TAKING EACH - AAIB...Mohamed Al Saqer Mr. Hisham Sayed Abdel Razik Al Razzuqi Dr. Amr Ahmed Samih...

TAKING EACH

SENSIBLY

has accelerated the pace even furtherTECHNOLOGYTIMES

are changing fast

Table of Contents

Board of Directors Chairman’s StatementManaging Director & Vice Chairman’s StatementCorporate & Institutional Banking DivisionTreasury & Capital MarketsRetail Banking and Wealth ManagementAAIB - United Arab EmiratesAAIB SubsidiariesInvestment ManagementSecurities BrokerageMortgage FinanceLeasingLeading By ExampleAction with ImpactFinancial Statements

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FINDINGTHE ROUTE that works best is what matters

When facing a time of substantial and encompassing change, we keep the destination in mind.Building for future success takes speed, strength and the determination to keep moving forward. At AAIB, our eyes are steadfastly on our objective: becoming a digital organization that leads in the marketplace of the future. We’re gaining ground in our multi-year transformation initiative, adding new capabilities for serving a demanding client base in innovative new ways, and fulfilling their expectations for convenience and personalization.

Because they determine the future we createOur careful financial choices, made over years, give us the strength and flexibility to shape our own future. In 2019, we grew our footprint and impact in all our core businesses, while continuing to reinforce our financial position and make investments that enable transformation.

GROWTHAnd building for

CHANGEDRIVING Our technology infrastructure redesign continues, bringing our new core banking system to the launchpad. This technology will underpin

enhanced speed and convenience for customers, as well as operational efficiency and the data analytics that will be necessary for banking success in the years ahead.

Building

RELATIONSHIPSthat rely not only on a particular

common goal, but also on a shared path to success

We’ve refocused our corporate and investment banking functions to meet our clients’ needs fast and flexibly. Today, we serve our longstanding large corporate clients but also midcap companies and SMEs. We refined our investment banking capabilities, separating M&A and advisory into independent offerings.

Caring about

and what they care about

CUSTOMERSMeeting customer expectations starts with understanding what matters to you most. We’ve listened and redesigned our retail banking value proposition, launching new products and service strategies that address your needs and solve problems. We will never stop working to improve your experience as an AAIB client.

Our team’s effort and hard work construct the

that connects our clients aspiration to reality

’

Our team is the front line of our ongoing transformation. In 2019, we completely restructured our HR systems and policies in line with our revamped service delivery model, and made key hires to support our goals—and yours. As you progress towards your own destination, we’re right beside you, with expert advice and financial services that make your own journey smoother and swifter.

The ROUTE may change,No one can foretell the future, but we are confident we can handle every turn as it comes.

but the

DESTINATION endures

$12.02 BILLIONIN ASSETS

$9.08 BILLIONTOTAL DEPOSITS

$1.9 BILLION IN SHAREHOLDERS’ EQUITY

96BRANCHES

11.4%RETURN ON AVERAGE EQUITY

25%OPERATING RATIO

1.7%RETURN ON AVERAGE ASSETS

272,973TOTAL CUSTOMERS

426ATMS

2%YOY GROWTH

3.5%YOY GROWTH

$4.3 BILLIONNET LOANS

1%YOY GROWTH

$191 MILLIONNET PROFIT

4%YOY GROWTH

As of December 31, 2019

JOURNEYMoments on the

BOARDOF DIRECTORS

Mr. Sulaiman Mohamed Al Wadaani

Mr. Ahmed Ashraf Ali Kouchouk

Mr. Gamal Abdul Aziz Negm

Mr. Salah El Baroudy

KIA Representative

CBE Representative

CBE Representative

General Secretary of the Board

Mr. Bader M. Al Humaidhi

Mr. Adnan S. Abulkarim Mohamed Al Saqer

Mr. Hisham Sayed Abdel Razik Al Razzuqi

Dr. Amr Ahmed Samih Talaat

Chairman of the Board,KIA Representative

KIA Representative

KIA Representative

CBE Representative

May Aboul Naga Ibrahim Safwat Lotfy

Mr. Sherif M. ElwyManaging Director & Vice Chairman,CBE Representative

From 1 Jan, 2019 to 17 Feb, 2019 From 1 Jan, 2019 to 30 Nov, 2019

As of December 31, 2019

Bader M. Al HumaidhiChairman

on moving to a space occupied by no other financial institution

We have been

FOCUSED

23Annual Report 201922 Annual Report 2019

Sustained Growth, Solid Financial Position

AAIB’s assets grew by more than 4% in 2019 to top USD 12 billion, as we retained our position as one of the top three Egyptian private banks. Both loans and deposits grew, and we continued to lead our peers in in productivity ratios. Net interest income grew by 10%, and net profit for the year recorded USD 191 million for a return on average assets of 1.7%.

AAIB’s balance sheet remains strong. Over the course of the year, we executed on a strategy to reduce the weight of treasury bills in our portfolio, and implemented revised lending processes to protect the quality of our loan portfolio. On the liability side, deposits surpassed USD 9 billion, enhancing our access to inexpensive funding.

We exceeded all CBE requirements as determined by Basel III metrics. At year end, our local and foreign currency liquidity ratios were 35.26% and 104.33% respectively, compared to the CBE requirements of 20% and 25%. Our net stable funding ratio was 126.25% for local currency and 171.44% for foreign currency, exceeding the CBE requirement of 100%. Finally, our liquidity coverage ratio stood at 122.69% for local currency and 209.81% for foreign currency, compared to the regulatory requirement of 100%.

AAIB’s capital base increased to USD 1.93 billion, providing a strong buffer and foundation for all of our activities to grow organically. Our capital adequacy ratio of 20.87% significantly exceeds the regulatory requirement of 12.75%. Our leverage ratio of 12.83% is more than four times higher than the required 3%. Our return on average equity reached 11.4%.

2019 Operational Highlights

In 2019, we balanced growth in our existing business with continued investment in positioning the bank for future growth. We refined our retail sales and service proposition and our wealth management, attracting new consumer accounts and strengthening existing relationships. We opened four new branches and 9 ATMs, for a total of 96 licensed branches and 426 ATMs. Our Corporate and Institutional Banking Division executed landmark deals, from project financing to securitization, that enable growth and job creation, and extended its service provision to smaller enterprises.

CONTINUOUS EVOLUTION

AAIB’s financial strength equips it to build for the future while weathering challenges and changing market conditions

As I discussed in my message in last year’s annual report, the Board of Directors is united behind a strategy that is positioning AAIB for success as banking evolves. Implementation of this strategy, which will enable us to efficiently and effectively address new market segments and to tailor our offerings down to the individual customer, continued full steam ahead in 2019. The progress made in this essential project is a testament to the skill and dedication of AAIB’s executive leadership team and staff, to whom I extend both gratitude and support.

Serving Stakeholder Interests with Solid Governance

As of year-end, the Board of Directors consists of eight qualified members: seven non-executive directors, including myself, and one executive director. This separation of the chairman and chief executive functions is consistent with best practices and CBE directions. The Board meets eight times per year to fulfill its stewardship and oversight responsibilities.

During 2019, three new members joined the Board of Directors:

• Mr. Gamal Abdul Aziz Negm joined in February, succeeding Ms. May S. Aboul Naga;

• Mr. Hisham Sayed Abdel Razik Al Razzuqi joined in June, succeeding Mr. Meshal M.N. Al Hammad, who sadly passed away in April; and

• Mr. Amr Ahmed Samih Talaat, joined in December, succeeding Mr. Ibrahim S. Lotfy.

I am grateful for the dedicated service and valuable insights provided by Ms. Aboul Naga and Messrs. Al Hammad and Lotfy during their terms, and extend a warm welcome to our three newest board members.

Stewardship in a Time of Challenge

As I write this message, the world is coming to terms with the devastating public health challenge of COVID-19. As we have already seen, the pandemic poses economic challenges to all countries; even those countries that are spared the worst of the virus are interconnected with other countries that have been harder hit. Global growth will certainly slow and capital flows and investment into our region may well follow suit.

The Government and the Central Bank of Egypt have already taken supportive measures to soften the pandemic’s expected impacts. For its part, AAIB has joined forces with Ahl Masr Foundation to inaugurate a fully equipped specialty hospital that tends to the specific needs of Covid patients and the medical staff who care for them.

In the course of ordinary business, the Board of Directors provides strong attention to risk management procedures and controls. Rest assured that as we weather this pandemic together, this attention is even stronger.

In closing, I extend my thanks to AAIB’s esteemed clients for their continued trust and collaboration. On behalf of the Board of Directors, we look forward to serving your evolving needs and interests in the years to come.

Bader M. Al HumaidhiChairman


FUTUREAAIB Has Gained Ground on Its Drive into the

Sherif M. ElwyManaging Director & Vice Chairman

To our clients,

In last year’s annual report, I shared AAIB’s roadmap to the future of banking, in which technological transformation is the differentiator between banks that can compete and those that will languish.

Answering the call of transformation has been the organizing principle of everything AAIB has done since. I’m pleased to report that we made considerable progress over the past year while continuing to deliver the responsive and innovative financial services we have always been known for.


A Report from the Road

The accomplishments of 2019 are a testament to AAIB’s focus. We know where we’re going and why; everyone has a role to play and is on the hook to deliver. With this potent combination of vision and determination, AAIB advanced across all domains of long-term success in 2019:

• We reinforced our position as a leading corporate bank that has unparalleled expertise in debt capital markets and syndications;

• Our support for small and medium enterprises surged as we applied new focus to opportunities in those market segments;

• We grew the footprint of our consumer banking business, positioning it to continue to build on our strong brand name, branch network and service orientation;

• We restructured major functions internally, bringing in key hires with the experience and dynamism to lead essential aspects of our plan, and created a Strategy department;

• We initiated a comprehensive portfolio assessment and significantly enhanced our provisioning, in a process we expect to complete in 2020; and

• We progressed to the brink of implementation of new technology infrastructure, which will give us the platform to expand and refine our product offerings in line with current and future client needs and demands.

These achievements are expanding our ability to capitalize on the opportunities in the Egyptian banking market, particularly with regard to the currently underserved retail and SME segments, and increasing our resilience.

At the same time, market conditions have evolved significantly during 2019 and into 2020, reducing some risks while amplifying others. The decline in interest rates obviously has implications for bank profitability, as does the shifting macroeconomic outlook and evolving perspective on debt sustainability. AAIB has acted decisively to assess and respond prudently to these changes. Now the Covid-19 pandemic is in inflicting enormous, pervasive change on the world. These developments underscore the urgency of our evolution from a traditional legacy institution into a nimble, far-sighted innovator.

Ready for the Unexpected

From the vantagepoint of mid-2020, it appears that the coming years will bring change and challenges that would have been unimaginable a few months ago. In times such as those ahead, what matters is having the resources and agility to adapt to detours and inclement conditions— and even to seize opportunities created by adversity.

AAIB is strong. We can handle the unexpected. We have the capital, the liquidity, the flexibility, and the grit to prevail through the pandemic, the resulting economic conditions, political difficulties and whatever else comes our way.

Like you, I have been saddened by the devastating impact that the Covid-19 pandemic is inflicting upon the world. Responding to this humanitarian disaster is a leadership and moral challenge that few ever expected to meet.

AAIB’s response to the pandemic began with coordinated actions to protect our staff, support our customers, and model responsible corporate and community behavior. Our Crisis Management Committee developed plans to ensure business continuity under a range of complex scenarios, and stress-tested those scenarios to confirm that we will retain the manpower and financial strength to weather this ordeal no matter what comes. These simulations offer peace of mind to our board and our clients.Internally, we have also committed resources to disciplined analysis of market reaction and potential future paths, and have developed plans that can be implemented immediately under various conditions.

Our efforts are now focused on working with our clients, offering our advice, experience and range of solutions to help them overcome immediate financial challenges, as well as supporting our country by providing specialized gear to hospitals treating Covid-19 patients. We hope that by this time next year, science will have identified a vaccine to limit the suffering and loss inflicted by the virus.

The Route Forward

The inevitability of challenges reinforces my confidence that AAIB has chosen the right destination. To accelerate our progress, we have initiated a comprehensive five-year strategy exercise, including digital strategy, that will entrench AAIB as a dynamic, growing institution that leverages all of its resources and offers well-structured and differentiating initiatives. I expect this strategic alignment to begin to bear fruit in 2021.

As we press forwards on our journey, I remain mindful of what has brought us this far: relationships. The ties that we’ve formed with our staff, with our clients, and with our community feel especially precious in a time of trial.I offer a public salute to AAIB’s staff. Your talent and commitment are both evident and essential as we pursue the future, and are the source of our staying power. And to our clients, I thank you for your trust and for the opportunities we have had to collaborate for growth and success. I look forward to reaching new milestones together in the years to come.

Sherif M. ElwyManaging Director & Vice Chairman

Relationships, and the opportunities they bring to collaborate for mutual growth, are our north star as we navigate towards our destination.

GROWING OUR CAPABILITIES


Our portfolio included a groundbreaking job-rich development for a mall on Cairo-Sokhna Road and a sharia-compliant revolving facility for construction of the main residential district at New Capital City.

We also support capital market liquidity through our leadership in debt securitization. In 2019, we brought several securitization transactions to the market, freeing up capital for the originators and providing attractive yields to investors. One marquee transaction was an impressively structured and highly rated offering that facilitated our client’s return to the capital markets for the first time in a decade. We also partnered with three peer banks as lead arranger of the largest securitization transaction in the local market.

While Egypt’s largest companies have been our bread and butter, we have expanded our reach with a banking team dedicated to the needs of small and medium-sized enterprises (SMEs). Our SME loan portfolio nearly tripled in size over the year.

CORPORATE & INSTITUTIONAL BANKING DIVISION

Speed. Collaboration.

Landmark deals.

In 2019, AAIB’s Corporate and

Institutional Banking Division assumed

leadership roles in first-of-their-kind

transactions that are changing the face

of the country and supporting national

priorities.


AAIB’s Treasury and Capital Markets (TCM) division is Egypt’s leading licensed Primary Dealer, facilitating an essential market in government securities for the benefit of both country and clients.

The TCM division is also among the five most active domestic banks in the primary and secondary markets, with a strong presence in the GCC through AAIB’s UAE arm. TCM also executed large foreign exchange deals.

In addition to its trading and advisory activities on behalf of clients, TCM also manages the bank’s own fixed income portfolio of USD 3.2 billion on a deposit base of USD 9.1 billion (as of year-end 2019), pursuing the objectives of yield, diversification and liquidity management. Finding the balance between risk and return, while remaining in compliance with all regulatory requirements, is our daily work.

Areas of expertise: treasury, fixed income, capital markets, foreign exchange, derivatives, and cash and liquidity management

TREASURY & CAPITALMARKETS

Intelligence.Innovation.Resilience.

In uncertain times, experience matters.

TCM has the knowledge, seasoning and long-

term view to help our clients face challenges

and market adversity with confidence. Our

experienced team, knowledge of regional

and global markets, and optimal execution sets

the standard for our industry.


Making our existing products easier to adopt and use was a driver of new business acquisition in 2019. For example, in alliance with Western Union, we debuted a new feature that enables Western Union transfers to be direct-deposited into a bank account, available for access without the need for a branch visit. We spread the word via a social media campaign directed at Egyptian expats in the Gulf region with very positive results.

We also looked for creative ways to encourage greater product usage, such as Easy installment plans and an African Cup of Nations promotion that offered chances to win match tickets with every use of our Visa cards. We solidified customer loyalty by streamlining remittance procedures, facilitating both incoming and outgoing flows with a friendly, straightforward approach.

Consumer education also buttressed our reputation for looking out for our customers’ best interests. For example, we ran a campaign to raise consumer awareness of electronic fraud. Finally, we invested significant time in preparation for the launch of a new core banking system, which will strengthen the foundation for our digital service strategy in 2020 and onward.

RETAIL BANKINGAND WEALTH MANAGEMENT

Convenience. Reputation.

High-quality service.

Growing our consumer banking business

continues to be a top priority for AAIB. In 2019, we expanded our network to 519

touch-points to our customers-93 local branches and 426

ATMs-and continued to broaden our retail

product portfolio with the goal of

holding a top-of-mind position with regard to competitive asset and

liability products.


AAIB - UNITED ARAB EMIRATES

AAIB-UAE served as Lead Arranger in two major transactions in 2019: a sharia-compliant syndication for a healthcare company and a senior secured syndication for a leading regional airline. The latter was the first-ever transaction secured by IATA receivables for a GCC national carrier.

Trade finance was another focal activity in 2019. AAIB-UAE opened credit limits for several banks representing major importers of commodities into Egypt.

In addition to its growing lending capabilities, AAIB-UAE grew its profile as a gateway for transactions between Egypt and the GCC, promoting leveraged investments in Egyptian Treasury Bills through carry trades, which attracted investments of EGP 650 million. AAIB-UAE also provided escrow services for two cross-border M&A transactions between Egypt and UAE.

The division accounted for 13% of consolidated deposits and 19% of consolidated loans and due from banks. Overall, 22% of total consolidated net profit was contributed by UAE operations.

Vision.Agility.

Ingenuity.

AAIB - UAE grew its footprint strongly in

2019, with innovative loan deals and new

business lines.Our cross-border

services and regional perspective

serve our clients’ growth outside

Egypt’s borders.


AAIBARAB AFRICAN

INTERNATIONAL BANK

AAIHArab African

Investment HoldingCapital

EGP 65 MM

AAIB shareholding90.0%

AAIMArab African

Investment Management CapitalEGP 10 MM

AAIH shareholding89.5%

AAISArab African

International Securities CapitalEGP 41.6 MM

AAIH shareholding99.9%

OtherInvestments

AAIMFArab African Int’l

Mortgage FinanceCapital

EGP 110 MM


AAILArab African Int’ILeasing CapitalEGP 100 MM


Sandah ForMicrofinance

CapitalEGP 115 MM

AAIB Shareholding67%


In a challenging investment environment, Arab African Investment Management (AAIM) continued to deliver attractive returns on its four open-ended investment funds—Shield (equities), Juman (money market), Gozoor (fixed income) and Guard (capital protection)—as well as on separately managed accounts for institutional clients and high net worth individuals. In 2019, AAIM launched a fifth investment fund named Afaq,

Assets under management grew by more than 18% to EGP 6.7 billion, a testament to AAIM’s investment skill and agility. Going forward, AAIM expects to grow by building on its reputation, growing domestic interest in wealth management products and strategies, and external appetites for developing markets exposure.

INVESTMENT MANAGEMENT

SECURITIES BROKERAGEOur brokerage subsidiary, Arab African International Securities (AAIS), grew its customer base by 6% in 2019 and boosted its institutional desk services, ending the year with market share of 1.4%. In AAIS’ market segment, information is king and execution is queen, so there were investments to deepen the company’s capabilities in both during 2019. Our value proposition includes a wealth of data plus fundamental and technical analysis to support measured investment decision-making, and we are developing an online trading system with enhanced mobile applications.


Arab African International Mortgage Finance (AAIMF) posted double-digit

growth in total loans and borrowers in 2019, and total cumulative financed

loans grew to EGP 1.66 billion for market share of nearly 12.5%.

In 2019, AAIMF extended its borrower advisory services with a new website

offering information and education regarding its first mortgage and

equity products for residential real estate as well as for the purchase

of business property. Potential borrowers can find real estate

development projects that are eligible for funding, calculate payments, and

apply for pre-approval.

MORTGAGE FINANCE

LEASINGThe tailored leasing solutions offered by Arab African International Leasing (AAIL) give our clients operational flexibility, cash flow certainty, and tax and balance sheet advantages.

Our service has secured our top-ten position in the market, with a diversified roster of clients in industries from construction to logistics. Our portfolio grew to EGP 1.4 billion in direct and indirect leases at year-end. In addition to large clients, we are supporting small and medium-size enterprises with leasing products that enable them to expand output, grow employment, and increase profitability.


Teacher Development Program

As part of AAIB’s commitment to the Sustainable Development Goals (SDGs) and having education recognized as a standalone goal, AAIB collaborated with the American University in Cairo (AUC) School of Continuing Education (SCE) to train 150 public school teachers through “Teacher Development Program”. During the program, the teacher is introduced to pedagogies and learning theories that promote the students’ cognitive, social, and emotional development.

The main aim of this program is to foster the teachers’ skills and competencies in a variety of areas, namely teaching methodology, lesson planning and assessment, classroom management, as well as, educational technology and gamification. It also aims to enable primary and preparatory school teachers to enrich their students’ learning experience and promote their wellbeing.

Given that the teacher is the main channel through which students receive information and since teachers constitute one of the main assets of the educational system, this program marks a step towards helping the public educational system to evolve and reach new potentials. We strongly believe that education is one of the most important aspects of culture and with well-trained teachers, Egypt will be on track to become a world leader in all aspects.

We work to create value for our communities and country through

our sustainable finance initiatives and corporate

philanthropy.

LEADING BY EXAMPLE

The program aligns with several SDGs. In Addition to SDG 4: Quality Education and SDGs 17: Partnership for the Goals, it also aligns with SDG9: Industry Innovation & Infrastructure since it empowers our education workforce to enhance their knowledge and skills to achieve a substantial wide impact on our young generations.

AUC Venture Lab

With the high youth population in Egypt, we had to think ahead of the curve to connect with them to achieve economic and social development. Accordingly, in 2013, AAIB partnered with the AUC School of Business to establish the AUC Venture Lab (AUC V-Lab), the leading university-based incubator in the MENA region.

The AUC V-Lab supports early-stage startups chosen through a selection process that judges aspects of the project such as its novelty, scalability, and commercialization potential. It also considers the dedication of the team and focuses on empowering and facilitating inventors and committed entrepreneurs to help them reach their goals.

This partnership that started years ago, marks a unique alignment between a financial and academic institution to address two main challenges facing entrepreneurs, that are lack of financial resources and lack of business knowledge and skills. Even though it contradicts the popular belief, our role as a financial institution is not limited to providing a financial contribution. We believe that for startups to grow they need mentorship and guidance as this will deliver a sustainable tool for their dazzling projects to see a prosperous growth. Accordingly, our team has been providing sessions on several topics including e-commerce and marketing. Not only that, we also assisted several startups in the development of successful and

innovative online payment gateways. This collaboration was very successful, resulting in the creation of more than 170 startups, creating more than 8000 jobs and generating revenue of EGP 450 million.

Maison Pyramide: Sponsorshipwith a cause

Attempting to partner with responsible entities that value responsible business practices and seek to maximize their environmental and social impacts, AAIB collaborated with Maison Pyramide (MP) to sponsor their booth in Harvey Nichols (HN) in London. The primary objective of this partnership was to support entrepreneurs and young talents of designers to display their products in one of the iconic stores, allowing them to expand their business, reach a wider customer audience and increase their brand awareness.

Supporting Maison Pyramide’s popup allows AAIB to contribute to several SDGs including SDG 5: Gender Equality, SDG 8: Decent Work & Economic Growth, SDG 9: Industry Innovation & Infrastructure, and SDG 17: Partnership for the Goals.

This partnership also allows AAIB to target one of the SDGs related to the environment, which is SDG 15: Life on Land since Maison Pyramide prohibits using fur in their designs. Moreover, a share of the total proceeds of The Shop will be invested into the youth educational programs implemented by the Elisa Sednaoui Foundation in Egypt, which contributes to SDG 4: Quality Education.


SUSTAINABILITY ADVOCACY

SUSTAINABLE BUSINESSEnvironmental & Social Risk Management

Since banks are the backbone of the economy, they have a substantial impact on the environment and the society. This impact results mainly from its financing and lending activities, which entails broadening risk management interpretation beyond the traditional risk management definition including credit risk, market risk, operational risk and liquidity risk to include Environmental &Social (E&S) risks such as climate change, income inequality and more constituting sources of major financial tremors and instability. To this end, AAIB joined the Equator Principles (EP) in 2009, which has been the main guideline for determining, assessing and managing social and environmental risks in project-related transactions.

AAIB applies the third version of the EP (EP III) which involves an array of financing activities from project finance to project-related corporate loans or bridge loans, in addition to disclosure of information and reporting on an annual basis.

AAIB’s commitment to the EP is supported by robust internal policies, procedures, and staff engagement. To this end, the bank has introduced an E&S Risk Policy that is updated on continually to ensure coping with emerging E&S challenges and best practices. The Policy is guided by the EP and other internationally recognized E&S standards.

The Principles identify the banking sector’s roles and responsibilities in achieving national and global goals implicated in Egypt Vision 2030, the Sustainable Development Goals (SDGs) and the Paris Climate Agreement.

The PRB provides the framework for a sustainable banking future and help the industry to demonstrate how it makes a positive contribution to society and environment. It focuses on positive impact measurement and growth, delivering resilient infrastructure with insurers and investors, climate-related disclosures, natural capital stress-testing as well as social impact and inclusion. All of which are highly important community, economy, and environment.

The final version of the six Principles was introduced to banks to commit to in 2019 where AAIB has become a Founding Signatory of the Principles.

The Principles for Responsible Banking

Banks play a key role in society. As financial intermediaries, it is our purpose to help develop sustainable economies and to empower people to build better futures. Believing in this role and with given our experience that exceeded 55 years in the banking industry, AAIB committed itself to share its experience and resources to contribute to a sustainable banking future. In this, the Bank collaborated with the United Nations Environmental Program Finance Initiative (UNEP FI) and 29 other banks worldwide to draft and introduce the Principles for Responsible Banking (PRB).

SANDAHAAIB’s microfinance subsidiary Sandah, launched in July 2018, provided essential economic fuel to thousands of small borrowers in 2019. Sandah began the year with three branches and expanded to 10 branches by year-end, disbursing nearly EGP 300 million to more than 10,000 borrowers. Customer care, a diverse product menu and fast turnaround time distinguish Sandah from conventional microlenders. The intersection of banking excellence with progress on shared national goals like financial inclusion and support for small-scale entrepreneurship make Sandah a remarkable success story.


AAIB’s philanthropic initiatives are designed to spur durable change that uplifts individuals, communities and country, organized around three pillars: empowering start-ups, improving public education, and championing social and environmental values.

Egypt’s young people—its most sizable demographic cohort—have the potential to be a compelling force for development, so equipping them with knowledge, resources and opportunities to help grow a modern economy and inclusive society is a smart investment. In 2013, AAIB partnered with the American University in Cairo (AUC) School of Business to form the AUC Venture Lab, which cultivates young entrepreneurs and their promising business ideas. The Venture Lab has grown into the leading university-based start-up incubator in the MENA region and has launched more than 170 startups with more than 8,000 jobs to date.

AAIB’s responsibilities extend beyond customers and

shareholders. Our view of corporate citizenship motivates us to nurture

opportunity, solve problems and create

lasting value in the wider community around us.

ACTIONWITH IMPACT

AAIB also believes that supporting market access for women-owned and socially conscious businesses creates a wide and welcome ripple effect. With this in mind, AAIB sponsored the pop-up shop established at London’s upscale Harvey Nichols department store by Maison Pyramide, Egypt’s premier fashion PR business and a leading women-owned enterprise. We were proud to partner with Maison Pyramid because it champions up-and-coming talents, promotes social values such as ethical sourcing, and dedicated a portion of the proceeds from its pop-up store to youth educational programs offered by Egypt’s Elisa Sednaoui Foundation—a perfect illustration of the ripple effect at work.

Education is essential to human and societal development, and teachers are assets of the educational system that should be cultivated. AAIB has partnered with the AUC School of Continuing Education to support an ongoing Teacher Development Program giving teachers new skills, methodologies and perspectives that enhance their ability to help students learn. One hundred and fifty public school teachers participated in the current round of the Program.

But corporate social responsibility isn’t solely about external actions; it’s also about day-to-day internal decisions. AAIB was one of the first banks to recognize that banking could be a force for good in shaping an equitable, resilient society and to embed sustainability criteria into banking decisions. More than 10 years ago, AAIB adopted the Equator Principles, which are parameters for identifying and managing the social and environmental risks in project-related transactions. AAIB’s commitment to the Principles is supported by robust internal policies, procedures and staff engagement.

AAIB is also a founding signatory of the Principles for Responsible Banking, which delineate the banking sector’s roles and opportunities in pursuing national and global goals articulated by Egypt Vision 2030, the Sustainable Development Goals, and the Paris Climate Agreement. AAIB collaborated with the United Nations Environment Programme Finance Initiative and 29 other leaders of the global banking industry to establish this visionary framework for responsible banking that addresses the needs of individuals and society.


FINANCIALSTATEMENTS

To: The Shareholders of “ARAB AFRICAN INTERNATIONAL BANK”

Report on the separate financial statements

We have audited the accompanying separate financial statements of Arab African International Bank “Egyptian joint stock company” which comprise the balance sheet as of “31 December 2019”and the statements of income, comprehensive income, changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the separate financial statements

These separate financial statements are the responsibility of bank management. Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with the rules of preparation and presentation of the Bank’s separate financial statements issued by the Central Bank of Egypt on 16 December 2008 and with the requirements of applicable Egyptian laws and regulations issued on 26 February 2019. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of separate financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these separate financial statements based on our audit. We conducted our audit in accordance with Egyptian Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the separate financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to The Bank’s preparation and fair presentation of the separate financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of The Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the accompanying separate financial statements present fairly, in all material respects, the financial position of “Arab African International Bank” as of 31 December 2019, and of its financial performance and its cash flows for the year then ended in accordance with the rules of preparation and presentation of Bank’s separate financial statements issued by the Central Bank of Egypt on 16 December 2008 and with the requirements of applicable Egyptian laws and regulations issued 26 February 2019.

Amr Mohamed Mostafa El Shaabini Aziz Maher Aziz Barsoum

Egyptian Financial SupervisoryAuthority registration number “81”

Egyptian Financial SupervisoryAuthority registration number “228”

Allied for Accounting & Auditing - E.Y KPMG Hazem Hassan

Public Accountants & Consultants Public Accountants and Consultants

Cairo, 17 March, 2020

Report on Other Legal and Regulatory Requirements

According to the information and explanations given to us during the financial years ended 31 December, 2019 no material contravention of the central bank and monetary institution law No. 88 of 2003.

The Bank keeps proper financial records, which include all that is required by the law and Bank’s statute and the accompanying separate financial statements are in agreement therewith. The financial information included in the Board of Directors report are in agreement with The Bank’s accounting records within the limit that such information is recorded therein.


For the year ended

31 December 2019 31 December 2018

Note US$ ’000 US$ ’000

Assets

Cash and due from Central Banks (16) 658,895 612,535

Due from banks (17) 3,388,211 3,204,281

Treasury bills (18) 2,159,465 2,742,399

Loans to Banks (21) 63,635 999

Loans to customers (22) 4,330,042 4,269,266

Financial Investments:

Fair value through profit or loss (19) 16,505 12,722

Fair value through other comprehensive income (19) 308,910 58,277

Amortized cost (19) 779,663 380,234

Investments in subsidiaries and associates (24) 45,904 46,251

Investments properties (20) 2,190 2,230

Other assets (25) 185,990 138,615

Deferred tax assets (26) 3,122 2,151

Net fixed assets (27) 74,919 63,463

Total Assets 12,017,451 11,533,423

Liabilities & owners’ equity

Liabilities

Due to banks (28) 522,553 450,036

Repos - Treasury bills (35) 82,000 27,600

Customers’ deposits (29) 9,083,651 8,778,470

Other liabilities (30) 267,005 233,254

Loans and facilites from banks (31) 92,500 117,500

Other provisions (32) 12,539 25,055

Current income tax liabilities (33) 18,941 23,989

Employee benefits obligations (34) 8,699 4,580

Total Liabilities 10,087,888 9,660,484

Owners’ Equity

Paid-in capital (36) 500,000 500,000

Reserves (37) 184,727 236,369

Retained earnings (37) 1,244,836 1,136,570

Total owners’ equity 1,929,563 1,872,939

Total liabilities and owners’ equity 12,017,451 11,533,423

*The accompanying notes from (1) to (46) form an integral part of these financial statements and to be read therewith

Sherif Elwy Bader Al-Humaidhi

Managing Director & Vice Chairman Chairman

Auditors’ report attached

Arab African International Bank (Egyptian joint stock company)

Separate statement of financial position as of 31 December 2019


Separate Income statement for the year ended 31 December 2019

For the year ended

Note 31 December 2019 31 December 2018

US$ ’000 US$ ’000

Interest Income & Similar revenues (6) 1,122,240 1,122,665

Interest Expense & Similar costs (6) (744,089) (778,096)

Net interest income 378,151 344,569

Fees & Commission income (7) 69,955 83,349

Fees & Commission expenses (7) (2,665) (2,546)

Net Fees & Commission income 67,290 80,803

Dividend income (8) 712 783

Net trading income (9) 25,903 29,782

Expected credit losses expense (10) (58,391) (53,244)

Gain on financial investments (19) 4,635 53,386

Administrative expenses (11) (113,559) (98,968)

Other operating expense (12) (27,117) (11,257)

Profit before income tax 277,624 345,854

Income tax expense (13) (86,551) (81,549)

Net profit for the year 191,073 264,305

Earnings per share ( dollar / share ) (14) 1.73 2.40



For the year ended


US$ ’000 US$ ’000

Net profit for the year 191,073 264,305

Items that will not be reclassified to the income statement

Net change in fair value reserve for financial investments in equity instruments at fair value through other comprehensive income

- (39,626)

Total - (39,626)

Items that is or may be reclassified to the income statement

Net change in fair value reserve of debt instruments 1,410 1,110

Expected credit loss for fair value of debt instruments measured at fair value through other comprehensive income

238 -

Total 1,648 1,110

Tax impact related to items that is or may be reclassified to income statement

(318) -

Total other comprehensive income items for the year after income tax

1,330 (38,516)

Total comprehensive income 192,403 225,789



Separate statement of Comprehensive Income for the year ended 31 December 2019


Separate statement of Changes in owners’ equity for the year ended 31 December 2019

Paid In Capital Reserves Retained Earnings Total

US$ ’000 US$ ’000 US$ ’000 US$ ’000

Balance as at 31 December 2017 Before appropriation

500,000 249,306 965,134 1,714,440

Transferred to legal reserve - 25,545 (25,545) -

Dividends of the year ended 2017 - - (67,285) (67,285)

Balance as at 31 December 2017 After appropriation

500,000 274,851 872,304 1,647,155

Bank risk reserve - (7) (14) (21)

Currencies translation differences - 16 - 16

Capital Reserve - 25 (25) -

Reclassification of fair value reserve for OCI investments

- 1,110 - 1,110

Net change in other comprehensive income items

- (39,626) - (39,626)

Net Profit as at 31 December 2018

- - 264,305 264,305

Balance as at 31 December 2018 500,000 236,369 1,136,570 1,872,939

Balance as at 31 December 2018 Before appropriation

500,000 236,369 1,136,570 1,872,939

Transferred to legal reserve - 26,428 (26,428) -

Dividends of the year ended 2018 - - (74,359) (74,359)

Balance as at 31 December 2018 After appropriation

500,000 262,797 1,035,783 1,798,580

Effect of change arising from first application of IFRS 9

- (79,724) 18,293 (61,431)

Restated balance at 1 January 2019

500,000 183,073 1,054,076 1,737,149

Bank risk reserve - 55 (34) 21

Currencies translation differences - (10) - (10)

Capital Reserve - 279 (279) -

Net change in other comprehensive income items

- 1,330 - 1,330

Net Profit as at 31 December 2019

- - 191,073 191,073

Balance as at 31 December 2019 500,000 184,727 1,244,836 1,929,563



Note 31 December 2019 31 December 2018US$ ’000 US$ ’000

Cash Flows from Operating ActivitiesProfit before income tax 277,624 345,854 Adjustments to reconcile net profit to net cash provided from operating activitiesDepreciation and amortization (11) 10,365 9,475 Expected credit losses expense (10) 58,391 54,517 Other provision charges (12) 1,124 2,481 Other provisions charges other than loans provision (32) (4,101) (15,126)Impairment charge in Financial Investments (19) - (1,017)Impairment charge in Investments in subsidiaries and associates (19) (731) 211 Impairment charge in Financial Investments - Amortized cost (19) - (1,273)Gain on sale of Investments in associates (19) (646) - Gain on sale of financial assets (19) (908) (51,050)Cash dividends (8) (712) (783)Gain on sale of fixed assets (12) (279) (25)Retirement benefit obligations changes (34) 8,687 5,978 Employee benefits (34) (4,568) (5,302)Gain / loss of monetary assets & liabilities in foreign currencies revaluation difference

(19) (67,408) 4,782

Gain Operating profit before changes in assets and liabilities provided from operating activities 276,838 348,722

Net Decrease (Increase) in Assets and LiabilitiesDue from banks (183,931) 14,094 Treasury bills 409,740 295,147 Financial Investments - Fair value through profit and loss (3,784) 2,625 Loans and advances to customers & banks (83,898) (90,124)Other assets (16,533) 52,984 Due to banks 72,517 (393,333)Customers’ deposits 305,181 194,785 Other liabilities 20,113 (71,182)Income taxes paid (92,570) (84,233)Net cash flows resulted from operating activities 703,673 269,485 Cash Flows From Investing ActivitiesPurchase securities other than financial assets at fair value through profit and loss

(19) (641,639) (105,290)

Sale / redemption of securities other than financial assets at fair value through profit and loss

64,182 173,280

Gain on sale of Financial assets at fair value through other comprehensive income

908 51,050

Gain on sale of fixed assets 279 25 Proceeds from dividends paid 712 783 Purchase of fixed assets / assets reverted to the bank and branches equipment and improvement

(29,421) (13,462)

Net cash flows resulted from (used in) investing activities (604,979) 106,386 Cash Flows from Financing ActivitiesLoans and advances from Banks (25,000) (12,500)Subordinated deposits - (300,000)Cash dividends paid (37) (74,359) (67,285)Net cash flows resulted from (used in) financing activities (99,359) (379,785)Net decrease in cash and cash equivalents during the year (665) (3,914)Cash and cash equivalents at the beginning of the year 4,051,820 4,055,734 Cash and cash equivalents at the end of the year 4,051,155 4,051,820 Cash and cash equivalents are represented in:Cash and due from Central Banks 658,934 612,535 Due from banks 3,389,380 3,204,281 Treasury bills 2,162,154 2,714,799 Balances with the Central Banks limited to the reserve ratio (576,834) (533,727)Deposits with banks (matured over than three months) (187,372) (141,419)Treasury bills (matured over than three months) (1,395,107) (1,804,649)Cash and cash equivalents at the end of the year (45) 4,051,155 4,051,820

*The accompanying notes from (1) to (46) form an integral part of these financial statements and to be read therewith.


Separate statement of cash flows for the year ended 31 December 2019


Separate statement of proposed appropriation for the year ended 31 December 2019


US$ ’000 US$ ’000

Net profit 191,073 264,305

Add / Deduct:

General banking risk reserve (34) (14)

Gain from sale - fixed assets transferred to capital reserve (279) (25)

Net profit 190,760 264,266

Add / Deduct:

Retained earnings at the beginning of the year modified with IFRS9 application

1,054,076 872,304

Total 1,244,836 1,136,570

Distributed as follows:

Legal reserve 19,079 26,428

Shareholders dividends (part 1) 100 100

Employee distribution 17,158 23,774

Remuneration of board members 450 585

Shareholders dividends (part 2) - 49,900

Retained earnings at the end of the year 1,208,049 1,035,783

1,244,836 1,136,570


1. General Information

Arab African International Bank (Egyptian Joint Stock Company) is established by special law No. 45 for 1964 in the Arab Republic of Egypt. The bank carries out all commercial and banking services. The address of its Head office is as follows: 5 Midan Al-Saray Al Koubra, Garden City, Cairo and the bank is not listed in the Egyptian stock exchange.Arab African International Bank (Egyptian joint stock Company) provides retail, corporate banking and investment banking services in Egypt and abroad through 97 branches and units, its Head Office and network of branches in the Arab Republic of Egypt (94 branches and units), United Arab Emirates (2 branches) and (1 branch) in Lebanon and employs over 2,262 employees at the balance sheet date.These financial statements were approved by the Board of Directors on, 16 March 2020.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to the year presented, unless otherwise stated.

A. Basis of preparation

These separate financial statements have been prepared in accordance with the instructions of the Central Bank of Egypt (CBE) rules approved by its Board of Directors on December 16, 2008; to under IFRS 9 “Financial Instruments” in accordance with the instructions of the Central Bank of Egypt (CBE) dated February 26, 2019.

The Separate financial statements as at December 31, 2018 have been prepared in accordance with the instructions of the Central Bank of Egypt (CBE) rules approved by its Board of Directors on December 16, 2008 and starting from January 01, 2019, the financial statements have been prepared according to Central Bank of Egypt (CBE) instructions dated January 28, 2019 and final instructions dated February 26, 2019 to prepare financial statements according to IFRS 9 “Financial Instruments”. The accounting policies set out below have been changed by the management to comply with the adoption of mentioned instructions that described the changes in accounting policies in the following disclosers.

B. Changes in accounting policies

The Bank applied the instructions of the Central Bank of Egypt (CBE) rules IFRS 9 “Financial Instruments” dated February 26, 2019 starting from January 01, 2019, the following summarize the main accounting policies changes resulted from applying the required instructions.

Classification of financial assets and financial liabilities

At initial recognition, financial assets have been classified and measured according to amortized cost, fair value through other comprehensive income (FVTOCI) and fair value through profit or loss (FVTPL). The financial assets have been classified according to how they are managed (the Bank’s business model) and their contractual cash flow characteristics.

The financial assets measured at amortized cost if it is not measured at fair value through profit or loss and the following two conditions met:

• The management intension maintaining the asset in business model to collect contractual cash flow.

• This contractual conditions of financial assets will build cash flow in certain dates which limited only on payment of principle and interest (SPPI).

Debt instruments have been measured at fair value through other comprehensive income “FVTOCI” if it is not measured at fair value through profit or loss and the following two conditions met:

• The management intension maintaining the asset in business model to collect contractual cash flow.

• This contractual conditions of financial assets will build cash flow in certain dates which limited only on payment of principal and interest (SPPI).

The Bank may choose without return to measure equity investment which not classified trading investments as fair value through other comprehensive income at initial recognition. All other financial assets will be classified as fair value through profit or loss.In addition to that, the bank may choose without return financial asset that will be measured at amortized cost or fair value through other comprehensive income to be at fair value through profit or loss , in such case that this reclassification will lead to prevent accounting mismatch.

Business model assessment

The Bank makes an assessment of the objective of a business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

• The stated policies and objectives for the portfolio and the operation of those policies in practice, specially to know whether these management policies concentrate to gain the contractual interest or reconcile financial assets period with financial liabilities period which finances these assets or target cash flow from selling the assets;

• How the performance of the portfolio is evaluated and reported to the Bank’s management;

• The risks that affect the performance of the business model and the financial assets held within that business model and how those risks are managed;

• The frequency, volume and timing of sales in prior years, the reasons for such sales and its expectations about future sales activity. Meanwhile, the bank didn’t scope only on information related to sales activity separately, but taking into consideration overall assessment on how achieving the goal that was announced by the bank to manage financial assets and how to achieve cash flow.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at fair value through profit or loss because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

Assessment of whether contractual cash flows are solely payments of principal and interest.

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 (e.g. liquidity risk and administrative costs), as well as profit margin.

In assessing whether the contractual cash flows are solely payments of the principal and interest, the bank considers the contractual terms of the

instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition.

Impairment of financial assets

According to Central Bank of Egypt (CBE) instructions dated February 26, 2019, to implement IFRS9 to replace impairment loss model recognized according to previous instructions dated December 16, 2008, with excepted credit loss (ECL).Excepted credit loss is applied on all financial assets in addition to some financial guarantees and loan commitments.According to IFRS 9; impairment loss will be recognized in a wide range from applying impairment loss according to Central Bank of Egypt (CBE) instructions dated December 16, 2008.

The Bank apply three stages to measure expected credit loss on financial assets that are recognized at amortized cost and debt instruments that are recognized at fair value through other comprehensive income. The financial assets can transfer between three stages according to changes in credit quality since initial recognition.

Stage 1: 12 months Expected Credit Loss:

Stage 1 includes financial assets on initial recognition and that do not have a significant increase in credit risk since the initial recognition or that have low credit risk. For these assets, expected credit loss is recognised on the gross carrying amount of the asset based on the expected credit losses that result from default events that are possible within 12 months after the reporting date.

Stage 2: Lifetime Expected Credit Loss - not credit impaired:

Stage 2 includes financial assets that have had a significant increase in credit risk since initial recognition but that do not have objective evidence of impairment. For these assets, lifetime expected credit loss are recognised, but interest is still calculated on the gross carrying amount of the asset. Lifetime expected credit loss is the expected credit losses that result from all possible default events over the expected life of the financial instrument.


Stage 3: Lifetime Expected Credit Loss - credit impaired

Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime expected credit loss is recognised.

C. Subsidiaries and associates companies C.1. Subsidiaries companies

Subsidiaries are all entities over which the bank has owned directly or indirectly the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the bank controls another entity.

C.2. Associates companies

Associates are all entities over which the bank has direct or indirect significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights.Purchase method of accounting has been applied to all the acquisition operations. The cost of acquisition is measured by fair value or the assets offered/ issued equity securities / liabilities incurred/ liabilities accepted in behalf of the acquired company, at the date of the exchange, plus costs directly attributed to the acquisition. Identifiable assets acquired, and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the bank’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the entity acquired, the difference is recognized directly in the income statement into other operating income (expenses).In the separate financial statements, the investments in subsidiaries and associates are subsequently accounted for using the cost method on the separate financial statements. According to the cost method; investments are recognized at acquisition cost less any impairment losses in value-if any-. Dividends are recognized as revenue in the separate income statement when they are declared and the bank’s right to collect them has been established.

D. Segment reporting

An operating segment is a group of assets and operations providing products or services whose risks and benefits are different from those associated with products or services provided by other operating segments. A geographical segment provides products or services within a specific economic environment characterized by risks and benefits different from those related to other geographical segments operating in a different economic environment.

E. Foreign currency translation

E.1. Transactions in foreign currencies

The bank maintains its accounts in US dollar. Foreign currency transactions are translated using the exchange rates prevailing at the date of the transactions. All monetary assets and liabilities balances in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at that date. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in the following items in the income statement:-

• Net trading income for trading assets and liabilities or net income from financial instruments designated at fair value through profit or loss for instruments designated at fair value through profit or loss according to its type.

• Other Operating income (expense) for the rest of items.

• Changes in the fair value of monetary instruments denominated in foreign currencies classified as available for sale investments (debt instruments) are analyzed between translation differences arising from changes in amortized cost of the instrument and differences arising from changes in exchange rates prevailing and differences arising from changes in the fair value of the instrument.

• In the income statement, the difference in valuation related to the changes in amortized cost within the income of loans and similar income and with differences in exchange rate differences in other operating income (expenses). The difference in fair value is recognized in equity (Fair value reserve / financial investments available for sale).

• Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available for sale financial assets, are included in the fair value reserve in equity.

E.2. Foreign branches

The bank translates result of business and financials for foreign branches to presentation currency (if they don’t operate in accelerating inflation economy) in which different functional currency from the presentation currency of the bank as follows:

Translation of assets and liabilities at each financial statement presented to the foreign branch using the closing price on the date of this financial statement.Translation of income & expenditure in each income statement presented using the average exchange rates, only if the average doesn’t represent an acceptable approximation of the cumulative effect of the rates applicable in the date of transaction, then the translation of income & expense will be by using exchange rate at the transaction date.Recognition of currency differences resulting in a separate item ( foreign exchange transaction differences )in equity , also transfer to equity foreign exchange resulting from the assessment of net investment in foreign branches ,loans and financial instruments in foreign currency to cover the investment with the same item , recognition of these differences in the income statement on disposal of foreign branches as the part of other operating income ( expense ).

F. Financial assets

F.1. Financial Policies applied until December 31, 2018:

The bank classifies its financial assets in the following categories: Financial assets at fair value through profit or loss; loans and receivables; held to maturity financial assets; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.

1.1. Financial assets at fair value through profit or loss

This category includes: financial assets held for trading, and those designated at fair value through profit or loss at inception.

A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated as hedging instruments.

Financial assets are designated at fair value through profit or loss when:

• Doing so reduces measurement inconsistencies that would arise if the related derivative was treated as held for trading and the underlying financial instruments were carried at amortized cost for such as loans and advances to banks and clients, and debt securities in issue.

» Certain investments, such as equity investments that are managed and evaluated on a fair value in accordance with a documented risk management or investment strategy, and reported to key management personnel on that basis are designated at fair value through profit and loss.

» Financial instruments, such as debt instruments held, containing one or more embedded derivatives, significantly modify the cash flows are designated at fair value through profit and loss

• Gains or losses arising from changes in the fair value of the financial derivatives that are managed with financial assets and liabilities are recorded at initiation with fair value through profits and losses in the income statement

• The bank shall not reclassify a derivative out of the fair value through profit or loss category while it is held or issued, shall not reclassify any financial instrument out of the fair value through profit or loss category if upon initial recognition it was designated by the entity as at fair value through profit or loss. In all cases, the bank shall not reclassify any financial instrument into the fair value through profit or loss category or to the held for trading category after initial recognition.

1.2. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than the following:

• Assets which the bank intends to sell immediately or in the short term. In which case, they are classified as assets held for trading or assets classified at inception at fair value through profit or loss.

• Assets classified as available-for-sale at initial recognition.

• Assets for which the bank will not be able to substantially recover the value of its initial investment for reasons other than credit worthiness deterioration.


1.3. Held-to-maturity financial assets

Held to maturity financial assets are non-derivative financial assets with fixed or determinable amount and fixed maturity dates that the bank has the positive intent and ability to hold to maturity. If the bank was to sell other than an insignificant amount except for specific situations, the entire category would be reclassified as available for sale.

1.4. Available-for-sale financial assets

Available-for-sale financial assets are those non-derivative financial assets intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

The following is followed for financial assets:

• Regular-way purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized on trade-date, the date on which the bank commits to purchase or sell the asset.

• Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or losses are initially recognized at fair value, and transaction costs are expensed in the income statement in net trading income.

• Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when they are extinguished − that is, when the obligation is discharged, cancelled or expires.

• Available for sale financial assets and financial assets at fair value through profit or loss are subsequently measured at fair value. While, held to maturity financial assets are measured at amortized cost.

• Gains and losses arising from changes in the fair value of the financial assets classified as at fair value through profit or loss are recognized in the income statement in the year in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets shall be recognized directly in equity, until the financial asset is derecognized or impaired, at which time, the cumulative gain or loss previously recognized in equity shall be recognized in the income statement.

• Interest calculated using the effective interest method and foreign currency gains and losses on monetary assets classified as available for sale are recognized in the income statement. Dividends on available for sale equity instruments are recognized in the income statement when the entity’s right to receive payment is established.

• The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the bank establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants, and if the bank could not assess the fair value of the equity instruments classified as available for sale, these instruments measured at cost less impairment.

• The bank may choose to reclassify the available for sale financial assets where the definition of loans and receivables (bonds and loans) is applicable from Available for sale to Loans and receivables or Held to maturity financial assets as the bank has an intention to hold them for the perspective future or to the maturity date. Reclassifications are made at fair value as of the reclassification date and any profits or losses related to these assets to be recognized in the owners’ equity as follows:

» In case of the financial asset which has fixed maturity date, profits and losses are amortized over the remaining Period of the held to maturity investments using the effective interest rate. Any difference between the value using amortized cost and the value based on the maturity date to be amortized over the financial asset remaining Period using the effective interest rate method.

» In case of the financial asset which does not have fixed maturity date, profits and losses remain in the owners’ equity till the selling or disposing the financial asset. At that time they will be recognized the profits and losses. In case of the subsequently impairment of the financial asset value, any previously recognized profits or losses in owners’ equity will be recognized in profits and losses.

» If the bank modified its estimations for the receivables and the payables then the book value of the financial asset (or group of financial assets) will be adjusted to reflect the effective cash flows and the modified

assessments to recalculate the book value through calculation the present value for the estimated future cash flows using the effective interest rate of the financial asset and the adjustment will be recognized as a revenue or expense in the profits and losses.

• In all cases if The bank reclassified a financial asset as mentioned before and The bank subsequently increased the estimated future cash inflows as a result of the increase of what will be collected from these receivables, This increase is to be recognized as an adjustment of the effective interest rate starting from the change in estimation date and not an adjustment of the book value in the change in estimation date.

F.2. Financial Policies applied starting from January 01, 2019:

Financial assets classified as amortized cost, fair value through other comprehensive income (FVTOCI) and fair value through profit or loss (FVTPL). The classification depends on the business model of the financial assets that are managed with its contractual cash flow and is determined by management at the time of initial recognition.

2.1. Financial assets classified as amortized cost

The financial asset is retained in the business model of financial assets held to collect contractual cash flow.The objective from this business model is to collect contractual cash flow which represented in principle and interest.The sale is an exceptional event for the purpose of this model and under the terms of the standard represented in following:

• Significant deterioration for the issuer of financial instrument;

• Lowest sales In terms of rotation and value;• A clear and reliable documentation process for

the justification of each sale and its conformity with the requirements of the standard

2.2. Financial assets classified as fair value through other comprehensive income

The financial asset is retained in the business model of financial assets held to collect contractual cash flows and sales to achieve the objective of the model.Sales are high in terms of turnover and value as compared to the business model retained for the collection of contractual cash flows.

2.3. Financial assets classified as fair value through profit or loss

The financial asset is held in other business models including trading, management of financial assets at fair value, maximization of cash flows through sale.The objective of the business model is not to retain the financial asset for the collection of contractual or retained cash flows for the collection of contractual cash flows and sales. Collecting contractual cash flows is an incidental event for the objective of the model.

The characteristics of the business model are as follows:

• Structuring a set of activities designed to extract specific outputs;

• Represents a complete framework for a specific activity (inputs - activities - outputs);

• One business model can include sub-business models.

G. Offsetting of financial instruments

Financial assets and liabilities are offset when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle amounts on a net basis, or realize the asset and settle the liability simultaneously.

H. Derivative financial instruments

Derivatives are recognized at fair value at the date of the derivative contract, and are subsequently revaluated at fair value. Fair values are obtained from quoted market prices in active markets, or according to the recent market deals, or the revaluation methods as the discounted cash flow modules and the pricing lists modules, as appropriate. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

The embedded financial derivatives into other financial instruments like convertible bonds should be treated as if they are separate derivatives when the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, and the hybrid (combined) instrument is not measured at fair value with changes in fair value recognized in profit or loss. The embedded derivatives are measured at fair value through profit or loss. Changes in fair value are recognized in net trading income in the income statement.


The embedded derivatives are not separated because the Bank has chosen to classify the entire complex contract at fair value through profit or loss.

The timing of recognition in profit or loss, of any gains or losses arising from changes in the fair value of derivatives, depends on whether the derivative is designated as a hedging instrument, and the nature of the item being hedged. The parent bank designates certain derivatives as:

• Hedging instruments of the risks associated with fair value changes of recognized assets or liabilities or firm commitments (fair value hedge).

• Hedging of risks relating to future cash flows attributable to a recognized asset or liability or a highly probable forecast transaction (cash flow hedge).

Hedge accounting is used for derivatives designated in a hedging relationship when the following criteria are met. At the inception of the hedging relationship, the bank documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the bank documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

H.1. Fair value hedge

Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized immediately in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of the interest rate swaps and the changes in the fair value of the hedged item attributable to the hedged risk are recognized in profit or loss. Additionally, interest differential on interest rate swaps is recognized in profit or loss as part of “Net interest income” line item in the income statement. Any ineffectiveness is recognized in profit or loss in “Net trading income”.

When the hedging instrument no longer qualifies for hedge accounting, the adjustment to the carrying amount of a hedged item, measured at amortized cost, arising from the hedged risk is amortized to profit or loss from that date to maturity of the asset using the effective interest

method. Adjustment to the carrying amount of a hedged equity instrument that has been deferred in equity remains in equity until the asset is derecognized.

H.2. Cash flow hedge

The effective portion of changes in the fair value of derivatives designated and effective for cash flow hedge is recognized in equity while changes in fair value relating to the ineffective portion is recognized immediately in the income statement in “Net trading income”.

Amounts accumulated in equity are transferred to income statement in the relevant years when the hedged item affects the income statement. The effective portion of changes in fair value of interest rate swaps and options are reported in “Net trading income”.

When a hedging item expires, or is sold or if hedging instrument no longer qualifies for hedge accounting requirements, gains or losses that have been previously accumulated in equity remain in equity and are only recognized in profit or loss when the forecast transaction ultimately occurs. If the forecast transaction is no longer expected to occur, any related cumulative gain or loss on the hedging instrument that has been recognized in equity shall be reclassified immediately to profit or loss.

H.3. Derivatives that do not qualify for hedge accounting

Derivative instruments that do not qualify for hedge accounting, changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognized immediately in the profit and loss under’’ net trading income’’. However, gains and losses arising from changes in the fair value of derivatives that are managed in conjunction with financial assets or liabilities are included in “net income from financial instruments at fair value through profit or loss”.

I. Interest income and expense

Interest income and expense on all interest-bearing financial instruments are recognized in “Interest income” and “Interest expense” line items in the income statement using the effective interest rate method, except for those classified as held for trading or designated at fair value through profit or loss.

The effective interest rate is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating its interest income or interest expense over the relevant year. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial debt instrument or,when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability on initial recognition. When calculating the effective interest rate, the bank estimates the future cash flows, considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been classified as nonperforming or impaired, related interest income is not recognized and is recorded in marginal records apart from the financial statements, and is recognized as revenues according to cash basis as follows:

• When they are collected, after receiving all past due instalments for consumption loans, mortgage loans, and small business loans.

• For corporate loans, interest income is recognized on a cash-basis after the bank collects 25% of the rescheduled installments and provided these installments continue to be paid for at least one year. If a loan continues to be performing thereafter, interest accrued on the principal then outstanding starts to be recognized as revenues. Interest that is marginalized prior to the date when the loan becomes performing is not recognized in profit or loss except after paying all the loan balance in the balance sheet before rescheduling.

J. Fees and commission income

Fees charged for servicing a loan or facility that is measured at amortized cost, are recognized as revenue as the service is provided. Fees and commissions on non-performing or impaired loans or receivables cease to be recognized as income and are rather recorded off balance sheet. These are recognized as revenue - on a cash basis - only when interest income on those loans is recognized in profit or loss, at which time, fees and commissions that are an integral part of the effective interest rate of a financial asset are treated as an adjustment to the effective interest rate of that financial asset.

Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognized as an adjustment to the effective interest rate on the loan. And in case of the commitment year was expired without issuing the loan, fees and commission are considered as income at the end of the commitment year,

Loan syndication fees are recognized as revenue when the syndication has been completed and the bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants.

Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognized on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a time-apportionate basis. Asset management fees related to investment funds are recognized ratably over the year in which the service is provided. The same principle is applied for financial planning and custody services that are continuously provided over an extended Period of time.

K. Dividends income

Dividends are recognized in the

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TAKING EACH - AAIB...Mohamed Al Saqer Mr. Hisham Sayed Abdel Razik Al Razzuqi Dr. Amr Ahmed Samih...

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