NBB ANNUAL REPORT 2009 I 05 AN ICON OF TRUST
20 An icon 09 of TRUST
AN ICON OF TRUST NBB was the first bank established in Bahrain. Today, we are at the heart of Bahrain’s financial community and continue to take pride in our deep rooted sense of responsibility, integrity and security. Whilst times have been turbulent this year for financial markets, NBB has ensured that its prudent policies have been maintained, helping to strengthen our customers’ belief and trust in our services. We constantly strive to build on this trust by continuing to enhance our products and customer service, ensuring that NBB can be relied upon even in the most difficult of times. Numerous corporate social responsibility initiatives and an innate ability to look forward and develop innovative and quality products and services for our customers has helped to reinforce NBB’s position as an Icon of Trust in Bahrain.
His Royal Highness Prince Khalifa bin Salman Al Khalifa Prime Minister
His Royal Majesty King Hamad bin Isa Al Khalifa King of The Kingdom of Bahrain
His Royal Highness Prince Salman bin Hamad Al Khalifa The Crown Prince, Deputy Supreme Commander
CONTENTS
An Icon of Trust
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Financial Summary
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Board of Directors
00
Board of Directors Report
00
Corporate Governance
00
Executive Management
00
Statement of the Chief Executive Officer
00
Review of Operations
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Financial Review
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Report of the Auditors to the Shareholders
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Balance Sheet
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Income Statement
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Statement of Changes in Equity
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Statement of Cash Flows
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Notes to Financial Statements
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Contact Directory
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Basel 2 Pillar 3 Disclosure
CONTENTS
Financial Summary
08
Board of Directors
10
Board of Directors’ Report
12
Corporate Governance
16
Executive Management
22
Statement of the Chief Executive Officer
24
Review of Operations
28
Financial Review
40
Risk Management
44
Report of the Auditors to the Shareholders
49
Statement of Financial Position
50
Income Statement
51
Statement of Comprehensive Income
52
Statement of Changes in Equity
53
Statement of Cash Flows
55
Notes to Financial Statements
56
Risk and Capital Management Disclosures
92
Contact Directory
108
04 I NBB ANNUAL REPORT 2009 05 CHAIRMANS AN ICON OF TRUST REPORT
By consistently adapting and evolving with the market environment we continue to provide competitively priced banking products and services to our customers
NBB ANNUAL REPORT 2009 I 05 AN ICON OF TRUST
06 I NBB ANNUAL REPORT 2009 RATINGS
RATINGS
Strong, consistent performance, a sound financial position, prudent management and conservative credit and risk management policies have resulted in the Bank being awarded the following ratings:
Foreign Currency Moody’s Fitch Capital Intelligence
FSR C-
Long Term A2
Short Term P1
Individual B/C
Long Term A
Short Term F1
Support 1
Financial Strength A
Long Term A
Short Term A1
Support 1
key achievements in 2009 • In 2009, for the 9th consecutive year, JP Morgan Chase presented their Quality Recognition Award to NBB for achieving a consistently high standard of operational efficiency. • Award for “Best Retail Bank Website” in Bahrain for year 2009 by the Pan Arab Web Awards Academy, Beirut Lebanon. • Increased participation in project financings in Bahrain and the GCC States • Total donations and contributions in 2009 amounted to BD 1.4 million
NBB ANNUAL REPORT 2009 I 05 AN ICON OF TRUST
08 I NBB ANNUAL REPORT 2009 FINANCIAL SUMMARY
Financial Summary
2009
2008
Net interest income
49.02
Other income
23.26
Operating expenses
2007
2006
2005
46.06
42.17
38.59
33.81
16.60
22.86
18.96
15.32
25.78
24.01
23.47
20.69
18.58
Profit for the Year
42.82
34.74
41.56
36.86
30.55
Dividend
27.22
23.33
25.92
21.60
21.60
Total assets
2,117.75
2,034.10
1,903.71
1,676.38
1,498.10
Loans and advances
1,151.42
1,095.71
945.97
784.31
697.36
Investment securities
483.12
399.18
347.94
391.85
290.45
Total deposits
1,865.79
1,805.03
1,640.42
1,426.21
1,256.65
Customers’ deposits
1,480.39
1,519.25
1,319.95
1,199.78
1,014.50
241.37
217.39
249.49
226.80
221.76
Return on average equity
18.67
14.88
17.45
16.43
14.59
Return on average assets
2.06
1.76
2.32
2.32
2.14
Earnings (BD millions)
Financial Positions (BD millions)
Equity Ratios (Per cent) Earnings
Earnings per share (fils) Cost-to-income ratio Earnings per employee (BD 000’s)
55
45
53
47
39
35.67
38.32
36.09
35.95
37.82
72
59
70
66
54
14.80
Capital 11.40
10.69
13.11
13.53
Total liabilities to equity (times)
7.53
8.36
6.63
6.39
5.76
Average total liabilities to equity (times)
7.92
7.43
6.52
6.08
5.82
22.30
19.30
28.29
28.70
31.64
Equity as per cent of total assets
Capital adequacy ratio (2009 & 2008: Basel 2, 2005 to 2007: Basel 1)
NBB ANNUAL REPORT 2009 I 09 AN ICON OF TRUST
42.82
09 34.74
08
05
41.56 36.86 30.55
47 39
05
earnings per share Bahraini Fils
241.37 217.39
08
249.49
07
09 08
22.30 19.30
07
28.29 28.70
06
226.80
06
05
221.76
05
shareholders’ EQUITY BD Millions
31.64
capital adequacy Per cent
18.67
09 14.88
16.43 14.59
Return on average equity Per cent
2.06
09 08
17.45
07
05
53
06
09
06
45
07
profit for the year BD Millions
08
55
08
07 06
09
1.76
07
2.32
06
2.32
05
2.14
Return on average assets Per cent
10 I NBB ANNUAL REPORT 2009 BOARD OF DIRECTORS
board of directors
Farouk Yousuf Khalil Almoayyed
Dr. Essam Abdulla Fakhro
Abdulla Yousif Akbar Alireza
Ali Hussain Yateem
Mohammed Mubarak Al Sulaiti
Dr. Abdulla Ahmed Mansoor Radhi
Khalid Yousif Abdul Rahman
Hussain Sultan Al Ghanem
Abdul Razak Abdulla Hassan Al Qassim
Abdulla Ali Kanoo
NBB ANNUAL REPORT 2009 I 11 AN ICON OF TRUST
Abdulla Ali Kanoo Chairman
Ali Hussain Yateem Director
Abdul Razak Abdulla Hassan Al Qassim Director
Appointed to the Board in 1997
Appointed to the Board in 1985
Appointed to the Board in 2009
Chairman: Yousuf Bin Ahmed Kanoo Group
Member of the Executive and Insiders’ Trading Committees
Member of the Executive Committee
Public Service: Chairman of Bahrain Philanthropic Society
Vice Chairman: Ali & Mohamed Yateem Group W.L.L.
Chairman: Benefit Company; Chairman of Corporate Governance Committee, Ministry of Industry and Commerce
Farouk Yousuf Khalil Almoayyed Deputy Chairman
Mohammed Mubarak Al Sulaiti Director
Deputy Chairman and Chairman of Executive Committee of Oasis Capital Bank B.S.C.
Appointed to the Board in 1997
Appointed to the Board in 1993
Chairman of the Executive and Insiders’ Trading Committees
Member of the Executive and Insiders’ Trading Committees
Chairman: Y. K. Al Moayyed & Sons; Al Moayyed International Group; Ashrafs; Bahrain Duty Free; Bahrain Hotels Company; Alwasat Newspaper; Ahlia University; National Finance House
Assistant Undersecretary for Public Revenue Development in the Ministry of Finance
Deputy Chairman: Labour Market Regulatory Authority
Dr. Abdulla Ahmed Mansoor Radhi Director
Board Member and Investment Committee Member of Esterad Investment Company; Board Member and Executive Committee Member of Bahrain Telecommunication Company; Board Member and Executive Committee Member of Bahrain Stock Exchange; Board Member and Chairman of Executive Committee of Housing Bank; Member of the Board and Investment Committee of Bahrain Duty Free Company.
Director: Investcorp Bank B.S.C.; TAIB Bank Public Service: Chairman of the Board of Trustees of Ibn Khuldoon School
Dr. Essam Abdulla Fakhro Deputy Chairman
Appointed to the Board in 1993
Deputy Chairman and Chairman of Executive Committee of the Arab Academy for Education and Research.
Chairman of the Audit Committee
Chairman of Board of Trustee of Ahlia University.
Undersecretary, Ministry of Industry & Commerce, for Commercial Affairs Vice Chairman: Bahrain Flour Mills Company
Appointed to the Board in 2008 Deputy Chairman of the Executive Committee Chairman: Bahrain Chamber of Commerce & Industry; Bahrain Cinema Company
Khalid Yousif Abdul Rahman Director Appointed to the Board in 2001
President: Federation of GCC Chamber of Commerce
Member of the Audit Committee
Director: Economic Development Board; Bahrain Mumtalakat Holdings Company BSC (c) (Mumtalakat); Bahrain Stock Exchange
Chairman: Food Supply Company
Abdulla Yousif Akbar Alireza Director
Managing Director and Deputy Chairman: Awal Dairy Company Director and Member of the Executive Committee: Bahrain Ship Repair and Engineering Company Director: Bahrain Saudi Transport Company
Appointed to the Board in 1984 Deputy Chairman of the Audit Committee
Hussain Sultan Al Ghanem Director
Chairman: Yousuf Akbar Alireza and Sons.
Appointed to the Board in 2004
Director: Bahrain Ship Repair and Engineering Company
Member of Audit Committee Undersecretary, Human Resources; Prime Minister’s Court
12 I NBB ANNUAL REPORT 2009 BOARD OF DIRECTORS’ REPORT
board of directors’ report
As the year drew to a close there were clear signs of economic recovery and a general feeling of optimism that economies are likely to grow at a steady pace in 2010.
The Board of Directors of National Bank of Bahrain takes pleasure in presenting the 53rd Annual Report of the Bank together with the financial statements for the year ended 31 December 2009. General Operating Environment 2009 was one of the most difficult years in the aftermath of the global financial crisis with many of the developed economies showing negative growth after years of strong growth. The Gulf Cooperataion Council (GCC) countries have not been immune to the developments in the rest of the world with a considerable slow down in growth rates and investments. However, as the year drew to a close there were clear signs of economic recovery and a general feeling of optimism that economies are likely to grow at a steady pace in 2010. Economic growth has turned positive as wide-ranging public intervention has lowered uncertainty and systemic risk in financial markets. The triggers for this rebound are strong government policies across advanced and many emerging economies including guarantees for financial institutions, capital injections, provision of liquidity and intervention in credit markets that have supported demand and eliminated fears of a global depression. Real-estate related activity, which along with the related downward pressure on bank balance sheets lies at the origin of the global downturn, may not see a strong rebound for some time. House prices are declining at a slower rate or beginning to stabilize in some advanced economies, but many markets still face the risk of further price declines. Timely policy responses by the authorities of the GCC countries brought about a measure of stability and cushioned the downturn across most of the GCC. The considerable financial reserves held by the Gulf states has enabled it to tackle the financial crisis better than most parts of the world and to also continue with most
of the planned development works. As a result, these economies are showing signs of growth, albeit at a lower level compared to the previous years. The crisis in Dubai towards the end of the year raised concerns on the future growth prospects for the region. However, timely intervention by Abu Dhabi has eased concerns about a potential debt default which could have had a major impact on the confidence of the international community in the region. The external environment is gradually improving, financing conditions are easing, oil prices are rising and OPEC is well positioned to meet a near-term rise in demand. Deposit growth and capital inflows are regaining strength while funding conditions in the banking systems in the region are also improving. The timing of the Federal Reserve’s pullback from an unprecedented level of monetary stimulus, deployed to combat the worst financial crisis since the Great Depression, will depend on inflation threats. As the Federal Reserve shifts its focus from spurring growth to heading off inflation, we are likely to see a reversal of trend in interest rates with a gradual increase. Future earnings for banks globally could be limited by the lingering loan losses from the housing bust and financial crisis. Overall Performance Against the backdrop of the global financial crisis and a challenging regional environment, the Bank achieved realistic growth during the year in line with its long-term objective of delivering consistent returns without compromising on risks. The strategy during the year was to focus on increasing business in the domestic market resulting in increased earnings from growth in core banking businesses. The results reflect improvement in earnings while efficiently managing operating expenses. In line with the Bank’s prudent approach to risk taking and considering the difficulties in the overall external credit environment, the Bank
NBB ANNUAL REPORT 2009 I 13 AN ICON OF TRUST
2,117.75
09
2,034.10
08
1,903.71
07
1,676.38
06
1,498.10
05
Total Assets BD Millions
Against the backdrop of the global financial crisis and a challenging regional environment, the Bank achieved realistic growth during the year in line with its long-term objective of delivering consistent returns without compromising on risks. on its own initiative decided to increase the level of general loan loss provisions with an emphasis on building a strong balance sheet. Accordingly, the results reflect a Net Profit of BD 42.82 million in 2009 compared to BD 34.74 million in 2008, an increase of 23.3 per cent. The Earnings Per Share is 55 fils for the year, as compared to 45 fils in the previous year. The increase in Net Interest Income by 6.4 per cent to BD 49.02 million is mainly attributable to growth in loans and investments and efficient balance sheet management despite lower yield on surplus liquidity in the background of falling interest rates worldwide. Other Income at BD 23.26 million (2008: BD 16.60 million) reflected a growth of 40.1 per cent on account of good growth in core banking activities, higher foreign exchange income and profit on available for sale investments. Our efforts to grow the Bank’s core business resulted in an increase in the Loans and Advances portfolio by 5.1 per cent from BD 1,095.71 million at the end of 2008 to BD 1,151.42 million at the end of 2009. Customer deposits at BD 1,480.39 million reflect the stability and range of products designed to suit the Bank’s retail and corporate clientele. The Bank continued to cater to customer needs and expectations with both new and upgraded products and services. The focus of the Personal Banking Group was expansion of the retail footprint
with new/enhanced products and improvement in service delivery standards to reinforce our position as the largest network of branches and ATMs in the Kingdom. The priority for the Business Banking Group was continuous strengthening of existing customer relationship by providing a wide range of products and services with particular emphasis on supporting initiatives towards development of the Kingdom. The Treasury & Investment Group’s concentration during the year was to maintain adequate liquidity while efficiently managing the Balance Sheet within the overall risk parameters. We are committed to supporting domestic growth and improve our market share in active sectors of the national economy as Bahrain’s economy expands with continued infrastructure investments as part of Vision 2030. As the nation charts its ambitious development plans we keep our strategies well aligned with the country’s policies and aim to effectively contribute to national development and actively participate in the government’s initiatives that are geared towards promoting economic diversification and addressing the needs and requirements of our people. We remain fully committed to meeting the high expectations of our customers, shareholders and all other stakeholders. Details of the Bank’s financial position and performance are elaborated in the Financial Review section and the Financial Statements.
14 I NBB ANNUAL REPORT 2009 BOARD OF DIRECTORS’ REPORT
board of directors’ report
2009
Recommended Appropriations Based on the results, the Board of Directors has recommended for approval by the shareholders the following appropriations: Bahraini Dinars
As at 31 December
Retained earnings as at 1 January 2009 2008 appropriations 2009 Net income Total
Acknowledgements TThe Directors, on behalf of the shareholders, take this opportunity to express their gratitude and sincere appreciation to His Majesty King Hamad bin Isa Al Khalifa - the King of Bahrain, to His Royal Highness Shaikh Khalifa bin Salman Al Khalifa - the Prime Minister, to His Royal Highness Shaikh Salman bin Hamad Al Khalifa - the Crown Prince and Deputy Supreme Commander, Government ministries and institutions- especially the Ministry of Finance and the Central Bank of Bahrain, for their guidance, kind consideration and support.
Dividends ( 35%) Donations and contributions Directors’ remuneration Retained earnings carried forward after 2009 appropriations Total
48,245,085 (25,414,942) 42,822,114 65,652,257 27,216,000 2,141,106 350,000 35,945,151 65,652,257
Donations and Contributions This year, the Board is recommending the allocation of BD 2,141,106 to the Donations and Contributions programme, representing 5 per cent of 2009 profits available for distribution. The cumulative allocation under the programme, since its inception in 1980, is now BD 24.97 million.
Number of shares held by Directors As a percentage of the total number of shares
2008
46,027,992 46,297,673 5.9 %
5.9 %
The Directors also extend their thanks and appreciation to the staff of the Bank whose dedicated service and commitment has played a vital role in the achievements of the Bank over the years and to all our valued customers and friends for their continuous support and the confidence reposed by them in the National Bank of Bahrain.
Details of the Bank’s Donations & Contribution programme are contained in the Corporate Social Responsibility section of the Annual Report. Directors’ Shareholding Given below are details of the interests of individual Directors in the shares of National Bank of Bahrain. The interests of Directors in the shares of the Bank includes interests in the shares of the Bank held by their spouse(s) or dependent children or by any other person, the control of whose interests in such shares lies ultimately with the Director.
Abdulla Ali Kanoo Chairman 21 January 2010
NBB ANNUAL REPORT 2009 I 05 AN ICON OF TRUST
16 I NBB ANNUAL REPORT 2009 corporate governance
corporate governance
The Bank operates in a highly regulated environment. Business is conducted within a well-developed control and risk management framework, underpinned by policy statements, written procedures and control manuals.
The Board of Directors is responsible for the overall governance of National Bank of Bahrain. The Board ensures that high ethical standards are established across the Bank and regularly reviews the Bank’s compliance with the Central Bank of Bahrain regulations with regard to Corporate Governance. The Board recognizes that good corporate governance practice is a vital ingredient in the creation of sustainable shareholder value and protecting the interests of all stakeholders. The Board of Directors meets regularly throughout the year and maintains full and effective control over strategic, financial, operational, internal control and compliance issues. The Board’s remit covers charting the strategic direction of the Bank, participating in formulating strategy, setting objectives, establishing and communicating corporate values and policy guidelines. The Board is also responsible for monitoring the Management’s running of the business within the agreed framework. The Board seeks to ensure that the Management strikes an appropriate balance between long-term growth and the short-term objectives. The Board is ultimately accountable and responsible for the affairs and performance of the Bank. The Board currently comprises of nine Non-Executive Directors and one Executive Director who is designated as the Chief Executive Officer and Director. The Chairman is mainly responsible for the leadership of the Board and ensuring that it operates effectively and fully discharges its legal and regulatory responsibilities. The roles of the Chairman and the Chief Executive Officer are separate and exercised by different persons. The members of the Board of Directors are elected by secret ballot in the general (ordinary) meeting of the shareholders by a simple majority of valid votes. The members of the Board of Directors remain in office for a term not exceeding three years, which
may be renewed. In order to be eligible for being nominated for directorship, the individuals should meet the ‘fit and proper’ criteria established by the Central Bank of Bahrain. An Executive Committee comprising of five members of the Board is empowered to approve specific credits, personnel policies and compensation; the Executive Committee also reviews budgets, plans and major organisational changes for eventual submission to the Board for approval. A separate Audit Committee exists with a mandate for oversight of internal control and the risk management framework and for reinforcing internal and external audit activities. The Audit Committee is responsible for overseeing the selection of the external auditors for appointment and approval at the shareholders’ meeting, reviewing the integrity of the Bank’s financial reporting, reviewing the activities and performance of internal audit function and reviewing compliance with relevant laws, regulations and code of conduct. The Insiders’ Trading Committee is responsible for overseeing the insider trading activities and ensuring the Bank’s compliance with Central Bank of Bahrain and Bahrain Stock Exchange rules and regulations in this regard. The Bank operates in a highly regulated environment. Business is conducted within a well-developed control and risk management framework, underpinned by policy statements, written procedures and control manuals. The Board has adopted a comprehensive Code of Conduct that provides a framework for directors, officers and employees on the conduct and ethical decision making integral to their work. All officers and employees subscribe to this Code and are expected to observe high standards of integrity and fairness in their dealings with customers, regulators and other stakeholders.
NBB ANNUAL REPORT 2009 I 17 AN ICON OF TRUST
The Bank believes that complying with the high standards of corporate governance has effectively contributed to enhancing value to our shareholders over the long-term.
In its role as the primary governing body, the Board of Directors provides oversight of the Bank’s affairs and constantly strives to improve and build on the Bank’s strong corporate governance practices. The business performance of the Bank is reported regularly to the Board of Directors. Performance trends and performance against budget and prior periods are closely monitored. Financial information is prepared using appropriate accounting policies, in accordance with the International Financial Reporting Standards as promulgated by the International Accounting Standards Board, and are consistently applied. Operational procedures and controls have been established to facilitate complete, accurate and timely processing of transactions and the safeguarding of assets. The Management Internal Control Division monitors the system of internal controls regularly. Monitoring includes an assessment of the risks and controls in each operating unit and matters arising there from are reported to the Audit Committee on a regular basis. The external auditors review the system of internal controls to the extent necessary for them to form an opinion on the financial statements. In addition to the annual audit, the external auditors conduct quarterly reviews on the systemic process and procedures on which the Bank’s quarterly financial statements are based. These statements are subsequently published in newspapers and posted on the Bank’s website in accordance with regulatory requirements. The processes, structures and policies help ensure compliance with laws and regulations and provide clear lines of sight for decision-making and accountability. The Board has established a management structure that clearly defines roles, responsibilities and reporting lines. Within the management structure there are eight committees, chaired by the Chief Executive Officer and responsible for the following activities: Business Development, Planning, Credit, Risk Management, Asset/Liability Management, Information Technology, Human Resources and Donations & Charities.
The Bank believes that the ways and means of achieving the results are equally important as the results. Our commitment to this principle is the key to sustaining public trust and confidence in the Bank. The Bank continuously strives for higher standards in everything it does - for our customers, our stakeholders, our society and nation, upon which the future prosperity of our institution rests. The Bank has a public disclosure policy approved by the Board of Directors. The Bank is committed to support the timely and accurate disclosure of material information in accordance with the requirements as set out in legislation and in the rules and regulations of the CBB, BSE and other applicable laws in order to facilitate efficient capital market activities. The Bank believes in the principle of transparency about its financial performance thus enabling all stakeholders to have access to such information on a timely basis. The annual report including all the notes for the current financial year and a minimum of three preceding financial years are provided on the Bank’s website. The quarterly financial highlights are also provided on the Bank’s website. The Bank believes that complying with the high standards of corporate governance has effectively contributed to enhancing value to our shareholders over the long-term. It has provided the Bank’s customers, counterparts, shareholders, regulators, employees and rating agencies with a high degree of confidence in our institution; achieved an appropriate balance between long-term growth and short term objectives, created a sound portfolio of assets, stable customer base, income diversity and the wherewithal to face economic cycles and uncertainties. The Board has set the moral tone with a high degree of intolerance to any instances of malpractice, fraud and unethical behaviour, and ensured the highest degree of adherence to laws, rules and regulations.
18 I NBB ANNUAL REPORT 2009 corporate governance
corporate governance
Board of Directors Executive Committee Insiders’ Trading Committee Audit Committee
Chief Executive Officer and Director Management Internal Control Board Secretary
Treasury & Investment Group
Banking Group
Marketing & Sales
Regional Banking
Government & Transactional Banking
Customers’ Services
Corporate Communications
Credit Policy & Risk Management Group
Corporate Services Group
Treasury
Credit Review
Financial Control
Personal Banking
Abu Dhabi Branch
Marketing & Sales
Central Operations
Portfolio Management
Credit Administration
Human Resources
Domestic Corporate Banking
Riyadh Branch
Remedial Management
Information Technology
Funds & Investments
Legal
Properties & Maintenance
Domestic Commercial Banking
Cards Operations
Wealth Management
Risk Management & Compliance
Projects Management & Process ReEngineering
Marketing & Planning
Call Centre
20 I NBB ANNUAL REPORT 2009 an icon of trust
All of our customers benefit from a personalized service and a wide range of products tailored to their needs
NBB ANNUAL REPORT 2009 I 21 AN ICON OF TRUST
22 I NBB ANNUAL REPORT 2009 EXECUTIVE MANAGEMENT
Executive Management
Abdul Razak Abdulla Hassan Al Qassim Chief Executive Officer and Director Master’s degree in Management Sciences and a Sloan Fellowship from MIT (Massachusetts Institute of Technology, USA). Mr. Al Qassim joined NBB in 1977 after nine years with Chase Manhattan Bank and Standard Chartered Bank. Chairman of Benefit Company; Chairman of Corporate Governance Committee, Ministry of Industry and Commerce; Deputy Chairman and Chairman of Executive Committee of Oasis Capital Bank B.S.C; Board Member and Investment Committee Member of Esterad Investment Company; Board Member and Executive Committee Member of Bahrain Telecommunication Company; Board Member and Executive Committee Member of Bahrain Stock Exchange; Board Member and Chairman of Executive Committee of Housing Bank; Member of the Board and Investment Committee of Bahrain Duty Free Company; Deputy Chairman and Chairman of Executive Committee of the Arab Academy for Education and Research and Chairman of Board of Trustee of Ahlia University. He assumed his present position in 2008. Abdul Rahman Abdulla Mohamed General Manager Banking Group Master of Business Administration from the University of Hull, UK. Mr. Mohamed joined NBB in 1977 after several years with Bahrain Petroleum Company and Chase Manhattan Bank. Chairman of National Motors Company and Director and Executive Committee Member of Bahrain Commercial Facilities Company. He assumed his present position in 2009. Hussain Sayed ali Al Hussaini Deputy General Manager Treasury and Investment Group MBA in Marketing and Management, DePaul University, USA; PMD (Programme for Management Development)
from Harvard Business School, Boston, USA; B.A. in Economics, Concordia University, Canada. Mr. Al Hussaini joined NBB in 1982. Vice Chairman of the Board of Directors and Vice Chairman of the Executive Committee of the Securities and Investment Company (SICO). Member of Delta Mu Delta - Chicago USA, Interarab Cambist Associations, International Securities Market Association, Harvard Business School - Alumni Club, USA, Bahrain Financial Market Association. He assumed his current position in 2009. Abdul Aziz abdulla Al Ahmed Executive Assistant General Manager Marketing & Sales Executive Diploma from University of Virginia, USA. He also attended a number of training courses inside the Kingdom of Bahrain and abroad. Board Member of Benefit Company. Mr. Abdul Aziz has over 35 years of banking experience. Mr. Abdul Aziz joined NBB in 1974. He assumed his present position in 2009. Khalid Ali Juma Executive Assistant General Manager Corporate Services Group Executive Diploma from University of Virginia, USA. He also attended a number of training courses inside the Kingdom of Bahrain and abroad. Mr. Juma joined NBB in 1972. He assumed his present position in 2008. Raveendra Krishnan Executive Assistant General Manager Credit Policy & Risk Management Group Masters Degree in Finance, University of Mumbai; Certified Associate of the Indian Institute of Bankers. Mr. Krishnan joined NBB in 1996 after several years with the State Bank of India and Oman International Bank. He assumed his present position in 2007.
NBB ANNUAL REPORT 2009 I 23 AN ICON OF TRUST
Abdulla Abdul Rahman Hussain Executive Assistant General Manager Customers’ Services
Jassim Mohamed Al Hammadi Assistant General Manager Central Operations
Master of Business Administration in Marketing from University of Bahrain, Post Graduate Diploma in Finance from University of Bahrain, Bachelor of Science in Computer Sciences from St. Edwards University, Austin, US. Mr. Hussain joined NBB in 2008 after more than 22 years of experience in Banking, professional services, technology, project management and e-Business. Board member and Chairman of executive committee of Benefit Company. He assumed his present position in 2008.
Master of Business Administration, University of Glamorgan, UK. Mr. Al Hammadi joined NBB in 1974, he has several years of experience in Financial Control, Customer Services, Card Business, Retail Banking and Operations. Member of the Bankers Society of Bahrain-ATM Security Committee, He assumed his present position, which includes the function of Money Laundering Reporting Officer in 2007.
Nader Karim Al Maskati Assistant General Manager Government & Transactional Banking Executive Management Diploma from Darden Graduate School of Business Administration, USA. Master Degree in Finance and Post Graduate Diploma in Marketing from Bahrain University. B.Sc in Economics & Political Sciences from Cairo University. Mr. Maskati joined NBB in 1993 after several years experience with National Bank of Abu Dhabi. He assumed his present position in 2009. Farouk Abdulla Khalaf Assistant General Manager Regional Banking Member of the Chartered Institute of Management Accountants, U.K. Mr. Farouk joined NBB in 1986 after several years experience with Gulf International Bank, Aluminum Bahrain (ALBA) and British Bank of the Middle East, Bahrain. He assumed his present position in 2009.
Abdul Monem Yousif Al Banna Assistant General Manager Management Internal Control CPA from University of Illinois, USA; BS in Accounting, University of Bahrain. Mr. Al Banna joined NBB in 1989. Secretary of the Audit Committee of NBB’s Board of Directors. He assumed his present position in 2006. Eyad Yousif Sater Senior Manager Abu Dhabi Branch Master of Business Administration, University of Glamorgan, UK. Mr. Eyad joined NBB in 1983. He has over 25 years of banking experience mostly with the National Bank of Bahrain. He assumed his present position in 2009. REyad Nasser Al nasser Senior Manager Riyadh Branch Master of Business Administration, Dublin University, USA. Mr. Reyad joined NBB in 1981. He has over 28 years of banking experience mostly with the National Bank of Bahrain. He assumed his present position in 2009.
24 I NBB ANNUAL REPORT 2009 STATEment of the chief executive officer
STATEMENT OF THE Chief Executive Officer
We have stayed focused on the basics of banking and by sticking to our values and culture we have shown resilience throughout this difficult period and proved our ability to consistently meet our strategic priorities.
National Bank of Bahrain once again delivered a commendable performance during the year 2009 amidst the unprecedented challenges resulting from the global economic meltdown. In a difficult economic environment and the aftershocks of the financial crisis, we continue to deliver growth and are encouraged by our performance in 2009.
meet our strategic priorities. We manage the quality of our asset base carefully and maintain a conservative approach to risk while our liquidity and capital strength have provided us a competitive advantage. In the core banking businesses we remained focused on Bahrain and the GCC that offer growth and stay focused on building long-term relationships with our clients.
While the year started with a very difficult external environment, the pace of macroeconomic deterioration slowed in the later part of the year and there are now tentative signs of improving economic conditions indicating that the worst may be behind us. Operating conditions in the financial sector improved over the course of the year as the effects of government and central bank policies worked through the system and enabled the sector to navigate the bottom of the cycle in the financial markets. Bahrain as the financial hub in the Middle East has not been immune to the events in the global markets but has managed the crisis with limited negative impact. The crisis in Dubai during the last quarter of the year raised concerns on the financial stability of the region. However, timely support by Abu Dhabi has temporarily eased the situation and the outcome of the debt restructuring is critical to the future growth prospects for the region.
As a result, all the main businesses of the Bank performed well and delivered a sustainable increase in underlying operating revenues. Our strong brand image and selective pricing enabled us to retain and grow the core deposit base during the year while we refrained from the aggressive pricing of deposits by some banks to meet their liquidity requirements. In a difficult economic environment, the Bank continued its policy of supporting initiatives aimed at developments in the Kingdom of Bahrain. Our results reflect the improvement in credit spread, success of mobilising core cost effective deposits and revenue diversification, while efficiently managing operating expenses. This careful positioning of our balance sheet and our focus on the needs of our customers means that NBB is well placed to build on opportunities as they emerge.
Against this backdrop, we are pleased to report that our strategy of positioning NBB’s balance sheet to focus on core commercial banking activities has been rewarding over the years. We have stayed focused on the basics of banking and by sticking to our values and culture we have shown resilience throughout this difficult period and proved our ability to consistently
To further reinforce our pre-eminent position in Personal Banking, we significantly broadened the range of products and services available to our customers, viz., the continuation of branch restructuring programme, expansion of the ATM network, introduction of Platinum card for high net worth customers and the introduction of new technological initiatives like the NBB on-line banking, SMS message for credit card transactions etc.
NBB ANNUAL REPORT 2009 I 25 AN ICON OF TRUST
Our strategy is to align NBB with those opportunities to achieve sustainable growth through diversification and enhancement of our presence in active segments of the domestic market with selective expansion in regional markets. 1,151.42
09
1,095.71
08
945.97
07 06 05
784.31 697.36
loans & advances BD Millions
1,480.39
09
1,519.25
08
05
A new division “Government and Transactional Banking” was created to focus on overall relationship with the Government of Bahrain and all its agencies and also handle large structured deals, syndications and institutional transactions in Domestic & Regional markets which requires special skills and execution capabilities. Also the overall organisational structure of the Bank was re-aligned with all business and direct support units reporting to the General Manager in an effort to provide greater customer focus and improve the speed of delivery of products and services. The Treasury and Capital Markets Group’s concentration during the year was to maintain adequate liquidity while efficiently managing the yield on the portfolio within the overall risk parameters. Despite the difficult market conditions and depressed interest rates, the Division successfully managed to exceed expectations with a number of carefully executed transactions in both international and GCC markets.
1,319.95
07 06
On the Business Banking side, the focus during the year was to further consolidate our position in the active sectors of the domestic economy. In a difficult economic environment, the Bank continued its policy of supporting initiatives aimed towards development of the Kingdom. In meeting with this objective, the Bank managed and participated in several deals which are of national importance.
1,199.78 1,014.50
customers’ deposits BD Millions
The timing, shape and scale of any recovery in the wider economy remain uncertain but despite the macroeconomic uncertainty, we are confident in the Bank’s continued ability to deliver sustained growth. Furthermore, as economies begin to recover and
interest rates start to rise, our deposit strength will reinforce our profitability and enable us to respond to new customer demand for financing. We look forward positively to the opportunities that are available in Bahrain, considering its position as the gateway to the northern Gulf and the potential benefits from the economic integration of a GCC wide single market. Our strategy is to align NBB with those opportunities to achieve sustainable growth through diversification and enhancement of our presence in active segments of the domestic market with selective expansion in regional markets. We do not underestimate the challenges and will engage and deepen our relationship with clients to win market share and enhance our competitive positioning. We believe the strength of our franchise, sound fundamentals and market image as the leading provider of financial services in the Kingdom will enable us to achieve this goal.
Abdul Razak Abdulla Hassan Al Qassim Chief Executive Officer & Director
26 I NBB ANNUAL REPORT 2009 an icon of trust
NBB ANNUAL REPORT 2009 I 27 AN ICON OF TRUST
A wide and growing network of ATMs and branches across Bahrain provide convenient and flexible banking services, 24 hours a day
28 I NBB ANNUAL REPORT 2009 reviews of operations
REVIEW OF OPERATIONS
BUSINESS BANKING
Abdul Rahman Abdulla Mohamed General Manager
BANKING group
NBB believes the GCC region’s economic growth will gradually recover in 2010 with higher growth rates compared to other regions of the world prompted by more government expenditure, stimulating private sector investments and restoration of general consumer and business confidence.
2009 was a challenging year for banking in general and corporate and commercial banking in particular, given that the global recession resulting from the economic crisis persisted for almost the entire year. At the local level, several key sectors such as real estate, construction, manufacturing and tourism have been adversely affected. Against this background, NBB’s Corporate and Commercial Banking units have withstood the turmoil in the financial markets by not only consolidating, but also enhancing its performance during this difficult period. This has been achieved by selective targeting and through application of prudent lending polices. As a result of these efforts, the asset book expanded and interest margins also improved. GOVERNMENT & TRANSACTIONAL BANKING Given the specialized nature of the business, a new division called “Government and Transactional Banking” was created in 2009. The primary objective of this division is to focus on the overall relationship with the Government of Bahrain and all its agencies, large structured deals, syndications and institutional transactions (including Financial Institutions & Trade Finance) in Domestic & Regional markets. During 2009, the division further reinforced its close relationship with Government agencies to cater to their various requirements, particularly in the import of machinery and equipment. The division played an advisory role to support some of the Government departments in evaluating several options with respect to their financing requirements and to recommend optimal solutions. The division worked with Ministry of Works on structuring a term loan of BD 85.5 million to partly finance a number of Grade A contractors in Bahrain for executing ongoing infrastructural projects. The division also worked with a consortium of local and international contractors
to structure a medium term Progress Certificate Discounting Facility to finance one of the Government’s major projects. NBB is presently working with a consortium of local, regional and international banks on the contract financing requirements of the Qatar Bahrain Causeway Project. The Financial Institutions & Trade Finance unit entered into a Facility Agreement in 2009 with Arab Trade Finance Programme (ATFP) based in Abu Dhabi to establish a line of credit for NBB to refinance the exports of Bahraini companies to Arab and international markets. The line of credit has been actively utilized during 2009. The Unit has successfully managed its exposure to local, regional and international financial institutions during the current financial crisis which ensured that the asset quality of the portfolio was maintained. The Unit also succeeded in timely exiting from some relationships with regional entities that faced financial difficulties and restructuring of several existing syndicated facilities in co-ordination with other lenders to strengthen the syndicate’s position and improve pricing and other terms of the facilities. This has reflected positively on the profitability from these transactions. The Unit solicited good volume of letters of guarantee business from international banks on behalf of international contractors that are undertaking large infrastructure projects in Bahrain. The Unit has played an active role in soliciting bank deposits (in the form of placements) from regional and international banks. REGIONAL BANKING Regional Banking continued to attract new assets in 2009 and despite some sizeable prepayments, Regional asset book exceeded US$ 300 Million. It consists of diversified, high quality assets mostly in Saudi Arabia, Qatar and Kuwait and includes medium-
NBB ANNUAL REPORT 2009 I 29 AN ICON OF TRUST
Our Abu Dhabi branch continued to grow its business, while Riyadh branch is part of our long term expansion strategy.
Regional Banking continued to attract new assets in 2009 and despite some sizeable prepayments, Regional asset book exceeded US$ 300 Million.
to-long term exposures to prestigious and prominent names that have been entrusted with major roles in the economic and industrial developments in their home countries. Meanwhile, we continued to attract higher levels of deposits from the region, in particular from areas where we have regional branches. Increased focus was also placed on correspondent banking relationships to serve a larger number of Financial Institutions in Riyadh, Abu Dhabi as well as in Bahrain.
During 2009 the branch introduced several measures to re-engineer itself, such as optimum system capability usage, improved automation resulting in enhancement of delivery channels and quality service to customers. Abu Dhabi is expected to be one of the regional economies that will make a reasonable comeback from the impact of the global meltdown and is best positioned to benefit from the pick-up in global economic activity.
NBB believes the GCC region’s economic growth will gradually recover in 2010 with higher growth rates compared to other regions of the world prompted by more government expenditure, stimulating private sector investments and restoration of general consumer and business confidence. In order to better position the Bank to capitalize on the increased business opportunities, Regional Banking Division was reorganised in 2009 to facilitate increase referrals to our Riyadh and Abu Dhabi branches, enhance services to select niche of regional corporate clients and attract increased bilateral business from the GCC.
Riyadh Branch Riyadh Branch is part of NBB’s long term expansion strategy in the GCC region, given the immense business opportunities available in the Kingdom of Saudi Arabia and the fact that its economy is the largest and most diversified in the region with impressive GDP growth rate prospects. The Bank embarked on a strategy of building contacts in the identified target segments, assessing the prospective customers’ needs in terms of products and services and the best way to attract them to start a bilateral relationship with NBB. In Retail Banking, the launch of the Personal Loan Program proved rewarding with encouraging results. The Bank also joined hands with major banks in financing a number of infrastructure and development projects in Saudi Arabia. The banking sector will continue to benefit from the Saudi government’s commitment to support the economy with an expansionary budget as numerous infrastructure and capital projects were approved in 2009. These in turn would ensure that banks have more opportunities to finance such large scale infrastructure and development projects in the country. NBB remained supportive of financing these projects and reaffirm our commitment to grow in the Saudi market both in Retail and Corporate sectors. The focus would be on selective targeting which meets the Bank’s asset acceptance criteria while adding value to the customers and achieving the desired objectives.
Abu Dhabi Branch Abu Dhabi Branch while observing the global and regional crisis closely had been developing its business growth cautiously. Asset quality and customer selection criteria continued to be maintained at the highest levels while attracting desired business. While remaining competitive in the market, the branch revised fees, charges and commissions to enhance return on risk. Cautious approach was observed in attracting new corporate deals considering prevailing general economic conditions and optimum application of available funding. The branch maintains relationship with leading corporate and government agencies through active participation in syndicated or club transactions at a senior level. In Retail Banking there was revision to the credit criteria with primary focus on UAE nationals for further growth and increased focus on quality borrowers.
30 I NBB ANNUAL REPORT 2009 reviews of operations
REVIEW OF OPERATIONS
global financial markets. Equity and bond markets recovered while the US Dollar went into a decline again, after enjoying a safe haven status at the height of the crisis. Economic activity globally has stabilized and in many countries has started moving up. By October, the IMF (International Monetary Fund) raised its forecast for global growth in 2010 to 3.1% as more than $2 trillion in stimulus packages and demand in Asia pulled the world economy out of its worst recession since World War II. Hussain sayed ali Al Hussaini Deputy General Manager Treasury & Investment Group
The unprecedented stimulus programs by governments around the globe, coupled with aggressive interest rate cuts by the central banks worldwide brought confidence back to the global financial markets. TREASURY & INVESTMENT GROUP Earlier in the year, investors were positioning themselves for a global financial meltdown which led to a panic sell-off in all asset classes in March. However, fears of a Great Depression faded by the middle of 2009 and financial markets recovered dramatically, mainly due to the response from policymakers – interest rate cuts, quantitative easing and fiscal boosts. The unprecedented stimulus programs by governments around the globe, coupled with aggressive interest rate cuts by the central banks worldwide brought confidence back to the
Marketable Securities Unit: In the fixed income portfolio consisting of senior investment grade floating rate and fixed rate securities, the Bank continued its strategy of holding liquid government bonds and high-grade GCC securities. The unit took full advantage of the low interest rate environment through aggressive roll down carry trades in short term G-7 bond markets. Market timing strategies were also utilized to take full advantage of the volatility producing capital gains throughout the year. Extremely conservative credit and investment guidelines were implemented to preserve capital during an uncertain investment environment. These strategies coupled with a high level of diversification enabled the unit to achieve above average returns. Foreign Exchange & Money Markets Unit: With a stream of bank failures and global market bailout programs introduced by central banks around the world, credit risk concerns played a major factor in the overall strategies implemented by the Money Market Unit during 2009. With liquidity remaining a top priority for the Bank the unit adopted a cautious approach in efficiently utilizing excess funds without exposing the Bank to unnecessary associated duration risk. Nonetheless, despite the severe market conditions and depressed interest rates, the Money Market Unit successfully managed to exceed expectations with a number of carefully executed inter-bank gapping and F/X swap transactions initiated during the year in both international and GCC markets. Moreover, in its unrelenting effort to play a vital role in the local economy, NBB continued to aggressively participate in all Treasury Bills
and Islamic Sukuk government issues during the year. Treasury Marketing & Sales Unit: Treasury Marketing & Sales Unit had a highly competitive and challenging year, with countless banks facing liquidity problems, resulting from the wide spread financial crisis. Consequently, in managing the overall liquidity requirements, and benefiting from the Bank’s solid financial standing, the unit effectively adopted an aggressive direct marketing strategy of offering the Bank’s valued clients attractive deposits interest rates and competitive foreign exchange services. As a result, the unit achieved an exceptional level of income and turnover during the year. Funds & Investment Unit: On the investment advisory side of the business, the Bank avoided creating products based on equities or hedge funds due to clients’ risk aversion. Instead, more attention was given to income-generating products and to helping clients exit from some products and lock in the gains by investing in fixed-rate instruments. The Bank has also taken steps to increase its product offerings so as to be ready with products suited to the risk appetite of its clients when the client demand improves. On the proprietary book front, the Bank substantially reduced its exposure to some of the asset classes in the earlier part of 2009. A part of the sale proceeds was invested in capital protected notes, which also contain options on equity markets, because of their attractive yields as well as potential upside when underlying equity markets pick up. The two actions reduced the portfolio risk, thus helping to avoid the effects of the dramatic sell-off in March 2009. The Bank adopted a cautious approach when markets recovered subsequently. The focus is on reducing volatility and on re-balancing the portfolio in the light of the changes in investment landscape. The Bank is looking afresh at asset allocation to different asset classes and continues to look for regional opportunities.
NBB ANNUAL REPORT 2009 I 31 AN ICON OF TRUST
The prestigious NBB Platinum card was launched for high net worth customers who enjoy the finest luxuries in life
Abdul Aziz abdulla Al Ahmed Executive Assistant General Manager Marketing & Sales
Operating within these tough market conditions, new products and campaigns were launched while enhancing existing products to provide attractive features to each market segment. PERSONAL BANKING In 2009, the operating environment was very challenging with the financial crisis deepening in the first half of the year. There was pricing pressure on liabilities due to liquidity constraints faced by some banks. Asset pricing was rationalised to match the reduction in market interest rates which affected operating margins on consumer assets. Operating within these tough market conditions, new products and campaigns were launched while enhancing existing products to provide attractive features to each market segment. A highly visible campaign was launched to promote personal loan products, in addition to tactical promotions and campaigns on credit and debit cards and Al Watani savings.
The prestigious NBB Visa Platinum card was launched for high networth customers and key relationships. The NBB Platinum card is aimed at customers who are accustomed to the best luxuries in life. The card offers special benefits that are commensurate with their lifestyle. Select Visa Gold card customers were upgraded to Platinum, as a token of the Bank’s appreciation of their relationship. In an effort to continuously add value to our customers, cardholders were presented with attractive special offers from a wide cross section of leading merchant partners. A significant achievement during the year was the launch of NBB on-line banking to retail customers. A multimedia campaign was unveiled to publicise the launch of this service. This has been well received by the market and we have seen a steady increase in the number of customers’ utilizing this service. Special incentive schemes were introduced on personal loans that allowed borrowers to take advantage of repayment holidays and price breaks. The Bank, in order to cater to a wider segment of the market, expanded the list of employers whose staff is eligible for credit facilities. The division continued to effectively deploy its professional Direct sales distribution channel during the year. By offering customers service at their door-step, the direct sales team was able to canvass business from a growing number of customers. The team has been especially effective in garnering new business from segments like mortgage loans, which require extensive customer contact to close a deal. Sales teams at branches were also strengthened in order to enhance both business and customer service. In an effort to make the branches more customer friendly and ease transaction flow, branches were redesigned under the branch restructuring project. Seef Mall, Isa Town and North Muharraq branches were refurbished with a new look and design to enhance the banking experience for our valued customers. Technology was leveraged to augment service levels and make transactions easier and more secure. The division
rolled out GPRS based Point-of-Sale (POS) terminals to select merchants, which will allow merchants to have wireless processing of card transactions. An SMS alert system was introduced, which gives customers immediate intimation of any transaction on their NBB credit cards, through an SMS message. Chip enabled EMV compliant debit and credit cards, which offer higher security of transactions, have been issued to customers. CORPORATE & COMMERCIAL BANKING The Division’s focus during the year was to support the active sectors of the domestic economy and help customers weather the financial crisis. In line with this objective, the Bank supported traditional areas ofbusiness, such as trade, contracting, manufacturing and trade finance in their expansion and addressed their banking needs with a complete suite of products and services. As a result, we increased our market penetration through focused relationship management and booked new assets underlying NBB’s commitment to the local economy with a firm belief that the Kingdom is well poised to withstand the prevailing economic conditions. On the liabilities side, the units were successful in attracting new deposits, as customers preferred to keep their funds with the Bank for its impeccable reputation of being both the most secure and stable institution in the Kingdom. Improvement in delivery channels has resulted in providing more efficient service to business customers. Corporate banking continues to be a “One Stop” solution provider for business customers’ total banking requirements, which encompass not only all their business products and services but also retail and treasury related requirements. Commercial banking continues to be well placed in the local market to meet and support the needs of its corporate and commercial customers. The projects in the pipeline bode well for the coming year and the division continues to be confident of overcoming these difficult times.
32 I NBB ANNUAL REPORT 2009 review of operations
REVIEW OF OPERATIONS
INFORMATION TECHNOLOGY The year 2009 began with many significant projects in the Information Technology area to primarily enhance our customers’ banking experience, upgrade IT Infrastructure to achieve a concerted migration towards technological advancement and ensuring compliance for regulatory authorities and internal control.
Abdulla Abdul Rahman Hussain Executive Assistant General Manager Customers’ Service
NBB launched its Internet Banking services during the year 2009 with BENEFIT Company hosting the service as an outsourced ASP (application service provider) Model. This type of outsourced ASP service is the first of its kind in the Kingdom.
As part of the Bank’s corporate and strategic vision to provide superior customer services, NBB launched its Internet Banking services during the year 2009 with BENEFIT Company hosting the service as an outsourced ASP (application service provider) Model. This type of outsourced ASP service is the first of its kind in the Kingdom and to a great extent provides a secured and cost-effective model, and yet achieves all the business objectives of the Bank. Indicative services offered in the Internet include but are not limited to, online access to customer accounts and credit cards, facility to download statements, transfer of funds across nominated accounts, local and International remittance facilities, bill payment and phone top up services, credit card payments etc. In line with the Bank’s commitment to improve customer service, a new Contact centre system has been installed replacing the earlier one. The prime objective of this new system is to achieve a uniform banking experience for our customers and with the sincere desire to fulfill all customers’ banking needs. The new system offers easy and friendly transaction navigation with added features to comprehensively address tasks frequently performed by customers. The technological upgrade enables integration with other channels, which is implemented to ensure a more enjoyable banking experience for NBB customers. In order to provide more secured card transactions and as per directives from the CBB, the Bank converted all its relevant systems like ATM Switch, Credit Card system and other peripheral systems to comply with EMV (Euro MasterCard and Visa) standards and issued
chip based Credit and Debit cards. The EMV chip card enhances the security of transactions by our customers with further use of PIN for customer safety. In addition, NBB introduced mobile SMS alert system for credit card transactions by customers. The alert specifies key transaction details such as the date, time of the transaction, the shop at which the transaction was conducted and the amount of the transaction. This service enhances the customers’ comfort on conducting transactions safely using their credit cards. Another important project in 2009 was the implementation of Anti-Money laundering solution from 3i-Infotech’s Amlock. The functionality of the product covers all the delivery channels including credit cards & ATM besides telephone banking and over the counter business transactions for retail and corporate customers. As part of business requirement, the new generation Point of sales (POS) machines (based on GPRS) communication technology was introduced. This was a critical and urgent requirement from the business which was completed in record time despite the complexity and the high-level technical expertise and coordination needed with diversified vendors. This initiative would go a long way in helping our merchants serve their customers more efficiently and enhance their business. A new Human Resources system (HR System) has been installed based on the most modern technology platform that co-exists with the rest of the systems in the Bank. This will enable the Bank to benefit from better resource management and timely execution of all daily activities pertaining to Human Resources & administration. To enable our customer service officers in conducting their business more efficiently, we have enhanced our e-Mail services to provide an ‘on-the-move’ mail through Blackberry mobile services. The officers now have access to their email and calendar on the move and are fully equipped to provide prompt service to our customers.
NBB ANNUAL REPORT 2009 I 33 AN ICON OF TRUST
Adding to our many accolades, we were awarded the JPMorgan Quality Recognition Award in 2009 for excellence in US Dollar Processing
In order to provide more secured card transactions, the Bank converted all its relevant systems like ATM Switch, Credit Card system and other peripheral systems to comply with EMV (Euro MasterCard and Visa) standards and issued chip based Credit and Debit cards. The EMV chip card enhances the security of transactions by our customers with further use of PIN for customer safety.
Other notable projects include Treasury back office replacement project covering Foreign Exchange, Money Market & Investments areas. The new system has a comprehensive coverage of all current and envisaged future treasury requirements and is implemented on Oracle technology with better control and security framework from an operational view point. The new system is currently undergoing extensive testing and is targeted to go live during the first quarter of 2010. CENTRAL OPERATIONS The effective and efficient management of Anti-Money Laundering risk is paramount to achieving success in the global financial industry. Keeping that in mind it has been the Bank’s philosophy to enhance operational risk management in addition to Anti-Money Laundering activities. This remained, as always, a key priority for the Bank throughout 2009. In a significant step forward, the Bank entered into a contract with one of the well known software companies to install the latest anti-money laundering system. The project was successfully implemented in June 2009. The AntiMoney Laundering System focuses on three major areas of concern: Know Your Customer (KYC), SWIFT Payments Monitoring and Transactions Monitoring. The installation of this state-of-the-art system reflects NBB’s firm commitment to meet the compliance requirements with highest accuracy and efficiency. Comprehensive measures were taken to ensure that the Bank is in full compliance with AML/CFT Regulations set by the Central Bank of Bahrain, and the Financial Action Task Force (FATF) 2003 Recommendations taking into consideration the best international practices in combating Money Laundering & Terrorist Financing. In recognition of its consistent, high-quality performance and standards in the funds transfer operations, the Bank was awarded the JPMorgan Quality Recognition Award in 2009 for excellence in US Dollar
processing. J.P. Morgan presents this award to selected U.S. Dollar clearing clients who achieve outstanding straight-through results by properly formatting their SWIFT payments. Less than one percent of J.P. Morgan’s total funds transfer clients are able to meet the criteria needed for the award. This is the 9th consecutive year that NBB has earned this recognition which not only illustrates NBB’s leading presence in the global financial services market but also aptly demonstrates the Bank’s long-term commitment to quality. CALL CENTRE Superior and personalized customer service has always been at the forefront of NBB’s objectives. In line with this philosophy the Bank re-launched its Call Centre services with a 24/7 mandate. This was a strategic initiative since it now provides the Bank’s customers with not only the ongoing account related banking services, but also with added features such as Fraud Guard Management & Internet Banking. The Bank also revamped its current IVR with the aim of converting the Call Center from an inbound Call Center to an out bound Call Center. This transformation not only gave the customers the opportunity to get information promptly but also enabled the Bank to prioritize its services to high end customers and increase it sales via tele-marketing. The new IVR features include reporting Lost or Stolen Cards, Credit Card Payments, loan inquiry details, funds transfer between cross currencies, Batelco/Zain Bill inquiry, real time payments, choosing your preferred account and a host of other features. The new Call Centre system is very robust and offers a wide variety of functions such as instant routing of important customers to the best agents, reduced hold times, more efficient scheduling of employees and detailed reporting. The smart dialer solution for call center avails predictive dialer for tele-marketing and proactive communications for campaigns.
34 I NBB ANNUAL REPORT 2009 review of operations
REVIEW OF OPERATIONS
Khalid Ali Juma Executive Assistant General Manager Corporate Services Group
Aligning HR with business priorities remained a key success story for the HR department at NBB.
HUMAN RESOURCES NBB understands that the organization’s success depends predominantly on knowledge, skills, creativity and motivation of our employees and hence we are committed to their continuous development. Attracting home grown talent to the Bank, ensuring that they become part of growing human capital, nurturing them to develop their careers and retaining talented professionals have been key priorities for Human Resources Department. To this effect, the Bank recently implemented a comprehensive HR strategy which focuses on critical HR initiatives and processes. Continuing its legacy, NBB stayed focused on hiring and developing young and talented Bahrainis. With nationalization being a key cornerstone of business strategy, NBB successfully maintained a level of 92% Bahrainization. Beyond staff development, the Bank also continued its endeavor to train and develop the youth of the country. Around 40 Bahraini students from various universities successfully completed their summer training program across different departments of the Bank. For the development of senior Bahraini executives and hone their leadership skills a new Leadership Development Program has been launched in association with reputed global business schools. This program will allow the executives to enhance their proficiency by exposing them to world class business management practices. Aligning HR with business priorities remained a key success story for the HR department at NBB. A new performance management system has been launched in the organization, the core objective of which is to foster
a performance oriented culture in NBB. The system is aimed at improving the performance and productivity of employees and assists them in their development and career growth path within the organization. In order to improve process efficiencies, a new Human Resources Information System (HRIS) has been implemented in the Bank. This has helped in digitizating most of the transactional processes in Human Resources and provide an efficient platform for accessing HR services. CORPORATE SOCIAL RESPONSIBILITY National Bank of Bahrain has always been at the forefront of community development in the Kingdom of Bahrain. The Bank has continually strived to develop an organization which plays a significant role in ensuring an ethos which encompass community growth as part of its responsibility to the society. It has been the Bank’s priority to develop its business in a socially and environmentally responsible way while simultaneously addressing the business interests of our stakeholders. The Bank has also taken an active role and responsibility in assisting local communities to achieve their aspirations. This is done through a combined effort of philanthropy and volunteer work. The Bank eventually owes its success to its customers and the community in which it conducts its business. There has been an increasing demand from society to ensure that businesses work in a sustainable manner. NBB not only shares this opinion, it actively ensures that this principle is actively followed. The Bank has
NBB ANNUAL REPORT 2009 I 35 AN ICON OF TRUST
The launch of our on-line banking service has been well received and customer usage is on the steady increase
It has been the Bank’s priority to develop its business in a socially and environmentally responsible way while simultaneously addressing the business interests of our stakeholders.
continually taken steps to promote the inclusion of the community and assist in bringing the less privileged groups into the vibrant social and economic interaction, the rest take for granted. We are determined that the community we serve also benefits from our success and translate that determination to practice by setting aside a percentage of the Bank’s annual net profit for allocation among various programmes and foundations/ projects aimed at social welfare, health care and the underprivileged sections of our society. This dates back to 1980 when the Bank’s Donation and Contribution Porgramme was conceived. In 2009 we contributed BD 1.4 million, through our donations and contributions programme, primarily directed towards health care, social welfare, supporting educational institutions including government schools, research studies and in ensuring that the less privileged among us are put on the path to a more secure future. The Bank spent BD 23.75 million since the inception of the Donation and Contributions programme in 1980. Our employees also make significant contributions as volunteers sharing their skills, financial and business knowledge and the benefit of their experience with the student community. This includes participating in a broad range of training seminars and work shops, for the benefit of students from educational establishments, particularly those enrolled in H.H. The Crown Prince’s Scholarship programme that is aimed at the
development of vision and leadership capabilities among Bahrain’s future government and business leaders. Since 1957, the community has warmly welcomed us to be a part of their lives and has placed their trust in NBB. We have endeavoured to ensure that we support the nation in its march forward. We always remember, that while we have been fortunate with our success we also need to provide for those among us who are less privileged and those with special needs to ensure a better society and a more prosperous Bahrain. We consider it an honour, our duty and our privilege, to be able to serve the community in more ways than just providing banking services.
36 I NBB ANNUAL REPORT 2009 review of operations
REVIEW OF OPERATIONS
2.14
09 1.74
08
2.08
07 1.84
06 05
1.53
donations & charities BD Millions
Major 2009 Projects Crown Prince’s International Scholarship Programme In 2006 NBB joined the Crown Prince International Scholarship Programme (CPISP) as a Gold sponsor and made a commitment to contribute BD 500,000 to the programme over a five-year period. Subsequently the Bank upgraded its sponsorship level to Platinum in 2009 whereby the Bank committed to contribute BD 1,000,000 to the programme over a five-year period. NBB has already made an initial contribution of BD 500,000 towards the prgramme. The sponsorship reflects the Bank’s continuing support to human resources development in the country and in particular, programmes that support Bahraini students to develop and improve their academic qualifications, including doctorate and master’s degrees. Support for Palestine Earlier in the year, NBB pledged BD 100,000 to the Bahrain Committee for supporting the Palestinian Nation in Gaza. In a country-wide televised donation campaign, NBB pledged the amount to assist the Palestinians in their struggle to achieve their independence and create a new nation. Support to the BDF NBB contributed BD 290,000 for a complete upgradation of the IT system at the BDF hospital. This contribution would not only help BDF in providing better and quicker medical services to the community but would also ensure that the Hospital is at par with the IT standards at leading medical institutions both regionally and locally. Bahrain Stock Exchange In 2009 NBB was one of the first organizations to commit BD 100,000 for the new Bahrain Stock Exchange office at BFH. The Bank has always played a key role in the development of the financial market of
the Kingdom and this commitment to the Bahrain Stock Exchange reaffirms the Bank’s efforts to be an effective contributor to the Kingdom’s long term vision of being a financial hub. Charity Funds Support 2009 was the fourteenth consecutive year that the Bank has provided assistance to all the local charity funds registered with the Ministry of Social Development. During the past thirteen years about BD 1,200,000 has been contributed by the Bank to the local charity funds that provide basic sustenance to poor families and under privileged people across the Kingdom. This year, during the Holy Month of Ramadan, the Bank distributed 7,700 coupons to purchase foodstuffs totaling BD 150,000.The amount was allocated to local charitable societies and organization, who in turn distributed these coupons to those families who are in dire need for help and support. Support to Government School Students In 2009, 20,000 needy government school students benefited from the annual winter clothing donation programme. NBB allocated BD 150,000 this year for the programme, which covered all government schools in the Kingdom of Bahrain. On the occasion of Eid Al Adha and Eid Al Fitr, the Bank organised the purchase and distribution of gift items for occupants and staff of the NBB Home for the Aged, NBB Home for Disabled Children, Bahrain Mobility International as well as for the children in the Hope Institute for the Blind and the Bahraini Institute for the Blind. Sponsorship NBB has demonstrated a leading role in supporting a unique number of important activities and events. Major activities in which the Bank participated as a key sponsor during 2009 were:
NBB ANNUAL REPORT 2009 I 37 AN ICON OF TRUST
In 2009, NBB was one of the first organizations to commit BD 100,000 to the new Bahrain stock exchange
Social • Bahrain Security Forum and Exhibition organized by the Ministry of Interior. • Electricity Conservation Campaign organized by the Electricity and Water Authority. Health Sponsor the 10th International Congress of the Middle East Africa Council of Ophthalmology (MEAC) organized by the Ophthalmologists Society.
•
Others • 9th GCC Banking Conference organized by the Central Bank of Bahrain. Included among the major beneficiaries of the Donations and Contributions programme this year were: •
NBB Home For The Aged
•
Rehabilitation Centre for Handicapped Children
•
Al Eslah Society
•
Bahrain Cancer society
•
Bahrain International Airport Group
•
Bahrain Philanthropic Society
•
Bahrain Red Crescent Society
•
Muharraq Social Welfare Centre
•
Royal Charity Organization
•
Bahrain Diabetes Society
•
Al Noor Charity Welfare
•
Al Rahma Centre
•
Al Sanable Orphans Care
•
Aysha Yateem Center
•
Economic Development Board
•
Bahrain Down Syndrome Society
•
Al Manar Parents Care Centre
•
Bahraini Disabled Sport Union
•
Bahrain National Hereditary Anaemia
•
Bahrain Society for Child Development
•
• •
•
Bahrain Society for Children with Behavioral & Communication Difficulties Child Care Home
Building and furnishing the Friendship Kindergarten for the Blind.
•
Children & Mother Welfare Society
•
•
Friendship Society For The Blind
Building and furnishing the NBB Home for Disabled Children and providing a bus with special equipment. Supplying 3 specially manufactured buses for Bahrain Mobility International and Muharraq Social Welfare Centre.
• Hope Institute for Handicapped •
Mother & Children Information Centre
•
Public Commission For The Protection Of Marine Environment & Wild Life
•
Sultan Bin A. Aziz Centre for Hearing & Speech
•
Bahrain Society for Child Development
•
The Saudi Bahraini Institute For The Blind
In addition, the Bank has made several smaller donations to deserving causes and voluntary organisations. Major Projects Major Projects financed, and contributions made, since the beginning of the Donations and Contributions Programme Health Services: • Building and equipping NBB Dair Health Centre. •
•
•
•
Financing and furnishing the NBB Arad Health Centre and Physiotherapy wing. Providing Salmaneya Medical Centre with two advanced general purpose X-rays, an ambulance, dialysis machines and a urology endoscopy system. New Eco Cardiogram machine for Shaikh Mohamed Bin Khalifa Cardiac Centre. Annual financial support to Shaikh Mohamed Bin Khalifa Cardiac Centre at the Bahrain Defence Force hospital.
Social Welfare Schemes Building and furnishing the NBB Home for the Aged.
•
•
Annual financial support to all the facilities built by the Bank.
Educational facilities Construction of Administration and Registration buildings for the University of Bahrain
• •
Building and furnishing the NBB Public Library in Muharraq. Providing the University of Bahrain with “Horizon”, a fully automated library system and 2 PC laboratories, the E-learning centre in addition to annual financial support for many years.
•
Contribution to the new Shaikh Isa Library
•
Installation of air conditioning in all Government primary schools.
•
•
Annual financial support to the University Student Fund.
•
Computerised library system for Women and Children Information Centre.
38 I NBB ANNUAL REPORT 2009 an icon of trust
NBB ANNUAL REPORT 2009 I 39 AN ICON OF TRUST
Our innovative and dynamic approach and steadfast business policies have helped us through a difficult year and lead us on a pathway to future growth
40 I NBB ANNUAL REPORT 2009 financial review
financial review
FINANCIAL PERFORMANCE Overview The Bank achieved strong growth in earnings despite a challenging and difficult external business environment in the aftermath of the global financial crisis. Customer relationships were strengthened and as opportunities arose the Bank improved its business without compromising on risk criteria or pricing in line with the long-term objective of achieving a balanced relation between risk and returns. While the Bank generated increased earnings from continued growth in core banking businesses, it recorded some mark to market losses on managed funds and on its own initiative increased the level of general provision for impairment in loans and advances taking in to consideration the overall external credit environment and adopting a conservative and prudent approach to banking. As a result, the Bank achieved a Net Profit of BD 42.82 million for 2009, compared BD 34.74 million for 2008, an increase of 23.3 per cent. At year-end 2009, the Bank’s Total Assets stood at BD 2,117.75 million, compared to BD 2,034.10 million at year-end 2008. The growth in Total Assets was attributable mainly to a growth of 5.1 per cent in Loans and Advances portfolio and a strong growth of 21.0 per cent in Investments while the Bank deployed additional funds in Treasury bills and reduced interbank placements. Deposits was marginally lower by 2.6 per cent as the Bank made a conscious decision not to engage in price war with competitors for customer deposits as the Bank continues to have a comfortable liquidity position and a strong deposits base.
Key performance indicators remained strong with Return on Average Equity improving to 18.67 per cent cent for the year 2009 from 14.88 per cent for the year 2008. Also Earnings Per Share improved from 45 fils in 2008 to 55 fils for 2009. The Bank continues to have a strong capital adequacy ratio of 22.3 per cent calculated in accordance with Basel 2 and Central Bank of Bahrain guidelines. Liquidity continues to be comfortable with liquid assets (Cash and balances with central banks, Treasury bills and Placement with financial institutions) representing 21.4 per cent of total assets. Net Interest Income Net Interest Income at BD 49.02 million for the year reflects an increase of 6.4 per cent over 2008. The main drivers for the increase in Net Interest Income are growth in Loans and Investments despite lower yield on surplus liquidity deployed in money market and investments in a low interest rate environment. As a result of better balance sheet management and tactical gapping strategies initiated by the Bank’s Treasury & Investment group, the net interest margin, on average total assets, improved from 2.34 per cent in 2008 to 2.36 per cent in 2009. Other Income Total Other Income for the year was BD 23.26 million compared to BD 16.60 million for 2008, an increase of 40.1 per cent. This is on account of strong growth in business volumes from core banking activities, increase in foreign exchange activities and lower mark to market losses on managed funds.
NBB ANNUAL REPORT 2009 I 41 AN ICON OF TRUST
49.02
09
46.06
08
42.17
07
38.59
06 05
33.81
net interest margin BD Millions
The Bank’s continued emphasis on cost management and productivity improvements while generating higher operating income resulted in the operating efficiency ratio improving from 38.32 per cent in 2008 to 35.67 per cent in 2009. Income stream of fees and commissions was in line with the expansion in business banking, retail lending and cards business activities. Increased volume of foreign exchange business due to increased deal flows and offering of structured solutions to the specific needs of our clients resulted in exchange income increasing by 14.8 per cent to BD 4.43 million for 2009. Details of Other Income, with comparative figures for the previous year, are set out in Note 23 to the Financial Statements. Operating Expenses Operating Expenses at BD 25.78 million increased by 7.4 per cent cent over the previous year. Staff Expenses increased from BD 17.86 million in 2008 to BD 18.97 million in 2009 mainly on account of annual salary reviews, performance related rewards and addition to the Bank’s human resources in line with the expansion in business. Other Operating Expenses increased marginally to BD 6.81 million in 2009 from BD 6.15 million in 2008 associated with system upgrades to improve operational efficiency and enhance customer service. The Bank’s continued emphasis on cost management
and productivity improvements while generating higher operating income resulted in the operating efficiency ratio improving from 38.32 per cent in 2008 to 35.67 per cent in 2009. Provisions In accordance with International Accounting Standard 39, the Bank follows a model-based approach for assessing the adequacy of provisions for loan losses. Provisions for individually significant credit exposures are determined by discounting expected future cash flows. Impairment and uncollectability is also measured on a portfolio basis, for a homogenous group of loans and advances not individually identified as impaired, on the basis of estimates of incurred losses inherent within the loans and advances portfolio that have not been specifically identified at the balance sheet date. The estimates are based on internal risk ratings, historical default rates adjusted considering current observable data, rating migrations, loss severity, macroeconomic outlook and other relevant factors that reflect the effect of current conditions on the loan book. Although there was no deterioration in the Bank’s credit portfolio quality and concerted efforts were directed on recovering non-performing loans, the
42 I NBB ANNUAL REPORT 2009 financial review
financial review
6%
2%
9% MIddle East Europe USA
Bank on its own initiative decided to make a general provision of BD 3.50 million during the year 2009 in line with the Bank’s prudent and conservative approach to risk considering the difficulties in the overall external credit environment and our emphasis on building up a strong balance sheet.
Others
83%
geographical distributions of assets
8% 31%
14%
Non-performing loans decreased to BD 7.42 million, at the end of 2009 compared to BD 8.65 million at the end of 2008. The low levels of non-performing loans compared to the loan portfolio, is the result of the Bank’s conservative credit risk policies, the effectiveness of credit risk management processes and the success of our recovery efforts. At year-end, the provision coverage ratio stands at 199.9 per cent. Details of the Bank’s non-performing loans, provisions and movements therein during the year are detailed in Note 7 to the Financial Statements
Government Manufacturing / Trading 8%
Banks / Financial Inst. Construction 8% 31%
Personal Others
sector wise distribution of assets Per cent
Assets Total Assets at BD 2,117.75 million, reflecting an increase of 4.1 per cent over 2008, is attributable mainly to a growth of BD 55.71 million in the Loans and Advances portfolio and BD 83.94 in Investments as the Bank diversified its funds deployment. At year-end 2009, Loans and Advances as a percentage of Total Assets was 54.4 per cent as compared to 53.9 per cent at
the end of year 2008. The proportion of Placements with Banks & Financial Institutions and Investment securities to Total Assets were 11.6 per cent 22.8 per cent respectively. The increase in the loan book was mainly due to enhanced participation in the domestic market and broadening of business relationships in Bahrain in line with the Bank’s strategy of focusing on the active sectors of the domestic economy. Loans and Advances portfolio is concentrated principally in Bahrain and other GCC countries. Based on contractual maturity terms, 42.5 per cent of the current portfolio matures within one year and 75.3 per cent is due to mature within 3 years of the balance sheet date. At the year-end, the Bank’s Investment portfolio of BD 483.12 million (2008: BD 399.18 million) consisted of Available-for-Sale securities that comprised debt and equity securities while the Fair Value Through Profit and Loss investments comprised mutual funds and capital protected notes. A substantial portion i.e. 95.7 per cent of the total debt portfolio is in investment grade securities. Notes 28 and 29 to the Financial Statements provide details of the distribution of Total Assets by geographical region and industry.
NBB ANNUAL REPORT 2009 I 43 AN ICON OF TRUST
The Bank’s capital adequacy ratio at the balance sheet date was 22.3 per cent which is well above the Basel requirement of 8 per cent.
The Bank has a stable and diversified customer base and the core deposits continue to grow.
2,117.75
09
2,034.10
08
1,903.71
07
Liabilities Customer Deposits was marginally lower by 2.6 per cent to BD 1,480.39 million as at year-end 2009, from BD 1,519.25 million at the end of 2008. The Bank has a stable and diversified customer base and the core deposits continue to grow. Borrowings under Repurchase Agreements and Due to Banks and Financial Institutions stood at BD 385.40 million at year-end 2009, compared to BD 285.78 million as at year-end 2008. Customers Deposits continue to be a major source of funding with the ratio of Customers’ Deposits to Total Liabilities at 78.9 per cent at year-end 2009.
1,676.38
06
1,498.10
05
Total Assets BD Millions
Capital Strength Shareholders’ Equity, inclusive of proposed appropriations, reflected a balance of BD 241.37 million. At the year-end, Shareholders’ Equity as a percentage of Total Assets was 11.4 per cent.
The Bank’s capital adequacy ratio at the balance sheet date was 22.3 per cent with Tier 1 ratio at 20.4 per cent. The ratios have been calculated in accordance with the Basel 2 and Central Bank of Bahrain guidelines. The Bank’s capital adequacy ratio, encompassing credit, operational and market risk, is well above the Basel requirement of 8 per cent and also comfortably above the minimum level of 12 per cent set by the Central Bank of Bahrain. Note 40 to the Financial Statements and Basel 2 – Pillar III disclosures provide further details on capital adequacy. The main factors that contribute to the Bank’s strong capital adequacy ratio are high capital base, low levels of non performing assets that are fully provided for and the low risk profile of our on-balance sheet and off-balance sheet exposures which includes significant exposures to low risk weighted assets namely governments, public sector undertakings, banks and financial institutions.
44 I NBB ANNUAL REPORT 2009 risk management
risk management
reveendra krishnan Executive Assistant General Manager Credit Policy & Risk Management
Risk management at NBB has always been conservative and proactive with the objective of achieving a balanced relation between risk appetite and expected returns.
Risk Management In a world characterised by high integration of global financial markets, innovation in financial products, extensive use of derivatives, market volatility and large scale regulatory changes, the management of risk has become a key issue for every bank. NBB has over the years, developed risk management into a core competence and remains well positioned to meet these challenges. The Bank evaluates risk in terms of the impact on income and asset values. The evaluation reflects the Bank’s assessment of the potential impact on its business on account of changes in political, economic and market conditions and in the credit worthiness of its clients. Risk management at NBB has always been conservative and proactive with the objective of achieving a balanced relation between risk appetite and expected returns.
authorises appropriate credit and market risk policies as well as suitable operational guidelines based on the recommendation of Management. Approval authorities are delegated to different functionaries in the hierarchy depending on the amount, type of risk and collateral security. The Bank has established committees that decide on all risk issues and authorities are properly structured.
Risk arises from the Bank’s lending and investment activities as carried out by the various units. Corporate Banking is responsible for lending to large corporate entities in Bahrain. Regional Banking handles credit facilities to leading corporates in other countries of the GCC. The Trade Finance and Financial Institutions unit is involved in identifying and financing trade flows between the GCC region and the rest of the world. Commercial Banking’s responsibilities cover the borrowing requirements of the small to medium-sized companies based in Bahrain. Personal Banking controls the lending portfolio to individuals in Bahrain and other retail services. Treasury and Investments is responsible for all the treasury and capital market related activities of the Bank, and the Abu Dhabi and Riyadh Branches serve the UAE and Saudi Arabian markets respectively.
The Credit Policy and Risk Management (CPRM) division of the Bank provides the necessary support to Senior Management and the business units in all areas of risk management. This division functions independently of the business units to analyse risks and put forth its recommendations prior to approval by the delegated authorities. The Bank promotes healthy debate among the business units and CPRM to achieve an optimum balance between risk and return.
The overall authority for risk management in the Bank is vested in the Board of Directors. The Board
Integral to the Bank’s risk management system is the internal audit department that plays a role in evaluating the independence and overall effectiveness of the Bank’s risk management functions. A periodic review of risk assets is conducted by the department to confirm that established policies, procedures and approved terms are complied with, and to review asset quality and highlight areas of concern so that corrective action can be taken in time.
The Bank’s risk management process encompasses the various dimensions of risk as follows: CREDIT RISK Credit Risk represents the potential financial loss as a consequence of a customer’s inability to honour the terms and conditions of the credit facility. Such risk is measured with respect to counterparties for both onbalance sheet assets and off-balance sheet items.
NBB ANNUAL REPORT 2009 I 45 AN ICON OF TRUST
NBB has developed risk management into a core competence and remains well positioned to meet these challenges
12% 6% Treasury Bills
5%
Placements Loans and Advances Investment Securities
23% 54%
Other Assets
Composition of total assets Per cent
18%
Deposits from banks and other financial institutions & borrowings under repurchase agreements
11%
Customers’ deposits
1% 70%
Other liabilities Equity
Composition of total liability and equity Per cent
The Bank has well laid out procedures, not only to appraise but also regularly monitor credit risk. Regular reviews are carried out for each account and risks identified are mitigated in a number of ways which include obtention of collateral, counter-guarantees from shareholders and/or third parties. Adequate margins are maintained on the collateral to provide a cushion against adverse movement in the market price of collateral. In addition to rigorous credit analysis, the terms and conditions of all credit facilities are strictly implemented by the Credit Administration Department. An internal grading system and review process ensures prompt identification of any deterioration in credit risk and consequent implementation of corrective action. The Bank’s internal ratings are based on a 10-point scale which takes into account the financial strength of a borrower as well as qualitative aspects to arrive at a comprehensive snapshot of the risk of default associated with the borrower. Ratings are further sub-divided into categories which reflect estimates of the potential maximum loss in an event of default. Risk Ratings assigned to each borrower are reviewed at least on an annual basis. Regular monitoring of the portfolio enables the Bank to identify accounts which witness a deterioration in risk profile. The Bank follows stringent criteria in setting credit limits for countries and international financial institutions. Prudent norms have also been implemented to govern the Bank’s investment activities. Not only are regular appraisals conducted to judge the credit worthiness of the counterparty but day-to-day monitoring of financial developments across the globe ensures timely identification of any event affecting the risk profile.
The Bank enters into derivative contracts in the normal course of business to meet customer requirements and to manage its own exposure to fluctuations in interest and exchange rates. The credit risk arising from a derivative contract is calculated by taking the cost of replacing the contract, where its mark to market value is positive, together with an estimate for the potential future change in the value of the contract. The credit risk on contracts with a negative mark to market value is restricted to the potential future change in their market value. Details of derivative contracts are contained in Note 16 to the Financial Statements. The Bank has systems and procedures in place to generate alerts in case of past dues in any account. A stringent classification process is followed for all accounts with past dues of over 90 days. The Bank applies rigorous standards for provisioning and monitoring of non- performing loans. Level of provisions required is determined based on the security position, repayment source, discounted values of cash flows, etc. Adequate provisions are carried to guard against inherent risks in the portfolio. At year-end 2009, the Bank’s provisions exceeded the entire non-performing portfolio. LEGAL RISK Legal risk management systems supplement the above credit procedures and guard against the inability of the Bank to enforce claims against counterparties and borrowers. In-house expertise together with firms of international repute retained by the Bank ensures that the facility documentation encompasses eventualities that might affect the implementation of stipulated terms and conditions.
46 I NBB ANNUAL REPORT 2009 risk management
risk management
The Bank’s ability to maintain a stable liquidity profile is primarily on account of its success in retaining and growing its customer deposit base.
LIQUIDITY RISK Liquidity Risk is classified as the potential inability of a bank to meet its financial obligations on account of a maturity mismatch between assets and liabilities. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Bank. The asset/liabilities management policies of the Bank define the proportion of liquid assets to total assets with the aim of minimising liquidity risk.
5% 10% 43% AAA AA A 32%
BBB Non-Rated 10%
investment securities by rating Per cent
Up to 3 Months
65
(135) 3 to 6 Months
191
(125) 187
6 to 12 Months
(1) 419
1 to 5 Years
The Bank has maintained adequate investments in liquid assets, such as inter-bank placements and treasury bills. In addition, the Bank also relies on trading assets and other marketable securities to provide for secondary sources of liquidity. The ratio of liquid assets to total assets as at 31 December 2009 was 21.4 per cent. The high level of liquidity enables the Bank to meet fluctuating customer borrowings and drawdowns comfortably.
2009, 31.4 per cent of assets were scheduled to mature within three months. Substantial investment securities with contractual maturities of more than three months can also be readily liquidated. Considering the effective maturities of deposits based on retention history and in view of the ready availability of liquid investments, the Bank is able to ensure that sufficient liquidity is always available. Proper contingency plans exist and can be implemented on a timely basis to minimise the risk associated with dramatic changes in market conditions. The Asset Liability Committee (ALCO) chaired by the Chief Executive Officer, reviews the Liquidity Gap Profile and the Liquidity scenario and addresses strategic issues concerning liquidity.
The Bank’s ability to maintain a stable liquidity profile is primarily on account of its success in retaining and growing its customer deposit base. The marketing strategy of the Bank has ensured a balanced mix of demand and time deposits. As a result of its successful deposit and asset-liability management strategies, the Bank is a net lender in the interbank market and is not dependent on volatile short-term borrowings.
INTEREST RATE RISK Interest Rate Risk is measured by the extent to which changes in the market interest rates impact margins, net interest income and the economic value of the Bank’s equity. The Bank’s asset and liability management process is utilised to manage interest rate risk through the structuring of on-balance sheet and off-balance sheet portfolios. Net interest income will be affected as a result of volatility in interest rates to the extent that the repricing structure of interest bearing assets differs from that of liabilities. The Bank’s goal is to achieve stable earnings growth through active management of the assets and liabilities mix while selectively positioning itself to benefit from nearterm changes in interest rate levels.
The Treasurer closely monitors the maturity profile of assets and liabilities so that adequate liquidity is maintained at all times. The asset and liability maturity profile by individual asset and liability category based on contractual repayment arrangements is detailed in Note 34 to the Financial Statements. As at 31 December
The Bank uses interest rate gap analysis to measure the interest rate sensitivity of its annual earnings due to repricing mismatches between rate sensitive assets, liabilities and derivatives’ positions. The interest rate sensitivity graph illustrates the Bank’s repricing gap structure as at 31 December 2009. A negative gap
484 506
Over 5 Years
563
2009
2008
cumulative interest rate sensitive gap BD Millions
NBB ANNUAL REPORT 2009 I 47 AN ICON OF TRUST
7% 9% 2% 4%
Manufacturing Construction Trade Personal Others
78%
sector profile of non-performing loans and advances Per cent
09 08 07 06 05
7.42 8.65 8.89 8.56 8.93
non-performing loans and advances BD Millions
denotes liability sensitivity and a positive gap denotes asset sensitivity. Note 31 to the Financial Statements gives details of the Bank’s exposure to interest rate risk. Duration analysis is used to measure the interest rate sensitivity of the fixed income portfolio. Duration of the portfolio is governed by economic forecasts, expected direction of interest rates and spreads. Modified Duration gives the percentage change in value of the portfolio following a 1% change in yield. Modified Duration of the Bank’s fixed income portfolio was 1.31 per cent on 31 December 2009, which implies that a 1% parallel upward shift in the yield curve could result in a drop in the value of the portfolio by BD 4.79 Million. Interest rate swaps and forward rate agreements are used to manage the interest rate risk. The Treasurer is primarily responsible for managing the interest rate risk. Reports on overall positions and risks are submitted to Senior Management for review and positions are adjusted if deemed necessary. In addition, ALCO regularly reviews the interest rate sensitivity profile and its impact on earnings. Strategic decisions are made with the objective of producing a strong and stable interest income over time. MARKET RISK Market Risk is classified as the risk to the value of the trading portfolio arising from changes in interest rates, foreign exchange, commodities and equity prices. The Bank’s trading activities are governed by conservative policies, by adherence to limits set annually and by regular reviews. Quality and rating are the main criteria in selecting a trading asset. The Bank uses the Valueat-Risk (VaR) measure to estimate the exposure of the trading portfolio and total currency book to market risk. The measure determines the BD value of the price sensitivity of market-traded instruments to market risk factors for a certain degree of confidence over a
pre-defined time horizon. Based on the approval of the Central Bank of Bahrain in 1999, the Bank has been computing its market risk using an internal model based on RiskMetrics methodology. The value quantifies the maximum potential change in the future value of the portfolio due to the sensitivity of the positions to the volatility of and correlation between the risk factors such as interest rates, foreign exchange rates and equity prices. Daily reports in this regard are submitted to Senior Management for review and decision making purposes. The Bank uses exponentially weighted RiskMetrics datasets on volatilities and correlations in estimating the VaR for its trading portfolio. A 99 per cent level of confidence is used to determine the maximum potential loss in the portfolio over the relevant time horizon. It implies 1 per cent likelihood of the loss exceeding the VaR limit. The VaR for the trading portfolio calculated as at 31 December 2009 was BD 1.72 Million for a 99 per cent confidence level and a 10 day time horizon. The average VaR for the last 60 days of 2009 was BD 1.92 Million. The Value-at-Risk at month end chart shows a monthly trend of VaR from January to December 2009. During this period, the maximum VaR was BD 2.27 Million on 29 October 2009 while the minimum VaR was BD 1.45 Million on 11 March 2009 The Value-at-Risk back-testing chart shows the Bank’s 1-day VaR compared to its daily trading profit and loss from January to December 2009. The Bank uses backtesting to validate the VaR model. VaR is compared
48 I NBB ANNUAL REPORT 2009 risk management
risk management
with daily profits and losses incurred on the trading portfolio. This assists in identifying any exceptions or losses that are not covered by the VaR measure. Back-testing results confirm that the internal model adequately captures risk within the Bank’s trading portfolio
Dec 09 Nov 09 Oct 09 Sep 09 Aug 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 0
500
1000
1500
2000
OPERATIONAL RISK Operational Risk is the risk of monetary loss on account of human error, fraud, systems failures or the failure to record transactions. The Bank has well laid out procedures and systems that set out the methodologies for carrying out specific tasks. These systems and procedures are constantly reviewed and revised to address potential risks.
2500
value-at-risk at month end - 2009 BD ‘000
400 200 0 -200 -400 -600 -800 Jan
Feb
Mar
Back testing P/L
Apr
May
Jun
Jul
Aug
Sep
Oct
1 Day VaR
value-at-risk backtesting january-december 2009 BD ‘000
Nov
Dec
During 2009, the Bank set up an Operational Risk Management department within the Credit Policy and Risk Management Division to independently monitor and manage all aspects of operational risk on a bank wide basis. The Bank also established a dedicated Operational Risk Management Committee to supervise, monitor and review operational risk issues and ensure that adequate mitgants are developed and implemented for all operational risk issues. This Committee is assisted by the Operational Risk Management department. The scope of the Bank’s internal audit department encompasses audits and reviews of all business units,
support services and branches. The internal audit process focuses primarily on assessing risks and controls and ensuring compliance with established policies, procedures and delegated authorities. New products and services are reviewed by the internal audit department and assessed for operational risks prior to their implementation. The internal audit department is operationally independent and reports significant internal control deficiencies to the Audit Committee. The Bank has a well-established off-site computer back-up centre that provides full system support to the Bank’s operations in case of an emergency in the information technology systems. The computer backup centre is regularly tested to ensure its readiness for a seamless switchover in case of any emergency. The necessary precautions have been put in place to protect the Bank from money laundering activities. All the aspects of risk mentioned above are reviewed regularly at each meeting of the Board of Directors and the Executive Committee, based on a comprehensive risk report. This integrated approach to risk management also serves the Bank in achieving its objective of protecting the interests of shareholders and customers.
NBB ANNUAL REPORT 2009 I 49 AN ICON OF TRUST
Report of Auditors to the shareholders REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of National Bank of Bahrain BSC (”the Bank”) which comprise the statement of financial position as at 31 December 2009, and the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
RESPONSIBILITY OF THE DIRECTORS FOR THE FINANCIAL STATEMENTS The Directors of the Bank are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, 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 financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the 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 financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December 2009, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS In addition, in our opinion, the Bank has maintained proper accounting records and the financial statements are in agreement therewith. We have reviewed the accompanying Board of Directors’ Report and confirm that the information contained therein is consistent with the financial statements. We are not aware of any violations of the Bahrain Commercial Companies Law 2001, the Central Bank of Bahrain and Financial Institutions Law 2006, terms of the Bank’s license or it’s memorandum and articles of association having occurred during the year that might have had a material effect on the business of the Bank or on its financial position. Satisfactory explanations and information have been provided to us by the management in response to all our requests.
21 January 2010 Kingdom of Bahrain
50 I NBB ANNUAL REPORT 2009 FINANCIAL STATEMENT
statement of financial position As at 31 December 2009
Note
2009 BD millions US$ millions
2008 BD millions US$ millions
Assets Cash and balances at central banks Treasury bills 4 Placements with banks and other financial institutions 5 Trading securities 6 Loans and advances 7 Investment securities 8 Accrued interest receivable and other assets 9 Property and equipment 18 Total assets
81.21 124.93 246.09
215.99 332.25 654.50
82.40 16.58 410.48
219.14 44.09 1,091.71
1.64 1,151.42 483.12 12.48 16.86 2,117.75
4.35 3,062.30 1,284.90 33.19 44.84 5,632.32
0.38 1,095.71 399.18 12.51 16.86 2,034.10
1.02 2,914.13 1,061.64 33.27 44.84 5,409.84
Liabilities 10 Due to banks and other financial institutions Borrowings under repurchase agreements 11 Customers’ deposits 12 Accrued interest payable and other liabilities 13 Total liabilities
259.82 125.58 1,480.39 10.59 1,876.38
691.00 334.01 3,937.21 28.16 4,990.38
253.96 31.82 1,519.25 11.68 1,816.71
675.42 84.64 4,040.57 31.06 4,831.69
Equity 19 Share capital Statutory reserve 20 General reserve 20 Reserves and retained earnings 20 Total equity
77.76 38.88 32.40 92.33 241.37
206.81 103.40 86.17 245.56 641.94
77.76 38.88 32.40 68.35 217.39
206.81 103.40 86.17 181.77 578.15
Total liabilities and equity
2,117.75
5,632.32
2,034.10
5,409.84
Farouk Yousuf Khalil Almoayyed Deputy Chairman
Abdul Razak A. Hassan Al Qassim Chief Executive Officer & Director
The Board of Directors approved the financial statements consisting of pages 50 to 91 on 21 January 2010. The accompanying notes 1 to 42 are an integral part of these financial statements.
NBB ANNUAL REPORT 2009 I 51 AN ICON OF TRUST
income statement For the year ended 31 December 2009
Note
22 Interest income Interest expense 22 Net interest income Other income 23 Operating Income
2009 BD millions US$ millions
2008 BD millions US$ millions
66.20
176.06
84.41
224.49
(17.18)
(45.70)
(38.35)
(102.00) 122.49
49.02
130.36
46.06
23.26
61.87
16.60
44.16
72.28
192.23
62.66
166.65
24
(18.97)
(50.45)
(17.86)
(47.49)
(6.81)
(18.10)
(6.15)
(16.37)
(25.78)
(68.55)
(24.01)
(63.86)
Profit before provisions
46.50
123.68
38.65
102.79
Impairment provisions for loans and advances 7 Impairment provisions for investments Profit for the year
(3.51)
(9.34)
1.30
3.46
(0.17) 42.82
(0.45) 113.89
(5.21) 34.74
(13.86) 92.39
55.1 fils
15 cents
44.7 fils
12 cents
Staff expenses Other expenses Operating expenses
Basic and diluted earnings per share
Farouk Yousuf Khalil Almoayyed Deputy Chairman
37
Abdul Razak A. Hassan Al Qassim Chief Executive Officer & Director
The Board of Directors approved the financial statements consisting of pages 50 to 91 on 21 January 2010. The accompanying notes 1 to 42 are an integral part of these financial statements.
52 I NBB ANNUAL REPORT 2009 financial statement
statement of comprehensive income For the year ended 31 December 2009
2009 BD millions US$ millions
Profit for the year Other comprehensive income: Revaluation reserve (available-for-sale securities): Net change in fair value Net amount transferred to profit or loss Other comprehensive income for the year Total Comprehensive income for the year
The accompanying notes 1 to 42 are an integral part of these financial statements.
2008 BD millions US$ millions
42.82
113.89
34.74
92.39
8.45
22.47
(37.58)
(99.95)
(2.18) 6.27 49.09
(5.80) 16.67 130.56
(2.00) (39.58) (4.84)
(5.32) (105.27) (12.88)
NBB ANNUAL REPORT 2009 I 53 AN ICON OF TRUST
statement of changes in equity For the year ended 31 December 2009
For the year ended 31 December 2009
Donation
Total BD
US$
earnings* Millions
Millions
Share
Statutory
General
In BD Millions
Note
capital
reserve
reserve
Revaluation and charity Retained reserve
reserve
At 1 January 2009
77.76
38.88
32.40
13.15
6.95
48.25
217.39
578.15
Dividend at 30%
–
–
–
–
–
(23.33)
(23.33)
(62.05)
Donations and charity
–
–
–
–
1.74
(1.74)
2008 appropriations (approved by the shareholders) –
–
Directors’ remuneration
–
–
–
–
–
(0.35)
(0.35)
(0.93)
Balance after 2008 appropriations
77.76
38.88
32.40
13.15
8.69
22.83
193.71
515.17
–
–
–
–
–
42.82
42.82
113.89
Net change in fair value
–
–
–
8.45
–
–
8.45
22.47
Net amount transferred to profit or loss
–
–
–
(2.18)
–
–
(2.18)
(5.80)
–
–
–
6.27
–
42.82
49.09
130.56
Total comprehensive income for the year: Profit for the year Other comprehensive income: Revaluation reserve (available-for sale securities):
Total comprehensive income to the year Utilization of donation and charity reserve At 31 December 2009
19-21
–
–
–
–
(1.43)
–
(1.43)
(3.79)
77.76
38.88
32.40
19.42
7.26
65.65
241.37
641.94
* The appropriations for the year 2009 will be submitted for approval by the Board of Directors to the shareholders at the annual general meeting. These appropriations include BD 27.22 million for cash dividend at 35% (2008: 30%), BD 2.14 million for donations and contributions and BD 0.35 million for directors’ remuneration.
The accompanying notes 1 to 42 are an integral part of these financial statements.
54 I NBB ANNUAL REPORT 2009 financial statement
statement of changes in equity For the year ended 31 December 2009
For the year ended 31 December 2008 Share Statutory
General
In BD Millions
Donation
Revaluation and charity Retained
Total BD
US$
Note
capital
reserve
reserve
reserve
reserve
earnings
Millions
Millions
At 1 January 2008
64.80
32.40
32.40
53.30
5.86
60.73
249.49
663.54
Dividend at 40%
–
–
–
–
–
(25.92)
(25.92)
(68.94)
Donations and charity
_
_
_
_
2.08
(2.08)
Directors’ remuneration
–
–
–
–
–
(0.35)
(0.35)
(0.93)
Balance after 2007 appropriations
64.80
32.40
32.40
53.30
7.94
32.38
223.22
593.67
–
–
–
–
–
34.74
34.74
92.39
Net change in fair value
–
–
–
(37.58)
–
–
(37.58)
(99.95)
Net amount transferred to profit or loss
2007 appropriations (approved by the shareholders) –
–
Total comprehensive income for the year Profit for the year Other comprehensive income: Revaluation reserve (available-for sale securities): –
–
–
(2.00)
–
–
(2.00)
(5.32)
Total comprehensive income to the year
–
–
–
(39.58)
–
34.74
(4.84)
(12.88)
One for five bonus issue
12.96
–
(12.96)
–
–
–
–
–
–
–
19.44
–
–
–
–
statutory reserve
–
6.48
(6.48)
–
–
–
Utilization of donation and charity reserve
–
–
–
–
(0.99)
–
Transfer from retained earnings to general reserve
(19.44)
Transfer from general reserve to
Transfers At 31 December 2008
19-21
– (0.99)
– (2.64)
–
–
–
(0.57)
–
0.57
–
–
77.76
38.88
32.40
13.15
6.95
48.25
217.39
578.15
The accompanying notes 1 to 42 are an integral part of these financial statements.
NBB ANNUAL REPORT 2009 I 55 AN ICON OF TRUST
statement of cash flows For the year ended 31 December 2009
Note
2009 BD millions US$ millions
Cash flows from operating activities: Profit for the year Adjustments to reconcile net income to net cash from operating activities : Depreciation Impairment provisions for loans and advances 7 Impairment provisions for investments
2008 BD millions US$ millions
42.82
113.89
34.74
92.39
2.05 3.51 0.17 48.55
5.45 9.34 0.45 129.13
1.82 (1.30) 5.21 40.47
4.84 (3.46) 13.86 107.63
Changes in operating assets and liabilities Balances with central banks ( mandatory cash reserves) Treasury bills Placement with banks and other financial institutions Trading securities Loans and advances Investments at fair value through profit or loss Available-for-sale securities Accrued interest receivable and other assets Due to banks and other financial institutions Borrowings under repurchase agreements Customers’ deposits Accrued interest payable and other liabilities Net cash used for / from operating activities
8.62 (3.17) (38.65) (1.26) (59.22) 18.57 (96.91) 0.54 5.86 93.77 (38.86) (1.09) (63.25)
22.91 (8.43) (102.79) (3.35) (157.50) 48.38 (257.74) 1.42 15.58 249.39 (103.35) (2.91) (169.26)
(24.27) (5.81)
(64.55) (15.45)
144.14
383.35
(0.38) (148.44) 9.52 (105.47) 9.65 (48.38) 13.68 199.30 (2.12) 81.89
(1.01) (394.79) 25.32 (280.47) 25.66 (128.67) 36.38 530.05 (5.64) 217.81
Cash flows from investing activities: Purchase of property and equipment, net Net cash used for investing activities
(2.05) (2.05)
(5.45) (5.45)
(1.69) (1.69)
(4.49) (4.49)
Cash flows from financing activities: Dividends Directors’ remuneration Donations and charities paid during the year Net cash used for financing activities Net (decrease) / increase in cash and cash equivalents
(23.33) (0.35) (1.43) (25.11) (90.41)
(62.05) (0.93) (3.80) (66.78) (241.49)
(25.92) (0.35) (0.99) (27.26) 52.94
(68.94) (0.93) (2.63) (72.50) 140.82
14 14
412.93 322.52
1,098.24 856.75
359.99 412.93
957.42 1,098.24
Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December
The accompanying notes 1 to 42 are an integral part of these financial statements.
56 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
1. ACTIVITIES National Bank of Bahrain BSC, a public shareholding company, was incorporated in the Kingdom of Bahrain by an Amiri decree in January 1957. The Bank operates in Bahrain under a banking licence issued under Rule Book Volume 1 by the Central Bank of Bahrain. The overseas branches in Abu Dhabi ( United Arab Emirates) and Riyadh (Kingdom of Saudi Arabia) operate under the laws of those respective countries. The Bank is principally engaged in providing retail and wholesale commercial banking services, treasury and investment activities, and investment advisory services. The Bank’s registered address is National Bank of Bahrain BSC, P.O.Box 106, NBB Tower, Government Avenue, Manama, Kingdom of Bahrain. The shares of the Bank are listed on the Bahrain Stock Exchange, Manama, Kingdom of Bahrain. 2. SIGNIFICANT ACCOUNTING POLICIES a. Statement of Compliance The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), the requirements of the Bahrain Commercial Companies Law 2001 and the Central Bank of Bahrain and Financial Institutions Law 2006. b. Basis of preparation The financial statements of the Bank are presented in Bahraini Dinar (BHD) being the functional currency of the Bank. The US Dollar (US$) amounts are presented for the convenience of the reader. The Bahraini Dinar has been translated to US dollar at the rate of BHD 0.376 to US$ 1 (2008: BHD 0.376 to US$ 1). The financial statements have been prepared on the historical cost convention except for financial instruments at fair value through profit or loss, available for sale securities and derivative financial instruments which are measured at fair value. The principal accounting policies applied in the preparation of these financial statements have been consistently applied to all the years presented except as described in note 2.b.i) below: i) Standards, amendments and interpretations effective on or after 1 January 2009 The following standards, amendments and interpretations, which became effective in 2009 are relevant to the Bank. IAS 1 (revised) - Presentation of Financial Statements Revised IAS 1- Presentation of Financial Statements (2007) became effective as of 1 January 2009. As a result, the Bank presents in the statement of changes in equity all owners’ changes in equity, whereas all non-owners’ changes in equity are presented in the statement of comprehensive income. Total comprehensive income may be presented in either: •
•
a single statement of comprehensive income (effectively combining both the income statement and all non-owners’ changes in equity in a single statement), or in an income statement and a separate statement of comprehensive income.
The Bank has opted to present the total comprehensive income in two separate statements - a statement of income and a separate statement of comprehensive income. In accordance with the transitional requirements of the Standard, the Bank has provided full comparative information. The adoption of the amendment results in additional disclosures but does not have an impact on the financial position or the comprehensive income of the Bank. Amendments to IFRS 7 - Financial instruments disclosures The IASB published amendments to IFRS 7 in March 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. The adoption of the amendment results in additional disclosures but does not have an impact on the financial position or the comprehensive income of the Bank.
NBB ANNUAL REPORT 2009 I 57 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
IFRS 8 - Determination and presentation of operating segments IFRS 8 - Determination and presentation of operating segments became effective as of 1 January 2009. The Bank’s operating segments for external reporting is based on the information that is internally provided to the Chief Executive Officer, who is the Bank’s chief operating decision maker. Previously, operating segments were determined and presented in accordance with IAS 14 Segment Reporting. There is no change in the determination of the operating segments arising from the adoption of this standard. Comparative segment information has been re-presented in conformity with the transitional requirement of IFRS 8 and only impacts presentation and disclosures aspects but does not have an impact on the financial position or the comprehensive income of the Bank. Improvements to IFRS (issued in May 2008) Improvements to IFRS issued in May 2008 contained numerous amendments to IFRS that the IASB considers non-urgent but necessary. ‘Improvements to IFRS’ comprise amendments that result in accounting changes to presentation, recognition or measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards. The amendments effective for annual periods beginning on or after 1 January 2009 have been adopted by the Bank and no material changes to accounting policies arose as a result of these amendments. ii) Standard and interpretations issued but not yet effective The following new / amended IFRS’s and interpretations have been issued which are not yet mandatory for adoption by the Bank. IFRS 9 Financial instruments part 1: Classification and measurement IFRS 9 was issued in November 2009 and is applicable for reporting period beginning on or after 1 January 2013. This standard replaces those parts of IAS 39 relating to the classification and measurement of financial assets and the key features are as follows: • Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and
those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. •
An instrument is subsequently measured at amortised cost only if it is a debt instrument and both the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and the asset’s contractual cash flows represent only payments of principal and interest (i.e. it has only ‘basic loan features’). All other debt instruments are to be measured at fair value through profit or loss.
•
All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognize unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.
The Bank is considering the implications of the standard, its impact and the timing of its adoption. IAS 24 Related Party Disclosures (revised 2009) The revised standard is applicable for reporting period beginning on or after 1 January 2011. The revised IAS 24 Related Party Disclosures amends the definition of a related party and modifies certain related party disclosure requirements for government-related entities. The revised standard will result in certain changes to disclosures on Related Parties. Amendments to IFRS 8 Operating Segments These amendments are applicable for reporting periods beginning on or after 1 January 2010 and clarify that segment information with respect to total assets is required only if such information is regularly reported to the chief operating decision maker. This amendment is not expected to result in any change in the Bank’s financial statements.
58 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
Improvements to IFRS (issued in April 2009) Improvements to IFRS issued in April 2009 contained numerous amendments to IFRS that the IASB considers non-urgent but necessary. ‘Improvements to IFRS’ comprise amendments that result in accounting changes to presentation, recognition or measurement purposes, as well as terminology or editorial amendments related to a variety of individual IFRS standards. The amendments are effective for annual periods beginning on or after 1 January 2010 with earlier adoption permitted. No material changes to accounting policies are expected as a result of these amendments. iii) Early adoption of standards The Bank did not early adopt new or amended standards in 2009. c. Foreign currencies Foreign currency transactions Foreign currency transactions are initially recorded at rates of exchange prevailing at the value date of the transactions. Monetary assets and liabilities in foreign currencies are translated to respective functional currencies at the rates of exchange prevailing at the balance sheet date. Realised and unrealised exchange gains and losses arising on such translation are included in Other Income. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in income statement, except for differences arising on the retranslation of available-for-sale equity instruments which are recognised directly in equity. Foreign Operations The assets and liabilities of the overseas branches are translated into Bahraini Dinar at the period-end rates of exchange. The income and expenses of these overseas branches are translated into Bahraini Dinar at average exchange rates for the period. Differences resulting from the translation of the opening net investment in these overseas branches are taken directly to equity. d. Use of estimates and management judgement The preparation of financial statements requires management to make estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The use of considerable judgement and estimates is principally required in the estimation of the amount and timing of future cash flows when determining the level of provisions required for individually significant non-performing loans and advances, estimating incurred losses that are inherent within the loans and advances portfolio, classification of financial assets and impairment losses for available-forsale financial assets. The Bank considers that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below cost. The determination of significant or prolonged decline requires judgment. In making this judgment, the Bank evaluates among other factors, the normal volatility in share price for the specific equity instrument and also the general market index. In addition, the Bank considers impairment when there is evidence of deterioration in the financial health of the investee company, industry and sector performance, changes in technology and operational and financing cash flows. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period or in the period of the revision and future period if the revision affects both current and future periods.
NBB ANNUAL REPORT 2009 I 59 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
e. Accounting for income and expenses i) Interest income and expenses are recognised in the income statement on an accrual basis using the effective interest rate method. The effective interest rate method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or liability or, where appropriate, a shorter period, to the net carrying amount of the financial asset or liability. The application of the effective interest rate method has the effect of recognising interest income and interest expense evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating the effective interest rate, cash flows are estimated taking into consideration all contractual terms of the financial instrument but excluding future credit losses. ii) Fees and commissions that are integral to the effective interest rate of a financial asset or liability are included in the calculation of the effective interest rate. Other fees and commissions are recognised as the related services are performed or received, and are included in fee and commission income. iii) Dividend income is recognised when the right to receive a dividend is established. iv) Short term employee benefit obligations are measured on an undiscounted basis and are expensed as the related services are provided. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The Bank has different retirement benefit schemes for its employees in Bahrain and its overseas branches, which are in accordance with the relevant labour laws of the respective countries. The retirement benefit scheme is in the nature of a ‘Defined Contribution Plan’ for employees who are covered by the social insurance pension schemes in Bahrain and the overseas branches. Other employees are entitled to leaving indemnities payable in accordance with the employment agreements or under the respective labour laws, based on length of service and final remuneration. This liability, which is unfunded, is considered as a ‘Defined Benifit Plan’ which represents a defined benefit scheme under IAS 19, and is provided for on the basis of the cost had all such employees left at the balance sheet date. The cost of providing these retirement benefits is charged to the income statement. The Bank has a voluntary employees saving scheme. The Bank and the employees contribute monthly on a fixed percentage of salaries basis to the scheme. The scheme is managed and administered by a board of trustees who are the employees of the Bank. The Bank’s share of contribution to this scheme is charged to the income statement. v) Other expenses are recognised in the period in which they are incurred on an accrual basis. f. Financial assets and liabilities i) Investments at fair value through profit or loss Investments at fair value through profit or loss: Investment securities which are acquired with an intent to hold for an indefinite period of time, and are managed, evaluated and reported internally on a fair value basis are designated as investments at fair value through profit or loss. These investments are carried at fair value based on quoted market prices, lead manager quotes or amounts derived from cash flow models as appropriate. Any unrealised gains and losses arising from changes in fair value are recognised in the income statement. Trading Securities: Securities which are either acquired for the purpose of generating a profit from short-term fluctuations in price or are included in a portfolio in which a pattern of short-term profit taking exists are categorised as trading securities. These securities are initially recognised at fair value and subsequently measured at fair value based on quoted market prices. Realised and unrealised gains and losses on trading securities are included in the income statement.
60 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
ii) Held To Maturity Investments Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank positively intends, and is able, to hold until maturity. Held to maturity investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest method, less any impairment losses. iii) Available-for-Sale Securities Securities which are non-derivative and which are intended to be held for an indefinite period of time and may be sold in response to needs for liquidity, changes in interest rates or concerns with respect to credit deterioration are categorised as available-for-sale securities. Available-for-sale securities which comprise both debt and equity securities are initially recognised at fair value, including transaction costs, and subsequently measured at fair value based on quoted market prices or amounts derived from cash flow models as appropriate. Unquoted and illiquid equity investments for which fair values cannot be reliably measured are stated at cost less provision for impairment. Unrealised gains and losses arising from changes in the fair values of available-for-sale securities are recognised in other comprehensive income. The cumulative fair value adjustments on available-for-sale securities which are sold or otherwise disposed of and which had previously been recognised in other comprehensive inome are transferred to the income statement. iv) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and advances are stated at amortised cost, adjusted for changes in fair value under any effective hedging arrangement, less provision for impairment. v) Customer deposits Customer deposits are initially recognised at their fair value and subsequently measured at their amortised cost using the effective interest method. vi) Financial guarantees Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specific debtor fails to make payment when due in accordance with the contractual terms. Financial guarantees are initially recognised at fair value (which is the premium received on issuance). The premium received is amortised over the life of the financial guarantee. The guarantee liability (the notional amount) is subsequently carried at the higher of this amortised amount and the present value of any expected payment (when a payment under the guarantee has become probable). The unamortised portion of the premium on these financial guarantees is included under other liabilities. vii) Derivative financial instruments All derivative financial instruments are initially recognised at cost, being the fair value at contract date, and are subsequently re-measured at their fair values. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in same income statement line as the hedged item. In the case of fair value hedges that meet the criteria for hedge accounting, any gain or loss arising from remeasuring the hedging instruments to fair value as well as the related changes in fair value of the item being hedged are recognised in Other Income. In the case of cash flow hedges that meet the criteria of hedge accounting, the portion of the gain or loss on that hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion, if any, is recognised in the income statement. All derivative financial instruments are recognised in the balance sheet as either assets (positive fair values) or liabilities (negative fair values).
NBB ANNUAL REPORT 2009 I 61 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
viii) Repos and Reverse repos Where securities are sold subject to a commitment to repurchase them at a specified future date (repo) and at a predetermined price, they are not derecognised and the consideration received is classified as Borrowings under Repurchase Agreements. The difference between the sale and repurchase price is treated as an interest expense and accrued over the life of the repo agreement using the effective yield method. Conversely, securities purchased under a commitment to resell them at a specified future date (reverse repo) and at a predetermined price are not recognised on the balance sheet and the consideration paid is recorded in Placements with Banks and Other Financial Institutions. The difference between the purchase and resale price is treated as an interest income and accrued over the life of the reverse repo agreement using the effective yield method. ix) Cash and cash equivalents Cash and cash equivalents comprise cash, balances at central banks excluding mandatory cash reserves, placements with banks and other financial institutions that mature within three months of the date of placement, and short-term highly liquid investments that are readily convertible to cash and which are subject to an insignificant risk of change in value and mature within three months of the date of acquisition. x) Amortised cost measurement The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method. xi) Fair value measurement Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available) and discounted cash flow analyses with accepted economic methodologies for pricing financial instruments. xii) Categorisation of financial assets The categorisation of financial assets into fair value through profit or loss, available-for-sale and held-to-maturity is done on the basis of the management intent at the time these securities are acquired and laid down investment policies. g) Impairment The carrying amount of the Bank’s financial assets is reviewed at each reporting period to determine whether there is objective evidence that a specific asset may be impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reasonably. If any such evidence exists, the recoverable amount of the asset is estimated to determine the extent of impairment. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated cash flows discounted at the assets’ original effective interest rate. Losses are recognised in income statement and reflected in an allowance account against loans and advances. When subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through income statement. Impairment losses on available-for-sale investment securities are recognised by transferring the difference between amortised cost and current fair value out of equity to income statement. When a subsequent event causes the amount of impairment loss on an available-forsale debt security to decrease, the impairment loss is reversed through income statement. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly to equity.
62 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
Provision for impairment, pertaining to individually significant impaired loans and advances, is determined based on the difference between the net carrying amount and the estimated recoverable amount of the loans and advances, measured at the present value of estimated future cash flows from such loans and advances and discounting them based on their original effective interest rate. If a loan has a floating interest rate, the discount rate is the current effective rate determined under the contract. Impairment and uncollectability is also measured and recognised on a portfolio basis for a group of similar loans and advances, that are not individually identified as impaired, on the basis of estimates of incurred losses that are inherent but not yet specifically identified within the loans and advances portfolio at the balance sheet date. The estimates are based on internal risk ratings, historical default rates, rating migrations, loss severity, macroeconomic and other relevant factors with historic loss experience being adjusted to reflect the effect of prevailing economic and credit conditions. Loans and advances are written off after all reasonable attempts at restructuring and possible courses of action to achieve recovery have been exhausted and the possibility of any further recovery is considered to be remote. h. Investment in associates Associates are those entities in which the Bank has significant influence, but not control, over their financial and operating policies. Significant influence is presumed to exist when the Bank holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are recognised initially at cost. The financial statements of the Bank include its share of the income and expenses and equity movements of associates, after adjustments to align the accounting policies with those of the Bank, from the date that significant influence commences until the date that significant influence ceases. When the Bank’s share of losses exceeds its interest in an associate, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that the Bank has an obligation or has made payments on behalf of the associate. i. Property and equipment Property and equipment are initially recorded at cost and subsequently stated at cost less accumulated depreciation and impairment losses. Land is not depreciated and is stated at cost at the date of acquisition. Where an item of property and equipment comprises major components having different useful lives, they are accounted for separately. The cost of an item of property and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be put to its intended use. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the property and equipment. The estimated useful lives are as follows: Buildings Furniture and Equipment
20 to 40 years 3 to 8 years
The residual value and the useful life of property and equipment are reviewed periodically and, if expectations differ from previous estimates, the change is recognised prospectively in the income statement over the remaining estimated useful life of the property and equipment. j. Other provisions A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. k. Off-setting Financial assets and financial liabilities are only set-off and the net amount reported in the balance sheet when there is a legally enforceable right to set-off the recognised amounts and the Bank intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
NBB ANNUAL REPORT 2009 I 63 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
l. Settlement date accounting All “regular way” purchases and sales of financial assets except for derivatives are recognised on the settlement date i.e. the date the Bank receives or delivers the asset. Regular way purchases and sales are those that require delivery of assets within the time frame generally established by regulation or convention in the market place. Derivative transactions are recognised on trade date i.e. the date the Bank contracts to purchase or sell. m. Proposed appropriations Dividends and other proposed appropriations are recognised as a liability in the period in which they are approved by the shareholders. n. Remuneration policy Board of Directors - The remuneration of the Board of Directors is approved by the shareholders. In addition, directors are paid nominal fees for attending meetings of the Board and its Committees. Employees - The Bank’s remuneration policies, which are approved by the Board of Directors, is applicable for all employees including the Chief Executive Officer. The remuneration primarily consists of monthly salaries and allowances. The Bank also has a discretionary profit sharing scheme based on the net income for the year and considering the employees’ performance during the year. o. Segment reporting An operating segment is a component of the Bank that engages in business activities from which it may earn revenue and incur expenses, including revenues and expenses that relate to transactions with any of the other components of the Bank. All operating results of the operating segments are reviewed regularly by the Chief Executive Officer to make decisions about resource allocation and assess its performance, and for which discrete financial information is available. p. Earnings per share The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. q. Income tax liability Companies are not liable to income tax in Bahrain.
3. FINANCIAL RISK MANAGEMENT The Bank is exposed to the following types of risks: • credit risk • liquidity risk • market risk • operational risk Risk management framework The overall authority for risk management in the Bank is vested in the Board of Directors. The Board authorises appropriate credit, liquidity and market risk policies as well as operational guidelines based on the recommendation of Management. The Bank has established various committees that review and assess all risk issues. Approval authorities are delegated to different functionaries in the hierarchy depending on the amount, type of risk and nature of operations or risk. The Credit Policy and Risk Management (CPRM) division of the Bank provides the necessary support to Senior Management and the business units in all areas of risk management. This division functions independent of the business units and reports directly to the Chief Executive Officer.
64 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
The Audit Committee of the Board is responsible for monitoring compliance with the Bank’s policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Audit Committee is assisted in these functions by the Management Internal Control division, which undertakes both regular and adhoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee and to Management. Credit Risk Credit risk represents the potential financial loss as a consequence of a customer’s inability to honour the terms and conditions of a credit facility. Such risk is measured with respect to counterparties for both on-balance sheet assets and off-balance sheet items. The Bank has well laid out procedures, not only to appraise but also regularly monitor credit risk. Credit appraisal is based on the financials of the borrower, performance projections, market position, industry outlook, external ratings (where available) track record, account conduct, repayment sources and ability, tangible and intangible security, etc. Regular reviews are carried out for each account and risks identified are mitigated in a number of ways, which include obtention of collateral, counter-guarantees from shareholders and/or third parties. Adequate margins are maintained on the collateral to provide a cushion against adverse movement in the market price of collateral. The Credit Review Department of the Bank analyses risks and puts forth its recommendations prior to approval by the appropriate authorities. In addition to rigorous credit analysis, the terms and conditions of all credit facilities are strictly implemented by the Credit Administration Department. An internal grading system and review process ensures prompt identification of any deterioration in credit risk and consequent implementation of corrective action. The Bank’s internal ratings are based on a 10-point scale, which takes into account the financial strength of a borrower as well as qualitative aspects to arrive at a comprehensive snapshot of the risk of default associated with the borrower. Ratings are further subdivided into categories, which reflect estimates of the potential maximum loss in an event of default. Risk Ratings assigned to each borrower are reviewed at least on an annual basis. Regular monitoring of the portfolio enables the Bank to identify accounts, which witness deterioration in risk profile. Consumer credit facilities which are granted based on pre-defined criteria such as salary assignment, maximum repayment obligation as a percentage of salary etc., are excluded from this rating system. The Bank also uses the ratings by established rating agencies, viz., Moody’s, Standard & Poor and Fitch as part of the appraisal process while considering exposures to rated entities. Liquidity Risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Bank. The asset/liabilities management policies of the Bank define the proportion of liquid assets to total assets with the aim of minimising liquidity risk. The Bank maintains adequate liquid assets such as inter-bank placements, treasury bills and other readily marketable securities, to support its business and operations. The Treasury department monitors the maturity profile of assets and liabilities so that adequate liquidity is maintained at all times. The Asset Liability Committee (ALCO) chaired by the Chief Executive Officer reviews the Liquidity Gap Profile and the Liquidity scenario and addresses strategic issues concerning liquidity.
NBB ANNUAL REPORT 2009 I 65 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
Market Risk Market Risk is the risk of potential losses arising from movements in market prices of interest rate related instruments and equities in the trading portfolio and foreign exchange and commodities holdings throughout the Bank. The Bank’s trading activities are governed by conservative policies that are clearly documented, by adherence to comprehensive limit structures set annually and by regular reviews. Quality and rating are the main criteria in selecting a trading asset. The Bank uses the Value-at-Risk (VaR) measure to estimate the exposure of the trading portfolio and total currency book to market risk. Daily reports in this regard are submitted to senior management for review and decision making purposes. The Bank also uses back testing to validate the VaR model and the results confirm that the model adequately captures risk within the Bank’s trading portfolio. Operational Risk Operational Risk is the risk of monetary loss on account of human error, fraud, systems failures or the failure to record transactions. The Bank has well laid out procedures and systems that set out the methodologies for carrying out specific tasks. These systems and procedures are constantly reviewed and revised to address any potential risks. The scope of the Bank’s internal audit department encompasses audits and reviews of all business units, support services and branches. The internal audit process focuses primarily on assessing risks and controls and ensuring compliance with established policies, procedures and delegated authorities. New products and services are reviewed by the internal audit department and assessed for operational risks prior to their implementation. The internal audit department is operationally independent and reports significant internal control deficiencies to the Audit Committee. Capital Management The Bank’s policy is to maintain sufficient capital to sustain investor, creditor and market confidence and to support future development of the business. The impact of the level of capital on return on shareholder’s equity is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Central Bank of Bahrain’s (CBB) Basel II guidelines outlining the capital adequacy framework for banks incorporated in the Kingdom of Bahrain became effective from 1st January 2008. The Bank ensures that the capital adequacy requirements are met on a consolidated basis and also with local regulator’s requirements, if any, in countries in which the Bank has branches. The Bank has complied with regulatory capital requirements throughout the year.
66 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
4. TREASURY BILLS Treasury bills are short-term treasury bills issued by the Government of Bahrain, Government of Saudi Arabia and short-term Islamic bills issued by the Government of Bahrain. As at 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Government of Bahrain Government of Saudi Arabia Total
114,915 10,012 124,927
305,625 26,628 332,253
6,408 10,169 16,577
17,043 27,045 44,088
5. PLACEMENTS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS Placements with banks and other financial institutions is part of the Bank’s money market activities and comprises short-term lending to banks and other financial institutions. As at 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Placements with banks Placements with other financial institutions Total
230,129 15,962 246,091
612,045 42,452 654,497
378,392 32,091 410,483
1,006,362 85,348 1,091,710
As at 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Current and call accounts Placements Term Total
7,128 238,963 246,091
18,957 635,540 654,497
10,535 399,948 410,483
28,019 1,063,691 1,091,710
As at 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Equity Securities Debt Securities Total
391 1,246 1,637
1,040 3,314 4,354
385 - 385
1,024 1,024
6. TRADING SECURITIES
NBB ANNUAL REPORT 2009 I 67 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
7. LOANS AND ADVANCES As at 31 December
BD’000
Loans and advances to non-banks Loans and advances to banks Less: Provision for impairment Total
1,054,917 111,338 (14,832) 1,151,423
2009 US$’000 2,805,630 296,112 (39,447) 3,062,295
BD’000
2008 US$’000
975,504 133,103 (12,896) 1,095,711
2,594,426 353,997 (34,298) 2,914,125
b) Loans and advances are of a floating rate nature, since as per the Bank’s loan agreements, the Bank reserves the right to change the rate of interest at any time in the event of money market fluctuations and/or other credit/banking considerations which may be set out from time to time by the Bank and/or any governmental or regulatory authority. c) As at 31 December 2009, the amount of floating rate loans for which interest was reset by the Bank on agreed dates and based on an agreed fixed margin over a benchmark interest rate, amounted to BD 750.8 million (US$ 1,996.8 million) [31 December 2008: BD 768.2 million (US$ 2,043.1 million)]. d) The Bank holds collateral in the form of mortgage on properties, shares, cash deposits and counter-guarantees from shareholders and/ or third parties etc against its credit exposures. e) In accordance with the Central Bank of Bahrain guidelines, loans on which payments of interest or repayments of principal are 90 days past due, are defined as non-performing. The following is the ageing schedule of non-performing and other impaired and past due loans and advances. The table shows the time period since the date of last repayment of principal or interest by the customer. As at 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Over 3 months to 1 year 1 to 3 years Over 3 years Total
2,431 1,482 3,507 7,420
6,465 3,942 9,327 19,734
2,291 1,545 4,815 8,651
6,093 4,109 12,806 23,008
As at 31 December 2009, loans on which payments of interest or repayments of principal are overdue up to 90 days amounted to BD 3.56 million (US$ 9.47 million) [31 December 2008: BD 1.26 million (US$ 3.35 million)]. As at 31 December 2009, the principal outstanding of the non-performing loans portfolio on which interest is not being accrued amounted to BD 6.57 million (US$ 17.47 million) [31 December 2008: BD 7.50 million (US$ 19.95 million)]. Management estimates the fair value of collaterals held against individually impaired loans and advances to reasonably approximate BD 8.85 million (US$ 23.54 million) [31 December 2008: BD 7.25 million (US$ 19.28 million)]. f) During 2009, credit facilities amounting to BD 45.83 million ( US$ 121.89 million) were restructured [2008: BD 1.39 million (US$ 3.70 million)]. Restructuring concessions mainly related to deferral of loan installments to assist customers overcome temporary cash crunch situations or to realign the payments with the borrowers’/projects’ revised cash flow projections. Due to minor nature of concession, there was no significant impact on the Bank’s provisions for loans and advances impairment and present and future earnings.
68 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
g) Exposure to credit risk As at 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Total carrying amount
1,151,423
3,062,295
1,095,711
2,914,125
1. Individually impaired Substandard Doubtful Loss Gross amount Interest in suspense Specific allowance for impairment Individually impaired carrying amount
847
2,252
1,150
3,058
268 9,894 11,009 (3,589) (6,601) 819
713 26,314 29,279 (9,545) (17,556) 2,178
177 12,055 13,382 (4,731) (7,521) 1,130
471 32,061 35,590 (12,582) (20,003) 3,005
2. Past due below 90 days but not impaired Gross amount Collective impairment provision Past due but not impaired carrying amount
3,556 (25) 3,531
9,457 (66) 9,391
1,257 (6) 1,251
3,343 (16) 3,327
3. Neither past due nor impaired by internal rating Rated 1 Rated 2 Rated 3 Rated 4 Rated 5 Rated 6 Not rated * Gross amount Collective impairment provision Carrying amount of neither past due nor impaired Total carrying amount
81,286 46,199 155,328 243,606 298,221 40,850 289,789 1,155,279 (8,206) 1,147,073 1,151,423
216,186 122,870 413,106 647,888 793,141 108,644 770,715 3,072,550 (21,824) 3,050,726 3,062,295
107,598 28,999 326,846 261,372 135,642 2,697 235,545 1,098,699 (5,369) 1,093,330 1,095,711
286,165 77,125 869,271 695,138 360,750 7,173 626,450 2,922,072 (14,279) 2,907,793 2,914,125
* Includes mainly consumer loans and other facilities which are not assigned any ratings at inception. h) Impairment provisions for loans and advances Movements during the year Amounts in BD 000’s At 1 January Charge for the year Amounts written off against provision Recoveries & write backs At 31 December
Specific Provision 2009 2008 7,521 938 (1,569) (289) 6,601
8,054 128 (344) (317) 7,521
Collective Impairment Provision 2009 2008 5,375 3,500 (8) (636) 8,231
6,491 – (5) (1,111) 5,375
Total Provisions 2009 2008 12,896 4,438 (1,577) (925) 14,832
14,545 128 (349) (1,428) 12,896
Interest in Suspense 2009 2008 4,731 722 (1,624) (240) 3,589
4,371 744 (7) (377) 4,731
NBB ANNUAL REPORT 2009 I 69 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
In accordance with IAS 39, provision for impairment of loans and advances that are measured and recognized on a portfolio basis are collectively evaluated for impairment based on an incurred loss model. The provisions and interest in suspense relate to loans and advances to non-banks. In accordance with the Bank’s policy and the Central Bank of Bahrain guidelines, interest on non-performing loans is reversed from income and is accounted for on a cash basis. During 2009, the suspension of interest income relating to such non-performing loans had an insignificant impact on the Banks’ net interest income. 8. INVESTMENT SECURITIES Investment securities comprises of the following:
BD’000
2009 US$’000
480,903 8,107 489,010 (5,889) 483,121
1,278,997 21,561 1,300,558 (15,662) 1,284,896
BD’000
2009 US$’000
Quoted: Debt securities Equity securities Provision for impairment on available for sale debt securities Total quoted securities
362,312 49,729 (5,845) 406,196
963,596 132,258 (15,545) 1,080,309
285,555 57,325 (5,212) 337,668
759,455 152,460 (13,862) 898,053
Unquoted: Debt securities Equity securities Provision for impairment on available for sale securities Total unquoted securities Total available-for-sale securities
53,990 14,872 (44) 68,818 475,014
143,590 39,553 (117) 183,026 1,263,335
19,347 15,478 - 34,825 372,493
51,455 41,165 92,620 990,673
As at 31 December Available-for-sale securities Investment at fair value through profit or loss Total Provision for impairment on available for sale debt securities Total investment securities
BD’000
2008 US$’000
377,705 26,683 404,388 (5,212) 399,176
1,004,535 70,965 1,075,500 (13,862) 1,061,638
A) Available for sale securities I. Breakdown of quoted and unquoted securities As at 31 December
BD’000
2008 US$’000
Available-for-sale securities at 31 December 2009 include securities amounting to BD 125.58 million (US$ 334.01 million) [31 December 2008:BD 31.82 million (US$ 84.64 million)], sold under agreement to repurchase.
70 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
ii. Breakdown between fixed rate and floating rate available-for-sale debt securities (net of provision for impairment) As at 31 December Fixed rate debt securities Floating rate debt securities Total
BD’000
2009 US$’000
BD’000
2008 US$’000
231,938 178,647 410,585
616,856 475,125 1,091,981
111,771 187,919 299,690
297,263 499,785 797,048
BD’000
2009 US$’000
BD’000
2008 US$’000
179,165 40,528 130,860 40,502 1,340 18,190 410,585
476,503 107,787 348,032 107,718 3,564 48,377 1,091,981
116,348 25,661 122,977 17,206 - 17,498 299,690
309,436 68,247 327,067 45,761 46,537 797,048
iii. Breakdown of available-for-sale debt securities by rating (net of provision for impairment) The ratings given below are by established rating agencies. As at 31 December AAA AA A BBB B+ Not-rated Total
B) Investments at fair value through profit or loss Fair value through profit or loss investment securities comprise investments in managed funds and capital protected notes as follows: As at 31 December Investments in managed funds Investments in capital protected notes Total
BD’000
2009 US$’000
BD’000
2008 US$’000
1,852 6,255 8,107
4,925 16,636 21,561
19,345 7,338 26,683
51,449 19,516 70,965
BD’000
2009 US$’000
BD’000
2008 US$’000
9. ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS As at 31 December Accrued interest receivable Accounts receivable & prepayments Others * Total
6,333
16,843
8,355
22,221
1,324
3,521
1,043
2,774
4,821 12,478
12,822 33,186
3,111 12,509
8,274 33,269
* Others include investment of BD 1.73 million (US$ 4.60 million) [31 December 2008: BD 1.35 million (US$3.58 million)] in an associate company - The Benefit Company BSC (c) in which the Bank has an interest of 34.84 %. The carrying amount represents the cost of the investment and the share of profits less dividends received. * Others include BD 1.32 million (US$ 3.51 million) [31 December 2008 : BD 1.32 million (US$ 3.51 million)] in respect of land and buildings acquired from customers and now held for disposal. The land and buildings are stated at lower of cost or net realisable value.
NBB ANNUAL REPORT 2009 I 71 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
10. DUE TO BANKS AND OTHER FINANCIAL INSTITUTIONS Due to banks and other financial institutions consists of short-term borrowings from banks and financial institutions. As at 31 December Current and call accounts Term deposits Total
BD’000
2009 US$’000
BD’000
2008 US$’000
19,283 240,533 259,816
51,285 639,715 691,000
21,897 232,060 253,957
58,237 617,181 675,418
11. BORROWINGS UNDER REPURCHASE AGREEMENTS Borrowings under repurchase agreements represent available-for-sale securities of BD 125.58 million (US$ 334.01 million) [31 December 2008: available-for-sale securities of BD 31.82 million (US$ 84.64 million)] sold under agreement to repurchase. 12. CUSTOMERS’ DEPOSITS As at 31 December Repayable on demand or at short notice Term deposits Total
BD’000
2009 US$’000
BD’000
2008 US$’000
688,165 792,227 1,480,392
1,830,226 2,106,987 3,937,213
663,222 856,034 1,519,256
1,763,888 2,276,686 4,040,574
BD’000
2009 US$’000
BD’000
2008 US$’000
2,413 2,901 914 2,903 1,458 10,589
6,417 7,715 2,431 7,721 3,878 28,162
3,915 2,727 942 1,955 2,138 11,677
10,412 7,253 2,505 5,200 5,686 31,056
BD’000
2009 US$’000
BD’000
2008 US$’000
26,810 111,585 184,118 322,513
71,303 296,769 489,675 857,747
82,398 6,408 387,148 475,954
219,144 17,043 1,029,649 1,265,836
13. ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES As at 31 December Accrued interest payable Creditors & account payables Deferred income Employee benefits Others Total 14. CASH AND CASH EQUIVALENTS As at 31 December Cash and balances at central banks* Treasury bills Placements with banks and other financial institutions Total
*Excluded from cash and balances at central banks is BD 54.4 million (2008: BD 63.1 million) maintained for the purpose of the cash reserve ratio requirement set by the central banks.
72 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
15. CONTINGENT LIABILITIES AND BANKING COMMITMENTS The Bank issues commitments to extend credit and guarantees the performance of customers by issuing standby letters of credit and guarantees to third parties. For these instruments, the contractual amount of the financial instrument represents the maximum potential credit risk if the counterparty does not perform according to the terms of the contract. The credit exposure for the contingent liabilities is reduced by obtaining counter guarantees and collateral from third parties. A large majority of these expire without being drawn upon, and as a result, the contractual notional principal amounts are not representative of the actual future credit exposure or liquidity requirements of the Bank. In the absence of any process for accurate determination of credit risk of these undrawn loan commitments and contingent liabilities, the contract or notional principal amount has been considered as the credit exposure. Based upon the level of fees currently charged, taking into account maturity and interest rates together with any changes in the credit worthiness of counter parties since origination, the Bank has determined that the fair value of contingent liabilities and undrawn loan commitments is not material. As at 31 December Contingent liabilities Liabilities on confirmed documentary credits Guarantees: Counter guaranteed by banks Others Sub-total Banking commitments Undrawn loan commitments Forward commitments: Securities purchased Interbank placings Sub-total Total
Notional principal amount 2009 BD’000 US$’000
Notional principal amount 2008 BD’000 US$’000
41,399
110,104
49,716
132,223
28,124 33,095 102,618
74,798 88,018 272,920
35,445 27,787 112,948
94,269 73,902 300,394
5,137
13,662
20,461
54,418
- 3,650 8,787 111,405
- 9,708 23,370 296,290
5,304 9,411 35,176 148,124
14,106 25,029 93,553 393,947
As at 31 December 2009, for the forward commitments, the remaining period to the contractual date was within 14 days. On the contractual date these commitments were carried out, and resulted in cash flows in and out of the Bank as represented by the notional principal amount. 16. DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS The Bank utilises various derivative and foreign exchange financial instruments for trading, asset/liability management and hedging risks. These instruments primarily comprise futures, forwards, swaps and options. Futures and forward contracts are commitments to buy or sell financial instruments or currencies on a future date at a specified price or yield, and may be settled in cash or through delivery. Swap contracts are commitments to settle in cash on a future date or dates, interest rate commitments or currency amounts based upon differentials between specified financial indices, as applied to a notional principal amount. Option contracts give the acquirer, for a fee, the right but not the obligation, to buy or sell within a limited period a financial instrument or currency at a contracted price. In respect of the derivative and foreign exchange financial instruments, the contract/notional principal amounts do not represent balances subject to credit or market risk. Contract/notional principal amounts represent the volume of outstanding transactions and are indicators of business activity. These amounts are used to measure changes in the value of derivative products and to determine the cash flows to be exchanged. The replacement cost is the cost of replacing those financial instruments with a positive market value,
NBB ANNUAL REPORT 2009 I 73 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
together with an estimate for the potential future change in the value of the contract, and reflects the maximum credit loss for the Bank had all these counterparties defaulted. For written options, there is no credit risk, as they represent obligations of the Bank. The fair value represents the aggregate of the positive and negative cash flows which would have occurred if the rights and obligations arising from the instrument were extinguished by the Bank in an orderly market as at the reporting date. The fair values of derivative financial instruments such as interest rate swaps and forward rate agreements were calculated using discounted cash flow models based on current market yields for similar types of instruments and the maturity of each instrument. The futures contracts, foreign exchange contracts and interest rate options were revalued using market prices and option valuation models as appropriate. a) The following table summarises for each type of derivative and foreign exchange financial instrument, the aggregate notional amounts, the replacement cost and the fair value : Amounts in BD’000 As at 31 December Foreign exchange contracts Outright spot and forward contracts Options Swap agreements Total
Contract / notional principal amount 2009 2008
67,230 – 261,278 328,508
61,061 139 121,235 182,435
Replacement cost 2009 2008
126 – 35 161
168 – 4 172
2009
Fair value 2008
(133) – 18 (115)
135 (19) (17) 99
b) The remaining maturity profile by each class of derivative and foreign exchange financial instrument based on contract/notional principal amounts is as follows: As at 31 December Amounts in BD’000 Up to 1 year Foreign exchange contracts Outright spot and forward contracts Options Swap agreements Total
67,230 – 261,278 328,508
2009 1 to 2 Up to years Total 1 year
– – – –
67,230 – 261,278 328,508
61,061 139 121,235 182,435
2008 1 to 2 years
Total
– – – –
61,061 139 121,235 182,435
17. CAPITAL COMMITMENTS At 31 December 2009 commitments for capital expenditure amounted to BD 0.64 million (US$ 1.70 million) [31 December 2008: BD 1.27 million (US$ 3.38 million)].
74 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
18. PROPERTY & EQUIPMENT Land BD’000 US$’000 Cost Accumulated depreciation Net book value at 31 December 2009 Net Book value at 31 December 2008
761 - 761 761
2,024 - 2,024 2,024
Buildings Furniture and equipment Total BD ’000 US$’000 BD’000 US$’000 BD’000 US$’000 23,917 (11,914) 12,003 12,549
63,609 (31,686) 31,923 33,375
11,498 (7,404) 4,094 3,550
30,580 (19,691) 10,889 9,441
36,176 96,213 (19,318) (51,377) 16,858 44,836 16,860 44,840
The depreciation charge for 2009 amounted to BD 2.05 million (US$ 5.45 million) [2008: BD 1.82 million (US$ 4.84 million)]. 19. SHARE CAPITAL As at 31 December Authorised share capital 1,500,000,000 (2008: 1,000,000,000) ordinary shares of 100 fils each (At the extraordinary general meeting held on 12 October 2008, the Bank’s authorised share capital was increased from BD 100 million to BD 150 million) Issued and fully paid share capital At 1 January: 777,600,000 shares of 100 fils each (2008: 648,000,000 shares of 100 fils each) One for five bonus issue ** At 31 Dec 2009: 777,600,000 shares of 100 fils each (at 31 Dec 2008: 777,600,000 shares of 100 fils each)
2009 BD millions US$ millions
2008 BD millions US$ millions
150,000
398,936
150,000
398,936
77,760 -
206,808 -
64,800 12,960
172,340 34,468
77,760
206,808
77,760
206,808
** During 2008, a one-for-five bonus issue was made comprising 129, 600,000 shares of 100 fils each by capitalisation of BD 12.96 million (US$ 34.47 million) from General Reserve. A distribution schedule of ordinary shares, setting out the number of shares and shareholders and percentage of total outstanding shares in the following categories is shown below: As at 31 December 2009 Number of Number of shares shareholders Less than 1% 1% up to less than 5% 5% up to less than 10% 10% up to less than 20% 20% up to less than 50% More than 50% Total
251,544,355 89,976,042 55,055,603 - 381,024,000 - 777,600,000
1,106 6 1 - 1 - 1,114
2008 % of total % of total outstanding Number of Number of outstanding shares shares shareholders shares 32.3% 11.6% 7.1% - 49.0% - 100%
255,602,134 140,973,866 - - 381,024,000 - 777,600,000
1,112 8 - - 1 - 1,121
32.9% 18.1% - 49.0% 100.0%
49% of the Bank’s share capital is held by the Bahrain Mumtalakat Holdings Co which is 100% owned by the Government of Bahrain, and 7.1% by Social Insurance Organisation, Bahrain. The rest of the share capital is widely held primarily by the citizens of and entities incorporated in the Kingdom of Bahrain.
NBB ANNUAL REPORT 2009 I 75 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
20. RESERVES a) Statutory reserve In accordance with the Bahrain Commercial Companies Law 2001, 10 percent of net profit is appropriated to a statutory reserve, which is not normally distributable except in accordance with Article 224 of the Law. Such appropriations may cease when the reserve reaches 50 percent of paid up share capital. b) General reserve The reserve has been created in accordance with the Bank’s articles of association and underlines the shareholders’ commitment to enhance the strong equity base of the Bank. c) Revaluation reserve The revaluation reserve includes the cumulative net change in fair value of available-for-sale investments, excluding impairment losses, until the investment is derecognised or impaired. d) Donation and charity reserve Based on the recommendations of the Board of Directors, an amount is transferred from the profit for the year to this reserve. The reserve represents the uncommitted amount of the donations and charities approved by the shareholders. 21. APPROPRIATIONS The appropriations relating to the year 2008 were approved at the last annual general meeting. 22. INTEREST INCOME / INTEREST EXPENSE a) INTEREST INCOME
BD’000
2009 US$’000
BD’000
2008 US$’000
169 440 4,094 49,841 3,924 7,732 66,200
450 1,170 10,888 132,556 10,436 20,564 176,064
524 576 12,592 53,537 5,010 12,170 84,409
1,394 1,532 33,489 142,386 13,324 32,367 224,492
For the year ended 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
Derivative liabilities held for risk management Deposits from banks and other financial institutions Deposits from customers Borrowings under repurchase agreements Total
631
1,678
1,423
3,785
1,287 14,870 396 17,184
3,423 39,548 1,053 45,702
6,934 29,090 906 38,353
18,441 77,367 2,410 102,003
For the year ended 31 December Derivative assets held for risk management Treasury Bills Placements with banks & financial institutions Loans and advances to customers Loans and advances to banks Investment securities Total b) INTEREST EXPENSE
76 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
23. OTHER INCOME For the year ended 31 December
BD’000
2009 US$’000
BD’000
2008 US$’000
a) Fees and commission income Fees and commission on loans and advances Commission on sale of managed funds Other fees and commission Less: fees and commision paid Sub-total
7,016 116 6,955
18,660 309 18,496
8,557 755 6,907
22,758 2,008 18,370
(2,464) 11,623
(6,553) 30,912
(2,516) 13,703
(6,691) 36,445
b) Other operating income Profit / (loss) on trading securities Profit on sale of available for sale secrities Profit on fair value through P/L investment secrities Share dividend income Profit on exchange dealing and transactions Profit / (loss) on derivatives Other income Sub-total Total other income
(42) 2,363 (763) 3,724 4,426 (20) 1,950 11,638 23,261
(112) 6,285 (2,029) 9,904 11,771 (53) 5,186 30,952 61,864
(726) 2,250 (9,097) 3,288 3,856 39 3,291 2,901 16,604
(1,931) 5,984 (24,194) 8,745 10,255 104 8,753 7,716 44,161
Other Income includes BD 0.46 million (US$ 1.22 million) [ 2008: BD 0.57 million (US$ 1.52 million)] representing Bank’s share of profits from associate recognised during the year. 24. STAFF EXPENSES For the year ended 31 December Salaries and allowances Social Security & Gratuity Housing & other benefits Others Total
BD’000
2009 US$’000
BD’000
2008 US$’000
14,924 2,106 1,718 221 18,969
39,691 5,601 4,569 588 50,449
13,479 2,432 1,771 173 17,855
35,849 6,468 4,710 460 47,487
BD’000
2009 US$’000
BD’000
2008 US$’000
304,627 134,222 23,790
810,178 356,973 63,271
226,201 25,920 165,913
601,598 68,936 441,258
25. SIGNIFICANT NET OPEN FOREIGN CURRENCY POSITIONS For the year ended 31 December US Dollar (long position) - unhedged UAE Dirhams (long position) - unhedged Saudi Riyal (long position) - unhedged The Bahraini dinar has a fixed rate of exchange against the US dollar.
NBB ANNUAL REPORT 2009 I 77 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
26. RELATED PARTY DISCLOSURES Certain related parties (major shareholders, directors of the Bank and families and companies of which they are principal owners, key management personnel) were customers of the Bank in the ordinary course of business . The transactions with these parties were made on an arm’s length basis. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank. Typically, key management personnel include the Chief Executive Officer and persons directly reporting to him. Balances at the reporting date in regard to related parties and transactions during the year with related parties comprised the following: Amounts in BD’000 As at 31 December Loans and advances Treasury bills and bonds Customers’ deposits Contingent liabilities for irrevocable commitments, guarantees and other contingencies For the year ended 31 December Loans advanced Loans repaid Net (decrease) / increase in overdrafts Treasury bills and bonds purchased Treasury bills and bonds matured/sold Interest income Interest expense Short term employee benefits Post employment retirement benefits
Majority Shareholder Directors 2009 2008 2009 2008
Key Management Personnel 2009 2008
297,253 178,776 145,042
131,558 34,857 62,633
9,867 - 19,856
18,459 - 26,342
60 - 3,090
81 1,620
27,626
30,225
2,698
6,138
-
–
2009
2008
2009
2008
2009
2008
108,054 51,440 67,484 213,292 69,373
130,822 60,858 (34,334) 58,042 88,325
4,436 9,571 (3,727) – –
6,535 7,907 7,882 – –
– 21 – – –
90 9 – – –
9,111 1,180
6,511 352
682 137
635 518
2 11
1 24
– –
– –
– –
– –
2,847 561
1,676 551
27. FUND ADMINISTRATION At 31 December 2009, administration of third party funds under investment amounted to BD 41.83 million (US$ 111.26 million)[31 December 2008: BD 52.38 million (US$ 139.30 million)]. 28. GEOGRAPHICAL DISTRIBUTION Amounts in BD’000 Assets Liabilities As at 31 December 2009 2008 2009 2008 Middle East U.S.A. Europe Rest of the World Total
1,762,545 195,155 115,059 44,989 2,117,748
1,753,657 150,698 113,138 16,606 2,034,099
1,742,523 1,271 129,781 2,808 1,876,383
1,771,206 1,741 40,680 3,087 1,816,714
Contingent liabilities and banking commitments 2009 2008 242,021 622 153,548 43,722 439,913
220,716 1,833 99,941 8,069 330,559
78 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
29. DISTRIBUTION BY SECTOR Amounts in BD’000 Assets Liabilities As at 31 December 2009 2008 2009 2008 Government Manufacturing / trading Banks / financial institutions Construction Personal Others Total
Contingent liabilities and banking commitments 2009 2008
669,617 162,103 650,589
311,218 237,866 863,287
138,917 187,820 676,695
156,843 201,867 560,418
27,000 17,685 362,977
27,808 20,209 254,016
168,280 304,059 163,100 2,117,748
144,345 288,962 188,421 2,034,099
21,475 746,892 104,584 1,876,383
15,226 766,617 115,743 1,816,714
13,992 1,860 16,399 439,913
23,875 2,387 2,264 330,559
30. CONCENTRATION OF CREDIT RISK The following is the concentration of credit risk by industry and geographical regions: a) By Industry Amounts in BD’000 Government Other As at 31 December 2009 Bahrain countries
Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable and other assets Total assets Contingent liabilities and banking commitments Derivatives
Banks/ Manufacturing/ financial trading institutions Construction
Personal
Others
– 114,915
– 10,012
– –
67,188 –
– –
– –
– 295,415 60,998
– 3,134 183,691
– 157,532 4,051
246,091 137,191 151,356
– 163,160 4,611
– 303,256 –
446 471,774
1,006 197,843
520 162,103
2,590 604,416
509 168,280
803 4,105 9,979 304,059 109,824 2,018,299
27,000 –
– –
17,685 –
34,469 328,508
13,992 –
1,860 –
– –
Total
67,188 124,927
– 246,091 91,735 1,151,423 13,984 418,691
16,399 –
111,405 328,508
NBB ANNUAL REPORT 2009 I 79 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
30. (a) Concentration of Credit Risk – By industry (continued) Amounts in BD’000 Government Other As at 31 December 2008 Bahrain countries
Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable and other assets Total assets Contingent liabilities and banking commitments Derivatives
Banks/ Manufacturing/ financial trading institutions Construction Personal
Others
Total
– –
69,657 16,577
– 6,408
– 10,169
– –
69,657 –
– –
– –
– 155,206 36,778
– 746 100,979
– 215,381 20,429
410,483 178,476 116,340
– 143,575 –
– – 410,483 288,034 114,293 1,095,711 – 51,847 326,373
541 198,933
361 112,255
2,056 237,866
2,432 777,388
770 144,345
928 3,568 10,656 288,962 169,708 1,929,457
27,808
–
20,209
71,581
23,875
2,387
2,264
148,124
–
–
–
182,435
–
–
–
182,435
The above includes certain exposures to customers / counterparties which are in excess of 15% of the Bank’s capital base. These have the approval of the Central Bank of Bahrain or are exempt exposures under the large exposures policy of the Central Bank of Bahrain. The balances at the end of the period are representative of the position during the period and hence average balances have not been separately disclosed. (b) By geographical regions: Amounts in BD’000 As at 30 December 2009 Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable and other assets Total assets Contingent liabilities and banking commitments Derivatives
Middle East USA Europe
Rest of the World
Total
67,188 124,927 170,003 1,142,117 151,514
– – 18,433 6,474 168,580
– – 57,311 – 56,900
– – 344 2,832 41,697
67,188 124,927 246,091 1,151,423 418,691
8,554 1,664,303 88,205 153,816
492 193,979 622 –
848 115,059 21,185 132,363
85 44,958 1,393 42,329
9,979 2,018,299 111,405 328,508
80 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
30. (b) Concentration of Credit Risk – By geographical regions (continued)
Amounts in BD’000 As at 30 December 2008 Assets Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable and other assets Total assets Contingent liabilities and banking commitments Derivatives
Middle East USA Europe
Rest of the World
Total
69,657 16,577 343,677 1,085,099 124,921
– – 2,418 7,464 139,531
– – 64,050 – 48,880
– – 338 3,148 13,041
69,657 16,577 410,483 1,095,711 326,373
9,832 1,649,763 111,869 108,847
563 149,976 242 1,591
208 113,138 28,240 71,701
53 16,580 7,773 296
10,656 1,929,457 148,124 182,435
31. INTEREST RATE RISK Interest Rate Risk is measured by the extent to which changes in the market interest rates impact margins, net interest income and the economic value of the Bank’s equity. Net interest income will be affected as a result of volatility in interest rates to the extent that the re-pricing structure of interest bearing assets differs from that of liabilities. The Bank’s goal is to achieve stable earnings growth through active management of the assets and liabilities mix while, selectively, positioning itself to benefit from near-term changes in interest rate levels. The Treasurer is primarily responsible for managing the interest rate risk. Reports on overall position and risks are submitted to senior management for review and positions are adjusted if deemed necessary. In addition, ALCO regularly reviews the interest rate sensitivity profile and its impact on earnings. The Bank’s asset and liability management process is utilised to manage interest rate risk through the structuring of on-balance sheet and off-balance sheet portfolios. The Bank uses various techniques for measuring and managing its exposure to interest rate risk. Duration analysis is used to measure the interest rate sensitivity of the fixed income portfolio. Duration of the portfolio is governed by economic forecasts, expected direction of interest rates and spreads. Modified Duration gives the percentage change in value of the portfolio following a 1% change in yield. Interest rate swaps and forward rate agreements are used to manage the interest rate risk. The Bank uses interest rate gap analysis to measure the interest rate sensitivity of its annual earnings due to repricing mismatches between rate sensitive assets, liabilities and derivatives’ positions. Assets and liabilities are placed in maturity buckets based on the remaining period to the contractual repricing or maturity dates, whichever is earlier. Customers’ deposits for which no specific contractual maturity or repricing dates exist are placed in ladders based on the Bank’s judgement concerning their most likely repricing behaviour.
NBB ANNUAL REPORT 2009 I 81 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
The repricing profile and effective interest rate of the various asset and liability categories are as follows:
Amounts in BD’000 As at 31 December 2009
Effective interest Up to 3 3 to 6 6 to 12 1 to 5 rate % months months months years
More than 5 years
Rate insensitive
Total
Assets Cash and balances at central banks – – Treasury bills 1.14% 114,915 Placements with banks and other financial institutions 0.95% 207,793 Trading securities 4.09% 1,246 Loans and advances 4.63% 580,816 Investment securities 1.76% 164,830 Accrued interest receivable and other assets – – Property and equipment – – Total assets 1,069,600
– 10,012
– –
– –
– –
31,170 – 86,713 13,816 – – 141,711
– – 128,266 22,652 – – 150,918
– – 280,275 205,524 – – 485,799
– – 75,353 3,762 – – 79,115
7,128 246,091 391 1,637 – 1,151,423 72,537 483,121 12,478 12,478 16,858 16,858 190,605 2,117,748
Liabilities and equity Due to banks and other financial institutions 0.48% 240,317 Borrowings under repurchase agreements 0.15% 125,586 Customers’ deposits 1.01% 838,198 Other liabilities – – Equity – – Total liabilities and equity 1,204,101 Interest rate sensitivity gap (134,501) Cumulative interest rate sensitivity gap (134,501)
– – 132,162 – – 132,162 9,549 (124,952)
216 – 27,092 – – 27,308 123,610 (1,342)
– – 160 – – 160 485,639 484,297
– – – – – – 79,115 563,412
19,283 259,816 – 125,586 482,780 1,480,392 10,589 10,589 241,365 241,365 754,017 2,117,748 (563,412) – – –
81,213 –
81,213 124,927
The repricing profile and effective interest rate of the various asset and liability categories are as follows: Amounts in BD’000 As at 31 December 2008
Effective interest Up to 3 3 to 6 6 to 12 1 to 5 rate % months months months years
Assets Cash and balances at central banks – – Treasury bills 3.00% 6,608 Placements with banks and other financial institutions 1.76% 386,550 Trading securities – – Loans and advances 5.37% 567,752 Investment securities 3.16% 196,473 Accrued interest receivable and other assets – – Property and equipment – – Total assets 1,157,383 Liabilities and equity Due to banks and other financial institutions Borrowings under repurchase agreements Customers’ deposits
1.22% 232,060 0.67% 31,824 1.74% 828,381 Other liabilities – – Equity – – Total liabilities and equity 1,092,265 Interest rate sensitivity gap 65,118 Cumulative interest rate sensitivity gap 65,118
More than Rate 5 years insensitive
82,398 –
Total
– 9,969
– –
– –
– –
82,398 16,577
– – 170,236 63,731 – – 243,936
13,398 – 38,698 39,487 – – 91,583
– – 231,433 – – – 231,433
– – 87,592 – – – 87,592
10,535 410,483 385 385 – 1,095,711 99,485 399,176 12,509 12,509 16,860 16,860 222,172 2,034,099
– – 118,388 – – 118,388 125,548 190,666
216 – 94,590 – – 94,806 (3,223) 187,443
– – – – – – 231,433 418,876
– – – – – – 87,592 506,468
21,681 253,957 – 31,824 477,897 1,519,256 11,677 11,677 217,385 217,385 728,640 2,034,099 (506,468) – – –
82 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
32. MARKET RISK a) The principle tool used to measure and control market risk exposure is Value-at-Risk (VaR). The VaR is the estimated loss that will arise on the trading portfolio over a pre-defined time horizon from an adverse market movement for a specified confidence level. Based on the approval of the Central Bank of Bahrain, the Bank has been computing market risk using an internal model based on RiskMetrics methodology since 1999. The VaR model used by the Bank is based upon a 99 percent confidence level and assumes a 10 day time horizon. The summary of the VaR position of the Bank at 31 December 2009 and during the period is as follows:
Amounts in BD’000 Foreign currency risk Interest rate risk Other price risk Total
At 31 Dec 1,025 440 258 1,723
2009 Average Maximum
Minimum
At 31 Dec
1,377 1,704 912 256 548 17 254 269 218 1,887
1,705 87 218 2,010
2008 Average Maximum Minimum 1,326 68 102 1,496
1,791 160 218
1,025 27 –
The limitations of the VaR methodology are recognised by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition the Bank uses a wide range of stress tests to model the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the Bank’s overall position. b) The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in future cash flows or fair values of financial instruments because of changes in market interest rates. The interest rate risk management process is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to an interest rate shock of 200bps increase/ decrease. An analysis of the Bank’s sensitivity to an increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows: Amounts in BD’000 At 31 December Average for the year Minimum for the year Maximum for the year
200 bps parallel increase
2009 200 bps parallel decrease
200 bps parallel increase
2008 200 bps parallel decrease
(9,582) (8,328) (5,470) (9,764)
9,582 8,328 5,470 9,764
(3,249) (2,983) (13) (4,422)
3,249 2,983 13 4,422
(c) The Bank holds investments in quoted equities as part of the available for sale securities. Equity risk is the potential adverse impact due to movements in individual equity prices or general market movements in stock markets. The Bank manages this risk through diversification of investments in terms of geographical distribution and industrial concentration. Overall non-trading interest rate risk positions are managed by the Treasury division , which uses investment securities, placements with banks, deposits from banks and derivative instruments to manage the overall position arising from the Bank’s non-trading activities. The use of derivatives to manage interest rate risk is described in note 16.
NBB ANNUAL REPORT 2009 I 83 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
33. SEGMENT INFORMATION For management purposes, the Bank is organised into the following main strategic business units (SBUs) - Personal Banking, Business Banking and Treasury & Investments. These SBUs are the basis on which the Bank reports its operating segment information. The Personal Banking and Business Banking SBUs provide various banking products and services to the Bank’s customers. The SBUs are differentiated based on their respective customer segments. Personal Banking caters to individuals. Business Banking caters to governments, corporates, small and medium enterprises and financial institutions. The Treasury & Investments SBU has the overall responsibility of managing the Bank’s liquidity, interest rate, foreign exchange and market risk. The SBUs activities comprise borrowing and lending in the interbank market, purchase of treasury bills, proprietary dealing in and customer related foreign exchange, investments and trading in securities, derivatives, managed funds and equities in international markets and selling of Bank’s own private label funds to clients. Financial information about the operating segments is presented in the following table: Amounts in BD’000 For the year ended 31 December
Personal Banking 2009 2008
Business Banking 2009 2008
Treasury & Investments 2009 2008
2009
Total 2008
Revenue 21,986 31,051 37,480 12,154 24,943 Interest income 22,994 Less: interest expense (4,400) (9,323) (10,491) (19,794) (2,292) (9,236) Inter-segment interest income/(expense) 4,166 10,588 1,948 5,375 (6,114) (15,963) Net interest income 22,760 23,251 22,508 23,061 3,748 (256) Other income 8,024 8,516 4,555 6,080 10,682 2,008 Operating income 30,784 31,767 27,063 29,141 14,430 1,752 Result 17,585 22,283 16,922 21,082 11,337 (6,109) Unallocated corporate expenses
66,199 84,409 (17,183) (38,353) – – 49,016 46,056 23,261 16,604 72,277 62,660 45,844 37,256 (3,022) (2,517)
Profit for the year
42,822
Other information: Segment assets 320,185 Segment liabilities & Equity 658,552
307,267 651,887
926,017 936,815
887,609 989,244
871,546 522,381
636 1,719
505 (888)
572 1,795
387 (412)
111 171
Depreciation for the year Provision for impaired assets
34,739
839,223 2,117,748 2,034,099 392,968 2,117,748 2,034,099 89 5,212
1,319 3,685
981 3,912
During 2009, the total capital expenditure amounted to BD 2.05 million (US$ 5.45 million) [ 2008: BD 1.69 million (US$ 4.49 million)]. Segment revenues and expenses are directly attributable to the business segments. The benefit of the Bank’s capital has been distributed among the segments in proportion to their total assets employed. Expenses of departments whose services are jointly utilised by more than one segment have been allocated to the relevant segments on an appropriate basis. Inter-segment interest income and expense represent the interest cost on the excess funds which are automatically transferred by all the other business segments to Treasury and Investments. The interest rate for calculating interest of such transfers is set once every three months separately for local and foreign currency and is based on the weighted average of market rates for various maturities for each currency.
84 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
While the Bank conducts its banking business primarily through its Strategic Business Units, it operates from various geographical locations: (I) Domestic operations, through its network of branches in Bahrain and (ii) Overseas operations through its branches in the United Arab Emirates and Saudi Arabia. Financial information about geographical locations is presented in the following table: Domestic 2009 2008
Amounts in BD 000’s For the year ended 31 December Operating income Profit for the year As at 31 December Segment assets Segment liabilities & Equity
Overseas
Total
2009
2008
2009
2008
70,305 42,702
60,146 34,267
1,972 120
2,514 472
72,277 42,822
62,660 34,739
2,003,759 2,003,759
1,884,237 1,884,237
113,989 113,989
149,862 149,862
2,117,748 2,117,748
2,034,099 2,034,099
34. MATURITY PROFILE AND LIQUIDITY RISK a) Maturity Profile The table below shows the maturity profile of total assets and liabilities and equity based on contractual terms, except for Asset Backed Securities and Mortgage Backed Securities which are based on expected weighted average tenor as it is better representative of the product’s maturity profile considering the inherent nature of the products. Amounts in BD’000 As at 31 December 2009
Up to 3 months
Assets Cash and balances at central banks 81,213 Treasury bills 114,915 Placements with banks and other financial institutions 214,921 Trading securities 1,637 Loans and advances 234,615 Investment Securities 10,948 Accrued interest receivable & other assets 7,225 Total assets 665,474 Liabilities and equity Due to banks and other financial institutions 259,600 Borrowings under repurchase agreements 125,586 Customers’ deposits 1,320,158 Accrued interest payable & other liabilities 10,043 Equity 27,566 Total liabilities and equity 1,742,953
3 to 6 months
6 to 12 months
1 to 3 years
3 to 5 years
5 to 10 years
10 to 20 years
Over 20 years
Total
– 10,012
– –
– –
– –
– –
– –
– –
81,213 124,927
31,170 – 66,394 13,684
– – – – 188,197 378,065 47,297 267,860
– – 161,737 69,243
– – 77,463 9,659
– – 43,924 –
– 246,091 – 1,637 1,028 1,151,423 64,430 483,121
432 121,692
70 882 235,564 646,807
800 231,780
15 87,137
– 43,924
19,912 29,336 85,370 2,117,748
–
216
–
–
–
–
– 259,816
– 132,168
– 27,630
– 436
– –
– –
– –
– 125,586 – 1,480,392
407 – 132,575
137 – 27,983
2 – 438
– – –
– – –
– – –
– 10,589 213,799 241,365 213,799 2,117,748
NBB ANNUAL REPORT 2009 I 85 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
34. (a) Maturity Profile (continued) Amounts in BD’000 As at 31 December 2008
Up to 3 months
Assets Cash and balances at central banks 82,398 Treasury bills 6,608 Placements with banks and other financial institutions 397,085 Trading securities 385 Loans and advances 188,532 Investment Securities 30,596 Accrued interest receivable & other assets 9,836 Total assets 715,440 Liabilities and equity Due to banks and other financial institutions 253,741 Borrowings under repurchase agreements 31,824 Customers’ deposits 1,306,219 Accrued interest payable & other liabilities 10,485 Equity 23,678 Total liabilities and equity 1,625,947
3 to 6 months
6 to 12 months
1 to 3 years
3 to 5 years
5 to 10 years
10 to 20 years
Over 20 years
Total
– 9,969
– –
– –
– –
– –
– –
– –
82,398 16,577
– – 31,429 19,317
13,398 – – – – – 119,226 307,879 253,548 34,517 158,285 79,623
– – 153,272 4,035
– – 38,983 –
– 410,483 – 385 2,842 1,095,711 72,803 399,176
924 61,639
404 167,545
– 466,164
– 333,171
– 157,307
– 38,983
18,205 29,369 93,850 2,034,099
–
216
–
–
–
–
–
– 118,405
– 94,626
– 6
– –
– –
– –
– 31,824 – 1,519,256
800 – 119,205
392 – 95,234
– – 6
– – –
– – –
– – –
– 11,677 193,707 217,385 193,707 2,034,099
253,957
b) Liquidity Risk The table below shows the undiscounted cash flows of the Bank’s financial liabilities and undrawn loan commitments on the basis of their earliest contractual liability. The Bank’s expected cash flows on these instruments vary significantly from this analysis; for example demand deposits from customers are expected to maintain stable or increased balances and undrawn loan commitments are not all expected to be drawn down immediately. For derivatives that have simultaneous gross settlement (e.g. forward exchange contracts and currency swaps) the gross nominal undiscounted cash inflow/(outflow) are considered while in the case of derivatives that are net settled the net amounts have been considered.
Amounts in BD’000 As 31 December 2009
Carrying amount
Non derivative liabilities Due to banks and other financial institutions 259,816 Borrowings under repurchase agreements 125,586 Customers’ deposits 1,480,392 Total non derivative liabilities 1,865,794 Derivative liabilities Trading: outflow 115 Trading: inflow – Risk management: outflow – Risk management: inflow – Total derivative liabilities 115 Banking commitments 5,137 Financial guarantees –
Gross nominal inflow/(outflow)
Less than 3 months
3 to 6 months
6 to 12 months
1 to 5 years
(260,122) (125,602) (1,485,268) (1,870,992)
(259,906) (125,602) (1,322,613) (1,708,121)
– – (133,938) (133,938)
(216) – (28,273) (28,489)
– – (444) (444)
(327,235) 328,508 –
(281,791) 283,034 –
(45,444) 45,474 –
– – –
– – –
–
–
–
–
–
1,273 (5,137) (1,521)
1,243 (1,171) (885)
30 (1,442) (252)
– (1,265) (276)
– (1,259) (108)
86 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
34. (b) Liquidity Risk (continued) Amounts in BD’000 As 31 December 2008
Carrying Gross nominal amount inflow/(outflow)
Non derivative liabilities Due to banks and other financial institutions 253,957 Borrowings under repurchase agreements 31,824 Customers’ deposits 1,519,256 Total non derivative liabilities 1,805,037 Derivative liabilities – Trading: outflow Trading: inflow 99 Risk management: outflow – Risk management: inflow – Total derivative liabilities 99 Banking commitments 35,176 Financial guarantees –
Less than 3 months
3 to 6 months
6 to 12 months
1 to 5 years
(254,404) (31,850) (1,533,342)
(254,188) (31,850) (1,297,981)
– – (137,749)
(216) – (97,606)
– – (6)
(1,819,596)
(1,584,019)
(137,749)
(97,822)
(6)
(184,180) 182,435 – – (1,745) (35,176) (2007)
(152,214) 150,379 – – (1,835) (21,458) (845)
(31,966) 32,056 – – 90 – (638)
– – – – – (11,508) (378)
– – – – – (2,210) (145)
35. RETIREMENT BENEFIT COSTS The Bank’s obligations to defined contribution pension plans for employees who are covered by the social Insurance pension scheme in Bahrain and its overseas branches are recognized as an expense in the income statement. The Bank’s contribution for 2009 amounted to BD 0.89 million (US$ 2.37 million) [2008: BD 0.86 million (US$ 2.29 million)]. Other employees are entitled to leaving indemnities payable in accordance with the employment agreements or under the respective labour laws. The movement in the provision for leaving indemnities during the year is as follows: Provision for leaving indemnities Movements during the year At 1 January Charged for the year Paid during the year At 31 December
2009 BD’000 US$’000 1,718 1,198 (406) 2,510
4,569 3,186 (1,080) 6,675
2008 BD’000 US$’000 5,097 1,577 (4,956) 1,718
13,556 4,194 (13,181) 4,569
Effective 2001, the Bank introduced a voluntary Staff Savings Scheme for Bahraini employees. The employees and the Bank contribute monthly on a fixed percentage of salaries basis to the Scheme. The Scheme is managed and administrated by a board of trustees who are the employees of the Bank. The Bank’s contribution to the Scheme for 2009 amounted to BD 0.60 million (US$ 1.60 million) [2008:BD 0.53 million (US$ 1.41 million)]. As 31 December 2009, after considering the employer’s and employees’ contributions, net income accretions and net pay-outs from the Scheme, the net balance of the Scheme, amounted to BD 5.69 million (US$ 15.13 million) [31 December 2008:BD 4.78 million (US$ 12.71 million)]. 36. LEGAL CLAIMS As at 31 December 2009, there were legal suits pending against the Bank aggregating BD 0.15 million (US$ 0.40 million) [31 December 2008: BD 0.17 million (US$ 0.45 million)]. Based on the opinion of the Bank’s legal advisors, management believes that no liability is likely to arise from the suits and does not consider it necessary to carry any specific provision in this respect.
NBB ANNUAL REPORT 2009 I 87 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
37. EARNINGS AND DIVIDEND PER SHARE 2009 BD millions US$ millions
2008 BD millions US$ millions
42.82 27.22
113.89 72.39
34.74 23.33
92.39 62.04
Weighted average number of ordinary shares (millions)
777.6 - 777.6
777.6 - 777.6
648.0 129.6 777.6
648.0 129.6 777.6
Earnings per share Dividend per share
55.1 fils 35.0 fils
15 cents 9 cents
44.7 fils 30.0 fils
12 cents 8 cents
Net income Dividend proposed at 35% (2008: 30 %) Weighted average number of shares issued (millions) Ordinary shares as at 1 January Effect of bonus shares issued during 2008
Diluted earnings per share has not been presented as the Bank has no commitments that would dilute earnings per share. 38. ACCOUNTING CLASSIFICATION AND FAIR VALUES Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Quoted market prices, when available, are used to measure fair value. In cases where quoted market prices are not available, fair values are based on present value estimates or other appropriate valuation techniques. a) The following table provides disclosure of the accounting classification and estimated fair value of financial instruments, for which it is practical to estimate Fair value: Fair value Total In BD 000’s through profit Held to Loans and Available Amortised carrying At 31 December 2009 Trading or loss maturity receivables for sale cost amount Fair value Cash and balances at central banks Trading securities Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable & other assets Total Due to banks and other financial institutions Borrowings under repurchase agreements Customers’ deposits Accrued interest payable & other liabilities Total
– 1,637 –
– – –
– – – – 1,637
– – 8,107 – 8,107
– – – – –
– – – – –
– – –
81,213 – 124,927
– – –
– 246,091 – 1,151,423 – – – 10,744 – 1,614,398
– – 475,014 – 475,014
– – – – –
– – – – –
– – –
81,213 81,213 1,637 1,637 124,927 124,927
– 246,091 246,091 – 1,151,423 1,151,423 – 483,121 483,121 – 10,744 10,744 – 2,099,156 2,099,156
– 259,816 259,816 259,816 – 125,586 125,586 125,586 – 1,480,392 1,480,392 1,480,392 – 7,686 7,686 7,686 – 1,873,480 1,873,480 1,873,480
88 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
38. Accounting Classification and Fair Values (continued) Fair value In BD 000’s through profit Held to Loans and Available Amortised At 31 December 2008 Trading or loss maturity receivables for sale cost Cash and balances at central banks Trading securities Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable & other assets Total Due to banks and other financial institutions Borrowings under repurchase agreements Customers’ deposits Accrued interest payable & other liabilities Total
– 385 –
– – –
– – – – 385
– – 26,683 – 26,683
– – – – –
– – – – –
– – –
82,398 – 16,577
– – –
– 410,483 – 1,095,711 – – – 11,164 – 1,616,333
– – 372,493 – 372,493
– – – – –
– – – – –
– – –
Total carrying amount Fair value 82,398 385 16,577
82,398 385 16,577
– 410,483 410,483 – 1,095,711 1,095,711 – 399,176 399,176 – 11,164 11,164 – 2,015,894 2,015,894
– 253,957 253,957 253,957 – 31,824 31,824 31,824 – 1,519,256 1,519,256 1,519,256 – 9,722 9,722 9,722 – 1,814,759 1,814,759 1,814,759
(a) Assets for which fair value approximates book value: The fair value is considered to approximate their respective book values due to their short-term nature and negligible probability of credit losses. (b) Treasury bills: The fair value of unquoted treasury bills is considered to approximate their respective book values due to their shortterm nature and negligible probability of credit losses. (c) Securities: The fair value of the quoted debt and equity securities, managed funds and capital protected notes are based on market prices. The fair value of unquoted equity securities are estimated with reference to the financial performance and other relevant available financial and economic data. (d) Loans and advances : The Bank has reviewed the loans and advances portfolio and estimates that the fair value of the portfolio approximates its carrying value, since the majority of loans are floating rate loans which have been disbursed at market rates, and adequate provisions have been taken for those loans with doubt as to collectibility. (e) Other financial assets: The fair value of other financial assets including accrued interest receivable approximate their respective book values due to their short term nature. Derivatives with positive fair values are included in other assets. The fair value of derivatives is based on market prices and or valuation models as appropriate. (f) Liabilities for which fair value approximates book value: The fair value is considered to approximate their respective book values due to their short term nature. (g) Customers’ deposits : The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is deemed to equal the amount repayable on demand, which is represented by the carrying value of the deposits. For interest bearing fixed maturity deposits, the Bank estimates that fair value will approximate their book value as the majority of deposits are of short term nature and as all deposits are at market rates. (h) Other financial liabilities: The fair value of other financial liabilities including accrued interest payable approximate their respective book values due to their short term nature. Derivatives with negative fair values are included in other liabilities. The fair value of derivatives is based on market prices and or valuation models as appropriate.
NBB ANNUAL REPORT 2009 I 89 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
38 b. Fair Value Hierarchy The Bank measures fair values of financial instruments using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. as derived from prices). This category includes instruments valued using quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes instruments where the valuation technique includes inputs not based on market observable data. The table below analyses financial assets and liabilities carried at fair value, by valuation method. Amounts in BD 000’s At 31 December 2009 Level 1
Level 2
Level 3
Total
1,637
-
-
1,637
- -
1,852 6,255
- -
1,852 6,255
362,312 49,729 - 413,678 -
53,990 - 161 62,258 276
- 14,872 - 14,872 -
416,302 64,601 161 490,808 276
Financial assets held for trading Financial assets designated at fair value through profit or loss: Managed Funds Capital Protected Notes Available for sale financial assets: Debt securities Equity securities Derivative financial assets Total Derivative financial assets
The following table analyses the movement in level 3 financial assets during the year. Amounts in BD 000’s
Available for Sale Financial Assets
At 1 January 2009 15,478 Total gains/(losses): (44) in income statement in other comprehensive income (562) Purchases Settlements Transfers into / (out) of Level 3 At 31 December 2009 14,872 Total gain / (loss) for the period included in income statement for assets/liabilities held at 31 December 2009 (44) Sensitivity analysis of the movement in fair value of the financial instruments in the level 3 category which relates to available sale financial assets is assessed as not significant to the other comprehensive income and total equity.
90 I NBB ANNUAL REPORT 2009 financial statement
Notes to the Financial Statements For the year ended 31 December 2009
39. AVERAGE BALANCES The following are the average daily balances for full year: Total assets Total liabilities Equity Contingent liabilities and undrawn loan commitments
2009 BD’000 US$’000
2008 BD’000 US$’000
1,989,909 1,767,243
5,292,311 4,700,114
1,976,279 1,740,374
5,256,061 4,628,654
222,666 128,627
592,197 342,093
235,905 189,808
627,407 504,809
40. CAPITAL ADEQUACY The Bank operates as an independent banking institution with headquarters in Bahrain and branches in Bahrain, United Arab Emirates and Saudi Arabia. The capital adequacy ratio has been calculated in accordance with the Basel 2 and Central Bank of Bahrain guidelines incorporating credit risk, operational risk and market risk. The Bank uses the Standardised Approach for computing Credit Risk. Operational Risk is computed using the Basic Indicator Approach. For the purpose of computing Market Risk in the trading portfolio, the Bank calculates Value at Risk (VaR) using an internal model based on RiskMetrics RiskManager system and adding specific capital charge for trading securities. The details of the Bank’s capital adequacy calculations under Basel 2 as at 31 December are shown below: Based on year end balances Tier 1 Capital Tier 2 Capital Total Capital Base Risk Weighted Exposure: Credit Risk Market Risk Operational Risk Total Risk Weighted Exposure Capital Adequacy Ratio Tier 1 Capital Adequacy Ratio
2009 BD’000 US$’000 216,531 20,641 237,172
2008 BD’000 US$’000
575,880 54,896 630,776
202,363 22,089 224,452
538,200 58,747 596,947
870,776 2,315,894 72,547 192,944 120,223 319,742 1,063,546 2,828,580 22.3% 20.4%
974,331 76,283 112,284 1,162,898
2,591,306 202,880 298,628 3,092,814 19.3% 17.4%
NBB ANNUAL REPORT 2009 I 91 AN ICON OF TRUST
Notes to the Financial Statements For the year ended 31 December 2009
40. Capital Adequacy (continued)
Based on average balances Tier 1 Capital Tier 2 Capital Total Capital Base Risk Weighted Exposure: Credit Risk Market Risk Operational Risk Total Risk Weighted Exposure Capital Adequacy Ratio Tier 1 Capital Adequacy Ratio
2009 BD’000 US$’000 184,835 37,259 222,094
2008 BD’000 US$’000
491,582 99,093 590,675
171,333 47,664 218,997
455,673 126,766 582,439
907,097 2,412,492 73,804 196,287 114,269 303,907 1,095,170 2,912,686 20.3% 16.9%
1,027,403 59,987 106,277 1,193,667
2,732,455 159,540 282,651 3,174,646 18.3% 14.4%
41. DEPOSIT PROTECTION SCHEME Deposits held with the Bank’s Bahrain operations are covered by the deposit protection scheme (the Scheme) which was established by the Central Bank of Bahrain. The Scheme applies to all non-banking private sector deposits held with the Bahrain offices of the Bank subject to specific exclusions mainly relating to maximum deposit amounts, maximum total amount covered in one calendar year and maximum total amount of the Deposit Protection Board’s financial resources. No up-front contribution is required to the Scheme and no liability is due until one of the member commercial banks is unable to meet its depository obligations. 42. Comparatives The comparative figures have been re-grouped where necessary to conform with the current presentation. The grouping has not affected profit for the year; total assets; and total liabilities and equity of the Bank.
92 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures for the year ended 31 December 2009
These disclosures have been prepared in accordance with the Public Disclosure Module (“PD”), Section PD-3.1.6, CBB Rule Book, Volume I for Conventional Banks. These disclosures should be read in conjunction with the Notes, in particular the Significant Accounting Policies and Financial Risk Management, in the Bank’s Financial Statements for the year ended 31 December 2009. These Disclosures have been reviewed by the Bank’s external auditors KPMG based upon agreed upon procedures as required under Para PD-A.2.4 of the PD Module.
NBB ANNUAL REPORT 2009 I 93 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
EXECUTIVE SUMMARY The Central Bank of Bahrain’s (CBB) Basel 2 guidelines outlining the capital adequacy framework for banks incorporated in the Kingdom of Bahrain became effective from 1st January 2008. NBB has adopted the Standardised Approach for Credit Risk, Internal Model Approach for Market Risk and the Basic Indicator Approach for Operational Risk to determine the capital requirement. This report consists of the Basel Committee’s Pillar 3 disclosure requirements as stipulated by the CBB. The report contains a description of the Bank’s risk management and capital adequacy policies and practices including detailed quantitative information on capital adequacy. As at 31st December 2009, the Bank’s total risk weighted assets amounted to BD 1,063.5 million; Tier 1 Capital and total regulatory capital amounted to BD 216.5 million and BD 237.2 million respectively. Accordingly, Tier 1 Capital Adequacy Ratio and Total Capital Adequacy Ratio were 20.4% and 22.3 % respectively. These ratios exceed the minimum capital requirements under the CBB’s Basel II framework. The Bank’s intention is to maintain a Tier 1 capital ratio above 8 per cent and a total capital ratio in excess of 12 per cent. The Bank views the Basel 2 Pillar 3 disclosures as an important means of increased transparency and accordingly has provided extensive disclosures in this report that is appropriate and relevant to the Bank’s stakeholders and market participants. This report should be read in conjunction with the Bank’s Financial Statements as at 31 December 2009 including Notes to the Financial Statements. There is a growing convergence of disclosures under International Financial Reporting Standards (IFRS) and the Basel 2 Pillar 3 disclosure requirements, which are in addition to or in some cases, serve to clarify the disclosure requirements of IFRS. SCOPE OF APPLICATION The Bank operates as an independent banking institution with headquarters in Bahrain and branches in Bahrain, the United Arab Emirates and Saudi Arabia. The Bank’s capital adequacy requirements are computed on a consolidated basis. RISK AND CAPITAL MANAGEMENT The Bank is exposed to the following types of risks: • Credit risk • Liquidity risk • Market risk • Interest rate risk • Operational risk Risk management framework The overall authority for risk management in the Bank is vested in the Board of Directors. The Board authorises appropriate credit, liquidity and market risk policies as well as operational guidelines based on the recommendation of Management. The Bank has established various committees that review and assess all risk issues. Approval authorities are delegated to different functionaries in the hierarchy depending on the amount, type of risk and nature of operations or risk. The Credit Policy and Risk Management (CPRM) division of the Bank provides the necessary support to Senior Management and the business units in all areas of risk management. This division functions independent of the business units and reports directly to the Chief Executive Officer. The division comprises of a Credit Review Department (responsible for pre-approval analysis of credit/ investment proposals as well as risk policy and procedures management), Credit Administration Department (responsible for post approval implementation and follow up), Legal Department (responsible for management of legal risk) and Risk Management and Compliance Department (responsible for market risk, operational risk and compliance management)
94 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
The Audit Committee of the Board is responsible for monitoring compliance with the Bank’s policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Audit Committee is assisted in these functions by the Management Internal Control division, which undertakes both regular and adhoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee and to Management. Credit Risk Credit Risk represents the potential financial loss as a consequence of a customer’s inability to honour the terms and conditions of a credit facility. Such risk is measured with respect to counterparties for both on-balance sheet assets and off-balance sheet items. The Bank acknowledges that credit risk is an inherent and substantial cost that needs to be set against income. Risk is just one aspect of the triangle for any economic capital system and must be seen in conjunction with capital requirements and returns. The Bank evaluates risk in terms of the impact on income and asset values and the evaluation reflects the Bank’s assessment of the potential impact on its business on account of changes in political, economic and market conditions and in the credit worthiness of its clients. Risk management at the Bank has always been conservative and proactive with the objective of achieving a balanced relation between risk appetite and expected returns. The Bank monitors and manages concentration risk by setting limits on exposures to countries, sectors, products and counterparty groups. Stringent criteria are used by CPRM in setting such limits and these have ensured that the impact on the Bank’s income stream and capital strength of any adverse developments is limited. Prior to launch of any new asset product, based on a comprehensive risk analysis, product specific transaction approval criteria are set. Similarly, prudent norms have been implemented to govern the Bank’s investment activities, which specify to the Bank’s Treasury department the acceptable levels of exposure to various products, based on its nature, tenor, rating, type, features, etc. The Bank has well laid out procedures, not only to appraise but also regularly monitor credit risk. Credit appraisal is based on the financials of the borrower, performance projections, market position, industry outlook, external ratings (where available), track record, product type, facility tenor, account conduct, repayment sources and ability, tangible and intangible security, etc. Regular reviews are carried out for each account and risks identified are mitigated in a number of ways, which include obtaining collateral, counter-guarantees from shareholders and/or third parties. Adequate margins are maintained on the collateral to provide a cushion against adverse movement in the market price of collateral. Not only are regular appraisals conducted to judge the credit worthiness of the counterparty but day-to-day monitoring of financial developments across the globe by the Business Units and CPRM ensures timely identification of any events affecting the risk profile. The Business Units of the Bank are responsible for business generation and initial vetting of proposals to make sure that the Bank’s risk acceptance criteria are met. Credit facilities in excess of BD 250,000 or falling outside pre-approved product criteria are referred to CPRM for review. The Credit Review Department within CPRM analyses the proposal and puts forth its recommendations prior to approval by the appropriate authorities. In addition to rigorous credit analysis, the terms and conditions of all credit facilities are strictly implemented by the Credit Administration Department. An internal grading system and review process ensures prompt identification of any deterioration in credit risk and consequent implementation of corrective action. The Bank’s internal ratings are based on a 10-point scale, which takes into account the financial strength of a borrower as well as qualitative aspects to arrive at a comprehensive snapshot of the risk of default associated with the borrower. Ratings are further subdivided into categories, which reflect estimates of the potential maximum loss in an event of default. Risk Ratings assigned to each borrower are reviewed at least on an annual basis. Regular monitoring of the portfolio enables the Bank to identify accounts, which witness deterioration in risk profile. Consumer credit facilities which are granted based on pre-defined criteria such as salary assignment, maximum repayment obligation as a percentage of salary, etc are excluded from this rating system
NBB ANNUAL REPORT 2009 I 95 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
The Bank also uses the ratings by established rating agencies, viz., Moody’s, Standard & Poor and Fitch as part of the appraisal process while considering exposures to rated entities. For purposes of comparison, the Bank’s internal ratings are mapped to Moody’s and Standard and Poor (S&P) ratings as under: Bank’s Internal Ratings Scale Equivalent to Moody’s and S&P ratings 1 AAA/Aaa 2 AA/Aa2 3 A/A2 4 BBB+/Baa1 5 BBB-/Baa3 6 BB/Ba2 7 B+/B1 8 - 10 CCC/Caa to C However, the above mapping is not intended to reflect a direct relationship between the Bank’s internal ratings and the corresponding rating of the external agencies since the basis and methodology differ. Liquidity Risk Liquidity Risk is the potential inability of a bank to meet its financial obligations on account of a maturity mismatch between assets and liabilities. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Bank. The asset/liability management policies of the Bank define the proportion of liquid assets to total assets with the aim of minimising liquidity risk. The Bank maintains adequate liquid assets such as inter-bank placements, treasury bills and other readily marketable securities, to support its business and operations. The Treasury Department monitors the maturity profile of assets and liabilities so that adequate liquidity is maintained at all times. The Bank’s ability to maintain a stable liquidity profile is primarily on account of its success in retaining and growing its customer deposit base. The marketing strategy of the Bank has ensured a balanced mix of demand and time deposits. Stability of the deposit base thus minimises the Bank’s dependence on volatile short-term borrowings. Further, investment securities with contractual maturities of more than three months can also be readily liquidated. Considering the effective maturities of deposits based on retention history and in view of the ready availability of liquid investments, the Bank is able to ensure that sufficient liquidity is always available. The Asset Liability Committee (ALCO) chaired by the Chief Executive Officer reviews the Liquidity Gap Profile and the Liquidity scenario and addresses strategic issues concerning liquidity. Market Risk Market Risk is the risk of potential losses arising from movements in market prices of interest rate related instruments and equities in the trading portfolio and foreign exchange and commodities holdings throughout the Bank. The Bank’s trading activities are governed by conservative policies that are clearly documented, by adherence to comprehensive limit structures set annually and by regular reviews. Quality and rating are the main criteria in selecting a trading asset. The Bank uses the Value-at-Risk (VaR) measure to estimate the exposure of the trading portfolio and total currency book to market risk. The VaR quantifies the maximum potential change in the future value of the portfolio due to the sensitivity of the positions to the volatility of and correlation between the risk factors such as interest rates, foreign exchange rates and equity prices. Daily reports in this regard are submitted to senior management for review and decision making purposes. The Bank also uses back testing to validate the VaR model and the results confirm that the model adequately captures risk within the Bank’s trading portfolio. On a monthly basis, the Bank stress tests its trading portfolio to assess the adequacy of the market risk capital held. Stress tests cover scenarios mandated by the Central Bank of Bahrain under its Market Risk regulations as well as specific scenarios created (and amended by the Bank from time to time) based on market developments and the structure of the Bank’s portfolio. The results of stress testing carried out so far have shown a satisfactory position.
96 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
Interest rate Risk Interest Rate Risk is measured by the extent to which changes in the market interest rates impact margins, net interest income and the economic value of the Bank’s equity. Net interest income will be affected as a result of volatility in interest rates to the extent that the re-pricing structure of interest bearing assets differs from that of liabilities. The Bank’s goal is to achieve stable earnings growth through active management of the assets and liabilities mix while, selectively positioning itself to benefit from near-term changes in interest rate levels. The Treasurer is primarily responsible for managing the interest rate risk. Reports on overall position and risks are submitted to senior management for review and positions are adjusted if deemed necessary. In addition, ALCO regularly reviews the interest rate sensitivity profile and its impact on earnings. The Bank’s asset and liability management process is utilised to manage interest rate risk through the structuring of on-balance sheet and off-balance sheet portfolios. The Bank uses various techniques for measuring and managing its exposure to interest rate risk. Duration analysis is used to measure the interest rate sensitivity of the fixed income portfolio. Duration of the portfolio is governed by economic forecasts, expected direction of interest rates and spreads. Modified Duration gives the percentage change in value of the portfolio following a 1% change in yield. Interest rate swaps and forward rate agreements are used to manage the interest rate risk. The Bank uses interest rate gap analysis to measure the interest rate sensitivity of its annual earnings due to repricing mismatches between rate sensitive assets, liabilities and derivatives positions. Operational Risk Operational Risk is the risk of monetary loss on account of human error, fraud, systems failures or the failure to record transactions. In order to manage and mitigate such risks, the Bank ensures that proper systems and resources (financial and personnel) are available to support the Bank’s operations. Proper segregation of duties and other controls (including reconciliation, monitoring and reporting) are implemented to support the various operations, especially credit, treasury and electronic banking activities. Detailed operational guidelines are spelt out in the Operations Manual to specify the steps to be followed in handling any transaction. These steps are designed to mitigate the risks arising from errors, omissions and oversights in dealing with customer instructions and transaction processing. The overriding principles in drawing up operational processes are that transactions must be scrutinized by a “checker” independent from the “originator” prior to booking and that there should be a clear audit trail for post facto scrutiny. The Bank’s Fraud Manual and the Code of Conduct provide necessary guidance to mitigate risks and ensure that adequate controls are in place for detecting suspicious transactions. Any changes to operational procedures need to be processed through the Management Internal Control Department, who ensure that satisfactory control mechanisms are in place in all procedures. Specific limits are set up to mitigate and monitor the Bank’s exposure including limits on maximum branch cash limit, maximum teller limit, maximum payment authorization limit, signature authorities, etc. Documented policies and procedures, approval and authorization process for transactions, documented authority letters, process of verification of transaction details and activities, reconciliation of key activities, dual custody of financial assets like demand drafts, cheques etc. and insurance coverage of various operational risks are the key pillars of the operational risk management process. The Bank has an Operational Risk Management Department within the Credit Policy and Risk Management Division to independently monitor and manage all aspects of operational risk on a bank wide basis. The Bank also has a dedicated Operational Risk Management Committee to supervise, monitor and review operational risks issues and ensure that adequate mitigants are developed and implemented for all operational risk issues. The scope of the Bank’s internal audit department encompasses audits and reviews of all business units, support services and branches. The internal audit process focuses primarily on assessing risks and controls and ensuring compliance with established policies, procedures and delegated authorities. New products and services are reviewed by the internal audit department and assessed for operational risks prior to their implementation. The internal audit department is operationally independent and reports significant internal control deficiencies to the Audit Committee. The Bank has a Business Continuity Plan (BCP) to ensure that the critical activities are supported in case of an emergency. The BCP is approved by the Board of Directors.
NBB ANNUAL REPORT 2009 I 97 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
Risk Monitoring and Reporting Systems and processes are in place to regularly monitor and report risk exposures to the Board of Directors and senior management to effectively monitor and manage the risk profile of the Bank. The Board of Directors is provided with quarterly risk reports covering credit, market, liquidity, operational, concentration and other risks. Senior management is provided with a daily report on market risk and monthly reports on other risks. Reports on capital adequacy and internal capital adequacy assessment are provided to senior management on a quarterly basis. In addition, stress testing on capital adequacy is undertaken once a year or in times of need and communicated to senior management for appropriate decisions. Capital Management The Bank’s policy is to maintain sufficient capital to sustain investor, creditor and market confidence and to support future development of the business. The impact of the level of capital on return on shareholder’s equity is also considered and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Bank’s capital management framework is intended to ensure that there is capital sufficient to support the underlying risks of the Bank’s business activities and to maintain a well-capitalised status under regulatory requirements. The Bank has a comprehensive Internal Capital Adequacy Assessment Process (ICAAP) that includes Board and senior management oversight, monitoring, reporting and internal control reviews, to identify and measure the various risks that are not covered under Pillar 1 risks and to regularly assess the overall capital adequacy considering the risks and the Bank’s planned business strategies. The non Pillar 1 risks covered under the ICAAP process include concentration risk, liquidity risk, interest rate risk in the banking book and other miscellaneous risks. The ICAAP also keeps in perspective the Bank’s strategic plans, credit growth expectations, future sources and uses of funds, dividend policy and the impact of all these on maintaining adequate capital levels. In addition, the ICAAP process also includes stress testing on the Bank’s capital adequacy to determine capital requirement and planning to ensure that the Bank is adequately capitalized in line with the overall risk profile. The Bank ensures that the capital adequacy requirements are met on a consolidated basis and also with local regulator’s requirements, if any, in countries in which the Bank has branches. The Bank has complied with regulatory capital requirements throughout the period. Prior approval of the Central Bank of Bahrain is obtained by the Bank before submitting any proposal for distribution of profits for shareholders approval. CAPITAL STRUCTURE AND CAPITAL ADEQUACY The Bank’s paid up capital consists only of ordinary shares which have proportionate voting rights. The Bank does not have any other type of capital instruments. The Bank’s Tier 1 capital comprise of share capital, share premium, retained earnings and eligible reserves. Retained profits are included in Tier 1 pursuant to an external audit. The eligible reserves in Tier 1 are excluding revaluation gains and losses arising on the re-measurement to fair value of available-for-sale securities. Further, the following items are adjusted from Tier 1 capital as per CBB guidelines: •
Unrealized losses, on equity securities classified as available-for-sale, are deducted wholly from Tier 1.
• Fair value of investments in associates and unrated securitisation exposures are deducted equally from Tier 1 and Tier 2 i.e. 50% from
Tier 1 and 50% from Tier 2. The Bank’s Tier 2 Capital comprises interim profits, collective impairment provisions and 45 per cent of unrealised gains arising on the re-measurement to fair value of equity securities classified as available-for-sale and deduction of 50% of fair value of investments in associates and unrated securitisation exposures. The fair value of the investments in The Benefit Company (associate company based on the Bank’s 34.84 percent holding) is deducted equally from the Tier 1 and Tier 2 capital of the Bank as required by the Central Bank of Bahrain guidelines. The Bank has no subsidiaries and/or investments in insurance companies exceeding 20% of the Bank’s capital or the investee company’s capital that is required to be deducted from capital.
98 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
Capital structure, minimum capital requirement and Capital Adequacy: As at 31 December 2009 BD ‘000s Tier 1 capital Share Capital Statutory Reserve General Reserve Other Reserves Retained Earnings Deductions from Tier 1 Capital Total Tier 1 (A) Tier 2 capital 45% of revaluation reserves on available for sale equity investments Collective impairment provision subject to a 1.25% risk adjusted exposure limitation Deductions from Tier 2 Capital Total Tier 2 Total Capital Base (Tier 1 + Tier 2) (B)
77,760 38,880 32,400 7,261 65,630 (5,400) 216,531 14,524 8,231 (2,114) 20,641 237,172
Risk weighted Capital requirement As at 31 December 2009 exposure @ 12% BD ‘000s Cash and collection items Sovereigns Banks Corporates Regulatory retail Residential mortgages Investments in equities/funds Securitisation exposures Others Total Credit Risk Exposure Market Risk Operational Risk Total Risk Weighted Exposure (C ) Capital Adequacy Ratio (B)/(C) Tier 1 Capital Adequacy Ratio (A)/(C)
469 – 167,953 323,871 207,601 15,238 57,374 111 98,159 870,776 72,547 120,223 1,063,546 22.30% 20.36%
56 – 20,154 38,865 24,912 1,829 6,885 13 11,779 104,493 8,705 14,427 127,625
NBB ANNUAL REPORT 2009 I 99 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
CREDIT RISK The Bank has a diversified on and off balance sheet credit portfolio, which are divided into counter party exposure classes in line with the CBB’s Basel II capital adequacy framework for the standardised approach for credit risk. A high-level description of the counter party exposure classes and the risk weights used to derive the Risk Weighted Assets are as follows: Sovereigns Portfolio The sovereign portfolio comprises exposures to governments and their respective central banks. The risk weights are 0 per cent for exposures in the relevant domestic currency of the sovereign, or for any exposures to GCC governments. Foreign currency claims on other sovereigns are risk weighted based on their external credit ratings. Certain multilateral development banks as determined by the CBB may be included in the sovereign portfolio and treated as exposures with a 0 per cent risk weighting. PSE Portfolio Public sector entities (PSEs) are risk weighted according to their external ratings excepting that Bahrain PSEs, and domestic currency claims on other PSEs that are assigned a 0 per cent risk weight by their respective country regulator, are consequentially allowed a 0 per cent risk weight by CBB for computation purposes. Banks Portfolio Claims on banks are risk weighted based on their external credit ratings. A preferential risk weight treatment is available for qualifying short-term exposures to banks in their country of incorporation. Short-term exposures are defined as exposures with an original tenor of three months or less and denominated and funded in the respective domestic currency. The preferential risk weight for short-term claims is allowed on exposures in Bahraini Dinar/US Dollar in the case of Bahraini incorporated banks. Corporates Portfolio Claims on corporates are risk weighted based on their external credit ratings. A 100 per cent risk weight is assigned to exposures to unrated corporates. A preferential risk weight treatment is available for certain corporates owned by the Government of Bahrain, as determined by the CBB, which are assigned a 0 per cent risk weight. Equities Portfolio The equities portfolio comprises equity investments in the banking book, i.e. the available-for-sale securities portfolio. The credit (specific) risk for equities in the trading book is included in market risk RWAs for regulatory capital adequacy calculation purposes. A 100 per cent risk weight is assigned to listed equities and funds. Unlisted equities and funds are risk weighted at 150 per cent. Investments in rated funds are risk weighted according to the external credit rating. Investments in companies engaged primarily in real estate are included in other assets and risk weighted at 200%. In addition to the standard portfolios, other exposures are risk weighted as under: Past due exposures All past due loan exposures, irrespective of the categorisation of the exposure are classified separately under the past due exposures asset class. A risk weighting of either 100 per cent or 150 per cent is applied depending on the level of specific provision maintained against the exposure. Other assets and holdings of securitisation tranches Other assets are risk weighted at 100 per cent. Securitisation tranches are risk weighted (ranging from 20 per cent to 350 per cent) based on their external credit ratings. Exposures to securitisation tranches that are rated below BB- or are unrated are deducted from regulatory capital rather than subject to a risk weight. Investments in real estate and also in bonds, funds and equities of companies engaged primarily in real estate are included in other assets and risk weighted at 200%
100 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
External Credit Assessment Institutions (ECAI) 1. The Bank uses ratings issued by Standard & Poor’s, Moody’s and Fitch to derive the risk weightings under the CBB’s Basel 2 capital adequacy framework. Where ratings vary between rating agencies, the highest rating from the lowest two ratings is used to represent the rating for regulatory capital adequacy purposes. The following are gross credit risk exposures considered for Capital Adequacy Ratio calculations comprising of banking book exposures. As at 31 December 2009 BD ‘000s Cash and balances at central banks Treasury bills Placements with banks and other financial institutions Loans and advances Investment securities Accrued interest receivable, other assets and property & equipment Total assets Non-derivative banking commitments and contingent liabilities (notional) Derivatives (notional)
81,213 124,927 246,091 1,159,654 483,121 29,336 2,124,342 111,405 328,508
The balances as at 31st December 2009 are representative of the position during the period; hence the average balances for the period is not separately disclosed. INDUSTRY OR COUNTERPARY EXPOSURE As at 31 December 2009 BD ‘000s Cash and balances at central banks Treasury Bills Placements with banks/financial institutions Loans and advances Investment securities Accrued interest receivable, other assets and property & equipment Total assets Non-derivative banking commitments and contingent liabilities (notional) Derivatives (notional)
Govt
Mfg/ Trdg Banks/ FIs
Const Personal
Others
Total
- 124,927 - 300,754 244,689
- - - 158,684 4,051
81,213 - - - - - 246,091 - - 138,217 164,156 305,511 181,867 4,611 -
1,452 671,822
520 163,255
2,590 509 803 23,462 29,336 649,978 169,276 306,314 163,697 2,124,342
27,000 -
17,685 -
34,469 328,505
13,992 -
1,860 -
- 81,213 - 124,927 - 246,091 92,332 1,159,654 47,903 483,121
16,399 -
111,405 328,505
The above includes certain exposures to customers / counter parties which are in excess of 15 % of the Bank’s capital base. These have the approval of the Central Bank of Bahrain or are exempt exposures under the large exposures policy of the Central Bank of Bahrain.
NBB ANNUAL REPORT 2009 I 101 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
GEOGRAPHIC DISTRIBUTION OF EXPOSURE As at 31 December 2009 BD ‘000s
Middle East USA Europe
Cash and balances at central banks Treasury Bills Placements with banks/ financial institutions Loans and advances Investment securities Accrued interest receivable, other assets and property & equipment Total assets Non-derivative banking commitments and contingent liabilities (notional) Derivatives (notional)
Rest of the world
Total
81,213 124,927 170,003 1,150,283 214,737
- - 18,433 6,519 169,756
- - 57,311 - 56,900
- - 344 2,852 41,728
81,213 124,927 246,091 1,159,654 483,121
27,911 1,769,074
492 195,200
848 115,059
85 45,009
29,336 2,124,342
88,205 153,816
622 -
21,185 132,363
1,393 42,329
111,405 328,508
RESIDUAL CONTRACTUAL MATURITY As at 31 December 2009 BD ‘000s
Up to 3 months
3 to 6 months
6 to 12 months
1 to 3 years
3 to 5 years
5 to 10 years
10 to 20 years
Over 20 years
Total
- Cash and balances at central banks 81,213 Treasury Bills 114,915 10,012 Placements with banks/ 214,921 31,170 financial institutions Loans and advances 236,328 66,882 Investment securities 10,948 13,684 Accrued interest receivable, other 432 assets and property & equipment 7,225 Total assets 665,550 122,180 Non-derivative banking commitments and contingent 54,728 9,578 liabilities (notional) Derivatives (notional) 283,035 45,473
- -
- -
- -
- -
- -
- -
81,213 124,927
- 189,574 47,297
- 380,629 267,860
- 162,917 69,243
- 78,041 9,659
- 44,247 -
- 246,091 1,036 1,159,654 64,430 483,121
70 236,941
882 649,371
800 232,960
15 87,715
- 44,247
19,912 29,336 85,378 2,124,342
16,152 –
21,685 –
9,262 –
– –
– –
– –
111,405 328,508
Past due exposures In accordance with the Bank’s policy and Central Bank of Bahrain guidelines, loans on which payment of interest or repayment of principal are 90 days past due, are defined as non-performing. The Bank has systems and procedures in place to generate alerts in case of past dues in any account. A stringent classification process is followed for all accounts with past dues of over 90 days. The Bank applies rigorous standards for provisioning and monitoring of nonperforming loans. Level of provisions required is determined based on the security position, repayment source, discounted values of cash flows, etc and adequate provisions are carried to guard against inherent risks in the portfolio. Provision for possible loan losses, pertaining to individually significant impaired loans and advances, is determined based on the difference between the net carrying amount and the estimated recoverable amount of the loans and advances, measured at present value of estimated future cash flows from such loans and advances and discounting them based on their original effective interest rate. If a loan has a floating interest rate, the discount rate is the current effective rate determined under the contract.
102 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
Impairment and uncollectability is also measured and recognised on a portfolio basis for a group of similar loans and advances, that are not individually identified as impaired, on the basis of estimates of incurred losses that are inherent but not yet specifically identified within the loans and advances portfolio at the balance sheet date. The estimates are based on internal risk ratings, historical default rates, rating migrations, loss severity, macroeconomic and other relevant factors with historic loss experience being adjusted to reflect the effect of prevailing economic and credit conditions. • Ageing analysis of impaired and past due loans and advances: As at 31 December 2009 BD ‘000s Over 3 months to 1 year 1 to 3 years Over 3 years Total
2,431 1,482 3,507 7,420
• Geographical location of impaired and past due loans and advances: As at 31 December 2009 BD ‘000s Loan Amount Bahrain Other GCC countries Others Total
6,958 462 – 7,420
Specific Collective provision impairment 6,191 410 – 6,601
6,585 1,564 82 8,231
• Industry/sector wise breakdown of impaired and past due loans and advances: At 31 December 2009 Specific Collective impairment impairment Year 2009 Loan Amount provision provision BD ‘000s Government Manufacturing/trading Construction Personal Others Total
– 687 679 5,738 316 7,420
– 688 605 5,181 127 6,601
2,138 897 1,169 2,070 1,957 8,231
Year 2009
Specific impairment provision
Collective impairment provision
BD ‘000s At 1 January 2009 Charge for the year Amounts written off against provision Recoveries & write backs At 31 December 2009
7,521 938 (1,569) (289) 6,601
5,375 3,500 (8) (636) 8,231
During the year ended 31 December 2009 Specific impairment Charge Write offs
97 – – 824 17 938
1,386 7
– 175 1 1,569
• Movement in provision for impairment of loans and advances:
Total Interest provision in suspense
12,896 4,438 (1,577) (925) 14,832
4,731 722 (1,624) (240) 3,589
NBB ANNUAL REPORT 2009 I 103 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
CREDIT RISK MITIGATION The reduction of the capital requirement attributable to credit risk mitigation is calculated in different ways, depending on the type of credit risk mitigation, as under: Adjusted exposure amount: The Bank uses the comprehensive method for eligible financial collateral such as cash and equities listed on a recognized stock exchange. The exposure amount and financial collateral, where applicable, are adjusted for market volatility through the use of supervisory haircuts (for currency mis-matches, price volatility and maturity-mismatches) that are specified by the CBB. Substitution of counterparty: The substitution method is used for eligible guarantees (only sovereigns, banks or corporate entities with ECAI ratings higher than that of the counterparty; guarantees issued by corporate entities may only be taken into account if their rating corresponds to A- or better) whereby the rating of the counterparty is substituted with the rating of the guarantor. COLLATERAL AND VALUATION PRINCIPLES The main collaterals taken for risk mitigation on credit exposures are deposits held by customers, pledge of quoted shares, residential/ commercial property mortgage, investment securities, counter-guarantees from other banks, etc. Other risk mitigants considered include salary and end of service benefits assignment for personal loans, personal guarantees of promoters etc. However, for purposes of capital adequacy computation, only eligible collaterals recognized under Basel 2 are taken into consideration and there are no significant concentrations in such eligible collaterals taken for credit risk mitigation. The Bank’s Credit Policy defines the types of acceptable collateral and the applicable haircuts or loan-to-value ratio. The Bank has a system of independent valuation of collateral. In the case of real estate, valuation is done by independent valuer at regular intervals as stipulated in the Bank’s credit policy. In respect of quoted shares and other securities, the valuation is done based on the closing price on the stock exchange. The market value of the collateral is actively monitored on a regular basis and requests are made for additional collateral in accordance with the terms of the underlying agreements. In general, lending is based on the customer’s repayment capacity and not the collateral value. However, collateral is considered as a secondary alternative to fall back on in the event of default. Eligible financial collateral, guarantees and credit derivatives, presented by standard portfolio are as under: As at 31 December 2009 BD ‘000s Sovereigns Banks Corporates Regulatory retail Residential mortgage Others
Of which secured by eligible Gross Guarantees credit Financial and credit exposure collateral derivatives 599,329 547,337 663,063 279,151 20,454 84,952
– 167,885 22,146 2,351 136 16,704
33,333 – – – – –
Credit exposure after risk mitigants 565,996 379,453 640,917 276,800 20,318 68,258
On and off-Balance Sheet netting: The legal documents that the Bank obtains from customers include clauses that permit the Bank to offset the customer’s dues to the Bank against the Bank’s dues to the customer. Thus, if the same legal entity has obtained credit facilities from the Bank and also maintains credit balance with the Bank, the Bank has the legal right to set-off the credit balances against the dues. In case of certain counter party banks, the Bank has entered into specific netting agreements that provide for netting on and off-balance sheet exposures. The amount of financial assets and financial liabilities set off under netting agreements amounted to BHD 35.1 million.
104 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
MARKET RISK The Bank uses the Internal Model Approach for assessing the capital requirement for market risk, which includes capital charge for both general and specific risk. The principal tool used to measure and control market risk exposure is Value-at-Risk (VaR). The VaR is the estimated loss that will arise on the trading portfolio over a pre-defined time horizon from an adverse market movement for a specified confidence level. Based on the approval of the Central Bank of Bahrain, the Bank has been computing market risk using an internal model based on RiskMetrics software since 1999. The VaR model used by the Bank is based upon a 99 percent confidence level and assumes a 10-day time horizon. The multiplication factor to be applied to the Value-at-Risk calculated by the internal model has been set at the regulatory minimum of 3.0 by the CBB. The Bank has clearly documented policies and procedures for the management and valuation of the trading portfolio. The Treasury Operations department, which is independent of the front office, is responsible for valuation which is done on a daily basis, based on quoted market prices from stock exchanges, independent third parties or amounts derived from cash flow models as appropriate. The summary of the VaR position of the Bank at 31 December and during the period is as follows: BD 000’s
At 31 December 2009
Foreign currency risk Interest rate risk Other price risk Total
1,025 440 258 1,723
During the year ended 31 December 2009 Average Maximum Minimum 1,377 256 254 1,887
1,704 548 269
912 17 218
The chart below shows a monthly trend of VaR from January to December 2009. During this period, the maximum VaR was BD 2.27 million on 29 October 2009 while the minimum VaR was BD 1.45 million on 11 March 2009. Dec 09 Nov 09 Oct 09 Sep 09 Aug 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 0
500
1000
value-at-risk at month end - 2009 BD ‘000
1500
2000
2500
NBB ANNUAL REPORT 2009 I 105 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
The Bank uses back-testing to validate the VaR model. VaR is compared with actual daily profits and losses incurred on the trading portfolio. This assists in identifying any exceptions or losses that are not covered by the VaR measure. Back-testing results, as detailed below, confirm that the internal model adequately captures risks within the Bank’s trading portfolio. 400 200 0 -200 -400 -600 -800 Jan
Feb
Back testing P/L
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1 Day VaR
value-at-risk backtesting january-december 2009 BD ‘000
OPERATIONAL RISK Whilst the Bank recognizes that operational risks cannot be eliminated in its entirety, it constantly strives to minimise operational risks (inherent in the Bank’s activities, processes and systems) by ensuring that a strong control infrastructure is in place throughout the organisation and enhanced where necessary. The various procedures and processes used to manage operational risks are regularly reviewed and updated and implemented through effective staff training, close monitoring of risk limits, segregation of duties, appropriate controls to safeguard assets and records, regular reconciliation of accounts and transactions, and financial management and reporting. In addition, regular internal audit and reviews, business continuity planning and arrangements for insurance cover are in place to complement the processes and procedures. The Bank presently follows the Basic Indicator Approach for assessing the capital requirement for Operational Risk. The capital requirement of BD 14.4 million is based on 15% of the average of the gross operating income (excluding profit/loss on Investments held under Available for Sale, Held to Maturity categories and any exceptional items of income) for the last 3 years multiplied by 12.5 ( the reciprocal of the 8 percent minimum capital ratio) to arrive at the operational risk-weighted exposure.
106 I NBB ANNUAL REPORT 2009 financial statement
risk and capital management disclosures For the year ended 31 December 2009
EQUITY POSITION IN BANKING BOOK The Bank holds certain investments in equity securities as part of its strategic holdings and others are held with the objective of capital appreciation and realising gains on sale thereof. All equity positions in the Banking book are classified as “Available for Sale”. The accounting policies for “Available for Sale” instruments are described in detail in the Financial Statements under “Significant Accounting Policies”. As at 31 December 2009 BD ‘000s Balance Details of Equity Investments: Sheet Value
Capital Requirement @12% of Risk Weighted Assets
49,729 14,828 64,557
3,986 2,660 6,646
Realised gains (recorded in Income Statement during the year) Unrealised gains recognised in Equity Unrealised losses deducted from Tier 1 Capital 45 % of unrealised gains recognised under Tier 2 Capital
BD 000’s
Quoted Equities: Unquoted Equities: Total
312 28,991 3,286 14,524
INTEREST RATE RISK IN BANKING BOOK Interest Rate Risk is measured by the extent to which changes in the market interest rates impact margins, net interest income and the economic value of the Bank’s equity. The Bank’s asset and liability management process is utilised to manage interest rate risk through the structuring of on-balance sheet and off-balance sheet portfolios. Net interest income will be affected as a result of volatility in interest rates to the extent that the re-pricing structure of interest bearing assets differs from that of liabilities. The Bank’s goal is to achieve stable earnings growth through active management of the assets and liabilities mix while, selectively positioning it to benefit from near-term changes in interest rate levels. Overall non-trading interest rate risk positions are managed by the Treasury division, which uses investment securities, placements with banks, deposits from banks and derivative instruments to manage the overall position arising from the Bank’s non-trading activities. Reports on overall position and risks are submitted to senior management for review and positions are adjusted if deemed necessary. In addition, ALCO regularly (at least on a monthly basis) reviews the interest rate sensitivity profile and its impact on earnings. Strategic decisions are made with the objective of producing a strong and stable interest income stream over time. Duration analysis is used to measure the interest rate sensitivity of the fixed income portfolio. Duration of the portfolio is governed by economic forecasts, expected direction of interest rates and spreads. Modified Duration gives the percentage change in value of the portfolio following a 1% change in yield. Modified Duration of the Bank’s fixed income portfolio was 1.31% on 31.12.2009, which implies that a 1% parallel upward shift in the yield curve could result in a drop in the value of the portfolio by BD 4.8 million. Deposits without a fixed maturity are considered as repayable on demand and are accordingly included in the overnight maturity bucket. The Bank usually levies a pre-payment charge for any loan or deposit, which is repaid/withdrawn before the maturity date, unless it is specifically waived. This prepayment charge is to take care of any interest rate risk that the Bank faces on account of such prepayments and accordingly, no assumptions regarding such prepayments are factored for computation of interest rate risk in the banking book.
NBB ANNUAL REPORT 2009 I 107 AN ICON OF TRUST
risk and capital management disclosures For the year ended 31 December 2009
The Bank uses interest rate gap analysis to measure the interest rate sensitivity of its annual earnings due to re-pricing mismatches between rate sensitive assets, liabilities and derivatives’ positions. The asset and liability re-pricing profile of various asset and liability categories is set out below: As at 31 December 2009 BD ‘000s
Upto 3 months
3 to 6 months
6 to 12 months
1 to 5 years
Over 5 years
Rate insensitive
Total
– 10,012
– –
– –
– –
81,213 –
81,213 124,927
31,170 – 86,713 13,816
– – 128,266 22,652
– – 280,275 205,524
– – 75,353 3,762
7,128 391 – 72,537
246,091 1,637 1,151,423 483,121
– 141,711
– 150,918
– 485,799
– 79,115
29,336 190,605
29,336 2,117,748
240,317
–
216
–
–
19,283
259,816
125,586 838,198 – – 1,204,101 (134,501)
– 132,162 – – 132,162 9,549
– 27,092 – – 27,308 123,610
– 160 – – 160 485,639
– – – – – 79,115
– 482,780 10,589 241,365 754,017 (563,412)
125,586 1,480,392 10,589 241,365 2,117,748 –
(134,501)
(124,952)
(1,342)
484,297
563,412
–
–
Assets – Cash and balances at central banks Treasury Bills 114,915 Placements with banks/ 207,793 financial institutions Trading securities 1,246 Loans and advances* 580,816 Investment securities 164,830 Accrued interest receivable, other – assets and property & equipment Total assets 1,069,600 Liabilities and equity Due to banks and financial institutions Borrowings under repurchase agreements Customers’ deposits Other liabilities Equity Total liabilities and equity Interest rate sensitivity gap Cumulative interest rate sensitivity gap
*Net of collective impairment provision of BD 8,231.
The interest rate risk management process is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to an interest rate shock of 200bps increase/ decrease. An analysis of the Bank’s sensitivity to an increase or decrease in market interest rates (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows: Year 2009 In BD ‘000s
200 bp parallel increase
200 bp parallel decrease
As at 31 December Average for the year Minimum for the year Maximum for the year
(9,582) (8,328) (5,470) (9,764)
9,582 8,328 5,470 9,764
108 I NBB ANNUAL REPORT 2009 contact directory
Contact Directory
Abdul Razak A. Hassan Al Qassim Chief Executive Officer & Director Abdul Rahman A. Mohamed General Manager Banking Group
Marketing & Sales
Government & Transactional Banking
Customers’ Services
Abdul Aziz Abdulla Al Ahmed Executive Assistant General Manager
Nader Karim Al Maskati Assistant General Manager
Abdulla Abdul Rahman Hussain Executive Assistant General Manager
Tariq I. Siddiqui Senior Manager Domestic Corporate Banking
Ghaneya Mohsen Al Durazi Senior Manager Marketing & Sales
Jassim Al Hammadi Assistant General Manager Central Operations
Ahmed Jassim Murad Senior Manager Domestic Commercial Banking
M. K. Fernandes Manager Remedial Management
Fouad Khalifa Al Eid Senior Manager Branch Operations
Subhodip Ghose Senior Manager Domestic Marketing & Planning
Manoj Cheryayancheri Senior Manager Cards Operations
Abdul Rahman Medfaei Senior Manager Personal Banking
V. Sreedharan Senior Manager Information Technology
Regional Banking
Mukesh Bhatia Senior Manager Technology Solutions Operations & Administration
Farouk Abdulla Khalaf Assistant General Manager Abu Dhabi Branch Eyad Yousif Sater Senior Manager Riyadh Branch Reyad Nasser Al Nasser Senior Manager
Khalifa Mohamed Al Ansari Senior Manager Information Technology Operations Conrad Cardozo Manager Call Centre Ali M. Al Merbaty Manager General Services
NBB ANNUAL REPORT 2009 I 109 AN ICON OF TRUST
Treasury & Investment Group
Credit Policy & Risk Management Group
Corporate Services Group
Hussain Al Hussaini Deputy General Manager
Raveendra Krishnan Executive Assistant General Manager
Khalid Ali Juma Executive Assistant General Manager
Noora Ali Mubarak Al Doseri Senior Manager Treasury Marketing & Sales
Yousif Mohamed A. Karim Senior Manager Credit Administration
Hemant Narayan Kulkarni Senior Manager Funds & Investment
Fatima Abdulla Budhaish Senior Manager Credit Review
Thomas Mulligan Senior Manager Marketable Securities
Abhik Goswami Senior Manager Risk Management and Compliance
Mohamed Rashid Al Mutaweh Manager Treasury Marketing & Sales
Hassan Hussain Hamad Senior Manager Legal Advisor
Riyad Yousif Ahmed Manager Funds & Investment
Management Internal Control
Sami Mansoor Radhi Manager Marketable Securities Maha Al Mahmood Manager Foreign Exchange & Money Markets Hussain Ebrahim Ghuloom Manager Foreign Exchange & Money Markets
Abdul Munem Al Banna Assistant General Manager
V.S M. Raju Senior Manager Financial Control Atul P. Raje Senior Manager Human Resources Mohamed Abdulla Janahi Senior Manager Properties & Maintenance Balu Ramamurthy Senior Manager Projects’ Management & Process Re-Engineering Abdul Aziz Al Hammadi Manager Treasury Operations Eman Ijaz Sarwani Manager Treasury Operations Board Secretary Nasser Mohamed Nasser Senior Manager Corporate Communications Abdul Rahim Mahmood Al Saeedi Senior Manager
110 I NBB ANNUAL REPORT 2009 contact directory
Contact Directory
National Bank of Bahrain BSC P O Box 106 NBB Tower Government Avenue Manama, Kingdom of Bahrain Commercial Registration no. 269
Branches in Bahrain
Telephone General
17 228800
Airport
Treasury
17 227722
Arrivals
17 321212
Transit
17 321214
Fax
A’ali
17 643438
General
17 228998
Al Esteqlal Highway
17 622611
Treasury
17 213503
Al Muthanna
17 225622
Asry
17 671007
Awali
17 756462
Telex General
8242 NATBNK BN
Central Market
17 241242
Treasury
8899 NBOBFX BN
Diplomatic Area
17 537466
East Riffa
17 775284
Cable
Exhibition Avenue
17 714900
NATBANK
Hamad Town
17 420898
Hidd
17 672683
S.W.I.F.T
Isa Town
17 689555
NBOB BHBM
Jidhafs
17 552257
Lulu Road
17 256444
E mail nbb@nbbonline.com
Main Branch (New NBB Tower)
17 228800
Mina Sulman
17 729319
Website
Muharraq North
17 322522
www.nbbonline.com
Muharraq Souk
17 343717
Palace Avenue
17 294191
Call Centre
Salmaniya
17 250777
17 214433
Seef Mall
17 582666
Card Services (24 hours)
Sitra
17 731128
17 214433
Souk Waqef
17 413444
NBB ANNUAL REPORT 2009 I 111 AN ICON OF TRUST
Branches in the Region
Share Registrars
Abu Dhabi Branch
KPMG
National Bank of Bahrain
P.O.Box 710
P O Box 46080, Al Otaiba Tower,
Hedaya house
Sh. Hamdan Street, Abu Dhabi
Government Avenue
United Arab Emirates
Manama, Kingdom of Bahrain
Telephone : 00971 2 6335288 Fax : 00971 2 6333783 Telex : 24344 NATBAH EM Riyadh Branch National Bank of Bahrain P O Box 65543 Riyadh 11566 Arch Tower King Fahad Highway Olaya, Riyadh Kingdom of Saudi Arabia Telephone: 009661 299 8800 Swift: NBOBSARI
112 I NBB ANNUAL REPORT 2009 financial statement