Annual Report 2011 Annual Report 2011
Annual Report | 2011
Orient Bank Limited 1
Annual Report 2011
Table of Contents
Corporate Information 7
Report of the Directors 26
Statement of Directors’ Responsibilities 28
Independent Auditors’ Report 30
Consolidated Statement of Comprehensive Income 31
Bank Statement of Comprehensive Income 32
Consolidated Statement of Financial Position 33
Bank Statement of Financial Position 34
Consolidated Statement of Changes in Equity 35
Bank Statement of Changes in Equity 36
Consolidated Statement of Cash flows 37
Bank Statement of Cash flows 38
Notes to the Financial Statements 39
Orient Bank Limited 3 Our Profile
Who we are Orient is a leading private sector commercial Bank in Uganda. We have been in operation for nineteen years and our performance since inception has been commendable. This steady growth can be attributed to the professional management and prudent lending and investment policies of the bank.
The foundation of Orient rests on a very strong capital base, with shareholders funds exceeding UGX 73.9bn as at 31 Dec 2011.
Our Mission Statement Together, with passion, we deliver superior value to our customers by redefining service standards.
Our Values Professionalism We shall deliver service to our internal and external customers with the highest level of proficiency and commitment. Our word is our bond.
Business Focus We are architects of value. We pursue commercial excellence in ways that create superior value for our customers through a wide range of products and services.
Innovation and Leadership Finding new and better ways to improve the value we deliver to our stakeholders is the foundation of our leadership aspiration.
Teamwork Our enduring success lies in collaborating and supporting each with the best teams to deliver value for our customers and stakeholders
Dynamism and Strength We explore new opportunities before our competitors. We combine this with prudent risk management that ensures a strong balance sheet, sustainable shareholders value and flexibility to adopt market changes. Annual Report 2011
Our Products and Services
Our Delivery Channels Retail Credit Public Servant Loan We pride ourselves in 6 channels of delivering our Orient Salary Xpress Loans products and services to our customers; Micro Xpress Loans Internet Goodlyfe Loans Mobile Phone SME’ Loans ATM Point of Sale machines (POS) Corporate Credit Branch Commercial Loans Visa Overdrafts Guarantees/ Perfomance/Bid bonds Our Product Portfolio International Currency Services We offer a host of Retail, Corporateand Commercial Foreign Currency Accounts banking products that meet the financial needs of our Telegraphic Transfer customers; Forex
Deposit Accounts Trade Finance Savings Accounts Letters of Credit US Dollar Savings Accounts Guarantees/ Bid bonds University Student Savings Account Phuture Account (Children’s Savings) Other Services Personal Current Accounts We have considerable experience in the provision of customer Corporate Accounts payments and cash management services for big organizations NGO Premium Account both local and foreign. Fixed Deposit Account Salary Processing Public Servant Salary Account Internal transfers Salary Account Safe custody Collections - Bill Payments (URA taxes, NWSC bills)
Orient Bank Limited 5 Annual Report 2011
Our community involvement
Orient bank undertakes CSR activities that foster partnerships and long-lasting engagements with our society.
We partnered with PROWE (Professional Women Empowered) walk/run to celebrate the achievements of professional women in Uganda.
Likewise, we participated in the clean the environment exercise with Kampala International University (KIU) an initiative that displayed our positive responsiveness to environmental issues.
We also supported the Annual Soft Power Amagezi Education Centre (SPE) school festival which attracted 10 students from each of 29 schools exhibiting learning opportunities and the sustainable young generation life skills acquired in the academic year.
Within the Banking community, Orient Bank impressively participated in the Annual Bankers’ Sports Gala where we won 2 Gold, silver and bronze medals.
Senior Management admires one of the trophies and medals Orient Bank Team - Gold Winners, 2011 Bankers Gala won
Support to Professional Women Empowered (PROWE) KIU- Orient Clean up of Kansanga fundraising run
6 Orient Bank Limited Annual Report 2011
Corporate Information
DIRECTORS Mr. Michael Cook - Chairman Mr. Ketan Morjaria - Vice Chairman Mr. Rajni Karia - Director Mr. Wole Sodipe - Director Mr. Francis M. Byaruhanga - Director Mr. Joram Kahenano - Director Mr. Maxwell Ibeanusi - CEO/Managing Director Mr. Ben Lewis - Executive Director
COMPANY LAWYERS Shonubi Musoke & Company Advocates SM Chambers Plot 14, Hannington road P.O. Box 3213, Kampala
COMPANY SECRETARY Nicholas Ecimu C/O Sebalu & Lule Advocates Certified Public Secretaries (Uganda) P.O. Box 2255, Kampala
AUDITORS Deloitte & Touche Rwenzori House P O Box 10314 Kampala
REGISTERED OFFICE Orient Plaza Plot 6 & 6A, Kampala road P O Box 3072 Kampala
OUR BRANCHES Head Office Nkrumah Road Branch Entebbe Town Branch Mbale Branch Orient Plaza Nkrumah Road Plot 29, Kampala Road Plot 23, Naboa Road Plot 6/6A Kampala Road P.O Box 22789 Kampala P.O. Box 797, Entebbe Mbale Municipality P.O. Box 3072, Kampala, Uganda Tel: +256-414-234554 Tel: +256-414-320960 Tel: +256-454-432253 Tel: +256-414-236012/3/4/5 Fax: +256-414-348039 William Street Branch Jinja Branch Kololo Branch Telex: 61342 ORIENTBK William Street Plot 1, Busoga Square Plot 16/17 Wampewo Fax: +256(41)4348039 P.O. Box 22789 P.O. Box 368, Jinja Avenue Nyonyi Gardens Website: www.orient-bank.com Tel: + 256-414-344950 Tel: +256-434-123031/0 Tel:041 250 839 SWIFT: ORINUGKA Kawempe Branch Kabalagala Branch Kisekka Branch Main Branch Plot 174, Benzina Station Plot 1900 Block 15 Nsambya Lohana Arcade Orient Plaza P.O. Box 7839 Kampala P.O Box 3072 Kampala Plot 70-76, Plot 6/6A Kampala Road Tel: +256-414-568847 Tel:0414 510 726 Nakivubo Road P.O. Box 3072, Kampala, Uganda Entebbe Airport Branch Tel: +256-414-236012/3/4/5 Garden City Branch Gulu Branch P.O Box 787, Entebbe Fax: +256-414-348039 Plot 64-86, Garden City Mall, Plot 15, Lamho Building, Tel: +256-414-320193 Yusuf Lule Rd, Awere Road, Market Sq. Arua Branch Jinja Town Branch Tel +256-0414-343017 Tel:+256-471-432075 Plot 12 Avenue Road Plot 8 Scindia Road, Tel: Arua Municipality +256-434-120340434-120
Orient Bank Limited 7 Annual Report 2011
Mr. MICHAEL COOK Chairman8 Orient Bank Limited Annual Report 2011
Chairman’s Statement
Orient Bank Limited performed strongly and successfully during 2011, despite a difficult and unpredictable economic environment. The situation required prudent and responsive strategic management, at all times.
Operating Environment At the start of the year Uganda faced twin challenges. Externally it was confronted by steep rises in the cost of crude oil and refined products, and consequentially in the cost of imported raw materials and manufactured goods. Domestically the economy was suffering from excess liquidity, attributed to the distribution of funds during the Presidential elections and associated activities. Combined they would, if unchecked, put Uganda at the risk of severe and upward spiralling inflation.
The situation was further aggravated by extreme foreign exchange rate volatility. As early as January 2011 the Bank of Uganda injected US$ 20 million I am delighted to be able to report to try to stabilize the exchange rate. Despite this and subsequent interventions that despite the challenging and the shilling continued to weaken throughout the year. From a previous stable a negative macro and micro average of UGX2300 against the dollar it fell to UGX2900. This was only a few economic environments in which shillings off the rates formerly associated with the Euro or the pound sterling. Orient has had to operate, we have achieved a significant Uganda is an import dependent country for fuel and other key items. It therefore improvement in performance. remained vulnerable throughout the year, to externally generated inflationary pressures. These were exacerbated by drought in much of the country which The Bank posted a profit, after reduced farm yields and pushed up food prices. This bitter cocktail fuelled tax, in 2011 of UGX 20.19bn, headline inflation to reach 30% in November with core inflation at 29%, a significant increase over the compared to the BOU target of 5%. previous year.
To counter exchange rate volatility, increasing inflation and excess liquidity the BOU imposed a tight monetary policy. The main component of this was the progressive increase in the Central Bank Rate to 23%. This in turn led to a major increase in interbank rates and very high lending rates.
It is likely that the BOU may maintain a strict monetary policy until the economy is stabilised and inflation reduced to manageable levels. There is some success as inflation rates have fallen albeit alongside a significant slowdown in lending to commercial investment and domestic consumption, a significant increase in default risk and a decline in deposits as disposable income is reduced. This environment poses a major challenge to banks including Orient Bank, to refocus their business on non-lending activity revenue generation.
Operating Results I am delighted to be able to report that despite the challenging and a negative macro and micro economic environments in which Orient Bank has had to
Orient Bank Limited 9 Annual Report 2011
Chairman’s Statement message - continued
operate, we have achieved a significant improvement in performance. The Bank posted a profit, after tax, in 2011 of UGX 20.185bn, a significant increase compared to the previous year.
The Bank also recorded steady growth in other key areas:
Increase in Total assets from UGX 362bn to UGX 435.1bn Increase In Deposits from UGX 290bn to UGX 332bn Increase in Loans and Advances from UGX 199.4bn to UGX 217.4bn Increase in Shareholders’ Fund from 53.8bn to UGX 73.9 bn The above results were all achieved within a growth profile designed The BOU required commercial to ensure an overall positive performance. banks operating in Uganda to Key Developments increase their minimum capital requirement to UGX 25bn by The BOU required commercial banks operating in Uganda to increase 2013. My fellow Board members their minimum capital requirement to UGX 25bn by 2013. My fellow Board of Orient Bank and I decided that members of Orient Bank and I decided that the bank’s interests and growth the bank’s interests and growth aspirations would best be served by increasing paid up capital to UGX 40bn aspirations would best be served by December 2011, with a provision for a further increase to UGX 50bn. We by increasing paid up capital to are thus fully compliant with the BOU requirement well within the deadline, which is a testimony to Orient Bank’s institutional and financial strength. UGX 40bn by December 2011, with a provision for a further There was also a major external change affecting Orient Bank. Its former increase to UGX 50bn. We are majority shareholder, the Nigerian Bank PHB, which had encountered thus fully compliant with the financial and other difficulties in its home country was nationalised by BOU requirement well within the the Central Bank of Nigeria. Its assets and liabilities were transferred to a deadline, which is a testimony to bridge bank, Keystone Bank Ltd., which in turn has been fully recapitalized Orient Bank’s institutional and by the Asset Management Company of Nigeria (AMICON) and is the major shareholder. financial strength.
During the year, the bank agreed to broaden the range of skills and experience represented on the Board by appointing two additional non- executive directors. Mr. Francis Byaruhanga and Mr Joram Kahenano were duly appointed. I also expect that during 2012 Mr. Oti Ikomi , Group Managing Director of Keystone Bank with extensive high level banking experience in various parts of Africa, will join the board as a non-executive director
10 Orient Bank Limited Annual Report 2011
Future Outlook
We expect the challenging economic environment of 2011 to persist through 2012. But we remain optimistic about the future. We therefore plan to build upon our success this year to fine tune our service delivery to our customers. Our plans include
The opening of additional branches and service centres in key new locations Consolidation and expansion of our e-banking services of which we are a leading provider to the market The growth of our retail sector and enhancement of our non-interest We faced and overcame income portfolio the economic challenges of The introduction of new products attractive to the un- banked sectors of the population 2011 and achieved such a successful outcome because of the dedication, commitment The BOU has licensed more commercial banks bringing the total to 25 and professionalism of the operating in Uganda. However, at Orient Bank we believe that increased Management and Staff of Orient competition can only be good for the market. We also believe that, as Bank, to whom I pay tribute. our results have shown, we are in a strong position to meet and beat that I thank our auditors, legal competition by continuing to provide, efficient, friendly and competitive banking services to our current and potential customers. advisers and Board Secretary for their professional services. I have Conclusion been grateful, as always, for We faced and overcame the economic challenges of 2011 and achieved the support and wisdom of my such a successful outcome because of the dedication, commitment and fellow directors. professionalism of the Management and Staff of Orient Bank, to whom I pay tribute. I thank our auditors, legal advisers and Board Secretary for their professional services. I have been grateful, as always, for the support and wisdom of my fellow directors. Lastly, on behalf of the Board of Directors and Shareholders I also thank our valued and loyal customers for their continuous support shown towrds Orient Bank.
Michael Cook Chairman
Orient Bank Limited 11 Annual Report 2011
Mr MAXWELL IBEANUSI Managing12 Director/Orient Bank CEO Limited Annual Report 2011
Managing Director/ CEO’s Statement
It is my pleasure to present Orient Bank 2011 annual accounts having recorded significant growth in various aspects of our business within a largely constrained economy at the international, national, vide macro and micro economic fundamentals.
In the year of review the Bank took a consolidate value proposition offerings for its product outlay. Indeed, customer relationships remain a key strategic focal point as the bank positions for strategic fit with the prevailing economic conditions.
I wish to state that during the period, the bank achieved closer interactions with our stakeholders therein understanding and addressing key requirements with appropriate solutions that supported our business Balance sheet size (total assets) growth profile and thus forming a foundation for future strategic aspirations. increased by 20% to UGX 435bn Overview of financial Results in 2011 from UGX 362bn recorded in the preceding year. The 2011 Performance highlights project a significant increase in gross income significant increase in the Balance from UGX 42.2bn to UGX 64.8bn representing a 53% growth. Whilst profit after tax increased to UGX 20.1bn from UGX 9.2bn during 2011 representing Sheet over the period was mainly 111% increase compared to what was recorded in 2010. The laudable due to our strategic decision to growth is in line with our strategy for measured growth that is on account increase our current assets in of prudent consolidation of the bank’s income profile. Specifically the bank interbank deposits/investments achieved the following; while prudently sweating our Balance sheet size (total assets) increased by 20% to UGX 435bn in credit portfolio growth optimizing 2011 from UGX 362bn recorded in the preceding year. The significant the interest rates profile that was increase in the Balance Sheet over the period was mainly due to our registered during the FY 2011. strategic decision to increase our current assets in interbank deposits/ investments while prudently sweating our credit portfolio growth optimizing the interest rates profile that was registered during the FY 2011.
During the period the bank’s loans and advances grew by 9% to UGX 217.3bn from UGX 199.3bn while the deposits grew by 15% to UGX 332bn from UGX 289.9bn. Interest income increased by 56% to UGX 49.0bn from UGX 31.4bn. Correspondingly, non interest income registered a growth of 47% to UGX 15.8bn from UGX 10.8bn between 2011 and 2010 respectively.
In the same period, Capital generation to cushion OBL’s growth aspiration was increased as part of the bank’s outlook inline with the bank’s business growth and business profile. In the period to 31st December 2011, the shareholders increased the bank’s paid-up capital to UGX 40bn and authorized capital of UGX 50bn.
Orient Bank Limited 13 Annual Report 2011
Managing Director/ CEO’s Statement - continued
As a consequence, Orient Bank took first mover direction for early adoption of minimum capital requirement compliance by Bank of Uganda in excess of UGX 15bn of the UGX 25bn required by 2013. The development was to position the bank for greater market opportunities.
Positioning Orient Bank for the future Within the bank’s organic growth strategies is the focus on increasing transaction based business growth through aggregate delivery of financial solutions to the market. In light of this Orient Bank in August 2011 went into partnership with Moneygram International Money transfer to provide full agency services to the Ugandan Market. This service is rolled out and can be accessed at all Orient Bank’s branch network country wide Within the bank’s organic growth strategies is the focus New service outlets; in December 2011, we opened our 15th Branch on increasing transaction based at Kisekka Market Kampala with objective of increasing outreach and business growth and aggregate service delivery for the budding business in Kisekka market and down town Kampala. This was a natural development for Orient Bank which delivery of financial solutions to has throughout its 19 years of existence served, nurtured and grown our stakeholders including current many businesses in Uganda into highly respected enterprises. and potential customers. In light of this Orient Bank in August In 2012, Orient Bank will roll-out a multiple of service delivery outlets 2011 went into partnership with across the country to service the bank’s customer’s expanding business Moneygram International Money territories as well as the growing needs of the market in general and transfer to provide full agency our customers. services to the Ugandan Market. Structural Developments This service is rolled out and can In line with the bank’s business aspirations, the shareholders during be accessed at all Orient Bank’s the period appointed Mr. Francis Magembe Byaruhanga and Mr. Joram branch network country wide Kahenano as non executive directors (NEDs) to supplement the depth and breadth of the Board. The NEDs were duly approved by Bank of Uganda. In addition, Mr. Oti Ikomi was in August 2011 seconded by our majority shareholders as a NED for Orient Bank Limited.
At the management executive level, Board appointed Mr. Kakeeto Julius and Bernard Robinson Magulu as Divisional Directors for Business Development and Finance and Corporate Support respectively. Like any other player in the industry, we remain keen to create an environment that will attract human capital with the requisite skills.
Orient Bank 2012 - Out-look The bank will strengthen its retail sector through aggressive leveraging of the existing service delivery platform including Visa, Interswitch,
14 Orient Bank Limited Annual Report 2011
Orient and other Visa enabled Point of Sale machines, we participated in the clean the environment exercise with Mobile Money and Mobile Banking. Kampala International University (KIU) an initiative that displayed positive environmental responsiveness. More particularly, the bank will embark on the enhancement of its Visa card by becoming EMV (Europay We also supported the Annual Soft Power Amagezi Education MasterCard and Visa) compliant through the CHIP and Centre (SPE) school festival. The festival attracted, 10 students PIN security card technology. CHIP and PIN technology from the 29 schools exhibit the learning opportunities and the will provide increased security and convenience to the sustainable life skills for the younger generation. populace. Indeed, the bank remained poised to position for greater As a universal bank specializing in commercial banking market share focus with aspirations on brand equity presence. with our major business lines being three key market We shall continue to sweat and leverage on our strength and segments of Corporate and Commercial, SME; Public navigate the market opportunities. Sector and Retail banking propositions will continue to guide our growth and customer entrenchment. I wish to The creation of a corporate culture founded upon strong enjoin our customer with assurances that the business organizational values and performance-driven operating approach will continue to be directed towards areas of norms, has meant that our people will grow their unique latent business both for the customers and the industry careers at Orient Bank. We shall continue with the mantra of wide. employee wellness and people happiness to create one of the most challenging, rewarding and exciting opportunities to all Our Retail banking segment remains very vibrant albeit our stakeholders. the economic swings in the economy that rocked the year ended 2011. We continue to position our retail value Evidently, we are in the period of interesting times for the proposition to leverage our E-banking product outlay of; global economy recession, and to the local industry discourse Point of Sale, VISA branding for the cards, Money Gram to though with all these Orient Bank remained upbeat. It is gain niche and segment market share. The trajectory is rewarding to note that our management team has remained aligned towards taking first mover advantage in the cash resilient in the face of fierce competition in the industry. less by applying latest card technology. On behalf of the entire Board of Directors and shareholders, I From corporate social responsibility stand point, the Bank thank our valued customers for the support and custom we continues with CSR activities that display partnerships and have and continue to receive. At this time too, I would like to long-lasting engagements with our people. We partnered commend the staff for their dedication to the vision of Orient with PROWE (Professional Women Empowered) walk/ Bank. run that attracted over 5000 participants to celebrate the achievements of professional women in Uganda. Likewise, Thank you and God bless.
Maxwell Ibeanusi Managing Director/CEO
Orient Bank Limited 15 Annual Report 2011
Board of Directors’
16 Orient Bank Limited
Annual Report 2011
Board of Directors’ Profiles
MICHAEL COOK Chairman
Mr. Cook is a Senior Career Diplomat and Former British High Commissioner to Uganda, with wide range political and commercial experience in Scandinavia, Middle East and Africa. He has been a Chairman of Orient Bank since April 2005.
KETAN MORJARIA Vice Chairman
Mr. Morjaria is a Member of The Institute of Chartered Accountants of England and Wales, the Institute of Taxation United Kingdom and the Institute of Certified Public Accountants of Uganda. He is the Founder of Orient Bank Limited and has diversified business interests and experience in East Africa, UAE, UK and India. Mr. Morjaria is a Board Member of Credit Bank Ltd, Nairobi, Kenya and holds various other directorships.
18 Orient Bank Limited Annual Report 2011
Board of Directors’ Profiles
RAJNI KARIA Non Executive Director
Mr. Karia is a well known seasoned business magnate in East Africa. He has held directorships in high performing companies including Nakuru Oil Mills Kenya, Molspi Limited Kenya, Jobka Limited Kenya, Karbil Limited Kenya and Lloyds Export Limited UK. He also has business interests and partnerships in Nairobi, India, United Kingdom and Dubai. He is on the Board of Credit Bank Ltd, Nairobi, Kenya.
WOLE SODIPE Non Executive Director
Mr. Sodipe is a a Fellow of Institute of Chartered Accountants of Nigeria, Fellow of Institute of Credit Administrators of Nigeria, member of Chartered Institute of Bankers of Nigeria and Chartered Institute of Taxation of Nigeria. He has 20 years banking experience most of which have been at senior strategic level in various functions of banking. He is currently the Managing Director Keystone Bank Africa– and is a board member of 4 African Subsidiaries of Keystone Bank as well as an Executive Member of West African Bankers Association, Nigeria.
Orient Bank Limited 19 Annual Report 2011
Board of Directors’ Profiles
JORAM KAHENANO Non Executive Director
Mr. Kahenano is a Fellow of The Uganda Institute of Bankers and a member of Chartered Institute of Bankers . He has held various director level positions in Bank of Uganda where he worked for 36 years. He was the Executive Director Administration, Executive Director Operations, Director Banking, Director Foreign Exchange, Director Exchange Control and worked in other capacities in many other departments in the Central Bank. 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 and Member of the Steering Committee of Uganda Banking Staff Training College.
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. His knowledge, experience and skills have earned him recognition as a management specialist and he is regularly consulted on Public Sector Management issues. He has overtime developed and maintained professional and business relationships with a wide range of agencies and organizations within the private and public sector. He has worked with rural water and sanitation project on an executive level and was a Director Road Agency Formation unit.
20 Orient Bank Limited Annual Report 2011
Board of Directors’ Profiles
MAXWELL IBEANUSI Managing Director
Mr Ibeanusi is a certified accountant. He is a Fellow of the Institute of Chartered Accountants of Nigeria. He has over 19 years banking experience with proven mantle in , relationship marketing, quality and operational controls and has garnered extensive experience in managing and optimizing business relationships. He is an avowed believer in value addition. BankPHB Plc appointed him as the Managing Director/CEO of Orient Bank Limited in April 2009 after working in Regional Management for three years. He is a member of the Governing Council, Uganda Securities Exchange.
BEN LEWIS Executive Director
Mr. Lewis is a member of The Chartered Institute of Bankers (ACIB ) with over 22 years of banking experience predominantly with, Bank of Wales, Barclays Bank UK and Uganda . He has a specialty in handling highly leveraged transactions in the UK and Uganda. Ben has financial experience in Cost and Management Accounting gained in the stand alone subsidiary banks where he has worked. He also possesses experience in information systems management implementation, training and support. He is currently the Vice Chairman of Kampala International School.
Orient Bank Limited 21 Annual Report 2011
Board of Directors’ Profiles
NICHOLAS ECIMU Company Secretary
Nicholas Ecimu is Orient Bank’s Company Secretary. He 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 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. He is also a Graduate Member of the Institute of Chartered Secretaries and Administrators (ICSA), London and is a member of the Uganda Law Society and the East African Law Society.
22 Orient Bank Limited Annual Report 2011
Executive Committee (EXCO)
MAXWELL IBEANUSI Managing Director/ CEO
BEN LEWIS BERNARD ROBINSON MAGULU JULIUS KAKEETO Executive Director Divisional Director Divisional Director Finance and Corporate Support Business Development
KEZIE NWOHA GERALD MUHEREZA DICK OMARA Country Head of Operations Group Head Head of Credit Kampala Main Branch
DARSHANA BHATIA KUMAR SVINALLAPA LUCAS OCHENG Head of Finance Head of IT Ag. Head of Treasury
Orient Bank Limited 23 Annual Report 2011
General Management Committee
Standing (left to Right) Oscar Kamukama Ag. Head of Retail Banking, Yudaya Musisi Head Public Sector, Goretti Masadde Head Corporate Communications and Product Development, Darshna Bhatia Head of Finance, Gerald Muheereza Group Head Kampala Main Branch, Jeremiah Kato Head of Internal Audit, Lucas Ochieng Ag Head of Treasury, Boaz Kanyima Ag Head Franchise and Collections, Kumar Svinallapa Head of IT, George Okello Opio Head of Human Capital, Jennifer Arinda Ag Head of Risk, Dick Omara Head of Credit, Bernard Robinson Magulu Divisional Director Finance and Corporate Support
Sitting (left to Right) Kezie Nwoha Country Head of Operations, Ben Lewis Executive Director, Maxwell Ibeanusi Managing Director/CEO, Julius Kakeeto Divisional Director Business Development 24 Orient Bank Limited Annual Report 2011
Orient Bank Limited 25 Annual Report 2011
Report of the Directors For the year ended 31 December 2011
The directors present their report together with the audited consolidated financial statements of the group for the year ended 31 December 2011.
Activities The principal activities of the group, which is licensed under the Financial Institutions Act, 2004 are the provision of banking, stock brokering and related financial services.
RESULTS Ushs ‘000 Profit before taxation 24,517,020 Taxation - charge (4,329,702) Profit for the year 20,187,318
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, Human Resources and Compensation Committee, Audit Committee and Credit Committee. Most of these Board Committees are constituted and chaired by non-executive directors. As at 31 December 2011, the board of directors consisted of 5 members. a) Risk/Compliance committee This committee is headed by the 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 the Non Executive Director and meets quarterly. It also comprises of; 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 the Non-Executive Director and comprises of; i) Non-Executive Director ii) Managing Director / CEO
26 Orient Bank Limited Annual Report 2011
Report of the Directors For the year ended 31 December 2011 d) Audit Committee This Committee is chaired by the Non-Executive Director. It meets every quarter and also comprises of; i) Non-Executive Director ii) Non-Executive Director iii) Managing Director / CEO as an attendee e) Credit Committee The Board Committee is chaired by the Non-Executive Director. It meets quarterly and comprises of; i) Non-Executive Director ii) Non-Executive Director iii) Executive Director iv) Managing Director / CEO
In addition to the above committees, there are committees on a management level comprised of senior management that meet everyday and weekly.
Dividend The directors recommend payment of a dividend for the current year of Ushs 4billion (40million @ Ushs100 per share) (2010: Nil).
Directors The present membership of the board is shown on page 2. Mr. Cyril Chukuwumah ceased to be a director of the Bank during the period. Mr. Joram Kahenano and Francis Magembe Byaruhanga, who were approved by Bank of Uganda on 17 May 2011 and 10 June 2011 respectively were appointed as directors. Mr. Otti Ikomi was seconded as director in August 2011. His position is under consideration by Bank of Uganda.
During the financial year and up to the date of this report, other than as disclosed in Note 33 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 33 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 Group 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.
Auditors Deloitte & Touche, have been auditors of the Bank for the last four financial years. In accordance with regulatory requirements of the Financial Institutions Act (Sec.67), they will retire as auditors after this year’s audit. A new auditor will be appointed by the directors subsequently.
BY ORDER OF THE BOARD
Secretary Kampala 20th April 2012
Orient Bank Limited 27 Annual Report 2011
Statement of Directors’ Responsibilities For the year ended 31 December 2011
The Ugandan Companies Act requires directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the group and the bank as at the end of the financial year and of the operating results of the group for that year. It also requires the directors to ensure the bank and its subsidiary company keep proper accounting records which disclose with reasonable accuracy at any time the financial position of the bank. They are also responsible for safeguarding the assets of the group.
The directors are responsible for the preparation and fair presentation of these financial statements in accordance with the Financial Institutions Act, International Financial Reporting Standards and in a manner required by the Ugandan Companies Act, and for such internal controls as directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgements and estimates, in conformity with the International Financial Reporting Standards and in the manner required by the Companies Act and the Ugandan 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 group and the bank and of its operating results. The directors further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control.
Nothing has come to the attention of the directors to indicate that the bank and its subsidiary will not remain a going concern for at least the next twelve months from the date of this statement.
Signed on behalf of the Board of Directors by;
______Michael Cook Ketan Morjaria Maxwell Ibeanusi Chairman Vice Chairman Managing Director/ CEO
20th April 2012
28 Orient Bank Limited Annual Report 2011
Mr. Oti Ikomi (3rd from Left) Group MD/CEO Keystone Bank Nigeria, Orient Bank’s majority shareholder during a courtesy visit to BOU Governor Prof. Tumusiime Mutebile (4th from Left), together with (L-R) Mr. Benedict Sekabira, Director Commercial Banking, Mr. Wole Sodipe, MD/CEO Keystone Africa, Mr. Michael Cook, Chairman, Orient Bank Ms Justine Bagyenda, Executive Director Supervision, BOU and Mr. Maxwell Ibeanusi, MD/CEO Orient Bank.
Orient Bank Limited 29 Annual Report 2011
Independent Auditor's Report to the Members of Orient Bank Limited For the year ended 31 December 2011
Report on the financial statements We have audited the accompanying financial statements of Orient Bank Limited and its subsidiary set out on pages 30 to 85 which comprise the consolidated and bank statement of financial position as at 31 December 2011, and the consolidated and bank statement of comprehensive income, consolidated and bank statement of changes in equity and consolidated and bank statement of cash flows for the year then ended, together with the summary of significant accounting policies and other explanatory notes.
Directors’ responsibility for the Financial Statements The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the Ugandan Companies Act, and for such internal controls as directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether 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 our judgment and include an assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we considered internal controls relevant to the group'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 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 audit opinion.
Opinion In our opinion, the accompanying financial statements give a true and fair view of the state of affairs of the bank and its subsidiary as at 31 December 2011 and of the group's profit and cash flows for the year then ended in accordance with applicable International Financial Reporting Standards comply with the Ugandan Companies Act and Financial Institutions Act, 2004.
Report on Other Legal Requirements As required by the Ugandan Companies Act we report to you, based on our audit, that: i) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit; ii) in our opinion proper books of account have been kept by the company, so far as appears from our examination of those books; and iii) the consolidated statement of financial position (balance sheet) and statement of comprehensiveincome (profit and loss account) is in agreement with the books of account.
Certified Public Accountants (Uganda) 20th April 2012, Kampala
30 Orient Bank Limited Annual Report 2011
Consolidated Statement of Comprehensive Income For the year ended 31 December 2011
2011 2010 Note Ushs’000 Ushs’000
INTEREST INCOME 6 49,033,455 31,479,303
INTEREST EXPENSE 7 (15,846,275) (11,347,956)
NET INTEREST INCOME 33,187,180 20,131,347 Fee and commission income 8 11,003,193 8,163,783 Foreign exchange gains 9 3,996,019 2,049,373 Other operating income 10 869,510 590,297
NET OPERATING INCOME 49,055,902 30,934,800 Net impairment gain/(loss) on loans and advances 11 379,386 (299,094) Employee expenses 12 (11,151,975) (8,278,178) General and administrative expenses 13 (13,766,293) (10,782,166) PROFIT BEFORE TAXATION 24,517,020 11,575,362 Taxation charge 14 (a) (4,329,702) (2,409,047) PROFIT FOR THE YEAR 20,187,318 9,166,315
OTHER COMPREHENSIVE INCOME Net (loss)/gain on revaluation of available for sale assets (5,231) 1,045 Tax on revaluation loss 1,569 (314) (3,662) 731 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 20,183,656 9,167,046
PROFIT ATTRIBUTABLE TO: Owners of the company 20,186,854 9,175,716 Non-controlling interests 464 (9,401) 20,187,318 9,166,315 OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the company (2,930) 668 Non-controlling interests (732) 63 (3,662) 731
Orient Bank Limited 31 Annual Report 2011
Bank Statement of Comprehensive Income For the year ended 31 December 2011
2011 2010 Note Ushs’000 Ushs’000
INTEREST INCOME 6 49,033,455 31,479,303
INTEREST EXPENSE 7 (15,846,275) (11,350,234)
NET INTEREST INCOME 33,187,180 20,129,069 Fee and commission income 8 10,935,317 8,125,587 Foreign exchange gains 9 3,996,019 2,049,373 Other operating income 10 855,797 590,297
NET OPERATING INCOME 48,974,313 30,894,326 Net impairment loss on loans and advances 11 379,386 (299,094) Employee expenses 12 (11,082,415) (8,210,198) General and administrative expenses 13 (13,756,516) (10,769,178)
PROFIT BEFORE TAXATION 24,514,768 11,615,856 Taxation charge 14 (a) (4,329,702) (2,401,563) PROFIT FOR THE YEAR 20,185,066 9,214,293 OTHER COMPREHENSIVE INCOME - - TOTAL COMPREHENSIVE INCOME FOR THE YEAR 20,185,066 9,214,293
32 Orient Bank Limited Annual Report 2011
Consolidated Statement of Financial Position For the year ended 31 December 2011
2011 2010 Note Ushs’000 Ushs’000 ASSETS Cash and balances with Bank of Uganda 15 51,511,938 42,502,651 Deposits and balances due from banking institutions 16 (a) 71,542,896 31,488,201 Government securities 16 (b) 74,549,457 72,951,330 Other investments 17 10,867 11,790 Loans and receivables 18 217,325,215 199,346,096 Other assets 21 8,877,058 6,602,963 Property and equipment 22 8,570,133 7,774,658 Operating lease prepayments 23 563,266 606,588 Intangible asset 24 372,834 596,021 Deferred tax asset 30 1,715,883 24,990 Total assets 435,039,547 361,905,288
LIABILITIES Customer deposits 26 332,017,932 289,963,281 Deposits and balances due to banking institutions 27 7,400,000 2,500,000 Refinance loans 28 1,178,557 2,955,672 Tax payable 25 702,238 349,642 Other liabilities 29 19,847,066 12,426,595 Total liabilities 361,145,793 308,195,190
EQUITY Share capital 31 40,000,000 5,000,000 Revaluation surplus 1,611,136 1,628,755 Statutory reserve 4,003,318 2,944,510 Investment Revaluation Reserve 15,444 12,514 Revenue reserves 24,286,611 44,140,946 Proposed Dividend 4,000,000 - Total equity 73,885,621 53,701,697
Non controlling Interest 8,133 8,401 Total liabilities and equity 435,039,547 361,905,288
The consolidated financial statements on pages 8 to 51 were approved by the board of directors on 2012 and were signed on its behalf by:
Michael Cook Ketan Morjaria Maxwell Ibeanusi Chairman Vice Chairman Managing Director/ CEO
20th April 2012
Orient Bank Limited 33 Annual Report 2011
Bank Statement of Financial Position For the year ended 31 December 2011
2011 2010 Note Ushs’000 Ushs’000 ASSETS Cash and balances with Bank of Uganda 15 51,511,938 42,502,651 Deposits and balances due from banking institutions 16 (a) 71,534,817 31,468,255 Government securities 16 (b) 74,549,457 72,951,330 Investment in subsidiary 17 80,000 80,000 Loans and receivables 18 217,373,625 199,346,096 Other assets 21 8,810,991 6,592,532 Property and equipment 22 8,569,329 7,773,049 Operating lease prepayments 23 563,266 606,588 Intangible asset 24 372,834 596,021 Deferred tax asset 30 1,714,627 32,788 Total assets 435,080,884 361,949,310 LIABILITIES Customer deposits 26 332,030,490 289,975,883 Deposits and balances due to banking institutions 27 7,400,000 2,500,000 Refinance loans 28 1,178,557 2,955,672 Tax payable 25 705,088 355,342 Other liabilities 29 19,832,347 12,413,077 Total liabilities 361,146,482 308,199,974 EQUITY Share capital 31 40,000,000 5,000,000 Revaluation surplus 1,611,136 1,628,755 Statutory reserve 4,003,318 2,944,510 Revenue reserves 24,319,948 44,176,071 Proposed Dividend 4000000 Total equity 73,934,402 53,749,336 Total liabilities and equity 435,080,884 361,949,310
The consolidated financial statements on pages 8 to 51 were approved by the board of directors on 2012 and were signed on its behalf by:
Michael Cook Ketan Morjaria Maxwell Ibeanusi Chairman Vice Chairman Managing Director/ CEO
20th April 2012
34 Orient Bank Limited Annual Report 2011
Consolidated Statement of Changes in Equity For the year ended 31 December 2011
Non - Proposed Share Revaluation Statutory Revenue controlling Dividend capital surplus reserve reserves Interest Total Notes Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000
At 1 January 2010 5,000,000 1,647,108 793,876 37,084,266 1,802 - 44,527,052 Transfer of excess depreciation - (26,219) - 26,219 - - Deferred tax on excess depreciation - 7,866 - (7,866) - - Increase in minority interest - - - - 16,000 16,000 Profit for the year - - - 9,175,716 (9,401) 9,166,315 Transfer to statutory reserve 20 - - 2,150,634 (2,150,634) - - Other comprehensive income for the year - - - 731 - 731
At 31 December 2010 5,000,000 1,628,755 2,944,510 44,128,432 8,401 53,710,098 At 1 January 2011 5,000,000 1,628,755 2,944,510 44,128,432 8,401 - 53,710,098 Transfer of excess depreciation - (25,170) - 25,170 - - Deferred tax on excess depreciation - 7,551 - (7,551) - - Profit for the year - - - 20,186,854 464 20,187,318 Transfer to share capital 35,000,000 - - (35,000,000) - - Transfer to statutory 20 - - 1,058,808 (1,058,808) - - reserve Other comprehensive income for the year - - - (2,930) (732) (3,662) Proposed Dividend (4,000,000) 4,000,000 -
At 31 December 2011 40,000,000 1,611,136 4,003,318 24,271,167 8,133 4,000,000 73,893,754
The revaluation surplus represents the surplus arising from the revaluation of property and equipment.
The statutory reserve represents an appropriation from retained earnings to comply with Bank of Uganda’s prudential guidelines on impairment of loans and receivables. It represents the excess of loan provision as computed in accordance with Bank of Uganda prudential guidelines over the impairment of loans and receivables arrived at in accordance with IAS 39.
The revaluation surplus and statutory reserve are not distributable.
On October 31, 2011 a bonus issue of thirty five million shares ar Ushs 1,000 each was issued by the bank after approval by the board. The bonus issuance was of 1 share for every 1 held.
Orient Bank Limited 35 Annual Report 2011
Bank Statement of Changes in Equity For the year ended 31 December 2011
Proposed Share Revaluation Statutory Revenue Dividend capital surplus reserve reserves Total Notes Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000
At 1 January 2010 5,000,000 1,647,108 793,876 37,094,059 - 44,535,043 Transfer of excess depreciation - (26,219) - 26,219 - Deferred tax on excess depreciation - 7,866 - (7,866) - Profit for the year - - - 9,214,293 9,214,293 Transfer to statutory reserve 20 - - 2,150,634 (2,150,634) -
At 31 December 2010 5,000,000 1,628,755 2,944,510 44,176,071 - 53,749,336 At 1 January 2011 5,000,000 1,628,755 2,944,510 44,176,071 - 53,749,336 Transfer of excess depreciation - (25,170) - 25,170 - Deferred tax on excess depreciation - 7,551 - (7,551) - Profit for the year - - - 20,185,066 20,185,066 Transfer to share capital 35,000,000 - - (35,000,000) - Transfer to statutory reserve 20 - - 1,058,808 (1,058,808) - Proposed Dividend (4,000,000) 4,000,000 -
At 31 December 2011 40,000,000 1,611,136 4,003,318 24,319,948 4,000,000 73,934,402
The revaluation surplus represents the surplus arising from the revaluation of property and equipment.
The statutory reserve represents an appropriation from retained earnings to comply with Bank of Uganda’s prudential guidelines on impairment of loans and receivables. It represents the excess of loan provision as computed in accordance with Bank of Uganda prudential guidelines over the impairment of loans and receivables arrived at in accordance with IAS 39.
The revaluation surplus and statutory reserve are not distributable.
On October 31, 2011 a bonus issue of thirty five million shares ar Ushs 1,000 each was issued by the bank after approval by the board. The bonus issuance was of 1 share for every 1 held.
36 Orient Bank Limited Annual Report 2011
Consolidated Statement of Cash Flows For the year ended 31 December 2011
2011 2010 Notes Ushs’000 Ushs’000
CASHFLOWS FROM OPERATING ACTIVITIES Profit before taxation 24,517,020 11,575,362 Adjustments for: Depreciation 22 1,488,855 1,489,472 Amortisation of operating lease prepayments 23 43,322 43,322 Amortisation of intangible asset 24 354,736 384,091 Gain on disposal of property & equipment (25,868) (5,584) Bonus share income (4,308) - Dividends received (234) - Profit before working capital changes 26,373,523 13,486,663 Increase in loans and advances (17,979,119) (76,576,190) Decrease in investment in government securities maturing after 90 days (5,258,523) (17,426,794) Increase in other assets (2,274,095) (3,153,227) Increase in customer deposits 42,054,651 90,395,837 Decrease in BOU refinance loan (1,777,115) (729,221) Increase in deposits due to banking institutions 4,900,000 - Increase in other liabilities 15 7,420,471 621,799 Cash generated from operations increase 53,459,794 6,618,867 Income tax paid (5,306,453) (2,363,286) Net cash generated from operating activities 48,153,341 4,255,581 CASHFLOWS FROM INVESTING ACTIVITIES Purchase of AFS investments - (9,790) Purchase of property and equipment (2,761,536) (2,471,594) Purchase of intangible assets (68,935) (175,289) Dividends received 234 - Proceeds on disposal of property & equipment 25,879 23,285 Net cash used in investing activities (2,804,358) (2,633,388) NET INCREASE IN CASH AND CASH EQUIVALENTS 45,348,983 1,622,193
CASH AND CASH EQUIVALENTS AT 1 JANUARY 91,487,452 89,865,259
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 136,836,434 91,487,452 Represented by:
Cash and balances with Bank of Uganda 51,511,938 42,502,651 Deposits and balances due from banking institutions 71,542,896 31,488,201 Treasury bills maturing within 90 days 16(b) 13,781,600 13,496,600 Treasury bonds maturing within 90 days 16(b) - 4,000,000 136,836,434 91,487,452
Orient Bank Limited 37 Annual Report 2011
Bank Statement of Cash Flows For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000 OPERATING ACTIVITIES Profit before taxation 24,514,768 11,615,856 Adjustments for: Depreciation 1,488,050 1,488,667 Amortisation of operating lease prepayments 43,322 43,322 Amortisation of intangible asset 354,736 384,091 Profit on disposal of property & equipment (25,868) (5,584)
Profit before working capital changes 26,375,008 13,526,352 Increase in loans and advances (18,027,529) (76,576,190) Increase in investment in government securities (5,253,888) (17,447,427) Increase/(decrease) in other assets (2,218,459) (3,108,697) Increase in customer deposits 42,054,607 90,240,309 Decrease in BOU refinance loan (1,777,115) (729,221) Increase in deposits due to banking institutions 4,900,000 - Increase in other liabilities 7,419,270 752,742 Cash generated from operations 53,471,894 6,657,868 Income tax paid (5,306,453) (2,363,286)
Net cash generated from operating activities 48,165,441 4,294,582 INVESTING ACTIVITIES Investment in subisidiary - (64,000) Purchase of property and equipment (2,761,536) (2,469,180) Purchase of intangible assets (68,935) (175,289) Proceeds on disposal of property & equipment 25,879 23,285 Net cash used in investing activities (2,804,592) (2,685,184) FINANCING ACTIVITIES Dividends received - -
Net cash used in financing activities - - NET INCREASE IN CASH AND CASH EQUIVALENTS 45,360,849 1,609,398 CASH AND CASH EQUIVALENTS AT 1 JANUARY 91,467,506 89,858,108
CASH AND CASH EQUIVALENTS AT 31 DECEMBER 136,828,355 91,467,506 Represented by: Cash and balances with Bank of Uganda 51,511,938 42,502,651 Deposits and balances due from banking institutions 71,534,817 31,468,255 Treasury bills maturing within 90 days 13,781,600 13,496,600 Treasury bonds maturing within 90 days - 4,000,000
136,828,355 91,467,506
38 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
1 REPORTING ENTITY Orient Bank Limited (The “bank”) is incorporated in Uganda under the Companies Act, and the Financial Institutions Act 2004.
2 ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) Effective for (a) New standards and amendments to published standards effective for the year annual periods ended 31 December 2011 Effective for annual periods beginning on or after beginning on or after Amendments and revised standards IFRS 1, First-time Adoption of International Financial Reporting Standards – limited exemption from comparative IFRS 7 disclosures for first-time adopters 1-Jul-10 IFRS 1, First-time Adoption of International Financial Reporting Standards – Amendments resulting from May 2010 Annual Improvements to IFRSs 1-Jan-11 IFRS 3, Business Combinations – Amendments resulting from May 2010 Annual Improvements to IFRSs 1-Jul-10 IFRS 7, Financial Instruments: Disclosures – Amendments resulting from May 2010 Annual Improvements to IFRSs 1-Jan-11 IAS 1, Presentation of Financial Statements – Amendments resulting from May 2010 Annual Improvements to IFRSs 1-Jan-11 IAS 24, Related Party Disclosures – Revised definition of related parties 1-Jan-11 IAS 32, Financial Instruments: Presentation – amendments relating to classification of rights issues 1-Feb-10 IAS 34, Interim Financial Reporting – Amendments resulting from May 2010 Annual Improvements to IFRSs 1-Jan-11
New interpretations IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction; prepayments of a minimum funding requirement 1-Jan-11 IFRIC 19,Extinguishing Financial Liabilities with Equity Instruments 1-Jul-10
(b) New and amended interpretations in issue but not yet effective in the year ended 31 December 2011
New and Amendments to standards IFRS 1, First-time Adoption of International Financial Reporting Standards – replacement of ‘fixed dates’ for certain exceptions with ‘the date of transition to IFRSs’; and additional exemption for entities ceasing to suffer from severe hyperinflation. 1-Jul-11 IFRS 1, First-time Adoption of International Financial Reporting Standards – Additional exemption for entities ceasing to suffer from severe hyperinflation 1-Jul-11 IFRS 7, Financial Instruments: Disclosures – Amendments enhancing disclosures about transfers of financial assets 1-Jul-11 IFRS 7, Financial Instruments: Disclosures – Amendments enhancing disclosures about offsetting financial assets and financial liabilities 1-Jan-13 IFRS 7, Financial Instruments: Disclosure – Amendments requiring disclosures about initial application of IFRS 9 IFRS 9, Financial Instruments – Classification and Measurement of financial assets 1-Jan-15
Orient Bank Limited 39 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2 ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (Continued)
Effective for annual periods beginning on or after IFRS 9, Financial Instruments – Accounting for financial liabilities and derecognition 1-Jan-15 IFRS 10, Consolidated Financial Statements 1-Jan-13 IFRS 11, Joint Arrangements 1-Jan-13 IFRS 12, Disclosure of Interests in Other Entities 1-Jan-13 IFRS 13, Fair Value Measurement 1-Jan-13 IAS 1, Presentation of Financial Statements – presentation of items of other comprehensive income 1-Jul-12 IAS 12, Income Taxes - Limited scope amendment (recovery of underlying assets) 1-Jan-12 IAS 19, Employee Benefits (2011) 1-Jan-13 IAS 27, Separate Financial Statements (2011) 1-Jan-13 IAS 28, Investments in Associates and Joint Ventures (2011) 1-Jan-13 IAS 32, Financial Instruments: Presentation – Amendments to application guidance on the offsetting of financial assets and financial liabilities 1-Jan-14
New interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine 1-Jan-13
(c) Impact of new and amended standards and interpretations on the financial statements for the year ended 31 December 2011 and future annual periods
Amendments to IAS 1 Presentation of Financial Statements (as part of Improvements to IFRSs issued in 2010) The amendments to IAS 1 clarify that an entity may choose to disclose an analysis of other comprehensive income by item in the statement of changes in equity or in the notes to the financial statements. In the current year, for each component of equity, the Group has chosen to present such an analysis in the notes to the financial statements, with a single-line presentation of other comprehensive income in the statement of changes in equity. Such amendments have been applied prospectively.
IAS 24 Related Party Disclosures (as revised in 2009) IAS 24 (as revised in 2009) has been revised on the following two aspects: (a) IAS 24 (as revised in 2009) has changed the definition of a related party and (b) IAS 24 (as revised in 2009) introduces a partial exemption from the disclosure requirements for government-related entities.
The Company and its subsidiaries are not government-related entities. The application of the revised definition of related party set out in IAS 24 (as revised in 2009) in the current year has not resulted in the identification of related parties that were not identified as related parties under the previous Standard.
40 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
IAS 27 Separate Financial Statements (2011) Amended version of IAS 27 which now only deals with the requirements for separate financial statements, which have been carried over largely unamended from IAS 27 Consolidated and Separate Financial Statements. Requirements for consolidated financial statements are now contained in IFRS 10 Consolidated Financial Statements.
The Standard requires that when an entity prepares separate financial statements, investments in subsidiaries, associates, and jointly controlled entities are accounted for either at cost, or in accordance with IFRS 9 Financial Instruments. The Standard also deals with the recognition of dividends, certain group reorganisations and includes a number of disclosure requirements:
IAS 28 Investments in Associates and Joint Ventures (2011) This Standard supersedes IAS 28 Investments in Associates and prescribes the accounting for investments in associates and sets out the requirements for the application of the equity method when accounting for investments in associates and joint ventures.
The Standard defines ‘significant influence’ and provides guidance on how the equity method of accounting is to be applied (including exemptions from applying the equity method in some cases). It also prescribes how investments in associates and joint ventures should be tested for impairment.
IFRS 9 Financial Instruments (2009) IFRS 9 introduces new requirements for classifying and measuring financial assets, as follows:
Debt instruments meeting both a ‘business model’ test and a ‘cash flow characteristics’ test are measured at amortised cost (the use of fair value is optional in some limited circumstances) Investments in equity instruments can be designated as ‘fair value through other comprehensive income’ with only dividends being recognised in profit or loss All other instruments (including all derivatives) are measured at fair value with changes recognised in the profit or loss The concept of ‘embedded derivatives’ does not apply to financial assets within the scope of the Standard and the entire instrument must be classified and measured in accordance with the above guidelines.
IFRS 9 Financial Instruments (2010) A revised version of IFRS 9 incorporating revised requirements for the classification and measurement of financial liabilities, and carrying over the existing derecognition requirements from IAS 39 Financial Instruments: Recognition and Measurement.
The revised financial liability provisions maintain the existing amortised cost measurement basis for most liabilities. New requirements apply where an entity chooses to measure a liability at fair value through profit or loss – in these cases, the portion of the change in fair value related to changes in the entity’s own credit risk is presented in other comprehensive income rather than within profit or loss.
IFRS 10 Consolidated Financial Statements Requires a parent to present consolidated financial statements as those of a single economic entity, replacing the requirements previously contained in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities.
Orient Bank Limited 41 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2 ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (Continued)
The Standard identifies the principles of control, determines how to identify whether an investor controls an investee and therefore must consolidate the investee, and sets out the principles for the preparation of consolidated financial statements.
The Standard introduces a single consolidation model for all entities based on control irrespective of the nature of the investee (i.e. whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in ‘special purpose entities’). Under IFRS 10, control is based on whether an investor has:
Power over the investee Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect the amount of the returns.
IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31, Interests in Joint Ventures. It requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations and then account for those rights and obligations in accordance with that type of joint arrangement.
Joint arrangements are either joint operations or joint ventures: A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. Joint operators recognise their assets, liabilities, revenue and expenses in relation to its interest in a joint operation (including their share of any such items arising jointly) A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (joint venturers) have rights to the net assets of the arrangement. A joint venturer applies the equity method of accounting for its investment in a joint venture in accordance with IAS 28 Investments in Associates and Joint Ventures (2011). Unlike IAS 31, the use of ‘proportionate consolidation’ to account for joint ventures is not permitted.
IFRS 12 Disclosure of Interests in Other Entities IFRS 12 requires the extensive disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. In high-level terms, the required disclosures are grouped into the following broad categories:
Significant judgements and assumptions - such as how control, joint control, significant influence has been determined Interests in subsidiaries - including details of the structure of the group, risks associated with structured entities, changes in control, and so on Interests in joint arrangements and associates - the nature, extent and financial effects of interests in joint arrangements and associates (including names, details and summarised financial information) Interests in unconsolidated structured entities - information to allow an understanding of the nature and extent of interests in unconsolidated structured entities and to evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities IFRS 12 lists specific examples and additional disclosures which further expand upon each of these disclosure objectives, and includes other guidance on the extensive disclosures required.
42 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
IFRS 13 Fair Value Measurement IFRS 13 replaces the guidance on fair value measurement in existing IFRS accounting literature with a single standard. The IFRS is the result of joint efforts by the IASB and FASB to develop a converged fair value framework. The IFRS defines fair value, provides guidance on how to determine fair value and requires disclosures about fair value measurements. However, IFRS 13 does not change the requirements regarding which items should be measured or disclosed at fair value.
IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures about fair value measurements (and measurements, such as fair value less costs to sell, based on fair value or disclosures about those measurements). With some exceptions, the standard requires entities to classify these measurements into a ‘fair value hierarchy’ based on the nature of the inputs:
Level 1 - quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2 - inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3 - unobservable inputs for the asset or liability
Entities are required to make various disclosures depending upon the nature of the fair value measurement (e.g. whether it is recognised in the financial statements or merely disclosed) and the level in which it is classified.
Classification of Rights Issues Amends IAS 32 Financial Instruments: Presentation to require a financial instrument that gives the holder the right to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency to be classified as an equity instrument if, and only if, the entity offers the financial instrument pro rata to all of its existing owners of the same class of its own non- derivative equity instruments. Prior to this amendment, rights issues (rights, options, or warrants) denominated in a currency other than the functional currency of the issuer were accounted for as derivative instruments.
Prepayments of a Minimum Funding Requirement The amendments apply when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements, permitting the benefit of such an early payment to be recognised as an asset.
Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters This amendment provides additional exemption on IFRS transition in relation to IFRS 7 Financial Instruments: Disclosures, to avoid the potential use of hindsight and to ensure that first-time adopters are not disadvantaged as compared with current IFRS preparers.
Improvements to IFRSs (2010) These amend seven pronouncements (plus consequential amendments to various others) as a result of the IASB’s 2008-2010 cycle of annual improvements.
Key amendments include: IFRS 1 - accounting policy changes in year of adoption and amendments to deemed cost (revaluation basis, regulatory assets)
Orient Bank Limited 43 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2 ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) (Continued)
IFRS 3/IAS 27 - clarification of transition requirements, measurement of non-controlling interests, unreplaced and voluntarily replaced share-based payment awards
Financial statement disclosures - clarification of content of statement of changes in equity (IAS 1), financial instrument disclosures (IFRS 7) and significant events and transactions in interim reports (IAS 34) IFRIC 13 - fair value of award credits.
Amendments to IFRS 7 Financial Instruments: Disclosures These make amendments to IFRS 7 Financial Instruments: Disclosures resulting from the IASB’s comprehensive review of off balance sheet activities.
The amendments introduce additional disclosures, designed to allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitisations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.
Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12) Amends IAS 12 Income Taxes to provide a presumption that recovery of the carrying amount of an asset measured using the fair value model in IAS 40 Investment Property will, normally, be through sale.
As a result of the amendments, SIC-21 Income Taxes — Recovery of Revalued Non-Depreciable Assets would no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC-21, which is accordingly withdrawn.
Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (Amendments to IFRS 1)
Amends IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRSs) to:
Replace references to a fixed date of ‘1 January 2004’ with ‘the date of transition to IFRSs’, thus eliminating the need for companies adopting IFRSs for the first time to restate derecognition transactions that occurred before the date of transition to IFRSs Provide guidance on how an entity should resume presenting financial statements in accordance with IFRSs after a period when the entity was unable to comply with IFRSs because its functional currency was subject to severe hyperinflation.
IAS 19 Employee Benefits (2011) The key amendments include: Requiring the recognition of changes in the net defined benefit liability (asset) including immediate recognition of defined benefit cost, disaggregation of defined benefit cost into components, recognition of remeasurements in other comprehensive income, plan amendments, curtailments and settlements (eliminating the ‘corridor approach’ permitted by the existing IAS 19) Introducing enhanced disclosures about defined benefit plans Modifying accounting for termination benefits, including distinguishing benefits provided in exchange for service and
44 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
benefits provided in exchange for the termination of employment and affect the recognition and measurement of termination benefits Clarifying various miscellaneous issues, including the classification of employee benefits, current estimates of mortality rates, tax and administration costs and risk-sharing and conditional indexation features Incorporating other matters submitted to the IFRS Interpretations Committee.
Disclosures — Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) Amends the disclosure requirements in IFRS 7 Financial Instruments: Disclosure to require information about all recognised financial instruments that are set off in accordance with paragraph 42 of IAS 32 Financial Instruments: Presentation.
The amendments also require disclosure of information about recognised financial instruments subject to enforceable master netting arrangements and similar agreements even if they are not set off under IAS 32. The IASB believes that these disclosures will allow financial statement users to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position.
Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) Amends IAS 32 Financial Instruments: Presentation to clarify certain aspects because of diversity in application of the requirements on offsetting, focused on four main areas: the meaning of ‘currently has a legally enforceable right of set-off’ the application of simultaneous realisation and settlement the offsetting of collateral amounts the unit of account for applying the offsetting requirements.
IFRIC 19 Extinguishing Liabilities with Equity Instruments Requires the extinguishment of a financial liability by the issue of equity instruments to be measured at fair value (preferably using the fair value of the equity instruments issued) with the difference between the fair value of the instrument issued and the carrying value of the liability extinguished being recognised in profit or loss. The Interpretation does not apply where the conversion terms were included in the original contract (such as in the case of convertible debt) or to common control transactions.
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine Clarifies the requirements for accounting for stripping costs associated with waste removal in surface mining, including when production stripping costs should be recognised as an asset, how the asset is initially recognised, and subsequent measurement. The Interpretation requires stripping activity costs which provide improved access to ore are recognised as a non-current ‘stripping activity asset’ when certain criteria are met. The stripping activity asset is depreciated or amortised on a systematic basis, over the expected useful life of the identified component of the ore body that becomes more accessible as a result of the stripping activity, using the units of production method unless another method is more appropriate.
Orient Bank Limited 45 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
3 SIGNIFICANT ACCOUNTING POLICIES.
Basis of preparation The financial statements have been prepared on the historical cost basis of accounting.
Functional and presentation currency The financial statements have been presented in Uganda Shillings (Ushs), which is also the bank’s functional currency. Except as indicated, financial information presented in Uganda Shillings has been rounded to the nearest million.
Use of Estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
During the period, the areas involving a higher degree of judgement or complexity or where assumptions and estimates are significant to the financial statements are disclosed in note 4 .
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been applied consistently throughout the year.
INTEREST INCOME AND EXPENSE Interest income and expense for all interest bearing financial instruments measured at amortised cost are recognised in the profit and loss account 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. The calculation includes all fees 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 that was used to discount the future cash flows for the purpose of measuring the impairment loss.
FEES AND COMMISSIONS 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.
46 Orient Bank Limited Annual Report 2011
Moneygram representative Fiona Tamale together with Chairman Board of Directors- Orient Bank Michael Cook cut the symbolic cake sealing the partnership flanked by the entire Board of Directors Orient Bank.
Orient Bank Limited 47 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
3 SIGNIFICANT ACCOUNTING POLICIES (Continued)
In the normal course of business, the bank earns fees and commission income from a diverse range of services to its customers. Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.
Other fees and commission income, including account servicing fees, investment management fees, placement fees and syndication fees, are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period.
Other fees and commission expenses relate mainly to transaction and service fees, which are expensed as the services are received.
FOREIGN CURRENCIES Transactions in foreign currencies are translated to the functional currency of the group at exchange rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The resultant foreign currency gain or loss is recognised in the statement of comprehensive income.
FINANCIAL INSTRUMENTS
Recognition The bank initially recognises loans and advances, deposits and debt securities issued on the date that they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the bank becomes a party to the contractual provisions of the instrument.
Classification The bank classifies its financial assets into the following categories: Financial assets at fair value through profit or loss; loans, advances and receivables, available-for-sale and held-to-maturity investments. Management determines the appropriate classification of its investments at initial recognition.
Impairment The bank reviews regularly, on a case-by–case basis, whether any objective evidence exists of impairment, individually for financial assets that are significant and individual or collectively for financial assets that are not individually significant. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably.
Offsetting Financial assets and liabilities are set off and the net amount reported in the balance sheet when there is a legal right to set off the amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Financial assets at fair value through profit or loss This category has two sub-categories: Financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are categorised as fair value through profit and loss.
48 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Derivatives held for risk management These comprise solely of forward foreign exchange contracts and are initially recognised at fair value on the date the derivative contract is entered into and subsequently measured at fair value. The fair value is determined using forward exchange market rates at the reporting date or appropriate pricing models. The derivatives do not qualify for hedge accounting. Changes in fair value of derivatives are recognised immediately in the statement of comprehensive income.
Loans, and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. Loans and advances are recognised when cash is advanced to borrowers.
Held to maturity These are non-derivative financial assets with fixed or determinable payments and fixed maturities that the group has the positive intention and ability to hold to maturity. Where a sale occurs, other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and classified as available for sale.
Available-for-sale financial assets Available-for-sale assets are financial assets that are not (a) financial assets at fair value through profit or loss, (b) loans, advances and receivables, or (c) financial assets held to maturity.
Financial liabilities Borrowings are classified as financial liabilities.
Derecognition The bank derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers substantially all the risks and rewards of ownership of the financial asset. A financial liability is derecognised when its contractual obligations are discharged or extinguished.
Measurement Financial instruments are initially recognised at fair value plus transaction costs. Financials assets at ‘fair value through profit and loss’ are subsequently carried at fair value. Gains and loss arising from changes in the fair value in those assets are recognised in the statement of comprehensive income in the period in which they arise.
Loans and advances and held to maturity investments are carried at amortised cost using the effective interest rate method. Financial liabilities are subsequently measured at amortised cost.
LOAN IMPAIRMENT At the end of each reporting period, the bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows on the asset that can be estimated reliably.
Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the group on terms that the bank would not otherwise consider, indications that a borrower or issuer will enter
Orient Bank Limited 49 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
3 SIGNIFICANT ACCOUNTING POLICIES (Continued) bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. Loan impairments are recognised promptly when there is objective evidence that impairment has occurred.
IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS At each balance sheet date, the group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that these assets have suffered an impairment loss.
If objective evidence on impairment losses exist, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. In cases where the asset is carried at revalued amount, the impairment loss is treated as a revaluation decrease.
In determining the recoverable amount, the bank considers the higher of the fair value of the asset less costs to sell, and value in use. In estimating value in use, the group is cognisant of the estimated future cashflow discounted to the present value using a pre-tax discount rate that is reflective of the current market assessment of time value of money and the risks specific to the asset itself.
Intangible assets with indefinite useful life and intangible assets not yet available for use are tested for impairment annually, and when there is indication that the asset may be impaired.
Where impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised, unless such asset is carried at revalued amount, in which case the reversal of the impairment loss is treated as revaluation income.
At each balance sheet date, the group reviews the carrying amount of its tangible and intangible assets to determine whether there is any indication that these assets have suffered an impairment loss.
If objective evidence on impairment losses exist, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. In cases where the asset is carried at revalued amount, the impairment loss is treated as a revaluation decrease.
In determining the recoverable amount, the bank considers the higher of the fair value of the asset less costs to sell, and value in use. In estimating value in use, the group is cognisant of the estimated future cashflow discounted to the present value using a pre-tax discount rate that is reflective of the current market assessment of time value of money and the risks specific to the asset itself.
Intangible assets with indefinite useful life and intangible assets not yet available for use are tested for impairment annually, and when there is indication that the asset may be impaired.
50 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Where impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised, unless such asset is carried at revalued amount, in which case the reversal of the impairment loss is treated as revaluation income.
EMPLOYEE EXPENSES
Retirement benefit obligations The bank contributes to the statutory National Social Security Fund (NSSF) on behalf of its employees. This is a defined contribution scheme registered under the NSSF Act. The institution’s obligations under the scheme are specific contributions legislated from time to time and are currently limited to 10% of the respective employees’ salaries. The institution’s contributions are charged to the statement of comprehensive income in the year in which they relate.
Short-term benefits Short-term employee benefit obligations (e.g. medical reimbursements and insurance) are measured on an undiscounted basis and are expensed as the related service is provided.
The monetary benefits for employee accrued leave entitlement at the balance sheet date are recognised as an expense accrual.
PROPERTY AND EQUIPMENT
Recognition and measurement Property and equipment are stated at either cost or revaluation less accumulated depreciation. The cost of purchased property and equipment is the value of consideration given to acquire the assets and the value of other directly attributed costs, which have been incurred in bringing the assets to the location and condition necessary for their intended service. Land and buildings were revalued on 31 December 2005 by independent professional valuers.
Subsequent costs The cost of replacing part of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the bank and its cost can be measured reliably. The costs of the day-to-day servicing of property and equipment are recognised in the statement of comprehensive income as incurred.
The gains or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income.
Depreciation is calculated on a straight line basis to write off the cost or revalued amounts of the property and equipment in equal annual instalments over their estimated useful lives. The annual rates in use are:
Buildings 4% to 7% Leasehold improvements 12.5% Safes and strong room 12.5%
Orient Bank Limited 51 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
3 SIGNIFICANT ACCOUNTING POLICIES (Continued) PROPERTY AND EQUIPMENT (Continued)
Furniture and fittings 12.5% Office Equipment 20.0% Motor vehicles 25.0% Computer Equipment 33.3% ATM/POS and SWIFT 33.3%
Freehold land is not depreciated. Capital work in progress is also not depreciated until it’s transferred to an appropriate asset category where it’s depreciated according to the policy set out above
Excess depreciation, representing the additional depreciation based on revalued amounts over depreciation based on historical costs, is transferred annually from revaluation surplus to revenue reserve.
LEASEHOLD LAND Payments to acquire leasehold interest in land are treated as prepaid operating lease rentals and amortised on straight line basis over the period of the lease.
INTANGIBLE ASSETS Intangible assets are stated at cost less accumulated amortisation and any accumulated impairment losses. The cost of the intangible assets is the value of consideration given to acquire the assets and the value of other directly attributable costs incurred in bringing the assets to the location and condition necessary for their intended service. Intangible assets are amortised over their useful economic life.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include notes and coins on hand, unrestricted balances held with Bank of Uganda (BOU), items in the course of collection from other banks, deposits held at call with banks and treasury bills with original maturities of less than three months. Such assets are generally subject to insignificant risk of changes in their fair value, and are used by the bank in the management of its short-term commitments.
TAXATION Current taxation is provided on the basis of the results for the year as shown in the financial statements, adjusted in accordance with the Ugandan tax legislation.
Deferred taxation is provided, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used to determine deferred income tax.
A deferred income tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the tax asset can be utilised.
STATUTORY RESERVE IAS 39 requires the bank to recognise an impairment loss when there is objective evidence that loans and advances are impaired. However, BOU prudential guidelines require the bank to set aside amounts for impairment losses on loans and advances in
52 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
addition to those losses that have been recognised under IAS 39. Any such amounts set aside represent appropriations of retained earnings and not expenses in determining profit or loss. These amounts are dealt with in the statutory reserve.
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 amounts due to other banks, deposits from banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded as deposits with 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. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability.
CONTINGENT LIABILITIES Letters of credit, acceptances, guarantees and performance bonds are generally written by the bank to support performance by a customer to third parties. The bank will only be required to meet these obligations in the event the customer defaults. These obligations are accounted for as off balance sheet transactions and disclosed as contingent liabilities.
FIDUCIARY ACTIVITIES Assets and income arising thereon together with related undertakings to return such assets to customers are excluded from these financial statements where the bank acts in a fiduciary capacity such as nominee, trustee or agent.
COMMITMENTS Commitments to lend are agreements to lend a customer in future, subject to certain conditions. Such commitments are normally made for a fixed period. The bank may withdraw from its contractual obligation for the undrawn portion of the agreed overdrafts/advances upon giving reasonable notice to the customer.
SEGMENTAL REPORTING The major part of the business of the institution falls under the category of banking with other income comprising 1% of total income. Also, the institution operates wholly within Uganda. Segmental reporting is, therefore, not considered of any useful value.
COMPARATIVES Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.
Orient Bank Limited 53 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
4. FINANCIAL RISK MANAGEMENT a. Strategy in using financial instruments By their nature, the bank’s activities are principally related to the use of financial instruments. The bank accepts deposits from customers at fixed rates and for various periods, and seeks to earn above average interest margins by investing these funds in high quality assets. The Bank seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates, while maintaining sufficient liquidity to meet all claims that might fall due.
The bank also seeks to raise its interest margins by obtaining above-average margins, net of allowances, through lending to commercial and retail borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances but also off-balance sheet arrangements like guarantees and other commitments such as letters of credit and performance bonds. b. Credit risk Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in financial loss to the bank. It arises principally from lending, leasing, trade finance and treasury activities. The amounts presented in the balance sheet are net of impairment for doubtful debts, estimated by the bank’s management based on prior experience and their assessment of the current economic environment.
Management of credit risk 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 groups of borrowers and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to a quarterly review. Limits on the level of credit risk by product and industry sector are approved annually by the Board of Directors. The exposure to any one borrower including banks is further restricted by sub-limits covering on and off-balance sheet exposures. Actual exposures against limits are monitored daily.
Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate personal guarantees, but a portion of the bank’s credit exposure is through personal lending where such facilities can not be obtained.
Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as and when required. Guarantees and standby letters of credit - which represent irrevocable assurances that the Bank will make payments in the event that a customer fails to meet their obligations to third parties, carry the same credit risk as loan. 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 shipment of goods to which they relate and therefore carry less risk than a direct borrowing.
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 relating 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. The bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk that shorter-term commitments.
54 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Maximum exposure to credit risk before collateral held
2011 % 2010 % Ushs ‘000 Ushs ‘000 Credit Exposures On – balance sheet items Items in the course of collection from other banks 51,511,938 11 42,502,651 11 Deposits and balances due from banking institutions 71,542,896 15 31,468,255 8 Loans and receivables 217,325,215 45 199,346,096 50 Government securities 74,549,457 15 72,951,330 18 414,929,506 86 346,268,332 87 Off-balance sheet items Letters of credit 41,289,186 9 25,254,968 6 Guarantee and performance bonds 26,315,290 5 26,309,118 7 67,604,476 14 51,564,086 13 482,533,982 100 397,832,418 100
The above represents the worst case scenario of credit exposure for both years, without taking account of any collateral held or other credit enhancements attached. Loans and receivables and off-balance sheet items comprise of 59% (2010 - 63%) of the total maximum exposure. While collateral is an important mitigant to credit risk, the bank’s policy is to establish that loans are within the capacity of the customer to repay, as the primary way out. The bank is confident that its policies and procedures provide sufficient safeguards against exposure on credit risk as shown on the table below:
Classification of loans and advances 2011 Gross Impairment Net Loans and receivables amounts allowances amounts Ushs’000 Ushs’000 Ushs’000 % Neither past due nor impaired 209,266,568 - 209,266,568 96.3 Past due but not impaired 6,245,681 - 6,245,681 2.9 Impaired 1,340,507 520,869 1,861,376 0.9 Total 216,852,756 520,869 217,373,625 100 2010 Loans and receivables Neither past due nor impaired 197,722,361 197,722,361 99.2 Past due but not impaired 871,596 871,596 0.4 Impaired 1,998,920 (1,246,736) 752,184 0.4 Total 200,592,877 (1,246,736) 199,346,141 100 Apart from the loans and advances to customers, all other credit exposures are neither past due nor impaired.
Orient Bank Limited 55 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
4 FINANCIAL RISK MANAGEMENT (Continued) b. Credit Risk (continued) Loans and advances that are neither past due nor impaired The bank classifies loans and advances under this category for those exposures that are up to date and in line with contractual agreements. Such loans would have demonstrated financial conditions, risk factors and capacity to repay that are acceptable. These exposures will normally be maintained largely within approved product programs and with no signs of impairment or distress. These exposures are categorised as normal accounts in line with BOU prudential guidelines and no provision is made.
Past due but not impaired This category includes exposures that are over 30 days (31 – 90 days) past due, where losses have been incurred but have not been identified. These exposures are graded internally as category A in line with BOU guidelines and a provision of 20% is made and appropriated under statutory reserves.
Impaired loans and advances Impaired loans and securities are loans and securities for which the bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan / securities agreement(s). These loans are graded categories B to C in the bank’s internal credit risk grading system. These accounts under BOU guidelines are termed as non-performing loans and are provided for
Allowances for impairment The bank establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.
Write-off policy The bank writes off loans and advances net of any related allowances for impairment losses, when the bank’s credit committee determines that the loans and advances are uncollectible and securities unrealisable. This determination is reached after considering information such as the occurrence of significant changes in the borrower or issuer’s financial position such that the borrower or issuer can no longer pay the obligation, or that proceeds from sale of collateral will not be sufficient to pay back the entire exposure and after exhausting all other means including litigation. For smaller balance standardised loans, charge off decisions are generally based on a product specific past due status.
Collateral held The bank holds collateral against loans and advances to customers in the form of mortgage interests over property, registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and refreshed after every three years. Security structures and legal covenants are also subjected to regular review to ensure they continue to fulfil their intended purpose. Collateral generally is not held over deposits and balance due from banks and items in the course of collection from other banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against government securities, and no such collateral was held at 31 December 2011 0r 2010
56 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Settlement risk The bank’s activities may give rise to risk at the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a counter-party to honour its obligations to deliver cash, securities or other assets as contractually agreed.
For certain types of transactions the bank mitigates this risk by pre-arranging facilities with the customer. Settlement limits form part of the credit approval / limit monitoring process described earlier. Acceptance of settlement risk on free settlement trades requires transaction specific or counterparty specific approvals from the credit committee.
Concentration of risk The bank monitors concentration of risk by economic sector and geographical location. An analysis of concentrations within the total assets, total liabilities, off-balance sheet items and revenues are as follows:
At 31 December 2011 Total Assets Total Liabilities Off-balance Revenue Capital sheet investment Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Kampala 387,910,361 316,400,183 67,604,476 58,816,527 17,672,462 Jinja 12,100,727 10,086,632 - 1,952,127 1,635,767 Entebbe 25,811,677 24,215,879 - 2,706,467 481,389 Mbale 2,977,139 3,579,153 - 445,661 285,836 Gulu 3,245,904 3,373,841 - 658,622 389,705 Arua 3,035,076 3,490,794 - 241,185 658,831
435,080,884 361,146,482 67,604,476 64,820,588 21,123,990
At 31 December 2010 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Kampala 351,988,100 276,925,477 51,564,086 38,765,210 15,859,724 Jinja 3,115,672 10,926,033 - 1,306,984 1,624,176 Entebbe 2,897,471 14,721,535 - 1,643,368 416,754 Mbale 1,098,465 2,221,845 - 181,330 274,655 Gulu 1,864,595 2,841,212 - 336,828 346,425 Arua 985,007 563,871 - 10,841 640,795 361,949,310 308,199,974 51,564,086 42,244,560 19,162,530 c. Liquidity risk Liquidity risk is the risk that the bank will encounter difficulty in meeting obligations from financial liabilities. The Assets and Liabilities Committee (ALCO), a management committee, is tasked with the responsibility of ensuring that all foreseeable funding commitments and deposits withdrawals can be met when due, and that the bank will not encounter difficulty in meeting obligations from its financial liabilities as they occur. ALCO relies substantially on the bank Treasury department to coordinate and ensure discipline across the bank, certify sufficient liquidity under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the bank’s reputation.
Orient Bank Limited 57 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
4 FINANCIAL RISK MANAGEMENT (Continued) c). Liquidity Risk (continued) The bank, like any other bank, does not maintain cash reserves to meet all of obligations as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty.
Source of funding The bank has an aggressive strategy aimed at increasing the customer deposit base. To this end, the bank maintains a diversified and stable funding base comprising of the core retail and corporate customers in addition to the nascent institutional banking component. The bank borrows from the inter bank market through transactions with other banks, and from the wholesale markets through transactions with pension funds and insurance companies for short term liquidity requirements.
Exposure to liquidity risk The key measure used by the bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers (liquidity ratio). For this purpose, net liquid assets are considered as including cash and cash equivalents and investment in securities for which there is an active and liquid market less any deposits from banks, as well as other borrowings and commitments maturing within the next month. The BOU requires that the bank maintains a cash reserve ratio computed as 9.5% of customer deposits of the preceding two weeks.
The table below details the liquidity ratio trends over the year: As at 31 December 2011 2010 % % Average for the period 30 34 Maximum for the period 36 43 Minimum for the period 26 28
The table below shows the undiscounted cash flows on the bank’s financial liabilities and unrecognised loan commitments on the basis of their earliest possible contractual maturity. The bank’s expected cash flows on these instruments vary significantly from this analysis. For example, demand deposits from customers are expected to maintain a stable or increasing balance; and unrecognised loan commitments are not all expected to be drawn down immediately.
58 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
The Gross nominal inflow/(outflow) disclosed below is the contractual, undiscounted cash flow on the financial liability or commitment.
0 to 3 4 to 6 7 to 12 Over Over 31 December months months months 1 year 5 years Total 2011 Ush’000 Ush’000 Ush’000 Ush’000 Ush’000 Ush’000
Assets
Cash and balances with BOU 51,511,938 - - - - 51,511,938 Deposits and balances due from banking institutions 71,542,896 - - - - 71,542,896 Government 12,613,952 17,460,263 25,301,557 19,173,686 - 74,549,457 securities Loans & advances 114,420,096 50,107,793 28,360,318 24,485,419 - 217,373,625 to customers Investment in - - - - 80,000 80,000 shares Other assets 8,810,991 - - - - 8,810,991 Total financial 258,899,872 67,568,055 53,661,875 43,659,105 80,000 423,868,907 assets
Liabilities
Customer deposits 238,604,252 36,157,218 29,628,475 27,165,544 475,001 332,030,490 Deposits and balances due to banking institutions 7,400,000 - - - - 7,400,000 Refinance loans 289,532 - - 889,025 - 1,178,557 Other liabilities and accruals 19,832,347 - - - - 19,832,347 Total financial 266,126,131 36,157,218 29,628,475 28,054,569 475,001 360,441,394 liabilities
Net liquidity gap (7,226,259) 31,410,837 24,033,400 15,604,536 (395,001) 63,427,513
31 December 2010
Total financial 201,450,563 40,148,385 60,781,786 50,480,131 80,000 352,940,864 assets Total financial 219,540,177 44,498,325 38,019,132 5,786,998 - 307,844,632 liabilities
Net liquidity gap (18,089,614) (4,349,940) 22,762,654 44,693,133 80,000 45,096,232
Orient Bank Limited 59 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011 d. Market risk Market risk exists wherever the Bank has taken trading, banking and investment positions. Trading limits are set for business units to contain losses within a prescribed amount in the event of adverse price movements. Independent price-risk management functions monitor exposure to trading and interest rate risks and report exposures and excesses.
Interest rate risk The bank is exposed to the risk that the value of a financial instrument will fluctuate due to changes in market interest rates, as funds are sourced at both fixed and floating rates. The maturities of asset and liabilities and the ability to replace at an acceptable cost, interest bearing liabilities as they mature, are important factors in assessing the bank's exposure to changes in interest rates and liquidity. In addition to maintaining an appropriate mix between fixed and floating rates deposit base, interest rates on advances to customers and other risk assets are either pegged to the bank’s base lending rate or Treasury bill rate. The base rate is adjusted from time to time to reflect the cost of deposits.
The table below summarises the exposure to interest rate risk. 0 to 3 4 to 6 7 to 12 Over Over Non Interest 31 December 2011 months months months 1 year 5 years bearing Total Ush’000 Ush’000 Ush’000 Ush’000 Ush’000 Ush’000 Ush’000 Financial assets Cash and balances with - - - - - 51,511,938 51,511,938 BOU Deposits and balances due from banking institutions - - - - - 71,542,896 71,542,896 Government securities 12,613,952 17,460,263 25,301,557 19,173,686 - - 74,549,457 Loans & advances to 114,420,096 50,107,793 28,360,318 24,485,419 - - 217,373,625 customers Investment in shares - - - - - 80,000 80,000 Total financial assets 127,034,047 67,568,055 53,661,875 43,659,105 - 123,134,834 415,057,916 Financial liabilities Customer deposits 131,348,061 36,157,218 29,628,475 27,165,544 475,001 107,256,191 332,030,490 Deposits and balances due to banking institutions 7,400,000 - - - - - 7,400,000 Refinance loans 289,532 - - 889,025 - - 1,178,557 Other liabilities and accruals 19,832,347 - - - - - 19,832,347 Total financial liabilities 158,869,940 36,157,218 29,628,475 28,054,569 475,001 107,256,191 360,441,394 Interest rate sensitivity gap (31,835,893) 31,410,837 24,033,400 15,604,536 (475,001) 15,870,564 54,616,522 31 December 2010 Total financial assets 120,887,126 40,148,385 60,781,786 50,480,130 - 80,643,438 352,940,864 Total financial liabilities 201,477,638 44,498,325 38,019,132 5,786,998 - 18,062,539 307,844,632 Interest rate sensitivity gap (80,590,512) (4,349,940) 22,762,654 44,693,132 - 62,580,899 45,096,232
60 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Interest rate risk – stress test We monitor the impact that an immediate hypothetical increase or decrease in interest rates of 100 basis points applied at the beginning of the year would have on our net interest income assuming a growing balance sheet and current interest rate risk profile.
The following table summarises such estimated impact: 2011 2010 Ushs’000 Ushs’000 100 basis points increases in interest rates 331,872 201,292 100 basis points decrease in interest rates (331,872) (201,292)
The model does not take into account any corrective action in response to interest rate movements, particularly in adverse situations.
Foreign exchange risk The bank is exposed to the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. The board of directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions. Foreign currency risk is addressed through the following measures.
On a daily basis, the overall foreign exchange risk exposure is measured using spot mid-rates as availed by the BOU and should not exceed 20% of the bank's core capital. The single currency exposure, irrespective of short or long positions should not exceed the limit of 20% of core capital. Intra-day foreign exchange exposures are limited within strictly defined limits by the board of directors.
Orient Bank Limited 61 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
4 FINANCIAL RISK MANAGEMENT (Continued) d. Market Risk (continued)
The table below summarises the bank's exposure to foreign currency exchange rate risk at 31 December.
US dollar GBP Euro Ushs Others Total 31 December 2011 Ush’000 Ush’000 Ush’000 Ush’000 Ush’000 Ush’000 Financial Assets Cash and balances with BOU 14,566,766 420,657 655,563 35,836,875 32,077 51,511,937 Deposits and balances due from banking institutions 49,960,374 4,698,796 1,984,882 13,526,925 1,363,839 71,534,816 Government securities - - - 74,549,457 - 74,549,457 Loans and advances to customers 90,993,022 20,854 5,566 126,354,183 - 217,373,625 Investment in shares - - - 80,000 - 80,000 Other assets 378,271 - 564 8,432,157 - 8,810,992
Total financial assets 155,898,433 5,140,306 2,646,575 258,779,597 1,395,916 423,860,827
Financial Liabilities Customer deposits 150,086,505 5,309,317 2,481,700 174,152,968 332,030,491 Deposits and balances due to banking institutions - - - 7,400,000 - 7,400,000 Refinance loans - - - 1,178,557 - 1,178,557 Other liabilities and accruals 4,162,176 238,852 21,373 15,397,180 12,765 19,832,346 Total financial liabilities 154,248,681 5,548,168 2,503,074 198,128,705 12,765 360,441,393
Net balance sheet position 1,649,751 (407,862) 143,501 60,650,893 1,383,151 63,419,434
OFF BALANCE SHEET POSITION ------
31 December 2010
Total financial assets 121,558,189 5,473,989 871,027 224,781,360 256,299 352,940,864 Total financial liabilities 121,378,482 5,682,828 1,313,109 179,464,970 5,243 307,844,632 Net balance sheet position 179,707 (208,839) (442,082) 45,316,390 251,056 45,096,232
62 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Compliance risk Compliance risk is the risk arising from failure to comply with relevant laws, regulations and regulatory requirements governing the conduct of business. It is the composite risk that can result in regulatory sanctions, financial penalties, litigation exposure and loss of reputation.
The compliance function is headed by a Risk & Compliance Manager, reporting directly to the Risk/Compliance Committee of the board and the Executive Director - Compliance. The function is tasked with the responsibility of: Development of compliance policies Advising management on compliance matters Assessment and monitoring of polices and compliance programs Reporting on compliance to the board of directors
Reputation risk The board of directors is of the opinion that the reputation of the bank is of paramount importance to continued prosperity and is the responsibility of the Chief Executive Officer. Reputation risk can arise form social, ethical, or environmental issues, or as a consequence of operations risk events. The bank's reputation depends upon the way in which business is conducted, but can also be affected by the way in which customers, to whom we provide financial services, conduct themselves.
Reputation risk is considered and assessed by the board of directors and senior management during the establishment of standards for all major aspects of the business and the formulation of policy. These policies, which are an integral part of the internal control systems, are communicated through manuals and statements of policy, internal communication and training. The policies set out operational procedures in all areas of reputation risk, including money laundering deterrence, environmental impact, anti-corruption measures and employee relations.
The bank has established a strong internal structure to minimize the risk of operational and financial failure and to ensure that a full appraisal of reputation risk is made before strategic decisions are taken. f) Capital management The bank monitors the adequacy of its capital using ratios established by the Bank of Uganda, which are in line with those established by the Bank for International Settlements (BIS). These ratios measure capital adequacy by comparing the bank's eligible capital with its balance sheet assets, off-balance sheet commitments, market and other risk positions at a weighted amount to reflect their relative risk. The market risk approach covers the general market risk and the risk of open positions in currencies, debt and equity securities. Assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting according to the amount of capital deemed to be necessary to support them.
Four categories of risk weights (0%, 20%, 50%, 70% and 100%) are applied; for example cash and money instruments have a zero risk weighting which means that no capital is required to support the holding of these assets. Property and equipment carries a 100% risk weighting, meaning that it must be supported by capital equal to at least 12% of the carrying amount. Other asset categories have intermediate weightings.
Off-balance sheet related commitments are taken into account by applying different categories of credit conversion factors, designed to convert these items into balance sheet equivalents. The resulting credit equivalent amounts are then weighted for credit risk using the same percentages as for balance sheet assets.
Orient Bank Limited 63 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
4 FINANCIAL RISK MANAGEMENT (Continued)
Tier 1 capital consists of shareholders’ equity. Tier 2 capital includes the bank’s eligible long term debt and general provisions. The risk weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of, and reflecting an estimate of the credit risk associated with each asset and counterparty. A similar treatment is adopted for off- balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses.
Nominal Risk weighted balance sheet amounts amounts 2011 2010 Risk 2011 2010 Ushs ‘000 Ushs ‘000 Weight Ushs ‘000 Ushs ‘000 Balance sheet assets (net of provisions) Cash balances 51,511,938 42,502,651 0% - - Deposits and balances due from banking 22,276,925 8,009,390 20% 4,455,385 1,601,878 institutions Due from other Commercial banks in Uganda Due from banks outside Uganda with long- term ratingsas follows; Rated AAA to AA(-) 8,991,837 - 20% 1,798,367 - Rated A (+) to A (-) 37,743,469 23,255,090 50% 18,871,735 11,630,472 Rated A (-) to non-rated 2,522,586 203,775 100% 2,522,586 203,775 Government securities 74,549,457 72,951,330 0% - - Loans and advances to customers 217,373,625 199,346,096 100% 217,373,625 199,346,096 Investment in subsidiary 80,000 80,000 100% 80,000 80,000 Property and equipment 8,569,329 7,773,049 100% 8,569,329 7,773,049 Operating lease prepayments 563,266 606,588 100% 563,266 606,588 Intangible assets - - - - - Other assets 8,810,991 6,592,532 100% 8,810,991 6,592,532 432,993,423 361,320,501 263,045,284 227,834,390 Off-balance sheet positions Performance bonds 7,337,624 5,095,961 50% 3,668,812 2,547,981 Letters of guarantee 18,977,666 21,213,157 100% 18,977,666 21,213,157 Letters of credit 41,289,186 25,254,968 20% 8,257,837 5,050,994 Unutilised commitments 32,310,736 24,350,437 50% 16,155,368 12,175,219 Total risk-weighted assets 532,908,635 437,235,024 310,104,967 268,821,739 Capital BIS% 2011 2010 2011 2010 Ushs ‘000 Ushs ‘000 %age %age BIS capital ratios Tier 1 capital 63,947,114 48,580,050 20.62% 18.07% Tier 1 + Tier 2 capital 69,561,568 53,153,315 22.43% 19.77% The above computation indicates that the bank complied with the core capital requirements and the total capital requirements under Section 27 of the Financial Institutions Act, 2004.
64 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
f) IFRS 7 MARKET RISKS - SENSITIVITY ANALYSIS The objective of the bank’s market risk management is to manage and control market risk exposures in order to optimize return on risk while maintaining a market profile consistent with the bank’s mission.
Market risk is the risk that movements in market risk factors, including foreign exchange rates and interest rates will reduce the bank’s income or capital.
A principal part of the bank’s management of market risk is to monitor the sensitivity of projected net interest income under varying interest rate scenarios (simulation modelling) and the sensitivity of future earnings and capital to varying foreign exchange rates. The bank aims, through its management of market risk, to mitigate the impact of prospective interest rate movements and foreign exchange fluctuations which could reduce future earnings and capital.
For simulation modelling, the bank uses a combination of scenarios relevant to local businesses and local markets. These scenarios are used to illustrate the effect on the Bank’s earnings and capital. a) Interest Rate Risks – Increase / Decrease of 10% in Net Interest Margin
The Interest Rate Risks sensitivity analysis is based on the following assumptions.
Changes in the market interest rates affect the interest income or expenses of variable interest financial instruments Changes in Market interest rates only affect interest income or expenses in relation to financial instruments with fixed interest rates if these are recognized at their fair value. The interest rate changes will have a significant effect on interest sensitive assets and liabilities and hence simulation modelling is applied to net interest margins. The interest rates of all maturities move by the same amount and, therefore, do not reflect the potential impact on net interest income of some rates changing while others remain unchanged. The projections make other assumptions including that all positions run to maturity.
The table below sets out the impact on future net interest income of an incremental 10% parallel fall or rise in all yield curves at the beginning of each quarter during the 12 months from 1 January 2012. Assuming no management actions, a series of such rise and fall would impact the future earnings and capital as illustrated in the table below;
Amount Scenario 1 Scenario 2 Ushs (‘000) 10% Increase 10% Decrease in net interest margin in net interest margin
Profit Before Tax 24,514,768 27,833,486 21,196,050 Adjusted Core Capital 63,947,114 67,265,832 60,628,396 Adjusted Total Capital 69,561,568 72,880,286 66,242,850 Risk Weighted Assets (RWA) 310,104,967 313,423,685 306,786,249 Adjusted Core Capital to RWA 20.6% 21.5% 19.8% Adjusted total Capital to RWA 22.4% 23.3% 21.6%
Orient Bank Limited 65 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
Assuming no management actions, a series of such rises would increase net interest income for 2011 by Ushs 3318 million (2010: 2,013 million), while a series of such falls would decrease net interest income for 2011 by Ushs 3318 million (2010: 2,013 million).
Also a series of such rises would increase the adjusted core capital to RWA and Adjusted total capital to RWA by 3.77% (2010: 3.37%) and 3.40% (2010: 3.02%) respectively, while a series of such falls would decrease the adjusted core capital to RWA and Adjusted total capital to RWA by 2010: 3.86% (2010: 3.42%) and 2011: 3.48% (2010:3.06%) respectively. Both the revised capital ratios are well above the minimum capital requirement of 8% and 12 % respectively. b) Foreign Exchange Risks – Appreciation/Depreciation of Ush against other currencies by 10%
The Foreign Exchange Risks sensitivity analysis is based on the following assumptions; Foreign exchange exposures represent net currency positions of all currencies other than Uganda Shillings. The currency risk sensitivity analysis is based on the assumption that all net currency positions are highly effective. The base currency in which the bank’s business is transacted are Uganda Shillings.
The table below sets out the impact on future earnings of an incremental 10% parallel fall or rise in all foreign currencies at the beginning of each quarter during the 12 months from 1 January 2012.
Assuming no management actions, a series of such rise and fall would impact the future earnings and capital as illustrated in the table below;
Amount Scenario 1 Scenario 2 Ushs (‘000) 10% Appreciation 10% Depreciation of Ushs of Ushs
Profit Before Tax 24,514,768 22,917,557 26,111,979 Adjusted Core Capital 63,947,114 62,349,903 65,544,325 Adjusted Total Capital 69,561,568 67,964,357 71,158,779 Risk Weighted Assets (RWA) 310,104,967 308,507,756 311,702,178 Adjusted Core Capital to RWA 20.6% 20.2% 21.0% Adjusted total Capital to RWA 22.4% 22.0% 22.8%
Assuming no management actions, a series of such appreciation would decrease earnings for 2011 by Ushs 1597 million (2010: 346 million), while a series of such falls would increase net interest income for 2011 by Ushs 1597 million (2010: 346 million).
Also a series of such rises would decrease the adjusted core capital to RWA and Adjusted total capital to RWA by 2011: 1.85% (2010: 0.58%) and 2011: 1.66% (2010: 0.52%) respectively, while a series of such falls would increase the adjusted core capital to RWA and Adjusted total capital to RWA by 2010: 1.83% (2010: 0.58%) and 2010: 1.65% (2009: 0.52%) respectively.
Both the revised capital ratios are well above the minimum capital requirement of 8% and 12% respectively.
66 Orient Bank Limited Annual Report 2011
Bank - Customer engagement day Mbale branch
Orient Bank Limited 67 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
5 ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING THE BANK'S ACCOUNTING POLICIES
In the process of applying the bank’s accounting policies, management has made estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year.
Impairment losses on loans and advances The bank reviews its loan portfolios to assess impairment regularly. In determining whether an impairment loss should be recorded in the income statement, the bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cashflows from a portfolio of loans, before a decrease can be identified with an individual loan in 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. Management uses 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 its 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.
Held -to-maturity investments The bank follows the guidance of IAS 39 on classifying 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 fails to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost.
Property and equipment Critical estimates are made by the directors in determining depreciation rates for property and equipment.
Fair value of derivatives financial instruments The fair value of financial instruments that are not quoted in a active market are determined using valuation techniques. When valuation techniques are used, they are periodically validated and reviewed by qualified personnel independent of the area that created them. However, volatilities and correlation require management to make estimates. Changes in assumptions of these factors could affect reported fair value of financial assets.
68 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs ‘000 Ushs ‘000 6 INTEREST INCOME
On loans and advances 39,706,468 26,042,913 On deposits and balances due from banking institutions 935,238 346,479 On government securities 8,391,749 5,074,901 On impaired loans - 15,010 49,033,455 31,479,303
7 INTEREST EXPENSE Group On demand deposits 697,102 697,812 On savings deposits 924,991 685,542 On fixed deposits - banks 1,287,175 685,316 On fixed deposits - others 12,699,584 9,000,698 On BOU refinance schemes 99,294 278,588 On impaired loans 138,129 - 15,846,275 11,347,956
Bank On demand deposits 697,102 697,812 On savings deposits 924,991 685,542 On fixed deposits - banks 1,287,175 687,594 On fixed deposits - others 12,699,584 9,000,698 On BOU refinance schemes 99,294 278,588 On impaired loans 138,129 - 15,846,275 11,350,234
8 FEE AND COMMISSION INCOME Group Commission income 7,093,288 4,760,089 Fee income 3,872,029 3,365,498 Commission on trade 37,876 25,459 Commission on NIC IPO - 8,206 Commission on Safaricom secondary trading - 4,531 11,003,193 8,163,783
Bank Commission income 7,063,288 4,760,089 Fee income 3,872,029 3,365,498 10,935,317 8,125,587
Orient Bank Limited 69 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010
Ushs ‘000 Ushs ‘000 9 FOREIGN EXCHANGE INCOME Group Foreign exchange income 3,996,019 2,049,373
Bank Unrealised exchange gain (2,174) 1,043 Realised exchange gain 3,998,193 2,048,330 3,996,019 2,049,373
10 OTHER OPERATING INCOME Group Other income 861,092 590,297 Bonus share income 4,308 - Dividends 234 - Interest on investments 1,857 - Other commissions 2,019 - 869,510 590,297
Bank Other income 855,797 590,297
11 NET IMPAIRMENT LOSS ON LOANS AND ADVANCES Specific allowance for impairment - (wrte back)/ identified (429,222) 189,484 - unidentified 49,836 109,610 (379,386) 299,094
12 EMPLOYEE EXPENSES Group Salaries and wages 6,924,930 6,080,742 NSSF contributions 807,933 642,643 Other staff costs 3,419,112 1,554,793 11,151,975 8,278,178 Bank Salaries and wages 6,861,830 6,018,942 NSSF contributions 801,623 636,463 Other staff costs 3,418,962 1,554,793 11,082,415 8,210,198
70 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010
Ushs’000 Ushs’000
13 GENERAL AND ADMINISTRATION EXPENSES
Group Operating expenses 1,863,328 1,627,764 Depreciation 1,488,855 1,489,472 Premise expenses 1,643,301 1,486,747 Communication expenses 1,149,387 1,061,604 Repairs and maintenance 1,207,498 1,116,904 Fraud writeoffs 1,128,247 - Advertising & selling costs 865,399 549,205 Security 617,516 499,860 Directors’ emoluments - Executive 491,013 390,314 Other administrative expenses 628,696 418,294 Deposit protection fund contribution 491,149 372,650 Travelling expenses 290,925 275,730 Printing and stationery 323,120 377,119 Amortisation of intangible asset 354,736 384,091 Directors’ emoluments - Non-executive 295,812 176,435 Motor vehicle running expenses 380,069 270,292 Charges on accounts closed 224,161 - Auditors’ remuneration 67,000 63,044 Amortisation of operating lease prepayments 43,322 43,322 Legal and professional fees 148,083 112,925 Rent and rates 18,964 18,228 Donations and subscriptions 43,562 47,960 Commission on share purchase - 206 Bad debts write-off 2,000 - Bidding expenses 150 - 13,766,293 10,782,166 Bank
Operating expenses 1,855,072 1,624,736 Premise expenses 1,643,301 1,486,747 Depreciation 1,488,050 1,488,667 Fraud write offs 1,128,247 - Repairs and maintenance 1,207,498 1,116,904 Communication expenses 1,149,387 1,061,604 Advertising & selling costs 865,182 547,684
Orient Bank Limited 71 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
13 GENERAL AND ADMINISTRATION EXPENSES (Continued)
2011 2010 Ushs’000 Ushs’000
Other administrative expenses 628,496 413,910 Security 617,516 499,860 Deposit protection fund contribution 491,149 372,650 Directors’ emoluments - Executive 491,013 390,314 Motor vehicle running expenses 380,069 270,292 Amortisation of intangible asset 354,736 384,091 Printing and stationery 323,040 377,119 Directors’ emoluments - Non-executive 295,812 176,435 Travelling expenses 290,925 275,730 Charges on accounts closed 224,161 - Legal and professional fees 148,083 112,925 Auditors’ remuneration 67,000 60,000 Donations and subscriptions 43,562 47,960 Amortisation of operating lease prepayments 43,322 43,322 Rent and rates 18,895 18,228 Penalties & fines 2,000 - 13,756,516 10,769,178
14 TAXATION Group (a) Taxation charge Current taxation - current year 4,967,330 1,978,241 Deferred taxation credit/(charge) - current year (1,681,839) (312,480) Final tax on investments 1,044,211 743,286 4,329,702 2,409,047
(b) Reconciliation of taxation charge Accounting profit before taxation 24,517,020 11,575,362 Tax at applicable rate of 30% 7,354,430 3,472,609 Tax effect of non-deductible items (2,888,495) (1,527,448) Final tax on investments 1,044,211 743,286 Prior year under provision (1,180,444) (286,884) Deferred tax not recognised - 7,484 Taxation charge 4,329,702 2,409,047
72 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
14 TAXATION (Continued)
2011 2010 Ushs’000 Ushs’000
Bank (a) Taxation charge Current taxation - current year 4,967,330 1,978,241 Deferred taxation (credit)/charge - current year (1,681,839) Final tax on investments 1,044,211 (319,964) 743286 4,329,702 2,401,563
(b) Reconciliation of taxation charge Accounting profit before taxation 24,514,768 11,615,856 Tax at applicable rate of 30% 7,354,430 3,484,757 Tax effect of non-deductible items (2,888,495) (1,527,448) Final tax on investments 1,044,211 743,286 Prior year under provision (1,180,444) (299,032)
Taxation charge 4,329,702 2,401,563
15 CASH AND BALANCES WITH BANK OF UGANDA
Cash on hand 12,905,037 7,918,246 Balances with BOU (Cash ratio requirement) 38,606,901 34,584,405 51,511,938 42,502,651
16 HELD TO MATURITY INVESTMENTS
(a) Deposits and balances due from other banking institutions Group Deposits with other banking institutions 46,305,396 7,451,035 Balances due from other banking institutions 25,237,500 24,037,166 71,542,896 31,488,201
Bank Deposits with other banking institutions 46,297,317 7,451,035 Balances due from other banking institutions 25,237,500 24,017,220 71,534,817 31,468,255
The deposits with other banking institutions are interest bearing.
Orient Bank Limited 73 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000 (b) Government securities At amortised cost Treasury bills Face value Maturing within 90 days 13,781,600 13,496,600 Maturing after 90 days 41,145,300 43,700,000 54,926,900 57,196,600 Unearned interest (4,657,925) (2,090,884) 50,268,975 55,105,716
Treasury bonds Maturing within 90 days - 4,000,000 Maturing after 90 days 28,800,000 17,300,000 28,800,000 21,300,000 Unearned interest (4,519,518) (3,454,385) 24,280,482 17,845,614 74,549,457 72,951,330
17 OTHER INVESTMENTS Group Investment in quoted shares 10,867 11,790
Bank Equity Stock brokers Limited 80,000 80,000
18 LOANS AND RECEIVABLES Group a) Analysis of loan advances to customers by category: Term loans - staff 1,261,759 1,037,368 - other 65,384,096 70,137,559 Overdrafts 150,158,491 129,417,905 Gross loans and receivables 216,804,346 200,592,832
b) Provisions for impairment of loans and advances Specific allowance (Note 19) (520,869) 1,246,736 Net loans and receivables 217,325,215 199,346,096
74 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
18 LOANS AND RECEIVABLES (Continued)
2011 2010 Ushs’000 Ushs’000 Bank a) Analysis of loan advances to customers by category:
Term loans - staff 1,261,759 1,037,368 - other 65,384,096 70,137,559 Overdrafts 150,206,901 129,417,905 Gross loans and receivables 216,852,756 200,592,832
b) Provisions for impairment of loans and advances Specific allowance (Note 19) (520,869) 1,246,736 Net loans and receivables 217,373,625 199,346,096
Included in net loans and receivables are loans and advances amounting to Ushs 1,340,506,748 (2010 - Ushs 1,998,920,336) net of specific provisions, which have been classified as non-performing)
c) Credit Concentration above 25% of Core Capital As at 31 December 2011, the bank had no borrowers with advances or credit facilities exceeding 25% of its core capital.
d) The maturity analysis of advances to customers is as follows:
Within three months 113,899,227 105,573,155 Between three and six months 50,107,793 23,378,412 Over six months 52,845,736 71,641,265 Gross advances to customers 216,852,756 200,592,832
e) Gross advances to customers by industry composition: Trade and commerce 72,734,789 88,480,605 Agriculture 22,146,236 29,450,440 Manufacturing 14,869,601 18,185,442 Transport & communication 14,322,636 14,993,421 Building and construction 33,803,992 16,573,166 Personal, service industry and others 58,975,502 32,909,758 216,852,756 200,592,832
Orient Bank Limited 75 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000
19 PROVISION FOR IMPAIRED LOANS AND ADVANCES
At 1 January 1,246,736 1,504,349 Provision for the year - identified as Per IAS 39 (429,222) 189,484 - unidentified as Per IAS 39 49,836 109,610 Movement in interest in suspense 138,129 Prior year over provision (1,526,348) (556,707) As at 31 December (520,869) 1,246,736
20 STATUTORY RESERVE Analysis as per Bank Of Uganda guidelines Specific provisions Specific provision as per BOU guidelines 829,329 1,360,803 Balance as per IAS 39 (1,095,721) (1,511,369) At 31 December (266,392) (150,566) At 1 January (558,064) (558,064) Transfer of excess to/(from) statutory reserves - - At 31 December (558,064) (558,064)
General provisions At 1 January (2,386,446) (235,812) Transfer to statutory reserves (1,058,808) (2,150,634) At 31 December (3,445,254) (2,386,446) Total balance of statutory reserve as at 31 December (4,003,318) (2,944,510)
21 OTHER ASSETS Group Interest receivable 6,428,123 4,641,246 Deposits & prepayments 1,493,685 1,111,441 Other receivables 891,252 786,278 SWIFT shares 63,998 63,998 8,877,058 6,602,963 Bank Interest receivable 6,428,123 4,641,246 Deposits & prepayments 1,493,685 1,066,441 Other receivables 825,185 820,847 SWIFT shares 63,998 63,998 8,810,991 6,592,532
76 Orient Bank Limited Annual Report 2011 Total (39,236) (62,614) Ushs’000 9,532,956 (131,363) (144,875) (148,166) 2,346,955 8,175,652 1,489,472 2,605,782 17,306,004 19,551,109 14,995,677 9,533,761 17,306,004 ------28,500 Work In Work 808,600 415,194 255,210 854,834 Progress Ushs’000 (421,906) (1,081,544) - 28,500 ------SWIFT 156,875 156,875 156,875 156,875 156,875 Ushs’000 156,875 156,875 - - - - 76,716 155,029 395,502 256,221 Ushs’000 2,313,802 2,720,155 2,796,871 1,918,300 2,308,905 2,313,802 2,720,155 ATMs & POS ATMs - room room 3,285 7,068 Strong Strong 13,080 36,681 37,986 & safes (1,372) (3,663) 317,256 484,933 524,899 280,642 468,448 Ushs’000 317,256 484,933 - Office 26,738 (5,633) (5,653) 209,564 314,857 312,114 381,307 Ushs’000 1,548,353 2,649,111 2,990,706 1,241,872 2,063,893 Computers Computers Equipment 1,548,353 2,649,111 - - Motor 87,583 59,000 190,413 402,305 662,320 161,517 413,172 vehicles (39,236) (58,687) (69,867) Ushs’000 1,025,389 190,413 402,305 - - 50,395 172,860 185,806 106,152 (16,495) (16,499) Ushs’000 1,517,143 1,759,749 1,932,609 1,347,832 1,619,701 Computer Computer Computers Computers Equipment 1,517,143 1,759,749 - 39,856 78,928 34,995 Fixtures 845,641 794,576 100,241 147,443 (49,176) (49,193) Ushs’000 1,356,230 1,470,153 1,218,124 Furniture & Furniture 845,641 1,356,230 - - - 327,413 465,454 229,389 260,878 168,633 158,780 718,039 793,757 Ushs’000 1,977,250 2,467,517 Leasehold Leasehold improvements 327,413 1,977,250 ------211,460 Ushs’000 Buildings 2,316,865 5,773,310 5,773,310 2,105,405 5,773,310 2,316,865 5,773,310 At 31 DecemberAt 2010 1 JanuaryAt 2011 Transfer WIP from Transfer 31 DecemberAt 2010 1 JanuaryAt 2011 Additions Disposals WIP from Transfer 31 DecemberAt 2011 DEPRECIATION ACCUMULATED 1 JanuaryAt 2010 the year for Charge on Eliminated disposal 22 PROPERTY AND EQUIPMENT Group COST or VALUATION 1 JanuaryAt 2010 Additions Disposals Notes to the Financial Statements the Financial to Notes ended 31 December 2011 the year For
Orient Bank Limited 77 Annual Report 2011
Total (39,226) Ushs’000 (144,875) (148,166) 1,488,855 5,325,148 3,244,985 8,570,133 7,774,658 2,603,368 10,983,390 14,995,677 - - - - - 28,500 Work In Work 415,194 415,194 255,210 854,834 Progress Ushs’000 (1,081,544) ------SWIFT 156,875 156,875 Ushs’000 - - - 155,029 231,736 251,333 251,333 406,353 256,221 Ushs’000 2,545,538 2,308,905 ATMs & POS ATMs - - room room 7,068 Strong Strong & safes 13,080 32,899 (3,663) 350,155 174,744 174,744 167,677 468,448 Ushs’000 - - Office (5,653) 209,564 345,740 381,307 Ushs’000 1,894,093 1,096,613 1,096,613 1,100,758 2,063,893 Computers Computers Equipment - - Motor 59,000 vehicles 162,949 314,136 711,253 711,253 211,892 413,172 (39,226) (69,867) Ushs’000 - - 50,395 156,117 259,349 259,349 242,606 103,738 (16,499) Ushs’000 1,673,260 1,619,701 Computer Computer Computers Computers Equipment - - 39,856 Fixtures 102,054 947,695 522,458 522,458 510,589 147,443 (49,193) Ushs’000 1,218,124 Furniture & Furniture - - - 465,454 245,900 573,313 718,039 793,757 Ushs’000 1,894,204 1,894,204 1,649,837 Leasehold Leasehold improvements - - - - - 211,460 Ushs’000 Buildings 2,528,325 3,244,985 3,244,985 3,456,445 5,773,310 Transfer WIP from Transfer Charge for the year for Charge on Eliminated disposal 31 DecemberAt 2011 NET BOOK VALUE cost At valuation At 31 DecemberAt 2011 31 DecemberAt 2010 revaluation The valuers using open market Surveyors, Consulting a firmbasis. of independent professional as at 31 December Associated 2005 by revalued Land and buildings were assessment. surplus split of the revaluation between The leasehold land and buildings was based on directors’ reserves. the revaluation to surplus was credited Bank COST or VALUATION 1 JanuaryAt 2010 Additions Disposals 22 PROPERTY (Continued) AND EQUIPMENT Notes to the Financial Statements the Financial to Notes ended 31 December 2011 the year For
78 Orient Bank Limited Annual Report 2011 (39,226) (39,236) 9,532,956 (131,363) (477,195) 9,532,956 1,488,050 5,324,344 3,244,985 8,569,329 7,773,049 2,761,536 8,175,652 1,488,667 10,981,780 17,306,004 17,306,004 19,551,109 ------28,500 28,500 28,500 415,194 415,194 863,889 415,194 (477,195) ------156,875 156,875 156,875 156,875 156,875 156,875 156,875 - - - - - 76,716 231,736 251,333 251,333 406,353 395,502 2,313,802 2,313,802 2,545,538 2,720,155 2,720,155 2,796,871 1,918,300 - - - - 32,899 39,967 37,986 (1,372) 317,256 317,256 350,155 174,745 174,745 167,677 484,933 484,933 524,900 280,642 - - - - (5,633) 345,740 341,594 312,114 1,548,353 1,548,353 1,894,093 1,096,612 1,096,612 1,100,758 2,649,111 2,649,111 2,990,705 1,241,872 - - 87,583 190,413 190,413 162,949 314,136 711,253 711,253 211,892 402,305 402,305 662,320 161,517 (39,226) (39,236) (58,687) 1,025,389 - - - - 155,312 258,545 258,545 240,997 172,860 185,001 (16,495) 1,516,338 1,516,338 1,671,650 1,757,335 1,757,335 1,930,195 1,347,832 - - - - 845,641 845,641 102,054 947,695 522,458 522,458 510,589 113,923 794,576 100,241 (49,176) 1,356,230 1,356,230 1,470,153 - - - - - 327,413 327,413 245,900 573,313 490,267 168,633 158,780 1,894,204 1,894,204 1,649,837 1,977,250 1,977,250 2,467,517 ------211,460 211,460 2,316,865 2,316,865 2,528,325 3,244,985 3,244,985 3,456,445 5,773,310 5,773,310 5,773,310 2,105,405 At 31 DecemberAt 2010 1 JanuaryAt 2011 the year for Charge on Eliminated disposal 31 DecemberAt 2011 NET BOOK VALUE cost At valuation At 31 DecemberAt 2011 31 DecemberAt 2010 revaluation The valuers using open market Surveyors, Consulting a firmbasis. of independent professional as at 31 December Associated 2005 by revalued Land and buildings were assessment. surplus split of the revaluation between The leasehold land and buildings was based on directors’ reserves. the revaluation to surplus was credited At 31 DecemberAt 2010 1 JanuaryAt 2011 Additions Disposals WIP from Transfer 31 DecemberAt 2011 DEPRECIATION ACCUMULATED 1 JanuaryAt 2010 the year for Charge on Eliminated disposal
Orient Bank Limited 79 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000
23 OPERATING LEASE PREPAYMENTS Group COST At 1 January & 31 December 1,018,152 1,018,152 AMORTISATION At 1 January 411,564 368,241 Charge for the year 43,322 43,323 At 31 December 454,886 411,564 NET BOOK VALUE At 31 December 563,266 606,588
Bank COST At 1 January & 31 December 1,018,152 1,018,152 AMORTISATION At 1 January 411,564 368,241 Charge for the year 43,322 43,323 At 31 December 454,886 411,564 NET BOOK VALUE At 31 December 563,266 606,588
24 INTANGIBLE ASSET COST At 1 January 2,118,222 1,933,263 Additions: Computer Software 68,935 175,289 Transfer from WIP 62,614 9,670 At 31 December 2,249,771 2,118,222
AMORTISATION At 1 January 1,522,201 1,138,110 Charge for the year 354,736 384,091 At 31 December 1,876,937 1,522,201 NET BOOK VALUE At 31 December 372,834 596,021
The intangible asset relates to computer software acquired to support the bank’s operations. This software is not an integral part of the related computer hardware and has therefore been presented as an intangible asset in accordance with IAS 38, Intangible assets.
80 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000 25 TAX PAYABLE Group Balance as at 1 January 355,342 (5,630) Current tax charge 4,967,330 1,978,241 Prior year tax underprovision (355,342) (119) Tax paid - current year (4,265,092) (1,622,850) 702,238 349,642
Bank Balance as at 1 January 355,342 (2,780) Current tax charge 4,967,330 1,978,241 Prior year tax underprovision (355,342) (119) Tax paid - current year (4,262,242) (1,620,000) Balance as at 31 December 705,088 355,342
26 CUSTOMER DEPOSITS Group Demand deposits 119,407,122 116,709,395 Time deposits 177,331,555 145,737,468 Savings accounts 35,279,255 27,516,418 332,017,932 289,963,281 Sectoral analysis Banks and financial institutions 17,523,065 14,758,900 Private enterprises and individuals 240,706,437 218,851,974 Government and parastatals 73,788,430 56,352,407 332,017,932 289,963,281
Bank Demand deposits 119,419,680 116,709,395 Time deposits 177,331,555 145,737,468 Savings accounts 35,279,255 27,529,020 332,030,490 289,975,883 Sectoral analysis Banks and financial institutions 17,523,065 14,758,900 Private enterprises and individuals 240,718,995 218,864,576 Government and parastatals 73,788,430 56,352,407 332,030,490 289,975,883
Orient Bank Limited 81 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000
27 DEPOSITS AND BALANCES DUE TO BANKING INSTITUTIONS Deposits due to banking institutions 7,400,000 2,500,000 The deposits with other banking institutions are interest bearing.
28 REFINANCE LOANS APEX III 928,557 594,500 APEX IV - 2,361,172 Agricultural Loan 250,000 1,178,557 2,955,672 APEX IV These refinance loans are denominated in Uganda Shillings (Ushs) and are unsecured. They attract interest of between 4% & 5% and matured in December 2011. APEX III These refinance loans are denominated in Uganda Shillings (Ushs) and are unsecured. They attract interest of between 8% & 9% and mature in December 2013, December 2014 and December 2015.
29 OTHER LIABILITIES Group Accrued expenses 3,510,913 824,863 Interest accrued on fixed deposits 5,946,217 3,902,759 Bankers’ cheques 215,533 691,260 Margin accounts 5,550,744 3,703,131 URA collection 221,794 426,994 Statutory payments 568,563 565,738 Stale drafts 625,377 463,233 Sundry creditors 1,832,503 344,252 Advance rent lockers 29,305 20,332 Advance commitment fees 1,366,516 1,338,362 APEX interest payable 20,227 13,765 Other liabilities (40,626) 131,906 19,847,066 12,426,595
Bank Accrued expenses 3,510,913 824,863 Interest accrued on fixed deposits 5,946,217 3,902,759 Bankers’ cheques 215,533 691,260 Margin accounts 5,550,744 3,703,131 URA collection 221,794 426,994
82 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000 Statutory payments 568,563 565,738 Stale drafts 625,377 463,233 Sundry creditors 1,832,503 344,252 Advance rent lockers 29,305 20,332 Advance commitment fees 1,366,516 1,338,362 APEX interest payable 20,227 13,765 Other liabilities (55,345) 118,388 19,832,347 12,413,077
30 DEFERRED TAX ASSET Deferred income taxes are calculated on all temporary differences under the liability method using the applicable tax rate of 30%. The deferred tax asset comprises: Group Accelerated capital allowances 97,097 500,720 Deferred tax on revaluation surplus 422,848 440,467 Legal provision - (3,000) Revaluation loss on investments (1,256) 313 Provisions for loan loss (2,234,572) (970,975) Deferred tax on subsidiary not recognised (10,422) 19,341 Tax losses brought forward 10,422 (11,856) (1,715,883) (24,990)
The movement on the deferred tax (asset)/liability account is as follows:
At 1 January (32,788) 287,176 Income statement credit - current year (note 14) (1,681,839) (312,480) Tax on other comprehensive income (1,256) 314 At 31 December (1,715,883) (24,990)
Bank Accelerated capital allowances 97,097 500,720 Deferred tax on revaluation surplus 422,848 440,467 Legal provision - (3,000) Provisions for loan loss (2,234,572) (970,975) (1,714,627) (32,788) The movement on the deferred income tax asset account is as follows: At 1 January (32,788) 287,176 Income statement credit - current year (note 14) (1,681,839) (319,964) At 31 December (1,714,627) (32,788)
Orient Bank Limited 83 Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000 31 SHARE CAPITAL Authorised: 5,000,000 ordinary shares of Ushs 10,000 each 50,000,000 5,000,000 15,000- 8% cumulative redeemable preference shares of Ushs 100,000 each - 1,500,000 50,000,000 6,500,000 Authorised, issued and fully paid: 40,000,000 ordinary shares of Ushs 1,000 each 40,000,000 5,000,000
32 OFF BALANCE SHEET FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS The bank conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties. In addition, there are other off-balance sheet financial instruments including forward contracts for purchase and sale of foreign currencies, the nominal amounts of which are not reflected in the balance sheet.
Letters of credit are commitments by the bank to make payments to third parties, on production of documents, on behalf of customers and are reimbursed by customers. Letters of guarantee and performance bonds are issued by the bank, on behalf of customers, to guarantee performance by customers to third parties. The bank will only be required to meet these obligations in the event of default by the customers.
2011 2010 Ushs’000 Ushs’000
The following are the commitments outstanding at year-end Letters of credit 41,289,186 25,254,968 Letters of guarantee 18,977,666 21,213,157 Performance bonds 7,337,624 5,095,961 67,604,476 51,564,086
Non-trade contingent liabilities There were 8 outstanding legal proceedings against the bank as at 31st December 2011 (2010: 8). In the opinion of the directors, after taking legal advice from the company lawyers, the outcome of these actions will not give rise to any significant loss.
Capital commitments Authorised and contracted for 92,788 216,267
84 Orient Bank Limited Annual Report 2011
Notes to the Financial Statements For the year ended 31 December 2011
2011 2010 Ushs’000 Ushs’000 Other commitments Commitments to lend are agreements to lend to customers in future subject to certain conditions. Such commitments are normally made for fixed periods. The bank may withdraw from its contractual obligations to extend credit by giving reasonable notice to the customers.
At 31st December, these included; Approved loans not disbursed 32,310,736 24,350,437
33 RELATED PARTY TRANSACTIONS a) Related party balances Deposits from directors and shareholders 14,254,446 2,934,637
b) Related party transactions Interest: Interest paid to related parties/directors 547,693 200,370 Directors’ remuneration Directors’ fees 295,812 176,435 Other emoluments - - 295,812 176,435 Key management compensation Salaries and short-term benefits 491,013 390,314 Services rendered Rent and service charges for premises - -
34 ASSETS PLEDGED AS SECURITY As at 31st December 2011, no treasury bills (2010: Nil) were held under lien with BOU central depository system.
35 FAIR VALUE The directors consider that there is no material difference between the fair value and carrying value of the group’s financial assets and liabilities where fair value details have not been presented.
Orient Bank Limited 85
Annual Report 2011
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
88 Orient Bank Limited