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Abu Dhabi Comm Bnk (IRSH)

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Monday 01 February, 2021

Abu Dhabi Comm Bnk

Annual Financial Report

RNS Number : 4540N
Abu Dhabi Commercial Bank PJSC
01 February 2021
 

 

 

 

 

 

 

Abu Dhabi Commercial Bank PJSC

 

 

Consolidated financial statements for the year ended

 

December 31, 2020

 

 

 

 

 Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/4540N_1-2021-1-31.pdf

 

Table of contents 

 

Independent Auditor's Report ........................................................................................................................................................................................................................................................................ 4

Consolidated statement of financial position .................................................................................................................................................................................................................................. 12

Consolidated income statement .................................................................................................................................................................................................................................................................. 13

Consolidated statement of comprehensive income ................................................................................................................................................................................................................... 14

Consolidated statement of changes in equity ................................................................................................................................................................................................................................. 15

Consolidated statement of cash flows .................................................................................................................................................................................................................................................... 16

Notes to the consolidated financial statements

1.   General information ................................................................................................................................................................................................................................................................................... 17

2.   Application of new and revised International Financial Reporting Standards (IFRSs) ............................................................................................................... 17

3.   Summary of significant accounting policies .......................................................................................................................................................................................................................... 19

3.1 .. Basis of preparation ............................................................................................................................................................................................................................................................................ 19

3.2 .. Measurement ............................................................................................................................................................................................................................................................................................ 19

3.3 .. Functional and presentation currency .............................................................................................................................................................................................................................. 19

3.4 .. Use of estimates and judgements .......................................................................................................................................................................................................................................... 19

3.5 .. Basis of consolidation ......................................................................................................................................................................................................................................................................... 20

3.6 .. Business combination under common control ........................................................................................................................................................................................................... 23

3.7 .. Changes in accounting policies on adoption of IFRS 9 - Hedge Accounting ................................................................................................................................... 24

3.8 .. Financial instruments ........................................................................................................................................................................................................................................................................ 29

3.9 .. Foreign currencies ................................................................................................................................................................................................................................................................................ 36

3.10   Offsetting ................................................................................................................................................................................................................................................................................................... 37

3.11   Sale and repurchase agreements ........................................................................................................................................................................................................................................ 37

3.12   Securities borrowing and lending ....................................................................................................................................................................................................................................... 37

3.13   Cash and cash equivalents ........................................................................................................................................................................................................................................................ 37

3.14   Amortised cost measurement ................................................................................................................................................................................................................................................. 37

3.15   Fair value measurement .............................................................................................................................................................................................................................................................. 38

3.16   Derivatives ................................................................................................................................................................................................................................................................................................ 39

3.17   Leases ............................................................................................................................................................................................................................................................................................................ 39

3.18   Treasury shares and contracts on own shares ....................................................................................................................................................................................................... 40

3.19   Financial guarantees ....................................................................................................................................................................................................................................................................... 40

3.20   Acceptances ............................................................................................................................................................................................................................................................................................. 40

3.21   Collateral repossessed ................................................................................................................................................................................................................................................................... 40

3.22   Investment properties ................................................................................................................................................................................................................................................................... 40

3.23   Property and equipment ............................................................................................................................................................................................................................................................ 41

3.24   Capital work in progress .............................................................................................................................................................................................................................................................. 41

3.25   Intangible assets ................................................................................................................................................................................................................................................................................. 41

3.26   Borrowing costs .................................................................................................................................................................................................................................................................................... 42

3.27   Impairment of non-financial assets ................................................................................................................................................................................................................................... 42

3.28   Employee benefits ............................................................................................................................................................................................................................................................................. 43

3.29   Taxation ...................................................................................................................................................................................................................................................................................................... 44

3.30   Segment reporting ............................................................................................................................................................................................................................................................................ 44

3.31   Zakat ............................................................................................................................................................................................................................................................................................................... 44

3.32   Provisions and contingent liabilities ................................................................................................................................................................................................................................. 45

3.33   Revenue and expense recognition ..................................................................................................................................................................................................................................... 45

3.34   Islamic financing ................................................................................................................................................................................................................................................................................. 46

4.   Critical accounting judgements and key sources of estimation uncertainty .......................................................................................................................................... 47

4.1  Critical judgments in applying the changes in Group's accounting policies .................................................................................................................................... 48

4.2 .. Key sources of estimation uncertainty ............................................................................................................................................................................................................................... 50

5.   Update on prospective changes in reference rates (Ibor) ..................................................................................................................................................................................... 52

6.   Coronavirus (Covid-19) outbreak and its impact on ADCB Group ................................................................................................................................................................. 56

7.   Cash and balances with central banks, net .......................................................................................................................................................................................................................... 65

8.   Deposits and balances due from banks, net ........................................................................................................................................................................................................................ 65

9.   Derivative financial instruments .................................................................................................................................................................................................................................................... 66

10.   Investment securities ................................................................................................................................................................................................................................................................................ 69

11.   Loans and advances to customers, net ..................................................................................................................................................................................................................................... 71

12.   Investment in associates ........................................................................................................................................................................................................................................................................ 71

13.   Investment properties ............................................................................................................................................................................................................................................................................. 72

14.   Other assets, net ............................................................................................................................................................................................................................................................................................ 73

15.   Property and equipment, net ........................................................................................................................................................................................................................................................... 74

16.   Intangible assets, net ................................................................................................................................................................................................................................................................................ 75

17.   Due to banks ..................................................................................................................................................................................................................................................................................................... 77

18.   Deposits from customers ....................................................................................................................................................................................................................................................................... 77

19.   Euro commercial paper ........................................................................................................................................................................................................................................................................... 78

20.   Borrowings .......................................................................................................................................................................................................................................................................................................... 79

21.   Other liabilities ................................................................................................................................................................................................................................................................................................ 82

22.   Share capital ...................................................................................................................................................................................................................................................................................................... 84

23.   Other reserves ................................................................................................................................................................................................................................................................................................. 85

24.   Islamic financing ............................................................................................................................................................................................................................................................................................ 87

25.   Employees' incentive plan shares, net ...................................................................................................................................................................................................................................... 88

26.   Capital notes ...................................................................................................................................................................................................................................................................................................... 88

27.   Interest income ............................................................................................................................................................................................................................................................................................... 89

28.   Interest expense ............................................................................................................................................................................................................................................................................................ 89

29.   Net fees and commission income ................................................................................................................................................................................................................................................... 89

30.   Net trading income ...................................................................................................................................................................................................................................................................................... 90

31.   Other operating income .......................................................................................................................................................................................................................................................................... 90

32.   Operating expenses .................................................................................................................................................................................................................................................................................... 90

33.   Impairment charge ..................................................................................................................................................................................................................................................................................... 90

34.   Earnings per share ...................................................................................................................................................................................................................................................................................... 91

35.   Discontinued operations ........................................................................................................................................................................................................................................................................ 91

36.   Cash and cash equivalents ................................................................................................................................................................................................................................................................... 92

37.   Related party transactions ................................................................................................................................................................................................................................................................... 92

38.   Commitments and contingent liabilities .................................................................................................................................................................................................................................. 95

39.   Operating segments ................................................................................................................................................................................................................................................................................... 95

40.   Financial instruments ............................................................................................................................................................................................................................................................................... 98

41.   Fair value hierarchy ................................................................................................................................................................................................................................................................................ 100

42.   Risk management ...................................................................................................................................................................................................................................................................................... 102

43.   Credit risk management ..................................................................................................................................................................................................................................................................... 103

43.1  Maximum exposure to credit risk .................................................................................................................................................................................................................................. 110

43.2  Gross exposure ................................................................................................................................................................................................................................................................................ 110

43.3  Expected credit losses ............................................................................................................................................................................................................................................................... 114

43.4  Concentration of credit risk ................................................................................................................................................................................................................................................. 118

43.5  Credit risk measurement and mitigation policies ............................................................................................................................................................................................ 120

44.   Interest rate risk framework, measurement and monitoring .......................................................................................................................................................................... 122

45.   Liquidity risk framework, measurement and monitoring ................................................................................................................................................................................... 125

46.   Market risk framework, measurement and management .................................................................................................................................................................................. 130

47.   Operational risk management ....................................................................................................................................................................................................................................................... 134

48.   Trust activities .............................................................................................................................................................................................................................................................................................. 136

49.   Subsidiaries .................................................................................................................................................................................................................................................................................................... 137

50.   Capital adequacy ratio and capital management ........................................................................................................................................................................................................ 138

51.   Social contributions ................................................................................................................................................................................................................................................................................. 143

52.   Legal proceedings ..................................................................................................................................................................................................................................................................................... 143

53.   Business combinations ......................................................................................................................................................................................................................................................................... 143

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC

 

 

 

Report on the audit of the consolidated financial statements

 

Opinion

We have audited the consolidated financial statements of Abu Dhabi Commercial Bank PJSC (the "Bank") and its subsidiaries (collectively referred to as the "Group"), which comprise the consolidated statement of financial position as at 31 December 2020 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information.

 

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2020 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

 

Basis for our opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the United Arab Emirates, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.  For each matter below, our description of how our audit addressed the matter is provided in that context.

 

We have fulfilled the responsibilities described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters.  Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements.  The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.
 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on the audit of the consolidated financial statements continued

 

Key audit matters continued

Finalisation of purchase price allocation for the merger with

Union National Bank PJSC and acquisition of Al Hilal Bank PJSC

 

Description of the Key Audit Matter

How the matter was addressed in the audit

 

The Bank acquired Union National Bank PJSC and Al Hilal Bank PJSC with effect from 1 May 2019 and accounted for these business combinations using the acquisition method of accounting. The initial accounting of business combination remained incomplete as at 31 December 2019 and the provisional values of the acquired assets and liabilities was reported. The initial purchase price allocation also resulted in recognition of intangibles assets relating to trademark & license, core deposits and customer relationships amounting to AED 785,000 thousand and provisional goodwill amounting to AED 4,592,872 thousand.

 

During the year, the purchase price allocation was finalised, and the fair values of the assets and liabilities acquired were adjusted on a retrospective basis and the provisional goodwill was restated to AED 6,734,717 thousand.

 

The fair values of the assets and liabilities were determined using a range of various complex valuation techniques and methodologies which involved various complex inputs (including those which were unobservable) and required use of various management judgements, estimates and assumptions.

 

The purchase price allocation was considered a significant risk for the current year audit and was considered as a Key Audit Matter on account of subjectivity involved in the overall valuation process, the quantitative materiality of the transactions and because of the nature, the required specialist knowledge & skill and the overall extent of effort spent on the audit of these transactions and the assessment of the reasonableness of the fair values of the acquired assets and liabilities.

 

Further information relating to this key audit matter is given in note 53 to the consolidated financial statements.

 

 

Our procedures mainly included, but were not limited to the following:

 

Ø We assessed the design and implementation of controls over the process of accounting for the business combinations;

Ø We assessed the competence, objectivity and capabilities of the management's experts used for the purchase price allocation;

Ø We reviewed the predecessor auditor's working paper to understand the audit procedures performed in respect of the initial allocation of the purchase price paid for the acquisition and merger of the two banks;

Ø We compared the fair values of the assets and liabilities used in the calculation of goodwill, to the audited consolidated statement of financial position of the acquirees as at 30 April 2019 prepared under fair value basis of accounting;

Ø We involved our internal valuation specialists for the assessment of the criterion of the recognition of identified intangible assets and the assessment of the reasonableness of the fair values of the intangible assets acquired including the valuation of residual goodwill as determined by the management;

Ø We involved our internal real estate specialists for the assessment of the reasonableness of the fair valuation of the real estate properties acquired including fair valuation inputs and assumptions used in the valuation;

Ø We involved our risk and modelling internal specialist for the review of integration and harmonisation of the Expected Credit Losses (ECL) models of the acquiree with the Bank's ECL models;

Ø We involved our internal valuation specialists for review of the fair values of acquired loans and review of the underlying estimates and assumptions including related inputs used for the valuation of the same;

Ø We evaluated the accounting policies adopted by the Group for purchased or originated credit impaired (POCI) financial assets and assessed the adequacy of recognition and measurement of the same. Also, we performed credit review over a selection of acquired POCI loans;

Ø We evaluated the overall accounting policies adopted by the management to account for business combinations; and

Ø We assessed the adequacy of the overall disclosures and presentation in the consolidated financial statements with respect to the transactions, the fair valuation and all the related notes.

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on the audit of the consolidated financial statements continued

 

Key audit matters continued

Estimation uncertainty with respect to measurement of allowance for

expected credit losses for loans and advances to customers

 

Description of the Key Audit Matter

How the matter was addressed in the audit

 

The Group has gross outstanding loans and advances to customers amounting to AED 250,453,230 thousand and holds an allowance for expected credit losses amounting to AED 11,477,528 thousand as at 31 December 2020. Loans and advances, net, approximately represent 58% of the total assets of the Group.

 

Determination of allowance for expected credit losses on loans and advances to customers is a process which requires significant judgements, estimates and inputs.

 

Management determines allowance for expected credit losses based on complex models which requires determination of exposure-at-default, loss given default and the probability of default. Other judgements of management relate to determination of the point as to when a Significant Increase in Credit Risk (SICR) on loans and advances to customers is deemed to have occurred and when the same can be regarded as credit impaired. The estimates also include determination of customer ratings based on the risk profiles, appropriate discount rates, estimation of cash flows and forward looking macro-economic variables.

 

For loans and advances classified in stage 1 (no significant increase in credit risk) and stage 2 (with significant increase in credit risk), loss allowances are assessed using the risk parameter modelling approach that incorporates key parameters, including probability of default, loss given default, exposure at default, discount rates and macro-economic inputs.

 

 

We adopted an audit approach which involved substantive testing of the allowance for ECL in addition to testing the design and operating effectiveness of the controls relevant to the process. Our procedures mainly included, but were not limited to the following:

 

Ø We obtained understanding of the overall controls surrounding the ECL assessment including controls related to governance, policies review, IT controls and models validation;

Ø We obtained an understanding of management's assessment of impairment of loans and advances and Islamic financing receivables, the Group's credit impairment provision policy and the ECL modelling methodology;

Ø We performed process walkthroughs to identify the controls over ECL process. We tested design and operational effectiveness of the following internal controls relating to the measurement of ECL:

Review and approval of classification of loans and advances.

The management regular monitoring of:

§ staging and ECL for loans and advances and Islamic financing receivables;

§ identification of loans displaying indicators of impairment under stage 3;

§ macroeconomic variables & forecast; and

§ performance of ECL models.

The review and approval of management overlays and the governance process around such overlays.

The model validation function.

Ø We also tested the completeness and accuracy of the data on a sample basis used for computation of allowances for expected credit losses;

Ø We involved our risk and modelling team to review the ECL models used by the Group which included testing of assumptions and forward-looking factors used to determine the exposure at default, loss given default and probability of default;

Ø We involved our internal IT specialists for the purpose of testing IT application controls relating to application used for computation of the credit impairment process. We evaluated system-based and manual controls over the recognition and measurement of the impairment allowances;

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on the audit of the consolidated financial statements continued

 

Key audit matters continued

Estimation uncertainty with respect to measurement of allowance for

expected credit losses for loans and advances to customers continued

 

Description of the Key Audit Matter

How the matter was addressed in the audit

 

For loans and advances in stage 3 (default and credit-impaired), loss allowances are assessed by estimating the future discounted cash flows from the loans.

 

Management has also applied significant level of judgement in areas noted above in determining the impact of COVID-19 on the allowances for credit losses by considering the following:

 

Ø Forward looking information, including variables used in macroeconomic scenarios and their associated weightings,

Ø Stress in specific sectors and industries, and

Ø Impact of Government support measures.

 

Due to the relative subjectivity involved in the estimation process for determination of the allowance for expected credit losses and the ongoing COVID-19 pandemic adding to further estimation uncertainty, complexity in accounting of loans and advances in a business combination, the quantitative materiality of the loans and advances including the use of specialised knowledge and the overall extent of effort spent on the audit in respect of this matter, therefore, this  was determined to be a key audit matter for the current year audit.

 

Further information relating to this key audit matter is given in note 43 to the consolidated financial statements.

 

 

Ø We performed credit reviews over a selection of customers, derived on quantitative and qualitative criteria and assessed the classification and appropriateness of the loan while assessing the credit worthiness of the customer. This included review of the credit documentation, approvals, collateral valuation reports, and other related documentation. For a sample of customers, we also obtained and recalculated the allowances for expected credit losses;

Ø We obtained management's specific assessment with respect to individually material exposures, assessed and challenged the assumptions used by the management;

Ø We reviewed the impact on expected credit losses on account of COVID 19 with specific focus on reassessment of macroeconomic weights, impact of financial stress on various industries and the consideration of Government support measures; and

Ø We reconciled the overall ECL numbers to the consolidated financial statements and assessed the appropriateness of disclosures made in the consolidated financial statements in this respect.

 

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on the audit of the consolidated financial statements continued

 

Other information

The Board of Directors and management are responsible for the other information. The other information comprises the annual report of the Bank but does not include the consolidated financial statements and our auditor's report thereon. The annual report is expected to be made available to us after the date of this auditor's report. Our opinion on the consolidated financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

 

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

 

When we read the annual report of the Bank, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the Board of Directors.

 

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and in compliance with the applicable provisions of the Articles of Association of the Bank and the UAE Federal Law No. (2) of 2015, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

 

Those Board of Directors and Board Audit & Compliance Committee are responsible for overseeing the Group's financial reporting process.

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on the audit of the consolidated financial statements continued

 

Auditor's responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

· Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

· Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

 

· Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

· Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on the audit of the consolidated financial statements continued

 

Auditor's responsibilities for the audit of the consolidated financial statements continued

· Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

· Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

 

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

 

Other matter

The consolidated financial statements of the Group for the year ended 31 December 2019 were audited by another auditor who expressed an unmodified opinion on those consolidated financial statements on 26 January 2020.

 

 

 

 

 

 

 

INDEPENDENT AUDITOR'S REPORT

 

TO THE SHAREHOLDERS OF ABU DHABI COMMERCIAL BANK PJSC continued

 

 

 

Report on Other Legal and Regulatory Requirements

 

Further, as required by the UAE Federal Law No. (2) of 2015, we report that:

 

i)  we have obtained all the information and explanations we considered necessary for the purposes of our audit;

ii)  the consolidated financial statements have been prepared and comply, in all material respects, with the applicable provisions of the UAE Federal Law No. (2) of 2015;

iii)  the Bank has maintained proper books of account;

iv)  the consolidated financial information included in the Directors' report is consistent with the books of account and records of the Group;

v)  note 10 to the consolidated financial statements discloses purchases and investments made by the Group during the year ended 31 December 2020;

vi)  note 37 reflects the disclosures relating to material related party transactions and the terms under which they were conducted;

vii)  based on the information that has been made available to us nothing has come to our attention which causes us to believe that the Bank has contravened, during the financial year ended 31 December 2020, any of the applicable provisions of the UAE Federal Law No. (2) of 2015 or of its Articles of Association which would materially affect its activities or its consolidated financial position as at 31 December 2020; and

viii)  note 51 to the consolidated financial statements discloses social contributions made during the year ended 31 December 2020.

 

Further, as required by the Decree of the Chairman of the Abu Dhabi Accountability Authority No. (1) of 2017 pertaining to Auditing the Financial Statements of Subject Entities, we report that, based on the procedures performed and information provided to us, nothing has come to our attention that causes us to believe that the Bank has not complied, in all material respects, with any of the provisions of the following laws, regulations and circulars, which would materially affect its activities or its consolidated financial statements as at 31 December 2020:

 

· law of establishment; and

· relevant provisions of applicable laws, resolutions and circulars organising the Bank's operations.

 

Further, as required by the UAE Federal Law No. (14) of 2018, we report that we have obtained all the information and explanations we considered necessary for the purpose of our audit.

 

 

 

 

Signed by

Joseph Alexander Murphy

Partner

Ernst & Young

Registration No 492

 

 

Date

Abu Dhabi

 

 

Consolidated statement of financial position

As at December 31, 2020 

 

 

 

As at

As at

As at

 

 

December 31

December 31

December 31

 

 

2020

2019

2020

 

 

 

restated (*)

 

 

Notes

 AED'000

AED'000

 USD'000

 

 

 

 

 

Assets

 

 

 

 

Cash and balances with central banks, net

7

29,601,607

24,904,966

8,059,245

Deposits and balances due from banks, net

8

21,535,442

23,064,974

5,863,175

Derivative financial instruments

9

11,146,396

6,789,717

3,034,684

Investment securities

10

88,205,984

73,442,662

24,014,698

Loans and advances to customers, net

11

238,975,702

247,833,080

65,062,810

Investment in associates

12

255,868

407,768

69,662

Investment properties

13

1,643,956

1,693,707

447,579

Other assets, net

14

10,081,413

16,750,208

2,744,735

Property and equipment, net

15

2,058,575

2,197,571

560,461

Intangible assets, net

16

7,390,291

7,474,342

2,012,059

Assets held for sale

35

261,067

  535,830

71,077

Total assets

 

411,156,301

405,094,825

111,940,185

Liabilities

 

 

 

 

Due to banks

17

8,222,071

5,732,779

2,238,516

Derivative financial instruments

9

10,855,048

6,949,891

2,955,363

Deposits from customers

18

251,395,457

262,093,782

68,444,176

Euro commercial paper

19

4,753,593

2,062,338

1,294,199

Borrowings

20

65,396,044

51,882,054

17,804,531

Other liabilities

21

13,927,975

20,302,794

3,791,989

Liabilities related to assets held for sale

35

4,725

  413,395

1,286

Total liabilities

 

354,554,913

349,437,033

96,530,060

Equity

 

 

 

 

Share capital

22

6,957,379

6,957,379

1,894,195

Share premium

 

17,878,882

17,878,882

4,867,651

Other reserves

23

9,865,416

9,257,919

2,685,929

Retained earnings

 

15,895,692

15,544,207

4,327,714

Capital notes

26

6,000,000

6,000,000

1,633,542

Equity attributable to equity holders of the Bank

 

56,597,369

55,638,387

15,409,031

Non-controlling interests

 

4,019

19,405

1,094

Total equity

 

56,601,388

55,657,792

15,410,125

 

 

 

 

 

Total liabilities and equity

 

411,156,301

405,094,825

111,940,185

(*) Refer note 53

 

 

These consolidated financial statements were duly approved by delegated members of the Board of Directors and authorised for issue on January 31, 2021 and signed on its behalf by:

 

 

 

Khaldoon Khalifa Al Mubarak

 

Ala'a Eraiqat

 

Deepak Khullar

Chairman

 

Group Chief Executive Officer

 

Group Chief Financial Officer

 

The accompanying notes 1 to 53 form an integral part of these consolidated financial statements.

 

Consolidated income statement

For the year ended December 31, 2020

 

 

Notes

2020

 

2019 (*)

 

2020

AED'000

 

AED'000

 

USD'000

 

 

 

 

 

 

 

Interest income

27

11,650,858

 

13,877,686

 

3,172,028

Interest expense

28

(3,745,602)

 

(6,364,907)

 

(1,019,766)

Net interest income

 

7,905,256

 

7,512,779

 

2,152,262

Income from Islamic financing and investing products

24

2,414,551

 

2,495,966

 

657,378

Distribution on Islamic deposits and profit paid to sukuk holders

24

(536,871)

 

(767,609)

 

(146,167)

Net income from Islamic financing and investing products

 

1,877,680

 

1,728,357

 

511,211

Total net interest income and income from Islamic financing and investing products

 

9,782,936

 

9,241,136

 

2,663,473

Net fees and commission income

29

1,550,889

 

1,816,162

 

422,240

Net trading income

30

555,288

 

460,909

 

151,181

Net losses from investment properties

13

(44,972)

 

(66,736)

 

(12,244)

Other operating income

31

627,106

 

270,669

 

170,734

Operating income

 

12,471,247

 

11,722,140

 

3,395,384

Operating expenses

32

(4,526,341)

 

(4,517,679)

 

(1,232,328)

Operating profit before impairment charge

 

7,944,906

 

7,204,461

 

2,163,056

Impairment charge

33

(3,992,912)

 

(2,352,054)

 

(1,087,098)

Operating profit after impairment charge

 

3,951,994

 

4,852,407

 

1,075,958

Share in profit of associates

12

18,005

 

17,765

 

4,902

Profit before taxation

 

3,969,999

 

4,870,172

 

1,080,860

Overseas income tax charge

 

(120,357)

 

(40,926)

 

(32,768)

Profit for the year from continuing operations

 

3,849,642

 

4,829,246

 

1,048,092

Loss from discontinued operations

35

(40,765)

 

(36,759)

 

(11,099)

Profit for the year

 

3,808,877

 

4,792,487

 

1,036,993

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

Equity holders of the Bank

 

3,806,078

 

4,789,686

 

1,036,231

Non-controlling interests

 

2,799

 

2,801

 

762

Profit for the year

 

3,808,877

 

4,792,487

 

1,036,993

 

 

 

 

 

 

 

Basic and diluted earnings per share (AED)

34

0.51

 

0.71

 

0.14

(*) Refer note 3.1 for basis of preparation

 

 

 

 

 

The accompanying notes 1 to 53 form an integral part of these consolidated financial statements.

 

 

 

 

Consolidated statement of comprehensive income 

For the year ended December 31, 2020

 

 

2020

 

2019(*)

 

2020

 

AED'000

 

AED'000 

 

USD'000

 

 

 

 

 

 

Profit for the year

3,808,877

 

4,792,487

 

1,036,993

 

 

 

 

 

 

Items that may be re-classified subsequently to the consolidated income statement

 

 

 

 

 

 

 

 

 

 

 

Exchange difference arising on translation of foreign operations (Note 23)

(2,675)

 

32,889

 

(728)

Net movement in cash flow hedge reserve (Note 23)

(56,191)

 

171,505

 

(15,298)

Net movement in revaluation reserve of debt instruments designated at FVTOCI (Note 23)

280,707

 

1,277,703

 

76,424

 

221,841

 

1,482,097

 

60,398

 

 

 

 

 

 

Items that may not be re-classified subsequently to the consolidated income statement

 

 

 

 

 

 

 

 

 

 

 

Net movement in revaluation reserve of equity instruments designated at FVTOCI (Note 23)

(23,584)

 

(50,616)

 

(6,421)

Actuarial (losses)/gains on defined benefit obligation (Note 21)

(31,213)

 

16,773

 

(8,498)

 

(54,797)

 

(33,843)

 

(14,919)

 

 

 

 

 

 

Other comprehensive income for the year

167,044

 

1,448,254

 

45,479

 

 

 

 

 

 

Total comprehensive income for the year

3,975,921

 

6,240,741

 

1,082,472

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

Equity holders of the Bank

  3,973,032

 

6,235,518

 

  1,081,685

Non-controlling interests

2,889

 

5,223

 

787

Total comprehensive income for the year

3,975,921

 

6,240,741

 

1,082,472

(*) Refer note 3.1 for basis of preparation

 

 

 

The accompanying notes 1 to 53 form an integral part of these consolidated financial statements.

 

 

 

 

Consolidated statement of changes in equity  

For the year ended December 31, 2020

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

 

 

attributable to

Non- 

 

 

 

 

Share capital

Share premium

Other reserves

Retained earnings

Capital notes

equity holders of the Bank

controlling interests

Total equity

 

 

 

AED'000

AED'000

AED'000

AED'000

AED'000

AED'000

AED'000

AED'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at January 1, 2020 (restated)

6,957,379

17,878,882

9,257,919

15,544,207

6,000,000

55,638,387

19,405

55,657,792

Profit for the year

-

-

-

3,806,078

-

3,806,078

2,799

3,808,877

Other comprehensive income for the year (Note 23)

-

-

198,167

(31,213)

-

166,954

90

167,044

Transfer to statutory and legal reserve (Note 23)

-

-

403,846

(403,846)

-

-

-

-

Other movements (Note 23)

-

-

3,236

(36)

-

3,200

-

3,200

Amounts transferred within equity upon disposal of investments in equity instruments designated at FVTOCI (Note 23)

-

-

-

19,953

-

19,953

-

19,953

Adjustment arising from changes in non-controlling interests

-

-

2,248

(4,138)

-

(1,890)

(18,275)

(20,165)

Dividends paid to equity holders of the Bank (Note 22)

-

-

-

(2,643,804)

-

(2,643,804)

-

(2,643,804)

Zakat for the year (Note 21)

-

-

-

(114,215)

-

(114,215)

 

(114,215)

Capital notes coupon paid (Note 34)

-

-

-

(277,294)

-

(277,294)

-

(277,294)

As at December 31, 2020

6,957,379

17,878,882

9,865,416

15,895,692

6,000,000

56,597,369

4,019

56,601,388

 

 

 

 

 

 

 

 

 

 

 

As at January 1, 2019

5,198,231

2,419,999

6,859,271

14,328,042

4,000,000

32,805,543

-

32,805,543

Issue of ordinary shares as consideration for business combinations (Note 22)

1,759,148

15,458,883

-

-

-

17,218,031

-

17,218,031

Addition on business combinations (restated) (Note 53)

-

-

-

-

3,836,500

3,836,500

14,931

3,851,431

Profit for the year

-

-

-

4,789,686

-

4,789,686

2,801

4,792,487

Other comprehensive income for the year (Note 23)

-

-

1,429,059

16,773

-

1,445,832

2,422

1,448,254

Transfer to statutory and legal reserve (Note 23)

-

-

957,936

(957,936)

-

-

-

-

Other movements (Note 23)

-

-

11,653

18

-

11,671

-

11,671

Amounts transferred within equity upon disposal of investments in equity instruments designated at FVTOCI (Note 23)

-

-

-

23,853

-

23,853

-

23,853

Adjustment arising from changes in non-controlling interests

-

-

-

13

-

13

(749)

(736)

Repayment of Tier 1 capital notes (Note 26)

-

-

-

-

(1,836,500)

(1,836,500)

-

(1,836,500)

Dividends paid to equity holders of the Bank

-

-

-

(2,391,186)

-

(2,391,186)

-

(2,391,186)

Capital notes coupon paid (Note 34)

-

-

-

(265,056)

-

(265,056)

-

(265,056)

As at December 31, 2019 (restated) (*)

6,957,379

17,878,882

9,257,919

15,544,207

6,000,000

55,638,387

19,405

55,657,792

(*) Refer note 3.1 for basis of preparation

 

For the year ended December 31, 2020, the Board of Directors has proposed to pay a cash dividend representing 27% of the paid up capital (Note 22).

 

The accompanying notes 1 to 53 form an integral part of these consolidated financial statements.

 

 

Consolidated statement of cash flows

For the year ended December 31, 2020

 

 

 

2020

 

2019(*)

 

2020

 

AED'000

 

AED'000

 

USD'000

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Profit before taxation including loss from discontinued operations (Note 35)

 

3,932,929

 

4,833,454

 

1,070,767

Adjustments for:

 

 

 

 

 

 

Depreciation on property and equipment (Note 15)

 

403,911

 

367,059

 

109,968

Amortisation of intangible assets (Note 16)

 

95,309

 

64,175

 

25,948

Net losses from investment properties (Note 13)

 

44,972

 

66,736

 

12,244

Impairment charge

 

4,277,480

 

2,611,404

 

1,164,574

Share in profit of associates (Note 12)

 

(18,005)

 

(17,765)

 

(4,902)

Discount unwind

 

(692,810)

 

(232,051)

 

(188,622)

Net (gains)/losses from disposal of investment securities (Note 31)

 

(282,701)

 

820

 

(76,967)

Interest income on investment securities

 

(2,093,011)

 

(2,385,551)

 

(569,837)

Dividend income (Note 31)

 

(21,683)

 

(13,191)

 

(5,903)

Interest expense on borrowings and euro commercial paper

 

1,164,863

 

1,817,590

 

317,142

Net losses/(gains) from trading securities (Note 30)

 

4,285

 

(815)

 

1,167

Ineffective portion of hedges - (gains)/losses (Note 9)

 

(31,600)

 

46,633

 

(8,603)

Employees' incentive plan expense (Note 25)

 

3,200

 

11,671

 

871

Cash flows from operating activities before changes in operating assets and liabilities

 

6,787,139

 

7,170,169

 

1,847,847

Net movement in balances with central banks

 

4,043,250

 

1,011,166

 

1,100,803

Net movement in due from banks

 

2,290,345

 

(449,647)

 

623,562

Net movement in derivative financial instruments

 

(185,184)

 

50,627

 

(50,418)

Net (purchases)/disposals of trading securities

 

(4,285)

 

60,949

 

(1,167)

Net movement in loans and advances to customers

 

4,413,604

 

(1,602,510)

 

1,201,635

Net movement in other assets

 

412,195

 

178,656

 

112,223

Net movement in due to banks

 

2,885,832

 

(1,958,908)

 

785,688

Net movement in deposits from customers

 

(10,818,731)

 

(9,742,010)

 

(2,945,475)

Net movement in other liabilities

 

(149,261)

 

(634,724)

 

(40,637)

Net cash from/(used in) operations

 

9,674,904

 

(5,916,232)

 

2,634,061

Overseas income tax paid

 

(67,857)

 

(33,906)

 

(18,475)

Net cash from/(used in) operating activities

 

9,607,047

 

(5,950,138)

 

2,615,586

INVESTING ACTIVITIES

 

 

 

 

 

 

Net proceeds from redemption/disposal of investment securities

 

27,767,982

 

30,940,003

 

7,560,028

Net purchases of investment securities

 

(40,702,279)

 

(29,737,663)

 

(11,081,481)

Interest received on investment securities

 

2,998,427

 

2,574,043

 

816,343

Dividend received from investment securities (Note 31)

 

21,683

 

13,191

 

5,903

Dividend received from associates (Note 12)

 

9,647

 

14,194

 

2,626

Disposal of investment in associate (Note 12)

 

40,414

 

-

 

11,003

Addition on business combinations (Note 53)

 

-

 

11,037,392

 

-

Disposal of investment properties (Note 13)

 

4,990

 

6,276

 

1,359

Net purchases of property and equipment

 

(215,573)

 

(273,344)

 

(58,691)

Net cash (used in)/from investing activities

 

(10,074,709)

 

14,574,092

 

(2,742,910)

FINANCING ACTIVITIES

 

 

 

 

 

 

Net movement in euro commercial paper (Note 19)

 

2,675,836

 

(1,257,754)

 

728,515

Net proceeds from borrowings (Note 20)

 

33,895,814

 

18,012,653

 

9,228,373

Repayment of borrowings (Note 20)

 

(22,859,293)

 

(19,799,050)

 

(6,223,603)

Interest paid on borrowings and euro commercial paper

 

(393,368)

 

(1,236,577)

 

(107,097)

Payment of lease liabilities

 

(94,486)

 

(89,064)

 

(25,724)

Dividends paid to equity holders of the Bank

 

(2,643,804)

 

(2,391,186)

 

(719,794)

Acquisition of non-controlling interests

 

(20,165)

 

-

 

(5,490)

Repayment of capital notes (Note 26)

 

-

 

(1,836,500)

 

-

Capital notes coupon paid (Note 34)

 

(277,294)

 

(265,056)

 

(75,495)

Net cash from/(used in) financing activities

 

10,283,240

 

(8,862,534)

 

2,799,685

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

9,815,578

 

(238,580)

 

2,672,361

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the year (Note 36)

 

22,856,273

 

23,094,853

 

6,222,781

 

 

 

 

 

 

 

Cash and cash equivalents at the end of the year  (Note 36)

 

32,671,851

 

22,856,273

 

8,895,142

(*) Refer note 3.1 for basis of preparation

 

The accompanying notes 1 to 53 form an integral part of these consolidated financial statements.

 

1.  General information

 

Abu Dhabi Commercial Bank PJSC ("ADCB" or the "Bank") is a public joint stock company with limited liability incorporated in the emirate of Abu Dhabi, United Arab Emirates (UAE). The Bank and its subsidiaries (together referred to as the "Group") is principally engaged in the business of retail, commercial and Islamic banking and provision of other financial services.

 

On March 21, 2019, the shareholders of ADCB and Union National Bank PJSC ("UNB") approved the merger of two banks pursuant to Article 283 (1) of UAE Federal Law No. 2 of 2015 and subsequent acquisition of 100% of issued share capital of Al Hilal Bank PJSC ("AHB") by the combined bank. The merger was effected through issuance of 0.5966 new shares in ADCB for every one share of UNB, subject to the terms and conditions of the merger. Following the merger, ADCB and UNB shareholders own approximately 76% and 24% of the combined bank, respectively. On the effective date of the merger, UNB shares were delisted from the Abu Dhabi Securities Exchange. The combined bank retained ADCB's legal registrations .

 

The combined bank issued a mandatory convertible bond ("bond") of AED 1,000,000 thousand to the shareholder of AHB as consideration to acquire the entire issued share capital of AHB. The bond was converted immediately into 117,647,058 ADCB shares.

 

The effective date of the above merger and acquisition was May 1, 2019.

 

The registered head office of ADCB is at Abu Dhabi Commercial Bank Head Office Building, Sheikh Zayed Bin Sultan Street, Plot C- 33, Sector E-11, P. O. Box 939, Abu Dhabi, UAE.

 

2.  Application of new and revised International Financial Reporting Standards (IFRSs)

The Group has applied the following amendments to IFRSs issued by the International Accounting Standards Board ("IASB") that are mandatorily effective for an accounting period that begins on or after January 1, 2020. The application of these amendments to IFRSs has not had any material impact on the amounts reported for the current and prior periods but may affect the accounting for the Group's future transactions or arrangements.

· Amendments to references to the Conceptual Framework for Financial Reporting.

· Amendment to IFRS 3 regarding the definition of business.

· Amendment to IFRS 7, IFRS 9 and IAS 39 regarding the interest rate benchmark reforms.

· Amendments to IAS 1 and IAS 8 regarding the definition of materiality.

· Amendments to IFRS 16 regarding Covid-19 related rent concession.

Other than the above, there are no other significant IFRSs, amendments or interpretations that were effective for the first time for the financial year beginning on or after January 1, 2020.

Standards and Interpretations in issue but not yet effective

 

 

New standards and significant amendments to standards applicable to the Group:

Effective for annual periods beginning on or after

 

Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16). The amendments clarify that hedge accounting is not discontinued solely because of the IBOR reform and also introduce disclosures that allow users to understand the nature and extent of risks arising from the IBOR reform to which the entity is exposed to and how the entity manages those risks as well as the entity's progress in transitioning from IBORs to alternative benchmark rates, and how the entity is managing this transition.

 

 

January 1, 2021

 

 

2.   Application of new and revised International Financial Reporting Standards (IFRSs) (continued)

 

Standards and Interpretations in issue but not yet effective (continued)

 

The Group has not early adopted new and revised IFRSs that have been issued but are not yet effective.

 

 

New standards and significant amendments to standards applicable to the Group:

Effective for annual periods beginning on or after

 

Extension of the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4). The amendment changes the fixed expiry date for the temporary exemption in IFRS 4 'Insurance Contracts' from applying IFRS 9 'Financial Instruments', so that entities would be required to apply IFRS 9 for annual periods beginning on or after January 1, 2023

 

January 1, 2023

Amendments to IAS 1 'Presentation of Financial Statements' to address classification of liabilities as current or non-current providing a more general approach based on the contractual arrangements in place at the reporting date.

 

January 1, 2023

Amendments to IAS 16 'Property, Plant and Equipment' regarding proceeds from selling items produced while bringing an asset into the location and condition necessary for it to be capable of operating in the manner intended by management.

 

January 1, 2022

Amendments to IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' amending the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous.

 

January 1, 2022

Amendments to IFRS 3 'Business Combinations' that update an outdated reference in IFRS 3 without significantly changing its requirements.

January 1, 2022

Annual improvements to IFRS Standards 2018-2020

January 1, 2022

Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures (2011)' relating to the treatment of the sale or contribution of assets from an investor to its associate or joint venture.

Effective date deferred indefinitely. Adoption is still permitted.

 

IFRS 17 'Insurance Contracts' which requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. These requirements are designed to achieve the goal of a consistent, principle-based accounting for insurance contracts. IFRS 17 supersedes IFRS 4 Insurance Contracts as of January 1, 2021.

 

 

January 1, 2023

 

Amendments to IFRS 17 'Insurance Contracts' to address concerns and implementation challenges that were identified after IFRS 17 was published in 2017

January 1, 2023

 

Management anticipates that these amendments will be adopted in the consolidated financial statements in the initial period when they become mandatorily effective. The impact of these standards and amendments are currently being assessed by the management.

 

 

3.    Summary of significant accounting policies

 

 

 

3.1  Basis of preparation

 

The consolidated financial statements have been prepared on a going concern basis and in accordance with

International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board (IASB). IFRSs comprise accounting standards issued by the IASB as well as Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

 

The consolidated financial statements and related notes for the year ended December 31, 2020 include the results of UNB, AHB and their subsidiaries while the comparative results for the year ended December 31, 2019 do not include their results prior to May 1, 2019 i.e. the date of merger and acquisition.

 

Certain disclosure notes/numbers have been restated (Note 53), reclassified and rearranged from the Group's prior year consolidated financial statements to conform to the current year's presentation.

 

3.2  Measurement

 

The consolidated financial statements have been prepared under the historical cost convention except as modified by the revaluation of financial assets and liabilities at fair value through profit and loss, financial assets and liabilities at fair value through other comprehensive income and investment properties.

 

3.3  Functional and presentation currency

 

The consolidated financial statements are prepared and presented in United Arab Emirates Dirhams (AED), which is the Group's functional and presentation currency. Except as indicated, financial information presented in AED has been rounded to the nearest thousand.

 

The United States Dollar (USD) amounts in the primary financial statements are presented for the convenience of the reader only by converting the AED balances at the pegged exchange rate of 1 USD = 3.673 AED.

 

 

3.4  Use of estimates and judgements

 

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

 

Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in Note 4.

 

 

 

3.   Summary of significant accounting policies (continued)

 

3.5  Basis of consolidation

 

These consolidated financial statements incorporate the financial statements of the Bank and its subsidiaries (collectively referred to as the "Group").

 

Subsidiaries

 

Subsidiaries are entities that are controlled by the Bank. Control is achieved when the Bank:

 

· has power over the investee;

· is exposed, or has rights, to variable returns from its involvement with the investee; and

· has the ability to use its power to affect its returns.

 

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

 

When the Bank has less than a majority of voting rights of an investee, it still has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank's voting rights in an investee are sufficient to give it power, including:

 

· the size of the Bank's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

· potential voting rights held by the Bank;

· rights arising from other contractual arrangements; and

· any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time the decision needs to be made, including voting patterns at previous shareholders' meetings.

 

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.

 

Profit or loss and each component of other comprehensive income are attributed to owners of the Bank and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Bank and non-controlling interests even if this results in non-controlling interests having a deficit balance.

 

When necessary, adjustments are made to the consolidated financial statements of subsidiaries to align their accounting policies with the Bank's accounting policies.

 

All intragroup balances and income, expenses and cash flows resulting from intragroup transactions are eliminated in full on consolidation.

 

 

3.  Summary of significant accounting policies (continued)

 

3.5  Basis of consolidation (continued)

 

Changes in the Bank's ownership interests in existing subsidiaries

 

Changes in the Bank's ownership interests in subsidiaries that do not result in the Bank losing control over the subsidiaries are accounted for as equity transactions. The carrying amount of the Bank's interests is adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the shareholders of the Bank. When the Bank loses control of a subsidiary, a gain or loss is recognised in the consolidated income statement and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), liabilities of the subsidiary and any non-controlling interests.

 

All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Bank had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to income statement or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary, at the date when control is lost, is regarded as the fair value on initial recognition for subsequent accounting under IFRS 9 or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

 

Special Purpose Entities 

 

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. A SPE is consolidated if, based on an evaluation of the substance of its relationship with the Bank, the Bank has power over the SPE, is exposed to or has rights to variable returns from its involvement with the SPE and its ability to use its power over the SPE at inception and subsequently to affect the amount of its return, the Bank concludes that it controls the SPE.

 

The assessment of whether the Bank has control over a SPE is carried out at inception and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE, or additional transactions between the Bank and the SPE except whenever there is a change in the substance of the relationship between the Bank and a SPE.

 

Funds under management

 

The Bank manages and administers assets held in unit trusts on behalf of investors. The financial statements of these entities are not included in the consolidated financial statements except when the Bank controls the entity, as referred to above. 

 

Investment in associates

Associates are those entities in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies. Investments in associates are accounted for using the equity method and are recognised initially at cost. The cost of the investments includes transaction costs.

 

The consolidated financial statements includes the Group's share of the profit or loss and other comprehensive income of investment in associates, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases.

 

 

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.5  Basis of consolidation (continued)

 

Investment in associates (continued)

 

When the Group's share of losses exceeds its interest in an equity‐accounted investee, the carrying amount of the investment, including any long‐term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee.

 

The carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 - Impairment of Assets, as a single asset by comparing with the recoverable amount (higher of value in use and fair value less cost of disposal). Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of the impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the investment in prior years.

 

The Group discontinues the use of equity method of accounting from the date when the investment ceases to be an associate or when the investment is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IFRS 9. The difference between the carrying amount of the associate at the date equity method was discontinued and the fair value of the retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation of that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued.

 

Joint arrangements

 

Joint arrangements are arrangements of which the Group has joint control, established by contracts requiring unanimous consent for decisions about the activities that significantly affect the arrangements' returns. They are classified and accounted for as follows:

 

Joint operation - when the Group has rights to the assets and obligations for the liabilities, relating to an arrangement, it accounts for each of its assets, liabilities and transactions, including its share of those held or incurred jointly, in relation to the joint operation.

 

Joint venture - when the Group has rights only to the net assets of the arrangements, it accounts for its interest using the equity method, as for associates.

 

Non-current assets held for sale

 

Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

 

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

 

3.  Summary of significant accounting policies (continued)

 

3.5  Basis of consolidation (continued)

 

Non-current assets held for sale (continued)

 

When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale.

When the Group is committed to a sale plan involving disposal of an investment in an associate or, a portion of an investment in an associate, the investment, or the portion of the investment in the associate, that will be disposed of is classified as held for sale when the criteria described above are met. The Group then ceases to apply the equity method in relation to the portion that is classified as held for sale. Any retained portion of an investment in an associate that has not been classified as held for sale continues to be accounted for using the equity method.

 

3.6  Business combination under common control

 

A business combination involving entities under common control is a business combination in which all the combining entities or businesses are ultimately controlled by the same party or parties both before and after the business combination, and that control is not transitory. Currently, there is no specific guidance on accounting for common control transactions under IFRSs, therefore the management needs to use judgement to develop an accounting policy that provides relevant and reliable information in accordance with IAS 8.

 

The Group accounts for business combinations under common control using the acquisition method when there is a commercial substance to the transaction. Under acquisition method, the consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

 

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:

 

· deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; and

· assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that standard.

 

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

 

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity's net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests' proportionate share of the recognised amounts of the acquiree's identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.

 

When a business combination is achieved in stages, the Group's previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of.

3.  Summary of significant accounting policies (continued)

 

3.6  Business combination under common control (continued)

 

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date.

 

The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date but does not exceed twelve months.

 

Impairment testing of goodwill

 

Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (Note 53) less accumulated impairment losses, if any.

 

For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination.

 

A cash-generating unit ("CGU") to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.

 

On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

 

3.7  Changes in accounting policies on adoption of IFRS 9 - Hedge Accounting 

 

The Group adopted IFRS 9 hedge accounting requirements with effect from January 1, 2020. As a part of transition, the Group carried out a review of all existing hedge relationships under IAS 39 and concluded that all hedge relationships qualified under IFRS 9 after taking into account any rebalancing of the hedging relationship on transition and are regarded as continuing hedging relationships.

 

The adoption of hedge accounting requirements under IFRS 9 have been implemented on a prospective basis and have not resulted in any adjustments to the Group's opening retained earnings.

 

Accounting policy till December 31, 2019

 

Derivatives designated as hedges are classified as either: (i) hedges of the change in the fair value of recognised assets or liabilities or firm commitments ('fair value hedges'); (ii) hedges of the variability in future cash flows attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction that could affect future reported net income ('cash flow hedges'); or (iii) a hedge of a net investment in a foreign operation ('net investment hedges'). Hedge accounting is applied to derivatives designated in this way provided certain criteria are met.

 

At the inception of a hedging relationship, to qualify for hedge accounting, the Group documents the relationship between the hedging instruments and the hedged items as well as its risk management objective and its strategy for undertaking the hedge. The Group also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the hedging instruments, primarily derivatives, that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. Interest income and expense on designated qualifying hedge instruments is included in 'Net interest income'.

3.  Summary of significant accounting policies (continued)

 

3.7  Changes in accounting policies on adoption of IFRS 9 - Hedge Accounting (continued)

 

Accounting policy till December 31, 2019 (continued)

 

Fair value hedges

 

Where a hedging relationship is designated as a fair value hedge, the hedged item is adjusted for the change in fair value in respect of the risk being hedged. Gains or losses on the changes in fair value of both the derivative and the hedged item attributable to hedged risk are recognised in the consolidated income statement and the carrying amount of the hedged item is adjusted accordingly. If the derivative expires, is sold, terminated, exercised, no longer meets the criteria for fair value hedge accounting or the designation is revoked, hedge accounting is discontinued on prospective basis. Any adjustment up to that point to the carrying value of a hedged item, for which the effective interest method is used, is amortised in the consolidated income statement as part of the recalculated effective interest rate over the period to maturity or derecognition.

 

Cash flow hedges

 

The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under cash flow hedge reserve. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item.  The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement.

 

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to consolidated income statement in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are removed from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. This transfer does not affect other comprehensive income. Furthermore, if the Group expects that some or all of the loss accumulated in other comprehensive income will not be recovered in the future, that amount is immediately reclassified to consolidated income statement.

 

Hedge accounting is discontinued only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria. This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in consolidated income statement. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in consolidated income statement.

 

Net investment hedge

 

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income and held in the net investment hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement. Gains and losses accumulated in equity are reclassified from other comprehensive income and included in the consolidated income statement on the disposal of the foreign operation.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.7  Changes in accounting policies on adoption of IFRS 9 - Hedge Accounting (continued)

 

Accounting policy till December 31, 2019 (continued)

 

Hedge effectiveness testing

 

To qualify for hedge accounting, the Group requires that at the inception of the hedge and through its life, each hedge must be expected to be highly effective (prospective effectiveness) and demonstrate actual effectiveness (retrospective effectiveness) on an ongoing basis.

 

The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method the Group adopts for assessing hedge effectiveness depends on its risk management strategy.

 

For prospective effectiveness, the hedging instrument must be expected to be highly effective in offsetting changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated. For actual effectiveness to be achieved, the changes in fair value or cash flows must offset each other in the range of 80 per cent to 125 per cent. Hedge ineffectiveness is recognised in the consolidated income statement.

 

Derivatives that do not qualify for hedge accounting

 

All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognised immediately in the consolidated income statement in "net gains from dealing in derivatives" under net trading income.

 

Accounting policy from January 1, 2020

 

Hedge accounting transition from IAS 39 to IFRS 9

 

IFRS 9 introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge accounting and aligns hedge accounting more closely with risk management. The new model no longer specifies quantitative measures for effectiveness testing and does not permit hedge de-designation. As a result, the 80% - 125% range under IAS 39 is replaced by an objectives-based test that focuses on the economic relationship between the hedged item and the hedging instrument, and the effect of credit risk on that economic relationship.

 

The Group designates certain derivatives as hedging instruments in respect of foreign currency risk and interest rate risk in fair value hedges, cash flow hedges, or hedges of net investments in foreign operations as appropriate. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships meet all of the following hedge effectiveness requirements:

 

· there is an economic relationship between the hedged item and the hedging instrument;

· the effect of credit risk does not dominate the value changes that result from that economic relationship; and

· the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the entity actually uses to hedge that quantity of hedged item.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.7  Changes in accounting policies on adoption of IFRS 9 - Hedge Accounting (continued)

 

Accounting policy from January 1, 2020 (continued)

 

If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, the Group adjusts the hedge ratio of the hedging relationship by way of rebalancing the hedge on a case-by-case basis, so that it meets the qualifying criteria again.

 

Fair value hedges

 

The fair value change on qualifying hedging instruments is recognised in consolidated income statement except when the hedging instrument hedges an equity instrument designated at FVTOCI in which case it is recognised in other comprehensive income. The carrying amount of a hedged item not already measured at fair value is adjusted for the fair value change attributable to the hedged risk with a corresponding entry in consolidated income statement. For debt instruments measured at FVTOCI, the carrying amount is not adjusted as it is already at fair value, but the hedging gain or loss is recognised in consolidated income statement instead of other comprehensive income. When the hedged item is an equity instrument designated at FVTOCI, the hedging gain or loss remains in other comprehensive income to match that of the hedging instrument.

 

Where hedging gains or losses are recognised in consolidated income statement, they are recognised in the same line as the hedged item. The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria (after rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to consolidated income statement from that date. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the consolidated income statement.

 

Cash flow hedges

 

The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under cash flow hedge reserve. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item.  The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement.

 

Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to consolidated income statement in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are removed from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. This transfer does not affect other comprehensive income. Furthermore, if the Group expects that some or all of the loss accumulated in other comprehensive income will not be recovered in the future, that amount is immediately reclassified to consolidated income statement.

 

The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria (after rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in consolidated income statement. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in consolidated income statement.

 

 

3.  Summary of significant accounting policies (continued)

 

3.7  Changes in accounting policies on adoption of IFRS 9 - Hedge Accounting (continued)

 

Accounting policy from January 1, 2020 (continued)

 

Net investment hedge

 

Hedges of net investments in foreign operations are accounted for in a similar way to cash flow hedges. A gain or loss on the effective portion of the hedging instrument is recognised in other comprehensive income and held in the net investment hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement. Gains and losses accumulated in equity are reclassified from other comprehensive income and included in the consolidated income statement on the disposal of the foreign operation.

 

Hedge effectiveness testing

 

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The documentation of each hedging relationship sets out how the effectiveness of the hedge is assessed. The method the Group adopts for assessing hedge effectiveness depends on its risk management strategy.

 

The Group assess economic relationship and effectiveness on its designated hedges by matching critical terms of hedged item and hedging instrument as part of its qualitative assessment. The critical terms matching method replicates the hedge item and hence is not used for those hedge relationships where the hedging derivative includes features that are not present in the hedged item. In such cases, the hedge effectiveness assessment is performed using other quantitative methods and may result in ineffectiveness.

 

Some of the sources of ineffectiveness include the following:

 

· mismatches between the contractual terms of the hedged item and hedging instrument, including basis differences

· significant changes in credit risk of the hedging instruments

· the effects of the forthcoming reforms of Interest rate benchmark, because these might take effect at a different time and have a different impact on hedged items and hedging instruments.

 

The ineffectiveness arising from quantitative assessments is recognised in the consolidated income statement.

 

Derivatives that do not qualify for hedge accounting

 

All gains and losses from changes in the fair values of derivatives that do not qualify for hedge accounting are recognised immediately in the consolidated income statement in "net gains from dealing in derivatives" under net trading income.

 

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments

 

Financial assets

 

All financial assets are recognised and derecognised on settlement date basis (other than derivative contracts which are recognised and derecognised on trade date basis) where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for those financial assets classified as at FVTPL. Settlement date is the date that the Group physically receives or transfers the assets. Transaction costs directly attributable to the acquisition of financial assets classified as at FVTPL are recognised immediately in profit or loss.

 

All recognised financial assets that are within the scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Specifically:

 

(i)  debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI), are subsequently measured at amortised cost;

(ii)  debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are SPPI, are subsequently measured at fair value through other comprehensive income (FVTOCI);

(iii)  all other debt instruments (e.g. debt instruments managed on a fair value basis, or held for sale) and equity investments are subsequently measured at FVTPL. However, the Group may make the following irrevocable election/designation at the date of initial application of IFRS 9 or at the date of initial recognition of a financial asset on an asset-by-asset basis:

· the Group may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which IFRS 3 applies, in other comprehensive income (OCI) with dividend income recognised in profit or loss; and

· the Group may irrevocably designate a debt instrument that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch (referred to as the fair value option).

 

The Group holds equity investments and mutual funds as strategic investments and has elected to carry these investments at FVTOCI with changes in fair value through other comprehensive income.

 

(a)  Debt instruments at amortised cost or at FVTOCI

 

The Group assesses the classification and measurement of a financial asset based on the contractual cash flow characteristics of the asset and the Group's business model for managing the asset.

 

For an asset to be classified and measured at amortised cost or at FVTOCI, its contractual terms should give rise to cash flows that are solely payments of principal and interest on the principal outstanding (SPPI).

 

For the purpose of SPPI test, principal is the fair value of the financial asset at initial recognition. That principal amount may change over the life of the financial asset (e.g. if there are repayments of principal). Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. The SPPI assessment is made in the currency in which the financial asset is denominated.

 

Contractual cash flows that are SPPI are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are SPPI. An originated or an acquired financial asset can be a basic lending arrangement irrespective of whether it is a loan in its legal form.

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial assets (continued)

 

An assessment of business models for managing financial assets is fundamental to the classification of a financial asset. The Group determines the business models at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The Group's business model does not depend on management's intentions for an individual instrument; therefore, the business model assessment is performed at a higher level of aggregation rather than on an instrument-by-instrument basis.

 

The Group has more than one business model for managing its financial instruments, which reflects how the Group manages its financial assets in order to generate cash flows. The Group's business models determine whether cash flows will result from collecting contractual cash flows, selling financial assets or both.

 

At initial recognition of a financial asset, the Group determines whether newly recognised financial assets are part of an existing business model or whether they reflect the commencement of a new business model. The Group reassess its business models during each reporting period to determine whether the business models have changed since the preceding period.

 

Debt instruments that are subsequently measured at amortised cost or at FVTOCI are subject to impairment.

 

(b)  Financial assets at FVTPL

 

Financial assets at FVTPL are:

 

(i)  assets with contractual cash flows that are not SPPI; or/and

(ii)  assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or

(iii)  assets designated at FVTPL using the fair value option.

 

These assets are measured at fair value, with any gains/losses arising on remeasurement recognised in profit or loss.

 

(c)  Reclassifications

 

If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that result in reclassifying the Group's financial assets. Changes in contractual cash flows are discussed under the accounting policy on modification and derecognition of financial assets.

 

(d)  Impairment

 

The Group recognises allowances for expected credit loss (ECLs) on the following financial instruments that are not measured at FVTPL:

 

· balances with central banks;

· deposits and balances due from banks;

· reverse-repo placements;

· debt investment securities;

· loans and advances to customers;

· loan commitments issued; and

· financial guarantee contracts issued.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial assets (continued)

 

No impairment loss is recognised on equity investments.

 

With the exception of purchased or originated credit impaired financial assets (which are considered separately below), ECLs are required to be measured through a loss allowance at an amount equal to:

 

· 12-month ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or

· full lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3).

 

A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL. More details on the determination of a significant increase in credit risk are provided in note 3.8(h).

 

ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as the present value of the difference between the cash flows due to the Group under the contract and the cash flows that the Group expects to receive arising from the weighting of multiple future economic scenarios, discounted at the asset's EIR. However, for unfunded exposures, ECL is measured as follows:

 

· for undrawn loan commitments, the ECL is the difference between the present value of the contractual cash flows that are due to the Group if the holder of the commitment draws down the loan and the cash flows that the Group expects to receive if the loan is drawn down; and

· for financial guarantee contracts, the ECL is the difference between the expected payments to reimburse the holder of the guaranteed debt instrument less any amounts that the Group expects to receive from the holder, the debtor or any other party.

 

Refer note 43 for more details on measurement of ECL.

 

(e)  Credit-impaired financial assets

 

A financial asset is 'credit-impaired' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence of credit-impairment includes observable data about the following events:

 

· significant financial difficulty of the borrower or issuer;

· a breach of contract such as a default or past due event;

· for economic or contractual reasons relating to the borrower's financial difficulty, concessions given to the borrower that would not otherwise be considered; or

· the disappearance of an active market for a security because of financial difficulties

 

It may not be possible to identify a single discrete event - instead, the combined effect of several events may have caused financial assets to become credit-impaired. The Group assesses whether debt instruments that are financial assets measured at amortised cost or FVTOCI are credit-impaired at each reporting date. To assess if sovereign and corporate debt instruments are credit impaired, the Group considers factors such as bond yields, credit ratings and the ability of the borrower to raise funding.

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial assets (continued)

 

A loan is considered credit-impaired when a concession is granted to the borrower due to a deterioration in the borrower's financial condition, unless there is evidence that as a result of granting the concession the risk of not receiving the contractual cash flows has reduced significantly and there are no other indicators of impairment. For financial assets where concessions are contemplated but not granted, the asset is deemed credit impaired when there is observable evidence of credit-impairment including meeting the definition of default. The definition of default (see below) includes unlikeliness to pay indicators and a backstop if amounts are overdue for 90 days or more.

 

(f)  Purchased or originated credit-impaired financial assets

 

Financial assets that are credit-impaired on initial recognition are classified as purchased or originated credit impaired financial assets (POCI). The Group measures expected credit loss on a lifetime basis for POCI instruments throughout the life of the instrument. However, expected credit loss is not recognised in a separate loss provision on initial recognition for POCI instruments as the lifetime expected credit loss is inherent within the gross carrying amount of the instruments. The Group recognises the change in lifetime expected credit losses arising subsequent to initial recognition in the income statement and the cumulative changes as a loss provision. Where lifetime expected credit losses on POCI instruments are less than those at initial recognition, then the favourable differences are recognised as impairment gains in the income statement (and impairment loss where the expected credit losses are greater).

 

(g)  Definition of default

 

Critical to the determination of ECL is the definition of default. The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk.

 

The Group considers the following as constituting an event of default:

 

§ the borrower is past due for more than 90 days on any material credit obligation to the Group; or

§ the borrower is unlikely to pay its credit obligations to the Group in full.

 

The definition of default is appropriately tailored to reflect different characteristics of different types of assets. The decision to use cross-default is based on case-by-case assessment of borrower and facility conditions such as collateral and materiality of exposure.

 

When assessing if the borrower is unlikely to pay its credit obligation, the Group takes into account both qualitative and quantitative indicators. The information assessed depends on the type of the asset; for example, in corporate lending a qualitative indicator used is the breach of covenants, which is not relevant for retail lending. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. The Group uses a variety of sources of information to assess default, which are either developed internally or obtained from external sources.

 

(h)  Significant increase in credit risk (SICR)

 

The Group monitors all financial assets, issued loan commitments and financial guarantee contracts that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk, the Group will measure the loss allowance based on lifetime rather than 12-month ECL.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial assets (continued)

 

In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument with the risk of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial instrument was first recognised. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort, based on the Group's historical experience and expert credit assessment including forward-looking information. For corporate lending, forward-looking information includes the future prospects of the industries in which the Group's counterparties operate, obtained from economic expert reports, financial analysts, governmental bodies and other similar organisations, as well as consideration of various internal and external sources of actual and forecast economic information.

 

For retail lending, forward-looking information includes the same economic forecasts as corporate lending with additional forecasts of local economic indicators, particularly for regions with a concentration to certain industries, as well as internally generated information of customer payment behaviour. Refer note 43 for more details about forward looking information and criteria used to determine significant increase in credit risk.

 

The Group uses different criteria to determine whether credit risk has increased significantly per portfolio of assets. The criteria used are both deterioration in internal/external ratings as well as qualitative assessment. For further details on SICR, refer to note 43.

 

Regardless of the analysis above, a significant increase in credit risk is presumed if a customer is more than 30 days past due in making a contractual payment.

 

The qualitative factors that indicate significant increase in credit risk are reflected in PD models on a timely basis. However, the Group still considers separately some qualitative factors to assess if credit risk has increased significantly. For corporate lending there is particular focus on assets that are included on a 'watch list' given an exposure is on a watch list once there is a concern that the creditworthiness of the specific counterparty has deteriorated. For retail lending the Group considers credit scores and events such as unemployment, bankruptcy or death. As a backstop when an asset becomes 30 days past due, the Group considers that a significant increase in credit risk has occurred and the asset is in stage 2 of the impairment model, i.e. the loss allowance is measured as the lifetime ECL.

 

(i)  Modification and derecognition of financial assets

 

Modification of financial assets

 

A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date.

 

In addition, the introduction or adjustment of existing covenants of an existing loan would constitute a modification even if these new or adjusted covenants do not yet affect the cash flows immediately but may affect the cash flows depending on whether the covenant is or is not met (e.g. a change to the increase in the interest rate that arises when covenants are breached).

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial assets (continued)

 

The Group renegotiates loans to customers in financial difficulty to maximise collection and minimise the risk of default. A loan forbearance is granted in cases where although the borrower made all reasonable efforts to pay under the original contractual terms, there is a high risk of default or default has already happened and the borrower is expected to be able to meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repayment), reduction in the amount of cash flows due (principal and interest forgiveness) and amendments to covenants.

 

When a financial asset is modified the Group assesses whether this modification results in derecognition. In accordance with the Group's policy a modification results in derecognition when it gives rise to substantially different terms. To determine the substantially different terms the Group considers the qualitative factors (i.e. contractual cash flows after modification, change in currency or counterparty, interest rates, maturity, covenants) and a quantitative assessment (i.e. compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, discounted at the original effective interest).

 

In case where the financial asset is derecognised the loss allowance for ECL is remeasured at the date of derecognition to determine net carrying amount of the asset at that date. The difference between this revised carrying amount and the fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based on 12-month ECL except in the rare occasions where the new loan is considered to be originated credit impaired. This applies only in the case where the fair value of the new loan is recognised at a significant discount to its revised par amount because there remains a high risk of default which has not been reduced by the modification. The Group monitors credit risk of modified financial assets by evaluating qualitative and quantitative information, such as if the borrower is in past due status under the new terms.

 

When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Group determines if the financial asset's credit risk has increased significantly since initial recognition by comparing the credit rating at initial recognition and the original contractual terms; with credit rating at the reporting date based on the modified terms.

 

Where a modification does not lead to derecognition the Group calculates the modification gain/loss comparing the gross carrying amount before and after the modification (excluding the ECL allowance). Then the Group measures ECL for the modified asset, where the expected cash flows arising from the modified financial asset are included in calculating the expected cash shortfalls from the original asset.

 

Derecognition of financial assets

 

The Group derecognises a financial asset only when the contractual rights to the asset's cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial assets (continued)

 

On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain/loss that had been recognised in OCI and accumulated in equity is recognised in profit or loss, with the exception of equity investment designated as measured at FVTOCI, where the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss but is transferred to retained earnings.

 

(j)  Presentation of allowance for ECL

 

Loss allowances for ECL are presented in the consolidated financial statements as follows:

 

· for financial assets measured at amortised cost (loans and advances, balances due from central banks and other banks, reverse-repo placements, investment securities carried at amortised cost and other financial assets): as a deduction from the gross carrying amount of the assets;

· for debt instruments measured at FVTOCI: as part of revaluation reserve of  investments designated at FVTOCI  and recognised in other comprehensive income; and

· for loan commitments and financial guarantee contracts: as a provision.

 

Financial liabilities

 

Financial liabilities are classified as either financial liabilities at 'FVTPL' or 'other financial liabilities'. The classification of financial liabilities at initial recognition depends on the purpose and management's intention for which the financial liabilities were incurred and their characteristics.

 

Financial liabilities are recognised in the Group's statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial liabilities (other than financial liabilities at FVTPL) are deducted from the fair value of the financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial liabilities at FVTPL are recognised immediately in profit or loss. If the transaction price differs from fair value at initial recognition, the Group will account for such difference as follows:

 

· if fair value is evidenced by a quoted price in an active market for an identical liability or based on a valuation technique that uses only data from observable markets, then the difference is recognised in profit or loss on initial recognition (i.e. day 1 profit or loss);

· in all other cases, the fair value will be adjusted to bring it in line with the transaction price (i.e. day 1 profit or loss will be deferred by including it in the initial carrying amount of the liability).

 

Financial liabilities are subsequently measured at amortised cost except for financial liabilities at fair value through profit or loss. Gains and losses on financial liabilities, other than derivative instruments, designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in fair value of the financial liability that is attributable to the changes in credit risk of that liability, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially in profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains or losses attributable to changes in the credit risk of the liability are also presented in the profit or loss.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.8  Financial instruments (continued)

 

Financial liabilities (continued)

 

Derecognition of financial liabilities

 

Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires).

 

The exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing liabilities, are accounted for as an extinguishment of the original financial liability and a recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability.

 

In addition, other qualitative factors such as, currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any cost or fees incurred is recognised as part of the gain or loss on extinguishment. If an exchange or modification is not accounted for as an extinguishment, any cost or fees incurred adjust the carrying amount of the liability and are amortised using EIR method over the remaining term of the modified liability.

 

3.9  Foreign currencies

 

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). The consolidated financial statements of the Group are presented in AED, which is the Group's functional and presentation currency.

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange prevailing at the statement of financial position date. Any resulting exchange differences are included in the consolidated income statement. Non-monetary assets and liabilities are translated at historical exchange rates or year-end exchange rates if held at fair value, as appropriate. The resulting foreign exchange gains or losses are recognised in either consolidated income statement or consolidated other comprehensive income statement depending upon the nature of the asset or liability.

 

In the consolidated financial statements, the results and financial positions of branches and subsidiaries whose functional currency is not AED, are translated into the Group's presentation currency as follows:

 

(a)  assets and liabilities at the rate of exchange prevailing at the statement of financial position date;

(b)  income and expenses at the average rates of exchange for the reporting period; and

(c)  all resulting exchange differences arising from the retranslation of opening assets and liabilities and  arising from retranslation of the result for the reporting period from the average rate to the exchange rate prevailing at the period end are recognised in other comprehensive income and accumulated in equity under 'foreign currency translation reserve' (Note 23).

 

On disposal or partial disposal (i.e. of associates or jointly controlled entities not involving a change of accounting basis) of a foreign operation, exchange differences relating thereto and previously recognised in reserves are recognised in the consolidated income statement on a proportionate basis, except in the case of partial disposal (i.e. no loss of control) of a subsidiary that includes a foreign operation, where the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in the consolidated income statement.

3.  Summary of significant accounting policies (continued)

 

3.10  Offsetting

 

Financial assets and liabilities are offset and reported net in the consolidated statement of financial position only when there is a legally enforceable right to set off the recognised amounts and when the Group intends to settle either on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses arising from a group of similar transactions such as in the Group's trading activity.

 

The Group is party to a number of arrangements, including master netting agreements that give it the right to offset financial assets and financial liabilities but, where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented on a gross basis.

 

3.11  Sale and repurchase agreements

 

Securities sold subject to a commitment to repurchase them at a predetermined price at a specified future date (repos) are continued to be recognised in the consolidated statement of financial position and a liability is recorded in respect of the consideration received under borrowings. The difference between sale and repurchase price is treated as interest expense using the effective interest rate yield method over the life of the agreement. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the consolidated statement of financial position.  Amounts placed under these agreements are included in reverse-repo placements. The difference between purchase and resale price is treated as interest income using the effective yield method over the life of the agreement.

 

3.12  Securities borrowing and lending

 

Securities borrowing and lending transactions are usually secured by cash or securities advanced by the borrower. Borrowed securities are not recognised in the statement of financial position nor are lent securities derecognised. Cash collateral received or given is treated as a financial asset or liability. However, where securities borrowed are transferred to third parties, a liability for the obligation to return the securities to the stock lending counterparty is recorded. The securities borrowing and lending activity arrangements are generally entered into through repos and reverse repos.

 

3.13  Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, balances held with central banks, deposits and balances due from banks, due to banks, items in the course of collection from or in transmission to other banks and highly liquid assets with original maturities of less than three months from the date of acquisition, which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position.

 

3.14  Amortised cost measurement

 

The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

 

 

3.  Summary of significant accounting policies (continued)

 

3.15  Fair value measurement

 

The Group measures its financial assets and liabilities at market price that it would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market, or in its absence in the most advantageous market for the assets or liabilities. The Group considers principal market as the market with the greatest volume and level of activity for financial assets and liabilities. 

 

The Group measures its non-financial assets at a price that take into account a market participant's ability to generate economic benefits by using the assets for their highest and best use.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. The fair value of a liability reflects its non-performance risk.

 

When applicable, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability takes place with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

When there is no quoted price in an active market, the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account into pricing a transaction.

 

The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or a liability nor based on valuation technique that uses only data from observable markets, the instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, the difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is supported wholly by observable market data or the transaction is closed out.

 

If an asset or a liability measured at fair value has a bid and an ask price, the Group measures assets and long positions at a bid price and liabilities and short positions at an ask price.

 

Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Group on the basis of the net exposure to either the market or credit risk, are measured on the basis of a price that would be received to sell a net long position (or paid to transfer a net short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.

 

Different levels of fair value hierarchy based on the inputs to valuation techniques are discussed in note 41. The Group's policy is to recognise transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer.

 

 

3.  Summary of significant accounting policies (continued)

 

3.16  Derivatives

 

A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in the price of one or more underlying financial instrument, reference rate or index.

 

Derivative financial instruments are initially measured at fair value at trade date, and are subsequently re-measured at fair value at the end of each reporting period. All derivatives are carried at their fair values as assets where the fair values are positive and as liabilities where the fair values are negative. Derivative assets and liabilities arising from different transactions are only offset if the transactions are with the same counterparty, a legal right of offset exists and the parties intend to settle the cash flows on a net basis.

 

Derivative fair values are determined from quoted prices in active markets where available. Where there is no active market for an instrument, fair value is derived from prices for the derivative's components using appropriate pricing or valuation models.

 

The method of recognising fair value gains and losses depends on whether derivatives are held for trading or are designated as hedging instruments, and if the latter, the nature of the risks being hedged. All gains and losses from changes in the fair value of derivatives held for trading are recognised in the consolidated income statement under 'net gain on dealing in derivatives' (Note 30).

 

3.17  Leases

 

The Group as lessee

 

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangement in which it is the lessee, except for short-term (defined as leases with a lease term of 12 months or less) and leases of low value asset. For these leases, the Group recognises the lease payments as an operating lease on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. This expense is presented within other expenses in the consolidated income statement.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by the rate implicit in the lease.  If this rate cannot be readily determined, the Group uses its incremental borrowing rate. The lease liability is subsequently measured by increasing the carrying amount to reflect the interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

 

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the period of lease term or useful life of the underlying asset whichever is shorter.  The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as per the Group's impairment policy for non-financial assets.

 

As a practical expedient, IFRS 16 permits a lessee not to separate non-lease component, and instead account for any lease and associated non-lease component as a single arrangement.

 

The Group has presented right of use asset within 'Property and equipment' and lease liabilities within 'Other liabilities' in the consolidated statement of financial position.

 

The Group as lessor

 

Leases where the Group does not transfer substantially all the risk and benefits of ownership of the asset are classified as operating leases. Rental income are recognised in the consolidated income statement on a straight-line basis over the lease term. Contingent rents are recognised as revenue in the period in which they are earned.

3.  Summary of significant accounting policies (continued)

 

3.18  Treasury shares and contracts on own shares

 

Own equity instruments of the Group which are acquired by the Group or any of its subsidiaries (treasury shares) are deducted from other reserves and accounted for at weighted average cost. Consideration paid or received on the purchase, sale, issue or cancellation of the Group's own equity instruments is recognised directly in equity.

 

No gain or loss is recognised in the consolidated income statement on the purchase, sale, issue or cancellation of own equity instruments.

 

Contracts on own shares that require physical settlement of a fixed number of own shares for a fixed consideration are classified as equity and added to or deducted from equity. Contracts on own shares that require net cash settlement or provide a choice of settlement are classified as trading instruments and changes in the fair value are reported in the consolidated income statement.

 

3.19  Financial guarantees

 

Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified party fails to meet its obligation when due in accordance with the contractual terms.

 

Financial guarantee contracts are initially recognised at their fair value, which is likely to equal the premium received on issuance. The received premium is amortised over the life of the financial guarantee. The guarantee liability (the notional amount) is subsequently recognised at the higher of this amortised amount and the present value of any expected payments (when a payment under guarantee has become probable). The premium received on these financial guarantees is included within other liabilities.

 

3.20  Acceptances

 

Acceptances arise when the Bank is under an obligation to make payments against documents drawn under letters of credit. Acceptances specify the amount of money, the date and the person to which the payment is due. After acceptance, the instrument becomes an unconditional liability (time draft) of the Bank and is therefore recognised as a financial liability in the consolidated statement of financial position with a corresponding contractual right of reimbursement from the customer recognised as a financial asset.

 

3.21  Collateral repossessed

 

The Bank acquires collaterals in settlement of certain loans and advances.  These collaterals are recognised at net realisable value on the date of acquisition and are classified as investment properties.  Subsequently, the fair value is determined on a periodic basis by independent professional valuers. Fair value adjustments on these collaterals are included in the consolidated income statement in the period in which these gains or losses arise.

 

3.22  Investment properties

 

Investment property is property held either to earn rental income or for capital appreciation or both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is reflected at valuation based on fair value at the statement of financial position date. Refer note 3.15 for policy on fair valuation.

 

The fair value is determined on a periodic basis by independent professional valuers. Fair value adjustments on investment property are included in the consolidated income statement in the period in which these gains or losses arise.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.22  Investment properties (continued)

 

Investment properties under development that are being constructed or developed for future use as investment property are measured initially at cost including all direct costs attributable to the design and construction of the property including related staff costs. Subsequent to initial recognition, investment properties under development are measured at fair value. Gains and losses arising from changes in the fair value of investment property under development is included in the consolidated income statement in the period in which they arise.

 

An investment property is derecognised upon disposal or when the investment property and investment property under development are permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised.

 

3.23  Property and equipment

 

Property and equipment are stated at cost less accumulated depreciation and impairment loss, if any. Cost includes expenditure that is directly attributable to the acquisition of the asset.

 

Depreciation is charged to the consolidated income statement so as to write off the depreciable amount of property and equipment over their estimated useful lives using the straight-line method. The depreciable amount is the cost of an asset less its residual value. Land is not depreciated.

 

Estimated useful lives are as follows:

 

Freehold properties

15 to 40 years

Leasehold and freehold improvements

7 to 10 years

Furniture, equipment and vehicles

3 to 5 years

Computer equipment, software and accessories

4 to 10 years

 

Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.

 

Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset at that date and is recognised in the consolidated income statement.

 

3.24  Capital work in progress

 

Capital work in progress is stated at cost. When the asset is ready for use, capital work in progress is transferred to the appropriate property and equipment category and depreciated in accordance with the Group's policies.

 

3.25  Intangible assets

 

An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Group. Intangible assets acquired separately or in a business combination (other than goodwill) are measured on initial recognition at fair value and subsequently at cost less accumulated amortisation and impairment loss.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.25  Intangible assets (continued)

 

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates and accounted for on a prospective basis. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement.

 

An intangible asset is derecognised on disposal or when no future economic benefits are expected from use. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in consolidated income statement when the asset is derecognised.

 

3.26  Borrowing costs

 

Borrowing costs directly attributable to the acquisition or construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use are added to the cost of those assets, until such time as the assets are substantially ready for their intended use.

 

All other borrowing costs are recognised in the consolidated income statement in the period in which they are incurred.

 

3.27  Impairment of non-financial assets

 

At each consolidated statement of financial position date, the Group reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

 

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount.  An impairment loss is recognised in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

 

 

3.  Summary of significant accounting policies (continued)

 

3.28  Employee benefits

 

(i)  Employees' end of service benefits

 

(a)  Defined benefit plan

 

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The liability recognised in the statement of financial position in respect of defined benefit gratuity plans is the present value of the defined benefit obligation at the end of the reporting period together with adjustments for unrecognised past-service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation.

 

Past-service costs are recognised immediately in income statement, unless the changes to the gratuity plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

 

Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses are recognised immediately in other comprehensive income. Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial assumptions.

 

The Group provides end of service benefits for its expatriate employees.  The entitlement to these benefits is based upon the employees' length of service and completion of a minimum service period.  The expected costs of these benefits are accrued over the period of employment.

 

(b)  Defined contribution plan

 

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in consolidated income statement in the periods during which services are rendered by employees.

 

Pension contributions are made by the Group to the Abu Dhabi Retirement Pensions and Benefits Fund for UAE citizens in accordance with UAE Federal Law No. 7 of 1999 and to respective pension authorities for other employees including GCC Nationals as per applicable laws.

 

(ii) Termination benefits

 

Termination benefits are recognised as an expense when the Group is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan either to terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if the Group has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting date, then they are discounted to their present value.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.28  Employee benefits (continued)

 

(iii) Short-term employee benefits

 

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

 

(iv)  Employees' incentive plan shares

 

The cost of the equity-settled share-based payments is expensed over the vesting period, based on the Group's estimate of equity instruments that will eventually vest. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in the consolidated income statement over the remaining vesting period, with a corresponding adjustment to the employees' incentive plan reserve.

 

Where the terms of an equity-settled award are modified, the minimum expense recognised is the expense as if the terms had not been modified. An additional expense is recognised for any modification which increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee as measured at the date of modification.

 

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-vesting conditions within the control of either the entity or the counterparty are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph.

 

The dilutive effect of outstanding incentive plan shares is reflected in the computation of diluted earnings per share (Note 34).

 

3.29  Taxation

 

Provision is made for taxes at rates enacted or substantively enacted as at statement of financial position date on taxable profits of overseas branches and subsidiaries in accordance with the fiscal regulations of the respective countries in which the Group operates.

 

3.30  Segment reporting

 

A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

 

Refer to note 39 on Business Segment reporting.

 

3.31  Zakat

 

Zakat is only paid on behalf of shareholders in jurisdictions where zakat payment is made mandatory by the regulations of the jurisdictions. Such payment is made in accordance with the regulations of the jurisdictions.
 

3.  Summary of significant accounting policies (continued)

 

3.32  Provisions and contingent liabilities

 

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

 

Provisions for onerous contracts are recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligation under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract.

 

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset only if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

 

Contingent liabilities, which include certain guarantees and letters of credit, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the Group's control; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the consolidated financial statements but are disclosed in the notes to the consolidated financial statements, unless they are remote.

 

3.33  Revenue and expense recognition

 

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised.

 

(i)  Interest income and expense

 

Interest income and expense for all financial instruments except for those classified as held for trading or those measured or designated at fair value through profit or loss (FVPTL) are recognised in 'net interest income' as 'interest income' and 'interest expense' in the profit or loss account using the effective interest method. Interest on financial instruments classified as held for trading or those measured or designated at FVTPL is recognised in 'Net gains from trading securities' under 'Net trading income'.

 

The effective interest rate (EIR) is the rate that exactly discounts estimated future cash flows of the financial instrument through the expected life of the financial instrument or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. The future cash flows are estimated taking into account all the contractual terms of the instrument. The calculation of the EIR includes all fees and points paid or received between parties to the contract that are incremental and directly attributable to the specific lending arrangement, transaction costs, and all other premiums or discounts. For financial assets at FVTPL transaction costs are recognised in profit or loss at initial recognition.

(ii)  Dividend income

 

Dividend income is recognised on the ex-dividend date when the Group's right to receive the payment is established.

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.33  Revenue and expense recognition (continued)

 

(iii)  Fee and commission income

 

The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories:

 

(a)  Fee income earned from services that are provided over a certain period of time

 

Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees.

 

Loan commitment fees for loans that are likely to be drawn down and other credit related fees are deferred (together with any incremental costs) and recognised as an adjustment to the effective interest rate on the loan. When it is unlikely that a loan will be drawn down, the loan commitment fees are recognised over the commitment period on a straight-line basis.

 

(b)  Fee income from providing transaction services

 

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria.

 

3.34  Islamic financing

 

The Group engages in Shari'ah compliant Islamic banking activities through various Islamic instruments such as Murabaha, Ijara, Musharaka, Salam, Mudaraba, Sukuk and Wakala.

 

Murabaha financing

 

A sale contract whereby the Group sells to a customer commodities and other assets at an agreed upon profit mark up on cost. The Group purchases the assets based on a promise received from customer to buy the item purchased according to specific terms and conditions. Profit from Murabaha is quantifiable at the commencement of the transaction. Such income is recognised as it accrues over the period of the contract on effective profit rate method on the balance outstanding. 

 

Ijara financing

 

Ijara financing is an agreement whereby the Group (lessor) leases or constructs an asset based on the customer's (lessee) request and promise to lease the assets for a specific period against certain rent instalments. Ijara could end in transferring the ownership of the asset to the lessee at the end of the lease period. Also, the Group transfers substantially all the risks and rewards related to the ownership of the leased asset to the lessee. Ijara income is recognised on an effective profit rate basis over the lease term.

 

Musharaka

 

Musharaka is an Islamic contract in which two parties (Islamic financial institution and its customer) pool their respective funds to form a partnership. In Musharaka both parties are involved in management of the business/partnership. Profit is shared on the basis of pre-agreed ratio and loss is shared in the ratio of capital contribution. It's not mandatory in Musharaka for all parties to participate in the management of business. Practically, this form of investment is used by the Islamic financial institution to finance its customers.

 

 

 

 

3.  Summary of significant accounting policies (continued)

 

3.34  Islamic financing (continued)

 

Mudaraba

 

A contract between the Group and a customer, whereby one party provides the funds (Rab Al Mal) and the other party (the Mudarib) invests the funds in a project or a particular activity and any  profits generated are distributed between the parties according to the profit shares that were pre-agreed in the contract. The Mudarib would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudaraba, otherwise, losses are borne by the Rab Al Mal. Income is recognised based on expected results adjusted for actual results on distribution by the Mudarib, whereas if the Group is the Rab Al Mal the losses are charged to the Group's consolidated income statement when incurred.

 

Salam

 

Bai Al Salam is a sale contract where the customer (seller) undertakes to deliver/supply a specified tangible asset to the Group (buyer) at mutually agreed future date(s) in exchange for an advance price fully paid on the spot by the buyer.

 

Revenue on Salam financing is recognised on the effective profit rate basis over the period of the contract, based on the Salam capital outstanding.

 

Wakala

 

An agreement between the Group and customer whereby one party (Rab Al Mal) provides a certain sum of money to an agent (Wakil), who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to guarantee the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. The Group may be Wakil or Rab Al Mal depending on the nature of the transaction.

 

Estimated income from Wakala is recognised on the effective profit rate basis over the period, adjusted by actual income when received. Losses are accounted for when incurred.

 

Sukuk

 

Certificates of equal value representing undivided shares in ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity. It is asset-backed trust certificates evidencing ownership of an asset or its usufruct (earnings or benefits) and complies with the principle of Shari'ah.

 

4.  Critical accounting judgements and key sources of estimation uncertainty

 

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of these consolidated financial statements. IFRS requires the Management, in preparing the Group's consolidated financial statements, to select suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. In the absence of an applicable standard or interpretation, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, requires Management to develop and apply an accounting policy that results in relevant and reliable information in the light of the requirements and guidance in IFRS dealing with similar and related issues and the IASB's Framework for the Preparation and Presentation of Financial Statements. The judgements and assumptions involved in the Group's accounting policies that are considered by the Board of Directors (the "Board") to be the most important to the portrayal of its financial condition are discussed below. The use of estimates, assumptions or models that differ from those adopted by the Group would affect its reported results.

 

 

 

 

4.  Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.1  Critical judgments in applying the changes in Group's accounting policies

 

The following are the critical judgments, apart from those involving estimations, that the management has made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements:

 

Business model assessment

 

Classification and measurement of financial assets depends on the results of the SPPI and the business model test. The Group determines the business model at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. This assessment includes judgment reflecting all relevant evidence including how the performance of the assets is evaluated and their performance measured, the risks that affect the performance of the assets and how these are managed and how the managers of the assets are compensated. The Group monitors financial assets measured at amortised cost or fair value through other comprehensive income that are derecognised prior to their maturity to understand the reason for their disposal and whether the reasons are consistent with the objective of the business for which the asset was held. Monitoring is part of the Group's continuous assessment of whether the business model for which the remaining financial assets are held continues to be appropriate and if it is not appropriate whether there has been a change in business model and so a prospective change to the classification of those assets.

 

Impairment losses

 

· Significant increase of credit risk: ECLs are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL for stage 2 or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. IFRS 9 does not define what constitutes a significant increase in credit risk. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward-looking information.

 

· Establishing groups of assets with similar credit risk characteristics: When ECLs are measured on a collective basis, the financial instruments are grouped on the basis of shared risk characteristics (e.g. instrument type, credit risk grade, collateral type, date of initial recognition, remaining term to maturity, industry, geographic location of the borrower, etc.). The Group monitors the appropriateness of the credit risk characteristics on an ongoing basis to assess whether they continue to be similar. This is required in order to ensure that should credit risk characteristics change there is appropriate re-segmentation of the assets. This may result in new portfolios being created or assets moving to an existing portfolio that better reflect the similar credit risk characteristics of that group of assets. Re-segmentation of portfolios and movement between portfolios is more common when there is a significant increase in credit risk (or when that significant increase reverses) and so assets move from 12-month to lifetime ECLs, or vice versa, but it can also occur within portfolios that continue to be measured on the same basis of 12-month or lifetime ECLs but the amount of ECL changes because the credit risk of the portfolios differ.

 

· Models and assumptions used: The Group uses various models and assumptions in measuring ECL of financial assets. Judgement is applied in identifying the most appropriate model for each type of asset, as well as for determining the assumptions used in these models, including assumptions that relate to key drivers of credit risk. Refer note 43 for more details on ECL.

 

 

 

4.  Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.1  Critical judgments in applying the changes in Group's accounting policies (continued)

 

Valuation of financial instruments

 

The best evidence of fair value is a quoted price for the instrument being measured in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employ only observable market data and so the reliability of the fair value measurement is high. However, certain financial instruments are valued on the basis of valuation techniques that include one or more significant market inputs that are unobservable. Valuation techniques that rely to a greater extent on unobservable inputs require a higher level of management judgement to calculate a fair value than those based wholly on observable inputs.

 

Valuation techniques used to calculate fair values are discussed in note 41. The main assumptions and estimates which management consider when applying a model with valuation techniques are:

 

· the likelihood and expected timing of future cash flows on the instrument. These cash flows are estimated based on the terms of the instrument, and judgement may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. Future cash flows may be sensitive to changes in market rates;

· selecting an appropriate discount rate for the instrument. The determination of this rate is based on an assessment of what a market participant would regard as the appropriate spread of the rate for the instrument over the appropriate risk-free rate; and

· when applying a model with unobservable inputs, estimates are made to reflect uncertainties in fair values resulting from a lack of market data inputs, for example, as a result of illiquidity in the market. For these instruments, the fair value measurement is less reliable. Inputs into valuations based on unobservable data are inherently uncertain because there is little or no current market data available from which to determine the level at which an arm's length transaction would occur under normal business conditions. However, in most cases there is some market data available on which to base a determination of fair value, for example historical data, and the fair values of most financial instruments are based on some market observable inputs even when unobservable inputs are significant.

 

Fair valuation of investment properties

 

The fair values of investment properties is based on the highest and best use of the properties, which is their current use. The fair valuation of the investment properties is carried out by independent valuers based on models whose inputs are observable in an active market such as market conditions, market prices, future rental income, etc.

 

The fair value movements on investment properties are disclosed in more detail in note 13.

 

Consolidation of Funds

 

The changes introduced by IFRS 10 'Consolidated Financial Statements' require an investor to consolidate an investee when it controls the investee. The investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The new definition of control requires the Group to exercise significant judgement on an ongoing basis to determine which entities are controlled, and therefore are required to be consolidated.

 

 

 

4.  Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.1  Critical judgments in applying the changes in Group's accounting policies (continued)

 

Lease accounting under IFRS 16

 

The following are the critical judgments in the application of IFRS 16, apart from those involving estimations, that the management has made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements:

 

· identifying whether a contract (or part of a contract) includes a lease;

· determining whether it is reasonably certain that an extension or termination option will be exercised;

· classification of lease arrangements (when the entity is a lessor).

 

Tax positions

 

The income tax positions taken are considered by the Group to be supportable and are intended to withstand challenge from tax authorities. However, it is acknowledged that these positions are uncertain and include interpretations of complex tax laws which could be disputed by tax authorities. Evolving insights, for example following final tax assessments for prior years, can result in additional tax burdens or benefits, and new tax risks may arise.

 

The Group judges these positions on their technical merits on a regular basis using all the information available (legislation, case law, regulations, established practice, authoritative doctrine as well as the current state of discussions with tax authorities, where appropriate). A liability is recorded for each item that is not probable of being sustained on examination by the tax authorities, based on all relevant information. The liability is calculated taking into account the most likely outcome or the expected value, depending on which is thought to give a better prediction of the resolution of each uncertain tax position in view of reflecting the likelihood of an adjustment being recognized upon examination. These estimates are based on facts and circumstances existing at the end of the reporting period. The tax liability and income tax expense include expected penalties and late payment interests arising from tax disputes.

 

Management has used its best estimate of the correct value of liability to recognize in each case, which includes a judgement on the length of the future time period to use in such assessments.

 

4.2  Key sources of estimation uncertainty

 

The following are key estimations that the management has used in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the Group's consolidated financial statements:

 

· Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and determining the forward-looking information relevant to each scenario: When measuring ECL the Group uses reasonable and supportable forward-looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other.

 

· Exposure at default (EAD) - The EAD over lifetime of a financial asset is modelled taking into account expected repayment profile. We apply specific credit conversion factors (CCFs) in order to calculate an EAD value. Conceptually, the EAD is defined as expected amount of credit exposure of counter party at the time of default. In the instance where a transaction involves an unfunded exposure, CCF models are applied in order to estimate amount of unfunded exposures are drawn down in case of default. The calibration of such parameters (CCFs) are based on internal historical data and consider counterparty and product type specifics.

4.  Critical accounting judgements and key sources of estimation uncertainty (continued)

 

4.2  Sources of estimation uncertainty (continued)

 

During the year, the Bank recalibrated its CCFs used in the computation of EAD in relation to the ECL against the Bank's unfunded letters of guarantees. The change in accounting estimate was based on management's analysis of the historical conversion ratio of guarantees issued by the Bank over one full economic cycle while considering a potential increase in the conversion ratio in short to medium term due to the impact of Covid-19 on the economy.

 

· Probability of default (PD) constitutes a key input in measuring ECL. PD is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions.

 

· Loss given default (LGD) is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements.

 

Impairment of goodwill and intangible assets

 

Goodwill is tested at least annually for impairment, along with the intangible assets and other assets of the Group's cash-generating units. 

 

Determining whether goodwill or intangible assets are impaired requires an estimation of the value in use of the business being tested for impairment and of the cash-generating units to which these assets have been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit, taking into account the achievability of long-term business plans and macroeconomic assumptions underlying the valuation process, and a suitable discount rate in order to calculate present value.

 

Lease accounting under IFRS 16

 

The following are key estimations that the management has used in the process of applying the Group's accounting policies for IFRS 16 and that have the most significant effect on the amounts recognised in the Group's consolidated financial statements:

 

· determination of the appropriate rate to discount the lease payments;

· assessment of whether a right-of-use asset is impaired.

 

Fair valuation of assets acquired and liabilities assumed in business combination

 

As stated in note 3.6 above, the identifiable assets acquired and the liabilities assumed in business combination are recognised at their fair value. In estimating the fair value of an asset or a liability, the Group uses market‑observable data to the extent it is available. Where Level 1 inputs are not available, the Group engages third party qualified valuers to perform the valuation.

 

 

 

 

5.  Update on prospective changes in reference rates (Ibor)

 

A fundamental reform of major interest rate benchmarks is being undertaken globally to replace or reform Interbank Offer Rates (IBORs) with alternative nearly risk-free rates (referred to as 'IBOR reform'). The Group has significant exposure to IBORs through its financial instruments that will be either replaced or reformed as part of this market-wide initiative. There is significant uncertainty over the timing and the methods of transition across the jurisdictions within which the Group operates. The Group anticipates that IBOR reform will have significant risk management and accounting impacts across all of its business lines. The Group has established a cross-functional IBOR Committee to manage its transition from IBORs to alternative rates. The objectives of the IBOR Committee include evaluating the extent to which assets and liabilities are referenced to IBOR cash flows, whether such contracts need to be amended as a result of IBOR reform and how to manage communication about IBOR reform with counterparties. The IBOR Committee reports to the Management Executive Committee (MEC) and collaborates with other business functions as needed.

 

The IBOR Committee is working closely with underwriting departments across the Group for new lending products indexed to the alternative nearly risk-free rate in impacted jurisdictions. Transition away from IBORs to the risk free "overnight reference rate" regime will affect the pricing of deposits, loans, hedging instruments and floating rate debt securities and the valuation of collateral. The following risk free rates (RFRs) will replace IBORs in their respective currencies:

· USD - SOFR (Secured overnight funding rate)

· GBP - SONIA (Sterling overnight index average)

· EUR - ESTER (Euro short term rate)

· CHF - SARON (Swiss average rate overnight)

· JPY - TONAR (Tokyo overnight average rate)

Financial assets and liabilities

 

The Group has exposure to LIBOR and other IBORs through its floating-rate financial assets and liabilities. The reform of IBORs has included a change to the underlying calculation methodology but it is not expected that the IBOR benchmark rates will be replaced by RFRs until after 2021.

 

Wholesale Banking Group has completed their review on assets and in-scope bilateral facilities (against loan-linked ISDA administered by ADCB Treasury). Treasury Group has completed a review of investment securities (bonds) and legacy derivatives. Legacy derivatives that reference IBORs will transition to the appropriate RFR either through adherence to ISDA Benchmark fallback protocol or by bi-lateral repapering. A review of treasury loans has been completed and all new treasury loans incorporate Loan Market Association (LMA) IBOR fallback provisions. Further, the Committee took a decision not to originate floating rate commercial paper or treasury deposits maturing beyond 2021. Consumer Banking Group does not have any significant exposure, however, leverage and overdraft products are under analysis with business and credit teams for any potential impact.

 

The Group has floating-rate liabilities indexed to IBORs of the currency of the liability. There have been no modifications to financial liabilities during the years ended December 31, 2020 and December 31, 2019 as a result of IBOR reform. However, the IBOR Committee and the Group's treasury and legal teams will manage the transition of the Group's floating rate bond financial liabilities at the appropriate time.

 

 

 

 

 

5.  Update on prospective changes in reference rates (Ibor) (continued)

 

Derivatives held for risk management purposes and hedge accounting

 

The Group holds derivatives for trading purposes (predominantly related to offering hedging solutions to customers) and for risk management purposes designated as hedges against eligible assets and liabilities (Note 9). The interest rate and cross currency interest rate derivative instruments have floating legs that are indexed to various IBORs. The Group's interest rate and cross currency derivative instruments are governed by the industry standard International Swaps and Derivatives Association (ISDA) Master Agreements that incorporate by reference the 2006 ISDA definitions. 2006 ISDA definitions provide for the basic framework for the documentation of bilaterally negotiated interest rate and currency derivative transactions. The ISDA has been working alongside market participants on initiatives to identify fall backs for derivatives contracts which are governed by ISDA-published terms and which reference certain key IBORs. On October 23, 2020, ISDA launched the IBOR fall backs supplement, a supplement to the 2006 ISDA definitions, and the IBOR fall backs protocol. These documents will take effect on January 25, 2021. IBOR fall backs protocol will enable adhering parties to amend legacy derivative transactions to include the updated rates and fall backs. The Group has adhered to the IBOR fall backs protocol. Derivative transactions incorporating the 2006 ISDA definitions that are entered into by the Group on or after January 25, 2021 will automatically include the new fall back provisions as set out in the IBOR fall backs supplement without any further action needed, regardless of whether parties adhere to the IBOR fall backs protocol or not.

 

In accordance with the transition provisions, the Group has adopted the amendments to IFRS 9 and IFRS 7, retrospectively to hedging relationships that existed at the start of the reporting period or were designated thereafter, and to the amount accumulated in the cash flow hedge reserve at that date.

 

The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by IBOR reform. The reliefs have the effect that IBOR reform should not generally cause hedge accounting to terminate. However, any hedge ineffectiveness continues to be recorded in the income statement. The reliefs will cease to apply when the uncertainty arising from interest rate benchmark reform is no longer present.

 

In summary, the reliefs provided by the amendments and applied by the Group are as follows:

 

· When considering the 'highly probable' requirement, the Group has assumed that the IBOR interest rates upon which hedged items are based do not change as a result of IBOR reform.

 

· In assessing whether the hedge is expected to be highly effective on a forward-looking basis the Group has assumed that the IBOR interest rates upon which the cash flows of the hedged items and the interest rate swaps that hedge them are based are not altered by IBOR reform.

 

· The Group has not recycled the cash flow hedge reserve relating to the period after the reforms are expected to take effect.

 

· The Group has assessed whether the hedged IBOR risk component is a separately identifiable risk only when it first designates a hedged item in a fair value hedge and not on an ongoing basis.

 

The Group is materially exposed to certain (or mainly to US dollar Libor) benchmark however it has not incorporated any changes in assumptions for effected benchmark into its expectation or calculation as the timing and effect of the IBOR reform is still uncertain.

 

Transition approach will be different considering the product and counterparty involved, the derivative contracts facing central counterparties will follow the market wide standardized approach to these reforms while bilateral contracts will be negotiated with the counterparty on case by case basis.

 

 

5.  Update on prospective changes in reference rates (Ibor) (continued)

 

IBORs are 'forward-looking' term rates and published tenor wise, whereas RFRs are typically 'backward-looking' rates, as they are based upon overnight rates from actual transactions, and are therefore published at the end of the overnight borrowing period. Furthermore, IBORs include a credit spread over the RFR. Therefore, to convert existing contracts and agreements to RFRs, adjustments for term and credit spread may need to be applied to RFRs to enable the two benchmarks to be economically equivalent upon transition.

 

If a hedging relationship impacted by IBOR reform has not been highly effective throughout the financial reporting period, then the Group evaluates whether the hedge is expected to be highly effective prospectively and whether the effectiveness of the hedging relationship can be reliably measured. The hedging relationship will not be discontinued as long as it meets all criteria for hedge accounting, with the exception of the requirement that the hedge was actually highly effective.

In these hedging relationships, the main sources of ineffectiveness are:

· the effect of the counterparty and the Group's own credit risk on the fair value of the swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate and foreign currency; and

· differences in maturities or timing of cash flows of the swap and the notes.

Hedging relationships impacted by IBOR reform may experience ineffectiveness attributable to market participants' expectations for when the shift from the existing IBOR benchmark rate to an alternative benchmark interest rate will occur. This transition may occur at different times for the hedged item and hedging instrument, which may lead to hedge ineffectiveness. The Group has applied its best judgment to analyse market expectations when determining the fair value of the hedging instrument and present value of estimated cash flows of the hedged item.

 

The Group's risk exposure is directly affected by IBOR reform, across both its cash flow hedges and fair value hedges as IBOR-linked derivatives are designated as a hedge instrument against its fixed and floating interest rate financial assets and liabilities.

 

The following table summarises the significant hedging notional values impacted by the IBOR reform as at December 31, 2020:

 

Current benchmark

Convergence to RFR

AED '000

 

Fair value hedges

Cash flow hedges

Total

Hedge item

USD Libor

Secured overnight financing rate (SOFR)

72,937,063

953,142

73,890,205

Fair value hedged items include fixed rate investments in debt securities, borrowings and loans and advances while cash flow hedged items include floating rate borrowings and investment securities.

 

All other IBORs

Various other RFRs

86,279

1,434,375

1,520,654

Fair value hedged items include fixed rate customer deposits, debt securities while cash flow hedged items include floating rate loans and advances.

 

 

5.  Update on prospective changes in reference rates (Ibor) (continued)

 

Specific policies applicable from January 1, 2020 for hedges directly affected by IBOR

 

On initial designation of the hedging relationship, the Group formally documents the relationship between the hedging instruments and hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both on inception of the hedging relationship and on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated. For the purpose of evaluating whether the hedging relationship is expected to be highly effective, the Group assumes that the benchmark interest rate is not altered as a result of IBOR reform.

 

The Group will cease to apply the amendments to its effectiveness assessment of the hedging relationship when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows of the hedged item or hedging instrument, or when the hedging relationship is discontinued.
 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group

 

The Covid-19 pandemic has caused an unprecedented human and health crisis. The measures necessary to contain the virus have triggered an economic downturn. Since the pandemic's outbreak, prices of assets have fallen sharply, and in some cases endured decline of 30 percent or more at the trough. While some countries have eased the lockdown, the relaxation has been gradual and, in some cases, they have had to re-impose stricter measures to deal with renewed outbreaks. Credit spreads have jumped and volatility has spiked to levels reminiscent of the global financial crisis with significant deterioration in market liquidity.

 

Central banks across the world have stepped in with measures to protect the stability of the global economy with a wide range of measures from easing of interest rates, to asset purchase programmes besides infusing significant liquidity into the economy. By effectively stepping in as "buyers of last resort" and helping contain upward pressures on the cost of credit, central banks are ensuring that households and firms continue to have access to credit at an affordable price. To date, central banks have announced plans to expand their provision of liquidity - including through loans and asset purchases.

 

In response to this crisis, Central Bank of the UAE (CBUAE) has instituted measures in the UAE to support businesses and households. These measures are expected to remain in place till the date announced by CBUAE as noted below. Some of the measures announced by CBUAE under Targeted Economic Support Scheme (TESS), which would mitigate the impact of Covid-19 are discussed below:

A.  Temporary relief to customers

Temporary relief from the payments of principal and/or interest/profit on outstanding loans for all Covid-19 affected private sector corporates, small and medium enterprises and individuals domiciled in UAE. To incentivize UAE banks to participate in the TESS programme:

 

· CBUAE has granted an extension of AED 50 billion capital buffer for the entire banking industry till December 31, 2021. This will facilitate additional lending capacity of banks.

 

· CBUAE has granted an extension of the zero cost funding facility against eligible collateral until June 30, 2021. The value of the zero cost funding programme is AED 50 billion.

 

B.  Liquidity and capital stimulus package

The effects of this crisis on the liquidity/funding and capital risks and profile of the banking system are evolving and subject to ongoing monitoring, as governments around the world intervene to provide various stimulus package to mitigate the adverse effects of the crisis. CBUAE has introduced the following stimulus package relating to liquidity and capital requirements to support the banking industry in the UAE through this disruption and to enable banks to fully pass on the TESS related benefits to end customers:

 

· CBUAE has a reduced requirement of maintaining minimum liquidity coverage ratio (LCR) of 70% (from 100%), minimum net funding ratio (NSFR) of 90% (from 100%) and minimum eligible liquid assets ratio (ELAR) of 7% (from 10%). The overall release of regulatory liquidity buffers is estimated at AED 95 billion. This liquidity can be used to compensate for the effect of posting collateral required by the TESS programme.

 

· To improve liquidity within UAE banking system, CBUAE halved the reserve requirement for demand deposit of all banks from 14% to 7% which is expected to release AED 61 billion additional liquidity for the UAE banking sector. The aggregate value of all the above capital and liquidity measures adopted by CBUAE is AED 256 billion which approximates to 17% of UAE GDP.

 

· To counter volatility in financial markets and its impact on regulatory capital, CBUAE has issued a new requirement for all banks to apply a prudential filter to IFRS 9 expected credit loss (ECL) provisions. Any increase in the provisioning compared to December 31, 2019 will be partially added back to regulatory capital while IFRS 9 provisions will be gradually phased-in during a five-year period, ending December 31, 2024.

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

B.  Liquidity and capital stimulus package (continued)

 

· CBUAE has allowed banks to tap into capital conservation buffer and domestic systemically important banks buffer (D-SIB) to the extent of 60% and 100% respectively till December 31, 2021.

 

· Planned implementation of certain Basel III capital requirements will be postponed to March 31, 2021.

Although the measures mentioned above are not exhaustive and may not fully counteract the impact of Covid-19 in the short run, they will mitigate the long-term negative impact of the pandemic.

In response to this crisis, the Bank continues to monitor and respond to all liquidity and funding requirements through its Liquidity Contingency Plan and stress tests reflecting the current economic scenarios. As at the reporting date, the liquidity, funding and capital position of the Bank remains strong and is well placed to absorb the impact of the current disruption. 

IASB Guidance and Joint Guidance issued by Central Bank of the UAE, Dubai Financial Services Authority (the "DFSA") and the Financial Services Regulatory Authority (the "FSRA")

The Bank recognises any changes made to ECL to estimate the overall impact of Covid-19 will be subject to very high levels of uncertainty as little reasonable and supportable forward-looking information is currently available on which to base those changes. This makes it even more important that ECL process remains robust since any significant overstatement of ECL could lead to unnecessary tightening in credit conditions which may not have a salutary economic impact. Accordingly, IASB and regulatory bodies in the UAE have proposed certain measures to manage the impact of economic uncertainty on ECL while remaining compliant with IFRS.

 

On March 27, 2020, the IASB issued a guidance note on accounting for expected credit losses in the light of current uncertainty arising from the Covid-19 pandemic. The guidance note states that IFRS 9 requires the application of judgement and allows entities to adjust their approach to determining ECLs in different circumstances. A number of assumptions and linkages underlying the way ECLs have been implemented to date may no longer hold in the current environment. Entities should not continue to apply their existing ECL methodology mechanically.

 

On April 22, 2020, CBUAE issued guidance on treatment of IFRS 9 ECL in context of the Covid-19 crises. The guidance requires banks to identify customers who are temporarily and mildly impacted by Covid-19 (Group 1) and those who are significantly impacted by Covid-19 in the long term (Group 2). The guidance also requires the Bank to review the credit conversion factor, staging and run scenarios to ascertain the impact of the macro-economic variables. ADCB has taken necessary steps to comply with this guidance. On October 27, 2020 CBUAE has issued further guidelines that required moving all accounts that are significantly impacted by Covid-19 (Group 2) to stage 2. The revised guidelines required banks to disclose all deferrals provided to the all customers irrespective of whether these deferrals were provided under TESS scheme or outside of the TESS scheme.

 

Further, to assess significant increase in credit risk (SICR) IFRS 9 requires that entities assess changes in the risk of a default occurring over the expected life of a financial instrument. Both the assessment of SICR and the measurement of ECLs are required to be based on reasonable and supportable information that is available to an entity without undue cost or effort. Entities are required to develop estimates based on the best available information about past events, current conditions and forecasts of economic conditions. In assessing forecast conditions, consideration should be given both to the effects of Covid-19 and the significant government support measures being undertaken.

 

 

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

IASB Guidance and Joint Guidance issued by Central Bank of the UAE, Dubai Financial Services Authority (the "DFSA") and the Financial Services Regulatory Authority (the "FSRA") (continued)

 

In line with the IASB guidance, CBUAE, DFSA and FSRA introduced a joint guidance which stipulates the following considerations while measuring ECLs:

 

· a temporary moratorium on payments, or a waiver of a breach of covenant, in itself is not considered an SICR trigger in the current environment. This would also be the case even if a moratorium results in a loss for the Bank (e.g., if interest payments are reduced or waived), if it is provided irrespective of the borrowers' individual circumstances.

 

· due to the current unusual circumstances the 30 days past due (DPD) backstop assumption in some cases has been rebutted.

 

· the Bank distinguishes between obligors whose long-term credit risk is unlikely to be significantly affected by Covid-19 from those who may be more permanently impacted. Obligors operating in certain industries are likely to be more affected compared to others. These factors are considered to determine whether there is a case of SICR.

 

· most modifications of contracts as a result of Covid-19 are not substantial modifications. 

 

Impact of Covid-19 on ADCB Group

 

ADCB's corporate portfolio is primarily UAE focused, therefore the Central Bank TESS programme directly aids most of the corporate portfolios with the exception of government-related enterprises/government debt which we believe will be able to manage this crisis based on their ownership and economic importance to the country.  All customers who have availed of any deferral, have been classified as Group 1 or Group 2 as per the CBUAE definitions. Customers have been provided deferrals under TESS and the subsequent repayment/account performance post the end of the deferral period is monitored.

 

ADCB's retail portfolio is expected to see more immediate term impact on account of reduced pay/job-losses/cash flow stress in businesses. ADCB is fully committed to help these customers through this turbulent period as directed by CBUAE. Small and medium enterprises (SME) customers are evaluated based on the stability of the business owner and business and any short term cash flow mismatches are supported by the Bank.

 

Al Hilal Bank, a fully owned subsidiary of ADCB, has a retail portfolio primarily of UAE nationals employed in government owned entities. This is a segment that we believe will be insulated from job cuts and salary reductions, and as such the impact on this portfolio would be considerably muted.

 

Impact on ECL

 

ADCB's IFRS 9 framework is implemented and is based on robust internal models.  ADCB's Group Risk Management has independent model development and model validation teams who oversee the re-development/calibration and model validations on policy defined frequencies. ADCB also relies on external model validation for ensuring the ECL outputs are relevant and reflect the latest portfolio risk composition.

 

For both 2020 numbers and projections, ADCB has updated its macro-economic variables by incorporating changes to economic scenarios, reduction in oil prices, drop in real estate prices and a negative GDP growth. These changes ensures that the ECL charge fully reflects the current prevailing macro-economic scenario. The impact of these changes is included in the net impairment charges of AED 3,993 million.

 

Given that ADCB's portfolio is largely UAE based, all the government support measures will help mitigate the impact of ECL on its portfolio.

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

Governance updates related to TESS

 

The Group has implemented robust governance around TESS deferrals. TESS deferrals follow a credit approval process and are approved after proper evaluation of customer needs, past performance and impact of Covid-19 on customer's credit worthiness.  In line with the Joint Guidance, the risk policy team has issued guidelines to ensure that TESS deferrals adhere to the prescribed CBUAE rules. All deferrals are tracked by credit operations with adequate checks and balances. TESS deferrals are monitored on a weekly basis by Group Risk division to ensure compliance with the CBUAE rules and Joint Guidance. The decisions on macro-economic adjustments, grouping, etc. are all documented via policies and approved by the relevant risk committees.

 

Payment deferrals

 

The Group has drawn AED 8,881,745 thousand of the TESS related funds allocated to it, of which AED 2,864,373 thousand has been repaid up to the date of approval of these financial statements. Further, the Group has passed on AED 11,018,457 thousand to the customers by means of payment deferrals under TESS, of which AED 4,819,124 thousand has been subsequently settled by customers as at December 31, 2020. Payment deferrals were given to corporate, SME and retail customers in line with the CBUAE regulations ensuring that the customers impacted by Covid-19 are supported by temporary payment deferrals.

 

Summary of payment deferrals (including TESS and other deferrals):

 

 

As at December 31, 2020

 

Wholesale banking

Retail  banking

Total

 

AED'000

AED'000

AED'000

TESS deferrals extended during the year

9,753,239

 1,265,218

11,018,457

Other deferrals extended during the year

 1,827,494

 356

1,827,850

Total payment deferrals extended during the year

  11,580,733

  1,265,574

12,846,307

Less: Payment deferrals repaid during the year

  (4,867,847)

  (500,762)

(5,368,609)

Payment deferrals outstanding

6,712,886

764,812

7,477,698

 

Summary of payment deferrals, exposure and outstanding impairment allowance by product:

 

 

 

As at December 31, 2020

 

 

Payment deferrals

Exposure

Impairment

allowance

 

 

AED'000

AED'000

AED'000

Overdrafts (corporates)

 

52,645

977,135

1,157

Retail loans

 

764,813

5,823,365

383,325

Corporate loans

 

5,891,809

53,308,851

993,107

Other facilities

 

768,431

770,722

16,369

Total

 

7,477,698

60,880,073

1,393,958

 

Product wise classification of retail loans:

 

 

As at December 31, 2020

 

Payment deferrals

 

Exposure

Impairment

allowance

 

AED'000

AED'000

AED'000

Personal loans (including credit cards)

  722,781

  4,667,234

  344,432

Mortgage loans

  24,625

  998,427

  29,726

Auto loans

  17,407

  157,704

  9,167

Total

764,813

5,823,365

383,325

 

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

Payment deferrals (continued)

 

Summary of payment deferrals, exposure and outstanding impairment allowance by economic sector:

 

 

As at December 31, 2020

 

Payment deferrals

Exposure

Impairment allowance

Economic activity sector

AED'000

AED'000

AED'000

Energy

71,560

405,429

5,125

Trading

620,201

831,193

14,866

Real estate investment

3,025,303

24,471,305

497,902

Hospitality

735,534

8,189,391

238,292

Transport and communication

88,710

598,206

9,879

Personal

941,315

6,095,300

382,810

Government and public sector enterprises

398,331

2,524,793

960

Financial institutions (*)

719,243

9,202,981

68,479

Manufacturing

105,620

541,688

148,724

Services

57,435

333,912

8,007

Others

714,446

7,685,875

18,914

Total

7,477,698

60,880,073

1,393,958

(*) includes investment companies

 

Joint Guidance requires that all customers who avail payment deferrals are to be grouped into two categories:

 

Group 1

 

Customers that are temporarily and mildly impacted by the Covid-19 crisis. For these customers, the payment deferrals are believed to be effective and thus the economic value of the facilities are not expected to be materially affected. These customers are expected to face liquidity constraints without substantial changes in their creditworthiness.

 

Group 2

 

Customers that are expected to face substantial changes in their credit worthiness beyond liquidity issues.

 

To comply with the above requirements, the Group reviewed the top 70% of its wholesale exposures on a case-by-case basis to ensure the correct classification of Group 1 and 2 exposures. For the remainder of the portfolio, the Group has adopted an approach based on industry sector, current internal rating and loan-to-value criteria for asset backed financing. The grouping policy was reviewed and approved by the Management Risk & Credit Committee of the Bank.

 

 

Based on the above considerations, customers availing payment deferrals have been categorised as follows:

 

 

As at December 31, 2020

 

 

 

Number of

customers

Payment deferrals

 

Exposure

Impairment

allowance

Segment

Group

 

AED'000

AED'000

AED'000

 

 

 

 

 

 

Wholesale banking (*)

Group 1

  643

  5,021,176

  48,890,463

  287,714

 

Group 2

  203

  1,691,709

  6,166,245

  722,919

 

 

846

6,712,885

55,056,708

1,010,633

 

 

 

 

 

 

Retail banking

Group 1

  18,483

  352,210

  4,945,479

  43,380

 

Group 2

12,864

  412,603

  877,886

  339,945

 

 

31,347

764,813

5,823,365

383,325

 

 

 

 

 

 

Total

 

32,193

7,477,698

60,880,073

1,393,958

(*) for the purpose of this disclosure, high net worth clients and their businesses are included in wholesale banking

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

Payment deferrals (continued)

 

The Group has aligned its internal policies on ECL and staging in line with "Joint Guidance Note to Banks and Finance Companies on treatment of IFRS 9 expected credit loss provisions in the UAE in the context of the Covid-19 crisis" ("Joint Guidance") dated April 4, 2020.

 

The Group has taken the following steps to ensure that the ECL practices remain prudent in light of the payment deferrals provided to the customer. 

 

· Changes in macro-economic variables

 

The Group runs ECL models based on forward looking assumptions. However, based on the CBUAE directives, latest macro-economic variables and projections have been updated in ECL models to reflect the current economic situation. In addition to this, the Bank continues to hold overlays that has been set aside to cover Covid-19 impact.

 

· Review of exposure at default (EAD)

 

The Group has reviewed the credit conversion factors (CCF) of unfunded exposures and the likelihood of these facilities being drawn. Further, the Group has increased the CCF of unutilised overdrafts and the revolving credit facilities of its wholesale portfolio as part of this review.

 

· Probability of default (Rating changes)

 

The Group continues to rate its customers using its internal models and customers with weak financial profiles will have rating downgrades thereby impacting their probability of default (PD) and ECL. This is to ensure any additional ECL required due to PD deterioration is taken into the ECL calculation.

 

Average PD and loss given default (LGD) of customers availing deferral benefits:

 

Weighted average PD

 

Weighted average LGD

Group

Wholesale

banking

Retail

banking

 

Wholesale

banking

Retail

banking

Group 1

3.51%

1.84%

 

17.59%

63.25%

Group 2

24.83%

52.16%

 

21.32%

60.40%

Segment average

5.90%

9.33%

 

18.01%

62.82%

 

· Migration of staging

 

The CBUAE regulations allows the staging of the Group 1 customers to remain unchanged for the duration of the crisis. Similarly, the Group 2 customers will not be normally migrated to stage 3 based on their financial performance as the impact of Covid-19 is not expected to be permanent in nature. The Bank has applied these principles, however some of the customer's stage has been downgraded post the end of the deferral period. In addition, as per the latest CBUAE guidelines, Group 2 customers who were under stage 1 have been migrated to stage 2.

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

Payment deferrals (continued)

 

The stage wise classification of customers availing payment deferrals (by business segment):

 

 

 

As at December 31, 2020

 

 

 

Payment deferrals

 

Exposure

Impairment

allowance

Segment

Stage

Group

AED'000

AED'000

AED'000

 

 

 

 

 

 

Wholesale banking

Stage 1

Group 1

  4,736,298

  46,919,251

  206,500

 

 

Group 2

  - 

  - 

  - 

 

 

 

  4,736,298

  46,919,251

  206,500

 

 

 

 

 

 

 

Stage 2

Group 1

  284,878

  1,971,212

  81,214

 

 

Group 2

  1,398,193

  5,446,285

  661,627

 

 

 

  1,683,071

  7,417,497

  742,841

 

 

 

 

 

 

 

Stage 3

Group 1

  - 

  - 

  - 

 

 

Group 2

  273,125

  501,597

  57,628

 

 

 

  273,125

  501,597

  57,628

 

 

 

 

 

 

 

POCI

Group 1

  - 

  - 

  - 

 

 

Group 2

  20,391

  218,363

  3,664

 

 

 

  20,391

  218,363

  3,664

 

 

 

 

 

 

Total

 

 

  6,712,885

  55,056,708

  1,010,633

 

 

 

 

 

 

Retail banking

Stage 1

Group 1

  352,210

  4,945,479

  43,380

 

 

Group 2

  - 

  - 

  - 

 

 

 

  352,210

  4,945,479

  43,380

 

 

 

 

 

 

 

Stage 2

Group 1

  - 

  - 

  - 

 

 

Group 2

  312,533

  701,966

  243,029

 

 

 

  312,533

  701,966

  243,029

 

 

 

 

 

 

 

Stage 3

Group 1

  - 

  - 

  - 

 

 

Group 2

  100,070

  175,920

  96,916

 

 

 

  100,070

  175,920

  96,916

 

 

 

 

 

 

Total

 

 

  764,813

  5,823,365

  383,325

 

 

 

 

 

 

Grand total

 

 

  7,477,698

  60,880,073

  1,393,958

 

 

 

 

6.  Coronavirus (Covid-19) outbreak and its impact on ADCB Group (continued)

 

Payment deferrals (continued)

 

Stage migration of exposure since January 1, 2020, of customers benefiting from payment deferrals (by business segment):

 

 

Stage 1

Stage 2

Stage 3(*)

POCI

Total

Wholesale banking

AED'000

AED'000

AED'000

AED'000

AED'000

As at January 1, 2020

46,481,920

5,871,434

253,732

139,318

52,746,404

- Transfer from stage 1 to stage 2

(2,062,953)

2,062,953

-

-

-

- Transfer from stage 1 to stage 3

(121,410)

-

121,410

-

-

- Transfer from stage 2 to stage 1

855,062

(855,062)

-

-

-

- Transfer from stage 2 to stage 3

-

(40,362)

40,362

-

-

- Transfer from stage 3 to stage 2

-

36,618

(36,618)

-

-

Changes in exposure within same stage

1,766,632

341,916

122,711

79,045

2,310,304

As at December 31, 2020

46,919,251

7,417,497

501,597

218,363

55,056,708

 

 

 

Stage 1

Stage 2

Stage 3(*)

POCI

Total

Retail banking

AED'000

AED'000

AED'000

AED'000

AED'000

As at January 1, 2020

5,169,588

260,962

13,912

-

5,444,462

- Transfer from stage 1 to stage 2

(472,014)

472,014

-

-

-

- Transfer from stage 1 to stage 3

(116,498)

-

116,498

-

-

- Transfer from stage 2 to stage 1

97,807

(97,807)

-

-

-

- Transfer from stage 2 to stage 3

-

(20,887)

20,887

-

-

- Transfer from stage 3 to stage 2

-

12,776

(12,776)

-

-

Changes in exposure within same stage

266,597

74,907

37,399

-

378,903

As at December 31, 2020

4,945,480

701,965

175,920

-

5,823,365

(*) as per CBUAE guidelines, the Group has extended payment deferrals under TESS only to stage 1 and stage 2 loans. Certain exposures had been subsequently migrated to stage 3 in exceptional circumstances where customer's debt servicing capacity was expected to be permanently impaired

 

 

6.   Coronavirus (Covid-19) outbreak and its impact on ADCB   Group (continued)

 

Payment deferrals (continued)

 

The internal rating classification of customers availing payment deferrals as at December 31, 2020:

 

 

Group 1

 

Group 2

 

Total

 

Internal

rating

Payment deferrals

Exposure

Impairment

allowance

 

Payment deferrals

Exposure

Impairment

allowance

 

Payment deferrals

 

Exposure

Impairment

allowance

AED'000

AED'000

AED'000

 

AED'000

AED'000

AED'000

 

AED'000

AED'000

AED'000

Grades 1-4

1,034,679

14,316,154

5,114

 

72,000

340,239

870

 

1,106,679

14,656,393

5,984

Grades 5-6

3,516,261

31,476,312

166,409

 

  536,148

  3,211,019

  449,325

 

  4,052,409

  34,687,331

  615,734

Grade 7

  402,295

  2,790,499

  107,941

 

  778,077

  1,847,316

  201,977

 

  1,180,372

  4,637,815

  309,918

Grades 8-10

  - 

  - 

  - 

 

  291,519

  710,605

  56,504

 

  291,519

  710,605

  56,504

Unrated

420,151

5,252,977

51,630

 

  426,568

  934,952

  354,188

 

  846,719

  6,187,929

  405,818

Total

5,373,386

  53,835,942

331,094

 

2,104,312

7,044,131

1,062,864

 

7,477,698

60,880,073

1,393,958

 

 

 

7.  Cash and balances with central banks, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2020

 

2019

 

 

 

 

 

 

 AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Cash on hand

 

 

 

 

1,682,035

 

1,830,228

Balances with central banks (*)

 

 

 

 

17,608,390

 

2,854,588

Reserves maintained with central banks

 

 

 

 

10,083,446

 

15,379,030

Certificate of deposits with central banks

 

 

 

 

228,201

 

4,841,367

Gross cash and balances with central banks

 

 

 

 

29,602,072

 

24,905,213

Less: Allowance for impairment (Note 43.3)

 

 

 

 

(465)

 

(247)

Total cash and balances with central banks, net

 

 

 

 

29,601,607

 

24,904,966

The geographical concentration is as follows:

 

 

 

 

 

 

 

Within the UAE

 

 

 

 

28,592,453

 

24,120,803

Outside the UAE

 

 

 

 

1,009,619

 

784,410

 

 

 

 

 

29,602,072

 

24,905,213

Less: Allowance for impairment (Note 43.3)

 

 

 

 

(465)

 

(247)

 

 

 

 

 

29,601,607

 

24,904,966

(*) includes overnight deposit amounting to AED 17,000,000 thousand (December 31, 2019 - AED nil) placed with CBUAE at 0.10% p.a.

 

Reserves maintained with central banks represent deposits with the central banks at stipulated percentages of its demand, savings, time and other deposits. These are available for day-to-day operations only under certain specified conditions.

 

8.  Deposits and balances due from banks, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2020

 

2019

 

 

 

 

 

 

 AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Nostro balances

 

 

 

 

1,194,880

 

1,151,543

Margin deposits

 

 

 

 

2,735,002

 

1,315,686

Time deposits

 

 

 

 

5,071,201

 

5,616,585

Wakala placements

 

 

 

 

1,744,675

 

3,305,700

Loans and advances to banks

 

 

 

 

10,836,253

 

11,725,422

Gross deposits and balances due from banks

 

 

 

 

21,582,011

 

23,114,936

Less: Allowance for impairment (Note 43.3)

 

 

 

 

(46,569)

 

(49,962)

Total deposits and balances due from banks, net

 

 

 

 

21,535,442

 

23,064,974

The geographical concentration is as follows:

 

 

 

 

 

 

 

Within the UAE

 

 

 

 

6,535,296

 

8,013,181

Outside the UAE

 

 

 

 

15,046,715

 

15,101,755

 

 

 

 

 

21,582,011

 

23,114,936

Less: Allowance for impairment (Note 43.3)

 

 

 

 

(46,569)

 

(49,962)

 

 

 

 

 

21,535,442

 

23,064,974

 

 

 

9.  Derivative financial instruments

 

In the ordinary course of business the Group enters into various types of derivative transactions that are affected by variables in the underlying instruments. 

 

A derivative is a financial instrument or other contract with all three of the following characteristics:

(a)  its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the 'underlying');

(b)  it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

(c)  it is settled at a future date.

 

Derivative financial instruments which the Group enters into includes forward foreign exchange contracts, interest rate futures, forward rate agreements, commodity swaps, interest rate swaps and currency and interest rate options.

 

The Group uses the following derivative financial instruments for hedging and trading purposes.

 

Forward and Futures transactions

 

Currency forwards represent commitments to purchase foreign and domestic currencies, including non-deliverable forward transactions (i.e. the transaction is net settled). Foreign currency and interest rate futures are contractual obligations to receive or pay a net amount based on changes in currency rates or interest rates or to buy or sell foreign currency or a financial instrument on a future date at a specified price established in an organised financial market. The credit risk for futures contracts is negligible as they are collateralised by cash or marketable securities and changes in the futures' contract value are settled daily with the broker. Forward rate agreements are individually negotiated interest rate futures that call for a cash settlement at a future date for the difference between a contracted rate of interest and the current market rate based on a notional principal amount.

 

Swap transactions

 

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates (for example: fixed rate for floating rate) or a combination of all these (for example: cross-currency interest rate swaps). No exchange of principal takes place except for certain cross currency interest rate swaps. The Group's credit risk represents the potential loss if counterparties fail to fulfill their obligation. This risk is monitored on an ongoing basis through market risk limits on exposures and credit risk assessment of counterparties using the same techniques as those of lending activities.

 

 

9.   Derivatives financial instruments (continued)


Option transactions

 

Foreign currency and interest rate options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, either to buy (a call option) or sell (a put option) at or by a set date or during a set period, a specific amount of a foreign currency or a specific rate of interest or any financial instrument at a predetermined price. The seller receives a premium from the purchaser in consideration for the assumption of foreign exchange or interest rate risk. Options may be either exchange-traded or negotiated between the Group and a customer over the counter (OTC).

 

Derivative contracts can be exchange traded or OTC. The Group values exchange traded derivatives using inputs at market-clearing levels. OTC derivatives are valued using market based inputs or broker/dealer quotations.  Where models are required, the Group uses a variety of inputs, including contractual terms, market prices, market volatilities, yield curves and other reference market data.

 

Fair value measurement models

 

For OTC derivatives that trade in liquid markets such as generic forwards, swaps and options, model inputs can generally be verified and model selection conforms to market practice. Certain OTC derivatives trade in less liquid markets with limited pricing information and the determination of fair value for these derivatives is inherently more difficult. Subsequent to initial recognition, the Group only updates valuation inputs when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker dealer quotations or other empirical market data. In the absence of such evidence, Management's best estimates are used.

 

Derivatives held or issued for trading purposes

 

The Group's trading activities are predominantly related to offering hedging solutions to customers at competitive prices in order to enable them to transfer, modify or reduce current and expected risks. The Group also manages risk taken as a result of client transactions or initiates positions with the expectation of profiting from favourable movement in prices, rates or indices.

 

Derivatives held or issued for hedging purposes

 

The Group uses derivative financial instruments for hedging purposes as part of its asset and liability management activities in order to reduce its own exposure to fluctuations in currency and interest rates.  The Group uses forward foreign exchange contracts, cross currency interest rate swaps and interest rate swaps to hedge currency rate and interest rate risks. In all such cases, the hedging relationship and objectives including details of the hedged item and hedging instrument are formally documented and the transactions are accounted for based on the type of hedge.

 

 

 

9.   Derivatives financial instruments (continued)

 

The table below shows the positive (assets) and negative (liabilities) fair values of derivative financial instruments.

 

 

 

 

 

  Fair values

 

 

 

 

 

 

Assets

 

Liabilities

 

Notional

 

 

 

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

As at December 31, 2020

 

 

 

 

 

 

Derivatives held or issued for trading

 

 

 

 

 

 

 Foreign exchange derivatives

 

526,498

 

421,507

 

304,195,751

 Interest rate and cross currency swaps

 

6,298,336

 

6,258,030

 

232,437,104

 Interest rate and commodity options

 

895,776

 

656,480

 

64,008,310

 Forward rate agreements

 

76

 

482

 

7,248,120

 Commodity and energy swaps

 

136,202

 

126,151

 

1,563,427

 Swaptions

 

577,111

 

493,621

 

72,938,327

Total derivatives held or issued for trading

 

8,433,999

 

7,956,271

 

682,391,039

Derivatives held as fair value hedges

 

 

 

 

 

 

 Interest rate and cross currency swaps

 

2,340,794

 

2,774,791

 

73,023,342

Derivatives held as cash flow hedges

 

 

 

 

 

 

Interest rate and cross currency swaps

 

57,361

 

110,585

 

3,942,375

Forward foreign exchange contracts

 

314,242

 

13,401

 

9,297,535

Total derivatives held as cash flow hedges

 

371,603

 

123,986

 

13,239,910

 

 

 

 

 

 

 

Total derivative financial instruments

 

11,146,396

 

10,855,048

 

768,654,291

 

As at December 31, 2019

 

 

 

 

 

 

Derivatives held or issued for trading

 

 

 

 

 

 

 Foreign exchange derivatives

 

532,891

 

521,455

 

331,658,208

 Interest rate and cross currency swaps

 

4,241,279

 

4,234,121

 

265,245,648

 Interest rate and commodity options

 

421,623

 

331,066

 

57,957,412

 Forward rate agreements

 

111

 

26

 

560,031

 Futures (exchange traded)

 

15

 

-

 

7,254,310

 Commodity and energy swaps

 

157,052

 

150,144

 

2,091,119

 Swaptions

 

213,455

 

219,663

 

40,292,838

Total derivatives held or issued for trading

 

5,566,426

 

5,456,475

 

705,059,566

Derivatives held as fair value hedges

 

 

 

 

 

 

 Interest rate and cross currency swaps

 

1,050,963

 

1,421,646

 

82,493,134

Derivatives held as cash flow hedges

 

 

 

 

 

 

Interest rate and cross currency swaps

 

76,819

 

51,881

 

7,000,783

Forward foreign exchange contracts

 

95,509

 

19,889

 

8,285,366

Total derivatives held as cash flow hedges

 

172,328

 

71,770

 

15,286,149

 

 

 

 

 

 

 

Total derivative financial instruments

 

6,789,717

 

6,949,891

 

802,838,849

 

The notional amounts indicate the volume of transactions and are neither indicative of the market risk nor credit risk. Refer note 45 for maturity profile of notional value of derivatives held for hedging purpose.

 

The net hedge ineffectiveness gains/(losses) recognised in the consolidated income statement are as follows:

 

 

2020

 

2019

 

AED'000

 

AED'000

Net change in the fair value of the hedged items attributable to risk hedged

125,633

 

  (997,113)

Net change in the fair value of the hedging instruments

(94,033)

 

  950,115

Fair value hedging ineffectiveness gains/(losses)

31,600

 

(46,998)

Add: Cash flow hedging ineffectiveness gains

-

 

365

Net hedge ineffectiveness gains/(losses)

31,600

 

(46,633)

 

 

9.   Derivatives financial instruments (continued)

 

The table below provides the Group's forecast of net cash flows in respect of its cash flow hedges and the periods in which these cash flows are expected to impact consolidated income statement, excluding any hedging adjustment that may be applied.

 

Forecasted net cash flows

Less than 3 months

 

3 months to less than 1 year

 

1 year to less than 2 years

 

2 years to less than 5 years

 

More than 5 years

 

Total

Year

AED'000

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

 

 

 

2020

197,444

 

93,852

 

2,025

 

(526)

 

(26,174)

 

266,621

2019

30,421

 

64,672

 

34,141

 

25,633

 

-

 

154,867

 

 

 

 

 

 

 

 

 

 

 

 

As at December 31, 2020, the Group received cash collateral of AED 1,690,099 thousand (December 31, 2019 - AED 758,274 thousand) and bonds with fair value of AED 922,863 thousand (December 31, 2019 - AED 186,117 thousand) against positive fair value of derivative assets.

 

As at December 31, 2020, the Group placed cash collateral of AED 2,748,588 thousand (December 31, 2019 - AED 1,315,686 thousand) and bonds of AED 3,313,735 thousand (December 31, 2019 - AED 1,956,945 thousand) against the negative fair value of derivative liabilities.  These collaterals are governed by collateral service agreements under International Swaps and Derivatives Association (ISDA) agreements.

 

 

10. Investment securities

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

GCC(*)

 

Rest of

 

 

 

 

UAE

 

countries

 

the world

 

Total

 

 

AED'000

 

AED'000

 

AED'000

 

AED'000

As at December 31, 2020

 

 

 

 

 

 

 

At fair value through other comprehensive income

 

 

 

 

 

 

 

Quoted:

 

 

 

 

 

 

 

 Government securities

16,752,097

 

14,404,246

 

7,742,358

 

38,898,701

 Bonds - Public sector

9,822,747

 

1,914,715

 

4,312,979

 

16,050,441

 Bonds - Banks and financial institutions

3,993,676

 

590,994

 

4,340,036

 

8,924,706

 Bonds - Corporate

1,113,847

 

394,689

 

194,624

 

1,703,160

 Equity instruments (**)

261,336

 

110,077

 

312,901

 

684,314

 Mutual funds

-

 

-

 

84,853

 

84,853

Total quoted

31,943,703

 

17,414,721

 

16,987,751

 

66,346,175

Unquoted:

 

 

 

 

 

 

 

 Equity instruments

166,548

 

-

 

37,550

 

204,098

 Mutual funds

-

 

1,337

 

546

 

1,883

 Total unquoted

166,548

 

1,337

 

38,096

 

205,981

Total investment securities at fair value through other  comprehensive income

32,110,251

 

17,416,058

 

17,025,847

 

66,552,156

 

 

 

 

 

 

 

 

At amortised cost

 

 

 

 

 

 

 

Quoted:

 

 

 

 

 

 

 

 Government securities

5,009,526

 

4,368,820

 

4,150,655

 

13,529,001

 Bonds - Public sector

2,536,387

 

1,253,712

 

2,206,558

 

5,996,657

 Bonds - Banks and financial institutions

149,026

 

-

 

366,395

 

515,421

 Bonds - Corporate

1,604,541

 

-

 

20,054

 

1,624,595

Total quoted

9,299,480

 

5,622,532

 

6,743,662

 

21,665,674

 Less: Allowance for impairment (Note 43.3)

(2,253)

 

(1,512)

 

(8,081)

 

(11,846)

 Total investment securities at amortised cost

9,297,227

 

5,621,020

 

6,735,581

 

21,653,828

 

 

 

 

 

 

 

 

Total investment securities

41,407,478

 

23,037,078

 

23,761,428

 

88,205,984

 (*) Gulf Cooperation Council

(**) includes investments in perpetual bonds issued by other banks

 

 

 

10.   Investment securities (continued)

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

GCC

 

Rest of

 

 

 

 

UAE

 

countries

 

the world

 

Total

 

 

AED'000

 

AED'000

 

AED'000

 

AED'000

As at December 31, 2019 (restated) (Note 53)

 

 

 

 

 

 

 

At fair value through other comprehensive income

 

 

 

 

 

 

 

Quoted:

 

 

 

 

 

 

 

 Government securities

  11,991,052

 

  16,262,483

 

  9,335,345

 

  37,588,880

 Bonds - Public sector

  10,209,692

 

  1,780,786

 

  4,695,439

 

  16,685,917

 Bonds - Banks and financial institutions

  6,882,385

 

  479,304

 

  5,083,594

 

  12,445,283

 Bonds - Corporate

  1,302,004

 

  473,176

 

  302,977

 

  2,078,157

 Equity instruments (*)

  251,237

 

  110,809

 

  81,623

 

  443,669

 Mutual funds

  72,201

 

  - 

 

  86,990

 

  159,191

Total quoted

  30,708,571

 

19,106,558

 

  19,585,968

 

  69,401,097

Unquoted:

 

 

 

 

 

 

 

 Government securities

  3,509,814

 

  174,598

 

  - 

 

  3,684,412

 Bonds - Banks and financial institutions

  - 

 

  - 

 

  134,226

 

  134,226

 Equity instruments

  183,077

 

  - 

 

  37,655

 

  220,732

 Mutual funds

  - 

 

  1,615

 

  580

 

  2,195

 Total unquoted

  3,692,891

 

176,213

 

172,461

 

4,041,565

Total investment securities

34,401,462

 

  19,282,771

 

  19,758,429

 

73,442,662

(*) includes investments in perpetual bonds issued by other banks

 

As at December 31, 2020, the allowance for impairment on debt instruments designated at FVTOCI amounting to AED 229,820 thousand (December 31, 2019 - AED 260,417 thousand) (Note 43.3) is included in revaluation reserve of investments carried at FVTOCI and recognised in other comprehensive income.

 

The Group hedges interest rate and foreign currency risks on certain fixed rate and floating rate investments through interest rate and currency swaps and designates these as fair value and cash flow hedges, respectively. The net negative fair value of these swaps at December 31, 2020 was AED 2,753,972 thousand (December 31, 2019 - net negative fair value AED 1,010,614 thousand). The hedge ineffectiveness gains and losses relating to these hedges were included in the consolidated income statement.

 

The Group entered into repurchase agreements whereby bonds were pledged and held by counterparties as collateral. The risks and rewards relating to the investments pledged remains with the Group. The bonds placed as collateral are governed under Global Master Repurchase Agreements (GMRA). The following table reflects the carrying value of these bonds and the associated financial liabilities:

 

 

 

As at December 31, 2020

 

As at December 31, 2019

 

 

Carrying value of pledged securities

 

Carrying value of associated liabilities

 

Carrying value of pledged securities

 

Carrying value of associated liabilities

 

 

 

 

 

 

 

AED'000

 

AED'000

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Repurchase financing

 

  15,060,298

 

13,027,819

 

  1,041,439

 

  851,056

 

Further, the Group pledged investment securities with fair value amounting to AED 3,313,735 thousand (December 31, 2019 - AED 1,964,034 thousand) as collateral against margin calls. The risks and rewards on these pledged investments remains with the Group.

 

 

11.   Loans and advances to customers, net

 

 

 

 

 

 

 

As at

 

As at

 

 

 

 

 

 

December 31

 

December 31

 

 

 

 

 

 

2020

 

2019

 

 

 

 

 

 

 

 

restated (*)

 

 

 

 

 

 

AED'000

 

AED'000

 

 

 

 

 

 

 

 

 

Overdrafts (retail and corporate)

 

 

 

 

9,834,901

 

  12,682,973

Retail loans

 

 

 

 

43,176,876

 

  46,664,157

Corporate loans

 

 

 

 

183,898,332

 

  180,835,988 

Credit cards

 

 

 

 

4,252,266

 

4,946,370

Other facilities

 

 

 

 

9,290,855

 

  10,037,002

Gross loans and advances to customers

 

 

 

 

250,453,230

 

255,166,490

Less: Allowance for impairment (Note 43.3)

 

 

 

 

(11,477,528)

 

  (7,333,410)

Total loans and advances to customers, net

 

 

 

 

238,975,702

 

247,833,080

(*) refer note 53

 

For Islamic financing assets included in the above table, refer note 24.

 

The Group hedges certain fixed rate and floating rate loans and advances to customers for interest rate risk using interest rate swaps and designates these instruments as fair value and cash flow hedges, respectively. The net positive fair value of these swaps at December 31, 2020 was AED 36,933 thousand (December 31, 2019 - net positive fair value of AED 28,252 thousand).

 

12.  Investment in associates

 

Investment in associates has been accounted in the consolidated financial statements using the equity method at net fair value of the identifiable assets and liabilities of the associate on the date of acquisition.

 

 

 

 

 

 

 

 

 

AED'000

As at January 1, 2019

 

 

 

 

 

205,158

Addition on business combinations (Note 53)

 

 

 

 

 

  197,855

Share in profit of associates

 

 

 

 

 

  17,765

Dividend received from associates

 

 

 

 

 

(14,194)

Impact of currency translation

 

 

 

 

 

  1,184

As at December 31, 2019

 

 

 

 

 

407,768

Share in profit of associates

 

 

 

 

 

18,005

Dividend received from associates

 

 

 

 

 

(9,647)

Impairment charge (Note 33)

 

 

 

 

 

(18,673)

Transfer to held for sale (Note 35)

 

 

 

 

 

(101,347)

Disposal during the year

 

 

 

 

 

(40,414)

Impact of currency translation

 

 

 

 

 

176

As at December 31, 2020

 

 

 

 

 

255,868

 

Investment in Al Hilal Global Balance Fund, one of the associates, was liquidated during the year and the carrying value of investment was fully realised on liquidation resulting in no gain or loss on disposal of associate.

 

For balances and transactions with associates, refer note 37.

 

 

12.   Investment in associates (continued)

 

Details of the investment in associates as at December 31, 2020 are as follows:

 

 

Effective ownership interest

Country of incorporation

Principal activities

Name of associate

2020

2019

Four N Property LLC

35.00%

35.00%

UAE

Residential facilities for lower income group.

Orient UNB Takaful PJSC(1)

47.54%

47.54%

UAE

General insurance services.

Arab Orient Takaful Insurance Company(1)

19.96%

19.32%

Egypt

General insurance services.

Al Hilal Global Sukuk Fund

10.14%

31.89%

UAE

Investment activities.

Al Hilal GCC Equity Fund

75.60%

48.99%

UAE

Investment activities.

Al Hilal Global Balance Fund(2)

-

76.43%

UAE

Investment activities.

 

(1) held for sale;  (2) liquidated

 

 

13.   Investment properties

 

 

 

 

 

 

 

AED'000

As at January 1, 2019

 

 

 

 

 

576,671

Addition on business combinations (Note 53)

 

 

 

 

 

1,180,799

Additions during the year

 

 

 

 

 

8,550

Disposals during the year

 

 

 

 

 

(5,859)

Revaluation of investment properties

 

 

 

 

 

(67,153)

Impact of currency translation

 

 

 

 

 

699

As at December 31, 2019

 

 

 

 

 

1,693,707

Disposals during the year

 

 

 

 

 

(4,574)

Revaluation of investment properties

 

 

 

 

 

(45,388)

Impact of currency translation

 

 

 

 

 

211

As at December 31, 2020

 

 

 

 

 

1,643,956

 

 

For the year 2020, net losses from investment properties include net gains of AED 416 thousand (2019: net gains of AED 417 thousand) on disposal of investment properties.

 

Additions during the year represent real estate acquired on settlement of certain loans and advances. These being non-cash transactions have not been reflected in the consolidated statement of cash flows.

 

Fair valuations

 

Valuations are carried out by