Annual Report For the Year Ended
March 20, 2015
In the Name of God
Annual Report For the Year Ended March 20, 2015
Please note: Iranian Year starts on March 21, and ends on March 20 of the following year Iranian Year 1393 : March 20, 2014-15
Iranian IRR (IRR) 27,994 : USD 1.0 Financial Highlights
Year ended March 20 2015 2014 2013 Outstanding Loans 20,751,434 12,708,181 2,575,223 Deposits 23,346,262 14,422,913 1,141,668 Total Assets 30,691,422 21,252,583 5,590,608 Net Profit 848,518 820,029 352,906 Letters of Guarantee 11,779,733 3,892,820 510,868 Letters of Credit 670,033 756,603 - Earnings per Shares (EPS in rials) 212 205 88 Capital Adequacy Ratio (CAR in %) 21.0 30.5 105.2
All figures in “Million IRR” except for EPS & CAR Table of Contents
Chapter 1 Management Report 7 (For the year ended March 20, 2015) 1. Bank’s Strategy 9 2. Corporate Governance 10 2.1. Board of Directors 10 2.2. Senior Management 11 2.3. Specialized Committees 12 2.4. Corporate Governance - Units 13 2.5. Disclosure and Transparency 13 3. Operational Reports 13 3.1. Human Capital Department 13 3.2. International Division 15 3.3. Information Technology Division 15 3.4. New Branches 16
Chapter 2 Review of Risks and Disclosure 17
1. Risk Management 18 2. Compliance Management 22 3. Internal Audit Management 23 4. Analysis of Financial Statements 24 5. Investments 29
Chapter 3 Report of Independent Auditor and Financial Statments 31
Chapter 4 Economic Review 1. Real Sector 2. Fiscal Policy 3. Monetary Policy 4. Balance of Payments
Chapter 1 Management Report (For the year ended March 20, 2015) 8 MIDDLE EAST BANK ANNUAL REPORT
Message from the Chairman This past year for Iran in general and the banking sector in particular was a challenging one. The Central Bank of Iran was pursuing a disciplinary monetary policy and concurrently combatting two consecutive years of negative growth, a historically unprecedented plight. But aggressive fiscal and monetary policies spurred a reinvigorated economic and financial environment. And while the con- ditions remain broadly difficult for the banks, we began to see nascent growth. In Iran, the economic recovery finally began to take hold with continuing underlying economic growth and slowly accel- erating gains in the labor market. At the same time political impasse and uncertainty over nuclear agreement both highlighted and, to some extent, contributed to the fragility of the economic recov- ery. As a result, many of our clients remained cautious, which impeded a broad-based resumption of their business activities. Amidst these shifting factors, I am pleased to report that Middle East Bank (MEB) performed rela- tively well. While sticking to “banking activities” only, it generated solid results for the year. This was the by-product of our commitment to a core set of businesses and actions we have taken in three important areas: strengthening our balance sheet, allocating capital efficiently across our businesses and managing our costs prudently. Since its inception, MEB has been in full compliance with directives of the Central Bank of Iran, the requirements of Tehran Stock Exchange, and the Basel Committees’ Principles. Within this frame- work, MEB ensures transparency in its activities including finance of the economic enterprises as well as directing its resources towards productive and profitable activities, whilst continually increas- ing the wealth and the Economic Value Added for its shareholders and depositors, pioneering a new standard in the quality of services available in the country. In this year’s report, we would like to review the significant steps we have taken recently to adapt to the realities of operating and, more specifically, regulatory environment and to respond to the post-sanction Iran, and, building on these efforts, our priorities for international activities as a fore- most Iranian financial institution going forward. In that vein, we also will discuss our competitive position across our businesses. Lastly, we want to share with you some of the initiatives we under- took related to our people, culture and business standards and practices. I am delighted to have the opportunity to present a report on the Bank’s performance and operations over the past financial year. The achievements outlined in this report are unequivocally the joint outcome of genuine efforts made by our committed team of experts and the ongoing support we have had from our shareholder group in our path to marking yet another successful year in the Bank’s history. I would like to take this opportunity to express my deepest gratitude to all individuals and parties who have played a part in the Bank’s ongoing successful track record.
Khosro Nayebi Ahranjani Chairman of the Board MANAGEMENT REPORT 9
1. Bank’s Strategy Middle East Bank (MEB) was incorporated on 30/07/1391 (Oc- the use of resources; tober 21, 2012) with a capital of 4,000 billion IRR (at the time • Continuing to earn the trust and faith of our shareholders and equivalent to about $380 million), consisting of 4 billion ordi- clients through transparent financial structure, establishment nary shares of 1,000 IRR each. The Bank was registered under of solid corporate governance and pioneering in risk man- registration number 430795 as “Bank Khavarmianeh Compa- agement; ny” with the Companies Registrar Office of Tehran. It obtained • Endeavoring to increase the shareholders’ values in the mid- its license to operate as a commercial bank from the Central term and long-term. Bank of Iran on 11/08/1391 (November 1, 2012). MEB’s operational strategies are as follows: By focusing its core activities on Corporate Banking, MEB satisfies the demands of legal entities which contribute to the • Emphasis on corporate banking; Management Report development of the country. To fulfill this mission, MEB has • Provision of centralized facility approvals; designed and supplied specialized banking products and ser- • Limiting network of branches; vices packages for its clients in industries, commercials, ag- • Development of distant services; ricultural and services sectors. Targeted companies identified • Provision of services corresponding to customer’s require- by the Bank as potential clients predominantly employ MEB’s ments; financing services and commission based activities. The Bank • Emphasis on recruiting and training talented graduates along- satisfies its clients’ needs by providing them with short term side with experienced managers; loan for working capital as well as medium and long-term guar- • Reiteration in all domestic business procedures; antees for funding from such sources as National Development • Collection and analysis of essential economic data; Fund of Iran. Other services such as trade finance and invest- • Cultivating and sustaining a highly stimulating and intellec- ment banking are also offered by the Bank. tual environment; The Bank also meets the special requirements of its depositors • Maximizing utility and preventing wasteful activities; by providing wide range of banking services including variety • Developing technology infrastructure. of deposit-arrangements in IRR and FX, card system, electronic According to Article (2) of the Bank’s Articles of Association, banking and distant banking. subject of bank activities are as follows: accept all kinds of The MEB’s perspective was therefore conceived as to be the
bank deposits, issue bearer or registered certificate of deposits, Risk Review and Disclosure nominated Bank for hardworking entrepreneurs, as well as grant credit facilities, open letters of credit and engage in all those who are providing the needed funds for economic growth foreign exchange transactions, issue, purchase and sell partici- of the country. pating bonds for the Bank, and on behalf of others, under CBI’s MEB’s mission is to be the provider of first class services to a relative regulations, issue bank guarantees, endorse, accept and substantial and diversified client base, with emphasis on com- underwrite securities including participating bonds, operate pliance with laws and regulations, financial transparency, and safe-deposit boxes, grant facilities for the export of technical value creation, by its young, vibrant, and educated workforce. services, participate and invest directly or through acquisition The Bank’s guiding principles are to provide high quality and of shares form stock exchange in manufacturing, commercial initiative services, through its remarkably cultivated work force, or service sectors under CBI’s relevant regulations, all under suitable to customers’ future demands by utilizing latest tech- non-usury banking law. nologies and emphasizing on three principles of expeditious- As at year-end 29/12/1393, the Bank had a total of 1980 share- ness, security and innovation to suit the needs of prominent holders. Classification and percentage of holdings of the share- corporate clients and major depositors. This has been achieved holders are stated below: with the help of professional and experienced managers in com- pliance with governing banking law in the country, transparent Financial Statments financial structure, customers’ discretion and respecting secrecy Classification of Shareholders No. of shares % of shares and
Real persons with one percent Report of Independent Auditor laws with the aim of value creation for the shareholders, cus- 719,705,256 18 tomers, employees and the society as a whole. and higher holding Legal persons with one percent The followings are the Bank’s principal goals: 860,521,640 22 and higher holding • Pioneering towards corporate and private banking through Others 2,419,773,104 60 provision of tailor-made products and services in accordance with customers’ requirements; Total 4,000,000,000 100 • Ever increasing customers’ loyalty by tribute, speedy and constructive response, close customer relations stance; • Leadership in provision of distant services to selected clients, Type of Shareholders • Prominence for developing international relations in order to gain recognition both regionally and globally; 18% • Developing technology infrastructures with security and flex- ibility in mind;
• Deploying the latest methods to maximize employees’ poten- 60% 22% Economic Review tial, expand their professional opportunities, and ensure their Real persons with one percent and higher holding interests remain focused on the long term and closely aligned Legal persons with one percent and higher holding with those of our clients and shareholders; Others • Reiterating all domestic business procedures in order to re- duce the operational cost, increase performance and optimize 10 MIDDLE EAST BANK ANNUAL REPORT
According to Tehran Stock Exchange’s authorization number Board as the 491st company and on 29/12/1393 with 52 percent 130/55289 dated 20/12/1393, MEB had fulfilled all the- re free floating shares, it ranked 14th amongst the companies list- quirements for its admission to Tehran Stock Exchange’s Main ed on the Main Board.
Share Prices and Transactions Value Market Cap End of year Capital Year ended No. of shares traded No. of days (mil. IRR) (mil. IRR) price (IRR) (mil. IRR) 30/12/1391 2,658,515,451* 2,715,241 55 4,156,000 1,039 4,000,000 29/12/1392 825,040,266 1,126,627 221 10,272,000 2,568 4,000,000 29/12/1393 409,085,657 842,589 229 7,776,000 1,944 4,000,000 *Of the total transaction value in the year that ended on 03/20/2013, 1,934,509 shares with the value of 1,934,509 million IRR were for the subscription of initial offering.
(IRR)
2. Corporate Governance Effective corporate governance is critical to the proper func- practices that help ensure an environment of effective oversight tioning of any enterprise but a lot more emphasis should be and strong accountability. placed on the banking industry. Banks perform a crucial role In order to implement effective corporate governance, the bank in the economy by intermediating funds from savers of funds should regulate and execute its strategic plan in accordance (depositors) to seekers of funds (borrowers) for activities that with international standards such as Corporate Governance support enterprise and help drive economic growth of the coun- Principles of Basel Committee on Banking Supervision dated try. Banks’ safety and soundness are key to financial stability, October 2014 or the UK Corporate Governance Code of Sep- and the manner in which they conduct their business, therefore, tember 2014. MEB’s achievements in the short period since its is central to economic health. Governance weaknesses at banks incorporation is a result of effective corporate governance. that play a significant role in the financial system can result in Middle East Bank’s Board of Directors acting on the recom- the transmission of problems across the banking sector and the mendation of its Corporate Governance, has adopted its prin- economy as a whole. ciples to promote the effective functioning of the Board and The primary objective of corporate governance should be the its committees, to promote the interests of shareholders, and to safeguarding of stakeholders’ interest in conformity with public ensure a common set of expectations as to how the Board, its interest on a sustainable basis. Among stakeholders, particular- various committees, individual directors and the senior man- ly with respect to deposit-taking banks, shareholders’ interest agement should perform their functions. would be secondary to that of the depositors. These principles have roots in Basel corporate governance Corporate governance determines the allocation of authority principles and other international models which have been and responsibilities by which the business and affairs of an in- modified and adjusted in accordance with the Bank’s type of stitution are carried out by its independent board and the senior activity and operation. The Bank has implemented the corpo- management of the company. rate governance principles in the following subjects: 1. Board The Basel Committee’s guidance draws from principles of cor- of Directors, 2. Executive Board, 3. Specialized Committees, 4. porate governance published by the Organization for Economic Corporate Governance Unit, and 5. Disclosure and Transparen- Co-operation and Development (OECD). The OECD’s widely cy which will be respectively elaborated in this section: accepted and long-established principles aim to assist govern- ments in their efforts to evaluate and improve their frameworks 2.1. Board of Directors for corporate governance and to provide guidance for partici- Middle East Bank is managed by a Board of 9 principal mem- pants and regulators of financial markets. bers. The members of the Board were elected in the resolution The Board of Directors and management of Middle East Bank of the founder’s general assembly dated 06/07/1391 and ac- have long recognized the importance of corporate governance cordingly in the registered letter No. 19713 dated 15/08/1391. MANAGEMENT REPORT 11 Management Report
9 8 7 6 1 2 3 4 5
The Board has designated responsibilities to adhere to the Basel • Determining and supervising the procedures of evaluating the principles of corporate governance. Chief among them are: Capital Adequacy, Compliance policies and Internal Audit • Outlining policies, strategy and an ongoing supervision on • Supervision of the Bank’s Compensation system the Bank’s operation The experience and the composition of the Board demonstrate • Determining the values and in general shaping the culture of the competency of the members in undertaking the assigned re- the Bank sponsibilities and also variety in their expertise and ultimately • Supervision of the Bank’s corporate governance framework compliance with second principle of Basel’s Corporate Gover- • Determining the Bank’s risk appetite nance Principles.
1. Khosro Nayebi-Ahranjani 6. Seyed-Hossein Salimi Board Chairman Board Member M.Sc. Accounting, NIOC’s Advanced Institute for Accounting M.Sc. Agricultural Engineering, Utah State University - Logan, Risk Review and Disclosure USA 2. Parviz Aghili-Kermani Board Vice-Chairman and Managing Director 7. Parviz Khakpour Ph.D. Finance, University of Wisconsin – Madison, USA Board Member 3. Amir Dadkhah M.Sc. Architecture and Urban Planning, Shahid Beheshti Uni- Board Member versity B.Sc. Mechanical Engineering, Amir-Kabir (Polytechnic) Uni- 8. Javad Javadi versity Board Member 4. Rouzbeh Pirouz M.Sc. Financial Management, Shahid Beheshti University Board Member M.Sc. International Relations, Harvard University, USA 9. Majid Safarian Board Member
5. Reza Soltanzadeh Financial Statments Board Member B.Sc. Accounting, Shahid Beheshti University Ph.D. Medical Sciences, Manipal Institute of Higher Education, and India Report of Independent Auditor
2.2. Senior Managment other individual and entities Middle East Bank’s Executive Board was set up in accordance • Standing before judicial authority, defending the Bank with the fourth Principle of Basel Corporate Governance Prin- against all claims, having the authority to sign the contracts ciples and by virtue of Article 81 of the Articles of Association including the arbitration clause and referring the claims to of the Bank. The Executive Board consists of the Managing arbitration and determining and selecting the appropriate ar- Director, Deputy Managing Director, the Advisor to M.D. and bitrator, and in general having the authority to request and to five assistants to the Managing Director. The authorities and take all applicable measures in the process of a judicial claim obligations of the Executive Board are inclusive of those exec- • Opening and closing of branch, counter, or subsidiary/affili- utive affairs which they have been assigned for by the Board of ates within or outside Iran in compliance with the rules • Opening any account and using that account in the name of Directors. These were elaborated in Article 84 of the Articles of Economic Review Association; chief among them are: the Bank in the other licensed banks and credit institutions • Representing the Bank before all governmental and non-gov- • Managing claims and liabilities ernmental natural or legal third parties, non-governmental • Issuance, endorsement, acceptance, payment and protest on public institutions, judicial authorities, commercial corpo- corporate bonds rations, non-governmental non-commercial institutions and • Concluding any contracts, and also amendment, conversion, 12 MIDDLE EAST BANK ANNUAL REPORT
termination or annulment of the contract of the subject matter on Compliance Department can be found in Chapter 2). of which there is a property linked to the Bank’s subject of activity Audit Committee • Depositing and refunding any document, deed, bank funds In line with the requirements of the Tehran Stock Exchange, and bonds the Audit Committee was set up on December 8, 2013, and its • To mortgage and the Bank’s property though frequently charter was ratified by the Board of Directors. The Audit Com- • To rent, lease, transfer, terminate a lease, request to amend mittee assists the Board in its supervision of financial reporting, the rent, and defending this request and all other requests in internal controls, accounting and compliance procedures and all authorities and in all stages the ethical code of conduct. The objective of this committee is • Constructing any buildings and installations to ensure the following: 1. Effectiveness of the strategy, risk management, and internal 2.3. Specialized Committees control procedures; 2. Acceptable quality and accuracy of the financial statements, Risk Committee the procedures of financial reporting, the accounting system The Risk Committee (RC) is composed of five board members, and financial monitoring; the Managing Director, and the Senior Manager of the Risk De- 3. Setting up, maintenance and support of the internal control partment. RC is responsible for making periodical reports to unit; help the Board with the Bank’s policies and decision makings. 4. Independence, professional competence, and quality of inter- It is further responsible for measuring, monitoring and reducing nal control and independent auditors; the Bank’s risks and ascertaining the Bank’s compliance with 5. Compliance with all laws, regulations and monitoring re- the rules and regulations of the Central Bank and international quirements, and the Bank’s own policies, including those relat- banking standards such as Basel III. The principal aim of the ing to the ethical code of conduct. committee is to make sure that the interests of the sharehold- (More information on Internal Audit Department can be found ers, the depositors and other stakeholders are protected through in Chapter 2) managing probable risks and hazards (more information on Risk Department can be found in Chapter 2). Other Committees Middle East Bank has set up other specialized committees. Compliance Committee Each committee is composed of some members of the Board of Compliance Committee (CC) is composed of two board mem- Directors. These committees include Property and Procurement bers, the Managing Director, Advisor to the Managing Director, Committee, Strategy Committee, Product Development Strate- and the Senior Manager-Compliance (SMC). CC’s objective gy, IT Committee, Human Resources and Compensation Com- is to develop policies of the Bank with respect to compliance mittee, Marketing Committee, Public Relations Committee, with domestic and international rules and regulations; particu- Complaints Committee, High Credit Committee of the Bank, larly with respect to Anti-money laundering. The framework of Central Credit Committee, and Branch Credit Committee. The the Compliance Department is determined by the Compliance table below demonstrates different committees of the bank and Committee. It includes amongst other tasks to enforce the poli- their members. cies, monitor activities and report to the CC (more information Total Jamalian Javad Javadi Alireza Edalat Mehdi Nedjati Amir Dadkhah Majid Safarian Dara Boushehri Rouzbeh Pirouz Parviz Khakpour Mohammad Taghi Reza SSoltanzadeh Seyed-Hossein Salimi Parviz Aghili Kermani Majid Nourmohammadi
Committees Khosro Nayebi Ahranjani
1. Risk 4
2. Audit 4
3. Compliance 4
4. HR & compensation 3
5. High Credit 6
6. Finance & Legal 5
7. Complaints 3
8. Marketing & Public Relation 5
9. Product Development & IT 4
10. Property 3 4 4 3 2 3 4 2 3 4 6 2 1 1 2 MANAGEMENT REPORT 13
2.4. Corporate Governance Units 2.5 Disclosures and Transparency In order to implement effective and efficient corporate gover- Middle East Bank published on its website a detailed report nance, MEB has established risk, compliance and internal audit on disclosures and transparency according to the CBI’s circular departments. The aforesaid departments carry out MEB’s strat- number MB/1172. This circular is in line with the Article XII egy with regards to corporate governance and are explained in Corporate Governance Principles. Further details on the opera- Chapter 2. tions and transparency of financial and non-financial issues are presented in detail in Chapter 2.
3. Operational Reports Management Report 3.1 - Human Capital Department Structure Number of Bank`s employees as of end of the year 1393 is as follows:
1393 1392 Head Office 154 125 Tehran Branches 88 68 Other Provinces Branches 40 23 Total 282 216
Composition of Human Capital Composition of Human Capital by Age by Gender 8% 7% Risk Review and Disclosure
50 and Above 52% 33% 51% 49% Male 50-40 Female 40-30 Under 30
Composition of Human Capital Composition of Human Capital by Education by Posting
35% Financial Statments
High School Diploma 57% 55% 45% Branch and
Bachelor Degree Headquarter Report of Independent Auditor Master Degree Ph.D. 6% 2%
Recruitment ployees; In 1393, HR Department recruited 43 persons to suit the needs • Codification of staff affairs regulations; of branches and 48 persons to fulfill the required human capital • Conducting midterm internal programs; of the head office through pre-recruitment test and analyses. • Conducting introductory programs for new employees of in- ternational department; Development of Human Capital • Conducting Crisis Management Program (including first aid, • Conducting 34 training programs for 70 employees during relief and rescue, disaster readiness and etc.) for all head of- service by external didactic entities; fice employees; • Training branch employees for customer service skills by
• Triggering Human Capital Portal to facilitate communication Economic Review with employees; coaching; • Attracting and retaining a suitable and competent workforce • Conducting educational program on International Financial and empowering them for the purpose of fulfilling their des- Reporting Standards (IFRS) for finance department employ- ignated duties to further the Bank’s interests and goals ees; • Printing a special booklet to facilitate orientation of new em- • Arranging for 2 of bank`s Executive Managers to attend 14 MIDDLE EAST BANK ANNUAL REPORT
EMBA program held by IBS institute in cooperation with cal wellbeing of employees, and instilling a positive and spir- Alto University of Finland; and ited outlook in the workforce • Encouraging employees to improve their English skills by • Providing life and casualty insurance coverage for employ- collaborating with reputed language institutes. ees. • Coverage of employees and their affiliated family members Welfare and Health Care Benefits in bank`s healthcare fund. • Facilitating usage of sport facilities for employees. • Organizing regular medical tests to monitor health condition • Preservation and promotion of the psychological and physi- of new and current employees. Organization Chart
Executive Managers Board of directors and Executive Board have conferred some Majid Safarian of their authorities to executive body of the bank. Through rig- Assistant Managing Director, Logistics and Branch Affairs Division orous supervision of the boards, accurate execution of bank`s B.Sc. Accounting, Shahid Beheshti University policies and authentic corporate governance are assured. Ex- ecutives are selected from top experts in their respective fields. Dara Boushehri They are introduced hither: Assistant Managing Director, Credit Division EMBA, American University of Sharjah, UAE Parviz Aghili-Kermani Managing Director Alireza Edalat Ph.D. Finance, University of Wisconsin – Madison, USA Assistant Managing Director, International Division B.Sc. Accounting, Advanced Institute for Accounting, Tehran Javad Javadi Deputy Managing Director Mehdi Nedjati M.Sc. Financial Management, Shahid Beheshti University Assistant Managing Director, Systems Development and IT Divi- sion Mohammad-Taghi Jamalian Ph.D. Computer Sciences, University College, London, UK Advisor to the Managing Director M.Sc. Business Management, Shiraz University Majid Nourmohammadi Assistant Managing Director, Finance Division M.Sc. Financial Management, University of Tehran MANAGEMENT REPORT 15
Jalaleddin Jalali Mohsen Karimi Advisor to the Managing Director and Acting Senior Manager, Eco- Senior Manager, Communication Department nomic Research Department M.A. Social Communications, Azad University, Tehran Ph.D. Economics, Princeton University, USA Mohammad Keshtehgar Azadeh Ahmadi-Kousha Senior Manager, Organization and Procedures Department Senior Manager, Finance Department M.Sc. Socio-Economic Systems Engineering, Azad University, B.Sc. Accounting, Azad University, Tehran Tehran
Vahid Azmoon Ali Khalili-Sadatloo Senior Manager, Branch Affairs Department Advisor to the Managing Director, Legal Affairs Management Report B.Sc. Industrial Management, Azad University, Tehran B.A. Law, University of Tehran
Rana Bani-Habib Laleh Mehradpay Senior Manager, International Affairs Department Senior Manager, Information Technology M.Sc. Banking Management, Iran Banking Institute, Tehran M.Sc. Socio-Economic Systems Engineering, Mazandaran University of Science and Technology Morteza Bina Senior Manager, Risk Management Department Ehsan Rahmaninia Ph.D. Signal Processing Engineering, Compiegne University of Senior Manager, Internal Audit and Inspection Technology, France Ph.D. Candidate, Accounting, Azad University, Sciences and Research Unit, Tehran Mohammad-Ali Dehghani Senior Manager, Credit Department 1 Farzaneh Rajaei-Salmasi M.Sc. Banking Management, Iran Banking Institute, Tehran Acting Senior Manager, Research and Product Development De- partment Gholamreza Hasanalizadeh M.Sc. Computer Engineering, Sharif University of Technology Acting Senior Manager, Legal Affairs Department Risk Review and Disclosure B.A. Law, Azad University, Tabriz Ehsan Sheikh-Taheri Senior Manager, Logistics Department Mahin Hanifeh B.Sc. Industrial Engineering, Azad University Senior Manager, Credit Department 3 M.Sc. Banking Accounting, Iran Banking Institute, Tehran Hedieh Tabrizi Senior Manager, Credit Department 2 Shokouh Hosseinabadi B.A. English Translation, Azad University, Tehran Senior Manager, Compliance Department Ph.D. International Trade Law, Kings College, London, UK Hossein Tayefeh-Mahmoudi Senior Manager, Human Capital Department M.A. Education, Tehran University
• Decrease the total cost of services provided while maximizing 3.2. International Division Financial Statments added value for customers
Middle East Bank provides importers, and exporters, and relat- and • Expansion and utilization of our correspondent banking rela-
ed businesses with trade finance services and products. These Report of Independent Auditor products include letters of credit, bank guarantees, counter tionships in order to fulfill the customers’ needs and improve guarantees, bills of exchange, foreign currency transactions, their trade opportunities fund transfers, current and time deposit accounts, and financ- • Offering high quality and secure services by providing suffi- ing imports and exports such as refinances in compliance with cient and suitable solutions to hedge operational risks Central Bank of Islamic Republic of Iran rules and regulations. Years of sanction and inattention to the importance of inter- One of our main missions is offering consultancy services in all national banking, has been a great obstacle in our economic international banking and finance fields. growth during the recent past. Our objective is to remedy this Bank’s long-term strategies in international banking are ex- oversight to the best of our abilities with the help of dedicated panding correspondent relationship network and establishment and well-trained team. of monetary and financial relations in international markets. As 3.3. Information Technology Division well, bank’s long-term objectives are defined as improvement of our internal business environment and promotion of our in- The majority of operational banking systems in the local mar- ternational business with a futuristic attitude. ket are legacy systems designed and developed in the 1990’s,
Our goals are to improve business environment, facilitate and including the banking system with which MEB commenced its Economic Review accelerate foreign currency interactions. It is imperative to operations in 2012. make progress in the following areas: Given the unavailability of a suitable system in the local mar- • Customer’s satisfaction by attending to their specific needs ket that met MEB requirements, MEB made a decision to pro- and trying to create tailor-made solutions and products for cus- cure a new generation banking system from the international tomers market. Consequently a system was selected from a number of 16 MIDDLE EAST BANK ANNUAL REPORT evaluated vendors. MEB’s technology personnel and the ven- ing the existing product range and in the creation of new prod- dor’s team made the required changes to the system to comply ucts and services. with country’s statuary banking regulations. The software lo- During this period the implementation of a Customer Relation- calization and customization also included a number of MEB ship Management system (CRM) has been completed for the specific requirements. This system became operational in MEB Public Relations group’s needs. Additionally the CRM system in September of 2014, replacing the operational system at the has been enhanced with capabilities that provide essential real time. The new system provides comprehensive functionality time data for the Credit and International group clients. These for MEB client needs. The system is particularly strong in the facilities enable the mentioned groups to inform their clients area of business banking. It provides corporate clients with in real time as to how their applications for credit and trade electronic payment capabilities such as payment initiation and finance are being pursued by the bank. This has reduced client payment authorization with multiple signature authorizations needs to contact the bank as they are being informed proactive- and any client required signature permutations for payment au- ly via email or SMS messages. thorization. It also provides corporates with a cash management Currently the product development group is involved with the module enabling them to manage their payment inflow and out- development of a new credit card system. The system is be- flow schedules. ing designed such that it meets with the local regulations but The system gives MEB an effective tool in achieving its busi- would have sufficient flexibility built in the product so that it ness objectives by providing its clients with superior and robust can conform to international credit card standards such as Visa service at reduced operational costs to the bank. The system and Master card standards with little or no customization. enables the bank to achieve a shorter time to market system development cycle with lower hardware and operational costs. 3.4. New Branches The system also provides secure, accurate and speedy service During the year under review, three new branches were added without the need for an extensive branch network. This system to the Bank’s network of branches, bringing the total number is being continually enhanced as client requirements change. to 11 branches. Product Development The product development group is closely involved in trans- Branch Date of Opening forming client requirements into attainable and implementable Tabriz 10/01/1393 products to increase client satisfaction and bank profitability. Zaferanieh 03/02/1393 During the last year the product development group was in- volved with making the Internet banking system into one of the Shiraz 17/03/1393 most advanced and full functional systems in the market. The group has been in regular contact with bank clients to assess their views and their satisfaction with the bank products and services. Client feedback has been used effectively in improv- Chapter 2 Review of Risks and Disclosure (For the year ended March 20, 2015) 18 MIDDLE EAST BANK ANNUAL REPORT
1. Risk Management Introduction 2- Average credit rating for the clients should be B+ or above Middle East Bank (MEB) is committed to implementing Ba- (top 50 percentile). sel-III Accord in addition to the requirements of Central Bank 3- Collaterals as well as “supplementary collaterals” are used of Iran (CBI). CBI has taken the necessary steps requiring Ira- to augment lower rated credits. The objective is to main- nian banks to disclose information regarding corporate gover- tain lower risk weight for all loans if the Advanced-IRB ap- nance and risk management. However, CBI has not as yet made proach were to be employed in the future. the implementation of Basel-III Accord compulsory nor has it 4- MEB attempts to maintain an 85% loan-to-deposit ratio. provided the prerequisite guidelines. For this reason, we rely According to IRB-Foundation model, the average risk weight directly on latest Basel documents and reference the relevant of the loan portfolio as of March 20, 2015 was 105.6%. Accord- 1 information where necessary. ing to the newly revised standardized approach , the average risk weight of the loan portfolio was 115.1%. Risk Management Structure Liquidity Risk Risk Management in MEB consists of Risk Committee (RC) and Risk Department (RD). The duties of the RC are modeled MEB’s Finance Department provides the senior management based on the Basel document entitled “Guidelines- Corporate with a daily report regarding the bank’s positions on its assets governance principles for banks”, issued in October 2014. The and liabilities. This report is accompanied with an analysis of RC consists of five Board members and the head of Risk De- return on assets and funding costs. Also, recently the bank’s risk department started reporting Liquidity Coverage Ratio partment (or Senior Manager Risk - SMR). SMR is responsi- 2 ble for reporting risk related matters to RC, discussing relevant (LCR) on a monthly basis . The aforementioned daily report information with members of the RC/Board members, as well from the finance department and the LCR report from the risk as executing various resolutions of RC. The Board assures in- department allow senior managers make important strategic de- dependence of the risk function from other business activities cisions. of the bank. Market Risk Credit Risk From the strategic point of view and for developing and de- livering better services to customers, MEB has established the MEB defines its credit policy to ensure the rules and regulations computer technology firm “Simaye Aftab” with 100% owner- of CBI are properly implemented. MEB’s primary credit clients ship. Also for delivering better services to customers, MEB are corporations. However, natural persons who manage their has invested in the following financial institutions: 1-Khavarm- business activities personally and are not under a legal umbrella ianeh Brokerage House with 75% ownership, 2- Khavarmianeh are welcomed and treated as proprietorship. Obviously in such Foreign Exchange Bureau with 95% ownership, 3- Kardan In- cases, Chamber of Commerce registration and a proper tax code vestment Firm with 33% ownership. are necessities prior to extension of any facilities. Concentra- The debt market in Iran is not well developed and interest rate tion of MEB’s credit is in short-term requirements of its clients; risk (as it is globally known) is non-existent. However, there namely inventory and receivable financing. Even international are some bonds issued for national development projects which activities are limited to the importation of raw mateIRR, spare are either backed by government guarantees or are indirectly parts and finished consumer goods. MEB occasionally arranges backed by CBI. MEB has marginally invested in some of these and participates in syndicated guarantee facilities when funding bonds; however, these bonds are practically not subject to mar- is provided through the capital market or State managed, Na- ket risk as they are very liquid, traded at face value, and backed tional Fund for Development. by government. General Credit Risk Policies Basel-III Capital Adequacy Ratios (CAR) The following statements describe MEB’s credit risk policy: In the absence of clear guidelines from CBI regarding Basel-III 1- All clients requesting facilities are independently evaluated CAR, we have opted to consider fairly conservative approaches and rated by Risk Department. Credit Department performs in our estimations of CAR according to Basel-III Accord. its own evaluation.
CAR Methodology Tier 1 (%) Tier 2 (%) Tier 1 + Tier 2 (%) CAR according to Basel-I (required by CBI and displayed here for 19.7 1.2 20.9 comparison) CAR according to IRB-Foundation 13.0 0.8 13.8 CAR according to “Revised Standardized Approach” Issued 2014 12.1 0.8 12.9 CAR according to MEB’s Stress Test Model in severe economic 10.3 0.6 10.9 conditions* *. The stress conditions are -8.5% GDP growth rate, 52% inflation rate, 62% lending rate in free market (outside banking system), and 77% drop in the value of the currency. MEB’s stress test model is very sensitive to the position of a bank within the estimated range of probability of defaults, and concentration of assets classes in the country’s banking system. The next level of the sensitivity of the model is to GDP growth rate. This stress test model is based on a research published by World Bank that can be used for banking systems of developing countries.
1. The Basel document “Revisions to the Standardized Approach for credit risk”, was issued December 2014, for comments by March 2015. 2. The LCR for the day March 20, 2015 was 156%. According to Basel-III, the important measures of liquidity are the Liquidity Coverage Ratio (LCR) and Net Stable Funding (NSF) ratio. The Basel-III minimum requirement for LCR is 100% to be achieved by 2019. Please refer to the “Liquidity” section of the risk management report for the detailed calculation of LCR. The NSFR will move to a minimum standard by January 2018. RISK REVIEW AND DISCLOSURE 19
CAR according to IRB-Foundation loans to remaining 23.5%. The rational for the risk assignment We have classified MEB’s loan portfolio as about 90% corpo- to 23.5% is supported by the fact that this portion of portfolio rate loans and 10% loans to natural persons who manage their consists of smaller size businesses, however, well diversified, business activities personally and not under a legal umbrella. and better known personally to the senior managers of the bank. MEB has credit rated about 76% of its corporate loans. The Accordingly, the average risk weight has been calculated to be average credit rate (without considering collateral risk mitiga- 105.6%. We have used Basel-III standardized risk weights for tion effects) is located in the range of B+ to BB. We have opted other balance sheet items. to assign the average risk weight calculated for the 76.5% of The following table describes the distribution of credit ratings of MEB’s credit portfolio. Corporate credit rates based on S&P rating system % of Total Risk weight %
AAA - - Management Report AA 3.0 14 A 11.4 34 BBB 13.6 60 BB 16.9 92 B 14.2 122 CCC 6.2 144 CC 4.8 150 C 6.5 300 D - - Total 76.5 Average risk weight 105.6
On Balance Sheet (Billion IRR) Assets Risk Weight % Risk Weighted
Cash and equivalents 122.3 0 0 Risk Review and Disclosure Due from CBI 2,988.5 0 0 Due from other banks (checks) 77.2 0 0 Due from other banks1 1,146.6 100 1,146.6 Participation Bonds 600.4 0 0 Non-consolidated direct investments in financial institutions 331.2 250 828.0 (total less than 10% of bank capital) Investments through stock exchange in financial institution (total 2.1 250 5.3 less than 10% of bank capital) Consolidated direct investments 115.9 100 115.9 Other equity investments through stock exchange 513.2 300 1,539.6 Significant investments in commercial entities 0 1,250 0
Account Receivables 1,232.9 100 1,232.9 Financial Statments
Loans 20,751.4 105.6 21,913.4 and
Tangible Fixed Assets 2,082.4 100 2,082.4 Report of Independent Auditor Intangible Assets 662.7 100 662.7 Goodwill 0 0 0 Other Assets 64.6 100 64.6 Total on balance sheet risk weighted 30,691.4 29,591.4 Off Balance Sheet Items (Billion IRR) Conversion Factor Risk Weight Risk weighted Performance bonds, bid bonds, warranties 11,780 50% 105.6% 6,220 Documentary credits collateralized by the underly- 1,551 20% 105.6% 310 ing shipments Total off balance sheet risk weighted 36,121.4 Operational Risk (Billion IRR) Economic Review Risk factor Risk Weight Multiplier Risk Weighted Average of 2 years’ net interest incomes 1,387 18% 12.5 3,121.0 Total Risk weighted assets and operational risk 39,242.4 1. Since most Iranian banks have an NPL ratio larger than 3% and the estimation of CAR according to Basel-III is less than 8%, for the simplicity we have opted to choose the rather conservative risk weight of 100% 20 MIDDLE EAST BANK ANNUAL REPORT
Eligible Capital (Billion IRR) Amount Ratios (%) Paid in capital 4,000 Retained earnings 770 Statuary reserves 311 Common equity tier-1 5,081 Less investments in financial institutions above 10% of bank capital - Less goodwill - Eligible common equity tier-1 5,081 13.0 Additional tier-1 - - Total eligible tier-1 5,081 13.0 General loss provisions 325 0.8 Less exceeding 1.25% of total risk weighted assets - - Eligible Tier-2 capital 325 0.8 Tier-1 + Tier-2 5,406 13.8
CAR according to Revised Standardized Approach The following calculations are based on the “Revisions to the Standardized Approach for Credit Risk”; a consultative docu- ment issued December 2014 for comments by March 2015.
Loans (Billion IRR) % of total Risk Weight (%) Risk Weighted
Exposures secured by real estates1 - - 25 to 100 - Retail and other2 - - 75 to 100 - Corporate loans subject to 60% risk weight3 - - 60 - Corporate loans subject to 70% risk weight4 - - 70 - Corporate loans subject to 80% risk weight5 750 3.6 80 600 6 Corporate loans subject to 90% risk weight 2,826 13.6 90 2,543 7 Corporate loans subject to 100% risk weight 2,570 12.4 100 2,570 8 Corporate loans subject to 110% risk weight 3,949 19.0 110 4,343 9 Corporate loans subject to 110% risk weight 3,810 14.9 110 4,572 10 Corporate loans subject to 120% risk weight 3,094 18.4 120 3,403 Corporate loans subject to 130% risk weight11 1,926 9.3 130 2,504 12 Corporate loans subject to 130% risk weight 1,052 5.1 130 1,368 13 Corporate loans subject to 150% risk weight 230 1.1 150 345 Corporate loans subject to 300% risk weight14 554 2.6 300 1,632 Total 20,751 100 23,881 Average loans risk weight 115.1
1- Exposures secured by real estate where the income for loan repayment is not dependent upon the collateralized property (subject to 25% to 100% risk weights). 2- Retail and other according to paragraphs 33 to 35 of “Revised Standardized Approach”, ( subject to 75% to 100% risk weights) 3- Leverage less than 3, revenue larger than 1bn euros. 4- Leverage between 3 and 5, revenue larger than 1bn euros. 5- Leverage less than 3, revenue between 50m euros and 1bn euros. 6- Leverage less than 3, revenue between 5m euros and 50m euros, or leverage between 3 and 5, revenue between 50m euros and 1bn euros. 7- Leverage less than 3, revenue less than 5m euros, or leverage between 3 and 5, revenue between 5m euros and 50m euros. 8- Leverage between 3 and 5, revenue less than 5m euros, or leverage greater than 5, revenue between 50m euros and 1bn euros. 9- Corporate loans where financial information has not been recorded. These are smaller size companies and well diversified. To our judgment, the risk weight of 110% is appropriate for this group of loans. 10- Leverage less than 3, revenue between 5m euros and 50m euros. 11- Loans to individuals where credit is extended for their businesses. These are smaller size loans and well diversified. To our judgment, the risk weight of 130% is appropriate for this group of loans. 12- Leverage greater than 5, revenue larger than 5m euros. 13- Loans past due, 14- Loans to corporate with negative equity. In these cases, usually, the shareholders have funded their corporations through an account and recorded as liability to shareholders. RISK REVIEW AND DISCLOSURE 21
By applying the risk weight of 115.1% to off balance sheet items, CAR reduces from 13.8% for IRB-Foundation to 12.9% for new standardized approach. Liquidity Coverage Ratio (LCR)
High Quality Liquid Assets (Billion IRR) Original amount Haircut After haircut After haircut % of total Level 1 Assets Cash and equivalent 122 0% 122 2.5
Due from Central Bank of Iran 2,989 0% 2,989 60.6 Management Report Checks in clearing due from other banks 77 0% 77 1.6 Total level 1 3,188 3,188 64.7 Level 2A Assets Due from other banks (deposits) 1,147 15% 975 19.8 participation bands backed by government 600 15% 510 10.4 Total Level 2A 1,747 1,485 30.1 Level 2B Assets Short term investments in stock exchange 516 50% 258 5.2 Total HQLA 5,451 4,931 100
Cash Outflows (Billion IRR)
Type of deposit Type of depositor Amount % of Total Outflow % Outflow Risk Review and Disclosure Stable funds Deposits as cash collateral 1,857 8 0 0 Deposits < 10 Natural persons 3,135 13 5 157 Less Stable Funds Deposits <10 Corporates 1,134 5 10 113 Natural persons 4,886 21 10 489 10 < Deposits <50 Corporates 2,296 10 15 344 Natural persons 1,390 6 15 208 50 < Deposits < 200 Corporates 2,479 11 25 620
Wholesale Funding Financial Statments Natural persons 1,604 7 25 401 and Deposits > 200 Report of Independent Auditor Corporates 4,565 20 40 1,826 Obligations Loans approved not withdrawn 1,725 Other obligations 86 Total cash outflow 5,969
Cash Inflows (Billion IRR) Cash inflows due to performing loans1 -1,840 Cash outflows minus cash inflows 4,129
HQLA 4,931 Economic Review LCR 119% 1- We have assumed that under stress 20% of current loans will not be repaid on time and the remaining would be paid during the expected average 9 months. 22 MIDDLE EAST BANK ANNUAL REPORT
Stress Testing Middle East Bank employs a stress testing model based on re- loss given default is allowed to increase in times of stress. search and working papers published by the World Bank re- 4- A bank’s lending concentration within individual asset class- searchers; mainly the paper entitled “Macroprudential Stress es and the extent of the performed maturity transformation Testing of Credit Risk, A Practical Approach for Policy Mak- are allowed to play an important role in bank specific capital ers”. The following is the abstract quoted from the said paper: charge calculations, eliminating some of the drawbacks of “Drawing on the lessons from the global financial crisis and the capital charge calculation based on Basel II methodology. especially from its impact on the banking systems of Eastern 5- The attributes are prudently combined to produce a more rel- Europe, the paper proposes a new practical approach to mac- evant outcome indicator measuring bank resilience to macro- ro-prudential stress testing. The proposed approach incorpo- economic as well as bank specific shocks. rates: (i) macroeconomic stress scenarios generated from both Unquote: a country specific statistical model and historical cross-country The inputs of the model can be differentiated in three catego- crises experience; (ii) indirect credit risk due to foreign cur- ries: rency exposures of un-hedged borrowers; (iii) varying under- 1- Macro-economic stress conditions writing practices across banks and their asset classes based on 2- Environment conditions: “through the cycle” macro-econom- their relative aggressiveness of lending; (iv) higher correlations ic conditions, and overall steady state conditions of banking between the probability of default and the loss given default system expressed as the range of probability of defaults, loss during stress periods; (v) a negative effect of lending concen- given defaults and concentration of assets in 7 loan groups tration and residual loan maturity on unexpected losses; and (Corporates, SMEs, Consumer Mortgages, Other Consumer, (vi) the use of an economic risk weighted capital adequacy ratio Sovereigns, Banks) as the relevant outcome indicator to measure the resilience of 3- Bank specific factors: bank NPL ratio, and bank specific PDs banks to materializing credit risk. The authors apply the pro- and LGDs for each asset class. posed approach to a set of Eastern European banks and discuss The macro- economic stress scenario are: -8.5% GDP negative the results.” real growth rate, 54% nominal inflation rate, free market lend- This paper is posted on the Web at http://elibrary.worldbank.org/ ing rate of 62%, local currency devaluation of 77%. We have doi/pdf/10.1596/1813-9450-5936. assumed slightly worst economic conditions than the economic The model is developed by studying the banking and economic conditions of 2012-2013. conditions of 162 countries and is very relevant to the bank- The macro- economic through the cycle (steady state) scenario ing systems of developing countries such as Iran. The model are: average 5% GDP real growth rate, average 20% nominal has been tested on the banking systems of Eastern European inflation rate, average free market lending rate of 30%, average countries and the result, according to the authors, has been very local currency devaluation of 16% per year. satisfactory. This is a top-down model that we found appropri- For determining the overall conditions of the Iranian banking ate for stress-testing of the Middle East Bank and other Iranian system we have resorted to estimates based on 25% NPL ratio banks. of the entire banking system. Naturally, the 1.7% NPL ratio of The proposed methodology integrates the following attributes: Middle East Bank relative to the banking system is very low, Quote: so the model becomes less sensitive to macro-economic condi- 1- An explicit and robust link of systemic credit risk to macro- tions and very sensitive to NPL ratio for the Middle East Bank. economic conditions based on cross-country experience that If the NPL ratio of a bank were in the mid-range relative to can be further tailored to country specific conditions, and that 25%, for example 10% to 15%, which are probably the norm allows for the credit risk sensitivity to changing macroeco- for many Iranian banks, the sensitivity to other factors such as nomic conditions to increase during crisis times. GDP would increase substantially. Under the said circumstanc- 2- A bank-specific, idiosyncratic component of credit risk based es, the model would show the most sensitivity to GDP. on the different underwriting standards across individual banks and their aggressiveness in lending, including the as- Stress Testing Result sumption of indirect credit risk from foreign currency lend- Given the above inputs and relevant descriptions, the capital ing to un-hedged borrowers. adequacy ratio of the bank according to Basel-III standard mod- 3- The correlation between the probability of default and the el reduces from 13% to 10.9%.
2. Compliance Management The rationale behind making laws and implementing regula- regulations, and regulations pertaining to unified practices by tions is to maintain stability, order and security. To this end, international organizations including, amongst others, the inter- MEB’s compliance department has been formed to ensure the national chamber of commerce (ICC). While emphasizing the application of this principle of jurisprudence and stability, or- importance of its mission to ensure strict adherence to laws and der and security in all aspects of our operations. The goal of regulations, the goals of the department include: this department is to ensure full compliance with laws and rules • Anti-Money Laundering and Countering of Financing and regulations, both domestic and international. Domestic reg- Terrorism ulations cover a wide spectrum ranging from the constitution, MEB has established a strict policy on Anti-money launder- ordinary laws, banking laws, government decisions and cen- ing (AML) and countering the financing of terrorism (CFT). tral bank directives and guidelines, to the bank’s own internal MEB’s compliance framework on combating money laundering guidelines. In the field of international regulations, compliance and financing of terrorism meets national and international reg- extends to international conversations, United Nations reso- ulatory requirements. Know your costumer (KYC), sanctions, lutions, international treaties, anti-money laundering (AML) politically exposed persons (PEPs), suspicious activities, shell RISK REVIEW AND DISCLOSURE 23
banks, and correspondent banking relationship, are subjects transparency are two sides of the same coin and are mutually with regards to MEB’s AML and CFT policies, and construc- dependent. tive measures have been undertaken to comply with relevant • Prevention of Non-Compliance laws and regulations. Furthermore, training programs on AML The compliance department has come up with a set of key mea- and CFT are devised regularly for the employees of the bank in sures to ensure identification of, and compliance with, funda- order to enhance their knowledge and insights, as well as the mental laws and regulations governing the banking profession. culture of compliance in these areas. This department has also made preparations to familiarize var- • Customer Due Diligence (CDD) ious bank departments with the laws and regulations related to One of the main functions of MEB’s compliance department their particular area of interest, and is in charge of monitoring is to conduct enhanced due diligence particularly with respect the observance of those laws and regulations. This proactive to sanctions. In this regard, MEB Compliance Screening Tool approach to compliance protects the customer’s interests. Management Report has been designed to screen all the customers, beneficiaries, • Reducing Losses Due to Non-Compliance and correspondent banks in the sanctions lists, including the By identifying all instances of non-compliance, the compliance UN, EU, OFAC, UK, SECO, and other prohibited lists such as department helps curb losses resulting from instances of such Politically Exposed Persons (PEPs), CBI Black list, Fraud and negligence and non-compliance. money laundering lists. • Promoting the Culture of Respecting Laws • Protecting the Rights of Customers One of the main goals of the compliance department is to inter- By supervising the observance of laws, the compliance depart- nalize the culture of compliance with the laws so that individ- ment will raise the customers’ confidence in the bank’s ability uals and divisions instinctually operate within the framework to look after their rights and interests. Confidence in a bank’s of the law, thereby safeguard the interests of the Bank and its ability to look after their rights and interests is a key criterion customers. for selecting a bank. The compliance department plays a key • Protecting the Bank’s Credibility and Reputation role in assisting customers in making that decision. Compliance with laws and regulations will lead to increased • Operational Transparency transparency, confidence and customer satisfaction, and- de One of the best indicators of compliance with laws and regula- creases losses resulting from non-compliance, and thus pro- tions is transparency in bank’s operations. Banking operations motes a culture of obedience by the law. The ultimate byproduct that are in line with the governing laws, rules and regulations of compliance is a boost in the bank’s credibility and reputation are clear and predictable, which are indispensable precondi- within the banking industry and the society at large, which is Risk Review and Disclosure tions for customer’s trust. In effect, compliance and operational the main goal of MEB. 3. Internal Audit Management The increased focus on risk and the supporting governance ment will ensure the followings: framework includes identifying the responsibilities of different • Risks should be identified, assessed, monitored, and- con parts of the organization for addressing and managing risk. Of- trolled on an ongoing bank-wide and individual entity basis. ten referred to as the “three lines of defense”, each of the three • When necessary, to appropriately interact with different oper- lines has an important role to play. The internal audit function ational units within the Bank. is charged with the third line of defense, conducting risk-based • Financial, managerial, and operational information is reliable, and general audits and reviews to provide assurance to the board timely, and complete. of directors that the overall governance framework, including • Provision of guidance to staff members on applicable laws, the risk governance framework, is effective and that policies rules and standards in the form of policies and procedures
and processes are in place and consistently applied. Superviso- and other documents such as compliance manuals, internal Financial Statments ry guidance for assessing the effectiveness of the internal audit codes of conduct and practice guidelines. and function in banks forms a major part of the Basel Committee’s • Ensuring the effectiveness of cost of funds. Report of Independent Auditor ongoing efforts to address bank supervisory issues and enhance • Achievable and realistic programs, goals and plans of the supervision through guidance that encourages sound practices bank. within banks. It builds on the Committee’s Principles for en- • Promotion of high quality and effectiveness of the Bank’s hancing Corporate Governance which require banks to have an control processes. internal audit function with sufficient authority, stature, inde- • Monitoring of compliance with laws and regulations, includ- pendence, resources, and access to the board of directors. Inde- ing any requirements from supervisors. pendent, competent and qualified internal auditors are central to The followings are the most important steps taken by the inter- sound corporate governance. nal audit department towards realizing the above goals: The Internal Audit Department was set up in 1391 under the supervision of the Bank’s Board of Directors in order to ad- Ensure the effectiveness and efficiency of the internal here to Middle East Bank’s commitment to fulfill its mission control system of increasing wealth and creating economic value added for One of the main duties of the Internal Audit Committee is to its shareholders and the society. The head of the internal au- independently and objectively evaluate the quality and effec- dit department is responsible for ensuring that the department tiveness of the Bank’s internal controls continuously in order Economic Review complies with national and international professional standards to improve them. The MEB’s internal control audit report of such as those established by the Institute of Internal Auditors. 1393 was based on the 17 principles of COSO 2013, which will It is also responsible for strengthening its compliance with the ensure the followings: Basel Principles, as well as the requirements of Tehran’s Stock • Effectiveness and efficiency of the operations. Exchange and Central Bank of Iran. Consequently the depart- • Reliability of reports. 24 MIDDLE EAST BANK ANNUAL REPORT
• Compliance with applicable laws and regulations. tional management. It assists operational management in defin- ing risk exposures and reporting through the organization. The Ensure the effectiveness of the risk management and compliance function monitors the risk of non-compliance with compliance functions laws, regulations and standards. These functions are also con- MEB’s internal audit function employs a risk-based approach trol functions, which ensure that policies and procedures with according to the Basel Committee’s Principles 2014 on corpo- regard to risk-taking are enforced. Other monitoring functions rate governance, supervisory guidelines typically referred to as may include human resources and the legal department. three lines of defense: Ensure Effectiveness of Information Technology’s Internal 1st line: Operational management Controls 2nd line: Risk management function, compliance function and IT plays a fundamental role in banks and the security of Infor- other monitoring functions mation Systems is a major concern of the Internal Audit Func- 3rd line: Internal audit function tion, particularly, the change of MEB’s core banking software Control failings by one line of defense should, in principle, be has become our primary focus. We use COBIT5 model for IT detected by another line of defense. However, responsibility for Supervision and control. The relevant reports were submitted to internal control does not transfer from one line to another. the Board of Directors. Operational management has ownership, responsibility and ac- countability for identifying, assessing, controlling, mitigating Supervision of Subsidiaries and reporting on risks encountered in the course of a bank’s The ultimate responsibility of the bank’s internal controls and business activities. its subsidiaries lies with the Board of Directors. The Internal The risk management function facilitates and monitors the im- Audit Department periodically examines MEB’s subsidiaries. plementation of effective risk management practices by opera- In 1393, the insufficiencies and issues regarding IT that demand attention, were reported to the Board of Directors. 4. Analysis of Financial Statements In view of the companies’ requirements to submit financial present its financial statements alongside its annual report of statements in accordance with International Financial Report- 2016 based on IFRS guidelines. A summary of the Bank’s fi- ing Standards (IFRS), from 2017 onward, the Bank plans to nancial operation in 2014 and 2015 is presented below:
1. Principal Balance Sheet Items (Million IRR)
Year Ended Increase Year Ended % of Notes % of Total 20 Mar.2015 (Decrease) 20 Mar.2014 Total A) Assets Loans 10 20,751,434 68% 63% 12,708,181 60% Participation Bond 8 600,402 2% 17% 723,000 3% Investments 9 962,411 3% 1% 954 ,563 4% Net Fixed Assets 12, 13 2,745,104 9% 21% 2,271,766 11% Other Assets 5,6,7,11,14 5,632,071 18% 23% 4,595,073 22% Total Assets 30,691,422 100% 44% 21,252,583 100%
B) Liabilities Deposits 16,15 23,346,262 76% 62% 14,422,913 68% Other Liabilities 17 to 22 2,263,707 7% 13% 1,996,735 9% Total Liabilities 25,609,969 83% 56% 16,419,648 77%
C) Shareholder’s Equity Share Capital 23 4,000,000 13% 0% 4,000,000 19% Retained Earnings and Legal reserve 1,081,453 4% 30% 832,935 4% Total Shareholder’s Equity 5,081,453 17% 5% 4,832,935 23% Total Liabilities and Shareholder’s Equity 30,691,422 21,252,583
D) Off Balance sheet commitments Guarantees issued 36 11,779,773 203% 3,892,820 32 L/C Commitments 36 670,033 (11%) 756,603 30 RISK REVIEW AND DISCLOSURE 25
A brief description regarding major items of the Balance Sheet
Facilities: Other Assets: In 2015, the Bank’s total facilities experienced a 63% growth Of 5,632 billion IRR, 2,891 billion IRR were for statutory de- compared with the previous year, rising from 12,700 billion posit held by the Central Bank of Iran, 1,223 billion IRR is IRR to 20,751 billion IRR. Also the facilities ratio to total assets for interbank receivables, 887 billion IRR for accrued interests rose 8%. This is an evidence of a shift into a more profitable and dividends receivable. The remaining is for cash and other combination of assets. The quality of the bank’s facility port- receivable accounts. folio is demonstrated by the fact that just 2% of the facilities Deposits: are overdue.
The total deposits experienced 62 percent growth compared Management Report Investments: with the previous year; considering the prevailing situation Of the 962 billion IRR investment in shares and stocks of oth- in the financial markets and macro-economic situation of the er companies, 447 billion IRR was allocated for long-term in- country, it is a satisfactory growth. However, it is expected the vestment in MEB Brokerage Firm, MEB Currency Exchange, deposits to Bank’s Capital ratio to grow from the current 5.8 Kardan Investment bank and Dadeh Pardazan Seemaye Aftab level to 10 this year. (DSA) which have been set up by MEB in order to provide Other debt items: better services to its customers. The remaining 515 billion IRR was invested in the shares of companies listed on TSE. 1,535 billion IRR is pertinent to short-term finance from CBI Fixed assets: which has been completely cleared in May 2016. 112 billion 2,460 billion IRR of the Bank’s total assets is related to its Main IRR is tax payable and the remaining is relevant to accounts Office’s and branch’s freehold, of its total 11 branches in 2015, payable the freehold of 7 of them belongs to MEB and 4 of them are in leasehold. 2. Profit and Loss (Million IRR)
Year Ended Year Ended % of Total Increase % of Total Risk Review and Disclosure Notes 20 March 20 March Income (Decrease) Incomes 2015 2014 A) Incomes Interest Income 26 4,236,583 81% 116% 1,963,238 72% Investments and Deposits Income 27 678,785 13% (1%) 687,775 25% Commission Income 29 215,140 4% 229% 65,449 2% Other Incomes 30,31 90,036 2% 377% 18,867 1% Total Incomes 5,220,544 100% 91% 2,735,329 100%
B) Expenses: Interest Expenses 28 (3,707,698) 71% 152% (1,473,941) 54% Financial Statments Adminiatration and General Expenses 32 (397,143) 8% 81% (219,742) 8% and Provision for Doubtful Loans 33 (148,809) 3% (6%) (158,621) 6% Report of Independent Auditor Other Expense 34 (5,626) 0.1% 147% (2,282) 0.1% Profit before tax 961,268 18% 9% 880,743 32% Net Profit 848,518 16% 3% 820,029 30%
A brief explanation regarding the Profit & Loss items: Bank’s commission based income rose 3 percentage point and of bank guarantees revenues is 177 billion IRR experiencing reached 7 percent in comparison with last year’s 4 percent. 186 percent growth. Though this is satisfactory, it is expected to grow substantially next year together with the increase in international operation Provision for Doubtful Debt: and commission based income. A crucially important fact is that As mentioned before, the ratio of none performing loans to total the 80 percent of Bank’s revenues come from conferring bank- facilities stands at 2 percent, which amounts to 126 billion IRR. Economic Review ing facilities which experienced 115 percent growth. The share 26 MIDDLE EAST BANK ANNUAL REPORT
Returns on Asssets and Liabilities and their compatibility with Profit and Loss Account (Million IRR)
Average Projected Weighted Amount of Actual Description % of Total Balance Return Return Return Return Cash 132,559 1% 0% - - - Due from the Central Bank of Iran Statuary Deposit 2,485,375 9% 1% 0.1% 24,854 24,754 Current Account-IRR 29,548 0% 0% - - - Current Account-Other Currencies 184,675 1% 0% - - - Due from other Banks & Financial Institutions Deposit-IRR 1,692,929 6% 26.58% 1.7% 449,981 449,384 Deposit- Other Currencies 1,003,212 4% - - - - Inter - bank checks 33,792 - - - - - Participation Bonds 886,265 3% 25.5% 0.86% 225,998 222,023 Investment in Listed Shares 672,943 3% (3%) (0.1%) (21,534) (21,581) Loans Loans-IRR 15,054,820 57% 28.1% 16% 4,234,921 4,235,100 Loans - Other Currencies 71,286 - 2% - 1,426 1,483 Investment in other Companies 386,034 1% 1% - 3,860 4,205 Pre-payments & Other Receivables 1,190,212 5% - - - - Fixed Assets 2,535,906 10% - - - - Other Assets 49,725 - - - - - Total Assets 26,409,281 100% 18.6% Deposits-IRR 19,277,965 73% 19.24% 14% (3,709,080) (3,707,698) Deposits Other Currencies 350,655 1% 1.5% - (5,260) (5,279) Due to the Central Bank of Iran 850,111 3% 0.1% - (850) - Accounts Payable 658,985 2% - - - - Tax Payable 95,968 - - - - - Dividends Payable 10,797 - - - - - Total Liabilities 21,244,481 80% 14% Accumulated Depreciation 44,415 - - - - - Provision for Doubtful Debts 245,917 1% - - - - Other Provisions 27,482 - - - - - Total Provisions 317,814 1% - - Share Capital 4,000,000 15% Legal Reserve 248,996 1% Retaied Earnings 597,990 2% Shareholders' Equity 4,846,986 18% Total liabilities & shareholders’ equity 26,409,281 100% Net profit before commissions, general 1,204,314 1,202,391 expenses & doubtful debts provisions Net return on assets before commissions general expenses & doubtful debts provisions 4.6% Commission Income 305,175 305,175 Expenses 546,298 546,298 Net Profit Before Tax 963,191 961,268 RISK REVIEW AND DISCLOSURE 27
Summary Financial and Operational Ratio For Years Ended 20 Mar.2014 and 20 Mar.2015
2015 2014 Capital Adequacy Ratio 20.9% 30.5% Loans to Deposits 90.4% 89.5% Loan to Total Assets 67.9% 60.2% Total Expenses to Total Income 81.6% 67.8% Liability Ratio 83.4% 77.3% Return on Assets 2.8% 4.1% Management Report Return on Capital 21.2% 20.5% Total Deposits to Capital (times) 5.8 3.6 Interest paid to Interest Received 87.6% 75.1% Interest paid to Total Deposits 21.7% 17.2% Interest Received to Loans 28.1% 26.9% Interest Paid to Total Income 87.2% 79.6% Interest Received to Total Income 81.2% 71.4% Non-Performing Loans Ratio 1.7% - Depreciation to Total Expenses 4.6% 5.3% Personnel Expenses to Total Expenses 1.1% 1.2% Bad Debt Expenses to Total Expenses 3.5% 8.6%
(Million IRR)
2015 2014 Risk Review and Disclosure Total Income per Branch (Average no.) – million IRR 522,054 455,888 Net Profit per Branch (Average no.) – million IRR 84,852 136,672 Total Deposits per Branch (Average no.) – million IRR 2,334,626 2,403,819 Total Loans per branch(Average no.) – million IRR 2,109,891 2,151,141 Total Income to the Number of Personnel– million IRR 20,966 16,679 Net Profit to Number of Personnel (Average no.) – million IRR 3,408 5,000 Total Deposits to the number of Personnel (Average no.) – million IRR 93,760 87,945 Total Facilities to the Number of Personnel (Average no.) – million IRR 84,735 78,700
Deposits Financial Statments The outcome of our efforts in mobilization of savings is sum- marized in the table below: and Report of Independent Auditor
(Million IRR)
20 Mar.2015 20 Mar.2014 Description Number Amount % of Total Number Amount % of Total Current Deposits 3,545 895,892 4% 1,918 513,609 4% Ordinary Short-term Investment Deposits 13,830 6,195,949 28% 6,196 811,647 5% Special Short-term Investment Deposits 600 1,347,205 6% 660 5,973,855 42% 3-month & 6-month Investment Deposits 86 207,845 0.9% 355 945,863 7% 6-month Deposit notes 98 43,440 0.1% - - - Long-term Investment Deposits 3,332 12,685,525 57% 1,219 5,698,030 40%
Deposits against Guarantees Issued and Let- 1,195 1,055,425 4% 481 282,783 2% Economic Review ters of Credit Opened Total 22,686 22,431,281 100% 10,829 14,225,787 100% 28 MIDDLE EAST BANK ANNUAL REPORT
Mobilization Of Foreign Currency Resources
20 Mar.2015 20 Mar.2014 Description Number (million IRR) % of Total Number (million IRR) % of Total Current Deposits 263 30,793 10% 105 1,603 1% Short-term Special Investment Deposits 49 12,336 4% 10 3,750 3% One-year Deposits 138 70,750 24% 48 36,415 31% Deposits against Guarantees 2 4,844 2% 2 4,546 4% Deposits against Letters of Credit 9 176,319 60% 4 70,723 61% Total 461 295,042 100% 169 117,037 100%
Interest Bearing Deposits & Non-Interest Bearing Deposits (Million IRR)
Description Number Amount % of Total Non-interest Bearing Deposits 4,740 1,951,317 9% Interest Bearing Deposits 17,946 20,479,964 91% Total 22,686 22,431,281 100%
Comparative Analysis of Fluctuations of Interest Expense on Rial Deposits
Description Year ended 20 Mar.2015 Year ended 20 Mar.2014 Average Balance of Deposits (million IRR) 19,444,729 8,480,336 Weighted Average Interest Rate on Deposits 19% 17% Interest Expenses on Rial Deposits (million IRR) 3,707,698 1,473,941 Increase in Interest Expense (million IRR) 2,233,757 1,450,330 Increase in Interest Expense Due to Volume (million IRR) 1,885,876 1,310,626 Increase Percentage 84% 90% Increase in Interest Expense Due to Rate (million IRR) 347,881 139,704 Increase Percentage 16% 10%
Summary of Loans and Commitments (Million IRR) Description Approvals (Volume) Utilized (Outstanding) on 20 Mar. 2015 Loans 32,160,537 21,099,224 Guarantees Issued Balance 28,767,054 11,779,733 Letters of Credit Balance 15,054,873 670,033
Comparative Analysis of Fluctuations of Interest Income on Rial Loans (Million IRR) Description Year ended 20 Mar.2015 Year ended 20 Mar.2014 Average Balance of Loans (million IRR) 15,054,820 7,155,089 Interest Income on Loans (million IRR) 4,235,100 1,963,022 Average Rate of Interest 28.1% 26.9% Increase in Interest Income (million IRR) 2,272,078 1,876,003 Increase in Interest Income Due to Volume (million IRR) 2,125,028 1,614,083 Percentage Increase 94% 86% Increase in Interest Income Due to Rate (million IRR) 147,050 261,920 Percentage Increase 6% 14% RISK REVIEW AND DISCLOSURE 29
Comparison of Budgeted & Actual Profit &Loss for the Year ended 20 Mar.2015 (Million IRR)
Forecasted Actual Projected 2016 2015 2015 Interest Income 6,876,905 4,236,583 4,198,239
Investments and deposits Income 532,558 678,785 778,006 Interest Expenses (5,791,740) (3,707,698) (3,695,296) Net Interest and Investment Income 1,617,723 1,207,670 1,280,949
Commission Income 277,595 215,140 228,101 Management Report Income from foreign Exchange Transactions 71,874 56,015 - Other Incomes 117,863 34,021 50,100 Operating Income 2,085,055 1,512,846 1,559,150
Expenses: Administration and General Expenses (491,519) (397,143) (409,585) Provision for Doubtful Loans (196,673) (148,809) (102,717) Commission Expenses (6,920) (5,626) - Profit before Tax 1,389,943 961,268 1,046,848 Income Tax (180,434) (112,750) (166,290) Net Profit 1,209,509 848,518 880,558 Number of the company’s shares 4,000,000 4,000,000 4,000,000 Risk Review and Disclosure Earning per share (Rial) 302 212 220
5. Investments
The summary of the Bank’s direct investing and its propri- Mar.2015 are presented in the following two tables: etary trading activities in Tehran Stock Exchanges as of 20
Listed Companies in Tehran Stock Exchange (in Million IRR) Description Purchase Price Current Price Dividend Profit (Loss) from the Transaction % of Total Net Investment 708,182 515,312 103,199 (21,582) 9%
Unlisted Companies Financial Statments
Company’s Name Number of Shares Paid-up Capital (%) Bank’s Ownership (%) Purchase Price (in Million IRR) and Report of Independent Auditor Dade Pardazan Seemaye 30,000,000 35 100 10,500 Aftab MEB Brokerage co. 70,000,000 100 75 67,404 Kardan Investment Bank 2,000,000,000 50 32/92 331,196 MEB Currency Exchange 40,000,000 100 95 38,000
Dadeh Pardazan Seemaye Aftab (DSA) banking software application, system software, hardware, net- DSA was incorporated on 17/11/1391 with a capital of 30 bil- work services, changes/enhancements, and maintenance and lion IRR. The main aim of DSA’s initial mission was the local- project management. ization and customization of the acquired banking system for In addition to the indebt knowledge of the banking systems, MEB. This mission was accomplished successfully within the DSA personnel have a unique and highly effective project man- planned time schedule and the acquired system from Datavision agement skill in the development and implementation of time critical online banking systems.
Company became operational in September 2014. Economic Review Subsequently DSA was given the responsibility of operating Middle East Bank Brokerage Company and maintaining the MEB’s entire technology requirements. These include information technology, hardware and network Middle East Bank Brokerage Company has been established services. DSA operates from MEB’s Operations Center and in March 1995 with total paid in capital of 100 million IRR provides the full spectrum of technology services, including and registered in TEHRAN judiciary registration Dept. under 30 MIDDLE EAST BANK ANNUAL REPORT number 120215. Company’s previous name was “SAHAM • Wealth and asset management services POUYA” and new owners of the company changed the name • Creating and founding mutual funds and fund management to the current name in 2013. Middle East Bank Brokerage firm services acts as integrated part of bank’s value chain as one of its affili- • Company listing services in Tehran Stock Exchange market ates and has been focused on Iranian stock and capital markets • Company listing services in OTC’S and OTC markets. Currently Company’s activity goes beyond and includes various financial services and products in 7 main Middle East Bank Currency Exchange following areas: Middle East Bank Currency Exchange Company with registra- tion NO 467640 and license NO 319250 from central Bank of • Stock transactions in Tehran Stock Exchange market Iran was incorporated on 13/11/1393 with a capital of 40 billion • Stock transactions in Iranian OTC IRR. Cash bill exchange, gold coin trade, and trustee money • Providing online trading services to clients transfer are amongst its activities. Chapter 3 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS (For the year ended March 20, 2015) 32 MIDDLE EAST BANK ANNUAL REPORT REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 33 Management Report Risk Review and Disclosure Financial Statments and Report of Independent Auditor Economic Review 34 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Consolidated Balance Sheet at March, 20, 2015
Million IRR Notes 20 March 2015 20 March 2014 20 March 2013 Assets: Cash 5 187,986 144,873 22,968 Due from Central Bank of Iran 6 2,988,543 2,012,965 139,061 Due from other Financial Institutions 7 1,230,068 1,589,869 431,942 Participation Bonds 8 600,402 723,000 1,140,000 Investments 9 906,495 941,777 71,567 Loans 10 20,700,215 12,680,109 2,575,223 Accounts Receivable 11 1,207,607 842,661 368,425 Tangible Fixed Assets 12 2,142,335 1,785,411 549,366 Intangible Assets 13 664,723 494,280 281,118 Other Assets 14 79,731 62,146 1,247 Total Assets 30,708,105 21,277,091 5,580,917
Liabilities and Equity: Customers Deposits 15 22,048,319 14,050,600 1,083,212 Other Deposits 16 1,236,235 357,903 48,675 Due to other Financial Institutions 17 106,122 79,207 - Due to Central Bank of Iran 18 1,749,067 1,580,160 - Dividends Payable 19 3,780 10,022 - Provision for Income Tax 20 114,836 122,300 80,585 Other Liabilities and Provisions 21 297,577 224,888 13,924 Staff Termination Benefits 22 25,172 9,467 2,118 Total Liabilities 25,581,108 16,434,547 1,228,514
Share Capital 23 4,000,000 4,000,000 4,000,000 Parent Shares Acquired by Subsidiary 24 (456) (670) - Legal Reserve 313,498 184,756 61,216 Retained Earnings 791,244 651,558 291,187 Parent Entity Total Equity 5,104,286 4,835,644 4,352,403 Minority Interest 25 22,711 6,900 - Total Liabilities and Shareholders’ Equity 30,708,105 21,277,091 5,580,917
The accompanying note are integral part of these financial statements. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 35
Middle East Bank (Public Joint Stock Company) Consolidated Profit and Loss Accounts For the Year Ended 20 March 2015
Million IRR
Notes Year Ended 20 Year Ended 20 For 5 months March 2015 March 2014 period ended 20 March 2013 Income: Interest Income 26 4,232,333 1,962,038 87,019 Management Report Investments and Deposits Income 27 686,883 673,446 221,340 Interest Expenses 28 (3,703,741) (1,472,953) (19,493) Net Interest and Investment Income 1,215,475 1,162,531 288,866 Commission Income 29 265,234 132,810 15,363 Pre-operation income - - 218,450 Income from Foreign Exchange Transactions 30 56,025 (410) - Other Incomes 31 34,021 19,277 949 355,280 151,677 234,762 Operating Income 1,570,755 1,314,208 523,628 Expenses: Administration and General Expenses 32 (430,999) (257,601) (41,680) Provision for Doubtful Loans 33 (148,028) (158,192) (40,041) Risk Review and Disclosure Commission Expense 34 (5,626) (2,282) (8,919) Total Expenses (584,653) (418,075) (90,640) Profit before Tax 986,102 896,133 432,988 Income Tax (114,836) (67,125) (80,585) Net Profit 871,266 829,008 352,403 Minority Interest (2,838) (5,687) - Profit Attributable to Shareholders of the Parent Company 868,428 823,321 352,403 Earning per Shares 217 206 88 Consolidated Statement of Retained Earnings
Net Profit for the Year 871,266 829,008 352,403 Financial Statments
Retained Earnings- Beginning Balance 706,733 346,362 - and
Previous Years Adjustments 35 (55,175) (55,175) - Report of Independent Auditor Adjusted Retained Earnings- Opening Balance 651,558 291,187 - Dividend (599,680) (340,000) - 51,878 (48,813) - Distributable Profit 923,144 780,195 352,403 Transfer to Legal Reserve (128,742) (123,540) (61,216) Retained Earnings- End of the Year 794,402 656,655 291,187 Minority Interest in Retained Earnings (3,158) (5,097) - Retained Earnings Attributable to Shareholders of the Parent Com- 791,244 651,558 291,187 pany Economic Review
The statement of comprehensive income is not presented because its elements would only have consisted of net profit for the year The accompanying note are integral part of these financial statements. 36 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Consolidated Statement of Cash Flows For the Year Ended 20 March 2015
Million IRR
Notes Year ended 20 Year ended 20 For 5 months March 2015 March 2014 period ended 20 March 2013 Operating Activities: Cash Flow from Operating Activities 37 807,344 3,628,292 (2,902,770)
Investing Activities: Purchase of Tangible Fixed Assets (412,463) (1,250,453) (549,693) Sale of Tangible Fixed Assets 9,258 - - Purchase of Intangible Assets (171,269) - - Purchase of Long Term Investments - (364,516) (107,539) Sale of Long Term Investments 13,167 - 32,564 Purchase of Short Term Investments (434,096) (1,249,601) - Sale of Short Term Investments 282,101 731,013 - Dividends Income 182,875 188,226 11,173 Net Cash Flow (Used in) from Investing Activities (530,427) (1,945,331) (613,495)
Financing activities: Share Capital Issue - - 4,000,000 Captal raised form Minority 7,800 - - Paid Dividend (606,242) (329,978) - Net Cash Flow (Used in) from Financing Activities (598,442) (329,978) 4,000,000 Net Increase (Decrease) in Cash 38 (321,524) 1,352,983 483,735 Currency Gain (Loss) (41) - - Cash at Beginning of the Year 38 1,836,718 483,735 - Cash at the End of the Year 38 1,515,153 1,836,718 483,735
The accompanying note are integral part of these financial statements. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 37
Middle East Bank (Public Joint Stock Company) Balance Sheet as at March, 20, 2015
Million IRR
Notes 20 March 2015 20 March 2014 20 March 2013 Assets: Cash 5 122,249 72,519 22,968 Due from Central Bank of Iran 6 2,988,543 2,012,965 139,061 Management Report Due from other Financial Institutions 7 1,223,712 1,574,321 431,942 Participation Bonds 8 600,402 723,000 1,140,000 Investments 9 962,411 954,563 81,613 Loans 10 20,751,434 12,708,181 2,575,223 Accounts Receivable 11 1,232,936 889,037 368,425 Tangible Fixed Assets 12 2,082,375 1,777,794 549,011 Intangible Assets 13 662,729 493,972 281,118 Other Assets 14 64,631 46,231 1,247 Total Assets 30,691,422 21,252,583 5,590,608
Liabilities and Equity: Customers Deposits 15 22,109,674 14,064,860 1,092,993 Risk Review and Disclosure Other Deposits 16 1,236,588 358,053 48,675 Due to other Financial Institutions 17 79,122 75,207 - Due to Central Bank of Iran 18 1,749,067 1,580,160 - Dividends Payable 19 3,780 10,022 - Provision for Income Tax 20 112,750 115,889 80,585 Other Liabilities and Provisions 21 296,508 206,944 13,334 Staff Termination Benefits 22 22,480 8,513 2,115 Total Liabilities 25,609,969 16,419,648 1,237,702
Share Capital 23 4,000,000 4,000,000 4,000,000
Legal Reserve 24 311,494 184,216 61,212 Financial Statments
Retained Earnings 769,959 648,719 291,694 and Parent Entity Total Equity 5,081,453 4,832,935 4,352,906 Report of Independent Auditor Total Liabilities and Shareholders’ Equity 30,691,422 21,252,583 5,590,608
The accompanying note are integral part of these financial statements. Economic Review 38 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Profit and Loss Accounts For the Year Ended 20 March 2015
Million IRR
Notes Year ended 20 Year ended 20 For 5 months March 2015 March 2014 period ended 20 March 2013 Income: Interest Income 26 4,236,583 1,963,238 87,019 Investments and Deposits Income 27 678,785 687,775 221,340 Interest Expenses 28 (3,707,698) (1,473,941) (19,580) Net Interest and Investment Income 1,207,670 1,177,072 288,779 Commission Income 29 215,140 65,449 15,363 Income from Foreign Exchange Transactions 30 56,015 (410) - Other Incomes 31 34,021 19,277 219,399 305,176 84,316 234,762 Operating Income 1,512,846 1,261,388 523,541
Expenses: Administration and General Expenses 32 (397,143) (219,742) (41,680) Provision for Doubtful Loans 33 (148,809) (158,621) (40,041) Commission Expense 34 (5,626) (2,282) (8,329) Total Expenses (551,578) (380,645) (90,050) Profit before Tax 961,268 880,743 433,491 Income Tax (112,750) (60,714) (80,585) Net Profit 848,518 820,029 352,906
Statement of Retained Earnings
Net Profit for the Year 848,518 820,029 352,906 Retained Earnings- Beginning Balance 703,894 346,869 - Previous Years Adjustments 35 (55,175) (55,175) - Adjusted Retained Earnings- Opening Balance 648,719 291,694 - Dividend (600,000) (340,000) - 48,719 (48,306) - Distributable Profit 897,237 771,723 352,906 Transfer to Legal Reserve (127,278) (123,004) (61,212) Retained Earnings- End of the Year 769,959 648,719 291,694
The statement of comprehensive income is not presented because its elements would only have consisted of net profit for the year The accompanying note are integral part of these financial statements. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 39
Middle East Bank (Public Joint Stock Company) Statement of Cash Flows For the Year Ended 20 March 2015
Million IRR
Notes Year ended 20 Year ended 20 For 5 months March 2015 March 2014 period ended 20 March 2013 Operating Activities: Management Report Cash Flow from Operating Activities 37 824,136 3,525,919 (2,893,029)
Investing Activities: Purchase of Tangible Fixed Assets (359,264) (1,249,602) (549,329) Sale of Tangible Fixed Assets 9,229 - - Purchase of Intangible Assets (169,930) - - Purchase of Long Term Investments (71,150) (364,516) (117,644) Sale of Long Term Investments 13,167 - 32,564 Purchase of Short Term Investments (420,737) (1,235,981) - Sale of Short Term Investments 292,100 731,013 - Dividends Income 182,976 188,226 11,173 Net Cash Flow (Used in) from Investing Activities (523,609) (1,930,860) (623,236)
Financing activities: Risk Review and Disclosure Paid Capital - - 4,000,000 Paid Dividend (606,242) (329,978) - Net Cash Flow (Used in) from Financing Activities (606,242) (329,978) 4,000,000 Net Increase (Decrease) in Cash 38 (305,715) 1,265,081 483,735 Currency Gain (Loss) (41) - - Cash at Beginning of the Year 38 1,748,816 483,735 - Cash at End of the Year 38 1,443,060 1,748,816 483,735
The accompanying note are integral part of these financial statements. Financial Statments and Report of Independent Auditor Economic Review 40 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
1-Background
1-1- Formation of the Company (Bank) • Issue, purchase and sell participation bonds for itself on be- half of others, under CBI’s operative regulations. Middle East Bank (Public Private Joint Stock Company – (“the • Receive credit facilities from real or legal persons in accord- Bank”) was approved by the Central Bank of Iran (“CBI”) un- ing with the standing regulations. der approval number 91/184904 in October 2012 and registered • Issue bank guarantees, endorse, accept and underwrite secu- with Tehran Registrar of Companies under registration number rities including participation bonds. 430795, in the same month. The Bank also registered with Teh- • Operate self-deposit boxes. ran Stock Exchange in July 2012 and its shares were traded in • Grant facilities for the export of technical services. the secondary market (“OTC”) in January 2013. The Bank’s • Participate and invest directly or through acquisition of Head Office is located in No2, 5th St. Ahmad Qasir(Bucharest) share from stock exchange in manufacturing, commercial or Ave. Tehran, Iran. service sectors, under CBI’s operative regulations and usu- 1-2- Scope of the Bank Activities ry-free banking law. And … According to clause No 2 of the Bank’s Articles of Association The object of bank is to provide funding resources by accepting , subject of bank activities are as follows: deposits, credit and other financial instruments and apply these • Accept all kinds of bank deposits. funds for extension of credit and investment in various sectors • Issue bearer or registered certificate of deposits. of economy. • Grant credit facilities. • Open letter of credits and engage in all foreign exchange 1-3- The number of staff employed at 22.Sep.2015 was as transactions. follows:
20 Mar.2015 20 Mar.2014 Main office 154 125 Branches 128 91 282 216
1-4- The Bank has 11 branches at 20 Mar.2015 ( 8 branches at 20 March.2014).
2- The Basis of Financial Statements The parent company’s (the Bank’s) and the group consolidat- price is used in some cases. ed financial statements are based on historical cost and current 3- Principles of Consolidation a)The consolidated financial statements incorporate the assets, maye Aftab Co.”,“Khavarmiyaneh Broker Co.” and “Khavar- liabilities and results of the subsidiary controlled by the Bank. miyaneh Currency Exchange Co.” and the shareholding per- Subsidiaries are fully consolidated from the date on which centage are 100, 75 and 95 respectively. control commences and are consolidated from the date control b) The Bank’s shares acquired by the subsidiary, if any, are re- ceases. In preparing the consolidation financial statements all corded at cost in the subsidiary’s accounts and deducted from intergroup transactions and balances have been deleted.The the Bank’s equity in the consolidated financial statements. subsidiary subjected to consolidation are “Dadeh Pardazan Si- 4-Summary of Significant Accounting Policies The principal accounting policies adopted in the preparation of 4-2- Foreign Currencies the financial statements are set out below: • Monetary assets and liabilities are converted at the official 4-1- Accounting Convention exchange rates, advised by the CBI, on a daily basis and ex- change differences, if any, are provided in the accounts. The consolidated financial statements have been prepared under • Non-monetary assets and liabilities are recorded at the histor- the historical cost convention and in accordance with Iranian ical exchange rates prevailing at the time of recording trans- Accounting Standards and the CBI’s monetary and banking actions in the accounts. regulations. Current values have been used where appropriate. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 41
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
• 4-3-Investment 4-4- Tangible Fixed Assets • Long-term investments are valued at cost less than the provi- 4-4-1- Tangible fixed assets, except land are stated at purchase sion made for any permanent reduction in their values. cost. Major repairs and improvements which extend the useful • Short-term liquid investments are valued at the lower of cost life of assets are capitalized whereas minor repairs are charged and market value at the portfolio level and non liquid short-
to the profit and loss account as incurred. Management Report term investments are valued at the lower of cost and market value of each investment. 4-4-2- Requirements of impairment on non-current assets is in • Dividend from subsidiaries not consolidated are recognized compliance with Iranian Standard 32. as income in the year in which payments of dividends are 4-4-3- Depreciation of fixed assets is calculated based on sec- approved in their annual general meetings (AGM’s). Whilst tion 151 of Iranian Direct Taxation Act of 1988 as amended (the in case of other investments, income is only recognized when Tax Act) as follows: approved by the investees’ AGMs held prior to the Bank’s year end.
Asset Depreciation Rate Basis Buildings and installations 7% Reducing balance Fixture and fittings 10 years Straight line Motor vehicles 25%& 35% Reducing balance ATM's 10 years Straight line Computer hardware 3 &10 years Straight line Risk Review and Disclosure 4-4-4- Fixed assets acquired during a month and put to use are ing in to account the likelihood of future cash inflows from such depreciated starting the first date of following month. Assets loans. not utilized immediately when ready to use, are depreciated at b) Guarantees commission is recognized as income at the time 30% of the above rates for the period they have been idle. of issuing guarantees. 4-4-5- Expenses incurred for renovation and major repairs of 4-7- Depositors Share of Profit rented buildings are recorded under fixed assets and depreciat- Under the CBI’s regulations, interest income and income from ed remained useful life of vthe assets. investments in shares and participation bonds are classified as “Participating income” which is divided between the Bank and 4-5- Intangible Assets its depositors proportionate to their resources. In accordance with the CBI’s regulations, the Bank is entitled to receive Intangible assets are recorded at cost at the time of acquisition. a commission from depositors based on total interest paid to In accordance with the CBI’s guidelines, computer software is them. The commission was 2.5% for the year under review. depreciated in a straight line basis over 5 years. No deprecia- tion is provided for goodwill and other intangible assets. 4-8- Classification of Loans Financial Statments and Loans are classified in accordance with the CBI’s regulations Report of Independent Auditor 4-6- Revenue Recognition and the management assessment of customers’ credit risk and a) Interest income is recognized on accrual basis and after tak- their ability to service facilities. The classification of loan port- folio is as follows:
Loan Principal & Interest (PI) Outstanding Required Provision -% in Months Current PI< 2 0 Overdue 2
4-9- Provision for Bad and Doubtful Loans forming loans including the period of irregularity, in compli- Provisions for bad and doubtful debts are provided in accor- ance with the CBI’s regulations, the Bank is required to provide dance with the CBI’s regulations as follows: specific provisions, based on the above classification ranging Economic Review a) General provision- amounting to 1.5% of the total loan port- from 10% to 100% of the shortfall in the balance of each loan folio. after allowing for the value of collaterals and general provision b) Specific provision- depending on the severity of the non-per- in (a) above. 42 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
4-10- Termination Benefits Staff termination benefits are provided at the rate of one month salary and other remuneration for each year of service.
5-Cash The details of cash balances are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Cash in hand-IRR 133,800 103,684 68,260 31,615 Cash in hand- other currencies 53,688 40,734 53,688 40,734 Others 498 455 301 170 187,986 144,873 122,249 72,519
5-1- Cash in hand is in the Bank’s branches and have counted at 20 March 2015. The cash insured against theft and fire. 6- Due from the Central Bank of Iran The balance due from the CBI comprises: (Million IRR) Consolidated Parent Co. Note 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Statutory deposit 6-1 2,891,444 1,910,989 2,891,444 1,910,989 Current account 97,099 101,976 97,099 101,976 2,988,543 2,012,965 2,988,543 2,012,965
6-1- Statutory deposit rate is as below:
20 Mar.2015 20 Mar.2014 (Rate)percentage Rls (m) (Rate)percentage Rls (m) Long term deposits 13.5 1,665,340 10,11,15 516,896 Short term deposits 13.5 980,763 15.5 1,243,290 Current account and temporary payables 13.5 157,097 17 98,306 Margin held against guarantees 13.5 87,813 17 51,787 Margin held against LCs 13.5 431 17 710 2,891,444 1,910,989
7-Due from Other Financial Institutions The details of balances due from other financial institutions are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Current account with other banks- other currencies 926,134 1,235,210 926,134 1,235,210 Current account with other banks-IRR 7,890 15,684 1,534 136 Term deposits with other banks-IRR 162,876 338,975 162,876 338,975 Term deposits with other banks- other currencies 55,988 - 55,988 - others 77,180 - 77,180 - 1,230,068 1,589,869 1,223,712 1,574,321 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 43
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
8-Participation Bonds The analysis of participation bonds is as follows: (Million IRR) Consolidated Parent Co. Management Report 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Government Development Projects 597,900 428,000 597,900 428,000 Non-government Participation Bonds 2,502 - 2,502 - Participation Bonds issued by CBI - 295,000 - 295,000 600,402 723,000 600,402 723,000
8-1-The maturity dates for bonds are as follows: (Million IRR) Profit Rate Nominal Amount Maturity date % Rls (m) 2015/08/23 20 2,502 2017/02/24 20 170,000 2017/03/12 20 150,000 2017/10/28 20 277,900 600,402 Risk Review and Disclosure
9-Investments The details of investments are as follows: (Million IRR) Consolidated Parent Co. Note 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Long Term Unlisted shares 9-1 389,696 361,698 447,099 375,016 Short Term 9-2 Listed shares 709,650 580,079 708,182 579,547 Accumulated decrease in value (192,851) - (192,870) -
906,495 941,777 962,411 954,563 Financial Statments and
9-1- The details of long term investments are as follows: Report of Independent Auditor (Million IRR) Consolidated Parent Co. Note 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Dadeh Pardazane Simaye Aftab Co. 100% - - 10,500 10,500 Khavarmiyaneh Broker Co. 75% - - 67,404 20,154 Tamin Sarmayeh Kardan Co. 32.92% 343,271 344,362 331,195 344,362 khavarmiyaneh Currency Exchange Co. 95% - - 38,000 - Others 46,425 17,336 - - 389,696 361,698 447,099 375,016 Economic Review 44 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
10-Loans The details of loans net of provision for bad and doubtful debts are as follows: (Million IRR)
Consolidated 20 Mar.2015 20 Mar.2014 Principal Doubtful debt Future interests Net balance Net balance balance provision Mozarebeh 2,817,127 - (43,529) 2,773,598 68,940 Mosharekat Madani (civil partner- 18,190,936 - (302,578) 17,888,358 11,645,148 ship contracts) Joaleh 785 (319) (7) 459 - Foreign facilities - - - - 328,858 Debtors for paid L/C 38,376 - (576) 37,800 - Debtors for paid guarantees - - - - 637,163 21,047,224 (319) (346,690) 20,700,215 12,680,109
(Million IRR)
Parent Co. 20 Mar.2015 20 Mar.2014 Principal Doubtful debt Future interests Net balance Net balance balance provision Mozarebeh 2,817,127 - (43,529) 2,773,598 68,940 Mosharekat Madani (civil partner- 18,242,936 - (303,359) 17,939,577 11,673,220 ship contracts) Joaleh 785 (319) (7) 459 - Foreign facilities - - - - 328,858 Debtors for paid L/C 38,376 - (576) 37,800 - Debtors for paid guarantees - - - - 637,163 21,099,224 (319) (347,471) 20,751,434 12,708,181 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 45
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
10-1- Classification of loan according to its principal, interest and provisions: (Million IRR)
Consolidated
20 Mar.2015 Management Report Current loans Overdue loans Postponed loans Doubtful debt Total Mozarebeh 2,815,558 1,569 - - 2,817,127 Mosharekat Madani (civil partner- 17,835,145 225,857 129,934 - 18,190,936 ship contracts) Joaleh 785 - - - 785 Debtors for paid L/C 38,376 - - - 38,376 20,689,864 227,426 129,934 - 21,047,224 less: Future interests (319) - - - (319) General provision for Doubtful debt (321,019) (3,411) - - (324,430) special provision for Doubtful debt - - (22,260) - (22,260) 20,368,526 224,015 107,674 - 20,700,215 Risk Review and Disclosure
(Million IRR)
Parent Co. 20 Mar.2015 Current loans Overdue loans Postponed loans Doubtful debt Total Mozarebeh 2,815,558 1,569 - - 2,817,127 Mosharekat Madani (civil partnership 17,887,145 225,857 129,934 - 18,242,936 contracts) Joaleh 785 - - - 785 Debtors for paid L/C 38,376 - - - 38,376
20,741,864 227,426 129,934 - 21,099,224 Financial Statments
less: and Future interests (319) - - - (319) Report of Independent Auditor General Provision for Doubtful Debt (321,800) (3,411) - - (325,211) Special Provision for Doubtful Debt - - (22,260) - (22,260) 20,419,745 224,015 107,674 - 20,751,434
10-2- Loans according to interest rate: Consolidated 20 Mar.2015 Interest rate 28%> 27%-28% 25%-27% 24%-25% 20%-23% <20% Total Noncurrent 999,434 - 13,900 - - - 1,013,334 Economic Review 2015 15,335,242 3,225,592 623,461 350,000 279,700 219,110 20,033,105 2018 - 466 - - - - 466 16,334,676 3,226,058 637,361 350,000 279,700 219,110 21,046,905 46 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
Parent Co. 20 Mar.2015 Interest rate 28%> 27%-28% 25%-27% 24%-25% 20%-23% <20% Total Noncurrent 999,434 - 13,900 - - - 1,013,334 2015 15,335,242 3,225,592 623,461 350,000 279,700 271,110 20,085,105 2018 - 466 - - - - 466 16,334,676 3,226,058 637,361 350,000 279,700 271,110 21,098,905
11- Accounts Receivable The details of account receivables are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Receivable from individuals 103,895 240,059 128,479 272,074 Accrued interest 734,497 349,326 734,564 349,358 Staff loan 205,631 215,320 205,631 215,320 Receivable dividends 152,277 17,115 152,955 31,444 Participation bonds interest 11,307 20,841 11,307 20,841 1,207,607 842,661 1,232,936 889,037
12- Tangible Fixed Assets The details of tangible fixed assets are given in Appendix “A”. 13- Intangible Assets The details of intangible assets are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Goodwill 493,487 493,487 493,487 493,487 Software 171,236 793 169,242 485 664,723 494,280 662,729 493,972 14- Other assets The details of other assets are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Rental deposits 57,450 38,000 57,450 38,000 Acquisition Goodwill 14,865 15,691 - - Consumables 3,156 5,049 3,156 5,049 Others 4,260 3,406 4,025 3,182 79,731 62,146 64,631 46,231 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 47
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
15- Customers Deposits The details of customers’ deposits are as follows: (Million IRR)
Consolidated Parent Co. Management Report Note 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Term deposits 15-1 20,518,618 13,469,200 20,563,050 13,469,560 Bank cheques and drafts 619,938 80,088 619,939 80,088 Current deposits 878,970 499,709 895,892 513,609 Saving deposits-other currencies 30,793 1,603 30,793 1,603 22,048,319 14,050,600 22,109,674 14,064,860
15-1- Term deposits (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Long term deposits 12,756,275 5,734,445 12,756,275 5,734,445 Short term deposits 7,762,343 7,734,755 7,806,775 7,735,115 20,518,618 13,469,200 20,563,050 13,469,560 Risk Review and Disclosure 15-2- The analysis of term deposits by maturity and interest rates are as follows: (Million IRR) 20 Mar.2015 Maturity date 20%< 17% to 20% 14% to 17% <14% Total 2015 4,777,683 11,369 694 2,709,577 7,499,322 2016 8,807,745 - 38,165 83,086 8,928,996 2017 800 - - - 800 2018 106,700 - - - 106,700 2019 2,920,917 - - - 2,920,917 2020 1,061,882 - - - 1,061,882 Financial Statments 17,675,727 11,369 38,859 2,792,663 20,518,618 and Report of Independent Auditor 16- Other deposits The details of other deposits are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Guarantees issuing deposits -IRR 758,170 241,623 758,523 241,773 Guarantees issuing deposits - other currencies 87,064 41,027 87,064 41,027 Advances received against LCs 389,399 74,773 389,399 74,773 Others 1,602 480 1,602 480 1,236,235 357,903 1,236,588 358,053 Economic Review 48 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
17- Due to other Financial Institutions (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Other financial institutions deposits 67,907 21,715 40,907 17,715 Due to other banks for term LCs 22,169 - 22,169 - Clearing cheques - 49,216 - 49,216 Others 16,046 8,276 16,046 8,276 106,122 79,207 79,122 75,207
18-Due to the Central Bank of Iran (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 CBI’ s deposit - IRR 1,535,109 - 1,535,109 - CBI’s term deposit -other currencies 213,958 1,580,160 213,958 1,580,160 1,749,067 1,580,160 1,749,067 1,580,160
19-Dividends Payable (Million IRR) Dividend at 20 Mar.2014 Balance at During the Balance at 20 Paid Divi- Dividend Dividend Mar.2014 dend during balance at 20 Mar.2013 year the Year 20 Mar.2015 Financial year ended March 20, 2013 340,000 - 329,978 10,022 9,248 774 Financial year ended March 20, 2014 600,000 - - - 596,994 3,006 940,000 - 329,978 10,022 606,242 3,780
20- Taxation Tax provision movement is as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Opening balance 122,300 31,821 115,889 25,410 Provision for the year 114,836 122,300 112,750 115,889 Paid during the year (122,300) (31,821) (115,889) (25,410) Closing balance 114,836 122,300 112,750 115,889
20-1 – The Bank’s tax position is as follows: (Million IRR) Tax Year Declared profit Taxable income Declared by Bank Claimed by MOF Agreed Paid Reserve 2013 433,490 101,640 25,410 80,585 80,585 80,585 - 2014 880,743 269,838 60,714 136,716 - 60,714 - 2015 848,518 563,750 112,750 - - - 112,750 REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 49
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
21-Other Liabilities and Provisions The balance comprises: (Million IRR)
Consolidated Parent Co. Management Report 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Payable interest on deposits 209,403 154,031 210,149 154,031 Social security premiums 30,017 17,294 29,484 17,046 Accrued expenses 407 5,561 - 4,688 Others 57,750 48,002 56,875 31,179 297,577 224,888 296,508 206,944 22 – Staff Termination Benefits The details of staff termination benefits are as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Balance at beginning of the year 9,467 2,115 8,513 2,115 Paid during the year (351) (32) (156) (30) Provision for the year 16,056 7,384 14,123 6,428 Balance at end of the year 25,172 9,467 22,480 8,513 Risk Review and Disclosure 23- Share Capital The Bank’s share capital consists of 4000M shares of 1,000 Rls each, fully paid. 24- Legal Reserve In accordance with the provisions of the “Monetary and Banking Law” and the Bank’s Articles of Association, the Bank is required to set aside 15% of its net profit as legal reserve until the latter is equal to the Bank’s share capital. The movements in the legal reserve during the year were as follows: (Million IRR) Consolidated Parent Co. 20 Mar.2015 20 Mar.2014 20 Mar.2015 20 Mar.2014 Balance at beginning of the year 184,756 61,216 184,216 61,212 Transfer during the year 128,742 123,540 127,278 123,004
Balance at the end of the year 313,498 184,756 311,494 184,216 Financial Statments and
25-Minority Intrest Report of Independent Auditor
20 Mar.2015 20 Mar.2014 Capital 19,500 1,750 Legal Reserve 53 (Million 53 IRR ) Retaied Earnings 3,158 5,097 22,711 6,900
26-Interest Income Interest income comprises: (Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20
Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Economic Review Loan interest 4,107,386 1,911,383 4,111,635 1,912,583 Late payment penalties 123,464 50,439 123,465 50,439 Foreign currencies loans 1,483 216 1,483 216 4,232,333 1,962,038 4,236,583 1,963,238 50 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
27-Investments and Deposits Income The details of investments and deposits income are as follows: (Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Interest on participation bonds 222,729 465,219 222,729 465,219 Statutory deposit interest 24,752 11,303 24,752 11,303 Deposits interest- local banks 449,384 21,875 449,384 21,875 Dividends 183,573 173,897 175,494 188,226 Increased (Decreased) value of investments (192,851) 3,468 (192,870) 3,468 Interest paid to others on participation (706) (2,316) (706) (2,316) bonds held in trust Others 2 - 2 - 686,883 673,446 678,785 687,775 28- Interest Expenses (Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Short term deposits 1,519,233 953,202 1,523,190 954,190 One- year deposits 945,417 3 945,417 3 Two- year deposits 28,787 81,394 28,787 81,394 Five-year deposits 1,210,304 438,354 1,210,304 438,354 3,703,741 1,472,953 3,707,698 1,473,941
29- Commission Income
(Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 On guarantees issued 177,657 61,978 177,688 61,978 On L/Cs issued 8,858 - 8,858 - On Stocks Trading 48,325 67,361 - - On foreign exchange operation 12,306 863 12,306 863 On Remittance 6,668 - 6,668 - Others 11,420 2,608 9,620 2,608 265,234 132,810 215,140 65,449
30- Income from Foreign Exchange Transactions (Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Foreign Exchange Transactions 56,025 (410) 56,015 (410) REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 51
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
31- Other Incomes (Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Management Report Professional services fees 29,570 18,416 29,570 18,416 Others 4,451 861 4,451 861 34,021 19,277 34,021 19,277 32-Administration and General Expenses The details of these expenses are as follows: (Million IRR) Consolidated Parent Co. Year ended to 20 Year ended to 20 Year ended to 20 Year ended to 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Personnel expenses 210,037 114,579 195,504 97,386 Rent 25,308 26,942 25,308 26,941 Depreciation 50,336 23,400 48,677 22,161 Others 145,318 92,680 127,654 73,254 430,999 257,601 397,143 219,742 Risk Review and Disclosure 33-Provision for Doubtful Debts
(Million IRR) Consolidated Parent Co. Year ended to Year ended to 20 Year ended to 20 Year ended to 20 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 General Provision for doubtful debts 125,768 158,192 126,549 158,621 Special Provision for doubtful debts 22,260 - 22,260 - 148,028 158,192 148,809 158,621
34- Commission The details of commission expenses are as follows: (Million IRR) Financial Statments
Consolidated Parent Co. and Year ended to Year ended to 20 Year ended to 20 Year ended to 20 Report of Independent Auditor 20 Mar. 2015 Mar. 2014 Mar. 2015 Mar. 2014 Interest paid on foreign currencies deposits 5,279 1,420 5,279 1,420 Others 347 862 347 862 5,626 2,282 5,626 2,282 35- Previous Years Adjustments 55,175 MRls is related to payment of agreed income tax of 2013. 36- Off Balance Sheet Commitments (Million IRR) The details of off balance sheet commitments are as follows:
Parent Co. 20 Mar.2015 20 Mar.2014 Economic Review Underwriting Commitments 880,567 421,828 Guarantees issued 11,779,733 3,892,820 L/C Commitments 670,033 756,603 Others 141,795,180 93,743,206 52 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
37- Cash Flow from Operating Activities The detail of cash flow from operating activities are given in Appendix B.
38- Cash Balance at the year end The details of cash balance at the year-end are as follows: (Million IRR) Consolidated Parent Co. Year ended Year ended Net Year ended Year ended Net Increase 20 Mar. 2015 Increase 20 Mar. 2015 20 Mar. 2014 (Decrease) 20 Mar. 2014 (Decrease) Cash in hand-IRR 5 134,298 104,139 30,159 68,561 31,785 36,776 Cash in hand- other currencies 5,7 728,712 40,734 687,978 728,712 1,112,166 (383,454) Current account with CBI 6 97,099 101,976 (4,877) 97,099 101,976 (4,877) Cash in intenak banks 7 555,044 1,589,869 (1,034,825) 548,688 502,889 45,799 1,515,153 1,836,718 (321,565) 1,443,060 1,748,816 (305,756) 39- Contingent Liabilities and Capital Commitments 39-1-Except for contingent liabilities disclosed in the Financial Statements, there are no other known material contingencies at the balance sheet date.
39-2-There were no capital commitments at 20 March 2015. 40- Post Balance Sheet Events There were no events , after balance sheet date which would require adjustment to the financial statements. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 53 ) Million IRR Balance ( 1,993 1,993 35,018 28,500 1,347 1,685 23,551 5,000 10,000 47,000 (3,580) 1,500 8,695 Profit(loss) 2014 1,057 1,057 24 7,328 95 2,121 11,213 11 93 Management Report Amount - Rls (m) 1,995 1,995 1,292,629 1,685 27,767 Balance 29,164 29,164 3 (3,000) 52,000 3,175 - 47,250 13,167 19 39,880 5,000 10,000 47,000 (6,187) 27,466 6,026 2,500 6,261 Profit(loss) 4,182 4,182 64 6,865 1,108 2,210 11,892 1,835 151 342 - Risk Review and Disclosure 2015 Amount - Rls (m) 96,319 96,319 991 1,040,176 3,000 16,146 47,250 13,167 1,666 16,729 Credit Limit Credit 57,000 57,000 3,528 50,000 5,000 10,000 50,000 40,000 300,000 3,000 6,957 Transaction Prepayment Prepayment for bank’s software Dividend Stock training in TSE Rental deposit Loans Guarantees issued Dividend Capital increase Dividend Prepayment for operating expenses Loans Loans Loans Loans Engineering services Loans Guarantees issued Loans Guarantees issued Financial Statments and - - Report of Independent Auditor Name Mr. J. Javadi Mr. J. Javadi Mr. Aghili P. Mr. R. Soltan Mr. zadeh R. Soltan Mr. zadeh Khakpour P. Mr. BM BM CBM CBM CBM CBM CBM CBM Relationship CEO Relatives Subsidiary entity and Subsidiary entity and Subsidiary entity and Related entity and BM - Economic Review person Legal and real Legal and real Dadeh Pardazan Dadeh Pardazan Simaye Aftab Co. Khavarmiyaneh broker Co. Sarmayeh Tamin Kardan Co. R. Pirooz Mr. H. Salimi Mr. Fanavari Nava Asoodeh Co. Tejarat Farzan Paramis Co. Mohandesin Moshaver Geno Co. Mrs. Leila Taba tabaee Sarmayeh Gozari Arzesh Proje 41- Related Parties Transactions 41- Related Parties CBM= Common Board Member BM = Board Member 54 MIDDLE EAST BANK ANNUAL REPORT
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
42-Capital Adequacy Ratio (CAR) Calculation of CAR is as follows: (Million IRR) Parent Co. 20 Mar.2015 20 Mar.2014 Tire I Paid up capital 4,000,000 4,000,000 Legal reserve 311,494 184,216 Retained earnings 769,959 648,719 Total tier I capital 5,081,453 4,832,935
Tier II General provisions for doubtful debts 325,211 198,662 Less: adjustments for 1.25% of risk weighted assets (3,182) - 322,029 198,662 Less: Investment in other banks’stocks (2,216) (29,458) 319,813 169,204 Base capital 5,401,266 5,002,139 Risk weighted assets 25,762,343 16,385,687 Capital adequacy ratio 20.97% 30.53% REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 55 )
( ( ( - 1,511 7,202 21,949 46,934 67,372 ) )
Total Million IRR ( 616,746 ) 1,807,361 1,026,295 2,209,707 1,785,412 2,142,335
( 44,413 125,213 692,743 773,543 125,213 773,543 )
Management Report Capex prepayments
( 802,770 329,594 412,409 802,770 412,409
719,955 ) Project in progress Project
( ( - 3,958
1,511 7,202 21,949 46,934 67,372 ) )
879,378 147,622 857,429 956,384
Total 1,023,756
( ( - - 217
1,078 8,338 2,805 1,517 6,821
Risk Review and Disclosure 7,179 1,505 11,634 14,439 ) )
Motor vehicles Motor
( ( 6 - ) 23 Consolidated ) 2,880 9,631
89,780 57,588 22,237 31,862 80,149
118,363 150,225
and equipments Office furnitures
Notes on the Financial Statements Notes on the Financial Statements For the Year Ended 20 March 2015 Ended 20 March Year the For
- - - - Financial Statments 9,513
90,034 24,480 33,993 Middle East Bank (Public Joint Stock Company)
251,725 341,759 242,212 307,766 and
Report of Independent Auditor Buildings
------Land
523,433 523,433 523,433 523,433
Appendix “A” Appendix Economic Review Cost: Balance at 20 Mar.2014 Additions Adjustments Disposals Balance at 20 Mar.2015 Depreciation: Balance at 20.03.2014 Depreciation for the period Adjustments Disposals Balance at 20 Mar.2015 Net book value at 20 Mar.2014 Net book value at 20 Mar.2015 Fixed assets are fully insured against fire, earthquake, etc. Fixed Assets: Fixed The details of fixed assets are as follows: 56 MIDDLE EAST BANK ANNUAL REPORT )
( ( ( - 7,179 1,505 21,137 45,336 64,968 ) )
Million IRR Total 972,337 (
616,746 ) 1,798,931 2,147,343 1,777,794 2,082,375
( 44,413 125,213 642,743 723,543 125,213 723,543 )
Capex prepayments
( 802,770 329,594 412,409 802,770 412,409
719,955 ) Project in progress Project
( ( - - 7,179 1,505 21,137 45,336 64,968 ) )
849,811 870,948 147,622 946,423
Total 1,011,391
( ( 37
6,365 2,764 1,296 5,069
7,179 1,505 13,544 10,780 ) )
Motor vehicles Motor
Parent Co. Parent 8,996
83,187 57,588 20,880 29,876 74,191
110,899 140,775
Notes on the Financial Statements Notes on the Financial Statements For the Year Ended 20 March 2015 Ended 20 March Year the For and equipments Office furnitures
Middle East Bank (Public Joint Stock Company) 9,377
90,034 24,419 33,796
250,785 340,819 241,408 307,023
Buildings
- Land
523,432 523,432 523,432 523,432
Appendix “A” Appendix Cost: Balance at 20 Mar.2014 Additions Adjustments Disposals Balance at 20 Mar.2015 Depreciation: Balance at 20.03.2014 Depreciation for the period Adjustments Disposals Balance at 20 Mar.2015 Net book value at 20 Mar.2014 Net book value at 20 Mar.2015 Fixed Assets: Fixed The details of fixed assets are as follows: Fixed assets are fully insured against fire, earthquake, etc. REPORT OF INDEPENDENT AUDITOR AND FINANCIAL STATMENTS 57
Middle East Bank (Public Joint Stock Company) Notes on the Financial Statements For the Year Ended 20 March 2015
(Million IRR) Cash Flow from Operating Activities Appendix “B” Consolidated Parent Co. 20 Mar. 2015 20 Mar. 2014 20 Mar. 2015 20 Mar. 2014
Profit before tax 986,102 896,133 961,268 880,743 Management Report Adjusted for: Depreciation 50,336 23,399 48,677 22,161 Income Tax (122,300) (31,821) (115,889) (25,410) Staff Termination Benefits 15,705 7,353 13,967 6,398 Provision for Doubtful Debts 148,028 158,193 148,809 158,621 Dividend Income (196,975) (188,226) (197,076) (188,226) Profit on Tangible Fixed Assets sales (2,056) - (2,050) - Currency Gain(Loss) 41 - 41 - Loss on Share valuation 192,851 (3,468) 192,870 (3,468) Net cash from Operating Activities 1,071,732 861,563 1,050,617 850,819
Net Increase (Decrease) in Operating Liabilities
Current Deposits 948,301 258,620 951,324 272,520 Risk Review and Disclosure Short Term Deposits 27,588 7,314,859 71,660 7,305,442 Long Term Deposits 7,021,830 5,443,123 7,021,830 5,443,123 Accounts payable 1,146,843 2,136,511 1,140,920 2,114,592 9,144,562 15,153,113 9,185,734 15,135,677 Net Increase (Decrease) in Operating Assets Statutory deposit (980,455) (1,800,753) (980,455) (1,800,753) Bonds 122,598 417,000 122,598 417,000 Accounts receivable (364,946) (479,690) (343,897) (526,065) Loans (8,168,562) (10,263,079) (8,192,061) (10,291,579) Other assets (17,585) (259,862) (18,400) (259,180)
(9,408,950) (12,386,384) (9,412,215) (12,460,577) Financial Statments
Cash Inflow From Operating Activities 807,344 3,628,292 824,136 3,525,919 and Report of Independent Auditor Economic Review