01 ..Think Possibilities

Overview Governance Financial Statements 01

..Think Possibilities SUPPLIERS SALARIES

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For details, ask any of our staff or; 0800 144551 (Toll Free) Available on PC, 0701 144551 (WhatsApp) [email protected] Tablet and Smartphone. 04 Orient Bank Limited Annual Report 2015

Table of Contents

Overview Our profile 4 Our Delivery Channels and Products 6 Corporate Information 8

Governance Chairman’s Statement 10 Managing Director/ CEO’s Statement 12 Board of Directors’ Profiles 14 Executive Committee 18 Directors’ Report 19 Statement of Directors’ Responsibilities 20 Report of the Independent Auditors 21

Financial Statements Consolidated Statement of Comprehensive Income 22 Bank Statement of Comprehensive Income 23 Consolidated Statement of Financial Position 24 Bank Statement of Financial Position 25 Consolidated Statement of Changes in Equity 26 Bank Statement of Changes in Equity 27 Consolidated Statement of Cash flows 28 Bank Statement of Cash flows 29 Notes to the Financial Statements 30 Overview Governance Financial Statements 05

Our Profile

Orient Bank Limited is a leading private sector commercial Bank in Uganda. We have been in operation since 1993 and our performance since has been commendable. This steady growth can be attributed to the professional management and prudent lending and investment policies of the bank.

Vision Mission To be the pace setter and preferred financial To deliver service that provides superior partner for our stakeholders value to our customers

Our Core Values We summarise our core values as SPIRIT

Service S Resilience R Customers will always want to talk to us and they believe Orient bank’s resilience is rooted in a tenacity of spirit; we can solve their problems. This is why at Orient Bank, a determination to embrace all that makes life worth we care more than others. We take risk for the sake of living even in the face of overwhelming odds. When service and we dream more than others think practical. we have a clear sense of identity and purpose, we are We expect more than others think possible. more resilient, because we can hold fast to our vision of a better future. Passion P Enthusiasm at Orient Bank is the most powerful engine Integrity I of our success. When we do something, we do it with The supreme quality for leadership is unquestionably all our might. We put our soul into our work and stamp integrity. Without it, no real success is possible, it with our own personality in order to accomplish our whether it is on a section gang, a football field, in an customers’ objectives. We believe that nothing great army, or in an office and most especially in Banking. was ever achieved without enthusiasm. At Orient Bank we lead with integrity.

Innovation I Teamwork T At Orient Bank, our discovery focuses on seeing what Our enduring success lies in collaborating and everybody has not seen and thinking what nobody supporting each with the best teams to deliver value has thought.” As Team members of Orient Bank, we for our customers and stakeholders. At Orient Bank, make discovery and excite customers with our product coming together with our customers is a beginning, offerings which we continuously develop to make your keeping together is progress and working together is banking enjoyable and pleasurable. success.

..Think Possibilities 06 Orient Bank Limited Annual Report 2015

Our Delivery Channels

Internet Banking: This is a service that has been designed to enable our customers transact via the Internet. With this service, customers are able to check their account details, view and download account statements, and make internal transfers, among others.

Automated Teller Machines (ATMs): We currently have 23 VISA enabled ATM machines strategically located in different towns. Customers can withdraw money and deposit cash/cheques at the ATM.

Point of Sale (POS) Machines: Orient Bank gives one easy access to their money through our Point of Sale (POS) machines which enable the bank’s customers to pay for goods and services using their Orient Bank VISA CHIP Delivery and PIN debit Cards. These POS terminals are very Channels strategically positioned at many merchants places of business and they accept VISA.

Mobile Banking: Orient Bank gives you a finger-tip convenient way of banking. One does not have to visit the Bank or ATM as they can now use their mobile phone to:• Check account balances top up Airtime on mobile phone among others

ORIENT VISA CHIP AND PIN: Our Visa card offers immense opportunities and access to a world of possibilities. Our Visa card is inbuilt with a chip and pin facility which allows for online transactions while enhancing the security features of the card. It can be used used worldwide at any VISA outlet

OUR BRANCH NETWORK: Orient Bank boasts of 21 branches spread across the three main regions of Uganda, including Central, Eastern and Nothern region. Customers can therefore access the Bank’s products and services from any Orient Bank Branch. Overview Governance Financial Statements 07

Our Product Portfolio

We are a customer focused bank and have developed tailor-made products to efficirntly and effectively meet our customers needs

CURRENT ACCOUNTS SAVINGS ACCOUNTS Standard Current Account (Personal & Business) Classic Saving Accounts SME Daily Current Account Dollar Savings Account (DOSA) Foreign currency current account (Personal & Business) Phuture Children’s Account Kyakala (Single Tariff) Account (Personal & Business) CHAMA Investment Club Account Premium Account Savings Account Plus Sapphire account Diaspora Account Smart Plan - Target Savings Account

RETAIL CREDIT TRADE FINANCE CORPORATE CREDIT Orient Salary Xpress Loans Letters of Credit Commercial Loans SME Loans Guarantees/ Bid bonds Overdrafts Guarantees/ Perfomance/ Bid bonds

OTHER SERVICES We have considerable experience in the provision of customer payments and cash management services for big organizations both local and foreign which includes; INTERNATIONAL Salary Processing CURRENCY SERVICES Internal transfers Foreign Currency Accounts Telegraphic Transfer Safe custody Forex Collections - Bill Payments (URA taxes, UMEME, NWSC bills, KCCA charges, NSSF )

..Think Possibilities 08 Orient Bank Limited Annual Report 2015

Corporate Information

DIRECTORS Mr. Michael Cook Chairman Mr. Ketan Morjaria Vice Chairman Mr. Francis M. Byaruhanga Director Mr. Joram Kahenano Director Mr. Zhong Shuang Quan Director (Appointed 16 July 2015) Mr. Hemen Shashikant Shah Director (Appointed 26 March 2015) Mr. Dugald Komla Agble Director (Appointed 26 March 2015) Mr. Philip Ikeazor Director (Resigned 20 February 2015) Mr. Okwudili Chigbogwu Director (Resigned 20 February 2015) Mr. Bernard Magulu R. Executive Director (Resigned February 2016) Mr. Julius Kakeeto Managing Director

COMPANY SECRETARY COMPANY LAWYERS

Nicholas Ecimu Shonubi Musoke & Company Advocates C/O Sebalu & Lule Advocates SM Chambers Certified Public Secretaries (Uganda) Plot 14, Hannington Road P. O. Box 2255, Kampala P. O. Box 3213, Kampala

AUDITOR

PricewaterhouseCoopers Certified Public Accountants 10th Floor, Communications House 1 Colville Street, P O Box 882 Kampala

REGISTERED OFFICE Orient Plaza Plot 6 & 6A, Kampala Road P O Box 3072 Kampala Overview Governance Financial Statements 09

Branch Network

Branches

Head Office/ Main Branch Kabalagala Branch Orient Plaza Kabalagala Plot 6/6A Kampala Road Tel:+256 414 510726 P.O. Box 3072, Kampala, Uganda Tel: +256 414 236012/3/4/5 Katwe Branch Fax: +256 414 348039 Muganzirwazza Plaza +256 414 256227 Acacia Branch Acacia Mall - Kisementi Kawempe Branch +256 414 660924 78 Bombo Rd, Kawempe Tel: +256 414 568847 Arua Branch Plot 12 Avenue Road, Arua Town Kikuubo Branch Tel: +256 393 280633 Grand Corner House Tel : +256 414 257451 Ben Kiwanuka Street Branch Haider Plaza Kisekka Branch Basement level Nakivubo Road +256 414 230938 Tel : +256 414 255376

Bweyale Branch Kololo Branch Plot 3c Gulu/ kampala Highway Wampewo Avenue Tel +256 392 614161 Tel : +256 414 532143

Entebbe Town Branch Makerere Branch Plot 29, Kampala Road Ham Towers Makerere Hill Rd Tel: +256 414 320960 +256 414 532143

Entebbe Airport Branch Mbale Branch Airport Terminal Building Plot 23, Naboa Rd Tel: +256 414 320193 Tel: +256 454 432253

Garden City Branch Nkrumah Road Branch Garden City Mall Sayuni Tower - Nasser Road Tel +256 414 343017 +256 414 256243

Gulu Branch Ntinda Branch Plot 15, Awere road, Capital Shoppers Tel:+256 471 432075 Tel : +256 414 289533

Jinja Town Branch William Street Branch Plot 8 Scindia Road, William Street Tel: +256 434 120340 Tel : +256 414 344950

www.orient-bank.com

..Think Possibilities 10 Orient Bank Limited Annual Report 2015

Chairman’s Statement

2015 was the first full year of operation under the new ownership of the Founders’ Consortium and 8 Miles LLC. It was a challenging year especially in the build up to the February 2016 National Elections. However, in spite of these challenges, the bank was able to register significant improvement including a return to profitability and remains committed to creating value for its customers, shareholders, staff and all its stakeholders and to continually improving its services.

Operating Environment The Ugandan economy experienced modest in growth in 2015 with GDP growth rising from 4.8% in 2014 to 5% in 2015. This was off the back of increased public investment in energy and transport infrastructure. However growth was below expectation and was the slowest amongst the regional peers of Kenya, Tanzania and Rwanda.

There was exchange rate volatility in the early part of the year with the Uganda shilling depreciating sharply against the United States Dollar, and over the course of 2015 by 17.5%. This together with the rising food prices and rising electricity tariffs had an impact on inflation. Annual Headline Inflation increased from 1.3% in January to 9.3% in December 2015. Annual Core Inflation also rose sharply during the course of the year but stabilised in the last quarter increasing from 2.7% in January to 7.4% in December 2015.

Bank of Uganda took strong action to dampen inflationary pressures by tightening monetary policy from April 2015. The Central Bank Rate was increased steadily from 11% in January to 17% by December 2015. In line with this, there was an increase in lending and deposit rates. Weighted average lending increased from Mr. Michael Cook 20.7% in December 2014 to 24.6% in December Chairman Board of Directors 2015 resulting in a slowdown in private sector credit. Overview Governance Financial Statements 11

Economic activity in the last half of the year was also adversely affected by the build up to the In spite of the tough operating environ- national elections scheduled for February 2016. ment, Orient Bank returned to profitability posting a modest profit before tax of Changes in Ownership and Board Composition UGX 492m for the year ending Decem- In February 2015, ownership of the bank changed ber 2015 versus the previous year’s loss with the Founders’ Consortium led by Dr. Ketan Morjaria acquiring 49% and UK based 8 Miles LLC of UGX 13.1bn. acquiring 42% of the bank. This resulted in changes to the composition of the board as is highlighted elsewhere in this Report. Total Assets Financial Performance In spite of the tough operating environment, 551bn Orient Bank returned to profitability posting a Up from 480bn modest profit before tax of UGX 492m for the year ending December 2015 versus the previous year’s loss of UGX 13.1bn. Non-performing loans

Improved performance was particularly registered in the following areas; 3.1% The bank reviewed all its policies to position itself down from 7.4 % better for growth The bank restructured its Treasury and Credit Operations to make them profitable. This resulted Conclusion in a sharp drop in non-performing loans ratio from In conclusion, the bank’s performance has 7.4% to 3.1% greatly improved over the last one year with the Total assets grew from UGX 480bn to 551bn major milestones being the rebuilding of the foundation and a return to profitability. I would like to thank our Auditors, Legal Advisers and Future Outlook Board Secretary for their professional input and GDP growth is projected at 5% for the year 2016. advice. And as always, I am grateful to my fellow Growth will be driven by public investment in Board members for their support and expertise transport and energy infrastructure and foreign throughout the year. direct investments. Finally, on behalf of the Board of Directors I Strategy into the Future thank the bank’s management and staff for their With new ownership and change in management, dedicated service and tireless efforts towards the bank reviewed its business strategy. Key to our driving the bank’s strategy and restoring strategy going forward are 4 pillars; Performance, profitability, and most of all thank our customers Service, People and Controls. for your patronage and support. The bank is in the process of upgrading its products and services and over the course of 2016 you can expect to see positive results in this area, with focus on digitisation. Michael Cook - Chairman Board of Directors

..Think Possibilities 12 Orient Bank Limited Annual Report 2015

Managing Director/ CEO’s Statement

It is a pleasure to present Orient Bank’s annual financial report for the year 2015, a year that was remarkable in two ways;

First, in February 2015 the bank’s ownership was divested to ‘new’ ownership led by the Founder’s Consortium (49%) and the UK based Private Equity Firm - 8 Miles LLC (42%)

Second, in spite of a challenging operating environment, the bank was able to return to profitability posting a profit before tax of 492m versus a loss of 13bn the previous year.

OVERVIEW OF ACHIEVEMENTS FOR FY 2015 At the start of the year, the bank was facing some legacy challenges in key areas like non-performing assets, quality of customer service, complex work processes and poor staff morale all of which were affecting the Bank’s performance. Over the last year, the Board and Management have been able to address several issues which in turn has had a positive impact on the bottom line.

Credit Management New leadership was put in place in the Credit Department and this coupled with a new credit policy helped improve our credit analysis and monitoring and reduce our NPA from double digits the previous year to 3%.

Expansion of our Branch Network The bank increased its branch network in Kikuubo which is the heartland of the Ugandan economy by opening our 21st branch on Ben Kiwanuka Street. The branch is already performing well and will help us strengthen our foothold in this segment.

Customer Service Mr. Julius Kakeeto 2015 saw a remarkable improvement in our Managing Director/ CEO customer service delivery and the results were evident on the bottom line. Focus will remain Overview Governance Financial Statements 13

Managing Director/ CEO’s Statement

At the start of the year, the bank was facing some legacy challenges in key Profit before Tax areas like non-performing assets, quality of customer service, complex 492m work processes and poor staff morale Up from 13.1bn LOSS all of which were affecting the Bank’s performance. Over the year however, the Board and Management have been able to address several issues which has in turn had a positive impact on the bottom line. 3.1%

on this core area as we look to fortify and build on our expertise in the middle market Non-performing loans down FOCUS FOR 2016 from 7.4 % In 2016 the bank will continue to focus on improving our service delivery channels and strengthening our customer relationships. We shall be enhancing our internet platform, rolling out the VISA infinite and prepaid cards. Additionally, the bank will be integrating customers’ accounts with Mobile Money.

All the above are intended to facilitate customer self- service while expanding the bank’s service channels. 21

CONCLUSION I am grateful to our esteemed and loyal customers who have stood by Orient Bank through the years. Current number of branches The bank remains committed to delivering superior up from 18 in 2014 value to you and we look forward to an excellent year ahead.

Julius Kakeeto - Managing Director/ CEO

..Think Possibilities 14 Orient Bank Limited Annual Report 2015

Board of Directors - 2015

Cr Ri Co Al Ri Al Co Cr MICHAEL COOK KETAN MORJARIA HEMEN SHASHIKANT SHAH Chairman Vice Chairman Non Executive Director Michael Cook was a senior career Mr. Morjaria a founder and Mr. Hemen Shah is a graduate diplomat and a former British Board Member of both Orient of Harvard University and a High Commissioner to Uganda, Bank and Credit Bank in Kenya, professional banker with over 23 with a wide range of political and a strategic shareholder in years of cognitive experience. and commercial experience both institutions, and has wide Mr. Shah has held several in Scandinavia, the Caribbean, experience in commerce and Board memberships including Turkey and Africa. After retiring property development in Africa, Directorships on the Boards from the Diplomatic Service he the United Kingdom, and the of; SCB Sierra Leone, Gambia, was a member of a commission Middle East. He is a member Cameroon, Ghana and Chairman, established by David Cameron of the Institute of Chartered Board of Directors for Standard before he became British Prime Accountants of England and Chartered Bank Cote d’Ivoire. Mr. Minister, to advice on future aid Wales and the Institute of Certified Shah is a founding partner and policy. Public Accountants of Uganda. Board member of 8 miles LLP.

Al Co Cr Au DUGALD AGBLE JAY KARIA FRANCIS MAGEMBE BYARUHANGA Non Executive Director Non Executive Director Non Executive Director Mr. Dugald Agble is a PhD holder Mr. Karia is a business magnate Mr. Byaruhanga holds a in Chemical Engineering from with over 25 years diversified Masters Degree in Business Imperial College, London, UK. exposure in London, Kenya and Administration. He has over He has over 17 years related Uganda. He has served in several 25 years experience in the experience. He has worked for managerial capacities as Manager areas of Management, Finance, Private Real Estate Investment, Lloyds Exports UK, Manager Kabril Accounting, Procurement and London, UK from 2004 – 2006, Limited UK. He has also severed Logistics Management. He has and thereafter joined Helios on several boards including worked with rural water and Investment Partners, London, Lloyds Exports and, Kabril Limited- sanitation project on an executive UK as Vice President from 2006 in London UK, Orion FXB Ltd and level and was a Director Road – 2010. Mr. Agble is a Partner at Credit Bank in Nairobi Kenya. Agency Formation Unit. 8 Miles LLP as well as a member of the 8 Miles LLP Investment Committee. Overview Governance Financial Statements 15

Al Au Ri Cr Al Ri ZHONG SHUANG QUAN JORAM KAHENANO JULIUS KAKEETO Non Executive Director Non Executive Director Managing Director/ CEO Mr. Zhong Shuang Quan holds Mr. Kahenano is a Fellow of the Mr. Kakeeto is a Fellow of the a Bachelors of Arts in Business Uganda Institute of Bankers and Association of Chartered Certified Management from the Sichuan a Fellow of Chartered Institute Accountants (FCCA) and holds an Normal University. He is a of Bankers. He has held various MBA from Manchester Business prominent Businessman with director positions in Bank of School, United Kingdom. He has diversified interests in East Africa, Uganda where he worked for 36 served in several management Asia and other parts of the years. He has in addition served capacities, among others, in world specializing in the fields on various Boards including Citigroup London as Business of Manufacturing household Uganda Institute of Bankers, Manager in the Investment plastics, Large Scale Rice farming, Makerere University, Mengo Banking Division for Emerging Import Trade in household goods Hospital, Church of Uganda and Markets, Vice President in EMEA and Road Transport. He has Uganda Christian University. Planning and Strategy and Managerial experience in Trade Joram is currently a trustee of Finance Director Equity Bank, and Manufacturing Enterprise. Uganda Small Scale Industries. Uganda.

Cr Al Ri BERNARD ROBINSON MAGULU NICHOLAS ECIMU Executive Director Company Secretary Bernard is a Fellow of Certified Mr. Ecimu practices law with Chartered Accountant (FCCA). Sebalu & Lule Advocates, a premier He previously worked with corporate and commercial law KEY

United Bank for Africa (UBA) as firm, where he is a Partner. AL Member of Asset and Liability Committee Chief Finance Officer and with He has previously served with the Bank of Uganda. He holds a the Privatisation & Utility Sector Cr Member of Credit Committee First Class/Distinction Masters of Reform Project (PUSRP) in Management and International Uganda’s Ministry of Finance, Au Member of Audit Committee Business, from the Southampton Planning and Economic Business School, United Kingdom. Development and was attached Ri Member of Risk/Compliance Committee to Edward Nathans Sonnenbergs, one of South Africa’s premier law Co Member of Compensation Committee firms, as visiting Attorney in 2006. Committee Chairman

..Think Possibilities 16 Orient Bank Limited Annual Report 2015

Executive Committee - 2015

JULIUS KAKEETO BERNARD ROBINSON MAGULU Managing Director/ CEO Executive Director

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Directors’ Report For the year ended 31 December 2013

The directors present their report together with the a) Risk/Compliance committee audited consolidated financial statements of the Orient This committee is headed by a Non Executive Director Bank Limited (the “Bank”) and its subsidiary (together and meets quarterly. It is comprised of the following ‘’the Group’’) for the year ended 31 December 2015. members: i) Non-Executive Director ACTIVITIES ii) Non-Executive Director The principal activities of the group are the provision iii) Managing Director/CEO of commercial banking, stock brokering and related iv) Executive Director financial services under licences granted by the Bank of Uganda and Capital Markets Authority. b) Asset and Liability Committee ALCO is headed by a Non Executive Director and meets RESULTS AND DIVIDEND quarterly. It also comprises the following: The profit for the year of UShs 1,558 million (2014: loss i) Non-Executive Director of UShs 8,028 million) has been transferred to retained ii) Non-Executive Director earnings. iii) Managing Director / CEO The directors do not recommend payment of dividends iv) Executive Director for the year (2014: Nil).

c) Compensation and General Purpose Committee CORPORATE GOVERNANCE This committee decides on recruitment at senior Orient Bank Limited has established a tradition of best levels based on responsibilities and remuneration of practices in corporate governance. The corporate Management staff and directors. The committee is governance framework is based on an effective headed by a Non-Executive Director and comprises of: independent board, the separation of the board’s i) Non-Executive Director supervisory role from the executive management ii) Non-Executive Director and the constitution of board committees generally iii) Non-Executive Director comprising a majority of non-executive directors and

chaired by a non-executive director to oversee critical d) Audit Committee areas. This Committee is chaired by a Non-Executive Director.

It meets every quarter and also comprises of: BOARD OF DIRECTORS i) Non-Executive Director Orient Bank Limited has a broad-based board of ii) Non-Executive Director directors. The board functions either as a full board or iii) Non-Executive Director through various committees constituted to oversee

specific operational areas. The board has constituted e) Credit Committee five committees. These are the Risk/Compliance The Board Credit Committee is chaired by the Non- Committee, Asset & Liability Management Committee, Executive Director. It meets quarterly and comprises of: Compensation and General Purpose Committee, Audit i) Non-Executive Director Committee and Credit Committee, Board Supervisory ii) Non-Executive Director Committee. All of these Board Committees are iii) Non-Executive Director constituted and chaired by non-executive directors. As iv) Non-Executive Director at 31 December 2015, the board of directors consisted v) Executive Director of 9 members. vi) Managing Director / CEO

18 Overview Governance Financial Statements 19

In addition to the above committees, there are DIRECTORS committees on a management level comprised of The directors who held office during the year and up senior management whose frequency is daily, weekly, to the date of this report are as indicated on Page 10, monthly and quaterly. under corporate information.

DIRECTORS AND THEIR BENEFITS AUDITOR During the financial year and up to the date of this The Bank’s external auditor, PricewaterhouseCoopers, report, other than as disclosed in Note 36 to the financial is not eligible for reappointment having reached the statements, no director has received or become entitled mandatory limit of four years of continous service to the to receive any benefit other than directors’ fees, and Bank as stipulated in the Ugandan Financial Institutions amounts receivable by executive directors under Act. Ernst and Young was appointed as the new auditor employment contracts and the senior staff incentive for the period effective 2016. scheme. The aggregate amount of emoluments for directors for services rendered in the financial year is BY ORDER OF THE BOARD disclosed in Note 36 to the financial statements

Neither at the end of the financial year nor at any time during the year did there exist any arrangement Nicholas Ecimu to which the Bank is a party whereby directors might C/O Sebalu & Lule Advocates acquire benefits by means of acquisition of shares in or Kampala debentures of the bank or any other body corporate 28 April 2016

..Think Possibilities 20 Orient Bank Limited Annual Report 2015

Statement of Directors’ Resposibilities For the year ended 31 December 2015

The Ugandan Companies Act requires the Directors to The Directors are of the opinion that the financial prepare financial statements for each financial year that statements give a true and fair view of the state of the give a true and fair view of the state of affairs of the Bank financial affairs of the Bank and Group and of its profit and Group as at the end of the financial year and of its in accordance with International Financial Reporting results. Standards and with the requirements of the Ugandan Companies Act and the Financial Institutions Act. It also requires the Directors to ensure that the company The Directors further accept responsibility for the keeps proper accounting records that disclose, with maintenance of accounting records that may be relied reasonable accuracy, the financial position of the upon in the preparation of financial statements, and company. They are also responsible for safeguarding for such internal control as the Directors determine the assets of the Bank and Group. is necessary to enable the preparation of financial statements that are free from material misstatement, The Directors accept responsibility for these financial whether due to fraud or error. statements, which have been prepared using appropriate accounting policies supported by Nothing has come to the attention of the Directors reasonable estimates, in conformity with International to indicate that the Bank and Group will not remain a Financial Reporting Standards, the requirements of the going concern for at least twelve months from the date Ugandan Companies Act and the Financial Institutions of this statement. Act.

Michael Cook Ketan Morjaria Julius Kakeeto Chairman Vice Chairman Managing Director/ CEO Overview Governance Financial Statements 21

REPORT OF THE INDEPENDENT AUDITOR

REPORT ON THE FINANCIAL STATEMENTS fair presentation of the financial statements in order We have audited the accompanying financial statements to design audit procedures that are appropriate in the of Orient Bank Limited (“the Bank”) and its subsidiary circumstances, but not for the purpose of expressing (together, “the Group”), as set out on pages 10 to 80. an opinion on the effectiveness of the entity’s These financial statements comprise the consolidated internal control. An audit also includes evaluating the statement of financial position for the year ended 31 appropriateness of accounting policies used and the December 2015, and the consolidated statements reasonableness of accounting estimates made by the of comprehensive income, changes in equity and directors, as well as evaluating the overall presentation cash flows for the year then ended, together with the of the financial statements. statement of financial position of the Bank standing alone as at 31 December 2015 and the statements We believe that the audit evidence we have obtained of comprehensive income, changes in equity and is sufficient and appropriate to provide a basis for our cash flows of the Bank for the year then ended, and a opinion. summary of significant accounting policies and other explanatory notes. OPINION In our opinion the financial statements give a true DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL and fair view of the financial affairs of the Group and STATEMENTS of the Bank as at 31 December 2015 and of the profit The directors are responsible for the preparation of and cash flows of the Group and the Bank for the year financial statements that give a true and fair view in then ended in accordance with International Financial accordance with International Financial Reporting Reporting Standards, the Ugandan Companies Act and standards and in the manner required by the Ugandan the Financial Institutions Act. Companies Act and the Financial Institutions Act 2004, and for such internal control as the directors determine REPORT ON OTHER LEGAL AND REGULATORY is necessary to enable the preparation of financial REQUIREMENTS statements that are free from material misstatement. The Ugandan Companies Act requires that in carrying out our audit we consider and report to you on the AUDITOR'S RESPONSIBILITY following matters. We confirm that: Our responsibility is to express an independent opinion on these financial statements based on our audit. We 1. we have obtained all the information and conducted our audit in accordance with International explanations which to the best of our knowledge Standards on Auditing. Those standards require that and belief were necessary for the purpose of our audit; we comply with ethical requirements and plan and perform our audit to obtain reasonable assurance 2. in our opinion proper books of account have that the financial statements are free from material been kept by the Bank, so far as appears from our examination of those books; and misstatement. 3. the Bank’s statement of financial position and An audit involves performing procedures to obtain statement of comprehensive income account are in agreement with the books of account. audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers Certified Public Accountants internal control relevant to the entity’s preparation and Kampala

..Think Possibilities 22 Orient Bank Limited Annual Report 2015

Consolidated statement of comprehensive income For the year ended 31 December 2015

2015 2014 Notes Ushs’000 Ushs’000

Interest and similar income 5 40,237,483 40,787,165 Interest and similar expenses 5 (17,243,228) (20,988,100) Net interest income 22,994,255 19,799,065 Loan impairment charges 6 (5,668,591) (18,813,833) Net interest income after loan impairment charges 17,325,664 985,232 Net fee and commission income 7 29,686,886 18,631,474 Net operating income 47,012,550 19,616,706 Net foreign exchange losses/gains 8 (4,529,013) 5,058,046 Employee benefits expenses 9 (14,213,247) (14,487,336) General and administrative expenses 10 (9,899,087) (9,030,374) Depreciation and amortisation 11 (5,228,391) (4,798,884) Reversal of Charges 12 (1,139,542) (307,796) Other operating expenses 13 (11,510,986) (9,190,546) Profit/ (loss) before income tax 492,284 (13,140,184) Income tax credit 14 1,065,371 5,111,599 Profit/ (loss) for the year 1,557,656 (8,028,585) Other comprehensive income Net fair value gain on available for sale financial assets 20 - 3,126 Deferred income tax thereon 31 - (938) Revaluation surplus on land and buildings 24,25 14,524,944 1,489,113 Deferred income tax thereon 31 (4,357,483) (446,734) 10,167,461 1,044,567 Total comprehensive income/ (loss) for the year 11,725,117 (6,984,018) PROFIT/ (LOSS) ATTRIBUTABLE TO: Owners of the company 1,553,351 (8,047,065) Non-controlling interests 4,305 18,480 1,557,656 (8,028,585) OTHER COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the company 10,167,461 1,044,129 Non-controlling interests - 438 10,167,461 1,044,567 Overview Governance Financial Statements 23

Bank statement of comprehensive income For the year ended 31 December 2015

2015 2014 Notes Ushs’000 Ushs’000

Interest and similar income 5 40,237,483 40,787,165 Interest and similar expenses 5 (17,243,228) (20,988,100) Net interest income 22,994,255 19,799,065 Loan impairment charges 6 (5,668,591) (18,813,833) Net interest income after loan impairment charges 17,325,664 985,232 Net fee and commission income 7 29,508,959 18,276,847 Net operating income 46,834,623 19,262,079 Net foreign exchange losses/gains 8 (4,529,013) 5,058,046 Employee benefits expenses 9 (14,114,279) (14,406,970) General and administrative expenses 10 (9,889,088) (9,027,287) Depreciation and amortisation 11 (5,226,581) (4,797,737) Reversal of Charges 12 (1,139,542) (307,796) Other operating expenses 13 (11,475,237) (9,052,809) Profit/ (loss) before income tax 460,883 (13,272,474) Income tax credit 14 1,075,249 5,151,488 Profit/ (loss) for the year 1,536,132 (8,120,986) Other comprehensive income Revaluation surplus on land and buildings 24,25 14,524,944 1,489,113 Deferred income tax thereon 31 (4,357,483) (446,734) 10,167,461 1,042,379 Total comprehensive income/ (loss) for the year 11,703,593 (7,078,607)

..Think Possibilities 24 Orient Bank Limited Annual Report 2015

Consolidated statement of financial position For the year ended 31 December 2015

2015 2014 Notes Ushs’000 Ushs’000 Assets Cash and balances with Bank of Uganda 16 77,516,687 66,497,667 Deposits and balances due from banking institutions 18 141,003,197 106,452,225 Government securities – Held-to-maturity 19 98,362,345 116,001,140 Other investments 20a - 27,723 Loans and advances to customers 21 177,020,954 154,386,228 Other assets 22 5,538,588 3,378,352 Current income tax recoverable 30 349,942 261,196 Intangible assets 26 3,051,650 4,096,799 Deferred income tax asset 31 21,944,698 18,167,741 Operating lease prepayments 25 23,953 458,464 Property and equipment 23 11,214,515 11,133,818 Freehold land 24 15,100,000 - Total assets 551,126,529 480,861,353

Liabilities Deposits due to other banks 27 4,002,164 5,000,274 Customer deposits 28 440,372,643 388,101,601 Refinance loans 29 104,167 166,667 Other liabilities 32 11,228,063 8,255,918 Total liabilities 455,707,037 401,524,460

Capital and reserves Share capital 33 76,500,000 76,500,000 Revaluation reserve 34 12,768,567 2,562,073 Transfer to credit risk reserve 35 225,098 5,005,634 Retained earnings/ (accumulated losses) 5,874,955 (4,783,738) Non controlling interests 50,872 46,567 Available for sale fair value reserve - 6,357 Total equity 95,419,492 79,336,893 Total equity and liabilities 551,126,529 480,861,353

The financial statements on pages 10 to 80 were authorised for issue by the Board of Directors on 28 April 2016 and signed on its behalf by:

Michael Cook Ketan Morjaria Julius Kakeeto Nicholas Ecimu Chairman Vice Chairman Managing Director/ CEO Company Secretary Overview Governance Financial Statements 25

Bank statement of financial position For the year ended 31 December 2015

2015 2014 Notes Ushs’000 Ushs’000 Assets Cash and balances with Bank of Uganda 16 77,516,687 66,497,667 Deposits and balances due from banking institutions 18 140,957,123 106,445,193 Government securities – Held-to-maturity 19 98,362,345 116,001,140 Investment in subsidiary 20b 80,000 80,000 Loans and advances to customers 21 177,020,954 154,386,228 Other assets 22 5,427,910 3,267,013 Current income tax recoverable 30 354,615 266,103 Deferred income tax asset 31 21,945,634 18,168,677 Intangible assets 26 3,051,650 4,096,799 Operating lease prepayments 25 23,953 458,464 Property and equipment 23 11,208,927 11,131,811 Freehold land 24 15,100,000 - Total assets 551,049,798 480,799,095

Liabilities Deposits due to other banks 27 4,002,164 5,000,274 Customer deposits 28 440,526,762 388,300,294 Refinance loans 29 104,167 166,667 Other liabilities 32 11,176,616 8,152,847 Total liabilities 455,809,709 401,620,082

Capital and reserves Share capital 33 76,500,000 76,500,000 Revaluation reserve 34 12,768,567 2,562,073 Transfer to credit risk reserve 35 225,098 5,005,634 Retained earnings/(accumulated losses) 5,746,424 (4,888,694) Total equity 95,240,089 79,179,013 Total equity and liabilities 551,049,798 480,799,095

The financial statements on pages 10 to 80 were authorised for issue by the Board of Directors on 28 April 2016 and signed on its behalf by:

Michael Cook Ketan Morjaria Julius Kakeeto Nicholas Ecimu Chairman Vice Chairman Managing Director/ CEO Company Secretary

..Think Possibilities 26 Orient Bank Limited Annual Report 2015

Consolidated statement of changes in equity For the year ended 31 December 2015

Share Reval- Statutory Accumu- Non- Availa- Proposed Total capital uation credit risk lated con- ble dividends equity reserve reserve losses trolling for sale / retained interest fair earnings value reserve Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Year ended 31 December 2014 At start of year 50,000,000 1,558,727 - 8,229,928 28,087 4,169 - 59,820,911 Comprehensive loss:

Transfer of excess depre- - (55,761) - 55,761 - - - - ciation Deferred income tax on - 16,728 - (16,728) - - - - excess depreciation Increase in revaluation 1,042,379 - - - 1,042,379 surplus on buildings (Loss)/profit for the year - - - (8,047,065) 18,480 - - (8,028,585) Other comprehensive - - - - - 2,188 - 2,188 income for the year Total comprehensive loss - 1,003,346 - (8,008,033) 18,480 2,188 - (6,984,018) Transfer to credit risk - - 5,005,634 (5,005,634) - - - - reserve Transactions with owners Increase in Share Capital 26,500,000 ------26,500,000 At end of year 76,500,000 2,562,073 5,005,634 (4,783,738) 46,567 6,357 - 79,336,893 Year ended 31 December 2015 At start of year 76,500,000 2,562,073 5,005,634 (4,783,738) 46,567 6,357 - 79,336,893 Comprehensive loss: Deferred income tax on - (4,357,483) - 4,357,483 - - - - revaluation surplus Transfer of excess depre- - 39,033 - (39,033) - - - - ciation ( net of deferred tax) Increase in revaluation 14,524,944 - - - - 14,524,944 surplus on land Profit for the year - - - 1,553,351 4,305 - - 1,557,656 Other comprehensive - - - 6,357 (6,357) - - income for the year Total comprehensive loss - 10,206,494 - 5,878,157 50,872 (6,357) - 16,082,600 Transfer to credit risk - - (4,780,535) 4,780,535 - - - - reserve At end of year 76,500,000 12,768,567 225,098 5,874,956 50,872 - - 95,419,494 Overview Governance Financial Statements 27

Bank statement of changes in equity For the year ended 31 December 2015

Share Revaluation Statutory Accumulat- Proposed Total eq- capital reserve credit risk ed losses dividends uity reserve / retained earnings Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Year ended 31 December 2014 At start of year 50,000,000 1,558,727 - 8,198,893 - 59,757,620 Comprehensive loss: Transfer of excess depreci- - (55,761) - 55,761 - - ation Deferred income tax on - 16,728 - (16,728) - - excess depreciation Increase in revaluation sur- - 1,042,379 - - - - plus on buildings Loss for the year - - (8,120,986) - 1,042,379 Total comprehensive loss - 1,003,346 - (8,081,953) - (8,120,986) Transfer to credit risk reserve - - 5,005,634 (5,005,634) - - Transactions with owners: Increase in Share Capital 26,500,000 - - - - 26,500,000 At end of year 76,500,000 2,562,073 5,005,634 (4,888,694) - 59,757,620 Year ended 31 December 2015 At start of year 76,500,000 2,562,073 5,005,634 (4,888,694) - 79,179,013 Comprehensive loss: Deferred tax on revaluation - (4,357,483) - 4,357,483 - - suprlus Transfer excess depreciation - 39,033 - (39,033) - - net of deferred tax Increase in revaluation sur- - 14,524,944 - - - 14,524,944 plus on land Profit for the year - - - 1,536,132 - 1,536,132 Total comprehensive loss - 10,206,494 - 5,854,582 - 16,061,076 Transfer to credit risk reserve - - (4,780,535) 4,780,535 - - At end of year 76,500,000 12,768,567 225,098 5,746,424 - 95,240,089

..Think Possibilities 28 Orient Bank Limited Annual Report 2015

Consolidated statement of cash flows For the year ended 31 December 2015

2015 2014 Notes Ushs’000 Ushs’000

Cash flows from operating activities Profit before income tax 492,284 (13,140,184) Adjustments: Depreciation 23 2,769,076 2,743,175 Amortisation of operating lease prepayments 25 23,455 44,535 Amortisation of intangible asset 26 2,435,860 2,011,173 Profit on disposal of property and equipment (81,188) (17,150) Fair value gain on investments - 3,126 Profit/ (loss) before working capital changes 5,639,487 (8,355,325) (Increase)/ decrease in deposits due to banking institutions (998,110) 3,989,707 (Increase)/ decrease in loans and advances (22,634,726) 62,030,598 Decrease/ (Increase) in investment in government securities 24,074,205 (26,151,556) Increase in other assets (2,161,148) (1,445,152) Increase/ (decrease) in customer deposits 52,271,042 (32,195,410) Decrease in BOU refinance loan (62,500) (118,600) Increase/ (decrease) in other liabilities 2,972,146 (1,439,677) Income taxes paid (2,803,233) (2,786,761) 50,657,676 1,883,150 Net cash generated from/ (used in) operating activities 56,297,164 (6,472,175)

Cash flows from investing activities Purchase of property and equipment 23 (3,036,698) (1,791,201) Sale of Shares 26,147 - Proceeds from sale of property and equipment 129,980 115,810 Purchase of intangible assets 26 (1,056,275) (1,439,204) Net cash used in investing activities (3,936,846) (3,114,595)

Cash flows from financing activities Dividends paid - - Increase in share capital - 26,500,000 Net cash generated from financing activities - 26,500,000 Cash and cash equivalents at start of year 196,036,629 179,123,399 Net cash from operating acitivities 56,297,164 (6,472,175) Net cash used in investing activities (3,936,846) (3,114,595) Net cash used in financing activities - 26,500,000 Cash and cash equivalents at the end of the year 17 248,396,947 196,036,629 Overview Governance Financial Statements 29

Bank statement of cash flows For the year ended 31 December 2015

2015 2014 Notes Ushs’000 Ushs’000

Cash flows from operating activities Profit/ (Loss) before income tax 460,883 (13,272,474) Adjustments: Depreciation 23 2,767,266 2,742,028 Amortisation of operating lease prepayments 25 23,455 44,535 Amortisation of intangible asset 26 2,435,860 2,011,173 Profit on disposal of property and equipment (81,188) (17,150) Profit/ (loss) before working capital changes 5,606,277 (8,491,888) (Increase)/ decrease in deposits due to banking institutions (998,110) 3,989,707 (Increase)/ decrease in loans and advances (22,634,726) 62,030,598 Decrease/ (Increase) in investment in government securities 24,074,205 (26,151,556) Increase in other assets (2,160,895) (1,435,089) Increase/ (decrease) in customer deposits 52,226,468 (32,058,665) Decrease in BOU refinance loan (62,500) (118,600) Increase/ (decrease) in other liabilities 3,023,769 (1,469,846) Income taxes paid (2,790,221) (2,758,061) 50,677,990 2,028,488 Net cash from operating activities 56,284,267 (6,463,400)

Cash flows from investing activities Purchase of property and equipment 23 (3,036,698) (1,791,201) Proceeds from sale of property and equipment 129,980 115,810 Purchase of intangible assets 26 (1,056,275) (1,439,204) Net cash used in investing activities (3,962,993) (3,114,595)

Cash flows from financing activities Dividends paid - - Increase in share capital - 26,500,000 Net cash from/(used in) financing activities - 26,500,000 Cash and cash equivalents at start of year 196,029,597 179,107,593 Net cash from operating acitivities 56,284,267 (6,463,401) Net cash used in investing activities (3,962,993) (3,114,595) Net cash used in financing activities - 26,500,000 Cash and cash equivalents at end of year 17 248,350,872 196,029,597

..Think Possibilities 30 Orient Bank Limited Annual Report 2015

NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2015

1. GENERAL INFORMATION 2.1.1 Changes in accounting policy and disclosures Orient Bank Limited (the ‘Bank’) is incorporated in (a) New and amended standards adopted by the Uganda under the Companies Act as a limited liability Bank company, and is domiciled in Uganda. The address of its The following standards and amendments have been registered office is: applied by the Bank for the first time for the financial year beginning 1 January 2015: Plot 6 & 6A, Kampala Road Annual Improvements to IFRSs 2010-2012 and 2011- P O Box 3072 2013 cycles. The following amendments are effective 1 Kampala July 2014:- IFRS 2 – clarifies the definition of ‘vesting condition’ For the Ugandan Companies Act reporting purposes, and now distinguishes between ‘performance the balance sheet is represented by the statement of condition’ and ‘service condition’ financial position and the profit and loss account by the IFRS 3 – clarifies that an obligation to pay statement of comprehensive income in these financial contingent consideration is classified as financial statements. liability or equity under the principles in IAS 32 and that all non-equity contingent consideration The financial statements for the year ended 31 (financial and non-financial) is measured at fair December 2015 were approved for issue by the Board value at each reporting date. of Directors on 28 April 2016. IFRS 3 – clarifies that IFRS 3 does not apply to

the accounting for the formation of any joint 2. SUMMARY OF SIGNIFICANT ACCOUNTING arrangement POLICIES The principal accounting policies applied in the IFRS 8 – requires disclosure of the judgements preparation of these financial statements are set out made by management in aggregating operating below. These policies have been consistently applied to segments and clarifies that a reconciliation of segment assets must only be disclosed if segment all the years presented, unless otherwise stated. assets are reported. 2.1 BASIS OF PREPARATION IFRS 13 confirms that short-term receivables and payables can continue to be measured at invoice The Bank’s financial statements have been prepared amounts if the impact of discounting is immaterial. in accordance with International Financial Reporting Standards (IFRS). The financial statements have been IFRS 13 – clarifies that the portfolio exception in prepared under the historical cost convention, except IFRS 13 (measuring the fair value of a group of for available-for-sale financial assets, financial assets and financial assets and financial liabilities on a net financial liabilities held at fair value through profit or basis) applies to all contracts within the scope of IAS 39 or IFRS 9 loss, which have been measured at fair value. IAS 16 and IAS 38 – clarifies how the gross carrying The preparation of financial statements in conformity amount and accumulated depreciation are treated with IFRS requires the use of certain critical accounting where an entity measures its assets at revalued estimates. It also requires the directors to exercise judge- amounts ment in the process of applying the Bank’s accounting IAS 24 – where an entity receives management policies. Changes in assumptions may have a significant personnel services from a third party (a impact on the financial statements in the period the as- management entity), the fees paid for those sumptions changed. services must be disclosed by the reporting entity, but not the compensation paid by the The areas involving a higher degree of judgement or management entity to its employees or directors. complexity, or areas where assumptions and estimates IAS 40 – clarifies that IAS 40 and IFRS 3 are not are significant to the financial statements, are disclosed mutually exclusive when distinguishing between in Note 4. investment property and owner-occupied property Overview Governance Financial Statements 31

and determining whether the acquisition of an IFRS 7 – that the additional disclosures relating investment property is a business combination. to the offsetting of financial assets and financial Amendments to IAS 19,’Defined Benefit Plans: liabilities only need to be included in interim Employee Contributions’. Effective 1 July 2014. reports if required by IAS 34. The amendments clarify the accounting for IAS 19 – that when determining the discount rate defined benefit plans that require employees or for post-employment benefit obligations, it is the third parties to contribute towards the cost of the currency that the liabilities are denominated in benefits. Under the previous version of IAS 19, most that is important and not the country where they entities deducted the contributions from the cost arise. of the benefits earned in the year the contributions IAS 34 – what is meant by the reference in the were paid. However, the treatment under the 2011 standard to ‘information disclosed elsewhere in the revised standard was not so clear. It could be quite interim financial report’ and adds a requirement complex to apply, as it requires an estimation to cross-reference from the interim financial of the future contributions receivable and an statements to the location of that information. allocation over future service periods. To provide relief, changes were made to IAS 19. These allow Amendments to IAS 1, ‘Presentation of Financial contributions that are linked to service, but that Statements’: The amendments are made in the do not vary with the length of employee service context of the IASB’s Disclosure Initiative, which (eg a fixed % of salary), to be deducted from the explores how financial statement disclosures can cost of benefits earned in the period that the be improved. The amendments, effective 1 January service is provided. Therefore many entities will be 2016, provide clarifications on a number of issues, able to (but not be required) continue accounting Materiality – an entity should not aggregate for employee contributions using their existing or disaggregate information in a manner that accounting policy. obscures useful information. Where items are The adoption of the improvements made in the material, sufficient information must be provided 2012-2012 cycle has required additional disclosures to explain the impact on the financial position or in the segment note. Other than that, the adoption performance. of these amendments did not have any impact on Disaggregation and subtotals – line items specified the current period or any prior period and is not in IAS 1 may need to be disaggregated where this likely to affect future periods. is relevant to an understanding of the entity’s financial position or performance. There is also (b) New standards and interpretations not yet new guidance on the use of subtotals. adopted Notes – confirmation that the notes do not need to be presented in a particular order. The Bank and Group has elected to adopt the following two amendments early OCI arising from investments accounted for under the equity method – the share of OCI arising from Annual Improvements to IFRSs 2012-2014 Cycle. equity-accounted investments is grouped based The latest annual improvements, effective 1 on whether the items will or will not subsequently January 2016; be reclassified to profit or loss. Each group should IFRS 5 – when an asset (or disposal group) then be presented as a single line item in the is reclassified from ‘held for sale’ to ‘held for statement of other comprehensive income. distribution’ or vice versa, this does not constitute According to the transitional provisions, the a change to a plan of sale or distribution and does disclosures in IAS 8 regarding the adoption of new not have to be accounted for as such. standards/accounting policies are not required for IFRS 7 – specific guidance for transferred financial these amendments. assets to help management determine whether As these amendments merely clarify the existing the terms of a servicing arrangement constitute requirements, they do not affect the company’s ‘continuing involvement’ and, therefore, whether accounting policies or any of the disclosures. the asset qualifies for de recognition.

..Think Possibilities 32 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

2. Summary of significant accounting policies (Continued)

(c) New standards and interpretations not yet adopted timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. A number of new standards and amendments to stand- Revenue is recognised when a customer obtains ards and interpretations are effective for annual periods control of a good or service and thus has the ability beginning after 1 January 2015, and have not been to direct the use and obtain the benefits from the applied in preparing these financial statement. None good or service. The standard replaces IAS 18 of these is expected to have a significant effect on the ‘Revenue’ and IAS 11 ‘Construction contracts’ and financial statements of the Company, except the follow- related interpretations. The standard is effective ing set out below. for annual periods beginning on or after 1 January IFRS 9, ‘Financial instruments’, addresses the 2018 and earlier application is permitted. The classification, measurement and recognition company is assessing the impact of IFRS 15. of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July 2014. IFRS 11, ‘Joint arrangements’. This amendment It replaces the guidance in IAS 39 that relates to adds new guidance on how to account for the the classification and measurement of financial acquisition of an interest in a joint operation that instruments. IFRS 9 retains but simplifies the constitutes a business. The amendments specify mixed measurement model and establishes three the appropriate accounting treatment for such primary measurement categories for financial acquisitions. The amendment is effective for annual assets: amortised cost, fair value through OCI and periods beginning on or after 1 January 2016. fair value through P&L. The basis of classification IAS 16, ‘Property, plant and equipment’, and IAS depends on the entity’s business model and the 41, ‘Agriculture,. These amendments change the contractual cash flow characteristics of the financial financial reporting for bearer plants, such as grape asset. Investments in equity instruments are vines, rubber trees and oil palms. The IASB decided required to be measured at fair value through profit that bearer plants should be accounted for in or loss with the irrevocable option at inception to the same way as property, plant and equipment present changes in fair value in OCI not recycling. because their operation is similar to that of There is now a new expected credit losses model manufacturing. Consequently, the amendments that replaces the incurred loss impairment model include them within the scope of IAS 16, instead of used in IAS 39. For financial liabilities there were no IAS 41. The produce growing on bearer plants will changes to classification and measurement except remain within the scope of IAS 41. The amendments for the recognition of changes in own credit risk are effective for annual periods beginning on or in other comprehensive income, for liabilities after 1 January 2016. designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness IAS 27, ‘Separate financial statements’. These by replacing the bright line hedge effectiveness amendments allow entities to use the equity tests. It requires an economic relationship between method to account for investments in subsidiaries, the hedged item and hedging instrument and joint ventures and associates in their separate for the ‘hedged ratio’ to be the same as the one financial statements. The amendments are management actually use for risk management effective for annual periods beginning on or after purposes. 1 January 2016. Contemporaneous documentation is still required IFRS 10, ‘Consolidated financial statements’ and IAS but is different to that currently prepared under 28, ‘Investments in associates and joint ventures’. IAS 39. The standard is effective for accounting These amendments address an inconsistency periods beginning on or after 1 January 2018. between the requirements in IFRS 10 and those Early adoption is permitted. The company is yet to in IAS 28 in dealing with the sale or contribution assess IFRS 9’s full impact. of assets between an investor and its associate or joint venture. The main consequence of the IFRS 15, ‘Revenue from contracts with customers’ amendments is that a full gain or loss is recognised deals with revenue recognition and establishes when a transaction involves a business (whether principles for reporting useful information to users it is housed in a subsidiary or not). A partial gain of financial statements about the nature, amount, or loss is recognised when a transaction involves Overview Governance Financial Statements 33

assets that do not constitute a business, even Foreign exchange gains and losses resulting from the if these assets are housed in a subsidiary. The settlement of foreign currency transactions and from amendments are effective for annual periods the translation at year-end exchange rates of monetary beginning on or after 1 January 2016. assets and liabilities denominated in foreign currencies IAS 1, ‘Presentation of financial statements’ These are recognised in profit or loss. amendments are as part of the IASB initiative to improve presentation and disclosure in financial Changes in the fair value of monetary assets denomi- reports. Effective for annual periods beginning nated in foreign currency classified as available-for-sale on or after 1 January 2016. are analysed between translation differences resulting Annual improvements 2014. These set of amendments, from changes in the amortised cost of the security and effective 1 January 2016, impacts 4 standards: other changes in the carrying amount of the security. IFRS 5, ‘Non-current assets held for sale and discontin- Translation differences related to changes in the am- ued operations’ regarding methods of disposal. ortised cost are recognised in profit or loss, and other changes in the carrying amount, are recognised in other IFRS 7, ‘Financial instruments: Disclosures’, (with comprehensive income. consequential amendments to IFRS 1) regarding servicing contracts. Translation differences on non-monetary financial instruments, such as equities held at fair value through IAS 19, ‘Employee benefits’ regarding discount profit or loss, are reported as part of the fair value rates. gain or loss. Translation differences on non-monetary IAS 34, ‘Interim financial reporting’ regarding financial instruments, such as equities classified as disclosure of information available-for-sale financial assets, are included in other There are no other IFRSs or IFRIC interpretations that are comprehensive income. not yet effective that would be expected to have a material impact on the Bank. 2.3 SALE AND REPURCHASE AGREEMENTS Securities sold subject to repurchase agreements 2.2 FOREIGN CURRENCY TRANSLATION (‘repos’) are reclassified in the financial statements as pledged assets when the transferee has the right by (a) Functional and presentation currency contract or custom to sell or repledge the collateral; the Items included in the Bank’s financial statements are counterparty liability is included in deposits from banks measured using the currency of the primary economic or deposits from customers, as appropriate. Securities environment in which the entity operates (‘the func- purchased under agreements to resell (‘reverse repos’) tional currency’). The financial statements are presented are recorded as loans and advances to other banks or in Uganda shillings and figures are stated in thousands customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued of Uganda shillings. over the life of the agreements using the effective interest method. Securities lent to counterparties are (b) Transactions and balances also retained in the financial statements. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. 2.4 FINANCIAL ASSETS AND LIABILITIES 2.4.1 Financial assets Monetary items denominated in foreign currency are The Bank classifies its financial assets in the following translated with the closing rate as at the reporting date. categories: financial assets at fair value through profit or If several exchange rates are available, the forward rate is loss, loans and receivables, held-to-maturity and availa- used at which the future cash flows represented by the ble-for-sale financial assets. The directors determine the transaction or balance could have been settled if those classification of its financial assets at initial recognition. cash flows had occurred. The Bank uses trade date accounting for regular way contracts when recording financial asset transactions. Non-monetary items measured at historical cost denominated in a foreign currency are translated with (a) Financial assets at fair value through profit or loss the exchange rate as at the date of initial recognition; This category comprises two sub-categories: financial non-monetary items in a foreign currency that are assets classified as held for trading, and financial assets measured at fair value are translated using the exchange designated by the Bank as at fair value through profit or rates at the date when the fair value was determined. loss upon initial recognition.

..Think Possibilities 34 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

2. Summary of significant accounting policies (Continued) | 2.4.1 Financial assets | (a) Financial assets at fair value through profit or loss (continued)

A financial asset is classified as held for trading if it is (a) those that the Bank intends to sell immediately acquired or incurred principally for the purpose of sell- or in the short term, which are classified as held ing or repurchasing it in the near term or if it is part of for trading, and those that the Bank upon initial a portfolio of identified financial instruments that are recognition designates as at fair value through managed together and for which there is evidence of a profit or loss; recent actual pattern of short-term profit-taking. (b) those that the Bank upon initial recognition Derivatives are also categorised as held for trading designates as available-for-sale; or unless they are designated and effective as hedging (c) those for which the holder may not recover instruments. All derivatives are carried as assets when substantially all of its initial investment, other than fair value is positive and as liabilities when fair value is because of credit deterioration. negative. Loans and receivables are initially recognised at fair value – which is the cash consideration to originate or The Bank designates certain financial assets upon initial purchase the loan including any transaction costs – and recognition as at fair value through profit or loss (fair measured subsequently at amortised cost using the value option). This designation cannot subsequently be effective interest method. changed and can only be applied when the following conditions are met: (c) Held-to-maturity investments the application of the fair value option reduces or Held-to-maturity investments are non-derivative finan- eliminates an accounting mismatch that would cial assets with fixed or determinable payments and otherwise arise or fixed maturities that the directors have the positive intention and ability to hold to maturity, other than: the financial assets are part of a portfolio of financial instruments which is risk managed and reported to (a) those that the Bank upon initial recognition senior management on a fair value basis or designates as at fair value through profit or loss; the financial assets consist of debt host and an (b) those that the Bank designates as available-for- embedded derivatives that must be separated. sale; and Financial instruments included in this category are (c) those that meet the definition of loans and recognised initially at fair value; transaction costs receivables. are taken directly to profit or loss. Gains and losses Held-to-maturity investments are initially recognised at arising from changes in fair value are included fair value including direct and incremental transaction directly in profit or loss and are reported as ‘Net costs and measured subsequently at amortised cost, us- gains/(losses) on financial instruments classified ing the effective interest method. as held for trading’. Interest income and expense and dividend income and expenses on financial 2.4.2 Financial liabilities assets held for trading are included in ‘Net interest The Bank’s holding in financial liabilities represents mainly deposits from banks and customers and other income’ or ‘Dividend income’, respectively. liabilities. Such financial liabilities are initially recognised Fair value changes relating to financial assets at fair value and subsequently measured at amortised designated at fair value through profit or loss are cost. recognised in ‘Net gains on financial instruments designated at fair value through profit or loss’. 2.4.3 Determination of fair value For financial instruments traded in active markets, the determination of fair values of financial instruments is (b) Loans and receivables based on quoted market prices or dealer price quota- Loans and receivables are non-derivative financial as- tions. This includes listed equity securities and quot- sets with fixed or determinable payments that are not ed debt instruments on major exchanges and broker quoted in an active market, other than: quotes from Bloomberg and Reuters. Overview Governance Financial Statements 35

A financial instrument is regarded as quoted in an active risks, liquidity risk and counterparty credit risk. Based on market if quoted prices are readily and regularly avail- the established fair value model governance policies, able from an exchange, dealer, broker, industry group, related controls and procedures applied, the directors pricing service or regulatory agency, and those prices believe that these valuation adjustments are necessary represent actual and regularly occurring market trans- and appropriate to fairly state the values of financial in- actions on an arm’s length basis. If the above criteria are struments carried at fair value. Price data and parame- not met, the market is regarded as being inactive. Indi- ters used in the measurement procedures applied are cators that a market is inactive are when there is a wide generally reviewed carefully and adjusted, if necessary – bid-offer spread or significant increase in the bid-offer particularly in view of the current market developments. spread or there are few recent transactions. In cases when the fair value of unlisted equity instru- For all other financial instruments, fair value is deter- ments cannot be determined reliably, the instruments mined using valuation techniques. In these techniques, are carried at cost less impairment. fair values are estimated from observable data in respect of similar financial instruments, using models to esti- The fair values of contingent liabilities and irrevoca- mate the present value of expected future cash flows or ble loan commitments correspond to their carrying other valuation techniques, using inputs (for example, amounts. LIBOR yield curve, FX rates, volatilities and counterparty spreads) existing at the reporting dates. 2.4.4 Derecognition The Bank uses widely recognised valuation models for determining fair values of non-standardised financial Financial assets are derecognised when the contractual instruments of lower complexity, such as options or rights to receive the cash flows from these assets have interest rate and currency swaps. For these financial in- ceased to exist or the assets have been transferred and struments, inputs into models are generally market-ob- substantially all the risks and rewards of ownership of servable. the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the For more complex instruments, the Bank uses internally Bank tests control to ensure that continuing involve- developed models, which are usually based on valua- ment on the basis of any retained powers of control tion methods and techniques generally recognised as does not prevent derecognition). Financial liabilities are standard within the industry. Valuation models such as derecognised when they have been redeemed or oth- present value techniques are used primarily to value de- erwise extinguished. rivatives transacted in the over-the-counter market, unlisted debt securities (including those with embedded 2.5 IMPAIRMENT OF FINANCIAL ASSETS derivatives) and other debt instruments for which markets were or have become illiquid. Some of the inputs (a) Assets carried at amortised cost to these models may not be market observable and are The Bank assesses at each reporting date whether there therefore estimated based on assumptions. The impact is objective evidence that a financial asset or group of on net profit of financial instrument valuations reflect- financial assets is impaired. A financial asset or a group ing non-market observable inputs (level 3 valuations) is of financial assets is impaired and impairment losses are disclosed in Note 3. incurred only if there is objective evidence of impairment as a result of one or more events that occurred The Bank uses its own credit risk spreads in determining after the initial recognition of the asset (a ‘loss event’) the current value for its derivative liabilities and all other and that loss event (or events) has an impact on the es- liabilities for which it has elected the fair value option. timated future cash flows of the financial asset or group When the Bank’s credit spreads widen, the Bank recognises a gain on these liabilities because the value of the of financial assets that can be reliably estimated. liabilities has decreased. When the Bank’s credit spreads The Bank first assesses whether objective evidence of narrow, the Bank recognises a loss on these liabilities be- impairment exists individually for financial assets that cause the value of the liabilities has increased. are individually significant, and individually or collectively for financial assets that are not individually significant. The output of a model is always an estimate or approx- If the Bank determines that no objective evidence of imation of a value that cannot be determined with impairment exists for an individually assessed financial certainty, and valuation techniques employed may not asset, whether significant or not, it includes the asset in fully reflect all factors relevant to the positions the Bank a group of financial assets with similar credit risk charac- holds. Valuations are therefore adjusted, where appro- teristics and collectively assesses them for impairment. priate, to allow for additional factors including model Assets that are individually assessed for impairment and

..Think Possibilities 36 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

2. Summary of significant accounting policies (Continued) | 2.5 Impairment of financial assets (continued) |(a) Assets carried at amortised cost (continued)

for which an impairment loss is or continues to be rec- Estimates of changes in future cash flows for groups ognised are not included in a collective assessment of of assets should reflect and be directionally consistent impairment. with changes in related observable data from period to period (for example, changes in unemployment rates, The amount of the loss is measured as the difference property prices, payment status, or other factors indic- between the asset’s carrying amount and the present ative of changes in the probability of losses in the Bank value of estimated future cash flows (excluding future and their magnitude). credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to The carrying amount of the asset is reduced through the reduce any differences between loss estimates and ac- use of an allowance account and the amount of the loss tual loss experience. is recognised in profit or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount When a loan is uncollectible, it is written off against rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a the related allowance for loan impairment. Such loans practical expedient, the Bank may measure impairment are written off after all the necessary procedures have on the basis of an instrument’s fair value using an ob- been completed and the amount of the loss has been servable market price. determined. Impairment charges relating to loans and advances to banks and customers are classified in loan The calculation of the present value of the estimated fu- impairment charges. ture cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less If, in a subsequent period, the amount of the impair- costs for obtaining and selling the collateral, whether or ment loss decreases and the decrease can be related not foreclosure is probable. objectively to an event occurring after the impairment was recognised (such as an improvement in the debt- For the purposes of a collective evaluation of impair- or’s credit rating), the previously recognised impairment ment, financial assets are grouped on the basis of sim- loss is reversed by adjusting the allowance account. The ilar credit risk characteristics (that is, on the basis of the amount of the reversal is recognised in profit or loss. Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due In addition to the measurement of impairment losses on status and other relevant factors). Those characteristics loans and advances in accordance with International Fi- are relevant to the estimation of future cash flows for nancial Reporting Standards as set out above, the Bank is groups of such assets by being indicative of the debtors’ also required by the Ugandan Financial Institutions Act, ability to pay all amounts due according to the contrac- 2004 to estimate losses on loans and advances as follows: tual terms of the assets being evaluated. A specific allowance for impairment for those loans and Future cash flows in a group of financial assets that are advances considered to be non-performing based on collectively evaluated for impairment are estimated on criteria and classification of such loans and advances es- the basis of the contractual cash flows of the assets in tablished by the Bank of Uganda, as follows: the group and historical loss experience for assets with credit risk characteristics similar to those in the group. a) substandard assets with arrears period between Historical loss experience is adjusted on the basis of 90 and 180 days – 20%; current observable data to reflect the effects of current b) doubtful assets with arrears period between conditions that did not affect the period on which the 181 days and 360 days – 50% and historical loss experience is based and to remove the effects of conditions in the historical period that do not c) loss assets with arrears period over 360 days – currently exist. 100%. Overview Governance Financial Statements 37

(b) Assets classified as available-for-sale Buildings 4% to 7% In the case of equity investments classified as available- for-sale, a significant or prolonged decline in the Leasehold improvements 12.5% fair value of the security below its cost is objective Furniture, Fixtures, Strongroom & 12.5% evidence of impairment resulting in the recognition Safes of an impairment loss. If any such evidence exists for Office Equipment 20.0% available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition Motor vehicles 25.0% cost and the current fair value, less any impairment loss Computer Equipment, ATM, POS & 33.3% on that financial asset previously recognised in profit or SWIFT loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in profit or loss The assets’ residual values and useful lives are reviewed, on equity instruments are not reversed through profit and adjusted if appropriate, at the end of each reporting or loss. If, in a subsequent period, the fair value of a period. Assets are reviewed for impairment whenever debt instrument classified as available-for-sale increases events or changes in circumstances indicate that the and the increase can be objectively related to an event carrying amount may not be recoverable. occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through Gains and losses on disposals are determined by profit or loss. comparing proceeds with carrying amount. These are included in ‘other operating expenses’ in profit or loss. 2.6 OFFSETTING FINANCIAL INSTRUMENTS Financial assets and liabilities are offset and the net The bank assesses the fair value of the buildings at amount reported in the statement of financial position the end of each reporting period to determine the when there is a legally enforceable right to offset the frequency of revaluation. If the difference between the recognised amounts and there is an intention to settle fair value of the buildings and their respective carrying on a net basis or realise the asset and settle the liability amounts is insignificant, the buildings will be revalued simultaneously. every five years.

2.7 CASH AND CASH EQUIVALENTS 2.9 INTANGIBLE ASSETS Cash and cash equivalents include cash in hand, Costs associated with maintaining computer software deposits held at call with banks and other short-term programmes are recognised as an expense as incurred. highly liquid investments with original maturities of Development costs that are directly attributable to the three months or less. design and testing of identifiable and unique software products controlled by the Bank are recognised as in- 2.8 PROPERTY AND EQUIPMENT tangible assets when the following criteria are met: Property and equipment comprise mainly branches and it is technically feasible to complete the software offices and includes freehold land. All equipment used product so that it will be available for use; by the Bank is stated at historical cost less depreciation. management intends to complete the software Historical cost includes expenditure that is directly at- product and use or sell it; tributable to the acquisition of the items. there is an ability to use or sell the software product; Subsequent expenditures are included in the asset’s it can be demonstrated how the software product carrying amount or are recognised as a separate asset, will generate probable future economic benefits; as appropriate, only when it is probable that future eco- adequate technical, financial and other resources nomic benefits associated with the item will flow to the to complete the development and to use or sell Bank and the cost of the item can be measured relia- the software product are available; and bly. The carrying amount of the replaced part is derecognised. All other repair and maintenance costs are the expenditure attributable to the software charged to profit or loss during the financial period in product during its development can be reliably which they are incurred. measured. Directly attributable costs that are capitalised as part Depreciation of assets is calculated using the straight- of the software product include the software develop- line method to allocate their cost to their residual values ment employee costs and an appropriate portion of rel- over their estimated useful lives, as follows evant overheads.

..Think Possibilities 38 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

2. Summary of significant accounting policies (Continued) | 2.9 Intangible assets (continued)

Other development expenditures that do not meet A defined benefit plan is a pension plan that is not a de- these criteria are recognised as an expense as incurred. fined contribution plan. Typically defined benefit plans Development costs previously recognised as an ex- define an amount of pension benefit that an employee pense are not recognised as an asset in a subsequent will receive on retirement, usually dependent on one or period. more factors, such as age, years of service and compensation. Computer software development costs recognised as assets are amortised over their estimated useful lives, The liability recognised in respect of defined benefit which does not exceed three years. pension plans is the present value of the defined benefit obligation at the reporting date less the fair value Acquired computer software licences are capitalised of plan assets, together with adjustments for unrecog- on the basis of the costs incurred to acquire and bring nised actuarial gains or losses and past service costs. to use the specific software. These costs are amortised The defined benefit obligation is calculated annually by on the basis of the expected useful lives. Software has a independent actuaries using the projected unit credit maximum expected useful life of 5 years. method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality 2.10 IMPAIRMENT OF NON-FINANCIAL ASSETS corporate bonds that are denominated in the currency Assets are reviewed for impairment whenever events in which the benefits will be paid, and that have terms or changes in circumstances indicate that the carrying to maturity approximating the terms of the related pen- amount may not be recoverable. An impairment loss sion liability. is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The Actuarial gains and losses arising from experience ad- recoverable amount is the higher of an asset’s fair value justments and changes in actuarial assumptions in ex- less costs to sell and value in use. For the purposes of cess of the greater of 10% of the value of plan assets assessing impairment, assets are grouped at the lowest or 10% of the defined benefit obligation are charged levels for which there are separately identifiable cash or credited to profit or loss over the employees’ expect- flows (cash-generating units). The impairment test also ed average remaining working lives. Past-service costs can be performed on a single asset when the fair value are recognised immediately in profit or loss, unless the less cost to sell or the value in use can be determined changes to the pension plan are conditional on the reliably. Non-financial assets that suffered impairment employees remaining in service for a specified period are reviewed for possible reversal of the impairment at of time (the vesting period). In this case, the past-ser- each reporting date. vice costs are amortised on a straight-line basis over the vesting period. 2.11 EMPLOYEE BENEFITS (a) Pension obligations For defined contribution plans, the Bank pays The Bank operates various pension schemes. The contributions to publicly or privately administered schemes are generally funded through payments to pension insurance plans on a mandatory, contractual insurance companies or trustee-administered funds, or voluntary basis. The contributions are recognised as determined by periodic actuarial calculations. The Bank employee benefit expense when they are due. Prepaid has both defined benefit and defined contribution contributions are recognised as an asset to the extent plans. that a cash refund or a reduction in the future payments is available. A defined contribution plan is a pension plan under which the Bank pays fixed contributions into a separate 2.12 PROVISIONS entity. The Bank has no legal or constructive obligations Provisions for restructuring costs and legal claims are to pay further contributions if the fund does not hold recognised when: the Bank has a present legal or con- sufficient assets to pay all employees the benefits relat- structive obligation as a result of past events; it is prob- ing to employee service in the current and prior periods. able that an outflow of resources will be required to Overview Governance Financial Statements 39

settle the obligation; and the amount has been reliably be available against which the temporary differences estimated. Provisions are not recognised for future op- can be utilised. erating losses. Where there are a number of similar obligations, the Deferred income tax assets and liabilities are offset likelihood that an outflow will be required in settlement when there is a legally enforceable right to offset is determined by considering the class of obligations as current income tax assets against current income a whole. A provision is recognised even if the likelihood tax liabiltites and when the deferred income taxes of an outflow with respect to any one item included in assets and liabilities relate to income taxes levied the same class of obligations may be small. Provisions are measured at the present value of the by the same taxation authority on either the same expenditures expected to be required to settle the entity or different taxable entities where there is an obligation using a pre-tax rate that reflects current intention to settle the balances on a net basis. market assessments of the time value of money and the risks specific to the obligation. The increase in 2.14 DIVIDEND PAYABLE the provision due to passage of time is recognised as Dividends on ordinary shares are charged to equity in interest expense. the period in which they are declared.

2.13 INCOME TAX 2.15 SHARE CAPITAL (a) Current income tax Ordinary shares are classified as ‘share capital’ in equity. The tax expense for the period comprises current and Any premium received over and above the par value of deferred income tax. Tax is recognised in profit or loss, the shares is classified as ‘share premium’ in equity. except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehen- 2.16 Leases Leases are divided into finance leases and operating sive income or directly in equity respectively. leases. The current income tax charge is calculated on the basis of tax laws enacted or substantively enacted at the (a) The Bank is the lessee reporting date. The directors periodically evaluate po- (i) Operating lease sitions taken in tax returns with respect to situations in Leases in which a significant portion of the risks which applicable tax regulation is subject to interpre- and rewards of ownership are retained by another tation. They establish provisions where appropriate on party, the lessor, are classified as operating leases. the basis of amounts expected to be paid to the tax Payments, including pre-payments, made under authorities. operating leases (net of any incentives received from the lessor) are charged to profit or loss on a (b) Deferred income tax straight-line basis over the period of the lease. Deferred income tax is recognised, using the liability method, on temporary differences arising between The total payments made under operating leases the tax bases of assets and liabilities and their carrying are charged to ‘other operating expenses’ on a amounts in the financial statements. However, deferred straight-line basis over the period of the lease. tax liabilities are not recognised if they arise from the in- When an operating lease is terminated before the itial recognition of goodwill; deferred income tax is not lease period has expired, any payment required accounted for if it arises from initial recognition of an to be made to the lessor by way of penalty is asset or liability in a transaction other than a business recognised as an expense in the period in which combination that at the time of the transaction affects termination takes place. neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that (ii) Finance lease have been enacted or substantially enacted by the re- Leases of assets where the Bank has substantially all porting date and are expected to apply when the relat- the risks and rewards of ownership are classified as ed deferred income tax asset is realised or the deferred finance leases. Finance leases are capitalised at the income tax liability is settled. lease’s commencement at the lower of the fair value of the leased property and the present value of the Deferred income tax assets are recognised only to the minimum lease payments. Each lease payment is extent that it is probable that future taxable profit will allocated between the liability and finance charges

..Think Possibilities 40 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

2. Summary of significant accounting policies (Continued) |2.16 Leases (continued) | (a) The bank is the leasee (continued)

so as to achieve a constant rate on the finance credit losses. The calculation includes all fees and points balance outstanding. The corresponding rental paid or received between parties to the contract that obligations, net of finance charges, are included in are an integral part of the effective interest rate, transac- deposits from banks or deposits from customers tion costs and all other premiums or discounts. depending on the counter party. The interest element of the finance cost is charged to profit Once a financial asset or a group of similar financial assets or loss over the lease period so as to produce a has been written down as a result of an impairment loss, constant periodic rate of interest on the remaining interest income is recognised using the rate of interest balance of the liability for each period. used to discount the future cash flows for the purpose of measuring the impairment loss. The leases entered into by the Bank are primarily operating leases. 2.18 FEE AND COMMISSION INCOME Fees and commissions are generally recognised (b) The Bank is the lessor on an accrual basis when the service has been When assets are held subject to a finance lease, the provided. Loan commitment fees for loans that present value of the lease payments is recognised as a are likely to be drawn down are deferred (together receivable. The difference between the gross receivable with related direct costs) and recognised as an and the present value of the receivable is recognised as unearned finance income. Lease income is recognised adjustment to the effective interest rate on the loan. over the term of the lease using the net investment Loan syndication fees are recognised as revenue method (before tax), which reflects a constant periodic when the syndication has been completed and rate of return. the Bank has retained no part of the loan package for itself or has retained a part at the same effective (c) Fees paid in connection with arranging leases interest rate as the other participants. The Bank makes payments to agents for services in connection with negotiating lease contracts with the Bank’s Commission and fees arising from negotiating, or lessees. For operating leases, the letting fees are capital- participating in the negotiation of, a transaction ised within the carrying amount of the related asset, and for a third party – such as the arrangement of the depreciated over the life of the lease. acquisition of shares or other securities, or the purchase or sale of businesses – are recognised on 2.17 INTEREST INCOME AND EXPENSE completion of the underlying transaction. Portfolio Interest income and expense for all interest- and other management advisory and service fees bearing financial instruments are recognised in are recognised based on the applicable service profit or loss using the effective interest method. contracts, usually on a time-apportionate basis. Performance-linked fees or fee components are The effective interest method is a method of calculat- recognised when the performance criteria are ing the amortised cost of a financial asset or a financial fulfilled. liability and of allocating the interest income or interest expense over the relevant period. The effective interest 2.19 DIVIDEND INCOME rate is the rate that exactly discounts estimated future Dividends are recognised in profit or loss when the cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter Bank’s right to receive payment is established. period to the net carrying amount of the financial asset or financial liability. When calculating the effective in- 2.20 ACCEPTANCES AND LETTERS OF CREDIT terest rate, the Bank estimates cash flows considering all Acceptances and letters of credit are accounted for as contractual terms of the financial instrument (for exam- off-balance sheet transactions and disclosed as contin- ple, prepayment options) but does not consider future gent liabilities. Overview Governance Financial Statements 41

3. FINANCIAL RISK MANAGEMENT The Bank’s business involves taking on risks in a target- The credit risk management and control are centralised ed manner and managing them professionally. The core in a credit risk management team, which reports to the functions of the Bank’s risk management are to identify Board of Directors and head of each business unit reg- all key risks for the Bank, measure these risks, manage ularly. the risk positions and determine capital allocations. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and 3.1.1 Credit risk measurement best market practice. a) Loans and advances (including loan commitments and guarantees) The Bank’s aim is to achieve an appropriate balance be- The estimation of credit exposure is complex and re- tween risk and return and minimise potential adverse quires the use of models, as the value of a product varies effects on the Bank’s financial performance.The Bank de- with changes in market variables, expected cash flows fines risk as the possibility of losses or profits foregone, and the passage of time. The assessment of credit risk of which may be caused by internal or external factors. a portfolio of assets entails further estimations as to the likelihood of defaults occurring, of the associated loss Risk management is carried out by a central treasury ratios and of default correlations between counterpar- department (Bank Treasury) under policies approved by the Board of Directors. Bank Treasury identifies, eval- ties. uates and hedges financial risks in close co-operation with the Bank’s operating units. The Board provides The Bank has developed models to support the quanti- written principles for overall risk management, as well as fication of the credit risk. These rating and scoring mod- written policies covering specific areas, such as foreign els are in use for all key credit portfolios and form the exchange risk, interest rate risk, credit risk, use of deriv- basis for measuring default risks. ative financial instruments and non-derivative financial In measuring credit risk of loan and advances at a instruments. In addition, internal audit is responsible for counterparty level, the Bank considers three compo- the independent review of risk management and the nents: (i) the ‘probability of default’ (PD) by the client or control environment. counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future de- The risks arising from financial instruments to which the Bank is exposed are financial risks, which includes credit velopment, from which the Bank derive the ‘exposure at default’ (EAD); and (iii) the likely recovery ratio on the risk, liquidity risk and market risk. defaulted obligations (the ‘loss given default’) (LGD). The models are reviewed regularly to monitor their robust- 3.1 CREDIT RISK ness relative to actual performance and amended as Credit risk is the risk of suffering financial loss, should necessary to optimise their effectiveness. any of the Bank’s customers, clients or market counterparties fail to fulfil their contractual obligations to the These credit risk measurements, which reflect expect- Bank. Credit risk arises mainly from commercial and con- sumer loans and advances, credit cards, and loan com- ed loss (the ‘expected loss model’), are required by the mitments arising from such lending activities, but can Basel Committee on Banking Regulations and the Su- also arise from credit enhancement provided, financial pervisory Practices (the Basel Committee) and are em- guarantees, letters of credit, endorsements and accept- bedded in the Bank’s daily operational management. ances. The operational measurements can be contrasted with impairment allowances required under IAS 39, which The Bank is also exposed to other credit risks arising are based on losses that have been incurred at the re- from investments in debt securities and other expo- porting date (the ‘incurred loss model’) rather than ex- sures arising from its trading activities (‘trading expo- pected losses. sures’), including non-equity trading portfolio assets, derivatives and settlement balances with market counterparties and reverse repurchase loans. Credit risk is the The Bank’s internal ratings scale and mapping of external single largest risk for the Bank’s business; the directors ratings as supplemented by the Bank’s own assessment therefore carefully manage the exposure to credit risk. through the use of internal rating tools are as follows:

..Think Possibilities 42 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) |3.1 Credit Risk (continued)

Normal Items that are fully current and the full repayment of the contractual principal and interest amounts are expected. Watch Items for which the borrower is experiencing difficulties. Ultimate loss is not expected but could occur if adverse conditions persist. Substandard Items that show underlying well defined weaknesses that could lead to probable loss if not corrected. The risk that these items may be impaired is probable and the Bank relies to a large extent on the available security. Doubtful Items that are considered to be impaired, but are not yet considered final losses because of pending factors, which may strengthen the equality of the items. Loss Items that are considered to be uncollectible and where the realization of collateral and institution of legal proceedings have been unsuccessful. These items are considered of such little value that they should no longer be included in the net assets of the Bank.

3.1.2 Risk limit control and mitigation policies (a) Collateral The Bank manages, limits and controls concentrations The Bank employs a range of policies and practices to of credit risk wherever they are identified − in particular, mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common to individual counterparties and banks, and to industries practice. The Bank implements guidelines on the ac- and countries. ceptability of specific classes of collateral or credit risk mitigation. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted The principal collateral types for loans and advances are: in relation to one borrower, or banks of borrowers, and .Mortgages over residential properties. to geographical and industry segments. Such risks are .Charges over business assets such as premises, monitored on a revolving basis and subject to an annu- inventory and accounts receivable. al or more frequent review, when considered necessary. Limits on the level of credit risk by product, industry sec- .Charges over financial instruments such as debt tor and country are approved quarterly by the Board of securities and equities. Directors. Collateral held as security for financial assets other than loans and advances depends on the nature of The exposure to any one borrower including banks and the instrument. brokers is further restricted by sub-limits covering on- Longer-term finance and lending to corporate entities and off-balance sheet exposures, and daily delivery risk are generally secured; revolving individual credit facil- limits in relation to trading items such as forward foreign ities are generally unsecured. In addition, in order to exchange contracts. Actual exposures against limits are minimise the credit loss the Bank will seek additional monitored daily. collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans Lending limits are reviewed in the light of changing and advances. market and economic conditions and periodic credit reviews and assessments of probability of default. (b) Lending limits (for derivative and loan books) Some other specific control and mitigation measures The Bank maintains strict control limits on net open de- are outlined below: rivative positions (that is, the difference between pur- Overview Governance Financial Statements 43

chase and sale contracts) by both amount and term. The Bank up to a stipulated amount under specific terms amount subject to credit risk is limited to expected fu- and conditions – are collateralised by the underlying ture net cash inflows of instruments, which in relation to shipments of goods to which they relate and therefore derivatives are only a fraction of the contract, or notional carry less risk than a direct loan. values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of Commitments to extend credit represent unused the overall lending limits with customers, together with portions of authorisations to extend credit in the form potential exposures from market movements. Collateral of loans, guarantees or letters of credit. With respect to or other security is not always obtained for credit risk credit risk on commitments to extend credit, the Bank exposures on these instruments, except where the Bank is potentially exposed to loss in an amount equal to the requires margin deposits from counterparties. total unused commitments. However, the likely amount of loss is less than the total Settlement risk arises in any situation where a payment unused commitments, as most commitments to extend in cash, securities or equities is made in the expectation credit are contingent upon customers maintaining of a corresponding receipt in cash, securities or equities. specific credit standards (often referred to as financial Daily settlement limits are established for each counter- covenants). party to cover the aggregate of all settlement risk arising from the Bank’s market transactions on any single day. The Bank monitors the term to maturity of credit commitments because longer-term commitments (c) Master netting arrangements generally have a greater degree of credit risk than The Bank further restricts its exposure to credit losses by shorter-term commitments. entering into master netting arrangements with counterparties with which it undertakes a significant volume 3.1.3 Impairment and provisioning policies of transactions. Master netting arrangements do not The internal and external rating systems described in generally result in an offset of assets and liabilities of the Note 3.1.1 focus on expected credit losses – that is, tak- statement of financial position, as transactions are either usually settled on a gross basis or under most netting ing into account the risk of future events giving rise to agreements the right of set off is triggered only on de- losses. In contrast, impairment allowances are recog- fault. nised for financial reporting purposes only for losses that have been incurred at the reporting date based on However, the credit risk associated with favourable con- objective evidence of impairment. tracts is reduced by a master netting arrangement to Due to the different methodologies applied, the the extent that if a default occurs, all amounts with the amount of incurred credit losses provided for in the counterparty are terminated and settled on a net basis. financial statements is usually lower than the amount The Bank’s overall exposure to credit risk on derivative determined from the expected loss model that is used instruments subject to master netting arrangements for internal operational management and banking reg- can change substantially within a short period, as it is af- ulation purposes. fected by each transaction subject to the arrangement.

The impairment allowance shown in the statement of (d) Financial govenants (for credit related financial position at year-end is derived from each of commitments and loan books) the four internal rating grades. However, the largest The primary purpose of these instruments is to ensure component of the impairment allowance comes from that funds are available to a customer as required. Guar- antees and standby letters of credit carry the same cred- the default grade. The table below (Table: 1) shows the it risk as loans. percentage of the Bank’s on- and off-balance sheet items, like financial guarantees, loan commitments and Documentary and commercial letters of credit – which other credit related obligations, relating to loans and are written undertakings by the Bank on behalf of a cus- advances and the associated impairment allowance for tomer authorising a third party to draw drafts on the each of the Bank’s internal rating categories.

..Think Possibilities 44 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) |3.1 Credit Risk (continued)

Table 1: Bank’s rating 2015 2014 Credit risk exposure Impairment allowance Credit risk exposure Impairment allowance 1. Normal 86.90% 83.08% 2. Watch 10.01% 9.56% 3. Substandard 1.64% 0.79% 4. Doubtful 0.99% 1.63% 5. Loss 0.46% 4.94%

3.1.4 Maximum exposure to credit risk before . 83.08% of the loans and advances portfolio are collateral held or other credit enhancements considered to be neither past due nor impaired The directors are confident in the ability to continue (2014: 83.03%); to control and sustain minimal exposure of credit risk to the Bank resulting from both the loan and advances All credit exposures arise in Uganda. The following table portfolio and debt securities based on the following: breaks down the Bank’s credit exposure at carrying amounts (without taking into account any collateral . 92.64% of the loans and advances portfolio is held or other credit support), as categorised by the categorised in the top two grades of the internal industry sectors of the Bank’s counterparties. rating system (2014: 92.64%); Overview Governance Financial Statements 45

Whole-sale Public Financial Manufac- and retail sector institutions turing Real estate trade Ushs Others Total At 31 December 2015 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 ‘000 Ushs ‘000 Ushs ‘000 Balances with the Cen- 77,516,687 - - - - - 77,516,687 tral Bank Deposits and balances 140,957,123 - - - - - 140,957,123 due from banking institutions Loans to Retail customers: − Overdrafts - 30,764 90,163 1,188,795 - 2,051,762.59 3,361,485 − Term loans - 22,209 3,495,180 1,819,351 - 24,913,950.82 30,250,690 Corporate - 11,449,276 20,247,526 29,796,639 - 42,783,584.80 104,277,026 SME - 1,523,899 7,700,852 19,275,067 - 15,608,421.89 44,108,240 Financial assets – Held to maturity 98,362,345 - - - - - 98,362,345 Other assets - - - - - 2,107,641 2,107,641 316,836,155 13,026,148 31,533,721 52,079,852 - 87,465,361 500,941,237 Credit risk exposures relating to off-balance sheet items are as follows: Guarantees and perfor- - 2,570,124 - 21,460,395 - 23,682,113 47,712,631 mance bonds Loan commitments 741,330 1,519,318 4,692,244 - 17,641,324 24,594,216 and other credit related obligations At 31 December 2015 - 3,311,454 1,519,318 26,152,639 - 41,323,437 72,306,847 At 31 December 2014 Balances with the Cen- 66,497,667 - - - - - 66,497,667 tral Bank Deposits and balances 106,445,193 - - - - - 106,445,193 due from banking institutions Loans to Retail customers: − Overdrafts - 1,791,935 1,719,326 10,194,138 - 6,396,782 20,102,181 − Term loans - 1,423,294 7,162,440 10,559,665 - 15,177,743 34,323,142 Corporate - 4,491,797 30,023,104 19,606,335 - 34,751,574 88,872,810 HNWI - - 315,379 224,955 - 17,509,901 18,050,235 Public sector ------Financial assets – Held to maturity 116,001,140 - - - - - 116,001,140 Other assets - - - - - 1,262,371 1,262,371 288,944,000 7,707,026 39,220,249 40,585,093 - 75,098,371 451,554,739 Credit risk exposures relating to off-balance sheet items are as follows: Guarantees and perfor- - 1,636,590 - 4,963,245 - 29,232,980 35,832,815 mance bonds Loan commitments 629,660 - 8,894,091 - 11,163,827 20,687,578 and other credit related obligations - 2,266,250 - 13,857,336 - 40,396,807 56,520,393

..Think Possibilities 46 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.1 Credit Risk (continued)

3.1.5 Loans and advances Loans and advances are summarised as follows: 2015 2014 Ushs ‘000 Ushs ‘000 Neither past due nor impaired 158,155,736 134,053,927 Past due but not impaired 18,223,495 15,419,958 Individually impaired 5,618,210 11,874,484 Gross 181,997,441 161,348,369 Less: allowance for impairment (4,709,112) (5,877,826) Less: Interest in suspense (267,375) (1,084,314) Net 177,020,954 154,386,229

Loans and advances are summarised as per risk rating as follows: Sub- Normal Watch standard Doubtful Loss Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2015 Neither past due nor impaired 158,155,736 - - - - 158,155,736 Past due but not impaired - 18,223,495 - - - 18,223,495 Individually impaired - - 2,982,472 1,804,251 831,487 5,618,210 Gross 158,155,736 18,223,495 2,982,472 1,804,251 831,487 181,997,442 Less: allowance for impairment (3,336,436) (2,542,296) (1,664,729) (769,463) (8,312,924) Net 154,819,300 18,223,495 440,176 139,522 62,024 173,684,518 31 December 2014 Neither past due nor impaired 134,053,927 134,053,927 Past due but not impaired 15,419,958 15,419,958 Individually impaired 1,278,045 2,633,471 7,962,968 11,874,484 Gross 134,053,927 15,419,958 1,278,045 2,633,471 7,962,968 161,348,368 Less: allowance for impairment (182,498) (672,043) (1,474,804) (4,815,292) (7,144,637) Net 133,871,429 15,419,958 606,002 1,158,667 3,147,676 154,203,731 Overview Governance Financial Statements 47

(a) Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the bank.

Public Overdrafts Term loans Corporate HNWI sector Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2015 Neither past due nor 2,311,446 26,887,428 92,296,002 36,660,860 - 158,155,735 impaired Total 2,311,446 26,887,428 92,296,002 36,660,860 - 158,155,735 31 December 2014 Neither past due nor 6,947,214 33,756,661 75,685,251 17,664,801 - 134,053,927 impaired Total 6,947,214 33,756,661 75,685,251 17,664,801 - 134,053,927

(b) Loans and advances past due but not impaired Late processing and other administrative delays on the side of the borrower can lead to a financial asset being past due but not impaired. Therefore, loans and advances less than 90 days past due are not usually considered impaired, unless other information is available to indicate the contrary.

Gross amount of loans and advances by class to customers that were past due but not impaired were as follows:

Overdrafts Term loans Corporate SME NBFI Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2015 Past due but not impaired 1,897 1,128,964 11,865,648 5,226,986 - 18,223,495 Total 1,897 1,128,964 11,865,648 5,226,986 - 18,223,495 31 December 2014 Past due but not impaired 4,729,163 534,670 9,793,843 362,282 - 15,419,958 Total 4,729,163 534,670 9,793,843 362,282 - 15,419,958

(c) Loans and advances individually impaired (i) Loans and advances to customers The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is Ushs 5,618,211 (2014: 11,874,484).

The breakdown of the gross amount of individually impaired loans and advances by class are as follows:

Public Overdrafts Term loans Corporate SME sector Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 31 December 2015 Individually impaired 1,048,143 2,234,298 115,376 2,220,394 - 5,618,211 Total 1,048,143 2,234,298 115,376 2,220,394 - 5,618,211 31 December 2014 Individually impaired 8,425,803 31,811 3,393,717 23,153 - 11,874,484 Total 8,425,803 31,811 3,393,717 23,153 - 11,874,484

..Think Possibilities 48 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) 3.2 MARKET RISK ments. It expresses the ‘maximum’ amount the Bank The Bank takes on exposure to market risks, which is the might lose, but only to a certain level of confidence risk that the fair value or future cash flows of a financial (98%). There is therefore a specified statistical probabil- instrument will fluctuate because of changes in market ity (2%) that actual loss could be greater than the VAR prices. Market risks arise from open positions in interest estimate. The VAR model assumes a certain ‘holding pe- rate, currency and equity products, all of which are ex- riod’ until positions can be closed (10 days). It also as- posed to general and specific market movements and sumes that market moves occurring over this holding changes in the level of volatility of market rates or prices period will follow a similar pattern to those that have such as interest rates, foreign exchange rates and equity occurred over 10-day periods in the past. The Bank’s as- prices. sessment of past movements is based on data for the past five years. The Bank separates exposures to market risk into either trading or non-trading portfolios. The market risks aris- The Bank applies these historical changes in rates, pricing from trading and non-trading activities are concen- es, indices, etc. directly to its current positions − a meth- trated in Bank Treasury and monitored by two teams od known as historical simulation. Actual outcomes are separately. Regular reports are submitted to the Board monitored regularly to test the validity of the assump- of Directors and heads of each business unit. tions and parameters/factors used in the VAR calculation. The use of this approach does not prevent losses Trading portfolios include those positions arising from outside of these limits in the event of more significant market-making transactions where the Bank acts as market movements. principal with clients or with the market. As VAR constitutes an integral part of the Bank’s mar- Non-trading portfolios primarily arise from the interest ket risk control regime, VAR limits are established by the rate management of the entity’s retail and commercial Board annually for all trading portfolio operations and banking assets and liabilities. Non-trading portfolios allocated to business units. Actual exposure against also consist of foreign exchange and equity risks arising limits, together with a Bank-wide VAR, is reviewed daily from the Bank’s held-to-maturity and available-for-sale by Bank Treasury. The quality of the VAR model is con- financial assets. tinuously monitored by back-testing the VAR results for trading books. 3.2.1 Market risk measurement techniques The objective of market risk measurement is to man- All back-testing exceptions and any exceptional reve- age and control market risk exposures within accept- nues on the profit side of the VAR distribution are inves- able limits while optimising the return on risk. The Bank tigated, and all back-testing results are reported to the Treasury is responsible for the development of detailed Board of Directors. risk management policies and for day-to-day imple- mentation of those policies. (b) Stress tests Stress tests provide an indication of the potential size (a) Value at risk of losses that could arise in extreme conditions. The The Bank applies a ‘value at risk’ (VAR) methodology to stress tests carried out by Bank Treasury include: risk fac- its trading and non-trading portfolios to estimate the tor stress testing, where stress movements are applied market risk of positions held and the maximum losses to each risk category; emerging market stress testing, expected, based upon a number of assumptions for var- where emerging market portfolios are subject to stress ious changes in market conditions. The Board sets limits movements; and ad hoc stress testing, which includes on the value of risk that may be accepted for the Bank, applying possible stress events to specific positions or which are monitored on a daily basis by Bank Treasury. regions − for example, the stress outcome to a region Interest rate risk in the non-trading book is measured following a currency peg break. through the use of interest rate repricing gap analysis (Note 3.2.3). The results of the stress tests are reviewed by senior management in each business unit and by the Board VAR is a statistically based estimate of the potential loss of Directors. The stress testing is tailored to the business on the current portfolio from adverse market move- and typically uses scenario analysis. Overview Governance Financial Statements 49

3.2.2 Foreign exchange risk The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign exchange risk at 31 December 2015. Included in the table are the Bank’s financial instruments at carrying amounts, categorised by currency.

UGX USD EUR GBP Other Total At 31 December 2015 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 52,694,879 22,841,576 809,703 1,119,162 51,367 77,516,687 Deposits and balances due from banking institutions 2,000,959 127,962,801 6,398,253 3,580,398 1,014,712 140,957,123 Investment securities – Held-to-maturity 98,362,345 - - - - 98,362,345 Investment in subsidiary 80,000 - - - - 80,000 Loans and advances to customers 71,728,161 105,291,988 805 - - 177,020,954 Other assets 4,622,034 721,630 81,623 2,623 - 5,427,910 Total financial assets 229,488,378 256,817,995 7,290,384 4,702,183 1,066,079 499,365,019 Liabilities Deposits from banks 4,002,164 - - - - 4,002,164 Deposits from customers 177,248,021 251,416,338 6,938,908 4,922,422 1,073 440,526,762 Refinance loans 104,167 - - - - 104,167 Other liabilities 6,111,249 5,039,934 20,102 5,311 20 11,176,616 Total financial liabilities 187,465,601 256,456,272 6,959,010 4,927,733 1,093 455,809,709 Net on-balance sheet financial position 42,022,777 361,723 331,374 (225,550) 1,064,986 43,555,310 Credit commitments 7,117,058 17,477,157 - - - 24,594,215 UGX USD EUR GBP Other Total At 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 47,101,254 17,155,968 809,669 1,395,049 35,727 66,497,667 Deposits and balances due from banking institutions 16,352,275 75,973,725 179,128 5,592,749 8,347,316 106,445,193 Investment securities – Held-to-maturity 116,001,140 - - - - 116,001,140 Investment in subsidiary 80,000 - - - - 80,000 Loans and advances to customers 66,266,052 88,107,649 10,410 2,117 - 154,386,228 Other assets 2,951,242 315,771 - - - 3,267,013 Total financial assets 248,751,963 181,553,113 999,207 6,989,915 8,383,043 446,677,241

..Think Possibilities 50 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.2 Market risk (continued) | 3.2.2 Foreign exchange risk (continued)

UGX USD EUR GBP Other Total At 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Liabilities Deposits from banks 5,000,274 - - - - 5,000,274 Deposits from customers 187,027,324 183,294,599 3,158,032 6,535,093 8,285,246 388,300,294 Refinance loans 166,667 - - - - 166,667 Provisions Current income tax liabilities Other liabilities 6,664,222 1,439,051 39,596 4,570 5,408 8,152,847 Total financial liabilities 198,858,487 184,733,650 3,197,628 6,539,663 8,290,654 401,620,082 Net on-balance sheet financial position 49,893,477 (3,180,537) (2,198,421) 450,252 92,389 45,057,160 Credit commitments 10,889,747 9,797,831 - - - 20,687,578 Overview Governance Financial Statements 51

3.2.3 Interest rate risk losses in the event that unexpected movements arise. Cash flow interest rate risk is the risk that the future cash The Board sets limits on the level of mismatch of interest flows of a financial instrument will fluctuate because of rate repricing and value at risk that may be undertaken, changes in market interest rates. Fair value interest rate which is monitored daily by Bank Treasury. risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The tables below summarise the Bank’s non-trading The Bank takes on exposure to the effects of fluctuations book fair value exposure to interest rate risks. It includes in the prevailing levels of market interest rates on both the Bank’s financial instruments at carrying amounts its fair value and cash flow risks. Interest margins may (non-derivatives), categorised by the earlier of contrac- increase as a result of such changes but may reduce tual repricing (for example for floating rate notes).

Non 0 to 3 4 to 6 7 to 12 Over Over Interest Months Months Months 1 year 5 years bearing Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 As at 31 December 2015 Assets Cash and balances with the Bank of Uganda - - - - - 77,516,687 77,516,687 Deposits and balances due from banking institutions 129,799,642 11,157,481 - - - - 140,957,123 Investment securities ------– Held-to-maturity 25,956,217 18,296,051 24,691,516 28,386,332 1,032,230 - 98,362,345 Investment in subsidiary 80,000 80,000 Loans and advances to customers 31,974,918 11,204,197 34,319,957 93,863,702 5,658,181 177,020,954 Other assets 5,427,910 5,427,910 Freehold - - - - - 15,100,000 15,100,000 Property and equipment - - - - - 11,208,927 11,208,927 Operating lease prepayments - - - - - 23,953 23,953 Intangible assets - - - - - 3,051,650 3,051,650 Deferred income tax asset - - - - - 21,945,634 21,945,634 Current income tax recoverable - - - - - 354,615 354,615 Total financial assets 187,730,777 40,657,729 59,011,473 122,250,034 6,690,411 134,709,376 551,049,798 Liabilities Deposits from banks 4,002,164 4,002,164 Deposits from customers 150,012,906 27,149,136 47,114,621 5,794,871 5,917 210,449,311 440,526,762 Refinance loans - - 104,167 - - - 104,167 Other liabilities - - - - - 11,176,616 11,176,616 Total financial liabilities 154,015,070 27,149,136 47,218,788 5,794,871 5,917 221,625,927 455,809,709

..Think Possibilities 52 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.2 Market risk (continued) | 3.2.3 Interest rate risk (continued)

Non 0 to 3 4 to 6 7 to 12 Over Over Interest Months Months Months 1 year 5 years bearing Total Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Interest sensitivity gap 33,715,707 13,508,592 11,792,685 116,455,165 6,684,494 (86,916,551) 95,240,089 As at 31 December 2014 Assets Cash and balances with the Central Bank - - - - - 66,497,667 66,497,667 Deposits and balances due from banking institutions 95,287,712 11,157,481 - - - - 106,445,193 Investment securities - – Held-to-maturity 22,122,433 20,195,756 15,141,793 57,504,651 1,036,506 - 116,001,140 Investment in subsidiary 80,000 80,000 Loans and advances to customers 57,777,816 15,069,559 21,541,318 56,364,637 3,632,898 - 154,386,228 Other assets - - - - - 3,267,013 3,267,013 Property and equipment - - - - - 11,131,811 11,131,811 Operating lease prepayments - - - - - 458,464 458,464 Intangible assets - - - - - 4,096,799 4,096,799 Deferred income tax asset - - - - - 18,168,677 18,168,677 Current income tax recoverable - - - - - 266,103 266,103 Total financial assets 175,187,961 46,422,796 36,683,111 113,869,288 4,669,404 103,966,534 480,799,095 Liabilities Deposits from banks 5,000,274 5,000,274 Deposits from customers 112,725,441 48,210,248 38,797,101 13,801,455 5,834 174,760,215 388,300,294 Refinance loans - - 166,667 - - - 166,667 Other liabilities - - - - - 8,152,847 8,152,847 Total financial liabilities 117,725,715 48,210,248 38,963,768 13,801,455 5,834 182,913,062 401,620,082 Total interest repricing gap 57,462,246 (1,787,453) 2,280,657) 100,067,833 4,663,572 (78,946,528) 79,179,013 Overview Governance Financial Statements 53

3.3 LIQUIDITY RISK Monitoring the liquidity ratios of the statement of Liquidity risk is the risk that the Bank is unable to meet financial position against internal and regulatory its obligations when they fall due as a result of custom- requirements; and er deposits being withdrawn, cash requirements from Managing the concentration and profile of debt contractual commitments, or other cash outflows, such maturities. as debt maturities or margin calls for derivatives. Monitoring and reporting take the form of cash flow Such outflows would deplete available cash resources measurement and projections for the next day, week for client lending, trading activities and investments. In and month respectively, as these are key periods for li- extreme circumstances, lack of liquidity could result in quidity management. The starting point for those pro- reductions in the statement of financial position and jections is an analysis of the contractual maturity of the sales of assets, or potentially an inability to fulfil lending financial liabilities and the expected collection date of commitments. the financial assets (Notes 3.3.3).

The risk that the Bank will be unable to do so is inherent Bank Treasury also monitors unmatched medium-term in all banking operations and can be affected by a range assets, the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of institution-specific and market-wide events includ- of contingent liabilities such as standby letters of credit ing, but not limited to, credit events, merger and acqui- and guarantees. sition activity, systemic shocks and natural disasters. 3.3.2 Funding approach 3.3.1 Liquidity risk management process Sources of liquidity are regularly reviewed by a separate The Bank’s liquidity management process, as carried out team in Bank Treasury to maintain a wide diversification within the Bank and monitored by a separate team in by currency, provider, product and term. Bank Treasury, includes: 3.3.3 Non-derivative financial liabilities and assets Day-to-day funding, managed by monitoring held for managing liquidity risk future cash flows to ensure that requirements can The table below presents the cash flows payable by the be met. This includes replenishment of funds as Bank under non-derivative financial liabilities and assets they mature or are borrowed by customers. The held for managing liquidity risk by remaining contrac- Bank maintains an active presence in global money tual maturities at the reporting date. The amounts dis- markets to enable this to happen; closed in the table are the contractual undiscounted Maintaining a portfolio of highly marketable assets cash flow, whereas the Bank manages the liquidity risk that can easily be liquidated as protection against based on a different basis (see Note 3.3.1 for details), not any unforeseen interruption to cash flow; resulting in a significantly different analysis.

..Think Possibilities 54 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.3 Liquidity risk (continued) | 3.3.3 Non-derivative financial liabilities and assets held for managing liquidity risk (continued)

0 to 3 4 to 6 7 to 12 Over Over Months Months Months 1 year 5 years Non Liquid Total As at 31 December 2015 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 77,516,687 - - - - - 77,516,687 Deposits and balances due from banking institutions 129,799,642 11,157,481 - - - - 140,957,123 Investment securities – Held-to-maturity 25,956,217 18,296,051 24,691,516 28,386,332 1,032,230 - 98,362,345 Investment in subsidiary 80,000 - 80,000 Loans and advances to customers 31,974,918 11,204,197 34,319,957 93,863,702 5,658,181 - 177,020,954 Other assets 5,427,910 - - - - - 5,427,910 Freehold 15,100,000 15,100,000 Operating lease prepayments - - - - - 23,953 23,953 Current income tax recoverable - - - - - 354,615 354,615 Intangible assets - - - - - 3,051,650 3,051,650 Deferred income tax asset - - - - - 21,945,634 21,945,634 Property and equipment - - - - - 11,208,927 11,208,927 Total financial assets 270,675,373 40,657,728 59,011,473 122,250,032 6,770,411 51,684,778 551,049,798 Liabilities Deposits from banks 4,002,164 - - - - - 4,002,164 Deposits from customers 360,462,217 27,149,136 47,114,621 5,794,871 5,917 - 440,526,762 Refinance loans - - 104,167 - - - 104,167 Other liabilities 11,176,616 - - - - - 11,176,616 Total financial liabilities 375,640,997 27,149,136 47,218,788 5,794,871 5,917 - 455,809,709 Total equity - - - - - 95,240,089 95,240,089 Total financial liabilities and equity 375,640,997 27,149,136 47,218,788 5,794,871 5,917 95,240,089 551,049,798 On-balance sheet liquidity gap (104,965,624) 13,508,592 11,792,685 116,455,162 6,764,494 (43,555,311) - Off-balance sheet items Loan Commitments 3,832,902 2,726,419 18,034,895 - - - 24,594,216 Guarantees 19,522,764 7,166,370 12,573,513 5,912,693 - - 45,175,340 Performance bonds 1,974,967 245,405 316,920 - - - 2,537,291 Letters of credit 38,615,395 4,989,559 4,234,065 - - 47,839,019 Total off-balancesheet items 63,946,028 15,127,753 35,159,393 5,912,693 - - 120,145,867 Net mismatch (168,911,651) (1,619,161) (23,366,709) 110,542,468 6,764,494 (43,555,311) (120,145,867) Overview Governance Financial Statements 55

0 to 3 4 to 6 7 to 12 Over Over Months Months Months 1 year 5 years Non Liquid Total As at 31 December 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 66,497,667 - - - - - 66,497,667 Deposits and balances due from banking institutions 95,287,712 11,157,481 - - - - 106,445,193 Investment securities – Held-to-maturity 22,122,433 20,195,756 15,141,793 57,504,651 1,036,506 - 116,001,140 Investment in subsidiary 80,000 - 80,000 Loans and advances to customers 57,777,816 15,069,559 21,541,318 56,364,637 3,632,898 - 154,386,228 Other assets 3,267,013 - - - - - 3,267,013 Operating lease prepayments - - - - - 458,464 458,464 Current income tax recoverable - - - - - 266,103 266,103 Intangible assets - - - - - 4,096,799 4,096,799 Deferred income tax asset - - - - - 18,168,677 18,168,677 Property and equipment - - - - - 11,131,811 11,131,811 Total financial assets 244,952,641 46,422,796 36,683,111 113,869,288 4,749,404 34,121,853 480,799,095 Liabilities Deposits from banks 5,000,274 - - - - - 5,000,274 Deposits from banks Deposits from customers 287,485,656 48,210,248 38,797,101 13,801,455 5,834 - 388,300,294 Refinance loans - - 166,667 - - - 166,667 Other liabilities 8,152,847 - - - - - 8,152,847 Total financial liabilities 300,638,777 48,210,248 38,963,768 13,801,455 5,834 - 401,620,082 Total equity - - - - - 79,179,013 79,179,013 Total financial liabilities and equity 300,638,777 48,210,248 38,963,768 13,801,455 5,834 79,179,013 480,799,095 On-balance sheet liquidity gap (55,686,136) (1,787,453) (2,280,657) 100,067,833 4,743,571 (45,057,160) - Off-balance sheet items Loan Commitments 4,017,650 4,883,730 11,786,198 - - - 20,687,578 Guarantees 8,367,564 7,432,918 12,407,812 3,607,171 - - 31,815,464 Performance bonds 2,515,794 416,680 1,084,877 - - - 4,017,350 Letters of credit 29,382,780 6,419,046 7,305,964 - 172,172 - 43,279,961 Total off-balancesheet items 44,283,787 19,152,374 32,584,851 3,607,171 172,172 - 99,800,355 Net mismatch (99,969,923) (20,939,827) (34,865,508) 96,460,662 4,571,399 (45,057,160) (99,800,355)

..Think Possibilities 56 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.3 Liquidity risk (continued)

3.3.4 Assets held for managing liquidity risk off-balance sheet financial instruments that it commits The Bank holds a diversified portfolio of cash and to extend credit to customers and other facilities (Note high-quality highly-liquid securities to support pay- 35) are summarised in the table below. ment obligations and contingent funding in a stressed market environment. (b) Other financial facilities The Bank’s assets held for managing liquidity risk com- Other financial facilities (Note 35) are also included prise: in the table below, based on the earliest contractual Cash and balances with central banks; maturity date. Certificates of deposit; (c) Operating lease commitments Government bonds and other securities that are Where the Bank is the lessee, the future minimum lease readily acceptable in repurchase agreements with payments under non-cancellable operating leases, central banks; and as disclosed in Note 35, are summarised in the table Secondary sources of liquidity in the form of highly below. liquid instruments in the Bank’s trading portfolios. (d) Capital commitments 3.3.5 Off-balance sheet items Capital commitments for the acquisition of buildings (a) Loan commitments and equipment (Note 35) are summarised in the table The dates of the contractual amounts of the Bank’s below.

No later than 1 year 1-5 years Over 5 years Total At 31 December 2015 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Loan commitments 24,594,216 - - 24,594,216 Letters of credit 47,839,019 - - 47,839,019 Guarantees 39,262,647 5,912,693 - 45,175,340 Performance bonds 2,537,291 - - 2,537,291 Capital commitments 1,033,756 - - 1,033,756 Total 115,266,929 5,912,693 - 121,179,622 At 31 December 2014 Loan commitments 20,687,578 - - 20,687,578 Letters of credit 43,107,789 - 172,172 43,279,961 Guarantees 28,208,294 3,607,171 - 31,815,464 Performance bonds 4,017,350 - - 4,017,350 Capital commitments 947,160 - - 947,160 Total 96,968,171 3,607,171 172,172 100,747,513 Overview Governance Financial Statements 57

3.4 FAIR VALUE OF FINANCIAL INSTRUMENTS (a) Financial instruments not measured at fair value The following table summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value:

Carrying Value Fair value 2015 2014 2015 2014 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Deposits and balances due from banking 140,957,123 106,445,193 140,957,123 106,445,193 institutions Loans and advances to customers 177,020,954 154,386,228 177,020,954 154,386,228 Investment securities (held-to-maturity) 98,362,345 116,001,140 98,362,345 116,001,140 416,340,422 376,832,561 416,340,422 376,832,561 Financial liabilities Deposits from banks 4,002,164 5,000,274 4,002,164 5,000,274 Deposits from customers 440,526,762 388,300,294 440,526,762 388,300,294 Refinance loan 104,167 166,667 104,167 166,667 444,633,093 393,467,235 444,633,093 393,467,235 Off-balance sheet financial instruments Loan commitment 24,594,215 20,687,578 24,594,215 20,687,578 Guarantees, acceptances and other financial 95,551,651 79,112,776 95,551,651 79,112,776 facilities 120,145,866 99,800,355 120,145,866 99,800,355

(i) Loans and advances to banks Loans and advances to banks include inter-bank place- Investment securities (available-for-sale) disclosed in ments and items in the course of collection. the table above comprise only those equity securities The carrying amount of floating rate placements and held at cost less impairment. The fair value for these as- overnight deposits is a reasonable approximation of fair sets is based on estimations using market prices and value. The estimated fair value of fixed interest bearing earning multiples of quoted securities with similar char- deposits is based on discounted cash flows using pre- acteristics. All other available-for-sale financial assets are vailing money-market interest rates for debts with simi- already measured and carried at fair value. lar credit risk and remaining maturity. (iv) Deposits from banks and customers (ii) Loans and advances to customers The estimated fair value of deposits with no stated Loans and advances are net of charges for impairment. maturity, which includes non-interest-bearing deposits, The estimated fair value of loans and advances repre- is the amount repayable on demand. sents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are The estimated fair value of fixed interest-bearing discounted at current market rates to determine fair val- deposits not quoted in an active market is based on ue. discounted cash flows using interest rates for new debts with similar remaining maturity. (iii) Investment securities The fair value for loans and receivables and held-to-ma- (v) Off-balance sheet financial instruments turity financial assets is based on market prices or bro- The estimated fair values of the off-balance sheet finan- ker/dealer price quotations. Where this information is cial instruments are based on markets prices for similar not available, fair value is estimated using quoted mar- facilities. When this information is not available, fair val- ket prices for securities with similar credit, maturity and ue is estimated using discounted cash flow analysis. yield characteristics.

..Think Possibilities 58 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.4 Fair value of financial instruments (continued)

(b) Fair value hierarchy returns for shareholders and benefits for other IFRS 7 specifies a hierarchy of valuation techniques stakeholders; and based on whether the inputs to those valuation tech- To maintain a strong capital base to support the niques are observable or unobservable. Observable development of its business. inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank’s market Capital adequacy and the use of regulatory capital are assumptions. monitored daily by the Bank’s management, employ- ing techniques based on the guidelines developed by These two types of inputs have created the following the Basel Committee, as implemented by the Bank of fair value hierarchy: Uganda (the Authority), for supervisory purposes. The required information is filed with the Authority on a Level 1 – Quoted prices (unadjusted) in active quarterly basis. The Bank maintains a ratio of total regu- markets for identical assets or liabilities. This latory capital to its risk-weighted assets (the ‘Basel ratio’) level includes listed equity securities and debt above a minimum level agreed with the Central Bank instruments on exchanges (for example, Uganda which takes into account the risk profile of the Bank. Stock Exchange). Level 2 – Inputs other than quoted prices included The regulatory capital requirements are strictly ob- within Level 1 that are observable for the asset or served when managing economic capital. The Bank’s liability, either directly (that is, as prices) or indirectly regulatory capital is managed by its Bank Treasury and (that is, derived from prices). comprises two tiers: Level 3 – inputs for the asset or liability that are not Tier 1 capital: Permanent shareholders’ equity in based on observable market data (unobservable the form of issued and fully paid- up shares plus all inputs). This level includes equity investments and disclosed reserves, less goodwill and any intangible debt instruments with significant unobservable assets. components. Tier 2 capital: General provisions which are held This hierarchy requires the use of observable against the future and current unidentified losses market data when available. The Bank considers that are freely available to meet the losses which relevant and observable market prices in its subsequently materialize, revaluation reserves on valuations where possible. banking premises, and any other form of capital as may be determined from time to time by the Central Bank. At 31 December 2014 and 2015, the Bank had no finan- The risk weighted assets are measured by means of a hi- cial assets measured at fair value. erarchy of 4 risk weights. Risk weights are assigned to as- 3.5 CAPITAL MANAGEMENT sets and off balance sheet items according to the Bank’s The Bank’s objectives when managing capital, which is own estimates of probabilities of default (PD), loss given a broader concept than the ‘equity’ on the face of the default (LGD) and credit fonversion factors (CCF) for re- statement of financial position, are: tail business and claims to central governments, institu- To comply with the capital requirements set by the tions and corporates. Central Bank; To safeguard the Bank’s ability to continue as a Own estimates of risk parameters are in accordance to going concern so that it can continue to provide the minimum requirements set out by Basel II. Overview Governance Financial Statements 59

The table below summarises the composition of regulatory capital and the ratios of the Bank for the years ended 31 December 2014 and 2013. During those two years, the Bank complied with all of the externally imposed capital requirements to which they are subject.

2015 2014 Ushs ‘000 Ushs ‘000 Tier 1 capital Share capital 76,500,000 76,500,000 Retained earnings 5,746,424 (4,888,694) Less: Intangible assets (3,051,650) (4,096,799) Less: Deferred income tax asset (21,945,634) (18,168,677) Less: Unrealized foreign exchange gains - (22,469) Less: Investment in subsidiary (80,000) (80,000) Total qualifying Tier 1 capital 57,169,139 49,243,361

Tier 2 capital Revaluation reserve 12,768,567 2,562,073 General provisions 2,761,323 2,309,121 Total qualifying Tier 2 capital 15,529,891 4,871,194 Total regulatory capital 72,699,030 54,114,555 Risk-weighted assets: On-balance sheet 273,420,825 213,580,224 Off-balance sheet 68,308,898 52,823,922 Total risk-weighted assets 341,729,723 266,404,146 Core capital ratio 16.73% 18.48% Total capital ratio 21.27% 20.31%

..Think Possibilities 60 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015

3. Financial Risk Management (Continued) | 3.4 Capital Management (continued)

Nominal statement of Risk weighted financial position amounts amounts 2015 2014 Risk 2015 2014 Shs ‘000 Shs ‘000 Weight Shs ‘000 Shs ‘000 Balance sheet assets (net of provisions) Cash balances 77,516,687 66,497,667 0% - - Deposits and balances due from 25,281,027 35,027,108 20% 5,056,205 7,005,422 banking institutions Due from banks outside Uganda with long-term ratingsas follows; Rated AAA to AA(-) 21,758,869 7,442,696 20% 4,351,774 1,488,539 Rated A (+) to A (-) 83,153,932 63,934,899 50% 41,576,966 31,967,449 Rated A (-) to non-rated 10,763,295 40,490 100% 10,763,295 40,490 Government securities 98,362,345 116,001,140 0% - - Loans and advances to customers 179,557,179 157,954,933 100% 179,557,179 157,954,933 Investment in subsidiary 80,000 80,000 0% - - Property and equipment 11,208,927 11,131,811 100% 11,208,927 11,131,811 Freehold land 15,100,000 - 100% 15,100,000 - Operating lease prepayments 23,953 458,464 100% 23,953 458,464 Other assets 5,427,910 3,267,013 100% 5,427,910 3,267,013 Current income tax recoverable 354,615 266,103 100% 354,615 266,103 Total assets 528,588,739 462,102,324 273,420,825 213,580,224 Off-balance sheet positions Performance bonds 2,537,291 4,017,351 50% 1,268,645 2,008,676 Letters of guarantee 45,175,340 31,815,465 100% 45,175,340 31,815,465 Letters of credit 47,839,019 43,279,961 20% 9,567,804 8,655,992 Unutilised commitments 24,594,216 20,687,578 50% 12,297,108 10,343,789 120,145,867 99,800,355 68,308,898 52,823,922 Total risk-weighted assets 648,734,606 561,902,679 341,729,722 266,404,146 Overview Governance Financial Statements 61

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The Bank makes estimates and assumptions that affect In addition, objective evidence of impairment may be the reported amounts of assets and liabilities within deterioration in the financial health of the investee, in- the next financial year. All estimates and assumptions dustry and sector performance, changes in technology, required in conformity with IFRS are best estimates un- and operational and financing cash flows. dertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a contin- (c) Fair value of financial instruments uous basis, and are based on past experience and oth- The fair value of financial instruments where no active er factors, including expectations with regard to future market exists or where quoted prices are not otherwise events. available are determined by using valuation techniques. In these cases, the fair values are estimated from observ- Accounting policies and directors’ judgements for cer- able data in respect of similar financial instruments or tain items are especially critical for the Bank’s results and using models. Where market observable inputs are not financial situation due to their materiality. available, they are estimated based on appropriate assumptions. (a) Impairment losses on loans and advances The Bank reviews its loan portfolios to assess impairment Where valuation techniques (for example, models) are at least on a quarterly basis. In determining whether an used to determine fair values, they are validated and pe- impairment loss should be recorded in profit or loss, the riodically reviewed by qualified personnel independent Bank makes judgements as to whether there is any ob- of those that sourced them. All models are certified be- servable data indicating an impairment trigger followed fore they are used, and models are calibrated to ensure by measurable decrease in the estimated future cash that outputs reflect actual data and comparative market flows from a portfolio of loans before the decrease can prices. be identified with that portfolio. To the extent practical, models use only observable This evidence may include observable data indicating data; however, areas such as credit risk (both own credit that there has been an adverse change in the payment risk and counterparty risk), volatilities and correlations status of borrowers in a bank, or national or local eco- require management to make estimates. nomic conditions that correlate with defaults on assets in the Bank. The directors use estimates based on his- (d) Held-to-maturity investments torical loss experience for assets with credit risk charac- In accordance with IAS 39 guidance, the Bank classifies teristics and objective evidence of impairment similar some non-derivative financial assets with fixed or deter- to those in the portfolio when scheduling future cash minable payments and fixed maturity as held-to-matu- flows. rity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention The methodology and assumptions used for estimating and ability to hold such investments to maturity. both the amount and timing of future cash flows are reviewed regularly to reduce any differences between If the Bank were to fail to keep these investments to ma- loss estimates and actual loss experience. turity other than for the specific circumstances – for example, selling an insignificant amount close to maturity (b) Impairment of available-for-sale equity – the Bank is required to reclassify the entire category as investments available-for-sale. The Bank determines that available-for-sale equity investments are impaired when there has been a signif- Accordingly, the investments would be measured at fair icant or prolonged decline in the fair value below its value instead of amortised cost. If all held-to-maturity cost. This determination of what is significant or pro- investments were to be so reclassified, the carrying val- longed requires judgement. In making this judgement, ue would increase by C62, with a corresponding entry in the Bank evaluates among other factors, the volatility in the fair value reserve in shareholders’ equity. share price.

..Think Possibilities 62 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

5. INTEREST INCOME AND INTEREST EXPENSES 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Interest income Loans and advances 24,982,644 26,198,156 Deposits and balances due from banking institutions 1,746,298 1,692,455 26,728,942 27,890,611 Investment securities: - Held-to-maturity 13,508,541 12,896,554 40,237,483 40,787,165 Interest expense Deposits from banks 1,395,771 1,091,150 Deposits from customers 15,833,915 19,877,561 BOU refinance schemes 13,542 19,389 17,243,228 20,988,100

6. LOAN IMPAIRMENT CHARGES 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Loans and advances to customers (Note 20) Net Increase in impairment 5,668,591 18,813,833 5,668,591 18,813,833 - identified 2,332,155 18,631,335 - unidentified 3,336,436 182,498 5,668,591 18,813,833

7. NET FEE AND COMMISSION INCOME 2015 2014 Ushs ‘000 Ushs ‘000 Group Fee and commission income Credit related fees and commissions 2,255,705 2,324,618 Commission income 20,520,976 12,803,686 Commission on trade 181,533 347,908 Other operating income 6,728,672 3,155,262 29,686,886 18,631,474 Overview Governance Financial Statements 63

8. NET FOREIGN EXCHANGE GAINS/ (LOSSES) 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Unrealised exchange gain - 22,469 Realised exchange losses/gains (4,529,013) 5,035,577 (4,529,013) 5,058,046 Foreign exchange net trading income includes gains and losses from spot and forward contracts.

9. EMPLOYEE BENEFITS EXPENSES 2015 2014 Ushs ‘000 Ushs ‘000 Group Wages and salaries 11,105,506 11,170,773 National Social Security Fund contributions 1,146,734 1,174,193 Other staff costs 1,255,323 1,400,857 Defined benefit pension fund contributions 705,684 741,513 14,213,247 14,487,336 Bank Wages and salaries 11,018,006 11,109,768 National Social Security Fund 1,137,984 1,168,092 Other staff costs 1,252,605 1,387,597 Defined benefit pension fund contributions 705,684 741,513 14,114,279 14,406,970

10. General and administrative expenses 2015 2014 Ushs ‘000 Ushs ‘000 Group IT and software costs 2,306,933 1,221,159 Occupancy, furniture and equipment 4,418,777 4,100,487 Marketing and public relations 726,950 864,433 Travel and entertainment 84,717 172,592 Telecommunication and postage 1,424,365 1,542,646 Other administrative expenses 937,345 1,129,057 9,899,087 9,030,374 Bank IT and software costs 2,306,933 1,221,159 Occupancy, furniture and equipment 4,418,777 4,100,487 Marketing and public relations 719,301 863,983 Travel and entertainment 84,717 172,592 Telecommunication and postage 1,422,015 1,540,846 Other administrative expenses 937,345 1,128,220 9,889,088 9,027,287

..Think Possibilities 64 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

11. DEPRECIATION AND AMORTISATION 2015 2014 Ushs ‘000 Ushs ‘000 Group Depreciation of property and equipment (Note 22) 2,769,076 2,743,176 Amortisation of intangible assets (Note 25) 2,435,860 2,011,173 Amortisation of operating lease prepayments (Note 24) 23,455 44,535 5,228,391 4,798,884 Bank Depreciation of property and equipment (Note 22) 2,767,266 2,742,029 Amortisation of intangible assets (Note 25) 2,435,860 2,011,173 Amortisation of operating lease prepayments (Note 24) 23,455 44,535 5,226,581 4,797,737

12. REVERSAL OF CHARGES 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Reversal of Charges 1,139,542 307,796 1,139,542 307,796 Reversal of charges relates to concessions given to customers.

13. OTHER OPERATING EXPENSES 2015 2014 Ushs ‘000 Ushs ‘000 Group Audit fees 199,990 92,000 Other general expenses 11,310,996 9,098,546 11,510,986 9,190,546 Bank Audit fees 199,990 92,000 Other general expenses 11,275,248 8,960,809 11,475,238 9,052,809 Overview Governance Financial Statements 65

14. INCOME TAX CREDIT 2015 2014 Ushs ‘000 Ushs ‘000 Group Current income tax 2,711,586 3,071,942 Deferred income tax (Note 30) (3,776,957) (8,183,541) Income tax credit (1,065,371) (5,111,599) The tax on the Group’s profit before income tax differs from the theoretical amount as follows: 2015 2014 Ushs ‘000 Ushs ‘000 Profit before income tax 492,284 (13,140,184) Tax calculated at the tax rate of 30% (2014: 30%) 147,685 (3,942,055) Effect of: - Final tax on government securities 2,701,708 3,032,053 - Income not subject to tax (3,776,957) (8,183,541) - Expenses not deductible for tax purposes (137,806) 3,981,944 Income tax credit (1,065,371) (5,111,600)

2015 2014 Ushs ‘000 Ushs ‘000 Bank Current income tax 2,701,708 3,032,053 Deferred income tax (Note 29) (3,776,957) (8,183,541) Income tax credit (1,075,249) (5,151,488) The tax on the Bank’s profit before income tax differs from the theoretical amount as follows: 2015 2014 Ushs ‘000 Ushs ‘000 Profit before income tax 460,883 (13,272,474) Tax calculated at the tax rate of 30% (2013: 30%) 138,265 (3,981,742) Effect of: - Final tax on Government securities 2,701,708 3,032,053 - Income not subject to tax (3,776,957) (8,183,541) - Expenses not deductible for tax purposes (138,265) 3,981,742 Income tax credit (1,075,249) (5,151,488)

..Think Possibilities 66 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

15. FINANCIAL INSTRUMENTS BY CATEGORY Loans and Held to receivables maturity Total At 31 December 2015 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Cash and bank balances with the Central Bank - 77,516,687 77,516,687 Deposits and balances due from banking institutions - 140,957,123 140,957,123 Investment securities - 98,362,345 98,362,345 Loans and advances to customers 177,020,954 - 177,020,954 177,020,954 316,836,155 493,857,109 Financial liabilities at amortised cost Deposits from banks - 4,002,164 4,002,164 Deposits from customers - 440,526,762 440,526,762 - 444,528,926 444,528,926 At 31 December 2014 Financial assets Cash and bank balances with the Central Bank - 66,497,667 66,497,667 Deposits and balances due from banking institutions - 106,445,193 106,445,193 Investment securities - 116,001,140 116,001,140 Loans and advances to customers 154,386,228 - 154,386,228 154,386,228 288,944,000 443,330,228 Financial liabilities at amortised cost Deposits from banks - 5,000,274 5,000,274 Deposits from customers - 388,300,294 388,300,294 - 393,300,568 393,300,568

16. CASH AND BALANCES WITH CENTRAL BANK 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Cash in hand 27,117,381 24,230,201 Balances with the Central bank other than mandatory reserve 50,399,306 42,267,466 deposits Included in cash and cash equivalents (Note 16) 77,516,687 66,497,667 Mandatory reserve deposits with Central Bank - - 77,516,687 66,497,667

Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. Cash-in-hand and balances with the Central Bank and mandatory reserve deposits are non-interest-bearing. Overview Governance Financial Statements 67

17. CASH AND CASH EQUIVALENTS For the purpose of the statement of cash flows, cash and cash equivalents include: 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Cash and balances with the Central Bank (Note 16) 77,516,687 66,497,667 Deposits and balances due from banking institutions (Note 18) 140,957,123 106,445,193 Treasury bills maturing within 90 days 15,283,923 14,743,586 Treasury bonds maturing within 90 days 14,593,138 8,343,151 248,350,871 196,029,597

For the purposes of the statement of cash flow, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with central banks, treasury bills and other eligible bills, and amounts due from other banks.

The required cash reserve with Bank of Uganda as at 31 December 2015 was Ushs: 34,880 million. The cash ratio requirement is non-interest earning and is based on the value off customer deposits as adjusted by the Bank of Uganda. The cash reserves held are allowed to flactuate to not less than 50% of the mandatory requirement on a given day provided the average for the specified two weeks period is not lower than minimum requirements, and are subject to sanctions for non-compliance.

18. DEPOSITS AND BALANCES DUE FROM BANKING INSTITUTIONS 2015 2014 Ushs ‘000 Ushs ‘000 Group Balances due from other banking institutions 106,272,877 71,590,550 Placements with other banks 34,730,320 34,861,675 141,003,197 106,452,225 Bank Balances due from other banking institutions 106,226,803 71,583,518 Placements with other banks 34,730,320 34,861,675 140,957,123 106,445,193

..Think Possibilities 68 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

19. GOVERNMENT SECURITIES 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Securities held-to-maturity Treasury bills Face value Maturing within 90 days 11,000,000 14,743,586 Maturing after 90 days 31,104,000 29,837,114 42,104,000 44,580,700 Unearned interest (2,319,604) (1,671,464) 39,784,396 42,909,236 Treasury Bonds Face value Maturing within 90 days 17,731,347 8,343,151 Maturing after 90 days 49,120,568 64,748,753 66,851,915 73,091,904 Unearned interest (8,273,966) - 58,577,949 73,091,904 Total government securities 98,362,345 116,001,140

20 (a) OTHER INVESTMENTS 2015 2014 Ushs ‘000 Ushs ‘000 Group Investment in quoted shares - 27,723 Total Investment in quoted shares - 27,723

20 (b) Investment in subsidiary 2015 2014 Ushs ‘000 Ushs ‘000 Bank Equity securities – at cost: – Equity Stock Brokers Ltd 80,000 80,000 Total investment in subsidiary 80,000 80,000 Overview Governance Financial Statements 69

21. LOANS AND ADVANCES TO CUSTOMERS 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank a) Analysis of loan advances to customers by category: Retail - Overdrafts 3,361,485 7,281,756 - Term loans 30,250,690 33,778,214 33,612,175 41,059,970 Corporate 104,277,026 85,106,107 SME 44,108,240 35,182,293 181,997,441 161,348,368 Gross loans and advances to customers 181,997,441 161,348,368 Less: Interest in suspense (267,375) (1,084,314) Less: allowance for impairment (4,709,112) (5,877,826) Net loans and advances to customers 177,020,954 154,386,228 b) Gross advances to customers by industry composition: - Trade and commerce 52,079,852 40,585,093 - Agriculture 13,051,873 21,448,196 - Manufacturing 13,026,149 7,707,026 - Transport & communication 14,127,152 10,478,898 - Building and construction 54,566,507 39,220,250 - Personal, service industry and others 35,145,908 41,908,905 Gross advances to customers 181,997,441 161,348,368 Reconciliation of allowance account for losses on loans and advances to customers is as follows: At 1 January 5,877,826 37,947,767 Increase in the provision for loan impairment . Individually assessed as Per IAS 39 8,717,465 35,766,848 . Collectively assessed as Per IAS 39 3,336,436 182,498 Recoveries and allowances no longer required (6,385,310) (17,135,513) Write offs during the year (6,837,305) (50,883,773) At 31 December 4,709,112 5,877,826 Identified Impairment 1,372,676 4,706,398 Unidentified Impairment 3,336,436 1,171,429 4,709,112 5,877,826 Charge to the statement of comprehensive income Net increase in the provision for loan impairment 5,668,591 18,813,832 22. Other Assets Group Prepayments 3,430,947 2,115,983 Other receivables 2,107,641 1,262,368 5,538,588 3,378,352 Bank Prepayments 3,320,269 2,004,642 Other receivables 2,107,641 1,262,371 5,427,910 3,267,013

..Think Possibilities 70 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

23. PROPERTY AND EQUIPMENT - Group Furniture, Computer Fixtures, Equip- Leasehold Strong- ment, Office improve- room & ATM, POS Motor Equip- Work In Buildings ments Safes & SWIFT vehicles ment Progress Total Group Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 COST or VALUATION At 1 January 2014 5,773,310 3,564,052 2,656,194 7,548,322 1,461,045 4,172,431 729,825 25,905,180 Additions 50,000 169,345 127,557 318,198 78,470 270,115 777,516 1,791,201 Disposals - - (149,527) (4,435) (113,422) (6,764) - (274,149) Transfer from WIP - 573,879 106,807 109,003 148,075 385,143 (1,442,241) (119,334) Elimination of accum- mulated depreciation (2,505,045) ------(2,505,045) Increase on revaluation 1,489,113 ------1,489,113 At 31 December 2014 4,807,377 4,307,276 2,741,031 7,971,087 1,574,168 4,820,925 65,100 26,286,965 At 1 January 2015 4,807,377 4,307,276 2,741,031 7,971,087 1,574,168 4,820,925 65,100 26,286,965 Additions - 86,301 99,652 723,226.09 - 547,227 1,421,682 2,878,088 Disposals - - - (1,406) (350,197) - - (351,603) Transfer from WIP - 313,092 32,987 31,459 - 69,264 (446,801) - At 31 December 2015 4,807,377 4,706,668 2,873,670 8,724,366 1,223,971 5,437,416 1,039,981 28,813,449 ACCUMULATED DEPRECIATION At 1 January 2014 2,951,245 1,246,548 1,627,076 5,641,878 817,562 2,784,896 - 15,069,205 Charge for the year 211,460 480,559 218,349 975,629 328,906 528,273 - 2,743,175 Eliminated on disposal - - (54,685) (4,433) (93,458) (1,612) - (154,188) Elimination of accum- mulated depreciation (2,505,045) ------(2,505,045) At 31 December 2014 657,660 1,727,107 1,790,739 6,613,074 1,053,010 3,311,557 - 15,153,147 At 1 January 2015 657,660 1,727,107 1,790,739 6,613,074 1,053,010 3,311,557 - 15,153,146 Charge for the year 225,516 530,833 219,776 1,010,978 234,680 547,292 - 2,769,076 Eliminated on disposal - - - (1,406) (321,850) (32) - (323,288) At 31 December 2015 883,176 2,257,940 2,010,516 7,622,646 965,840 3,858,817 - 17,598,935 NET BOOK VALUE At cost - 2,448,728 863,154 1,101,719 258,131 1,578,600 1,039,981 7,290,313 At valuation 3,924,201 ------3,924,201 At 31 December 2015 3,924,201 2,448,728 863,154 1,101,719 258,131 1,578,600 1,039,981 11,214,515 At 31 December 2014 4,149,718 2,580,169 950,292 1,358,013 521,158 1,509,368 65,100 11,133,818

The buildings at Plot 6 and 6A, Kampala Road were revalued on 20th March 2014 by Bageine & Company Limited. The revaluation reserve arising out of this has been disclosed adequately in the financials. Overview Governance Financial Statements 71

PROPERTY AND EQUIPMENT - Bank Furniture, Computer Fixtures, Equip- Leasehold Strong- ment, Office improve- room & ATM, POS Motor Equip- Work In Buildings ments Safes & SWIFT vehicles ment Progress Total Group Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Ushs’000 COST or VALUATION At 1 January 2014 5,773,310 3,564,052 2,656,194 7,542,466 1,461,045 4,172,431 729,825 25,899,324 Additions 50,000 169,345 127,557 318,198 78,470 270,115 777,516 1,791,201 Disposals - - (149,527) (4,435) (113,422) (6,764) - (274,149) Transfer from WIP - 573,879 106,807 109,003 148,075 385,143 (1,442,241) (119,334) Elimination of accum- mulated depreciation (2,505,045) ------(2,505,045) Increase on revaluation 1,489,113 ------1,489,113 At 31 December 2014 4,807,377 4,307,276 2,741,031 7,965,232 1,574,168 4,820,925 65,100 26,281,109 At 1 January 2015 4,807,377 4,307,276 2,741,031 7,965,232 1,574,168 4,820,925 65,100 26,281,109 Additions - 86,301 99,652 717,836 - 547,227 1,421,682 2,872,698 Disposals - - - (1,406) (350,197) - - (351,603) Transfer from WIP - 313,092 32,987 31,459 - 69,264 (446,801) - At 31 December 2015 4,807,377 4,706,668 2,873,670 8,713,120 1,223,971 5,437,416 1,039,981 28,802,204 ACCUMULATED DEPRECIATION At 1 January 2014 2,951,245 1,246,548 1,627,076 5,639,177 817,562 2,784,896 - 15,066,504 Charge for the year 211,460 480,559 218,349 974,482 328,906 528,273 - 2,742,028 Eliminated on disposal - - (54,685) (4,433) (93,458) (1,612) (154,188) Elimination of accum- mulated depreciation (2,505,045) ------(2,505,045) At 31 December 2014 657,660 1,727,107 1,790,739 6,609,226 1,053,010 3,311,557 - 15,149,298 At 1 January 2015 657,660 1,727,107 1,790,739 6,609,226 1,053,010 3,311,557 - 15,149,299 Charge for the year 225,516 530,833 219,776 1,009,168 234,680 547,292 - 2,767,266 Eliminated on disposal - - - (1,406) (321,850) (32) - (323,288) At 31 December 2015 883,176 2,257,940 2,010,516 7,616,989 965,840 3,858,817 - 17,593,277 NET BOOK VALUE At cost - 2,448,728 863,154 1,096,131 258,131 1,578,600 1,039,981 7,284,725 At valuation 3,924,201 ------3,924,201 At 31 December 2015 3,924,201 2,448,728 863,154 1,096,131 258,131 1,578,600 1,039,981 11,208,927 At 31 December 2014 4,149,718 2,580,169 950,292 1,356,006 521,158 1,509,368 65,100 11,131,811

The buildings at Plot 6 and 6A, Kampala Road were revalued on 20th March 2014 by Bageine & Company Limited. The revaluation reserve arising out of this has been disclosed adequately in the financials.

..Think Possibilities 72 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

24. FREEHOLD LAND 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Cost At 1 January and 31 December - - Transfer from operating lease 15,100,000 - At 31 December 15,100,000 - The Land on Plot 6 and 6A, Kampala Road was converted to freehold during the year and revalued by independent and professional revaluers Bageine & Company Limited on 20th April 2015. The revaluation reserve arising out of this has been adequately reported in the financials (refer to note 33).

25. OPERATING LEASE PREPAYMENTS Group and Bank Cost At 1 January and 31 December 1,046,652 1,046,652 Additions 164,000 Elimination of accumulated depreciation (607,096) - Increase on revaluation 14,524,944 - Transfer to Freehold (15,100,000) - At 31 December 635,596 1,046,652 Accumulated amortisation At 1 January 588,188 543,653 Amortisation charge 23,455 44,535 Effect of revaluation (607,096) At 31 December 611,643 588,188 Net book value 23,953 458,464

26. INTANGIBLE ASSETS Group and Bank Cost At 1 January 8,942,000 7,383,462 Additions 1,056,275 1,439,204 Transfer from work in progress 334,436 119,334 At 31 December 2015 10,332,711 8,942,000 Accumulated amortisation At 1 January 4,845,201 2,834,028 Amortisation charge 2,435,860 2,011,173 At 31 December 2015 7,281,061 4,845,201 Net book value 3,051,650 4,096,799 Overview Governance Financial Statements 73

27. Deposits from banks 2015 2014 Ushs ‘000 Ushs ‘000 Group and Bank Deposits from other banks 4,002,164 5,000,274 4,002,164 5,000,274

28. Customer deposits Deposits due to customers primarily comprise savings deposits, amounts payable on demand, and term deposits. 2015 2014 Ushs ‘000 Ushs ‘000 Group Demand deposits 227,705,328 190,429,875 Time deposits 135,198,539 142,179,417 Savings accounts 77,468,775 55,492,309 440,372,642 388,101,601 Banks and financial institutions - - Private enterprises and individuals 408,665,404 347,052,679 Government and parastatals 31,707,239 41,048,922 440,372,643 388,101,601 Bank Demand deposits 227,759,448 190,478,568 Time deposits 135,298,539 142,329,417 Savings accounts 77,468,775 55,492,309 440,526,762 388,300,294 Segment analysis Corporate 113,362,007 98,352,107 Retail 200,249,010 169,882,261 NBFI 45,466,840 41,166,666 SME 81,448,906 78,899,260 440,526,762 388,300,294 Private enterprises and individuals 408,819,525 347,251,372 Government and parastatals 31,707,237 41,048,922 440,526,762 388,300,294

29. Refinance loans 2015 2014 Ushs ‘000 Ushs ‘000 APEX III/Agricultural Credit Facility (ACF) Loans 104,167 166,667 104,167 166,667 These refinance loans are denominated in Uganda Shillings (Ushs) and are unsecured. They attract interest of 10% and mature in July 2016.

..Think Possibilities 74 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

30. Current income tax recoverable 2015 2014 Ushs ‘000 Ushs ‘000 Group Balance as at 1 January (261,196) (543,619) Current tax charge 2,711,586 3,071,942 Tax paid - current year (2,803,233) (2,789,519) 2,902 (349,942) (261,196) Bank Balance as at 1 January (266,103) (540,095) Current tax charge 2,701,708 3,032,053 Tax paid - current year (2,790,221) (2,758,061) (354,615) (266,103) Overview Governance Financial Statements 75

31. Deferred income tax Deferred income tax is calculated using the enacted income tax rate of 30% (2014: 30%). The movement on the deferred income tax account is as follows:

Reval- Acceler- uation ated tax Charges for Deferred tax loss on deprecia- loan impair- on revalua- invest- tion ment Tax Losses tion surplus ments Total Group Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2015 158,077 (411,905) (18,653,797) 292,214 447,670 (18,167,741) Charged/credited to income statement (631,394) (1,056,411) (2,089,152) - - (3,776,957) Charged/credited to other comprehensive income ------At 31 December 2015 (473,317) (1,468,316) (20,742,949) 292,214 447,670 (21,944,698) At 1 January 2014 543,503 (657,415) (10,665,933) 347,975 (2) 10,431,872) Charged/credited to income statement (385,426) 245,510 (7,987,864) (55,761) 18,480 (8,165,061) Charged/credited to other comprehensive income - - - - 429,192 429,192 At 31 December 2014 158,077 (411,905) (18,653,797) 292,214 447,670 18,167,741) Bank At 1 January 2015 158,077 (411,905) (18,653,797) 738,948 (18,168,677) Charged/credited to income statement (631,394) (1,056,411) (2,089,152) - (3,776,957) Charged/credited to other comprehensive income - - - - - At 31 December 2015 (473,317) (1,468,316) (20,742,949) 738,948 (21,945,634) At 1 January 2014 543,503 (657,415) (10,665,933) 347,975 (10,431,870) Charged/credited to income statement (385,426) 245,510 (7,987,864) (55,761) (8,183,541) Charged/credited to other comprehensive income - - - 446,734 446,734 At 31 December 2014 158,077 (411,905) (18,653,797) 738,948 (18,168,677)

..Think Possibilities 76 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

32. Other liabilities The other liabilities mentioned below relates to margins held for off balance sheet items, transit liability accounts and statutory deductions payable among others. 2015 2014 Ushs ‘000 Ushs ‘000 Group Provisions and accruals 2,555,148 2,101,399 Other 8,672,915 6,154,519 Total 11,228,063 8,255,918 Bank Provisions and accruals 2,540,979 2,096,072 Other 8,635,637 6,056,775 Total 11,176,616 8,152,847

33. Share Capital Number of shares issued & fully paid Total value of shares (thousands) Value per share Ushs ‘000 2014 At 1 January 2014 50,000 1,000 50,000,000 Shares issued at par 26,500 1,000 26,500,000 At 31 December 2014 76,500 1,000 76,500,000 2015 At 1 January 2015 and December 2015 76,500 1,000 76,500,000 76,500 1,000 76,500,000 The total number of ordinary shares paid up at year end was 76.5 million (2014: 76.5 million) with a par value of Ushs 1,000 per share (2014: Ushs 1,000 per share). The total number of ordinary shares authorised for issue is 100 million Overview Governance Financial Statements 77

34. Revaluation reserve

The revaluation reserve shows the effects from the revaluation of buildings after deduction of deferred income taxes. Any gains or losses are not recognised in profit or loss until the asset has been sold or impaired. 2015 2014 Ushs ‘000 Ushs ‘000 At start of year 2,562,073 1,558,727 Deferred tax on revaluation surplus (4,357,483) (55,761) Transfer of excess depreciation net of tax 39,033 16,728 Increase in revaluation surplus 14,524,944 1,042,379 At end of year 12,768,567 2,562,073

35. Statutory credit risk reserve The statutory credit risk reserve represents an appropriation of retained earnings to comply with the Financial Institutions Act, 2004. The balance in the reserve represents the extent to which provisions for loan losses determined in accordance with the Financial Institutions Act, 2004 exceed amounts determined in accordance with IFRS. The reserve is not distributable. Below is the reconciliation of the statutory credit risk reserve per the Bank of Uganda and per IFRS: 2015 2014 Ushs ‘000 Ushs ‘000 Provisions as per Bank of Uganda guidelines Specific provisions 2,172,887 8,574,341 General Provisions 2,761,323 2,309,121 4,934,210 10,883,462 Provisions as per IFRS guidelines Individual impairment 1,372,676 4,706,398 Collective impairment 3,336,436 1,171,429 4,709,112 5,877,827 Statutory credit risk reserve 225,098 5,005,634

36. Dividends payable The directors do not recommend the payment of dividends for the year (2014: Nil).

..Think Possibilities 78 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

37. Contingent liabilities and commitments (a) Legal proceedings The Bank is a litigant in several other cases which arise from normal day to day banking. The directors have carried out an assessment of all the cases outstanding as at 31 December 2015 - supported by independent professional legal advice - and where considered necessary based on the merits of each case, a provision has been raised. In aggregate the total provisions amounting to Shs 748 million (2014: Shs 854 million) has been made.

The directors believe that the resolution of pending legal cases will not give rise to losses above amounts already provided.

(b) Capital commitments At 31 December 2015, the Bank had capital commitments of Shs 1,033 million (2014: Shs 947 million).

(c) Loan commitments, guarantee and other financial facilities In common with other banks, the Bank conducts business involving acceptances, letters of credit, guarantees and performance bonds. The majority of these facilities are offset by corresponding obligations of third parties.

2015 2014 Ushs ‘000 Ushs ‘000 Loan commitments 24,594,216 20,687,578 Performance Bonds 2,537,291 4,017,350 Guarantees 45,175,340 31,815,464 Documentary and letters of credit 47,839,019 43,279,961 Total 120,145,867 99,800,355 Overview Governance Financial Statements 79

38. Related-party disclosures Keystone Bank Limited, incorporated in Nigeria, held 80% of the ordinary shares of the Bank until 20 February 2015 when those shares were sold to a consortium of four shareholders. Related parties and their disclosures have been identified and made based on relationships that existed as of 31 December 2015.

Transactions and balances with related parties as at the year end were as follows: 2015 2014 Ushs ‘000 Ushs ‘000 a) Related party balances Deposits from directors and shareholders 5,644,577 6,348

b) Related party transactions Interest: Interest paid to related parties/directors 352,301 26,693 Directors’ remuneration Directors’ fees 668,168 686,841 Other emoluments 387,051 249,575 1,055,219 936,416

c) Key management compensation Salaries and short-term benefits 916,344 560,648

d) Services rendered Rent and service charges for premises 16,000 24,000

..Think Possibilities Branches

Bweyale Branch Kololo Branch Plot 3c Gulu/ kampala Highway Wampewo Avenue Tel +256 392 614161 Tel : +256 414 532143

Entebbe Town Branch Makerere Branch Plot 29, Kampala Road Ham Towers Makerere Hill Rd Tel: +256 414 320960 +256 414 532143

Entebbe Airport Branch Mbale Branch Airport Terminal Building Plot 23, Naboa Rd Tel: +256 414 320193 Tel: +256 454 432253

Garden City Branch Nkrumah Road Branch Garden City Mall Sayuni Tower - Nasser Road Tel +256 414 343017 +256 414 256243

Gulu Branch Ntinda Branch Plot 15, Awere road, Capital Shoppers Tel:+256 471 432075 Tel : +256 414 289533

Jinja Town Branch William Street Branch Plot 8 Scindia Road, William Street Tel: +256 434 120340 Tel : +256 414 344950

www.orient-bank.com Overview Governance Financial Statements 81

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0800 144551 (Toll Free) 0701 144551 (WhatsApp) [email protected] ..Think Possibilities 82 Orient Bank Limited Annual Report 2015

Notes to the Financial Statements For the year ended 31 December 2015 (continued)

Orient Bank Limited Orient Plaza, Plot 6/6A Kampala Road, | P. O. Box 3072 Kampala - Uganda Tel: +256 417 719100 | [email protected] | Fax: +256 414 348039