2018 Get medical and life insurance for as low as 59,000/- per month.

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Orient Bancassurance is regulated by The Insurance Regulatory Authority of . Terms & conditions apply ANNUAL REPORT 2018

Get medical and life insurance for as low as 59,000/- per month.

Insurance you can afford.

Underwritten by

Orient Bancassurance is regulated by The Insurance Regulatory Authority of Uganda. Terms & conditions apply ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

CONTENTS

OVERVIEW Corporate Information 6 Branch Network 7 About Us 8 Our Product Portfolio 9 Our Delivery Channels 10 The Orient Business Academy 11

GOVERNANCE Chairman’s Statement 13 Managing Director/ CEO’s Statement 15 18 Report of the Directors 22 Statement of Directors’ Responsibilities 24 Report of the Independent Auditors 25

FINANCIAL STATEMENTS Consolidated and separate statements of profit or loss and other comprehensive income 30 Consolidated and separate statements of financial position 31

Consolidated statements of changes in equity 32 Separate statements of changes in equity 33 Consolidated and separate statements of cash flows 34

NOTES TO THE FINANCIAL STATEMENTS Notes to the Financial Statements 35 – 100

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. ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

CORPORATE INFORMATION

DIRECTORS

Mr. Michael Cook Chairman British Mr. Ketan Morjaria Vice-Chairman Ugandan Mr. Hemen Shashikant Shah Non American Mr. Francis M. Byaruhanga Non Executive Director Ugandan Mr. Joram Kahenano Non Executive Director Ugandan Mr. Zhong Shuang Quan Non Executive Director Chinese (Alternative: Mr. Jay Karia) Mr. Julius Kakeeto Managing Director Ugandan Ms. Darshana Bhatia Executive Director Indian

COMPANY SECRETARY Nicholas Ecimu c/o Sebalu & Lule Advocates Certified Public Secretaries (Uganda) P. O. Box 2255,

COMPANY LAWYERS Shonubi, Musoke & Company Advocates SM Chambers Plot 14, Hannington Road P. O. Box 3213, Kampala

AUDITOR

Deloitte & Touche Certified Public Accountants 3rd Floor, Rwenzori House, Plot 1, Lumumba Avenue P. O. Box 10314, Kampala

REGISTERED OFFICE Orient Plaza Plot 6/6A Kampala Road P. O. Box 3072, Kampala

06 Overview

OUR BRANCH NETWORK

Branches

Katwe Branch Head Office/ Main Branch Muganzirwazza Plaza - Orient Plaza, Plot 6/6A Kampala Road Kampala P.O. Box 3072, Kampala

Kawempe Branch Plot 78 Bombo Road Acacia Branch Acacia Mall - Kisementi Kampala Kampala Kikuubo Branch Branch Grand Corner House Plot 12 Avenue Road Kampala Arua Municipality Kisekka Branch Ben Kiwanuka Branch Lohana Arcade, Nakivubo Road Haider Plaza - Ben Kiwanuka Street Kampala Kampala Branch Branch Nyonyi Gardens, Wampewo Avenue Mamerito House, Jinja Road, Kampala Bweyogerere Branch Town Branch Ham Shopping Mall, Makerere Hill Road Plot 29 Kampala Road Kampala Entebbe Branch Entebbe Airport Branch Plot 23 Naboa Road Entebbe International Airport Mbale Municipality Entebbe Branch Garden City Branch Plot 73 High Street Garden City Mall - Yusuf Lule Road Mbarara Kampala Nakivubo Branch Branch HAM Shopping Mall, Nakivubo Road Plot 15 Awere Road Kampala Gulu

Ntinda Branch Jinja Branch Capital Shoppers’ Mall Scindia Road Kampala Jinja

Kabalagala Branch William Street Branch Plot 1900 Road, William Street Kampala Kampala

www.orient-bank.com

07 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

ABOUT US

Orient Bank is a leading private sector commercial bank in Uganda. We began operations in 1993 and have grown steadily due to our professional management, prudent lending and investment policies.

Our Vision To be the pace setter and preferred financial partner for our stakeholders

Our Mission To deliver service that provides superior value to our customers

OUR VALUES We summarise our core values as SPIRIT

Service We provide service that is Resilience timely, helpful, friendly and We are strong, determined and convenient adapt to the world around us

Integrity Passion We are honest, open and We are enthusiastic and self straightforward with our motivated to excel in all that colleagues, customers, we do investors, regulators and community

Innovation Teamwork We are open-minded and We are collaborative and constantly striving to improve combine our collective our processes, platforms and knowledge and skills to offerings outperform our competitors

08 Overview

OUR PRODUCT PORTFOLIO

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

CURRENT ACCOUNTS SAVINGS ACCOUNTS ‚‚ Current Account (Personal & Business) ‚‚ Classic Saving Accounts ‚‚ SME Daily Account ‚‚ Dollar Savings Account (DOSA) ‚‚ Foreign Currency Account ‚‚ Future Children’s Savings Account (Personal & Business) ‚‚ CHAMA Investment Club Account ‚‚ Kyakala Account (Personal & Business) ‚‚ Diaspora Account ‚‚ Premium Account ‚‚ Target Savings Account ‚‚ Sapphire Account

RETAIL CREDIT TRADE FINANCE CORPORATE CREDIT ‚‚ SME Loans ‚‚ Letters of Credit ‚‚ Commercial 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 CURRENCY ‚‚ Salary Processing SERVICES ‚‚ Internal transfers ‚‚ Foreign Currency Accounts ‚‚ Safe custody ‚‚ Telegraphic Transfer ‚‚ Collections - Bill Payments (URA taxes, , NWSC bills, ‚‚ Forex KCCA charges, NSSF )

09 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

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. The Orient Fastpay Mobile Banking app puts all your banking needs in the palm of your hands.

Automated Teller Machines (ATMs): The app allows you to; We currently have 24 ATMs strategically located in View balances and statements, transfer several towns across the country. Customers can money, make domestic and international withdraw money and deposit cash/cheques at payments, control your VISA card, locate the ATM. These ATMs accept VISA, MasterCard branches and ATMs among and UnionPay cards and are linked to Interswitch. others.

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 and PIN debit Cards. These POS terminals are very strategically positioned at many merchants places of business and they accept VISA, MasterCard and UnionPay. Xpresspay is a secure platform that enables any business to conveniently receive online payments from anywhere Mobile Banking: in the world. Orient Bank gives you a finger-tip convenient way of banking. By dialing *200# customers can use Accepting; their mobile phone to check account balances, pay bills, deposit and withdraw money, top up airtime among others.

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

The areas covered include; OUR BRANCH NETWORK: Motor insurance, SME Cover, Travel Orient Bank boasts of 22 branches spread across insurance and Life insurance the four main regions of Uganda, including central, eastern, western and nothern region. Customers Orient Bancassurance is regulated by can therefore access the bank’s products and The Insurance Regulatory Authority of services from any Orient bank branch. Uganda.

10 Overview

THE ORIENT BUSINESS ACADEMY

Finalists of the 2nd Orient Business Academy pose for a group picture on graduation day

Five Micro and Small Enterprise received funding amounting to UGX 60 million shillings at the second annual Orient Business Academy graduation held in Kololo on Friday 14th September 2018. They were part of the 35 Academy finalists, the second cohort to graduate.

The Orient Business Academy is run in partnership with Business School and has provided financial literacy and business management training to 35 micro and small enterprises to enable them grow their businesses.

As part of the training, the small businesses were The overall winner Michelle Kyeyune (Director at St Michaels Food Lab), receives a dummy cheque of UGX 20m from MD Julius Kakeeto and Director MUBS tasked to come up with Business Growth Plans Entrepreneurship Centre, Diana Ntamu. and the best 5 business plans were to win total funding of UGX 60 million depending on their business needs. St Michaels Food Lab and Consultancy, a food analytical lab that conducts microbiological analysis on raw and processed food to assess quality emerged the best and was awarded 20 million shillings.

Pio Wines a manufacturer and whole seller of wines, Jora Shoes whose business is shoe manufacturing, Meko Engravers from Lira whose business is engraving and metal works, as well as Synergy Gas a door-to-door gas distributor were the other winners who went home with UGX 10 An Orient Academy finalist receives her graduation certificate from the Orient Bank million each. Managing Director Julius Kakeeto

11 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

12 Governance

CHAIRMAN’S STATEMENT

Overview Orient Bank celebrated its Silver Jubilee in 2018. Over the last 25 years the Bank has grown significantly Total assets and now operates 22 branches, with 24 ATMs. grew from UGX 681 Throughout, we have placed our customers, large billion to UGX 750 billion 10.3% and small, first by providing customised, cost effective services and are committed to continue to do so. Orient Bank has also been a pioneer in adopting the latest technology to provide fastpay and secure card and e-banking facilities. Loans and advances grew from UGX 311 billion to 7.4% I would like to thank all our customers, old and UGX 334 billion recent, who have been part of our 25 year journey and reiterate our commitment to continue to provide high quality and personalised banking today and in the years ahead. Deposits grew from Ugx

555 billion to UGX 618 11.3% Operating Environment billion The Ugandan economy achieved modest recovery in 2018 with growth increasing to around 6 percent, from 3.9 percent in the previous year. The base lending rate remained relatively stable at 9 percent from February until December 2018 when Total Income grew from it was raised to 10 percent. The shilling depreciated UGX 80 billion to UGX 89 11.25% 4.9 percent against the US dollar in the earlier part of billion the year to June, but made some gains in the quarter to September appreciating by 1 percent and a further 1.6 percent between September and November 2018. These factors presented a modestly favourable Non-Performing Loans environment for business. ratio remained low at 2.8% The Bank regards compliance with local and 2.8% international regulations a priority. It therefore fully implemented in January 2018, IFRS 9,the new global accounting and reporting standard. As a bank, we Strategy into the Future are fully prepared for the impact these new standards Projected private sector growth for 2019 seems will have in our operations by for example arranging positive. The bank will seek to maximise opportunities, compliance training programmes for Board members this will present by actively pursuing its current and bank staff. We shall continue to make any strategy with the objective of migrating 40 percent of necessary adjustments going forward. its customers to self-service digital channels by 2020.

Financial Performance Conclusion Orient Bank’s performance was in concert with the Finally I would like to extend my sincere thanks to the fairly stable market, realising significant gains in the management and staff for their commitment to deliver period ending December 2018. set objectives within the Bank’s strategy to the benefit ‚‚ Total assets grew from UGX 681 billion to UGX of all customers. Also thank fellow Board members, 750 billion our Auditors and Legal Advisers for their professional ‚‚ Loans and advances grew from UGX 311 billion input, advice and support always. to UGX 334 billion ‚‚ Deposits grew from Ugx 555 billion to UGX 618 billion ‚‚ Total Income grew from UGX 80 billion to UGX 89 billion and, ‚‚ Non-Performing Loans ratio remained low at Michael Cook CMG 2.8% Chairman Board of Directors

13 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

14 Governance

MANAGING DIRECTOR/ CEO’S STATEMENT

Introduction It is with great pleasure that I present to you Orient The Bank also supported the Indian Women Bank’s financial report for the year ended 31st Association in raising funds to conduct cervical and December 2018. breast cancer camps among urban market women and the construction of a maternity ward at Kitebi The Bank experienced growth in a number of areas Health Centre. as detailed below: Assets grew by 10.3% to UGX 750 billion, while Customer Deposits registered a growth of 11.3% to UGX 618 billion. The Bank registered growth of 7.4% in Loans and Advances to UGX 334 billion while Total Income grew by 11.25 % to UGX 89 billion. The Bank launched Fastpay, a Net profitability grew to UGX 5.5 billion, an increase of mobile phone based application 14.6% from the previous year. that allows Customers to Achievements in 2018 open accounts and carry out The Bank launched Fastpay, a mobile phone based transactions without coming application that allows Customers to open accounts and carry out transactions without coming to the to the bank. Fastpay will drive bank. Fastpay will drive financial inclusion and provide financial inclusion and provide convenience to our Customers. convenience to our Customers. The Bank expanded its footprint by opening two new branches in Mbarara and Nakivubo. This was to move services closer to our Customers in western Uganda and downtown Kampala.

The Bank also rolled out Bancassurance operations following a change in the law that has enabled banks to sell insurance services. This has created an additional service opportunity for our customers who can now do all their banking and insurance business 2019 insight at Orient Bank. The Bank will continue investing in electronic channels to improve convenience to our Customers. We shall The Bank entered an agreement to acquire China be rolling out Agent Banking to provide additional Union Pay cards across our ATMs, Point of Sale service delivery channels for our Customers. Machines and Xpress Pay payment gateway. This new relationship has expanded the bank’s offering to Conclusion the Chinese community in Uganda. I would like to thank our Customers for the partnership over the years, the Board for its support Corporate Social Responsibility and guidance and my colleagues for the dedication Orient Business Academy, our premier Corporate and commitment. Social Responsibility Project, held its second graduation of 30 participants, with the five outstanding Think Possibilities. entrepreneurs winning a collective grant of UGX 60m to grow their businesses.

We continued our partnership with Makerere University Business School training Small and Medium Enterprises to equip them with business skills. The training covered a number of areas including book keeping, marketing, financial planning and human Julius Kakeeto resources management. Managing Director and CEO

15 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

BOARD OF DIRECTORS SITTING (L -R) Julius Kakeeto - MD/CEO, Ketan Morjaria - Vice Chairman, Michael Cook - Chairman, Hemen Shashikant Shah - Non Executive Director

16 Overview

STANDING (L - R) Zhong Shuang Quan - Non Executive Director, Joram Kahenano - Non Executive Director Darshana Bhatia - Executive Director Nicholas Ecimu - Secretary Francis M. Byaruhanga - Non Executive Director (Jay Karia (not in photo) - Non Executive Director)

17 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

BOARD OF DIRECTORS

MICHAEL COOK Chairman Michael Cook was a senior career diplomat and a former British High Commissioner to Uganda, with a wide range of political and commercial experience in Scandinavia, the Caribbean, Turkey and Africa. After retiring from the Diplomatic Service he was a member of a commission established by David Cameron before he became British Prime Minister, to advise on future aid policy.

KETAN MORJARIA Vice Chairman Cr Ri Co Al Mr. Morjaria is a founder and Board Member of both Orient Bank and in Kenya, and a strategic shareholder in both institutions. He has wide experience in commerce and property development in Africa, the , and the Middle East. He is a member of the Institute of Chartered Accountants of England and Wales and the Institute of Certified Public Accountants of Uganda.

JULIUS KAKEETO Managing Director/CEO Cr Al Ri Mr. Kakeeto is a Fellow of the Association of Chartered Certified Accountants (FCCA) and holds an MBA from Manchester Business School, United Kingdom. He has served in several management capacities, among others, in London as a Vice President in Global Markets, in Uganda as Chief Financial Officer, and in Equity Bank Uganda as Finance Director. He started his career with Ernst & Young.

HEMEN SHASHIKANT SHAH Non Executive Director Ri Al Co Cr Mr. Hemen Shah is a graduate of Harvard University and a professional banker with over 23 years of cognitive experience. Mr. Shah has held several Board memberships including Directorships on the Boards of; SCB Sierra Leone, Gambia, Cameroon, Ghana and Chairman, Board of Directors for Bank Cote d’Ivoire. Mr. Shah is a founding partner and Board member of 8 miles LLP.

JORAM KAHENANO Non Executive Director Au Ri Mr. Kahenano is a Fellow of the Uganda Institute of Bankers and a Fellow of Chartered Institute of Bankers. He has held various director positions in where he worked for 36 years. He has in addition served on various Boards including Uganda Institute of Bankers, Makerere University, , Church of Uganda and Uganda Christian University. Joram is currently a trustee of Uganda Small Scale Industries.

Al Member of Asset and Liability Committee Cr Member of Credit Committee Au Member of Audit Committee

18 Governance

FRANCIS MAGEMBE BYARUHANGA Co Cr Au Non Executive Director Mr. Byaruhanga holds a Masters Degree in Business Administration. He has over 25 years experience in the areas of Management, Finance, Accounting, Procurement and Logistics Management. He has worked with rural water and sanitation project on an executive level and was a Director Road Agency Formation Unit.

ZHONG SHUANG QUAN Non Executive Director Al Mr. Zhong Shuang Quan holds a Bachelors of Arts in Business Management from the Sichuan Normal University. He is a prominent Businessman with diversified interests in East Africa, Asia and other parts of the world specializing in the fields of Manufacturing household plastics, Large Scale Rice farming, Import Trade in household goods and Road Transport. He has Managerial experience in Trade and Manufacturing Enterprise.

JAY KARIA Alternative - Non Executive Director Al

Mr. Karia is a business magnate with over 25 years diversified exposure in London, Kenya and Uganda. He has served in several managerial capacities as Manager Lloyds Exports UK, Manager Kabril Limited UK. He has also severed on several boards including Lloyds Exports and, Kabril Limited- in London UK, Orion FXB Ltd and Credit Bank in Kenya.

DARSHANA BHATIA Executive Director Cr Al Ri Ms. Bhatia is a member of the Institute of Chartered Accountants of India. She previously worked as Head of Finance at . Prior to that, Darshana worked as Head of Finance at Orient Bank from 2006 to 2013. She holds a Bachelor’s Degree in Commerce – Financial Accounting & Auditing from the University of Mumbai. She is also a member of the Institute of Cost & Works Accountants of India & the Institute of Certified Public Accountants of Uganda.

NICHOLAS ECIMU Company Secretary Mr. Ecimu practices law with Sebalu & Lule Advocates, a premier corporate and commercial law firm, where he is a Partner. He has previously served with the Privatisation & Utility Sector Reform Project (PUSRP) in Uganda’s Ministry of Finance, Planning and Economic Development and was attached to Edward Nathans Sonnenbergs, one of ’s premier law firms, as visiting Attorney in 2006.

Ri Member of Risk/Compliance Committee Co Member of Compensation Committee Committee Chairman

19 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

EXECUTIVE COMMITTEE

JULIUS KAKEETO DARSHANA BHATIA Managing Director/CEO Executive Director

MILLIE NKAJA PANKAJ SHARMA ANDREW AGABA Head of Credit Head of Operations Head of Retail & SME

20 Live life on the go

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CARDHOLDER NAME CARDHOLDER NAME CARDHOLDER NAME

CLASSIC GOLD INFINITE R B U ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

REPORT OF THE DIRECTORS

The Directors present their report together with The Audit Committee informs the Bank and the Board the audited consolidated and separate financial of any risks, suspected frauds or irregularities, failures statements of the Orient Bank Limited (the “Bank”) of internal control or suspected infringements of laws, and its subsidiary, Equity Stock Brokers Limited rules and regulations which come to its attention. (together ‘’the Consolidated’’) for the year ended 31 December 2018. b) Asset and Liability Committee ALCO is headed by a Non-Executive Director and ACTIVITIES meets quarterly. The principal activities of the Bank are the provision of commercial banking and related financial services. It also comprises the following: i) Mr. Hemen Shashikant Shah The principal activity of the subsidiary is stock ii) Mr. Ketan Morjaria brokering. iii) Mr. Zhong Shuang Quan (Alternative: Mr. Jay Karia) RESULTS AND DIVIDEND The Consolidated and Bank profit for the year of Ushs The overall objective of the Asset and Liability 5,555 million (2017: profit of Ushs 4,818 million) and Committee is to maximize earning and return on Ushs 5,516 million (2017: profit of Ushs 4,810 million) capital with acceptable and controllable levels of the respectively has been transferred to retained earnings. main treasury risks i.e. liquidity, interest rate, foreign The directors do not recommend payment of dividend exchange and concentration risks. The assets and for the year (2017: Nil). liabilities of the Bank shall be managed to maximize shareholder value, to enhance profitability and increase capital, and to protect the Bank from any CORPORATE GOVERNANCE excessive financial risks arising from changes in Orient Bank Limited has established a tradition of best interest rates. practices in corporate governance. The corporate governance framework is based on an effective c) Remuneration and Nominations Committee independent board, the separation of the board’s This committee decides on recruitment at senior supervisory role from the executive management levels based on responsibilities and remuneration of and the constitution of board committees generally management staff and directors. It meets quarterly. comprising a majority of non-executive directors and chaired by a non-executive director to oversee critical The committee is headed by a Non-Executive Director areas. and comprises: i) Mr. Francis M. Byaruhanga BOARD OF DIRECTORS ii) Mr. Ketan Morjaria Orient Bank Limited has a broad-based Board of iii) Mr. Hemen Shashikant Shah Directors. The board functions either as a full board or through various committees constituted to oversee The Committee is responsible for ensuring that the specific operational areas. The Board has constituted Board remains balanced, both in terms of skills six committees. These are the Audit Committee, and experience, and between Executive and Non- Risk Committee, Asset & Liability Committee, Executive Directors. It is authorized to lead the Remunerations and Nominations Committee, Credit process for appointments to the Board, and make Committee, Board IT Committee. All of these Board recommendations to the Board, ensuring there is a Committees are constituted and chaired by non- formal, rigorous and transparent procedure. executive directors. As at 31 December 2018, the Board of Directors consisted of 8 members.

d) Risk committee This committee is headed by a Non-Executive Director a) Audit Committee and meets quarterly. This committee is chaired by an independent Non- Executive Director. It is comprised of the following members: The committee meets every quarter and also i) Mr. Hemen Shashikant Shah comprises: ii) Mr. Joram Kahenano i) Mr. Francis M. Byaruhanga iii) Mr. Ketan Morjaria ii) Mr. Joram Kahenano

22 Governance

The committee is granted the authority for (i) oversight financial statements, no director has received or and advice to the board in relation to the current and become entitled to receive any benefit other than potential risk exposures of OBL; (ii) oversight of the directors’ fees, and amounts receivable by executive Bank’s Risk Management Framework; (iii) the future directors under employment contracts and the senior risk strategy of the bank, including strategy for capital staff incentive scheme. The aggregate amount of and liquidity management and the determination of emoluments for directors for services rendered in the risk appetite and tolerance, and (iii) promoting a risk financial year is disclosed in Note 36 to the financial awareness culture in the bank, alongside established statements. policies and procedures. Neither at the end of the financial year nor at any time e) Credit Committee during the year did there exist any arrangement to The Board Credit Committee is chaired by a Non- which the Bank is a party whereby directors might Executive Director. It meets quarterly and comprises: acquire benefits by means of acquisition of shares i) Mr. Ketan Morjaria in or debentures of the Bank or any other body ii) Mr. Hemen Shashikant Shah corporate. iii) Mr. Francis M. Byaruhanga DIRECTORS The Credit Committee seeks to ensure that the quality The directors who held office during the year and up of the Bank’s asset book remains within acceptable to the date of this report are indicated on page 2. parameters and that the business has an effective credit policy, consistent with regulatory requirements STATEMENT OF GOING CONCERN and prudent risk management practices. Nothing has come to the attention of the directors to indicate that the Consolidated will not remain a going f) IT Committee concern for at least twelve months from the date of The Board IT Committee is chaired by a Non- this statement. Executive Director. INDEPENDENT AUDITORS It meets quarterly and comprises: The auditors, Deloitte & Touche, were appointed i) Mr. Ketan Morjaria during the year and have expressed their willingness ii) Mr. Hemen Shashikant Shah to continue in office in accordance with section 167(2) of the Ugandan Companies Act, 2012. The IT Committee is granted the authority for oversight and advice to the Board on IT strategy and initiatives, and to oversee the implementation and cost effectiveness of IT projects and IT security. BY ORDER OF THE BOARD

In addition to the above committees, there are committees on a management level comprised of senior management whose frequency of meetings is daily, weekly, monthly and quarterly. Secretary Directors and their Benefits Nicholas Ecimu During the financial year and up to the date of this C/O Sebalu & Lule Advocates report, other than as disclosed in Note 36 to the Kampala

23 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

STATEMENT OF DIRECTORS’ RESPOSIBILITIES

The Companies Act of Uganda, 2012 requires the view of the state of the financial affairs of the Bank directors to prepare consolidated and separate and of its profit and cash flows for the year ended financial statements for each financial year that 31 December 2018 in accordance with International give a true and fair view of the state of affairs of the Financial Reporting Standards, the requirements of Consolidated and Bank as at the end of the financial the Companies Act of Uganda, 2012 and the Financial year and of its results for that year. It also requires Institutions Act 2004 as amended by the Financial the Directors to ensure that the Group keeps proper Institutions (Amendment) Act, 2016. accounting records that disclose, with reasonable accuracy, the financial position of the Group. They The directors further accept responsibility for the are also responsible for safeguarding the assets of the maintenance of accounting records that may be relied Group. upon in the preparation of financial statements and for such internal control as the Directors determine is The directors accept responsibility for these necessary to enable the preparation of consolidated Consolidated and Separate financial statements, and separate financial statements that are free from which have been prepared using appropriate material misstatement, whether due to fraud or error. accounting policies supported by reasonable and prudent judgements and estimates, in conformity Nothing has come to the attention of the directors to with International Financial Reporting Standards, the indicate that the Consolidated will not remain a going requirements of the Companies Act of Uganda, 2012 concern for at least twelve months from the date of and the Financial Institutions Act, 2004 as amended this statement. by the Financial Institutions (Amendment) Act, 2016. The Consolidated and Separate financial statements The directors are of the opinion that the Consolidated were approved by the Board of Directors on 26th April and Separate financial statements give a true and fair 2019 and signed on its behalf by;

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

24 Governance

INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ORIENT BANK LIMITED

REPORT ON THE CONSOLIDATED AND SEPARATE International Financial Reporting Standards (IFRSs) FINANCIAL STATEMENTS and requirements of the Uganda Companies Act, 2012 as well as the Financial Institutions Act 2004 as amended by the Financial Institutions (Amendment) Opinion Act, 2016. We have audited the consolidated and separate financial statements of Orient Bank Limited and its subsidiary (together “the Group”), as set out on Basis for Opinion pages 14 to 115. These Consolidated and Separate We conducted our audit in accordance with financial statements (“the financial statements”) International Standards on Auditing (ISAs). Our comprise the Consolidated and Separate Statements responsibilities under those standards are further of financial position as at 31 December 2018, and the described in the Auditor’s Responsibilities for the Audit Consolidated and Separate Statements of profit or of the Financial Statements section of our report. We loss and other comprehensive income, Consolidated are independent of the Bank in accordance with the and Separate Statements of changes in equity and International Ethics Standards Board for Accountants’ Consolidated and Separate Statements of cash flows Code of Ethics for Professional Accountants (IESBA for the year then ended, and notes to the financial Code) together with the ethical requirements that statements, including a summary of significant are relevant to our audit of the financial statements accounting policies. in Uganda. We have fulfilled our other ethical responsibilities in accordance with these requirements In our opinion, the Group and separate financial and the IESBA Code. statements present fairly the state of the financial affairs of the Consolidated and Bank as at 31 December We believe that the audit evidence we have obtained 2018, and of their financial performance and cash is sufficient and appropriate to provide a basis for our flows for the year then ended in accordance with opinion.

Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements for the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key Audit Matter How the matter was addressed in the audit Impairment of loans and advances to Our procedures to assess the directors’ expected credit loss customers allowance, in response to the risks identified on the ECL included the following: On 1 January 2018, a new accounting standard, IFRS 9 financial instruments, ‚‚ We evaluated the processes for identifying impairment became effective, which introduced indicators and assessed compliance for classification of impairment on financial assets based on loans in accordance with the Financial Institutions (Credit Expected Credit Loss (ECL), rather than Classification and Provisioning) Regulations, 2005. the incurred loss model previously applied ‚‚ For a sample of selected non-performing loans, we assessed under the previous standard IAS 39. the directors’ forecast of recoverable cash flows, valuation of collaterals, estimates of recovery on default and other As discussed in note 2 to the financial sources of repayment. We evaluated the consistency of key statements, the Group reported an ECL of assumptions applied. Ushs 13,238,517,000 at 1 January 2018 arising from a day-one IFRS 9 adjustment ‚‚ As IFRS 9 was adopted at the start of the year, we performed of Ushs 5,531,334,000. audit procedures on the opening balances to gain assurance over the transition from IAS 39. As at 31 December 2018, the bank reported This included evaluating the accounting interpretations for gross loans of Ushs 345,210,623,000 and compliance with IFRS 9 and testing the day one adjustment ECL provision of Ushs 11,107,352,000. and disclosures made on transition.

25 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ORIENT BANK LIMITED (continued) Key audit matters (continued)

Key Audit Matter How the matter was addressed in the audit The bank reported a further ECL of Ushs ‚‚ We tested the design and operating effectiveness of 880,887,000 from other categories of key controls across the processes relevant to the ECL. financial assets, bringing the total ECL to This included the allocation of assets into stages, model Ushs 6,579,569,000 (note 8). governance, data accuracy and completeness, individual provisions and production journal entries and disclosures. Key judgements and estimates in respect ‚‚ We performed an overall assessment of the ECL provision of the timing and measurement of expected levels by stage to determine if they were reasonable credit loss include: considering the bank’s portfolio, risk profile, credit Allocation of assets to stage 1, 2 or 3 using risk management practices and the macro economic criteria in accordance with the accounting environment. standard. Stage 1 refers to the ECL within ‚‚ We reviewed and challenged the criteria used to allocate the first 12 months from origination ofa an asset to stage 1, 2 or 3 in accordance with IFRS 9. We financial asset. 12-month ECL also applies tested assets in stage 1, 2 and 3 to verify that they were to existing loans with no significant increase allocated to the appropriate stage. in credit risk since their initial recognition; ‚‚ With support from our internal modelling specialists, we Stage 2 implies that credit risk has increased tested the assumptions, inputs and formulae used in a sample significantly since initial recognition and of ECL models. This included assessing the appropriateness is not considered low, lifetime ECLs are of model design and formulae used, considering alternative recognized. modelling techniques and recalculating the ECL. For both stages 1 and 2, interest revenue ‚‚ To verify data quality, we tested the data used in the ECL is calculated on the assets’ gross carrying calculation by reconciling to source systems. To test credit amount. monitoring, we recalculated the risk ratings for a sample of Stage 3 ECL is recognized when the credit performing loans. risk of a financial asset increases to the ‚‚ With the support of our internal modelling specialists, we point where it is considered credit-impaired assessed the base case and alternative economic scenarios, i.e. in default. Interest revenue is calculated including challenging probability weights and comparing based on the asset’s net carrying amount. to other scenarios. We assessed whether forecasted macroeconomic variables were appropriate, such as GDP, Accounting interpretations and modelling interest rates. assumptions used to build the models that ‚‚ With the support from our internal modelling specialists, we calculate the ECL. challenged the correlation and impact of the macroeconomic factors to the ECL including how non-linearity was captured. Completeness and accuracy of data used to calculate the ECL. ‚‚ With support from our internal specialists, we recalculated a sample of individually assessed provisions including Inputs and assumptions used to estimate comparing to alternative scenarios and challenging probability weights assigned. the impact of multiple economic scenarios. ‚‚ We assessed the adequacy and appropriateness of Completeness and valuation of post model disclosures for compliance with the accounting standards adjustments. including disclosure of transition from IAS 39; ‚‚ Within the context of our audit materiality, we did not find the Measurements of individually assessed model and assumptions used in the calculation of the ECLs provisions including assessment of multiple to be materially divergent from the IFRS 9 requirements, scenarios; and professional guidance and market practices.

Accuracy and adequacy of the financial Overall, the results of our evaluation of the Bank’s allowance for statement disclosures. impairment of financial assets are consistent with the directors’ assessment.

We found that adequate disclosures had been made by the directors pertaining to the allowance for impairment of financial assets and the related credit risk.

26 Governance

Other Information an audit conducted in accordance with International The directors are responsible for the other information. Standards on Auditing (ISAs) will always detect a The other information comprises the information material misstatement when it exists. Misstatements included in the ‘Report of the Directors’. The other can arise from fraud or error and are considered information does not include the financial statements material if, individually or in the aggregate, they could and our auditor’s report thereon. Our opinion on reasonably be expected to influence the economic the financial statements does not cover the other decisions of users taken on the basis of these financial information and we do not express any form of statements. assurance conclusion thereon. As part of an audit in accordance with ISAs, we In connection with our audit of the financial statements, exercise professional judgment and maintain our responsibility is to read the other information and, professional scepticism throughout the audit. We in doing so, consider whether the other information also: is materially inconsistent with the financial statements ‚‚ Identify and assess the risks of material or our knowledge obtained in the audit or otherwise misstatement of the financial statements, whether appears to be materially misstated. If, based on the due to fraud or error, design and perform audit work we have performed, we conclude that there is procedures responsive to those risks, and obtain a material misstatement of this other information, we audit evidence that is sufficient and appropriate are required to report that fact. We have nothing to to provide a basis for our opinion. The risk of report in this regard. not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, Responsibilities of directors for the Consolidated intentional omissions, misrepresentations, or the and Separate Financial Statements override of internal control. The directors are responsible for the preparation of the Consolidated and Separate financial statements ‚‚ Obtain an understanding of internal control (“financial statements”) that give a true and fair view relevant to the audit in order to design in accordance with International Financial Reporting audit procedures that are appropriate in the Standards, and in the manner required by the Uganda circumstances, but not for expressing an opinion Companies Act, 2012 and the Financial Institutions on the effectiveness of the Bank’s internal control. Act, 2004 as amended by the Financial Institutions (Amendment) Act, 2016 and for such internal control ‚‚ Evaluate the appropriateness of accounting as the directors determine is necessary to enable the policies used and the reasonableness of preparation of financial statements that are free from accounting estimates and related disclosures material misstatement, whether due to fraud or error. made by the directors.

In preparing the Consolidated and Separate financial ‚‚ Conclude on the appropriateness of the statements, the directors are responsible for directors` use of the going concern basis of assessing the Bank’s ability to continue as a going accounting and, based on the audit evidence concern, disclosing, as applicable, matters related obtained, whether a material uncertainty to going concern and using the going concern basis exists related to events or conditions that may of accounting unless the directors either intends to cast significant doubt on the Bank’s ability to liquidate the Bank or to cease operations, or has no continue as a going concern. If we conclude that realistic alternative but to do so. a material uncertainty exists, we are required to draw attention in our auditor’s report to the Those charged with governance are responsible for related disclosures in the financial statements or, overseeing the Bank’s financial reporting process. if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may Auditor’s Responsibilities for the Audit of the cause the Bank to cease to continue as a going Consolidated and Separate Financial Statements concern. Our objectives are to obtain reasonable assurance about whether the Consolidated and Separate ‚‚ Evaluate the overall presentation, structure financial statements (“financial statements”) asa and content of the Consolidated and Separate whole are free from material misstatement, whether financial statements, including the disclosures, due to fraud or error, and to issue an auditor’s report and whether the financial statements represent that includes our opinion. Reasonable assurance is the underlying transactions and events in a a high level of assurance, but is not a guarantee that manner that achieves fair presentation.

27 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

INDEPENDENT AUDITORS REPORT TO THE MEMBERS OF ORIENT BANK LIMITED (continued) Auditor’s Responsibilities for the Audit of the Consolidated and Separate Financial Statements (continued)

We communicate with the directors regarding, among Report on other Legal Requirements other matters, the planned scope and timing of the As required by the Uganda Companies Act, 2012, we audit and significant audit findings, including any report to you based on our audit, that: significant deficiencies in internal control that we 1. We have obtained all the information and identify during our audit. explanations which to the best of our knowledge and belief, were necessary for the purposes of the We also provide the Directors with a statement that audit; we have complied with relevant ethical requirements 2. In our opinion, proper books of account have regarding independence, and to communicate with been kept by the bank, so far as appears from them all relationships and other matters that may our examination of those books; reasonably be thought to bear on our independence, 3. The Consolidated and Separate Statements of and where applicable, related safeguards. financial position (Balance sheet) and Consolidated and Separate Statements of profit or loss and From the matters communicated with the directors, other comprehensive income (profit or loss) are in we determine those matters that were of most agreement with the books of account. significance in the audit of the financial statements The engagement partner responsible for the audit of the current period and are therefore the key audit resulting in this independent auditor`s report is Norbert matters. Kagoro Practicing Number P0053.

We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare ______circumstances, we determine that a matter should Certified Public Accountant of Uganda not be communicated in our report because the Norbert Kagoro adverse consequences of doing so would reasonably Partner be expected to outweigh the public interest benefits 2018 of such communication. Kampala

28 UNSECURED Governance BID BONDS

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O B B U T

29 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

CONSOLIDATED AND SEPARATE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

CONSOLIDATED SEPARATE 2018 2017 2018 2017 Note Ushs’000 Ushs’000 Ushs’000 Ushs’000

Interest and similar income 5 64,809,704 56,462,951 56,462,951 64,809,704 Interest and similar expenses 5 (20,294,498) (21,608,220) (20,294,498) (21,608,220) Net interest income 44,515,206 34,854,731 44,515,206 34,854,731 Net fee and commission income 6 21,471,517 20,099,280 21,206,565 19,911,444 Net trading gains 7 3,195,908 3,762,848 3,195,908 3,762,848 Revenue 69,182,631 58,716,859 68,917,679 58,529,023 Impairment charges 8 (6,579,569) (6,253,779) (6,579,569) (6,253,779) Employee benefits expenses 9 (18,373,328) (17,810,258) (18,242,356) (17,698,394) General and administrative expenses 10 (14,995,465) (12,304,528) (14,984,865) (12,299,578) Other operating expenses 12 (21,334,474) (15,373,520) (21,259,824) (15,312,424) Profit before income tax 7,899,795 6,974,774 7,851,065 6,964,848 Income tax expense 13 (2,344,546) (2,156,609) (2,335,003) (2,153,997)

Profit for the year 5,555,249 4,818,165 5,516,062 4,810,851 Other comprehensive income that will not be reclassified to the statement of profit or loss

Equity stock brokers at fair value 20 - - 407,422 - Deferred income tax on fair value - - (122,226) - Other comprehensive income for the - 285,196 - year, net of tax - Total comprehensive income for the 5,555,249 4,818,165 5,801,258 4,810,851 year

Profit attributable to: Owners of the company 5,547,412 4,816,946 Non-controlling interests 7,837 1,219 5,555,249 4,818,165

Total comprehensive income for the year attributable to:

Owners of the company 5,547,412 4,816,946 Non-controlling interests 7,837 1,219 5,555,249 4,818,165

The notes on pages 31 to 99 form an integral part of these consolidated and separate financial statements.

30 Financial Statements

CONSOLIDATED AND SEPARATE STATEMENT OF FINANCIAL POSITION

CONSOLIDATED SEPARATE 2018 2017 2018 2017 Note Ushs’000 Ushs’000 Ushs’000 Ushs’000 Assets Cash and balances with Central Bank 15 163,256,415 93,832,065 163,256,415 93,832,065 Deposits and balances due from 17 100,824,140 177,248,124 100,814,159 177,236,485 banking institutions Derivative financial assets 18 558,500 1,551,136 558,500 1,551,136 Government securities 19 93,567,945 48,334,440 93,191,471 48,334,440 Investment in subsidiary 20 - - 487,422 80,000 Loans and advances to customers 21 334,103,271 310,780,076 334,103,271 310,780,076 Other assets 22 12,873,816 5,023,610 12,722,029 4,898,168 Current income tax recoverable 23 - 5,742 - - Property and equipment 24 13,423,459 16,896,456 13,421,651 16,895,324 Intangible assets 25 5,379,898 3,275,227 5,379,898 3,275,227 Deferred income tax asset 26 25,869,200 23,990,548 25,746,973 23,990,548 Total assets 749,856,644 680,937,424 749,681,789 680,873,469 Liabilities Customer deposits 28 618,019,250 554,792,435 618,079,011 555,213,730 Deposits due to other banks 27 1,434,289 155,060 1,434,289 155,060 Derivative financial instruments 18 1,250 4,769 1,250 4,769 Refinance loans 29 63,116 83,949 63,116 83,949 Current income tax payable 23 1,245,759 - 1,250,799 - Other liabilities 30 14,277,859 12,818,688 14,195,957 12,736,999 Deferred income tax liability 26 542 340 - - Total liabilities 635,042,065 567,855,241 635,024,422 568,194,507 Capital and reserves Issued capital 31 96,750,000 96,750,000 96,750,000 96,750,000 Revaluation reserve 32 1,831,836 2,434,811 1,831,836 2,434,811 Credit risk reserve 33 - - - - Fair value reserve 20 - - 285,196 - Retained earnings 16,129,514 13,801,980 15,790,335 13,494,151 Equity attributable to owners of the 114,711,350 112,986,791 114,657,367 112,678,962 Bank Non-controlling interests 103,229 95,392 - - Total equity 114,814,579 113,082,183 114,657,367 112,678,962 Total equity and liabilities 749,856,644 680,937,424 749,681,789 680,873,469 The Consolidated and separate financial statements were authorised for issue by the Board of Directors on 26th April 2019 and signed on its behalf by:

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

31 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 - - - 49,081 292,007 Ushs’000 5,555,249 5,555,249 1,659,400 4,818,165 4,818,165 (5,531,334) Total equity Total 114,814,579 109,210,249 113,082,183 113,082,183 113,082,183 107,972,011 ------Non- 7,837 7,837 1,219 1,219 95,392 95,392 95,392 95,392 94,173 interest 103,229 Ushs’000 controlling controlling - - - 49,081 292,007 Ushs’000 5,547,412 5,547,412 1,659,400 4,816,946 4,816,946 (5,531,334) 114,711,350 109,114,857 112,986,791 112,986,791 112,986,791 107,877,838 of the parent to equity holders Total attributable Total - - 652,056 973,357 earnings Retained Ushs’000 5,547,412 5,547,412 9,930,046 1,659,400 2,982,438 4,816,946 4,816,946 5,029,239 (5,531,334) 16,129,514 13,801,980 13,801,980 10,819,542 ------reserve (Note 33) Ushs’000 2,982,438 2,982,438 Credit risk Credit (2,982,438) ------49,081 reserve 292,007 (652,056) (973,357) (Note 32) Ushs’000 1,831,836 2,434,811 2,434,811 2,434,811 2,434,811 3,116,161 Revaluation ------(Note 31) Ushs’000 96,750,000 96,750,000 96,750,000 96,750,000 96,750,000 96,750,000 Issued capital CONSOLIDATED STATEMENT OF CHANGES IN EQUITY STATEMENT CONSOLIDATED As at 31 December 2018 Deferred income tax thereon Deferred Transfer of excess depreciation to retained to retained of excess depreciation Transfer earnings Total comprehensive income for the year comprehensive Total Profit for the year Profit Restated at 1 January 2018 Deferred income tax thereon Deferred IFRS 9 transitional adjustment (note 2.4a) Year ended 31 December 2018 Year stated At start of year as previously As at 31 December 2017 Transfer from credit risk reserve (note 33) risk reserve credit from Transfer Total Deferred income tax thereon Deferred Transfer of excess depreciation to retained to retained of excess depreciation Transfer earnings Total comprehensive income for the year comprehensive Total Profit for the year Profit Year ended 31 December 2017 Year At start of year

32 Financial Statements ------49,081 49,081 292,007 285,196 292,007 Ushs’000 5,555,249 5,555,249 1,659,400 4,818,165 4,818,165 5,801,258 5,516,062 1,659,400 4,810,851 4,810,851 Ushs’000 (5,531,334) (5,531,334) Total equity Total 114,814,579 109,210,249 113,082,183 113,082,183 113,082,183 107,972,011 114,657,367 108,807,028 112,678,962 112,678,962 112,678,962 107,576,104 Total equity Total ------Non- 7,837 7,837 1,219 1,219 95,392 95,392 95,392 95,392 94,173 interest 103,229 Ushs’000 285,196 285,196 controlling controlling Ushs’000 Fair Value Fair Value 285,196 Adjustments ------49,081 292,007 Ushs’000 5,547,412 5,547,412 1,659,400 4,816,946 4,816,946 (5,531,334) 652,056 973,357 114,711,350 109,114,857 112,986,791 112,986,791 112,986,791 107,877,838 of the parent earnings Retained 5,516,062 9,622,217 1,659,400 2,982,438 4,810,851 4,810,851 4,727,506 Ushs’000 (5,531,334) 15,790,335 13,494,151 13,494,151 10,511,714 5,516,062 to equity holders Total attributable Total ------reserve 652,056 973,357 earnings Retained (Note 33) Ushs’000 2,982,438 2,982,438 Ushs’000 5,547,412 5,547,412 9,930,046 1,659,400 2,982,438 4,816,946 4,816,946 5,029,239 (2,982,438) (5,531,334) 16,129,514 Credit risk Credit 13,801,980 13,801,980 10,819,542 ------reserve 49,081 (Note 33) Ushs’000 2,982,438 2,982,438 292,007 reserve Credit risk Credit (2,982,438) (652,056) (973,357) (Note 32) 1,831,836 2,434,811 2,434,811 2,434,811 2,434,811 3,116,161 Ushs’000 Revaluation ------49,081 ------reserve 292,007 (652,056) (973,357) (Note 32) Ushs’000 1,831,836 2,434,811 2,434,811 2,434,811 2,434,811 3,116,161 Revaluation Issued capital ------(Note 31) - - - - Ushs’000 96,750,000 96,750,000 96,750,000 96,750,000 96,750,000 96,750,000 (Note 31) Ushs’000 96,750,000 96,750,000 96,750,000 96,750,000 96,750,000 96,750,000 Issued capital SEPARATE STATEMENT OF CHANGES IN EQUITY STATEMENT SEPARATE The IFRS 9 transition adjustment related to both on and off balance sheet items. The IFRS 9 transition adjustment related As at 31 December 2018 Deferred income tax thereon Deferred Transfer of excess depreciation to retained earnings to retained of excess depreciation Transfer As at 31 December 2018 Total comprehensive income for the year comprehensive Total Deferred income tax thereon Deferred Other comprehensive income (note 20) Other comprehensive Transfer of excess depreciation to retained to retained of excess depreciation Transfer earnings Profit for the year Profit Total comprehensive income for the year comprehensive Total Restated at 1 January 2018 Profit for the year Profit IFRS 9 transitional adjustment (note 2.4a) Deferred income tax thereon Deferred Restated at 1 January 2018 2018 stated At start of year as previously Deferred income tax thereon Deferred IFRS 9 transitional adjustment (note 2.4a) As at 31 December 2017 Year ended 31 December 2018 Year stated At start of year as previously Transfer from credit risk reserve (note 33) risk reserve credit from Transfer As at 31 December 2017 Total Transfer from credit risk reserve (note 33) risk reserve credit from Transfer Deferred income tax thereon Deferred Total Transfer of excess depreciation to retained earnings to retained of excess depreciation Transfer Deferred income tax thereon Deferred Total comprehensive income for the year comprehensive Total Transfer of excess depreciation to retained to retained of excess depreciation Transfer earnings Profit for the year Profit Total comprehensive income for the year comprehensive Total 2017 At 1 January 2017 Profit for the year Profit Year ended 31 December 2017 Year At start of year

33 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

CONSOLIDATED AND SEPARATE STATEMENT OF CASH FLOWS

CONSOLIDATED SEPARATE 2018 2017 2018 2017 Note Ushs’000 Ushs’000 Ushs’000 Ushs’000 Operating activities Profit before income tax 7,899,795 6,974,774 7,851,065 6,964,848 Adjustments: Depreciation 24 3,471,482 2,895,019 3,469,837 2,893,223 Amortisation of intangible assets 25 2,012,455 2,048,661 2,012,455 2,048,661 Unrealised foreign exchange gain (557,250) (1,546,367) 557,250) (1,546,367) Provision on litigation 1,575,800 488,215 1,575,800 488,215 Impairment charge on loans and advances 6,579,569 6,253,779 6,579,569 6,253,779 Profit on disposal of property and equipment (1,601) 68,489 (1,601) 68,489 Profit before changes in operating assets and liabilities 20,980,250 17,182,570 20,929,875 17,170,848 (Increase)/decrease in cash reserve requirement (2,500,000) (11,416,000) (2,500,000) (11,416,000) Decrease in deposits due to banking institutions 1,279,229 (3,457,948) 1,279,229 (3,457,948) Decrease in derivative financial assets 989,117 - 989,117 - Increase in loans and advances (23,323,195) (66,278,027) (23,323,195) (66,278,027) (Increase)/decrease in investment in government securities (48,203,203) 30,695,777 (47,887,923) 30,695,777 (Increase)/decrease in other assets (7,488,462) 1,932,565 (7,823,861) 1,922,282 Increase in customer deposits 62,865,281 131,544,192 62,865,281 131,589,190 Decrease in BOU refinance loan (20,833) (36,921) (20,833) (36,921) Increase in other liabilities 1,458,958 (6,890,714) 1,458,958 (6,898,239) Income taxes paid 23 (1,263,015) (2,839,956) (1,254,376) (2,823,606) (16,206,123) 73,252,968 (16,217,603) 73,296,508 Net cash flows generated from operating activities 4,774,127 90,435,538 4,712,272 90,467,356 Investing activities Purchase of property and equipment 24 (7,417,927) (9,693,439) (7,415,607) (9,693,439) Proceeds from sale of property and equipment 4,513 54,038 4,513 54,038 Purchase of intangible assets 25 (599,114) (333,323) (599,114) (333,323) Net cash flows used in investing activities (8,012,528) (9,972,724) (8,010,208) (9,972,724) Cash and cash equivalents at start of year 226,740,189 146,277,375 226,728,550 146,233,918 Net increase/(decrease) in cash and cash equivalents (3,238,401) 80,462,814 (3,297,936) 80,494,632 Cash and cash equivalents at the end of the year 16 223,501,788 226,740,189 223,430,614 226,728,550

34 Financial Statements

NOTES TO THE FINANCIAL STATEMENTS

1. GENERAL INFORMATION have a significant impact on the financial statements Orient Bank Limited (the ‘Bank’) and its subsidiary in the period the assumptions changed. The areas Equity Stock Brokers Limited, (together the involving a higher degree of judgement or complexity, Consolidated) are incorporated in Uganda under the or areas where assumptions and estimates are Companies Act as a limited liability company, and is significant to the financial statements, are disclosed domiciled in Uganda. The address of its registered in Note 4. office is: 2.3 BASIS OF CONSOLIDATION Plot 6 & 6A, Kampala Road The consolidated and separate financial statements P O Box 3072 comprise the financial statements of Orient Bank Kampala Limited and its subsidiary, Equity Stock Brokers Limited, made up to 31 December 2018. Control is The Bank is licensed and regulated by Bank of achieved when the Bank; Uganda under the FIA 2004 as amended by the ‚‚ Has power over the investee; FIA 2016. For the Companies Act of Uganda, 2012 ‚‚ Is exposed, or has rights, to variable returns from reporting purposes, the balance sheet is represented its involvement with the investee; and by the consolidated and separate statement of ‚‚ Has the ability to use its power to affect its financial position and the profit and loss account by returns. the statement of comprehensive income in these The Bank reassesses whether or not it controls an consolidated and separate financial statements. investee if facts and circumstances indicate that there

are changes to one or more of the three elements of The financial statements for the year ended 31 control listed above. December 2018 have been approved for issue by the Board of Directors. Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when 2. SUMMARY OF SIGNIFICANT the Bank loses control of the subsidiary. Specifically, ACCOUNTING POLICIES income and expenses of a subsidiary acquired or disposed of during the year are included in the The principal accounting policies applied in the consolidated statement of profit or loss and other preparation of these consolidated and separate comprehensive income from the date the Bank gains financial statements are set out below. These policies control until the date when the Bank ceases to control have been consistently applied to all the years the subsidiary. presented, unless otherwise stated.

Profit or loss and each component of other 2.1 STATEMENT OF COMPLIANCE comprehensive income are attributed to the owners The consolidated and separate financial statements of the Bank and to the non-controlling interests. Total have been prepared in accordance with International comprehensive income of subsidiary is attributed to Financial Reporting Standards. the owners of the Bank and to the non-controlling interests even if this results in the non-controlling 2.2 BASIS OF PREPARATION interests having a deficit balance. The consolidated and separate financial statements have been prepared on a historical cost basis, except When necessary, adjustments are made to the financial the following; statements of subsidiary to bring their accounting ‚‚ Derivative financial instruments are measured at policies into line with the group’s accounting policies. fair value ‚‚ Financial instruments at fair value through profit All intragroup assets and liabilities, equity, income, or loss are measured at fair value. expenses and cash flows relating to transactions between members of the Consolidated are eliminated The preparation of financial statements in conformity in full on consolidation. with IFRS requires the use of certain critical accounting estimates. It also requires the directors to exercise A change in the ownership interest of a subsidiary, judgement in the process of applying the Bank’s without loss of control, is accounted for as an equity accounting policies. Changes in assumptions may transaction. If the Consolidated loses control over a Ü

35 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.3 Basis of consolidation (continued)

Ü subsidiary, it derecognises the related assets (including ‚‚ Recognise revenue when (or as) the entity goodwill), liabilities, non-controlling interest (NCI) and satisfies a performance obligation. other components of equity, while any resultant gain or loss is recognised in profit or loss. Any investment The group has reviewed all revenue streams as part retained is recognised at fair value at the date of loss of its IFRS 15 impact assessment. The impact of IFRS of control. Given the level of judgement required 15 implementation is not material. regarding consolidation of structured entities, these considerations are described further in the Critical IFRS 9 Financial Instruments- Effective for annual accounting estimates and judgements in Note 4. periods beginning on or after 1 January 2018 Disclosures for investment in subsidiaries are provided in Note 20. The standard contains requirements in the following areas: Non-controlling interests Non-controlling interests that are present ownership Classification and measurement. Financial assets interests and entitle their holders to a proportionate are classified by reference to the business model share of the entity’s net assets in the event of liquidation within which they are held and their contractual cash may be initially measured either at fair value or at the flow characteristics. The 2014 version of IFRS 9 non-controlling interests’ proportionate share of the introduces a ‘fair value through other comprehensive recognised amounts of the acquiree’s identifiable net income’ category for certain debt instruments. assets. Financial liabilities are classified in a similar manner to under IAS 39, however there are differences in The of measurement basis is made on a the requirements applying to the measurement of an transaction-by-transaction basis. Other types of non- entity’s own credit risk. controlling interests are measured at fair value or, when applicable, on the basis specified in another Impairment. The 2014 version of IFRS 9 introduces IFRS. an ‘expected credit loss’ model for the measurement of the impairment of financial assets, so it is no longer 2.4 CHANGES IN ACCOUNTING POLICY AND necessary for a credit event to have occurred before DISCLOSURES a credit loss is recognised.

Adoption of new and revised International Hedge accounting. Introduces a new hedge Financial Reporting Standards (IFRSs) and accounting model that is designed to be more closely interpretations (IFRIC). aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. 2.4 (a) New standards and amendments effective for the year ended 31 December 2018 Derecognition. The requirements for the derecognition of financial assets and liabilities are IFRS 15 Revenue from Contracts with carried forward from IAS 39. Customers- Effective for annual periods beginning on or after 1 January 2018. Financial assets have been classified as at amortised IFRS 15 provides a single, principles based five-step cost, fair value through profit and loss’, or fair value model to be applied to all contracts with customers. through other comprehensive income.

The five steps in the model are as follows: Equity investments, previously classified as available ‚‚ Identify the contract with the customer for sale have been classified as financial assets at fair ‚‚ Identify the performance obligations in the value through other comprehensive income, with no contract recycling of gains and losses. ‚‚ Determine the transaction price ‚‚ Allocate the transaction price to the performance The new impairment model has been applied to all obligations in the contracts loans and advances and other financial assets.

36 Financial Statements

Reclassifications The combined application of the business model and SPPI tests on adoption of IFRS 9 resulted in the reclassification of the following financial assets and liabilities IFRS 9 IAS 39 As at January 1, 2018 December 31, 2017 Previous measurement Measurement Carrying Carrying Ushs’000 category amount category amount Financial assets: Government securities at Amortised cost Amortized cost 46,654,418 Held for maturity 46,654,419 Government securities at FVTPL FVTPL 1,680,020 Held for trading 1,680,021 Loans and advances Amortized cost 306,755,849 Loans and advances 310,780,076 Other assets FVTPL 4,898,168 FVTPL 4,898,168 Financial liabilities: Customer deposits Amortized cost 555,213,730 Customer deposits 555,213,730 Deposits due to other Deposits due to other banks Amortized cost 155,060 banks 155,060 Derivative financial Derivative financial instruments FVTPL 4,769 instruments 4,769 Refinance loans Amortized cost 83,949 Refinance loans 83,949 Other liabilities Amortized cost 12,736,999 Other liabilities 12,736,999

Allowance for credit losses The following table is a comparison of impairment allowances determined in accordance with IAS 39 and IAS 37 to the corresponding impairment allowance determined in accordance with IFRS 9 as at January 1, 2018.

Transition IAS 39 / IAS 37 as at Adjust- IFRS 9 as at January 1, 2018 December 31, 2017 ments Collec- Individ- Ushs’000 tively as- ually as- Total Stage 1 Stage 2 Stage 3 Total sessed sessed Bank - - - 35,962 35,962 - - 35,962 Balances Government - - - 2 2 - - 2 Securities Guarantees - - - 566,625 566,625 - - 566,625 Letters of - - - 499,836 499,836 - - 499,836 Credit Loans and 3,586,221 4,120,962 7,707,183 4,024,227 1,976,373 900,004 8,855,032 11,731,410 Overdrafts OD Commit- - - - 384,591 384,591 - - 384,591 ments Placements - - - 20,092 20,092 - - 20,092 Total allowance for credit losses 3,586,221 4,120,962 7,707,183 5,531,334 3,483,481 900,004 8,855,032 13,238,517

37 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.4 Changes in accounting policy and disclosures (continued)

The table below provides the reconciliations from IAS 39 to IFRS 9 for the Consolidated Balance Sheet, showing separately the impacts of adopting the IFRS 9 impairment, and classification and measurement, requirements.

Group Statement of financial position Impact of As at classifica- As at Impact of Total December tion and January 1, impairment Impact 31, 2017 measure- 2018 ment Ushs’000 IAS 39 IFRS 9 Assets Cash and balances with Central Bank 93,832,065 - (35,962) (35,962) 93,796,103 Deposits and balances due from banking institutions 177,248,124 - (20,092) (20,092) 177,228,032 Derivative financial assets 1,551,136 - - 1,551,136 Government securities 48,334,440 - (2) (2) 48,334,438 Investment in subsidiary - - - - Loans and advances to customers 310,780,076 - (4,024,227) (4,024,227) 306,755,849 Other assets 5,023,610 - - 5,023,610 Current income tax recoverable 5,742 - - 5,742 Property and equipment 16,896,456 - - 16,896,456 Intangible assets 3,275,227 - - 3,275,227 Deferred income tax asset 23,990,548 - 1,659,400 1,659,400 25,649,948 Total assets 680,937,424 - (2,420,883) (2,420,883) 678,516,541 Liabilities Customer deposits 554,792,435 - - 554,792,435 Deposits due to other banks 155,060 - - 155,060 Derivative financial instruments 4,769 - - 4,769 Refinance loans 83,949 - - 83,949 Current income tax payable - - - - Other liabilities 12,818,688 - 1,451,051 1,451,051 14,269,739 Deferred income tax liability 340 - - 340 Total liabilities 567,855,241 - 1,451,051 1,451,051 569,306,292 Capital and reserves Issued capital 96,750,000 - - 96,750,000 Revaluation reserve 2,434,811 - - 2,434,811 Credit risk reserve - - - - Retained earnings 13,801,980 - (3,871,934) (3,871,934) 9,930,046 Equity attributable to owners of the Bank 112,986,791 - (3,871,934) (3,871,934) 109,114,857 Non-controlling interests 95,392 - - - 95,392 Total equity 113,082,183 - (3,871,934) (3,871,934) 109,210,249 Total equity and liabilities 680,937,424 - (2,420,883) (2,420,883) 678,516,541

38 Financial Statements

Separate Statement of financial position Impact of As at classifica- As at Impact of Total December tion and January 1, impairment Impact 31, 2017 measure- 2018 ment Ushs’000 IAS 39 IFRS 9 Assets Cash and balances with Central Bank 93,832,065 - (56,054) (56,054) 93,776,011 Deposits and balances due from banking institutions 177,236,485 - - - 177,236,485 Derivative financial assets 1,551,136 - - - 1,551,136 Government securities – Held-to- maturity 48,334,440 - (2) (2) 48,334,438 Government securities – Held-for- trading 1,680,021 - - - 1,680,021 Investment in subsidiary 80,000 - - - 80,000 Loans and advances to customers 310,780,076 - (4,024,227) (4,024,227) 306,755,849 Other assets 4,898,168 - - 4,898,168 Property and equipment 16,895,324 - - 16,895,324 Intangible assets 3,275,227 - - 3,275,227 Deferred income tax asset 23,990,548 - 1,659,400 1,659,400 25,649,948 Total assets 680,873,469 - (2,420,883) (2,420,883) 678,452,586 Liabilities Customer deposits 555,213,730 - - 555,213,730 Deposits due to other banks 155,060 - - 155,060 Derivative financial instruments 4,769 - - 4,769 Refinance loans 83,949 - - 83,949 Other liabilities 12,736,999 - 1,451,051 1,451,051 14,188,050 Total liabilities 568,194,507 - 1,451,051 1,451,051 569,645,558 Capital and reserves Issued capital 96,750,000 - - 96,750,000 Revaluation reserve 2,434,811 - - 2,434,811 Credit risk reserve - - - - - Fair Value Adjustments - - - - Retained earnings 13,494,151 - (3,871,934) (3,871,934) 9,622,217 Equity attributable to owners of the Bank 112,678,962 - (3,871,934) (3,871,934) 108,807,028 Total equity and liabilities 680,873,469 - (2,420,883) (2,420,883) 678,452,586

39 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.4 Changes in accounting policy and disclosures (continued)

IFRIC 22 Foreign Currency Transactions and IFRS 16 Leases- Applicable to annual reporting Advance Consideration- Applicable to an entity’s periods beginning on or after 1 January 2019 first annual IFRS financial statements for a period The group expects to adopt IFRS 16 on 1 January beginning on or after 1 January 2018. 2019 and based on current modelling, is likely to apply a simplified transition method. The interpretation addresses foreign currency transactions or parts of transactions where: IFRS 16 specifies how an IFRS reporter will recognise, ‚‚ there is consideration that is denominated or measure, present and disclose leases. The standard priced in a foreign currency; provides a single lessee accounting model, requiring ‚‚ the entity recognises a prepayment asset or lessees to recognise assets and liabilities for all leases a deferred income liability in respect of that unless the lease term is 12 months or less or the consideration, in advance of the recognition of underlying asset has a low value. the related asset, expense or income; and ‚‚ the prepayment asset or deferred income liability Lessors continue to classify leases as operating or is non-monetary. finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The Interpretations Committee came to the following conclusion: The full impact is being evaluated, but is likely to have The date of the transaction, for the purpose of a material impact to both the balance sheet net liability determining the exchange rate, is the date of initial position, and the income statement particularly as for recognition of the non-monetary prepayment asset or future reporting periods after adoption. deferred income liability. The following new or amended standards are If there are multiple payments or receipts in advance, not expected to have significant impact on the a date of transaction is established for each payment company’s financial statements. or receipt IFRS 17 Insurance Contracts Classification and Measurement of Share-based Applicable to annual reporting periods beginning Payment Transactions (Amendments to IFRS 2) on or after 1 January 2021. - Effective for annual periods beginning on or after 1 January 2018 IFRS 17 requires insurance liabilities to be measured at a current fulfilment value and provides a more Amends IFRS 2 Share-based Payment to clarify the uniform measurement and presentation approach standard in relation to the accounting for cash-settled for all insurance contracts. These requirements share-based payment transactions that include a are designed to achieve the goal of a consistent, performance condition, the classification of share- principle-based accounting for insurance contracts. based payment transactions with net settlement IFRS 17 supersedes IFRS 4 Insurance Contracts as features, and the accounting for modifications of of 1 January 2021. share-based payment transactions from cash-settled to equity-settled. IFRIC 23 Uncertainty over Income Tax Applicable to annual reporting periods Transfers of Investment Property (Amendments Treatments- beginning on or after 1 January 2019. to IAS 40)- Effective for annual periods beginning on or after 1 January 2018. The interpretation addresses the determination of The amendments to IAS 40 Investment Property: taxable profit (tax loss), tax bases, unused tax losses, Amends paragraph 57 to state that an entity shall unused tax credits and tax rates, when there is transfer a property to, or from, investment property uncertainty over income tax treatments under IAS 12. when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or It specifically considers: ceases to meet, the definition of investment property. ‚‚ Whether tax treatments should be considered A change in management’s intentions for the use of collectively a property by itself does not constitute evidence of a ‚‚ Assumptions for taxation authorities’ change in use. examinations ‚‚ The determination of taxable profit (tax loss), tax The list of examples of evidence in paragraph 57(a) bases, unused tax losses, unused tax credits – (d) is now presented as a non-exhaustive list of and tax rates examples instead of the previous exhaustive list. ‚‚ The effect of changes in facts and circumstances.

40 Financial Statements

2.5 FINANCIAL INSTRUMENTS iii. The asset is held within a business model Prior to 2018, the group’s accounting policy was in whose objective is to hold assets in order line with IAS 39. to collect contractual cash flows; and From 1 January 2018 the group’s accounting policies iv. The contractual terms of the financial relating to financial instruments changed significantly asset give rise on specified dates to cash following adoption of IFRS 9. The current policies are flows that are solely payments of principal described in detail below; and interest on the principal amount a. Orient Bank accounts, measures and reports outstanding. financial instruments in accordance with IFRS 9: Financial Instruments v. Fair value through other comprehensive —financial assets is classified b. A Financial Instrument are any contract that income and measured at fair value through other gives rise to a financial asset or a financial liability comprehensive income if they are held or equity instrument of the Bank. c. The financial instruments shall be classified in a business model whose objective is under the following three headings: achieved by both collecting contractual cash flows and selling financial assets. i. measured at fair value through profit or loss (FVTPL) vi. Fair value through profit or loss—any financial assets that are not held in one ii. measured at fair value through other of the two business models mentioned comprehensive income (FVTOCI) is measured at fair value through profit or iii. measured at amortised cost loss. d. Classification of financial instruments is made b. Orient Bank reclassifies all affected financial at the time the financial instrument is initially assets when, and only when, it changes its recognised, i.e. when the Bank becomes a party business model for managing financial assets. to the contractual provisions of the instrument. e. Financial instruments held by Orient Bank for the 2.5.2.2 Financial Liabilities time being include the following: a. All financial liabilities are measured at amortised i. Financial assets: loans and advances cost, except for financial liabilities at fair value (including commitments to provide through profit or loss. Such liabilities include further credit), investments in treasury derivatives (other than derivatives that are bills and bonds, contract assets such as financial guarantee contracts or are designated placements, and other receivables and effective hedging instruments), other liabilities held for trading, and liabilities that an ii. Financial liabilities: customer deposits, entity designates to be measured at fair value borrowed funds, agency collection through profit or loss. accounts, corporate bonds. b. After initial recognition, the Bank does not reclassify any financial liability. 2.5.1 Recognition of Financial Instruments a. A financial asset or a financial liability is 2.5.2.3 Fair Value Option recognized in the statement of financial position a. The Bank, at initial recognition, irrevocably when the Bank becomes party to the contractual designates a financial asset or liability that would provisions of the instrument. otherwise have to be measured at amortised cost b. At initial recognition, the Bank measures a or fair value through other comprehensive income financial asset or a financial liability at its fair to be measured at fair value through profit or loss value, plus or minus, in the case of a financial if doing so would eliminate or significantly reduce asset or a financial liability not at fair value a measurement or recognition inconsistency (or through profit or loss, transaction costs that are an ‘accounting mismatch’) or otherwise results directly attributable to the acquisition or issue of in more relevant information. the financial asset or the financial liability. b. The irrevocable designation referred to in Section 2.5.2 Classification of Financial Instruments 4.1.3(a) above is approved by management 2.5.2.1 Financial Assets ALCO. a. On first recognition, a financial asset is classified based on the Bank’s business model for 2.5.3 Impairment Assessment of Financial Instruments managing the asset and the asset’s contractual cash flow characteristics, as follows: Policy Statements a. Orient Bank operates an impairment model ii. Amortised cost—a financial asset is that will form the basis for determination of a measured at amortised cost if both of the loss allowance for expected credit losses on all following conditions are met: relevant financial instruments.

41 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.5 Financial Instruments (continued) b. The expected credit loss (ECL) amount is possible within 12 months after the reporting determined on a probability-weighted basis date (or a shorter period if the expected life of as the difference between the cash flows that the financial instrument is less than 12 months). are due to the bank in accordance with the 12-month ECLs shall be weighted by the contractual terms of a financial instrument and probability of such a default occurring. the cash flows that the bank expects to receive. c. The impairment model applies to all of the Lifetime expected credit losses following financial instruments: d. Lifetime ECLs are the losses that result from all i. Financial assets measured at amortised possible default events over the expected life of cost; the financial instrument. e. With the exception of purchased or originated ii. Financial assets mandatorily measured at credit-impaired financial assets, the loss FVTOCI; allowance for financial instruments is measured iii. Loan commitments when there is a present at an amount equal to lifetime expected losses obligation to extend credit (except where if the credit risk of a financial instrument has these are measured at FVTPL); increased significantly since initial recognition, iv. Financial guarantee contracts to which unless the credit risk of the financial instrument IFRS 9 is applied (except those measured is low at the reporting date in which case it can at FVTPL); and be assumed that credit risk on the financial instrument has not increased significantly since v. Lease receivables within the scope of IAS initial recognition. 17 Leases. d. The Bank assesses a loss allowance for all financial instruments at each reporting date, 2.5.6 Significant Increase in Credit Risk and accordingly applies and discloses the loss a. Credit risk is considered low if there is a low risk allowance in the relevant sections of its financial of default, the borrower has a strong capacity statements. to meet its contractual cash flow obligations in the near term and adverse changes in economic and business conditions in the longer term 2.5.4 The impairment assessment model may, but will not necessarily, reduce the ability a. Recognition of expected credit losses (ECLs) of the borrower to fulfil its contractual cash flow b. The Bank measures a loss allowance for a obligations. financial instrument at an amount equal to the b. The assessment of whether there has been 12-month or lifetime expected credit losses a significant increase in credit risk is based on depending on whether or not the credit risk increase in the probability of a default occurring on that financial instrument has increased since initial recognition and shall consider both significantly since initial recognition. the qualitative and quantitative factors including:

2.5.5 Time Horizons for Computation of ECLs Quantitative factors may include: a. ECLs are measured based on the risk of i. When contractual payments are more than default over one of two different time horizons, 30 days past due – except where there is depending on whether the credit risk of the verifiable evidence that credit risk has not borrower has increased significantly since the increased since initial recognition exposure was first recognised. The assessment of significant increase in credit risk is explained Qualitative factors may include: below. i. When a credit facility has been maintained on Alert category (in line with the Credit b. The loss allowance for those exposures that have Policy) for over 6 months; not increased significantly in credit risk (‘stage ii. An actual or expected significant change 1’ exposures) shall be based on 12-month in the financial instrument’s external credit ECLs. The allowance for those exposures that rating; have suffered a significant increase in credit risk (‘stage 2’ and ‘stage 3’ exposures) is based on iii. An actual or expected internal credit rating lifetime ECLs as defined below. downgrade for the borrower; iv. Existing or forecast changes in in business, 12-month expected credit losses financial or economic conditions that may c. 12-month ECLs are the portion of the lifetime cause significant change in the borrower’s ECLs that represent the ECLs that result from ability to meet debt obligations; default events on a financial instrument that are v. Actual or expected significant change in

42 Financial Statements

operating results of the borrower; conditions and factors including GDP growth vi. Significant increase in credit risk on other rates, inflation, and the Central Bank rate (CBR). financial instruments of the same borrower; d. For loans advances, the Bank determines PDs for and the following segments: overdrafts; mortgages; unsecured and short-term loans; VAF loans; and vii. Significant changes in regulatory or staff loans. technological environment of the borrower e. In determining the probability of default for credit that may affect their ability to meet debt facilities, management takes into account all obligations. known factors and signs of potential default as highlighted in the Bank’s Credit policy. 2.5.7 Individual vs Collective Assessment of Loss Allowance 2.5.9 Exposure at Default (EAD) a. The Bank measures ECLs on individually large In determining the EAD particularly for stage 2 exposures and credit-impaired loans on an exposures, the Bank considers the expected changes individual basis. Where less borrower-specific in the balance outstanding over the lifetime of the loan information is available, ECLs are measured on exposure that are permitted by the current contractual a collective basis. terms, including: b. In order to measure a loss allowance on a collective basis, the Bank groups its exposures i. Required repayments/ amortisation into segments on the basis of shared credit risk schedule characteristics, including: geographical region, ii. Full early repayment (e.g. early refinancing) type of customer (such as wholesale or retail), iii. Monthly overpayments (i.e. payments over industry, product type, customer rating, date of and above required repayments but not for initial recognition, term to maturity, the quality of the full amount of the loan) collateral and the loan to value (LTV) ratio. c. The Bank on an annual basis, performs iv. Changes in utilisation of an undrawn procedures to ensure that the groups of commitment within agreed credit limits in exposures used in collective assessment of advance of default ECLs continue to share credit characteristics, v. Credit mitigation actions that can be taken and to re-segment the portfolio when necessary, prior to default in the light of changes in credit characteristics over time. 2.5.10 Loss Given Default (LGD) a. In arriving at the LGD for secured exposures, the 2.5.8 Probability of Default (PD) Bank considers the following factors: a. Management determines and applies a probability i. forecasts of future collateral valuations, of default (PD) for each financial instrument that including expected sale discounts; reflects an unbiased current view of the future free of any conservatism or optimism. The PD ii. time to realisation of collateral (and other shall be of two types as follows: recoveries); i. The 12-month PD is the estimated iii. allocation of collateral across exposures probability of default occurring within the where there are a number of exposures next 12 months (or over the remaining life to the same counterparty (cross- of the financial instrument if that is less collateralisation); and than 12 months); this is used to calculate iv. External costs of realisation of collateral. 12-month ECLs for stage 1 exposures; b. For unsecured exposures, the Bank determines ii. The Lifetime PDs is the estimated probability the recovery rate of written off facilities over a of a default occurring over the remaining life three-year period in order to determine the LGD. of the financial instrument, and is used to c. Collateral values for secured exposures reflect the calculate lifetime ECLs for ‘stage 2’ and amount and timing of cash flows expected from ‘stage 3’ exposures. foreclosure irrespective of whether foreclosure is probable. b. The Bank uses 4-year historical data to arrive at the 12-month and life-time PDs for the different 2.5.11 Discount Rate segments/categories of the applicable financial a. To reflect time value, expected losses are instruments. This is achieved through analysing discounted to the reporting date using the the movement of exposures between different effective interest rate of the asset (or an risk buckets over time. approximation thereof) that was determined at c. In forecasting the PDs based on the historical initial recognition. trends, the Bank incorporates forecast economic b. A “credit-adjusted effective interest” rate is used for expected credit losses of purchased or

43 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.5 Financial Instruments (continued)

originated credit-impaired financial assets. of the financial asset have occurred to the holder of a c. Expected credit losses of undrawn loan financial asset: commitments are discounted by using the i. Significant financial difficulty of the issuer or effective interest rate (or an approximation borrower; thereof) that will be applied when recognising the financial asset resulting from the commitment. ii. A breach of contract, such as a default or past-due event for over 90 days; If the effective interest rate of a loan commitment iii. The lenders for economic or contractual cannot be determined, the discount rate reflects reasons relating to the borrower’s financial the current market assessment of time value of difficulty granted the borrower a concession money and the risks that are specific to the cash that would not otherwise be considered; flows but only if, and to the extent that, such iv. It becoming probable that the borrower risks are not taken into account by adjusting will enter bankruptcy or other financial the discount rate. This approach is also used reorganisation; to discount expected credit losses of financial guarantee contracts. v. The disappearance of an active market for the financial asset because of financial 2.5.12 Credit-Impaired Financial Asset difficulties; or A financial asset is considered credit-impaired when one or more of the following events that have a vi. The purchase or origination of a financial significant impact on the expected future cash flows

asset at a deep discount that reflects incurred credit losses. Summary of the three-stage impairment assessment model

Parameter Stage 1 Stage 2 Stage 3 Portfolio classification: Performing Under-performing Non-performing Timing or trigger: Initial recognition Significant increase in Credit impaired asset credit risk ECL calculation: 12-month Lifetime Lifetime Basis of revenue EIR on carrying amount EIR on gross carrying EIR on amortised cost recognition: amount EIR = Effective interest rate

2.5.13 Presentation spot rates at the date the transaction first The impairment losses, including reversals of qualifies for recognition. impairment losses and impairment gains (in the case of purchased or originated credit-impaired financial Monetary assets and liabilities denominated in foreign assets), are presented in a separate line item in the currencies are translated at the functional currency statement of profit or loss and other comprehensive spot rates of exchange at the reporting date. income. Differences arising on settlement or translation of monetary items are recognised in profit or loss. 2.6 FOREIGN CURRENCY TRANSLATION Non-monetary items that are measured in terms of

historical cost in a foreign currency are translated using a. Functional and presentation currency the exchange rates at the dates of the recognition. Items included in the consolidated and separate’s Non-monetary items measured at fair value in a financial statements are items/transactions measured using the currency of the primary foreign currency are translated using the exchange economic environment in which the entity rates at the date when the fair value is measured. operates (‘the functional currency’). The consolidated and separate financial statements The gain or loss arising on translation of non-monetary are presented in Uganda shillings and figures are items measured at fair value is treated in line with the stated in thousands of Uganda shillings. recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items b. Transactions and balances whose fair value gain or loss is recognised in OCI or Transactions in foreign currencies are initially profit or loss are also recognised in OCI or profit or recorded at their respective functional currency loss, respectively).

44 Financial Statements

Non–monetary items that are measured at historical reliably. The carrying amount of the replaced part is cost in a foreign currency are translated using the derecognised. All other repair and maintenance costs spot exchange rates as at the date of recognition. are charged to profit or loss during the financial period in which they are incurred. 2.7 SALE AND REPURCHASE AGREEMENTS Buildings are measured at fair value and in case Securities sold subject to repurchase agreements for the building, less accumulated depreciation (‘repos’) are reclassified in the financial statements as and impairment losses recognised at the date of pledged assets when the transferee has the right by revaluation. Valuations are performed with sufficient contract or custom to sell or re-pledge the collateral; frequency to ensure that the carrying amount of a the counterparty liability is included in deposits from revalued asset does not differ materially from its fair banks or deposits from customers, as appropriate. value. A revaluation surplus is recorded in OCI and Securities purchased under agreements to resell credited to the asset revaluation surplus in equity. (‘reverse repos’) are recorded as loans and advances However, to the extent that it reverses a revaluation to other banks or customers, as appropriate. The deficit of the same asset previously recognised in profit difference between sale and repurchase price is or loss, the increase is recognised in profit and loss. treated as interest and accrued over the life of the A revaluation deficit is recognised in the statement of agreements using the effective interest method. profit or loss, except to the extent that it offsets an Securities lent to counterparties are also retained in existing surplus on the same asset recognised in the asset revaluation surplus. the financial statements. An annual transfer between retained earnings and 2.8 OFFSETTING FINANCIAL revaluation reserves is made for the difference between depreciation based on the revalued carrying INSTRUMENTS amount of the asset and depreciation based on Financial assets and liabilities are offset and the the asset’s original cost. Additionally, accumulated net amount reported in the statement of financial depreciation as at the revaluation date is eliminated position when there is a currently enforceable legal against the gross carrying amount of the asset and right to offset the recognised amounts and there is an the net amount is restated to the revalued amount intention to settle on a net basis or realise the asset of the asset. Upon disposal, any revaluation surplus and settle the liability simultaneously. relating to the particular asset being sold is transferred to retained earnings. 2.9 CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in hand, Depreciation of assets is calculated using the straight- deposits held at call with banks and other short-term line method to allocate their cost to their residual highly liquid investments with original maturities of values over their estimated useful lives, as follows: three months or less.For the purposes of the statement of cash flows, cash and cash equivalents comprise Buildings 7% balances with less than three months` maturity from Shorter of useful lives Leasehold improvements the date of acquisition, including cash with central and lease terms banks, treasury bills and other eligible bills, loans and Furniture, Fixtures, Strong 12.5% advances to banks, amounts due from other banks room & Safes and government securities. Cash and cash equivalent exclude the cash reserve requirement held with the Office Equipment 20.0% Bank of Uganda. Motor vehicles 25.0% Computer Equipment, 33.3% 2.10 PROPERTY AND EQUIPMENT ATM, POS & SWIFT Property and equipment comprise mainly office equipment, computer hardware, furniture & fittings The assets’ residual values, depreciation methods and and leasehold land. All equipment and land used by useful lives are reviewed, and adjusted if appropriate, the Bank is stated at historical cost less depreciation. at the end of each reporting period. Assets are Historical cost includes expenditure that is directly reviewed for impairment whenever events or changes attributable to the acquisition of the items. in circumstances indicate that the carrying amount may not be recoverable. Subsequent expenditures are included in the asset’s carrying amount or are recognised as a separate asset, Property and equipment is derecognised on disposal as appropriate, only when it is probable that future or when no future economic benefits are expected economic benefits associated with the item will flow from its use. Any gain or loss arising on derecognition to the Bank and the cost of the item can be measured of the asset (calculated as the difference between

45 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.7 Financial Liabilities (continued) the net disposal proceeds and the carrying amount The useful lives of intangible assets are assessed as of the asset) is recognised in other operating income either finite or indefinite. Intangible assets with finite in the statement of profit or loss in the year the asset lives are amortised over the useful economic life is derecognised. Detailed disclosures are provided in and assessed for impairment whenever there is an Note 24. indication that the intangible asset may be impaired. The amortisation period and the amortisation method Gains and losses on disposals are determined by for an intangible asset with a finite useful life are comparing proceeds with carrying amount. These reviewed at least at the end of each reporting period. are included in ‘other operating expenses’ in profit or loss.” The bank assesses the fair value of the buildings Changes in the expected useful life or the expected at the end of each reporting period to determine the pattern of consumption of future economic benefits frequency of revaluation. If the difference between the embodied in the asset are considered to modify the fair value of the buildings and their respective carrying amortisation period or method, as appropriate, and amounts is insignificant, the buildings will be revalued are treated as changes in accounting estimates. The every five years. amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss in the expense category that is consistent with the 2.11 INTANGIBLE ASSETS function of the intangible assets. Costs associated with maintaining computer software programmes are recognised as an expense Gains or losses arising from derecognition of an as incurred. Development costs that are directly intangible asset are measured as the difference attributable to the design and testing of identifiable between the net disposal proceeds and the and unique software products controlled by the carrying amount of the asset and are recognised Bank are recognised as intangible assets when the in the statement of profit or loss when the asset is following criteria are met: ‚‚ It is technically feasible to complete the software derecognised. product so that it will be available for use; ‚‚ Management intends to complete the software 2.12 IMPAIRMENT OF NON-FINANCIAL product and use or sell it; ASSETS ‚‚ There is an ability to use or sell the software The Bank assesses, at each reporting date, whether product; there is an indication that an asset may be impaired. ‚‚ It can be demonstrated how the software If any indication exists, or when annual impairment product will generate probable future economic testing for an asset is required, the Bank estimates the benefits; asset’s recoverable amount. An asset’s recoverable ‚‚ Adequate technical, financial and other resources amount is the higher of an asset’s or CGU’s fair to complete the development and to use or sell value less costs of disposal and its value in use. The the software product are available; and recoverable amount is determined for an individual ‚‚ The expenditure attributable to the software asset, unless the asset does not generate cash product during its development can be reliably inflows that are largely independent of those from measured. other assets or group’s assets. When the carrying

amount of an asset or CGU exceeds its recoverable Directly attributable costs that are capitalised as amount, the asset is considered impaired and is part of the software product include the software written down to its recoverable amount. development employee costs and an appropriate portion of relevant overheads. In assessing value in use, the estimated future cash flows are discounted to their present value using a Other development expenditures that do not meet pre-tax discount rate that reflects current market these criteria are recognised as an expense as assessments of the time value of money and the incurred. Development costs previously recognised risks specific to the asset. In determining fair value as an expense are not recognised as an asset in a less costs of disposal, recent market transactions subsequent period. Computer software development are taken into account. If no such transactions can costs recognised as assets are amortised over be identified, an appropriate valuation model is used. their estimated useful lives, which does not exceed These calculations are corroborated by valuation three years. Acquired computer software licences multiples, quoted share prices for publicly traded are capitalised on the basis of the costs incurred to companies or other available fair value indicators. acquire and bring to use the specific software. These costs are amortised over the expected useful lives. Impairment losses of continuing operations are Software has a maximum expected useful life of 5 recognised in the statement of profit or loss in years. expense categories consistent with the function of

46 Financial Statements

the impaired asset, except for properties previously is determined by considering the class of obligations revalued with the revaluation taken to OCI. For such as a whole. A provision is recognised even if the properties, the impairment is recognised in OCI up to likelihood of an outflow with respect to any one item the amount of any previous revaluation. included in the same class of obligations may be small.

2.13 EMPLOYEE BENEFITS Provisions are measured at the present value of the expenditures expected to be required to settle the a. Pension obligations obligation using a pre-tax rate that reflects current The Bank operates various pension schemes. market assessments of the time value of money and The schemes are generally funded through the risks specific to the obligation. The increase in the payments to insurance companies or trustee- provision due to passage of time is recognised as administered funds, determined by periodic interest expense. actuarial calculations. The Bank has a defined contribution scheme. Provisions are recognised when the Bank has a present legal or constructive obligation as a result A defined contribution plan is a pension plan of past events, where it is probable that an outflow under which the Bank pays fixed contributions of resources embodying economic benefits will be into a separate entity. The Bank has no legal required to settle the obligation, and a reliable estimate or constructive obligations to pay further of the amount of the obligation can be made. contributions if the fund does not hold sufficient assets to pay all employees the benefits relating

to employee service in the current and prior 2.15 INCOME TAX

periods. a. Current income tax Current tax assets and liabilities for the current and prior years are measured at the amount For defined contribution plans, the Bank pays contributions to publicly or privately administered expected to be recovered from, or paid to, the pension insurance plans on a mandatory, taxation authorities. The tax rates and tax laws contractual or voluntary basis. The contributions used to compute the amount are those that are recognised as employee benefit expense are enacted, or substantively enacted, by the when they are due. Prepaid contributions are reporting date in the countries where the Bank recognised as an asset to the extent that a cash operates and generates taxable income. refund or a reduction in the future payments is available. Current income tax relating to items recognised directly in equity is recognised in equity and not b. Retirement benefit obligations in the statement of profit or loss. Management The Consolidated contributes to the statutory periodically evaluates positions taken in the National Social Security Fund (NSSF) on behalf tax returns with respect to situations in which of its employees. This is a defined contribution applicable tax regulations are subject to scheme registered under the NSSF Act. interpretation and establishes provisions where appropriate. The group’s obligations under the scheme are specific contributions legislated from time to time b. Deferred income tax and are currently limited to 10% of the respective Deferred tax is provided on temporary differences employees’ salaries. The group’s contributions at the reporting date between the tax bases of are charged to the profit or loss in the year in assets and liabilities and their carrying amounts which they relate. for financial reporting purposes.

2.14 PROVISIONS Deferred tax liabilities are recognised for all taxable Provisions for restructuring costs and legal claims temporary differences, except: are recognised when: the Bank has a present legal or ‚‚ Where the deferred tax liability arises from the constructive obligation as a result of past events; it is initial recognition of goodwill or of an asset or probable that an outflow of resources will be required liability in a transaction that is not a business to settle the obligation; and the amount has been combination and, at the time of the transaction, reliably estimated. Provisions are not recognised for affects neither the accounting profit nor taxable future operating losses. profit or loss ‚‚ In respect of taxable temporary differences Where there are a number of similar obligations, the associated with investments in subsidiaries, likelihood that an outflow will be required in settlement where the timing of the reversal of the temporary

47 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 2. Summary of significant accounting policies (continued) 2.15 Income tax (continued)

differences can be controlled and it is probable of the arrangement and requires an assessment of that the temporary differences will not reverse in whether the fulfilment of the arrangement is dependent the foreseeable future on the use of a specific asset or assets or whether the arrangement conveys a right to use the asset. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that Leases are divided into finance leases and operating it is no longer probable that sufficient taxable profit leases. will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax a. The Bank as the lessee assets are reassessed at each reporting date and are i. Operating lease recognised to the extent that it becomes probable Leases in which a significant portion of the that future taxable profit will allow the deferred tax risks and rewards of ownership are retained asset to be recovered. by another party, the lessor, are classified as operating leases. Payments, including pre- Deferred tax assets and liabilities are measured at the payments, made under operating leases (net tax rates that are expected to apply in the year when of any incentives received from the lessor) are the asset is realised or the liability is settled, based charged to profit or loss on a straight-line basis on tax rates (and tax laws) that have been enacted or over the period of the lease. substantively enacted at the reporting date. The measurement of deferred tax reflects the tax The total payments made under operating leases consequences that would follow from the manner are charged to ‘other operating expenses’ on a in which the Consolidated expects at the end of straight-line basis over the period of the lease. the reporting period to recover to settle the carrying When an operating lease is terminated before the amounts of its assets and liabilities. lease period has expired, any payment required to be made to the lessor by way of penalty is

recognised as an expense in the period in which Current and deferred taxes are recognised as income termination takes place. tax benefits or expenses in the income statement The leases entered into by the Bank are primarily except for tax related to the fair value remeasurement operating leases. of available-for-sale assets, foreign exchange differences and the net movement on cash flow hedges, which are charged or credited to OCI. b. The Bank as the lessor When assets are leased out under a finance These exceptions are subsequently reclassified lease, the present value of the lease payments from OCI to the income statement together with is recognised as a receivable. The difference the respective deferred loss or gain. The Bank also between the gross receivable and the present recognises the tax consequences of payments and value of the receivable is recognised as unearned issuing costs, related to financial instruments that are finance income. Lease income is recognised over classified as equity, directly in equity. the term of the lease using the net investment method (before income tax), which reflects a The Bank only off-sets its deferred tax assets against constant periodic rate of return. liabilities when there is both a legal right to offset and it is the Bank’s intention to settle on a net basis. 2.19 INTEREST INCOME AND EXPENSE Interest income and expense for all interest-bearing financial instruments are recognised in profit or loss 2.16 DIVIDEND PAYABLE using the effective interest method. Dividends on ordinary shares are charged to equity in the period in which they are declared. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial 2.17 SHARE CAPITAL liability and of allocating the interest income or interest Ordinary shares are classified as ‘share capital’ in expense over the relevant period. The effective interest equity. Any premium received over and above the par rate is the rate that exactly discounts estimated future value of the shares is classified as ‘share premium’ in cash payments or receipts through the expected equity. life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the 2.18 LEASES financial asset or financial liability. When calculating The determination of whether an arrangement is a the effective interest rate, the Bank estimates cash lease, or contains a lease, is based on the substance flows considering all contractual terms of the financial

48 Financial Statements

instrument (for example, prepayment options) but part at the same effective interest rate as the other does not consider future credit losses. participants.

The calculation includes all fees and points paid or Commission and fees arising from negotiating, or received between parties to the contract that are an participating in the negotiation of, a transaction for a integral part of the effective interest rate, transaction third party – such as the arrangement of the acquisition costs and all other premiums or discounts. of shares or other securities, or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Once a financial asset or a Consolidated of similar financial assets has been written down as a result of an Portfolio and other management advisory and impairment loss, interest income is recognised using service fees are recognised based on the applicable the rate of interest used to discount the future cash service contracts, usually on a time-apportionate flows for the purpose of measuring the impairment basis. Performance-linked fees or fee components loss. are recognised when the performance criteria are fulfilled. 2.19.2 Calculation of Interest Revenue Interest revenue is calculated based on the status of the asset with regard to credit classification as follows: 2.21DIVIDEND INCOME Dividends are recognised in profit or loss when the a. In the case of a financial asset that is not Bank’s right to receive payment is established. a purchased or originated credit-impaired financial asset and for which there is no objective evidence of impairment at 2.22 ACCEPTANCES AND LETTERS OF the reporting date, interest revenue is CREDIT calculated by applying the effective interest Acceptances and letters of credit are accounted for rate method to the gross carrying amount. as off-balance sheet transactions and disclosed as b. In the case of a financial asset that is not contingent liabilities. a purchased or originated credit-impaired financial asset but subsequently has 2.23 FINANCIAL GUARANTEE become credit-impaired, interest CONTRACTS revenue shall be calculated by applying Financial guarantee contracts are contracts that the effective interest rate to the amortised require the issuer to make specified payments to cost balance, which comprises the gross reimburse the holder for a loss it incurs because a carrying amount adjusted for any loss specified debtor fails to make payment when due, in allowance. accordance with the terms of a debt instrument. Such c. In the case of purchased or originated financial guarantees are given to other Banks, financial credit-impaired financial assets, institutions and other bodies on behalf of customers interest revenue shall be recognised by to secure loans, overdrafts and other facilities. applying the credit-adjusted effective Financial guarantees are initially recognised in the interest rate to the amortised cost carrying financial statements at fair value on the date the amount. The credit-adjusted effective guarantee was given. Subsequent to initial recognition, interest rate is the rate that discounts the the Bank’s liabilities under such guarantees are cash flows expected on initial recognition measured at the higher of the initial investment, less (explicitly taking account of expected credit amortisation calculated to recognise in the income losses as well as contractual terms of the statement the fee income earned on a straight line instrument) back to the amortised cost at basis over the life of the guarantee and the best initial recognition. estimate of the expenditure required to settle any financial obligation arising at the statement of financial 2.20 FEE AND COMMISSION INCOME position date. Fees and commissions are generally recognised on an accrual basis when the service has been provided. The Bank’s business involves taking on risks in a Loan commitment fees for loans that are likely to targeted manner and managing them professionally. be drawn down are deferred (together with related The core functions of the Bank’s risk management direct costs) and recognised as an adjustment to the are to identify all key risks for the Bank, measure effective interest rate on the loan. Loan syndication these risks, manage the risk positions and determine fees are recognised as revenue when the syndication capital allocations. The Bank regularly reviews its risk Ü has been completed and the Bank has retained no management policies and systems to reflect changes part of the loan package for itself or has retained a in markets, products and best market practice.

49 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued)

3. FINANCIAL RISK MANAGEMENT 3.1.1 Credit risk measurement The Bank’s aim is to achieve an appropriate balance between risk and return and minimise potential Loans and advances (including loan commitments adverse effects on the Bank’s financial performance. and guarantees)

The Bank defines risk as the possibility of losses or profits foregone, which may be caused by internal or The estimation of credit exposure is complex and external factors. requires the use of models, as the value of a product varies with changes in market variables, expected Financial Risk Management is overseen by the Risk cash flows and the passage of time. The assessment Department and carried out primarily by the Credit of credit risk of a portfolio of assets entails further and Treasury Departments. Bank Treasury identifies, estimations as to the likelihood of defaults occurring, evaluates and hedges financial risks in close co- of the associated loss ratios and of default correlations operation with the Bank’s operating units. The Board between counterparties. provides written principles for overall risk management, as well as written policies covering specific areas, The Bank has developed models to support the such as foreign exchange risk, interest rate risk, credit quantification of the credit risk. These rating and risk, use of derivative financial instruments and non- scoring models are in use for all key credit portfolios derivative financial instruments. In addition, internal and form the basis for measuring default risks. audit is responsible for the independent review of risk In measuring credit risk of loan and advances at management and the control environment. a counterparty level, the Bank considers three components: (i) the ‘probability of default’ (PD) by the The risks arising from financial instruments to which client or counterparty on its contractual obligations; the Bank is exposed are financial risks, which includes (ii) current exposures to the counterparty and its credit risk, liquidity risk and market risk. likely future development, from which the Bank

derive the ‘exposure at default’ (EAD); and (iii) the 3.1 CREDIT RISK likely recovery ratio on the defaulted obligations (the Credit risk is the risk of suffering financial loss, should ‘loss given default’) (LGD). The models are reviewed any of the Bank’s customers, clients or market counterparties fail to fulfil their contractual obligations regularly to monitor their robustness relative to actual to the Bank. Credit risk arises mainly from commercial performance and amended as necessary to optimise and consumer loans and advances, credit cards, and their effectiveness. loan commitments arising from such lending activities, but can also arise from credit enhancement provided, These credit risk measurements, which reflect financial guarantees, letters of credit, endorsements expected loss (the ‘expected loss model’), are required and acceptances. by the Basel Committee on Banking Regulations and the Supervisory Practices (the Basel Committee) The Bank is also exposed to other credit risks and are embedded in the Bank’s daily operational arising from investments in debt securities and other management. The operational measurements can exposures arising from its trading activities (‘trading be contrasted with impairment allowances required exposures’), including non-equity trading portfolio under IAS 39, which are based on losses that have assets, derivatives and settlement balances with been incurred at the reporting date (the ‘incurred loss market counterparties and reverse repurchase loans. model’) rather than expected losses. Credit risk is the single largest risk for the Bank’s business; the directors therefore carefully manage the The Bank’s internal ratings scale and mapping of exposure to credit risk. The credit risk management external ratings as supplemented by the Bank’s own and control are centralised in a credit risk management assessment through the use of internal rating tools team, which provides reports to the Management and are as follows: Board Credit Committees

50 Financial Statements

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 Items that are considered to be impaired, but are not yet considered final losses because of pending factors, which may strengthen the quality 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 of credit risk wherever they are identified − in to mitigate credit risk. The most traditional of these is particular, to individual counterparties and banks, and the taking of security for loans and advances, which to industries. is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or The Bank structures the levels of credit risk it undertakes credit risk mitigation. by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and The principal collateral types for loans and advances to geographical and industry segments. Such risks are: are monitored on a revolving basis and subject to ‚‚ Mortgages over residential properties. ‚‚ Charges over business assets such as premises, an annual or more frequent review, when considered inventory and accounts receivable necessary. Limits on the level of credit risk by product, ‚‚ Charges over financial instruments such as debt industry sector and country are approved quarterly by securities and equities. the Board of Directors. Collateral held and other credit enhancements The exposure to any one borrower including banks The Consolidated holds collateral and other credit and brokers is further restricted by sub-limits covering enhancements to customers in the form of mortgage on- and off-balance sheet exposures, and daily interests over property, other registered securities delivery risk limits in relation to trading items such as over assets, and guarantees. Estimates of fair value forward foreign exchange contracts. Actual exposures are based on the value of collateral assessed at the against limits are monitored daily. time of borrowing, and are regularly updated through the life of the credit facility. Collateral requirements Lending limits are reviewed in the light of changing are based on the individual risk rating of borrowers as market and economic conditions and periodic credit stipulated in the Bank’s policy Ü reviews and assessments of probability of default. Some other specific control and mitigation measures The table below sets out the principal types of are outlined below: collateral held against different types of financial assets.

51 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.1 Credit Risk (continued)

Percentage 31 December 31 December Principal type Type of credit exposure 2018 2017 of collateral held Derivative assets held for risk management 100% 100% Cash Reverse sale and repurchase agreements 100% 100% Cash Loans and advances to retail customers Secured 57% 29% Unsecured 43% 71% Loans and advances to corporate customers Secured 96% 99% Unsecured 4% 1%

Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument.

The table below shows the collateral coverage for secured loans as at year-end. The type of collateral held includes land titles and buildings mainly. As at 31 December 2018 Netting off Total loan agreements Collateral less Collateral over portfolio (cash secured) than 100% 100% Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Gross loans and advances 345,210,623 27,353,473 144,975,825 172,881,325 Total 345,210,623 27,353,473 144,975,825 172,881,325 As at 31 December 2017 Gross loans and advances 318,487,259 5,757,188 139,848,746 172,881,325

Total 318,487,259 5,757,188 139,848,746 172,881,325

Longer-term finance and lending to corporate entities of the overall lending limits with customers, are generally secured; revolving individual credit together with potential exposures from market facilities are generally unsecured. In addition, in movements. Collateral or other security is not order to minimise the credit loss, the Bank will seek always obtained for credit risk exposures on additional collateral from the counterparty as soon as these instruments, except where the Bank impairment indicators are identified for the relevant requires margin deposits from counterparties. individual loans and advances. Settlement risk arises in any situation where a b. Lending limits (for derivatives and loan payment in cash, securities or equities is made books) in the expectation of a corresponding receipt The Bank maintains strict control limits on net in cash, securities or equities. Daily settlement open derivative positions (that is, the difference limits are established for each counterparty to between purchase and sale contracts) by both cover the aggregate of all settlement risk arising amount and term. The amount subject to credit from the Bank’s market transactions on any risk is limited to expected future net cash inflows single day. of instruments, which in relation to derivatives are only a fraction of the contract, or notional values c. Master netting arrangements used to express the volume of instruments The Bank further restricts its exposure to outstanding. credit losses by entering into master netting arrangements with counterparties with which it This credit risk exposure is managed as part undertakes a significant volume of transactions.

52 Financial Statements

Master netting arrangements do not generally goods to which they relate and therefore carry result in an offset of assets and liabilities of the less risk than a direct loan. statement of financial position, as transactions Commitments to extend credit represent unused are either usually settled on a gross basis or portions of authorisations to extend credit in the under most netting agreements the right of set form of loans, guarantees or letters of credit. off is triggered only on default. With respect to credit risk on commitments to However, the credit risk associated with extend credit, the Bank is potentially exposed favourable contracts is reduced by a master to loss in an amount equal to the total unused netting arrangement to the extent that if a default commitments. However, the likely amount of occurs, all amounts with the counterparty loss is less than the total unused commitments, are terminated and settled on a net basis. as most commitments to extend credit are The Bank’s overall exposure to credit risk on contingent upon customers maintaining specific derivative instruments subject to master netting credit standards (often referred to as financial arrangements can change substantially within a short period, as it is affected by each transaction covenants). subject to the arrangement. The Bank monitors the term to maturity of credit commitments because longer-term d Financial covenants (for credit related commitments generally have a greater degree of commitments and loan books) credit risk than shorter-term commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters 3.1.3 Credit exposure of credit carry the same credit risk as loans. An analysis of the Group’s credit risk exposure per Documentary and commercial letters of credit – class of financial asset, internal rating and “stage” which are written undertakings by the Bank on without taking into account the effects of any behalf of a customer authorising a third party collateral or other credit enhancements is provided in to draw drafts on the Bank up to a stipulated the following tables. Unless specifically indicated, for amount under specific terms and conditions – financial assets, the amounts in the table represent are collateralised by the underlying shipments of gross carrying amounts.

Year ended 2018 Year Ended 2017 Stage 1 Stage 2 Stage 3 12-month Lifetime Lifetime Loans and advances ECL ECL ECL Total IAS 39 Total to customers at amortised cost Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Grade 1: Normal 253,370,123 11,009,639 4,474,251 268,854,013 289,341,691 Grade 2: Watch 1,326,995 64,696,272 78,653 66,101,919 16,488,700 Grade 3: Substandard - - 515,322 515,322 11,264,565 Grade 4: Doubtful - - 1,796,298 1,796,298 1,057,335 Grade 5: Loss - - 10,943,773 10,943,773 334,968 Total gross carrying amount 254,697,118 75,705,911 17,808,297 348,211,326 318,487,259 Loss allowance (796,235) (1,935,998) (11,375,822) (14,108,055) (7,707,183) Carrying amount 253,900,883 73,769,912 6,432,476 334,103,271 310,780,076

53 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Total 6,654,419 1,680,021 5,942,026 1,929,678 9,457,129 Ushs ‘000 4 56,098,122 30,118,938 99,370,083 69,251,145 87,625,918 68,548,038 33,593,375 594,390,440 116,134,635 177,248,124 100,909,583 334,103,271 310,780,076 654,172,562 102,141,413

- - - - - Others 1,929,678 9,457,129 Ushs ‘000 19,814,264 35,574,060 23,843,533 16,771,646 40,615,179 - 15,759,796 130,085,094 133,630,289 128,155,416 143,087,418 ------Public sector - - - - Ushs ‘000 ------retail retail - trade Whole- sale and 9,970,184 8,119,530 Ushs ‘000 84,458,740 - 17,426,048 99,481,673 11,526,671 84,458,740 7,455,864 99,481,673 19,646,202 ------Real estate - 1,688,223 5,177,269 Ushs ‘000 62,329,296 - 27,543,047 31,910,302 62,329,296 25,854,824 52,926,876 37,087,572 52,926,876 ------1,267,532 4,792,462 Ushs ‘000 35,836,624 17,666,341 48,064,433 48,064,433 - - 35,836,624 - 3,524,930 18,826,928 1,160,587 Manufacturing ------1,680,021 Financial 5,942,026 Ushs ‘000 56,098,122 87,625,918 46,654,419 281,680,686 - - institutions 116,134,635 100,909,583 177,248,124 310,612,163 - NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) Risk (continued) 3.1 Credit 3.1.4 Concentration of risks financial assets with credit risk exposure Consolidated At 31 December 2018 Balances with the Central Bank Deposits and balances due from banking institutions Deposits and balances due from Loans to Retail customers: Government securities at Amortised cost Government securities at FVTPL Other assets as follows: to off-balance sheet items are relating risk exposures Credit LCs, Guarantees and performance bonds obligations related Loan commitments and other credit Balances with the Central Bank banking institutions Deposits and balances due from Loans to Retail customers: Government securities – Held-to-maturity Government securities – Held-for-trading Other assets as follows: to off-balance sheet items are relating risk exposures Credit LCs, Guarantees and performance bonds obligations related Loan commitments and other credit At 31 December 2017

54 Financial Statements Total 1,929,679 9,461,556 1,680,021 Ushs ‘000 30,118,938 99,370,083 68,548,038 33,593,375 69,251,145 56,098,122 594,378,802 116,134,635 654,167,008 177,236,485 334,103,271 310,780,076 100,899,602 102,141,413 5,942,026 87,625,918 46,654,419 - - Others - - 1,929,679 Ushs ‘000 19,814,264 23,843,533 16,771,646 15,759,796 40,615,179 35,574,060 143,091,845 133,630,289 128,155,416 9,461,556 130,085,095 ------Public sector - - Ushs ‘000 - - - - - retail retail trade Whole- - - sale and 7,455,864 8,119,530 9,970,184 - - - Ushs ‘000 99,481,673 - 84,458,740 17,426,048 99,481,673 11,526,671 84,458,740 19,646,201 ------Real - estate 1,688,223 5,177,269 Ushs ‘000 27,543,047 52,926,876 62,329,296 52,926,876 31,910,302 62,329,296 25,854,824 37,087,571 ------1,160,587 1,267,532 3,524,930 4,792,462 Ushs ‘000 18,826,928 48,064,433 35,836,624 - - 48,064,433 35,836,624 17,666,341 Manufacturing - - - - 5,942,026 Financial - 1,680,021 Ushs ‘000 87,625,918 56,098,122 46,654,419 - 310,602,182 281,669,047 116,134,635 177,236,485 - - - institutions - 100,899,602 Separate Other assets Government securities at FVTPL At 31 December 2018 Balances with the Central Bank banking institutions Deposits and balances due from Loans and advances to customers Government securities at Amortised cost as follows: to off-balance sheet items are relating risk exposures Credit LCs, Guarantees and performance bonds obligations related Loan commitments and other credit Balances with the Central Bank banking institutions Deposits and balances due from Loans and advances to customers Government securities – Held-to-maturity Other assets LCs, Guarantees and performance bonds obligations related Loan commitments and other credit Government securities – Held-for-trading Credit risk exposures relating to off-balance sheet items are as follows: to off-balance sheet items are relating risk exposures Credit At 31 December 2017

55 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued)

3.2 MARKET RISK estimate. The VAR model assumes a certain The Bank takes on exposure to market risks, which ‘holding period’ until positions can be closed is the risk that the fair value or future cash flows (10 days). It also assumes that market moves of a financial instrument will fluctuate because of occurring over this holding period will follow changes in market prices. Market risks arise from a similar pattern to those that have occurred open positions in interest rate, currency and equity over 10-day periods in the past. The Bank’s products, all of which are exposed to general and assessment of past movements is based on specific market movements and changes in the level data for the past five years. The Bank applies of volatility of market rates or prices such as interest these historical changes in rates, prices, indices, etc. directly to its current positions − a method rates, foreign exchange rates and equity prices. The known as historical simulation. Actual outcomes Bank separates exposures to market risk into either are monitored regularly to test the validity of the trading or non-trading portfolios. assumptions and parameters/factors used in the VAR calculation. The use of this approach does The market risks arising from trading and non-trading not prevent losses outside of these limits in the activities are concentrated in Bank Treasury and event of more significant market movements. monitored by two teams separately. Regular reports are submitted to the Management ALCO and Board As VAR constitutes an integral part of the ALCO Committees and the Board of Directors and Bank’s market risk control regime, VAR limits are heads of each business unit. established by the Board annually for all trading portfolio operations and allocated to business Trading portfolios include those positions arising from units. Actual exposure against limits, together market-making transactions where the Bank acts as with a Bank-wide VAR, is reviewed daily by principal with clients or with the market. Bank Treasury. The quality of the VAR model Non-trading portfolios primarily arise from the interest is continuously monitored by back-testing the rate management of the entity’s retail and commercial VAR results for trading books. All back-testing banking assets and liabilities. Non-trading portfolios exceptions and any exceptional revenues on the also consist of foreign exchange and equity risks profit side of the VAR distribution are investigated, arising from the Bank’s held-to-maturity and available- and all back-testing results are reported to the for-sale financial assets. Board of Directors.

3.2.1 Market risk measurement techniques a. Stress tests The objective of market risk measurement is to Stress tests provide an indication of the potential manage and control market risk exposures within size of losses that could arise in extreme acceptable limits while optimising the return on risk. conditions. The stress tests carried out by The Bank Treasury is responsible for the development Bank Treasury include: risk factor stress testing, of detailed risk management policies and for day-to- where stress movements are applied to each day implementation of those policies. risk category and ad hoc stress testing, which includes applying possible stress events to a. Value at risk specific positions or sectors, or to the Bank’s top The Bank applies a ‘value at risk’ (VAR) 5 borrowers methodology to its trading and non-trading portfolios to estimate the market risk of positions The results of the stress tests are reviewed by held and the maximum losses expected, based senior management in each business unit and upon a number of assumptions for various by the Board of Directors. The stress testing changes in market conditions. The Board sets is tailored to the business and typically uses limits on the value of risk that may be accepted scenario analysis. for the Bank, which are monitored on a daily basis by Bank Treasury. Interest rate risk in the 3.2.2 Foreign exchange risk non-trading book is measured through the use of The Bank takes on exposure to the effects of interest rate repricing gap analysis (Note 3.2.3). fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The VAR is a statistically based estimate of the Board sets limits on the level of exposure by currency potential loss on the current portfolio from and in aggregate for both overnight and intra-day adverse market movements. It expresses the positions, which are monitored daily. The table below ‘maximum’ amount the Bank might lose, but summarises the Bank’s exposure to foreign exchange only to a certain level of confidence (98%). There risk at 31 December 2017. Included in the table are is therefore a specified statistical probability (2%) the Bank’s financial instruments at carrying amounts, that actual loss could be greater than the VAR categorised by currency.

56 Financial Statements

Consolidated and Separated USD EUR GBP Other Total At 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 64,857,191 1,954,368 2,863,069 523,749 70,198,377 Deposits and balances due from banking institutions 67,805,547 1,792,933 4,891,469 235,283 74,725,232 Derivative financial instruments 558,500 - - - 558,500 Investment in subsidiary - - - - - Loans and advances to customers 198,008,915 1,118 - 198,108,751 Other assets 2,725,489 32,236 12,044 - 2,769,769 Total financial assets 333,955,642 3,780,655 7,766,582 759,032 346,261,911 Liabilities Deposits from banks - - - - - Derivative financial instruments 1,250 - - - 1,250 Deposits from customers 321,221,969 3,738,323 7,882,331 202 332,842,825 Refinance loans - - - - - Other liabilities - - - - - Total financial liabilities 321,223,219 3,738,323 7,882,331 202 332,844,075 Net on-balance sheet financial position 12,732,423 42,332 (115,749) 758,830 13,417,836 Credit commitments 18,109,028 - - - 18,109,028

USD EUR GBP Other Total At 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 20,723,278 2,568,727 2,477,233 164,262 25,933,500 Deposits and balances due from banking institutions 107,966,523 1,356,095 2,556,918 63,301 111,942,837 Derivative financial instruments 1,551,136 - - - 1,551,136 Investment in subsidiary Loans and advances to customers 177,076,570 8,261 - 180,978 177,265,809 Other assets 90,775 61,060 - - 151,835 Total financial assets 307,408,282 3,994,143 5,034,151 408,541 316,845,117 Liabilities Deposits from banks - - - - - Derivative financial instruments 4,769 - - - 4,769 Deposits from customers 255,524,571 3,622,733 4,425,232 1,787 263,574,323 Refinance loans - - - - - Other liabilities 4,956,028 103,050 29,753 17 5,088,848 Total financial liabilities 260,485,368 3,725,783 4,454,985 1,804 268,667,940 Net on-balance sheet financial position 46,922,914 268,360 579,166 406,737 48,177,177 Credit commitments 21,071,014 - - 9,044,924 30,115,938 Below is the impact of a 10% change in foreign exchange rates on the profit before tax and equity:

57 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.2 Market Risk (continued)

Below is the impact of a 10% change in foreign exchange rates on the profit before tax and equity: a. Profit before tax USD EUR GBP At 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 (10%) 1,630,058 4,233 (11,575) 10% (1,630,058) (4,233) 11,575 At 31 December 2017 (10%) 4,692,291 26,836 57,917 10% (4,692,291) (26,836) (57,917) b. Equity USD EUR GBP At 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 (10%) 3,284,604 18,785 40,542 10% (3,284,604) (18,785) (40,542) At 31 December 2017 (10%) 3,284,604 18,785 40,542 10% (3,284,604) (18,785) (40,542)

3.2.3 Interest rate risk Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. The Board sets limits on the level of mismatch of interest rate repricing and value at risk that may be undertaken, which is monitored daily by Bank Treasury.

The tables below summarise the Bank’s non-trading book fair value exposure to interest rate risks. It includes the Bank’s financial instruments at carrying amounts, categorised by age.

58 Financial Statements - 542 Total 1,250 63,116 558,500 5,942,026 5,379,898 1,434,289 1,245,839 1,246,381 Ushs ‘000 87,625,919 12,873,816 13,423,459 25,869,200 44,672,557 14,277,859 71,388,323 163,256,415 100,824,140 334,103,271 705,184,087 749,856,644 618,019,250 633,795,764 635,042,145 ------542 Non 1,250 Interest Interest bearing 558,500 5,379,898 1,246,381 Ushs ‘000 12,873,816 13,423,459 25,869,200 44,672,557 14,277,859 1,245,839 (37,941,622) 163,256,415 176,688,731 221,361,288 200,351,244 214,630,353 215,876,734 ------Over 5 years 1,000,000 2,969,722 Ushs ‘000 11,206,785 15,176,507 15,176,507 15,176,507 ------Over 1 year 316,658 316,658 316,658 Ushs ‘000 45,991,589 173,753,544 219,745,134 219,745,134 219,428,477 ------7 to 12 Months 5,532,181 Ushs ‘000 18,788,397 50,120,838 74,441,415 74,441,415 (33,609,693) 108,051,108 108,051,108 108,051,108 ------4 to 6 Months Ushs ‘000 16,862,126 41,597,432 58,459,558 58,459,558 42,371,887 42,371,887 42,371,887 16,087,670 ------0 to 3 63,116 Months 409,846 4,983,807 1,434,289 Ushs ‘000 89,617,354 65,661,735 160,672,742 160,672,742 266,928,352 268,425,757 268,425,757 (107,753,015) Consolidated As at 31 December 2018 Assets Cash and balances with the Central Bank Deposits and balances due from banking institutions Deposits and balances due from Derivative financial instruments Government securities at Amortised cost Government securities at FVTPL Loans and advances to customers Other assets Total financial assets Total Property and equipment Property Operating lease prepayments Intangible assets Deferred income tax asset Deferred Total non-financial assets Total Total assets Total Liabilities banks Deposits from Derivative financial instruments Deposits from customers Deposits from Refinance loans Other liabilities Total financial liabilities Total Other liabilities income tax liability Deferred non-financial liabilities Total Total liabilities Total Interest sensitivity gap Interest

59 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 Total 5,742 - 3,275,227 - - Ushs ‘000 68,914,550 12,818,688 46,654,419 340 340 4,769 567,855,241 680,937,424 310,780,076 567,854,901 44,167,973 177,248,124 83,949 554,792,435 155,060 16,896,456 23,990,548 93,832,065 636,769,451 1,680,021 1,551,136 5,023,610 - - Non Interest Interest bearing - Ushs ‘000 - 16,896,456 12,818,688 - - - - - 218,977,746 144,574,784 218,977,406 (118,570,595) 340 340 93,832,065 4,769 1,551,136 5,023,610 3,275,227 5,742 23,990,548 206,153,949 100,406,811 44,167,973

- - Over 7,007 7,007 - - - - 5 years 7,007 ------4,071,877 4,078,884 4,078,884 4,078,884 Ushs ‘000

Over - 1 year - - - 287,554 287,554 ------Ushs ‘000 203,605 219,241,730 170,951,210 219,529,283 37,562,141 83,949 11,015,932 219,529,283

- - - 7 to 12 - - Months ------8,123,550 1,361,021 - - - 9,092,278 Ushs ‘000 55,264,626 52,934,878 63,388,176 55,264,626 63,388,176 55,264,626

- - 4 to 6 - - - - - Months ------Ushs ‘000 - 50,867,437 20,050,948 20,050,948 50,867,437 50,867,437 (30,816,489) 20,050,948

- 0 to 3 - 319,000 - Months ------Ushs ‘000 - (13,135,523) 62,764,156 229,315,348 242,295,811 242,450,871 155,060 166,232,192 242,450,871 229,315,348 Total non-financial liabilities Total Total non-financial assets Total Total financial assets Total Total financial liabilities Total NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) 3.2 Market Risk (continued) rate risk (continued) 3.2.3 Interest Consolidated As at 31 December 2017 banking institutions Deposits and balances due from Derivative financial instruments Government securities – Held-to-maturity – Held-for-trading Loans and advances to customers Other assets income tax recoverable Current and equipment Property Operating lease prepayments Intangible assets income tax asset Deferred assets Total Liabilities banks Deposits from Derivative financial instruments customers Deposits from Refinance loans Other liabilities Other liabilities income tax liability Deferred liabilities Total sensitivity gap Interest Assets Cash and balances with the Central Bank

60 Financial Statements - - Total 1,250 63,116 558,500 487,422 5,942,027 5,379,898 1,434,289 Ushs ‘000 87,249,444 12,722,029 13,421,651 25,746,973 44,548,522 15,446,756 70,501,489 163,256,415 100,814,159 334,103,271 705,133,267 749,681,789 618,079,011 635,024,421 635,024,421 ------Non 1,250 Interest Interest bearing 558,500 487,422 5,379,898 Ushs ‘000 12,722,029 13,421,651 25,746,973 44,548,522 15,446,756 (38,442,002) 163,256,415 177,024,366 221,572,888 200,411,005 215,859,011 215,859,011 ------Over 5 years 1,000,000 2,969,722 3,969,722 3,969,722 3,969,722 Ushs ‘000 ------Over 1 year 316,658 316,658 316,658 Ushs ‘000 45,991,589 173,753,544 219,745,134 219,745,134 219,428,477 ------7 to 12 Months 5,532,181 Ushs ‘000 18,266,600 18,788,397 50,120,838 92,708,015 92,708,015 (15,343,093) 108,051,108 108,051,108 108,051,108 ------4 to 6 Months Ushs ‘000 10,952,890 16,485,652 41,597,432 69,035,975 69,035,975 42,371,887 42,371,887 42,371,887 26,664,086 ------0 to 3 63,116 Months 409,846 4,983,806 1,434,289 Ushs ‘000 71,594,669 65,661,735 142,650,056 142,650,056 266,928,352 268,425,757 268,425,757 (125,775,701) Bank As at 31 December 2018 Assets Cash and balances with the Central Bank Deposits and balances due from banking institutions Deposits and balances due from Derivative financial instruments Government securities at Amortised cost Government securities at FVTPL Loans and advances to customers Investment in subsidiary Other assets Total financial assets Total Property and equipment Property Intangible assets Deferred income tax asset Deferred Total non-financial assets Total Total assets Total Liabilities banks Deposits from Derivative financial instruments Deposits from customers Deposits from Refinance loans Other liabilities Total financial liabilities Total Other liabilities Total non-financial liabilities Total Total liabilities Total Interest sensitivity gap Interest

61 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 0 Total 80,000 4,898,168 - - 3,275,227 1,551,136 1,680,021 Ushs ‘000 12,736,999 23,990,548 44,241,099 46,654,419 16,895,324 93,832,065 4,769 680,953,469 555,213,730 568,194,507 636,712,370 112,758,962 83,949 177,236,485 310,780,076 155,060 568,194,507 - - - - - Non 80,000 4,898,168 3,275,227 1,551,136 Ushs ‘000 23,990,548 44,241,099 16,895,324 93,832,065 - - - - 144,602,468 206,575,244 219,317,012 100,361,369 (74,714,544) 4,769 219,317,012 Interest bearing Interest 12,736,999 ------Over 7,007 7,007 7,007 5 years - - - - - 4,078,884 4,078,884 4,078,884 4,071,877 Ushs ‘000 ------Over 1 year 203,605 287,554 - - - - Ushs ‘000 37,562,141 208,513,351 287,554 208,225,797 83,949 170,951,210 208,513,351 - - - - - 7 to 12 Months - - - - - 9,092,278 1,361,021 Ushs ‘000 81,654,777 55,264,626 26,390,151 18,266,600 55,264,626 52,934,878 81,654,777 55,264,626 ------4 to 6 Months - - - - - Ushs ‘000 31,003,838 50,867,437 10,952,890 50,867,437 20,050,948 31,003,838 (19,863,599) 50,867,437 ------0 to 3 Months 319,000 - - - - Ushs ‘000 62,764,156 211,100,151 242,295,811 (31,350,720) 148,016,995 242,450,871 211,100,151 242,450,871 155,060 Total financial liabilities Total NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS 3. Financial Risk Management (continued) 3.2 Market Risk (continued) rate risk (continued) 3.2.3 Interest Bank As at 31 December 2017 banking institutions Deposits and balances due from Derivative financial instruments Government securities – Held-to-maturity – Held-for-trading Loans and advances to customers Investment in subsidiary Other assets financial assets Total and equipment Property Intangible assets income tax asset Deferred non-financial assets Total assets Total Liabilities banks Deposits from Derivative financial instruments customers Deposits from Refinance loans Other liabilities Other liabilities liabilities Total sensitivity gap Interest Total non-financial liabilities Total Assets Cash and balances with the Central Bank

62 Financial Statements

Below is the impact of a 10% change in interest rates on the profit before tax and equity: Profit before tax Equity As at 31 December 2018 Ushs ‘000 Ushs ‘000 (10%) (4,451,521) (3,116,064) 10% 4,451,521 3,116,064 As at 31 December 2017 (10%) (3,485,473) (2,439,831) 10% 3,485,473 2,439,831

3.3 LIQUIDITY RISK starting point for those projections is an analysis Liquidity risk is the risk that the Bank is unable to of the contractual maturity of the financial meet its obligations when they fall due as a result liabilities and the expected collection date of the of customer deposits being withdrawn, cash financial assets (Notes 3.3.3). requirements from contractual commitments, or other ‚‚ Bank Treasury also monitors unmatched cash outflows, such as debt maturities or margin calls medium-term assets, the level and type of for derivatives. Such outflows would deplete available undrawn lending commitments, the usage of cash resources for client lending, trading activities overdraft facilities and the impact of contingent and investments. liabilities such as standby letters of credit and guarantees. In extreme circumstances, lack of liquidity could result in reductions in the statement of financial position 3.3.2 Funding approach and sales of assets, or potentially an inability to fulfil Sources of liquidity are regularly reviewed by a lending commitments. The risk that the Bank will be separate team in Bank Treasury to maintain a wide unable to do so is inherent in all banking operations diversification by currency, provider, product and and can be affected by a range of institution-specific term. and market-wide events including, but not limited to, credit events, merger and acquisition activity, 3.3.3 Financial liabilities and assets held for managing systemic shocks and natural disasters. liquidity risk

The table below presents the cash flows payable by 3.3.1 Liquidity risk management process the Bank under financial liabilities and assets held The Bank’s liquidity management process, as carried for managing liquidity risk by remaining contractual out within the Bank and monitored by a separate maturities at the reporting date. The amounts disclosed team in Bank Treasury, includes: in the table are the contractual undiscounted cash ‚‚ Day-to-day funding, managed by monitoring flows, whereas the Bank manages the liquidity risk future cash flows to ensure that requirements based on a different basis (see Note 3.3.1 for details), can be met. This includes replenishment of funds not resulting in a significantly different analysis. as they mature or are borrowed by customers. The Bank maintains an active presence in global money markets to enable this to happen; ‚‚ Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow; ‚‚ Monitoring the liquidity ratios of the statement of financial position against internal and regulatory requirements; and ‚‚ Managing the concentration and profile of debt maturities. ‚‚ Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. The

63 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.3.3 Financial liabilities and assets held for managing liquidity risk (continued)

Consolidated 0 to 3 4 to 6 7 to 12 Over Over As at 31 December months months months 1 year 5 years Total 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 163,256,415 - - - - 163,256,415 Deposits and balances due from banking institutions 100,824,140 - - - - 100,824,140 Derivative financial assets 558,500 - - - - 558,500 Government securities at Amortised cost 4,983,807 16,862,126 18,788,397 45,991,589 1,000,000 87,625,919 Government securities at FVTPL 409,846 - 5,532,181 - - 5,942,026 Loans and advances to customers 65,661,735 41,597,432 50,120,838 173,753,544 2,969,722 334,103,271 Other assets 12,873,816 - - - - 12,873,816 Total financial assets 348,568,259 58,459,558 74,441,416 219,745,133 3,969,722 705,184,088 Liabilities Deposits from banks 1,434,289 - - - - 1,434,289 Derivative financial instruments 1,250 - - - - 1,250 Deposits from customers 467,279,597 42,371,887 108,051,108 316,658 - 618,019,250 Refinance loans 63,116 - - - - 63,116 Other liabilities 14,277,859 - - - - 14,277,859 Total financial liabilities 483,056,111 42,371,887 108,051,108 316,658 - 633,795,764 On-balance sheet liquidity gap (134,487,852) 16,087,671 (33,609,692) 219,428,475 3,969,722 71,388,324 Off-balance sheet items Loan commitments 6,170,692 7,157,082 20,265,600 - - 33,593,374 Guarantees 4,330,701 1,845,074 5,643,270 26,358,877 - 38,177,922 Performance bonds 1,573,394 903,534 381,369 55,000 - 2,913,297 Letters of credit 18,059,057 277,439 9,120,325 - - 27,456,821 Total off-balance sheet items 30,133,844 10,183,129 35,410,564 26,413,877 - 102,141,414 Net Liquidity gap (164,621,696) 5,904,542 (69,020,256) 193,014,598 3,969,722 (30,753,090)

64 Financial Statements

Consolidated 0 to 3 4 to 6 7 to 12 Over Over As at 31 December months months months 1 year 5 years Total 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 93,832,065 - - - - 93,832,065 Deposits and balances due from banking institutions 166,232,192 - 11,015,932 - - 177,248,124 Derivative financial assets 1,551,136 - - - - 1,551,136 Governments Securities

– Held-to-maturity - - 9,092,278 37,562,141 - 46,654,419 – Held-for-trading 319,000 - 1,361,021 - - 1,680,021 Loans and advances to customers 62,764,156 20,050,948 52,934,878 170,951,210 4,078,884 310,780,076 Other assets 5,023,609 - - - - 5,023,609 Total financial assets 329,722,159 20,050,948 74,404,109 208,513,351 4,078,884 636,769,450 Liabilities

Deposits from banks 155,060 - - - - 155,060 Derivative financial instruments 4,769 - - - - 4,769 Deposits from customers 448,449,760 50,867,437 55,264,626 203,605 7,007 554,792,435 Refinance loans - - - 83,949 - 83,949 Other liabilities 12,818,688 - - - - 12,818,688 Total financial liabilities 461,428,277 50,867,437 55,264,626 287,555 7,007 567,854,901 On-balance sheet liquidity gap (131,706,118) (30,816,489) 19,139,484 208,225,796 4,071,876 68,914,549 Off-balance sheet items Loan commitments 7,624,535 22,494,403 - - - 30,118,938 Guarantees 8,218,581 4,645,352 11,233,796 2,703,817 - 26,801,547 Performance bonds 1,446,214 493,722 391,539 - - 2,331,476 Letters of credit 24,898,638 7,241,764 7,977,719 - - 40,118,122 Total off-balance sheet items 42,187,968 34,875,241 19,603,054 2,703,817 - 99,370,080 Net Liquidity gap (173,894,086) (65,691,730) (463,570) 205,521,979 4,071,876 (30,455,531)

65 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.3.3 Financial liabilities and assets held for managing liquidity risk (continued)

Bank 0 to 3 4 to 6 7 to 12 Over Over As at 31 December months months months 1 year 5 years Total 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with the Central Bank 163,256,415 - - - - 163,256,415 Deposits and balances due from banking institutions 100,814,159 - - - - 100,814,159 Derivative financial assets 558,500 - - - - 558,500 Government securities at Amortised cost 4,983,807 16,485,653 18,788,397 45,991,589 1,000,000 87,249,444 Government securities at FVTPL 409,847 - 5,532,181 - - 5,942,026 Loans and advances to customers 65,661,735 41,597,432 50,120,838 173,753,544 2,969,722 334,103,271 Other assets 12,722,029 - - - - 12,722,029 Total financial assets 348,406,491 58,083,085 74,441,415 219,745,132 3,969,721 704,645,844 Liabilities

Deposits from banks 1,434,289 - - - - 1,434,289 Derivative financial instruments 1,250 - - - - 1,250 Deposits from customers 467,339,358 42,371,887 108,051,108 316,658 - 618,079,011 Refinance loans 63,116 - - - - 63,116 Other liabilities 14,195,957 - - - - 14,195,957 Total financial liabilities 483,033,970 42,371,887 108,051,108 316,658 - 633,773,623 On-balance sheet liquidity gap (134,627,479) 15,711,198 (33,609,692) 219,428,474 3,969,721 70,872,221 Off-balance sheet items Loan commitments 6,170,692 7,157,082 20,265,600 - - 33,593,375 Guarantees 4,330,701 1,845,074 5,643,270 26,358,877 - 38,177,922 Performance bonds 1,573,394 903,534 381,369 55,000 - 2,913,296 Letters of credit 18,059,057 277,439 9,120,325 - - 27,456,821 Total off-balance sheet items 30,133,844 10,183,128 35,410,564 26,413,877 - 102,141,414 Net Liquidity gap (164,761,323) 5,528,070 (69,020,257) 193,014,597 3,969,721 (31,269,193)

66 Financial Statements

Bank 0 to 3 4 to 6 7 to 12 Over Over As at 31 December months months months 1 year 5 years Total 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets

Cash and balances with the Central Bank 93,832,065 - - - - 93,832,065 Deposits and balances due from banking institutions 166,220,553 - 11,015,932 - - 177,236,485 Derivative financial assets 1,551,136 - - - - 1,551,136 – Held-to-maturity - - 9,092,278 37,562,141 - 46,654,419 – Held-for-trading 319,000 - 1,361,021 - - 1,680,021 Loans and advances to customers 62,764,156 20,050,948 52,934,878 170,951,210 4,078,884 310,780,076

Other assets 4,898,168 - - - - 4,898,168

Total financial assets 329,585,078 20,050,948 74,404,109 208,513,351 4,078,884 636,632,370 Liabilities

Deposits from banks 155,060 - - - - 155,060 Derivative financial instruments 4,769 - - - - 4,769 Deposits from customers 448,871,055 50,867,437 55,264,626 203,605 7,007 555,213,730 Refinance loans - - - 83,949 - 83,949 Other liabilities 12,736,999 - - - - 12,736,999 Total financial liabilities 461,767,883 50,867,437 55,264,626 287,554 7,007 568,194,507 On-balance sheet liquidity gap (132,182,805) (30,816,489) 19,139,483 208,225,797 4,071,877 68,437,863 Off-balance sheet items Loan commitments 7,624,535 22,494,403 - - - 30,118,938 Guarantees 8,218,581 4,645,352 11,233,796 2,703,817 - 26,801,546 Performance bonds 1,446,214 493,722 391,539 - - 2,331,476 Letters of credit 24,898,638 7,241,764 7,977,719 - - 40,118,121 Total off-balance sheet items 42,187,968 34,875,241 19,603,054 2,703,817 - 99,370,080 Net Liquidity gap (174,370,773) (65,691,730) (463,571) 205,521,980 4,071,877 (30,932,217)

67 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued)

3.3.4 Assets held for managing liquidity risk The Bank holds a diversified portfolio of cash and high-quality highly-liquid securities to support payment obligations and contingent funding in a stressed market environment. The Bank’s assets held for managing liquidity risk comprise: ‚‚ Cash and balances with central banks; ‚‚ Certificates of deposit; ‚‚ Government bonds and other securities that are readily acceptable in repurchase agreements with central banks; and ‚‚ Secondary sources of liquidity in the form of highly liquid instruments in the Bank’s trading portfolios.

3.3.5 Current and Non-Current Assets and Liabilities The table below shows the current and non-current assets and liabilities as at 31 December 2018 and 2017 respectively.

Consolidated Less than 12 More than 12 Statement months after months after of financial the reporting the reporting position date date Total As at 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with Central Bank 163,256,415 163,256,415 - 163,256,415 Deposits and balances due from banking institutions 100,824,140 100,824,140 - 100,824,140 Derivative financial instruments 558,500 558,500 - 558,500 Government securities at Amortised cost 87,625,921 40,634,330 46,991,589 87,625,919 Government securities at FVTPL 5,942,026 5,942,026 - 5,942,026 Loans and advances to customers 334,103,271 157,380,005 176,723,266 334,103,271 Other assets 12,873,816 12,873,816 - 12,873,816 Property and equipment 13,423,459 - 13,423,459 13,423,459 Intangible assets 5,379,898 - 5,379,898 5,379,898 Deferred income tax asset 25,869,200 - 25,869,200 25,869,200 Total Assets 749,856,646 481,469,232 268,387,412 749,856,644 Liabilities Deposits due to other banks 1,434,289 1,434,289 - 1,434,289 Derivative financial instruments 1,250 1,250 - 1,250 Customer deposits 618,019,250 617,702,593 316,657 618,019,250 Refinance loans 63,116 - 63,116 63,116 Current income tax payable 1,245,758 1,245,758 - 1,245,758 Other liabilities 14,277,859 14,277,859 - 14,277,859 Deferred income tax liability 542 542 542 Total Liabilities 635,042,065 634,661,750 380,315 635,042,064

68 Financial Statements

Consolidated Less than 12 More than 12 Statement months after months after of financial the reporting the reporting position date date Total As at 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets Cash and balances with Central Bank 93,832,065 93,832,065 - 93,832,065 Deposits and balances due from banking institutions 177,248,124 177,248,124 - 177,248,124 Derivative financial instruments 1,551,136 1,551,136 - 1,551,136 Government securities – Held-to-maturity 46,654,419 9,092,278 37,562,141 46,654,419 Government securities – Held-for-trading 1,680,021 1,680,021 - 1,680,021 Loans and advances to customers 310,780,076 135,749,982 175,030,094 310,780,076 Other assets 5,023,610 5,023,610 - 5,023,610 Current income tax recoverable 5,742 5,742 - 5,742 Property and equipment 16,896,456 - 16,896,456 16,896,456 Intangible assets 3,275,227 - 3,275,227 3,275,227 Deferred income tax asset 23,990,547 - 23,990,547 23,990,547 Total Assets 680,937,424 424,182,958 256,754,466 680,937,424 Liabilities

Deposits due to other banks 155,060 155,060 - 155,060 Derivative financial instruments 4,769 4,769 - 4,769 Customer deposits 554,792,435 554,581,823 210,612 554,792,435 Refinance loans 83,949 - 83,949 83,949 Other liabilities 12,818,688 12,818,688 - 12,818,688 Deferred income tax liability 340 - 340 340 Total Liabilities 567,855,241 567,560,340 294,901 567,855,241

69 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.3.5 Current and Non-Current Assets and Liabilities (continued)

Bank More than Less than 12 12 months Statement months after after the of financial the reporting reporting position date date Total As at 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets

Cash and balances with Central Bank 163,256,415 163,256,415 - 163,256,415 Deposits and balances due from banking institutions 100,814,159 100,814,159 - 100,814,159 Derivative financial instruments 558,500 558,500 - 558,500 Government securities at Amortised cost 87,249,444 40,634,330 46,615,114 87,249,444 Government securities at FVTPL 5,942,026 5,942,026 - 5,942,026 Loans and advances to customers 334,103,271 157,380,005 176,723,266 334,103,271 Other assets 12,722,029 12,722,029 - 12,722,029 Investment in subsidiary 487,422 - 487,422 487,422 Property and equipment 13,421,651 - 13,421,651 13,421,651 Intangible assets 5,379,898 - 5,379,898 5,379,898 Deferred income tax asset 25,746,973 - 25,746,973 25,746,973 Total Assets 749,681,788 481,307,464 268,374,324 749,681,788 Liabilities

Deposits due to other banks 1,434,289 1,434,289 - 1,434,289 Derivative financial instruments 1,250 1,250 - 1,250 Customer deposits 618,079,011 617,762,354 316,657 618,079,011 Refinance loans 63,116 - 63,116 63,116 Current income tax payable 1,250,799 1,250,799 - 1,250,799 Other liabilities 14,195,957 14,195,957 - 14,195,957 Total Liabilities 635,024,422 634,644,649 379,773 635,024,421

70 Financial Statements

Bank Less than 12 months More than 12 Statement after the months after of financial reporting the reporting position date date Total As at 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets

Cash and balances with Central Bank 93,832,065 93,832,065 - 93,832,065 Deposits and balances due from banking institutions 177,236,485 177,236,485 - 177,236,485

Derivative financial instruments 1,551,136 1,551,136 - 1,551,136 Government securities – Held-to-maturity 46,654,419 9,092,278 37,562,141 46,654,419 Government securities – Held-for-trading 1,680,021 1,680,021 - 1,680,021

Loans and advances to customers 310,780,076 135,749,982 175,030,094 310,780,076 Other assets 4,898,168 4,898,168 - 4,898,168 Investment in subsidiary 80,000 - 80,000 80,000 Property and equipment 16,895,324 - 16,895,324 16,895,324 Intangible assets 3,275,227 - 3,275,227 3,275,227 Deferred income tax asset 23,990,547 - 23,990,547 23,990,547 Total Assets 680,873,469 424,040,135 256,833,334 680,873,469 Liabilities

Deposits due to other banks 155,060 155,060 - 155,060 Derivative financial instruments 4,769 4,769 - 4,769 Customer deposits 555,213,730 555,003,118 210,612 555,213,730 Refinance loans 83,949 - 83,949 83,949 Other liabilities 12,736,999 12,736,999 - 12,736,999 Total Liabilities 568,194,507 567,854,948 294,561 568,194,507

71 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued)

3.4 FAIR VALUE OF FINANCIAL market data obtained from independent INSTRUMENTS sources; unobservable inputs reflect the Bank’s market assumptions. i. Loans and advances to customers Loans and advances are net of charges for These two types of inputs have created the impairment. The estimated fair value of loans and following fair value hierarchy: advances represents the discounted amount ‚‚ Level 1 – Quoted prices (unadjusted) of estimated future cash flows expected to be in active markets for identical assets or received. Expected cash flows are discounted at liabilities. This level includes listed equity current market rates to determine fair value. securities and debt instruments on exchanges (for example, Uganda Stock ii. Government securities held-to-maturity Exchange). The fair value for these held-to-maturity assets is ‚‚ Level 2 – Inputs other than quoted prices based on market prices. Where this information included within Level 1 that are observable is not available, fair value is estimated using for the asset or liability, either directly (that quoted market prices for securities with similar is, as prices) or indirectly (that is, derived credit, maturity and yield characteristics. from prices). ‚‚ Level 3 – inputs for the asset or liability that iii. Refinance loans are not based on observable market data (unobservable inputs). This level includes The refinance loans are measured at cost. equity investments and debt instruments

with significant unobservable components. iv. Other liabilities The fair value of the other liabilities is computed This hierarchy requires the use of observable market through computing the present value of the cash data when available. The Bank considers relevant flows using the weighted average cost of capital and observable market prices in its valuations where of the bank. possible.

a. Fair value hierarchy The fair value of the financial assets and liabilities in IFRS 13 specifies a hierarchy of valuation the table below is included at the amount at which techniques based on whether the inputs to the instrument could be exchanged in a current those valuation techniques are observable transaction between willing parties, other than in a or unobservable. Observable inputs reflect forced or liquidation sale.

Level 1 level 2 Level 3 Total As at 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets measured at fair value

Derivative financial assets - - 558,500 558,500 Government securities at FVTPL - 7,819,473 - 7,819,743 Investment in subsidiary - - 487,422 487,422 Other assets - - 12,722,029 12,722,029 - 7,819,473 13,767,951 21,587,694 Liabilities measured at fair value

Derivative financial instruments - - 1,250 1,250 - - 1,250 1,250

72 Financial Statements

Level 1 level 2 Level 3 Total As at 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Assets measured at fair value

Derivative financial assets - - 1,551,136 1,551,136 Government securities at FVTPL - 2,141,975 - 2,141,975 Investment in subsidiary - - 80,000 80,000 Other assets - - 4,898,168 4,898,168 - 2,141,975 6,529,304 8,671,279 Liabilities measured at fair value

Derivative financial instruments - - 169,990 169,990 Refinance loans - - 83,949 83,949 - - 253,939 253,939

3.5 CAPITAL MANAGEMENT The regulatory capital requirements are strictly The Bank’s objectives when managing capital, which observed when managing economic capital. The is a broader concept than the ‘equity’ on the face of Bank’s regulatory capital is managed by its Bank the statement of financial position, are: Treasury and comprises two tiers: ‚‚ To comply with the capital requirements set by ‚‚ Tier 1 capital: share capital, general banking the Central Bank; reserve, retained earnings and reserves created by appropriations of retained earnings, less any

deductions determined by the central bank; ‚‚ To safeguard the Bank’s ability to continue as a and; going concern so that it can continue to provide

returns for shareholders and benefits for other stakeholders; and ‚‚ Tier 2 capital: qualifying subordinated loan capital and collective impairment allowances.

‚‚ To maintain a strong capital base to support the development of its business. The risk weighted assets are measured by means of a hierarchy of 4 risk weights. Risk weights are assigned Capital adequacy and the use of regulatory capital to assets and off balance sheet items according to are monitored daily by the Bank’s management, the Bank’s own estimates of probabilities of default employing techniques based on the guidelines (PD), loss given default (LGD) and credit conversion developed by the Basel Committee, as implemented factors (CCF) for retail business and claims to central by the Bank of Uganda (the Authority), for supervisory governments, institutions and corporates. Own purposes. The required information is filed with the estimates of risk parameters are in accordance to the Authority on a quarterly basis. minimum requirements set out by Basel II.

The Bank maintains a ratio of core capital to its risk The table below summarises the composition of weighted assets and total regulatory capital to its regulatory capital and the ratios of the Bank for the risk-weighted assets above the minimum levels of years ended 31 December 2018 and 2017. During 10% and 12% respectively as established under the those two years, the Bank complied with all of the Financial Institutions (Capital Adequacy Requirements) externally imposed capital requirements to which it is Regulations, 2018. subject.

73 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 3. Financial Risk Management (continued) 3.5 Capital Management (continued)

2018 2017 Ushs ‘000 Ushs ‘000 Tier 1 capital Share capital 96,750,000 96,750,000 Retained earnings 15,790,336 13,494,151 Less: Intangible assets (5,379,898) (3,275,227) Less: Deferred income tax asset (25,746,973) (23,990,548) Less: Unrealized foreign exchange gains (557,250) (1,546,367) Less: Investment in subsidiary (487,422) (80,000) Total qualifying Tier 1 capital 80,368,793 81,352,009 Tier 2 capital Revaluation reserve 1,831,835 2,434,811 General provisions 3,971,804 3,672,689 Total qualifying Tier 2 capital 5,803,638 6,107,500 Total regulatory capital 86,172,431 87,459,509 Risk-weighted assets: On-balance sheet 410,127,474 394,143,596 Off-balance sheet 61,922,622 51,050,376 Market risk 29,208,138 - Total risk-weighted assets 501,258,234 443,193,972 Core capital ratio 16.03% 18.27% Total capital ratio 17.19% 19.94%

The minimum required core and total capital ratios are 10% and 12% respectively.

74 Financial Statements

Nominal statement of Risk weighted financial position amounts Risk amounts 2018 2017 Weight 2018 2017 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Balance sheet assets (net of provisions) Cash and balances with Central Bank 163,256,415 93,832,065 0% - - Deposits and balances due from banking institutions 51,210,143 130,403,761 20% 10,242,029 26,080,752 Due from banks outside Uganda with long-term ratings as follows; Rated AAA to AA(-) 215,132 169,316 20% 43,026 33,863 Rated A (+) to A (-) 38,188,342 30,204,159 50% 19,094,171 15,102,080 Rated A (-) to non-rated 11,210,522 16,470,888 100% 11,210,522 16,470,888 Government securities at Amortised cost 87,625,918 46,654,419 0% - - Government securities at FVTPL 5,942,026 1,680,021 0% - - Loans and advances to customers 343,392,238 314,661,390 100% 343,392,238 314,661,390 Property and equipment 13,423,459 16,896,456 100% 13,423,459 16,896,456 Other assets 12,722,029 4,898,168 100% 12,722,029 4,898,168 Total assets 727,186,226 655,870,643 410,127,474 394,143,596 Off-balance sheet positions Performance bonds 2,913,296 2,331,475 50% 1,456,648 1,165,738 Guarantees 38,177,922 26,801,546 100% 38,177,922 26,801,546 Letters of credit 27,456,821 40,118,121 20% 5,491,364 8,023,624 Foreign currency contracts 558,500 1,551,136 0% - - Unutilised commitments 33,593,375 30,118,938 50% 16,796,688 15,059,469 102,699,914 100,921,216 61,922,621 51,050,376 Counterparty Government of Uganda and Bank of Uganda - - - - Rated AAA to AA (-) and banks in Uganda - - - - Rated A (+) to A (-) - - - - Rated A (-) and non-rated - - - - Total risk weighted CCR exposures ------Market risk - - 29,208,138 - Total risk-weighted assets 829,886,140 756,791,859 501,258,234 445,193,973

The breakdown of the Loans and advances to customers is as below ; 2018 2017 Ushs ‘000 Ushs ‘000 Gross loans and advances (note 21) 345,210,623 318,487,259 Less Interest Suspended (98,718) (180,979) Less Specific Provisions (note 33) (1,719,668) (3,644,890) Net loans and advances 343,392,238 314,661,390

75 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued)

4. CRITICAL ACCOUNTING ESTIMATES and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and AND JUDGEMENTS actual loss experience. Refer to note 2.5.

The Bank makes estimates and assumptions that b. Fair value of financial instruments affect the reported amounts of assets and liabilities The fair value of financial instruments where no within the next financial year. All estimates and active market exists or where quoted prices assumptions required in conformity with IFRS are are not otherwise available are determined by best estimates undertaken in accordance with the using valuation techniques. In these cases, the applicable standard. Estimates and judgements are fair values are estimated from observable data evaluated on a continuous basis, and are based in respect of similar financial instruments or on past experience and other factors, including using models. Where market observable inputs expectations with regard to future events. are not available, they are estimated based on appropriate assumptions. Where valuation Accounting policies and directors’ judgements for techniques (for example, models) are used to certain items are especially critical to the Bank’s determine fair values, they are validated and results and financial position due to their materiality. periodically reviewed by qualified personnel independent of those that sourced them. a. Impairment losses on loans and advances . The Bank reviews its loan portfolios to assess All models are certified before they are used, impairment at least on a quarterly basis. In and models are calibrated to ensure that outputs determining whether an impairment loss reflect actual data and comparative market should be recorded in profit or loss, the Bank prices. To the extent practical, models use only makes judgements as to whether there is any observable data; however, areas such as credit observable data indicating a significant increase risk (both own credit risk and counterparty risk), in credit risk followed by measurable decrease in volatilities and correlations require management the estimated future cash flows from a portfolio to make estimates. of loans before the decrease can be identified with that portfolio. This evidence may include observable data indicating that there has been c. Property, plant and equipment an adverse change in the payment status The bank carries its buildings at revalued of borrowers in a Consolidated, or national amounts, being its fair value at the date of the or macroeconomic conditions that correlate revaluation less any subsequent accumulated with defaults on assets in the Consolidated. depreciation and subsequent accumulated The assessment of whether there has been impairment losses. a significant increase in credit risk is based on increase in the probability of a default occurring Changes in fair value are recognised in other since initial recognition and considers both the comprehensive income. qualitative and quantitative factors. Revaluations are made with sufficient regularity to The directors use estimates based on historical loss ensure that the carrying amount does not differ experience and forward-looking factors for assets materially from that which would be determined using with credit risk characteristics and objective evidence fair value at the end of the reporting period. The Bank of impairment similar to those in the portfolio when determined that as at 31 December 2018, there was scheduling future cash flows. The methodology and no material revaluation gain since the last assessment assumptions used for estimating both the amount performed in 2016.

76 Financial Statements

5. INTEREST INCOME AND INTEREST EXPENSES 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Interest income Loans and advances 48,338,449 41,561,892 48,338,449 41,561,892 Deposits and balances due from banking institutions 7,902,192 5,627,374 7,902,192 5,627,374

56,240,641 47,189,266 56,240,641 47,189,266

Government securities-Held to maturity 8,445,684 9,260,775 8,445,684 9,260,775 Government securities-Held for trading 123,379 12,910 123,379 12,910

64,809,704 56,462,951 64,809,704 56,462,951 Interest expense Deposits from banks 238,611 368,445 238,611 368,445 Deposits from customers 20,055,887 21,235,030 20,055,887 21,235,030 BOU refinance schemes - 4,745 - 4,745

20,294,498 21,608,220 20,294,498 21,608,220 The effective interest rate for loans and advance is 15.4% (2017:13.1%). The effective interest rate for deposits is 3.2% (2017: 3.8%). The effective interest rate for government securities is 9.2% (2017: 18.5%).

6. NET FEE AND COMMISSION INCOME 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Fee and commission income Credit related fees and commissions 3,963,905 4,341,761 3,963,905 4,341,761 Commission income 13,767,323 12,267,177 13,767,323 12,267,177 Commission on trade 228,799 116,551 - - Other operating income 3,511,490 3,373,791 3,475,337 3,302,506 21,471,517 20,099,280 21,206,565 19,911,444

7. NET FOREIGN EXCHANGE GAINS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Unrealised exchange gain 557,250 1,546,367 557,250 1,546,367 Realised exchange gains 2,648,224 2,216,481 2,648,224 2,216,481 Fair value adjustment (9,566) - (9,566) - 3,195,908 3,762,848 3,195,908 3,762,848

77 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 4 ECL Total Total 7,765 98,656 77,679 closing 534,819 161,964 Ushs ‘000 11,107,352 11,988,239 ------Stage 3 8,375,119 Ushs ‘000 8,375,119 ------Stage 2 1,935,998 At 31 December 2018 Ushs ‘000 1,935,998 4 7,765 98,656 77,679 Stage 1 534,819 161,964 796,235 Ushs ‘000 1,677,122 ------Write-offs Ushs ‘000 (7,829,847) (7,829,847) 1 2017 charge 41,717 (12,327) (31,805) Net P&L (285,934) (337,871) Separate 6,253,779 6,253,779 7,205,789 Ushs ‘000 Ushs ‘000 6,579,569 ------Stage 3 7,417,802 Ushs ‘000 7,417,802 2018 ------Separate 6,579,569 6,579,569 Ushs ‘000 Stage 2 Movement during the period 1,235,973 Ushs ‘000 1,235,973 1 2017 41,717 (12,327) (31,805) Stage 1 (285,934) (337,871) Ushs ‘000 Ushs ‘000 (1,447,985) (2,074,206) 6,253,779 6,253,779 Consolidated 2

ECL Total Total 20,092 35,962 opening 384,591 566,625 499,836 2018 Ushs ‘000 11,731,410 13,238,517 ------6,579,569 6,579,569 Ushs ‘000 Consolidated Stage 3 8,855,032 Ushs ‘000 8,855,032 ------(Note 2.4a) Stage 2 At 1 January 2018 900,004 900,004 Ushs ‘000 Ushs 2 20,092 35,962 Stage 1 384,591 566,625 499,836 1,976,373 Ushs ‘000 3,483,481 - IMPAIRMENT CHARGES IMPAIRMENT 8 (a) Impairment charges to P&L Net Increase in impairment (Note 8b) Net Increase Grand Total 8. ments Placements Bank Balances Government Securities Guarantees Letters of Credit Loans OD Commit 8 (b) Movement in ECLs during the period

78 Financial Statements

9. EMPLOYEE BENEFITS EXPENSES 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Salaries 14,174,633 13,402,216 14,070,020 13,305,196

National Social Security Fund contributions 1,412,793 1,308,883 1,402,332 1,299,181 Other staff costs 1,949,819 2,367,756 1,933,921 2,362,614 Defined contribution fund 836,083 731,403 836,083 731,403 18,373,328 17,810,258 18,242,356 17,698,394

10. GENERAL AND ADMINISTRATIVE EXPENSES 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate IT and software costs 4,018,532 2,591,840 4,018,532 2,591,840 Occupancy, furniture and equipment 6,214,849 5,724,331 6,214,849 5,724,331 Marketing and public relations 1,765,276 1,227,981 1,757,576 1,225,431 Travel and entertainment 95,540 38,765 95,540 38,765 Telecommunication and postage 1,503,446 1,268,750 1,500,546 1,266,350 Other administrative expenses 1,397,822 1,452,861 1,397,822 1,452,861 14,995,465 12,304,528 14,984,865 12,299,578

11. DEPRECIATION AND AMORTISATION 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Depreciation of property and equipment (Note 24) 3,471,482 2,895,019 3,469,837 2,893,223 Amortisation of intangible assets (Note 25) 2,012,455 2,048,661 2,012,455 2,048,661 5,483,937 4,943,680 5,482,292 4,941,884

12. OTHER OPERATING EXPENSES 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Audit fees 180,000 130,000 180,000 130,000 Reversal of charges* 661,613 1,755,728 661,613 1,755,728 Other general expenses 15,008,924 8,544,112 14,935,919 8,484,812 Depreciation and amortisation (note 11) 5,483,937 4,943,680 5,482,292 4,941,884 21,337,474 15,373,520 21,259,824 15,312,424

*Reversal of charges relates to concessions given to customers and reversal of charges on overdrawn accounts.

79 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued)

13. INCOME TAX 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Current income tax Current year charge 9,341 3,150 - - Income tax on government securities 1,254,376 2,823,606 1,254,376 2,823,606 Prior year overstated income tax receivable - 203,337 - 203,337 Prior year assessment* 1,250,799 - 1,250,799 - Prior year under provision - 34,532 - 34,532 Deferred tax Current year - Bank (170,172) (907,478) (170,172) (907,478) - Equity Stock Brokers 202 (538) - - Income tax expense 2,344,546 2,156,609 2,335,003 2,153,997

* The prior year assessment relates to the final income tax assessment by the Uganda Revenue Authority arising from the audit of the 2012 – 2017 period.

The tax on the consolidated profit before income tax differs from the theoretical amount as follows: 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Profit before income tax 7,899,795 6,974,774 7,851,065 6,964,848 Tax calculated at the tax rate of 30% (2017: 30%) 2,369,939 2,092,432 2,355,320 2,089,454 Effect of: - Final tax on government securities 1,254,376 2,823,606 1,254,376 2,823,606 - Prior year tax under provision - 204,305 - 204,305 - Permanent difference - (247,901) - (247,901)

- Income not subject to tax (Tbills + Tbonds) (2,553,766) (2,783,074) (2,549,031) (2,783,074) - Prior year assessment 1,250,799 - 1,250,799 - Prior year under-provision - 34,532 - 34,532 - Expenses not deductible for tax purposes 23,198 32,709 23,539 33,075 Income tax expense 2,344,546 2,156,609 2,335,003 2,153,997

The effective tax rate for 2018 is 30% (2017: 31%).

80 Financial Statements

14. FINANCIAL INSTRUMENTS BY CATEGORY Consolidated Held at fair value Financial through liabilities at Amortised profit or amortised IFRS 9 cost loss cost Total At 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Cash and bank balances with the Central Bank 163,256,415 - - 163,256,415 Deposits and balances due from banking institutions 100,824,140 - - 100,824,140 Derivative financial instruments - 558,500 - 558,500 Government securities 87,625,918 5,942,026 - 93,567,945 Loans and advances to customers 334,103,271 - - 334,103,271 Other assets 12,873,816 - 12,873,816 685,809,744 19,374,342 - 705,184,087 Financial liabilities at amortised cost Deposits from banks - - 1,434,289 1,434,289 Deposits from customers - - 618,019,250 618,019,250 Derivative financial instruments - 1,250 - 1,250 Refinance loans - - 63,116 63,116 Current income tax payable 1,255,839 1,255,839 Other liabilities - - 14,277,859 14,277,859 - 1,250 635,050,353 635,051,603

Held at fair value through Financial profit or liabilities at Amortised Held to loss amortised IAS 39 cost maturity Ushs cost Total At 31 December 2017 Ushs ‘000 Ushs ‘000 ‘000 Ushs ‘000 Ushs ‘000 Financial assets Cash and bank balances with the Central Bank 93,832,065 - - - 93,832,065 Deposits and balances due from banking institutions 177,248,124 - - - 177,248,124 Derivative financial instruments - - 1,551,136 - 1,551,136 Government securities – Held-to-maturity - 46,654,419 - - 46,654,419 Government securities – Held-for-trading - - 1,680,021 - 1,680,021 Loans and advances to customers 310,780,076 - - - 310,780,076 Other assets 5,023,610 - - - 5,023,610 586,883,875 46,654,419 3,231,157 - 636,769,451 Financial liabilities at amortised cost Deposits from banks - - - 155,060 155,060 Deposits from customers - - - 554,792,435 554,792,435 Derivative financial instruments - - 4,769 - 4,769 Refinance loans - - - 83,949 83,949 Current income tax payable - - Other liabilities - - - 12,818,688 12,818,688 - - 4,769 567,850,132 567,854,901

81 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 14. Financial instruments by category (continued)

Bank Financial Held at fair liabilities at Amortised value through amortised IFRS 9 cost profit or loss cost Total At 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Cash and bank balances with the Central Bank 163,256,415 - - 163,256,415 Deposits and balances due from banking 100,814,159 - - institutions 100,814,159 Derivative financial instruments - 558,500 - 558,500 Government securities 87,249,444 5,942,026 - 93,191,471 Investment in subsidiary - 487,422 - 487,422 Loans and advances to customers 334,103,271 - - 334,103,271 Other assets 12,722,029 - 12,722,029 685,423,289 19,709,977 - 705,133,267 Financial liabilities at amortised cost Deposits from banks - - 1,434,289 1,434,289 Deposits from customers - - 618,079,011 618,079,011 Derivative liabilities - 1,250 - 1,250 Refinance loans - - 63,116 63,116 Current income tax payable - - 1,250,799 1,250,799 Other liabilities - - 14,519,237 14,519,237 - 1,250 635,346,452 635,347,702

Held at fair value Financial through liabilities at Amortised Held to profit or amortised IAS 39 cost maturity loss cost Total At 31 December 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Financial assets Cash and bank balances with the Central Bank 93,832,065 - - 93,832,065 Deposits and balances due from banking institutions 177,236,485 - - 177,236,485 Derivative financial instruments - - 1,551,136 - 1,551,136 Government securities – Held-to-maturity - 46,654,419 - - 46,654,419 Government securities – Held-for-trading - - 1,680,021 - 1,680,021 Loans and advances to customers 310,780,076 - - - 310,780,076 Other assets 4,898,168 - - - 4,898,168 586,746,793 46,654,419 3,231,157 - 636,632,370 Financial liabilities at amortised cost Deposits from banks - - - 155,060 155,060 Deposits from customers - - - 555,213,730 555,213,730 Derivative liabilities - - 4,769 - 4,769 Refinance loans - - - 83,949 83,949 Other liabilities - - - 12,736,999 12,736,999 - - 4,769 568,189,738 568,194,507

82 Financial Statements

15. CASH AND BALANCES WITH CENTRAL BANK 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Cash in hand 47,121,780 32,730,039 47,121,780 32,730,039 Balances with the Central bank other than mandatory reserve deposits 69,294,635 11,758,122 69,294,635 11,758,122 Included in cash and cash equivalents (Note 16) 116,416,415 44,488,161 116,416,415 44,488,161 Mandatory reserve deposits with Central Bank 46,840,000 44,340,000 46,840,000 44,340,000 Repurchase agreements - 5,003,904 - 5,003,904 163,256,415 93,832,065 163,256,415 93,832,065 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.

The required cash reserve with Bank of Uganda as at 31 December 2018 was Ushs: 46,840 million (2017: Ushs 44,340 million). The cash ratio requirement is non-interest earning and is based on the value of customer deposits as adjusted by the Bank of Uganda. The cash reserves held are allowed to fluctuate 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.

16. CASH AND CASH EQUIVALENTS For the purpose of the consolidated and separate statement of cash flows, cash and cash equivalents include: 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Cash and balances with the Central Bank (Note 15) 116,416,415 44,488,161 116,416,415 44,488,161 Deposits and balances due from banking institutions (Note 17) 100,909,583 177,248,124 100,899,602 177,236,485 Repurchase agreements - 5,003,904 - 5,003,904 Treasury bills maturing within 90 days (Note 19) 2,487,427 - 2,426,234 - Treasury bonds maturing within 90 days (Note 19) 3,688,363 - 3,688,363 - 223,501,788 226,740,189 223,430,614 226,728,550

For the purposes of the statement of cash flows, available to finance the bank’s day-to-day activities. cash and cash equivalents comprise balances with The amount is determined by Bank of Uganda as a less than 90 days maturity from the date of acquisition percentage of the average outstanding customer including: cash and balances with Banks, Treasury deposits over a cash reserve cycle period of 2 weeks. bills and other eligible bills, and amounts due from other banks. Cash and cash equivalents exclude the cash reserve requirement held with the Bank of Whilst it is available for use in the bank’s activities and Uganda. may fall to 50% of the margin on a given day there are sanctions for non-compliance. As at 31 December, Banks are required to maintain a prescribed minimum the reserve requirement was Ushs 46.84 billion (2017: cash balance with the Bank of Uganda that is not Ushs 44.34 billion).

83 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued)

17. DEPOSITS AND BALANCES DUE FROM BANKING INSTITUTIONS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Balances due from other banking institutions 52,619,583 59,515,528 52,609,602 59,503,889 Placements with other banks 48,290,000 117,732,596 48,290,000 117,732,596 Gross deposits and balances due from banking institutions 100,909,583 177,248,124 100,899,602 177,236,485 Less impairment (85,443) - (85,443) - Net deposits and balances due from banking institutions 100,824,140 177,248,124 100,814,159 177,236,485

Bank Bank Balances Stage 1 Stage 2 Stage 3 Total As at 31 December 2018 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Amortised cost 52,609,602 - - 52,609,602 Total 52,609,602 - - 52,609,602 Less impairment (77,679) - - (77,679) Total 52,531,923 - - 52,531,923

Placements Stage 1 Stage 2 Stage 3 Total As at 31 December 2018 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Amortised cost 48,290,000 - - 48,290,000 Total 48,290,000 - - 48,290,000 Less impairment (7,765) - - (7,765) Total 48,282,235 - - 48,282,235

18. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives held for trading are generally related to products that the Bank provides to its customers. The Bank may also take positions with the expectation of profiting from favourable movements in rates. Most of the trading portfolio is within the Bank’s treasury department and is treated as trading risk for risk management purposes. The table below shows the fair values of derivative financial instruments recorded as assets or liabilities together with their notional amounts. The notional amount, recorded gross, is the quantity of the derivative contracts’ underlying instrument. The notional amounts indicate the volume of transactions outstanding at the year end and are not indicative of either the market risk or credit risk.

Carrying Carrying Notional Notional amount amount value amount value amount assets asset liabilities liabilities At 31 December 2018 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Derivatives held for trading Foreign exchange contracts 558,500 14,488,500 1,250 13,931,250 Total 558,500 14,488,500 1,250 13,931,250 At 31 December 2017 Derivatives held for trading Foreign exchange contracts 1,551,136 44,414,570 4,769 42,868,203 Total 1,551,136 44,414,570 4,769 42,868,203

84 Financial Statements

19. GOVERNMENT SECURITIES AT AMORTISED COST 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Treasury bills Face value Maturing within 90 days 2,071,993 - 2,010,800 - Maturing after 90 days 20,315,281 8,500,000 20,000,000 8,500,000 22,387,274 8,500,000 22,010,800 8,500,000 Unearned interest (1,252,941) (592,278) (1,252,941) (592,278) 21,134,333 7,907,722 20,757,859 7,907,722 Treasury Bonds Face value Maturing within 90 days 3,688,363 - 3,688,363 - Maturing between 90 and 365 days 20,285,998 - 20,285,998 - Maturing after 365 days 57,775,947 46,754,059 57,775,947 46,754,059 81,750,309 46,754,059 81,750,309 46,754,059 Unearned interest (15,258,721) (8,007,362) (15,258,721) (8,007,362) 66,491,588 38,746,697 66,491,588 38,746,697

Gross Government securities at Amortised cost 87,625,921 46,654,419 87,249,447 46,654,419 Less impairment (3) (3) Net Government securities at Amortised cost 87,625,918 46,654,419 87,249,444 46,654,419

Gross Government securities at Amortised cost Stage 1 Stage 2 Stage 3 Total As at 31 December 2018 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Amortised cost 87,249,447 - - 87,249,447 Total 87,249,447 - - 87,249,447 Less impairment (3) - - (3) Total 87,249,444 - - 87,249,444

85 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 19. Government securities at amortised cost (continued)

Government securities at FVTPL 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Face value Maturing within 90 days 415,434 - 415,434 - Maturing after 90 days 6,000,000 1,821,012 6,000,000 1,821,012 6,415,434 1,821,012 6,415,434 1,821,012 Unearned interest (473,406) (140,991) (473,406) (140,991) Gross Government securities at FVTPL 5,942,027 1,680,021 5,942,027 1,680,021 Less impairment (1) - (1) - Net Government securities at FVTPL 5,942,026 1,680,021 5,942,026 1,680,021 Total government securities 93,567,945 48,334,440 93,191,471 48,334,440

Gross Government securities at FVTPL Stage 1 Stage 2 Stage 3 Total As at 31 December 2018 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Amortised cost 5,942,027 - - 5,942,027 Total 5,942,027 - - 5,942,027 Less impairment (1) - - (1) Total 5,942,026 - - 5,942,026

20. INVESTMENT IN SUBSIDIARY 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Equity securities – at fair value: – Equity Stock Brokers Limited - - 487,422 80,000 Total investment in subsidiary - - 487,422 80,000

Ushs ‘000 Equity stock brokers total fair value 609,277 Equity stock brokers at fair value (80%) 487,422 Less original investment (80,000) 407,422 Deferred income tax on fair value (122,226) Fair value net of tax 285,196

The movement in fair value of the investment in Equity Stock Brokers arises because, from 1 January 2018, the investment is classified as ‘fair value through OCI’ in line withIFRS 9 Financial Instruments. The principal place of business of Equity Stock Brokers Ltd is Kampala. The Bank owns 80% (2016: 80%) of the company while 20% is owned by Shoal.

Further, the profit that has been allocated to Shoal Ltd for the year ended 31st Dec 2018 is Ushs. 7.8mn (2017: Ushs 1.2mn). The accumulated non-controlling interest is Ushs. 103.2mn (2017: Ushs 95.4mn).

86 Financial Statements

Summary of Equity Stock Brokers Limited’s financial statements 2018 2017 Ushs ‘mn Ushs ‘mn Total assets 609 565 Total liabilities 82 77 Revenue 265 188 Profit after tax 39 6

21. LOANS AND ADVANCES TO CUSTOMERS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Retail 66,369,563 65,800,276 66,369,563 65,800,276 Corporate 278,841,060 252,686,983 278,841,060 252,686,983 345,210,623 318,487,259 345,210,623 318,487,259 Net loans and advances Gross loans and advances to 345,210,623 318,487,259 345,210,623 318,487,259 customers Less: allowance for impairment (11,107,352) (7,707,183) (11,107,352) (7,707,183) Net loans and advances to customers 334,103,271 310,780,076 334,103,271 310,780,076 Gross loans and advances Gross advances to customers by industry composition: - Trade and commerce 99,984,562 84,458,739 99,984,562 84,458,739 - Agriculture 61,844,168 58,818,125 61,844,168 58,818,125 - Manufacturing 48,307,403 35,836,624 48,307,403 35,836,624 - Transport & communication 22,390,375 16,706,999 22,390,375 16,706,999 - Building and construction 63,459,667 62,329,296 63,459,667 62,329,296 - Personal, service industry and 49,224,448 60,337,476 49,224,448 60,337,476 others Gross advances to customers 345,210,623 318,487,259 345,210,623 318,487,259

The bank holds the following collateral as security for its loans and advances: buildings, land, deposits, margins accounts, plant, machinery and stock among others.

Loans and Overdrafts to Customers Stage 1 Stage 2 Stage 3 Total As at 31 December 2018 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Amortised cost 254,690,195 78,678,296 11,842,133 345,210,623 Total 254,690,195 78,678,296 11,842,133 345,210,623 Less impairment (796,235) (1,935,998) (8,375,119) (11,107,352) Total 253,893,960 76,742,297 3,467,014 334,103,271

87 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 21. Loans and advances to customers (continued)

Movement analysis The tables below analyse the movement of the loss allowance during the year per class of assets. Stage 1 Stage 2 Stage 3 12-month Lifetime Lifetime ECL ECL ECL Total ECL on loans and advances at amortised cost Ushs’000 Ushs’000 Ushs’000 Ushs’000 Corporate & Retail

IAS 39 closing provision 7,707,183 Day 1 adjustment 4,024,227 Loss allowance as at 1 January 2018 1,976,373 900,004 8,855,032 11,731,410 Changes in the loss allowance

– Transfer to stage 1 (762,260) 1,530,704 1,787,893 2,556,337 – Transfer to stage 2 (355,781) (200,495) 288,140 (268,136) – Transfer to stage 3 (208,596) (60) 9,220,671 9,012,015 – Write-offs - - (7,829,847) (7,829,847) New financial assets originated or purchased 55,837 692 67,086 123,614 Financial assets that have been derecognised (177,184) (94,868) (3,945,988) (4,218,041) Loss allowance as at 31 December 2018 528,388 2,135,977 8,442,987 11,107,352

Movement analysis The tables below shows the movement of the loss allowance during the previous year (2017) per class of assets as measured under IAS 39. 2017 Ushs ‘000 Provisions for impairment of loans and advances Consolidated At 1 January 3,318,974 Increase in the provision for loan impairment; -Individually assessed as Per IAS 39 5,195,545 -Collectively assessed as Per IAS 39 1,058,234 Restatement of the previously written off provision on specific write offs 2,416,362 Write offs during the year (3,533,258) At 31 December 7,707,183 Identified Impairment 4,120,962 Unidentified Impairment 3,586,221 7,707,183 Net increase in the provision for loan impairment 6,253,779

88 Financial Statements

22. OTHER ASSETS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Prepayments 3,416,688 3,093,931 3,260,473 2,968,488 Other receivables 9,457,128 1,929,679 9,461,556 1,929,680 12,873,816 5,023,610 12,722,029 4,898,168

Prepayments include advance payments made for insurance, advertisement, stationary and software maintenance among others. Other receivables comprise of mainly charges and commission receivable among others.

23. CURRENT INCOME TAX PAYABLE / (RECOVERABLE) 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Consolidated Separate Separate Balance as at 1 January (5,742) (196,847) - (204,305) Write off of opening receivable - 204,305 - 204,305 Prior year under-provision 1,250,799 34,532 1,250,799 34,533 Current tax charge 1,263,717 2,792,224 1,254,376 2,789,073 Tax paid - current year (1,263,015) (2,839,956) (1,254,376) (2,823,606) Balance as at 31 December 1,245,759 (5,742) 1,250,799 -

89 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 - - - Total (354,223) (399,356) (279,852) Ushs’000 9,693,440 7,417,927 (3,895,346) (3,518,012) 30,778,464 38,765,526 (1,072,303) 38,765,526 38,370,738 - - - Work In Work 346,460 805,366 Progress (279,852) Ushs’000 8,665,233 6,120,120 4,545,284 4,545,284 (2,905,587) (1,072,303) (3,895,346) (3,518,012) (3,573,160) - - - - Office 59,568 44,249 397,052 784,541 (253,373) 580,301 (116,425) Ushs’000 6,025,794 6,593,487 6,593,487 7,521,707 Equipment ------Motor (1,245) 571,636 829,958 vehicles 831,203 829,958 Ushs’000 1,401,594 - - - - (3,165) SWIFT (97,075) (33,113) 311,020 667,983 722,228 Ushs’000 Computer 2,600,748 8,949,044 11,824,534 13,117,670 Equipment, 11,824,534 ATM, POS & ATM, - - - - 41,549 41,540 (48,908) (41,084) 150,385 412,498 (194,867) Ushs’000 Furniture, 3,169,387 3,213,404 3,169,387 3,574,517 room & Safes room Fixtures, Strong Strong Fixtures, ------(8,573) 95,337 191,232 414,684 388,361 Ushs’000 5,257,126 4,782,001 5,257,126 5,863,041 Leasehold improvements ------Ushs’000 Buildings 4,060,000 4,060,000 (1,065,000) 5,125,000 4,060,000 ------Land 374,098 Ushs’000 1,065,000 2,485,750 2,485,750 1,046,652 2,485,750

Transfer from WIP from Transfer Disposals Disposals Additions Additions Transfer from WIP from Transfer Reclassification 24. PROPERTY AND EQUIPMENT PROPERTY 24. Consolidated COST or VALUATION At 1 January 2017 WIP write off during the year to intangibles (note 25) Transfer At 31 December 2017 At 1 January 2018 WIP write off during the year to intangibles (note 25) Transfer At 31 December 2018 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTES TO THE FINANCIAL STATEMENTS

90 Financial Statements - - - - Total 4,544 (263,224) (397,814) Ushs’000 3,471,482 3,137,454 2,895,019 10,286,005 19,237,271 21,869,066 21,869,066 13,423,459 16,896,456 24,947,280 ------Work In Work 346,459 346,459 Progress Ushs’000 4,545,284 - - - - 841 Office (94,116) 35,652 680,347 (252,027) 656,871 Ushs’000 4,241,493 4,839,900 2,252,646 4,839,900 5,269,061 2,252,646 1,753,587 Equipment ------445 Motor (1,245) 70,866 96,085 71,600 758,358 571,925 829,669 571,925 vehicles 663,518 758,358 Ushs’000 - - - - 383 (3,164) SWIFT (97,064) (32,702) Ushs’000 1,527,565 9,134,790 2,551,996 2,551,996 Computer 8,227,779 9,134,790 2,689,743 10,565,674 Equipment, 942,877.48 ATM, POS & ATM, - - - - 386 (31,907) (48,723) 250,371 220,749 896,164 (127,493) Ushs’000 Furniture, 2,211,873 2,273,222 1,099,261 2,273,222 2,475,256 1,099,261 room & Safes room Fixtures, Strong Strong Fixtures, ------2,491 (7,668) 526,681 577,748 Ushs’000 2,804,905 3,374,985 1,958,884 3,374,985 3,904,157 1,958,885 1,882,139 Leasehold improvements ------(61,979) 284,200 284,200 416,125 638,346 638,346 922,546 Ushs’000 Buildings 3,137,454 3,137,454 3,421,654 ------Land 61,398 131,452 116,489 671,578 849,465 849,465 980,917 Ushs’000 1,504,833 1,504,833 1,636,285 Reclassification Reclassification Charge for the year At valuation Charge for the year 2017 Adjustments At 31 December 2017 ACCUMULATED DEPRECIATION ACCUMULATED At 1 January 2017 Eliminated on disposal Elimination of accumulated depreciation At 31 December 2017 At 1 January 2018 Eliminated on disposal Elimination of accumulated depreciation At 31 December 2018 AMOUNT NET CARRYING At cost At 31 December 2018 being installed. and server that are for the mobile application, firewall to infrastructure relates in progress Work

91 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 24. Property and equiment (continued) - - Total (354,223) (279,852) Ushs’000 (1,072,303) 9,693,4340 30,767,218 38,754,280 (3,895,346) 38,754,280 38,356,172 (399,356) (3,518,012) - 7,415,606 - - Work In Work 805,366 346,059 (279,852) Progress Ushs’000 4,545,284 (2,905,587) 8,665,233 4,545,284 (3,573,160) (1,072,303) 6,120,120 - (3,895,346) (3,518,012) - - - - Office 59,568 44,249 580,301 (116,425) Ushs’000 6,593,487 6,025,794 6,593,487 7,521,707 784,541 Equipment 397,052 (253,373) ------Motor (1,245) 829,958 831,203 829,958 vehicles Ushs’000 1,401,594 571,636 - - - - - (3,165) SWIFT (33,113) 311,020 Ushs’000 Computer 8,937,799 2,600,748 11,813,289 13,104,104 Equipment, 11,813,289 ATM, POS & ATM, 665,662 722,228 (97,075) - - - - (41,084) 41,549 150,385 (194,867) Ushs’000 Furniture, 3,213,404 3,169,387 3,169,387 3,574,517 41,540 412,498 room & Safes room (48,908) Fixtures, Strong Strong Fixtures, - - - - - (8,573) 95,337 191,232 414,684 388,361 Ushs’000 4,782,000 5,257,125 5,257,125 5,863,041 Leasehold improvements ------Ushs’000 Buildings 4,060,000 4,060,000 (1,065,000) 5,125,000 - 4,060,000 ------Land - 374,098 Ushs’000 2,485,750 2,485,750 1,046,652 1,065,000 2,485,750 Bank COST or VALUATION At 1 January 2017 WIP from Transfer WIP write off during the year to intangibles (note 25) Transfer At 31 December 2017 At 1 January 2018 WIP from Transfer WIP write off during the year to intangibles (note 25) Transfer At 31 December 2018 Disposals Additions Additions Disposals Reclassification

92 Financial Statements - - Total 4,544 (263,224) (397,814) Ushs’000 3,137,454 2,893,223 3,469,837 10,284,196 19,228,955 21,858,954 21,858,954 24,935,521 13,421,651 16,895,324

------Work In Work 346,459 346,459 Progress Ushs’000 4,545,284 - - 841 Office (94,116) 35,652 680,347 (252,027) 656,871 Ushs’000 2,252,646 4,241,493 4,839,900 4,839,900 5,269,061 2,252,646 1,753,587 Equipment - - - - 445 Motor (1,245) 96,085 70,866 71,600 571,925 663,518 758,358 758,358 829,669 571,925 vehicles Ushs’000 - - 382 (3,164) SWIFT (97,064) (32,702) 941,081 Ushs’000 2,550,187 9,124,679 1,525,920 2,550,187 Computer 8,219,464 9,124,679 2,688,610 10,553,917 Equipment, ATM, POS & ATM, - - 385 (31,907) (48,723) 250,371 220,749 896,166 (127,493) Ushs’000 Furniture, 1,099,263 2,211,872 2,273,221 2,273,221 2,475,254 1,099,263 room & Safes room Fixtures, Strong Strong Fixtures, - - - - 2,491 (7,668) 526,681 577,748 Ushs’000 1,958,883 2,804,905 3,374,985 3,374,985 3,904,157 1,958,883 1,882,138 Leasehold improvements - - - - - (61,979) 638,346 284,200 922,546 416,125 284,200 638,346 Ushs’000 Buildings 3,137,454 3,137,454 3,421,654 - - - - - Land 61,398 671,578 116,489 849,465 131,452 849,465 980,917 Ushs’000 1,504,833 1,504,833 1,636,285 ACCUMULATED DEPRECIATION ACCUMULATED At 1 January 2017 Charge for the year Eliminated on disposal At 31 December 2017 At 1 January 2018 2017 Adjustments Charge for the year Eliminated on disposal At 31 December 2018 AMOUNT NET CARRYING At cost At 31 December 2018 At valuation Work in progress relates to infrastructure for the mobile application, firewall and server that are being installed. and server that are for the mobile application, firewall to infrastructure relates in progress Work Reclassification Reclassification At 31 December 2017

93 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 24. Property and equiment (continued)

Reconciliation of the carrying amount of buildings 2018 2017 Ushs’000 Ushs’000 Carrying amount as at 1 January 2018 3,421,654 4,708,875 Reclassification (net) - (1,003,021) Depreciation for the year (284,200) (284,200) Level 3 revaluation gain - - Carrying amount and fair value as at 31 December 2018 3,137,454 3,421,654

If the buildings were measured using the cost method, the carrying amounts would be as follows: 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Buildings (cost) 3,318,264 3,318,264 3,318,264 3,318,264 Reclassification (net) (1,003,021) (1,003,021) (1,003,021) (1,003,021) Accumulated depreciation (922,546) (700,325) (922,546) (700,325) Net carrying amount 1,392,697 1,614,918 1,392,697 1,614,918

25. INTANGIBLE ASSETS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Cost At 1 January 15,250,806 13,860,809 15,250,806 13,860,809 Additions 599,114 333,323 599,114 333,323 Disposal - (15,629) - (15,629) Transfer from work in progress 3,518,012 1,072,303 3,518,012 1,072,303 (Refer to note 24) At 31 December 2018 19,367,932 15,250,806 19,367,932 15,250,806 Accumulated amortisation At 1 January 11,975,579 9,942,519 11,975,579 9,942,519 Disposal - (15,601) - (15,601) Amortisation charge 2,012,455 2,048,661 2,012,455 2,048,661 At 31 December 2018 13,888,034 11,975,579 13,888,034 11,975,579 Net carrying amount 5,379,898 3,275,227 5,379,898 3,275,227

94 Financial Statements

26. DEFERRED INCOME TAX Deferred income tax is calculated using the enacted income tax rate of 30% (2017: 30%). The movement on the deferred income tax account is as follows:

Consolidated a) Deferred income tax asset Deferred Accelerated Charges tax on Derivative tax for loan revaluation financial depreciation Others impairment Tax Losses surplus instruments Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2017 (633,518) (64,604) (993,073) (22,486,851) 1,286,118 100,867 (22,791,061) Charged/credited to profit (296,363) - (217,275) (292,975) - (100,867) (907,479) Charged to equity - - - - (292,007) - (292,007) At 31 December 2017 (929,881) (64,604) (1,210,348) (22,779,826) 994,111 - (23,990,548) At 1 January 2018 (929,881) (64,604) (1,210,348) (22,779,826) 994,111 - (23,990,548) Charged/credited to profit 302,900 (121,808) (3,697,709) 3,346,445 - - (170,172) Charged to equity - - (1,659,400) - (49,081) - (1,708,481) At 31 December 2018 (626,981) (186,412) (6,567,458) (19,433,381) 945,030 - (25,869,200)

Separate a) Deferred income tax asset Deferred Accelerat- tax on Derivative ed tax Charges revalua- financial deprecia- for loan tion sur- instru- Fair tion Others impairment Tax Losses plus ments value Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2017 (633,518) (64,604) (993,073) (22,486,851) 1,286,118 100,867 - (22,791,061) Charged/ credited to profit (296,363) (217,275) (292,975) - (100,867) - (907,479) Charged to equity - - - (292,007) - - (292,007) At 31 December 2017 (929,881) (64,604) (1,210,348) (22,779,826) 994,111 - - (23,990,548)

At 1 January 2018 (929,881) (64,604) (1,210,348) (22,779,826) 994,111 - - (23,990,548) Charged/ credited to profit 302,900 (121,808) (3,697,709) 3,346,445 - - - (170,172) Charged to equity - - (1,659,400) - (49,081) - 122,226 (1,586,254) At 31 December 2018 (626,981) (186,412) (6,567,458) (19,433,381) 945,030 - 122,226 (25,746,973)

95 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued) 26. Deffered income tax (continued)

Deferred assets amounting to Ugx 19.02bn (2017: Ugx 22.48bn) bn in respect to carry forward tax losses of Ugx 63.4bn (2017: Ugx 74.95bn) have been recognised. In the opinion of the Directors, the Bank is projected to have sufficient future taxable future profits to utilise the tax credits. b) Deferred income tax liability 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Accelerated tax depreciation As at 1 January 340 879 - - Charged/credited to profit or loss 202 (539) - - As at 31 December 542 340 - - 27. DEPOSITS FROM BANKS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate

Deposits due to other banks 1,434,289 155,060 1,434,289 155,060 1,434,289 155,060 1,434,289 155,060

28. CUSTOMER DEPOSITS Deposits due to customers primarily comprise savings deposits, amounts payable on demand, and term deposits. 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Demand deposits 224,741,707 230,088,714 224,801,468 230,174,483 Time deposits 289,787,886 224,427,679 289,787,886 224,763,205 Savings accounts 103,489,657 100,276,042 103,489,657 100,276,042 618,019,250 554,792,435 618,079,011 555,213,730 Private enterprises and individuals 597,741,165 507,170,129 597,800,926 507,591,424 Government and parastatals 20,278,085 47,622,306 20,278,085 47,622,306 618,019,250 554,792,435 618,079,011 555,213,730 Segment analysis Corporate 228,020,765 210,626,496 228,020,765 210,626,496 Retail 389,998,485 344,165,939 390,058,246 344,587,234 618,019,250 554,792,435 618,079,011 555,213,730

29. REFINANCE LOANS 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate APEX III/Agricultural Credit Facility (ACF) Loans 63,116 83,949 63,116 83,949 63,116 83,949 63,116 83,949 The refinance loans with Bank of Uganda are denominated in Uganda Shillings (Ushs). The amount outstanding is the interest portion payable that has not been remitted.

96 Financial Statements

30. OTHER LIABILITIES The other liabilities mentioned below relates to margins held for off balance sheet items, transit liability accounts and statutory deductions payable among others.

The margin and transit liability accounts do not attract any interest rate. They are cash collateral accounts for the off balance sheet items. 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Provisions and accruals 4,169,332 3,931,618 4,135,912 3,893,387 Other 9,313,087 8,887,070 9,264,605 8,843,612 IFRS 9 impairment for off balance sheet items – note 35 795,440 - 795,440 - Total 14,277,859 12,818,688 14,195,957 12,736,999

31. ISSUED CAPITAL Number of shares issued & fully paid Total value of (thousands) Value per share shares Consolidated and Separate Ushs ‘000 Ushs ‘000 Ushs ‘000 2018 At 1 January 2018 and December 2018 96,750 1,000 96,750,000 At 31 December 2018 96,750 1,000 96,750,000

2017 At 1 January 2017 and December 2017 96,750 1,000 96,750,000 At 31 December 2017 96,750 1,000 96,750,000

The total number of ordinary shares paid up at year end was 96.75 million (2017: 96.75 million) with a par value of Ushs 1,000 per share (2017: Ushs 1,000 per share). The total number of ordinary shares authorised for issue is 100 million. 2018 2017 2018 2017 Millions Millions Millions Millions Number of shares Consolidated Consolidated Consolidated Consolidated At 1 January 96.75 96.75 96.75 96.75 Increase in shares - - - - As at 31 December 96.75 96.75 96.75 96.75

97 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued)

32. REVALUATION RESERVE The revaluation reserve shows the effects from the revaluation of buildings after deduction of deferred income taxes. Changes in the revaluation surplus may be transferred to retained earnings in the subsequent periods as the asset is used or when it is derecognised. The revaluation reserve relates to surplus on revalued property and is not available for distribution to shareholders. 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate At start of year 2,434,811 3,116,161 2,434,811 3,116,161 Transfer of excess depreciation net of tax (602,976) (681,350) (602,976) (681,350) Increase in revaluation surplus - - At end of year 1,831,835 2,434,811 1,831,835 2,434,811

33. 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 guidelines and per IFRS: 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Provisions as per Bank of Uganda guidelines (Note 21) Specific provisions 1,719,668 3,644,890 1,719,668 3,644,890 General Provisions 3,971,804 3,672,689 3,971,804 3,672,689 5,691,472 7,317,579 5,691,472 7,317,579

Provisions as per IFRS guidelines (Note 21) IFRS 9 Expected credit loss 11,988,239 - 11,988,239 - Individual impairment - 4,120,962 - 4,120,962 Collective impairment - 3,586,221 - 3,586,221 11,988,239 7,707,183 11,988,239 7,707,183 Statutory credit risk reserve* (6,296,767) (389,604) (6,296,767) (389,604) * No reserve has been recognised as the IFRS provisions exceed FIA provisions.

34. DIVIDENDS PAYABLE The directors do not recommend the payment of dividends for the year (2017: Nil).

35. COMMITMENTS AND CONTINGENT LIABILITIES The Bank is a litigant in several 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 2018 - 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 1,178 million (2017: Shs 1,762 million) has been made. The Bank has identified contingent liabilities of Ugx 810mn. Below is the schedule of movement in the legal provision:

98 Financial Statements

2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Opening balance 1,761,714 2,097,725 1,761,714 2,097,725 Increase in provision 1,575,800 488,215 1,575,800 488,215 Decrease in provision (payments and adjustments) (2,482,172) (824,226) (2,482,172) (824,226) Closing balance 855,342 1,761,714 855,342 1,761,714 The directors believe that the resolution of pending legal cases will not give rise to losses above amounts already provided. In addition to those cases provided for, there are cases with possible liabilities which the directors do not consider probable to result in further liability to the group.

Capital commitments At 31 December 2018, the Bank had capital commitments of Ushs 346 mn (2017: Ushs 3.48 bn).

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. 2018 2017 2018 2017 Ushs ‘000 Ushs ‘000 Ushs ‘000 Ushs ‘000 Consolidated Consolidated Separate Separate Loan commitments 33,593,375 30,118,938 33,593,375 30,118,938 Performance Bonds 2,913,295 2,331,476 2,913,295 2,331,476 Guarantees 38,177,922 26,801,547 38,177,922 26,801,547 Foreign currency contracts 558,500 1,551,136 558,500 1,551,136 Legal cases 810,000 - 810,000 - Documentary and letters of credit 27,456,821 40,118,122 27,456,821 40,118,122 Total 103,509,913 100,921,219 103,509,913 100,921,219

Stage 1 Stage 2 Stage 3 Total As at 31 December 2018 Ushs’000 Ushs’000 Ushs’000 Ushs’000 Guarantees Amortised cost 41,091,217 - - 41,091,217 Impairment (534,819) - - (534,819) Letters of Credit Amortised cost 27,456,821 - - 27,456,821 Impairment (161,964) - - (161,964) OD Commitments Amortised cost 48,290,000 - - 48,290,000 Impairment (98,656) - - (98,656) Expected credit loss on off balance sheet items: Guarantees (534,819) - - (534,819) Letters of credit (161,964) - - (161,964) OD Commitments (98,656) - - (98,656) Total (795,440) - - (795,440)

99 ANNUAL REPORT AND CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

NOTES TO THE FINANCIAL STATEMENTS (continued)

36. RELATED-PARTY DISCLOSURES Transactions and balances with related parties as at the yearend were as follows: 2018 2017 Ushs ‘000 Ushs ‘000 Related party balances Deposits from directors and shareholders 11,721,343 13,553,919 Deposits from Equity Stock Brokers Ltd 59,686 440,487 Related party transactions Interest: Interest paid to related parties/directors 186,000 498,555 Interest paid to Equity Stock Brokers Ltd 4,757 46,159 Directors’ remuneration Directors’ fees 740,703 708,143 Other emoluments 392,316 327,293 1,133,019 1,035,436 Key management compensation-Orient Leadership Team Salaries and short-term benefits 992,310 951,522 Defined contribution benefits 69,462 161,923

37. SUBSEQUENT EVENTS DISCLOSURE There are no material subsequent events after the reporting period.

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