386

Central Bank of Iraq 140,744 163,831

Bank of England 40,503 36,851

2,576,352 2,464,846

The Deposits with Central Banks and Treasury bills are local currency denominated and are match funded by underlying respective local currencies.



Annual Report 2017

8 LOANS AND ADVANCES

2017 2016

US$ ’000 % US$ ’000 %

a) By industry sector

Consumer/personal 2,923,110 14.6 3,003,722 15.6

Residential mortgage 1,566,687 7.8 1,439,689 7.5

Trading and manufacturing 4,980,074 24.8 4,604,115 23.9

Real estate 5,192,200 25.8 5,188,090 26.9

Banks and other financial institutions 805,739 4.0 817,111 4.2

Services 4,130,810 20.6 3,709,224 19.2

Government/public sector 115,380 0.6 221,186 1.1

Others 373,770 1.8 320,917 1.6

20,087,770 100.0 19,304,054 100.0

Less: Specific impairment provision (324,679) (380,239)

Less: Collective impairment provision (264,389) (316,932)

19,498,702 18,606,883

2017 2016

US$ ’000 % US$ ’000 %

b) By geographic region

Kingdom of Bahrain 3,640,879 18.1 3,553,793 18.5

State of Kuwait 9,683,976 48.2 9,824,968 50.9

Other GCC countries 3,096,729 15.4 2,804,696 14.5

United Kingdom 1,558,328 7.8 1,300,502 6.7

Arab Republic of Egypt 1,601,126 8.0 1,431,118 7.4

Europe (excluding United Kingdom) 205,848 1.0 88,856 0.5

Asia (excluding GCC countries) 200,977 1.0 241,190 1.2

Rest of the world 99,907 0.5 58,931 0.3

20,087,770 100.0 19,304,054 100.0

Less: Specific impairment provision (324,679) (380,239)

Less: Collective impairment provision (264,389) (316,932)

19,498,702 18,606,883

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



Annual Report 2017

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

2017

Up to 30 daysUS$ ’000

31 to 60 daysUS$ ’000

61 to 89 daysUS$ ’000

TotalUS$ ’000

Loans and advances

Retail 167,574 48,011 30,908 246,493

Corporate 83,416 22,025 32,893 138,334

250,990 70,036 63,801 384,827

2016

Up to 30 daysUS$ ’000

31 to 60 daysUS$ ’000

61 to 89 daysUS$ ’000

TotalUS$ ’000

Loans and advances

Retail 65,182 27,256 30,202 122,640

Corporate 19,087 8,714 61,182 88,983

84,269 35,970 91,384 211,623

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

2017 2016

Retail US$ ’000

Corporate US$ ’000

Total US$ ’000

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

Gross impaired loans 46,269 335,384 381,653 33,552 414,552 448,104

Specific impairment provisions (39,422) (285,257) (324,679) (28,586) (351,653) (380,239)

6,847 50,127 56,974 4,966 62,899 67,865

Impaired loan coverage 85.2% 85.1% 85.1% 85.2% 84.8% 84.9%

Gross loans 3,942,033 16,145,737 20,087,770 3,781,435 15,522,619 19,304,054

Impaired loan ratio 1.2% 2.1% 1.9% 0.9% 2.7% 2.3%

The fair value of collateral that the Group holds relating to loans individually determined to be impaired at 31 December 2017 amounts to US$ 357.7 million (31 December 2016: US$ 443.9 million). The collateral consists of cash, securities and properties.


8 LOANS AND ADVANCES (continued)


Annual Report 2017

e) Impairment allowance for loans and advances

A reconciliation of the allowance for impairment losses for loans and advances by class is as follows:

2017 2016

Retail US$ ’000

Corporate US$ ’000

Total US$ ’000

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

At 1 January 64,148 633,023 697,171 62,615 608,297 670,912

Add/(Less):

Amounts written off

during the year (20,464) (188,981) (209,445) (17,270) (105,675) (122,945)

Charge for the year 20,790 116,408 137,198 23,416 136,801 160,217

Recoveries during the year (3,678) (46,398) (50,076) (4,196) (1,085) (5,281)

Exchange rate and other adjustments 1,823 12,397 14,220 (417) (5,315) (5,732)

At 31 December 62,619 526,449 589,068 64,148 633,023 697,171

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:

2017US$ ’000

2016US$ ’000

Impairment charge for the year on loans and advances (note 8(e)) 137,198 160,217

Recoveries from loans and advances during the year (including from fully provided loans written off in previous years) (76,481) (21,629)

Net charge for others 25,953 10,974

Net provision for loan losses and others 86,670 149,562


8 LOANS AND ADVANCES (continued)


Annual Report 2017

9 NON-TRADING INVESTMENTS

2017

Held at amortised cost

US$’000Held at Fair value

US$’000Total

US$’000

Quoted investments

GCC government bonds and debt securities 1,141,952 - 1,141,952

Other government bonds and debt securities 1,100,076 - 1,100,076

GCC government entities' securities 650,860 - 650,860

Notes and certificates of deposit:

- issued by banks and other financial institutions 1,770,930 - 1,770,930

- issued by corporate bodies 1,194,231 - 1,194,231

Equity - 37,362 37,362

Funds at net asset value - 1,729 1,729

5,858,049 39,091 5,897,140

Unquoted investments


- issued by banks and other financial institutions 57,788 - 57,788

Equity - 33,519 33,519


57,788 86,703 144,491

Total 5,915,837 125,794 6,041,631

Less: Allowance for impairment (39,221)

6,002,410



Annual Report 2017

2016

Held at amortised cost

US$’000Held at Fair value

US$’000Total

US$’000

Quoted investments

GCC government bonds and debt securities 855,203 - 855,203

Other government bonds and debt securities 823,052 - 823,052

GCC government entities' securities 647,828 - 647,828


- issued by banks and other financial institutions 1,918,561 - 1,918,561

- issued by corporate bodies 1,088,916 - 1,088,916

Equity - 37,592 37,592


5,333,560 49,532 5,383,092

Unquoted investments

Other government bonds and debt securities 1,860 - 1,860


- issued by banks and other financial institutions 182,834 - 182,834

- issued by corporate bodies 1,558 - 1,558

Equity - 33,025 33,025


186,252 91,337 277,589

Total 5,519,812 140,869 5,660,681

Less: Allowance for impairment (90,234)

5,570,447

The fair value of the non-trading investments held at amortised cost is US$ 5,990.7 million as at 31 December 2017 (31 December 2016: US$ 5,563.8 million) of which US$ 5,932.9 million is classified under level 1 of fair value hierarchy (31 December 2016: US$ 5,377.2 million) and US$ 57.8 million is classified under level 2 of fair value hierarchy (31 December 2016: US$ 186.6 million).

Investment held at fair value include investments amounting to US$ 1.2 million (2016: US$ 1.0 million) which are designated as FVTPL. Please refer note 31 (c) for disclosure of credit quality of non-trading investments.


9 NON-TRADING INVESTMENTS (continued)


Annual Report 2017

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

2017US$ ’000

2016US$ ’000

At 1 January 90,234 184,099

Add/(Less):

Charge for the year 2,280 9,279

Amounts written off during the year (12,436) (11,564)

Transfer to repossessed assets - (26,351)

Transfer to investment properties - (16,798)

Exchange rate and other reclassification / adjustments (40,857) (48,431)

At 31 December 39,221 90,234

10 INVESTMENTS IN ASSOCIATES The principal associates of the Group are:

Country of incorporation

Nominal Holding

Name 2017 2016

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

United Bank for Commerce and Investment S.A.L. (UBCI) Libya 40.0% 40.0%

Middle East Financial Investment Company (MEFIC)Kingdom of Saudi

Arabia 40.0% 40.0%

The summarised financial information of the Group’s associates was as follows:

2017US$ ’000

2016US$ ’000

Assets 5,937,476 5,524,151

Liabilities 4,967,284 4,715,872

Net profit and comprehensive income for the year (Group’s share) 23,251 26,626

Financial information of Ahli Bank S.A.O.G. is provided below. The information is based on amounts as reported in financial statements of Ahli Bank S.A.O.G.


9 NON-TRADING INVESTMENTS (continued)


Annual Report 2017

31 December 2017

US$ ’000

31 December2016

US$ ’000

Ahli Bank S.A.O.G.

Balance sheet related information


Investment securities 562,964 458,812

Total assets 5,232,680 4,934,168



Income statement related information


Net profit for the year 69,266 76,760

Total comprehensive income 67,869 77,703

Dividends received during the year 12,955 12,955

Cash flow related information

Net cash from (used in) operating activities 130,967 (73,857)


Net cash from (used in) financing activities 8,961 (32,013)

The market value of AUB’s investment in Ahli Bank S.A.O.G. based on the price quoted in the Muscat Securities Market is US$ 224.1 million (31 December 2016: US$ 254.0 million). 11 INVESTMENT PROPERTIES These represent properties acquired by the Group and are recognized at cost. As at 31 December 2017, the fair value of the investment properties is US$ 291.3 million (31 December 2016: US$ 159.3 million). Investment properties were valued by independent valuers using significant valuation inputs based on unobservable market data and are classified under level 3 of the fair value hierarchy.

12 PREMISES AND EQUIPMENT The net book values of the Group’s premises and equipment are:

2017US$ ’000

2016US$ ’000

Freehold land 92,976 94,326

Freehold buildings 26,146 25,827

Leasehold land and buildings 37,350 30,098

IT equipment and others 49,715 38,000

Capital work-in-progress 20,485 22,958

226,672 211,209

Freehold land was revalued by an independent valuer using significant valuation inputs based on unobservable market data and is classified under level 3 of the fair value hierarchy.


10 INVESTMENTS IN ASSOCIATES (continued)


Annual Report 2017

13 INTEREST RECEIVABLE AND OTHER ASSETS

2017US$ ’000

2016US$ ’000

Tax assets (note 22) 3,748 4,735

Interest receivable 160,644 179,900

Derivative assets (note 28) 91,191 112,945

Prepayments and others 361,337 440,575

616,920 738,155

Prepayments and others include repossessed assets amounting to US$ 255.6 million (31 December 2016: US$ 301.8 million).

14 GOODWILL AND OTHER INTANGIBLE ASSETS

2017 2016

GoodwillUS$’000

Intangible assets

US$’000Total

US$’000GoodwillUS$’000

Intangible assets

US$’000Total

US$’000

At 1 January 426,561 48,071 474,632 458,453 112,145 570,598

Exchange rate and other adjustments 4,738 1,460 6,198 (31,892) (64,074) (95,966)

At 31 December 431,299 49,531 480,830 426,561 48,071 474,632

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 management, extrapolated for five year projections using nominal projected 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 goodwill impairment testing was 8.8% to 17.3% (2016: 8.5% to 18.0%). 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 subsidiaries’ banking licenses which have indefinite lives. Based on an annual impairment assessment of the intangible assets, no indications of impairment were identified (2016: Nil). The fair values of a banking license are determined at the time of acquisition by discounting the future expected profits from their acquisition and their projected terminal value.



Annual Report 2017

15 DEPOSITS FROM BANKS

2017US$ ’000

2016US$ ’000

Demand and call 1,146,635 775,224

Time deposits 2,796,598 2,503,814

3,943,233 3,279,038

16 BORROWINGS UNDER REPURCHASE AGREEMENTS

The Group has collateralized borrowing lines of credit with various financial institutions through repurchase arrangements, under which it can borrow up to US$ 5.6 billion (31 December 2016: US$ 4.8 billion). Collateral is provided in the form of investment securities held within the non-trading investments portfolio.

As at 31 December 2017, the borrowings under these agreements were US$ 1,272.8 million (31 December 2016: US$ 698.2 million) and the fair value of investment securities that had been provided as collateral was US$ 1,437.6 million (31 December 2016: US$ 782.9 million).

17 CUSTOMERS’ DEPOSITS

2017US$ ’000

2016US$ ’000

Current and call accounts 3,999,944 4,354,547

Saving accounts 2,178,777 2,094,429

Time deposits 15,831,136 15,254,382

22,009,857 21,703,358

18 INTEREST PAYABLE AND OTHER LIABILITIES

2017US$ ’000

2016US$ ’000

Interest payable 145,647 161,594

Accrued charges and other payables 148,612 127,040

Derivative liabilities (note 28) 143,145 142,547

Other credit balances* 425,238 413,494

Tax liabilities (note 22) 50,037 20,701

912,679 865,376

* Other credit balances mainly includes insurance related technical provisions, unearned fees, dividend payables, pension fund, margin deposits and other creditors.



Annual Report 2017

19 SUBORDINATED LIABILITIES

These borrowings are subordinated to the claims of all other creditors of the respective banks.

Maturity2017

US$ ’0002016

US$ ’000

International Finance Corporation (IFC):

- Repayable in two (31 December 2016: four) equal semi-annual installments and falling on each Interest Payment Date falling thereafter up to and including 15 December 2018.

2018 22,222 44,444

- Repayable in four equal semi-annual installments commencing on 15 April 2019 and falling on each Interest Payment Date falling thereafter up to and including 15 October 2020.

2020 165,000 165,000

187,222 209,444

Others:

- 10 year subordinated debt repayable at maturity on 20 January 2020 2020 17,997 17,997

- Repayable at maturity

5 years &one day notice 9,985 9,541

27,982 27,538

215,204 236,982

20 EQUITY

Ordinary share capital :

2017US$ ’000

2016US$ ’000

(a) Authorised :

Share capital10,000 million shares (2016: 8,000 million shares) of US$ 0.25 each 2,500,000 2,000,000

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

2017US$ ’000

2016US$ ’000

(b) Issued and fully paid:

Ordinary share capital (US$ 0.25 each) 1,889,213 1,711,322

Number of shares (millions) 7,556.9 6,845.3

Number of treasury shares (millions) 18.2 16.3



Annual Report 2017

Movement in ordinary shares 2017(number in

millions)

2016(number in

millions)

Opening balance as at 1 January 6,845.3 6,492.1

Add: bonus share issue 687.0 325.7

Add: issuance of additional shares (note 20 (c)) 24.6 27.5

Closing balance as at 31 December 7,556.9 6,845.3

(c) Employee Share Purchase Plan and Mandatory Share Plan

The Employee Share Purchase Plan (“ESPP”) was approved by the Board of Directors on 29 March 2005 and authorized by the shareholders at an EGM on 5 October 2004. An extension of the ESPP by authorizing the issuance of 100 million Ordinary Shares (“Shares”) was approved by:

(i) Board of Directors (on 5 November 2014)(ii) Ministry of Commerce (letter dated 9 March 2015).(iii) Capital Markets Supervision Directorate of CBB (letter dated 10 March 2015);(iv) Retail Banking Supervision Directorate of CBB (letters dated 22 February 2015 & 18 March 2015); (v) Shareholders at Annual General Meeting (on 31 March 2015)

As per the approved ESPP terms, 100 million shares were authorized for issuance to qualifying employees of the AUB Group, in five annual tranches (tranches 9-13) over a period from 2015 to 2019. The prices, timing and sizes of the tranches of the Shares are determined by the Board of Directors, within set parameters. The individual allocations of each tranche are made at the discretion of the Compensation Committee. In line with the earlier structure, the Shares are issued to the existing ESPP company, Al Mazaya Company B.S.C. (c) [“AMC”] a special purpose entity incorporated on 29 August 2005, to hold the Shares. AMC in turn issues to the ESPP Trustees, for the beneficial ownership of employees, a corresponding number of unsecured and unsubordinated equity linked notes (“Notes”), each Note representing the economic value of an Ordinary Share, as adjusted by any bonus share issues, dividends and/or rights issues. Notes issued under the scheme are subject to the vesting criteria and conditions, as set out in the ESPP Rules.

During 2016, the Bank issued 21,200,000 Ordinary Shares at a price of US$ 0.52 per share under Tranche 10 and it was fully allocated to employees. During 2017, the Bank issued 18,368,831 Ordinary Shares at a price of US$ 0.48 per share under Tranche 11 and it was fully allocated to employees. These Notes vest equally over three years from the grant date and as determined by the Compensation Committee.

Pursuant to the existing shareholders’ approval, the Board of Directors has resolved to issue 26,333,496 Ordinary Shares at a price of US$ 0.50 per share under Tranche 12 to be allocated to employees by the Compensation Committee after obtaining the necessary regulatory approvals. The same bodies also approved the issuance of up to 50 million of Ordinary Shares for the approved Mandatory Share Plan (“MSP”) to be initially issued as option rights exercisable into AUB ordinary shares, adjustable for any future bonus share distributions, rights issues or other issuances of share equivalents arising from any re-organization, re-classification, stock-split or consolidation of ordinary shares by the Bank. These options were authorised for issuance to employees of the Bank falling within the ambit of Module HC-5.4.2 of the CBB Rulebook, commencing 1 January 2015 to 1 January 2019 in five annual tranches, corresponding to the annual staff compensation cycle. Individual tranche sizes are determined by the Compensation Committee to address annual remuneration of defined employees, within the CBB regulations. The options can be exercised at the grant price of US$ 0.25 per option over a three year service period in the ratio of 50%, 35%, 15% respectively and the options expire within 12 months from end of grant date month.

During 2016, the Bank issued 6,302,207 shares as part of the 2015 Performance Bonus Deferred Share Awards of which 1,960,471 options have been exercised till 31 December 2017. During 2017, the Bank issued 6,208,326 shares as part of the 2016 Performance Bonus Deferred Share Awards of which 32,087 options have been exercised till 31 December 2017.


20 EQUITY (continued)


Annual Report 2017

Under the MSP scheme, the Board of Directors has resolved to issue 7,444,378 shares as part of the 2017 Performance Bonus Deferred Share Awards. These shares are entitled to be adjusted for any bonus share issues and dividend until the rights are exercised under the MSP.

(d) Perpetual Tier 1 Capital Securities

2017US$ ’000

2016US$ ’000

Issued by the Bank (20d(i)) 400,000 400,000

Issued by the subsidiary (20d(ii)) 200,000 200,000

600,000 600,000

(i) Basel III compliant Additional Tier I Perpetual Capital Securities issued by the Bank during 2015 carries an initial distribution rate of 6.875 percent per annum payable semi annually with a reset after every 5 years. These securities are perpetual, subordinated and unsecured. The Capital Certificates are listed on the Irish Stock Exchange. The Bank can elect to make a distribution at its own discretion. The holders of these securities do not have a right to claim the same and such an event will not be considered an event of default. The securities carry no maturity date and have been classified under equity.

(ii) During 2016, Ahli United Bank K.S.C.P, a subsidiary of the Bank, issued a US$ 200 million Basel III compliant Additional Tier 1 Perpetual Capital Securities that bears a profit rate of 5.5%, which are eligible to be classified under equity. The Capital Certificates are subordinated, unsecured and will carry a Periodic Distribution Amount, payable semi-annually in arrears, until the first call date (25 October 2021). The Periodic Distribution Amounts in respect of the Capital Certificates may be cancelled (in whole or in part) at the sole discretion of the issuer on a non-cumulative basis. The Capital Certificates is listed on the Irish Stock Exchange and NASDAQ Dubai. These certificates have no maturity date and are callable (in whole but not in part) at par at the option of the issuer on the first call date and on every distribution payment date thereafter, subject to certain conditions.

21 RESERVES a) Share premium The share premium arising on the issue of ordinary shares is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. b) Capital reserve As required by the Bahrain Commercial Companies Law, any profit on the sale of treasury stock is transferred to a capital reserve. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. c) Statutory reserve As required by the Bahrain Commercial Companies Law and the Bank’s Articles of Association, 10% of the net profit is transferred to a statutory reserve on an annual basis. The Bank may resolve to discontinue such transfers when the reserve totals 50% of the paid up capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. d) Property revaluation reserve The revaluation reserve arising on revaluation of freehold land is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. e) Foreign exchange translation reserve It comprises of translation effects arising on consolidation of subsidiaries, non-monetary equity investments and investments in associates.


20 EQUITY (continued)


Annual Report 2017

f ) 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. g) Cash flow hedge reserve This reserve represents the effective portion of gain or loss on the Group’s cash flow hedging instruments.

h) Movements in other reserves

Cumulative changes

Capitalreserve

US$ ’000

Propertyrevaluation

reserveUS$ ’000

Foreign exchange

translationreserve

US$ ’000

OCIreserve

US$ ’000

Cash flowhedge

reserveUS$ ’000

ESPPreserve

US$ ’000

Pension fund

reserveUS$ ’000

Totalother

reserves US$ ’000

Balance at 1 January 2017 8,480 36,256 (455,168) (11,019) (23,783) - (57,742) (502,976)

Currency translation adjustments - - 31,182 - - - - 31,182

Transfers to consolidated statement of income - - - - (1,570) - - (1,570)

Net fair value movements - - - (5,666) (1,306) - - (6,972)

Transfers to retained earnings - (243) - 3,704 - (3,921) - (460)

Fair value movements and others - - - - - 3,921 2,410 6,331

Revaluation of freehold land - (445) - - - - - (445)

Balance at 31 December 2017 8,480 35,568 (423,986) (12,981) (26,659) - (55,332) (474,910)

Cumulative changes

Capitalreserve

US$ ’000

Propertyrevaluation

reserveUS$ ’000

Foreign exchange

translationreserve

US$ ’000

OCIreserve

US$ ’000

Cash flowhedge

reserveUS$ ’000

ESPPreserve

US$ ’000

Pension fund

reserveUS$ ’000

Totalother

reserves US$ ’000

Balance at 1 January 2016 8,480 36,173 (194,342) (16,568) (28,048) 12,587 (42,250) (223,968)

Currency translation adjustments - - (260,826) - - - - (260,826)

Transfers to consolidated statement of income - - - - (540) - - (540)

Net fair value movements - - - (9,380) 4,805 - - (4,575)

Transfers to retained earnings - - - 14,929 - (17,811) - (2,882)

Fair value movements and others - - - - - 5,224 (15,492) (10,268)

Revaluation of freehold land - 83 - - - - - 83

Balance at 31 December 2016 8,480 36,256 (455,168) (11,019) (23,783) - (57,742) (502,976)

Foreign currency translation risk primarily arises from Group’s investments in diverse countries. Assets and liabilities of these subsidiaries are translated into US Dollars at the rates of exchange prevailing at the balance sheet date. Income and expense items are translated at average exchange rates prevailing for the reporting periods. Any exchange differences arising on translation are included in “foreign exchange translation reserve” forming part of other comprehensive income prorated between non-controlling interests and equity owners.

The Group undertakes hedging of such net investment in foreign operation to mitigate any currency risk in a number of ways including borrowing in the underlying currency, structural hedging in the form of holding US Dollar long position to the extent possible and forward contracts.


21 RESERVES (continued)


Annual Report 2017

i) Dividends paid and proposed

2017US$’000

Proposed for approval at the forthcoming Annual General Assembly of Shareholders Meeting

Cash dividend on the Ordinary shares @ US cents 4.5 per share 341,578

Bonus share issue 5%

2016US$’000

Declared and paid during the year

Cash dividend on the Ordinary shares @ US cents 4.5 per share (2016:US cents 4.5 per share) 309,144

Bonus share issue (2016: 5%) 10%

j) Distribution on Perpetual Tier 1 capital securities and Sukuk

2017US$ ’000

2016US$ ’000

Distribution @ 6.875 percent per annum on the Perpetual Tier 1 Capital Securities 27,500 27,500

Distribution @ 5.5 percent per annum on the Perpetual Tier 1 Sukuk 11,000 -

22 TAXATION

2017US$ ’000

2016US$ ’000

Consolidated balance sheet (note 13 and note 18):

- Deferred tax asset 3,748 4,735

- Current tax liability (26,737) (19,410)

- Deferred tax liability (23,300) (1,291)

(50,037) (20,701)

Consolidated statement of income

- Current tax expense on foreign operations 40,925 45,192

- Deferred tax expense on foreign operations 83 923

41,008 46,115

The Group’s tax expense includes all direct taxes that are accrued 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 and AUBE. Effective tax rate at AUBE is 22.5% (2016: 22.5%) and AUBUK is 19.25% (2016: 20.0%).


21 RESERVES (continued)


Annual Report 2017

23 EARNINGS PER SHARE Basic and diluted earnings per ordinary share are calculated by dividing the net profit for the year attributable to the Bank’s ordinary equity shareholders less distribution on Perpetual Tier 1 Capital Securities, by the weighted average number of ordinary shares outstanding during the year. The following reflects the income and share data used in basic and diluted earnings per ordinary share computations :

2017US$ ’000

2016US$ ’000

Net profit for basic and diluted earnings per ordinary share computation

Net profit attributable to Bank's equity shareholders 618,715 570,640

(Less): Perpetual Tier 1 Capital Securities distribution (35,740) (27,500)

Adjusted net profit attributable to Bank’s ordinary equity shareholders for basic and diluted earnings per ordinary share 582,975 543,140

Basic and diluted earnings per ordinary share (US cents) 7.7 7.2

Number of shares (in millions)

2017US$ ’000

2016US$ ’000

Weighted average ordinary shares outstanding during the year adjusted for bonus shares 7,535 6,821

Weighted average number of ordinary shares for diluted earnings per share 7,535 6,821

24 CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the consolidated statement of cash flows include the following balance sheet amounts:

2017US$ ’000

2016US$ ’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 7(a)) 484,124 665,894

Deposits with Central banks, other banks and financial institutions - with an original maturity of three months or less 2,044,598 1,643,219

2,528,722 2,309,113

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.



Annual Report 2017

The income, expense and the period end balances in respect of related parties included in the consolidated financial statements were as follows:

2017

US$ ’000

Senior Management

Major shareholders Associates

Non ExecutiveDirectors

ManagementDirectors2 Others Total

Interest income 63 3,756 7,073 241 49 11,182

Interest expense 111,247 12 696 113 12 112,080

Fees and commissions 109 2,338 288 11 2 2,748

Deposits with banks - 113,336 - - - 113,336

Loans and advances - - 167,615 7,310 1,767 176,692

Deposits from banks - 6,686 - - - 6,686

Customers’ deposits1 5,966,668 - 46,248 7,035 1,916 6,021,867

Subordinated liabilities 197,207 - - - - 197,207

Derivatives liabilities - 622 - - - 622

Commitments and contingent liabilities - 198,158 155,511 - - 353,669

Short term employee benefits - - - 11,437 3,781 15,218

End of service benefits - - - 1,663 472 2,135

Directors' fees and related expenses3 - - 2,226 - - 2,226

2016

US$ ’000

Senior Management

Major shareholders Associates

Non ExecutiveDirectors

ManagementDirectors2 Others Total

Interest income 2,740 2,850 6,451 264 45 12,350

Interest expense 91,913 25 992 51 - 92,981

Fees and commissions 585 1,338 330 4 - 2,257

Deposits with banks - 160,889 - - - 160,889

Loans and advances 110,500 - 151,604 13,055 2,282 277,441

Deposits from banks - 5,692 - - - 5,692

Customers’ deposits1 6,193,804 - 63,352 6,609 32 6,263,797

Subordinated liabilities 218,985 - - - - 218,985

Commitments and contingent liabilities - 144,088 152,331 - - 296,419

Short term employee benefits - - - 11,859 3,174 15,033

End of service benefits - - - 1,743 221 1,964

Directors' fees and related expenses3 - - 2,181 - - 2,181

1 Customers’ deposits include deposits from GCC government-owned institutions amounting to US$ 5,925 million (31 December 2016: US$ 6,166 million). 2 AUB Group Management Directors (Employees) who are appointed by the shareholders of AUB to the AUB Board to represent management or by AUB to the boards of any of its subsidiaries or affiliates or their related committees, are excluded from receiving any additional remuneration for their membership of or attendance at board or related committee meetings as per their contractual arrangements. Accordingly, the short term employee benefits and end of service benefits shown above reflect employment remuneration only. 3 Directors fees and related expenses for 2016 were approved by the shareholders in the annual general meeting on 29 March 2017 and the same for 2017 will be presented for shareholders’ approval at the ensuing annual general meeting in March 2018.


25 RELATED PARTY TRANSACTIONS (continued)


Annual Report 2017

The consolidated income statement includes a fair value amortisation charge of US$ 1.4 million (2016: US$ 1.8 million) relating to share based transactions.

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$ 17,451 thousand (2016: US$ 7,249 thousand). There are no material differences between the carrying amount of the provision for end of service benefits at both 31 December 2017 and 2016 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. In accordance with the amended IAS-19 Employee Benefits, the Group immediately recognizes the actuarial gains and losses relating to ‘Defined Pension Benefit’ scheme through consolidated statement of changes in equity. Defined contribution plans The Group contributed US$ 7,726 thousand (2016: US$ 8,034 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 2017 was US$ 3,774.1 million (2016: US$ 3,660.5 million). 28 DERIVATIVES In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rates or indices. Derivatives include financial options, futures and forwards, interest rate swaps and currency swaps, which create rights and obligations that have the effect of transferring between the parties of the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On inception, a derivative financial instrument gives one party a contractual right to exchange financial assets or financial liabilities with another party under conditions that are potentially 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.


25 RELATED PARTY TRANSACTIONS (continued)


Annual Report 2017

The table below shows the net fair values of derivative financial instruments.

2017 2016

Derivativeassets

US$ ’000

DerivativeliabilitiesUS$ ’000

Derivativeassets

US$ ’000

DerivativeliabilitiesUS$ ’000

Derivatives held for risk management:

Interest rate swaps 20,787 15,939 21,731 15,308

Forward foreign exchange contracts 36,446 25,279 50,787 38,959

Options 278 415 169 181

Interest rate futures 320 102 - -

Derivatives held as fair value hedges:

Interest rate swaps 33,334 72,371 36,104 60,279

Derivatives held as cash flow hedges:

Interest rate swaps - 27,982 2,287 27,666

Forward foreign exchange contracts 26 1,057 1,867 154

91,191 143,145 112,945 142,547

Counterparties with whom the Group has entered into forward foreign exchange contracts have placed margin monies representing net fair values of contracts outstanding. In respect of derivative assets above, the Group has US$ 25.2 million (2016: US$ 31.0 million) of liabilities that can be offset through master netting arrangements. These master netting arrangements create a right of set-off that is enforceable only following an event of default, insolvency or bankruptcy of counterparties or following other predetermined events. Cash flow hedges The time periods in which the hedged cash flows are expected to occur and their impact on the consolidated statement of income is as follows:

3 monthsor less

US$’000

More than3 months

up to 1 yearUS$’000

More than1 year

up to 5 yearsUS$’000

More than 5 years

US$’000 Total

US$’000

At 31 December 2017

Cash outflows from liabilities (345) (3,211) (9,205) (13,898) (26,659)

At 31 December 2016

Cash outflows from liabilities 534 (3,459) (9,130) (11,728) (23,783)

No significant hedge ineffectiveness on cash flow hedges was recognised in 2017 and 2016.


28 DERIVATIVES (continued)


Annual Report 2017

Fair value hedges The net fair value of interest rate swap held as fair value hedges as at 31 December 2017 is negative US$ 39.0 million (2016: Negative US$ 24.2 million). Gain recognised on the hedged item at 31 December 2017, attributable to the hedged risk is US$ 39.0 million (2016: US$ 24.2 million). These gains and losses are included in “trading income” in the consolidated statement of income during 2017 and 2016 respectively. 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.


28 DERIVATIVES (continued)


Annual Report 2017

The Group has the following credit related commitments:

2017US$ ’000

2016US$ ’000

Contingent liabilities

Guarantees 2,629,554 2,443,017

Acceptances 187,852 132,119

Letters of credit 566,808 534,461

3,384,214 3,109,597

Maturity of contingent liabilities is as follows:

- Less than one year 2,502,602 2,302,598

- Over one year 881,612 806,999

3,384,214 3,109,597

Irrevocable commitments:

Undrawn loan commitments 1,077,266 1,130,419

Please also refer to note 35 for additional liquidity disclosures.

The Group’s commitments in respect of non-cancellable operating leases were as follows:

2017US$ ’000

2016US$ ’000

Within one year 1,967 1,540

Between one to five years 4,718 5,219

6,685 6,759

30 SEGMENT INFORMATION

For management purposes the Group is organised into four major business segments:

Retail banking Principally handling individual customers’ deposit and current accounts, providing consumer loans, residential mortgages, overdrafts, credit cards and fund transfer facilities.

Corporate banking Principally handling loans and other credit facilities, and deposit and current accounts for corporate and institutional customers.

Treasury & investments Principally providing money market, trading and treasury services, as well as management of the Group’s investments and funding.

Private banking Principally servicing high net worth clients through a range of investment products, funds, credit facilities, trusts and alternative investments.

These segments are the basis on which the Group reports its primary segment information. Transactions between segments are conducted at approximate market rates on an arm’s length basis. Interest is charged/credited to business segments based on a pool rate which approximates the cost of funds.


29 COMMITMENTS AND CONTINGENT LIABILITIES (continued)


Annual Report 2017

Segmental information for the year was as follows:

Retailbanking

US$ ’000

Corporatebanking

US$ ’000

Treasury &investments

US$ ’000

Privatebanking

US$ ’000Total

US$ ’000

Year ended 31 December 2017:

Net interest income 27,431 651,623 148,005 49,411 876,470

Inter segment interest 146,080 (199,562) 34,269 19,213 -

Fees, commissions and others 36,804 68,116 16,261 23,832 145,013

Investment income and trading income 3,215 19,918 74,603 153 97,889

OPERATING INCOME 213,530 540,095 273,138 92,609 1,119,372

Net provision for loan losses and others 8,264 80,179 - (1,773) 86,670

Provision for investments - - 2,280 - 2,280

NET OPERATING INCOME 205,266 459,916 270,858 94,382 1,030,422

Operating expenses 111,932 75,768 103,191 32,009 322,900

PROFIT BEFORE TAX 93,334 384,148 167,667 62,373 707,522

Tax expense 41,008

NET PROFIT FOR THE YEAR 666,514

Less : Attributable to non-controlling interest 47,799

NET PROFIT ATTRIBUTABLE TO THE OWNERS’ OF THE BANK 618,715

Segment assets 3,807,435 15,452,710 10,397,849 1,955,449 31,613,443

Goodwill 154,935 99,857 96,826 79,681 431,299

Other intangible assets 13,441 17,783 16,213 2,094 49,531

Investment in associates 304,020

Unallocated assets 843,592

TOTAL ASSETS 33,241,885

Segment liabilities 5,146,229 4,833,337 14,509,456 2,952,030 27,441,052

Unallocated liabilities 912,679

TOTAL LIABILITIES 28,353,731


30 SEGMENT INFORMATION (continued)


Annual Report 2017

Segmental information for the year was as follows:

Retailbanking

US$ ’000

Corporatebanking

US$ ’000

Treasury &investments

US$ ’000

Privatebanking

US$ ’000Total

US$ ’000

Year ended 31 December 2016:

Net interest income 20,683 586,964 169,452 51,133 828,232

Inter segment interest 169,960 (189,471) 9,175 10,336 -

Fees, commissions and others 41,447 93,415 10,069 24,804 169,735

Investment income and trading income 7,786 14,406 122,985 2,342 147,519

OPERATING INCOME 239,876 505,314 311,681 88,615 1,145,486

Net provision for loan losses and others 10,402 142,617 - (3,457) 149,562

Provision for investments - - 9,279 - 9,279

NET OPERATING INCOME 229,474 362,697 302,402 92,072 986,645

Operating expenses 114,286 75,317 95,193 31,424 316,220

PROFIT BEFORE TAX 115,188 287,380 207,209 60,648 670,425

Tax expense 46,115

NET PROFIT FOR THE YEAR 624,310

Less : Attributable to non-controlling interest 53,670

NET PROFIT ATTRIBUTABLE TO THE OWNERS’ OF THE BANK 570,640

Segment assets 3,761,034 14,181,899 9,806,124 1,822,557 29,571,614

Goodwill 153,381 98,599 95,802 78,779 426,561

Other intangible assets 13,043 17,258 15,735 2,035 48,071

Investment in associates 326,874

Unallocated assets 949,364

TOTAL ASSETS 31,322,484

Segment liabilities 4,823,033 4,982,953 13,348,790 2,762,830 25,917,606

Unallocated liabilities 865,376

TOTAL LIABILITIES 26,782,982




Annual Report 2017

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

2017US$ ’000

2016US$ ’000

2017US$ ’000

2016US$ ’000

GCC Countries 783,536 705,715 22,977,029 22,205,097

Rest of the World 335,836 439,771 10,264,856 9,117,387

Total 1,119,372 1,145,486 33,241,885 31,322,484

Net profit from Bahrain onshore operations included above is US$ 86.3 million (2016: US$ 80.7 million) amounting to 13.9% (2016: 14.1%) of the Group’s net profit attributable to owners of the Bank. RISK MANAGEMENT 31 CREDIT RISK Credit risk is the risk that one party to a financial instrument will fail to discharge a financial obligation and cause the other party to incur a financial loss. In the case of derivatives this is limited to positive fair values. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. a) Concentration risk Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location. The Group manages its credit risk exposure so as to avoid over concentration to a particular sector or geographic location. It also obtains security where appropriate. Guidelines are in place regarding the acceptability of types of collateral and valuation parameters. The principal collateral types are as follows: - In the personal sector – cash, mortgages over residential properties and assignments over salary income; - In the commercial sector – cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees; - In the commercial real estate sector – charges over the properties being financed; and - In the financial sector – charges over financial instruments, such as debt securities and equities.




Annual Report 2017

The Group monitors the market value of collateral and requests additional collateral when necessary in accordance with the underlying agreement.

Details of the concentration of the loans and advances by industry sector and geographic region are disclosed in note 8(a) and 8(b) respectively. Details of the industry sector analysis and the geographical distribution of the assets, liabilities and commitments on behalf of customers are set out in note 32.

b) Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

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.

Grossmaximumexposure

2017US$ ’000

Grossmaximumexposure

2016US$ ’000

Balances with central banks 677,594 789,422

Treasury bills and deposits with central banks 2,576,352 2,464,846



Non-trading investments 5,876,616 5,429,578

Interest receivable and other assets 308,942 385,700

Total 31,407,957 29,560,922

Contingent liabilities 3,384,214 3,109,597


Total credit related commitments 4,461,480 4,240,016

Total credit risk exposure 35,869,437 33,800,938

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.


31 CREDIT RISK (continued)


Annual Report 2017

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

gradeUS$ ’000

Standardgrade

US$ ’000Total

US$ ’000

At 31 December 2017

Balances with central banks 677,594 - 677,594

Treasury bills and deposits with central banks 2,037,712 538,640 2,576,352

Deposits with banks 2,309,631 160,120 2,469,751

Loans and advances

Retail 2,844,665 804,606 3,649,271

Corporate 8,952,988 6,719,031 15,672,019

Non-trading investments 3,914,616 2,001,221 5,915,837

Interest receivable and other assets 147,382 70,369 217,751

Other assets - derivatives 91,191 - 91,191

The table below shows distribution of financial assets neither past due nor impaired.

Neither past due nor impaired

High standard

gradeUS$ ’000

Standardgrade

US$ ’000Total

US$ ’000

At 31 December 2016

Balances with central banks 789,422 - 789,422

Treasury bills and deposits with central banks 1,584,629 880,217 2,464,846

Deposits with banks 1,737,861 146,632 1,884,493

Loans and advances

Retail 2,820,992 804,251 3,625,243

Corporate 9,035,773 5,983,311 15,019,084

Non-trading investments 3,893,853 1,625,958 5,519,811

Interest receivable and other assets 210,921 61,834 272,755

Other assets - derivatives 112,945 - 112,945

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:


31 CREDIT RISK (continued)


Annual Report 2017

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 2017 and 2016 other than those disclosed under note 8(c).

32 CONCENTRATION ANALYSIS The distribution of assets, liabilities and commitments on behalf of customers by geographic region and industry sector was as follows:

2017 2016

AssetsUS$ ’000

LiabilitiesUS$ ’000

Contingent liabilities &

commitmentson behalf of

customersUS$ ’000

AssetsUS$ ’000

LiabilitiesUS$ ’000

Contingent liabilities &

commitmentson behalf of

customersUS$ ’000

Geographic region:

Kingdom of Bahrain 5,935,876 4,278,065 956,123 5,616,371 4,434,613 816,722

State of Kuwait 12,091,452 15,865,172 1,428,029 11,915,097 15,857,714 1,387,674

Other GCC countries 4,949,701 1,546,179 310,399 4,673,629 923,769 303,176

United Kingdom (UK) 2,402,182 705,559 37,976 2,206,461 705,767 12,373

Arab Republic of Egypt 2,749,095 2,573,010 386,634 2,563,112 2,227,158 376,328

Europe (excluding UK) 1,517,920 956,564 181,467 1,243,236 482,179 155,540

Asia (excluding GCC) 1,742,117 1,342,957 35,727 1,574,951 1,143,035 8,157

United States of America 723,072 199,670 4,803 633,953 230,878 5,025

Rest of the World 1,130,470 886,555 43,056 895,674 777,869 44,602

33,241,885 28,353,731 3,384,214 31,322,484 26,782,982 3,109,597

Industry sector:

Banks and other financial institutions 10,045,621 13,265,548 489,975 9,860,992 12,229,616 456,688 Consumer/personal 2,843,340 5,492,545 21,939 2,906,297 5,146,647 8,241 Residential mortgage 1,540,526 - 215 1,423,193 - 214 Trading and manufacturing 5,771,772 1,459,145 1,309,406 5,163,317 1,371,348 1,181,986 Real estate 5,332,464 368,572 32,625 5,244,436 367,696 37,884 Services 4,111,806 2,537,221 1,247,853 3,676,082 2,420,122 1,212,843 Government/public sector 3,234,447 4,296,313 89,222 2,730,631 4,147,678 26,604 Others 361,909 934,387 192,979 317,536 1,099,875 185,137

33,241,885 28,353,731 3,384,214 31,322,484 26,782,982 3,109,597


31 CREDIT RISK (continued)c) Credit quality per class of financial assets (continued)


Annual Report 2017

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 inter-dependency between risk variables. Non-trading portfolios are managed and monitored using stop loss limits and other sensitivity analyses. The data given below is representative of the information during the year.

a. Market risk-trading The Group calculates historical simulation VaR using a one day holding period at a confidence level of 99%, 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 exchangeUS$ ’000

Interest rate

US$ ’000

Effects of correlation

US$ ’000Total

US$ ’000

31 December 2017 1,032 (139) 1 894

31 December 2016 243 2 0 245

b. Market risk-non-trading

Interest rate riskInterest 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 periodically 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 for the next one year, 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 2017 and 31 December 2016 including the effect of hedging instruments.



Annual Report 2017

Sensitivity analysis - interest rate risk

2017US$ ’000

2016US$ ’000

at 10 bps - increase (+)/decrease (-) +/- 4,669 3,713

at 25 bps - increase (+)/decrease (-) +/- 11,673 9,283

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 periodically 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(h). 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 FVTOCI) due to a reasonably possible change in equity indices, with all other variables held constant is as follows:

Change in equityindices

%

2017

Effect onOCI

US$ ’000

2016

Effect onOCI

US$ ’000

Market indices

Kuwait Stock Exchange +/- 10% +/- 25 602

34 FAIR VALUE MEASUREMENT The fair value of financial assets and financial liabilities, other than those disclosed in the table below and in note 9, 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.


33 MARKET RISK (continued)b. Market risk-non-trading (continued)


Annual Report 2017

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; and Level 3 : techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable

market data.

2017

Level 1 US$ ’000

Level 2US$ ’000

Level 3US$ ’000

TotalUS$ ’000

Equity instruments and funds at fair value 251 77,034 48,509 125,794

Derivative assets 320 90,871 - 91,191

Derivative liabilities 102 143,043 - 143,145

2016

Level 1 US$ ’000

Level 2US$ ’000

Level 3US$ ’000

TotalUS$ ’000

Equity instruments and funds at fair value 465 92,174 48,230 140,869

Derivative assets - 112,945 - 112,945

Derivative liabilities - 142,547 - 142,547

During the year 2017 and 2016 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). The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year.

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 is the responsibility of the Group Asset and Liability Committee (GALCO) under the chairmanship of the Deputy Group Chief Executive Officer Treasury and Investments supported by the Group Treasurer, and is responsible for ensuring that all foreseeable funding commitments, including deposit withdrawals, can be met when due, and that wholesale market access is coordinated and controlled. The Group maintains a stable funding base comprising core retail and corporate customer deposits and institutional balances, augmented by wholesale funding and portfolios of highly liquid assets which are diversified by currency and maturity, in order to enable the Group to respond quickly to any unforeseen liquidity requirements.


34 FAIR VALUE MEASUREMENT (continued)


Annual Report 2017

The Group subsidiaries and affiliates maintain a strong individual liquidity position and manage their liquidity profiles so that cash flows are balanced and funding obligations can be met when due. Treasury limits are set by the GALCO and allocated as required across the various group entities. Specifically GALCO and the Group Treasurer are responsible for: - projecting cash flows by major currency under various stress scenarios and considering the level of liquid assets necessary in relation thereto; - monitoring balance sheet liquidity ratios against internal and regulatory requirements; - maintaining a diverse range of funding sources with adequate back-up facilities; - managing the concentration and profile of debt maturities; - managing contingent liquidity commitment exposures within predetermined caps; - monitoring depositor concentration in order to avoid undue reliance on large individual depositors and ensure a satisfactory overall funding mix; and - maintaining liquidity and funding contingency plans. These plans must identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises while minimising adverse long-term implications for the business. The maturity profile of the assets and liabilities at 31 December 2017 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 or expected maturity date, where relevant. The liquidity profile of customer deposits has been determined on the basis of the effective maturities indicated by the Group’s deposit retention history.


35 LIQUIDITY RISK (continued)


Annual Report 2017

US$’000

Upto threemonths

Over threemonths to

one yearAbove1 year Undated Total

ASSETS

Cash and balances with central banks 809,986 - - - 809,986

Treasury bills and deposits with central banks 1,007,636 1,568,716 - - 2,576,352

Deposits with banks 2,357,499 12,252 100,000 - 2,469,751

Loans and advances 7,802,632 1,940,791 9,755,279 - 19,498,702

Non-trading investments 538,448 575,149 4,888,813 - 6,002,410

Investment in associates - - - 304,020 304,020

Investment properties - - - 256,242 256,242

Premises and equipment - - - 226,672 226,672

Interest receivable and other assets 119,909 335,230 161,781 - 616,920

Goodwill and other intangible assets - - - 480,830 480,830

Total 12,636,110 4,432,138 14,905,873 1,267,764 33,241,885

LIABILITIES

Deposits from banks 3,555,191 388,042 - - 3,943,233

Borrowings under repurchase agreements 737,992 534,766 - - 1,272,758

Customers’ deposits 6,557,366 4,926,848 10,525,643 - 22,009,857

Interest payable and other liabilities 346,493 308,470 257,716 - 912,679

Subordinated liabilities - 22,222 192,982 - 215,204

Total 11,197,042 6,180,348 10,976,341 - 28,353,731

Net liquidity gap 1,439,068 (1,748,210) 3,929,532 1,267,764 4,888,154

The Group has collateralized borrowing lines of credit with various financial institutions through repurchase arrangements. Please refer note 16 for further details.




Annual Report 2017

The maturity profile of the assets and liabilities at 31 December 2016 was as follows:

US$’000

Upto threemonths

Over threemonths to

one yearAbove1 year Undated Total

ASSETS

Cash and balances with central banks 912,924 - - - 912,924

Treasury bills and deposits with central banks 1,318,342 1,146,504 - - 2,464,846

Deposits with banks 1,749,447 84,126 50,920 - 1,884,493

Loans and advances 5,840,882 3,343,177 9,422,824 - 18,606,883

Non-trading investments 533,859 520,504 4,516,084 - 5,570,447

Investment in associates - - - 326,874 326,874

Investment properties - - - 132,021 132,021

Premises and equipment - - - 211,209 211,209

Interest receivable and other assets 185,450 394,773 157,932 - 738,155

Goodwill and other intangible assets - - - 474,632 474,632

Total 10,540,904 5,489,084 14,147,760 1,144,736 31,322,484

LIABILITIES

Deposits from banks 3,065,663 213,375 - - 3,279,038

Borrowings under repurchase agreements 322,819 375,409 - - 698,228

Customers’ deposits 6,271,169 4,743,379 10,688,810 - 21,703,358

Interest payable and other liabilities 397,475 275,337 192,564 - 865,376

Subordinated liabilities - 22,222 214,760 - 236,982

Total 10,057,126 5,629,722 11,096,134 - 26,782,982

Net liquidity gap 483,778 (140,638) 3,051,626 1,144,736 4,539,502

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. However, the Group’s expected cash flows on these instruments vary significantly from this analysis. In particular, customer deposits are expected to maintain stable or increased balances.




Annual Report 2017

US$’ 000

Up to One month

One monthto threemonths

Over threemonths to

one year

Over one year to

five yearsOver five

years Total

As at 31 December 2017

Deposits from banks 2,105,425 1,455,037 391,105 - - 3,951,567

Borrowings under repurchase agreements 231,808 507,800 539,973 - - 1,279,581

Customers’ deposits 10,506,062 3,917,929 6,604,986 1,140,625 11,241 22,180,843

Subordinated liabilities - - 22,856 203,885 12,264 239,005

Total 12,843,295 5,880,766 7,558,920 1,344,510 23,505 27,650,996

Credit related commitments 22,877 75,139 330,793 597,290 51,167 1,077,266

Derivatives (net) 205 9,183 (2,142) (7,946) (51,335) (52,035)

US$’ 000

Up to One month


Over threemonths to

one year

Over one year to

five yearsOver five

years Total

As at 31 December 2016

Deposits from banks 1,592,184 1,477,897 214,932 - - 3,285,013

Borrowings under repurchase agreements 14,268 309,076 377,755 - - 701,099

Customers’ deposits 9,952,746 4,275,858 6,601,084 961,866 23,904 21,815,458

Subordinated liabilities - - 22,766 225,323 11,410 259,499

Total 11,559,198 6,062,831 7,216,537 1,187,189 35,314 26,061,069

Credit related commitments 18,653 131,414 211,137 671,940 97,275 1,130,419

Derivatives (net) 15,925 9,945 (7,007) (14,158) (34,295) (29,590)

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. The Group does not have any significant restrictions on its ability to access or use its assets and settle its liabilities other than any restrictions that may result from the supervisory frameworks within which the banking subsidiaries operate. 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 total capital ratio, calculated in accordance with the capital adequacy guidelines, under Basel III, issued by the Central Bank of Bahrain (“CBB”), for the Group, is disclosed under Pillar III Table 1, which is included in the Annual Report. The minimum capital adequacy ratio as per CBB is 12.5%. The Group’s total capital ratio is 17.0% as of 31 December 2017 (31 December 2016: 17.1%).




Annual Report 2017

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 issued by the Central Bank of Bahrain (CBB) in accordance with Resolution No.(34) of 2010. This scheme covers eligible ‘natural persons’ (individuals) up to a maximum of Bahraini Dinar 20,000 as set out by CBB requirements. A periodic contribution as mandated by the CBB is paid by the Bank under this scheme. 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 mandated under this scheme and no liability is due unless any member bank of the scheme is unable to meet its depository obligations.



Annual Report 2017

38 ISLAMIC BANKING

The Group’s Shari’a compliant Islamic banking activities are offered through its Islamic Banking subsidiary AUBK, Islamic banking associate UBCI and dedicated Islamic banking branches/windows at AUB Bahrain, AUBUK and through its associate Ahli Bank S.A.O.G. The results of its Islamic banking activities is presented below.

BALANCE SHEET AS AT 31 DECEMBER Note2017

US$ ’0002016

US$ ’000

ASSETS

Cash and balances with central banks 114,885 105,519

Deposits with central banks 1,376,244 1,396,752

Deposits with banks (a) 641,960 732,787

Receivable balances from Islamic financing (b) 11,115,957 10,573,736

Financial investments 819,008 778,615

Investment in associates 42,738 40,880

Investment properties 125,914 75,443

Premises and equipment 110,616 103,058

Profit receivable and other assets 57,291 82,094

TOTAL ASSETS 14,404,613 13,888,884

LIABILITIES

Deposits from banks (c) 2,391,720 1,913,217

Customers' deposits (d) 9,825,484 10,047,383

Profit payable and other liabilities 240,499 230,161

Restricted investment accounts 31,964 2,773

12,489,667 12,193,534

Equity of unrestricted investment account holders 125,219 55,199

TOTAL LIABILITIES AND EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS 12,614,886 12,248,733

TOTAL EQUITY 1,789,727 1,640,151

TOTAL LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS AND EQUITY 14,404,613 13,888,884



Annual Report 2017

STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER Note2017

US$ ’0002016

US$ ’000

Net income from Islamic financing (e) 402,436 346,590

402,436 346,590

Fees and commissions 41,609 39,814

Other operating income 14,623 18,770

Foreign exchange gains 11,447 13,239

OPERATING INCOME 470,115 418,413

Provision for financing receivables and others 117,462 113,285

NET OPERATING INCOME 352,653 305,128

Staff costs 81,680 69,148

Depreciation 8,527 8,292

Other operating expenses 45,029 40,196

OPERATING EXPENSES 135,236 117,636

PROFIT FOR THE YEAR BEFORE TAX 217,417 187,492

Tax expense 7,085 6,685

PROFIT FOR THE YEAR BEFORE THE SHARE OF PROFIT OF EQUITY OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS 210,332 180,807

Less : Share of profit of equity of unrestricted investment account holders 611 270

NET PROFIT FOR THE YEAR 209,721 180,537

Attributable to:

Owners of the Bank 172,906 151,472

Non-controlling interest 36,815 29,065

209,721 180,537


38 ISLAMIC BANKING (continued)


Annual Report 2017

Notes

2017US$ ’000

2016US$ ’000

(a) Deposits with banks

Murabaha finance with other banks 514,929 622,221

Wakala with banks 99,917 70,103

Current accounts and others 27,114 40,463

641,960 732,787

2017US$ ’000

2016US$ ’000

(b) Receivable balances from Islamic financing

Tawarruq receivables 6,539,897 6,544,634

Murabaha receivables 3,301,572 2,698,429

Ijara receivables 1,707,097 1,718,212

Others 28,861 11,184

Less: Allowance for impairment (461,470) (398,723)

11,115,957 10,573,736

2017US$ ’000

2016US$ ’000

(c) Deposits from banks

Murabaha 1,855,346 1,616,778

Wakala 464,265 282,866

Current accounts 72,109 13,573

2,391,720 1,913,217

2017US$ ’000

2016US$ ’000

(d) Customers' deposits

Wakala 5,899,772 5,863,449

Murabaha 1,997,722 2,364,822

Mudaraba 779,536 822,289

Current accounts 1,148,454 996,823

9,825,484 10,047,383


38 ISLAMIC BANKING (continued)


Annual Report 2017

2017US$ ’000

2016US$ ’000

(e) Net income from Islamic financing

Income from Tawarruq 292,040 252,218

Income from Murabaha 149,274 171,650

Income from Ijara 93,049 87,771

Income from Financial Investments 51,654 14,718

Income from Islamic financing 586,017 526,357

Profit expenses on Wakala 91,536 106,078

Profit expenses on Murabaha 69,295 62,002

Profit expenses on Mudaraba 22,750 11,687

Less: Distribution to depositors 183,581 179,767

Net income from Islamic financing 402,436 346,590

39 COMPARATIVE INFORMATION Certain corresponding figures for 2016 have been reclassified in order to conform to the presentation of financial statements for the current year. Such reclassifications do not affect previously reported net profit or shareholders’ equity.


38 ISLAMIC BANKING (continued)Notes (continued)


Annual Report 2017

Introduction to the Central Bank of Bahrain’s Basel III Guidelines 134Pillar III Quantitative & Qualitative Disclosures 135Capital Structure 136Group Risk Governance Structure 137Credit Risk Management 139Market Risk 150Liquidity Risk and Funding Management 154Operational Risk 154Information Technology Risk 155Strategic Risk 155Legal, Compliance, Regulatory and Reputational Risks 155Environmental Risk 156Appendix I - Regulatory Capital Disclosures 156

Pillar III Disclosures -Basel III

31 DECEMBER 2017


Annual Report 2017


Annual Report 2017Pillar III Disclosures - Basel III31 December 2017

INTRODUCTION TO THE CENTRAL BANK OF BAHRAIN’S BASEL III GUIDELINES The Central Bank of Bahrain (CBB) Basel III Guidelines, based upon the Bank of International Settlements (BIS) Revised Framework – ‘International Convergence of Capital Measurement and Capital Standards’, are applicable from 1 January 2015. Basel III 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 adequacy ratio. It defines the calculation of Risk Weighted Assets (RWAs) for credit risk, market risk and operational risk, as well as the derivation of 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 12.5%. This includes, mandatory Capital Conservation Buffer (CCB) of 2.5%. The Group ensures that each subsidiary maintains sufficient capital levels for their respective legal and compliance purposes. Credit risk Basel III provides two 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 (BIA), 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 12.5 per cent minimum capital adequacy ratio at the Group level.


Annual Report 2017Pillar III Disclosures - Basel III31 December 2017

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 2017.

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 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 incorporated under respective tiers of capital as per CBB rules (Subject to Basel III transitional rules);

b) Investments in associates as reported under note 10 to the audited consolidated financial statements are treated as Significant

Investment in financial entities. They are risk weighted and deducted from Capital as per CBB Basel III guidelines (subject to CBB and Basel III transitional rules);

c) Goodwill and Intangibles (subject to transitional rules) are deducted from Tier 1 capital; d) Subordinated term debt, 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) Collective impairment provisions to the extent of maximum threshold of 1.25% of Credit Risk Weighted Assets are included under

Tier 2 capital.


Annual Report 2017

1. CAPITAL STRUCTURE

TABLE - 1

A. NET AVAILABLE CAPITAL

US$ ’000

CET 1 AT 1 Tier 2

NET AVAILABLE CAPITAL 3,651,587 563,813 514,001

TOTAL ELIGIBLE CAPITAL BASE (CET 1 + AT 1 + Tier 2) 4,729,401

RISK WEIGHTED EXPOSURES

Credit Risk Weighted Exposures 25,495,693

Market Risk Weighted Exposures 366,938

Operational Risk Weighted Exposures 1,880,925

TOTAL RISK WEIGHTED EXPOSURES 27,743,556

CET 1 & Capital Conservation Buffer (CCB) 13.2%

Tier 1 - Capital Adequacy Ratio (CET 1, AT 1 & CCB) 15.2%

Total - Capital Adequacy Ratio 17.0%

As part of the Basel III implementation, Central Bank of Bahrain (CBB) has revised the public disclosure requirements module [PD Module - Chapter PD-3.1.5A: Quarterly Disclosure Requirements] and incorporated additional disclosure requirements related to regulatory capital.

In line with above requirements, the Group has disclosed the regulatory capital reconciliation and other related disclosures in Appendix I which forms part of Pillar III disclosures for the year ended 31 December 2017.

B. CAPITAL ADEQUACY RATIO As at 31 December 2017, the capital adequacy ratio of banking subsidiaries under Basel III unless mandated otherwise were:

Subsidiaries

Ahli United Bank K.S.C.P. (AUBK)

Ahli United Bank (U.K.) PLC

(AUBUK)

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

(AUBE)*

Commercial Bank of Iraq P.S.C.

(CBIQ)*

Tier 1 - Capital Adequacy Ratio 16.8% 23.0% 16.9% 555.9%

Total - Capital Adequacy Ratio 18.0% 24.0% 18.1% 594.1%

* under Basel II

Pillar III Disclosures - Basel III31 December 2017


Annual Report 2017

2. GROUP RISK GOVERNANCE STRUCTURE Risk Governance The Group Board of Directors (BOD) seeks to optimise the Group’s performance by enabling the various Group business units to realize the Group’s business strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters and Group risk policy framework. AUB Group Risk Governance Structure

The above Group committees are set up as part of the Group risk governance structure. The terms of reference for these committees are approved by the Group BOD. Group Audit & Compliance Committee has oversight over Group’s Audit,Compliance and Operational Risk.


AUB GroupBOD

Group ExecutiveCommittee

Group Audit &Compliance Committee

Shari’aAdvisory & Supervisory

Board

Group RiskCommittee

Group Assets &Liability Committee

Group OperationalRisk Committee


Annual Report 2017

AUB Group Management Risk Governance Structure

Group Chief Executive

Officer & MD

Deputy Group CEORisk, Legal & Compliance

Group Head ofAudit

Group Audit &Compliance Committee

Group Head ofRisk Management

Group Head ofLegal

Group Head ofCredit Risk

Group Head ofCompliance

Head ofSpecial Assets

Head ofMarket Risk

Head ofOperational Risk

Head ofCredit Risk

Shari’a ComplianceOfficer


2. GROUP RISK GOVERNANCE STRUCTURE (continued)

The Group BOD approves the risk parameters, policies and Group Risk Framework on annual basis. The Group Risk Committee monitors the Group’s risk profile against these parameters. The Board and its Executive Committee receive quarterly risk updates including detailed risk exposures analysis reports. 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 the 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. Systems and procedures are in place to identify, control and report on all major risks. Internal Audit is responsible for the independent review of risk management and the Group’s risk control environment. The Group Audit & Compliance 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.

Shari’aAdvisory & Supervisory

Board


Annual Report 2017

3. CREDIT RISK MANAGEMENT Credit risk is the risk of financial loss if a customer or counterparty fails to meet a financial obligation under a contract. It arises principally from lending, trade finance and treasury activities. Credit risk also arises where assets are held in the form of debt securities, the value of which may fall. The Group has policies and procedures in place to monitor and manage these risks and the Group Risk Management function provides high-level centralized oversight and management of credit risk. The specific responsibilities of Group Risk Management are to: - Set credit policy and 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 Group’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, AUB’s 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.



Annual Report 2017

Counterparty Exposure Classes The CBB’s capital adequacy framework for the standardised approach to credit risk sets the following counterparty exposure classes and the risk weightings to be applied to determine the risk weighted assets:

Exposure Class Risk Weighting Criteria

Sovereign Portfolio Exposures to governments of GCC (refer table 4 for definition of GCC) member states and their central banks {including International organization and Multilateral Development Banks (MDBs)} 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.

Public Sector Entity [PSE] Portfolio

Bahrain PSEs and domestic currency claims on other sovereign PSEs [which are assigned a zero % risk weighting by their own national regulator] are assigned a zero % risk weighting. All other PSEs are risk weighted based on their external credit ratings.

Banks Portfolio 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).

Investment company Portfolio

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.

Corporate Portfolio Exposures to corporates are risk weighted based on their external credit rating. Unrated corporates are 100% risk weighted. A number of corporates owned by the Kingdom of Bahrain have been assigned a preferential zero % risk weighting.

Regulatory Retail Portfolio Eligible regulatory retail exposures are risk weighted at 75%.

Residential Property Portfolio Exposures fully secured by first mortgages on owner occupied residential property are risk weighted between 35%-75% based on applicable regulatory guidance.

Commercial Property Portfolio

Exposures secured by mortgages on commercial real estate are subject to a minimum 100% risk weighting, except where the borrower has an external rating below BB- in which case the rating risk weighting applies.

Equities and Funds Investment Portfolio

Investments in listed equities carry a 100%-250% risk weighting. Unlisted equities are 150%-250% risk weighted.

Investments in funds are risk weighted according to the type of underlying assets.

Past Due Portfolio The unsecured portion of any exposure [other than a residential mortgage loan] that is past due for 90 days or more: 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%.

Holdings of Real Estate 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 Real Estate Investment Trusts (REITs) are risk-weighted at 200%. Premises occupied by the bank are weighted at 100%.

Other Assets All other assets not classified above are risk weighted at 100%


3. CREDIT RISK MANAGEMENT (continued)


Annual Report 2017

External Rating Agencies

The Group uses the following external credit assessment institutions (ECAI’s): Moody’s, Standard & Poors and Fitch. The external rating of each ECAI is mapped to the prescribed internal risk rating that in turn produces standard risk weightings. Basel III Reporting of Credit Risk Exposures As a result of the methodologies applied in credit risk exposures presented under Basel III reporting differs in many ways from the exposures reported in the consolidated financial statements. 1. As per the CBB Basel III framework, off balance sheet exposures are converted, by applying a credit conversion factor (CCF), into

direct credit exposure equivalents. 2. Under the Basel III capital adequacy framework eligible collateral is applied after applying prescribed haircut, 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 mitigation. Acceptable forms of collateral are defined within the Group risk framework and conservative valuation parameters are also pre-set and regularly reviewed to reflect any changes in market conditions. Security structures and legal covenants are also subject to regular review to ensure that they continue to fulfil their intended purpose and remain in line with the CBB’s prescribed minimum requirements set out in their capital adequacy regulations. The principal collateral types are as follows: - in the 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 is 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 III CRM techniques. The CBB’s Basel III 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.




Annual Report 2017

TABLE - 2 GROSS CREDIT RISK EXPOSURES

US$ ’000

As at 31 December

2017

Averagemonthlybalance

Balances with central banks 677,594 756,726

Treasury bills and deposits with central banks 2,576,352 2,623,889



Non-trading investments 5,876,616 5,495,759

Interest receivable and other assets 308,942 339,232

TOTAL FUNDED EXPOSURES 31,407,957 31,080,606

Contingent liabilities 3,384,214 3,371,871


TOTAL UNFUNDED EXPOSURES 4,461,480 4,417,397

TOTAL GROSS CREDIT RISK EXPOSURE 35,869,437 35,498,003

The gross credit exposures reported above are as per the consolidated balance sheet as reduced by exposures which do not carry credit risk.




Annual Report 2017

TABLE - 3 RISK WEIGHTED EXPOSURES

US$ ’000

Grossexposure

Secured byeligible

CRM

Risk weightedexposures after CRM

Capitalrequirement

Claims on sovereigns 5,553,979 - 303,151 37,894

Claims on public sector entities 1,228,596 - 842,490 105,311

Claims on banks 5,042,285 116,985 2,276,992 284,624

Claims on corporates 18,860,898 1,007,255 17,386,894 2,173,362

Regulatory retail exposures 1,982,139 9,199 1,479,705 184,963

Residential mortgage exposures 1,537,630 - 653,631 81,704

Equity 361,067 - 879,737 109,967

Investments in funds 39,816 - 58,860 7,358

Other exposures 1,190,807 - 1,614,233 201,779

TOTAL 35,797,217 1,133,439 25,495,693 3,186,962

TOTAL CREDIT RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 25,495,693 3,186,962

TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 366,938 45,867

TOTAL OPERATIONAL RISK CAPITAL REQUIREMENT (BASIC INDICATOR APPROACH)* 1,880,925 235,116

TOTAL 27,743,556 3,467,945

*Indicator for operational risk exposure is gross income, adjusted for exceptional items, as per BIA. This approach uses average of adjusted gross income for previous three financial years (USD 1,003,159 thousands) for operational risk computation.

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 III 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 Group has selected to use the comprehensive method where collateral is in the form of cash or bonds or equities. The Group uses a range of risk mitigation tools including collateral, guarantees, credit derivatives, netting agreements and financial covenants to reduce credit risk.

The Group has an equity investment in insurance subsidiary, Al Hilal Life B.S.C.(c), which is consolidated at the Group level and its assets are risk weighted as per CBB rules.




Annual Report 2017

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 the Kingdom of Bahrain are required to obtain the CBB’s approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15 per cent of the regulatory capital base. As at 31 December 2017, the Group had no qualifying single obligor exposures in accordance with Central Bank of Bahrain guidelines which exceed 15 percent of the Group’s regulatory capital base. 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 2017. TABLE - 4 GEOGRAPHIC DISTRIBUTION OF GROSS CREDIT EXPOSURES

US$ ’000

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 Total

Balances with central banks 142,221 39,077 - 273,491 - 173,928 48,877 - 677,594

Treasury bills and deposits with central banks 610,952 1,376,244 - 40,503 - 407,909 140,744 - 2,576,352

Deposits with banks 166,843 431,267 150,882 276,602 345,780 51,382 392,673 654,322 2,469,751

Loans and advances 3,496,074 9,369,028 3,069,995 1,554,007 202,425 1,525,058 183,183 98,932 19,498,702

Non-trading investments 855,344 128,739 1,366,852 123,468 950,982 424,335 944,405 1,082,491 5,876,616

Interest receivable and other assets 60,798 64,846 25,073 84,768 14,501 32,199 11,395 15,362 308,942

Total funded exposures 5,332,232 11,409,201 4,612,802 2,352,839 1,513,688 2,614,811 1,721,277 1,851,107 31,407,957

Contingent liabilities 956,123 1,428,029 310,399 37,976 181,467 386,634 35,727 47,859 3,384,214

Undrawn loan commitments 369,780 33,138 509,300 117,018 2,020 43,967 851 1,192 1,077,266

Total unfunded exposures 1,325,903 1,461,167 819,699 154,994 183,487 430,601 36,578 49,051 4,461,480

TOTAL 6,658,135 12,870,368 5,432,501 2,507,833 1,697,175 3,045,412 1,757,855 1,900,158 35,869,437

18.6% 35.9% 15.1% 7.0% 4.7% 8.5% 4.9% 5.3% 100.0%

* Other GCC countries are countries which are part of the Gulf Co-operation Council comprising the 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.




Annual Report 2017

TABLE - 5 SECTORAL CLASSIFICATION OF GROSS CREDIT EXPOSURES

US$ ’000

Funded Unfunded Total %

Balances with central banks 3,253,946 - 3,253,946 9.1

Banks and other financial institutions 5,228,771 946,744 6,175,515 17.2

Consumer/personal 2,843,340 21,939 2,865,279 8.0

Residential mortgage 1,540,526 84,115 1,624,641 4.5

Trading and manufacturing 5,771,772 1,545,584 7,317,356 20.4

Real estate 5,061,662 168,556 5,230,218 14.6

Services 4,111,584 1,321,303 5,432,887 15.1

Government/public sector 3,234,447 174,212 3,408,659 9.5

Others 361,909 199,027 560,936 1.6

TOTAL 31,407,957 4,461,480 35,869,437 100.0

87.6% 12.4% 100.0%

TABLE - 6 RESIDUAL CONTRACTUAL MATURITY OF GROSS CREDIT EXPOSURES

US$ ’000

Up toone month


Over threemonths to

one year

Over oneyear to

five years

Overfive to

ten years

Over ten to twenty

years

Overtwenty

years Total

Balances with central banks 503,710 173,884 - - - - - 677,594

Treasury bills and deposits with central banks 532,536 475,100 1,568,716 - - - - 2,576,352

Deposits with banks 1,978,267 379,232 12,252 100,000 - - - 2,469,751

Loans and advances 3,533,301 4,269,331 1,940,791 5,327,616 3,312,813 1,045,153 69,697 19,498,702

Non-trading investments 69,925 468,523 575,149 3,281,109 1,312,628 146,610 22,672 5,876,616

Interest receivable and other assets 65,068 45,533 54,861 93,957 46,555 2,968 - 308,942

Total funded exposures 6,682,807 5,811,603 4,151,769 8,802,682 4,671,996 1,194,731 92,369 31,407,957

Contingent liabilities 393,219 700,709 1,408,674 764,042 117,570 - - 3,384,214

Undrawn loan commitments 22,877 75,139 330,793 597,290 51,167 - - 1,077,266

Total unfunded exposures 416,096 775,848 1,739,467 1,361,332 168,737 - - 4,461,480

TOTAL 7,098,903 6,587,451 5,891,236 10,164,014 4,840,733 1,194,731 92,369 35,869,437




Annual Report 2017

Impairment Provisions

The Group Risk Committee regularly evaluates the adequacy of the established allowances for impaired loans.

Two types of impairment allowance are in place:

Individually assessed impairment provisions

These are determined by evaluating the exposure to loss, case by case, on all individually significant accounts based upon the following factors:- aggregate exposure to the customer;- the viability of the customer’s business model and its capacity to trade successfully out of financial difficulties, generating sufficient

cash flow to service debt obligations;- the amount and timing of expected receipts and recoveries;- the extent of other creditors’ commitments ranking ahead of, or pari passu with the Bank, and the likelihood of other creditors

continuing to support the company;- the realisable value of security (or other credit 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.

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 Group will adopt ‘IFRS 9- Financial Instruments - Impairment of financial assets and hedge accounting’ issued by the International Accounting Standards Board (IASB) on 1 January 2018.




Annual Report 2017

TABLE - 7 SECTORAL BREAKDOWN OF IMPAIRED LOANS AND IMPAIRMENT PROVISIONS

US$’000

Impaired and past due

loans

Specific impairment

provision

*Net specific charge for the

year ended 31 December

2017

Write off during the

year ended 31 December

2017

Collective impairment

provision

Consumer/personal 69,934 57,674 18,083 20,467 38,334

Trading and manufacturing 19,318 18,445 348 97,762 66,376

Real estate 116,246 91,286 7,836 - 68,240

Residential mortgage 16,636 14,189 - - 20,769

Banks and other financial institutions 4,114 3,426 - - 10,733

Services 146,185 130,614 44,727 91,216 53,514

Government/public sector - - - - 1,544

Others 9,220 9,045 - - 4,879

TOTAL 381,653 324,679 70,994 209,445 264,389

*Net specific charge for the year excludes recoveries from fully provided loans written off in prior years.

TABLE - 8 GEOGRAPHICAL DISTRIBUTION OF IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCES

US$ ’000

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 Total

Specific impairment provision 108,376 194,008 - - - 6,394 15,901 - 324,679

Collective impairment provision 36,429 120,940 26,734 4,321 3,423 69,674 1,893 975 264,389

TOTAL 144,805 314,948 26,734 4,321 3,423 76,068 17,794 975 589,068




Annual Report 2017

TABLE - 9 MOVEMENTS IN IMPAIRMENT PROVISION FOR LOANS AND ADVANCES

US$ ’000

Specific Collective

Balance at 1 January 2017 380,239 316,932

Amounts written off during the year (209,445) -

Net charge for the year* 70,994 16,128

Transfers 76,485 (76,485)

Exchange rate adjustments / other movements 6,406 7,814

Balance at 31 December 2017 324,679 264,389

*Net specific charge for the year excludes recoveries from fully provided loans written off in prior years.

Past Due and Impaired Credit Facilities

As per CBB guidelines, credit facilities are placed on non-accrual status and interest income suspended when either principal or interest is overdue by 90 days whereupon unpaid and accrued interest is reversed from income. Interest on non-accrual facilities is included in income only when received. Credit facilities classified as past due are assessed for impairment in accordance with IFRS guidelines. A specific provision is established where there is objective evidence that a credit facility is impaired.

Impaired credit facilities comprise those facilities where there is objective evidence that the Bank will not collect all amounts due, including both principal and interest. Objective evidence would include:

- a breach of contract, such as default or delinquency in interest or principal payments, - the granting of a concession that, for economic or legal reasons relating to the borrower’s financial difficulties, would not otherwise be considered,- indications that it is probable that the borrower will enter bankruptcy or other financial reorganisation,

Refer to notes 8(a) to 8(d) and note 31(c) to the audited consolidated financial statements for the year ended 31 December 2017 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 excellent to good 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.




Annual Report 2017

TABLE - 10 PAST DUE AND IMPAIRED LOANS - AGE ANALYSIS

i) By Geographical area

US$ ’000

Three months to one year

One to three years

Over threeyears Total

Kingdom of Bahrain 73,369 34,792 5,425 113,586

State of Kuwait 72,225 143,928 21,620 237,773

Other GCC Countries - - - -

United Kingdom - - - -

Europe (excluding United Kingdom) - - - -

Arab Republic of Egypt 4,496 569 1,670 6,735

Asia (excluding GCC countries) 15,000 - 8,559 23,559

TOTAL 165,090 179,289 37,274 381,653

43.2% 47.0% 9.8% 100.0%

ii) By Sector

Consumer/personal 29,700 34,451 5,783 69,934

Trading and manufacturing 13,483 5,198 637 19,318

Real estate 87,938 28,308 - 116,246

Residential mortgage 14,558 2,078 - 16,636

Banks and other financial institutions - - 4,114 4,114

Services 18,806 109,199 18,180 146,185

Others 605 55 8,560 9,220

TOTAL 165,090 179,289 37,274 381,653

43.2% 47.0% 9.8% 100.0%

TABLE - 11 RESTRUCTURED CREDIT FACILITIES

US$ ’000

Balance of any restructured credit facilities as at year end 238,882

Loans restructured during the year 215,534

The above restructurings did not have any significant impact on the present or future earnings and were primarily extensions of the loan tenor.




Annual Report 2017

TABLE - 12 COUNTERPARTY CREDIT RISK IN DERIVATIVE TRANSACTIONS

i) Breakdown of the credit exposure

US$ ’000

Notional amountGross positive

fair valueCredit

conversion factor

Foreign exchange related 11,002,456 37,070 212,999

Interest rate related 10,181,587 54,121 112,621

21,184,043 91,191 325,620

Gross positive fair value represents the replacement cost of the derivatives.

US$ ’000

ii) Amounts of collateral 200

TABLE - 13 RELATED PARTY TRANSACTIONS

Refer note 25 to the audited consolidated financial statements of the Group for the year ended 31 December 2017.

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 non-trading portfolios. Trading portfolios include those positions arising from market-making, proprietary position-taking and other marked-to-market positions. Non-trading portfolios include positions that arise from the foreign exchange/interest rate management of the Group’s retail and commercial banking assets and liabilities, and financial assets designated 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); - Stress tests; and - Sensitivities and position size related metrics.




Annual Report 2017

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 PeriodConfidence

IntervalFrequency of

Calculation

“Management” VaR 260 days 1 day 99% Daily

“Regulatory” VaR 260 days 10 day 99% Daily

Daily losses exceeding the VaR figure are likely to occur, on average, either once or five times in every 100 business days depending on the confidence interval employed in the VaR calculation (per the above). The Group routinely validates the accuracy of its VaR models by back testing the actual daily profit and loss results. The actual number of excesses over a given period can be used to gauge how well the models are performing. Although a useful guide to risk, VaR should always be viewed in the context of its limitations. For example: - the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which

are extreme in nature; - the use of a 1-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the

market risk arising at times of severe illiquidity, when a 1-day holding period may be insufficient to liquidate or hedge all positions fully;

- the use of a confidence level, by definition, does not take into account losses that might occur beyond the applied level of confidence; and

- VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures.

The VaR for the Group was as follows:

US$ ‘000

Average Minimum Maximum

For the year 2017 672 315 1,291

TABLE - 14 CAPITAL REQUIREMENTS FOR COMPONENTS OF MARKET RISK

US$ ’000

Risk-weightedexposures

Capital requirement

Maximumvalue

Minimumvalue

Interest rate risk 197,304 24,663 24,663 18,550

Equity position risk 2,328 291 291 246

Foreign exchange risk 135,554 16,944 16,944 12,003

Options & others 31,752 3,969 5,409 1,474

TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 366,938 45,867


4. MARKET RISK (continued)


Annual Report 2017

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 recognizes 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 Group’s interest rate risk policies resides with the Group Treasurer. An independent review and measurement of all interest exposure present in the banking book is undertaken by the Group Market Risk team and reported 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. The behavioural adjustments are applied mainly for those liabilities with no fixed maturity dates such as current and savings accounts. These adjustments are based on empirical experience, and current account balances are spread over a maximum period of 3 years while savings accounts are spread over a maximum period of 7 years. Reports detailing the interest rate risk exposure of the Group are reviewed by GALCO and the Board on a regular basis.




Annual Report 2017

The following table summarizes the re-pricing profiles of the Group’s assets and liabilities as at 31 December 2017. TABLE - 15 INTEREST RATE RISK

US$ ’000

Less thanthree months

Three months to one year

Over oneyear Total

ASSETS

Treasury bills and deposits with central banks 993,458 1,582,894 - 2,576,352

Deposits with banks 2,459,122 10,629 - 2,469,751

Loans and advances 15,828,295 2,453,561 1,216,846 19,498,702

Non-trading investments 750,946 570,149 4,555,521 5,876,616

20,031,821 4,617,233 5,772,367 30,421,421

LIABILITIES

Deposits from banks 3,556,649 386,584 - 3,943,233

Borrowings under repurchase agreements 737,992 534,766 - 1,272,758

Customers' deposits 11,157,783 7,866,006 2,986,068 22,009,857

Subordinated liabilities 17,997 197,207 - 215,204

15,470,421 8,984,563 2,986,068 27,441,052

On balance sheet gap 4,561,400 (4,367,330) 2,786,299

Off balance sheet gap 2,150,223 964,762 (3,114,985)

Total interest sensitivity gap 6,711,623 (3,402,568) (328,686)

Cumulative interest sensitivity gap 6,711,623 3,309,055 2,980,369

Interest rate risk sensitivity analysis The Group’s interest rate risk sensitivity is analyzed in note 33(b) to the consolidated financial statements of the Group for the year ended 31 December 2017. The impact of a +/- 200bps interest rate shock on assets and liabilities which are carried at fair value and the consequent impact on equity as of 31 December 2017 is as per the following table.

US$ ’000

Assets Liabilities Equity

at 200 bps - increase (+) (130,926) 135,471 4,545

at 200 bps - decrease (-) 130,926 (135,471) (4,545)

Equity Risk Equity risk is the risk of changes in the fair value of an equity instrument. The 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.




Annual Report 2017

Valuation and accounting policies: a) Equity investments held for strategic reasons - investments in associates 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. Investments in associated companies 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 3.3(c) (v) of the consolidated financial statements.

TABLE - 16 GAINS ON EQUITY INSTRUMENTS

US$ ’000

Gains / (loss) recognized in Tier1 Capital (CET1)

Unrealized (loss) gains recognized in the balance sheet (12,981)

Realized (loss) gains recognized in the equity (3,704)

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 2017. 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 2017.

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. This definition includes legal risk, but excludes strategic and reputational risk. 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 Operational Risk Management framework has been in place for a number of years and is ingrained in the Group’s culture and processes. The Group has developed a comprehensive ‘Operational Risk Self Assessment’ (ORSA) process.




Annual Report 2017

The Board takes lead in promoting and encouraging a culture of risk awareness and prevention across all areas of the Group. The Group follows a Group Operational Risk Policy approved by the Board. The policy, supported by the Group Operational Risk Framework, aims to ensure that operational risk measures are incorporated into all major aspects of the overall management framework.

The Group Operational Risk Committee is responsible for maintaining an operational risk management framework across the organization. The Committee receives regular reporting on all key operational risk measures. Promptness in resolution of material operational risks identified through Operational Risk Self Assessments and audits are considered as one of the key criteria for performance reviews.

The Group Audit & Compliance Committee assists the Board in ensuring compliance with all regulatory requirements and consistency with best market practices. The Group Audit & Compliance Committee reviews regular reports on all key operational risk measures.

The Group Operational Risk Policy, supported by the Group Operational Risk Framework requires reporting of all material Operational Risk Incidents / Loss Events within a specified period of the occurrence of the event which is followed by an analysis of the root cause and its remediation. The Operational Risk Management Policy requires that internal controls are reviewed and enhanced on an ongoing basis in order to mitigate the residual risks identified through the Operational Risk Self Assessments, analysis of operational loss and near miss events and, internal and external audits. In addition, regular reviews of operating procedures also aim to enhance internal controls. The Group’s Human Resources Policy requires that employees are trained regularly so that they are, among others, aware of operational risks and the mitigating controls. The policies require the establishment of appropriate infrastructure and processes for ensuring continuity of business which must be comprehensively and frequently tested for different contingencies.

7. INFORMATION TECHNOLOGY RISK All computer system developments and operations are centrally controlled and common standard business systems are deployed across the Group wherever possible. Information security is defined through a common ‘AUB Group Information Security framework’ and is executed through 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 and the Disaster Recovery and Business Continuity capabilities are each tested at least once a year and critical systems data are continuously replicated at the disaster recovery site. 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. All management and staff are expected to apply highest standards of business conduct and professional ethics at all times. The Group has a dedicated Legal Department whose role is to identify, and provide analysis and advice on the legal risks.

The department is governed by the Group Legal Policy approved by the Board of Directors, which facilitates the management and control of operational risks from pending legal actions, by performing the following tasks:

• Ensuring compliance with applicable legislation and regulation; • Reviewing and / drafting non- standard contracts and related documentation (including amendments to existing contracts) applicable to the Group; • periodically reviewing the standard contractual documentation of the Bank; and • advising on matters involving legal risk and drafting formal communication relating to legal claims involving the Group.There are no material litigations / claims against the Group as at 31 December 2017.


6. OPERATIONAL RISK (continued)


Annual Report 2017

The Board approved policies, including AUB Group Reputation Risk policy, Communications Policy, Personal Account Dealing Policy, Key Person Dealing Policy, Compliance Policy, Anti Money Laundering policy, Banking Integrity and Whistle Blowing Policy & Procedures and Code of Business conduct policy and such other policies prescribes the required standards of ethical behaviour 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 Group recognizes 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 Group 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 Group 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 Group will finance projects only when they are expected to be designed, built, operated and maintained in a manner consistent with the applicable national laws.

APPENDIX I - REGULATORY CAPITAL DISCLOSURES PD 2 : Reconciliation Of Regulatory Capital i) Step 1: Disclosure of Balance Sheet under Regulatory scope of Consolidation There are no differences between the regulatory and accounting consolidation, with both following the line by line consolidation approach as per the IFRS 10 Consolidated Financial Statements without excluding any entities. As mandated by the Central Bank of Bahrain (CBB), Loans & Advances and Investments have been grossed up with collective impairment provision, as presented below:

US$ ’000

Balance sheet per published financial statements 33,241,885

Collective impairment provision 313,009

Balance sheet as in Regulatory Return 33,554,894


9. LEGAL, COMPLIANCE, REGULATORY AND REPUTATIONAL RISKS (continued)


Annual Report 2017

ii) Step 2: Expansion of the Balance Sheet under Regulatory scope of Consolidation

US$ ’000Balance as per published

financial statementsConsolidated

PIR data ReferenceAssetsCash and balances with central banks 809,986 809,986 Financial assets at fair value through Profit & Loss 1,165 Treasury bills and deposits with central banks 2,576,352 2,576,352 Deposits with banks 2,469,751 2,469,751 Loans and advances 19,498,702 19,763,092 of which employee stock incentive program 807 A3 Non-trading investments 6,002,410 6,040,016 of which significant investment exceeding regulatory threshold - H1 of which investment NOT exceeding regulatory threshold 6,040,016 Investment properties 256,242 256,242 Interest recievable and other assets 616,920 626,768 of which deferred tax assets 3,748 G1 of which MSP 2,138 A4 Investments in associates 304,020 304,020 of which significant investment exceeding regulatory threshold - H2 of which significant investment NOT exceeding regulatory threshold 304,020 Goodwill and intangible assets 480,830 480,830 of which goodwill 431,297 E of which other intangibles (excluding MSRs) 49,533 F1 Premises and equipment 226,672 226,672 of which software 22,851 F2 TOTAL ASSETS 33,241,885 33,554,894

Liabilities Deposits from banks 3,943,233 3,943,233 Customers' deposits 22,009,857 22,009,857 Borrowings under repurchase aggrements 1,272,758 1,272,758 Interest payable and other liabilities 912,679 912,679 of which deferred tax liabilities 2,133 G2 Subordinated liabilities 215,204 215,204 of which amount eligible for Tier 2 113,769 K of which amount ineligible 101,435 TOTAL LIABILITIES 28,353,731 28,353,731

Equity Paid-in share capital 1,877,552 1,877,552 of which form part of Common Equity Tier 1 1,877,552 Ordinary Share Capital 1,889,213 A1 Treasury Shares (11,661) A2 Perpetual Tier 1 Capital Securities - AUB Bahrain 400,000 400,000 I Reserves 1,938,070 1,938,070 of which form part of Common Equity Tier 1 Retained earnings/(losses) brought forward 585,101 B Net profit for the current period 618,715 C1 Share premium 754,308 C2 Legal reserve 454,856 C3 General (disclosed) reserves (46,852) C4 FX translation adjustment (423,986) C5 Unrealized gains and losses from fair valuing equities (12,981) C6 Fair value changes of cash flow hedges (26,659) C7 of which form part of Tier 2 Fixed assets revaluation reserves 35,568 M1 Perpetual Tier 1 Capital Securities - AUB Kuwait 200,000 Non - controlling interest 472,532 of which amount eligible for Common Equity Tier 1 324,161 D of which amount eligible for Additional Tier 1 163,813 J of which amount eligible for Tier 2 51,655 L of which amount ineligible 132,903 Collective impairment provision 313,009 of which amount eligible for Tier 2 (maximum 1.25% of RWA) 313,009 M2 of which amount ineligible - TOTAL EQUITY 4,888,154 5,201,163


APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 2 : Reconciliation Of Regulatory Capital (continued)

672,532


Annual Report 2017

PD 4 : Capital Composition Disclosure Template

Basel III Common disclosure template (For transition period from 1 January 2015 to 31 December 2018)

US$ ’000

PIR as on 31 Dec 2017

Amounts Subject to Pre-2015

Treatment ReferenceCommon Equity Tier 1 capital: instruments and Reserves Directly issued qualifying common share capital plus related stock surplus 1,874,607 A1+A2-A3-A4 Retained earnings 585,101 B Accumulated other comprehensive income (and other reserves) 1,317,401 C1+C2+C3+C4+ C5 +C6 +C7 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) 324,161 79,735 D Common Equity Tier 1 capital before regulatory adjustments 4,101,270

Common Equity Tier 1 capital: regulatory adjustmentsGoodwill (net of related tax liability) 431,297 E Other intangibles other than mortgage-servicing rights (net of related tax liability) 43,430 28,954 F1+F2 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) 1,615 G1-G2 Cash-flow hedge reserve (26,659) C7 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) - - H1 + H2 Total regulatory adjustments to Common equity Tier 1 449,683 Common Equity Tier 1 capital (CET1) 3,651,587

Additional Tier 1 capital: instrumentsDirectly issued qualifying Additional Tier 1 instruments plus related stock surplus 400,000 I Additional Tier 1 instruments (and CET1 instruments not included above) issued by subsidiaries and held by third parties (amount allowed in group AT1) 163,813 24,125 J Additional Tier 1 capital before regulatory adjustments 563,813 Total regulatory adjustments to Additional Tier 1 capital - Additional Tier 1 capital (AT1) 563,813 Tier 1 capital (T1 = CET1 + AT1) 4,215,400

Tier 2 capital: instruments and provisionsDirectly issued qualifying Tier 2 instruments plus related stock surplus 113,769 K Tier 2 instruments (and CET1 and AT1 instruments not included above) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 51,655 (15,259) L Provisions & Reserves 348,577 M1+M2 Tier 2 capital before regulatory adjustments 514,001 Total regulatory adjustments to Tier 2 capital - Tier 2 capital (T2) 514,001 Total capital (TC = T1 + T2) 4,729,401


APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)


Annual Report 2017

RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT 28,954 of which: Intangible assets (RW @ 100%) 28,954 of which: Significant Investments (RW @ 250%) - Total risk weighted assets 27,743,556

Capital ratiosCommon Equity Tier 1 (as a percentage of risk weighted assets) 13.2%Tier 1 (as a percentage of risk weighted assets) 15.2%Total capital (as a percentage of risk weighted assets) 17.0%Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement expressed as a percentage of risk weighted assets) 9.0%of which: Capital Conservation Buffer requirement 2.5%of which: bank specific countercyclical buffer requirement (N/A) NA of which: G-SIB buffer requirement (N/A) NA

National minima (if different from Basel 3)CBB Common Equity Tier 1 minimum ratio (including buffers) 9.0 %CBB Tier 1 minimum ratio (including buffers) 10.5%CBB total capital minimum ratio (including buffers) 12.5%

Amounts below the thresholds for deduction (before risk weighting)Non-significant investments in the capital of other financial entities 40,737 Significant investments in the common stock of financial entities 338,441

Applicable caps on the inclusion of provisions in Tier 2Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) 313,009 Cap on inclusion of provisions in Tier 2 under standardised approach 318,696


APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 4 : Capital Composition Disclosure Template (continued)


Annual Report 2017

PD 3 : Main features of regulatory capital instruments

1 Issuer Ahli United Bank B.S.C.

Ahli United Bank B.S.C.

Ahli United Bank K.S.C.P.






2 Unique identifier

AUBB.BH - Bahrain Bourses

AUB/818 - Kuwait Stock

Exchange

ISIN: XS1133289832

/ Perpetual Tier 1 Capital Securities

ISIN: XS1508651665

/ Perpetual Tier 1 Capital Securities

Series 2011

ISIN: XS0469091275

2010-1 / Euro Medium Term

Note

Series 2006 Private Placement Private Placement

3 Governing law(s) of the instrument Laws of Bahrain

English Law, except for the provisions of

subordination which will be

governed by the Laws of Bahrain



governed by the Laws of Kuwait

English Law



governed by the Laws of Bahrain

English Law English Law English Law

4 Transitional CBB rules Not applicable Not applicable Not applicable Tier 2 Tier 2 Tier 2 Tier 2 Tier 2

5 Post-transitional CBB rules

Common Equity Tier 1 Additional Tier 1 Additional Tier 1 NA NA NA NA NA

6 Eligible at solo/group/group & solo Solo and Group Solo and Group Group Solo and Group Solo and Group Solo and Group Group Group

7 Instrument type Common Equity Shares Capital Securities Capital Securities Subordinated

DebtSubordinated

DebtSubordinated

DebtSubordinated

DebtSubordinated

Debt

8 Amount recognised in regulatory capital $1,889.2 mn $400.0 mn $146.6 mn $92.1 mn $7.4 mn $4.2 mn $4.9 mn $5.1 mn

9 Par value of instrument (USD) $0.25

$1000 subject to minimum of

$200,000

$1000 subject to minimum of

$200,000$165.0 mn $1.00 $33.3 mn $4.9 mn $5.1 mn

10 Accounting classification Shareholders’ equity

Shareholders’ equity

Shareholders’ equity

Liability – amortised cost





11 Original date of issuance 31-May-2000 29-Apr-2015 25-Oct-2016 18-Apr-2011 20-Jan-2010 13-Dec-2006 01-Jul-1996 31-Jan-1985, 30-Apr-1985

12 Perpetual or dated Perpetual Perpetual Perpetual Dated Dated Dated Perpetual Perpetual

13 Original maturity date No Maturity No Maturity No Maturity 15-Oct-2020 20-Jan-2020 15-Dec-2018 No Maturity No Maturity

14 Issuer call subject to prior supervisory approval NA Yes Yes Yes Yes Yes Yes Yes

15Optional call date, contingent call dates and redemption amount

NA

Call Option : 29-Apr-2020 at

Par/100%;Tax event at

Par/100%;Regulatory Capital

Event at 101% (Full or partial)

Call Option : 25-Oct-2021 at

Par/100%;Tax event at

Par/100%;Regulatory Capital

Event at 100% (Full or partial)

Various financial & non-financial

Covenants

Early redemption in case of Tax

event; or various events of default

(Full or partial )

Various financial & non-financial

CovenantsNA NA

16 Subsequent call dates, if applicable NA

Every 5 years after 29 April

2020

Every 5 years after 26 Oct 2021 NA NA NA NA NA

17 Fixed or floating dividend/coupon NA Fixed Fixed Floating Floating Floating Floating Floating

18 Coupon rate and any related index NA 6.875% 5.500% 6m USD LIBOR +

375 bps3m USD

LIBOR+150 bps6m USD LIBOR +

123 bps6m USD LIBOR +

75 bps6m USD LIBOR +

75 bps

19 Existence of a dividend stopper NA Yes Yes No No No No No

20Fully discretionary, partially discretionary or mandatory

Fully discretionary Fully discretionary Fully discretionary Mandatory Mandatory Mandatory Mandatory Mandatory

21 Existence of step up or other incentive to redeem No No No No No No No No


APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)


Annual Report 2017

Issuer Ahli United Bank B.S.C.


Ahli United Bank K.S.C.P.






22 Noncumulative or cumulative NA Noncumulative Noncumulative Noncumulative Noncumulative Noncumulative Noncumulative Noncumulative

23 Convertible or non-convertible NA Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible

24 If convertible, conversion trigger (s) NA NA NA NA NA NA NA NA

25 If convertible, fully or partially NA NA NA NA NA NA NA NA

26 If convertible, conversion rate NA NA NA NA NA NA NA NA

27 If convertible, mandatory or optional conversion NA NA NA NA NA NA NA NA

28If convertible, specify instrument type convertible into

NA NA NA NA NA NA NA NA

29If convertible, specify issuer of instrument it converts into


30 Write-down feature NA Yes Yes No No No No No

31 If write-down, write-down trigger(s) NA

Notification by regulator of Non

viability without (a)

write-down ; or (b) a public sector

injection of capital (or equivalent

support)

Notification by regulator of Non

viability without (a)

write-down ; or (b) a public sector

injection of capital (or equivalent

support)

NA NA NA NA NA

32 If write-down, full or partial NA Fully / Partially Fully / Partially NA NA NA NA NA

33 If write-down, permanent or temporary NA Permanent Permanent NA NA NA NA NA

34If temporary write-down, description of write-up mechanism


35

Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

Additional Tier 1 Capital Bonds

Subordinated Debts

Subordinated Debts

All depositors and creditors





36 Non-compliant transitioned features NA No No Yes Yes Yes Yes Yes

37 If yes, specify non-compliant features NA NA NA Non Viability Loss

AbsorbtionNon Viability Loss




Absorbtion


PD 3 : Main features of regulatory capital instruments (continued)


Annual Report 2017


Annual Report 2017


Annual Report 2017

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