More annual reports from Commercial Bank of Qatar:
2021 ReportEmbracing Challenges Navigating Innovation 2019 Annual Report His Highness Sheikh Tamim Bin Hamad Al Thani Amir of the State of Qatar His Highness Sheikh Hamad Bin Khalifa Al Thani Father Amir 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 2019 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 10 12 16 17 20 22 26 28 32 58 62 67 68 69 70 74 76 169 Towards a Promising Future Commercial Bank remains firmly focused on building a promising future for the State of Qatar. Supporting Qatar’s National Vision 2030, we work to strengthen our nation’s human, social, economic and environmental development to create a prosperous and sustainable economy for many generations to come. As part of our transformation change in terms of digitization, we are committed towards developing and providing innovative banking products and services which enhance the customer experience. Living up to our belief that ‘everything is possible’, Commercial Bank continued to work together in 2019 as one team to deliver on our five-year strategic plan and achieve sustainable growth. The foundation of our strategic plan with the vision to be the ‘Best Bank in Qatar’ are the Five Cs of Commercial Bank: • Corporate Earnings Quality • Creativity and Innovation • Compliance We are living up to each of these Five Cs by taking real action to achieve growth in the present and position Commercial Bank for increasingly strong performance in the coming years as we continue our transformation journey. • Client Experience • Culture 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, 173 ATMs and 7 cheque book printing machines, and we also own and operate the 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 issuances are 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 strategic partnerships with the National Bank of Oman (S.A.O.G.) and United Arab Bank (P.J.S.C.). 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 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 147.5 billion as at 31 December 2019 and a capital adequacy ratio of 16.4%. 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. 6 CB Global Trading Limited. A fully owned subsidiary incorporated in Cayman Islands, an issuing vehicle for Derivatives. CB Innovation Services (L.L.C.) 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 each in Egypt, Abu Dhabi and Dubai. United Arab Bank (P.J.S.C.) An associate entity that operates through 11 conventional branches in the United Arab Emirates. 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 48 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 Turkey. 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. 7 Our Roots, Our Pride Our Roots, Our Pride Since day one, we have always been holding on to our roots. Today, more than ever, we continue operating as a Qatari bank that takes pride in our country of origin. In the course of time, not only has Commercial Bank proven to be a Qatari bank, but also the nation’s partner. Hand in hand, we have celebrated, faced, resisted and overcome for the sake of our country and people. We are proud of our accomplishments and to show the world that together we keep on going above and beyond. 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 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 2007 Commercial Bank forms a strategic alliance with United Arab Bank in the UAE 2008 First Qatari bank to list Global Depository Receipts on the London Stock Exchange 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 10 2011 Incorporates Commercial Bank Investment Services (re-branded to Commercial Bank Financial Services) 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 (L.L.C.), 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 Awards from the Asian Banker 2019 Commercial Bank embraces a new era of digitization by launching ‘CB Fawri’, ‘CB Wallet’, and ‘SWIFT GPI’. Commercial Bank successfully upgrades its Mobile App and widens its digital infrastructure 11 Forward Looking Statements Net Profit QAR 2,021 million Earnings per Share QAR 0.44 Loans and Advances QAR 88.0 bn Customer Deposits QAR 76.3 bn Total Assets QAR 147.5 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 recommendation with respect to such securities or other financial instruments. NET PROFIT (QAR MILLION) 2,021 12 Investment & Dividend Income Other Income 3% 2% 6% Foreign Exchange Income Net Fee Income 21% Net Interest Income 68% Net Operating Income 13 Other Liabilities Other Borrowed Funds 4% 14% 52% Customer Deposits Shareholders’ Funds 15% Funding Mix 15% Due to Banks and Financial Institutions Other Reserves Risk Reserve Retained Earnings 4% 6% 8% 45% Legal Reserve Additional Tier 1 Note 18% Shareholders’ Equity 19% Share Capital 14 Contracting Other Personal 1% 4% 7% 28% Services Industry 9% Commercial 13% Loans & Advances 17% Government 21% Real Estate Investments in Associates Other Assets Loans & Advances 3% 7% 60% Liquid Assets 12% Investments Securities 18% Total Assets 15 Financial Highlights In QAR million, except per share amounts and as stated otherwise Net interest income Net operating income Net profit Total assets 2019 2,963 2018 2,482 2017 2,518 2016 2,341 2015 2,534 4,347 3,508 3,529 3,578 3,949 2,021 1,674 604 501 1,434 147,536 134,928 138,449 130,380 123,421 Lending to customers 88,009 84,642 89,122 77,798 76,601 Basic/diluted earnings per share in QAR* 0.44 0.35 0.09 0.08 0.39 Dividends declared per ordinary share including bonus shares in QAR* Closing market price per ordinary share in QAR (at year end)* 0.20 0.15 0.10 0.05 0.30 4.70 3.94 2.89 3.25 4.59 Book value per ordinary share in QAR* 5.38 4.91 5.25 5.91 5.30 Long-term debt (at year end) 21,568 24,451 20,908 22,495 20,523 Shareholders’ equity (at year end) 21,756 19,856 21,022 19,301 17,299 Return on average shareholders’ equity Return on average assets Capital adequacy ratio 9.7% 1.4% 16.4% 8.2% 1.2% 15.5% 3.0% 0.4% 16.1% 2.7% 0.4% 15.2% 8.2% 1.2% 13.5% Full-time employees (at year end) 2,320 2,270 2,251 2,138 2,286 * 2015-2018 restated to reflect share split from QAR 10 to QAR 1 as per QFMA regulations 16 Key Highlights 20.7% NET PROFIT OF QAR 2,021 MILLION, UP BY 20.7% 23.9 % NET OPERATING INCOME OF QAR 4,347 MILLION, UP BY 23.9% Other key financial highlights • Cost to income ratio of 28.3%, reduced • Best ‘Cash Management Bank’ in Qatar from 33.4%. • Net provisions QAR 654 million, down by 21.8%, NPL ratio reduced from 5.6% to 4.9% and coverage improved from 78.6% to 82.1%. • Total assets of QAR 147.5 billion, up by 9.3%. • CET1 improved from 10.5% to 11.1% and total CAR improved from 15.5% to 16.4% . • Customer loans and advances of QAR 88.0 billion, up 4.0% led by growth in Government and Public Sector. award for the third year in a row, and “Best Transaction Banking Service” in Qatar from “The Asian Banker”. • ‘Best Retail Bank’ in Qatar award for the third year in a row and “Financial Technology Innovation Award 2019” for the 60 Seconds Online Remittance service and digital innovations. • “Best Corporate Governance” in Qatar 2019 award by World Finance. 17 Towards a Brighter Future Towards a Brighter Future In 2016 we started on our corporate strategic path built on the Five Cs. In 2019 we moved forward with confidence, achieving success, earning prestigious awards and introducing innovative technologies that play a vital role in enhancing our customers’ experience. All these accomplishments have paved the way for a promising future. Chairman’s Message Abdulla Bin Ali Bin Jabor Al Thani Chairman On behalf of the Board of Directors, I am pleased to present Commercial Bank’s Annual Report for the year ended on 31 December 2019. Thanks to strong leadership and prudent macroeconomic management, Qatar’s resilient economy continues to withstand the diplomatic and economic blockade imposed in 2017. Qatar has strong economic fundamentals, with a stable business environment that is supportive of foreign investments. This is recognised by major rating agencies and Qatar has maintained strong sovereign ratings of Aa3, AA- and AA- from Moody’s, S&P and Fitch respectively. A clear indication of the confidence that international investors have in the economy was evident when Qatar successfully raised $12 billion from the bond markets in March 2019, which was more than four times oversubscribed and with lower spreads than in previous issues. 20 Real GDP growth is expected to increase from 1.49% last year to 1.97% in 2019, underpinned by a recovery in hydrocarbon output and continuing robust growth of the non-hydrocarbon sector. Qatar is blessed with deep natural resources, and gas reserves are forecasted to last for at least another 130 years. Qatar has competitive strengths in LNG compared to 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. Qatar’s economy is well diversified, with nominal non-hydrocarbon share of overall GDP forecast to be 65% in 2019, and Qatar continues to invest heavily in strengthening the private sector to secure the nation’s long-term financial future. Spending on major infrastructure projects such as Hamad Port, the Special Economic Zones, roads and logistics centres in strategic locations across the country will boost economic diversification. Self-sufficiency projects continue strongly, especially in food products, with Baladna’s IPO notable success in October 2019. In further support of the private sector and economic diversification, the government has introduced new reforms designed to enhance Qatar’s attractiveness to international businesses and to strengthen its position as a leading investment destination within the Middle East region. Foreign investors are permitted to invest in all sectors of the economy up to 100% compared to 49%, a new public-private partnership law will accelerate infrastructure development and commercial administration services have been streamlined. Predictions for the global economy in 2020 are mixed, with optimistic views contrasting against fears of a global recession. Commentators point to trade tensions, a slowdown in China, record levels of global debt and the prospects of a sharp market correction as major risks. Due to the coordinated efforts of many ministries, organisations and companies, all under the leadership of His Highness the Amir Sheikh Tamim Bin Hamad Al Thani, the economic outlook for Qatar in 2020 is positive, with the World Bank forecasting Qatar’s GDP to grow continually up to the World Cup in 2022. Qatar will post a budget surplus in 2019 and favourable macroeconomic fundamentals, financial stability and large reserves will provide an environment that enables growth. As one of the leading financial institutions in the country, we are committed to supporting Qatar on its economic journey. Commercial Bank is on its own economic journey, and we have a clear five-year strategic plan initiated in 2016 to transform the Bank. Within that plan, our key focus areas have been taking provisions for our legacy loan book, increasing our capital, reducing our cost to income ratio and continuing to build the Bank’s 44-year- old franchise in terms of new technology and innovation. Actions taken under our five-year strategic plan are delivering good results as demonstrated by the Bank achieving the highest annual net profit in its history in 2019. Commercial Bank, its subsidiaries and associates announced its financial results for the full year ended on 31 December 2019, and the Board of Directors have recommended, for approval at the Annual General Assembly on 23 March 2020, a cash dividend payout of QAR 0.2 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 Amir 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 to 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 2019 a successful year for Commercial Bank, recognising that this success would not have been achieved without the loyalty of our customers and the continued support of our shareholders. We have made good progress in reshaping our business under our five-year strategic plan, and in 2020 we will continue on our transformation journey towards delivering long-term sustainable growth for our shareholders and supporting the continued growth and prosperity of the Qatari economy. Abdulla Bin Ali Bin Jabor Al Thani Chairman 21 Board of Directors 22 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. HE Mr. Khalaf Ahmed Al Mannai Member (Representing Qatar Insurance Company) 9. HE Mr. Saleh Abdulla Mohamed Al Ibrahim Al Mannai Member 23 One Team, One Bank One Team, One Bank Investing in our human capital and the wellbeing of our employees has always been a top priority. In 2019, we strived to develop their skills and employ experienced talents, while nurturing a collaborative, cross-departmental culture of “One Team, One Bank.” Vice Chairman’s Message Mr. Hussain Ibrahim Alfardan Vice Chairman In 2019, Qatar’s economy went from strength to strength, overcoming challenges of the economic blockade and a lower-oil-price environment to record good growth and a budget surplus. Commercial Bank too has overcome a challenging environment to achieve the highest net profit in the Bank’s history in the third full year of our five-year strategic plan. The Bank delivered a consolidated operating profit of QAR 3,119 million and a net profit of QAR 2,021 million as at 31 December 2019, representing a 33.6% and 20.7% increase over the same period last year, respectively. 26 Our subsidiary Alternatif Bank reported a good set of results despite challenging market conditions and the depreciation of the Turkish Lira by circa 21%. The bank reported an increase in net profit to QAR 100 million, up 10% compared to 2018. Alternatif Bank grew customer deposits by 4% while loans and advances dropped by 3% at the end of the year, compared to the previous year. Our associate bank in Oman, National Bank of Oman (NBO), performed steadily during 2019, reporting a net profit of QAR 485 million. UAB has been reclassified from an asset held for sale to an associate, and we have taken a goodwill charge of QAR 414 million. 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 Amir, 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 in guidance and support, which we continue to greatly appreciate. Hussain Ibrahim Alfardan Vice Chairman Under our five-year strategic plan, our strategic intent is to de-risk and re-shape our balance sheet. We took the prudent decision to clean up our legacy loan book and significant provisions have been taken since 2016. This provisioning process is coming to an end, with net provisions for loans and advances decreasing by 21.8% in 2019 to QAR 654 million. In terms of de-risking, the Bank has proactively exited QAR 5.2 billion of riskier names since 2016, up from QAR 3.7 billion in 2018. In terms of re-shaping, the Bank’s exposure to the real-estate sector decreased by 13% in 2019 and our exposure in government and public sector loans increased by 47% in 2019. Income previously associated with provisions and de-risked loans has been substituted with high-quality sources. Operating income increased 23.9% in 2019 to QAR 4,347 million, supported by a 19.4% year-on-year increase in net interest income to QAR 2,964 million (despite the low global interest rate environment) and strong demand for the Bank’s Transaction Banking and cash management services. Our strategic focus on Transaction Banking and fee-based services such as remittances, cash management and wealth management supports long-term sustainable growth as it builds fee income that is not purely based on lending. Total fees and other income increased 34.8% to QAR 1,383 million in 2019 compared to 2018. Supported by the success of Transaction Banking and cash management services, low-cost deposits grew 15% during 2019 contributing to an improvement in net interest margins. Total loans and advances were QAR 88.0 billion in 2019, up 4% compared to 2018 and total customer deposits increased 6.3% to QAR 76.3 billion. In line with our strategy to drive operational efficiencies across the business through investment in digitization and automation, eliminating waste and reducing staff costs while avoiding large scale redundancies, we continued to decrease our cost to income ratio down from 33.4% in 2018 to 28.3% in 2019. During 2018, we implemented a one-time IFRS 9 charge of just over QAR 1.5 billion in line with best governance standards and a conservative approach, reducing our CET1 capital to 10.5% as at 31 December 2018. Our strategic intent is to maintain a minimum CET1 between 11.0 to 11.5%, and in 2019 we successfully increased CET1 to 11.1% back within our target range. 27 Group Chief Executive Officer’s Message Mr. Joseph Abraham Group Chief Executive Officer In 2019, we successfully executed the third 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, achieving in 2019 the highest net profit in the history of the Bank. The foundation of our strategic plan with the vision of being the “Best Bank in Qatar” are the 5 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 strongly delivered against each of these 5 Cs in 2019. 28 Our Turkish subsidiary Alternatif Bank has delivered positive returns and improved net profit by 10% in a challenging macroeconomic environment and NBO has delivered solid results. United Arab Bank (UAB) in the U.A.E. has been reclassified from an asset held for sale to an associate and UAB has developed a strategic plan to improve results following the appointment of a new CEO in 2019. We are confident that our subsidiary and associates will make a greater contribution to the Commercial Bank Group in the future and we are looking forward to building on the successful recent collaborative work undertaken with Alternatif Bank in Turkey and NBO in Oman. Our five-year strategic plan has not changed and our objective for 2020 is to continue to deliver our strategy with disciplined execution. Our committed staff have demonstrated that “everything is possible” in 2019 and with the support and guidance of our Board, we will continue to innovate, invest in our business and grow sustainably in 2020. Joseph Abraham Group Chief Executive Officer Since beginning operations in 1975, Commercial Bank has built its franchise based on innovation and customer service. To continue this legacy, the Bank is undergoing a transformation change in terms of investment, digitization and building new capabilities in technology, while at the same time controlling waste. Corporate earnings quality was strong in 2019, with good growth across the board. We increased our capital to 11.1% within our minimum CET1 target range of 11% to 11.5% and we continued to improve our cost to income ratio, moving down from 33.4% to 28.3% closer in line with the market. We have reshaped and diversified our loan book by proactively exiting high risk names, decreasing our concentration in real estate and increasing our share of high-quality government and public sector loans by 47% in 2019. For the best Client experience, we revamped our brand design for branches and opened our first Doha Metro Rail branch at Doha Exhibition Convention Centre metro station with a digital self-service model. Mobile, Corporate and Internet Banking all added new digital features and functionality. We expanded contactless cards to over 2,590 terminals, increased remote cheque scanning and expanded our 60-second remittance service to over 30 countries. This has all contributed to our strategic focus on Transaction Banking by capturing more and more financial flows and increasing our low- cost deposits by 15% over the year. Creativity and innovation are linked to Client experience and our digital transformation process. In 2019, we expanded and enhanced our digital products and services, while internally embedding digital into Commercial Bank’s DNA throughout our organization. Our “One Bank” culture emphasizes strong collaboration across the Bank’s different departments for the benefit of our clients and we continued to invest in our premises and people-related activities to promote teamwork and togetherness. Compliance is a key focus area for the Bank and we have invested significantly in this area to make substantial improvements over the course of 2019. The disciplined execution of our five-year strategic plan is delivering results and market recognition has come in the form of numerous award wins in 2019 including “Best Retail Bank”, “Best Cash Management Bank”, “Best Transaction Banking Service” and “Best Mobile Banking App” by reputable providers. 29 Limitless Ambitions Limitless Ambitions While shining bright in Qatar, we have widened our accomplishments and geographical reach to other countries and borders. Thanks to our international alliances with associate banks such as Alternatif Bank in Turkey and National Bank of Oman, we aspire to enhance international investments between countries and affirm Qatar’s strategic role in the region. Management Review of Operations Financial Results In 2019, Commercial Bank delivered a net profit of QAR 2,021 million, an increase of 20.7% compared to the QAR 1,674 million achieved in 2018. Loans and advances to customers increased by 4.0% to QAR 88.0 billion at 31 December 2019, compared with QAR 84.6 billion in 2018. The increase was mainly in the government and public sector. Our deposits increased by 6.3%, to QAR 76.3 billion at 31 December 2019 compared with QAR 71.8 billion in 2018, the increase is mainly in the current and call deposits. Investment securities increased by 20.9% to QAR 26.8 billion as at 31 December 2019 compared with QAR 22.2 billion at the end of December 2018. The increase is mainly in Government bonds. Financial Results (QAR million) Net interest income Non-interest income Net operating income Operating expenses Impairment on loans & financial assets Impairment on Associate 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 2019 2,963 1,384 4,347 (1,228) 2018 2,482 1,026 3,508 (1,173) (654) (836) (414) (7) (23) 2,021 2019 796 227 205 1,228 - 182 (7) 1,674 2018 676 313 184 1,173 32 Rehan Khan EGM, Chief Financial Officer Net Operating Income Commercial Bank’s net operating income reached QAR 4,347 million for the year ended 31 December 2019, an increase of 23.9% compared with QAR 3,508 million achieved in 2018. Net operating income for the Bank in Qatar increased by 25.1% to QAR 3,747 million compared to the same period in 2018. Net interest income for the group increased by 19.4% to QAR 2,963 for the year ended 31 December 2019 compared with QAR 2,482 in 2018. Net Interest Margin increased to 2.5% compared to 2.1% in 2018. The increase in margins is mainly due to lower cost of funds and increased the proportion of high yielding assets. Non-interest income increased by 34.8% to QAR 1,384 million for the year ended 31 December 2019 compared with QAR 1,026 million in 2018. The overall increase in non-interest income was due to increase in net fee and commission based income mainly from cards and transactional banking, foreign exchange gains and income from investment securities. Operating Expenses Total operating expenses slightly increased at a group level by 4.7% to QAR 1,228 million for the year ended 31 December 2019 compared with QAR 1,173 million in 2018. The increase was primarily driven by staff expenses on account of IFRS 2 accounting of its performance rights (share options) granted to staff. Provisions for Impairment Losses Provisions for loans and advances for the group reduced by 35.9% to QAR 594 million for the year ended 31 December 2019, compared to QAR 927 million provided in 2018. The non-performing loan ratio decreased to 4.9% in December 2019 compared to 5.6% in 2018, the loan coverage ratio increased to 82.1% as at December 2019 compared to 78.6% in December 2018. The bank sets aside a risk reserve against its lending as part of shareholders’ equity. At 31 December 2018, the risk reserve was QAR 1,421 million. In addition, the group impaired its associate United Arab Bank by QAR 414 million in 2019, on conversion from asset held for sale to an associate as the book value of UAB was higher than the industry standard model used for its valuation. Total Assets and Funding Commercial Bank balance sheet increased by 9.3% in 2019, with total assets at QAR 147.5 billion compared to QAR 134.9 billion in 2018. Balance sheet increase was driven by QAR 3.4 billion increase in loans and advances, increase of QAR 4.6 billion in investment securities and an increase of QAR 2.9 billion in due from banks. Customers’ deposits increased by 6.3% to QAR 76.3 billion at 31 December 2019, compared with QAR 71.8 billion in 2018, an increase of QAR 4.5 billion. Low-cost deposits grew by 15% in 2019, contributing to the improvement in NIMs. Capital Commercial Bank’s capital position remains strong, the capital adequacy ratio increased to 16.4% as at 31 December 2019 compared to 15.5% at the end of 2018. 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 155 million for the year ended 31 December 2019, with total assets of TL 30.2 billion and lending of TL 18.9 billion. Alternatif Bank provides its customers in the corporate, commercial and retail banking segments with high value products, services and solutions. Alternatif Bank has 48 branches widely distributed around Turkey. In 2019, 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 (L.L.C.) 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 Exchange. In 2019, CBFS delivered a net profit of QAR 9.1 million. Other Income Foreign Exchange Income Investment & Dividend Income 2% 3% 6% 68% Net Interest Income Retained Earnings Other Reserves Risk Reserve 4% 6% 8% Legal Reserve 45% Net Fee Income 21% Net Operating Income Additional Tier 1 Note 18% Shareholder’s Equity 19% Share Capital 33 Management Review of Operations continued Orient 1 Limited A fully owned subsidiary that owns and manages an exclusive Diners Club franchise in Turkey. 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 (L.L.C.) 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.) National Bank of Oman (NBO) achieved net profit of OMR 51 million, compared with OMR 50.6 million in 2018. Operating income maintained at OMR 128 million. During 2019, NBO customer deposits increased by 3% to OMR 2.5 billion. United Arab Bank (P.J.S.C.) United Arab Bank (UAB) has been reclassified from an asset held for sale to an associate, and we have taken a goodwill charge of QAR 414 million. A new CEO for UAB was appointed in March 2019 and we will be working to ensure that UAB achieves improved results through implementation of a new strategic plan.. 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. 34 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 potentials. 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 2019, Wholesale Banking’s business represented the growth of most of the Bank’s total loan book and generated over 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: • Growing the balance sheet in line with the market, primarily within the government and public sector; • Strategically re-shaping the composition of the balance sheet to reflect the market; • Proactively de-risking the balance sheet for sustainable growth; • Building a strong pipeline of the right customers, with the right risk profile and the right quality of assets; • Focusing on Transaction Banking; • Diversifying revenue streams; • Working closely with Alliance banks. Growing the government and public sector balance sheet Growth in the government and public sector balance sheet during 2019 was over 53%. The growth of this sector in Commercial Bank’s book is estimated to be significantly faster than the market growth. We have identified new public sector customers to focus on, targeting cash management. Re-shaping Wholesale Banking’s balance sheet The composition of the balance sheet has been 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 21% of Wholesale Banking’s portfolio in YTD 2018 to 29% in YTD 2019; • Rationalisation of real estate exposure with a reduction from 27.8% of Wholesale Banking’s portfolio in 2018 to 27.6% in 2019 in line with the bank’s Strategic plan. 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 with exposure to be either partially or fully reduced to ensure Commercial Bank does not have very large exposure towards any client. In 2019, the total amount of intentionally de-risked assets was more than QAR 2.0 billion, with an additional target of over QAR 1.0 billion by 2020, for an optimized balance sheet containing high-quality customers and assets. Growth and strong lending pipeline Wholesale Banking’s lending book grew by approximately 11% in 2019. Wholesale Banking’s focus in 2019 was to grow its lending book with the right risk profile and the right quality, in conjunction with the strategic aims of reshaping 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. 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 was above 15% 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, ultrahigh net worth, government and public sector. Domestic Corporate Banking was active in arranging large financings in the domestic syndicated and club loan markets, and was associated with a number of the successful transactions in 2019, including key arterial highways connecting stadiums being built for the 2022 World Cup, and supporting district cooling in the Lusail area. In 2019, 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 unit, where a key strategic focus has been to enhance the total relationship value for each customer across all business portfolios. 35 Management Review of Operations continued • Updated CB Smart Trade solution that helps ease transaction flow, faster turnaround time and real-time status updates; • Corporate Mobile application enriched with seamless retrieval and approval of Salary and bulk payments initiated on line (Corporate Internet Banking); • Swift GPI for corporates through CIB and mobile for online tracking customer transactions on real time basis; • Multiple structured trade solutions for leading automobile Dealers and other commodity traders that assisted imports in Qatar on an extended credit period; • Implemented customized B2B solutions for large public sector conglomerates engaged in Transportation, Aviation and Exports; • International remittances have seen significant growth of 49% and exports share has moved up to 19% from 16%. Transaction Banking has worked closely with international Block Chain initiatives for Trade Finance conducted by Voltron and MarcoPolo along with many international banks and in 2020 will move to testing phase from the current design phase. This would be a significant innovation which will add value to our customers. 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 2019, 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 wins two prestigious corporate awards by Global Finance Transaction Banking Commercial Bank has been continuously enhancing products and services to maintain its leadership position in Transaction Banking in Qatar. In 2019, the Bank rolled out new services and strengthened the product suite. Customer adoption of digital channels has improved substantially - 85% of payments, 98% of salaries and 50% of trade transactions are now conducted digitally. The Bank’s efforts with regards to digitization are also recognized by Global Finance and Bank has been rewarded as “Best Trade Finance Services, Corporate Digital Banking” and “Best Online Cash Management Bank” in Qatar. Recognizing Commercial Bank’s 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 2019. This is the third year in succession after 2017 & 2018. Some of other significant initiatives are as follows: • Automated insurance service for trade finance customers; • Postdated cheque Management solution for the benefit of Real estate sector that provides control of data, remote submission of cheques and custody; • Corporate Mobile App with rich features to conduct all payments and inquiries of bank accounts; 36 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. 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 2019, 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, Alliance bank partner, and National Bank of Oman; • SIBOS in London, United Kingdom, 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. 2020 priorities Moving forward, our strategic priorities in 2020 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 lead to increased cross-selling and improve International Banking’s portfolio returns; Fahad Badar EGM, International Banking 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 2019 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 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 on 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. 37 Management Review of Operations continued • 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 team manages the banking and financial solutions for individuals and business interests of small and medium-sized enterprise (SMEs). Our broad spectrum of products for individual customers includes accounts, deposits, loans, credit cards, insurance, and wealth management solutions to help our customers through different stages of their life journeys. Our Enterprise banking teams support small and mediums sized businesses in a range of industries and provide tailor-made solutions as required by customers. As a business group, we are fully aligned and committed to the Bank’s 5-year transformation strategy underpinned by Five Cs - Corporate Earnings Quality, Client Experience, Creativity & Innovation, Culture and Compliance. We are proud to have won a range of awards in 2019, as a testimony to our commitment and innovation, that makes it easy and convenient for our customers to bank with us: • “Best Retail Bank in Qatar” by The Asian Banker; • “The Best Remittance Product and Service of the year 2019” by the Asian Bankers; • “Best Consumer Mobile Banking App” award by Global Finance. 38 Amit Sah EGM, Consumer Banking Business performance Retail Banking continues to contribute significantly to Commercial Bank’s overall performance. Built on a strong franchise of customer service and innovation, Retail Banking has delivered strong performance in 2019 . The Retail and Enterprise balance sheet remained healthy with lending to customers adjusted to QAR 18.1 billion and deposits growing to QAR 23.3 billion. Increase in fee income compared to previous years has improved the quality and sustainability of earnings. Coupled with careful management of net interest margins, control of direct costs and focus on increasing digitization, Retail Banking was able to deliver another year of strong performance. Our innovative services, especially in remittances and product positioning including Wealth, have helped Retail Banking maintain consistency in performance through 2019. We take great pride in delivering a quality service to all our customers, with our Private Banking and Sadara Premium Banking services leading with exceptional standards. 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 170 ATMs that are strategically located around Qatar to ensure optimum usage of the network by customers. Customers can also conveniently do bill payments, transfers and generate or change PINs for their cards through our ATM network. Retail Internet and Mobile Banking Motivated by our continued digital success, we maintained persistent efforts in 2019 to enhance the range of services offered by our Internet Banking platform and Mobile Banking App. The CB mobile app offers greater flexibility than ever before, greatly reducing the need to visit branches or call our helpline whilst continuing to being safe, secure and convenient. Success of our 60-Seconds Remittances’ initiative encouraged us to expand our reach to 30 countries including India, the Philippines, Sri Lanka, Pakistan, Nepal, Turkey, Jordan UK & Europe allowing customers to send faster payments and reducing reliance on other traditional methods. Commercial Bank will be the 1st bank in Qatar to launch its own Mobile Wallet, when in Q1 -2020 we enable customers to use their mobile devices to perform ‘Tap n Pay’ transactions while making payments at any contactless POS terminals and even complete remote online e-commerce purchases via Masterpass checkout services without exposing their credit card details. We are proud that our CB Mobile App consistently features as the #1 Financial App in Qatar, in both Apple and Android App stores. Commercial Bank opens a new branch in Ain Khaled Commercial Bank wins “Best Consumer Mobile Banking App” award by Global Finance Branch and ATM networks We continued our strategic journey of aligning presence in emerging geographic and economic zones in Qatar by launching the country’s 1st metro branch in DECC station, relocating our branch from Industrial Area to a new location in Ain Khaled and moving the Al Sadd branch to our flagship Le Boulevard Building. Our modern look-and-feel new breed of metro branches offer customers increased self-service functionality and customers can conveniently use our branch through all opening hours of the metro station. In addition to re-aligning our footprint, we have transformed and enriched customer experience for key branch services. We continue to maintain one of the largest branch networks amongst all the banks in the country and as we reshape our distribution model, we will ensure fit for purpose physical distribution to complement our string digital banking presence. 39 Management Review of Operations continued Cards Commercial Bank’s Cards and Payments business is keeping steady strides to provide its customers the most innovative and market best payment solutions. 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 2018. Leveraging the contactless payment platform, Commercial Bank will launch Qatar’s 1st digital mobile wallet, enabling Android users to pay for goods and services. We continue to invest in our flagship portfolio of the Limited-Edition Cards, which contributes greatly to the Card Business spends portfolio. Overall, the cards business had a strong growth in spend and balances in 2019. The Bank has achieved market dominating numbers of issuance of over 500,000 for Contactless Cards, rollout of over 8,000 POS terminals and processing more than 2million Contactless POS transactions in 2019. In 2019, we introduced another market 1st product and changed the way customers perceive reward and loyalty, with regards to how they spend on Commercial Bank cards. CB Fawri is the instant discount at POS terminals without customer having to ask for the discount. Over 36,000 transactions and savings worth QR 1.13 million have already been recorded. Commercial Bank continues to play a key role in Qatar’s merchant acquiring business and has forged ahead with fully integrated ECR payment system with retailers. Commercial Bank is leading the low-salary segment keeping in line with the government’s vision for WPS customers. Our low cost but efficient payroll card (PayCard) business model is the market leader with an estimated 50%+ market share of this 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. Wealth management Diversification requirements of our customers inspired us to expand our product range through key alliances and we continued increasing our investment in our people, processes and systems. Partnering with NBK Capital, we successfully launched the exclusive CB Leasing and Finance Fund Ltd. product, which seeks to achieve its investment objectives of distributing income to investors monthly, by investing in equipment leasing and related transactions and asset backed and structured finance transactions. Our focus on upskilling our people continued in 2019 with additional wealth advisors obtaining the International Certificate in Wealth and Investment Management (ICWIM) from the Chartered Institute for Securities and Investment (CISI). In 2020, our focus will be on automating operational processes to allow customers near real-time execution of trades and more granularity & transparency of reporting. Life in Qatar Commercial Bank continues to dominate the market for new expat arrivals into Qatar with our innovative offer “Life in Qatar”. Customers can have their account numbers ready as soon as they apply, even before arriving in the country. A dedicated team who speaks their language welcomes them the minute they land in Qatar with their debit and credit cards. Commercial Bank rewards 195 customers with individual gold coins 40 Tailored specifically for people moving to Qatar, it provides ease and convenience for those relocating and has already helped over 100,000 customers from over 144 different countries worldwide. The “Life in Qatar” website provides necessary information that is relevant to relocation and continues to attract visitors daily. The partnership with Qatar Visa Centres in selected overseas locations also enables inbound expat customers to resolve banking needs even before stepping foot in the country. Focus on Qatari Youth Customers In 2019, we launched Sadara Youth, a digital product designed to fit the needs and lifestyles of young Qatari customers. Sadara Youth This package is exclusively for Qatari Nationals aged between 18 and 25 years and provides a style of Banking through a dedicated Digital App that is educational and fun to use. It is the 1st Mobile Banking application in Qatar that educates and rewards young customers as they learn to transact and acquaint themselves with day-to-day banking services. The Sadara Youth package also delivers another 1st in Qatar by issuing a fashionably striking, vertical design Credit Card. 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 2019 has been to dominate Transaction Banking, drive digitization and build strong transaction revenues while moving away from assets- based lending. Building upon the 360-degree view of our customers, we have been able to improve our relationship management and have successfully launched industry specific cash management and digital banking solutions. This enhancement of customer experience and led to increased engagement. We continue to educate and migrate our customers to self-service digital banking services. Over two-thirds of the total SME base 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. Parvez Khan EGM, Treasury and Investments 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 as 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 2019 whilst ensuring a liquidity buffer for the Bank by focusing on liquid and diversified investments. It’s goal in 2020 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. 41 Management Review of Operations continued 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 2019, 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. Treasury is also actively engaged with Commercial Bank subsidiary in Turkey – AlternatifBank to provide end-to- end origination, structuring, negotiation and execution. 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 is the three lines of defense, namely: 1. The first line of defense consists of frontline business units and 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. 42 Paul Gossiaux EGM, Chief Risk Officer 2. The second line of defense consists of independent risk management, which oversees risk-taking and assesses risks independent of frontline business units and 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 consists of internal audit, which provides independent assurance to the Board on the effectiveness of governance, risk management, and internal controls. During 2019, Commercial Bank continued to enhance its risk systems infrastructure platforms, including introduction of an automated retail banking provision system, improvements in credit approval workflow, among others. The Bank also implemented improvements in ICAAP and IRRBB, and successfully completed its first review of Internal Controls over Financial Reporting in accordance with Qatar Financial Markets Authority. In 2020, 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. 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. 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 Board of Directors or its 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. 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. 43 Management Review of Operations continued Commercial Bank celebrates National Day Commercial Bank Lead Sponsor of the Euromoney Qatar Conference 2019 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 supports 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. Following a national vision Commercial Bank’s successes and achievements this year emerged from the Bank’s commitment towards Qatar National Vision 2030, which inspired us to achieve results, in alignment with the country’s key strategic messages and fulfilment of the Qatar National Vision 2030. As part of its Qatar National Day 2019 celebrations, Commercial Bank has organized several visits to various entities, such as schools, hospitals, Hamad International Airport, and centers for people with special needs, where limited-edition souvenirs and gifts were distributed. The bank also organized activities for its employees to celebrate the rich heritage, culture and history of Qatar and to reflect the love and loyalty of the Bank’s employees towards His Highness the Amir Sheikh Tamim bin Hamad Al Thani. Moreover, Commercial Bank organized several pre- and post-event activities at its branches, where people enjoyed Arda performance, Arabian coffee and sweets, and a limited-edition set of National Day souvenirs that was distributed. As part of the event programme, a special song was dedicated to Qatar, “Shofto El-Gomar”. The exclusive operetta was performed during the National Day celebration before the audience by the young singer Nasser Al Kubaisi and was widely very well received. 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 Qatar National Vision 2030. To promote excellence within the country’s financial sector, the Bank was a Lead Sponsor of the Euromoney Qatar Conference 2019, held under the patronage of HE Sheikh Abdullah bin Nasser bin Khalifa Al Thani, Prime Minister and Minister of Interior. 44 Group CEO Joseph Abraham and COO Leonie Lethbridge spoke at this major industry event, which focused on the future of Qatar, and on how the small but resourceful and capital-rich Qatari economy is transforming its already sizeable role in the global economy to meet the new demands of 21st century business and finance. Commercial Bank has also hosted the author and futurist Brett King for the very first time in Qatar, who shared with the audience his thoughts about the future of banks and the strategies banks need to follow in order to flourish. In the future, banks will predict customers’ needs and serve them when and where they need them, as predicting customer experiences with banking built into them is key. King expressed that banks need to think technology first and be technology savvy, as by 2025, customers should be able to receive more advice on their money every day via their phone than they will in one year from an employee sitting behind their desk, as advising, distribution and banking experiences will be digital. Commercial Bank has been working towards developing and enhancing the localization process of the energy sector’s supply chain and to expand the small and medium enterprise (SME) landscape in Qatar. In order to achieve this goal, the bank has announced its support of an important national initiative by QP ‘Tawteen’, a ‘Localisation Programme for Services and Industries in the Energy Sector’ by Qatar Petroleum (QP). Corporate Social Responsibility (CSR) Since its inception over forty-five 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 responsibility fulfillment, including a variety of activities aiming to spread the spirit of the holy month of Ramadan and the values of giving in a creative and innovative way. The Bank also launched a social media initiative – #CastYourKindness – to encourage charity and compassion amongst employees through volunteering in distributing Iftar boxes every Saturday to people around Qatar. Hussein M Ali Al-Abdulla EGM, Chief Marketing Officer Additionally, as part of our support to the community, the Bank’s team joined the Center for Empowerment and Elderly Care (Ihsan) for a special Iftar meal. Several employees have participated in the Bank’s initiatives during Ramadan to demonstrate our commitment to “One Bank” and “One Team” culture. Sports, health, and fitness At Commercial Bank, our people are our greatest asset, and we are committed to invest 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 only 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. Since the beginning of 2019, Commercial Bank has embarked on a series of well-organized events and activities that showcased its commitment towards promoting sports. The Bank’s participation in Ooredoo Marathon was a big success, as over 130 employees and their families have participated, confirming that Commercial Bank is a big supporter of healthy and active lifestyle. Additionally, Commercial Bank participated in the celebrations of the National Sport Day with a mix of physical activities, staff wellness and a community outreach programme. To engage with the wider Qatari society, volunteers from Commercial Bank distributed special National Sports Day gifts at Qatar Society for Rehabilitation of Special Needs, independent schools, the children’s floor at Hamad Hospital and at Al Wakrah Hospital. 45 Management Review of Operations continued In the same context, Commercial Bank Staff Club prepared an exclusive CB Olympics event for staff which turned out to be an intense competition, spreading a positive energy that represents the Bank’s character. The CB Olympics event was a day full of challenges designed to promote competition, teamwork, and boost employees’ morals. Commercial Bank Staff Club is keen on fulfilling the Bank’s obligation towards promoting sports and wellness activities for our staff by providing a selection of fitness training programmes designed and scheduled to run throughout the year for the benefit our staff. 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. As a result of this commitment, the Bank and Qatar Golf Association (QGA) has signed a three-year sponsorship agreement to host the Qatar Masters Golf Tournament. With this agreement, Commercial Bank will continue to be the official Title Sponsor for QGA’s Qatar Masters Golf tournament until 2022. We are proud of being the title sponsor of Qatar Masters 2019 for the 14th year in a row which is a source of pride for Commercial Bank. It is the live proof of the bank’s keenness on playing an active role in spreading awareness to the public in the field sport. Furthermore, the Bank launched an exciting and innovative campaign to promote the Commercial Bank Qatar Masters Golf Tournament which focused on generating awareness about the event itself, as well as on educating the public in Qatar about golf in the context of the Qatari culture. Additionally, the Bank has also hosted several educational events for over 5000 students ranging from a variety of schools and universities in Qatar in several malls. In its efforts to enhance awareness of key health issues in Qatar in 2019, Commercial Bank has partnered with Qatar Cancer Society (QCS) as a Gold Sponsor for their ‘Walk to Support’ campaign. The Bank has conducted a variety of joint exciting awareness-raising activities and workshops in October to support the society within its mission to raise awareness on breast cancer. Emphasizing on the importance of Breast Cancer Awareness Month, Commercial Bank has launched the remarkable ‘One Image’ campaign exclusively for its employees. The bank’s employees got the opportunity to attend the informative “Breast Cancer Awareness Sessions” and enjoy exciting activities held on the side. As part of the “One Image” campaign, Commercial Bank’s female employees attended a workshop entitled “Our Passion in our Health,” which was delivered by 46 Commercial Bank participates at the Education City Career Fair Commercial Bank Staff Club presents an exclusive CB Olympics event for staff Commercial Bank Gold Sponsor for Qatar Cancer Society (QCS) ‘Walk to Support’ campaign Commercial Bank and Qatar Golf Association (QGA) signed a three-year sponsorship agreement to host the Qatar Masters Golf Tournament Commercial Bank participates in Ooredoo Marathon In 2019, Commercial Bank’s National Development Team participated at the Education City Career Fair twice to recruit Qatari nationals as the next generation of highly skilled banking leaders. Bringing together representatives of leading organizations and companies in Qatar, this initiative mainly targets high-school students and seeks to familiarize them with the dynamics and challenges of Qatar’s labor market. Additionally, Commercial Bank launched the new Nationalization Forum, which aims to introduce the National Talent Council (NTC), its initiatives, and upcoming programs for nationals across the bank. In the development of a prosperous and sustainable nationalization strategy at Commercial Bank, and in light of the Qatar National vision 2030, the forum is a great asset for everyone to get updates on the current Nationalization strategy, initiatives and upcoming programs, the forum also serves as a channel to obtain feedback and inquiries that will give the NTC a much greater understanding to improve and drive Nationalization in Commercial Bank. specialists in the Health Education Department at the Qatar Cancer Society. The awareness campaign was concluded by the participation of Commercial Bank’s employees along with their families in the “Walk to Support” initiative expressing encouragement and compassion for those living with breast cancer. 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 capital 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. 47 Management Review of Operations continued In 2019, Commercial Bank was awarded: • ‘Best Corporate Governance in Qatar 2019’ by World Finance magazine • ‘Best Remittance Product and Service of the Year 2019’ for 60 Seconds Remittance Service by The Asian Banker • ‘Best Retail Bank in Qatar 2019’ by The Asian Banker • ‘Best Cash Management Bank in Qatar in 2019’ by The Asian Banker • ‘Best Transaction Banking service in Qatar in 2019’ by The Asian Banker • ‘Best Mobile Banking App 2019’ by Global Finance • ‘Best Online Cash Management 2019’ by Global Finance • ‘Best Trade Finance Services 2019’ by Global Finance Human Capital In 2019, Commercial Bank continued to invest in its entrepreneurial and performance culture. Initiatives included: • Reinvigorating our performance management system and putting more focus on people, conversations and development; • Setting new, challenging performance standards for our leaders and teams; • Restructuring the Human Capital team and introducing of HC Operations, to deliver common HC services and proactive support to employees; • Introducing staff clubs and gym classes, where employees are encouraged to unleash hobbies and lifestyle to fit with work life work balance; • Attracting and recruiting the right talent that will contribute further in delivering on the Bank’s strategic plan; Commercial Bank spreads awareness on how to protect ourselves in a digital world Spreading awareness on how to protect ourselves in a digital world As part of the Commercial Bank’s role in protecting the interests of their customers, the Bank has held a media round table in order spread awareness on how to protect ourselves in a digital world, and to help our customers and the public to act wisely to avoid becoming a victim. This effort comes as a result to our keenness to equip our valued customers with the knowledge on how to act when they receive a phishing email or a phishing SMS. A secondary audience is the general public, as Commercial Bank plays a vital role in spreading awareness to the public as well. 2019 Awards In recognition of its leading digital services in the local market, Commercial Bank has won a number of awards from reputable bodies like Global Finance magazine, The Asian Banker, and World Finance magazine. Commercial Bank is committed to digital innovation to enhance the experience of our clients, and receiving these awards from renowned awarding bodies reflects the strength and breadth of our best-in-class digital products and validates our strategy of investing in innovative technologies. 48 Initiating our talent transfer and secondment program, enabling knowledge sharing and building experiences, initially with Alternatif Bank. We’ve built the secondment program to enable us and our partners to develop and learn through exposing our talents to different assignments and learnings. Learning and development We invest in making Commercial Bank a great place for learning. We target our development resources toward our people who are skilled in sharing knowledge and training others through leader-led training. This strengthens our creativity and innovation culture. With on-demand learning portal, we have provided all compliance courses through e-learning. With other development initiatives, we are pursuing our study support initiative for staff working towards full- or part- time study programmes, focused on Qatari nationals and endorsed by the NTC. The Board of Directors regularly reviews compensation and benefits to ensure we pay fairly and competitively, reward high performers, and link 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 2019, building on digitization and lessening prints, HC operations started with digitization of forms and lessening prints, increasing efficiency and speed for basic services and allowing comprehensive views on effectiveness. Newly intake in 2019, Commercial Bank has successfully attracted skilled and competent new graduate nationals across various strategic business units. These employees have been able to contribute significantly and successfully towards the Bank’s strategic goals. Moreover, focusing on world-class and uplifting experiences, Commercial Bank successfully attracted global new key talents and leaders to accelerate its strategic vision, with technology and customer focus in mind. Developing our nationals is one of our strategic pillars. Through experiences and knowledge transfer, we have promoted new national leaders from our talent pool. 49 Jassim Al Thani Chief Human Capital Officer • Partnering with the ministries and education institutions; in partnership with the Ministry of Labour to source national talent and provide them with career opportunities within the Bank Nationalization plans, the bank contributes to education and development in collaboration with universities and schools through events and training programmes; • Restructuring concept to all nationalization themes, from internal development initiatives, mentorship, top talent program and enhanced development programs to attract, retain and motivate the right candidates; • Newly forming Conflict Management Office CMO, in alignment with conflict of interest declaration policy, CMO manages and mitigates declarations and conflicts, a new process introduced through the digital forms in employee files, allows declarations to be made, tracked and updated and most importantly clarified with CMO to assure business integrity; • Newly reintroducing e-learning approaches, developed with the business expertise in Commercial Bank. We’ve launched e-learning story-based courses, built on real life sceneries and cases, enhancing and delivering compliances and on- demand learning. Enhanced career experiences In 2019, going strong with our nationalization programs, building on inner focused development, progressing our internal talents to higher positions and enabling them to take significant roles in the business, from the newly-introduced head of branches into the development of our nationals supported by the National Talent Committee NTC. Management Review of Operations continued Operations Banking operations have undergone rapid change over the past few years. There is an increasing pressure to provide more innovative product solutions that improve client experience while simultaneously reducing the cost to transact. At Commercial Bank, we have a unique ability to upscale transaction volumes efficiently, thanks to a strategic change in our operating model and the intelligent use of new technologies. By onboarding previously outsourced functionalities in 2017, we centralized technology, operations and client capabilities under one roof. This essentially gave us control to streamline and refine our processes, employ end-to-end digitalization and smart technologies such as robotic process automation. It also allowed Commercial Bank to develop a competitive edge for customization and creativity, allowing bespoke tailing for client solutions. Expanding our digital footprint At Commercial Bank, our digital conversion strategy is at the forefront of improving client experience and transacting at the lowest possible cost. Digital solutions provide the customer with convenient, fast and efficient products and services, while allowing Commercial Bank to automate processing end-end, eradicating manual tasks and enabling capacity to scale at low cost. This year’s client centric advancement in technology includes: • Digital Account Opening, providing fast efficient onboarding and instant card insurance; • Digital Wallet, for smart and secure payments; • Online Trade Portal: allowing customers an efficient, convenient vehicle to lodge applications for trade products. Leonie Ruth Lethbridge EGM, Chief Operating Officer Our digital footprint continues to grow with active digital users increasing 15% year on year, with an increasing client base migrating to mobile banking. Recognizing this customer preference, Commercial Bank has developed a leading edge Mobile App. It is the most competent financial mobile app in Qatar and in many cases has 2x functionality compared to competitors’ apps. Self-service rate transactions increased to 96% supported by continued growth in our award-winning “60 seconds remittance” programme, mobile banking transactions and increasing usage in cheque printing machines and electronic forms. Investment in key systems supporting future technological change This year marked some significant upgrades to key infrastructure, including the core banking system and the customer relationship management (CRM) system. The core banking upgrade sets the bank up for the future, enabling seamless integration with other applications while the new CRM system is aligned to our Sadara customer segment uplift, providing more structured client coverage and allowing greater client insights. 50 Transaction Banking continues to be at the forefront of the banks strategy Transaction Banking presents an opportunity to create diversified sustainable earnings, supporting fee income, low-cost deposits and the benefits of economies of scale. We continued to enhance our cash management offering providing flexible, tailored client solutions, which were recognized by the industry by winning the “Best Cash Management Bank in Qatar” for the third year in a row by Asian banker. Trade and payments have been another area of focus with the development of the online trade portal, for convenient fast trade applications. Our reputation for meeting bespoke client mandates is growing, making us win the “Best Trade Services” award by Global Finance. Commercial Bank is a market leader for credit card propositions in Qatar with over 51% market share (non- govt), over 14K POS locations, and more than QAR7bn spend from over 1 million cards. This year, we have also launched many new products and offerings including: • CB Fawri, the merchant loyalty platform giving customers instant discounts, have provided customers more than QAR 2m in POS purchases. • First in the market to launch Metal cards for LE customers and the Vertical card for Sadara Youth. • More than 3 million taps made by the contactless payment platform, which is paving the way for future digital transactions. Modernizing the branch network to meet customer requirements While digital technology is of critical importance to Commercial Bank and we fully embrace the global trend towards cashless transactions, our branch continues to be the favored banking channel for many of our customers. This year, we have introduced SMARTBanking to the Doha Metro. Conveniently located, the smaller sized bespoke branches feature predominantly automated services for speedy transactions but it also has some branch presence. We have established new premium suites for our Private Banking and Sadara customers that are tailored for individual attention, access to premium services and privacy. While our core branches are undergoing a modern look and feel upgrade to enhance our customer experiences. Heavy volume branches are being modified to high volume cash, cheque and mainstream services. Commercial Bank wins “Best Cash Management Bank in Qatar” by Asian Banker Commercial Bank wins “Best Trade Services” by Global Finance 51 Management Review of Operations continued Internet vs. Mobile Banking Transaction 83% 88% 56% 44% 50% 50% 57% 43% 70% 30% 2014 2015 2016 Internet 2017 Mobile 17% 12% 2018 2019 Digital vs. Branch Transactions 2013 2014 2015 2016 Customer 2017 2018 Branch 2019 Digital 2020 2021 Millions 50 45 40 35 30 25 20 15 10 5 0 Thousands 400 350 300 250 200 150 100 50 0 52 190K 185K 168K 146K Active Digital Users 147K 75K 126K 67K 99K 57K 88K 50K 66K 44K 2014 2015 2016 Active Users 2018 2017 Mobile Users 2019 2020 44K 29K 2013 Biometric Registered Customers 69K 65K 63K 43K 59K 28K H1 2017 H2 2017 H1 2018 H2 2018 H1 2019 H2 2019 53 Management Review of Operations continued Corporate Mobile Transactions Jan Feb Mar Apr 2016 May 2017 Jun Jul 2018 Aug 2019 Sept Oct Nov Dec 2020 Corporate Mobile - easy to access accounts Jan Feb Mar Apr 2016 May 2017 Jun Jul 2018 Aug 2019 Sept Oct Nov Dec 2020 10000 8000 6000 4000 2000 0 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 54 Acknowledgement Commercial Bank’s successful business performance in 2019 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, Amir 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, His Excellency the Minister of Finance, the Qatar Central Bank and the Ministry of Commerce and Industry 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 sector to prosper. 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. 55 In 2019, Commercial Bank celebrated success and achievements that we are proud of. We recorded the highest annual net profit in the Bank’s history, introduced technological innovations, launched ground-breaking products and services, and earned prestigious awards. With these achievements, we are ready to rise to the challenge and look forward to a prosperous and successful year ahead as we believe that “everything is possible.” The best is yet to come The best is yet to come Corporate Governance COMMERCIAL BANK’S CORPORATE GOVERNANCE REFLECTS OUR COMMITMENT TO COMPLY WITH LOCAL REGULATIONS AND INTERNATIONALLY ACCEPTED STANDARDS INCLUDING TRANSPARENT DISCLOSURE FOR THE BEST INTERESTS OF OUR STAKEHOLDERS. 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. Corporate Governance developments During 2019, Commercial Bank’s core governance documents were reviewed and updated, namely the Corporate Governance Charter, Board of Directors Charter and Board Committees Charter. Commercial Bank aims to be a leading ESG company in Qatar and within its international peer group. Due to the nature of Commercial Bank’s business, the governance component of ESG is especially critical for the interests of all our stakeholders, with the Bank’s corporate governance best practices detailed in the Annual Corporate Governance Report 2019. In 2019 the Bank enhanced its ESG disclosure practices by participating in the QSE’s voluntary ESG disclosure initiative. Commercial Bank’s ESG data for 2017 to 2019 is publicly available via the QSE’s Sustainability and ESG Dashboard. In partnership with a local provider, in 2019 Commercial Bank commenced recycling of paper printed in Bank premises, with segregated bins provided for the separation of paper, plastic and metal waste. Secure bins are also provided for the shredding and recycling of confidential paper waste. Commercial Bank also received the “Best Corporate Governance in Qatar 2019” award by World Finance magazine based on the strength of our corporate governance framework and how this framework supports good governance. 58 Commercial Bank continued its progress in aligning and developing the governance of the Group’s subsidiary, including changes in the board and committees of Alternatif Bank, in the context of board succession planning at the subsidiary level. We regularly monitor developments in corporate governance guidelines, regulations and best practice standards in all jurisdictions relevant to our business operations. In 2019, the QFMA issued new investor relations rules with mandatory requirements on listed companies as part of the QSE’s efforts to further develop the investor relations environment including appointing a dedicated IRO, hosting a dedicated investor relations section on the Bank’s website and holding quarterly investor conference calls. In 2019, Commercial Bank established four new internal Management Committees involved in the day-to- day management of the Bank due to governance requirements and the changing nature of the Bank’s operations. The new Management Committees are the Operational Risk Committee, Technology Risk Committee, Information Security Committee and Compliance Risk Committee. Refer to “Management Committees” section in the Annual Corporate Governance Report for further information. Corporate Governance framework 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. Refer to “Board of Directors” section in the Annual Corporate Governance Report for further information. Commercial Bank’s Code of Conduct provides a clear statement of our conduct expectations and ethical values, supported by our conduct and ethics standards. Refer to “Governance Framework” section in the Annual Corporate Governance Report for further information. 59 Corporate Governance continued Complying with rules and regulations We fully adhere to the principles set out in the QCB Corporate Governance Guidelines and to the provisions of the QFMA Corporate Governance Code as at 31 December 2019. The detailed Annual Corporate Governance Report 2019 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 in 2020. The Annual Corporate Governance Report 2019 can also be viewed on Commercial Bank’s website at www.cbq.qa Our governance includes a committee structure and a comprehensive set of corporate policies which are developed, reviewed and approved by the Board, the respective Board Committees, the Group CEO, CRO, and the board of directors of the Bank’s subsidiaries, in accordance with their respective responsibilities and levels of authority. Refer to “Board of Directors” and “Board Committees” sections in the Annual Corporate Governance Report for further information. 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 international best practice for corporate governance developed by leading international frameworks. 60 2019 Consolidated Financial Statements 31 December 2019 61 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 2019, 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 2019, 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 Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the consolidated financial statements in the 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 were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. 62 Report on the Audit of the Consolidated Financial Statements (continued) Key audit matters (continued) Key audit matter 1. 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 Expected Credit Loss (“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 2019, the Group’s gross loans and advances amounted to QR 90,923 million and the related allowances for impairment amounted to QR 3,686 million, comprising QR 935 million of ECL against Stage 1 and 2 exposures and QR 2,751 million against exposures classified under Stage 3. How our audit addressed the key audit matter Our audit procedures in this area 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. 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. • For a sample of exposures, we performed procedures to evaluate: • Appropriateness of exposure at default, probability of default and loss given default (including 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. 63 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 investments in associates The determination of recoverable amounts of the Group’s investments in associates relies on management’s estimates of future cash flows and their judgment with respect to the the uncertainty of associates’ performance. Due forecasting and discounting future cash flows, the level of management’s judgement involved and the significance of the Group’s investment in associates, this audit area is considered as a key audit matter. to As at 31 December 2019, the Group’s in associates amounted to QR 4,021 million. Refer to the significant accounting policies and note the consolidated financial statements. investment 12 to How our audit addressed the key audit matter Our audit procedures focused on the following key areas: • We obtained the calculation of recoverable amounts of the Group’s investments in associates. • With the assistance of our own specialists, we assessed the assumptions and compared the estimates used to externally available industry, economic and financial data and methodologies used by the management to determine the recoverable amount of the investments in associates. • We assessed the forecasts of future cash flows prepared by management. • Discussions with management on the performance of the associates and their future outlook. 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 2019 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. 64 Report on the Audit of the Consolidated Financial Statements (continued) Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not 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. • 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. 65 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) 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 year 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. 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 2019. Ahmed Sayed of Ernst & Young Qatar Auditors Registry Number 326 Doha - State of Qatar Date: 26 February 2020 66 Consolidated Statement of Financial Position As at 31 December Notes 2019 ASSETS Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement 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 14 15 16 17 18 19 20 21 6,075,044 12,396,433 88,009,448 26,844,226 4,021,239 2,853,712 236,377 7,100,005 147,536,484 22,530,782 76,296,592 9,524,590 12,043,167 5,385,126 125,780,257 QAR ‘000s 2018 (Restated) 6,729,798 9,474,893 84,642,464 22,206,077 4,512,940 2,718,913 283,049 4,359,615 134,927,749 13,950,459 71,785,783 16,071,746 8,379,734 4,883,568 115,071,290 EQUITY Share capital 4,047,254 Legal reserve 9,745,152 General reserve 26,500 Risk reserve 886,151 Fair value reserve (96,333) Treasury shares (179,507) Foreign currency translation reserve (1,816,866) Other reserves 959,764 Revaluation reserve 1,283,920 Retained earnings 1,000,413 TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK 15,856,448 Non-controlling interests 11 Instruments eligible for additional capital 4,000,000 TOTAL EQUITY 19,856,459 TOTAL LIABILITIES AND EQUITY 134,927,749 The consolidated financial statements were approved by the Board of Directors on 29th January 2020 and were signed on its behalf by: 4,047,254 9,841,333 26,500 1,421,236 600,094 (38,860) (1,946,677) 859,893 1,283,920 1,661,524 17,756,217 10 4,000,000 21,756,227 147,536,484 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 40 form an integral part of these consolidated financial statements 67 Consolidated Income Statement For the year ended 31 December Notes 2019 Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net fee and commission income Net foreign exchange gain Net income from investment securities Other operating income Net operating income Staff costs Depreciation Amortization of intangible assets Net impairment reversal/(losses) on investment securities Net impairment losses on loans and advances to customers Net impairment (losses)/reversal on other financial assets Impairment on Investment in an Associate 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 Earnings per share Basic/diluted earnings per share (QAR) 25 26 27 28 29 30 31 32 14 15 10 33 12 6,795,410 (3,832,227) 2,963,183 1,289,220 (374,374) 914,846 281,045 68,993 118,578 4,346,645 (796,352) (149,994) (55,023) 6,797 (594,427) (66,108) (413,881) (226,644) 2,051,013 (6,799) 2,044,214 (23,173) 2,021,041 2,021,040 1 2,021,041 QAR ‘000s 2018 (Restated) 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) 1,499,714 181,483 1,681,197 (7,272) 1,673,925 1,673,924 1 1,673,925 34 0.44 0.35 The attached notes 1 to 40 form an integral part of these consolidated financial statements. 68 Consolidated Statement of Comprehensive Income For the year ended 31 December Notes 2019 QAR ‘000s 2018 (Restated) Profit for the year 2,021,041 1,673,925 Other comprehensive income for the year: Items that are, or may be subsequently reclassified to profit or loss: Foreign currency translation differences from 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 change in fair value of investments in debt securities designated at FVOCI : Net change in fair value Net amount transferred to consolidated statement of income Items that may not be subsequently reclassified to profit or loss: Net change in fair value of equity investments designated at FVOCI Share of other comprehensive income of investment in associates and a joint arrangement Revaluation reserve on land and buildings Other comprehensive income /(loss) for the year 23 23 23 23 23 23 23 (129,811) 28,059 9,053 663,769 (9,091) (34,072) (6,008) - 521,899 (432,940) (24,959) 24,436 2,128 (10,001) (19,484) (5,423) 19,126 (447,117) Total comprehensive income for the year 2,542,940 1,226,808 Attributable to: Equity holders of the bank Non-controlling interests Total comprehensive income for the year 2,542,939 1 2,542,940 1,226,807 1 1,226,808 The attached notes 1 to 40 form an integral part of these consolidated financial statements. 69 Consolidated Statement of Changes in Equity For the year ended 31 December 2019 Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve Balance as at 1 January 2019 4,047,254 9,745,152 26,500 886,151 (96,333) (179,507) (1,816,866) 959,764 1,283,920 1,000,413 15,856,448 11 4,000,000 19,856,459 Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to legal reserve Transfer to risk reserve FVOCI instrument loss transferred to Retained earnings Dividend for instruments eligible for additional capital Net movement in other reserve Provision for Sports and Social Activities Support Fund Movement in treasury shares Transactions with equity holders, recognised directly in equity Contributions by and distributions to equity holders of the bank: Dividends for the year 2018 Total contributions by and distributions to equity holders of the bank Net movement in non-controlling interests Balance as at 31 December 2019 - - - - - - - - - - - - - - - 8,803 - - - - - 87,378 - - - - - - - - - - - - - - - - - 535,085 - - - - - - - 651,710 651,710 - - 44,717 - - - - - 22 22 22 24 22 22 - - 4,047,254 9,841,333 - - 26,500 1,421,236 - 600,094 (38,860) (1,946,677) 859,893 1,283,920 1,661,524 17,756,217 10 4,000,000 21,756,227 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 (240,000) (240,000) (99,871) - - - - - - - - - - - - 140,647 (129,811) (129,811) - - - - - - - - - - - - - - - - - - - - - - - 2,021,040 - 2,021,040 (8,803) (525,000) (44,717) 99,871 (50,526) 16,334 - - - - - - - - - - - - - 2,021,040 521,899 2,542,939 10,085 (50,526) 244,359 - - - - (607,088) (607,088) (607,088) (607,088) - (2) 1 - 1 - - - - - - - - - - - - - - - - - - - - 2,021,041 521,899 2,542,940 10,085 - - (240,000) (50,526) 244,359 (607,088) (607,088) (2) The attached notes 1 to 40 form an integral part of these consolidated financial statements 70 Balance as at 1 January 2019 4,047,254 9,745,152 26,500 886,151 (96,333) (179,507) (1,816,866) 959,764 1,283,920 1,000,413 15,856,448 11 4,000,000 19,856,459 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 - - - - - - - - - 140,647 - - - (129,811) (129,811) - - - - - - - - - - - - - - - - (99,871) - - - - - - - - - - - - - - - - 2,021,040 - 2,021,040 (8,803) (525,000) (44,717) 2,021,040 521,899 2,542,939 - 10,085 - (240,000) (240,000) 99,871 (50,526) 16,334 - (50,526) 244,359 (607,088) (607,088) (607,088) (607,088) 1 - 1 - - - - - - - - - - - - - - - - - - - 2,021,041 521,899 2,542,940 - 10,085 - (240,000) (50,526) 244,359 (607,088) (607,088) 4,047,254 9,841,333 26,500 1,421,236 600,094 - (38,860) - (1,946,677) - 859,893 - 1,283,920 - 1,661,524 - 17,756,217 - (2) 10 4,000,000 (2) 21,756,227 For the year ended 31 December 2019 Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to legal reserve Transfer to risk reserve FVOCI instrument loss transferred to Retained earnings Dividend for instruments eligible for additional capital Net movement in other reserve Provision for Sports and Social Activities Support Fund Movement in treasury shares Transactions with equity holders, recognised directly in equity Contributions by and distributions to equity holders of the bank: Dividends for the year 2018 Total contributions by and distributions to equity holders of the bank Net movement in non-controlling interests Balance as at 31 December 2019 22 22 22 24 22 22 8,803 535,085 - - - - - - - - - - - - - - - - - - - - - - - - 87,378 - - - - - - - - - - - - - - - - - - - - - - - 651,710 651,710 44,717 - - - - - - - - - The attached notes 1 to 40 form an integral part of these consolidated financial statements 71 Consolidated Statement of Changes in Equity continued For the year ended 31 December 2018 Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve (Restated) Balance as at 1 January 2018 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 Transition adjustments on adoption of IFRS 9 on 1 January 2018 (Restated) Balance as at 1 January 2018 (Restated) Profit for the year (Restated) Other comprehensive loss (Restated) Total comprehensive income for the year (Restated) Transfer to legal reserve Transfer to risk reserve Net movement in other reserves and fair value reserve (Restated) Dividend for Instruments eligible for additional capital Provision for Sports and Social Activities Support Fund Transactions with equity holders, recognised directly in equity Contributions by and distributions to equity holders of the bank: Dividends for the year 2017 Total contributions by and distributions to equity holders of the bank Net movement in non-controlling interests Balance as at 31 December 2018 - - - (1,529,257) (18,530) (209,281) 4,047,254 - - 9,742,066 - - 26,500 - - - - - - - - - - - 3,086 - - - - - - - - - - - - - - 22 22 22 24 22 361,151 - - (63,030) - (33,303) - (33,303) - 525,000 - - - - - - - - - - - - - 4,047,254 - 9,745,152 - 26,500 - 886,151 - (96,333) The attached notes 1 to 40 form an integral part of these consolidated financial statements 72 Foreign currency translation reserve Treasury shares Other reserves (Restated) Revaluation reserve Retained earnings (Restated) QAR ‘000s Total equity attributable to equity holders of the Bank Instruments eligible for additional Non- controlling interests capital Total equity (179,507) (1,383,926) 854,908 1,264,794 15 4,000,000 - - - - - - - - - - - - (432,940) (432,940) 104,856 - - - - - - - - - - 51,510 (1,705,558) 645,736 1,673,924 - 15,315,946 1,673,924 (447,117) 1,673,924 1,226,807 19,126 19,126 (3,086) (525,000) (104,856) (240,000) (240,000) (41,580) (41,580) (404,725) (404,725) (404,725) (404,725) - - - - - - - - - - - - - - - - - - - - - - - - - - 1 - 1 - - - - - - - (5) 11 - - - - - - - - - - - - (1,705,558) 19,315,961 1,673,925 (447,117) 1,226,808 - - - (240,000) (41,580) (404,725) (404,725) (5) (179,507) (1,816,866) 959,764 1,283,920 1,000,413 15,856,448 4,000,000 19,856,459 Balance as at 1 January 2018 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 (Restated) Revaluation reserve Retained earnings (Restated) Total equity attributable to equity holders of the Bank Non- controlling interests Instruments eligible for additional capital QAR ‘000s Total equity (1,529,257) (18,530) - - (209,281) - 51,510 (1,705,558) (179,507) - - - - - - - - - - (1,383,926) - (432,940) (432,940) - - - - - - - 854,908 - - 1,264,794 - 19,126 645,736 1,673,924 - 15,315,946 1,673,924 (447,117) - - - 104,856 - - - - 19,126 1,673,924 1,226,807 - - - - - - - (3,086) (525,000) (104,856) - - - (240,000) (240,000) (41,580) (41,580) (404,725) (404,725) (404,725) (404,725) - 15 1 - 1 - - - - - - - - (1,705,558) 4,000,000 - - - - - - - - - - 19,315,961 1,673,925 (447,117) 1,226,808 - - - (240,000) (41,580) (404,725) (404,725) 4,047,254 9,745,152 26,500 886,151 (96,333) - (179,507) - (1,816,866) - 959,764 - 1,283,920 - 1,000,413 - 15,856,448 (5) 11 - 4,000,000 (5) 19,856,459 For the year ended 31 December 2018 Notes Share capital Legal reserve General reserve Risk reserve Fair value reserve (Restated) Transition adjustments on adoption of IFRS 9 on 1 January 2018 (Restated) Balance as at 1 January 2018 (Restated) Profit for the year (Restated) Other comprehensive loss (Restated) Total comprehensive income for the year (Restated) Transfer to legal reserve Transfer to risk reserve Net movement in other reserves and fair value reserve (Restated) Dividend for Instruments eligible for additional capital Support Fund directly in equity Provision for Sports and Social Activities Transactions with equity holders, recognised Contributions by and distributions to equity holders of the bank: Dividends for the year 2017 Total contributions by and distributions to equity holders of the bank Net movement in non-controlling interests Balance as at 31 December 2018 4,047,254 9,742,066 26,500 361,151 (63,030) 3,086 525,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (33,303) (33,303) - - - - - - - - - 22 22 22 24 22 The attached notes 1 to 40 form an integral part of these consolidated financial statements 73 Consolidated Statement of Cash Flows For the year ended 31 December Notes 2019 QAR ‘000s 2018 (Restated) Cash flows from operating activities Profit before tax Adjustments for: Net impairment losses on loans and advances to customers Impairment (reversal) / losses on investment securities Net impairment losses / (reversal) on other financial assets Depreciation Amortization of intangible assets and transaction costs Gain on Sale of Treasury shares Net (gain) / loss income on investment securities Gain on disposal of property and equipment Impairment on Investment in an Associate Share of results of associates and a 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 flows from / (used in) operating activities 14 30 12 Cash flows from investing activities Acquisition of investment securities Investment in associate participating in right issue Proceeds from sale of treasury shares 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 flows used in investing activities 12 14&15 2,044,214 1,681,197 594,427 (6,797) 66,108 149,994 90,926 (87,378) (64,642) 3,902 413,881 6,799 3,211,434 (3,845,259) (5,821,742) (2,341,566) 10,167,792 5,702,956 490,037 (41,580) 7,522,072 (8,620,481) - 228,025 93,072 4,255,059 (157,359) 6,801 (4,194,883) 927,164 399 (92,055) 129,227 97,592 - 24,131 (91) - (181,483) 2,586,081 908,197 (898,316) (1,322,483) 673,265 (3,148,142) 522,206 (15,091) (694,283) (7,323,607) (272,491) - 76,627 3,977,082 (286,431) 4,184 (3,824,636) The attached notes 1 to 40 form an integral part of these consolidated financial statements 74 Consolidated Statement of Cash Flows continued For the year ended 31 December Notes 2019 Cash flows from financing activities Proceeds from issue of debt securities Repayment of debt securities Repayment of other borrowings Proceeds from other borrowings Payment of Lease Liability Payment on Coupon of instrument eligible for Tier 1 Capital Dividends paid (note 16) Net cash flows (used in) / from financing activities Net increase / (decrease) in cash and cash equivalents Effect of exchange rate fluctuation Cash and cash equivalents as at 1 January Cash and cash equivalents at the end of the year Net cash flows from interest and dividend: Interest paid Interest received Dividend received QAR ‘000s 2018 (Restated) 9,508,091 (5,055,194) (6,634,330) 6,583,404 - (240,000) (404,725) 3,757,246 (761,673) 424,784 10,321,435 9,984,546 19 19 20 20 36 3,486,978 (9,932,780) (3,735,723) 7,793,321 (39,499) (240,000) (607,088) (3,274,791) 52,398 19,027 9,984,546 10,055,971 3,829,417 6,916,197 4,350 3,455,544 5,864,966 5,305 The attached notes 1 to 40 form an integral part of these consolidated financial statements 75 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 shareholding 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 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, branches and subsidiaries. The principal subsidiaries of the Group are as follows: Name of subsidiary Country of incorporation Capital of the subsidiary Activity of the subsidiary Percentage of ownership Alternatifbank A.S. (“ABank”) Commercial Bank Financial Services (L.L.C.) CBQ Finance Limited Turkey Qatar TRY 1,730,655,000 QAR 100,000,000 Bermuda US$ 1,000 2019 100% 100% 2018 100% 100% 100% 100% Banking services Brokerage services Debt issuance for the Bank 2. BASIS OF PREPARATION (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’); other financial assets designated at fair value through profit or loss (‘FVTPL’); financial investment measured at fair value through other comprehensive income (‘FVOCI’); 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. 76 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 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 2019 The following standards, amendments and interpretations, which became effective as of 1 January 2019, are relevant to the Group: IFRS 16 Leases IFRIC 23 Uncertainty over Income Tax Treatment IFRS 9 (Amendments) Prepayment Features with Negative Compensation IFRS 9/IAS 39 and IFRS (Amendments) Interest Rate Benchmark Reform 01-Jan-19 01-Jan-19 01-Jan-19 01-Jan-19 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 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 applied the standard from its mandatory adoption date of 1 January 2019. The Group has applied the simplified transition approach and has not restated comparative amounts, prior to the date of the standard. 77 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (a) New standards, amendments and interpretations (continued) (i) IFRS 16 Leases (continued) 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. The Group’s activities as a lessor are not material and there is no significant impact on the financial statements. When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The following amounts are recognised under the new standard and included in the respective headings of the consolidated statement of financial position and consolidated statement of income: Right of use Asset (Property & Equipment) Lease Liability (Other Liabilities) Depreciation charge for Right of Use Asset Interest expense on lease liabilities 31 December 2019 132,616 133,333 1 January 2019 142,020 130,373 31 December 2019 34,220 11,149 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. Amendments to IFRS 3: Definition of a Business Amendments to IAS 1 and IAS 8: Definition of Material 78 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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 acquiree 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 acquiree 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 IFRS 9 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. The excess of the consideration transferred of any non-controlling interest and the acquisition-date fair value of any previous equity interest 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 statement of income. 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 3, 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. 79 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Basis of consolidation (continued) (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. 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 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. The Bank performs impairment assessment of investment in associates on an annual basis. Impairment testing involves calculating the value in use (VIU) by estimating the present values of future cash flows based on management’s estimates of future earnings available to ordinary shareholders and observable market inputs. Where the carrying amount exceeds the VIU, an impairment would be recognized in the statement of income and the carrying amount will be reduced. 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. 80 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. 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. (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. 81 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (ii) Classification Financial assets 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. 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 or 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. 82 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (ii) Classification (continued) 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. 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 liabilities The Group has classified and measured its financial liabilities at amortized cost. (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. 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. 83 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (iii) Derecognition (continued) 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. 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. 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. 84 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (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). 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. 85 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 (continued) 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. (vii) Impairment 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. 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. 86 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Financial assets and financial liabilities (continued) (vii) Impairment (continued) 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. 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. 87 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. (g) Investment Securities The ‘investment securities’ include: - - - - 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. 88 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. 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. 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. 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’. 89 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (h) Derivatives (i) Derivatives held for risk management purposes and hedge accounting (continued) Cash flow hedge (continued) 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. (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. 90 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Property and equipment (continued) (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. During 2019, the Group conducted a useful economic life review of the buildings, which resulted in changes in the useful life of certain buildings. The estimated useful lives for the current and comparative years are as follows: Buildings Leasehold improvements Furniture and equipment Motor vehicles 20 - 30 years 6 - 10 years 3 - 8 years 5 years (vi) Right-of-use assets (Leases) The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group applies a single recognition and measurement approach for all leases, except for short-term leases less than 12 months and leases of low-value assets (USD 5,000 or less). The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets, as follows: Buildings 2 - 40 years 91 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Property and equipment (continued) (vi) Right-of-use assets (Leases) (continued) At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date. Right-of-use assets are subject to impairment in line with the policy for the impairment of non-financial assets. The carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments or a change in the assessment of an option to purchase the underlying asset. (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. 92 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (j) Impairment of goodwill and intangible assets (continued) (ii) Intangible assets (continued) 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. (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. 93 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (n) Employee benefits (continued) 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. Alternatifbank, 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. Share-based payments Employees (including senior management) of the Bank receive remuneration in the form of share-based payments, whereby employees are granted share appreciation rights, which are settled in cash (cash settled transactions). Cash settled transactions The cost of cash settled transactions is measured at fair value at the grant date using Black Scholes model, further details of which are given in Note 21. The fair value is measured initially and at each reporting date up to and including the settlement date, with changes in fair value recognised in employee benefits expense Note 32. The fair value is expensed over the period until the vesting date with recognition of a corresponding liability. (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. 94 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. 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 of 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 and measured at amortised cost is calculated using effective interest rate method and is also included in interest income. (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. 95 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. 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. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on laws that have been enacted at the reporting date. (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. (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. 96 Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ACCOUNTING POLICIES (continued) (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. 97 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 along with the following Board and Management Committees: 1) Board Risk Committee is responsible for all aspects of risk management across the Group 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. 2) Board Audit and compliance 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 responsible for compliance & anti-money laundering which is managed through the Chief Compliance Officer. 3) 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. 4) Management Credit Committee (MCC) is the third highest-level authority on all Counterparty Credit Risk Exposures, after the Board of Directors and Board Executive Committee. The MCC also is responsible 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. MCC exercises its credit authorisation 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 business continuity, prevention, planning, testing, and evaluation. The CMC’s objective is to mitigate and minimize the consequences of crisis events. 98 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 optimizing its loan mix. This is being achieved through a strategy of reducing exposure to non-core client relationships while selectively increasing the size of the consumer portfolio comprising of consumer loans, vehicle loans, credit cards and residential mortgages. In measuring credit risk of loan and advances to customers and to banks, 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 independently validated. 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, the probability of default changes with the migration of ratings. 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 carrying 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. For undrawn facilities, the Group applies credit conversion factors that are prescribed by Qatar Central Bank and are aligned to Bank of International Settlements (BIS) guidelines. (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. 99 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 improve the overall asset quality, enhance yield and provide a readily available source to meet the funding requirement. (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; Lending against lien marked deposits; • 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; working capital 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. 100 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) 2019 2018 5,250,971 12,396,433 88,009,448 26,408,148 1,690,200 133,755,200 21,353,539 1,706,950 4,287,871 27,348,360 161,103,560 6,111,773 9,474,893 84,642,464 21,436,688 1,426,928 123,092,746 22,057,901 2,148,781 4,373,836 28,580,518 151,673,264 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. 101 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. 2019 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 3,698,747 4,275,094 73,308,248 19,914,595 1,302,765 102,499,449 - 675,608 474,138 364,868 516 1,552,224 4,089,664 13,491,026 4,059,685 276,834 1,515,130 23,469,433 5,250,971 - 3,356,067 12,396,433 736,036 88,009,448 26,408,148 1,690,200 6,271,188 133,755,200 2,069,000 110,085 2018 Balances with central banks Due from banks Loans and advances to customers Investment securities - debt Other assets 2019 Guarantees Letters of credit Unutilised credit facilities Qatar Other GCC Other Middle east Rest of the world Total 4,661,672 2,742,306 70,419,832 17,204,539 738,229 95,766,578 - 630,912 581,968 256,110 27,274 1,496,264 1,450,101 2,407,217 12,413,261 2,507,842 415,971 19,194,392 - 3,694,458 1,227,403 1,468,197 245,454 6,635,512 6,111,773 9,474,893 84,642,464 21,436,688 1,426,928 123,092,746 Qatar Other GCC Other Middle east Rest of the world Total 9,723,889 1,326,800 3,179,533 14,230,222 1,303,244 463 828,211 2,131,918 253,249 - - 253,249 10,073,157 379,687 280,127 21,353,539 1,706,950 4,287,871 10,732,971 27,348,360 102 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) 2018 Guarantees Letters of credit Unutilised credit facilities Qatar Other GCC Other Middle east (Figures in QAR ‘000s) 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 8,439,449 22,057,901 2,148,781 4,373,836 28,580,518 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 2018 Gross exposure 2019 39,234,483 3,975,558 8,091,993 13,710,085 38,612,198 2,857,702 19,495,282 5,907,053 1,870,846 133,755,200 3,446,069 11,986,717 11,915,574 27,348,360 161,103,560 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 28,580,518 151,673,264 103 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 Accrued interest Carrying amount 2019 (Figures in QAR ‘000s) 2018 Stage 1 Stage 2 Stage 3 Total Total 9,174,366 5,459,786 - - - - 3,043,808 - - - 14,634,152 3,043,808 (33,037) 3,010,771 (7,515) 14,626,637 - - - - - - - - 9,174,366 8,503,594 - - - 17,677,960 (40,552) 17,637,408 9,996 17,647,404 9,763,533 5,816,904 - - - 15,580,437 (13,698) 15,566,739 19,927 15,586,666 2018 Total Loans and advances to Customers Stage 1 Stage 2 Stage 3 Total 2019 36,969,262 34,143,968 - - - 110,704 15,204,195 545 - - 71,113,230 15,315,444 (872,666) 71,051,266 14,442,778 (61,964) - - 962,594 1,345,136 2,179,512 37,079,966 49,348,163 963,139 1,345,136 2,179,512 4,487,242 90,915,916 (3,685,672) (2,751,042) 1,736,200 87,230,244 779,204 12,522,973 70,134,165 1,025,370 1,902,502 1,963,246 87,548,256 (3,846,625) 83,701,631 940,833 88,009,448 84,642,464 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 Accrued Interest Carrying amount ORR = Obligatory Risk Rating 104 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 2019 (Figures in QAR ‘000s) 2018 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 Accrued interest Carrying amount 17,397,199 6,947,653 - - - 24,344,852 (4,071) 24,340,781 270,761 295,715 - - - 566,476 - 566,476 - - - - - - - - 17,667,960 7,243,368 - - - 24,911,328 (4,071) 24,907,257 138,199 18,102,960 2,818,337 - - - 20,921,297 (24,053) 20,897,244 96,238 25,045,456 20,993,482 Loan Commitments and financial Guarantees Stage 1 Stage 2 Stage 3 Total 2019 2018 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 100,661 5,490,388 4,141,518 17,271,678 8,509 - - - - - 22,762,066 4,250,688 (41,764) 22,735,721 4,208,924 (26,345) 12,847,456 5,591,049 - 15,245,527 21,413,196 - 75,362 53,935 45,426 26,295 518 518 289,662 385,878 289,662 335,606 27,348,360 28,580,518 (103,972) (27,644) (95,753) 307,962 27,252,607 28,476,546 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 restructured due to credit reasons in past 12 months will be classified under stage 2. 105 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 2019 is QAR 56,806 million (2018: QAR 61,363 million), stage 2 QAR 13,272 million (2018: QAR 21,520 million) and stage 3 QAR 3,587 million (2018: QAR 3,670 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 1,922 million (2018: QAR 450 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 the relevant Credit Committees determines that the loan or security is uncollectible. QCB approval is required for local write offs when the amount to be written off exceeds Qatari Riyal one 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 1,076 million (2018: QAR 2,863 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. 106 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 ‘absolute’ notches downgrade for ratings better than Rating Grade 5 at the time of origination and one ‘absolute’ notch rating downgrade for rated customers; Facilities restructured during previous twelve months; ii) iii) Facilities overdue by 30 days as at the reporting date in case of Retail Products and overdue by 60 days for corporate customers. 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 uses its own database of default history to model estimates of PD for respective ratings that are used in credit decision making. Yearly transition matrices are developed to capture the rating migration of borrowers and yearly PDs are calculated over 5 years to get the through-the-cycle (TTC) PD. In order the transform the TTC PD to point in time, a credit index for the last five historical years is calculated based upon minimizing the sum of the squared differences between the TTC PD and Point-in-time (PIT) PD matrix elements. 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. 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 (Doubtful) or 10 (Loss). - - 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 for regulatory capital purposes. 107 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. LGD is the magnitude of the likely loss if there is a default. The Group has applied LGD factors based on the type of collateral available and has used the LGD floors that are prescribed by QCB for certain collateral types. LGD estimation includes: 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. Incorporation of forward-looking information Incorporating forward-looking in these macroeconomic factors will affect the Expected Credit Loss (ECL) applicable to the stage 1 and stage 2 exposures which are considered as performing. The methodologies and assumptions involved, including any forecasts of future economic conditions, are reviewed periodically. judgement as to how changes increases the information level of The assessment of Significant Increase in Credit Risk (SICR) and the calculation of ECL both incorporate forward- looking information. The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses for each portfolio. 108 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) Incorporation of forward-looking information (continued) The Group employs statistical models to incorporate macro-economic factors on historical default rates. In the case that none of the macro-economic parameters are statistically significant or the results of forecasted PDs are too deviated from the present forecast of the economic conditions, qualitative PD overlay is used by management based on portfolio analysis. These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. Expert judgement has also been applied in this process. Forecasts of these economic variables (the ‘base economic scenario’) are based on available information and include mean reversion approaches for long-term forecasts. The impact of these economic variables on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these variables have had historically on default rates and on the components of LGD and EAD. In addition to the base economic scenario, other possible scenarios are assessed along with scenario weightings. The number of other scenarios used is set based on the analysis of each major product type to ensure non linearities are captured. At 31 December 2019, the Group concluded that three scenarios appropriately captured non linearities for all portfolios. The scenario weightings are determined by a combination of statistical analysis and expert credit judgement, taking account of the range of possible outcomes each chosen scenario is representative of. The assessment of SICR is performed using the lifetime PD under each of the base, and other scenarios, multiplied by the associated scenario weighting, along with qualitative and backstop indicators. This determines whether the whole financial instrument is in Stage 1, Stage 2 or Stage 3 and hence whether 12-month or lifetime ECL should be recorded. Following this assessment, the Group measures ECL as either a probability weighted 12 month ECL (Stage 1), or a probability weighted lifetime ECL (Stages 2 and 3). These probability-weighted ECLs are determined by running each scenario through the relevant ECL model and multiplying it by the appropriate scenario weighting (as opposed to weighting the inputs). As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. The Group considers these forecasts to represent its best estimate of the possible outcomes. Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analyzing historically data estimate of expected credit losses. In reality there will be interdependencies between the various economic inputs and the exposure to sensitivity will vary across the economic scenarios. The most significant period end assumption used for ECL estimate as at 31 December 2019 is the oil price and revenue (as a % of GDP) given the high level of correlation between this and other economic indicators. The scenarios ‘base’, ‘best’ and ‘worst’ were used for all portfolios The weightings assigned to each economic scenario at 31 December 2019 were base (70%), best (15%) and worst (15%). Other forward-looking considerations not otherwise incorporated within the above scenarios, such as the impact of any regulatory, legislative or political changes, have also been considered, but are not deemed to have a material impact and therefore no adjustment has been made to the ECL for such factors. This is reviewed and monitored for appropriateness on a quarterly basis. 109 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 2019 Stage 1 Stage 2 Stage 3 (Figures in QAR ‘000s) 2018 Total Total 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 619 50,382 236 25,711 13,079 952,226 23,817 76,308 - 13,698 31,632 2,844,017 - 3,846,625 24,053 5,478,995 23,654 1,953 103,972 269,339 76,948 1,065,430 2,845,970 3,988,348 5,803,620 7,019 2,750 4,041 6,122 19,958 (39,394) (10,838) (34,116) - 963,815 - 67,125 26,977 927,171 (6,797) 39,131 (17,934) 1,401,477 399 (74,120) 19,932 (64,390) 1,030,940 986,482 1,309,822 - - - - - - - - - (10,084) - (1,024,756) - (1,034,840) - (2,772,216) - - (41,198) (41,198) (90,965) (10,084) (1,065,954) (1,076,038) (2,863,181) (123) 8,832 - - (30,082) - (5,488) (428) - (32,034) - (236) (123) (53,284) - (6,152) - (261,631) - (282) 3,221 (30,510) (32,270) (59,559) (261,913) 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) Closing Balance as at 31 December Stage 1 Stage 2 Stage 3 2019 (Figures in QAR ‘000s) 2018 Total Total Due from banks and balances with central banks Loans and Advances to Customers Investment Securities (Debt) Loan Commitments and Financial Guarantees 7,515 61,964 4,277 26,345 33,037 872,666 12,979 41,764 - 40,552 13,698 2,751,042 - 3,685,672 17,256 3,846,625 24,053 27,644 95,753 103,972 100,101 960,446 2,778,686 3,839,233 3,988,348 Inter Bank Offered Rate (IBOR) Reforms A fundamental review and reform of major interest rate benchmarks is being undertaken globally. There is uncertainty as to the timing and the methods of transition for replacing existing benchmark interbank offered rates (IBORs) with alternative rates. As a result of these uncertainties, significant accounting judgement is involved in determining whether certain hedge accounting relationships that hedge the variability of foreign exchange and interest rate risk due to expected changes in IBORs continue to qualify for hedge accounting as at 31 December 2019. IBOR continues to be used as a reference rate in financial markets and is used in the valuation of instruments with maturities that exceed the expected end date for IBOR. Therefore, the Group believes the current market structure supports the continuation of hedge accounting as at 31 December 2019. (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. 111 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (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 bb+ and outlook Stable. Long Term BBB+, Short Term A-2, financial strength bb+ 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: At 31 December Average for the year Maximum for the year Minimum for the year 2019 (%) 108.11 109.14 120.18 100.48 2018 (%) 106.60 105.57 111.84 95.06 112 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) 2019 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Property and equipment and all other assets Total Due to banks Customer deposits Debt securities Other borrowings Other liabilities Total Difference 6,075,044 1,631,106 - - 1,631,106 - 12,396,433 7,554,562 560,646 2,875,551 10,990,759 1,405,674 - - 88,009,448 9,618,237 2,450,468 11,421,574 23,490,279 19,093,568 45,425,601 4,443,938 - - 26,844,226 19,971 365,272 1,890,660 2,275,903 13,047,121 11,085,124 436,078 4,021,239 - - 10,190,094 1,776,949 26,089 - - - - 1,803,038 4,690,583 - - 4,021,239 3,696,473 147,536,484 20,600,825 3,402,475 16,187,785 40,191,085 38,236,946 56,510,725 12,597,728 10,951,690 44,985,571 143,726 422,229 3,288,364 22,530,782 76,296,592 9,524,590 12,043,167 5,385,126 4,768,171 20,203,681 11,455,043 71,283,527 297,430 1,193,476 1,334,034 7,096,813 4,977,001 1,142,730 125,780,257 59,791,580 18,997,408 25,965,510 104,754,498 (64,563,413) 21,756,227 (39,190,755) (15,594,933) 4,483,820 14,842,913 752,320 5,340,550 545,907 (9,777,725) 253,384 2,073,717 - 5,013,065 1,261,225 7,069,889 - 4,946,354 - 408,125 1,514,609 19,511,150 18,725,796 54,996,116 - - - - - - 12,597,728 113 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) 6,729,798 3,172,984 - - 3,172,984 - 9,474,893 5,451,328 2,742,734 1,208,136 9,402,198 72,695 - - 84,642,464 5,627,287 2,368,452 7,918,349 15,914,088 23,776,426 44,951,950 3,556,814 - - 22,206,077 253,067 4,512,940 - - - - - - 2,510,762 2,763,829 8,970,428 9,702,429 769,391 7,361,577 1,119,690 17,856 67,524 1,205,070 2,594,198 134,927,749 15,624,356 5,129,042 11,704,771 32,458,169 35,413,747 54,654,379 12,401,454 13,950,459 71,785,783 16,071,746 8,379,734 4,883,568 115,071,290 19,856,459 7,612,664 41,519,760 290,559 172,030 3,217,720 52,812,733 (37,188,377) 2,352,838 13,534,260 487,244 1,496,057 942,387 18,812,786 (13,683,744) 2,567,534 12,501,134 7,185,615 1,884,124 567,555 24,705,962 (13,001,191) 12,533,036 67,555,154 7,963,418 3,552,211 4,727,662 96,331,481 (63,873,312) 1,164,040 4,230,629 6,846,644 4,827,523 155,906 17,224,742 18,189,005 253,383 - 1,261,684 - - 1,515,067 53,139,312 - - - - - - 12,401,454 - - 4,512,940 3,562,309 2018 (Restated) Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Property and equipment and all other assets Total Due to banks Customer deposits Debt securities Other borrowings Other liabilities Total Difference 114 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) 11,148,211 24,001,339 22,530,782 45,794,237 77,685,628 76,296,592 155,456 11,999,211 9,524,590 12,043,167 432,450 12,639,842 120,395,131 126,326,020 57,530,354 4,851,681 11,656,175 303,258 1,481,117 2,164,738 5,542,683 5,109,472 15,125,744 7,839,350 920,432 5,255,053 5,471,222 18,292,231 27,060,081 20,368,613 294,026 - 2,780,715 - 3,074,741 Gross undiscounted cash flows Carrying amount Less than 1 month 1-3 months 3 months – 1 year 1-5 years More than 5 years 13,950,459 71,785,783 16,071,746 8,379,734 110,187,722 14,544,569 7,765,249 73,484,438 42,493,340 330,178 212,890 50,801,657 17,813,184 9,082,420 114,924,611 2,392,305 13,871,045 514,117 1,545,051 18,322,518 2,804,214 12,797,217 7,518,549 2,116,633 25,236,613 1,283,573 4,322,836 7,543,965 5,207,846 18,358,220 299,228 - 1,906,375 - 2,205,603 2019 Non-derivative financial liabilities Due to banks Customer deposits Debt securities Other borrowings Total liabilities 2018 Non-derivative financial liabilities Due to banks Customer deposits Debt securities Other borrowings Total liabilities 115 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. Total 1-3 months 3 months – 1 year (Figures in QAR ‘000s) More than 5 years 1-5 years (23,838,530) 23,884,092 (7,255,454) 7,327,951 (2,133,677) 2,135,873 (9,976,329) 9,947,720 (4,473,070) 4,472,548 (806,861) 826,333 (159) 1,661 (3,665) 9,207 (267,615) 279,601 (535,422) 535,864 (348,207) 304,973 (3,902) 4,506 (17,550) 14,934 (89,924) 76,081 (236,831) 209,452 (2,399,405) 2,233,481 - - (87,966) 15,137 (2,311,439) 2,218,344 - - (28,455) 15,210 (27,421,458) 27,264,089 (9,111) 5,003 (7,268,626) 7,339,121 (19,344) 10,207 - - (2,262,202) (12,645,307) 12,521,746 2,185,358 - - (5,245,323) 5,217,864 2019 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 116 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 1-3 months 3 months – 1 year (Figures in QAR ‘000s) More than 5 years 1-5 years (21,165,182) 21,422,087 (13,099,457) 13,190,695 (3,803,913) 3,903,026 (4,234,125) 4,242,510 (291,328) 322,395 (719) 1,637 (7,170) 14,915 (274,028) 295,184 (27,687) 85,856 (9,411) 10,659 (354,777) 310,303 (5,140) 5,572 (21,612) 18,132 (91,194) 77,147 (236,831) 209,452 (1,972,842) 1,691,766 - - (165,234) 105,719 (1,807,608) 1,586,047 - - (45,252) 40,968 (23,829,381) 23,787,519 (9,606) 10,133 (13,114,922) 13,208,037 (27,292) 24,152 (4,025,221) 4,065,944 (8,354) 6,683 (6,415,309) 6,207,571 - - (273,929) 305,967 117 Notes to the Consolidated Financial Statements continued 4. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk (continued) (v) Off-balance sheet items The table below summarises contractual expiry dates of the Group’s off - financial position financial instruments: 2019 Loan commitments Guarantees and other financial facilities Capital commitments Total liabilities 2018 Loan commitments Guarantees and other financial facilities Capital commitments Total liabilities Below 1 Year 1,854,247 12,131,603 421,352 14,407,202 (Figures in QAR ‘000s) Total Above 1 Year 2,433,624 10,928,886 - 13,362,510 4,287,871 23,060,489 421,352 27,769,712 Below 1 Year Above 1 Year Total 1,968,142 12,816,899 157,569 14,942,610 2,405,694 11,389,783 - 13,795,477 4,373,836 24,206,682 157,569 28,738,087 (d) Market risks The Group takes exposure to market risk, 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 soverign bond 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. 118 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. 119 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 % 6,075,044 2,392,663 - 12,396,433 8,115,209 4,281,224 - - - - 3,682,381 - 88,009,448 37,268,422 43,780,437 4,785,851 705,096 1,469,642 - 3.01% 6.67% 26,844,226 1,621,866 2,895,737 11,659,216 10,231,329 436,078 4.73% 4,021,239 10,190,094 - - - - - - - - 4,021,239 10,190,094 147,536,484 49,398,160 50,957,398 16,445,067 10,936,425 19,799,434 (22,530,782) (15,918,496) (6,612,286) - (76,296,592) (44,590,651) (15,265,298) (5,013,065) - - - (11,427,578) (9,524,590) (12,043,167) (5,385,126) (21,756,227) (147,536,484) (441,156) (2,434,614) (97,059) - (63,481,976) (1,064,513) (9,529,003) (30,449) - (32,501,549) (6,757,695) (79,550) (19,197) - (11,869,507) (1,261,226) - (65,236) - - - (5,173,185) (21,756,227) (1,326,462) (38,356,990) - - (14,083,816) 18,455,849 4,575,560 9,609,963 (18,557,556) (14,083,816) 4,372,033 8,947,593 18,557,556 - - - - 3.61% 3.71% 3.95% 3.84% - - - - - 2019 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement 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 120 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) 6,729,798 3,100,216 - - 9,474,893 8,170,614 1,231,479 72,800 - - 3,629,582 - - 2.72% 84,642,464 39,381,081 38,914,437 4,159,870 471,349 1,715,727 6.18% 22,206,077 1,602,503 3,535,118 7,570,881 8,728,185 769,390 4.24% 4,512,940 7,361,577 - - - - - - - - 4,512,940 7,361,577 134,927,749 52,254,414 43,681,034 11,803,551 9,199,534 17,989,216 (13,950,459) (10,933,365) (3,017,094) - (71,785,783) (43,626,394) (12,501,134) (4,230,677) - - - (11,427,578) (16,071,746) (8,379,734) (4,883,568) (19,856,459) (134,927,749) (229,825) (1,768,303) - - (56,557,887) (2,395,058) (6,134,016) - - (24,047,302) (12,185,179) (477,415) - - (16,893,271) - (1,261,684) - - - (4,883,568) - (19,856,459) (36,167,605) (1,261,684) - - (4,303,473) 19,633,732 (5,089,720) 7,937,850 (18,178,389) (4,303,473) 15,330,259 10,240,539 18,178,389 - - - - 4.47% 3.53% 2.93% 4.07% - - - - - 2018 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement 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 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) 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 2019 At 31 December Average for the year 2018 At 31 December Average for the year Sensitivity to reported Fair value reserve in equity of interest rate movements 2019 At 31 December Average for the year 2018 At 31 December Average for the year (Figures in QAR ‘000s) 50 bp parallel decrease 50 bp parallel increase 17,838 45,392 (17,838) (45,392) 68,654 65,555 (68,654) (65,555) 50 bp parallel increase 50 bp parallel decrease 344 176 9 720 (344) (176) (9) (720) 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 debt securities which 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. 122 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 2019 2018 (24,938) (16,239) (412,063) 102,908 (7,199) (154,874) (625,983) 99,876 (Figures in QAR ‘000s) 2019 2018 (498,768) (324,782) (8,241,260) 2,058,159 (143,989) (3,097,484) (12,519,651) (1,997,530) (Figures in QAR ‘000s) Increase (decrease) in fair value reserve 2019 - - - - 2018 - - 307 - Open exchange position in other currencies represents Group’s investment in subsidiary, associates and a joint arrangement denominated in TL, OMR and AED. 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 2019 would have increased equity by QAR nil (2018: QAR Nil). An equivalent decrease would have resulted in an equivalent but opposite impact. 123 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) 2019 2018 - - 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. 124 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 2018 Basel III 2019 13,020,429 3,962,723 16,983,152 2,282,590 19,265,742 108,221,142 2,559,342 7,026,182 117,806,666 11,898,725 3,962,963 15,861,688 1,772,890 17,634,578 105,121,959 1,494,331 7,032,731 113,649,021 16.35% 15.52% 125 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 2019 Actual Minimum QCB limit 2018 Actual Minimum QCB limit 11.05% 6.00% 11.05% 8.50% 14.42% 10.50% 16.35% 12.50% 16.35% 13.00% 16.35% 14.00% 10.47% 6.00% 10.47% 8.50% 13.96% 10.50% 15.52% 12.50% 15.52% 13.00% 15.52% 14.00% 5. USE OF ESTIMATES AND JUDGMENTS (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) Going concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has resources to continue in the business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. (ii) Allowances for credit losses 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)(viii). (iii) 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. 126 Notes to the Consolidated Financial Statements continued 5. USE OF ESTIMATES AND JUDGMENTS (continued) (a) Key sources of estimation uncertainty (continued) (iii) Determing fair values (continued) 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. (iv) 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 Cash Generating Units (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. 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. 127 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) 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: (Figures in QAR ‘000s) Carrying amount Level 3 - 29,102 29,102 - - - 164,951 164,951 - - 764,320 6,685,822 7,450,142 526,643 526,643 371,716 5,092,415 5,464,131 353,499 353,499 2019 2018 164,951 (68,340) (16,934) (50,575) 29,102 84,107 113,879 (23,793) (9,242) 164,951 2019 Derivative assets Investment securities Derivative liabilities 2018 Derivative assets Investment securities Derivative liabilities Level 1 Level 2 - 1,004,890 1,004,890 - - - 35,825 35,825 - - 764,320 5,651,830 6,416,150 526,643 526,643 371,716 4,891,639 5,263,355 353,499 353,499 There have been no transfers between level 1 and level 2. Reconciliation 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 128 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 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. (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 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. (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. During 2019, the Group conducted a useful economic life review of the buildings, which resulted in changes in the useful life of certain buildings. The useful life of these identified buildings increased from 20 years to 30 years. (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. (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. (viii) Leases - Estimating the incremental borrowing rate The Group uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. The Group estimates the IBR using observable inputs (such as market interest rates). 129 Notes to the Consolidated Financial Statements continued 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. Abank also has its subsidiaries. The Group reported Abank 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, United Arab bank in the United Arab Emirates 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. 130 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: 2019 Commercial Bank Subsidiaries Wholesale Banking Retail Banking Total Commercial Bank Alternatif Bank 1,658,244 982,968 2,641,212 671,412 556,855 1,228,267 2,329,656 1,539,823 3,869,479 6,856 - 6,856 383,831 189,876 573,707 (59) (204,912) (240,822) (445,734) (214,829) (Figures in QAR ‘000s) Others Unallocated Total 5,181 21,177 (67,041) 2,963,183 (55,858) 1,383,462 26,358 (122,899) 4,346,645 - 28 - - 6,797 (660,535) - - - - - (413,881) (413,881) 2,588,971 100,126 13,197 (674,454) 2,027,840 58,349,751 18,125,456 76,475,207 11,534,241 - - - - - - 41,446,278 1,389,525 42,835,803 4,434,806 297,193 43,306,921 23,282,182 66,589,103 9,686,498 41,202,171 868,859 42,071,030 7,278,368 20,991 30,321 (6,799) 2,021,041 - 88,009,448 - 4,021,239 7,937,995 55,505,797 147,536,484 - 76,296,592 103,946 49,483,665 125,780,257 - 27,348,360 Contingent items 22,080,759 224,543 22,305,302 4,483,058 560,000 Intra-group transactions are eliminated from this segmental information (Assets: QAR 2,789 million, Liabilities: QAR 1,262 million). 131 Net interest income Net fee, commission and other income Segmental revenue Net Impairment reversal on investment securities Net impairment loss on loans and advances to customers and other financial assets Impairment for investment in an associate Segmental profit Share of results of associates and a joint arrangement Net profit for the year Other information Loans and advances to customers Investments in associates and a joint arrangement Assets (other than above) Customer deposits Liabilities (other than above) Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (a) By operating segment (continued) 2018 (Restated) Commercial Bank Subsidiaries Wholesale Banking Retail Banking Total Commercial Bank Alternatif Bank Others Unallocated Total (Figures in QAR ‘000s) Net interest income Net fee, commission and other income Segmental revenue Net Impairment reversal / (losses) 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 Loans and advances to customers Investments in associates and a joint arrangement Assets (other than above) Customer deposits Liabilities (other than above) 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 27,405 32,540 34,399 1,026,235 (32,643) 3,508,557 (399) - (399) - - (374,247) (336,829) (711,076) (124,573) 540 - - (399) (835,109) 1,441,990 90,642 13,911 (54,101) 1,492,442 181,483 1,673,925 53,187,845 19,455,991 72,643,836 11,949,749 - - - - - - 48,879 84,642,464 - 4,512,940 32,527,616 1,292,358 33,819,974 5,868,200 273,094 5,811,077 40,858,866 21,644,591 62,503,457 9,270,185 - 12,141 45,772,345 134,927,749 71,785,783 34,638,044 777,470 35,415,514 7,372,989 38,069 458,935 43,285,507 Contingent items 23,208,775 628,245 23,837,020 4,183,497 560,001 115,071,290 28,580,518 - Intra-group transactions are eliminated from this segmental information (Assets: QAR 2,015 million, Liabilities: QAR 613 million). 132 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography Consolidated statement of financial position 2019 Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement 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 Other GCC countries Other Middle East Qatar Europe North America Rest of the world Total (Figures in QAR ‘000s) 4,431,379 - 1,643,665 - - - 6,075,044 4,275,094 675,608 4,089,664 1,364,764 838,935 1,152,368 12,396,433 73,308,248 474,138 13,491,026 596,344 - 139,692 88,009,448 19,951,886 612,636 4,060,018 231,367 594,220 1,394,099 26,844,226 7,924 4,013,315 - - 8,798,664 15,738 1,163,612 202,962 - - - 4,021,239 9,118 10,190,094 110,773,195 5,791,435 24,447,985 2,395,437 1,433,155 2,695,277 147,536,484 6,865,322 54,401,976 - 501,300 4,307,492 21,756,217 1,895,718 2,225,789 - 782,157 17,250 - 2,396,674 9,516,489 1,733,336 3,062,483 642,387 10 10,799,162 1,588,987 7,791,254 3,235,029 340,816 - - 853,982 - 2,196,931 15,154 - 573,906 7,709,369 - 2,265,267 62,027 - 22,530,782 76,296,592 9,524,590 12,043,167 5,385,126 21,756,227 87,832,307 4,920,914 17,351,379 23,755,248 3,066,067 10,610,569 147,536,484 133 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography (continued) Consolidated statement of income Year ended 31 December 2019 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 Impairment on Investment in an Associate 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 Other GCC countries Other Middle East Qatar Europe North America (Figures in QAR ‘000s) Rest of the world Total 3,464,077 (44,592) 534,091 (598,299) (47,543) (344,551) 2,963,183 1,054,288 4,518,365 (663,231) (125,482) (46,268) 6,856 68,913 24,321 - - - - 228,124 762,215 (133,112) (24,512) (8,755) (59) (377,030) 28 (217,425) (68,704) - 2,596 - (413,881) - (156,899) - (69,517) 10,141 (588,158) - - - 21,996 1,383,462 (47,543) - - (322,555) 4,346,645 (796,352) (149,994) (9) - - - - - - - - - - - - - - - - - - (55,023) 6,797 (594,427) (66,108) (413,881) (228) (226,644) 3,087,607 (389,532) 311,431 (588,158) (47,543) (322,792) 2,051,013 2,571 (9,370) - - - - (6,799) 3,090,178 (398,902) 311,431 (588,158) (47,543) (322,792) 2,044,214 (377) 3,089,801 - (398,902) (22,796) 288,635 - (588,158) - (47,543) - (322,792) (23,173) 2,021,041 134 Notes to the Consolidated Financial Statements continued 6. OPERATING SEGMENTS (continued) (b) By geography (continued) Consolidated statement of financial position 2018 (Restated) Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement Property and equipment and all other assets Total assets Other GCC countries Other Middle East Qatar Europe North America (Figures in QAR ‘000s) Rest of the world Total 5,206,929 - 1,522,869 - - - 6,729,798 2,742,307 630,912 2,407,217 1,217,740 1,338,149 1,138,568 9,474,893 70,419,832 581,968 12,413,262 683,061 - 544,341 84,642,464 17,321,411 736,731 2,527,474 55,933 774,792 789,736 22,206,077 12,603 4,500,337 - - 5,984,569 10,481 1,170,600 194,000 - - - 4,512,940 1,927 7,361,577 101,687,651 6,460,429 20,041,422 2,150,734 2,112,941 2,474,572 134,927,749 Due to banks Customer deposits Debt securities Other borrowings Other liabilities Equity Total liabilities and equity 5,314,714 51,801,046 - 212,031 3,941,445 19,856,448 81,125,684 823,977 2,457,201 - 503,399 - - 3,784,577 2,193,552 9,089,715 2,567,407 1,447,427 698,379 11 15,996,491 5,597,166 1,185,586 13,504,339 3,832,769 216,985 - 24,336,845 - 16,539 - 1,107,196 13,473 - 1,137,208 21,050 13,950,459 71,785,783 16,071,746 8,379,734 4,883,568 19,856,459 8,546,944 134,927,749 7,235,696 - 1,276,912 13,286 - 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 3,785 177,698 - - - - 181,483 2,114,375 (189) 2,114,186 217,756 - 217,756 98,647 (7,083) 91,564 (538,791) - (538,791) (50,568) - (50,568) (160,222) - (160,222) 1,681,197 (7,272) 1,673,925 Consolidated statement of income Year ended 31 December 2018 (Restated) 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 7. FINANCIAL ASSETS AND LIABILITIES 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: Consolidated statement of financial position Fair value through Profit & loss Fair value through other comprehensive income 2019 Debt instruments Equity instruments Debt instruments Equity instruments Amortised Cost (Figures in QAR ‘000s) Total carrying amount Fair value Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Due to banks Customer deposits Debt securities Other borrowings - - - - - - - - - - - 6,075,044 6,075,044 6,075,044 12,396,433 12,396,433 12,396,433 - 88,009,448 88,009,448 88,009,448 1,362,693 1,362,693 430,878 430,878 4,921,729 4,921,729 20,123,727 5,199 5,199 126,604,652 26,844,226 133,325,151 27,063,912 133,544,837 - - - - - - - - - - - - - - - - - - - - 22,530,782 76,296,592 9,524,590 12,043,167 120,395,131 22,530,782 76,296,592 9,524,590 12,043,167 22,530,782 76,296,592 9,736,064 12,043,167 120,395,131 120,606,605 137 Notes to the Consolidated Financial Statements continued 7. FINANCIAL ASSETS AND LIABILITIES (continued) 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: Consolidated statement of financial position 2018 Fair value through Profit & loss Debt instruments Equity instruments Fair value through other comprehensive income Debt instruments Equity instruments Amortised Cost Total carrying amount Fair value (Figures in QAR ‘000s) Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Due to banks Customer deposits Debt securities Other borrowings - - 4,619 443,206 447,825 - - - - - - - - - - - - - - 6,729,798 6,729,798 6,729,798 9,474,893 9,474,893 9,474,893 84,637,845 84,642,464 84,642,464 658,617 658,617 3,899,727 3,899,727 110,774 110,774 17,093,753 117,936,289 22,206,077 123,053,232 22,201,752 123,048,907 - - - - - - - - - - - - - - - 13,950,459 71,785,783 16,071,746 8,379,734 110,187,722 13,950,459 71,785,783 16,071,746 8,379,734 110,187,722 13,950,459 71,785,783 16,079,143 8,379,734 110,195,119 8. CASH AND BALANCES WITH CENTRAL BANKS Cash Cash reserve with central banks * Other balances with central banks Accrued interest (Figures in QAR ‘000s) 2019 2018 824,073 3,619,864 1,629,546 6,073,483 1,561 6,075,044 618,025 3,531,400 2,566,633 6,716,058 13,740 6,729,798 * The cash reserve with central banks is mandatory reserve not available for use in the Group’s day to day operations. 138 Notes to the Consolidated Financial Statements continued 9. DUE FROM BANKS Current accounts Placements Loans to banks Accrued interest Allowance for impairment of due from bank 10. LOANS AND ADVANCES TO CUSTOMERS a) By type Loans Overdrafts Bills discounted Bankers acceptances Deferred profit Accrued interest 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) 2019 2018 2,009,118 6,540,135 3,879,297 12,428,550 8,435 (40,552) 12,396,433 1,794,590 5,182,478 2,505,336 9,482,404 6,187 (13,698) 9,474,893 (Figures in QAR ‘000s) 2019 2018 79,403,992 9,734,710 303,614 1,480,885 90,923,201 (7,285) 90,915,916 779,204 (2,751,042) (934,630) 88,009,448 80,356,664 5,069,471 367,098 1,766,122 87,559,355 (11,099) 87,548,256 940,833 (2,844,016) (1,002,609) 84,642,464 *The aggregate amount of non-performing loans and advances to customers amounted QAR 4,487 million which represents 4.94% of total loans and advances to customers (2018: QAR 4,891 million 5.59% of total loans and advances to customers). **Allowance for impairment of loans and advances to customers includes QAR 711 million of interest in suspense (2018: QAR 563 million). 139 Notes to the Consolidated Financial Statements continued 10. LOANS AND ADVANCES TO CUSTOMERS (continued) b) By sector 2019 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 9,194,619 847,212 8,168,393 10,488,416 23,018,547 2,710,789 18,764,910 5,006,804 1,204,302 79,403,992 5,845,271 29,475 8,015 256,924 1,257,758 666,143 237,111 1,407,199 26,814 9,734,710 - 12,618 5,510 52,223 108,689 124,574 - - - 303,614 4,049 - 10,423 973,560 231,998 260,232 - - 623 1,480,885 Accrued interest 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 2018 Government and related agencies Non-banking financial institutions Industry Commercial Services Contracting Real estate Personal Others Loans Overdrafts Bills discounted Bankers acceptances 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 Accrued interest 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 15,043,939 889,305 8,192,341 11,771,123 24,616,992 3,761,738 19,002,021 6,414,003 1,231,739 90,923,201 779,204 (7,285) (2,751,042) (934,630) (2,913,753) 88,009,448 Total 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 87,559,355 940,833 (11,099) (2,844,016) (1,002,609) (2,916,891) 84,642,464 140 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 Balance at 1 January Transition adjustment on adoption of IFRS 9 on 1 January 2018 Allowance made during the year Recoveries / reversals 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) 2019 2018 3,846,625 - 1,086,841 (159,670) 927,171 (1,034,840) (53,284) 3,685,672 4,274,363 1,315,988 1,913,098 (511,621) 1,401,477 (2,883,572) (261,631) 3,846,625 *This includes net interest suspended during the year QAR 212.6 million (2018: QAR 474.3 million) as per QCB regulations. Net impairment losses on loans and advances to customers Gross allowance made during the year Less: Recoveries / reversals during the year Less: Interest suspended during the year Less: Recoveries on previously written off loans (Figures in QAR ‘000s) 2019 2018 1,086,841 (159,670) 927,171 (212,595) (120,149) 594,427 1,913,098 (511,621) 1,401,477 (474,313) - 927,164 141 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) Balance at 1 January 2019 Adjustment due to reclassification between segments Allowance made during the year Recoveries/reversal during the year Written off / transferred during the year Exchange differences Balance at 31 December 2019 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 30,393 43,181 680,475 11,938 1,449,129 1,009,833 3,224,949 (23,192) 259,813 373,228 609,849 11,827 3,846,625 481 (481) (41,060) 41,060 (59,756) 59,756 14,149 - - - 45,023 (1,762) - - - 40,938 87,048 - (10,084) - 716,379 (9,176) - - - 43,822 250,230 (4,242) (303,257) - 1,332,104 446,077 (72,550) (227,189) - 1,215,927 Stage 1 Commercial Bank Stage 2 Stage 3 Wholesale Banking Retail Banking Wholesale Banking Retail Banking Wholesale Banking Retail Banking 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 - - - 2,879,220 869,910 820 890,711 42,361 - - - 43,181 (210,236) - - - 680,475 42,105 (30,167) - - - 11,938 - - 1,201,874 (214,259) (2,417,706) - 557,450 (80,382) (337,145) - 1,449,129 1,009,833 142 54,931 (64,568) 100,991 (218,257) 3,394,193 (23,997) 8,832 (30,081) 112,466 - - - - 144,353 199,975 (494,310) (32,035) 191,211 300,275 (82,850) (494,310) (53,284) 279,680 Commercial Total Bank 786,566 (76,792) (540,530) - - Commercial Total Bank 3,749,130 - - - Subsidiaries Total Alternatif Bank Subsidiaries Total Alternatif Bank 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 (Figures in QAR ‘000s) Total - 1,086,841 (159,670) (1,034,840) (53,284) 3,685,672 (28) 11,799 (Figures in QAR ‘000s) 1,315,988 1,913,098 (511,621) (2,883,572) (261,631) 3,846,625 (541) 11,827 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Alternatif bank Others Total - 512,865 512,865 12,368 4,274,363 Notes to the Consolidated Financial Statements continued Balance at 1 January 2019 Adjustment due to reclassification between segments Allowance made during the year Recoveries/reversal during the year Written off / transferred during the year Exchange differences 481 14,149 (481) (41,060) 41,060 (59,756) 59,756 (1,762) 87,048 (9,176) (10,084) 250,230 (4,242) (303,257) - 446,077 (72,550) (227,189) - Balance at 31 December 2019 45,023 40,938 716,379 43,822 1,332,104 1,215,927 Stage 1 Commercial Bank Stage 2 Stage 3 Wholesale Banking Retail Banking Wholesale Banking Retail Banking Wholesale Banking Retail Banking - - - - - - - - - - - - - - - - - - - - - - - - - - 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 537 820 890,711 42,105 29,856 42,361 (210,236) (30,167) - 2,879,220 869,910 1,201,874 (214,259) (2,417,706) 557,450 (80,382) (337,145) - - - - 30,393 43,181 680,475 11,938 1,449,129 1,009,833 10. LOANS AND ADVANCES TO CUSTOMERS (continued) c) Movement in allowance for impairment of loans and advances to customers (continued) 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) 30,393 43,181 680,475 11,938 1,449,129 1,009,833 3,224,949 (23,192) 259,813 373,228 609,849 - - - - - 786,566 (76,792) (540,530) - 3,394,193 54,931 (64,568) - 8,832 (23,997) 100,991 (218,257) - (30,081) 112,466 144,353 199,975 (494,310) (32,035) 191,211 300,275 (82,850) (494,310) (53,284) 279,680 - - - - - - - - - - - - - - 11,827 3,846,625 - - (28) - - 11,799 - 1,086,841 (159,670) (1,034,840) (53,284) 3,685,672 (Figures in QAR ‘000s) Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 Subsidiaries Total Commercial Bank Alternatif bank Total Alternatif Bank Others Total 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) 3,846,625 143 Notes to the Consolidated Financial Statements continued 11. INVESTMENT SECURITIES Fair value through other comprehensive income (FVOCI) Fair value through profit & loss (FVTPL) Amortised cost (AC) Accrued interest (Figures in QAR ‘000s) 2018 (Restated) 2019 4,899,768 1,786,054 20,012,686 26,698,508 145,718 26,844,226 3,992,624 1,099,791 17,015,392 22,107,807 98,270 22,206,077 The carrying value of investment securities pledged under repurchase agreements (REPO) is QAR 10,610 million (2018: QAR 7,656 million). a) Fair value through other comprehensive income Equities State of Qatar debt securities Debt and other securities* Total Equities State of Qatar debt securities Debt and other securities* Total (Figures in QAR ‘000s) 2019 Unquoted Total 5,198 - 53,898 59,096 2018 Unquoted 110,774 - 42,690 153,464 5,198 3,624,920 1,269,650 4,899,768 Total 110,774 2,568,724 1,313,126 3,992,624 Quoted - 3,624,920 1,215,752 4,840,672 Quoted - 2,568,724 1,270,436 3,839,160 * Fixed rate securities and floating rate securities amounted to QAR 1,201 million and QAR 69 million respectively (2018: QAR 1,311 million and QAR 2 million respectively). 144 Notes to the Consolidated Financial Statements continued 11. INVESTMENT SECURITIES (continued) (b) Fair value through profit & loss Equities State of Qatar debt securities Debt and other securities Investment funds Total Equities State of Qatar debt securities Debt and other securities Investment funds Total c) Amortised Cost 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) 2019 Unquoted Total 8,321 - 36,400 24,402 69,123 2018 Unquoted 26,752 - 36,400 36,101 99,253 399,039 111,000 1,244,174 31,841 1,786,054 Total 596,448 61,000 380,174 62,169 1,099,791 (Figures in QAR ‘000s) 2019 Unquoted Total - 281,882 281,882 15,533,030 4,479,656 20,012,686 (Figures in QAR ‘000s) 2019 Unquoted Total 281,882 - 281,882 19,859,180 153,506 20,012,686 Quoted 390,718 111,000 1,207,774 7,439 1,716,931 Quoted 569,696 61,000 343,774 26,068 1,000,538 Quoted 15,533,030 4,197,774 19,730,804 Quoted 19,577,298 153,506 19,730,804 145 Notes to the Consolidated Financial Statements continued 11. INVESTMENT SECURITIES (continued) c) Amortised Cost (continued) 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 1,605,250 - 1,605,250 14,088,212 2,927,180 17,015,392 (Figures in QAR ‘000s) 2018 Unquoted Total - - - 16,884,538 130,854 17,015,392 Quoted 12,482,962 2,927,180 15,410,142 Quoted 16,884,538 130,854 17,015,392 * Investment in securities include an amount of Nil (2018: QAR 1.92 billion) in a subsidiary which were re-classified and designated as amortized cost from FVOCI. The associated FVR within the statement of OCI increased by Nil (2018: QAR 202 million) with a corresponding increase in the carrying value of the investment. The profit and loss impact impact was not material. 12. INVESTMENT IN ASSOCIATES AND A JOINT ARRANGEMENT The Group’s investment in associates and a joint arrangement are as follows: Balance at 1 January Share of results -(note 22) Cash dividend - (note 22) Other movements Reclassified from asset held for sale - (note 13)* Impairment of investment in an associate Balance at 31 December (Figures in QAR ‘000s) 2018 (Restated) 2019 4,512,940 (6,799) (93,072) 22,051 - (413,881) 4,021,239 2,088,158 181,483 (76,627) (239,665) 2,559,591 - 4,512,940 * Reclassified assets held for sale includes rights issue by UAB in 2018, amounting to QAR 272 million. 146 Notes to the Consolidated Financial Statements continued 12. INVESTMENT IN ASSOCIATES AND A JOINT ARRANGEMENT (continued) Name of the Entity National Bank of Oman SAOG (‘NBO’) United Arab Bank PJSC (‘UAB’)* Massoun Insurance Services L.L.C Classification Country Activities 2019 2018 (Restated) % Carrying Value and % of interest held Price per share (QAR) % (Figures in QAR ‘000s) Associate Oman Banking 2,163,815 34.9% 2,083,707 34.9% 1.74 Associate UAE Banking 1,849,500 40.0% 2,416,630 40.0% 0.99 Joint venture Qatar Insurance brokerage 7,924 50.0% 12,603 50.0% Not listed 4,021,239 4,512,940 ** Refer to note 13 The summarised financial position and results of NBO and UAB 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 (Restated) 2019 53,395,161 46,000,933 1,752,987 38,419 129,713 (9,370) 54,093,441 46,515,921 1,861,059 554,895 450,597 177,698 13. ASSET HELD FOR SALE The Group had previously classified its investment in UAB as an asset held for sale as they were under advanced stages of discussion with a third party which was not realized. The management has hence reclassified the investment to an Investment in an Associate in fourth quarter of 2019, effective from 1 January 2019 with prior year balances restated in line with IFRS. 147 Notes to the Consolidated Financial Statements continued 14 PROPERTY AND EQUIPMENT Land and buildings Right of use assets Leasehold improvements Furniture and equipment Motor vehicles Capital work in progress Total (Figures in QAR ‘000s) Cost Balance at 1 January 2018 Additions / transfers Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2018 1,998,459 177,909 21,592 (414) (21,264) 2,176,282 - - - - - - Balance at 1 January 2019 Adjustment on transition to IFRS 16 Additions / transfers Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2019 2,176,282 - 6,543 - (6) (18,334) 2,164,485 - 142,020 28,981 - (4,282) (1,178) 165,541 Accumulated depreciation Balance at 1 January 2018 Depreciation for the year Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2018 Balance at 1 January 2019 Depreciation for the year Revaluation on land & buildings Disposals Exchange differences Balance at 31 December 2019 Net carrying amounts Balance at 31 December 2018 Balance at 31 December 2019 48,351 39,629 - - (211) 87,769 87,769 32,057 - (1) (311) 119,514 - - - - - - - 34,220 - (692) (603) 32,925 135,713 6,067 - (11,000) (11,820) 118,960 1,184,804 79,056 - (12,014) (20,282) 1,231,564 1,231,564 118,960 - - 58,274 7,724 - - (5,898) (5,729) (3,095) (6,192) 117,860 1,277,748 113,324 4,424 - (7,652) (6,711) 103,385 103,385 3,921 - (3,444) (1,660) 102,202 985,508 84,534 - (11,687) (14,018) 1,044,337 1,044,337 79,023 - (5,296) (3,512) 1,114,552 4,825 456 - (905) (217) 4,159 4,159 - 3,891 - (38) (231) 7,781 3,294 640 - (901) (168) 2,865 2,865 773 - (31) (46) 3,561 417,663 8,641 - - - 426,304 3,741,464 272,129 21,592 (24,333) (53,583) 3,957,269 426,304 - 66,747 - - - 3,957,269 142,020 172,160 - (15,953) (29,030) 493,051 4,226,466 - - - - - - - - - - - - 1,150,477 129,227 - (20,240) (21,108) 1,238,356 1,238,356 149,994 - (9,464) (6,132) 1,372,754 2,088,513 2,044,971 - 132,616 15,575 15,658 187,227 163,196 1,294 4,220 426,304 2,718,913 493,051 2,853,712 Right of use asset pertains to the following: Land and buildings Vehicles 148 2019 131,592 1,024 Notes to the Consolidated Financial Statements continued 15. INTANGIBLE ASSETS Cost Balance at 1 January 2018 Additions / transfers Acquisitions Disposals Exchange differences Balance at 31 December 2018 Balance at 1 January 2019 Additions / transfers Acquisitions Disposals Exchange differences Balance at 31 December 2019 Amortisation and Impairment Balance at 1 January 2018 Amortisation during the year Acquisitions Impairment during the year Exchange differences Balance at 31 December 2018 Balance at 1 January 2019 Amortisation during the year Acquisitions Impairment during the year Exchange differences Balance at 31 December 2019 Net carrying amounts Balance at 31 December 2018 Balance at 31 December 2019 Goodwill Brand Customer relationship Core deposit (Figures in QAR ‘000s) Internally developed software Total 251,220 - - - (70,971) 180,249 180,249 - - - (20,593) 159,656 49,800 - - - - 49,800 49,800 - - - - 49,800 87,863 5,001 - - (23,463) 69,401 69,401 - 3,464 - (6,976) 65,889 46,940 3,449 - - (12,360) 38,029 38,029 3,414 - - (2,955) 38,488 286,479 - - - (15,718) 270,761 270,761 - - - 15,488 286,249 147,576 36,894 - - - 184,470 184,470 36,892 - - - 221,362 73,878 - - - (6,165) 67,713 67,713 - - - 2,758 70,471 33,292 8,323 - - - 41,615 41,615 8,323 - - - 49,938 28,300 9,301 - (188) (7,418) 29,995 727,740 14,302 - (188) (123,735) 618,119 618,119 29,995 - - 14,180 10,716 - - (11,754) (2,431) 38,280 620,545 19,954 6,083 - - (4,881) 21,156 21,156 6,394 - - (2,970) 24,580 297,562 54,749 - - (17,241) 335,070 335,070 55,023 - - (5,925) 384,168 130,449 109,856 31,372 27,401 86,291 64,887 26,098 20,533 8,839 13,700 283,049 236,377 149 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-Alternatifbank. A cost of equity of 24.7% and a terminal growth rate of 2.5 % were used to estimate the recoverable amount of Alternatifbank. 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 Bonds 10 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 2019 nil (2018: nil) as the recoverable amount of this CGU was determined to be higher than its carrying amount. 16. OTHER ASSETS Accrued income Prepaid expenses Accounts receivable Repossessed collateral* Positive fair value of derivatives (note 37) Clearing cheques Others (Figures in QAR ‘000s) 2019 2018 69,973 56,441 615,812 4,531,182 764,320 240,094 822,183 7,100,005 68,481 60,366 392,869 2,605,213 371,716 218,861 642,109 4,359,615 *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 Placement with banks Repurchase agreements with banks Accrued interest Total 150 (Figures in QAR ‘000s) 2019 2018 1,193,687 844,499 11,107,326 9,223,815 161,455 22,530,782 561,311 323,873 6,773,721 6,161,638 129,916 13,950,459 Notes to the Consolidated Financial Statements continued 18. CUSTOMER DEPOSITS Current and call deposits Saving deposits Time deposits Accrued interest Total Government Government and semi government agencies Individuals Corporate Non-banking financial institutions Accrued interest 19. DEBT SECURITIES EMTN unsecured Programme – Senior unsecured notes * Senior Notes* Subordinated Notes * Others# Accrued interest Total (Figures in QAR ‘000s) 2019 2018 18,712,151 4,746,766 52,381,708 75,840,625 455,967 76,296,592 16,310,290 4,389,075 50,622,085 71,321,450 464,333 71,785,783 (Figures in QAR ‘000s) 2019 2018 6,788,520 12,286,077 24,049,009 28,516,188 4,200,831 75,840,625 455,967 76,296,592 10,610,571 8,641,978 22,064,871 26,865,471 3,138,559 71,321,450 464,333 71,785,783 (Figures in QAR ‘000s) 2019 2018 7,038,935 466,805 1,261,225 727,556 30,069 9,524,590 7,809,032 2,888,175 3,441,222 1,860,110 73,207 16,071,746 * The following table provides the breakdown of the Debt Securities as at close of 31 December 2019. 151 Notes to the Consolidated Financial Statements continued 19. DEBT SECURITIES (continued) Instrument Issuer Issued amount Issued on Maturity Coupon Senior Notes Subordinated Notes EMTN - Senior notes CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd CBQ Finance Ltd Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank Alternatifbank * Issued for and Guaranteed by the Bank # Others include Commercial Papers and certificate of deposits issued by the bank. USD 750 million * USD 500 million * CHF 335 million * CHF 150 million * CHF 100 million * USD 36 million * USD 25 million * USD 24.9 million * USD 297 million USD 50 million TL 50 million TL 30 million TL 87 million TL 9 million TL 113 million TL 59 million TL 26 million TL 51 million TL 40 million TL 35 million TL 43 million TL 8 million TL 93 million TL 115 million TL 13 million TL 8 million Jun-16 May-18 Mar-18 Oct-19 Oct-18 Feb-19 Sep-19 Nov-19 Apr-16 Jun-15 Aug-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Nov-19 Dec-19 Dec-19 Dec-19 Dec-19 Dec-19 Dec-19 Dec-19 Jun-21 May-23 Mar-21 Oct-23 Oct-22 Feb-24 Sep-22 Nov-21 Apr-26 Jun-25 Aug-21 Jan-20 Feb-20 Jan-20 Jan-20 Jan-20 Jan-20 Feb-20 Feb-20 Feb-20 Feb-20 Mar-20 Mar-20 Mar-20 Mar-20 Mar-20 Fixed Rate 3.25% Fixed Rate 5.00% Fixed Rate 0.697% Fixed Rate 0.38% Fixed Rate 1.115% LIBOR + 1.95% LIBOR + 1.15% LIBOR + 1% Fixed Rate 8.75% LIBOR +6.00% Fixed Rate 14.29% Fixed Rate 13.13% Fixed Rate 12.50% Fixed Rate 12.61% Fixed Rate 12.94% Fixed Rate 12.50% Fixed Rate 12.23% Fixed Rate 12.28% Fixed Rate 11.60% Fixed Rate 11.62% Fixed Rate 11.71% Fixed Rate 10.58% Fixed Rate 10.86% Fixed Rate 10.72% Fixed Rate 10.44% Fixed Rate 10.25% 152 Notes to the Consolidated Financial Statements continued 19. DEBT SECURITIES (continued) Movement in debt securities are analysed as follows: Balance at 1 January Additions Repayments Amortisation of discount and transaction cost Accrued interest Exchange difference Balance at 31 December The table below shows the maturity profile of debt securities: Up to 1 year Between 1 and 3 years Over 3 years Total 20. OTHER BORROWINGS Bilateral loans Syndicated loans Others Accrued interest Total (Figures in QAR ‘000s) 2019 2018 16,071,746 3,486,978 (9,932,780) 23,826 (43,138) (82,042) 9,524,590 11,604,890 9,508,091 (5,055,194) 29,119 73,207 (88,367) 16,071,746 (Figures in QAR ‘000s) 2019 2018 1,193,838 4,568,449 3,762,303 9,524,590 7,958,305 4,679,586 3,433,855 16,071,746 (Figures in QAR ‘000s) 2019 2018 180,559 4,616,940 7,144,995 100,673 12,043,167 - 4,848,032 3,453,796 77,906 8,379,734 153 Notes to the Consolidated Financial Statements continued 20. OTHER BORROWINGS (continued) Movements in other borrowings are as follows: Balance at 1 January Additions Repayments Fair value adjustment on consolidation of Abank Amortisation of discount and transaction cost Accrued interest 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 Total (Figures in QAR ‘000s) 2019 2018 8,379,734 7,793,321 (3,735,723) - 12,077 22,767 (429,009) 12,043,167 9,303,365 6,583,404 (6,634,330) (37,291) 13,724 77,906 (927,044) 8,379,734 (Figures in QAR ‘000s) 2019 2018 7,102,050 4,134,116 807,001 12,043,167 3,526,421 4,096,190 757,123 8,379,734 154 Notes to the Consolidated Financial Statements continued 21. OTHER LIABILITIES Accrued expense payable Other provisions (Note i) Negative fair value of derivatives (Note 37) Unearned income Cash margins Accounts payable Directors’ remuneration and meeting attendance fee Provision for sports and social activities support fund (“Daam”) (note 24) Dividend payable Managers’ cheque and payment order Unclaimed balances Due for trade acceptances Deferred tax liabilities Lease liabilities (Note ii) Employees’ benefit liability (Note32 and Note iii) Income tax payable Others Net impairment losses on loan commitments and financial guarantees Total (Figures in QAR ‘000s) 2019 2018 148,459 194,270 526,643 231,416 663,044 650,715 18,500 50,526 23,373 46,841 12,609 1,480,885 649 133,333 117,462 25,596 965,052 95,753 5,385,126 127,238 215,723 353,499 228,529 652,083 443,407 18,500 41,580 19,640 28,164 11,010 1,766,122 12,123 - - 26,634 835,344 103,972 4,883,568 (i) Other provisions Provident fund (a) Pension fund (b) (Figures in QAR ‘000s) Total Total 2019 2018 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 213,005 13,327 5,530 5,627 - (43,117) (503) 193,869 2,701 9,156 - 4,801 (16,247) (10) - 401 215,706 22,483 5,530 10,428 (16,247) (43,127) (503) 194,270 225,099 19,368 5,968 12,802 (15,460) (29,838) (2,216) 215,723 (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 21. OTHER LIABILITIES (continued) (ii) Lease liabilities The table below shows the maturity profile of lease liabilities: Up to 1 year Above 1 year Total 2019 2018 26,534 106,799 133,333 - - - (iii) Employees’ benefit liability The Bank has granted performance rights to employees including senior management. Performance rights represent a contingent right to receive a cash payment by referencing to the value of Bank shares during a specified period of time. These performance rights do not provide any entitlement to receive Bank shares, voting rights or dividends associated with them. The fair value at the grant date was estimated using the Black Scholes model, considering the terms and conditions upon which the performance rights were granted. Performance rights will be settled in cash. The following tables list the inputs to the model used for plan for the year ended 31 Dec 2019: Expected volatility (%) Dividend yield (%) Risk - free int. rate (%) Number of performance rights Vesting period Share price (QAR) Average strike price (QAR) Max Min 30.88% 9.92% 3.05% 26.78% 3.28% 2.43% 180.7 million 3 years 4.7 3.56 156 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 4,047,253,750 (2018: QAR 4,047,253,750) divided into 4,047,253,750 (2018: 404,725,375) ordinary shares of QAR 1 each (2018: QAR 10 each). Authorised number of ordinary shares Nominal value of ordinary shares (QAR) Issued and paid up capital (in thousands of Qatar Riyals) (Figures in QAR ‘000s) 2019 2018 4,047,253,750 1 4,047,254 404,725,375 10 4,047,254 On 20 March 2019, the Extraordinary General Meeting of the Bank, shareholders approved the par value of the ordinary share to be QAR 1 instead of QAR 10, as per the instructions of Qatar Financial Markets Authority, and amendment of the related Articles of Association. The share split was implemented on 09 June 2019 and the total number of shares were increased from 404,725,375 to 4,047,253,750 ordinary shares. Consequently, Earnings per share for comparative periods has been restated to reflect this. At 31 December 2019, the authorised share capital comprised 4,047,254 thousand ordinary share (2018: 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 Alternatifbank are QAR 9,740 million (2018: QAR 9,652 million) and QAR 96 million (2018: QAR 89 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 and sale of treasury shares is 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. 157 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 credit impairment losses 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 535 million (2018: QAR 525 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 FVOCI instrument loss transferred to Retained earnings Net movement during the year Balance as at 31 December (Figures in QAR ‘000s) 2018 (Restated) 2019 (96,333) (44,500) - - (96,333) (34,072) 663,769 (9,091) 9,053 22,051 44,717 696,427 600,094 32,980 (51,510) (63,030) (19,484) 2,355 (10,228) 24,436 (30,382) - (33,303) (96,333) (f) Treasury shares Treasury shares represents ordinary shares of The Commercial Bank (P.S.Q.C) with nominal value of QAR 1 each. These shares are carried at cost of QAR 2.747 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. 158 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: (Figures in QAR ‘000s) 2018 (Restated) 2019 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 959,764 - (6,799) (93,072) (99,871) 859,893 1,064,189 (209,281) 181,483 (76,627) 104,856 959,764 (i) Proposed dividend The Board of Directors has proposed a cash dividend of 20% for the year 2019 (2018: 15% cash dividend). This proposal is subject to approval at the Annual General Assembly. (j) Dividends A cash dividend of 15% for the year 2018 (2017: 10% cash dividend), was approved at the Annual General Assembly held on 20 March 2019 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 regulatory tier 1 capital of QAR 2 billion by issuing unsecured perpetual non-cumulative unlisted Tier 1 notes. The coupon payments are discretionary and non-cumulative. On the first call date of 30 December 2019, the interest rates on the notes have been agreed at 5.15% (previous rate 6%) and thereafter to be reset at a prevailing sixth year mid-swap rate plus margin every sixth year which will be at 30 December 2025. In February 2016, the Bank raised additional regulatory tier 1 capital of QAR 2 billion by issuing unsecured perpetual non- cumulative unlisted Tier 1 notes. The 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. 159 Notes to the Consolidated Financial Statements continued 22. EQUITY (continued) (l) Instruments eligible for additional capital (continued) 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. 23. OTHER COMPREHENSIVE INCOME Changes in fair value of investments in debt securities designated at FVOCI (IFRS 9): 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): 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 (Restated) 2019 666,739 (2,970) 663,769 (9,091) (129,811) 28,059 9,053 561,979 (34,072) (6,008) - 521,899 68,543 (66,415) 2,128 (10,001) (432,940) (24,959) 24,436 (441,336) (19,484) (5,423) 19,126 (447,117) *Net amount transferred to profit or loss includes a positive change in fair value of QAR 9.7 million (2018: QAR 10.4 million) and a negative change in fair value of QAR 0.6 million (2018: QAR 0.4 million). 24. CONTRIBUTION TO PROVISION FOR SPORTS AND SOCIAL ACTIVITIES SUPPORT FUND (“DAAM”) Pursuant to Law No. 13 of 2008, the Bank made an appropriation of QAR 50.5 million (2018: QAR 41.6 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 2019. 160 Notes to the Consolidated Financial Statements continued 25. INTEREST INCOME Loans and advances to customers Debt securities Amounts deposited with banks Amounts deposited with central bank (Figures in QAR ‘000s) 2019 2018 5,220,424 1,148,964 375,151 50,871 6,795,410 4,811,277 895,035 321,830 49,180 6,077,322 The amounts reported above include interest income, calculated using the effective interest method, that relate to, at amortized cost QAR 6,459 million (2018 : QAR 5,763 million) and at fair value QAR 336 million (2018: QAR 314 million). 26. INTEREST EXPENSE Customer deposits Debt securities Other borrowings Interest expense on lease liabilities Amount deposited by central banks and other banks (Figures in QAR ‘000s) 2019 2018 2,348,258 644,014 393,231 11,149 435,575 3,832,227 2,291,014 591,718 364,976 - 347,292 3,595,000 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 (Figures in QAR ‘000s) 2019 2018 366,114 458,963 168,011 251,633 44,499 1,289,220 327,352 438,709 180,091 137,962 33,851 1,117,965 161 Notes to the Consolidated Financial Statements continued 28. FEE AND COMMISSION EXPENSE Credit and debit card fees Brokerage services Others 29. NET FOREIGN EXCHANGE GAIN (Figures in QAR ‘000s) 2019 2018 288,162 11,391 74,821 374,374 269,986 23,805 66,936 360,727 (Figures in QAR ‘000s) 2019 2018 Dealing in foreign currencies & revaluation of spot assets 281,045 202,247 30. INCOME FROM INVESTMENT SECURITIES Net gain on disposal of investment securities measured at fair value Net Change in Fair-value of Investment securities Dividend income 31. OTHER INCOME Rental and other income 32. STAFF COSTS Salary and benefits (Note) Health care and medical insurance expenses Staff end of services and pension fund contribution (note 21 (i)) Training and education Note: Salary and benefits include performance rights charge of QAR 117.5 million. 162 (Figures in QAR ‘000s) 2019 2018 25,237 39,405 4,351 68,993 10,267 (34,398) 5,305 (18,826) (Figures in QAR ‘000s) 2019 2018 118,578 85,576 (Figures in QAR ‘000s) 2019 2018 754,687 17,028 22,483 2,154 796,352 637,954 16,997 19,368 2,147 676,466 Notes to the Consolidated Financial Statements continued 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) 2019 2018 26,842 16,325 46,914 18,500 41,486 1,684 4,376 38,158 32,359 226,644 38,021 25,671 50,232 18,500 68,328 1,800 6,498 46,361 57,482 312,893 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: Basic and diluted Profit for the year attributable to the equity holders of the Bank Less: Dividend on Instrument eligible for additional capital Profit for EPS calculation (Figures in QAR ‘000s) 2018 (Restated) 2019 2,021,040 (240,000) 1,781,040 1,673,924 (240,000) 1,433,924 Weighted average number of outstanding shares in thousands (Note 22 (a)) Basic and diluted earnings per share (QAR) 4,047,254 0.44 4,047,254 0.35 163 Notes to the Consolidated Financial Statements continued 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) 2019 2018 4,287,871 21,353,539 1,706,950 27,348,360 4,373,836 22,057,901 2,148,781 28,580,518 421,352 157,569 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 make the group liable 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. 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) 2019 2018 2,453,619 7,602,352 10,055,971 3,184,658 6,799,888 9,984,546 164 Notes to the Consolidated Financial Statements continued 37. DERIVATIVES Positive fair value Negative fair value Notional amount within 3 months 3 - 12 months (Figures in QAR ‘000s) More than 5 years 1-5 years At 31 December 2019 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 & others Interest rate swaps Total At 31 December 2018 Derivatives held for trading: Interest rate swaps Forward foreign exchange contracts & others Derivatives held for fair value hedges: Interest rate swaps Derivatives held for cash flow hedges: Forward foreign exchange contracts & others Interest rate swaps Total 439,654 333,780 12,540,390 30,599 1,936,671 4,004,935 6,568,185 237,389 113,847 47,722,621 14,873,925 3,979,028 19,924,049 8,945,619 86,578 8,086 3,713,772 - 62,289 4,426,448 - - - - 1,092,122 2,621,650 4,426,448 - 699 764,320 210,529 147,758 8,641 - 526,643 68,929,415 14,904,524 6,282,804 29,606,633 18,135,454 159,079 526,184 367,105 - 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 - - 168,379 1,239,795 2,449,272 92,094 1,303,797 - 72,371 1,395,891 120 - 371,716 2,769 353,499 413,065 - 55,159,143 26,321,063 - 8,274,259 413,065 15,081,250 - 5,482,571 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. 165 Notes to the Consolidated Financial Statements continued 37. DERIVATIVES (continued) At 31 December 2019, 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 TRY USD CHF 860,000,000 610,905,560 585,000,000 22.90% 3.96% 0.69% Hedging instrument Fair value Hedges: Hedged item Description Currency Notional in currency Average Rate Interest Rate Swaps Govt Bonds Fixed for floating USD 260,000,000 2.79% 38. FUND MANAGEMENT As at the end of the reporting date, the Group holds QAR 392 million (2018: QAR 357 million) worth of international investment securities on behalf of its customers. Out of this amount, investment securities with a value of QAR 338 million (2018: QAR 306 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. 39. RELATED PARTIES 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 166 (Figures in QAR ‘000s) 2019 2018 1,176,839 798,857 3,722 25,835 8,532 18,500 309,400 10,610 9,951 745,942 - 4,725 1,604,135 729,255 13,307 36,683 12,017 18,500 436,800 24,333 14,602 782,138 26 2,271 Notes to the Consolidated Financial Statements continued 39. RELATED PARTIES (continued) Senior management of the bank - Remuneration and other benefits* - Loans and advances 2019 110,941 5,156 2018 46,710 4,636 * Remuneration and other benefits include cost for performance rights amounting to QAR 71.7 million. (a) A significant portion of the loans, advances and financing activities’ balance at 31 December 2019 and 31 December 2018 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. 40. COMPARATIVES FIGURES The comparative figures presented have been reclassified where necessary to preserve consistency with current period figures. The below reclassifications did not have any impact on the consolidated net profit or the total consolidated equity for the comparative period. Accrued interest receivable amounting to QAR 1,059 million and accrued interest payable amounting to QAR 745 million as at 31 December 2018 have been reclassified to each of the respective account balances. Particulars Assets Cash and balances with central banks Due from banks Loans and advances to customers Investment securities Other assets Total Liabilities Due to banks Customer deposits Debt securities Other borrowings Other liabilities Total 2018 (Previously reported) 6,716,058 9,468,706 83,701,631 22,107,807 5,418,645 13,820,543 71,321,450 15,998,539 8,301,828 5,628,930 (Figures in QAR ‘000s) Reclassification 2018 (Reclassified) 13,740 6,187 940,833 98,270 (1,059,030) - 129,916 464,333 73,207 77,906 (745,362) - 6,729,798 9,474,893 84,642,464 22,206,077 4,359,615 13,950,459 71,785,783 16,071,746 8,379,734 4,883,568 167 Notes to the Consolidated Financial Statements continued 40. COMPARATIVES FIGURES (continued) In addition to the above, due to the reclassification of assets held for sale to investment in associates and a joint arrangement, comparative figures have been represented for the carrying value of investment and adjustment of share of results in associate in line with IFRS 5. The net impact is as follows: (Figures in QAR ‘000s) Particulars Assets Investment in associates and a joint arrangement Asset held for sale Total Equity Fair value reserve Other reserve* Total 2018 (Previously reported) 2,096,310 2,559,591 (73,466) 1,079,858 Reclassification and adjustment 2018 (Restated) 2,416,630 (2,559,591) (142,961) (22,867) (120,094) (142,961) 4,512,940 - (96,333) 959,764 INCOME STATEMENT Share of results of associates and a joint arrangement Profit for the year 170,738 1,663,180 10,745 10,745 181,483 1,673,925 * includes QAR 130 million related to IFRS 9 opening adjustment 168 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 banks Due from banks Loans and advances to customers Investment securities Investment in associates and a joint arrangement and subsidiaries 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 reserve Treasury shares Foreign currency translation reserve Other reserves Revaluation reserve Retained earnings TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK Instruments eligible for additional capital TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 2019 QAR ‘000s 2018 (Restated) 4,431,379 11,767,481 76,475,207 24,407,811 5,445,227 2,639,085 6,403,778 131,569,968 23,348,968 66,854,395 7,791,254 7,256,184 4,779,148 110,029,949 4,047,254 9,739,507 26,500 1,486,994 619,393 (38,860) (1,982,124) 809,892 1,264,794 1,566,669 17,540,019 4,000,000 21,540,019 131,569,968 5,206,929 8,934,975 72,643,836 19,811,384 6,052,484 2,523,835 3,678,728 118,852,171 13,569,153 62,738,014 13,504,339 4,991,906 4,201,614 99,005,026 4,047,254 9,652,129 26,500 951,909 (63,951) (179,507) (1,771,821) 909,764 1,264,794 1,010,074 15,847,145 4,000,000 19,847,145 118,852,171 169 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 Net foreign exchange gain Net income from investment securities Other operating income Net operating income Staff costs Depreciation Amortization and impairment of intangible assets Net impairment (losses)/reversal on investment securities Net impairment losses on loans and advances to customers Net impairment losses on other financial assets Impairment on Investment in an Associate Other expenses Profit for the year 2019 5,047,785 (2,473,614) 2,574,171 1,118,382 (333,812) 784,570 189,832 69,955 128,052 3,746,580 (592,298) (118,921) (46,268) 6,856 (377,030) (68,704) (413,881) (221,817) 1,914,517 QAR ‘000s 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) 1,387,886 170 www.cbq.qa
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