1 annual report 2018 - arab african international … report 2018...annual report 2018 10 11 annual...

1 Annual Report 2018

THE WATERthe active world of the depths goes

unseen by those on the surface

54 Annual Report 2018Annual Report 2018

puts down

and a

TREE

before it reaches for theROOTS

SUN


Behind the scenes of our everyday business, we’re cultivating seeds of change.

IT TAKES A ROBUST PLATFORM TO REACH NEW HEIGHTS

In the natural world, change can be imperceptible until it’s suddenly crystal clear that something is transformed.So too in our world.


What does it take to TRANSFORM while maintaining the strengths we’re known for?


AAIB has been a leader in full-service banking in Egypt for more than 50 years, and one of the country’s fastest-growing banks in profitability over the past decade. We have built a strong franchise serving top-tier clients with innovative products and services.

Building on our strengths, we will continue planting flags in new territory, using the skills we have acquired over the past five decades—like reading the map of our environment, planning for shifts in conditions, preparing and provisioning wisely, perfecting our practice before pushing higher.

Becoming the bank for tomorrow’s needs isn’t easy, but we know that our innovations will continue to contribute to our clients’ success and lift up our country and the communities in which we operate.

First Bank to sell protection on Egyptian Eurobonds

Finalized the first securitization deal in the market

First Bank to initiate Corporate Social Responsibility through establishing our “We Owe It to Egypt” Foundation

First Bank to launch standalone microcredit arm

First Bank to extend working hours till 5 pm

We’re proud of our many “firsts”, but it takes more than past accomplishments to keep a bank relevant and ensure a successful future.

Taking our culture of trailblazing to the next level


as the catalyst for transformation

Utilizing

FORESIGHT

Many of AAIB’s 2018 customer service enhancements came from the realm of technology. We laid the groundwork to implement a new core banking system, which will facilitate retail banking from any branch and across multiple channels while streamlining processes and expediting many transactions. In other service upgrades, retail customers can now elect to receive e-statements and choose their own card PINs. Technology enables us to provide an integrated digital experience, while preserving a high personal touch for complex issues.

In 2019, we will leverage technology to even greater advantage. Our strategic roadmap includes customer-facing digital launches that address demand for enhanced speed and convenience. The technology fueling improved efficiency also yields abundant information that empowers insights into specific customer needs.

The expanded data analytics made possible by technology will strengthen our ability to anticipate what our clients want and to proactively offer exquisitely tailored and relevant experiences in real time.

Transforming to address clients’ future needs requires technology infrastructure of unimpeachable security, flawless functioning and a high degree of flexibility.


to respond to change and take advantage of new opportunities

Capitalizing on our

AGILITY

Agility has always distinguished AAIB from its peers. For decades, we’ve strived to remain several steps ahead of the market as it has evolved.

Our market leadership is based on our abundant track record of creating new products and related businesses that have continually expanded the services and advice that we can offer our clients. The many subsidiaries that we’ve built—such as leasing, brokerage, asset management and mortgage finance—enable us to serve our clients’ diverse needs for solutions in a comprehensive manner, across sectors, geography and the business cycle.

We’ve also earned early-mover status in initiatives that also support Egypt’s development goals. We have been a key player in renewable energy, financing the new solar park in Benban. We’re supporting new cities outside greater Cairo with savvy expansion, and have just become the first bank with full-fledged, on-the-ground microfinance operations through our new Sandah subsidiary.

Today, the pace of change is undeniably accelerating, demanding more of both traditional banks and their clients. We are proving equal to this challenge with our aggressive integration of technology, which turbo-charges our ability to innovate and to make deft adjustments as markets shift. By setting information free, technology expands our understanding of our clients and their needs, giving us the opportunity to serve in a coordinated and deeply informed way.

At AAIB, agility means deploying speed, flexibility and judgment to continually elevate our service offerings, making life easier and better for our clients.

An adaptive culture is a prerequisite for proactive innovation.


our customers’ needs today, while transforming to exceed the

expectations they’ll have tomorrow

ABOVEGoing

BEYOND&

AAIB was well ahead of the curve in anticipating clients’ desire to incorporate social and ethical considerations into their financial decisions. In 2005, we became the first Egyptian bank to sign on to the UN Global Compact and since then have led our industry in corporate social responsibility and sustainable finance initiatives.

Today, the value of these commitments has become clear to government and corporate decision-makers, who are prioritizing projects that enhance economic and financial inclusion and that have a positive impact on the environment.

One of our proudest 2018 accomplishments occurred at the intersection of investment banking and “green” finance: providing direct financing and contingent facilities to the landmark renewable energy project underway in the city of Benban, Upper Egypt. This project capitalizes on Egypt’s enormous potential for solar energy and will ultimately become the world’s largest solar farm, generating 15 gigawatts of electricity and reducing the country’s reliance on expensive and polluting fossil fuels.

Our early adoption of sustainable principles ultimately positioned us to participate in breakthrough projects like Benban and to build a responsive subsidiary like Sandah. We are confident that today’s transformation agenda will position us to lead on future milestone initiatives.

Change is non-negotiable, and so is our commitment to our clients’ and our country’s success.


Anticipate, innovate, optimize, repeat

In this era of accelerating change, transformation happens as we continually and iteratively:

We’re transforming every aspect of our operations, from corporate strategy to customer service, supported by our investment in technology infrastructure.

While we’ve historically been known as bankers to high-end corporate clients, our strategic scope has broadened to include consumer banking. Technology underpins the convenience, security and mobility that is critical for retail banking success. At the same time, tech-enabled data mining allows us to closely observe trends and behavior in real time, to continually refine our marketing propositions and to foster individual customers’ emotional connection with the AAIB brand.

The opportunities made possible by technology have also inspired internal restructuring. Corporate banking functions that previously resided in silos are now interlinked so that we can offer a more holistic suite of services to our clients. At the same time, we’ve sharpened our ability to work with enterprises across the size spectrum with the creation of a unit specializing in lending to SMEs.

Today, we’re primed to serve a highly dynamic and demanding client base, leveraging our status as a financial group offering not only retail, corporate and investment banking, but also asset management, brokerage, mortgage finance, leasing and microfinance.

At AAIB, transformation isn’t a one-time project—it’s an ongoing imperative.

Analyze the environment to formulate a perspective on the future

Allocate resources and know-how to align with expected new realities

Perfect our practice for maximum efficiency and results

And then do it again


TRANSFORMENOUGH TO PULL IT OFF?

IS THE WILL TO


OUR PEOPLENot quite. The will to transform opens the door to the future.

We ended 2018 with a headcount of 2,346 team members who serve, advise and partner with our clients. Whether they are client-facing or making things run smoothly behind the scenes, our employees put relationships at the heart of everything they do.

Our team brings diverse yet complementary skills and points of view. We are proud that more than 25% of our managers and 36% of 2018 hires are females, and that we employ people with disabilities.

AAIB’s learning and development philosophy is founded on the belief that our most profitable investment as an institution lies in the development of our staff, who are the catalyst for AAIB’s sustainable growth.

Our annual employee retention rate of 94% is consistent with a corporate culture in which employees both value the opportunities they have at AAIB and feel valued for their contributions.

Our employees’ outstanding productivity compared to peers confirms that our team is truly exceptional.

At AAIB, no one is a spectator to change. Identifying and preparing to meet our clients’ future needs is the job of every employee.

carry us through.

Peer AverageAAIB Productivity Ratios vs. Peers

Assets / EmployeeCustomer Deposits / EmployeeCustomer Net Loans / Employee

15,858 31,024

37,955 36,314

74,670

97,868


GREAT CHALLENGES

INSPIREUS

Some say that transforming a large, mature company can be like turning an ocean liner. Others might say new market entrants, unencumbered by legacy processes and habits forged over decades, will have an advantage over incumbents.

We say that our foresight and agility, in the context of a track record of innovation and a strong service culture, are a potent combination.

The opportunities are clear. In our home market, we see robust potential in the expansion of the retail market as more individuals open bank accounts. The country’s demographic structure, which features a sizable segment of young adults, is another source of future growth, as are the smaller enterprises that have the potential to expand economic activity and participation.

The path to capitalize on these opportunities is also clear—by enhancing our ability to respond. Flexible systems and processes, shorter product development cycles, faster decision-making and a willingness to experiment—that’s what we mean when we speak of transformation.

Challenging? Yes. But worth all of our effort.

Our markets are brimming with opportunity.

84% of the population remains unbanked

Young people ages 18-29 are more than 20% of the population

97% of the youth population use mobile phones

More than 5 million micro, small and medium enterprises in need of credit


BY THE NUMBERSAS OF DECEMBER 31, 2018

AAIB

$11.5 BILLIONIN ASSETS

$8.8 BILLIONTOTAL DEPOSITS

$1.9 BILLION IN SHAREHOLDERS’

EQUITY

93BRANCHES

15.2%RETURN ON

AVERAGE EQUITY

19.9%OPERATING

RATIO

2.3%RETURN ON

AVERAGE ASSETS

238,655TOTAL CUSTOMERS

417ATMS

6%YOY

GROWTH

2%YOY

GROWTH

$4.3 BILLIONTOTAL LOANS

1%YOY

GROWTH

$264 MILLIONNET PROFIT

3%YOY

GROWTH


Ibrahim Safwat Lotfy

Meshal M. Al Hammad

Ahmed Ashraf Ali Kouchouk

Salah El-Din El Baroudi

Representative,Central Bank of Egypt

Representative, KuwaitInvestment Authority


General Secretary to the Board

Sherif Mohamed Elwy

Bader M. Al Humaidhi

Sulaiman M. Al Wadaani

May Aboul Naga

Adnan S. Al Sager

Vice Chairman & Managing Director

Chairman




BOARD OF DIRECTORS


CHAIRMAN’S LETTER

A More Encouraging Business Climate

To our clients, business partners and shareholders,

On behalf of the Board of Directors, I am proud to report that AAIB recorded impressive results in 2018 on a wide range of performance measures, further strengthening its leadership position in the Egyptian banking market.

There were a number of positive developments in our home market in 2018. Egypt posted its strongest GDP growth in over a decade at an estimated 5.3%, with even higher growth expected for 2019. Unemployment declined from 12% to 10%, while ongoing fiscal consolidation began to show results, with public revenues rising and debt/GDP falling. The EGP/USD exchange rate remained stable at EGP 17.8/USD 1, and key overnight lending rates, while still high in absolute terms, eased early in the year and then held firm through year-end.

While headwinds remain, the business environment has undeniably improved. Structural economic and fiscal reforms are supporting a sustainable path, as are initiatives pertaining to Egypt’s Sustainable Development Strategy—Vision 2030. In response, Moody’s upgraded its outlook on Egypt’s sovereign issuer rating from Stable to Positive in August and subsequently upgraded the rating itself from B3 to B2 in April 2019.

Egypt’s strong economic performance diverged from worldwide trends. Global economic activity slowed notably in the second half of 2018, reflecting increasing trade tensions and tightening financial conditions. Overall global growth is expected to slow in 2019, with advanced economies showing more pronounced deceleration than emerging economies.


Transformation Means Building the Capabilities for Future Success in a Fast-Moving Marketplace

Sustained Profitable Growth, Solid Financial Position

AAIB grew both loans and deposits in 2018, retaining its position as Egypt’s third-largest private bank by assets with a 3.8% market share. Operating efficiency and productivity logged peer-group-leading levels. Net profit for the year was USD 264 million, a gain of 3% over 2017, and return on average assets was 2.3%.

AAIB’s balance sheet remains strong. We continued our strategic direction of diversifying our loan portfolio, reducing the concentration of our fifty largest borrowers from 64% to 56% and assertively pursuing the middle market. As of year-end, we held a 4.2% share of the loans to customers market. On the liability side, strong growth in current account deposits supported our strategy to increase access to inexpensive funding.

Our total equity stood at USD 1.9 billion, with a return on average dollar-based equity of slightly above 15%, indicating continued productive use of capital to generate returns, while our capital adequacy ratio reached 17.2%, far outstripping the 10% baseline requirement.

2018 Operational Highlights

2018 was a year of relentless focus on our core business across all of our business lines. On the retail side, we continued to extend our reach with five new branches and 23 ATMs for a total of 93 branches and 417 ATMs, while our Corporate and Institutional Banking Division executed deals with a total value of USD 200 million.

Our most pioneering accomplishment of 2018 was the launch of our newest subsidiary Sandah, which is Egypt’s first standalone microfinance company owned by a bank and represents a thoughtful end-to-end reinvention of the process of lending to micro-entrepreneurs.

On the technological front, we put into place systems to enhance sales, service, risk profiling and enterprise connectivity, as well as made final preparations for the implementation of a new core banking system and a new branching concept, the digital kiosk, in 2019.

An Ambitious Agenda

Moving into 2019, AAIB’s Board of Directors is united behind an agenda of transformation, in which we continue to manage and shape our core business for growth, while building the capabilities required for future success in an evolving marketplace. In addition to our ongoing operations, we intend to expand our visibility in new market segments. On the corporate banking side, that means small and medium-sized enterprises, who have much to offer the economy as they grow. On the retail side, Egypt’s enormous digital-native youth market presents compelling potential. Addressing these currently underserved segments requires adapting to their needs and demands, rather than attempting to satisfy them with an existing menu conceived for large corporate clients or financially established individuals.

Leading organizational transformation takes a unique mindset, outlook and set of traits and I am delighted to announce that AAIB has found the

right person in Mr. Sherif Elwy, who was named Vice Chairman and Managing Director of AAIB in November. Mr. Elwy joined AAIB last year from Arab Bank, where he was country manager for the past four years. Before that, he was Vice Chairman for business at the National Bank of Egypt for seven years with more than 10,000 employees under his management. In addition to his track record in our sector and his demonstrated leadership skills, he has served on the boards of directors of several major companies. The AAIB board of directors is confident in his ability to initiate change and inspire our more than 2,000 employees to excellence.

Additionally, I would like to welcome three new board members: Mr. Ibrahim Safwat Lotfy, Mr. Ahmed Kouchouk, and Ms. May Aboul Naga, all of whom represent the Central Bank of Egypt, one of our major shareholders. I would like to thank Mr. Mahmoud Abdel Aziz, Ms. Lobna Helal, and Mr. Abdel Salam Al Anwar, whose terms ended in 2018, for their dedicated service as directors.I would also like to thank Mr. Hassan Abdalla for his dedication over the past 16 years.

Success Beyond Numbers

Social responsibility and ethical banking concerns have long been integrated into AAIB’s business model through our We Owe It to Egypt Foundation and our MOSTADAM platform. We took another stride forward in 2018, joining 27 other leading global banks as founders of the UN Principles for Responsible Banking, a framework for the sustainable banking system of the future and a means by which banks can demonstrate how their business strategies are aligned with society’s goals.

Our progress in 2018 resulted from the commitment and hard work of AAIB’s more than 2,000 employees. I offer them my most sincere thanks as well as enduring support for the essential work of transformation ahead. My gratitude also extends to our board members for their counsel and wisdom during a transitional year, and as always to our clients for the trust they have placed in us.

Bader M. Al HumaidhiChairman


VICE CHAIRMAN & MANAGING DIRECTOR’S LETTER

To our clients,

It is my privilege to write this first letter as the Vice Chairman and Managing Director of Arab African International Bank.

2019 is a pivotal year for AAIB as we assess the future prospects for traditional financial institutions. Opportunities are abundant but at the same time, the nature of banking is changing at an accelerating rate. In order to capitalize on opportunities, defend against competitive threats, and thrive in the future, AAIB must transform.

First of all, technology is increasingly shifting banking activities into the digisphere. Consumers are demanding self-service options and young generations strongly prefer tech-enabled convenience to visiting a branch. Digital ledger technology facilitates fast and efficient global payments for businesses and potentially frees liquidity to go anywhere.

Second, the competitive landscape is shifting rapidly. Non-bank financial technology companies (fintechs) are encroaching on traditional bank business with innovative business and service models and without the costly brick-and-mortar infrastructure of established banks.

And third, the formula for success as a bank has changed. For decades, banks have built customer relationships through competitive pricing, products and branch convenience. Going forward, reputation and market position will rest on fulfilled expectations—delivering services when, where and how the customer wants them. The winning banks of the future will be those that can devise not just a single winning formula, but rather tailor a winning formula for each individual customer.

We need to radically reconsider the customer experience, for both retail and corporate clients. Incremental change and adjustment at the margins will no longer suffice.

What Is Driving the Need for Transformation?


What will it take to transform?

Our recipe for transformation has three main ingredients: foresight, technology infrastructure, and agility.

Before joining AAIB, I long admired its well-known history of setting tone and trend for the Egyptian banking market, of being an early adopter of visionary advances in our industry. The instinct to look to where the market is heading is ingrained here. As the person tasked with executing transformation, I intend to leverage that existing habit of foresight, integrate it into all aspects of our operations, and harness it to faster, highly disciplined execution of innovation, without compromising the excellence of our existing business.

In five years’ time—possibly sooner—technology will be the differentiator between banks that are thriving and banks that have withered. No one will be able to compete without a robust yet flexible suite of technology that can support the myriad ways customers want to interact, that is scalable and secure and always available. In 2019 we will implement a new core banking system that will upgrade our service, sales, and data management capabilities to a new level. In addition to our

core system, we will make other investments in technology to stay on our forward foot, able to respond to opportunity, across our financial group.

AAIB has immense human capital. Nurturing organizational agility means equipping our educated and empowered employees with clearly defined objectives, disciplined processes and the tools they need to bring transformational projects to fruition—and then unleashing their talent and energy to redefine modern banking.

What will transformation look like?

AAIB’s transformation will enhance our ability to serve our customers in appealing new ways. For example, in 2019 we plan to launch our first digital kiosk, which is an unmanned standalone branch that customers can use for transactions that go beyond what can be accomplished with an ATM. Going forward, always-open digital kiosk in highly trafficked locations can enhance customer convenience at a much lower operational cost than a staffed brick-and-mortar brand.

Another example of a transformational innovation is the digital wallet, which enables consumers to make electronic transactions without a physical

card. Digital wallets are wins all around. They’re free to users, they save time because information is entered only once, and they protect individuals with encryption and security measures. Merchants love them because they protect against fraud and reduce the frequency of abandoned transactions. We are working hard to launch this service in 2019.

Marketing and sales used to be about casting a wide net with offers aimed at the average customer. Having state-of-the-art technology will improve our ability to tailor value propositions that fulfill the needs and aspirations of the individual customer, whether retail or corporate. Because the needs of small and medium enterprises can be more diverse than the needs of large enterprises, technology will improve our service to them as well.

With increased adoption of digital channels, particularly among younger individuals, the role of the branch in banking will evolve. As transactions increasingly shift online, the branch is becoming the place where customers seek and receive advice on financial matters, such as in our Wealth Management hubs. While tactical branch placement will still occur in the future, aggressive branching strategies are a thing of the past.

More convenience, more personalization, better service—these are just a few examples of the concrete ways in which transformation will drive change at AAIB.

Every day, our clients’ best interests motivate us in everything we do. We are proud to be your partner. On behalf of our entire workforce, I would like to thank you for placing your confidence in AAIB and I look forward to updating you in next year’s annual report on the progress of our transformation agenda.

Sherif ElwyVice Chairman and Managing Director

We Assess the Future Prospects for Traditional Financial Institutions


BUSINESS MOMENTUM


Corporate & Institutional Banking Division

AAIB capitalized on its solid leadership in the Egyptian bank ecosystem in 2018, executing more than USD 200 million in new deals (syndicated loans, securitization bonds and other transactions) for both private and public sector institutions in an array of industries.

Noteworthy among these transactions was a new syndicated facility agreement of LE 7 billion for a leading chemical manufacturer and producer. This deal was one of the largest ever granted to a Public Sector Ministry company. AAIB served as Initial Mandated Lead Arranger, Underwriter, Book-runner, Security Agent, Account Bank, and Debt Service Reserve Account Bank.

AAIB has long distinguished itself in the domestic market as one of the few commercial banks

providing full-service capital markets advisory services. Our demonstrated expertise in organizing debt funding paired with our strong network of relationships with other top-tier financial institutions have made us a top choice for corporate clients. Historically, large corporate clients have been our focus. Going forward, we are broadening our scope to include small and medium enterprises (SMEs), which we see as offering essential fuel to the continued development of a well-rounded and sustainable economy.

Treasury & Capital Markets

In 2018, AAIB’s Treasury and Capital Markets (TCM) division maintained its position as the leading licensed Primary Dealer in Egypt and remained among the five most active domestic banks in the primary and secondary markets.

At the same time, TCM managed the bank’s own portfolio in a manner that optimized yield while exceeding all regulatory requirements pertaining to liquidity. At year end, TCM was responsible for USD 7.1 billion in assets under management and a fixed income portfolio of USD 3.1 billion. Annual turnover was USD 16.6 billion, an increase of approximately 36% over 2017.

TCM’s knowledge of regional and global markets, ability to tune into client needs, and optimal execution make us a trusted partner for both traditional and customized financing solutions. Our work with clients ranges from plain-vanilla cash management and foreign exchange to sophisticated yield enhancement and hedging instruments such as our “Fix & Forward” contract. Our trading floor is staffed by one of the most experienced and well-credentialed teams in the region.


Retail Banking and Wealth Management

2018 was a year of growth on a wide range of retail banking measures. Retail assets and liabilities posted double-digit growth year over year, while we increased the number of physical touchpoints to 510: 93 branches and 417 ATMs. AAIB also operates four elite Wealth Management hubs in Cairo and Alexandria to offer an enhanced banking proposition and advisory services to high net worth individuals.

We implemented numerous customer-facing improvements that make AAIB even better to do business with, such as launching a dollar-denominated debit card, introducing e-statements, and making online transactions more secure with MasterCard Secure Code.

Our Western Union business continued to grow at a healthy rate.

We also attracted new payroll company relationships and new merchant relationships, both of which offer excellent cross-selling opportunities.

AAIB has been meticulously planning for a digital transformation to expand the unmatched services we provide to our customers. In 2018, we implemented new initiatives that increased the volume and number of transactions in the Point of Sale (POS) and e-commerce channels by 41% and 30%, respectively. These initiatives included contactless acceptance on POS, installment option on POS, and introduction of the Smart POS as well as new multi-currency terminals. We are working to introduce further advanced solutions to the market in the coming period.

AAIB - UAE

AAIB’s UAE branches are powerhouses, representing 14% of total bank assets and contributing 16% of net profit.

AAIB - UAE, which offers corporate and retail banking along with treasury, logged several key firsts in 2018, including offering structured finance products to facilitate carry trades and rolling out Real Estate Trust Accounts. Landmark transactions included providing 40% of the funding for an AED 300 million syndicated real estate loan.


SUBSIDIARIES

AAIBARAB AFRICAN

INTERNATIONAL BANK

AAIHArab African

Investment HoldingCapital

EGP 65 MM

AAIB shareholding90.0%

AAIMArab African

Investment Management CapitalEGP 10 MM

AAIH shareholding89.5%

AAISArab African

International Securities CapitalEGP 41.6 MM

AAIH shareholding99.9%

OtherInvestments

AAIMFArab African Int’l

Mortgage FinanceCapital

EGP 110 MM


AAILArab African Int’ILeasing CapitalEGP 100 MM


Sandah ForMicrofinance

CapitalEGP 115 MM

AAIB Shareholding70%


Investment Management

Arab African Investment Management (AAIM) is one of the fastest-growing asset management companies in Egypt. In 2018, AAIM grew its assets under management by more than 80% to EGP 5.6 billion. Its four open-ended investment funds—Shield (equities), Juman (money market), Gozoor (fixed income) and Guard (capital protection)—produced attractive returns for clients.

AAIM also manages separate portfolio accounts across asset classes, tailored to specific investment objectives for high net worth individuals and major

Egyptian institutions including pension funds and insurance companies.

Securities Brokerage

Our brokerage subsidiary, Arab African International Securities (AAIS), improved its market share in 2018 to 1.9%, and advanced to rank 14th by turnover among brokerage firms in Egypt. Historically focused on retail clients, AAIS created an institutional desk in 2018 and by year-end, institutional clients represented 55% of total value traded. AAIS also established an equity research department, which currently covers 20 companies listed on the Egyptian Stock Exchange.


Arab African International Mortgage Finance (AAIMF) disbursed EGP 290 million in new mortgage loans in 2018, capturing a 13% share of mortgage lending market volume. AAIMF distinguishes itself from its competitors with a disbursement cycle as short as five business days and with extensive borrower advisory services. AAIMF has completed its fourth year with almost no nonperforming loans in its portfolio, illustrating that nimble loan decision-making doesn’t mean sacrificing robust due diligence.

Leasing

Arab African International Leasing (AAIL), one of the top ten players in the market, increased its portfolio of leased assets from LE 2.7 billion in 2017 to LE 3.2 billion in 2018 (through direct and indirect lease transactions). Large corporate clients have historically represented AAIL’s main target market; however the company has diversified into the SME market to expand its reach. Consequently, its presence in the machinery and equipment asset class has noticeably expanded.

Mortgage Finance


AAIB has long been the Egyptian bank industry’s thought leader, signing on the U.N. Global Compact in 2005, the London Benchmark Group in 2007 and the Equator Principles in 2009.

In 2018, we set the leadership bar even higher, becoming one of the 28 founding banks of the U.N. Environmental Program Finance Initiative, which requires target-setting, disclosure and accountability pertaining to the Initiative’s Principles for Responsible Banking.

Investment in renewable energy plays a strategic role in sustainable development. We were an integral part of the financing of what is expected to become the world’s largest solar park near Aswan and actively seek opportunities to finance projects that contribute to a cleaner, healthier environment.

Support for entrepreneurship is another aspect of our leadership. In 2013 AAIB co-founded the American University in Cairo Venture Lab (AUC V-Lab), a start-up accelerator that provides support for entrepreneurs, and provides financial and in-kind support as well as mentoring and advice. To

date the AUC V-Lab has given birth to more than 100 startups that have in turn created more than 500 jobs.

MOSTADAM is an initiative founded in 2014 by AAIB in conjunction with the U.N. Development Program and the Egyptian Corporate Responsibility Center to groom a new generation of bankers oriented to the integration of finance with the environment, society and responsible governance. Sixty-five young bankers from different Egyptian banks participated in the program this year.

AAIB also participated in several environmental projects focused on the clean-up of plastic waste from the coast and other environmentally fragile sites.

AAIB’s “We Owe It to Egypt” Foundation was created in 2007 to support the expansion and refinement of systems of care in public sector hospitals in Egypt. The Foundation engages in a robust set of activities and donations to problem-solve, automate, equip and boost into excellence facilities around the country.

We work to create value for our communities and country through our sustainable finance initiatives and corporate philanthropy.

Leading By Example

Sandah

Sandah, AAIB’s microfinance subsidiary, started operations in July 2018 and by year-end had made EGP 38 million in loans to more than 1,000 borrowers in Sohag, Minya and Tanta. Sandah differentiates itself from traditional microlenders with a diverse product portfolio, accelerated turnaround time and customer care and support. We see Sandah not only as a profitable venture but also as another pillar in our corporate social responsibility framework, as it contributes to financial inclusion, reduces poverty and unemployment, and enhances broader economic well-being.


CORPORATE GOVERNANCE


The common goal of AAIB’s Board, management and staff is to achieve business growth, sustainability, profitability, and maximize AAIB’s value in the medium to long term.

AAIB’s Board of Directors consists of eight qualified members: seven non-executive directors (NEDs) including the Chairman of the Board and one Executive Director. This structure is consistent with best practice and CBE directives, which recommend the separation of the chairman and chief executive functions.

The Board is responsible for the overall stewardship of the Bank, including establishing AAIB’s strategic direction, overseeing the achievement of its long-term goals, and monitoring the effectiveness of internal controls. The Board of Directors is also responsible for ensuring that business activities are aligned with the interests of AAIB’s main stakeholders and within the framework of governing laws and regulations and the Bank’s approved policies.

During 2018, the terms of three non-executive board members ended. In June, Mr. Mahmoud Abdul Aziz Mahmoud was succeeded by Mr. Ibrahim Safwat Lotfy and Ms. Lobna Helal was succeeded by Mr. Ahmed Kouchouk. In October, Mr. Abdel Salam Al Anwar was succeeded by Ms. May Aboul Naga. These three board positions represent the interests of the Central Bank of Egypt, whose ownership position equals 49.37%.

Additionally, the previous incumbent Vice Chairman and Managing Director, Mr. Hassan Abdalla, was succeeded in November by current incumbent Mr. Sherif Elwy.

Going forward, the Board of Directors will meet eight times per year, in accordance with revised Central Bank of Egypt requirements.


The board is responsible for the overall oversight of the Bank

Director Shareholder Affiliation Executive

Mr. Bader M. Al HumaidhiChairman of the Board

KIA

Mr. Sherif ElwyVice Chairman & Managing Director

CBE x

Mr. Meshal M.N. Al Hammad KIA

Mr. Sulaiman M. Al Wadaani KIA

Mr. Adnan Al Sager KIA

Mr. Ahmed Kouchouk CBE

Mr. Ibrahim Safwat Lotfy CBE

Ms. May Aboul Naga CBE

Board Membership


RISK MANAGEMENT

In 2018, AAIB continued its record of accomplishments in complying with both local and international regulations while also finalizing preparations for the implementation of the new International Financial Reporting Standard (IFRS) 9 accounting standards.

In early 2018, the Central Bank of Egypt announced that beginning in fiscal year 2019, all Egyptian banks will be required to present their financial statements in accordance with IFRS 9. IFRS 9 aligns the measurement of financial assets with future economic scenarios and the bank’s business model, and requires the evaluation of how economic and credit changes will affect portfolios, capital and loss provision levels. The requirements of IFRS 9 are substantially different from IAS 39 and necessitate a new approach to categorizing, staging and assessing the bank’s assets and computing the required provisioning using risk-based methodologies.

AAIB’s Risk Management Group has devoted significant attention and resources to developing a concrete process and solid infrastructure for seamless implementation. Working with internationally renowned consultants, the Risk Management Group together with all stakeholders developed prudent methodologies to define default probabilities for all asset classes. Complex statistical and economic models are applied to determine exposures at default, define loss-giving defaults and estimate expected credit loss by asset.

In April 2019, months of dedicated efforts by all stakeholders culminated in the successful validation of applied methodologies and related results by external parties. In May 2019, AAIB’s board of directors approved the implementation and introduction of related policies.

Accordingly, AAIB’s Risk Management Group has achieved another milestone in its continued support of AAIB’s asset management capabilities and in its contributions to the preservation of shareholder value within a comprehensive yet business-supporting risk management framework.


FINANCIAL STATEMENTS


To: The Shareholders of “Arab African International Bank”

Report on the separate financial statements

We have audited the accompanying separate financial statements of Arab African International Bank “Egyptian joint stock company” which comprise the balance sheet as of “31 December 2018” and the statements of income, changes in equity and cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the separate financial statements

These separate financial statements are the responsibility of bank management. Management is responsible for the preparation and fair presentation of these separate financial statements in accordance with the rules of preparation and presentation of the Bank’s separate financial statements issued by the Central Bank of Egypt on 16 December 2008 and with the requirements of applicable Egyptian laws and regulations.

This responsibility includes designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of separate financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility

Our responsibility is to express an opinion on these separate financial statements based on our audit. We conducted our audit in accordance with Egyptian Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the separate financial statements are free from material

misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the separate financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the separate financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal controls relevant to the Bank’s preparation and fair presentation of the separate financial statements 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 Bank’s internal controls.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the separate financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the accompanying separate financial statements present fairly, in all material respects, the financial position of “Arab African International Bank” as of 31 December 2018, and of its financial performance and its cash flows for the year then ended in accordance with the rules of preparation and presentation of Bank’s separate financial statements issued by the Central Bank of Egypt on 16 December 2008 and with the requirements of applicable Egyptian laws and regulations.

Nothing has come to our attention that indicated that the Bank materially violated any of the provisions of Law No. 88 of 2003 during the year ended 31 December 2018.

The Bank keeps proper financial records, which include all that is required by the law and Bank’s statute and the accompanying separate financial statements are in agreement therewith.

The financial information included in the Board of Directors report are in agreement with the Bank’s accounting records within the limit that such information is recorded therein.

Ashraf Emil Botros Egyptian Financial Supervisory Authority registration number “81”

E.Y - Ernst & Young Public Accountants & Consultants

Aziz Maher Aziz BarsoumEgyptian Financial Supervisory Authority registration number “228”

KPMG Hazem HassanPublic Accountants & Consultants

Cairo, 25 February 2019

Report on Other Legal and Regulatory Requirements


Arab African International Bank(Egyptian joint stock company)

Separate balance sheet as at 31 December 2018

Note 31 December 2018 31 December 2017

US$ ‘000 US$ ‘000

Assets

Cash and due from Central Banks (15) 612,535 564,902

Due from banks (16) 3,204,281 3,363,108

Treasury bills (17) 2,714,799 2,953,789

Trading investment (18) 5,168 7,793

Loans to customers (22) 4,269,266 4,237,112

Loans to Banks (21) 999 -

Financial Investments:

Available for sale investments (19) 59,450 75,393

Held to maturity investments (19) 386,615 437,465

Investments in subsidiaries and associates (24) 46,251 44,427

Investment properties (20) 2,230 2,270

Intangible assets (28) - 437

Other assets (25) 138,615 183,833

Deferred tax assets (26) 2,151 4,652

Fixed assets (net of accumulated depreciation) (27) 63,463 58,794

Total assets 11,505,823 11,933,975

Liabilities & owners’ equity

Liabilities

Due to banks (29) 450,036 843,369

Customers’ deposits (30) 8,778,470 8,583,685

Other liabilities (31) 233,254 291,656

Loans and facilites from banks (32) 117,500 130,000

Other provisions (33) 25,055 37,772

Current income tax liabilities (34) 23,989 29,149

Retirement benefit obligations (35) 4,580 3,904

Subordinated deposits (36) - 300,000

Total liabilities 9,632,884 10,219,535

Owners’ Equity

Paid-in capital (37) 500,000 500,000

Reserves (38) 236,369 249,306

Retained earnings (38) 1,136,570 965,134

Total owners’ equity 1,872,939 1,714,440

Total liabilities and owners’ equity 11,505,823 11,933,975

* The accompanying notes from (1) to (48) form an integral part of these financial statements and are to be read therewith.


Separate statement of income for the year ended 31 December 2018


US$ ‘000 US$ ‘000

Interest Income & Similar revenues (6) 1,121,797 941,029

Interest Expense & Similar costs (6) (777,228) (624,663)

Net interest income 344,569 316,366

Fees & Commission income (7) 83,349 87,601

Fees & Commission expenses (7) (2,546) (2,409)

Net Fees & Commission income 80,803 85,192

Dividend income (8) 783 3,347

Net trading income (9) 29,782 27,966

Impairment charge for credit losses (10) (53,244) (22,002)

Gain on financial investments (19) 53,386 4,509

Administrative expenses (11) (98,968) (71,280)

Other operating expense (12) (11,257) (9,137)

Net Profit before income tax 345,854 334,961

Income tax expense (13) (81,549) (79,458)

Net profit for the year 264,305 255,503

Earnings per share ( dollar / share ) (14) 2.40 2.38


Bader M. Al HumaidhiChairman

Sherif ElwyVice Chairman and Managing Director



Separate statement of Changes in owners’ equity for the year ended 31 December 2018

Paid In Capital

ReservesRetained Earnings

Total

US$ ‘000 US$ ‘000 US$ ‘000 US$ ‘000

Balance as at 31 December 2016 -Before appropriation 100,000 152,838 1,258,358 1,511,196

Dividends of the year ended 2016 - - (65,585) (65,585)

Balance as at 31 December 2016 -After appropriation 100,000 152,838 1,192,773 1,445,611

Bank risk reserve - (16) (47) (63)

Currencies translation differences - 7 - 7

Capital Reserve - 51 (51) -

Transferred to IFRS 9 risk reserve - 83,044 (83,044) -

Net change in fair value of available for sale 13,382 13,382

Transferred from Retained Earnings to Paid in Capital 400,000 - (400,000) -

Net Profit as at 31 December 2017 - - 255,503 255,503

Balance as at 31 December 2017 500,000 249,306 965,134 1,714,440

Balance as at 31 December 2017 -Before appropriation 500,000 249,306 965,134 1,714,440

Transferred to legal reserve - 25,545 (25,545) -

Dividends of the year ended 2017 - - (67,285) (67,285)

Balance as at 31 December 2017 -After appropriation 500,000 274,851 872,304 1,647,155

Banking risks reserve - (7) (14) (21)

Currencies translation differences - 16 - 16

Capital Reserve - 25 (25) -

Reclassification of Available for sale reserve - 1,110 - 1,110

Net change in fair value of available for sale - (39,626) - (39,626)

Net Profit as at 31 December 2018 - - 264,305 264,305

Balance as at 31 December 2018 500,000 236,369 1,136,570 1,872,939



Separate statement of cash flows for the year ended 31 December 2018


US$ ‘000 US$ ‘000

Cash Flows from Operating Activities

Profit before income tax 345,854 334,961

Adjustments to reconcile net profit to net cash provided from operating activities

Depreciation and amortization (11) 9,475 8,573

Impairment charge for credit losses (10) 54,517 20,730

Other provision charges (12) 2,481 3,030

Other provisions charges expcept loans provisions

(33) (15,126) (4,849)

Impairment charge in Financial Investments Available for Sale

(19) (1,017) 68

Impairment charge in Investments in subsidiaries and associates

(19) 211 -

Impairement charge in Financial Investemnts Held to maturity

(19) (1,273) 1,272

Gain on sale of investments - available for Sale

(19) (51,050) (2,850)

Cash dividends (8) (783) (3,347)

Gain on sale of Fixed assets (12) (25) (133)

Retirement benefit obligations changes (35) 5,978 3,396

Employee benefits (35) (5,302) (4,757)

Gain / loss of monetary assets & liabilities revaluation Difference

(19) 4,782 (9,764)

Gain Operating profit before changes in assets and liabilities provided from operating activities

348,722 346,330

Net Decrease (Increase) in Assets and Liabilities

Due from banks 14,094 72,018

Treasury bills 295,147 (760,114)

Trading financial Investment 2,625 (1,407)

Loans and advances to customers & banks (90,124) (727,207)

Derivative financial instruments (net) - 52

Other assets 52,984 (54,802)

Due to banks (393,333) (14,484)

Customers’ deposits 194,785 1,533,475

Other liabilities (71,182) 82,389

Income taxes paid (84,233) (62,506)



Net cash flows resulted from operating activities 269,485 413,744

Cash Flows From Investing Activities

Purchase securities other than trading (19) (105,290) (61,272)

Sale / redemption of securities other than trading

175,103 43,073

Gain on sale of Financial assets available for sale

51,050 2,850

Investments in subsidiaries and associates (1,823) (2,252)

Gain on sale of Fixed assets 25 133

Proceeds from dividends paid 783 3,347

Purchase of fixed assets and branches leasehold improvements

(13,462) (7,977)

Net cash flows resulted from (used in) investing activities

106,386 (22,098)

Cash Flows from Financing Activities

Loans and advances from Banks (12,500) 30,000

Subordinated deposits (300,000) -

Cash dividends paid (38) (67,285) (65,585)

Net cash flows( used in ) financing activities (379,785) (35,585)

Net decrease in cash and cash equivalents during the year

(3,914) 356,061

Cash and cash equivalents at the beginning of the period

4,055,734 3,699,673

Cash and cash equivalents at the end of the period

4,051,820 4,055,734

Cash and cash equivalents are represented in:

Cash and due from Central Banks 612,535 564,902

Due from banks 3,204,281 3,363,108

Treasury bills 2,714,799 2,953,789

Balances with the Central Banks limited to the reserve ratio

(533,727) (469,237)

Deposits with banks (matured over than three months)

(141,419) (253,251)

Treasury bills (matured over than three months) (1,804,649) (2,103,577)

Cash and cash equivalents at the end of the period

(46) 4,051,820 4,055,734



Separate statement of proposed appropriation for the year end as at 31 December 2018

31 December 2018 31 December 2017

US$ ‘000 US$ ‘000


Added / Deducted:

General banking risks reserve (14) (47)

Gain on sale of fixed assets transferred to capital reserve

(25) (51)

Net profit for the year available to distribution 264,266 255,405

Add / Subtract

Transferred to IFRS 9 risk reserve** - (83,044)

Retained earnings at beginning of the year 872,304 1,192,773

Transferred to paid in capital* - (400,000)

Total 1,136,570 965,134

Appropriated as follows:

Legal reserve 26,428 25,545

Shareholders profit distribution (Part 1) 100 50,000

Shareholders profit distribution (additional part)

49,900 50,000

Board of directors remuneration 585 585

Distributions of employees 23,774 16,700

Retained earnings at end of the year 1,035,783 872,304

Total 1,136,570 965,134

* On September 12, 2017, the Extraordinary General Meeting of Arab African International Bank shareholders approved the increase of the bank’s authorized capital from 500 million USD to 1 billion USD and amended the statement of Article (6) of the Bank’s Articles of Association. Also the increase of the issued and paid in capital from 100 million USD to 500 million USD of the retained earning represented in 100 million shares of 5 USD par value.

** The IFRS 9 risk reserve is composed of 1% of the total credit risk weighted by the net profit after tax for 2017 in accordance with the instructions of the Central Bank of Egypt issued on 28 January 2017 and is only used with the approval of the Central Bank of Egypt


1. General Information

Arab African International Bank (Egyptian Joint Stock Company) is established by special law No. 45 for 1964 in the Arab Republic of Egypt. The Bank carries out all commercial and banking services. The address of its Head office is as follows: 5 Midan Al-Saray Al Koubra, Garden City, Cairo. The Bank is not listed in the Egyptian stock exchange.

Arab African International Bank (Egyptian Joint Stock Company) provides retail, corporate banking and investment banking services in Egypt and abroad through 93 branches and units, its Head Office and network of branches in the Arab Republic of Egypt (89 branches and units), United Arab Emirates (two branches) and (one branch) in Lebanon and employs 2,346 employees at the balance sheet date.

These financial statements were approved by the Board of Directors on 19 February 2019.

2. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated.

A. Basis of preparation

The separate financial statements of the Bank have been prepared in accordance with the rules of preparation and presentation approved by the Central Bank of Egypt on 16 December 2008, under the historical cost convention modified to re-evaluate financial assets and financial liabilities held for trading, financial assets and financial liabilities classified at inception at fair value through profits or losses and financial investments available for sale, and all derivative contracts.

B. Subsidiaries and associates

B.1. Subsidiaries

Subsidiaries are all entities (including special purpose entities) over which the Bank has owned directly or indirectly the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Bank controls another entity.

B.2. Associates

Associates are all entities over which the Bank has direct or indirect significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights.

Purchase method of accounting has been applied to all the acquisition operations. The cost of acquisition is measured by fair value or the assets offered/ issued equity securities/ liabilities incurred/ liabilities accepted in behalf of the acquired company, at the date of the exchange, plus costs directly attributed to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Bank’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the entity acquired, the difference is recognized directly in the income statement into other operating income (expenses).

In the separate financial statements, investments in subsidiaries and associates are accounted for using the cost method. According to this method, investments are recognized by the acquisition cost including goodwill and deducting any impairment losses. Dividends are recognized in the income statement when they are declared and the Bank’s right to receive payment is established.

C. Segment reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns different from those of segments operating in other economic environments.

D. Foreign currency translation

D.1. Transactions in foreign currenciesThe Bank maintains its accounts in US dollars. Foreign currency transactions are translated using the exchange rates prevailing at the date of the transactions. All monetary assets and liabilities balances in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at that date. Foreign exchange gains

and losses resulting from the settlement of such transactions are recognized in the following items in the income statement:

• Net trading income for trading assets and liabilities or net income from financial instruments designated at fair value through profit or loss for instruments designated at fair value through profit or loss according to its type;

• Other operating income (expense) for the rest of items;

• Changes in the fair value of monetary securities denominated in foreign currency classified as available for sale (debt instruments) are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortization costs are recognized in the income statement, and other changes in the carrying amount are recognized in equity (fair value reserve - investments available for sale);

• Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available for sale financial assets, are included in the fair value reserve in equity.

D.2. Foreign branches

The Bank translates results of business and financials for foreign branches to presentation currency (if they don’t operate in accelerating inflation economy) in which different functional currency from the presentation currency of the Bank as follows:

Translation of assets and liabilities at each financial statement presented to the foreign branch using the closing price on the date of this financial statement.

Translation of income and expenditure in each income statement presented using the average exchange rates, only if the average doesn’t represent an acceptable approximation of the cumulative effect of the rates applicable in the date of transaction, then the translation of income and expense will be by using exchange rate at the transaction date.

Recognition of currency differences resulting in a separate item (foreign exchange transaction differences)in equity, also transfer to equity

foreign exchange resulting from the assessment of net investment in foreign branches, loans and financial instruments in foreign currency to cover the investment with the same item, recognition of these differences in the income statement on disposal of foreign branches as the part of other operating income (expense).

E. Financial assets

The Bank classifies its financial assets in the following categories: financial assets at fair value through profit or loss; loans and receivables; held to maturity financial assets; and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.

E.1. Financial assets at fair value through profit or loss

This category includes: financial assets held for trading, and those designated at fair value through profit or loss at inception.

A financial asset is classified as held for trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Derivatives are also categorized as held for trading unless they are designated as hedging instruments.

Financial assets are designated at fair value through profit or loss when:

• Doing so reduces measurement inconsistencies that would arise if the related derivative was treated as held for trading and the underlying financial instruments were carried at amortized cost for such as loans and advances to banks and clients, and debt securities in issue;

• Certain investments, such as equity investments that are managed and evaluated on a fair value in accordance with a documented risk management or investment strategy, and reported to key management personnel on that basis are designated at fair value through profit and loss;

• Financial instruments, such as debt instruments held, containing one or more embedded derivatives, significantly modify the cash flows are designated at fair value through profit and loss.

Gains or losses arising from changes in the fair value of the financial derivatives that are managed


with financial assets and liabilities are recorded at initiation with fair value through profits and losses in the income statement.

The Bank shall not reclassify a derivative out of the fair value through profit or loss category while it is held or issued, shall not reclassify any financial instrument out of the fair value through profit or loss category if upon initial recognition it was designated by the entity as at fair value through profit or loss. In all cases, the Bank shall not reclassify any financial instrument into the fair value through profit or loss category or to the held for trading category after initial recognition.

E.2. Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

• Those that the Bank intends to sell immediately or in the short term, which are classified as held for trading, and those that the Bank upon initial recognition designates as at fair value through profit or loss;

• Those that the Bank upon initial recognition designates as available for sale; or

• Those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration.

E.3. Held-to-maturity financial assets

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank’s management has the intention and ability to hold to maturity. If the Bank were to sell other than an insignificant amount except for specific situations, the entire category would be reclassified as available for sale. E.4. Available-for-sale financial assets

Available-for-sale investments are non-derivative financial assets intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

The following is followed for financial assets:

Regular-way purchases and sales of financial assets at fair value through profit or loss, held to maturity and available for sale are recognized on

trade-date, the date on which the Bank commits to purchase or sell the asset.

Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement in net trading income. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when they are extinguished − that is, when the obligation is discharged, cancelled or expires.

Available for sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortized cost.

Gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the year in which they arise. Gains and losses arising from changes in the fair value of available for sale financial assets are recognized directly in equity, until the financial asset is derecognized or impaired. At this time, the cumulative gain or loss previously recognized in equity is recognized in income statement.

• Interest calculated using the effective interest method and foreign currency gains and losses on monetary assets classified as available for sale are recognized in the income statement. Dividends on available for sale equity instruments are recognized in the income statement when the entity’s right to receive payment is established.

• The fair values of quoted investments in active markets are based on current bid prices. If there is no active market for a financial asset, the Bank establishes fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants, and if the Bank could not assess the fair value of the equity instruments classified as available for sale, these instruments are measured at cost less impairment.

• The Bank may choose to reclassify the available for sale financial assets where the definition of loans and receivables (bonds and loans) is

applicable from Available for sale to Loans and receivables or Held to maturity financial assets as the Bank has an intention to hold them for the perspective future or to the maturity date. Reclassifications are made at fair value as of the reclassification date and any profits or losses related to these assets to be recognized in the owners’ equity as follows:

1. In case of the financial asset which has fixed maturity date, profits and losses are amortized over the remaining period of the held to maturity investments using the effective interest rate. Any difference between the value using amortized cost and the value based on the maturity date to be amortized over the financial asset remaining period using the effective interest rate method.

2. In case of the financial asset which does not have fixed maturity date, profits and losses remain in the owners’ equity till the selling or disposing the financial asset. At that time the profits and losses will be recognized. In case of the subsequent impairment of the financial asset value, any previously recognized profits or losses in owners’ equity will be recognized in profits and losses.

If the Bank modified its estimations for the receivables and the payables then the book value of the financial asset (or group of financial assets) will be adjusted to reflect the effective cash flows and the modified assessments to recalculate the book value through calculation of the present value for the estimated future cash flows using the effective interest rate of the financial asset and the adjustment will be recognized as a revenue or expense in the profits and losses.

In all cases if the Bank reclassified a financial asset as mentioned before and the Bank subsequently increased the estimated future cash inflows as a result of the increase of what will be collected from these receivables, this increase is to be recognized as an adjustment of the effective interest rate starting from the change in estimation date and not an adjustment of the book value in the change in estimation date.

F. Offsetting of financial instruments

Financial assets and liabilities are offset when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

G. Derivative financial instrumentsDerivatives are recognized at fair value at the date of the derivative contract, and are subsequently revaluated at fair value. Fair values are obtained from quoted market prices in active markets, or according to the recent market deals, or the revaluation methods as the discounted cash flow modules and the pricing lists modules, as appropriate. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

The embedded financial derivatives into other financial instruments like convertible bonds should be treated as if they are separate derivatives when the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, and the hybrid (combined) instrument is not measured at fair value with changes in fair value recognized in profit or loss. The embedded derivatives are measured at fair value through profit or loss. Changes in fair value are recognized in net trading income in the income statement. The embedded derivatives are not separated because the Bank has chosen to classify the entire complex contract at fair value through profit or loss.

Derivatives that do not qualify for hedge accounting

Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognized immediately in the profit and loss under ‘’ net trading income’’. However, gains and losses arising from changes in the fair value of derivatives that are managed in conjunction with financial assets or liabilities are included in “net income from financial instruments at fair value through profit or loss”.

H. Recognition of deferred day one profit and loss

The best evidence of fair value at initial recognition is the transaction price (the fair value of the consideration given or received), unless the fair value of the instrument is evidenced by comparison with other observable current market transactions in the same instruments or based on valuation technique. When the Bank has entered into transactions that come due after the lapse of a long period of time, fair value is determined using valuation models whose inputs do not necessarily come from quoted prices or market rates. These financial instruments are initially recognized at the transaction price, which represents the best index to fair value, despite the


value obtained from a valuation model may be different. The difference between the transaction price and the model value is not immediately recognized, commonly referred to as “day one gains or losses”. It is included in other assets in case of loss, and other liabilities in case of gain.

Deferred profits and losses are recognized for each case individually, either by amortization over the lifetime of the transaction or by determining the fair value of the instrument using quoted markets or by recognizing it when the transaction is settled, the financial instruments later measured at fair value and it is recognized directly in the income statements by changes in the fair value.

I. Interest income and expense

Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognized within ‘interest income’ and ‘interest expense’ in the income statement using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Once a financial asset or a group of similar financial assets has been classified as nonperforming or impaired, related interest income is not recognized and is recorded in marginal records apart from the financial statements, and is recognized as revenues according to cash basis as follows:

• When they are collected, after receiving all past due instalments for consumption loans, mortgage loans, and small business loans.

• For corporate loans, cash basis is also applied,

where the return subsequently calculated is raised in accordance with the loan rescheduling contract, until 25% of the rescheduling instalments are repaid, with a minimum of one period of regular repayment scheme. In case the counterparty persists to regularly pay, the return calculated on the loan outstanding is recognized in interest income. (interest on rescheduling without deficits) without interests aside before rescheduling which is avoiding revenues except after paying all the loan balance in the balance sheet before rescheduling.

J. Fees and commission income

Fees and commissions are generally recognized on an accrual basis when the service has been provided. Fees and commissions are not recognized for the nonperforming or impaired loans, as it is recorded in a separate margin records outside the financial statements, and it is recorded on a cash basis when fees and commissions are recognized according to note (2/I) for the fees which are considered a part from effective interest rate for the financial asset as it is considered as a part for the effective interest rate.

Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognized as an adjustment to the effective interest rate on the loan. And in case that the commitment period was expired without issuing the loan, fees and commissions are considered as income at the end of the commitment period.

Loan syndication fees are recognized as revenue when the syndication has been completed and the Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses – are recognized on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a time-apportionate basis. Asset management fees related to investment funds are recognized ratably over the period in which the service is provided. The same principle is applied for financial planning and custody services that are continuously provided over an extended period of time.

K. K.Dividend income

Dividends are recognized in the income statement when the Bank’s right to receive payment is established.

L. Treasury Bills and Sold in an agreement to repurchase

Treasury bills are recognized when they are bought at face value and the issuance cost which represents the unearned interest on these bills and government bonds is recognized through credit balances and other liabilities. These treasury bills appear on the financial statement excluding the unearned interest and they are measured by the amortized cost using the effective interest rate.

Financial instruments that are sold in an agreement to repurchase those (Repos) are presented in financial statements under Treasury Bills and Other Governmental Notes. The difference between the selling and repurchase price is recognized as accrued income over the agreement’s period using the effective rate of return method. On the other hand, reverse repos are deducted from Treasury Bills and Other Governmental Notes.

M. Impairment of financial assets

M.1. financial assets carried at amortized cost

The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:

• Significant financial difficulties of the issuer or obligor;

• Breach of contract such as default in interest or principal payment;

• It becomes probable that the borrower will enter bankruptcy or other financial reorganization;

• Deterioration of the borrower’s competitive position;

• The Bank, for economic or legal reasons relating to the borrower’s financial difficulties, granting to the borrower a concession that the Bank would not otherwise consider;

• Deterioration in the value of collateral;• Downgrading the credit status.

The existence of clear data that indicates measurable decrease in estimated future cash flows from a group of financial assets is considered as objective evidence of impairment for that group, irrespective of the ability of identifying that reduction for each individual asset, e.g. the increase in number of repayment defaults for a particular banking product. The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the period used varies between three months and twelve months.

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant and the following is considered:

• If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment using historical probabilities of default.

• Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. Otherwise it will be added to the group of the financial assets.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement.

If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank


may measure impairment on the basis of an instrument’s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collaterized financial asset reflects the cash flow that may result from foreseeable less cost for obtaining and selling the collateral.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (that is, on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. .The Bank assesses the collective impairment for groups of financial assets with similar credit risk characteristics and collectively assesses them for impairment using historical probabilities of default, and individually for the impaired loans using discounted cash flows, and compared to the obligor risk rating. Differences between the two methods are transferred from retained earnings to general banking reserve, if the obligor risk rating requires more impairment. Future cash flows in a group of financial assets that are collectively estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

M.2. Available for sale financial investments

The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets classified as available for sale or held to maturity is impaired. In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired.

The decline should be considered significant when it reaches 10% of the cost of book value,

and the decline shall be considered prolonged if it is continuous for more than nine months. If the mentioned evidences are available, then the accumulated loss should be carried over from shareholder’s equity to be recognized in the income statement. The impairment in value recognized in the income statement concerning equity instruments will not be reversed if a later increase in the fair value occurs. Meanwhile in case the fair value of debt instruments classified available for sale increased, and it is found possible to objectively link the mentioned increase to an event taking place after recognition of impairment in the income statement, then the impairment will be reversed thought the income statement.

N. Investment Property

Investments property are represented in lands and buildings owned by the Bank for obtaining lease income or capital increase, consequently it does not include properties assets through which the Bank executes its operations, or those properties which reverted to the Bank in the settlements of debts, the investments properties are accounted for similarly with the same accounting treatment for the fixed assets.

O. Intangible Assets

O.1. Computers

Computers’ software related development and maintenance expenses are recognized in the income statement when incurred. Intangible asset is recognized for specific direct costs of computer programs under the Bank’s control and where a probable economic benefit is expected to be generated for more than one year. Direct costs include program development staff costs and appropriate allocation of the overhead costs. Development costs are recognized as computer program in which lead to an increase or expansion in the performance of computer programs and are added to the original costs of the program. These costs are amortized on the basis of the expected useful lives, and not more than five years.

O.2. Intangible assets

Intangible assets other than goodwill are recorded at acquisition cost and amortized on a straight line basis or based on the expected future economic benefits over the expected life. Intangible assets with indefinite life are not amortized but tested for impairment at least annually impairment losses are changed to income statement.

P. Fixed Assets

Land and buildings comprise mainly branches and offices. All property, plant and equipment are stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or are recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to other operating expenses during the financial year in which they are incurred.

Land is not depreciated. Depreciation of other assets is calculated using the straight line method to allocate their cost to their residual values over their estimated useful lives, as follows:

Building 30 Years

Furniture and safes 5 Years

Equipment 7 Years

Transportation 5 Years

Computers 5 Years

Installations 7 Years

E.D.P Systems 5 Years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. Gains (losses) on disposals are determined by comparing proceeds with carrying amount. These are included in other operating income (expenses) in the income statement.

Q. Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortization—except goodwill—and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognized 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 that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. R. Lease

Finance leases are accounted for according to Law No. 95 of 1995 if the contract gives the right to the lessee to purchase the asset on a specified period and with specified amount where the contract’s period represents at least 75% of the expected useful life of the asset or the present value of total lease payments represents at least 90% of the asset’s value. Other lease contracts are considered operating leases.

R.1. The Bank as a lessee

Finance lease contracts are recognized at the lease cost, including the cost of maintenance of the leased assets, within the expenses in the income statement for the period in which they occurred. If the Bank decided to exercise the right to purchase the leased assets, the cost of the right to purchase it as an asset is capitalized and amortized over the useful life of the expected remaining life of the asset in the same manner as similar assets.

Lease expenses are recognized in the income statement using straight line method over the term of contract, after deduction of any discount obtained by the Bank at the contract. In case of periods when the Bank is exempted from paying the lease or if the lease is different (more or less) in different periods, in that case the distribution of the total lease expected to pay over the contract and charge over income statement in equal amounts per month, including the periods that the Bank does not pay the lease.


R.2. The Bank as a Lessor

For assets leased financially, asset are recorded in the fixed assets in the financial statement and amortized over the expected useful life of this asset in the same manner as similar assets. Leasing income recorded less any discount given to the lessee on a straight line method over the contract period.

S. Cash and cash equivalents

For the purpose of the cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash and balances due from Central Banks other than for mandatory reserve, due from banks, and treasury bills.

T. Other provisions

Provisions for restructuring costs and legal claims are recognized when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Reversals of provisions no longer required are presented in other operating income (expense).

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. If the settlement is within one year or less, provisions will be measured by the contractual value if there is no material variance; otherwise, it will be measured at present value. U. Financial guarantees contracts

The financial guarantees contracts are the contracts that the Bank issues as a guarantee for the Bank’s customers for their loans with other parties, and it is required that the Bank pays some claims for the beneficiary as a result of default in repayments. These financial guarantees are presented to banks and other financial institutions instead of the Bank’s customers.

These contracts are initially recognized at fair value on the contract date, and the Bank’s liability is measured by the higher of the initial recognition value deducted by the calculated amortization of guarantee fees or the best estimated value payments required to settle any financial liability resulting from the financial guarantee on balance sheet date. These estimated values are determined based on the Bank’s management experience in similar transactions.

Any differences in the Bank’s liabilities will be recorded in the income statement in other operating income (expense).

V. Income tax

The income tax on the Bank’s period’s profits or losses includes both current tax and deferred tax. Income tax is recognized in the income statement, except when it relates to items directly recognized into equity, in which case the tax is also recognized directly in equity. Income tax is calculated on the taxable profits using the prevailing tax rates as of balance sheet in addition to tax adjustments for previous years.

Deferred income tax is provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined based on the method used to realize or settle the current values of these assets and liabilities, using the tax rates prevailing as of the balance sheet date. Deferred tax assets are recognized when it is probable that the future taxable profit will be available against which the temporary difference can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Reversal is subsequently permitted when there is a probable from its economic benefit limited to the extent reduced.

W. Employee benefits

W.1. Pension obligations

The Bank has a special social fund scheme (the fund) that is not subject to the general law (law 79 for 1975) as it was established under law 64 for 1980 and this fund has its own alternative independent articles of insurable rights (Pension/Bonuses/one payment compensation) and according to the ministry decree 94 for 1985.

This fund covers only the Bank employees in the Headquarters and branches in the Arab Republic of Egypt.

The Bank is committed to pay the fund its monthly contributions, which calculated according the fund’s articles of association and its amendments. The fund is generally funded through monthly contributions payments and other resources as identified in the fund’s articles of association. The liability in respect of the fund is the present value of the defined benefit obligation at the balance sheet date minus the fair value of plan assets, together with adjustments for actuarial gains/losses and past service cost. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using interest rates of government securities, which have terms to maturity approximating the terms of the related liability.

The most basic assumptions used by the actuary are as follows:

• Rates of death from the British Table A49-52ULT;

• The rates of disability from the experience of social insurance in Egypt;

• Average rates of salaries increases during the year for Egyptian pound and American dollar;

• Method is used estimated additional unit in the calculation of the commitments and the present value of subscriptions (Unit Projected Method).

W.2. Bonuses scheme

A liability for employees and managers benefits in the form of bonus is recognized in other credit balances and other liabilities according to the Bank board of directors’ decisions in this respect and the payments should be determined before the time of issuing the financial statements.

W.3. Employees share in profits

The Bank pays a portion of the profits expected to be distributed as a share of the Bank’s personnel determined by the board under the Statute of the Bank, no liability is recognized for undistributed board of directors’ profit sharing.

W.4. Board of directors members profit sharing

The Bank pays percentage of its cash dividends as profit sharing to its Board of directors’ members. Board of directors’ profit sharing is recognized as a dividend distribution through equity and as a liability when approved by the Bank’s shareholders. No liability is recognized for profit sharing relating to undistributed profits.

X. Capital

X.1. Cost of capital

Issue charges are presented, which is directly related to the issuance of new shares or shares for the acquisition of an entity or the issuance of options against owners’ equity with the net proceeds after taxes.

X.2. Dividends

Dividends are deducted from equity in the year in which the General assembly of the shareholders acknowledges these distributions. These distributions include the share of workers in the profits and remuneration of the board of directors as per regulation and law.

Y. Comparative Figures

Comparative figures are reclassified, where necessary, to conform with changes in the current year’s presentation.

3. Financial Risk management

The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance.

The most important types of risk are credit risk, liquidity risk, market risk and other operational risk. Market risk includes currency risk, interest rate and other price risk.

The Bank’s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of


reliable and up to date information system. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products, and emerging best practice.

Risk management is carried out by a risk department under policies approved by the Board of Directors. Financial risks in close co-operation with the Group are operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments. In addition, credit risk management is responsible for the independent review of risk management and the control environment. A. Credit risk

The Bank is exposed to credit risk, which is the risk of suffering financial loss, should any of the Bank’s customers, clients or market counterparties fail to fulfill their contractual obligations to the Bank. Credit risk is the most important risk for the Bank’s business. Management therefore carefully manages its exposure to credit risk. Credit risk arises mainly from lending activities which resulted in loans, facilities and investment activities which result in including the financial assets in the Bank’s assets. Credit risk is available in the off-balance sheet financial assets such lending commitment. The credit risk management and control are centralized in a credit risk management team, which reports to the Board of Directors and head of each business unit regularly.

A.1. Credit risk measurement

Loans and advances to banks and customers

In measuring credit risk of loans and advances to banks and customers, the Bank reflects the following component:

Probability of default - by the client or counterparty on its contractual obligations.

The Bank assesses the probability of default of individual customers using internal rating tools tailored to the various categories of counterparty. They have been developed internally and combine statistical analysis with credit officer judgment. Clients of the Bank are segmented into four rating classes. The rating scale which is shown below reflects the range of default probabilities- defined for each rating class. This means that in principle, exposures might migrate between classes as

the assessment of their probability of default changes. The rating tools are kept under review and upgraded as necessary. The Bank regularly validates the performance of the ratings and their predictive power with regard to default cases.

Bank’s internal ratings scale and mapping of external ratings

Bank’s rating Description of the grade

1-5 Performing loans

6 Regular watching

7 Watch list

8-10 Nonperforming loans

The above ratings are reviewed and approved by the Central Bank of Egypt.

Exposure at default is based on the amounts the Bank expects to be outstanding at the time of default. For example, for a loan this is the face value. For a commitment, the Bank includes any amount already drawn plus the further amount that may have been drawn by the time of default, should it occur.

Loss given default or loss severity represents the Bank’s expectation of the extent of loss on a claim should default occur. It is expressed as a percentage of 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.

Debt securities and treasury bills

For debt securities and treasury bills, external ratings such as Standard & Poor’s rating or their equivalents are used by the Bank for managing of the credit risk exposures. In case such ratings are unavailable, internal rating methods are used that are similar to those used for credit customers. The investment in those securities and bills are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirements at the same time.

A.2. Risk limit control and mitigation policiesThe Bank manages, limits and controls concentrations of credit risk wherever they are identified − in particular, to individual counterparties, groups and to industries and countries.

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product, industry sector and by country are approved quarterly by the Board of Directors.

The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily.

Exposure to credit risk is also managed through regular analysis of the ability of the borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits when appropriate.

Some other specific control and mitigation measures are outlined below:

Collateral

The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:

• Mortgages over residential properties;• Charges over business assets such as premises,

inventory;• Charges over financial instruments such as debt

securities and equities.

Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans and advances.Collateral held as security for financial assets other than loans and advances depends on 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.

Derivatives

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. The amount subject to credit risk is limited to expect future net cash inflows of instruments, which in relation to derivatives are only a 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 counterparties.Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank market’s transactions on any single day.

Master Netting Arrangements

The Bank further restricts its exposure to credit losses by entering into master netting arrangements with counterparties with which it undertakes a significant volume of transactions. Master netting arrangements do not generally result in an offset of assets and liabilities shown in the balance sheet, as transactions are either usually settled on a gross basis. However, the credit risk associated with favourable contracts is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Bank’s overall exposure to credit risk on derivative instruments subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement.

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 Bank on behalf of a customer authorising a third party to draw drafts on the Bank 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.


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 Bank 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 Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

A.3. Impairment and provisioning policies

The internal system for rating previously mentioned in disclosure (A.1) is focused more on credit quality mapping from the inception of the lending and investment activities. In contrast,

impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the balance sheet date based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements are usually lower than the amount determined from the expected loss model that is used for internal operational management and Central Bank of Egypt regulations purposes.

The impairment allowance shown in the balance sheet date at year end is derived from each of the four internal rating grades. However, the largest majority of the impairment allowance comes from the lowest grading.

The table below shows the percentage of the Bank’s on balance sheet items relating to loans and advances and the associated impairment allowance for each of the Bank’s internal rating categories:


Bank’s ratingLoans and

advances %Impairment Provision %

Loans and advances %

Impairment Provision %

Performing loans 67 15 78 22

Regular watching 22 10 15 7

Watch list 4 3 3 3

Nonperforming loans 7 72 4 68

100 100 100 100

The internal rating tool assists management to determine whether objective evidence of impairment exists under EAS 26, based on the following criteria set out by the Bank:

• Significant financial difficulties facing the counterparty;

• Breach of loan covenants as in case of default;• Expecting the bankruptcy of the counterparty,

liquidation, lawsuit, or finance rescheduling;• Deterioration of the borrower’s competitive

position;• Offering exceptions or surrenders due to

economic and legal reasons related to financial difficulties encountered by the counterparty not provided by the Bank in ordinary conditions;

• Deterioration in the value of collateral;• Deterioration in credit situation.

The Bank’s policies require the review of individual financial assets that are above materiality threshold at least annually or more regularly when individual circumstances require.

Impairment allowances on individually assessed accounts are determined by an evaluation of the incurred loss at balance sheet on a case-by-case basis, and are applied to all individually significant accounts. The assessment normally encompasses collateral hold including re-confirmation of its enforceability and the anticipated receipts for that individual account.

Collectively assessed impairment allowances are provided for portfolios of homogenous assets using the available historical experience, experience judgment and statistical techniques.

A.4. General Bank Risk Measurement Model

In addition to the four credit rating levels (note A.1), management classifies categories that are more detailed so as to agree with the requirements of the Central Bank of Egypt (CBE). Assets subject to credit risk are classified in these categories in accordance with regulations and detailed conditions that largely depend on information related to the client, his/her activity, financial position, and regularity of repayment.

The Bank calculates the required provisions for the impairment of the assets subject to

credit risk, including commitments related to credit, on the basis of ratios specified by the Central Bank of Egypt. In case the impairment loss provision required by the Central Bank of Egypt exceeds that required for the purpose of financial statement preparation in accordance with Egyptian accounting standards, retained earnings are decreased to support the General Bank risk reserve with the amount of the increase. This reserve is periodically revised for an increase or a decrease to reflect the amount of increase between the two provisions.

Following is a table of the worthiness levels for institutions in accordance with the internal assessment bases compared to the Central Bank of Egypt assessment bases and the provision ratios required for the impairment of the assets exposed to credit risk:

CBE rating categorization Rating description Provision % Indication of internal rating

1 Low risk 0% Good loans

2 Average risk 1% Good loans

3 Satisfactory risk 1% Good loans

4 Reasonable risk 2% Good loans

5 Acceptable risk 2% Good loans

6 Marginally acceptable risk 3% Standard monitoring

7 Watch List 5% Special monitoring

8 Substandard 20% Non-performing

9 Doubtful 50% Non-performing

10 Bad Debt 100% Non-performing


A.5. Maximum credit risk limit before collaterals On balance sheet credit risk exposure is shown below:


Balances with the central banks limited to the reserve ratio

533,727 469,237

Due from banks 3,204,281 3,363,108

Treasury bills 2,714,799 2,953,789

Loans and advances to banks 6,059 6,059

Loans and advances to customers

Retail:

Overdrafts 258,632 207,024

Credit cards 12,126 10,865

Personal loans 109,314 95,024

Direct loans 13,089 19,543

Mortgage loan 28,721 10,588

Other loans 205,201 261,388

Corporate:

Overdrafts 1,237,201 1,189,901

Direct loans 1,436,012 1,462,500

Syndicated loans 1,273,299 1,278,873

Other loans 64,488 28,002

Financial investments:

Debt instruments 425,250 445,414

Other assets 50,463 55,473

Total 11,572,662 11,856,788

Off balance sheet credit risk exposure is shown below:


Letters of guarantee 1,034,133 1,002,973

Letter of credit 53,601 102,601

Customers acceptances 16,487 38,623

Total 1,104,221 1,144,197

The above table represents maximum credit risk exposure to the Bank at the end of 31 December 2018 without taking into account any collateral held or other credit enhancements attached. As shown above, 40.13% of the total maximum exposure is derived from loans and advances to banks and customers, while the investments in debt instruments represents 3.67%.

Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loans and advances portfolio and debt Instruments base on the following:

• 90% of the loans and advances portfolio is categorized in the top two grades of the internal rating system.

• 88.74% of the loans and advances portfolio is considered to be neither past due nor impaired.

• Loans and advances assessed on an individual basis are valued at USD 295,774 thousand.

• The Bank has implemented more prudent processes when granting loans and advances during the financial year ended in 31 December 2018.

• More than 98.79% of the investments in debt instruments are treasury bills represented in debt instruments on the Egyptian government.

A.6. Loans and advances to banks and customers

Loans and advances balances in terms of the credit worthiness:


Neither past due nor impaired 4,121,286 4,107,834

Past due but not impaired 227,082 278,054

Subject to impairment 295,774 183,879

Total 4,644,142 4,569,767

Less: Unearned discount for commercial papers and loans

(45,832) (58,524)

Less: Loans unearned revenues (30) (39)

Less: Impairment loss provision (309,977) (256,054)

Less: Interest in suspense (18,038) (18,038)

Net 4,270,265 4,237,112

Total impairment loss for loans and advances has amounted to USD 54,517 thousand of which USD 26,420 thousand of impairment on to individual loans, addition to 28,097 thousand USD representing impairment based on group basis of the credit portfolio. Note (22) provide additional information on the provision of impairment loss on loans and advances to banks and customers.

Loans and advances neither past due nor impaired

The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank.

31 December 2018

Retail

Rating Overdrafts Credit cards Personal loans Direct loans Mortgage loan Other loans

Good 258,632 10,151 101,097 9,410 23,823 147,516

Standard monitoring - - - 3,110 - 48,759

Special monitoring - - - 569 - 8,926

Total 258,632 10,151 101,097 13,089 23,823 205,201

31 December 2018

Corporate

Rating Overdrafts Direct loansSyndicated

loansOther loans

Total loans & advances to customer & banks

Good 869,276 807,000 800,144 46,360 3,073,409

Standard monitoring 287,323 266,736 264,473 15,323 885,724

Special monitoring 52,602 48,833 48,418 2,805 162,153

Total 1,209,201 1,122,569 1,113,035 64,488 4,121,286


31 December 2017

Retail

Rating Overdrafts Credit cardsPersonal

loansDirect loans

Mortgage loan

Other loans

Good 207,024 9,128 80,641 15,875 9,885 212,329

Standard monitoring - - - 3,053 - 40,830

Special monitoring - - - 615 - 8,229

Total 207,024 9,128 80,641 19,543 9,885 261,388

31 December 2017

Corporate

Rating Overdrafts Direct loansSyndicated

loansOther loans

Total loans & advances to customer & banks

Good 966,539 1,001,571 868,670 22,746 3,394,408

Standard monitoring 185,864 192,600 167,043 4,374 593,764

Special monitoring 37,457 38,815 33,664 882 119,662

Total 1,189,860 1,232,986 1,069,377 28,002 4,107,834

Loans that are backed by collateral are not considered impaired for the nonperforming category, taking into consideration the collectability of the collateral.

Loans and advances past due but not impaired

These loans and advances are past due for up to 90 days but not impaired, unless the Bank is otherwise informed. Loans and advances past due but not impaired and the fair values of the related collateral are as follows:

31 December 2018

Retail Direct loans Credit cards Personal loans Mortgage loans Total

Past due up to 30 days - 1,005 4,767 3,820 9,592

Past due 30-60 days - 463 1,417 947 2,827

Past due 60-90 days - 214 626 131 971

Total - 1,682 6,810 4,898 13,390

Corporate Overdrafts Direct loansSyndicated

loansOther loans Total

Past due up to 30 days 17,374 158,509 11,077 - 186,960

Past due 30-60 days 10,626 16,106 - - 26,732

Past due 60-90 days - - - - -

Total 28,000 174,615 11,077 - 213,692

31 December 2017

Retail Direct loans Credit cards Personal loans Mortgage loans Total

Past due up to 30 days - 965 10,476 634 12,075

Past due 30-60 days - 418 2,161 63 2,642

Past due 60-90 days - 162 561 6 729

Total - 1,545 13,198 703 15,446

Corporate Overdrafts Direct loans Syndicated loans Other loans Total

Past due up to 30 days 41 202,403 58,855 - 261,299

Past due 30-60 days - - - - -

Past due 60-90 days - 1,309 - - 1,309

Total 41 203,712 58,855 - 262,608

Loans and advances individually impaired


The individually impaired loans and advances to customers before taking into consideration the cash flows from collateral held is USD 295,774

thousand at the end of 31 December 2018 (against USD 183,879 thousand at the end of December 2017)

The following is a breakdown of the gross amount of individually impaired loans and advances by class:

Retail

Overdrafts Credit cards Personal loans Direct loans Total

31 December 2018Individually impaired loans

- 293 1,407 - 1,700


- 192 1,185 - 1,377

Corporate

Overdrafts Credit cardsSyndicated

loansBanks loans

Total


- 138,828 149,187 6,059 294,074


- 25,802 150,641 6,059 182,502

Loans and advances restructure

Restructuring 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 judgment of local management, indicate that payment will

most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans – in particular, customer finance loan. Total renegotiated loans results amounted to USD 17,178 thousand at the end of 31 December 2018 (31 December 2017 was USD 18,996 thousand).


Loans and advances to customers 31 December 2018 31 December 2017

Corporate

Syndicated loans 12,740 14,134


Retail

Credit Card 2 3

Personal loans 16 14

Total 17,178 18,996

A.7. Debt securities and treasury bills

The table below presents an analysis of debt

securities and treasury bills based on Standard & Poor’s assessment or equivalent at 31 December 2018:

31 December 2018

Treasury bills Investment in debt instruments securities Total

AA+ - 6,744 6,744

AA - 19,346 19,346

A - 8,249 8,249

AA- - 3,684 3,684

Less than BBB 2,714,799 387,227 3,102,026

Total 2,714,799 425,250 3,140,049

31 December 2017

Treasury bills Investment in debt instruments securities Total

AA+ - 884 884

AA - 5,404 5,404

A - 65,351 65,351

Less than BBB 2,953,789 373,775 3,327,564

Total 2,953,789 445,414 3,399,203

Arab Republic of Egypt

CairoAlex& Delta

Upper Egypt

Sinai,Red sea & Canal

townsTotal

Gulf countries

Other countries

Total

Balances with the central banks limited to the reserve ratio

442,540 - - - 442,540 91,117 70 533,727

Due from banks 2,270,158 - - - 2,270,158 931,264 2,859 3,204,281

Treasury bills and other governmental papers

2,624,935 - - - 2,624,935 83,729 6,135 2,714,799

Loans and advances to bank

992 - - - 992 - 5,067 6,059

Loans and advances to customers:

Retail

Overdrafts 235,117 11,854 1,616 4,953 253,540 5,092 - 258,632

Credit cards 9,202 2,124 225 575 12,126 - - 12,126

Personal loans 66,193 22,058 6,865 13,902 109,018 296 - 109,314

Direct loans 13,062 - - - 13,062 27 - 13,089

Mortgage loan 28,437 6 - 1 28,444 277 - 28,721

Other loans 205,201 - - - 205,201 - - 205,201

Corporate

Overdrafts 807,867 158,947 2 1,733 968,549 249,378 19,274 1,237,201

Direct loans 1,133,764 131,665 - 180 1,265,609 170,403 - 1,436,012

Syndicated loans 988,099 125,028 - - 1,113,127 160,172 - 1,273,299

Other loans 41,048 578 - - 41,626 22,862 - 64,488

Investment securities

Debt instruments 418,764 - - - 418,764 - 6,486 425,250

Other assets 9,527 29,626 4,155 2,968 46,276 4,108 79 50,463

Total as at 31 December 2018

9,294,906 481,886 12,863 24,312 9,813,967 1,718,725 39,970 11,572,662


9,948,338 609,719 11,113 23,927 10,593,097 1,224,005 39,686 11,856,788

A.8. Concentration of risks of financial assets with credit risk exposure

Geographical sectors

The following table breaks down the Bank’s

credit exposure at their carrying amounts by geographical regions at the end of the year. For this table, the Bank has allocated exposures to regions based on the country of domicile of its clients.


Industry sectors

The following table breaks down the Bank’s credit exposure at carrying amounts by industry sectors of the Bank’s clients.

Manufacturing Agriculture Commercial ServiceFinancial Intuitions

Constructions Government Individual Others Total

Balances with the central banks limited to the reserve

- - - - 533,727 - - - - 533,727

Due from banks

- - - - 3,204,281 - - - - 3,204,281

Treasury bills and other governmental papers

- - - - - - 2,714,799 - - 2,714,799

Loans and advances to banks

- - - - 6,059 - - - - 6,059

Loans and advances to customers:

Loans to Individuals

Overdrafts - - - - - - - 258,632 - 258,632

Credit cards - - - - - - - 12,126 - 12,126

Personal loans - - - - - - - 109,314 - 109,314

Direct loans - - - - - - - 13,089 - 13,089

Mortgage loan - - - - - - - 28,721 - 28,721

Other loans - - - - - - - 205,201 - 205,201

Loans to Corporate

Overdrafts 664,451 1,928 175,721 157,886 173,274 39,919 24,022 - - 1,237,201

Direct loans 440,318 - 74,998 545,286 183,226 58,437 133,747 - - 1,436,012

Syndicated loans

267,275 30,433 12,576 293,350 13,711 43,383 612,571 - - 1,273,299

Other loans 2,438 - 62 31,999 16,521 462 13,006 - - 64,488


Debt instruments

- - - 2,140 42,370 - 380,740 - - 425,250

Other assets - - - - - - - - 50,463 50,463


1,374,482 32,361 263,357 1,030,661 4,173,169 142,201 3,878,885 627,083 50,463 11,572,662


1,518,695 36,204 273,640 1,067,370 4,149,606 143,174 4,001,530 604,432 62,137 11,856,788

B. Market risk

B.1. Interest rate fluctuation risk

Interest rate risk is controlled by asset and liability committee (ALCO).

Financial assets in foreign currencyThe interest rate is determined on the basis of

(floating rate) therefore interest rate fluctuation is mitigated on foreign currency increasing or decreasing taking into consideration hedging price fluctuation risk resorting to financial derivatives Interest Rate Swap (IRS).

Financial assets in local currencyFixed income financial assets: the risk of fixed income assets is covered by issuing medium and

The following table includes the carrying value at the financial instruments distributed by its original currencies.Foreign currency risk concentration on financial instruments

31 December 2018 USD EGP EUR GBP OTHER TOTAL

Financial assets

Cash and balances with central banks

55,874 485,180 6,854 2,158 62,469 612,535

Due from banks 2,249,707 616,777 84,955 69,330 183,512 3,204,281

Treasury bills 1,195,198 1,360,791 152,675 - 6,135 2,714,799

Trading investment - 5,168 - - - 5,168

Loans and advances to customers 1,571,425 2,464,044 89,474 1,576 143,746 4,270,265


Available for sale 19,253 39,327 870 - - 59,450

Held to maturity 6,486 380,129 - - - 386,615

Other financial assets 42,450 48,972 701 233 94,354 186,710

Total financial assets 5,140,393 5,400,388 335,529 73,297 490,216 11,439,823

Financial liabilities

Due to banks 341,563 4,924 31,963 6,994 64,592 450,036

Customers deposits 2,665,506 5,201,583 300,078 65,882 545,421 8,778,470

Loans and facilities from banks 117,500 - - - - 117,500

Other financial liability 59,156 211,560 1,570 416 14,176 286,878

Total financial liabilities 3,183,725 5,418,067 333,611 73,292 624,189 9,632,884

Net on balance sheet financial position 1,956,668 (17,679) 1,918 5 (133,973) 1,806,939

Credit commitments 221,423 397,759 304,263 122 180,654 1,104,221

31 December 2017

Total financial assets 5,736,902 5,265,936 466,757 64,333 338,211 11,872,139

Total financial liabilities 3,837,583 5,266,531 464,860 64,249 586,312 10,219,535

Net on balance sheet financial position

1,899,319 (595) 1,897 84 (248,101) 1,652,604

Credit commitments 263,483 398,226 262,755 55 219,678 1,144,197

long term (liability products) to meet fixed rate income risk.

Floating rate financial assetsvariable cost is free risk free due to their compatibility with the prices prevailing at the grant. Foreign exchange fluctuation riskMonitor foreign currency instantly by responsible department to keep the allowed limits with currency position, whether by the Central Bank of Egypt or Bank board of directors. The Bank does not open position on foreign currency except on clients’ requirement.

B.2. Foreign exchange risk

The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by level of currency and in aggregate for both overnight and intra-day positions which are monitored daily. The table on the following page summarises the Bank’s exposure to foreign currency exchange rate risk at the end of the financial year.


B.3. Interest rate risk

Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank 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 because of

such changes but may reduce profits in the event that unexpected movements arise. The board sets limits on the level of mismatch of interest rate repricing and value at risk that may be undertaken, which is monitored daily by the respective Bank’s department.

The tables below summaries the Bank’s exposure to the interest rate fluctuations risk that include carrying value of the financial instruments categorized based on the repricing dates or the maturity date – whichever is earlier.

31 December 2018Up to 1

Months1-3

Months3-12

Months1-5

YearsOver 5

YearsNon Interest

BearingTotal

Financial assets

Cash and balances with central bank

92,476 - - 442,390 - 77,669 612,535

Due from banks 2,368,433 665,764 141,418 - - 28,666 3,204,281

Treasury bills 153,633 756,517 1,804,469 180 - - 2,714,799

Trading investment - - - - - 5,168 5,168


1,977,571 1,252,716 788,903 194,982 54,953 1,140 4,270,265


Available for sale 12,263 - 4,197 28,327 57 14,606 59,450

Held to maturity - - 17,516 236,159 132,940 - 386,615

Other financial assets 509 5,489 - - - 180,712 186,710

Total financial assets 4,604,885 2,680,486 2,756,503 902,038 187,950 307,961 11,439,823


Due to banks 263,383 47,098 108,620 - - 30,935 450,036

Customers deposits 5,207,693 1,134,510 658,473 1,024,248 109,415 644,131 8,778,470

Loans and facilities from banks

- - 117,500 - - - 117,500

Other financial liabilities 2,260 4,878 - - - 279,740 286,878

Total financial liabilities 5,473,336 1,186,486 884,593 1,024,248 109,415 954,806 9,632,884

Total interest repricing gap (868,451) 1,494,000 1,871,910 (122,210) 78,535 (646,845) 1,806,939

31 December 2018Up to 1

Months1-3

Months3-12

Months1-5

YearsOver 5

YearsTotal

Assets

Cash and balances with central bank

170,145 - - 442,390 - 612,535

Due from banks 2,397,098 665,764 141,419 - - 3,204,281

Treasury bills 153,633 756,517 1,804,469 180 - 2,714,799

Trading investment 5,168 - - - - 5,168


274,999 144,384 1,083,989 1,624,545 1,142,348 4,270,265


Available for sale 14,849 - 6,312 36,311 1,978 59,450

Held to maturity - - 17,516 236,159 132,940 386,615

Other assets 181,221 5,489 - - - 186,710

Total financial assets 3,197,113 1,572,154 3,053,705 2,339,585 1,277,266 11,439,823


Due to banks 294,318 47,098 108,620 - - 450,036

Customers deposits 4,051,574 1,353,185 1,110,728 2,232,362 30,621 8,778,470

Loans and facilities from banks

- - 25,000 92,500 - 117,500

Other liabilities 282,000 4,878 - - - 286,878

Total financial liabilities 4,627,892 1,405,161 1,244,348 2,324,862 30,621 9,632,884

Total liquidity gap (1,430,779) 166,993 1,809,357 14,723 1,246,645 1,806,939

C. Liquidity risk

Liquidity risk is the risk that the Bank is unable to meet its obligations associated with its financial

liabilities when they fall due and to replace funds when they are withdrawn. The consequence may be the failure to meet obligation to repay depositors and fulfil commitments to lend.

Liquidity risk management process

The Bank liquidity management process, as carried out within the Bank and monitored by assets and liability committee, includes:

• Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The Bank maintains an active presence in global money markets to enable this to happen.

• Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow.

• Monitoring the liquidity ratios against internal and regulatory requirements by the Central Bank of Egypt.

• Managing the concentration and profile of debt maturities.

Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. The starting point for those projections is an analysis of the contractual maturity of the financial liabilities and the expected collection date of the financial assets.

Assets and liability management also monitors unmatched medium-term assets, the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees.


31 December 2018 Up to 1 Month 1-3 Months 3-12 Months Total

Derivatives held for trading

Foreign exchange derivatives

Outflow - - - 0

Inflow - - - 0

Swap derivatives

Outflow - - - 0

Inflow - - - 0

Total outflow 0

Total inflow 0

31 December 2017 Up to 1 Month 1-3 Months 3-12 Months Total

Derivatives held for trading

Foreign exchange derivatives

Outflow - - - 0

Inflow - - - 0

Swap derivatives

Outflow - - - 0

Inflow - - - 0

Total outflow 0

Total inflow 0

Off-balance sheet items


No later than 1 year No later than 1 year

Letter of guarantee 1,034,133 1,002,973

Letter of credit (import and export) 53,601 102,601

Customs acceptance 16,487 38,623

Total 1,104,221 1,144,197

Funding approach

Sources of liquidity are regularly reviewed by a separate team in the Bank’s treasury to maintain a wide diversification by currency, geography, provider, product and term.

Derivatives

Derivatives settled on a gross basis

The Bank’s derivatives that will be settled on a

gross basis include:

Foreign exchange derivatives: currency forward, currency swaps.

The table below analyzes the Bank’s derivative financial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the date of the statement of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

D. Fair value of financial assets and liabilities

D.1. Financial instruments measured at fair value using valuation techniques

No change in the assessed fair value using the valuation techniques through the financial year ended on 31 December 2018 and the financial year ended on 31 December 2017.

D.2. Financial instruments not measured at fair value

The table below summarizes the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value:

Book Value Fair Value

31 December 2018

31 December 2017

31 December 2018

31 December 2017

Financial assets

Due from banks 3,204,281 3,363,108 3,204,281 3,363,108

Loans and advances to banks 6,059 6,059 999 -

Loans to customers

Individual 627,083 604,432 623,479 600,907

Corporate entities 4,011,000 3,959,276 3,704,627 3,706,747

Financial investments

Available for sale-equity instruments

13,030 15,390 13,030 15,390

Held to maturity 386,615 437,465 365,352 431,384


Due to banks 450,036 843,369 450,036 843,369

Customer deposits:

Individual 3,088,041 2,781,661 3,088,041 2,781,661

Corporate entities 5,690,429 5,802,024 5,690,429 5,802,024

Loans and facilities from banks 117,500 130,000 117,500 130,000

Due from banks

The fair value of due from banks represents the book value, where all balances are current balances matured during the year.


Loans and advances are net of charges for impairment loan losses. Loans and advances to customers are divided into current and non-current balances. The book value of the current balances is considered the fair value.


Investment securities disclosed in the table above comprise only those financial assets classified as held to maturity.The fair value for loans and

available for sale securities and held-to-maturity assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics.

Due to banks

The fair value of due to banks represents the book value, where all balances are current balances matured during the year.

Deposits due to customers:

The customer deposits are divided into current and non-current balances. The book value of the current balances is considered the fair value.


Other loans:

The other loans are divided into current and non-current balances. The book value of the current balances is considered the fair value.

E. Capital management

The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the statement of financial position, are:

• To comply with the capital requirements set by the Arab Republic of Egypt and countries in which Bank branches operate.

• To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders.

• To maintain a strong capital base to support the development of its business.

• Capital adequacy and the use of regulatory capital (Central Bank of Egypt) are monitored by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community Directives, as implemented by the Central Bank of Egypt (CBE) or supervisory purposes, the required information is filed with the Authority on a quarterly basis.

• The Bank maintains a ratio of 10% or more of total regulatory capital to its risk-weighted assets and contingent liabilities.

• The Bank’s branches operating outside the Arab Republic of Egypt are subject to banking supervision rules in countries which they operate.

• The Central Bank of Egypt approved on 18 December 2012 at the instructions for the minimum standard for the standard capital adequacy in line with the implementation Basel (2) and under these instructions the Bank must abide by such instructions as of December 2012. The Bank provides the data in accordance with the previous instructions.

According to the new regulations issued on 18 December 2012

Tier 1 capital:

Tier 1 capital consists of two parts: Going Concern Capital and Additional Going Concern.

Tier 2 capital:

Gone Concern Capital consists of

• 45% of the increase in the fair value of the book value of financial investments (fair value reserve if it is positive, financial investments held to maturity, investments in subsidiaries and associates).

• 45% of the special reserve.• 45% of the reserve foreign currency translation

differences positive.• Hybrid financial instruments.• Loans (deposits) support.• Provision for impairment losses for loans and

advances and liabilities regular (must not exceed 1.25% of the total credit risk of the assets and liabilities of regular risk-weighted, must also be dedicated impairment losses for loans and credit facilities and contingent liabilities irregular enough to meet the liabilities component for which LCA).

Deducted 50% of the Tier 1 and 50% of the Tier 2:

• Investments in non-financial companies - each company alone, which amount to 15% or more of continuous core capital of the Bank by regulatory amendments.

• The total value of the Bank’s investments in non-financial companies - each individual company and that at least 15% of the basic capital continued by regulatory amendments provided that exceed those investments combined for 60% of the core capital continued by regulatory amendments.

• Securitization portfolios.• Regarding the value of the assets that devolved

to the Bank settlement of debts a general banking risks reserve.

When calculating the total extension of capital adequacy standard, shall not exceed loans (deposits) support for 50% of the first slide after the disposals.

And are weighted assets and contingent liabilities weighted credit risk, market risk, operational risk.The shrine consists capital adequacy standard form.

1. Credit risk2. Market risk3. Operational risk

The assets are weighted risk weights ranging from zero to 100% classified according to the nature of the debtor each asset to reflect the credit risk associated with it, and taking cash collateral account.

The treatment is used for extra-budgetary funds after making adjustments to reflect the episodic nature of the potential losses of those amounts.

The Bank has committed to all local capital requirements in the countries in which they operate foreign branches over the past period.

According to the new regulations issued on 18 December 2012


Capital

Tier 1 Going Concern Capital (1)

Share capital (net of the treasury shares) 500,000 500,000

Reserves 137,826 112,205

Retained earnings 872,265 792,726

IFRS 9 risk reserve 83,044 83,044

Total Deducted from the continuous core capital (51,022) (49,610)

Total common equity capital 1,542,113 1,438,365

Tier 2 (Gone Concern Capital) (2)

45% of the value of the special reserve 1,224 1,224

Subordinated deposits - 300,000

45% fair value of financial investment 6,063 21,669

Provision for impairment losses for performing loans and advances and contingent liabilities

100,098 103,805

Total impairment losses from tier 2 (92) (86)

Total (Gone Concern Capital) 107,293 426,612

Total capital base after deducted (1+2) 1,649,406 1,864,977

Total Credit Risk, Market Risk and Operational Risk

Credit Risk 8,815,396 10,213,507

Market Risk 44,640 27,332

Operational Risk 725,354 607,607

Total Credit Risk, Market Risk and Operational Risk 9,585,390 10,848,446

Capital Adequacy Ratio % 17.21% 17.19%

Net stable funding ratio (NSFR) reached 148.52 % (128.26% local currency and 167.9% foreign currency) and liquidity coverage ratio (LCR) reached 309.81 % (148.7 % local currency and 206.4% foreign currency).

Financial Leverage Ratio

Central Bank of Egypt Board of Directors had approved in its meeting held on July 14, 2015 special supervisory instructions related to leverage ratio of maintaining a minimum level of leverage ratio of 3% to be reported on a quarterly basis as follows:

• As a guidance ratio starting from end of September 2015 till December 2017;

• As an obligatory ratio starting from the year 2018.

This ratio will be included in Basel requirement Tier 1 in order to maintain the effectiveness of the Egyptian banking system, as well as keep up with the best international regulatory practices.

Financial leverage ratio reflects the relationship between Tier 1 for capital that are used in capital adequacy ratio (after exclusions) and the Bank’s assets (on and off-balance Sheet items) that are not risk weighted assets.


Ratio Components

The Numerator Components The numerator consists of the Tier 1 for capital that are used in capital adequacy ratio (after exclusions) in accordance with the requirements of the Central Bank of Egypt.

The Denominator Components The denominator consists of all Bank assets (on and off-balance sheet items) according to the financial statements, called “Bank Exposures”

including the following totals:

• On balance sheet exposure items after deducting Tier 1 exclusions for capital base;

• Derivatives contracts exposure;• Financing financial securities operations

exposure;• Off-balance sheet exposures “weighted

exchange transactions”.

The Financial leverage ratio as follow:


Tier 1 Capital after exclusion 1,542,113 1,438,365

Total Tier 1 Capital after exclusion 1,542,113 1,438,365

Total on balance sheet exposures items including derivatives contracts and financial securities

11,601,629 12,043,482

Total off-balance sheet exposures 1,521,224 1,431,462

Total exposures on and off-balance sheet 13,122,853 13,474,944

Financial leverage ratio 11.75% 10.67%

4. Critical accounting estimates and judgments

The Bank makes estimates and assumptions that affect the presented amounts of assets and liabilities within the next financial year. Estimates and judgments are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events believed to be reasonable during the current conditions and available information.

A. Impairment losses on loans and advances

The Bank reviews its loan portfolios to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in the income statement, the Bank makes judgments as to whether there is any observable data indicating an impairment trigger followed by measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults

on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The method and assumptions used to estimate the amount and the timing of future cash flows are reviewed on a regular basis in order to reduce any difference between the expected and the actual loss based on experience.

B. Impairment of available-for-sale equity investments

The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of whether they are significant or prolonged requires judgment. In making this judgment, the Bank evaluates, among other factors, the volatility in share price. In addition, objective evidence of impairment may be deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

C. Fair value of derivatives

The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using valuation techniques. In these cases, the fair values are estimated from observable data in respect of similar financial instruments or using models. Where market observable inputs are not available, they are estimated based on appropriate assumptions. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of those that sourced them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data; however, areas such as credit risk (both own credit risk and counterparty risk), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments.

D. Held-to-maturity investments

The Bank classifies some non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. This classification requires significant judgment. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank were to fail to keep these investments to maturity other than for the specific circumstances – for example, selling an insignificant amount close to maturity – the Bank is required to reclassify the entire category as available for sale. Accordingly, the investments would be measured at fair value instead of amortized cost, in addition to changing the classification of any investments in this category.

E. Income taxes

The Bank is subject to income taxes in numerous jurisdictions. Significant estimates are required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Bank recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period where the differences exist.

5. Segment reporting analysis

Segment activity involves operating activities, assets used in providing banking services, and risk and return management associated with this activity, which might differ from other activities. Segment analysis for the banking operations involves the following:

Large, medium, and small enterprises:

Includes current accounts, deposits, overdraft accounts, loans, credit facilities, and financial derivatives activities.

Investment:

Includes mergers, purchase of investments and financing the restructuring of companies and financial instruments.

Retail:

Includes current account, saving accounts, deposits, credit card, personal loans, and real estate loans activities.

Other activities:

Includes other banking operations, such as money management.

Transactions among segments are performed according to the Bank’s operating cycle, and include operating assets and liabilities as presented in the Bank’s statement of financial position.


A. Segment reporting analysis

31 December 2018Corporate

bankingRetail

Investment banking

Wealth management

Total

Revenues and expenses according to the sector activity

Revenues of the sector activity 702,370 266,672 310,542 23,670 1,303,254

Expenses of the sector (563,118) (209,987) (48,794) (21,067) (842,966)

Result of the sector operations 139,252 56,685 261,748 2,603 460,288

Uncategorized expenses (114,434)

Profit before tax 345,854

Income taxes (81,549)

Net profit after tax 264,305

Assets and liabilities according to the sector activity

Assets of the sector activity 3,740,499 1,007,931 5,938,059 44,958 10,731,447

Uncategorized assets 774,376

Total assets 11,505,823

Liabilities of the sector activity 5,651,403 643,172 3,390,158 348,105 10,032,838

Uncategorized liabilities 1,472,985

Total liabilities 11,505,823

31 December 2017Corporate

bankingRetail

Investment banking

Wealth management

Total

Revenues and expenses according to the sector activity

Revenues of the sector activity 548,420 47,397 476,795 3,471 1,076,083

Expenses of the sector (437,532) (6,155) (213,034) (2,394) (659,115)

Result of the sector operations 110,888 41,242 263,761 1,077 416,968

Uncategorized expenses (82,007)


Income taxes (79,458)

Net profit after tax 255,503

Assets and liabilities according to the sector activity

Assets of the sector activity 3,952,424 731,668 6,460,648 29,734 11,174,474

Uncategorized assets 759,501

Total assets 11,933,975

Liabilities of the sector activity 5,786,371 552,031 2,954,518 323,643 9,616,563

Uncategorized liabilities 2,317,412

Total liabilities 11,933,975

B. Geographical sector analysis

31 December 2018 CairoAlex

DeltaUpperEgypt

Other Total GulfOther

CountriesTotal

Revenues and expenses according to the geographical sectors

Revenues of the geographical sectors

1,043,315 128,599 21,090 18,267 1,211,271 91,278 705 1,303,254

Expenses of the geographical sectors

(788,850) (96,544) (18,924) (16,161) (920,479) (36,709) (212) (957,400)

Result of sector operations

254,465 32,055 2,166 2,106 290,792 54,569 493 345,854


Tax (81,549)

Profit of the year after tax

264,305

Assets and liabilities according to the geographical sectors

Geographical sectors assets

9,276,269 511,540 41,771 29,176 9,858,756 1,627,310 19,757 11,505,823

Total assets 9,276,269 511,540 41,771 29,176 9,858,756 1,627,310 19,757 11,505,823

Geographical sectors liabilities

9,276,269 511,540 41,771 29,176 9,858,756 1,627,310 19,757 11,505,823

Total liabilities 9,276,269 511,540 41,771 29,176 9,858,756 1,627,310 19,757 11,505,823

31 December 2017 CairoAlex

DeltaUpperEgypt

Other Total GulfOther

CountriesTotal

Revenues & expenses according to the geographical sectors

Revenues of the geographical sectors

910,381 75,679 4,160 4,596 994,816 80,534 733 1,076,083

Expenses of the geographical sectors

(675,972) (42,908) (2,633) (3,166) (724,679) (16,063) (380) (741,122)

Result of sector operations

234,409 32,771 1,527 1,430 270,137 64,471 353 334,961


Tax (79,458)

Profit of the year 255,503

Assets and liabilities according to the geographical sectors

Geographical sectors assets

9,609,277 645,193 27,500 29,808 10,311,778 1,602,509 19,688 11,933,975

Total assets 9,609,277 645,193 27,500 29,808 10,311,778 1,602,509 19,688 11,933,975

Geographical sectors liabilities

9,609,277 645,193 27,500 29,808 10,311,778 1,602,509 19,688 11,933,975

Total liabilities 9,609,277 645,193 27,500 29,808 10,311,778 1,602,509 19,688 11,933,975


6. Net interest income


Interest on loans and similar income

Loans and advances to customers 617,195 501,394

Treasury bills and bonds 341,676 309,277

Deposits and current accounts 155,313 124,873

Investments in held to maturity and available for sale debt instruments

7,613 5,485

1,121,797 941,029

Interest expenses and similar charges

Deposits and current accounts:

To banks (26,663) (16,559)

To customers (739,339) (595,812)

Other loans (6,842) (5,039)

Others (subordinated deposit) (4,384) (7,253)

Total (777,228) (624,663)

Net interest income 344,569 316,366

7. Net fees and commission income


Fees and commissions income:

Credit related fees and commissions 52,089 59,233

Funding institutions services fees 10,160 9,576

Trust and other fiduciary fees 2,087 1,339

Western Union service fees 7,742 6,575

Transfers fees 5,558 4,710

fees collected of customer service 4,346 3,812

Other fees 1,367 2,356

Total 83,349 87,601

Fees and commissions expense:

Other fees and commissions paid (2,546) (2,409)

Net fees and commissions 80,803 85,192

8. Dividend Income


From Available for trade 248 273

From Available for sale 535 3,074

Total 783 3,347

9. Net trading income


Foreign exchange:

Gains from foreign currencies transactions 33,258 25,484

(Loss) on revaluation of swap rate contracts (337) -

(Loss) on revaluation of forward rate contracts - (40)

Change in the fair value of the equity instruments held for trading

(3,139) 2,522

Total 29,782 27,966

10. Impairment charge for credit losses


Loans loss impairment (note.22) (54,517) (20,730)

Impairment loss on held to maturity investment 1,273 (1,272)

(53,244) (22,002)

11. Administrative expenses


Salaries, wages and staff benefits (33,090) (27,353)

Staff medical expenses (752) (613)

Social insurance and pension (10,505) (6,865)

Merchandise supplies (6,587) (5,573)

Services supplies (16,824) (15,742)

Stamp duty taxes and fees (15,906) (6,176)

Depreciation and amortization (9,475) (8,573)

Donation (4,819) (385)

Insurance expense (1,010) -

(98,968) (71,280)

12. Other Operating expense


Gain/(Loss) on translation of monetary assets and liabilities balances in foreign currencies other than trading

825 (756)

Gain on sale of fixed assets 25 133

Other operating income 8,347 8,800

Other operating expenses (17,973) (14,284)

Other provision expense (2,481) (3,030)

(11,257) (9,137)


13. Income tax expense


Current income taxes-Local Branches (67,844) (61,012)

Current income taxes-Foreign Branches (11,204) (13,369)

Deferred tax (2,501) (5,077)

(81,549) (79,458)

Current income tax on profit before income tax differs from the theoretically expected current income tax when applying the average tax rate applicable to the Bank’s profits realized from local and overseas units as follows:


Net accounting profit before taxes 345,854 334,961

The tax rate according to the average tax rates of local and foreign branches

22.50% 22.50%

Income tax computed based on the average tax rates of local and foreign branches on the profit in several tax circuits

77,817 75,366

Add/(Deduct)

Revenues not subject to taxation (36,325) (27,205)

Expenses not deducted for tax purposes 26,264 23,268

Treasury bills taxes 11,292 2,952

Used in deferred tax asset has not been recognized 2,501 5,077

Income tax 81,549 79,458

Actual tax rate 23.58% 23.72%

14. Earnings per share



Expected distributions of employees (23,774) (16,700)

Expected board of directors remuneration (585) (585)

239,946 238,218

Weighted average for the expected number of shares 100,000 100,000

Earnings per share 2.40 2.38

15. Cash and due from the Central Banks


Cash in hand 78,808 95,665

Balances with the Central Banks limited to the reserve ratio 533,727 469,237

612,535 564,902

Non-interest bearing balances 612,535 564,902

612,535 564,902

16. Due from banks


Current accounts 92,182 169,398

Deposits 3,112,099 3,193,710

3,204,281 3,363,108

Central banks apart from Legal Reserve 882,568 619,896

Local banks 1,207,146 951,923

Foreign banks 1,114,567 1,791,289

3,204,281 3,363,108


Variable interest bearing balances 3,065,099 3,193,710

3,204,281 3,363,108

Current balance 3,204,281 3,363,108

17. Treasury bills


Treasury bills 2,742,399 3,012,772

Sales of treasury bills with a commitment to repurchase (27,600) (58,983)

Net treasury bills 2,714,799 2,953,789

Treasury bills issued from Central Bank of Egypt 2,708,664 2,947,621

Treasury bills issued from Central Bank of Lebanon 6,135 6,168

Net treasury bills 2,714,799 2,953,789

Treasury bills represent the following according to maturities:

Treasury bills, maturity 91 days 70,661 63,531

Treasury bills, maturity 182 days 146,465 461,229

Treasury bills, maturity 273 days* 335,233 119,609

Treasury bills, maturity 364 days* 2,347,399 2,535,864

Treasury bills, maturity more than 1 year* 959 1,284

Total nominal value 2,900,717 3,181,517

Unearned interest (158,318) (168,745)

Total (1) 2,742,399 3,012,772

Sales of treasury bills with a commitment to repurchase

Sales of treasury bills with commitment to repurchase in 91 days

(27,600) (58,983)

Total (2) (27,600) (58,983)

Total (1-2) 2,714,799 2,953,789

* Include treasury bills in dollar and euro at 31 December 2018 amounting to 1,347,873 thousand U.S dollar (1,377,419 thousand USD as 31 December, 2017)

* Includes treasury bills sold with a commitment to resell amounting to 27,600 thousand U.S dollar against the Central Bank of Egypt’s mortgage finance initiative for low income


18. Trading investment


Listed equity securities in the stock market

Local companies shares 5,168 7,793

Total equity securities 5,168 7,793

Total trading investment 5,168 7,793

All trading investment are listed in the stock market

19. Financial investment


Available for sale investment

Debt instrument:

Listed at fair value 45,016 14,398

Equity securities

Listed at fair value 1,404 45,605

Non listed at cost value 13,030 15,390

Total available for sale investment (1) 59,450 75,393

Held to maturity investment 31 December 2018 31 December 2017

Debt securities – at amortized cost

Listed debt instruments – at amortized cost 380,234 368,538

Non listed debt instruments – at amortized cost - 62,478

Mutual fund certificates - according to law requirements 6,381 6,449

Total held to maturity investments (2) 386,615 437,465

Total financial investments(1+2) 446,065 512,858

Current balances 22,339 32,471

Non-current balances 423,726 480,387

446,065 512,858

Debt instruments with fixed interest rates 412,816 382,936

Debt instruments with variable interest rates 12,434 62,478

425,250 445,414

The movement in financial investments during the year may be summarized as follows:

Available for sale Held to maturity Total

Balance at 1 January 2017 144,229 328,624 472,853

Additions 12,655 48,617 61,272

Reclassification* (73,877) 73,877 -

Disposals (sale/redemption/amortization) (21,420) (21,653) (43,073)

Impairment losses for equity securities held to maturity

- (1,272) (1,272)

Impairment losses for equity securities available for sale (68) - (68)

Valuation exchange difference of monetary assets 492 9,272 9,764

Net changes in fair value for equity securities available for sale

13,382 - 13,382

Balance at 31 December 2017 75,393 437,465 512,858

Balance at 1 January 2018 75,393 437,465 512,858

Additions 43,703 61,587 105,290

Disposals (sale/redemption/amortization) (65,619) (109,484) (175,103)

Impairment losses for equity securities held to maturity

- 1,273 1,273

Impairment losses for equity securities available for sale 1,017 - 1,017

Valuation Exchange difference of monetary assets (556) (4,226) (4,782)

Net changes in fair value for equity securities available for sale

5,512 - 5,512

Balance at 31 December 2018 59,450 386,615 446,065

* The Bank has disposed, on 30th of September 2018, corporate bonds classified as Held to Maturity, at USD 41,192 thousands. As the sale was in conformity with Central Bank of Egypt rules of preparation and presentation of the Bank’s financial statement pertaining to disposals for Held to Maturity Investment.

Gain from financial investments


Gain on sale of available for sale investments 51,050 2,850

Gain on sale treasury bills 1,530 1,727

Impairment loss of associates and subsidiaries investment

(211) -

Available for sale investments impairment losses 1,017 (68)

53,386 4,509

* The Bank has disposed of Available for Sale equity instruments for USD 52,377 thousands during the third quarter, and recognized gains from sale amounting to USD 48,982 thousands in income statement reclassified position changing fair value from equity.


20. Investment property (net of accumulated depreciation)

Land Building Total

Balance at 1 January 2018

Cost 958 2,177 3,135

Accumulated depreciation - (865) (865)

Net book value as of 1 January 2018 958 1,312 2,270

Depreciation expense - (40) (40)

Net book value as of 31 December 2018 958 1,272 2,230

Net book value as of 31 December 2017 958 1,312 2,270

21. Loans and advances to banks


Loans 6,059 6,059

Less: Impairment loss provision

(4,992) (5,991)

Interest in suspense (68) (68)

999 -

22. Loans and advances to customers


Retail

Overdrafts 258,632 207,024

Credit cards 12,126 10,865

Personal loans 109,314 95,024


Mortgage loan 28,721 10,588

Other loans 205,201 261,388

Total (1) 627,083 604,432

Corporate

Overdrafts 1,237,201 1,189,901

Direct loans 1,436,012 1,462,500

Syndicated loans 1,273,299 1,278,873

Other loans 64,488 28,002

Total (2) 4,011,000 3,959,276

Total loans and advances (1+2) 4,638,083 4,563,708

Less : unearned discount for commercial papers and loans (45,832) (58,524)

Less : prepaid interest for loans (30) (39)

Less: allowance for impairment (304,985) (250,063)

Less : suspense interest (17,970) (17,970)

Net distributed as follows: 4,269,266 4,237,112

Current balances 1,503,372 1,464,915

Non-current balances 2,765,894 2,772,197

4,269,266 4,237,112

Allowance for impairmentMovement of allowance account for losses on loans and advances to banks and customers by class is as follows:

31 December 2018 Retail Corporate Total

Balance at the beginning of the year 3,525 252,529 256,054

Impairment charges 184 54,333 54,517

Proceeds from written off debts 65 5 70

Provision uses during the financial year (153) - (153)

Foreign currencies translation differences

(17) (494) (511)

Balance at the end of year 3,604 306,373 309,977

31 December 2017 Retail Corporate Total

Balance at the beginning of the year 2,550 232,427 234,977

Impairment charges 869 19,861 20,730

Proceeds from written off debts 152 41 193

Provision uses during the financial year (46) (938) (984)

Foreign currencies translation differences

- 1,138 1,138

Balance at the end of year 3,525 252,529 256,054

23. Financial Derivatives Derivatives Currency forwards represent commitments to purchase foreign and domestic currency, including undelivered spot transactions. Foreign currency and interest rate futures are contractual obligations to receive or pay a net amount based on changes in currency rates or interest rates, or to buy or sell foreign currency or a financial instrument on a future date at a specified price, established in an active financial market.

Forward rate agreements are individually negotiated interest rate futures that call for a cash settlement at a future date for the difference between a contracted rate of interest and the current market rate, based on a notional principal amount.

Currency and interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of currencies or interest rates (for example, fixed rate for floating rate) or a combination of all these (i.e., cross-currency interest rate swaps). No exchange of principal takes place, except for certain currency swaps.

The Bank’s credit risk represents the potential cost to replace the swap contracts if counterparties failto fulfill their obligations. This risk is monitored on an ongoing basis with reference to the current fair value, and a proportion of the notional amount of the contracts. In order to control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities.

The notional amounts of certain types of financial instrument provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore do not indicate the Bank’s exposure to credit or price risks.

The derivative instruments become favorable (assets) or unfavorable (liabilities) as a result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favorable or unfavorable, and thus the aggregate fair values of derivative financial assets and liabilities, can fluctuate significantly from time to time.


24. Investment in subsidiaries and associates

The Bank’s interest in its subsidiary and associates is as follows:

31 December 2018

Nature of relation

CountryCompany

assets

Company liabilities without owners’ equity

Company revenues

Company profit/(loss)

Participation value

Participation percentage

Universal for Investment and Development Company (S.A.E.)*

Subsidiary Egypt 543 94 532 66 224 90.0%

Arab African Holding Company (S.A.E.)

Subsidiary Egypt 11,580 3,202 3,078 914 9,498 89.63%

Arab African Real Estate Mortgage Company (S.A.E.)

Subsidiary Egypt 28,469 15,428 4,465 1,757 17,787 95.46%

Arab African Financial Leasing (S.A.E.)

Subsidiary Egypt 42,870 32,173 8,268 1,646 14,086 99%

Sandah Fund for MSME (S.A.E.)

Subsidiary Egypt 5,462 33 248 (723) 4,309 67%

Nuun Fund Services*

Associates Egypt 81 14 28 (8) 0 20%

Egyptian Modern Matches Company (S.A.E.)*

Associates Egypt 1,567 1,101 1,759 (9) 125 23.4%

Egyptian Matches Company (S.A.E.)*

Associates Egypt 2,689 1,499 2,097 5 222 39.6%

Total 93,261 53,544 20,475 3,648 46,251

* Created for the Bank’s contribution to Egyptian Matches Company (S.A.E.) was impaired by USD 443 thousand.* Created for the Bank’s contribution to New Egyptian Matches Company (S.A.E.) was impaired by USD 289 thousand.* Created for the Bank’s contribution to Nuun Fund Services was impaired by USD 11 thousand and USD 22 thousand

currency translation difference.* Created for the Bank’s contribution to Universal for Investment and Development Company (S.A.E.) was impaired by

USD 280 thousand.* Investments in subsidiaries and associates are not listed in the stock exchange.

31 December 2018

Nature of relation

CountryCompany

assets

Company liabilities without owners’ equity

Company revenues

Company profit/(loss)

Participation value

Participation percentage

Universal for Investment and Development Company (S.A.E.)*

Subsidiary Egypt 418 53 524 60 224 90%

Arab African Holding Company (S.A.E.)


Arab African Real Estate Mortgage Company (S.A.E.)


Arab African Financial Leasing (S.A.E.)

Subsidiary Egypt 37,474 28,250 8,509 1,627 14,086 99%

Sandah Fund for MSME (S.A.E.)

Subsidiary Egypt - - - - 2,252 67%

Nuun Fund Services*

Associates Egypt 92 12 27 (9) 33 20%

Egyptian Modern Matches Company (S.A.E.)*


Egyptian Matches Company (S.A.E.)*


Total 80,847 50,024 23,100 5,213 44,427

* Created for the Bank’s contribution to Egyptian Matches Company (S.A.E.) was impaired by USD 243 thousand.* Created for the Bank’s contribution to New Egyptian Matches Company (S.A.E.) was impaired by USD 289 thousand.* Created for the Bank’s contribution to universal for Investment and Development company (S.A.E.) impairment with

USD 280 thousand. * Investments in subsidiaries and associates are not listed in the stock exchange.

25. Other assets


Accrued revenues 50,463 55,473

Prepaid expenses 4,084 5,110

Advance payments for purchase of fixed assets 5,754 6,706

Assets reverted to the Bank in settlement of debts 307 335

Insurance and custody 715 524

Other debit balances 77,292 115,685

138,615 183,833


26. Deferred tax assets

Deferred tax assets resulting from tax differences of the assets and liabilities items comprise the following:


Assets Liabilities Assets Liabilities

Fixed assets - (1,655) - (1,412)

Other provisions 3,806 - 5,778 -

Equity instruments available for sale impairment loss - - 286 -

Total tax assets (liabilities) 3,806 (1,655) 6,064 (1,412)

Net deferred tax assets 2,151 - 4,652 -

Deferred tax assets and liability movements are as follows:


Balance at the beginning of the year 4,652 9,729

Deferred tax movement during the year (2,501) (5,077)

Balance at the end of the year 2,151 4,652

27. Fixed assets

Land and building

Machinery and equipment

OtherBalance as of

1 January 2017

Balance as of 1 January 2017

Cost 66,407 12,984 32,073 111,464

Accumulated depreciation (37,239) (5,447) (12,283) (54,969)

Net book value as of 1 January 2017 29,168 7,537 19,790 56,495

Additions 417 2,064 7,915 10,396

Depreciation expense (1,058) (1,752) (5,287) (8,097)

Net book value as of 31 December 2017 28,527 7,849 22,418 58,794

Balance as of 1 January 2018

Cost 66,821 13,888 38,253 118,962


Net book value as of 1 January 2018 28,527 7,849 22,418 58,794

Additions 4,071 3,543 6,800 14,414

Disposals - - (747) (747)

Depreciation expense (1,145) (2,057) (5,796) (8,998)


Balance as of end of year

Cost 70,883 16,680 42,856 130,419



• Fixed assets (net of accumulated depreciation) at the financial position date include USD 7,194 thousand representing assets not registered yet in the Bank’s name as the legal procedures are currently undertaken to register such assets.

• Assets fully depreciated amounted to USD 2,210 thousand at the end of 31 December 2018.

28. Intangible assets

Intangible assets presented at the financial position date are resulted from the acquisition of ex- Misr America International Bank by the Bank (during year 2005), which are subjected annually to the impairment test, and represented as follows:


Cost 11,309 11,309

Accumulated amortization cost (11,309) (10,872)

NBV at the end of the year - 437

29. Due to banks


Current accounts 124,751 307,497

Deposits 325,285 535,872

450,036 843,369

Central banks 100,976 30,538

Local banks 87,151 288,267

Foreign banks 261,909 524,564

450,036 843,369


Interest bearing balances 325,285 535,872

450,036 843,369

Current balances 450,036 843,369

30. Customers’ deposits


Demand deposits 1,002,572 1,028,768

Time and call deposits 5,873,527 5,868,332

Certificates of deposits 713,022 668,298

Saving accounts 1,080,051 845,351

Other deposits 109,298 172,936

Total 8,778,470 8,583,685

Corporate deposits 5,690,429 5,802,024

Retail deposits 3,088,041 2,781,661

8,778,470 8,583,685

Non-interest bearing balances 1,124,564 1,202,607

Interest bearing balances 1,693,204 1,176,342

Fixed rate interest balances 5,960,702 6,204,736

8,778,470 8,583,685

Current balances 6,515,487 5,413,805

Non-current balances 2,262,983 3,169,880

8,778,470 8,583,685


31. Other liabilities


Accrued interest 158,609 161,812

Prepaid revenue 1,498 2,969

Accrued expenses 8,690 6,481

Creditors 29,214 31,642

Other credit balances 35,243 88,752

Total 233,254 291,656

32. Loans and facilities from banks

Interest Rate 31 December 2018 31 December 2017

Loan for a period of 5 years from EBRD renewal

2.9% over Libor for 6 months

30,000 30,000

Loan for a period of 5 years from IFC renewal

3.15% over Libor for 6 months

87,500 100,000

Total 117,500 130,000

Non current balance - -

Total 117,500 130,000

33. Other provisions

31 December 2018

Description

Balance at the

beginning of the year

Provided during the

year

Foreign exchange currency

difference

Transferred from other accounts

Used during the year

Balance at the end of the year

Claims provision 9,751 672 (15) - (6,584) 3,824

Contingent liabilities provision

15,133 2,583 (57) - - 17,659

Employees’ incentives provision

12,888 (774) - - (8,542) 3,572

Total 37,772 2,481 (72) - (15,126) 25,055

31 December 2017

Description

Balance at the

beginning of the year

Provided during the

year

Foreign exchange currency

difference

Transferred from other accounts

Used during the year

Balance at the end of the year

Claims provision 17,344 (2,793) 49 - (4,849) 9,751

Contingent liabilities provision

13,236 1,823 74 - - 15,133

Employees’ incentives provision

8,888 4,000 - - - 12,888

Total 39,468 3,030 123 - (4,849) 37,772

34. Current income tax liabilities


Current tax obligation for bills and treasury bonds 12,975 15,915

Current tax obligation foreign branches 11,014 13,234

23,989 29,149

35. Retirement benefit obligations

The Department of Social Fund for employees in the Arab African International Bank conducted an actuarial study to determine the net present value of the obligations of the fund and thus determine the surplus or deficit in the fund as of 31 December 2017 under which the Bank will compensate any shortfall that may arise from the investment fund.

The most important was the basic assumptions used by the actuary as follows:

• Death rates from the British Table A49-52 ULT • Disability rates from the experience of the

Egyptian Social Security. • Unity method is used in the calculation of the

estimated additional commitments and the present value of subscriptions (Unit Projected method).

The following table shows the movement on the income statement:


Beginning balance 3,904 5,265

Provided during the year 5,978 3,396

Used during the year (5,302) (4,757)


Amounts recognized in the balance sheet


The present value of funded obligations 92,020 104,521

The fair value of the assets system 51,759 63,445

Deficit of funded system 40,261 41,076

Unrealized actuarial losses (35,681) (38,938)

The liabilities in the Financial Position statement 4,580 2,138

Amounts recognized in the balance sheet


Liabilities 4,580 2,138

Assets - -

The liabilities in the financial position statement 4,580 2,138

The Bank committed to pay the monthly pensions of 70 thousand U.S. dollar.


The actuarial bases used:The pension and remuneration system for employees who receive their salaries in Egyptian pounds.

Average assumptions for determining employee benefits liabilities EGP % USD %

Average discount rate 15.75 2.83

Increase rate of compensation 13.50 2.00

Price inflation rate 13.50 2.20

Rate of pension increase 4.00 2.00

Average assumptions for determining net cost

Average discount rate 17.50 2.78

The long-term rate of return on the assets of the system during the fiscal year 11.99 2.95

Increase rate of compensation 13.75 1.60

Price inflation rate 13.50 1.30

Rate of pension increase 5.00 2.00

Ownership Interest

Central Bank of Egypt 49.37%

Kuwait General Investment Authority 49.37%

Others 1.26%

100%

36. Subordinated deposit

• On July 2008, the Bank has taken from the Bank`s principal shareholders subordinated deposit amounting 300 MM U.S. dollar divided equally between them for ten years, with interest rate 0.5% over LIBOR for six months. Interests are paid semiannually during the first five years and then become 1% above LIBOR for six months in the next five years.

• On June 2018, the subordinated deposits due to the shareholders amounted with 300 MM USD.

37. Capital

A. Authorized capital

The authorized capital for the Bank is 1 Billion USD.

B. Issued and paid-in capital

The issued, subscribed and paid-in capital amounts to 500 million USD represented in 100 million shares of 5 USD par value.

On September 12, 2017, the Extraordinary General Meeting of Arab African International Bank shareholders approved the increase of the Bank’s authorized capital from 500 million USD to 1 billion USD and amended the statement of Article (6) of the Bank’s Articles of Association. Also, the increase of the issued and paid-in capital from 100 million USD to 500 million USD of the retained earning represented in 100 million shares of 5 USD par value.

C. Shareholders

38. Reserves and retained earnings

Reserves 31 December 2018 31 December 2017

Legal reserve 125,545 100,000

General reserve 10,000 10,000

Special reserve 13,583 13,583

General banking risks reserve 185 192

Capital reserve 2,281 2,256

Currencies translation reserve 1 (15)

Fair value reserve – available for sale investments 1,730 40,246

IFRS 9 risk reserve 83,044 83,044

Total reserves at the end of the year 236,369 249,306

Movements in reserves were as follows:

A. Legal reserve 31 December 2018 31 December 2017


Transferred from retained earning 25,545 -


• In accordance with the Bank’s articles of association, 10% of annual net profit is transferred to the legal reserve. Such transfer will be stopped when the legal reserve reaches 100% of the issued capital and this reserve is not able to distribute.

B. General reserve 31 December 2018 31 December 2017



C. Special reserve 31 December 2018 31 December 2017



In compliance with the Central Bank of Egypt guidelines, the balance of the special reserve is not to be disposed off without recourse to the Central Bank of Egypt

D. Banking risk reserve 31 December 2018 31 December 2017

Balance at the beginning of the year 192 208

Transferred from retained earning 14 (22)

Foreign exchange differences (21) 6

Balance at the end of the year 185 192


In compliance with the Central Bank of Egypt guidelines, the balance of the banking risk reserve is not to be disposed off without recourse to the Central Bank of Egypt.

E. Capital reserve 31 December 2018 31 December 2017


Transferred from retained earning 25 51


F. Currencies translation reserve 31 December 2018 31 December 2017

Balance at the beginning of the year (15) (22)

Foreign exchange difference 16 7

Balance at the end of the year 1 (15)

In accordance with the Central Bank of Egypt guidelines, the results of the business and budget of the foreign branches are translated into the presentation currency, which is different from the presentation currency of the Bank. Exchange differences arising from a separate item (foreign currency translation differences) are recognized in equity as currencies translation reserve.

G. Fair value reserve – available for sale investments 31 December 2018 31 December 2017


Revaluation of fair value reserve – investments 1,110 -

Net (loss)/gain transferred to income statement due to disposals

(45,138) -

Net change of fair value reserve - available for sale investments

5,512 13,382


H. IFRS 9 risk reserve 31 December 2018 31 December 2017

Balance at the end of the year 83,044 -

Balance at the end of the year 83,044 -

The IFRS 9 risk reserve is composed of 1% of the total credit risk weighted by the net profit after tax for 2017 in accordance with the instructions of the Central Bank of Egypt issued on 28 January 2018 and is only used with the approval of the Central Bank of Egypt.

Retained earnings 31 December 2018 31 December 2017

Balance at the beginning of the year 965,134 1,258,358

Distributions of cash dividends of the year profit 2017 /2016 (67,285) (65,585)

Transferred to legal reserve (25,545) -

Transferred to capital reserve (25) (51)

Transferred to capital increase - (400,000)

Transferred to banking risk reserve (14) (47)

Profit of the year 264,305 255,503

Balance at the end of the year 1,136,570 1,048,178

Transferred to IFRS 9 reserve - (83,044)

Balance at the end of the year 1,136,570 965,134

On September 12, 2017, the Extraordinary General Meeting of Arab African International Bank shareholders approved the increase of the Bank’s authorized capital from 500 million USD to 1 billion USD and amended the provisions of Article

40. Tax status

First: Corporate tax according to law for the year 2005

1. Years until 2012 The tax return has been submitted according to law number 91 for the year 2005, and the tax authority has performed the tax examination for the year and the Bank paid the difference of tax. So, there is no disagreement between the Bank and the tax authority.

2. Years 2013/2016The tax return for 2013 till 2016 has been submitted according to law number 91 for the year 2005. The Bank was notified document processing and checked and the owed tax has been paid from by the Bank, tax settlement for these years are under way.

3. Year 2017The tax return for 2015 has been submitted according to law number 91 for the year 2005. We are preparing the documents and the information required for the tax inspection.

Second: Salary tax:

1. Years until 2012The Bank has been examined by the tax authority until the year 2012, the Bank has obtained final acknowledgment of pay for these years

2. Years 2013/2016The tax return for 2013 till 2016 has been submitted according to law number 91 for the year 2005. The Bank was notified document processing and checked and the owed tax has been paid by the Bank, tax settlements for these years are underway.

3. Year 2017The tax return for 2017 has been submitted according to law number 91 for the year 2005 and the tax difference has been paid by the Bank.

Third: Stamp Duty Tax:

1. Years until 31/7/2006 (according to law number 111 for the Year 1980)The tax examination of all the Bank’s branches has been finalized. The follow-up on the disputed items with the tax authority in the judicial courts of different grades are still pending. Further provisions for disputed items are included at the contingent liabilities provisions.

2. Years from 1/8/2006 To 31/12/2018 (according to law number 143 for the year 2006):The examination of the stamp duty for this year ended in accordance with law number 143 of 2006, law number 115 of 2008 and law number 9 of 2013. The internal committee has completed its work for these years. All financial obligations have been fulfilled and all disputes with the tax authority have been settled. The Bank has obtained final acknowledgment of pay for these years.

41. Related party transactions

Related parties include the major shareholders, subsidiaries and associates. During the year the Bank has dealt with related parties within its ordinary operations. The nature of these transactions and balances on the financial position date are as follows:

(6) of the Bank’s Articles of Association. Also the increase of the issued and paid in capital from 100 million USD to 500 million USD of the retained earning represented in 100 million shares of 5 USD par value.

39. Contingent liabilities and commitments


Letters of guarantee 1,034,133 1,002,973

Commercial letters of credit (import and export) 53,601 102,601

Letters of acceptances 16,487 38,623

Total 1,104,221 1,144,197


31 December 2018

31 December 2017

Due from banks -Central Bank of Egypt (shareholder) 882,568 619,896

Investments in subsidiaries and associates 46,251 44,427

Loans to customers (subsidiaries and associates) 41,521 42,173

Customers’ deposits (subsidiaries and associates) 6,959 6,462

Due to banks -Central Bank of Egypt (shareholder) 100,976 30,538

Held to maturity investment (mutual fund certificates) “Shield” 1,631 1,648

Held to maturity investment (mutual fund certificates) “Juman” 2,791 2,821

Held to maturity investment (mutual fund certificates) “fixed debt instruments” 1,680 1,698

Held to maturity investment (mutual fund certificates) “Guard” 279 282

31 December 2018

31 December 2017

Fees and commission income (AAIB mutual fund)“ Shield” 106 77

Fees and commission income (AAIB mutual fund)“Juman” 350 200

Fees and commission income (AAIB mutual fund)“Gozor” 16 34

Fees and commission income (SME fund) - 1

Board of directors and top management benefits*


Salaries and Employee benefit 3,693 3,283

Employee benefits 1,572 880

5,265 4,163

* The value of the remuneration of the biggest twenty owners of bonuses and salaries in the Bank together, including senior management and staff branches of the Bank inside and outside Egypt (on the basis of monthly average for the year), according to the stated rules to strengthen corporate governance and internal control of banks and issued by the Central Bank of Egypt on 23/8 /2011 amount to U.S. 535 thousand on 31 December 2018 (394 thousand U.S. dollars in 31 December 2017).

42. Arab African International Bank Mutual Fund “shield”

The Bank owns “Shield” mutual fund which was established in accordance with the capital law No. 95 of 1992 and its executive regulations. The Bank shares are currently amounting to 322,839 certificates equivalent to 66.97 MM EGP and the value per certificates at the Balance Sheet date was 207,44 EGP.

43. Arab African International Bank Mutual Fund “Juman”

The Bank owns “Juman” mutual fund which was established in accordance with the capital law No. 95 of 1992 and its executive regulations. The Bank shares are currently amounting to 439,259 certificates equivalent to 111.81 MM EGP and the value per certificates at the balance sheet date was 245.53 EGP.

44. Arab African International Bank Mutual Fund Fixed debt instrument “Gozor”

The Bank owns fixed debt instrument mutual fund which was established in accordance with the capital

law No. 95 of 1992 and its executive regulations. The Bank shares are currently amounting to 2,807,009 certificates equivalent to 56.7 MM EGP and the certificates value per certificates at the balance sheet date was 20.20 EGP.

45. Arab African International Bank Mutual Fund Fixed debt instrument “Guard”

The Bank owns fixed debt instrument mutual fund which was established in accordance with the capital law No. 95 of 1992 and its executive regulations. The Bank shares are currently amounting to 500,000 certificates equivalent to 6.43 MM EGP and the certificates value per certificates at the balance sheet date was 12.86 EGP.

46. Cash and cash equivalents

For the purposes of the cash flow statement presentation, cash and cash equivalents comprise the following balances with a maximum maturity of three months from the date of acquisition.


Cash and balances with central banks 612,535 564,902

Due from banks 3,204,281 3,363,108

Treasury bills 2,714,799 2,953,789

Due from the central banks “obligatory reserve ratio” (533,727) (469,237)

Deposits at banks (141,419) (253,251)

Treasury bills ( maturity more than three months) (1,804,649) (2,103,577)

Cash and Cash equivalents 4,051,820 4,055,734

122Annual Report 2018

47. Material Events IFRS 9: Financial Instruments The IASB issued IFRS 9 ‘Financial Instruments’ in its final form in July 2014 and Central Bank of Egypt (“CBE”) issued a circular on 28 January 2018 instructing banks to implement the standard with effect from 1 January 2019. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non- financial assets, impairment of financial assets and hedge accounting. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.

A. Classification and measurement The adoption of this standard will have an effect on the classification and measurement of the Bank’s financial assets but is not expected to have a significant impact on the classification and measurement of financial liabilities. The classification and measurement of financial assets will depend on how these are managed (the entity’s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income or fair value through statement of income. The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale.

B. Impairment of financial assets The impairment requirements apply to financial assets measured at amortised cost, fair value through other comprehensive income, and lease receivables and certain loan commitments and financial guarantee contracts. At initial recognition, allowance is required for expected credit losses resulting from default events that are possible within the next 12 months (“12-month ECL”). In the event of a significant increase in credit risk, allowance is required for ECL resulting from all possible default events over the expected life of the financial instrument (“lifetime ECL”).

Financial assets where 12-month ECL is recognised are considered to be ‘stage 1’; financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment are considered to be in default or otherwise credit impaired are in ‘stage 3’.

The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period by the Bank.

The assessment of credit risk and the estimation of ECL are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment including information about past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date. In addition, the estimation of ECL should take into account the time value of money. As a result, the recognition and measurement of impairment is intended to be more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile.

According to the Central Bank of Egypt instructions, the banks set up the IFRS 9 risk reserve at 1% from credit risk weighted assets deducted from net profit after tax for 2017 amounted to 83 MM USD (through statement of change in equity) included in the capital (tear 1) in the capital adequacy and it is not used unless obtaining the approval of the Central Bank of Egypt.

The final instructions of the Central Bank regarding the application of IFRS 9 as of the date of approval of these financial statements have not been issued.

48. Translation

These financial statements are translated into English from the original Arabic statements. The original Arabic statements are the official financial statements.

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