Annual Report 2014 Annual Report 2014
..Think Possibilities
01 ..Think Possibilities TRADE FINANCE.
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..Think Possibilities Orient Bank Limited Annual Report, 2014 Orient Bank Limited
TABLE OF CONTENTS
REVIEW Our profile 5 Corporate Social Responsibility 6 Our Delivery Channels and Products 8 Corporate Information 9 GOVERNANCE Chairman’s Statement 11 Managing Director/ CEO’s Statement 15 Board of Directors’ Profiles 18 Executive Committee 22 Directors’ Report 24 Statement of Directors’ Responsibilities 26 Report of the Independent Auditors 27 FINANCIAL STATEMENTS Consolidated Statement of Comprehensive Income 30 Bank Statement of Comprehensive Income 31 Consolidated Statement of Financial Position 32 Bank Statement of Financial Position 33 Consolidated Statement of Changes in Equity 34 Bank Statement of Changes in Equity 35 Consolidated Statement of Cash flows 36 Bank Statement of Cash flows 37 Notes to the Financial Statements 38
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OUR PROFILE
WHO WE ARE Orient Bank Limited is a leading private sector commercial Bank in Uganda. We have been in operation since 1993 and our performance since has been commendable. This steady growth can be attributed to the professional management and prudent lending and investment policies of the bank.
VISION To be the pace setter and preferred financial partner for our stakeholders
MISSION To deliver service that provides superior value to our customers
CORE VALUES We summarise our core values as SPIRIT
Service Customers will always want to talk to us and they believe we can solve their problems. This is why at Orient Bank, we care more than others think. We take risk for the sake of service and we dream more than others think practical. We expect more than others think possible.
Passion Enthusiasm at Orient Bank is the most powerful engine of our success. When we do something, we do it with all our might. We put our soul into our work and stamp it with our own personality in order to accomplish our customers’ objectives. We believe that nothing great was ever achieved without enthusiasm.
Innovation At Orient Bank, our discovery focuses on seeing what everybody has not seen and thinking what nobody has thought.” As Team members of Orient Bank, we make discovery and excite customers with our product offerings which we continuously develop to make your banking enjoyable and pleasurable.
Resilience Orient bank’s resilience is rooted in a tenacity of spirit; a determination to embrace all that makes life worth living even in the face of overwhelming odds. When we have a clear sense of identity and purpose, we are more resilient, because we can hold fast to our vision of a better future.
Integrity The supreme quality for leadership is unquestionably integrity. Without it, no real success is possible, whether it is on a section gang, a football field, in an army, or in an office and most especially in Banking. At Orient Bank we lead with integrity.
Teamwork Our enduring success lies in collaborating and supporting each with the best teams to deliver value for our customers and stakeholders. At Orient Bank, coming together with our customers is a beginning, keeping together is progress and working together is success.
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COMMUNITY INVOLVEMENT AND EVENTS
COMMUNITY INVOLVEMENT The Orient Open Antenatal Day Orient Bank Limited in partnership with Vision Group and KCCA organized an Antenatal Open Day at Kawala KCCA Health center III. The bank gave out a total of 830 Mama Kits and over 1000 mothers received free Antenatal education and testing kits and medical personnel. The bank aslo donated water dispensers, boilers and medicines to the Health Centre in a bid to improve service delivery. The MD/CEO of Orient Bank-Julius Kakeeto hands over the supplies to the KCCA Director Health services Dr. Daniel Okello. Looking on from the left are members of Orient Bank's Senior Management team and New Vision's Head of Marketing - Susan Nsibirwa (third from the left).
EVENTS
The MD/CEO of Orient Bank-Julius Kakeeto officiates at the launch of the Visa The Head of Treasury- Peace Adia , takes coffee dealers through the bank’s Debit Chip and Pin card. He is flanked by the ED Orient Bank - Bernard Magulu product offering. Orient bank held a coffee dealers’ breakfast as an initiative and Head of Finance, Amargeet Singh. to further understand the customers’ needs and address them accordingly.
The Governor Bank of Uganda, Chief Guest at the unveilling of the The Orient giants won the gold medal during the 2014 banker’s gala awards. Acacia mall branch, Prof Tumusiime Mutebile cuts tape to officially open the The volley ball also won a bronze medal for their outstanding performance branch, flanked by the Chairman of the Board, Michael Cook.
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07 ..Think Possibilities Orient Bank Limited
OUR DELIVERY OUR PRODUCT CHANNELS PORTFOLIO
INTERNET BANKING: We offer a host of Retail, Corporateand Commercial This is a service that has been designed to enable banking products that meet the financial needs of our our customers transact via the Internet. With this customers; service, customers are able to check their account details, view and download account statements, CURRENT ACCOUNTS and make internal transfers, among others. Standard Current Account (Personal & Business) SME Daily Current Account Foreign currency current account (Personal & Business) Kyakala (Single Tariff) Account (Personal & Business) AUTOMATED TELLER MACHINES (ATMS): Premium Account We currently have 23 VISA enabled ATM machines Sapphire account strategically located in different towns. Customers can withdraw money and deposit cash/cheques at the ATM. SAVINGS ACCOUNTS Classic Saving Accounts Dollar Savings Account (DOSA) Phuture Children’s Account CHAMA Investment Club Account POINT OF SALE (POS) MACHINES: Savings Account Plus Orient Bank gives one easy access to their money Diaspora Account through our Point of Sale (POS) machines which Smart Plan - Target Savings Account enable the bank’s customers to pay for goods and services using their Orient Bank VISA CHIP and PIN debit Cards. These POS terminals are very RETAIL CREDIT strategically positioned at many merchants places Orient Salary Xpress Loans of business and they accept VISA. SME Loans
TRADE FINANCE MOBILE BANKING: Letters of Credit Orient Bank gives you a finger-tip convenient way Guarantees/ Bid bonds of banking. One does not have to visit the Bank or ATM as they can now use their mobile phone to:• CORPORATE CREDIT Check account balances top up Airtime on mobile Commercial Loans phone among others Overdrafts Guarantees/ Perfomance/Bid bonds
ORIENT VISA CHIP AND PIN: INTERNATIONAL CURRENCY SERVICES Our Visa card offers immense opportunities and Foreign Currency Accounts access to a world of possibilities. Our Visa card is Telegraphic Transfer inbuilt with a chip and pin facility which allows for Forex online transactions while enhancing the security features of the card. It can be used used wildwide OTHER SERVICES at any VISA outlet We have considerable experience in the provision of customer payments and cash management services for OUR BRANCH NETWORK: big organizations both local and foreign which includes; Orient Bank boasts of 21 branches spread across Salary Processing the three main regions of Uganda, including Internal transfers Central, Eastern and Nothern region. Customers Safe custody can therefore access the Bank’s products and Collections - Bill Payments (URA taxes, UMEME, NWSC services from any Orien Bank Branch. bills, KCCA charges, NSSF )
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CORPORATE INFORMATION
DIRECTORS Mr. Michael Cook - Chairman Mr. Ketan Morjaria - Vice Chairman Mr.Jay Karia - Director Mr. Francis M. Byaruhanga - Director Mr. Joram Kahenano - Director Mr. Hemen Shashikant Shah - Director (Appointed 26 March 2015) Mr. Dugald Komla Agble - Director (Appointed 26 March 2015) Mr. Phillip Ikeazor - Director (Resigned 20 February 2015) Mr. Okwudili Chigbogwu - Director (Resigned 20 February 2015) Mr. Bernard Magulu R. - Executive Director (Appointed 21 January 2014) Mr. Julius Kakeeto - Managing Director (Appointed 26 February 2014) COMPANY SECRETARY Nicholas Ecimu C/O Sebalu & Lule Advocates Certified Public Secretaries (Uganda) P. O. Box 2255, Kampala COMPANY LAWYERS Shonubi Musoke & Company Advocates SM Chambers Plot 14, Hannington Road P.O. Box 3213, Kampala AUDITOR PricewaterhouseCoopers Certified Public Accountants 10th Floor, Communications House 1 Colville Street, P O Box 882 Kampala
REGISTERED OFFICE Orient Plaza Plot 6 & 6A, Kampala Road P O Box 3072 Kampala
OUR BRANCHES
Head Office Entebbe Airport Branch Katwe Branch Kisekka Branch Orient Plaza Airport Terminal Building Muganzirwazza Plaza Lohana Arcade, Nakivubo Rd Plot 6/6A Kampala Road Tel: +256 414 320193 +256 414 256227 +256 414 255376 P.O. Box 3072, Kampala, Uganda Garden City Branch Kawempe Branch Kololo Branch Tel: +256 414 236012/3/4/5 Garden City Mall 78 Bombo Rd, Kawempe Tel: Plot 16/17 Wampewo Av. Fax: +256 414 348039 Tel +256 414 343017 +256 414 568847 Nyonyi Gardens Tel: +256 414 250 839 Acacia Branch Gulu Branch Kikuubo Branch Acacia Mall - Kisementi Plot 15, Awere road, Grand Corner House Nkrumah Branch +256 414 255376 Tel:+256 471 432075 Tel : +256 414 257451 Plot 5 Nasser Road Arua Branch Jinja Main Branch Main Branch Tel: +256 414 234554 Plot 12 Avenue Road, Arua Town Plot 1 Busoga Square Plot 6/6A Kampala Road Ntinda Service Center Tel: +256 476 420123 Tel: +256 434 122030 Tel: +256 414 236012/3/4/5 Capital Shoppers’ Mall Bweyale Branch Jinja Town Branch Mbale Branch Tel: +256 414 289533 Plot 3c Gulu/ kampala Highway Plot 8 Scindia Road, Plot 23, Naboa Rd William Street Branch Tel +256 393 614161 Tel: +256 393 280310 Tel: +256 454 432253 Plot 44, William Street Entebbe Town Branch Kabalagala Branch Makerere Branch Tel: +256 414 344950 Plot 29, Kampala Road Kabalagala 09 Ham Towers Makerere Hill Rd : +256 393 202639..Think Possibilities Tel: +256 414 320960 Tel:+256 414 510 726 +256 414 532143 Orient Bank Limited
Mr. Michael Cook - Chairman Board of Directors
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CHAIRMAN’S STATEMENT
Orient Bank Limited is delighted to share key milestones that will make you aware of insights into the remarkable and progressive changes that have taken place in the ownership structure of the bank.
In 2014, Keystone Bank, which owned 80% stake in Orient Bank Limited decided to divest its interests in all its subsidiaries to concentrate on its core business in Nigeria. Keystone Bank had acquired the 80% stake in Orient Bank from Bank PHB in 2011.
As one of the industry leaders of the indigenous banks in Uganda, it gives us profound joy to be at the forefront of contributing to the improvement of the banking sector. Despite the fact that Orient Bank recorded a significant loss in 2013, I am glad to report that Orient bank embarked on a disciplined growth strategy which has led to an improvement in the bank’s performance for the year ended 2014. The bank continued to receive strong support from its customers.
2014 was characterized by the divestiture process which resulted into changes in the bank’s shareholding. The bank also focused on cleaning up its asset portfolio and improving internal processes in order to adequately support its future growth.
The Board and Management of Orient Bank remains steadfast on the implementation of strategies that will further enhance the bank’s performance and profitability in the next 5 years.
ECONOMIC OVER VIEW The Central Bank of Uganda continues to pursue a cautious monetary policy stance aimed at stimulating output. Bank of Uganda reduced the central bank rate (CBR) by 50 basis points and kept the CBR unchanged, largely because of the uncertainty regarding the food prices and shilling depreciation. Inflation has remained subdued, with headline and core inflation averaging 4.6 per cent and 3.1 per cent, respectively. Inflation is expected to be consistent with the 5 per cent target over the next two years. Given this assessment, the monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target
The interest rates on average evolved in line with the CBR. Lending rates have continued to edge lower, averaging 21.6 per cent in 2014 compared to an average of 23.4 per cent in 2013. However, the decline has remained relatively sticky. This created a fairly stable environment for Orient Bank and the entire banking industry to operate.
KEY MILESTONES Orient Bank is delighted to share key milestones that will make you aware of insights into the remarkable and progressive changes that have taken place in the ownership structure of the bank.
In 2014, Keystone Bank, which owned 80% stake in Orient Bank Limited decided to divest its interests in all its subsidiaries to concentrate on its core business in Nigeria. Keystone Bank had acquired the 80% stake in Orient Bank from Bank PHB in 2011.
Following the divesture decision by Keystone Bank in FY 2014 and the subsequent conclusion of the process in February 2015, 8 Miles LLP, a Private Equity firm, acquired a 42 percent stake in the bank. The founders’ consortium chaired by Dr. Ketan Morjaria a prominent business man with diverse experience in Commerce and property
11 ..Think Possibilities Orient Bank Limited
Chairman’s Statement (Continued) development in Africa, the United Kingdom and the Middle East, upped their stake to 49 percent, making them the majority shareholders. The remaining 9 percent was acquired by two local investors, Mr. Zhong Shuang Quan – 4.5% Mr. Alemayehu Fissecha each taking 4.5 percent.
8 Miles is a Private Equity firm focused exclusively on making private equity investments in Africa. The investments in 8 Miles fund complements parallel investments by the IFC (International Finance Corporation), the CDC (Commonwealth Development Corporation) and the AfDB (African Development Bank). 8 Miles focuses on consumer-driven businesses and service providers with strong growth prospects. Typical sectors supported by the fund include agribusiness, business and financial services, consumer goods and retail, energy and utilities, healthcare and pharmaceutical services, hospitality and real estate, telecom, media and technology, transport and logistics. A core part of their strategy is active ownership - actively participating in transforming businesses in which they invest.
The Management team led by the Managing Director/CEO, Julius Kakeeto and the Executive Director, Bernard Robinson Magulu remain committed to steering the organization to the next level through dedicated customer service.
FUTURE With the successful completion of the divesture process, Orient Bank is looking towards gaining disciplined growth in the market. We have a lot of confidence that the new strategies and experience brought on board by the new shareholders will increase the profitability of the bank.
Orient Bank continues to increase on its service delivery channels which entails expansion of the bank’s network of branches and rolling out a robust e-banking which will enable the bank’s customers bank at any time of their convenience.
CONCLUSION I would like to acknowledge the hard work and professionalism of the management, staff and Board of directors of Orient Bank. We shall continue to ensure the best service to our existing and future customers and remain at the forefront of banking.
Michael Cook - Chairman Board of Directors
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Mr. Julius Kakeeto - Managing Director/ CEO
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MANAGING DIRECTOR/ CEO’S STATEMENT
With the new shareholding comes a renewed spirit of service, commitment and a tradition of trust to all of you our stakeholders. I want to assure you that Orient bank will continue to uplift the mantra of service and regulatory compliance, driving the bank into a formidable force in this market.
Over the last five years we have seen the steady transformation of Orient Bank Limited into a sustainable growth company, underpinned by energizing and customer-driven business strategies. 2014 was another year of progress in that journey and the Board and Management remain confident that Orient Bank’s strategy will continue to generate sustainable returns for stakeholders.
Although the economic environment remains challenging, Orient Bank’s financial highlights point towards a business that is delivering long-term financial performance.
As you are ware, Orient Bank Limited has completed a divestiture exercise process in which the former shareholder Keystone Bank divested it 80% stake to new shareholders. This exercise is a momentous achievement in the history of Orient Bank which creates the pedestal for future growth and victory.
With the new shareholding comes a renewed spirit of service, commitment and a tradition of trust to all of you our stakeholders. I want to assure you that orient bank will continue to uplift the mantra of service and regulatory compliance, driving the bank into a formidable force in this market.
OVER VIEW OF FINANCIAL RESULTS In the year 2014, Orient Bank has made steady strides to recover from the loss of UGX16.6bn posted in 2013. The loss was as a consequence of the regulatory requirement to make provisions to cover non-performing loans, as businesses struggled in the depressed economic environment to meet their obligations. The performance has improved with the loan impairment dropping by 57% hence narrowing the loss gap by UGX 8 billion shillings. This is attributed to a vigorous credit management process adopted by the bank.
Orient adopted an aggressive approach to international and trade operations which saw a 26% increase in the bank’s commission income and increased foreign exchange gains by 3%.
FOCUS FOR 2015 The bank will continue to focus on the improvement of service delivery channels to its customers and fostering strong relationships. The latter is vital to ensuring the bank’s appreciation of customer’s businesses enabling it to tailor relevant solutions to address the customer’s needs.
I am confident that Orient Bank has the strategy, team and resources in delivering sustainable growth in 2015 and beyond.
CONCLUSION Finally, I want to thank our esteemed customers, who have always been the bedrock of our growth and my colleagues for their commitment towards the delivery of superior value to our customers.
Julius Kakeeto - Managing Director/ CEO 15 ..Think Possibilities Orient Bank Limited
BOARD OF DIRECTORS
STANDING (L - R) Bernard Robinson Magulu - Executive Director, Hemen Shah - Non Executive Director, Jay Karia - Non Executive Director, Julius Kakeeto - Managing Director/ CEO, Nicholas Ecimu - Company Secretary, Dugald Agble - Non Executive Director, Francis Magembe Byaruhanga - Non Executive Director, Joram Kahenano - Non Executive Director
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SITTING (L -R) Michael Cook - Chairman, Ketan Morjaria - Vice Chairman
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BOARD OF DIRECTORS’ PROFILES
MICHAEL COOK Chairman
Michael Cook was a senior career diplomat and a former British High Commissioner to Uganda, with a wide range of political and commercial experience in Scandinavia, the Caribbean, Turkey and Africa.
After retiring from the Diplomatic Service he was a member of a commission established by David Cameron before he became British Prime Minister, to advice on future aid policy.
He has been Chairman of Orient Bank since April 2005
KETAN MORJARIA Vice Chairman
Mr. Morjaria a founder and Board Member of both Orient Bank and Credit Bank in Kenya, and a strategic shareholder in both institutions, and has wide experience in commerce and property development in Africa, the United Kingdom, and the Middle East.
He was born in Uganda and has a lifetime commitment to the development of trade, investment, and financial services in the East African sub-region.
He has served on the boards of several successful commercial companies. He is a member of the Institute of Chartered Accountants of England and Wales and the Institute of Certified Public Accountants of Uganda.
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DUGALD AGBLE Non Executive Director
Mr. Dugald Agble is a PhD holder in Chemical Engineering from Imperial College, London, UK. He has over 17 year’s related experience. Mr. Agble started his career as an analyst in 1998 working for ABB Steward (Engineering Services, London) and thereafter worked for Terra Firm Capital Partners, London, UK as Transaction Executive from 1999 – 2004. He has worked for Private Real Estate Investment, London, UK from 2004 – 2006, and thereafter joined Helios Investment Partners, London, UK as Vice President from 2006 – 2010.
Mr. Agble is a Partner at 8 Miles LLP as well as a member on the Board and member of the 8 Miles LLP Investment Committee.
JAY KARIA Non Executive Director
Mr. Karia is a business magnate with over 25 years diversified exposure in London, Kenya and Uganda. He has served in several managerial capacities as Manager Lloyds Exports UK, Manager Kabril Limited UK.
He has also severed on several boards including Lloyds Exports and, Kabril Limited- in London UK, Orion FXB Ltd and Credit Bank in Nairobi Kenya.
HEMEN SHASHIKANT SHAH Non Executive Director
Mr. Hemen Shah is a graduate of Harvard University and a professional banker with over 23 years cognitive experience. He started his banking career in 2002 working for Standard Chartered Bank (SCB), London UK as the Group Head of Strategy and thereafter became the Chief Executive Officer of Standard Charted Bank (SCB), DaresSalaam, Tanzania (2004 – 2008) and thereafter joined Standard Chartered Bank Ghana, as Chief Executive Officer and Area General Manager, for Standard Chartered Bank West Africa from 2008 – 2010. Mr. Shah has held several Board memberships from 2008 to 2010. These included Directorships on the Boards of; SCB Sierra Leone, SCB Gambia, SCB Cameroon, SCB Ghana and Chairman, Board of Directors for Standard Chartered Bank Cote d’Ivoire. Mr. Shah is currently a Partner at 8 Miles LLP a Private Equity firm and he is one of the founding partners and Board members of 8 miles.
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FRANCIS MAGEMBE BYARUHANGA Non Executive Director
Mr. Byaruhanga holds a Masters Degree in Business Administration. He has over 25 years experience in the areas of Management, Finance, Accounting, Procurement and Logistics Management with Excellent Knowledge of government and International agencies procedures and practices.
He has worked with rural water and sanitation project on an executive level and was a Director Road Agency Formation Unit.
JORAM KAHENANO Non Executive Director
Mr. Kahenano is a Fellow of the Uganda Institute of Bankers and a Fellow of Chartered Institute of Bankers. He has held various director positions in Bank of Uganda where he worked for 36 years. He was Executive Director Administration, Executive Director Operations, Director Banking, Director Foreign exchange, Director Exchange Control among others.
He has in addition served on various Boards including Uganda Institute of Bankers, Makerere University, Mengo Hospital, Church of Uganda and Uganda Christian University. Joram is currently a trustee of Uganda Small Scale Industries.
JULIUS KAKEETO Managing Director/ CEO
Mr. Kakeeto is a Fellow of the Association of Chartered Certified Accountants (FCCA), a member of the Institute of Certified Public Accountants of Uganda and holds an MBA from Manchester Business School, United Kingdom. He is an experienced banker with over 15 years’ experience in financial services which he has garnered from leading banks both at a local and international level. He has served in several management capacities as Executive Director Business Development (OBL), Divisional Director Business Development, Chief Financial Officer for Citigroup –Uganda, Vice President in the Strategy and Planning team in London under Citigroup Global markets, Business Manager (Chief of staff) in the Investment Banking Division for Emerging Markets - Citigroup London, and Finance Director Equity Bank, Uganda.
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BERNARD ROBINSON MAGULU Executive Director
Bernard is an astute and consummate Banker with 18 years’ Banking experience. He is a Fellow of Certified Chartered Accountant (FCCA) and a Wharton Business School Open Source Innovation Maven at the University of Pennsylvania, USA.
He previously worked with United Bank of Africa (UBA) as Chief Finance Officer and Chief Strategist; with the Bank of Uganda, and British Airways Group’s Strategy outfit for East Africa.
Bernard holds a First Class/Distinction Masters of Management and International Business, from the Southampton Business School, United Kingdom, specializing in International Finance and Corporate Strategy. He is a member of the Institute of Public Accountants of Uganda (ICPAU).
NICHOLAS ECIMU Company Secretary
Mr. Ecimu practices law with Sebalu & Lule Advocates, a premier corporate and commercial law firm, where he is a Partner. Nicholas holds a Bachelor of Laws degree from Makerere University, a Post- Graduate Diploma in Legal Practice from the Law Development Centre (LDC) and has attended several highly-specialized courses covering a range of legal aspects in financial markets and oil & gas sectors.
He has previously served with the Privatisation & Utility Sector Reform Project (PUSRP) in Uganda’s Ministry of Finance, Planning and Economic Development and was attached to Edward Nathans Sonnenbergs, one of South Africa’s premier law firms, as visiting Attorney in 2006.
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EXECUTIVE COMMITTEE (EXCOM)
JULIUS KAKEETO BERNARD ROBINSON MAGULU Managing Director/ CEO Executive Director
PANKAJ SHARMA MILLIE NKAJA Head of Operations Head of Credit
NICHOLAS SENNUNGI PEACE ADIA AMARJEET SINGH Head of Corporate Banking Head of Treasury Head of Finance
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23 ..Think Possibilities23 Orient Bank Limited
DIRECTORS’ REPORT For the year ended 31 December 2013
The directors present their report together with the audited consolidated financial statements of the Orient Bank Limited (the “Bank”) and its subsidiary (together ‘’the Group’’) for the year ended 31 December 2014.
ACTIVITIES The principal activities of the group are the provision of commercial banking, stock brokering and related financial services
RESULTS AND DIVIDEND The net loss for the year of UShs 8,121 million (2013: loss of UShs 16,655 million) has been transferred to retained earnings.
The directors do not recommend payment of dividend for the year (2014: Nil).
CORPORATE GOVERNANCE Orient Bank Limited has established a tradition of best practices in corporate governance. The corporate governance framework is based on an effective independent board, the separation of the board’s supervisory role from the executive management and the constitution of board committees generally comprising a majority of non-executive directors and chaired by a non-executive director to oversee critical areas
BOARD OF DIRECTORS Orient Bank Limited has a broad-based board of directors. The board functions either as a full board or through various committees constituted to oversee specific operational areas. The board has constituted five committees. These are the Risk/Compliance Committee, Asset & Liability Management Committee, Compensation and General Purpose Committee, Audit Committee and Credit Committee, Board Supervisory Committee. All of these Board Committees are constituted and chaired by non-executive directors. As at 31 December 2014, the board of directors consisted of 9 members. a) Risk/Compliance committee This committee is headed by a Non Executive Director and meets quarterly. It is comprised of the following members: i) Non-Executive Director ii) Non-Executive Director iii) Managing Director/CEO iv) Executive Director b) Asset and Liability Committee ALCO is headed by a Non Executive Director and meets quarterly. It also comprises the following: i) Non-Executive Director ii) Non-Executive Director iii) Managing Director / CEO iv) Executive Director c) Compensation Committee This committee decides on recruitment at senior levels based on responsibilities and remuneration of Management staff and directors. The committee is headed by a Non-Executive Director and comprises of: i) Non-Executive Director ii) Non-Executive Director iii) Non-Executive Director
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d) Audit Committee This Committee is chaired by a Non-Executive Director. It meets every quarter and also comprises of: i) Non-Executive Director ii) Non-Executive Director iii) Non-Executive Director e) Credit Committee The Board Credit Committee is chaired by the Non-Executive Director. It meets quarterly and comprises of: i) Non-Executive Director ii) Non-Executive Director iii) Non-Executive Director iv) Non-Executive Director v) Executive Director vi) Managing Director / CEO
In addition to the above committees, there are committees on a management level comprised of senior management whose frequency is daily, weekly, monthly and quaterly.
DIRECTORS AND THEIR BENEFITS During the financial year and up to the date of this report, other than as disclosed in Note 36 to the financial statements, no director has received or become entitled to receive any benefit other than directors’ fees, and amounts receivable by executive directors under employment contracts and the senior staff incentive scheme. The aggregate amount of emoluments for directors for services rendered in the financial year is disclosed in Note 36 to the financial statements
Neither at the end of the financial year nor at any time during the year did there exist any arrangement to which the Bank is a party whereby directors might acquire benefits by means of acquisition of shares in or debentures of the bank or any other body corporate DIRECTORS The directors who held office during the year and up to the date of this report are as indicated on Page 9, under corporate information.
AUDITOR The Bank’s external auditor, PricewaterhouseCoopers, continues in office in accordance with section 167(2) of the Ugandan Companies Act and section 62(1) of the Financial Institutions Act 2004.
BY ORDER OF THE BOARD
Secretary
Nicholas Ecimu C/O Sebalu & Lule Advocates Kampala
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STATEMENT OF DIRECTORS’ RESPOSIBILITIES FOR THE YEAR ENDED 31 DECEMBER 2014
The Uganda Companies Act 2012 requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the company as at the end of the financial year and of its results. It also requires the Directors to ensure that the company keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the company. They are also responsible for safeguarding the assets of the company.
The Directors accept responsibility for these financial statements, which have been prepared using appropriate accounting policies supported by reasonable estimates, in conformity with International Financial Reporting Standards, the requirements of the Uganda Companies Act 2012 and the Financial Institutions Act 2004.
The Directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the Bank and of its loss in accordance with International Financial Reporting Standards and with the requirements of the Ugandan Companies Act and the FInancial Institutionc Act 2004. The Directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Nothing has come to the attention of the Directors to indicate that the Bank will not remain a going concern for at least twelve months from the date of this statement.
Michael Cook Ketan Morjaria Julius Kakeeto Chairman Vice Chairman Managing Director/ CEO
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REPORT OF THE INDEPENDENT AUDITOR
REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of Orient Bank Limited (“the Bank”) and its subsidiary (together, “the Group”), as set out on pages 10 to 79. These financial statements comprise the consolidated statement of financial position for the year ended 31 December 2014, the consolidated income statement, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, together with the statement of financial position of the Bank standing alone for the year ended 31 December 2014 and the statement of changes in equity of the Bank for the year then ended, and a summary of significant accounting policies and other explanatory notes.
DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The directors are responsible for the preparation and the fair presentation of the financial statements in accordance with International Financial Reporting standards and in a manner required by the Companies Act, the Financial Institutions Act 2004 and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement.
AUDITOR'S RESPONSIBILITY Our responsibility is to express an independent 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 ethical requirements and plan and perform our audit to obtain reasonable assurance that the financial statements are free from 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 the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, 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 opinion.
OPINION In our opinion the financial statements give a true and fair view of the financial affairs of the Group and of the Bank at 31 December 2014 and of the loss and cash flows of the Group and Bank for the year then ended in accordance with International Financial Reporting Standards and the Companies Act and the Financial Institutions Act 2004.
REPORT ON OTHER LEGAL REQUIREMENTS The Ugandan Companies Act requires that in carrying out our audit we consider and report to you on the following matters. We confirm that:
1. We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;
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2. In our opinion proper books of account have been kept by the Bank, so far as appears from our examination of those books; and
3. the Bank’s statement of financial position and statement of comprehensive income account are in agreement with the books of accounts of account have been kept by the Bank, so far as appears from our examination of those books; and
4. the Bank’s statement of financial position and statement of comprehensive income account are in agreement with the books of account.
Certified Public Accountants
Kampala
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29 ..Think Possibilities29 Orient Bank Limited
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014
2014 2013 Notes Ushs’000 Ushs’000
Interest and similar income 5 40,787,165 60,313,106 Interest and similar expenses 5 (20,988,100) (25,646,310) Net interest income 19,799,065 34,666,796 Loan impairment charges 6 (18,813,833) (43,430,725) Net interest income/(expense) after loan impairment charges 985,232 (8,763,929) Net fee and commission income 7 18,631,474 14,630,145 Net operating income 19,616,706 5,866,216 Net foreign exchange gains 8 5,058,046 4,902,719 Employee benefits expenses 9 (14,487,336) (14,903,468) General and administrative expenses 10 (9,030,374) (7,837,921) Depreciation and amortisation 11 (4,798,884) (3,068,688) Other operating expenses 12 (9,498,342) (8,721,917) Loss before income tax (13,140,184) (23,763,059) Income tax credit 13 5,111,599 7,124,831 Loss for the year (8,028,585) (16,638,227)
Other comprehensive income Net fair value gain on available for sale financial assets 3,126 5,956 Deferred income tax thereon (938) (1,787) Revaluation surplus on buildings 1,489,113 - Deferred income tax thereon (446,734) - 1,044,566 4,170 Total comprehensive loss for the year (6,984,019) (16,634,059)
(Loss)/Profit attributable to: Owners of the company (8,047,065) (16,641,695) Non-controlling interests 18,480 3,468 (8,028,585) (16,638,227)
Other comprehensive income attributable to: Owners of the company 1,044,129 3,336 Non-controlling interests 437 834 1,044,566 4,170
30 Annual Report 2014
BANK STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014
2014 2013 Notes Ushs’000 Ushs’000
Interest and similar income 5 40,787,165 60,313,106 Interest and similar expenses 5 (20,988,100) (25,646,310) Net interest income 19,799,065 34,666,796 Loan impairment charges 6 (18,813,833) (43,430,725) Net interest income/(expense) after loan impairment charges 985,232 (8,763,929) Net fee and commission income 7 18,276,847 14,514,978 Net operating income 19,262,079 5,751,049 Net foreign exchange gains 8 5,058,046 4,902,719 Employee benefits expenses 9 (14,406,970) (14,823,763) General and administrative expenses 10 (9,027,287) (7,834,993) Depreciation and amortisation 11 (4,797,737) (3,068,401) Other operating expenses 12 (9,360,605) (8,713,485) Loss before income tax (13,272,474) (23,786,874) Income tax credit 13 5,151,488 7,131,308 Loss for the year (8,120,986) (16,655,566) Other comprehensive income Revaluation surplus on buildings 1,489,113 - Deferred income tax thereon (446,734) - Total comprehensive loss for the year (7,078,607) (16,655,566)
31 ..Think Possibilities Orient Bank Limited
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014
2014 2013 Notes Ushs’000 Ushs’000
Assets Cash and balances with Central Bank 15 66,497,667 78,315,534 Deposits and balances due from banking institutions 17 106,452,225 78,105,139 Government securities – Held-to-maturity 18 116,001,140 89,444,269 Other investments 19a 27,723 24,597 Loans and advances to customers 20 154,386,228 216,416,826 Other assets 21 3,378,352 1,939,086 Operating lease prepayments 23 458,464 502,999 Current income tax recoverable 28 261,196 543,619 Intangible assets 24 4,096,799 4,549,434 Deferred income tax asset 29 18,167,741 10,431,872 Property and equipment 22 11,133,818 10,835,975 Total assets 480,861,353 491,109,350
Liabilities Deposits due to other banks 25 5,000,274 1,010,567 Customer deposits 26 388,101,601 420,297,010 Refinance loans 27 166,667 285,267 Other liabilities 30 8,255,918 9,695,595 Total liabilities 401,524,460 431,288,439
Capital and reserves Share capital 31 76,500,000 50,000,000 Revaluation reserve 32 2,562,073 1,558,727 Statutory credit risk reserve 33 5,005,634 - Accummulated losses/retained earnings (4,783,738) 8,229,928 Non controlling interest 46,567 28,087 Available for sale fair value reserve 6,357 4,169 Total equity 79,336,893 59,820,911 Total equity and liabilities 480,861,353 491,109,350
The financial statements on pages 30 to 90 were authorised for issue by the Board of Directors on 26 March 2015 and signed on its behalf by:
Michael Cook Ketan Morjaria Julius Kakeeto Chairman Vice Chairman Managing Director/ CEO
32 Annual Report 2014
BANK STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014
2014 2013 Notes Ushs’000 Ushs’000
Assets Cash and balances with Central Bank 15 66,497,667 78,315,534 Deposits and balances due from banking institutions 17 106,445,193 78,089,336 Government securities – Held-to-maturity 18 116,001,140 89,444,269 Investment in subsidiary 19b 80,000 80,000 Loans and advances to customers 20 154,386,228 216,416,826 Other assets 21 3,267,013 1,831,923 Operating lease prepayments 23 458,464 502,999 Current income tax recoverable 28 266,103 540,095 Intangible assets 24 4,096,799 4,549,434 Deferred income tax asset 29 18,168,677 10,431,870 Property and equipment 22 11,131,811 10,832,820 Total assets 480,799,095 491,035,106
Liabilities Deposits due to other banks 25 5,000,274 1,010,567 Customer deposits 26 388,300,294 420,358,959 Refinance loans 27 166,667 285,267 Other liabilities 30 8,152,847 9,622,693 Total liabilities 401,620,082 431,277,486
Capital and reserves Share capital 31 76,500,000 50,000,000 Revaluation reserve 32 2,562,073 1,558,727 Statutory credit risk reserve 33 5,005,634 - Accummulated losses/retained earnings (4,888,694) 8,198,893 Total equity 79,179,013 59,757,620 Total equity and liabilities 480,799,095 491,035,106
The financial statements on pages 30 to 90 were authorised for issue by the Board of Directors on 26 March 2015 and signed on its behalf by:
Michael Cook Ketan Morjaria Julius Kakeeto Chairman Vice Chairman Managing Director/ CEO
33 ..Think Possibilities Orient Bank Limited
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014
Accummu- Available Statutory lated losses Non- for sale Share Revalua- credit risk / retained cotrolling fair value Proposed capital tion reserve reserve earnings interest reserve dividends Total equity Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 YEAR ENDED 31 DECEMBER 2013 At start of year 50,000,000 1,599,296 3,890,574 20,940,481 24,619 4,000,000 80,454,970 Transfer of excess depreciation - (57,956) - 57,956 - - - Deferred income tax on excess depreciation - 17,387 - (17,387) - - - (Loss)/profit for the year - - - (16,641,696) 3,468 - (16,638,228) Transfer to statutory reserve - - (3,890,574) 3,890,574 - - - Other comprehensive income for the year - - - - - 4,169 - 4,169 Dividends paid - - - - - (4,000,000) (4,000,000) At end of year 50,000,000 1,558,727 - 8,229,928 28,087 4,169 - 59,820,911 YEAR ENDED 31 DECEMBER 2014 At start of year 50,000,000 1,558,727 - 8,229,928 28,087 4,169 - 59,820,911 Transfer of excess depreciation - (55,761) - 55,761 - - - - Deferred income tax on excess depreciation - 16,728 - (16,728) - - - - Increase in revaluation surplus on buildings 1,042,379 - - - 1,042,379 (Loss)/profit for the year - - - (8,047,065) 18,480 - - (8,028,585) Other comprehensive income for the year - - - - - 2,188 - 2,188 Increase in Share Capital 26,500,000 ------26,500,000 Statutory credit risk reserve - - 5,005,634 (5,005,634) - - - - At end of year 76,500,000 2,562,073 5,005,634 (4,783,738) 46,567 6,357 - 79,336,893
34 Annual Report 2014
BANK STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2014
Accummu- Statutory lated losses Share Revaluation credit risk / retained Proposed capital reserve reserve earnings dividends Total equity Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 YEAR ENDED 31 DECEMBER 2013 At start of year 50,000,000 1,599,296 3,890,574 20,923,316 4,000,000 80,413,186 Transfer of excess depreciation - (57,956) - 57,956 - - Deferred income tax on excess depreciation - 17,387 - (17,387) - - Profit for the year - - - (16,655,566) - (16,655,566) Transfer to statutory reserve - - (3,890,574) 3,890,574 - - Dividends paid - - - - (4,000,000) (4,000,000) At end of year 50,000,000 1,558,727 - 8,198,893 - 59,757,620 YEAR ENDED 31 DECEMBER 2014 At start of year 50,000,000 1,558,727 - 8,198,893 - 59,757,620 Transfer of excess depreciation - (55,761) - 55,761 - - Deferred income tax on excess depreciation - 16,728 - (16,728) - - Increase in revaluation surplus on buildings - 1,042,379 - - - 1,042,379 Loss for the year - - - (8,120,986) - (8,120,986) Increase in Share Capital 26,500,000 - - - - 26,500,000 Statutory credit risk reserve - - 5,005,634 (5,005,634) - - At end of year 76,500,000 2,562,073 5,005,634 (4,888,694) - 79,179,013
35 ..Think Possibilities Orient Bank Limited
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014
2014 2013 Notes Ushs’000 Ushs’000 Cash flows from operating activities Loss before income tax (13,140,184) (23,763,059) Adjustments: Depreciation 22 2,743,175 2,372,039 Amortisation of operating lease prepayments 23 44,535 44,535 Amortisation of intangible asset 24 2,011,173 652,114 Profit on disposal of property and equipment (17,150) (9,835) Fair value gain on investments 3,126 4,170 Loss before working capital changes (8,355,325) (20,700,036) Decrease/ (increase) in deposits due to banking institutions 3,989,707 (2,992,515) Decrease in loans and advances 62,030,598 48,599,672 (Increase)/decrease in investment in government securities (26,151,556) 16,654,924 (Increase)/decrease in other assets (1,445,150) 912,061 (Decrease)/increase in customer deposits (32,195,410) 1,373,492 Decrease in BOU refinance loan (118,600) (318,543) (Decrease) in other liabilities (1,439,677) (3,420,272) Income taxes paid (2,786,761) (2,855,515) 1,883,151 57,953,304 Net cash (used in) /generated from operating activities (6,472,174) 37,253,268 Cash flows from investing activities Purchase of property and equipment 22 (1,791,201) (2,660,133) Purchase of quoted investments - (9,950) Proceeds from sale of property and equipment 115,810 29,849 Purchase of intangible assets 24 (1,439,204) (4,900,733) Net cash used in investing activities (3,114,595) (7,540,968) Cash flows from financing activities Dividends paid - (4,000,000) Increase in share capital 26,500,000 - Net cash generated from /(used in) financing activities 26,500,000 (4,000,000) Cash and cash equivalents at start of year 179,123,399 153,411,099 Net cash from operating acitivities (6,472,174) 37,253,268 Net cash used in investing activities (3,114,595) (7,540,968) Net cash used in financing activities 26,500,000 (4,000,000) Cash and cash equivalents at the end of the year 16 196,036,630 179,123,399
36 Annual Report 2014
BANK STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014
2014 2013 Notes Ushs’000 Ushs’000 Cash flows from operating activities Loss before income tax (13,272,474) (23,786,874) Adjustments: Depreciation 22 2,742,028 2,371,752 Amortisation of operating lease prepayments 23 44,535 44,535 Amortisation of intangible asset 24 2,011,173 652,114 Profit on disposal of property and equipment (17,150) (9,835) Loss before working capital changes (8,491,889) (20,728,308) Increase/(decrease) in deposits due to banking institutions 3,989,707 (2,992,515) Decrease in loans and advances 62,030,598 48,599,672 Increase/(decrease) in investment in government securities (26,151,556) 16,654,924 Increase/(decrease) in other assets (1,435,089) 896,597 Decrease/(increase) in customer deposits (32,058,665) 1,384,233 Decrease in BOU refinance loan (118,600) (318,543) (Decrease) in other liabilities (1,469,846) (3,440,809) Income taxes paid (2,758,061) (2,834,544) 2,028,488 57,949,015 Net cash from operating activities (6,463,401) 37,220,708 Cash flows from investing activities Purchase of property and equipment 22 (1,791,201) (2,654,279) Proceeds from sale of property and equipment 115,810 29,849 Purchase of intangible assets 24 (1,439,204) (4,900,733) Net cash used in investing activities (3,114,595) (7,525,163) Cash flows from financing activities Dividends paid - (4,000,000) Increase in share capital 26,500,000 - Net cash from/(used in) financing activities 26,500,000 (4,000,000) Cash and cash equivalents at start of year 179,107,593 153,412,048 Net cash from operating acitivities (6,463,401) 37,220,708 Net cash used in investing activities (3,114,595) (7,525,163) Net cash used in financing activities 26,500,000 (4,000,000) Cash and cash equivalents at end of year 16 196,029,597 179,107,593
37 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014
1. GENERAL INFORMATION “Orient Bank Limited (the ‘Bank’) is incorporated in Uganda under the Companies Act 2012 as a limited liability company, and is domiciled in Uganda. The address of its registered office is: Plot 6 & 6A, Kampala Road P O Box 3072 Kampala
For the Companies Act 2012 reporting purposes, the balance sheet is represented by the statement of financial position and the profit and loss account by the statement of comprehensive income in these financial statements.”
The financial statements for the year ended 31 December 2014 have been approved for issue by the Board of Directors on 26 March 2015. Neither the Bank’s owners nor others have the power to amend the financial statements after issue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 Basis of preparation The Bank’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have been prepared under the historical cost convention, except for available-for- sale financial assets, financial assets and financial liabilities held at fair value through profit or loss, which have been measured at fair value.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the directors to exercise judgement in the process of applying the Bank’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.
2.1.1 Changes in accounting policy and disclosures (a) New and amended standards adopted by the Bank The following standards/ amendments have been adopted by the Bank for the first time for the financial year beginning on 1 January 2014 but have no impact on the Bank:
IAS 32, ‘Financial instruments: Presentation’ on offsetting financial assets and financial liabilities. This amendment clarifies that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendment also considers settlement mechanisms.
IAS 36, ‘Impairment of assets’ on the recoverable amount disclosures for non-financial assets. This amendment removed certain disclosures of the recoverable amount of Cash Generating units (CGUs) which had been included in IAS 36 by the issue of IFRS 13.
38 Annual Report 2014
IAS 39, ‘Financial instruments: Recognition and measurement’ on the novation of derivatives and the continuation of hedge accounting. This amendment considers legislative changes to ‘over-the-counter’ derivatives and the establishment of central counterparties. Under IAS 39 novation of derivatives to central counterparties would result in discontinuance of hedge accounting. The amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument meets specified criteria.
IFRIC 21, ‘Levies’, sets out the accounting for an obligation to pay a levy if that liability is within the scope of IAS 37 ‘Provisions’. The interpretation addresses what the obligating event is that gives rise to pay a levy and when a liability should be recognised.
(b) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Bank, except the following set out below:
IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The company is yet to assess IFRS 9’s full impact.
IFRS 15, ‘Revenue from contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for annual periods beginning on or after 1 January and earlier application is permitted. The company is assessing the impact of IFRS 15.
There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Bank.
39 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
2. Summary of significant accounting policies (Continued)
2.2 Foreign currency translation (a) Functional and presentation currency Items included in the Bank’s financial statements are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The financial statements are presented in Uganda shillings and figures are stated in thousands of Uganda shillings.
(b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Monetary items denominated in foreign currency are translated with the closing rate as at the reporting date. If several exchange rates are available, the forward rate is used at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred. Non-monetary items measured at historical cost denominated in a foreign currency are translated with the exchange rate as at the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value was determined.
Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
Changes in the fair value of monetary assets denominated in foreign currency classified as available-for-sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount, are recognised in other comprehensive income.
Translation differences on non-monetary financial instruments, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary financial instruments, such as equities classified as available-for-sale financial assets, are included in other comprehensive income.
2.3 Sale and repurchase agreements Securities sold subject to repurchase agreements (‘repos’) are reclassified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability is included in deposits from banks or deposits from customers, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded as loans and advances to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements.
2.4 Financial assets and liabilities 2.4.1 Financial assets The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity and available-for-sale financial assets. The directors determine the
40 Annual Report 2014
classification of its financial assets at initial recognition. The Bank uses trade date accounting for regular way contracts when recording financial asset transactions.
(a) Financial assets at fair value through profit or loss. This category comprises two sub-categories: financial assets classified as held for trading, and financial assets designated by the Bank as at fair value through profit or loss upon initial recognition.
A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.
Derivatives are also categorised as held for trading unless they are designated and effective as hedging instruments. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
The Bank designates certain financial assets upon initial recognition as at fair value through profit or loss (fair value option). This designation cannot subsequently be changed and can only be applied when the following conditions are met: the application of the fair value option reduces or eliminates an accounting mismatch that would otherwise arise or the financial assets are part of a portfolio of financial instruments which is risk managed and reported to senior management on a fair value basis or the financial assets consist of debt host and an embedded derivatives that must be separated.
Financial instruments included in this category are recognised initially at fair value; transaction costs are taken directly to profit or loss. Gains and losses arising from changes in fair value are included directly in profit or loss and are reported as ‘Net gains/(losses) on financial instruments classified as held for trading’. Interest income and expense and dividend income and expenses on financial assets held for trading are included in ‘Net interest income’ or ‘Dividend income’, respectively. Fair value changes relating to financial assets designated at fair value through profit or loss are recognised in ‘Net gains on financial instruments designated at fair value through profit or loss’.
(b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: those that the Bank intends to sell immediately or in the short term, which are classified as held for trading, and those that the Bank upon initial recognition designates as at fair value through profit or loss;
those that the Bank upon initial recognition designates as available-for-sale; or
those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.
Loans and receivables are initially recognised at fair value – which is the cash consideration to originate or purchase the loan including any transaction costs – and measured subsequently at amortised cost using the effective interest method.
(c) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the directors have the positive intention and ability to hold to maturity, other than:
41 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
2. Summary of significant accounting policies (Continued) 2.4.1 Financial assets (c) Held-to-maturity investments (continued)
(a) those that the Bank upon initial recognition designates as at fair value through profit or loss;
(b) those that the Bank designates as available-for-sale; and
(c) those that meet the definition of loans and receivables.
Held-to-maturity investments are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method.
2.4.2 Financial liabilities The Bank’s holding in financial liabilities represents mainly deposits from banks and customers and other liabilities. Such financial liabilities are initially recognised at fair value and subsequently measured at amortised cost.
2.4.3 Determination of fair value For financial instruments traded in active markets, the determination of fair values of financial instruments is based on quoted market prices or dealer price quotations. This includes listed equity securities and quoted debt instruments on major exchanges and broker quotes from Bloomberg and Reuters.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indicators that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions.
For all other financial instruments, fair value is determined using valuation techniques. In these techniques, fair values are estimated from observable data in respect of similar financial instruments, using models to estimate the present value of expected future cash flows or other valuation techniques, using inputs (for example, LIBOR yield curve, FX rates, volatilities and counterparty spreads) existing at the reporting dates. The Bank uses widely recognised valuation models for determining fair values of non-standardised financial instruments of lower complexity, such as options or interest rate and currency swaps. For these financial instruments, inputs into models are generally market-observable. For more complex instruments, the Bank uses internally developed models, which are usually based on valuation methods and techniques generally recognised as standard within the industry. Valuation models such as present value techniques are used primarily to value derivatives transacted in the over-the-counter market, unlisted debt securities (including those with embedded derivatives) and other debt instruments for which markets were or have become illiquid. Some of the inputs to these models may not be market observable and are therefore estimated based on assumptions. The impact on net profit of financial instrument valuations reflecting non-market observable inputs (level 3 valuations) is disclosed in Note 3. The Bank uses its own credit risk spreads in determining the current value for its derivative liabilities and all other liabilities for which it has elected the fair value option. When the Bank’s credit spreads widen, the Bank
42 Annual Report 2014
recognises a gain on these liabilities because the value of the liabilities has decreased. When the Bank’s credit spreads narrow, the Bank recognises a loss on these liabilities because the value of the liabilities has increased. The output of a model is always an estimate or approximation of a value that cannot be determined with certainty, and valuation techniques employed may not fully reflect all factors relevant to the positions the Bank holds. Valuations are therefore adjusted, where appropriate, to allow for additional factors including model risks, liquidity risk and counterparty credit risk. Based on the established fair value model governance policies, related controls and procedures applied, the directors believe that these valuation adjustments are necessary and appropriate to fairly state the values of financial instruments carried at fair value. Price data and parameters used in the measurement procedures applied are generally reviewed carefully and adjusted, if necessary – particularly in view of the current market developments.
In cases when the fair value of unlisted equity instruments cannot be determined reliably, the instruments are carried at cost less impairment. The fair values of contingent liabilities and irrevocable loan commitments correspond to their carrying amounts.
2.4.4 Derecognition Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.
2.5 Impairment of financial assets (a) Assets carried at amortised cost The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument’s fair value using an observable market price.
The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
43 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
2. Summary of significant accounting policies (Continued) 2.5 Impairment of financial assets (continued) (a) Assets carried at amortised cost (continued)
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (that is, on the basis of the Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.
Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Impairment charges relating to loans and advances to banks and customers are classified in loan impairment charges.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in profit or loss.
“In addition to the measurement of impairment losses on loans and advances in accordance with International Financial Reporting Standards as set out above, the Bank is also required by the Ugandan Financial Institutions Act, 2004 to estimate losses on loans and advances as follows:
A specific allowance for impairment for those loans and advances considered to be non-performing based on criteria and classification of such loans and advances established by the Bank of Uganda, as follows: a) substandard assets with arrears period between 90 and 180 days – 20%; b) doubtful assets with arrears period between 181 days and 360 days – 50%; c) loss assets with arrears period over 360 days – 100%.”
(b) Assets classified as available-for-sale In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is objective evidence of impairment resulting in the recognition of an impairment loss. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously
44 Annual Report 2014
recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in profit or loss on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss.
2.6 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.
2.7 Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.
2.8 Property and equipment Buildings comprise mainly branches and offices. All equipment used by the Bank is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent expenditures are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repair and maintenance costs are charged to profit or loss during the financial period in which they are incurred.
Depreciation of assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Buildings 4% to 7% Leasehold improvements 12.5% Furniture, Fixtures, Strongroom & Safes 12.5% Office Equipment 20.0% Motor vehicles 25.0% Computer Equipment, ATM, POS & SWIFT 33.3%
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in ‘other operating expenses’ in profit or loss.
The bank assesses the fair value of the buildings at the end of each reporting period to determine the frequency of revaluation. The frequency of revaluation if the difference between the fair value of the buildings and their respective carrying amounts are insignificant is five years.
2.9 Intangible assets Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognised as intangible assets when the following criteria are met:
45 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
2. Summary of significant accounting policies (Continued) 2.9 Intangible assets (continued)
it is technically feasible to complete the software product so that it will be available for use; management intends to complete the software product and use or sell it; there is an ability to use or sell the software product; it can be demonstrated how the software product will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and the expenditure attributable to the software product during its development can be reliably measured.
Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
Computer software development costs recognised as assets are amortised over their estimated useful lives, which does not exceed three years. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives. Software has a maximum expected useful life of 5 years.
2.10 Impairment of non-financial assets Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The impairment test also can be performed on a single asset when the fair value less cost to sell or the value in use can be determined reliably. Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
2.11 Employee benefits (a) Pension obligations The Bank operates various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds, determined by periodic actuarial calculations. The Bank has both defined benefit and defined contribution plans.
A defined contribution plan is a pension plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation. The liability recognised in respect of defined benefit
46 Annual Report 2014
pension plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to profit or loss over the employees’ expected average remaining working lives. Past-service costs are recognised immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.
For defined contribution plans, the Bank pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
2.12 Provisions Provisions for restructuring costs and legal claims are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
2.13 Income tax (a) Current income tax The tax expense for the period comprises current and deferred income tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity respectively.
The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the reporting date. The directors periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. They establish provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
(b) Deferred income tax Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill; deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined
47 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
2. Summary of significant accounting policies (Continued) 2.13 Income tax (continued) (d) Deferred income tax (continued) using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabiltites and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same entity or different taxable entities where there is an intention to settle the balances on a net basis.
2.14 Dividend payable Dividends on ordinary shares are charged to equity in the period in which they are declared.
2.15 Share capital Ordinary shares are classified as ‘share capital’ in equity. Any premium received over and above the par value of the shares is classified as ‘share premium’ in equity.
2.16 Leases Leases are divided into finance leases and operating leases.
(a) The Bank is the lessee (i) Operating lease Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including pre-payments, made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease.
The total payments made under operating leases are charged to ‘other operating expenses’ on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
(ii) Finance lease Leases of assets where the Bank has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in deposits from banks or deposits from customers depending on the counter party. The interest element of the finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
The leases entered into by the Bank are primarily operating leases.
48 Annual Report 2014
(b) The Bank is the lessor When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return.
(c) Fees paid in connection with arranging leases The Bank makes payments to agents for services in connection with negotiating lease contracts with the Bank’s lessees. For operating leases, the letting fees are capitalised within the carrying amount of the related asset, and depreciated over the life of the lease.
2.17 Interest income and expense Interest income and expense for all interest-bearing financial instruments are recognised in profit or loss using the effective interest method.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
2.18 Fee and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-apportionate basis. Performance-linked fees or fee components are recognised when the performance criteria are fulfilled.
2.19 Dividend income Dividends are recognised in profit or loss when the Bank’s right to receive payment is established.
2.20 Acceptances and letters of credit Acceptances and letters of credit are accounted for as off-balance sheet transactions and disclosed as contingent liabilities.
49 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. FINANCIAL RISK MANAGEMENT The Bank’s business involves taking on risks in a targeted manner and managing them professionally. The core functions of the Bank’s risk management are to identify all key risks for the Bank, measure these risks, manage the risk positions and determine capital allocations. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice.
The Bank’s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance.The Bank defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors.
Risk management is carried out by a central treasury department (Bank Treasury) under policies approved by the Board of Directors. Bank Treasury identifies, evaluates and hedges financial risks in close co-operation with the Bank’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments. In addition, internal audit is responsible for the independent review of risk management and the control environment.
The risks arising from financial instruments to which the Bank is exposed are financial risks, which includes credit risk, liquidity risk and market risk.
3.1 Credit risk Credit risk is the risk of suffering financial loss, should any of the Bank’s customers, clients or market counterparties fail to fulfil their contractual obligations to the Bank. Credit risk arises mainly from commercial and consumer loans and advances, credit cards, and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, financial guarantees, letters of credit, endorsements and acceptances.
The Bank is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities (‘trading exposures’), including non-equity trading portfolio assets, derivatives and settlement balances with market counterparties and reverse repurchase loans.
Credit risk is the single largest risk for the Bank’s business; the directors therefore carefully manage the exposure to credit risk. The credit risk management and control are centralised in a credit risk management team, which reports to the Board of Directors and head of each business unit regularly.
3.1.1 Credit risk measurement (a) Loans and advances (including loan commitments and guarantees) The estimation of credit exposure is complex and requires the use of models, as the value of a product varies with changes in market variables, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties.
The Bank has developed models to support the quantification of the credit risk. These rating and scoring models are in use for all key credit portfolios and form the basis for measuring default risks. In measuring credit risk of loan and advances at a counterparty level, the Bank considers three components: (i) the ‘probability of default’ (PD) by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future
50 Annual Report 2014
development, from which the Bank derive the ‘exposure at default’ (EAD); and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’) (LGD). The models are reviewed regularly to monitor their robustness relative to actual performance and amended as necessary to optimise their effectiveness.
These credit risk measurements, which reflect expected loss (the ‘expected loss model’), are required by the Basel Committee on Banking Regulations and the Supervisory Practices (the Basel Committee) and are embedded in the Bank’s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39, which are based on losses that have been incurred at the reporting date (the ‘incurred loss model’) rather than expected losses.
The Bank’s internal ratings scale and mapping of external ratings as supplemented by the Bank’s own assessment through the use of internal rating tools are as follows:
Normal Items that are fully current and the full repayment of the contractual principal and interest amounts are expected. Watch Items for which the borrower is experiencing difficulties. Ultimate loss is not expected but could occur if adverse conditions persist. Substandard Items that show underlying well defined weaknesses that could lead to probable loss if not corrected. The risk that these items may be impaired is probable and the Bank relies to a large extent on the available security. Doubtful Items that are considered to be impaired, but are not yet considered final losses because of pending factors, which may strengthen the equality of the items. Loss Items that are considered to be uncollectible and where the realization of collateral and institution of legal proceedings have been unsuccessful. These items are considered of such little value that they should no longer be included in the net assets of the Bank.
3.1.2 Risk limit control and mitigation policies The Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties and banks, and to industries and countries.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or banks of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, industry sector and country are approved quarterly by the Board of Directors.
The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily.
Lending limits are reviewed in the light of changing market and economic conditions and periodic credit reviews and assessments of probability of default.
Some other specific control and mitigation measures are outlined below:
(a) Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:
51 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.12 Risk limit control and mitigation policies (continued) a) Collateral (continued)
Mortgages over residential properties. Charges over business assets such as premises, inventory and accounts receivable. Charges over financial instruments such as debt securities and equities. Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument.
Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans and advances.
(b) Lending limits (for derivative and loan books) The Bank maintains strict control limits on net open derivative positions (that is, the difference between purchase and sale contracts) by both amount and term. The amount subject to credit risk is limited to expected future net cash inflows of instruments, which in relation to derivatives are only a fraction of the contract, or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not always obtained for credit risk exposures on these instruments, except where the Bank requires margin deposits from counterparties.
Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank’s market transactions on any single day.
(c) Master netting arrangements The Bank further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of assets and liabilities of the statement of financial position, as transactions are either usually settled on a gross basis or under most netting agreements the right of set off is triggered only on default.
However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Bank’s overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement.
(d) Financial govenants (for credit related commitments and loan books) The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan.
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Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards (often referred to as financial covenants).
The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.
3.1.3 Impairment and provisioning policies The internal and external rating systems described in Note 3.1.1 focus on expected credit losses – that is, taking into account the risk of future events giving rise to losses. In contrast, impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the reporting date based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements is usually lower than the amount determined from the expected loss model that is used for internal operational management and banking regulation purposes.
The impairment allowance shown in the statement of financial position at year-end is derived from each of the four internal rating grades. However, the largest component of the impairment allowance comes from the default grade. The table below shows the percentage of the Bank’s on- and off-balance sheet items, like financial guarantees, loan commitments and other credit related obligations, relating to loans and advances and the associated impairment allowance for each of the Bank’s internal rating categories.
Bank’s rating 2014 2013 Credit risk exposure Impairment allowance Credit risk exposure Impairment allowance 1. Normal 83.08% 70.86% 2. Watch 9.56% 11.41% 3. Substandard 0.79% 8.42% 4. Doubtful 1.63% 2.42% 5. Loss 4.94% 6.88%
3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements The directors are confident in the ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both the loan and advances portfolio and debt securities based on the following: 92.64% of the loans and advances portfolio is categorised in the top two grades of the internal rating system (2013: 82.27%); 83.08% of the loans and advances portfolio are considered to be neither past due nor impaired (2013: 70.86%);
All credit exposures arise in Uganda. The following table breaks down the Bank’s credit exposure at carrying amounts (without taking into account any collateral held or other credit support), as categorised by the industry sectors of the Bank’s counterparties.
53 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.1.4 Maximum exposure to credit risk before collateral held or other credit enhancements (continued)
Whole-sale Financial insti- Manuf and retail Public tutions acturing Real estate trade sector Others Total At 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Balances with the Central Bank 66,497,667 - - - - - 66,497,667 Deposits and balances due from 106,445,193 - - - - - 106,445,193 banking institutions Loans to Retail customers: − Overdrafts 1,791,935 1,719,326 10,194,138 - 6,396,782 20,102,181 − Term loans 1,423,294 7,162,440 10,559,665 - 15,177,743 34,323,142 Corporate 4,491,797 30,023,104 19,606,335 - 34,751,574 88,872,810 HNWI - 315,379 224,955 - 17,509,901 18,050,235 Public sector ------Financial assets – Held to maturity 116,001,140 - - - - - 116,001,140 Other assets - - - - - 1,262,371 1,262,371 288,944,000 7,707,026 39,220,249 40,585,093 - 75,098,371 451,554,739 Credit risk exposures relating to off-balance sheet items are as follows: Guarantees and performance - 1,636,590 - 4,963,245 - 29,232,980 35,832,815 bonds Loan commitments and other 629,660 - 8,894,091 - 11,163,827 20,687,578 credit related obligations At 31 December 2014 - 2,266,250 - 13,857,336 - 40,396,807 56,520,393 At 31 December 2013 Balances with the Central Bank 78,315,534 - - - - - 78,315,534 Deposits and balances due from banking institutions 78,089,336 - - - - - 78,089,336 Loans to Retail customers: − Overdrafts - 1,721,367 6,742,297 15,004,971 - 18,849,292 42,317,927 − Term loans - 2,139,820 1,770,796 5,686,305 - 16,250,634 25,847,555 Corporate - 13,306,540 29,986,921 52,490,353 - 82,242,301 178,026,116 HNWI - - 86,177 276,795 - 9,776,945 10,139,917 Public sector - - - - - 982,994 982,994 Financial assets ------– Held to maturity 89,444,269 - - - - - 89,444,269 Other assets - - - - 487,117 487,117 245,849,139 17,167,727 38,586,192 73,458,425 - 128,589,282 503,650,765 Credit risk exposures relating to off-balance sheet items are as follows: Guarantees and performance bonds - - - 2,802,537 - 28,068,234 30,870,772 Loan commitments and other credit related obligations - 1,260,773 - 13,528,607 - 19,477,144 34,266,524 - 1,260,773 - 16,331,145 - 47,545,378 65,137,296
54 Annual Report 2014
3.1.5 Loans and advances Loans and advances are summarised as follows:
2014 2013 Loans and advances to customers Loans and advances to customers Ushs ‘000 Ushs ‘000 Neither past due nor impaired 134,053,927 182,344,734 Past due but not impaired 15,419,958 29,351,604 Individually impaired 11,874,484 45,618,170 Gross 161,348,368 257,314,508 Less: allowance for impairment (5,877,826) (37,947,767) Less: Interest in suspense (1,084,314) (2,949,915) Net 154,386,228 216,416,826
Loans and advances are summarised as per risk rating as follows: Normal Watch Substandard Doubtful Loss Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2014 Neither past due nor impaired 134,053,927 134,053,927 Past due but not impaired 15,419,958 15,419,958 Individually impaired 1,278,045 2,633,471 7,962,968 11,874,484 Gross 134,053,927 15,419,958 1,278,045 2,633,471 7,962,968 161,348,368 Less: allowance for impairment (182,498) (672,043) (1,474,804) (4,815,292) (7,144,637) Net 133,871,429 15,419,958 606,001 1,158,667 3,147,676 154,203,731 31 December 2013 Neither past due nor impaired 182,344,734 - - - - 182,344,734 Past due but not impaired - 29,351,604 - - - 29,351,604 Individually impaired - - 21,666,525 6,238,938 17,712,706 45,618,170 Gross 182,344,734 29,351,604 21,666,525 6,238,938 17,712,706 257,314,508 Less: allowance for impairment (988,931) - (21,426,142) (3,523,524) (3,523,524) (29,462,121) Net 181,355,803 29,351,604 240,384 2,715,413 2,715,413 227,852,386
55 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.1.5 Loans and Advances (continued)
(a) Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank.
Loans and advances to customers Total loans and Public advances to Retail customers Corporate HNWI sector customers Over-drafts Term loans Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2014 Neither past due nor impaired 6,947,214 33,756,661 75,685,251 17,664,801 - 134,053,927 Total 6,947,214 33,756,661 75,685,251 17,664,801 - 134,053,927 31 December 2013 Neither past due nor 29,436,236 120,254,764 9,729,613 997,439 182,344,734 impaired 21,926,682 Total 29,436,236 21,926,682 120,254,764 9,729,613 997,439 182,344,734
(b) Loans and advances past due but not impaired Late processing and other administrative delays on the side of the borrower can lead to a financial asset being past due but not impaired. Therefore, loans and advances less than 90 days past due are not usually considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class to customers that were past due but not impaired were as follows:
Loans and advances to customers Total loans and Public advances to Retail customers Corporate HNWI sector customers Over-drafts Term loans Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2014 Past due but not impaired 4,729,163 534,670 9,793,843 362,282 - 15,419,958 Total 4,729,163 534,670 9,793,843 362,282 - 15,419,958 31 December 2013 Past due but not impaired 1,284,016 1,011,591 27,055,997 - - 29,351,604 Total 1,284,016 1,011,591 27,055,997 - - 29,351,604
56 Annual Report 2014
(c) Loans and advances individually impaired (i) Loans and advances to customers The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is Uganda shillings 11,874,484 (2013: 45,618,170). The breakdown of the gross amount of individually impaired loans and advances by class are as follows: Loans and advances to customers Total loans and Public advances to Retail customers Corporate HNWI sector customers Over-drafts Term loans Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2014 Individually impaired 8,425,803 31,811 3,393,717 23,153 - 11,874,484 Total 8,425,803 31,811 3,393,717 23,153 - 11,874,484 31 December 2013 Individually impaired 12,255,016 1,756,970 31,309,295 296,889 - 45,618,170 Total 12,255,016 1,756,970 31,309,295 296,889 - 45,618,170
3.2 Market risk The Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, foreign exchange rates and equity prices. The Bank separates exposures to market risk into either trading or non-trading portfolios.
The market risks arising from trading and non-trading activities are concentrated in Bank Treasury and monitored by two teams separately. Regular reports are submitted to the Board of Directors and heads of each business unit.
Trading portfolios include those positions arising from market-making transactions where the Bank acts as principal with clients or with the market.
Non-trading portfolios primarily arise from the interest rate management of the entity’s retail and commercial banking assets and liabilities. Non-trading portfolios also consist of foreign exchange and equity risks arising from the Bank’s held-to-maturity and available-for-sale financial assets.
3.2.1 Market risk measurement techniques he objective of market risk measurement is to manage and control market risk exposures within acceptable limits while optimising the return on risk. The Bank Treasury is responsible for the development of detailed risk management policies and for day-to-day implementation of those policies.
(a) Value at risk The Bank applies a ‘value at risk’ (VAR) methodology to its trading and non-trading portfolios to estimate the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Board sets limits on the value of risk that may be accepted for the Bank, which are monitored on a daily basis by Bank Treasury. Interest rate risk in the non-trading book is measured through the use of interest rate repricing gap analysis (Note 3.2.3).
57 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.2 Market Risk (continued) 3.2.1 Market risk measurement techniques (continued)
VAR is a statistically based estimate of the potential loss on the current portfolio from adverse market movements. It expresses the ‘maximum’ amount the Bank might lose, but only to a certain level of confidence (98%). There is therefore a specified statistical probability (2%) that actual loss could be greater than the VAR estimate. The VAR model assumes a certain ‘holding period’ until positions can be closed (10 days). It also assumes that market moves occurring over this holding period will follow a similar pattern to those that have occurred over 10-day periods in the past. The Bank’s assessment of past movements is based on data for the past five years. The Bank applies these historical changes in rates, prices, indices, etc. directly to its current positions − a method known as historical simulation. Actual outcomes are monitored regularly to test the validity of the assumptions and parameters/factors used in the VAR calculation. The use of this approach does not prevent losses outside of these limits in the event of more significant market movements.
As VAR constitutes an integral part of the Bank’s market risk control regime, VAR limits are established by the Board annually for all trading portfolio operations and allocated to business units. Actual exposure against limits, together with a Bank-wide VAR, is reviewed daily by Bank Treasury. The quality of the VAR model is continuously monitored by back-testing the VAR results for trading books. All back-testing exceptions and any exceptional revenues on the profit side of the VAR distribution are investigated, and all back-testing results are reported to the Board of Directors.
(b) Stress tests Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The stress tests carried out by Bank Treasury include: risk factor stress testing, where stress movements are applied to each risk category; emerging market stress testing, where emerging market portfolios are subject to stress movements; and ad hoc stress testing, which includes applying possible stress events to specific positions or regions − for example, the stress outcome to a region following a currency peg break.
The results of the stress tests are reviewed by senior management in each business unit and by the Board of Directors. The stress testing is tailored to the business and typically uses scenario analysis.
58 Annual Report 2014
3.2.2 Foreign exchange risk The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign exchange risk at 31 December 2014. Included in the table are the Bank’s financial instruments at carrying amounts, categorised by currency. UGX USD EUR GBP Other Total At 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 47,101,254 17,155,968 809,669 1,395,049 35,727 66,497,667 Deposits and balances due from banking institutions 16,352,275 75,973,725 179,128 5,592,749 8,347,316 106,445,193 Investment securities – Held-to-maturity 116,001,140 - - - - 116,001,140 Investment in subsidiary 80,000 - - - - 80,000 Loans and advances to customers 66,266,052 88,107,649 10,410 2,117 - 154,386,228 Other assets 2,951,242 315,771 - - - 3,267,013 Total financial assets 248,751,964 181,553,113 999,207 6,989,915 8,383,043 446,677,242 Liabilities Deposits from banks 5,000,274 - - - - 5,000,274 Deposits from customers 187,027,324 183,294,599 3,158,032 6,535,093 8,285,246 388,300,294 Refinance loans 166,667 - - - - 166,667 Other liabilities 6,664,222 1,439,051 39,596 4,570 5,408 8,152,847 Total financial liabilities 198,858,487 184,733,650 3,197,628 6,539,663 8,290,654 401,620,082 Net on-balance sheet financial position 49,893,477 (3,180,537) (2,198,421) 450,252 92,389 45,057,160 Credit commitments 10,889,747 9,797,831 - - - 20,687,578 UGX USD EUR GBP Other Total At 31 December 2013 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 63,530,306 12,409,734 1,218,817 1,120,312 36,365 78,315,534 Deposits and balances due from banking institutions 34,020,699 31,850,029 3,621,465 3,339,307 5,257,836 78,089,336 Investment securities ------– Held-to-maturity 89,444,269 - - - - 89,444,269 Investment in subsidiary 80,000 - - - - 80,000 Loans and advances to customers 82,691,871 132,813,821 908,870 2,264 - 216,416,826 Other assets 1,641,320 189,484 - 1,117 - 1,831,921 Total financial assets 271,408,465 177,263,068 5,749,152 4,463,000 5,294,201 464,177,886
59 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.2 Market Risk (continued) 3.2.2 Market risk measurement techniques (continued)
UGX USD EUR GBP Other Total At 31 December 2013 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Liabilities Deposits from banks 1,010,567 - - - - 1,010,567 Deposits from customers 231,880,296 170,386,594 6,784,217 6,517,655 4,790,197 420,358,959 Refinance loans 187,500 - - - - 187,500 Provisions ------Current income tax liabilities ------Other liabilities 6,179,212 3,414,929 90,966 16,539 18,814 9,720,460 Total financial liabilities 239,257,575 173,801,523 6,875,183 6,534,194 4,809,011 431,277,486 Net on-balance sheet financial position 32,150,890 3,461,545 (1,126,031) (2,071,194) 485,190 32,900,400 Credit commitments 13,986,650 16,742,164 - - - 30,728,815
60 Annual Report 2014
3.2.3 Interest rate risk Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate repricing and value at risk that may be undertaken, which is monitored daily by Bank Treasury. The tables below summarise the Bank’s non-trading book fair value exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts (non-derivatives), categorised by the earlier of contractual repricing (for example for floating rate notes). Non 0 to 3 4 to 6 7 to 12 Over Over Interest Months Months Months 1 year 5 years bearing Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 As at 31 December 2014 Assets Cash and balances with the Central Bank 66,497,667 66,497,667 Deposits and balances due from banking institutions 95,287,712 11,157,481 106,445,193 Investment securities - – Held-to-maturity 22,122,433 20,195,756 15,141,793 57,504,651 1,036,506 116,001,140 Investment in subsidiary 80,000 80,000 Loans and advances to customers 57,777,816 15,069,559 21,541,318 56,364,637 3,632,898 154,386,228 Other assets 3,267,013 3,267,013 Property and equipment 11,131,811 11,131,811 Operating lease prepayments 458,464 458,464 Intangible assets 4,096,799 4,096,799 Deferred income tax asset 18,168,677 18,168,677 Current income tax recoverable 266,103 266,103 Total financial assets 175,187,961 46,422,796 36,683,111 113,869,288 4,669,405 103,966,534 480,799,095 Liabilities Deposits from banks 5,000,274 5,000,274 Deposits from customers 112,725,441 48,210,248 38,797,101 13,801,455 5,834 174,760,215 388,300,294 Refinance loans 166,667 166,667 Other liabilities 8,152,847 8,152,847 Total financial liabilities 117,725,715 48,210,248 38,963,768 13,801,455 5,834 182,913,062 401,620,082 Interest sensitivity gap 57,462,246 (1,787,453) (2,280,657) 100,067,833 4,663,572 (78,946,528) 79,179,013
61 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.2 Market Risk (continued) 3.2.3 Interest rate risk (continued)
Non 0 to 3 4 to 6 7 to 12 Over Over Interest Months Months Months 1 year 5 years bearing Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 As at 31 December 2013 Assets Cash and balances with the Central Bank - - - - - 78,315,534 78,315,534 Deposits and balances due from banking institutions 72,514,972 5,574,364 - - - - 78,089,336 Investment securities ------– Held-to-maturity 4,793,400 43,264,235 25,298,021 16,088,612 - - 89,444,269 Investment in subsidiary - - - - - 80,000 80,000 Loans and advances to customers 83,689,446 66,498,087 31,137,189 34,004,236 1,087,868 216,416,826 Other assets - - - - - 1,831,923 1,831,923 Property and equipment - - - - - 10,832,820 10,832,820 Operating lease prepayments - - - - - 502,999 502,999 Intangible assets - - - - - 4,549,434 4,549,434 Deferred income tax asset - - - - - 10,431,870 10,431,870 Current income tax recoverable - - - - - 540,095 540,095 Total financial assets 160,997,819 115,336,686 56,435,210 50,092,848 1,087,868 107,084,676 491,035,107 Liabilities Deposits from banks 1,010,567 - - - - - 1,010,567 Deposits from customers 97,339,521 81,862,904 80,497,064 25,806,129 5,668 134,847,672 420,358,959 Refinance loans - - 285,267 - - - 285,267 Other liabilities - - - - - 9,622,693 9,622,693 Total financial liabilities 98,350,088 81,862,904 80,782,331 25,806,129 5,668 144,470,365 431,277,487 Total interest repricing gap 62,647,730 33,473,782 (24,347,121) 24,286,719 1,082,200 (37,385,690) 59,757,620
62 Annual Report 2014
3.3 Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its obligations when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows, such as debt maturities or margin calls for derivatives. Such outflows would deplete available cash resources for client lending, trading activities and investments. In extreme circumstances, lack of liquidity could result in reductions in the statement of financial position and sales of assets, or potentially an inability to fulfil lending commitments. The risk that the Bank will be unable to do so is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters.
3.3.1 Liquidity risk management process The Bank’s liquidity management process, as carried out within the Bank and monitored by a separate team in Bank Treasury, includes: Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The Bank maintains an active presence in global money markets to enable this to happen; Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow; Monitoring the liquidity ratios of the statement of financial position against internal and regulatory requirements; and Managing the concentration and profile of debt maturities.
Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. The starting point for those projections is an analysis of the contractual maturity of the financial liabilities and the expected collection date of the financial assets (Notes 3.3.3).
Bank Treasury also monitors unmatched medium-term assets, the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees.
3.3.2 Funding approach Sources of liquidity are regularly reviewed by a separate team in Bank Treasury to maintain a wide diversification by currency, provider, product and term.
3.3.3 Non-derivative financial liabilities and assets held for managing liquidity risk The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and assets held for managing liquidity risk by remaining contractual maturities at the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flow, whereas the Bank manages the liquidity risk based on a different basis (see Note 3.3.1 for details), not resulting in a significantly different analysis.
63 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.3 Liquidity Risk (continued) 3.3.3 Non-derivative financial liabilities and assets held for managing liquidity risk (continued)
0 to 3 4 to 6 7 to 12 Over Over Non Months Months Months 1 year 5 years Liquid Total As at 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 66,497,667 - - - - - 66,497,667 Deposits and balances due from banking institutions 95,287,712 11,157,481 - - - - 106,445,193 Investment securities – Held-to-maturity 22,122,433 20,195,756 15,141,793 57,504,651 1,036,506 - 116,001,140 Investment in subsidiary 80,000 - 80,000 Loans and advances to 57,777,816 15,069,559 21,541,318 56,364,637 3,632,898 - customers 154,386,228 Other assets 3,267,013 - - - - - 3,267,013 Operating lease prepayments - - - - - 458,464 458,464 Current income tax recoverable - - - - - 266,103 266,103 Intangible assets - - - - - 4,096,799 4,096,799 Deferred income tax asset - - - - - 18,168,677 18,168,677 Property and equipment - - - - - 11,131,811 11,131,811 Total financial assets 244,952,641 46,422,796 36,683,111 113,869,288 4,749,404 34,121,853 480,799,095 Liabilities Deposits from banks 5,000,274 - - - - - 5,000,274 Deposits from customers 287,485,656 48,210,248 38,797,101 13,801,455 5,834 - 388,300,294 Refinance loans - - 166,667 - - - 166,667 Other liabilities 8,152,847 - - - - - 8,152,847 Total financial liabilities 300,638,777 48,210,248 38,963,768 13,801,455 5,834 - 401,620,082 Total equity - - - - - 79,179,013 79,179,013 Total financial liabilities and equity 300,638,777 48,210,248 38,963,768 13,801,455 5,834 79,179,013 480,799,095 On-balance sheet liquidity gap (55,686,136) (1,787,453) (2,280,657) 100,067,833 4,743,571 (45,057,160) - Off-balance sheet items Loan Commitments 4,017,650 4,883,730 11,786,198 - - - 20,687,578 Guarantees 8,367,564 7,432,918 12,407,812 3,607,171 - - 31,815,464 Performance bonds 2,515,794 416,680 1,084,877 - - - 4,017,350 Letters of credit 29,382,780 6,419,046 7,305,964 - 172,172 - 43,279,961 Total off-balancesheet items 44,283,787 19,152,374 32,584,851 3,607,171 172,172 - 99,800,355 Net mismatch (99,969,923) (20,939,827) (34,865,508) 96,460,662 4,571,399 (45,057,160) (99,800,355)
64 Annual Report 2014
0 to 3 4 to 6 7 to 12 Over Over Non Months Months Months 1 year 5 years Liquid Total As at 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 78,315,534 - - - - - 78,315,534 Deposits and balances due from banking institutions 72,514,972 5,574,364 - - - - 78,089,336 Investment securities - – Held-to-maturity 4,793,400 43,264,235 25,298,021 16,088,612 - - 89,444,269 Investment in subsidiary - - - - 80,000 - 80,000 Loans and advances to customers 83,689,446 66,498,087 31,137,189 34,004,236 1,087,868 - 216,416,826 Other assets 1,831,923 - - - - - 1,831,923 Operating lease prepayments - - - - - 502,999 502,999 Current income tax recoverable - - - - - 540,095 540,095 Intangible assets - - - - - 4,549,434 4,549,434 Deferred income tax asset - - - - - 10,431,870 10,431,870 Property and equipment - - - - - 10,832,820 10,832,820 Total financial assets 241,145,275 115,336,686 56,435,210 50,092,848 1,167,868 26,857,219 491,035,106 Liabilities Deposits from banks 1,010,567 - - - - - 1,010,567 Deposits from banks 232,192,861 81,862,904 80,497,064 25,806,129 - - 420,358,959 Deposits from customers - - - 285,267 - - 285,267 Refinance loans ------Other liabilities 9,622,693 - - - - - 9,622,693 Total financial liabilities 242,826,121 81,862,904 80,497,064 26,091,396 - 431,277,486 Total equity - - - - - 59,757,620 59,757,620 Total financial liabilities and equity 242,826,121 81,862,904 80,497,064 26,091,396 - 59,757,620 491,035,106 On-balance sheet liquidity gap (1,680,846) 33,473,782 (24,061,854) 24,001,452 1,167,868 (32,900,401) - Off-balance sheet items Loan Commitments 8,925,117 10,993,773 10,808,181 1,743 - - 30,728,814 Guarantees 3,257,721 11,303,924 5,266,820 5,308,150 - - 25,136,615 Performance bonds 894,461 3,544,650 1,295,046 - - - 5,734,157 Letters of credit 37,447,379 9,822,957 2,264,350 - - - 49,534,686 Total off-balancesheet items 41,599,560 24,671,531 8,826,216 5,308,150 - - 80,405,458 Net mismatch (43,280,407) 8,802,251 (32,888,070) 18,693,301 1,167,868 32,900,401 80,405,458
3.3.4 Assets held for managing liquidity risk The Bank holds a diversified portfolio of cash and high-quality highly-liquid securities to support payment obligations and contingent funding in a stressed market environment. The Bank’s assets held for managing liquidity risk comprise: Cash and balances with central banks; Certificates of deposit;
65 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.3 Liquidity Risk (continued) 3.3.4 Assets held for managing liquidity risk (continued)
Government bonds and other securities that are readily acceptable in repurchase agreements with central banks; and Secondary sources of liquidity in the form of highly liquid instruments in the Bank’s trading portfolios.
3.3.5 Derivative liabilities The Bank’s derivatives that are settled on a gross basis include: Foreign exchange derivatives: currency forward, currency swaps; and Interest rate derivatives: interest rate swaps for which cash flows are exchanged on a gross basis, cross currency interest rate swaps.
3.3.6 Off-balance sheet items (a) Loan commitments The dates of the contractual amounts of the Bank’s off-balance sheet financial instruments that it commits to extend credit to customers and other facilities (Note 35) are summarised in the table below.
(b) Other financial facilities Other financial facilities (Note 35) are also included in the table below, based on the earliest contractual maturity date.
(c) Operating lease commitments Where the Bank is the lessee, the future minimum lease payments under non-cancellable operating leases, as disclosed in Note 35, are summarised in the table below. (d) Capital commitments Capital commitments for the acquisition of buildings and equipment (Note 35) are summarised in the table below.
No later than 1 year 1-5 years Over 5 years Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 At 31 December 2014 Loan commitments 20,687,578 - - 20,687,578 Letters of credit 43,107,789 - 172,172 43,279,961 Guarantees 28,208,294 3,607,171 - 31,815,464 Performance bonds 4,017,350 - - 4,017,350 Capital commitments 947,160 - - 947,160 Total 96,968,171 3,607,171 172,172 100,747,513 At 31 December 2013 Loan commitments 30,727,071 1,743 - 30,728,815 Letters of credit 49,534,686 - - 49,534,686 Guarantees 19,828,465 5,308,150 - 25,136,615 Performance bonds 5,734,157 - - 5,734,157 Capital commitments 847,545 - - 847,545 Total 106,671,923 5,309,894 - 111,981,817
66 Annual Report 2014
3.4 Fair value of financial instruments (a) Financial instruments not measured at fair value The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value: Carrying Value Fair value 2014 2013 2014 2013 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Deposits and balances due from banking 106,445,193 78,089,336 106,445,193 78,089,336 institutions Loans and advances to customers 154,386,228 216,416,826 154,386,228 216,416,826 Investment securities (held-to-maturity) 116,001,140 89,444,269 116,001,140 89,444,269 376,832,561 383,950,431 376,832,561 383,950,431 Financial liabilities Deposits from banks 5,000,274 1,010,567 5,000,274 1,010,567 Deposits from customers 388,300,294 420,358,959 388,300,294 420,358,959 Refinance loan 166,667 285,267 166,667 285,267 393,467,235 421,654,794 393,467,235 421,654,794 Off-balance sheet financial instruments Loan commitment 20,687,578.36 30,728,815 20,687,578 30,728,815 Guarantees, acceptances and other financial facilities 79,112,776 80,405,458 79,112,776 80,405,458 99,800,355 111,134,272 99,800,355 111,134,272
(i) Loans and advances to banks Loans and advances to banks include inter-bank placements and items in the course of collection. The carrying amount of floating rate placements and overnight deposits is a reasonable approximation of fair value. The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity.
(ii) Loans and advances to customers Loans and advances are net of charges for impairment. The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.
(iii) Investment securities The fair value for loans and receivables and held-to-maturity financial assets is based on market prices or broker/ dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. Investment securities (available-for-sale) disclosed in the table above comprise only those equity securities held at cost less impairment. The fair value for these assets is based on estimations using market prices and earning multiples of quoted securities with similar characteristics. All other available-for-sale financial assets are already measured and carried at fair value.
(iv) Deposits from banks and customers The estimated fair value of deposits with no stated maturity, which includes non-interest-bearing deposits, is the amount repayable on demand
67 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.4 Fair value of financial instruments (continued) (a) Financial instruments not measured at fair value (continued)
The estimated fair value of fixed interest-bearing deposits not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity.
(v) Off-balance sheet financial instruments The estimated fair values of the off-balance sheet financial instruments are based on markets prices for similar facilities. When this information is not available, fair value is estimated using discounted cash flow analysis.
(b) Fair value hierarchy IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank’s market assumptions.
These two types of inputs have created the following fair value hierarchy: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Uganda Stock Exchange) and exchanges traded derivatives like futures (for example, Nasdaq). Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The sources of input parameters like LIBOR yield curve or counterparty credit risk are Bloomberg and Reuters. Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs).
This level includes equity investments and debt instruments with significant unobservable components. This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible.
At 31 December 2013 and 2014, the Bank had no financial assets measured at fair value.
68 Annual Report 2014
3.5 Capital management The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the statement of financial position, are: To comply with the capital requirements set by the Central Bank; To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and To maintain a strong capital base to support the development of its business.
Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Bank of Uganda (the Authority), for supervisory purposes. The required information is filed with the Authority on a quarterly basis. The Bank maintains a ratio of total regulatory capital to its risk-weighted assets (the ‘Basel ratio’) above a minimum level agreed with the Central Bank which takes into account the risk profile of the Bank.
The regulatory capital requirements are strictly observed when managing economic capital. The Bank’s regulatory capital is managed by its Bank Treasury and comprises two tiers: Tier 1 capital: share capital, general banking reserve, retained earnings and reserves created by appropriations of retained earnings; and Tier 2 capital: qualifying subordinated loan capital and collective impairment allowances.
The risk weighted assets are measured by means of a hierarchy of 4 risk weights. Risk weights are assigned to assets and off balance sheet items according to the Bank’s own estimates of probabilities of default (PD), loss given default (LGD) and credit fonversion factors (CCF) for retail business and claims to central governments, institutions and corporates. Own estimates of risk parameters are in accordance to the minimum requirements set out by Basel II. The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended 31 December 2014 and 2013. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject.
2014 2013 Ushs ‘000 Ushs ‘000 Tier 1 capital Share capital 76,500,000 50,000,000 Retained earnings (4,888,694) 8,198,893 Less: Intangible assets (4,096,799) (4,549,434) Less: Deferred income tax asset (18,168,677) (10,431,870) Less: Unrealized foreign exchange gains (22,469) (2,063) Less: Investment in subsidiary (80,000) (80,000) Total qualifying Tier 1 capital 49,323,361 43,215,526 Tier 2 capital Revaluation reserve 2,562,073 1,558,727 General Provisions 2,309,121 3,386,034 Total qualifying Tier 2 capital 4,871,194 4,944,761 Total regulatory capital 54,114,555 44,774,252 Risk-weighted assets: On-balance sheet 209,825,416 247,286,165 Off-balance sheet 52,823,922 53,275,038 Total risk-weighted assets 262,649,339 300,561,203 Core capital ratio 18.78% 14.38% Total capital ratio 20.61% 14.90%
69 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
3. Financial Risk Management (Continued) 3.5 Capital management (Continued)
Nominal statement of Risk weighted financial position amounts amounts 2014 2013 Risk 2014 2013 Shs ‘000 Shs ‘000 Weight Shs '000 Shs ‘000 Balance sheet assets (net of provisions) Cash balances 66,497,667 78,315,534 0% - - Deposits and balances due from banking institutions 35,027,108 34,000,000 20% 7,005,422 6,800,000 Due from other Commercial banks in Uganda Due from banks outside Uganda with long-term ratings as follows; Rated AAA to AA(-) 7,442,696 13,823,535 20% 1,488,539 2,764,707 Rated A (+) to A (-) 63,934,899 15,958,602 50% 31,967,449 7,979,301 Rated A (-) to non-rated 40,490 77,588 100% 40,490 77,589 Government securities 116,001,140 89,444,269 0% - - Loans and advances to customers 154,386,228 216,416,826 100% 154,386,228 216,416,826 Investment in subsidiary 80,000 80,000 0% 80,000 80,000 Property and equipment 11,131,811 10,832,820 100% 11,131,811 10,832,820 Operating lease prepayments 458,464 502,999 100% 458,464 502,999 Other assets 3,267,013 1,831,923 100% 3,267,013 1,831,923 Current income tax recoverable 266,103 540,095 0% - - Total assets 458,533,619 461,824,191 209,825,416 247,286,165 Off-balance sheet positions Performance bonds 4,017,351 5,734,157 50% 2,008,676 2,867,078 Letters of guarantee 31,815,465 25,136,615 100% 31,815,465 25,136,615 Letters of credit 43,279,961 49,534,686 20% 8,655,992 9,906,937 Unutilised commitments 20,687,578 30,728,815 50% 10,343,789 15,364,407 99,800,355 111,134,272 52,823,922 53,275,038 Total risk-weighted assets 558,333,974 572,958,463 262,649,338 300,561,203
70 Annual Report 2014
4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. All estimates and assumptions required in conformity with IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events.
Accounting policies and directors’ judgements for certain items are especially critical for the Bank’s results and financial situation due to their materiality.
(a) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgements as to whether there is any observable data indicating an impairment trigger followed by measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a bank, or national or local economic conditions that correlate with defaults on assets in the Bank. The directors use estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.
(b) Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgement, the Bank evaluates among other factors, the volatility in share price. In addition, objective evidence of impairment may be deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.
(c) Fair value of financial instruments The fair value of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated from observable data in respect of similar financial instruments or using models. Where market observable inputs are not available, they are estimated based on appropriate assumptions. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of those that sourced them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data; however, areas such as credit risk (both own credit risk and counterparty risk), volatilities and correlations require management to make estimates.
(d) Held-to-maturity investments In accordance with IAS 39 guidance, the Bank classifies some non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank were to fail to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – the Bank is required to reclassify the entire category as available-for- sale. Accordingly, the investments would be measured at fair value instead of amortised cost. If all held-to-maturity investments were to be so reclassified, the carrying value would increase by C62, with a corresponding entry in the fair value reserve in shareholders’ equity.
71 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
5. NET INTEREST INCOME 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Interest income Loans and advances 26,198,156 45,810,324 Deposits and balances due from banking institutions 1,692,455 2,200,756 27,890,611 48,011,080 Investment securities: - Held-to-maturity 12,896,554 12,302,026 40,787,165 60,313,106 Interest expense Deposits from banks 1,091,150 975,048 Deposits from customers 19,877,561 24,615,431 BOU refinance schemes 19,389 55,831 20,988,100 25,646,310
6. LOAN IMPAIRMENT CHARGES 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Loans and advances to customers (Note 20) Net Increase in impairment 18,813,833 43,430,725 18,813,833 43,430,725 - identified 18,631,335 42,441,794 - unidentified 182,498 988,931 18,813,833 43,430,725
72 Annual Report 2014
7. NET FEE AND COMMISSION INCOME
2014 2013 Ushs ‘000 Ushs ‘000 Group Fee and commission income Credit related fees and commissions 2,324,618 3,342,696 Commission income 12,803,686 9,857,634 Commission on trade 347,908 107,664 Other operating income 3,155,262 1,322,151 18,631,474 14,630,145 Bank Fee and commission income Credit related fees and commissions 2,324,618 3,342,696 Commission income 12,803,686 9,857,634 Other operating income 3,148,543 1,314,648 18,276,847 14,514,978
8. NET FOREIGN EXCHANGE GAINS/(LOSSES) 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Unrealised exchange gain 22,469 2,063 Realised exchange gain 5,035,577 4,900,656 5,058,046 4,902,719 Foreign exchange net trading income includes gains and losses from spot and forward contracts and options.
9. EMPLOYEE BENEFITS EXPENSES 2014 2013 Ushs ‘000 Ushs ‘000 Group Wages and salaries 11,170,773 11,619,218 National Social Security Fund contributions 1,174,193 1,222,830 Other staff costs 1,400,857 1,359,644 Defined benefit pension fund contributions 741,513 701,776 14,487,336 14,903,468 Bank Wages and salaries 11,109,768 11,546,759 National Social Security Fund 1,168,092 1,215,584 Other staff costs 1,387,597 1,359,644 Defined contributions 741,513 701,776 14,406,970 14,823,763
73 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
10. GENERAL AND ADMINISTRATIVE EXPENSES 2014 2013 Ushs ‘000 Ushs ‘000 Group IT and software costs 1,221,159 1,015,252 Occupancy, furniture and equipment 4,100,487 3,290,365 Marketing and public relations 864,433 912,990 Travel and entertainment 172,592 201,887 Telecommunication and postage 1,542,646 1,405,238 Other administrative expenses 1,129,057 1,012,189 9,030,374 7,837,921 Bank IT and software costs 1,221,159 1,015,252 Occupancy, furniture and equipment 4,100,487 3,290,365 Marketing and public relations 863,983 912,204 Travel and entertainment 172,592 201,887 Telecommunication and postage 1,540,846 1,403,780 Other administrative expenses 1,128,220 1,011,505 9,027,287 7,834,993
11. DEPRECIATION AND AMORTISATION 2014 2013 Ushs ‘000 Ushs ‘000 Group Depreciation of property and equipment (Note 23) 2,743,176 2,372,039 Amortisation of intangible assets (Note 24) 2,011,173 652,114 Amortisation of operating lease prepayments (Note 25) 44,535 44,535 4,798,884 3,068,688 Bank Depreciation of property and equipment (Note 23) 2,742,029 2,371,752 Amortisation of intangible assets (Note 24) 2,011,173 652,114 Amortisation of operating lease prepayments (Note 25) 44,535 44,535 4,797,737 3,068,401
74 Annual Report 2014
12. OTHER OPERATING EXPENSES 2014 2013 Ushs ‘000 Ushs ‘000 Group Audit fees 92,000 126,078 Other general expenses 9,406,342 8,595,839 9,498,342 8,721,917 Bank Audit fees 92,000 126,078 Other general expenses 9,268,605 8,587,407 9,360,605 8,713,485
13. INCOME TAX CREDIT 2014 2013 Ushs ‘000 Ushs ‘000 Group Current income tax 3,071,942 3,899,908 Deferred income tax (Note 29) (8,183,541) (11,024,739) Income tax credit (5,111,599) (7,124,831) The tax on the Group’s loss before income tax differs from the theoretical amount as follows: Loss before income tax (13,140,184) (23,763,059) Tax calculated at the tax rate of 30% (2013: 30%) (3,942,055) (7,128,918) Effect of: - Final tax on government securities 3,032,053 2,402,449 - Income not subject to tax (8,183,541) (3,986,128) - Expenses not deductible for tax purposes 3,981,944 1,587,766 Income tax credit (5,111,600) (7,124,831)
2014 2013 Ushs ‘000 Ushs ‘000 Bank Current income tax 3,032,053 3,893,431 Deferred income tax (Note 29) (8,183,541) (11,024,739) Income tax credit (5,151,488) (7,131,308) The tax on the Bank’s loss before income tax differs from the theoretical amount as follows: Loss before income tax (13,272,474) (23,786,874) Tax calculated at the tax rate of 30% (2013: 30%) (3,981,742) (7,136,062) Effect of: - Final tax on Government securities 3,032,053 2,402,449 - Income not subject to tax (8,183,541) (3,986,128) - Expenses not deductible for tax purposes 3,981,742 1,588,433 Income tax credit (5,151,488) (7,131,308)
75 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
14. FINANCIAL INSTRUMENTS BY CATEGORY Loans and Held to Total receivables maturity Ushs ‘000 Ushs ‘000 Ushs ‘000 At 31 December 2014 Financial assets Cash and bank balances with the Central Bank - 66,497,667 66,497,667 Deposits and balances due from banking institutions - 106,445,193 106,445,193 Investment securities - 116,001,140 116,001,140 Loans and advances to customers 154,386,228 - 154,386,228 154,386,228 288,944,000 443,330,228 Financial liabilities at amortised cost Deposits from banks - 5,000,274 5,000,274 Deposits from customers - 388,300,294 388,300,294 - 393,300,568 393,300,568 At 31 December 2013 Financial assets Cash and bank balances with the Central Bank - 78,315,534 78,315,534 Deposits and balances due from banking institutions - 78,089,336 78,089,336 Investment securities - 89,444,269 89,444,269 Loans and advances to customers 216,416,826 - 216,416,826 216,416,826 245,849,139 462,265,965 Financial liabilities at amortised cost Deposits from banks - 1,010,567 1,010,567 Deposits from customers - 420,358,959 420,358,959 - 421,369,527 421,369,527
76 Annual Report 2014
15. CASH AND BALANCES WITH CENTRAL BANK 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Cash in hand 24,230,201 19,215,808 Balances with the Central bank other than mandatory reserve deposits 42,267,466 27,569,726 Included in cash and cash equivalents (Note 16) 66,497,667 46,785,534 Mandatory reserve deposits with Central Bank - 31,530,000 66,497,667 78,315,534 Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. Cash-in-hand and balances with the Central Bank and mandatory reserve deposits are non-interest-bearing.
16. CASH AND CASH EQUIVALENTS For the purpose of the statement of cash flows, cash and cash equivalents include: 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Cash and balances with the Central Bank (Note 15) 66,497,667 78,315,534 Deposits and balances due from banking institutions (Note 17) 106,445,193 78,089,336 Treasury bills maturing within 90 days 14,743,586 13,899,600 Treasury bonds maturing within 90 days 8,343,151 8,803,124 196,029,597 179,107,594
For the purposes of the statement of cash flow, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with central banks, treasury bills and other eligible bills, and amounts due from other banks.
The required cash reserve with Bank of Ugnada as at 31 December 2014 was Ushs: 31,530 million. The cash ratio requirement is non-interest earning and is based on the value off customer deposits as adjusted by the Bank of Uganda. The cash reserves held are allowed to flactuate to not less than 50% of the mandatory requirement on a given day provided the average for the specified two weeks period is not lower than minimum requirements, and are subject to sanctions for non-compliance.
77 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
17. DEPOSITS AND BALANCES DUE FROM BANKING INSTITUTIONS 2014 2013 Ushs ‘000 Ushs ‘000 Group Balances due from other banking institutions 71,590,550 29,875,527 Placements with other banks 34,861,675 48,229,612 106,452,225 78,105,139 Bank Balances due from other banking institutions 71,583,518 29,859,724 Placements with other banks 34,861,675 48,229,612 106,445,193 78,089,336
18. GOVERNMENT SECURITIES 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Securities held-to-maturity Treasury bills Face value Maturing within 90 days 14,743,586 13,899,600 Maturing after 90 days 29,837,114 39,000,000 44,580,700 52,899,600 Unearned interest (1,671,464) (2,767,176) 42,909,236 50,132,424 Treasury Bonds Face value Maturing within 90 days 8,343,151 8,803,214 Maturing after 90 days 64,748,753 34,132,921 73,091,904 42,936,135 Unearned interest - (3,624,290) 73,091,904 39,311,845 Total government securities 116,001,140 89,444,269
78 Annual Report 2014
19 (A) OTHER INVESTMENTS 2014 2013 Ushs ‘000 Ushs ‘000 Group Investment in quoted shares 27,723 24,597 Total Investment in quoted shares 27,723 24,597
19 (B) INVESTMENT IN SUBSIDIARY 2014 2013 Ushs ‘000 Ushs ‘000 Bank Equity securities – at cost: – Equity Stock Brokers Ltd 80,000 80,000 Total investment in subsidiary 80,000 80,000
20. LOANS AND ADVANCES TO CUSTOMERS 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank a) Analysis of loan advances to customers by category: Retail - Overdrafts 20,102,180 42,317,927 - Term loans 34,323,142 25,847,555 54,425,322 68,165,482 Corporate 88,872,810 178,026,116 High Net Worth Individuals 18,050,236 10,139,917 Public sector - 982,994 161,348,368 257,314,508 Gross loans and advances to customers 161,348,368 257,314,508 Less: Interest in suspense (1,084,314) (2,949,915) Less: allowance for impairment (5,877,826) (37,947,767) Net loans and advances to customers 154,386,228 216,416,826 b) Gross advances to customers by industry composition: - Trade and commerce 40,585,093 73,457,650 - Agriculture 21,448,196 30,408,293 - Manufacturing 7,707,026 17,167,727 - Transport & communication 10,478,898 33,047,088 - Building and construction 39,220,250 38,586,192 - Personal, service industry and others 41,908,905 64,647,559 Gross advances to customers 161,348,368 257,314,508
79 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
20. Loans and advances to customers (Continued)
Reconciliation of allowance account for losses on loans and advances to customers is as follows: 2014 2013 Ushs ‘000 Ushs ‘000 At 1 January 37,947,767 10,151,587 Increase in the provision for loan impairment . Individually assessed as Per IAS 39 35,766,848 43,546,967 . Collectively assessed as Per IAS 39 182,498 988,931 Recoveries and allowances no longer required (16,349,579) (1,105,173) Writte offs during the year (51,669,708) (15,634,545) At 31 December 5,877,826 37,947,767 Identified Impairment 4,706,398 36,958,836 Unidentified Impairment 1,171,429 988,931 5,877,826 37,947,767 Charge to the statement of comprehensive income Net increase in the provision for loan impairment 18,813,832 43,430,725 Recoveries of amounts previously written off -
21. OTHER ASSETS 2014 2013 Ushs ‘000 Ushs ‘000 Group Prepayments 2,115,983 1,451,969 Other receivables 1,262,368 487,117 3,378,352 1,939,086 Bank Prepayments 2,004,642 1,344,806 Other receivables 1,262,371 487,117 3,267,013 1,831,923
80 Annual Report 2014
22. PROPERTY AND EQUIPMENT (GROUP)
Furniture, Computer Leasehold Fixtures, Equipment, improve- Strongroom ATM, POS & Motor Office Work In Buildings ments & Safes SWIFT vehicles Equipment Progress Total Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 COST or VALUATION At 1 January 2013 5,773,310 2,973,201 2,377,527 6,775,222 1,331,754 3,569,927 531,230 23,332,171 Additions - 95,617 217,624 429,607 144,315 589,000 1,183,971 2,660,134 Disposals - - (19,125) - (68,000) - - (87,125) Transfer from WIP - 495,234 80,169 343,493 52,976 13,504 (985,376) - At 31 December 2013 5,773,310 3,564,052 2,656,194 7,548,322 1,461,045 4,172,431 729,825 25,905,180 At 1 January 2014 5,773,310 3,564,052 2,656,194 7,548,322 1,461,045 4,172,431 729,825 25,905,180 Additions 50,000 169,345 127,557 318,198 78,470 270,115 777,516 1,791,201 Disposals - - (149,527) (4,435) (113,422) (6,764) - (274,149) Transfer from WIP - 573,879 106,807 109,003 148,075 385,143 (1,442,241) (119,334) Elimination of accummulated depreciation (2,505,045) ------(2,505,045) Increase on revaluation 1,489,113 ------1,489,113 - - - - At 31 December 2014 4,807,377 4,307,276 2,741,031 7,971,087 1,574,168 4,820,925 65,100 26,286,965 ACCUMULATED DEPRECIATION At 1 January 2013 2,739,785 882,962 1,453,486 4,795,470 576,279 2,316,294 - 12,764,276 Charge for the year 211,460 363,586 183,308 846,408 298,675 468,602 - 2,372,039 Eliminated on disposal - - (9,718) - (57,392) - - (67,110) At 31 December 2014 2,951,245 1,246,548 1,627,076 5,641,878 817,562 2,784,896 - 15,069,205 At 1 January 2014 2,951,245 1,246,548 1,627,076 5,641,878 817,562 2,784,896 - 15,069,205 Charge for the year 211,460 480,559 218,349 975,629 328,906 528,273 - 2,743,175 Eliminated on disposal - - (54,685) (4,433) (93,458) (1,612) - (154,188) Elimination of accummulated depreciation (2,505,045) ------(2,505,045) At 31 December 2014 657,660 1,727,107 1,790,739 6,613,074 1,053,010 3,311,557 - 15,153,147 NET BOOK VALUE At cost - 2,580,169 950,292 1,358,013 521,158 1,509,368 65,100 6,984,101 At valuation 4,149,718 - - - - 4,149,718 At 31 December 2014 4,149,718 2,580,169 950,292 1,358,013 521,158 1,509,368 65,100 11,133,818 At 31 December 2013 2,822,065 2,317,504 1,029,119 1,906,444 643,483 1,387,535 729,825 10,835,975 The buildings at Kampala Road Plot 6 and 6A were revalued on 20th March 2014 by Bageine and Company. The revalua- tion reserve arising out of this has been adequately in the financials refered to in note 32
81 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
22. PROPERTY AND EQUIPMENT (BANK)
Furniture, Computer Leasehold Fixtures, Equipment, improve- Strongroom ATM, POS & Motor Office Work In Buildings ments & Safes SWIFT vehicles Equipment Progress Total Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 COST or VALUATION At 1 January 2013 5,773,310 2,973,201 2,377,527 6,775,222 1,331,754 3,569,927 531,230 23,332,171 Additions - 95,617 217,624 423,751 144,315 589,000 1,183,971 2,654,279 Disposals - - (19,125) - (68,000) - - (87,125) Transfer from WIP - 495,234 80,169 343,493 52,976 13,504 (985,376) - At 31 December 2013 5,773,310 3,564,052 2,656,194 7,542,466 1,461,045 4,172,431 729,825 25,899,324 At 1 January 2014 5,773,310 3,564,052 2,656,194 7,542,466 1,461,045 4,172,431 729,825 25,899,324 Additions 50,000 169,345 127,557 318,198 78,470 270,115 777,516 1,791,201 Disposals - - (149,527) (4,435) (113,422) (6,764) - (274,149) Transfer from WIP - 573,879 106,807 109,003 148,075 385,143 (1,442,241) (119,334) Elimination of accummulated depreciation (2,505,045) ------(2,505,045) Increase on revaluation 1,489,113 ------1,489,113 At 31 December 2014 4,807,377 4,307,276 2,741,031 7,965,232 1,574,168 4,820,925 65,100 26,281,109 ACCUMULATED DEPRECIATION At 1 January 2013 2,739,785 882,962 1,453,486 4,793,056 576,279 2,316,294 - 12,761,862 Charge for the year 211,460 363,586 183,308 846,121 298,675 468,602 - 2,371,752 Eliminated on disposal - - (9,718) - (57,392) - - (67,110) At 31 December 2013 2,951,245 1,246,548 1,627,076 5,639,177 817,562 2,784,896 - 15,066,504 At 1 January 2014 2,951,245 1,246,548 1,627,076 5,639,177 817,562 2,784,896 - 15,066,504 Charge for the year 211,460 480,559 218,349 974,482 328,906 528,273 - 2,742,028 Eliminated on disposal - - (54,685) (4,433) (93,458) (1,612) - (154,188) Elimination of accummulated depreciation (2,505,045) ------(2,505,045) At 31 December 2014 657,660 1,727,107 1,790,739 6,609,226 1,053,010 3,311,557 - 15,149,298 NET BOOK VALUE At cost - 2,580,169 950,292 1,356,006 521,158 1,509,368 65,100 6,982,093 At valuation 4,149,718 ------4,149,718 At 31 December 2014 4,149,718 2,580,169 950,292 1,356,006 521,158 1,509,368 65,100 11,131,811 At 31 December 2013 2,822,065 2,317,504 1,029,119 1,903,289 643,483 1,387,535 729,825 10,832,820 The buildings at Kampala Road Plot 6 and 6A were revalued on 20th March 2014 by Bageine and Company. The revalua- tion reserve arising out of this has been adequately in the financials refered to in note 32
82 Annual Report 2014
23. OPERATING LEASE PREPAYMENTS 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Cost At 1 January 1,046,652 1,046,652 Additions - - At 31 December 1,046,652 1,046,652 Accumulated amortisation At 1 January 543,653 499,118 Amortisation charge 44,535 44,535 At 31 December 588,188 543,653 Net book value 458,464 502,999
24. INTANGIBLE ASSETS 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Cost At 1 January 7,383,462 2,482,729 Additions 1,439,204 4,900,733 Transfer from WIP 119,334 - At 31 December 2013 8,942,000 7,383,462 Accumulated amortisation At 1 January 2,834,028 2,181,914 Amortisation charge 2,011,173 652,114 At 31 December 2013 4,845,201 2,834,028 Net book value 4,096,799 4,549,434
83 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
25. DEPOSITS FROM BANKS 2014 2013 Ushs ‘000 Ushs ‘000 Group and Bank Deposits from other banks 5,000,274 1,010,567 5,000,274 1,010,567
26. CUSTOMER DEPOSITS Deposits due to customers primarily comprise savings deposits, amounts payable on demand, and term deposits.
2014 2013 Ushs ‘000 Ushs ‘000 Group Demand deposits 190,429,875 140,559,824 Time deposits 142,179,417 223,921,227 Savings accounts 55,492,309 55,815,959 388,101,601 420,297,010 Banks and financial institutions - 3,420,475 Private enterprises and individuals 347,052,679 322,830,842 Government and parastatals 41,048,922 94,045,693 388,101,601 420,297,010 Bank Demand deposits 190,478,568 140,571,773 Time deposits 142,329,417 223,971,227 Savings accounts 55,492,309 55,815,959 388,300,294 420,358,959 Segment analysis Corporate 79,614,852 72,016,269 High net worth individuals 29,714,841 44,839,825 Retail 237,921,679 206,036,698 Public sector 41,048,922 97,466,167 388,300,294 420,358,959 Banks and financial institutions - 3,420,475 Private enterprises and individuals 347,251,372 322,892,791 Government and parastatals 41,048,922 94,045,693 388,300,294 420,358,959
84 Annual Report 2014
27. REFINANCE LOANS 2014 2013 Ushs ‘000 Ushs ‘000 APEX III/Agricultural Credit Facility (ACF) Loans 166,667 285,267 166,667 285,267 These refinance loans are denominated in Uganda Shillings (Ushs) and are unsecured. They attract interest of 10% and mature in July 2015.
28. CURRENT INCOME TAX RECOVERABLE 2014 2013 Ushs ‘000 Ushs ‘000 Group Balance as at 1 January (543,619) (1,588,012) Current tax charge 3,069,184 3,899,908 Tax paid - current year (2,786,761) (2,855,515) (261,196) (543,619) Bank Balance as at 1 January (540,095) (1,598,982) Current tax charge 3,032,053 3,893,431 Tax paid - current year (2,758,061) (2,834,544) (266,103) (540,095)
85 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
29. DEFERRED INCOME TAX Deferred income tax is calculated using the enacted income tax rate of 30% (2013: 30%). The movement on the deferred income tax account is as follows: Group Accelerated Charges for Deferred tax Revaluation tax depreci- loan impair- on revalua- loss on invest- ation ment Tax Losses tion surplus ments Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2014 543,503 (657,415) (10,665,933) 347,975 (2) (10,431,872) Charged/credited to income statement (385,426) 245,510 (7,987,864) (55,761) 18,480 (8,165,061) Charged/credited to other comprehensive income - - - - 429,192 429,192 At 31 December 2014 158,077 (411,905) (18,653,797) 292,214 447,670 (18,167,741) At 1 January 2013 389,503 (202,565) - 405,931 (3,044) 589,825 Charged/credited to income statement 154,000 (454,850) (10,665,933) (57,956) 3,468 (11,021,271) Charged/credited to other comprehensive income - - - - (426) (426) At 31 December 2013 543,503 (657,415) (10,665,933) 347,975 (2) (10,431,872)
Bank Accelerated Charges for Deferred tax Revaluation tax depreci- loan impair- on revalua- loss on invest- ation ment Tax Losses tion surplus ments Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2014 543,503 (657,415) (10,665,933) 347,975 (10,431,870) Charged/credited to income statement (385,426) 245,510 (7,987,864) (55,761) (8,183,541) Charged/credited to other comprehensive income - - - 446,734 446,734 At 31 December 2014 158,077 (411,905) (18,653,797) 738,948 (18,168,677) At 1 January 2013 389,503 (202,565) - 405,931 592,869 Charged/credited to income statement 154,000 (454,850) (10,665,933) (57,956) (11,024,739) At 31 December 2013 543,503 (657,415) (10,665,933) 347,975 (10,431,870)
86 Annual Report 2014
30. OTHER LIABILITIES The other liabilities mentioned below relates to margins held for off balance sheet items, transit liability accounts and statutory deductions payable among others. 2014 2013 Ushs ‘000 Ushs ‘000 Group Provisions and accruals 2,101,399 2,100,234 Other 6,154,519 7,595,361 Total 8,255,918 9,695,595 Bank Provisions and accruals 2,096,072 2,060,080 Other 6,056,775 7,562,613 Total 8,152,847 9,622,693
31. SHARE CAPITAL Number of shares issued & fully paid (thousands) Value per share Total value of shares Ushs ‘000 2013 At 1 January 2013 and 31 December 2013 50,000 1,000 50,000,000 2014 At 1 January 2014 50,000 1,000 50,000,000 Shares issued at par 26,500 1,000 26,500,000 At 31 December 2014 76,500 1,000 76,500,000
The total authorised number of ordinary shares at year end was 76.5 million (2013: 50 million) with a par value of Ushs 1,000 per share (2013: Ushs 1,000 per share).
On 11 July 2014, the board approved to increase the Bank’s share capital from Ushs 50,000 million to Ushs 76,500 million. Consequently, a total of 26.5 million ordinary shares were alloted and fully paid.
87 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
32. REVALUATION RESERVE 2014 2013 Ushs ‘000 Ushs ‘000 At start of year 1,558,727 1,599,296 Transfer of excess depreciation (55,761) (57,956) Deferred income tax on excess depreciation 16,728 17,387 Increase in revaluation surplus on buildings 1,042,379 - At end of year 2,562,073 1,558,727
33. STATUTORY CREDIT RISK RESERVE The statutory credit risk reserve represents an appropriation of retained earnings to comply with the Financial Institutions Act, 2004. The balance in the reserve represents the extent to which provisions for loan losses determined in accordance with Financial Institutions Act, 2004 exceed amounts determined in accordance with IFRS. The reserve is not distributable. Below is the reconciliation of the statutory credit risk reserve between the Bank of Uganda version and the IFRS once; 2014 Ushs ‘000 Provisions as per Bank of Uganda guidelines Specific provisions 8,574,341 General Provisions 2,309,121 10,883,462 Provisions as per IFRS guidelines Individual impairment 4,706,398 Collective impairment 1,171,429 5,877,827 Statutory credit risk reserve 5,005,634
34. DIVIDENDS PAYABLE The directors do not recommend the payement of dividends for the year (2013: 4,000 million).
88 Annual Report 2014
35. CONTINGENT LIABILITIES AND COMMITMENTS (a) Legal proceedings The Bank is a litigant in several other cases which arise from normal day to day banking.
The directors have carried out an assessment of all the cases outstanding as at 31 December 2014 - supported by independent professional legal advice - and where considered necessary based on the merits of each case, a provision has been raised. In aggregate the total provisions amounting to Shs 854 million (2013: Shs 620million) have been made.
The directors believe that the resolution of pending legal cases will not give rise to losses above amounts already provided.
(b) Capital commitments At 31 December 2014, the Bank had capital commitments of Shs 947 million (2013: Shs 848 million).
(c) Loan commitments, guarantee and other financial facilities In common with other banks, the Bank conducts business involving acceptances, letters of credit, guarantees and performance bonds. The majority of these facilities are offset by corresponding obligations of third parties.
2014 2013 Ushs ‘000 Ushs ‘000 Loan commitments 20,687,578 30,728,815 Performance Bonds 4,017,350 5,734,157 Guarantees 31,815,464 25,136,615 Documentary and letters of credit 43,279,961 49,534,686 Total 99,800,355 111,134,272
89 ..Think Possibilities Orient Bank Limited
NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 (continued)
36. RELATED-PARTY DISCLOSURES Keystone Bank Limited, incorporated in Nigeria, held 80% of the ordinary shares of the bank until 20th February 2015 when those shares werre sold to consortium of four shareholders. Related parties and their disclosures have been identified and made based on relationships that existed as at 31st December 2014.
Transactions and balances with related parties as at the year end were as follows: 2014 2013 Ushs ‘000 Ushs ‘000 a) Related party balances Deposits from directors and shareholders 6,348,160 10,651,941
b) Related party transactions Interest: Interest paid to related parties/directors 26,693 684,308
Directors’ remuneration Directors’ fees 686,841 594,028 Other emoluments 249,575 143,345 936,416 737,373
c) Key management compensation Salaries and short-term benefits 560,648 554,815
d) Services rendered Rent and service charges for premises 24,000 24,000
37. POST BALANCE SHEET EVENTS Keystone Bank Nigeria, which held majority shares in the bank as at 31 December 2014 divested its interest in February 2015.
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..Think Possibilities91 Orient Bank Limited
Orient Bank Limited Orient Plaza, Plot 6/6A Kampala Road, | P. O. Box 3072 Kampala - Uganda | Tel: +256 417 719100 | Fax: +256 414 348039 www.orient-bank.com
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