Middle East Bank, Annual Report For the Year Ended March 20, 2018 Ended March Year the Annual Report For Middle East Bank, Annual Report For the Year Ended March 20, 2018 Middle East Bank Headquarters No. 2, 5th St., Ahmad Qasir (Bucharest) Ave., Tehran, Iran Tel: (+98 21) 4217 8000 Fax: (+98 21) 8870 1095 www.middleeastbank.ir [email protected] 2018 This page is intentionally left blank. In the Name of God Annual Report For the Year Ended March 20, 2018 Financial Highlights All figures in IRR million except for EPS and CAR 20181 20172 20163 20154 20145 20136 Loans 67,821,271 53,625,316 28,097,787 21,474,088 13,057,539 2,575,223 Deposits 78,082,825 62,781,801 34,416,163 24,914,454 14,422,913 1,141,668 Shareholders’ Equity 9,272,080 7,314,433 5,763,114 5,074,186 4,832,935 4,408,081 Assets 95,272,293 74,537,131 41,377,823 30,717,191 21,252,583 5,590,608 Net Profit 2,454,063 2,016,642 1,355,526 848,516 820,029 408,081 EPS (Rls.) 499 504 339 212 205 102 Guarantees 27,939,617 21,543,141 16,750,179 11,779,733 3,892,820 510,868 Letters of Credit 4,971,119 2,975,041 2,507,746 670,033 756,603 - Capital Adequacy Ratio Basel (%) 12.9* 13.5 18.0 21.0 30.5 105.2 * For details, refer to Section 4 of the Report 1. Year ended March 20,2018 2. Year ended March 20,2017 3. Year ended March 19,2016 4. Year ended March 20,2015 5. Year ended March 20,2014 6. Year ended March 20,2013, Middle East Bank had only five months of operation in that year A Note on the Iranian Calendar Iran’s official calendar is a solar calendar that starts on the first day of spring and ends on the last day of winter. The government of Iran as well as Iranian banks have adopted the calendar year as their fiscal year. This Annual Report is for fiscal year 1396, coinciding with the calendar year 1396, that started on March 21, 2017 and ended on March 20, 2018. A Note on the Exchange Rate of the Iranian Rial On March 20, 2018, the official exchange rate of the US dollar was: USD1 = IRR37,690. Message from the Chairman of the Board of Directors In 1396, the rate of economic growth reached 3.7 percent, most of which took place in the first half of the year. This was set against the very high rate of 12.5 percent, coupled with the lowest annual inflation rate during the past 25 years in 1395. Consequently, the actual budget performance was considerably below the approved budget, due to the optimistic forecasts for tax and oil revenues, resulting in the budget deficit of IRR270 trillion, 5.7 percent above its level in 1395. The increase in crude oil prices and its exports, in spite of the decline in the value and volume of natural gas condensates and oil products, brought about 8.4 percent rise in the goods account of the balance of payments. The unilateral withdrawal of the US from the Joint Comprehensive Plan of Actions, rumors of the return of nuclear sanctions and pressures that were going to be imposed on the economy of Iran, adversely affected the foreign exchange rate in 1396 and foreign currencies sharply appreciated in the last quarter of the year. The average USD/IRR exchange rate in 1396 rose by 11.1 percent compared to the preceding year. The monetary base and liquidity at the end of 1396 increased by 19.1 percent and 22.1 percent, respectively, compared to a year earlier. In the same period, the balance of facilities extended by the banking system and the deposits of banks and non-bank credit institutions grew by 12.0 percent and 29.3 percent, in that order. In recent years, different interest rates were set by the banks to attract deposits, a decision which was then corrected by the Central Bank of the Islamic Republic of Iran (CBI) in the second half of the year and all banks were obliged to follow the CBI regulations. The expansion of international banking relations was influenced by recent political developments which have caused some complications for the banking system. Nonetheless, Middle East Bank (MEB) maintained its profitability like previous years and recorded a favorable performance in 1396. Moving in accordance with its predetermined strategy, fulfillment of its approved budget and realization of profits, which were around 40 percent of the bank’s capital, securing low levels of non-performing loans and leading the credit portfolio to low-risk and productive customers, expansion and diversity in foreign exchange operations, and providing modern and high– quality services indicate the satisfactory performance of the Bank in 1396. Obtaining the permit of establishing a branch in Munich was the other outstanding achievement of the Bank in 1396. Our success was owing to the commitment of the Board of Directors, the Managing Director, and the bank’s employees to international regulations and standards and the effectiveness of corporate governance, compliance, risk and internal audit functions. Moreover, the Bank’s efforts to prepare the financial statements in strict conformity with International Financial Reporting Standards (IFRS), which was due to the bank’s policies to increase transparency and providing relevant and reliable information to its shareholders and creditors, led to its success in 1396. These statements have been audited and sent to the CBI. All these achievements are indebted to the shareholders and all my colleagues in MEB. I find it also necessary to express my sincere gratitude to the members of our Board of Directors, Executive Board, senior managers, and specifically our Managing Director, Dr. Parviz Aghili-Kermani. Khosrow Nayebi-Ahranjani Chairman of the Board of Directors This page is intentionally left blank. Table of Contents Chapter 1 Management Report 7 1. Middle East Bank’s Strategy 9 2. Shares and Shareholders 10 3. Corporate Governance 11 4. Operational Reports 16 Chapter 2 Review of Risks and Disclosure 29 1. Risk Management 31 2. Compliance 56 3. Internal Audit 59 4. Analysis of Financial Statements 61 5. Investments 66 Chapter 3 Survey of the Iranian Economy 67 1. Real Sector 70 2. Labor Market 75 3. Government Budget 76 4. Balance of Payments 84 5. Foreign Exchange Market 86 6. Monetary Policy 87 7. Prices and Inflation 91 8. Capital Market 93 9. Business Environment 95 Chapter 4 Auditor’s Report & Audited Financial Statements 99-223 This page is intentionally left blank. Chapter 1 Management Report This page is intentionally left blank. MANAGEMENT REPORT 9 Management Report Review of Risks and Disclosure 1. Middle East Bank’s Strategy The Middle East Bank (MEB) aims to be the most trusted and financial solutions to professional individuals and businesses, value-creating Iranian bank in the domestic and international while contributing to the national economy and creating value banking sector. It defines its mission as becoming a leading for its customers, employees and shareholders. MEB intends to and the most reliable financial institution, providing efficient achieve its goals while strictly adhering to financial ethics. Survey of the Iranian Economy 1.1. Middle East Bank’s Business Strategy MEB operates primarily as a wholesale bank, providing financing MEB’s business strategies for the next five years are as follows: and investment solutions to its corporate clients, high net-worth • Putting into effect the projected development of human individuals and high income earners. Accordingly, rather than resources in both quantitative and qualitative terms; focusing on expansion of branches, MEB has been leveraging • Calibrating the Bank structure and resources to customers’ on its preeminent position in technology to deliver services to requirements; its clients. These delivery channels are quite unique in Iran, • Achieving sustainable and growing profitability and acceptable taking banking services to the offices and homes of its clients organic growth in all areas; through distance banking as well as e-banking tools. Following • Leading effective implementation of risk management, this approach, while satisfying the customers’ needs, MEB internal audit and compliance with domestic and international has experienced significant economy in operating costs and a rules and regulations; corresponding increase in profitability. • Enhancing investment banking group and expanding its Since the commencement of its operations in 2012, MEB has services; pioneered new standards of transparency, quality of services • Developing project financing facilities; Auditor’s Report & and focusing on IT. In line with its mission and vision, MEB • Creating a sustainable competitive advantage in information Audited Financial Statements has adopted coherent strategies at both the business level and the technology and e-banking tools and technologies; and operational level. MEB’s senior management is confident that it • Focusing on innovative products and services, and customized will achieve all the goals set forth in its five-year business plan. solutions tailored to the needs of clients. 10 MIDDLE EAST BANK ANNUAL REPORT 2. Shares and Shareholders By March 20, 2018, MEB had a total of 2,933 shareholders. The corporations holding more than one percent of the total shares composition and percentage of shares held by individuals and are as follow: Composition of shareholders Classification of shareholders No. of shareholders No. of shares Percentage of shares Individuals with 1% holdings and higher 16 1,362,606,318 22.7 Institutions with 1% holdings and higher 8 751,867,765 12.5 Individual investors with less than 1% holdings 2,652 3,155,827,220 52.6 Institutions with less than 1% holdings 257 729,698,697 12.2 Total 2,933 6,000,000,000 100.0 22.7% Individuals with 1% holdings and higher Institutions with 1% holdings and higher 12.5% Other investors 64.8% 2.1.