Rising to the challenge Annual Report 2018 A His Highness Sheikh Tamim Bin Hamad Al Thani Emir of the State of Qatar His Highness Sheikh Hamad Bin Khalifa Al Thani Father Emir 1 The tailwinds powering Qatar Commercial Bank stands united with His Highness the Emir Sheikh Tamim Bin Hamad Al Thani and the people of Qatar in the face of the continued economic blockade. We are proud to be a Qatari bank, loyal to His Highness the Emir, and we believe the economic blockade has made Qatar stronger than ever before. Over the last year, Qatar’s economy has grown, new businesses have emerged, and social and cultural life is flourishing. As Qatar’s first private bank with over 40 years of history, we support our country in every way we can, acting as one of the many tailwinds powering Qatar. By providing innovative banking products and services, financing major projects and small businesses, developing human capital as a leading private sector employer and investing in Qatar’s community, supporting Qatar’s National Vision 2030 and all-round national development is a common thread in everything we do. After defying expectations by becoming stronger after the blockade, Qatar has set sail on a new voyage to success as a bold, confident, and prosperous nation. So too has Commercial Bank as a business. Living up to our belief that ‘everything is possible’ Commercial Bank has continued to work together in 2018 as one team to deliver on our five-year strategic plan to build momentum for a new phase of sustainable growth. The foundation of our ambition to be the ‘Best Bank in Qatar’ and the ‘Qatari Bank of Choice’ are the Five C’s of Commercial Bank: • Corporate Earnings Quality • Client Experience • Creativity and Innovation • Culture • Compliance We are living up to each of these Five C’s by taking real action to achieve growth in the present and position Commercial Bank well for increasingly strong performance in the coming years as we continue our transformation journey. 2 Contents Business at a glance Forward looking statements Financial highlights Key highlights Chairman’s message Board of Directors Vice Chairman’s message Group Chief Executive Officer’s message Management review of operations Annual Corporate Governance Report 2018 Independent Auditors’ Report Consolidated Statement of Financial Position Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Supplementary Information 8 10 14 15 18 20 24 26 30 58 60 65 66 67 68 72 74 167 3 About Commercial Bank Incorporated in 1974 as the first private bank in the country, Commercial Bank is today one of the leading financial institutions in Qatar with a profitable track record since inception. We continue to play an important role in driving innovation and raising service standards in banking across the region through our investment in new technology, a clear focus on customers and prudent management. Our country-wide network includes 29 full service branches and 159 ATMs, and we also own and operate exclusive ‘Diners Club’ franchise in Qatar and Turkey. We are listed on the Qatar Exchange and were the first Qatari bank to list its Global Depository Receipts on the London Stock Exchange. Commercial Bank’s bonds issuance is listed on the Irish Stock Exchange and the Swiss Exchange (SIX). Expanding its geographical footprint, Commercial Bank is 100% owner of Alternatif bank in Turkey and has a strategic partnership with the National Bank of Oman (NBO). These strategic alliances enable Commercial Bank to offer integrated services across the region, including cross-border services for corporate banking and capital markets; trade services for Corporate Banking customers; private banking services; and, syndicated loans in all our alliance markets. Our continual investment in technology and people, together with our strong capital base, provides a solid foundation for further growth. Commercial Bank has a robust financial position, with total assets of QAR 135.1 billion at 31 December 2018 and a capital adequacy ratio of 15.5%. The Bank enjoys strong credit ratings of (A3) from Moody’s, (A) from Fitch, and (BBB+) from Standard & Poor’s. True to our pioneering origins and history of success, we are dedicated to supporting Qatar’s economic development and social infrastructure through Corporate Social Responsibility programmes and sponsorship of various events, which help to raise Qatar’s profile internationally. 4 CBQ Finance Limited. A fully owned subsidiary incorporated in Bermuda and organised as a special purpose entity established to raise capital for Commercial Bank by issue of debt instruments. CB Global Trading Limited. A fully owned subsidiary incorporated in Cayman Islands, an issuing vehicle for Derivatives. CB Innovation Services LLC. A fully owned subsidiary incorporated in Qatar under the Qatar Financial Centre Authority providing the Bank with Operations management services. Associates National Bank of Oman (S.A.O.G.) An associate entity that operates through 60 conventional branches and 6 Islamic branches in Oman, and one branch in each at Egypt, Abu Dhabi and Dubai Massoun Insurance Services L.L.C. A joint arrangement entity that provides tailored corporate and personal insurance products to the Bank’s customers. Our business segments Wholesale Banking Provides a range of conventional commercial and investment banking services and products to large, medium and small enterprises, including corporate lending, trade finance, syndicated loans, deposits, letter of credit and guarantees. Retail Banking Provides a full suite of conventional retail banking services and products to retail customers in Qatar, including current and deposit accounts, wealth management, mortgage lending, personal and vehicle loans and credit card and other card services. Subsidiaries Alternatif Bank A fully owned subsidiary in Turkey that operates through a network of 49 branches. Commercial Bank Financial Services (L.L.C.) A fully owned subsidiary that provides direct access to the Qatar Exchange, online trading and brokerage services. Orient 1 Limited A fully owned subsidiary incorporated in Bermuda that owns an exclusive ‘Diners Club’ franchise in Qatar and Turkey. CB Global Limited. A fully owned subsidiary incorporated in Cayman Islands, an issuing vehicle for Euro Commercial Paper and Certificate of Deposit Programme. 5 proud to be qatari We are a Qatar-based bank and we are incredibly proud of our country. As one of the largest private sector employers Qatar, we have a duty to contribute to the development and success of the country and it is our honour to do so. Through the services we offer to the market and our innovative approach to business, Commercial Bank supports economic diversity and sustainability. We are also committed to build Qatar’s human capital by investing in our people and community. Business at a Glance Our voyages 1974 Commercial Bank is incorporated as Qatar’s first private sector bank 1975 The Bank begins operations under a management services contract with Chase Manhattan Bank 1981 The contract with Chase Manhattan Bank officially ends and Commercial Bank is fully independent 1987 A new Commercial Bank 1987 head office opens on Grand Hamad Street 1990 ATMs are introduced in Qatar by Commercial Bank 1991 Commercial Bank acquires the Diners Club franchise for Qatar 1992 Point-of-sale machines are introduced in Qatar by Commercial Bank 1997 A dedicated Customer Call Centre is established 2005 Commercial Bank forms a strategic alliance with National Bank of Oman 2006 Commercial Bank signs an agreement to become the title sponsor for the Qatar Masters golf tournament 2008 First Qatari bank to list GDRs on the London Stock Exchange 8 2009 Commercial Bank Plaza, the new headquarters of Commercial Bank, is opened on 13 May 2009 by H E Sheikh Hamad bin Jassim bin Jaber Al- Thani, Prime Minister and Minister for Foreign Affairs of Qatar Incorporates Commercial Bank Investment Services (re-branded to become Commercial Bank Financial Services) 2011 2013 Commercial Bank acquires 74.24% shareholding in Alternatif Bank in Turkey 2015 Commercial Bank celebrates its 40th anniversary milestone as Qatar’s first private bank 2016 Commercial Bank signs a debut USD 166 million 3-year Ninja loan facility – the first Ninja loan for a GCC financial institution Commercial Bank successfully completes the acquisition of the remaining 25% shareholding in Alternatif Bank 2017 Commercial Bank incorporates CB Innovation Services LLC, a management operation services captive entity that has successfully on-shored previously outsourced activities. 2018 Commercial Bank receives ‘Best Bank in Qatar’ award from Global Finance, ‘Best Remittance Service’ and ‘Best Cash Management Bank’ in the Middle East from the Asian Banker. 9 Forward Looking Statements Net Profit QAR 1,663 million Earnings per Share QAR 3.52 Loans and Advances QAR 83.7 bn Customer Deposits QAR 71.3 bn Total Assets QAR 135.1 bn This document contains certain forward looking statements with respect to certain plans and current goals and expectations of Commercial Bank and its associated companies relating to their future financial condition and performance. These forward looking statements do not relate only to historical or current facts. By their nature forward- looking statements involve risk and uncertainty because they relate to future events and circumstances including a number of factors which are beyond Commercial Bank’s control. As a result, Commercial Bank’s actual future results may differ materially from the plans, goals and expectations set forth in Commercial Bank’s forward- looking statements. Any forward-looking statements made by or on behalf of Commercial Bank are made in the context of the time of publication of this report. Commercial Bank does not undertake to update forward looking statements to reflect any changes in Commercial Bank’s expectations with regard to any changes in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this presentation do not constitute a public offer under any applicable legislation, or an offer to sell or solicitation of an offer to buy any securities or financial instruments or any advice, or recommendations with respect to such securities or other financial instruments. NET PROFIT (QAR MILLION) 1,663 10 Investment & Dividend Income Other Income -1% 2% 6% Foreign Exchange Income Net Fee Income 22% Net Interest Income 71% Net Operating Income 11 Other Liabilities Due to Banks and Financial Institutions Customers’ Deposits 4% 10% 53% Shareholders’ Funds 15% Funding Mix 18% Other Borrowed Funds Retained Earnings Other Reserves Risk Reserve 4% 2% 5% 49% Legal Reserve Share Capital 19% Shareholders’ Equity 20% Tier 1 Note 12 Non-Banking Financial Institutions Contracting Personal 8% Industry 8% Commercial 10% Other 2% 1% 5% 29% Services Loans & Advances 12% 25% Real Estate Government Investments in Associates Other Assets Loans 6% 3% 62% Liquid Assets 12% Investments 16% Total Assets 13 Financial Highlights In QAR million, except per share amounts and as stated otherwise Net interest income Net operating income Net profit Total assets Lending to customers Basic/diluted earnings per share in QAR Dividends declared per ordinary share including bonus shares in QAR Closing market price per ordinary share in QAR (at year end) Book value per ordinary share in QAR Long-term debt (at year end) Shareholders’ equity (at year end) Return on average shareholders’ equity Return on average assets Capital adequacy ratio Full-time employees (at year end)* 2018 2,482 3,509 1,663 135,071 83,702 3.52 2017 2,518 3,529 604 2016 2,341 3,578 501 138,449 130,380 89,122 0.91 77,798 0.78 2015 2,534 3,949 1,434 123,421 76,601 3.92 2014 2,581 3,903 1,940 115,652 72,541 5.93 1.5 1.0 0.5 3.00 4.50 39.39 49.41 24,300 19,999 8.1% 1.2% 15.5% 2,270 28.90 51.94 32.50 59.09 20,908 22,495 21,021 3.0% 0.5% 16.1% 2,251 19,301 2.7% 0.4% 15.2% 2,138 45.90 52.96 20,523 17,299 8.2% 1.2% 13.5% 2,286 68.50 59.60 18,885 17,696 11.3% 1.7% 15.2% 2,374 * Group employees (Commercial Bank, Alternatif Bank and Commercial Bank Innovation Services) 14 Key Highlights 175.5 % NET PROFIT OF QAR 1,663.2 MILLION, UP BY 175.5% 5.9 % OPERATING PROFIT OF QAR 2,335 MILLION, UP BY 5.9% Other key financial highlights • Cost to income ratio of 33.4% reduced • “Best Bank in Qatar” award from Global from 37.5%. Finance Magazine. • Provisions on loans and advances to customers QAR 927.2 million, down by 45.4%. • “Best Retail Bank in Qatar” award for a second year in a row from The Asian Banker. • “Best Remittance Service for the Middle East” • Total assets of QAR 135.1 billion, down award from The Asian Banker. by 2.4%. • Customer loans and advances of QAR 83.7 billion, down by 6.1%. 15 international voyages Commercial Bank is truly international. Our geographical footprint extends far beyond Qatar through our regional alliance of banks. Turkey and Oman are key markets for Commercial Bank and we are present in these markets through our Turkish subsidiary, Alternatif Bank and associate, National Bank of Oman. Because these countries are strategic trading partners of Qatar, Commercial Bank Group is well positioned to capitalize on the increasing investment flows between these countries. Chairman’s Message Sheikh Abdulla Bin Ali Bin Jabor Al Thani Chairman I am pleased to present Commercial Bank’s Annual Report for the year ended 31 December 2018 on behalf of the Board of Directors. In 2018 Qatar returned to “business as usual” on its transformation journey towards a sustainable, knowledge-based economy. The initial effects of the blockade imposed in 2017 are now fully behind us and the economy has not only maintained the status quo but emerged from a challenging position to become stronger and more diversified this year. Qatar has strong economic fundamentals, which are recognised by the major rating agencies and international investors. Fitch, Moody’s and S&P all upwardly revised their outlook on Qatar to “stable” from “negative” in 2018, and affirmed Qatar’s sovereign credit ratings at AA-, Aa3 and AA-/A-1 respectively. The Qatar Stock Exchange was the best performer in the region in 2018 and confidence in the future of Qatar’s economy was evident when Qatar raised a $12 billion sovereign bond in April in the international financial markets that was heavily oversubscribed, with orders exceeding $52 billion. 18 Qatar’s resilient, well-diversified economy is backed by large sovereign reserves and prudent macroeconomic management. The IMF predicts Qatar’s GDP to grow by 2.7% in 2018, well ahead of the 1.3% forecast for the Middle East region. Lower output in the hydrocarbon sector has meant that a large proportion of this growth in 2018 has come from the private sector, demonstrating Qatar’s success in promoting economic diversification. 2018 has been noteworthy for Qatar’s rapid progress in delivering self-sufficiency projects, especially in food products and manufacturing, with Qatar’s private sector and stable business environment that is supportive of foreign investments playing a major role in facilitating these projects. Private sector growth is expected to increase in 2019 driven by construction, agriculture, manufacturing, transportation and logistics. Construction remains a key private sector growth driver, supported by continued funding for major infrastructure projects relating to the 2022 World Cup and delivering the Qatar National Vision 2030. Strict fiscal discipline has helped Qatar achieve a budget surplus in the first half of 2018, and prospects for hydrocarbon sector growth in 2019 look the best in several years. Longer term, Qatar’s competitive strengths in LNG set us apart from our regional neighbours and the lifting of the moratorium on the development of the North Field will cement Qatar’s position as the world’s largest LNG exporter for many years to come. Looking abroad, there is much uncertainty about the future of the global economy. Markets ended the year in turmoil, the US Treasury yield curve inverted for the first time in more than a decade, and increasing economic and geopolitical rivalry between the US and China suggests that global growth achieved since the end of the financial crisis has peaked. 2019 is likely to see US economic growth weaken in line with the rest of the world. China’s economy slowed in 2018 and stimulus provided by the authorities won’t increase growth until later in 2019. Other major advanced economies are also slowing, with both the Eurozone and Japan set for sluggish growth next year. In emerging economies, higher US interest rates and a stronger dollar push up borrowing costs and curb investments, while slower US and Chinese growth will impact negatively on exports in 2019. Thanks to the coordinated efforts of many ministries, organisations and companies, all under the leadership of His Highness the Emir Sheikh Tamim Bin Hamad Al Thani, the economic outlook for Qatar in 2019 is stronger. 2018 was a better year for Qatar than the year before, and so too at Commercial Bank. We have a clear vision to improve the Bank’s performance based on our five-year strategic plan initiated in 2016. Within that plan, our key areas of focus have been taking provisions for our legacy loan book, reducing our cost to income ratio, and continuing to build the Bank’s 43 year-old franchise in terms of new technology and innovation. This plan is working, with actions taken under our five-year strategic plan delivering good results and evident in the Bank’s strong bottom line performance in 2018. Commercial Bank, its subsidiaries and associates announced its financial results for the full year ended 31 December 2018, and the Board of Directors have recommended, for approval at the Annual General Assembly on 20 March 2019, a cash dividend payout of QAR 1.5 per share. On behalf of the Board of Directors, I would like to express our thankfulness and gratitude for the visionary leadership of His Highness the Emir Sheikh Tamim Bin Hamad Al Thani. Under the leadership of His Highness, Qatar is well positioned to continue on its remarkable growth trajectory and Commercial Bank is fully aligned with, and contributes towards, Qatar’s national development objectives. I also want to convey our appreciation for the guidance and support we have received from His Excellency the Prime Minister and Minister of the Interior, His Excellency the Minister of Finance, His Excellency the Minister of Commerce and Industry and His Excellency the Governor of Qatar Central Bank. I would like to thank the Board of Directors for their continued guidance and all our employees for their collective efforts towards making 2018 a successful year for Commercial Bank, recognising that this success could not have been achieved without the loyalty of our customers and the continued support of our shareholders. 2019 will be the third year of our five-year strategic plan. We have made good progress in reshaping our business and next year we will continue on our transformation journey towards delivering long-term sustainable growth for our shareholders while contributing towards Qatar’s national success story. Abdulla Bin Ali Bin Jabor Al Thani Chairman 19 Board of Directors 20 1 4 7 2 5 8 3 6 9 1. Sheikh Abdulla Bin Ali bin Jabor Al Thani Chairman 2. Mr. Hussain Ibrahim Alfardan Vice Chairman 3. HE Mr. Abdul Rahman Bin Hamad Al Attiyah Member 4. Mr. Omar Hussain Alfardan Managing Director 5. Sheikh Jabor Bin Ali bin Jabor Al Thani Member 6. Sheikh Faisal Bin Fahad bin Jassim Al Thani Member 7. Mr. Mohd Ismail Mandani Al Emadi Member 8. Qatar Insurance Company Member (Represented by HE Mr. Khalaf Ahmed Al Mannai) 9. HE Mr. Saleh Abdulla Mohamed Al Ibrahim Al Mannai Member 21 investing in our crew At Commercial Bank, we know that our people are our most important asset. That is why we invest so much in their career development, health, and wellbeing. Through our successful National Development Programme, we have helped hundreds of young, Qatari nationals to learn the skills that are needed to develop successful careers. We also support people outside of the Commercial Bank family through our community-focused corporate social responsibility programme. Vice Chairman’s Message Mr. Hussain Ibrahim Alfardan Vice Chairman Qatar continued to transform its economy in 2018 for a more sustainable future, implementing a raft of reforms designed to strengthen the economy, increase self- sufficiency and promote growth. By aligning itself with the economic objectives of the nation and providing a strong, stable and innovative financial institution to support Qatar’s economy, Commercial Bank is pleased to continue to be a part of Qatar’s growth story. 2018 is the second full year of our five-year strategic plan and the benefits of the continuing execution of this plan are evident in our positive financial results for the year ended 31 December 2018. 24 The Bank delivered a consolidated operating profit of QAR 2.34 billion and a net profit of QAR 1.66 billion, representing a 5.9% and a 175.5% increase over the same period last year, respectively. Under our five-year strategic plan, we took the prudent decision to take provisions for our legacy loan book. This provisioning process is coming to an end, with net provisions for loans and advances decreasing by 45.4% in 2018 to QAR 927 million. Significant provisions have been taken since 2016, and income previously associated with these provisions have been substituted with high quality sources due to our strategic intent to de-risk and re-shape our balance sheet. As part of this re-shape, the Domestic Bank’s exposure to the real estate sector decreased from 29.2% in 2017 to 28.7% in 2018. In further support of long-term sustainable growth, we are building new fee income that is not purely lending based due to our strategic focus on transaction banking and growth in fee-based products and services such as remittances, cash management and wealth management. Non-interest income increased by 1.5% to QAR 1.03 billion. We successfully decreased our operating expenses by 11.5% year on year, in line with our strategy to drive operational efficiencies across the business through investment in digitization and automation, eliminate waste, and reduce staff costs while avoiding large scale redundancies. Consequently, the Bank reported a substantial fall in the cost to income ratio of 33.4%, down from 37.5% in 2017. Due to the repayment of government loans across banks in Qatar in April 2018 after the State’s sovereign bond issue, an increase in interest rates, and a depreciation in the Turkish Lira, loans and advances to customers decreased by 6.1% in 2018 at a Group level, with consolidated net interest income down 1.4% to QAR 2.48 billion for the year 2018. Despite a 4.4% decrease in loans and advances, net interest income increased by 4.0% at the Domestic level through a combination of asset pricing and a strong focus on cost of funding. A conscious decision to dispose of deposits bearing high interest rates resulted in customer deposits decreasing in the Domestic Bank by 7.7% to QAR 62.4 billion. Deposits and liquidity continue to be well-managed despite the blockade, supported by our successful fundraisings this year, including a $500 million bond under our European Medium Term Note Programme, a CHF 435 million Swiss Franc bond and a $750 million syndicated senior unsecured term loan facility. During 2018 we implemented IFRS 9 in line with best governance standards and a conservative approach, resulting in a one-time IFRS 9 charge of just over QAR 1.5 billion. This impacted our CET1 capital, reducing to 10.5% as at 31 December 2018 and our future focus is to increase this back to a minimum range of 11.0 to 11.5% through profit generation and retention. Our subsidiary Alternatif Bank reported an increase in net profit to QAR 90.6 million for the year, up 85% compared with last year. Our investment in Turkey is set to grow in the long-term and Alternatif Bank has the right strategy and management team on the ground to manage Turkey’s current macroeconomic challenges and proactively seek opportunities with the right risk profile for growth. Our associate bank in Oman, National Bank of Oman (NBO), reported a net profit of OMR 51 million for 2018, 16% higher than the previous year. We continue to classify United Arab Bank (UAB) as an Asset Held for Sale and we remain focused on improving the performance of the entity as per our corporate strategy. On behalf of the Board of Directors, I would like to convey our sincere gratitude for the visionary and gracious leadership of His Highness the Emir, His Excellency the Prime Minister and Minister of the Interior, His Excellency the Minister of Finance, His Excellency the Minister of Commerce and Industry and His Excellency the Governor of the Qatar Central Bank for their wisdom, guidance and support, which we continue to greatly appreciate. Hussain Ibrahim Alfardan Vice Chairman 25 Group Chief Executive Officer’s Message Mr. Joseph Abraham Group Chief Executive Officer 2018 marks the second full year of our five-year strategic plan designed to reshape our business, build sustainable earnings, diversify risk and achieve growth. We are on track to deliver this plan and 2018 was a transformational year during which the market recognised the value of our strategy and its disciplined execution. The foundation of our strategic plan with the vision of being the “Best Bank in Qatar” are the Five Cs of Commercial Bank: Corporate earnings quality; Client experience; Creativity and innovation; Culture; and Compliance, together with a focus on best in class transaction banking. We have made continued progress against each of these Five C’s in 2018. 26 Commercial Bank is Qatar’s oldest and leading private sector bank with a solid franchise based on over 42 years of innovation and customer service. To build on our past and position Commercial Bank for a sustainable future, we continue to invest in innovation, new technology, new products, new premises and our staff development and capability enhancement. We continue to reshape and diversify our loan book, with the strategic intent of decreasing our concentration in real estate and increasing our share of high quality government and public sector loans. The provisioning process for our legacy loan book has started to tail off as we have provisioned the majority of legacy exposures and we continue to de-risk legacy assets with significant single name concentrations. We have successfully reduced our costs by 11.5% this year by targeting waste and inefficiency, and moved our cost to income ratio down from 37.5% to 33.4% closer in line with the market. For the best client experience, we launched new digital products and services in 2018 such as contactless cards, a redesigned mobile app, and expanded our award- winning digital remittance service to two additional countries, as well as opening a new state-of-the-art branch in Doha Festival City. Our “One Bank” culture emphasizes strong collaboration across the Bank’s different departments for the benefit of our clients and we have invested in a new gym and staff club for our employees. In line with our objective to be a market leader for compliance and good governance, we have further strengthened our risk culture and are the first company in Qatar to introduce mandatory deferred executive remuneration with provisions for malus and clawback in line with international best practice. Our strategic focus on transaction banking is gaining momentum and contributing to revenues while keeping operating costs flat. Key to our competitive advantage in transaction banking is our wholly owned subsidiary based in the Qatar Financial Centre (QFC) called Commercial Bank Innovation Services (CBIS), which is deploying the latest world-class technologies, enabling the Bank to quickly deliver innovative new products, apply new processes to our banking operations, and improve creativity. Previously our technology and operations were outsourced to India but we have achieved something unique by bringing this function back in-house in Qatar, creating over 300 onshore jobs in support of the country’s vision of making the QFC and Qatar a world class location for establishing companies. The result of all these actions taken under our strategic plan is that I am pleased to report a positive business performance for 2018. The market has also recognised that Commercial Bank is doing the right thing under our strategic plan, with recognition coming in the form of a greater than 50% rise in our share price and award wins such as the “Best Bank in Qatar 2018” from Global Finance magazine, “Best Remittance Bank in the Middle East 2018”, and “Best Retail Bank in Qatar 2018” for the second year in a row from The Asian Banker. Our Turkish subsidiary Alternatif Bank and alliance bank National Bank of Oman (NBO) continue to be a key part of our strategy and we remain confident in their potential to contribute additional value to the Commercial Bank Group. The Turkish economy and currency have gone through some volatility in 2018 but we remain committed long- term investors in Alternatif Bank, injecting a further $50 million of capital into the business in 2018 and purchasing new head office in Istanbul. Turkey remains one of Qatar’s most important partners for trade and investments and we continue to integrate and align our business with Alternatif Bank in terms of business strategy, risk protocols, and our cross-border offerings to take advantage of the increasing two-way investment flows between Qatar and Turkey. NBO has a strong capital position and continues to deliver solid results, while our stake in United Arab Bank (UAB) continues to be an Asset Held for Sale. Our strategy for UAB is to focus on transforming its performance to ensure its share price more closely reflects the true value of UAB. Our achievements in 2018 demonstrate that Commercial Bank has the right strategy in place and the right team to implement it. We will continue to invest in 2019, with a long list of new technological initiatives, new digital products to meet the needs of our clients, and new branches aligned to our client footprint all planned for launch. We have demonstrated that “everything is possible” in 2018, and I am confident with the support and guidance of our Board and the capability and engagement of our staff working together as “One Bank”, we will continue to build our business and grow sustainably in 2019. Joseph Abraham Group Chief Executive Officer 27 our pioneering culture We are strongest when we work together to achieve a shared vision, which is to be the best bank in Qatar. At Commercial Bank, we have worked hard to foster a pioneering culture where “Everything is possible” and our “One Bank, One Team” culture is based on values of respect, collaboration and teamwork. We are incredibly proud of this culture and believe that it is one of the most important factors behind the Bank’s success in 2018. Management Review of Operations Financial Results In 2018, Commercial Bank delivered a net profit of QAR 1,663 million, an increase of 175.5% compared to the QAR 604 million achieved in 2017. Loans and advances to customers reduced by 6.1% to QAR 83.7 billion at 31 December 2018, compared with QAR 89.1 billion in 2017. The reduction was mainly due to the reduction in government temporary overdraft and the translation of the Turkish Lira into the reporting currency. Our deposits decreased by 8.1% to QAR 71.3 billion, as we let go expensive deposits. Investment securities increased by 12.6% to QAR 22.1 billion as at 31 December 2018 compared with QAR 19.6 billion at the end of December 2017. The increase is mainly in Government bonds. Financial Results (QAR million) Net interest income Non-interest income Net operating income Operating expenses Provisions for impairment losses Share of results of associates Income tax expense Net profit for the year Operating Expenses (QAR million) Staff costs General and administrative expenses Depreciation and amortisation Total operating expenses 2018 2,482 1,026 3,508 (1,173) (836) 171 (7) 1,663 2018 676 313 184 1,173 2017 2,518 1,011 3,529 (1,325) (1,743) 148 (5) 604 2017 713 404 208 1,325 Rehan Khan EGM, Chief Financial Officer Net Operating Income Commercial Bank’s net operating income decreased by 0.6% to QAR 3,508 million for the year ended 31 December 2018, down from QAR 3,529 million achieved in 2017. Net operating income for the Bank in Qatar increased by 0.2% to QAR 2,996 million compared to the same period in 2017. Net interest income for the year ended 31 December 2018 was 1.4% lower than in 2017 to QAR 2,482 million, Net interest margin remained at 2.2% as margins have been managed through active loan book re-pricing and diversifying liquidity sources to minimize the increasing cost of funding. Non-interest income increased by 1.5% to QAR 1,026 million for the year ended 31 December 2018 compared with QAR 1,011 million in 2017. The overall increase in non-interest income was due to higher income from fee-based income mainly on credit and transaction banking and foreign exchange gains. 30 Operating Expenses Total operating expenses were tightly managed and decreased by 11.5% to QAR 1,173 million for the year ended 31 December 2018 compared with QAR 1,325 million in 2017. The decrease in operating expenses was mainly due to lower staff costs and administrative expenses. Provisions for Impairment Losses Provisions for loans and advances reduced by 45.4% to QAR 927 million for the year ended 31 December 2018, compared to QAR 1,697 million provided in 2017. The non-performing loan ratio decreased to 5.6% in December 2018 compared to 5.7% in 2017, the coverage ratio has reduced to 78.9% as at December 2018 compared to 81.0% in December 2017. The Bank sets aside a risk reserve against its lending as part of shareholders’ equity. At 31 December 2018, the risk reserve was QAR 886 million. Impairment provisions on the Bank’s investment portfolio decreased to QAR 0.4 million for the year ended 31 December 2018 compared with QAR 46 million in 2017. Total Assets and Funding Commercial Bank’s balance sheet declined by 2.4% in 2018, with total assets at QAR 135.1 billion compared to QAR 138.4 billion in 2017. Balance sheet decline was driven by QAR 5.4 billion decline in loans and advances and this was partially offset by the increase of QAR 2.5 billion in investment securities. Customer deposits reduced by 8.1% to QAR 71.3 billion at 31 December 2018, compared with QAR 77.6 billion in 2017, as we let go expensive deposits. Capital Commercial Bank’s capital position remains strong, however capital adequacy ratio reduced to 15.5% as at 31 December 2018 compared to 16.1% at the end of 2017, due to the impact of the one-time IFRS 9 adjustment. The capital adequacy ratio is above the Qatar Central Bank’s required minimum level of 14.0 %. Subsidiaries Alternatif Bank Alternatif Bank delivered a net profit of TL 116.6 million for the year ended 31 December 2018, with total assets of TL 25.5 billion and lending of TL 17.3 billion. Alternatif Bank provides its customers in the corporate, commercial and retail banking segments with high value products, services and solutions. Alternatif Bank has 49 branches widely distributed around Turkey. In 2018, Alternatif Bank continued to work closely with its counterparts in Commercial Bank to implement best international practice and continue to realise synergies. Commercial Bank Financial Services Commercial Bank Financial Services (CBFS) is a fully owned subsidiary of Commercial Bank. CBFS provides direct access to the Qatar Exchange and offers seamless online trading capabilities for individuals, institutions, corporate and foreign counterparties. In addition to its electronic trading platform, CBFS is also licensed by Qatar Financial Markets Authority to act as Liquidity Provider for certain securities at Qatar Stock Exchange. In 2018, CBFS delivered a net profit of QAR 11.5 million. Foreign Exchange Income Investment & Dividend Income Other Income -1% 2% 6% 71% Net Interest Income Retained Earnings Other Reserves Risk Reserve 4% 2% 5% 49% Legal Reserve Net Fee Income 22% Net Operating Income Share Capital 19% Shareholder’s Equity 20% Tier 1 Note 31 Management Review of Operations continued Orient 1 Limited A fully owned subsidiary incorporated in Bermuda owns exclusive ‘Diners Club’ franchise in Qatar and Turkey. CB Global Limited A fully owned subsidiary incorporated in Cayman Islands, an issuing vehicle for Euro Commercial Paper and Certificate of Deposit Programme. CBQ Finance Limited A fully owned subsidiary incorporated in Bermuda and organised as a special purpose entity established to raise capital for Commercial Bank by issue of debt instruments. CB Global Trading Limited A fully owned subsidiary incorporated in Cayman Islands, an intermediary vehicle for Derivatives. CB Innovation Services LLC. A fully owned subsidiary incorporated in Qatar under the Qatar Financial Centre Authority providing the Bank with operations management services. Associates National Bank of Oman National Bank of Oman (NBO) achieved net profit of OMR 50.6 million, compared with OMR 44 million in 2017. Operating income was marginally down by 2.3% to OMR 129 million from OMR 132.1 million in 2017. During 2018 NBO continued to increase its customer lending by 5.9% to OMR 2.8 billion and customers’ deposits are maintained at OMR 2.5 billion. Massoun Insurance Services L.L.C. Massoun Insurance Services is a Qatari incorporated joint venture company between Commercial Bank and Qatar Insurance Company. The company provides a range of insurance products which have been tailored to meet the specific needs of the Bank’s retail and corporate customers. Commercial Bank opens new Alternatif Bank head office in Istanbul 32 • Focus on Transaction Banking; • Diversify revenue streams; • Working closely with Alliance banks. Growing the government and public sector balance sheet Growth in the public sector balance sheet during 2018 was approximately 8%. While public sector growth numbers for the market are not separately available, the growth of this sector in Commercial Bank book is estimated to be faster than the market growth. We have identified new public sector customers to focus on, targeting cash management. We aim to see significant growth in this sector – approximately 10% in 2019. Re-shaping Wholesale Banking’s balance sheet The composition of the balance sheet was re-shaped in two key areas to reflect stresses in the market and to ensure a quality mix of assets, which are: • Growth of government and public sector lending from 17% of Wholesale Banking’s portfolio YTD Sep 2017 to 21.5% in YTD Sep 2018; • Rationalisation of real estate exposure with a reduction from 31% of Wholesale Banking’s portfolio YTD Sep 2017 to 29.3% YTD Sep 2018. Growth of government and public sector lending and rationalisation of real estate exposure remains a strategic aim, with a five-year target of 21% and 25% composition of the Wholesale Banking book respectively. De-risking selected exposures As part of prudent risk management, Wholesale Banking identified certain clients where exposure will either be partially or fully reduced to ensure Commercial Bank does not have very large exposure towards any one client. In 2018, the total amount of intentionally de-risked assets was more than QAR 0.7 billion, with an additional target of over QAR 1.5 billion by 2019, for an optimized balance sheet containing high-quality customers and assets. Growth and strong lending pipeline Wholesale Banking’s asset book grew by approximately 20% in 2017, outperforming the market growth of around 9%. Wholesale Banking’s focus in 2018 was to grow its assets book with the right risk profile and the right quality, in conjunction with the strategic aims of re- shaping and de-risking to maintain growth and ensure a sustainable revenue stream in the future. The lending pipeline originating from the public sector represents over 50% of the total lending pipeline. 33 Raju Buddhiraju EGM, Wholesale Banking Wholesale Banking Commercial Bank’s Wholesale Banking department offers a comprehensive range of financial services to corporate businesses in Qatar, international companies trading or implementing projects in Qatar, and corporate relationships across the Bank’s strategic markets in Turkey, the GCC and other target geographies with high growth potential. These services include commercial banking, treasury, investment banking, cash management, trade, transaction banking, corporate finance and advisory services across different industries. Wholesale Banking comprises Domestic Corporate Banking and Transaction Banking, and has strong and longstanding banking relationships with leading Qatari businesses, nurtured over the years through excellent customer service, tailored financial solutions, and the application of innovative technologies. Business performance In 2018, Wholesale Banking’s business represented most of the Bank’s total loan book and generated almost half of the Bank’s total revenues. In line with the Bank’s five-year strategic plan, Wholesale Banking proactively initiated several new measures, such as: • Grow the balance sheet in line with the market, primarily within the government and public sector; • Strategically re-shape the composition of the balance sheet to reflect the market; • Proactively de-risk the balance sheet for sustainable growth; • Build a strong pipeline of the right customers, with the right risk profile and the right quality of assets; Management Review of Operations continued Cross-selling Diversification of the revenue, primarily an increase of the fee income that is not lending-based, is one of the major strategic aims of Wholesale Banking. Fee income increased in 2017 to approximately 20% of Wholesale Banking’s total operating income, resulting in part from cross-selling innovative new services to customers across Domestic, Corporate Banking, and Transaction Banking. Working with Alliance banks Wholesale Banking contributes to the efforts of enhancing synergies with our Alliance banks, Alternatif Bank and National Bank of Oman, through cross-selling activities, supporting Turkish companies as well as Qatari business in Oman. Domestic Corporate Banking Domestic Corporate Banking provides a comprehensive range of cross-product banking solutions to corporate clients operating in Qatar. This unit services client relationships across the following sectors: large corporates, mid-market corporates, contracting, ultra- high net worth, government and the public sector. Domestic Corporate Banking was active in arranging large financings in the domestic syndicated and club loan markets, and was associated with the following successful transactions in 2018: • Lending towards an iconic government hotel geared towards the 2022 World Cup; • Key arterial highways connecting stadiums being built for the 2022 World Cup; • Supporting air conditioning in Lusail; • Supporting warehousing and logistics in Manatec. In 2018, Domestic Corporate Banking continued to focus on organic growth of operations by delivering the best client experience and service quality through innovative banking solutions with state-of-the-art technologies. This includes introducing host-to-host connectivity and providing a direct link with our customers to enhance the client experience. Wholesale Banking continues to work very closely with Retail Banking through the successful Banking at Work 34 unit, where a key strategic focus has been to enhance the total relationship value for each customer across all business portfolios. Transaction Banking Commercial Bank is the market leader for Transaction Banking in Qatar, covering a range of services in areas of Cash Management and Trade Finance. In 2018, several new service and digital technology initiatives were implemented to improve the client experience: • Remote Cheque Deposit solution for corporate customers for faster and easy collection of cheques; • Corporate Mobile App with rich features to conduct all payments and inquiries of bank accounts; • CB Smart Trade solution that provides real-time notifications and alerts on all trade finance requests submitted to the Bank; • Conducting workshops for customers focusing on trade best practices and encouraging adoption of the Bank’s online channels; • A structured trade solution for a leading automobile dealer that assisted automobile imports in Qatar on an extended credit period; • 60 Seconds Remittance service for corporate customers through Corporate Internet Banking; • A Corporate Premium Service Counter at Commercial Bank’s dedicated corporate branches. Transaction Banking concluded several notable deals in 2018 including cash management mandates for two large mobile phone operators, host-to-host services for Milaha, and customised cash management solutions for large public sector and private sector corporates. Recognising its continued focus on enhancing products and services for corporate customers and leading role in cash management, Commercial Bank was awarded the “Best Cash Management Bank in Qatar” and “Best Transaction Bank in Qatar” at the Asian Banker Middle East and Africa Transaction Banking Awards 2018, adding to the “Best Cash Management Bank” award received in 2016 and 2017. and products platform to capitalise on the increasing strategic investment and trade-related activity between Qatar and Turkey. Trade loans to financial institutions and relationships with large, diversified corporate groups in Turkey have been a key driver for the Commercial Bank Group with a focus in strengthening Alternatif Bank’s business franchise in the country. Commercial Bank continues to work closely with its Alliance bank partners to develop a network of Group-wide lending and cross- selling opportunities, in addition to implementing a coordinated Group financial institutions strategy for its correspondent banking and corporate business. Diversifying funding The International Banking department also plays a key role in supporting the Bank’s funding needs by leveraging its global relationships and supporting the Treasury Department in diversifying the Bank’s funding. This is achieved by arranging bilateral and syndicated loans for the Bank and expanding treasury and corporate deposit relationships with regional and Asian sovereign wealth funds, asset managers, and other non-bank financial institutions. The International Banking department played a leading role in the successful arrangement of a three-year USD 750 million syndicated Senior Unsecured Term Loan Facility, closed in December 2018. The syndication was launched at an initial value of USD 750 million. The transaction received strong interest from the market and closed significantly oversubscribed at a value of USD 975 million. Supporting business initiatives Supporting major business initiatives that are relevant to the Qatari banking sector remains a key pillar of the International Banking business. In 2018, the Bank sponsored and participated in several major banking industry events and conferences. These included: • The Annual Meetings of the International Monetary Fund (IMF) and the Institute of International Finance (IIF), where Commercial Bank was joined by its subsidiary, Alternatif Bank, and Alliance bank partner, National Bank of Oman; • SIBOS in Sydney, Australia, a major industry event for banks and financial institutions around the world. Commercial Bank continues to support its financing and services network with global trade and development institutions such as the ICC Banking Commission, SWIFT, the Institute of International Finance, the International Finance Corporation, IMF, Arab Trade Finance Program, ISDA and other development institutions. 35 Fahad Badar EGM, International Banking International Banking International Banking at Commercial Bank is responsible for providing correspondent banking services, corporate cross-border loans and other Wholesale Banking products to financial institutions, large corporates, sovereigns, non-bank financial institutions, and high to ultra-high net worth family offices based outside of Qatar. In 2018, the Bank’s international corporate lending strategy focused mostly on transport, industry and services sectors with strong Qatari angles. The corporate lending business maintained its strategic drive towards diversification, targeting landmark opportunities both on direct balance sheet transactions and cross-selling activities such as FX and derivatives. Commercial Bank’s cross-border business strategy remains cautious and focused on portfolio diversification and revenues from trade finance flows and banks, and strategic relationships with large corporates in the EMEA region, Turkey, and selectively across the North American, Asia Pacific and Sub-Saharan African markets. The lower risk and mostly short-term trade finance book saw reasonable activity in 2018 as credit demand picked up for strategic commodities across markets linked to Qatar. Another key pillar of our strategy was to collaborate more closely on correspondent banking services, credit products and other cross-border business activities of Commercial Bank with our Alliance bank partners to benefit from synergistic growth across the Commercial Bank Group. Interests in Turkey Turkey remains a key market for Commercial Bank following the acquisition of Alternatif Bank in 2013. The International Banking department is providing complementary support through its balance sheet Management Review of Operations continued 2019 priorities Moving forward, our strategic priorities in 2019 and beyond will be to manage and expand the business along the following lines: • Focus on opportunistic growth in the network countries of our Alliance banks, with a view to strengthening the client proposition and create synergies in these markets; • Diversify into Asia and Africa as trade and investment flows pick up and also grow into developed markets like the US, UK and select OECD countries for portfolio diversification and risk management purposes; • Enhance the value proposition by developing structured finance, distribution, trade, and treasury capabilities, which will lead to increased cross-selling and improve International Banking’s portfolio returns; • Maintain a well-diversified portfolio with no large concentrations in line with regulatory and the Bank’s governance standards, focusing on tangible collateral and security support for risk mitigation to withstand credit event downturns; • Support the Commercial Bank Group’s funding initiatives and balance sheet growth by leveraging Commercial Bank’s international corporate network. Retail and Enterprise Banking Commercial Bank’s Retail Banking manages the banking and financial needs of individuals and businesses through small and medium-sized enterprise (SMEs). We provide a full range of products and services including transactional accounts, deposits, loans, credit cards, insurance, and wealth management solutions, that all help our customers to realise their financial goals and ambitions. The Retail and Enterprise Banking teams remain focused on developing innovative products and services to meet customers’ many and changing needs. We are active in driving the Bank’s five-year strategic plan, guided by its core values that we call our Five Cs, which are: 36 Amit Sah EGM, Consumer Banking • Corporate earnings quality: we aim to drive revenue growth across a set of diversified products and customers, whilst maintaining high quality credit, together with an efficient and cost-effective delivery structure; • Client experience: our goal is to be the bank of choice for our clients by providing the best service and customer experience; • Creativity and innovation: we are embarking on a digital transformation journey and we will continue to be pioneers of this change in the market by introducing best-in-class products and services. Our capability and dominance in transactional banking is achieved through continuous development and improvement; • Culture: our focus is on a “One Bank, One Team” culture, based on values of respect, collaboration, and teamwork. We use all our resources collectively to achieve the best outcome for our customers and stakeholders; • Compliance: this is core to our business, the ability to be robust and manage with good governance is vital when building and sustaining a market-leading Bank. Awards In 2018, Retail Banking further grew its customer base through improved banking products and the introduction of innovative services to meet the needs of our customers. Whilst we continually seek and value feedback from our customers, it is equally rewarding when industry experts recognise our performance with awards. We won the following three awards in 2018: • “Best Bank in Qatar” by Global Finance Magazine; • “Best Retail Bank in Qatar” by The Asian Banker; • “Best Remittance Service for the Middle East” by The Asian Banker. Business performance Retail Banking remains an important contributor to the overall success of Commercial Bank, built on a strong franchise of customer service and innovation. Despite tough market conditions, Retail Banking delivered a strong performance in 2018. The Retail and Enterprise balance sheet remained healthy with lending to customers adjusted to QAR 19.3 billion and deposits growing marginally to QAR 21.6 billion. With increased focus on automation, control of direct costs, improved fee income revenue streams, and effective net interest margin management, Retail Banking improved its contribution to the Bank’s revenues by maintaining healthy margins and operating income. Commercial Bank receives The Best Retail Bank in Qatar award Commercial Bank & QFC form strategic partnership Commercial Bank’s 2018 awards 37 This is to certify thatCommercial Bank of Qatarwas awardedBest Bank - Qatarin the Global FinanceWorld’s Best Bank Awards 2018 Management Review of Operations continued The growth in our operating income in 2018 over 2017 is testament to improved business management. Our innovative and intelligent product positioning and ongoing customer campaigns have helped Retail Banking maintain consistency in performance through 2018. We take great pride in delivering a quality service to all our customers, with our Private Banking and Sadara Banking services leading with exceptional standards. Branch and ATM networks Continuing our branch strategy to align our presence with emerging geographic and economic zones in Qatar, we opened our branch at Al Ruwais, which expanded our reach to serve customers and support the international trade hub in Northern Qatar. We proudly maintain one of the largest branch networks amongst all the banks in the country and as we reshape our physical model, you will see the efforts in 2018 working with national partners such as Qatar Rail, start to emerge with a new breed of branches in 2019. For greater convenience for our SME and corporate customers, we have dedicated Corporate Cash Centres and Corporate Branches at five different locations, working extended hours. Our branch network is supplemented by over 180 ATMs that are strategically located around Qatar to ensure optimum usage of the network by customers. Commercial Bank Doha Festival City branch opening 38 More than 60% of our ATM machines offer both cash withdrawal and cash deposit facilities. Customers can also conveniently do bill payments, transfers and generate or change PINs for their cards through our ATM network. Internet and Mobile Banking Our leadership in Digital Banking grew even further with our unrelenting focus on our Internet Banking and Mobile Banking services. The new look mobile app came with more features, intuitive navigation supported by voice commands and biometric recognition using face and fingerprint. The ability to personalise and remember favourite transactions made the app both easy to use whilst being safe, secure and convenient. The introduction of 60 Seconds Remittance service to India, the Philippines, Sri Lanka, Pakistan, and Nepal allows customers from these countries to send money home almost instantly. These services have resulted in a significant increase in transaction volumes and over 95% of Retail Customer remittances are now processed seamlessly through our digital channels. For the first time in the history of Commercial Bank, online international remittances reached almost 1.5 million transactions in 2018. In recognition of this outstanding service, Commercial Bank was named “Best Remittance Service for the Middle East” by the Asian Banker. ‘PayCard’ customers benefitted from being able to use a Nepalese language version if required, to cater to this nationality being the largest ‘PayCard’ customer base, the first in the Middle East, offering convenient banking with easy remittance facilities. This helped reduce our customers’ reliance on exchange houses for sending money back their home country. Our dedicated Enterprise Mobile Banking App witnessed a fivefold increase in mobile transaction volumes. The Mobile App offers corporate and business customers a convenient banking experience with features including complex, rule-based signatory approvals for payments and transfers. Commercial Bank customer wins hotel stay on Maldives private island These innovative features that make our customers’ journeys easier were part of the reason that Commercial Bank’s Mobile Banking App consistently featured as the #1 Financial App in Qatar, by both Apple and Android App stores. Cards Commercial Bank’s Cards and Payments business continued its market leading journey in 2018 by launching innovative, new, award winning products through the year. The limited edition range, a High Net Worth Card offer, by select invitation only, is the flagship portfolio for the cards business. It led with strong double-digit growth and contributed 21% of the Card Business spends portfolio. The limited edition customers of Commercial Bank have one of the highest spends per card, across the Middle East, as per statistics shared by the card schemes. Overall the cards business had a strong growth in spend and balances in 2018. In line with changing trends and consumer behavior, Commercial Bank has also focused on increasing online spending, which resulted in the Bank registering huge growth in this area and winning an award from Visa for being the “Highest growing Bank in E-com spends” in 2017 and the same has continued in 2018. Commercial Bank was one of the first banks in Qatar to launch the comprehensive Contactless payment ecosystem comprising Contactless Credit Cards, Debit Cards and POS terminals in Q1 2018. The Bank has achieved market dominating numbers of issuance of over 200,000 for Contactless Cards, rollout of over 6000 POS terminals and processing more than 500,000 Contactless POS transactions in 2018. We launched a fully integrated ECR payment system with one of the largest retailers in the Middle East region. The innovation resulted in a great customer experience by reducing the transaction time and by eliminating the chances of manual errors. The integrated payment solution was received very well by our customers and the Bank is working with other key merchant partners to expand the reach and scope of this enhanced offering. In line with the government’s vison for WPS customers and the need for the Bank’s own Corporate & SME customers, Commercial Bank has created a low cost but efficient payroll card (PayCard) business model and is the market leader with an estimated 60%+ market share in the low salaried WPS segment. The pace of innovation and technological change in the payments industry is very high, and Commercial Bank is staying at the forefront of this change. Following Contactless Credit Cards, Debit Cards and Acquiring, the Bank will continue to launch new products in 2019, including a mobile wallet, which will allow customers to use their mobile phones to make payments. 39 Management Review of Operations continued Commercial Bank customer wins QAR 1 million in Save and Win campaign Wealth management We have been building our wealth management capabilities with a focus on investing in and upskilling our people. Over the course of the year, 28 individuals from various retail businesses have obtained the International Certificate in Wealth and Investment Management (ICWIM) from the Chartered Institute for Securities and Investment (CISI). This is one of the leading professional body for securities, investment, wealth and financial planning, and is widely recognised in the region as the foundation for offering wealth services. With an expanding product range, improved technology and systems, we are aware that our high net worth clients need access to a world class wealth management service and that is what we have been growing in a discreet and professional manner. CB Save & Win Retail Banking concluded a year-long campaign in October 2018, called CB Save & Win that was aimed at changing the behavior of our customers to save more money, and rewarding them for banking with us, with cash prize draws. Since its launch in 2017, Commercial Bank has awarded a total of 365 cash prizes to customers totaling QAR 3.2 million. All customers who maintained a minimum average balance of QAR 10,000 or more in their Current or Savings account were automatically entered into monthly, quarterly and annual prize draws. Many of our Sadara Wealth customers took part and enjoyed the monthly prize draws. We will continue to create and lead the market with innovative ideas to help our customers. Life in Qatar Commercial Bank dominates the market for new arrivals into Qatar with our innovative offer for expatriates, “Life in Qatar.” This service continued to move from strength to strength in 2018. We improved the “instant service”, which allows customers to have their bank account details and debit card ready as soon as they sign up, the minute they land in Qatar, thus helping them settle quickly and their employers to arrange salary payments efficiently. Tailored specifically for people moving to Qatar, it provides ease and convenience for those relocating and has already helped over 90,000 customers from over 144 different countries worldwide. The “Life in Qatar” website now has a new look and provides a better user experience. It is filled with useful information for those relocating and continues to attract visitors daily. 40 Enterprise banking Commercial Bank remains committed to the development of the SME sector in line with the Qatar National Vision 2030. Our SME strategy in 2018 has been to dominate Transaction Banking, drive digitization and build strong transaction revenues while moving away from assets-based lending. Digital initiatives in 2018 such as Remote Cheque Deposit, modernising our Corporate Mobile Banking App and Corporate Trade Portal with end-to-end supply chain finance, has enhanced the customer experience and lead to increased customer engagement. Over two-thirds of the total SME base banking with Commercial Bank is now digitally active. The digital channels have given SMEs better control over cash flows and provided flexibility to securely transact from the comfort of their offices. Treasury and Investments The Commercial Bank’s Treasury and Investments Department is responsible for asset-liability management, capital and financial market investments, trading, and treasury sales. The department manages the overall funding and liquidity requirements of the Bank. This includes management of operational and strategic liquidity requirements, as well as accessing the international debt capital markets for funding needs. Departmental functions Proactive management allows the Bank to manage its funding base in a cost-efficient manner while ensuring its balance sheet is managed in accordance with the expectations of rating agencies, regulators, the Board of Directors and shareholders. The department’s treasury function has been instrumental in maintaining a stable cost of funding, managing the duration of the Bank’s liabilities in a volatile interest rate environment, seeking diversification of funding channels, and maintaining key liquidity ratios and related business regulatory ratios well above the minimum required by the Qatar Central Bank. The department’s investments function is engaged in managing the Bank’s investments in capital markets to achieve superior and stable returns. It continued to provide strong revenue generation in 2018 whilst Parvez Khan EGM, Treasury and Investments ensuring a liquidity buffer for the Bank by focusing on liquid and diversified investments. It’s goal in 2019 is to maintain returns momentum in a challenging geopolitical and monetary policy environment. The investment emphasis remains on active portfolio management to optimise returns and ensure effective risk management by flexible asset allocation, hedging, and duration management. Treasury Sales The Treasury Sales unit provides a full suite of products to the Bank’s customers, supporting their needs with regards to managing and hedging their foreign exchange, interest rate exposures and other asset classes. Commercial Bank Treasury and Investments department continues to grow its footprint as a leading market-maker in the regional rates, fixed income, treasury securities and FX markets, and in providing market access to corporates and institutions. In 2018, Commercial Bank Treasury and Investments expanded its capacity to support client needs by adding digital execution capabilities and risk management solutions, both domestically as well as cross-border, demonstrating its ability to provide seamless client solutions across multiple geographies. 41 Management Review of Operations continued Commercial Bank Financial Services Commercial Bank Financial Services (L.L.C.) (CBFS), a wholly owned subsidiary of The Commercial Bank (P.S.Q.C.), provides customers with a secure platform for trading on Qatar Stock Exchange Listed stocks, Bonds and T–bills. CBFS is a licensed brokerage company and is regulated by the Qatar Financial Markets Authority (QFMA). CBFS provides its customers with the best investment product options and services available in Qatar while building up on its rich heritage from Commercial Bank, based on understanding of customer needs. CBFS has a robust online trading platform and has introduced a mobile trading application for its customers in order to have online presence and provide convenient trading options through secure mobile channels for its customers. CBFS has also upgraded its e-trading system which is used by our Retail customers to trade online. The latest version provides real time market feeds, richer user interface and additional functionalities. Encouraging customers with online trading option is in line with the Bank’s strategy of providing best digital experience. CBFS caters to a range of clients with varying risk appetites and investment needs. Our large and diversified customer base include retail, High Net Worth Individuals and Corporate entities (both Domestic and International). Since inception in 2011, CBFS has made significant progress and continues to build its position as one of the leading brokerage houses in Qatar. Risk Management Managing risk is a fundamental part of Commercial Bank’s day-to-day business activities. As part of the overall corporate governance framework, the Board of Directors is responsible for overseeing a strong risk governance framework, including a strong risk culture, a well-developed risk appetite—articulated through the Bank’s Risk Appetite Statement – and well-defined responsibilities for risk management and control functions. The keystone of the Bank’s risk governance framework are the three lines of defense, namely: 1. The first line of defense is the frontline units, business units, or functions that create risk. These groups are the Bank’s primary risk-takers, responsible for implementing effective internal controls and maintaining processes for identifying, assessing, controlling, and mitigating the risks associated with their activities, consistent with the Bank’s Risk Appetite Statement and risk limits. 2. The second line of defense is independent risk management, which oversees risk-taking and assesses risks independent of the frontline units, business units or functions that create risk. Independent risk management complements the frontline units’ risk-taking activities through its monitoring and reporting responsibilities, including compliance with the Bank’s risk appetite, and is responsible for identifying, measuring, monitoring, and controlling aggregate and emerging risks enterprise-wide. 3. The third line of defense is internal audit, which provides independent assurance to the Board on the effectiveness of governance, risk management, and internal controls. Accurate, reliable and timely information is vital to support business decisions regarding risk matters at all levels at the Bank. 42 The Operational Risk Management (ORM) Department supports the achievement of Commercial Bank’s financial and business goals. ORM manages operational risk using industry standard operational risk tools. The primary objectives of the ORM Department are: • Maintenance of an effective internal control environment and system of internal control; • Demonstration of effective governance, including a consistent approach to operational risk management across the Bank; • Transparency, escalation and resolution of risk and control incidents and issues. Market Risk Market Risk, the potential loss in value or earnings arising from changes in market factors is managed by the Bank’s Market Risk Department with full oversight by the Asset and Liability Committee (ALCO), which provides specific guidelines for market risk management. Commercial Bank uses value-at-risk (VaR) as one of the measures for Market Risk. VaR measures potential loss using historically observed market volatility. Stressed VaR is used at the Bank to measure the potential for economic loss from extreme market events. For assessing interest rate risk, metrics include earnings-at-risk (EaR), change in yield (PV01) and economic value of equity (EVE). The results of these measures are reported to the ALCO and the Management Risk Committee on a regular basis. Liquidity and Funding Management Commercial Bank follows a balanced liquidity management strategy through the combined use of liquid asset holdings and borrowed liquidity to meet its liquidity needs. The Bank’s funding policies provide that: • Liquidity requirements be measured using several approaches including sources and uses, structure of funds and liquidity indicators; • An appropriate level of assets is retained in highly liquid form; • The level of liquid assets complies with stressed scenario assumptions to provide for the risk of the Bank’s committed but undrawn lending obligations; • Establishment of credit lines. 43 Paul Gossiaux EGM, Chief Risk Officer During 2018, Commercial Bank continued to enhance its Asset Liability Management capability by incorporating prepayment and behavioral modelling to sensitize expected cash flows. The Bank also implemented IFRS 9 during the year and is fully compliant with Qatar Central Bank requirements. There were also significant improvements made to Operational Risk and Fraud Management capabilities in line with the overall digitization strategy of the Bank. In 2019, Commercial Bank will continue to employ clear risk management objectives and well-established strategies through core risk management processes. Credit Risk Commercial Bank has clearly defined credit policies for the approval and management of credit risk. Formal credit standards apply to all credit risks decisions, with specific portfolio standards applying to all major lending areas. These incorporate obligor quality, income capacity, repayment sources, acceptable terms and security, and loan documentation tests. The Bank assesses the integrity and ability of debtors or counterparties to meet their contracted financial obligations for repayment. Collateral security such as real estate, charge over income or assets, and financial securities is generally taken for business credit, except for government, major banks and corporate counterparties that are externally risk-rated and of strong financial standing. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It includes legal risk but excludes strategic and reputational risk. Management Review of Operations continued In summary, the governance framework, policies and administrative procedures and practices relating to risk management in Commercial Bank align well with global best practice, the recommendations of the Basel Committee and the guidelines of Qatar Central Bank. Marketing The Marketing Department of Commercial Bank establishes and promotes the Bank’s reputation and brand identity to stakeholders and customers through effective communication using both traditional and digital media channels. Marketing works closely with the Bank’s main business units and support functions to develop integrated marketing campaigns targeting different customer segments with diverse products and services based on ongoing research, consumer insight and return on investment analysis. Marketing also runs the Bank’s sponsorships and key events, as well as its Corporate Social Responsibility (CSR) programmes. Commercial Bank is proud of its leading position as a digital bank. Through exemplary thought leadership in digital marketing – alongside our proactive approach to digital media, introduction of first-to- market technologies, quality content offering, and customer engagement on and through social media – Commercial Bank continues to dominate Qatar’s digital banking spaces. Board Risk-related Committees The two Board Committees that have primary responsibility and oversight for risk are: 1. The Board Risk Committee (BRC), which is responsible for all aspects of enterprise wide risk management including, but not limited to, credit risk, market risk, liquidity risk and operational risk. The BRC reviews policy on all risk issues and maintains oversight of all Bank risks. 2. The Board Executive Committee (BEC) is responsible for evaluating and granting credit facilities within authorised limits as per Qatar Central Bank and Board guidelines. The BEC also reviews strategy on recovery of special asset relationships, reviews and approves all credit proposals (other than off-the-shelf products) relating to political figures and persons in ministerial posts and within the risk delegation of authority. In addition, specific risk-focused management committees (Risk Management, Asset and Liability and Special Assets Management) convene, at a minimum, on a quarterly basis and more frequently on a needs basis. The Board of Directors or their sub-committees are regularly updated on any potential risk that the Bank may face. Risk Management continues to be very well positioned to manage risk resulting from the increasing sophistication, scope and diversity of the Bank’s business and operations. Risk Management has dedicated teams, underlining Commercial Bank’s commitment to a strong risk governance and management framework. In 2019, the Bank will continue to enhance its internal controls and improve various processes in all areas of risk management. The Bank follows the provisions of the Basel III framework as per the directive of Qatar Central Bank. 44 Demonstrating national pride Commercial Bank’s successes and achievements this year contributed to a national awareness about how the continuing blockade has, throughout Qatar, made us more resilient and determined to achieve results, in alignment with the country’s key strategic messages and fulfilment of the Qatar National Vision 2030. The Bank’s pride in enhancing its national identity and high values of participation in all social and cultural events stems out of its loyalty to and solidarity with the wise leadership of our government under His Highness the Amir Sheikh Tamim bin Hamad Al Thani. Commercial Bank’s sponsorship of National Day is a key part of its aims to establish positive cooperation and play an effective role in the interest of all segments of Qatari society by sponsoring major activities in various important fields. We were honored with a prestigious award as Gold Sponsor of Qatar National Day 2018 celebrations, presented by HE the Minister of Culture and Sports, Dr Salah bin Ghanem bin Nasser Al Ali, following the success of our celebratory events. Supporting Qatar’s economy Commercial Bank is committed to helping support the development of Qatar’s economy and future sustainability in line with the goals of the economic pillar of the Qatar National Vision 2030. To promote excellence within the country’s financial sector, the Bank took the role of Lead Sponsor of the Euromoney Qatar Conference 2018, held under the patronage of HE Sheikh Abdullah bin Nasser bin Khalifa Al Thani, Prime Minister and Minister of Interior. Group CEO Joseph Abraham and COO Leonie Lethbridge spoke at this major industry event, which focused on Qatar’s post-blockade strategy, and on how the financial services sector can work together to drive Qatar’s private sector and economic growth forward into 2019. As part of its remit to support international trading relations, the Bank participated in the inaugural Qatar– Germany Business and Investment Forum, during which high-level government officials and executives from both countries discussed business and investment opportunities to expand the long-term Qatari-German economic partnership, supported by Qatari investments into Germany. In support for increasing two-way trade between Qatar and Turkey, and to increase support for robust strategic Hussein M Ali Al-Abdulla EGM, Chief Marketing Officer collaboration between the countries, Commercial Bank held its annual Analyst Day in Istanbul, where senior management presented details of its strategy, key successes over the past year and plans for future growth. On the sidelines of the Analyst Day, Commercial Bank opened the new head office of its subsidiary Alternatif Bank at the Vadistanbul Bulvar complex in Istanbul, Turkey. A high-level delegation of National Bank of Oman (NBO) Board Members and senior management was hosted at Commercial Bank Plaza for their first board meeting in Doha as part of a tradition of dialogue and collaboration between NBO and Commercial Bank. During this time, the Bank welcomed an NBO delegation to an event attended by Qatari businessmen, including the Bank’s VIP clients, thus enhancing economic relations and investment opportunities between Qatari and Omani companies. Commercial Bank has a strategic alliance with NBO as Oman’s second largest bank and holds a 34.9% stake. Commercial Bank has also helped home-grown companies to flourish. In the Qatar National Vision 2030, SMEs play a vital role in creating a strong and diversified private sector. That is why in 2018 the Bank launched an initiative to assist Qatari entrepreneurs by providing them with a display space at Commercial Bank Plaza to communicate to a wider audience and bring them closer to new and potential customers. The initiative also served to promote locally made Qatari products, which is very important given Qatar’s strategic priority of self-sufficiency. 45 Management Review of Operations continued Commercial Bank Lead Sponsor of Euromoney Conference Corporate Social Responsibility (CSR) Since its inception over forty years ago, Commercial Bank has been committed to supporting Qatar’s national development by giving back to the wider community through a comprehensive range of meaningful corporate social responsibility programmes formulated and implemented by the Bank’s Marketing Department. As part of the Bank’s humanitarian and social initiatives, Commercial Bank engaged in a range of initiatives during the holy month of Ramadan that focused on community engagement and social inclusiveness, including distributing water and dates to members of the public before Iftar every Saturday in different locations around the city, distributing food supplies for needy families direct to their homes, and giving Iftar boxes to taxi drivers. The Bank also launched a social media initiative – #CastYourKindness – to encourage philanthropy and community experiences by having others share their favorite videos of social events taking place in Ramadan. As part of its Qatar National Day 2018 celebrations, Commercial Bank created and distributed a limited edition set of National Day souvenirs for children in schools, hospitals and the Qatar Society for Rehabilitation of People with Special Needs. This activity was designed to ensure that all children in Qatar can take part in National Day celebrations. 46 Commercial Bank supports World Diabetes Day Commercial Bank community activities during Ramadan Health and fitness At Commercial Bank, our people are our greatest asset, and we are committed to investing in their wellbeing. Improving the nation’s health is also one of the most important parts of the human development pillar of the Qatar National Vision 2030, and we promote sports and wellness activities for our staff not just during National Sports Day but throughout the year, advertising the message that sport and physical exercise perform a vital function for the community, promoting active and healthy lifestyles and cultivating values of dedication, teamwork, competition and good sportsmanship. In 2018 Commercial Bank helped the nation celebrate National Sport Day with a mix of physical activities, staff wellness and a community outreach programme, which included the distribution of special gifts to the Qatar Society for Rehabilitation of Special Needs, independent schools, the children’s floor at Hamad Hospital and at Al Wakrah Hospital. The opening of Commercial Bank’s new on-site gym, CB House of Fitness, marked an important moment in the development of the Bank’s employee wellness programme, promoting a healthy workforce all year round. CB House of Fitness is a fully equipped mixed gym, with a ladies-only area, open from early to late every workday with high-quality facilities and dedicated, professional staff also offering fitness classes like Yoga, Zumba, Aerobics and Reformer Pilates. Our continued title sponsorship of the Commercial Bank Qatar Masters not only reinforces the Bank’s support for sporting activities but also its pursuit of excellence. Commercial Bank remains committed to enhancing Qatar’s sporting reputation by bringing the best international competitors to Qatar annually for a golf tournament that attracts a global audience. To celebrate the 2018 World Cup in Russia, staff from across the Bank’s different departments enjoyed the thrilling final stages of the tournament in two specially created fan zones at Commercial Bank Plaza and our Al Wakrah branch. In addition, Commercial Bank engaged with football fans using their social media channels to create awareness and spread the excitement. Commercial Bank awarding the winner of Commercial Bank Qatar Masters 2018 47 Management Review of Operations continued In further efforts to enhance awareness of key health issues in Qatar, the Bank marked Breast Cancer Awareness Month by organizing an awareness day in collaboration with Qatar Cancer Society during which a range of awareness-raising activities were launched for its employees and members of the public. Likewise, to promote employee health and wellness on World Diabetes Day, Commercial Bank, in partnership with a medical team from the Qatar Diabetes Association (QDA), offered one-to-one diabetes assessments to all its employees at a risk-assessment station at Commercial Bank Plaza to help them identify and prevent type two diabetes, one of the most common non-communicable diseases in Qatar. Qatari youth Commercial Bank takes pride in being a Qatari bank and supporting all four pillars of the Qatar National Vision 2030 through our activities, with a focus on strengthening the economy through our services and investing in Qatar’s human talent as one of the largest private sector employers in the country. The Bank’s National Development Programme invests heavily in the skills and training of young Qataris and we look forward to continuing to support Qatar on its journey towards sustainable development and prosperity, for the benefit of current and future generations. The Bank remains committed to a policy of attracting, recruiting, training and developing Qatari nationals and fostering home-grown ideas and talents. Commercial Bank’s policy on Qatarization is to offer excellent opportunities to young nationals embarking on a banking career and to continually explore the market to select and to provide exciting career opportunities for experienced nationals. Commercial Bank’s National Development Team participated at the Education City Career Fair in February 2018 to recruit Qatari nationals as the next generation of highly skilled banking leaders. The Bank’s new National Talent Development Programmes were rolled out during mid-2018 to ensure our future leaders receive the very best training and enhanced professional development. Commercial Bank also participated in the second Qatar Student Forum, organised by the Embassy of the State of Qatar in Washington, DC, and held in Los Angeles, California. Senior human capital and talent development staff from the Bank spoke about the opportunities available to graduates, giving Qatari students based in the United States an opportunity to network with Commercial Bank as a prestigious Qatar-based employer offering excellent career prospects. Commercial Bank honours Young Bankers 48 • A newly-supportive National Talent Committee (NTC) that oversees creative initiatives and endorses various programs that development and encourage nationals. Enhanced development for Commercial Bank Qatari Nationals We believe the best way to learn is to apply ourselves creatively at work. We expect around 70% of learning and professional development to happen in the workplace and on the job, which is why our new National Development Programmes focuses on stretch assignments and learning-by-doing. In 2018, we identified high-potential Qatari talent and supported them to take on new roles, challenging short-term assignments, and high-profile projects. This programme has been very successful, and we look forward to expanding the intake in 2019. Enhanced career experiences In 2018, through the newly reintroduced mentorship program, we paired young Qataris with senior managers from a different business unit, which has helped to both supporting business challenges and unlocking human potential. We have also introduced an ongoing feedback initiative to Qatari nationals, at 30, 60, and 90 days intervals, to further support and accelerate integration and affiliation to the Bank. In 2019, we look forward to attracting more young Qataris who share our entrepreneurial vision. Through our new National Recruitment Programme, we will purposely seek out young Qatari nationals who are ambitious, innovative and driven to shape the future of banking and financial services sector in Qatar. Learning and development We invest to make Commercial Bank a great place for learning. We target our development resources toward our people who are skilled at sharing knowledge and training others through leader-led training. This strengthens our creativity and innovation culture. We have also introduced a new study support initiative for staff working towards full or part time study programs, focuses on Qatari nationals and endorsed by the NTC. Jassim Al Thani Chief Human Capital Officer Human Capital In 2018, Commercial Bank continued to invest in its entrepreneurial culture. Initiatives included: • Reinvigorating our performance management system and put more focus on people, conversations and development; • Setting new, challenging performance standards for our leaders and teams; • A restructure of the Human Capital team and introduction of HC Communications and Culture to engage and communicate proactively with employees; • Introduction of the Chamber of Innovation, where employees are encouraged to propose ideas and get immediate business endorsement to apply; • Attracting and recruiting the right talent that will contribute further into delivering on the Bank’s five- year strategic plan; • Partnering with Ministry of Labour to source national talent and provide them with career opportunities within the Bank Nationalisation; • A restructure concept to all nationalization themes, from a new sponsorship program where we enhance the experiences of internships, to developing our internal talents and launching our new talent development program; 49 Management Review of Operations continued Performance and rewards The Board of Directors regularly reviews compensation and benefits to ensure we pay fairly and competitively, reward high performers, and linking incentive payments to the overall performance of the Bank. The Board of Directors also focuses on risk management by considering. • The split between salary and incentives; • The balance between profit, risk and the time horizons associated with those risks. We disclose our remuneration policies and practices in our financial reports. Human Capital operations In 2018, we undertook a comprehensive review of our policies, procedures, and operating model. We simplified our policies and processes and implemented SuccessFactors – a cloud-based human resource information system that increases operational efficiency and support managers with effective people process. Commercial Bank at the Second Qatar Students Conference and Forum in the United States 50 Talent resourcing and management Through a structured process, Commercial Bank has successfully attracted skilled and competent employees across various strategic business units. These employees have been able to contribute significantly and successfully towards the Bank’s strategic goals. Our recruitment strategy focuses on global competencies, diversity, strong academic qualifications, and leadership capabilities of the future with a strong emphasis on technology. We aim to transfer knowledge to our national talent pool, equipping them with the capabilities required to become the leaders to take the Bank into the future. As we continue to build on our strategies, our focus remains to attract Qatari nationals across all levels in the bank with the focus on senior leadership roles. Operations The future of banking is increasingly digital and Commercial Bank is a pioneer of this change in Qatar. Commercial Bank is investing in innovation and bringing creative, globally leading solutions to the market to provide the best client experience. Commercial Bank is facilitating and experiencing a rapid digitization among our customer base. Digital banking has the advantage of speed and convenience, allowing customers to bank at a time and place that suits them for the best client experience. In 2018, Commercial Bank grew its active digital users by 21,000 (14%), with the number of digital transactions rising by 12.9 million (84%). Commercial Bank’s digital transformation also applies to our internal activities, and we have embedded digital throughout our organisation for greater efficiencies and cost reduction. In 2018, robotic processing capability and technology was leveraged to enable fast, reliable processing of highly complex tasks, with reduced risk. Expansion of digital customer services Innovation has always been at the heart of Commercial Bank. This commitment to innovation continues today, with Commercial Bank launching several ‘first-to-market’ digital innovations in 2018, including an expanded 60 Seconds Remittance service to Nepal and Pakistan, expanding the service initiated in 2017 to India, Sri Lanka, and the Philippines. The milestone of enabling more than one million 60 Seconds Remittances was surpassed in 2018. Client-centric advancements in technology include the ‘Tap and Pay’ Credit Cards for quick and easy purchases, the Corporate & SME Mobile Banking App that offers convenient tailored services, and a Remote Cheque Deposit solution that allows customers to process cheques digitally for clearing. In another digital first, Commercial Bank introduced the CB Smart tracker for Corporate Banking clients. This online portal allows customers to view the progress of their trade finance requests and eliminate the need to visit or call the Bank during the process. For customers who prefer to use paper-based instructions, the Bank provides dynamic SmartForms, a sophisticated solution that performs necessary validation of customer data to trigger real-time payments. The importance of our branch network While digital technology is of a critical importance to Commercial Bank and we fully embrace the global trend towards cashless transactions, our branch network continues to be the favoured banking channel for many of our customers. Branches remain integral to how Commercial Bank delivers its services in recognition of some customers’ preferences for personal and face- to-face interactions with our Relationship Managers. Commercial Bank continues to invest in our branch network and in 2018 we opened two new, state-of-the- art branches at the popular Doha Festival City and at Al Ruwais, with full personal banking and ATM services. Transaction Banking The future of banking will be determined by banks who can capture an increasing share of transaction flows and do so cost-effectively. Transaction Banking is an essential part of our strategic future and is a key element of Commercial Bank’s vision to be the “Best Bank in Qatar”. In 2018, several global banks again recognised Commercial Bank as best in class for our seamless payments services, which enabled real-time processing particularly in US dollar and Euro transactions. Leonie Ruth Lethbridge EGM, Chief Operating Officer Relative to other banks in Qatar, Commercial Bank handled many transactions in 2018, for example: • Commercial Bank branches and digital channels jointly handled an estimated 30 million transactions in 2018; • Commercial Bank is among the top three providers of ATM and Branch services; • Commercial Bank is the market leader in acquiring, with 56% of all point of sale terminals (excluding Government) in Qatar; • Over 600,000 monthly salaries are initiated through the government’s Wages Protection System with Commercial Bank, of which 96% is initiated by the customer online. Commercial Bank Innovation Services Transaction Banking presents an opportunity to create diversified, sustainable earnings, supporting fee income, low cost deposits and the benefits of economies of scale. To fully capitalise on this opportunity, we invested substantially in Commercial Bank Innovation Services (CBIS), which provides a major capability uplift towards realising our goal of dominating Transaction Banking in Qatar. Using innovative technologies, CBIS is scalable to handle greater volumes of transactions at lower cost. As Commercial Bank grows to process a greater number of transactions, the incremental cost of these transactions are kept at virtually zero through innovation and the benefits of economies of scale. 51 Management Review Management Review of Operations continued of Operations continued SME Mobile Banking Transactions 6658 6086 6032 5761 7403 6933 6507 8139 8175 7658 5622 4899 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Internet vs. Mobile Banking Transaction 83% 70% 56% 44% 50% 50% 57% 43% 30% 17% 2014 2015 2016 2017 2018 Internet Mobile 52 Digital vs. Branch Transactions (millions) 28.3 15.4 9.7 5.32 5.63 6.29 1.6 1.67 1.69 1.69 1.84 1.97 2013 2014 2015 Digital 2016 2017 2018 Branch Digital vs. Branch Transactions 2013 2014 2015 2016 Customer 2017 2018 Branch 2019 Digital 2020 2021 Thousands 400 350 300 250 200 150 100 50 0 Millions 50 45 40 35 30 25 20 15 10 5 0 53 Management Review Management Review of Operations continued of Operations continued 66K 44K 2014 44K 29K 2013 Active Digital Users 147K 155K 126K 90K 75K 67K 99K 57K 88K 50K 2016 2015 Active Users 2017 Mobile Users 2018 2020 Biometric Registered Customers 63K 65K 59K 74K 69K 43K 28K 6K Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 54 CBIS marked the end of a Commercial Bank’s previous outsourcing model to a global, top three business process outsourcing firm, where operational costs were proportional to transaction volumes. Under this old model, costs increased two and a half times since 2011 and were projected to increase by a factor of four by 2020. 2018 marked the very successful consolidation of the CBIS model, which successfully serviced increased transaction volumes at 50% of the projected cost of the previous outsourced approach. CBIS is a scale-agnostic model and a wholly owned subsidiary of Commercial Bank, operating under the regime of the Qatar Financial Centre. By bringing operational services back on-shore through our own in- house entity, CBIS facilitates the implementation of new technologies and new ways of thinking such as robotics, to revamp our end-to-end operating model. By having direct control over our own processes, Commercial Bank can now fully exploit these latest technologies and digitization as a driver of innovation, future growth, and improved customer experience. Acknowledgement Commercial Bank’s successful business performance in 2018 has only been possible through the dedication and hard work of our valued employees and the leadership team. We are also extremely grateful for the ongoing support and guidance provided by the Chairman, Vice Chairman and Managing Director and Members of the Board. Under their leadership, we have continued to achieve growth and have maintained our reputation of being one of Qatar’s oldest and most successful banks for more than four decades. In conclusion, we would like to express our sincere gratitude to His Highness Sheikh Tamim Bin Hamad Al Thani, Emir of the State of Qatar, for his visionary leadership of Qatar. We would also like to thank His Excellency the Prime Minister and Minister of the Interior Sheikh Abdullah Bin Nasser Bin Khalifa Al Thani, His Excellency the Minister of Finance, Mr. Ali Shareef Al Emadi, the Qatar Central Bank and the Ministry of Economy and Commerce for their continued guidance and support of the Bank throughout this past year. The Qatar Central Bank, under the leadership of His Excellency the Governor Sheikh Abdullah Bin Saud Al Thani, has shown prudence with clear and consistent leadership of the banking industry enabling Qatar’s financial market to grow despite a challenging operating environment. We are very proud of our success over the years and are optimistic about what the future will bring for Commercial Bank and for Qatar. Responsibility Statement To the best of our knowledge, financial statements prepared in accordance with International Financial Reporting Standards provide a true and fair view of the assets, liabilities, financial position and profit of The Commercial Bank (P.S.Q.C.). We confirm that the management review, together with the notes to the financial statements, includes a fair review of development and performance of the business and the position of the Group together with a description of the principal risks and opportunities associated with the expected development of the Group. 20 March 2019 For and on behalf of the Board of Directors: Mr. Hussain Ibrahim Alfardan Vice Chairman Mr. Joseph Abraham Group Chief Executive Officer 55 our growing fleet We are a growing business with an expanding local and international footprint. In 2016, we launched our Five-Year Strategic Plan focused on five Cs: corporate earnings quality, client experience, creativity and innovation, culture, and compliance. The execution of this plan has showed positive results since launch. We have reshaped our loan book and improved asset quality, reduced our costs, and grown our international portfolio. This work has led to year-on-year increases in our net and operating profit in 2018, which we hope to continue in 2019. Annual Corporate Governance Report 2018 Effective governance is, at its core, simply about doing the right things for stakeholders. It is enabled by having the right checks and balances throughout the organization to ensure that the right things are always done. It comprises the processes and structures which affect the way an organization is directed, managed and monitored and its activities are reported, including: the elements of internal control, ethics, various risk functions, policies and procedures, internal audit, external audit and formal committees that promote greater transparency and facilitate efficient and effective management for the best interests of stakeholders. The Board of Directors firmly believes that good corporate governance is fundamental in ensuring the proper management of Commercial Bank in the interests of all of our stakeholders. We recognise that the way we interact with stakeholders is key for the success of our business and the transparent disclosure of our governance assists investors in their investment decisions. We continue to enhance our corporate governance framework as the Bank’s business evolves and regulatory requirements change. The main rules, procedures and practical application of Commercial Bank’s governance are contained in the Bank’s Corporate Governance Charter, Board of Directors Charter and Board Committees Charter. These charters reflect Commercial Bank’s long-standing ethical governance practices and the regulatory requirements mandated by: • guidelines and instructions issued by the Qatar Central Bank on 26 July 2015 by virtue of Circular No. 68/2015 (QCB Corporate Governance Guidelines); • the Commercial Companies Law promulgated by Law No. 11 of 2015 (CCL); and • the Governance Code for Companies and Legal Entities Listed on the Main Market issued by Qatar Financial Markets Authority pursuant to Decision No. 5 of 2016 (QFMA Corporate Governance Code). These charters also follow the recommendations of leading international best practice for corporate governance developed by the Organisation for Economic Cooperation and Development (OECD), the Bank for International Settlements (BIS), and the International Institute of Finance (IIF). The Board understands that sound corporate governance principles and practices are fundamental to maintaining the trust of its stakeholders, which is also critical in business growth, sustainability and profitability. The Board is committed to implement the corporate governance principles of justice, equality among stakeholders without discrimination, transparency and disclosure, while upholding the values of corporate social responsibility and acting in the public interest of Commercial Bank and stakeholders over their personal interests, as well as performing their duties, tasks and functions in good faith, integrity, honour and sincerity. The implementation of these principles is driven by a qualified Board aided by a seasoned and experienced Executive Management team. The Board ensures that the Bank adheres to these corporate governance principles in its day-to-day activities at all times. The Board of Directors of Commercial Bank have prepared the Bank’s Annual Corporate Governance Report for 2018 as required by the QCB Corporate Governance Guidelines, the QFMA Corporate Governance Code, and in line with international best practice. The Annual Corporate Governance Report 2018 is an attachment to this Annual Report, forms an integral part of it, and is presented to shareholders for approval at the Bank’s AGM on 20 March 2019. The Annual Corporate Governance Report 2018 can also be viewed on Commercial Bank’s website at www.cbq.qa The Board of Directors confirms that Commercial Bank is compliant with the provisions of the QFMA Corporate Governance Code and the QCB Corporate Governance Guidelines as at 31 December 2018. 58 Consolidated Financial Statements 31 December 2018 59 Independent Auditor’s Report To the Shareholders of The Commercial Bank (P.S.Q.C.) Report on the Audit of the Consolidated Financial Statements Opinion We have audited the consolidated financial statements of The Commercial Bank (P.S.Q.C.) (the “Bank”) and its subsidiaries (together referred to as the “Group”), which comprise the consolidated statement of financial position as at 31 December 2018, 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. 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 2018, 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 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 Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the State of Qatar, 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 where 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. 60 Report on the Audit of the Consolidated Financial Statements (continued) Key audit matters (continued) Key audit matter 1. Adoption of IFRS 9 effective from 1 January 2018 The Group adopted IFRS 9 effective 1 January 2018. As permitted by IFRS 9, the requirements have been applied retrospectively without restating comparatives. The differences between previously reported carrying amounts and new carrying amounts of financial instruments as of 31 December 2017 and 1 January 2018 amounted to QR 1,496 million which have been recognized in the opening retained earnings. Transitional impact of IFRS 9 has been disclosed in note 3.a (i) to the consolidated financial statements. Significant judgement is involved in order to determine the classification and impairment of financial assets under IFRS 9, hence, this is considered a key audit matter. How our audit addressed the key audit matter Our audit procedures in this area included the following: • Obtained an understanding and evaluated the Group’s business model assessment and the test on the contractual cash flows, which give rise to cash flows that are ‘solely payments of principal and interest’ (SPPI test) performed by the management specialist; • Evaluated the classification analysis performed by the Bank regarding the classification of financial instruments into Amortized Cost “(AC”), Fair Value Through Other Comprehensive Income (“FVOCI”) or Fair Value Through Profit and Loss (“FVTPL”); • Obtained an the Group’s understanding of implementation process of ECL model with respect to IFRS 9. • Our approach included testing the controls associated with the relevant processes for estimating ECL and performing substantive procedures on such estimates for all financial assets subject to impairment testing under IFRS 9. • Tested the appropriateness of the opening balance adjustments. • Assessed the adequacy of the Group’s disclosures in relation to first time application of IFRS 9. 61 Independent Auditor’s Report continued Report on the Audit of the Consolidated Financial Statements (continued) Key audit matters (continued) Key audit matter 2. Impairment of loans and advances to customers The process for estimating impairment provision on credit risk associated with loans and advances in accordance with IFRS 9 Financial instruments (IFRS 9) involves significant judgement. IFRS 9 requires use of the ECL model for the purposes of calculating impairment provision. ECL model requires the Group to exercise significant judgement using subjective assumptions when determining both the timing and the amounts of ECL for loans and advances. Due to the complexity of requirements under IFRS 9, significance of judgements applied and the Group’s exposure to loans and advances forming a major portion of the Group’s assets, the audit of ECL for loans and advances is a key audit matter. As at 31 December 2018, the Group’s gross loans and advances amounted to QR 87,559 million and the related allowances for impairment amounted to QR 3,847 million, comprising QR 1,003 million of ECL against Stage 1 and 2 exposures and QR 2,844 million against exposures classified under Stage 3. The basis of calculation of ECL is presented in the summary of significant accounting policies and notes 4 (b) and 10 to the consolidated financial statements. How our audit addressed the key audit matter In addition to the procedures enumerated in the key audit matter 1 above, our procedures focused on the following key areas: • We assessed: • the Group’s IFRS 9 based impairment provisioning policy including significant increase in credit risk criteria with the requirements of IFRS 9; • Group’s ECL modeling techniques and methodology • against the requirements of IFRS 9; and the theoretical soundness and mathematical integrity of the models. tested the • We obtained an understanding of the design and tested the operating effectiveness of relevant controls over the credit process and ECL model. • We have also tested completeness and accuracy of the data used and reasonableness of the management assumptions, involving specialists where needed. • We understood and assessed the significant modeling assumptions for exposures. • loss given default For a sample of exposures, we performed procedures to evaluate: • Appropriateness of exposure at default, probability (including of default and collateral values used) in the calculation of ECL; • Timely identification of exposures with a significant increase in credit risk and appropriateness of the Group’s staging; and • The ECL calculation. • Assessed the impairment allowance for individually impaired loans and advances (stage 3) in accordance with IFRS. Other Matter The consolidated financial statements as at and for the year ended 31 December 2017 were audited by another auditor, whose audit report dated 29 January 2018, expressed an unmodified audit opinion thereon. 62 Report on the Audit of the Consolidated Financial Statements (continued) Other information The Board of Directors is responsible for the other information. The other information comprises the information included in the Bank’s annual report (the “Annual Report”), but does not include the Bank’s consolidated financial statements and our auditor’s report thereon. The Bank’s 2018 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 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. Responsibilities of the Board of Directors for the consolidated financial statements The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and the applicable provisions of Qatar Central Bank regulations, and for such internal control as the Board of Directors determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors 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 the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. 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 guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of user taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: • Identify and assess the risk 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 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 reasonableness of accounting estimates and related disclosures made by the Board of Directors. 63 Independent Auditor’s Report continued Report on the Audit of the Consolidated Financial Statements (continued) Auditor’s responsibilities for the audit of the consolidated financial statements (continued) • Conclude on the appropriateness of the Board of Directors’ 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 auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosure is 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. • 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 the Board of Directors 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 the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and 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 the Board of Directors, 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 disclosures 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. Report on other legal and regulatory requirements We have obtained all the information and explanations, which we considered necessary for the purpose of our audit. The Bank has maintained proper accounting records and its consolidated financial statements are in agreement therewith. We have read the report of the Board of Directors to be included in the Annual Report and the financial information contained therein is in agreement with the books and records of the Bank. We confirm that we are not aware of any contraventions by the Bank of its Articles of Association and the amendments thereto, the applicable provisions of Qatar Central Bank Law No. 13 of 2012 and of the Qatar Commercial Companies Law No. 11 of 2015, having occurred during the financial year which might have had a material effect on the Bank’s consolidated financial position or performance as at and for the year ended 31 December 2018. Ziad Nader Partner of Ernst & Young Qatar Auditors Registry Number 258 Doha - State of Qatar Date: 28 February 2019 64 Consolidated Statement of Financial Position As at 31 December Notes 2018 ASSETS Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Property and equipment Intangible assets Other assets TOTAL ASSETS LIABILITIES Due to banks Customer deposits Debt securities Other borrowings Other liabilities TOTAL LIABILITIES 8 9 10 11 12 13 14 15 16 17 18 19 20 21 6,716,058 9,468,706 83,701,631 22,107,807 2,096,310 2,559,591 2,718,913 283,049 5,418,645 135,070,710 13,820,543 71,321,450 15,998,539 8,301,828 5,628,930 115,071,290 QAR ‘000s 2017 7,373,918 10,499,348 89,121,935 19,629,246 2,088,158 2,287,100 2,590,987 430,178 4,428,182 138,449,052 13,515,872 77,633,333 11,604,890 9,303,365 5,370,073 117,427,533 EQUITY Share capital 4,047,254 Legal reserve 9,742,066 General reserve 26,500 Risk reserve 1,890,408 Fair value reserve (44,500) Treasury shares (179,507) Foreign currency translation reserve (1,383,926) Other reserves 1,064,189 Revaluation reserve 1,264,794 Retained earnings 594,226 TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK 17,021,504 Non-controlling interests 15 Instruments eligible for additional capital 4,000,000 TOTAL EQUITY 21,021,519 TOTAL LIABILITIES AND EQUITY 138,449,052 The consolidated financial statements were approved by the Board of Directors on 4th February 2019 and were signed on its behalf by: 4,047,254 9,745,152 26,500 886,151 (73,466) (179,507) (1,816,866) 1,079,858 1,283,920 1,000,413 15,999,409 11 4,000,000 19,999,420 135,070,710 22 22 22 22 22 22 22 22 22 22 Sheikh Abdulla Bin Ali Bin Jabor Al Thani Chairman Mr. Hussain Ibrahim Alfardan Vice Chairman Mr. Joseph Abraham Group Chief Executive Officer The attached notes 1 to 41 form an integral part of these consolidated financial statements 65 Consolidated Income Statement For the year ended 31 December Notes 2018 Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net foreign exchange gain (Loss)/Income from investment securities Other income Net operating income Staff costs Depreciation Amortisation of intangible assets Impairment losses on investment securities Net impairment losses on loans and advances to customers Net impairment reversal on other financial assets Other expenses Profit before share of results of associates and a joint arrangement Share of results of associates and a joint arrangement Profit before tax Income tax expense Profit for the year Attributable to: Equity holders of the Bank Non-controlling interests Profit for the year 25 26 27 28 29 30 31 32 14 15 33 12 6,077,322 (3,595,000) 2,482,322 1,117,965 (360,727) 757,238 202,247 (18,826) 85,576 3,508,557 (676,466) (129,227) (54,749) (399) (927,164) 92,055 (312,893) 1,499,714 170,738 1,670,452 (7,272) 1,663,180 1,663,179 1 1,663,180 QAR ‘000s 2017 5,138,921 (2,620,621) 2,518,300 1,029,333 (308,985) 720,348 162,641 48,690 79,296 3,529,275 (713,472) (152,392) (55,610) (46,484) (1,696,819) - (403,593) 460,905 147,876 608,781 (5,131) 603,650 603,648 2 603,650 Earnings per share Basic/diluted earnings per share (QAR per share) 34 3.52 0.91 The attached notes 1 to 41 form an integral part of these consolidated financial statements 66 Consolidated Statement of Comprehensive Income For the year ended 31 December Notes 2018 QAR ‘000s 2017 Profit for the year 1,663,180 603,650 Other comprehensive income for the year: Items that are, or may be subsequently reclassified to profit or loss: Foreign currency translation differences for foreign operation Share of other comprehensive income of investment in associates and a joint arrangement Net movement in cash flow hedges-effective portion of changes in fair value Net movement in fair value of available-for-sale investments (IAS 39) Net change in fair value of investments in debt securities designated at FVOCI (IFRS 9) Net amount transferred to profit and loss Items that may not be subsequently reclassified to profit or loss: Net change in fair value of equity investments designated at FVOCI (IFRS 9) Share of other comprehensive income of investment in associates and a joint arrangement (IFRS 9) Revaluation reserve on land and buildings Other comprehensive (loss) / income for the year 23 23 23 23 23 23 23 23 23 (432,940) (2,092) 24,436 - 2,128 (10,001) (19,484) (5,423) 19,126 (424,250) (124,119) 8,190 - 167,125 - - - - - 51,196 Total comprehensive income for the year 1,238,930 654,846 Attributable to: Equity holders of the Bank Non-controlling interests Total comprehensive income for the year 1,238,929 1 1,238,930 654,844 2 654,846 The attached notes 1 to 41 form an integral part of these consolidated financial statements 67 4,047,254 9,742,066 26,500 1,890,408 (44,500) (179,507) (1,383,926) 1,064,189 1,264,794 594,226 17,021,504 4,000,000 4,047,254 9,742,066 26,500 361,151 (63,030) (179,507) (1,383,926) 1,264,794 645,736 15,446,785 4,000,000 19,446,800 Foreign currency translation reserve Treasury shares Other reserves Revaluation reserve Retained earnings QAR ‘000s Total equity attributable to equity holders of the Bank Instruments eligible for additional Non- controlling interests capital Total equity (432,940) (432,940) 19,126 19,126 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (78,442) 985,747 94,111 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 51,510 (1,574,719) 1,663,179 (424,250) 1,238,929 1,663,179 - 1,663,179 (3,086) (525,000) (94,111) (240,000) (240,000) (41,580) (41,580) - - - - - (404,725) (404,725) (404,725) (404,725) - - - - - - - - 15 - 15 1 - 1 - - - - - - - - - - - (5) 21,021,519 (1,574,719) 1,663,180 (424,250) 1,238,930 (240,000) (41,580) (404,725) (404,725) (5) - - - - - - - - - - - - - - - - - - - - - - - - 4,047,254 - 9,745,152 - 26,500 - 886,151 - (73,466) (179,507) (1,816,866) 1,079,858 1,283,920 1,000,413 15,999,409 11 4,000,000 19,999,420 Consolidated Statement of Changes in Equity For the year ended 31 December Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve 22 22 22 Balance as at 1 January 2018 Transition adjustments on adoption of IFRS 9 on 1 January 2018* Balance as at 1 January 2018 – restated Total comprehensive income for the year Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to legal reserve Transfer to risk reserve Net movement in other reserves and fair value reserve Dividend for Instruments eligible for additional capital Social and sports fund Transactions with equity holders of the Bank recognised directly in equity Contributions by and distributions to equity holders of the Bank: Increase in share capital Increase in legal reserve Dividends for the year 2017 Bonus issue Treasury shares Total contributions by and distributions to equity holders of the Bank Net movement in non-controlling interests Balance as at 31 December 2018 *Includes transition on adoption of IFRS 9 for investment in associate 22 22 22 22 24 - - - (1,529,257) (18,530) - - - - - - - - - - - - - - - - - 3,086 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 525,000 - (10,436) (10,436) - - - - - - - - - - - - - - - - - - - - The attached notes 1 to 41 form an integral part of these consolidated financial statements 68 Foreign currency translation reserve Treasury shares Other reserves Revaluation reserve Retained earnings Total equity attributable to equity holders of the Bank Non- controlling interests Instruments eligible for additional capital QAR ‘000s Total equity 4,047,254 9,742,066 26,500 1,890,408 (44,500) (179,507) (1,383,926) 1,064,189 1,264,794 594,226 17,021,504 4,047,254 9,742,066 26,500 361,151 (63,030) (1,529,257) (18,530) - - (179,507) (1,383,926) (78,442) 985,747 - 51,510 (1,574,719) 1,264,794 645,736 15,446,785 15 - 15 4,000,000 - 21,021,519 (1,574,719) 4,000,000 19,446,800 - - - - - - - - - - - - - - - (432,940) (432,940) - - - - - - - - - - - - - - - - 94,111 - - - - - - - - - 19,126 19,126 - - - - - - - - - - - 1,663,179 - 1,663,179 (3,086) (525,000) (94,111) 1,663,179 (424,250) 1,238,929 - - - (240,000) (240,000) (41,580) (41,580) - - (404,725) - - - - (404,725) - - (404,725) (404,725) 1 - 1 - - - - - - - - - - - - - - - - - - - - - - - - - 1,663,180 (424,250) 1,238,930 - - - (240,000) (41,580) - - (404,725) - - (404,725) 4,047,254 9,745,152 26,500 886,151 (73,466) - (179,507) - (1,816,866) - 1,079,858 - 1,283,920 - 1,000,413 - 15,999,409 (5) (5) - 11 4,000,000 19,999,420 For the year ended 31 December Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve Balance as at 1 January 2018 Transition adjustments on adoption of IFRS 9 on 1 January 2018* Balance as at 1 January 2018 – restated Total comprehensive income for the year Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to legal reserve Transfer to risk reserve Net movement in other reserves and fair value Dividend for Instruments eligible for additional reserve capital Social and sports fund Transactions with equity holders of the Bank recognised directly in equity Contributions by and distributions to equity holders of the Bank: Increase in share capital Increase in legal reserve Dividends for the year 2017 Bonus issue Treasury shares 22 22 22 22 24 22 22 22 Total contributions by and distributions to equity holders of the Bank Net movement in non-controlling interests Balance as at 31 December 2018 *Includes transition on adoption of IFRS 9 for investment in associate - - - - - - - - - - - - - - - - (10,436) (10,436) 3,086 525,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - The attached notes 1 to 41 form an integral part of these consolidated financial statements 69 Consolidated Statement of Changes in Equity continued For the year ended 31 December Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve Balance as at 1 January 2017 3,266,292 8,828,240 26,500 1,802,308 (219,815) (1,259,807) 997,767 1,264,794 594,980 15,301,259 13 4,000,000 19,301,272 Total comprehensive income for the year Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to legal reserve Transfer to risk reserve Net movement in other reserves and fair value reserve Instruments eligible for additional capital Dividend for Instruments eligible for additional capital Social and sports fund Transactions with equity holders of the Bank recognised directly in equity Contributions by and distributions to equity holders of the Bank: Increase in share capital Increase in legal reserve Dividends for the year 2016 Bonus issue Treasury shares Total contributions by and distributions to equity holders of the Bank Net movement in non-controlling interest Balance as at 31 December 2017 - - - - - - - - - - - - 2,062 - - - - - 588,235 - - 192,727 - 780,962 - 911,764 - - - 911,764 22 22 22 22 22 24 22 22 - - - - - - - - - - - - - - - - - - - 175,315 175,315 - 88,100 - - - - - - - - - - - - - - - - - - - - - - - - 4,047,254 9,742,066 - - 26,500 1,890,408 - (44,500) (179,507) (1,383,926) 1,064,189 1,264,794 594,226 17,021,504 15 4,000,000 21,021,519 Foreign currency translation reserve Treasury shares Other reserves Revaluation reserve Retained earnings QAR ‘000s Total equity attributable to equity holders of the Bank Instruments eligible for additional Non- controlling interests capital Total equity - - - - - - - - - - - - - - - (179,507) (179,507) (124,119) (124,119) 66,422 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 603,648 51,196 654,844 603,648 603,648 (2,062) (88,100) (66,422) (240,000) (240,000) (15,091) (15,091) 588,235 911,764 (179,507) (192,727) (192,727) 1,320,492 - - - - - - - - - - - - - - 2 - 2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 603,650 51,196 654,846 - - - - - - - (240,000) (15,091) 588,235 911,764 (179,507) 1,320,492 The attached notes 1 to 41 form an integral part of these consolidated financial statements 70 For the year ended 31 December Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve Balance as at 1 January 2017 3,266,292 8,828,240 26,500 1,802,308 (219,815) Total comprehensive income for the year Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to legal reserve Transfer to risk reserve Net movement in other reserves and fair value reserve Instruments eligible for additional capital Dividend for Instruments eligible for additional capital Social and sports fund Transactions with equity holders of the Bank recognised directly in equity Contributions by and distributions to equity holders of the Bank: Increase in share capital Increase in legal reserve Dividends for the year 2016 Bonus issue Treasury shares Total contributions by and distributions to equity holders of the Bank Net movement in non-controlling interest Balance as at 31 December 2017 22 22 22 22 22 24 22 22 - - - - - - - - - - - - - 2,062 88,100 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 175,315 175,315 - - - - - - - - - - - - - - 588,235 192,727 911,764 780,962 911,764 4,047,254 9,742,066 26,500 1,890,408 (44,500) The attached notes 1 to 41 form an integral part of these consolidated financial statements Foreign currency translation reserve Treasury shares Other reserves Revaluation reserve Retained earnings Total equity attributable to equity holders of the Bank Non- controlling interests Instruments eligible for additional capital QAR ‘000s Total equity - - - - - - - - - - - - - - (179,507) (179,507) - (179,507) (1,259,807) 997,767 1,264,794 594,980 15,301,259 13 4,000,000 19,301,272 - (124,119) (124,119) - - - - - - - - - - - - - - - - - 66,422 - - - - - - - - - - - - - - - - - - - - - - - - - (1,383,926) - 1,064,189 - 1,264,794 603,648 - 603,648 (2,062) (88,100) (66,422) - 603,648 51,196 654,844 - - - - (240,000) (240,000) (15,091) (15,091) - - - (192,727) - (192,727) - 594,226 588,235 911,764 - - (179,507) 1,320,492 - 17,021,504 2 - 2 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15 4,000,000 603,650 51,196 654,846 - - - - (240,000) (15,091) 588,235 911,764 - - (179,507) 1,320,492 - 21,021,519 71 Consolidated Statement of Cash Flows For the year ended 31 December Notes 2018 QAR ‘000s 2017 Cash flows from operating activities Profit before tax Adjustments for: Net impairment loss on loans and advances to customers Impairment loss on investment securities Net impairment losses on other financial assets Depreciation Amortization of intangible assets and transaction costs Net loss/ (gain) on investment securities measured at fair value Gain on disposal of property and equipment and other assets Share of results of associates and joint arrangement Operating profit before working capital changes Working capital changes Change in due from banks Change in loans and advances to customers Change in other assets Change in due to banks Change in customer deposits Change in other liabilities Contribution to social and sports fund Net cash (used in) / from operating activities 14 30 12 Cash flows from investing activities Acquisition of investment securities Investment in associate participating in rights issue Dividend received from associates and a joint arrangement Proceeds from sale/maturity of investment securities Acquisition of property and equipment and intangible assets Proceeds from the sale of property and equipment and other assets Net cash (used in) / from investing activities 12 14&15 1,670,452 608,781 927,164 399 (92,055) 129,227 97,592 24,131 (91) (170,738) 2,586,081 908,197 (898,316) (1,322,483) 673,265 (3,148,142) 282,206 (15,091) (934,283) (7,323,607) (272,491) 76,627 3,977,082 (286,431) 4,184 (3,824,636) 1,696,819 46,484 - 152,392 126,930 (36,704) (4,042) (147,876) 2,442,784 3,521,993 (13,984,587) (444,075) 2,194,421 7,381,483 (823,358) (12,534) 276,127 (8,561,768) - 81,454 4,253,761 (113,350) 6,201 (4,333,702) The attached notes 1 to 41 form an integral part of these consolidated financial statements 72 Consolidated Statement of Cash Flows continued For the year ended 31 December Notes 2018 Cash flows from financing activities Proceeds from issue of debt securities Repayment of debt securities Repayment of other borrowings Proceeds from other borrowings Proceeds from rights issue Proceeds from issue of instrument eligible for additional capital Purchase of treasury shares Dividends paid Net cash from / (used in) financing activities Net (decrease) in cash and cash equivalents Effect of exchange rate fluctuations Cash and cash equivalents as at 1 January Cash and cash equivalents as at 31 December Net cash flows from interest and dividend: Interest paid Interest received Dividend received QAR ‘000s 2017 3,845,587 (3,968,148) (5,414,984) 4,161,023 1,499,999 - (179,507) - (56,030) (4,113,605) 119,174 14,315,866 10,321,435 19 19 20 20 36 9,508,091 (5,055,194) (6,634,330) 6,583,404 - - - (404,725) 3,997,246 (761,673) 424,784 10,321,435 9,984,546 3,455,544 5,864,966 5,305 2,613,395 4,948,811 11,986 The attached notes 1 to 41 form an integral part of these consolidated financial statements 73 Notes to the Consolidated Financial Statements 1. REPORTING ENTITY The Commercial Bank (P.S.Q.C.) (“the Bank”) is an entity domiciled in the State of Qatar and was incorporated in 1974 as a public share holding company under Emiri Decree No.73 of 1974. The commercial registration number of the Bank is 150. The address of the Bank’s registered office is PO Box 3232, Doha, State of Qatar. The consolidated financial statements of the Bank for the year ended 31 December 2018 comprise the Bank and its subsidiaries (together referred to as “the Group”). The Group is primarily engaged in conventional banking, brokerage services and the credit card business and operates through its head office, subsidiaries and branches. The principal subsidiaries of the Group are as follows: Name Country of incorporation Capital Activity Alternatifbank A.S. (“ABank”) Commercial Bank Financial Services (L.L.C.) CBQ Finance Limited Turkey Qatar TRY 1,167,000,000 QAR 100,000,000 Bermuda USD 1,000 Banking services Brokerage services Debt issuance for the Bank 2. BASIS OF PREPARATION Percentage of ownership 2018 100% 100% 2017 100% 100% 100% 100% (a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and the applicable provisions of the Qatar Central Bank (“QCB”) regulations. The Group presents its consolidated statement of financial position broadly in the order of liquidity. An analysis regarding recovery or settlement of assets/liabilities within twelve months after the end of the reporting date (“current”) and more than twelve months after the reporting date (“non-current”) is presented in Note 4(c) (iii). (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following assets and liabilities that are measured at fair value: • • • • • • derivative financial instruments; investments measured at fair value through profit or loss (‘FVTPL’) (2018) / Held for trading financial investments (2017); other financial assets designated at fair value through profit or loss (‘FVTPL’); financial investment measured at fair value through other comprehensive income (‘FVOCI’) (2018) / Available-for- sale financial investments (2017); land and buildings; and the carrying values of recognised assets and liabilities that are hedged items in quantifying fair value hedges, and otherwise carried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are being hedged. 74 2. BASIS OF PREPARATION (continued) (c) Functional and presentation currency These consolidated financial statements are presented in Qatari Riyals (“QAR”), which is the Bank’s functional and presentation currency. Except as otherwise indicated, financial information presented in QAR has been rounded to the nearest thousand. (d) Use of estimates and judgments The preparation of the consolidated financial statements in conformity with IFRS and QCB regulations requires management to make judgements, estimates and assumptions that affect the application of 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 5. 3. SIGNIFICANT ACCOUNTING POLICIES Except for the changes explained in note 3(y), the accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by the Group entities. (a) New standards, amendments and interpretations New standards, amendments and interpretations effective from 1 January 2018 The following standards, amendments and interpretations, which became effective as of 1 January 2018, are relevant to the Group: IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers IFRIC 22 Foreign Currency Transactions and Advance Consideration 1-Jan-18 1-Jan-18 1-Jan-18 The adoption of the above did not result in any changes to previously reported net profit or equity of the Group except as mentioned below. (i) IFRS 9 Financial Instruments The Group has adopted IFRS 9, as issued by the IASB in July 2014 with a date of transition of 1 January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the consolidated financial statements as of and for the year ended 31 December 2017. The Group did not early adopt any of IFRS 9 in previous periods. The adoption of IFRS 9 has resulted in changes in the accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 ‘Financial Instruments: Disclosures’. 75 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) (i) IFRS 9 Financial Instruments (continued) Classification of financial assets and financial liabilities IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, although under IAS 39 all fair value changes of liabilities designated under the fair value option were recognised in the consolidated income statement, under IFRS 9 fair value changes are generally presented as follows: - - The amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and The remaining amount of change in the fair value is presented in the consolidated income statement. Impairment of financial assets IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The new impairment model also applies to certain loan commitments and financial guarantee contracts but not to equity investments. Under IFRS 9, credit losses are recognised earlier than under IAS 39. The Group applies three-stage approach to measure expected credit losses (ECL) on financial assets carried at amortised cost and debt instruments classified as FVOCI. Assets migrate through the following three stages based on the change in credit quality since initial recognition. Stage 1: 12 months ECL - not credit impaired. Stage 1 includes financial assets on initial recognition and that do not have a significant increase in credit risk since the initial recognition or that have low credit risk. For these assets, ECL are recognised on the gross carrying amount of the asset based on the expected credit losses that result from default events that are possible within 12 months after the reporting date. Interest is computed on the gross carrying amount of the asset. Stage 2: Lifetime ECL - not credit impaired Stage 2 includes financial assets that have had a significant increase in credit risk (SICR) since initial recognition but that do not have objective evidence of impairment. For these assets, lifetime ECL are recognised, but interest is still calculated on the gross carrying amount of the asset. Lifetime ECL are the expected credit losses that result from all possible default events over the expected life of the financial instrument. Stage 3: Lifetime ECL - credit impaired Stage 3 includes financial assets that have objective evidence of impairment at the reporting date. For these assets, lifetime ECL are recognised. For an explanation of how the Group classifies financial liabilities under IFRS 9. Refer to Note 3 (d) (ii). 76 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) (i) IFRS 9 Financial Instruments (continued) Hedge accounting The general hedge accounting requirements of IFRS 9 retain the three types of hedge accounting mechanisms in IAS 39. However, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify as hedging instruments and the types of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is no longer required. The Group has also elected to continue to apply the hedge accounting requirements of IAS 39 on adoption of IFRS 9. Transition Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below. (a) As permitted by the transitional provisions of IFRS 9, The Group elected not to restate comparative figures. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 are recognised in retained earnings and reserves as at 1 January 2018. Accordingly, the information presented for 2017 does not reflect the requirements of IFRS 9 and therefore is not comparable to the information presented for 2018 under IFRS 9. (b) The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. - - The determination of the business model within which a financial asset is held. The designation of certain investments in equity instruments not held for trading as at FVOCI. If a debt security had low credit risk at the date of initial application of IFRS 9, then the Group has assumed that credit risk on the asset had not increased significantly since its initial recognition. 77 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) (i) IFRS 9 Financial Instruments (continued) Impact of adopting IFRS 9 The impact of adopting IFRS 9 has been shown below: Closing balance under IAS 39 (31 December 2017) Impact on reclassification and remeasurements: Investment securities (equity) from available-for-sale to those measured at fair value through other comprehensive income Investment securities (equity) from available-for-sale to those measured at fair value through profit and loss Investment securities (debt) from available-for-sale to those measured at fair value through profit and loss Investment securities (funds) from available-for-sale to those measured at fair value through profit and loss Investment securities (debt) from available-for-sale to those measured at amortised cost Impact on recognition of Expected Credit Losses Expected credit losses for due from banks Expected credit losses for debt securities Expected credit losses for loan and advances Expected credit losses for off balance sheet exposures subject to credit risk. Transfer from risk reserve Opening balance under IFRS 9 on date of initial application of 1 January 2018 Retained earnings (Figures in QAR ‘000s) Fair value reserve 594,226 (44,500) 2,002 16,075 20,745 12,688 - 51,510 (31,632) (23,654) (1,315,988) (157,983) (1,529,257) 1,529,257 645,736 (2,002) (16,075) (20,745) (12,688) 32,980 (18,530) - - - - - - (63,030) 78 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) (i) IFRS 9 Financial Instruments (continued) Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 The following table is reconciliation of original measurement categories and carrying value in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets and financial liabilities as at 1 January 2018. Financial assets Original classification under IAS 39 New classification under IFRS 9 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities – debt Investment securities – debt Investment securities – debt Investment securities – debt Investment securities – equity Investment securities – equity and funds Loans and receivables Loans and receivables Loans and receivables Available-for- sale Available-for- sale Available-for- sale Held-for- trading Available-for- sale Available-for- sale Amortised cost Amortised cost Amortised cost Amortised cost FVOCI FVTPL FVTPL FVOCI FVTPL Re measurement Original carrying amount under IAS 39 (Figures in QAR ‘000s) Re classification New carrying amount under IFRS 9 7,373,918 - 10,499,348 (31,632) - - 7,373,918 10,467,716 89,121,935 (1,315,988) - 87,805,947 13,802,548 32,980 4,497,695 728,787 181,915 166,260 - - - - - - - - 13,835,528 4,497,695 728,787 181,915 2,002 168,262 252,041 (16,075) - 235,966 Financial Liabilities There were no changes to the classification and measurement of financial liabilities. 79 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) (i) IFRS 9 Financial Instruments (continued) Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 (continued) Expected credit loss / Impairment allowances: The following table reconciles the closing impairment allowance for financial assets in accordance with IAS 39 as at 31 December 2017 to the opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018. 31 December 2017 (Figures in QAR ‘000s) 1 January Re- 2018 measurement Loans and receivables under IAS 39 / financial assets at amortised cost under IFRS 9 (includes cash and cash equivalents, loans and advances to banks and loans and advances to customers) Available-for-sale debt investment securities under IAS 39/ debt financial assets at FVOCI under IFRS 9 Loan commitments and financial guarantee contracts issued 4,163,007 1,347,620 5,510,627 - 111,356 23,654 157,983 23,654 269,339 (ii) IFRS 15 ‘Revenue from Contracts with Customers’ The Group implemented this new revenue recognition standard with effect from 1 January 2018. IFRS 15 provides a principles-based approach for revenue recognition, and introduces the concept of recognising revenue for performance obligations as they are satisfied. The Group has assessed the impact of IFRS 15 and concluded that the standard has no material effect, on the consolidated financial statements of the Group. Standards issued but not yet effective A number of standards and amendments to standards are issued but not yet effective and the Group has not adopted these in the preparation of these consolidated financial statements. The below standards may have a significant impact on the Group’s consolidated financial statements, however, the Group is currently evaluating the impact of these new standards. The Group will adopt these new standards on the respective effective dates. IFRS 16 Leases IFRS 16 was issued in January 2016. It will result in almost all leases being recognized on the balance sheet by lessee, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exception are short-term and low- value leases. The group has set up a project team which has reviewed all of the group’s leasing arrangements over the last year in light of the new lease accounting rules in IFRS 16. 80 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) IFRS 16 Leases (continued) The Group expects to recognise right-of-use assets of approximately QAR 147.1 million on 1 January 2019, lease liabilities of QAR 130.4 million (after adjustments for prepayments and accrued lease payments recognised as at 31 December 2018). Overall net assets will not be impacted, and net current assets will be lower due to the presentation of a portion of the liability as a current liability. The Bank expects that net profit after tax will decrease by approximately QAR 1.2 million for 2019 as a result of adopting the new rules. Net interest income is expected to decrease by approximately QAR 9.8 million, as the interest on the lease liability will be part of interest expense, Other expenses will decrease by QAR 46.9 million as operating lease payments were included in other expenses, however depreciation will increase by QAR 38.3 million due to amortization of the right-of-use assets. The Group’s activities as a lessor are not material and hence the Bank does not expect any significant impact on the financial statements. However, some additional disclosures will be required from next year. The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year, prior to date of adoption. Further the group has used the following practical expedients on initial application: Used the Group’s previous assessment of which existing contracts are or contain, lease; - - Where the unexpired lease term of less than 12 months or leases are of low value (USD 5,000 or less), then the Group has elected to use the short term lease exemption. (b) Basis of consolidation (i) Business combination The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquire and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquire is re-measured to fair value at the acquisition date; any gains or losses arising from such re-measurement are recognised in profit or loss. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is accounted for within equity. 81 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Basis of consolidation (continued) (i) Business combination (continued) The excess of the consideration transferred the amount of any non-controlling interest in the acquired and the acquisition-date fair value of any previous equity interest in the acquired over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities. (ii) Non-controlling interests (NCI) In accordance with IFRS 3R, for each business combination, the acquirer can measure, at the acquisition date, components of NCI in the acquired business that represent ownership interests and entitle its holders to a proportionate share of the entity’s net assets in the event of liquidation at either: (a) (b) fair value on the acquisition date; or the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. NCI is measured only on initial recognition. The Group measures the NCI at fair value, including its share of goodwill. (iii) Subsidiaries Subsidiaries are entities controlled by the Group. The Group ‘controls’ an investee if it is exposed to, 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 financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. The accounting policies of subsidiaries are consistent with the accounting policies adopted by the Group. (iv) Transactions eliminated on consolidation Intra-group balances, and income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (v) Associates and joint arrangements Associates and joint arrangements are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates and joint arrangements are accounted for by the equity method of accounting and are initially recognised at cost (including transaction costs directly related to acquisition of investment in associates and joint arrangement). The Group’s investment in associates and joint arrangements includes goodwill (net of any accumulated impairment loss) identified on acquisition. 82 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Basis of consolidation (continued) (v) Associates and joint arrangements (continued) The Group’s share of its associates’ and joint arrangement’s post-acquisition profits or losses is recognised in the consolidated income statement; its share of post-acquisition reserve movements is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associates and joint arrangements equals or exceeds its interest in the associates and joint arrangements, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associates and joint arrangement. Intergroup gains on transactions between the Group and its associates and joint arrangement are eliminated to the extent of the Group’s interest in the associates and joint arrangements. Intergroup losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Associates financial statements are being prepared using similar accounting policies and period end as the parent. (vi) Funds management The Group manages and administers assets held in unit trusts and other investment vehicles on behalf of investors. The financial statements of these entities are not included in these consolidated financial statements except when the Group controls the entity. Information about the Group’s funds management is set out in Note 38. (c) Foreign currency (i) Foreign currency transactions and balances Foreign currency transactions that require settlement in a foreign currency are translated into the respective functional currencies of the operations at the spot exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The gains and losses on revaluation of foreign currency non-monetary available-for-sale investments are recognised in the consolidated statement of changes in equity. Foreign currency differences resulting from the settlement of foreign currency transactions and arising on translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. 83 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Foreign currency (continued) (ii) Foreign operations The results and financial position of all the Group’s entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: - - - Assets and liabilities for each statement of financial position presented are translated at the closing rate at the reporting date; Income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and All resulting exchange differences are recognised in other comprehensive income. Exchange differences arising from the above process are reported in equity and NCI as ‘foreign currency translation reserve”. When the Group has any foreign operation that is disposed of, or partially disposed of, such exchange differences are recognised in the consolidated income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of the net investment in the foreign operation and are recognised in other comprehensive income, and presented in the foreign exchange translation reserve in equity. (d) Financial assets and financial liabilities (i) Recognition and initial measurement The Group initially recognises loans and advances to customers, due from / to banks, customer deposits, debt securities and other borrowings on the date at which they are originated. All other financial assets and liabilities are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. (ii) Classification Financial assets – Policy applicable from 1 January 2018 On initial recognition, a financial asset is classified as measured at: amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: • The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. 84 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (ii) Classification (continued) Financial assets – Policy applicable from 1 January 2018 (continued) A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: • The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI. This election is made on an investment-by-investment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Business model assessment The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes: • • • • The stated policies and objectives for the portfolio and the operation of those policies in practice. How the performance of the portfolio is evaluated and reported to the Group’s management; The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; How managers of the business are compensated. The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. Assessment whether contractual cash flows are solely payments of principal and interest For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. 85 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (ii) Classification (continued) Assessment whether contractual cash flows are solely payments of principal and interest (continued) In assessing whether the contractual cash flows are solely payments of principal and interest (“the SPPI test”), the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers contingent events that would change the amount and timing of cash flows, prepayment and extension terms, terms that limit the Group’s claim to cash flows from specified assets and features that modify consideration of the time value of money. Reclassifications Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. The reclassification takes place from the start of the first reporting period following the change. Financial assets - applicable up to 31 December 2017 At inception or on initial recognition a financial asset is classified in one of the following categories: • • • • loans and receivables (LaR); held to maturity (HTM); available-for-sale (AFS); and at fair value through profit or loss (FVTPL), either as: held for trading; or FVTPL on initial designation Financial assets held for trading A financial asset is classified as held-for-trading if it is: • • • acquired or incurred principally for the purpose of selling or repurchasing it in the near term; on initial recognition, part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or a derivative, except for a derivative that is a designated and effective hedging instrument. Financial assets designated as at FVTPL In addition to financial assets held for trading, financial assets are classified in the FVTPL category on initial recognition, to designate such instruments as a FVTPL using the fair value option in one of the following circumstances: When doing so results in more relevant information because either: • it eliminates or significantly reduces a measurement or recognition inconsistency that would result from measuring assets or liabilities or recognising gains or losses on them on different bases (an “accounting mismatch”); or a group of financial assets or liabilities (or both) is managed and its performance is evaluated on a fair value basis in accordance with the entity’s document risk management or investment strategy and information is provided by key management personnel on this basis. • Financial liabilities The Group has classified and measured its financial liabilities at amortized cost. 86 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (iii) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) is recognised in profit or loss. From 1 January 2018, any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in the consolidated income statement on derecognition of such securities. A financial asset (in whole or in part) is derecognised where: - the rights to receive cash flows from the asset have expired; the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of ownership or (b) when it has neither transferred or retained substantially all the risks and rewards and when it no longer has control over the financial asset, but has transferred control of the asset. The Group enters into transactions whereby it transfers assets recognised, but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. Transfers of assets with retention of all or substantially all risks and rewards include, for example, securities lending and repurchase transactions. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. (iv) Modification of financial assets and liabilities Financial Assets If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value, and recalculates a new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purpose, including for the purpose of determining whether a significant increase in credit risk has occurred. 87 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (iv) Modification of financial assets and liabilities (continued) Policy applicable from 1 January 2018 If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset based on the revised cash flows of the financial assets and recognises the amount arising from adjusting the gross carrying amount as a modification gain or loss in the consolidated income statement. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income. Policy applicable up to 31 December 2017 If the terms of a financial asset were modified because of financial difficulties of the borrower and the asset was not derecognised, then impairment of the asset was measured using the premodification interest rate. Financial Liabilities The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in the consolidated income statement. (v) Offsetting Financial assets and liabilities are offset and the net amount presented in the consolidated statement of financial position when, and only when, the Group has a legal right to set off the recognised amounts and it intends either to settle 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 under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group’s trading activity. (vi) Measurement principles • Amortized 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 loss. The calculation of effective interest rate includes all fees paid or received that are an integral part of the effective interest rate (EIR). 88 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (vi) Measurement principles (continued) • Fair value measurement ‘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. The fair value of a liability reflects its non-performance risk. When available, 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 take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then 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 of the factors that market participants would take into account in 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 liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognized in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out If an asset or a liability measured at fair value has a bid price and an ask price, then 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 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. The fair value of a demand deposit is not less than the amount payable on demand, discounted from the first date on which the amount could be required to be paid. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. 89 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (vii) Impairment Policy applicable from 1 January 2018 The Group recognises loss allowances for expected credit losses (ECL) on the following financial instruments that are not measured at FVTPL: − − Financial assets that are debt instruments; and Loan commitments and financial guarantee contracts. No impairment loss is recognised on equity investments. The Group measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL: − − debt investment securities that are determined to have low credit risk at the reporting date; and other financial instruments on which credit risk has not increased significantly since their initial recognition 12-month ECL are the portion of ECL that result from default events on financial instruments that are possible with the 12 months after the reporting date. Measurement of ECL ECL are a probability-weighted estimate of credit losses. They are measured as follows: - - - - Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover. Restructured financial assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognised and ECL are measured as follows. - - If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset that are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. 90 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (vii) Impairment (continued) Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI are credit impaired. 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. Evidence that a financial asset is credit-impaired includes the following observable data: - - - - - Significant financial difficulty of the borrower or issuer; A breach of contract such as a default or past due event; The restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or The disappearance of an active market for a security because of financial difficulties. Policy applicable upto 31 December 2017 At each reporting date the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset(s), and that the loss event has an impact on the future cash flows of the asset(s) that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include significant financial difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. The Group considers evidence of impairment loss for loans and advances to customers and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and advances to customers and held-to-maturity investment securities are assessed for specific impairment. All individually significant loans and advances to customers and held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and advances to customers and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and advances to customers and held-to-maturity investment securities with similar risk characteristics. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and advances to customers. 91 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (vii) Impairment (continued) For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. For listed investments, a decline in the market value from cost by 20% or more, or a decline in the market value from cost for a continuous period of 9 months or more, are considered to be indicators of impairment. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. In subsequent periods, the appreciation of fair value of previously impaired available-for-sale equity investment securities is recorded in fair value reserve. (e) Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of three months or less from the acquisition date that are subject to an 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 includes amounts due from banks and with an original maturity of 90 days or less. (f) Loans and advances to customers Loans and advances to customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term. Loans and advances to customers are initially measured at the transaction price, which is the fair value plus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest rate method, except for the financial assets which are classified to be measured at FVTPL, which are measured at fair value with changes recognised immediately in the consolidated income statement. 92 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Investment Securities Policy applicable from 1 January 2018 The ‘investment securities’ includes: − Debt investment securities measured at amortised cost; these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; − Debt and equity investment securities mandatorily measured at FVTPL or designated as at FVTPL; these are at fair value with changes recognised immediately in profit or loss; − Debt securities measured at FVOCI; and − Equity investment securities designated at FVOCI. For debt securities measured at FVOCI, gains and losses are recognised in OCI, except for the following, which are recognised in profit or loss in the same manner as for financial assets measured at amortised cost: - - - Interest income using the effective interest method; Expected credit losses and reversals; and Foreign exchange gains and losses. When a debt security measured at FVOCI is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to consolidated income statement. The Group elects to present in OCI changes in the fair value of certain investments in equity. The election is made on an instrument by instrument basis on initial recognition and is irrevocable. Gains and losses on such equity instruments are never subsequently reclassified to consolidated income statement, including on disposal. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in consolidated income statement, unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised in OCI. Cumulative gains and losses recognised in OCI are transferred to retained earnings on disposal of an investment. Policy applicable upto 31 December 2017 Subsequent to initial recognition investment securities are accounted for depending on their classification as either ‘held to maturity’, ‘fair value through profit or loss’, or ‘available-for-sale’. (i) Held-to-maturity financial assets Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed maturity that the Group has the positive intent and ability to hold to maturity, and which were not designated as at fair value through profit or loss or as available-for-sale. Held-to-maturity investments are carried at amortised cost using the effective interest method. (ii) Held for trading financial assets A financial asset is classified as held-for-trading if it is: • • • acquired or incurred principally for the purpose of selling or repurchasing it in the near term; on initial recognition, part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or a derivative, except for a derivative that is a designated and effective hedging instrument. 93 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (g) Investment Securities (continued) (iii) Financial assets designated as at fair value through profit or loss In addition to financial assets held for trading, financial assets are classified in the FVTPL category on initial recognition, to designate such instruments as a FVTPL using the fair value option in one of the following circumstances: When doing so results in more relevant information because either: • it eliminates or significantly reduces a measurement or recognition inconsistency that would result from measuring assets or liabilities or recognising gains or losses on them on different bases (an “accounting mismatch”); or a group of financial assets or liabilities (or both) is managed and its performance is evaluated on a fair value basis in accordance with the entity’s document risk management or investment strategy and information is provided by key management personnel on this basis. • The Group has classified its investments as held for trading where such investments are managed for short term profit taking or designated certain investments as fair value through profit or loss. Fair value changes on these investments are recognised immediately in profit or loss. (iv) Available-for-sale financial investments Available-for-sale investments are non-derivative investments that are designated as available-for-sale or are not classified as another category of financial assets. Unquoted equity securities are carried at cost less impairment, and all other available-for-sale investments are carried at fair value. Interest income is recognised in profit or loss using the effective interest method. Dividend income is recognised in profit or loss when the Group becomes entitled to the dividend. Foreign exchange gains or losses on available-for- sale debt security investments are recognised in profit or loss. Other fair value changes are recognised in other comprehensive income until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognised in other comprehensive income are transferred to profit or loss. (h) Derivatives (i) Derivatives held for risk management purposes and hedge accounting Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. Derivatives held for risk management purposes are measured at fair value. The Group designates certain derivatives held for risk management as well as certain non-derivative financial instruments as hedging instruments in qualifying hedging relationships. Fair value hedges When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk. If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item, for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life. 94 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (h) Derivatives (continued) (i) Derivatives held for risk management purposes and hedge accounting (continued) Cash flow hedge When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income in the hedging reserve. The amount recognised in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of comprehensive income. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement within ‘Other gains/ (losses) – net’. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated income statement within ‘Other gains/ (losses) – net’. (ii) Derivatives held for trading purposes The Group’s derivative trading instruments includes, forward foreign exchange contracts and interest rate swaps. The Group sells these derivatives to customers in order to enable them to transfer, modify or reduce current and future risks. These derivative instruments are fair valued as at the end of reporting date and the corresponding fair value changes is taken to the profit or loss. . 95 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Property and equipment (i) Recognition and measurement Items of property and equipment are initially measured at cost and subsequently at cost less accumulated depreciation and accumulated impairment losses, if any, except for land and building which are subsequently measured at fair value. Revaluations of freehold land and buildings are carried out by an independent valuer. Net surpluses arising on revaluation are credited to a revaluation reserve, except that a revaluation increase is recognised as income to the extent that it reverses a revaluation decrease of the same asset previously recognised as an expense. A decrease as a result of a revaluation is recognised as an expense, except that it is charged directly against any related revaluation surplus to the extent that the decrease does not exceed the amount held in the revaluation surplus in respect of that same asset. On disposal the related revaluation surplus is credited to retained earnings. Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property or equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying amount of the item of property and equipment, and is recognised in other income/other expenses in profit or loss. (ii) Subsequent costs The cost of replacing a component of an item of property or equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property and equipment are recognised in profit or loss as incurred. (iii) Depreciation The depreciable amount is the cost of property and equipment, or other amount substituted for cost, less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset and is based on cost of the asset less its estimated residual value. Land and Capital work in progress are not depreciated. 96 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Property and equipment (continued) (i) Recognition and measurement (continued) The estimated useful lives for the current and comparative years are as follows: Buildings Leasehold improvements Furniture and equipment Motor vehicles 20 years 6 - 10 years 3 - 8 years 5 years (j) Impairment of goodwill and intangible assets (i) Goodwill Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the Group’s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of the non-controlling interest in the acquiree. Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed. (ii) Intangible assets The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangibles, excluding capitalised development costs, are not capitalised and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least 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 considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss as the expense category that is consistent with the function of the intangible assets. The estimated useful economic life of intangible assets with finite lives are; Brand 18 to 19 years, Customer relationship 11 to 12 years, Core deposit 13 to 16 years and Internally developed software and others 5 years. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when the asset is derecognised. 97 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (k) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. (l) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (m) Financial guarantee contract and loan commitments Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognised initially at their fair value, and this initial fair value is amortised over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment when a payment under the guarantee has become probable. Financial guarantees are included within other liabilities. (n) Employee benefits Defined contribution plans The Bank provides for its contribution to the State administered retirement fund for Qatari employees in accordance with the retirement law, and the resulting charge is included in staff cost in the consolidated income statement. The Bank has no further payment obligations once the contributions have been paid. The contributions are recognised when they are due. Defined benefit plan The Bank makes provision for end of service benefits payable to its expatriate employees on the basis of the employees’ length of service in accordance with the employment policy of the Bank and the applicable provisions of the Labour Law. This provision is included in other provisions as part of other liabilities in the consolidated statement of financial position. The expected costs of these benefits are accrued over the period of employment. Alternatif Bank, under Turkish Labour Law, is required to pay termination benefits to each employee who has completed at least one year of service and whose employment is terminated without due cause, is called up for military service, dies or who retires. There are certain transitional provisions relating to length of service prior to retirement. The amount payable consists of one month’s salary subject to a maximum threshold per employee for each year of service. There are no agreements for pension commitments other than the legal requirement as explained above. The liability is not funded, as there is no funding requirement. 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. 98 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (o) Share capital and reserves (i) Share issue costs Incremental costs directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. (ii) Dividends on ordinary shares Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank’s equity holders. (p) Interest income and expense Interest income and expense are recognised in the consolidated income statement using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses. From 1 January 2018, for the financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to their amortised cost (i.e. net f the expected credit loss provision). If the asset is no longer credit-impaired, then the calculation of interest income reverts to the gross basis The calculation of the effective interest rate includes all transaction costs and fees paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or liability. Interest income and expense include: - - - Interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest rate basis; The effective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of variability in interest cash flows, in the same period that the hedged cash flows affect interest income / expense; The ineffective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of interest rate risk; and Fair value changes in qualifying derivatives, including hedge ineffectiveness, and related hedged items in fair value hedges of interest rate risk Interest income on investment (debt) securities measured at FVOCI (2018) / available-for-sale financial investments (2017) and measured at amortised cost (2018) / held to maturity (2017) is calculated using effective interest rate method and is also included in interest income. 99 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (q) Fee and commission income and expense Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees, are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, the related loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. (r) Income from investment securities Gains or losses on the disposal of investment securities are recognised in profit or loss as the difference between fair value of the consideration received and carrying amount of the investment securities. Unrealised gains or losses on fair value changes from remeasurement of investment securities classified as held for trading or designated as fair value through profit or loss are recognised in profit or loss From 1 January 2018, any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in the consolidated income statement on derecognition of such securities (s) Dividend income Dividend income is recognised when the right to receive dividend income is established. (t) Income tax expenses Taxes are calculated based on tax laws and regulations in the countries in which the Group operates. Tax is recognized based on an evaluation of the expected tax charge/credit. Income tax and deferred tax mainly arising from Alternatif bank operations. (u) Earnings per share The Bank presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary equity holders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. (v) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined the Chief Executive Officer of the Bank as its chief operating decision maker. All transactions between operating segments are conducted on an arm’s length basis directly associated with each segment are included in determining operating segment performance. 100 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (w) Fiduciary activities The Group acts as fund manager and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, corporate and other institutions. These assets and income arising thereon are excluded from these consolidated financial statements, as they are not assets of the Group. (x) Repossessed collateral Repossessed collaterals in settlement of customers’ debts are stated under «Other assets» at carrying value of debts or fair value if lower. According to QCB instructions, the Group should dispose of any land and properties acquired in settlement of debts within a period not exceeding three years from the date of acquisition although this period can be extended with the approval of QCB. (y) Comparatives Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or disclosed with comparative information. 4. FINANCIAL RISK MANAGEMENT a) Introduction and overview The Group’s business involves taking risks in a targeted manner and managing them professionally. The core functions of the Group’s risk management are to identify all key risks for the Group, measure these risks, manage the risk positions and determine capital allocations. The Group regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice. The Group’s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Group’s financial performance. The Group defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors. Financial instruments Financial instruments comprise the Group’s financial assets and liabilities. Financial assets include cash and balances with Central banks, due from banks, loans and advances, investment securities, derivative financial assets and certain other assets and financial liabilities include customer deposits, borrowings under repurchase agreements and interbank takings, debt issued and other borrowed funds, derivative financial liabilities and certain other liabilities. Financial instruments also include rights and commitments included in off- balance sheet items. Note 3(d) describes the accounting policies followed by the Group in respect of recognition and measurement of the key financial instruments and their related income and expense. Risk management The Group derives its revenue from assuming and managing customer risk for profit. Through a robust governance structure, risk and return are evaluated to produce sustainable revenue, to reduce earnings volatility and increase shareholder value. The most important types of risk are credit risk, liquidity risk, market risk and operational risk. Credit risk reflects the possible inability of a customer to meet his/her repayment or delivery obligations. Market risk, which includes foreign currency, interest rate risks and other price risks, is the risk of fluctuation in asset and commodity values caused by changes in market prices and yields. Liquidity risk results in the inability to accommodate liability maturities and withdrawals, fund asset growth or otherwise meet contractual obligations at reasonable market rates. Operational risk is the potential for loss resulting from events involving people, processes, technology, legal issues, external events or execution or regulatory issues. 101 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) a) Introduction and overview (continued) Risk and other committees The governance structure of the Group is headed by the Board of Directors. The Board of Directors evaluates risk by engaging with the Group Chief Executive Officer and Chief Risk Officer alongwith the following Board and Management Committees: 1) 2) 3) 4) Board Risk Committee is responsible for all aspects of Enterprise Risk Management including but not restricted to credit risk, market risk, and operational risk. This committee sets the policy on all risk issues and maintains oversight of all Group risks through the Management Risk Committee. Board Audit Committee is responsible for setting the policy on all Audit issues and maintains oversight of all Bank audit issues through the Chief Internal Auditor. In addition, the committee is also be responsible for Compliance & Anti-Money Laundering. Board Executive Committee is responsible for evaluating and granting credit facilities and approval of the Group’s investment activities within authorized limits per Qatar Central Bank and Board of Directors’ guidelines. In addition, this committee is also responsible for all policies and strategies of the business and compliance of corporate Governance. Management Credit Committee is the third highest-level authority on all regular and performing Counterparty Credit Risk Exposures, after the Board of Directors and Board Executive Committee. The Special Assets Management Committee is the MCC equivalient for watch list and non performing assets to minimize risks, prevent losses, maximize recoveries and restore profits through rehabilitation, restructuring, workout, collection or legal actions. Both Committees exercise the powers as conferred upon them by the Delegation of Authority (“DoA”) as approved by the Board. 5) Management Risk Committee is the highest management authority on all risk related issues in the Group and its subsidiaries and affiliates in which it has strategic investments. This committee provides recommendations on all risk policy and portfolio issues to the Board Risk Committee. 6) Asset and Liability Committee (ALCO) is a management committee which is a decision making body relating to Asset and Liability management. (i.e. balance sheet structure, funding, pricing, hedging, setting limits etc.) Under the overall risk management framework, ALCO is a key component of risk management within the Bank. 7) Investment Committee (IC) is the decision making committee for bank’s investment activities, with a view to optimize returns, ensuring that the investment book provides a liquidity buffer for the bank and mitigate market risk attached to the nature of targeted investment. 8) Crisis Management Committee (CMC) is the authority for management of a crisis entailing, prevention, planning, testing, evaluation and maintenance to mitigate and minimize the consequences. 102 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk Credit risk is defined as the potential that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximize the Group’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Loans and advances are the largest sources of credit risk for the Group. Other sources of credit risk exist throughout the activities of the Group, including in the banking book and in the trading book, and both on and off the balance sheet. The Group also faces credit risk (or counterparty risk) in various financial instruments other than loans, including: acceptances, interbank transactions, trade financing, foreign exchange transactions, derivative instruments, and in the extension of commitments and guarantees, as well as the settlement of transactions. The Group maintains well defined, written policies and procedures for identifying, measuring, monitoring, and controlling credit risk, governing credit-granting activities in conformance with the risk appetite and limits defined by the Board. All extensions of credit are made on an arm’s length basis in accordance with the Group’s credit-granting approval process by a combination of authorized individuals, groups or credit committees, depending on the size and nature of the credit, who have the experience, knowledge and background to exercise prudent judgement in assessing, approving and managing credit risks. (i) Credit risk measurement 1. Loans and advances The Group’s aim is to maintain a sound asset portfolio by enhancing its loan mix. This is being achieved through a strategy of reducing exposure to non-core client relationships while increasing the size of the consumer portfolio comprising of consumer loans, vehicle loans, credit cards and residential mortgages, which have historically recorded very low loss rates. In measuring credit risk of loan and advances to customers and to banks at a counterparty level, the Group reflects three components (i) the ‘probability of default’ by the client or counterparty on its contractual obligations; (ii) current exposures to the counterparty and its likely future development, from which the Group derive the ‘exposure at default’; and (iii) the likely recovery ratio on the defaulted obligations (the ‘loss given default’). (i) The Group assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of counterparty. They combine statistical analysis along with the business relationship officers and credit risk officers assessment and are validated, where appropriate, by comparison with externally available data. Clients of the Group are segmented based on a 10-point rating scale (22 notches including modifiers) for the corporate book and product based application scores for the retail products. The Group’s rating scale reflects the range of default probabilities defined for each rating class. This means that, in principle, exposures migrate between classes as the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The ratings of the major rating agency are mapped to Group’s rating grades based on the long-term average default rates for each external grade. The Group uses the external ratings where available to benchmark internal credit risk assessment. Observed defaults per rating category vary year on year, especially over an economic cycle. (ii) Exposure at default is based on the amounts the Group expects to be owed at the time of default. For example, for a loan this is the face value. For a commitment, the Group includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur. (iii) Loss given default or loss severity represents the Group’s expectation of the extent of loss on a claim should default occur. It is expressed as percentage loss per unit of exposure and typically varies by type of counterparty, type and seniority of claim and availability of collateral or other credit mitigation. 103 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (i) Credit risk measurement (continued) 2. Debt securities and other bills For debt securities and other bills, external ratings such as Standard & Poor’s and Moody’s ratings or their equivalents are used by Treasury for managing the credit risk exposures. The investments in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time. (ii) Risk limit control and mitigation policies Portfolio diversification Portfolio diversification is an overriding principle, therefore, the credit policies are structured to ensure that the Group is not over exposed to a given client, industry sector or geographic area. To avoid excessive losses if any single counter-party is unable to fulfil its payment obligations, large exposure limits have been established per credit policy following the local regulations. Limits are also in place to manage exposures to a particular country or sector. These risks are monitored on an ongoing basis and subject to an annual or more frequent review, when considered necessary. Collateral In order to proactively respond to credit deterioration, the Group employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Group implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Mortgages over residential properties; • • Charges over business assets such as premises, inventory and accounts receivable; Charges over financial instruments such as debt securities and equities. Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise the credit loss, the Group will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset- backed securities and similar instruments, which are secured by portfolios of financial instruments. Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit – which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. 104 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (ii) Risk limit control and mitigation policies (continued) Credit-related commitments (continued) Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as at the reporting date. With gross-settled derivatives, the Group is also exposed to a settlement risk, being the risk that the Group honours its obligation but the counterparty fails to deliver the counter-value. (iii) Maximum exposure to credit risk before collateral held or other credit enhancements Credit risk exposures relating to assets recorded on the consolidated statement of financial position are as follows: Balances with central banks Due from banks Loans and advances to customers Investment securities - debt Other assets Total as at 31 December Other credit risk exposures are as follows: Guarantees Letters of credit Unutilised credit facilities Total as at 31 December (Figures in QAR ‘000s) 2018 2017 6,098,033 9,468,706 83,701,631 21,338,418 2,485,958 123,092,746 22,057,901 2,148,781 4,373,836 28,580,518 151,673,264 6,647,279 10,499,348 89,121,935 19,250,397 1,957,777 127,476,736 20,823,314 2,700,146 5,948,621 29,472,081 156,948,817 The above table represents a worse-case scenario of credit risk exposure to the Group, without taking account of any collateral held or other credit enhancements attached. 105 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (iv) Concentration of risks of financial assets with credit risk exposure Geographical sectors The following table breaks down the Group’s credit exposure at their carrying amounts (without taking into account any collateral held or other credit support), as categorized by geographical region. For this table, the Group has allocated exposures to regions based on the country of domicile of its counterparties. 2018 Qatar Other GCC Other Middle east (Figures in QAR ‘000s) Rest of the world Total Balances with central banks Due from banks Loans and advances to customers Investment securities - debt Other assets 4,661,557 2,740,633 69,962,068 17,132,116 1,270,204 95,766,578 - 630,516 578,185 255,032 32,531 1,496,264 1,436,476 2,405,394 11,941,650 2,489,253 921,619 19,194,392 - 3,692,163 1,219,728 1,462,017 261,604 6,098,033 9,468,706 83,701,631 21,338,418 2,485,958 6,635,512 123,092,746 2017 Qatar Other GCC Other Middle east Rest of the world Balances with central banks Due from banks Loans and advances to customers Investment securities - debt Other assets 4,547,098 3,288,722 71,388,727 15,208,688 964,455 95,397,690 - 972,305 1,214,430 783,439 26,052 2,996,226 2,100,181 2,204,001 14,154,022 2,492,389 664,289 21,614,882 - 4,034,320 2,364,756 765,881 302,981 7,467,938 Total 6,647,279 10,499,348 89,121,935 19,250,397 1,957,777 127,476,736 2018 Guarantees Letters of credit Unutilised credit facilities Qatar Other GCC Other Middle east Rest of the world Total 11,101,817 1,910,758 3,293,914 16,306,489 1,346,053 3,300 828,219 2,177,572 1,657,008 - - 1,657,008 7,953,023 234,723 251,703 22,057,901 2,148,781 4,373,836 8,439,449 28,580,518 106 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (iv) Concentration of risks of financial assets with credit risk exposure (continued) Geographical sectors (continued) 2017 Guarantees Letter of credit Unutilised credit facilities Qatar Other GCC Other Middle east (Figures in QAR ‘000s) Rest of the world Total 11,407,787 2,269,333 4,424,384 18,101,504 1,399,027 32,779 910,146 2,341,952 329,753 - - 329,753 7,686,747 398,034 614,091 8,698,872 20,823,314 2,700,146 5,948,621 29,472,081 Industry sectors The following table breaks down the Group’s credit exposure at carrying amounts before taking into account collateral held or other credit enhancements, as categorized by the industry sectors of the Group’s counterparties. Funded Government Government agencies Industry Commercial Services Contracting Real estate Consumers Other sectors Total funded Un-funded Government institutions & semi government agencies Services Commercial and others Total un-funded Total (Figures in QAR ‘000s) Gross exposure 2017 Gross exposure 2018 30,554,077 5,912,184 7,127,587 10,052,752 34,749,235 3,055,669 22,513,464 6,175,154 2,952,624 123,092,746 1,471,520 3,632,236 23,476,762 28,580,518 151,673,264 31,719,283 4,829,599 8,194,017 7,639,784 34,374,970 3,938,925 26,203,202 7,909,046 2,667,910 127,476,736 802,862 12,546,526 16,122,693 29,472,081 156,948,817 107 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (v) Credit quality The following table sets out information about the credit quality of financial assets, commitments and financial guarantees. Cash and Balances with Central Banks (Excluding Cash on Hand) and Due from Banks Investment grade - ORR 1 to 4 Sub-investment grade - ORR 5 to 7 Substandard - ORR 8 Doubtful ORR 9 Loss - ORR 10 Total - Gross Loss allowance Carrying amount 2018 (Figures in QAR ‘000s) 2017 Stage 1 Stage 2 Stage 3 Total Total 9,763,533 2,400,399 - - - 12,163,932 (619) 12,163,313 - 3,416,505 - - - 3,416,505 (13,079) 3,403,426 2018 - - - - - - - - 9,763,533 5,816,904 - - - 15,580,437 (13,698) 15,566,739 13,820,925 3,325,702 - - - 17,146,627 - 17,146,627 2017 Total Loans and advances to Customers Stage 1 Stage 2 Stage 3 Total Investment grade - ORR 1 to 4 Sub-investment grade - ORR 5 to 7 Substandard - ORR 8 Doubtful ORR 9 Loss - ORR 10 Total - Gross Loss allowance Carrying amount 51,549 12,471,424 23,228,644 46,905,521 - - - - - - 59,376,945 23,280,193 (952,227) 59,326,563 22,327,966 (50,382) 12,522,973 33,902,648 - 54,219,465 70,134,165 - 669,952 1,025,370 1,025,370 641,342 1,902,502 1,902,502 1,963,246 3,962,891 1,963,246 4,891,118 87,548,256 93,396,298 (4,274,363) (3,846,625) (2,844,016) 2,047,102 83,701,631 89,121,935 108 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (v) Credit quality (continued) Investment Securities - Debt Stage 1 Stage 2 Stage 3 2018 (Figures in QAR ‘000s) 2017 Total Total Investment grade - ORR 1 to 4 Sub-investment grade - ORR 5 to 7 Substandard - ORR 8 Doubtful ORR 9 Loss - ORR 10 Total - Gross Loss allowance Carrying amount 18,289,149 2,430,699 - - - 20,719,848 (236) 20,719,612 254,985 387,638 - - - 642,623 (23,817) 618,806 - - - - - - - - 18,544,134 2,818,337 - - - 21,362,471 (24,053) 21,338,418 Loan Commitments and financial Guarantees Stage 1 Stage 2 Stage 3 Total 2018 17,819,114 1,431,283 - - 67,055 19,317,452 (67,055) 19,250,397 2017 Total Investment grade - ORR 1 to 4 Sub-investment grade - ORR 5 to 7 Substandard - ORR 8 Doubtful ORR 9 Loss - ORR 10 Total - Gross Loss allowance Carrying amount 12,315,583 7,086,883 - - - 19,402,466 (25,711) 19,376,755 531,873 8,158,644 - - - 8,690,517 (76,308) 8,614,209 12,847,456 - 15,245,527 - 75,362 75,362 26,295 26,295 385,878 385,878 487,535 28,580,518 (103,972) 485,582 28,476,546 (1,953 ) 12,002,780 17,416,595 16,118 539 36,049 29,472,081 (751) 29,471,330 Rescheduled loans and advances to customers Rescheduled activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Restructuring policies and practices are based on indicators or criteria that, in the judgement of local management, indicate that payment will most likely continue. These policies are kept under continuous review. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts as non impaired. The accounts which are re-structed due to credit reasons in past 12months will be clasiified under stage 2. 109 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (v) Credit quality (continued) Collateral The determination of eligible collateral and the value of collateral are based on QCB regulations and are assessed by reference to market price or indices of similar assets. The Group has collateral in the form of blocked deposits, pledge of shares or legal mortgage against loans and advances to customers. Aggregate collateral for stage 1 as at 31 December 2018 is QAR 61,363 million (2017 QAR 72,114 million), stage 2 QAR 21,520 million (2017 QAR 11,379 million) and stage 3 QAR 3,670 million (2017 QAR 2,084 million). (vi) Repossessed collateral During the year, the Group acquired ownership of land and building by taking possession of collateral held as security for an amount of QAR 450 million (2017: QAR nil million). Repossessed properties proceeds are used to reduce the outstanding indebtedness and are sold as soon as practicable. Repossessed property is classified in the consolidated statement of financial position within other assets. (vii) Write-off policy The Group writes off a loan or an investment in debt security balance, and any related allowances for impairment losses, when Group Credit determines that the loan or security is uncollectible. QCB approval is required for such write off when the amount to be written off exceeds Qatar Riyal hundred thousand. This determination is made after considering information such as the occurrence of significant changes in the borrower’s/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardized loans, write-off decisions generally are based on a product-specific past due status. The amount written off during the year was QAR 2,819 million (2017: QAR 702 million). (viii) Inputs, assumptions and techniques used for estimating impairment Significant increase in credit risk When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis including internal credit risk grading system, external risk ratings, where available, delinquency status of accounts, credit judgement and, where possible, relevant historical experience. The Group may also determine that an exposure has undergone a significant increase in credit risk based on particular Qualitative indicators that it considers are indicative of such and whose effect may not otherwise be fully reflected in its Quantitative analysis on a timely basis. 110 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (viii) Inputs, assumptions and techniques used for estimating impairment (continued) In determining whether credit risk has increased significantly since initial recognition following criteria are considered. i) Two notches downgrade for ratings investment grade rating or one notch downgrade for ratings non investment grade ratings Facilities restructured during previous twelve months ii) iii) Facilities overdue by 30 days as at the reporting date Credit risk grades Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. These factors vary depending on the nature of the exposure and the type of borrower. Exposures are subject to on-going monitoring, which may result in an exposure being moved to a different credit risk grade. Generating the term structure of Probability of Default (PD) The Group employs statistical models to analyse the data collected and generate estimates of PD of exposures and how these are expected to change as a result of the passage of time. This analysis includes the identification and calibration of relationships between changes in default rates and changes in key macro-economic factors, across various geographies in which the Group has exposures. Renegotiated financial assets The contractual terms of a loan may be modified for a number of reasons, including changing market conditions, customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value. Where possible, the Group seeks to restructure loans rather than to take possession of collateral, if available. This may involve extending the payment arrangements and documenting the agreement of new loan conditions. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The accounts which are restructured due to credit reasons in past 12 months will be classified under Stage 2. Definition of default The Group considers a financial asset to be in default when: - the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or the borrower is past due more than 90 days on any material credit obligation to the Group; or the borrower is rated 9 or 10. - - In assessing whether a borrower is in default, the Group also considers indicators that are: - - quantitative – e.g. overdue status and non-payment on another obligation of the same issuer to the Group; and based on data developed internally and obtained from external sources. Inputs into the assessment of whether a financial instrument is in default and their significance may vary over time to reflect changes in circumstances. The definition of default largely aligns with that applied by the Group for regulatory capital purposes. 111 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (viii) Inputs, assumptions and techniques used for estimating impairment (continued) Measurement of ECL The key inputs into the measurement of ECL are the term structure of the following variables: - - - probability of default (PD); loss given default (LGD); and exposure at default (EAD). These parameters are generally derived from internally developed statistical models and other historical data. They are adjusted to reflect forward-looking information as described above. PD estimates are estimates at a certain date, which are calculated based on statistical rating models. These statistical models are primarily based on internally compiled data comprising both quantitative and qualitative factors and are supplemented by external credit assessment data where available. LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the forecasted collateral value and recovery costs of any collateral that is integral to the financial asset. LGD estimation icludes: 1) Cure Rate: Defined as the ratio of accounts which have fallen to default and have managed to move backward to the performing accounts. 2) Recovery Rate: Defined as the ratio of liquidation value to market value of the underlying collateral at the time of default would also account for expected recovery rate from a general claim on the individual’s assets for the unsecured portion of the exposure. Discounting Rate: Defined as the opportunity cost of the recovery value not being realized on the day of default adjusted for time value. EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract including amortisation. The EAD of a financial asset is its gross carrying amount. For lending commitments and financial guarantees, the EAD includes the amount drawn, as well as potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward- looking forecasts. 112 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (b) Credit risk (continued) (viii) Inputs, assumptions and techniques used for estimating impairment (continued) Movement in ECL Opening Balance as at 1 January 2018 (After Day 1 impact) Due from banks and balances with central banks Loans and advances to customers Investment Securities (Debt) Loan Commitments and Financial Guarantees ECL Charge for the Period (net) Due from banks and balances with central banks Loans and advances to customers Investment Securities (Debt) Loan Commitments and Financial Guarantees Write offs / Transfer Due from banks and balances with central banks Loans and advances to customers Investment Securities (Debt) Loan Commitments and Financial Guarantees Exchange differences Due from banks and balances with central banks Loans and advances to customers Investment Securities (Debt) Loan Commitments and Financial Guarantees Closing Balance - as at 31 December 2018 Due from banks and balances with central banks Loans and Advances to Customers Investment Securities (Debt) Loan Commitments and Financial Guarantees Stage 1 Stage 2 (Figures in QAR ‘000s) Total Stage 3 31,575 (40,557) 20,497 50,301 61,816 (30,956) 91,240 (20,261) (27,590) 12,433 - (301) - - (301) - - - 3,000 3,000 619 50,382 236 25,711 76,948 57 1,356,545 3,157 107,682 1,467,441 13,022 (291,752) 20,660 (31,374) (289,444) - 4,163,007 - 111,356 4,274,363 - 1,601,989 - (15,156) 1,586,833 31,632 5,478,995 23,654 269,339 5,803,620 (17,934) 1,401,477 399 (74,120) 1,309,822 - 6,919 - - - (2,778,834) - (90,965) 6,919 (2,869,799) - (2,772,216) - (90,965) (2,863,181) - (119,485) - - (119,485) 13,079 952,227 23,817 76,308 1,065,431 - (142,146) - (3,282) (145,428) - (261,631) - (282) (261,913) - 2,844,016 - 1,953 2,845,969 13,698 3,846,625 24,053 103,972 3,988,348 113 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk Liquidity risk is the risk that the Group is unable to meet its obligations when they fall due as a result of e.g. customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows, such as debt maturities or margin calls for derivatives etc. Such outflows would deplete available cash resources for client lending, trading activities and investments. In extreme circumstances, lack of liquidity could result in reductions in the consolidated statement of financial position and sales of assets, or potentially an inability to fulfil lending commitments. The risk that the Group will be unable to do so is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to, credit events, merger and acquisition activity, systemic shocks and natural disasters. (i) Management of liquidity risk The management of liquidity risk is governed by the Group’s liquidity policy. The primary objective of liquidity risk management; over which ALCO has oversight, is to provide a planning mechanism for unanticipated changes in the demand or needs for liquidity created by customer behaviour or abnormal market conditions. ALCO emphasises the maximisation and preservation of customer deposits and other funding sources. ALCO also monitors deposit rates, levels, trends and significant changes. Deposit marketing plans are regularly reviewed for consistency with the liquidity policy requirements. ALCO has in place a contingency plan, which is periodically reviewed. The Group’s ability to raise wholesale and/or long term funding at competitive costs is directly impacted by the Bank’s credit ratings, which are as follows: Moody’s: Fitch : Standard & Poor’s: Long Term A3, Short Term P2, financial strength Ba1 and outlook Stable. Long Term A, Short Term F1, financial strength bbb- and outlook Stable. Long Term BBB+, Short Term A-2, financial strength bbb- and outlook stable (ii) Exposure to liquidity risk The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose, net liquid assets are considered as including cash and cash equivalents and investment grade debt securities for which there is an active and liquid market less any deposits from banks, debt securities, other borrowings and commitments maturing within the next month. A similar, but not identical, calculation is used to measure the Group’s compliance with the liquidity limit established by the Group’s lead regulator, QCB under the heading ‘Liquidity adequacy ratio’ (LAR). The minimum ratio limit set by QCB is 100%. Following table sets out the LAR position of the Group during the year as follows: 2018 (%) 106.60 105.57 111.84 95.06 2017 (%) 100.41 108.27 114.88 93.72 At 31 December Average for the year Maximum for the year Minimum for the year 114 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (iii) Maturity analysis The following table sets out the maturity profile of the Group’s assets and liabilities. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at 31 December to the contractual maturity date and do not take account of the effective maturities as indicated by the Group’s deposit retention history and the availability of liquid funds. Management monitors the maturity profile to ensure that adequate liquidity is maintained. Carrying amount Demand / within 1 month 1-3 months 3 months – 1 year Subtotal 1 year 1-5 years More than 5 years No Maturity (Figures in QAR ‘000s) 2018 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Other assets Total Due to banks Customer deposits Debt securities Other borrowings Other liabilities Total Difference 6,716,058 3,159,244 - - 3,159,244 - 9,468,706 5,451,328 2,742,734 1,201,950 9,396,012 72,694 - - 83,701,631 5,627,287 2,368,452 6,977,516 14,973,255 23,776,426 44,951,950 3,556,814 - - 22,107,807 253,067 2,096,310 - - - 2,412,492 2,665,559 8,970,428 9,702,429 769,391 - - - - 2,096,310 2,559,591 8,420,607 - 1,248,682 135,070,710 15,739,608 - 211,343 - 301,085 5,322,529 10,893,043 - 1,761,110 2,559,591 4,063,239 31,955,180 35,415,806 54,654,379 13,045,345 - 2,596,258 - - 2,352,838 13,534,260 487,244 1,496,057 1,054,256 13,820,543 71,321,450 15,998,539 8,301,828 5,628,930 12,403,120 2,437,618 7,612,664 67,090,821 12,036,801 41,519,760 7,890,211 7,112,408 290,559 3,474,305 1,806,218 172,030 5,432,176 659,932 3,717,988 115,071,290 53,313,001 18,924,655 24,052,977 96,290,633 19,999,420 (37,573,393) (13,602,126) (13,159,934) (64,335,453) 1,164,040 4,230,629 6,846,644 4,827,523 196,754 17,265,590 18,150,216 - 253,383 - - - 1,261,684 - - - - 1,515,067 - 53,139,312 13,045,345 115 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (iii) Maturity analysis (continued) Carrying amount Demand / within 1 month 1-3 months 3 months – 1 year Subtotal 1 year More than 1-5 years 5 years No Maturity (Figures in QAR ‘000s) 2017 Cash and balances with central bank Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Others assets Total Due to banks Customer deposits Debt securities Other borrowings Other liabilities Total Difference 7,373,918 3,792,896 - - 3,792,896 - 10,499,348 7,457,612 947,049 1,985,487 10,390,148 109,200 - - 89,121,935 9,205,960 2,509,831 9,340,865 21,056,656 23,559,354 44,505,925 3,581,022 - - 19,629,246 22,903 1,278,827 1,649,125 2,950,855 7,700,892 8,598,650 378,849 2,088,158 - - - - - - 2,088,158 2,287,100 7,449,347 138,449,052 - 1,095,720 21,575,091 - 196,275 4,931,982 - 218,788 13,194,265 - 1,510,783 39,701,338 - 2,187,163 33,556,609 - - 53,104,575 2,287,100 3,751,401 12,086,530 7,601,509 13,515,872 45,510,147 77,633,333 103,120 11,604,890 411,793 9,303,365 2,540,501 5,370,073 56,167,070 117,427,533 21,021,519 (34,591,979) 3,082,910 15,293,079 - 553,656 567,012 19,496,657 (14,564,675) 1,109,864 13,042,771 1,734,223 6,063,877 1,929,939 23,880,674 (10,686,409) 11,794,283 73,845,997 1,837,343 7,029,326 5,037,452 99,544,401 (59,843,063) 1,468,206 3,787,336 8,510,390 2,274,039 332,621 16,372,592 17,184,017 253,383 - 1,257,157 - - 1,510,540 51,594,035 - - - - - - 12,086,530 116 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (iv) Maturity analysis (financial liabilities and derivatives) The table below summarises the maturity profile of the Group’s financial liabilities at 31 December based on contractual undiscounted repayment obligations. Gross undiscounted cash flows Carrying amount Less than 1 month 1-3 months 3 months – 1 year 1-5 years More than 5 years (Figures in QAR ‘000s) 13,820,543 71,321,450 15,998,539 8,301,828 14,414,653 7,765,249 73,020,105 42,493,340 330,178 17,739,977 212,890 9,004,514 109,442,360 114,179,249 50,801,657 2,392,305 13,871,045 514,117 1,545,051 2,674,298 12,332,884 7,445,342 2,038,727 18,322,518 24,491,251 1,283,573 4,322,836 7,543,965 5,207,846 299,228 - 1,906,375 - 18,358,220 2,205,603 Gross undiscounted cash flows Carrying amount Less than 1 month 1-3 months 3 months – 1 year 1-5 years More than 5 years 13,515,872 77,633,333 11,604,890 9,303,365 112,057,460 13,983,949 78,968,189 12,735,145 9,804,820 115,492,103 7,781,117 46,286,513 109,489 413,938 54,591,057 1,284,691 3,126,136 13,272,299 15,555,963 1,779,319 - 568,652 6,344,175 19,250,751 22,680,484 1,487,665 3,853,414 9,435,119 2,478,055 17,254,253 304,340 - 1,411,218 - 1,715,558 2018 Non-derivative financial liabilities Due to banks Customer deposits Debt securities Other borrowings Total liabilities 2017 Non-derivative financial liabilities Due to banks Customer deposits Debt securities Other borrowings Total liabilities 117 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (iv) Maturity analysis (financial liabilities and derivatives) (continued) Derivative financial instruments: Generally, forward foreign exchange contracts are settled on a gross basis and interest rate swaps are settled on a net basis. 2018 Derivatives Held for Trading: Forward foreign exchange contracts: Outflow Inflow Interest rate swaps: Outflow Inflow Derivatives Held as Fair Value Hedges: Interest rate swaps: Outflow Inflow Derivatives Held as Cash Flow Hedges: Forward foreign exchange contracts: Outflow Inflow Interest rate swaps: Outflow Inflow Total Outflows Total inflows Total Up to 1 Year (Figures in QAR ‘000s) More than 5 years 1 - 5 years (21,165,182) 21,422,087 (16,903,370) 17,093,721 (4,234,125) 4,242,510 (291,328) 322,395 (7,889) 16,552 (274,028) 295,184 (27,687) 85,856 (9,411) 10,659 (354,777) 310,303 (26,752) 23,704 (91,194) 77,147 (236,831) 209,452 (1,973) 1,692 (165) 106 (1,808) 1,586 - - (45,252) 40,968 (21,858,512) 22,097,445 (36,898) 34,285 (16,975,074) 17,168,368 (8,354) 6,683 (4,609,509) 4,623,110 - - (273,929) 305,967 118 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (iv) Maturity analysis (financial liabilities and derivatives) (continued) Derivative financial instruments: Generally, forward foreign exchange contracts are settled on a gross basis and interest rate swaps are settled on a net basis. 2017 Derivatives Held for Trading: Forward foreign exchange contracts Outflow Inflow Interest rate swaps: Outflow Inflow Derivatives Held as Fair Value Hedges: Interest rate swaps: Outflow Inflow Derivatives Held as Cash Flow Hedges: Forward foreign exchange contracts: Outflow Inflow Interest rate swaps: Outflow Inflow Total Outflows Total inflows Total Up to 1 Year (Figures in QAR ‘000s) More than 5 years 1 - 5 years (18,009,204) 17,896,328 (14,957,505) 14,792,197 (3,013,671) 3,008,141 (103,935) 114,072 (20,749) 22,739 (63,115) 68,980 (38,028) 95,990 (20,071) 22,353 (358,276) 189,245 (20,805) 11,385 (81,971) 44,081 (255,500) 133,779 - - - - - - - - (18,471,415) 18,199,645 - - (14,999,059) 14,826,321 - - (3,158,757) 3,121,202 - - - - (313,599) 252,122 119 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (v) Off-balance sheet items 2018 Loan commitments Guarantees and other financial facilities Capital commitments Total 2017 Loan commitments Guarantees and other financial facilities Capital commitments Total Below 1 Year 1,968,142 12,816,899 157,569 14,942,610 (Figures in QAR ‘000s) Total Above 1 Year 2,405,694 11,389,783 - 13,795,477 4,373,836 24,206,682 157,569 28,738,087 Below 1 Year Above 1 Year Total 1,148,931 12,400,537 178,472 13,727,940 4,799,690 11,122,923 - 15,922,613 5,948,621 23,523,460 178,472 29,650,553 (d) Market risks The Group takes exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates and equity prices. The Group separates exposures to market risk into either trading or non-trading portfolios and by product type. The market risks arising from trading and non-trading activities are concentrated in Group Treasury and monitored by two teams separately. Regular reports are submitted to the Board of Directors and heads of each business unit. Trading portfolios include those positions arising from market-making transactions where the Group acts as principal with clients or with the market. Non-trading portfolios primarily arise from the interest rate management of the entity’s retail and commercial banking assets and liabilities. Non-trading portfolios also consist of foreign exchange and equity risks arising from the Group’s held-to-maturity and available-for-sale investments. (i) Management of market risks Overall authority for market risk is vested in ALCO. Group Market Risk is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day-to-day review of their implementation. 120 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (d) Market risks (continued) (i) Management of market risks (continued) The Group’s proprietary investments are managed according to the Group’s internal investment policy, which has been approved by the Board of Directors and drafted in accordance with the Qatar Central Bank guidelines. The Group’s trading activities are conducted by Treasury and Investments Division. These activities are subject to business line guidelines and policies. The Group employs several techniques to measure and control activities including sensitivity analysis, position limits and risk based limits. Investment proposals are approved at the Investment Committee and decisions driven by the investment strategy, which is developed by the business line under ALCO oversight and approved by the Board. (ii) Exposure to interest rate risk – non – trading portfolio The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for repricing bands. ALCO is the monitoring body for compliance with these limits and is assisted by Group Treasury in its day-to-day monitoring activities. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily by Group Treasury. The Asset and Liability Management (“ALM”) process, managed through ALCO, is used to manage interest rate risk associated with non-trading financial instruments. Interest rate risk represents the most significant market risk exposure to the Group’s non-trading financial instruments. The Group’s goal is to manage interest rate sensitivity so that movements in interest rates do not adversely affect net interest income. Interest rate risk is measured as the potential volatility to the net interest rate income caused by changes in market interest rates. The Group typically manages the interest rate risk of its non-trading financial instruments by segmenting these assets and liabilities into two broad portfolios: non–discretionary and discretionary. The non-discretionary portfolio consists of the Group’s customer driven loans and deposit positions and securities required to support regulatory requirements. To manage the resulting interest rate sensitivity of the Group’s non- discretionary portfolio, the Group uses a discretionary portfolio of securities, long dated deposits, inter-bank takings and placements, and when warranted, derivatives. Strategically positioning the discretionary portfolio, the Group largely manages the interest rate sensitivity in the non-discretionary portfolio. The following table summarises the interest sensitivity position at year end, by reference to the re-pricing period or maturity of the Group’s assets and liabilities. 121 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (d) Market risks (continued) (ii) Exposure to interest rate risk – non – trading portfolio (continued) A summary of the Group’s interest rate gap position on non-trading balances are as follows: Repricing in: Carrying amount Less than 3 months 3-12 months 1-5 years More than 5 years (Figures in QAR ‘000s) Non- interest sensitive Effective interest rate % 6,716,058 3,086,476 - - 9,468,706 8,170,614 1,225,292 72,800 - - 3,629,582 - 83,701,631 39,381,081 37,973,604 4,159,870 471,349 1,715,727 22,107,807 1,602,503 3,436,848 7,570,881 8,728,185 769,390 2,096,310 2,559,591 8,420,607 - - - - - - - - - - - - 2,096,310 2,559,591 8,420,607 135,070,710 52,240,674 42,635,744 11,803,551 9,199,534 19,191,207 (13,820,543) (71,321,450) (15,998,539) (8,301,828) (5,628,930) (19,999,420) (135,070,710) (10,933,365) (43,626,394) (229,825) (1,768,303) - - (56,557,887) (2,887,178) (12,036,801) (2,321,851) (6,056,110) - - (23,301,940) - (4,230,677) (12,185,179) (477,415) - - (16,893,271) - - (1,261,684) - - - (1,261,684) - (11,427,578) - - (5,628,930) (19,999,420) (37,055,928) - 2.72% 6.18% 4.24% - - - - 4.47% 3.53% 2.93% 4.07% - - - - - (4,317,213) 19,333,804 (5,089,720) 7,937,850 (17,864,721) (4,317,213) 15,016,591 9,926,871 17,864,721 - - 2018 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Property and equipment and all other assets Due to banks Customer deposits Debt securities Other borrowings Other liabilities Equity Interest rate sensitivity gap Cumulative Interest rate sensitivity gap 122 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (d) Market risks (continued) (ii) Exposure to interest rate risk – non – trading portfolio (continued) A summary of the Group’s interest rate gap position on non-trading balances are as follows: Repricing in: Carrying amount Less than 3 months 3-12 months 1-5 years More than 5 years Non- interest sensitive Effective interest rate % (Figures in QAR ‘000s) 7,373,918 3,701,691 - 10,499,348 8,513,861 1,985,487 - - - - 3,672,227 - 89,121,935 44,082,741 37,244,372 5,048,210 589,675 2,156,937 - 2.35% 5.27% 19,629,246 1,158,654 4,182,396 6,282,285 7,627,058 378,853 3.38% 2,088,158 2,287,100 7,449,347 - - - - - - - - - - - - 2,088,158 2,287,100 7,449,347 138,449,052 57,456,947 43,412,255 11,330,495 8,216,733 18,032,622 (13,515,872) (77,633,333) (11,604,890) (9,303,365) (5,370,073) (21,021,519) (138,449,052) (12,601,973) (49,353,702) - (1,828,448) - - (63,784,123) (913,899) (13,042,772) (226,386) (6,848,718) - - (21,031,775) - (3,787,409) (10,121,348) (626,199) - - (14,534,956) - - (1,257,156) - - - (1,257,156) - (11,449,450) - - (5,370,073) (21,021,519) (37,841,042) - - (6,327,176) 22,380,480 (3,204,461) 6,959,577 (19,808,420) (6,327,176) 16,053,304 12,848,843 19,808,420 - - - - - 2.73% 2.67% 4.42% 1.37% - - - - - 2017 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Property and equipment and all other assets Due to Bank Customer deposits Debt securities Other borrowings Other liabilities Equity Interest rate sensitivity gap Cumulative Interest rate sensitivity gap 123 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (d) Market risks (continued) (ii) Exposure to interest rate risk – non – trading portfolio (continued) Sensitivity analysis The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered on a monthly basis include a 50 basis point (bp) parallel fall or rise in all yield curves worldwide and a 50 bp rise or fall in the greater than 12-month portion of all yield curves. An analysis of the Group’s sensitivity to an increase or decrease in market interest rates, assuming no a symmetrical movement in yield curves and a constant financial position, is as follows: Sensitivity of net interest income 2018 At 31 December Average for the year 2017 At 31 December Average for the year Sensitivity to reported Fair value reserve in equity of interest rate movements 2018 At 31 December Average for the year 2017 At 31 December Average for the year (Figures in QAR ‘000s) 50 bp parallel decrease 50 bp parallel increase 68,654 65,555 (68,654) (65,555) 59,726 64,471 (59,726) (64,471) 50 bp parallel increase 50 bp parallel decrease 9 720 1,432 1,770 (9) (720) (1,432) (1,770) Interest rate movements affect reported equity in the following ways: • Retained earnings arising from increases or decreases in net interest income and the fair value changes reported in profit or loss; and Fair value reserves arising from increases or decreases in fair values of FVOCI financial instruments are reported directly in other comprehensive income. • Overall non-trading interest rate risk positions are managed by Group Treasury, which uses investment securities, advances to banks, deposits from banks and derivative instruments to manage the overall position arising from the Group’s non-trading activities. 124 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (d) Market risks (continued) (iii) Exposure to other market risks – non-trading portfolios Foreign currency transactions The Group monitors any concentration risk in relation to any individual currency in regard to the translation of foreign currency transactions and monetary assets and liabilities. The table shows the net foreign currency exposure by major currencies at the end of the reporting period along with the sensitivities if there were to be a change in the currency exchange rate. Net foreign currency exposure: Pounds Sterling Euro USD Other currencies 5% increase in currency exchange rate Pound Sterling Euro USD Other currencies Increase (decrease) in profit or loss 2018 2017 (7,199) (154,874) (625,983) 99,876 8,302 (51,324) (658,575) 196,372 (Figures in QAR ‘000s) 2018 2017 (143,989) (3,097,484) (12,519,651) 1,997,530 166,043 (1,026,485) (13,171,504) 3,927,455 (Figures in QAR ‘000s) Increase (decrease) in fair value reserve 2018 - - 307 - 2017 31 66 8,401 749 Open exchange position in other currencies represents Group’s investment in associates and a joint arrangement denominated in OMR and AED which are pegged with USD. Equity price risk Equity price risk is the risk that the fair value of equities decreases as a result of changes in the equity indices and individual stocks. The non-trading equity price risk exposure arises from equity securities classified as fair value through other comprehensive income. A 10 per cent increase in the Qatar Exchange market index at 31 December 2018 would have increased equity by QAR nil (2017: QAR 8 million). An equivalent decrease would have resulted in an equivalent but opposite impact. 125 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (d) Market risks (continued) (iii) Exposure to other market risks – non-trading portfolios (continued) Equity price risk (continued) The Group is also exposed to equity price risk and the sensitivity analysis there of is as follows: Increase / (decrease) in other comprehensive income: Qatar Exchange (Figures in QAR ‘000s) 2018 2017 - 7,509 The above analysis has been prepared on the assumption that all other variables such as interest rate, foreign exchange rate, etc. are held constant and is based on historical correlation of the equity securities to the relevant index. Actual movement may be different from the one stated above and is subject to impairment assessment at the end of each reporting period. (e) Operational risks Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s involvement with financial instruments, including processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid Control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address Operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Group standards for the management of operational risk in the following areas: • • • • • • • • • • requirements for appropriate segregation of duties, including the independent authorisation of transactions; requirements for the reconciliation and monitoring of transactions; compliance with regulatory and other legal requirements; documentation of controls and procedures; requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified; requirements for the reporting of operational losses and proposed remedial action; development of contingency plans; training and professional development; ethical and business standards; and risk mitigation, including insurance where this is effective. 126 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (f) Capital management Regulatory capital The Group’s policy is to maintain a strong capital base so as to ensure investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on equity holders’ return is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. The Group and its individually regulated operations have complied with all externally imposed capital requirements throughout the period. The Capital Adequacy Ratio (CAR) of the group is calculated in accordance with the Basel Committee guidelines as adopted by Qatar Central Bank (QCB). From 1st January 2014 QCB adopted Basel III guidelines for CAR calculation. The Group’s regulatory capital position under Basel III QCB regulations as at 31 December was as follows: Common Equity Tier 1 (CET 1) Capital Additional Tier 1 Capital Tier 1 Capital Tier 2 Capital Total Eligible Capital Risk Weighted Assets for Credit Risk Risk Weighted Assets for Market Risk Risk Weighted Assets for Operational Risk Total Risk Weighted Assets Total Capital Ratio (Figures in QAR ‘000s) Basel III 2017 Basel III 2018 11,898,725 3,962,963 15,861,688 1,772,890 17,634,578 13,044,099 3,961,712 17,005,811 1,799,160 18,804,971 105,121,959 1,494,331 7,032,731 113,649,021 108,224,349 2,454,384 6,285,206 116,963,939 15.52% 16.08% 127 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (f) Capital management (continued) CET 1 ratio Without Capital Conservation buffer CET 1 ratio Including Capital Conservation buffer Tier 1 capital ratio including capital conservation buffer Tier 1 and 2 capital ratio including capital conservation buffer Total capital including capital conservation buffer and DSIB’ buffer Total capital including conservation buffer, DSIB’ buffer and ICAAP Pillar II capital charge 2018 Actual Minimum QCB limit 2017 Actual Minimum QCB limit 10.47% 6.00% 11.15% 6.00% 10.47% 8.50% 13.96% 10.50% 11.15% 8.50% 14.54% 10.50% 15.52% 12.50% 16.08% 12.50% 15.52% 13.00% 16.08% 12.875% 15.52% 14.00% 16.08% 13.875% Had the Group not adopted IFRS9, total capital adequacy ratio and Common equity tier 1 (CET 1) capital adequacy ratio would have been as follows: CET1 Ratio Total Capital Ratio 5. USE OF ESTIMATES AND JUDGMENTS Basel III 2018 10.47 % 15.07 % (a) Key sources of estimation uncertainty The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. (i) Allowances for credit losses Policy applicable from 1 January 2018 Assessment of whether credit risk on the financial assets has increased significantly since initial recognition and incorporation of forward looking information in the measurement of ECL, refer to note 4(b)(ix). 128 Notes to the Consolidated Financial Statements continued 5. USE OF ESTIMATES AND JUDGMENTS (continued) (a) Key sources of estimation uncertainty (continued) Policy applicable upto 31 December 2017 (ii) Determing fair values The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques as described in the accounting policy. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Where the fair values of financial assets and financial liabilities cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of liquidity and model inputs such as correlation and volatility for longer dated derivatives. Goodwill impairment Goodwill is tested annually for impairment; assets are grouped together into smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to the CGU which is expected to benefit from the synergies of the combination. The ‘recoverable amount’ of an asset or CGU is the greater of its value in use and its fair value less costs to sell. ‘Value in use’ is based on the estimated future cash flows, 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 or CGU. An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognized in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. (b) Critical accounting judgements in applying the Group’s accounting policies (i) Valuation of financial instruments The Group’s accounting policy on fair value measurements is discussed in the significant accounting policies section. The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. • • Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments. Level 2: Inputs other than quoted prices included within Level1 that are observable either directly (i.e.as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. 129 Notes to the Consolidated Financial Statements continued 5. USE OF ESTIMATES AND JUDGMENTS (continued) (b) Critical accounting judgements in applying the Group’s accounting policies (continued) (i) Valuation of financial instruments (continued) • Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are value based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using valuation techniques. Valuation techniques include net present value and discounted cash flow models and comparison to similar instruments for which market observable prices exist. The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorised: 31-Dec-2018 (Audited) Derivative assets Investment securities Derivative liabilities 31-Dec-2017 (Audited) Derivative assets Investment securities Derivative liabilities Level 1 Level 2 - 35,825 35,825 - - - 2,556,279 2,556,279 - - 371,716 4,891,639 5,263,355 353,499 353,499 462,483 16,874,981 17,337,464 355,614 355,614 There have been no transfers between level 1 and level 2 Reconcilation of level 3 investments are as follows : Balance at 1 January Cost movement Profit and loss movement Fair value reserve movement Balance at 31 December 130 (Figures in QAR ‘000s) Carrying amount Level 3 - 164,951 164,951 - - - 84,107 84,107 - - 371,716 5,092,415 5,464,131 353,499 353,499 462,483 19,515,367 19,977,850 355,614 355,614 2018 2017 84,107 113,879 (23,793) (9,242) 164,951 122,160 (61,041) 22,988 - 84,107 Notes to the Consolidated Financial Statements continued 5. USE OF ESTIMATES AND JUDGMENTS (continued) (b) Critical accounting judgements in applying the Group’s accounting policies (continued) (ii) Financial asset and liability classification Policy applicable from 1 January 2018 Assessment of the business model within which the assets are held and assessment of whether the contractual terms of the financial asset are solely payments of principal and interest on the principal amount outstanding. Refer to note 3 (d) (ii) for further information. Policy applicable up to 31 December 2017 The Group’s accounting policies provide scope for assets and liabilities to be designated in inception into different accounting categories in certain circumstances: - - - In classifying financial assets or liabilities as trading, the Group has determined that it meets the description of trading assets and liabilities set out in the accounting policies. In designating financial assets at fair value through profit or loss, the Group has determined that it has met one of the criteria for this designation set out in the accounting policies. In classifying financial assets as held – to – maturity, the Group has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by the accounting policies. Details of the Group’s classification of financial assets and liabilities are given in Note 7. (iii) Qualifying hedge relationships In designating financial instruments in qualifying hedge relationships, the Group has determined that it expects the hedges to be highly effective over the period of the hedging relationship. (iv) Impairment of investments in equity and debt securities . Policy applicable from 1 January 2018 Assessment of whether credit risk on the financial asset has increased significantly since initial recognition and incorporation of forward –looking information in the measurement of ECL. Refer to note 4 (b) (viii) Inputs, assumptions and techniques used for estimating impairment of financial assets for more information. Policy applicable up to 31 December 2017 Investments in equity and debt securities are evaluated for impairment on the basis described in the significant accounting policies section. (v) Useful lives of property and equipment The Group’s management determines the estimated useful life of property and equipment for calculating depreciation. This estimate is determined after considering the expected usage of the asset, physical wear and tear, technical or commercial obsolescence. (vi) Useful life of intangible assets The Group’s management determines the estimated useful life of its intangible assets for calculating amortization. This estimate is determined after considering the expected economic benefits from the use of intangible assets. 131 Notes to the Consolidated Financial Statements continued 5. USE OF ESTIMATES AND JUDGMENTS (continued) (b) Critical accounting judgements in applying the Group’s accounting policies (continued) (vii) Fair value of land and buildings The fair value of land and building is determined by valuations from an external professional real estate valuer using recognised valuation techniques and the principles of IFRS 13 “Fair Value Measurement”. 6. OPERATING SEGMENTS For management purposes, the Group is divided into four operating segments, which are based on business lines, together with its associates and joint arrangement companies, as follows: Commercial Bank: 1. Wholesale Banking provides an extensive range of conventional funded and non-funded credit facilities, demand and time deposit services, currency exchange facilities, interest rate swaps and other derivative trading services, loan syndication and structured financing services to corporate, commercial and multinational customers. Money market funds and proprietary investment portfolio are also managed by this operating segment. 2. Retail Banking provides personal current, savings, time and investment account services, credit card and debit card services, consumer and vehicle loans, residential mortgage services and custodial services to retail and individual customers. Subsidiaries: 3. Alternatif Bank: A subsidiary that provides banking services through its branch network in Turkey. Alternatif Bank also has its subsidiaries. The Group reported Alternatif Bank group result under this operating segment. 4. Other principal subsidiaries: a) Commercialbank Financial Services L.L.C. provides brokerage services in the State of Qatar. b) CBQ Finance Limited, a SPV used for debt issuance for the bank, Unallocated assets, liabilities and revenues are related to certain central functions and non-core business operations. (For example, Group headquarters, staff apartments, common property & equipment, cash functions and development projects and related payables, net of intra-group transactions). Associates and joint arrangement Companies – includes the Group’s strategic investments in the National Bank of Oman in the Sultanate of Oman and Massoun Insurance Services L.L.C. which operate in the State of Qatar. All Associates and joint arrangement Companies are accounted for under the equity method. Management monitors the results of the operating segments separately to make decisions about resource allocation and performance assessment. Transfer prices between operating segments are on an arm’s length basis. 132 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (a) By operating segment Segment assets and liabilities comprise operating assets and liabilities which are directly handled by the operating segment and income or expenses are attributed with the assets and liabilities’ ownership. The following table summarizes performance of the operating segments: 2018 Commercial Bank Subsidiaries (Figures in QAR ‘000s) Wholesale Banking Retail Banking Total Commercial Bank Alternatif Bank Others Unallocated Total 1,307,822 845,913 2,153,735 390,494 5,135 (67,042) 2,482,322 299,102 575,600 874,702 89,729 1,606,924 1,421,513 3,028,437 480,223 (399) - (399) - 27,405 32,540 - (374,247) (336,829) (711,076) (124,573) 540 34,399 1,026,235 (32,643) 3,508,557 - - (399) (835,109) 1,441,990 90,642 13,911 (54,101) 1,492,442 170,738 1,663,180 32,948,009 52,767,452 1,344,186 19,404,163 34,292,195 72,171,615 6,336,812 11,481,137 273,094 - 5,811,077 46,713,178 48,879 83,701,631 - - - - - 34,934,575 40,562,335 23,208,775 - 862,197 21,559,864 628,245 - 35,796,772 62,122,199 23,837,020 - 7,456,064 9,187,110 4,183,497 - - 38,069 - 560,001 - 2,096,310 - 2,559,591 458,935 43,749,840 71,321,450 - 28,580,518 12,141 Net interest income Net fee, commission and other income Segmental revenue Impairment loss on investment securities Net impairment loss on loans and advances to customers and other financial assets Segmental profit Share of results of associates and a joint arrangement Net profit for the year Other information Assets Loans and advances Investments in associates and a joint arrangement Asset held for sale Liabilities Customers deposits Contingent items Intra-group transactions are eliminated from this segmental information (Assets: QAR 2,015 million and Liabilities: QAR 613 million). 133 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (a) By operating segment (continued) 2017 Commercial Bank Subsidiaries Wholesale Banking Retail Banking Total Commercial Bank Alternatif Bank (Figures in QAR ‘000s) Others Unallocated Total Net interest income Net fee, commission and other income Segmental revenue Impairment loss on investment securities Net impairment loss on loans and advances to customers and other financial assets Segmental profit Share of results of associates and a joint arrangement Net profit for the year Other information Assets Loans and advances Investments in associates and a joint arrangement Asset held for sale Liabilities Customer deposits Contingent items 1,131,817 956,485 2,088,302 493,735 486,609 427,222 913,831 1,618,426 1,383,707 3,002,133 (46,484) - (46,484) 21,513 515,248 - 3,273 19,845 23,118 - (866,625) (659,019) (1,525,644) (174,917) 3,742 (67,010) 2,518,300 55,786 (11,224) - - 1,010,975 3,529,275 (46,484) (1,696,819) 428,962 49,121 10,706 (33,015) 455,774 147,876 603,650 31,720,140 53,921,796 1,189,437 21,559,998 32,909,577 75,481,794 6,327,154 13,503,762 316,796 - 5,398,332 136,379 44,951,859 89,121,935 - - - - - 30,994,122 45,840,134 23,921,526 - 653,702 21,498,451 597,103 - 31,647,824 67,338,585 24,518,629 - 7,997,634 10,260,871 4,392,507 - - 94,092 - 560,945 - 2,088,158 - 2,287,100 54,650 39,794,200 77,633,333 33,877 29,472,081 - Intra-group transactions are eliminated from this segmental information (Assets: QAR 2,520 million and Liabilities: QAR 364 million) 134 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography Consolidated statement of financial position 2018 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Property and equipment and all other assets Total assets Due to banks Customer deposits Debt securities Other borrowings Other liabilities Equity Total liabilities and equity Qatar Other GCC countries Other Middle East Europe North America (Figures in QAR ‘000s) Rest of the world Total 5,206,814 - 1,509,244 - - - 6,716,058 2,740,633 630,516 2,405,394 1,216,987 1,337,322 1,137,854 9,468,706 69,962,068 578,185 11,941,651 17,248,988 735,653 2,508,886 12,603 2,083,707 - 2,559,591 - - 678,913 55,933 - - 6,516,545 15,738 1,676,247 202,962 - 540,814 83,701,631 771,558 786,789 22,107,807 - - - - - 2,096,310 2,559,591 9,115 8,420,607 101,687,651 6,603,390 20,041,422 2,154,795 2,108,880 2,474,572 135,070,710 5,264,977 51,485,510 - 211,617 4,313,656 19,999,409 816,266 2,442,214 - 502,323 17,250 - 2,173,662 9,006,613 2,544,056 1,392,122 880,027 11 5,544,785 1,178,961 13,454,483 3,817,800 340,816 - - 16,514 - 1,105,540 15,154 - 20,853 7,191,638 - 1,272,426 62,027 - 13,820,543 71,321,450 15,998,539 8,301,828 5,628,930 19,999,420 81,275,169 3,778,053 15,996,491 24,336,845 1,137,208 8,546,944 135,070,710 135 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography (continued) Qatar Other GCC countries Other Middle East Europe North America (Figures in QAR ‘000s) Rest of the world Total 2,797,758 939,302 3,737,060 (532,741) (119,438) (47,339) (399) 44,576 (5,059) 39,517 - - - - 387,357 93,789 481,146 (143,461) (9,789) (7,410) - (822,184) 541 (105,521) 111,108 (215,477) - - (19,053) (97,265) (520,112) (18,679) (538,791) - - - - - - - (59,742) (167,515) 2,482,322 9,174 7,708 1,026,235 (50,568) - - (159,807) (264) - 3,508,557 (676,466) (129,227) (54,749) (399) (927,164) 92,055 - - - - (151) (312,893) - - - - - 2,110,590 40,058 98,647 (538,791) (50,568) (160,222) 1,499,714 3,785 166,953 - - - - 170,738 2,114,375 (189) 2,114,186 207,011 - 207,011 98,647 (538,791) (50,568) (160,222) 1,670,452 (7,083) 91,564 - (538,791) - (50,568) - (160,222) (7,272) 1,663,180 Consolidated statement of income Year ended 31 December 2018 Net interest income Net fee, commission and other income Net operating income Staff cost Depreciation Amortization of intangible assets Impairment loss on investment securities Net impairment loss on loans and advances to customers Net impairment losses on other financial assets Other expenses Profit before share of results of associates and a joint arrangement Share of results of associates and a joint arrangement Profit for the year before tax Income tax expenses Net profit for the year 136 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography (continued) Consolidated statement of financial position 2017 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Asset held for sale Property and equipment and all other assets Total assets Qatar Other GCC countries Other Middle East Europe North America (Figures in QAR ‘000s) Rest of the world Total 5,182,523 9 2,191,386 - - - 7,373,918 3,288,722 972,305 2,204,001 1,916,134 916,216 1,201,970 10,499,348 71,388,727 1,214,430 14,154,023 1,391,439 63 973,253 89,121,935 15,433,344 866,833 2,523,754 140,580 428,947 235,788 19,629,246 8,818 2,079,340 - 2,287,100 - - - - - - - - 2,088,158 2,287,100 5,687,013 26,052 1,433,140 258,213 2,073 42,856 7,449,347 100,989,147 7,446,069 22,506,304 3,706,366 1,347,299 2,453,867 138,449,052 Due to banks Customer deposits Debt securities Other borrowings Other liabilities Equity Total liabilities and equity 3,253,831 57,730,958 181,131 119,851 4,251,110 21,021,504 86,558,385 4,379,585 2,689,705 - 4,579,359 61,233 - 11,709,882 971,171 10,028,755 2,206,596 1,088,099 726,896 15 15,021,532 3,670,600 1,998,896 9,217,163 1,960,815 266,577 - 17,114,051 300,846 30,801 - 1,118,786 19,660 - 1,470,093 939,839 5,154,218 - 436,455 44,597 - 13,515,872 77,633,333 11,604,890 9,303,365 5,370,073 21,021,519 6,575,109 138,449,052 137 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography (continued) Qatar Other GCC countries Other Middle East Europe North America (Figures in QAR ‘000s) Rest of the world Total 1,882,834 (34,873) 795,558 (223,447) (59,861) 158,089 2,518,300 995,647 2,878,481 (550,973) (141,080) (47,339) (645) (35,518) - - - 822,882 (162,451) (11,297) (8,271) 27,324 (12,470) 22,861 (235,917) - - (37,000) - - (21,742) 136,347 (48) (15) 1,010,975 3,529,275 (713,472) (152,392) - - - (55,610) (18,071) (14,351) - (5,001) (8,097) (964) (46,484) (1,525,644) 3,742 (174,917) (298,967) - (104,060) - - - - - (1,696,819) (566) (403,593) 296,407 (46,127) 361,886 (240,918) (45,097) 134,754 460,905 3,959 143,917 - - - - 147,876 300,366 - 300,366 97,790 - 97,790 361,886 (5,131) 356,755 (240,918) - (240,918) (45,097) - (45,097) 134,754 - 134,754 608,781 (5,131) 603,650 Consolidated statement of income Year ended 31 December 2017 Net interest income Net Fee, commission and other income Net operating income Staff cost Depreciation Amortization of intangible assets Impairment losses on investment securities Net impairment losses on loans and advances to customers Other expenses Profit before share of results of associates and a joint arrangement Share of results of associates and a joint arrangement Profit for the year before tax Income tax expenses Net profit for the year 138 Notes to the Consolidated Financial Statements continued 7. FINANCIAL ASSETS AND LIABILITIES (a) Accounting classifications and fair values The table below sets out the carrying amounts and fair values of the Group’s financial assets and financial liabilities: Fair value through Profit & loss Fair value through other comprehensive income Debt instruments Equity instruments Debt instruments Equity instruments Amortised Cost (Figures in QAR ‘000s) Total carrying amount Fair value - - 4,619 - - - - - - - - - 6,716,058 6,716,058 6,716,058 9,468,706 9,468,706 9,468,706 83,697,012 83,701,631 83,701,631 441,174 - 445,793 658,617 - 658,617 3,881,850 - 3,881,850 110,774 - 110,774 - 17,015,392 5,092,415 5,092,415 17,011,067 17,015,392 116,897,168 121,994,202 121,989,877 - - - - - - - - - - - - - - - 13,820,543 71,321,450 15,998,539 8,301,828 13,820,543 - 71,321,450 - 16,005,936 - - 8,301,828 - 109,442,360 109,442,360 109,449,757 13,820,543 71,321,450 15,998,539 8,301,828 2018 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities - Measured at fair value - At amortised cost Due to banks Customer deposits Debt securities Other borrowings 139 Notes to the Consolidated Financial Statements continued 7. FINANCIAL ASSETS AND LIABILITIES (continued) (a) Accounting classifications and fair values (continued) The table below sets out the carrying amounts and fair values of the Group’s financial assets and financial liabilities: Fair value through income statement Loans and receivables (at amortised cost) Held-to- maturity Available- for-sale Other amortised cost Total carrying amount Fair value (Figures in QAR ‘000s) - - - 188,680 188,680 - - - - - - - - - - - - - - - 7,373,918 10,499,348 89,121,935 - - - - 19,440,566 106,995,201 19,440,566 - - - - - 7,373,918 7,373,918 10,499,348 10,499,348 89,121,935 89,121,935 19,629,246 19,629,246 126,624,447 126,624,447 - - - - - - - - - - 13,515,872 13,515,872 77,633,333 77,633,333 11,604,890 11,604,890 9,303,365 9,303,365 112,057,460 112,057,460 13,515,872 77,633,333 11,782,538 9,303,365 112,235,108 2017 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities- measured at fair value Due to banks Customer deposits Debt securities Other borrowings 8. CASH AND BALANCES WITH CENTRAL BANKS Cash Cash reserve with central banks * Other balances with central banks (Figures in QAR ‘000s) 2018 2017 618,025 3,531,400 2,566,633 6,716,058 726,639 4,395,786 2,251,493 7,373,918 *The cash reserve with central banks is mandatory reserve not available for use in the Group’s day to day operations. 140 Notes to the Consolidated Financial Statements continued 9. DUE FROM BANKS Current accounts Placements Loans to banks Allowance for impairment of due from bank 10. LOANS AND ADVANCES TO CUSTOMERS a) By type Loans Overdrafts Bills discounted Bankers acceptances Deferred profit Allowance for impairment of loans and advances to customers** ECL on loans and advances to customers Net loans and advances to customers* (Figures in QAR ‘000s) 2018 2017 1,794,590 5,182,478 2,505,336 9,482,404 (13,698) 9,468,706 1,760,666 6,268,824 2,469,858 10,499,348 - 10,499,348 (Figures in QAR ‘000s) 2018 2017 80,356,664 5,069,471 367,098 1,766,122 87,559,355 (11,099) (2,844,016) (1,002,609) 83,701,631 82,692,419 7,928,545 632,506 2,156,937 93,410,407 (14,109) (4,274,363) - 89,121,935 *The aggregate amount of non-performing loans and advances to customers amounted QAR 4,891 million which represents 5.59% of total loans and advances to customers (2017: QAR 5,274 million 5.65% of total loans and advances to customers). **Allowance for impairment of loans and advances to customers includes QAR 563 million of interest in suspense (2017: QAR 549 million). By internal business segment Government and related agencies Wholesale Retail Net loans and advances to customers (Figures in QAR ‘000s) 2018 2017 10,218,386 46,956,120 26,527,125 83,701,631 12,348,519 48,166,483 28,606,933 89,121,935 141 Notes to the Consolidated Financial Statements continued 10. LOANS AND ADVANCES TO CUSTOMERS (continued) b) By sector 2018 Loans Overdrafts Bills discounted Bankers acceptances Total (Figures in QAR ‘000s) Government and related agencies Non-banking financial institutions Industry Commercial Services Contracting Real estate Personal Others 7,741,511 1,575,772 7,408,275 7,916,044 24,312,889 3,468,394 21,784,703 5,191,694 957,382 80,356,664 2,476,875 - 10,405 288,218 238,557 367,274 162,561 1,476,295 49,286 5,069,471 - 25,236 6,083 72,704 150,710 112,365 - - - 367,098 - - 11,614 732,073 451,151 568,770 - - 2,514 1,766,122 Less: Deferred profit Allowance for impairment of loans and advances to customers ECL on loans and advances to customers Net loans and advances to customers 10,218,386 1,601,008 7,436,377 9,009,039 25,153,307 4,516,803 21,947,264 6,667,989 1,009,182 87,559,355 (11,099) (2,844,016) (1,002,609) (3,857,724) 83,701,631 142 Notes to the Consolidated Financial Statements continued Total 12,348,519 2,385,005 8,374,272 6,257,594 23,338,235 6,627,503 24,621,840 8,623,475 833,964 93,410,407 (14,109) (4,274,363) (4,288,472) 89,121,935 10. LOANS AND ADVANCES TO CUSTOMERS (continued) b) By sector (continued) (Figures in QAR ‘000s) 2017 Government and related agencies Non-banking financial institutions Industry Commercial Services Contracting Real Estate Personal Others Loans Overdrafts Bills discounted Bankers acceptances 7,348,152 2,347,076 8,329,504 5,637,966 21,855,330 4,921,300 24,262,392 7,210,031 780,668 82,692,419 5,000,367 76 21,059 275,875 471,829 377,230 359,274 1,370,432 52,403 7,928,545 - 37,853 12,863 120,646 256,022 161,881 - 43,012 229 632,506 - - 10,846 223,107 755,054 1,167,092 174 - 664 2,156,937 Less: Deferred profit Allowance for impairment of loans and advances to customers Net loans and advances to customers c) Movement in allowance for impairment of loans and advances to customers Balance at 1 January Transition adjustment on adoption of IFRS 9 on 1 January 2018 Allowance made during the year Recoveries during the year Net allowance for impairment during the year * Written off / transferred during the year Exchange differences Balance at 31 December (Figures in QAR ‘000s) 2018 2017 4,274,363 1,315,988 1,913,098 (511,621) 1,401,477 (2,883,572) (261,631) 3,846,625 3,206,064 - 2,167,992 (364,497) 1,803,495 (701,577) (33,619) 4,274,363 *This includes net interest suspended during the year QAR 474.3 million (2017: QAR 106.7 million) as per QCB regulations. 143 Notes to the Consolidated Financial Statements continued 10. LOANS AND ADVANCES TO CUSTOMERS (continued) c) Movement in allowance for impairment of loans and advances to customers (continued) Further analysis is by internal business segment Stage 1 Commercial Bank Stage 2 Stage 3 Wholesale Banking Retail Banking Wholesale Banking Retail Banking Wholesale Banking Retail Banking Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Alternatif bank Others Total Balance at 1 January 2018 Transition adjustment on adoption of IFRS 9 on 1 January 2018 Allowance made during the year Recoveries/reversal during the year Written off / transferred during the year Exchange differences Balance at 31 December 2018 - 537 29,856 - - - 30,393 - - - 2,879,220 869,910 3,749,130 - - 512,865 512,865 12,368 4,274,363 820 890,711 42,361 - - - 43,181 (210,236) - - - 680,475 42,105 (30,167) - - - 11,938 - - 1,201,873 (214,259) (2,417,706) - 557,450 (80,382) (337,145) - 1,449,128 1,009,833 934,173 (41,914) 423,729 - 381,815 1,591,138 (294,641) (2,754,851) 122,381 (103,358) (301) - 3,224,949 (23,192) 23,900 (75,250) 6,919 (119,485) 259,813 175,679 (37,831) (135,339) (142,146) 373,228 321,960 (216,439) (128,721) (261,631) 609,849 Stage 1 Commercial Bank Stage 2 Stage 3 Wholesale Banking Retail Banking Wholesale Banking Retail Banking Wholesale Banking Retail Banking Balance at 1 January 2017 Transition adjustment on adoption of IFRS 9 on 1 January 2018 Allowance made during the year Recoveries/reversal during the year Written off / transferred during the year Exchange differences Balance at 31 December 2017 - - - - - - - - - - - - - - - - - - - - - - 2,048,565 643,912 - - - - - - - - 1,489,934 (172,557) (486,722) - 2,879,220 379,566 (64,623) (88,945) - 869,910 144 Subsidiaries Total Alternatif Bank Subsidiaries Total Alternatif Bank (Figures in QAR ‘000s) - - - - - - - - 1,315,988 1,913,098 (511,621) (2,883,572) (261,631) 3,846,625 (541) 11,827 (Figures in QAR ‘000s) 16,110 3,206,064 - 2,167,992 (364,497) (701,577) (33,619) 4,274,363 (3,742) 12,368 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 497,477 497,477 - - 298,492 (123,575) (125,910) (33,619) 512,865 298,492 (123,575) (125,910) (33,619) 512,865 Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Alternatif bank Others Total Commercial Total Bank - - - Commercial Total Bank 2,692,477 1,869,500 (237,180) (575,667) 3,749,130 Notes to the Consolidated Financial Statements continued 10. LOANS AND ADVANCES TO CUSTOMERS (continued) c) Movement in allowance for impairment of loans and advances to customers (continued) Further analysis is by internal business segment Balance at 1 January 2018 Transition adjustment on adoption of IFRS 9 on 1 January 2018 Allowance made during the year Recoveries/reversal during the year Written off / transferred during the year Exchange differences 537 820 890,711 42,105 29,856 42,361 (210,236) (30,167) 1,201,873 (214,259) (2,417,706) 557,450 (80,382) (337,145) Balance at 31 December 2018 30,393 43,181 680,475 11,938 1,449,128 1,009,833 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,048,565 643,912 1,489,934 (172,557) (486,722) 379,566 (64,623) (88,945) 2,879,220 869,910 - - - - - - - - - Stage 1 Commercial Bank Stage 2 Stage 3 Wholesale Banking Retail Banking Wholesale Banking Retail Banking Wholesale Banking Retail Banking Balance at 1 January 2017 Transition adjustment on adoption of IFRS 9 on 1 January 2018 Allowance made during the year Recoveries/reversal during the year Written off / transferred during the year Exchange differences Balance at 31 December 2017 Stage 1 Commercial Bank Stage 2 Stage 3 Wholesale Banking Retail Banking Wholesale Banking Retail Banking Wholesale Banking Retail Banking Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Subsidiaries Total Commercial Bank Alternatif bank Total Alternatif Bank Others Total (Figures in QAR ‘000s) - 2,879,220 869,910 3,749,130 - - 512,865 512,865 934,173 (41,914) 423,729 - 381,815 1,591,138 (294,641) (2,754,851) - 3,224,949 122,381 (103,358) (301) - (23,192) 23,900 (75,250) 6,919 (119,485) 259,813 175,679 (37,831) (135,339) (142,146) 373,228 321,960 (216,439) (128,721) (261,631) 609,849 - - - - - - - - - - - - - - 12,368 4,274,363 - 1,315,988 - (541) - - 11,827 1,913,098 (511,621) (2,883,572) (261,631) 3,846,625 (Figures in QAR ‘000s) Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Subsidiaries Alternatif bank Total Alternatif Bank Others Total - - - - - - - - - - - - - - 497,477 497,477 - - 298,492 (123,575) (125,910) (33,619) 512,865 298,492 (123,575) (125,910) (33,619) 512,865 - - - - - - - - - - - - - - 16,110 3,206,064 - - (3,742) - - 12,368 - 2,167,992 (364,497) (701,577) (33,619) 4,274,363 Total Commercial Bank 2,692,477 - 1,869,500 (237,180) (575,667) - 3,749,130 145 Notes to the Consolidated Financial Statements continued 11. INVESTMENT SECURITIES IFRS 9: Fair value through other comprehensive income (FVOCI) Fair value through profit & loss (FVTPL) Amortised cost (AC) Total IAS 39: Available-for-sale Investment securities designated at fair value through profit or loss Total (Figures in QAR ‘000s) 31-Dec-17 Audited 31-Dec-18 Audited 3,992,624 1,099,791 17,015,392 22,107,807 - - - - - - - 19,440,566 188,680 19,629,246 The carrying value of investment securities pledged under repurchase agreements (REPO) is QAR 7,656 million (2017: QAR 6,666 million) a) Fair value through other comprehensive income (IFRS 9): Equities State of Qatar debt securities Debt and other securities* Total Available-for-sale (IAS 39): Equities State of Qatar debt securities Debt and other securities Investment funds Total (Figures in QAR ‘000s) 2018 Unquoted 110,774 - 42,690 153,464 Total 110,774 2,568,724 1,313,126 3,992,624 2017 Unquoted 151,248 1,681,420 71,096 54,944 1,958,708 Total 263,429 14,777,116 4,284,601 115,420 19,440,566 Quoted - 2,568,724 1,270,436 3,839,160 Quoted 112,181 13,095,696 4,213,505 60,476 17,481,858 * Fixed rate securities and floating rate securities amounted to QAR 1,311 million and QAR 2 million respectively (2017: QAR 3,999 million and QAR 286 million respectively). The Group has classified three strategic equity investments as fair value through other comprehensive income (FVOCI) amounting to QAR 110.8 million. 146 Notes to the Consolidated Financial Statements continued 11. INVESTMENT SECURITIES (continued) b) Fair value through profit & loss (IFRS 9) Equities State of Qatar debt securities Debt and other securities Investment funds Total Quoted 569,696 61,000 343,774 26,068 1,000,538 Investment securities designated at fair value through profit & loss (IAS 39) Debt securities Total c) Amortised Cost (IFRS 9) By Issuer State of Qatar debt securities Debt and other securities Total By Interest Rate Fixed Rate Securities Floating Rate Securities Total (Figures in QAR ‘000s) 2018 Unquoted Total 26,752 - 36,400 36,101 99,253 596,448 61,000 380,174 62,169 1,099,791 2017 188,680 188,680 (Figures in QAR ‘000s) 2018 Unquoted Total Quoted 12,482,962 2,927,180 15,410,142 1,605,250 - 1,605,250 14,088,212 2,927,180 17,015,392 (Figures in QAR ‘000s) 2018 Unquoted Total Quoted 15,279,288 130,854 15,410,142 1,605,250 - 1,605,250 16,884,538 130,854 17,015,392 Investment in securities include an amount of QAR 1.92 billion in a subsidiary which were re-classified and designated as amortized cost from FVOCI as on 30th September 2018. The associated FVR within the statement of OCI increased by QAR 202 million with a corresponding increase in the carrying value of the investment. The profit and loss impact was not material. 147 Notes to the Consolidated Financial Statements continued 12. INVESTMENT IN ASSOCIATES AND A JOINT ARRANGEMENT Balance at 1 January Share of results -(note 22) Cash dividend - (note 22) Other movements Reclassified to asset held for sale- (note 13) Balance at 31 December (Figures in QAR ‘000s) 2018 2017 2,088,158 170,738 (76,627) (85,959) - 2,096,310 4,300,647 147,876 (81,454) 8,189 (2,287,100) 2,088,158 Amount (QAR ‘000s) Classification 2018 2017 Country Activities Ownership % Price per share 2018 (QAR) 2017 Associate 2,083,707 2,079,340 Oman Banking 34.9% 34.9% Associate - - UAE Banking 40% 40% 1.72 1.19 Joint venture 12,603 8,818 Qatar Insurance brokerage 50% 50% Un listed 2,096,310 2,088,158 Name of the Entity National Bank of Oman SAOG (‘NBO’) United Arab Bank PJSC (‘UAB’)* Massoun Insurance Services LLC *Refer to note 13 The summarised financial position and results of NBO as at the end of reporting period is as follows: Total assets Total liabilities Operating income Net profit Total comprehensive income Share of results (Figures in QAR ‘000s) 2018 2017 33,770,081 28,698,879 1,219,512 478,375 456,804 166,953 32,803,699 27,640,155 1,248,957 416,158 382,063 145,239 13. ASSET HELD FOR SALE The Group had granted a third party purchaser (the “Purchaser”) an exclusivity during which the parties were negotiating the terms of a potential sale to the Purchaser, subject to the satisfaction of certain conditions, of the Group’s stake in one of its associates, UAB. Discussions for the sale of Group’s stake in UAB have concluded in June 2018, with both parties unable to reach an agreement. The Group’s strategy in regards to UAB remains unchanged. 148 Notes to the Consolidated Financial Statements continued 14 PROPERTY AND EQUIPMENT Cost Balance at 1 January 2017 Additions / transfers Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2017 Balance at 1 January 2018 Additions / transfers Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2018 Accumulated depreciation Balance at 1 January 2017 Depreciation for the year Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2017 Balance at 1 January 2018 Depreciation for the year Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2018 Net carrying amounts Balance at 31 December 2017 Balance at 31 December 2018 Land and buildings Leasehold improvements Furniture and equipment Motor vehicles 1,997,145 1,518 - (193) (11) 1,998,459 1,998,459 177,909 21,592 (414) (21,264) 2,176,282 10,958 37,393 - - - 48,351 48,351 39,629 - - (211) 87,769 136,704 8,108 - (6,008) (3,091) 135,713 1,115,533 83,933 - (9,520) (5,142) 1,184,804 1,184,804 135,713 79,056 6,067 - - (12,014) (11,000) (20,282) (11,820) 118,960 1,231,564 114,283 6,899 - (5,977) (1,881) 113,324 890,261 107,246 - (8,206) (3,793) 985,508 113,324 4,424 - (7,652) (6,711) 985,508 84,534 - (11,687) (14,018) 103,385 1,044,337 4,560 1,666 - (1,364) (37) 4,825 4,825 456 - (905) (217) 4,159 3,216 854 - (745) (31) 3,294 3,294 640 - (901) (168) 2,865 (Figures in QAR ‘000s) Capital work in progress Total 414,011 3,652 - - - 417,663 3,667,953 98,877 - (17,085) (8,281) 3,741,464 417,663 8,641 - - - 3,741,464 272,129 21,592 (24,333) (53,583) 426,304 3,957,269 - - - - - - - - - - - - 1,018,718 152,392 - (14,928) (5,705) 1,150,477 1,150,477 129,227 - (20,240) (21,108) 1,238,356 1,950,108 2,088,513 22,389 15,575 199,296 187,227 1,531 1,294 417,663 2,590,987 426,304 2,718,913 149 Notes to the Consolidated Financial Statements continued 15. INTANGIBLE ASSETS Cost Balance at 1 January 2017 Additions / transfers Acquisitions Disposals Exchange differences Balance at 31 December 2017 Balance at 1 January 2018 Additions / transfers Acquisitions Disposals Exchange differences Balance at 31 December 2018 Amortisation and Impairment Balance at 1 January 2017 Amortisation during the year Acquisitions Impairment during the year Exchange differences Balance at 31 December 2017 Balance at 1 January 2018 Amortisation during the year Acquisitions Impairment during the year Exchange differences Balance at 31 December 2018 Net carrying amounts Balance at 31 December 2017 Balance at 31 December 2018 Customer relationship Brand Core deposit (Figures in QAR ‘000s) Internally developed software Total 86,405 6,722 - - (5,264) 87,863 87,863 5,001 - - (23,463) 69,401 45,910 3,982 - - (2,952) 46,940 46,940 3,449 - - (12,360) 38,029 279,295 - - - 7,184 286,479 286,479 - - - (15,718) 270,761 110,682 36,894 - - - 147,576 147,576 36,894 - - - 184,470 72,915 - - - 963 73,878 73,878 - - - (6,165) 67,713 24,969 8,323 - - - 33,292 33,292 8,323 - - - 41,615 21,535 7,751 - - (986) 28,300 28,300 9,301 - (188) (7,418) 29,995 14,501 6,411 - - (958) 19,954 19,954 6,083 - - (4,881) 21,156 729,226 14,473 - - (15,959) 727,740 727,740 14,302 - (188) (123,735) 618,119 245,862 55,610 - - (3,910) 297,562 297,562 54,749 - - (17,241) 335,070 Goodwill 269,076 - - - (17,856) 251,220 251,220 - - - (70,971) 180,249 49,800 - - - - 49,800 49,800 - - - - 49,800 201,420 130,449 40,923 31,372 138,903 86,291 40,586 26,098 8,346 8,839 430,178 283,049 150 Notes to the Consolidated Financial Statements continued 15. INTANGIBLE ASSETS (continued) Impairment testing for CGU containing goodwill For the purpose of impairment testing, goodwill is allocated to the Group’s CGU-ABank. A discount rate of 23.0% and a terminal growth rate of 2.75 % were used to estimate the recoverable amount of ABank. The recoverable amount for the CGU has been calculated based on the ‘Value in Use Method’, determined by discounting the future cash flows expected to be generated from the continuing use of the CGU. The discount rate was a pre-tax measure based on the Government Bonds10 year yield TL, adjusted for an equity market risk premium and equity beta. Five years of cash flows are included in the discounted cash model. A long term growth rate into perpetuity has been determined as the lower of the nominal GDP rates for the country in which CGU operate and the long term compound annual profit before taxes, depreciation and amortization growth rate estimated by the management. The key assumptions described above may change as economic and market conditions change. No impairment loss is recognized in 2018 nil (2017: nil) as the recoverable amount of this CGU was determined to be higher than its carrying amount. 16. OTHER ASSETS Interest receivable and accrued income Prepaid expenses Accounts receivable Repossessed collateral* Positive fair value of derivatives (note 37) Clearing cheques Others (Figures in QAR ‘000s) 2018 2017 1,127,511 60,366 392,869 2,605,213 371,716 218,861 642,109 5,418,645 892,709 94,354 352,874 2,139,591 462,483 249,711 236,460 4,428,182 *This represents the value of the properties acquired in settlement of debts and subsequent additions, which have been stated at their carrying value net of any allowance for impairment and credit enhancement. The estimated market values of these properties at the end of the reporting period are not materially different from the carrying values. 17. DUE TO BANKS Balances due to central banks Current accounts Placements with banks Repurchase agreements with banks (Figures in QAR ‘000s) 2018 2017 561,311 323,873 6,773,721 6,161,638 13,820,543 281,625 811,754 6,570,486 5,852,007 13,515,872 151 Notes to the Consolidated Financial Statements continued 18. CUSTOMER DEPOSITS a) By type Current and call deposits Saving deposits Time deposits b) By sector Government Government and semi government agencies Individuals Corporate Non-banking financial institutions 19. DEBT SECURITIES EMTN unsecured Programme – Senior unsecured notes * Senior Notes* Subordinated Notes * Others# Total (Figures in QAR ‘000s) 2018 2017 16,310,290 4,389,075 50,622,085 71,321,450 17,630,840 4,394,576 55,607,917 77,633,333 (Figures in QAR ‘000s) 2018 2017 10,610,571 8,641,978 22,064,871 26,865,471 3,138,559 71,321,450 12,426,816 12,540,523 21,494,057 27,491,521 3,680,416 77,633,333 (Figures in QAR ‘000s) 2018 2017 7,809,032 2,888,175 3,441,222 1,860,110 15,998,539 5,540,548 1,130,570 3,431,969 1,501,803 11,604,890 152 Notes to the Consolidated Financial Statements continued 19. DEBT SECURITIES (continued) * The following table provides the breakdown of the Debt Securities as at close of 31 December 2018. Instrument Issuer Issued amount Issued on Maturity Coupon EMTN - Senior notes Subordinate notes CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd Alternatif Bank USD 750 million* USD 750 million* USD 155 million* USD 500 million* CHF 335 million* CHF 100 million* USD 600 million* USD 297 million Alternatif Bank USD 50 million Jun-14 Jun-16 Apr-18 May-18 Mar-18 Oct-18 Nov-09 Apr-16 Jun-15 Senior Notes Senior Notes Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank Alternatif Bank * Issued for and Guaranteed by the Bank ** Guaranteed by the Bank # Others include Commercial Papers and certificate of deposits issued by the bank. USD 250 million** TL 66 million TL 77 million TL 50 million TL 33 million TL 53 million TL 65 million TL 84 million TL 84 million TL 26 million TL 6 million Jul-14 Oct-18 Nov-18 Dec-18 Dec-18 Dec-18 Dec-18 Oct-18 Nov-18 Dec-18 Dec-18 Movements in debt securities are analysed as follows: Balance at 1st January Additions Repayments Amortisation of discount and transaction cost Other movement Exchange difference Balance at 31 December Jun-19 Jun-21 Apr-19 May-23 Mar-21 Oct-22 Nov-19 Apr-26 Jun-25 Jul-19 Jan-19 Jan-19 Mar-19 Mar-19 Mar-19 Mar-19 Jan-19 Feb-19 Mar-19 Mar-19 Fixed Rate 2.875% Fixed Rate 3.25% Fixed Rate 3.25% Fixed Rate 5.00% Fixed Rate 0.707% Fixed Rate 1.125% Fixed Rate 7.50% Fixed Rate 8.75% Floating Rate LIBOR +6.00% Fixed Rate 3.13% Fixed Rate 27.00% Fixed Rate 26.00% Fixed Rate 23.75% Fixed Rate 23.50% Fixed Rate 23.70% Fixed Rate 23.61% Fixed Rate 11.00% Fixed Rate 10.90% Fixed Rate 24.00% Fixed Rate 24.00% (Figures in QAR ‘000s) 2018 2017 11,604,890 9,508,091 (5,055,194) 29,119 - (88,367) 15,998,539 11,717,260 3,845,587 (3,968,148) 19,776 - (9,585) 11,604,890 153 Notes to the Consolidated Financial Statements continued 19. DEBT SECURITIES (continued) The table below shows the maturity profile of debt securities: Up to 1 year Between 1 and 3 years Over 3 years Balance at 31 December 20. OTHER BORROWINGS Syndicated loans Others Total Movements in other borrowings are as follows: Balance at 1 January Additions Repayments Fair value adjustment on consolidation of Alternatif Bank Amortisation of discount and transaction cost Other movement Exchange difference Balance at 31 December The table below shows the maturity profile of other borrowings: Up to 1 year Between 1 and 3 years Over 3 years Balance at 31 December 154 (Figures in QAR ‘000s) 2018 2017 7,885,098 4,679,586 3,433,855 15,998,539 1,837,344 5,801,290 3,966,256 11,604,890 (Figures in QAR ‘000s) 2018 2017 4,848,032 3,453,796 8,301,828 5,065,654 4,237,711 9,303,365 (Figures in QAR ‘000s) 2018 2017 9,303,365 6,583,404 (6,634,330) (37,291) 13,724 - (927,044) 8,301,828 10,777,242 4,161,023 (5,414,984) (37,291) 10,556 - (193,181) 9,303,365 (Figures in QAR ‘000s) 2018 2017 3,474,304 4,093,799 733,725 8,301,828 7,029,324 935,090 1,338,951 9,303,365 Notes to the Consolidated Financial Statements continued 21. OTHER LIABILITIES Interest payable Accrued expense payable Other provisions (note i) Negative fair value of derivatives (note 37) Unearned income Cash margins Accounts payable Directors’ remuneration Social & sports activities support fund (“Daam”) (note 24) Dividend payable Managers’ cheque and payment order Unclaimed balances Due for trade acceptances Deferred tax liabilities Income tax payable Others Net impairment losses on loan commitments and fiancial guarantees Total (Figures in QAR ‘000s) 2018 2017 601,527 291,899 215,723 353,499 228,529 652,083 443,407 18,500 41,580 19,640 28,164 11,010 1,751,994 12,123 26,634 828,646 103,972 5,628,930 462,071 306,682 225,099 355,614 209,891 520,427 267,194 18,500 15,091 16,009 38,255 43,087 2,156,937 33,822 24,465 676,929 - 5,370,073 (i) Other provisions Provident fund (a) Pension fund (b) (Figures in QAR ‘000s) Total Total 2018 2017 Balance at 1 January Provision made during the year (note 32) Earnings of the fund Provident fund – staff contribution Transferred to state retirement fund authority Payment during the year Exchange difference Balance at 31 December 223,789 8,369 5,968 6,950 - (29,838) (2,216) 213,022 1,310 10,999 - 5,852 (15,460) - - 2,701 225,099 19,368 5,968 12,802 (15,460) (29,838) (2,216) 215,723 235,658 27,240 6,051 13,235 (16,770) (39,789) (526) 225,099 (a) The provident fund includes the Group’s obligations for end of service benefits to expatriate staff per Qatar labour law and the employment contracts. (b) Pension fund contributions in respect of the national staff are paid to the State administered retirement fund at the end of each month. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized when they are due. 155 Notes to the Consolidated Financial Statements continued 22. EQUITY (a) Share capital The issued, subscribed and paid up share capital of the Bank is QAR 4,047,253,760 (2017: QAR 4,047,253,760) divided into 404,725,376 (2017: 404,725,376) ordinary shares of QAR 10 each. In thousands of shares On issue at the beginning of the reporting period Right issued Bonus shares issued In issue at 31 December (Figures in QAR ‘000s) 2018 2017 404,725 - - 404,725 326,629 58,823 19,273 404,725 The Extraordinary General Assembly of the Bank was held on 16 November 2016 to resolve the increase of issued share capital of the Bank from QAR 3,266,292,100 to QAR 3,854,527,390 by way of offering 58,823,529 new ordinary shares for subscription at a price of QAR 25.50 (Twenty-five Qatari Riyals and fifty Dirhams) each (including premium per share of QAR 15.5) (the Rights Issue). This resulted in an increase in the share capital by QAR 588.24 million and legal reserve by QAR 911.76 million (share premium) and in total by QAR 1,500 million. The Rights Issue exercise was closed on 25 January 2017. At 31 December 2018, the authorised share capital comprised 404,725 thousand ordinary share (2017: 404,725 thousand). The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ Annual/Extra-ordinary General meeting of the Bank. (b) Legal reserve The legal reserve of Commercial Bank and Alternatif Bank are QAR 9,652 million (2017: QAR 9,652 million) and QAR 89 million (2017: QAR 86 million) respectively. In accordance with Qatar Central Bank Law No 13 of 2012, 10% of the net profit of the Group for the year is required to be transferred to legal reserve. Share premium collected from the issuance of new shares also transferred to legal reserve. Transfer to legal reserve from net profit is mandatory until the legal reserve equals 100% of the paid up capital. This reserve is not available for distribution except in circumstances specified in Qatar Commercial Companies Law No 11 of 2015 and is subject to pre-approval from QCB. In accordance with the Turkish Commercial code, an entity is required to transfer 5% of net profit until the legal reserve is equal to 20% of issued and fully paid up share capital. Rate for transfer to legal reserve goes up to 10% of net profit allocated for distribution excluding the first 5% of the allocated profit. Share premium and proceeds from cancelled shares, if any net of related expenses are also transferred to legal reserve. (c) General reserve As per the Bank’s Articles of Association, the general reserve may only be used in accordance with a resolution from the General Assembly upon the Board of Directors recommendation and after obtaining Qatar Central Bank approval. 156 Notes to the Consolidated Financial Statements continued 22. EQUITY (continued) (d) Risk reserve In accordance with QCB regulations, a risk reserve should be maintained created to cover contingencies on both the public and private sector financing assets, with a minimum requirement of 2.50% of the total loans and advances of the Group inside and outside Qatar after the exclusion of the specific provisions and interest in suspense. The finance provided to/or secured by the Ministry of Finance or finance against cash guarantees is excluded from the gross direct finance. On 1st January 2018, after QCB approval QAR 1,529 millions was appropriated from risk reserve for transition adjustment on adoption of IFRS 9. During the year QAR 525 million (2017: QAR 88 million) was transferred to the risk reserve account as per QCB approval. (e) Fair value reserve The fair value reserve arises from the revaluation of the investment securities through FVOCI, cash flow hedges and change of post acquisition fair value reserve of its associates and a joint arrangement. Fair value reserve Balance as at 1 January Changes due to adoption of IFRS 9: Transfer to Amortised cost Transfer from retained earnings Restated balance at beginning of the year Impact of revaluation (IFRS 9) : - on equity securities - on debt securities Net amount Transferred to Income statement Net movement in effective portion of Cash Flow hedges Net change in fair value of investment in associates Net change in fair value of available -for -sale investments (IAS 39) Net movement during the year Balance as at 31 December (Figures in QAR ‘000s) 2018 2017 (44,500) (219,815) 32,980 (51,510) (63,030) (19,484) 2,355 (10,228) 24,436 (7,515) - (10,436) (73,466) - - (219,815) - - (46,612) - 8,190 213,737 175,315 (44,500) (f) Treasury shares Treasury shares represent ordinary shares of The Commercial Bank (P.S.Q.C) with nominal value of QAR 10 each. These shares are carried at cost of QAR 27.47 each. Treasury shares are presented as a deduction from equity. (g) Foreign currency translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. 157 Notes to the Consolidated Financial Statements continued 22. EQUITY (continued) (h) Other reserves This includes the Group’s share of profit from investment in associates and a joint arrangement and non-distributable profit of subsidiaries, net of cash dividend received, as required by QCB regulations as follows: Balance as at 1 January Transition adjustments on adoption of IFRS 9 on 1 January 2018 Share of result of associates and a joint arrangement (note 12) Dividend from associates and a joint arrangement (note 12) Net movement Balance as at 31 December (Figures in QAR ‘000s) 2018 2017 1,064,189 (78,442) 170,738 (76,627) 94,111 1,079,858 997,767 - 147,876 (81,454) 66,422 1,064,189 (i) Proposed dividend The Board of Directors has proposed a cash dividend of 15 % for the year 2018 (2017: 10% cash dividend). This proposal is subject to approval at the Annual General Assembly. (j) Dividends A cash dividend of 10% for the year 2017 (2016: 5% bonus share), was approved at the Annual General Assembly held on 21 March 2018 and distributed to shareholders. (k) Revaluation reserve This represents the surplus on revaluation of land and buildings that are used in Group’s operations and is not available for distribution until the related assets have been disposed off or used. (l) Instruments eligible for additional capital In December 2013 the Bank raised tier 1 capital by issuing unsecured perpetual non-cumulative unlisted Tier 1 notes for an amount of QAR 2 billion. The distributions (i.e. coupon payments) are discretionary and non-cumulative and priced at a fixed rate of 6% per annum, payable annually until the first call date (i.e. 30 December 2019), and thereafter to be reset at a prevailing sixth year mid-swap rate plus margin every sixth year. In February 2016 the Bank raised additional tier 1 capital by issuing unsecured perpetual non-cumulative unlisted Tier 1 notes for an amount of QAR 2 billion. The distributions (i.e. coupon payments) are discretionary and non-cumulative and priced at a fixed rate of 6% per annum, payable annually until the first call date and thereafter to be reset at a prevailing sixth year mid-swap rate plus margin every sixth year. As per amendments required by Qatar Central Bank the first call date was amended from 27 February 2022 to 31 December 2021. The Notes are ranked junior to the Bank’s existing unsubordinated obligations including existing subordinated debt and depositors, pari passu to all current and future subordinated obligations and senior to the ordinary shares issued by the Bank. The Notes have no fixed redemption date and the Bank can only redeem the Notes in the limited circumstance as mentioned in the term sheet i.e. regulatory / tax redemption and other general redemption conditions solely at the Bank’s discretion. The Bank might be required to write-off the proposed Capital issue, if a “loss absorption” event is triggered and the Bank has non-discretionary obligation to deliver cash or financial assets. These notes have been classified under equity. 158 Notes to the Consolidated Financial Statements continued 23. OTHER COMPREHENSIVE INCOME Changes in fair value of investments in debt securities designated at FVOCI (IFRS 9) and (Available-for-sale investments for 2017): Positive change in fair value Negative change in fair value Net change in fair value Net amount transferred to profit or loss* Foreign currency translation differences for foreign operation Share of other comprehensive income of associates and a joint arrangement Net changes in FV of Cash Flow hedges Net changes in fair value of equity investments designated at FVOCI (IFRS 9): Foreign currency translation differences for foreign operation Net changes in FV of equity investments – FVOCI Share of other comprehensive income of associates and a joint arrangement Revaluation Reserve Total other comprehensive income (Figures in QAR ‘000s) 2018 2017 68,543 (66,415) 2,128 (10,001) (432,940) (2,092) 24,436 (418,469) - (19,484) (5,423) 19,126 (424,250) 261,900 (48,163) 213,737 (46,612) - - - 167,125 (124,119) - 8,190 - 51,196 *Net amount transferred to profit or loss includes a positive change in fair value of QAR 10.4 million (2017: QAR 50.0 million) and a negative change in fair value of QAR 0.4 million (2017: QAR 4.0 million). 24. CONTRIBUTION TO SOCIAL AND SPORTS ACTIVITIES SUPPORT FUND (“DAAM”) Pursuant to Law No. 13 of 2008, the Bank made an appropriation of QAR 41.6 million (2017: QAR 15.1 million) from retained earnings for its contribution to the Social and Sports Activities Support Fund (“Daam”) of Qatar. This amount represents 2.5% of the net profit of the Group for the year ended 31 December 2018. 25. INTEREST INCOME Loans and advances to customers Debt securities Amounts deposited with banks Amounts deposited with central banks (Figures in QAR ‘000s) 2018 2017 4,811,277 895,035 321,830 49,180 6,077,322 4,163,011 670,313 277,739 27,858 5,138,921 The amounts reported above include interest income, calculated using the effective interest method, that relate to at amortized cost QAR 5,763 million (2017 : 4,469 million) and at fair value QAR 314 million (2017: QAR 670 million) 159 Notes to the Consolidated Financial Statements continued 26. INTEREST EXPENSE Customer deposits Debt securities Other borrowings Amount deposited by central banks and other banks (Figures in QAR ‘000s) 2018 2017 2,291,014 591,718 364,976 347,292 3,595,000 1,689,441 436,558 293,660 200,962 2,620,621 The amounts reported above include interest expense, calculated using the effective interest method, on financial liabilities at amortised cost. 27. FEE AND COMMISSION INCOME Loans and advances Credit and debit card fees Indirect credit facilities Banking and other operations Investment activities for customers 28. FEE AND COMMISSION EXPENSE Credit and debit card fees Brokerage services Others 29. NET FOREIGN EXCHANGE GAIN (Figures in QAR ‘000s) 2018 2017 327,352 438,709 180,091 137,962 33,851 1,117,965 314,412 406,628 151,380 113,750 43,163 1,029,333 (Figures in QAR ‘000s) 2018 2017 269,986 23,805 66,936 360,727 245,560 3,344 60,081 308,985 (Figures in QAR ‘000s) 2018 2017 Dealing in foreign currencies & revaluation of spot assets 202,247 162,641 160 Notes to the Consolidated Financial Statements continued 30. INCOME FROM INVESTMENT SECURITIES Net gain on disposal of investment securities measured at fair value Net Change in Fair-value of Investment securities measured at fair value through icome statement Dividend income 31. OTHER INCOME Rental and other income 32. STAFF COSTS Salary and allowances Health care and medical insurance expenses Staff end of services and pension fund contribution (note 21 (i)) Training and education 33. OTHER EXPENSES Marketing and advertisement Professional fees Communication, utilities and insurance Board of Directors’ remuneration Occupancy, IT consumables and maintenance Travel and related costs Printing and stationery Outsourcing service costs Others (Figures in QAR ‘000s) 2018 2017 10,267 (34,398) 5,305 (18,826) 39,339 (2,635) 11,986 48,690 (Figures in QAR ‘000s) 2018 2017 85,576 79,296 (Figures in QAR ‘000s) 2018 2017 637,954 16,997 19,368 2,147 676,466 664,902 17,132 27,240 4,198 713,472 (Figures in QAR ‘000s) 2018 2017 38,021 25,671 50,232 18,500 68,328 1,800 6,498 46,361 57,482 312,893 32,126 44,509 59,430 18,500 103,005 1,970 8,185 98,830 37,038 403,593 161 Notes to the Consolidated Financial Statements continued 34. EARNINGS PER SHARE Earnings per share of the Bank is calculated by dividing profit for the year attributable to the equity holders of the Bank by the weighted average number of ordinary shares in issue during the year: Profit for the year attributable to the equity holders of the Bank Less: Dividend on instruments eligible for additional capital Profit for EPS calculation Weighted average number of outstanding ordinary shares in thousands Earnings per share (QAR) (Figures in QAR ‘000s) 2018 2017 1,663,179 (240,000) 1,423,179 603,648 (240,000) 363,648 404,725 3.52 400,040 0.91 The weighted average number of ordinary shares in thousands have been calculated as follows: Qualifying ordinary shares at the beginning of the period Effect of bonus share issue Effect of right issue Weighted average number of ordinary shares for the period 35. CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS a) Contingent liabilities Unutilized credit facilities Guarantees Letters of credit Total b) Capital commitments Total (Figures in QAR ‘000s) 2018 2017 404,725 - - 404,725 326,629 19,273 54,138 400,040 (Figures in QAR ‘000s) 2018 2017 4,373,836 22,057,901 2,148,781 28,580,518 5,948,621 20,823,314 2,700,146 29,472,081 157,569 178,472 Unused facilities Commitments to extend credit represent contractual commitments to make loans and revolving credits. The total contractual amounts do not necessarily represent future cash requirements, since commitments may expire without being drawn upon. Guarantees and Letters of credit Guarantees and letters of credit commit the group to make payments on behalf of customers in the event of a specific event. Guarantees and standby letters of credit carry the same credit risk as loans. 162 Notes to the Consolidated Financial Statements continued 36. CASH AND CASH EQUIVALENTS Cash and balances with central banks * Due from banks up to 90 days *Cash and balances with central banks exclude the mandatory cash reserve. (Figures in QAR ‘000s) 2018 2017 3,184,658 6,799,888 9,984,546 2,978,132 7,343,303 10,321,435 37. DERIVATIVES At 31 December 2018 Derivatives held for trading: Interest rate swaps Forward foreign exchange contracts and others Derivatives held for fair value hedges: Interest rate swaps Derivatives held for cash flow hedges: Forward foreign exchange contracts and others Interest rate swaps Total At 31 December 2017 Derivatives held for trading: Interest rate swaps Forward foreign exchange contracts and others Derivatives held for fair value hedges: Interest rate swaps Total Notional / expected amount by term to maturity Positive fair value Negative fair value Notional amount within 3 months 3 - 12 months 1-5 years More than 5 years (Figures in QAR ‘000s) 210,529 147,758 119,502 6,905,474 66,489 271,270 3,647,959 2,919,756 158,232 42,587,267 26,254,574 7,742,516 8,476,634 113,543 13,309 625 3,857,446 120 72,371 1,395,891 - - 168,379 1,239,795 2,449,272 92,094 1,303,797 - - 371,716 282,479 178,437 2,769 - 353,499 55,159,143 26,321,063 8,274,259 15,081,250 5,482,571 413,065 413,065 - - 174,367 7,888,900 68,185 251,668 4,036,997 3,532,050 160,427 35,902,206 22,337,907 7,410,907 6,019,374 134,018 1,567 462,483 - 20,820 3,090,986 355,614 46,882,092 22,406,092 - 7,662,575 105,646 10,162,017 2,985,340 6,651,408 163 Notes to the Consolidated Financial Statements continued 37. DERIVATIVES (continued) The bank maintains strict control limits on net open derivative positions, i.e. the difference between purchase and sale contracts, by both amount and term. At any one time the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the bank (i.e. assets) which in relation to derivatives is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except where the bank requires margin deposits from counter-parties. At 31 December 2018, the Group held the following derivatives as hedging instruments:- Cash Flow Hedges: Hedged item Description Currency Notional in currency Average Rate Hedging instrument Interest Rate Swaps Cross Currency Swaps Customer Deposits Bond Issuance Fixed for floating CHF to USD Cross Currency Swaps JPY Bond JPY to USD TRY USD CHF USD JPY 600,000,000 23.81% 459,390,408 435,000,000 25,300,443 2,800,000,000 4.34% 0.78% 2.77% 0.10% Hedging instrument Fair value Hedges: Hedged item Description Currency Notional in currency Average Rate Interest Rate Swaps Govt Bonds Loans Fixed for floating Fixed for floating USD TRY 260,000,000 2.79% 110,000,000 22.59% 38. FUND MANAGEMENT As at the end of the reporting date, the Group holds QAR 357 million (2017: QAR 314 million) worth of international investment securities on behalf of its customers. Out of this amount, investment securities with a value of QAR 306 million (2017: QAR 258 million) are held with an international custody and settlement house. The remaining investment securities are held with the financial institutions through whom the securities were purchased. These financial institutions are industry leaders in their respective fields. The Group has established maximum limits for such holding with each financial institution according to its risk management policy 164 Notes to the Consolidated Financial Statements continued 39. RELATED PARTIES The Group carries out various transactions with subsidiaries, associates and joint arrangement companies, members of the Board of Directors and the executive management or companies in which they have significant interest or any other parties of important influence in the Group’s financial or operations decisions. The balances at the year end with these accounts were as follows: Board members of the bank - Loans, advances and financing activities (a) - Deposits - Contingent liabilities and other commitments - Interest and fee income - Interest paid on deposits accounts of board members - Remuneration Associates and joint arrangement companies Due from banks Due to banks Deposits Contingent liabilities - Interest earned from associates - Interest paid to associates Senior management of the bank - Remuneration and other benefits - Loans and advances (Figures in QAR ‘000s) 2018 2017 1,604,135 729,255 13,307 36,683 12,017 18,500 436,800 24,333 14,602 782,138 26 2,271 1,568,573 933,329 59,200 25,625 12,433 18,500 91,000 31,353 10,663 766,360 3,049 2,424 46,710 4,636 46,925 5,286 (a) A significant portion of the loans, advances and financing activities’ balance at 31 December 2018 and 31 December 2017 with the members of the Board and the companies in which they have significant influence are secured against tangible collateral or personal guarantees. Moreover, the loans, advances and financing activities are performing satisfactorily honouring all obligations. 165 Notes to the Consolidated Financial Statements continued 40. CASH FLOW MOVEMENT IN LIABILITIES AND EQUITY Additional disclosure for IAS 7 Cash Flow statement on Liabilities and Equity arising from Financing activities Liabilities Other Debt Securities Borrowings 11,604,890 9,303,365 6,583,404 9,508,091 (5,055,194) (6,634,330) 29,119 13,724 Share Capital 4,047,254 - Legal Reserve 9,742,066 - - - - - (Figures in QAR ‘000s) Retained Earnings Total 645,736 35,163,804 16,091,495 - - (11,689,524) - 42,843 Equity Treasury Shares (179,507) - - - - (88,367) - - - - - - - - - - - - - - - - 15,998,539 8,301,828 4,047,254 (37,291) (927,044) - - - - - - - - - - - - 3,086 - - - 9,745,152 - - - - - - - - - (179,507) (412,982) (375,691) (1,015,411) - - - - - 1,663,179 1,663,179 - (3,086) (525,000) (525,000) (404,725) (404,725) - - 1,000,413 38,913,679 Balance at 1 January 2018 Proceeds from issue of debt securities/borrowings Repayment of debt securities/ borrowings Amortization of discount and transaction costs on securities/ other borrowings Other movements Exchange differences Proceeds from rights issue Bonus share issue Profit for the year Transfer to legal reserve Transfer to risk reserve Dividend paid Treasury shares Balance at 31 December 2018 41. COMPARATIVES Prior year figures have not been restated upon the adoption of IFRS 9. 166 Notes to the Consolidated Financial Statements continued Supplementary Information - Parent FINANCIAL STATEMENTS OF THE PARENT (a) Statement of Financial Position – Parent As at 31 December ASSETS Cash and balances with central bank Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement and subsidiaries Asset held for sale Property and equipment Other assets TOTAL ASSETS LIABILITIES Due to banks Customer deposits Debt securities Other borrowings Other liabilities TOTAL LIABILITIES EQUITY Share capital Legal reserve General reserve Risk reserve Fair value reserves Treasury shares Foreign currency translation reserve Other reserves Revaluation reserve Retained earnings TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK Instrument eligible for additional capital TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 2018 QAR ‘000s 2017 5,206,814 8,929,370 72,171,615 19,731,226 3,635,854 2,559,591 2,523,835 4,236,827 118,995,132 13,442,167 62,356,756 13,454,483 4,969,305 4,782,315 99,005,026 4,047,254 9,652,129 26,500 951,909 (41,084) (179,507) (1,771,821) 1,029,858 1,264,794 1,010,074 15,990,106 4,000,000 19,990,106 118,995,132 5,182,523 10,252,481 75,481,794 17,173,445 4,387,602 2,287,100 2,554,001 3,502,271 120,821,217 12,576,417 67,561,058 9,217,163 5,438,849 4,645,897 99,439,384 4,047,254 9,652,129 26,500 1,573,600 13,756 (179,507) (1,121,125) 1,014,189 1,264,794 1,090,243 17,381,833 4,000,000 21,381,833 120,821,217 167 Supplementary Information - Parent continued FINANCIAL STATEMENTS OF THE PARENT (continued) (b) Income Statement – Parent For the year ended 31 December Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Foreign exchange gain Income from investment securities Other operating income Net operating income Staff costs Depreciation Amortization and impairment of intangible assets Impairment losses on investment securities Net impairment losses on loans and advances to customers Net impairment reversal on other financial assets Other expenses Profit for the year 2018 4,348,781 (2,262,088) 2,086,693 967,658 (311,412) 656,246 171,946 (6,599) 87,508 2,995,794 (494,179) (118,874) (47,339) (399) (822,184) 111,108 (236,041) 1,387,886 QAR ‘000s 2017 3,737,021 (1,715,729) 2,021,292 894,560 (273,587) 620,973 213,360 58,309 76,975 2,990,909 (542,469) (141,080) (47,339) (46,484) (1,525,644) - (291,946) 395,947 168 www.cbq.qa