In the Name of God
Annual Report For the Year Ended March 20, 2017 Financial Highlights IRR million 20171 20162 20153 20144 20135 Outstanding Loans 53,625,316 28,097,787 21,474,088 13,057,539 2,575,223 Deposits 62,781,801 34,416,163 24,914,454 14,422,913 1,141,668 Total Assets 74,544,249 41,377,823 30,717,191 21,252,583 5,590,608 Net Profit 2,023,812 1,355,526 848,516 820,029 408,081 Basic EPS 506 339 212 205 102 Guarantees 21,543,141 16,750,179 11,779,733 3,892,820 510,868 Letters of Credit 2,975,041 2,507,746 670,033 756,603 - Capital Adequacy Ratio, Basel-III Foundation-IRB (Percent) 12.6 12.8 13.8 - - Capital Adequacy Ratio, Basel-III Standardized Approach (Percent) 11.7 12.5 13.5 26.1 -
1. Year ended March 20, 2017 2. Year ended March 19, 2016 3. Year ended March 20, 2015 4. Year ended March 20, 2014 5. Year ended March 20, 2013. Middle East Bank had only five months of operation in that year The Exchange Rate of the Iranian Rial On March 20, 2017, the official exchange rate of the US dollar was: USD1 = IRR32,420.
A Note on the Iranian Calendar Iran’s official calendar is a solar calendar that starts on the first day of spring and ends on the last day of winter. The government of Iran as well as Iranian banks have adopted the calendar year as their fiscal year. This Annual Report is for the fiscal year 1395, coinciding with the calendar year 1395, that started on March 20, 2016 and ended on March 20, 2017. Message from the Chairman of the Board of Directors The conclusion of nuclear negotiations in 2015 and the gradual implementation of the terms of the agreement heralded a new era in the Iranian economy. In the Iranian year that followed, the highest rate of economic growth and the lowest rate of inflation for the past 25 years were attained. The oil production picked up very rapidly and was the predominant factor behind the 12.5 percent increase in GDP while inflation fell to 9 percent. Nevertheless, the stock exchange that had performed exceptionally well in the preceding year, presumably in anticipation of a high growth, witnessed a decline of 3.7 percentage points in its overall index and 12.1 percentage points in its price index. Meanwhile, contrary to expectations, little success was achieved in attracting foreign investments as investors remained cautious and seemingly skeptical. Concurrently, the banking system, as the main source of funding the economy, remained hungry for funds. Their efforts to attract more private savings through higher interest rates in defiance of the Central Bank regulations exacerbated the unhealthy competition among banks and other financial institutions and naturally failed to produce the desired outcome. In fact, the Central Bank had to step in to fill the liquidity gap and so the banking system’s indebtedness to the Central Bank increased by 19.2 percent while the monetary base registered a jump of 17.3 percent. Middle East Bank, however, relatively a newcomer to the loanable funds market, managed to avoid getting entangled in speculations; it followed its own projects without deviating from its strategy and was accordingly remunerated. As a matter of fact, we remained committed to the policy of high- quality services and adopted a state-of-the-art mechanism of risk management, thereby succeeded to attract low-risk and high-performance clients, which certainly contributed to our success in achieving the lowest ratio of problematic assets in the entire Iranian banking system, with our year-end profits amounting to a handsome 40 percent of our share capital, surpassing our own budgetary projection. There was also a special emphasis on the expansion of the Bank’s international activities. From the very beginning, we were focused on building up an efficient and solid infrastructure for future development, both in terms of size and diversity of services. So far, our progress has been quite satisfactory. Another source of our attention, an indispensable corollary to our predilection for the expansion of our international activities, has been keeping abreast of international standards and latest progress, particularly in matters of corporate governance, compliance, anti-money laundering, prevention financing of terrorism, transparency, internal audit, and risk management. We are proud of having been the first bank in Iran to adopt these standards extensively and comprehensively, as is reflected in our financial statements. As a matter of fact, in collaboration with the advisory services of KPMG, henceforth we are committed to present our financial statements in strict conformity with International Financial Reporting Standards (IFRS). Needless to say, none of our achievements would have been possible without extremely careful investment in our human capital, which was behind the dedication and creativity of our back-room heroes, highest quality managers, and first and foremost, our tireless CEO, Dr. Parviz Aghili-Kermani. I find it also necessary to express my sincere gratitude to the members of our Management Board and the Board of Directors. Many thanks are of course due to our shareholders and to the customers of the Bank who, through their trust and support, brought good name and offered encouragement to the Bank.
Khosrow Nayebi-Ahranjani Chairman of the Board of Directors Table of Contents
Chapter 1 Management Report 5 1. Middle East Bank’s Strategy 7 2. Shares and Shareholders 8 3. Corporate Governance 8 4. Operational Reports 13
Chapter 2 Review of Risks and Disclosure 21
1. Risk Management 23 2. Compliance 46 3. Internal Audit 48 4. Analysis of Financial Statements 50 5. Investments 55
Chapter 3 Survey of the Iranian Economy 57 1. Real Sector 60 2. Labor Market 64 3. Government Budget 65 4. Balance of Payments 71 5. Foreign Exchange Market 73 6. Monetary and Credit Policies 74 7. Prices and Inflation 80 8. Capital Market 81 9. Business Environment 85
Chapter 4 Report of Independent Auditor and Financial Statements 89 Chapter 1 Management Report
MANAGEMENT REPORT 7 Management Report Review of Risks and Disclosure
1. Middle East Bank’s Strategy Middle East Bank (MEB) aims to be the most trusted and solutions to professional individuals and businesses, while value-creating Iranian bank in the domestic and international contributing to the national economy and creating value for banking sector. It defines its mission as becoming a leading and its customers, employees and shareholders. MEB intends to most reliable financial institution, providing efficient financial achieve its goals while strictly adhering to financial ethics.
1.1 - Middle East Bank’s Business Strategy MEB operates primarily as a wholesale bank, providing • Putting into effect the projected development of human financing and investment solutions to its corporate clients, high resources in both quantitative and qualitative terms; net-worth individuals and high income earners. Accordingly, • Calibrating the Bank structure and resources to customers’ rather than focusing on proliferation of branches, MEB has been requirements; Survey of the Iranian Economy leveraging on its preeminent position in technology to deliver • Achieving sustainable and growing profitability and acceptable services to clients. These delivery channels are quite unique organic growth in all areas; in Iran, taking banking services to the offices and homes of its • Leading effective implementation of risk management, internal clients through distance banking as well as e-banking tools. audit, and compliance with domestic and international rules Following this approach, while satisfying the customers’ needs, and regulations; MEB has experienced significant economy in operating costs and • Achieving a significant growth in trade finance and international a corresponding increase in profitability. banking; Since the commencement of operations in 2012, MEB has • Developing investment banking and project financing services pioneered new standards of transparency, quality of services, through National Development Fund of Iran and Islamic and focusing on IT. In line with its mission and vision, financial instruments; MEB has adopted coherent strategies at both the business • Creating a sustainable competitive advantage in information level and operational level. MEB’s senior management is technology and e-banking tools and technologies; and confident that it will achieve all the goals set forth inits • Focusing on innovative products and services, and customized five-year business plan. solutions tailored to the needs of clients. MEB’s business strategies for the next five years are as follows: and Financial Statements Report of Independent Auditor 8 MIDDLE EAST BANK ANNUAL REPORT
2. Shares and Shareholders As of March 20, 2017, MEB has a total of 2,458 shareholders. traded shares at year ends and performance of MEB shares are The composition of shareholders, share prices and number of as follows: Composition of Shareholders Classification of Shareholders No. of Shareholders No. of Shares Percentage of Shares Individual investors with more than 1 percent share 14 982,880,727 24.5 Corporate investors with more than 1 percent share 10 606,078,960 15.2 Other individual investors 2,225 2,026,486,230 50.7 Other corporate investors 209 384,554,083 9.6 Total 2,458 4,000,000,000 100.0
24.5%
Individual investors with more than 1 percent Corporate investors with more than 1 percent 60.3% 15.2% Other individual investors
2.1. Share Prices and Transactions
No. of Share Price Value of Shares Traded Market Value Capital Year End No. of Shares Traded Trading at Year End (IRR million) (IRR million) (IRR million) Days (IRR) March 20, 2013 2,658,515,451* 2,715,241 55 4,156,000 1,039 4,000,000 March 20, 2014 825,040,266 1,126,627 221 10,272,000 2,568 4,000,000 March 20, 2015 409,085,657 842,589 229 7,776,000 1,944 4,000,000 March 19, 2016 843,689,780 2,415,505 229 12,328,000 3,082 4,000,000 March 20, 2017 717,378,577 1,814,375 228 12,215,000 2,443** 4,000,000 * Of the total transaction value in year that ended March 20, 2013, 1,934,509,000 shares with a value of IRR1,934,509 million were for the subscription of initial offering. ** According to the Board of Directors' decision of August 21, 2016, the Bank made a public announcement of capital increase from IRR4,000,000 million to IRR5,000,000 million. The value of the rights of first refusal issued at the balance sheet date was IRR1,475.
Performance of MEB Shares
Middle East Bank Ordinary Share Listed Iranian Banking Index Second Market Index
+75%
+50%
+25%
0%
-25% May 2015 July 2015 Sept. 2015 Nov. 2015 Jan. 2016 Mar. 2016 May 2016 July 2016 Sept. 2016 Nov. 2016 Jan. 2017 Mar. 2017
3. Corporate Governance MEB has fully embraced the principles of corporate governance. MEB managers realize that it is only through the regular Cognizant of the importance of the full implementation of supervision of adherence to the best practices at all levels that corporate governance and aware of international standards in they can ensure the healthy operation of the Bank and safeguard this regard, MEB’s Board of Directors has set detailed policies the interests of all stakeholders. to fully implement various aspects of corporate governance. MANAGEMENT REPORT 9
3.1. Board of Directors MEB used to be managed by a nine-member Board of Directors The board members and alternate members, along with their up to October 7, 2015, when the General Assembly decided educational backgrounds, are as follows: on having a seven-member Board plus two alternate members. Management Report
1 2 3 4 5 6 7
Khosrow Nayebi-Ahranjani (4) Rouzbeh Pirouz (6) Chairman Board Member M.Sc. Accounting, NIOC’s Advanced Institute for Accounting M.Sc. International Relations, Harvard University, USA Hossein Salimi (2) Reza Soltanzadeh (7) Vice-Chairman Board Member M.Sc. Agricultural Engineering, Utah State University, Logan, M.D., Manipal University, India
USA EMBA, University of California, Los Angeles (UCLA), USA Review of Risks and Disclosure Parviz Aghili-Kermani (3) Board Member Ph.D. Finance, University of Wisconsin-Madison, USA Javad Javadi MBA, University of Wisconsin-Madison, USA Alternate Member Amir Dadkhah (5) M.Sc. Financial Management, Shahid Beheshti University Board Member B.Sc. Business Administration, University of Tehran B.Sc. Mechanical Engineering, AmirKabir University of Technology Majid Safarian Parviz Khakpour (1) Alternate Member Board Member B.Sc. Accounting, Shahid Beheshti University M.Sc. Architecture and Urban Planning, Shahid Beheshti University
3.2. Executive Committee MEB has established an Executive Committee in accordance Dara Boushehri with Article 81 of its Articles of Association and the fourth Assistant Managing Director, Credit Division principle of the Basel Corporate Governance Principles. It EMBA, American University of Sharjah, UAE Survey of the Iranian Economy consists of the Managing Director (MD), the Deputy MD, B.Sc. Electrical Engineering, Sharif University of Technology an MD Adviser, and five Assistant MDs. The powers and Alireza Edalat responsibilities of the Executive Committee are set by the Board Assistant Managing Director, International Division of Directors. The current members’ names and educational B.Sc. Accounting, Advanced Institute for Accounting, Tehran backgrounds are briefly set forth below. Mehdi Nedjati Parviz Aghili-Kermani Assistant Managing Director, Systems Development and IT Division Managing Director Ph.D. Computer Science, University College London, UK Ph.D. Finance, University of Wisconsin-Madison, USA M.Sc. Computer Science, Staffordshire University, UK MBA, University of Wisconsin-Madison, USA B.Sc. Computer Science, University of Hertfordshire, UK Javad Javadi Majid Nourmohammadi Deputy Managing Director Assistant Managing Director, Finance Division M.Sc. Financial Management, Shahid Beheshti University M.Sc. Financial Management, University of Tehran B.Sc. Business Administration, University of Tehran
Majid Safarian and Financial Statements
Mohammad-Taghi Jamalian Assistant Managing Director, Logistics and Branch Affairs Division Report of Independent Auditor Advisor to the Managing Director B.Sc. Accounting, Shahid Beheshti University B.Sc. Economics, Shiraz University 10 MIDDLE EAST BANK ANNUAL REPORT
3.3. Advisors and Senior Managers The Executive Committee has delegated some of its powers to Mohsen Karimi senior managers who are highly professional experts in their Senior Manager, Communication Department respective fields. The list of senior managers along with their M.A. Social Communications, Azad University, Tehran educational backgrounds is as follows: Zahra Kazem-Tabrizi Azadeh Ahmadi-Kousha Senior Manager, International Treasury Department Senior Manager, Finance Department B.Sc. Economics, Shahid Beheshti University B.Sc. Accounting, Azad University, Tehran Mohammad Keshtehgar Hossein Astaneha Senior Manager, Research & Development Department Chief, Credit Operations Office M.Sc. Socio-Economic Systems Engineering, Azad University, M.Sc. Accounting, NIOC’s Advanced Institute for Accounting Tehran B.Sc. Electrical and Electronic Engineering, Sharif University of B.A. Applied Mathematics, Kharazmi University, Tehran Technology Mohammad-Mahdi Khalaji-Arab Rana Bani-Habib Senior Manager, Organization and Procedures Department Senior Manager, International Department B.Sc. Industrial Engineering, Azad University M.Sc. Banking Management, Iran Banking Institute, Tehran Ali Khalili-Sadatloo B.Sc. Accounting, Allameh Tabatabai University Advisor to the Managing Director, Legal Department Morteza Bina B.A. Law, University of Tehran Senior Manager, Risk Management Department Laleh Mehradpay Ph.D. Signal Processing Engineering, Compiegne University of Senior Manager, Information Technology Technology, France M.Sc. Socio-Economic Systems Engineering, Mazandaran M.Sc. Business Management, Rice University, USA University of Science and Technology B.Sc. Electrical Engineering, Sharif University of Technology B.A. Applied Mathematics, Amirkabir University of Technology Sahar Dadkhah Hoora Moslehi Senior Manager, Project Finance Department Advisor to the Managing Director, Business Development- East Asia M.Sc. Financial Management, Azad University MBA, ACMS School of Management B.Sc. Mechanical Engineering, University of Tehran B.Sc. Petrochemical Engineering, Tokyo Institute of Technology, Suneh Dergrigorian Japan Senior Manager, MNC Banking Department Ehsan Rahmaninia M.Sc. Finance, Shahid Beheshti University Senior Manager, Inspection and Internal Audit Department B.Sc. Business Management, Isfahan University Ph.D. Candidate, Accounting, Azad University, Tehran Mohammad-Ali Dehghani M.Sc. Accounting, Azad University, Tehran Senior Manager, Credit Department-1 B.Sc. Accounting, Economic Affairs & Finance University, Tehran M.Sc. Banking Management, Iran Banking Institute, Tehran Farzaneh Rajaei-Salmasi B.Sc. Public Administration, University of Tehran Senior Manager, Compliance and Anti-Money Laundering Farshid Eslambolchi Department Acting Senior Manager, Economic Research Department M.Sc. Computer Engineering, Sharif University of Technology M.Sc. Socio-Economic Systems Engineering, Sharif University of B.Sc. Computer Science, Amirkabir University of Technology Technology B.A. Mathematics, Tabriz University Ehsan Sheikh-Taheri Senior Manager, Logistics Department Reza Ghezipour B.Sc. Industrial Engineering, Azad University Senior Manager, Credit Administration Department M.Sc. Energy Economics, Azad University, Tehran Hedieh Tabrizi B.Sc. Business Economics, University of Tehran Senior Manager, Credit Department-2 B.A. English Translation, Azad University, Tehran Mahin Hanifeh Senior Manager, Credit Department-3 Hossein Tayefeh-Mahmoudi M.Sc. Banking Accounting, Iran Banking Institute, Tehran Senior Manager, Human Capital Department B.Sc. Accounting, Shahid Beheshti University M.A. Education, University of Tehran B.A. Psychology, University of Tehran Gholamreza Hassanalizadeh Acting Senior Manager, Legal Department B.A. Law, Azad University, Tabriz Shokouh Hosseinabadi Advisor to the Managing Director on Anti-Money Laundering and Compliance Ph.D. International Trade Law, King’s College London, UK M.Sc. International Business Law, City University of London, UK M.Sc. International Business Law, Shahid Beheshti University B.Sc. Law, Shahid Beheshti University MANAGEMENT REPORT 11
3.4. Organizational Chart Management Report Review of Risks and Disclosure
3.5. Specialized Committees In accordance with the recommendations of the Basel • Investigating capital management methods based on capital Committee on Banking Supervision, MEB’s Board of Directors adequacy positions; Survey of the Iranian Economy has set up the following specialized committees in order to • Setting limits for Bank’s risk exposures and procedures to focus on specific areas. follow in case the risk limits are breached; • Educating the Bank’s Board of Directors on various risks; 3.5.1. Risk Committee and According to the rules and regulations of the Central Bank of • Making recommendations to the Board of Directors on the Islamic Republic of Iran (CBI) and international banking internal procedure for risk management. standards such as those set by Basel-III, the Risk Committee is composed of three Board members, three Executive Committee 3.5.2. Compliance Committee members and the Senior Manager of Risk Department. The The Compliance Committee assists the Bank’s Board Risk Committee is responsible for the following tasks: of Directors in the fulfillment of its responsibilities and oversees Bank’s activities. Its main function is to monitor • Identifying, measuring, monitoring and ultimately policies and procedures to reduce the risks arising from determining methods of minimizing various risks to the Bank, financial instruments which are not conforming to the Bank’s such as credit risk, liquidity risk, market risk, operational policies. The Compliance Committee is comprised of the
risk, concentration risk in loans and deposits, legal risk, and and Financial Statements Managing Director, Advisors, two members of the Board of reputation risk; Report of Independent Auditor Directors, and the Senior Manager of Anti-Money Laundering • Creating controls and measures to mitigate and manage risks; (AML) & Compliance Department. The Compliance Committee • Creating required procedures for measuring capital adequacy; sets the risk appetite of the Bank with respect to compliance risks. 12 MIDDLE EAST BANK ANNUAL REPORT
3.5.3. Internal Audit Committee • Effectiveness of internal audit (setting up and providing the MEB’s Internal Audit Committee was set up, and its charter necessary support to the Internal Audit Department); was ratified by the Board of Directors, on December 8, • Independence and effectiveness of the decisions of the 2013, in compliance with CBI’s circular No.1172 of June independent auditor; and 21, 2007, titled Guidelines for the internal control system in • Compliance with the laws and regulations. credit institutions and Article X of the Securities & Exchange 3.5.4. Other Committees Organization’s Internal Controls Instruction approved on May 5, 2012. The Internal Audit Committee is composed of three Other MEB committees include Assets and Liabilities non-executive members of the Board of Directors, an advisor to Management Committee, Complaints Committee, Product the Managing Director, and a banking expert. This Committee Development and IT Committee, Human Resources and assists the Board of Directors in its supervision of corporate Compensation Committee, Marketing and Public Relations governance, financial reports, internal controls, internal audit, Committee, Property Committee, Security Steering Committee, and independent auditors’ procedures. MEB’s Internal Audit Credit Committees (at the three levels of Supreme, Primary Committee held ten meetings in 2016. The objective of this and Branch) and Overdue Loans Follow-up Committee. Committee is to ensure the following: Membership of each committee includes at least one member • Effectiveness of the strategy, risk management, and internal of the Board of Directors. Information on various committees, control procedures; including their membership and the number of meetings held in • Transparency in financial reporting; the year under review, is presented in the table blow.
Specialized Committees and their Membership and Number of Meetings Held in the Year under Review
Committee Khosro Nayebi-Ahranjani Parviz Aghili-Kermani Amir Dadkhah Rouzbeh Pirouz Seyed-Hossein Salimi Reza Soltanzadeh Parviz Khakpour Javad Javadi Majid Safarian Mohammad-Taghi Jamalian Mehdi Nedjati Majid Nourmohammadi Dara Boushehri Alireza Edalat Total Number of Members Number of Meetings Held in the Year under Review
1. Risk 6 6 2. Internal Audit 4 10 3. Compliance 4 2 4. Supreme Credit 6 84 5. Assets and Liabilities Management 6 5 6. Overdue Loans Follow-up 3 47 7. Complaints 3 4 8. Product Development and IT 5 0* 9. Primary Credit 3 93 10. HR and Compensation 3 5 11. Marketing and Public Relations 5 10 12. Property 4 11 Total 4 6 3 2 3 3 3 7 5 6 3 1 4 2 * Although formal meetings were not held during the year under review, there were routine meetings between Managing Director and Assistant Managing Directors for the development of new products and management of assets and liabilities of the Bank throughout the year.
3.6. Corporate Governance Departments In order to effectively and efficiently implement Corporate Audit Department, whose responsibilities are elaborated in the next Governance, MEB has established a Risk Management chapter. Department, an AML and Compliance Department, and an Internal
3.7. Disclosure and Transparency In accordance with CBI’s circular No. MB/1172, and in and transparency on its website. Details of the operations and line with Article XII of the Basel Corporate Governance transparency of financial and non-financial issues are presented Principles, MEB publishes details of its policies on disclosure in the next chapter. MANAGEMENT REPORT 13
4. Operational Reports
4.1. Human Capital Department Management Report
4.1.1. Human Capital Mission staff in order to enable them to create value for the Bank; The missions of the Human Capital Department are: • Talent acquisition and succession planning for the key • Recruiting and maintaining competent human capital and positions; and empowering them to carry out their responsibilities efficiently; • Ensuring and improving the mental and physical health of the Review of Risks and Disclosure • Training and expanding the capacity and capabilities of the staff and creating a lively spirit. 4.1.2. MEB’s Human Capital Structure
The Number of MEB Employees Year ended March 20, 2015 Year ended March 19, 2016 Year ended March 20, 2017 Headquarters 154 171 188 Tehran Branches 88 104 106 Branches in Other Provinces 40 51 55 Total 282 326 349
Distribution of Employees by Various Criteria
B B Survey of the Iranian Economy
Post High School Diploma Degree
B B and and Financial Statements Report of Independent Auditor 14 MIDDLE EAST BANK ANNUAL REPORT
4.1.3. Training and Empowerment training management system based on ISO10015, to carry on Staff training is a key priority of Human Capital Department, all the training procedures; indispensable for achieving the Bank’s goals. For this reason, • Designing and administering online exams; MEB tries to provide appropriate facilities for self-study, in- • Managing training system and updating the internal portal person, and virtual trainings. to promote self-study culture and sharing knowledge and MEB’s important training activities in the year under review experience; • Arranging for two branch managers to attend online courses included: of American Bankers Association on branch management; • Arranging 131 courses for 889 staffers, totaling 13,440 person- and hours; • Evaluating the effectiveness of training courses using the • Planning and conducting 13 in-house courses on general and Patrick Model for 13 in-house courses and workshops. international banking, financial analysis, and information technology; 4.1.4. Staff Welfare • Designing and running 28 training programs by external During the year under review, the Human Capital Department: institutions on audit and finance, international banking, • Granted 39 housing loans, 14 marriage loans, 4 auto purchase risk, compliance, anti-money laundering, human capital loans and 3 personal loans to staff; development, and other related seminars; • Facilitated healthcare for the Bank and affiliated companies • Organizing and holding online virtual programs on (MEB’s Brokerage Firm, Currency Exchange, and compliance and anti-money laundering for branches and Information Technology Companies), staff and their families headquarters employees; through MEB’s healthcare fund; • Arranging an educational program on International Financial • Arranged regular medical tests to monitor health conditions Reporting Standards (IFRS) for Finance and Internal Audit of new employees; Departments in collaboration with Professional Accountants • Provided life and casualty insurance coverage for employees; Center of Training (PACT); and • Arranging for four employees to attend the CFA Program • Facilitated access to appropriate sport facilities for employees. Exam Levels I and II; • Conducting Professional Ethics workshops for branch 4.1.5. Other Activities managers and their deputies; Other activities of the Human Capital Department included: • Holding the first phase of English language courses for • Evaluating the performance of the staff and managers in branches (71 courses) and headquarters employees (19 order to enhance their performance; courses); • Granting credit cards to the Bank employees; • Arranging for an MEB executive manager to attend the • Providing job standards and descriptions; EMBA program organized by the IBS Institute in cooperation • Upgrading the Bank’s Employee Time and Attendance with Alto University of Finland; System; • Creating an interactive and dynamic environment between • Improving the recruitment system on the Bank’s website; and staff and training them by using an intelligent software of • Providing staff with property, fire, and accidents insurance.
4.2 - International Division
The International Division of MEB in its initial years of performed well in the issuance and receipt of import counter- formation was working to establish solid foundations in order guarantees against permitted Letters of Guarantee. Considering to be able to conduct higher volume of business aligned with MEB’s good relations with its correspondent banks, issuing the vision of the Bank. The focus on offering superior services international Letters of Guarantee will have a bright future to importers resulted in an increase in the Bank’s market share. once current limitations and sanctions are removed. The In spite of international limitations and others imposed by CBI International Division, contrary to the market practice, has regarding the issuance of certain Letters of Guarantee, MEB has prioritized quality over quantity in establishing correspondent MANAGEMENT REPORT 15 banking relationships and has concentrated on limited number • Developing and improving MEB’s Treasury Services to enter of correspondents with higher value of business. Among other into the international arena; criteria in selecting new correspondents, the financial health, • Continuing the expansion of the correspondent banking size of the distribution network, variety of services and currency network in key countries based on customers’ demand; accounts are taken into account. The most important initiatives • Obtaining foreign currency credit lines with foreign financial to be carried out in the coming year include: institutions in line with country’s development policies; and • Developing or upgrading the present system to the latest • Planning establishment of branches in key foreign countries. existing trade finance systems; The performance of the International Division in various • Completing the product range in trade finance and offering categories is displayed in the table below: export Letters of Credit and the associated products/services; Management Report
Volume of Different Business Activities (IRR million)
* Review of Risks and Disclosure
* National Development Fund of Iran
4.3 - Credit Division Survey of the Iranian Economy
Based on MEB’s strategy of wholesale banking, relying on • Continuous monitoring of customers’ financial standing and limited network of branches and being pioneer in corporate credit rating; and banking services, MEB’s Credit Department has focused its • Providing specialized banking services as a competitive activities within the following framework: advantage in order to increase flexibility to serve target
• Corporate Relationship Management; customers. and Financial Statements
• Close collaboration with corporate clients to understand As a result of MEB’s corporate banking strategy, credit Report of Independent Auditor their financial structure and meet their short-term financial decision-making process and credit committees are structured requirements by providing a wide range of financial solutions; in a centralized manner and located at MEB headquarters. 16 MIDDLE EAST BANK ANNUAL REPORT
MEB’s Credit Department is focused on providing short-term of facilitating all credit facets of a portfolio of their corporate finance for corporate clients in the form of credit lines for clients, ranging from marketing to preparing credit proposal working capital facilities, trade finance, letters of credit and and enforcing credit approvals. bank guarantees. MEB’s Credit Administration Unit caters for the vast Credit Department consists of three Credit Units and a Credit administration requirement of the Department. Administration Unit. MEB’s Credit Units communicate with A summary of the Credit Department activities in the year their corporate clients through a group of experienced and well- under review is presented below: educated Corporate Relationship experts. They are in charge (IRR million) Loan Bank Guarantee Letter of Credit Year ended Year ended Year ended Year ended Year ended Year ended March 19, 2016 March 20, 2017 March 19, 2016 March 20, 2017 March 19, 2016 March 20, 2017 Approved Utilized Approved Utilized Approved Utilized Approved Utilized Approved Utilized Approved Utilized 31,641,577 27,720,647 79,314,398 54,700,194 21,433,207 16,750,179 50,380,030 21,543,141 8,896,378 2,507,746 34,051,773 2,975,041
A key responsibility of the Credit Department is to continuously • Attestation of audited financial statements of the Company monitor the customers’ financial standings and credit ratings. by the Iranian Association of Certified Public Accountants; Credit Department is required to strictly follow its client • Automated process to get customers’ risk rating from MEB’s monitoring process in view of the current local, regional, and Risk Unit; international economic situation and non-performing loan • Automated process of periodically inquiring from MEB’s (NPL) problems of the banking system, by focusing on the Compliance & AML Unit, and continuous supervision of following salient points: customers’ activities in view of Anti-Money Laundering and • Know Your Customer "KYC"; Countering of Financing of Terrorism provisions; • Customer Due Diligence "CDD"; • Sending request for loan disbursement, issuing and extending • Enhanced Due Diligence "EDD"; and bank guarantees and LCs, considering MEB’s KYC and • Know Your Customer’s Customer "KYCC". CDD framework for customer and its beneficiaries; • Ability to define members of a single customer group 4.3.1. Credit Application and Relationship and MEB-related clients in order to comply with CBI’s Management (CARM) System provisions to "Large Loans and Commitments" and MEB has implemented a Corporate Relationship Management "Individuals Affiliated to the Bank"; model to provide specialized banking services and increase • Automated system for informing due-dates of loans, flexibility and better serve its target market. In this method each commitments and credit lines to the clients; corporate customer is linked with a Corporate Relationship • Archiving documents of approved financial statements and Executive. tax payment inquiries; In order to facilitate customer relationship and simplify • Producing reports of customers’ accounts and deposited procedures, MEB has designed, implemented and deployed checks for managerial and supervision purposes; the Credit Application and Relationship Management System • Producing reports of overdue loans and NPLs; (CARM). This paperless system is designed to deal with all • Producing reports of customers’ standings with other banks credit activities from the early stage of initial applications, to exercise constant supervision of customers’ credit limits the gathering of customers’ accounts information, validation and avoid diversion of funds through weekly inquiry from processes and the credit approval process. CBI; and CARM has effectively removed all the barriers such as access • Automated system for calculating customers’ risk ratings. time and geographical limitations of communicating with In the coming year, it is planned to add several new services to customers, and also the boundaries of supervision on customers’ the CARM system, including: accounts, loans and credit lines. • Online preparation of all relevant contracts for loan The salient features of CARM are detailed hereunder: disbursements and bank guarantees; • Sending requests and organizing credit proposals based on • Online processing of clients’ applications for utilizing all MEB’s KYC and CDD framework; credit lines such as loan disbursement, issuing and extending • Completing, uploading and sending customers’ documents bank guarantees and LCs; and into the system (documents of company registration and • Implementation of an automated report-generating module identification documents of board of directors, senior with different access levels for internal and external use. managers, guarantors, etc.); MANAGEMENT REPORT 17
4.4 - Investment Banking Division Management Report
Increasing revenues from non-interest sources by undertaking would be recommended to NDF for final approval. an acceptable level of risk was an important goal for MEB in In advanced economies, medium-term financing comprises the year under review. Increased competition among domestic a significant part of corporate debt portfolio and generally banks and a dramatic reduction in interest income for domestic exceeds bank loan financing. Advising domestic companies on banks generally underscore the importance of non-interest the advantages of utilizing debt and accessing the potential that income revenue sources. During the year under review, MEB’s debt markets offer is a primary goal for MEB. Considering this
Investment Banking Division (IBD) concentrated on offering market’s huge untapped potential, MEB offers its clients a wide Review of Risks and Disclosure medium and long-term financing products consistent with the range of services ranging from advisory services to underwriting Bank’s focus on increasing non-interest income. debt issuances with the goal of minimizing the cost for our IBD primarily finances green-field projects, expansion client. Currently, debt financings are relatively expensive. projects, equipment purchases, capital goods and technical and In the year under review, total amount raised by private engineering services by providing services including: firms from debt market was relatively small (approximately • Granting foreign exchange facilities to export-oriented IRR13,662 billion, of which IRR2,000 billion was underwritten projects from NDF based on MEB’s agency contract with by MEB). To facilitate the use of debt securities markets by NDF; private companies, MEB has initiated and is pursuing various • Extending facilities from established foreign credit lines; proposals with the Securities & Exchange Organization in the • Extending Export Credit Agency (ECA) covered facilities; hope of improving the use of this market. • Providing syndicated loans; Several ECAs have stated their interest to start extending • Underwriting debt securities; services to Iranian entities as Iran’s conditions in the wake of • Financing real estate development projects by setting up trust JCPOA and recent developments in commercial relationships accounts; and with other countries have led to reductions in the country’s • Providing advisory services such as financing, valuation and perceived risks. Such services include issuing insurance
restructuring. policies on supplier credit facilities, buyer credit facilities and Survey of the Iranian Economy IBD has extended funded facilities of USD500 million from discount of letters of credit. IBD has initiated the operational NDF’s resources to two large oil and gas projects to develop process of utilizing these services in cooperation with several joint oil and gas fields of Iran. IBD has also extended credit ECAs for a number of eligible projects. facilities totaling approximately USD60 million to small and IBD also provides loan syndications when the amount of a medium-sized projects through its agency contract with NDF. requested facility exceeds the limits set by CBI and when a Considering MEB’s policies and obligations with respect to risk-sharing policy is preferred. MEB manages the syndication the prudent use of NDF’s resources (which insures that NDF’s process with other Iranian banks and forms a syndicate based on resources are channeled to the best possible and most robust a comprehensive syndication agreement. This approach benefits projects), the Bank conducts an in-depth due diligence to ensure the banks in both sharing the risk and delivering services to that NDF’s funds are spent on the best available projects possible large customers without causing liquidity constraints or capital in order to strengthen the economy of Iran. Before funding adequacy issues. an NDF project, IBD first conducts a preliminary review of In addition to the services mentioned, MEB offers products the project to ensure compliance with various regulatory and such as trust accounts for real estate development projects contractual requirements. If a project is eligible and clears the which decrease financing costs for projects and provide
Bank’s initial due diligence process, IBD then conducts further greater confidence to investors (those who have pre-purchased and Financial Statements comprehensive due diligence on the project’s sponsors and its the units) with respect to the use of funds committed. Use Report of Independent Auditor economic, technical, financial and environmental feasibility. If of trust accounts will likely lead to additional financings of the project is approved by the Bank’s credit committees, then it construction and industrial projects. MEB, based on successful 18 MIDDLE EAST BANK ANNUAL REPORT experiences of foreign banks, has offered this service for the active project being financed by this service during the year first time in Iran to finance real estate projects by pre-sale. Trust under review. services allow pre-purchasers of real estate assets to deposit IBD also provides its customers with various advisory services installments in trust accounts administered by the Bank which to address their financing, operational and structural needs and will in turn disburses payments to developers. Disbursement difficulties. The Bank believes that purposeful consultancy can by the Bank to developers takes place from this designated play a meaningful role in correction of financial structure of the account under the Bank’s control and supervision on the basis firms. Considering the eagerness of foreign investors to enter of predetermined milestones. Developers and contractors, Iran’s market in post-JCPOA era, especially in manufacturing therefore, gain certainty as to access to capital of the project and projects, IBD has advised several foreign investor groups in pre-purchasers gain certainty on accurate and sound use of pre- various fields, which the Bank hopes will result in increased sale proceeds in the project. MEB will pay pre-purchasers their non-interest income for MEB and the attraction of much needed principal investment with an agreed-upon interest if a contract foreign investment to help further develop Iran’s economy in is not fulfilled by the developer. Considering stagnation of real the near future. estate market in the past year, there were only a limited number of requests and formal applications for this service, with one
4.5 – MNC Banking Department
In the first half of the year under review, Multinational Protection Act (FIPPA) license for exchanging the investment Corporations (MNC) Banking Department was established with funds at free market rate by MEB; two main goals: attracting active multinational corporations • Opening escrow account in merger and acquisition contracts; inside Iran and those which are about to enter the market. • Opening bank accounts and offering e-banking services; This Department focuses on MNC’s needs and vies to offer the • Advising on international banking services including fund highest international and domestic services to its customers. transfers; and Furthermore, MEB offers a widespread network of products and • Offering short term and long term financing solutions. services to this group of clients, even including their suppliers MNC Banking Department, in cooperation with other units and and customers. subsidiaries of the Bank has: In this context, MNC Banking Department undertakes to act • Attracted more than 60 multi-national corporations; as a channel of communication between the customers and • Helped customers bring more than EUR249 million into Iran; executive units or subsidiaries according to the customer’s and requirements. • Signed escrow account contracts for merger and acquisition The foremost services this Department presents include: agreements worth EUR230 million. • Obtaining the required Foreign Investment Promotion and MANAGEMENT REPORT 19
4.6 - Branch Affairs Department Management Report
MEB branches are either cash branches or non-cash branches. 4.6.2 - Credit Card Issuing Cash branches are customary bank branches which provide usual CBI’s circular No. 168811 authorized MEB to issue credit cards. banking services. MEB has 13 cash branches in Iran. Non-cash The credit card applicant is examined by the branch and in some branches are new types of bank branches first established in cases by headquarters. There are three types of credit cards in Iran by MEB in 2016. This type of branch operates like cash terms of the credit amount: Gold, Silver, and Bronze. branch except for accepting and paying cash, which is paid out to customers through a corresponding bank. Moreover, 4.6.3 - Other Services Review of Risks and Disclosure non-cash branches are located at commercial centers and provide In cooperation with three main payment service providers, mobile banking services to clients. MEB has 3 non-cash branches MEB offers POS machines for clients in Iran. MEB is also in Iran. able to launch internet payment gates at customer’s request. MEB’s Branch Affairs Department offers the following services. Since 2016, MEB has been installing POS machines at various 4.6.1 - Mobile Banking Services locations on demand. Mobile banking services are among the special services MEB 4.6.4 - Service Quality Management provides to its high net-worth customers. Currently, 413 retail As a customer-oriented bank, MEB regularly carries out and corporate clients receive this type of service and 33 percent customer surveys to monitor and ensure costumer’s satisfaction. of MEB’s resources are covered by mobile banking customers. Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 20 MIDDLE EAST BANK ANNUAL REPORT
4.7 - Information Technology Department
During the year under review, the Information Technology • Central Bank verification and validation systems for various Department has maintained and supported MEB’s core banking banking applications; and other auxiliary and periphery systems with an availability • Chakavak system (electronic check clearing); of over 99.9 percent around the clock. • AML system; The Information Technology development teams have • Compliance system; developed a number of systems during the period under • Credit card management system; review and also enhanced, improved and modified a number of • Internet and mobile banking systems; operational systems. These include the followings: • A number of business intelligence applications; • Payam system (phase 1); • Regular upgrading of the main and backup data centers; and • Rial-based currency trade finance system; • Formation of the Security Operations Center (SOC). • Bulk payment system (Paya); • Judiciary court rulings system on banking clients; Chapter 2 Review of Risks and Disclosure
REVIEW OF RISKS AND DISCLOSURE 23
1. Risk Management Management Report
Middle East Bank (MEB) continued building and enhancing disclosure and market discipline matters for the current reporting its information technology infrastructures for risk management period. Although CBI has not yet issued guidelines on capital according to Basel-III requirements. Central Bank of Iran (CBI) adequacy or liquidity ratios. MEB (conforming to Basel-II or Review of Risks and Disclosure has taken major steps to bring Iran’s banking regulations in Basel-III accords) voluntarily reports its capital adequacy and line with the latest Basel accords and International Financial liquidity ratios according to the latest guidelines released by the Reporting Standards (IFRS). The CBI has emphasized Basel Committee on Banking Supervision (BCBS) in addition implementation of IFRS particularly for matters related to to current CBI rules.
1.1 - Risk Review 1.1.1 - Risk Highlights III requirements for identifying risks through risk inventory MEB manages risk from two perspective: “Regulatory” process, risk appetite framework, risk bearing capacity, Internal perspective and “Internal Economic” perspective. The Capital Adequacy Assessment Process (ICAAP), Internal regulatory perspective is designed to ensure compliance with Liquidity Adequacy Assessment Process (ILAAP) and stress CBI regulations, Basel-III requirements and the Bank’s internal testing. MEB implements the principle of three lines of defense rating methodologies. The internal economic perspective is in order to achieve its goals of risk management. intended to establish policies and processes according to Basel- Table 1 illustrates some highlights of MEB’s risk profile.
Table 1- Risk Highlights Survey of the Iranian Economy Select Risk Ratios as of March 20, 2017 Percentage Doubtful Loans /Total Loans 0.5 Capital Adequacy Ratio Basel-III Foundation-IRB 12.6 Capital Adequacy Ratio Basel-III Standardized Approach 11.7 Liquidity Coverage Ratio (LCR) 77.2 Net Stable Funding Ratio (NSFR) 97.3 Basel-III Leverage Ratio 8.4 High Liquid Assets1 / Total Deposits 6.9* (High Liquid Assets1 + Regulatory Deposits) / Total Deposits 13.9* High Liquid Assets/Total Deposits except NDF2 9.3* (High Liquid Assets + Regulatory Deposits)/Total Deposits except NDF2 18.7* Loans / Total Assets 71.9
Loans / Deposits 85.4 and Financial Statements
1. Cash and Cash Equivalents + unencumbered due from other banks+ bonds + short-term liquid investment Report of Independent Auditor 2. National Iranian Oil Company has guaranteed loans financed by National Development Fund. Therefor, MEB is not exposed to liquidity risk due to National Development Fund. * Overnight Interbank Loans are considered as encumbered due from banks and financial intuitions, in the calculations and are not added to High Liquid Assets Assuming otherwise these liquidity ratios are 13.3, 20.2, 17.9, and 27.3 percent, respectively, top down in the table. 24 MIDDLE EAST BANK ANNUAL REPORT
Graph 1 shows the share of economic capital for credit risks, value at risk model with a capital multiplier of 6 times standard market risks and operational risks. The measurement of deviation (beta distribution and 99.5% confidence level). Graph economic capital for clients’ credit risks is based on historical 1 and its associated table show the estimated economic capital measurement of probability of default (PD) and loss given for different risk groups. Graph 2 and its associated table show default (LGD) except for that portion of credit risk that is due the estimated economic capital compared with net exposures. It to financing of projects through National Development Fund should be noted that one is effectively taking into consideration (NDF) and guaranteed by government entities. The PD-LGD the fat tail that may result from loss of diversification effect in economic capital is estimated based on a 99.5% confidence level stressed conditions by having capital multiplier 6 times standard with a capital multiplier of 6 times the standard deviation based deviation. Table 2 describes respectively from the left the on a beta distribution with significantly fatter tail than normal exposure types, the economic capital assessment methodology, distribution. The measurement of economic capital for NDF amount of net exposure, corresponding risk weights, estimated projects, interbank loans, interest rate risk and operational risks economic capital, economic capital to exposure ratio, and the are based on standardized models and risk weights for a capital share of economic capital compared to the total capital (Tier 1 adequacy ratio of 13%. The measurement for economic capital plus Tier 2) for each exposure. of market risk due to short term equity investments is based on Please see section 1.3 (Risk Bearing Capacity) for more detail.
Graph 1- Share of Economic Capital for Risk Groups
Graph 2 - Economic Capital vs. Exposure REVIEW OF RISKS AND DISCLOSURE 25
Table 2 - Data for Graphs 1 and 2 Risk Weights (driven from Capital Share of Measurment Net Capital to Risk simulation based on Net Economic Method Exposure Net Exposure based on PD Exposure Capital & LGD) Credit risk - rated incorporated clients 28,873,753 107% 4,026,778 13.95% 52.8% Credit risk - unrated incorporated clients Historical 3,676,075 131% 625,839 17.02% 8.2% Credit risk - unrated natural persons PD-LGD 3,108,498 69% 279,511 8.99% 3.7% Credit risk - financial institutions methodology 1,104,577 57% 81,356 7.37% 1.1%
Credit risk - off-balance sheet items 7,168,661 70% 652,348 9.10% 8.6% Management Report Credit risk - Interbank Loans 6,310,934 20% 164,084 2.60% 2.2% Standardized Credit risk - projects financed by NDF & CBI 17,803,579 20% 462,893 2.60% 6.1% risk weight Market risk - interest rate risk 3,286,489 24% 102,538 3.12% 1.3% Basel-III standardized Operational risks - 241,000 3.2% measurement approach VaR Market risk - equity 407,446 159% 84,368 20.71% 1.1% methodology Long Term Investment in Financial Institution 258,404 250% 83,981 32.50% 1.1% Due from Subsidiaries 165,504 100% 21,516 13.00% 0.3% Other Receivables Standardized 665,828 100% 86,558 13.00% 1.1% Tangible Fixed Assets risk weight 2,006,126 100% 260,796 13.00% 3.4% Intangible Assets Excluding Goodwill 119,868 100% 15,583 13.00% 0.2% Other Assets 1,861,632 100% 242,012 13.00% 3.2%
Total of measured risks 7,431,161 97.5% Review of Risks and Disclosure Available capital for other risks 193,430 2.5% (Model, reputation, etc.) Equity 7,624,591 100%
1.1.2 - Risk Strategy Summary 1.1.3 - New Basel-III Requirements MEB’s risk strategy follows its basic rules and goals of steering, According to the latest BCBS rules, banks should be able principles of risk management, risk management structure and to estimate their economic capital and the adequacy of their processes, risk bearing capacity, risk limits, and capital and liquidity position based on risk exposures and should have liquidity management . processes in place in order to reliably estimate their capital MEB defines itself as a corporate bank, providing financing and liquidity adequacy. Processes are called Internal Capital services to ongoing businesses for their working capital needs. Adequacy Assessment Process (ICAAP) and Internal Liquidity Our loans mostly cover short term needs of our customers, Adequacy Assessment Process (ILAAP). MEB has strengthened usually payable in three months and reusable up to one year. its corporate governance in order to comply with these rules. Survey of the Iranian Economy Longer-dated financing or project finance is only provided Corporate Governance in MEB follows the international when the viability of the project passes credit committee’s standard of “Three Lines of Defense”. All of MEB’s risk stringent requirement and funding is provided by the National bearing units are referred to as the first line of defense. Development Fund (NDF) an associated guarantee. Larger These units are owners of risks and are responsible for the projects may also be funded trough, a syndication of banks. proper management of the risks their activities generate. Risk MEB’s strategy is to minimize market risks related to its equity Management function and Compliance Management function share holdings and so therefore commits no more than 0.5% of are referred to as “Second Line of Defense”. Risk Management its assets in a diversified marketable equity securities portfolio. function consists of Risk Committee (a Board sub-committee), The Bank’s risk strategy is formulated based on the business and the Risk Management Department headed by Senior Risk strategy, risk bearing capacity and risk appetite. Manager. Risk Management function oversees the risk taking The Board oversees implementation of ICAAP and ILAAP. The activities, imposes limits on risk exposures and interfaces with Risk Management Department regularly reports and update the first line of defense when the risk limits are breached or (if necessary educates) the Board with concepts of economic risk exposures are not acceptable. The Senior Risk Manager capital and capital adequacy measurement as well as assisting regularly reports the status of risk exposures, the risk limit the Board developing its supervisory processes on capital breaches, changes to the risk bearing capacity of the Bank to adequacy and liquidity adequacy, ICAAP and ILAAP. It is the Risk Committee and to the Board. and Financial Statements Report of Independent Auditor expected that the elaboration and implementation of ICAAP MEB’s Board has approved ICAAP, and Internal Liquidity and ILAAP will be completed by mid-2018. Adequacy Processes ILAAP to manage and control risk exposures affecting capital adequacy and liquidity. 26 MIDDLE EAST BANK ANNUAL REPORT
The Internal Audit Department (referred to as the “Third Line Department” to create APQC. Properly documented and Board of Defense”) audits all the units including Risk Management approved processes are finally submitted to Risk Management and Compliance Management. Internal Audit function Department to conduct risk inventory process. The team for independently reports to the Board as compliance matters. identifying and assessing all risks and controls is referred The Risk Management Department’s activities include to as RCSA Team and consists of an expert or experts from 1- preparing risk inventory, 2- preparing risk appetite, 3- each department being analyzed and risk analysts from Risk developing risk strategy, 4- developing processes required to Management Department including an operational risk analyst implement MEB’s risk strategy, 5- internal evaluation of capital and credit, market and liquidity risk analysts. The RCSA Team adequacy and liquidity, 6- evaluating the capital and liquidity meets to identify and assess risks and relevant controls for each plans of the Bank, 7- developing stress test models for capital section, or department. The identified risk and controls must adequacy and liquidity, 8- reporting risk status to the Board and be confirmed by the head of the corresponding department 9- publishing transparent public reports on risk management and the Senior Risk Manager. The RCSA Team determines practices of the Bank. the frequencies and severities of the identified risks. Risks are divided into two classes: material and non-material risks. The 1.1.4 - Risk Inventory materiality is determined based on frequency of occurrence and Risk inventory is a risk identification and assessment process severity of loss for each identified risk. The residual risks those whereby risks are identified and assessed at all levels of the that the Bank is willing to accept after the mitigating controls Bank. MEB’s Risk Inventory includes credit risks, market risks, are applied to material risks. operational risks, liquidity risks, concentration risks, legal and compliance risks, and reputational risks. 1.1.5 - Risk Appetite Risk Inventory provides a general overview of the Bank’s Determining the Bank’s risk appetite follows the risk inventory risks (Risks Profile). Risk Inventory process specifies the process. Risk appetite determines the limits and tolerance levels sub-processes for risk identification, risk assessment, risk of risks with respect to capital adequacy, liquidity adequacy materiality, and measuring risk controls. The risk assessment and profitability conditions. The Board and the Bank’s Senior processes follow RCSA methodology. Management ultimately define and approve Banks’ risk appetite. Processes, sub-processes, activities and sub activities of each The board is responsible for setting the acceptable limits and is department and the Bank’s branches are documented according responsible for monitoring the implementation and compliance to a model called American Productivity and Quality Center of units with the limits set by risk appetite. (APQC). Managers and experts from the risk taking departments MEB’s risk limits are set forth in Table 3 as bellow: cooperate with risk analysts and “Organization and Methods
Table 3 - MEB Risk Limits Risk Limit (%) Indicator Safe Caution Red Zone Capital Adequacy Capital Adequacy Ratio – Basel-III standard model > 13/0 > 10/5 < 10/5 CET1 % - Basel-III > 10/0 > 8/0 < 8/0 Capital Adequacy/ Economic Capital > 120/0 > 100/0 < 100/0 Credit Risks Largest single customer / Core Tier 1 < 10/0 < 20/0 > 20/0 Groups’ Accumulative Loans / Core Tier 1 < 10/0 < 20/0 > 20/0 Total of first 20 significant customers Loans/ Total Loans < 20/0 < 35/0 > 35/0 Each Industry Total Loan / Total Loan < 10/0 < 15/0 > 15/0 Non-Current Loan / Total Loan < 2/0 < 5/0 > 5/0 Expected losses / Total Loan < 2/0 < 3/0 > 3/0 Liquidity Risks Total Loan / Total Deposit < 80/0 < 85/0 > 85/0 Highly liquid assets and Regulatory Deposit/ Deposits > 25/0 > 20/0 < 20/0 LCR – Basel-III > 110/0 > 100/0 < 100/0 NSFR – Basel-III > 110/0 > 100/0 < 100/0 Market Risks Short-Term Equity Investment / Total Asset < 1/0 < 1/5 > 1/5 Required Capital for short-term Equity Investment / Core < 2/0 < 3/0 > 3/0 Tier 1 – Basel-III Risk Weight of short-term Investment according to Basel-II < 150/0 < 300/0 > 300/0 based on VaR REVIEW OF RISKS AND DISCLOSURE 27
1.1.6 - Developing Risk Strategy The Board is kept informed by the Risk Management Department The Bank’s risk strategy is formulated based on the business which regularly familiarizes the Board with concepts of strategy, risk bearing capacity and risk appetite. The Board economic capital and capital adequacy measurement as well reviews and approves the risk strategy in the last quarter of as assisting the Board developing its supervisory processes on each year for the following year. All risk bearing departments capital adequacy and liquidity adequacy (ICAAP and ILAAP). are required to report regularly the status of compliance with It is expected that the implementation of ICAAP and ILAAP the limits set for identified risks. Risk strategy employs two will be completed by mid-2018. important tools for ensuring its effectiveness: Economic Capital 1.1.9 - Planning for the Capital and Liquidity of the and Risk Adjusted Return on Capital (RAROC). Economic Bank capital is the amount of capital assigned to cover unexpected losses due to risk-bearing. RAROC measures the economic Given its business strategy and risk strategy, the Bank targets a Management Report value of a risk bearing activities. Activities that have RAROC capital adequacy ratio of at least 13% according to the Basel- higher than cost of capital add economic value and these that III standardized model. Therefore, the Bank raised its capital do not lose value. Hence, measuring economic capital and risk raising from IRR4,000 to IRR7,783 billion funded by retained adjusted return are important tools for controlling compliance earnings and capital market. In addition, Bank plans to add to with the risk strategy and measuring performance in order its capital at least IRR1,000 billion to its capital from retained to encourage activities that add economic value. The Bank earnings or 50% of retained earnings for the foreseeable future. has now built the required infrastructure to measure RAROC In the event of the expansion of the debt market in Iran, the for different risk bearing units and is in the process of its Bank may use new instruments such as convertible bonds to implementing it as a management tool. raise its Tier 2 capital. It is our judgment that 13% Basel-III standardized model of Capital Adequacy Ratio (CAR) is highly 1.1.7 - Developing Processes Required to Implement sufficient. the Risk Strategy 1.1.10 - Developing Stress Test Models The Bank’s processes and procedures for implementation of its risk strategy are prepared and communicated to all departments According to new international banking requirements the Bank through “Organization and Methods Department” . These must estimate its capital and liquidity in economic distressed processes determine application of the risk management to the situations. Therefore, the Bank must define a variety of stress scenarios and assure that it can maintain an optimal capital
first line of defense and monitoring of risks by the risk function Review of Risks and Disclosure as second line of defense. Also, the risk strategy determines the adequacy in the event of significant economic distressed various responsibilities of senior management and the Board situations. The risk management department develops models for control of the capital and liquidity adequacy,Both of which for examining capital and liquidity adequacy in in the event are key control elements of risk management in the MEB. of economic crises. The stress models are summarized in the Stress Testing section of this document. 1.1.8 - Internal Evaluation of Capital and Liquidity 1.1.11 - Reporting and Transparency Adequacy (ICAAP and ILAAP) MEB complies with the reporting requirements of the CBI. The Board oversees and ensures the effective implementation of Additionally, MEB voluntarily implements latest Basel-III ICAAP and ILAAP. The Board and Risk Committee are aware requirements. Accordingly MEB’s reports are in accordance and knowledgeable about the measurement and management of with IFRS and in accordance with Basel-III transparency and capital and liquidity adequacy with respect to the amount of market discipline requirements. risk exposures.
1.2 - Balance Sheet Highlights
1.2.1 - Assets Highlights on our assessment of the borrowers’ ability to generate the Survey of the Iranian Economy During the year under review we carried on with our strategy of required cash flows, in order to pay back interest and principal lending short-term loans to select corporate clients with whom at maturity; generally within three months. This strategy has we have developed and maintained strong long-term banking allowed the bank to maintain a ratio of doubtful loans to total relationships. Our loan portfolio constitutes about 72% of loans of less than 1%, well below the 11% stated national total assets and consists mostly of working capital financing average of doubtful loans as reported by CBI. The ratio of (receivables and inventory purchases) of our corporate clients non-performing loans (more than 60 days late) to total loans is and individuals who operate their businesses as proprietorship. about 4.3%. The national average for loans “60 days past due” Borrowers’ credit ratings and credit extensions are based is not available but it is likely to be much higher figure than the nationwide doubtful loans of 11%. and Financial Statements Report of Independent Auditor 28 MIDDLE EAST BANK ANNUAL REPORT
Table 4 - Loans’ Classification Each Item as a Percentage of Total Loans Loans’ Classification March 20, 2017 March 19, 2016 Standard 95.8 95.6 Overdue (late between 60 days and 6 months) 1.6 3.7 Suspended (late between 6 months and 18 months) 2.1 0.1 Doubtful (late more than 18 months) 0.5 0.6 Total 100.0 100.0
Also, on the asset side, MEB’s short-term investments in investments were about 0.3% of total assets and were used equities constitute 0.5% of total assets. MEB plans to reduce for facilitating the financial needs of our customers. These even further the short-term equity investments considering the investments include a brokerage house, an FX trade company low Sharpe Ratio and the very high risk weight associated with and an investment bank, and an information technology these assets. Our estimate of IRB-Foundation risk weight for company used for development of MEB’s core banking our short-term equity investments is about 202%. For these and related IT products. Considering the current economic short-term investments, the standardized Basel-III risk weight is situation, MEB has adopted a conservative liquidity strategy 300%. These risk weights are to be contrasted with the Basel-I and maintains about 12% of its total assets in very liquid assets risk weight of 100% for short-term stock market investments. plus regulatory reserves. Customer loans portfolio constitutes These high risk weights impose a policy of minimal and about 72% of total assets; while about 8% of total assets are prudent short-term stock market investments. The overall asset tangibles, intangibles and other assets supporting the core side strategy of MEB is reflected in its strong capital ratios as activities of the Bank. depicted in the section “Capital Conservation Strategy”. As of March 20, 2017, MEB’s Long-term and strategic
Table 5 - Assets Composition Each Item as a Percentage of Total Assets Asset Type March 20, 2017 March 19, 2016 High Liquid Assets1 5.8 10.7 Regulatory Deposits with CBI 5.9 7.5 Long term and strategic investments 0.3 1.4 Loans 71.9 67.5 Tangibles, Intangibles, Receivables, and others 7.6 10.4 Encumbered Assets with CBI and other banks 8.5 2.5 Total 100.0 100.0 1. Cash & Cash Equivalent + Unencumbered due from other banks+ Bonds + Short - Term Liquid Investment
The average risk weight of our on-balance sheet assets is about This high penalty interest rate pushed interbank loans to 68%. The average risk weight of loans including loans related levels higher than regulatory fixed interest rates imposed on to projects from NDF is 83%, Therefore, MEB has a relatively term deposits. This situation also forced some banks with high CAR of 12.6% using the IRB-Foundation model and an deficient reserves to offer deposit interest rates higher than CBI acceptable CAR of 11.7% using Basel-III standardized model. regulatory deposit rates to avoid the much higher penalty for Despite a relatively high CAR in comparison with other Iranian deficiency in statutory reserves. banks, MEB is one of the most profitable banks in Iran. MEB’s profitability can be attributed to an efficient workforce, lower 1.2.2 - Liabilities Highlights cost of capital and high regulatory interest rate for loans. MEB We do not rely on large number of branches for expanding our has a lower cost of capital because a relatively large section financial resources. Instead, we rely on our business borrowers of its deposits consists of customers’ current account deposits. to bring their banking activities and financial resources to the The reputation of the Bank as a solid and trustworthy bank also Bank. Essentially with this strategy we work as an intermediary helped the lower cost of capital. We operate in an environment to help our clients with occasional excess resources to finance where our depositors feel more comfortable with us having our other clients with occasional short-term working capital lower deposit interest rates rather than having the opportunity needs. We also rely on the high quality of our services to attract to gain higher interest rates available with many other banks. the employees, managers and the customers of our borrowers Another contributing factor to high profitability of the Bank to do their banking with us. We also attract high net worth was because the interbank overnight rates were higher than individuals (HNWI) and business owners/managers and high regulatory deposits interest rates for much of reporting year. income earners (HIE) because of the quality of our services and MEB was generally a provider of funds in the interbank market the reputation established among the business leaders. Majority which provided a window of opportunity to profit from the high of the deposits and funds provided by the HNWI and HIEs are interbank rates and low deposits rates. The reason for unusual related to our corporate clients. high interbank rates was that CBI imposed a high interest rate MEB’s depositors have stayed loyal despite the fact that higher penalty on banks with deficiencies in their statutory reserves. deposit rates were available at other banks. REVIEW OF RISKS AND DISCLOSURE 29
Table 6 - Composition of Liabilities Each Item as a Percentage of Total Liabilities Items March 20, 2017 March 19, 2016 Current account deposits 11.9 14.8 Short term deposits 33.1 44.2 Long term deposits 49.0 37.7 Due to other banks 0.1 0.2 Due to CBI 1.6 1.1 Other liabilities 4.3 2.0 Total 100.0 100.0 Management Report 1.2.3 - Capital Highlights The result of capital conservation strategy is shown in Table 7 Considering the current economic situation, MEB continues to where several Capital Adequacy Ratios are estimated based on maintain more capital than regulatory requirements. Despite different models. higher than required liquidity and capital ratios, MEB has been MEB reports its capital adequacy ratio (CAR) based on several able to stay one of the most profitable banks in the country for models: Basel-I, Basel-III Foundational Internal Rating and the reasons explained in the “Asset side strategy” of this report. Basel-III Standardized Approach.
Table 7 - Capital Adequacy Ratios Capital Adequacy Ratio Percentage CAR Approaches and Stress Scenarios March 20, 2017 March 19, 2016 Tier1 only Tier 1 + Tier 2 Tier1 only Tier 1 + Tier 2 CAR according to Basel-I - 13.54 - 18.01 CAR according to IRB-Foundation 11.3 12.6 11.9 12.8 CAR according to Basel-III Standardized Approach 10.5 11.7 11.6 12.5 Stress Test scenario 2 (less severe) 7.7 9.0 9.0 9.9
Stress Test scenario 3 (more severe) 5.2 6.4 7.3 8.1 Review of Risks and Disclosure Stress Test scenario 4 (most severe) 3.6 4.8 5.9 6.7 1 (Tier 1% +Tier 2%) / (RWA + Operational & FX Risk)
Table 8 - Capital Adequacy Analysis Amount % March 20, 2017 March 19, 2016 CAR according to IRB-Foundation 12.6 12.8 Liquid Assets1/ Total Assets 11.7 18.2 Loans/ Total Assets 71.9 67.5 Short term and Long term and strategic investments / Total Assets 0. 9 2.6 Average risk weight of loans according to IRB-Foundation (without NDF) 109.9 - Average risk weight of loans according to IRB-Foundation (with NDF) 82.6 107 Average risk weight of on balance sheet assets 68.5 91.9 Equity Ratio: (capital+ Retained earnings)/ Total Assets 10.4 12.8 Average risk weight of on and off balance sheet assets with market risk and operational risk 2 60.3 82.0 Survey of the Iranian Economy 1. Cash & Cash Equivalent + Unencumbered due from other Banks+ Bonds + Short - Term Liquid Investment + Regulatory Deposits
2. (12.5* required capital of operational risk + 12.5* required capital of FX risk + Total of On-balance and Off-balance sheet risk weighted assets) / (Total of On-balance and off-balance sheet assets)
1.3 - Risk Bearing Capacity The purpose of the determination of the risk-bearing capacity of risks serves the purpose of preventing developments, is to ensure that the bank takes only the amount of risks that its which could potentially endanger the viability of the Bank. capitalization can sufficiently cover at any time. The process for Additionally the monitoring of risks provides information, on the definition and implementation of the risk-bearing capacity which the Board and the Risk Committee can act in a timely is conducted in three steps: manner. • Calculation of the risk-bearing capacity; In line with the capital requirements of Basel-III and the • Allocation and planning of the capital; and European Banking Authority’s (EBA) guideline on the • Monitoring of and reporting on the risk-bearing capacity of Supervisory Review and Evaluation Process (SREP), the Bank the Bank. voluntarily uses an integrated internal capital and liquidity and Financial Statements These processes are designed to ensure the long-term viability adequacy process (ICAAP and ILAAP), which is commensurate Report of Independent Auditor of the Bank and are thus of great importance in the risk with the bank’s business model, size, complexity, and riskiness. management system of the Bank. The continuous monitoring The ICAAP is aimed at maintaining the viability of the bank 30 MIDDLE EAST BANK ANNUAL REPORT on an ongoing basis, covering short-term and medium-term for each client in the portfolio. assessments from different perspectives. The Bank implements • Estimates of Exposure At Default (EAD) a proportionate ICAAP that incorporates two complementary • Estimates of Probabilities of Default (PD) perspectives: the normative internal perspective and the • Estimates of Loss Given Default (LGD) economic internal perspective. • Estimates of Default Correlations Under the normative perspective, risks are determined by Using this information, the portfolio loss distribution can be first calculating the risk-weighted assets (RWAs) by using approximated. To this end, a Monte Carlo simulation is used. the regulatory approaches, and then adding further binding The simulation procedure evaluates a very large number of regulatory capital requirements and capital buffers. The details portfolio losses based on simulated defaults of clients. The of normative regulatory capital adequacy calculations are likelihood of different portfolio loss levels is estimated based provided in section 1.6 - Capital Adequacy Ratios. on the results of the simulation. The assessment of the risk-bearing capacity under the economic The simulation is based on the portfolio data as of the beginning internal perspective includes risks that are not covered by of a financial year. It covers the period of one year after the regulatory methods under the normative perspective. Under the beginning of the simulation. Hence the results of the simulation economic perspective, the Resources Available to Cover Risks provide information on the likelihood of defaults during the (RAtCR) are determined. Thereafter the amount of economic 12-month-period following the date of the simulation. Details capital required to cover at least all material risk categories about the four relevant input factors are provided below. is determined. The methodology for the determination of the For the initial estimation of the Bank’s credit risk exposure at risks incurred by the institution is described in the annex of this the portfolio level, the input factors EAD, PD and LGD are document. multiplied. The estimation of the input factors for the initial The internal models for the calculation of the risk bearing credit risk exposure calculation is described in the sections capacity under the economic internal perspective are explained below. The multiplication of these factors results in the Expected below for credit risk, market risk, liquidity risk and operational Loss (EL) estimates of the Bank for each years based on the risk business plan of the Bank. Table 9 describes the estimation of economic capital at 99.5% confidence interval using beta 1.3.1 - Credit Risk distribution which is equivalent to a capital multiplier six times The potential losses of the credit portfolio are measured with standard deviation. It should be noted that the capital multiplier a credit portfolio model. The calculation aims to estimate the for a confidence level of 99.9% for a Normal distribution is 3.1. probability distribution of the portfolio’s default losses caused The capital multiplier 6 effectively covers the risk resulting by the default of clients. The credit portfolio model requires from the rise of correlations in stressed conditions and loss of four inputs the estimation of the credit risk, which are obtained diversification effects.
Table 9 - Share of Economic Capital for Credit Risk Groups Exposure Economic Capital Economic Capital / Economic Capital / Group (million IRR) (million IRR) Exposure Total Equity AA- to AAA 0 0 0 BB+ to A+ 10,924,298 991,829 9.1% 13.0% BB- to BB 5,053,954 788,328 15.6% 10.3% B- to B+ 5,615,666 573,416 10.2% 7.5% CCC- to CCC+ 6,101,167 975,306 16.0% 12.7% D to CC 1,345,453 177,825 13.2% 2.3% Unrated (Individuals) 3,126,454 247,476 7.9% 3.2% Unrated (Corporates) 3,697,309 545,171 14.7% 7.1% Financial Institutions 1,110,957 74,740 6.7% 1.0% Converted Off-Balance Sheet 7,408,760 853,372 11.5% 11.2% NDF’s and CBI’s Loans 17,930,769 404,040 2.3% 5.3% Interbank Loans to Other Banks 3,975,000 89,570 2.3% 1.2% Total 66,289,787 5,721,073 74.8%
1.3.1.1 - Probabilities of Default (PD) • Credit products, which were disbursed or authorized in the The probabilities of default estimate the likelihood that a client year under consideration will not serve the pledged payment obligations within the next • Credit products that are in default or written off year. • Credit products that were restructured Credit default probabilities are estimated with regard to clients Credit default events are observed for each financial year. The rather than credit products. Hence the default probability identification of default events is based either on write-offs assigned to a client with several products is the same for all or on arrears of more than 90 days. For clients with several products under consideration. The default of a client on his exposures in arrears, the highest number of days in arrears is obligations for any one product is treated as a default on all used as figure for all exposures. obligations. The credit is considered as in default if: All products that the Bank issues, which contain credit risk, are • The arrears are more than 90 days, starting from the 90th day considered: after the agreed payment date • Credit products that are outstanding • A credit is partially or fully written off, regardless of the REVIEW OF RISKS AND DISCLOSURE 31
number of days that the credit has been in arrears. capital. This is effectively 12 times the standard deviation of In order to estimate the probability of default of credit the portfolio for a 10-day period. exposures, the Bank conducts a credit rating analysis for each individual borrower. The credit rating takes a number 1.3.3 - Liquidity Risk of background factors into account such as balance sheet Liquidity risk is a material risk. Liquidity risk can be: insolvency information, competitiveness and managerial factors. risk or funding risk. The information necessary for the estimation of the default Liquidity risk in the form of the risk type insolvency risk is probabilities will be based on the actual observed default rates based on the accessibility of liquidity at specific points of time, for clients grouped in different risk rating categories. The credit which is difficult to mitigate by capital. Therefore, liquidity risk categories are shown in “Table 9 - Share of Economic risk is mostly managed in the specialized liquidity management
Capital for Credit Risk Groups” process, which are largely carried out by the treasury of the Management Report 1.3.1.2 - Loss Given Default (LGD) Bank. Hence insolvency risk is not part of the risk- bearing The exposure outstanding at the time of default and all capacity. subsequent payments are considered in order to estimate LGD. The potential financial impact of liquidity risk on the Bank’s 1.3.1.3 - Default Correlations own funds is included in the Bank’s risk-bearing capacity in Default correlations have significant effect when stressed the quantification of the risk type funding risk. Funding risk conditions arise and the diversification effects become less describes an increase in funding costs that is not caused by reliable. The rise of default correlations in stressed conditions market rate increases but by increases of risk premiums and causes a loss distribution with a tail significantly fatter than general risk aversion in the market. Thus rising rates of interest normal distribution. In order to account for rise of default rates or deposits are already covered by interest rate risks. correlations and hence the resulting fat tail we consider the loss 1.3.4 - Operational Risk distribution to be a beta distribution where 99.5% confidence interval requires us to use a capital multiplier 6 times standard Operational risks have been identified in the risk inventory deviations. As a reminder, if we were to use a normal distribution as a material risk category and are therefore carefully and with a confidence interval of 99.5% the capital multiplier would conservatively assessed. be 2.3 instead of capital multiplier 6 that we use. The management of the operational risks is based on a risk self-assessment (RSA). The RSA considers the frequency of 1.3.2 - Equity Market Price Risk event occurrence and severity in case of event occurrence. The Bank uses Basel value-at-risk model for the monitoring The categories of the two dimensions are detailed in the risk Review of Risks and Disclosure of the equity price risk. For this purpose capital adequacy inventory policy. requirement of the equity portfolio is measured using a Value The severity estimate is also based on the sub - categories at Risk model with a confidence interval of 99.9%. The 1-day- laid down in the risk inventory policy. For the estimation of VaR for the equity portfolio is calculated from a one year the severity, the arithmetic mean of the upper and the lower historical data and then the 1-day-VaR is scaled by the square- bounds of the categories is used as an estimate for the severity root-of-t-rule to obtain the 10 days-VaR. This10-days-VaR is of the losses in case of event occurrence. For events in the then compared with the 10-days-VaR from the latest 60 day highest two severity categories, the RSA will provide a concrete period and the greater of the two is selected. The greater of two estimate of the severity. Value at Risks is then multiplied by 4 to calculate the required Table 10 provides an overview over the severity categories for the RSA and the assumed average losses for branch operations.
Table 10 - Operational Risk Self-Assessment Matrix-Severity Severity Interval (Million IRR) Bucket Lower bound Upper bound
Very low 1 0 0.1 Survey of the Iranian Economy Low 2 >0.1 10 Medium 3 >10 1,000 High 4 > 1,000 10,000 Very high 5 > 10,000 To be Assigned
Table 11 below provides an overview over the frequency categories for the Branches RSA and the respective scaling factors.
Table 11-Branches Operational Risk Self-Assessment Matrix-Frequency Severity Interval (Million IRR) Bucket Lower bound Upper bound Extremely low 1 0 0.1 Very low 2 >0.1 1 Low 3 >1 6 and Financial Statements
Medium 4 > 6 12 Report of Independent Auditor High 5 >12 24 Very high 6 > 24 To be Assigned 32 MIDDLE EAST BANK ANNUAL REPORT
Each bucket of Tables 10 and 11 is used by applying a presumed as economic capital. distribution. The identified operational risks lie within one The procedure of estimating economic capital is conducted of the buckets both in Tables 10 and 11. The severity of for the branches and for other sections and departments are in operational risks is multiplied by the corresponding frequency process. of them on which the presumed distributions are set. Therefore, Additionally, the operational risk estimate is challenged by the expected loss equals the sum of the product of frequency the update standardized measurement approach (USMA). The and severity of the risks. The Mont Carlo simulation results capital required according to the USMA serves as floor for the 99.9% percentile of expected loss, that is taken to consideration calculation of the operational risks.
1.4 - Risk Management Structure Risk Management in MEB consists of Risk Committee (RC) and interest rates. However, regulatory risks remain where MEB Risk Department. The duties of the RC are modeled based on may face loss of funds in case MEB abides by the CBI rules on the Basel document entitled “Guidelines - Corporate governance fixed interest rates while other banks deviate significantly from principles for banks”, issued in October 2014. The RC consists CBI rules. The equity stock portfolio of the Bank is relatively of four Board members, one assistant to managing director and small, however, it is regularly monitored and the relevant risk the head of Risk Department (or Senior Risk Manager - SRM). measurements such as Value at Risk (VaR) and concentration SRM is responsible for reporting risk related matters to RC, are reported. discussing relevant information with members of the RC/Board Foreign exchange rate risk in MEB arises from the off-balance members, as well as executing various resolutions of RC. sheet commitments related to imports of goods. MEB engages Risk Department operates under the guidance of RC and carries only with clients who are not listed as a sanctioned entity the policies set forth by the RC. The Risk Department is headed and whose activities are allowed according to the imposed by the SRM and employs five additional risk analysts. The risk international sanctions. The foreign exchange commitments analysts and SRM share the duties of credit risk modeling, required direct dealing with CBI where the exchange rates were credit risk rating and liquidity risk measurements. Because both guaranteed and allowed by CBI. MEB did not engage in of the regulatory fixing of lending and deposits interest rates direct market related foreign exchange activities or hedging. and an almost flat effective yield curve, the interest rate risk With expected increase in international activities following comprised a non-significant portion of overall risks of MEB the implementation of JCPOA, the foreign exchange risk is for this reporting period. However it is expected that with the expected to increase for future reporting periods albeit such risk further development of debt market in Iran, we would face is always passed on to the importers or exporters. The Board interest rate risk as a material risk for future reporting periods. assures independence of the risk function from other business A sensitivity analysis did not reveal a major impact on MEB’s activities of the Bank. profitability ratios from a significant regulatory change in
1.5 - The Bank’s Risks
1.5.1 - Credit Risk rating. It is MEB’s risk policy to maintain an average credit MEB’s credit extension policies implements CBI’s rules and risk rate of B+ or better. Collaterals as well as “supplementary regulations. MEB’s primary credit clients are incorporated collaterals” are used to augment the credit quality of clients entities with whom MEB develops and maintains strong long- with credit rating in the lower ranges. term banking relationships. However, natural persons who Principles for Extension of Credit manage their business activities personally and are not under 1. Knowing the client and his/her credibility. Credit a legal umbrella are welcomed and treated as proprietorships. measurement is performed such that it is an indicator of Obviously in such cases, Chamber of Commerce registration ability and capacity of the client in paying back the loans. and a proper tax code are necessities prior to extension of Making sure that the loan usage is monitored, and that the any facilities. Concentration of MEB’s credit is in short-term resources for repayment are identified and recognized by the requirements of its clients; namely inventory and receivable Bank. financing. Even international activities are limited to the 2. The approved facilities are valid for at most one year. The importation of raw materials, spare parts and finished consumer branches are required to periodically check the documents goods. MEB occasionally arranges and participates in syndicated and financial statements in order to make sure that documents guarantee facilities when funding is provided through the are compliant with the facilities’ covenants. capital market or State-financed, National Development Fund. 3. The interest rate charged, and the required collaterals depend Risk Department assigns credit risk rates to non-financial on the client’s credit worthiness and client’s history with the incorporated clients based on their audited financial statements, Bank. past payment history, competitive position in the market, 4. The Bank makes sure that the collaterals are unencumbered management quality and other qualitative information. Risk and have high degree of liquidity. Department’s assessment, among others, is based on a client’s 5. Clients’ receivable checks from their own customers and ability to generate the required cash flows for short-term identifying the validity of these checks confirm the client’s financing of receivables and or inventories. All incorporated business viability and these checks can be endorsed for non-financial clients with three years of audited financial collection by the Bank. These receivable checks constitute statements are independently evaluated by Risk Department and one method of loan repayment. are given an internal credit rating. Credit Department performs 6. The level of activity of the deposit and current accounts of its own evaluation before submitting client information for risk REVIEW OF RISKS AND DISCLOSURE 33
the borrower are periodically checked in order to verify that loans and commitments must not exceed IRR400 billion. the level of activity is conforming with the loan covenants 4- The Board of directors - for loans more than IRR150 billion 7. The credit quality and operations of the client are periodically and commitments more than IRR300 billion. checked to make sure that the borrower is conforming with loan covenants Credit rating procedure 8. The borrowers are credit risk rated by the Risk Department. More than 90% of MEB’s Potential borrowers are legal persons The capacity of the borrower is also evaluated and then and 10% of credit facilities are extended to natural person is the credit committees set loan conditions and collaterals based on their business activities. accordingly. In addition to complying with the CBI rules, all customers 9. For SMEs and Corporate borrowers, at least three years seeking loans and commitments must be assessed by Risk
of audited financial statements are required to obtain a Department in terms of credit risk and this assessment must Management Report reasonably good credit risk rate. be done independently of Credit Department. Credit risk 10. Collateral quality and amount is dependent on the credit risk scoring of the customers is carried out based on the following rate evaluation of the Risk Department. Borrowers with major elements: 1- Three years of financial statements 2-Risk bad credit risk rate are required to provide substantially Management Department’s assessment of the customers’ cash higher level of liquid collaterals. flow from operating activities to pay back the principal and 11. MEB has set its policy to maintain a minimum weighted interest portions of the loans. 3- Qualitative elements including average credit rating of B+ for its loan portfolio. competitiveness and managerial ability 4- Past payment 12. In general, approval and extension of large credit facilities behavior. are concentrated in MEB’s Head Quarters. The summary of loans and commitment credit granting 13. It is the policy of the Bank that after the Credit Department procedure to legal and natural persons running business is as evaluates a borrower to be creditworthy, it must inform follows: the Risk Department and provide all required information 1. Submitting request, information, and the required to Risk Department for proper credit risk rating. The documents through CARM system which is available at the credit risk rate should be taken in consideration for setting Bank’s website (http://carm.middleeastbank.ir), it including covenants and collaterals of the loan. company registration and management information, 14. The Risk Department periodically reports to the Risk operational licenses, history, and financial information. Committee and to the Board. The reports discuss the 2. After filling the required information by the customer, portfolio concentrations in credit risk, industry, borrower the relationship manager check the data and contact the Review of Risks and Disclosure type, collaterals, etc. customer for any additional information or corrections. 3. Having the case completed by the relationship manager, the Different levels of institutional authority to approve customers information is processed for a primary risk score. loans and commitments 4. The credit status of the customer is then analyzed more In general, MEB’s credit issuance decisions making are precisely by credit analysts to obtain the final risk score. centralized at the Bank’s Headquarter. Considering the amount 5. The risk score obtained will play a key role for credit of credit requested, approvals will be carried out by the granting and specifying collaterals following authorities: 6. Loan to natural persons is usually considered only after 1- Branches - for credits less than IRR4 billion and considering the specified business activity of such person commitments less than IRR8 billion. Since MEB’s strategy is and their need for working capital and commitments. This to offer banking services to mostly corporate customers, Branch kind of customers form less than 10% of our customers. credit committees should use their authority in order to attract, Their tax declaration is the base of Risk Management consolidate and expand depositor customers. Department Analysis 2- Central Credit Committee - for loans less than IRR20 billion 7. The equity ratio of the customer must meet the CBI’s and commitments less than IRR100 billion. standard 3- Supreme Credit Committee - for loans less than IRR150 We provide several tables describing quality measures of credit Survey of the Iranian Economy billion and commitments less than IRR300 billion (combined portfolio, including internal rating, late payment behavior, and concentrations. and Financial Statements Report of Independent Auditor 34 MIDDLE EAST BANK ANNUAL REPORT
Table 12-1 – Loans’ Ratings (Including National Development Fund) Loans Internal Ratings as of March 20, 2017 Including National Development Fund Internal Rating Risk Weight (Percentage) Each Item as Percentage of Total Loans AAA 4 0.0 AA 14 0.0 A 34 2.1 A- 42 2.9 BBB+ 50 1.1 BBB 60 2.7 BBB- 70 3.7 BB+ 80 2.3 BB 92 5.3 BB- 102 4.5 B+ 112 3.1 B 122 4.0 B- 129 5.3 CCC+ 137 2.9 CCC 144 7.9 CCC- 150 3.5 CC,C 250 2.1 Corporates and SMEs not rated 100 3.7 Natural person borrowers not rated 100 5.6 National Development Fund 20 30.3 Other Foreign currency Loans 100 2.6 Loans granted by subsidiary not rated 100 0.4 Overdue 150 1.6 Suspended 150 2.1 Doubtful - 0.5 Total 100.0 Average Risk Weight 82.6
Table 12-2 shows the credit quality of loans not including loans this approach the Loss Given Default is set to the Basel-III related to National Development Fund based on internal rating standardized value of 45%. The overall IRB-Foundation risk and the associated risk weights used for capital adequacy ratio weight of loan portfolio excluding NDF for March 20, 2017 is calculations based on Basel-II IRB-Foundation Approach. In calculated to be 109.9%.
Table 12-2 – Loans’ Rating (Excluding National Development Fund) Loans Internal Ratings as of March 20, 2017 Excluding National Development Fund Internal Rating Risk Weight (Percentage) Each Item as Percentage of Total Loans AAA 4 0.0 AA 14 0.0 A 34 3.1 A- 42 4.1 BBB+ 50 1.6 BBB 60 3.8 BBB- 70 5.3 BB+ 80 3.3 BB 92 7.6 BB- 102 6.5 B+ 112 4.4 B 122 5.7 B- 129 7.6 CCC+ 137 4.1 CCC 144 11.3 CCC- 150 5.0 CC,C 250 3.0 Corporates and SMEs not rated 100 5.4 Natural person borrowers not rated 100 8.0 Other Foreign currency Loans 100 3.7 Loans granted by subsidiary not rated 100 0.6 Overdue 150 2.3 Suspended 150 3.0 Doubtful - 0.8 Total 100.0 Average Risk Weight 109.9 REVIEW OF RISKS AND DISCLOSURE 35
The following graph shows the contribution of each credit rate National Development Fund. in the overall risk weight of loans excluding loans related to the
Graph 3 - Distribution of Credit Risk Weights Management Report
Risk Department monitors and measures the payment behavior payment behavior of current customers with outstanding loans of its clients. These measurements help the risk department to are reported. improve its internal rating model. In Tables 13-1, 13-2, the past
Table 13-1 - Credit Risk– Borrowers Payment Behavior Distribution – Excluding National Development Fund Review of Risks and Disclosure Each Item as a Percentage of Total Loans Customer Categorization Based on Days late 1 March 20, 2017 Customers with only payments after the year ended2 5.6 Excellent 3 40.0 Good4 4.8 Average5 26.2 Below average6 9.0 Unsatisfactory (however current)7 8.3 All current customers 93.9 Late between 60 days and 6 months 2.3 Late between 6 months and 18 months 3.0 Late more than 18 months 0.8 Non-current customers 6.1 All customers 100.0 1 The past payment behavior of clients with outstanding and current loans is evaluated and categorized according to a measure similar to standard deviation of days clients have been late.
2 First time customers who were current and had no previous payments recorded (all their payments were due in a future date after the year ended) Survey of the Iranian Economy 3 Less than 1 day late 4 Between 1 and less than 2 days late 5 Between 2 and less than 25 days late 6 Between 25 and less than 60 days late 7 Greater than 60 days late
Table 13-2 - Credit Risk– Borrowers Payment Behavior Distribution - Excluding National Development Fund Number of customers Customer Categorization Based on Days late 1 Percentage of Total Number Customers with only payments after the year ended2 12.7 72 Excellent 3 44.3 251 Good4 4.6 26 Average5 23.0 130 Below average6 6.0 34 Unsatisfactory (however current)7 3.2 18 All current customers 93.8 531
Late between 60 days and 6 months 1.6 9 and Financial Statements
Late between 6 months and 18 months 3.4 20 Report of Independent Auditor Late more than 18 months 1.2 6 Non-current customers 6.2 35 All customers 100.0 566 36 MIDDLE EAST BANK ANNUAL REPORT
Table14 - Credit Risk / Concentration per Economic Sector Each Item as a Percentage of Total Loans Economic Sector March 20, 2017 March 19, 2016 Industrial 57.9 36.8 Housing 10.8 15.4 Commercial 25.5 35.7 Services 4.2 10.1 Agriculture 1.1 1.8 Banks 0.0 0.0 Other 0.4 0.2 Total 100.0 100.0
Table 15 – Off-Balance Sheet Commitments (Local Currency) Local Currency in IRR million Off-Balance Sheet Commitments March 20, 2017 March 19, 2016 Letters of credit 711,692 370,000 Guarantees 17,448,006 14,775,364 Managed accounts 651,829 70,154 Others 2,752,282 957,530 Total 21,563,809 16,173,048
Table 16- Off- Balance Sheet Commitments (Foreign Currencies) Foreign Currencies in IRR million Off-Balance Sheet Commitments March 20, 2017 March 19, 2016 Letters of credit 2,263,349 2,137,746 Guarantees 4,095,135 1,974,815 Managed accounts 0 0 Others 0 0 Total 6,358,484 4,112,561
1.5.2 - Liquidity Risk and Assets and Liability senior level managers including senior risk manager is held Management where these reports are discussed and decisions regarding future directions of the Bank are taken. Risk Management Department The Finance Department generate a daily report regarding periodically provides reports on Liquidity Coverage Ratio changes in funds, uses of funds, costs of funds, asset profitability (LCR), Net Stable Funding Ratio (NSFR) and Liquidity Gaps. and return on equity. Additionally a weekly meeting of the Additionally, Risk Management Department provides reports managing director, assistants to managing director and other on concentration of funds and loans.
Table 17 – Liquidity Coverage Ratio – Part 1: HQLA as of March 20, 2017 Amount Percentage of Total High Quality Liquid Assets (IRR million) HQLA Level 1 Assets Cash and Cash Equivalent 367,531 5.2 Regulatory Deposit with CBI 4,363,685 62.2 Participation bonds considered level1assets 983,126 14.0 Total level 1 Assets 5,714,342 81.4 Level 2A Assets 85% of participation bonds considered level 2A assets 948,617 13.5 Total level 2A Assets 948,617 13.5 Level 2B Assets 50% of Short term investments in stock exchange 203,723 2.9 50% of fixed income investment 153,626 2.2 Amount of Level 2B Assets above 15% of HQLA to be deducted = 1,053,046 0 Total level 2B Assets 357,349 Amount of Level 2B Assets above 40% of HQLA to be deducted = 2,808,123 0 Total Level 2 Assets 1,305,966 18.6 Total HQLA 7,020,308 100.0 REVIEW OF RISKS AND DISCLOSURE 37
Table 18 – Liquidity Coverage Ratio – Part 2: Net Outflows & Result Liquidity Coverage Ratio as of March 20, 2017 Amount Exit rate Outflows (IRR million) Percentage Outflow Retail Deposit Stable Deposits 0 Deposit of bank employees 27,306 5% 1,365 Deposits of natural person-guaranteed by deposit insurance fund 1,402,813 5% 70,141 Less Stable Deposits Deposits of natural person-not guaranteed by deposit insurance fund 2,288,752 10% 228,875 Wholesale Funding Management Report Stable Deposits Deposits of legal entities-guaranteed by deposit insurance fund 626,839 5% 31,342 Less Stable Deposits Legal entities deposits- not guaranteed by deposit insurance fund- equal or less than 5,931,565 10% 593,157 IRR40 billion Other Legal entities deposits- not guaranteed by deposit insurance fund- more than IRR40 billion 9,410,342 40% 3,764,137 Banks deposit 1,025,000 40% 410,000 Due to other banks 1,078,154 100% 1,078,154 Other Funding Other deposit not considering in above items 909,938 100% 909,938 Stable- encumbered deposits (including retail and wholesale funding and other) 9,587,742 5% 479,387 Long-term deposit of National Development Fund (IRR) 16,210,000 0% 0 Deposits with maturity more than 30 days 15,361,506 5% 768,075 Total 63,859,955 8,334,570
Other dues that must be paid within 30 days Review of Risks and Disclosure Payable interest 418,525 100% 418,525 Off balance sheet commitments 24,518,182 10% 2,451,818 Estimated unused loan limits 4,468,776 0% 0 Dividend payable 5,747 0% 0 Tax provision 172,379 0% 0 Other dues and provisions 2,251,750 10% 225,175 Employee termination provisions 52,551 0% 0 Total of Outflows 11,430,088
Amount Inflow rate% Inflow Inflows (Million IRR) Loans to Banks with maturity less than 30 days 71,101 100% 71,101 Loans to natural persons and legal entities with maturity less than 30 days 8,792,110 25% 2,198,028 Other inflows during the period less than 30 days 665,828 10% 66,583
Inflow Cap: 75% of total outflows = 8,572,566 0 0 Survey of the Iranian Economy Total of Inflows 2,335,711 HQLA 7,020,308 Net Cash Outflows 9,094,377 LCR = HQLA/Net Cash Outflows 77.2% and Financial Statements Report of Independent Auditor 38 MIDDLE EAST BANK ANNUAL REPORT
Table 19 – Net Stable Funding Ratio (NSFR) Amount ASF Available Stable Funds (ASF) (IRR million) (IRR million) Liabilities and capital receiving a 100% ASF factor Tier 1 and Tier 2 Capital (based on Basel-III) 7,784,612 7,784,612 Long-term deposit of National Development Fund (IRR) 16,210,000 16,210,000 Liabilities receiving a 90% ASF factor Stable funds from LCR 3,289,108 2,960,197 Liabilities receiving a 80% ASF factor Less stable funds from LCR 26,405,545 21,124,436 Liabilities receiving a 50% ASF factor Wholesale deposits 12,944,949 6,472,474 Liabilities receiving 0% ASF factor Banks deposit 1,025,000 0 Due to other banks 1,078,154 0 Other liabilities and capital not considering in above items 5,806,881 0 Total ASF 74,544,249 54,551,720 Amount ASF Due to other banks (IRR million) (IRR million) Assets assigned a 0% RSF factor Cash and Cash Equivalent 367,531 0 Participation bonds considered 0% RSF factor 802,522 0 Assets assigned a 5% RSF factor Participation bonds considered 5% RSF factor 2,182,534 109,127 Assets assigned a 50% RSF factor Equity portfolio and fixed income funds 714,698 357,349 Unencumbered Loans to non-financial entities with remaining maturity less than one year 31,245,715 15,622,858 Assets assigned a 85% RSF factor Unencumbered Loans to natural persons with remaining maturity less than one year 3,063,959 2,604,365 Assets assigned a 100% RSF factor Loans to financial entities 940,046 940,046 Other loans 1,725,537 1,725,537 Mid-term deposit of National Development Fund (IRR) 16,650,059 16,650,059 Regulatory Deposit with CBI 4,363,685 4,363,685 Other assets not considering in above items 12,487,963 12,487,963 Total of On-Balance sheet RSF 74,544,249 54,860,988 Off-Balance sheet assigned a 5% RSF factor Off-Balance sheet commitments 24,518,182 1,225,909 Total of On-Balance and Off-Balance sheet RSF 99,062,431 56,086,897 NSFR=ASF/RSF 97.3%
Table 20 - Concentration of Funds Each Row as a Percentage of Total Deposits Number of Top Depositors March 20, 2017 March 19, 2016 National Development Fund Deposit 27.54 - 20 49.38 27.00 100 66.86 50.00 200 75.45 63.00 400 84.41 76.00 1000 93.83 91.00 21455 99.99 100.00 29700 100
Table 21 - Concentration of Loans Each Row as a Percentage of Total Loans Number of Top Borrowers March 20, 2017 March 19, 2016 Loans financed by National Development Fund of Iran 30.46 - 20 46.56 31.00 100 77.51 76.00 200 92.11 94.00 432 99.89 99.00 496 99.98 100.00 562 100.00 REVIEW OF RISKS AND DISCLOSURE 39
Table 22 - Other Liquidity Ratios Other Liquidity Ratios March 20, 2017 March 19, 2016 Local currency Loans / Local Currency Deposits 74.00 81.4 Local Currency off Balance Sheet Commitments/ Local Currency Deposits 46.22 48.8 Foreign currency Loans / Foreign Currency Deposits 93.96 88.6 Foreign Currency off Balance Sheet Commitments/ Foreign Currency Deposits 232.20 323.2
1.5.3 - Market Risk reported. MEB’s short-term investments in equity stock market Risks related to short-term equity investments, and changes in constitute 0.5% of total assets. The equity portfolio consists of foreign exchange rate and changes in interest rates are discussed 40 corporate shares (IRR407،446 million) of which 28 are listed in this section. companies on Tehran Stock Exchange (TSE) (IRR303,508 Management Report million), 6 are shares in investment funds (IRR73,186 million) Short-term equity Investments and 6 are shares of privately held companies (IRR30،752 The equities portfolio of the Bank is relatively small and is million) . regularly monitored and the relevant risk measurements are
Table 23 - Short-Term Equity Investments Portfolio Composition Each Item as a Percentage of total short term investments Investment Type March 20, 2017 March 19, 2016 Tehran Stock Exchange Short-term Investments 90.8 93.7 Other Short-Term Investments (Farabourse) 9.2 6.3 Total Short-Term Investments 100.0 100.0
According to Basel-II, market risk can be calculated using the requirement equals to VaR Amount *(3 + X) with X between “Value at Risk” (VaR) methodologies. The VaR calculation 0 and 1. Our estimate of risk-weight of the short-term equity must be done based on 1% probability (one tail) using daily investments using a Basel-III Value at Risk model is 202% standard deviation and 10 days horizon time. Each bank must (the standardized Basel-III risk weight for equity investment Review of Risks and Disclosure meet, on a daily basis, capital requirement illustrated as the in acceptable equity exchanges is 300%). The high risk weight higher of previous day’sVaR or an average of the daily value at of 202% imposes a policy of minimal and prudent equity risk in 60 working days. According to Basel-II notes, the capital investments in TSE listed companies.
Table 24 – Calculation of Short-Term Equity Investments Risk Weight using IRB-Foundation Basel-III Short-Term Equity Investments Risk Weight March 20, 2017 March 19, 2016 10 days portfolio standard deviation of returns 1.7% 2.61% Basel-III VaR multiplier 4 4 Risk Weight 202% 304%
The annualized standard deviation of stock portfolio return is 8.7% a Sharpe Ratio of -36% is calculated. The Sharpe Ratio estimated to be 8.7% and annualized return is estimated to be -36% is too low (1.0 is considered adequate), and considering 14.9%. Assuming risk-free rate for term deposits to be 18%, the higher capital requirements for equity investments, MEB the risk premium for stock portfolio is estimated to be -3.1%. plans to further reduce its short-term equity investment. Table
From the -3.1% risk premium and the standard deviation of 25 shows the concentration of MEB’s investments in TSE. Survey of the Iranian Economy
Table 25 – Concentration of TSE Short-Term Equity Portfolio Each Row as a Percentage of Total TSE Investments Tehran Stock Exchange (TSE) Equity Short-Term Investments March 20, 2017 March 19, 2016 Top 5 Stocks 46 52 Top 10 Stocks 70 70 Top 20 Stocks 89 90
Interest Rate Risk However, regulatory interest rate risks remain where MEB may Interest Rate Risk on Banking Book (IRRBB) face loss of funds in case where MEB abides by the CBI rules MEB did not have any loans with floating rates, or significant on fixed interest rates and other banks may deviate significantly optionality (e.g. early payment) affecting the profitability of its from CBI rules. loans portfolio. IRRBB comprised a non-significant portion of Interest Rate Risk on Trading Book overall risks of MEB because of lending and deposits interest During the year ended March 20, 2017, there was no secondary and Financial Statements rates and an almost regulatory fixed flat yield curve. We have market for trading bonds at discount or premium. All the bonds Report of Independent Auditor not observed any significant changes on profitability ratios were traded at the nominal value plus coupons due. Towards the due to regulatory changes on fixed rates of deposits and loans. end of financial year (March 20, 2017), the government issued 40 MIDDLE EAST BANK ANNUAL REPORT new bonds tradable in secondary markets with discount MEB did not engage in direct market related foreign exchange Foreign Exchange Risk activities or related hedging activities. MEB does not engage in profiting from changes to foreign currency exchange rates, Foreign exchange rate risk in MEB arises from off-balance however, occasionally, MEB would end up with open long sheet commitments related to imports of goods. MEB or short positions in its normal activities for servicing clients engages only with clients who are not listed on internationally engaging in import/export or other foreign exchange activities. recognized sanctions lists and whose activities are allowed With expected increase in international activities following according to the imposed international sanctions. The foreign the implementation of JCPOA, the foreign exchange risk is exchange commitments required direct dealing with CBI where expected to increase for future reporting periods. the exchange rates were both guaranteed and allowed by CBI.
Table 26- Foreign Exchange Open Positions Value at Risk (VaR ) March 20, 2017 March 20, 2017 Open Position Equivalent VaR Equivalent Million Open Position Equivalent VaR Equivalent Million Foreign Currency Million IRR IRR Million IRR IRR US Dollar 108,156 347 (6,078) 21 Swiss Frank 3 0 84 3 Indian Rupiah 740 15 613 14 Emirate Dirhams 18,791 62 1,345 5 Turkish Lira 1,678 85 2,532 120 Iraqi Dinar 1,904 115 1,898 130 Chinese Yuan 25 0 3 0 Korean won (27) 1 (9,815) 347 Euro 283,818 10,302 27,050 1080 Omani Rial 3,760 17 6,418 30 Total 418,848 10,943 24,050 1750 Diversification effect (805) (509) 10,138 1,241 Required Capital Provision Based Ball 3 40,522 4,964
The above Table illustrates foreign exchange guarantees and line of Corporate Banking equals 18%. Therefore, based on commitments and impact of a major change in the foreign Standardized Approach, 18% of MEB’s average operating exchange rates. income for the past three years was allocated to operational risk capital charge. 1.5.4 - Operational risks Recently, MEB applied Updated Standardized Approach To identify and assess operational risks, MEB Risk Management recommended by BCBS’s Consultative Document, updated Department uses Risk and Control Self-Assessment (RCSA) standard measurement approach published on June 2016 by methodology. Applying RCSA we have identified 481 calculating business indicator (BI) based on its interest, service, operational risks in the following departments: Branches, Legal, and financial income and expenses to obtain operational risk Compliance, IT, MNC, and Projects Financing. The seven capital charge. This approach is more sophisticated and leads to operational risk event types according to Basel Committee more precise result than compare to the older version. are: 1- Internal Fraud, 2- External Fraud 3- Employment MEB Risk Management Department is in process of estimating Practices and Workplace Safety, 4- Clients, Products, and required economic capital for operational risks based on Basel- Business Practice, 5- Damage to Physical Assets, 6- Business II “Advanced Measurement Approach”. This approach requires Disruption and Systems Failures, 7- Execution, Delivery, and estimation of loss distribution for each department. Currently, Process Management. Risk Management Department uses this loss distributions are estimated using RCSA methodology categorizing method in its RCSA collection. which is based on experts’ qualitative judgments for severity The following number of risks have been identified: 240 risks and frequency of losses. Monte Carlo simulation will be in the Branches, 137 risks in Compliance Department, 44 risks used to estimate economic capital based on the estimated in IT Department, 48 risks in Legal Department, and 13 risks in loss distributions. So far, this procedure has been applied on MNC (Multi-National Corporates) Department. We estimated operational risks of branches. the total Expected Loss for Branches’ operational risks to be The Bank uses Basel Committee’s updated standard 65,676 million Rials for which the estimated economic capital measurement approach (USMA) published on June 2016 to is 74,751 million Rials. The economic capital is obtained for calculate operational risk capital charge. According to Basel a confidence level of 99.9%. Currently, we are in process of it is estimated that the amount of operational risks and so the estimating the losses resulting from Compliance and other required capital charge are highly correlated with the interest departments’ operational risks, income and interest expenses, interest earning assets, services Previously MEB used “Basel-III Standardized Approach” for incomes, and net profit/loss on trading book. The income calculating operational risk capital charge (one of the three generating activities and expenses consists of components approaches proposed by Basel Committee). To calculate the such as interest income except leases, services income, and operational risk capital charge MEB considered its business financial incomes and expenses. The USMA model uses three lines consisting only as “Corporate Banking”. According year averages of each of the above components. Interest income to Basel Committee, the risk factor (beta) for the business includes interest income from loans and advances, Interest REVIEW OF RISKS AND DISCLOSURE 41 income form assets held to maturity, Interest income form held for sale not qualifying as discontinued operations. trading assets and other interest incomes such as interest from The capital charge for the operational risk is estimated to statuary deposit and fixed income securities. Interest expenses be 240,125 million IRR according to a complex formula include interest expenses from deposits. Interest earning assets as described in the Basel Committee’s updated standard consist of total gross outstanding loans, advances, and interest measurement approach (USMA) published on June 2016. The bearing securities (including government bonds) inputs for operational risk capital charge according to updated Services income includes fee and commission income from: standardized measurement approach (USMA) including net Securities (issuance, origination, reception, transmission, profit/loss on the trading book includes unrealized net profit execution of orders on behalf of customers) and other operating (loss) from investments, foreign currency exchanges, trading income such as rental income from investment properties and assets and trading liabilities are detailed in Table 27.
Gains from non -current assets and disposal groups classified as Management Report
Table 27-MEB Income and Expense items (Inputs for Updated Standard Approach for Calculating Operational Risk Capital Charge) Year 2015 Year 2016 Year 2017 Average Interest income form loans and advances 4,236,583 6,010,603 7,803,164 Interest income, Interest income form assets held to maturity 627,003 342,480 806,140 except for Interest income form trading assets 44,405 26,113 127,236 financial and operating lease Other interest income 124,752 133,007 357,799 Total 5,032,743 6,512,203 9,094,339 14,503,637 Interest expens- Interest expenses from deposits 3,702,679 4,902,668 6,570,559 es, except for financial and Total 3,702,679 4,902,668 6,570,559 5,058,635 operating lease Total gross outstanding loans, advances, and Interest earning interest bearing securities (including gov- assets (balance 22,996,377 33,717,636 63,710,141 ernment bonds) measured at the end of each sheet item, not financial year P&L) Total 22,996,377 33,717,636 63,710,141 40,141,385
Fee and commission income from: Securities Review of Risks and Disclosure (issuance, origination, reception, trans- Fee and com- 288,997 482,480 695,979 mission, execution of orders on behalf of mission customers) Total 288,997 482,480 695,979 489,152 Rental income from investment properties - 400 - Gains from non -current assets and disposal Other operating groups classified as held for sale not qualify- 48 816 928 income ing as discontinued operations (IFRS 5.37) Total 48 1,216 928 731 Total of unrealized net profit (loss)of investments + net profit (loss) from Foreign 190,770 264,044 322,300 currency exchange Unrealized net profit/(loss) on trading assets Net profit (loss) and trading liabilities (derivatives, debt secu- on the trading rities, equity securities, loans and advances, (192,850) 66,749 11,048 book short positions, other assets and liabilities)
measured at fair value through profit and loss Survey of the Iranian Economy Net profit/loss from exchange differences 56,024 45,744 100,544 Total 53,944 376,537 433,892 288,124
1.6 - Capital Adequacy Ratios (CAR)
1.6.1 - CAR according to IRB-Foundation Approach multiplying VaR by multiplier (12.5) and after all adding the According to IRB-Foundation the average risk weight of loan result into the denominator of CAR ratio. The market risk portfolio excluding National Development Fund was estimated related to interest rate risk was estimated to be nil. The market to be 109.9%. We risk weighted our loans to other banks at a risk due to foreign exchange rate fluctuations was extremely higher rate of 100%, because of estimated low Basel-III capital small and constituted about 0.01% of the total risk weighted adequacy ratio for other banks, The total long term and short assets. term investment of the Bank in financial institutions was less Off balance sheet items, (customers of Letters of Credit and than 10% of the Bank’s Basel-III Tier 1 capital. Accordingly Bank Guarantees) generally have a much lower risk profile than our on balance sheet loan customers. For this reason we there were no deductions concerning these investments; and Financial Statements estimated the average risk weight of our off balance sheet items however these investments were risk weighted at 250%. We Report of Independent Auditor calculated the risk weight of 202% for our investments in Tehran to be 70% equivalent to "BBB-" credit rating. Stock Exchange using the Value at Risk (VaR) methodologies, 42 MIDDLE EAST BANK ANNUAL REPORT
Table 28 - Assets Risk Weights - IRB-Foundation Each Item as Risk Weight- Amount Risk Weight On Balance Sheet Assets as of March 20, 2017 Percentage of ed Assets (IRR million) (Percentage) Total Assets (IRR million) Cash and equivalents 730,251 0.98 0 - Due from CBI & other banks (Encumbered) 6,310,934 8.45 20 1,262,187 Loans and Advances 53,562,768 - Loans funded using MEB resources excluding doubtful loans (Net of 36,762,902 49.25 109.9 40,387,237 Provisions)1 Loans financed by NDF 16,650,059 22.30 20 3,330,012 Doubtful Loans (Net of Provisions) 149,807 0.20 0 - Investments in equity and securities with fixed income 3,836,439 - Investment in equity2 407,751 0.55 - - Investment in Islamic treasury bill or governmental securities3 with CBI 688,386 0.92 0 - guarantee Investment in government securities with government guarantee 2,290,851 3.07 20 458,170 Investment in non-government securities with government guarantee 0 0.00 20 - Investment in non-government securities without government or banks 325,251 0.44 100 325,251 guarantee Investments in financial institutions 124,200 - Investments in financial institutions less than 10% of Tier 1 Capital4 124,200 0.17 250 310,500 Deducted Investments in financial institutions in excess of 10% of Tier 1 Capital5 0 0.00 - from Capital Due From Subsidiaries 0 0.00 100 - Other Account Receivables 878,490 1.18 100 878,490 Tangible Fixed Assets 2,090,581 2.80 100 2,090,581 Intangible Assets except Goodwill 120,934 0.16 100 120,934 Deducted Goodwill 813,037 1.09 - from Capital Regulatory Deposits with CBI 4,363,685 5.85 0 - Other Assets 1,943,887 2.60 100 1,943,887 Total of Assets 74,651,006 100.00 51,107,249 1. The overall IRB-Foundation risk weight of loan portfolio is calculated based on internal rating to corporate and individual customer considering corporates and SMEs not rated, Natural persons borrowers not rated, overdue, suspended and doubtful loans. 2.We calculated the risk weight of 202% for our investments in Tehran Stock Exchange using the Value at Risk (VaR) methodologies, multiplying VaR by multiplier (12.5) and after all adding the result into the denominator of CAR ratio. 3. Bond 4. Investment in Middle East Life Insurance 5. Amount of this item will be deducted from Tier 1Capital. 6. Amount of Goodwill will be deducted from Tier 1 Capital.
Table 29- Off-Balance Sheet Risk Weights - IRB-Foundation Amount % of Total Conversion Risk Off Balance Sheet Commitments as of March 20, 2017 Risk Weight % (Million IRR) Commitments Factor % Weighted Commitments for guarantees issued (Credit Conversion 16,520,832 63.73 20 70 2,312,916 Factor = 20%) Commitments for guarantees issued (Credit Conversion 3,369,751 13.00 50 70 1,179,413 Factor = 50%) Commitments for letter of credit issued (- Credit 2,033,204 7.84 20 70 284,649 Conversion Factor= 20%) Commitments for letter of credit issued (- Credit 597,133 2.30 50 70 208,997 Conversion Factor =50%) Guaranty for non-governmental participation bonds 2,555,740 9.86 50 70 894,509 (Credit Conversion Factor = 50%) Other commitments (Credit Conversion Factor =100%) 196,542 0.76 100 70 137,579 Managed Accounts 651,829 2.51 0 70 - Total of Commitments1 25,925,031 Total of Risk Weighted Commitments 5,018,063 Total of Risk weighted Assets and Commitments 56,125,312
1. Current deposit required for guarantee issue and down payment required for letter of credit is deducted. REVIEW OF RISKS AND DISCLOSURE 43
1.6.2 - Basel-III Standardized Approach financial institutions was less than 10% of the Bank’s Basel-III For calculation of CAR according to Basel-III Standardized Tier 1 capital, therefore, there were no deductions from capital Approach, the average risk weight of the performing loan concerning these investments, however these investments were portfolio will be set to 100% compared to 106.8% for IRB- risk weighted at 250%. We risk weighted our investments in Foundation. We risk weighted our exposure to other banks at Tehran Stock Exchange at 300%. The market risk related to 100% considering our estimated low Basel-III capital adequacy interest rate risk was estimated to be nil. The market risk due ratios for other banks. The long term investment of the Bank in to foreign exchange rate fluctuations was extremely small and constituted 0.01% of the total risk weighted assets.
Table 30 - Assets Risk Weights - Basel-III Standardized Approach Risk Each Item as Management Report Amount Risk Weight Weighted On Balance Sheet Assets as of March 20, 2017 Percentage of (IRR million) (Percentage) Assets Total Assets (IRR million) Cash and equivalents 730,251 0.98 0 - Due from CBI & other banks (Encumbered) 6,310,934 8.45 0 - Loans and Advances 53,562,768 - Loans funded using MEB resources excluding doubtful loans (Net of 22,663,685 30.36 100 22,663,685 Provisions) Loans guaranteed by real states 12,945,477 17.34 50 6,472,739 Loans financed by NDF1 16,650,059 22.30 100 16,650,059 Suspended Loan 1,153,740 10.55 150 1,730,610 Doubtful Loans (Net of Provisions) 149,807 0.20 0 - Investments in shares and securities with fixed income 3,836,439 - Investment in equity 407,751 0.55 300 1,223,253 Investment in Islamic treasury bill or governmental securities with CBI 688,386 0.92 0 - guarantee Investment in government securities with government guarantee 2,290,851 3.07 20 458,170
Investment in non-government securities with government guarantee 0 0.00 20 - Review of Risks and Disclosure Investment in non-government securities without government or banks 325,251 0.44 100 325,251 guarantee Investments in financial institutions 124,200 - Investments in financial institutions less than 10% of Tier 1 Capital 124,200 0.17 250 310,500 Deducted Investments in financial institutions in excess of 10% of Tier 1 Capital 0 0.00 - from Capital Due From Subsidiaries 0 0.00 100 - Other Account Receivables 878,490 1.18 100 878,490 Tangible Fixed Assets 2,090,581 2.80 100 2,090,581 Intangible Assets except Goodwill 120,934 0.16 100 120,934 Deducted Goodwill 813,037 1.09 - from Capital Regulatory Deposits with CBI 4,363,685 5.85 0 - Other Assets 1,943,887 2.60 100 1,943,887 Total of Assets 74,651,006 100.00 54,868,159
1. Although we could assign risk weight of zero percent to the loans given from NDF, we assumed the risk weight to be 100 percent because Basel-III does not differen- Survey of the Iranian Economy tiate loans from internal funds and other one and suggest risk weight of 100 percent to loans Table 31 - Off Balance Sheet Risk Weights - Standardized Approach Amount % of Total Conversion Risk Off Balance Sheet Commitments as of March 20, 2017 Risk Weight % (Million IRR) Commitments Factor % Weighted Commitments for guarantees issued (Credit Conversion 16,520,832 63.73 20 100 3,304,166 Factor = 20%) Commitments for guarantees issued (Credit Conversion 3,369,751 13.00 50 100 1,684,876 Factor = 50%) Commitments for letter of credit issued (- Credit 2,033,204 7.84 20 100 406,641 Conversion Factor= 20%) Commitments for letter of credit issued (- Credit 597,133 2.30 50 100 298,567 Conversion Factor =50%) Guaranty for non-governmental participation bonds 2,555,740 9.86 50 100 1,277,870 (Credit Conversion Factor = 50%) Other commitments (Credit Conversion Factor =100%) 196,542 0.76 100 100 196,542 Managed Accounts 651,829 2.51 0 100 0 and Financial Statements Total of Commitments1 25,925,031 Report of Independent Auditor Total of Risk Weighted Commitments 7,168,661 Total of Risk weighted Assets and Commitments 62,036,820
1. Current deposit required for guarantee issue and down payment required for letter of credit is deducted. 44 MIDDLE EAST BANK ANNUAL REPORT
1.6.3 - FX Market Risk and Operational Risk Calculation Table 32 - Market Risk and Operational Risk Risk Type Business Type Factor Multiplier Risk Weighted Market risk due to exchange rate volatility 40,544 12.5 506,800 Market risk due to short-term Equity Investment Portfolio1 84,368 12.5 1,054,600 The risk weight for Operational Risk using updated Basel standard approach 240,125 12.5 3,001,564 FX Market Risk and Operational Risk 4,562,964 1. In IRB-Foundation approach we calculated the risk weight of 202% for our investments in Tehran Stock Exchange using the Value at Risk (VaR) methodologies, multiplying VaR by multiplier (12.5) and after all adding the result into the denominator of CAR ratio as market risk but in Standardized Approach risk weight for equity investment in acceptable equity exchanges is 300% and using in risk weighted asset.
1.6.4 - Tier 1 and Tier 2 Capital Adequacy Ratios Using Different Approaches Table 33 – Summary of Total Risk Weighted Assets with Different Approaches Standardized Risk Items (IRR million) IRB-Foundation Approach On Balance Sheet Assets 51,107,249 54,868,159 Off Balance Sheet Commitments 5,018,063 7,168,661 Operational Risk 3,001,564 3,001,564 FX Market Risk 1,561,400 506,800 Total Risk Weighted Assets 60,688,276 65,545,184
Table 34 - CAR Calculation Standardized Eligible Capital (IRR million) Basel-III IRB-Foundation Approach Total Equity 7,828,832 7,828,832 Loss due to remaining amount of doubtful loans1 (149,807) (149,807) Less goodwill (813,037) (813,037) Less investments in financial institutions above 10% of bank Tier 1 - - capital Total Eligible Tier 1 Capital 6,865,988 6,865,988 Tier 2 Capital(=General Loss Provision) 787,300 787,299 Eligible Tier 1 and Tier 2 Capital 7,653,288 7,653,287 1.25% of total risk 758,603 819,315 Less exceeding 1.25% of total risk from Tier 2 Capital 28,697 - Total Eligible Tier 1 Capital + Tier 2 Capital 7,624,591 7,653,287 Total Risk Weighted Assets + Operational Risk + FX 60,688,276 65,545,184 CAR Tier 1 11.3 10.5 CAR Tier 2 1.3 1.2 CAR (Tier1+Tier2) 12.6 11.7
1. It is the difference between doubtful loans and the amount of provision for these loans
1.7 - Stress Testing In order to perform our stress test we assume that MEB will year. Table 35 below summarizes the severity of economic maintain the same balance sheet size and composition as of situations dependent on average oil price for the year and the March 20, 2017 for the year ending March 19, 2018. We assume effect on credit worthiness of our clients and the resulting loss/ the credit quality of our clients would depend on national real profit and the Capital Adequacy Requirement (CAR). GDP, which in turn would depend on average oil price for the
Table 35 - Stress Test Assumptions Expected Loss/Profit Profits Distribution (Percentage) CAR IRB-F Economic stress scenarios (IRR million) Scenario 1 (Base case) 40 +3 to +4 No change Scenario 2 (Less severe) 35 +1 to +3 One notch decline Scenario 3(more severe) 30 -1 to +1 Two notches decline Scenario 4 (most severe) 20 -4 to -1 Three notches decline REVIEW OF RISKS AND DISCLOSURE 45
Table 36 - Stress Test Results Expected Loss/ Overdue loans Suspended Doubtful loans Loans Risk Economic Stress Scenarios Profit (Million as a % of Total loans as a % of as a % of Total CAR IRB-F Weight % IRR) Loans Total Loans Loans Scenario 1 (Base case) 109.9 1,864,87 2.3 3.0 0.8 12.6% Scenario 2 (Less severe) 105.4 (437,226) 9.8 0.0 6.9 9.0% Scenario 3(More severe) 118.8 (1,713,402) 9.7 0.0 10.4 6.4% Scenario 4 (Most severe) 126.9 (2,594,520) 12.2 0.0 12.5 4.8%
Scenario 1 - Base case scenario: Similar to current situation. credit ratings of all performing loans with rating of CCC and
For the year ending March 19, 2018, we assume the same above were downgraded by two notches. 80% of performing Management Report assets composition and the same credit worthiness for loans as loans rated CCC- to C go to overdue status. All overdue, of March 20, 2017 as reported in Table 12-2 – Loans Internal suspended, and doubtful loans and 20% of performing loans Rating. rated CCC- to C and 10% of not-rated loans go to default status. Scenario 2 - Less severe scenario: For the year ending March Also, we assume 25% of all not-rated loans go to overdue status. 19, 2018, we assume the same assets composition; however, the Scenario 4 - Most severe scenario: For the year ending March credit ratings of all performing loans with rating of CCC and 19, 2018, we assume the same assets composition; however, the above were downgraded by one notch. 90% of performing loans credit ratings of all performing loans with rating of CCC and rated CCC- to C went overdue status. All currently overdue, above were downgraded by three notches. 70% of performing suspended, and doubtful loans and 10% of performing loans loans rated CCC- to C go to overdue status. All overdue, rated CCC- to C go to default status. Also, we assume 20% of suspended, and doubtful loans and 30% of performing loans all not-rated loans go to overdue status. rated CCC- to C and 20% of not-rated loans go to default status. Scenario 3 - More severe scenario: For the year ending March Also, we assume 50% of all not-rated loans go to overdue status. 19, 2018, we assume the same assets composition; however, the Review of Risks and Disclosure Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 46 MIDDLE EAST BANK ANNUAL REPORT
2. Compliance
MEB has adopted comprehensive policies, procedures, and protection, as well as financial crimes, including money programs to ensure that staff fully understand the importance laundering, terrorism financing, violating sanctions, bribery, of compliance, and take care not to breach or disregard issues and corruption. such as code of ethics, fair lending practice, and information
2.1 - Responsibilities AML & Compliance Department’s ultimate goal is to ensure to reduce compliance risks. that the Bank observes all applicable domestic and international The AML & Compliance Department also adopts solutions to laws, rules, regulations and standards and thus safeguards the address all identified risks, develops compliance procedures Bank’s reputation. for new regulations, and oversees staff training programs. Its General tasks of this department include identification, other activities include giving advice on regulatory challenges, assessment, controls, and monitoring compliance risks and carrying on enhanced due diligence for high risk cases, and reporting them to the Board of Directors, which may include educating and training staff on ways to avoid unintentionally assessing the effectiveness of policies and procedures adopted infringing rules or creating conflicts of interest.
2.2 - Structure MEB’s AML & Compliance Department is under the direct Managing Director, and the Board of Directors. supervision of the Managing Director and is responsible for The Department also interacts with other departments of the implementing the policies approved by the board of directors Bank, including Legal, International, Credit, Risk, and Internal through the Compliance Committee. The Head of the AML Audit Departments, as well as external financial regulators and & Compliance Department is responsible for implementing supervisors including CBI and the Financial Intelligence Unit and reviewing the policies and procedures adopted by this (FIU). Department and reports to the Compliance Committee, the
2.3 - Anti-Money Laundering and Countering the Financing of Terrorism MEB’s AML and combating the financing of terrorism (CFT) banking relationships are matters of concern with regards to procedures are in line with international standards such as the AML and CFT. MEB carries on due diligence and enhanced recommendations of the Financial Action Task Force (FATF) due diligence for high risk clients and transactions, using and also compatible with domestic regulations including the meticulous procedures and an automated monitoring system. CBI’s regulations and guidelines of the FIU. AML requirements apply to all units of the Bank, and all Furthermore, protective measures against Politically Exposed employees are required to comply with them in order to prevent Persons (PEPs), suspicious activities, shell-companies including misuse of the name or the products and services of the Bank for financial institutions and particularly banks, and correspondent money laundering and financing of terrorism purposes.
2.4 - AML/CFT Project During the year under review, in line with the Bank’s strategy its objective of expanding its international relationships, MEB of complying with national and international regulations and launched the AML/CFT and compliance enhancement project. REVIEW OF RISKS AND DISCLOSURE 47
The main issues addressed by this project are the policies and with external subsidiaries such as Exchange Co. and Stock procedures improvement, software development, and extensive Brokerage Co., all of them directly supervised by the CEO. training of the Bank’s staff. In the late 2016, MEB achieved the highest ranking among the Various departments of the Bank have collaborated and 34 country-wide banks and credit institutions in terms of anti- developed a project team to, specifically, elevate the Bank’s money laundering provisions. MEB also invited KPMG (one of AML/CFT functions to international levels and standards, the big four accounting firms) to examine and assess the Bank’s in compliance with FATF’s 40 recommendations and also to corrective actions on compliance, risk and internal audit. The establish the compliance culture within the Bank. The project Bank is now certain that it has a clear understating of, and is team included participants from the legal, risk, international, focused on, risks associated with AML/CFT and compliance IT, audit, policy & procedures, research & development credit, regulations. and operations departments as well as from branches along Management Report
2.5 - Sanctions MEB is committed to complying with relevant international Resolutions (UNSCRs), the European Union (EU), the US economic and trade sanction regulations and strives to identify, Office of Foreign Assets Control (OFAC), United Kingdom mitigate and manage relevant risks, not merely because it is (UK HM Treasury) and Switzerland (SECO). Furthermore, required to, but also because considers it to be the right thing MEB complies with the requirements of the Iranian sanction to do. Most important sanction regimes to which MEB adheres, regimes and foregoes any business that would breach Iranian are those imposed by the United Nations Security Council sanctions1.
2.6 - Anti-Bribery and Corruption MEB’s stance on bribery and corruption complements its As mentioned in MEB’s compliance policy, bribery and core values of ethics, integrity, and the standards of behavior corruption, in any form or under any title, is prohibited. This expected from the Bank’s staff. It is committed to observing applies to acceptance, offer, payment, giving, solicitation of or all regulations on anti-corruption and bribery in Iran as well as authorizing bribe. This policy sets MEB’s minimum standards. international principles in business.
2.7 - Assessing and Accepting Clients Review of Risks and Disclosure MEB has developed an effective mechanism for assessing its to them. clients and doing Know Your Customer (KYC) procedures and, MEB’s KYC procedures start with intensive checks and in order to facilitate carrying out comprehensive compliance, examinations before accepting a client and continue with regular has put in place a special practice for accepting new clients. reviews. KYC ensures that the bank knows detailed information Our procedures apply not only to individuals and corporations about the clients’ risk tolerance, investment knowledge and that are or may become our direct business partners, but also financial position. to beneficiaries who stand behind them or are indirectly linked
2.8 - Customer Risk Categorization Based on clients’ information, such as the history of their relations is carried on by a software and all the necessary information and with the Bank, their field of activity, nationality and financial factors are employed to calculate risk of the customer. Further to transparency, the Bank becomes capable of analyzing the risk classification, if the customer is regarded as high risk, enhanced associated with them and classifying the clients’ risk level in terms due diligence and constant monitoring will be conducted. of money laundering and financing of terrorism. This classification
2.9 - Enhanced Due Diligence Survey of the Iranian Economy Enhance due diligence (EDD) is required by the AML or any other financial crime through the services and products. & Compliance Department where the clients and/or their MEB considers a number of situations such as non-face-to-face transaction is considered to be of higher risk. This elevated clients relations, or dealing with a PEP as high risk. When an level of due diligence is required to mitigate the increased risk. EDD procedure is needed, more information and documents are MEB strives to mitigate higher risk situations where there is an requested by compliance officers. increased likelihood for money laundering, terrorist financing
2.10 - Softwares and Tools Compliance Screening Tool or international sanctions. The tool checks the clients in the Compliance Screening Toolkit is installed/employed for following databases: screening sanctions. This screening tool uses a mass database • International sanction lists such as UN, UK, EU, OFAC and containing restricted persons exposed to local restrictions SECO;
1. On July 14, 2015, Iran and the so-called group of 5+1 (China, France, Russia, taking necessary steps to implement their commitments under JCPOA. January and Financial Statements
UK, USA and Germany) as well as the European Union reached a Joint Compre- 16, 2016, was marked as the Implementation Day of the JCPOA when, as a result Report of Independent Auditor hensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program remains of Iran having verifiably met its nuclear commitments, the United States lifted its exclusively peaceful. October 18, 2015, was marked as the Adoption Day of the nuclear-related sanctions on Iran, as prescribed in JCPOA. Furthermore, all other JCPOA, the date on which the JCPOA came into effect and the parties set about nuclear-related sanctions on Iran, including the UN and EU sanctions, terminated. 48 MIDDLE EAST BANK ANNUAL REPORT
• Interpol list; own rules and regulations to detect any changes in the pattern of • Central Bank black list; the customer’s financial behavior. In addition, the categorization • Fraudulent persons; and of customer’s risk is inserted in the AML software. • Other restricted persons announced by legal authorities PEP Screening Tool AML Software Information collection on PEPs for this tool has been One of the measures taken to combat money laundering is the outsourced, so the toolkit carries on advanced database search. installation and use of advanced software to detect suspicious The customer is regularly checked by this toolkit and, in case of transactions. Not only does the software conform to the being detected as PEP, the EDD procedure is followed. regulations issued by the CBI, but it also satisfies the Bank’s
2.11 - Compliance Risk Management Compliance risks arise from non-conformance with laws, rules, The AML & Compliance Department is responsible for and regulations. In order to control and mitigate compliance assessment and implementation of appropriate measures to risks and avoid the legal, financial, and reputational losses to mitigate the identified risks. Regular update of risk analysis the Bank, all applicable national and international rules and is provided for the Compliance Committee or, if required, the regulations must be identified and satisfied. Board of Directors.
2.12. Awareness and Training MEB ensures that its staff are fully aware of the relevant compliance officers every year. The annual compliance training regulations and obligations. General trainings as part of program also includes tailor-made courses which provide the compliance concerning financial crime is provided twice a year necessary information to ensure observing related regulations. at least. Furthermore, special training packages are designed for
2.13 - Reporting The senior manager of AML & Compliance Department is tasked Director, Compliance Committee, and board members. with providing monthly and quarterly reports for the Managing
2.14 - Ethics and Integrity MEB’s compliance culture is anchored to the Code of Ethics. and professional conduct. All the Bank’s staff are required to The Code of Ethics is based on the MEB’s core values and complete training courses on a yearly basis and acknowledge articulates its commitment to the highest standards of ethical their understanding of the MEB’s Code of Ethics. 3. Internal Audit
3.1 - Definitions and Policies Internal audit is an independent activity to assure the board In order to achieve the above objectives, the Internal Audit of directors of the effectiveness of governance processes, risk Department (IAD) was established in MEB in 2012. management, and internal controls with value-adding purpose. Policies and procedures of the department are defined in REVIEW OF RISKS AND DISCLOSURE 49 the Audit Charter which is aligned with final version of the audit quality, and monitoring the progress); International Professional Practice Framework (IPPF) that was • Determining the structural principles of IAD including issued by the Institute of Internal Auditors. The Charter was independence, impartiality, professional care, and revised and approved by the board in 2017. The main topics commitment to excellence; covered by the Charter are as follows: • Complying with international standards and particularly the • Describing the mission and strategy of IAD; IPPF; and • Defining the scope of IAD responsibilities (management • Promoting principles of ethics and integrity within the of internal audit activities, nature of work, work planning, department. carrying out the work, information, assessment of internal
3.2 - Corporate Governance Management Report In the latest Basel Committee Guidelines on Corporate should assess the effectiveness of the management system, Governance adopted in 2015 (translated by the Central Bank risk management, and internal control system of the Bank. The of Iran), principle 10 recommends establishment of an Internal Bank’s Internal Audit charter covers the responsibilities and Audit Department in the banks. This Department should act duties set out in the above-mentioned Guideline. independently from all other operations and controls and
3.3 - Organizational Status All departments of the Bank are defined in a three-line defense Board of Directors. The Bank’s Audit Committee consists of model. The Internal Audit Department acts as the third line of three non-executive members of the Board of Directors and defense and independent from the first and second lines, reviews two independent professionals from banking sector. The Audit and evaluates the effectiveness of operations throughout the Committee was formed in 2012 and held 10 sessions during the Bank, and presents its reports to the Audit Committee and the year under review.
3.4 - Audit Universe and the Department Structure The Internal Audit Department has developed a three-year through electronic communication systems and increase of the strategy by preparing an Audit Universe based on which, speed of exchanging information, information security and IT Review of Risks and Disclosure conducting the operations would be on a risk-based approach. audit have gained special significance. Therefore, for assessing Audit Universe has been approved by the Audit Committee weaknesses and providing internal controls for IT, the internal and the Board of Directors. The Internal Audit’s structure and audit department employed COBIT 5 as its framework. operational plan have been revised according to Audit Universe. Auditing Based on Data Analytics and Data Mining Audit Universe identifies the points of focus of the audit, i.e., Complex processes and high volume of transactions have the structure and instruments for achieving the specified goals caused the Internal Audit Department to do auditing in the within three years. A summary of the issues pointed out in Audit coming years, Based on data analytics and data mining. Universe are as set forth below. Therefore, many obsolete and inefficient accounting methods 3.4.1- Points of Focus will be omitted and designing control scenarios through data analysis and auditing based on data mining will help them to Control Environment and Organizational Culture fulfill their responsibilities more efficiently. These scenarios Since a sound control environment is the key component of will increase awareness of the Internal Audit Department about internal control systems, the objective of this department would events that occur in the Bank in the shortest possible time and be enhancing the level of ethical and organizational culture. help to discover any off-line operations in the Bank quickly. According to this, the internal audit department reviews staff Anti-Money Laundering and Combating the Financing of and managers compliance with MEB’s adopted code of ethics, Survey of the Iranian Economy job description, rules and regulations and then analyzes the Terrorism (AML & CFT) causes of non-compliance and reports them periodically. Regarding international conditions and necessity of observance of AML & CFT regulations, internal audit department, as the Risk-Based Audit third line of defense, has taken steps to evaluate effectiveness Accurate assessment and effectiveness of operations were the and to satisfy these regulations. In 2016, a long-term project most important objectives of the Internal Audit Department in was defined and complying with these regulations was added the year under review. In this regard, it is necessary to assess to the agenda of all operating and controlling departments, the performance of the first and the second lines of defense. especially the Compliance Department. Monitoring the efficient Determining objectives, Bank strategy, risk strategy, risk and correct implementation of FATF recommendations entered inventory, risk appetite, and necessary controls to cover and the agenda of Internal Audit Department. This Department used manage risks and finally adherence to those documents are laws, regulations and internal related directions (instructions) essential points that are taken into consideration in the internal and also International Guidelines and instructions, including audit reports which are presented to Audit Committee. those published by Wolfsburg, Basel Committee and FATF, Information Security and IT Audit to prepare checklists and controls at different levels (first and In recent years, due to the high growth of banking services second lines of defense) and has produced and presented various reports about the status of the Bank to the Audit Committee. and Financial Statements Report of Independent Auditor 50 MIDDLE EAST BANK ANNUAL REPORT
4. Analysis of Financial Statements
4.1 - Financial and Operational Performance Based on MEB’s strategy and in order to expand its international financial reporting and affects all aspects of the business. relations, the Bank has decided to adopt IFRS for reporting Considering the complexity of accounting issues in banks, and purposes, in addition to producing reports according to local in order to use international experience of IFRS adoption, MEB GAAP. The Bank has finished gap analysis and is now preparing has used the consultancy services of KPMG. its IFRS financial statements. Based on international experience A summary of the Bank’s financial and operational performance of IFRS adoption, change to IFRS standards goes beyond in the year under review and preceding years is as follows. 4.1.1 - Principal Items of Balance Sheet
Increase Increase 20 Mar. 2017 Percentage 19 Mar. 2016 Percentage 20 Mar. 2015 Percentage Description (Decrease) (Decrease) of total of total of total (IRR million) (percent) (IRR million) (percent) (IRR million) A) Assets Credit facilities granted 53,625,316 72 91 28,097,787 68 31 21,474,088 70 Investments 3,952,339 5 8 3,648,680 9 133 1,562,813 5 Fixed assets 2,939,031 4 6 2,763,709 7 1 2,747,766 9 Statutory deposit 4,363,685 6 41 3,099,233 7 7 2,891,444 9 Other assets 9,663,878 13 156 3,768,414 9 85 2,041,080 7 Total Assets 74,544,249 100 80 41,377,823 100 35 30,717,191 100 B) Liabilities Customers' deposits 62,781,801 84 82 34,416,163 83 38 24,914,454 81 Other liabilities 3,979,106 5 232 1,198,546 3 65 728,551 2 Total Liabilities 66,760,907 90 87 35,614,709 86 39 25,643,005 83 C) Shareholders’ equity Share capital 4,000,000 5 0 4,000,000 10 0 4,000,000 13 Share capital increase in 996,416 1 100 - 0 0 - 0 progress Retained earnings and legal 2,786,926 4 58 1,763,114 4 64 1,074,186 3 reserve Total shareholders’ equity 7,783,342 10 35 5,763,114 14 14 5,074,186 17 Total Liabilities and 74,544,249 100 80 41,377,823 100 35 30,717,191 100 Shareholders’ Equity D) Customers’ commitments L/C commitments 2,975,041 11 19 2,507,746 12 274 670,033 5 Guarantees issued 21,543,141 77 29 16,750,179 83 42 11,779,733 88 Other commitments 2,752,282 10 187 957,530 5 9 880,890 7 Managed funds commitments 651,829 2 829 70,154 0 0 - 0 REVIEW OF RISKS AND DISCLOSURE 51
Credit Facilities Granted Fixed Assets Five fiscal years after establishment of the Bank, a significant As shown in supplementary notes 15 and 16 of the financial growth of 91% is seen in credit facilities extended in 2017 statements, the bulk of the Bank’s total fixed assets is in its compared to the previous financial year. It should be noted headquarters and branches’ lands, buildings, and goodwill which that facilities extended in foreign currency have contributed to experienced significant growth year on year. The balance shows this growth. The balance of facilities comprises 72 percent of a small increase in the value of fixed assets in the current fiscal total assets, pointing to the Bank’s intent to play its financial year, and fixed assets comprise only 4 percent of total assets (it intermediary role. On the other hand, monitoring and controlling was 7 percent in the preceding year) showing the Bank’s intention of the customers’ financial status resulted in 4.3 percent of non- to use its resources in interest-bearing assets. Out of 16 branches performing loan (NPL) at the end of fiscal year which shows the of the Bank at the end of the year under review, 9 are freeholds Bank did not compromise prudence and quality for growth. and 7 are leaseholds. Management Report Investments Other Assets Out of IRR3,952 billion of the Bank’s investments, IRR258 billion Out of IRR9,663 billion of other assets displayed in the previous goes to long-term investments in the share capital of MEB’s table, IRR6,105 billion are receivables from other banks and Brokerage Co., MEB Currency Exchange Co., Dadeh Pardazan approximately IRR4,000 billion are the amount used in interbank Simaye Aftab (DSA) Co., and MEB’s Life Insurance Co. In line market and the remaining goes to other receivables. with CBI instructions, actions were taken to sell Kardan Investment Deposits Bank in the year under review. In the same line, according to the The Bank’s deposits at the end of the year stood at IRR62,782 defined plan, IRR407 billion investment in listed shares will be sold billion, showing an increase of 82 percent from the year before. in 2018. The remaining is composed of investments in bonds and Nevertheless, and despite the increase of IRR1,000 billion in the mutual funds, acquired for liquidity management and risk mitigation Bank’s paid-in capital, the ratio of deposits to capital rose from purposes. 8.6 to 12.5 folds. 4.1.2-Principal Items of Income Statements The principal items and brief explanation of some items are shown in the following table:
Year ended 20 Increase Year ended 19 Increase Year ended 20 Description Percentage Percentage Percentage Mar. 2017 of total (Decrease) Mar. 2016 of total (Decrease) Mar. 2015 of total Review of Risks and Disclosure (IRR million) income (percent) (IRR million) income (percent) (IRR million) income A) Income Interest income on credit facilities granted, deposits and 9,085,696 89 40 6,510,681 89 32 4,932,743 94 debt instruments Net income (loss) from 379,712 4 13 336,791 5 (2.038) (17,376) 0 investment Fees and commission income 581,814 6 49 390,259 5 61 243,084 5 Other income 117,001 1 107 56,658 1 (9) 62,091 1 Total income 10,164,223 100 39 7,294,389 100 40 5,220,542 100 B) Expenses Interest expenses (6,589,609) 65 34 (4,910,753) 67 32 (3,706,636) 71 Administration and general (615,911) 6 14 (542,442) 7 58 (344,132) 7 expenses Provision for bad and doubtful (554,894) 5 173 (203,253) 3 37 (148,809) 3 Survey of the Iranian Economy debts Depreciation and amortization (181,867) 2 37 (132,716) 2 173 (48,677) 1 Fees and commission expenses (24,851) 0 149 (9,981) 0 (9) (11,022) 0 Total expenses (7,967,132) 78 37 (5,799,145) 80 36 (4,259,276) 82 C) Profit before tax 2,197,091 22 47 1,495,244 20 56 961,266 18 D) Net income after tax 2,023,812 20 49 1,355,526 19 60 848,516 16 Revenues Expenses Almost 89 percent of the Bank’s revenues came from interest Interest Expenses income, showing a considerable growth rate of 40 percent. The Compared with the previous year, MEB has managed to 13 percent growth in revenues from investments, year on year, decrease its cost of funds from 21.1 percent to 18.2 percent and comprising 4 percent of the total income of the Bank is mainly this had a considerable effect on maintaining the profit margin due to gains from the sale of Kardan Investment Bank Co. of money activities. Regarding the 49 percent growth in commission income, it Provision for Bad Loans NPL ratio stands at 4.3 percent. Out of the provisions for
should be noted that some IRR407 billion of total commission and Financial Statements bad loans, IRR394 billion is related to general provisions income (IRR581 billion) come from 43 percent increase in Report of Independent Auditor guarantees issued. (irrespective of the amount of collaterals and the category of facilities) which is due to increase in the amount of outstanding facilities, and the remaining is related to specific provisions. 52 MIDDLE EAST BANK ANNUAL REPORT
4.2 - Returns on Assets and Liabilities and Their Compatibility with Income Statement
Average Projected Weighted Projected Percentage Actual Return Description Balance Return Rate Return Rate Return of Total (IRR million) (percent) (percent) (IRR million) (IRR million) Cash Cash 2,401,046 4 0 0 - - Unencumbered deposits 709,246 1 0 0 - - Due from Banks and financial institutions Current deposits 1,906,234 3 0 0 - - Term deposits 1,381,413 2 21 0 293,965 292,928 Credit facilities granted Credit facilities granted-LCY 29,360,461 46 23 10 6,629,592 6,621,947 Credit facilities granted-FCY 14,659,709 23 8 2 1,180,107 1,181,214 Investments Investment in listed shares 424,586 1 6 0 24,626 24,848 Long-term investment in unlisted shares 483,862 1 35 0 169,352 354,864* Participating bonds 4,064,687 6 23 1 951,137 950,980 Other accounts receivable 1,591,973 2 0 0 - - Fixed assets 2,871,911 4 0 0 - - Statutory deposit 3,912,872 6 1 0 39,129 38,627 Other assets 632,703 1 0 0 - - Total Assets 64,400,703 100 Due to Banks and Financial Institutions Current deposits 545,586 1 0 0 - - Term deposits 871,597 1 2 0 (16,560) (16,970) Customers’ current deposits 7,746,438 12 0 0 - - Dividends payable 176,390 0 0 0 - - Income tax provision 123,822 0 0 0 - - Other liabilities and accruals 1,742,912 3 0 0 - - Staff termination benefits 46,859 0 0 0 - - Customers’ investment deposits Term deposits 30,502,585 47 18 9 (5,565,234) (5,580,481) Inter banks deposits 901,598 1 18 0 (165,083) (166,652) Term deposits-FCY 13,836,101 21 6 1 (830,166) (825,506) Interest payable to investment deposit 255,771 0 0 0 - - holders Total liabilities and interest and benefits of 56,749,660 88 investment deposit holders Accumulated depreciation 279,255 0 0 0 - - Provision for bad and doubtful debts 833,702 1 0 0 - - Total Provisions 1,112,957 2 Share capital 4,000,000 6 0 0 - - Capital increase in process 565,222 1 0 0 - - Legal reserve 658,085 1 0 0 - - Retained earnings 1,314,779 2 0 0 - - Total Shareholders' Equity 6,538,086 10 Total liabilities, interest and benefits of investment deposit holders and 64,400,703 100 shareholders’ equity Net profit before fee income, general expenses and doubtful debts provisions 2,710,864 2,875,798 Net return on assets before fee income, general expenses and doubtful debts provisions 4.2% 4.5% Fee Income and foreign exchange profit(Loss) 668,241 668,241 Expenses (1,345,363) (1,346,948) Profit Before Tax 2,033,742 2,197,091 * The difference between the projected return and the actual return on long-term investments was due to the gain on the sale of investment in Kardan Investment Co. (note 30.2.1) REVIEW OF RISKS AND DISCLOSURE 53
4.3 - Financial and Operational Indicators
Summary of financial and operational indicators for years 2015 to 2017 is as below: (percent) Description 20 Mar. 2017 19 Mar. 2016 20 Mar. 2015 Capital adequacy ratio 13.54 18.01 20.96 Loans to deposits 87 83 88 Loans to total assets 72 68 70 Total expenses to total income 80 81 84 Liability ratio 90 86 83 Return on assets 3 4 3 Management Report Return on capital 45 34 21 Total deposits to capital (times) 12.56 8.60 6.23 Interest paid to interest received 73 75 85 Interest paid to total deposits 15.32 18.24 18.90 Interest received to loans 23.35 27.40 28.10 Interest paid to total expenses 81 83 85 Interest received to total income 77 82 81 Non-performing loans ratio 4.3 4.2 2.0 Depreciation to total expenses 2.2 2.2 1.1 Personnel expenses to total expenses 4.3 4.6 4.5 Bad debt expenses to total expenses 6.8 3.4 3.4 (IRR million) Description 2017 2016 2015 Total income per branch (average no.) 700,981 607,866 549,531 Net profit per branch (average no.) 139,573 112,961 89,317 Total deposits per branch (average no.) 4,329,779 2,868,014 2,622,574 Total loans per branch (average no.) 3,772,427 2,386,862 2,297,006 Review of Risks and Disclosure Total income to the number of personnel 30,072 23,995 20,966 Net profit to the number of personnel (average no.) 5,988 4,459 3,408 Total deposits to the number of personnel (average no.) 185,745 113,211 100,058 Total loans to the number of personnel (average no.) 161,835 94,218 87,637
4.4 - Deposits A summary of the Bank’s performance in absorbing customers’ deposits in 2016 and 2017 is as below.
Rial Customers’ Resources (IRR million) 20 Mar. 2017 19 Mar. 2016 Description Percentage Percentage Number Amount Number Amount of Total of Total Current deposits 6,824 4,580,003 10.7 5,579 3,232,708 10 Ordinary short-term investment deposits 31,813 21,038,003 49.3 24,359 12,264,299 40
Special short-term investment deposits 10 44,629 0.1 266 1,165,675 4 Survey of the Iranian Economy Long-term deposits 3,494 15,239,836 35.7 3,958 12,578,076 41 Deposits against guarantee issued 1,941 1,613,274 3.8 1,728 1,331,115 4 Prepayments for LCs 59 150,395 0.4 10 179,039 1 Total 44,141 42,666,140 100 35,900 30,750,912 100
Mobilization of Foreign Currency Resources (IRR million) 20 Mar. 2017 19 Mar. 2016 Description Percentage Percentage Number Amount Number Amount of Total of Total Current deposits 640 440,534 2.42 421 53,348 4.5 Ordinary short-term investment deposits 3 143 0.001 8 627 0.05 Special short-term investment deposits 39 10,087 0.06 47 13,172 1.15 Long-term investment deposits-FCY 301 17,496,576 96.24 218 822,283 70
Deposits against guarantee issued-FCY 6 39,284 0.22 3 14,137 1.3 and Financial Statements Prepayments for LCs-FCY 93 194,309 1.07 28 277,397 23 Report of Independent Auditor Total 1,082 18,180,933 100 725 1,180,964 100 54 MIDDLE EAST BANK ANNUAL REPORT
Interest-Bearing and Non-Interest-Bearing Deposits 20 Mar. 2017 19 Mar. 2016 Description Amount Amount Number Percentage of Total Number Percentage of Total (IRR million) (IRR million) Non-interest-bearing deposits 8,824 6,343,672 15 7,317 4,742,862 15 Interest-bearing deposits 35,317 36,322,468 85 28,583 26,008,050 85 Total 44,141 42,666,140 100 35,900 30,750,912 100
Interest-Bearing and Non-Interest-Bearing Deposits Non-Interest-Bearing Deposits Interest-Bearing Deposits
85% 85%
15% 15% March 20, 2017 March 19, 2016
Comparative Analysis of Fluctuations of Interest Expenses on Rial Customers’ Deposits Due to Volume and Rate Description 20 Mar. 2017 19 Mar. 2016 Average balance of deposits (IRR million) 36,322,480 25,896,958 Weighted average interest rate on deposits (before subtracting statutory deposits) 15.32% 18.24% Interest expenses on rials deposits (IRR million) 5,580,480 4,723,335 Increase in interest expenses (IRR million) 857,145 1,015,637 Increase (decrease) in interest expenses due to volume (IRR million) 1,916,820 1,225,923 Increase (decrease) % 224% 120% Increase (decrease) in interest expenses due to rate (IRR million) (1,059,675) (210,286) Increase (decrease) % (124%) (20%)
4.5 - Facilities Granted A summary of the Bank’s performance in granting facilities to customers is as follows. (IRR million) Description Approvals Outstanding on 20 Mar. 2017 Loans 79,314,398 54,700,194 Issued guarantees 50,380,030 21,543,141 LCs 34,051,773 2,975,041
Comparative Analysis of Fluctuations of Interest Income on Customers’ Rial Loans (IRR million) Description 2017 2016 Average balance of loans 29,360,461 22,012,461 Interest income from loans 6,595,970 5,963,462 Weighted average rate of interest 23.4% 27.4% Increase in interest income 632,508 1,742,818 Increase (decrease) in interest income due to volume 2,013,352 1,955,097 Increase (decrease) % 318% 112% Increase (decrease) in interest income due to rate (1,380,844) (212,279) Increase (decrease) % (218%) (12%) REVIEW OF RISKS AND DISCLOSURE 55
5. Investments The Bank’s investment in listed shares and direct investments as of March 20, 2017, are as follows.
5.1 - Listed Companies in Tehran Exchange (IRR million) Description Cost Market Value Dividend Transaction Profit (Loss) Investment in Listed Shares 522,500 407,446 56,995 (43,140) Management Report 5.2 - Unlisted Companies
Number of Total Percentage of Paid-up Percentage of Company’s Name Cost Shares Capital Bank’s Ownership Dadeh Pardazan Simaye Aftab 30,000,000 35 100 10,500 MEB Brokerage Co. 100,000,000 100 75 89,904 MEB Currency Exchange Co. 40,000,000 100 95 38,000 MEB Life Insurance Co. 1,200,000,000 50 20 120,000
Dadeh Pardazan Simaye Aftab (DSA) Co. activities include trading and rendering market making as well DSA was incorporated on February 5, 2013, with a capital as financial and consulting services. of IRR30 billion. At first, DSA’s mission was to internalize Middle East Bank Currency Exchange Co. and customize the purchased banking software for MEB. Subsequently, all MEB technological issues including but not MEB’s Currency Exchange Company was incorporated on limited to information technology and hardware and network February 2, 2015, with a capital of IRR40 billion. Cash bill services were assigned to DSA for operating and maintaining exchange, gold coin trading, and trustee money transfer are purposes. DSA operates from MEB’s Operations Center and among its activities. Review of Risks and Disclosure provides the full spectrum of technology services, including Middle East Bank Life Insurance Co. banking software application, system software, hardware, License for establishment of MEB’s Life Insurance Co. was network services, enhancements, and maintenance and project granted by the High Insurance Council in September 2012 management. In addition to having the in-depth knowledge of and the underwriting process was completed in March 2016 in the banking systems, DSA personnel have unique and highly OTC’s Third Market. This Company, with a capital of IRR1,200 effective project management skills in the development and billion, provides all services related to life insurance. implementation of time critical issues online. Middle East Bank Brokerage Co. MEB’s Brokerage Company was established in March 1995. The Company’s name used to be Saham Pouya but it was renamed by the new owners in 2013. The Company’s major Survey of the Iranian Economy and Financial Statements Report of Independent Auditor
Chapter 3 Survey of the Iranian Economy
SURVEY OF THE IRANIAN ECONOMY 59 Management Report Review of Risks and Disclosure
In 1395 Iran experienced its lowest inflation rate and highest bill. The parliament also approved a government-proposed economic growth rate of the past 25 years. The surge in amendment to the Budget Law that aimed at re-capitalizing oil production following the implementation of the Joint state-owned banks or settling banks’ claims on the public sector Comprehensive Plan of Action (JCPOA) in the winter of 1394 by re-valuating CBI’s net foreign assets valued at IRR450 and the rise in global oil prices were by far the most important trillion. contributors to this exceptional performance. The utilization During the first 11 months of 1395 government’s tax revenues of high levels of spare capacity in the economy resulted in rose by 31.1 percent, other current revenues by 33.2 percent, fast production growth in non-oil sectors as well, despite the and current expenditures by 20.2 percent. In the same period oil contraction of gross fixed capital formation in four of the revenues rose by 18.5 percent while development expenditures preceding five years. According to Central Bank of Iran (CBI) fell by 12.2 percent. As a result, the budget deficit fell by statistics, in 1395 the inflation rate reached 9.0 percent and 23.1 percent and reached IRR232.9 trillion. The government economic growth registered 12.5 percent -- 3.3 percent if the relied so much on the Treasury’s revolving fund for financing oil sector is excluded. Among the four main economic sectors, its budget deficit that during the first 9 months of the year, the Survey of the Iranian Economy the oil sector grew by 61.6 percent, followed by agriculture at disposal of government securities amounted to only IRR94.5 4.2 percent, services at 3.6 percent, and industries and mining trillion and the disposal of state-owned companies to only at 2.2 percent. On the expenditures side, private consumption IRR46.6 trillion while the “other” subgroup of the disposal of expenditures which constitute over half of the GDP, experienced financial assets, which includes using the Treasury’s revolving 3.8 percent growth; government consumption expenditures fund, rose by 140.4 percent to IRR200 trillion. grew by 3.7 percent; and net exports grew by 63.8 percent, In 1395 the balance of payments was influenced by the surge while persistence of the housing market recession resulted in in oil exports following the lifting of the sanctions, global oil 3.7 percent fall in gross fixed capital formation. price increases and the capital flows in and out of the country. Notwithstanding the exceptional GDP growth and 616 thousand The latest statistics are for the end of the third quarter of 1395 jobs created in 1395, the unemployment rate rose by 1.4 and indicate a 19.7 percent rise in the current account balance, a percentage points to 12.4 percent. This unusual event was due 35.9 percent rise in the goods account and a 71.7 percent rise in to the fact that the economically active population grew faster the services account deficit from a year earlier. During the first than the employed population. In 1395, 25.8 million individuals three quarters of 1395 the surplus in oil account increased by aged 10 and above were economically active and participation 52.5 percent to USD38.7 billion and the deficit in non-oil goods rate stood at 39.4 percent. account also rose by 66.9 percent to USD22.7 billion. The latter and Financial Statements The Budget Bill of 1395 raised the main figures by 13 percent was due to both a rise in non-oil imports and a fall in non-oil Report of Independent Auditor from their 1394 levels, which was above the expected inflation exports. Although the current account rose by USD2 billion, rate, and the parliament raised them further before passing the factors including USD14.1 billion drop in net capital account 60 MIDDLE EAST BANK ANNUAL REPORT caused the overall balance to turn negative and the foreign that a large portion of the extended facilities in recent years has reserves to drop by USD7.9 billion. not yet been settled, raising the ratio of non-performing loans The free market USD/IRR exchange rate averaged 36,400 in (NPLs) to total facilities to 11.7 percent at the end of the fall 1395. This exchange rate was gradually increasing in the first of 1395, 1.5 percentage points up from that at the end of 1394. two quarters of the year but then speeded up in the third quarter. The point-to-point consumer price inflation rate reached its The petrochemical companies’ reluctance to exchange their lowest in the past three decades of 6.8 percent at the end of export proceeds, the rise in demand for foreign exchange by the spring of 1395 and then reversed course and reached 11.9 commercial companies for their international settlements, and percent at the end of the year. The annual inflation rate reached the outcome of the presidential election in the United States 9.0 percent at the end of 1395 to register the first end-of-the- were among factors contributing to the sharper increase in the year single-digit inflation rate of the past quarter of century. USD/IRR exchange rate in the fall. The rate reached the high The point-to-point producer price inflation rate, which is often of 41,450 in the first week of winter but then quickly fell and considered a precursor to the consumer price inflation rate, also hovered around 37,500 for the remainder of the year. reached its low of 1.6 percent at the end of spring and then Regarding monetary developments, at the end of 11/1395 the increased to reach 9.1 percent at the end of the year. monetary base rose by 18.1 percent mainly as a result of a 35.3 The overall index of the Tehran Stock Exchange (TSE), which percent increase in CBI claims on banks. The M2 liquidity rose had risen sharply in 1394, fell by 3.7 percent in 1395. Its price by 24.1 percent to IRR12,111 trillion out of which quasi-money index also fell by 12.1 percent and its market capitalization accounted for 87.4 percent and the M1 money for the rest. fell by 4.5 percent to IRR3,220 trillion. However, the Over the The balance of deposits with the banks and non-bank credit Counter (OTC) market’s overall index rose by 8.6 percent and institutions, in both IRR and foreign currencies, stood at its market capitalization by 8.4 percent. Financial securities IRR12,728.4 trillion at the end of 1395, indicating a 19.9 accounted for 56 percent of the value of OTC’s transactions percent rise from the end of 1394. The funds available to the in 1395. banks for credit extension, i.e., deposits after taking out reserve Iran’s business environment has often been described as requirements, rose by 18.8 percent from the end of 1394. The unfriendly by potential foreign investors. On the basis of the ratio of extended facilities to deposits (after the deduction latest “Easing of Doing Business” report by the World Bank, of reserves) rose by 4.0 percentage points to 86.7 percent. in 2017 Iran’s ranking dropped by 3 places to120th. The World The assets of banks and non-bank credit institutions totaled Economic Forum has also lowered Iran’s competitiveness rank IRR20,382.0 trillion at the end of 11/1395, showing a 15.4 among its sample of 140 countries from 74th in 2015-2016 to percent rise from the end of 1394 and 18.8 percent rise from 76th in 2016-17. However, the result of the survey carried out 11/1394. by the Majlis (Iran’s parliament) Research Center in the third Extended facilities grew by 31.4 percent in 1395. Facilities for quarter of 1395 indicates a slight improvement in the country’s financing working capital rose by 33.3 percent and accounted for business environment from both the previous quarter and a year 64.0 percent of the total extended facilities. It should be noted earlier. 1. Real Sector After eight consecutive quarters of stagflation during 1391-92, also important factors in this growth. Removal of sanctions on the 11th government initiated non-inflationary growth policies exports also led to increased non-oil exports, and thanks to high that reined in inflation and brought about 3.2 percent growth in spare capacity in the economy, an exceptional economic growth 1393 despite the dramatic fall in oil prices and while external rate was achieved despite the low level of investment in recent sanctions were still in place. The fall in both oil prices and oil years. Given the unbalanced nature of the growth and weak exports in that year led to a severe drop in oil revenues. High linkages between the oil and petrochemicals sectors with the inventory of firms indicated that the low level of per capita rest of the economy the boom was slow to be felt in all corners. income at the end of the 2-year recession in conjunction with As shown in Table 1, GDP growth rate in 1395 was 12.5 percent the negative effect of the fall in oil prices on the government’s based on the preliminary estimates of the CBI. Among the main current and development expenditures signaled issues on subsectors of the economy, the value-added of the oil sector the demand side. In addition, the newfound optimism in the which accounts for 12.3 percent of the GDP rose at the highest aftermath of the JCPOA resulted in the postponement of rate of 61.6 percent. Non-oil GDP growth rate reached 3.3 demand for durable goods in the hope of lower prices, thus the percent in this period. The agriculture sector experienced the aggregate demand diminished. Under these circumstances low second highest growth rate with 4.2 percent and was the only demand led to a slightly negative GDP growth in 1394. sector of the economy that has persistently grown by about In 1395, the lowest inflation rate and the highest economic 5 percent a year in recent years, even during the recession of growth in the past quarter century were achieved. The surge 1391-92. The services sector that accounts for 57.1 percent of in oil production and export in the aftermath of the JCPOA the GDP, experienced 3.6 percent growth and the industries and coupled with the rise in global oil prices contributed to this high mining sector grew by 2.2 percent, despite the persistence of economic growth. The considerable rise in gas production and the construction sector’s negative growth in recent years and its the rise in the production and exports of petrochemicals were considerable contraction in 1395. SURVEY OF THE IRANIAN ECONOMY 61
Table 1 - Real Growth Rates of Economic Sectors and their Shares in the GDP in 1395 at Current Prices (percent) 1395* Share in 1392 1393 1394 Q1 Q2 Q3 Q4 Year 1395 Agriculture 5.5 5.4 4.6 3.5 4.1 5.0 4.4 4.2 10.0 Oil -5.1 4.5 7.2 57.6 66.2 77.7 47.1 61.6 12.3 Industries and Mining -4.2 5.4 -6.1 -5.1 3.0 4.1 6.4 2.2 22.7 Services 2.3 1.4 -2.3 -0.7 4.2 6.0 4.9 3.6 57.1 GDP at Basic Prices -0.3 3.2 -1.6 7.5 12.9 16.8 12.9 12.5 100.0 Non-oil GDP at Basic Prices 0.5 3.0 -3.1 -1.8 3.9 5.4 5.6 3.3 87.7 Source: Central Bank of Iran, Presentation of the economic deputy to the CBI’s governor; Summary of Iran’s Economic Developments on Real Sector, 1395
*The 1395 GDP growth rates are preliminary and may be revised. Management Report The statistical center of Iran (SCI) also reports statistics on the of exports of goods and services in this period rose by 41.3 economy. According to SCI statistics at constant 1376 prices, the percent thanks mainly to the oil sector growth, and given the GDP growth rate in 1395 reached 8.3 percent, and 6.3 percent if negligible fall in imports value, the value of net exports of oil is excluded. Among subsectors of the economy, agriculture goods and services rose by 63.8 percent at constant prices. Net grew by 5.0 percent, services by 7.1 percent, and manufacturing exports accounts for 1.6 percent of the GDP at current prices. by 11.3 percent. The latter was mostly due to the 78.8 percent Private consumption, which accounts for nearly half of the rise in the value-added of extraction of oil and natural gas. The GDP, grew by 3.8 percent in 1395, while it contracted during difference between SCI and CBI statistics are partly rooted in the recession of 1391-92 and 1394. Government consumption their different base years and the definition of the oil sector. expenditures also grew by 3.7 percent following an upward CBI’s definition of the oil sector includes subsectors such as trend that had started in 1392. However, as shown in Table refineries and also involves a wider range of industries than the 2, gross fixed capital formation contracted by 3.7 percent in “oil and natural gas extraction” sector of the SCI. Hence, CBI’s 1395 as in its preceding year. The drop in the gross fixed capital non-oil growth rate statistics provide a more realistic picture of formation in construction was not unexpected given the housing the non-oil sectors of the economy. sector recession while the 5.6 percent growth in the fixed gross An examination of the GDP from the expenditures side reveals capital formation in machinery augurs well for the future of the a surge in net exports of goods and services in 1395. The value economy. Review of Risks and Disclosure Table 2 - GDP Growth Rates from the Expenditures Side at Constant 1390 Prices and their Share at Current Prices (percent) 1395 Share in 1392 1393 1394 Q1 Q2 Q3 Q4 Year 1395* Private Consumption -1.9 2.0 -3.5 0.7 1.7 6.7 6.2 3.8 49.4 Government Consumption Expenditures 0.8 4.2 4.8 -1.3 12.2 5.4 0.3 3.7 13.3 Gross Fixed Capital Formation -7.8 7.8 -12.0 -16.3 3.1 -9.5 3.1 -3.7 20.3 -in Machinery -9.8 10.0 -15.2 2.6 3.4 10.9 5.4 5.6 7.8 -in Construction -6.9 6.9 -10.7 -24.8 3.0 -17.5 2.2 -7.4 12.5 Exports of Goods and Services -3.1 7.2 12.1 50.7 48.6 37.4 30.8 41.3 22.4 Imports of Goods and Services -17.9 -4.5 -20.2 -7.2 3.5 22.0 6.0 6.1 20.8 GDP at Market Prices -0.2 4.6 -1.3 9.0 11.7 17.1 16.0 13.4 100.0 Source: Central Bank of Iran, Presentation of the economic deputy to the CBI’s governor; Summary of Iran’s Economic Developments on Real Sector, 1395 *The divergence of the sum of shares of subdivisions of GDP from 100 is due to the 15.4 percent share of the inventory.
1.1 - Agriculture Survey of the Iranian Economy The performance of the agriculture sector is normally percent. Accordingly, the value-added of agriculture grew by independent of economic cycles as it depends on rainfalls, 4.2 percent in the year. surface water flows, area under cultivation, and the extraction of The rise in agricultural production resulted in an increase in underground water. During 1395 the value-added of agriculture exports and a decrease in imports of agriculture products in at current prices amounted to IRR1,267 trillion, corresponding 1395. According to the Ministry of Agriculture, exports of this to approximately 10 percent of the GDP. According to sector rose by 21.8 percent in terms of weight and 3.6 percent estimates, in 1395 the production of crops grew by 8.2 percent, in terms of value, while that of imports fell by 5.8 percent and horticulture by 6.1 percent, and main animal products by 4.6 by 1.2 percent, respectively.
1.2 - Oil The production and exports of Iran’s crude oil fell during the exports of crude oil that had reached 2.7 million bpd in 1384, past 2 decades, firstly as a result of the high age of oil wells declined to 1.4 million bpd in 1393. However, as shown in and insufficient gas injection into them, and secondly due to the Figure 1, the downward trend of crude oil production reversed imposition of international sanctions against Iran that affected course from the beginning of 1393 and rose to about 4.0 million the country’s international trade. These caused Iran’s oil bpd in the fall of 1395. In the same period, oil exports reached and Financial Statements Report of Independent Auditor production to reach 3 million barrels per day (bpd) by 1393, far 2.4 million bpd, following the upward trend that had started below the 4 million bpd production in 1382-86. Concurrently, from the middle of 1393. 62 MIDDLE EAST BANK ANNUAL REPORT
Figure 1 - Iran’s Production and Exports* of Crude Oil and the Price of Heavy Crude Oil
Source: Central Bank of Iran, Economic Trends; OPEC Reports *Including exports of crude oil and net exports of oil products
In the first 9 months of 1395, oil production grew by 17 percent has reached 3.9 million bpd in that quarter. The production and oil exports by 46 percent compared to the same period in and exports of natural gas condensates and liquids, refinery the preceding year. Oil production reached the high of 4 million products, and natural gas have also experienced considerable bpd and oil exports surpassed 2.4 bpd in fall of 1395. In the growths in 1395. early winter of 1395, OPEC members agreed on cutting oil Global oil prices that had fallen in recent years in response to production for the first time in the past eight years. According oversupply by the USA and Saudi Arabia and the fall in demand to the agreement, the total daily production of OPEC should be by Europe and China, experienced a severe drop in the second decreased by 1.2 million barrels to reach 32.5 million. Among half of 1393 (1393H2), but in spring 1394, rose slightly before the 14 member countries, 10 agreed to cut their production; reversing course again. The fall in oil prices in winter of 1394 Saudi Arabia and Iraq had the highest production cuts of was so severe that it pulled oil prices below USD25 a barrel. 486 thousand and 210 thousand barrels per day, respectively. In 1395, after a temporary rise in global oil prices, the price of Indonesia, Libya and Nigeria were exempted from production Iran’s heavy crude oil grew by 87 percent in spring compared cuts and only Iran was allowed to increase its daily production to the preceding quarter and surpassed USD52 per barrel, but by 90 thousand barrels to get back to its pre-sanction production again fell to USD45 in the following two quarters. However, levels. Although no new statistics on Iran’s oil production in the global oil prices reacted to the OPEC agreement and rose the winter of 1395 were available at the time of preparing this above USD50. According to OPEC, the price of Iran’s heavy report, OPEC quotes sources that maintain Iran’s oil production crude oil averaged USD52 a barrel in winter 1395.
1.3 - Industries and Mining Following a 6.1 percent contraction of industries and mining construction had the longest and deepest period of continuous in 1394, the sector experienced much better conditions in contraction between 1391 and 1395, culminating in a 13.1 1395 and grew by 2.2 percent. The production index of large percent contraction in 1395. Unlike construction, the electricity, manufacturing establishments (1390=100) reached its highest gas, and water supply subsector grew even during the recession level since 1391 of 102 in fall 1395. The index rose by 6.8 of 1391-92, and its value added rose by 6.8 percent in 1395. percent during the first 9 months of 1395, resulting in a 5.8 According to the Ministry of Industry, Mining, and Trade, percent growth in manufacturing at constant 1390 prices. As in the first 9 months of 1395 investment in establishing and shown in Table 3, the value-added of the mining sector rose developing manufacturing units rose by 49.5 percent and the by 2.1 percent in 1395 following a 10.5 percent contraction number of operation permits rose by 8.8 percent. in 1394. Among the subsectors of industries and mining,
Table 3 - Growth Rate of Industries and Mining Subsectors at Constant 1390 Prices and their Shares at Current Prices (percent) 1394 1395 Share in Year Q1 Q2 Q3 Q4 Year 1395 Industries and Mining -6.1 -5.1 3.0 4.1 6.4 2.2 100.0 Mining -10.5 -7.8 -4.3 10.7 10.4 2.1 3.0 Manufacturing -4.6 1.4 5.3 11.2 9.4 6.9 54.2 Electricity, Gas, and Water 3.3 1.7 6.2 7.3 12.3 6.8 19.9 Construction -17.0 -27.6 -4.0 -16.8 -6.8 -13.1 22.9 Source: Central Bank of Iran, a Summary of Economic Developments of Iran on Real Sector, first 9 Months of 1395 SURVEY OF THE IRANIAN ECONOMY 63
The growth in industrial production was mostly due to the 35.6 industries rose by 7.7 percent and 3.8 percent, respectively, in percent growth in the production of motor vehicles thanks to the first 9 months of 1395. Given the weights of these subsector, the utilization of spare production capacity in that subsector. among the 24 industrial subsectors, motor vehicles had the Table 4 exhibits the changes in the production index of six largest positive effect and non-metallic minerals had the largest major industrial subsectors by weight. According to this Table, negative effect on the production index of large manufacturing production of chemicals and base metals as the top two major establishments.
Table 4 - Point-to-point Growth Rates of Production in Major Industrial Groups in the first 9 Months of 1395 Weight Percentage Change of the Index Production Index 100 6.8 Chemicals 26 7.7 Management Report Base Metals 20 3.8 Motor Vehicles 16 35.6 Non-metallic Minerals 10 -7.4 Food 7 7.3 Generator 4 2.8 Source: Central Bank of Iran, Production Index of Large Manufacturing Establishments (preliminary) in the first 9 months of 1395
Table 5 shows the performance of the largest subsector of each of were sold in the domestic market. In base metals, the production the top 3 major industries listed in Table 4. In chemicals sector, of crude steel rose by 14.8 percent in 1395 to 18.5 million tons. petrochemical industries benefited from the implementation of The production of automobiles in the motor vehicles subsector the JCPOA. According to Iran Petrochemical Company (IPC), grew by 37.9 percent to 1.35 million in the same year which was production of petrochemicals in 1395 totaled 50.6 million tons. still below the production level in 1390. Out of this production Sales of petrochemicals in that year amounted to 27.6 million level, cars accounted for 1.255 million and pickup trucks and tons, out of which 20.4 million tons valued at USD9.5 billion commercial vehicles for the rest. were exported and 7.2 million tons valued at IRR163.8 trillion Review of Risks and Disclosure Table 5 - Performance of Some Major Industries 1390 1391 1392 1393 1394 1395 Petrochemicals (1000 tons)* 42,736 41,064 40,574 44,511 46,411 50,600 Percentage change 6.4 -3.9 -1.2 9.7 4.3 9.0 Crude Steel (1000 tons) 13,270 14,362 15,627 16,692 16,081 18,468 Percentage change 6.1 8.2 8.8 6.8 -3.7 14.8 Vehicles (1000’s) 1,653 924 737 1,130 979 1,350 Percentage change 3.1 -44.1 -20.2 53.4 -13.4 37.9
Source: Summary of Economic Developments in 1394; Iran Petrochemical Company (IPC); World Steel Association; Iran Vehicle Manufacturers Association *The data on petrochemical production exceeds the sum of exports and domestic sales because of double counting. This happened as output of some companies are inputs for other companies, i.e., intermediate products are double counted.
1.3.1 - Housing and Construction This long recession followed severe price jumps in 1390 and Survey of the Iranian Economy The construction sector which encompasses public and private 1391 which were due to factors such as expansionary monetary buildings, contracted by 13.1 percent in 1395, according to policy, monetary indiscipline, unwise use of oil revenues and the CBI. The value of private investment in buildings in urban inappropriate housing policies. Figure 2 exhibits the moving areas fell by 14.1 percent at current prices, based on which it is average of the real value of investment in urban buildings by estimated that the value-added of construction in private sector phases of construction and indicates that private investment has dropped by 20.1 percent. The housing market recession that started a downward trend from late 1391 and has touched its had started in mid-1392 and peaked in 1394, continued in 1395. 1390-95 minimum in 1395. This trend began in newly-started buildings and expanded to semi-finished and finished buildings. and Financial Statements Report of Independent Auditor 64 MIDDLE EAST BANK ANNUAL REPORT
Figure 2 - Moving Average of Real Value* of Private Investment in Urban Buildings by Phases of Construction
Source: Central Bank of Iran, Economic Trends, various issues *Nominal statistics on investment have been converted to real statistics, using cost of constructions index
1.4 - Services The value-added of the services sector that had dropped by grew in all subsectors of the services sector. Transportation, 2.3 percent in 1394, fell by another 0.7 percent in spring 1395. storage and communications had the highest growth rate of However, it grew by 3.6 percent in 1395 due to its positive 6.7 percent among the services subsectors. Table 6 exhibits the growth rates in the latter 3 quarters of the year. The value-added growth rates of these subsectors at constant 1390 prices.
Table 6 - Growth Rates of Services Subsectors at Constant 1390 Prices and their Shares at Current Prices (percent) 1394 1395 Share in 1395 Year Q1 Q2 Q3 Q4 Year Services Sector -2.3 -0.7 4.2 6.0 4.9 3.6 100.0 Trades, Restaurant and Hotels -6.1 0.7 4.4 10.3 9.3 6.2 23.3 Transportation, Storage and Communications -6.1 1.3 5.7 8.3 11.2 6.7 18.4 Financial Services 1.0 0.8 2.8 3.2 -0.1 1.7 5.5 Real Estate and Professional Services 0.8 -0.5 1.0 3.4 3.5 1.8 25.4 Pubic Services 1.2 -2.8 10.3 3.6 -1.5 2.0 20.4 Social, Personal, and Domestic Services -4.4 -10.1 -0.4 4.3 7.0 0.1 7.0 Source: Central Bank of Iran, Summary of Economic Developments in the first 9 months of 1395
2. Labor Market Job creation has been a critical challenge in recent years. unemployed in this age group corresponded to 57 percent of the Employment is affected by the performance of a wide range total unemployed individuals. Out of this figure, 650 thousand of markets as well as labor market indices that are affected were females, corresponding to 42.3 percent unemployment by individuals’ decisions and expectations. Probably the only rate among them. It is common for the unemployment rate of way policymakers can influence the employment level is by females to be higher than males’ while their participation rate is improving the business environment in the country. considerably below the males’. In 1395, the female participation In 1395, the unemployment rate rose by 1.4 percentage points to rate in Iran grew by 1.6 percentage points to 14.9 percent which 12.4 percent despite the exceptional GDP growth and noticeable is still below the rates in many other countries. job creation in that year. During 1395, out of a 65.5 million In 1395 approximately 2.3 million people, corresponding to population aged 10 and above, 25.8 million were economically 10.3 percent of employed individuals were underemployed, active and 22.6 million were employed, resulting in a 39.4 due to their failure in finding full-time jobs. By contrast with percent participation rate and 34.5 percent employment ratio. lower unemployment in rural areas than in urban areas, the Among different age groups, population aged 15-29 had the underemployment in the former is higher than in the latter. highest unemployment rate of 25.9 percent. The 1.8 million Table 7 exhibits the labor force indices in 1395. SURVEY OF THE IRANIAN ECONOMY 65
Table 7 - Labor Force Indices in 1395 Total Male Female Urban Rural Rate (percent) 39.4 64.1 14.9 38.9 41.0 Participation of 10 Years Old and Above No. (million people) 25.8 20.9 4.9 18.8 7.0 Rate (percent) 34.5 57.4 11.8 33.6 37.3 Employment Ratio of 10 Years Old and Above No. (million people) 22.6 18.7 3.9 16.2 6.4 Rate (percent) 12.4 10.5 20.7 13.7 8.9 Unemployment of 10 Years Old and Above No. (million people) 3.2 2.2 1.0 2.6 0.6 Rate (percent) 25.9 21.4 42.3 28.1 19.9 Unemployment of 15-29 Years Old Youth No. (million people) 1.8 1.2 0.6 1.4 0.4 Management Report The Share of Population with the Underemployment Time (percent) 10.3 11.5 4.9 8.7 14.6 Source: Statistical Center of Iran, Summary of results of the Workforce Survey Project in 1395
In 1395, more than 22.6 million were employed, 616 thousand their formal studies rejoined the active population. The drop in more than in 1394, indicating a considerable level of job the number of those leaving the labor market to pursue formal creation in the year. However, the unemployment rate rose in education, the severe fall in the number of those who moved 1395 because the economically active population rose faster from unemployed to inactive, and the fall in the rate of retirement than the employed population. The unprecedented number of have all contributed to lower exits from the active population. job seekers is a noteworthy point in the labor market during the As shown in Table 8, the number of people added to the 11th administration. Following the improvement in economic economically active population in both 1394 and 1395 is above conditions, a large number of individuals who graduated in the the number of people added to the employed population and late 1380s and the early 1390s and had exited the labor market even higher than the population at working age. For instance, the because of its disappointing conditions, returned to the ranks of number of working age population grew by 798 thousand and the the active population in hope of finding jobs. In addition, students number of the active population by 1.1 million. At the same time, who had postponed entering the labor market by extending the unemployed population rose by 474 thousand.
Table 8 - Annual Changes in Number of the Working Age Population (thousand people) Review of Risks and Disclosure 1395 to 1394 1392 1393 1394 1395 Change (percent) Population aged 10 and Above -550.6 638.4 634.6 797.8 1.2 Active Population -271.0 -16.1 882.7 1,090.3 4.4 Employed 184.8 -41.9 667.8 616.0 2.8 Unemployed -455.8 25.8 214.9 474.3 17.4 Source: Statistical Center of Iran, Summary of results of the Workforce Survey Project in 1395
Out of the total jobs created in 1395, 463 thousand were in sector in total employment fell by 0.6 percentage points to 31.9 the services sector, increasing the number of employed in that percent. The agriculture sector maintained its 18.0 percent share sector to 11.5 million, corresponding to 50.1 percent of the total of the employed population and by adding 99 thousand new jobs employed population. The number of employed people in the in 1395, brought the total number of workers in that sector to 4.1 manufacturing sector rose to 7.2 million in 1395, showing 53 million. thousand rise from 1394. However, the share of manufacturing Survey of the Iranian Economy 3. Government Budget The 1395 budget bill was prepared in 1394 as the economy not promising. As a result, the government rose the main figures was contracting and oil revenues were falling. In 1394 the in its proposed budget by about 13 percent which was slightly government had covered a portion of the shortage in its oil higher than the expected rate of inflation in 1395, although the revenues by the “pre-sell of oil to CBI” and it had to understate parliament amended the bill in a way that the legislated Budget its actual oil revenues in 1395 so as to settle its “pre-sell”. At Law reflected a higher real growth rate of the budget. the same time because of the recession, tax revenues were also
3.1 - Budget Law of 1395 In the 1395 Budget Law, the general budget was legislated at rose by 13.4 percent, which is higher than the inflation rate, to IRR3,355 trillion, indicating 22.3 percent rise compared to the IRR6,828 trillion. Table 9 compares the Budget Laws of 1394 1394 Law. The budget of state-owned companies, and banks and 1395.
and commercial institutions affiliated with the government and Financial Statements Report of Independent Auditor 66 MIDDLE EAST BANK ANNUAL REPORT
Table 9 - Main Subdivisions of the Budget Laws of 1394 and 1395 (in IRR trillions) 1394 to 1393 1395 to 1394 1394 Budget Law Description Growth Rate 1395 Budget Law Growth Rate (2nd ceiling) (percent) (percent) General Government Budget 8,467.4 5.4 9,785.5 15.6 General Budget 2,744.1 16.8 3,354.9 22.3 General Sources 2,362.8 11.9 2,943.9 24.6 Dedicated Revenues 381.3 59.9 411.0 7.8 Budget of State-owned Companies, Banks and 6,019.4 0.8 6,828.2 13.4 Profit Institutions Affiliated with Government Source: Government Budget Laws 3.2 - General Budget The general budget consists of general sources and dedicated than development expenditures in the general uses. Table 10 revenues. Oil and tax revenues have the largest shares in the presents details of the two sides of the general budget for 1395. general sources, and current expenditures are usually much larger
Table 10 - Subsections of General Budget in 1395 Budget Law (in IRR trillions) Sources Bill Law Uses Bill Law Revenues (general) 1,490.1 1,573.8 Expenditures (current) 1,971.9 2,137.6 Tax 1,011.3 1,038.3 Compensation of Employees 774.0 - Proceeds of State-owned Properties 220.0 238.9 Cost of Properties 7.0 - Proceeds of Sales of Goods and Services 72.8 76.8 Use of Goods and Services 256.9 - Proceeds of Crime and Damage 64.6 84.6 Subsidies 162.6 - Other 121.4 135.2 Grants 50.6 - Social Welfare 654.7 - Other 66.0 - Operating Balance -481.7 -563.8 Acquisition of Non-financial Assets Disposal of Non-Financial Assets 730.5 790.5 597.0 574.8 (Development Expenditures) Receipts from Crude Oil and Oil 685.0 745.0 Construction 409.1 - Products Receipts from Sales or Disposal of 15.5 15.5 Machinery and Equipment 151.3 - Properties Receipts from Disposal of Development 30.0 30.0 Other Fixed Assets 1.8 - Plans Inventory Use 0.0 - Precious Items 0.0 - Land 3.0 - Other Non-produced Assets 31.8 - Net Disposal of Non-financial Assets 133.5 215.7 Disposal of Financial Assets 453.2 579.6 Acquisition of Financial Assets 105.0 231.5 Sales of Islamic Securities 275.0 400.0 Repayment of Securities 17.5 - Use of Foreign Loans 0.1 1.5 Repayment of Foreign Loans 7.2 - Receiving Loan Principals 2.8 2.8 Repayment of Bank Loans 0.6 - Credit Related to Disposal of Disposal of State-owned Companies 160.5 160.5 73.4 - Stocks Unpaid Obligations from Last Year Payments Return 3.9 3.9 6.3 - Previous Years Foreign Cultural and Economic Use of National Development Fund 6.0 6.0 0.0 - Contributions Other 5.0 5.0 Net disposal of financial assets 348.2 348.1 Total Government General Resources 2,673.8 2,943.9 Total Government General Expenditures 2,673.8 2,943.9 Dedicated Revenues 400.0 411.0 Expenditures from Dedicated Revenues 400.0 411.0 General Budget Sources 3,073.8 3,354.9 General Budget Uses 3,073.8 3,354.9
Source: Budget Law and Budget Bill of 1395 SURVEY OF THE IRANIAN ECONOMY 67
The operating balance deficit was IRR481.7 trillion in the budget disposal of financial assets, as before. In this regard, IRR400 bill, but was raised by the parliament to IRR563.8 trillion. trillion sales of Islamic government securities and IRR161 The share of compensation of employees in the total current trillion disposal of state-owned companies were to bring about expenditures is 39 percent, corresponding to 76 percent of the a surplus of IRR348 trillion in net disposal of financial assets. total tax income. Assuming an oil price of USD40 per barrel, Therefore the 1395 Budget Law raised the issuance of Islamic 2.4 million bpd of oil and natural gas condensates exports, and government securities by 264 percent from 1394 Budget Law the USD/IRR exchange rate of IRR29,970, oil revenues were while it lowered the estimated revenues from the disposal of estimated at IRR685 trillion which was raised by the parliament state-owned companies by 9 percent. These figures indicate to IRR745 trillion. that the government has relied more on the capital market and According to the CBI, oil exports during the first 9 months of treasury bills than on the disposal of state-owned companies the year averaged 2.2 million bpd and, given the developments as a means of financing its budget deficit. Issuing Islamic Management Report in the oil sector, a further increase in oil exports in the remainder government securities to finance old government debts is a of 1395 was expected. The price of Iran’s heavy crude oil sound practice but financing new debts by issuing government reached USD53 per barrel in late 1395 and thus oil revenues in securities is not. Budget deficit financing through government the Budget Law, which were higher than that in the budget bill, securities alone will eventually put upward pressure on interest turned out to have been realistic. But the parliament curtailed rates and lead to a crowding out effect, while financing it development expenditures in order to cover the operating through the disposal of state-owned companies will not have balance deficit, thereby devoting a larger portion of oil revenues such adverse effects. to deficit financing. The Budget Law also lowered the National In the 1395 Budget Law, dedicated revenues rose by 7.8 Development Fund’s share of oil revenues to 20 percent so percent in comparison to the Budget Law of 1394. Government as to increase the share going to government expenditures, organizations were allowed to spend up to IRR411 trillion of thereby disregarding the 35 percent share legislated in the Fifth their dedicated revenues inside their respective organizations. Development Plan. Figures 3 and 4 show the general sources and uses in the 1395 Another source of deficit balancing was to be through the budget bill.
Figure 3 - General Sources in the 1395 Budget Bill Review of Risks and Disclosure Survey of the Iranian Economy
Source: 1395 Budget Bill and Financial Statements Report of Independent Auditor 68 MIDDLE EAST BANK ANNUAL REPORT
Figure 4 - General Uses in the 1395 Budget Bill
Source: 1395 Budget Bill
Given the persistence of low oil prices, the Budget Law of increase its sources via the CBI. 1395, like its predecessor, assumed tax revenues in excess of oil As soon as a new parliament formed in late spring 1395, the revenues, leaving the government with no choice but to cover government proposed an amendment to the Budget Law of the shortage of oil revenues through raising taxes. Tax revenues 1395 calling for re-capitalizing pubic banks or settling banks’ in 1395 Budget Law were 14.4 percent higher than the Budget claims on the public sector via re-valuating CBI foreign assets Law of 1394 while oil revenues were only 6.5 percent higher. by IRR450 trillion. Other amendments aimed at excluding the Current expenditures were 22.3 percent higher than in the 1394 well-off population from receiving direct subsidies, settling Budget Law -- far above the 9.0 percent inflation rate in 1395. banks and creditors’ claims on the public sector by issuing Given the problems in the banking sector, the government IRR400 trillion of Islamic treasury bills, settling Iran’s Health added amendments to the 1395 budget bill in order to raise the Insurance Organization debts by issuing IRR50 trillion of capital of state-owned banks by means including the National Islamic treasury bills and eliminating fuel cards. Eventually Development Fund, but the parliament did not agree and the amendments were passed by the new parliament and the removed the amendments. In the budget bill, the government government was allowed to use CBI sources. This effectively was seeking to settle up to IRR500 trillion of CBI’s and banks’ translates into penalizing disciplined private banks and creating claims on the public sector through re-valuating CBI’s net rent for undisciplined public and semi-public banks and also foreign assets, but the parliament rejected it. The same had been increases the government’s reliance on financing through proposed twice before and rejected both times on the ground borrowing from the banks. that doing so could become a practice for the government to 3.3 - Government Fiscal Performance Tax revenues amounted to IRR856.4 trillion during the first 11 the legislated IRR519.0 trillion and indicates the government’s months of 1395, corresponding to 89.6 percent of the legislated divergence from the Budget Law. amount. Other current revenues of the government during Regarding the disposal of non-financial assets, proceeds from this period amounted to IRR321.2 trillion which corresponds sales of oil and oil products during the first 11 months amounted to 65.2 percent of the legislated IRR493.0 trillion. Current to 87.1 percent of the legislated, indicating that despite the 18.5 expenditures amounted to IRR1,786 trillion, equal to 90.8 percent annual growth, oil revenues in the Budget Laws remain percent of the legislated amount. Therefore, operation balance overestimated. In the same period, development expenditures deficit during the first 11 months of 1395, including unsettled reached IRR185.9 trillion which was far below the legislated revolving fund, stood at IRR647.7 trillion which is more than IRR529.1 trillion, showing 12.2 percent drop compared to the SURVEY OF THE IRANIAN ECONOMY 69 same period in 1394. Hence, net disposal of non-financial assets, by the CBI are very different. According to the government’s including movable and immovable assets amounted to IRR415 spokesman, the development expenditures amounted to IRR420 trillion in those 11 months -- far above the legislated IRR199 trillion, corresponding to 68 percent of the legislated amount, trillion. Meanwhile, according to the government spokesman while according to CBI, despite the rise in oil revenues in 1395, in early 1396, the IRR790 trillion disposal of non-financial the government has spent less on development expenditures and assets materialized in 1395, but in regards to the acquisition of more on current expenditures. Table 11 shows the government’s these assets (development expenditures) the statistics released fiscal performance in 1394 and 1395.
Table 11 - Government Fiscal Performance in 1394 and 1395 (in IRR trillions) Performance of First 11 months of First 11 months of 1395 to 1394 first 11 months Management Report 1394 1395 percentage change (approval percentage) Revenues 1,401.2 1,778.4 26.9 81.7 Tax revenues 653.4 856.4 31.1 89.6 Oil revenues 503.9 597.1 18.5 87.1 Other current revenues 241.2 321.2 33.2 65.2 Receipts from movable and immovable assets 2.7 3.7 37.0 8.8 Expenditures 1,704.0 2,011.3 18.0 80.6 Current expenditures 1,485.4 1,785.8 20.2 90.8 Development expenditures 211.7 185.9 -12.2 35.1 Budget Balance -302.8 -232.9 -23.1 72.7 Source: Central Bank of Iran, Selected Economic Indicators, 20/01/1396 Note: The difference between expenditures and the sum of current and development expenditures is due to the unsettled revolving funds.
Budget deficit is financed via the net disposal of financial assets percent fall compared to the same period in 1394. The “other” Review of Risks and Disclosure so that the budget gets balanced. The net disposal of financial subgroup of the disposal of financial assets rose by 140.4 percent assets in the first 11 months of 1395 fell by 23.1 percent to to IRR200.0 trillion from the same period in 1394 due to the IRR233.9 trillion, below the legislated IRR320.5 trillion. This overuse of the revolving fund of the treasury. Accordingly, the was partly due to constraints levied on financing via issuing heading “other”, which mainly consists of the revolving fund Islamic treasury bills in the fear that they would raise interest of the treasury, accounted for 58.1 percent of the total disposal rates. However unofficial sources indicate that a large amount of financial assets in the first 9 months of 1395. According to of the bills were disposed to contractors in the last month of the Law, the revolving fund of the treasury ought to be settled the year. at the end of the year. However, given the government’s On the basis of CBI statistics, in the first 3 quarters of 1395, limitations on sources for financing its debts, CBI claims on the disposal of Islamic treasury bills amounted to only IRR94.5 the government through revolving funds might have risen. No trillion. In the same period, the disposal of state-owned portion of the deficit was financed through foreign borrowing, companies amounted to only IRR46.6 trillion, indicating a 28.1 either by choice or because of the remaining sanctions. 3.4 - Privatization The Iranian Privatization Organization started the disposal total privatization. Table 12 shows the performance of the of state-owned companies in 1380, and by the end of 1395, Iranian Privatization Organization by disposition type during Survey of the Iranian Economy about 46.7 percent out of the privatized companies was 1380-1395. An examination of the privatization at constant privatized through the stock market, 12.6 percent through the 1390 prices reveals that the year 1395 accounts for only 1.2 OTC market, 40.4 percent through auction, and the remaining percent of the total privatization process, indicating the slowing 0.2 percent through direct negotiations. Also, 21.9 percent of of the privatization pace. In 1395 privatization of state-owned the companies were passed on to creditors in settlement of firms at constant 1390 prices fell by 25 percent, while settlement government debts outside market mechanisms. In this period, of debts through privatization rose by 143 percent. the so-called “Justice shares” accounted for 19 percent of the
Table 12 - Performance of the Iranian Privatization Organization by Disposition Type (in IRR trillions) At Current Prices At Constant 1390 Prices 1380-1392 1393 1394 1395 1380-1392 1393 1394 1395 Stock Market 741.8 48.9 30.1 24.0 814.0 23.9 14.4 10.8 Settlement of Debt 287.5 0.0 7.3 19.0 277.3 0.0 3.5 8.5 and Financial Statements
Justice Shares 270.0 2.6 0.0 0.0 445.5 1.3 0.0 0.0 Report of Independent Auditor Total Sales Value 1,299.3 51.5 37.3 43.1 1,536.8 25.2 17.9 19.3
Source: Iranian Privatization Organization 70 MIDDLE EAST BANK ANNUAL REPORT
Total sales of state-owned companies in 1395 amounted to came back in 1394 at IRR7.3 trillion and in 1395 at IRR19.0 IRR43.1 trillion, indicating 15.5 percent rise from 1394. trillion. Figure 5 exhibits the performance of the Iranian Unfortunately, the disposal of state-owned companies for the Privatization Organization in 1395 by disposition type and settlement of government debts, which had ceased in 1393, Figure 6 by market type.
Figure 5 - Privatization in 1395 by Disposition Type Figure 6 - Privatization in 1395 by Market Type
Source: Iranian Privatization Organization Source: Iranian Privatization Organization
A considerable portion of privatizations in 1394 was carried 1395 is mainly due to the use of government assets valued at out through the Tehran Stock Exchange (TSE) and the over IRR76.7 trillion for debt settlement. In 1395, funds deposited the counter (OTC) market, and privatization through auction into the public revenues account by the Iranian Privatization accounted for only 36 percent of total, in 1395, the latter’s share Organization amounted to only IRR74.1 trillion, equivalent reached 93 percent at the expense of the other mechanisms. to 61 percent of the legislated amount and 19.3 percent down In 1395, IRR160.7 trillion of privatization revenues were from that in 1394. Figure 7 compares the privatization revenues transferred to the treasury or spent as debt settlements, indicating deposited into the public revenues account with the legislated a 52.7 percent rise from the corresponding amount in 1394 but amounts. still below that in 1393. The rise in privatization revenues in
Figure 7- Privatization Revenues Deposited to the Public Revenues Account in 1395 Compared to their Legislated Amounts
Legislated
Source: Iranian Privatization Organization 3.5 - National Development Fund The National Development Fund (NDF) was established with and USD200 million for the “Innovation Fund” which goes the goal of allocating a portion of oil and gas revenues to against the ban on the use of NDF for general budget purposes. sustainable and productive economic activities and preserving Based on the latest report of the Sovereign Wealth Fund a part of it for future generations. Any use of the NDF funds by Institute, Iran’s NDF with its assets of USD62 billion ranked the government and exchanging its foreign exchange funds to 22nd among the 79 sovereign wealth funds throughout the IRR are strictly prohibited in the Fund’s articles of association, world. Should only the commodity sovereign wealth funds be but the government violated it again in 1395 and received a included, the NDF ranks 12th. Note that according to the NDF’s portion of the funds and exchanged it into IRR. The share of report, its assets amounted to USD68.2 billion at the end of NDF in oil revenues was set at 20 percent in the 1395 Budget 1393. In terms of transparency, NDF scored 5 points out of 10 Law, which is 15 percentage points below the legislated share and ranked 32. At the time of writing this Report in spring of in the Fifth Development Plan. The Budget Law also assigned 1396, no official report of NDF’s performance in 1394 or 1395 USD500 million for financing pressurized irrigation projects had been published. SURVEY OF THE IRANIAN ECONOMY 71
3.6 - The Subsidies Reform Plan In the Budget Law of 1395, a sum of IRR480 trillion was legislated 3.6.1 - The Performance of the Subsidies Reform Plan to be financed by increasing the prices of energy carriers, as in the Energy prices were not increased as much as the Budget Law preceding year, while its uses were not clearly specified. Because of had called for and so the sources of the subsidies reform plan the deficit in the subsidies program, the top three income deciles of was lowered from the legislated IRR480 trillion to about the population were to be excluded from receiving cash subsidies. IRR320 trillion and the rest of the deficit was financed by the But given that there was no database for identifying members general budget sources. Table 13 shows the performance of of various deciles, the government was not fully successful in the government in the subsidies reform plan during the first 8 implementing this part of the Budget Law and cash subsidies months of 1395. continued to use up most of the Plan’s available funds. Management Report
Table 13 - Performance of the Subsidies Reform Plan in the First 8 Months of 1395 Subject Amount (in IRR trillions) Share in Total (percent) Total Sources 284 100 Proceeds from the increase in prices of energy carriers 200 70 Receipts from general budget 84 30 Total Expenditures 283 100 Cash subsidies 273 96 Non-cash subsidies 2 1 Contribution to health sector 5 2 Contribution to production 3 1 Source: Majlis Research Center, examination of 1396 budget bill
As can be seen, cash subsidies paid to households accounted of IRR48 trillion for health and IRR16 trillion for production for more than 95 percent of the uses of the plan in the first 8 purposes. Part of this could be attributed to the fact that cash months of 1395 so cash subsidies available for the health and subsidies to only 333 thousand households were eliminated in Review of Risks and Disclosure production sectors were much less than the legislated amounts 1395H1. 4. Balance of Payments In 1395 the balance of payments was influenced by factors the non-oil goods account. During the first 9 months of 1395, including changes in oil exports following the implementation the oil account rose by 52.5 percent to USD38.7 billion due of the JCPOA in the winter of 1394, global oil price fluctuations mainly to a 47.2 percent rise in oil exports (including crude oil, and capital flows in and out of the country. Table 14 exhibits oil products, natural gas, natural gas condensates and liquids) details of the balance of payments during 1391-94 and in the and a 31.5 percent fall in oil imports (including oil products, first 9 months of 1394 and 1395. During the first 9 months natural gas, natural gas condensates and liquids). The non-oil of 1395, despite a 71.7 percent fall in services from the same goods account deficit rose by 66.9 percent to USD22.7 billion period of the preceding year and helped by a 35.9 percent rise due to 12.3 percent fall in non-oil exports and 16.9 percent rise in the goods account, the current account rose by 19.7 percent. in non-oil imports. The goods account can be broken down into the oil account and
Table 14 - Components of Balance of Payments (in USD millions) Survey of the Iranian Economy First 9 Months 1391 1392 1393 1394 Percentage 1394 1395 change Current Account 23, 423 26, 440 15, 861 9, 016 9, 953 11, 915 19.7 Goods Account 28, 559 31, 970 21, 392 12, 178 11, 801 16, 036 35.9 Exports (fob) 97, 271 93, 124 86, 471 64, 597 50, 384 60, 292 19.7 Oil exports 68, 058 64, 882 55, 352 33, 569 27, 093 39, 877 47.2 Non-oil exports 29, 213 28, 243 31, 119 31, 028 23, 291 20, 415 -12.3 Imports (fob) 68, 712 61, 155 65, 079 52, 419 38, 583 44, 256 14.7 Gas and oil products 2, 652 3, 111 3, 948 2, 233 1, 711 1, 172 -31.5 Other Goods 66, 060 58, 044 61, 131 50, 186 36, 872 43, 085 16.9 Services Account -7, 307 -7, 137 -6, 985 -4, 472 -3, 042 -5, 222 -71.7 Income Account 1, 661 1, 066 943 763 786 685 -12.8 Current Transfers Account 510 541 511 547 408 416 2.0 Net Capital Account -6, 664 -11, 547 -1, 664 -2, 513 2, 070 -14, 134 -782.8 and Financial Statements Report of Independent Auditor Errors and Omissions -4, 546 -1, 703 -5, 635 -4, 270 -8, 255 -5, 656 31.5 Overall Balance 12, 213 13, 189 8, 561 2, 233 3, 768 -7, 875 -309.0 Source: Central Bank of Iran, Selected Economic Indicators, 1391-95 72 MIDDLE EAST BANK ANNUAL REPORT
Figure 8 illustrates quarterly volumes and values of oil exports of 1395 but export volumes jumped by 45.9 percent, bringing during 1393-95. Oil exports have grown in both volume and about higher oil export revenues compared to the similar period value since the JCPOA implementation in winter 1394. Iran’s of the preceding year. average oil price fell by 11.2 percent during the first 9 months
Figure 8 - Quarterly Amount and Value of Oil Exports during 1393-95
Source: Central Bank of Iran, Selected Economic Indicators, 1393-95
Despite the USD2 billion rise in the current account surplus billion at the end of fall 1395. Figure 9 shows the net capital during the first 9 months of 1395 compared to the same period account during 1380-94 and the first 9 months of 1395. As can in 1394, the USD14.1 billion fall in the net capital account be seen in this Figure, since1383 capital outflow has exceeded and other factors led to negative overall balance and a USD7.9 capital inflow, resulting in USD109.2 billion net outflow of billion fall in international reserves. Hence, the total reserves capital by the end of 1394. of the country is estimated to have shrunk to about USD120.5 Figure 9 - Net Capital Account
Source: Central Bank of Iran, Selected Economic Indicators, 1380-1395 *Data for 1395 covers only the first 9 months of the year.
The capital account mostly includes transfers of capital (foreign report it ranked second at USD12.2 billion in 59 projects, debt relief, or worker remittances), foreign direct investment accounting for 9 percent of total FDI in the region. Egypt (FDI), portfolio investment, other types of investment and ranked first with an FDI of USD40.0 billion accounting for 28 change in foreign reserves. As details on changes of the percent of the total. In 2016, Iran ranked seventh among MENA aforementioned components of the capital account are not yet countries in terms of foreign investment by investing USD1.7 published, a comprehensive examination of the capital account billion in 12 projects abroad. Note that in recent years most of cannot be carried out. However, FDIs are estimated by “fDi the FDIs in Iran have been in the oil and gas sector in the form Markets”1 of the Financial Times daily. While according to the of buyback contracts. For instance, in 1393 buybacks accounted 2015 issue of this report Iran did not rank among the top 10 for approximately 78.4 percent of the FDI under the Foreign countries in attracting FDI in MENA, according to its 2016 Investment Promotion and Protection Act (FIPPA). 4.1 - Goods Exports As shown in Table 15, in 1395 customs exports grew by 3.5 and 26.0 percent in weight. Therefore, the rise in the weight of percent in value and 38.1 percent in weight from 1394. The exports of natural gas condensates and petrochemicals has been exports value of natural gas and other goods fell by 2.8 percent the main factor that prevented the value of exports from falling. and 10.2 percent, respectively, while they grew by 67.2 percent
1. fDi Intelligence, The fDi Reports SURVEY OF THE IRANIAN ECONOMY 73
Table 15 - Customs Exports Statistics (excluding oil and suitcase trade) during 1394-95 1395 to 1394 1394 1395 percentage change Share in Total Share in Total Value Value Weight (percent) Weight (percent) Weight Value (1000 tons) (USD millions) (1000 tons) (USD millions) Weight Value Weight Value Petrochemicals 22,988 13,134 24.5 31.0 32,434 14,340 25.0 32.6 41.1 9.2 Natural Gas 10,495 4,680 11.2 11.0 18,663 7,320 14.4 16.7 77.8 56.4 Condensates Natural Gas 5,817 2,139 6.2 5.0 9,726 2,079 7.5 4.7 67.2 -2.8 Management Report Other Goods 54,608 22,475 58.2 53.0 68,825 20,192 53.1 46.0 26.0 -10.2 Total 93,908 42,428 100.0 100.0 129,648 43,931 100.0 100.0 38.1 3.5 Source: Islamic Republic of Iran Customs Administration, Preliminary Statistics in 1395
Natural gas condensates valued at USD7.3 billion, light crude were respectively the main exports items. The main exports oil except gasoline at USD2.5 billion, natural liquefied gas at destinations in terms of value were China, UAE, Iraq, Turkey, USD2.1 billion, and liquefied propane gas (LPG) at USD1.2 and South Korea, respectively. billion with value shares of 16.7, 5.6, 4.7, and 2.8 percent, 4.2 - Goods Imports The customs imports in 1395 experienced 5.0 percent fall in million, auto parts at USD782 million, and rice at USD690 weight and a 5.2 percent rise in value. Table 16 exhibits custom million with the value shares of 3.2, 2.1, 2.0, 1.8, and 1.6 imports statistics during 1392-95. Cattle-feed corn valued at percent, respectively, were the main import items it this year. USD1.4 billion, soybeans at USD909 million, motor vehicles China, UAE, South Korea, Turkey, and Germany were the main (1500-2000 cc, excluding ambulance and hybrid) at USD893 sources of imports in terms of value.
Table 16 - Customs Imports Statistics during 1392-95 Review of Risks and Disclosure 1395 to 1394 percentage 1392 1393 1394 1395 change 1394 1395 Weight (1000 tons) 33,684 43,016 35,152 33,399 -18.3 -5.0 Value (USD millions) 49,709 53,569 41,539 43,684 -22.5 5.2 Source: Islamic Republic of Iran Customs Administration, Preliminary Statistics in 1395
5. Foreign Exchange Market In 1395 the average free market USD/IRR exchange rate rose in the post-JCPOA era and gradually increasing oil revenues. by 5.8 percent to 36,400. This rate was rising at a slow pace Figure 10 exhibits the developments of USD/IRR exchange during the first 7 months of the year thanks to the stability felt rates during 1394-95.
Figure 10 - Monthly Average USD/IRR Exchange Rates in the Free Market and the Official Market Survey of the Iranian Economy and Financial Statements
Source: Central Bank of Iran; Royal Exchange Report of Independent Auditor 74 MIDDLE EAST BANK ANNUAL REPORT
As shown in this Figure, the free market USD/IRR exchange at the end of 2016, and finally uncertainties emanating from rate has experienced sharper increases in the fall both in 1394 the USA presidential election. The considerable global and 1395 from preceding quarters and has reversed course strengthening of the USD also contributed to speculations for from the beginning of the winter of those years. The causes further strengthening of the USD in Iran’s free market so much of increases in the falls were different. Changes in global oil that this exchange rate surpassed 40,000 at the beginning of prices in conjunction with the JCPOA implementation were winter and reached its high of 41,450 in the first week of that the main causes of USD/IRR changes in the fall and winter of season. CBI’s intervention brought this rate down and in the last 1394. But in the case of the fall of 1395 the main factors were one and a half months of the year, it hovered around 37,700. the petrochemical companies’ reluctance to exchange their All in all, the USD/IRR exchange rate experienced more exports proceeds in the market in the hope of benefiting from fluctuations in 1395 than in 1394, mainly due to fluctuations the surge in exchange rates coupled with the increased demand in late fall and early winter 1395. Table 17 shows annual USD/ by commercial companies for their international settlements IRR exchange rate statistics during 1390-95.
Table 17 - Nominal USD/IRR Exchange Rate Statistics during 1390-95 1395 to 1394 Growth Rate 1390 1391 1392 1393 1394 1395 (percent) Annual Average 12,407 26,078 31,838 32,785 34,484 36,487 5.8 Maximum 19,148 39,800 36,827 35,700 37,300 41,450 11.1 Minimum 10,403 15,800 28,950 30,354 32,100 34,400 7.2 Standard Deviation 1,699 7,420 2,346 1,351 1,335 1,662 24.5 Source: Royal Exchange; Research Calculations
Unlike the USD/IRR free market exchange rate, its official rate last month of 1395, marking the first single-digit annual rate did not change much in 1395. The official USD/IRR exchange of inflation in the past 26 years. This presented a good time rate grew by 0.6 percent and its free market rate by 0.7 percent for the CBI to unify foreign exchange rates and align them on average per month, indicating that the free market rate has with inflation differentials without exerting much shock to grown faster during the year. Hence the gap between the two the market. Unfortunately the chance was again missed even rates widened and surpassed 16 percent by the end of the year though exchange rate unification has been a declared goal of this 1395. government. Figure 11 exhibits the average annual inflation rate The average annual inflation rate at the end of each month that and the average growth rates of official and free market USD/ had started to decrease in mid-1394, touched 9.0 percent in the IRR exchange rates at the end of each month during 1394-95.
Figure 11 - Annual Inflation Rate and Growth Rates of Official and Market USD/IRR Exchange Rates
Source: Central Bank of Iran; Research Calculations 6. Monetary and Credit Policies CBI can help stabilize the economy through sound monetary principal and interest on behalf of the government and also and credit policies and supporting the government in its plans keeping accounts of ministries and institutions affiliated with aimed at sustainable economic growth. In recent years, CBI the government. policies have been in line with improving monetary discipline, Lack of monetary policy tools consistent with the Usury-free appropriate liquidity management, foreign exchange market Banking Act is a major challenge for monetary policies in stability, sound financing of economic sectors, directing funds to Iran, especially since even the available tools are not fully production and supporting small and medium sized enterprises under the control of the CBI. For instance, the monetary base (SMEs). According to chapter 2 of the Money and Banking Act, (M0) whose manipulation is the main policy tool of the CBI the CBI is charged with overseeing the activities of banks and is affected by fiscal policy, thereby the CBI is not capable credit institutions, regulating foreign exchange transactions, of changing it independently. Also, members of the Money and regulating the flow of the national currency. The CBI is and Credit Council, which is the supreme board of monetary also responsible for selling government bonds and paying their policymaking, are affiliated with different institutional interests SURVEY OF THE IRANIAN ECONOMY 75 therefore the Council policies are not necessarily in line with At the end of 11/1395, the monetary base grew by 18.0 percent, the viewpoints of CBI experts. mostly due to the 35.3 percent rise in the CBI claims on banks. The success of the monetary policy depends on the credibility At the same point, CBI claims on the public sector amounted of the policymakers, which itself depends on the relationship to IRR597.5 trillion, out of which IRR338.6 trillion belonged between the Central Bank and the government, independence to the government and the rest to state-owned companies and of the Central Bank and the reputation of its executives. institutions. In 11/1395 CBI claims on the government had Obviously, the more successful the CBI’s monetary policy, the grown by 28.3 percent from a year earlier, far above its 17.1 higher will be its credibility and public trust in the success of percent growth in 1394. Despite this 28.3 percent growth, net its future policies. CBI claims on public sector fell by 6.0 percent, attributed to Reining in inflation, foreign exchange stability, lowering the 5.8 percent fall in the claims on state-owned companies and interest rates, decreasing non-performing loans, bringing under institutions and a 20.7 percent drop in public sector deposits. Management Report its control the unauthorized credit institutions, and managing The net foreign assets of CBI grew by 6.3 percent in the year CBI claims on banks were the main achievements of the CBI ending in 11/1395 due to 0.1 percent rise in foreign assets since 11th administration took office, all resulting in enhanced and a 6.6 percent fall in foreign debt, resulting in a rise in the credibility of that institution, but the degree of CBI’s success monetary base. Table 18 exhibits sources of monetary base and is in dispute. the uses of liquidity along with their growth rates.
Table 18 - Uses of Liquidity and Sources of Monetary Base and their Point-to-point Growth Rates End of Period (in IRR trillions) Growth (percent) 1393 1394 11/1395 1393 1394 11/1395 Monetary Base 1,311.5 1,532.4 1,734.1 10.7 16.8 18.1 CBI Net Foreign Assets 1,584.7 1,921.9 1,880.9 -5.6 21.3 6.3 CBI Net Claims on the Public Sector 33.3 124.6 185.1 -14.0 274.2 -6.0 CBI Net Claims on Banks 858.0 836.1 1,154.9 42.4 -2.6 35.3 Net of Other Items -1,164.5 -1,350.2 -1,486.8 2.6 15.9 10.0 Liquidity 7,823.9 10,172.8 12,110.9 22.3 30.0 24.1 Money 1,207.6 1,367.0 1,522.6 1.0 13.2 23.3 Review of Risks and Disclosure Quasi Money 6,616.3 8,805.8 10,588.3 27.2 33.1 24.2 Source: Selected Economic Indicators
According to this Table, the M2 liquidity reached IRR12,111 of notes and coins with the public and sight deposits grew by trillion at the end of 11/1395, showing a 24.1 percent growth. 23.3 percent to IRR1,523 trillion at the end of 11/1395, up from This growth rate which is higher than that of the monetary base its 10.4 percent growth at the end of 11/1394. The quasi-money caused the M2 money multiplier to rise to 7.0. At the same time, registered IRR10,588 trillion at the end of 11/1395, indicating quasi-money accounted for 87.4 percent of the M2 liquidity and 24.2 percent rise, below its 32 percent growth at the end of M1 money accounted for the rest. The M1 money which consists 1394. 6.1 - Sources and Uses of the Banks
On the basis of CBI statistics, the balance of banks’ and credit 1395, the funds available to the banks rose by 18.8 percent and institutions’ deposits in IRR and foreign currencies reached reached IRR11,374.1 trillion. This 18.8 percent growth in the IRR12,728.4 trillion at the end of 1395, indicating 19.9 percent balance of deposits after taking out legal reserve requirements growth from the end of 1394. This 19.9 percent growth rate was the minimum annual growth rate during the past 7 years.
is below the average annual growth rate during the 5-year Table 19 exhibits the balance of banks’ and credit institutions’ Survey of the Iranian Economy period ending in 1394, to some extent because of the inclusion extended facilities and deposits in IRR and foreign currencies of data on additional banks and credit institutions in 1391 and during 1386-95. 1392. Given the 10.6 percent legal reserves ratio at the end of
Table 19 - Balance of Banks’ and Credit Institutions’ Extended Facilities and Deposits in IRR and Foreign Currencies during 1386-95 Deposits Deposits Extended Facilities (legal reserves deducted) Legal reserve Ratio Amount Change Amount Change Amount Change (percent) (in IRR trillion) (percent) (in IRR trillion) (percent) (in IRR trillion) (percent) 1386 1,741.4 29.9 1,494.7 30.1 1,640.8 36.4 14.2 1387 1,943.3 11.6 1,675.8 12.1 1,852.4 12.9 13.8 1388 2,424.4 24.8 2,131.6 27.2 2,289.6 23.6 12.1 1389 3,187.7 31.5 2,823.2 32.4 3,177.9 38.8 11.4 1390 3,867.0 21.3 3,438.3 21.8 3,803.7 19.7 11.1 1391 4,977.3 28.7 4,403.7 28.1 4,390.6 15.4 11.5 1392 6,844.2 37.5 6,081.1 38.1 5,719.3 30.3 11.1 and Financial Statements Report of Independent Auditor 1393 8,192.8 19.7 7,257.0 19.3 6,739.7 17.8 11.4 1394 10,619.0 29.6 9,573.9 31.9 7,916.1 17.5 9.8 1395 12,728.4 19.9 11,374.1 18.8 9,866.6 24.6 10.6 Source: Central Bank of Iran, Banking Statistics 76 MIDDLE EAST BANK ANNUAL REPORT
As shown in Table 19, during 1390-94, the balance of extended facilities, but in 1395 it reversed course and increased to 86.7 facilities has grown slower than deposits after taking out legal percent because of the faster growth of facilities than deposits. reserves, hence the extended facilities to deposits ratio has Figure 12 shows the extended facilities to deposits (after fallen in that period. This ratio touched the low of 82.7 percent deduction of reserves) ratio during 1386-95. at the end of 1394 due to the faster rise of deposits compared to
Figure 12 – Ratio of Extended Facilities to Deposits after the Deduction of Legal Reserves during 1386-95
Source: Central Bank of Iran, Banking Statistics
Table 20 shows assets and liabilities of banks and non-bank banks and non-bank credit institutions net claims on the public credit institutions at the end of 11/1395. Total assets reached sector compared to the end of 1394 and 11/1394, respectively. IRR20,382.0 trillion, indicating a 15.4 percent rise from the At the end of 11/1395, government debt accounted for 97.6 end of 1394 and a 18.8 percent rise from 11/1394. As can be percent of banks and non-bank credit institutions claims on the seen, non-public debt, other assets, and foreign assets at 44.0, public sector and only 2.4 percent was related to state-owned 30.3, and 11.4 percent accounted for the highest shares in total companies and institutions. The 33.5 percent rise in non-public assets, respectively. In 11/1395, the banks and non-bank credit banks and non-bank credit institutions' claims on the public institutions claims on the non-public sector (balance of extended sector since 11/1394 was the main factor for the increase in their facilities), which is referred to as a driver of M2 liquidity, grew claims, accounting for 13.5 percentage points of this growth. by 21.9 percent from the end of 1394 and by 25.8 percent from During the same period, CBI claims on non-public banks and 11/1394. The 23.4 percent rise in banks and non-bank credit non-bank credit institutions rose by 193.9 percent, accounting institutions claims on the public sector coupled with the 19.9 for 31.3 percentage points of the 35.3 percent growth of CBI percent fall in public sector loans and deposits with them at the claims on banks. end of 11/1395 resulted in 37.3 percent and 44.0 percent rises in
Table 20 - Assets and Liabilities of Banks and Non-bank Credit Institutions at the End of 11/1395 (in IRR trillions) Share of Banks and Non-bank Credit Percentage Change Compared Balance Institutions (percent) to Description at the end Non-public and of 11/1395 Commercial Specialized 11/1394 12/1394 Non-Bank Assets Foreign Assets 2,322.9 14.5 23.2 62.3 9.1 0.8 Notes and Coins 114.1 44.1 8.8 47.2 9.2 34.1 Deposits with the Central Bank 1,298.3 18.6 6.5 74.9 22.1 20.6 Claims on Public Sector 1,502.9 26.2 31.8 42.0 28.0 23.4 Claims on Non-public Sector 8,972.3 15.4 22.8 61.8 25.8 21.9 Others 6,171.5 19.1 8.6 72.3 11.1 9.9 Liabilities Deposits of Non-public Sector 11,789.2 18.7 9.8 71.5 24.6 20.3 Claims of Central Bank 1,154.9 12.7 52.2 35.1 35.3 38.1 Loans and Deposits of Public Sector 238.1 33.8 50.6 15.6 -19.6 -19.9 Capital Account 752.5 18.8 19.2 61.9 5.3 1.8 Foreign Exchange Loans and Deposits 1,816.2 13.2 22.7 64.1 12.1 2.2 Others 4,631.1 16.5 27.1 56.4 9.8 9.9 Source: Central Bank of Iran, Selected Economic Indicators SURVEY OF THE IRANIAN ECONOMY 77
As another portion of assets, at the end of 11/1395 legal reserve Non-public deposits at 57.8 percent, other liabilities at 22.7 requirements of banks and non-bank credit institutions with percent, and foreign exchange loans and deposits at 8.9 percent, CBI rose by 21.1 percent and their sight deposits by 10.7 accounted for the highest shares in banks and non-bank credit percent compared to the end of 1394. Compared to their levels institutions debt in 11/1395. Non-public deposits are presented in 11/1394, the former rose by 24.1 percent and the latter fell by in the four categories of sight, time, Gharz-al-hasaneh, and 6.7 percent. The “others” category, which includes assets such other. Figure 13 exhibits commercial banks, specialized banks, as real estate and shares of firms possessed by banks, rose by non-public banks and non-bank credit institution shares in the only 11.1 percent between 11/1394 and 11/1395, much less than four aforementioned deposit categories. the 43.0 percent growth between 11/1393 and 11/1394.
Figure 13 – Shares of Commercial, Specialized, and Non-public Banks and Non-bank Credit Institutions in the Management Report Deposits of the Non-public Sector, 11/1395
100
80
60
40
20
0
Source: Central Bank of Iran, Selected Economic Indicators
In Figure 14, shares of each category of the deposits is shown institutions capital account rose from 14.2 percent in 11/1394 Review of Risks and Disclosure in the balance sheets of the three aforementioned financial to 18.8 percent in 11/1395 at the expense of the shares of non- institutions. As can be seen in these Figures, non-public public banks and non-bank credit institutions. Given the high banks and non-bank credit institutions account for the highest growth of foreign exchange loans and deposits with commercial shares in all four categories of deposits. Also, time deposits and specialized banks, the share of total foreign loans and accounted for a higher share in non-public banks and non-bank deposits with banks and non-bank credit institutions rose. The credit institutions balance sheet than in the commercial and category of “other liabilities” of banks and non-bank credit specialized banks’, while in the balance sheets of commercial institutions rose by 9.8 percent between 11/1394 and 11/1395, and specialized banks, sight deposits and Gharz-al-hasaneh much slower than its 29.7 percent growth between 11/1393 and accounted for higher shares than other two deposit categories. 11/1394. The share of commercial banks in banks and non-bank credit
Figure 14 - Share of Various Deposits in Non-public Deposits with Banks and Non-bank Credit Institutions, 11/1395
100
80 Survey of the Iranian Economy
60
40
20
0
Source: Central Bank of Iran, Selected Economic Indicators
6.2 - Extended Facilities and Non-performing Loans
Extended facilities increased by IRR1,310.5 trillion in 1395 year earlier. Given the continued recession in construction, the and Financial Statements
and amounted to IRR5,483.7 trillion, indicating a 31.4 percent share of housing and construction in extended facilities dropped Report of Independent Auditor growth. Agriculture, industries and mining, and trade and from 10.3 percent in 1394 to 9.1 percent. Table 21 shows details services accounted for 8.5, 29.3, and 52.9 percent of extended of facilities extended to various economic sectors in 1395. facilities, respectively, which do not show much change from a 78 MIDDLE EAST BANK ANNUAL REPORT
Table 21 - Extended Facilities in 1395 by Sector and Purpose (in IRR trillions- percent) Manufacturing Housing and Agriculture Trade Services Others All sectors and Mining Construction Amount Share Amount Share Amount Share Amount Share Amount Share Amount Share Amount Share Creation 67.9 14.6 127.8 7.9 76.6 15.3 27.0 3.7 234.0 10.7 0.9 25.3 534.3 9.7 Working 336.1 72.0 1,325.0 82.3 140.3 28.0 519.3 71.7 1,189.8 54.6 1.3 38.3 3,511.8 64.0 capital Repair 1.3 0.3 4.7 0.3 61.1 12.2 2.3 0.3 21.0 1.0 0.0 0.2 90.3 1.6 Development 28.5 6.1 63.8 4.0 17.0 3.4 24.1 3.3 105.8 4.9 0.1 2.4 239.3 4.4 Purchase of consumer 14.5 3.1 34.3 2.1 13.8 2.8 44.9 6.2 374.3 17.2 0.1 3.5 482.0 8.8 goods Purchase of 1.0 0.2 6.9 0.4 178.5 35.6 10.1 1.4 24.2 1.1 0.0 0.8 220.7 4.0 house Others 17.4 3.7 46.8 2.9 13.8 2.8 96.6 13.3 229.7 10.5 1.0 29.5 405.3 7.4 Total 466.8 100.0 1,609.2 100.0 501.1 100.0 724.3 100.0 2,178.8 100.0 3.4 100.0 5,483.7 100.0
Source: Central Bank of Iran, Extended Facilities by Sectors and Purpose in 1395
In an effort to direct funds to short-term facilities for financing in order to avoid any adverse effect on economic growth. In working capital, since 1393 the CBI has prohibited banks from addition to the facilities extended to creation plans, home offering time deposits with maturities of more than one year. mortgages are also long-term in nature, and due to the absence In 1394 extended facilities aimed at financing working capital of mechanisms for their securitization in Iran, would freeze grew by 27.2 percent and accounted for 63.1 percent of the banking resources. Mortgages accounted for 4 percent of total total. In 1395 it increased by IRR3,512 trillion indicating a 33.3 facilities extended in 1395. percent growth and 64.0 percent share in the total. Funds aimed The balance of the extended facilities of the banking system at financing working capital accounted for 82.3 percent of the at the end of 11/1395 reveals that Civil Partnership with its facilities extended to the industries and mining sector, indicating 42.1 percent of the total accounted for the highest share of the that the CBI has been somewhat successful in directing funds extended facilities that is 0.2 percentage points below its share to short term facilities for working capital. In 1395 only 9.7 in 1394. Installment sale ranked second with the same share of percent of bank resources were extended to new projects, 0.4 the total as in 1394. The share of Murabaha, which was added to percentage points below that in 1394. Hence, other than the the types of facilities in 1394, gradually increased and accounted importance of financing working capital via the banking system for 3.7 percent and 5.2 percent of the total extended facilities in to utilize spare production capacities, consideration of the role 11/1394 and 11/1395, respectively. Table 22 exhibits the shares of the capital market in financing creation plans is necessary of extended facilities by type through the end of 11/1395.
Table 22 - Share Various Extended Facilities by Type at the End of 11/1395 (percent) Commercial State-owned Banks and Banks and Credit Type Specialized Banks Banks Credit Institutions Institutions Gharz-al-hasaneh 7.4 2.3 5.5 5.0 Mudarabah 3.7 0.4 2.0 1.9 Forward Transactions 1.1 0.7 0.0 0.3 Civil Partnership 34.3 20.5 52.1 42.1 Ju’alah 8.1 4.2 2.3 3.6 Installment Sale 21.6 59.3 11.9 24.3 Murabaha 7.2 2.3 5.8 5.2 Higher Purchase 0.9 0.2 0.2 0.3 Legal Partnership 2.9 1.2 4.4 3.5 Direct Investment 1.8 0.3 1.0 0.9 Other 11.0 8.5 14.8 12.8 Source: Central Bank of Iran, Selected Economic Indicators
Given that interest rates on various facilities are decreed by the the balance of extended facilities totaled 4.4 percent, indicating CBI, and civil partnership bears a higher interest rate than other 0.3 percentage points rise from 1394 and pointing to increased partnership types, naturally a higher share of bank facilities is entrepreneurial activities of the banks. extended to civil partnership. However, CBI has decreed the It should be noted that in the recent past a considerable part interest rate on both partnership and non-partnership facilities of the extended facilities has not been paid back to the banks, at 18.0 percent since the beginning of summer of 1395. In raising the ratio of non-performing loans to the total extended 1395, the share of direct investment and legal partnership in facilities. Figure 15 shows this ratio from 1387 to 1395. SURVEY OF THE IRANIAN ECONOMY 79
Figure 15 - Non-performing Loan Ratios, 1387-95 Management Report
Source: Central Bank of Iran, Economic Trends *1395 statistics cover only the first 9 months of the year.
As shown in this Figure, in the aftermath of the 1391 exchange structural problems such as the interventionist practices of the rate shock and the imposition of sanctions against Iran, the CBI in the money market, bank’s weakness in customers’ credit ratio of non-performing loans to extended facilities in foreign evaluation, entrepreneurial actions by banks, and CBI’s bailing exchange rose sharply, but it fell during 1392-94 as a result of out of insolvent banks which has almost eliminated the cost of the stability in the foreign exchange market. The ratio again extending risky loans have exacerbated the problem. rose in 1395 and by fall reached 13.7 percent. The overall non- Non-performing loans are not the only frozen assets of the banks. performing loans ratio (in both IRR and foreign exchange) Banks’ claims on the public sector, such as participation bonds reached 11.7 percent at the end of fall of 1395, lying in the and acquired collaterals, are also included in this category of critical interval. The rise in overdue claims in 1395 is attributed assets. In 11/1395, banks claims on the public sector accounted to low non-oil economic growth coupled with high nominal for 23.6 percent of the balance of extended facilities, indicating interest rates despite the fall in the inflation rate. However, a 0.2 percentage points fall from the end of 1394. Review of Risks and Disclosure 6.3 - Interest Rates In early summer of 1395 the Money and Credit Council went percent. Therefore, given the 9.0 percent inflation rate of 1395, along with the banks’ agreement to drop the interest rate on the real interest rate on deposits was 5.5 percent, slightly below one-year deposits from 18.0 percent to 15.0 percent and in line the 7.2 percent rate in 1394. Figure 16 shows the interest rate on with that set the maximum interest rate on facilities at 18.0 deposits versus the annual inflation rate during 1385-95. Figure 16 –Nominal and Real Annual Deposit Interest Rates and Annual Inflation Rate 1385-95 Survey of the Iranian Economy
Source: Central Bank of Iran, Economic Trends and Economic Time Series Database
In reality, however, many banks did not abide by their agreement interest rates. The real interest rate on bank deposits that had and offered higher interest rates on deposits, and some set up been negative for years up to 1393 kept rising through the end investment funds with fixed income that promised interest rates of 1395 with an obvious negative effect on investments and the in excess of 20 percent to attract more funds. The fact that the banks. market determined the interest rate on Islamic treasury bills, CBI’s attempts to lower interest rates through the injection of which should in principle be risk-free, at around 23 percent funds into the interbank market was partially successful for a was an indication that the discretionary deposit interest rate on while, but by the end of 1395 this rate was still as high as 19.2
bank deposits was not observed. As such, the nominal interest percent. Due to the structural problems of the banking system, and Financial Statements rate was much higher than the CBI’s discretionary rate and, at some point in the second half of the year the interbank interest Report of Independent Auditor given the falling rate of inflation, indicated a sharp rise in real rate was even in the 20-25 percent range. 80 MIDDLE EAST BANK ANNUAL REPORT
6.4 - Unauthorized Financial and Credit Institutions According to the “Money and Banking” Act of 1351, the led to illiquidity problems and civil protests. The operation establishment of banks and credit institutions is subject to of these institutions not only weakened the CBI’s ability to CBI’s permission. In 1378 permission was issued for the exercise monetary policy, but also created problems for the establishment of private credit institutions, and in 1380 for authorized banks and credit institutions. the establishment of private banks. However legal loopholes CBI is trying to bring the unauthorized credit institutions under were found for the Ministry of Interior to issue permits for the its supervision in order to prevent any probable systematic establishment of Gharz-al-hasaneh funds, and for the Ministry risk in the banking system. It has promoted the merger of the of Cooperatives for the establishments of credit institutions less-risky unauthorized credit institutions, the closing of the without CBI’s approval or supervision. The aforementioned insolvent ones, and has also more widely advertised the risks institutions were operating with no regards for banking rules that depositors in these institutions are taking. Dissolving the and regulations related to legal reserves requirements, interest Mizan Credit Institution in 1394 and the Samen-al-hojaj Credit rates on deposits and loans, facilities ratios, capital adequacy, Institution in 1395 was in line with the CBI’s efforts to organize etc. Despite the passing of the “Regulating Unorganized Money the money market. Caspian Credit Institution is another one that Markets” Act in 1383 which stresses that the establishment of received a CBI license in 1394 contingent on organizing eight financial and credit institutions is subject to CBI’s permit, only specific unauthorized credit institutions. Considering massive a few received such a license to operate as a bank or credit liquidity problems in those eight institutions, Caspian was not institution and some committed to merge and operate as credit liquid enough to reimburse depositor claims and depositor institutions under CBI supervision. But most of them that were protests ensued. Untangling the problem of unauthorized credit associated with politically powerful organizations continued to institutions is a difficult task that requires coordinated efforts operate as before without obtaining a CBI license. They offered by policymakers in order to minimize its financial and socio- interest rates far above the banks in order to attract potential economic repercussions. depositors and also extended high risk facilities that eventually 7. Prices and Inflation The point-to-point CPI inflation that had dropped from double-digit (producer price index) inflation rate reached the low of 1.6 rates to 9.4 percent in 9/1394, kept on decreasing to the low of percent in 3/1395 following its downward trend that had started 6.8 percent in 3/1395, but then reversed course and eventually at the end of 1394, but reversed course and eventually registered touched 11.9 percent in the last month of the year. The 12-month the high of 9.1 percent at the end of 1395. As the PPI inflation inflation rate at the end of each month that had been falling after affects the CPI inflation with a couple of months’ lag, the rise the 11th government took office in 1392, turned to a single-digit in the latter since the beginning of summer 1395 can be partly rate of 9.7 percent in 3/1395. It remained at 8.6 percent from attributed to the rise in the former. The annual PPI inflation rate 8/1395 to 10/1395 and then slightly increased to reach 9.0 in 1395 reached 5.0 percent, showing only a 0.1 percentage percent at the end of 1395, registering the first single-digit annual points rise from its preceding year. Figure 17 depicts point- inflation rate in the past 26 years. to-point CPI and PPI inflation rates and the average annual As a precursor to the CPI inflation, the point-to-point PPI inflation rates at the end of each month in 1395.
Figure 17 - Point-to-point CPI and PPI Inflation Rates and Average Annual Inflation Rate
Source: Central Bank of Iran, Consumer Price Index and Producer Price Index, 12/1395; Research Calculations
In order to investigate the influence of global inflation on goods did not experience much fluctuations and was hovering domestic inflation, price changes in the two categories of around 11.4 percent since 3/1395. The annual inflation rates of tradable and non-tradable goods should be examined. The tradable and non-tradable goods in 1395 were 6.9 percent and inflation rate of tradable goods increased in 10 consecutive 11.5 percent, respectively, indicating a 1.5 and 4.7 percentage months, reaching to a high of 12.8 percent in the last month of points fall compared to its preceding year. Figure 18 depicts 1395 from 3.0 percent in the third month of that year, helped the point-to-point inflation rates of tradable and non-tradable by the intense depreciation of IRR against foreign currencies goods in 1395. in fall 1395. In contrast, the inflation rate of non-tradable SURVEY OF THE IRANIAN ECONOMY 81
Figure 18 - Point-to-point Inflation Rates of Tradable and Non-tradable Goods in 1395 Management Report
Source: Central Bank of Iran, Price Indices, Tradable and Non-tradable Goods Price Indices, 12/1395
The export price index fell by 2.7 percent in 1395. This drop, percent while Communication had the lowest rate of 3.5 percent. in conjunction with the depreciation of IRR against foreign Except Tobacco, the annual inflation rate of all major groups in currencies, will help Iranian goods to be more competitive in the consumption basket have fallen in 1395. In other words, global markets. Among major subgroups of exports, the highest consumer prices of all major groups except Tobacco have risen price fall belonged to “Mineral Products” with negative 8.2 at a lower pace in 1395. Besides, the annual inflation rate of percent, and the highest price rise belonged to “Animal and both the goods and services subgroups of the consumption Vegetables Fats and Oils” with a 10.0 percent price change. basket have experienced falls in 1395. Table 23 presents annual An examination of the price index changes in the consumption inflation rates in the major categories of the consumption basket basket of goods and services reveals that among major groups, in 1394 and 1395. Health experienced the highest annual inflation rate of 16.7 Review of Risks and Disclosure Table 23 - Annual Inflation Rates in Major Categories of the Consumption Basket (percent) Annual Inflation Rate 1394 1395 Overall 11.9 9.0 Major Groups Food and Beverages 10.4 8.2 Tobacco 3.1 10.0 Clothing and Footwear 10.4 6.6 Housing, Water, Electricity, Gas and other Fuels 12.3 9.5 Household Equipment and Routine Household Maintenance 5.7 5.2 Health 23.8 16.7 Transport 11.1 7.1 Communication 3.6 3.5 Recreation and Culture 14.9 8.6
Education 16.4 16.0 Survey of the Iranian Economy Restaurants and Hotels 16.2 9.5 Miscellaneous Goods and Services 11.1 9.7 Special Groups Goods 9.2 7.0 Services 15.9 11.8 Source: Central Bank of Iran, Consumer Price Index Reports
8. Capital Market Iran’s capital market consists of the Tehran Stock Exchange times that of the OTC in terms of market capitalization, and 1.4 (TSE) and the Over the Counter (OTC) Market; stocks and times in terms of value. Figure 19 depicts the movement of the debt securities are traded. The OTC market has the same legal two indices in 1395 and shows that the TSE overall index fell structure as the TSE but has easier conditions for entering the by 3.7 percent, while the OTC index rose by 8.6 percent during
market and trading. At the end of 1395, TSE was more than 3 the year. and Financial Statements Report of Independent Auditor 82 MIDDLE EAST BANK ANNUAL REPORT
Figure 19 - Overall Indices of the TSE and OTC in 1395
Source: Rahavard Novin Database
Major developments in the capital market in 1395 included time, the market for trading SME shares was established. OTC exemption of stock market transactions from value-added tax, market regulations for listing SME shares are simple and easy permission for the issuance of mortgage securities, tax exempt to meet. In the last days of 1395, share deposits certificates were recapitalization through asset revaluation, and drafting new introduced in the market that allow investors to differentiate legislation for the securities and exchange at the end of the year. ownership rights from voting rights. Share deposit certificates In 1395 new financial instruments were introduced in the provide a method for increasing free float shares of companies market, including venture capital in the OTC market in early which enables major shareholders to sell a portion of their winter, with a focus on investments in small and medium sized shares while maintaining their management power. enterprises (SMEs) with high growth potential. At the same
8.1 - Tehran Stock Exchange After a period of high returns in 1394, in 1395 the TSE the weighted indices, uniformly-weighted indices assign equal price index fell by 12.1 percent and its overall index by 3.7 weights to small and large corporations. It thus follows that percent. The financial index fell by 16.7 percent, much higher losses of dominant corporations have resulted in the fall in the than the 1.3 percent drop in the industry index. However, the overall index and have offset the positive returns of the other uniformly-weighted price index rose by 10.5 percent and the corporations. Table 24 presents statistics on the performance of uniformly-weighted overall index rose by 17.7 percent. Unlike the stock exchange in 1394 and 1395
Table 24 - Tehran Stock Exchange Performance at the end of 1394 and 1395 Uniformly Uniformly – Overall Free Float Financial Industry Group Price Index –weighted weighted Price Index Index Index Index Overall Index Index End of 1395 77,230 26,829 15,722 12,379 84,725 131,866 66,100 End of 1394 80,219 30,511 13,357 11,202 92,557 158,225 66,994 Percentage Change -3.7 -12.1 17.7 10.5 -8.5 -16.7 -1.3 Standard Deviation of Changes 0.457 0.437 0.462 0.465 0.551 0.768 0.433 Source: Tehran Stock Exchange, Report of Market Analysis, end of 1395
Market capitalization of the TSE fell by 4.5 percent in 1395 profitability, and high shares of free float shares are listed in the and closed the year at IRR3,220 trillion. The total value of primary market, while those with less desirable conditions are market transactions amounted to IRR638 trillion, indicating a listed in the secondary market. The primary market accounts 13.7 percent rise. Investment by individuals accounted for 56 for approximately 59 percent of all transactions value. In the percent of buys and 57 percent of sells, and investments by legal debt market which only includes fixed-rate bonds, participation entities investments for the rest. As shown in Table 25, the stock bonds issued by municipalities account for the highest share, exchange accounted for 84.2 percent and the debt market for followed by Sukuk, lease, and Istisna’a. In the derivatives 14.6 percent of TSE’s market capitalization while the shares of market, where transaction volume in 1395 was 5 times that of exchange-traded funds (ETF) and derivatives were negligible. 1394, the absolute majority of transactions was in options and TSE’s equity market is divided into the primary market and the put options, and the share of futures was negligible. secondary market. Companies with favorable capital conditions, SURVEY OF THE IRANIAN ECONOMY 83
Table 25 - Total Value and Volume of Transactions in TSE 1395 1395 to 1394 Percentage Change Share in Volume Value Volume Value Value (Million Shares) (IRR billion) (Percent) Market 256,772 638,540 100.0 12.6 13.7 Stock Exchange 252,613 537,936 84.2 10.9 13.6 Primary market 158,211 327,343 51.3 1.1 6.6 Secondary market 94,402 210,593 33.0 32.3 26.5
Debt security 93 93,132 14.6 5.7 7.5 Management Report Share certificates 1 899 0.1 0.0 -36.3 Sukuk 20 20,393 3.2 100.0 100.1 Participation bonds 72 71,840 11.3 -5.3 -4.2 Derivatives 3,371 60 0.0 5,814.0 407.6 Futures 0 1 0.0 -96.0 -92.8 Put options 3,371 19 0.0 5,795.9 3,241.8 Options 0.03 40 0.0 - - Exchange-Traded Funds (ETF) 695 7,412 1.2 479.2 451.1 Source: Tehran Stock Exchange, Report of Market Analysis, 1395Q4
In 1395, approximately IRR238.4 trillion was financed through financing via debt securities fell by IRR26.5 trillion and reached the TSE, IRR37.4 trillion below the 1394 amount. The share IRR32 trillion, accounting for 13 percent of the total financing of initial public offering (IPO) in total financing from the TSE through the TSE. Table 26 exhibits statistics on companies’ rose by 6 percentage points to 16 percent in 1395. The value of financing through the capital market.
Table 26 - Financing via Capital Market Instruments in TSE (in IRR trillions) Review of Risks and Disclosure 1394 1395 Share in Total Share in Total Value Value (percent) (percent) Total 275.8 100 238.4 100 Equity Financing 217.3 79 206.4 87 Initial Public Offering 28.3 10 39.2 16 Raising Capital 189.0 69 167.2 70 Receivables and cash 103.6 38 99.0 42 Accumulated profits, reserves, and share premiums 85.3 31 68.2 29 Debt Financing 58.5 21 32.0 13 Source: Tehran Stock Exchange, Report of Market Analysis, 1395Q4
Out of all the industries listed in TSE, 10 account for 81 percent the rate of returns of the 10 major industries against their risks of the market value. At the end of 1395 the group of chemicals as measured by standard deviation. As shown in the Figure, the accounted for the highest share in the market capitalization auto parts and manufacturing group has the highest risk and the Survey of the Iranian Economy at 20.6 percent, followed by base metals at 10.3 percent, and lowest return, while the pharmaceuticals group, despite its high banks and credit institutions at 9.8 percent. Figure 20 illustrates rate of return, exposed investors to low risks. and Financial Statements Report of Independent Auditor 84 MIDDLE EAST BANK ANNUAL REPORT
Figure 20 - Risk and Return of Top 10 Major Industries Listed in TSE in 1395*
Source: Tehran Stock Exchange, Report of Market Analysis, 1395Q4 *The size of each circle is proportional to the corresponding industry’s market share. 8.2 - Over the Counter Market (OTC) The OTC’s overall index rose by 8.6 percent in 1395 to close the The OTC market is divided into various subgroups, of which year at 875. The OTC index experienced 7.8 percent fall in the new financing tools is the major one. This subgroup, which first 17 trading days of 1395. The OTC’s market capitalization continues to expand, includes debt securities, certificates of rose by 8.4 percent to IRR1,047 trillion in 1395. The total value deposit, mutual funds, and home mortgage preemptive rights. of transactions also registered IRR461 trillion, indicating a 2.2 The value of securities in this OTC subgroup has considerably percent rise. Securities including Islamic treasury bills, lease risen in recent years; during 1390-95, the value of transactions bills, Murabaha and home mortgage bonds accounted for more has grown 10-fold. Table 27 presents details of the market for than 56 percent of the total value of OTC transactions and 19 new financing tools, and Figure 21 exhibits changes in the value percent of the total market value. and the volume of transactions through 1395.
Table 27 - Value of Transactions and Number of Symbols Traded in the Market for New Financing Tools 1394 1395 Percentage Value of Number of Value of Change in Number of Symbols Transactions Symbols Transactions Value of Traded (in IRR billions) Traded (in IRR billions) Transaction Islamic Treasury 22,492 4 84,228 5 274.5 Bills Lease 96,484 17 78,673 24 -18.5 Sukuk Mortgage - 20 5,453 1 - Participation 78,642 1 49,303 17 -37.3 Murabaha 6,446 - 27,401 9 325.1 Deposit Certificate - 13 11,066 2 - Exchange-traded 9,179 - 15,692 14 71.0 Mutual Fund Venture Capital - 23 13 2 - Mortgage Certifi- Derivatives 9,020 - 10,288 29 14.1 cate Total 222,263 78 282,117 103 26.9 Source: Iran Fara Bourse, 1395 annual report SURVEY OF THE IRANIAN ECONOMY 85
Figure 21 - Value and Volume of New Financing Tools Management Report
Source: Iran Fara Bourse, 1395, Annual Report
9. Business Environment A firm’s business environment refers to factors that are not and elimination of production obstacles”. Other measures under the control of the firm’s manager but influence the firm’s include the insertion of Article 41 in the “Fourth Development performance. Improving of the business environment and the Plan” and Articles 69 to 78 in the “Fifth Development Plan”, reduction of unnecessary intervention in the economy by the the passage of the law on “Continuous Improvement of the government are prerequisites to increased participation of the Business Environment” in 1390, the establishment of the private sector and increased growth. The better the business “Private-Public Dialogue Council” in the early summer of environment, the more incentives will foreign and domestic 1390 and the announcement of general policies for supporting
investors have to step in, which in turn will create additional national production in the winter of 1391. The office of Review of Risks and Disclosure employment and growth. “Monitoring and Improving the Business Environment” was The government plays a significant role in either improving or established at the Ministry of Economic Affairs and Finance worsening the business environment. It can make sustainable after the 11th government took office to accelerate the pace of economic growth more achievable by winning investors’ improvements in the business environment. confidence through the elimination of unnecessary interventions Currently, various international institutions monitor and in the operation of firms, recognition of property rights, and by quantify the business environment in various countries refraining from distributing economic rents among economic according to different methodologies. Their reports can give a agents. Various Iranian administrations attempted to improve better picture of each country’s business environment and the the business environment by establishing task forces to degree to which the respective governments have succeeded in eliminate manufacturing obstacles in 1370s and 1380s and improving them. through the execution of the 1387 “law on industrial investment
9.1 - World Bank’s “Ease of Doing Business” The World Bank has been publishing an index for assessing ease framework within which the private sector operates in that of doing business in various countries since 2003. Its assessments country. The latest such report earlier in 2017, ranked countries are based on the opinion of various economic agents obtained on the basis of 10 criteria. Table 28 presents Iran’s ranking by Survey of the Iranian Economy through direct interviews, phone calls and questionnaires in the the 10 main criteria of the business environment in 2016-17. country’s largest business city. These annual reports overlook Iran’s overall ranking in ease of doing business was 118 in 2016 many factors that affect the business environment such as the which was later revised to 117 as a result of revisions in both macroeconomic conditions, employment, corruption, strengths data and methodology. The 2017 edition of the report indicates and weaknesses of the financial system, and intellectual that Iran’s ranking has dropped by three places to 120. Note that property right regulations. Overall, the reports do not present there was a 32-place improvement in Iran’s rank between 2014 a comprehensive picture of the country’s competitiveness and to 2017 which was mainly the result of correcting data errors business environment but mainly provide an index of the legal and changing the methodology. and Financial Statements Report of Independent Auditor 86 MIDDLE EAST BANK ANNUAL REPORT
Table 28 - Iran’s Ranking in 10 Main Indices of Business Environment in 2016-17 2016 2017 Change Best Performer of the Region Starting a Business 97 102 -5 Azerbaijan (World’s 5th) Dealing with Construction Permits 27 27 0 United Arab Emirates (World’s 2nd) Getting Electricity 90 94 -4 United Arab Emirates (World’s 4th) Registering Property 85 86 -1 Georgia (World’s 3rd) Paying Taxes 99 100 -1 UAE and Qatar (World’s 1st) Trading Across Borders 171 170 +1 Armenia (World’s 48th) Getting Credit 97 101 -4 Georgia (World’s 7th) Protecting Minority Investors 166 165 +1 Kazakhstan (World’s 3rd) Enforcing Contracts 69 70 -1 Kazakhstan (World’s 9th) Resolving Insolvency 155 156 -1 Israel (World’s 31st) Source: Doing Business Report 2017, World Bank Group
As shown in this Table, in 2017 Iran’s ranking has worsened one place, mainly attributed to the improving and expanding in seven main indices and has improved in two. In starting a services offered by the national single window. business, despite the fall in costs of starting business, Iran’s The difference between the score of a country in a given index ranking worsened by 5 places due to the better performance of with the score of the best performing country is referred to other countries. In getting electricity, the country’s ranking fell as the former’s “distance to frontier” (DTF). DTF provides by 4 places because of the rise in costs and better performance a good picture of a country’s business environment. Figure of other countries. Iran’s ranking in getting credit worsened 22 compares Iran’s DTF figures with the average DTF of despite the increased coverage of residents in systems of MENA countries. As can be seen, Iran has worse than average facilities registry and credit ratings. Regarding Trading across conditions, in paying taxes, trade across borders, protecting Borders, due to the shorter duration of checking the compliance minority investors, and resolving insolvency, and has better of exports and imports documents, Iran’s ranking improved by conditions in other fields.
Figure 22 - Iran’s Distance to Frontier in 2017*
Source: Doing Business Report 2017, World Bank Group * Zero indicates the worst and 100 indicates the best performance.
According to Figure 22, Iran has large distances to frontier across borders, and getting credit. in resolving insolvency, protecting minority investors, trade
9.2 - World Economic Forum’s “Global Competitiveness” The World Economic Forum’s (WFE) Global Competitiveness efficiency enhancers, and innovation and sophistication factors. Report examines the business environment on the basis of As shown in this Table, the country’s ranking has worsened in competitiveness and micro and macro factors affecting it. Iran’s macroeconomic environment, health and primary education, ranking in 2015-16 was 74th among 140 countries but it worsened labor market efficiency, and market size, while in other factors in 2016-17 to 76th among 138 countries even though Iran’s has improved or remained unchanged. According to the report, score had increased. In other words, Iran’s ranking worsened higher education and training, financial market development, due to better performance by other countries. Table 29 exhibits technological readiness and innovation have improved in Iran. Iran’s ranking in 12 sub-indices regarding basic requirements, SURVEY OF THE IRANIAN ECONOMY 87
Table 29 - Iran’s Rankings in Global Competitiveness and Its Components 2015-16 2016-2017 Component Criterion (out of 140 countries) (out of 138 countries) Global Competitiveness 74 76 Overall Rank 63 61 Institutions 94 90 Basic Requirement Infrastructure 63 59 Macroeconomic Environment 66 72 Health and Primary Education 47 49 Overall Rank 90 89 Higher Education and Training 69 60 Management Report Goods Market Efficiency 109 111 Efficiency Enhancers Labor Market Efficiency 138 134 Financial Market Developments 134 131 Technological readiness 99 97 Market Size 19 19 Overall Rank 102 101 Innovation and Sophistication Factors Business Sophistication 110 109 Innovation 90 89 Source: Global Competitiveness Report, World Economic Forum, 2016-17
The rise in the ratio of the government budget deficit to worsening of customer orientation. Regarding the market size, GDP coupled with the fall in the ratio of the gross national health and primary education, higher education and training, savings to GDP led to the worsening of Iran’s ranking in and the macroeconomic environment, Iran has performed better the macroeconomic environment in 2016-17. Despite the than the average of MENA countries, but in areas other than improvement in its health and primary education score, Iran’s infrastructure, it has not. On the basis of the latest WEF report, ranking worsened in this field due to better performance by other hardship of obtaining credit, the high inflation rate, inefficient countries. In goods market efficiency, Iran’s ranking worsened bureaucracy, unstable policies, widespread corruption, and Review of Risks and Disclosure due to decreased effectiveness of antitrust policies, longer insufficient infrastructure are respectively the most important duration and additional prerequisites for starting a business, and obstacles to developing and expanding businesses in Iran.
9.3 - Economic Freedom and Corruption Fraser Institution’s Economic Freedom of the World (EFW) Heritage Foundation’s Index of Economic Freedom (IEF) and Heritage Foundation’s Index of Economic Freedom (IEF) covers property rights, juridical effectiveness, government try to measure economic freedom in various countries. Fraser integrity, tax burden, government spending, fiscal health, Institution measures economic freedom on the basis of the business freedom, labor freedom, monetary policy setting following five areas: freedom, trade freedom, investment freedom, and financial 1. Size of government: expenditures, taxes, and enterprises; freedom. According to the 2017 Heritage Foundation’s report, 2. Legal structure and security of property rights; Iran ranked 155th among 180 countries, indicating a 16-place 3. Access to sound money; improvement. The country’s worst rankings were in financial 4. Freedom to trade internationally; and freedom, government integrity and property rights, while its 5. Regulations of credit, labor, and business. best rankings were in fiscal health, government spending and Fraser Institution’s 2016 report presents the results of the the tax burden. Survey of the Iranian Economy survey on 159 countries in 2014, among which Iran ranked Apart from the above two reports, according to the 2016 150th, lower than in 2013. Iran’s ranks were, respectively, 125, International Property Rights report of the Property Rights 73, 119, 159, and 152 in the five aforementioned areas of the Alliance, Iran ranked 101st among 128 countries in the world EFW, indicating that it has only improved in legal structure and and 14th among the 18 countries in the region. Based on the security of property rights. Also, Iran ranked as 124 in “Gender Transparency International’s 2016 Corruption Perception Index, Disparity in Legal Rights”. Iran’s rank dropped one place to 131 among 176 countries.
9.4 - Majlis Research Center’s Business Environment Report The latest quarterly report by the Majlis (Parliament) Research market”, and “widespread corruption in different layers of Center, dated fall 1395, measures Iran’s business environment on administration” were ranked as the worst aspects of the business the basis of a surveys of 268 domestic economic organizations. environment, while the “distribution system’s weakness and It examines 23 aspects of the business environment, of which problems relating to delivering the product to the consumers”, “access to technology” and “lack of skilled workers” were “weakness in transportation infrastructure”, and “weakness of added in fall of 1394. According to this Report, Iran’s business the infrastructure for power supply” were ranked as the best environment improved compared to summer 1395 and fall ones. and Financial Statements
1394. Out of the 23 components of the index, “difficulties in Note that “difficulties in obtaining bank credit” and “weakness Report of Independent Auditor obtaining bank credit”, “weakness of the capital market in of the capital market in financing production and high rates financing production and high rates of financing from informal of financing from informal market” have consistently been 88 MIDDLE EAST BANK ANNUAL REPORT the worst areas of the business environment in the past four corruption has worsened. In the same period, the problem of years. The banking system and capital market could not satisfy “bounced checks” exacerbated, especially during 1393-94. The firms’ financial needs, due to critical problems in the banks’ negative effects of “international sanctions imposed on Iran” balance sheets and limited access of small and medium size on the business environment has lightened in the fall of 1395 enterprises to the capital market. “Corruption in different layers because of the implementation of the JCPOA. Table 30 exhibits of administration” gradually assumed more importance and its the results of the survey carried out by the Majlis Research rank rose from the fifth worst factor of business environment Center on the country’s business environment. in fall 1392 to the third in the fall of 1395, indicating that
Table 30 - Results of the Majlis Research Center Survey of the Country’s Business Environment by 23 Aspects Fall 1395 Fall 1395 to Components of Business Environment Index (1 refers to the Summer Fall 1394 Fall 1395 to Fall 1394 Summer 1395 worst and 23 refers to the best) 1395 Change Change Difficulties in obtaining bank credit 1 1 1 0 0 Weakness of the capital market in financing production and 2 2 2 0 0 high rates of financing from informal market Corruption in different layers of administration 4 3 3 -1 0 Excessive rate of compulsory labor insurance 6 4 4 -2 0 Lack of commitment of public institutions and companies to 3 5 5 2 0 make timely payments of their debts to contractors Bounced checks of customers and colleagues 5 6 6 1 0 Weakness of prosecutors in effectively dealing with complaints, and enforcing the parties to fulfill their 8 8 7 -1 -1 obligations Instability of laws and regulations related to production and 9 7 8 -1 1 investment Volatility in prices of raw materials 15 16 9 -6 -7 High number of public holidays 12 14 10 -2 -4 Production of non-standard, counterfeit goods and relatively 11 11 11 0 0 unrestricted supply of goods to the market Irrational pricing of state-owned institutions' products 13 12 12 -1 0 Restrictive Labor Market Regulations 14 9 13 -1 4 International sanctions imposed on Iran 7 13 14 7 1 Supply of smuggled foreign goods in the domestic market 10 10 15 5 5 Tariff barriers to export goods and import raw materials 16 15 16 0 1 Low tariffs on imported goods and unfair competition of 17 17 17 0 0 foreign products on the domestic market Higher consumer’s tendency to purchase foreign goods, and 19 20 18 -1 -2 lower demand for similar products produced in Iran Lack of access to required technologies 18 19 19 1 0 Lack of skilled workers 20 18 20 0 2 Distribution system’s weakness and problems relating to 22 22 21 -1 -1 delivering the product to the consumers Weakness in transportation infrastructure 21 21 22 1 1 Weakness of the infrastructure for power supply 23 23 23 0 0 Source: Business Environment Quarterly Reports, Economic Research Department, Majlis Research Center, 02/1396
According to the latest quarterly report, in the fall of 1395, Various obstacles to doing business in agriculture, industries Zanjan, Qazvin, South Khorasan, and North Khorasan were and mining, and the services sectors were ranked differently the provinces with the worst business environments, while by their respective organizations. For instance, “lack of skilled Chaharmahal and Bakhtiari, Gilan, Ardebil, and Mazandaran labor force” ranked 15 in the industries and mining sector, 21 were the provinces with the best. On the basis of the average in agriculture and 22 in services sectors. Similarly, distribution score of provinces during 1390-95, Boushehr, Kohgiluyeh and system’s weakness and problems relating to delivering the Boyer-Ahmad, Alborz, and North Khorasan had the worst, product to the consumer ranked 14 in agriculture, 22 in and Gilan, Ardebil, Yazd, and Markazi had the best business industries and mining, and 21 in services. environments. Chapter 4 Report of Independent Auditor and Financial Statements
REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 91 Management Report Review of Risks and Disclosure Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 92 MIDDLE EAST BANK ANNUAL REPORT REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 93 Management Report Review of Risks and Disclosure Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 94 MIDDLE EAST BANK ANNUAL REPORT REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 95
Middle East Bank (PJSC) Consolidated Balance Sheet as at 20 March 2017
(IRR million) Restated Description Note 20 Mar. 2017 19 Mar. 2016
Assets: Management Report Cash 9 730,251 343,880 Due from banks and financial institutions 10 6,310,934 2,158,486 Credit facilities granted 11 53,562,768 27,998,699 Investments 12 3,836,439 3,560,451 Due from subsidiaries and associates 13 - 183,157 Other accounts receivable 14 878,490 1,376,729 Fixed assets 15 2,090,581 1,994,424 Intangible assets 16 933,971 858,837 Statutory deposit 17 4,363,685 3,099,233 Other assets 18 1,943,887 201,611 Total assets 74,651,006 41,775,507
Liabilities, interest and benefits of investment deposit holders and shareholders’ equity Liabilities: Review of Risks and Disclosure Due to banks and financial institutions 19 1,078,154 469,037 Customers' deposits 20 7,877,888 5,262,561 Dividends payable 21 5,747 4,718 Income tax provision 22 182,418 172,712 Other liabilities and accruals 23 2,405,623 712,948 Staff termination benefits 24 62,367 37,423 Total liabilities 11,612,197 6,659,399 Interest and benefits of investment deposit holders: Customers’ investment deposits 25 54,792,177 29,149,769 Interest payable 26 417,800 150,230 Total interest and benefits of investment deposit holders 55,209,977 29,299,999 Total liabilities and interest and benefits of investment deposit holders 66,822,174 35,959,398
Shareholders’ equity: Survey of the Iranian Economy Share capital 27 4,000,000 4,000,000 Capital increase in progress 27 996,416 - Legal reserve 28 825,430 518,876 Retained earnings 1,966,599 1,264,817 Total equity attributable to equity holders of the Bank 7,788,445 5,783,693 Non-controlling interests 40,387 32,416 Total shareholders' equity 7,828,832 5,816,109 Total liabilities, interest and benefits of investment deposit holders and 74,651,006 41,775,507 shareholders’ equity
Letters of credit commitments 45.1 2,975,041 2,507,746 Issued guarantees commitments 45.2 21,543,141 16,750,179 and Financial Statements
Other commitments 45.3 2,752,282 957,530 Report of Independent Auditor Managed funds commitments 45.4 651,829 70,154
The accompanying notes are an integral part of these financial statements. 96 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Consolidated Income Statement For the year ended 20 March 2017
(IRR million) Restated Description Note Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Interest income on credit facilities granted, deposits and 29 9,094,339 6,512,203 debt instruments Interest expense 34 (6,570,559) (4,902,668) Net interest income on credit facilities granted and deposits 2,523,780 1,609,535
Fees and commission income 35 695,979 482,480 Fees and commission expense 36 (24,851) (10,609) Net fees and commission income 671,128 471,871
Net income (loss) from investment 30 313,172 325,925 Net foreign exchange transactions income 37 120,720 50,612 Total other operating income 433,892 376,537
Other income 38 928 1,216 Administrative and general expenses 39 (685,344) (600,257) Provision for bad and doubtful debts 40 (555,453) (202,953) Finance expenses 41 - (109) Depreciation and amortization 42 (190,931) (137,087) Profit before tax 2,198,000 1,518,753 Income tax 22 (183,318) (145,889) Net income after tax 2,014,682 1,372,864 Profit attributable to: Profit attributable to shareholders of the parent company 2,008,653 1,366,662 Profit attributable to non-controlling interests 6,029 6,202 2,014,682 1,372,864
Basic EPS (Rials) 47 502 342 Basic EPS including effects of right issue(Rials) 420 296
The accompanying notes are an integral part of these financial statements. The statement of comprehensive income is not presented because its elements would only have consisted of net profit and prior year adjustments for the year. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 97 ( ( - - ( ------7,500 ) 1,959 996,416 ) 33,075 2,014,682 7,830,791 7,828,832 5,849,184 IRR million ) ( Total equity ) 1,005,875 ( - - - - - 317 6,029 1,942 7,500 38,445 40,387 32,416 ) 5,875 Non- Continued on next page next on Continued interest controlling ( ( - - ( - - ( ------) 317 ) 3,901 996,416 ) 33,075 2,008,653 7,792,346 7,788,445 5,816,768 to equity the Bank holders of Management Report attributable Total equity ) 1,000,000 - - - - - stock Treasury ( ( - - ( ( - - - ) 33,075 ) 306,871 2,008,653 3,273,470 1,966,599 1,297,892 earnings Retained ) 1,000,000 ) 1,306,871 ------foreign currency operations for foreign differences transaction ------of assets Revaluation Year ended 20 Mar. 2017 - - - - Review of Risks and Disclosure Other reserves Legal reserve 306,554 306,554 825,430 518,876 - - - - - share reserve Premium - - Middle East Bank (PJSC) in 996,416 996,416 996,416 Capital increase progress For the year ended 20 March 2017 ended 20 March the year For - - - - shares Consolidated Statement of Changes in Equity Parent’s owned by subsidiaries Survey of the Iranian Economy - - - Share capital 4,000,000 4,000,000 28 21 43 Note Description and Financial Statements Report of Independent Auditor Total Capital increase Net profit Distribution Distribution Legal reserve Other reserves Stock dividends Dividends Balance at 20 Mar. 2017 Balance at 20 Mar. Balance at 20 Mar. 2016 Balance at 20 Mar. Prior years adjustments Income (net of tax) comprehensive Other Revaluation of assets Foreign currency transaction differences for foreign operations on other comprehensive income Tax other comprehensive income Total comprehensive income Total Share capital increase-Registered Share capital increase-Unregistered Purchase of treasury stock Sale of treasury stock owned by subsidiaries shares Parent’s Treasury stock Treasury 98 MIDDLE EAST BANK ANNUAL REPORT ( ( - - ( ------456 ) 35,588 IRR million ) ) 640,351 ) 639,895 1,372,864 6,456,004 5,118,728 5,816,109 ( Total equity ( ------415 766 ) 351 6,202 32,001 25,799 32,416 Non- interest controlling ( ( - - ( - ( ------456 ) 766 ) 35,588 ) 640,000 ) 640,310 1,366,662 6,424,003 5,092,929 5,783,693 to equity the Bank holders of attributable Total equity - - - - - stock Treasury ( ( - - ( ( - - - 779,887 ) 35,588 ) 640,000 ) 846,144 ) 206,144 1,366,662 2,110,961 1,264,817 earnings Retained ------Foreign currency operations for foreign differences transaction ------of assets Revaluation Year ended 19 Mar. 2016 - - - - Other reserves Legal reserve 205,378 205,378 518,876 313,498 - - - - - share Middle East Bank (PJSC) reserve Premium - - - - - For the year ended 20 March 2017 ended 20 March the year For in Capital increase progress Consolidated statement of changes in equity - ( 456 456 ) 456 shares Parent’s owned by subsidiaries - - - Share capital 4,000,000 4,000,000 28 21 43 Note Description Total Capital increase Net profit Distribution Distribution Legal reserve Other reserves Stock dividends Dividends Balance at 21 Mar. 2015 Balance at 21 Mar. Prior years adjustments Income (net of tax) comprehensive Other Revaluation of assets Foreign currency transaction differences for foreign operations on other comprehensive income Tax other comprehensive income Total comprehensive income Total Share capital increase-Registered Share capital increase-Unregistered Purchase of treasury stock Sale of treasury stock owned by subsidiaries shares Parent’s 2016 Balance at 19 Mar. Treasury stock Treasury REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 99
Middle East Bank (PJSC) Consolidated Statement of Cash Flows For the year ended 20 March 2017
(IRR million) Restated Description Notes Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Operating activities: Management Report Cash inflows: Loans' interest and penalty 7,063,711 5,811,561 Interest from debt securities 843,447 233,933 Fees and commission 698,098 491,701 Deposits interest 325,630 268,577 Investments income 279,743 381,072 Other income 928 1,216 Cash outflows: Deposits interest (6,303,010) (4,989,900) Fees and commission (24,850) (10,610) Finance expenses (59) (6,392) Other operating expenses (643,080) (572,971) Paid taxes (172,712) (122,626) Cash inflows(outflows)from operating activities before changes in 2,067,846 1,485,561 operating assets and liabilities
Cash flows from changes in operating assets and liabilities: Review of Risks and Disclosure Net increase (decrease) in liabilities and deposits: Due to CBI and financial institutions 609,176 238,069 Customers' deposits 2,615,327 2,468,433 Provisions and other liabilities-operating 1,675,376 268,376 Customers' investment deposits 25,642,408 7,064,151 Net increase (decrease) in assets: Due from CBI and financial institutions (4,152,448) (930,067) Loans to customers-principal (25,436,773) (6,573,569) Investment in shares and other securities (275,988) (2,092,324) Due from subsidiaries and associates 183,157 (89,990) Other accounts receivable 619,573 (683,957) Statutory deposit (1,264,452) (207,789) Other assets-operating (1,563,827) (32,978) Cash flows from changes in operating assets and liabilities (1,348,471) (571,645) Net cash inflow(outflow)from operating activities 44 719,375 913,916 Survey of the Iranian Economy Investing activities: Acquisition of fixed assets (197,214) (147,425) Disposal of fixed assets 28 3,336 Acquisition of intangible assets (165,036) (45,916) Disposal of intangible assets - 3 Net cash inflow(outflow) from investing activities (362,222) (190,002) Net cash inflow(outflow) before financing activities 357,153 723,914 Financing activities: Capital increase 100,189 - Dividends paid (69,943) (639,062) Net cash inflow (outflow) from financing activities 30,246 (639,062) Net increase (decrease) in cash 387,399 84,852 Cash at beginning of the year 343,880 246,655 and Financial Statements Effect of exchange rate fluctuations on cash (1,028) 12,373 Report of Independent Auditor Cash at end of the year 730,251 343,880 Non-cash transactions 44.1 955,426 -
The accompanying notes are an integral part of these financial statements. 100 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Balance Sheet as at 20 March 2017
(IRR million) Restated Description Notes 20 Mar. 2017 19 Mar. 2016 Assets: Cash 9 659,980 318,494 Due from banks and financial institutions 10 6,310,934 2,171,078 Credit facilities granted 11 53,625,316 28,097,787 Investments 12 3,952,339 3,648,680 Due from subsidiaries and associates 13 165,504 276,661 Other accounts receivable 14 665,828 884,003 Fixed assets 15 2,006,126 1,906,471 Intangible assets 16 932,905 857,238 Statutory deposit 17 4,363,685 3,099,233 Other assets 18 1,861,632 118,178 Total assets 74,544,249 41,377,823
Liabilities, interest and benefits of investment deposit holders and shareholders’ equity Liabilities: Due to banks and financial institutions 19 1,078,154 469,037 Customers' deposits 20 7,927,527 5,322,031 Dividends payable 21 5,747 4,718 Income tax provision 22 172,379 165,337 Other liabilities and accruals 23 2,251,750 377,391 Staff termination benefits 24 52,551 31,462 Total liabilities 11,488,108 6,369,976
Interest and benefits of investment deposit holders: Customers' investment deposits 25 54,854,274 29,094,132 Interest payable 26 418,525 150,601 Total interest and benefits of investment deposit holders 55,272,799 29,244,733 Total liabilities and interest and benefits of investment deposit holders 66,760,907 35,614,709 Shareholders’ equity: Share capital 27 4,000,000 4,000,000 Capital increase in progress 27 996,416 - Legal reserve 28 819,185 515,614 Retained earnings 1,967,741 1,247,500 Total shareholders' equity 7,783,342 5,763,114 Total liabilities, interest and benefits of investment deposit holders and 74,544,249 41,377,823 shareholders’ equity
Letters of credit commitments 45.1 2,975,041 2,507,746 Issued guarantees commitments 45.2 21,543,141 16,750,179 Other commitments 45.3 2,752,282 957,530 Managed funds commitments 45.4 651,829 70,154
The accompanying notes are an integral part of these financial statements. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 101
Middle East Bank (PJSC) Statement of Investment Deposits Performance For the year ended 20 March 2017
(IRR million) Restated Description Notes Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Mutual income Management Report Loan’s interest income 29 6,426,655 5,936,230 Deposits interest income 29 1,243,905 467,704 Net income (loss) from investments 30 379,712 336,791 Sum of mutual income 8,050,272 6,740,725 Bank’s share of mutual income 31 (1,882,702) (1,434,297) Depositor’s share of mutual income before deduction of the bank’s charges 6,167,570 5,306,428 The Bank’s charges 32 (845,464) (511,517) Depositors' share of mutual income 5,322,106 4,794,911 Income from statutory deposit of investment deposits 31 33,575 28,100 Depositors' interest income 5,355,681 4,823,011 Income paid on account to investment deposits 33 (5,747,132) (4,885,992) Overpaid interest to depositors (391,451) (62,981) Review of Risks and Disclosure Survey of the Iranian Economy and Financial Statements Report of Independent Auditor
The accompanying notes are an integral part of these financial statements. 102 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Income Statement For the year ended 20 March 2017
(IRR million) Restated Note Description Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Interest income on credit facilities granted, deposits and debt 29 9,085,696 6,510,681 instruments Interest expense 34 (6,589,609) (4,910,753) Net interest income on credit facilities granted and deposits 2,496,087 1,599,928
Fees and commission income 35 581,814 390,259 Fees and commission expense 36 (24,851) (9,872) Net fees and commission income 556,963 380,387
Net income (loss) from investment 30 379,712 336,791 Net foreign exchange transactions income 37 111,277 50,355 Total other operating income 490,989 387,146
Other income 38 5,724 6,303 Administrative and general expenses 39 (615,911) (542,442) Provision for bad and doubtful debts 40 (554,894) (203,253) Finance expenses 41 - (109) Depreciation and amortization 42 (181,867) (132,716) Profit before tax 2,197,091 1,495,244 Income tax 22 (173,279) (139,718) Net income after tax 2,023,812 1,355,526
The accompanying notes are an integral part of these financial statements. The statement of comprehensive income is not presented because its elements would only have consisted of net profit and prior year adjustments for the year. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 103
( ( ( ------) 3,584 ) 31,871 996,416 IRR million ) 5,794,985 7,786,926 2,023,812 7,783,342 ( ) 1,000,000 Total equity Management Report - - - - - Continued on next page next on Continued stock Treasury
( ( ( ( - - - - - ) 31,871 ) 303,571 1,279,371 1,967,741 3,271,312 2,023,812 earnings Retained ) 1,303,571 ) 1,000,000 ------Foreign currency operations for foreign differences transaction ------of assets Revaluation Review of Risks and Disclosure - - - - Other reserves Year ended 20 Mar. 2017
Legal 515,614 819,185 303,571 303,571 reserve - - - - - share reserve Premium Middle East Bank (PJSC)
Statement of Changes in Equity - - For the year ended 20 March 2017 ended 20 March the year For 996,416 996,416 996,416 Capital process increase in
Survey of the Iranian Economy - - - 4,000,000 4,000,000 Share capital 43 28 21 Note Description and Financial Statements Report of Independent Auditor Balance at 20 Mar. 2016 Balance at 20 Mar. Net profit Prior years adjustments Income (net of tax) comprehensive Other Revaluation of assets Foreign currency transaction differences for foreign operations on other comprehensive income Tax other comprehensive income Total comprehensive income Total Capital increase Capital increase-Registered Capital increase-Unregistered stock Treasury Purchase of treasury stock Sale of treasury stock Distribution Legal reserve Other reserves Stock dividends Dividends Total 2017 Balance at 20 Mar. 104 MIDDLE EAST BANK ANNUAL REPORT
( ( ( ------) 33,859 ) 640,000 ) 640,000 IRR million ) 5,081,447 5,763,114 6,403,114 1,355,526 ( Total equity - - - - - stock Treasury
( ( ( ( - - - - - ) 33,859 769,953 ) 844,120 ) 640,000 ) 204,120 1,247,500 2,091,620 1,355,526 earnings Retained ------Foreign currency operations for foreign differences transaction ------of assets Revaluation - - - - Other reserves Year ended 19 Mar. 2016
Legal 311,494 515,614 204,120 204,120 reserve - - - - - share reserve Middle East Bank (PJSC) Premium Statement of changes in equity For the year ended 20 Mar. 2017 ended 20 Mar. the year For - - - - - Capital process increase in
- - - 4,000,000 4,000,000 Share capital 43 28 21 Note Description Balance at 21 Mar. 2015 Balance at 21 Mar. Net profit Prior years adjustments Income (net of tax) comprehensive Other Revaluation of assets Foreign currency transaction differences for foreign operations on other comprehensive income Tax other comprehensive income Total comprehensive income Total Capital increase Capital increase-Registered Capital increase-Unregistered stock Treasury Purchase of treasury stock Sale of treasury stock Distribution Legal reserve Other reserves Stock dividends Dividends Total 2016 Balance at 19 Mar. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 105
Middle East Bank (PJSC) Statement of cash flows For the year ended 20 March 2017
(IRR million) Restated Description Notes Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Operating activities: Management Report Cash inflows: Loans' interest and penalty 7,065,006 5,811,557 Interest from debt securities 842,670 233,845 Fees and commission 583,934 399,480 Deposits interest 321,485 267,144 Investments income 377,907 350,990 Other income 5,724 6,303 Cash outflows: Deposits interest (6,321,707) (4,998,360) Fees and commission (24,851) (9,872) Finance expenses (59) (6,392) Other operating expenses (577,790) (518,192) Paid taxes (165,337) (120,015) Cash inflows(outflows)from operating activities before changes in 2,106,982 1,416,488 operating assets and liabilities
Cash flows from changes in operating assets and liabilities: Review of Risks and Disclosure Net increase (decrease) in liabilities and deposits: Due to CBI and financial institutions 609,176 238,067 Customers' deposits 2,605,496 2,510,627 Provisions and other liabilities-operating 1,857,349 255,308 Customers' investment deposits 25,760,142 6,991,082 Interest payable to deposits - - Net increase (decrease) in assets: Due from CBI and financial institutions (4,139,856) (942,657) Loans to customers-principal (25,407,134) (6,621,742) Investment in shares and other securities (303,659) (2,085,867) Due from subsidiaries and associates 111,157 (153,652) Other accounts receivable 310,287 (541,313) Statutory deposit (1,264,452) (207,789) Other assets-operating (1,574,407) (4,811) Survey of the Iranian Economy Cash flows from changes in operating assets and liabilities (1,435,901) (562,747) Net cash inflow(outflow)from operating activities 44 671,081 853,741 Investing activities: Acquisition of fixed assets (192,810) (102,718) Acquisition of intangible assets (164,378) (45,943) Net cash inflow(outflow) from investing activities (357,188) (148,661) Net cash inflow(outflow) before financing activities 313,893 705,080 Financing activities: Capital increase 97,689 - Dividends paid (69,068) (639,061) Net cash inflow (outflow) from financing activities 28,621 (639,061) Net increase (decrease) in cash 342,514 66,019 Cash at beginning of the year 318,494 240,102
Effect of exchange rate fluctuations on cash (1,028) 12,373 and Financial Statements
Cash at end of the year 659,980 318,494 Report of Independent Auditor Non-cash transactions 44.1 955,426 -
The accompanying notes are an integral part of these financial statements. 106 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
1- Introduction
1.1- Background Middle East Bank (Public Joint Stock Company) – (“the Bank”) was approved by the Central Bank of Iran (“CBI”) under approval number 91/184904 in October 2012 and registered with Tehran Registrar of Companies under registration number 430795, in the same month. The Bank also registered with Tehran Stock Exchange in July 2012 and its shares were traded in the secondary market in January 2013. The Bank’s headquarters is located in No2, 5th St, Ahmad Qasir(Bucharest) Ave, Tehran, Iran. 1.2- Scope of the Bank activities According to clause No 3 of the Bank’s articles of association, subject of Bank’s activities are as follows: - Accept all kinds of bank deposits. - Issue bearer or registered certificate of deposits. - Grant credit Loans. - Open letters of credit and engage in all foreign exchange transactions. - Issue, purchase and sell participation bonds for itself or on behalf of others, under CBI’s operative regulations. - Receive credit Loans from real or legal persons in according with the standing regulations. - Issue bank guarantees, endorse, accept and underwrite securities including participation bonds. - Operate self-deposit boxes. - Grant Loans for the export of technical services. - Participate and invest directly or through acquisition of share from stock exchange in manufacturing, commercial or service sectors, under CBI’s operative regulations and usury-free banking law. The object of the Bank is to provide funding resources by accepting deposits, credit and using other financial instruments and applying these funds for granting of credit and investing in various sectors of economy. 1.3- Number of branches The number of the Bank’s branches at 20 Mar. 2017 is as follows:
20 Mar.2017 19 Mar. 2016
Year end Average Year end Average Branches-Tehran province 9 9 9 8 Branches-other provinces 7 5 4 3 16 14 13 11
1.4- Employees The average number of employees during the year is as follows:
20 Mar.2017 19 Mar. 2016
Year end Average Year end Average Headquarters 188 180 171 163 Tehran branches 106 103 104 96 Other provinces' branches 55 53 51 45 349 336 326 304
2 - The basis of financial statements The parent company (the Bank’s) and the group’s consolidated financial statements are prepared based on the Iranian Accounting Standards and the Central Bank of Iran’s regulations. Details of accounting policies, including changes during the year, are included in notes 5 to 7. 2.1 - Principles of consolidation The consolidated financial statements are the result of aggregation of the financial statements of the parent company and it’s subsidiaries after adjustments for intergroup transactions and elimination of unrealized profit and losses. The subsidiaries consolidated are “Dadeh Pardazan Simaye Aaftab Co. ”Middle East Bank Brokerage Co.” and “Middle East Currency Exchange Co.”. The parent’s shares owned by subsidiaries have been taken into account at cost,is presented as deduction to owner’s equity in consolidated REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 107
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017 balance sheet. 3 - Functional and presentation currency
These consolidated financial statements are presented in Iranian Rials which is the Bank’s functional currency. All amounts have Management Report been rounded to the nearest million, except when otherwise indicated. 4 - Use of judgments and estimates As the consolidated financial statements have been prepared based on CBI’s regulation, the management has not made judgments and estimates over these regulations. 5 - Measurement These consolidated financial statements are based on historical costs except investment in listed shares which are measured at market value. 6 - Changes in accounting policies The Bank observe all accounting policies, mentioned in note 7, with consistency in all reporting periods in the financial statements. 7 - Accounting policies Review of Risks and Disclosure 7.1 - Investments
Consolidated Parent Measurement: Long term investments: Cost (less provision made for any Investment in subsidiaries Consolidated permanent reduction in their values) Cost (less provision made for any Investment in associates Equity method permanent reduction in their values) Cost (less provision made for any Cost (less provision made for any Other long term investments permanent reduction in their values) permanent reduction in their values) Short term investments: Investment in listed shares Lower of cost and market value(LCM) Lower of cost and market value(LCM) Survey of the Iranian Economy Revenue recognition: At the time in which payments of dividends are approved in their annual Investment in subsidiaries Consolidated general meetings (AGM's). (till the date of financial statements approval) At the time in which payments of dividends are approved in their annual Investment in associates Equity method general meetings (AGM's). (till the date of financial statements approval) At the time in which payments of At the time in which payments of dividends are approved in their annual dividends are approved in their annual Other long term investments in shares general meetings (AGM's). (till the general meetings (AGM's). (till the Balance sheet date) Balance sheet date)
7.2 - Fixed assets and Financial Statements Report of Independent Auditor 7.2.1 - Fixed assets are stated at cost. Major repairs and improvement expenses that increase capacity or useful life of fixed assets considerably and improve their working quality are capitalized and depreciated during the remaining useful life of the respective 108 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017 assets,whereas minor repairs and maintenance expenses which restore the expected economic useful life of the assets,are recognised as an expense in income statement.
7.2.2 - Depreciation of fixed assets is calculated based on section 149 of Iranian Direct Taxation Act of 2015 as amended (the Tax Act) as follows:
Asset Depreciation Rate Basis Buildings 25 year Straight line Elevator 15% Reducing balance Installations 6,8&10 year Straight line Office furniture 3,5,6,8&10 year Straight line Computer hardware 3,5,6,8&10 year Straight line Motor vehicles 6 year Straight line Improvement and renovation of leased real estate During the lease term Straight line
7.2.3 - Fixed assets acquired during a month and put to use are depreciated starting the first date of following month. Assets not utilized immediately when ready to use, are depreciated at 30% of the above rates for the period they have been idle.
7.3 - Intangible assets Intangible assets except for goodwill are recorded at cost. No depreciation is provided for goodwill, the impairment test is done at year end if needed. Computer software are depreciated on straight line basis. 7.4 - Loan’s interest, fee and penalty revenue recognition According to CBI’s monetary and banking regulations, recognition of loan’s interest is based on accrual basis. Based on these regulations, interest income for doubtful loans has to be taken into account on cash basis. Accordingly, the bank’s revenue recognition is as follows:
Loan’s interest, fee and penalty Revenue recognition Interest Current loans Accrual basis Past due loans Accrual basis Outstanding and Doubtful debt Accrual basis
Penalty(Loan’s rate) Current loans Accrual basis Past due loans Accrual basis Outstanding and Doubtful debt Cash basis
Penalty(Over loan’s rate) Cash basis
Fee Guarantee issuance At the time of issuing guarantee-Cash basis Other services At the time of performing services-Cash basis
7.5 - According to Usury-Free Banking Law approved on 30 Aug. 1983 and its instructions and according to CBI regulations, mutual income, usage of mutual sources and depositors’ share of mutual income are calculated and its results are reported in the statement of investment deposits performance. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 109
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
7.6 - Classification of loans Loans are classified in accordance with the CBI’s regulations and based on time as below, customers’ financial states and their industry and business. The classification of loan portfolio is as follows: Management Report Classification Principal & interest (PI) outstanding in months Current PI< 2 Past due 2
Classification Specific percentage Past due loans 10%
Outstanding 20% Review of Risks and Disclosure Doubtful debt 50-100%
3. For loans that payment of its principal and interest are deferred more than 5 years, specific provision is taken into account equal to 100% (without allowing for collaterals’ value). Management has not applied any judgments over the CBI regulations. 7.8 - Termination benefits Staff termination benefits are provided at the rate of one month salary and other remunerations for each year of service.
7.9 - Defined contribution plans
The employees are covered by social security fund so no defined contribution plans provision has taken in to account.
7.10 - Foreign Currencies
Monetary assets and liabilities are converted at the official exchange rates, advised by the CBI, on a daily basis and exchange Survey of the Iranian Economy differences, if any, are provided in the accounts. Non-monetary assets and liabilities are recorded at the historical exchange rates prevailing at the time of recording transactions in the accounts. 8 - “Others” in Notes The “Others” in notes are insignificant and are less than 10% of the relevant Note’s total balance. and Financial Statements Report of Independent Auditor 110 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
9 - Cash (IRR million) Consolidated-Restated Parent Co. -Restated Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Cash in hand-LCY 131,745 89,456 131,563 88,090 Cash in hand- FCY 281,043 125,429 235,969 125,429 Unrestricted balances with CBI 9.3 6,011 66,134 6,011 66,134 Unrestricted balances with other banks 9.4 311,452 62,861 286,437 38,841 730,251 343,880 659,980 318,494 9.1 - Cash in hand in the Bank’s branches up to IRR714,255 million is insured against theft and fire.
9.2 - Cash in hand-FCY included USD5,367,853, EUR1,622,851, CNY1,500, AED676,275, INR1,000 and TRY1,000.
9.3 - Unrestricted balances with CBI (IRR million) Consolidated Parent Co.
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Unrestricted current deposits with CBI-LCY 6,011 66,134 6,011 66,134 6,011 66,134 6,011 66,134
9.4 - Unrestricted balances with other banks (IRR million) Consolidated-Restated Parent Co. -Restated
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Unrestricted current deposits with other local banks-LCY 8,323 24,924 1,656 904 Unrestricted current deposits with other local banks-FCY 224,275 - 222,332 - Unrestricted term deposits with other local banks-LCY 52,540 30,362 36,135 30,362 Unrestricted current deposits with foreign banks-FCY 26,314 7,575 26,314 7,575 311,452 62,861 286,437 38,841
9.5 - Restricted balances are classified in due from banks and financial institutions note.
10 - Due from banks and financial institutions (IRR million) Consolidated-Restated Parent Co. -Restated Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Due from CBI 10.2 25,257 1,050,183 25,257 1,050,183 Due from other banks 10.3 6,285,677 1,108,303 6,285,677 1,120,895 Total 6,310,934 2,158,486 6,310,934 2,171,078
10.1 - Unrestricted balances are classified as cash. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 111
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
10.2 - Due from CBI (IRR million) Consolidated - Restated Parent Co. - Restated
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Management Report Restricted current deposits with CBI-LCY 10.2.1 22,494 1,050,000 22,494 1,050,000 Restricted current deposits with CBI-FCY 188 183 188 183 Due from CBI for currency sale 2,575 - 2,575 - 25,257 1,050,183 25,257 1,050,183
10.2.1 - Above amounts are related to currency transaction with CBI.
10.3 - Due from other banks (IRR million) Consolidated - Restated Consolidated - Restated Note 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 Restricted current deposits with other local banks-FCY 110,774 306,880 110,774 319,472 Restricted term deposits with other local banks-LCY 10.3.1 4,075,408 600,000 4,075,408 600,000
Restricted current deposits with foreign banks-FCY 10.3.2 2,030,969 166,669 2,030,969 166,669 Review of Risks and Disclosure Other banks checks 3,386 61 3,386 61 Due from other banks due to PAYA transactions 65,140 34,693 65,140 34,693 6,285,677 1,108,303 6,285,677 1,120,895
10.3.1 - Included within restricted term deposits with other local banks is a total of IRR3,975 billion relating to interbank depos- its.
10.3.2 - Included within current deposits with foreign banks-FCY is a total of EUR3 million deposits from foreign investors and according to CBI’s regulation is exchanged in free rate. Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 112 MIDDLE EAST BANK ANNUAL REPORT ------76 76 1,128 1,128 55,017 55,017 IRR million ) IRR million ) ( ( 1,126,950 1,126,950 2,425,110 2,425,110 24,390,418 27,998,699 24,489,506 28,097,787 Net balance Net balance 19 Mar. 2016 19 Mar. 2016 3,975 3,975 4,912 4,912 12,631 12,631 134,216 223,516 109,677 134,216 223,516 109,677 3,141,420 3,141,420 17,803,579 17,803,579 32,128,842 53,562,768 32,191,390 53,625,316 Net balance Net balance (61) (61) (75) (75) (2,044) (3,404) (1,670) (2,044) (3,404) (1,670) (4,681) (4,681) (52,757) (52,757) Provision Provision (271,120) (271,120) (738,114) (739,068) for bad and for bad and (1,073,926) (1,074,880) doubtful debt doubtful debt 4,036 4,036 4,987 4,987 17,312 17,312 136,260 226,920 111,347 136,260 226,920 111,347 Total Total 3,194,177 3,194,177 18,074,699 18,074,699 32,866,956 54,636,694 32,930,458 54,700,196 ------(4,544) (4,544) fee and fee and interest interest Deferred Deferred (125,674) (125,674) (121,130) (121,130) (63) (63) (9,840) (9,840) Parent Co. (28,805) (12,382) (28,805) (12,382) Consolidated Future Future interests interests (3,610,622) (3,610,622) (3,661,712) (3,661,712) 20 Mar.2017 20 Mar.2017 - - - - fund fund (403,227) (403,227) (403,227) (403,227) Mosharekat Mosharekat Mozarebeh and Mozarebeh and Madani received Madani received ------6 6 11 16 11 16 734 734 balance balance 13,232 13,232 Penalty Penalty receivable receivable receivable 224,427 224,427 238,426 238,426 Middle East Bank (PJSC) ------65 65 Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 2,051 2,051 95,066 95,066 balance balance 894,916 401,550 894,916 401,550 1,393,648 1,393,648 est receivable est receivable Fee and inter Fee and inter 4,034 4,971 4,034 4,971 16,578 16,578 165,054 236,754 121,678 165,054 236,754 121,678 balance balance Principal Principal 3,090,423 3,090,423 32,271,970 21,283,771 32,335,472 21,283,771 57,195,233 57,258,735 Installment sales Joaleh Mozarebeh Mosharekat Madani (civil partnership contracts) Debt purchase Morabehe Foreign currency facilities Debtors for paid L/Cs Debtors for paid guarantees Installment sales Joaleh Mozarebeh Mosharekat Madani (civil partnership contracts) Debt purchase Morabehe Foreign currency facilities Debtors for paid L/Cs Debtors for paid guarantees 11 - Credit facilities granted - Credit 11 to order in Bank East Middle to million USD500 allocated has Iran of Fund Development National the 2017, March 20 ended year fiscal the during interests Law, Budget principle, IRI of 2 note Following of repayments the and companies these to totally granted amount This Company. Oil Iranian National by introduced companies and contractors private to loans granting and penalties in their maturities has been guaranteed by Nation al Iranian Company. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 113
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
11.1 - Classification of loans according to CBI’s regulations is as below: (IRR million) Parent Co.
20 Mar.2017 Management Report Current loans Past due loans Outstanding loans Doubtful debt Total Installment sales 163,969 1,096 - - 165,065 Joaleh 236,640 120 - - 236,760 Mozarebeh 3,085,155 44,592 68,974 - 3,198,721 Mosharekat Madani (civil partnership contracts) 31,127,335 876,528 1,149,444 301,508 33,454,815 Debt purchase 123,729 - - 123,729 Morabehe 4,099 - - - 4,099 Foreign currency facilities 21,685,321 - - - 21,685,321 Debtors for paid L/Cs 4,987 - - - 4,987 Debtors for paid guarantees 3,436 - - 13,876 17,312 56,434,671 922,336 1,218,418 315,384 58,890,809 Less Future interests (3,661,712) - - - (3,661,712) Deferred fee and interest - (45,226) (64,678) (15,770) (125,674) Mozarebeh received fund - - - - -
Mosharekat Madani received fund (403,227) - - - (403,227) Review of Risks and Disclosure 52,369,732 877,110 1,153,740 299,614 54,700,196 General provision for bad and doubtful loans (785,564) (925) (810) - (787,299) Specific provision for bad and doubtful loans - (54,400) (128,808) (104,373) (287,581) Balance at 20 March 2017 51,584,168 821,785 1,024,122 195,241 53,625,316 Balance at 19 March 2016 27,019,708 941,829 31,948 104,302 28,097,787 As subsidiaries loan balance is not significant, consolidated note has not presented in this part. The intra-group loans has been presented in note 11.8.
11.2 - Provision for bad and doubtful loans is as below : (IRR million) Parent Co. 20 Mar.2017 19 Mar. 2016 General Specific General Specific Total Total provision provision provision provision Survey of the Iranian Economy Opening balance 424,101 126,623 550,724 325,211 22,260 347,471 Provision during the year 363,198 160,958 524,156 98,890 104,363 203,253 Closing balance 787,299 287,581 1,074,880 424,101 126,623 550,724 As subsidiaries loan balance is not significant, consolidated note has not been presented in this part. The intra-group loans has been presented in note 11.8. 11.3 - Classification of foreign facilities according to resources based on CBI’s regulations (note 7.6): (IRR million) Consolidated and Parent Co. 20 Mar.2017 19 Mar. 2016 Past due Outstanding Current loans Doubtful debt Total Total loans loans Internal resources 1,153,520 - - - 1,153,520 731,212 CBI resources 233,847 - - - 233,847 395,738
National development fund 16,416,212 - - - 16,416,212 - and Financial Statements
17,803,579 - - - 17,803,579 1,126,950 Report of Independent Auditor 114 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
11.4 - Classification of loans according to its maturity and interest rate is as below: (IRR million) Parent Co. 20 Mar.2017 19 Mar. 2016 24% and 12% and 21-24% 18-21% 15-18% 12-15% Total Total more less 20 Mar. 2017 and before 2,057,626 773,011 1,178,889 - - - 4,009,526 27,260,161 2017 6,123,647 4,967,195 19,727,902 607,770 - 250,820 31,677,334 105,291 2018 - - 86,411 - 226 235,697 322,334 349 2019 - 305 38,953 - - 1,158,978 1,198,236 731,596 2020 and after - - 6,586 - - 16,411,300 16,417,886 390 8,181,273 5,740,511 21,038,741 607,770 226 18,056,795 53,625,316 28,097,787 19 Mar. 2016 23,865,382 1,848,359 500,513 410,119 384 1,473,030 28,097,787 As subsidiaries loan balance is not significant, consolidated note has not been presented in this part. The intra-group loans has been presented in note 11.8.
11.5 - Classification of loans according to its collaterals is as below: (IRR million) Parent Co.
20 Mar.2017 19 Mar. 2016 Deposits 1,454,397 214,525 Participation bonds and other securities guaranteed by banks 7,095 88,356 Listed shares 1,076,901 242,733 Land, building and equipment 16,912,908 12,459,631 Check and promissory notes 17,415,980 8,048,462 Other 16,743,623 7,044,080 53,610,904 28,097,787 Without collateral 14,412 - 53,625,316 28,097,787 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 115 - 7,754 11,244 921,623 744,084 (41,610) IRR million ) ( Total (530,323) (544,557) 1,632,074 8,114,478 53,625,316 28,097,787 53,098,488 27,720,721 (1,074,880) (7,411,781) 218,665,877 (194,032,194) - 734 573 (838) 12,631 55,017 54,797 16,578 55,282 (4,681) (3,843) (54,636) 4,934,513 (4,973,217) Debtors for Management Report paid guarantees ------16 16 (75) (75) 4,912 4,971 3,920,543 L/Cs (3,915,572) Debtors for paid - 7,754 12,522 401,550 744,084 (17,162) (271,120) (253,958) 1,126,950 1,855,120 1,131,590 Foreign 17,803,579 facilities 17,673,149 32,155,323 currency (1,473,846) (16,357,848) - - - 76 65 65 77 (1) (61) (60) 3,975 3,971 12,956 (9,062) Morabehe Parent Co. ------Review of Risks and Disclosure 2,051 2,051 (1,670) (1,670) Debt 109,677 109,296 177,230 (67,934) purchase - 832,350 (41,610) (739,068) (250,315) (488,753) 1,119,343 5,584,341 32,191,390 24,489,506 31,852,725 24,145,909 contracts) (5,297,348) partnership 165,462,067 Mosharekat Madani (civil (157,755,251) Middle East Bank (PJSC) - Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 11,244 76,178 108,298 618,058 (52,757) (14,971) (37,786) (585,938) 3,141,420 2,425,110 3,074,635 2,386,718 Mozarebeh 11,586,712 (10,898,795) - - 6 9 (3) (17) Survey of the Iranian Economy 1,128 1,145 (3,404) (3,387) Joaleh (9,658) 223,516 226,914 235,427 - - - - - 11 21 (10) sales (2,044) (2,044) 134,216 136,249 181,106 (44,857) Installment and Financial Statements Report of Independent Auditor Loans movement is as below : Balance at 20 Mar. 2017 Mozarebeh received fund Mosharekat Madani received fund Net balance Balance at 19 Mar. 2016 Balance at 20 March. 2017 Decrease during the year Increase during the year Provision for bad and doubtful loans Balance at 19 Mar. 2016 Foreign exchange effect Balance at 20 Mar. 2017 Decrease during the year Increase during the year Interest and penalty Balance at 19 Mar. 2016 Foreign exchange effect Balance at 20 Mar. 2017 Decrease during the year Increase during the year Principal Balance at 19 Mar. 2016 11.6 - 11.6 The intra-group loans has been presented in note 11.8. As subsidiaries loan balance is not significant, consolidated no te has been presented in this part. 116 MIDDLE EAST BANK ANNUAL REPORT - 7,754 921,623 238,426 998,893 146,777 774,846 IRR million ) ( Total (907,244) 1,632,074 1,393,648 7,115,624 (6,504,576) - - - - 734 573 734 573 54,797 (54,636) Debtors for paid guarantees ------16 16 16 L/Cs Debtors for paid - - - - - 7,754 12,522 12,522 401,550 401,550 1,855,120 Foreign facilities currency (1,473,846) ------65 65 104 (39) Morabehe Parent Co. ------2,051 2,051 2,051 Debt purchase 832,350 224,427 827,784 143,187 894,916 689,163 (746,544) 1,119,343 4,756,557 contracts) (4,550,804) partnership Mosharekat Madani (civil Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements 3,017 For the year ended 20 March 2017 ended 20 March the year For 76,178 13,232 95,066 73,161 108,298 116,266 501,792 (106,051) (479,887) Mozarebeh ------6 6 9 (3) Joaleh - - - - 11 11 21 (10) sales Installment Balance at 20 Mar. 2017 Balance at 19 Mar. 2016 Foreign exchange effect Balance at 20 Mar. 2017 Decrease during the year Increase during the year Loans' penalty Balance at 19 Mar. 2016 Foreign exchange effect Balance at 20 Mar. 2017 Decrease during the year Increase during the year Loans' interest Balance at 19 Mar. 2016 11.6.1 - Loans interest and penalty movement is as below: - Loans interest 11.6.1 The intragroup loans has been presented in note 11.8. As subsidiaries loan balance is not significant, consolidated no te has been presented in this part. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 117
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
11.7 - Classification of loans according to types of customer (IRR million) Parent Co.
20 Mar.2017 19 Mar. 2016 Management Report
Provision for bad Provision for bad Gross balance Net balance Gross balance Net balance and doubtful loans and doubtful loans Natural persons 3,219,182 (62,030) 3,157,152 2,946,517 (52,453) 2,894,064 Corporate customers 51,481,014 (1,012,850) 50,468,164 25,695,830 (492,107) 25,203,723 54,700,196 (1,074,880) 53,625,316 28,642,347 (544,560) 28,097,787 As subsidiaries loan balance is not significant, consolidated note has not been presented in this part. The intra-group loans has been presented in note 11.8.
11.8 - Loans to subsidiaries (IRR million) 20 Mar.2017 19 Mar. 2016
Interest rate Provision for bad Current Non-performing Total Total % and doubtful loans Consolidated subsidiaries Middle East Bank Brokerage Co. 18 63,604 - (954) 62,650 99,417 Review of Risks and Disclosure
12 - Investments (IRR million) Consolidated 20 Mar.2017 19 Mar. 2016
Note Short term Long term Total Short term Long term Total
Investment in listed shares 12.1 407,751 - 407,751 511,591 - 511,591 Investment in unlisted shares 12.2 - 124,200 124,200 - 569,007 569,007 Investment in securities with fixed income 12.3 2,429,727 874,761 3,304,488 2,405,195 74,658 2,479,853 2,837,478 998,961 3,836,439 2,916,786 643,665 3,560,451
(IRR million) Survey of the Iranian Economy Parent Co.
20 Mar.2017 19 Mar. 2016
Note Short term Long term Total Short term Long term Total Investment in listed shares 12.1 407,446 407,446 511,591 - 511,591 Investment in unlisted shares 12.2 258,404 258,404 - 657,236 657,236 Investment in securities with fixed income 12.3 2,411,728 874,761 3,286,489 2,405,195 74,658 2,479,853 2,819,174 1,133,165 3,952,339 2,916,786 731,894 3,648,680 and Financial Statements Report of Independent Auditor 118 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
12.1 - Investment in listed shares (IRR million) Consolidated 20 Mar.2017 19 Mar. 2016 Percentage of Market Market No. of shares Cost Cost investment % value value TSE companies : Jam Petrochemical 5,337,403 0.056 49,086 51,479 74,276 75,118 Pension Fund Investment 21,834,036 0.081 56,734 33,406 65,252 48,240 Iran chemical industry 13,078,944 0.283 61,772 39,224 61,772 54,644 Khark Petrochemical 1,935,239 0.097 34,248 29,067 34,248 22,687 Middle East Bank Mutual funds 31,191 - 32,997 34,537 32,997 37,527 Mokhaberat Iran 9,484,622 0.016 23,582 21,928 28,613 27,560 Persian Gulf Petrochemical Industries 3,794,605 0.008 23,950 16,237 23,950 21,071 Pars Minoo 739,848 0.117 3,012 4,617 3,012 3,488 Ertebatat Sayar 490,881 0.012 13,291 17,959 18,816 13,189 Kardan Equity Fund ETF 1,500,000 - 15,027 16,335 13,291 18,733 Mines and Metals Development Investment 4,893,076 0.016 13,087 6,288 15,027 17,550 Mines and Metals Development right issue 534,965 0.002 896 152 23,217 9,802 Mazandaran Cement 1,905,858 0.232 13,875 9,085 15,238 10,555 Iran Khodro Investment Development 487,211 0.032 2,449 1,719 9,721 10,414 Firozeh ETF 1,000,000 - 10,018 10,875 10,018 11,938 Gol Gohar 2,758,172 0.011 10,303 6,818 11,783 6,335 Mobarakeh Steel 5,087,296 0.007 12,850 7,168 12,850 7,143 Ofogh Roshan Middle East mutual fund 2,840 - 2,999 3,026 - - Bandar Abbas Oil Refining 1,100,000 0.008 14,552 5,500 14,552 6,038 Kardan mutual fund 5,368 - 5,408 4,958 5,000 5,784 National Iranian Copper Industries 2,550,000 0.005 6,594 5,118 7,209 4,445 Oil and gas investment 1,800,000 0.004 6,064 3,380 6,064 4,210 Fars & Khuzestan Cement 866,000 0.015 2,627 1,323 7,083 3,752 Esfahan Oil Refining 1,762,286 0.009 11,916 4,714 11,916 5,586 National Development Investment Group 10,430,849 0.064 28,187 20,695 12,464 11,388 National Development Investment 1,584,536 0.035 3,856 2,023 3,856 2,294 Ghadir Investment 1,800,868 0.003 3,777 2,028 4,051 3,049 Calcimin 448,611 0.022 1,800 1,647 3,004 1,510 Parsian Oil and gas development 941,593 0.002 3,963 1,693 3,180 1,731 Alborz Investment 505,824 0.016 1,918 1,859 2,189 2,480 Investment Pharmaceutical Suppliers 322,500 0.011 2,071 1,951 2,071 2,227 Daroupakhsh 277,288 0.055 1,790 1,472 1,850 1,596 Kian fixed income mutual fund 500,000 5,009 5,357 500 408 Amin Yekom fixed income mutual fund 300,000 3,005 3,056 - - Others - 327 305 58,198 37,670 483,040 376,999 597,268 490,162 OTC companies : Zagros Petrochemical 927,372 0.039 23,032 20,477 23,032 9,297 Khorasan Petrochemical 520,000 0.029 4,610 3,098 4,610 3,664 Tehran Oil Refinery 1,202,316 0.010 4,386 2,866 4,386 2,860 Middle East Mines and Mining Industries 734,268 0.003 2,923 1,315 3,098 2,118 Development Investment Alborz Etela Investment 725,000 0.173 1,587 1,058 1,751 1,214 Lavan Oil Refinery 150,000 0.013 3,250 1,938 3,250 1,950 Others - - - - 297 326 39,788 30,752 40,424 21,429 Total 522,828 407,751 637,692 511,591 Less: Accumulated decrease in value (115,077) - (126,101) - 407,751 407,751 511,591 511,591 Continued on next page REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 119
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
(IRR million) Parent Co. 20 Mar.2017 19 Mar. 2016 Percentage of Market Market
No. of shares Cost Cost Management Report investment % value value TSE companies : Jam Petrochemical 5,337,403 0.056 49,086 51,479 74,276 75,118 Pension Fund Investment 21,834,036 0.081 56,734 33,406 65,252 48,240 Iran chemical industry 13,078,944 0.283 61,772 39,224 61,772 54,644 Khark Petrochemical 1,935,239 0.097 34,248 29,067 34,248 22,687 Middle East Bank Mutual funds 31,191 - 32,997 34,537 32,997 37,527 Mokhaberat Iran 9,484,622 0.016 23,582 21,928 28,613 27,560 Persian Gulf Petrochemical Industries 3,794,605 0.008 23,950 16,237 23,950 21,071 Pars Minoo 739,848 0.117 3,012 4,617 3,012 3,488 Ertebatat Sayar 490,881 0.012 13,291 17,959 18,816 13,189 Kardan Equity Fund ETF 1,500,000 - 15,027 16,335 13,291 18,733 Mines and Metals Development Investment 4,893,076 0.016 13,087 6,288 15,027 17,550 Mines and Metals Development right issue 534,965 0.002 896 152 23,217 9,802 Mazandaran Cement 1,905,858 0.232 13,875 9,085 15,238 10,555 Iran Khodro Investment Development 487,211 0.032 2,449 1,719 9,721 10,414 Firozeh ETF 1,000,000 - 10,018 10,875 10,018 11,938
Gol Gohar 2,758,172 0.011 10,303 6,818 11,783 6,335 Review of Risks and Disclosure Mobarakeh Steel 5,087,296 0.007 12,850 7,168 12,850 7,143 Ofogh Roshan Middle East mutual fund 2,840 - 2,999 3,026 - - Bandar Abbas Oil Refining 1,100,000 0.008 14,552 5,500 14,552 6,038 Kardan mutual fund 5,368 - 5,408 4,958 5,000 5,784 National Iranian Copper Industries 2,550,000 0.005 6,594 5,118 7,209 4,445 Oil and gas investment 1,800,000 0.004 6,064 3,380 6,064 4,210 Fars & Khuzestan Cement 866,000 0.015 2,627 1,323 7,083 3,752 Esfahan Oil Refining 1,762,286 0.009 11,916 4,714 11,916 5,586 National Development Investment Group 10,430,849 0.064 28,187 20,695 12,464 11,388 National Development Investment 1,584,536 0.035 3,856 2,023 3,856 2,294 Ghadir Investment 1,800,868 0.003 3,777 2,028 4,051 3,049 Calcimin 448,611 0.022 1,800 1,647 3,004 1,510 Parsian Oil and gas development 941,593 0.002 3,963 1,693 3,180 1,731 Alborz Investment 505,824 0.016 1,918 1,859 2,189 2,480
Investment Pharmaceutical Suppliers 322,500 0.011 2,071 1,951 2,071 2,227 Survey of the Iranian Economy Daroupakhsh 277,288 0.055 1,790 1,472 1,850 1,596 Kian fixed income mutual fund 500,000 5,009 5,357 500 408 Amin Yekom fixed income mutual fund 300,000 3,005 3,056 - - Others - - - 58,198 37,670 482,713 376,694 597,268 490,162 OTC companies : Zagros Petrochemical 927,372 0.039 23,032 20,477 23,032 9,297 Khorasan Petrochemical 520,000 0.029 4,610 3,098 4,610 3,664 Tehran Oil Refinery 1,202,316 0.010 4,386 2,866 4,386 2,860 Middle East Mines and Mining Industries 734,268 0.003 2,923 1,315 3,098 2,118 Development Investment Alborz Etela Investment 725,000 0.173 1,587 1,058 1,751 1,214 Lavan Oil Refinery 150,000 0.013 3,250 1,938 3,250 1,950 Others - - - - 297 326
39,788 30,752 40,424 21,429 and Financial Statements Total 522,501 407,446 637,692 511,591 Report of Independent Auditor Cost adjustment (115,055) (126,101) - 407,446 407,446 511,591 511,591 120 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
12.2 - Investment in unlisted shares Consolidated 20 Mar. 2017 19 Mar. 2016
Note Percentage of Accumulated No. of shares Cost Book value Book value investments decrease in value % IRR million IRR million IRR million IRR million Kardan Investment Bank - - - - - 444,577 Middle East Life Insurance Co. 12.2.1 240,400,000 20 122,970 - 122,970 120,200 Others 1,230 - 1,230 4,230 124,200 - 124,200 569,007
Parent Co. 20 Mar. 2017 19 Mar. 2016
Note Percentage Accumulated No. of shares of Cost decrease in Book value Book value investments value % IRR million IRR million IRR million IRR million Kardan Investment Bank - - - - - 421,332 Middle East Bank Brokerage Co. 74,999,900 75 89,904 - 89,904 67,404 Dadeh Pardazane Simaye Aftab Co. 12.2.2 30,000,000 100 10,500 - 10,500 10,500 Middle East Currency Exchange Co. 37,999,800 95 38,000 - 38,000 38,000 Middle East Life Insurance Co. 12.2.1 240,000,000 20 120,000 - 120,000 120,000 258,404 - 258,404 657,236
12.2.1 - At the balance sheet date 50% of investment in Middle East Life Insurance Co. has been paid.
12.2.2 - At the balance sheet date 35% of investment in Dadeh Pardazan Simaye Aftab Co. has been paid. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 121
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017 - - - - - 7,000 7,000 50,037 50,037 700,000 700,000 291,300 291,300 191,040 191,040 352,038 352,038 170,000 170,000 435,000 435,000 Management Report (882,380) IRR million 2,479,853 2,479,853 1,165,818 1,165,818 19 Mar. 2016 19 Mar. - - - - - Parent Co. Parent 7,000 7,000 99,997 99,997 293,801 293,801 686,502 686,502 200,255 200,255 968,681 968,681 300,000 300,000 (277,900) IRR million 3,286,489 3,286,489 1,008,153 1,008,153 20 Mar. 2017 20 Mar. - - 7,000 7,000 50,037 50,037 700,000 700,000 291,300 291,300 191,040 191,040 352,038 352,038 170,000 170,000 435,000 435,000 (882,380) IRR million 2,479,853 2,479,853 1,165,818 1,165,818 19 Mar. 2016 19 Mar. - - - 7,000 7,000 99,997 99,997 293,801 293,801 686,502 686,502 218,254 218,254 968,681 968,681 300,000 300,000 (277,900) IRR million 3,304,488 3,304,488 1,008,153 1,008,153 20 Mar. 2017 20 Mar. Consolidated Review of Risks and Disclosure % 21 17 17 19 21 20 20 income Interest Interest 18,20,21 Type Morabehe Investment units Investment units Investment units Investment units Participation Bond Participation Bond Participation Bond Participation Bond Islamic treasury bonds Preferred Investment units Note 12.3.1 12.3.2 12.3.3 12.3.3 12.3.3 Survey of the Iranian Economy Issuer and Financial Statements Interest rates in the table above are that has guaran teed by mutual funds. Report of Independent Auditor 2019. The difference be The difference National Iranian Oil Company bonds(Face value IRR299,620 millio n) is issued in discount and its maturity date on March 16, 2019. and Finance on behalf of the government. Affairs Islamic treasury bonds are zero-coupon published by Min istry of Economic Non-governmental Other bonds with us Kardan mutual fund Hami mutual fund Governmental and Finance Affairs Ministry of Economic Ministry of Roads and City Planning Construction & Development of Transportation Infrastructure Co. Transportation Construction & Development of Iran National Oil Company Ministry of Agriculture-Jahad Ministry of Economic Affairs and Finance Affairs Ministry of Economic Middle East Bank Ofogh mutual fund Middle East Bank Ofogh mutual fund Yekom Iranian mutual fund Yekom 12.3 - Investment in securities with fixed income is as follows: 12.3.1- interest rate method. tween market value and face value(IRR5,819 M) is amortized unde r the effective 12.3.2 - 12.3.3 - 122 MIDDLE EAST BANK ANNUAL REPORT - Total IRR million ) IRR million ) Total 59,038 95,216 11,250 ( ( 15,232 15,282 16,984 61,288 165,504 167,875 276,661 - - - - 240 232 359 859 (389) (629) 1,450 Other Other ------payable payable Dividends Dividends - - - - 47,351 36,101 11,250 Dividends 15,000 16,625 receivable Dividends receivable 167,875 199,500 IRR million ) ( 93,504 93,504 183,157 183,157 276,661 276,661 19 Mar. 2016 19 Mar. ------Parent Co. Parent Co. 20 Mar. 2017 19 Mar. 2016 68,278 68,278 Parent Co. Parent 15,282 60,429 75,711 - Prepayments Prepayments 165,504 165,504 165,504 165,504 20 Mar. 2017 20 Mar. ------Foreign services 58,875 58,875 exchange transactions Purchase of - Middle East Bank (PJSC) ------183,157 183,157 183,157 183,157 19 Mar. 2016 19 Mar. Notes to the Financial Statements Notes to the Financial Statements services services (8,611) (8,611) For the year ended 20 March 2017 ended 20 March the year For Purchase of Purchase of Consolidated ------20 Mar. 2017 20 Mar. Sales of assets Sales of assets and investments and investments Name of company Name of company Due from subsidiaries and associates according to intragroup tr ansactions is as follows:
Associates Kardan Investment Bank Middle East Bank Brokerage Co. Middle East Life Insurance Co. Middle East Bank Currency Exchange Co. Dadeh Pardazan Simaye AftabNet Income Co. Subsidiaries Dadeh PardazanMiddle East Life Insurance Co. Simaye AftabMiddle East Bank Currency Exchange Co. Co. Middle East Bank Brokerage Co. Net Income 13 - Due from subsidiaries and associates 13 - Due from 13.1 - REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 123
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
14 - Other accounts receivable (IRR million) Consolidated-Restated Parent Co.-Restated
Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Management Report Dividends 14.1 47,714 45,910 47,714 45,910 Participation bonds interest 121,644 9,738 118,048 9,738 Staff loan 14.2 341,232 245,307 341,002 245,307 Temporary debtors 14.3 367,900 1,075,774 159,064 583,048 878,490 1,376,729 665,828 884,003
14.1 - Dividends receivable (except dividends from subsidiaries and associate) are as follows: (IRR million) Consolidated and Parent Co. 20 Mar.2017 19 Mar. 2016 TSE and OTC companies Jam Petrochemical 11,365 - Iran Chemical Industries 7,651 6,670 National Development Investment Group 5,737 7,518 Pension fund investment 5,240 15,695
Khark petrochemical 4,064 - Review of Risks and Disclosure Mokhaberat 3,853 - Mazandaran Cement 1,955 1,718 Gol Gohar 1,900 1,320 Persian Gulf petro chemical 1,138 941 Mines and Metals Development 1,034 3,102 Others 3,777 8,946 47,714 45,910
14.2 - In order to compensate the efforts of the Banks founders for the banking license receipt, create incentives and align the interest of senior management with the bank’s, the Founders’ committee has agreed on financing resources for partial purchasing of the bank’s shares. This amount is repaid from the loans which are allocated to them against the shares as collaterals. The shares were mostly in the name of founders and the related debts is IRR134 billion at the balance sheet date. Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 124 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
14.3 - Temporary debtors are as follow: (IRR million) Consolidated-Restated Parent Co.-Restated 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Related to loans Loans related costs 9,664 506 9,664 506 Not related to loans Guarantee fees liquidity funds 6,132 6,477 6,132 6,477 Accrual interest from interbank market 10,738 668 10,738 668 Ali agha sardar 52,322 - 52,322 - Behdash Chemical Co. 3,053 7,086 3,053 7,086 Navdis Rah Co. - 69 - 69 Participation bond’s discount fee 1,521 4,915 1,521 4,915 Tamin Atiyeh khavarmianeh Co. 3,361 2,413 3,361 2,413 Pre-paid for purchasing goods and services 1,119 22,138 1,119 22,138 Afzar pardaz ramis Co. 6,125 - 6,125 - Samand investment Co. 13,356 - 13,356 - Kavosh Etminan Nazer Co. 1,857 2,054 1,857 2,054 Rahsa bridge and building Co. 346 3,595 346 3,595 Samand investment Co. - 512,950 - 512,950 Behsa Rahkar Novin Co. 3,000 6,192 3,000 - Hamedi Esa 3,027 - 3,027 - Couzo Co. 21,769 - 21,769 - Henkel Co. 2,354 - 2,354 - Remittance commission 1,219 2,163 1,219 - Iran Water and Power Project Engineering Co. (Panier) 1,400 1,789 1,400 - SOS rescuer 1,284 1,098 1,284 - Client’s cash in Middle East Bank Brokerage Co. 206,755 484,936 - - Others 18,124 19,113 16,043 22,565 General provision for bad debts (626) (2,388) (626) (2,388) 367,900 1,075,774 159,064 583,048
14.4 - Other accounts receivable classification based on CBI regulations is as follow: (IRR million) Parent Co.
20 March.2017
Current loans Past due loans Outstanding loans Doubtful debt Total Staff loans 315,096 - - - 315,096 Temprory debtors 41,699 - - - 41,699 Other accounts receivable before 356,795 - - - 356,795 deduction of bad and doubtful debt’s provision General provision for bad and doubtful (5,352) - - - (5,352) debt Specific provision for bad and doubtful - - - - - debt Balance at 20 March 2017 351,443 - - - 351,443 Balance at 19 March 2016 255,063 - - - 255,063 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 125 - - - - - (34) (300) 67,351 (3,636) 268,884 336,229 100,556 168,362 147,938 101,311 Total IRR million ) (139,550) (191,202) 2,359,465 2,162,786 2,090,581 1,994,424 2,209,686 2,142,335 ( - - - - 134 Continued on next page next on Continued 29,949 29,949 149,999 297,804 149,999 773,543 773,543 Capex (177,754) (743,728) Management Report prepayments - - - - 3,967 29,078 193,050 229,654 193,050 229,654 412,409 412,409 progress (40,571) Project in (211,833) ------85 8,093 9,822 56,993 37,792 48,815 13,553 24,239 19,201 28,982 14,417 24,576 19,833 10,011 lease property Improvements of ------(248) 8,906 7,494 7,590 99,332 35,101 90,426 20,265 14,836 64,231 27,417 75,590 66,085 58,495 Office (3,076) furniture Consolidated ------Review of Risks and Disclosure (34) 5,546 2,170 1,857 3,723 7,247 2,283 2,084 6,900 8,340 1,639 6,701 Motor 12,793 10,623 vehicles ------(52) (560) 66,306 12,728 24,534 41,772 48,412 34,444 20,928 60,218 68,106 47,210 20,896 114,718 101,990 Equipments ------Middle East Bank (PJSC) 618 2,368 1,213 5,457 4,673 4,055 8,943 8,325 For the year ended 20 Mar. 2017 ended 20 Mar. the year For 49,957 10,130 46,376 Notes on the financial statements 37,433 39,827 41,703 Installations ------9,356 12,960 34,890 79,119 25,600 52,333 26,786 903,835 114,009 881,519 526,926 789,826 802,400 328,993 302,207 Buildings Survey of the Iranian Economy ------Land 55,354 778,788 723,434 200,000 778,788 723,434 523,434 523,434 and Financial Statements Report of Independent Auditor Balance at 20 Mar. 2017 Adjustments Disposals Balance at 20 Mar. 2017 Increase (decrease) from revaluation Adjustments Additions Disposals Balance at 19 Mar. 2016 Depreciation Adjustments Balance at 19 Mar. 2016 Disposals Adjustments Increase (decrease) from revaluation Disposals Balance at 20 Mar. 2017 Additions Depreciation Balance at 19 Mar. 2016 Cost Balance at 21 Mar. 2015 Accumulated depreciation Balance at 21 Mar. 2015 Book value Balance at 21 Mar. 2015 15 - Fixed assets 126 MIDDLE EAST BANK ANNUAL REPORT ------(34) 92,719 96,925 64,968 331,890 112,223 IRR million ) 254,578 161,893 Total (139,550) (191,202) ( 2,260,704 2,068,364 2,006,126 1,906,471 2,147,343 2,082,375 - - - - 134 29,950 29,950 150,000 297,804 150,000 723,543 723,543 Capex (177,754) (693,727) prepayments - - - - 3,967 29,078 193,049 229,653 193,049 229,653 412,409 412,409 progress (40,571) Project in (211,834) ------85 8,093 9,822 56,993 48,815 19,201 28,982 24,576 19,833 10,011 37,792 13,553 24,239 14,417 lease property Improvements of ------5,367 6,996 7,191 86,827 81,460 54,305 19,509 67,273 61,951 54,760 Office 32,522 18,335 14,187 furniture Parent Co. Parent ------(34) 9,993 2,147 7,846 5,658 1,479 5,031 6,367 5,071 4,335 1,554 2,815 1,519 1,296 Motor vehicles ------11,951 95,854 46,533 33,041 56,540 62,813 43,361 61,272 21,958 39,314 19,862 19,452 107,805 Equipments - - - - - Middle East Bank (PJSC) - - - - 618 2,368 1,213 8,943 8,325 5,457 4,673 4,055 For the year ended 20 Mar. 2017 ended 20 Mar. the year For 49,957 46,376 Notes on the financial statements 37,433 39,827 41,703 10,130 Installations ------9,356 12,960 31,862 76,665 50,076 26,589 827,295 804,979 476,926 718,768 728,314 328,053 301,464 108,527 Buildings ------Land 55,354 778,785 723,431 200,000 778,785 723,431 523,431 523,431 The major increase in land and buildings(IRR55,354 million and IRR12,960 million) is related to the recognition of the cost of the building next to the headquarters located located headquarters the to next building the of cost the of recognition the to related is million) IRR12,960 and million buildings(IRR55,354 and land in increase major The
This year, part of a commercial building consisting of a 300 square meters floor and 120 square meters floor to the amount of IRR280,000 million, according to the evaluation evaluation the to according million, IRR280,000 of amount the to floor meters square 120 and floor meters square 300 a of consisting building commercial a of part year, This Balance at 20 Mar. 2017 Adjustments Balance at 20 Mar. 2017 Disposals Adjustments Increase (decrease) from revaluation Disposals Additions Additions Balance at 19 Mar. 2016 Balance at 19 Mar. 2016 Adjustments Adjustments Disposals Disposals Increase (decrease) from revaluation Balance at 20 Mar. 2017 Additions Additions Balance at 19 Mar. 2016 Cost Balance at 21 Mar. 2015 Accumulated depreciation Balance at 21 Mar. 2015 Book value Balance at 21 Mar. 2015 15.1 - 15.2 - of the official expert, has been pre-purchased with the delivery date of 2018. In accordance with the terms of the contract, we will pay IRR150,000 million for this, and the rest will will rest the and this, for million IRR150,000 pay will we contract, the of terms the with accordance In 2018. of date delivery the with pre-purchased been has expert, official the of be due to the time of delivery construction and transfer ownership. in Ahmad Qasir street and the building of Aftab Branch. This year on the basis of contract and official expert of judiciary assessment, the building of the Aftab Branch purchased to to purchased Branch Aftab the of building the assessment, judiciary of expert official and contract of basis the on year This Branch. Aftab of building the and street Qasir Ahmad in the amount of IRR147,804 million which includes I RR128,246 for goodwill. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 127
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
15.3 - The balance of project in progress is related to Elahiyeh building expenditures .Construction of this building is completed and the necessary steps to obtain the certificate of completion are in progress. 15.4 - Fixed assets (up to IRR691,353 million) are insured against potential hazards caused by fire, flood and earthquake.
15.5 - The necessary steps are being taken to obtain the ownership documents of the building of the headquarters and the Aftab Management Report branch 16 - Intangible assets (IRR million)
Consolidated Software Right to use Good will Software Total development public services Cost Balance at 21 Mar. 2015 493,485 8,012 166,061 2,691 670,249 Additions 180,000 3,367 - 4,287 187,654 Internal development - - 38,553 - 38,553 Increase (decrease) from revaluation - - - - - Disposals - - - (2) (2) Adjustments - 199,862 (199,862) - - Balance at 19 Mar. 2016 673,485 211,241 4,752 6,976 896,454 Additions - 280 - 12 292 Review of Risks and Disclosure Internal development - 1,056 22,554 1,220 24,830 Increase (decrease) from revaluation - - - - - Disposals - - - - - Adjustments 139,552 10,026 (10,992) 138,586 Balance at 20 Mar. 2017 813,037 222,603 16,314 8,208 1,060,162
Accumulated amortization Balance at 21 Mar. 2015 - 2,835 - 2,835 Amortization for the year - 34,782 - 34,782 Value decrease loss - - - - - Disposals - - - - - Adjustments - - - - Balance at 19 Mar. 2016 - 37,617 - - 37,617 Additions - 88,574 - 88,574 Value decrease loss - - - - - Survey of the Iranian Economy Disposals - - - - - Adjustments - - - - Balance at 20 Mar. 2017 - 126,191 - - 126,191
Book value Balance at 21 Mar. 2015 493,485 5,177 166,061 2,691 667,414 Balance at 19 Mar. 2016 673,485 173,624 4,752 6,976 858,837 Balance at 20 Mar. 2017 813,037 96,412 16,314 8,208 933,971
Continued on next page and Financial Statements Report of Independent Auditor 128 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
(IRR million) Parent Co. Software Right to use Good will Software Total development public services Cost Balance at 21 Mar. 2015 493,485 5,697 166,061 2,662 667,905 Additions 180,000 3,124 - 4,265 187,389 Internal development - - 38,554 - 38,554 Increase (decrease) from revaluation - - - - - Disposals - - - - - Adjustments - 199,862 (199,862) - - Balance at 19 Mar. 2016 673,485 208,683 4,753 6,927 893,848 Additions - - - - - Internal development - 1,054 22,554 1,220 24,828 Increase (decrease) from revaluation - - - - - Disposals - - - - - Adjustments 139,552 10,991 (10,992) - 139,551 Balance at 20 Mar. 2017 813,037 220,728 16,315 8,147 1,058,227
Accumulated amortization Balance at 21 Mar. 2015 - 2,515 - 2,515 Amortization for the year - 34,095 - 34,095 Value decrease loss - - - - - Disposals - - - - - Adjustments - - - - Balance at 19 Mar. 2016 - 36,610 - - 36,610 Additions - 88,712 - 88,712 Value decrease loss - - - - - Disposals - - - - - Adjustments - - - - Balance at 20 Mar. 2017 - 125,322 - - 125,322
Book value Balance at 21 Mar. 2015 493,485 3,182 166,061 2,662 665,390 Balance at 19 Mar. 2016 673,485 172,073 4,753 6,927 857,238 Balance at 20 Mar. 2017 813,037 95,406 16,315 8,147 932,905
Increasing in goodwill account amounting to IRR139,522 million is mainly related to the Aftab branch’s building purchased amounting to IRR128,146 million. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 129
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
17 - Statutory deposit (IRR million) Consolidated and Parent Co.
20 Mar.2017 19 Mar. 2016 Management Report Statutory deposit 4,363,685 3,099,233
17.1 - Statutory deposit has been deposited with CBI in accordance with paragraph 3 of Article 14 of banking and monetary law.
18 - Other assets (IRR million) Consolidated Parent Co. Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Term letters of credit debtors - net 18.1 1,667,069 2,794 1,667,069 2,794 Non-operational lands and estates 18.2 9,523 9,506 9,523 9,506 Rental deposits 122,475 100,000 121,475 99,000 Consumables 1,917 1,601 1,917 1,601 Tax stamps 316 470 316 470 Project in progress 18.3 74,161 74,161 - - Acquisition goodwill(net) 5,803 6,165 - - Review of Risks and Disclosure Collateral in possession 18.4 56,700 - 56,700 - Others 5,923 6,914 4,632 4,807 1,943,887 201,611 1,861,632 118,178
18.1 - Net of term letters of credit debtors - net (IRR million) Consolidated and Parent Co.
Note 20 Mar.2017 19 Mar. 2016 Debtors for term letters of credit-LCY 151,424 4,365 Debtors for term letters of credit-FCY 1,661,681 - 1,813,105 4,365 Less: Prepayments for term letters of credit-LCY (27,209) (1,528)
Prepayments for term letters of credit-FCY 18.1.2 (93,440) - Survey of the Iranian Economy General provision for bad and doubtful debt (25,387) (43) 1,667,069 2,794
18.1.1 - Letters of credit debtors maturity is up to six months in accordance with CBI’s regulations.
18.1.2 - The movements for general provision for bad and doubtful debt are as follow: (IRR million) Consolidated and Parent Co.
20 Mar.2017 19 Mar. 2016 Opening balance 43 489 Write off - - Provision 25,344 (446) Closing balance 25,387 43 and Financial Statements Report of Independent Auditor 130 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
18.2 - Non-operational lands and estates (IRR million) Consolidated and Parent Co.
20 Mar.2017 19 Mar. 2016 Balance at 20 Mar. 2016 9,506 - Additions 2,149 11,202 Disposals - - Gross balance at 20 Mar. 2017 11,655 11,202 Accumulated decrease in value - - Accumulated depreciation (2,132) (1,696) Net Balance at 20 Mar. 2017 9,523 9,506
18.2.1 - Real estates not related to Bank’s activities in accordance with the articles of association are not classified in fixed as- sets’ note and are presented in this section. This assets are calculated in Bank’s fixed assets limit.
18.2.2 - Rent income of these assets amounted to IRR4,800 million has been presented in note 38.
18.3 - The balance of project in progress of IRR74,161 million is related to the cost of the core banking software in Dadeh Par- dazan Simaye Aftab Co. accounts and all direct and indirect costs including the management of executing the contract, gathering and analyzing the bank’s executive needs, localizing and implementing costs are recorded in project in progress account.
18.4 - Collateral in possession (IRR million) Consolidated and Parent Co. Possessed during the Sale / Submission 19 Mar. 2016 20 Mar.2017 year during the year Residential property - 56,700 56,700 Accumulated impairment loss - - - 56,700 Gain/loss on sale - -
18.4.1 - collateral in possession timetable is as below: (IRR million) Consolidated and Parent Co.
20 Mar.2017 19 Mar. 2016 Less than one year from possession 56,700 - 1-2 year from possession - - More than 2 year from possession - - 56,700 - REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 131
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
19 - Due to banks and financial institutions (IRR million) Consolidated Parent Co.
Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Management Report Due to the CBI Current deposit-FCY 737,588 - 737,588 - Term deposit-FCY 236,378 400,526 236,378 400,526 Due for purchasing foreign currency 19.1 63,675 1,693 63,675 1,693 Due for overdraft penalty - 59 - 59 1,037,641 402,278 1,037,641 402,278 Due to other banks Current deposits-FCY 3,286 17,712 3,286 17,712 SHETAB transactions 37,227 49,047 37,227 49,047 40,513 66,759 40,513 66,759 1,078,154 469,037 1,078,154 469,037 19.1 - Included within due for purchasing foreign currency is a total of IRR63,675 million (equivalent to 1,850,004 euro) which is settled until financial statements sign-off. *Other banks investment deposits (IRR and other currencies) are classified in Interest and benefits of investment deposit holders based on their maturities as well as other investment deposits. Review of Risks and Disclosure 20 - Customers' deposits (IRR million) Consolidated Parent Co. Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Natural persons Current deposits 20.1 489,746 363,724 489,746 363,724 Saving deposits 20.2 9,746 4,441 9,746 4,441 Other deposits 20.3 3,430 173,076 3,430 173,076 502,922 541,241 502,922 541,241 Corporate customers Current deposits 20.1 4,985,265 3,070,663 4,999,985 3,103,271 Saving deposits 20.2 396,907 22,346 430,788 48,907 Survey of the Iranian Economy Other deposits 20.3 1,992,794 1,628,311 1,993,832 1,628,612 7,374,966 4,721,320 7,424,605 4,780,790 7,877,888 5,262,561 7,927,527 5,322,031 20.1 - Current deposits (IRR million) Consolidated Parent Co.
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Current deposits-LCY 4,565,338 3,200,100 4,580,003 3,232,708 Bank checks 126,309 108,272 126,309 108,272 Remittance-FCY 767,447 118,169 767,447 118,169 Others-LCY 15,917 7,846 15,972 7,846
5,475,011 3,434,387 5,489,731 3,466,995 and Financial Statements Report of Independent Auditor 132 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
20.2 - Saving deposits (IRR million) Consolidated Parent Co.
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Saving deposits-FCY 406,653 26,787 440,534 53,348
20.3 - Other deposits (IRR million) Consolidated Parent Co.
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Guarantee issuing deposits -LCY 1,612,236 1,330,814 1,613,274 1,331,115 Guarantee issuing deposits -FCY 39,284 14,137 39,284 14,137 Prepayments for LCs-LCY 150,395 179,039 150,395 179,039 Prepayments for LCs-FCY 194,309 277,397 194,309 277,397 Total 1,996,224 1,801,387 1,997,262 1,801,688
21 - Dividends payable Consolidated and Parent Co. Capital increase Dividend Balance at 19 Paid dividend Written-off by Balance at 20 Dividend from dividend per share Mar. 2016 during the year staff loans March. 2017 payable IRR IRR million IRR million IRR million IRR million IRR million IRR million Year ended 20 March 2013 85 340,000 487 (14) - (319) 154 Year ended 20 March 2014 150 600,000 1,469 (47) - (1,212) 210 Year ended 20 March 2015 160 640,000 2,762 (157) - (1,885) 720 Year ended 19 March 2016 250 1,000,000 - (69,815) (30,212) (895,310) 4,663 Total 4,718 (70,033) (30,212) (898,726) 5,747
22 - Income tax provision (IRR million) Consolidated - Restated Parent Co.- Restated
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Opening balance 145,797 115,310 138,743 112,750 Provision for the year 183,318 145,889 173,279 139,718 Prior years tax adjustments 26,915 35,114 26,594 33,859 Paid during the year (172,712) (122,626) (165,337) (120,015) 183,318 173,687 173,279 166,312 Prepayments (900) (975) (900) (975) Closing balance 182,418 172,712 172,379 165,337 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 133 - - Management Report Method of assessment Assessment of Books Assessment of Books Assessment of Books Assessment of Books - - (975) 87,242 166,312 165,337 139,718 (60,648) balance Provision IRR million 19 Mar. 2016 - - - - (900) 173,279 173,279 172,379 balance Provision Review of Risks and Disclosure Paid 27,201 139,718 147,955 112,750 - - Final 27,201 147,955 Tax Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 80,585 350,289 135,807 254,925 As assessed Survey of the Iranian Economy Sept. 21, 2016 - IRR million Declared 25,410 60,714 173,279 139,718 112,750 income Taxable 867,985 101,639 931,454 269,838 563,750 433,490 880,743 961,266 2,198,676 1,500,519 Declared profit and Financial Statements Report of Independent Auditor The Bank’s tax position is as follows: The Bank’s According to the final assessment for fiscal year of 2014 and aft er revised decision tax committee, Bank has paid as well it ap Bank has made an appeal to the assessment of 2016 fiscal year. The Bank income tax for the 2013 fiscal year is final and has been settled. Bank has made an appeal to the assessment of 2015 fiscal year tax committee. IRR254,925 million is assessed as for 201 5 financial by com Income tax provision is calculated based on declared taxable i ncome Fiscal Year 20 Mar. 2017 Prepayments 20 Mar. 2013 20 Mar. 2014 20 Mar. 2015 19 Mar. 2016 22.1 - 22.2 - 22.3 - pealed to Supreme tax Council about the calculation of taxa ble income. 22.4 - mittee. Bank appeal against assessment of tax committees is in progress. 22.5 - 22.6 - 134 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
23 - Other liabilities and accruals (IRR million) Consolidated - Restated Parent Co. - Restated Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Debts for LCs-LCY 23.1 151,424 4,365 151,424 4,365 Debts for LCs-FCY 23.1 1,661,681 - 1,661,681 - Payable fees and interests 686 708 686 708 Social security 20,143 24,883 19,093 24,113 Tax 2,970 1,610 2,749 872 Provision for staff leave 13,298 8,511 13,210 8,434 Provision for accrued expenses 23.2 19,606 11,890 19,093 8,222 National Iranian Oil Company-Bonds on credit - 262,170 - 262,170 Contractors performance deposit 5,718 5,789 5,718 5,789 Customers' prepayments for discount fee on bonds 98,446 48,894 98,446 48,894 Central depository brokerage 81,813 56,187 - - Brokerage costumers 50,099 264,722 - - Others 23.3 299,739 23,219 279,650 13,824 2,405,623 712,948 2,251,750 377,391
23.1 - Debts for Lcs amounted to IRR1,813 billion is related to the LCs that their documents have been sent to the buyers and the Bank has guaranteed the payment in the maturity. Generally in the maturity date Bank will funding from the buyer and pays debts. 23.2 - Provision for accrued expenses includes the IRR12,930 million which is related to the annual membership fee of the Deposit Guarantee Fund for the year ended Mar. 2017, that will be paid in due time. 23.3 - Other amount includes IRR73,208 million which is received from the National Development Fund at the balance sheet date are as follows:
interest Balance-million Amounts received Currency Receipt date Due date No. installment Balance-currency rate IRR million 880,672 USD 11/08/2016 05/08/2023 54 6 880,672 28,551 1,377,454 USD 06/24/2016 12/28/2022 54 6 1,377,454 44,657 73,208
24 - Staff termination benefits (IRR million) Consolidated Parent Co.
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Opening balance 37,423 19,760 31,462 17,073 Paid during the year (5,280) (1,277) (1,675) (1,126) Provision for the year 30,224 18,940 22,764 15,515 Closing balance 62,367 37,423 52,551 31,462
25 - Customers investment deposits (IRR million) Consolidated Parent Co.
Note 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Long-term investment deposits 25.1 32,736,412 13,400,359 32,736,412 13,400,359 Short-term investment deposits 25.1 20,976,049 12,236,763 21,038,146 12,264,926 Special short-term investment deposits 25.1 54,716 1,178,847 54,716 1,178,847 Interbank deposits 25.1 1,025,000 2,333,800 1,025,000 2,250,000 54,792,177 29,149,769 54,854,274 29,094,132 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 135
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
25.1 - Term investment deposits based on currency units are as follows: (IRR million) Consolidated
20 Mar.2017 19 Mar. 2016 Management Report IRR FCY Total IRR FCY Total Short-term investment deposits 22,000,906 143 22,001,049 14,569,936 627 14,570,563 Short-term special investment deposits Three-month deposit 22,180 5,061 27,241 1,120 7,616 8,736 Three month to six-month deposit 22,449 5,026 27,475 1,164,555 5,556 1,170,111 Six-month to one year deposit - - - Long-term investment deposits One-year deposit 12,101,353 1,286,576 13,387,929 9,226,013 822,283 10,048,296 Two-year deposit - - - 200 - 200 Three-year deposit - 16,210,000 16,210,000 - - - Five-year deposit 3,138,483 - 3,138,483 3,351,863 - 3,351,863 37,285,371 17,506,806 54,792,177 28,313,687 836,082 29,149,769 (IRR million) Parent Co.
20 Mar. 2017 19 Mar. 2016
IRR FCY Total IRR FCY Total Review of Risks and Disclosure Short-term investment deposits 22,063,003 143 22,063,146 14,514,299 627 14,514,926 Short-term special investment deposits Three-month deposit 22,180 5,061 27,241 1,120 7,616 8,736 Three month to six-month deposit 22,449 5,026 27,475 1,164,555 5,556 1,170,111 Six-month to one year deposit - - - Long-term investment deposits One-year deposit 12,101,353 1,286,576 13,387,929 9,226,013 822,283 10,048,296 Two-year deposit - - - 200 - 200 Three-year deposit - 16,210,000 16,210,000 - - - Five-year deposit 3,138,483 - 3,138,483 3,351,863 - 3,351,863 37,347,468 17,506,806 54,854,274 28,258,050 836,082 29,094,132
25.1.1 - According to CBI’s regulations, banks are banned from accepting term deposits with more than one year maturity. The amount of term deposits with more than on year maturity is related to previous periods. Survey of the Iranian Economy 25.1.2 - Three-year deposit-FCY($ 500M) is used for loans in note 11.1.
25.2 - Term investment deposits according to maturity and interest rate (IRR million) Consolidated 20 Mar.2017 19 Mar. 2016 More than 22% 19%-22% 16%-19% 13%-16% 10%-13% Less than 10% Total Total Matured - 12,168,079 4,719,733 1,577,529 512,172 2,103,099 21,080,612 12,634,483 2016-17 ------13,036,222 2017-18 3,700 9,152,779 3,283,411 562,760 22,180 1,291,171 14,316,001 233,901 2018-19 688,615 1,883,011 30,145 - - 5,636 2,607,407 2,598,521 2019-20 447,442 130,715 - - - 16,210,000 16,788,157 646,642 1,139,757 23,334,584 8,033,289 2,140,289 534,352 19,609,906 54,792,177 29,149,769
19 Mar. 2016 1,325,192 16,013,703 9,216,229 359,015 - 2,235,630 29,149,769 and Financial Statements Report of Independent Auditor 136 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
(IRR million) Parent Co. 20 Mar.2017 19 Mar. 2016 More than 22% 19%-22% 16%-19% 13%-16% 10%-13% Less than 10% Total Total Matured - 12,168,079 4,719,733 1,633,094 518,705 2,103,099 21,142,710 12,662,646 2016-17 ------12,952,422 2017-18 3,700 9,152,779 3,283,411 562,760 22,180 1,291,171 14,316,000 233,901 2018-19 688,615 1,883,011 30,145 - - 5,636 2,607,407 2,598,521 2019-20 447,442 130,715 - - - 16,210,000 16,788,157 646,642 1,139,757 23,334,584 8,033,289 2,195,854 540,885 19,609,906 54,854,275 29,094,132 19 Mar. 2016 1,311,592 16,040,626 9,186,029 319,015 - 2,236,870 29,094,132
25.3 - Movements of investments deposits-LCY (IRR million) Consolidated Parent Co. Balance Balance at Balance Balance Principal Principal at 19 Mar. New Deposits 20 March. at 19 Mar. New Deposits at 20 Mar. repayment repayment 2016 2017 2016 2017 Long-term deposits One-year deposits 9,226,013 12,153,815 9,278,475 12,101,353 9,226,013 12,153,815 9,278,475 12,101,353 Two-year deposits 200 - 200 - 200 - 200 - Five-year deposits 3,351,863 - 213,380 3,138,483 3,351,863 - 213,380 3,138,483 Short-term deposits 12,236,136 380,241,435 371,438,165 21,039,406 12,264,299 380,211,869 371,438,165 21,038,003 Special short-term 1,165,675 107,022 1,228,068 44,629 1,165,675 107,022 1,228,068 44,629 deposits Interbank deposits 2,333,800 38,260,885 39,633,185 961,500 2,250,000 38,260,885 39,485,885 1,025,000 28,313,687 430,763,157 421,791,473 37,285,371 28,258,050 430,733,591 421,644,173 37,347,468
25.4 - Movements of investments deposits-FCY Consolidated and Parent Co. Balance at 19 Principal Balance at 20 Balance at 20 Balance at 19 New Deposits Mar. 2016 repayment Mar. 2017 Mar. 2017 Mar. 2016 Currency amount Currency amount Currency amount Currency amount IRR million IRR million Long-term deposits USD 2,279,557 501,113,206 1,159,350 502,233,413 16,282,407 68,934 EUR 553,590 1,184,850 183,560 1,554,880 54,189 18,786 AED 89,211,005 42,226,010 24,400 131,412,615 1,159,979 734,562 Short-term deposits USD 327,472 212,060 284,522 255,010 8,267 9,903 EUR 113,155 49,022 105,827 56,350 1,964 3,840 AED 6,900 - 6,900 - - 57 17,506,806 836,082 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 137
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
25.5 - The composition of depositors of investment deposits is as follows: Parent Co. 20 Mar. 2017 19 Mar.2016 No. Amount No. Amount Management Report Investor IRR million Investor IRR million Deposits-LCY Natural person 32,964 21,064,359 26,667 15,833,795 Corporate Investors 2,353 15,258,109 1,916 10,174,255 Investment deposits received from banks and credit 2 1,025,000 2 2,250,000 institutions 35,319 37,347,468 28,585 28,258,050 Deposits-FCY Natural person 325 141,932 261 103,250 Corporate Investors 18 17,364,874 12 732,832 343 17,506,806 273 836,082 35,662 54,854,274 28,858 29,094,132 26 - Interest payable (IRR million) Consolidated Review of Risks and Disclosure Balance at 19 Prepaid advance The difference between final interest and Interest paid Balance at 20 Mar. 2016 interest prepaid advance interest during the year Mar. 2017 Short-term deposits 53,027 2,404,639 - (2,369,223) 88,443 Special short-term deposits 8,433 77,128 - (85,524) 37 One-year deposits 33,533 2,351,493 - (2,354,155) 30,871 Two-year deposits 2 2 - (4) - Five-year deposits 42,000 728,168 - (741,517) 28,651 Interbank deposits 5,692 166,652 - (159,512) 12,832 Foreign currency deposits 7,543 842,477 - (593,054) 256,966 150,230 6,570,559 - (6,302,989) 417,800 (IRR million) Parent Co. Balance at 19 Prepaid advance The difference between final interest and Interest paid Balance at 20 Mar. 2016 interest prepaid advance interest during the year Mar. 2017 Short-term deposits 53,398 2,423,689 - (2,387,918) 89,169
Special short-term deposits 8,433 77,128 - (85,524) 37 Survey of the Iranian Economy One-year deposits 33,533 2,351,493 - (2,354,155) 30,871 Two-year deposits 2 2 - (4) - Five-year deposits 42,000 728,168 - (741,517) 28,651 Interbank deposits 5,692 166,652 - (159,512) 12,832 Foreign currency deposits 7,543 842,477 - (593,055) 256,965 150,601 6,589,609 - (6,321,685) 418,525
27 - Share capital The Bank’s capital is IRR4,000,000 million comprising 4,000 million shares with a face value of IRR1,000 per share. and Financial Statements Report of Independent Auditor 138 MIDDLE EAST BANK ANNUAL REPORT 5.0 4.1 4.0 3.2 2.0 2.0 1.8 1.6 1.5 1.4 1.4 1.3 1.3 1.2 1.1 1.0 1.0 1.0 1.0 1.0 100 of shares 10.2 52.0 Percentage Percentage 19 Mar. 2016 19 Mar. 50,767,511 50,767,511 80,400,000 80,400,000 80,145,155 70,000,000 63,048,000 59,267,458 55,000,000 55,000,000 53,990,000 46,555,410 43,000,000 41,205,000 41,182,256 40,000,000 40,000,000 40,000,000 200,000,000 200,000,000 163,660,000 160,000,000 128,780,000 407,674,527 No. of shares 4,000,000,000 2,080,324,683 2,080,324,683 More than 1% More System Keifiat Fonoun Co. (Private Joint Stock) Fetaneh Akhdari Sanati Investment Co. (Public Joint Stock) Tosee delan Tamadon Mehdi Hassan Rasoulian Atieh Khahan Investment Co. (Private Joint Stock) Farzam Manouchehri Amiri Ali Amir Investment Co.(Public Joint Stock) Tousheh Pars Amiri Amir Reza Nasiri Amiri Nesiri Mozaffar Amiri Amir Massoud Noordena investment Co.(Public Joint Stock) Ahoranjani Khosrow Nayebi Sam Group Co. (Private Joint Stock) Seyed Hossein Salimi Hooman Qavimi Arvand (Private Joint Stock) Shahrak Sanaye Daryayi Sahel Sepahan Industry Group (Public Joint Stock) Jahan Pars Engineering and Construction Co. Others (less than 1%) Corporate Investors ( 206 shareholders) Natural persons (2494 shareholders) Middle East Bank (PJSC) 100 4.1 4.1 3.2 3.0 2.8 2.2 2.0 1.8 1.6 1.5 1.5 1.4 1.4 1.3 1.3 1.3 1.2 1.1 1.1 1.0 1.0 1.0 1.0 1.0 1.0 9.6 of shares 50.7 50.7 Percentage Percentage Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 20 Mar.2017 88,099,266 79,148,418 70,750,000 60,673,442 60,000,000 55,000,000 55,000,000 53,990,000 50,500,000 46,555,410 43,000,000 42,100,000 41,205,000 40,310,061 40,000,000 40,000,000 40,000,000 63,048,000 52,900,000 41,182,256 113,057,834 128,780,000 384,554,083 163,660,000 120,000,000 No. of shares 2,026,486,230 4,000,000,000 According to extra-ordinary general meeting of August 2016, a capital raise from IRR4,000 billion to IRR5,000 billion from shareholders’ receivables and cash Composition of shareholders at balance sheet date is as follow s: Fetaneh Akhdari More than 1% More delan Tamadon Mehdi Morteza Soltani Saman bank (PJSC) finance development Group Co. Mehr-e-ayandegan Atieh Khahan Investment Co. (Private Joint Stock) Farzam Manouchehri Amiri Ali Amir Investment Co.(Public Joint Stock) Tousheh Pars Iran Industrial Development Investment Company Amiri Nesiri Mozaffar Amiri Farrokh Nesiri Amiri Amir Massoud Hassan Rasoulian Farhad Shariatmadari Ahoranjani Khosrow Nayebi Nattional development investment Co. Sam Group Co. (Private Joint Stock) Seyed Hossein Salimi Hooman Qavimi Mohammad Reza Jabersanari Arvand (Private Joint Stock) Shahrak Sanaye Daryayi Sahel Jahan Pars Engineering and Construction Co. Sepahan Industry Group (Public Joint Stock) Others (less than 1%) Corporate Investors ( 209 shareholders) Natural persons (2,225 shareholders) 27.1 - 27-2 - is agreed. Due to Board’s meeting in August 2016, underwriting is publicized and receivables and cash has been transferred to pre-capital raise account. legal shareholders’ procedure is being processed. At the balance sheet date, IRR996,416 millions of REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 139
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
28 - Legal reserve (IRR million) Consolidated Parent Co. Management Report 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Opening balance 518,876 313,498 515,614 311,494 Transferred from net profit 306,554 205,378 303,571 204,120 Closing balance 825,430 518,876 819,185 515,614
28.1 - According to Article 33 of the Money and Banking Regulation and Article 108 of the Bank’s articles of association, 15 per- cent of net profit is allocated to legal reserve annually. Annual allocation is compulsory till it equals the Bank’s capital.
29 - Interest income on credit facilities granted and deposits (IRR million) Consolidated
Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Note Mutual Non-mutual Total Mutual Non-mutual Total Loans income 29.1 6,426,655 1,376,506 7,803,161 5,936,230 74,373 6,010,603 Review of Risks and Disclosure Deposits income 29.2 1,252,548 38,630 1,291,178 469,226 32,374 501,600 Total 7,679,203 1,415,136 9,094,339 6,405,456 106,747 6,512,203
(IRR million) Parent Co.
Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Note Mutual Non-mutual Total Mutual Non-mutual Total Loans income 29.1 6,426,655 1,376,506 7,803,161 5,936,230 74,373 6,010,603 Deposits income 29.2 1,243,905 38,630 1,282,535 467,704 32,374 500,078 Total 7,670,560 1,415,136 9,085,696 6,403,934 106,747 6,510,681 Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 140 MIDDLE EAST BANK ANNUAL REPORT - 146 7,752 19,480 35,881 Total 623,833 4,168,875 1,154,636 6,010,603 IRR million ) ( ------11,260 10,666 21,926 FCY (Non-mutual) - 146 7,752 19,480 25,215 Total 623,833 4,157,615 1,154,636 5,988,677 - - - - - Year ended 19 Mar. 2016 7,752 19,480 25,215 52,447 Rials Non-mutual - - - - 146 623,833 Mutual 4,157,615 1,154,636 5,936,230 148 6,216 3,220 59,555 52,997 Total 501,564 109,760 1,059,409 4,847,700 1,162,592 7,803,161 Consolidated and Parent Co. ------96,209 17,338 1,057,985 1,171,532 FCY (Non-mutual) 148 1,424 6,216 3,220 59,555 35,659 Total 501,564 109,760 4,751,491 1,162,592 6,631,629 ------Year ended 20 Mar. 2017 59,555 35,659 109,760 204,974 Middle East Bank (PJSC) Rials Non-mutual Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For - - - 148 1,424 6,216 3,220 501,564 Mutual 4,751,491 1,162,592 6,426,655 Note 29.1.1 Loans income-FCY amounted IRR1,057,985 million is related to the loans paid from National Development Fund of Iran deposits. Loans income-FCY Loans income
Joaleh Installment sales Mozarebeh Mosharekat Madani (civil partnership contracts) Morabehe Debt purchase Penalty Penalty from paid LCs Penalty from paid guarantees Other 29.1 - 29.1.1 - REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 141
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
29.2 - Deposits Income (IRR million) Consolidated Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Rials Rials Management Report FCY Total FCY Total Mutual Non-mutual Total (Non-mutual) Mutual Non-mutual Total (Non-mutual) Income from statutory - 38,627 38,627 - 38,627 - 31,207 31,207 - 31,207 deposit Income from term 297,195 - 297,195 3 297,198 236,862 - 236,862 1,167 238,029 deposits Income from participation bonds 636,181 - 636,181 - 636,181 130,564 - 130,564 - 130,564 and fixed income securities Income from fixed 319,172 - 319,172 - 319,172 101,800 - 101,800 - 101,800 income mutual funds 1,252,548 38,627 1,291,175 3 1,291,178 469,226 31,207 500,433 1,167 501,600
(IRR million) Parent Co. Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Rials Rials FCY Total FCY Total Review of Risks and Disclosure Mutual Non-mutual Total (Non-mutual) Mutual Non-mutual Total (Non-mutual) Income from statutory - 38,627 38,627 - 38,627 - 31,207 31,207 - 31,207 deposit Income from term 292,925 - 292,925 3 292,928 235,428 - 235,428 1,167 236,595 deposits Income from participation bonds 636,181 - 636,181 - 636,181 130,476 - 130,476 - 130,476 and fixed income securities Income from fixed 314,799 - 314,799 - 314,799 101,800 - 101,800 - 101,800 income mutual funds 1,243,905 38,627 1,282,532 3 1,282,535 467,704 31,207 498,911 1,167 500,078
30 - Net income (loss) from investments
(IRR million) Survey of the Iranian Economy Consolidated Parent Co.
Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Note Rial (mutual) Rial (mutual) Rial (mutual) Rial (mutual) Accrued income (loss) from investments Dividends 30.1 59,828 262,685 104,345 284,578 Income (loss) from sales of investments 30.2 242,296 (3,509) 264,319 (14,556) Total 302,124 259,176 368,664 270,022
Income (loss) from increase (decrease) in value of investments Net income (loss) from increase (decrease) in value of 30.3 11,048 66,749 11,048 66,769 investments and Financial Statements Report of Independent Auditor Net income (loss) from investments 313,172 325,925 379,712 336,791 142 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
30.1 - Dividends are as follow: (IRR million) Consolidated Parent Co.
Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Rial (mutual) Rial (mutual) Rial (mutual) Rial (mutual) Dadeh Pardazan Simaye Aftab Co. - - 56 118 Middle East Life Insurance Co. 2,770 - - - Kardan Investment Co. - 177,015 - 165,846 Middle East Currency Exchange Co. - - 36,100 19,010 Middle East Bank Brokerage Co. - - 11,250 15,000 Dividends from investments in unlisted shares 2,770 177,015 47,406 199,974
Jam Petrochemical 11,365 12,115 11,365 12,115 Iranian Chemical Industry investment 7,651 - 7,651 - National Development Investment Group 5,737 7,518 5,737 7,518 Pension Fund Investment 5,240 15,695 5,240 15,695 Khark Petrochemical 4,064 6,945 4,064 6,945 Mokhaberat 3,853 3,762 3,853 3,762 Ertebetate saYear 2,958 2,656 2,958 2,656 Iran Tractor 2,275 3,900 2,275 3,900 Zagros Petrochemical 1,633 3,403 1,633 3,403 Persian Gulf Petrochemicals 1,138 - 1,138 - Mines and Metals Development 1,034 3,102 1,034 3,102 Khorasan Petrochemical 780 936 780 936 Mazandaran Cement 968 1,718 968 1,718 National Development Investment 713 - 713 - Gol Gohar 581 1,320 581 1,320 National Iranian copper industries 510 204 510 204 Other companies 3,874 20,057 3,755 18,991 Dividend from investment in listed shares 54,374 83,331 54,255 82,265
Middle East Bank mutual Fund 2,135 2,339 2,135 2,339 Kardan stock broker mutual fund 409 - 409 - Amin-Yekom farda mutual fund 140 - 140 - 2,684 2,339 2,684 2,339 Total 59,828 262,685 104,345 284,578 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 143
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
30.2 - Income (loss) from sales of investments is as follows: Consolidated Year ended Year ended 20 Mar. 2017 19 Mar. 2016 Management Report NO. shares Sale value Cost Income(loss) Income(loss) Note Share IRR million IRR million IRR million IRR million Income (loss) from sales of investments-LCY(mutual) National Iranian Copper Industries 387,788 316 615 (299) - Mokhaberat 2,817,864 4,140 5,031 (892) - Hegmatan cement 200,000 330 1,400 (1,071) - Fars & Khuzestan Cement 1,634,000 2,114 4,456 (2,342) - National Development Investment Group 1,100,000 2,959 2,973 (13) - Pension Fund Investment 25,250,814 17,832 43,640 (25,808) (52) Kharazmi investment 3,231,522 4,715 3,900 815 - Mines and Metals Development Investment 3,894,580 3,444 9,235 (5,791) - Iran Khodro Investment Development 1,446,729 8,359 7,272 1,087 425 Tereaktor sazi 6,499,993 15,400 18,816 (3,416) - Jam Petrochemical 2,738,973 23,323 25,189 (1,866) - Gol Gohar 541,076 428 1,480 (1,052) - Review of Risks and Disclosure Shahd 411,947 2,010 1,850 161 110 Urmia Cement 158,000 475 1,426 (951) - Tehran cement 300,000 770 1,049 (278) - kardan investment fund 30.2.1 666,666,200 933,333 454,557 284,214 - Other companies 1,462,839 4,534 5,957 (202) (3,992) 718,742,325 1,024,482 588,846 242,296 (3,509)
Continued on next page Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 144 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
Parent Co. Year ended 19 Year ended 20 Mar. 2017 Mar. 2016 NO. shares Sale value Cost Income(loss) Income(loss) Note share IRR million IRR million IRR million IRR million Income (loss) from sales of investments-LCY(mutual) National Iranian Copper Industries 387,788 316 615 (299) - Mokhaberat 2,817,864 4,140 5,031 (892) - Hegmatan cement 200,000 330 1,400 (1,071) - Fars & Khuzestan Cement 1,634,000 2,114 4,456 (2,342) - National Development Investment Group 1,100,000 2,959 2,973 (13) - Pension Fund Investment 25,250,814 17,832 43,640 (25,808) (52) Kharazmi investment 3,231,522 4,715 3,900 815 - Mines and Metals Development Investment 3,894,580 3,444 9,235 (5,791) - Iran Khodro Investment Development 1,446,729 8,359 7,272 1,087 425 Tereaktor sazi 6,499,993 15,400 18,816 (3,416) - Jam Petrochemical 2,738,973 23,323 25,189 (1,866) - Gol Gohar 541,076 428 1,480 (1,052) - Shahd 411,947 2,010 1,850 161 110 Urmia Cement 158,000 475 1,426 (951) - Tehran cement 300,000 770 1,049 (278) - kardan investment fund 30.2.1 666,666,200 933,333 625,875 307,458 - Other companies 1,462,839 4,534 5,957 (1,423) (15,039) 718,742,325 1,024,482 760,164 264,319 (14,556)
30.2.1 - During current year, investment in Kardan investment fund is sold out and IRR920,000 million is received in cash till fi- nancial statements sign-off. The legal process of transaction is in progress. In accordance with the terms of the company’s Articles of Association, the stock buyers should be approved by the Tehran Stock Exchange and It is worth noting that according to the contract of sale of shares, if buyers fail to obtain confirmation, they are obliged to introduce the new buyer to the bank. It should be noted that the cost of investment in the Kardan investment fund includes the profit receivable until the date of sale.
30.3 - Net income (loss) from increase (decrease) in value of investments in listed shares is as follows: (IRR million) Consolidated Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Book value Market value Income(loss) Income(loss) Income (loss) from increase (decrease) in value of investments- Rials(mutual) Investments in listed shares' portfolio 396,727 407,751 11,048 66,749
Continued on next page REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 145
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
(IRR million) Parent Co. Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Management Report Book value Market value Income(loss) Income(loss) Income (loss) from increase (decrease) in value of investments- Rial(mutual) Investments in listed shares' portfolio 396,400 407,446 11,048 66,769
31 - Bank’s share of mutual income Bank’s share of mutual income is as follows: 31.1 - Bank’s share of mutual income
Bank’s share of mutual Bank’s resource to mutual usages(31.2) Mutual income Fiscal Year income Percentage IRR million IRR million 2017 23% 8,050,272 1,882,702 2016 21% 6,740,725 1,434,297
* If mutual usages are less than free resources of term deposits, bank’s resources and bank’s share of mutual income will be zero.
31.2 - Distribution of mutual resources and mutual usages between bank and depositors Review of Risks and Disclosure
Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Description Notes IRR million IRR million Average of mutual usages( 31.2.1 ) 36,784,954 25,991,070 Weekly average Average of depositors' term deposits(31.2.2) 31,476,628 23,201,649 Weekly average less : statutory deposit of term deposits (3,294,502) (2,740,979) Weekly average Free resources of term deposits 28,182,126 20,460,670 Bank’s share of mutual usages (Additional 8,602,828 5,530,400 free resources from term deposits)
* Bank’s share of mutual usages is mutual usages minus free resources of term deposits. If total of term deposit’s free resource is more than mutual usages, the excess is called excess of free resources of term deposits.
31.2.1 - Average of mutual usages
(IRR million) Survey of the Iranian Economy Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Mutual usages items Amount(average) Amount(average) Net usages related to loans 30,407,701 22,996,328 Net usages related to participation bonds 4,064,840 876,673 Net usages related to term deposit in other banks 1,403,937 1,005,545 Net usages related to investments 908,476 1,112,524 Total usages related to mutual operation 36,784,954 25,991,070 and Financial Statements Report of Independent Auditor 146 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
31.2.2 - Average of depositors' term deposits
(IRR million) Year ended 20 Mar. 2017 Year ended 19 Mar. 2016
Term deposits Average Average One year deposits 12,082,366 8,924,584 Two year deposits 38 24,832 Five year deposits 3,244,630 3,799,216 Short term deposits 14,909,968 9,514,411 Short term deposits from other banks 883,640 681,538 Special short term deposits 355,986 257,068 Average of term deposits 31,476,628 23,201,649
31.3 - Interest from statutory deposit of term deposits
(IRR million) Description Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Average of statutory deposit of term deposits 3,294,502 2,740,979 Interest from statutory deposit(rate = 1% of average of resource) 33,575 28,100
32 - The Bank’s charge The Bank’s charge was publishes in public newspaper on 16 Mar. 2016, as 3 percent for fiscal year ended 20 Mar. 2017 and is calculated base on that rate . Average of free resources of depositors *Rate = Bank’s charge 845,464 = 3% * 28,182,126 33 - Income paid on account to investment deposits (IRR million) Consolidated Parent Co.
Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Short term deposits 2,404,639 1,851,601 2,423,689 1,859,685 Special short term deposits 77,128 50,357 77,128 50,357 Long term deposits One year deposits 2,351,493 1,945,571 2,351,493 1,945,571 Two Year deposits 2 5,255 2 5,255 Five Year deposits 728,168 859,594 728,168 859,594 Certificates of deposits - 2,873 - 2,873 Interbank deposit 166,652 162,657 166,652 162,657 5,728,082 4,877,908 5,747,132 4,885,992 34 - Interest expense (IRR million) Consolidated Parent Co.
Note Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Term deposits interest expense-LCY 34.1 5,728,082 4,877,908 5,747,132 4,885,992 Term deposits interest expense-FCY 842,477 24,760 842,477 24,761 6,570,559 4,902,668 6,589,609 4,910,753 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 147
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
34.1 - Reconciliation of income paid on account to investment deposits and term deposits interest expense-LCY (IRR million) Parent Co.
Year ended Year ended Management Report 20 Mar. 2017 19 Mar. 2016 Income paid on account to investment deposits (note 33) 5,747,132 4,885,992 Overpaid interest to depositors (391,451) (62,981) Depositor’s interest income 5,355,681 4,823,011 Overpaid interest to depositors 391,451 62,981 Term deposits interest expense-LCY 5,747,132 4,885,992 35 - Fee and commission income (IRR million) Consolidated Parent Co.
Note Year ended Year ended Year ended Year ended 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 On L/Cs issuance 41,300 11,804 41,300 11,804 On guarantees issuance 407,878 285,097 407,878 285,097 Foreign currency operation 14,551 13,879 14,551 13,879 Managed funds 3,719 - 3,719 - Review of Risks and Disclosure On remittance 13,008 16,145 4,532 2,632 Collaterals Assessment 3,903 3,125 3,903 3,125 Review of customers credit files 48,991 36,890 48,991 36,890 Liquidity guarantee fee for mutual funds 13,896 6,138 13,896 6,138 Amin contract guarantee fee 259 766 259 766 Participation and guarantee fee 16,339 3,876 16,339 3,876 SHETAB 6,981 3,299 6,981 3,299 Oversight commission received from the National 11,847 8,065 11,847 8,065 Development Fund On share trading 57,351 57,694 - - Income from currency exchange operations 35.1 21,968,326 6,663,758 - - Cost of currency exchange operations 35.1 (21,920,235) (6,646,066) - - Other services 7,865 18,010 7,618 14,688 695,979 482,480 581,814 390,259
35.1 - Income from and cost of currency exchange operations relates to the purchase and sale of foreign currency by Middle East Currency Exchange Co. Survey of the Iranian Economy 36 - Fee and commission expenses (IRR million) Consolidated Parent Co.
Year ended Year ended Year ended Year ended 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 SHETAB commission 1,480 108 1,480 108 POS transaction commission 22,803 8,511 22,803 8,510 Clearing house commission - 1,069 - 1,069 Paid commission to brokerages 568 921 568 185 24,851 10,609 24,851 9,872 and Financial Statements Report of Independent Auditor 148 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
37 - Net foreign exchange transactions income (IRR million) Consolidated Parent Co. Year ended Year ended Year ended Year ended 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 Income (loss) from foreign currency buy and sell 20,176 4,868 10,744 4,660 Income (loss) from foreign exchange difference 100,544 45,744 100,533 45,695 120,720 50,612 111,277 50,355
38 - Other income (IRR million) Consolidated Parent Co.
Year ended Year ended Year ended Year ended 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 Rental revenue - 400 4,800 5,200 Others 928 816 924 1,103 928 1,216 5,724 6,303
39 - Administrative and general expenses (IRR million) Consolidated Parent Co.
Note Year ended Year ended Year ended Year ended 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 Personnel expenses 39.1 431,060 299,840 350,772 275,812 Other administrative expenses 39.2 254,284 300,417 265,139 266,630 685,344 600,257 615,911 542,442
39.1 - The details of personnel expenses are as follows: (IRR million) Consolidated Parent Co.
Note Year ended Year ended Year ended Year ended 20 Mar. 2017 19 Mar. 2016 20 Mar. 2017 19 Mar. 2016 Wages, salaries and allowances 39.1.1 367,973 253,099 294,164 234,500 Insurance employer quota 35,198 26,147 30,942 23,304 Staff termination benefits 24,162 17,157 23,133 15,574 Travel and mission 3,727 3,437 2,533 2,434 431,060 299,840 350,772 275,812 39.1.1 - The increase in the salaries in comparison with the previous year is due to the increase of the number of personnel and the minimum salaries which is determined by the law. The increase in the salary and benefits of the group is mainly because of the salaries of personnel of the Dadeh Pardazan Simaye Aftab Co. for the amount of IRR42,195 million, which is according to the contract of core-banking recognized as an expense, though last year it was recognized in project in progress. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 149
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
39.2 - The details of other administrative expenses are as follows: (IRR million) Consolidated-Restated Parent Co.-Restated
Note Year ended 20 Year ended 19 Year ended 20 Year ended 19 Management Report Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Rent 24,265 35,425 23,157 34,078 Training and research 4,259 3,818 4,259 3,818 Communications 8,754 12,593 8,754 12,237 Insurance costs 1,869 2,821 1,869 2,791 Audit and consulting fee 19,189 24,956 18,693 16,749 Transportation 2,464 1,966 2,280 1,966 Power and Water 12,089 8,209 11,857 8,046 Repayment and maintenance of fixed assets 39.2.2 16,913 11,469 61,812 11,248 Consumption items 23,813 18,905 22,189 17,920 Board of directors bonus 11,027 9,700 10,000 9,600 Fee payment 71,392 53,844 66,860 47,221 Membership fee in Deposit Guarantee Fund 39.2.1 12,930 88,223 12,930 88,223 Membership fee in associations 1,255 3,030 1,255 2,870 Others 44,065 25,458 19,224 9,863 254,284 300,417 265,139 266,630 39.2.1 - The decrease in cost of membership fee in Deposit guarantee fund compared with the previous year is related to the Review of Risks and Disclosure payment of the first membership fee of Deposits Guarantee Fund in the previous year. 39.2.2 - Increasing the cost of asset maintenance is mainly due to the contract of a core-banking with the Dadeh Pardazan Simaye Aftab Co. Considering that the localization and implementation has been done by that company therefore, the support services has been delegated to that company. It is worth noting that 100% of this company is owned by the bank and the process of employing personnel is controlled by the bank. 40 - Provision for bad and doubtful debts (IRR million) Consolidated Parent Co.
Note Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Specific provision for bad and doubtful debts 40.1 160,959 104,362 160,958 104,363 General provision for bad and doubtful debts 40.2 394,494 98,591 393,934 98,890 555,453 202,953 554,892 203,253 Survey of the Iranian Economy
40.1 - Specific provision for bad and doubtful debts is calculated as follows: (IRR million) Parent Co. Year ended Year ended 20 Mar. 2017 19 Mar. 2016 Pastdue Outstanding Doubtful debt Total Total loans loans Balance of non-performing loans (note 11.1) 877,110 1,153,740 299,614 2,330,464 1,199,488 Less : adjusted collateral’s value Investment deposits (60,000) - - (60,000) - Lands and estates (273,110) (509,700) (90,868) (873,678) (380,107) (333,110) (509,700) (90,868) (933,678) (380,107) Basis of calculation of specific provision 544,000 644,040 208,746 1,396,786 819,381
Specific provision calculation factor- % 10% 20% 50% and Financial Statements Specific Provision of bad and doubtful debts at 20 Mar. 2017 54,400 128,808 104,373 287,581 126,623 Report of Independent Auditor Less: Specific provision for bad and doubtful debts at 19 Mar. 2016 (69,255) (4,035) (53,333) (126,623) (22,260) Expense of specific bad and doubtful debts provision (14,855) 124,773 51,040 160,958 104,363 150 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
40.2 - General provision for bad and doubtful debts is calculated as follows: (IRR million) Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Loan balance at 20 Mar. 2017 (note 11) 54,700,196 29,015,207 Debtors related to loans (note 14) 9,664 506 Debtors for term letters of credit (note 18) 1,692,456 2,837 Other accounts receivable (note 14) 347,131 407,767 Less: Balance of loans that specific provision has calculated for (2,213,512) (1,152,784) Basis for general provision for bad and doubtful debts 54,535,935 28,273,533 General provision calculation factor-% 1.5 1.5 General provision for bad and doubtful debts at 20 Mar. 2017 818,037 424,101 General provision for bad and doubtful debts at 19 Mar. 2016 (424,103) (325,212) General provision for bad and doubtful debts expense 393,934 98,890
41 - Finance costs (IRR million) Consolidated and Parent Co. Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Overdraft penalty - 109
42 - Depreciation and amortization (IRR million) Consolidated Parent Co.
Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Fixed assets' depreciation 101,029 102,594 93,155 98,621 Intangible assets' amortization 89,902 34,493 88,712 34,095 190,931 137,087 181,867 132,716
Increasing in amortization of intangible assets is due to reducing of the useful life of software from 5 years to 3 years in order to be in accordance with tax laws. 43 - Prior years adjustments (IRR million) Consolidated- Restated Parent Co. - Restated
Year ended 20 Year ended 19 Year ended 20 Year ended 19 Mar. 2017 Mar. 2016 Mar. 2017 Mar. 2016 Correction of mistakes: Receipt of 2013 income tax 60,648 61,172 60,648 60,648 Payment of 2013 income tax - (7,789) - (7,265) Payment of 2014 income tax (88,446) (88,971) (87,242) (87,242) Adjustment for Deposit Guarantee Fund provision in 2015 (1,385) - (1,385) - Adjustment for general provision for bad and doubtful debts in 2016 (3,892) - (3,892) - (33,075) (35,588) (31,871) (33,859) In order to present an accurate picture of financial position and performance results, all comparative items in financial statements have been adjusted. Therefore some comparative items do not match with those of previous year’s financial statements. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 151
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
44 - Reconciliation of profit before tax with cash flow from operating activities (IRR million) Consolidated
Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Management Report Profit before tax 2,198,000 1,518,753 Paid tax (172,712) (122,626) Depreciation and amortization 190,931 137,087 Net increase (decrease) in provision of staff termination benefits 24,944 17,663 Effect of exchange rate fluctuation on cash 1,028 (12,373) 2,242,191 1,538,504 Net increase (decrease) in operating liabilities Due to banks and financial institutions 609,117 231,786 Customers' deposits 2,615,327 2,468,433 Other liabilities and provisions-operating portion 1,692,675 278,710 Customers' investment deposits 25,642,408 7,064,151 Interest payable 267,570 (87,940) 30,827,097 9,955,140 Net increase (decrease) in operating assets Due from banks and financial institutions (4,152,448) (930,067) Credit facilities granted (25,620,769) (6,569,662) Investments (275,988) (2,092,324) Review of Risks and Disclosure Due from Subsidiaries and associates 183,157 (89,990) Other accounts receivable 466,163 (618,679) Statutory deposit (1,264,452) (207,789) Other assets-operating portion (1,685,576) (71,217) (32,349,913) (10,579,728) Net cash inflow from operating activities 719,375 913,916
(IRR million) Parent Co.
Year ended 20 Mar. 2017 Year ended 19 Mar. 2016 Profit before tax 2,197,091 1,495,244 Paid tax (165,337) (120,015) Depreciation and amortization 181,867 132,716 Net increase (decrease) in provision of staff termination benefits 21,089 14,389
Effect of exchange rate fluctuation on cash 1,028 (12,373) Survey of the Iranian Economy 2,235,738 1,509,961 Net increase (decrease) in operating liabilities Due to banks and financial institutions 609,117 231,784 Customers' deposits 2,605,496 2,510,627 Other liabilities and provisions-operating portion 1,874,359 265,877 Customers' investment deposits 25,760,142 6,991,082 Interest payable 267,924 (88,315) 31,117,038 9,911,055 Net increase (decrease) in operating assets Due from banks and financial institutions (4,139,856) (942,657) Credit facilities granted (25,590,393) (6,617,535) Investments (303,659) (2,085,867) Due from Subsidiaries and associates 111,157 (153,652) Other accounts receivable 192,223 (516,982) and Financial Statements
Statutory deposit (1,264,452) (207,789) Report of Independent Auditor Other assets-operating portion (1,686,715) (42,793) (32,681,695) (10,567,275) Net cash inflow from operating activities 671,081 853,741 152 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
44.1 - Non-cash transactions Major non-cash transactions during the period is as below: (IRR million) Consolidated and Parent Co. Note 20 Mar. 2017 19 Mar. 2016 Possession of asset against granted loans 44.1.1 56,700 - Increase of capital from shareholders' claims 898,726 - 955,426 -
44.1.1 - Assets which are possessed during the year are as below: (IRR million) Amount of debt at Asset value Amount of debt at Type of possessed asset Type of customer relationship Paid amount possession date (Determined by expert) possession date Residential property Non-related customer 263,974 56,700 - 207,247 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 153 374 8,485 1,617 24,631 73,011 22,706 24,323 54,650 70,187 13,739 196,867 302,994 704,008 2,263,349 1,093,074 1,936,032 IRR million Management Report 49,767 11,517 651,507 423,770 FCY 2,094,963 Closing balance 41,868,803 49,659,587 31,364,202 295,636,942 149,725,296 141,505,513 1,904,168,668 5 1 9 3 5 9 7 1 11 14 49 22 No. 552 875 (133) (390) 3,864 3,145 6,456 6,323 4,934 2,874 4,375 30,205 22,644 87,303 38,107 50,775 ation Exchange rate fluctu - IRR million (54,911) (49,226) (260,849) (141,239) (175,409) (130,438) (399,928) (233,458) (2,661,272) (2,856,426) (2,204,273) (2,807,200) (2,817,389) (1,032,461) (4,789,083) IRR million (10,306,781) Review of Risks and Disclosure FCY (1,524,053) (5,486,072) (11,705,166) (63,556,167) (81,078,473) (82,232,376) (12,551,500) (300,364,651) (220,256,695) (502,608,691) Paid during the period 39,643 (6,450,924,903) (4,936,590,694) 672,049 711,692 IRR million - - (7) (4) (3) (9) (6) (21) No. (39) (76) (11) (58) Closing balance 2 46 No. Consolidated and Parent Co. 49,437 92,058 93,544 Middle East Bank (PJSC) 265,470 251,226 162,725 202,797 409,292 1,949,946 3,753,029 2,112,882 1,270,525 2,063,445 1,731,533 6,282,253 10,345,081 IRR million Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For (1,134,603) (1,021,923) (2,156,526) IRR million FCY 1,524,053 2,950,426 (2) (36) No. Paid during the period 53,573,969 36,651,130 59,334,099 12,975,270 350,024,238 110,080,227 368,837,791 423,424,303 6,746,561,845 3,398,730,484 Issued during the period Survey of the Iranian Economy 8 3 8 1 12 15 35 35 19 11 64 No. 123 2,498,218 1,436,652 1,061,566 - - - - Consolidated and Parent Co. IRR million 1,539 5,326 78,791 88,670 99,973 984,115 119,327 761,544 984,115 760,005 392,087 2,137,746 4 78 IRR million No. Issued during the period - - - - 49,767 370,000 370,000 FCY 3,516,351 2,547,163 1,144,200 29,000,000 22,395,881 Opening balance IRR million 220,689,901 3,442,028,878 - 4 Opening balance No. - - - 1 7 1 - 2 6 1 2 16 No. and Financial Statements Letters of credit - FCY Letters of credit - LCY Report of Independent Auditor Letters of credit commitments Currency Type of credit Current EUR Term EUR KRW CNY INR Refinance EUR CHF Current Term Total CHF CNY KRW INR USD 45 - Off-balance sheet items 45.1 - 45.1.1 - 45.1.2 - 154 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
45.2 - Issued guarantees commitments
45.2.1 - Guarantees-FCY
Consolidated and Parent Co. 20 Mar.2017 19 Mar. 2016
FCY IRR million FCY IRR million EUR 90,305,149 3,147,225 34,228,474 1,161,543 AED 3,198,598 28,234 3,198,598 26,337 USD 26,553,994 860,880 22,457,948 679,128 INR 20,000,000 9,920 26,000,000 11,778 IQD 926,421,359 25,412 2,402,718,500 65,690 CNY 4,990,143 23,464 4,990,143 23,229 GBP - - 165,000 7,110 4,095,135 1,974,815
45.2.2 - Guarantees-LCY (IRR million) Consolidated and Parent Co. 20 Mar.2017 19 Mar. 2016 Commitments for guaranties issued-LCY 17,448,006 14,775,364
45.3 - Other commitments (IRR million) Consolidated and Parent Co. 20 Mar.2017 19 Mar. 2016 Commitments for bonds' guarantee 2,555,740 835,740 Commitments for AMIN contracts 147,390 121,790 Commitments for credit cards 49,152 - 2,752,282 957,530
45.4 - Managed funds (IRR million) Consolidated and Parent Co. 20 Mar.2017 19 Mar. 2016 Loans paid from managed funds 651,829 70,154
45.5 - Commitments for letter of credits and guaranties by type of collateral: (IRR million) Consolidated and Parent Co. Type of collaterals 20 Mar.2017 19 Mar. 2016 Deposits 381,774 269,244 Participation bonds and other securities with guaranties of 45,960 64,529 government and CBI Listed shares 358,288 316,253 Land and building 1,996,627 1,945,740 Checks and promissory notes 11,684,808 7,794,349 Other 10,050,725 8,867,810 24,518,182 19,257,925 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 155
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
46 - Capital commitments and contingent liabilities 46.1 - The bank’s ledgers have been audited by Social Security Organization auditors. The Social Security Statement on performance review from the year 2013 to 2015 is IRR48,625 million. At the initial meeting of the Board, the bank presented its defense bill and announced the extent of the protest against the declaration of the debt. Management Report 46.2 - As mentioned in note 12.2, on the balance sheet, the amount of commitment for investment in the Middle East Life Insurance Company and Dadehpardazan Simaye Aftab are IRR120,000 million and IRR19,500 million, respectively. 46.3 - A commercial building located on the Africa street amount to IRR280,000 million has been purchased with the delivery of 2018. In accordance with the terms of contract the amount of IRR150,000 million is paid and IRR130,000 million will be settled at the time of delivery and transfer of ownership. 47 - Earning per share
47.1 - Basic earning per share The calculation of basic earning per share has been based on the profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding. Weighted-average number of ordinary shares (basic) is 4,000,000,000 shares.
47.2 - Basic EPS including effects of right issue(Rials) Basic EPS including effects of right issue(Rials) is the dividend of earnings from ordinary shareholders to the weighted average of the number of ordinary shares held by the shareholders after adjusting the effect of the right issues. The average of the number of
ordinary shares is 4,382,513,661. Review of Risks and Disclosure 48 - Subsequent events From the date of the balance sheet to the date of the approval of the financial statements, no event which needed to be disclosed in financial statements has occurred. Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 156 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49 - Bank risks Bank faces the following types of risk: • Credit risk • Liquidity risk • Market risk • Operational risk level of influence of risks on different types of banking is illustrated by the following chart.
49.1 - level of influence of risks on different types of banking is illustrated by the following chart.
Middle East Bank
Corporate banking Retail banking
Credit risk: low to medium Credit risk: no Market risk: low Market risk: no Liquidity risk: low Liquidity risk: low Operational risk: medium Operational risk: medium
49.2 - Risk management structure is as follows:
“Risk Management in MEB consists of Risk Committee (RC) and risk department. The duties of the RC are modeled based on the Basel document entitled “Guidelines - corporate governance principles for banks”, issued in October 2014. The RC consists of five Board members and the head of risk department (or senior risk manager - SRM). SRM is responsible for reporting risk related mat- ters to RC, discussing relevant information with members of the RC/Board members, as well as executing various resolutions of RC.
Risk department operates under the guidance of risk committee (RC) and carries the policies set forth by the RC. The risk depart- ment is headed by the SRM and employs four additional risk analysts. The risk analysts and SRM share the duties of credit risk modeling, credit risk rating and liquidity risk measurements.
Board of directors
CEO
Risk committee Senior risk manager consists of the head of the board, three other Administrative risk board members, and management unit risk senior manager REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 157
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.3 - Credit risk
49.3.1 - Credit risk definition The Basel Committee on Banking Supervision (or BCBS) defines credit risk as the potential that a bank borrower, or counter Management Report party, will fail to meet its payment obligations regarding the terms agreed with the bank. It includes both uncertainty involved in repayment of the bank’s dues and repayment of dues on time. 49.3.2 - ME Bank’s policies regarding credit risk MEB’s credit extension policies ensure CBI’s rules and regulations are properly implemented. MEB’s primary credit clients are incorporated entities with whom MEB develops and maintains strong long-term banking relationships. However, natural persons who manage their business activities personally and are not under a legal umbrella are welcomed and treated as proprietorships. Obviously in such cases, Chamber of Commerce registration and a proper tax code are necessities prior to extension of any loans. Concentration of MEB’s credit is in short-term requirements of its clients; namely inventory and receivable financing. Even international activities are limited to the importation of raw materials, spare parts and finished consumer goods. MEB occasionally arranges and participates in syndicated guarantee loans when funding is provided through the capital market or State financed, National Development Fund. The principles of Middle East Bank for extension of credit: 1. Knowing the client and his/her credibility. Credit measurement is performed such that it is an indicator of ability and capacity of the client in paying back the loans. Making sure that the loan usage is monitored, and that the resources for repayment are identified and recognized by the bank.
2. The approved loans are valid for at most one year. The branches are required to periodically check the documents and financial Review of Risks and Disclosure statements in order to make sure that documents are compliant with the loans’ covenants. 3. The interest rate charged, and the required collaterals depend on the clients credit worthiness and client’s history with the bank. 4. Bank makes sure that the collaterals are unencumbered and have high degree of liquid ability. 5. Clients’ receivable checks from their own customers and identifying the validity of these checks confirms the clients business viability and these checks can be endorsed for collection by the bank. These receivable checks constitute one method of loan repayment. 6. The level of activity of the deposit and current accounts of the borrower are periodically checked in order to verify that the level of activity is conforming with the loan covenants. 7. The credit quality and operations of the client are periodically checked to make sure that the borrower is conforming with loan covenants. 8. The borrowers are credit risk rated by the risk department. The capacity of the borrower is also evaluated and then the credit committees set loan conditions and collaterals accordingly. Survey of the Iranian Economy 9. For SMEs and corporate borrowers, at least three years of audited financial statements are required to obtain a reasonably good credit risk rate . 10. Collateral quality and amount is dependent on the credit risk rate evaluation of the risk department. Borrowers with bad credit risk rate are required to provide substantially higher level of liquid collaterals. 11. MEB has set its policy to maintain a minimum weighted average credit rating of B+ for its loan portfolio. 12. In general, approval and extension of large credit loans are concentrated in MEB’s headquarter. 13. It is the policy of the bank that after the Credit Department evaluates a borrower to be credit worthy, it must inform the risk department and provide all required information to risk department for proper credit risk rating. The credit risk rate should be taken in consideration for setting covenants and collaterals of the loan. 14. The risk department periodically reports to the Risk Committee and to the Board. The reports discuss the portfolio concentrations in credit risk, industry, borrower type, collaterals, etc.
49.3.3 - Administrative units of risk department and Financial Statements
The risk management department is an administrative unit and it has no separate sub-units for specific risk types, instead, the risk Report of Independent Auditor analysts are assigned different tasks by the SRM and cover all risk types including credit risk. 158 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.3.4 - Different levels of institutional authority to approve loans and commitments In general, Middle East bank’s credit issuance decision makings are centralized at the headquarter. Considering the amount of credit requested, approvals will be carried out by the following authorities: 1. Branches - for credits less than 4 billion Rials and commitments less than 8 billion Rials. Since ME Bank’s strategy is to offer banking services to mostly corporate customers, Branch credit committees should use their authority in order to attract, consolidate and expand depositor customers. 2. Central credit committee - for loans less than 20 billion Rials and commitments less than 100 billion Rials. 3. Supreme credit committee - for loans less than 150 billion Rials and commitments less than 300 billion Rials (combined loans and commitments must not exceed 400 billion Rials. 4. Board of director for loans more than 150 billion Rials and commitments more than 300 billion Rials. 49.3.5 - Methods of credit risk mitigation
Currently, considering the lack of appropriate financial instruments, the only way to soothe the credit risk is to take collaterals and guarantees at the discretion of the decision makers considering the analysis of financial statements and the credit rate of the client performed by the risk management department, past behavior of the client, payment history, visiting the business site by account officers, and monitoring the consumption of the loan. Moreover, the presence of seasoned lawyers of ME Bank in charge of designing contracts and following up law cases helps ME Bank to reduce the credit risk to a great extent. 49.3.6 - Credit rating procedure More than 90% of ME Bank’s loan takers are legal persons and giving loan to natural persons are done based on their business activities. Besides from complying with the CBI rules, all customers seeking loans and commitments must be assessed by risk departments in terms of credit risk and this assessment must be done independently of credit department. Credit risk scoring of the customers is carried out based on the following major elements: 1- Three years of financial statements 2-Risk management department’s assessment of the customers’ cash flow from operating activities to pay back the principal and interest portions of the loans. 3- Qualitative elements including competition ability and managerial ability 4- Past payment behavior The summary of loans and commitment credit granting procedure to legal and natural persons running business is as follows: 1- Submitting request, information, and the required documents through CARM system which is available at the bank’s website (http://carm.middleeastbank.ir), it includes the company registration and management information, operational licenses, history, and financial information. 2-After filling the required information by the customer, the relationship manager check the data and contact the customer for any additional information or corrections. 3- Having the case completed by the relationship manager, the case will be referred to risk department to find a primary risk score. 4- The customers information gets processed by a computer program to produce the primary risk score. 5- The credit status of the customer is then analyzed more precisely by risk analysts to obtain the final risk score. 6- The risk score obtained by risk management department will play a key role for credit granting and specifying collaterals. 7- Loan granting process for natural persons is usually considered regarding a specified business activity. The need for working capital and commitments is assessed. This kind of customers form less than 10% of our customers. Their tax declaration is the base of risk management department analysis. 8- The equity ratio of the customer must meet the CBI’s standard. 49.3.7 - Credit quality analysis The quality of bank assets, including loans, commitments and investments, the type and amount of collaterals taken and adequacy of collaterals taken (loan to value ratio) is illustrated by the following tables from risk department point of view. 49.3.7.1 - Analysis of credit quality of loans and funded commitments and investments based on the bank’s internal credit rating “Credit quality analysis table regardless of the value of collaterals and on the basis of a review of financial statements, ability to REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 159
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017 pay principal and interest on loans and payment behaviour of customers in the past is provided. Level 1 loans (low risk) are those in which customers have paid back completely with less than three days in average late payment and B or higher risk rate. Level 2 loans (medium risk) are those in which customers had late payment in the past but for the current loan they have paid back completely without change in the asset class and in average have B- to CCC- risk score. Level 3 loans (high risk) are those who have CC to C risk rate and all overdue and suspend loans. Level 4 loans (nearly doubtful) are those who have been “”doubtful”” in 20 Mar. 2017. Management Report As for risk levels for commitments, the same risk level of the loan of that customer has been used. As for investments, long-term investments have been considered as “”low risk”” and for short-term investment (TSE listed companies) “”medium risk”” has been considered.”
Credit quality analysis-IRR million
Title Loan Investments Commitments
20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 level1 - low risk 39,773,535 16,932,842 258,404 657,236 10,851,155 8,866,930 level2 - medium risk 11,374,905 9,343,033 522,501 637,692 12,366,575 9,828,730 level 3 - high risk 3,252,142 2,179,019 - - 1,300,452 562,265 level 4 - nearly doubtful 299,614 193,617 - - - - Total gross amount 54,700,196 28,648,511 780,905 1,294,928 24,518,182 19,257,925 Provision for bad and doubtful loans (1,074,880) (550,724) (115,055) (126,101) Book value 53,625,316 28,097,787 665,850 1,168,827 Review of Risks and Disclosure 49.3.7.2 - Analysis of credit quality of loans granted to customers based on asset classes (IRR million) Loans
20 Mar.2017 19 Mar. 2016 Current loans 52,369,732 27,449,024 Past due loans 877,110 1,005,870 Outstanding loans 1,153,740 35,983 Doubtful loans 299,614 157,634 Total gross amount 54,700,196 28,648,511 Provision for bad and doubtful loans (1,074,880) (550,724) Net book amount 53,625,316 28,097,787
49.3.7.3 - Credit quality of participation bonds and etc. (IRR million) Analysis of credit quality Survey of the Iranian Economy
20 Mar.2017 19 Mar. 2016 Governmental Ministry of Roads and City Planning - 520 Government’s development projects 990,781 74,138 Ministry of Agriculture-Jahad 1,008,153 Islamic treasury bonds 686,502 1,165,818 2,685,436 1,240,476 Governmental companies bonds National Iranian Oil Company 293,801 291,300 Non-governmental Middle East Bank mutual fund 207,255 57,037 Kardan mutual fund - 700,000
Yekom Iranian mutual fund - 191,040 and Financial Statements
Hami fixed income fund 99,997 - Report of Independent Auditor 307,252 948,077 3,286,489 2,479,853 160 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.3.7.4 - Types and amounts of customers’ collaterals (IRR million) Collaterals’ type 20 Mar.2017 19 Mar. 2016 Collaterals from natural persons' loans Participation bonds\sukuk 39,610 602,423 Listed shares 308,713 539,776 Unlisted shares 21,243 Deposit 329,022 462,624 Land and real states 1,720,741 5,255,173 Checks 9,955,666 3,865,951 Promissory notes 114,579 30,693 Stand-alone legally binding contract 8,640,779 9,689,144
Collaterals from corporate customers' loans Participation bonds\sukuk 409,730 270 Listed shares 3,194,152 2,413,980 Unlisted shares 218,968 324,619 Deposit 3,403,460 2,052,070 Land and real states 17,799,649 12,917,735 Checks 102,983,187 50,148,061 Promissory notes 1,185,231 18,753,310 Stand-alone legally binding contract 89,381,759 72,810,208 239,706,489 179,866,037 * Amount above are based on Bank’s expert report.
49.3.7.5 - Loans classification(net) according to collateral’s market value is as below: (IRR million) Description 20 Mar.2017 19 Mar. 2016 Loans to natural persons Less than 50% 887,668 1,073,930 51-70% 213,562 164,947 71-90% 610,378 471,603 91-100% 14,580 169,386 More than 100% 1,430,964 1,014,198 Loans to corporate customers Less than 50% 31,010,877 12,623,929 51-70% 850,050 1,277,962 71-90% 1,614,675 852,512 91-100% 1,116,009 573,008 More than 100% 15,876,553 9,876,312 53,625,316 28,097,787
* The amount of collateral’s market value is based on CBI’s regulations. 49.3.8 - Credit risk concentration MEB’s credit risk management mostly concentrates on short-term loans that provide manufacturing, commercial or contracting firms and business owners with their working capital. Furthermore, investment companies and stock brokerage firms can get loan in order to facilitate their own customers investment activities in the condition that they bring all their banking activities to MEB. Generally, Future operational cash flow forecast must confirm firms’ ability to reimburse principal and interest of the loan received. Thus, credit risk management’s concentration is in its minimum level for personal loans, mortgages, consumption loans or long- term project financing. Although MEB might contribute in national projects with other banks as syndication to ensure project’s profitability. At the moment, risk management department does not rate individuals and brokerage firms based on financial statements, but tries to cover the risk by substantiating customer’s reputation, experience, history of its activity with MEB and other banks and obtaining guarantees. Risk management department is developing internal rating models to cover brokerage firms, leasing companies, REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 161
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017 investment companies, currency exchange firms and individuals. On average, facility applicants have B+ or higher credit rate. Based on definition, at the moment customer with B+ or higher credit rate has ability to reimburse received loans. Although bad economic situations of the country might cause these kind of customers face difficulties. Collateral received from customers with credit rates lower than average are much higher than those with credit rates higher than Management Report average (B+ to AA). Amount of collateral based on credit rates ensure risk management they expected loss would be lower than one percent. If loans or commitments concentration increases in a specific area, bank tries to control or decrease loans and commitments in that area. Risk management department periodically prepares reports about loans concentration in different areas for risk committee/ board of directors Risk acceptance amount in Middle East Bank differs based on the level of loans and deposits and other existing risks. For instance, if the loan to deposit ratio exceeds approximate level of 85%, bank tries to lower this ratio by carefully selecting customers and maintaining its liquidity position at a favorable level. Also, if bank notices that average risk factor of loans exceeds its usual level (based on capital adequacy ratio calculation in Basel-III), it prefers to give loans to customers with higher credit rates. Giving Loans and making commitments take place by considering relationships in any kind and by observing huge Loans and commitments regulation approved by Money and credit council. 49.3.8.1 - Loan and investment distribution based on economic sectors and geography (IRR million) Loans Investment in stocks Commitments of guaranties and L/Cs 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Review of Risks and Disclosure Book value 53,625,316 28,097,787 665,850 1,168,827 24,518,182 19,257,925 Amount of loans based on economic sectors Industrial 31,084,003 10,337,868 442,595 564,846 7,847,726 7,799,596 Housing 5,783,736 4,338,082 - - 6,023,128 4,494,487 Commercial 13,658,809 10,026,729 - - 989,980 763,116 Services 2,276,747 2,827,287 338,310 730,082 6,812,873 5,033,279 Agriculture 608,511 512,728 - - 94,215 17,566 Mining - - - - 873,145 88,235 Other 213,510 55,093 - - 1,877,115 1,061,646 Accumulated decrease in value - - (115,055) (126,101) 53,625,316 28,097,787 665,850 1,168,827 24,518,182 19,257,925 Amount of loans/commitments inside/outside of the country Inside the country 53,625,316 28,097,787 665,850 1,168,827 24,518,182 19,257,925 Survey of the Iranian Economy Outside the country ------53,625,316 28,097,787 665,850 1,168,827 24,518,182 19,257,925 and Financial Statements Report of Independent Auditor 162 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.3.8.1.1 - Distribution of loans, commitments and investments based on the type of industry is as follows (IRR million) Description 20 Mar.2017 19 Mar. 2016 Loans Automobile and parts 1,422,785 689,308 Mineral and metal industries 7,513,706 494,773 Chemical and petrochemical industries 1,915,276 873,304 Food and Drug 7,353,539 5,231,151 Energy 67,519 25,271 Contracting 187,646 187,737 Telecommunications, Computers and related industries 107,564 72,586 Financial intermediary 47,410 27,714 Other 12,468,558 2,736,024 Investments Automobile and parts 2,449 29,989 Mineral and metal industries 48,452 61,161 Chemical and petrochemical industries 240,830 266,018 Food and Drug 8,790 10,912 Energy - - Contracting - - Telecommunications, Computers and related industries 36,873 41,904 Financial intermediary 88,699 128,666 Other 16,502 26,196 Commitments Automobile and parts 636,004 13,199 Mineral and metal industries 339,781 307,133 Chemical and petrochemical industries 920,238 1,471,910 Food and Drug 1,616,049 3,339,467 Energy 1,956,546 1,091,564 Contracting 271,833 235,884 Telecommunications, Computers and related industries 564,703 499,865 Financial intermediary - - Other 1,542,572 840,574 Total 39,374,324 18,702,310
49.3.8.2 - Loans according to profit sharing contracts and trading contracts
Loans increase during the year Loans balance at the balance sheet date
Amount % of total Amount % of total IRR million Percentage IRR million Percentage Natural persons 47,444 0.0% 36,510 0.1% Trading contracts Corporate customers 32,294,110 14.8% 17,001,079 31.7% Natural persons 16,423,105 7.5% 3,120,642 5.8% Profit sharing contracts Corporate customers 169,901,218 77.7% 33,467,085 62.4% 218,665,877 53,625,316 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 163
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.3.9 - Managing of non performing loans The committee of “Supervision and collection of loans and receivables” meets every week to follow through with the status of the Non-performing loans, and the required legal actions in order to collect bad loans and receivables. The committee members are the
managing director, the deputy to managing director, legal advisor to managing director, the assistant managing director in credit Management Report department, the managers of the credit department, the manager of finance department, the manager of legal department, and the manager of credit operations department. During the financial year ended Mar., 20, 2017, this committee has met 46 times. The decisions made in this committee are sent to relevant departments to follow through. The loans and receivables that are late for more than 60 days are categorized as overdue and are put on the committee’s agenda for decision making. When the following through with a non performing client does not result in the desired collection or settlement, then the case is sent to legal department for raising the case with the Judiciary for collection and possibly the liquidation of collaterals according to the laws and regulations and as required. 49.3.9.1 - Non performing loan movements is as below (IRR million) 20March. 2017 19 Mar.2016 Principal Interest Penalty Total Principal Interest Penalty Total Balance at 20 Mar. 1,012,924 71,522 115,040 1,199,486 357,361 24,758 39,797 421,916 2016 Additions 8,021,067 554,606 822,216 9,397,889 6,275,791 617,746 111,014 7,004,551 Settled during the period
Cash (1,463,410) (498,606) (621,481) (2,583,497) (199,957) (570,982) (13,240) (784,179) Review of Risks and Disclosure Collateral (27,703) (1,849) (27,148) (56,700) - - - - New loans (5,052,784) - - (5,052,784) (5,420,271) - - (5,420,271) Extension (500,000) - - (500,000) - - - - Penalty write off - - (73,930) (73,930) - - (22,531) (22,531) Balance at 20 Mar. 1,990,094 125,673 214,697 2,330,464 1,012,924 71,522 115,040 1,199,486 2017
49.3.9.2 - Distribution of non performing loans based on economic sectors (IRR million) Balance of non-performing loans Specific provision Net Balance of non-performing loans 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 20 Mar.2017 19 Mar. 2016 Distribution of non performing loans Industry 181,034 210,265 (7,646) (12,905) 173,388 197,360 Housing 85,264 19,963 (4,683) (1,070) 80,581 18,893
Commercial 1,532,561 904,818 (218,018) (109,716) 1,314,543 795,102 Survey of the Iranian Economy Services 531,605 64,442 (57,234) (2,932) 474,371 61,510 Total 2,330,464 1,199,488 (287,581) (126,623) 2,042,883 1,072,865
49.3.9.3 - Balance of possessed assets (IRR million) Description 20 Mar.2017 19 Mar. 2016 Residential Real Estate 56,700 -
49.3.10 - Capital needed to cover credit risk
The amount of capital needed to cover the credit risk of the assets is 5,065,251 million Rials and its calculations presented in table 49.3.10.1 Compared with base capital at the balance sheet date, Bank has IRR3,505,390 million surplus in order to over credit risk. and Financial Statements Report of Independent Auditor 164 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.3.10.1 - Calculation for capital needed to cover credit risk
20 Mar.2017
Assets and Risk factor Risk amount Allocated Type of asset Commitments capital IRR million % IRR million IRR million Due from CBI and financial institutions 6,572,114 20 1,314,423 105,154 Non governmental participation bonds 307,252 100 307,252 24,580 Investment in shares 665,850 100 665,850 53,268 Accounts receivable 831,332 100 831,332 66,507 Loans that are guarantee with real states 12,945,477 50 6,472,739 517,819 Other loans and receivables 41,754,719 100 41,754,719 3,340,378 Net of fixed assets and goodwill 2,939,031 100 2,939,031 235,122 other assets 1,861,632 100 1,861,632 148,931 Guaranty for non-governmental participation bonds(Credit Conversion 1,277,870 100 1,277,870 102,230 Factor = 50%) Commitments for guarantees issued(Credit Conversion Factor = 20%) 3,304,166 100 3,304,166 264,333 Commitments for guarantees issued(Credit Conversion Factor = 50%) 1,684,876 100 1,684,876 134,790 Commitments for letter of credit issued(Credit Conversion Factor= 20%) 406,641 100 406,641 32,531 Commitments for letter of credit issued(Credit Conversion Factor =50%) 298,567 100 298,567 23,885 Other commitments(Credit Conversion Factor =100%) 196,542 100 196,542 15,723 Total 75,046,068 63,315,640 5,065,251 49.4 - Liquidity risk
49.4.1 - Liquidity risk definition Liquidity risk is caused by bank’s inability to repay its short-term liability. Liquidity risk is usually intensified by the lack of enough assets with high liquidity and because of the inability to liquidate other assets fast to repay short-term liability. 49.4.2 - Liquidity management policy In order to control liquidity risk or be sure of the bank’s ability to repay its short-term debt, its needed to define bank’s asset management and resource collection. MEB’s asset management policy, as last years is based on giving short-term loans to firms and establishing long-term relationships with corporate clients. For financial year ended Mar. 20, 2017, bank’s short-term loans portfolio comprised 72% of itstotal asset. Major part of this portfolio was allocated to short-terms loans to provide working capital for firms and individuals who run businesses for buying raw materials, sales on credit, etc. Corporate clients would be rated based on their financial reports, cash flows and ability to repay principal and interest of the given facility from their revenues. MEB’s has a policy that states its investment on TSE listed companies must be at a minimum level. For financial year ended Mar. 20, 2017, these investments comprised 0.54% of total asset. Long-term investments comprises 0.5% of total asset and include investment on life insurance company, brokerage firm, currency exchange company and investment company in order to facilitate other financial needs of clients beside investment on an IT firm to develop bank’s systems. Because of the economic situations, MEB has continued its conservative approach of liquidity management by maintaining highly liquid assets (cash and cash equivalent, contribution bonds or other assets with active market) composing 6% of total asset. About 6% of banks asset consist of fixed, intangible and other assets which are employed for bank’s main operations. MEB’s resources are mainly collected from 3 sources: 1- Cash flows from corporate clients and individuals related to those clients 2- Customers who have good long-term relationship with MEB for their asset management and 3-Other customers with low worth deposits. 49.4.3 - Administrative units for liquidity risk management MEB’s risk management department has one administrative unit and does not have different units for each risk of the bank. Risk department’s experts cover other risks of the bank by switching responsibilities assigned by the senior risk manager. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 165
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.4.4 - Liquidity risk assessment methodology Liquidity risk assessment is based on some traditional models and Basel-III models. Traditional models include loans to deposits ratio, highly liquid assets to total assets ratio and liquidity gap ladder. Basel-III models include liquidity coverage ratio (LCR) and
net stable funding ratio (NSFR). LCR indicates bank’s ability to recover deposit outflow in crisis situation for a 30-day period. Management Report According to Basel-III, this ratio must be at least 100% and for financial period ended 21 Sept. 2016, it is 123% in MEB. NSFR is defined as the amount of resources bank assumes to be available in long-term per the amount bank needs to operate in long-term. This ratio must at least be 100% which for MEB it is 160% for financial period ended 21 Sept. 2016. 49.4.5 - Liquidity risk control & monitoring procedures To ensure that the bank’s path is aligned with defined policies in 49-4-2 note and to control liquidity risk and managing cost and resource, finance department every day provides the seniors managers of the bank with a status report of deposits, given loans, bank’s various assets and liabilities, assets profitability and cost of resources. Every week costs and resources status would be reviewed with the presence of senior managers and based on these reports decisions would be made in order to progress the affairs. In appropriate times, risk management department prepares reports about calculation of liquidity gap, liquidity coverage ratio and net stable funding ratio to senior managers and board of directors. Based on defined acceptable ratios including liquidity ratios, necessary decisions would be made for liquidity management. For liquidity risk, these decisions include decrease or increase in loans amount which causes increase or decrease in bank’s liquid assets. MEB tries loans to resources ratio not to be more than 85%. In case of liquidity gap, bank maintains a significant positive balance for the period less than 3 months. 49.4.5.1 - Liquidity reserves (IRR million)
Description 20 Mar.2017 19 Mar. 2016 Review of Risks and Disclosure Due from CBI 6,011 66,134 Cash and due from banks and financial institutions 653,969 252,360 Governmental bonds 2,979,237 1,531,776 Non-governmental bonds 307,252 948,077 Investments in listed shares 407,446 511,591 Total 4,353,915 3,309,938
49.4.5.2 - Liquidity ratios
At the At the end of beginning of Ave Max Min the period the period % % % % % Cash and cash equivalent to total assets 8 8 11 6 6 Cash and cash equivalent to total deposits 10 9 13 7 7 Net liquid assets to total deposits* 2 4 8 3 3 Survey of the Iranian Economy Loans to total deposits 83 84 87 80 87 Loans to long-term deposits 214 193 262 155 167 Non-maturity deposits to total deposits** 46 42 48 36 43
Cash and cash equivalent include cash, bonds and etc. which have active liquid market. *Net liquid assets include cash, cash equivalent and investments which have active liquid market excluding other banks deposit, issued debts securities and other liabilities with less than one month maturity. **Non-maturity deposits include deposits which have no contractual maturity like current deposits, saving deposits and short-term deposits.. and Financial Statements Report of Independent Auditor 166 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.4.5.3 - Assets and liabilities gap analysis Below table illustrates assets and liabilities according to their maturity that is possible to be withdrawn or settled (IRR million) 20 Mar.2017 Between 3 Less than 1 Between 1 Between 1 More than Non-specific Book value Months and 1 month and 3 Months and 5 Years 5Years maturity Year Assets: Cash 659,980 659,980 - - - - - Due from banks and financial institutions 6,310,934 6,310,934 - - - - - Credit facilities granted 53,625,316 10,833,258 19,990,175 5,097,425 17,702,120 2,338 - Investments 3,952,339 1,695,001 - 1,124,174 874,761 258,403 - Due from subsidiaries and associates 165,504 - - 165,504 - - - Other accounts receivable 665,828 7,942 55,367 265,863 224,758 111,898 - Fixed assets 2,006,126 - - - - - 2,006,126 Intangible assets 932,905 - - - - - 932,905 Statutory deposit 4,363,685 880,335 161,665 364,489 2,954,835 2,361 - Other assets 1,861,632 201,501 732,615 735,413 - 192,103 - Total assets 74,544,249 20,588,951 20,939,822 7,752,868 21,756,474 567,103 2,939,031 Liabilities: Due to banks and financial institutions (1,078,154) (798,395) (279,759) - - - - Customers' deposits (7,927,527) (6,077,283) (666,600) (1,124,230) (46,430) (12,984) - Dividends payable (5,747) (5,747) - - - - - Income tax provision (172,379) - - (172,379) - - - Other liabilities and provisions (2,251,750) (826,574) (1,101,329) (90,177) (90,830) (73,208) (69,632) Staff termination benefits (52,551) - - - - - (52,551) Customers' investment deposits (54,854,274) (5,052,195) (20,866,124) (9,696,172) (19,239,783) - - Interest payable (418,525) (168,732) (249,793) - - - - Total liabilities (66,760,907) (12,928,926) (23,163,605) (11,082,958) (19,377,043) (86,192) (122,183) Total shareholders’ equity (7,783,342) (7,783,342) Total liabilities and shareholders' equity (74,544,249) (12,928,926) (23,163,605) (11,082,958) (19,377,043) (86,192) (7,905,525) Gap 7,660,025 (2,223,783) (3,330,090) 2,379,431 480,911 (4,966,494) Accumulated gap 7,660,025 5,436,242 2,106,152 4,485,583 4,966,494 - Gap to base capital 89% -26% -39% 28% 6% -58% Accumulated gap to base capital 89% 63% 25% 52% 58% 0% Gap to CBI base capital 147% -43% -64% 46% 9% -95% Accumulated gap to CBI base capital 147% 104% 40% 86% 95% 0%
Continued on next page REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 167
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
(IRR million) 19 Mar. 2016 Between 3 Less than 1 Between 1 Between 1 More than Non-specific Book value Months and 1 month and 3 Months and 5 Years 5Years maturity Year Assets: Management Report Cash 318,494 318,494 - - - - - Due from banks and financial institutions 2,171,078 2,159,176 11,902 - - - - Loans and advances 28,097,787 8,428,824 17,947,415 989,207 732,341 - - Investments 3,648,680 2,625,485 291,300 - 74,658 657,237 - Due from subsidiaries and associates 276,661 - - 276,661 - - - Other accounts receivable 884,003 515,806 13,700 66,205 199,946 41,589 46,757 Tangible fixed assets 1,906,471 1,906,471 Intangible assets 857,238 857,238 Statutory deposit 3,099,233 1,598,576 190,465 1,016,142 292,781 1,269 - Other assets 118,178 - - 2,474 - 115,704 - Total assets 41,377,823 15,646,361 18,454,782 2,350,689 1,299,726 815,799 2,810,466 Liabilities: Due to banks and financial institutions (469,037) (162,383) (306,654) - - - - Customers' deposits (5,322,031) (4,031,785) (380,135) (856,647) (41,092) (12,372) - Dividends payable (4,718) (4,718) - - - - - Income tax provision (165,337) - - (165,337) - - - Other liabilities and provisions (377,391) (6,055) (266,840) (88,888) - - (15,608) Review of Risks and Disclosure Staff termination benefits (31,462) - - - - - (31,462) Customers' investment deposits (29,094,132) (6,228,722) (10,181,196) (9,138,903) (3,545,311) - - Interest payable (150,601) (144,427) (6,174) - - - - Total liabilities (35,614,709) (10,578,090) (11,140,999) (10,249,775) (3,586,403) (12,372) (47,070) Total shareholders’ equity (5,763,114) (5,763,114) Total liabilities and shareholders' equity (41,377,823) (10,578,090) (11,140,999) (10,249,775) (3,586,403) (12,372) (5,810,184) Gap 5,068,271 7,313,783 (7,899,086) (2,286,677) 803,427 (2,999,718) Accumulated gap 5,068,271 12,382,054 4,482,968 2,196,291 2,999,718 - Gap to base capital 82% 118% -127% -37% 13% -48% Accumulated gap to base capital 82% 199% 72% 35% 48% 0% Gap to CBI base capital 106% 153% -166% -48% 17% -63% Accumulated gap to CBI base capital 106% 260% 94% 46% 63% 0% Survey of the Iranian Economy and Financial Statements Report of Independent Auditor 168 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.4.5.4 - Contractual maturity analysis of financial liabilities
49.4.5.4.1 - Below table illustrates financial liabilities according to their maturity that mentioned in related contract (IRR million)
20 Mar.2017 Between 3 Less than 1 Between 1 Between 1 More than Non-specific Book value Months and 1 month and 3 Months and 5 Years 5Years maturity Year Liabilities: Due to banks and financial institutions (1,078,154) (213,656) (279,759) - - - (584,739) Customers' deposits (7,927,527) (6,077,283) (666,600) (1,124,230) (46,430) (12,984) - Customers' investment deposits (54,854,274) (22,531,184) (3,387,135) (9,696,172) (19,239,783) - - Interest payable (418,525) (168,732) (249,793) - - - - Total (64,278,480) (28,990,855) (4,583,287) (10,820,402) (19,286,213) (12,984) (584,739) (IRR million)
19 Mar. 2016 Between 3 Less than 1 Between 1 Between 1 More than Non-specific Book value Months and 1 month and 3 Months and 5 Years 5Years maturity Year Liabilities: Due to banks and financial institutions (469,037) (162,383) (306,654) - - - - Customers' deposits (5,322,031) (4,031,785) (380,135) (856,647) (41,092) (12,372) - Customers' investment deposits (29,094,132) (13,662,818) (2,747,100) (9,138,903) (3,545,311) - - Interest payable (150,601) (144,427) (6,174) - - - - Total (35,035,801) (18,001,413) (3,440,063) (9,995,550) (3,586,403) (12,372) - 49.4.5.4.2 - Below table illustrates financial liabilities according to their maturity that mentioned in related contract (IRR million)
20 Mar.2017 Between 3 Less than 1 Between 1 Between 1 More than Non-specific Book value Months and 1 month and 3 Months and 5 Years 5Years maturity Year Liabilities: Due to banks and financial institutions (977,252) (112,755) (279,758) - - - (584,739) Customers' deposits (1,441,574) (1,250,173) (115,568) (65,913) (9,920) - - Customers' investment deposits (17,506,806) (13,214) (337,845) (945,747) (16,210,000) - - Interest payable (256,965) (7,172) (249,793) - - - - Total (20,182,597) (1,383,314) (982,964) (1,011,660) (16,219,920) - (584,739)
(IRR million)
19 Mar. 2016 Between 3 Less than 1 Between 1 Between 1 More than Non-specific Book value Months and 1 month and 3 Months and 5 Years 5Years maturity Year Liabilities: Due to banks and financial institutions (419,931) (113,336) (306,595) - - - - Customers' current deposits (463,051) (454,181) (8,870) - - - - Customers' investment deposits (836,082) (8,497) (10,865) (85,656) (731,064) - - Interest payable (7,543) (3,321) (4,222) - - - - Total (1,726,607) (579,335) (330,552) (85,656) (731,064) - -
49.4.6 - Program to cope with crisis (crisis testing) Middle East Bank, according to special circumstances of Iran economics during ,2017 and recently years in which MEB has been established, follow a high conservative policy to liquidity management and capital preservation. To be aware of these policies can be referred to 49.4.2 and 49.4.4 notes. Accumulated gap for less than 3 months period is IRR5,436,242 million which is 63% of the bank’s capital. This indicates the liquidity status of bank for less than 3 months is relevant. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 169
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.5 - Market risk 49.5.1 - Market risk definition Market risk in MEB raised from 3 causes: 1-Change in short-term investments value of bank’s stock portfolio, 2-Change in deposits and loans rates and 3-Change in foreign Currencies Exchange rates. Management Report The equity stock portfolio of the bank is 0.54 percent of bank’s total assets , however, its major portion is allocated to listed corporates in TSE. The stock portfolio consists of 40 corporate shares (IRR407,446 Million), 28 corporates are listed companies in Tehran Stock Exchange (IRR303,508 Million), 6 ETF(IRR73,186 million) and 6 OTC(IRR30,752 million). However, year of 2017, interest rates have fallen as directed by the Central Bank of Iran, but profitability of bank has not experienced any significant change. IRRBB comprised a non-significant portion of overall risks of MEB because of the regulatory fixing of lending and deposits interest rates and an almost regulatory fixed flat yield curve. We have not observed any significant changes on profitability ratios due to regulatory changes on fixed rates of deposits and loans. However, regulatory interest rate risks remain where MEB may face loss of funds in case where MEB abides by the CBI rules on fixed interest rates and other banks may deviate significantly from CBI rules. Foreign exchange rate risk in MEB arises from the off-balance sheet commitments related to imports of goods. MEB did not engage in direct market related foreign exchange activities or related hedging activities. MEB does not engage in profiting from changes to foreign currency exchange rates, however, occasionally, MEB would end up with open long or short positions in its normal activities for servicing clients engaging in import/export or other foreign exchange activities. 49.5.2 - Administrative units for market risk management “Risk management in MEB consists of integrated executive department and has not a separate unit for each type of risk. Risk experts by rotating in various responsibility that assigned by the senior risk management (SRM), in addition to market risk, cover other type of risks faced by bank. Review of Risks and Disclosure 49.5.3 - Method of market risk calculation Market risk arises from stock investment calculated by Basel-III and sharp model. According to Basel-III, market risk can be calculated using the Value at Risk (VaR) methodologies. The “Value at Risk” calculation must be done based on 0.1% probability (one tail) using daily standard deviation and 10 days horizon time. Each bank must meet, on a daily basis, capital requirement illustrated as the higher of previous day’s value at risk or an average of the daily value at risk in 60 working days. According to Basel-III notes, the capital requirement equals to VaR Amount *(3 + X) with X between 0 and 1. Our estimate of risk-weight of the short-term equity investments using a Basel-III Value at Risk model is 202% (the standardized Basel-III risk weight for equity investment in acceptable equity exchanges is 300%). According to the Sharp model, the return of the portfolio is higher than the risk-free rate with the annual standard deviation of the portfolio return, and the ratio of these two criteria reflects the proportionality of portfolio efficiency with portfolio risk. The stock market of the Middle East Bank in the year ended 20 Mar. 2017 has yields less than the risk-free rate of interest, leading to a negative Sharp ratio indicating a lack of adequacy between the efficiency and risk of the portfolio. 49.5.4 - Stock and other market investment VaR
VaR for stock investments and other market-oriented investments based on 10 days horizon time and 1% loss probability are Survey of the Iranian Economy calculated by below 2 methodology: single asset and variance-covariance. Calculating VaR based on variance-covariance methodology (10 days horizon time and 1% Loss Probability) 20 Mar. 2017 19. Mar. 2016 Type of investments Potential Change Impact on Profit Potential Change Impact on Profit in Market Price and Loss in Market Price and Loss Percent IRR Million Percent IRR Million Investment in listed shares (-4.04 , +4.04) 21,092 (-6.1 , +6.1) 31,207 Other strategic long term investments - - - - Calculating VaR based on single asset methodology (10 days horizon time and 1% Loss Probability) 20 Mar. 2017 19. Mar. 2016 Type of investments Potential Change Impact on Profit Potential Change Impact on Profit in Market Price and Loss in Market Price and Loss
Percent IRR Million Percent IRR Million and Financial Statements Investment in listed stocks (-8.7 , +8.7) 45,244 (-14.4 , +14.4) 73,820 Report of Independent Auditor Other strategic long-term investments - - - - 170 MIDDLE EAST BANK ANNUAL REPORT ------3 90 90 90 0.0% 0.0% 2,724 61,284 Swiss Franc ------740 0.0% 0.0% 58,464 Rupee 1,352,976 1,491,777 20,000,000 93,298,865 46,862,445 46,377,956 94,790,641 27,241,898 67,548,743 191,165,100 ------25 632 0.0% 0.0% 5,256 9,257 Yuan 4,990,143 9,496,354 2,866,827 6,629,526 9,501,610 2,293,462 7,198,891 191,594,099 ------0.0% 0.0% 1,904 69,409,826 69,406,826 69,406,826 25,000,000 44,406,826 Iraqi Dinar 926,421,359 ------(27) 0.0% 0.0% (947,994) 225,452,301 Korean Won 2,199,805,610 5,950,914,846 5,725,462,545 5,949,966,852 4,761,536,758 1,188,430,094 ------0 0.1% 0.0% 3,760 85,098 44,663 50,947 50,947 95,610 60,170 35,440 Rial Omani ------0.0% 0.0% 1,678 Lira 83,342 83,342 239,996 187,620 270,962 109,838 161,124 ------0.4% 0.2% 18,791 163,300 400,000 537,000 3,198,598 2,128,787 11,004,124 11,120,455 Middle East Bank (PJSC) 143,164,524 132,160,400 145,293,311 133,235,856 UAE Dirham ------Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 0.0% 0.0% Pound British ------0.2% 0.1% 12,585 311,196 market Euro-free 2,783,955 2,783,955 3,095,151 3,095,151 ------5.2% 3.2% 797,099 271,260 692,284 Euro 7,783,411 1,617,854 6,812,068 6,481,518 90,305,149 34,110,671 42,461,205 33,132,047 23,538,565 40,380,138 54,167,074 100,749,671 108,533,082 ------2.1% 1.3% 21,884 423,770 108,156 509,865 Dollar (200,991) 3,336,099 2,259,768 4,816,000 1,816,000 5,369,595 26,553,994 517,789,276 510,203,643 521,125,376 513,917,897 - - Issued guarantees Commitments Issued letters of credit Commitments Net assets (liabilities) at 19 Mar. 2016 Foreign currency open position to CBI base capital Foreign currency open position to CBI base capital Foreign currency open position - IRR equivalent Net assets (liabilities) at 20 Mar. 2017 ers-FCY Total liabilities and Interest benefits of investment deposit hold Customers investment deposits Other liabilities and accruals Income tax provision Dividends payable Customers' deposits Due to banks and financial istitutions Total assets-FCY Other assets Statutory deposit Intangible assets Fixed assets Other accounts receivable Due from subsidiaries and associates Investments Credit facilities granted Due from banks and financial isti tutions Cash 49.5.5 - Foreign Currency VaR Analysis VaR Currency 49.5.5 - Foreign 2017 is as follows: Status of assets and liabilities foreign exchange commitmen ts by the end 20 Mar. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 171
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
Method 1: Single asset VaR According to foreign currencies single asset VaR methodology, VaR for stock investments and other market-oriented investments has been illustrated in the following table.
Currency portfolio of bank consists of 10 currency so that Var is calculated by single asset methodology. VaR based on 10 days Management Report horizon time and 1% loss Probability at 20 Mar.,2017 has been calculated IRR10,941 Million. Potential market price changes are calculated 10 days horizon time and 1% loss probability.
20 Mar.2017 19 Mar. 2016 Potential change Impact on profit potential change Impact on profit Currency Type in market price and loss in market price and loss Percent IRR Million Percent IRR Million USD (-.3,+.3) 347 (-.05,+.05) 21 CHF (-3.6+3.6) 0 (-.05,+.05) 3 INR (-2.0,+2.0) 15 (-.03,+.03) 14 AED (-.3,+.3) 62 (-.05,+.05) 5 TRY (-5.1,+5.1) 85 (-.07,+.07) 120 IQD (-6.0,+6.0) 115 (-.1,+.1) 130 CNY (-1.7,+1.7) 0 (-.03,+.03) - KRW (-3.6,+3.6) (1) (-.05,+.05) 347 EUR (-3.6,+3.6) 10,302 (-.07,+.07) 1,080
OMR (-.05,+.05) 17 (-.05,+.05) 30 Review of Risks and Disclosure 10,941 1,750
Method 2: value at risk using variance-covariance method According to the method of calculating the value at risk of foreign exchange assets in accordance with the variance-covariance method, The value at risk to invest in stocks and other investments have a market price is provided in the following table: The portfolio consists of 10 foreign exchanges that value at risk has been calculated. The value at risk of foreign exchange portfolio within 10 days and 99% confidence interval would be about IRR10,136 Million. probable changes interval in market price within 10 days and 99% confidence for each foreign exchange has been calculated separately and the diversification effect is deducted.
20 Mar.2017 19 Mar. 2016 probable changes Value at risk probable changes Value at risk Currency Type in market price in market price Percent IRR Million Percent IRR Million
USD (-.3,+.3) 347 (-0.3 , +0.3) 21 Survey of the Iranian Economy CHF (-3.6+3.6) 0 (-4.1, + 4.1) 3 INR (-2.0,+2.0) 15 (-2.3 , +2.3) 14 AED (-.3,+.3) 62 (-0.4, +0.4) 5 TRY (-5.1,+5.1) 85 (-4.7 , +4.7) 120 IQD (-6.0,+6.0) 115 (-6.9, +6.9) 130 CNY (-1.7,+1.7) 0 (-2 , +2) - KRW (-3.6,+3.6) (1) (-3.5 , +3.5) 347 EUR (-3.6,+3.6) 10,302 (-4 , +4) 1,080 OMR (-.05,+.05) 17 (-0.5 , +0.5) 30 Total 10,941 1,750 Diversification effect (805) (509) 10,136 1,241 and Financial Statements Report of Independent Auditor 172 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.5.6 - The amount of required capital to cover market risk using a single asset method
(IRR million)
Stock risk Foreign exchange risk Total contingen- Measurement method Value at risk contingency Value at risk contingency cy reserved for (10days ) reserved (10days ) reserved market risk Historical simulation model 45,244 180,976 10,941 43,765 224,741 The amount of required capital to cover market risk using variance-covariance method (IRR million)
Stock risk Foreign exchange risk Total contingen- Measurement method Value at risk contingency Value at risk contingency cy reserved for (10days ) reserved (10days ) reserved market risk Historical simulation model 21,092 84,368 10,136 40,544 124,912 49.5.7 - Interest rate sensitive asset and liability gap analysis (IRR million) 20 Mar.2017 Maturities up 3 Month-1 Insensitive Amount 1-3 Month 1-5 Year >5 Year to one month Year to rate Assets Cash 659,980 - - - - - 659,980 Due from banks and financial istitutions 6,310,934 3,975,000 - - - - 2,335,934 Credit facilities granted 53,625,316 10,833,258 19,990,175 5,097,425 17,702,120 2,338 - Investments 3,952,339 1,695,001 1,124,174 874,761 258,403 - Due from subsidiaries and associates 165,504 - - - - - 165,504 Other accounts receivable 665,828 - - - - - 665,828 Fixed assets 2,006,126 - - - - - 2,006,126 Intangible assets 932,905 - - - - - 932,905 Statutory deposit 4,363,685 841,956 154,617 348,599 2,826,017 2,259 190,237 Other assets 1,861,632 - - - - - 1,861,632 Total assets 74,544,249 17,345,215 20,144,792 6,570,198 21,402,898 263,000 8,818,146 Liabilities Due to banks and financial istitutions (1,078,154) (176,429) (279,759) - - - (621,966) Customers' deposits (7,927,527) (6,077,283) (666,600) (1,124,230) (46,430) (12,984) - Dividends payable (5,747) - - - - - (5,747) Income tax provision (172,379) - - - - - (172,379) Other liabilities and accruals (2,251,750) (664,732) (1,095,800) (76,613) (90,830) (73,208) (250,567) Staff termination benefits (52,551) - - - - - (52,551) Customers' investment deposits (54,854,274) (5,052,195) (20,866,124) (9,696,172) (19,239,783) - - Interest payable (418,525) (168,732) (249,793) - - - - Total liabilities (66,760,907) (12,139,371) (23,158,076) (10,897,015) (19,377,043) (86,192) (1,103,210) Shareholders' equity (7,783,342) (7,783,342) Total liabilities and shareholders' equity (74,544,249) (12,139,371) (23,158,076) (10,897,015) (19,377,043) (86,192) (8,886,552) Liquidity gap 5,205,844 (3,013,284) (4,326,817) 2,025,855 176,808 (68,406) Cumulative liquidity gap 5,205,844 2,192,560 (2,134,257) (108,402) 68,406 -
Continued on next page REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 173
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
(IRR million) 19 Mar. 2016 Maturities up 3 Month-1 Insensitive Amount 1-3 Month 1-5 Year >5 Year to one month Year to rate
Assets Management Report Cash 318,494 - - - - - 318,494 Due from banks and financial institutions 2,171,078 600,000 - - - - 1,571,078 Credit facilities granted 28,097,787 8,428,824 17,947,415 989,207 732,341 - - Investments 3,648,680 2,625,485 291,300 - 74,658 657,237 - Due from subsidiaries and associates 276,661 - - - - - 276,661 Other accounts receivable 884,003 884,003 Tangible fixed assets 1,906,471 1,906,471 Intangible assets 857,238 857,238 Statutory deposit 3,099,233 1,529,625 182,249 972,312 280,152 1,214 133,681 Other assets 118,178 118,178 Total assets 41,377,823 13,183,934 18,420,964 1,961,519 1,087,151 658,451 6,065,804 Liabilities: Due to banks and financial institutions (469,037) (162,383) (306,654) - - - - Customers' deposits (5,322,031) (3,520,343) - - - - (1,801,688) Dividends payable (4,718) (4,718) Income tax provision (165,337) (165,337)
Other liabilities and accruals (377,391) (403) (305) (376,683) Review of Risks and Disclosure Staff termination benefits (31,462) (31,462) Customers' investment deposits (29,094,132) (6,228,722) (10,181,196) (9,138,903) (3,545,311) - - Interest payable (150,601) (144,427) (6,174) - - - - Total liabilities per maturity (35,614,709) (10,056,278) (10,494,329) (9,138,903) (3,545,311) - (2,379,888) Shareholders' equity (5,763,114) (5,763,114) Total liabilities and shareholders' equity (41,377,823) (10,056,278) (10,494,329) (9,138,903) (3,545,311) - (8,143,002) Liquidity gap 3,127,656 7,926,635 (7,177,384) (2,458,160) 658,451 (2,077,198) Cumulative liquidity gap 3,127,656 11,054,291 3,876,907 1,418,747 2,077,198 - 49.6 - Operational risk
49.6.1 - Operational risk definition Definition of operational risk Definition of operational risk Potential losses due from defined internal bank processes which are not well defined or are not defined completely or are defined incorrectly. Survey of the Iranian Economy Samples of operational risk are losses due to intentional or unintentional breakdowns, losses due to bank software application bugs and errors, losses due to events outside the Bank, or losses due to legal issues. Loses due to strategic decisions or damages resulting from strategic decisions are not considered operational risk. 49.6.2 - Administrative units for operational risk management Risk management in MEB consists of risk committee (RC) and risk department. The duties of the RC are modeled based on the Basel document entitled “Guidelines - Corporate governance principles for banks”, issued in October 2014. The RC consists of four board members and the head of risk department (or Senior Risk Manager - SRM). SRM is responsible for reporting risk related matters to RC, discussing relevant information with members of the RC/Board members, as well as executing various resolutions of RC. Risk department operates under the guidance of risk committee (RC) and carries the policies set forth by the RC. The risk department is headed by the SRM and employs four additional risk analysts. The risk analysts and SRM share the duties of credit risk modeling, credit risk rating and liquidity risk measurements. 49.6.3 - Intentional and unintentional human errors preventive measure Internal audit, compliance department and risk management department each have control and monitoring systems and report and Financial Statements separately to board of directors on the implementation of the bank’s internal rules, current issues, problems or process improvement Report of Independent Auditor methods. Human capital Management holds training courses to familiarize employees with the rules and regulations of the Bank. 174 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
Also, all employees are required to sign a commitment to carry out tasks correctly in terms of morality and in accordance with the Bank’s rules and regulations. Managers are responsible for the errors of their own staff and the effectiveness of managers in controlling the errors of their staff is examined in terms of lack of human errors. 49.6.4 - Program to cope with crisis (crisis testing) The crises of banking operations can be divided into the following groups: The crisis due to failure of information security systems, crisis due to failure of data communication lines, crisis due to physical damages to the Bank’s information systems, crisis due to in- accessibility of the Bank’s employees to their activity place for setting up banking systems. Middle East Bank has created replicated information system in different buildings in Tehran and keeps several copies of the Bank’s database in several location. The Bank also is setting a site for catastrophic events outside Tehran where information is copied with a few hours delay. Additionally, Middle East Bank holds training courses and operational safety drills and exercises for critical events. 49.6.5 - Operational risk measurement method The risk weight for operational risk is measured using Base II, the “Standardized approach”. In this approach considering the type of clients who are mostly corporate client, the corporate business factor of 18% is chosen. The average of last 3 years gross income is calculate and then multiplied by 12.5. The result is added to the total risk weights of other risks such as credit risk and market risk for foreign exchange risk weights. 49.6.6 - Operational risk control & monitoring procedures Operational risk management consultants and risk management department issue reports which would be reviewed in risk committee and board of directors committees and based on reported recommendations, necessary orders would be given by risk committee and bank’s CEO in order to establish better controls. Also internal audit, compliance and legal departments have their specific monitoring’s and make risk department aware of probable operational problems in the bank and risk management department executes necessary arrangements to solve the problems by presenting these reports to credit risk committee. Periodic reports of the result of implementing new controls would be presented to risk committee and risk committee gives necessary orders to reduce operational risks 49.6.7 - Necessary amount of capital to cover operational risk Based on Bank’s method to measure operational risk, capital exposed to this risk is: (IRR million) Measurement method Capital exposed to operational risk Standard Method 318,825 49.7 - Capital management
49.7.1 - Basic capital Basic capital at balance sheet date is IRR8,570,641 million and presented as follows: (IRR million) Description 20 Mar.2017 19 Mar. 2016 Tire I Paid up capital 4,000,000 4,000,000 Capital increase in progress 996,416 - Legal reserve 819,185 515,614 Retained earnings 1,967,741 1,279,374 7,783,342 5,794,988 Tire II General provision for bad and doubtful loans 787,299 420,209 Less: adjustment for 1.25% of risk weighted assets - - Less: tier II over tier I - - Total of Tire II 787,299 420,209 Base capital before deduction 8,570,641 6,215,197 Less Investment in banks and subsidiaries - - Investment in other banks and credit institutions - - - - Base capital 8,570,641 6,215,197 CBI base capital 5,203,812 4,766,448 The amount of base capital for the year ended 20 Mar. 2017 is approved by CBI as IRR5,203,812 million. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 175
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
49.7.2 - Capital allocation Total of risk-weighted Assets and commitments is IRR63,315,640 million at balance sheet date.
20 Mar.2017 19 Mar. 2016 Management Report Risk-weighted Adjusted Assets and Assets and Description Risk factor assets and Risk factor Assets and commitments commitments commitments commitments IRR million % IRR million IRR million % IRR million Cash 367,532 - - 213,519 - - Statutory deposit 4,363,685 - - 3,099,233 - - Due from CBI 31,268 - - 1,116,317 - - Due from financial institutions 6,572,114 20 1,314,423 1,159,736 20 231,947 Governmental participation bonds 2,979,237 - - 1,531,776 - - Non-governmental participation bonds 307,252 100 307,252 948,077 100 948,077 Investment in shares 665,850 100 665,850 1,168,827 100 1,168,827 Accounts receivable 831,332 100 831,332 1,160,664 100 1,160,664 Loans guaranteed by real states 12,945,477 50 6,472,739 9,589,853 50 4,794,927 Other loans and receivable 41,754,719 100 41,754,719 19,058,658 100 19,058,658 Fixed assets and goodwill 2,939,031 100 2,939,031 2,763,709 100 2,763,709 Other assets 1,861,632 100 1,861,632 118,178 100 118,178 Guaranty for non-governmental participation
1,277,870 100 1,277,870 417,870 100 417,870 Review of Risks and Disclosure bonds(Credit Conversion Factor = 50%) Issued guarantees Commitments(Credit 3,304,166 100 3,304,166 2,980,951 100 2,980,951 Conversion Factor = 20%) Issued guarantees Commitments(Credit 1,684,876 100 1,684,876 250,087 100 250,087 Conversion Factor = 50%) Issued letter of credit Commitments(Credit 406,641 100 406,641 351,153 100 351,153 Conversion Factor= 20%) Issued letter of credit Commitments(Credit 298,567 100 298,567 147,772 100 147,772 Conversion Factor =50%) Other commitments(Credit Conversion 196,542 100 196,542 121,790 100 121,790 Factor =100%) Total of adjusted Assets and 63,315,640 34,514,610 commitments based on risk 49.7.3 - Capital adequacy Capital adequacy ratio for the year ended 20, Mar., 2017 is 13.54% . (IRR million) Survey of the Iranian Economy 20 Mar.2017 19 Mar. 2016 Base capital 8,570,641 6,215,197 Risk weighted assets 63,315,640 34,514,610 Capital adequacy ratio 13.54% 18.01%
CBI base capital 5,203,812 4,766,448 Risk weighted assets 63,315,640 34,514,610 Capital adequacy ratio 8.22% 13.81% Above calculation is based on CBI’s Instruction. 49.7.4 - Leverage ratio Leverage ratio is total assets to shareholders’ equity and for the year ended 20 Mar. 2017 is as below: (IRR million) 20 Mar.2017 19 Mar. 2016 and Financial Statements 74,544,249 41,377,823
Total assets Report of Independent Auditor Total shareholders' equity 7,783,342 5,763,114 Leverage ratio 9.58 7.18 176 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
50 - Operating segments
50.1 - base of classification of parts Information related to each reportable parts are shown in the below table.profit before tax of the segment is used as criterion of segment performance. (IRR million) Treasury and bank- International Description Total ing operations banking Incomes earned from outside of the bank Interest income on credit facilities granted and deposits 6,565,027 2,520,669 9,085,696 Interest expense (5,747,133) (842,476) (6,589,609) Net interest income on credit facilities granted and deposits 817,894 1,678,193 2,496,087
Fees and commission income 422,286 159,528 581,814 Fees and commission expense (24,283) (568) (24,851) Net fees and commission income 398,003 158,960 556,963
Net income (loss) from investment 379,712 - 379,712 Net foreign exchange transactions income - 111,277 111,277 Total other operating income - - - 379,712 111,277 490,989 Net income earned from outside of the bank 1,595,609 1,948,430 3,544,039 Net income between parts of the bank 13,057 (13,057) - Total income of operational parts of the bank 1,608,666 1,935,373 3,544,039 Doubtful debts of operational parts (300,861) (254,033) (554,894) Other expenses attributable to operational parts (509,033) (29,328) (538,361) Profit(loss) of every parts before non-attributable general expenses 798,772 1,652,012 2,450,784
Non attributable General expenses to parts (253,693) Profit before tax 2,197,091 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 177
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
50.2 - Geographical concentration of major items of assets, liabilities and income Assets are reported by location and income and liabilities are reported based on residency location of the bank’s counterparty in geographical areas.
(IRR million) Management Report 20 Mar.2017 Iran Germany Turkey Switzerland India UAE Others Total Assets Cash 626,985 704 11,702 - 457 10,066 10,066 659,980 Due from banks and financial institutions 4,237,328 1,118,852 576,217 162,429 51,292 82,408 82,408 6,310,934 Credit facilities granted 53,625,316 ------53,625,316 Investments 3,952,339 ------3,952,339 Due from subsidiaries and associates 165,504 ------165,504 Statutory deposit 4,363,685 ------4,363,685 Fixed assets 2,006,126 ------2,006,126 Intangible fixed assets 932,905 ------932,905 Total 69,910,188 1,119,556 587,919 162,429 51,749 92,474 92,474 72,016,789 Liabilities Due to CBI and financial institutions (1,078,154) ------(1,078,154) Customers' deposits (7,927,527) ------(7,927,527) Customers' investment deposits (54,854,274) ------(54,854,274) Review of Risks and Disclosure Interest payable (418,525) ------(418,525) Total (64,278,480) ------(64,278,480) Income 10,164,223 ------10,164,223
(IRR million) 19 Mar. 2016 Iran Iraq Oman Turkey India UAE Others Total Assets Cash 310,748 1,570 - - 6,176 - - 318,494 Due from banks and financial institutions 2,004,580 - 30,817 123,779 11,902 - - 2,171,078 Credit facilities granted 28,097,787 ------28,097,787 Investments 3,648,680 ------3,648,680 Due from subsidiaries and associates 276,661 ------276,661 Statutory deposit 3,099,233 ------3,099,233
Fixed assets 1,906,471 ------1,906,471 Survey of the Iranian Economy Intangible fixed assets 857,238 ------857,238 Total 40,201,398 1,570 30,817 123,779 18,078 - - 40,375,642 Liabilities Due to banks and financial institutions (469,037) ------(469,037) Customers' deposits (5,322,031) ------(5,322,031) Customers' investment deposits (29,094,132) ------(29,094,132) Interest payable (150,601) ------(150,601) Total (35,035,801) ------(35,035,801) Income 7,294,388 ------7,294,389 and Financial Statements Report of Independent Auditor 178 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
51 - Retained earning at the end of period Allocation of the closing of the retained earning is subject to approval of the annual general meeting:
(IRR million) Amount Legal 10% of net profit of the period ended 20 Mar. 2017 according to Act Trade Law 202,381
The most attributable profit 1,600,582
Board’s offer for dividend Board’s offer for dividend 500,000 52 - Transactions with related parties
52.1 - Changes of major shareholders During the fiscal year ended 20 Mar. 2017, Noor-Dena Development Investment Company and Keifiat Systems Company by selling 50,552,199 shares and 200,000,000 shares exited from the group of more than 1% shareholders, and Saman Bank companies, Mehr- Ayandegan Financial development group, national development investment and a real person respectively, with the purchase of 77,357,834 and 81,299,266 and 42,100,000 and 11,000,000 shares placed in the ranking of shareholders with more than one percent. 52.2 - Transactions with managers (Managers includes CEO, members of board and executive committee) There were no transactions between managers and subsidiaries during the period. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 179 ------240 9,075 2,470 6,293 63,604 20,028 30,889 48,132 68,278 58,875 (9,240) Balance IRR million IRR ------56 68 189 1,798 1,341 1,868 5,735 9,764 1,510 16,208 10,080 IRR million Profit (loss) - Management Report 241 9,352 4,800 1,500 10,378 48,000 69,624 47,400 36,000 66,000 158,183 625,000 103,844 188,000 amount 3,348,200 5,517,365 IRR million Transaction Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Bank’s BOD Pricing method Act? to Article Is it liable 129 of Trade Review of Risks and Disclosure 20 Mar.2017 Staff loans Rent of buildings Guarantees issued Transaction subject Stock trading in TSE System back services Foreign exchange trading Moshatekat madani Loans Moshatekat madani Loans Moshatekat madani Loans Moshatekat madani Loans Moshatekat madani Loans Moshatekat madani Loans Moshatekat madani Loans Mosharekat madani Loans Mosharekat madani Loans Prepayment for Bank’s software Prepayment for Bank’s software Middle East Bank (PJSC) Prepayment for operating expenses Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For Subsidiary Subsidiary Subsidiary Relationship Survey of the Iranian Economy Deputy CEO Board member Common board member Common board member Common board member Common board member Common board member Common board member Related party Dadeh Pardazan Simaye Aftab Co. Midle East Currency Exchange Co. Sanaye Iran Investment Co. Fanavari Nava Asoudeh Co. (Reza Soltanzadeh) Rouzbeh Pirouz Tose Sanati investment Co. (Rouzbeh Pirooz) Farayand Sanaat Sakhteman Giv Co. Shadkam Golchin Co. Ghand Marvdasht Co. Javad Javadi Middle Ease Bank Brokerage Co. and Financial Statements Report of Independent Auditor Transactions with related parties during the period are as follows: Transactions Subsidiaries Other related parties Members of board directors and senior executive managers 52.3 - 180 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (PJSC) Notes to the Financial Statements For the year ended 20 March 2017
52.4 - The balance of related parties that didn’t have any transaction in the fiscal year are as below:
Balance at 20 Mar. Balance at 19 Related party Relationship Pay(receive) adjustments 2017 Mar.2016 Majdi Safarian Executive committee (1,708) (26) 20,521 21,666 Seyyed Mehdi Nejati Executive committee (1,698) (25) 20,505 21,651 Majid Nourmohammadi Executive committee (1,680) (25) 6,238 6,241 Dara Boushehri Executive committee (180) (3) 381 393 Deputy chairman of Parviz Aghili Kermani board of directors and (2,383) (36) 30,980 32,712 CEO Khosrow Nayebi Chairman of board of (1,841) (28) 21,486 22,868 Ahranjani directors Arzesh Project Common board - (71) 6,957 6,261 Investment Co. member REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 181
39 Total net of loans and commitments and loans of net Total 340 378 646 370 680 645 756
7,223 6,250 6,250 7,800 1,800 9,000 9,000
23,500 10,720 72,897 ratio
- - - -
adjusted with conversion conversion with adjusted 39
340 378 646 370 680 645 756 Net of commitments commitments of Net 1,800 9,000 9,000 10,720 34,374
Continued on next page next on Continued - - - - - Net of commitments of Net 197 1,701 1,890 3,227 1,853 9,000 3,402 3,222 3,780 53,600 45,000 45,000 171,871
- - - - - Received cash advance cash Received 22 189 210 359 206 378 358 420 1,000 5,000 5,000 13,400 26,541 Management Report
- - - - - commitments and stock price commitments Gross 219 Total balance of net loans and 1,890 2,100 3,586 2,059 3,780 3,580 4,200
67,000 10,000 50,000 50,000
198,414 Approval Authority Approval ------
director director director director
Board of Board of Board of Board of Date of approval of Date ------
1395/11/2 1395/11/2 1395/11/4 1395/11/4 1395/12/17 1395/12/17 1395/11/24 1395/11/24 Rate of interest /commission interest of Rate
------18 18 18 18 Duration of contract (day) contract of Duration ------91 92 90 91 Review of Risks and Disclosure
Loan/debt Type of debt or contract or debt of Type ------madani madani madani madani Mosharekat Mosharekat Mosharekat Mosharekat
------Total
7,223 6,250 6,250 7,800
23,500 38,523 Middle East Bank (PJSC) Non-current ------
------Notes to the Financial Statements Notes to the Financial Statements Current For the year ended 20 March 2017 ended 20 March the year For of cash received 7,223 6,250 6,250 7,800 Mosharekat madani) from Mozarebeh and 23,500 38,523 Balance(after deduction
------Paid amount-principal Paid
7,223 6,250 6,250 7,800
23,500 38,523 9-2
Survey of the Iranian Economy 8-2
7-2
6-2 5-2
tions 4-2
3-2
2-2 to the second chapter of regula - 1-2 Examples of related persons according Name Company Industry Co. and Financial Statements
Geno Construction Giv Manufacturing
Report of Independent Auditor ROW 1 2 Subtotal Subtotal 53 - Information on loans and commitments of related persons 53 - Information on loans and commitments of related Information on loans and commitments of related persons in acco rdance with CBI is as below:
182 MIDDLE EAST BANK ANNUAL REPORT Total net of loans and commitments and loans of net Total 445 445 800
2,000 1,252 9,000 1,000 2,000 1,600 3,520
1,252 10,000 29,920
ratio
adjusted with conversion conversion with adjusted Net of commitments commitments of Net 1,252 1,252 - 445 445 ------
Continued on next page next on Continued Net of commitments of Net 6,261 6,261
- 2,223 2,223 ------Received cash advance cash Received 696 696
- 247 247 ------commitments and stock price commitments Gross Total balance of net loans and 6,957 6,957
- 2,470 2,470 ------Approval Authority Approval - -
director director director director director director director director
Board of Board of Board of Board of Board of Board of Board of Board of Date of approval of Date - -
1395/10/5 1395/10/5 1395/10/7 1395/10/7 1395/11/5 1395/11/5 1395/12/8 1395/12/8 1395/12/2 1395/12/2 1395/12/3 1395/12/3 1395/10/19 1395/10/19 1395/11/24 1395/11/24 Rate of interest /commission interest of Rate
- -
22 18 18 18 18 18 18 18 Duration of contract (day) contract of Duration - - 97 92 91 90 90 91 104 103
Loan/debt Type of debt or contract or debt of Type - - madani madani madani madani madani madani madani madani Mosharekat Mosharekat Mosharekat Mosharekat Mosharekat Mosharekat Mosharekat Mosharekat
- - - Total 800
2,000 9,000 1,000 2,000 1,600 3,520
10,000 29,920 Middle East Bank (PJSC) Non-current ------
- - - Notes to the Financial Statements Notes to the Financial Statements Current For the year ended 20 March 2017 ended 20 March the year For of cash received 800 2,000 9,000 1,000 2,000 1,600 3,520 Mosharekat madani) from Mozarebeh and 10,000 29,920 Balance(after deduction
- - - Paid amount-principal Paid 800
2,000 9,000 1,000 2,000 1,600 3,520
10,000 29,920
9-2
8-2
7-2
6-2 5-2
tions 4-2
3-2
2-2 to the second chapter of regula - 1-2 Examples of related persons according Name Investment Development Iran Industrial Arzesh project Roozbeh Pirooz
Investment Company ROW 3 4 5 Subtotal Subtotal Subtotal
REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 183 Total net of loans and commitments and loans of net Total 241 241 788
9,000 7,000 9,000 1,080
22,935 67,649 27,000 22,935 67,649 20,000 56,500 47,000 65,368
ratio
adjusted with conversion conversion with adjusted Net of commitments commitments of Net ------788 1,080 1,868
Continued on next page next on Continued Net of commitments of Net
------3,940 5,400 9,340 Received cash advance cash Received
Management Report ------438 600 1,038 commitments and stock price commitments Gross Total balance of net loans and
------4,378 6,000 10,378 Approval Authority Approval - - - -
director director director director director director
Board of Board of Board of Board of Board of Board of Date of approval of Date - - - - 2016)
1395/12/5 1395/12/5
1395/10/25 1395/10/25 1395/12/14 1395/12/25 1395/12/28 1395/12/28 Dey 94 (Jan Rate of interest /commission interest of Rate
- -
- - 7 18 18 18 18 18 Duration of contract (day) contract of Duration - - - - 90 92 14 93 30 551 Review of Risks and Disclosure
Loan/debt Type of debt or contract or debt of Type - - Joaleh madani madani madani madani madani Debtors Debtors Mosharekat Mosharekat Mosharekat Mosharekat Mosharekat
- - Total 241 241
9,000 7,000 9,000
67,649 27,000 22,935 22,935 67,649 20,000 56,500 47,000 63,500 Middle East Bank (PJSC) Non-current ------
- - Notes to the Financial Statements Notes to the Financial Statements Current For the year ended 20 March 2017 ended 20 March the year For 241 of cash received 241 9,000 7,000 9,000 Mosharekat madani) from Mozarebeh and 67,649 27,000 22,935 22,935 67,649 20,000 56,500 47,000 63,500 Balance(after deduction
- - - - Paid amount-principal Paid
9,000 7,000 9,000
27,000 22,850 22,850 20,000 56,500 47,000 63,500 9-2
Survey of the Iranian Economy 8-2
7-2
6-2 5-2
tions 4-2
3-2
2-2 to the second chapter of regula - 1-2 Examples of related persons according Name Asoodeh Brokerage Fanavari Nava investment Co. Khosro Nayebi and Financial Statements Dadeh Pardazan Iranian Industries Simaye Aftab Co. Middle East Bank
Report of Independent Auditor Middle East exchange ROW 6 8 7 9 10 11 Subtotal Subtotal Subtotal Subtotal
184 MIDDLE EAST BANK ANNUAL REPORT Total net of loans and commitments and loans of net Total 313 313 5,099 5,099
33,051 21,369 21,827 21,816 33,051 21,369 21,827 21,816
426,432
ratio
adjusted with conversion conversion with adjusted Net of commitments commitments of Net
------37,939 Net of commitments of Net
------189,696 Received cash advance cash Received
------28,522 commitments and stock price commitments Gross Total balance of net loans and
------218,219 Approval Authority Approval
director director director director director director
Board of Board of Board of Board of Board of Board of Date of approval of Date 2016) 2015) 2016) 2016) 2016) 2016) Esfand Esfand Esfand 92
Dey 94 (Jan Dey 93(Jan
Dey 94 (Jan Dey 94 (Jan 92(Mar.2014) 92(Mar.2014) (Mar.2014) & & Dey 94(Jan & Dey 94(Jan Rate of interest /commission interest of Rate
7 7 15 15 15
15 7 & 7 & 7 & Duration of contract (day) contract of Duration 551 551 1,825 1,825 & 551 1,825 & 551 1,825 & 551 4,383 & 1,825 4,383 & 1,825
Loan/debt Type of debt or contract or debt of Type sales Joaleh Joaleh Joaleh Joaleh Joaleh sales and sales and sales and
Installment Installment Installment Installment Total 313 313 5,099 5,099
33,051 21,369 21,827 21,816 33,051 21,369 21,827 21,816
388,493
Middle East Bank (PJSC) Non-current ------Notes to the Financial Statements Notes to the Financial Statements Current For the year ended 20 March 2017 ended 20 March the year For of cash received 313 313 5,099 5,099
Mosharekat madani) from Mozarebeh and 33,051 21,369 21,827 21,816 33,051 21,369 21,827 21,816
Balance(after deduction 388,493 Paid amount-principal Paid 500 500 6,750 6,750
32,680 21,250 21,300 21,300 32,680 21,250 21,300 21,300
320,823
9-2
8-2
7-2
6-2 5-2
tions 4-2
3-2
2-2 to the second chapter of regula - 1-2 Total Examples of related persons according Majid Name Kermani Javad Javadi Parviz Aghili Majid Safarian Dara Boushehri Nourmohammadi
Seyyed Mehdi Nejati ROW 12 18 14 15 16 17 Subtotal Subtotal Subtotal Subtotal Subtotal Subtotal REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 185 Date 1395/06/23 1395/06/23 1395/06/23 1395/06/23 1395/06/23 1395/06/23 1395/06/23 1395/02/27 1394/09/29 1394/11/12 1395/10/14 1395/10/14 1395/10/14 1395/11/11 No. Board’s resolution 1395/1/39 1395/1/149 1395/1/149 1395/1/150 1395/1/150 1395/1/150 1395/1/150 1395/1/150 1394/1/264 1394/1/306 1395/1/270 1395/1/270 1395/1/270 1395/1/302 Continued on next page next on Continued 1,487 3,240 86,185 40,546 41,557 645,390 540,000 618,640 278,696 529,961 974,600 611,663 153,753 352,000 Value 3,294,101 2,092,016 Management Report Collateral
Type " Check and promissory note Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, certified check, check Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Review of Risks and Disclosure 551 279 5= 39,175 15,017 15,391 92,110 69,888 189,820 281,200 200,000 199,982 443,000 278,029 160,000 950,916 Total
1+2+3+4 1,033,525 Disbursement date Disbursement 1395/09/4 1395/09/4 1394/12/5 1394/12/5 1395/09/4 1395/09/4 1395/09/4 1395/06/29 1395/06/29 1394/11/17 1394/11/17 1395/06/29 1395/06/17 1395/07/25 1395/07/25 1394/11/14 1395/10/19 1395/10/19 1395/11/11 1395/12/24 1395/11/11
- - Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) - - Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 279 279 Net (3) - 1,742 1,742 Commitments Gross Major loans and commitments Survey of the Iranian Economy - 200,000 200,000 NPL (2) Loans 551 39,175 15,017 15,391 92,110 69,888 189,820 281,200 199,982 833,246 950,916 443,000 278,029 160,000 PL (1) Co. Pardis Iranian Golestan Kian Badas
Gileran Motor
Sanaye Sandan Asan Motor Co. Rastikar Alborz Sanaye Ghazayi Customer name Beneficiary and Financial Statements Group Total of Total of Report of Independent Auditor
Gerami group Shariatmadari beneficiary unit beneficiary unit Row 2 3 1 4 5 6 7 8 9 10 11 12 13 14 54 -Information of major loans and commitments 54 -Information of major Information of loans and major commitments in accordance with c ouncil money credit are as below: 186 MIDDLE EAST BANK ANNUAL REPORT Date 1395/03/31 1395/03/31 1395/03/31 1394/12/17 1394/12/17 1394/12/17 1394/12/17 1394/12/17 1395/01/18 1395/01/18 1395/01/18 1395/01/18 1394/12/17 1394/12/17 1394/12/17 1394/12/17 1394/12/17 1394/12/17 No. Board’s resolution Continued on next page next on Continued 1395/1/73 1395/1/73 1394/1/361 1394/1/361 1394/1/361 1394/1/361 1394/1/361 1395/02/05 1395/02/05 1395/02/05 1395/02/05 1394/1/362 1394/1/362 1394/1/362 1394/1/362 1394/1/363 1394/1/363 1395/1/7473 680 5,610 6,600 88,000 44,000 11,000 77,000 33,000 55,000 22,000 22,000 88,000 17,420 16,940 37,950 49,500 154,000 110,000 838,700 Value Collateral Type Promissory note Check and promissory note Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check 113 5,000 1,508 7,700 2,550 3,000 5= 70,000 40,000 50,000 20,000 35,000 15,000 25,000 10,000 10,000 40,000 17,250 22,500 417,870 792,491
Total
1+2+3+4 Disbursement date Disbursement 1395/11/4 1395/11/4 1395/11/3 1395/11/3 1395/11/3 1395/11/3 1395/10/4 1395/10/4 1395/11/3 1395/11/3 1395/11/4 1395/11/4 1393/03/26 1395/10/13 1395/10/13 1395/12/15 1395/12/15 1395/12/18 1395/12/18 1395/09/29 1395/09/29 1395/10/26 1395/10/26 1395/11/16 1395/11/16 1395/03/09 1395/12/16 1395/12/16 1395/12/17 1395/12/17 1395/12/18 1395/12/18 1395/12/23 1395/12/23 1395/01/18
- Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 113 1,508 Net (3) 417,870 419,491 630 8,375 Commitments 835,740 844,745 Gross Major loans and commitments - NPL (2) Loans 5,000 7,700 2,550 3,000 70,000 40,000 50,000 20,000 35,000 15,000 25,000 10,000 10,000 40,000 17,250 22,500 373,000 PL (1) Boutan Boutan Servigaz Elika Co. Boutanran
Sanati Boutan Kala khadamat
Tose-e Ghataate Customer name Beneficiary Total of
Boutan Group beneficiary unit Row 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 187 Date 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/03/11 1395/07/19 1395/07/19 1395/07/19 1395/07/19 1395/07/19 1395/07/19 No. Board’s resolution Continued on next page next on Continued 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/62 1395/2/184 1395/2/184 1395/2/184 1395/2/184 1395/2/184 1395/2/184 388 382 1,058 4,143 2,250 1,230 1,399 10,791 16,640 40,167 32,151 91,176 72,275 320,000 320,000 320,000 420,500 116,000 Value 1,770,550 Management Report Collateral Type and real state and real state and real state Certified check Certified check Certified check Certified check Certified check Certified check Certified check Certified check Certified check Check and contract Check and contract Check and contract Check and contract Check and contract Check and contract Stand-alone legally binding contract, certified check, check Stand-alone legally binding contract, certified check, check Stand-alone legally binding contract, certified check, check Review of Risks and Disclosure 115 313 667 364 415 113 1,228 3,997 4,930 5= 13,851 11,087 31,440 24,922 40,000 100,000 100,000 100,000 145,000 578,441
Total
1+2+3+4 Disbursement date Disbursement 1395/11/9 1395/11/18 1395/11/18 1395/12/05 1395/12/11 1395/12/11 1395/12/11 1395/12/11 1395/12/25 1395/09/15 1395/09/22 1395/10/18 1395/07/06 1395/07/06 1395/07/06 1395/11/29 1395/07/20 1395/07/20
- Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 115 313 667 364 415 113 1,228 3,997 4,930 12,142 Net (3) 288 784 911 283 3,069 1,667 1,037 7,993 12,326 28,356 Commitments Gross Major loans and commitments Survey of the Iranian Economy - NPL (2) Loans 40,000 13,851 11,087 31,440 24,922 100,000 100,000 100,000 145,000 566,300 PL (1) Dr. Abidi
Customer name Cobel Darou Co. Beneficiary and Financial Statements group Total of Report of Independent Auditor
Cobel Darou
beneficiary unit Row 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 188 MIDDLE EAST BANK ANNUAL REPORT Date 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 1395/09/21 No. Board’s resolution Continued on next page next on Continued 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 1395/1/250 6,640 6,640 6,640 6,640 38,500 38,500 44,000 44,000 11,000 33,000 33,000 33,000 33,000 44,000 44,000 33,000 44,000 33,000 44,000 44,000 33,000 33,000 Value Collateral Type certified check certified check certified check certified check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check 5,000 2,213 2,213 2,213 2,213 5= 17,500 17,500 20,000 20,000 15,000 15,000 15,000 15,000 20,000 20,000 15,000 20,000 15,000 20,000 20,000 15,000 15,000
Total
1+2+3+4 Disbursement date Disbursement
1395/12/8 1395/12/8 1395/12/8 1395/12/8 1395/12/9 1395/12/9 1395/12/9 1395/12/9 1395/12/9 1395/12/9 1395/6/15 1395/6/15 1395/6/15 1395/6/15
1395/10/25 1395/10/25 1395/10/28 1395/10/28 1395/11/10 1395/12/10 1395/12/16 1395/12/16 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 2,213 2,213 2,213 2,213 Net (3) 4,918 4,918 4,918 4,918 Commitments Gross Major loans and commitments NPL (2) Loans 5,000 17,500 17,500 20,000 20,000 15,000 15,000 15,000 15,000 20,000 20,000 15,000 20,000 15,000 20,000 20,000 15,000 15,000 PL (1) Adine Vasl
Customer name Beneficiary Group
Sharifi nevisi Row 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 189 Date 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 No. Board’s resolution Continued on next page next on Continued 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 1395/1/249 215 923 3,595 3,595 5,675 3,268 6,453 2,592 4,220 3,612 1,823 4,261 154,000 143,000 143,000 154,000 154,000 148,500 158,752 148,500 122,363 144,221 143,000 146,664 Value Management Report Collateral Type Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Review of Risks and Disclosure 19 75 311 311 491 283 527 212 345 295 149 348 5,619 5= 20,000 15,000 15,000 20,000 20,000 17,500 22,160 17,500 15,555 15,000 16,665
Total
1+2+3+4 Disbursement date Disbursement
1395/11/4 1395/6/15 1395/7/14
1395/12/4 1395/12/4 1395/12/7 1395/12/7 1395/12/7 1395/12/7 1395/12/9 1395/12/9 1395/10/26 1395/10/29 1395/11/10 1395/11/10 1395/11/10 1395/12/16 1395/12/16 1395/12/23 1395/09/22 1395/09/22 1395/10/22 1395/10/22 1395/09/22 1395/09/22 1395/09/24 1395/10/04 1395/10/04 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 19 75 311 311 491 283 527 212 345 295 149 348 Net (3) 104 471 930 1,728 1,728 2,728 1,571 3,292 1,323 2,153 1,843 2,174 Commitments Gross Major loans and commitments Survey of the Iranian Economy NPL (2) Loans 5,619 20,000 15,000 15,000 20,000 20,000 17,500 22,160 17,500 15,555 15,000 16,665 PL (1) Adine Arman Sabz
Customer name Beneficiary and Financial Statements Group Report of Independent Auditor
Sharifi nevisi Row 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 74 75 76 77 78 190 MIDDLE EAST BANK ANNUAL REPORT Date 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/09/22 1395/10/27 1395/09/22 1395/10/27 1395/10/27 1395/10/27 1395/10/27 1395/10/27 1395/10/27 1395/10/27 1395/10/27 1395/10/27 No. Board’s resolution Continued on next page next on Continued 1395/1/251 1395/1/251 1395/1/251 1395/1/251 1395/1/251 1395/2/306 1395/1/251 1395/2/306 1395/2/306 1395/2/306 1395/2/306 1395/2/306 1395/2/306 1395/2/306 1395/2/306 1395/2/306 6,043 9,268 6,977 5,236 18,669 16,707 16,707 16,707 18,669 55,000 25,788 55,000 55,000 55,000 14,050 23,707 Value 2,600,038 Collateral - Type Certified check Certified check Certified check Certified check Certified check Certified check Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Check and promissory note Stand-alone legally binding contract and certified check Stand-alone legally binding contract and certified check Stand-alone legally binding contract and certified check Stand-alone legally binding contract and certified check 806 930 698 628 1,616 1,446 1,446 1,446 1,616 2,223 1,236 1,873 3,161 1,705 5= 25,000 25,000 25,000 25,000 522,009
Total
1+2+3+4 Disbursement date Disbursement 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/16 1395/12/26 1395/12/26 1395/12/26 1395/12/26 1395/12/10 1395/12/10 1395/12/22 1395/12/22 1395/11/11 1395/11/11 1395/11/11 1395/11/13 1395/11/23 1395/11/11 1395/12/23 1395/12/18
- Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 806 930 698 628 1,616 1,446 1,446 1,446 1,616 2,223 1,236 1,873 3,161 1,705 22,009 Net (3) 8,976 8,032 8,032 8,032 8,976 4,476 6,865 5,168 3,878 3,487 9,474 12,449 94,215 10,408 17,561 Commitments Gross Major loans and commitments - NPL (2) - Loans 25,000 25,000 25,000 25,000 500,000 PL (1)
Darousazi Exsir
Customer name Arghavan Adineh Arghavan Beneficiary Group Total of
Shasta group Sharifi nevisi
beneficiary unit Row 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 191 Date 1395/02/27 1395/02/27 1395/02/27 1395/02/27 1395/08/03 1395/08/03 1395/08/03 1395/08/03 1395/08/03 1395/08/03 1395/06/15 1395/06/15 1395/06/15 1395/06/15 1395/08/24 1395/08/24 No. Board’s resolution Continued on next page next on Continued 1395/2/41 1395/2/41 1395/2/41 1395/2/41 1395/2/203 1395/2/203 1395/2/203 1395/2/203 1395/2/203 1395/2/203 1395/2/161 1395/2/161 1395/2/161 1395/2/161 1395/2/231 1395/2/231 207 463 986 2,491 1,553 1,508 2,445 74,000 74,000 220,000 123,448 183,475 270,000 270,000 270,000 540,000 Value 2,319,858 Management Report Collateral Type Certified check Certified check Certified check Certified check Certified check Certified check Certified check Stand-alone legally binding contract and certified check Stand-alone legally binding contract and certified check Stand-alone legally binding contract and certified check Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Review of Risks and Disclosure 61 738 460 119 254 389 631 4,263 5= 56,113 83,398 20,000 20,000 899,463 101,998 100,000 100,000 100,000 200,000
Total
1+2+3+4 Disbursement date Disbursement 95/1/25 1395/6/8 1395/7/5
1395/10/9 1395/5/27 1395/11/7 1395/5/23 1395/11/6
1395/12/07 1395/12/24 1395/08/10 1395/11/12 1395/12/22 1395/12/24 1395/09/21 1395/10/15 1395/12/18 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) 1,998 1,998 Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 61 738 460 119 254 389 631 4,263 17,954 Net (3) 153 298 636 973 1,845 1,151 1,577 9,474 77,426 Commitments Gross Major loans and commitments Survey of the Iranian Economy - NPL (2) Loans 56,113 83,398 20,000 20,000 879,511 100,000 100,000 100,000 100,000 200,000 PL (1) - khsh Exsir reihan
Darousazi Abu - Pakhsh Darouyi Tozi-e Daroupa Daroupakhsh Co Customer name Beneficiary and Financial Statements Total of Report of Independent Auditor
Shasta group
beneficiary unit Row 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 192 MIDDLE EAST BANK ANNUAL REPORT Date 1395/09/09 1395/09/09 1395/09/09 1395/09/09 1395/09/09 1395/09/09 1395/08/09 1395/05/18 1395/05/18 1395/05/18 1393/07/07 1395/06/28 1395/06/28 1395/06/28 1395/06/28 1395/06/28 1395/06/28 No. Board’s resolution Continued on next page next on Continued 1395/1/235 1395/1/235 1395/1/236 1395/1/236 1395/1/234 1395/1/234 1395/2/208 1395/2/138 1395/2/138 1395/2/138 1393/2/182 1395/2/169 1395/2/169 1395/2/169 1395/2/169 1395/2/169 1395/2/169 38,862 83,200 164,450 598,000 234,600 828,000 160,020 189,630 109,199 110,801 169,015 912,681 338,030 169,015 169,015 Value 2,023,932 1,219,311 1,680,000 3,308,941 Collateral state state Type shares and real state and real state certified check movable property movable property movable property movable property movable property Check and promissory note Stand-alone legally binding contract and certified check Stand-alone legally binding contract and certified check Stand-alone legally binding contract,certified check and Stand-alone legally binding contract,certified check and Stand-alone legally binding contract,certified check and Stand-alone legally binding contract,certified check and Stand-alone legally binding contract,certified check and Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, certified check, check Stand-alone legally binding contract, certified check, check Stand-alone legally binding contract, certified check, check Stand-alone legally binding contract, certified check and real Stand-alone legally binding contract, certified check and real Stand-alone legally binding contract, certified check and listed - 7,200 55,000 85,000 17,000 70,000 45,150 49,636 50,364 55,000 55,000 55,000 5= 200,000 300,000 727,000 670,150 525,000 297,000 110,000
Total
1+2+3+4 Disbursement date Disbursement 1395/7/10 1395/11/5 1395/09/18 1395/09/18 1395/09/18 1395/09/18 1395/09/18 1395/09/18 1395/08/18 1395/09/15 1395/07/12 1395/11/13 1395/11/17 1395/12/17 1395/12/22 1395/12/22 1394/02/14
- Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) - - - Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 7,200 Net (3) - 40,000 Commitments 786,652 786,652 Gross Major loans and commitments - NPL (2) Loans 55,000 85,000 17,000 70,000 45,150 49,636 50,364 55,000 55,000 55,000 200,000 300,000 727,000 670,150 525,000 297,000 110,000 PL (1) Shahir Golzar Farmad Ancholigy Mihan dairy Darousazi Ati Alborz Pakhsh
Tose-e Tejarat San Electronic Bazargani Iran
Customer name Darousazi Sobhan Beneficiary group Total of Total of Setad Ejrayi
Farman Emam Saatchi Group
beneficiary unit beneficiary unit Mihan ice-cream Row 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 193 Date 1395/09/29 1395/09/29 1395/09/29 1395/11/11 1395/11/11 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 No. Board’s resolution Continued on next page next on Continued 1395/2/271 1395/2/271 1395/2/271 1395/2/322 1395/2/322 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 7,718 10,893 38,400 10,955 10,955 10,955 11,317 11,066 11,066 11,090 11,090 11,041 11,041 11,041 11,041 11,042 11,017 10,993 10,993 10,920 11,066 110,000 640,000 Value Management Report Collateral Type Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Stand-alone legally binding contract and check Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, check and real state Review of Risks and Disclosure 670 945 950 950 950 982 960 960 962 962 958 958 958 958 958 956 954 954 947 960 50,000 15,000 5= 250,000
Total
1+2+3+4 Disbursement date Disbursement
1395/09/30 1395/01/21 1395/01/22 1395/12/21 1395/12/24 1395/01/25 1395/01/28 1395/01/28 1395/01/29 1395/01/29 1395/01/31 1395/02/08 1395/02/08 1395/02/12 1395/02/13 1395/02/20 1395/02/21 1395/02/25 1395/03/01 1395/03/08 1395/03/08 1395/03/11 1395/03/27 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 670 945 950 950 950 982 960 960 962 962 958 958 958 958 958 956 954 954 947 960 Net (3) 3,524 4,974 5,002 5,002 5,002 5,168 5,053 5,053 5,064 5,064 5,042 5,042 5,042 5,042 5,042 5,031 5,020 5,020 4,986 5,053 Commitments Gross Major loans and commitments Survey of the Iranian Economy NPL (2) Loans 50,000 15,000 250,000 PL (1) Arian Mihan Pangouan Tabiat Sabz Polimer Pak
Ghaza Faravar
Customer name Beneficiary and Financial Statements group Report of Independent Auditor
Mihan ice-cream Row 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 194 MIDDLE EAST BANK ANNUAL REPORT Date 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 No. Board’s resolution Continued on next page next on Continued 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 2,617 2,617 2,612 2,621 3,145 5,241 5,241 11,066 11,065 11,066 11,066 10,993 14,202 10,993 14,202 10,483 14,220 14,220 14,220 14,220 11,007 14,220 Value Collateral Type Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit 960 960 960 960 227 227 227 954 954 227 273 455 909 955 455 1,232 1,232 1,234 1,234 1,234 1,234 1,234 5=
Total
1+2+3+4 Disbursement date Disbursement
1395/03/27 1395/03/27 1395/03/27 1395/03/27 1395/04/01 1395/04/09 1395/04/09 1395/04/09 1395/04/09 1395/04/09 1395/04/09 1395/04/14 1395/04/14 1395/04/14 1395/04/14 1395/04/19 1395/04/19 1395/04/19 1395/04/19 1395/04/19 1395/04/19 1395/04/20 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 960 960 960 960 227 227 227 954 954 227 273 455 909 955 455 1,232 1,232 1,234 1,234 1,234 1,234 1,234 Net (3) 5,053 5,053 5,053 5,053 1,195 1,195 1,193 5,020 6,485 5,020 6,485 1,197 1,436 2,393 4,787 6,493 6,493 6,493 6,493 5,026 2,393 6,493 Commitments Gross Major loans and commitments NPL (2) Loans PL (1) Mihan Tabiat Sabz
Customer name Beneficiary group
Mihan ice-cream Row 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 195 Date 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 1394/11/20 No. Board’s resolution Continued on next page next on Continued 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 1394/2/331 690 6,833 5,256 9,505 1,056 2,126 1,063 1,494 1,484 1,466 14,261 14,261 14,261 14,261 14,261 14,261 14,261 14,261 14,261 14,261 14,261 14,261 14,261 11,038 10,561 Value 3,295,957 Management Report Collateral Type Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Check and promissory note deposit Review of Risks and Disclosure 92 92 60 593 456 958 916 825 184 130 129 127 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 5= 952,033
Total
1+2+3+4 Disbursement date Disbursement 1395/04/20 1395/04/20 1395/04/20 1395/04/20 1395/04/20 1395/04/21 1395/04/21 1395/04/21 1395/04/21 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/04/22 1395/07/11 1395/07/11 1395/08/05 1395/08/11 1395/09/06 1395/09/20
- Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 92 92 60 593 456 958 916 825 184 130 129 127 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 1,237 65,033 Net (3) 482 971 485 315 682 678 669 6,512 6,512 6,512 6,512 3,120 2,400 6,512 6,512 6,512 6,512 6,512 6,512 6,512 6,512 6,512 5,040 4,823 4,340 Commitments 344,384 Gross Major loans and commitments Survey of the Iranian Economy - NPL (2) Loans 887,000 PL (1) Mihan Tabiat Sabz
Customer name Beneficiary and Financial Statements Total of Report of Independent Auditor
beneficiary unit Mihan ice-cream Row 196 195 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 196 MIDDLE EAST BANK ANNUAL REPORT Date 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1395/09/29 1394/12/09 1395/10/06 1395/10/06 1395/09/29 1395/10/06 1395/09/29 1395/09/29 1395/09/29 No. Board’s resolution Continued on next page next on Continued 95/2/273 95/2/273 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1395/2/274 1394/2/353 1395/1/262 1395/1/262 1395/2/272 1395/1/262 1395/2/272 8,705 60,875 46,876 28,310 46,627 37,981 47,059 680,000 222,193 680,000 340,000 210,000 154,000 691,048 396,000 Value 1,050,000 1,050,000 2,310,000 1,364,000 2,198,627 2,605,048 Collateral Type check Check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract check and share Stand-alone legally binding contract check and share Stand-alone legally binding contract check and share Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and Stand-alone legally binding contract, certified check and 8,327 8,471 1,393 17,904 13,787 65,351 13,714 11,171 50,000 70,000 5= 200,000 200,000 100,000 250,000 250,000 550,000 314,113 180,000 620,000 640,117
Total
1,184,113 1+2+3+4 Disbursement date Disbursement 1395/12/4 1395/12/4 1395/12/9 1395/10/15 1395/10/22 1395/10/28 1395/12/21 1395/12/22 1395/12/24 1395/05/31 1394/12/06 1395/12/26 1395/12/28 1395/10/20 1395/12/28 1395/10/20 1395/10/25 1395/10/27
- - Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) - - Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 8,471 1,393 9,864 Net (3) - - 8,705 47,059 55,765 Commitments Gross Major loans and commitments - - NPL (2) Loans 8,327 17,904 13,787 65,351 13,714 11,171 50,000 70,000 200,000 200,000 100,000 250,000 250,000 550,000 314,113 180,000 620,000 630,254 PL (1) 1,184,113 - Iranian opment Behshahr Kaleh Dairy International
Noandish Atlas Building devel Saramad Sanaye
Customer name Bani Chav Iranian Beneficiary Group Total of Total of Total of Building Solico Group International Development
beneficiary unit beneficiary unit beneficiary unit
Sanaye Behshahr Row 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 197 Date 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 1393/09/04 No. Board’s resolution Continued on next page next on Continued 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 1393/2/224 48,410 44,325 12,172 92,996 27,500 27,500 25,300 25,300 14,300 16,175 24,613 43,551 46,252 39,600 266,859 220,000 220,000 Value 1,194,853 Management Report Collateral Type Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Review of Risks and Disclosure 5,533 6,500 7,352 22,005 20,148 42,271 12,500 12,500 11,500 11,500 11,188 19,796 21,024 18,000 5= 121,321 100,000 100,000 543,136
Total
1+2+3+4 Disbursement date Disbursement
1394/04/7 1394/06/2 1394/06/5
1394/05/13 1394/05/13 1394/05/13 1394/05/14 1394/05/19 1394/05/19 1394/05/21 1394/05/21 1394/05/25 1394/05/25 1394/06/14 1394/06/30 1394/06/30 1394/07/18 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) - Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For Net (3) - Commitments Gross Major loans and commitments Survey of the Iranian Economy 5,533 6,500 7,352 22,005 20,148 42,271 12,500 12,500 11,500 11,500 11,188 19,796 21,024 18,000 121,299 100,000 100,000 543,115 NPL (2) 21 21 Loans PL (1) Jalal-Ara
Customer name Beneficiary and Financial Statements Total of Report of Independent Auditor
beneficiary unit beneficiary unit Jalal-Ara Group Row 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 198 MIDDLE EAST BANK ANNUAL REPORT Date 1395/07/22 1395/07/22 1395/07/22 1395/07/22 1395/08/25 1395/08/17 1395/09/24 1395/04/01 1395/04/01 1395/04/01 1395/09/24 1395/09/24 1395/08/26 1394/12/12 1394/12/12 1394/12/12 1395/07/13 1395/01/17 No. Board’s resolution 95-2-1 Continued on next page next on Continued 94/2/366 94/2/366 94/2/366 1395/2/79 1395/2/79 1395/2/79 1395/2/187 1395/2/186 1395/2/189 1395/2/188 1395/2/233 1395/2/223 1395/2/265 1395/2/264 1395/2/264 1395/2/235 1395/2/180 93 1,626 4,665 88,000 44,000 12,068 40,000 34,916 51,535 14,100 110,000 330,000 110,000 110,000 220,000 154,000 110,000 220,000 Value Collateral Type Certified check Certified check Certified check Certified Check Certified Check Certified Check Certified Check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check - 8 4 19 16 750 2,172 7,200 50,000 40,000 50,000 50,000 20,000 70,000 50,000 15,871 5= 150,000 100,000 100,000
Total
1+2+3+4 Disbursement date Disbursement
1395/12/7 1395/10/1 1395/08/2 1395/08/9 1395/08/4 1395/09/6 1395/6/15 1395/12/5 1395/1/28 1395/4/14 1395/4/20 1395/1/29
1395/08/25 1395/09/15 1395/07/10 1395/03/08 1395/07/17 1395/04/15 1395/11/30 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) 8 4 Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 19 16 750 2,172 7,200 Net (3) 93 41 20 82 4,169 12,068 40,000 Commitments Gross Major loans and commitments NPL (2) - Loans 50,000 40,000 50,000 50,000 20,000 70,000 50,000 15,871 150,000 100,000 100,000 PL (1) - Sina Gharb Gharn Pakhsh Pakhsh Padideh industrial trial Group Arian Lian ics industry nasan indstry Kourosh food Gostaresh Fa - Salamat Arian Arian Salamat
Padideh Shimi Padideh Shimi navaran Shargh Sepehr Pelastik Seloolozi Mari Anitasan indus -
Customer name Arian Kimia Tak Golbarg Baharan Vianasan cosmet - Vianasan Beneficiary
Golrang Group Row 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 199 Date 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 1395/06/13 No. Board’s resolution Continued on next page next on Continued 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 1395/2/158 9 1 87 39 29 13 43 54 22 16 61 34 33 230 124 3,458 5,187 1,374 9,037 Value 1,681,102 Management Report Collateral Type Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Certified Check Review of Risks and Disclosure 1 6 0 4 2 6 8 3 2 9 5 5 13 34 18 435 653 183 1,138 5= 708,569
Total
1+2+3+4 Disbursement date Disbursement 1395/7/8
1395/4/15 1395/4/30 1395/6/13 1395/5/30 1395/6/01 1395/7/17 1395/7/17 1395/7/17
1395/10/01 1395/09/14 1395/09/14 1395/10/12 1395/09/13 1395/09/13 1395/09/24 1395/10/07 1395/10/22 1395/08/26 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) 1 6 0 4 2 6 8 3 2 9 5 5 Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 13 34 18 435 653 183 1,138 12,698 Net (3) 6 1 64 29 92 21 10 32 40 16 12 45 25 25 170 2,562 3,842 1,018 6,694 71,178 Commitments Gross Major loans and commitments Survey of the Iranian Economy - NPL (2) Loans 695,871 PL (1) Irandar
Customer name Beneficiary and Financial Statements Total of Report of Independent Auditor
beneficiary unit Golrang Group Row 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 200 MIDDLE EAST BANK ANNUAL REPORT Date 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/11 1395/11/12 1395/11/12 1395/11/12 1395/11/12 No. Board’s resolution Continued on next page next on Continued 1395/1/306 1395/1/306 1395/1/306 1395/1/306 1395/1/306 1395/1/306 1395/1/306 1395/1/306 1395/1/306 1395/1/305 1395/1/305 1395/1/305 1395/1/305 204 3,384 71,212 34,617 74,179 88,000 144,980 330,000 189,200 188,760 325,600 198,000 330,000 Value 1,978,137 Collateral Type Check and promissory note deposit Check and promissory note deposit Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check 12 192 32,369 65,900 15,735 86,000 85,800 33,718 40,000 90,000 5= 150,000 148,000 150,000 897,725
Total
1+2+3+4 Disbursement date Disbursement
1395/11/4 1395/11/5 1395/12/3
1395/11/26 1395/12/14 1395/12/15 1395/12/15 1395/12/22 1395/08/23 1395/08/23 1395/09/28 1395/10/23 1395/11/13 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 12 192 203 Net (3) 64 1,064 1,129 Commitments Gross Major loans and commitments NPL (2) Loans 32,369 65,900 15,735 86,000 85,800 33,718 40,000 90,000 150,000 148,000 150,000 897,522 PL (1) Novin Co.
Rahrou Foolad
Customer name Kanoon Felez co. Beneficiary Total of
beneficiary unit
Motahedan Group Row 293 294 295 296 297 298 299 300 301 302 303 304 305 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 201 Date 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/03/31 1395/05/19 No. Board’s resolution Continued on next page next on Continued 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/72 1395/3/123 173 519 185 7,675 1,712 10,817 49,703 160,000 160,000 160,000 160,000 160,000 320,000 544,000 554,808 Value 2,100,000 2,100,000 2,289,596 Management Report Collateral
Type Certified check and Certified check and Certified check and Certified Check and promissory note Certified Check and promissory note Certified Check and promissory note Certified Check and promissory note Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Review of Risks and Disclosure 37 39 110 328 4,917 3,489 9,037 50,000 50,000 50,000 50,000 50,000 5= 100,000 170,000 173,378 716,290 716,290 711,335 Total 1+2+3+4
- Disbursement date Disbursement 1395/6/3 1395/6/3
1395/2/30
1395/12/26 1395/12/26 1395/12/26 1395/12/26 1395/12/26 1395/12/26 1395/12/26 1395/12/26 1395/11/13 1395/12/13 1395/09/24 1395/11/23 1395/12/11 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) 9,552 16,290 16,290 - Notes to the Financial Statements Notes to the Financial Statements 37 39 For the year ended 20 March 2017 ended 20 March the year For 110 328 9,037 Net (3) 74 79 221 728 22,592 23,695 Commitments Gross Major loans and commitments Survey of the Iranian Economy - - NPL (2) Loans 4,917 3,489 50,000 50,000 50,000 50,000 50,000 100,000 170,000 173,378 700,000 700,000 701,783 PL (1) co. Industries Persian Gulf
Petrochemical
Shafayabgostar Customer name Beneficiary and Financial Statements Group Total of Total of Report of Independent Auditor
Persian Gulf
Petrochemical Industries Co. beneficiary unit beneficiary unit Shafayabgostar Row
306 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 202 MIDDLE EAST BANK ANNUAL REPORT Date 1395/11/17 1395/11/17 1395/11/17 1395/11/17 1395/11/17 1395/11/17 1395/11/17 1395/11/17 1395/10/13 1395/10/13 1395/10/13 1395/06/23 No. Board’s resolution Continued on next page next on Continued 1395/3/360 1395/3/360 1395/3/360 1395/3/360 1395/3/360 1395/3/360 1395/3/360 1395/3/360 1395/3/304 1395/3/304 1395/3/304 1395/3/171 9,800 78,400 139,802 340,000 510,000 547,490 377,490 130,417 370,000 370,000 270,000 170,000 Value 3,313,399 Collateral Type Check and promissory note Check and promissory note Check and promissory note Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract and check Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, check and real state Stand-alone legally binding contract, check and real state 800 6,400 41,118 11,286 50,000 5= 100,000 150,000 150,000 100,000 100,000 100,000 100,000 909,604
Total
1+2+3+4 Disbursement date Disbursement
1395/10/6 1395/11/2 1395/12/1 1395/12/1 1395/12/1
1394/03/04 1395/02/21 1393/07/01 1395/09/28 1395/09/30 1395/10/20 1395/11/10 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 800 6,400 11,286 18,486 Net (3) 5,000 40,000 62,701 Commitments 107,701 Gross Major loans and commitments NPL (2) Loans 41,118 50,000 100,000 150,000 150,000 100,000 100,000 100,000 100,000 891,118 PL (1) - turing co. Alifard co. Pakhsh co. Saye Saman
Shiva manufac Customer name Beneficiary Total of
Alifard Group beneficiary unit Row 322 323 324 325 326 327 328 329 330 331 332 333 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATEMENTS 203 Date 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 1394/06/31 No. Board’s resolution 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 1394/3/177 88,270 44,135 17,654 88,270 88,270 88,270 17,654 353,080 353,080 176,540 176,540 176,540 199,243 264,810 174,767 Value 2,307,123 43,521,975 Management Report Collateral Type Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Stand-alone legally binding contract and deposits Review of Risks and Disclosure 8,827 8,827 88,270 88,270 44,135 88,270 99,622 22,068 44,135 87,383 44,135 44,135 5= 176,540 176,540 132,405 520,381 Total
1,153,561
1+2+3+4 5,203,812 15,140,478 Disbursement date Disbursement
1394/08/12 1394/10/05 1394/11/19 1394/11/27 1394/12/10 1394/12/12 1394/12/18 1394/12/22 1395/02/01 1395/02/12 1395/02/28 1395/03/17 1395/03/25 1395/04/05 1395/05/19 Cost of investment (4) (4) investment of Cost Middle East Bank (PJSC) 18,288 Notes to the Financial Statements Notes to the Financial Statements For the year ended 20 March 2017 ended 20 March the year For 587,710 Net (3) Commitments Gross Major loans and commitments 2,436,987 Survey of the Iranian Economy 743,115 NPL (2) Loans 8,827 8,827 88,270 88,270 44,135 88,270 99,622 22,068 44,135 87,383 44,135 44,135 176,540 176,540 132,405 PL (1) 1,153,561 13,791,366 tanks co.
petrochemical
Asalouye green Customer name Beneficiary and Financial Statements Total Total of tanks co. Report of Independent Auditor
petrochemical
beneficiary unit Asalouye green Row Base capital at reporting date Major loans and commitments threshold(10% of base capital more) 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348