ANNUAL REVIEW 2015
The KIPCO Group is one of the biggest Dar al-Athar al-Islamiyyah, one of Kuwait’s leading cultural holding companies in the Middle East and organizations, was created to manage activities related to North Africa, with consolidated assets of The al-Sabah Collection. The collection includes one of the US$ 32 billion as at 31 December 2015. world’s finest assemblages of arts from the Islamic world. The Group has significant ownership The collection consists of over 30,000 priceless objects, interests in over 60 companies operating including manuscripts, scientific instruments, carpets, across 24 countries. The group’s main fabrics, jewelry, ceramics, ivory, metalwork and glass from business sectors are financial services, countries such as Spain, India, China and Iran. media, real estate and manufacturing. Through its core companies, subsidiaries This year, the annual reports of KIPCO Group companies and affiliates, KIPCO also has interests in each feature a key ancient carpet from The al-Sabah the education and medical sectors. Collection. The images used within the reports reflect KIPCO’s commitment to protecting and promoting Kuwait’s heritage, while helping to build the nation’s future.
The item pictured here (LNS 75 R) is a Transylvanian carpet made out of wool. The item was made in Transylvania (present day Romania) during the 18th century CE. The image is reproduced with the kind permission of The al-Sabah Collection, Dar al-Athar al-Islamiyyah. Welcome to our Annual Review for the year 2015
Welcome to our Annual Review for the year 2015, a year Magazine: ‘Best Domestic Retail Bank of the Year’ for the of optimization and agility where our prudent strategy and third consecutive year, ‘Best Credit Card Initiative of the focused execution have enabled the Group to continue Year in Kuwait’, “Best Advertising campaign of the Year in delivering for the fifth year in a row. Kuwait” and ‘Kuwait Domestic Cash Management Bank of the Year’ for the second consecutive year. The Bank also During 2015, Burgan Bank Group has worked on won the ‘Best Treasury and Cash Management Provider in optimizing its capital and enhancing its performance Kuwait’ award by Global Finance Magazine, the ‘Best Co- culture which enabled it to continue to build on previous Branded Credit Card’ award from The Banker Middle East performances and to deliver despite complex operating Kuwait Product Awards 2015, ‘Quality Recognition Award’ environments with less favorable economic and for the year 2014 from J.P. Morgan and the ‘Elite Quality geopolitical conditions as well as the adjustment to new Recognition Award’ for the year 2015 from J.P. Morgan. regulatory requirements. Burgan Bank Group’s performance reflects its high Burgan Bank Group reported revenues growth of 12% commitment to all its stakeholders; shareholders, reaching KD248 million, 12% growth in profit before tax customers, communities, and employees. The Group from continuing operations reaching KD74 million. As a aims at achieving calculated and smart growth through result, Burgan Bank Group achieved net profit growth of excellence, high standards of achievements, and sound 23% reaching KD76 million. Underlying Return on equity flexible strategies. Supported by a strong talented and stood at 14.2% and underlying return on tangible equity diverse team of banking professionals, Burgan Bank stood at 19%. This higher than the market growth levels Group is well poised for future success and growth. have been achieved even after taking KD29 million in precautionary reserves during 2015, 16% higher than We assure the explanations in the report are approved by reserves booked during 2014. the board of directors and are comprehensive and based on the published financial statements of the bank and the The group solid performance was highlighted management’s vision. internationally as 2015 yielded much recognition for the Bank’s performance from multiple reputable international Burgan Bank Group organizations on both local and regional fronts. The Bank has won four awards by The Asian Banking & Finance
Members of the Burgan Bank Group H.H. Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah Amir of the State of Kuwait
H.H. Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah Crown Prince of the State of Kuwait This year, the annual reports of KIPCO Group companies each feature a key ancient carpet from Dar al-Athar al-Islamiyyah - one of the world’s finest collections of Islamic art. These images are reproduced with the kind permission of The al-Sabah Collection, Dar al-Athar al-Islamiyyah. Contents
Welcome Message 2
Executive Summary 2015 8
Financial Highlights 10
Chairman’s Statement 14
GCEO’s Statement 18
Review of the Year – Kuwait Operation 22
Corporate Social Responsibility Report 25
Corporate Governance and Disclosures 35
Management Team 49
Financial Review 57
EXECUTIVE SUMMARY Executive Summary 2015
Key highlights in 2015 Burgan Bank Group Established in 1977, Burgan Bank is the youngest Capital Optimization to adjust to Basel III commercial Bank, the second largest by assets, and maintain growth momentum. and one of the most diverse banking groups in Kuwait. The Group is known for its strong position Sale of Jordan Kuwait Bank and and distinct offering in the corporate and private allocation of capital to faster growth banking and financial institutions sectors, as well as having a growing retail bank customer base. markets. Burgan Bank has four majority owned subsidiaries, Solid Operating performance with high which include Burgan Bank – Turkey, Gulf Bank adaptability to external pressures. Algeria - AGB (Algeria), Bank of Baghdad - BOB (Iraq & Lebanon), and Tunis International Bank - Internationalization of business lines TIB (Tunisia), (collectively known as the “Burgan through expanding footprint. Bank Group”).
Continuation of Group synergies to optimise opportunities.
Strong Market Position in core market and steadily growing and profitable subsidiaries.
Burgan Bank 2015 ratings Rating agency Rating highlights Moody’s Bank deposit rating A3 Fitch Long term Issuer default rating A+ Standard & Poor’s Long term counterparty credit rating BBB+ Capital Intelligence Long term issuer rating (Foreign currency) A-
8 2015 financial results summary
Stemming from its resilient business model and focused register KD 133 million also reflecting a growth of 9% year execution, high performance culture, simple and agile on year. Net income grew by 23% reaching KD76 million structure, Burgan Bank Group developed a flexible and earnings per share reached 32.1 fils. approach to optimize its performance and maximize its Burgan Bank Group is on the right trajectory, well financial delivery amid increasingly unfavorable operating equipped to face headwinds resulting from external environments and new tighter regulatory conditions. pressures and volatilities. Our prudent approach and well We continued to fulfill our promises as we conclude 2015. executed strategy have helped us build a resilient model We generated tangible results which enable us to continue that is proven successful. to build on our previous performances whilst preparing for During 2016, we aim at continuing to optimize inter- 2016 and beyond. During 2015, in order to fulfill Basel III group opportunities, internationalization of our business requirements and to strengthen our growth platform, we arms, and focusing on smart targeting. We always eye took various capital optimization steps which included the opportunities that will help us in sustaining a long term sale of our stake in Jordan Kuwait Bank “JKB”, the recall growth model whilst protecting our risk culture. The Group of our USD bonds, gaining regulatory approvals to issue plans on continuing to focus on smart diversification by a Basel III qualified tier 2 bond, and sale of our treasury growing the regional franchises and to continue gaining shares. market share with profitability in the core market - Kuwait. As a result of this optimization plan, capital has been The 2015 Annual Report provides shareholders with adjusted to levels well above Basel III requirements with an overview of the Group’s financial and business Core Equity capital at 11.7% and capital adequacy ratio performance highlights as well as financials and of 15.6% at the end of December 31st 2015. This carefully disclosures. planned and well executed capital optimization strategy will enable the group to continue its targeted growth A copy of the annual report can be obtained from strategy without the need to raise capital for the next few www.burgan.com, or also, if you would prefer to receive years. a printed copy of the annual report, please contact us on +965 2298 8000 or send an email to [email protected] The Group’s performance remains solid with operating income surging to KD248 million registering a growth of 12% while operating profits before provisions soared to
12% 23% Revenues Net Profit Growth Growth
9 Financial Highlights
Burgan Bank Group demonstrated a solid operating & 2015 was a year of balance sheet optimization for financial performance continuing to reflect a faster than Burgan Bank Group; Optimizing capital through a mix market growth almost in all indicators which mirrors the of well planned and executed initiatives that aimed at soundness of Burgan Bank’s resilient business model and adjusting capital to Basel 3 and solidifying the platform focused strategy execution. for continuous growth. The Group’s capital ratios by December 31st 2015 stand at 11.7% for core equity Compared to the same period last year, Operating capital (CET1) and a capital adequacy ratio (CAR) of income grew by 12% from KD222 million to KD 248 15.6%, capital ratios that are well above regulatory levels. million while Operating Profit before provisions soared to register KD 133 million reflecting a growth of 9%. Profit Asset quality maintained at reasonable levels. before tax from continuing operations soared by 12% Non- performing assets net of collateral stood at 1.4% reaching KD 74 million. Net profit for the year 2015 grew to gross facilities while coverage ratio net of collateral by 23% reaching KD 76 million while earning per share reached 332%, very comfortable levels compared to (EPS) is reported at 32.1 Fils. The board of directors has any benchmarks. recommended a payout of 18 fils in cash. The consolidated financials encompass the results of The strong operating performance during the financial the Group’s operations in Kuwait, and its share from year 2015 delivered a continuous solid growth in all its regional subsidiaries, namely Burgan Bank-Turkey, business lines in the core market and abroad, despite the Gulf Bank Algeria, Bank of Baghdad, Tunis International headwinds stemming from the volatilities of exchange Bank, in which Burgan Bank owns a majority stake. It is rates, financial markets and geopolitical pressures. The imperative to highlight that in December 2015, Burgan solid underlying performance during 2015 was achieved Bank Group has sold its entire stake in Jordan Kuwait even after taking KD29m of precautionary provisions. Bank to a subsidiary of Kuwait Projects Company (KIPCO). The 2015 set of results indicates that once again, Burgan Bank Group is well above the banking industry average growth rates almost on all profitability indicators.
Consolidated Balance Sheet KD 000’s 2011 2012 2013 2014 2015
Cash and cash equivalents 567,352 787,468 1,004,290 1,040,563 903,409 Treasury bills and bonds with CBK and others 419,079 483,588 583,647 629,819 471,800 Investment securities 148,585 311,021 421,402 484,942 570,125 Total assets 4,551,772 5,972,938 7,154,751 7,751,424 6,824,705 Total liabilities 3,986,063 5,353,107 6,534,924 6,795,537 5,988,382 Shareholders’ Equity 447,288 490,725 475,458 660,841 636,675
Consolidated Income Statement KD 000’s 2011 2012 2013 2014 2015 (restated) Net interest income 104,577 118,940 165,435 147,917 156,609 Net fee and commission income 38,114 38,143 44,623 43,441 36,936 Operating income 163,381 190,116 253,559 221,935 248,097 Operating profit before provision 101,962 118,934 140,723 122,087 132,794 Net profit attributable to shareholders 50,562 55,600 20,102 61,758 76,131
Earnings per share (in fils) 33.7 36.0 12.0 33.8 32.1
10 21.3% 15.9% Return on Return on Tangible Equity Opening Equity (Excluding additional (Excluding additional provisions & AT1 Cost) provisions & ATI cost)
102 119 141 122 133 163 190 254 222 248
2011 2012 2013 * 2014 2015 2011 2012 2013 * 2014 2015 Operating Profit Total Revenues (Before provisions) KD millionss KD millions
4,55 5,97 7,15 7,75 6,82 13.5 15.6
11.7 9.4
2011 2012 2013 2014 2015 2014 2015 Assets Capital Ratios KD billions ( CAR CET1 Ratio ) %
* 2014 income statement has been restated to exclude JKB.
11 12 Letter from Chairman & GCEO and Review of the year
13 Chairman’s Statement
Dear shareholder,
The Group is poised for further growth under a focused execution of a highly flexible strategy. As we close yet another year in our book, we reflect on the milestones, challenges, and many changes the Group has undergone. 2015 was a positive year for Burgan Bank Group as it continued to display its agility, innovation and perseverance. In fact, our achievements during this year solidify our constantly evolving strategy under highly changeable global, regional, and local operating conditions both on a geopolitical and economic sense.
“We are optimizing capital and working We continue to celebrate our prudence in the steps and on Group strengths” decisions we made in 2015; of which have continued to place us as innovative and highly adaptable player. The Group has once again met its objectives; growing in performance, delivering results, building inter-group The 2015 Annual Report includes the following disclosure synergies, nurturing its culture, and solidifying its clause as they are considered inclusive to this Report: reputation and brand position.
Financial Year and performance Executive Summary - Pages 8-9 I will focus on this letter on some of the milestones Executive Summary we have achieved this year particularly in relation to Summary on new/halted activities Note 17 - Page 113 at end of year the capital optimization plan, financial performance, Summary of events following Group Chief Executive Officer market position, and our continuous corporate social financial year Statement - Pages 18-21 responsibility activities. Summary of financial indicators Financial Highlights - Pages 10-11 Recommended Dividends payout Consolidated Financial Statements Capital Optimization as per the agenda of Annual - Note 12 in Page 111 General Assembly Firstly, to further maintain the growth momentum, the Board of Directors Remuneration Governance & Disclosure Report - Page 42 delivery of attractive returns to shareholders and to Summary on Stock Option Scheme N/A strengthen the capital base amid tighter local and global capital requirements, Burgan Bank Group has undertaken a portfolio rationalization analysis aiming to allocate capital to faster growth environments. We have sold our entire stake in Jordan Kuwait Bank to a subsidiary of Kuwait Projects Company (KIPCO); a transaction that yielded an immediate reduction of over KD 500 million in risk-weighted assets.
This move came to place the Bank’s capital ratios at a comfortable level under the Basel III regime. This will also allow us to grow further in the next few years without the need for further capital raise. The resultant capital adequacy ratio at the end of 2015 stands at 15.6% while core equity capital stands at 11.7%; healthy ratios under Basel III requirements.
14 The strategic capital optimization plan that has started In 2015, Asset quality remained in reasonable and in 2010 and continuing, included: balance sheet manageable levels. Non-performing assets net of collateral optimization, successful issuance of many instruments stood at 1.4% to gross facilities while coverage ratio net of such as subordinated US dollar denominated bonds, collateral reached 332%. Furthermore, Burgan Bank group first subordinated bonds denominated in Kuwaiti dinars, managed to maintain its market share without sacrificing AT1 hybrid security, right issue and sales of treasury pricing or risk parameters. Current market share in loans sales. The capital optimization actions enabled the bank stood at 14% while market share in total assets stands at to adjust capital to newer regulations stemmed from the 15%. Market share in deposits stands implementation of Basel 3 and to deliver above industry- at 13%. average returns to the shareholders for the last 5 years. In 2015, Burgan Bank Group continued to reap the Financial Performance & Market Position benefits of its diversification. All subsidiaries are profitable and growing in their respective markets as planned with Secondly, in 2015, Burgan Bank’s solid performance some headwinds faced from exchange rate volatilities. continued to yield impressive financial delivery despite the global, regional and local market volatilities and The group solid performance was highlighted geopolitical pressures. The management of the Group internationally as 2015 yielded much recognition for the has demonstrated once more that its diverse expertise Bank’s performance from multiple reputable international coupled with a sharp strategy execution, enabled the bank organizations on both local and regional fronts. The Bank to maintain a leading position for the last 5 years. has won four awards by The Asian Banking & Finance Magazine: ‘Best Domestic Retail Bank of the Year’ for the For the year ended December 31st 2015, Burgan third consecutive year, ‘Best Credit Card Initiative of the Bank Group operating incomes grew by 12% from KD Year in Kuwait’, “Best Advertising campaign of the Year in 222 million to KD248 million. Operating profit before Kuwait” and ‘Kuwait Domestic Cash Management Bank of provisions grew by 9% reaching KD133 million. Net the Year’ for the second consecutive year. The Bank also profit grew by 23% reaching KD76 million and earnings won the ‘Best Treasury and Cash Management Provider in per share reported at 32.1 fils and the board of directors Kuwait’ award by Global Finance Magazine, the ‘Best Co- recommended a payout of 18 fils in cash dividends. Branded Credit Card’ award from The Banker Middle East Kuwait Product Awards 2015, ‘Quality Recognition Award’ for the year 2014 from J.P. Morgan and the ‘Elite Quality Recognition Award’ for the year 2015 from J.P. Morgan.
15 In addition, and as a testament of excellence, compliance values which are reflected in the way we conduct business and prudence in operations, Burgan Bank was re- as well. We are proud of our CSR activities and promise certified with the prestigious ISO 9001:2008, for the third to continue our commitment toward achieving our main consecutive time. The Bank received the certification objective of sustainable development for a after comprehensive review and audit process of all its better tomorrow. departments by Bureau Veritas, a global leader in Testing, In the end, I can only reflect on 2015 as we look forward Inspecting and Certification (TIC) to 2016 as a Group. This chapter closes as another Corporate Social Responsibility celebrated year full of challenges and milestones. We take pride in the journey as we have met our objectives and This year, as we elevate our performance, we continue continue to build with the aim of ultimately becoming a to focus on giving back to our stakeholders on all levels. leading regional financial powerhouse. We definitely value and strictly commit to our contribution to our Corporate Social Responsibility (CSR) program; a On behalf of the board, I would like to extend my warmest sheer reflection of our commitment to all our stakeholders. gratitude to you, our shareholders, and to the hard work We take pride in our programs and activities and we and contribution exerted by our employees as well as to ensure that high standards of social responsibility are the executive management team for their leadership and applied across all spectrums. This year, in addition to prudent execution of our strategy. We expect nothing our efforts each year, we have focused on three main less from a body of talented, experienced, and dedicated engagements: Education, care for Special needs and professionals. philanthropy. This comes as we felt the need to adapt to social needs. As we do with our business strategy in terms of focusing on consumer needs, we apply the same Best Regards, concept to CSR.
Corporate Social responsibility is an ongoing and honorable daily commitment we take pride in. We respect and value our communities and know that the standards around us merely are a reflection of our own standards, Majed E. al-Ajeel ethics, and vision. Our support and high commitment to Chairman of the Board. giving back to our communities stems from our corporate values of trust, progression, excellence, and commitment;
16 Board of Directors
Mr Majed E. Al Ajeel Chairman Mr Mohammed A. Al Bisher Vice Chairman H.E. Abdul Kareem A. Al Kabariti Board Member Mr Faisal M. Al Radwan Board Member Mr Masaud M. J. Hayat Board Member Mr Samer S. Khanachet Board Member Mr Sadoun Abdulla Ali Board Member Mr Maitra Pinak P. M. Narian Board Member Mr Abdul Salam M. Al Bahar Board Member
17 GCEO’s Statement
Dear shareholder,
2015 marks as another positive year for Burgan Bank Group since our turnaround in 2011. We have been consistently delivering and this year is no different. 2015 can be summed as follows; A year of optimization, prudent decisions and brave innovative adaptations to less favorable macro environment as well as new regulations. The focus during 2015 was on optimization of balance sheet and performance culture. This optimization has enabled us to continue delivering on our promises made in 2014 while building an attractive and sustainable risk-adjusted returns platform to our shareholders going forward.
Before I highlight the milestones of 2015, allow me to tiptoe around the operating environment and the business context in which Burgan Bank Group’s resilient business model and focused execution continued to achieve and preserve the growth momentum. For the last 5 years, and even since the economic crisis began in 2008 followed by political turmoil in the region in 2010, Burgan Bank Group as well as other banks locally, regionally and globally have been working in increasingly challenging environments with more complexities and volatilities added each year. From headwinds stemming from the volatility in the exchange rates and markets, geopolitical instability to the more demanding regulatory environment. In 2015, the economic activities remained minimal. Global economy growth remained below potential. Growth in emerging markets was under expectations and the risk for another recession is looming.
Having said that, we remain optimistic. Thanks to our resilient business model and our focused execution that enabled us to be agile in responding to constant market changes and to deliver an operating performance that is solid and above industry average almost on all profitability indicators, not only for the financial year 2015, but also for the last 5 years.
18 During 2015, Burgan Bank Group focused on optimization Secondly, our performance culture that has been built as a main theme with two pivots: around the dogma of “we manage by returns” has proven effective across the group. The accountability and the 1. Optimization of Balance Sheet entrepreneurship of our management team in Kuwait and 2. Optimization of performance culture the subsidiaries have enabled us to continue achieve Firstly, to adjust to new capital requirements under the sound levels of profitability and solid performance. For Basel 3 regime and to further strengthening our growth 2015 and despite the challenging operating environment, platform, we have opted to execute a comprehensive Burgan Bank Group reported revenues growth of 12% capital optimization plan that included a variety of steps. reaching KD248 million, 12% growth in profit before tax From calling back our USD & KD bonds that are no from continuing operations reaching KD74 million. As a longer eligible under Basel 3, enhancing our long term result, Burgan Bank Group achieved net income growth of 23% reaching KD76 million. Underlying Return (excluding USD funding profile through a USD350 million club loan, precautionary reserves and AT1 cost) on equity stood at receiving regulatory approvals to issue new LT2 bonds in 15.9% and underlying return (excluding precautionary Kuwaiti Dinars that qualify under Basel 3, optimizing our reserves and AT1 cost) on tangible equity stood at 21.3%. risk-weighted assets (RWAs) and to the sales of treasury This higher than the market growth levels have been shares. Furthermore, through a capital friendly solution, achieved even after taking KD29 million in precautionary we have concluded in December 2015 the sale of Jordan reserves during 2015. Kuwait Bank to a subsidiary of KIPCO group, a solution that enabled us to offload of more than KD500million in With this helicopter view of the operating environment RWAs. A step that allows us to allocate capital to faster and the financial performance of the group, I would like to growth markets. As of December 31st 2015, and as a invite you to zoom-in on our performance in Kuwait – the result of this comprehensive plan, our Core Equity capital core market and our international operations: stood at 11.7% and capital adequacy ratio of 15.6%, Kuwait Operations well above regulatory thresholds. This carefully planned and well executed capital optimization strategy was We continue to grow faster than the market in profitability. Our revenues in Kuwait operations grew at 14% while well received by the investment community’s analysts. our operating profit grew at 17% and net profit grew at Also, Our asset quality remained in comfortable levels as 25%. During 2015, Kuwait operations witnessed a non-performing assets (net of collateral) stood at 1.4% modest growth in balance sheet due to some early to gross facilities while coverage ratio (net of collaterals) settlements in loans and an intentional replacement of reached 332%. expensive deposits.
19 In Kuwait, we continued focusing on our customer-focus International operations across the business lines. Our Corporate bank, optimized Turkey: their resources to continue serving their clientele in Kuwait and built the infrastructure needed to serve their clientele Burgan Bank Turkey is performing well as planned despite regionally through the inauguration of the representative the lower contribution due to the 25% depreciation of office in Dubai International Financial Center “DIFC”. Turkish Lira. With a clear focus on risk management, Burgan Corporate banking continues to be recognized efficiency, sales culture and active involvement from internationally and won in 2015 the “Kuwait Domestic Kuwait, the Turkish Operation is achieving higher than Cash Management Bank of the year” for the second banking sector growth in loans and deposits reaching consecutive year by Asian banking and finance and “Best 27% & 23% respectively in Turkish Lira terms. Treasury & Cash Management Provider in Kuwait” by During 2015, Burgan Bank Turkey achieved revenue Global Finance. growth of 23%, operating profit growth of 57% leading Burgan Private Banking have optimized their resources to an impressive 120% growth in net income in KWD through multiple initiatives in Kuwait and the international equivalent. Burgan Bank Turkey is considered next to desk in Turkey and as a result, Burgan Private banking Kuwait, a main growth engine for the group going forward. continued to win market share with profitability. Our Turkey is an excellent example of a smart turnaround young retail banking franchise continued to win customers with balance in results and risk taking. Several relevant through the introduction of new products and services investments and changes implemented during the year. and comprehensive sales campaigns. The retail bank For Example, the new Treasury platform (Murex), Moving has been also recognized as “Best Domestic Retail Bank to a new better functioning building consolidating location of the Year” for the third consecutive year and “Best for all three main companies (Burgan Bank Turkey, Burgan Co-Branded Credit Card of the Year in Kuwait” from Leasing and Burgan Securities). In 2015 we also de- Asian banking and finance. Burgan Bank Kuwait have risked the Securities house and continued consolidating undoubtedly become a more innovative, stronger and the good performance of the leasing operation. We agile banking Group that is winning customers’ trust at all upgraded one third of the branch managers (2014-15), levels. and generated a good pipeline of business synergizing the You can find more details about the business lines network; particularly with Algeria, (construction projects performance during 2015 in the business review section. with Turkish companies), with Lebanon, (mobile Energy project), with Kuwait on infrastructure projects and private bank customers willing to invest in Turkey.
20 Algeria: Conclusion and Way forward
Gulf Bank of Algeria remains profitable and grew its As we enter 2016 and face increasingly complex balance sheet during 2015 in local currency despite challenges in political and economic situations, I would many internal and external challenges. The change of like to leave you with the following thoughts: management, the drop in oil price hence the government • We have built a highly adaptable model working on incentives to curb credit growth, the Algerian dinar being proactive and prudently applying brave tactics as depreciation and the regulatory changes affecting challenges arise. revenues from FX, LCs and LGs, are all factors that slowed down growth. However, growth potentials for the • We have been growing consistently, mostly beating Algerian franchise are still sizable and it remains together market performance and we are poised for more growth. with Turkey our two strongest franchises abroad. • We have identified low potential areas and have Tunis: reallocated resources to faster growth opportunities.
Tunis International Bank has also witnessed a slowdown • We have expanded our business lines in innovative ways. in growth due to lost income from its share of profit from • Our risk architecture continues to improve, thus Gulf Bank Algeria for the same reasons highlighted above solidifying our resilient model and supporting our growth for Algeria. However, The franchise remained profitable year on year. and focusing as mandated on customers and risk management. Burgan Bank Group is well poised for further growth. We aim at positively impacting our stakeholders; contributing Tunisia was managed cautiously due to adverse to our communities, creating a world-class working culture circumstances. Since Feb 2011 (Arab Spring initiation) for our employees, taking care of our customers, and Tunisia has had very adverse conditions to work. Later optimizing returns for our shareholders. the foreign trade with Libya dried out after revolution that toppled the leadership and since then both countries have struggled to manage politically, socially and economically. Sincerely, Iraq:
2015 was another year of challenges for Bank of Baghdad for the well-known reason about the state of war in Iraq, Despite all this, the franchise remained profitable Eduardo Eguren and managed to deliver a good performance amid the Group Chief Executive Officer challenges it has faced mainly driven from FX income, which is classified as business as usual.
21 Review of the Year – Kuwait Operations
Kuwait operations performed well during 2015. Through a consistent strategy execution and customer focus, businesses continued their previous years’ growth momentum.
Corporate Banking a mandated lead arranger in primary syndication. The portfolio was managed to reduce Capital consumption Corporate Banking, the largest contributor to Kuwait’s while enhancing returns. operations, remains a powerful driving force in performance. During 2015 Corporate Banking Group Banking has achieved good results despite market slow down Additional unfunded trade risk participations of over and competition and limited opportunities due to market US$320 million were added to the portfolio, despite a saturation. The corporate bank team continued to expand reduction in global trade while the Origination efforts were its performance through the high focus on its services enhanced to record significant growth in the Guarantee/ culture enabling the group to expand its client base, earn Bonding Portfolio within Kuwait. credit growth with asset quality improving as Corporate banking non-performing Assets were reduced in 2015. Financial Institution Division also assisted Burgan Bank Group subsidiaries with Trade issuances and Corporate Banking has financed projects domestically secondary risk participation in addition to providing as well as outside of Kuwait aggregated to KD 896 leads for Guarantee issuances into network countries. million during the year. These projects are under various During the year, the Division arranged facilities for more sectors and activities such as construction, maintenance, than 250 Banks globally thus enhancing Burgan Bank’s infrastructure, services, oil, marine and real estate transactional capabilities in Treasury, Trade Finance and developments. Corporate Banking continues to remain the Correspondence Banking while simultaneously supporting largest contributor to the bank’s profitability. the cross-border activities of Corporate and Private The Corporate Banking Group continues to pin down Banking groups. international recognitions. During 2015, Cash Management Non-Banking Financial Institutions under Corporate Banking Group won two awards for the ‘Best Domestic Cash Management bank of the year’ from Revenues have been maintained and improved through Asian Banking and Finance’s Wholesale Banking Awards increased activity with a core group of counterparts while 2015 and “Best Cash Management & Treasury in Kuwait” actively managing the restructured portfolio to ensure that from Global Finance. provisions are minimized. The Liability portfolio continues to be a focus area to improve the Liquidity of the Bank. Financial Institutions Private Banking The Financial Institution Division activities during 2015 consolidated the core business portfolios in syndicated 2015 was another banner year for Private Banking marked loan participations and trading, trade finance, banking and by the accomplishments of all major objectives, not the other financial institutions transactions. Underlying net least of which the achievement of record profits reaching profit from Financial Institution Division was significantly KD 25 million, with a combined Asset/Liability book of over above target by 20% through opportunistic transactions one Billion Kuwaiti Dinars. In addition to its spectacular and improved marketing of capabilities. financial results, PB quality success included ISO 9001- 2008 recertification. Aligned with its new brand identity, Loan Syndications and Trading: Burgan bank Private Banking is currently occupying Additional assets of over US$200 million sourced in offices in three newly renovated floors in Burgan Towers, primary and secondary were added to the loan portfolio specially designed and equipped to cater to its privileged and included new markets such as Indonesia, Hong Kong, clients. Private Banking group is growing its professional Qatar and Kuwait, where Burgan Bank participated as team and expanding its reach into new market segments
22 and more lucrative businesses. By adopting Moody’s Risk During 2015, Retail Banking has also expanded its branch Rating system, Private Banking helps to keep its portfolio network with the opening of its 28th branch in Jleeb Al risk in check. Shuyoukh area.
Retail Banking Furthermore, customer satisfaction score increased significantly during the year as a result of applying Retail Banking continued to develop its strategy, based improved service quality standards and investing in on long-term and value added relationship with customers programs designed to improve customer experience. by catering to customers’ needs through its products and services offerings in addition to focusing on developing, Investment Division testing, and investing in technology to improve customer The Investments Division has continued to generate experience at touch points. strong returns for Burgan Bank Group via successful In 2015, the group was awarded as “the best domestic management of a diversified proprietary investment retail bank of the year” by Asian banking and Finance portfolio consisting of a variety of asset classes. The magazine for the third consecutive year in recognition of Division is also responsible for managing the Bank’s the retail bank efforts in delivering exceptional services to legacy asset portfolio. Both portfolios are subject to our customers. The group also won the “Best Co-Branded predetermined risk/reward targets in line with the Bank’s Credit Card in Kuwait” award from The Banker Middle East investment policy and approved limit framework. for its Qatar Airways co-branded MasterCard. Asset Management Division During 2015, new technologies were developed and are The Asset Management Division manages fund assets now in place to simplify interactions with customers by on behalf of the Bank’s clients. The Burgan Equity Fund enabling them to transact anywhere and anytime; Burgan generated 1.17% alpha over the KSE Weighted Index in Bank was the first bank in Kuwait to launch the Apple 2015. Between January, 2012 and December, 2015, the Watch application that complemented the smartphone Fund outperformed the KSE Weighted Index by 10.66% application which is already being widely used by its retail on a cumulative basis. The superior performance of this customers. The “apply online” application was another Fund is attributable to the successful asset management technological milestone that allowed customers to apply to strategy combined with a defensive balanced investment any of Burgan Bank’s products instantly through the bank’s approach. website. Treasury The group also launched three successful packages in 2015; the SME package which caters to the small & The Treasury Group posted a record performance for the medium enterprises, the new recruit package that targets financial year, benefiting from increased market volatility nationals and expatriates entering the workforce, and the and favourable trading opportunities. Treasury provides new youth account offerings targeting students. The Group the interest rate, currency, liquidity management and also strived to have the best business intelligence tools and balance sheet hedging functions for the Bank. As well, better management of information by making an improved Treasury actively led both the capital raising initiatives and use of Customer Relationship Management (CRM) to the longer term funding transactions undertaken by the provide insightful information for effective targeting across Bank in 2015. Treasury continues to develop and adapt its retail branches. Additionally, the reengineering of the Retail products and services to cater to its sophisticated clients’ Banking client onboarding process was initiated to collect needs and also to the changing regulatory environment marketing data that will drive higher cross-sell rates as due to the implementation of the Basel III framework well as to increase direct channel usage hence a better customer experience.
23 24 Corporate Social Responsibility 2015 Report
25 Corporate Social Responsibility – 2015 Report
Burgan Bank Group continues to drive its strategic approach towards integrating governance best practices in the heart of its operations. To that extent, the bank’s brand promise, “Driven by You”, is a strong reflection of its commitment to delivering robust opportunities for its customers, enabling businesses to thrive, driving economies to grow as well as supporting the social fabric of local communities to achieve their potentials in education, develop sustainable environments.
Thought Leadership The event served as an ideal platform offering an opportunity to network with peers, share best practice i. Investor Relations – Shafafiya 2015 and quarterly with the industry, and learn from an industry expert like earnings calls – ‘Transparency & Investment Peter Frank. Three important topics were addressed Community engagement’ during the event, namely “Euro: Spiraling down and facing Burgan Bank held its annual Al Shafafiya Investor’s forum Quantitative Easing debasement?”, “US Dollar: Safe- following the bank’s annual general assembly meetings, haven solidity and macro superiority, but for how long?”, in which members of the board presented Burgan Bank’s and “Turkish Lira: Economic Outlook”. financial earnings report for the year ended December iii. Second Internal Audit Conference – ‘Promoting 31, 2014 and agreed to a pay of 15% cash dividends Good Governance’’ while also distributing bonus shares of 5% to registered shareholders. In an effort to present the latest trends in the internal audit field, Burgan Bank hosted the ‘Second Internal The Shafafiya Forum is an annual event that is Audit Conference for Banking Industry in Kuwait’, which held amongst Kuwait Projects Company’s (KIPCO) was attended by the Chief Internal Auditors from local subsidiaries, and reflects a strong corporate governance and foreign banks and involved keynote speeches and practice, which promotes corporate fairness, transparency discussions around the recent trends and emerging topics and accountability. The forum provides an ideal gate to of internal audit. discuss financial reports and outlook as well as market predictions openly with shareholders. The event gathered experts and representatives from international audit firms, namely; Protivity, Ernst & Young, The Bank also organizes quarterly earnings calls aimed KPMG, PWC and Deloitte, who took part in the discussion at increasing transparency and engagement with the panels by presenting their perspective on the emerging investment community; a practice which has been initiated internal audit trends and best practices. five years ago.
ii. Treasury Event – ‘Benchmarking banking excellence’
Dedicated to provide its clients with the latest updates and recent trends in the financial world, Burgan Bank’s Investment Banking and Treasury Group recently organized an important and timely event focusing on global foreign exchange markets for its private and corporate clients at the bank’s headquarters. The event entailed an in-depth presentation revolving around the recent currency Awards Ceremony trends and an analysis of possible future outcomes , which was delivered by Peter Frank, Global Head of Foreign- Exchange Strategy at Banco Bilbao Vizcaya Argentaria SA (BBVA); a global financial services group.
26 Awards Ceremony Awards Ceremony
award by Global Finance Magazine, the ‘Best Co-Branded Credit Card’ award from The Banker Middle East Kuwait Product Awards 2015, ‘Quality Recognition Award’ for the year 2014 from J.P. Morgan and the ‘Elite Quality Recognition Award’ for the year 2015 from J.P. Morgan.
And as a testament of excellence and strict compliance to prudent overall banking measures, Burgan Bank was re- certified with the prestigious ISO 9001:2008, for the third Awards Ceremony consecutive period. The bank received the certification after the successful completion of the recertification audit iv. Awards – ‘A Frequently Awarded Regional of all its departments by Bureau Veritas, a global leader in Financial Powerhouse’ Testing, Inspecting and Certification (TIC) Pioneering the banking industry through highly awarded Human Capital services and products has been one of the bank’s key goals. Burgan Bank strives to maintain the highest Burgan Bank endeavors to create a gratifying corporate standards in the banking industry and to positively environment that supports the efforts of the diverse contribute to the economy and community. range of employees. This is reflected through the bank’s employment philosophy, programs offered to help 2015 yielded astonishing accomplishments for the bank employees thrive and achieve their goals, as well as as a group on both a local and regional front. The bank’s supporting employees’ wellness and work-Life balance. solid financial strength and full spectrum of banking products and services were recognized by leading Since its inception, Burgan Bank has continued to financial institutions. This year’s awards consisted of reinforce its commitment in attracting national cadres and the banking winning four major awards from The Asian top talents by fostering groundbreaking processes that not Banking & Finance Magazine, one of the world’s most only serve the bank’s interest, but the societies’ interests distinguished publications that reports on an extensive in which it operates in. range of financial news across different practices. The bank recognizes human capital to be one of the most The awards presented to the bank were ‘Best Domestic crucial pillars of its corporate foundation, and to help Retail Bank of the Year’ for the third consecutive year, ensure each employee realizes his or her full potential; the ‘Best Credit Card Initiative of the Year in Kuwait’, “Best bank has carried out extensive learning and development Advertising campaign of the Year in Kuwait” and ‘Kuwait programs for every stage of an employee’s career. Domestic Cash Management Bank of the Year’ for the second consecutive year. The bank also won the ‘Best Treasury and Cash Management Provider in Kuwait’
27 Investor Relations - Shafafiyah Town Hall Gathering
Town Hall Gathering – ‘Commending Internal The bank’s employees succeeded in completing the 5 Achievements ’ months long program which involved travelling to the USA to receive professional training from UC Berkeley Maintaining a solid internal communication strategy is business faculty members and Silicon Valley’s successful crucial to the bank’s growth plans. The bank’s overall entrepreneurs, to help them develop innovative projects approach in investing in its internal audiences is backed which aimed at driving further growth within the bank. by the aim of nurturing a culture of open dialogue, harnessing skills, and creating credible proud brand Employees Dental Checkups ambassadors. To promote healthy lifestyles among employees, Burgan Burgan Bank held its yearly gathering event at the Salwa Bank organized an internal dental checkup for all its Sabah Al Ahmad Al Sabah hall and was attended by employees, in collaboration with the Ministry of Health’s Burgan Bank’s Chairman, Mr. Majed Essa Al-Ajeel, Dental Administration as part of the Capital Oral Health Group CEO, Mr. Eduardo Eguren, staff members, senior Program. The program, which was held over the course executive management, as well as representatives from of two days at Burgan Bank’s Head Office, involved a the Bank’s regional subsidiaries. team of specialized dentists and hygienist who offered free dental checkups, oral examination, and consultations Employees were engaged by receiving latest updates about employees’ diet and oral hygiene habits in order to on the key highlights of the bank’s performance over raise their awareness about the importance of maintaining the course of the year 2014 from the Group CEO along a healthy dental lifestyle. with key highlights on the way forward. Burgan Bank’s Chairman commended the employees on transforming the youngest local commercial bank to an active overseas operator.
KFAS Innovation Challenge
In efforts of leading, supporting, and inspiring teams to achieve business goals, Burgan Bank was chosen among Kuwait’s top 10 companies to participate in KFAS Innovation Challenge program, designed by the Kuwait Employees Dental Checkups Foundation for the Advancement of Sciences (KFAS) for innovation and development affairs in the Kuwaiti private Employees Cancer Awareness Campaign sector. The program came in partnership between KFAS by the Patients Helping Fund Society and UC Berkeley Haas School of Business; the second oldest business school in the USA, and extended for a Tugging on the notion of educating employees about period of 5 months. the various cancer diseases, prevention measures, and early detection methods, Burgan Bank collaborated with the Patients Helping Fund Society in Kuwait (PHFS) to
28 Turkish Media Convention
ii. Turkish Media Convention – ‘Building Mutual Relationships with Media Partners ’
For the first time since its inception, Burgan Bank hosted an exclusive media convention which consisted of meetings and activities with a number of financial Turkish media personnel and senior executive management from Burgan Bank Turkey.
A group of senior executives from Burgan Bank-Turkey Employees Cancer Awareness Campaign accompanied Turkish media during their visit to Kuwait, deliver a comprehensive awareness seminar around CML who attended business forums, toured around Kuwait (Chronic Myeloid Leukemia) cancer, and Breast Cancer. and discussed business opportunities with executive Employees had the opportunity to be empowered with management from Burgan Bank Kuwait, Qurain cancer awareness talk that was conducted at the bank’s Petrochemical Industries Company (QPIC) and KIPCO. head office. The meetings were headed by Burgan Bank Group Chairman Majed Essa Al-Ajeel, Burgan Bank Group CEO To further grow the sense of responsibility towards the Eduardo Eguren as well as Burgan Bank Turkey Chairman, wider community, employees were introduced to several and CEO. ways in which they can donate to the less-advantaged and in dire need of treatment. The two-day meeting involved an overview on the Kuwaiti economy as well as a topline look at the group’s Media Relations performance, and investments. This was through a series i. KIPCO Media Dinner of presentations led by various Burgan Bank Group officials, KIPCO senior management team as well as As part of its Media Relations activities and by its belief in QPIC officials. the importance of the Media role in Society, KIPCO hosted a media gathering and dinner in 2015 on behalf of its operating companies to thank the media and acknowledge their efforts, support and role in the society.
The media event was attended by the local media. Burgan Bank as a subsidiary of KIPCO was represented by its Corporate Communications team that maintains an on-going dialogue with both local and regional and international media. Apart from which the bank has conducted several periodical initiatives to thank the local KIPCO Media Dinner media landscape for their constant support.
29 RUNQ8 Marathon Human Marathon
Corporate Citizenship Nelson Mandela Cricket Cup– ‘Inspiring the upcoming young Kuwaiti generation’ A. Education As part of its social responsibility towards a wholesome Burgan Bank Group is an entity that considers education, development of its youth, Burgan Bank sponsored the self-development, and constant human knowledge Nelson Mandela Cricket Cup for youth development for evolution to be vital aspects of progress. As such, we the second year, which was hosted by the South African focus on spreading knowledge and supporting our Embassy, in collaboration with Kuwait Cricket, the official communities to embrace positive change. Over the last governing body of cricket in the State of Kuwait. This couple of years we have been amplifying our focus on initiative was taken to further develop cricket in Kuwait Health Awareness, Educational initiatives, and the Arts among Kuwaiti youth, and to provide a rewarding avenue and culture. for the youth to develop individually and collectively, i. Health Awareness through this sport. As cricket is one of the fastest developing sports in Kuwait, the Mandela Cricket Cup Human Marathon 2015 – ‘Integrating those with special will also serve as an inspiration to the upcoming young needs into the mainstream community’ cricketers and contribute further to the development of Burgan Bank sponsored ‘The Human Marathon 2015’, cricket amongst Kuwaiti youth. which is a voluntary youth project. This new marathon was Capital School Oral Health Program – ‘A long-standing held at the 360 mall, and shed light on integrating those social commitment’ with special needs into the mainstream community and restoring their sense of belonging by engaging them in As part of Burgan Bank’s leadership and social dedication the marathon and through different activities throughout to the wellbeing of the society, the bank had sponsored the day. This was in addition to encouraging a healthier the Ministry of Health’s ‘Capital School Oral Health lifestyle in Kuwait. Program’. Through this year-round partnership, the bank extended its full support to work alongside the Ministry of RUNQ8 Marathon – ‘Spreading awareness on an Health in spreading awareness of maintaining a healthy important social cause’ dental lifestyle amongst school students. This was Burgan Bank sponsored RunQ8, the 10 km charity race implemented through a series of school visits, activation organized by the Fawzia Sultan Rehabilitation Institute and awareness programs in clinics, hospitals, and malls in (FSRI). RunQ8 took place on the Gulf Road, under the efforts of enriching the entire community’s dental health theme of “Run for a Cause”. FSRI’s goal is to provide much knowledge. needed specialized treatment and support to affected The Capital School Oral Health Program is a children, regardless of their family’s financial constraints. comprehensive school-based/linked program providing Burgan Bank’s sponsorship falls under its corporate social Oral health Education, Prevention and Treatment to almost responsibility umbrella, to support a cause that raises 270,000 Kuwaiti school children. public awareness on children with a physical or cognitive disability, while encouraging healthy living for these children.
30 Capital school oral health program The 9th annual Kuwait Times photography competition ii. Educational Initiatives iii. Arts & Culture
Gulf Studies Symposium- ‘Helping to Shape the research ‘The 9th annual Kuwait Times photography agenda in the Gulf region’ competition – ‘Empowering the country with n ational pride’ Believing in the idea of working on mutual corporate citizenship projects and helping to add value to the field Reflecting its keenness in supporting local talents, Burgan of Gulf academic studies, Burgan Bank announced its Bank sponsored the 9th annual Kuwait Times photography latest contribution to the 2015 Gulf Studies Symposium competition themed ‘Kuwait Culture and Heritage’. organized by the Center for Gulf Studies at the American This year’s theme aimed to provide an opportunity for University of Kuwait. The bi-annual event, which was professional photographers to take rare photos that organized for the second time and themed ‘Knowledge- reflect quick response in documenting actions in their Based Development in the Gulf’, brought together leading surroundings. The lucky winners were recognized during scholars from Kuwait, the Gulf, Middle East, Europe, and an awards ceremony which took place at Holiday Inn the United States to present original qualitative research Hotel – Salmiya. as well as personal experiences to address key questions The nationwide competition united all the professionals related to knowledge-based development in the region. and aspiring photographers who submitted their Microsoft Imagine Cup – ‘Addressing the world’s global innovative works on Kuwait’s culture and heritage through challenges using technology’ images of the country’s environment, sea, sky and surroundings in general. The initiative that was open for Burgan Bank sponsored Microsoft’s annual Imagine Cup all ages and races and not restricted to only professional for the third time in order to pave the way for top talents photographers provided a mutual platform that enabled an to hone their skills as software experts on a common, equal opportunity to exhibit individual talent. competitive and productive platform. ‘Universities Art Competition – ‘Connecting with young Microsoft Imagine Cup is an international, premier, creative talents through art’ student technology competition that is aimed at providing opportunities for students across all disciplines around the Organized by ALARGAN International Real Estate world to team up and use their creativity and knowledge in Company and in collaboration with the United Nations technology to create applications, games and integrated Development Programme (UNDP) and the National solutions that can change the way we live, work and play. Council for Culture, Arts and Letters (NCCAL), Burgan Through this sponsorship, Burgan Bank assisted in the Bank sponsored the ‘Universities Art Competition’ development and encouragement of young business exhibition, themed ‘The Power of Life’, for the second savvy individuals to creatively search for solutions to real year. The bank’s participation came in line with its problems affecting the world. This was accomplished by corporate social responsibility strategy to support the research, brainstorming, design elements, as well as finding local youth’s advancements as well as to shed light on the right mechanics suitable to tackle the respective issues. their gifted skills. The art competition allowed students to showcase their creative masterpieces and gave them
31 DEN Gallery International Day for Disabled People
the opportunity to be recognized for their outstanding The event witnessed vast participation by professionals illustrations and capabilities. In 2014, the first edition of in the creative fields, students, and the general public the ‘Universities Art Competition’ exhibition witnessed through the organized series of lectures, workshops, and vast participation by university students and was cultural entertainment programs. overwhelmingly successful. DEN Gallery – ‘Encouraging new horizons to be met in Arabian Horse Festival – ‘Preserving Arab contemporary art’ cultural heritage’ Looking to expand the idea of contemporary art in the Keeping in-line with its commitment to preserving the country, Burgan Bank proudly sponsored the “Den history and breed of Arabian horses as part of the Kuwaiti Gallery” exhibition, which took place at the Kuwait and Arab cultural heritage, Burgan Bank was a major International Fair Grounds in Mishref. “Den Gallery” was sponsor of the Kuwait National Arabian Horse Festival established by a group of talented Kuwaiti artists who 2015 at Bait Al Arab show area. The event was organized gathered under one roof to present new approaches in the by Bait Al Arab, under the umbrella of Al Diwan Al Amiri, areas of painting, drawing, sculpting and graphics. and was under the patronage of H.H. the Crown Prince Burgan Bank’s sponsorship of the ‘Den Gallery’ exhibition Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah. falls in line with its corporate social responsibility strategy The 4th National Championship was supervised that focuses on local talents and capabilities in enriching by ECAHO (European Conference of Arab Horse the contemporary art landscape by capturing the country’s Organizations) which is the official body concerned with culture and history through gifted handiwork. managing similar local and international tournaments. The B. Special Needs Kuwait National Arabian Horse Festival is also popular for its huge publicity and vast active participation by Arab Tariq Al Qallaf – ‘Supporting promising local talents to horse breeders as well as owners from both inside and reach greater heights’ outside the State of Kuwait, along with a large number of Burgan Bank sponsored Tariq Al Qallaf, Kuwait’s world fans and enthusiasts of Arabian horses. champion wheelchair fencer, on his journey in the USA NUQAT Creative Conference – ‘Highlighting the Fencing Championship. The championship took place evolvement of creativity in all shapes and forms’ in Richmond, Virginia from 9 – 12 October, 2015 and at St. Louis, Missouri from 8 – 11 January, 2016. During his Springing from its belief that the current generation is participation in the US Fencing Championship for the the major contributor to today’s successful and vibrant Disabled, Al Qallaf won three gold medals along with the business, social and cultural environment, Burgan Bank title of ‘Best Fencing Champion’. The bank’s sponsorship sponsored the “Nuqat” Creative Conference for the came in line with its commitment to supporting Kuwait’s third consecutive year. The conference was held at the world title-holders in raising the Kuwaiti flag at worldwide Amricani Cultural Centre, under the theme: “Copy & Paste arenas. Syndrome” and helped on highlighting how imitation both inspires and limits creative production.
32 Orphans trip KAACH 2015
International Day for Disabled People – ‘Promoting the Orphans Trip – ‘Infusing happiness into children in need’ rights and the well-being of people with disabilities’ Burgan Bank believes in giving back to all segments and In order to support programs and activities that empower ages of the society. For that reason, the bank organized a people with special needs and help their integration into fun-filled trip for the Ministry of Social Affairs and Labor’s society, Burgan Bank sponsored the “International Day orphaned children, who visited Kuwait’s Scientific Center. of People with Disabilities”, which took place at the Ideal The trip aimed at infusing happiness into children and to Education School. The aim of this event was to assist attend to their various needs. The children were taken those in the community who have special needs and who through an educational journey at the Scientific Center want to overcome their disabilities. It also focused on where they visited the IMAX Theater, Aquarium, and the increasing their self-confidence and encouraging them to Discovery Place. The children were then escorted to enjoy become productive members of the society. dinner at one of the restaurants located at the sea-side to The event included theatrical performances, as well as end their trip with joy and excitement. other recreational activities. Students and their parents Universal Children’s Day 2015 – took part in the event, while the bank was there to show ‘Celebrating and promoting awareness around children’s its solidarity and support for people with special needs rights in Kuwait’ in Kuwait. As part of its corporate social responsibility strategy, C. Philanthropy Burgan Bank celebrated Universal Children’s Day in KAACH 2015 – ‘Creating a lasting difference to collaboration with the Kuwait Child’s Rights Society humanitarian causes’ (KCRS). The internationally celebrated occasion was celebrated this year amongst parents and children at “The Burgan Bank underlined its firm dedication to supporting Gate Mall”. humanitarian causes through its support to the Kuwait Association for Care of Children in Hospitals (KACCH). Children had the chance to enjoy exciting educational This is an ongoing commitment which is now in its 14th games, face painting, competitions, and many more year. Supporting healthcare initiatives has been an integral entertaining activities. Parents were also able to engage part of Burgan Bank’s Corporate Social Responsibility in an awareness session focused on protecting children in framework and Corporate Citizenship program. Burgan Kuwait against abuse, maltreatment, and negligence. Bank is proud to be a benefactor towards such leading medical projects, and KAACH’s humane initiatives.
Burgan Bank is a firm believer of creating a lasting difference, thus, over the past 14 years, Burgan Bank maintained its contributions to support the development of healthcare within pediatric facilities at various health institutions.
Universal Children’s Day 2015
33 34 Corporate Governance and Disclosures
35 Corporate Governance and Disclosures
Good corporate governance remains integral to the way the group operates. We are committed to operating in a correct, principled and commercially astute manner and staying accountable to our stakeholders. We hold the view that transparency and accountability are essential for our group to thrive and succeed in the short, medium and long term.
The following outlines the key aspects of the Bank’s the board, ensuring its effective functioning and setting corporate governance framework. The Board has its agenda, in consultation with the Group Chief Executive consistently placed great importance on good corporate Officer and the directors. His duties include facilitating governance practices of the Bank, which it believes is vital to dialogue at board meetings, ensuring proper functioning of the Bank’s well-being. the executive management, and setting the board’s annual work plan. The Board has adopted a comprehensive framework of Corporate Governance Guidelines, designed to properly Board Composition balance performance and conformance. The Board comprises of non-executive Directors, as elected This enables the Bank to undertake, in an effective manner, by the General Assembly, and will ensure independence in the prudent risk-taking activities which are the basis of its actions and decisions at all times. The Board shall comprise business. of sufficient number of members to allow it to form the required number of Board Sub-Committees. Board of Directors Election and renewal of the Board membership shall be done The Bank is steered by an effective and unitary Board in compliance with the applicable rules and regulations. The which assumes responsibility for its leadership and control changes related to the number of Board members of the and is collectively responsible for promoting Bank’s long- Bank shall be suitably reflected through amendments in the term success by directing and supervising its affairs. The Articles of Association to correspond to the implementation Directors are responsible for ensuring that the Board makes of the rules, regulations and instructions. decisions objectively in fulfilling the Bank’s public and corporate responsibilities. Each member of the Board shall serve a term of three years, at the end of which the Board shall be formed again and it The Board shall have overall responsibility for the Bank, shall be permissible to appoint the members whose term has including approving and overseeing the implementation expired. of the Bank’s strategic objectives, risk strategy, corporate governance and corporate values. The Board shall also The Board is structured to ensure that the directors provide be responsible for providing oversight of the Executive the Group with the appropriate balance of skills, experience Management. The board understands that sound and knowledge as well as independence. governance practices are fundamental to earning the trust Induction and professional development of stakeholders, which is critical to sustaining performance and preserving shareholder value. The board members’ The Board adopts a formal induction program to familiarise collective experience and expertise provide a balanced mix with the Bank’s operations and activities. of attributes for it to fulfill its duties and responsibilities. The Board is conscious of its obligations to regulators Separation of roles of the Chairman and and shareholders and is committed to ongoing training, Group Chief Executive Officer professional development and attendance at relevant conferences and seminars. Only by continuing to keep The roles of Chairman and Group Chief Executive Officer abreast of issues that have an impact on the business can continue to be substantively different and separated. The the Board fulfill its responsibilities. chairman is a non-executive director charged with leading
36 Board Meetings • Chairman and CEO - United Projects Co. (27/10/2004 - 12/04/2010) The Board holds at least (6) meetings annually with one • Board Member - Kuwait and Middle East Financial meeting at least on quarterly basis upon an invitation Investment Company (1984 - 1986) from the Chairman, the Board meeting shall be valid only • Board Member - Kuwait Real Estate Investment if attended by the majority of the Board members and Consortium (1985 - 1992) attendance may not be by proxy, the Board meeting shall • Board Member - International Leasing and Investment be valid only if attended by the majority of the Board Co. (1999 - 2003) members, board meetings could be held using the modern • Managing Director - Kuwait Finance and Investment communication means, during 2015, Board held (16*) Company (KFIC) (2002 - 2004) meetings. The following table shows the Board Members • Board Member - Burgan Bank (1998 - 2004) attendance of the Board of Directors meetings, the table Current Positions shows a high degree of commitment of each member in • Board Member - Burgan Bank (2007 - present) attending the Board of Directors’ meetings: • Deputy Chairman - Kuwait Banking Association Board Members No. of meetings • Board Member - Institute of Banking Studies attended (2015) • Board Member - Burgan Bank Turkey 1 Mr. Majed E. Al Ajeel 16 • Board Member - FIM Bank - Malta 2 Mr. Mohammed A. Al Bisher 13 • Board Member - United Projects Co. 3 H.E. Abdul Kareem A. Al Kabariti 10 2 Mr. Mohammed A. Al Bisher (Vice Chairman) 4 Mr. Faisal M. Al Radwan 15 Year of Birth 1948 5 Mr. Masaud M. J. Hayat 13 Appointed 2013 6 Mr. Samer S. Khanachet 16 Term expires 2015 7 Mr. Sadoun Abdulla Ali 16 Has been with Burgan Bank since 2010 8 Mr. Maitra Pinak Pani Maitra Narian 16 Studied in Kuwait 9 Mr. AbdulSalam M. Al Bahar 16 University Kuwait University * out of which (7) by circulation. Degree Bachelors - Economics and Political Science Burgan Bank Board comprises of (9) Non-Executive members, the following paragraphs show information on the Graduated in 1971 current members of the Board for the current term (2013 - Past Positions (date and details) 2015) who were elected members of the Board for this term • Board Member - Jordan Kuwait Bank (1981 - 1989) with effect from April 1, 2013. The information includes the • Board Member - Kuwait International Investment year in which they were born, the year in which their term Company (1983-2000) as Board Members expires, their qualifications and their • Board Member - Kuwait Clearing Company principal business activities outside our Bank. (1986 - 1992) 1 Mr. Majed E. Al Ajeel (Chairman) Current Positions Year of Birth 1953 • Board Member - Burgan Bank (2010 - present) • Director and Partner of Abdulrahman Al-Bisher and Appointed 2013 Zaid Al- Kazemi Group Term expires 2015 • Director of Al-Bisher Son’s Group for General Has been with Burgan Bank since 2007 Trading and Contracting Studied in The United States of America • Director of Etemadco Exchange Company • Director and Partner of International Optics Kuwait University Catholic University of America • Chairman of Leo Witter GmbH (Jewellery Degree Bachelors - Science in Architecture and Precious Mineral Kuwait). Masters in Planning • Serves as a Representative for ATA Investment Graduated in Bachelors - 1977 Masters - 1978 Company ( Turkey) and Partner of a group of Saudi Past Positions (date and details) Arabia Companies. • Vice Chairman and CEO - United Projects Co. (from 12/04/2010 - 03/07/2012) 37 3 H.E. Abdul Kareem A. Al Kabariti • General Manager -National Bank of Kuwait Year of Birth 1949 (1980 - 1983) • Deputy Chief Executive Officer - National Appointed 2013 Bank of Kuwait (1983 - 1993) Term expires 2015 • Board Member - Bank of Bahrain and Kuwait Has been with Burgan Bank since 2004 (1986 to march 1994) Studied in The United States of America • Vice Chairman - Bank of Bahrain and Kuwait University St. Edwards University (1991-1994) • Board Member - Bank of Oman Bahrain and Kuwait Degree Bachelors - Business and Finance (1990 - 1994) Graduated in 1973 • Board Member - Burgan Bank (2001-2003) Past Positions (date and details) • Vice Chairman and Managing Director - Burgan Bank • Member of the Jordanian Senate, Head of the (2003 - 2004) Economics and Finance Committee (2005 - 2007) Current Positions • Member of the Jordanian Senate, First Deputy to the • Board Member - Burgan Bank (2010 - present) Speaker (2000 - 2002) • Vice Chairman - Burgan Bank Turkey • Chief of the Royal Court, (1999 - 2000) 5 Mr. Masaud M. J. Hayat • Member of the Eleventh and the Twelfth Jordanian Year of Birth 1953 Parliaments (1989 - 1993) and (1993 - 1997) / Head of the Economics and Finance Committee Appointed 2013 (1993 - 1995) Term expires 2015 • Prime Minister, Minister of Foreign Affairs and Minister Has been with Burgan Bank since 2013 of Defense (1996 - 1997) Studied in Kuwait • Minister of Foreign Affairs (1995 - 1996) University Kuwait University • Minister of Labor (1991 - 1993) • Minister of Tourism (1989 - 1991) Degree Bachelors - Commerce and Current Positions Business Administration • Board Member - Burgan Bank - (2004 - Present) Diploma - Institute of Banking Studies • Chairman of the Board of Trustees, Al-Ahliyya Amman Graduated in Bachelors - 1973 Diploma - 1975 University • Chairman, United Financial Investments Company. Past Positions (date and details) • Chairman, Algeria Gulf Bank - Algeria • Al-Ahli Bank of Kuwait - (April 1974 - Dec. 1996) • Board Member, Jordan Dairy Company I. Operation and Local / International Credit 1974 • Chairman, Jordan Kuwait Bank - Jordan II. Deputy Chief General Manager 1992 III. Advisor to the Board of Director 1993 4 Mr. Faisal M. Al Radwan • Board Member (BIAT) Tunis (1989 - 1995) Year of Birth 1944 • Board Member - Bank of Bahrain and Kuwait Appointed 2013 (1986 - 1988 and from 1991 to 1995) • Board Member Industrial Investment Co. (1993 - 2001) Term expires 2015 • Board Member Gulf Insurance Co. (1997 - 2001) Has been with Burgan Bank since 2010 • Board Member United Fisheries Co. (1997 - 2001) Studied in Egypt - Cairo • Board Member The International Investor (2005 - 2009) University Cairo University • Chairman KAMCO (1998 - 2010) Degree Bachelors - Commerce and • Managing Director United Gulf Bank (1997 - 2009) Business Administration • Board Member Wataniya Algeria (1997 - 2009) • Chairman United Gulf Financial Services Co. Graduated in 1970 (1997 - 2009) Past Positions (date and details) • Board Member and Board Secretary Union • Deputy General Manager - National Bank of Investment Companies (1997 - 2009) of Kuwait (1978 - 1980) • Managing Director - Burgan Bank - (2009 - 2010)
38 Current Positions 7 Mr. Sadoun Abdulla Ali • Board Member - Burgan Bank (2013 - Present) Year of Birth 1961 • CEO - Banking Sector - Kuwait Projects Co. “Holding” Appointed 2013 • Chairman United Gulf Bank - Bahrain Term expires 2015 • Chairman - Tunis International Bank - Tunis • Board Member Jordan Kuwait Bank - Jordan Has been with Burgan Bank since 2004 • Deputy Chairman - Algeria Gulf Bank - Algeria Studied in The United States of America • Deputy Chairman - Bank of Baghdad University Ashland University • Deputy Chairman - FIM Bank - Malta Degree Bachelors - Management of Financial • Vice Chairman - North Africa Holding Co. and Accounting Services • Vice Chairman - The Royal Capital Group - Abu Dhabi Graduated in 1988 • Chairman Syria Gulf Bank - Syria Past Positions (date and details) • Board Member - KAMCO • Board Member - Bank of Kuwait and the • Board Member - Masharea AlKhair Middle East (2003 - 2004) 6 Mr. Samer S. Khanachet • Executive Management - Head of Accounting and Financial Group - KIPCO (1997 - 2006) Year of Birth 1951 • General Manager - KAMCO (2006 - 2008) Appointed 2013 • Chief Executive Officer - KAMCO (2008 - 2010) Term expires 2015 • Managing Director and Chief Executive Officer - Has been with Burgan Bank since 2011 KAMCO (2010 - 2012) Current Positions Studied in The United States of America • Board Member - Burgan Bank (2004 - Present) University Massachusetts Institute of Technology • Board Member - Bank of Baghdad Harvard University • Vice Chairman and Chief Executive Officer - Qurain Degree Masters - Business Administration Petrochemical Company (Harvard) • Board Member - United Industries Company Bachelors - Science - Chemical • Board Member - Advanced Technology Company Engineering and Science Management • Chairman - United Oil Projects Company Graduated in Bachelors - 1973 Masters - 1975 8 Mr. Maitra Pinak Pani Maitra Narian
Past Positions (date and details) Year of Birth 1958 • 1975 - 1980 The Industrial Bank of Kuwait Appointed 2013 i. Financial Analyst Term expires 2015 ii. Senior Financial Analyst Has been with Burgan Bank since 2010 iii. Assistant Manager Studied in India • Deputy CEO - Sharjah Group (1980 - 1990) • General Manager - KIPCO (1990 - 1995) University Osmania University • CEO - United Gulf Management (1991 - 2007) Degree Bachelors - Commerce • GCOO - KIPCO (2008 - Present) Graduated in 1979 Current Positions • Board Member - Burgan Bank (2011 - Present) Past Positions (date and details) • Board Member - United Gulf Bank - Bahrain • Vice President - Financial Control and Planning - • Chairman of the Board - TAKAUD Saving and Pensions United Gulf Bank - Bahrain, • Board Member - United Real Estate Co. (June - 1988 - October 1988) • Member of Corporation Development Committee • Assistant Vice President of Planning and Financial - Massachusetts Institute of Technology Control - KIPCO (1988 - 1990) • Vice President, Financial Controller - United Gulf Management Inc. (1991 - 1996)
39 Current Positions Delegation of authority • Board Member - Burgan Bank (2010 - Present) The board retains effective control through its governance • Group Chief Financial Officer - KIPCO (1996 - Present) framework that provides for delegation of authority. In • Board Member - OSN (Panther Media Group Limited) discharging its duties, the Board delegates some authorities (2009 - Present) to relevant Board Sub-Committees with clearly defined • Board Member - Pulsar Knowledge Center (2003 mandates and authorities, although the board retains its - Present) accountability. 9 Mr. AbdulSalam M. Al Bahar Board Sub-Committees facilitate the discharge of Board Year of Birth 1965 responsibilities and provide in-depth focus on specific Appointed in Burgan 2013 areas. Each Committee has a mandate, which the board Term expires 2015 reviews at least annually. Each mandate sets out the role, responsibilities, scope of authority, composition, terms of Has been with Burgan Bank since 2004 reference and procedures. Studied in The United States of America Board Sub-Committees University Fairleigh Dickinson University Degree Bachelors - Science - The Board has established the following Board Sub- Electrical Engineering Committees in order to enhance its supervision effectiveness Graduated in 1988 over operations of the Bank, each committee member’s expertise, skills and background was considered while Past Positions (date and details) forming the committees to assure the best supervision of • Board Member - Tunis International Bank the committee over the bank’s operation according to each (1997 - 1999) committee responsibilities. • Board Member - Bahrain Middle East Bank (1998 - 1999) Board Corporate Governance Committee (BCGC) • Board Member - Wataniya Telecom (1998 - 2007) The BCGC shall essentially be responsible for assisting the • Board Member - Kuwait Catering Company Board in setting the Bank’s corporate governance policies (1997 - 1999) and following-up on its execution and periodic review to • Chairman of the Board - Kuwait Catering Co. ensure its effectiveness. (1999 - 2001) • Board Member - Kuwait Catering Company BCGC held (5*) meetings during 2015. (2001 - 2003) BCGC Members No. of meetings • Board Member - Tamdeen Group (2003 - 2006) attended (2015) • Board Member - Wataniya Airways (2006 -2007) • Chairman and Managing Director - Wataniya Airways Mr. Majed E. Al Ajeel (Chairman) 5 (2007 - 2011) Mr. Mohammed A. Al Bisher 5 • Executive Management - Companies Mr. Faisal M. Al Radwan 4 Financing - KIPCO -(1995 - 2007) Mr. Masaud M. J. Hayat 5 • General Manager - OverLand Real Estate Company * out of which (4) by circulation (2012 - 2014) Current Positions Board Nomination and Remuneration • Board Member - Burgan Bank - (2004 - Present) Committee (BNRC) • Board Member - United Industries Company (2012 - Present) The BNRC shall be responsible for presenting • Board Member - United Networks Co. recommendations to the Board regarding nomination to the (2014 - Present) Board’s membership, review of Board structure on an annual • Financial Advisor - OverLand Real Estate Company basis, undertake performance evaluation of the overall Board (2014 - Present) and the performance of each member on annual basis, and developing Bank-wide reward policy in line with applicable
40 laws and regulations. In addition, BNRC shall be responsible Board Executive Committee (BEXCO) for presenting recommendations to the Board of Directors The BEXCO shall be responsible for directing and monitoring on appointment of the senior positions of the Executive the Executive Management of the Bank in execution of the Management, ensuring that these positions are occupied strategic plan as approved by the Board of Directors and by qualified employees along with setting performance other daily operations of the Bank. standards and succession plans. Board and Management Investment Committee (BMIC) BNRC held (4) meetings during 2015. The (BMIC) a sub-committee of BEXCO, shall provide an BNRC Members No. of meetings oversight on the Bank’s investment activities and make attended (2015) decisions within its delegated authorities. Mr. Masaud M. J. Hayat (Chairman) 4 BEXCO held (14*) meetings during 2015. Mr. Samer S. Khanachet 4
Mr. AbdulSalam M. Al Bahar 4 BEXCO Members No. of meetings Board Audit Committee (BAC) attended (2015) Mr. Majed E. Al Ajeel (Chairman) 13 The BAC shall be responsible for setting and overseeing Mr. Faisal M. Al Radwan 13 the sufficiency of internal control and audit functions of the Bank, along with ensuring compliance with applicable laws, Mr. Samer S. Khanachet 13 policies, instructions and code of business conduct and Mr. AbdulSalam M. Al Bahar 12 ethics. Mr. Masaud M. J. Hayat 12 BAC held (12*) meetings during 2015. * out of which (7) by circulation
Board Credit Committee (BCC) BAC Members No. of meetings attended (2015) The BCC shall act as the focal point in the credit activity of H.E. Abdul Kareem A. Al Kabariti (Chairman) 12 the Bank and shall consider and grant approval on behalf of the Board. Mr. Sadoun Abdulla Ali 12 Mr. Maitra Pinak Pani Maitra Narian 12 BCC held (53*) meetings during 2015. Mr. Mazen Essam Hawa (Advisor) 8 BCC Members No. of meetings * out of which (1) by circulation attended (2015) Board Risk Committee (BRC) Mr. Majed E. Al Ajeel (Chairman) 47
The BRC shall be responsible for providing review and Mr. Faisal M. Al Radwan 47 report to the Board on the current and future risk strategy Mr. Samer S. Khanachet 49 and tolerance along with supervising implementation of Mr. AbdulSalam M. Al Bahar 48 this strategy by the Executive Management. The BRC shall Mr. Masaud M. J. Hayat 37 ensure existence of effective systems for risk management * out of which (16) by circulation and independence of these functions. Accomplished tasks BRC held (4) meetings during 2015. During the year 2015 and in light of each committee’s BRC Members No. of meetings responsibilities and authorities, Board Committees attended (2015) -supported by respective committee members’ skills and Mr. Sadoun Abdulla Ali (Chairman) 4 background- have handled all assigned tasks effectively Mr. Mohammed A. Al Bisher 4 which helped the Board enhancing the control and supervision effectiveness over operations of the Bank. Mr. Maitra Pinak Pani Maitra Narian 4
41 Board Secretary Related Party Transactions
The board secretary ensures the flow of information to For information on related party transactions please refer enable the board to be aware of its duties and helps the to Note 20 “Related Party Transactions” in the Annual board on discharging its responsibilities effectively and Financials. continuously, the Board Secretary keeps the board abreast Code of Conduct of relevant changes in legislation and governance best practices. Burgan Bank’s Code of Conduct describes the values and minimum standards for ethical business conduct that we The Board Secretary verifies that the new board members expect all of our employees to follow. These values and have obtained the required induction program and follow- standards govern employee interactions with our clients, up with the concerned department in the bank to verify competitors, business partners, government and regulatory that it has provided the required training programs to the authorities, and shareholders, as well as with other board members. Board Secretary also acts as Board Audit employees. Committee secretary in line with the recommendations of the Central Bank of Kuwait. In addition, it forms the cornerstone of our policies, which provide guidance on compliance with applicable laws and To enable the board to function effectively, all directors regulations. Burgan Bank’s directors, executive management have full and timely access to information that may be and employees are committed to the highest degree of relevant in the proper discharge of their duties. This includes adherence to the code of conduct policies. information such as corporate announcements, investor communications and other developments that may affect the The current version of Burgan Bank’s Code of Business Bank and its operations. Conduct and Ethics is available on our website www.burgan.com Ms. Madiha Bouftain was appointed Board Secretary on Apr. 2013, Ms. Madiha spent 16 years at Burgan in various roles. Conflicts of Interest In her last role, she served as a Manager - Board Affairs In accordance with the CBK corporate governance responsible for: instructions and the Meeting Guidelines for Board and 1. Ensuring the effective functioning of the board by Sub-Committees, Directors are required to disclose to the providing support to the Chairman, the Vice Chairman Board any interest they may have that might cause a conflict and the Board Members. of interest. Any Director with a material personal interest in a matter being considered by the Board shall not attend nor 2. Being focal point for all communication related vote on the matter being considered. to Board and Board Committee meetings, and coordinates between Board of Directors Bank’s Code of Conduct listed some cases that represent and Bank Management. examples of potential conflicts of interest.
3. The custody of all Board related records. Relations with investors
Ms. Madiha served as Manager - Board Affairs The Chairman is responsible for ensuring effective from Jan. 2005 and is, therefore, well experienced. communication with shareholders. The Bank communicates with shareholders through the Annual Report and Accounts Board Members Remuneration and by providing information in advance of the Annual Information on Board Members Remuneration is disclosed General Meeting. in the “Income Statement” as well as in the notes to the financial statement “Note 20 - Transactions with related parties” in the Annual Financials.
The Proposed Board of Directors’ remuneration for 2015 amounted KD 390,000. The remuneration amount for the Board membership in addition to the Committees’ services remuneration were disclosed in the Financial Statements.
42 Compliance with the CBK instructions on the Rules and compromising on core business ethics and values. Regulations of Corporate Governance in Kuwaiti Banks Compliance group is outfitted with a qualified and (Declaration of Conformity 2015) empowered team that are trained to complete the assigned tasks. The Compliance Team will benchmark and endeavor The Declaration of Conformity is pursuant to CBK to adhere to best practices in all areas. instructions No. (2/RB/RBA/284/2012) on the Rules & Regulations of Corporate Governance in Kuwaiti Banks Internal Audit issued on June 20, 2012. The Board of Directors stated that Group Internal Audit provides an independent and objective Burgan Bank has complied and will continue to comply assurance and consultancy services over the design and with the CBK instructions on the Rules & Regulations of operating effectiveness of our system of internal controls Corporate Governance in Kuwaiti Banks. Since then, Burgan by performing periodic risk based audits and reviews to Bank has complied with the recommendations of the evaluate and improve the effectiveness of risk management, “Corporate Governance Rules and Regulations in the Kuwaiti control and governance processes. Banks” in its version dated June 20, 2012. Audit reports are issued summarizing the results from each Burgan Bank has done all the necessary amendments to performed audit engagement which are then distributed its policies to be in line with the CBK instructions aiming for to the responsible heads of the auditable departments/ implementing sound corporate governance practices, the units. These reports provide evidence to support the annual Bank has formed the required Board Sub-Committees to evaluation of the overall operating effectiveness of the enhance its supervision effectiveness over operations of the internal control environment. Bank, and updated the Corporate Governance manual to reflect the governance measures adopted by the Bank. However, any internal control system can only provide reasonable, but not absolute assurance that the objectives The current version of the manual is available on the Bank’s of that control system are met. Further, the design of a website www.burgan.com control system must reflect the fact that there are resources Furthermore, as disclosure is considered an effective tool constraints, and that the benefits of controls must be to influence companies’ behavior and protect investors, the considered relative to their costs. Bank has adopted a disclosure and transparency policy As a result of the above evaluation, it can be concluded that that serves shareholders, depositors, and stakeholders. By the internal control environment is appropriately designed the disclosure and transparency policy, the bank commits and operating effectively as of 31st December 2015. itself to an accurate and timely disclosure for any critical information related to the Bank. Report on Internal Control Systems
Compliance Group Internal control effectiveness is driven by people. It’s not merely about policy, manuals, and submitting forms, but Compliance Group rehearses the employed independence about people behaviour at every level of an organization. decisively, to carry out a road map of functions to ensure Every One in Burgan Bank is responsible for the internal the bank’s integrity and emphasize corporate standards of controls. In addition, there are specific responsibilities which transparency before all regulators. It is of high Compliance are detailed as below: duties to ensure guidance on the appropriate implementation of compliance laws, rules and regulations through policies • Board of Directors: Governance, guidance, and and procedures. The steadily performance is customary oversight to avoid any legal or regulatory sanctions, financial or • Management and Senior Management: Ownership and reputational losses, due to any abrupt compliance failure Accountability to all pertinent laws, regulations and banking standards of good practice. The Compliance Group has been successful • Assurance providers: Provide assurance over key in bringing up stringent Compliance Culture within BB Group controls & risks of the bank and proactively plays a significant role in implementing and • Other Employees: Information, Communication and monitoring the bank’s compliance program in a healthy Adherence system. Exercising independent judgments accurately and equally to avoid any emerging conflict of interests • Internal Control Department: Monitoring and Evaluation in opposition to bank’s objectives and goals, without
43 The Board of Directors has the ultimate responsibility for the Group and report to the Board and senior management Bank’s Internal Control System, and it discharges its duties of these risks and propose recommendations to manage in this area by: them. The Board reviews and provides guidance regarding the alignment of the Bank’s strategy regarding risk appetite • Providing oversight activities through the board and and the internal risk management structure and framework. management committees The Bank has a well-documented Risk and Disclosure • Ascertaining that executive management implements Policy that classifies the risks faced by it in its day-to-day effective systems of controls for activities into certain families of risks and accordingly specific responsibilities have been given to various officers - Effectiveness and efficiency of operations for the identification, measurement, control and reporting of - Reliability of processes of internal and external these identified families of risks using appropriate metrics to reporting analyze and evaluate the extracted data. Among the families of risks are: - Adherence with applicable laws, regulations and internal policies i. Credit Risk which includes default risk of clients and counterparties - Adherence to operational risk appetite of the bank ii. Market Risk which includes interest rate, foreign - Fulfilment of individual and collective responsibilities exchange and equity risks and link accountability iii. Operational Risk which includes risks due to operational ICD’s mission is to support Senior Management in failures maintaining an effective control environment. The Risk Management Group is organized into, among In accordance with CBK requirements on evaluation of others, four departments each responsible for one of the internal controls system within Burgan Bank Group, the Bank above families of risk plus an Enterprise Risk department arranges an annual review of the internal control systems via that provides shared services to the other Risk functions an independent external audit firm. The opinion furnished including reporting, data management, and quantitative by the external auditor in the Internal Control Review (ICR) analytics. Together these departments ensure the for December 2014, does not refer to any significant control effectiveness of managing the Bank’s risk portfolio taking deficiency. The ICR report was also reviewed by the Board of into consideration all internal and external economic Directors. changes that might affect bank’s stability and growth. The Risk Management Group confirms that each director and Based on the evaluations conducted by the Executive group head is aware of the size of risks faced by the bank Management and Board of Directors during the year, there through timely distribution of reports to the Board and to the are no critical control deficiencies identified which may need related committees in order to ensure risks are effectively to be reported in the Annual Financial Statements for the managed within the bank and across subsidiaries. year ended 31 December 2015. A majority of the subsidiaries have an independent risk Overall, the external auditor rating of Burgan Bank Group management function reporting to the respective Board Risk Internal Control Environment was satisfactory. Committee, as per their respective regulatory guidelines, Risk Management with a separate reporting line to their CEO and the GCRO.
The Bank has set up a Risk Management Group headed Burgan Bank supports subsidiaries in the ICAAP and Stress by the Group Chief Risk Officer who reports directly to the Testing process with oversight from the Board of Directors, Board Risk Committee in order to ensure the independence taking into account the applicable rules of their respective of the function. central banks wherever applied. Since some jurisdictions do not yet mandate an ICAAP and stress testing process, the The Risk Management Group does not have any business Group will, in due course, assist the subsidiaries to develop targets in terms of either levels of business or income/ their own processes, suited to their requirements. As part of profits to be achieved, with a view to ensuring its objectivity the Group ICAAP process, the Bank at the consolidated and in managing risks. The mission of the Group is to identify, subsidiary levels already compute Pillar 2 capital according measure and monitor risks across the Risk Management to Central Bank of Kuwait regulations.
44 Human Resources and Development Remuneration amounts are based on the bonus pools approved by the Board for the purpose of rewarding Remuneration Policy employee performance. The total amount of performance The remuneration policy aims at enabling the Group to related remuneration is based on a combination of the attract, retain, motivate and reward qualified workforce assessment of the overall results of the Bank, of the while ensuring fairness and consistency as well as being performance of the business unit and of the individual appropriately risk balanced. The policy reflects the Groups concerned. When assessing individual performance, objectives for good corporate governance as well as financial and non-financial targets and metrics are taken sustained and long term value creation for all stakeholders. into account. The Remuneration policies and practices form part of The payout of the variable remuneration may be deferred the Group’s overall obligation to have robust governance -as approved by the Board annually in line with the arrangements in place. approved policy over a period of time not exceeding three Employees are entitled to different remuneration years. The variable remuneration, including the deferred components targeting appropriate and balanced portion, is paid or vests only if it is sustainable according to remuneration package based on the employee job grade the financial situation of the Bank as a whole, and justified taking into consideration the employees skills, experience, according to the performance of the Bank, the business and his role in the Bank as well as market practice. unit and the individual concerned.
The remuneration components consist of all forms of The Board Nominations and Remuneration Committee payments or benefits in exchange for the services provided (BNRC) is responsible for presenting recommendations by the employee and can be divided into: to the Board on the Bank-wide reward policy in line with applicable laws and regulations. The composition and • Fixed remuneration based on employee job role and responsibility of BNRC is further detailed under the Board market Sub-Committees section of the Corporate Governance • Variable remuneration depending on employee Report. performance
Variable remuneration may be paid in cash and may be subject to a vesting or deferral period.
Financial Accounting Control
Shareholder Composition Main shareholders who own 5% or more of the Bank’s shares (2014 and 2015)
Shareholder Nationality No. of Shares % No. of Shares %
31/12/2014 31/12/2015 Kuwait Projects Company Kuwaiti 821,772,773 42.10 802,861,412 39.18 Holding K.S.C. (Closed) United Gulf Bank B.S.C. Bahraini 331,855,114 17.00 348,447,869 17.00 Public Institution for Social Security Kuwaiti 143,334,553 7.34 156,518,850 7.64
45 Appendix 1 - Report on Accounting and other Records and Internal Control Systems
Tel: +965 2242 6999 Al Johara Tower, 6th Floor Fax: +965 2240 1666 Khaled Ben Al Waleed Street, Sharq www.bdo.com.kw P.O. Box 25578, Safat 13116 Kuwait
The Board of Directors Burgan Bank S.A.K.P P.O. Box 5389, Safat 12170 State of Kuwait 9 June, 2015 Dear Sirs, Report on Accounting and other Records and Internal Control Systems In accordance with our letter of engagement dated 12 March 2015, we have examined the accounting and other records and internal control systems of Burgan Bank S.A.K.P (‘the Bank’) and the following subsidiaries of the Bank (hereafter collectively referred to as the “Group”) for the year ended 31 December 2014:
• Jordan Kuwait Bank • Tunis International Bank • Burgan Bank A.S – Turkey • Bank of Baghdad • Gulf Bank Algeria
We covered the following areas of the Bank:
• Corporate Governance • Anti-money Laundering • General Control Environment • Group Risk Management • The Investment Banking and • Clients’ Complaints Unit Treasury Group • Internal Control Unit • Retail Banking Group • Group Strategic Business • Private Banking Group Development • Group Corporate Communication • Group Information Technology • Banking Group • Group Strategic Financial Planning and Control Group • Operations Group • Operations Strategic Development • Group Human Resources and Development • International Operations Office • Legal Division • Financial Securities Activities • Group Compliance Department • Confidentiality of Customer’s Information • Group Internal Audit
46 Our examination has been carried out as per the requirements of the Central Bank of Kuwait (CBK) circular dated 22 February 2015 considering the requirements contained in the Manual of General Directives issued by the CBK on 14m November 1996, Pillar IV of the corporate governance instructions in respect of risk management and internal controls issues by the CBK on 20 June 2012. Instructions dated 23 July 2013 concerning anti money laundering and combating financing of terrorism, instructions dated 9 February 2012 regarding confidentiality of customer’s information and financial securities activities of the Group. As members of the Board of Directors of the Bank, you are responsible for establishing and maintaining adequate accounting and other records and internal control systems, taking into consideration the expected benefits and relative costs of establishing such systems. The objective of this report is to provide reasonable, but not absolute, assurance on the extent to which the adopted procedures and systems are adequate to safeguard the assets against loss from unauthorized use or disposition; the key risks are properly monitored and evaluated; that transactions are executed in accordance with established authorization procedures and are recorded properly; and to enable you to conduct the business in a prudent manner. Because of inherent limitations and internal control system, errors or irregularities may nevertheless occur and not be detected. Also, projection of any evaluation of the systems to the future periods in subject to the risk that management information and control procedure may become inadequate because of changes in conditions or that the degree of compliance with those procedures may deteriorate. With the exception of the matters set out in the accompanying report, and having regard to the nature and volumes of the Group’s operations, during the year ended 31 December 2014, and the materiality and risk rating of our findings, in our opinion: a) the accounting and other records and internal control systems of the Group were established and maintained in accordance with the requirements of the Manual of General Directives issues by the CBK on 11 November 1996 and letter issued by the CBK on 11 February 2014, b) the findings raised in the examination and assessment of the internal controls do not have an impact on the fair presentation of the financial statements of the Group for the year ended 31 December 2014, and c) the actions taken by the Group to address the findings referred in the report, including previous years’ findings, are satisfactory.
Yours faithfully,
Qais M. Al Nisf Licence No. 38 “A” BDO Al Nisf & Partners
47 48 Management Team
49 Management Team
Qualifications and Experience of the Bank’s GCEO and Executive Management Team
a - Group Chief Executive Officer
Eduardo Eguren Group Chief Executive Officer
Mr. Eguren was appointed as the Group Chief Executive Officer of Burgan Bank in September 2010. Mr. Eguren has over 31 years’ experience in global corporate, retail and commercial banking across five continents. Prior to joining Burgan Bank, Mr. Eguren was the CEO for the Global Commercial Banking Operations for Barclays Bank in the United Kingdom. From 1984-2007, Mr. Eguren held senior management positions at Citigroup, Citibank, Citi including Chief Financial Officer and Chief Operating Officer covering the businesses including corporate and retail banking, asset management, insurance and pension funds in Latin America, Europe, Asia, North America and Africa. He has extensive experience in developing, implementing and driving forward strategies for a number of global banks and initiating inorganic growth opportunities in Emerging Markets.
Mr. Eguren is a Chartered Accountant-Bachelor of Administration from Montevideo University, Uruguay.
b - Executive Management Team
Adrian Gostuski Raed Al Haqhaq Group Chief Operating Officer Chief Banking Officer
Mr. Gostuski joined Burgan Bank in 2011. As the Group Mr. Raed Al Haqhaq joined Burgan Bank in 2000 and has Chief Operating Officer, Mr. Gostuski is responsible for held senior roles in Corporate Banking. He was General leading the group’s operational areas of finance, legal, Manager- Corporate Banking from 2005 before moving banking operations, internal control and technology. Mr. into the role of Chief Banking Officer in 2008. Mr. Al Adrian Gostuski is a banking professional with over 37 Haqhaq is presently heading the Banking Group years of experience. He has solid international experience, responsible for the strategic direction, leadership as well both in Developed Economies and Emerging Markets, as revenue growth and profitability of Corporate Banking, with expertise in Finance, Investment Management and Retail Banking and Financial Institutions with development M&A. He has diverse experiences as Chief Financial of new and expansion of existing business relationships. Officer (CFO) and in Senior Executive positions for Mr. Al Haqhaq has over 20 years’ local and international Operations, Technology, Treasury and Equity Funds. Prior experience in corporate and investment banking. Mr. Al to joining Burgan Bank, Mr. Gostuski has worked at Haqhaq began his career at the Kuwait Investment Barclays - London, and Citigroup for over 23 years in Authority and then moved to the International Investment various capacities of which the last seven years were in Group. the capacity of CFO in Mexico and Singapore. Mr. Al Haqhaq is a graduate of California State University, Mr. Gostuski is a Certified Public Accountant (CPA) from Sacramento, USA with a Bachelor of Science degree Buenos Aires University, Argentina and also holds a majoring in Strategic Management. Masters in Business Administration in Strategic Planning from ESEADE, Buenos Aires, Argentina.
50 Khalid Fahad Al Zouman Robbert Voogt Group Chief Financial Officer Group Chief Private Banking Officer
Mr. Al Zouman joined Burgan Bank in 2000 as Head of Risk Mr. Voogt has been part of the Burgan Bank Group since Management, before moving into the role of Chief Financial 2013 and has been assigned as Group Chief Private Officer in 2003. He is mainly responsible for the strategic Banking Officer in 2014. He is responsible for the growth of planning of the finance activities for the Group to support the Private Banking business and portfolio for Burgan bank the Bank corporate strategy and to ensure the development at the Group level covering Kuwait as well as the and implementation of financial guidelines, controls and subsidiaries. reporting procedures to support management in the Mr. Voogt has solid experience of over 24 years, of which achievement of profitable business plans. 21 years are in Private Banking, He has held senior level Mr. Al Zouman has over 27 years’ experience working in positions in reputed Private Banking organizations like Kuwait and international markets in financial management. Emirates NBD, Mees Pierson and Merill Lynch in Europe, Prior to joining Burgan Bank, Mr. Al-Zouman held senior Middle East and Far East regions. Prior to joining Burgan financial management roles with Ernst & Young in Kuwait Bank, he was Group Head at CIMB Private Banking, and in the United States. Malaysia.
Mr. Al Zouman is a Certified Public Accountant (CPA) from Mr. Voogt holds a Bachelor’s degree in Business from the State of New Hampshire, USA, and also holds a Nyenrode Business University, Netherlands. Bachelor’s degree in Computer Science from Kuwait University.
Venkatakrishnan Menon Robert James Frost Chief Retail Banking Officer Group Chief Investment Banking and Treasury Officer
Mr. Menon joined Burgan Bank in 2005. Mr. Menon is Mr. Frost joined the bank in 2014. Mr. Frost is responsible responsible for development and delivery of the retail for the strategic leadership and financial expertise in the banking strategy ensuring that operational, customer Treasury and Investment Banking functions; developing a service, business development, risk management and unified and robust strategy to achieve the financial goals profit targets are met. He manages the overall retail branch and objectives. network as well as Alternative delivery channels, Marketing Mr. Frost has acquired over 20 years of experience in and Retail Credit. Mr. Menon has over 30 years of global financial markets with Macquarie Bank Ltd. where experience in Banking. Prior to his current role, he has lead he held the position of Executive Director and Global Head the Operations function at the bank in the capacity of Chief of Capital Management for the Macquarie Securities Group, Operations Officer for 9 years. Prior to joining Burgan bank and was responsible for the development, implementation Mr. Menon has held senior management roles in and management of the Group’s treasury requirements. organisations such as Qatar National Bank, BNP Paribas, Mr. Frost’s area of accountability spanned more than 20 Standard Chartered Bank and HDFC Bank. financial markets across the globe. Mr. Menon holds a Master’s degree in Business Mr. Frost holds a Bachelor’s Degree in Economics and a Management and Bachelor of Science from University of Bachelor’s degree in Science (Mathematics) from the Bombay, India. University of Queensland, Australia.
51 Halah El-Sherbini Bashir Jaber Group Chief Human Resources Group Head of Investor Relations and Development Officer and Corporate Communications
Ms. El Sherbini joined Burgan Bank in 2011. Ms. El Sherbini Mr. Jaber joined Burgan Bank in 2006. As the Group Head is responsible for leading the development of group of Investor Relations and Corporate Communications, Mr. strategies to build the capabilities and skills of Burgan Jaber is responsible for managing Burgan Bank’s corporate Bank group staff, so that the Bank can deliver its business marketing which includes investor relations, brand objectives and aspirations. Ms. El Sherbini has over 20 management, relationship management, external years’ experience and prior to joining Burgan Bank, Ms. El communications and corporate social responsibility. Mr. Sherbini was the Head of Human Resources at Ahli United Jaber has over 15 years of experience and prior to joining Bank and Citibank Kuwait and also held various leadership Burgan Bank, Mr. Jaber held various positions globally at roles at Gulf Bank and National Bank of Kuwait. Ogilvy and Mather Worldwide - an international advertising, marketing and public relations group. Ms. El Sherbini is a graduate of Alexandria University, Egypt with a Bachelor’s degree in English Literature and Mr. Jaber holds an Executive Masters of Business holds a Professional in Human Resources (PHR) Certificate Administration (EMBA) from the American University of from Society for Human Resource Management Beirut, a Bachelor’s degree in Advertising & Marketing from (SHRM). Ms. El Sherbini is a Certified Professional Trainer Notre Dame University, Lebanon, as well as a post graduate from Arab Bankers Association and a Certified Assessor diploma in Business Administration from University of from SHL. Leicester in the United Kingdom.
Fahad Mohammed Al Menayes Ghassan Bani Al Marjeh Chief Information Technology Chief Operations Officer Officer
Mr. Al Menayes joined Burgan Bank in 2012 as Head of IT Mr. Al Marjeh joined the bank in 2014. Mr. Al Marjeh is Operations. Mr. Al Menayes is handling the responsibility responsible for the planning, implementation and of the Bank’s Information Technology department. He will administration of the Bank’s operational and support lead and reinforce the bank’s strategic direction and functions such as Operations Strategic Development, leadership in terms of technology functions. Mr. Al General Services, and Centralized Banking Operations to Menayes has over 19 years of experience in Information achieve the Bank’s strategic business objectives. Mr. Al Technology field mainly at Al Ahli Bank of Kuwait & Burgan Marjeh has over 33 years of experience in Banking. His Bank. career spans various positions in the operations arena in organisations like National Bank of Kuwait, Gulf Bank, Mr. Al Menayes holds a Master’s degree of Science in Burgan Bank and Commercial Bank of Qatar. Prior to re- Software Engineering and a Bachelor’s degree in Computer joining Burgan Bank, Ghassan had moved to Warba Bank Science and Math from Monmouth University, USA. to handle the role of Deputy Chief Operations Officer.
Mr. Al Marjeh holds a Masters of Business Administration, Aviation Management from Coventry University, UK and Bachelor of Arts from University of Damascus, Syria in addition to a Diploma in Banking Operations & Information Technology, Vanderbilt University, USA.
52 Elyas Naser Anil Sunal Group Head of Strategic Business Head of International Department & Chief of Staff Operations Office- AGM
Mr. Naser joined Burgan Bank in 2011 with the Group Mr. Sunal has been with Burgan Bank since 1993 having Operations Office and then moved to Head of Strategic worked for 9 years in Corporate Banking Group and then Business Department & Chief of Staff in 2013. He is moving to Strategic Financial Planning Group where he responsible for maximising value of assets, through was appointed as Head- Management Information in 2004. strategic planning of investment activities and managing Mr. Sunal is handling the role of Head of International post acquisition activities. These entail leading the process Operations Office since 2012. Prior to joining Burgan Bank of evaluating and structuring of mergers & acquisitions, Mr. Sunal has 19 years of experience. Mr. Sunal is investments and financing-related opportunities and responsible for monitoring the performance of the Bank’s focusing on synergies across the group. Mr. Naser has subsidiaries on Financial, Risk, Regulatory, Control and over ten years of experience with various financial other critical aspects and issues. He also coordinates with organisations in the region including HSBC, Central Bank the Banks Board Members in the Subsidiaries for alignment of Bahrain and United Gulf Bank. with the Banks group wide policies and strategies.
Mr. Naser holds an Executive Masters of Business Mr. Sunal holds a Bachelor’s degree in Science and a Administrator (EMBA) from the American University of degree in Law from Karnataka University, India. Beirut and a Bachelor’s degree in Banking and Finance from the University of Bahrain.
c - Risk, Internal Audit and Compliance Executives
Andrew Christopher Singh Amr El-Kasaby Group Chief Risk Officer Group Chief Internal Auditor
Mr. Singh joined Burgan Bank in 2015 with over 27 years of Mr. El Kasaby joined Burgan Bank in 2007. As the Group extensive hands-on experience in risk management, and a Chief Internal Auditor, Mr. El Kasaby is responsible for proven record in enterprise wide risk management in both leading the internal audit function for the Burgan Bank developed and emerging markets. Prior to joining Burgan Group. Mr. El Kasaby has over 27 years’ experience in Bank, he has held positions which include Group Chief Risk Officer at EFG Hermes Holding for Middle East and auditing and accounting, and he has led audit engagements North Africa, Regional Head of Risk Americas at Depfa across a broad cross section of industries including Bank Plc, Regional Head of Risk for Europe at Credit Suisse banking, trading, investment management, manufacturing, and various risk & control related roles at JPMorgan Asia automotive and oil and gas while in Ernst & Young. Prior to Pacific and UK. joining Burgan Bank, Mr. El Kasaby was Deputy Manager of Internal Audit, Acting Chief Internal Auditor for Kuwait Mr. Singh is responsible for establishing Burgan Bank Group’s risk strategies and the enhancement of the Bank’s Finance House. risk management framework as well as implementation of Mr. El Kasaby is a Certified Public Accountant (CPA) from risk policies and risk governance across the bank and its State of Oregon, USA, in addition to holding a Bachelor’s subsidiaries. He also has in depth knowledge of market, degree of Commerce in Accounting and Auditing from credit, operational risk and regulatory compliance. Kuwait University. Mr. El Kasaby is also a Certified Fraud Mr. Singh holds a Bachelor’s degree of Science in Examiner (CFE) and Certified Internal Control Auditor Chemistry from Imperial College, London University, and is (CICA). an Associate of the Royal College of Science (A.R.C.S)
53 Hanan Mohamed Metwalli Group Head of Compliance
Mrs. Metwalli joined Burgan Bank in 1988 and has been with the Bank for over 25 years holding a number of positions for 16 years in the credit department, Corporate Banking and Risk Management Groups. Mrs. Metwalli has been assigned as the Head of Compliance since 2006 and is responsible for monitoring the implementation and application of strategies, action plans and policies in accordance with the principles and guidelines issued by the Basel Committee and different regulators to ensure regulatory compliance of the group represented by the Central Bank of Kuwait, Kuwait Stock Exchange, Capital Markets Authority and other regulatory bodies. Prior to joining Burgan Bank, Mrs. Metwalli has 11 years of experience in various roles at Al Ahli Bank of Kuwait, Commercial Bank of Kuwait and Gulf Bank.
Mrs. Metwalli holds a Bachelor’s degree of Commerce (Accounting) from the University of Alexandria - Egypt, and holds the degree of a Certified Compliance Officer (CCO) from American Academy of Financial Management (AAFM).
Remuneration disclosure by Employee Category
Category No. of Annual Remuneration Packages employees Fixed Variable ** Total Remuneration Group – 1: GCEO and his deputies and assistants and the main executive managers whose appointment 18 2,284,198 1,117,980 3,402,178 is subject to the approval of supervisory parties (Senior Management) Group – 2: Financial Risk and Control responsibilities 8 436,617 163,175 599,792 Group – 3: Material Risk Takers 9 605,679 182,250 787,929 Grand Total 35 3,326,494 1,463,405 4,789,899
Notes: All remunerations are paid in cash. Variable remuneration is on estimate basis for 2015.
Remuneration for five of the major executives who received the highest remuneration from the Bank, in addition to all the functions as required by the Corporate Governance guidelines (as a group): KD 2,438,206.
54 Corporate Governance structure
Burgan Bank, Kuwait Shareholder’s Assembly Board Committee Group Level Subsidiaries Board of Directors
Board Corporate Board Risk Board Nomination Board Secretariat Board Executive Board Credit Board Audit Governance Committee & Remuneration Committee Committee Committee Committee (BRC) Committee (BEXCO) (BCC) (BAC) (BCGC) (BNRC)
Chairman of Board & the Board Management Investment Group Group Risk Group Anti Committee (BMIC) Group Internal Group External Compliance (GR) Money Audit (GIA) Audit (GC) Laundering (GAML) Group Chief Executive Officer (GCEO)
Algeria Tunis Bank of Burgan Bank Gulf Bank International Baghdad (Turkey) (Algeria) Bank (Iraq) (Tunisia)
Banking Group Group Private Group Investment Group Operations Group Human Group Corporate Group Strategic Group Client (BG) Banking (GPB) Banking & Office Resources & Communication Business International Complaints Unit Treasury (GOO) Development (GCCD) Development Operations Office (CCU) (GIBT) (GHRD) (GSBD) (GIOO)
Corporate Financial Retail Banking Group Legal Group Strategic Group Operations Banking Group Institution (FI) Group (RBG) (GL) Financial Planning Information (CBG) & Control Technology (GSFP&C) (GIT)
55 56 Basel - III Qualitative and Quantitative Disclosures
57 Basel - III Qualitative and Quantitative Disclosures
INTRODUCTION The practices in all the group entities are not uniform due to banking practices and regulatory requirements In June 2014, Central Bank of Kuwait (CBK) issued directives in the respective countries of operation. However, a on the adoption of the Capital Adequacy Standards (Basel level of harmonization has already been put in place for III) under the Basel Committee framework applicable the purpose of meaningful consolidation of the financial to licensed banks in Kuwait, effectively replacing and position & performance and reporting in accordance with superseding the earlier requirements under the circular issued Basel and IFRS standards. Also, under the Group mandate in 2005 Basel framework (Basel II). These instructions cover standardization of Risk frameworks and processes are being comprehensively the calculation of the Capital Adequacy implemented in all the entities. Ratio (CAR) under Pillar 1 of Basel III, the supervisory oversight under Pillar 2, the disclosure of information under iii. Restriction/Impediments on Fund Transfers Pillar 3, and additional liquidity and leverage controls. Given below are the necessary disclosures pertaining to the Bank’s Transfer of funds or regulatory capital within the group Capital Structure, Risk Management objectives and policies, entities is subject to the applicable rules and regulations information relating to the Credit Exposure, Credit Risk in the respective jurisdictions. While some of the countries Mitigation, Market Risk, Operational Risk, and additional of incorporation of the subsidiaries have liberalized foreign Capital Disclosure Requirements as required under the CBK exchange regimes others have exchange control regulations Basel 3 regulations. In arriving at the CAR, in accordance with governing cross-border transfer of funds. Any transfer of the regulations, the standardised approach has been used for regulatory capital among the group entities is subject to the the computation of Risk Weighted Assets (RWA). applicable laws and regulations and the receipt of necessary approvals from the respective authorities. SUBSIDIARIES AND SIGNIFICANT INVESTMENTS CAPITAL STRUCTURE i The CBK regulations apply to: i. Main features of Capital Instruments BURGAN BANK K.P.S.C The Bank’s paid up capital entirely consists of ordinary shares ii Basis of Consolidation which have proportionate voting rights. These are listed on the Kuwait Stock Exchange and are actively traded thereon. The Bank has four subsidiaries as on 31st Dec. 2015. These are the following commercial banking entities acquired during the years 2009 – 2012 whose financials are consolidated in the Bank’s financial statements.
Name Country of Paid-up Effective Date of Incorporation Capital holding becoming a % Subsidiary
Gulf Bank Algeria Algerian 86.01% 30 April Algeria (GBA) Dinars 10 2009 billion Bank of Iraq Iraqi Dinars 51.79% 10 January Baghdad 250 billion 2010 (BOB) Tunis Tunisia United States 86.70% 27 June International Dollars 50 2010 Bank (TIB) million Burgan Bank Turkey Turkish Lira 99.26% 21 Turkey (BBT) 900 million December 2012
58 As at 31 December 2015, the share capital comprised of Additionally, the Bank also conducts stress testing which 2,049,359,158 issued and fully paid equity shares of KD 100 calculates the effect on its profits and CAR in cases of stress, fils each and the bank’s capital structure was as follows: based on certain scenarios.
CAPITAL STRUCTURE OF THE BANK KD’000s The Bank takes into account the CAR calculations in respect 31-12-2015 31-12-2014 of all its future business plans to ensure that, the level of its Share capital 204,936 195,177 eligible capital is sufficient to meet the expected increase in Share premium 210,559 210,559 business and particularly the level of RWAs. The Bank takes Statutory reserve 67,859 59,916 into consideration developments locally and in the region as Voluntary reserve 68,237 60,294 well as the expected changes in the banking environment Treasury shares reserve 45,082 45,082 while examining the level of capital buffer that it would like Investments revaluation reserve (2,292) 4,912 to maintain. The Board also takes into consideration other Foreign currency translation reserve (61,557) (19,043) factors such as the Bank’s future business plans, the new Other disclosed reserves (6,548) 1,118 areas of business under examination and the nature of the Retained earnings 122,981 112,401 attendant risks etc. The Bank has in place an Internal Capital Eligible minority interest in consolidated Adequacy Assessment Process (ICAAP) Policy developed 9,920 43,211 subsidiaries to comply with CBK regulations on Pillar 2 of Basel III. The Less: Regulatory adjustments internal assessment process for capital requirements is - Treasury shares (12,582) (9,575) carried out periodically by the bank taking into account the - Goodwill (17,617) (90,455) latest financials as well as forecasted plans. - Other intangibles (30,010) (78,036) As regards to the subsidiaries, the respective banking - Proposed dividends (36,376) (28,983) regulations in regard to capital adequacy are different in COMMON EQUITY TIER 1 (CET1) 562,592 506,578 each of the jurisdictions. While the authorities in Turkey have CAPITAL mandated the transition to certain Basel III standards over the Eligible minority interest in consolidated 1,751 7,626 subsidiaries next several years, are yet to finalize the regulations in this Perpetual Tier 1 capital securities 144,025 144,025 regard. All subsidiaries are using the standardised approach. ADDITIONAL TIER 1 (AT1) CAPITAL 145,776 151,651 The relevant CBK regulations on Basel III have however been applied for the consolidated financial position of the Bank and TIER 1 CAPITAL (CET1 + AT1) 708,368 658,229 its subsidiaries. Eligible minority interest in consolidated 2,334 10,167 subsidiaries CAPTIAL REQUIREMENT FOR EACH STANDARD PORTFOLIO General provision subject to 1.25% of the Amounts in KD’000s 56,009 62,251 credit RWA’s 31-12-2015 31-12-2014 Deductions from Capital Base arising from Claims on sovereigns 3,082 9,393 Investments in FIs where ownership is > (15,175) - Claims on public sector entities 1,403 12,795 10% Claims on banks 46,686 46,775 TIER 2 CAPITAL 43,168 72,418 Claims on corporates 297,235 310,210 TOTAL ELIGIBLE CAPITAL 751,536 730,647 Regulatory retail exposures 69,995 68,180 RHL Eligible for 35% RW - 504 CAPITAL ADEQUACY Past due exposures 7,208 5,886 Other exposures 134,478 143,867 i. Bank’s Approach to Capital Adequacy Assessment Total 560,087 597,610 Less: General provision in excess of The Bank has in place a system under which the capital (17,569) (15,072) adequacy of the Bank is calculated at regular intervals, based 1.25% of RWA’s on the CBK circular instructions dated 24/06/2014. Based Total Credit risk weighted exposure 542,518 582,538 on this system, the CRAR of the Bank has been above the Market risk exposure under 4,285 5,752 required threshold of 12.5% during the year 2015. standardised approach The Bank also has in place a policy for the Internal Capital Operational risk exposure 56,654 61,104 Adequacy Assessment Process (ICAAP) that is compliant with Total Capital Requirement 603,457 649,394 CBK instructions in regard to Pillar 2 of Basel and has been duly approved by its Board of Directors during the year. The Capital Adequacy Ratio (%) 15.57% 13.50% ICAAP policy covers additional risks apart from credit, market Tier 1 Ratio (%) 14.67% 12.16% and operational risks covered under Pillar 1 and assesses additional capital requirements for these additional risks Common Equity Tier 1 Ratio (%) 11.65% 9.36% over and above the minimum level stipulated by the CBK.
59 The CET1, Tier1 & total capital ratio of the banking BBT has, in addition an ICAAP process with the due approval subsidiaries were as follows: of its Board of Directors, taking into account the applicable rules of their respective central banks. Since the regulations 31-12-2015 in other jurisdictions do not mandate this as yet, the Bank will, in due course, assist the subsidiaries to develop their Subsidiary Banks CET1* Tier 1* Total capital ratio* own ICAAP processes, suited to their requirements. In Gulf Bank Algeria (GBA) 21.83% 21.83% 22.84% the meanwhile, the ICAAP is applied by the Bank at the Bank of Baghdad (BOB) 52.69% 52.69% 53.68% consolidated as well at the subsidiary wise level of assets and liabilities. Tunis International Bank 18.91% 18.91% 19.73% (TIB) A. CREDIT RISK Burgan Bank Turkey (BBT) 10.02% 10.02% 15.55% i. Strategies and Processes * Ratios computed under Basel III regulations as adopted in the state of Kuwait. The Bank has a well-documented Credit Policy that complies with CBK regulations and describes the appetite of the Bank 31-12-2014 for assumption of risks in its various business groups viz. the Corporate Banking, Private Banking, Retail Banking and Subsidiary Banks CET1* Tier 1* Total Financial Institutions groups. The Credit Policy has been capital developed by the Risk Management Group in consultation ratio* with the business groups and under the guidance and Jordan Kuwait Bank (JKB) 19.04% 19.04% 19.85% approval of the Board. All the business groups are required Gulf Bank Algeria (GBA) 12.02% 12.02% 13.08% to market for business and present credit proposals in Bank of Baghdad (BOB) 47.35% 47.35% 48.00% accordance with the general and specific guidelines stated Tunis International Bank 19.91% 19.91% 20.75% in the Credit Policy. Subject to the guidelines of the Policy, (TIB) each business group may draw up its own business strategy, Burgan Bank Turkey (BBT) 15.90% 15.90% 17.03% which is deliberated at the Executive Committee of the Bank * Ratios computed under Basel III regulations as adopted in and approved by the Board Executive Committee. The Policy the state of Kuwait. also defines the types of products that the various business groups can market to their clients and counterparties. Any RISK MANAGEMENT new product is required to undergo a specific validation process before its launch. The Bank has set up an independent Risk Management Group headed by the Group Chief Risk Officer who reports The Bank’s subsidiaries also have their respective credit directly to the Board Risk Committee. The Risk Management policies that govern the grant of credit facilities to clients Group does not have any business targets in terms of either segmented suitably, based on the market in their respective levels of business or income/profits to be achieved, with a business areas. Subject to the respective local business view to ensuring its objectivity in analyzing the various risks. environments and the specific requirements applicable in The mission of the Group is to identify, measure and control each jurisdiction, the policies of the subsidiaries have a various risks and report to the top management of the Bank similar coverage. on the effects and, where possible, mitigations. The Bank has comprehensive Risk and Disclosure Policy that classifies ii. Structure and Organisation the risks faced by it in its day-to-day activities into certain The Credit Risk Department is headed by Head of Credit families of risks and accordingly specific responsibilities Risk and has independent teams that are respectively have been given to various officers for the identification, responsible for Credit Risk Analysis and Credit Control. measurement, control and reporting of these identified The Credit Risk Analysis function is responsible for making families of risks. Among the families of risks are: independent risk analysis and appraisal of credit proposals i. Credit Risk which includes default risk of clients and that are marketed by the business groups. This department counterparties gives its independent views/recommendations on credit proposals brought to it by the Relationship Managers of the ii. Market Risk which includes interest rate, foreign exchange various business groups. These proposals are then further and equity risks processed in accordance with the delegation of powers approved by the Board. The Bank’s structure of delegation of iii. Operational Risk which includes risks due to failures from powers envisages that a credit approval requires, in addition people, process, systems and external events. to the recommendation of the concerned business group, The Risk Management Group is organised into, among an independent enabling opinion of an official of the Risk others, three departments each responsible for one of the Management Group at an appropriate level. This ensures above three families, viz. the Credit Risk, Market Risk and that the approval process has an in-built mechanism of Operational Risk departments. checks and balances with the concurrence of an independent functionary before a credit proposal can be approved. To be All subsidiaries have an independent risk management noted that under the new Corporate Governance Code, Risk function reporting directly to the respective Board Risk Management personnel do not have any signing power or Committees, as per CBK corporate governance requirements, approving authority, but can give their independent opinion with a dotted line reporting to GCEO. Among the subsidiary, on the proposal.
60 The subsidiaries are in the process of setting up similar The collaterals accepted by the bank normally consist of cash structures and organisations, subject of course to their in the form of deposits with the Bank, shares, bonds and respective local conditions and business environments. While units of mutual funds, various forms of real estate such as TIB and BBT already have similar organisations in place, as vacant lands, residential and commercial buildings, projects regards the other two subsidiaries, in view of their business under construction etc. The scope to obtain any other type of environment with less number of large corporate exposures collateral such as movables etc. is limited since the law does and higher exposures to retail and small & medium business not recognize a hypothecation charge or a chattel mortgage. entities, the organisation is being made to adapt to the local For the purposes of credit risk mitigation, only such of the requirements. collaterals that are permitted by the CBK and where the conditions stipulated are fully met are considered. iii. Scope and Nature of Reporting Systems As regards shares, bonds etc., the Bank fulfills the stipulated After the approval of the credit proposal, the Credit regulatory requirements for their periodic valuation, Control unit of the Credit department is entrusted with the application of haircuts etc. In regard to real estate assets, responsibility of checking that the conditions precedent the Bank has employed independent, professional and govt. for the draw-down of the credit facilities as approved are recognized evaluators who are required to assess the value fulfilled before the facilities are made available to the client/ of the collateral before they are accepted as security. As per counterparty. This unit, which is independent of the Credit the CBK rules, the Bank seeks two valuation reports. The Risk Analysis unit of the Department, also follows up on periodicity of the valuation is again in line with the regulatory the conduct of the accounts by the client/counterparty in requirements. accordance with the terms of approval and reports any irregularities for necessary corrective action. This unit is The amount of a secured facility that a borrower can avail also responsible to ensure that the relevant details for of is based on the valuation of security, after applying the measurement of the risk and allocation of the appropriate risk necessary ratios on the same, in terms of the conditions of weights to the exposures are made available in the system or approval. otherwise, so that the computation of the RWAs can be made appropriately. The respective credit policies of the subsidiaries also define the collaterals acceptable for their respective credit facilities Since the Bank is at present required to follow the with the ratios for coverage, top-up and liquidation. However, Standardised Approach for calculation of the RWAs, the unlike the laws of Kuwait, the laws in the jurisdictions of the internal ratings ascribed by the Bank for the obligors are not subsidiaries permit hypothecation of immoveable properties used in the process. However, bearing in mind the future of clients in favor of a bank and where this is permitted, such needs of the Bank in the event of application of the more collateral is also obtained, subject to the conditions stipulated advanced methods, the Bank has in place an internal credit in the respective legal provisions. Based on their respective rating system, Burgan Credit Rating (BCR). local regulatory requirements and banking practices, the collaterals are valued by independent sources. It is perceived that BCR has reached the end of its product life cycle and hence to keep pace with the changing business B. MARKET RISK environment BB has initiated the process of implementing Moody’s Obligor Risk Rating system. It is expected to be fully The primary objective of Burgan Bank‘s market risk functional by 2016. management function is to provide a coherent policy and operating framework for a strong Bank-wide management of All the credit proposals approved under delegated authorities market risk and liquidity risk. are reported with relevant details to the Board Credit Committee at regular intervals. i. Strategies and Processes
The subsidiaries will also have similar set up for the credit The operations of the Bank’s Treasury and Investment process after credit approval. Banking Group give rise to the market risks assumed by the Bank. The Bank has a well-defined and CBK compliant iv. Hedges and Mitigants Treasury, liquidity and investment Policies that outlines the framework that governs trading and investing activities that The Credit Policy of the Bank, while outlining the risk appetite give rise to market risk. These policy documents are prepared as regards credit risk, has also laid down guidelines for by the Treasury and Investment Banking with inputs from mitigating risks in terms of availability of credit enhancements Group Risk Management, under the guidance of the Board and/or collaterals to support the exposure, the coverage ratio and their approval. These policies covers rules concerning the of collateral value to the loan to be granted, the threshold positions that the Bank assumes in the course of its trading levels for top-up of security and liquidation. The policy and in foreign exchange, equities and fixed-income securities as procedures of the Bank also lay down the required methods well as the interest rate risk exposures in the banking book in and intervals for valuation of the different collaterals so as terms of mismatches in maturity and/or re-pricing periods. to determine the necessity for top-up by the client and/or procedure for liquidation. Since there are limited avenues for other types of hedges such as Credit Default Swaps etc. in the Kuwaiti banking environment, the chief mitigants considered are eligible collaterals and/or guarantee of acceptable third parties.
61 Every year, during the annual budget exercise, the Treasury where deemed appropriate and these are monitored and Group decides upon and proposes its expected strategy reported upon by the local Mid-Office and Market Risk units, and business plan for the coming year. These business with frequent reports to Group Market Risk. For Subsidiaries and strategy forecasts are discussed during Asset Liability that are active in Capital markets trading(mostly via back-to- Committee (ALCO) meetings throughout the year and when back deals with customers). P&L and risk sensitivity reports necessary corrective actions, are decided. ALCO meetings are sent to Group Market Risk sometimes more than once a are chaired by the Chief Executive Officer and are convened day. by the Market Risk Controller in the Risk Management Group. The ALCO discusses and deliberates on all aspects of market a. Scope and Nature of Reporting Systems and liquidity risks. The Bank has in place systems that allow independent, on- Liquidity management policy and limits ensure that liquidity is line monitoring of intra-day positions from outside the dealing maintained at sufficient levels to support operations and meet room. These systems enables the Market Risk Controller to payment demands even under stressed conditions that might monitor the activities of dealers and traders while transactions arise with a sudden change in the market environment. The are being booked. P&L and Risk Report covering trading Bank has also in place a comprehensive stress testing policy activities and their impact on various liquidity metrics are sent and liquidity contingency funding plan. daily to Senior Management. Stress testing for interest rate risk, foreign exchange risk and liquidity risk is conducted on The subsidiaries have their respective well defined ALCO a regular basis and results are presented to ALCO for review. and Market Risk policies with a similar content of topics, Detailed market risk reviews are submitted to the Board Risk but suited to their respective business environments. These Committee on a quarterly basis. The reviews highlight major policies have been framed with due consideration for the changes in the Bank‘s market and liquidity risk profiles as well respective local regulations that have an effect on the market as compositions of the investments portfolio. and liquidity risks assumed by each of them. The respective Board of Directors of each subsidiary approves the market b. Hedges and Mitigants risk appetite, in terms of limits, for market risks including A major part of the banking and trading books of the Bank foreign currency risk, interest rate risk and equity risk. These is in Kuwaiti Dinars (KD’s), the other important currencies limits are based on notional amount, stop-loss, sensitivity being the internationally actively traded currencies. Due to and/or VaR (Value at Risk). the limited scope for hedging interest rate positions in KD’s The Treasury group, in consultation with Risk Management, arising from a limited range of hedging products, the Bank proposes various limits and rules under which front-office enters into, where reasonably possible, variable interest rate traders and dealers are allowed to take positions. These transactions structured to enable it to minimize maturity/re- limits are approved by the Board Executive Committee and pricing mismatches. where so required under the regulations, also by CBK. These As regards the other currencies, the open positions taken limits relate to intra-day and overnight positions as well as by the Bank are subject to internal limits and when hedging positions under different maturity buckets, counterparty is required the Bank also makes use of interest rate and exposure limits, stop-loss levels etc. While the adherence of cross-currency swaps.. The Bank deals in derivates in order these limits is monitored by the Head- Investment Banking to meet client requests on a fully matched basis. At the same & Treasury (“IBT”), they are also independently monitored by time, the Bank only deals in or offers to its clients, vanilla Middle Office and the Market Risk unit whose reporting lines derivatives such as forward foreign exchange contracts and are independent of Treasury and Investment Banking Group. does not handle the more sophisticated derivatives including The Market Risk Controller reports relevant information on exotics and structured derivatives. treasury and investment activities to the Group Chief Risk Officer on a daily basis or more frequently if necessary. As regards the subsidiaries, with the exception of BBT have modest proprietary trading operations. The range of products While quantifying market risks, the Bank considers risks offered by them to their clients is also limited, due to the arising from movements in interest rates (for each of the market environment and where applicable, exchange control currencies in which it holds positions), foreign exchange and regulations. price of traded equity securities. As stated earlier, the Bank does not assume positions in commodities. Based on the BBT deals in foreign exchange and interest rate derivatives composition of the risk assets that give rise to these risks, to cover client needs on a back to back basis for proprietary the bank applies various rules to measure market risk. These activities. BBT also uses Interest rate swaps mainly with an are in line with the applicable regulatory guidelines and are aim to keep the interest rate risks in its banking book within considered commensurate with the positions assumed by the limits. All derivatives activities are regulated through limits bank Securities held in FVPL are marked to market daily as approved by the BOD and monitored through P&L and risk prescribed by the regulatory guidelines and these valuations systems. are independently computed/ verified by the Middle Office.
For subsidiaries, dealing and trading activities are governed by the applicable local regulations and prescribed limits. In addition to these regulatory limits, internal limits are applied
62 C. OPERATIONAL RISK In order to support Burgan Bank group business resilience and continued to deliver strong growth as well as solid Operational Risk Management Strategy is to continue support performance and maintain the highest standards in the the Management to minimize the risk of loss resulting from Banking industry; Burgan Bank (BB) Operational Risk inadequate or failed processes, people, technology and Implemented Operational Risk Management Framework external event across the business. (ORMF) that set in the Policy on Operational Risk, approved Burgan Bank have increase the focus on operational risk to by the Board of Directors supported by automated system ensure effective oversight and managing of theses risk. that simplify the process of collecting, storing, analyzing, tracking and reporting on information relevant to operational The Operational Risk department enables the Bank to identify losses, risk and control assessments, and management of measure, monitor and control its inherent risk exposures key risk indicators. across the Bank Operational Business areas at all levels by using different tools such as Risk Assessment, Event Operational Risk Key Management Process include but not Management, and Key Risk Indicator play an important role limited to the following: that enable the Bank to evaluate the risk controls, based on • Governance – incorporates the direction and review by the identified inherent risk, and to measure the residual risk senior management of operational risk within the bank. which remains after the implementation of controls. • Risk & Control Self-Assessment (RCSA) - The RCSA The Risk and Disclosure Policy of the Bank classifies the process is to identify, asses the key Operational Risk various areas of operational risks and identifies specific and its associated controls to the business based on the officers who are primarily responsible for rectifying these judgment of the respective business areas management. risks. • Key Risk Indicators (KRIs) - KRIs are a tool to measure and Information Security and Business Continuity monitor operational risk across the bank in a consistent Information, either internal or external, is heart of any format, and provide an ‘early warning indicator’ of potential organization operations. Due to its importance at every level process failures and/or control issues. of organization, it requires adequate level of protection. • Operational Loss Events - A key component of the As banks are source of money in physical or other form, Operational Risk Management process is the collection reliable information becomes even more critical and hence and tracking of operational loss events. The objective of Information Security becomes vital area of its concern. the loss event collection process is to provide a consistent The Information Security Management System Framework and organized approach to identify, capture, analyze and is prepared with a primary objective of developing a strong report the operational losses. The loss event collection will information security within the Bank through suitable policies encourage root cause analysis which can be used to drive and procedures. The objectives of this framework is to improvement action, and identify control gaps, highlighting provide the necessary protection of information, thereby correlations between risk and controls. ensuring its confidentiality, integrity and availability through • Reporting – allows the immediate above processes (i.e. technical, organizational and administrative measures, Burgan risk and control assessment, losses,& key indicators) to be Bank proactively work with Information Security management brought together in a coherent manner for use by all levels to protect all types of assets, including personnel, Burgan of management to oversee and control operational risk. Bank Information security management is in compliance with the international standard & best practice. The goal of the Operational Risk Management framework is to provide the management with the information needed to Burgan Bank has also coordinated processes to prevent make and execute the proper decision. and manage serious events such as IT System disruptions, financial disturbances and pandemics. Burgan Bank will continue to develop and improve methods and processes for managing and controlling operational risk Burgan Bank principles for Information Security, Business by ensuring the common language for operational risk and Continuity, and crisis management are defined in a controls. Business Continuity framework. A crisis management team is available on the group level for high-level coordination and communication internally and externally. In addition, continuity plans are in place for business-critical operations and services that are critical for society.
For significant parts of its operations, Burgan Bank also has insurance protection, with an importance on catastrophe protection. The goal of continuous risk reduction work is to maintain and reinforce the Group’s reputation by protecting, among other things, life, health, financial assets and data.
63 CREDIT EXPOSURES for off-balance sheet exposures is considered to be part of the Tier 2 capital of the Bank and the remaining amount is i. Definition of Past Due and Impaired Assets given the same treatment for the purpose of CAR as if it was In regard to income recognition, asset classification and a specific provision, i.e., it is reduced from the RWA of the provisioning requirements, the Bank, as a matter of policy, Bank. follows the relevant regulations of CBK. Where considered In regard to impaired assets, the Bank determines the appropriate for reasons of prudence, a more conservative necessary level of specific provision in terms of the norms policy is followed in regard to the amounts of loan loss laid down under the CBK regulations. These regulations provisions than those calculated by using the norms laid require the Bank to make a provision of at least 20% of the down in these regulations. The Bank considers an asset or value of the exposure (net of the value of eligible collateral as an exposure to be impaired if, in its opinion, the realizable defined therein) if it remains past due for more than 90 days value of the asset or the exposure is less than the value at but less than 180 days, 50% if the period of past due is more which it is carried in the books of the Bank before it considers than 180 days but less than 1 year and 100% if the past due the necessity of making a specific provision for the same. As period exceeds 1 year. However, based on the circumstances defined under the regulations of CBK, a past due exposure of a particular exposure, if and when the Bank considers it is considered to be one where the client or counterparty has necessary, a higher level of provisioning is made even if these failed to meet his contractual obligation to the Bank towards default periods are not attained. payment of the interest or the principal or a part thereof on the date on which such payment is due. Thus, if a client is In all cases of non-performing exposures, the Bank does not required to pay interest at monthly rests and if the interest recognize any accrued income. Interest/commission on such is not paid upon its debit to the account on the first day of exposure is recognized as income only on actual receipt. the following month, the loan is considered to be past due. Similarly, if the principal amount of the loan or an installment The Loan Review and Provisioning Committee of the Bank thereof is not paid on the day it falls due for payment under examines, at monthly intervals, all the delinquent accounts the contract entered into by the client with the Bank, such to determine if a specific provision needs to be made for any loan is considered as past due from the next day. However, particular account. The Committee is chaired by the Chief as is the international practice in the banking industry and Executive Officer or in his absence, by the GCOO to ensure as laid down under the CBK regulations, an exposure is an objective assessment of the concerned exposure without considered as non-performing if it continues to remain past taking into consideration the performance of the Bank or its due for more than 90 days. In respect of retail banking loans, profits/profitability. an asset is considered as non-performing if more than 3 The subsidiaries follow their respective applicable regulations installments remain unpaid. In all such cases, the exposure in regard to impaired assets and provisioning requirements. will be considered to be impaired. However, at the time of consolidation of the accounts, The The subsidiaries also apply such prudent policies which Bank applies the CBK rules in regard to provisioning on the are in line with the relevant regulations in their respective consolidated basis. Any shortfall arising on account of the jurisdictions. Additionally, the subsidiaries also follow the difference between the respective regulatory requirements rules laid down by their respective regulatory authorities. of a subsidiary and the CBK regulatory requirements are covered by the Bank at the consolidated level. ii. Approaches for Specific and General Provisions iii. Credit Risk Management Policy As required under the CBK regulations, the Bank maintains two types of loan loss reserves. On the Bank’s exposure to In regard to the credit portfolio of the Bank, the Credit Policy, non-bank clients and counterparties which are not covered as stated earlier, defines the risk appetite of the Bank. The by collateral in the form of cash or demand/term deposits Bank gives, in addition to the financial position of the client/ with the Bank, the Bank was required to maintain a general counterparty, due consideration to the sector of activity of the provision of 2% of the outstanding exposure, both on and off- client/counterparty, the exposure of the Bank to the group balance sheet. If the exposure to a third party is covered by to which the client/counterparty belongs, the quantum of the guarantee of a bank that is rated below ‘A’, in such cases exposure vis-à-vis the capital funds of the Bank, the country also, the Bank was required to maintain a general provision of of origin of the main cash flow of the client/counterparty, the 2% of the outstanding exposure. nature of credit facilities, their purpose and the source of repayment and any other considerations that are essential However, with effect from 12.03.07, the CBK amended these for the credit assessment. The availability or otherwise of rules and banks in Kuwait are, after that date, required to acceptable collateral, the standing and reputation of the maintain only 1% (instead of 2%) general reserve in respect client/counterparty, market reports, the exposures assumed of cash exposures and 0.5% for non-cash exposures. The by other banks on the same client/counterparty etc. are some past level of general provisions as of 31.12.2006 however of the considerations that are examined before approving cannot be reversed unless, under special circumstances, credit facilities. As a rule, all credit exposures are reviewed CBK approval is obtained for the same. The Bank has not at least once in a year. In the case of locally incorporated reversed any past provision in this regard. Out of the general unlisted companies and partnerships with limited liability, the provision so maintained, a sum equal to 1.25% of the RWA personal guarantees of the main promoters of the enterprise in the case of on-balance sheet exposures and after the are normally also required. application of Credit Conversion Factors and Risk Weights
64 Since the Bank is at present required to follow the CREDIT RISK EXPOSURE Amounts in KD’000s Standardised Approach for credit risk, it does not follow 31-12-2014 Gross credit exposure Gross average any statistical methods to estimate either the probability of credit exposure* default or exposure at default or loss given default. Based Funded Unfunded Funded Unfunded on the public ratings given to the clients/counterparties Claims on 1,305,347 18,599 1,208,032 9,340 by recognized and approved External Credit Assessment sovereigns Institutions (ECAIs), the exposures are risk weighted in Claims on public 130,617 16,239 116,617 21,825 accordance with the CBK regulations. sector entities Claims on banks 1,080,254 801,436 1,155,411 320,688 iv. ECAIs and Mapping Process Claims on 2,721,516 2,059,229 2,216,596 1,843,706 An exercise to map these ratings to the exposure of the Bank corporates where applicable is carried out. Where a general issuer rating Cash items 188,710 - 164,342 - Regulatory retail is available, the same is used for the relevant exposure of 612,317 56,774 584,479 53,344 the rated client/counterparty. Where only an issue rating is exposures RHL Eligible for available, if the rated issue has comparable characteristics 19,715 - 15,243 - 35% RW to the Bank’s exposure both in terms of the tenor and other Past due features such as availability of credit enhancement etc. such 117,475 3,045 129,359 2,390 exposures rating is considered. CBK at present considers Moody’s, Other exposures 1,580,405 19,202 1,572,318 22,639 Standard and Poor’s and Fitch as the Approved ECAIs and only those clients/counterparties who have a solicited rating Total 7,756,356 2,974,524 7,162,397 2,273,932 from one or more of these ECAIs, are considered to be rated. * Average exposure represents daily average outstanding Based on the rating systems as declared by the ECAIs, except in the case of past due exposures, which show the ratings are classified into Investment Grade and Non- quarterly averages since the classification of past due Investment Grade ratings. Those who are not rated by any exposures is done quarterly of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated.
CREDIT RISK EXPOSURE Amounts in KD’000s 31-12-2015 Gross credit exposure Gross average credit exposure* Funded Unfunded Funded Unfunded Claims on 993,456 - 799,367 - sovereigns Claims on public 56,131 - 56,503 - sector entities Claims on banks 969,233 1,107,872 978,480 386,872 Claims on 2,570,213 1,613,850 1,923,113 1,360,781 corporates Cash items 158,732 - 102,494 - Regulatory retail 599,141 101,301 568,070 102,540 exposures RHL Eligible for - - - - 35% RW Past due 119,587 27,868 104,674 13,858 exposures Other exposures 1,480,250 25,202 1,218,055 1,313 Total 6,946,743 2,876,093 5,750,756 1,865,364
65 GEOGRAPHIC DISTRIBUTION OF GROSS CREDIT EXPOSURE Amounts in KD 000’s Other Rest of 31-12-2015 Kuwait Jordan Algeria Iraq Tunisia Turkey Middle Europe Total the world East Claims on sovereigns 446,581 - 134,042 189,314 - 165,581 53,076 - 4,862 993,456 Claims on public sector 40,993 - - - - - 11,463 - 3,675 56,131 entities Claims on banks 312,553 74,800 528 18,542 23,023 94,151 710,608 705,282 137,618 2,077,105 Claims on corporates 2,213,983 - 456,268 48,080 6,297 1,332,906 76,899 3,888 45,742 4,184,063 Cash items 81,291 - 31,122 33,533 269 2,745 196 - 9,576 158,732 Regulatory retail 406,803 - 36,409 28,213 255 226,923 42 1,465 332 700,442 exposures RHL Eligible for 35% ------RW Past due exposures 84,322 - 10,654 47,937 190 - 4,352 - - 147,455 Other exposures 1,151,351 580 48,085 42,613 5,237 49,676 97,247 16,680 93,983 1,505,452 Total 4,737,877 75,380 717,108 408,232 35,271 1,871,982 953,883 727,315 295,788 9,822,836
GEOGRAPHIC DISTRIBUTION OF GROSS CREDIT EXPOSURE Amounts in KD 000’s Other Rest of 31-12-2014 Kuwait Jordan Algeria Iraq Tunisia Turkey Middle Europe Total the world East Claims on sovereigns 417,089 365,977 150,176 186,685 - 175,310 27,344 1,365 - 1,323,946 Claims on public sector 20,205 112,840 - - - - 13,811 - - 146,856 entities Claims on banks 241,921 14,501 281 48,865 25,108 66,003 626,436 556,283 302,292 1,881,690 Claims on corporates 2,279,943 476,882 543,279 111,605 9,492 1,256,004 47,206 25,321 31,013 4,780,745 Cash items 70,223 16,076 50,451 42,426 312 3,444 1,363 500 3,915 188,710 Regulatory retail 394,476 54,541 37,656 27,548 184 154,635 - 50 1 669,091 exposures RHL Eligible for 35% - 19,715 ------19,715 RW Past due exposures 71,030 12,350 9,079 13,152 418 9,315 5,176 - - 120,520 Other exposures 1,184,098 93,101 50,979 41,015 1,888 75,176 37,718 16,960 98,672 1,599,607 Total 4,678,985 1,165,983 841,901 471,296 37,402 1,739,887 759,054 600,479 435,893 10,730,880
GROSS CREDIT RISK EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY Amounts in KD 000’s 31-12-2015 Up to 3 months 3 to 6 months 6 to 12 months Over 12 months Total Claims on sovereigns 455,737 107,963 72,986 356,770 993,456 Claims on public sector entities - - - 56,131 56,131 Claims on banks 1,026,892 305,853 246,251 498,109 2,077,105 Claims on corporates 918,487 328,371 575,117 2,362,088 4,184,063 Cash items 158,732 - - - 158,732 Regulatory retail exposures 113,463 32,127 46,902 507,950 700,442 RHL Eligible for 35% RW - - - - - Past due exposures 147,455 - - - 147,455 Other exposures 216,154 148,503 83,861 1,056,934 1,505,452 Total 3,036,920 922,817 1,025,117 4,837,982 9,822,836
66 GROSS CREDIT RISK EXPOSURES BY RESIDUAL CONTRACTUAL MATURITY Amounts in KD 000’s 31-12-2014 Up to 3 months 3 to 6 months 6 to 12 months Over 12 months Total Claims on sovereigns 570,105 133,221 133,388 487,232 1,323,946 Claims on public sector entities 48,734 - - 98,122 146,856 Claims on banks 1,137,514 220,856 221,330 301,990 1,881,690 Claims on corporates 1,123,548 553,046 842,873 2,261,278 4,780,745 Cash items 188,710 - - - 188,710 Regulatory retail exposures 72,323 35,513 48,200 513,055 669,091 RHL Eligible for 35% RW - - - 19,715 19,715 Past due exposures 120,520 - - - 120,520 Other exposures 234,361 76,506 218,473 1,070,267 1,599,607 Total 3,495,815 1,019,142 1,464,264 4,751,659 10,730,880
IMPAIRED LOANS AND PROVISIONS BY STANDARD PORTFOLIO IMPAIRED LOANS AND PROVISIONS BY STANDARD PORTFOLIO Amounts in KD 000’s Amounts in KD 000’s Impaired Specific Impaired Specific loans (net of provision loans (net of provision Total Total 31-12-2015 suspended charge / 31-12-2014 suspended charge / provisions provisions interest and charge off interest and charge off collateral) (-) collateral) (-) Claims on banks 1,207 6,894 (587) Claims on banks 1,903 6,141 431 Claims on corporates 29,997 206,344 19,819 Claims on corporates 53,105 209,830 34,747 Regulatory retail Regulatory retail 24,474 31,145 6,372 19,912 24,190 4,764 exposures exposures Other exposures 6,471 10,810 (2,033) Other exposures - 14,136 3,971 Total 62,149 255,193 23,571 Total 74,920 254,297 43,913
GEOGRAPHICAL DISTRIBUTION OF IMPAIRED LOANS (NET) Amounts in KD 000’s Other Rest of 31-12-2015 Kuwait Jordan Algeria Iraq Tunisia Turkey Middle Europe Total the world East Claims on banks ------1,207 - - 1,207 Claims on 4,380 - 6,915 3,078 584 15,040 - - - 29,997 corporates Regulatory retail 21,060 - 571 2,446 - 397 - - - 24,474 exposures Other exposures 6,471 ------6,471 Total 31,911 - 7,486 5,524 584 15,437 1,207 - - 62,149
GEOGRAPHICAL DISTRIBUTION OF IMPAIRED LOANS (NET) Amounts in KD 000’s Other Rest of 31-12-2014 Kuwait Jordan Algeria Iraq Tunisia Turkey Middle Europe Total the world East Claims on banks ------1,903 - - 1,903 Claims on 6,692 25,301 5,100 2,615 342 12,710 345 - - 53,105 corporates Regulatory retail 14,479 1,913 576 2,761 - 183 - - - 19,912 exposures Total 21,171 27,214 5,676 5,376 342 12,893 2,248 - - 74,920
67 RECONCILIATION OF CHANGES IN PROVISIONS Amounts in KD BBT also uses CEM to calculate capital charge on its OTC 000’s derivative products. 31-12-2015 Funded Unfunded Total Provisions as on CREDIT SECURITIZATION 236,678 17,619 254,297 1 January 2015 The Bank does not conduct any securitization activities. Disposal of a subsidiary (35,424) (749) (36,173) Exchange adjustment (5,114) (352) (5,466) CREDIT RISK MITIGATION (CRM) Amounts written off (12,539) - (12,539) Charge to income The main CRM techniques applied by the Bank are based on 53,253 1,821 55,074 statement eligible collaterals. Cases where the guarantee of a better- Provisions as on rated client/counterparty is obtained for exposures to a lower 236,854 18,339 255,193 31 December 2015 rated client/counterparty are few, mainly due to the limited number of Kuwaiti and other regional corporates for which RECONCILIATION OF CHANGES IN PROVISIONS Amounts in KD ratings by approved ECAIs are available. In cases where 000’s specific pledge or blocking of deposits is available, on and 31-12-2014 Funded Unfunded Total off- balance sheet netting is also used to mitigate client risks. Provisions as on 216,073 16,413 232,486 1 January 2014 i. On and Off-Balance Sheet Netting Exchange adjustment (957) (115) (1,072) The generic legal documents that the Bank obtains from its Amounts written off (38,419) - (38,419) clients normally include a clause that permits the Bank to Charge to statement of 59,981 1,321 61,302 offset the client’s dues to the Bank against the Bank’s dues income to the client. Thus, if the same legal entity that has obtained Provisions as on 236,678 17,619 254,297 31 December 2014 credit facilities from the Bank also maintains credit balances in its accounts, the Bank would normally have the legal right COUNTERPARTY CREDIT RISK to set off the credit balances against its dues. In respect of some counterparty banks, there are specific agreements that i. Objective and Policies provide for netting on and/or off-balance sheet exposures. Additionally, in specific cases, the Bank approves credit The primary objective of counterparty credit risk management facilities to a client against pledge/block of his deposits to function is to effectively identify, measure and manage cover the whole or part of his dues. all derivatives related counterparty exposures through regular review of counterparty limits and daily monitoring of For the purposes of computation of CAR (also for calculation exposures vs. limits. of general provisions), as a prudential measure, the Bank does not take into account the general lien available to it ii. Strategies and Process under the generic documentation but only considers cases All derivative limits for counterparties are approved by Board where specific pledge/block of deposits is in place. Credit Committee or its delegated authority. With regard ii. Collateral Policy to non-banking customers, derivative products are mainly offered only to selective large corporate customers with a It is the Bank’s endeavour to obtain acceptable collateral demonstrated need to employ these products to manage the cover for its exposures as far as commercially practicable. financial risks in their businesses. The collateral normally consists of real estate properties, shares listed in Kuwait and other leading stock exchanges, iii. Structure and Organisation other traded and untraded securities such as bonds, mutual Treasury Group manages day-to-day counterparty funds etc. In some cases, in order to ensure the promoter’s exposures for derivatives within the limits set by the Board commitment, the Bank also obtains other forms of collateral Credit Committee. Middle Office monitors and controls the such as unlisted shares/securities etc. but these securities of exposures independently so that the exposures remain within course are not considered for CRM purposes. While the Bank the approved limits. will be willing to accept other eligible collaterals as defined by the CBK such as gold, eligible debt instruments etc. these are iv. Scope and Nature of Risk Measurement and Reporting not generally offered by clients/counterparties to the Bank. Systems Accordingly, the eligible collateral predominantly consists of Capital charge for Over the Counter (OTC) derivative products shares listed and traded on the recognized stock exchanges is calculated using the current exposure method (“CEM”). which form part of their respective main indices and eligible Under this method exposure is calculated, applying CBK real estates as per CBK rules. recommended add-on factors and positive mark-to-market of Under Kuwaiti laws, the repossession and enforcement of the transactions. a mortgage on the primary residence of a borrower is not As regards the subsidiaries, with the exception of BBT, other permitted except under specific conditions. The bulk of the entities do not actively deal in derivative transactions. BBT residential mortgage loans of the Bank in its Retail Banking also has similar objectives, policies, strategies, processes, Group are therefore not considered to be collateralized by structure and organisation but customized to local market the primary residence, even though mortgage documents are environment and regulations. Starting from November 2014, obtained from some of the clients.
68 Only in some cases, where the legal conditions for vi. Concentration enforcement are fulfilled, these are considered to be retail exposures collateralized by residential mortgages and are The Bank makes an endeavor to avoid concentration of applied the relevant weight. collateral as far as possible. To this intent, when collateral in the form of listed shares is accepted, the year-to-date daily However, as regards the subsidiaries, the respective traded volumes of the concerned share and the average local laws do not pose any constraints on enforcement of number of trades are examined and these are, among other the mortgage on the primary residence and hence these points, taken into consideration in making a decision to constraints do not apply in their cases. accept the collateral and stipulating the concerned threshold ratios stated above, viz. coverage ratio, top-up ratio and iii. Main Types of Collateral liquidation ratio. The Bank classifies listed shares into The Credit Policy of the Bank defines the types of collateral various categories based on the liquidity and volatility of the that are acceptable and the collateral coverage ratio, which concerned share, derived from the data available with the is the ratio of the value of the collateral to the exposure, for Kuwait Stock Exchange. The ratios stated above would vary each type of acceptable collateral. The policy also stipulates depending on the classification of the shares. that the terms of credit facilities should stipulate a top-up NET CREDIT EXPOSURE AFTER RISK MITIGATION AND level. If the value of collateral falls to a level where the actual CREDIT CONVERSION FACTOR Amounts in KD 000’s coverage available breaches the top-up level, the client is Net 31-12-2015 Before CRM CRM required to either lodge additional collateral or reduce his Exposure outstanding dues accordingly. If the client fails to do either of Claims on sovereigns 993,456 - 993,456 these and the value of collateral falls further, the terms also Claims on public stipulate a liquidation threshold, which is the level of coverage 56,131 - 56,131 sector entities at which the Bank may proceed to liquidate the collateral Claims on banks – to realize its dues. These various ratios, after approval, are 594,547 791 593,756 monitored independently by the Credit Control unit and Rated Claims on banks – reported to the concerned business group for follow up with 415,454 - 415,454 the client. Unrated Claims on corporates 2,944,719 518,612 2,426,107 iv. Collateral Valuation and Management Cash items 158,732 - 158,732 Regulatory retail The Bank follows a system under which the collateral 637,132 39,814 597,318 valuation is independently verified. In respect of real estate exposures RHL Eligible for 35% accepted as collateral, the valuation is done on an annual - - - basis by two independent valuers, one by a valuer approved RW by Central Bank of Kuwait and another by a registered valuer Past due exposures 125,487 58,446 67,041 approved by the Bank and the average of two values being Other exposures 1,493,098 610,543 882,555 considered for risk mitigation. In respect of shares and other Total 7,418,756 1,228,206 6,190,550 securities listed on the Kuwait Stock Exchange, the valuation is computed daily, based on the prices declared by the Stock Exchange at the end of the day. The valuation of other NET CREDIT EXPOSURE AFTER RISK MITIGATION AND CREDIT CONVERSION FACTOR Amounts in KD 000’s collateral such as unlisted shares is done on such bases as Net may be considered appropriate, on a case-by-case basis. 31-12-2014 Before CRM CRM Exposure The valuation process is handled by the Credit Control unit Claims on sovereigns 1,320,789 299 1,320,490 of the Bank with no involvement of the concerned business Claims on public group who are kept informed of the value of client collateral. 133,876 43 133,833 sector entities v. Guarantees for Credit Enhancement Claims on banks – 726,710 17 726,693 Rated As stated earlier, there are very few cases where guarantee Claims on banks – of a better-rated entity is obtained for the exposure to a lower 390,338 - 390,338 Unrated rated entity. In these cases, where the rating is given by an approved ECAI, the guarantor’s rating is substituted in place Claims on corporates 3,193,211 601,401 2,591,810 of the rating of the borrower, for the purpose of computation Cash items 188,710 - 188,710 Regulatory retail of RWAs. Where the guarantor and/or the borrower are/is 633,393 32,331 601,062 not rated by an approved ECAI, the Bank uses its internal exposures assessment to determine the acceptability of the guarantee RHL Eligible for 35% 19,715 7,721 11,994 but for the purpose of computation of RWA, this has no RW effect. Past due exposures 118,699 61,519 57,180 Other exposures 1,590,343 623,854 966,489 Total 8,315,784 1,327,185 6,988,599
69 EXPOSURE COVERED BY ELIGIBLE COLLATERAL AND CAPITAL REQUIREMENT FOR MARKET RISK Amounts in KD GUARANTEE 000’s Amounts in KD 000’s 31-12-2014 Covered by Equity position risk 550 Financial Exposure after Foreign exchange risk 2,493 collateral after CCF, net of Interest rate position risk 713 31-12-2015 application suspended Options 79 of haircuts as interest stipulated by Total 3,835 CBK Claims on sovereigns 993,456 - OPERATIONAL RISK Claims on public sector entities 56,131 - Claims on banks 1,010,001 791 As stipulated by CBK, the Bank uses the Standardised Claims on corporates 2,944,719 518,612 Approach for computation of Operational Risk and the capital Cash items 158,732 - required for the same. Out of the eight business lines defined Regulatory retail exposures 637,132 39,814 by CBK, the Bank’s operations are confined only to five, and RHL Eligible for 35% RW - - the Bank does not presently operate in Corporate Finance, Past due exposures 125,487 58,446 Agency Services and Retail Brokerage. For the remaining Other exposures 1,493,098 610,543 business lines, the Bank uses the stipulated beta factors. Additionally, as stated earlier, the Bank has put in place Total 7,418,756 1,228,206 an Incident Management System to track operational risk incidents and eventually, the system is expected to assist the EXPOSURE COVERED BY ELIGIBLE COLLATERAL AND Bank develop a more advanced approach for operational risk, GUARANTEE if and when this is approved or mandated by the authorities. Amounts in KD 000’s Also, the Bank uses ICCs as a control tool in respect of Covered by operational risks. The risk dashboards give a view of the Financial Exposure after areas of operational risk to the senior management of the collateral after CCF, net of Bank and the Board. 31-12-2014 application suspended of haircuts as interest The subsidiaries apply the Basic Indicator Approach for stipulated by computing operational risk under their respective local CBK regulations. However, during the consolidation process, the Claims on sovereigns 1,320,789 299 operational risks are considered under the Standardised Claims on public sector entities 133,876 43 Approach where the activities of the subsidiaries are Claims on banks 1,117,048 17 considered under the various business lines as stipulated Claims on corporates 3,193,211 601,401 under the CBK regulations on Basel III calculations. Cash items 188,710 - Regulatory retail exposures 633,393 32,331 EQUITY POSITION IN THE BANKING BOOK RHL Eligible for 35% RW 19,715 7,721 i. Classification of Investments Past due exposures 118,699 61,519 Other exposures 1,590,343 623,854 The Bank consolidates the assets and liabilities of its four Total 8,315,784 1,327,185 subsidiaries, viz. Bank of Baghdad, Gulf Algeria Bank, Tunis International Bank and Burgan Bank Turkey. The Bank’s MARKET RISK FOR TRADING PORTFOLIO, FOREIGN investments are classified as either ‘Available for Sale’, ‘Held EXCHANGE AND COMMODITIES EXPOSURES to Maturity’, ‘At fair value through income statement’ or ‘Held for Trading’. Investments in equities that are acquired The Bank applies the Standardised Approach for computing principally for the purpose of selling in the short term or, if the market risk on its trading portfolio and at present does they are managed and their performance is evaluated on not use the Internal Model Approach (IMA). Under the reliable fair value basis in accordance with the documented Standardised Approach, the risk exposure is quantified investment strategy, are classified as at fair value through according to the levels stipulated by CBK. income statement and all other investments are classified as available for sale. The Bank has an Investment Policy CAPITAL REQUIREMENT FOR MARKET RISK Amounts in KD that outlines the type of investments, the accounting 000’s requirements, the risk appetite for investments etc. 31-12-2015 Equity position risk 167 Foreign exchange risk 1,536 Interest rate position risk 987 Options 53 Total 2,743
70 ii. Accounting Policy and Valuation Methodology INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)
The accounting policies concerning investments and their The interest rate risk in the banking book arises due to valuation methodologies are described in detail under the maturity/re-pricing mismatches of the assets and liabilities. “Summary of Significant Accounting Policies” elsewhere in For the purpose of monitoring such interest rate risk, the this Annual Report. During the year 2015, there has been no Bank has in place a system that tracks interest repricing significant change in these policies and methodologies. dates for all of its interest bearing assets and liabilities. From such data, an interest repricing profile is prepared showing The Bank’s Investment Committee examines proposals for the relevant mismatches classified into various buckets. Non- investments that come from the Investment Department interest bearing assets and liabilities are disregarded since which is under the Head- IBT. The Committee deliberates they do not affect the IRRBB. IRRBB details are prepared and on these proposals before sending them for the final presented at ALCO meetings and these offer an additional decision of the Board Executive Committee. The Investment tool to assist ALCO in managing interest rate risk. Committee also takes a view on appropriate classification of the concerned investment, based on the Bank’s objective in For a parallel 25/50/100 basis point shock along the yield making the investment. curve, net interest income for one year including derivatives is affected as shown below (KD mn): As regards the subsidiaries, they also have their respective investment policies on the above lines, which of course, are in 31-12-2015 line with their applicable regulatory requirements. Impact of interest rate change on earnings
105,000 55% INVESTMENTS Amounts in KD 000’s 100,000 31-12-2015 Publicly traded* Privately held 95,000 50% 90,000 45% Equities 65,669 162,481 85,000 80,000 40% Fixed income instruments 224,989 40,402 75,000 35% 70,000 Any other investments 7,003 69,581 65,000 30% 60,000 Total 297,661 272,464 55,000 25% 50,000 20%
KD ‘000 KD 45,000 40,000 15% 35,000 INVESTMENTS Amounts in KD 000’s 10% 30,000 31-12-2014 Publicly traded* Privately held 25,000 5% 20,000 0% Equities 84,333 102,173 15,000 10,000 -5% Fixed income instruments 194,352 15,796 5,000 Any other investments 19,783 68,505 – -10% (5,000) -15% (10,000) Total 298,468 186,474 (15,000) -20% Down 100 Down 50 Down 25 BB Consolidated Up 25 Up 50 Up 100 76,120 79,240 81,546 84,567 87,687 90,808 97,339 • The Bank does not have any publicly traded investments (8,447) (5,327) (3,021) – 3,120 6,241 12,772 whose fair value as disclosed in the financial statements is -10% -6% -4% 0% 4% 7% 15% materially different from publicly quoted values. Net Int. Inc. Forecast Earnings at Risk Earnings at Risk %
KD 000’s 31-12-2014 31-12-2015 31-12-2014 Impact of interest rate change on earnings Realised gains/(losses) recorded 2,464 4,686 105,000 55% in the income statement 100,000 50% Unrealised gains/(losses) 95,000 90,000 45% recognised in the shareholder’s (2,292) 4,912 85,000 80,000 40% equity 75,000 35% 70,000 65,000 30% Capital requirement by equity groupings 60,000 55,000 25% 50,000 20%
KD 000’s ‘000 KD 45,000 40,000 15% 31-12-2015 31-12-2014 35,000 10% 30,000 Investments available for sale 50,049 40,185 25,000 5% 20,000 Investments held to maturity 8,098 6,368 0% 15,000 Investments designated through 10,000 -5% 11,245 12,061 5,000 profit & loss – -10% Investments held for trading 731 1,431 (5,000) -15% (10,000) Investment in associates 4,125 4,631 (15,000) -20% Down 100 Down 50 Down 25 BB Consolidated Up 25 Up 50 Up 100 Total 74,247 64,676 68,745 73,677 75,944 79,515 83,289 87,056 94,737 (10,770) (5,838) (3,571) – 3,774 7,541 15,222 -14% -7% -4% 0% 5% 9% 19%
Net Int. Inc. Forecast Earnings at Risk Earnings at Risk %
71 On a consolidated basis, interest rate sensitivity at year-end Employees are entitled to different remuneration components was such that if interest rates of all maturities were to rise targeting appropriate and balanced remuneration package (fall) by an equal 1%, then net interest income for the coming based on the employee job grade taking into consideration year would have risen (fallen) by KD 10.9M (KD 6.4M) (2014 - the employees skills, experience, his/her role in the Bank as KD 14.1M [KD 9.7M]) well as market practice
REMUNERATION PRACTICES The remuneration components consist of all forms of payments or benefits in exchange for the services provided Remuneration Governance by the employee and can be divided into:
The Board Nominations and Remuneration Committee • Fixed remuneration based on employee job role and (BNRC) is responsible for presenting recommendations to market the Board regarding nomination to the Board’s membership, review of Board structure on an annual basis, undertake • Variable remuneration depending on employee performance evaluation of the overall Board and the performance- mainly in the form of cash bonuses, both performance of each member on annual basis, and deferred and non-deferred developing Bank-wide reward policy in line with applicable Employees are eligible to variable remuneration applicable laws and regulations. In addition, BNRC is responsible to their position. Variable remuneration is in the form of cash for appointment of the senior positions of the Executive bonus for Variable remuneration may be paid in cash and Management, ensuring that these positions are occupied may be subject to a vesting or deferral period. Remuneration by qualified employees along with setting performance amounts are based on the bonus pools approved by the standards and succession plans. Board for the purpose of rewarding employee performance. There were 4 meetings held during the year by the BNRC. The total amount of performance related remuneration is based on a combination of the assessment of the overall The Committee is formed and operates as per the guidelines results of the Bank and of the performance of the business provided under the Corporate Governance manual and unit and of the individual concerned. When assessing the ‘Board/ Committee Meeting Guidelines. In addition, individual performance, key financial and non‐financial specifically for the BNRC composition, the Chairman of the targets and metrics are taken into account. Board is not be a member of the BNRC. The payout of the variable remuneration is paid in cash for The Bank has updated the grade &compensation structure most of our employees. The variable remuneration is deferred during the year previously developed with Hay consultants. for the CEO and Group Executives as approved by the Board annually in line with the approved policy over a period of time The scope of this remuneration policy covers Burgan bank not exceeding three years. and its subsidiaries where the regulatory requirements of the subsidiaries in the countries they operate are not in conflict The variable remuneration, including the deferred portion, is with the remuneration policy. paid or vests only if it is sustainable according to the financial situation of the Bank as a whole, and justified according For the purposes of the disclosures, the Bank has identified to the performance of the Bank, the business unit and the 18 staff members as being senior management group individual concerned. comprising mainly of the CEO and his deputies who are directly responsible for the governance and management of Employees engaged in control functions are independent the Bank and 12 staff members as being Material risk takers- from the business units they oversee, have appropriate group whose roles are not covered in the above group and authority, and are remunerated in accordance with the whose activities, individually or collectively, have a significant achievement of the objectives linked to their functions, impact on the Banks financial performance and stability/ independent of the performance of the business areas they control soundness. control. The remuneration of the senior officers in the Internal Audit Risk management, and Compliance functions is directly Remuneration Policy overseen by the respective committees to whom they report The remuneration policy aims at enabling the Group to (i.e. BAC, BRC and BCGC respectively). attract, retain, motivate and reward qualified workforce The Remuneration policy was approved by the Board in June while ensuring fairness and consistency as well as being 2013 and is reviewed for material changes. appropriately risk balanced. The policy reflects the Groups objectives for good corporate governance as well as Remuneration and risk management sustained and long term value creation for all stakeholders. The Remuneration policies and practices form part of The general remuneration policy is aimed at the alignment of the Group’s overall obligation to have robust governance remuneration with prudent risk taking. The long-term strategy arrangements in place. will include the overall business strategy and quantified risk tolerance levels with a multi-year horizon, as well as other values such as compliance culture, ethics, behavior towards customers, measures to mitigate conflicts of interest.
72 The remuneration practices are carefully managed within 3. The deferral portion and percentage may be adjusted in our risk appetite as laid out by the Board taking into account accordance with the level of seniority or responsibility of all key risks-financial, operational as well as compliance. the person remunerated. The Bank ensures that the remuneration is designed and implemented to include, in particular, The deferral schedule is defined by different components:
1. a proper balance of variable to fixed remuneration, (a) the time horizon of the deferral,
2. the measurement of performance as well as the structure (b) the proportion of the variable remuneration that is being and, deferred,
3. the risk adjustment of the variable remuneration. (c) the speed at which the deferred remuneration vests (vesting process) and The assessment of the performance-based components of remuneration are based on longer-term performance as (d) the time span from accrual until the payment of the first outlined in the Long Range Plan (LRP) and take into account deferred amount; the outstanding risks associated with the performance. (e) the form of the deferred variable remuneration Variable remuneration is decided based on the individual performance against KPI’s set at the beginning of the The Bank will differentiate the deferral schedules by varying performance year and the risk appetite. these five components.
In order to minimize incentives for excessive risk-taking, Claw back variable remuneration will constitute a balanced proportion of The variable remuneration, including the deferred portion, is total remuneration. Having a fully-flexible policy on variable paid or vests only if it is sustainable according to the financial remuneration provides that all rewards may be reduced as situation of the Bank as a whole, and justified according a result of negative performance or even adjusted to zero to the performance of the Bank, the business unit and the in cases of risk management issues. There are no material individual concerned. changes in these measures over the past year. The claw-back applies to identified staff such as the CEO and Linking performance and remuneration Executive management team The banks remuneration practices are linked to both short Claw back would necessitate that the executive pays back an term and long term performance goals. Key financial and non- amount already received under a cash bonus award following financial performance measures are aligned to the Bank’s receipt of the cash either due to the fact that the performance business strategy. Performance based remuneration is based of the business had been overstated at the time the payment on the bonus pools allocated by the BNRC/Board for the was made; or the recipient was, at the time the payment was purpose of rewarding employee performance. The rewards made, in serious breach of his employment contract and/ or are based on the bank’s overall performance, department/ bank’s policy or breach of regulatory issues, which resulted in group performance and individual contribution thereof. The declining financial performance of the Bank. senior management team’s performance is measured through balanced scorecard which reviews the key performance The claw back will be applicable even after the severance of areas of Customer focus, financial performance, process the employment relationship for a period of one year from the improvement and people management. All other employees award of the variable remuneration and the Bank will follow in the bank have annual performance appraisals assessing the legal recourse available to it for the recovery financial and non-financial objectives based on their roles. The Board shall, in all appropriate circumstances, require Risk being a key factor in determining the sustainability reimbursement of any annual incentive payment or long-term of long term performance the deferral of remuneration is incentive payment to an executive officer where: essential to improving risk alignment in the remuneration package. The deferral of remuneration currently applies to (1) the payment was predicated upon achieving certain staff identified such as the CEO and senior management financial results that were subsequently the subject of a team. substantial restatement of the Bank’s published financial statements; 1. Deferral Amount : A portion of the variable remuneration component not exceeding 40%, should be deferred over (2) the Board determines the executive engaged in intentional an appropriate period of time as defined in point 2 below misconduct that caused or substantially caused the need for the substantial restatement; and 2. Deferral Period: the deferred portion of the variable remuneration should be spread over a period not (3) a lower payment would have been made to the executive exceeding three years, and is to be aligned with the nature based upon the restated financial results. of the business, its risks and the activities of the member of staff in question. The actual payment of variable remuneration is spread over a period which takes account of the underlying business cycle of the Bank and its business risks
73 In each such instance, the Bank will, to the extent practicable, B) Deferred cash remuneration outstanding as of end of seek to recover from the individual executive the amount by the year (Salary & Bonus) relating to performance of 2014 which the individual executive’s incentive payments for the amounted to KD 683,303. relevant period exceeded the lower payment that would have been made based on the restated financial results. C) Deferred remuneration paid during the year amounted to KD 374,102 • Total number of Senior management for 2015 is 18 (2014: 17) D) Summary of remunerations (salary & awards) for senior managers and material risk-takers for the 2015 financial year • Total number of Material risk takers for 2015 is 12 31-12-2015 Senior Management Material Risk Takers (2014: 12) Total amount in KD Unrestricted Deferred Unrestricted Deferred A) Awards for senior managers and material risk-takers paid Variable cash 692,384 425,596 181,530 45,382 during the year (related to performance of 2014) remuneration : 31-12-2015 Senior Management Material Risk Takers Fixed cash Total Total 2,284,198 - 820,640 - Number of Number of remuneration : amount in amount in Employees Employees KD KD D) Summary of remunerations (salary & awards) for senior Variable Awards managers and material risk-takers for the 2015 financial year paid during the 31-12-2014 Senior Management Material Risk Takers year*: Total amount in KD Cash 16 635,548 12 197,360 Unrestricted Deferred Unrestricted Deferred Fixed Awards granted Variable cash during the year: 740,329 334,481 217,161 24,129 remuneration : Cash 4 251,900 - - Fixed cash Total awards 2,253,335 - 754,883 - remuneration : paid during the 887,448 197,360 year(variable & OVERVIEW AND CONCLUSION fixed) Employees who It is considered by the Board and Management of the Bank received Sign on - - - - that, as at the end of 2015, the institution has in place a Awards during the management, control and evaluation system that is: year End of Service − Responsive to present business environment, the bank’s termination benefits - - - - growth plans and the attendant risks, paid during the year − Compliant both with historic regulatory instructions and in A) Awards for senior managers and material risk-takers paid conformity with the Basel III driven requirements detailed during the year (related to performance of 2013) by CBK in their June 2014 instruction document and 31-12-2014 Senior Management Material Risk Takers further enhancements to the same issued from time to time Total Total including the detailed additions on Pillar 2 matters, and Number of Number of amount in amount in Employees Employees KD KD − Meets generally accepted international risk management Variable Awards standards for a financial institution of the size and paid during the complexity of the Bank. year*: The Bank also appoints an independent audit firm other Cash 17 559,610 12 136,063 than its external auditors, to examine the internal control Fixed Awards granted during the systems in the Bank and its subsidiaries and to point out any year: deficiencies that may give rise to risks. This is being done in Cash 3 212,400 - - fulfillment of the CBK regulations and a copy of these reports Total awards along with the steps taken to correct any deficiencies is paid during the presented to the Board Audit Committee and also to CBK. 772,010 136,063 year(variable & This provides additional comfort regarding the checks and fixed) balances in place in the Bank and its subsidiaries. Employees who received Sign on 1 120,000 - - Awards during the year End of Service termination benefits - - - - paid during the year * represents 3.8% of total employees Variable and Fixed awards are only in the form of Cash awards
74 The Bank has in place relevant policies and detailed procedures for all its major departments/functions aimed to achieve full operational conformity with the policies set out in this section in an integrated and cost efficient manner. In this regard,
− Detailed operating procedures are in place in respect of all major functions and the concerned staff members may refer to them as and when necessary so as to ensure their compliance
− An international control framework monitored by a dedicated internal control unit covering all areas of the Bank
− The Bank’s IT security and control structure has been effectively functioning and is certified under an international information security certification.
− An independent internal audit function has regular board approved audit plans to audit the various areas of the bank and present their findings and the responses of the audited departments including the steps taken to address audit observations.
The Bank Management will continue to review the policies and procedures on an ongoing basis periodically for necessary and appropriate enhancements, and present them for approval by Board Committees and/or the Board itself as required by the Bank’s Governance structure and, where applicable, CBK guidance.
75 ADDITIONAL CAPITAL DISCLOSURE REQUIREMENTS
1. Common Disclosure Template - Composition of Regulatory Capital
All amounts are in KD’000s Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share capital plus related stock surplus 415,495 2 Retained earnings 86,605 3 Accumulated other comprehensive income (and other reserves) 110,781 4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies) 5 Common share capital issued by subsidiaries and held by third parties (minority interest) 9,920 6 Common Equity Tier 1 capital before regulatory adjustments 622,801 Common Equity Tier 1 capital: regulatory adjustments 7 Prudential valuation adjustments 8 Goodwill (net of related tax liability) 17,617 9 Other intangibles other than mortgage-servicing rights (net of related tax liability) 30,010 10 Deferred tax assets excluding those arising from temporary differences (net of related tax liability) 11 Cash flow hedge reserve 12 Shortfall of provisions to expected losses (based on Internal Models Approach, if applied) 13 Securitisation gain on sale 14 Gains and losses due to changes in own credit risk on fair valued liabilities 15 Defined benefit pension fund net assets 16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) 12,582 17 Reciprocal cross holdings in common equity of banks, Fis and insurance entities 18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions , where the bank does not own more than 10% of the issued capital (amount above 10% threshold of bank’s CET1 capital) 19 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 20 Mortgage servicing rights (amount above 10% threshold of bank’s CET1 capital) 21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) 22 Amount exceeding the 15% threshold 23 of which: significant investments in the common stock of financials 24 of which: mortgage servicing rights 25 of which: deferred tax assets arising from temporary differences 26 National specific regulatory adjustments 27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions 28 Total regulatory adjustments to Common Equity Tier 1 60,209 29 Common Equity Tier 1 capital (CET1) 562,592 Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 144,025 31 of which: classified as equity under applicable accounting standards 144,025 32 of which: classified as liabilities under applicable accounting standards 33 Directly issued capital instruments subject to phase out from Additional Tier 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties 1,751 (amount allowed in group AT1) 35 of which: instruments issued by subsidiaries subject to phase out 36 Additional Tier 1 capital before regulatory adjustments 145,776 Additional Tier 1 capital: regulatory adjustments 37 Investments in own Additional Tier 1 instruments 38 Reciprocal cross holdings in Additional Tier 1 instruments 39 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions , where the bank does not own more than 10% of the issued capital (amount above 10% threshold of bank’s CET1 capital) 40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions
76 41 National specific regulatory adjustments 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions 43 Total regulatory adjustments to Additional Tier 1 capital - 44 Additional Tier 1 capital (AT1) 145,776 45 Tier 1 capital (T1 = CET1 + AT1) 708,368 Tier 2 capital: instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus 47 Directly issued capital instruments subject to phase out from Tier 2 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third 2,334 parties (amount allowed in group Tier 2) 49 of which: instruments issued by subsidiaries subject to phase out 50 General provisions included in Tier 2 capital 56,009 51 Tier 2 capital before regulatory adjustments 58,343 Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments 53 Reciprocal cross holdings in Tier 2 instruments 54 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions , where the bank does not own more than 10% of the issued capital (amount above 10% threshold of bank’s CET1 capital) 55 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory 15,175 consolidation, net of eligible short positions 56 National specific regulatory adjustments 57 Total regulatory adjustments to Tier 2 capital 15,175 58 Tier 2 capital (T2) 43,168 59 Total capital (TC = T1 + T2) 751,536 60 Total risk-weighted assets 4,827,665 Capital ratios and buffers 61 Common Equity Tier 1 (as percentage of risk-weighted assets) 11.65% 62 Tier 1 (as percentage of risk-weighted assets) 14.67% 63 Total capital (as percentage of risk-weighted assets) 15.57% 64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus D-SIB buffer requirement, expressed as a percentage of risk-weighted assets) 65 of which: capital conservation buffer requirement 2.5% 66 of which: bank specific countercyclical buffer requirement 67 of which: DSIB buffer requirement 68 Common Equity Tier 1 available to meet buffers (as percentage of risk-weighted assets) 5.7% National minima 69 Kuwait Common Equity Tier 1 minimum ratio 9.0% 70 National Tier 1 minimum ratio 10.5% 71 National total capital minimum ratio excluding CCY and DSIB buffers 12.5% Amounts below the thresholds for deduction (before risk weighting) 72 Non-significant investments in the capital of other financials 73 Significant investments in the common stock of financials 74 Mortgage servicing rights (net of related tax liability) 75 Deferred tax assets arising from temporary differences (net of related tax liability) Applicable caps on the inclusion of allowances in Tier 2 76 Provision eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of 193,060 cap) 77 Cap on inclusion of allowances in Tier 2 under standardised approach 56,009 78 Provision eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) 79 Cap on inclusion of allowances in Tier 2 under internal ratings-based approach
77 2. Reconciliations requirement: All amounts are in KD’000s The basis for the scope of consolidation for accounting and Item Balance Under Reference regulatory purposes is consistent for the Group. In order to sheet as in regulatory published scope of provide a full reconciliation of all regulatory capital elements financial consolidation to the balance sheet in the audited financial statements, a statements three step approach has been mandated under the Pillar 3 Shareholders’ Equity disclosures section of the CBK Basel III framework. Share capital 204,936 204,936 e Below table provides the comparison (Step1) of the balance Share premium 210,559 210,559 f sheet published in the consolidated financial statement Treasury shares (12,582) (12,582) g and the balance sheet under the regulatory scope of Statutory reserve 67,859 67,859 h consolidation. Lines have been expanded and referenced Voluntary reserve 68,237 68,237 i with letters (Step 2) to display the relevant items of the Treasury shares reserve 45,082 45,082 j regulatory capital. Investment revaluation (2,292) (2,292) k All amounts are in KD’000s reserve Item Balance Under Reference Share based compensation 564 564 l sheet as in regulatory reserve published scope of Foreign currency translation (61,557) (61,557) m financial consolidation reserve statements Other reserves (7,112) (7,112) n 31-Dec-15 31-Dec-15 Retained earnings 122,981 122,981 o Assets of which proposed dividend (36,376) (36,376) p Cash and cash equivalents 903,409 903,409 Equity attributable to 636,675 636,675 Treasury bills and bonds 471,800 471,800 shareholders of the Bank with CBK and others Perpetual Tier 1 capital 144,025 144,025 q Due from banks and other 574,870 574,870 securities financial institutions Non-controlling interests 55,623 55,623 of which Deductions from 15,175 15,175 u of which Limited 9,920 9,920 r Capital Base arising from Recognition eligible as CET1 Investments in FIs where Capital ownership is > 10% of which Limited 1,751 1,751 s Loans and advances to 4,011,645 4,011,645 Recognition eligible as AT1 customers Capital of which General Provisions 56,009 56,009 a of which Limited 2,334 2,334 t (netted above) capped for Recognition eligible as Tier Tier 2 inclusion 2 Capital Investment securities 570,125 570,125 Total equity 836,323 836,323 of which goodwill in 1,467 1,467 b investment in associate Total liabilities and equity 6,824,705 6,824,705 Other assets 165,533 165,533 Property and equipment 81,163 81,163 Intangible assets 46,160 46,160 of which goodwill 16,150 16,150 c of which other intangibles 30,010 30,010 d Total assets 6,824,705 6,824,705 Liabilities Due to banks 886,102 886,102 Due to other financial 816,841 816,841 institutions Customers deposits 3,874,344 3,874,344 Other borrowed funds 218,003 218,003 Other liabilities 193,092 193,092 Total liabilities 5,988,382 5,988,382
78 Below table provides the relevant lines under Common Disclosure Template - Composition of Regulatory Capital with cross references to the letters in above table, thereby reconciling (Step 3) the components of regulatory capital to the published balance sheet.
All amounts are in KD’000s Relevant Common Equity Tier 1 capital: instruments and reserves Component Source based on Row Number of regulatory reference letters in Common capital of the balance Disclosure sheet from step 2 Template 1 Directly issued qualifying common share capital plus related stock surplus 415,495 e+f 2 Retained earnings 86,605 o+p 3 Accumulated other comprehensive income (and other reserves) 110,781 h+i+j+k+l+m+n 5 Common share capital issued by subsidiaries and held by third parties (minority interest) 9,920 r 6 Common Equity Tier 1 capital before regulatory adjustments 622,801 Common Equity Tier 1 capital : regulatory adjustments 8 Goodwill (net of related tax liability) 17,617 b+c 9 Other intangibles other than mortgage-servicing rights (net of related tax liability) 30,010 d 16 Investments in own shares (if not already netted off paid-in capital on reported balance 12,582 g sheet) 28 Total regulatory adjustments to Common Equity Tier 1 60,209 29 Common Equity Tier 1 capital (CET1) 562,592 Additional Tier 1 capital : instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 144,025 q 31 of which: classified as equity under applicable accounting standards 144,025 q 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by 1,751 s subsidiaries and held by third parties (amount allowed in group AT1) 36 Additional Tier 1 capital before regulatory adjustments 145,776 Additional Tier 1 capital : regulatory adjustments 44 Additional Tier 1 capital (AT1) 145,776 45 Tier 1 capital (T1 = CET1 + AT1) 708,368 Tier 2 capital : instruments and provisions 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by 2,334 t subsidiaries and held by third parties (amount allowed in group Tier 2) 50 General Provisions included in Tier 2 Capital 56,009 a 51 Tier 2 capital before regulatory adjustments 58,343 Tier 2 capital: regulatory adjustments 55 Significant investments in the capital of banking, financial and insurance entities that are 15,175 u outside the scope of regulatory consolidation, net of eligible short positions 57 Total regulatory adjustments to Tier 2 capital 15,175 58 Tier 2 capital (T2) 43,168 59 Total capital (TC = T1 + T2) 751,536
79 3. Disclosure for main features of regulatory capital instruments:
1 Issuer BURGAN TIER 1 FINANCING LIMITED 2 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement) XS1106874198 3 Governing law(s) of the instrument WHOLE INSTRUMENT- ENGLISH LAW; SUBORDINATION PROVISION - DIFC LAW Regulatory treatment 4 Type of Capital (CET1, AT1 or T2) AT1 5 Eligible at solo/group/group & solo Group & Solo 6 Instrument type (types to be specified by each jurisdiction) Sub-ordinated debt 7 Amount recognised in regulatory capital USD 500,000 thousand 8 Par value of instrument 100 9 Accounting classification Equity 10 Original date of issuance 30/09/2014 11 Perpetual or dated Perpetual 12 Original maturity date No Maturity 13 Issuer call subject to prior supervisory approval Yes 14 Optional call date, contingent call dates and redemption amount Optional Call Date: 30/09/2019 ; Regulatory event (full or partial disqualification) or tax event call: principal + accrued interest 15 Subsequent call dates, if applicable Quarterly Coupons / dividends 16 Fixed or floating dividend/coupon Fixed for every 5-year period; at the end of every 5 year period, resets to the prevailing 5 year mid-swap rate plus margin 17 Coupon rate and any related index 7.25%; 5-year USD mid-swap 18 Existence of a dividend stopper Yes 19 Fully discretionary, partially discretionary or mandatory Mandatory 20 Existence of step up or other incentive to redeem No 21 Noncumulative or cumulative Non-cumulative 22 Convertible or non-convertible Non-convertible 23 If convertible, conversion trigger (s) N/A 24 If convertible, fully or partially N/A 25 If convertible, conversion rate N/A 26 If convertible, mandatory or optional conversion N/A 27 If convertible, specify instrument type convertible into N/A 28 If convertible, specify issuer of instrument it converts into N/A 29 Write-down feature Yes 30 If write-down, write-down trigger(s) Determination by regulator that the bank will be non- viable without a write-down 31 If write-down, full or partial Can be partial or full 32 If write-down, permanent or temporary Permanent 33 If temporary write-down, description of write-up mechanism N/A 34 Position in subordination hierarchy in liquidation (specify instrument type Perpetual Tier 1 securities are immediately junior to immediately senior to instrument) subordinated notes and subordinated bonds which are not considered eligible capital securities in accordance with Basel III guidelines issued by the CBK. 35 Non-compliant transitioned features None 36 If yes, specify non-compliant features N/A
80 4. Financial leverage Ratio:
Below table provides the reconciliation of the balance sheet assets from the published financial statement with total exposure amount in the calculation of leverage ratio.
Summary comparison of accounting assets vs leverage ratio exposure measure: Item KD’000s 1 Total consolidated assets as per published financial statements 6,824,705 2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting (47,627) purposes but outside the scope of regulatory consolidation 3 Adjustment for fiduciary assets recognized on the balance sheet pursuant to the operative accounting framework but - excluded from the leverage ratio exposure measure 4 Adjustments for derivative financial instruments 30,330 5 Adjustment for securities financing transactions (i.e. repos and similar secured lending) - 6 Adjustment for off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures) 441,681 7 Other adjustments - 8 Leverage ratio exposure 7,249,089
Leverage ratio common disclosure template: Item KD 000’s On-balance sheet exposures 1 On-balance sheet items (excluding derivatives and SFTs, but including collateral) 6,824,705 2 (Asset amounts deducted in determining Basel III Tier 1 capital) (47,627) 3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2) 6,777,078 Derivative exposures 4 Replacement cost associated with all derivatives transactions (i.e. net of eligible cash variation margin) 8,851 5 Add-on amounts for PFE associated with all derivatives transactions 21,479 6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative - accounting framework 7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) - 8 (Exempted CCP leg of client-cleared trade exposures) - 9 Adjusted effective notional amount of written credit derivatives - 10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) - 11 Total derivative exposures (sum of lines 4 to 10) 30,330 Securities financing transaction exposures 12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions - 13 (Netted amounts of cash payables and cash receivables of gross SFT assets) - 14 CCR exposure for SFT assets - 15 Agent transaction exposures - 16 Total securities financing transaction exposures (sum of lines 12 to 15) - Other off-balance sheet exposures 17 Off-balance sheet exposure at gross notional amount 1,445,438 18 (Adjustments for conversion to credit equivalent amounts) (1,003,757) 19 Off-balance sheet items (sum of lines 17 and 18) 441,681 Capital and total exposures 20 Tier 1 capital 708,368 21 Total exposures (sum of lines 3, 11, 16 and 19) 7,249,089 Leverage ratio 22 Basel III leverage ratio 9.8%
81 INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BURGAN BANK K.P.S.C.
Report on the Consolidated Financial Statements Opinion We have audited the accompanying consolidated financial In our opinion, the consolidated financial statements statements of Burgan Bank K.P.S.C. (the “Bank”) and its present fairly, in all material respects, the financial position subsidiaries (collectively “the Group”), which comprise of the Group as at 31 December 2015, and its financial the consolidated statement of financial position as at 31 performance and cash flows for the year then ended in December 2015 and the consolidated income statement, accordance with International Financial Reporting Standards consolidated statement of comprehensive income, as adopted for use by the State of Kuwait. consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then Report on Other Legal and Regulatory Requirements ended, and a summary of significant accounting policies and Furthermore, in our opinion proper books of account have other explanatory information. been kept by the Bank and the consolidated financial statements, together with the contents of the report of the Management’s responsibility for the consolidated financial Bank’s Board of Directors relating to these consolidated statements financial statements, are in accordance therewith. We further Management is responsible for the preparation and fair report that we obtained all the information and explanations presentation of these consolidated financial statements in that we required for the purpose of our audit and that the accordance with International Financial Reporting Standards consolidated financial statements incorporate all information as adopted for use by the State of Kuwait, and for such that is required by the Capital Adequacy Regulations and internal control as management determines is necessary to Financial Leverage Ratio Regulations issued by the Central enable the preparation of consolidated financial statements Bank of Kuwait (“CBK”) as stipulated in CBK Circular Nos. 2/ that are free from material misstatement, whether due to RB, RBA/336/2014 dated 24 June 2014 and 2/BS/342/2014 fraud or error. dated 21 October 2014 respectively, the Companies Law No 1 of 2016, the executive regulation of Law No 25 of Auditors’ responsibility 2012, and by the Bank's Memorandum of Incorporation and Our responsibility is to express an opinion on these Articles of Association, as amended, that an inventory was consolidated financial statements based on our audit. duly carried out and that, to the best of our knowledge and We conducted our audit in accordance with International belief, no violations of the Capital Adequacy Regulations and Standards on Auditing. Those standards require that we Financial Leverage Ratio Regulations issued by the CBK as comply with ethical requirements and plan and perform the stipulated in CBK Circular Nos. 2/RB, RBA /336/2014 dated audit to obtain reasonable assurance about whether the 24 June 2014 and 2/BS/342/2014 dated 21 October 2014 consolidated financial statements are free from material respectively, the Companies Law No 1 of 2016, and the misstatement. executive regulation of Law No 25 of 2012 or of the Bank’s An audit involves performing procedures to obtain Memorandum of Incorporation and Articles of Association, audit evidence about the amounts and disclosures in as amended, have occurred during the year ended 31 the consolidated financial statements. The procedures December 2015 that might have had a material effect on the selected depend on the auditors’ judgement, including the business of the Bank or on its financial position. assessment of the risks of material misstatement of the We further report that, during the course of our audit, we consolidated financial statements, whether due to fraud have not become aware of any violations of the provisions or error. In making those risk assessments, the auditors of Law No. 32 of 1968, as amended, concerning currency, consider internal controls relevant to the entity’s preparation the CBK and the organisation of banking business, and its and fair presentation of the consolidated financial statements related regulations during the year ended 31 December 2015 in order to design audit procedures that are appropriate in that might have had a material effect on the business of the the circumstances, but not for the purpose of expressing an Bank or on its financial position. opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Waleed A. Al Osaimi Bader A. Al Wazzan Licence No. 68 A Licence No. 62 A We believe that the audit evidence we have obtained is EY Deloitte & Touche sufficient and appropriate to provide a basis for our audit (Al Aiban, Al Osaimi & Partners) (Al-Wazzan & Co.) opinion. 14 March 2016 Kuwait
82 BURGAN BANK GROUP Consolidated Statement of Financial Position As at 31 December 2015
2015 2014 Notes KD 000’s KD 000’s
ASSETS Cash and cash equivalents 3 903,409 1,040,563 Treasury bills and bonds with CBK and others 471,800 629,819 Due from banks and other financial institutions 4 574,870 689,819 Loans and advances to customers 5 4,011,645 4,386,466 Investment securities 6 570,125 484,942 Other assets 7 165,533 259,495 Property and equipment 81,163 93,566 Intangible assets 8 46,160 166,754 ───────── ───────── TOTAL ASSETS 6,824,705 7,751,424 ═════════ ═════════
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES Due to banks 886,102 801,178 Due to other financial institutions 816,841 825,250 Deposits from customers 3,874,344 4,708,331 Other borrowed funds 10 218,003 226,644 Other liabilities 11 193,092 234,134 ───────── ───────── TOTAL LIABILITIES 5,988,382 6,795,537 ───────── ───────── EQUITY Share capital 12 204,936 195,177 Share premium 12 210,559 210,559 Treasury shares 12 (12,582) (9,575) Statutory reserve 12 67,859 59,916 Voluntary reserve 12 68,237 60,294 Treasury shares reserve 12 45,082 45,082 Investment revaluation reserve (2,292) 4,912 Share based compensation reserve 564 564 Foreign currency translation reserve (61,557) (19,043) Other reserves (7,112) 554 Retained earnings 122,981 112,401 ───────── ───────── Total equity attributable to the equity holders of the Bank 636,675 660,841 Perpetual Tier 1 capital securities 12 144,025 144,025 Non-controlling interests 151,021 55,623 ───────── ───────── 955,887 TOTAL EQUITY 836,323 ───────── ───────── TOTAL LIABILITIES AND EQUITY 6,824,705 7,751,424 ═════════ ═════════
______Khalid Al Zouman Eduardo Eguren Linsen Group Chief Financial Officer Group Chief Executive Officer
______Majed Essa Al Ajeel Chairman of the Board
The attached notes 1 to 25 form an integral part of these consolidated financial statement. The attached notes 1 to 25 form an integral part of these consolidated financial statements. 3 83 BURGAN BANK GROUP Consolidated Income Statement For the year ended 31 December 2015
2015 2014 Notes KD 000’s KD 000’s (Restated)
Continuing operations: Interest income 13 263,612 250,653 Interest expense 14 (107,003) (102,736) ───────── ───────── Net interest income 156,609 147,917
Fee and commission income 43,049 48,636 Fee and commission expense (6,113) (5,195) ───────── ───────── Net fee and commission income 36,936 43,441
Net gain from foreign currencies 22 26,246 6,029 Net investment income 15 10,740 15,912 Dividend income 3,109 845 Other income 5 14,457 7,791 ───────── ───────── Operating income 248,097 221,935 Staff expenses (53,720) (49,844) Other expenses (61,583) (50,004) ───────── ───────── Operating profit before provision 132,794 122,087 Provision for impairment of loans and advances 5 (56,491) (55,392) Impairment of investment securities (2,111) (357) ───────── ───────── Profit for the year from continuing operationsbefore taxation and board of directors' remuneration 74,192 66,338
Taxation 16 (9,984) (9,967) Board of directors' remuneration (90) (90) ───────── ───────── Profit for the yearfrom continuing operations 64,118 56,281 Profit after tax for the year from discontinued operations 17 23,820 16,424 ───────── ───────── Profit for the year 87,938 72,705 ═════════ ═════════ Attributable to: Equity holders of the Bank 76,131 61,758 Non-controlling interests 11,807 10,947 ───────── ───────── 87,938 72,705 ═════════ ═════════ Fils Fils Basic and diluted earnings per share attributable to the equity holders of the Bank 18 32.1 33.8 ═════════ ═════════
Basic and diluted earnings per share from continuing operations attributable to the equity holders of the Bank 18 24.6 29.2 ═════════ ═════════
TheThe attached attached notesnotes 1 1 to to 25 25 form form an an integral integral part part of of these these consolidated consolidated financial financial statement. statements. 4 84 BURGAN BANK GROUP Consolidated Statement of Comprehensive Income For the year ended 31 December 2015
2015 2014 KD 000’s KD 000’s (Restated)
Profit for the year 87,938 72,705 ───────── ───────── Other comprehensive loss Other comprehensive income to be reclassified to consolidated income statementinsubsequent periods: Financial assets available for sale: Net change in fair value (8,021) (2,053) Net transfer to consolidated income statement 1,540 (1,373) Net transfer to consolidated income statement on disposal of a subsidiary (780) - Foreign currency translation: Foreign currency translation adjustment (15,834) 2,227 Net transfer to consolidated income statement on disposal of a subsidiary (20,623) - Changes in fair value of cash flow hedges 1,160 - Net loss on hedge of a net investment (6,710) - ───────── ───────── Other comprehensive loss for the year (49,268) (1,199) ───────── ───────── Total comprehensive income for the year 38,670 71,506 ═════════ ═════════ Attributable to: Equity holders of the Bank 20,854 57,952 Non-controlling interests 17,816 13,554 ───────── ───────── 38,670 71,506 ═════════ ═════════
The attachedattached notes 11 toto 2525 form form an an integral integral part part of of these these consolidated consolidated financial financial statement. statements. 5 85
- - 1,885 9,268) (3,007) 87,938 87,938 38,670 38,670
(35,544) (4 (10,923) 836,323 955,887
(110,645) ─────── ─────── ═══════
KD 000’s Total equity
- - - - - 4,061 6,009
(6,561) 55,623 55,623 17,816 17,816 Non 11,807 11,807
151,021 interests
(110,714)
─────── ─────── ═══════ KD 000’s
controlling
------ier 1ier T capital capital 144,025 144,025
securities KD 000’s ─────── ─────── ═══════ Perpetual
5
69 - - (3,007) (2,176) Total 20,854 20,854 76,131 76,131
(55,277) (28,983) (10,923) 636,67 660,841
KD 000’s ─────── ─────── ═══════
- - - - (9,759) 76,131 76,131 76,131 76,131
(15,886) (28,983) (10,923) 122,981 112,401
earnings Retained ─────── ─────── ═══════
KD 000’s
*
69 ------554 554
(7,112) (5,559) (5,559) (2,176)
Other ─────── ─────── ═══════
reserves KD 000’s
------(61,557) (19,043) (42,514) (42,514)
reserve Foreign ─────── ─────── ═══════ currency
KD 000’s translation
4
------56 564 564
─────── ─────── ═══════
KD 000’s on reserve compensati Share based based Share
------4,912
(2,292) (7,204) (7,204)
reserve ─────── ─────── ═══════
KD 000’s Investment Investment revaluation revaluation
6
------
45,082 45,082 45,082 45,082
shares reserve Treasury ─────── ─────── ═══════
KD 000’s
Attributable to equity holders of the Bank the of holders equity Attributableto
------statements. 7,943
68,237 68,237 60,294 60,294
reserve
─────── ─────── ═══════ KD 000’s Voluntary
------7,943
59,916 59,916 67,859 67,859
reserve ─────── ─────── ═══════ Statutory
KD 000’s
------(3,007) (9,575)
shares (12,582)
Treasury
KD 000’s ─────── ─────── ═══════
------
210,559 210,559 Share Share
─────── ─────── ═══════ premium
KD 000’s
------9,759
Share capital 204,936 195,177
─────── ─────── ═══════ KD 000’s
)
17
31 December 2015 31 December
capital GROUP
(note 12)
solidated Statement of Changes in Shareholders’ Equity ofsolidated Shareholders’ Statement Changes in BANK BURGAN Con For the year ended reserves. other break of up further for12 *Refernote The integralattached1 an notes to 25 part consolidated these form of financial
securities securities (note 12) Balance at 31 December 2015 The attached notes form 25 1 to an integral part of these consolidated financial statement. Balance at 1 January 2015 1 at January Balance income comprehensive Total 12)issued Bonus (note shares dividendCash paid shares treasury Purchase of (note subsidiary a Disposal of disposal subsidiary a of Deemed Interest payment on Tier 1 on Interest payment Tier Transfer to reserves Transfer Profit for the year I ncome Other comprehensive (loss) Other comprehensive
86
- - 312 312
(7,214) (1,199) (1,022) 72,705 72,705 71,506 71,506 50,884 50,884
(14,248) (10,783) 619,827 102,600 144,025 955,887
─────── ─────── ═══════
KD 000’s Total equity
------312 312
2,607
(7,214) 13,554 13,554 Non 10,947 10,947
144,369 151,021 interests
─────── ─────── ═══════ KD 000’s controlling
------Tier 1Tier 144,025 capital 144,025
KD 000’s ─────── ─────── ═══════
securities Perpetual
- - - - - 00’s (3,806) (1,022) Total 61,758 61,758 57,952 57,952 50,884 50,884
(14,248) (10,783) 660,841 475,458 102,600
KD 0 ─────── ─────── ═══════
------
(1,022) 86,675 61,758 61,758 61,758 61,758
(11,355) (10,783) (12,872) 112,401
earnings Retained ─────── ─────── ═══════
KD 000’s
* ------554 554 554
Other ─────── ─────── ═══════
reserves KD 000’s
------(1,671) (1,671)
(19,043) (17,372)
reserve Foreign ─────── ─────── ═══════ currency
KD 000’s translation
------564 564 564
─────── ─────── ═══════
KD 000’s on reserve compensati Share based based Share
------7,047 4,912
(2,135) (2,135)
reserve
─────── ─────── ═══════
KD 000’s Investment Investment revaluation revaluation
7
------
8,528
36,554 45,082 45,082
shares reserve ─────── ─────── ═══════ Treasury
KD 000’s
Attributable to equity holders of the Bank the of holders equity Attributableto
------6,436
53,858 60,294 60,294
reserve
─────── ─────── ═══════ KD 000’s Voluntary
------000’s 6,436
53,480 59,916 59,916
reserve ─────── ─────── ═══════ Statutory
KD
------(9,575) 42,356 42,356
shares (37,683) (14,248)
Treasury
─────── ─────── ═══════ KD 000’s
------
81,000 81,000
210,559 129,559 Share Share
─────── ─────── ═══════ premium
KD 000’s
------11,355 11,355 21,600
162,222 195,177 Share
capital ─────── ─────── ═══════
KD 000’s
4 31 December 2015 31 December
GROUP
to reserves
attached notes 1 to 25 form an integralattached1 an notes to 25 part consolidated these form of financial statements. For For the year ended BANK BURGAN Equity (Continued) ofConsolidated Shareholders’ Statement Changes in reserves. other break of up further for12 *Refernote The 2014 1 at January Balance Balance at 31 December 201 The attached notes form 25 1 to an integral part of these consolidated financial statement. Cash dividend paid to non to paid dividend Cash Rights shares issuedRights shares Cash dividend paid (note 12) dividendCash (note paid Share capital increase in a subsidiary Bonus shares issued (note 12)issued Bonus (note shares controlling interests controlling income comprehensive Total shares treasury Purchase of shares treasury of Sale Profit for the year Transfer Perpetual Tier1 capital securities securities capital Perpetual Tier1 issuance issuance cost (note 12) Proceeds from issue of perpetual of issue Proceedsfrom 12) (note securities capital Tier1 I ncome Other comprehensive (loss) Other comprehensive
87 BURGAN BANK GROUP Consolidated Statement of Cash Flows Year ended 31 December 2015
2015 2014 Notes KD 000’s KD 000’s Operating activities Profit for the year before taxation and board of directors' remuneration - Continuing operations 74,192 66,338 - Discontinued operations 31,457 23,818 ───────── ───────── 105,649 90,156 Adjustments: Net investment income 15 (10,740) (16,272) Provision for impairment of loans and advances 56,491 61,302 Provision for impairment of investment securities 2,111 2,079 Dividend income (3,109) (1,894) Depreciation and amortisation 14,540 15,134 Net gain on derecognition of a subsidiary 17 (6,505) - ───────── ───────── Operating profit before changes in operating assets and liabilities 158,437 150,505 Changes in operating assets and liabilities: Treasury bills and bonds with CBK and others (41,526) (46,172) Due from banks and other financial institutions 112,264 9,930 Loans and advances to customers (103,930) (492,586) Other assets 8,395 (21,357) Due to banks 224,166 232,617 Due to other financial institutions (1,940) (55,242) Deposits from customers 816 68,247 Other liabilities (21,968) 13,860 Taxation paid (8,405) (15,367) ───────── ───────── Net cash from (used in) operating activities 326,309 (155,565) ───────── ───────── Investing activities Purchase of investment securities (980,082) (791,670) Proceeds from sale of investment securities 838,043 738,897 Purchase of property and equipment (14,198) (20,392) Dividends received 3,109 1,894 Net cash outflow on disposal of a subsidiary 17 (234,154) - ───────── ───────── Net cash used in investing activities (387,282) (71,271) ───────── ───────── Financing activities Other borrowed funds (8,641) (953) Proceeds from share capital increase 12 - 102,600 Proceeds from share capital increase in a subsidiary 1 - 312 Purchase of treasury shares (3,007) (14,248) Sale of treasury shares - 50,884 Proceeds from issue of perpetual Tier 1 capital securities 12 - 144,025 Perpetual Tier 1 capital securities issuance cost 12 - (1,022) Cash dividend paid to equity holders of the Bank 12 (28,983) (10,783) Cash dividend paid to non-controlling interests (6,561) (7,214) Interest payment on Tier 1 capital securities (10,923) - ───────── ───────── Net cash (used in) from financing activities (58,115) 263,601 ───────── ───────── Net (decrease) increase in cash and cash equivalents (119,088) 36,765 Effect of foreign currency translation (18,066) (492) Cash and cash equivalents at 1 January 1,040,563 1,004,290 ───────── ───────── Cash and cash equivalents at 31 December 3 903,409 1,040,563 ═════════ ═════════ Additional cash flow information: Interest received 256,950 309,020 Interest paid 103,185 131,175 ═════════ ═════════
The attached notes 1 to 25 form an integral part of these consolidated financial statement. The attached notes 1 to 25 form an integral part of these consolidated financial statements. 8 88 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
1. INCORPORATION AND PRINCIPAL ACTIVITIES
Burgan Bank K.P.S.C. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a bank with the Central Bank of Kuwait (“CBK”). The Bank’s registered address is P.O. Box 5389, Safat 12170, State of Kuwait.
The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year ended 31 December 2015 were authorised for issue in accordance with a resolution of the Board of Directors on 14 March 2016 and are issued subject to the approval of the Annual General Assembly of the shareholders of the Bank. The Annual General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance.
The new Companies Law No. 1 of 2016 was issued on 24 January 2016 and was published in the Official Gazette on 1 February 2016 cancelled the Companies Law No 25 of 2012, and its amendments. According to article No. 5, the new Law will be effective retrospectively from 26 of November 2012, the executive regulation of Law No. 25 of 2012 will continue until a new set of executive regulation is issued.
The principal activities of the Group are explained in note 19.
The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C.P ("the Parent Company”).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation The consolidated financial statements are prepared under the historical cost convention, except for financial assets classified as fair value through profit or loss, certain financial assets classified as available for sale and derivative financial instruments that are measured at fair value.
The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency, rounded to the nearest thousand except when otherwise stated.
Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”) except for International Accounting Standards (“IAS”) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the CBK’s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets.
Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous financial year, except for the adoption of the accounting policy for discontinued operations and the amendments to the existing standardsrelevant to the Group, effective as of 1 January 2015.
Discontinued operations A disposal group qualifies as discontinued operation if it is a component of an entity that either has beendisposed of, or is classified as held for sale, and:
Represents a separate major line of business or geographical area of operations Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or Is a subsidiary acquired exclusively with a view to resale
Discontinued operations are excluded from the results of continuing operations and are presented as a singleamount as profit or loss from discontinued operations in the consolidated income statement.
Additional disclosures are provided in note 17. All other notes to the consolidated financial statements include amounts forcontinuing operations, unless otherwise mentioned.
IFRS 3 Business Combinations (Amendment) The amendment is applied prospectively for annual periods beginning on or after 1 January 2015 and clarify that all contingent consideration arrangements classifiedas liabilities (or assets) arising from a business combination should be subsequently measured at fair valuethrough profit or loss whether or not they fall within the scope of IAS 39. This is consistent with the Group’scurrent accounting policy and, thus, this amendment did not impact the Group’s accounting policy.
9 89 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
IFRS 8 Operating Segments (Amendment) The amendments are applied retrospectively for annual periods beginning on or after 1 January 2015 and clarify that:
An entity must disclose the judgements made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (e.g., sales and gross margins) used to assess whether the segments are ‘similar’
The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation isreported to the chief operating decision maker, similar to the required disclosure for segment liabilities.
The Group has not applied the aggregation criteria in IFRS 8.12 and, thus, this amendment did not impact the Group’s accounting policy.
IAS 24 Related Party Disclosures (Amendment) The amendment is applied retrospectively for annual periods beginning on or after 1 January 2015 and clarifies that a management entity (an entity that provides key management personnel services) is a related party subject to the related party disclosures. In addition, an entity that uses a management entity is required to disclose the expenses incurred for management services. This amendment is not relevant for the Group as it does not receive any management services from other entities.
IFRS 13 Fair Value Measurement The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IAS 39. The Group does not apply the portfolio exception in IFRS 13.
Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2015did not have any material impact on the accounting policies, financial position or performance of the Group.
New and revised IASB Standards, but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective.
IFRS 9: Financial Instruments: The IASB issued IFRS 9 - Financial Instruments in its final form in July 2014 and is effective for annual periods beginning on or after 1 January 2018 with a permission to early adopt. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non- financial assets. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The adoption of this standard will have an effect on the classification and measurement of Group's financial assets but is not expected to have a significant impact on the classification and measurement of financial liabilities. The Groupis in the process of quantifying the impact of this standard on the Group's consolidated financial statements, when adopted.
IFRS 15 – Revenue from Contracts with customers IFRS 15 was issued by IASB on 28 May 2014 is effective for annual periods beginning on or after 1 January 2017. IFRS 15 supersedes IAS 11 – Construction Contracts and IAS 18 – Revenue along with related IFRIC 13, IFRIC 18 and SIC 31 from the effective date. This new standard would remove inconsistencies and weaknesses in previous revenue recognition requirements, provide a more robust framework for addressing revenue issues and improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The Group is in the process of evaluating the effect of IFRS 15 on the Group and do not expect any significant impact on adoption of this standard.
10 90 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries (investees which are controlled by the Bank). Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights
The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the Group’s consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of OCI are attributed to the equity holders of the Parent Company of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non- controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value.
The principal operating subsidiaries of the Group are as follows:
Effective Effective interest as at interest as at Principal Country of 31 December 31 December Name of company activities incorporation 2015 2014
Jordan Kuwait Bank P.S.C. (“JKB”) * Banking Jordan -% 51.19% Algeria Gulf Bank S.P.A. (“AGB”) ** Banking Algeria 86.01% 91.13% Bank of Baghdad P.J.S.C. (“BoB”) Banking Iraq 51.79% 51.79% Tunis International Bank S.A (“TIB”) Banking Tunisia 86.70% 86.70% Burgan Bank A.S. (“BBT”) Banking Turkey 99.26% 99.26%
Held through JKB United Financial Investments Company * Brokerage Jordan -% 25.70% Ejara Leasing Company * Leasing Jordan -% 51.19%
Held through BoB Baghdad Brokerage Company Brokerage Iraq 51.79% 51.79%
11 91 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of consolidation (continued)
Held through BBT
Burgan Finansal Kiralama A.S Leasing Turkey 99.26% 99.26% Burgan Yatirim Menkul Degerler A.S. Brokerage Turkey 99.26% 99.26% Burgan Portfoy Yonetimi A.S. Asset Management Turkey 99.26% 99.26%
* disposed during the year (note 17) ** reduction during the year due to the sale of JKB (note 17)
Effective Effective interest as at interest as at Principal Country of 31 December 31 December Name of company activities incorporation 2015 2014
Structuredentity (“SPVs”) treated as a subsidiary Special purpose Burgan Tier 1 Financing Limited entity Dubai 100% 100% Special purpose Burgan Senior SPC Limited entity Dubai 100% -
Financial instruments
Classification of financial instruments The Group classifies financial instrumentsas at "fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and “financial liabilities at amortised cost”. Management determines the appropriate classification of each instrument at initial recognition.
Recognition/de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in OCI in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place.
A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive cash flows from the asset have expired; or the Group has transferred its rights to receive cash flows from the assets or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset.
A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated income statement.
12 92 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial instruments (continued)
Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets at fair value through profit or loss are recognised in the consolidated income statement.
Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or buying in the near term. Changes in fair value are recognised in net investment income. Interest earned is accrued in interest income, using the effective interest rate (EIR), while dividend income is recorded under operating income, in the consolidated income statement, when the right to receive the payment has been established.
Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is evaluated on reliable fair value basis in accordance with documented investment strategy.
After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all changes in fair value recognised in the consolidated income statement.
Derivative instruments are categorised as held for trading unless they are designated as hedging instruments.
Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold to maturity.
After initial recognition, held to maturity financial assets are carried at amortised cost using the EIR method, less impairment losses, if any. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.
Loans and receivables These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. These are subsequently measured at amortised cost using the effective yield method adjusted for impairment losses, if any.
Treasury bills and bonds with CBK and others, due from banks and OFIs, and loans and advances to customers are classified as “loans and receivables”.
Financial assets available for sale Financial assets available for sale include equity and debt securities. Equity investments classified as available for sale are those that do not qualify to be classified as loans and receivables, held to maturity oratfair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.
These are subsequently measured at fair value with gains and losses being recognised as other comprehensive income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the financial assets are determined to be impaired at which time the cumulative gains and losses previously reported as OCI in equity are transferred to the consolidated income statement. Financial assets whose fair value cannot be reliably measured are carried at cost less impairment losses, if any.
Financial liabilities at amortised cost These financial liabilities are subsequently measured at amortised cost using the EIR. “Due to banks”, “due to other financial institutions (“OFI”)”, “deposit from customers”, “other borrowed funds”, and “other liabilities” are classified as “financial liabilities at amortised cost”.
13 93 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently measured as a higher of the amount initially recognised less amortisation or the value of any financial obligation that may arise as a result of financial guarantee. Any increase in the liability relating to financial guarantees is recorded in the consolidated income statement.
Derivative financial instruments The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks.
Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of a recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated income statement.
Hedge accounting For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; and (b) cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or a foreign currency risk in an unrecognised firm commitment.
When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also document its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows attributable to the hedge risk.
The Group discontinues hedge accounting when the following criteria are met: a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge; b) the hedging instrument expires, or is sold, terminated, or exercised; c) the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable.
Fair value hedges The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the consolidated income statement over the period to maturity of the previously designated hedge relationship using the EIR.
If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated income statement.
When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in consolidated income statement.
14 94 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Hedge accounting (continued) Cash flow hedges For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in OCI, and transferred to the consolidated income statement in the periods when the hedged transaction affects consolidated income statement. Any ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the consolidated income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income and is recognised when the hedged forecast transaction is ulimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is immediately transferred to the consolidated income statement.
Hedge of net investment in a foreing operation Hedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised in other comprehensive income while any gains or losses relating to the ineffective portion are recognised in the consolidated income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised in other comprehensive income is transferred to the consolidated income statement.
Fair value measurement The Group measures financial instruments, such as, derivatives, investment securities etc., at each balance sheet date. Also, fair values of financial instruments measured atamortised cost are disclosed in note 23.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The fair value measurement is based on thepresumption that the transaction to sell the asset or transfer the liability takes place either:
In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability
The principal or the most advantageous market must be accessible to by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would usewhen pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generateeconomic benefits by using the asset in its highest and best use or by selling it to another market participantthat would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data areavailable to measure fair value, maximising the use of relevant observable inputs and minimising the use ofunobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorisedwithin the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fairvalue measurement as a whole:
Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 — Valuation techniques for which the lowest level input that is significant to the fair valuemeasurement is directly or indirectly observable Level 3 — Valuation techniques for which the lowest level input that is significant to the fair valuemeasurement is unobservable
For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value.
For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes.
15 95 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments.
For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost.
For assets and liabilities that are recognised in the financial statements on a recurring basis, the Groupdetermines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation(based on the lowest level input that is significant to the fair value measurement as a whole) at the end of eachreporting period.
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basisof the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy asexplained above.
Amortised cost This is computed using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position, if there is a currently enforceable legal right to offset and intends to settle on a net basis, to realise the asset and settle the liability simultaneously.
Assets pending sale The Group occasionally acquires non-monetary assets in settlement of certain financing receivables and loans and advances. Such assets are stated at the lower of the carrying value of the related financing receivables and loans and advances and the current fair value. Gains or losses on disposal, and revaluation losses, are recognised in the consolidated income statement.
Impairment of financial assets The Group assesses at each reporting date whether there is an objective evidence that a specific financial asset or a group of financial assets are impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Objective evidence that a specific financial asset or a group of financial assets classified as loans and receivables are impaired includes whether any payment of principal or interest is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant except for financial assets classified as due from banks and financial institutions and loans and receivables where minimum general provision as per CBK’s instructions is followed.
The impairment loss for financial assets classified as loans and receivables is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows including amounts recoverable from collateral and guarantees, discounted at the financial asset’s original effective interest rate. If the financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement.
For debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets classified as loans and receivables. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement.
16 96 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of financial assets (continued) In the case of equity instruments classified as ‘available for sale’, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any evidence of impairment exists, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement, is recognised in the consolidated income statement. Subsequent increases in fair value of such available for sale equity instruments are not reversed through the consolidated income statement.
For non-equity financial assets, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account.
In addition, in accordance with CBK instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically.
Financial assets are written off when there is no realistic prospect of recovery.
Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur.
Repurchase and reverse repurchase agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position as the Group retains substaintially all the risks and rewards of ownership. The corresponding cash received is recognised in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including the accrued interest as a liability, reflecting the transaction’s economic substance as loan to the Group. The difference between the sale and repurchase price is treated as interest expense using the effective interest rate method.
Conversely, assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method.
Cash and cash equivalents Cash and cash equivalents comprises of cash in hand and in current account with banks and OFIs and balances with CBK and due from banks and OFIs with original maturities not exceeding thirty days from acquisition date.
Investment in associate The Group’s investment in its associate is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.
The consolidated income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the other comprehensive income of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.
17 97 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment in associate (continued) The Group’s share of profit of an associate is shown on the face of the consolidated income statement. This is the profit attributable to equity holders of the associate and therefore is profit after tax and non-controlling interest in the subsidiaries of the associate.
The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Groupcalculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the consolidated income statement.
Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in consolidated income statement.
Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis to their residual values over its estimated useful life. Freehold landis stated at cost less impairment losses.
The estimated useful lives of the assets for the calculation of depreciation are as follows:
Buildings 20 to 35 years Furniture and equipment 4 to 11 years Motor vehicles 3 to 7 years Computers 5 years
When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement.
The carrying amounts of property and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amounts and the impairment loss is recognised in the consolidated income statement.
Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property and equipment. All other expenditure is recognised in the consolidated income statement as the expense is incurred.
Intangible assets Intangible assets represent separately identifiable non-monetary assets without physical substance arising from business combinations. Intangible assets are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.
The useful lives of intangible assets are assessed as finite.
Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each financial position date. Changes in the expected useful economic life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement under “other expenses” consistent with the function of the intangible asset.
18 98 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible assets (continued) Amortisation is calculated using the straight-line method to write down the cost of intangible assets over their estimated useful economic lives as follows:
Banking license 10 to 30 years Customer relationships and core deposits 5 to 10 years
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised. A previously recognisedimpairment loss is reversed only if there has been achange in the assumptions used to determine the asset’srecoverable amount since the last impairment loss was recognised. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
Group as a lessee Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term. Contingent rental payable is recognised as an expense in the period in which they are incurred.
Group as a lessor Leases where the Group does not transfer substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.
Business combinations and goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity as a result of one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of accounting is used to account for business combinations. Under this method, the acquirer recognises, separately from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at the acquisition date.
The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed in the period in which they are incurred.
If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income statement. It is then considered in the determination of goodwill.
Goodwill arising in a business combination is recognised as of the acquisition date as the excess of :
a) the aggregate of the consideration transferred, the amount of any non-controlling interests in the acquiree measured at fair value or at the non-controlling interest’s proportionate share of the acquiree’s b) identifiable net assets and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; over c) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured at their fair values.
If the aggregate consideration transferred is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in consolidated income statement.
19 99 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business combinations and goodwill (continued) Goodwill is allocated to each of the Group’s cash-generating units or for groups of cash-generating units and is tested annually for impairment and is assesssed regularly whether there is any indication of impairment. Goodwill impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates. The recoverable value is the higher of the fair value less costs to sell and its value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period.
Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.
End of service indemnity Provision is made for amounts payable to employees under the Kuwait Labour Law, employee contracts and respective applicable laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the reporting date. This basis is considered to be a reliable approximation of the present value of the final obligation.
Treasury shares The Bank’s holding in its own shares is stated at acquisition cost and is recognised in shareholders’ equity. Treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable.
Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares.
Share based compensation The Group operates an equity settled share based compensation plan. The cost of share based compensation transactions with employees is measured by reference to the fair value at the date on which they are granted. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or shares on the date of grant using the Black Scholes model. Measurement inputs include share price on grant date, exercise price, volatility, risk free interest rate and expected dividend yield. At each reporting date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity.
Other reserve Other reserve is used to record the effect of changes in ownership interest in subsidiaries, without loss of control, changes in fair value of derivatives and hedge of net investments.
Revenue recognition Interest and similar income and expense Interest income and expense are recognised in the consolidated income statement for all financial instruments measured at amortised cost, interest bearing assets classified as available-for-sale and financial instruments designated at fair value through profit or loss using effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, a shorter period, when appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses.
Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
20 100 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition (continued) When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the effective portion of the swap. All fees paid or recieved are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party, at which time it is recognised immediately.
Fee and commission income Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan.
Dividend income Dividend income is recognised when the right to receive payment is established.
Foreign currency Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.
Transactions in foreign currencies are initially recorded at the spot rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange ruling at the reporting date. Any resultant gains or losses are recognised in the consolidated income statement.
Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to respective entity’s functional currency at the foreign exchange rates ruling on the dates that the values were determined. In case of non-monetary assets whose change in fair values are recognised directly in OCI, foreign exchange differences are recognised directly in OCI and for non-monetary assets whose change in fair value are recognised directly in the consolidated income statement, foreign exchange differences are recognised in the consolidated income statement.
As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency (KD) at the rate of exchange ruling on the reporting date, and their income statements are translated at the average exchange rates for the year. Exchange differences arising on translation are taken directly to OCI. On disposal of a foreign subsidiary, the deferred cumulative amount recognised in OCI relating to that particular subsidiary is recognised in the consolidated income statement.
Any goodwill or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the respective subsidiaries and translated at the rate of exchange ruling on the reporting date.
Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year.
Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution.
Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007.
21 101 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Taxation (continued) Taxation on overseas subsidiaries Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to the prevailing laws, regulations and instructions of the countries where these subsidiaries operate. Income tax payable on taxable profit (‘current tax’) is recognised as an expense in the period in which the profits arise in accordance with the fiscal regulations of the respective countries in which the Group operates.
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Deferred tax assets and liabilities are measured using tax rates and applicable legislation at the reporting date.
Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments.
Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable.
Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote.
Fiduciary assets Assets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the Group and accordingly are not included in the consolidated statement of financial position.
Significant accounting judgments, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
22 102 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Significant accounting judgments, estimates and assumptions (continued) Judgments In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements:
Classification of financial assets On acquisition of financial assets, management decides whether it should be classified as investments at fair value through profit or loss or investments available for sale or loans and receivables or held to maturity.
Impairment of financial assets available for sale The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. In making this judgement, the Group evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost.
Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits will be available against which the losses can be utilised. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies.
Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use or fair value less cost to sell of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.
Fair values of assets and liabilities including intangible assets Considerable judgement by management is required in the estimation of the fair value of the assets including intangible assets with finite useful life, liabilities and contingent liabilities acquired.
Impairment losses on loans and advances The Group reviews its loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the consolidated income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.
Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility.Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on carrying amounts of loans and receivables and investments available for sale.
23 103 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
3. CASH AND CASH EQUIVALENTS 2015 2014 KD 000’s KD 000’s
Cash on hand and in current account with banks and OFIs 544,353 688,052 Balances with the CBK 24,510 372 Due from banks and OFIs maturing within thirty days 334,546 352,139 ───────── ───────── 903,409 1,040,563 ═════════ ═════════
4. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS 2015 2014 KD 000’s KD 000’s Loans and advances - Banks 301,040 212,865 - OFIs 75,990 98,020 ────────── ────────── 377,030 310,885 ────────── ────────── Placements with banks 278,379 459,824 ────────── ────────── Gross due from banks and OFIs 655,409 770,709 Provision for impairment (note 5) (80,539) (80,890) ────────── ────────── 574,870 689,819 ══════════ ══════════
5. LOANS AND ADVANCES TO CUSTOMERS
a) Balances 2015 2014 KD 000’s KD 000’s
Corporate* 3,668,363 3,988,338 Retail 499,597 553,916 ───────── ───────── Gross loans and advances to customers 4,167,960 4,542,254 Provision for impairment (156,315) (155,788) ───────── ───────── 4,011,645 4,386,466 ═════════ ═════════ “* Loans and advances to corporate customers includes net present value of receivable from sale of subsidiary amounting to KD 112,333 thousand due 30 June 2019 (note 17).
b) Provision for impairment Banks and OFIs Corporate Retail Total KD 000's KD 000's KD 000's KD 000's
At 1 January 2015 80,890 149,217 24,190 254,297 Exchange adjustment 63 (5,743) 214 (5,466) Amounts written off (101) (12,438) - (12,539) Charged to income statement * (313) 46,251 9,136 55,074 Disposal of a subsidiary (note 17) - (33,778) (2,395) (36,173) ───────── ───────── ───────── ───────── At 31 December 2015 80,539 143,509 31,145 255,193
═════════ ═════════ ═════════ ═════════ At 1 January 2014 80,792 130,379 21,315 232,486 Exchange adjustment (22) (1,123) 73 (1,072) Amounts written off - (38,239) (180) (38,419) Charged to income statement * 120 58,200 2,982 61,302 ───────── ───────── ───────── ───────── At 31 December 2014 80,890 149,217 24,190 254,297 ═════════ ═════════ ═════════ ═════════
* charge to income statement includes (write back of) /provision, amounting to KD (1,417) thousand (31 December 2014: KD 5,910 thousand) on discontinued operations (note 17).
24 104 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
5. LOANS AND ADVANCES TO CUSTOMERS (continued)
The provision for impairment includes KD 18,339 thousand (31 December 2014: KD 17,619 thousand), being provision for non-cash facilities reported under other liabilities (note 11), of which KD Nil (31 December 2014: KD Nil thousand) relates to OFI’s.
The impairment provision for credit facilities complies in all material respects with the specific provision requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period. The general provision as of 31 December 2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154 thousand and is retained as a general provision until further directive from the CBK. Interest income on impaired loans and advances is immaterial.
During the year the Group recovered KD 10,143 thousand (Restated 2014: KD 4,192 thousand) from customers whose balances were written off and recorded the same under Other income in the consolidated income statement.
The analysis of the provision for impairment based on specific and general provision is as follows:
2015 2014 KD 000’s KD 000’s
Specific provision 58,633 66,444 General provision 196,560 187,853 ───────── ───────── 255,193 254,297
═════════ ═════════
Non-performing loans to customers: 2015 2014 KD 000’s KD 000’s
Loans and advances to customers 168,877 175,272 Provisions 48,996 57,778 Collaterals 108,208 102,603
6. INVESTMENT SECURITIES 2015 2014 KD 000’s KD 000’s Financial assets at fair value through profit or loss Investments held for trading Debt securities - Quoted investments 3,917 8,007 Equity securities - Quoted investments 652 936
Investments designated at fair value through profit or loss Equity securities - Quoted 348 420 - Unquoted 27,286 21,560 Managed funds 62,324 78,460 ────────── ────────── Total financial assetsat fair value through profit or loss 94,527 109,383 ────────── ──────────
25 105 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
6. INVESTMENT SECURITIES (continued)
Financial assets available for sale Debt securities - Quoted 156,288 133,280 - Unquoted 40,402 15,796 ────────── ────────── 196,690 149,076 ────────── ────────── Equity securities - Quoted 62,907 76,378 - Unquoted 136,550 79,868 ────────── ────────── 199,457 156,246 ────────── ────────── Total financial assets available for sale 396,147 305,322 ────────── ────────── Financial assets held to maturity Debt securities - Quoted 64,785 53,065 - Unquoted - - ────────── ────────── Total financial assets held to maturity 64,785 53,065 ────────── ──────────
Investment in associates 14,666 17,172 ────────── ────────── Total investment securities 570,125 484,942 ══════════ ══════════
Associates of the Group: Effective Effective interest as at interest as at Principal Country of 31 December 31 December Name of company activities incorporation 2015 2014
International FIMBank P.L.C. (“FIMBank”) Trade Finance Malta 19.7% 19.7% Middle East Payment Services Co. Credit Card & (“MEPS”) * ATM Services Jordan 19.5% 29.6% First Real Estate Investment Company Investing in Real K.S.C. (Closed) (“FREICO”) Estate Kuwait 19.8% 19.8%
* reduction due to sale of JKB during the year.
Carrying value of associates is as follows: 2015 2014 KD000’s KD000’s
FIMBank 8,764 10,889 MEPS 1,277 1,877 FREICO 4,625 4,406
Summarised financial information of associates is as follows: 2015 2014 KD000’s KD000’s
Net result (8,388) (1,396) Other comprehensive (loss) income (1,705) 1,747
26 106 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
7. OTHER ASSETS 2015 2014 KD 000’s KD 000’s
Accrued interest receivable 54,729 55,565 Prepaid expenses 10,205 6,117 Assets pending sale * 36,972 88,060 Deferred tax assets 4,253 7,847 Taxation paid in advance 3,600 5,255 Sundry debtors 18,363 38,755 Other balances 37,411 57,896 ────────── ────────── 165,533 259,495 ══════════ ══════════
* The fair value of real estate assetsincluded in assets pending for sale are based on valuations performed by accredited independent valuers by using market comparable method.As the significant valuation inputs used are based on unobservable market data these are classified under level 3 fair value hierarchy.However, the impact on the consolidated income statement would be immaterial if the relevant risk variables used to fair value were altered by 5%.
8. INTANGIBLE ASSETS Other intangible Goodwill assets Total KD 000’s KD 000’s KD 000’s Cost At 1 January 2015 88,718 113,943 202,661 Exchange adjustment 2,852 (620) 2,232 Disposal (75,420) (61,262) (136,682) ────── ────── ────── At 31 December 2015 16,150 52,061 68,211 ══════ ══════ ══════
Amortisation At 1 January 2015 - 35,907 35,907 Charge for the year - 6,450 6,450 Disposal - (20,306) (20,306) ────── ────── ────── At 31 December 2015 - 22,051 22,051 ══════ ══════ ══════ Net book value At 31 December 2014 88,718 78,036 166,754 ══════ ══════ ══════ At 31 December 2015 16,150 30,010 46,160 ══════ ══════ ══════
The carrying amounts of goodwill and other intangible assets allocated to each CGU are as follows:
Other intangible assets KD000’s Core Goodwill Banking Customer customer Total KD 000’s license relationship deposits Total KD 000’s
AGB 3,683 10,234 528 63 10,825 14,508 BoB 7,246 5,399 - - 5,399 12,645 TIB 5,221 8,693 - - 8,693 13,914 BBT - - 4,522 571 5,093 5,093 ────── ────── ────── ────── ────── ────── At 31 December 2015 16,150 24,326 5,050 634 30,010 46,160 ══════ ══════ ══════ ══════ ══════ ══════
27 107 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
8. INTANGIBLE ASSETS (continued)
Other intangible assets KD 000’s Core Goodwill Banking Customer customer Total KD 000’s license relationship deposits Total KD 000’s
JKB 72,748 37,313 4,023 920 42,256 115,004 AGB 4,340 12,714 810 97 13,621 17,961 BoB 6,592 6,140 - - 6,140 12,732 TIB 5,038 8,965 - 7 8,972 14,010 BBT - - 6,257 790 7,047 7,047 ────── ────── ────── ────── ────── ────── At 31 December 2014 88,718 65,132 11,090 1,814 78,036 166,754 ══════ ══════ ══════ ══════ ══════ ══════
Impairment testing of goodwill The carrying value of goodwill is tested for impairment on an annual basis (or more frequently if evidence exists that goodwill might be impaired) by estimating the recoverable amount of the cash-generating unit ("CGU") to which these items are allocated using value-in-use calculations unless fair value based on active market price is higher than the carrying value of the CGU. The value in use calculations use pre-tax cash flow projections based on financial budgets approved by management over a five years period and a relevant terminal growth rate of 4% to 7% (31 December 2014: 4% to 7%). These cash flows were then discounted using a pre-tax discount rate of 15% to 30% (31 December 2014: 15% to 30%) to derive a net present value which is compared to the carrying value. The discount rate used is pre-tax and reflects specific risks relating to the relevant CGU.The recoverable amounts are either higher or approximates the carrying value of goodwill. The Group has also performed a sensitivity analysis by varying these input factors by a reasonable possible margin. Based on such analysis, there are no indications that goodwill is impaired considering the level of judgments and estimations used.
9. MATERIAL PARTLY-OWNED SUBSIDIARIES
The management of the Bank has concluded that BoBis the only subsidiary which has non-controlling interests that is material to the Group.
The information relating to non-controlling interests to BB Group is as follows: BoB 2015 2014 KD 000’s KD 000’s
Accumulated balances 40,975 37,968 Profit attributable 2,264 2,248 Dividends 2,430 3,208
The summarised financial information of these subsidiary as of 31 December 2015 is provided below. This information is based on amounts before inter-company eliminations.
Summaried income statement: BoB 2015 2014 KD 000’s KD 000’s
Operating income 18,609 14,341 Operating expense (8,802) (6,704) Operating profit before provision 9,807 7,637 Profit for the year 5,910 6,121 Total comprehensive income 5,084 6,293
28 108 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
9. MATERIAL PARTLY-OWNED SUBSIDIARIES (continued)
Summarised statement of financial position: BoB 2015 2014 KD 000’s KD 000’s
Loans and advances to customers 70,588 61,991 Customer deposits 337,883 354,633
Total assets 422,079 435,713 Total liabilities 342,491 363,104 Total equity 79,588 72,609
Net cash flows(used) from - operating activities (19,519) 23,145 - investment activities (1,080) (339) - financing activities (5,540) (6,930)
Net (decrease) increasein cash and cash equivalents during the year (26,139) 15,876
10. OTHER BORROWED FUNDS Effective 2015 2014 interest rate KD 000’s KD 000’s
Subordinated notes* 8.125% - 114,161 Subordinated bonds (Fixed tranch) ** 5.650% 40,788 40,747 Subordinated bonds (Floating tranch capped at 6.650%)** CBK + 3.9% 57,461 58,394 3M Libor + Medium term borrowing 1.05% 106,225 - Other borrowings – subsidiaries 0.66%-3.71% 13,529 13,342 ────────── ────────── 218,003 226,644 ══════════ ══════════
* In 2010, Burgan Finance No. 1 (Jersey) Limited (incorporated with limited liability under the laws of the Jersey), a special purpose entity established by the Bank, had issued US$ 400 million 7.875 per cent subordinated notes due 2020 (the “Notes”) at a discounted price of 98.3 per cent of the principal amount.
** In 2012, the Bank issued KD 100 million bonds due 2022 (the “Subordinated bonds”) at the principal amount.
The Subordinated bonds and Notesare callable in whole, or, in part, at the option of the Bank after 5 years from the date of the issuance (subject to certain conditions being satisfied and prior approval of the CBK).
At the time when the USD 2020 Tier II notes and the KD2022 Tier II bonds were issued, these notes and bonds met the requirements to be treated as Tier II capital under the Kuwait Basel II regulations.
However, these notes and bonds are no longer eligible as Tier II capital under the Kuwait Basel III regulations.Since the terms of the notes denominated in USD allow an early redemption on or after 29 September 2015, the Bank received necessary approvalsand exercised its right to redeem the USD 2020 notes during the year.
Further, the Bank is seeking to replace the KD 2022 bonds with bonds eligible to be classified as Tier II Capital under the Kuwait Basel III regulations and accordingly, the bank has received approval to repurchase the KD 2022 bonds.
29 109 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
11. OTHER LIABILITIES 2015 2014 KD 000’s KD 000’s
Accrued interest payable 34,885 34,116 Staff benefits 11,957 15,054 Provision for non-cash credit facilities (note 5) 18,339 17,619 Clearing cheques and balances 38,128 53,668 Income received in advance 10,639 11,332 Other payable and accruals 38,054 43,039 Deferred tax liabilities 29 1,271 Taxation payable 11,104 17,494 Other balances 29,957 40,541 ────────── ────────── 193,092 234,134 ══════════ ══════════
12. EQUITY AND RESERVES
a) Authorised, issued and fully paid up capital of the Bank 2015 2014
Authorised share capital (shares of 100 fils each) 2,500,000,000 2,500,000,000 ═════════════ ════════════ Issued and fully paid up capital (shares of 100 fils each) 2,049,359,158 1,951,770,627 ═════════════ ════════════
b) On 22March 2015, the annual general assembly approved the distribution of cash dividend of 15fils per share for the year ended 31 December 2014(for the year ended 31 December 2013: 7fils) to the Bank’s shareholders on record at the date of general assembly and stock dividend of 5% for the year ended 31 December 2014(for the year ended 31 December 2013: 7%) to the Bank’s shareholders on record at the date of regulatory approval for distribution of bonus shares. This resulted in an increase in the number of issued shares by 97,588,531 shares and share capital by KD 9,759thousand.
c) The share premium and treasury shares reserve are not available for distribution. The Companies Law and the Bank’s articles of association require that 10% of the profit for the year attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when accumulated profits are not sufficient for the payment of a dividend of that amount.
d) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this reserve.
e) Treasury shares 2015 2014
Number of shares held 28,496,685 19,586,964 ══════════ ══════════ Percentage of shares held 1.39% 1.00% ══════════ ══════════ Cost KD 000’s 12,582 9,575 ══════════ ══════════ Market value KD 000’s 10,829 9,402 ══════════ ══════════ Weighted average market value per share (fils) 429 538 ══════════ ══════════
The balance in the treasury share reserve account is not available for distribution. An amount equal to the cost of treasury shares is not available for distribution from voluntary reserve throughout the holding period of these treasury shares.
30 110 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
12. EQUITY AND RESERVES (continued)
f) Other reserves 2015 2014 Changes in Changes in ownership in Cash flow ownership in Cash flow subsidiaries hedge reserve Total subsidiaries hedge reserve Total KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s
Balance at the beginning of the year 554 - 554 554 - 554 Profit for the year ------Other comprehensive loss - (5,559) (5,559) - - - ─────── ─────── ─────── ─────── ─────── ─────── Total comprehensive loss - (5,559) (5,559) - - - Disposal of a subsidiary (note 17) 69 - 69 - - - Deemed disposal of a subsidiary (2,176) - (2,176) - - - ─────── ─────── ─────── ─────── ─────── ─────── Balance at the end of the year (1,553) (5,559) (7,112) 554 - 554 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════
g) Proposed dividends
The Board of Directors has recommended to distribute cash dividend of 18 fils per share (2014: 15fils) and nil bonus shares (2014: 5%) for the financial year ended 31 December 2015. Subject to being approved at the annual general assembly ("AGM") of the shareholders, the cash dividend and bonus shares shall be payable to shareholders registered in the Bank's records as of the AGM date.
h) Perpetual Tier 1 Capital Securities
On 30 September, 2014, the Bank through Burgan Tier 1 Financing Limited (a newly incorporated special purpose company with limited liability in the Dubai International Financial Centre) (“Issuer”) issued Perpetual Tier 1 Capital Securities (the “Tier 1 securities”), amounting to USD 500,000 thousand.
The Tier 1securities are unconditionally and irrevocably guaranteed by the Bank and constitute direct, unconditional, subordinated and unsecured obligations of the Issuerand are classified as equity in accordance with IAS 32: Financial Instruments – Classification. The Tier 1 securitiesdo not have a maturity date. They are redeemable by the Bank at its discretion after 30 September 2019 (the “First Call Date”) or on any interest payment date thereafter subject to the prior consent of the regulatory authority.
The Tier 1 securitiesbear interest on their nominal amount from the issue date to the first call date at a fixed annual rate of 7.25%. Thereafter the interest rate will be reset at five year intervals. Interest will be payable semi-annually in arrears and treated as a deduction from equity.
The Bank at its sole discretion may elect not to distribute interest and this is not considered an event of default.If the Bank does not pay interest on the Tier 1 securities, on a scheduled interest payement date (for whatever reason), then the Bank must not make any other distribution or payment on or with respect to its other shares that rank equally with or junior to the Tier 1 securities (other than pro-rata distributions or payments on shares that rank equally with Tier 1 securities) unless and until it has paid two consecutive interest payments in full on the Tier 1 securities.
The semi-annual interest payments were paid during the year.
31 111 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
13. INTEREST INCOME 2015 2014 KD 000’s KD 000’s (Restated) Loans and advances to customers 226,373 212,632 Due from banks and other financial institutuions 23,210 20,485 Treasury bills and bonds 10,021 14,685 Investment securities 4,008 2,851 ────────── ────────── 263,612 250,653 ══════════ ══════════
14. INTEREST EXPENSE 2015 2014 KD 000’s KD 000’s (Restated) Deposits from customers 64,206 63,546 Due to banks 8,270 7,238 Due to other financial institutuions 13,681 15,803 Other borrowed funds 20,846 16,149 ────────── ────────── 107,003 102,736 ══════════ ══════════
15. NET INVESTMENT INCOME 2015 2014 KD 000’s KD 000’s (Restated) Financial assets at fair value through profit or loss: – net gain on investments held for trading 131 2,905 – net gain on investments designated at fair value through profit or loss 12,490 10,332 ───────── ───────── 12,621 13,237 Net gain from financial assets available for sale (234) 2,911 Share of result from associates (1,647) (236) ───────── ───────── 10,740 15,912 ═════════ ═════════
16. TAXATION 2015 2014 KD 000’s KD 000’s (Restated)
NLST 1,667 1,304 KFAS 590 453 Zakat 650 454 Taxation arising from overseas subidiaries 7,077 7,756 ────────── ────────── 9,984 9,967 ══════════ ══════════
32 112 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
16. TAXATION (continued)
Components of taxation arising from overseas subsidiaries are as follows: 2015 2014 KD 000’s KD 000’s (Restated)
Current tax 7,243 8,027 Deferred tax (166) (271) ────────── ────────── 7,077 7,756 ══════════ ══════════
The tax rate applicable to the taxable subsidiary companies is in the range of 15% to 30%(2014: 15% to 30%) whereas the effective income tax rate for the year ended 31 December 2015 is in the range of 15% to 30%(2014: 15% to 30%). For the purpose of determining the taxable results for the year, the accounting profit of the overseas subsidiary companies were adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense. The adjustments are based on the current understanding of the existing laws, regulations and practices of each overseas subsidiary companies jurisdiction.
17. DISCONTINUED OPERATIONS
During the year, the Bank sold its entire equity interest of 51.19% in JKBto a related party (note 20)for a total consideration of KD 191,128thousand resulting in a gain of KD 6,505 thousand. The results of discontinued operations included in the consolidated income statement of the Group are as follows:
2015 2014 KD 000’s KD 000’s
Interest income 48,024 56,155 Interest expense (15,216) (18,534) ────────── ────────── Net interest income 32,808 37,621
Net fee and comission income 4,325 5,148
Net gain from foreign currencies 1,386 1,222 Net investment income 152 360 Dividend income 436 1,049 Other income 4,631 8,376 ────────── ────────── Operating income 43,738 53,776 Staff expenses (8,872) (8,694) Other expenses (10,790) (13,632) ────────── ────────── Operating profit before provision 24,076 31,450 Write back of (Provision for) impairment of loans and advances 1,417 (5,910) Impairment of investment securities (541) (1,722) ────────── ────────── Profit before taxation 24,952 23,818 Taxation (7,637) (7,394) Gain on disposal of discontinued operations 6,505 - ────────── ────────── Profit from discontinued operations 23,820 16,424
Attributable to: Equity holders of the Bank 15,303 8,365 Non-controlling interests 8,517 8,059
33 113 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
17. DISCONTINUED OPERATIONS (continued)
Net cash flows(used) from operating activities 82,148 (37,660) investment activities (11,353) 10,236 financiing activities 864 (8,260)
18. EARNINGS PER SHARE
Basic and diluted earnings per share is computed by dividing the profit for the year attributable to equity holders of the Bank after interest payment of Tier 1 capital securities by the weighted average number of shares outstanding during the year less treasury shares.
The computation of basic and diluted earnings per share is as follows: 2015 2014 KD 000’s KD 000’s (Restated)
Profit for the year attribuitable to equity holders of the Bank 76,131 61,758 Less: Interest payments on Tier 1 capital securities (10,923) - ────────── ────────── Profit for the year attributable toequity holders of the Bank after interest payment on Tier1 capital securities 65,208 61,758 ══════════ ══════════ Shares Shares
Weighted average number of outstanding shares, net of treasury shares 2,028,758,459 1,826,318,656 ────────── ────────── Basic and diluted earnings per share (fils) 32.1 33.8 ══════════ ══════════
Basic and diluted earnings per share from continuing operations: 2015 2014 KD 000’s KD 000’s (Restated) Profit for the year from continuing operations attributable to equity holders of the Bank 60,828 53,393 Less: Interest payments on Tier 1 capital securities (10,923) - ────────── ────────── Profit for the yearfrom continuing operaitons attributable toequity holders of the Bank after interest payment on Tier1 capital securities 49,905 53,393 ══════════ ══════════ Shares Shares
Weighted average number of outstanding shares, net of treasury shares 2,028,758,459 1,826,318,656 ────────── ────────── Basic and diluted earnings per share from continuing operations(fils) 24.6 29.2 ══════════ ══════════
Basic and diluted earnings per share from discontinued operations: 2015 2014 KD 000’s KD 000’s (Restated) Profit for the year from discontinued operations attributable to equity holders of the Bank 15,303 8,365 ══════════ ══════════ Shares Shares
Weighted average number of outstanding shares, net of treasury shares 2,028,758,459 1,826,318,656 ────────── ────────── Basic and diluted earnings per share from discontinued operations(fils) 7.6 4.6 ══════════ ══════════
The basic and diluted earnings per share for the year ending 31 Decembe 2014 have been adjusted to take account of the bonus shares issued in 2015.
34 114 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
19. SEGMENT INFORMATION
For management purposes, the Group organises its operations by geographic territory in the first instance, primarily Domestic and International. All operations outside Kuwait are classified as International. Within its domestic operations, the Group is organised into the following business segments.
Corporate banking: provides comprehensive product and services to corporate customers and financial institutions including lending, deposits, trade services, foreign exchange, advisory services and others.
Private and retail banking: provides wide range of products and services to retail and private bank customers including loans, deposits, credit and debit cards, foreign exchange, and others.
Treasury, investment bankingand others: includes treasury asset liability and liquidity management, investment services and management, fund management and any residual of transfer pricing. It also provides products and services to banks including money markets, lending, deposits, foreign exchange and others.
Executive Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on segment result after provisions which in certain respects are measured differently from operating profit or loss in the consolidated financial statements.
35 115
(2,111) 74,192 74,192
(14,540) (32,991) (10,402) (23,500) Total 156,609 156,609 248,097 143,196 108,094
───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════ Group KD 000’s 6,824,705 6,824,705 5,988,382
- - -
(549)
(6,450)
(18,371) (23,547) (33,498) (34,047) (34,047)
(479,595) (219,039) ───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════
KD 000's Transactions Unallocated Intragroup Unallocated Intragroup
1
- -
(5,600) 79,115 79,115 44,960 28,387 28,387
(16,574) 001,382 001,382 109,615 109,615
───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════ KD 000's 2,285,656 2,285,656 2, Operations
International
(2,112) (2,490) 95,865 95,865 79,852
Total
(15,868) (10,402) (23,500) gments. 162,029 162,029 131,734 113,754
KD 000's ───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════ 5,018,644 5,018,644 4,206,039
(595) (407)
(2,112) 10,033 10,033 48,183 43,222 40,515
KD 000’s ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ 2,064,522 2,064,522 2,867,706
Treasury and Treasury
investment banking 36
-
Kuwait Operations (5,828) (1,456) 35,232 35,232 48,134 30,423 24,595
770,368 770,368
banking KD 000’s ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ 1,145,607 1,145,607
Retail and Private
-
banking
(627)
(9,445) 50,600 50,600 65,712 58,089 48,644
567,965 567,965
KD 000’s ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ 1,808,515 1,808,515
Corporate
and board of directors' directors' of and board
GROUP INFORMATION (continued)
SEGMENT
renumeration BURGAN BANK BANK BURGAN to the Consolidated Statements Financial Notes At 2015 31 December 19 . 2015 31 December interest Net income income operating Segment Depreciation amortisation and provisions result before Segment advances and loans of impairment Provision for provisions result after Segment Unallocated expenses before taxation the year for Profit assets Total liabilitiesTotal The presents table income below and results and certain assetsand liabilities information the regarding Group’s operating se Provision for impairment of investment securities investment of impairment Provision for Unallocated provisions
116
(357) (7,991) 66,338 89,329
(15,000) (40,392) (15,134) 130,078 147,917 221,935
Total 6,795,537 6,795,537 7,751,424 7,751,424 ───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════
Group KD 000’s
- - -
892 892
(6,975)
(31,891) (32,783) (15,145) (28,578) (31,891)
(285,974) (561,509)
───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════ KD 000's Transactions Unallocated Intragroup Unallocated Intragroup
(5) - -
(5,657) 27,384 43,269 68,026 27,384
(15,880) 102,223 2,977,553 2,977,553 3,440,436 3,440,436 ───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════
KD 000's Operations International
(352)
000's (7,991) (2,502) 70,845 95,036 93,836
(15,000) (25,404) 148,290 119,592 Total
4,103,958 4,103,958 4,872,497 4,872,497 KD ───────── ───────── ───────── ───────── ───────── ───────── ═════════ ═════════ ═════════
(489) (352)
8,240
(1,161) 36,488 32,216 30,703
2,541,673 2,541,673 2,001,272 2,001,272 KD 000’s ───────── ───────── ───────── ───────── ───────── ═════════ ═════════
Treasury and
investment banking 37
-
Kuwait Operations (1,389) (7,497) 34,388 34,388 41,479 41,479 25,715 25,715 18,218 18,218
810,071
banking 1,084,779 1,084,779 KD 000’s ───────── ───────── ───────── ───────── ───────── ═════════ ═════════
Retail and Private
-
(624)
52,408 52,408 70,323 70,323 61,661 61,661 44,915 44,915
(16,746) 752,214
1,786,446 1,786,446 KD 000’s ───────── ───────── ───────── ───────── ───────── ═════════ ═════════
Corporate banking Corporate
and board of directors' directors' of and board
GROUP
(Restated)
before taxation 4
SEGMENT INFORMATION (continued) 31 December 2015 31 December
. renumeration BURGAN BANK BANK BURGAN to the Consolidated Statements Financial Notes At 31 December 201 interest Net income income operating Segment Depreciation amortisation and provisions result before Segment advances and loans of impairment Provision for securities investment of impairment Provision for provisions result after Segment Unallocated expenses Unallocated provisions the year for Profit assets Total liabilitiesTotal 19
117 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
20. TRANSACTIONS WITH RELATED PARTIES
The Group has entered into transactions with certain related parties (Parent Company, directors and key management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties) who were customers of the Group during the year.The “Others” column in the table below mainly represent transactions with other related parties that are either controlled or significantly influenced by the parent company.The terms of these transactions are substantially on the same commercial basis as approved by the Group’s management, including collateral.Lending to Board Members and their related parties is secured by tangible collateral in accordance with regulations of Central Bank of Kuwait.The outstanding balances and transactions are as follows:
Parent company Associate Others 2015 2014 KD 000's KD 000's KD 000's KD 000s KD 000s (Restat ed) Due from banks and OFIs - 78,910 217,168 296,078 196,382 Loans and advances to customers - 12,140 864,757 876,897 775,636 Investment securities 44,063 - 128,083 172,146 77,751 Investment securities managed by a related party - - 61,971 61,971 62,966 Due to banks - - 9,605 9,605 20,782 Due to other financial institutions - - 20,475 20,475 23,015 Deposits from customers 7,022 - 57,439 64,461 36,713
Commitments, contingent liabilities and derivatives Letters of credit - - 4,146 4,146 36 Letters of guarantee - - 41,359 41,359 14,369 Derivative financial instruments - - 38,327 38,327 35,996
Transactions Interest income 116 1,211 31,459 32,786 25,377 Interest expense 285 - 247 532 494 Fee and commission income 5 - 1,367 1,372 956 Fee and commission expense - - - - 712 Dividend income 1,838 - 551 2,389 751 Other expense - - 1,719 1,719 2,798
Other transactions during the year Sale of a subsidiary - - 191,128 191,128 - Purchase of investment securities 65,495 - - 65,495 - Sale of investment securities - - 15,213 15,213 - Gain on sale of a subdiary - - 6,505 6,505 -
No. of Board members 2015 2014 or executive staff KD 000’s KD 000’s Board members (Restated) Loans and advances to customers 6 3,777 3,528 Deposits from customers 8 974 781
Executive staff Loans and advances to customers 22 156 167 Deposits from customers 39 2,308 1,918 Letters of guarantee 3 2 1
38 118 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
20. TRANSACTIONS WITH RELATED PARTIES (continued)
Key management compensation Remuneration paid or payable in relation to “key management” (deemed for this purpose to comprise Directors in relation to their committee service, the Chief Executive Officer and other Senior Officers), was as follows:
2015 2014 KD 000’s KD 000’s (Restated) Short term employee benefits – including salary and bonus 5,015 4,925 Accrual for end of service indemnity 423 819 Accrual for cost of long term incentive rights 472 379 Accrual for committee services 300 300 ───────── ───────── 6,210 6,423 ═════════ ═════════
21. COMMITMENTS AND CONTINGENT LIABILITIES 2015 2014 KD 000’s KD 000’s
Acceptances 26,499 64,254 Letters of credit 261,576 379,014 Letters of guarantee 756,928 787,200 Undrawn lines of credit 345,573 670,952 Other commitments 54,862 54,802 ────────── ────────── 1,445,438 1,956,222 ══════════ ══════════
The primary purpose of these instruments is to ensure that funds are available to customers as required. Acceptances, standby letters of credit and guarantees, which represent irrevocable assurances that the Group will make payments in the event that the customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are undertaken by the Group on behalf of the customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.
Undrawn lines of credit represent unused portions of authorisations to extend cash credit. With respect to credit risk on undrawn lines of credit, the Group is potentially exposed to loss in an amount equal to the total unused lines. However, the likely amount of loss is less than the total unused linessince most of these lineswill expire or terminate without being funded.
The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks to loans and these are mitigated by the same control processes and policies.
22. DERIVATIVE FINANCIAL INSTRUMENTS
In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments.
Derivatives are carried at fair value. Positive fair value represents the cost of replacing all derivative transactions with a fair value in the Groups’ favour had the rights and obligations arising from that derivative instrument been closed in an orderly market transaction at the reporting date. Credit risk in respect of derivative financial instruments is limited to the positive fair value of instruments. Negative fair value represents the cost to the Groups’ counter parties of replacing all their transactions with the Group.
The Group deals in forward foreign exchange contracts, swaps and options for customers and to manage its foreign currency positions and cash flows.
39 119 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
22. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The table below shows the fair value of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts analysed by the terms of maturity. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk. The credit risk exposure is managed as part of the overall borrowers lending limits, together with potential exposures from market movements.
Derivatives held for hedging
Hedge of net investment in foreign operations The Bank entered into forward foreign exchange contracts between TRY and USD, rolled over on a monthly basis, which has been designated starting 1 October 2015 as a hedge of the Bank’s net investment in it’s Turkish subsidiary. This transaction has created a net long position in USD. Gains or losses on the retranslation of the aforesaid contracts are transferred to equity to offset anygains or losses on translation of the net investments in the Turkish subsidiary. No ineffectiveness from hedges of net investments in foreign operations was recognised in profit or loss during the year.
Swaps One of the subsidiary of the group applies cash flow hedge accounting using interest rate swaps to hedge its foreign currency deposits with an average maturity upto 3 months against interest rate fluctuations. The subsidiary implements effectiveness tests at balance sheet dates for hedge accounting; the effective portions are accounted as part of changes in fair value of derivatives under other reserves, whereas the ineffective portion is recognised in profit or loss. No ineffectiveness from hedges was recognised in profit or loss during the year.
Derivatives held for trading Derivative transactions for customers and derivatives used for economic hedging purpose as part of the group’s risk management strategy but which do not meet the qualifying criteria for hedge accounting are classified as ‘Derivatives held for trading’. The risk exposures on account of derivative transactions for customers are covered by entering in to similar transactions with counter parties or by other risk mitigating transactions.
Till 30 September 2015, the Bank recognised a net gain of KD 12.3 million from economic hedges (non- qualifying hedge) which is included in “Net gain from foreign currencies”.
Forward foreign exchange contracts Forward foreign exchange contracts are contractual agreements to either buy or sell a specified currency, at a specific price and date in the future, and are customised contracts transacted in the over-the-counter market.
Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specified amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period.
The Group purchases and sells options through regulated exchanges and in the over–the–counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed–upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value.
Options written by the Group provide the purchaser the opportunity to purchase from or sell to the Group the underlying asset at an agreed–upon value either on or before the expiration of the option.
Swaps Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index.
Interest rate swaps relate to contracts taken out by the Bank with OFIs in which the Group either receives or pays a floating rate of interest, respectively, in return for paying or receiving a fixed rate of interest. The payment flows are usually netted against each other, with the difference being paid by one party to the other.In a currency swap, the Group pays a specified amount in one currency and receives a specified amount in another currency. Currency swaps are mostly gross–settled.
40 120 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
22. DERIVATIVE FINANCIAL INSTRUMENTS (continued)
Notional amount Positive fair Negative fair Within 1 Over 1 31 December 2015 value value year year Total KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 6,482 (10,397) 997,151 3,508 1,000,659 Interest rate swaps 1,714 (997) 20,921 195,110 216,031 Options 1,946 (1,844) 255,973 44,942 300,915 ────────── ────────── ────────── ────────── ────────── 10,142 (13,238) 1,274,045 243,560 1,517,605 ────────── ────────── ────────── ────────── ────────── Derivatives held for hedging: Forward swaps/ foreign exchange contracts 312 (538) 100,332 - 100,332 Interest rate swaps 4,274 (1,703) - 52,666 52,666 ────────── ────────── ────────── ────────── ────────── 4,586 (2,241) 100,332 52,666 152,998 ────────── ────────── ────────── ────────── ────────── Notional amount Positive fair Negative fair Within 1 Over 1 31 December 2014 value value year year Total KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 6,363 (9,902) 705,533 - 705,533 Interest rate swaps 4,362 (670) 33,079 197,212 230,291 Options 2,945 (2,907) 139,791 36,875 176,666 ────────── ────────── ────────── ────────── ────────── 13,670 (13,479) 878,403 234,087 1,112,490 ────────── ────────── ────────── ────────── ──────────
23. FAIR VALUE MEASUREMENT
Fair value of all financial instruments is not materially different from their carrying values. For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments.
The fair value of investment securities is categorised as per the policy on fair value measurement in Note 2.Movement in level 3 is mainly on account of purchase, sale and change in fair value. During the year, an increase of KD 1,705thousand (2014: increase KD 4,441 thousand) was recorded in the other comprehensive income representing change in fair value. There were no material transfers between the levels during the year. The impact on the consolidated statement of financial position or the consolidated statment of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5%.
Debt securities included under level 3 consists of unquoted corporate bonds issued by banks and financial institutions. The fair values of these bonds are estimated using discounted cash flow method using credit spread (ranging from 1% to 3%). Equities and other securities included in this category mainly include strategic equity investments and managed funds which are not traded in an active market. The fair values of these investments are estimated by using valuation techniques that are appropriate in the circumstances. Valuation techniques include discounted cash flow models, observable market information of comparable companies, recent transaction information and net asset values. Significant unobservable inputs used in valuation techniques mainly include discount rate, terminal growth rate, revenue, profit estimates and market multiples such as price to book and price to earnings. Given the diverse nature of these investments, it is not practical to disclose a range of significant unobservable inputs.
41 121 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
23. FAIR VALUE MEASUREMENT (continued)
Other financial assets and liabilities are carried at amortised cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in interest rates. Fair values of remaining financial assets and liabilities carried at amortised cost are estimated using valuation techniques incorporating certain assumptions such as credit spreads that are appropriate in the circumstances.
The impact on the consolidated statement of financial position or the consolidated income statement or the consolidated statment of shareholders’ equity would be immaterial if the relevant risk variables used for fair value estimations to fair value the unquoted securities were altered by 5%.
42 122
936 670
4,362 4,362 8,007 8,007 6,363 6,363 2,945 9,902 2,907
78,460 21,980 Total 156,246 156,246 149,076 149,076
KD 000’s KD
------
4 62,966 21,560 79,868 79,868 15,796 15,796
Level 3 KD 000’s KD
- - - - - 670 4,362 4,362 6,363 6,363 2,945 9,902 2,907 31 December 201
Level 2 KD 000’s KD
------936 420
Level 1 8,007 8,007
15,494 76,378 76,378
KD 000’s KD 133,280 133,280
:
652
5,988 5,988 2,700 6,794 6,794 1,844 1,844 1,946 1,946 3,917 3,917
10,935 10,935 27,634 27,634 62,324 62,324
Total 199,457 199,457 196,690 196,690
KD 000’s KD
------
5 43 27,286 27,286 62,324 62,324 40,402 40,402
136,550 136,550 201
Level 3 KD 000’s KD
------31December 6,794 6,794 5,988 5,988 2,700 1,844 1,844 1,946 1,946
10,935 10,935
Level 2 that are carried is as value at fair follows KD 000’s KD
liabilities
------652 348
3,917 3,917
62,907 62,907
156,288 156,288 Level 1
KD 000’s KD financial
: profit
assets and continued)
financial
:
MEASUREMENT (
: GROUP
FAIR VALUE
Forward swaps/foreign exchange contracts Interest rate swaps Options
.
Equity securities Equity - - - air value measurement hierarchy for 3 Financialassets available sale for Financial assets at fair value through profit or loss F
Equity securities Equity securities Equity Financial liabilities Financial liabilities at fair value through profit or loss Forward swaps/foreign exchange contracts Managed funds Financial assets Debt securities
BURGAN BANK BANK BURGAN to the Consolidated Statements Financial Notes At 2015 31 December 2 Financial assets held for trading: Debt securities Financial assets designatedat fair value through or loss: Derivative financial instruments: Interest rate swaps Options
Derivative Derivative financial instruments:
123 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT
INTRODUCTION Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected geographic and industrial sectors. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.
The operations of certain subsidiaries are also subject to regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the banking and insurance companies to meet unforeseen liabilities as these arise.
As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates and foreign currency transactions.
The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level of seniority within the Group.
The Group classifies the risks faced as part of its day to day activities into certain categories of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. The categories of risks are:
A. Risks arising from financial instruments: i. Credit risk which includes default risk of clients and counterparties ii. Market risk which includes interest rate, foreign exchange and equity price risks and iii. Liquidity risk
B. Other risks i. Operational risk which includes risks due to operational failures
A. CREDIT RISK
Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are approved by the Board or each subsidiary board.
The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. The Group has a well-documented credit policy that complies with CBK regulations and defines the appetite of the Group for assumption of risks in its various business groups.
Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.
Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in the consolidated statement of financial position.
44 124 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
A. CREDIT RISK (continued)
Maximum exposure to credit risk: The table below shows the maximum exposure to credit risk across financial assets before taking into consideration the effect of any collateral and other credit enhancements i.e. credit risk mitigation.
2015 2014 KD 000’s KD 000’s
Cash and cash equivalents 762,479 873,665 Treasury bills and bonds with CBK and others 471,800 629,819 Due from banks and other financial institutions 574,870 689,819 Loans and advances to customers 4,011,645 4,386,466 Investments securities 265,392 210,148 Other assets* 110,503 152,216 ───────── ───────── Total 6,196,689 6,942,133 ───────── ───────── Commitments and contingent liabilities 1,445,438 1,956,222 ───────── ───────── Maximum credit risk exposure before consideration of credit risk mitigation 7,642,127 8,898,355 ═════════ ═════════
* Other assets include accrued interest receivable, sundry debtors and other balances as shown in note 7.
The exposures set above, are based on net carrying amounts as reported in the consolidated statement of financial position, except for commitments and contingent liabilities.
Collateral and Credit risk mitigation techniques The amount, type and valuation of collateral are based on guidelines specified in the risk management framework. The main types of collaterals accepted include real estate and marketable securities. The revaluation and custody of collaterals are performed independent of the business units.
The main credit risk mitigation techniques applied by the Group are based on eligible collaterals. The Group’s management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of the collateral at regular intervals in line with regulatory guidelines.
For further details regarding the Group’s use of credit risk mitigation techniques, and collateral policy, refer to Basel III – Pillar 3 Disclosures under the risk management section of the annual report.
Credit risk concentration The top 10 largest exposures outstanding as a percentage of gross loans and advances to customers at 31 December 2015is 21%(31 December 2014: 18%).
The concentration across classes within loans and advances to customers, which form part of the significant portion of assets subject to credit risk, is given in note 5.
45 125 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
A. CREDIT RISK (continued)
The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following geographic regions:
2015 2014 Commitments Commitments and contingent and contingent Assets liabilities Total Assets liabilities Total KD 000s KD 000s KD 000s KD 000s KD 000s KD 000s
Kuwait 3,415,294 877,655 4,292,949 3,095,258 1,096,317 4,191,575 Jordan 68,868 5,932 74,800 767,157 201,454 968,611 Algeria 424,945 208,625 633,570 483,803 255,077 738,880 Iraq 286,272 50,606 336,878 309,160 106,188 415,348 Tunisia 24,357 2,969 27,326 39,332 2,337 41,669 Turkey 1,220,133 238,487 1,458,620 1,217,635 213,528 1,431,163 Other middle east 447,458 4,965 452,423 497,024 2,943 499,967 Europe 123,538 19,378 142,916 224,989 23,580 248,569 Rest of the world 185,824 36,821 222,645 307,775 54,798 362,573
───────6,196,689 ───────1,445,438 ───────7,642,127 ───────6,942,133 ───────1,956,222 ───────8,898,355
═══════ ═══════ ═══════ ═══════ ═══════ ═══════ The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following industry sectors:
2015 2014 KD 000’s KD 000’s
Industry sector Sovereign 904,973 1,288,451 Banking 1,130,793 1,100,176 Investment 190,003 183,314 Trade and commerce 651,448 1,087,038 Real estate 1,179,287 1,181,876 Personal 1,159,444 1,212,861 Manufacturing 622,533 841,613 Construction 666,222 713,850 Other Services 1,137,424 1,289,176 ───────── ───────── 7,642,127 8,898,355
═════════ ═════════
Credit quality per class of financial assets The credit quality of financial assets are summarised by reference to public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs) namely Moody’s, Standard and Poor’s and Fitch. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated.
For further details regarding the Group’s credit risk management policy please refer to Basel III – Pillar 3 Disclosures under the risk management section of the annual report.
46 126 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
A. CREDIT RISK (continued) a) Financial assets neither past due nor impaired
2015 Rated Unrated Total Investment Non investment grade grade KD 000’s KD 000’s KD 000’s KD 000’s
Sovereigns 450,495 - 189,275 639,770 Banks and OFIs 486,858 140,923 540,793 1,168,574 Corporates - - 3,355,785 3,355,785 Retail - - 427,777 427,777 Other credit exposures 159,346 - 216,549 375,895
───────1,096,699 ─────── 140,923 ───────4,730,179 ───────5,967,801
═══════ ═══════ ═══════ ═══════ 2014 Rated Unrated Total Investment Non investment grade grade KD 000’s KD 000’s KD 000’s KD 000’s
Sovereigns 738,191 - 438,301 1,176,492 Banks and OFIs 640,157 23,102 353,569 1,016,828 Corporates 97,791 1,931 3,488,478 3,588,200 Retail - - 487,697 487,697 Other credit exposures 57,530 18,569 286,265 362,364
───────1,533,669 ───────43,602 ───────5,054,310 ───────6,631,581
═══════ ═══════ ═══════ ═══════ b) Financial assets past due but not impaired
For credit risk related exposures, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Group towards payment of the interest or the principal or a part thereof on the date on which such payment is due.
2015 2014
1 to 45 45 to 90 1 to 45 45 to 90 days days Total days days Total KD000's KD 000's KD 000's KD 000's KD 000's KD 000's
Banks and OFIs 839 - 839 - - - Corporates 76,603 7,633 84,236 143,754 22,547 166,301 Retail 14,742 9,224 23,966 15,035 11,739 26,774 ─────── ─────── ─────── ─────── ─────── ─────── 92,184 16,857 109,041 158,789 34,286 193,075 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ Fair value of collateral held* 60,765 132 60,897 101,752 2,181 103,933
*Fair value of collateral stated above is to the extent of the outstanding exposure.
47 127 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
A. CREDIT RISK (continued)
c) Impaired financial assets The Group considers an asset to be impaired if the realisable value of the asset is less than the value at which it is carried in the books of the Group before it considers the necessity of making a specific provision for the same.
2015 2014
Fair value of Fair value of collateral collateral Total Provision held* Total Provision held* KD 000's KD 000's KD 000's KD 000's KD 000's KD 000's
Banks and OFIs 1,480 1,514 - 2,251 2,268 - Corporates 133,162 31,640 96,967 146,017 45,011 93,257 Retail 35,715 17,356 11,241 29,255 12,767 9,346 ─────── ─────── ─────── ─────── ─────── ─────── 170,357 50,510 108,208 177,523 60,046 102,603 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════
*Fair value of collateral stated above is to the extent of the outstanding exposure.
B. MARKET RISK
Market risk is the risk that the value of an asset will fluctuate as a result of changes in market variables such as interest rates, foreign exchange rates, and equity prices, whether those changes are caused by factors specific to the individual investment or its issuer or factors affecting all financial assets traded in the market.
Market risk is managed on the basis of pre-determined asset allocations across various asset categories, diversification of assets in terms of geographical distribution and industry concentration, a continuous appraisal of market conditions and trends and management’s estimate of long and short term changes in fair value.
Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair value or cash flows of the financial instruments. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. This arises as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies.
The Group is exposed to interest rate risk on its interest bearing assets and liabilities (treasury bills and bonds with CBK and others, due from banks and OFIs, loans and advances to customers, due to banks, due to OFIs, deposits from customers and other borrowed funds).
The table below summarises the effect on net interest income as a result of the changes in interest rate:
2015 2014 KD 000’s KD 000’s Increase in interest rate "Basis Points" 50 4,614 5,594 100 9,519 11,328
Decrease in interest rate “Basis Points” 50 (3,578) (3,893) 100 (4,949) (6,882)
Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily.
48 128 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
B. MARKET RISK (continued)
Currency risk (continued) The table below analyses the effect on profit and equity of an assumed 5% strengthening in value of the currency rate against the Kuwaiti Dinar from levels applicable at the year end, with all other variables held constant. A negative amount in the table reflects a potential net reduction in profit or equity, where as a positive amount reflects a net potential increase.
2015 2014
1Currency Effect on Effect on Effect on Effect on % Change in profit equity profit equity currency rate KD 000’s KD 000’s KD 000’s KD 000’s
Jordanian Dinar +5 - - 780 13,924 Algerian Dinar +5 22 3,942 334 3,929 Iraqi Dinar +5 134 4,478 155 4,112 Turkish Lira +5 123 - 63 6,171 US Dollar +5 558 2,515 630 2,910 Others +5 432 - 549 -
Equity price risk Equity price risk is the risk that the fair values of equities will fluctuate as a result of changes in the level of equity indices or the value of individual share prices. Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The majority of the Group’s quoted investments are listed on the regional Stock Exchanges.
The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material implication over the Group’s profit or other comprehensive income for a 5% fluctuation in major stock exchanges.
Prepayment risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when interest rate fall. The fixed rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers the effect of prepayment on net interest income is not material after taking in to account the effect of any prepayment penalties.
49 129 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
C. LIQUIDITY RISK
Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees. To limit this risk, the Group manages assets with liquidity in mind and monitors liquidity on a daily basis.
The table below shows an analysis of financial liabilities and contingent liabilities and commitments based on the remaining undiscounted contractual maturities:
Up to 3 3 – 6 6 – 12 More than months months months 12 months Total KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s 31 December 2015
Financial liabilities Due to banks 735,707 59,828 74,038 21,374 890,947 Due to other financial institutions 362,161 178,451 123,761 162,884 827,257 Deposits from customers 2,907,305 432,644 170,207 379,250 3,889,406 Other borrowed funds 444 5,591 6,075 251,269 263,379 Other liabilities* 129,426 14,014 14,301 35,351 193,092 ───────── ───────── ───────── ───────── ───────── 4,135,043 690,528 388,382 850,128 6,064,081 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and commitments 425,089 213,611 344,351 462,387 1,445,438 ═════════ ═════════ ═════════ ═════════ ═════════
Up to 3 3 – 6 6 – 12 More than months months months 12 months Total KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s 31 December 2014
Financial liabilities Due to banks 518,217 163,555 129,902 8,755 820,429 Due to other financial institutions 288,756 107,326 216,613 222,988 835,683 Deposits from customers 3,901,988 486,271 293,846 47,905 4,730,010 Other borrowed funds 2,306 4,291 9,819 314,914 331,330 Other liabilities* 198,872 14,233 19,032 1,997 234,134 ───────── ───────── ───────── ───────── ───────── 4,910,139 775,676 669,212 596,559 6,951,586 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and commitments 666,534 348,102 475,078 466,508 1,956,222 ═════════ ═════════ ═════════ ═════════ ═════════
* Other liabilities include negative fair value of derivative financial liabilities (note 22).
The table below summarises the maturity profile of the Group’s assets and liabilities. The maturities of assets and liabilities have been determined according to when they are expected to be recovered or settled. The maturity profile for financial assets at fair value through profit or loss and financial assets available for sale is determined based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties.
50 130 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
C. LIQUIDITY RISK (continued) Up to 3 3 – 6 6 – 12 More than months months months 12 months Total KD 000s KD 000s KD 000s KD 000s KD 000s 31 December 2015 ASSETS Cash and cash equivalents 903,409 - - - 903,409 Treasury bills and bonds with CBK and others 247,837 107,835 71,653 44,475 471,800 Due from banks and other financial institutions 295,088 27,721 96,423 155,638 574,870 Loans and advances to customers 1,313,678 449,277 338,653 1,910,037 4,011,645 Investment securities 178,339 1,509 6,801 383,476 570,125 Other assets 8,069 27,111 5,624 124,729 165,533 Property and equipment - - - 81,163 81,163 Intangible assets - - - 46,160 46,160 ──────── ──────── ──────── ──────── ──────── Total assets 2,946,420 613,453 519,154 2,745,678 6,824,705 ════════ ════════ ════════ ════════ ════════ LIABILITIES AND EQUITY Due to banks 732,788 59,342 73,293 20,679 886,102 Due to other financial institutions 361,665 177,137 121,975 156,064 816,841 Deposits from customers 2,904,244 425,906 167,033 377,161 3,874,344 Other borrowed funds - 2,207 2,207 213,589 218,003 Other liabilities 129,426 14,014 14,301 35,351 193,092 Equity - - - 836,323 836,323 ──────── ──────── ──────── ──────── ──────── Total liabilities and equity 4,128,123 678,606 378,809 1,639,167 6,824,705 ════════ ════════ ════════ ════════ ════════
Up to 3 3 – 6 6 – 12 More than months months months 12 months Total KD 000s KD 000s KD 000s KD 000s KD 000s 31 December 2014 ASSETS Cash and cash equivalents 1,040,563 - - - 1,040,563 Treasury bills and bonds with CBK and others 263,240 120,318 74,252 172,009 629,819 Due from banks and other financial institutions 391,568 149,870 112,364 36,017 689,819 Loans and advances to customers 1,404,819 417,758 524,218 2,039,671 4,386,466 Investment securities 84,526 16,235 33,228 350,953 484,942 Other assets 57,745 2,910 3,447 195,393 259,495 Property and equipment - - - 93,566 93,566 Intangible assets - - - 166,754 166,754 ──────── ──────── ──────── ──────── ──────── Total assets 3,242,461 707,091 747,509 3,054,363 7,751,424 ════════ ════════ ════════ ════════ ════════ LIABILITIES AND EQUITY Due to banks 515,694 162,673 118,575 4,236 801,178 Due to other financial institutions 288,524 106,769 213,767 216,190 825,250 Deposits from customers 3,894,921 481,569 288,816 43,025 4,708,331 Other borrowed funds - 1,368 2,294 222,982 226,644 Other liabilities 198,872 14,233 19,032 1,997 234,134 Equity - - - 955,887 955,887 ──────── ──────── ──────── ──────── ──────── Total liabilities and equity 4,898,011 766,612 642,484 1,444,317 7,751,424 ════════ ════════ ════════ ════════ ════════
51 131 BURGAN BANK GROUP Notes to the Consolidated Financial Statements At 31 December 2015
24. RISK MANAGEMENT (continued)
D. OPERATIONAL RISK Operational risk is the risk of loss arising from the failures in operational process, people and system that supports operational processes. The Group has a set of policies and procedures, which are approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risks relating to the banking and financial activities of the Group. Operational risk is managed by Risk management. Risk management ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global risk management.
25. CAPITAL MANAGEMENT
The primary objectives of the Group's capital management policy are to ensure that the group complies with regulatory capital requirements and that the group maintains strong credit ratings and health capital ratios in order to support its business and maximize shareholder value.
Capital adequacy, financial leverage and the use of various levels of regulatory capital are monitored regularly by the Group’s management and are governed by guidelines of Basel Committee on Banking Supervision as adopted by the CBK.
The Group’s regulatory capital and capital adequacy ratios,calculated under Basel III in accordance with CBK Circular number 2/RB, RBA/A336/2014 dated 24 June 2014, are as shown below:
2015 2014 KD 000s KD 000s
Risk weighted assets 4,827,665 5,411,616 ═════════ ═════════ Total capital required 603,458 649,394 ═════════ ═════════ Common Equity Tier 1 (CET1) capital 562,592 506,578 Additional Tier 1 (AT1) capital 145,776 151,651 Tier 2 capital 43,168 72,418 ───────── ───────── Total eligible capital 751,536 730,647 ═════════ ═════════ CET1 capital adequacy ratio 11.7% 9.4% Tier 1 capital adequacy ratio 14.7% 12.2% Total capital adequacy ratio 15.6% 13.5%
The Group’s financial leverage ratio,calculated in accordance with CBK circular number 2/BS/ 342/2014 dated 21 October 2014, is shown below:
2015 2014 KD 000s KD 000s
Tier 1 capital 708,368 658,229 ═════════ ═════════ Total exposure 7,249,089 8,142,360 ═════════ ═════════ Leverage ratio 9.8% 8.1% ═════════ ═════════
52 132
LNS 75 R, Copyright ©, The al-Sabah Collection, Dar al-Athar al-Islamiyyah, Kuwait
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