ffa private bank sal consolidated financial ......ffa syria sarl 2009 syria financial consulting...

FFA PRIVATE BANK SAL

CONSOLIDATED FINANCIAL STATEMENTS

31 DECEMBER 2014


The attached notes from 1 to 32 form an integral part of these consolidated financial statements.

2

CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2014

2014 2013

Notes LL (000) LL (000)

Interest and similar income 8,198,628 4,826,609

Interest and similar expense (2,821,045) (1,146,822)

__________ __________

NET INTEREST INCOME 3 5,377,583 3,679,787

__________ __________

Fee and commission income 18,151,482 15,850,147

Fee and commission expense (3,800,406) (2,802,605)

__________ __________

NET FEE AND COMMISSION INCOME 4 14,351,076 13,047,542

__________ __________

Net gain from financial assets at fair value through profit or loss 5 441,910 1,030,016

Other income 3,579 30,292

__________ __________

TOTAL OPERATING INCOME 20,174,148 17,787,637

__________ __________

Write-back of impairment on balances due

from a bank

11

-

1,532,505

Provision for credit losses, net 6 (469,047) (11,359)

__________ __________

NET OPERATING INCOME 19,705,101 19,308,783

__________ __________

Personnel expenses 7 (9,543,493) (9,402,069)

Depreciation of property and equipment 17 (1,769,124) (1,519,999)

Amortization of intangible assets 18 (37,097) (36,584)

Other operating expenses 8 (6,963,421) (7,270,933)

__________ __________

TOTAL OPERATING EXPENSES (18,313,135) (18,229,585)

__________ __________

PROFIT BEFORE TAX 1,391,966 1,079,198

Income tax expense 9 (4,333) (20,164)

__________ __________

PROFIT FOR THE YEAR 1,387,633 1,059,034

__________ __________

Attributable to:

Equity holders of the parent 1,388,440 1,060,599

Non-controlling interests (807) (1,565)

__________ __________


__________ __________



3

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2014

2014 2013

LL (000) LL (000)


__________ __________

Other comprehensive income:

Revaluation of property (note 25) - 14,328,847

Exchange differences on translation of foreign operations (14,218) (64,713)

Net (loss) gain from financial instruments at fair value through

other comprehensive income

(43,278)

20,776

__________ __________

Other comprehensive (loss) income for the year (57,496) 14,284,910

__________ __________

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,330,137 15,343,944

__________ __________

Attributable to:

Equity holders of the parent 1,327,218 15,331,441

Non-controlling interests 2,919 12,503

__________ __________

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 1,330,137 15,343,944

__________ __________



4


CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2014


5

Equity holders of the parent

Non-distributable reserves

Distributable

reserve

Share capital

– common

shares

Share

premium –

common

shares

Legal

reserve

Reserve for

general

banking risks

Total

General

reserve

Retained

earnings

(accumulated

losses)

Changes in fair

value of

financial assets

at fair value

through other

comprehensive

income

Revaluation

reserve of

property

Foreign

currency

translation

reserve

Result of the

year – profit

Total

Non-

controlling

interests

Total

equity

LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000)

Balance at 1 January 2013 17,000,000 19,443,212 1,583,408 1,147,935 2,731,343 1,465,396 (1,261,012) (63,713) - (110,605) 3,036,985 42,241,606 47,114 42,288,720

Profit for the year – 2013 - - - - - - - - - - 1,060,599 1,060,599 (1,565) 1,059,034

Other comprehensive income - - - - - - - 20,776 14,328,847 (78,781) - 14,270,842 14,068 14,284,910

_________ _________ __________ __________ __________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Total comprehensive income - - - - - - - 20,776 14,328,847 (78,781) 1,060,599 15,331,441 12,503 15,343,944

_________ _________ __________ __________ __________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Transfer to reserves and retained

earnings (note 24)

-

-

44,804

-

44,804

(745,399)

3,737,580

-

-

-

(3,036,985)

-

-

-

_________ _________ __________ __________ __________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Balance at 31 December 2013 17,000,000 19,443,212 1,628,212 1,147,935 2,776,147 719,997 2,476,568 (42,937) 14,328,847 (189,386) 1,060,599 57,573,047 59,617 57,632,664

Profit for the year – 2014 - - - - - - - - - - 1,388,440 1,388,363 (807) 1,387,545

Other comprehensive loss - - - - - - - (43,278) - (18,032) - (61,222) 3,726 (57,496)

_________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Total comprehensive income - - - - - - - (43,278) - (18,032) 1,388,440 1,327,141 2,919 1,330,049

_________ _________ __________ __________ __________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Transfer to reserves and retained

earnings (note 24)

-

-

29,433

264,902

294,335

-

766,264

-

-

-

(1,060,599)

-

-

-

_________ _________ __________ __________ __________ _________ _________ _________ _________ _________ _________ _________ _________ _________

Balance at 31 December 2014 17,000,000 19,443,212 1,657,645 1,412,837 3,070,482 719,997 3,242,832 (86,215) 14,328,847 (207,418) 1,388,440 58,900,188 62,536 58,962,713

_________ _________ __________ __________ __________ _________ _________ _________ _________ _________ _________ _________ _________ _________



6

CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2014

2014 2013

Notes LL (000) LL (000)

OPERATING ACTIVITIES

Profit before tax 1,391,966 1,079,198

Adjustments for:

Depreciation 17 1,769,124 1,519,999

Amortization 18 37,097 36,584

Provision for credit losses , net 6 469,047 11,359

(Write-back of provision) provision for risks and charges (10,883) 10,953

Loss on disposal of property and equipment 2,888 2,492

Provision for employees’ end of service benefits 7 255,449 373,777

___________ ___________

3,914,688 3,034,362

Operating loss before working capital changes:

Balances with the Central Bank (8,592,750) (3,768,750)

Financial assets at fair value through profit or loss 11,310,714 (5,890,407)

Loans and advances to customers and related parties (29,121,771) (2,673,551)

Other assets (673,288) 127,339

Financial liability under murabaha transaction (377) 4,543,063

Customers’ deposits at amortized cost 46,505,053 (631,508)

Other liabilities 181,824 (792,231)

Employees’ end of service benefits paid - (3,347)

___________ ___________

23,524,093 (6,055,030)

Taxes paid (20,164) (80,676)

___________ ___________

Net cash from (used in) operating activities 23,503,929 (6,135,706)

___________ ___________

INVESTING ACTIVITIES

Purchase of property and equipment 17 (417,305) (328,335)

Purchase of intangible assets 18 (19,746) -

Proceeds from disposal of property and equipment 6,329 704

___________ ___________

Net cash from (used in) investing activities (430,722) (327,631)

___________ ___________

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,073,207 (6,463,337)

Effects of foreign exchange (186,193) (64,712)

Cash and cash equivalents at 1 January 12,645,429 19,173,478

___________ ___________

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 27 35,532,443 12,645,429 ___________ ___________

During the year ended 31 December 2014, non-cash transactions comprised the transfer of LL (000) 790,388 from

investments in subsidiaries and affiliates accounts to loans and advances accounts (note 15).

During the year ended 31 December 2013, the non-cash transaction comprised the revaluation of property in the amount of

LL (000) 14,328,847 which was charged to the revaluation reserve under equity (note 25).


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31 December 2014

7

1 CORPORATE INFORMATION

FFA Private Bank SAL (the Bank) is a Lebanese shareholding company registered at the commercial registry of

Beirut on 7 June 1996 under no. 70256. The Bank started its operations as a financial institution (Financial Funds

Advisors SAL) registered at the Bank of Lebanon under no. 18 in the list of financial institutions. On 20 March

2007, the status of the entity changed from a financial institution to a Private Bank under the name “FFA Private

Bank SAL” according to the terms of legislative law no 50 dated 15 July 1983. The Bank was registered at the

commercial registry of Beirut under the same number on 2 June 2007 and under the number 129 in the list of Banks

at the Central Bank of Lebanon. The Bank, together with is subsidiaries (the Group), Financial Funds Advisors

(FFA) SARL, FFA Dubai Limited, FFA Investments (Holding) SAL, FFA Real Estate SAL, FFA Real Estate

Limited, FFA Capital Limited and FFA Syria SARL are involved in mainly banking, real estate and financial

services activities. The Bank is regulated by the Laws in Lebanon mainly the Code of Commerce, the Money and

Credit Act and the circulars issued by the Central Bank of Lebanon and the Banking Control Commission. The

Bank’s main activity is to provide financial services such as corporate and project finance as well as asset

management and brokerage.

The Bank’s head office is located at One FFA Gate-Marfaa 128, Foch Street, Beirut, Central District, Lebanon.

2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

2.1 Basis of preparation

The consolidated financial statements are prepared on a historical cost basis, except for financial assets designated at

fair value through profit or loss, financial assets designated at fair value through other comprehensive income, and a

certain class of property which are all measured at fair value.

The consolidated financial statements have been presented in thousands of Lebanese Liras (LL (000)) which is the

functional and presentation currency of the Group unless otherwise mentioned. Other currencies are presented in

their relating units.

Statement of compliance

The consolidated financial statements are prepared in accordance with International Financial Reporting Standards

(IFRS) as issued by the International Accounting Standards Board (IASB) and the regulations of the Central Bank of

Lebanon and the Banking Control Commission (BCC).

Presentation of financial statements

The Group presents its consolidated statement of financial position broadly in order of liquidity. An analysis

regarding recovery or settlement within 12 months after the consolidated statement of financial position date:

(current), and more than 12 months after the consolidated statement of financial position date: (non-current) is

presented in the risk management notes.

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of

financial position only when there is a legally enforceable right to offset the recognized amounts and there is an

intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense

will not be offset in the consolidated income statement unless required or permitted by any accounting standard or

interpretation, as specifically disclosed in the accounting policies of the Group.

The consolidated financial statements include the financial statements of FFA Private Bank SAL and the subsidiaries

listed in the following table: % effective equity interest

Date of Country of 31 December 31 December

Name establishment incorporation Activities 2014 2013

% %

FFA SARL 1994 Lebanon Financial Consulting and Brokerage 99.97 99.97

FFA Dubai Limited 2006 UAE Financial Institution 100.00 100.00

FFA Investments (Holding) SAL 2007 Lebanon Investment 99.99 99.99

FFA Real Estate SAL 2008 Lebanon Real Estate Consulting 100.00 100.00

FFA Capital Limited 2009 Cayman Islands Financial Consulting 100.00 100.00

FFA Syria SARL 2009 Syria Financial Consulting 88.00 88.00

FFA Real Estate Limited 2014 Cayman Islands Real Estate 100.00 100.00



8

2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

2.1 Basis of preparation (continued)

Basis of consolidation (continued)

Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the

investee and has the ability to affect those returns through its power over the investee. Specifically, the Group

controls an investee if and only if the Group has:

Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of

the investee)

Exposure, or rights, to variable returns from its involvement with the investee, and

The ability to use its power over the investee to affect its returns

When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all

relevant facts and circumstances in assessing whether it has power over an investee, including:

The contractual arrangement with the other vote holders of the investee

Rights arising from other contractual arrangements

The Group’s voting rights and potential voting rights

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are

changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group

obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities,

income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of

comprehensive income from the date the Group gains control until the date the Group ceases to control the

subsidiary.

Non-controlling interest represent the portion of profit or loss and net assets of subsidiaries not owned directly or

indirectly by the Bank. Profit or loss and each component of other comprehensive income (OCI) are attributed to the

equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-

controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of

subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets

and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are

eliminated in full on consolidation.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity

transaction. If the Group loses control over a subsidiary, it:

Derecognizes the assets (including goodwill) and liabilities of the subsidiary

Derecognizes the carrying amount of any non-controlling interests

Derecognizes the cumulative translation differences recorded in equity

Recognizes the fair value of the consideration received

Recognizes the fair value of any investment retained

Recognizes any surplus or deficit in profit or loss

Reclassifies the parent’s share of components previously recognized in OCI to profit or loss or retained

earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or

liabilities

2.2 Significant accounting judgments, estimates and assumptions

In the process of applying the Group’s accounting policies, management has exercised judgment and estimates in

determining the amounts recognized in the consolidated financial statements. The most significant use of judgment

and estimates are as follows:

Going concern

The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is

satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the

management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to

continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going

concern basis.



9


2.2 Significant accounting judgments, estimates and assumptions (continued)

Fair value of financial instruments

Where the fair values of financial assets and financial liabilities recorded on the consolidated statement of financial

position cannot be derived from active markets, they are determined using a variety of valuation techniques that

include the use of mathematical models. The input to these models is taken from observable market data where

possible, but where observable market data are not available, judgment is required to establish fair values.

Impairment losses on loans and advances

The Group reviews its individually significant loans and advances at each statement of financial position date to

assess whether an impairment loss should be recorded in the consolidated income statement. In particular, judgment

by management is required in the estimation of the amount and timing of future cash flows when determining the

impairment loss. In estimating these cash flows, the Group makes judgments about the borrower’s financial situation

and the net realizable value of collateral. These estimates are based on assumptions about a number of factors and

actual results may differ, resulting in future changes to the allowance.

Loans and advances that have been assessed individually and found not to be impaired and all individually

insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics,

to determine whether provision should be made due to incurred loss events for which there is objective evidence but

whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as

credit quality, levels of arrears, credit utilization, loan to collateral ratios etc.), concentrations of risks and economic

data (including levels of unemployment, real estate prices indices, country risk and the performance of different

individual groups).

Revaluation of property and equipment

The Bank measures buildings at revalued amounts with changes in fair value being recognized in other

comprehensive income (OCI). The Bank engaged an independent valuation specialist to assess fair value of

buildings. Buildings were valued by reference to market-based evidence, using comparable prices adjusted for

specific market factors such as nature, location and condition of the property.

2.3 Changes in accounting policies and disclosures

Revaluation of buildings

The Bank re-assessed its accounting for buildings with respect to measurement after initial recognition. The Bank

has previously measured all buildings using the cost model as set out in IAS 16.30, whereby after initial recognition

of the asset classified as property and equipment, the asset was carried at cost less accumulated depreciation.

On 3 December 2013, the Bank elected to change the method of accounting for buildings classified in property and

equipment. Since the Bank believes that revaluation model more effectively demonstrates the financial position of

buildings.

After initial recognition, the Bank uses the revaluation model, whereby buildings will be measured at fair value at

the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment

losses. The Bank applied the exemptions in IAS 8, which exempts this change in accounting policy from

retrospective application and extensive disclosure requirements.

New and amended standards and interpretations

The accounting policies adopted in the preparation of the financial statements are consistent with those followed in

the preparation of the Group’s annual financial statements for the year ended 31 December 2013 except for the

adoption of new standards and interpretations effective as of 1 January 2014, noted below:

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

These amendments provide an exception to the consolidation requirement for entities that meet the definition of an

investment entity under IFRS 10 Consolidated Financial Statements and must be applied retrospectively, subject to

certain transition relief. The exception to consolidation requires investment entities to account for subsidiaries at fair

value through profit or loss.



10


2.3 Changes in accounting policies and disclosures (continued)

New and amended standards and interpretations (continued)

Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32

These amendments clarify the meaning of “currently has a legally enforceable right to set-off” and the criteria for

non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting and is applied retrospectively.

Novation of Derivatives and Continuation of Hedge Accounting – Amendments to IAS 39

These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as

a hedging instrument meets certain criteria and retrospective application is required.

IFRIC 21 Levies

IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified

by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation

clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective

application is required for IFRIC 21.

Annual Improvements 2010-2012 Cycle

In the 2010-2012 annual improvements cycle, the IASB issued seven amendments to six standards, which included

an amendment to IFRS 13 Fair Value Measurement. The amendment to IFRS 13 is effective immediately and, thus,

for periods beginning at 1 January 2014, and it clarifies in the Basis for Conclusion that short-term receivables and

payables with no stated interest rates can be measured at invoice amounts when the effect of discounting is

immaterial.

Annual Improvements 2011-2013 Cycle

In the 2011-2013 annual improvements cycle, the IASB issued four amendments to four standards, which included

an amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendment to

IFRS 1 is effective immediately and, thus, for period beginning at 1 January 2014, and clarifies in the Basis for

Conclusions that an entity may choose to apply either a current standard or a new standard that is not yet mandatory,

but permits early application, provided either standard is applied consistently throughout the periods presented in the

entity’s first IFRS financial statements.

The above changes are not expected to have a significant effect on the Group’s financial statements.

2.4 Standards issued but not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s

financial statements were disclosed below. The Bank intends to adopt these standards, if applicable, when they

become effective.

- IFRS 14 Regulatory Deferred Accounts

- Amendments to IAS 19 Defined Benefit Plans : Employee Contributions

- Annual improvements 2010 – 2012 and 2011-2013 Cycle (effective from 1 July 2014)

- IFRS 15 Revenue from contracts with Customers

- Amendments to IFRS 11 Joint Arrangements : Accounting for Acquisitions of Interests

- Amendments to IAS 16 and IAS 38 : Clarification of Acceptable methods of Depreciation and

Amortization

- Amendments to IAS 16 and IAS 41 Agriculture : Bearer Plants

- Amendments to IAS 27 : Equity Method in Separate Financial Statements



11


2.5 Summary of significant accounting policies

(1) Foreign currency translation

The consolidated financial statements are presented in Lebanese Liras (LL). Each entity in the Group determines its

own functional currency and items included in the financial statements of each entity are measured using that

functional currency.

(i) Transactions and balances

Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date

of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of

exchange at the date of the statement of financial position. All differences are taken to “net gain on financial assets at

fair value through profit or loss” in the consolidated income statement.

Non–monetary items that are measured in terms of historical cost in a foreign currency are translated using the

exchange rates as at the dates of the initial transactions. Non–monetary items measured at fair value in a foreign

currency are translated using the exchange rates at the date when the fair value was determined. The gain or loss

arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in fair

value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in other

comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss

respectively).

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying

amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign

operations and translated at closing rate.

(ii) Group companies

On consolidation, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency at the

rate of exchange as at the reporting date, and their income statements are translated at the weighted average

exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of

equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that

particular foreign operation is recognised in the consolidated income statement.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying

amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign

operations and translated at closing rate.

(2) Financial instruments – classification and measurement

(i) Date of recognition

All financial assets and liabilities are initially recognized on the trade date, i.e., the date that the Group becomes a

party to the contractual provisions of the instrument. This includes “regular way trades”: purchases or sales of

financial assets that require delivery of assets within the time frame generally established by regulation or

convention in the market place.

(ii) Classification and measurement of financial instruments

a. Financial assets

The classification of financial assets depends on the basis of the entity's business model for managing the financial

assets and the contractual cash flow characteristics of the financial asset. Assets are initially measured at fair value

plus, in the case of a financial asset not at fair value through profit or loss, particular transaction costs. Assets are

subsequently measured at amortized cost or fair value.



12


2.5 Summary of significant accounting policies (continued)

(2) Financial instruments – classification and measurement (continued)

(ii) Classification and measurement of financial instruments (continued)

a. Financial assets (continued)

An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit

or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes

referred to as an 'accounting mismatch') that would otherwise arise from measuring assets or liabilities or recognizing

the gains and losses on them on different bases. An entity is required to disclose such financial assets separately from

those mandatorily measured at fair value.

Debt instruments at amortized cost

Debt instruments are subsequently measured at amortized cost less any impairment loss (except for debt instruments

that are designated at fair value through profit or loss upon initial recognition) if they meet the following two

conditions:

The asset is held within a business model whose objective is to hold assets in order to collect contractual

cash flows; and

The contractual terms of the instrument give rise on specified dates to cash flows that are solely payments

of principal and interest on the principal amount outstanding.

These financial assets are initially recognized at cost, being the fair value of the consideration paid for the

acquisition of the investment. All transaction costs directly attributed to the acquisition are also included in the cost

of investment. After initial measurement, these financial assets are measured at amortized cost using the effective

interest rate (EIR) method, less allowance for impairment. Amortized cost is calculated by taking into account any

discount of premium on acquisition and fees and costs that are an integral part of the effective interest rate. The

amortization is included in “Interest and similar income” in the consolidated income statement. The losses arising

from impairment are recognized in the consolidated income statement.

Although the objective of an entity's business model may be to hold financial assets in order to collect contractual

cash flows, the entity need not hold all of those instruments until maturity. Thus an entity's business model can be to

hold financial assets to collect contractual cash flows even when sales of financial assets occur. However, if more

than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales

are consistent with an objective of collecting contractual cash flows. If the objective of the entity's business model

for managing those financial assets changes, the entity is required to reclassify financial assets.

Gains and losses arising from the derecognition of financial assets measured at amortized cost are reflected under

“net gain (loss) from sale of financial assets at amortized cost” in the consolidated income statement.

Financial assets at fair value through profit or loss

Included in this category are those debt instruments that do not meet the conditions in “at amortized cost” above,

debt instruments designated at fair value through profit or loss upon initial recognition and equity instruments at fair

value through profit or loss.



13





a. Financial assets (continued)

Debt instruments and other financial assets at fair value through profit or loss

Included in this category are those debt instruments that do not meet the conditions in “Debt instruments at

amortized cost” above, and debt instruments designated at fair value through profit or loss upon initial recognition.

These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in fair

value and interest income are recorded under “net gain (loss) from financial assets at fair value through profit or loss”

in the consolidated income statement showing separately, those related to financial assets designated at fair value

upon initial recognition from those mandatorily measured at fair value. Gains and losses arising from the

derecognition of debt instruments and other financial assets at fair value through profit or loss are also reflected

under “net gain (loss) from financial instruments at fair value through profit or loss” in the consoldiated income

statement showing separately, those related to financial assets designated at fair value upon initial recognition from

those mandatorily measured at fair value.

Equity instruments at fair value through profit or loss

Investments in equity instruments are classified at fair value through profit or loss, unless the Group designates at

initial recognition an investment that is not held for trading as at fair value through other comprehensive income.

These financial assets are recorded in the consolidated statement of financial position at fair value. Changes in fair

value and dividend income are recorded under “net gain (loss) from financial assets at fair value through profit or

loss” in the consolidated income statement. Gains and losses arising from the derecognition of equity instruments at

fair value through profit or loss are also reflected under “net gain (loss) from financial instruments at fair value

through profit or loss” in the consolidated income statement.

Dividends on these investments are recognized when the entity’s right to receive payment of dividend is established

in accordance with IAS 18: «Revenue », unless the dividends clearly represent a recovery of part of the cost of the

investment.

Equity instruments at fair value through other comprehensive income

Investments in equity instruments designated at initial recognition as not held for trading are classified at fair value

through other comprehensive income.

These financial assets are initially measured at fair value plus transaction costs. Subsequently, they are measured at

fair value, with gains and losses arising from changes in fair value recognized in other comprehensive income and

accumulated under equity. The cumulative gain or loss will not be reclassified to the consolidated income statement

on disposal of the investments.

Dividends on these investments are recognized under “net gain on financial assets” in the consolidated income

statement when the entity’s right to receive payment of dividend is established in accordance with IAS 18:

“Revenue”, unless the dividends clearly represent a recovery of part of the cost of the investment.

Due from banks and financial institutions, loans and advances to customers and related parties – at amortized cost

After initial measurement, amounts “Due from banks and financial institutions” and “Loans and advances to

customers and related parties” are subsequently measured at amortized cost using the EIR, less allowance for

impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees

and costs that are an integral part of the EIR. The amortization is included in ‘Interest and similar income’ in the

consolidated income statement. The losses arising from impairment are recognized in the consolidated income

statement in “Credit loss expense”.



14





b. Financial liabilities

An entity classifies all financial liabilities as subsequently measured at amortized cost using the effective interest

method, except for:

- financial liabilities at fair value through profit or loss (including derivatives);

- financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the

continuing involvement approach applies.

- financial guarantee contracts and commitments to provide a loan at a below-market interest rate which after initial

recognition are subsequently measured at the higher of the amount determined in accordance with IAS 37

Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognized less, when

appropriate, cumulative amortization recognized in accordance with IAS 18 Revenue.

An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair value through

profit or loss when:

- doing so results in more relevant information, because it either eliminates or significantly reduces a measurement

or recognition inconsistency (sometimes referred to as 'an accounting mismatch') that would otherwise arise from

measuring assets or liabilities or recognizing the gains and losses on them on different bases; or

- a group of financial liabilities or financial assets and financial liabilities is managed and its performance is

evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and

information about the group is provided internally on that basis to the entity's key management personnel.

As at 31 December 2014, there are no financial liabilities designated at fair value through profit or loss by the Group.

Financial liabilities consist mainly of due to banks and financial institutions and Customers’ deposits.

Due to banks and financial institutions and customers’ deposits

After initial measurement, due to banks and financial institutions and customers’ deposits are measured at amortized

cost less amounts repaid using the effective interest rate method. Amortized cost is calculated by taking into account

any discount or premium on the issue and costs that are an integral part of the effective interest method.

(iii) Reclassification of financial assets

An entity reclassifies financial assets if the objective of the entity's business model for managing those financial

assets changes. Such changes are expected to be very infrequent. Such changes must be determined by the entity's

senior management as a result of external or internal changes and must be significant to the entity's operations and

demonstrable to external parties.

If an entity reclassifies financial assets it shall apply the reclassification prospectively from the reclassification date,

which is the first day of the first reporting period following the change in business model that results in an entity

reclassifying financial assets. The entity shall not restate any previously recognised gains, losses or interest.

If the entity reclassifies a financial asset so that it is measured at fair value, its fair value is determined at the

reclassification date. Any gain or loss arising from a difference between the previous carrying amount and fair value

is recognised in profit or loss. If the entity reclassifies a financial asset so that it is measured at amortized cost, its

fair value at the reclassification date becomes its new carrying amount.



15



(3) Derecognition of financial assets and financial liabilities

(i) Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is

derecognized where:

The rights to receive cash flows from the asset have expired; or

The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to

pay the received cash flows in full without material delay to a third party under a “pass-through”

arrangement; and either:

(a) the Group has transferred substantially all the risks and rewards of the asset, or

(b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset,

but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through

arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor

transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the

asset. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability

are measured on a basis that reflects the rights and obligations the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the

original carrying amount of the asset and the maximum amount of consideration that the Group could be required to

repay.

(ii) Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or

the terms of an existing liability are substantially modified, such an exchange or modification is treated as a

derecognition of the original liability and the recognition of a new liability, and the difference in the respective

carrying amounts is recognized in the consolidated income statement.

(4) Repurchase and reverse repurchase agreements

Securities sold under agreements to repurchase at a specified future date are not derecognized from the consolidated

statement of financial position as the Group retains substantially all the risks and rewards of ownership. The

corresponding cash received is recognized in the consolidated statement of financial position as an asset with a

corresponding obligation to return it, including accrued interest as a liability reflecting the transaction’s economic

substances as a loan to the Group. The difference between the sale and repurchase prices is treated as interest

expense and is accrued over the life of the agreement using the EIR. When the counterparty has the right to sell or

repledge the securities, the Group reclassifies those securities in its consolidated statement of financial position to

“Financial assets at fair value through profit or loss pledged as collateral”.

Conversely, securities purchased under agreements to resell at a specified future date are not recognized in the

consolidated statement of financial position. The consideration paid, including accrued interest is recorded in the

consolidated statement of financial position within “Cash collateral on securities borrowed and reverse purchase

agreements”, reflecting the transaction’s economic substance as a loan by the Group. The difference between the

purchase and resale prices is recorded in “Net interest income” and is accrued over the life of the agreement using

the EIR.

(5) Murabaha transaction

An agreement whereby the Bank sells a commodity or asset, which the Bank has purchased and acquired based on a

promise received from the customer to buy the item purchased according to specific terms and conditions. The

selling price comprises the cost of the commodity and an agreed profit margin.

Murabaha expense is recognised on an effective rate basis over the period of the contract based on the principal

amounts outstanding.



16



(6) Determination of fair value

The Group measures financial instruments, at fair value at each balance sheet date. Also, fair values of financial

instruments measured at amortized cost are disclosed in the notes.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the measurement date. The fair value measurement is based on the presumption that

the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or

In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a

liability is measured using the assumptions that market participants would use when pricing the asset or liability,

assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate

economic benefits by using the asset in its highest and best use or by selling it to another market participant that

would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are

available to measure fair value, maximising the use of relevant observable inputs and minimising the use of

unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are

categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to

the fair value measurement as a whole:

Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities

Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value

measurement is directly or indirectly observable

Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value

measurement is unobservable

For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the Group

determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on

the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting

period.

At each reporting date, the management analyses the movements in the values of assets and liabilities which are

required to be re-measured or re-assessed as per the Group’s accounting policies.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of

the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained

above.

(7) Impairment of financial assets

The Group assesses at each statement of financial position date whether there is any objective evidence that a

financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to

be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has

occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or events) has an

impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably

estimated.



17



(7) Impairment of financial assets (continued)

Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing

significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will

enter bankruptcy or other financial restructuring and where observable data indicate that there is a measurable

decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with

defaults. If such evidence exists, any impairment loss is recognised in the consolidated income statement.

Financial assets carried at amortised cost

For financial assets carried at amortised cost (such as amounts due from Banks, loans and advances to customers),

the Group first assesses individually whether objective evidence of impairment exists individually for financial

assets that are individually significant, or collectively for financial assets that are not individually significant. If the

Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it

includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them

for impairment.

Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be,

recognised are not included in a collective assessment of impairment.

If there is objective evidence that an impairment loss has been incurred, 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 expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through

the use of an allowance account and the amount of the loss is recognised in the consolidated income statement.

Loans together with the associated allowance are written off when there is no realistic prospect of future recovery

and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the

estimated impairment loss increases or decreases because of an event occurring after the impairment was

recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If

a future write-off is later recovered, the recovery is credited to the “Net credit losses” in the consolidated income

statement.

The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest

rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective

interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset

reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or

not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group’s

internal credit grading system, that considers credit risk characteristics such as asset type, industry, geographical

location, collateral type, past-due status and other relevant factors.

Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the

basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical

loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on

which the historical loss experience is based and to remove the effects of conditions in the historical period that do

not exist currently.

Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable

data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status,

or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and

assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss

estimates and actual loss experience.



18



(8) Renegotiated loans

Where possible, the Bank seeks to restructure loans. This may involve extending the payment arrangements and the

agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the

original effective interest rate as calculated before the modification of terms and the loan is no longer considered

past due. The loans continue to be subject to an individual or collective impairment assessment, calculated using the

loan’s original effective interest rate.

(9) Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of

financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and

there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not

generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in

the consolidated statement of financial position.

(10) Leasing

The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the

arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a

specific assets or assets and the arrangement conveys a right to use the assets.

Lease which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased

items are operating leases. Operating lease payments are recognized as an expense in the consolidated income

statement on a straight line basis over the lease term. Contingent rental payable are recognized as an expense in the

period in which they are incurred.

(11) Recognition of income and expenses

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the

revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is

recognized.

(i) Interest and similar income and expense

For all financial instruments measured at amortised cost, interest income or expense is recorded at the effective

interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected

life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial

asset or financial liability The calculation takes into account all contractual terms of the financial instrument and

includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the

effective interest rate, but not future credit losses.

The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of

payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate. Once

the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment

loss, interest income continues to be recognized using the rate of interest used to discount future cash flows for the

purpose of measuring the impairment loss.

Interest income on debt securities classified at fair value through profit or loss is recognized under net gain from

financial assets at fair value through profit or loss in the income statement.

(ii) Fee and commission income

The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee

income can be divided into the following two categories:

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

Fees earned for the provision of services over a period of time are accrued over that period. These fees include

commission income and asset management, custody and other management and advisory fees.



19



(11) Recognition of income and expenses (continued)

(ii) Fee and commission income (continued)

Fee income from providing transaction services

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the

arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on

completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are

recognised after fulfilling the corresponding criteria.

(iii) Dividend income

Dividend income is recognized when the Bank’s right to receive the payment is established.

(12) Cash and cash equivalents

Cash and cash equivalents as referred to in the statement of cash flows comprises cash on hand, non-restricted current

accounts with central Banks and amounts due from Banks on demand or with an original maturity of three months or

less.

(13) Property and equipment

Property and equipment (except buildings) is stated at cost excluding the costs of day-to-day servicing, less

accumulated depreciation and accumulated impairment in value. Such cost includes the cost of replacing part of the

property and equipment. When significant parts of property and equipment are required to be replaced at intervals,

the Bank recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the equipment as a

replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognized in the

consolidated income statement as incurred. The present value of the expected cost for the decommissioning of an

asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met.

Changes in the expected useful life are accounted for by changing the amortization period or method, as appropriate,

and treated as changes in accounting estimates.

Buildings are measured at fair value less accumulated depreication and any impairment losses recognized at the date of

revaluation. Valuations are performed with sufficient frequency to ensure that fair value of a revalued asset does not

differ materially from its carrying amount.

A revaluation surplus is recorded in other comprehensive income and credited to revaluation reserve in equity.

However, to the extent that it reverses a revaluation deficit of the same asset previously recognized in profit or loss, the

increase is recognized in the profit or loss. A revaluation deficit is recognized in the profit or loss, except to the extent

that it offsets an existing surplus on the same asset recognized in the revaluation reserve.

Depreciation is calculated using the straight line method to write down the cost of property and equipment to their

residual values over their estimated useful lives. The estimated useful lives are as follows:

Buildings 50.00 years

Office supplies and furniture 12.50 years

Office equipment 6.67 years

Computer equipment 5.00 years

Motor vehicles 10.00 years

Property and equipment is derecognized on disposal or when no future economic benefits are expected from its use.

Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds

and the carrying amount of the asset) is recognized in the consolidated income statement in the year the asset is

derecognized.

The asset’s residual lives and methods of depreciation are reviewed at each financial year end and adjusted

prospectively if applicable.



20



(14) Intangible assets

The Group’s intangible assets include the value of computer software. An intangible asset is recognized only when

its cost can be measured reliably and its is probable that the expected future economic benefits that are attributable

to it will flow to the Group.

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition,

intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses.

The useful lives of intangible assets are assessed to be either finite of indefinite. Intangible assets with finite lives are

amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset

with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the

expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing

the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation

expense on intangible assets with finite lives is recognised in the consolidated income statement.

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual

values over their estimated useful lives as follows:

Software 5 years

(15) Investments in associates

The Company’s investments in associates are accounted for under the equity method of accounting in the

consolidated financial statements and at cost in the separate financial statements. As associate is an entity over which

the Company has significant influence. Significant influence is the power to participate in the financial and operating

policy decisions of the investee, but is not control or joint control over those policies.

(16) Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any

indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s

recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value

less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its

recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing

value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that

reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair

value less costs to sell, an appropriate valuation model is used.

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that

previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the

Group estimates the asset’s or cash-generating unit’s recoverable amount. A previously recognized impairment loss

is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since

the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not

exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of

depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the

consolidated income statement.

(17) Provisions for risks and charges

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event,

and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation

and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is

presented in the consolidated income statement net of any reimbursement.



21



(18) Taxation

Taxes are provided for in accordance with regulations and laws that are effective in the countries where the Group

operates.

(19) Assets under management

The Group provides trust and other fiduciary services that result in the holding or investing of assets on behalf of its

clients. Assets held in a fiduciary capacity and under management are not reported in the consolidated financial

statements, as they are not the assets of the Group.

(20) Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the

Bank’s and subsidiaries’ shareholders.

Dividends for the year that are approved after the statement of financial position date are disclosed as an event after

the statement of financial position date.

(21) Employees’ end of service benefits

Subscriptions for end of service benefits paid and due to the National Social Security Fund (NSSF) are calculated on

the basis of 8.5% of the staff salaries. The final end of service benefits due to employees after completing certain

years of service, at the retirement age, or if the employee permanently leaves employment, are calculated based on

the last monthly salary multiplied by the number of years of service. The Bank is liable to pay to the NSSF the

difference between the subscriptions paid and the final end of service benefits due to employees.

End of services benefits of foreign subsidiaries are accrued for in accordance with the laws and regulations of the

respective countries in which the subsidiaries operate.

3 NET INTEREST INCOME

2014 2013

LL (000) LL (000)

Interest and similar income

Central Bank 230,684 13,933

Banks and financial institutions 126,775 192,479

Loans and advances to customers at amortized cost 7,841,169 4,620,197

__________ __________

8,198,628 4,826,609

__________ __________

Interest and similar expense

Banks and financial institutions (1,042,370) (402,367)

Customers’ deposits (1,778,675) (744,455)

__________ __________

(2,821,045) (1,146,822)

__________ __________

Net interest income 5,377,583 3,679,787

__________ __________



22

4 NET FEE AND COMMISSION INCOME

2014 2013

LL (000) LL (000)

Fee and commission income

Brokerage fees on purchase and sale transactions 11,469,585 9,655,108

Fiduciary accounts management and related fees 2,970,183 2,386,104

Revenue from management and consultancy services 3,711,714 3,808,935

__________ __________

18,151,482 15,850,147

__________ __________

Fee and commission expense

Brokerage fees paid (3,384,206) (2,559,082)

Other fees (416,200) (243,523)

__________ __________

(3,800,406) (2,802,605)

__________ __________

Net fee and commission income 14,351,076 13,047,542

__________ __________

5 NET GAIN FROM FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2014 2013

LL (000) LL (000)

Interest and similar income from debt instruments

- Lebanese government bonds 73,574 319,111

- Other debt securities 306,541 198,578

__________ __________

380,115 517,689

Gain from sale of debt instruments 62,418 79,968

Unrealized gain (loss) from revaluation of debt instruments 23,949 (104,125)

__________ __________

Net gain from debt instruments 466,482 493,532

__________ __________

Equity instruments

- Gain (loss) from sale 340,946 (128,998)

- Unrealized loss from revaluation (243,195) (163,809)

- Dividend income 64,693 412,614

__________ __________

Net gain from equity instruments 162,444 119,807

__________ __________

Foreign exchange (187,016) 416,677

__________ __________

441,910 1,030,016

__________ __________

6 PROVISION FOR CREDIT LOSSES, NET

2014 2013

LL (000) LL (000) Provision for credit losses (note 14) (448,836) (11,359)

Write-back of provision for credit losses (note 14) 2,451 -

Write-off loans and advances to customers (22,662) -

__________ __________

(469,047) (11,359)

__________ __________



23

7 PERSONNEL EXPENSES

2014 2013

LL (000) LL (000)

Salaries and wages 6,736,186 6,808,619

Directors’ remunerations (note 28) 1,302,250 1,041,478

National Social Security Fund contributions 612,812 712,756

Transportation 223,953 174,786

Provision for employees’ end-of-service benefits 255,449 373,777

Other employees’ charges 412,843 290,653

__________ __________

9,543,493 9,402,069

__________ __________

8 OTHER OPERATING EXPENSES

2014 2013

LL (000) LL (000)

Telecommunication 1,591,516 1,582,667

Travel expenses 763,214 694,782

Legal and consulting fees 590,793 692,269

Maintenance and repairs 476,184 465,529

Rent expense 462,431 365,395

Insurance premiums 344,190 321,262

Electricity and fuel 268,568 277,672

Taxes and charges 256,273 364,377

Professional fees 245,647 269,275

Entertainment and congress expenses 241,559 352,634

Advertising fees 236,433 555,764

Printing and stationery 194,145 173,763

Transportation 43,958 36,059

Loss on sale of fixed assets 2,888 2,492

Other expenses 1,245,622 1,116,993

__________ __________

6,963,421 7,270,933

__________ __________

9 INCOME TAX

Income tax expense for the year ended 31 December resulted from the following entity:

2014 2013

LL (000) LL (000)

FFA Real Estate SAL 4,333 20,164

__________ __________



24

10 CASH AND BALANCES WITH THE CENTRAL BANK

2014 2013

LL (000) LL (000)

Cash on hand 104,537 103,064

Balances with the Central Bank:

Current accounts 4,038,627 3,419,529

Time deposits 30,602,250 22,009,500

____________ __________

34,745,414 25,532,093

____________ __________

Deposits with the Central Bank include mandatory reserve deposits and are not available for use in the Bank’s day-

to-day operations in the amount of US$ 20.3 million as at 31 December 2014 (2013: US$ 14.6 million).

11 DUE FROM BANKS AND FINANCIAL INSTITUTIONS

2014 2013

LL (000) LL (000)

Commercial banks:

- Current accounts 39,590,090 28,565,269

Financial institutions:


Brokerage companies:


___________ ___________

62,344,384 42,515,509

___________ ___________

During 2013, the Bank recovered the doubtful bank accounts and accordingly recognized a provision write-back in

the amount of LL (000) 1,532,505 in the its income statement for the year ended 31 December 2013.

12 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

2014 2013

LL (000) LL (000)

Government bonds 77,160 6,972,567

Debt instruments 7,250,930 4,343,922

Equity instruments 8,905,502 11,653,691

Equity funds 4,810,712 5,304,443

Bond funds 325,422 4,405,817

__________ __________

21,369,726 32,680,440

__________ __________



25

13 FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

2014 2013

LL (000) LL (000)

Equity instruments 61,191 104,470

__________ __________

The revaluation loss during the year ended 31 December 2014 amounting to LL (000) 43,278 (2013: revaluation

gain of LL (000) 20,776) is recorded under equity. As at 31 December 2014, changes in fair value amounted to LL

(000) 86,215 (2013: LL (000) 42,937).

14 LOANS AND ADVANCES TO CUSTOMERS

2014 2013

LL (000) LL (000)

Loans and advances to customers against securities 102,640,619 75,252,778

Other loans 6,372,235 3,480,678

____________ ____________

109,012,854 78,733,456

Less: Allowance for credit losses (718,957) (272,572)

Allowance for unrealized interest on impaired loans (596,000) (450,346)

____________ ____________

107,697,897 78,010,538

____________ ____________

A reconciliation of allowance for credit losses, by class, is as follows:

2014 2013

Loans and advances

to customers against

securities

Loans and advances


securities

LL (000) LL (000)

Balance at 1 January 272,572 261,213

Charge for the year 448,836 11,359

Provision written-back (2,451) -

______________ ______________

Balance at 31 December 718,957 272,572

______________ ______________

Individual impairment 536,843 152,313

Collective impairment 182,114 120,259

______________ ______________

718,957 272,572

______________ ______________

Gross amount of loans, individually determined to be impaired, before

deducting the individually assessed impairment allowance 1,525,444 607,235

______________ ______________



26

14 LOANS AND ADVANCES TO CUSTOMERS (continued)

A reconciliation of allowances for unrealized interest on impaired loans, by class, is as follows:

2014 2013

Loans and advances


securities

Loans and advances


securities

LL (000) LL (000)

Balance at 1 January 450,346 376,618

Unrealized interest during the year 154,850 73,728

Unrealized interest written-off during the year (9,196) -

_____________ ______________

Balance at 31 December 596,000 450,346

_____________ ______________

Loans and advances to customers generate interest at a rate ranging from 4.75% to 13% (2013: the same).

15 INVESTMENT AND LOAN TO ASSOCIATE

Country of

incorporation

Ownership%

2014 2013 Activity 2014 2013

LL (000) LL (000)

Carati Jewellery SAL Lebanon - 7.00% Jewellery - 210,000

Loan to Carati Jewellery SAL - 580,388

_________ ________

- 790,388

_________ _________

During the year ended 31 December 2014, the Bank transferred all its investment in Carati Jewellery SAL (the

Company) and the associated loan of LL (000) 790,388 to one of the Company’s shareholders who, in turn obtained

a loan from the Bank to settle the transfer price.

16 OTHER ASSETS

2014 2013

LL (000) LL (000)

Mandatory deposit with the Lebanese Treasury 2,550,000 2,550,000

Commission receivable 1,739,669 1,345,297

Miscellaneous debtors 750,702 552,890

Fixed deposits and prepayments 117,788 119,253

Regularization and other debtor accounts 814,619 732,050

__________ __________

5,972,778 5,299,490

__________ __________



27

17 PROPERTY AND EQUIPMENT

Buildings

Office supplies

and furniture

Office

equipment

Computer

equipment

Motor

vehicles

Advances on

purchase

properties

Total

LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000)

Cost or revaluation

At 1 January 2014 21,926,146 1,651,233 5,973,444 2,257,853 853,219 49,448 32,711,343

Additions 38,003 99,407 59,766 205,040 - 15,089 417,305

Disposals - (7,711) - (4,299) - - (12,010)

Transfers - - - 49,448 - (49,448) -

_________ _________ ________ ________ _________ ________ ___________ At 31 December 2014 21,964,149 1,742,929 6,033,210 2,508,042 853,219 15,089 33,116,638

_________ _________ ________ ________ _________ ________ __________

Depreciation:

At 1 January 2014 102,379 715,767 3,755,639 1,749,975 439,713 - 6,763,473

Depreciation charge for the year 470,732 122,775 857,147 244,272 74,198 - 1,769,124

Disposals - - - (2,793) - - (2,793)

_________ _________ ________ ________ _________ ________ ___________ At 31 December 2014 573,111 838,542 4,612,786 1,991,454 513,911 - 8,529,804

_________ _________ ________ ________ _________ ________ ___________

Net carrying value:

At 31 December 2014 21,391,038 904,387 1,420,424 516,588 339,308 15,089 24,586,834

_________ _________ ________ ________ _________ ________ ___________

Buildings

Office supplies

and furniture

Office

equipment

Computer

equipment

Motor

vehicles

Advances on

purchase

properties

Total

LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000)

Cost or revaluation

At 1 January 2013 8,513,869 1,640,013 5,936,112 2,086,441 831,692 - 19,008,127

Additions 29,022 19,594 37,332 171,412 21,527 49,448 328,335

Disposals - (8,374) - - - - (8,374)

Elimination of cost (note a) (945,592) - - - - - (945,592)

Revaluation reserve or property 14,328,847 - - - - - 14,328,847

_________ _________ ________ ________ _________ ________ ___________ At 31 December 2013 21,926,146 1,651,233 5,973,444 2,257,853 853,219 49,448 32,711,343

_________ _________ ________ ________ _________ ________ __________

Depreciation:

At 1 January 2013 847,169 604,478 2,904,510 1,476,290 361,797 - 6,194,244

Depreciation charge for the year 200,802 116,467 851,129 273,685 77,916 - 1,519,999

Disposals - (5,178) - - - - (5,178)

Elimination of depreciation (note a) (945,592) - - - - - (945,592)

_________ _________ ________ ________ _________ ________ ___________ At 31 December 2013 102,379 715,767 3,755,639 1,749,975 439,713 - 6,763,473

_________ _________ ________ ________ _________ ________ ___________ Net carrying value:

At 31 December 2013 21,823,767 935,466 2,217,805 507,878 413,506 49,448 25,947,870

_________ _________ ________ ________ _________ ________ ___________

Note a: As a result of the revaluation of the buildings, the Bank eliminated the accumulated depreciation against the

gross carrying amount of the asset and the net amount was restated to the revalued amount.

In December 2013, the Bank has changed its accounting policy for the measurement of buildings to the revaluation

model.

If the buildings were measured using the cost model, the carrying amounts would be as follows:

2014 2013

LL (000) LL (000) Cost 8,507,061 8,507,061

Accumulated depreciation (1,091,853) (921,711)

__________ __________

Net carrying amount 7,415,208 7,585,350

__________ __________

The buildings consist of the office and storage properties in Beirut. Management determined that these constitute

one class of asset under IFRS 13, based on the nature, characteristics and risks of the property.

Fair value of the properties was determined by using market comparable method. This means that valuations

performed by the valuer are based on active market prices, significantly adjusted for difference in the nature,

location or condition of the specific property.



28

18 INTANGIBLE ASSETS

Software

2014 2013

LL (000) LL (000)

Cost:

At 1 January 160,661 160,661

Additions 19,746 -

__________ __________

At 31 December 180,407 160,661

__________ __________

Amortization:

At 1 January 57,312 20,728

Amortization charge for the year 37,097 36,584

__________ __________

At 31 December 94,409 57,312

__________ __________

Net carrying amount at 31 December 85,998 103,349

__________ __________

19 DUE TO BANKS AND FINANCIAL INSTITUTIONS

2014 2013

LL (000) LL (000)

Commercial banks:

- Current accounts 394,210 711,737

Financial institutions:


Brokerage firms:

- Current accounts 9,632,314 361,150

__________ __________

30,955,105 33,392,673

__________ __________

Overdrafts due to financial institutions include current credit balances with non-resident financial institutions

resulting from trading of financial instruments for the account of the Bank’s and a subsidiary’s clients.

20 FINANCIAL LIABILITY UNDER MURABAHA TRANSACTION

During the year ended 31 December 2014, the Bank entered into a Murabaha transaction amounting to US$

3,013,391 (equivalent to LL (000) 4,542,686) with a local Islamic Bank. During the year ended 31 December 2014,

a loss amounting to LL (000) 106,869 was recorded in the consolidated income statement for the year. The

transaction will be settled on 26 May 2015.

21 CUSTOMERS’ DEPOSITS AT AMORTIZED COST

2014 2013

LL (000) LL (000)

Term deposits 35,424,260 14,873,912

Margins received from clients 124,293,387 98,338,682

__________ __________

159,717,647 113,212,594

__________ __________



29

22 OTHER LIABILITIES

2014 2013

LL (000) LL (000)

Due to public sectors 72,590 90,191

Accrued expenses 655,122 633,344

Taxes payable 591,929 469,646

Miscellaneous creditors 200,315 160,782

__________ __________

1,519,956 1,353,963

__________ __________

23 SHARE CAPITAL

- The share capital of the Bank amounted to LL (000) 17,000,000 (170,000 shares of LL (000) 100 each

fully paid as at 31 December 2014) (2013: the same).

- An amount of LL (000) 19,443,212 representing an issue premium resulted from the issuance of 85,000

shares of LL (000) 100 each for a consideration of US$ 218.07 by the Bank.

24 RESERVES

Non distributable Reserves

a) Reserve for general banking risks

According to the Central Bank of Lebanon regulations, banks in Lebanon are required to appropriate from their

annual net profit a minimum of 0.2 percent and a maximum of 0.3 percent of total risk weighted assets and off

statement of financial position items based on rates specified by the Central Bank of Lebanon to cover general

banking risks. The consolidated ratio should not be less than 1.25 percent of these risks at the end of year ten (2007)

and 2 percent at the end of year twenty (2017). This reserve is part of the Bank’s equity and cannot be distributed as

dividends.

b) Legal reserve

As required by the Lebanese Code of Commerce and the Bank’s articles of association (applicable to subsidiaries

established in Lebanon), 10% of the net profit for the year has to be transferred to legal reserve. This reserve is not

available for distribution.

Distributable reserve

a) General reserve

In accordance with the General Assembly decisions, the Bank appropriated general reserve from profits of previous

years. In accordance with the resolutions of the General Assembly dated 10 June 2013, the shareholders decided to

extinguish the balance of accumulated losses in the amount of LL (000) 745,399 through the transfer of an

equivalent amount from the General reserve. This reserve amounting to LL (000) 719,997 as at 31 December 2014

(2013: the same) is available for distribution.

25 REVALUATION RESERVE OF PROPERTY

On 3 December 2013, the Central Bank of Lebanon approved the Bank’s revaluation of buildings resulting in a

surplus of LL (000) 14,328,847 on the condition that this revaluation reserve should not be considered eligible under

neither Tier 1 nor Tier 2 Capital as per the definition of the Central Bank of Lebanon’s rules and regulations.



30

26 OFF STATEMENT OF FINANCIAL POSITON ACCOUNTS

2014 2013

LL (000) LL (000)

Financial instruments with brokers on behalf of customers 883,691,391 820,273,111

Deposits with banks 15,163,934 45,752,259

Certificates of deposit from the Central Bank of Lebanon 2,669,554 2,477,868

Trading financial instruments 8,277,829 4,380,860

Loans and advances 82,227,981 87,559,951

Engagements on customers’ future contracts (long) - notional amount 153,463,184 29,343,048

Engagements on customers’ future contracts (short) - notional amount 87,896,145 143,327,155

Other accounts 909,501 2,379,633

____________ ____________

1,234,299,519 1,135,493,885

____________ ____________

Customers’ financial instruments under custody 1,127,720,274 995,421,182

Deposits with specific instructions – Fiduciary 106,579,245 140,072,703

____________ ____________

1,234,299,519 1,135,493,885

____________ ____________

In the normal course of business, the Group’s activities involve the execution, settlement, and financing of various

customer securities transactions. These activities may expose the Group to off-statement of financial position risk in

the event the customer or other broker is unable to fulfill its contractual obligations and the Group has to purchase or

sell the financial instrument underlying the contract at a loss. The Group’s customer securities activities are

transacted on either a cash or advance basis. In the event that customers fail to satisfy their obligations, the Group

may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer’s

obligations. The Group seeks to control the risks associated with its customer activities by requiring customers to

maintain margin collateral in compliance with various regulatory and internal guidelines. The Group requires the

customer to deposit additional collateral or to reduce positions when necessary.

The Group’s customer financing and securities settlement activities require the Group to pledge customer securities

as collateral in support of various secured financing sources. In the event the counterparty is unable to meet its

contractual obligation to return customer securities pledged as collateral, the Group may be exposed to the risk of

acquiring the securities at prevailing market prices in order to satisfy its customer obligations. The Group controls

this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of

collateral levels in the event of excess market exposure.

27 CASH AND CASH EQUIVALENTS

2014 2013

LL (000) LL (000)

Cash and balances with the Central Bank 4,143,164 3,522,593

Due from banks and financial institutions (note 11) 62,344,384 42,515,509

Due to banks and financial institutions (note 19) (30,955,105) (33,392,673)

___________ ___________

35,532,443 12,645,429

___________ ___________



31

28 RELATED PARTY TRANSACTIONS

The Group enters into transactions with the major shareholders, directors, senior management and affiliates in the

ordinary course of business at commercial interest and commission rates. All the loans and advances with related

parties are performing and not subject to a provision for potential credit losses.

Related parties’ transactions included in the consolidated income statement are summarized as follows:

2014 2013

LL (000) LL (000)

Other related parties:

Commission income 5,442 107,780

Interest income 28,000 -

Revenue from custody of shares 37,544 37,541

Interest expense 324,907 -

Directors’ remunerations amounted to LL (000) 1,302,250 for the year ended 31 December 2014 (2013: LL (000)

1,041,478).

Related parties’ balances included in the consolidated statement of financial position are summarized as follows:

2014 2013

LL (000) LL (000)

Loans and advances to other related parties 92,560 336,897

29 COMMITMENTS AND CONTINGENT LIABILITIES

a) The Bank is contingently liable for a guarantee issued in favor of the Beirut Stock Exchange amounting to

LL 200 million as a guarantee for the commitments of the Bank to operate as a financial broker (2013: the

same).

b) The Bank’s books and records have not been reviewed by the Lebanese Tax authorities for the years 2010 till

2014. The ultimate outcome of any tax review that may take place cannot presently be determined.

c) Litigation is a common occurrence in the banking industry due to the nature of the business. Management, after

review with its legal counsel of all pending actions and proceedings, considers that the aggregate liability or

loss, if any, resulting from an adverse determination would not have a material effect on the consolidated

financial position of the Group.

d) Minimum future lease payments:

2014 2013

LL (000) LL (000)

During one year 420,754 362,280

More than one year and less than 5 years 1,392,971 1,508,518

__________ __________

1,813,725 1,870,798

__________ __________

e) As at 31 December 2014, letters of guarantee issued on behalf of the Bank in favour of another bank amounted

to LL (000) 40,202.

f) Due from banks and financial institutions include cash margins amounting to LL (000) 15,243,453 (2013:

LL (000) 7,360,426) representing guarantees against future contracts purchased to the order of customers.



32

30 FAIR VALUE

The fair values in this note are stated at a specific date and may be different from the amounts which will actually be

paid on the maturity or settlement dates of the instrument. In many cases, it would not be possible to realize

immediately the estimated fair values given the size of the portfolios measured. Accordingly, these fair values do not

represent the value of these instruments to the Group as a going concern. Financial assets and liabilities are classified

according to a hierarchy that reflects the significance of observable market inputs. The three levels of the fair value

hierarchy are defined below.

Quoted market prices – Level 1

Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are

valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted

price is readily available, and the price represents actual and regularly occurring market transactions on an arm’s length

basis. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing

information on an ongoing basis.

Valuation technique using observable inputs – Level 2

Financial instruments classified as Level 2 have been valued using models whose most significant inputs are observable

in an active market. Such valuation techniques and models incorporate assumptions about factors observable in an

active market, that other market participants would use in their valuations, including interest rate yield curve, exchange

rates, volatilities, and prepayment and defaults rates.

Valuation technique using significant unobservable inputs – Level 3

Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on

observable market data (unobservable inputs). A valuation input is considered observable if it can be directly observed

from transactions in an active market, or if there is compelling external evidence demonstrating an executable exit price.

Unobservable input levels are generally determined based on observable inputs of a similar nature, historical

observations or other analytical techniques.

The following table shows an analysis of asset classes carried at fair value by level of the fair value hierarchy:

2014

Level 1 Level 2 Level 3 Total

LL (000) LL (000) LL (000) LL (000)

Financial assets designated at fair value through profit or loss:

Equity instruments 8,612,973 292,529 - 8,905,502

Debt instruments - 7,250,930 - 7,250,930

Government bonds 77,160 - - 77,160

Equity funds 4,810,712 - - 4,810,712

Bond funds 325,422 - - 325,422

Financial assets at fair value through other comprehensive income

Equity instruments 61,191 - - 61,191

__________ __________ __________ __________

13,887,458 7,543,459 - 21,430,917

__________ __________ __________ ___________

Property and equipment:

Buildings - 21,391,038 - 21,391,038

__________ __________ __________ ___________

2013

Level 1 Level 2 Level 3 Total

LL (000) LL (000) LL (000) LL (000)

Financial assets designated at fair value through profit or loss:

Equity instruments 9,783,298 1,870,393 - 11,653,691

Debt instruments - 4,343,922 - 4,343,922

Government bonds 6,972,567 - - 6,972,567

Equity funds 5,304,443 - - 5,304,443

Bond funds 4,405,817 - - 4,405,817

Financial assets at fair value through other comprehensive income

Equity instruments 104,470 - - 104,470

__________ __________ __________ __________

26,570,595 6,214,315 - 32,784,910

__________ __________ __________ ___________

Property and equipment:

Buildings - 21,890,316 - 21,890,316

__________ __________ __________ ___________

There were no transfers between levels during 2014 (2013: the same).



33

30 FAIR VALUE (continued)

Assets and liabilities measured at fair value using a valuation technique with significant observable inputs

(Level 2)

The Group values these unquoted securities using discounted cash flow valuation models where the lowest level

input that is significant to the entire measurement is observable in an active market. These inputs include

assumptions regarding current rates of interest, implied volatilities, credit spreads and broker statements. Buildings

are valued using comparable market transactions.

Financial instruments not recorded at fair value

The book and fair values of the financial assets and liabilities not carried at fair value as of 31 December are as

follows: 2014

Fair

value

Book

value

Difference

LL (000) LL (000) LL (000)

Financial assets

Cash and balances with the Central Bank 34,745,414 34,745,414 -

Due from banks and financial institutions 62,344,384 62,344,384 -

Loans and advances to customers 107,854,053 107,697,897 156,156

Loans and advances to related parties 92,650 92,650 -

__________ __________ __________

205,036,501 204,880,345 156,156

__________ __________ __________

Financial liabilities

Due to banks and financial institutions 30,955,105 30,955,105 -

Customers’ deposits at amortized cost 159,869,544 159,717,647 151,897

__________ __________ __________

190,824,649 190,672,752 151,897

__________ __________ __________

2013

Fair

value

Book

value

Difference

LL (000) LL (000) LL (000)

Financial assets

Cash and balances with the Central Bank 25,532,093 25,532,093 -

Due from banks and financial institutions 42,515,509 42,515,509 -

Investment and loan to associate 790,388 790,388 -

Loans and advances to customers 77,949,784 78,010,538 (60,754)

Loans and advances to related parties 334,073 336,897 (2,824)

__________ __________ __________

147,121,847 147,185,425 (63,578)

__________ __________ __________


Due to banks and financial institutions 33,392,673 33,392,673 -

Customers’ deposits at amortized cost 113,097,081 113,212,594 (115,513)

__________ __________ __________

146,489,754 146,605,267 (115,513)

__________ __________ __________

Assets and liabilities for which fair value is disclosed using a valuation technique with significant observable

inputs (Level 2)

Loans and advances to customers and related parties and due from banks and financial institutions

The fair value is determined using valuation models which incorporate a range of assumptions. These are grouped,

as far as possible, into homogeneous groups and stratified by subgroups with similar characteristics to improve the

accuracy of valuation outputs. These valuation techniques also consider expected credit losses and changes to

behavioural profiles.

Due to banks and financial institutions and customers’ accounts

For the purpose of estimating fair value, these are grouped by remaining contractual maturity. Fair values are

estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities.

The fair value of a deposit repayable on demand is assumed to be the amount payable on demand at the financial

position date.



34

30 FAIR VALUE (continued)

Assets and liabilities for which fair value is disclosed using a valuation technique with significant observable

inputs (Level 2) (continued)

Assets and liabilities not carried at fair value, for which fair value approximates carrying value

For financial assets and financial liabilities that have a short term maturity (less than three months) it is assumed that

the carrying amounts approximate their fair values. This assumption is also applied to demand deposits, and savings

accounts without a specific maturity.

The following table provides the fair value measurement hierarchy of the Bank’s assets and liabilities for which their

fair values are disclosed.

31 December 2014 2014

Level 1

LL (000)

Level 2

LL (000)

Level 3

LL (000)

Total

LL (000)

Assets for which fair values are disclosed:

Balances with Central Bank - 34,745,414 - 34,745,414

Due from banks and financial institutions - 62,344,384 - 62,344,384

Loans and advances to customers - 107,854,053 - 107,854,053

Loans and advances to related parties - 92,650 - 92,650

Liabilities for which fair values are disclosed:

Due to banks and financial institutions - 30,955,105 - 30,955,105

Customers’ deposits at amortized cost - 159,869,544 - 159,869,544

31 December 2013 2013 Level 1

LL (000)

Level 2

LL (000)

Level 3

LL (000)

Total

LL (000)

Assets for which fair values are disclosed:

Balances with Central Bank - 25,429,029 - 25,429,029

Due from banks and financial institutions - 42,515,509 - 42,515,509

Investment and loan to associate - 790,388 - 790,388

Loans and advances to customers - 77,949,784 - 77,949,784

Loans and advances to related parties - 334,073 - 334,073 Liabilities for which fair values are disclosed:

Due to banks and financial institutions - 33,392,673 - 33,392,673

Customers’ deposits at amortized cost - 113,097,081 - 113,097,081

There were no transfers between levels during 2014 (2013: the same).

31 RISK MANAGEMENT

31.1 Introduction

Risk is inherent in the Group’s activities but is managed through a process of ongoing identification, measurement

and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Group’s

continuing profitability and each individual within the Group is accountable for the risk exposures relating to its

responsibilities. The Group is exposed to credit risk, liquidity risk, prepayments risk, operational risk and market

risk, the latter being subdivided into trading and non-trading risks. It is also subject to various operating risks.

The independent risk control process does not include business risks such as changes in the environment, technology

and industry. The Group’s policy is to monitor those business risks through the Group’s strategic planning process.

Risk Management Structure

The Board of Directors is ultimately responsible for identifying and controlling risks. However, there are separate

independent bodies responsible for managing and monitoring risks.

Board of Directors

The Board of Directors (the Board) is ultimately responsible for identifying and setting the level of tolerable risks to

which the Group is exposed, and as such defines the risk appetite for the Group. In addition, the Board approves

policies and procedures related to all types of risks. Periodic reporting is made to the Board on existing and

emerging risks in the Group. A number of Management committees and departments are also responsible for various

levels of risk management, as set out below.



35

31 RISK MANAGEMENT (continued)

31.1 Introduction (continued)

Risk Management Structure (continued)

Board Risk Committee

The role of the Board Risk Committee is to oversee the risk management framework and assess its effectiveness,

review and recommend to the Board the bank risk policies and risk appetite, monitor the bank risk profile, review

stress tests scenarios and results.

Asset Liability Committee

The Asset Liability Committee (ALCO) is a Management committee responsible in part for managing market risk

exposures, liquidity, funding needs and contingencies. It is the responsibility of this committee to set up strategies

for managing market risk exposures and ensuring that treasury implements those strategies so that exposures are

managed within approved limits and in a manner consistent with the risk policy and limits approved by the Board.

Risk Management Unit

The Risk Management Unit is responsible for implementing and maintaining risk related procedures to ensure an

independent control process is maintained.

The Risk Management Unit is responsible for monitoring compliance with risk principles, policies and limits across

the Group. Each business group has its own unit which is responsible for the independent control of risks, including

monitoring the risk of exposures against limits and the assessment of risks of new products and structured

transactions. This unit also ensures the complete capture of the risks in risk measurement and reporting systems.

Group Treasury

Group Treasury is responsible for managing the Group’s assets and liabilities and the overall financial structure.

It is also primarily responsible for the funding and liquidity risks of the Group.

Internal Audit

The Group’s policy is that risk management processes throughout the Group are audited annually by the internal

audit function, which examines both the adequacy of the procedures and the Group’s compliance with the

procedures. Internal Audit discusses the results of all assessments with management, and reports its findings and

recommendations to the Audit Committee.

Risk measurement and reporting systems

The Group’s risks are measured using a method which reflects both the expected loss likely to arise in normal

circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models.

The models make use of probabilities derived from historical experience. The Group also runs worst case scenarios

that would arise in the event that extreme events which are unlikely to occur do, in fact occur.

Monitoring and controlling risks is primarily performed based on adjustable limits established by the Group. These

limits reflect the business strategy of the Group, and most important, are periodically attuned to be in line with the

market environment and the level of risk that the Group is willing to accept. In addition, the Group’s policy is to

measure and monitor the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types

and activities.

Information compiled from all the businesses is examined and processed in order to analyze, control and identify

risks on a timely basis. This information is presented to the Board of Directors via the Assets, Liabilities, and Risk

Management Committee, the Credit Committee, and the Board Risk Committee.

For all levels throughout the Group, specifically tailored risk reports are prepared and distributed in order to ensure

that all business divisions have access to extensive, necessary and up-to-date information.

Risk mitigation

As part of its overall risk management, the Group manages its exposures resulting from changes in interest rates,

foreign currencies, equity risks, credit risks, and exposures arising from transactions.



36


31.1 Introduction (continued)

Excessive risk concentration

Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the

same geographic region, or have similar economic features that would cause their ability to meet contractual

obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the

relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical

location.

In order to avoid excessive concentrations of risk, the Group’s policies and procedures include specific guidelines to

focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed

accordingly. Selective hedging is used within the Group to manage risk concentrations at both the relationship and

industry levels.

31.2 CREDIT RISK

Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to discharge their

contractual obligations. The Group manages and controls credit risk by limiting transactions with specific

counterparties, and continuously assessing the creditworthiness of counterparties.

The Group manages credit risk by setting limits for individual borrowers and groups of borrowers and for

geographical and industry segments. In addition, the Group obtains security where appropriate.

Origination of loans and maintenance

There are consistent standards across the Group for the origination, documentation and maintenance of extensions of

credit.

Loan portfolio management

The Group seeks to control the credit risks associated with its loan portfolio by requiring customers to maintain

margin collateral in compliance with regulatory and internal guidelines.

Credit quality per class of financial assets

In managing its portfolio, the Group utilizes ratings and other measures and techniques which seek to take account of

all aspects of perceived risk. Credit exposures classified as “High” quality are those where the ultimate risk of

financial loss from the obligor’s failure to discharge its obligation is assessed to be low. These include facilities to

corporate entities with financial condition, risk indicators and capacity to repay which are considered to be good to

excellent. Credit exposures classified as “Standard” quality comprise all other facilities whose payment performance

is fully compliant with contractual conditions and which are not “impaired”. The ultimate risk of possible financial

loss on “Standard” quality is assessed to be higher than that for the exposures classified within the “High” quality

range.

The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific

counterparties, and continuously assessing the creditworthiness of counterparties. The Group seeks to manage its

credit risk exposure through diversification of lending activities to avoid undue concentrations of risks with

individuals or groups of customers in specific locations or businesses. The Group also monitors non-performing

loans and books required provisions when necessary.

Past due obligations (PDO)

Any delay in the customer’s meeting payments on pre-arranged due dates, and/or failure to make repayments,

prompts immediate action by the Account Officer to determine underlying reasons. A justifiable explanation by the

customer may be in itself satisfactory and as such, may warrant no further action other than obtaining an agreement,

to be approved by the Risk Management Department, that payment will be forthcoming at a specified later date. If

reason is considered unsatisfactory and/or if customer fails to make repayment on agreed extended payment date,

account will be considered as PDO.



37


31.2 CREDIT RISK (continued)

Provisioning policy

As part of the conservative approach to sustain the quality of the Group’s loan portfolio, periodic evaluation of loan

loss provision is performed.

Non-performing loans are closely monitored and well provisioned as required with remedial actions taken and

managed proactively.

As a result, all adversely classified accounts are reviewed periodically and the concerned department makes

recommendation for specific provisions against the accounts. In this regard, specific approval from regulatory

authority is obtained when necessary.

The classification of loans and advances to customers and related parties at amortised cost as in accordance with the

ratings of Central Bank of Lebanon circular 58 are as follows:

2014

Gross

balance

Unrealised

interest

Impairment

allowances

Net

balance

LL million LL million LL million LL million

Regular 107,488 - - 107,488

Doubtful 1,525 (596) (537) 392

_____________ _____________ _____________ _____________

109,013 (596) (537) 107,880

Collective impairment (182) - - (182)

_____________ _____________ _____________ _____________

108,831 (596) (537) 107,698

_____________ _____________ _____________ _____________

2013

Gross

balance

Unrealised

interest

Impairment

allowances

Net

balance


Regular 78,126 - - 78,126

Doubtful 607 (450) (152) 5

_____________ _____________ _____________ _____________

78,733 (450) (152) 78,131

Collective impairment (120) - - (120)

_____________ _____________ _____________ _____________

78,613 (450) (152) 78,011

_____________ _____________ _____________ _____________

Renegotiated Loans

Restructuring activity aims to manage customer relationships and maximize collection opportunities and, if possible

avoid portfolio liquidation. Such activities include extended payment arrangements, modification, loan rewrites

and/or deferral of payments pending a change in circumstances.

Restructuring policies and practices are based on indicators or criteria which, in the judgment of management,

indicate that repayment will probably continue.

2014 2013

LL million LL million

Loans and advances to customers 2,528 -

____________ ____________



38



Risk concentrations, maximum exposure to credit risk without taking account of any collateral and other

credit enhancements

The Group’s concentrations of risk are managed by client / counterparty. The maximum credit exposure to any client

or counterparty as of 31 December 2014 was LL (000) 8,908,890 (2013: LL (000) 8,967,967).

The following table shows the maximum exposure to credit risk for the component of the statement of financial

position by resident and non-resident.

Geographic analysis 2014

Lebanon MENA Europe US Other Total

LL million LL million LL million LL million LL million LL million Cash and balances with the Central Bank 34,733 12 - - - 34,745

Due from banks and financial institutions 3,169 8,604 31,424 15,040 4,107 62,344

Financial assets at fair value through profit or loss 12,029 271 3,795 5,265 10 21,370

Financial assets at fair value through other comprehensive income - - - 61 - 61

Loans and advances to customers 47,488 58,650 1,560 - - 107,698

Loans and advances to related parties 93 - - - - 93

_________ ________ ________ ________ ________ ________

97,512 67,537 36,779 20,366 4,117 226,311

_________ ________ ________ ________ ________ ________

2013

Lebanon MENA Europe US Other Total

LL million LL million LL million LL million LL million LL million Cash and balances with the Central Bank 25,519 13 - - - 25,532

Due from banks and financial institutions 6,560 5,494 16,144 13,810 508 42,516

Financial assets at fair value through profit or loss 17,076 603 4,425 9,075 1,502 32,681

Financial assets at fair value through other comprehensive income - - - 104 - 104

Loans and advances to customers 75,650 470 1,891 - - 78,011

Loans and advances to related parties 337 - - - - 337

_________ ________ ________ ________ ________ ________

125,142 6,580 22,460 22,989 2,010 179,181

_________ ________ ________ ________ ________ ________

Collateral and other credit enhancements

The amount, type and valuation of collateral is based on guidelines specified in the risk management framework.

The main types of collateral obtained include quoted shares, cash collateral and bank guarantees. The revaluation

and custody of collaterals are performed independent of the business units.

Guarantees received from customers are detailed as follows:

2014 2013

LL million LL million

Securities 81,429 53,080

Cash 7,382 14,021

__________ __________

88,811 67,101

__________ __________

Analysis of maximum exposure to credit risk and collateral and other credit enhancements

The following table shows the maximum exposure to credit risk by class of financial asset. It further shows the total

fair value of collateral, capped to the maximum exposure to which it relates and the net exposure to credit risk. 2014

Maximum

exposure

Cash

Securities

Net credit

exposure


Loans and advances to customers 107,698 7,382 81,429 18,887

Loans and advances to related parties 93 - - 93

____________ ____________ ____________ ___________

Total net loans and advances 107,791 7,382 81,429 18,890

____________ ____________ ____________ ___________



39



Analysis of maximum exposure to credit risk and collateral and other credit enhancements (continued)

2013

Maximum

exposure

Cash

Securities

Net credit

exposure


Loans and advances to customers 78,011 14,016 53,004 10,991

Loans and advances to related parties 337 5 76 256

____________ ____________ ____________ ___________

Total net loans and advances 78,348 14,021 53,080 11,247

____________ ____________ ____________ ___________

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying

agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance

for impairment losses.

Credit quality by class of financial assets

The credit quality of financial assets is managed by the Group using internal credit ratings. The table below shows

the credit quality by class of asset for all financial assets exposed to credit risk, based on the Group’s internal credit

rating system. The amount presented are gross of impairment allowances:

2014

Neither past due nor impaired

High-

Grade

Standard

grade

Past due but

not impaired

Individually

impaired

Total

LL million LL million LL million LL million LL million

Cash and balances with the Central bank 34,745 - - - 34,745

Due from banks and financial institutions 62,344 - - - 62,344

Financial assets at fair value through profit or loss 7,994 13,376 - - 21,370

Financial assets at fair value through other comprehensive income 61 - - - 61

Loans and advances to customers 106,173 - - 1,525 107,698

Loans and advances to related parties 93 - - - 93

____________ ____________ ____________ __________ ___________

211,410 13,376 - 1,525 226,311

_____________ ____________ ____________ __________ ___________

2013

Neither past due nor impaired

High-

Grade

Standard

grade

Past due but not

impaired

Individually

impaired

Total

LL million LL million LL million LL million LL million

Cash and balances with the Central bank 25,532 - - - 25,532

Due from banks and financial institutions 42,516 - - - 42,516

Financial assets at fair value through profit or loss 15,002 17,679 - - 32,681

Financial assets at fair value through other comprehensive income 104 - - - 104

Loans and advances to customers 77,404 - - 607 78,011

Loans and advances to related parties 337 - - - 337

____________ ____________ ____________ __________ ___________

160,895 17,679 - 607 179,181

_____________ ____________ ____________ __________ ___________

Impairment assessment

For accounting purposes, the Group uses an incurred loss model for the recognition of losses on impaired financial

assets. This means that losses can only be recognized when objective evidence of a specific loss event has been

observed. Triggering events include the following:

- Significant financial difficulty of the customer;

- A breach of contract such as a default of payment;

- Where the Group grants the customer a concession due to the customer experiencing financial difficulty;

- It becomes probable that the customer will enter bankruptcy or other financial reorganization; and

- Observable data that suggests that there is a decrease in the estimated future cash flows from the loans.



40



Individually assessed allowances

The Group determines the allowance appropriate for each individually significant loan or advance on an individual

basis. Items considered when determining allowance amounts include the sustainability of the counterparty’s business

plan, its ability to improve performance once a financial difficulty has arisen, projected receipts and the expected

payout should bankruptcy ensue, the availability of other financial support, the realizable value of collateral and the

timing of the expected cash flows. Impairment allowances are evaluated at each reporting date, unless unforeseen

circumstances require more careful attention.

Collectively assessed allowances

Allowances are assessed collectively for losses on loans and advances that are not individually significant and for

individually significant loans that have been assessed individually and found not to be impaired. Allowances are

evaluated separately at each reporting date with each portfolio.

31.3 LIQUIDITY RISK AND FUNDING MANAGEMENT

Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with

financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the

possibility that the Group might be unable to meet its payment obligations when they fall due under both normal and

stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core

deposit base, manages assets with liquidity in mind, maintaining a healthy balance of cash and cash equivalents and

readily marketable securities.

The Group maintains a portfolio of highly marketable and diverse assets that are assumed to be easily liquidated in

the event of an unforeseen interruption of cash flow. The Group also has committed lines of credit that it can access

to meet liquidity needs.

As per the Lebanese banking regulations, the Bank must retain with the Central Bank of Lebanon interest bearing

statutory investments equivalent to 15% of all foreign currency deposits regardless of their nature.

The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress

factors relating to both the market in general and specifically to the Bank. The Bank maintains a solid ratio of highly

liquid net assets in foreign currencies to deposits and commitments in foreign currencies taking market conditions

into consideration. In accordance, with the Central Bank of Lebanon circulars, the ratio of net liquid assets to

deposits and commitments in foreign currencies and Lebanese Liras should not be less than 10% and 40%,

respectively.

The ratios during the year were as follows:

The Group stresses the importance of current accounts and savings accounts as sources of funds to finance lending

to customers. They are monitored using the advances to deposit ratios, which compares loans and advances to

customers as a percentage of core customer and savings accounts.

Net liquid assets to deposits in foreign currencies 2014 2013

Year-end 21.79 18.94

Maximum 30.95 40.51

Minimum 8.26 16.81

Average 18.5 25.31



41


31.3 LIQUIDITY RISK AND FUNDING MANAGEMENT (continued)

Analysis of Financial Assets and Liabilities by Remaining Maturities

The table below summarizes the maturity profile of the Group’s financial assets and liabilities as at 31 December.

Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Group

expects that many customers will not request repayment on the earliest date the Group could be required to pay and

the table does not reflect the expected cash flows indicated by the Group’s deposit retention history.

31 December 2014

Up to 1

Month

1 to 3

months

3 to 12

months

Sub total

1 to 5

years

Over 5

years

Sub total

Amount

without

maturity

Total

LL million LL million LL million LL million LL million LL million LL million LL million LL million

Financial assets

Cash and balances with the Central

Bank 15,148 3,014 - 18,162 16,583 - 16,583 - 34,745

Due from banks and financial

institutions 62,344 - - 62,344 - - - - 62,344

Financial assets at fair value through

profit or loss 15,636 - - 15,636 77 - 77 5,657 21,370



-

-

-

-

-

-

-

61

61

Loans and advances to customers 104,115 - 66 104,181 3,517 - 3,517 - 107,698

Loans and advances to related parties 93 - - 93 - - - - 93

________ _________ __________ __________ _________ __________ __________ _________ __________

Total undiscounted financial assets 197,336 3,014 66 200,416 20,177 - 20,177 5,718 226,311

_______ _________ __________ __________ _________ __________ __________ _________ __________


Due to banks and financial institutions 30,955 - - 30,955 - - - - 30,955

Customers’ deposits at amortized cost 123,707 27,124 8,887 159,718 - - - - 159,718

________ _________ __________ __________ _________ __________ __________ _________ __________

Total undiscounted financial

liabilities 154,662 27,124 8,887 190,673 - - - - 190,673

________ _________ __________ __________ _________ __________ __________ _________ __________

Net undiscounted financial assets

(liabilities) 42,674 (24,110) (8,821) 9,743 20,177 - 20,177 5,718 35,638

________ _________ __________ __________ _________ __________ __________ _________ __________

31 December 2013

Up to 1

month

1 to 3

months

3 to 12

months

Sub total

1 to 5

years

Over 5

years

Sub total

Amount

without

maturity

Total


Financial assets

Cash and balances with the Central

Bank 25,532 - - 25,532 - - - - 25,532

Due from banks and financial

institutions 42,516 - - 42,516 - - - - 42,516


profit or loss 17,557 - - 17,557 - 3,849 3,849 11,275 32,681



-

-

-

-

-

-

-

104

104

Loans and advances to customers 74,690 - - 74,690 3,321 - 3,321 - 78,011


________ _________ __________ __________ _________ __________ __________ _________ __________

Total undiscounted financial assets 160,632 - - 160,632 3,321 3,849 7,170 11,379 179,181

_______ _________ __________ __________ _________ __________ __________ _________ __________



Customers’ deposits at amortized cost 100,818 5,269 7,126 113,213 - - - - 113,213

________ _________ __________ __________ _________ __________ __________ _________ __________

Total undiscounted financial

liabilities 134,211 5,269 7,126 146,606 - - - - 146,606

________ _________ __________ __________ _________ __________ __________ _________ __________

Net undiscounted financial assets

(liabilities) 26,421 (5,269) (7,126) 14,026 3,321 3,849 7,170 11,379 32,575

________ _________ __________ __________ _________ __________ __________ _________ __________



42


31.3 LIQUIDITY RISK AND FUNDING MANAGEMENT (continued)

The table below shows the contractual expiry by maturity of the Group’s contingent liabilities and commitments:

On Less than 3 to 12 1 to 5 Over

demand 3 months months years 5 years Total

As of 31 December 2014 LL million LL million LL million LL million LL million LL million

Financial instruments with brokers on behalf of customers 883,691 - - - - 883,691

Deposits with banks - 316 14,848 - - 15,164

Certificates of deposit from the Central Bank of Lebanon 2,670 - - - - 2,670

Trading financial instruments 8,278 - - - - 8,278

Loans and advances 106 - 16,500 42,496 23,127 82,229

Other accounts 910 - - - - 910

___________ ___________ ___________ ___________ ___________ ___________

895,655 316 31,348 42,496 23,127 992,942

___________ ___________ ___________ ___________ ___________ ___________

On Less than 3 to 12 1 to 5 Over

Demand 3 months months years 5 years Total

As of 31 December 2013 LL million LL million LL million LL million LL million LL million

Financial instruments with brokers on behalf of customers 820,273 - - - - 820,273

Deposits with banks - 43,885 1,867 - - 45,752

Certificates of deposit from the Central Bank of Lebanon 2,478 - - - - 2,478

Trading financial instruments 4,381 - - - - 4,381

Loans and advances - - 14,760 40,100 32,700 87,560

Other investments 172,670 - - - - 172,670

Other accounts 2,380 - - - - 2,380

___________ ___________ ___________ ___________ ___________ ___________

1,002,182 43,885 16,627 40,100 32,700 1,135,494

___________ ___________ ___________ ___________ ___________ ___________

31.4 MARKET RISK

Market risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in

market prices. Market risks arise from open positions in interest rate and currency rate, all of which are exposed to

general and specific market movements and changes in the level of volatility of market rates or prices such as

interest rates and foreign exchange rates.

Risk management is responsible for generating internal reports quantifying the Group’s earnings at risk due to

extreme movements in interest rates, while daily monitoring the sensitivity of the Group’s trading portfolio of fixed

income securities to changes in market prices and / or market parameters.

31.4.1 INTEREST RATE RISK

Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair

values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate

repricing of assets and liabilities and off-statement of financial position items that mature or reprice in a given period.

The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies.

The effective interest rate (effective yield) for a monetary financial instrument is the rate that if used to determine the

present value of the instrument would give the book value of the instruments. The historical cost is used to price the

instrument with fixed income that is presented net of amortization and the current market price is used to price the

instrument with a floating rate or the instrument that is presented at fair value.

Interest rate sensitivity

The sensitivity of the consolidated income statement is the effect of the assumed changes in interest rates on the

profit or loss for a year based on the floating rated of non-trading financial assets and financial liabilities held at 31

December.



43


31.4 MARKET RISK (continued)

31.4.1 INTEREST RATE RISK (continued)

The tables below analyze the Group’s interest rates risk exposure on non-trading financial assets and liabilities

(excluding financial assets at fair value through profit or loss). The Group’s assets and liabilities are included at

carrying amount and categorized by the earlier of contractual re-pricing or maturity dates:

As of 31 December 2014 Up to

1 month

1 to 3

months

3 months

to 1 year

Total less

than one year

1 to

5 years

Over

5 years

Total more

than one year

Non-interest

sensitive

Total


Assets

Cash and balances with the Central Bank 11,035 3,014 - 14,049 16,583 - 16,583 4,113 34,745

Due from banks and financial institutions 62,344 - - 62,344 - - - - 62,344

Loans and advances to customers 104,115 - 66 104,181 3,517 - 3,517 - 107,698


________ ________ ________ ________ ________ ________ ________ ________ ________

Total assets 177,587 3,014 66 180,667 20,100 - 20,100 4,113 204,880

________ ________ ________ ________ ________ ________ ________ ________ ________

Liabilities


Customers’ deposits at amortized cost - 26,538 8,887 35,425 - - - 124,293 159,718

__________ _________ __________ _________ _________ _________ ________ _________ _________

Total liabilities 30,955 26,538 8,887 66,380 - - - 124,293 190,673

__________ _________ __________ _________ _________ __________ ________ _________ _________

Total interest sensitivity gap 146,632 (23,524) (8,821) 114,287 20,100 - 20,100 (120,180) 14,207

__________ _________ __________ _________ _________ __________ __________ _________ _________

As of 31 December 2013 Up to

1 month

1 to 3

months

3 months

to 1 year

Total less

than one year

1 to

5 years

Over

5 years

Total more than

one year

Non-interest

sensitive

Total


Assets

Cash and balances with the Central Bank 22,010 - - 22,010 - - - 3,522 25,532

Due from banks and financial institutions 42,516 - - 42,516 - - - - 42,516

Loans and advances to customers 74,690 - - 74,690 3,321 - 3,321 - 78,011


________ ________ ________ ________ ________ ________ ________ ________ ________

Total assets 139,553 - - 139,553 3,321 - 3,321 3,522 146,396

________ ________ ________ ________ ________ ________ ________ ________ ________

Liabilities


Customers’ deposits at amortized cost - 5,269 7,126 12,395 - - - 100,818 113,213

Other liabilities - - - - - - - 1,354 1,354

__________ _________ __________ _________ _________ _________ ________ _________ _________

Total liabilities 33,393 5,269 7,126 45,788 - - - 102,172 147,960

__________ _________ __________ _________ _________ __________ ________ _________ _________

Total interest sensitivity gap 106,160 (5,269) (7,126) 93,765 3,321 - 3,321 (98,650) (1,564)

__________ _________ __________ _________ _________ __________ __________ _________ _________

31.4.2 CURRENCY RISK

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange

rates. In accordance with the Group’s policy, positions are monitored on a daily basis and hedging strategies are

used to ensure positions are maintained within established limits The Central Bank of Lebanon allows the banks to

maintain a currency exchange position, receivable or payable, that does not exceed at any time 1% of total net equity

on condition that the global currency exchange position does not exceed 40% of total net equity, provides that the

Group abide on a timely and consistent manner by the required solvency rate.

Breakdown of assets and liabilities by currency as at 31 December 2014:

LL USD EUR GBP AED Other Total

LL million LL million LL million LL million LL million LL million LL million

Assets

Cash and balances with the Central Bank 790 33,900 52 - - 3 34,745

Due from banks and financial institutions 1,891 38,843 11,100 3,126 1,325 6,059 62,344

Financial assets at fair value through profit or loss 1,891 18,280 915 3 271 10 21,370

Financial assets at fair value through other

comprehensive income

-

61

-

-

-

-

61

Loans and advances to customers 118 71,878 14,712 1,073 18,584 1,333 107,698

Loans and advances to related parties - 93 - - - - 93

Investment and loan to associate - - - - - - -

Other assets 2,600 3,102 122 7 111 31 5,973

Property and equipment 24,498 19 - - 68 2 24,587

Intangible assets 74 12 - - - - 86

____________ ____________ ____________ ____________ ____________ ____________ ____________

Total assets 31,862 166,188 26,901 4,209 20,359 7,438 256,957

____________ ____________ ____________ ____________ ____________ ____________ ____________

Liabilities

Due to banks and financial institutions - 19,858 207 1,008 9,299 2,331 32,703

Financial liability under murabaha transaction - 4,543 - - - - 4,543

Customers’ deposits at amortized cost 427 121,482 25,469 3,170 4,594 4,576 159,718

Other liabilities 486 950 35 1 41 4 1,517

Provisions for risks and charges 1,259 - - - - - 1,259

____________ ____________ ____________ ____________ ____________ ____________ ____________

Total liabilities 2,172 146,833 25,711 4,179 13,934 6,911 199,740

____________ ____________ ____________ ____________ ____________ ____________ ____________

Net exposure 29,690 19,355 1,190 30 6,425 527 57,217

____________ ____________ ____________ ____________ ____________ ____________ ____________



44


31.4 MARKET RISK (continued)

31.4.2 CURRENCY RISK (continued)

Breakdown of assets and liabilities by currency as at 31 December 2013:

LL USD EUR GBP AED Other Total

LL million LL million LL million LL million LL million LL million LL million

Assets

Cash and balances with the Central Bank 225 24,156 1,148 - 3 - 25,532

Due from banks and financial institutions 2,312 25,726 4,162 2,611 764 6,941 42,516

Financial assets at fair value through profit or loss 1,667 27,948 2,463 - - 603 32,681

Financial assets at fair value through other

comprehensive income

-

104

-

-

-

-

104

Loans and advances to customers 312 58,972 4,854 - 12,219 1,654 78,011

Loans and advances to related parties - 337 - - - - 337

Investment and loan to associate 210 580 - - - - 790

Other assets 2,605 2,358 37 - 164 136 5,300

Property and equipment 25,898 4 - - 40 6 25,948

Intangible assets 77 26 - - - - 103

____________ ____________ ____________ ____________ ____________ ____________ ____________

Total assets 33,306 140,211 12,664 2,611 13,190 9,340 211,322

____________ ____________ ____________ ____________ ____________ ____________ ____________

Liabilities

Due to banks and financial institutions - 27,834 387 - - 5,172 33,393

Financial liability under murabaha transaction - 4,543 - - - - 4,543

Customers’ deposits at amortized cost 1,898 86,113 9,156 5,796 6,172 4,078 113,213

Other liabilities 654 614 49 - - 37 1,354

Provisions for risks and charges 944 242 - - - - 1,186

____________ ____________ ____________ ____________ ____________ ____________ ____________

Total liabilities 3,496 119,346 9,592 5,796 6,172 9,287 153,689

____________ ____________ ____________ ____________ ____________ ____________ ____________

Net exposure 29,810 20,865 3,072 (3,185) 7,018 53 57,633

____________ ____________ ____________ ____________ ____________ ____________ ____________

The Group’s exposure to currency risk

The table below indicates the currencies to which the Group had significant exposure at 31 December on its non-

trading monetary assets and liabilities and its forecast cash flows. The analysis calculates the effects of a reasonably

possible movement of the currency rate against the Lebanese Lira, with all other variables held constant, on the

consolidated income statement (due to the fair value of currency sensitive non-trading monetary assets and

liabilities). A negative amount in the table reflects a potential net reduction in income statement, while a positive

amount reflects a net potential increase. An equivalent decrease in each of the below currencies against the Lebanese

Ponds would have resulted in an equivalent but opposite impact.

The table below shows the consolidated income statement sensitivity due to a 5% increase in currency rates against

the Lebanese Lira, with all other variables held constant. A negative amount reflects a potential net reduction in

income, while a positive amount reflects a net potential increase.

Effect on profit before tax

Increase in 2014 2013

currency rate % LL million LL million

EUR 5% (23) (14)

USD 5% 352 223

JPY 5% 12 (58)

Equity price risk

Equity price risk is the risk that fair value of equities decreases as the result of changes in the level of equity indices

and individual stocks. The non-trading equity price risk exposure arises from equity securities classified as fair value

through other comprehensive income. A 10% increase in the value of the Group’s financial instruments at fair value

through other comprehensive income at 31 December 2014 would have increased equity by LL (000) 6,119 (2013:

LL (000) 10,447). An equivalent decrease would have resulted in an equivalent but opposite impact.

31.6 PREPAYMENT RISK

Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay

or request repayment earlier than expected. Market conditions causing prepayment is not significant in the markets

in which the Group operates. Therefore, the Group considers the effect of prepayment on net interest income is not

material after taking into account the effect of any prepayment penalties.



45


31.7 OPERATIONAL RISK

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls

fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to

financial loss. The Group cannot expect to eliminate all operational risks, but it endeavors to manage these risks

through a control framework and by monitoring and responding to potential risks. Controls include effective

segregation of duties, access, authorization and reconciliation procedures, staff education and assessment processes,

including the use of internal audit.

32 CAPITAL

The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the

Bank’s capital is monitored using, among other measures, the rules and ratios established by the Central Bank of

Lebanon and the Banking Control Commission.

In accordance with the Central Bank of Lebanon Main Circular 44, the Bank should maintain the minimum required

capital adequacy ratio for the year ended 31 December 2014 and thereafter as follows:

Tier 1 capital ratio Total capital ratio

Year ending 31 December 2014 8.5 % 10.5 %



Capital management

The primary objectives of the Group’s capital management policy are to ensure that the Group complies with

external imposed capital requirements and that the Group maintains healthy credit ratios to support its business and

maximum shareholder value.

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions

and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust

the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No

changes were made in the objectives, policies and processes from the previous years however, it is under constant

scrutiny of the Board.

Regulatory Capital

2014 2013

LL (000) LL (000)

Tier 1 capital 43,249,000 35,069,000

Tier 2 capital 35,000 33,000

____________ ____________

43,284,000 35,102,000

____________ ____________

Risk weighted assets 153,957,000 147,222,000

Tier 1 capital 28.11% 23.82%

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