Annual Report- 2014

Transcript

TABLE OF CONTENTS 01 06 02 14 03 18 | A WORD OF INTRODUCTION 08 | THE GROUP 1 2 | LIST OF AWARDS AND RECOGNITIONS | CHAIRMAN’S LETTER | EXECUTIVE GENERAL MANAGER’S LETTER 04 | CORPORATE GOVERNANCE 24 | GOVERNANCE FRAMEWORK 26 | BOARD OF DIRECTORS 34 | EXECUTIVES 36 | BANKMED’S COMMITTEES 40 | COMPLIANCE 4 1 | INTERNAL AUDIT 22 07 78 | SUPPORT LINES 05 42 | MANAGEMENT REPORT 08 84 06 64 | RISK MANAGEMENT 09 206 | | INDEPENDENT AUDITORS’ REPORT CORPORATE DIRECTORY 212 | CORRESPONDENT BANKS 01 | A WORD OF INTRODUCTION THE GROUP LIST OF AWARDS AND RECOGNITIONS 01 A WORD OF INTRODUCTION THE GROUP LIST OF AWARDS AND RECOGNITION A WORD OF INTRODUCTION For more than 70 years, sound governance, prudent risk management, and transparency have been the pillars of Bankmed’s leadership and the primary foundations that have fortified the Bank’s presence in the local and regional markets. The Bank’s customer-centric culture, founded on timely and swift responsiveness to its clients’ needs, has largely contributed to its success throughout the years. Bankmed has always been highly recognized for its key economic role in the nineties, particularly in terms of financing commercial, industrial, and contracting sectors. The Bank promoted the growth of these sectors and earned itself a prime position as a market leader in Corporate Banking. This traditional focus on the corporate sector has endowed the Bank with a robust business model and a notable history of structuring financial transaction. Following this success in Corporate Banking, the Bank has embarked on various initiatives aimed at widening and diversifying the scope of its activities as well as enhancing its other business lines. The Bank’s diversified business model includes Corporate and Commercial Banking, Retail Banking, Private Banking, as well as Investment and Brokerage Services. Bankmed has further geared its efforts towards Small and Medium Enterprises (SMEs), an increasingly important segment of the economy. This focus has been key for the Bank’s continued progress and growth, and has also proven essential in its expansion plans. Bankmed offers an extensive range of financial solutions through its 61 branches that cover all of the Lebanese territories. The Bank is also present in Turkey through its commercial bank, Turkland Bank (T-Bank), in Switzerland through its fully owned private banking subsidiary, BankMed Suisse, in Saudi Arabia through its investment banking arm, SaudiMed Investment Company (SaudiMed), and in Cyprus through a branch in Limassol. Bankmed also extended its presence to Iraq where it operates in three cities: Baghdad, Erbil, and Basra. Most recently, Bankmed and its fully owned subsidiary, MedSecurities Investment opened corporate and investment branches in the DIFC. Through this presence, Bankmed became the first bank in the MENA region to operate under a Category 1 license, the most comprehensive license granted by the Dubai Financial Services Authority. MedSecurities obtained a Category 3 license which entitles it to address the evolving needs of customers and to offer a wide range of investment and brokerage services within a world-class regulatory framework. Realizing the important role it plays in its community, Bankmed has integrated Corporate Social Responsibility (CSR) within its business strategy. In 2014, the Bank continued to promote sustainability by responding to the environmental, cultural and educational needs of our community. Moving forward, Bankmed will continue to seek new avenues to expand the scope of its operations, both locally and regionally, and to provide a comprehensive range of financial solutions that meet its clients’ expectations. Moreover, Bankmed will remain committed to promoting investments in Lebanon and strengthening its position within the Lebanese economy. 6 7 A WORD OF INTRODUCTION THE GROUP SWITZERLAND TURKEY CYPRUS IRAQ LEBANON UAE KSA 8 9 THE GROUP Bankmed s.a.l. (Headquarters) GroupMed Insurance Brokers 482 Clémenceau Street P.O. Box: 11-0348, Riad El-Solh Beirut, Lebanon Tel: (961-1) 373937 Fax: (961-1) 362706 (961-1) 362806 www.bankmed.com.lb 4th Floor, 131 Marfaa Foch Street, Beirut Central District P.O. Box: 11-1082 Riad El Solh Beirut, Lebanon Tel: (961-1) 999433 Fax: (961-1) 998129 Saudi Lebanese Bank s.a.l. BankMed Suisse s.a. 1st Floor 131 Marfaa Foch Street, Beirut Central District Beirut, Lebanon Tel: (961-1) 976333 MedInvestment Bank s.a.l. Bankmed Center 482 Clémenceau Street P.O. Box: 11-0348, Riad El-Solh Beirut, Lebanon Tel: (961-1) 373937 Rue du Mont-Blanc 3 P.O. Box 1523 1201 Geneva, Switzerland Tel: (41-22) 90 60 606 www.bankmed.ch MedSecurities Investment s.a.l. Bankmed Center 482 Clémenceau Street P.O. Box: 11-0348, Riad El-Solh Beirut, Lebanon Tel: (961-1) 371333 www.medsecurities.com MedProperties Management s.a.l. Al-Shua’a Bldg. Bashir Al-Kassar Street, Verdun Beirut, Lebanon Tel: (961-1) 868864 Continental Trust Insurance and Reinsurance s.a.l. Bloc C. Cebaco Center P.O. Box: 90-967 Baoucharieh Dora, Lebanon Tel: (961 1) 260090 - 265063 Fax: (961 3) 240595 E-mail: [email protected] SaudiMed Investment Company (SaudiMed) Turkland Bank Anonim Širketi (T-Bank) EMKAN Finance s.a.l. Demir Sigorta Anonim Širketi Suite 1104, Futuro Tower Al-Ma’ather Road P.O. Box 63851, Riyadh 11526 Kingdom of Saudi Arabia Tel: (966) 920 000 371 Fax: (966) 920 000 372 www.saudimed.com.sa 5th Floor, Sadat Tower Sadat Street, Hamra P.O. Box 11-1350 Beirut, Lebanon Tel: (961-1) 814900 www.emkanfinance.com 19 Mayis Cad. Sisli Plaza Block A No:7 Sisli 34360 Istanbul, Turkey Tel: (90-212) 368 34 34 Fax: (90-212) 368 35 35 www.turklandbank.com Büyükdere Caddesi Özsezen Is Merkezi No.124/B, Kat: 11 34394 Esentepe Istanbul, Turkey Tel: (0212) 288 68 44 Fax: (0212) 217 23 00 10 11 THE GROUP LIST OF AWARDS AND RECOGNITION Best Investment Bank Award Global Finance (2009 - 2013) Best Trade Finance Award Global Finance (2014) Best GCC Structured Finance Company (SaudiMed Investment Company) World Finance Banking Award (2014) Best Banking Group Lebanon World Finance Banking Award (2012 - 2014) Most Sustainable Bank World Finance Banking Award (2011 - 2014) Best Broker (MedSecurities) Global Investor ISF (2011 - 2014) Best New Investment Product (Med All Cap) (MedSecurities) Banker Middle East (2014) Best Broker Award (MedSecurities) Global Banking and Finance Review (2013) Achievers Award VISA (2014) Best Mobile Application (MedMobile) VISA (2013) 12 13 LIST AWARDS AND RECOGNITIONS 02 | CHAIRMAN’S LETTER 02 | CHAIRMAN’S LETTER upsurge in its Lending portfolio as the SMEs’ client base expanded. Similarly, we successfully increased our Trade Finance volumes and activities. With the continuous introduction of unique retail products and services, our Retail Banking unit also significantly grew this year. Our mounting focus on microfinance was exhibited in the outstanding portfolio of lending and other services offered to economically-active individuals with limited means through our microfinance arm. With respect to investment, our Treasury successfully diversified the Balance sheet profile, minimizing risks while enhancing profitability. Bankmed’s investment banking arms, SaudiMed Investment Company, MedSecurities Investment, and MedInvestment Bank, also contributed remarkably to the Bank’s positive performance. The Lebanese banking sector remains one of the main pillars of economic stability in the country, demonstrating a notable ability to weather challenges. In 2014, the Lebanese economy was able to grow at a real annual GDP of 2% despite the unstable domestic conditions and regional disturbances. The Lebanese commercial banks were able to report a growth of 7% in their consolidated assets to reach USD 175.7 billion by the end of the year, representing more than 350% of the country’s GDP. Capitalizing on the distinctive culture of prudent risk management and sound corporate governance, Bankmed focused on executing a growth strategy reflected in the Bank’s strong results. The Bank’s Total Assets reached USD 15.4 billion at the end of 2014, recording a 12% growth rate, and its Net Profit amounted to a record USD 133.5 million, the highest reported in its history. Customers’ Deposits grew at 10% and Loans to Customers recorded a growth rate of 6% as compared to the previous year. In 2014, Bankmed continued to attend to the evolving needs of its clients across all of its business lines. At the Corporate Banking level, we continued to cater to large Corporate clients, expanding our Corporate Lending portfolio and providing unique services. Small and Medium Enterprises (SMEs) also witnessed an Bankmed successfully expanded the scope of its operations to new locations and cemented its presence in a number of regional and international markets. We continued to offer a wide range of financial solutions through our branches in Cyprus and Iraq in addition to Switzerland, Saudi Arabia, and Turkey through our respective subsidiaries: BankMed Suisse, SaudiMed Investment Company, and Turkland Bank (T-Bank). In Turkey, T-Bank continued to show notable growth. In Iraq, Bankmed expanded its presence by inaugurating a third branch in Basra, after those operating in Baghdad and Erbil. Capitalizing on our success in these regional markets and due to the rising attractiveness of the Dubai International Financial Centre (DIFC) as a major hub for financial activities, we identified a significant opportunity in expanding into the DIFC. Bankmed and its fully owned subsidiary, MedSecurities Investment, thus established a presence in the DIFC in the beginning of 2015. We take great pride in being the first Bank in the MENA region and one of the selected financial institutions authorized to operate in the DIFC under a Category 1 License, the most comprehensive license granted by the Dubai Financial Services Authority. This presence will allow us to cater to the demands of customers who are operating in the GCC area and the wider MENA region. Moving forward, Bankmed will continue to expand its activities and explore new strategic avenues of opportunities in various promising markets. As part of its solid foothold in Corporate Social Responsibility, Bankmed continued during the year to embrace and practice a sustainable approach to business through its significant contributions to economic growth and social development. Guided by our customer-centric culture, which places our clients at the heart of everything we do, we will continue to stand by our customers and support their endeavors as we move together on the growth path. Finally, I would like to extend my sincere appreciation to our stakeholders for their continued support, our clients for their ongoing trust and confidence, and our staff for their commitment. Mohammed Hariri 16 17 CHAIRMAN'S LETTER 03 | EXECUTIVE GENERAL MANAGER’S LETTER 03 | EXECUTIVE GENERAL MANAGER’S LETTER Bankmed continued on a path of steady growth. This growing success was underpinned by developments realized across its various business lines and by sustained expansion into regional markets. 20 In 2014, Bankmed continued on a path of steady growth, reporting significant increases in most financial indicators despite the challenging environment in Lebanon. The Bank’s Net Profit increased to USD 133.5 million, setting a remarkable all-time high. The Total consolidated Assets increased by 12% year-on-year as at end of 2014 to reach USD 15.4 billion, a record growth that is higher than the market average of 6.6% in 2014. Customers’ Deposits reached USD 12.1 billion, representing an increase of 10%, which was above the industry’s average of 6% for 2014. Loans grew by 6% to reach USD 4.7 billion and Loans-to-Deposits ratio stood at 39.1%. The Bank’s Provisions Coverage Ratio exceeded 150%, while the Liquidity Ratio stood at 35.5%, and its Capital Adequacy Ratio stood at 14.3%, exceeding, yet again, the regulatory requirement that is set by the Central Bank of Lebanon. The high liquidity and strong capitalization are reflective of our prudent risk management and sound decisionmaking. Bankmed’s growing success was underpinned by developments realized across its various business lines. While the Bank continues to hold one of the largest commercial lending portfolios in the Lebanese market, it succeeded at attracting new clients and expanding its corporate customer base in spite of the regional turmoil. Moreover, the intensified focus on Small and Medium Enterprises (SMEs) was reflected in the growth of the Bank SME’s Loan Portfolio. In addition, given the increasing demand, Bankmed boosted its Trade Finance activities and volumes, which exceeded USD 2.5 billion in 2014. Similarly, Bankmed’s Retail Banking also witnessed significant growth in 2014 with the continuous introduction of unique retail products and services. The Bank has enhanced its reach by adding new branches, entering new markets, and acquiring a full range of state-of-the-art remote delivery channels. Furthermore, new products and services have been introduced including new loyalty card programs, as well as more user-friendly mobile banking solutions. On the investment front, Bankmed’s Treasury continued to play a major role in the performance of the Bank and to offer its clientele access to local, regional, and international markets. In fact, the increase in the Bank ’s investment portfolio was one of the main factors that contributed to our achievements. Bankmed’s investment banking arms, SaudiMed Investment Company (SaudiMed), MedSecurities Investment (MedSecurities), and MedInvestment Bank (MIB), also played a pivotal role in the Bank’s success. SaudiMed continued to focus on building its core competency business lines of corporate finance advisory and Asset Management solutions. MedSecurities continued to realize increased success in 2014, introducing new investment solutions to a growing client base which is fundamental to the Bank’s strategic regional expansion. As for MIB, it continued to complement Bankmed’s investment banking services, strengthening further the Bank’s position in the market. In terms of technological developments, this year witnessed the launching of several projects as well as the enhancement of existing systems. Among the most significant projects was the establishment of a strategic longterm partnership with Oracle to install a new cutting-edge universal banking system. We also continued to provide state-of-the-art business solutions to support infrastructure upgrades and to optimize operational efficiency with an aim in keeping up with our clients’ expectations and in enhancing their banking experience. In parallel, our regional and international expansion was successfully sustained in markets in which we are already present. Our subsidiaries in Switzerland and Turkey, BankMed Suisse and Turkland Bank (T-Bank) respectively, witnessed notable achievements throughout 2014. BankMed Suisse’s Liquidity Portfolio continued to grow throughout the year, while its Assets under Management witnessed a year-on-year increase of 33% to reach USD 1.6 billion. With respect to T-Bank, it maintained its growth momentum; the bank’s Total Assets recorded a year-onyear growth of 24% in line with the bank’s strategy, while its Net Profits doubled. Similarly, our overseas branches continued to contribute to the Bank’s success. In Iraq, Bankmed inaugurated a third branch in Basra following the establishment of Baghdad and Erbil branches. The Bank still realizes a growth opportunity in the country despite the challenging operational environment. Furthermore, given the well-entrenched position of our Banking Group in the region as well as the growing importance of the Dubai International Financial Centre (DIFC), as one of the world’s most prominent financial hubs. Bankmed and its fully owned subsidiary, MedSecurities Investment opened in early 2015 corporate and investment branches in the DIFC. Through this presence, Bankmed became the first bank in the MENA region to operate under a Category 1 license, the most comprehensive license granted by the Dubai Financial Services Authority (DFSA), while MedSecurities will operate under a Category 3 license. Moving forward, Bankmed will continue to explore expansion opportunities regionally while cementing its presence in existing markets. As a socially responsible institution, Corporate Social Responsibility (CSR) remains one of the main pillars of our business operations. In 2014, we continued to embark on adopting initiatives that reflect our CSR strategy, conducting business while integrating social, ethical, and environmental dimensions in all aspects of our activities. One of the major initiatives is our continuous drive for expanding our microfinance, which lies at the heart of our CSR mission. Finally, I would like to thank our valued customers for their continued trust and loyalty, our Board of Directors and Shareholders for their continuous support and contributions, and our hardworking staff for their unwavering dedication. Mohamed Ali Beyhum 21 EXECUTIVE GENERAL MANAGER'S LETTER 04 | CORPORATE GOVERNANCE GOVERNANCE FRAMEWORK BOARD OF DIRECTORS EXECUTIVES BANKMED’S COMMITTEES COMPLIANCE INTERNAL AUDIT 04 | CORPORATE GOVERNANCE GOVERNANCE FRAMEWORK Principles Bankmed is committed to practicing and promoting a responsible and sound corporate governance policy. The Board of Directors is actively involved in setting the highest standards of Corporate Governance and exercising strong oversight of the management team. The Bank emphasizes a set of fundamental principles that include: protecting shareholders’ rights, respecting and treating equitably the interests of all stakeholders, defining the responsibilities of the Board of Directors and Transparency the Executive Management, pursuing a policy of full disclosures, transparency, and sound practice, as well as empowering the functions of internal and external auditors as well as those of other Banking supervisors. The Board appoints senior and executive managers for key positions in the Bank and ensures that these managers have the necessary skills and knowledge to manage their divisions as well as the appropriate control over the key individuals in those areas. Summary of the Code of Ethics and Professional Conduct The “Code of Ethics and Professional Conduct” (the “Code”), which is regularly updated and communicated to the Bank’s entire staff, requires all employees to avoid activities that may result in conflict of interest between customers or employees. It also requires all employees to be alert against money laundering activities and exercise honesty and due diligence when performing their duties. Disclosure Policy Function The Board of Directors of Bankmed is actively involved in setting the highest standards of Corporate Governance and exercising strong oversight of an independent management team. These standards are founded on the core principles of transparency and accountability at all levels of the organization and are ultimately safeguarded by a strong commitment to a high moral standard of honesty and integrity. The Board and the Bank’s Management are committed to fully comply with established best practices in Corporate Governance including those set by the Central Bank of Lebanon, Banque du Liban (BDL) namely those stipulated in Circular No. 106 and Corporate Governance Guidelines adopted by the Association of Banks in Lebanon (ABL) based on Basel Committee’s recommendations concerning the Principles for enhancing Corporate Governance. Bankmed is committed to provide a timely, accurate, and balanced disclosure of all material information about the Bank to the broadest possible audience. This Disclosure Policy demonstrates the Bank’s commitment to transparency in reporting obligations to its stakeholders. To ensure transparency, the Bank’s Annual Reports disclose correct and fair accounting information prepared in accordance with applicable standards. The disclosed financial statements include complete financial information and data, not just summaries. The statements are kept confidential until officially published in a way that will reach the audience in a timely manner. In order to maintain transparency and fair dealings with related parties, the Bank is committed to apply the requirements of Articles 152 and 158 of the Lebanese Money and Credit Law and Commercial Law respectively, which require strict approval rules and conditions on the Bank’s facilities granted to any member of its Board, Executive Management or principal shareholders or to members of their families. Facilities are subject to the pre-approval of the Shareholders’ Assembly and Board and are secured by adequate and sufficient collaterals. 24 25 CORPORATE GOVERNANCE BOARD OF DIRECTORS Board Responsibilities and Composition The Board of Directors oversees the development of the Bank’s overall business strategy and the decisions made by the Senior Management in the pursuit of strategic objectives. The Board of Directors assesses the appropriateness of the strategy, and the extent of its success. There is an approved Charter for the Board that clearly defines its structure, powers, responsibilities, obligations, liabilities and the powers of the Chairman of the Board. The Bank’s By-Laws require that any amendment to such powers be subject to the Shareholders’ Assembly approval. The Board is composed of 9 real members, 7 of them are non-executive members while many are independent. This composition helps in strengthening the objectivity of the Board’s monitoring; it also enables the members to allocate the necessary time and effort to fulfill their responsibilities. Although it is not required by local regulations to separate the roles of the Chairman and the General Manager (CEO), the Board has nominated a separate senior Executive General Manager (EGM) to carry out many of the executive responsibilities vested in the General Manager’s role in order to achieve the appropriate checks and balances. Bankmed’s Board of Directors Executive/ Independent Non-Executive Audit Committee Risk Committee Special Credit Committee Remuneration Committee Mr. MOHAMMED HARIRI Executive Chairman (CHAIRMAN) Mrs. NAZEK HARIRI Non-Executive Mr. BASILE YARED, ESQ. x Mr. HANI FADAYEL x Mr. MAROUN ASMAR Non-Executive Chairman Member Chairman Member Member Member Member Mr. STANISLAS DE Executive Member HAUSS BONCZA H.E. Dr. GHAZI YOUSSEF x Member Chairman H.E. Mrs. RAYA HAFFAR x Member EL-HASSAN Mr. RICARDO RAHME, ESQ. Non-Executive Member GROUPMED S.A.L. (HOLDING) 26 27 CORPORATE GOVERNANCE BOARD MEMBERS’ PROFILES MOHAMMED HARIRI NAZEK HARIRI Chairman of the Board of Directors and General Manager Member Mr. Hariri is the Chairman of GroupMed (Holding), Bankmed and its subsidiaries, Saudi Lebanese Bank, MedInvestment Bank, Al Mal Investment (Holding) in Lebanon, BankMed Suisse S.A. in Switzerland, and SaudiMed Investment Company in Saudi Arabia, and the Chairman of GroupMed International Holding Limited in Dubai. He is the Chairman of Oger Telecom in Dubai, Türk Telekomünikasyon, TTNET, and Avea Illetisim Hizmeltleri in Turkey, and CELLC in South Africa. Mr. Hariri is also Vice Chairman (Finance and Investments) of Saudi Oger Limited. He is a board member of Arab Bank-Jordan and serves on the board of directors of various companies of the Saudi Oger Group, including 3C Telecommunications (PTY) in South Africa, Ojer Telekomünikasyon in Turkey, and Oger International and Entreprise de Travaux Internationaux (ETI) in France. Mr. Hariri is a member of the board of directors of the Association of Banks in Lebanon. Mrs. Hariri, the wife of H.E. late Prime Minister Rafik Hariri, is a Board Member of GroupMed (Holding), Bankmed and Arab Bank. She is also the President of the Rafik Hariri Foundation and several other humanitarian, cultural, and educational institutions in Lebanon as well as in the Gulf region. She is the First Ambassador of the International Osteoporosis Foundation, as well as President of this Foundation’s 206-A Bone Fund, and President of Nazek Hariri Welfare Center for Special Education. In addition, she is the President of the Beirut Festivals Association, Vice-President of the Chronic Care Center, Lebanon, Member of the Board of Trustees of the Children’s Cancer Center, Lebanon, Member of the “Nahda Philanthropic Society for Women,” Saudi Arabia, Member of the Board of Trustees of the “Welfare Association,” Member of the Board of Trustees of Jordan Education Association as well as the Co-Chairperson of the Rafik Hariri UN-Habitat Memorial Award. GROUPMED S.A.L. (HOLDING) Member GroupMed is the principal shareholder of Bankmed and one of the largest banking and financial groups in Lebanon, with a growing regional presence. 28 29 CORPORATE GOVERNANCE BASILE YARED, ESQ. GHAZI YOUSSEF Member Member Mr. Yared is an attorney at law, with law offices in Beirut. He is the Chairman of Bankmed’s Audit Committee and a member of the Special Credit Committee. He, inter alia, is a Board Member of GroupMed (Holding), MedInvestment Bank, BankMed Suisse, Interaudi Bank in New York, and GroupMed International Holding limited in Dubai. He also serves as a Board member at The Lebanese Company for the Development and Reconstruction of the Beirut Central District (Solidere) and Solidere International, as well as Saudi Oger and affiliates. Mr. Yared is also a Board member of the Ecole Supérieure des Affaires (ESA). Dr. Youssef is the Chairman of the Remuneration Committee and member of the Risk Committee. Dr. Youssef is also a Board Member of MedInvestment Bank, Saudi Lebanese Bank, and MedSecurities Investment. Dr. Youssef served as an Economic Advisor to the late Prime Minister H.E. Rafik Hariri and acted as the Secretary General for the Higher Council for Privatization. Dr. Youssef is currently the Chairman of the Board of Directors of Middle East Airport Services, and he also serves as Board Member at Cedrus Invest Bank. Dr. Youssef has been a member of the Lebanese Parliament since 2005. HANI FADAYEL Member Mr. Fadayel is the Chairman of Bankmed’s Risk Committee and a member of the Special Credit Committee. He also serves as a Board Member of MedInvestment Bank, Saudi Lebanese Bank, and GroupMed International Management Holding. Mr. Fadayel also serves as a Board member of INVESTBANK Jordan and GroupMed Reinsurance and Brokers. Mr. Fadayel is former Assistant CEO of Arab Bank in Jordan and was previously Gulf Regional Manager of Arab Bank. He had also worked at Citibank/SAMBA. Mr. Fadayel has extensive experience in Corporate and Project Finance, Credit Risk Management, Retail, Treasury, and General Management. MAROUN ASMAR RAYA HAFFAR EL-HASSAN Member Mrs. El-Hassan is a member of Bankmed’s Audit Committee and a Board Member of MedInvestment Bank and Saudi Lebanese Bank. From November 2009 until June 2011, Mrs. El-Hassan served as the Minister of Finance in Lebanon. Mrs. El-Hassan was recently appointed as the Chairman-General Manager of Tripoli’s Special Economic Zone. Earlier in her career, she was an Advisor to the Minister of Economy and Trade. In the mid 90’s, she supervised the implementation of expenditure management reforms at the Ministry of Finance. She also served as Project Director at the Prime Minister’s Office, working on the elaboration of the Government’s Economic and Social Reform Agenda. Member Mr. Asmar is a member of Bankmed’s Audit, Risk, and Remuneration Committees. He is also the Chairman-General Manager of MIB Investment (Holding), GroupMed Insurance Brokers. He also serves as a Board Member of Saudi Lebanese Bank, MedInvestment Bank, and GroupMed International Management Holding Limited. He is the former Dean of the Faculty of Engineering at Saint Joseph University in Beirut and had previously served as the Chairman of the Board of Directors of Electricité du Liban. STANISLAS DE HAUSS BONCZA Member 30 Mr. De Hauss Boncza is a member of Bankmed’s Special Credit Committee and the CEO-General Manager of BankMed Suisse since March 2009. Prior to that, he had spent the last 25 years with Indosuez, Crédit Agricole, and Calyon assuming various senior management positions, most of which are directly related to the Middle East region. RICARDO RAHME, ESQ. Member Mr. Rahme is an attorney at law (member of the Beirut Bar Association) and a member of Bankmed’s Remuneration Committee. He is a Board Member of BankMed Suisse, MedInvestment Bank, and Saudi Lebanese Bank. He is also a Board Member of Continental Trust Insurance and Reinsurance Co., GroupMed Reinsurance Brokers Limited, GroupMed International Management Holding Limited, and Demir Sigorta. He serves as General Counsel of the Saudi Oger Limited Group. Prior to joining Saudi Oger Limited Group, Mr. Rahme worked for five years at Gide Loyrette Nouel as a senior associate in the Department of Structured Financing mainly leverage buy outs (LBO), securitizations and derivatives. 31 CORPORATE GOVERNANCE BOARD COMMITTEES Organizational Structure Marketing & Communication Board of Directors Audit Committee Risk Committee Special Credit Committee Executive General Manager Remuneration Committee The Board Committees include: The Audit Committee assists the Board in the proper discharge of its duties, especially those related to selecting and enhancing the qualifications and independence of external and internal auditors, fairness of the financial statements and related disclosures. This committee is also entitled to ensure compliance with applicable laws and regulations. The Risk Committee assists the Board of Directors in fulfilling its tasks and supervisory role in properly applying the Bank’s Risk Management framework as stipulated in the regulations issued by BDL and the Banking Control Commission (BCC) Circulars. As per BDL Circular No. 133, the Bank established a Remuneration Committee for the purpose of setting the remuneration principles and standards for Bankmed’s staff of all levels. The Committee also oversees the proper Special Projects Retail Banking The Bank formed a Board Special Credit Committee. The Committee is responsible for authorizing new credit or increase in credit limits granted by the Bank’s Executive Credit Committee (ECC) to a client, or several clients forming a single economic group or an interconnected group that leads to a total exposure of USD 100 million or more, net of limits secured by cash collaterals. The Board and its relevant Committees meet regularly with the Heads of Internal Audit, Risk and Financial Control to review policies and to ensure that control functions are properly staffed and that their responsibilities are carried out effectively. The Board and Senior Management assess the quality of Corporate Governance at the Bank on an ongoing basis. The assessment is based on the reviewed results of the activities at the Bank, completed by all control units and by the Bank’s independent examiners. Treasury Retail Non-Resident Consumer Consumer Branch Electronic Banking Relationship Support Credit Network & Delivery - Corporate and Products Retail Liability Channels & Syndicate Products Cards Products Collection implementation of both the Remuneration Principles and Remuneration framework. Advisors Subsidiaries Business Development The Audit Committee, the Risk Committee, the Remuneration Committee, and the Special Credit Committee. Chairman General Manager Legal Advisory Administration Capital Management & Financial Modeling Financial Control Technology & Central Operations Central MIS Information Technology Market & Economic Research Operations Financial Control Human Resources Portfolio Risk Management Small & Medium Enterprises Banking Information Security & Business Continuity Operations Risk Management Institutional Banking Remedial Management International Commercial Banking Corporate Banking Legal Market Risk Management Financial Institutions & Trade Finance Risk Management Commercial Credit Risk Management Consumer Credit Risk Management Credit Administration 32 33 CORPORATE GOVERNANCE EXECUTIVES Samir Mouawad Human Resources Risk Management Marwan Abiad Diala Choucair Ahmad Kanaan Nabil Rafei Najib Abou Merhi Rola Ejjeh Mahmoud Kibbi Joy Saba Sami Akkaoui Saad El Zein Mohamad Loutfi Abdellatif Sidani Ahmad Alwan Muhieddine Fathallah Faten Matar Mazen Soueid Najib Assaad Fadi Flaihan Nicole Melhem Nabil Zakka Fouad Baalbaki Ziad Ghosn Aref Mneimneh Antoine Zeidan Samar Baasiri Nuha Halawani Iman Baba Samir Hammoud* SUBSIDIARIES Afif Makkawi Dinçer Alpman Osama Qirreh Mayada Baydas Samer Salam Financial Control, IT & Central Operations Consumer Relationship - Corporate & Syndicate Capital Management & Financial Modeling Treasury / Foreign Exchange and Treasury Sales International Commercial Banking Information Technology Compliance InfoSec and Business Continuity Nadim Barrage Special Projects Ameen Bissat Governance, Audit and Compliance Marketing & Communication Talent Management and Training Corporate Banking Business Development Retail Banking Financial Institutions and Trade Finance Remedial Management Administration Institutional Banking Advisor Treasury / Money and Capital Markets Legal Advisor Small and Medium Enterprises Banking Legal Management Banking & Finance Financial Control Market and Economic Research Commercial Credit Risk Management Collection Retail Support Remedial Management Mohammed A.G. Itani Consumer Credit Products Adel Jabre Treasury Turkland Bank (T-Bank) MedProperties Management SaudiMed Investment Company Antoine Boustany Raed Jalloul Hatem Chaarani Lina Jebeile Omar Bilani Omar Sultani Joseph Chidiac Samer Jumaa Stanislas de Hauss Boncza Khaled Zeidan Operations Electronic Delivery Channels and Card Products Non-Resident Banking 34 Dania Kaakani EMKAN Finance SaudiMed Investment Company Branch Network and Retail Liability Products Office Manager for Chairman - General Manager Internal Audit Continental Trust / GroupMed Insurance Brokers-Lebanon BankMed Suisse Saudi Lebanese Bank MedSecurities Investment Company 35 * Resigned in March 2015 CORPORATE GOVERNANCE BANKMED’S COMMITTEES Asset and Liability Committee (ALCO) International Committee The ALCO provides significant oversight and governance of the balance sheet as per the requirements of the Banking Control Commission Circular 250. Its main The International Committee’s objective is to abide by the requirements of BDL Circular No.110 concerning the relationship between the Lebanese banks and financial institutions and their affiliates abroad as well as to oversee objective is to monitor and manage the Bank’s assets and liabilities and verify compliance with the Lebanese Central Bank and Banking Control Commission policies and regulations. Major Duties and Responsibilities - Manages the market and liquidity risks and funding resources; - Sets the Foreign Exchange position limits allowed on currencies for the Bank and its affiliates; Major Duties and Responsibilities - Designs the overall interest risk policy of the Bank and set the ceilings and limits for the operations allowed, as well as verifies proper compliance and adherence to it. Executive Credit Committee (ECC) The ECC has the Bank’s wide responsibility for maintaining sound, effective credit risk management process. The ECC is authorized to assess, review, and approve (within its limits) all the major credits and retail products offered by the Bank. Credit facilities comprise any form of credit, such as loans, letters of credit, guarantees, limits for foreign exchange transactions, and other commodities. Major Duties and Responsibilities - Reviews, approves, and delegates approvals to other authorities (within its limits) of all the major credits; - Approves credit retail and consumer products offered by the Bank; the financial condition, risks, and control measures taken by all the international affiliates and evaluate how well each affiliate has achieved its stated objectives. - Monitors the international operations of the Bank as well as the progress toward achievement of the agreed upon goals and objectives; - Reviews and expresses an opinion on the financial position and business letters submitted by the affiliates; - Provides expertise in areas where Committee members have specific experiences; - Provides the Bank’s Board of Directors with an executive summary of all the Committee’s minutes of meetings and submit the quarterly business letters prepared by the affiliates; - Reviews the Internal Audit (IA) reports related to the affiliates and follow on the proper implementation of IA’s recommendations. Anti-Money Laundering and Countering Terrorism Financing Committee The Anti-Money Laundering and Countering Terrorist Financing Committee (AML-CTF) assesses the effectiveness of the Bank’s systems in fighting money laundry and Terrorism Financing activities and reviews the reports sent by the various divisions concerning possible suspicious activities. Major Duties and Responsibilities - Approves Correspondent Banking lines and the allocation and placement of the Bank’s assets including shipments of cash to/from the Bank; - Ensures the classification of loans and the transfer of problematic loans to litigious accounts and/or to Remedial Management Division and the loans write-off. - Reviews and approves the guide for implementing the provisions of the Law on Fighting Money Laundering and the provisions of these Regulations; - Ascertains the proper implementation and effectiveness of the AML-CTF procedures and regulations; - Reviews periodically the AML-CTF procedures and regulations and develop them in line with the latest best practices. - Reviews the reports submitted by the Compliance Unit and the Internal Audit Unit on adopted procedures, unusual operations and high-risk accounts, regarding certain activities. 36 37 CORPORATE GOVERNANCE Information Technology (IT) Overseeing Committee The IT Overseeing Committee ensures that the Bank’s IT strategies, plans policies and projects conform to the business objectives of the whole Bank, and reviews IT operational efficiency. Major Duties and Responsibilities - Prioritizes IT initiatives and projects across the business units and review progress; - Oversees IT deliverables and ensures that it has the needed resources to perform its tasks; - Approves the IT Strategy and Operating Plan, annually and as updated; - Discusses IT service delivery and target improvements. Information Security Committee (ISC) The ISC determines the Information Security Policy as well as ensures the proper implementation of corrective measures recommended by the various internal control units in the Bank. Major Duties and Responsibilities To take the necessary measures to address and define the Information Security Policy and verify compliance with the general guidelines of IT Security mainly through: - Defining and aligning the Information Security Policy, scope, and applicability; Purchasing and Disbursing Committee The objectives of the Purchasing and Disbursing Committee are to decide on the disbursements for certain amounts, to approve purchases within certain limits, to qualify and determine suppliers and to inform senior management about the status of work-in-progress projects. Major Duties and Responsibilities - Allocates and approves the disbursements for certain amounts of purchases; - Approves purchases of assets and Bank applications within certain limits; - Completes bidding and obtains offers from suppliers or service providers for intended purchases. Authorized Signature Granting Committee The Authorized Signature Granting Committee reviews requests to grant and modify authorized signatures to employees. Major Duties and Responsibilities - Ensuring the implementation of the recommendations and issues raised by the IT Security; - Providing guidance for IT Security Breaches and Incidents noted; - Reviewing and approving the Business Continuity Plan for the Bank. - Reviews applications and requests to grant (or cancel) authorized signatures to / from employees at the Bank; - Ensures proper segregation of duties and absence of conflict of interest in granting authorized signatures; - Ensures that the ethical and professional background of authorized signatories fit the predetermined criteria for holding such signatures. 38 39 CORPORATE GOVERNANCE COMPLIANCE INTERNAL AUDIT The Compliance Function assists the Management in verifying that the Bank and its subsidiaries meet relevant regulatory requirements in protecting and enhancing its reputation with its stakeholders to minimize and avoid financial losses. The Function also verifies compliance with all relevant laws and regulations and assists Senior Management in identifying compliance risks. The Function reports deviations to the Board Audit Committee and Senior Management. It ensures proper implementation of the Directives issued by the Central Bank of Lebanon, (BDL), in fighting money laundering and countering terrorist financing by following the highest standards and best practices in implementing the proper due diligence on customers’ accounts and transactions and verifying compliance with relevant laws and regulations. The Compliance Function has succeeded in opening communication channels with the branches, front liners, monitoring units, and the Legal Management Division in Bankmed and other subsidiaries in the Group on one hand, and with the Correspondent Banks (in coordination with the Financial Institutions Division) and the Special Investigation Commission (SIC) on the other hand in order to ensure proper understanding and full abidance with the Anti-Money Laundering (AML) and Countering Terrorism Financing (CTF) regulations. The Compliance Function is independent from any business and other control activities of the Bank. Furthermore, the Compliance program is subject to regular independent reviews by the Bank’s Internal Auditors, External Auditors, and SIC who assess the efficiency of the program and assess the Bank’s compliance with the AML directives. The staff of Compliance collectively have a thorough understanding of banking and financial laws and regulations and are requested to become AML certified through the Certified Anti-Money Laundering Specialists (CAMS) certification. Bankmed Internal Audit (IA) Division assists the Bank in accomplishing its objectives by bringing a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. The IA operates in accordance with an approved Internal Audit Charter which clearly specifies the reporting level, mission and scope of work of the Internal Audit. The IA, independent of the Bank’s Management, is managed by the Head of the Internal Audit Division who, in turn, reports to the Audit Committee and to the Chairman of the Board. The staff of the IA, under the supervision of the Head of the Internal Audit Division, have unrestricted access to all functions, records, property, and personnel; in order to allocate resources, set frequencies, select subjects, determine scopes of work, and apply the techniques required to accomplish the audit objectives. Collectively, the IA has extensive experience and knowhow pertaining to auditing tools and techniques and is composed of dynamic, flexible, and experienced audit staff. The IA encourages and supports the Bank’s Internal Auditors to qualify for the Certified Internal Auditor certification (CIA) and the Certified Information Systems Auditor certification (CISA), creating as such a knowledgeable pool and well-trained team of professional Internal Auditors. While the IA coverage at the Bank is guided primarily by the regulations of the Central Bank and the Banking Control Commission of Lebanon, yet this coverage continuously exceeds such requirements and rigorously complies with International Auditing Standards as well as standards of other related supervisory authorities. Given the steady and gradual expansion of Bankmed Branch network and diversity of operations, the Internal Audit plans to maintain sufficient and adequate Audit coverage and techniques, while maintaining a cost effective approach through: a- Using a “risk-based” audit approach, a methodology that links internal auditing coverage to the Bank’s overall risk management framework. Such a methodology relies heavily on the efficient and effective use of technology in the conduct of its business; b- Developing the IA electronic audit methodology, namely the “Continuous Auditing” methodology, employing one of the most widely used Computer Aided Audit Techniques (CAATs), Audit Command Language (ACL); c- Emphasizing the importance of controls and preventive techniques by requiring Branches to comply with Key Control Elements (KCE) embedded in the banking operations, necessary to prevent incidents of fraud and regulatory non-compliances. 40 41 CORPORATE GOVERNANCE 05 | MANAGEMENT REPORT 05 Real Sector Most Real Sector indicators recorded positive growth in 2014. Primarily, the total number of tourist arrivals increased by 6.3% year-on-year to reach 1,354,647 tourists by the end of 2014. This represents the first positive growth in the Lebanese tourism sector since the beginning of the Arab Spring in 2011. The total flow of passengers at Beirut Rafik Hariri International Airport | MANAGEMENT REPORT BDL Coincident Indicator (yearly average) increased by 5.0%, construction permits issues increased by 4.8%, and the Central Bank of Lebanon (Banque du Liban-BDL) coincident indicator (the composite indicator of economic activity in Lebanon as monitored by the Central Bank) rose by 3.1%. The average inflation rate for 2014 was around 1.2%. 2014 2013 Y-o-Y 273 265 3.1% Real Estate Indicators Construction Permits Issues (in sqm) Cement Deliveries (in tons) Total Value of Cleared Checks (USD billions) Tourist Arrivals 13,546,000 12,925,000 4.8% 5,517,000 5,831,000 (5.4%) 74.4 1,354,647 72.4 2.9% 1,274,362 6.3% Beirut Port Indicators Freight Activity (in thousand tons) LEBANON’S ECONOMIC UPDATE Growth accelerated at a modest pace despite the fragile political and economic situation that continued to loom over Lebanon in 2014. Most economic indicators picked up during the year, albeit below their growth potential. However, the sound monetary policy, the robust banking system, driven by strong financial flexibility and liquidity GDP-current prices (USD billions) Number of Containers Number of Vessels 8,268 0.2% 764,451 758,338 0.8% 2,110 2,026 4.1% Beirut Airport Indicators (passengers) positions, as well as stable remittances from the large Lebanese Diaspora contributed to the high resilience of the economy and financial situation. In fact, despite all of the challenges, the Lebanese Economy was able to achieve a real annual GDP growth of 2.0% in 2014. 2014 2013 49.9 47.6 Real GDP Growth Rate 2.0% 2.5% Inflation Rate-average consumer prices 1.2% 5.7% Source: IMF, Central Administration of Statistics 8,281 Arrivals 3,222,616 Departures 3,332,322 3,219,316 3.5% Transfers 3,030,187 14,419 15,629 6.4% (7.7%) Source: Banque du Liban (BDL) Foreign Sector Lebanon’s Foreign Trade Deficit showed a slight contraction by 0.6% during 2014 to reach USD 17.2 billion at the end of the year, given that the value of imports decreased by a 3.5% (fuel imports went down by 4.0% (USD billions) due to lower prices) while the value of exports decreased by 15.9%. Net capital inflows reached USD 15.8 billion dropping from USD 16.2 billion in 2013. This resulted in a wider balance of payment deficit of USD 1.4 billion. 2014 2013 Imports 20.5 21.2 Exports 3.3 3.9 Foreign Trade Balance (17.2) (17.3) Balance of Payment (1.4) (1.1) Capital Inflows 15.8 16.2 o/w* Remittances 8.9 7.9 Exports/Imports 16.2% 18.5% Capital Inflows/Trade Deficit 91.8% 93.5% Trade Deficit/GDP 34.4% 36.3% (*) of which Source: Banque du Liban (BDL), Lebanese Customs 44 45 MANAGEMENT REPORT Banking Sector Conditions Public Finance The year 2014 witnessed some improvement in fiscal accounts. In fact, Total Fiscal Deficit narrowed by a yearly 27.0% to reach USD 3.1 billion. The main factor behind this drop is the rise in total revenues by 15.5% to reach USD 10.9 billion in 2014 accompanied with a 2.3% contraction in total expenditures that reached USD 14.0 billion in 2014. The amount of expenditures dedicated to the debt service increased by 10.8% from its 2013 figure, to reach USD 4.2 billion. (USD billions) 2014 2013 Total Government Revenues 10.9 9.4 o/w* Customs 1.4 1.4 o/w VAT 2.2 2.2 o/w Total Income Tax** 1.9 1.7 o/w Telecom Transfers 2.0 1.4 Total Government Expenditures 14.0 13.6 o/w EDL Transfers 2.1 2.0 o/w Interest Payments 4.2 3.8 o/w Salaries, Wages, and End of Services Compensations 4.5 4.3 (3.1) (4.2) 1.3 (0.2) Total Government Deficit Primary Government Balance (*) of which (**) Including taxes on income, interests, profits, capital gains, and dividends Source: Ministry of Finance Net Public Debt rose by 7.6% to reach USD 57.3 billion. This upsurge is largely attributed to the rise in local currency debt by 10.0%, while Foreign Currency Debt In 2014, Lebanon’s financial sector performance remained solid with Total Assets reaching around 352% of GDP as of December 2014. The sector’s Total Assets grew by USD 10.9 billion, a 6.6% growth to reach USD 175.7 billion at end-2014. This growth was funded by the rise in the Capital Accounts by USD 1.5 billion, representing a 10.8% year-on-year growth. Total loans to Customers (Residents and Non-Residents) recorded a 7.4% annual growth and reached USD 50.9 billion in December 2014. This is still a healthy growth, considering the relatively difficult operating environment caused by domestic uncertainties and regional instabilities. The Total Customers’ Loan Portfolio represented 29.0% of Total Assets and 34.0% of Total Deposits as of December 31, 2014. (USD billions) Resident Private Sector Deposits represented around 77.0% of Total Deposits, recording USD 114.1 billion in December 2014. Non-Resident Private Sector Deposits represented 21.0% of Total Deposits in 2014, having grown by USD 1.8 billion, representing a 6.4% year-onyear growth to reach USD 30.3 billion. Public Sector Deposits accounted for the remaining 2.0% of Total Deposits, recording USD 3.2 billion at year-end 2014. December 31, 2014 Total Assets 175.7 164.8 6.6% 2013 Y-o-Y Deposits 147.6 139.2 6.1% decreased by 2.0%. As for Gross Public Debt, it grew by 4.9% in 2014 to reach USD 66.6 billion. Resident Private Sector 114.1 107.7 5.9% o/w* in LBP 45.6 42.7 6.8% o/w in FCY 68.5 65.0 5.4% Non-Resident Private Sector 30.3 28.5 6.4% December 31, o/w in LBP 3.9 3.4 14.8% 2014 2013 o/w in FCY 26.4 25.1 5.3% Gross Local Currency Debt, of which: 41.0 37.3 Public Sector Deposits (in LBP) with the Central Bank 13.2 11.4 Loans to Customers with Commercial Banks 20.9 19.8 (USD billions) with Public Entities 5.1 4.7 Other Holders 1.8 1.4 Foreign Currency Debt, of which: with Commercial Banks Gross Public Debt Public Sector Deposits 25.6 26.1 16.3 17.6 66.6 63.5 9.3 10.2 Net Public Debt 57.3 53.2 Gross Public Debt/GDP 133.0% 133.0% Net Public Debt/GDP 115.0% 112.0% Source: Ministry of Finance During 2014, Lebanon benefited from a favorable monetary situation; the Central Bank’s Foreign Reserves reached USD 37.9 billion by the end of 2014, recording a year-on-year increase of 7.3%. These reserves covered 22 months of imports at end-2014, underlining BDL’s strong ability to meet demand for foreign currencies. 3.2 3.0 8.4% 50.9 47.4 7.4% o/w to residents in LBP 12.5 11.1 11.9% o/w to residents in FCY 32.9 30.4 8.4% o/w to non-residents in FCY Capital Accounts 5.5 5.9 (5.9%) 15.7 14.2 10.8% o/w Tier I 14.5 13.0 11.9% o/w Tier II 1.2 1.2 (1.4%) 37.4 37.7 (0.8%) Exposures to Treasury o/w Treasury Bills in LBP 20.9 20.1 4.4% o/w Treasury Bills in FCY 16.5 17.6 (7.4%) Deposits with the Central Bank 63.5 54.4 16.8% Foreign Assets** 18.7 20.7 (10.1%) (*) of which (**) Excluding loans to non-residents Source: BDL, Association of Banks in Lebanon Monetary Conditions 46 The banking sector activity remains mainly driven by Customer Deposits, which constitute the major source of funding. Banks’ Deposits grew by USD 8.5 billion in 2014, recording a 6.1% annual growth. The LBP deposits grew by USD 3.6 billion, a 7.4% growth when compared with the same period in 2013 and the Foreign Currency Deposits increased by USD 4.8 billion recording a 5.3% growth on a year-on-year basis. When coupled with the gold stock, which stood at USD 11 billion at year-end 2014, the foreign assets at the BDL cover more than 100% of the local currency money supply (M2), which indicates a solid footing of the exchange rate peg. 47 MANAGEMENT REPORT MANAGEMENT REPORT The Management Report has been prepared based on the audited consolidated financial statements of Bankmed and the companies in which the Bank has a controlling financial interest (subsidiaries and associates, as applicable) as at December 31, 2014 and December 31, 2013. Bankmed’s Management Report should be read in conjunction with the audited consolidated financial statements as at December 31, 2014, which have been prepared in accordance with International Financial Reporting Standards (IFRS). Growth Indicators Performance Summary in 2014 Bankmed maintained a steady growth in 2014 across all lines of operations and succeeded in weathering uncertainties within challenging environments. The implementation of well-defined strategies along with setting clear priorities for each business unit has allowed Bankmed’s consolidated Total Assets stood at USD 15,420 million as at December 31, 2014 reflecting an 11.8% year- on-year increase when compared to USD 13,790 million as at December 31, 2013. The USD 1,6 30 million increase in 2014 was driven by a (USD millions) Total Assets the Bank to deliver consistent and sustainable growth across various financial indicators. In order to grow its bottom line, Bankmed continued to seek new opportunities powered by its extensive experience in the local and regional banking environment. BALANCE SHEET REVIEW ASSETS rise evident in the majority of the Bank’s asset classes. This reflects the Bank’s commitment to maintain a steady and sustainable growth that has been witnessed over the past years, and it is also an attestation of the soundness and effectiveness of the Bank’s strategy. 2014 2013 2012 2011 2010 CAGR 15,420 13,790 12,507 11,791 11,186 8.4% Cash and Deposits with Central Banks 2,817 2,809 2,441 1,884 1,433 18.4% Total Loans 4,746 4,488 4,334 4,160 3,522 7.7% Total Liabilities 13,919 12,442 11,218 10,803 10,082 8.4% Total Customers’ Deposits 12,123 11,051 9,862 9,478 8,806 8.3% 1,501 1,348 1,289 988 1,104 8.0% Net Interest Income 264 220 210 217 195 7.9% Net Income for the Year 133 128 127 117 106 5.9% Number of Staff (count) 2,408 2,207 2,115 1,954 1,788 7.7% 108 93 92 86 85 6.2% Total Equity Number of Branches (count) Breakdown of Asset Classes in 2014 Total Assets (USD millions) 48 49 MANAGEMENT REPORT Breakdown of Net Loans and Advances by Type of Customer in 2014 Loan Portfolio Total Loans (USD millions) The Loan Portfolio stood at USD 4,746 million as at December 31, 2014 compared to USD 4,488 million as at December 31, 2013, registering a year-on-year growth of 5.7%. The increase in the Loan Portfolio was mainly driven by a 20.5% year-on-year growth in Retail Loans (including mortgages), which stood at USD 863 million as at December 31, 2014 compared to USD 716 million as at December 31, 2013. The continuous introduction of new tailor-made products and services, including strategic alliances with major retailers, new loyalty cards, housing loan services, as well as mobile banking solutions all contributed to the augmentation in the Loans to Retail customers. Lending activities to Small and Medium Enterprises (SMEs) clients reached USD 1,053 million as at December 31, 2014 compared to USD 1,004 million as at December 31, 2013, registering a year-on-year increase of 4.9%. The growth stems from the expansion of the Bank’s operations in Turkey where the Bank has been increasing its share of this line of business through new products and facilities. Also as one of the very few banks targeting this sector in Lebanon, Bankmed offers tailored financial solutions to adequately meet its clients’ financial needs. The largest component of the Loan Portfolio remains Corporate clients whose outstanding loans registered a year-on-year increase of 2.2% as at December 31, 2014 and reached USD 2,830 million. Corporate clients maintain their relationship with Bankmed as it is recognized for its expertise and knowledge in a wide spectrum of sectors, including: Contracting, Real Estate Development, Manufacturing, Wholesale and Retail Trade, Transportation, and Telecommunication. In addition, the Bank’s business solutions have helped its clients manage and expand their own businesses and improve their bottom-line. In addition to enhancing its relationships with existing clients, the Bank welcomed during the year new prime customers, who are leaders in their respective sectors, and thus expanded and varied its client base. This approach is in line with Bankmed’s implementation of a well-diversified strategy ensuring reasonable credit exposure to any one particular industry, and thus reducing high concentration ratios in specific economic sectors. its staff members undergo the necessary trainings in order to always exceed customers’ expectations. In order to be highly accessible to its clients, Bankmed pursued its expansion strategy by adding new branches to its networks in Lebanon and abroad. Two new branches were inaugurated in Lebanon in 2014 in addition to six branches in Turkey. Moreover, the Bank ensures that As illustrated in the following chart, the diversification of Bankmed’s Loan Portfolio ranges across various business activities, from Contracting and Construction, to Manufacturing Industries, to dealings with Private Individuals. Bankmed is always keen on attending to its customers’ evolving needs through its 61 branches and 110 ATMs in Lebanon, one branch in Cyprus, three branches in Iraq, a subsidiary in Switzerland, and a subsidiary in Turkey (with 33 branches). Breakdown of Net Loans and Advances by Economic Sector in 2014 50 51 MANAGEMENT REPORT With respect to the maturity of the Loan Portfolio as at year-end 2014, the majority of the loans are classified as short-term loans, maturing within three months (representing 50.6% of the portfolio), followed by loans maturing within more than five years (representing 15.7% of the portfolio). Breakdown of Net Loans and Advances by Maturity in 2014 Loans denominated in Lebanese Pounds stood at a counter-value of USD 466 million as at December 31, 2014 compared to a counter-value of USD 357 million as at December 31, 2013. The 30.5% year-on-year increase in loans denominated in Lebanese Pounds was mainly driven by a 19.4% year-on-year surge in mortgages. The Loan Portfolio originating from Europe as at yearend 2014 reached USD 1,609 million, registering a yearon-year increase of 14.6% where most of the growth is generated from Turkey. Breakdown of Net Loans and Advances Booked in Europe in 2014 The segregation of the Loan Portfolio by originating country is composed of Lebanon (65.5%), Europe (33.9%), and the Middle East (0.6%). Loans denominated in US Dollar accounted for the largest share of the Loan Portfolio, standing at USD 2,896 million as at December 31, 2014 and remaining flat as compared with the previous year. The Loan Portfolio originating from Lebanon remained stable and reached USD 3,110 million as at December 31, 2014. Loans issued to Retail clients witnessed a year-on-year increase of 37.9% by year-end 2014 when compared with year 2013, reflecting the Bank’s strategy to further strengthen its position in Retail Banking. In addition, mortgage loans to clients witnessed an increase of 20.8% as at December 31, 2014 when compared with year-end 2013. Breakdown of Net Loans and Advances in Lebanon in 2014 Loans originating from Turkey witnessed an increase of 16.4% and reached USD 1,448 million as at December 31, 2014 compared to USD 1,244 million as at December 31, 2013. The growth was driven by an increase in Turkland’s (T-Bank) lending activities to Corporates and SMEs. Loans denominated in Turkish Lira stood at a countervalue of USD 1,034 million as at December 31, 2014 compared to a counter-value of USD 842 million as at December 31, 2013, registering a year-on-year increase of 22.8%. Loan Portfolio by Currency Year-on-Year 2014 Contribution 2013 Contribution (USD millions) Change USD 2,896 61.0% 2,906 64.7% (0.3%) TRY 1,034 21.8% 842 18.8% 22.8% LBP 466 9.8% 357 8.0% 30.5% EUR 259 300 GBP Other Total 5.4% 6.7% (13.7%) 31 0.7% 17 0.4% 82.4% 60 66 1.3% 1.4% (9.1%) 4,746 100% 4,488 100% The loans booked in the Middle East recorded a yearon-year surge of 125% and reached USD 27 million as at December 31, 2014 when compared with last year. The main cause behind the increase is due to a rise in the 5.7% Bank’s lending activities to Corporate Clients, which constitute the majority of the Lending Portfolio in the Middle East. 52 53 MANAGEMENT REPORT Loans Utilization In order to reduce high concentration ratios in specific economic sectors, Bankmed implements a welldiversified strategy ensuring reasonable credit exposure to any particular industry. Throughout 2014, there was a slight shift from loans utilization in the Middle East, Gulf and Africa regions to Europe. However, loans utilization exposures remained the same in the Lebanese market. Loans by Geographical Utilization (%) Bankmed’s Investment Securities portfolio stood at USD 5,374 million as at December 31, 2014 compared to USD 3,810 million as at December 31, 2013. The portion of the Investment Securities portfolio to Total Assets increased to 34.9% as at December 31, 2014. The Fixed Income Securities (Financial Assets Measured at Amortized Cost) exhibited a significant year-on-year increase and reached USD 4,669 million as at December 31, 2014. In this respect, Bankmed’s portfolio of BDL Certificate of Deposits (CDs) stood at USD 2,781 million as at December 31, 2014, going up from USD 1,195 million as at December 31, 2013. On the other hand, holding 2014 Contribution 2013 Contribution BDL Certificate of Deposits 2,781 59.6% 1,195 37.2% Lebanese Government bonds 1,308 28.0% 1,689 52.5% Other Government exposures 418 9.0% 303 9.4% Debt securities issued by banks 93 2.0% 20 0.6% Certificates of deposits issued by banks 30 0.6% Debt securities issued by foreign companies 29 0.6% Fixed income securities reinforcing the highly conservative approach adopted by the Bank. In turn, the provision coverage ratio as at December 31, 2014 is high at 151.4%. Additionally, the Non-Performing Loans to Gross Loans ratio as at December 31, 2014 is 2.8% from 2.2%, which is still considered to be low compared to the market. Investment Securities Breakdown of Portfolio Securities in 2014 (USD millions) Lebanese Government bonds - 8 0.3% 100% 10 0.2% - 4,669 100% 3,215 Securities classified as Financial Assets at Fair Value Through Profit and Loss (FVTPL) stood at USD 439 million as at December 31, 2014 compared to USD 358 million as at December 31, 2013, registering a year-on-year growth of 22.6%. This was mainly driven by an increase in the Bank’s - holding of BDL Certificate of Deposits by USD 54 million to reach USD 93 million as at December 31, 2014, followed by a year-on-year increase of 38.5% in the Bank’s exposure to Lebanese Government bonds which stood at USD 216 million as at December 31, 2014. 2014 Contribution 2013 Contribution 216 49.3% 156 43.6% BDL Certificate of Deposit 93 21.3% 39 10.9% Structured notes-CLN 52 11.8% 62 17.3% Debt securities issued by foreign companies 51 11.6% 49 13.7% Debt securities issued by foreign Banks 11 2.4% 40 11.2% 423 96.4% 346 96.7% 16 3.6% 12 3.3% 439 100% 358 100% Debt securities at FVTPL Equity securities at FVTPL Total securities at FVTPL Strategic Equity Securities witnessed a year-on-year increase of 12.2% to reach USD 266 million as at December 31, 2014, contributing further to the USD 1,564 million total increase witnessed in Bankmed’s Investment Securities portfolio. 54 The restructuring in the Investment portfolio is based on Asset and Liability Management Committee (ALCO)’s decision to enhance profitability and to decrease the Risk Weighted Assets (RWAs) due to the fact that BDL CD’s RWA is Risk Weighted at 50% for Foreign Currencies instruments, while Government of Lebanon bonds are Risk Weighted at 100% for Foreign currency instruments. (USD millions) Structured notes-CLN With regards to collateralization, Bankmed’s Loans Portfolio remained well-collateralized, diversifying away risks associated with lending activities as the majority of the outstanding facilities are backed by secured collaterals. Furthermore, collective provisions as at December 31, 2014 stood at a significant USD 130 million, of Lebanese Government bonds declined from USD 1,689 million as at December 31, 2013 to USD 1,308 million as at December 31, 2014, recording a year-on-year decrease of 22.6%. Insurance Brokers in Saudi Arabia and a 100% equity stake in Continental Trust Insurance and Reinsurance in Lebanon. Bankmed also participated, according to its percentage of ownership, in the capital increase of T-Bank for the amount of TRL 75 million (USD 35 million) increasing the bank’s capital by TRL 150 million. During 2014, Bankmed incorporated two new insurance companies by acquiring 55% ownership of GroupMed 55 MANAGEMENT REPORT LIABILITIES The following table sets forth a breakdown of the Total Deposit Base by tenor and by currency as at December 31, 2014 and December 31, 2013: Total Liabilities (USD millions) (USD millions) December 31, 2014 LBP Base Accounts Less than 1 year 2,868 9,389 12,257 87 944 1,031 7.6% 88 136 1.0% 5 to 10 years 9 100 109 0.8% Over 10 years 19 22 41 0.3% 3,031 10,543 13,574 100% December 31, 2013 LBP Base Accounts Less than 1 year Deposits from banks and financial institutions Customers’ deposits Deposits from related parties 2014 2013 431 386 11,443 10,332 680 719 Borrowings from banks and financial institutions 521 261 499 498 13,574 12,196 Total customers and related parties’ deposits reached USD 12,123 million as at December 31, 2014, recording a year-on-year increase of 9.7%, when compared with last year, and accounting for 89.3% of the Bank’s Total Deposit Base. The continuous increase in the deposit base over the years firmly reflects the increasing confidence in Bankmed. Total Contribution 8,280 10,789 88.5% 1 to 3 years 76 528 604 4.9% 3 to 5 years 25 620 645 5.3% 5 to 10 years 11 99 110 0.9% Over 10 years 20 28 48 0.4% 2,641 9,555 12,196 100% Over the past few years the Bank has been working as part of a strategic decision to increase deposits with longer duration. Bankmed continued to attract deposits with longer maturities and launched several campaigns for this purpose during the year 2014. As at December 31, Certificates of deposits Total Deposit Base FCY Base Accounts 2,509 Total (USD millions) 90.3% 48 Contribution 1 to 3 years (USD millions) product offerings. The Deposit Base recorded a year-onyear growth of 11.3% and reached USD 13,574 million as at December 31, 2014 when compared to year-end 2013. Total 3 to 5 years Total Bankmed’s Total Deposit Base continued to exhibit strong growth as the focus on acquiring and retaining core customer accounts was reinforced with a large variety of FCY Base Accounts SHAREHOLDERS’ EQUITY Total Equity (USD millions) Deposits and borrowing from banks and financial institutions showed an increase of 47.1% and reached USD 952 million as at December 31, 2014 when compared with December 31, 2013. Despite the slight increase in the ratio of deposits and borrowing from banks and financial institutions to the Total Deposit Base from 5.3% at year-end 2013 to 7.0% at year-end 2014, Bankmed continued to demonstrate little dependency on external sources of money and remained reliant on the loyal core customer base. 56 57 MANAGEMENT REPORT Bankmed strives to maintain an adequate capital base with the aim to cover risks inherent in its business operations. The adequacy of the Bank’s capital is actively managed and monitored in line with Basel framework and as required by the Central Bank of Lebanon. The primary objective remains to ensure that the Bank maintains a sufficient level of capital exceeding regulatory requirements and to achieve a strong credit rating, while optimizing shareholders’ value and managing the planned business expansions. Bankmed’s Total Equity stood at USD 1,501 million as at December 31, 2014, compared to USD 1,348 million as at December 31, 2013, recording a year-on-year increase of 11.4%. The increase witnessed in 2014 was largely at the level of Tier I Equity which registered the following changes: - Issuance of Series III redeemable, non-cumulative and perpetual Preferred Shares for a value of USD 150 million at a price of USD 100 per share. This issuance was partially offset by a call option exercised by the Bank on its Preferred Shares Series I redeemable, noncumulative and perpetual shares by USD 100 million. - Issuance of 1 million ordinary shares, distributed to the ordinary shareholders for an aggregate value of LBP 10 billion (USD 6.63 million), transferred from the retained earnings to the share capital. - Increase in reserves and retained earnings transferred from Net Profits for a total of USD 59.6 million. - Other equity changes and non-controlling interest contributed further to the rise in the Bank’s Equity. December 31, (LBP millions) 2014 2013 Credit Risk Market Risk Operational Risk Risk-Weighted Assets 2014 2013 2014 2013 418 411 Share capital Preferred share 375 325 Legal reserves 78 67 2 2 124 109 33 18 222 203 12 (2) Property revaluation reserve Reserve for general banking risks Reserves for assets acquired in satisfaction of loans Retained earnings Cumulative change in fair value of financial assets through other comprehensive income Currency translation adjustment (59) (47) Profit for the year 125 123 1,330 1,209 171 139 1,501 1,348 Equity attributable to the group Non-controlling interest Total equity Regulatory Requirements The Group monitors the adequacy of its capital using the methodology and ratios established by the Central Bank of Lebanon. These ratios measure Capital Adequacy by comparing the Group’s eligible capital with its balance sheet assets, commitments and contingencies, as well as notional amount of derivatives at a weighted amount to reflect their relative risk. 58 The Central Bank of Lebanon requires each bank or banking group to hold a minimum level of regulatory capital of LBP 10 billion for the Head Office, LBP 0.5 billion for each local branch and LBP 1.5 billion for each branch abroad. In addition, the Bank is required to observe the minimum Capital Adequacy Ratio set by the regulator at 11.5% as at December 31, 2014, in addition to a 2% capital conservation buffer set by the Management. 950,852 872,158 13,513,730 12,706,184 2014 2013 Tier I Capital 1,757,387 1,601,900 Tier II Capital 176,283 178,257 1,933,670 1,780,157 Total Eligible Capital Capital Adequacy Ratio December 31, 2014 2013 13.00% Capital Adequacy Ratio-Tier I and II As Asat atDecember December31, 31, (USD millions) (USD millions) 436,565 December 31, Capital Adequacy Ratio-Tier II 11,397,461 592,899 (LBP millions) Capital Adequacy Ratio-Tier I Bankmed’s capital structure is outlined in the below table: 11,969,979 The Bank’s Capital Adequacy Ratio continued to show growth in 2014. As at December 31, 2014 the ratio stood at 14.31% compared to 14.01% a year earlier and to an 11.5% required by the Central Bank of Lebanon. This strong capitalization reflects the Management’s focus on sustaining an adequate position to cover 12.61% 1.31% 1.40% 14.31% 14.01% inherent risks in various business activities, while coping with the Bank’s future growth strategies. In line with the Basel III new capital regulations, the Central Bank of Lebanon had established a road map in 2011 for gradually increasing capital requirements in phase-in arrangements with the implementation taking place between the years 2012 to 2015. OFF-BALANCE SHEET Trade Finance By offering a full range of commercial lending products and services including term loans, syndications, subsidized loans, and working capital facilities, Bankmed provides solutions to help its clients manage their working capital, protect and expand their business, and increase revenues. In addition, Bankmed is recognized for its expertise and knowledge in offering its customers customized Trade Finance facilities incorporating all associated products and services. Bankmed manages a growing network of more than 230 prime local, regional, and international correspondent banks virtually meeting clients’ needs in every corner of the globe. The Bank structures, coordinates, and finds solutions that cater to all possible customers’ Trade Finance needs by negotiating the best terms and conditions with its correspondents on behalf of its clients. Despite the challenging environment in which the Bank operates, the total number of Trade Finance transactions, increased from 12,404 in 2013 to 12,823 in 2014, recording a year-on-year growth of 3.4%. With respect to business volumes, the Trade Finance activities increased from USD 2,441 million in 2013 to USD 2,554 million in 2014, recording a year-on-year increase of 4.6%. 2014 2013 Types of Transactions Number Volumes Number (USD millions) Volumes (USD millions) Import L/Cs 1,946 1,007 1,905 801 Import Collections 1,274 124 1,198 133 Export L/Cs 265 210 241 229 Export Collections 998 643 723 224 L/G Issuance Total 8,340 570 8,337 1,054 12,823 2,554 12,404 2,441 MANAGEMENT REPORT 59 In 2014, the greatest growth in the type of Trade Finance transactions was witnessed in the Export Documentary Collections whose transactions volumes handled for its customers, witnessed a year-on-year increase of 187.1% when compared with the previous year to reach USD 643 million. The number of transactions also recorded the greatest year-on-year growth of 38.0% to reach around 1,000 transactions. In addition, the average size of each ticket grew from around USD 310,000 in 2013 to around USD 644,000 in 2014. Collections transactions handled on behalf of clients, it recorded a year-on-year increase of 6.3% compared to 2013 to reach 1,274 transactions, while in terms of volumes, there was a slight decrease from prior year. The transaction count of Export Letters of Credit received from overseas correspondents increased from 241 transactions in 2013 to 265 transactions in 2014, recording a year-on-year growth of 10.0%, while the average size of each ticket decreased from around USD 950,000 in 2013 to around USD 792,000 in 2014. The volume of Import Letters of Credit reached USD 1,007 million as at December 31, 2014, registering a year-on-year growth of 25.7% when compared with the year 2013, while the number of transactions increased by 2.2% from prior year. Regarding the number of Import Documentary Despite the challenging regional environment, Bankmed was able to maintain its leading position in the issuance of Letters of Guarantee with remarkable 8,340 facilities being issued in 2014; however, the volume of Letters of Guarantees experienced a decrease from last year. INCOME STATEMENT REVIEW Net Income (USD millions) Fiduciary Deposits and Assets under Management Fiduciary Deposits and Assets under Management (USD millions) The Bank’s Net Profit reached USD 133.5 million as at December 31, 2014 compared to USD 128.1 million as at December 31, 2013, registering a year-on-year increase of 4.2% and reflecting a strong momentum despite the challenging business environment. The registered profit in 2014 mirrors the strong performance in different business lines, while maintaining a prudent approach in identifying business opportunities. It is worth noting that despite the fact that the largest portion of the income is generated in Lebanon, T-Bank remains one of the major subsidiaries of the Bank outside Lebanon, with a contribution to the consolidated bottom line of the Bank by approximately 11.1%. Net Interest Income Net Interest Income (USD millions) Fiduciary Deposits and Assets under Management increased by USD 218 million to reach USD 1,111 million as at December 31, 2014 recording a year-on-year increase of 24.4% when compared with year-end 2013. The USD 218 million increase mainly arose from an increase in Fiduciary Deposits and Assets under Management stemming from the Bank’s entities in the Middle East. The growth was particularly driven by the business activities of SaudiMed Investment Company in Riyadh, Saudi Arabia, one of Bankmed’s investment arms, which is licensed and regulated by the Saudi Capital Market Authority. It is important to note that Bankmed’s only private banking arm, BankMed Suisse in Geneva, Switzerland complements the Bank’s banking activities by offering a wide range of private banking products as well as asset management to high net worth individuals, mainly from the Middle East and the GCC region. 60 61 MANAGEMENT REPORT Bankmed’s Net Interest Income reached USD 263.8 million as at December 31, 2014 compared to USD 220.2 million as at December 31, 2013, recording a year-on-year increase of 19.8%. This was mainly due to two major factors: a quantity effect as assets grew by 11.8% from prior year-end, and a price effect as existing assets were restructured into higher yielding longer tenor instruments. Taken separately, interest income experienced a year-onyear growth of 17.2% and reached USD 799.6 million, while, in turn, interest expense also increased with the growth of the Deposit Base from USD 461.8 million for the year 2013 to USD 535.7 million for the year ending December 31, 2014. Segmental Analysis of Net Interest Income by Geography The Bank’s entities’ contribution to the Net Interest Income for the year-ending 2014 was mainly distributed as follows: 63.9% from Lebanon; 34.3% from Europe; and 1.8% from the Middle East. Net Interest Income generated in Lebanon reached USD 168.5 million as at December 31, 2014, registering a year-on-year growth of 15.4% when compared with the same period in 2013. This was mainly driven by a 12.1% year-on-year increase in Interest Income during the aforementioned period to reach USD 596.7 million. Net Interest Income generated by the Bank’s entities in Europe reached USD 90.6 million as at December 31, 2014, registering a year-on-year growth of 28.8% when compared with the same period in 2013. This was mainly driven by a 29.4% year-on-year increase in Interest Income during the aforementioned period to reach USD 210.7 million. Net Interest Income generated by the Bank’s entities in the Middle East, reached USD 4.7 million as at December 31, 2014 registering a year-on-year growth of 23.8% when compared with the same period in 2013. This was mainly driven by a 15.6% year-on-year increase in Interest Income during the aforementioned period to reach USD 6.8 million. December 31, (USD millions) 61.9 54.5 Net results on financial instruments at fair value through profit or loss 22.4 18.1 Gain from financial assets measured at amortized cost 60.3 122.2 Other operating income 60.0 59.1 204.6 253.9 Bankmed registered a 13.6% increase in Net Fee and Commission Income from operations which reached USD 61.9 million as at December 31, 2014 compared to USD 54.5 million as at December 31, 2013. Net results from financial instruments classified at Fair Value Through Profit or Loss reached USD 22.4 million, an increase of 24% as at December 31, 2014 despite the moderate capital markets activity. Gains on Financial Assets Measured at Amortized Cost decreased in 2014 to USD 60.3 million when compared to USD 122.2 million in 2013. This decrease is mainly due to the fact that 2013 registered exceptional gains deriving from the de-recognition of Financial Assets. The core Non-Interest Revenues earned during the year can be mainly attributed to the activities of (DFSA) to operate in the Dubai International Financial Center (DIFC) complementing its well-positioned local presence. It expects to launch its operations in the first quarter of 2015. Revenues remained firm in 2014 compared with 2013, despite the volatility in the market. In addition, the firm managed to grow its private placements business by 83% over the same period. MedSecurities’ Assets under Custody stood at USD 1.04 billion and its average trading volume reached USD 650 million as at December 31, 2014. December 31, (USD millions) 2014 2013 Total fee and commission income 74.8 64.3 Total fee and commission expense 12.9 9.8 Net fee and commission income 61.9 54.5 Total Operating Expenses by a USD 2 million increase in administrative expenses, as well as a USD 2 million increase in depreciation and amortization charges. Cost to income ratio increased from 58.1% as at December 31, 2013 to 61.5% as at December 31, 2014, in line with the expansion strategy that is being implemented by the Bank. 2014 2013 Net fee and commission income Total In addition, MedSecurities received an in-principle approval from Dubai Financial Services Authority Total Operating Expenses reached USD 287.6 million as at December 31, 2014 compared to USD 275.4 million as at December 31, 2013, recording a slight year-on-year increase of 4.4%. This reflects the Management’s decision to control its expenses while focusing on specific areas of growth. The USD 12.2 million increase is mainly driven by a USD 8.2 million increase in staff expenses, followed Non-Interest Income international customer base. The year 2014 was mainly characterized by a strong performance with the execution of private placements, acting as a placement agent for a venture capital investment and the launching of an in-house fund in collaboration with S&P. MedSecurities was involved in three private placements in Real Estate, Retail, and Digital Media and recognized as the highest profile deals in the market. Operational Expenses (USD millions) Bankmed’s Treasury Services and the brokerage and investment services arm MedSecurities Investment (MedSecurities), a wholly owned subsidiary of Bankmed, as well as insurance activities in Lebanon through GroupMed Insurance Brokers (GMIB) and Demir Sigorta, the insurance company in Turkey. The Treasury Services are ideally-positioned to help clients identify their Treasury requirements through its professional and well-experienced team and providing clients with access to both local and regional markets. It also offers Online Trading Platforms, which enable clients to conduct their FX and trading activities using downloadable web-based and mobile applications. MedSecurities offers value-added products, brokerage and investments solutions as well as trading of different financial instruments to a growing local, regional and 62 63 MANAGEMENT REPORT 06 | RISK MANAGEMENT 06 RISK MANAGEMENT | RISK MANAGEMENT The Risk Management Report covers Bankmed’s Pillar III disclosures on capital and risk management as at December 31, 2014. It also provides useful information on the capital and risk profile of Bankmed Group. Stakeholders can assess the scope of Basel application and capital adequacy, risk exposures and risk assessment processes. Bankmed’s capital adequacy is calculated at a consolidated level using the Basel III requirements of the Basel Committee on Banking Supervision (BCBS) and the local regulators’ requirements set by the Banking Control Commission of Lebanon (BCC). The Bank’s individual offshore subsidiaries are directly regulated by the respective local banking supervisors who set and monitor their capital adequacy requirements. In addition, the stand-alone capital adequacy ratio of Bankmed subsidiaries is also reported to the BCC. The following Bankmed’s ratios are reported in accordance with the minimum capital requirement calculation methodology under Pillar I of Basel framework reported as at December 31, 2014: Total Capital Adequacy Ratio Tier I Capital Adequacy Ratio Common Equity Capital Ratio 14.31% 13.00% 8.54% It is important to note that following the new capital regulations set by Basel III, the Central Bank of Lebanon (BDL) issued new regulations in 2011 defining the new required capital ratios for Lebanon. In addition, the procedure includes a gradual implementation plan which starts on December 31, 2012 and ends on December 31, 2015. The principles adopted for the management and control of risk and capital are described herein. Strategic Risk, Reputational Risk, Liquidity Risk, and Compliance. Bankmed is engaged in a wide variety of businesses; this engagement requires us to identify, measure, and manage the risks effectively, and enables us to allocate capital among these businesses properly. The Risk Management policies are in place to identify and quantify such risks, set appropriate limits in line with defined risk appetite, ensure control, and monitor adherence to the limits. Bankmed’s Risk Management identifies and assesses the implications of relevant risks on the Bank’s operations and recommends appropriate ways to mitigate these risks. The main focus of Risk Management is to ensure the Bank’s risk profile is in line with its risk strategy and business objectives. The Bank’s key risks include: Credit Risk, Market Risk, Operational Risk, Concentration Risk, Business Risk, Risk Appetite Risk Appetite is established at Bankmed through a dialog between the businesses and Risk Management in light of the Bank’s strategy, stakeholders’ requirements, and risk-reward trade-offs. Bankmed’s Risk Appetite is defined across five categories within the Board’s approved risk appetite framework: • Group-level risk appetite metrics • Specific risk-type limit setting • Stakeholders’ targets (e.g. target debt rating, dividend policy, minimum acceptable capital ratio, etc.) • Policies, procedures and controls for all types of Risks including Compliance and Legal • Zero-tolerance statements for Reputational Risk and Compliance Risk Appetite defines the risk tolerance level that is translated into financial targets for Business Units throughout the Bank. It is measured and expressed in terms of quantitative and qualitative measures, which are periodically tested against downside events. - Quantitative measures mainly include earnings volatility vs. budget, regulatory capital adequacy, external Agency Rating target, exposure concentration limits, Value at Risk (VAR), and maximum acceptable losses etc. - Qualitative measures are expressed in terms of policies, procedures and controls in order to limit risks that may or may not be quantifiable. The testing of the Bank’s Strategic and Business Planning is formally conducted against the Group’s Risk Appetite in order to determine consistency with the Bank’s risk appetite and risk tolerances and adjust its Strategic Planning accordingly. Basel Implementation in Lebanon December 31, Phase-in Arrangements 2012 2013 2014 2015 * Min. Common Equity 5.0% 6.0% 7.0% 8.0% Min. Tier I Equity 8.0% 8.5% 9.5% 10.0% 10.0% 10.5% 11.5% 12.0% Min. Total Equity (Tier I + Tier II) * These capital requirements include a Capital Conservation buffer set at 2.5% of RWAs designed to ensure the build-up of capital outside periods of stress, which can be drawn down when losses are incurred Stress Testing Stress Testing is a core component of the Bank’s Internal Capital Adequacy Assessment Process (ICAAP) and The Asset and Liability Management (ALM) processes. Stress-tests assess the ability of Bankmed to continue its operations under stressed conditions. Scenario analysis involves discussions between Risk Management and Senior Management to review the impact of the stresstests on the Bank’s capital ratio and liquidity position. In addition, through these discussions the Management ensures that the Bank has adequate capital and liquidity reserves to absorb the impact of these stressed scenarios if they were to occur. It also ensures that these scenarios are in line with the assumed stress tests’ factors. The Bank takes into account the results of stress testing when assessing its internal capital requirements where the results are included in the Bank’s ICAAP and communicated to the Board of Directors for review and feedback. 66 67 RISK MANAGEMENT Risk Measurement and Reporting The purpose of Bankmed’s Risk Measurement and Reporting is to ensure that risks are comprehensively captured and accurately assessed, and they are reported to the Board’s Risk Committee on an ongoing basis, or more frequently as the need arises, for those risks to be efficiently managed and mitigated. Risk Measurement and Reporting, prepared at the Group level, are implemented in major operating subsidiaries through a common reporting model for integrated risk management and control. Each operating subsidiary is responsible for the quality and performance of its assets’ portfolio as well as reporting and monitoring all risks in those portfolios in accordance with the Group standards. (LBP millions) Composition of Regulatory Capital 2013 2012 Eligible Paid-Up Share Capital 630,000 620,000 620,000 Eligible Reserves and Retained Earnings and Net Income 721,535 661,743 677,126 Deductions from Common Equity (297,095) (268,982) (220,206) (Including Goodwill and Intangible Assets) Deductions from Common Equity of Unconsolidated Banking - - (95,779) and Financial Entities’ Investments Acceptable Minority Interests under Common Equity Risk Culture Unrealized Losses on Debt Securities Classified at Fair Value through OCI A strong Risk Culture helps reinforce the management of risk and return throughout the Bank. It requires a forward-looking perspective on key risk issues and a good assessment of those risks. Risk Culture and Risk Awareness of all types of risks, including Compliance, Legal and Reputational, are key issues in the strategic decisions of the Board, Senior Management, and in every employee’s daily business. The principal objectives of Bankmed’s Risk Management function are to maintain, across the Bank, a strong risk culture and a robust risk policy and procedures framework. In 2014, Risk Management has launched training programs with a consultancy firm on risk awareness in order to strengthen risk culture among all employees. Bankmed nurtures a positive learning culture by conducting internal and external risk education training seminars in addition to constant communication through day-to-day on the job interaction and periodic Business/Risk Management meetings. Bankmed strongly believes that “Risk is everyone’s Business,” and that effective risk management requires a strong, robust, and pervasive risk management culture. December 31, 2014 Net Common Equity after Deductions Non-Cumulative Preferred Shares 107,533 80,609 (8,303) 56,007 (14,994) (117,016) 1,153,670 1,078,376 920,132 565,313 489,938 489,938 Deductions from Tier I of Unconsolidated Banking - - (15,367) and Financial Entities’ Investments Acceptable Minority Interests Under Tier I Capital Net Tier I Capital Asset Revaluation Reserves 38,405 33,587 33,604 1,757,387 1,601,899 1,428,306 3,213 3,213 3,213 Unrealized Gains on Debt Securities Classified 13,268 5,706 20,723 at Fair Value through OCI (Only 50% to be reported) General Provisions Acceptable Minority Interests Under Tier II Total Tier II Total Regulatory Capital (Tier I +Tier II) 129,078 142,468 98,651 30,724 26,870 22,403 176,283 178,257 144,990 1,933,670 1,780,156 1,573,296 Risk Governance The above mentioned risk culture and vision required the adoption and implementation of an Enterprise Risk Management Framework (ERMF) covering Bankmed, its affiliates, and subsidiaries. Bankmed Group considers that the foundation for a successful risk management is the pragmatic and consistent implementation of a strong Risk Governance, which reflects the importance placed by the Board, the Board Risk Committee and Executive Management on shaping the Group’s risk strategy and managing risks effectively. The Bank’s Risk Governance is based on the following “three lines of defense:” • Businesses, which own their risk exposures; • Risk Management, which provides an independent oversight of risks; • Internal Audit, which evaluates the overall effectiveness of the control environment. Core Capital or Common Equity Capital Core Capital or Common Equity Capital includes shareholders’ common share capital, retained earnings, and legal reserves. The book values of goodwill and intangible assets are deducted from Core Tier I Capital, and the other deductions from Common Equity is the Unrealized Gross Losses on Debt Securities Classified at Fair Value through Other Comprehensive Approach (OCI). Other regulatory adjustments under Common Equity Capital entail the deduction of participating interests in unconsolidated banking and financial entities. Tier I Capital or Additional Tier I Capital REGULATORY CAPITAL Bankmed primary objective is to meet regulatory capital requirements while optimizing shareholders’ value and maintaining a strong capital base to support planned expansions. The Bank’s capital adequacy is actively managed Bankmed’s Total Regulatory Capital is divided as follows: and monitored using the rules and ratios established under the Basel III Accord and as adopted by the BCC. The Total Regulatory Capital (Tier I and II) in accordance with the BCC guidelines is as follows: Tier I Capital is primarily composed of Non-Cumulative Preferred Shares. In 2014, Bankmed increased its Tier I Capital by USD 50 million through the issuance of 1.5 million new Series III Redeemable, Non-Cumulative and Perpetual Preferred Shares of USD 150 million at an issue price of USD 100 per share. In parallel, Bankmed exercised a call option on USD 100 million preferred shares and redeemed 1 million Series I Preferred Shares at a redemption price of USD 100 per share. 68 69 RISK MANAGEMENT Tier II Capital Bankmed’s Overall Capital Requirement Tier II Capital consists of 50% of unrealized gains on listed securities classified at Fair Value through OCI. It also includes reserves arising from the Revaluation of Properties and General Provisions held against unidentified losses which qualify for inclusion within Tier II Capital up to 1.25% Credit Risk-Weighted Assets. CALCULATION OF CAPITAL REQUIREMENTS Bankmed’s capital requirements are calculated based on the regulatory provided formulae. Pillar I’s risk types are reported in accordance with Basel guidelines and include credit, market, and operational risks. Bankmed, its Affiliates, and Subsidiaries (LBP millions) 2014 December 31, 2013 Risk Type % of Total Requirement December 31, 2014 2013 Capital Requirement (LBP millions) Capital Requirement (LBP millions) Credit Risk 89% 957,598 911,797 Market Risk 4% 47,432 34,925 Operational Risk 7% 76,068 69,773 100% 1,081,098 1,016,495 Total BDL Intermediate Circular # 282 Required Capital Ratios 2012 Risk Weighted Assets 13,513,730 12,706,184 11,720,412 Credit Risk 11,969,979 11,397,461 10,419,841 Market Risk 592,899 436,565 498,366 Operational Risk 950,852 872,158 802,204 Common Equity Tier I Capital 1,153,670 1,078,375 920,131 Tier I Capital 1,757,387 1,601,900 1,428,306 Tier II Capital 176,283 178,257 144,990 Total Tier I and Tier II 1,933,670 1,780,157 1,573,296 Common Equity Ratio 8.54% 8.49% 7.85% Year-End 2014 Year-End 2015 7.00% 8.00% Tier I Ratio 13.00% 12.61% 12.19% 9.50% 10.00% Total Capital Ratio 14.31% 14.01% 13.42% 11.50% 12.00% Bankmed continues to ensure that capital is well invested in order to meet expected future requirements in the context of a more demanding regulatory environment. In addition, by increasing its capital base through the issuance of preferred shares and increasing retained earnings, Bankmed has exceeded the Regulatory Capital minimum requirements as shown below: Capital Requirements for Credit Risk Credit Risk exposure is disclosed in accordance with the Standardized Approach. Under this approach, exposures are assigned to portfolio segments based on the type of counterparty and/or the nature of the underlying exposure. Credit Risk generates the largest regulatory capital requirement of risks and accounted for 89% of the Bank’s overall capital requirement. Bankmed’s well diversified business activities resulted in different risk-taking by the Bank’s business divisions including investment and credit risks. The investment risk is dominated by the investment in sovereign exposure in the banking book and the trading book which gives rise to both credit and market risks. (The latter is calculated under Market Risk Capital charge). The credit risk is originated from exposures to Financial Institutions, Corporates, Small and Mediumsized Enterprises (SMEs), Retail Lending, Home Loans, Commercial Mortgage Loans and Other Assets such as Equity Investment and Shares’ Participation, Fixed Assets, etc. Other Assets on the regulatory balance sheet, such as Intangible Assets and Goodwill, are excluded from the calculation of the credit risk exposure value as they are deducted from capital. The credit risk exposures also exclude the assets that are classified at Fair Value through Profit and Loss. Credit Risk-Weighted Assets (LBP millions) Bankmed Capital ratios versus Regulatory Capital Requirements as at December 31, 2014 By Counterparty Type Sovereign Banks and FIs December 31, 2014 2013 2,947,653 2,380,213 963,148 1,219,458 Corporate 4,010,189 3,851,065 Small & Medium Enterprises (SMEs) 1,739,136 1,671,624 Retail 185,563 178,245 Residential Mortgage Loan 173,163 140,775 Commercial Real Estate Mortgage Loan Other Assets Total 527,646 473,373 1,423,481 1,482,708 11,969,979 11,397,461 70 71 RISK MANAGEMENT Credit Risk-Weighted Assets (LBP) Market Risk Capital Requirements LBP (000) Capital Requirements for Operational Risk Capital Requirements for Market Risk In order to calculate Market Risk regulatory capital requirement, the Standardized Approach is also adopted. Trading, investment and asset and liability management activities expose the Bank to interest rate, equity, and foreign exchange risks. • Interest Rate Risk is the impact on banks’ earnings and market value of equity due to changes in interest rates. This risk is of two-fold: Specific and General risks. - The capital charge related to the Specific Risk increased from LBP 17,937 million in 2013 to LBP 22,098 million in 2014, following the increase in RWA from LBP 224 billion in 2013 to LBP 276 billion in 2014. (LBP millions) Market Risk Type RWA - The capital charge related to the General Risk increased from LBP 13.4 billion in 2013 to LBP 20.5 billion in 2014, following the increase in RWA from LBP 168 billion in 2013 to LBP 257 billion in 2014. • The total capital required to cover Risks for Equity Position increased from LBP 2,840 million in 2013 to LBP 3,826 million in 2014. • The capital required to cover the Foreign Exchange Risk increased from LBP 730 million in 2013 to LBP 940 million in 2014. (LBP millions) RWA Operational Risk. The Bank’s capital requirement for Operational Risk for 2014 compared to 2013 is as follows: December 31, One Year % 2014 2013 Change in Operational Risk Capital Capital Requirements RWA Capital Requirements Requirement Operational Risk 950,852 76,068 872,158 69,773 (Basic Indicator Approach) 9% The capital requirements for Market Risk, calculated on assets and positions held in the trading book, are presented in the table below: December 31, 2014 2013 % Change Capital Requirements RWA Capital Requirements Interest Rate-General Risk 257,089 20,567 167,713 13,417 Interest Rate-Specific Risk 53% 276,226 22,098 224,215 17,937 23% Equity-General Risk 23,916 1,913 17,754 1,420 35% Equity-Specific Risk 23,916 1,913 17,754 1,420 35% Foreign Exchange Risk 11,751 940 9,130 730 29% 592,899 47,432 436,565 34,925 36% Total Bankmed adopts the Basic Indicator Approach (BIA) to calculate the regulatory capital charge requirements for Movement in Risk Weighted Assets in 2014 Total Risk-Weighted Assets (RWAs) amounted to LBP 13,514 billion in 2014 compared to LBP 12,706 billion reported in 2013, representing a 6% year-on-year increase. The LBP 807.5 billion increase in Total RWAs toward the end of 2014 is derived from changes witnessed in Credit, Market and Operational RWAs is outlined below: • The 5% year-on-year increase witnessed in Credit RWAs was mainly driven by the ongoing growth in the Bank’s overall businesses locally and abroad. • The 36% year-on-year increase in Market RWAs was mainly driven by a 22% year-onyear increase in the Trading Assets’ Portfolio. 72 73 RISK MANAGEMENT December 31, RWAs Change 2014 2013 2014-2013 (LBP millions) % Change Risk-Weighted Assets 13,513,730 100% 12,706,184 100% 807,546 6% Credit Risk 11,969,979 89% 11,397,461 90% 572,518 5% Market Risk 592,899 4% 436,565 3% 156,334 36% Operational Risk 950,852 7% 872,158 7% 78,694 9% Eligible Capital 2014 % 2013 % Capital Change 2014-2013 % Tier I Capital 1,757,387 91% 1,601,900 90% 155,487 10% Tier II Capital 176,283 9% 178,257 10% (1,974) (1% ) Total Capital 1,933,670 153,513 8.6% 1,780,157 Stress Testing Bankmed’s exposure to changes in market behavior is captured by Stress Testing, detecting unfavorable events that could have plausible effect on the Bank. Liquidity Risk Liquidity Risk is the risk that a bank will have insufficient funds to meet its obligations. In order to ensure an adequate Liquidity level at all times, LEVERAGE RATIO Following the outbreak of the global financial crisis, the Basel III framework introduced the Leverage Ratio, a non-risk-based measure supplementing risk-based capital requirements. This was preceded by a decision from financial markets forcing the banking sector to reduce its leverage. The ratio captures both the on and off-balance sheet sources of the bank’s leverage and aims to restrict the build-up of excess leverage in the banking sector. This decision was necessary as the buildup of excessive on and off-balance sheet leverage in the banking system was recognized as an underlying cause of the global financial crisis. As per Basel III, banks are expected to meet a 3% Tier I Leverage Ratio, calculated by dividing Net Tier I capital by Total on and off-balance sheet exposures. As per Basel III, banks are required to report the Leverage Ratio to their national supervisors as of January 2013 including a parallel run period. The period, spanning from January 2013 and ending in January 2017, will assess if the proposed minimum Leverage Ratio of 3% is appropriate with a view to migrating to a Pillar I requirement on January 1, 2018. In January 2014, the Basel Committee published its final Leverage Ratio framework, along with the public disclosure requirements applicable from January 1, 2015. The BCC introduced to its Quantitative Impact Study (QIS) the calculation of the Leverage Ratio. Bankmed Leverage Ratio, based on the aforementioned equation, equaled to 6.75% as at December 31, 2014, well exceeding the minimum requirement of 3%. Market Risk at Bankmed is overseen by the Market Risk Department as per established risk management policies and limits within which exposure to market risk is monitored, measured and controlled with strategic oversight by Asset and Liability Management Committee (ALCO). The Market Risk Department is responsible for developing and implementing market risk policy and risk measuring/monitoring methodologies and for reviewing all new trading and investment products and product limits prior to ALCO’S approval. Interest Rate Risk in the Banking Book 74 Interest Rate Risk in the Banking Book is the risk of loss arising from changes in market interest rates that could result in fluctuations in the fair value of investments or in the future cash flows. Under the guidance of ALCO, this risk is measured Market Risk Department monitors the funding profile and the diversification level of its funding sources as well as regulatory and internal Liquidity ratios. Funding Profile MARKET RISK The Market Risk Department is an independent risk management function that reports to the Head of Risk Management Division. The Department works closely with Business Lines in Bankmed to identify and monitor market risks and define related policies and procedures. Market Risk arises from movements in interest rates, equity prices, credit spreads, foreign exchange rates and commodity prices causing a decline in earnings and economic value. Stress Testing is carried out on a regular basis and the findings are directly reported to Senior Management. The test is conducted by applying a 200 basis points Interest Rate shock on interest rate sensitive Assets and Liabilities in local and foreign currencies. through interest rate gaps methodology and closely monitored by the Market Risk Department. The Loan-to-Deposit ratio was at 39% as at December 31, 2014. Contingency Funding Plan Under Contingency Funding Plan (CFP), sources of liquidity are primarily derived from assets, repos, additional deposit gathering and to a lower extent from incremental interbank borrowings. The plan is set to cover Event Scenario in a local market. As part of the analysis of liability runoff, historical events or statistical core deposit analysis should be considered when projecting liquidity under a CFP. In addition, prospects for loan collection and repayments are considered. The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) Bankmed adopted the early implementation of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), the two liquidity measures introduced by Basel Committee in 2010. The Liquidity Coverage Ratio (LCR) The LCR ensures that the Bank maintains an adequate level of unencumbered high-quality assets in LBP and FCY that can be converted into cash to meet the 1-month Net Cash Outflow in an acute stress scenario. LCR calculation includes a minimum requirement of 60% effective January 1, 2015 and will be gradually increased to reach 100% on January 1, 2019. As at December 31, 2014, Bankmed’s LCR stood at 129% in LBP and 451% in FCY well above the minimum requirement. Net Stable Funding Ratio (NSFR) Under this rule, financial institutions need to maintain a ratio above 100% effective 2018. The objective of this ratio is to ensure that long-term assets are funded with at least a minimum amount of stable liabilities in relation to their liquidity risk profiles. It aims to limit over-reliance on short-term wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all on and off-balance sheet items. As at December 31, 2014, Bankmed’s NSFR stood at 183% in LBP and 120% in FCY exceeding the minimum regulatory requirement. The Asset and Liability Management, Sungard ALM tool, is adopted to generate and monitor interest rate in the banking book. 75 RISK MANAGEMENT Systemic Risk Market Risk in Bankmed’s Subsidiaries The Interest Rate Risk (Trading and Non-Trading) and the Liquidity Risk measurement and monitoring are performed at the subsidiary level and the consolidated results are reported to Bankmed’s Headquarters in Beirut, Lebanon. The reports include: the Market Risk Capital Charges, Interest Rate Risk Gap Analysis, Liquidity Gap Analysis, Stress Testing and Liquidity Ratios (where applicable). Operational Risk Management is an integrated umbrella with all underlying Operational Risk elements like AntiFraud, Business Continuity, and Policy and Procedure forming a part of the Operational Risk Management chain. Operational Risk Management is embedded in each Business area, and the Risk Mitigation techniques are applied to each activity, product, and processes. The analysis of operational risk-related events, potential risk, and other early-warning signals are in focus when developing the processes. The exceptions and quality deficiencies’ issues are documented and monitored for resolution at senior levels. Bankmed uses Key Risk Indicators (KRI) as an essential instrument for pro-active Operational Risk Management. KRIs for Human Resources, IT and Processes and 8% Minimum Capital Ratio Requirement to be allocated specifically to safeguard the banks from this risk. Business Risk OPERATIONAL RISK Operational Risk arises from inadequate or failed internal processes, people, systems and/or external events. A robust internal control coupled with quality supervision and management is integrated in managing Operational Risk as it is inherent in all the activities of the Bank, and in all interactions with external parties. Lebanese regulators have imposed more stringent requirements to mitigate the effects of Systemic Risk. BDL has required an additional 1.5% to be added to the Compliance should help predict changes in the Bank’s Operational Risk profile. They have two main targets: the prevention of Operational Risk events and the timely detection of unfavorable events. The mitigating techniques include: preventive control measures, robust Information Security framework, strong Anti-Fraud/Compliance regime, comprehensive Physical/Access security and Business Continuity Plans together with crisis management preparation and a broad insurance coverage for handling major incidents. Each business area at Bankmed is primarily responsible for managing its own Operational Risk. Operational Risk Management develops and maintains a framework for identifying, assessing, monitoring and controlling operational risks and supports the line organization for implementing the framework. The techniques and processes for managing operational risks are structured around the risk sources as described in the definition of Operational Risk. This approach improves the comparability of risk profiles throughout the organization including Bankmed’s branches and subsidiaries. Business Risk mainly arises from adverse business decisions, critical strategic choices, or unforeseen changes in the business and regulatory environment, or technological changes. At Bankmed, a specialized committee assesses the risks stemming from adopting new investments, credit products, and information systems acquired or developed internally. Once these risks are identified, preventive control procedures are taken into account, and the concerned business units develop the related policies and procedures in order to manage these products. Reputation Risk An adverse perception of the image of the Bank on the part of customers, counterparties, employees, regulators, or any other stakeholders, could give rise to Reputational Risk. Hence, their trust is an essential condition to carrying out day-to-day business operations. The Bank regards the management of Reputation Risk in terms of the Bank’s image, services, and products offered as an extremely serious matter. Reputational Risk is mainly mitigated by a set of policies and procedures and in line with the Bank’s Code of Ethics. Legal and Compliance Risks Breaches or non-compliance with Anti-Money Laundering (AML), Laws regulations, legislation, or ethical standards can contribute to the rise of Legal and Compliance Risks. They are mitigated by various policies and procedures. OTHER RISKS (UNDER PILLAR II) Other risks covered under Pillar II include Concentration Risk, Systemic Risk and various risks like Business Risk, Reputation Risk, Legal Risk and Compliance Risk. Concentration Risk Concentration Risk is captured through monitoring and limits’ setting of large exposures, sector lending, collateral type, geographic spread and product type. The Bank’s credit concentration by sector, obligor and country of utilization is subject to internal limits. 76 Any exception over the stated limits is regularized or hedged by eligible mitigates. Major mitigation actions taken by the Bank for managing Concentration Risk include: reducing limits on risk concentration; adjusting the business strategy to address excessive concentration; diversifying asset allocation; liquidating certain assets; hedging through obtaining additional collateral/guarantees. 77 RISK MANAGEMENT 07 | SUPPORT LINES 07 Operations Division | SUPPORT LINES FINANCIAL CONTROL, INFORMATION TECHNOLOGY AND OPERATIONS The Financial Control, Information Technology and Operations Divisions reinforced their commitment to the overall business objectives and Bankmed’s growth strategy. This was achieved through the implementation of the highest financial and reporting standards, cost efficiency, and sound risk management practices. Bankmed’s long-term strategic plans and business decisions act as key drivers in these divisions’ planning process, where the best practices with the latest technology are incorporated. Financial Control Division The Financial Control Division provides accurate and timely information to the senior management and ensures that the Bank is meeting regulators’ requirements in countries where it is present and is complying with the applicable tax laws. The consolidated financial statements, as prepared by the Division, are in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The Division formulates the financial policy of the Bank and acts as a business partner to the senior management and the separate business lines. In addition, it provides comprehensive information on financial and capital management, financial planning and reporting, accounting policy and control, as well as taxation. The Division’s main purpose remains to enhance the asset quality and to quantify and manage the risks associated with the assets and liabilities in order to maintain the flow of earnings and the long-term sustenance of the Bank. In 2014, the Division launched the financial hub of the data warehouse in line with the Bank’s strategy to continuously strengthen its business intelligence tools and address expanding business plans and data mining needs. Information Technology Division 80 The Information Technology (IT) Division continues to provide business solutions, support infrastructure upgrades, and optimize its operational efficiency in order to support customer service. With a commitment to provide state-of-the-art technology, the year witnessed the launching of multiple projects as well as the enhancements of existing applications and systems. Within this context, some of the projects, which were successfully completed include: enhancement of the Mobile Payment Solution, a Mobile Treasury Trading Platform, the enablement of Card Mass Production with Instant Issuance, the e-mail engine and IP Telephony migration, as well as the establishment of new infrastructure specifications for the Data Center. The selection of the new cutting-edge universal banking system, initiated in the prior year and finalized during 2014, paved the way for a strategic long-term partnership with Oracle. In addition, a fully dedicated governance structure was established for the execution of this project. The project is expected to be completed in 2017. Through the integration of technology, data, and processes, Bankmed is continuously meeting its customers’ evolving demands, enabling them to conduct their businesses efficiently. The Operations Division continues to focus on the development, enrichment and execution of operating models to increase efficiency, improve clients’ service levels, and reduce operational risk. The Division supports individual business lines at every stage of their respective transactions, handles complex exceptions, manages risk, and drives change. The Division ensures that all operations remain in full compliance with evolving regulatory requirements. The Division’s goal is to achieve optimum operational efficiency through the implementation of Straight-Through-Processing (STP), which simultaneously reduces risk and cost, and streamlines processing practices. The Operations Division has enabled business to flow smoothly whenever the Bank enters new markets or launches new products. Furthermore, the Division supports Bankmed’s international branches in Limassol, Cyprus and in Baghdad, Basra and Erbil in Iraq, assuring accurate and efficient executions of every transaction. The payments team continues to ensure persistent support to Bankmed’s clients by rendering timely and reliable services. Payment Operations were rewarded several Performance Excellence Awards for their exceptional quality of payment messages and financial transfers at an STP rate of above 98%. The Operations Division is constantly working on identifying and mitigating potential risks. In case of any disruption to the normal operating environment, emergency plans including Business Contingency and Disaster Recovery Planning can be immediately activated if needed. Furthermore, continuous reviews and updates to the operational policies and procedures and special trainings on various issues such as moneylaundering are in place to enable staff to detect and report suspicious transactions. LEGAL SUPPORT The Legal Management Unit is committed to provide Bankmed, its affiliates, and subsidiaries with continuous and efficient legal support in a timely manner. The Unit has a strategic role in an evolving and a more regulated, complex and competitive environment. The Legal Unit provides an ongoing and daily assistance and legal advice to Bankmed Group and all local and foreign branches. The Unit cooperated during year 2014 with other related Divisions and newly established branches for the drafting and updating of the Bank’s forms and policies and procedures. It also assisted in the implementation of the Foreign Account Tax Compliance Act (FATCA) proceedings. In addition, the Unit provided tailor-made solutions adapted to customers’ needs in connection with their banking activities, investment and development strategies. The Legal Unit during 2014 was involved in a variety of local and international transactions such as drafting, reviewing and negotiation of documentation and agreements relating to Corporate Finance, Project Finance, Trade Financing activities, establishment of funds abroad, Structured Finance, Cross Border Financing, Private Placement Transactions, Risk Participations and several complex deals’ structuring including various international club deals and syndications for local and foreign established companies, as well as opening and operations of Bankmed (Dubai) and MedSecurities Investment (Dubai). ADMINISTRATION DIVISION Bankmed’s Administration Division ensures that all logistics to Bankmed’s head offices and branches as well as the Bank’s international branches are in place in order to maintain an uninterrupted and ongoing performance. Within this context, the Division’s dedicated team is focused on ensuring the best practices in procurement and services delivering the best quality at a minimal cost in several areas of expenditure. The Division adopts standard efficient policies to manage, utilize, and preserve fixed assets, along with the preparation of monthly general expenses report. In order to support the Bank’s ongoing growth, the Division, and within its capacities, provides continuous architectural and civil supervision to all branches that are under construction or undergoing face-lifting. In addition, regular maintenance visits and innovated quality control are introduced in order to avoid work interruptions. In parallel, the Division continued to deploy its services to handle the Bank’s insurance policies and monitor their abidance with the international norms and standards, ensuring that they are always concluded in the Bank’s best interest. SUPPORT LINES 81 MARKET AND ECONOMIC RESEARCH Headed by a former IMF Economist, the Market and Economic Research Division conducts economic and market analyses covering local, regional, and global economic developments. The Division publishes, on a weekly basis, a newsletter covering Lebanon’s economic, financial, and business sectors. The Division issues special monthly reports analyzing various sectors of the Lebanese economy, such as real estate, food production, tourism, pharmaceuticals, and other sectors. In addition, the Division, in collaboration with the Beirut Traders Association, issues “The Beirut Traders Association– Bankmed Investment Index.” The index assesses the reality of the wholesale sector in an aim to assist the caretakers of this sector in generating educated decisions for future investments. The Division also publishes quarterly country reports, in Arabic, covering economic and business developments as well as the financial sectors in Iraq and Saudi Arabia. Furthermore, the Division supports other divisions within the Bank by providing internal reports that identify opportunities and challenges in the local, regional, or global markets. MARKETING AND COMMUNICATION In 2014, Bankmed’s Marketing and Communication Unit confirmed its vital role in supporting the Bank’s Retail and Corporate communication. Within its framework, the Division continued to promote new products and services, cementing further the Bank’s position as a leader in product communication. In addition to Retail campaigns, which mainly covered home loan advertisements, the Unit succeeded at promoting Bankmed’s corporate image through the 70-year corporate ad campaign, which marked the Bank’s 70 th anniversary. The Marketing Division continues to set up strategies aimed at endorsing the Bank’s image locally and in countries where the Bank is present. HUMAN RESOURCES The Human Resources (HR) plays a pivotal role in translating the Bank’s mission to support its staff and cater for their well-being and professional growth. The Division contributes effectively to Bankmed’s business strategy by aligning Human Resources functional areas with the Bank’s priorities. In order to attract and retain a skilled, competent workforce that share Bankmed’s organizational mission and vision, HR partners with the Bank’s business lines. Human Resources aims to foster the professional growth and development of Bankmed’s business, making it an employer of choice as it is reflected by the Bank’s application database which exceeded 22,000 by the end of 2014. Throughout the year, the recruitment team screened more than 700 applicants and selected 163 new recruits which included 94 fresh graduates and 69 professionals. It is worth mentioning that the Bank’s new recruits are evenly distributed between genders (48% females; 52% males). Remuneration Policy and Practices In 2014, and in line with Central Bank of Lebanon’s Circular No. 133, Bankmed established the Remuneration Committee. The Committee established the remuneration guidelines under a well-defined policy which is the “Remuneration and Performance Evaluation Policy” or The Policy. 82 The Policy is designed to: safeguard the principles of sound and equitable compensation practices by encouraging performance-based remuneration, and balanced Risk Management; provide a competitive compensation package; achieve internal and external equity; support the core principles of Bankmed’s compensation scheme for performance; align staff interests with those of the Bank and its stakeholders, by emphasizing incentives while considering the fact that different circumstances may warrant different target pay mixes. The compensation package is a combination of fixed and variable elements, mainly: basic salary, performancebased merit, performance-based bonus, additional benefits, and severance pay. Amounts of compensation paid annually are currently disclosed in accordance with the International Financial Reporting Standards. Currently, there are no claw backs or differed remuneration payments, and applying such schemes will depend on future long-term business strategies. TALENT MANAGEMENT AND TRAINING Talent Management and Training (TMT) continued to devote all of its resources and efforts to manage talents, develop careers, and facilitate staff learning, to keep Bankmed’s human power committed, competent, and productive. Simultaneously, TMT continued to offer Lebanese university students an outstanding opportunity to acquire a professional experience in the banking field. In 2014, 15,365 training hours were invested to deliver 100 training programs for 2,057 participants. A comprehensive Training Program catering for technical and soft arrays was offered through diversified training approaches. Distinctively, this year, most of the programs were developed and delivered by Bankmed teams, thus reflecting the cooperative team spirit amongst teams and a sense of commitment of staff. In the occasion where the required expertise was not available, TMT relied on external consultancy to fill the gap. *For more information on TMT activities throughout 2014, please refer to the Human Development Section in Bankmed’s 2014 CSR report titled “Growing Stronger Together.” INFORMATION SECURITY AND BUSINESS CONTINUITY Bankmed’s Information Security and Business Continuity (ISBC) securely protects customers and the Bank’s information assets by adhering to and encouraging a highly security-focused culture. Bankmed has earned its customers’ trust through the professional delivery of robust and secure products and services. In addition, the business continuity plan is periodically rehearsed for execution in the event of disruption. In addition, the Bank’s employees regularly receive up-to-date information in order to identify new risks and respond immediately to potential security hazards as well as to adopt high security measures. Bankmed has an active Business Continuity Management Program to ensure our customers receive our products and services as intended, particularly in times of crisis. Bankmed ensures that adequate Business Continuity Plans are in place and are regularly rehearsed. CORPORATE SOCIAL RESPONSIBILITY Realizing the key role it can play in prompting economic, human, environmental, as well as social and cultural development, Bankmed integrated Corporate Social Responsibility (CSR) within its business strategy. The Bank has set several principles aimed at reflecting its commitment to sustainability. Reducing the Bank’s carbon footprint emission, taking care of the environment, educating the public on the importance of being ecofriendly, supporting cultural and sports activities across the country, and developing the community by helping those who are most disadvantaged and marginalized, remain the top priorities on the Bank’s CSR list. *For more information on Bankmed’s CSR initiatives, please refer to Bankmed’s 2014 CSR report titled “Growing Stronger Together.” SUPPORT LINES 83 08 | INDEPENDENT AUDITORS’ REPORT 08 | INDEPENDENT AUDITORS’ REPORT Ernst & Young p.c.c. Commerce & Finance Building 1st Floor Kantari, Beirut P.O. Box: 11-1639, Riad el Solh Beirut - 1107 2090, Lebanon Ernst & Young p.c.c. Commerce & Finance Building 1st Floor Kantari, Beirut P.O. Box: 11-1639, Riad el Solh Beirut - 1107 2090, Lebanon Tel: +961 1 760 800 Fax: +961 1 760 822/3 [email protected] ey.com/mena Tel: +961 1 760 800 Fax: +961 1 760 822/3 [email protected] ey.com/mena To the Shareholders Bankmed S.A.L. Beirut, Lebanon We have audited the accompanying consolidated financial statements of Bankmed S.A.L. and its subsidiaries (collectively the “Group”), which comprise the consolidated statement of financial position as at December 31, 2014, and the consolidated statements of profit or loss, profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 86 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements, within the framework of the existing banking laws in Lebanon. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditors’ Responsibility Opinion Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Bankmed S.A.L. as of December 31, 2014, and of its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Beirut, Lebanon April 13, 2015 Deloitte & Touche Ernst & Young INDEPENDENT AUDITORS' REPORT 87 BANKMED S.A.L. CONSOLIDATED STATEMENT OF FINANCIAL POSITION BANKMED S.A.L. CONSOLIDATED STATEMENT OF FINANCIAL POSITION December 31, LIABILITIES Notes 2014 LBP’000 December 31, ASSETS Notes 2014 LBP’000 2013 LBP’000 2013 LBP’000 Deposits from banks and financial institutions 19 649,477,279 581,694,664 Customers’ deposits at fair value through profit or loss 20 40,972,933 48,627,557 Customers’ deposits at amortized cost 21 17,208,933,949 15,526,699,743 Related parties’ deposits at amortized cost 22 1,025,397,069 1,083,916,658 184,768,794 84,024,058 Cash and deposits with central banks 6 4,246,672,076 4,234,924,901 Acceptances payable 13 Deposits with banks and financial institutions 7 1,517,252,238 2,565,970,261 Financial assets at fair value through profit or loss 8 660,826,620 539,910,164 Borrowings from banks and financial institutions and central banks 23 784,768,655 392,901,106 Reverse repurchase agreements and loans to banks 9 853,981,089 198,492,122 Other liabilities 25 234,264,059 208,090,172 10 6,861,684,290 6,481,516,008 Certificates of deposit 24 752,063,550 750,882,861 Provisions 26 102,274,918 79,449,152 Loans and advances to customers Loans and advances to related parties 11 292,442,624 284,439,172 Investment securities 12 7,440,312,635 5,204,249,456 Customers’ acceptance liability 13 184,768,794 84,024,058 Investments in associates and other investments 14 85,397,308 125,071,655 Assets acquired in satisfaction of loans 15 439,418,106 437,346,385 Goodwill 16 176,915,027 180,230,045 Property and equipment 17 298,942,501 289,877,193 Other assets 18 186,916,876 162,969,295 Total Assets 23,245,530,184 20,789,020,715 Guarantees and standby letters of credit 2,051,556,487 1,949,781,331 Documentary and commercial letters of credit 385,488,084 492,364,557 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS 40 Forward exchange contracts 861,262,317 655,472,606 FIDUCIARY DEPOSITS AND ASSETS UNDER MANAGEMENT 41 1,674,474,177 1,345,728,549 Total liabilities 20,982,921,206 18,756,285,971 December 31, EQUITY Notes 2014 LBP’000 Share capital 27 Preferred shares 28 Legal reserve 29 Property revaluation reserve 29 Reserve for general banking risks and other reserves 29 Reserves for assets acquired in satisfaction of loans 15, 29 Retained earnings Cumulative change in fair value of financial 30 assets through other comprehensive income Currency translation adjustment Profit for the year 630,000,000 565,312,500 116,763,107 3,213,000 187,375,906 50,101,022 334,808,558 2013 LBP’000 620,000,000 489,937,500 100,511,453 3,213,000 164,818,864 27,385,641 306,420,725 18,233,466 (3,581,768) (89,602,488) 188,707,712 (71,330,991) 184,851,175 Equity attributable to the Group Non-controlling interest 31 2,004,912,783 257,696,195 1,822,225,599 210,509,145 Total equity 2,262,608,978 2,032,734,744 Total Liabilities and Equity 23,245,530,184 20,789,020,715 88 89 THE ACCOMPANYING NOTES 1 TO 50 FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT BANKMED S.A.L. BANKMED S.A.L. CONSOLIDATED STATEMENT OF PROFIT OR LOSS CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Year Ended December 31, Notes 2014 2013 LBP’000 LBP’000 Interest income 32 1,205,356,024 1,028,134,002 Interest expense 33 (807,632,226) (696,165,175) Net interest income 397,723,798 331,968,827 Fee and commission income 34 Fee and commission expense 35 Net fee and commission income 112,771,338 (19,437,163) 93,334,175 96,969,827 (14,775,244) 82,194,583 Net results on financial instruments at fair value through profit or loss 36 Gain from financial assets measured at amortized cost 12 Other operating income (net) 37 Net operating revenues 33,790,973 90,893,099 90,396,564 706,138,609 27,339,098 184,174,218 89,000,622 714,677,348 Provision for credit losses (net of write-back) 10 Loss from write-off of loans Net operating revenues after credit losses (37,794,743) (5,912,792) 662,431,074 (55,371,987) (398,997) 658,906,364 Staff costs Administrative expenses 38 Depreciation and amortization 15,17&18 Impairment of assets acquired in satisfaction of loans Provision for contingencies (net of write-back) 26 Write-back of provision for impairment of an investment in a fund 18 (237,915,779) (169,432,342) (26,265,834) (478,218) (19,503,038) (225,624,398) (166,408,144) (23,219,502) (308,278) (26,889,858) 22,612,500 - Profit before taxes Income tax expense 25 Profit for the year 231,448,363 (30,209,456) 201,238,907 216,456,184 (23,291,171) 193,165,013 Attributable to: Equity holders of the Group Non-controlling interest 188,707,712 12,531,195 201,238,907 184,851,175 8,313,838 193,165,013 2.40 2.42 Earnings per share: Basic/diluted earnings per share 39 Year Ended December 31, Notes 2014 2013 LBP’000 LBP’000 Profit for the year Other comprehensive income («OCI»): Items that will not be reclassified subsequently to profit or loss: Gain on revaluation of property 17 Net gain/(loss) on financial assets at fair value through other comprehensive income Net loss on financial assets at fair value through other comprehensive income recycled to retained earnings 12 Income tax relating to components of OCI Remeasurement of defined benefit obligation Items that may be reclassified subsequently to profit or loss: Currency translation adjustment Net other comprehensive (loss)/income for the year 201,238,907 193,165,013 - 29,227,714 25,404,132 (67,208,531) - (3,588,898) (470,810) 21,344,424 132,062,181 7,134,794 401,804 101,617,962 (35,638,264) (35,638,264) (14,293,840) (67,897,766) (67,897,766) 33,720,196 Total comprehensive income for the year 186,945,067 226,885,209 Attributable to: Equity holders of the Group Non-controlling interest 191,780,639 (4,835,572) 186,945,067 252,267,208 (25,381,999) 226,885,209 90 91 THE ACCOMPANYING NOTES 1 TO 50 FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT BANKMED S.A.L. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Equity Attributable to the Group Balance at December 31, 2012 Equity Attributable to the Group Share Capital Preferred Shares Legal Reserve Property Revaluation Reserve Reserve for General Banking Risks and Other Reserves Reserve for Assets Acquired in Satisfaction of Loans Retained Earnings LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Cumulative Change in Fair Value of Financial Assets through Other Currency Comprehensive Translation Income Adjustment LBP’000 LBP’000 Profit for the Year LBP’000 Total NonControlling Interests Total LBP’000 LBP’000 LBP’000 620,000,000 489,937,500 82,256,119 3,213,000 141,252,716 10,068,802 370,887,367 (75,570,212) (37,129,061) 182,594,402 1,787,510,633 156,250,663 1,943,761,296 Total comprehensive income - 2013 - - - 29,227,714 - - 401,805 71,988,444 (34,201,930) 184,851,175 252,267,208 (25,381,999) 226,885,209 Difference of exchange - - - - - - (1,526,727) - - - (1,526,727) - (1,526,727) Allocation of 2012 profit - - 18,255,334 - 23,061,948 17,821,039 123,456,081 - - (182,594,402) - - - - - - - - - (132,062,181) - - - (132,062,181) - (132,062,181) - - - - - - (296,232) - - - (296,232) - (296,232) Disposal of assets acquired in satisfaction of loans – Note 15 - - - - 504,200 (504,200) - - - - - - - Increase in minority interest due to capital increase - - - - - - - - - - - 79,640,481 79,640,481 - - - (29,227,714) - - 29,227,714 - - - - - - Dividends declared - Notes 27 and 28 - - - - - - (82,246,060) - - - (82,246,060) - (82,246,060) Liquidation of a subsidiary - - - - - - (1,229,194) - - - (1,229,194) - (1,229,194) Other - - - - - - (191,848) - - - (191,848) Loss on sale of financial assets at fair value through other comprehensive income – Note 12 Appropriation from 2012 profit to provisions for bad and doubtful loans and advances – Note 10 Transfer from property revaluation reserve to retained earnings –Note 29 Balance at December 31, 2013 - (191,848) 620,000,000 489,937,500 100,511,453 3,213,000 164,818,864 27,385,641 306,420,725 (3,581,768) (71,330,991) 184,851,175 1,822,225,599 210,509,145 2,032,734,744 Total comprehensive income - 2014 - - - - - - (470,810) 21,815,234 (18,271,497) 188,707,712 191,780,639 (4,835,572) 186,945,067 Difference of exchange - - - - - - (4,240,634) - - - (4,240,634) - (4,240,634) Allocation of 2013 profit - - 16,251,654 - 22,107,705 23,164,718 123,327,098 - - (184,851,175) - - - 10,000,000 - - - - - (10,000,000) - - - - - - Issuance of preferred shares - Series 3 – Note 28 - 226,125,000 - - - - - - - - 226,125,000 - 226,125,000 Redemption of preferred shares - Series 1 – Note 28 - (150,750,000) - - - - - - - - (150,750,000) - (150,750,000) Disposal of assets acquired in satisfaction of loans – Note 15 - - - - 449,337 (449,337) - - - - - - - Increase in minority interest due to capital increase - - - - - - - - - - - 48,839,250 48,839,250 Dividends declared - Notes 27 and 28 - - - - - - (79,803,281) - - - (79,803,281) - (79,803,281) Acquisition of subsidiaries – Note 44 - - - - - - - - - - - 3,183,372 3,183,372 Other - - - - - - (424,540) - - - (424,540) Capital increase – Note 27 Balance at December 31, 2014 630,000,000 565,312,500 116,763,107 3,213,000 187,375,906 50,101,022 334,808,558 18,233,466 (89,602,488) 188,707,712 2,004,912,783 - (424,540) 257,696,195 2,262,608,978 92 93 THE ACCOMPANYING NOTES 1 TO 50 FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT BANKMED S.A.L. CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended December 31, Year Ended December 31, Notes 2014 LBP’000 Cash flows from operating activities: Profit for the year 201,238,907 Adjustments for: Provision for impairment of assets acquired in satisfaction of loans (net) 15 478,218 Depreciation and amortization 15,17 &18 26,265,834 Provision for credit losses (net) 10 45,142,625 Provision for collective impairment (net) 10 (7,347,882) Loss from write-off of loans 5,912,792 Provision for employees’ end of service indemnity (net) 26 5,335,990 Provision for contingencies 26 19,065,615 Insurance technical provision 26 437,423 Effect of exchange rate fluctuation on goodwill 16 4,328,540 Write-back of provision for investment in a fund 18 (22,612,500) Amortization of discount on certificates of deposit 24 1,180,689 Realized loss/(gain) on sale of financial assets at fair value through profit or loss 36 4,538,476 Realized gain from financial assets at amortized cost 12 (90,893,099) Unrealized gain on financial assets at fair value through profit or loss 36 (2,458,115) Income from associates at equity method 37 (3,964,638) Accretion of securities premium 5,433,875 Loss on sale of securities at fair value through other comprehensive income 12 - Gain from sale of property and equipment 37 (354,826) Gain on sale of assets acquired in satisfaction of loans 37 (2,806,413) Gain on sale of an associate 37 4,731,216 Currency translation adjustment (18,271,497) Increase in financial assets at fair value through profit or loss (122,996,817) (Increase)/decrease in reverse repurchase agreements and loans to banks (655,488,967) Increase in loans and advances to customers 43 (435,520,092) (Increase)/decrease in loans and advances to related parties (8,003,452) Decrease in deposits with banks and financial institutions and compulsory deposits and deposits with central banks (19,654,340) 2013 Notes LBP’000 193,165,013 308,278 23,219,502 (895,736) 56,267,723 398,997 6,846,251 26,889,858 - (1,183,793) 840,620 (1,098,283) (184,174,218) (33,824) (14,465,209) 5,069,116 (132,062,181) (36,284) (1,707,142) (34,201,930) (210,429,008) 13,030,043 (516,890,726) 192,267,256 (176,632,709) Goodwill from acquisition of a subsidiary 16 (Increase)/decrease in other assets Increase in deposits from banks and financial institutions Increase/(decrease) in other liabilities 43 Decrease in customers’ deposits at fair value through profit or loss Increase in customers’ deposits at amortized cost (Decrease)/increase in related parties’ deposits at amortized cost Decrease in provisions for contingencies Increase in minority interest Liquidation of a subsidiary Exchange difference and other movement on retained earnings and legal reserves Net cash generated by operating activities Cash flows from investing activities: Increase in investment securities 43 Decrease in investments in associates and other investments 43 Proceeds from sale of associates Decrease/(increase) in assets acquired in satisfaction of loans 43 Increase in property and equipment Proceeds from sale of assets acquired in satisfaction of loans Proceeds from sale of property and equipment Net cash used in investing activities Cash flows from financing activities: Issuance of preferred shares Redemption of preferred shares Certificates of deposit Decrease in borrowings from banks and financial institutions 23 Dividends paid Net cash generated by/(used in) financing activities Net (decrease)/ increase in cash and cash equivalents Cash and cash equivalents - Beginning of year 43 Cash and cash equivalents - End of year 43 2014 2013 LBP’000 LBP’000 (1,013,522) (7,964,325) 71,857,405 23,762,951 (7,654,624) 1,682,234,206 (58,519,589) (2,484,072) 34,655,855 - 12,002,992 18,678,407 (12,694,781) (11,468,719) 1,608,416,279 185,393,454 (7,816,835) 45,944,645 (1,229,194) (4,665,173) 663,926,675 (1,526,729) 1,080,191,133 (2,127,566,684) (13,854,731) 52,762,500 926,882 (31,449,243) 10,503,378 4,761,557 (2,103,916,341) (225,665,394) (1,676,653) (339,826) (26,852,781) 4,284,996 368,774 (249,880,884) 226,125,000 (150,750,000) - 391,867,549 (79,803,281) 387,439,268 (1,052,550,398) 2,418,196,044 1,365,645,646 - - (112,539) (58,531,789) (82,246,060) (140,890,388) 689,419,861 1,728,776,183 2,418,196,044 94 95 THE ACCOMPANYING NOTES 1 TO 50 FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT BANKMED S.A.L. NOTES TO THE FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 2014 1. GENERAL INFORMATION Bankmed S.A.L. (the “Bank”) is a Lebanese joint stock company, registered under Number 5261 in the Lebanese Commercial Register on August 13, 1955 and under Number 22 in the list of banks published by the Central Bank of Lebanon. The principal activities of the Bank and its subsidiaries (the Group) consist of conventional commercial and private banking through a network of 63 branches in Lebanon in addition to a branch in Cyprus and 3 branches in Iraq, a subsidiary in Switzerland, a subsidiary in Turkey (with 33 branches) and a subsidiary financial institution in Lebanon (with 6 branches). The Bank’s certificates of deposit are listed on the Luxemburg Stock Exchange. Further information on the Group’s structure is provided in Note 3A. Information on other related party transactions of the Group is provided in Note 42. Bankmed S.A.L. is wholly owned by GroupMed (Holding) S.A.L. and its headquarters are located in Clemenceau, Beirut, Lebanon. 2. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) 2.1 Application of New and Revised International Financial Reporting Standards (IFRSs) In the current year, the Group has applied the following new and revised Standards issued by the International Accounting Standards Board (IASB) that are mandatorily effective with a date of initial application of January 1, 2014 and that are applicable to the Group: Amendments to IFRS 10, IFRS 12, and IAS 27 Investment Entities; The amendments to IFRS 10 define an investment entity and require a reporting entity that meets the definition of an investment entity not to consolidate its subsidiaries but instead measure its subsidiaries at fair value through profit or loss in its consolidated and separate financial statements. To qualify as an investment entity, a reporting entity is required to: • Obtain funds from one or more investors for the purpose of providing them with investment management services; • Commit to its investor(s) that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and • Measure and evaluate performance of substantially all of its investments on a fair value basis. Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities. The amendments require retrospective application. Amendments to IAS32 Offsetting Financial Assets and Financial Liabilities The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of “currently has a legally enforceable right to set-off” and “simultaneous realization and settlement”. The amendments require retrospective application. 96 Amendments to IAS36 Recoverable Amount Disclosures for Non-Financial Assets The amendments to IAS 36 remove the requirement to disclose the recoverable amount of a cash-generating unit (CGU) to which goodwill or other intangible assets with definite useful lives had been allocated when there has been no impairment or reversal of impairment of the related CGU. Furthermore, the amendments introduce additional disclosure requirements applicable to when the recoverable amount of an asset or a CGU is measured at fair value less costs of disposal. These new disclosures include the fair value hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by IFRS 13 Fair Value Measurements. The amendments require retrospective application. Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting The amendments provide relief from the requirement to discontinue hedge accounting when a derivative designated as a hedging instrument is novated under certain circumstances. The amendments also clarify that any change to the fair value of the derivative designated as a hedging instrument arising from the novation should be included in the assessment and measurement of hedge effectiveness. The amendments require retrospective application. IFRIC 21 Levies IFRIC 21 addresses the issue as to when to recognize a liability to pay a levy imposed by a government. The interpretation defines a levy, and specifies that the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by legislation. The application of the above new and revised Standards did not have a material impact on the disclosures and amounts reported for the current and prior years, but may affect the accounting for future transactions or arrangements. 2.2 New and revised IFRSs in issue but not yet effective The Group has not applied the following new and revised IFRSs that have been issued but not yet effective: Effective for annual periods beginning on or after • Annual Improvements to IFRSs 2010-2012 Cycle that include amendments to IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 38 and IAS 24. 1 July 2014 • Annual Improvements to IFRSs 2011-2013 Cycle that include amendments to IFRS 1, IFRS 3, IFRS 13 and IAS 40. 1 July 2014 • Amendments to IAS 19 Employee Benefits clarify the requirements that relate to how contributions from employees of third parties that are linked to service should be attributed to periods of service. In addition, the amendments permit a practical expedient if the amount of the contributions is independent of the number of years of service, in that contributions, can, but are not required, to be recognized as a reduction in the service cost in the period in which the related service is rendered. 1 July 2014 • IFRS 15 Revenue from Contracts with Customers- establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. 1 January 2017 • Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations – provide guidance on how to account for the acquisition of a joint operation that constitutes a business as defined under IFRS 3 Business Combinations. 1 January 2016 • Amendments to IAS 16 and IAS 38 Classification of Acceptable Methods of Depreciation and Amortization – Amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. 1 January 2016 • Amendments to IAS 27 Separate Financial Statements permit investments in subsidiaries, joint ventures and associates to be optionally accounted for using the equity method of accounting in separate financial statements. 1 January 2016 97 INDEPENDENT AUDITORS' REPORT 3. SIGNIFICANT ACCOUNTING POLICIES • Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture clarify the treatment of the sale or contribution of assets from an investor to its associate or joint venture to (i) require full recognition in the investor’s financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations), (ii) require the partial recognition of gains and losses where the assets do not constitute a business; i.e. a gain or loss is recognized only to the extent of the unrelated investors’ interests in that associate or joint venture. These requirements apply regardless of the legal form of the transaction, e.g. whether the sale or contribution of assets occurs by an investor transferring shares in a subsidiary that holds the assets (resulting in loss of control of the subsidiary), or by a direct sale of the assets themselves. 1 January 2016 • Amendments to IAS 1 Presentation of Financial Statements address perceived impediments to prepares of financial statements exercising their judgment in presenting the financial reports. 1 January 2016 • Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures (2011) clarify certain aspects of applying the consolidation exception for investment entities. 1 January 2016 • Annual Improvements to IFRSs 2012-2014 Cycle that include amendments to IFRS 5, IFRS 7, IAS 19, and IAS34. 1 January 2016 A. Basis of Consolidation: • IFRS 9 Financial Instruments (2013) was revised in November 2013 to incorporate a hedge accounting chapter and permit early application for presenting in other comprehensive income the own credit gains or losses on financial liabilities designated under the fair value option without early applying the other requirements of IFRS 9. The main amendments to hedge accounting are summarized by (i) The 80 – 125% rule for testing of hedge effectiveness is no longer required, (ii) hedge effectiveness is measured prospectively with no more consideration for retrospective testing, (iii) funding of foreign investments in foreign currency can be considered as a hedge and related foreign currency adjustment is deferred under equity, (iv) hedging instrument can be re-designated and periodically revisited to eliminate mismatch, and (v) cash flow hedge for fixed income securities classified at amortized cost has become eligible. 1 January 2018 The consolidated financial statements of Bankmed S.A.L. incorporate the financial statements of the Bank and entities (including structured entities) controlled by the Bank and its subsidiaries. Control is achieved when the Bank: Statement of Compliance: The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). Basis of Preparation and Measurement: The consolidated financial statements have been prepared on the historical cost basis except for the following: - Land and buildings acquired prior to 1993 are measured at their revalued amounts based on market prices prevailing during 1996, to compensate for the effect of the hyper-inflationary economy prevailing in the earlier years. - Financial assets and liabilities at fair value through profit and loss are measured at fair value. - Equity securities at fair value through other comprehensive income are measured at fair value. - Derivative financial instruments are measured at fair value. Assets and liabilities are grouped according to their nature and are presented in an approximate order that reflects their relative liquidity. Certain 2013 comparative figures were reclassified to conform with the current year’s presentation. The principal accounting policies adopted are set out below: This version of the standard remains available for application if the relevant date of initial application is before 1 February 2015. The final version of IFRS 9 Financial Instruments (2014) was issued in July 2014 to replace IAS 39: Financial Instruments: Recognition and Measurement. IFRS 9 (2014) incorporates requirements for classification and measurement, impairment, general hedge accounting and derecognition. The final version of IFRS 9 introduces a) new classification for debt instruments that are held to collect contractual cash flows with ability to sell, and related measurement requirement consists of “fair value through other comprehensive income (FVTOCI), and b) impairment of financial assets applying expected loss model through 3 phases, starting by 12 month expected impairment loss to be initiated on initial recognition of the credit exposure, and life time impairment loss to be recognized upon significant increase in credit risk prior to the date the credit exposure is being impaired, and phase 3 when the loan is effectively impaired. On phase 1 and 2 income from time value is recognized on the gross amount of the credit exposure and in phase 3 income is recognized on the net exposure. Except for IFRS 9, the Directors of the Group do not anticipate that the application of these amendments will have a significant effect on the Group’s consolidated financial statements. • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank’s voting rights in an investee are sufficient to give it power, including: • the size of the Bank’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the Bank, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of profit or loss and other comprehensive income from the date the Bank gains control until the date the Bank 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 Bank 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. 98 99 INDEPENDENT AUDITORS' REPORT 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. Country of Incorporation 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; and • Reclassifies the parent’s share of components previously recognised 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. The consolidated subsidiaries as at December 31, 2014 comprise: Country of Incorporation Percentage of Ownership Date of Acquisition or Incorporation Banks and Financial Institutions: Saudi Lebanese Bank S.A.L. Lebanon 100 January 1, 1995 Med-Investment Bank S.A.L. Lebanon 100 January 24, 1996 BankMed Suisse - S.A. Switzerland 100 August 31, 2001 Allied Business Investment Corporation S.A.L. Lebanon 70.9 November 30, 2001 Turkland Bank A.S. Turkey 50 January 28, 2007 Saudi Med Investment Company Saudi Arabia 100 May 21, 2007 Med Securities Investment Company S.A.L. Lebanon 100 November 27, 2007 Emkan Finance S.A.L. Lebanon 100 May 19, 2011 Real Estate: Al Hana S.A.L. Al Jinan S.A.L. Al Shams S.A.L. Centre Méditerranée S.A.L. Al Hosn Real Estate II S.A.L. 146 Saifi S.A.L. Al Narjess Real Estate S.A.L. Al Anshita Real Estate S.A.L. Al Bani S.A.L. Al Hosn Real Estate S.A.L. Anbar Real Estate S.A.L. Sakhret Bahr Real Estate S.A.L. Laura Real Estate S.A.L. Al Zomorodah Real Estate S.A.L 528 Real Estate S.A.L Al Sabah Real Estate S.A.L. Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 December 1, 1995 December 1, 1995 December 1, 1995 January 16, 1996 February 27, 2004 January 19, 2010 February 23, 2011 February 23, 2011 April 18, 2011 October 11, 2011 October 11, 2011 October 11, 2011 November 14, 2011 May 28, 2012 May 4, 2012 July 4, 2012 Business Activity Commercial Banking Investment Banking Private Banking Financial and Fund Management Commercial Banking Corporate Finance Advisory and asset management Financial Institution Financial Institution Owns Bank’s Premises Owns Bank’s Premises Owns Bank’s Premises Owns Bank’s Premises Owns Bank’s Premises Owns Bank’s Premises Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Insurance: GroupMed Insurance Brokers S.A.L. (GMIB) Lebanon Demir Sigorta A.S. Turkey Group Med Insurance Brokers- Saudi Arabia Saudi Arabia Continental Trust Insurance and Reinsurance S.A.L. Lebanon Percentage of Ownership 100 55 55 100 Date of Acquisition or Incorporation May 20, 2003 April 17, 2013 June 20, 2014 December 29, 2014 Business Activity Insurance Brokerage Insurance Company Insurance Brokerage Insurance Company Other: Méditerranée Investment Holding Lebanon 100 December 24, 1996 Investment in shares and management of companies Medfinance Holding Ltd. BVI 100 January 1, 2003 Any activity outside of BVI Med Properties Management S.A.L. Lebanon 100 January 15, 2009 Real estate management services Med Properties S.A.L. Holding Lebanon 100 April 23, 2008 Investment in shares and management of companies Cynvest S.A.L. Holding Lebanon 100 December 23, 2008 Investment in shares and management of companies GroupMed Advisory Services Limited Cyprus 100 January 26, 2008 Investment in shares and management of companies Further information on the financial position and performance of the material partly-owned subsidiaries, Turkland Bank A.S. and Demir Sigorta A.S., is included under Note 45 as required by IFRS12. Disclosures of interests in other entities. B. Business Combinations: Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs other than those associated with the issue of debt or equity securities are generally recognized in profit or loss as incurred. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. When the excess is negative, the Group re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. Non-controlling interests in the net assets (excluding goodwill) of consolidated subsidiaries and associates are identified separately from the Group’s equity therein. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another IFRS. 100 101 INDEPENDENT AUDITORS' REPORT When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IAS 39, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognised in profit or loss. When a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. D. Financial Assets and Liabilities: Recognition and Derecognition: The Group initially recognizes loans and advances, deposits debt securities issued and subordinated liabilities on the date that they are originated. All other financial assets and liabilities are initially recognized on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognized, when the contractual rights to the cash flows from the financial asset expire. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date. In instances where the Group is assessed to have transferred a financial asset, the asset is derecognized if the Group has transferred substantially all the risks and rewards of ownership. Where the Group has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognized only if the Group has not retained control of the financial asset. The Group recognizes separately as assets or liabilities any rights and obligations created or retained in the process. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. On derecognition of a financial asset measured at amortized cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognized in profit or loss. C. Foreign Currencies: Upon derecognition of a financial asset that is classified as fair value through other comprehensive income, the cumulative gain or loss previously accumulated in the investments revaluation reserve is not reclassified to profit or loss, but is reclassified to retained earnings. The consolidated financial statements are presented in Lebanese pounds (“LBP”), which is the Group’s reporting currency. However, the primary currency of the economic environment in which the Group operates (functional currency) is the U.S. Dollar (“USD”). The exchange rate of the USD against the LBP has been constant for several years. In preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognized in profit or loss in the period in which they arise except for exchange differences on transactions entered into in order to hedge certain foreign currency risks, and except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future, which are recognized in other comprehensive income, and presented in the translation reserve in equity. These are recognized in profit or loss on disposal of the net investment. For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into Lebanese Pound using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate). Such exchange differences are recognized in profit or loss in the period in which the foreign operation is disposed of. In addition, in relation to a partial disposal of a subsidiary that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognized in profit or loss. 102 Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognized in other comprehensive income. Debt securities exchanged against securities with longer maturities with similar risks, and issued by the same issuer, are not derecognized because they do not meet the conditions for derecognition. Premiums and discounts derived from the exchange of said securities are deferred to be amortized as a yield enhancement on a time proportionate basis, over the period of the extended maturities. A financial liability (or a part of a financial liability) can only be derecognized when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss. Day 1 gain or loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Group immediately recognizes the difference between the transaction price and fair value as a “Day 1 gain or loss” in the consolidated statement of profit or loss. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognized in the consolidated statement of profit or loss when the inputs become observable, or when the instrument is derecognized. Repurchase and Reverse Repurchase Agreements: Securities sold under agreements to repurchase at a specified future date (“repos”) are not derecognized from the consolidated statement of financial position. The corresponding cash received, including accrued interest, is recognized on the consolidated statement of financial position reflecting its 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 effective interest rate method. INDEPENDENT AUDITORS' REPORT 103 Conversely, securities purchased under agreements to resell at a specified 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 reflecting the transaction’s economic substance as a loan by the Group. The difference between the purchase and resale prices is treated as interest income in the consolidated statement of profit or loss and is accrued over the life of the agreement using the effective interest rate method. Offsetting: Financial assets and liabilities are set off and the net amount is presented in the statement of financial position when, and only when, the Group has a legal right to set off the amounts or intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Fair Value Measurement: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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 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 financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair 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 recognized in the 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. • it becoming probable that the borrower will enter bankruptcy or financial re-organization; or • the disappearance of an active market for that financial asset because of financial difficulties; or • significant or prolonged decline in fair value beyond one business cycle that occurred after the initial recognition of the financial asset or group of financial assets which impacted the estimated future cash flows of the investment. For certain categories of financial asset, such as loans and advances, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. This provision is estimated based on various factors including credit ratings allocated to a borrower or group of borrowers, the current economic conditions, the experience the Group has had in dealing with a borrower or group of borrowers and available historical default information, as well as observable changes in national or local economic conditions that correlate with default on loans and advances. The amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows reflecting the amount of collateral and guarantee, discounted at the financial asset’s original effective interest rate. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Collateral Valuation: The Group seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms, such as cash, securities, letters of credit/guarantees, real estate, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral is generally assessed, at a minimum, at inception and periodically updated based on the Group’s policies and type of collateral. To the extent possible, the Group uses active market data for valuing financial assets held as collateral. Other financial assets which do not have readily determinable market value are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties, such as independent accredited experts and other independent sources. E. Classification of Financial Assets: All recognized financial assets are measured in their entirety at either amortized cost or fair value, depending on their classification. Debt Instruments: Non-derivative debt instruments that meet the following two conditions are subsequently measured at amortized cost, less impairment loss (except for debt investments that are designated as at fair value through profit or loss on initial recognition): 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. • They are held within a business model whose objective is to hold the financial assets in order to collect the contractual cash flows, rather than to sell the instrument prior to its contractual maturity to realize its fair value changes, and Impairment of Financial Assets: • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets that are measured at amortised cost are assessed for impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the asset have been affected. Debt instruments which do not meet both of these conditions are measured at fair value through profit or loss (“FVTPL”). In addition, debt instruments that meet the amortized cost criteria but are designated as at FVTPL are measured at FVTPL. Objective evidence of impairment could include: Even if a debt instrument meets the two amortized cost criteria above, it may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases. • significant financial difficulty of the issuer or counterparty; or • breach of contract, such as a default or delinquency in interest or principal payments; or 104 105 INDEPENDENT AUDITORS' REPORT Equity Instruments: A financial liability is classified as held for trading if: Investments in equity instruments are classified as at FVTPL, unless the Group designates an investment that is not held for trading as at fair value through other comprehensive income (“FVTOCI”) on initial recognition (see below). • it has been acquired principally for the purpose of repurchasing it in the near term; or • on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument. Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any gains or losses arising on re-measurement recognized in profit or loss. On initial recognition, the Group can make an irrevocable election (on an instrument-by-instrument basis) to designate investments in equity instruments at fair value through other comprehensive income (“FVTOCI”). Investments in equity instruments at FVTOCI are measured at fair value. Gains and losses on such equity instruments are recognized in other comprehensive income, accumulated in equity and are never reclassified to profit or loss. Only dividend income is recognized in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment, in which case it is recognized in other comprehensive income. Cumulative gains and losses recognized in other comprehensive income are transferred to retained earnings on disposal of an investment. Designation at FVTOCI is not permitted if the equity investment is held for trading. A financial asset is held for trading if: • it has been acquired principally for the purpose of selling it in the near term; or • on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has evidence of a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and effective as a hedging instrument or a financial guarantee. Reclassification: Financial assets are reclassified between FVTPL and amortized cost or vice versa, if and only if, the Group’s business model objective for its financial assets changes so its previous model assessment would no longer apply. When reclassification is appropriate, it is done prospectively from the reclassification date. Reclassification is not allowed where: • the other comprehensive income option has been exercised for a financial asset, or • the fair value option has been exercised in any circumstance for a financial instrument. F. Loans and Advances: Loans and advances are non-derivative financial assets that have fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortized cost, less any impairment. Interest income is recognized by applying the effective interest rate. Non-performing loans and advances to customers are stated net of unrealized interest and provision for credit losses because of doubts and the probability of non-collection of principal and/or interest. G. Financial Liabilities and Equity Instruments Issued by the Group: Classification as Debt or Equity: Debt and equity instruments issued by a group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognized at the proceeds received, net of direct issue costs. Financial Liabilities at Fair Value Through Profit or Loss: Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. 106 A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and the entire combined contract is designated as at FVTPL in accordance with IFRS 9. Financial liabilities at FVTPL are stated at fair value. Any gains or losses arising on remeasurement of held-for-trading financial liabilities are recognised in profit or loss. Such gains or losses that are recognised in profit or loss incorporate any interest paid on the financial liabilities and are included in the “Net interest and gain and loss on liabilities at FVTPL” in the consolidated statement of profit or loss. However, for non-held-for-trading financial liabilities that are designated as at FVTPL, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. The remaining amount of change in the fair value of liability is recognised in profit or loss. Changes in fair value attributable to a financial liability’s credit risk that are recognised in other comprehensive income are not subsequently reclassified to profit or loss. Financial Liabilities Subsequently Measured at Amortised Cost: Financial liabilities that are not held-for-trading and are not designated as at FVTPL are measured at amortised cost at the end of subsequent accounting periods. The carrying amounts of financial liabilities that are subsequently measured at amortised cost are determined based on the effective interest method. Financial Guarantee Contract Liabilities: Financial guarantees contracts are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. These contracts can have various judicial forms (guarantees, letters of credit, credit-insurance contracts). Financial guarantee contract liabilities are measured initially at their fair values and, if not designated at FVTPL, are subsequently measured at the higher of: • the amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets; and • the amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies set out above. H. Derivative Financial Instruments: Derivative financial instruments including foreign exchange contracts, currency and interest rate swaps, (both written and purchased) are initially measured at fair value at the date the derivative contract is entered into and are subsequently re-measured to their fair value at each statement of financial position date. All derivatives are carried at their fair value as assets where the fair value is positive and as liabilities where the fair value is negative. The resulting gain or loss is recognized in the income statement immediately unless the derivative is designated and effective as a hedge instrument in which event the timing of the recognition in the statement of profit or loss depends on the 107 INDEPENDENT AUDITORS' REPORT hedge relationship. The Group designates certain derivatives as either hedges of the fair value recognized assets or liabilities or firm commitments (fair value hedges), hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges), or hedges of net investments in foreign operations. Fair values are generally obtained by reference to quoted market prices, discounted cash flow models or pricing models as appropriate as indicated under Note 3D. Embedded Derivatives: Hedges of Net Investments in Foreign Operations: Derivatives embedded in other financial instruments or other host contracts with embedded derivatives are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contract: Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in other comprehensive income and accumulated in the foreign currency translation reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. • is not measured at fair value with changes in fair value recognized in profit or loss. • is not an asset within the scope of IFRS 9. Gains and losses accumulated in the foreign currency translation reserve are reclassified to profit or loss on disposal of the foreign operation. Hedge Accounting: The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions and firm commitments. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. At inception of the hedge relationship, the Group formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge and the method that will be used to assess the effectiveness of the hedging relationship. At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. A formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item, both at inception and at each quarter end on an ongoing basis. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated are expected to offset in a range of 80% to 125% and are expected to achieve such offset in future periods. Hedge ineffectiveness is recognized in the consolidated statement of profit or loss in “Net results on financial instruments at fair value through profit or loss”. For situations where that hedged item is a forecast transaction, the Group also assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated statement of profit or loss. Fair Value Hedge: Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair value of the hedged item that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in the line of the statement of profit or loss relating to the hedged item. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortized to profit or loss from that date. Cash Flow Hedge: The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss. Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item is recognized in profit or loss, in the same line of the income statement as the recognized hedged item. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. 108 Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognized immediately in profit or loss. I. Investments in Associates: An associate is an entity over which the Group 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. The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries. The results and assets and liabilities of associates, except where the Group has control over the associates’ financial and operating policies, are incorporated in the consolidated financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for under IFRS 5 Non-current Assets Held-for-Sale and Discontinued Operations. Under the equity method, an investment in an associate is initially recognized in the consolidated statement of financial position at cost and adjusted thereafter to recognize the Group’s share of the profit or loss and other comprehensive income of the associate. When the Group’s share of losses of an associate exceeds the Group’s interest in that associate, the Group discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of an associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognized immediately in profit or loss. The entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. The Group discontinues the use of the equity method from the date when the investment ceases to be an associate or when the investment is classified as held for sale. When the Group retains an interest in the former associate or joint venture and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Group accounts for all amounts previously recognized in other comprehensive income in relation to that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognized in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. When the Group reduces its ownership interest in an associate but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognized in other INDEPENDENT AUDITORS' REPORT 109 comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. When a Group entity transacts with an associate of the Group, profits and losses resulting from the transactions with the associate are recognized in the Group’s consolidated financial statements only to the extent of interests in the associate that are not related to the Group. The financial statements of the associates are prepared for the same reporting period of the Group. J. Property and Equipment: Property and equipment except for buildings acquired prior to 1993 are stated at historical cost, less accumulated depreciation and any impairment loss. Buildings acquired prior to 1993 are stated at their revalued amounts, based on market prices prevailing during 1996 less accumulated depreciation and impairment loss, if any. Resulting revaluation surplus is reflected under “Equity”. “Land held for banking operations” are measured at fair value at the date of the revaluation less impairment losses. Valuations are performed with sufficient frequency to ensure that the fair value of a revalued asset does not differ from its carrying amount. A revaluation surplus is recorded in OCI and credited to the asset revaluation reserve in equity. However, to the extent that it reserve a revaluation deficit of the same asset previously recognized in profit or loss, the increase is recognized in profit and loss. A revaluation deficit is recognized in the statement of profit or loss, except to the extent that it offsets an existing surplus on the same asset recognized in the asset revaluation reserve. Depreciation of property and equipment, other than land and advance payments on capital expenditures, is calculated systematically using the straight-line method over the estimated useful lives of the related assets using the following annual rates: Buildings Office improvements and installations Furniture Equipment and machines Computer equipment Vehicles 2% 12.5 % - 20% 8% - 20% 7% - 25% 20% - 33.33% 10% - 20% An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. 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 under “Other operating income” in the consolidated statement of profit or loss in the year the asset is derecognized. On January 1, 2013, the Group elected to change the method of accounting for land held for banking operations classified in property and equipment. After initial recognition, the Group uses the revaluation model, whereby land held for banking operations will be measured at fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The Group applied the exemptions in IAS 8, which exempts this change in accounting policy from retrospective application and extensive disclosure requirements. K. Intangible Assets other than Goodwill: Intangible assets consisting of computer software are amortized over a period of three years and are subject to impairment testing. Subsequent expenditure on software assets is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. L. Goodwill: 110 Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business. Refer to Note 3B for the measurement of goodwill at initial recognition. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses, if any. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognized for goodwill is not reversed in a subsequent period. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group’s policy for goodwill arising on the acquisition of an associate is described under “Investments in associates and other investments”. M. Assets Acquired in Satisfaction of Loans: The Lebanese banking entities of the Group account for collateral repossessed in accordance with the Central Bank of Lebanon main circular 78 and the Banking Control Commission circulars 173 and 267. Repossessed assets should be sold within two years from the date of approval of repossession by the Banking Control Commission. These are immediately transferred to “Assets acquired in satisfaction of loans” at their fair value at the repossession date, as approved by the Banking Control Commission. Upon sale of repossessed assets, any gain or loss realized is recognized in the consolidated statement of profit or loss under “Other operating income” or “Other operating expenses”. Gains resulting from the sale of repossessed assets are transferred to “Reserves for assets acquired in satisfaction of loans” starting in the following financial year. For assets which were not disposed of within the specified period of two years, an amount computed as percentage of their gross carrying value is transferred to “Reserves for assets acquired in satisfaction of loans” in the following financial year. N. Impairment of Tangible and Intangible Assets (Other than Goodwill): At each statement of financial position date, the carrying amounts of tangible and intangible assets are reviewed to determine whether there is any indication that these assets have suffered an impairment loss. If any such indication exists, the recoverable amount is estimated in order to determine the extent of impairment provision required, if any. Recoverable amount is defined as the higher of: - Fair value that reflects market conditions at the statement of financial position date, less cost to sell, if any. To determine fair value the Group adopts the market comparability approach using as indicators the current prices for similar assets in the same location and condition. - Value in use: the present value of estimated future cash flows expected to arise from the continuing use of the asset and from its disposal at the end of its useful life, only applicable to assets with cash generation units. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. In this connection, the recoverable amount of the Group’s owned properties and of properties acquired in satisfaction of debts, is the estimated market value, as determined by real estate appraisers on the basis of market compatibility by comparing with similar transactions in the same geographical area and on the basis of the expected value of a current sale between a willing buyer and a willing seller, that is, other than in a forced or liquidation sale after adjustment for illiquidity and market constraints. The impairment loss is charged to income. INDEPENDENT AUDITORS' REPORT 111 O. Employees’ Benefits: the statement of comprehensive income. Premiums receivable are derecognized when the derecognition criteria for financial assets have been met. Obligations for contributions to defined employees’ benefits are recognized as an expense on a current basis. Premiums and insurance balances receivable are reflected under consolidated other assets. Employees’ End-of-Service Indemnities: (Under the Lebanese Jurisdiction) S. Claims and Expenses Recognition: The provision for staff termination indemnities is based on the liability that would arise if the employment of all the staff were terminated at the statement of financial position date. This provision is calculated in accordance with the directives of the Lebanese Social Security Fund and Labor laws based on the number of years of service multiplied by the monthly average of the last 12 months remunerations and less contributions paid to the Lebanese Social Security National Fund. Claims, comprising amounts payable to contract holders and third parties and related loss adjustment expenses, net of salvage and other recoveries, are charged to income as incurred and are reflected under “insurance expense incurred” in the consolidated other operating income note. Claims comprise the estimated amounts payable, in respect of claims reported to the Company and those not reported at the date of the statement of financial position. Defined Benefit Plans: (Under other jurisdictions) Obligations in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and any unrecognized past service costs and the fair value of any plan assets are deducted. The Company generally estimates its claims based on previous experience. Independent loss adjusters normally estimate property claims. In addition, a provision based on management’s judgment and the Company’s prior experience is maintained for the cost of settling claims incurred but not reported (IBNR) at the date of the statement of financial position reflected under other liabilities. Any difference between the provisions at the date of the statement of financial position and settlements and provisions for the following year is included in the underwriting account for that year. Change in IBNR is reflected under “insurance expense incurred” in the consolidated other operating income note. P. Provisions: Provisions are recognized when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provision is measured at the best estimate of the consideration required to settle the obligation at the statement of financial position date. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. T. Reinsurance: The Company cedes insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies reflected under consolidated other assets. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. An impairment review is performed at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Company may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Company will receive from the reinsurer can be measured reliably. The impairment loss is recorded in the statement of comprehensive income. Ceded reinsurance arrangements do not relieve the Company from its obligations to policyholders. Q. Deferred Policy Acquisition Costs: Commissions and other costs directly related to the acquisition and renewal of insurance contracts are deferred and amortized over the terms of the insurance contracts to which they relate, similar to premiums earned. All other acquisition costs are recognized as an expense when incurred. Amortization is recorded under “insurance expense incurred” in the consolidated other operating income note. 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 amortization period and are treated as a change in accounting estimate. An impairment review is performed at each reporting date or more frequently when an indication of impairment arises. If the assumptions relating to future profitability of these policies are not realized, the amortization of these costs could be accelerated and this may also require additional impairment write-offs in the statement of income. Deferred policy acquisition costs are also considered in the liability adequacy test for each reporting period and are reflected under consolidated other assets. R. Premiums and Insurance Balances Receivable: Premiums and insurance balances receivable are recognized when due and measured on initial recognition at the fair value of the considerations received or receivable. The carrying value of premiums receivable is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Any impairment loss is recorded in the statement of comprehensive income. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal is recognized in 112 Premiums and claims on assumed reinsurance are recognized as income and expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. Reinsurance liabilities represent balances due to reinsurance companies and are reflected under consolidated other liabilities. Amounts payable are estimated in a manner consistent with the associated reinsurance contract. Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance. Reinsurance assets or liabilities are derecognized when the contractual rights are extinguished or expire or when the contract is transferred to another party. U. Reinsurance Claims: Reinsurance claims are recognized when the related gross insurance claim is recognized according to the terms of the relevant contract. These are reflected against claims under “insurance expense incurred” in the consolidated other operating income note. V. Insurance Contract Liabilities: Non-life insurance contract liabilities are recognized when contracts are entered into and premiums are charged. These liabilities are known as the outstanding claims provision reflected under “insurance technical provisions” in the consolidated provisions note, which are based on the estimated ultimate cost of all claims incurred but not settled at the date of the statement of financial position, whether reported or not, together with related claims handling costs INDEPENDENT AUDITORS' REPORT 113 and reduction for the expected value of salvage and other recoveries. Delays can be experienced in the notification and settlement of certain types of claims, therefore the ultimate cost of these cannot be known with certainty at the date of the statement of financial position. The liability is calculated at the reporting date using a range of standard actuarial claim projection techniques, based on empirical data and current assumptions that may include a margin for adverse deviation. The liability is not discounted for the time value of money. No provision for recognized or catastrophe reserves is recognized. The liabilities are recognized when the contract expires, is discharged or is cancelled and are reflected under “insurance expense incurred” in the consolidated other operating income note. the portion of the gross premiums relating to the unexpired period of coverage. Unearned premiums are calculated on a daily pro rata basis. The proportion attributable to subsequent periods is deferred as a provision for unearned premiums. The provision for unearned premiums represents that portion of premiums received or receivable that relates to risks that have not yet expired at the reporting date. The provision is recognized when contracts are entered into and premiums are charged, and is brought to account as premium income over the term of the contract in accordance with the pattern of insurance service provided under the contract. Net premiums earned are reflected under “insurance income earned” in the consolidated other operating income note. W. Revenue and Expense Recognition: Interest income and expense are recognized on an accrual basis, taking account of the principal outstanding and the rate applicable, except for non-performing loans and advances for which interest income is only recognized upon realization. Interest income and expense include the amortization discount or premium. Interest income and expense presented in the statement of profit or loss include: - Interest on financial assets and liabilities at amortized cost. - Fair value changes in qualifying derivatives, including hedge ineffectiveness, and related hedged items when interest rate risk is the hedged risk. Net trading income presented in the statement of profit or loss includes: - Interest income and expense on the trading portfolio. - Dividend income on the trading equities. - Realized and unrealized gains and losses on the trading portfolio. Interest income on financial assets measured at fair value through profit or loss and interest income on the trading portfolio are presented separately in the statement of profit or loss. Other net income from financial assets measured at fair value through profit or loss, other than those held for trading, includes: - Dividend income. - Realized and unrealized fair value changes. - Foreign exchange differences. Dividend income is recognized when the right to receive payment is established. Dividends on equity instruments designated as at fair value through other comprehensive income in accordance with IFRS 9, are presented in other revenue, unless the dividend clearly represents a recovery of part of the investment, in which case it is presented in other comprehensive income. Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability (i.e. commissions and fees earned on the loan book) are included under interest income and expense. Other fees and commission income are recognized as the related services are performed. Insurance revenue Gross premiums Gross premiums are recognized at the time when the risk commences under a policy or contract of insurance incepted during the accounting period. Premium includes any adjustments arising in the accounting period for premiums receivable in respect of business written in prior accounting periods. Gross premiums from life and nonlife insurance contracts are taken to income over the terms of the policies to which they relate using the recognized prorate temporis method. For gross earned single premium business, revenue is recognized on the date from which the policy is effective. Gross changes in the unearned premiums are recorded against premiums. Unearned premiums reserve represents The provision for unearned premiums represents premiums received for risks that have not yet expired and is reflected under “insurance technical provisions” in the consolidated provisions note. Generally the reserve is recognized over the term of the contract and is recognized as premium income. If the unearned premiums reserve is not considered adequate to cover future claims arising on these premiums, a premium deficiency reserve is created and is reflected under “insurance technical provisions” in the consolidated provisions note. The change in premium deficiency reserve is reflected under “insurance expense incurred” in the consolidated other operating income note. Reinsurance premiums Gross reinsurance premiums are recognized as expense over the term of the policies to which they relate according to reinsurance agreements and are reflected under “insurance expense incurred” in the consolidated other operating income note. Premiums include any adjustment arising in the accounting period in respect of reinsurance contracts incepting in prior accounting periods. Gross change in unearned reinsurance premiums are recorded against reinsurance premiums. Unearned reinsurance premiums reserve represents the portion of the gross reinsurance premiums relating to the unexpired period of the coverage and is reflected under “insurance technical provisions” in the consolidated provisions note. Fee and commission income from providing insurance services Insurance and investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contracts fees. These fees are recognized as revenues over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognized over those future periods. X. Income Tax: Income tax expense represents the sum of the tax currently payable and deferred tax. Income tax is recognized in the statement of profit or loss except to the extent that it relates to items recognized in other comprehensive income (OCI), in which case it is recognized in OCI. Current tax is the expected tax payable on the taxable income for the year, using rates enacted at the statement of financial position date. Income tax payable is reflected in the consolidated statement of financial position net of taxes previously settled in the form of withholding tax. Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax base used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognized for all taxable temporary differences, except: - When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. - In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. 114 115 INDEPENDENT AUDITORS' REPORT Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except: - When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. - In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is possible that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the reporting date. Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss. Deferred tax items are recognized in correlation to the underlying transaction either in OCI or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. AC. Earnings per Share: The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares. 4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group’s accounting policies, which are described in note 3, the directors are required to make judgments, estimates and assumptions about the reported amounts of revenues, expenses, assets and liabilities and the accompanying disclosures, and the disclosure of contingent liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognized subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognized in profit or loss. A. Critical accounting judgments in applying the Group’s accounting policies: Y. Fiduciary Deposits: Going Concern: In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect in the amounts recognized in the financial statements. All fiduciary deposits are held on a non-discretionary basis and related risks and rewards belong to the account holders. Accordingly, they are reflected as off-balance sheet accounts. 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, 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. Z. Operating Lease Agreements: Classification of Financial Assets: Lease agreements which do not transfer substantially all the risks and benefits incidental to ownership of the leased items are classified as operating leases. Operating lease payments are recorded in the consolidated statement of profit or loss on a straight line basis over the lease term. Business Model: Cash and cash equivalents comprise balances with maturities of a period of three months including: cash and balances with the Central Banks, deposits with Banks and financial institutions, and deposits due to banks and financial institutions. The business model test requires the Group to assess whether its business objective for financial assets is to collect the contractual cash flows of the assets rather than realize their fair value change from sale before their contractual maturity. The Group considers at which level of its business activities such assessment should be made. Generally, a business model can be evidenced by the way business is managed and the information provided to management. However the Group’s business model can be to hold financial assets to collect contractual cash flows even when there are some sales of financial assets. While IFRS 9 provides some situations where such sales may or may not be consistent with the objective of holding assets to collect contractual cash flows, the assessment requires the use of judgment based on facts and circumstances. AB. Dividends on Ordinary Shares In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows the Group considers: AA. Cash and Cash Equivalents: Dividends on ordinary shares are recognized as a liability and deducted from equity when they are approved by the Bank’s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Group. Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date. • The frequency and volume of sales; • The reasons for any sales; • How management evaluates the performance of the portfolio; • The objectives for the portfolio. 116 117 INDEPENDENT AUDITORS' REPORT Characteristics of the Financial Asset: Impairment of Goodwill: Once the Group determines that its business model is to hold the assets to collect the contractual cash flows, it exercises judgment to assess the contractual cash flows characteristics of a financial asset. In making this judgment, the Group considers the contractual terms of the acquired asset to determine that they give rise on specific dates, to cash flows that solely represent principal and principal settlement and accordingly may qualify for amortized cost accounting. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Features considered by the Group that would be consistent with amortized cost measurement include: • Fixed and / or floating interest rate; • Caps, floors, collars; • Prepayment options. Features considered by the Group that would be inconsistent with amortized cost measurement include: • Leverage (i.e. options, forwards and swaps); • Conversion options; • Inverse floaters; • Variable rate coupons that reset periodically; • Triggers that result in a significant reduction of principal, interest or both. Qualifying Hedge Relationships: In designating financial instruments as qualifying hedge relationships, the Group has determined that it expects the hedge to be highly effective over the life of the hedging instrument. In accounting for derivatives as cash flow hedges, the Group has determined that the hedged cash flow exposure relates to highly probable future cash flows. B. Key Sources of Estimation Uncertainty: The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. The Group based their assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur. Determining Fair Values: The determination of fair value for financial assets for which there is no observable market price requires the use of valuation techniques as described in Note 3D. For financial instruments that traded infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective should remain the same; that is, an exit price from the perspective of market participants. Unobservable inputs are developed based on the best information available in the circumstances, which may include the reporting entity’s own data. Non-life insurance (which comprises general insurance and healthcare) contract liabilities: For non-life insurance contracts, estimates have to be made for both the expected ultimate cost of claims reported at the date of the statement of financial position and for the expected ultimate cost of claims incurred but not yet reported (IBNR) at the date of the statement of financial position. It can take a significant period of time before the ultimate claims cost can be estimated with certainty. The main assumption underlying these techniques is that an entity’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Historical claims development is mainly analysed by accident years, but can also be further analysed by significant business lines as well as by claim types. Large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in the historical claims development data on which the projections are based. Additional qualitative judgment is used to assess the extent to which past trends may not apply in future (for example to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflations, judicial decisions and legislation, as well as internal factors such as a portfolio mix, policy features and claims handling procedures) in order to arrive at the estimated ultimate cost of claims that present the likely outcome from the range of possible outcomes, taking account of all the uncertainties involved. Allowances for Credit Losses: Specific impairment for credit losses is determined by assessing each case individually. This method applies to classified loans and advances and the factors taken into consideration when estimating the allowance for credit losses include the counterparty’s credit limit, the counterparty’s ability to generate cash flows sufficient to settle his advances and the value of collateral and potential repossession. 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, economic data and the performance of different individual groups. 5. SEGMENT INFORMATION The Group’s operating segments are organized as follows: Lebanon, Middle East & Europe. Measurement of segment assets, liabilities, income and expenses is based on the Group’s accounting policies. Segment income and expenses include transfers between segments and these transfers are conducted on arm’s length terms and conditions. Shared costs are included in segments on the basis of the actual recharges made, if any. The Group has three reportable business segments which reflect the basis on which senior management reviews operating activities, allocates capital, and assesses performance. 118 119 INDEPENDENT AUDITORS' REPORT December 31, 2014 December 31, 2013 Lebanon Middle East Europe LBP’000 LBP’000 LBP’000 Inter-Segment Lebanon Middle East Europe Inter-Segment LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Total Assets 20,961,012,851 677,461,605 4,043,875,493 (2,436,819,765) 19,100,518,616 336,873,341 3,408,956,951 (2,057,328,193) Total Liabilities 18,304,830,271 573,247,123 3,418,188,322 (1,313,344,510) 16,675,637,830 254,655,426 2,828,442,452 (1,002,449,737) Total Equity 2,656,182,580 104,214,482 625,687,171 (1,123,475,255) 2,424,880,786 82,217,915 580,514,499 (1,054,878,456) Net Income 166,882,259 9,718,567 24,638,081 - 108,210,763 8,062,848 76,897,711 (6,309) ASSETS Financial assets at fair value through profit or loss Loans and advances to customers Loans and advances to related parties Investment securities 620,613,030 2,291,986 37,921,604 - 500,934,162 2,260,913 36,715,089 - 4,393,163,868 41,182,561 2,418,782,020 8,555,841 4,370,437,413 18,367,603 2,078,131,277 14,579,715 286,729,660 - 5,712,964 - 277,984,740 - 6,454,432 - 6,551,123,542 40,084,967 849,104,126 - 4,726,745,771 21,401,296 456,102,389 - LIABILITIES Customers’ deposits at fair value through profit or loss 40,972,933 - - - 48,627,557 - - - 14,387,056,331 137,396,921 2,684,650,955 (170,258) 13,272,823,170 34,483,044 2,219,563,787 (170,258) 1,018,506,707 - 86,854,854 (79,964,492) 1,104,004,416 - 35,110,804 (55,198,562) Interest income 899,454,794 10,278,832 317,722,472 (22,100,074) 802,369,848 8,894,093 245,591,179 (28,721,118) Interest expense (645,428,145) (3,166,641) (181,137,514) 22,100,074 (582,167,706) (3,150,981) (139,567,606) 28,721,118 254,026,649 7,112,191 136,584,958 - 220,202,142 5,743,112 106,023,573 - Customers’ deposits at amortized cost Related parties’ deposits at amortized cost STATEMENT OF PROFIT OR LOSS Net interest income Fee and commission income 78,639,107 6,735,563 27,396,668 - 66,697,274 3,205,144 27,067,409 - Fee and commission expense (15,886,926) (1,711,159) (1,839,078) - (12,575,805) (322,345) (1,877,094) - Net fee and commission income 62,752,181 5,024,404 25,557,590 - 54,121,469 2,882,799 25,190,315 - Net results on financial instruments at fair value through profit or loss 44,209,661 - (10,418,688) - 22,180,404 - 5,158,694 - Gain from derecognition of financial assets measured at amortized cost 90,885,516 - 7,583 - 123,027,197 232,723 60,914,298 - 68,323,492 8,301,250 18,131,568 (4,359,746) 84,563,398 8,088,660 3,689,257 (7,340,693) Net operating revenues 520,197,499 20,437,845 169,863,011 (4,359,746) 504,094,610 16,947,294 200,976,137 (7,340,693) Provision for credit losses (net of write back) (20,290,270) (609,895) (16,894,578) - (53,131,027) (367,797) (1,873,163) - Other operating income (net) Loss from write-off of loans (270,029) - (5,642,763) - (398,997) - - - 499,637,200 19,827,950 147,325,670 (4,359,746) 450,564,586 16,579,497 199,102,974 (7,340,693) Staff costs (177,498,280) (3,846,036) (57,778,860) 1,207,397 (168,411,144) (3,087,918) (55,327,201) 1,201,865 Administrative expenses (130,061,376) (3,120,183) (39,403,132) 3,152,349 (123,251,016) (2,729,315) (46,560,332) 6,132,519 (17,315,084) (1,120,348) (7,830,402) - (15,649,111) (1,005,847) (6,564,544) - 29,872 - (508,090) - 64,400 - (372,678) - Provision for Contingencies (net of write-back) (8,922,350) - (10,580,688) - (19,402,196) - (7,487,662) - Write-back of provision for impairment of an Investment in a fund (net) 22,612,500 - - - - - - - Profit before taxes 188,482,482 11,741,383 31,224,498 - 123,915,519 9,756,417 82,790,557 (6,309) Income tax expense (21,600,223) (2,022,816) (6,586,417) - (15,704,756) (1,693,569) (5,892,846) - Profit for the year 166,882,259 9,718,567 24,638,081 - 108,210,763 8,062,848 76,897,711 (6,309) Net operating revenues after credit losses Depreciation and amortization (Impairment)/write-back of impairment of assets acquired in satisfaction of loan 120 Profit for the year ended December 31, 2013 generated by the European subsidiaries includes gain generated by the Cyprus Branch in the amount of LBP54.5billion and nil in 2014 from the sale of Lebanese Government debt securities. 121 INDEPENDENT AUDITORS' REPORT 6. CASH AND DEPOSITS WITH CENTRAL BANKS 7. DEPOSITS WITH BANKS AND FINANCIAL INSTITUTIONS December 31, December 31, 2014 2013 2014 2013 LBP’000 LBP’000 LBP’000 LBP’000 Cash on hand 162,289,925 125,096,661 Checks in the course of collection 62,712,098 55,383,749 Compulsory reserves with the Central Bank of Lebanon 303,330,956 256,129,219 Current accounts 179,544,573 282,462,546 Current accounts with the Central Bank of Lebanon 21,894,557 20,706,274 Current accounts - related parties 476,669 782,310 Current accounts with other central banks 132,068,479 122,047,668 Call placements 7,224,015 18,014,625 Term placements with the Central Bank of Lebanon 3,307,584,344 3,339,044,907 Overnight placements 360,964,590 444,712,500 285,451,636 329,876,291 Overnight placements - related parties 75,375,000 13,521,000 Term placements and compulsory reserves with other central banks Accrued interest receivable 34,052,179 42,023,881 Term placements 762,173,644 1,467,083,331 4,246,672,076 4,234,924,901 Term placements - related parties 31,714,464 242,991,150 Pledged deposits – Note 46 31,356,000 38,378,516 Blocked deposits 2,822,730 - Compulsory reserves with the Central Bank of Lebanon represent non-interest earning deposits in Lebanese Pounds computed on the basis of 25% and 15% of the average weekly sight and term customers’ deposits in Lebanese Pounds, respectively, after taking into account certain waivers in relation to loans granted in Lebanese Pounds, in accordance with the local banking regulations. Current accounts with other central banks include compulsory reserves with the Central Bank of Iraq amounting to the equivalent in Iraqi Dinar of LBP13.2billion as at December 31, 2014 (LBP4.8billion as at December 31, 2013) representing 15% of customers’ deposits. Term placements with the Central Bank of Lebanon include the equivalent in foreign currencies of LBP1,778billion as at December 31, 2014 (LBP1,677billion as at December 31, 2013) deposited in accordance with local banking regulations which require banks to maintain interest earning placements in foreign currency to the extent of 15% of customers’ deposits in foreign currencies, certificates of deposits and loans obtained from nonresident financial institutions. Accrued interest receivable 2,888,455 2,640,534 1,517,252,238 2,565,970,261 Term placements and current accounts with banks and financial institutions include term placements in the amount of LBP61.96billion and current accounts in the amount of LBP193.6million, as at December 31, 2014 (term placements in the amount of LBP84.4billion and current accounts in the amount of LBP159million, as at December 31, 2013) with right of set-off against acceptances payable amounting to LBP20.6billion, letters of guarantee amounting to LBP21.3billion, and letters of credit amounting to LBP9.63billion (LBP5.19billion, LBP48.57billion and LBP23.04billion, respectively as at December 31, 2013). Term placements with other central banks include the equivalent in: - Turkish Lira and other foreign currencies of LBP285.2billion as at December 31, 2014 (LBP307.9billion as at December 31, 2013) deposited in accordance with banking laws and regulations in Turkey which require banks to maintain at the Central Bank of Turkey mandatory interest earning deposits to the extent of 6% to 11% of their liabilities in Turkish Lira and 5% to 11% of their liabilities in foreign currencies, depending on the nature of their liabilities. - Euro of LBP191.4million as at December 31, 2014 (LBP52.8million as at December 31, 2013) deposited in accordance with banking laws and regulations in Cyprus which require banks to maintain at the Central Bank of Cyprus mandatory interest earning deposits in Euro to the extent of 1% (1% as at December 31, 2013) of banks’ and customers’ deposits maturing in less than two years, after deducting a fixed amount of Euro100,000. Compulsory deposits with the central banks are not available for use in the Group’s day-to-day operations. 122 123 INDEPENDENT AUDITORS' REPORT 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 9. REVERSE REPURCHASE AGREEMENTS AND LOANS TO BANKS December 31, 2014 LBP C/V of F/Cy December 31, Total 2014 2013 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 103,849,782 218,266,394 322,116,176 137,108,251 - 137,108,251 Debt securities issued by banks - 15,576,846 15,576,846 Debt securities issued by companies - 73,511,258 73,511,258 Credit linked notes issued by banks - 77,107,116 77,107,116 Other foreign government bonds - 17,582 17,582 Quoted equity securities - 778,298 778,298 Unquoted equity securities - 23,137,966 23,137,966 Lebanese Government bonds Certificates of deposit issued by the Central Bank of Lebanon Accrued interest receivable 5,398,145 6,074,982 11,473,127 246,356,178 414,470,442 660,826,620 December 31, 2013 LBP C/V of F/Cy LBP’000 Lebanese government bonds LBP’000 Total LBP’000 71,697,422 160,390,502 232,087,924 57,855,634 - 57,855,634 Debt securities issued by banks - 59,654,982 59,654,982 Debt securities issued by companies - 70,364,760 70,364,760 Credit linked notes issued by banks - 92,672,017 92,672,017 Other foreign government bonds - 81,915 81,915 Quoted equity securities - 754,620 754,620 Unquoted equity securities - 16,999,142 16,999,142 Certificates of deposit issued by the Central Bank of Lebanon Accrued interest receivable 2,097,389 7,341,781 9,439,170 131,650,445 408,259,719 539,910,164 Loans to banks 92,610,534 197,824,836 Loans under reverse repurchase agreements 760,214,508 - Accrued interest receivable 1,156,047 667,286 853,981,089 198,492,122 Loans to banks as at December 31, 2014 include LBP69.2billion (LBP70.4billion as at December 31, 2013) representing unsecured loans in foreign currencies purchased from foreign banks, net of related unearned income in the amount of LBP207.9million (LBP450million as at December 31, 2013). Loans to banks also include discounted acceptances in foreign currencies with an aggregate nominal value of LBP4.5billion as at December 31, 2014 (LBP13.3billion as at December 31, 2013). Loans to banks include loans granted in LBP to a resident housing bank with aggregate remaining outstanding balance of LBP6.1billion as at December 31, 2014 (LBP7.9billion as at December 31, 2013). As a guarantee of these LBP loans, the borrower has pledged in favor of the Group bills related to the housing loans granted to its customers. These loans are for a period of 12 years with a grace period on payments of 2 years. Interest on the loans is reset every three years. Loans under reverse repurchase agreements represent short term loans granted to a financial institution in Lebanon. These loans are secured by USD certificates of deposit issued by the Central Bank of Lebanon in the amount of LBP900billion. These loans mature during the first quarter of 2015. The positive change in the fair value of financial assets at fair value through profit or loss in the amount of LBP2.5billion (LBP33.8million in 2013) is recorded under “net results on financial instruments at fair value through profit or loss” (Note 36) in the consolidated statement of profit or loss. 124 125 INDEPENDENT AUDITORS' REPORT 10. LOANS AND ADVANCES TO CUSTOMERS Loans and advances to customers are reflected at amortized cost and consist of the following: December 31, 2014 December 31, 2013 Gross Amount Unrealized Interest Impairement Allowance Carrying Amount Gross Amount Unrealized Interest Impairement Allowance Carrying Amount LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Performing Retail Customers: Mortgage loans 661,516,084 - - 661,516,084 557,305,810 - - 557,305,810 Personal loans 314,920,090 - - 314,920,090 273,623,954 - - 273,623,954 41,202,207 - - 41,202,207 31,474,552 - - 31,474,552 Credit cards Overdrafts 61,500,658 - - 61,500,658 39,408,590 - - 39,408,590 217,928,369 - - 217,928,369 179,588,110 - - 179,588,110 5,806,460 (700,814) - 5,105,646 12,248,444 (2,634,205) (1,412) 9,612,827 53,398 - (24,745) 28,653 64,261 - (3,531) 60,730 14,262,529 (5,374,358) (9,100,915) (212,744) 8,542,705 (2,894,795) (5,891,051) (243,141) 30,819,465 - - 30,819,465 19,279,651 - - 19,279,651 Corporate loans 3,995,582,346 - - 3,995,582,346 3,948,141,151 - - 3,948,141,151 Small and medium enterprises’ loans 1,587,224,863 - - 1,587,224,863 1,513,271,643 - - 1,513,271,643 Other Non-Performing Retail Customers: Substandard loans Rescheduled bad and doubtful Bad and doubtful loans Performing Corporate Customers: Rescheduled loans Non-Performing Corporate Customers: Rescheduled substandard loans Substandard loans Rescheduled bad and doubtful loans 1,562,687 (952,372) - 610,315 2,348,355 (1,514,889) - 833,466 13,448,762 (1,201,718) - 12,247,044 32,840,486 (2,478,434) (741,468) 29,620,584 50,051,758 (27,645,576) (11,482,020) 10,924,162 68,096,660 (37,069,891) (19,955,178) 11,071,591 198,271,490 (35,168,297) (82,342,100) 80,761,093 105,885,949 (29,531,040) (45,744,928) 30,609,981 Corporate loans - - (180,686,955) (180,686,955) - - (191,403,668) (191,403,668) Retail loans - - (15,562,818) (15,562,818) - - (18,549,826) (18,549,826) Bad and doubtful loans Allowance for collectively assessed: Deferred penalties charged on excess over limit (14,848,001) - - Accrued interest receivable - - 52,623,813 52,623,813 (14,848,001) 7,231,926,978 (71,043,135) (299,199,553) 6,861,684,290 (14,404,824) 62,214,827 6,839,930,324 - - (76,123,254) - (14,404,824) - (282,291,062) 62,214,827 6,481,516,008 126 127 INDEPENDENT AUDITORS' REPORT The movement of unrealized interest on substandard loans during 2014 and 2013 is summarized as follows: The movement of allowance for impairment on bad and doubtful loans during 2014 and 2013 is summarized as follows: 2014 2013 2014 2013 LBP’000 LBP’000 LBP’000 LBP’000 Balance on January 1 6,627,528 7,669,408 Balance on January 1 69,751,865 87,662,040 Additions 5,473,384 4,828,480 Additions 50,329,839 6,848,159 Write-back to profit or loss – Note 32 (1,317,554) (3,212,978) Write-off (9,616,006) (11,187,533) Write-off (902,213) (2,780,824) Write-back to profit or loss (9,898,387) (14,514,965) Transfer to unrealized interest on bad and doubtful loans (7,026,241) - Transfer from allowance for substandard loans 5,163,286 5,347,044 Effect of exchange rate changes - 123,442 Transfer to off-balance sheet (net) (7,949,422) (2,367,190) Balance on December 31 2,854,904 6,627,528 Transfer from allowance for collective impairment 4,472,419 - Contractual write-off on rescheduled debts (836,929) (1,131,838) Appropriation from retained earnings - 296,232 Net balance, end of year 2,017,975 5,495,690 Effect of exchange rate changes (1,027,843) (2,331,922) Balance on December 31 101,225,751 69,751,865 Contractual write-off on rescheduled debts (including regular rescheduled loans) (3,333,437) (10,383,795) Net balance, end of year 97,892,314 59,368,070 The movement of allowance for impairment on substandard loans during 2014 and 2013 is summarized as follows: Balance on January 1 2014 2013 LBP’000 LBP’000 742,880 - Escrow funds 1,724,029 1,842,823 Balance end of year (net) 99,616,343 61,210,893 The movement of the escrow funds during 2014 and 2013 is summarized as follows: Additions 5,907,494 8,741,288 Write-back to profit or loss (1,166,470) (1,902,245) 2014 2013 Transfer to allowance for bad and doubtful loans (5,163,286) (5,347,044) LBP’000 LBP’000 Effect of exchange rate changes (320,618) (749,119) Balance end of year - 742,880 1,842,823 2,652,152 Balance on January 1 Write-back to profit or loss (29,851) (67,973) Write-off (88,943) (348,680) Transfer to off-balance sheet (net) - (392,676) Balance on December 31 1,724,029 1,842,823 The movement of unrealized interest on bad and doubtful loans during 2014 and 2013 is summarized as follows: 2014 2013 LBP’000 LBP’000 Balance on January 1 69,495,726 86,514,393 2014 2013 Additions 11,779,495 12,865,439 LBP’000 LBP’000 Write-off (4,621,393) (16,584,249) Write-back to profit or loss – Note 32 (6,408,240) (7,424,421) Transfer from unrealized interest on substandard loans 7,026,241 - Transfer to off-balance sheet (net) (9,190,785) (5,875,980) Effect of exchange rate changes 107,187 544 The movement of the allowance for collectively assessed loans during 2014 and 2013 is summarized as follows: Balance on December 31 68,188,231 69,495,726 Contractual write-off on rescheduled debts (12,155,277) (19,732,166) Net balance, end of year 56,032,954 49,763,560 Balance on January 1 209,953,494 157,127,492 Additions net of write-back (7,347,882) 56,267,723 Transfer to allowance for impairment on doubtful and bad loans (4,472,419) - Effect of exchange rate changes (1,883,420) (3,441,721) Balance on December 31 196,249,773 209,953,494 As of December 31, 2014, the Group has unutilized financing commitments (excluding credit cards) amounting to LBP169billion (LBP299billion as of December 31, 2013). 128 129 INDEPENDENT AUDITORS' REPORT 11. LOANS AND ADVANCES TO RELATED PARTIES A. Financial assets at fair value through other comprehensive income: December 31, 2014 December 31, LBP Base Accounts 2014 2013 LBP’000 LBP’000 Retail loans and advances 14,961,047 6,341,137 Corporate loans and advances 273,795,335 274,121,545 Accrued interest receivable 3,686,242 3,976,490 292,442,624 284,439,172 Loans and advances to related parties are partially secured (Note 42). Cost LBP’000 Quoted equity securities LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 - - - 293,481,842 287,936,095 (5,545,747) 30,317,851 47,402,492 17,084,641 18,793,966 19,476,420 682,454 Cumulative preferred shares issued by a Lebanese bank - - - 7,537,500 7,537,500 - Convertible preferred shares issued by a Lebanese bank - - - 753,750 791,437 37,687 Non-cumulative preferred shares issued by Lebanese banks - - - 37,687,500 37,958,850 271,350 30,317,851 47,402,492 17,084,641 358,254,558 353,700,302 (4,554,256) (2,562,696) December 31, 2013 1,187,769 December 31, 2013 LBP C/V of F/Cy Total LBP C/V of F/Cy Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 401,102,794 12,405,726 345,158,502 357,564,228 LBP Base Accounts Financial assets at fair value through Cost other comprehensive income (A) 47,402,492 47,402,492 353,700,302 401,102,794 353,700,302 12,405,726 345,158,502 357,564,228 LBP’000 Quoted equity securities Financial assets at amortized 2,755,491,670 4,174,960,101 6,930,451,771 2,277,155,553 2,500,232,324 4,777,387,877 Accrued interest receivable on 61,474,015 108,758,070 32,347,051 36,950,300 69,297,351 2,802,775,725 4,236,434,116 7,039,209,841 2,309,502,604 2,537,182,624 4,846,685,228 2,850,178,217 4,590,134,418 7,440,312,635 2,321,908,330 2,882,341,126 5,204,249,456 F/Cy Base Accounts Fair Value Cumulative Change in Fair Value Cumulative Change in Fair Value Cost Fair Value LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 - - - 293,481,842 280,186,491 (13,295,351) 11,321,086 12,405,726 1,084,640 17,136,938 17,224,963 88,025 Cumulative preferred shares issued by a Lebanese bank - - - 7,537,500 7,537,500 - Convertible preferred shares issued by a Lebanese bank - - - 753,750 783,900 30,150 - - - 39,195,000 39,425,648 230,648 Unquoted equity securities 47,284,055 Fair Value 14,521,945 (3,366,487) December 31, 2014 financial assets at amortized cost Cost Cumulative Change in Fair Value Unquoted equity securities cost (B) Fair Value Cumulative Change in Fair Value Deferred tax - Note 30 12. INVESTMENT SECURITIES F/Cy Base Accounts Non-cumulative preferred shares issued by Lebanese banks 11,321,086 12,405,726 Deferred tax – Note 30 1,084,640 358,105,030 345,158,502 (12,946,528) (162,710) 2,376,680 921,930 (10,569,848) Dividends received during 2014 on financial assets at fair value through other comprehensive income in the amount of LBP7.58billion (LBP3.76billion for the year 2013) are reflected under “Other operating income (net)” in the consolidated statement of profit or loss (Note 37). During 2013, the Group sold to a related party quoted equity securities classified at fair value through other comprehensive income for an aggregate consideration of LBP175billion (USD116million), at the market price prevailing at the date of the transaction. This transaction resulted in a loss in the amount of LBP132billion (USD87.6million) recorded in other comprehensive income. 130 131 INDEPENDENT AUDITORS' REPORT B. Financial assets at amortized cost: Gain from financial assets at amortized cost resulted from the following: December 31, 2014 LBP Base Accounts F/Cy Base Accounts Amortized Cost Fair Value Accrued Interest Receivable LBP’000 LBP’000 LBP’000 Amortized Cost Fair Value Accrued Interest Receivable LBP’000 LBP’000 LBP’000 Lebanese Government bonds 1,411,079,166 1,454,435,767 18,554,813 534,262,092 544,168,575 7,695,242 Certificates of deposit issued by the Central Bank of Lebanon 1,344,412,504 1,367,199,242 28,729,242 2,767,192,950 2,796,590,529 51,438,820 2014 2013 LBP’000 LBP’000 Gain from derecognition of financial assets (a) 28,805,840 184,174,218 Gain upon acquisition of financial assets (Day 1 gain) (b) 62,087,259 - 90,893,099 184,174,218 (a) Gain from derecognition of financial assets at amortized cost resulted from the following: Certificates of deposit issued by banks - - - 45,225,091 45,225,091 141,757 Debt securities issued by banks - - - 139,817,050 139,724,069 536,632 2014 2013 LBP’000 LBP’000 Lebanese Government bonds 28,798,257 100,339,107 Turkish Government bonds 7,583 5,872,458 Certificates of deposits issued by Central Banks - 77,729,930 Debt securities issued by companies - - - 43,276,481 43,133,200 799,852 Other foreign government bonds - - - 629,830,941 629,476,356 372,421 Credit linked notes issued by banks - - - 15,355,496 15,075,030 489,291 2,755,491,670 2,821,635,009 47,284,055 4,174,960,101 4,213,392,850 61,474,015 December 31, 2013 LBP Base Accounts Lebanese Government bonds Amortized Cost LBP’000 F/Cy Base Accounts Fair Value Accrued Interest Receivable Amortized Cost Fair Value Accrued Interest Receivable LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 1,973,530,038 1,988,962,409 25,546,264 539,650,628 544,827,195 8,171,350 Certificates of deposit issued by the Central Bank of Lebanon 303,625,515 307,572,334 6,800,787 1,462,656,083 1,495,292,293 28,065,630 Debt securities issued by banks - - - 30,150,000 30,150,000 67,000 Debt securities issued by companies - - - 11,729,011 12,375,331 646,320 Other foreign government bonds - - - 456,046,602 425,776,347 - 2,277,155,553 2,296,534,743 32,347,051 2,500,232,324 2,508,421,166 36,950,300 The fair value of Lebanese Government bonds and of certificates of deposit was calculated using a valuation model which takes into account observable market data using a discounted cash flow model based on current interest yield curve appropriate for the remaining term to maturity and credit spreads. Corporate debt securities - 232,723 28,805,840 184,174,218 During 2014, the Group entered into several sale transactions of Lebanese Government bonds denominated in LBP and in US Dollars in the aggregate nominal value of LBP70.7billion and USD37.1million, respectively. Furthermore, the Group entered into 3 exchange transactions of Lebanese Government bonds in the aggregate nominal value of LBP717.7billion against certificates of deposit issued by the Central Bank of Lebanon in the aggregate nominal value of LBP798.5billion and into 3 exchange transactions of Lebanese Government bonds in the aggregate nominal value of LBP73billion against Lebanese Government bonds in the aggregate nominal value of LBP58billion. In addition, the Group entered into an exchange transaction of Lebanese Government bonds denominated in US Dollars in the aggregate nominal value of USD125.4million against Lebanese Government bonds with shorter maturities denominated in US Dollars in the aggregate nominal value of USD160million. During 2013, the Group entered into 4 sale transactions of certificates of deposit issued by the Central Bank of Lebanon and Lebanese Government bonds in the aggregate of LBP150billion and LBP753.75billion, respectively. Furthermore, the Group entered into 2 exchange transactions whereby, the Group exchanged certificates of deposit issued by the Central Bank of Lebanon in the aggregate of LBP1,061billion against Lebanese treasury bonds with longer maturities. In addition, the Group exchanged certificates of deposit issued by the Central Bank of Lebanon in USD maturing in January 2014 in the aggregate of USD313.6million against certificates of deposit issued by the Central Bank of Lebanon with longer maturities. The Group entered into the above transactions for the purpose of liquidity gap and yield management and exchange of certificates of deposit and Lebanese government bonds with the Central Bank of Lebanon. (b) During 2014, the Group purchased from the Central Bank of Lebanon certificates of deposit denominated in US Dollars having a fair value of USD500million at the transaction date while the purchase price was USD458.81million. This transaction resulted in a “Day 1 gain” amounting to USD41.19million (C/V LBP62billion) (Note 23). 132 133 INDEPENDENT AUDITORS' REPORT The following tables illustrate summarized financial information of the Group’s investments in associates: 13. CUSTOMERS’ ACCEPTANCE LIABILITY Acceptances represent documentary credits which the Group has committed to settle on behalf of its customers against commitments by those customers (acceptances). The commitments resulting from these acceptances are stated as a liability in the statement of financial position for the same amount. 14. INVESTMENTS IN ASSOCIATES AND OTHER INVESTMENTS December 31, 2014 Country of Incorporation 2013 December 31, 2014 Name Country of Incorporation Total Assets Total Liabilities Net Assets Interests Held Group’s Share of Net Assets LBP’000 LBP’000 LBP’000 % LBP’000 Ciment de Sibline S.A.L Lebanon 272,028,796 59,916,988 212,111,808 19.36% 41,064,846 Pin Pay S.A.L Lebanon 2,325,345 350,281 1,975,064 37.11% 733,044 GroupMed services S.A.L Lebanon 18,410,081 17,492,421 917,660 25.00% 229,415 292,764,222 77,759,690 215,004,532 42,027,305 December 31, 2014 2013 Interest Held Interest Held Carrying Value Carrying Value % % LBP’000 LBP’000 Investments in Associates December 31, 2013 Name Country of Incorporation Total Assets Total Liabilities Net Assets Interests Held Group’s Share of Net Assets LBP’000 LBP’000 LBP’000 % LBP’000 CSC Bank S.A.L Lebanon 325,049,805 203,420,852 119,784,061 40.00% 47,913,624 Ciment de Sibline S.A.L Lebanon 243,307,485 54,710,190 188,597,295 19.36% 36,512,436 CSC Bank S.A.L. Lebanon - 40.00 - 47,980,271 Pin Pay S.A.L Lebanon 2,289,647 1,264,657 1,024,990 35.43% 363,154 GroupMed Services S.A.L. Lebanon 25.00 25.00 2,712,410 2,718,031 GroupMed services S.A.L Lebanon 18,598,510 17,658,804 939,706 25.00% 234,927 Pin Pay S.A.L. Lebanon 37.11 35.43 3,701,117 3,193,875 589,245,447 277,054,503 310,346,052 85,024,141 Ciment de Sibline S.A.L. Lebanon 19.36 19.36 41,065,344 36,511,836 47,478,871 90,404,013 60.83 7,173,170 7,173,170 Long-term loan to Light Metal Products S.A.L. 3,403,458 3,412,540 Al Fanadeq S.A.L. Lebanon 48.00 48.00 4,829,705 2,533,409 Beverly Hotel S.A.L. Lebanon 99.00 99.00 4,586,132 4,586,132 Sidem S.A.L. Lebanon 20.00 Other Investments Light Metal Products S.A.L. Lebanon 60.83 20.00 17,925,972 16,962,391 37,918,437 34,667,642 85,397,308 125,071,655 During the first half of 2014, the Group sold its investment in CSC Bank S.A.L., an associate, for a total consideration of LBP52.76billion (USD35million). This transaction resulted in a capital gain of around LBP4.7billion recorded under “Gain on sale of an associate” under “Other operating income (net)” in the consolidated statement of profit or loss (Note 37). The investment in CSC Bank S.A.L. was reflected as at December 31, 2013 using the equity method whereby the Group accounted for its share in the net income of the associate net of deferred dividend tax as well as its share of the change in fair value of the associate’s portfolio of securities held through other comprehensive income, if any. In this connection, the Group recorded its share in the net income of the associate in the amount of LBP4.1billion for the year 2013, net of deferred tax in the amount of LBP455million under “Other operating income (net)” in the consolidated statement of profit or loss (Note 37). During 2014, PinPay S.A.L. increased its capital by an amount of LBP2.6billion in which the Group participated in the amount of LBP1.1billion and its share of the capital increase was fully paid thereby increasing its ownership to 37.11%. The Group accounts for its share in the net result of the associate using the equity method. In this connection, the Group recorded its share in the net loss of the associate for an amount of LBP583million (LBP483million in 2013) under “Other operating income (net)” in the consolidated statement of profit or loss (Note 37). The investment in Ciment de Sibline S.A.L. is reflected using the equity method whereby the Group accounts for its shares in the associate’s equity. In this connection, the Group recorded its share in the associate’s change in equity in the amount of LBP4.6billion (LBP9.4billion in 2013) under “Other operating income” (Note 37) in the consolidated statement of profit or loss. Furthermore, the Group recorded in 2013 LBP1.5billion representing its share in prior periods results under “Other operating income (net)” (Note 37) in the consolidated statement of profit or loss. 134 135 INDEPENDENT AUDITORS' REPORT 15. ASSETS ACQUIRED IN SATISFACTION OF LOANS 16. GOODWILL Assets acquired in satisfaction of loans have been acquired through enforcement of security over loans and advances. The goodwill balance outstanding as of the statement of financial position date consists of the following: The movement of assets acquired in satisfaction of loans during 2014 and 2013 was as follows: December 31, 2014 2013 LBP’000 LBP’000 16,182,023 16,182,023 up to the statement of financial position date 23,397,246 27,725,786 39,579,269 43,907,809 Saudi Lebanese Bank S.A.L. 31,765,458 31,765,458 Turkland Bank A.S. 80,871,312 80,871,312 Demir Sigorta S.A. – Note 44 1,013,522 - Med Finance Holding Ltd. 616,568 616,568 153,846,129 157,161,147 Allied Bank S.A.L. 23,068,898 23,068,898 Goodwill (net) 176,915,027 180,230,045 December 31, 2014 2013 LBP’000 LBP’000 BankMed (Suisse) S.A., net of accumulated amortization up to December 31, 2003 Gross Amount: Balance January 1 449,051,403 415,538,450 Additions due to settlement of loans and receivables 11,644,275 35,798,564 Additions fees and charges 659,011 904,407 Disposals (7,751,014) (2,577,854) Effect of exchange rate (1,644,408) (612,164) Balance December 31 451,959,267 449,051,403 Impairment Allowance: Balance January 1 (10,806,830) (10,546,135) Additions (508,090) (372,678) Write-back 29,872 64,400 Write-off 54,049 15,536 Effect of exchange rate 58,515 32,047 Balance December 31 (11,172,484) (10,806,830) Balance January 1 (898,188) - Additions (470,489) (452,912) Accumulated depreciation: Transfers from property and equipment - (445,276) Balance December 31 (1,368,677) (898,188) 439,418,106 437,346,385 Cumulative effect of exchange rate changes Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business combination. The Group has determined that each subsidiary acquired constitutes a single cash generating unit. The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. Goodwill is considered to be impaired when the carrying value exceeds the recoverable amounts of the merged business which are determined based on a market comparability approach. Carrying Amount: December 31 The acquisition of assets in settlement of loans in Lebanon is regulated by the banking regulatory authorities and these should be liquidated within 2 years. In case of default of liquidation, a regulatory reserve should be appropriated from the yearly net profits over a period of 5 years. This reserve is reduced to 5% annually when certain conditions linked to the restructuring of non performing loans’ portfolio are met. This regulatory reserve is reflected under equity. In this connection, an amount of LBP23.2billion was appropriated in 2014 from 2013 income (LBP17.8billion in 2013). An amount of LBP449million was transferred in 2014 to retained earnings upon the sale of the related foreclosed assets (LBP504million in 2013). The fair value of assets acquired in satisfaction of loans is disclosed under Note 49. 136 137 INDEPENDENT AUDITORS' REPORT 17. PROPERTY AND EQUIPMENT Other Allowance for Impairement Loss on Property and Equipment Total LBP’000 LBP’000 LBP’000 Real Estate Properties Improvements and Installations Furniture and Equipment Vehicles Advance Payments on Capital Expenditures LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 222,481,947 119,885,040 73,083,680 2,151,108 4,094,876 8,188,440 (1,400,000) 428,485,091 2,220,560 14,486,878 4,037,764 191,651 4,727,863 444,881 - 26,109,597 (48,725) - (4,178,126) Cost: Balance, January 1, 2013 Additions Disposals/retirements - Transfers - 6,414,113 (3,298,540) - (5,928,208) 2,812,635 - Transfers to intangible assets (2,267,415) (1,517,409) (112,003) (232,574) - - - (158,659) - - - - (158,659) Assets revaluation surplus 29,227,714 - - - - - - 29,227,714 Others (1,371,787) - - Effect from exchange rate changes Balance December 31, 2013 Acquisition of subsidiary Additions - - - - (1,371,787) - (1,392,803) (1,987,820) 7,019 (5,272) (1,201,468) - (4,580,344) 252,558,434 137,125,813 70,159,016 2,237,775 2,656,685 10,195,763 (1,400,000) 473,533,486 - 260,811 - - - - - 260,811 537,875 17,902,474 760,278 5,520,199 2,013,378 - 29,823,904 (444,965) (225,963) - (4,406,731) - Transfers - (177,063) 6,056,184 - (5,879,121) - - - Effect from exchange rate changes - (862,103) (609,057) (27,893) - (737,533) - (2,236,586) 253,096,309 151,856,095 77,515,460 2,808,577 1,852,798 11,245,645 (1,400,000) 496,974,884 (22,748,470) (93,193,158) (49,743,487) (1,406,066) - (9,030,630) - (176,121,811) Balance December 31, 2014 (2,393,837) 3,089,700 Disposals/retirements (1,180,383) (161,583) Accumulated depreciation: Balance, January 1, 2013 Additions Write-off on disposal Transfers Transfers to assets acquired in satisfaction of loans Effect from exchange rate changes Balance December 31, 2013 Acquisition of subsidiary Additions (1,846,730) - (7,434,332) 2,280,971 (5,804,492) 1,477,569 - (3,032,957) 2,987,763 445,276 - - (179,341) 84,364 - - (509,022) 30,924 - (15,773,917) - 3,873,828 - - 45,194 - - - - - - 445,276 - 897,815 1,580,769 (4,616) - 1,446,363 - 3,920,331 (24,149,924) (100,481,661) (49,501,878) (1,505,659) - (8,017,171) - (183,656,293) - - - - (216,913) - (1,856,801) (216,913) (8,493,595) - (6,660,409) (223,342) - (519,167) - (17,753,314) Write-off on disposal - 378,325 1,020,175 113,548 - 149,123 - 1,661,171 Effect from exchange rate changes - 843,416 475,172 19,711 - 594,667 - 1,932,966 (26,006,725) (107,970,428) (54,666,940) (1,595,742) - (7,792,548) - (198,032,383) December 31, 2014 227,089,584 43,885,667 22,848,520 1,212,835 1,852,798 3,453,097 (1,400,000) 298,942,501 December 31, 2013 228,408,510 36,644,152 20,657,138 732,116 2,656,685 2,178,592 (1,400,000) 289,877,193 Balance December 31, 2014 Net Book Value: Additions to “Furniture and Equipment” and “Advance payments on capital expenditure” represent mainly costs incurred in connection with the opening and refurbishment of branches in Lebanon. The Group has as at December 31, 2014 capital expenditure commitments in the amount of LBP4.66billion (LBP6.45billion as at December 31, 2013). During 2013, the Group adopted the revaluation model for land held for banking operations included under real estate properties. The fair value of land held for banking operations amounted to LBP49.1billion. This adoption resulted in a revaluation reserve of LBP29.23billion recognized in other comprehensive income. Fair value of this property as at December 31, 2014 approximates the fair value as at December 31, 2013. 138 139 INDEPENDENT AUDITORS' REPORT 18. OTHER ASSETS accrued interest in the amount of LBP20.5billion and LBP671.8million (LBP16.4billion and LBP520million, respectively in 2013), were deferred and netted against the financing granted to debtors. December 31, 2014 2013 LBP’000 LBP’000 Receivables on properties sold with deferred payment (a) 23,962,670 23,271,337 (d) The regulatory blocked deposit represents a non-interest earning compulsory deposit placed with the Lebanese Treasury upon the inception of banks according to Article 132 of the Lebanese Code of Money and Credit, and is refundable in case of cease of operations. (e) Fair value of derivatives consists of the following: Deferred tax asset (b) 5,877,809 3,900,353 Deferred asset under Central Bank of Lebanon – soft loan (c) 4,079,666 6,997,845 Prepayments, deferred charges and accrued income 24,845,617 26,120,898 Due from personnel 1,094,046 2,439,921 Regulatory blocked deposit (d) 1,580,019 1,580,019 Fair value of forward contracts 3,828,679 471,781 Fair value of derivatives (e) 15,431,451 2,563,016 Fair value of currency option contracts - Note 25 11,602,772 2,091,235 15,431,451 2,563,016 Intangible assets (f) 30,577,223 23,463,600 Receivables from customers on insurance operations 20,094,126 15,966,532 Other (g) 59,374,249 56,665,774 186,916,876 162,969,295 December 31, 2013 LBP’000 LBP’000 53,304,662 53,896,128 Additions 609,029 230,881 Interest – Note 32 1,137,374 97,411 Balance beginning of year Collections (1,055,070) (919,758) 53,995,995 53,304,662 Deferred income (30,033,325) (30,033,325) Net balance, end of year 23,962,670 23,271,337 “Receivables on properties sold with deferred payment” includes receivables from related parties amounting to LBP52.8billion net of deferred income in the amount of LBP30.03billion as at December 31, 2014 (LBP52.76billion and LBP30.03billion respectively in 2013). (b) Deferred tax asset includes an amount of LBP1.1billion representing deferred tax on the change in fair value of financial assets at fair value through other comprehensive income (LBP2.2billion in 2013). 140 (c) During the first half of 2009, the Central Bank of Lebanon (“BDL”) granted the Group a soft loan in the amount of LBP91billion, maturing on April 21, 2016, in accordance with Decision number 6116 dated March 7, 1996, recorded under “Borrowings from banks and financial institutions” (Note 23). The loan proceeds are invested in Lebanese treasury bills pledged in favor of BDL until full repayment of the loan (Note 46). The present value of the net investment proceeds amounting to LBP19.5billion were used to finance write offs of debtors’ exposures under credit facilities used to refinance construction of property and acquisition of equipment damaged during the July 2006 war. Aggregate financing granted by the Group to the eligible debtors amounted to LBP25billion as at December 31, 2014 in addition to interest receivable in the amount of LBP249million (LBP23.72billion as at December 31, 2013 in addition to interest receivable in the amount of LBP236million). The interest differential between the investment in treasury bills and the soft loan and its related 2013 LBP’000 LBP’000 (f) Intangible assets are detailed as follows: Software (a) The movement of “Receivables on properties sold with deferred payment” for the years 2014 and 2013 is as follows: 2014 2014 LBP’000 Cost: Balance, January 1, 2013 Transfers from property and equipment Additions Effect from exchange rate changes Balance, December 31, 2013 Acquisition of subsidiary Additions Effect from exchange rate changes Balance, December 31, 2014 Amortization: Balance, January 1, 2013 Amortization for the period Effect from exchange rate changes Balance, December 31, 2013 Acquisition of subsidiary Amortization for the period Exchange Rate Difference Balance, December 31, 2014 Net Book Value: Balance, December 31, 2014 Balance, December 31, 2013 Key Money LBP’000 Advance Payments on Purchase of Intangible Assets Total LBP’000 LBP’000 22,398,571 158,659 20,356,552 (1,309,982) 41,603,800 1,326,897 5,118,839 (1,884,265) 46,165,271 3,295,329 - - - 3,295,329 - - - 3,295,329 - - - - - - 10,592,880 - 10,592,880 25,693,900 158,659 20,356,552 (1,309,982) 44,899,129 1,326,897 15,711,719 (1,884,265) 60,053,480 (15,382,469) (6,786,464) 1,598,229 (20,570,704) (1,037,648) (7,835,823) 1,038,951 (28,405,224) (658,616) (206,209) - (864,825) - (206,208) - (1,071,033) - - - - - - - - (16,041,085) (6,992,673) 1,598,229 (21,435,529) (1,037,648) (8,042,031) 1,038,951 (29,476,257) 17,760,047 21,033,096 2,224,296 2,430,504 10,592,880 - 30,577,223 23,463,600 Advance payments on purchase of intangible assets as of December 31, 2014 includes LBP10.59billion representing the cost of a new core banking system. The Group has, as at December 31, 2014, intangible assets commitments for the new core banking system (software) in the amount of LBP13.24billion (Nil as at December 31, 2013). INDEPENDENT AUDITORS' REPORT 141 (g) Included in other assets as at December 31, 2013 is an investment in a fund amounting to LBP22.6billion that was fully provided for in previous years and recorded as net under “Other”. During 2014, the Group wrote-back the provision previously setup against its investment in a fund in the amount of LBP22.6billion (USD15million) recorded it under “Write-back of provision for impairment of an investment in fund” in the consolidated statement of profit or loss for the year ended December 31, 2014. The investment value was recuperated. 19. DEPOSITS FROM BANKS AND FINANCIAL INSTITUTIONS Accrued interest payable is segregated between the different categories as follows: December 31, 2014 December 31, 2013 Non Related LBP’000 Related Parties LBP’000 Money market deposits 876,469 167,190 652,257 - Borrowings under sale and repurchase agreement 145,867 - 83,327 - 968,661 1,302 1,153,866 519,279 1,990,997 168,492 1,889,450 519,279 Other short term deposits Non Related LBP’000 Related Parties LBP’000 December 31, 2014 LBP C/V of F/Cy LBP’000 Current deposits of banks and financial institutions Money market deposits LBP’000 Total LBP’000 888,787 16,374,905 17,263,692 106,000,000 108,157,187 214,157,187 Time deposits with the Central Bank of Lebanon - 1,004,565 1,004,565 Borrowings under sale and repurchase agreements - 280,167,986 280,167,986 Other short term deposits - 121,665,048 121,665,048 Money Market deposits – related parties Accrued interest payable - 13,059,312 13,059,312 297,561 1,861,928 2,159,489 107,186,348 542,290,931 649,477,279 20. CUSTOMERS’ DEPOSITS AT FAIR VALUE THROUGH PROFIT OR LOSS December 31, 2014 Customers’ deposits at fair value through profit or loss Accrued interest payable December 31, 2013 C/V of F/Cy Total C/V of F/Cy Total LBP’000 LBP’000 LBP’000 LBP’000 40,817,280 40,817,280 48,472,160 48,472,160 155,653 155,653 155,397 155,397 40,972,933 40,972,933 48,627,557 48,627,557 December 31, 2013 LBP C/V of F/Cy LBP’000 Current deposits of banks and financial institutions Current deposits - related parties LBP’000 161,763 15,067,772 Total LBP’000 15,229,535 5,538 304,801 310,339 102,000,000 34,452,886 136,452,886 Borrowing under sale and repurchase agreements - 278,906,366 278,906,366 Other short term deposits - 132,485,502 132,485,502 Money market deposits Other short term deposits - related parties Accrued interest payable - 15,901,307 15,901,307 89,765 2,318,964 2,408,729 102,257,066 479,437,598 581,694,664 Deposits from customers which are matched with an embedded derivative have been designated at fair value through profit or loss, where the underlying assets vary from product to product. An accounting mismatch would arise if customers’ deposits were accounted for at amortized cost, because the related derivative is measured at fair value with movements in the fair value taken through the income statement. By designating those deposits from customers at fair value, the change in the fair value of these deposits is recorded in the consolidated statement of profit or loss. Customers’ deposits at fair value through profit or loss include deposits where the underlying monetary value is invested in products yielding variable returns depending on the performance of baskets of commodities, global indices or Lebanese Government bonds all hedged through an effective over-the-counter call option. The changes in the fair value recognized on these deposits and the related derivatives acquired for hedging are broken down as follows: December 31, 2014 “Borrowings under sale and repurchase agreements” mature during the first quarter of 2015. The borrowings are secured by foreign government bonds classified under financial assets at amortized cost in the consolidated statement of financial position (Note 46). Customers’ deposits at fair value through profit or loss Related derivative contracts (held for hedging) December 31, 2013 Initial Value Fair Value Initial Value Fair Value LBP’000 LBP’000 LBP’000 LBP’000 40,702,500 40,817,280 48,918,381 48,472,160 433,399 134,304 960,247 406,377 142 143 INDEPENDENT AUDITORS' REPORT 21. CUSTOMERS’ DEPOSITS AT AMORTIZED COST 22. RELATED PARTIES’ DEPOSITS AT AMORTIZED COST December 31, 2014 LBP Base Accounts December 31, 2014 F/Cy Base Accounts Interest Bearing Non-Interest Bearing Total Interest Bearing LBP’000 LBP’000 LBP’000 LBP’000 211,001,012 33,801,872 3,839,775,466 317,331 - - - 1,039,314 7,681,226 8,720,540 8,720,540 4,098,339 1,050,963 5,149,302 15,060,037 7,265,808 22,325,845 27,475,147 Other margins 11,696,356 7,341,218 19,037,574 17,442,190 80,447,839 97,890,029 116,927,603 Accrued interest payable 22,055,348 - 22,055,348 49,406,257 - 49,406,257 71,461,605 Current / demand deposits Term deposits 244,802,884 Non-Interest Bearing LBP Base Accounts LBP’000 880,258,905 610,615,872 3,840,092,797 11,407,843,739 Total Total Interest Bearing Non-Interest Bearing Total Interest Bearing LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 5,624,555 392,336 6,016,891 176,028,250 - 176,028,250 Margins on letters of guarantee - 280,772 Other margins - 676 1,490,874,777 1,735,677,661 734,857 11,408,578,596 15,248,671,393 Margins for irrevocable import letters of credit Margins on letters of guarantee F/Cy Base Accounts Total Total LBP’000 LBP’000 LBP’000 200,313,785 21,676,125 221,989,910 228,006,801 619,393,505 - 619,393,505 795,421,755 280,772 13,157 34,598 47,755 328,527 676 293,955 274 294,229 294,905 Deposits from customers Current / demand deposits Term deposits 4,088,626,521 42,511,384 4,131,137,905 12,371,050,442 706,745,602 13,077,796,044 17,208,933,949 Margins and other collateral Accrued interest payable 396,888 - 396,888 948,193 - 948,193 1,345,081 182,049,693 673,784 182,723,477 820,962,595 21,710,997 842,673,592 1,025,397,069 December 31, 2013 LBP Base Accounts Current / demand deposits Term deposits Margins for irrevocable import letters of credit Non-Interest Bearing Total Interest Bearing LBP’000 LBP’000 LBP’000 LBP’000 185,587,109 14,913,030 3,441,022,179 December 31, 2013 F/Cy Base Accounts Interest Bearing 200,500,139 Non-Interest Bearing LBP’000 847,678,195 396,500,357 161,843 3,441,184,022 10,493,289,223 LBP Base Accounts Total Interest Bearing Non-Interest Bearing Total Interest Bearing LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 3,387,930 599,687 3,987,617 26,744,229 1,244,178,552 1,444,678,691 344,091 10,493,633,314 13,934,817,336 - - - 1,377,862 5,581,783 6,959,645 6,959,645 4,592,507 901,627 5,494,134 11,855,728 6,254,568 18,110,296 23,604,430 Other margins 6,902,377 1,871,990 8,774,367 26,896,179 21,179,810 48,075,989 56,850,356 20,025,156 - 20,025,156 39,764,129 - F/Cy Base Accounts Total Margins on letters of guarantee Accrued interest payable Non-Interest Bearing 39,764,129 59,789,285 3,658,129,328 17,848,490 3,675,977,818 11,420,861,316 429,860,609 11,850,721,925 15,526,699,743 Non-Interest Bearing Total Total LBP’000 LBP’000 LBP’000 12,199,011 38,943,240 Deposits from customers Current / demand deposits Term deposits 77,440,498 - 77,440,498 961,644,227 42,930,857 - 961,644,227 1,039,084,725 Margins and other collateral Margins on letters of guarantee Other margins Accrued interest payable 200,000 63,380 263,380 13,016 3,317 16,333 279,713 - - - 302 - 302 302 67,495 81,095,923 - 663,067 67,495 1,553,566 - 1,553,566 1,621,061 81,758,990 989,955,340 12,202,328 1,002,157,668 1,083,916,658 Deposits from customers at amortized cost at December 31, 2014 include coded deposit accounts in the aggregate amount of LBP5.32billion (LBP8.36billion in 2013). These accounts are subject to the provisions of Article 3 of the Banking Secrecy Law dated September 3, 1956 which provides that the Bank’s management, in the normal course of business, cannot reveal the identities of these depositors to third parties. Deposits from customers at amortized cost include at December 31, 2014 deposits linked to Lebanese Government bonds in the aggregate of LBP296.81billion (LBP324.82billion in 2013). These bonds are owned by the Group and are classified as financial assets at amortized cost (Note 46). Deposits from customers at amortized cost at December 31, 2014 include deposits received from non-resident banks and financial institutions relating to their fiduciary clients for a total amount of LBP1.78trillion (LBP1.66trillion in 2013) out of which LBP1.39trillion are from a related company, a related bank and a subsidiary bank (LBP998.22billion in 2013). 144 145 INDEPENDENT AUDITORS' REPORT 23. BORROWINGS FROM BANKS AND FINANCIAL INSTITUTIONS AND CENTRAL BANKS December 31, 2014 2013 LBP C/V of F/Cy Total LBP LBP’000 LBP’000 LBP’000 LBP’000 Borrowings from the Central Bank of Lebanon – Note 46 55,447,728 376,875,000 432,322,728 29,858,102 - 29,858,102 Soft loan from the Central Bank of Lebanon – Note 18 and 46 90,936,000 - 90,936,000 90,936,000 - 90,936,000 - 258,949,018 258,949,018 - 995,927 1,564,982 2,560,909 589,215 Other long term borrowings – Note 46 Accrued interest payable 147,379,655 637,389,000 784,768,655 C/V of F/Cy LBP’000 Total LBP’000 270,955,179 270,955,179 562,610 1,151,825 On December 14, 2012, the Group issued a USD500million Certificates of Deposits through an international bank summarized as follows: Nominal amount of certificates USD 500,000,000 Issue price USD 497,300,000 Issue date December 14, 2012 Maturity December 14, 2017 Fixed rate of interest 5.375% Interest payment date December & June Outstanding amount (in LBP’000) 753,750,000 The Group has not had any defaults of principal, interest or other breaches with respect to its certificates of deposit during 2014 and 2013. 25. OTHER LIABILITIES 121,383,317 271,517,789 392,901,106 December 31, Borrowings from Central Bank of Lebanon in LBP represent facilities in accordance with Central Bank of Lebanon Basic Decision No. 6116 of March 7, 1996 and its amendments by which the Group benefited from credit facilities granted against loans the Group has granted, on its own responsibility, to its customers, pursuant to certain conditions, rules and mechanism. Borrowings from Central Bank of Lebanon in foreign currency represent a facility granted by the Central Bank of Lebanon in the amount of USD250million for the purpose of partially funding the purchase of certificates of deposit issued by the Central Bank of Lebanon denominated in US Dollars in the aggregate nominal value of USD500million (Note 12), of which an amount of USD250million was pledged in favor of the Central Bank of Lebanon (Note 46). 24. CERTIFICATES OF DEPOSIT December 31, 2014 2013 C/V of F/Cy C/V of F/Cy LBP’000 LBP’000 Global certificates of deposit 753,750,000 753,750,000 Discount on issuance of global certificates of deposit (3,487,075) (4,667,764) Accrued interest payable 1,800,625 1,800,625 752,063,550 750,882,861 2014 2013 LBP’000 LBP’000 Accrued income tax and other taxes (a) 20,936,076 16,353,826 Withheld taxes on staff benefits and payments to non-residents 5,570,235 6,266,171 Withheld tax on interest 8,141,294 3,129,020 Deferred tax liability (b) 8,491,147 10,380,947 Due to the Social Security National Fund 2,283,898 2,240,667 Checks and incoming payment orders in course of settlement 31,218,307 28,166,358 Blocked capital subscriptions for companies under incorporation 978,685 1,117,477 Accrued expenses 53,968,182 43,885,891 Financial guarantee contracts issued 2,941,428 3,478,862 Fair value of derivatives (c) 13,162,230 7,922,523 Unearned revenues 5,512,266 11,792,726 Payables from insurance operations 5,182,312 10,677,000 Sundry accounts payable 75,877,999 62,678,704 234,264,059 208,090,172 (a) During 2014, a subsidiary bank was subject to tax examination for the fiscal years 2009 to 2012. The tax assessment resulted in additional taxes including penalties amounting to LBP864million. The Group accrued for an amount of LBP429million during 2014 recorded under “Administrative expenses” in the consolidated statement of profit or loss. The remaining balance amounting to LBP435million was accrued for in previous years. Up to the date of issuance of these financial statements, the Group had not settled this tax liability. During 2013, BankMed S.A.L. and one of its subsidiaries were subject to tax examination for the fiscal years 2008 until 2011. This tax assessment resulted in additional taxes and penalties amounting to LBP31billion after penalty deductions. The Group filed an appeal and has set up a provision in the amount of LBP17billion recorded under provision for contingencies as at December 31, 2013 (Note 26). The Group settled an amount of around LBP11.1billion during 2014. The tax returns of BankMed S.A.L. for the years 2012 and 2013 and most of its subsidiaries for the years 2010 to 2014 remain subject to examination and final tax assessment by the tax authorities. Any additional tax liability depends on the results of these reviews. 146 147 INDEPENDENT AUDITORS' REPORT 26. PROVISIONS (b) Deferred tax liability consists of the following: December 31, 2014 2013 LBP’000 LBP’000 Provisions consist of the following: December 31, Deferred tax liability on financial assets at fair value through other comprehensive income - Note 30 2,461,147 Deferred tax liability on undistributed income of subsidiaries 6,030,000 6,030,000 Deferred tax liability on income from associates - Note 14 - 4,300,736 8,491,147 10,380,947 2014 2013 LBP’000 LBP’000 Provision for employees’ end-of-service indemnity 44,701,077 40,953,922 Provision for contingencies 42,281,598 37,558,520 50,211 (c) Fair value of derivatives consists of the following: Provision for loss on foreign currency position 738,127 936,710 Insurance technical provisions 14,554,116 - 102,274,918 79,449,152 December 31, 2014 2013 LBP’000 LBP’000 The movement of provision for employees’ end-of-service indemnity is as follows: Fair value of forward contracts - 5,831,288 Fair value of currency option contracts – Note 18 11,602,772 2,091,235 Deferred option premium on currency option 1,559,458 - 13,162,230 7,922,523 December 31, 2014 2013 LBP’000 LBP’000 Balance at January 1 40,953,922 37,694,975 Acquisition of a new subsidiary 168,171 - The negative fair value of currency options is related to call and put options entered into by the Group with its customers and back-to-back with a non-resident bank. The offsetting positive fair value is recorded under “Other assets” (Note 18). Additions 6,723,278 9,689,811 Settlements (1,200,213) (2,583,056) Write-back (1,387,288) (2,843,560) The following table explains the relationship between taxable income and accounting income: Effect of exchange rate changes (556,793) (1,004,248) Balance at December 31 44,701,077 40,953,922 December 31, 2014 2013 LBP’000 LBP’000 The movement of the provision for contingencies is as follows: Income before income tax 231,448,363 216,456,184 Income from subsidiaries, associates and foreign branches (31,129,967) (125,770,184) 200,318,396 90,686,000 2014 2013 Add: Non-deductible expenses 21,503,136 81,969,822 LBP’000 LBP’000 Add: Deductible losses recycled directly to retained earnings - (110,296,896) Balance at January 1 37,558,520 15,739,928 Additions 19,630,739 27,889,184 Settlements (13,378,043) (3,569,840) Write-back (565,124) (999,326) Less: Non-taxable revenues or revenues subject to tax in previous periods (97,511,371) (8,530,917) Taxable income 124,310,161 53,828,009 Income tax (15%) 18,646,524 8,074,201 Non-refundable withheld tax - 4,202,264 18,646,524 12,276,465 Add: Income tax expense on subsidiaries and foreign branches 11,562,932 11,014,706 Income tax expense 30,209,456 23,291,171 December 31, Other 90,450 - Effect of exchange rate changes (1,054,944) (1,501,426) Balance at December 31 42,281,598 37,558,520 148 149 INDEPENDENT AUDITORS' REPORT The movement of the insurance technical provisions is as follows: During 2014, the Group issued Non-cumulative Perpetual Redeemable Series 3 Preferred Shares for an amount of LBP226.13billion (USD150,000,000) in accordance with the decision of the extraordinary general assembly of shareholders in its meeting held on September 4, 2014 and after the approval of the Central Bank of Lebanon dated October 27, 2014. December 31, 2014 2013 LBP’000 LBP’000 The Group’s issued preferred shares carry the following terms: Balance at January 1 - - Acquisition of a subsidiary 14,140,941 - Additions 437,423 - Effect of exchange rate changes (24,248) - Balance at December 31 14,554,116 - Non-Cumulative Perpetual Redeemable Preferred Shares Series 1 Number of shares Share’s issue price Share’s nominal value Issue premium 27. SHARE CAPITAL Benefits The capital of the Bank as at December 31, 2014 consists of 63,000,000 shares of LBP10,000 par value each, issued and fully paid (62,000,000 shares as at December 31, 2013). On September 4, 2014, the extraordinary shareholders’ general assembly approved the redemption and cancellation of all the Non-cumulative perpetual redeemable series 1 Preferred shares in the amount of USD100million (Note 28), and the issuance of 1 million ordinary shares to be distributed to the ordinary shareholders on the basis of 1 share for each owner of 62 shares, for an aggregate value of LBP10billion to be transferred from retained earnings to share capital. Series 2 Series 3 1,000,000 2,250,000 1,500,000 USD100 USD100 USD100 LBP10,000 LBP10,000 LBP10,000 LBP140,750,000,000 LBP316,687,500,000 LBP211,125,000,000 USD7.75 payable in arrear USD6.75 payable in arrear USD6.5 payable in arrear Subject to compliance with applicable ratios and regulations, the Group may at its option, at each redemption date, redeem and cancel all or any part of the Series 1, Series 2 and Series 3 preferred shares (but not less than 20%, each time, of the original issue size or, if less, 100% of the outstanding balance of Series1, Series 2 or Series 3 preferred shares). Redemption date means any time after the issue date, if a regulatory event occurs or for the first time within a set period following the lapse of a 5 years period as of the date of the Ordinary General Assembly held to approve the accounts of the Bank for the immediately preceding fiscal year, in its sole discretion, at a redemption price equal to 100% of the Issue Price. On March 27, 2014, the ordinary shareholders’ general assembly approved the distribution of dividends in the amount of LBP45.23billion (USD30million) to the ordinary shareholders. On September 4, 2014, the extraordinary shareholders’ general assembly approved the redemption of Series 1 Preferred Shares. (Note 27). On April 15, 2013, the ordinary shareholders’ general assembly approved the distribution of dividends in the amount of LBP47.67billion (USD31.6million) to the ordinary shareholders. The ordinary shareholders’ general assembly approved the distribution of dividends to the holders of the preferred shares as follows: The Group has set up a special foreign currency position to the extent of USD71.15million as of December 31, 2014 and December 31, 2013 as a hedge of capital within the limits authorized by local banking regulations. 28. PREFERRED SHARES December 31, 2014 2013 LBP’000 LBP’000 Date March 24, 2014 April 15, 2013 LBP’000 LBP’000 Series 1 preferred shares 11,683,125 11,683,125 Series 2 preferred shares 22,895,156 22,895,156 34,578,281 34,578,281 29. RESERVES Non-cumulative perpetual redeemable Series 1 December 31, Preferred shares - Note 27 - 150,750,000 Non-cumulative perpetual redeemable Series 2 Preferred shares 339,187,500 339,187,500 Non-cumulative perpetual redeemable Series 3 Preferred shares 226,125,000 - 565,312,500 489,937,500 2014 2013 LBP’000 LBP’000 Legal reserve 116,763,107 100,511,453 Property revaluation reserve 3,213,000 3,213,000 Reserve for general banking risks 176,998,151 154,441,109 Special reserves available for distribution 10,377,755 10,377,755 Reserves for assets acquired in satisfaction of loans – Note 15 50,101,022 27,385,641 Total 357,453,035 295,928,958 150 151 INDEPENDENT AUDITORS' REPORT Legal reserve is constituted in conformity with the requirements of the Lebanese Money and Credit Law on the basis of 10% of net profit. This reserve is not available for distribution. 32. INTEREST INCOME During 2013, the Group transferred property revaluation reserves in the amount of LBP29.23billion to retained earnings. This amount is not available for distribution (Note 17). The reserve for general banking risks is constituted according to local banking regulations, from net profit, on the basis of a minimum of 2 per mil and a maximum of 3 per mil of the total risk weighted assets, off-balance sheet risk and global exchange position as defined for the computation of the solvency ratio at year-end. This reserve should reach 1.25% of total risk weighted assets, off-balance sheet risk and global exchange position at year 10 and 2% of that amount at year 20. This reserve is constituted in Lebanese Pounds and in foreign currencies in proportion to the composition of the Group’s total risk weighted assets and off-balance sheet items. This reserve is not available for distribution. 30. CUMULATIVE CHANGE IN FAIR VALUE OF FINANCIAL ASSETS THROUGH OTHER COMPREHENSIVE INCOME Year Ended December 31, Unrealized loss on equity securities Unrealized gain on fair value of securities from associatesand others Cumulative Change in Fair Value Deferred Tax Total Cumulative Change in Fair Value LBP’000 LBP’000 LBP’000 LBP’000 Total LBP’000 12,639,427 (1,374,927) 11,264,500 (11,755,157) 2,213,970 (9,541,187) 6,968,966 - 6,968,966 5,959,419 - 5,959,419 19,608,393 (1,374,927) 18,233,466 (5,795,738) LBP’000 Deposits with the central banks 152,813,415 151,522,118 11,183,366 11,010,238 Deposits with related party banks and financial institutions 1,038,865 1,232,085 Financial assets at amortized cost 424,143,784 325,943,304 Reverse repurchase agreements and loans to banks 22,653,750 11,943,310 Loans and advances to customers 565,683,253 494,268,704 Loans and advances to related parties 18,976,423 21,479,433 Receivables on properties sold with deferred payment – Note 18 1,137,374 97,411 7,725,794 10,637,399 1,205,356,024 1,028,134,002 Interest income realized on impaired loans and advances to customers represent recoveries of interest. Accrued interest on impaired loans and advances is not recognized until recovery or a rescheduling agreement is signed with customers. Deferred Tax LBP’000 LBP’000 Deposits with banks and financial institutions Interest recognized on impaired loans and advances to customers – Note 10 December 31, 2013 2013 Interest income from: December 31, 2014 2014 2,213,970 (3,581,768) Interest income on assets held at fair value through profit or loss, and other instruments designated at fair value through profit or loss is included under “Net result on financial instruments at fair value through profit or loss” (Note 36). 33. INTEREST EXPENSE Year Ended December 31, 31. NON-CONTROLLING INTEREST 2014 2013 LBP’000 LBP’000 Deposits from banks and financial institutions 8,021,251 8,620,566 Deposits from related party banks and financial institutions 1,141,697 576,672 Interest expense on: December 31, Securities lent and repurchase agreements 23,979,503 12,927,971 2014 2013 Customers’ deposits at amortized cost 690,073,883 602,308,044 LBP’000 LBP’000 Related parties’ deposits at amortized cost 28,540,451 21,038,901 Borrowings from banks and financial institutions and central banks 10,353,998 8,589,860 Certificates of deposit 40,798,388 41,733,774 Other 4,723,055 369,387 807,632,226 696,165,175 Capital 283,335,261 230,741,229 Reserves and retained earnings 23,664,851 16,142,469 Currency translation adjustment (61,835,112) (44,688,391) Profit for the year 12,531,195 8,313,838 257,696,195 210,509,145 Interest expense on customers’ and related parties’ deposits at fair value through profit or loss is included under “Net result on financial instruments at fair value through profit or loss” (Note 36). 152 153 INDEPENDENT AUDITORS' REPORT 34. FEE AND COMMISSION INCOME 37. OTHER OPERATING INCOME (NET) Year Ended December 31, This caption consists of the following: 2014 2013 LBP’000 LBP’000 2014 2013 LBP’000 LBP’000 Commission on documentary credits 6,132,002 5,006,836 Commission on acceptances 2,242,764 2,221,857 Commission on letters of guarantee 18,884,579 17,358,864 Service fees on customers’ transactions 61,617,996 50,122,621 Brokerage fees 2,022,493 1,830,163 Commission on transactions with banks 715,582 941,142 Asset management, placement and underwriting fees 14,707,675 13,150,474 Commissions on fiduciary activities 2,696,249 2,424,523 Other 3,751,998 3,913,347 112,771,338 96,969,827 Year Ended December 31, Gain on sale of an associate – Note 14 4,731,216 - Dividends from equity investment securities – Note 12 7,577,180 3,755,823 Income from associates at equity method – Note 14 3,964,638 15,005,175 Gain on disposal of property and equipment 354,826 36,284 Foreign exchange gain 38,148,654 34,418,906 Commission from insurance brokerage 16,601,530 8,017,070 Net insurance income 66,356 - Gain on sale of assets acquired in satisfaction of loans 2,806,413 1,707,142 Other 16,145,751 26,060,222 90,396,564 89,000,622 Net insurance income consists of the following: 35. FEE AND COMMISSION EXPENSE Year Ended December 31, Year Ended December 31, Commission on transactions with banks and financial institutions 2014 2013 LBP’000 LBP’000 2014 2013 Insurance income earned 13,892,466 LBP’000 LBP’000 Insurance expense incurred (13,826,110) 10,926,069 9,355,212 Safe custody charges 755,812 512,439 Other 7,755,282 4,907,593 19,437,163 14,775,244 - - 66,356 - 38. ADMINISTRATIVE EXPENSES This caption consists of the following: 36. NET RESULTS ON FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS Year Ended December 31, 154 2014 2013 LBP’000 LBP’000 Interest income on assets at fair value through profit or loss 38,421,055 28,988,155 Change in fair value of financial assets at fair value through profit or loss – Note 8 2,458,115 33,824 Interest expense on customers’ deposits at fair value through profit or loss (2,638,737) (2,859,803) Fee income on customers’ deposits at fair value through profit or loss 28,067 17,690 Dividends received on assets at fair value through profit or loss 60,949 60,949 (Loss)/gain on sale of financial assets at fair value through profit or loss (4,538,476) 1,098,283 33,790,973 27,339,098 Year Ended December 31, 2014 LBP’000 2013 LBP’000 Professional fees and outsourcing services 35,082,555 34,232,373 Travel and hotel expenses 2,513,896 2,125,762 Rent charges 19,870,051 16,442,606 Cleaning and maintenance of office premises 4,975,945 5,298,316 Electricity and fuel charges 6,353,989 6,976,723 Marketing and advertising expenses 25,894,220 24,258,026 Communication fees (telephones, fax, swift, etc...) 5,207,605 5,497,461 Furniture and equipment maintenance 6,353,015 4,718,327 Hardware and software maintenance 11,871,361 9,834,840 Insurance expense 3,584,019 3,668,972 Subscriptions fees 5,621,119 5,730,240 Printing, stationery, and office supplies 4,059,222 3,352,346 Fiscal stamps and other taxes 10,964,479 11,644,671 Other 27,080,866 32,627,481 169,432,342 166,408,144 INDEPENDENT AUDITORS' REPORT 155 39. EARNINGS PER SHARE 41. FIDUCIARY DEPOSITS AND ASSETS UNDER MANAGEMENT Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year. This caption consists of the following: December 31, 2014 Diluted earnings per share is calculated by dividing the net profit attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential shares into ordinary shares. The following table shows the income and share data used in the basic earnings per share calculation: 2014 2013 LBP’000 LBP’000 63,000,000 62,000,000 Weighted average number of common shares outstanding during the period 2014 LBP’000 Lebanon Other Countries Total LBP’000 LBP’000 LBP’000 Fiduciary deposits invested in deposits with non-resident banks 88,923,907 139,271,341 228,195,248 Fiduciary deposits invested in securities portfolio 51,248,747 143,704,608 194,953,355 Fiduciary deposits invested in back-to-back lending 43,952,140 - 43,952,140 184,124,794 282,975,949 467,100,743 Assets under management invested in securities portfolio 255,894,337 951,479,097 1,207,373,434 440,019,131 1,234,455,046 1,674,474,177 2013 LBP’000 Net profit attributable to equity holders of the parent 188,707,712 184,851,175 (Less): Proposed dividends to preferred shares (37,593,281) (34,578,281) Net profit attributable to equity holders of the parent 151,114,431 150,272,894 Basic earnings per share in LBP’000 2.40 2.42 December 31, 2013 Fiduciary deposits invested in deposits with non-resident banks Fiduciary deposits invested in securities portfolio Fiduciary deposits invested in back-to-back lending 40. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS The guarantees and standby letters of credit and the documentary and commercial letters of credit represent financial instruments with contractual amounts representing credit risk. The guarantees and standby letters of credit represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties and are not different from loans and advances on the statement of financial position. However, documentary and commercial letters of credit, which represent written undertakings by the Group on behalf of a customer authorizing a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralized by the underlying shipments documents of goods to which they relate and, therefore, have significantly less risks. Forward exchange contracts outstanding as of December 31, 2014 and 2013 represent positions held for customers’ accounts and at their risk. The Group entered into such instruments to serve the needs of customers, and these contracts are fully hedged by the Group. The forward exchange contracts outstanding as at December 31, 2014 include a forward transaction for the purchase of USD93.13million versus CHF87.1million (USD93.57million versus CHF87.1million as at December 31, 2013). This transaction was effected to hedge the investment in the Swiss banking subsidiary. Assets under management invested in securities portfolio Lebanon Other Countries Total LBP’000 LBP’000 LBP’000 156,160,869 97,599,617 253,760,486 37,415,395 146,041,233 183,456,628 68,675,350 - 68,675,350 262,251,614 243,640,850 505,892,464 86,548,857 753,287,228 839,836,085 348,800,471 996,928,078 1,345,728,549 Fiduciary accounts and assets under management are segregated as follows: December 31, 2014 December 31, 2013 Lebanon LBP’000 Other Countries LBP’000 Non-discretionary 184,124,794 282,975,949 262,251,614 243,640,850 184,124,794 282,975,949 262,251,614 243,640,850 Lebanon LBP’000 Other Countries LBP’000 Fiduciary deposits: Assets under management: Non-Discretionary 255,894,337 951,479,097 86,548,857 753,287,228 255,894,337 951,479,097 86,548,857 753,287,228 440,019,131 1,234,455,046 348,800,471 996,928,078 156 157 INDEPENDENT AUDITORS' REPORT - Documentary and commercial letters of credit include letters of credit issued on behalf of related parties in favor of third parties in the amount of LBP49billion as at December 31, 2014 (LBP71billion as at December 31, 2013). 42. BALANCES / TRANSACTIONS WITH RELATED PARTIES In the ordinary course of its activities, the Group conducts transactions with related parties including shareholders, directors, subsidiaries and associates. - Documentary and commercial letters of credit include letters of credit issued to the benefit of related parties on behalf of third parties in the amount of LBP867million as at December 31, 2014 (LBP575million as at December 31, 2013). Loans and advances and deposits of related parties other than related banks and financial institutions consist of the following (excluding accrued interest receivable/payable). - Forward exchange contracts receivable include balances receivable from related parties in the amount of LBP41billion as at December 31, 2014 (nil as at December 31, 2013). - Forward exchange contracts payable include balances payable to related parties in the amount of LBP41billion as at December 31, 2014 (nil as at December 31, 2013) 2014 2013 Year End Balance Year End Balance LBP’000 LBP’000 - Fiduciary deposits from related parties in the amounted to LBP99billion as at December 31, 2014 (LBP97billion as at December 31, 2013). - Fiduciary deposits in related parties in the amounted to LBP110billion as at December 31, 2014 (LBP114billion as at December 31, 2013). Shareholders, directors and other key management personnel and close family members: Secured loans and advances 11,965,023 6,341,137 Unsecured loans and advances 2,996,024 - Deposits 205,173,410 57,569,314 Secured loans and advances 273,795,335 274,121,545 Deposits 818,878,578 1,024,726,283 Related party companies: 43. NOTES TO THE STATEMENT OF CASH FLOWS Cash and cash equivalents for the purpose of the statement of cash flows consist of the following: December 31, Interest rates charged on balances outstanding are the same rates that would be charged in an arm’s length transaction. The financial statements include balances with banks and related parties that are reflected under deposits with banks and financial institutions, loans and advances to related parties, deposits from related parties, other assets, other liabilities and off balance sheet accounts. Refer to the statement of financial position and notes thereto. Related party transactions not disclosed elsewhere in the notes to the consolidated financial statements are as follows: 2013 LBP’000 Cash 162,289,925 125,096,661 Checks in the course of collection 62,712,098 55,383,749 Current accounts with central banks 153,963,036 142,726,807 Time deposits with central banks 27,000,000 21,930,000 - General operating expenses include approximately LBP33.7billion for the year ended December 31, 2014 (LBP31.4billion for the year ended December 31, 2013) of which LBP2.4billion (LBP1.85billion in 2013) are accrued for under “Other liabilities” and represent charges for services rendered to the Group by related party companies. Current accounts with banks and financial institutions 180,021,242 283,244,856 Time deposits with banks and financial institutions 982,462,928 1,996,692,344 - “Other Assets” and “Other Liabilities” include balances with related parties in the amount of LBP10.2billion and LBP7.6million respectively, as at December 31, 2014 (LBP19.5billion and LBP944million, respectively, as at December 31, 2013). - Other operating income includes approximately LBP10billion for the year ended December 31, 2014 (LBP20.3million for the year ended December 31, 2013) representing income from related parties for services rendered by the Group. - Acceptances payable include acceptances payable to a related bank in the amount of LBP149million as at December 31, 2014 (LBP46.6million as at December 31, 2013). - Acceptances receivable include acceptances receivable from related parties in the amount of LBP2.8billion as at December 31, 2014 (LBP2.7billion as at December 31, 2013). - Guarantees, and standby letters of credit include guarantees issued on behalf of related parties in favor of third parties in the amount of LBP18.6billion as at December 31, 2014 (LBP15.5billion as at December 31, 2013). 158 2014 LBP’000 - Guarantees, and standby letters of credit include guarantees issued to the benefit of related parties on behalf of third parties in the amount of LBP46.6billion as at December 31, 2014 (LBP43.16billion as at December 31, 2013). Demand deposits from banks (17,263,692) (15,539,874) Time deposits from banks (185,539,891) (191,338,499) 1,365,645,646 2,418,196,044 Time deposits with and from Central Banks and banks and financial institutions represent inter-bank placements and borrowings with an original term of 90 days or less. The following operating, investing and financing activities, which represent non-cash items were excluded from the consolidated cash flow statement as follows: (a) Net increase in change in fair value of financial assets at fair value through other comprehensive income, deferred tax asset and deferred tax liability in the amounts of LBP21.8billion, LBP1.2billion and LBP2.4billion, respectively, against investment securities for the year ended December 31, 2014 (Net increase in change in fair value of financial assets at fair value through other comprehensive income and deferred tax asset in the amounts of LBP72billion and LBP7.95billion, respectively, against investment securities for the year ended December 31, 2013). (b) Increase in assets acquired in satisfaction of debts in the amount of LBP11.6billion against loans and advances to customers for the year ended December 31, 2014 (increase in assets acquired in satisfaction of debts in the amount of LBP35.8billion against loans and advances to customers for the year ended December 31, 2013 and decrease in the amount of LBP445million against increase in property and equipment). INDEPENDENT AUDITORS' REPORT 159 (c) Increase in deferred tax liability on income from associates and increase in change in fair value of securities at fair value through other comprehensive income in the amount of LBP395million and LBP51million, respectively, against investments in associates and other investments for the year ended December 31, 2013. Summarized financial information of the subsidiary are provided below. This information is based on amounts before inter-company eliminations: (d) Decrease in retained earnings in the amount of LBP471million against decrease in provision for employees’ endof-service indemnity as of December 31, 2014 (increase of LBP402million as of December 31, 2013). (e) Increase in property and equipment in the amount of LBP29.23billion against retained earnings for the year ended December 31, 2013. (f) Increase in share capital in the amount of LBP10billion against decrease in retained earnings. 2014 LBP’000 2013 LBP’000 Total Assets 3,309,051,938 2,925,087,024 Total Liabilities 2,806,008,313 2,507,879,222 Total Equity 503,043,625 417,207,802 Attributable to non-controlling interest 251,521,813 208,603,901 Profit for the year 22,312,527 16,592,112 Attributable to non-controlling interest 11,156,264 8,296,056 44. ACQUISITIONS Summarized statement of profit or loss: On December 29, 2014, the Group acquired a 100% equity stake in Continental Trust Insurance and Reinsurance S.A.L. in Lebanon for a total consideration of LBP7billion fully paid in 2014. During 2014, Turkland Bank A.S. increased its capital by an amount of TRL150million in which the Group participated according to its percentage of ownership. The Group’s share of the capital increase which is equivalent to USD35.27million (TRL75million) at the date of the increase was fully paid. As a result of this capital increase, noncontrolling interests increased by an amount of LBP48.8billion during 2014. During 2014, the Group incorporated GMIB KSA, a 55% owned subsidiary with a capital of SAR3million (LBP1.2billion) and settled its share in the capital in the amount of LBP664million. As a result, non-controlling interests increased by an amount of LBP542.3million during 2014. During 2013, the Group acquired 55% of Demir Sigorta A.S., an insurance company in Turkey for a total consideration of LBP2.31billion fully paid in 2013. During 2013 and subsequent to the acquisition, the Group subscribed into its share of the capital increase of the company in the amount of LBP4.54billion. Upon finalization of the acquisition price allocation in 2014, the excess of the consideration paid over the fair value of the net assets in the amount of LBP1billion was recorded under “Goodwill” (Note 16). Year Ended December 31, 2014 LBP’000 2013 LBP’000 Interest income 305,864,653 222,435,011 Interest expense (179,183,412) (126,995,276) Fee and commission income 20,482,162 18,751,268 Fee and commission expense (1,123,727) (1,084,732) Net gain from sale of financial assets at amortized cost - 5,872,458 Other operating income 16,294,728 1,861,013 Staff costs (47,288,907) (46,299,329) Administrative expenses (33,772,472) (39,333,417) Summarized statement of financial position: December 31, During 2013, Turkland Bank A.S. increased its capital by an amount of TRL200million in which the Group participated according to its percentage of ownership. The Group’s share of the capital increase which is equivalent to USD52.83million (TRL100million) at the date of the increase was fully paid. As a result of this capital increase, noncontrolling interests increased by an amount of LBP79.6billion during 2013. Cynvest S.A.L. Holding, a wholly owned subsidiary increased its capital in 2014 by an amount of LBP9.8billion fully paid in 2014 (by an amount of LBP9.3billion in 2013 fully paid in 2013). During 2013, Emkan Finance S.A.L., which is wholly owned by the Group, increased its capital by an amount of LBP3billion which was fully paid in 2013. 45. MATERIAL PARTLY - OWNED SUBSIDIARIES 2014 LBP’000 2013 LBP’000 ASSETS Cash and deposits with central bank 310,711,401 325,133,718 Deposits with banks and financial institutions 177,834,779 202,242,106 Loans and advances to customers 2,182,937,351 1,875,412,666 Investment Securities 570,634,541 456,102,389 LIABILITIES Deposits from banks and financial institutions 388,640,611 463,487,410 Customers’ deposits at amortized cost 2,285,740,717 1,948,889,321 Related parties’ deposits at amortized cost 58,133,034 23,323,052 Demir Sigorta A.S. is a partly-owned subsidiary with a 55% equity stake of the Group. Turkland Bank A.S. is a material partly – owned subsidiary with a 50% equity stake of the Group. 160 161 INDEPENDENT AUDITORS' REPORT Summarized financial information of the subsidiary are provided below. This information is based on amounts before inter-company eliminations: Year Ended December 31, 2014 LBP’000 Total Assets 23,336,809 Total Liabilities 17,110,544 Total Equity Attributable to non-controlling interest Loss for the year Attributable to non-controlling interest Insurance expense incurred Staff costs Corresponding Facilities Pledged Amount 2,801,819 (1,389,751) (625,388) Year Ended December 31, 2014 LBP’000 Insurance income earned The carrying values of financial assets given as collateral are as follows as at December 31, 2014: 6,226,265 Summarized statement of profit or loss: Interest income 46. COLLATERAL GIVEN 1,693,270 13,892,466 (13,826,110) (2,189,300) Summarized statement of financial position: LBP’000 351,850,500 Long term borrowing 188,437,500 Lebanese Government bonds at amortized cost - Note 23 90,936,000 Soft loan 90,936,000 Other foreign government bonds at amortized cost - Note 19 Borrowings under sale and 280,167,986 repurchase agreements 280,167,986 Pledged deposits with banks and financial institutions - Note 7 Participation in 31,356,000 letter of credit 31,356,000 Lebanese Government bonds at amortized cost - Note 21 Customers’ deposits at amortized cost 296,811,675 296,811,675 Certificates of deposit with the Central Bank of Lebanon - Note 23 Central Bank 376,875,000 Time borrowing 376,875,000 The carrying values of financial assets given as collateral are as follows as at December 31, 2013: Corresponding Facilities ASSETS Other assets Technical provisions Pledged Amount 14,861,374 6,744,806 LIABILITIES Other liabilities LBP’000 Lebanese Government bonds at amortized cost - Note 23 Year Ended December 31, 2014 LBP’000 Deposits with banks and financial institutions Amount of Outstanding Facilities Nature of Facility 2,378,208 14,554,116 Amount of Outstanding Facilities Nature of Facility LBP’000 LBP’000 Lebanese Government bonds at amortized cost - Note 23 351,850,500 Long term borrowing 188,437,500 Lebanese Government bonds at amortized cost - Note 23 90,936,000 Soft loan 90,936,000 Other foreign government bonds at amortized cost - Note 19 Borrowings under sale and 278,906,366 repurchase agreements 278,906,366 Pledged deposits with banks and financial institutions- Note 7 Participation in 38,378,516 letter of credit 38,378,516 Customers’ deposits 324,821,025 at amortized cost 324,821,025 Lebanese Government bonds at amortized cost - Note 21 In addition to the above, the Group has pledged “Other government bonds at amortized cost” with an aggregate value of LBP40.25billion (LBP12.92billion as at December 31, 2013) in favor of the Central Bank of Turkey and the Turkish Stock Exchange against rights to perform and enter into money market and other open market operations. Over and above, the Group had contractual right of setoff arrangements with correspondent banks, details of which are disclosed under Note 7. 162 163 INDEPENDENT AUDITORS' REPORT 47. CAPITAL MANAGEMENT 48. FINANCIAL RISK MANAGEMENT The Group’s objectives when managing capital are to comply with the capital requirements set by the Central Bank of Lebanon, the Group’s main regulator, to safeguard the Group’s ability to continue as a going concern and to maintain a strong capital base. The Group’s activities are principally related to the use of financial instruments including derivatives. It accepts deposits from customers at both fixed and floating rates and for various periods and seeks to earn interest margins by investing these funds in high quality assets. It also seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates while maintaining sufficient liquidity to meet all claims that may fall due. Risk weighted assets and capital are monitored periodically to assess the quantum of capital available to support growth and optimally deploy capital to achieve targeted returns. The Central Bank of Lebanon requires each bank or banking group to hold a minimum level of regulatory capital of LBP10billion for the head office and LBP500million for each local branch and LBP1.5billion for each branch abroad. In addition, the Group is required to observe the minimum capital adequacy ratio set by the main regulator at 11.50% as at December 31, 2014. The Group monitors the adequacy of its capital using the methodology and ratios established by Central Bank of Lebanon. These ratios measure capital adequacy by comparing the Group’s eligible capital with its balance sheet assets, commitments and contingencies, and notional amount of derivatives at a weighted amount to reflect their relative risk. The Group’s capital is split as follows: Tier I capital: Comprises share capital after deduction of treasury shares, shareholders’ cash contribution to capital, non-cumulative perpetual preferred shares, share premium, reserves from appropriation of profits and retained earnings. Goodwill and cumulative unfavorable change in fair value of securities at fair value through other comprehensive income are deducted from Tier I Capital. Tier II capital: Comprises qualifying subordinated liabilities, cumulative favorable change in fair value of securities at fair value through other comprehensive income and revaluation surplus of owned properties. Certain investments in financial and non-financial institutions are ineligible and are deducted from Tier I and Tier II. Furthermore, various limits are applied to the elements of capital base: Qualifying Tier II capital cannot exceed Tier I capital and qualifying short term subordinated loan capital may not exceed 50% of Tier I capital. The Group has complied with the regulatory capital requirement throughout the period. The Group’s consolidated capital adequacy ratio based on the Central Bank of Lebanon directives applicable as at December 31, 2014 and 2013 amounted to 14.31% and 14.01% respectively, and is determined as follows: December 31, 2014 2013 LBP’million LBP’million Risk-weighted assets 13,513,730 12,706,184 Credit risk 11,969,979 11,397,461 Market risk 592,899 436,565 Operational risk 950,852 872,158 With the exception of specific hedging arrangements, foreign exchange and interest rate exposures associated with derivatives are normally offset by entering into counter balancing positions, thereby controlling the variability in the net cash amounts required to liquidate market positions. Risk management is a systematic process of identifying and assessing the Group risks and taking actions to protect the Group against these risks. The use of financial instruments also brings with it associated inherent risks. The Group recognizes the relationship between returns and risks associated with the use of financial instruments and the management of risks forms an integral part of the Group’s strategic objectives. The strategy of the Group is to maintain a strong risk management culture and manage the risk/reward relationship within and across each of the Group’s major risk-based lines of business. The Group continuously reviews its risk management policies and practices to reflect changes in markets, products and emerging best practice. The Group has exposure to the following risks from its use of financial instruments: - - - - reserves for assets acquired in satisfaction of loans) 1,757,387 1,601,900 Tier II capital 176,283 178,257 Total capital 1,933,670 1,780,157 Capital adequacy ratio - Tier I 13.00% 12.61% Capital adequacy ratio - Tier I and Tier II 14.31% 14.01% Credit risk Liquidity risk Market risk Operational risk A – Credit Risk Credit risk is the risk of financial loss to the Group if counterparty to a financial instrument fails to discharge an obligation. Financial assets that are mainly exposed to credit risk are deposits with banks, loans and advances to customers and other banks and investment securities. Credit risk also arises from off-balance sheet financial instruments such as letters of credit and letters of guarantee. Concentration of credit risk arises 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 of credit risk indicate the relative sensitivity of the Group’s performance affecting a particular industry or geographical location. Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographical location. The Group limits the impact of concentration risk in exposure by setting progressively lower limits for longer tenors and taking security, where considered appropriate, to mitigate such risks. 1. Tier I capital (including net income less proposed dividends and 164 The Group also seeks to raise interest margins through lending to commercial and retail borrowers with a range of credit standing. Such exposures include guarantees and other commitments such as letters of credit and performance and other bonds. Management of credit risk The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties. The Group’s risk management policies are designed to identify and to set appropriate risk limits and to monitor the risks and adherence to limits. Actual exposures against limits are monitored daily. In certain cases the Group may also close out transactions or assign them to other counterparties to mitigate credit risk. The Group’s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfill their obligation, and to control the level of credit risk taken, the Group assesses counterparties using the same techniques as for its lending activities. INDEPENDENT AUDITORS' REPORT 165 The Group seeks to manage its credit risk exposure also through diversification of lending activities to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or business. It also takes security when appropriate and also seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. 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. 3. Risk mitigation policies Collateral: The Group mainly employs collateral to mitigate credit risk. The principal collateral types for loans and advances are: The Group regularly reviews its risk management policies and systems to reflect changes in markets products and emerging best practices. - - - - - 2. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities. Measurement of credit risk a) Loans and advances The Group assesses the probability of default of individual counterparties using internal rating tools. The Group’s rating scale reflects the range of default probabilities defined for each rating class as explained below: • Watch List: Loans and advances rated Watch List are loans that are not impaired but for which the Group determines that they require special monitoring. • Past due but not impaired: Loans past due but not impaired are loans where contractual interest or principal are past due but the Group’s management believes that impairment is not appropriate on the basis of the level of collateral available and the stage of collection of amounts owed to the Group. • Substandard loans: Substandard loans are loans that are inadequately protected by current sound worth and paying capacity of the obligor or by any collateral pledged in favor of the group. Exposures where an indication of the possibility that the Group will sustain a loss if certain irregularities and deficiencies are not addressed exists are classified under this category. The Group does not provide against these loans but it defers the recognition of interest income under unrealized interest. • Doubtful loans: Doubtful loans have, in addition to the weaknesses existing in substandard loans, characteristics indicating that current existing facts and figures make the collection in full highly improbable. The probability of loss is high but certain reasonable and specific pending factors which if addressed could strengthen the probability of collection, result in the deferral of the exposure as an estimated loss until a more exact status is determined. These loans are provided for and interest income recognition is deferred. • Loss: Loans classified as loss are considered as uncollectible and of such minimal value that their classification as assets is not warranted. This does not mean that the loan is absolutely unrecoverable or has no salvage value. However, the amount of loss is difficult to measure and the Group does not wish to defer the writing of the loan even partial recovery might occur in the future. Loans are charged off in the period in which they are deemed uncollectible and therefore classified as loss. The Group establishes an allowance for impairment that represents its estimate of incurred losses in its loan portfolio. The main component of its allowance are specific loss component that relate to individually significant exposures, and a minor part of a collective loan loss allowance established for retail and Small and Medium Enterprises (SME’s) where there is objective evidence that unidentified losses exist at the reporting date. This provision is estimated based on various factors including credit ratings allocated to a borrower or group of borrowers, the current economic conditions, the experience the Group has had in dealing with a borrower or group of borrowers and available historical default information. The Group writes off a loan/security balance (and any related allowances for impairment losses) when it determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower / issuer’s financial position such as the borrower / issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. Pledged deposits Mortgages over real estate properties (land, commercial and residential properties) Bank guarantees Financial instruments (equities and debt securities) Business other assets (such as inventories and accounts receivable) Other specific risk mitigation policies include: Netting arrangements: The Group sometimes further restricts its exposure to credit losses by entering into netting arrangements with counterparties. Netting arrangements reduce credit risk associated with favorable contracts to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. 4. Financial assets with credit risk exposure and related concentrations a) Exposure to credit risk: December 31, 2014 2013 Gross Maximum Exposure LBP’000 Gross Maximum Exposure LBP’000 Deposits with central banks 4,084,382,151 4,109,828,240 Deposits with banks and financial institutions 1,517,252,238 2,565,970,261 Financial assets at fair value through profit or loss 660,826,620 539,910,164 Reverse repurchase agreements and loans to banks 853,981,089 198,492,122 Loans and advances to customers 6,861,684,290 6,481,516,008 Loans and advances to related parties 292,442,624 284,439,172 Financial assets measured at amortized cost 7,039,209,841 4,846,685,228 Financial assets at other comprehensive income 401,102,794 357,564,228 Customers’ acceptance liabilities 184,768,794 84,024,058 Other assets 101,462,654 83,252,707 Total 21,997,113,095 19,551,682,188 Financial instruments with off-balance sheet risks 3,298,306,888 3,097,618,494 Fiduciary deposits and assets under management 1,674,474,177 1,345,728,549 Total 4,972,781,065 4,443,347,043 Total credit risk exposure 26,969,894,160 23,995,029,231 166 167 INDEPENDENT AUDITORS' REPORT Below are the details of the Group’s exposure to credit risk with respect to loans and advances to customers (excluding deferred penalties): December 31, 2014 December 31, 2014 Fair Value of Collateral Received Regular loans and advances Substandard loans Bad and doubtful loans Gross Exposure Net of Unrealized Interest Allowance for Impairment Net Exposure Pledged Funds Property Equity Securities Debt Securities Other Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 6,963,317,895 (196,249,773) 6,767,068,122 559,008,736 2,799,560,779 267,065,914 113,076,968 401,032,177 4,139,744,574 17,963,005 - 17,963,005 603,000 2,454,911 - - - 3,057,911 186,892 101,607,620 - - 4,968,580 106,763,092 194,450,944 7,175,731,844 (102,949,780) (299,199,553) 91,501,164 6,876,532,291 559,798,628 2,903,623,310 267,065,914 113,076,968 406,000,757 4,249,565,577 December 31, 2013 December 31, 2013 Fair Value of Collateral Received Performing loans and advances Substandard loans Bad and doubtful loans Gross Exposure Net of Unrealized Interest Allowance for Impairment Net Exposure Pledged Funds Property Equity Securities Debt Securities Other Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 6,624,308,288 (209,953,494) 6,414,354,794 501,216,756 2,736,100,083 498,507,713 97,352,887 382,299,818 4,215,477,257 40,809,757 (742,880) 40,066,877 609,064 32,786,179 - - - 33,395,243 165,948 56,090,746 31,007 - 5,654,929 61,942,630 113,093,849 6,778,211,894 (71,594,688) (282,291,062) 41,499,161 6,495,920,832 501,991,768 2,824,977,008 498,538,720 97,352,887 387,954,747 4,310,815,130 168 169 INDEPENDENT AUDITORS' REPORT b) Concentration of financial assets by industry: 2014 Sovereign LBP’000 Balance sheet Exposure: Deposits with central banks Banks and Financial Institutions LBP’000 2014 Retail Trade Manufacturing Industries Wholesale Trade Transport and Storage and Communication Private Individuals LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Educational, Hotels and Media, Advrt, Real Estate Furnished Legal, Acctg, Public Health Developers Apartments and Consulting and and Social and Contractors Restaurants Admin Srvcs Services LBP’000 LBP’000 LBP’000 LBP’000 Other Total LBP’000 LBP’000 4,084,382,151 - - - - - - - - - - - 4,084,382,151 - 1,516,395,133 - - - - - 857,105 - - - - 1,517,252,238 466,508,792 168,625,699 - - - 23,261,884 - - 2,412,663 - - 17,582 660,826,620 Reverse repurchase agreements and loans to banks - 853,981,089 - - - - - - - - - - 853,981,089 Loans and advances to customers - 612,656,671 176,167,388 1,048,281,007 606,751,467 244,904,296 1,082,631,329 2,313,673,442 295,845,902 98,053,593 89,980,248 292,738,947 6,861,684,290 Loans and advances to related parties - - 2,221,552 - - 135,675,000 15,145,836 139,400,236 - - - - 292,442,624 6,221,678,013 211,398,382 - - - - - - - - - 606,133,446 7,039,209,841 - 97,857,044 - 14,266,980 - - - 282,567,735 1,992,019 - 1,261,465 3,157,551 401,102,794 - 1,648,913 9,581,101 9,573,769 129,599,930 8,619,636 - 18,697,763 - - - 7,047,682 184,768,794 Deposits with banks and financial institutions Financial assets at fair value through profit or loss Financial assets at amortized cost Financial assets at fair value through other comprehensive income Customers’ acceptance liability Other assets 1,507,500 16,081,786 - - - 10,774,076,456 3,478,644,717 Off-Balance sheet Risks: Guarantees and standby letters of credit - Documentary and commercial letters of credit Forward exchange contracts 187,970,041 1,072,121,756 736,351,397 310,709,943 71,594,462 453,668,438 113,291,022 - 12,740,298 10,624,696 63,390,215 144,444,878 - 608,308,153 8,706,907 2,146,239 46,196,313 32,656,927 66,109 - - - - 51,150,332 101,462,654 445,117,743 48,217,669 1,097,843,274 2,755,196,281 300,250,584 Sovereign LBP’000 Balance sheet Exposure: Deposits with central banks Deposits with banks and financial institutions LBP’000 4,109,828,240 - - 2,565,903,603 91,241,713 960,245,540 21,997,113,095 133,348,134 783,941,416 6,377,309 28,652 16,391,411 113,988,031 2,051,556,487 - 471,853 106,258,679 - - - 47,557,465 385,488,084 191,496 185,726,258 6,363,730 - - - 3,623,221 861,262,317 2013 Banks and Financial Institutions 98,053,593 2013 Retail Trade Manufacturing Industries Wholesale Trade Transport and Storage and Communication Private Individuals LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Educational, Hotels and Media, Advrt, Real Estate Furnished Legal, Acctg, Public Health Developers Apartments and Consulting and and Social and Contractors Restaurants Admin Srvcs Services LBP’000 - - - - - - - - - - - 66,658 LBP’000 LBP’000 Other Total LBP’000 LBP’000 LBP’000 - - - - 4,109,828,240 - - - - 2,565,970,261 Financial assets at fair value through profit or loss 294,552,564 245,275,685 - - - - - - - - - 81,915 539,910,164 Reverse repurchase agreements and loans to banks - 198,492,122 - - - - - - - - - - 198,492,122 Loans and advances to customers - 733,028,598 224,771,272 993,396,920 495,693,313 245,511,860 843,203,092 2,358,919,212 296,087,785 9,278,618 127,723,815 153,901,523 6,481,516,008 Loans and advances to related parties - - 1,034,884 - - 135,675,000 6,517,789 140,704,822 - 506,677 - - 284,439,172 4,348,046,295 30,217,000 - - - - - - - - - 468,421,933 4,846,685,228 - 63,331,015 - 14,395,117 - - - 274,689,979 1,992,019 - 1,172,044 1,984,054 357,564,228 - - 11,630,469 10,639,364 39,906,957 - - - - - - 21,847,268 84,024,058 1,507,500 16,308,582 - - - 31,478,986 65,382 - - - - 33,892,257 83,252,707 Financial assets at amortized cost Financial assets at fair value through other comprehensive income Customers’ acceptance liability Other assets 8,753,934,599 3,852,556,605 Off-Balance sheet Risks: Guarantees and standby letters of credit - Documentary and commercial letters of credit Forward exchange contracts 237,436,625 1,018,431,401 535,600,270 412,665,846 849,786,263 2,774,380,671 298,079,804 9,785,295 128,895,859 680,128,950 19,551,682,188 339,612,115 148,304,319 393,860,193 94,883,936 43,039,263 57,500,413 769,832,184 7,797,609 26,414 21,848,733 73,076,152 1,949,781,331 - 9,389,045 17,984,745 58,588,556 125,923,496 1,456,102 105,339,397 141,051,444 - - - 32,631,772 492,364,557 - 360,795,317 8,216,342 1,470,704 30,135,804 1,026,891 252,480,838 - - - - 1,346,710 655,472,606 170 171 INDEPENDENT AUDITORS' REPORT c) Concentration of assets and liabilities by geographical area: December 31, 2014 December 31, 2013 Lebanon Middle East, Gulf & Africa North Africa Europe Other Total Lebanon Middle East, Gulf & Africa North Africa Europe Other Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 ASSETS Cash and deposits with central banks Deposits with banks and financial institutions ASSETS 3,767,429,356 142,881,051 - 336,361,669 - 4,246,672,076 3,760,814,303 89,656,891 - 384,453,707 - 4,234,924,901 Deposits with banks and financial institutions 295,010,204 657,595,163 76,587,582 1,361,655,015 175,122,297 2,565,970,261 305,084,628 104,739,165 7,473,850 122,239,767 372,754 539,910,164 15,483,961 8,051,460 13,296,410 161,660,291 - 198,492,122 68,924,283 539,794,681 101,964,747 760,541,982 Financial assets at fair value through profit or loss 472,891,667 85,381,994 - 97,985,550 4,567,409 660,826,620 Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks 796,239,465 4,169,123 178,177 53,394,324 - 853,981,089 Reverse repurchase agreement and loans to banks Loans and advances to customers Loans and advances to related parties 3,481,746,131 783,727,566 1,744,513 2,550,296,934 46,026,545 1,517,252,238 Cash and deposits with central banks 44,169,146 6,861,684,290 41,098,759 107,665,413 - 135,675,000 - 284,439,172 Investment securities 4,702,434,384 14,375,130 1,120,553 486,319,389 - 5,204,249,456 70,912,924 7,586,138 - 5,524,996 - 84,024,058 Investments in associates and other investments 125,071,655 - - - - 125,071,655 416,577,513 - - 20,768,872 - 437,346,385 - - 124,779,121 111,219,733 - 135,675,000 6,569,762,207 87,936,598 19,771,521 702,357,751 108,738,896 74,381,085 - 1,648,813 - 184,768,794 85,397,308 - - - - 85,397,308 417,223,597 - - 22,194,509 - 439,418,106 Assets acquired in satisfaction of loans 55,450,924 - - 121,464,103 - 176,915,027 Goodwill Property and equipment 284,121,169 4,646,739 - 10,174,593 - 298,942,501 Property and equipment 280,638,711 3,917,474 - 5,321,008 - 289,877,193 Other assets 136,118,501 7,279,416 - 41,887,225 1,631,734 186,916,876 Other assets 107,883,710 1,534,267 920 52,010,723 1,539,675 162,969,295 Total Assets 16,289,591,395 1,841,417,986 123,658,958 4,833,982,453 156,879,392 23,245,530,184 Total Assets 13,465,787,208 1,922,563,707 100,478,479 5,094,027,012 Investment securities Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill 292,442,624 3,289,325,532 927,442,606 1,999,164 2,233,619,123 29,129,583 6,481,516,008 Loans and advances to related parties 45,547,891 Customers’ acceptance liability - Loans and advances to customers 60,484,558 7,440,312,635 LIABILITIES Deposits from banks and financial institutions Customers’ deposits at fair value through profit or loss Customers’ deposits at amortized cost Related parties’ deposits at amortized cost Acceptances payable Customers’ acceptance liability 230,140,226 23,756,698 1,517,159 394,063,196 - 649,477,279 - 40,694,503 - 278,430 - 40,972,933 10,648,294,926 2,266,540,302 76,214,191 3,992,432,522 30,055,821 965,778,127 - 29,563,121 109,411,916 73,708,065 - 1,648,813 225,452,008 17,208,933,949 Deposits from banks and financial institutions 85,581,268 59,036,441 Customers’ deposits at fair value through profit or loss 29,618,355 15,171,498 3,042,210 795,494 10,315,293,993 2,171,672,731 131,386,558 2,618,662,824 85,234,203 590,465,538 27,053,611 366,186,226 Customers’ deposits at amortized cost - - 271,517,788 - 392,901,106 157,647,001 2,958,342 468,260 46,225,369 791,200 208,090,172 - - 750,882,861 - 750,882,861 - - - 784,768,655 1,318,151 56,834,391 7,511,635 234,264,059 Other liabilities - - 752,063,550 - 752,063,550 12,026,229,632 3,380,865,375 79,049,501 5,263,813,055 289,683,637 15,526,699,743 121,383,318 - - 36,929,032 48,627,557 Acceptances payable 9,967,924 419,756 - 184,768,794 158,631,958 - - 581,694,664 - 784,768,655 64,926,130 - 437,076,955 - 1,025,397,069 Other liabilities Total Liabilities 206,164,309 20,789,020,715 Related parties’ deposits at amortized cost Borrowings from banks and financial institutions and central banks Certificates of deposit - 180,230,045 LIABILITIES Borrowings from banks and financial institutions and central banks Provisions 55,450,924 - 102,274,918 232,963,643 20,982,921,206 Certificates of deposit Provisions Total liabilities 14,977,080 6,703,622 3,648,813 45,282,019 28,315,859 - 63,757,861 10,865,219,621 300,651 2,843,254,014 - 15,390,640 207,232,658 4,535,054,016 1,083,916,658 73,745 84,024,058 - 79,449,152 305,525,662 18,756,285,971 172 173 INDEPENDENT AUDITORS' REPORT d) Credit quality by 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 ratings. The credit quality of financial assets is managed by the Bank 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: December 31, 2014 December 31, 2014 Neither past due nor impaired Financial assets at amortized costs Deposits with central banks Deposits with banks and financial institutions Reverse repurchase agreements and loans to banks Other Assets Financial assets designated at fair value through profit or loss Lebanese government bonds Certificates of deposit issued by the Central Bank of Lebanon Debt securities issued by banks Debt securities issued by companies Credit linked notes issued by banks Other foreign government bonds Quoted equity securities Unquoted equity securities Loans and advances Loans and advances to customers Loans and advances to related parties Financial investments-Financial assets at fair value through other comprehensive income Quoted equity securities Unquoted equity securities Convertible preferred shares issued by a Lebanese bank Cumulative preferred shares issued by a Lebanese bank Non-cumulative preferred shares issued by a Lebanese bank Financial investments-Financial assets at amortized cost Lebanese Government bonds Certificates of deposit issued by the Central Bank of Lebanon Certificates of deposit issued by banks Debt securities issued by banks Debt securities issued by companies Structured Notes CLN Other foreign government bonds High and Standard Grades Sovereign Past due but not Impaired Individually Impaired Allowance for Impairement Collective Provision Accrued Interest Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 - 1,514,363,783 852,825,042 99,955,154 2,467,143,979 4,050,329,972 - - 1,507,500 4,051,837,472 - - - - - - - - - - - - - - - - - - - - 34,052,179 2,888,455 1,156,047 - 38,096,681 4,084,382,151 1,517,252,238 853,981,089 101,462,654 6,557,078,132 - 322,116,176 - - - - 3,535,393 325,651,569 - 15,576,846 73,511,257 77,107,116 - 778,299 23,137,966 190,111,484 137,108,251 - - - 17,582 - - 459,242,009 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3,748,972 43,480 3,344,838 800,444 - - - 11,473,127 140,857,223 15,620,326 76,856,095 77,907,560 17,582 778,299 23,137,966 660,826,620 6,881,104,339 288,756,382 7,169,860,721 - - - 29,589,743 - 29,589,743 283,457,084 - 283,457,084 (188,840,916) - (188,840,916) (196,249,773) - (196,249,773) 52,623,813 3,686,242 56,310,055 6,861,684,290 292,442,624 7,154,126,914 287,936,095 66,878,912 791,437 7,537,500 - - - - - - - - - - - - - - - - - - - - - - - - 287,936,095 66,878,912 791,437 7,537,500 37,958,850 401,102,794 - - - - - - - - - - - - 37,958,850 401,102,794 - 1,945,341,258 - - - - 26,250,055 1,971,591,313 - 45,225,091 139,817,049 43,276,482 15,355,496 - 243,674,118 10,471,893,096 4,111,605,454 - - - - 629,830,942 6,686,777,654 11,197,857,135 - - - - - - - 29,589,743 - - - - - - - 283,457,084 - - - - - - - (188,840,916) - - - - - - - (196,249,773) 80,168,061 141,757 536,632 799,852 489,291 372,421 108,758,069 214,637,932 4,191,773,515 45,366,848 140,353,681 44,076,334 15,844,787 630,203,363 7,039,209,841 21,812,344,301 174 175 INDEPENDENT AUDITORS' REPORT December 31, 2013 December 31, 2013 Neither past due nor impaired Financial assets at amortized costs Deposits with central banks Deposits with banks and financial institutions Reverse repurchase agreements and loans to banks Other Assets Financial assets designated at fair value through profit or loss Lebanese government bonds Certificates of deposit issued by the Central Bank of Lebanon Debt securities issued by banks Debt securities issued by companies Credit linked notes issued by banks Other foreign government bonds Quoted equity securities Unquoted equity securities Loans and advances Loans and advances to customers Loans and advances to related parties Financial investments-Financial assets at fair value through other comprehensive income Quoted equity securities Unquoted equity securities Convertible preferred shares issued by a Lebanese bank Cumulative preferred shares issued by a Lebanese bank Non-cumulative preferred shares issued by a Lebanese bank Financial investments-Financial assets at amortized cost Lebanese Government bonds Certificates of deposit issued by the Central Bank of Lebanon Corporate debt securities Debt securities issued by banks Other foreign government bonds High and Standard Grades Sovereign Past due but not Impaired Individually Impaired Allowance for Impairement Collective Provision Accrued Interest Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 - 2,563,329,727 197,824,836 81,745,207 2,842,899,770 4,067,804,359 - - 1,507,500 4,069,311,859 - - - - - - - - 22,612,500 22,612,500 - - - (22,612,500) (22,612,500) - - - - - 42,023,881 2,640,534 667,286 - 45,331,701 4,109,828,240 2,565,970,261 198,492,122 83,252,707 6,957,543,330 - 232,087,924 - - - - 3,691,831 235,779,755 - 59,654,982 70,364,760 92,672,017 - 754,620 16,999,142 240,445,521 57,855,634 - - - 81,915 - - 290,025,473 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 902,104 183,803 3,301,655 1,359,777 - - - 9,439,170 58,757,738 59,838,785 73,666,415 94,031,794 81,915 754,620 16,999,142 539,910,164 6,532,319,802 280,462,682 6,812,782,484 - - - 29,773,659 - 29,773,659 230,026,860 - 230,026,860 (162,865,646) - (162,865,646) (209,953,494) - (209,953,494) 62,214,827 3,976,490 66,191,317 6,481,516,008 284,439,172 6,765,955,180 280,186,491 29,630,689 783,900 7,537,500 - - - - - - - - - - - - - - - - - - - - - - - - 280,186,491 29,630,689 783,900 7,537,500 39,425,648 357,564,228 - - - - - - - - - - - - 39,425,648 357,564,228 - 2,513,180,666 - - - - 33,717,614 2,546,898,280 - - - - - 29,773,659 - - - - - 252,639,360 - 11,729,011 30,150,000 - 41,879,011 10,295,571,014 1,766,281,598 - - 456,046,602 4,735,508,866 9,094,846,198 - - - - - (185,478,146) - - - - - (209,953,494) 34,866,417 1,801,148,015 646,320 12,375,331 67,000 30,217,000 - 456,046,602 69,297,351 4,846,685,228 190,259,539 19,467,658,130 176 177 INDEPENDENT AUDITORS' REPORT Liquidity risk is the risk that the Group will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades, which may cause certain sources of funding to dry up immediately. In accordance with banking regulations issued by Central Bank of Lebanon, the Group maintains compulsory reserves with Central Bank of Lebanon of 25% and 15% of the weekly average demand and term customers’ deposits in Lebanese Pounds. The Group has the ability to raise additional funds through repurchase facilities available with Central Bank of Lebanon against Government debt securities. 1. The Group sets policies and procedures to ensure that its individual entities are in compliance with liquidity ratios imposed by the regulators in the countries in which each of these entities operates in addition to other internal limits and thresholds. B – Liquidity Risk Management of liquidity risk To mitigate this risk, management has diversified funding sources, manages assets with liquidity in mind, maintaining an adequate balance of cash, cash equivalents and readily marketable securities and monitors future cash flows and liquidity on a daily basis. The Group also has committed lines of credit that it can access to meet liquidity needs. Liquidity risk is the Group’s ability to ensure the availability of funding to meet commitments, both on-balance and off-balance sheet commitments, at a reasonable cost on time. The management of liquidity should not lead to threats to the Group’s solvency. Liquidity risk arises when in case of crisis, refinancing may only be raised at higher market rates (funding risk), or assets may only be liquidated at a discount to market rates (market liquidity risk). Liquidity risk is also caused by mismatches in the maturities of assets and liabilities (uses and sources of funds). 2. Exposure to liquidity risk The tables below summarize the maturity profile of the Group’s assets, liabilities and equity. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date, and do not take account of the effective maturities as indicated by the Group’s deposit retention history and the availability of liquid funds. Management monitors the maturity profile to ensure that adequate liquidity is maintained. Residual contractual maturities of assets and liabilities: The tables below show the Group’s assets and liabilities in Lebanese Pounds and foreign currencies base accounts segregated by maturity: ASSETS Cash and deposits with central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks Loans and advances to customers Loans and advances to related parties Investment securities Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets December 31, 2014 December 31, 2014 LBP Base Accounts LBP Base Accounts Accounts with No Maturity Up to 3 months 3 months to 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 340,703,447 9,482,584 - - (46,441,658) - 28,495,147 7,542,115 82,098,163 23,068,898 282,488,316 46,680,673 774,117,685 17,989,838 499,176 - - 32,215,524 - 59,953,854 - - - - - 110,658,392 - 49,534 - - 26,686,029 - 42,711,340 - - - - - 69,446,903 - - - 1,972,044 58,313,687 - 222,843,942 - - - - 25,253,423 308,383,096 - - 26,947,051 4,198,718 52,275,758 - 66,786,978 - - - - - 150,208,505 1,227,846,846 - 115,224,977 - 171,109,413 - 1,185,804,239 - - - - - 2,699,985,475 6,455,005 - 104,184,150 - 404,058,774 3,559,775 1,224,675,372 - - - - - 1,742,933,076 1,592,995,136 10,031,294 246,356,178 6,170,762 698,217,527 3,559,775 2,831,270,872 7,542,115 82,098,163 23,068,898 282,488,316 71,934,096 5,855,733,132 LIABILITIES Deposits from banks and financial institutions Customers’ deposits at amortized cost Related parties’ deposits at amortized cost Borrowings from banks and financial institutions and central banks Other liabilities Provisions Total Liabilities 5,817 42,511,957 673,784 107,130,998 3,624,588,896 178,944,750 49,534 366,833,244 1,516,807 - 39,754,017 - - 16,237,022 - - 13,483,660 - - 27,729,109 1,588,136 107,186,349 4,131,137,905 182,723,477 - 52,291,076 46,775,142 142,257,776 - - - 3,910,664,644 - - - 368,399,585 91,478,926 - - 131,232,943 55,900,729 - - 72,137,751 - 4,500,000 - 17,983,660 - - - 29,317,245 147,379,655 56,791,076 46,775,142 4,671,993,604 Maturity Gap 631,859,909 (3,800,006,252) (298,952,682) 177,150,153 78,070,754 2,682,001,815 1,713,615,831 1,183,739,528 178 179 INDEPENDENT AUDITORS' REPORT ASSETS Cash and deposits with central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks Loans and advances to customers Investment securities Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets December 31, 2013 December 31, 2013 LBP Base Accounts LBP Base Accounts Accounts with No Maturity Up to 3 months 3 months to 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 301,565,279 - - 2,809,343 2,191,424 3,363,167 - - - - - - (67,026,196) 29,615,632 24,084,937 12,405,726 2,087,666 962,441 47,529,413 - - 81,449,939 - - 23,068,898 - - 278,425,829 - - 21,628,893 - - 701,857,124 33,894,722 28,410,545 - - 1,383,534,684 - 1,685,099,963 - - - - 8,363,934 - 26,401,926 105,042,938 205,582 131,650,446 908,374 1,970,805 5,038,460 - 7,917,639 42,593,634 57,874,038 120,800,781 330,920,871 538,863,697 347,199,132 279,775,030 842,304,355 837,173,980 2,321,908,330 - - - - 47,529,413 - - - - 81,449,939 - - - - 23,068,898 - - - - 278,425,829 23,954,705 - - - 45,583,598 414,655,845 366,021,799 2,456,721,218 1,168,300,433 5,169,861,686 LIABILITIES Deposits from banks and financial institutions Customers’ deposits at amortized cost Related parties’ deposits at amortized cost Borrowings from banks and financial institutions and central banks Other liabilities Provisions Total Liabilities - - - 40,372,756 - 4,523 54,572,023 - - 113,461,950 3,405,931,058 358,037,298 91,471,057 29,912,261 - - 121,383,318 - - - - 40,377,279 - - - - 54,572,023 113,871,641 37,993,563 16,380,893 30,650,091 4,076,326,494 Maturity Gap 588,395,174 300,784,204 5,537 17,848,567 663,067 102,251,529 3,222,583,608 81,095,921 (3,372,036,336) - 358,032,775 - (329,626,753) - 22,400,584 - - 8,081,302 - 328,028,236 - 16,380,893 - 2,440,340,325 - 30,650,091 - 1,137,650,342 102,257,066 3,675,977,820 81,758,988 1,093,535,192 180 181 INDEPENDENT AUDITORS' REPORT ASSETS Cash and deposits with central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks Loans and advances to customers Loans and advances to related parties Investment securities Customers’ acceptance liability Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets LIABILITIES Deposits from banks and financial institutions Customers’ deposits at fair value through profit or loss Customers’ deposits at amortized cost Related parties’ deposits at amortized cost Acceptances payable Borrowings from banks and financial institutions and central banks Other liabilities Certificates of deposit Provisions Total Liabilities Maturity Gap December 31, 2014 December 31, 2014 F/Cy Base Accounts F/Cy Base Accounts Accounts with No Maturity Up to 3 months 3 months to 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 821,949,191 227,309,854 24,821,427 4,440,909 (48,184,547) - 364,817,063 - 77,855,193 357,319,943 153,846,129 16,454,185 114,982,780 2,115,612,127 244,822,753 968,706,757 - 742,247,880 3,618,833,382 62,509,711 148,145,005 154,734,874 - - - - - 5,940,000,362 146,701,616 311,107,378 101,034,980 89,775,202 799,347,060 1,527,067 340,714,178 28,063,652 - - - - - 1,818,271,133 754,577,820 96,955 15,134,145 11,346,336 752,009,366 60,597,524 359,420,220 1,970,268 - - - - - 1,955,152,634 377,238,170 - 51,017,707 - 635,735,222 25,122,063 151,765,115 - - - - - - 1,240,878,277 - - 57,534,372 - 324,111,965 136,492,385 607,647,565 - - - - - - 1,125,786,287 308,387,390 - 164,927,811 - 81,614,315 2,634,099 2,636,532,617 - - - - - - 3,194,096,232 2,653,676,940 1,507,220,944 414,470,442 847,810,327 6,163,466,763 288,882,849 4,609,041,763 184,768,794 77,855,193 357,319,943 153,846,129 16,454,185 114,982,780 17,389,797,052 3,409,134 - 565,718,457 21,710,998 - 339,057,857 37,802,536 10,583,095,249 747,738,773 154,734,874 172,832,125 - 1,253,700,730 3,063,118 28,063,652 26,991,814 - 510,845,530 70,160,703 1,970,268 - - 113,683,509 - - - 3,170,397 46,339,426 - - - - 4,413,143 - - 542,290,930 40,972,933 13,077,796,044 842,673,592 184,768,794 - 177,472,983 - 55,499,776 823,811,352 395,427,913 - - - 12,257,857,202 30,887,712 - - - 1,488,547,337 63,590,572 - 752,063,550 - 1,425,622,437 18,244,715 - - - 131,928,224 100,512,412 - - - 150,022,235 28,725,676 - - - 33,138,819 637,389,000 177,472,983 752,063,550 55,499,776 16,310,927,602 1,291,800,775 (6,317,856,840) 329,723,796 529,530,197 1,108,950,053 975,764,052 3,160,957,413 1,078,869,450 182 183 INDEPENDENT AUDITORS' REPORT ASSETS Cash and deposits with central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks Loans and advances to customers Loans and advances to related parties Investment securities Customers’ acceptance liability Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets LIABILITIES Deposits from banks and financial institutions Customers’ deposits at fair value through profit or loss Customers’ deposits at amortized cost Related parties’ deposits at amortized cost Acceptances payable Borrowings from banks and financial institutions and central banks Other liabilities Certificates of deposit Provisions Total Liabilities Maturity Gap December 31, 2013 December 31, 2013 F/Cy Base Accounts F/Cy Base Accounts Accounts with No Maturity Up to 3 months 3 months to 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 491,457,816 377,787,753 150,847,915 183,933,575 2,235,523,660 137,919,560 17,753,762 2,325,174 45,286,975 13,258,956 16,847,473 155,279,376 (67,700,352) 3,689,539,119 538,642,515 - 58,250,710 - 345,158,502 176,849,771 254,202,884 - 66,536,698 17,487,360 77,542,242 - - 355,896,446 - - 157,161,147 - - 11,451,364 - - 116,914,372 - - 1,702,827,830 6,623,660,358 1,299,666,585 12,680,637 7,925,057 429,890,270 12,202,328 - 384,937,854 37,687,500 9,558,304,347 989,338,131 66,536,698 54,057,489 - 981,264,124 617,211 17,487,360 - 3,051,480 8,967,608 167,650,666 57,704 4,523 - - - 24,877,129 - - 655,226,087 11,039,913,714 1,062,398,315 1,047,601,743 (4,416,253,356) 237,268,270 542,196,778 679,179,320 - 308,355,356 2,549,824,938 229,532 - - - 2,557,606,327 120,293,014 66,222,840 142,388,615 13,989,338 408,259,718 5,188,678 - - - 190,574,483 934,683,283 374,466,928 396,692,278 76,328,540 5,942,652,311 18,180 90,495,282 135,675,000 - 284,439,172 230,225,872 140,859,361 295,286,163 1,439,758,573 2,882,341,126 - - - - 84,024,058 - - - - 77,542,242 - - - - 355,896,446 - - - - 157,161,147 - - - - 11,451,364 471,325 - - - 117,385,697 1,833,306,662 1,351,223,731 970,042,056 1,838,431,807 15,619,159,029 27,761,618 - 665,384,475 - - - - 165,516,491 - - - 3,015,000 45,477,173 - - - - 4,885,043 - - 479,437,598 48,627,557 11,850,721,923 1,002,157,670 84,024,058 102,885,946 18,244,800 100,564,153 37,803,801 271,517,788 - - - - 167,712,893 - 750,882,861 - - 750,882,861 - - - - 24,877,129 796,032,039 934,644,152 149,056,326 42,688,844 14,679,959,477 1,037,274,623 416,579,579 820,985,730 1,795,742,963 939,199,552 184 185 INDEPENDENT AUDITORS' REPORT C – Market Risks Market risk is the risk that the fair value or future cash flows of the financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates, and equity prices. 1. The Management sets limits on the level of exposure by currency and in the aggregate for both overnight and intra-day positions and hedging strategies, which are monitored daily and are in compliance with Central Bank of Lebanon rules and regulations. Below is the carrying value of assets and liabilities segregated by major currencies to reflect the Group’s exposure to foreign currency exchange risk at year end: Management of market risks The Group classifies exposures to market risk into either trading or banking (non-trading) book. The market risk for the trading book is managed and monitored using a combination of limits monitoring and Value at Risk (VAR) methodology. Market risk for non-trading book includes Price and Liquidity risks that are managed and monitored through internal limits, gap analysis, stress testing and sensitivity analysis. a) Market Risk-Trading Book Trading Book contains the Group’s positions in financial instruments which are held intentionally for short-term resale and/or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits. The Board has set limits for the acceptable level of risks in managing the trading book. The Group applies a VAR methodology to assess the market risk positions held and to estimate the potential economic loss based upon a number of parameters and assumptions for change in market conditions. A VAR methodology estimates the potential negative change in market value of a portfolio at a given confidence level and over a specified time horizon. The Group uses simulation models to assess the possible changes in the market value of the trading book based on historical data. VAR models are usually designed to measure the market risk in a normal market environment and therefore the use of VAR has limitations as it is based on historical correlations and market price volatilities and assumes that the future movements will follow a statistical distribution. The VAR that the Group measures is an estimate, using a confidence level of 95% of the potential loss that is not expected to be exceeded if the current market positions were to be held unchanged for one day. The use of 95% confidence level depicts that within a one-day horizon, losses exceeding VAR figure should occur, on average, not more than once every hundred days. The VAR represents the risk of portfolios at the close of a business day, and it does not account for any losses that may occur beyond the defined confidence interval. The actual trading results however, may differ from the VAR calculations and, in particular, the calculation does not provide a meaningful indication of profits and losses in stressed market conditions. b) Market Risk – Non-Trading Or Banking Book Market risk on non-trading or banking positions mainly arises from the interest rate, foreign currency exposures, equity price changes and liquidity risk. 2. Exposure to Foreign Exchange risk Foreign exchange risk is the risk that changes in foreign currency rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of foreign currency risk management is to manage and control foreign currency risk exposure within acceptable parameters while optimizing the return on risk. Foreign exchange exposure arises from normal banking activities, primarily from the receipt of deposits and the placement of funds. Future open positions in any currency are managed by means of forward foreign exchange contracts. It is the policy of the Group that it will, at all times, adhere to the limits laid down by the Central Bank as referred to below. It is not the Group’s intention to take open positions on its own account (proprietary trading) but rather to maintain square or near square positions in all currencies. December 31, 2014 ASSETS Cash and deposits with central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks Loans and advances to customers Loans and advances to related parties Investment securities Customers’ acceptance liability Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets LBP USD EURO GBP Other Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 1,592,995,136 2,229,404,999 305,463,998 1,638,869 117,169,074 4,246,672,076 10,031,294 1,191,534,115 107,630,348 44,941,507 163,114,974 1,517,252,238 246,356,178 414,452,860 - - 17,582 660,826,620 6,170,762 814,716,238 29,237,458 3,856,631 - 853,981,089 698,217,527 4,121,705,568 384,073,957 47,001,239 1,610,685,999 6,861,684,290 3,559,775 2,831,270,872 - 243,801,976 3,978,274,342 151,586,367 5,745,822 26,636,615 28,905,031 - - 1,130,005 39,335,051 604,130,806 3,147,391 292,442,624 7,440,312,635 184,768,794 7,542,115 77,855,193 - - - 85,397,308 82,098,163 23,068,898 282,488,316 71,934,096 5,855,733,132 335,125,434 114,266,860 1,396,318 15,724,178 13,689,844,448 - - 252,239 39,185,645 927,131,113 - 22,194,509 439,418,106 - 39,579,269 176,915,027 - 14,805,628 298,942,501 5,944,867 50,299,411 183,088,197 104,513,118 2,664,479,694 23,241,701,505 LIABILITIES Deposits from banks and financial institutions 107,186,349 137,017,326 19,422,462 Customers’ deposits at fair value through profit or loss - 40,641,661 331,272 Customers’ deposits at amortized cost 4,131,137,905 10,380,600,215 1,022,838,156 Related parties’ deposits at amortized cost 182,723,477 745,144,238 36,757,570 Acceptances payable - 151,586,367 28,905,031 Borrowings from banks and financial institutions and central banks 147,379,655 637,389,000 - Other liabilities 56,791,076 103,889,809 6,685,033 Certificates of deposit - 752,063,550 - Provisions 46,775,142 19,042,612 189,945 Total Liabilities 4,671,993,604 12,967,374,778 1,115,129,469 - - 784,768,655 6,346,330 60,551,811 234,264,059 - - 752,063,550 947 36,266,272 102,274,918 98,422,789 2,130,000,566 20,982,921,206 Currencies to be delivered Currencies to be received Discount/Premium Net on-balance sheet financial position 445,726 385,405,416 649,477,279 - - 40,972,933 90,341,380 1,584,016,293 17,208,933,949 158,401 1,130,005 60,613,383 3,147,391 1,025,397,069 184,768,794 - - - - (400,121,176) 349,460,103 (12,634) (50,673,707) (85,608,498) 308,543,270 (7,551) 222,927,221 (7,151,072) 1,641,639 - (5,509,433) (365,121,497) 201,617,305 588,790 (162,915,402) (858,002,243) 861,262,317 568,605 3,828,679 1,183,739,528 671,795,963 34,928,865 580,896 371,563,726 2,262,608,978 186 187 INDEPENDENT AUDITORS' REPORT 3. Exposure to Interest rate risk December 31, 2013 ASSETS Cash and deposits with central banks Deposits with banks and financial institutions Financial assets at fair value through profit or loss Reverse repurchase agreements and loans to banks Loans and advances to customers Loans and advances to related parties Investment securities Customers’ acceptance liability Investments in associates and other investments Assets acquired in satisfaction of loans Goodwill Property and equipment Other assets Total Assets LBP USD EURO GBP Other Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 1,685,099,963 2,119,862,052 228,991,238 3,672,276 197,299,372 4,234,924,901 8,363,934 1,515,825,144 778,979,549 40,186,864 222,614,770 2,565,970,261 131,650,446 408,177,803 - - 81,915 539,910,164 7,917,639 125,774,355 59,533,713 5,260,138 6,277 198,492,122 538,863,697 4,138,094,682 446,606,339 25,016,173 1,332,935,117 6,481,516,008 - 2,321,908,330 - 242,073,905 2,426,238,569 59,391,344 6,454,432 - 20,387,380 - - 280,026 35,910,835 456,102,557 3,965,308 284,439,172 5,204,249,456 84,024,058 47,529,413 77,540,734 1,508 - - 125,071,655 81,449,939 23,068,898 278,425,829 45,583,598 5,169,861,686 LIABILITIES Deposits from banks and financial institutions 102,257,066 Customers’ deposits at fair value through profit or loss - Customers’ deposits at amortized cost 3,675,977,820 Related parties’ deposits at amortized cost 81,758,988 Acceptances payable - Borrowings from banks and financial institutions and central banks 121,383,318 Other liabilities 40,377,279 Certificates of deposit - Provisions 54,572,023 Total Liabilities 4,076,326,494 Currencies to be delivered Currencies to be received Discount/Premium Net on-balance sheet financial position 335,127,574 - 113,253,339 - 2,235,494 1,508 92,289,508 932,934 11,655,884,503 1,541,888,601 - 20,768,872 437,346,385 - 43,907,808 180,230,045 - 9,214,362 289,877,193 183,743 23,507,731 162,497,514 74,599,220 2,346,314,924 20,788,548,934 75,815,838 89,167,633 6,169,209 308,284,918 581,694,664 48,627,557 - - - 48,627,557 9,161,680,762 1,414,534,009 887,827,444 59,391,344 8,449,847 20,387,380 271,517,788 - 117,740,116 (974,339) 750,882,861 - 9,222,523 206,528 11,382,706,233 1,531,771,058 Interest rate risk arises when there is a mismatch between positions, which are subject to interest rate adjustment within a specified period. The Group’s lending, funding and investment activities give rise to interest rate risk. The immediate impact of variation in interest rate is on the Group’s net interest income, while a long term impact is on the Group’s net worth since the economic value of the Group’s assets, liabilities and off-balance sheet exposures are affected. The Group manages this risk by matching or hedging the repricing profile of assets and liabilities through risk management strategies. The Board has established interest rate gap limits for stipulated periods. The effective interest rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current market rate for a floating rate instrument or an instrument carried at fair value. Below is a summary of the Group’s interest rate gap position on assets and liabilities reflected at carrying amounts at year end segregated between floating and fixed interest rate earning or bearing and between Lebanese Pound and foreign currencies base accounts: 68,099,537 1,206,407,615 15,526,699,743 2,230 280,026 105,878,149 3,965,308 1,083,916,658 84,024,058 - - 392,901,106 (6,531) 45,122,359 202,258,884 - - 750,882,861 1,002 15,447,076 79,449,152 74,545,473 1,685,105,425 18,750,454,683 - - - - (137,172,177) 379,024,741 (45,567) 241,806,997 (54,266,122) 48,659,695 (37,618) (5,644,045) (12,800,601) 12,979,886 (1,628) 177,657 (335,018,570) 93,403,267 (84,813) (241,700,116) (539,257,470) 534,067,589 (169,626) (5,359,507) 1,093,535,192 514,985,267 4,473,498 231,404 419,509,383 2,032,734,744 188 189 INDEPENDENT AUDITORS' REPORT Interest rate gap position in LBP: Non-interest Bearing Up to 3 months LBP’000 LBP’000 3 months to 1 year LBP’000 December 31, 2014 December 31, 2014 Floating Interest Rate Fixed Interest Rate 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years LBP’000 LBP’000 LBP’000 LBP’000 ASSETS Cash and deposits with central banks 340,703,447 17,989,838 - - - - - Deposits with banks and financial institutions 9,981,760 - - - - - - Financial assets at fair value through profit or loss - - - - - - - Reverse repurchase agreements and loans to banks - - - 1,972,044 4,198,718 - - Loans and advances to customers (46,441,658) 32,215,524 20,203,353 29,651,531 36,031,566 162,188,212 399,620,729 Loans and advances to related parties - - - - - - 3,559,775 Investment securities 28,495,147 59,953,854 - - - - - Customers’ acceptance liability - - - - - - - Investments in associates and other investments 7,542,115 - - - - - - Assets acquired in satisfaction of loans 82,098,163 - - - - - - Goodwill 23,068,898 - - - - - - Property and equipment 282,488,316 - - - - - - Other assets 46,680,673 - - - - - - Total Assets 774,616,861 110,159,216 20,203,353 31,623,575 40,230,284 162,188,212 403,180,504 LIABILITIES Deposits from banks and financial institutions 5,817 107,130,998 - - - - - Customers’ deposits at fair value through profit or loss - - - - - - - Customers’ deposits at amortized cost 42,511,957 3,624,588,896 325,331,282 33,089,155 4,038,842 10,802,006 21,797,052 Related parties’ deposits at amortized cost 673,784 178,944,750 1,516,807 - - - 1,556,029 Acceptances payable - - - - - - - Borrowings from banks and financial institutions and central banks - - - - - - - Other liabilities 52,291,076 - - - - 4,500,000 - Certificates of deposit - - - - - - - Provisions 46,775,142 - - - - - - Total Liabilities 142,257,776 3,910,664,644 326,848,089 33,089,155 4,038,842 15,302,006 23,353,081 Interest rate gap position 632,359,085 (3,800,505,428) (306,644,736) (1,465,580) 36,191,442 146,886,206 379,827,423 Total Over 3 months less than 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total Grand Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 17,989,838 - - - 1,227,846,846 6,455,005 1,234,301,851 1,592,995,136 - 49,534 - - - - 49,534 10,031,294 - - - 26,947,051 115,224,977 104,184,150 246,356,178 246,356,178 6,170,762 - - - - - - 6,170,762 679,910,915 6,482,676 28,662,156 16,244,192 8,921,201 4,438,045 64,748,270 698,217,527 3,559,775 59,953,854 - 42,711,340 - 222,843,942 - 66,786,977 - 1,185,804,239 - - 1,224,675,373 2,742,821,871 3,559,775 2,831,270,872 - - - - - - - - - - - - - - - 767,585,144 - - - - 7,542,115 - - - - - - 82,098,163 - - - - - - 23,068,898 - - - - - - 282,488,316 - 25,253,423 - - - 25,253,423 71,934,096 49,243,550 276,759,521 109,978,220 2,537,797,263 1,339,752,573 4,313,531,127 5,855,733,132 107,130,998 49,534 - - - - 49,534 107,186,349 - - - - - - - - 4,019,647,233 41,501,962 6,664,862 12,198,180 2,681,654 5,932,057 68,978,715 4,131,137,905 182,017,586 - - - - - - - - - 32,107 - 32,107 - 182,723,477 - - - 91,478,926 55,900,729 - - 147,379,655 147,379,655 4,500,000 - - - - - - 56,791,076 - - - - - - - - - - - - - - - 46,775,142 4,313,295,817 41,551,496 98,143,788 68,098,909 2,681,654 5,964,164 216,440,011 4,671,993,604 (3,545,710,673) 7,692,054 178,615,733 41,879,311 2,535,115,609 1,333,788,409 4,097,091,116 1,183,739,528 190 191 INDEPENDENT AUDITORS' REPORT Interest rate gap position in LBP: Non-interest Bearing Up to 3 months LBP’000 LBP’000 3 months to 1 year LBP’000 December 31, 2013 December 31, 2013 Floating Interest Rate Fixed Interest Rate 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years LBP’000 LBP’000 LBP’000 LBP’000 ASSETS Cash and deposits with central banks 301,565,279 - - - - - - Deposits with banks and financial institutions 2,809,343 2,191,424 - - - - - Financial assets at fair value through profit or loss - - - - - - - Reverse repurchase agreements and loans to banks - - - 908,374 1,970,805 5,038,460 - Loans and advances to customers (67,026,196) 29,615,632 17,914,587 20,523,409 39,484,716 111,859,577 281,163,648 Investment securities 12,405,726 2,087,666 - - - - - Investments in associates and other investments 47,529,413 - - - - - - Assets acquired in satisfaction of loans 81,449,939 - - - - - - Goodwill 23,068,898 - - - - - - Property and equipment 278,425,829 - - - - - - Other assets 21,628,893 - - - - - - Total Assets 701,857,124 33,894,722 17,914,587 21,431,783 41,455,521 116,898,037 281,163,648 LIABILITIES Deposits from banks and financial institutions 5,537 102,251,529 - - - - - Customers’ deposits at amortized cost 17,848,567 3,222,583,608 312,191,092 20,100,364 6,335,432 15,253,685 27,694,086 Related parties’ deposits at amortized cost 663,067 81,095,921 - - - - - Borrowings from banks and financial institutions and central banks - - - - - - - Other liabilities 40,377,279 - - - - - - Provisions 54,572,023 - - - - - - Total Liabilities 113,466,473 3,405,931,058 312,191,092 20,100,364 6,335,432 15,253,685 27,694,086 Interest rate gap position 588,390,651 (3,372,036,336) (294,276,505) 1,331,419 35,120,089 101,644,352 253,469,562 Total Over 3 months less than 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total Grand Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 - - - - 1,383,534,684 2,191,424 3,363,167 - - - 1,383,534,684 1,685,099,963 - - 3,363,167 8,363,934 - - - 26,401,926 105,042,938 205,582 131,650,446 131,650,446 7,917,639 - - - - - - 7,917,639 500,561,569 6,170,350 22,070,225 18,389,322 8,941,204 49,757,223 105,328,324 538,863,697 2,087,666 962,441 347,199,132 279,775,030 842,304,355 837,173,980 2,307,414,938 2,321,908,330 - - - - - - - 47,529,413 - - - - - - - 81,449,939 - - - - - - - 23,068,898 - - - - - - - 278,425,829 - - 23,954,705 - - - 23,954,705 45,583,598 512,758,298 10,495,958 393,224,062 324,566,278 2,339,823,181 887,136,785 3,955,246,264 5,169,861,686 102,251,529 3,604,158,267 - - - 45,841,683 81,095,921 2,300,220 1,745,870 - - - 102,257,066 1,127,208 - - - 2,956,005 53,970,986 3,675,977,820 - - - 81,758,988 - - 91,471,057 29,912,261 - - 121,383,318 121,383,318 - - - - - - - 40,377,279 - - - - - - - 54,572,023 3,787,505,717 45,841,683 93,771,277 31,658,131 1,127,208 2,956,005 175,354,304 4,076,326,494 (3,274,747,419) (35,345,725) 299,452,785 292,908,147 2,338,695,973 884,180,780 3,779,891,960 1,093,535,192 192 193 INDEPENDENT AUDITORS' REPORT Interest rate gap position in F/CY: Non-interest Bearing Up to 3 months LBP’000 LBP’000 3 months to 1 year LBP’000 December 31, 2014 December 31, 2014 Floating Interest Rate Fixed Interest Rate 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years LBP’000 LBP’000 LBP’000 LBP’000 ASSETS Cash and deposits with central banks 821,949,191 244,822,753 146,701,616 754,577,820 377,238,170 - - Deposits with banks and financial institutions 227,403,125 968,613,486 19,815,510 - - - - Financial assets at fair value through profit or loss 24,821,427 - - - 7,547,236 - - Reverse repurchase agreements and loans to banks 4,440,909 742,247,880 66,871,296 11,346,336 - - - Loans and advances to customers (48,184,547) 3,618,833,382 420,276,434 318,752,193 365,805,676 300,771,168 77,342,484 Loans and advances to related parties - 62,509,711 1,507,500 60,565,661 25,026,888 817,385 2,634,099 Investment securities 364,817,063 148,145,007 227,014,368 92,382,322 11,726,240 311,716,839 - Customers’ acceptance liability 184,768,794 - - - - - - Investments in associates and other investments 77,855,193 - - - - - - Assets acquired in satisfaction of loans 357,319,943 - - - - - - Goodwill 153,846,129 - - - - - - Property and equipment 16,454,185 - - - - - - Other assets 114,982,780 - - - - - - Total Assets 2,300,474,192 5,785,172,219 882,186,724 1,237,624,332 787,344,210 613,305,392 79,976,583 LIABILITIES Deposits from banks and financial institutions 3,409,133 339,057,857 17,210,620 - - - - Customers’ deposits at fair value through profit or loss - 37,802,536 - - - - - Customers’ deposits at amortized cost 565,718,457 10,583,095,249 831,912,184 248,194,192 90,304,499 44,694,389 1,987,980 Related parties’ deposits at amortized cost 21,710,998 747,738,773 3,063,118 70,160,703 - - - Acceptances payable 184,768,794 - - - - - - Borrowings from banks and financial Institutions and central banks - 395,427,913 30,887,712 63,590,572 18,244,715 91,441,146 19,654,410 Other liabilities 177,472,983 - - - - - - Certificates of deposit - - - - - - - Provisions 55,499,776 - - - - - - Total Liabilities 1,008,580,141 12,103,122,328 883,073,634 381,945,467 108,549,214 136,135,535 21,642,390 Interest rate gap position 1,291,894,051 (6,317,950,109) (886,910) 855,678,865 678,794,996 477,169,857 58,334,193 Total Over 3 months less than 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total Grand Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 1,523,340,359 - - - - 308,387,390 308,387,390 2,653,676,940 988,428,996 291,291,868 96,955 - - - 291,388,823 1,507,220,944 7,547,236 101,034,980 15,134,145 43,470,471 57,534,372 164,927,811 382,101,779 414,470,442 820,465,512 22,903,906 - - - - 22,903,906 847,810,327 5,101,781,337 379,070,626 433,257,173 269,929,546 23,340,797 4,271,831 1,109,869,973 6,163,466,763 153,061,244 790,984,776 19,567 113,699,809 31,863 267,037,898 95,175 140,038,875 135,675,000 295,930,726 - 135,821,605 2,636,532,616 3,453,239,924 288,882,849 4,609,041,763 - - - - - - - 184,768,794 - - - - - - - 77,855,193 - - - - - - - 357,319,943 - - - - - - - 153,846,129 - - - - - - - 16,454,185 - - - - - - - 114,982,780 9,385,609,460 908,020,756 715,558,034 453,534,067 512,480,895 3,114,119,648 5,703,713,400 17,389,797,052 356,268,477 155,621,506 26,991,814 - - - 182,613,320 542,290,930 37,802,536 - - - 3,170,397 - 3,170,397 40,972,933 11,800,188,493 421,788,546 262,651,338 23,379,010 1,645,037 2,425,163 820,962,594 - - - - - - - - - - - 711,889,094 13,077,796,044 - - 842,673,592 184,768,794 619,246,468 - - - 9,071,266 9,071,266 18,142,532 637,389,000 - - - - - - - 177,472,983 - - 752,063,550 - - - 752,063,550 752,063,550 - - - - - - - 55,499,776 13,634,468,568 577,410,052 1,041,706,702 23,379,010 13,886,700 11,496,429 1,667,878,893 16,310,927,602 (4,248,859,108) 330,610,704 (326,148,668) 430,155,057 498,594,195 3,102,623,219 4,035,834,507 1,078,869,450 194 195 INDEPENDENT AUDITORS' REPORT Interest rate gap position in F/CY: Non-interest Bearing Up to 3 months LBP’000 LBP’000 3 months to 1 year LBP’000 December 31, 2013 December 31, 2013 Floating Interest Rate Fixed Interest Rate 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years LBP’000 LBP’000 LBP’000 LBP’000 ASSETS Cash and deposits with central banks 491,457,816 377,787,753 150,847,915 542,196,778 679,179,320 - - Deposits with banks and financial institutions 313,591,047 2,108,762,086 - - - - - Financial assets at fair value through profit or loss 17,753,762 64,261 37,813,125 41,215,902 39,146,328 2,987,725 - Reverse repurchase agreements and loans to banks 13,258,956 16,847,473 50,120,178 5,188,678 - - - Loans and advances to customers (67,700,351) 3,689,539,119 233,399,069 607,778,126 181,894,702 356,286,767 72,733,322 Loans and advances to related parties - 58,250,710 - 18,180 90,495,282 135,675,000 - Investments securities 337,600,020 176,849,771 231,017,833 - - - - Customers’ liability under acceptances 78,499,062 4,926,172 598,824 - - - - Investments in associates 77,542,242 - - - - - - Assets acquired in satisfaction of loans 355,896,446 - - - - - - Goodwill 157,161,147 - - - - - - Property and equipment 11,451,364 - - - - - - Other assets 116,914,372 - - - - - - Total Assets 1,903,425,883 6,433,027,345 703,796,944 1,196,397,664 990,715,632 494,949,492 72,733,322 Total Over 3 months less than 1 year 1 to 3 years 3 to 5 years 5 to 10 years Over 10 years Total Grand Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 308,355,356 2,549,824,938 1,750,011,766 - - - - 2,108,762,086 135,253,194 - - 308,355,356 - - 135,253,194 2,557,606,327 121,227,341 7,473,850 79,077,112 27,076,512 141,661,803 13,989,338 269,278,615 408,259,718 72,156,329 105,159,198 - - - - 105,159,198 190,574,483 5,141,631,105 305,243,446 326,905,157 192,572,225 40,405,511 3,595,218 868,721,557 5,942,652,311 284,439,172 407,867,604 - 23,185,051 - 237,784,354 - 140,859,361 - 295,286,163 - - 1,439,758,573 2,136,873,502 284,439,172 2,882,341,126 5,524,996 - - - - - - - - - - - - - 84,024,058 77,542,242 - - - - - - - 355,896,446 - - - - - - - 157,161,147 - - - - - - - 11,451,364 - - 471,325 - - - 471,325 117,385,697 9,891,620,399 576,314,739 644,237,948 360,508,098 477,353,477 1,765,698,485 3,824,112,747 15,619,159,029 LIABILITIES Deposits from banks and financial institutions 12,680,637 384,937,854 - - - - - Customers’ deposits at fair value through profit or loss 7,925,057 37,687,500 - - - - - Customers’ deposits at amortized cost 429,890,271 9,558,304,346 646,865,477 477,559,581 29,977,750 45,008,344 4,220,127 Related parties’ deposits at amortized cost 12,202,328 989,338,131 617,211 - - - - Liability under acceptances 78,499,062 4,926,172 598,824 - - - - Borrowings from banks and financial institutions and central banks - 3,051,480 8,967,608 102,885,946 18,244,800 100,564,153 37,803,801 Other liabilities 167,659,711 53,181 - - - - - Certificates of deposit - - - - - - - Provisions 24,877,130 - - - - - - Total Liabilities 733,734,196 10,978,298,664 657,049,120 580,445,527 48,222,550 145,572,497 42,023,928 271,517,788 - - - - - - 271,517,788 53,181 - - - - - - 167,712,892 - - - 750,882,861 - - 750,882,861 750,882,861 - - - - - - - 24,877,130 12,451,612,286 388,456,136 215,586,512 886,421,602 3,483,829 664,916 1,494,612,995 14,679,959,477 Interest rate gap position (2,559,991,887) 1,169,691,687 (4,545,271,319) 46,747,824 615,952,137 942,493,082 349,376,995 30,709,394 384,937,854 54,057,489 27,761,618 - - - 81,819,107 479,437,598 37,687,500 - - - 3,015,000 - 10,761,935,625 334,398,647 187,824,894 135,538,741 468,829 664,916 989,955,342 5,524,996 - - - - - - - - - - 187,858,603 428,651,436 (525,913,504) 473,869,648 3,015,000 48,627,557 658,896,027 11,850,721,923 - - 1,765,033,569 2,329,499,752 1,002,157,670 84,024,058 939,199,552 196 197 INDEPENDENT AUDITORS' REPORT The effect of a 50 basis point change in interest rates upwards on the earnings of the Group for the subsequent fiscal year for the statement of financial position structure and exposure would be a decrease of LBP50.7billion for the year 2014, a downwards movement will have an inverse effect. The effect of a change in interest rate by 50 basis points on fair values of financial assets and liabilities stated at fair value as at December 31, 2014 would be in the amount of approximately LBP16.2billion and LBP85million, respectively summarized as follows: Financial assets at fair value through profit or loss Customers’ deposits at fair value through profit or loss December 31, 2014 Notes Carrying Amount Level 1 Level 2 Level 3 Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Fair value through other comprehensive income Quoted equity securities 12 287,936,095 287,936,095 - - 287,936,095 Change in Fair Value Unquoted equity securities 12 66,878,912 - 66,878,912 - 66,878,912 LBP’000 Cumulative preferred shares 16,220,843 issued by a Lebanese bank 12 7,537,500 - - 7,537,500 7,537,500 84,674 Convertible preferred shares 12 791,437 791,437 - - 791,437 12 37,958,850 - - 37,958,850 37,958,850 401,102,794 288,727,532 66,878,912 45,496,350 401,102,794 6 4,084,382,151 - 4,184,533,414 - 4,184,533,414 issued by a Lebanese bank Non-cumulative preferred shares issued by a Lebanese bank 49. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES Amortized cost: Deposits with central banks Deposits with banks and For assets and liabilities that are recognised in the 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. financial institutions 7 1,517,252,238 - 1,517,252,238 - 1,517,252,238 Loans and advances to customers 10 6,861,684,290 - 6,868,239,627 - 6,868,239,627 Loans and advances to related parties 11 292,442,624 - 294,016,378 - 294,016,378 Lebanese Government bonds 12 1,971,591,313 - 2,024,854,397 - 2,024,854,397 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. 12 4,191,773,515 - 4,243,957,833 - 4,243,957,833 by banks 12 45,366,848 - 45,366,848 - 45,366,848 Debt securities issued by banks 12 140,353,681 - 140,260,701 - 140,260,701 Debt securities issued by companies 12 44,076,334 - 43,933,052 - 43,933,052 Other foreign government bonds 12 630,203,363 570,432,021 59,416,756 - 629,848,777 Credit linked notes issued by banks 12 15,844,787 - 15,564,321 - 15,564,321 15 439,418,106 - 855,058,397 - 855,058,397 Certificates of deposit issued by the Central Bank of Lebanon The summary of the Group’s classification of each class of assets and liabilities and their fair values are as follows: December 31, 2014 Notes Carrying Amount Level 1 Level 2 Level 3 Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Assets measured at: Assets acquired in satisfaction of loans 20,234,389,250 570,432,021 20,292,453,962 - 20,862,885,983 Liabilities measured at: Fair value through profit or loss Lebanese government bonds Certificates of deposit issued 8 325,651,569 - 325,651,569 - 325,651,569 the Central Bank of Lebanon 8 140,857,223 - 140,857,223 - 140,857,223 Debt securities issued by banks 8 15,620,326 15,619,663 - 663 15,620,326 Debt securities issued by companies 8 76,856,095 36,876,609 39,979,486 - 76,856,095 Credit linked notes issued by banks 8 77,907,560 - 77,907,560 - 77,907,560 Other foreign government bonds 8 17,582 17,582 - - 17,582 Quoted equity securities 8 778,299 778,299 - - 778,299 Unquoted equity securities 8 23,137,966 - 20,725,966 2,412,000 23,137,966 660,826,620 53,292,153 605,121,804 2,412,663 660,826,620 Certificates of deposit issued by Fair value through profit or loss Customers’ deposits at fair value through profit or loss 20 40,972,933 40,972,933 - - 40,972,933 40,972,933 40,972,933 - - 40,972,933 19 649,477,279 - 652,006,194 - 652,006,194 21 17,208,933,949 institutions and central banks 23 784,768,655 Certificates of deposit 24 Amortized cost Deposits from banks and financial institutions Customers’ deposits at amortized cost - 17,141,717,709 - 17,141,717,709 - 784,768,655 - 784,768,655 - 766,535,550 - 766,535,550 Borrowings from banks and financial 752,063,550 19,395,243,433 - 19,345,028,108 - 19,345,028,108 198 199 INDEPENDENT AUDITORS' REPORT December 31, 2013 December 31, 2013 Notes Carrying Amount Level 1 Level 2 Level 3 Total Notes Carrying Amount Level 1 Level 2 Level 3 Total LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 Assets measured at: Amortized cost Deposits from banks and Fair value through profit or loss Lebanese government bonds 8 235,779,755 - 235,779,755 - 235,779,755 the Central Bank of Lebanon 8 58,757,738 - 58,757,738 - 58,757,738 Debt securities issued by banks 8 59,838,785 59,838,785 - - 59,838,785 Debt securities issued by companies 8 73,666,415 33,718,002 39,948,413 - 73,666,415 Credit linked notes issued by banks 8 94,031,794 - 94,031,794 - 94,031,794 Other foreign government bonds 8 81,915 81,915 - - 81,915 Quoted equity securities 8 754,620 754,620 - - 754,620 Unquoted equity securities 8 16,999,142 - 16,999,142 - 16,999,142 539,910,164 94,393,322 445,516,842 - 539,910,164 Certificates of deposit issued by Fair value through other comprehensive income Quoted equity securities 12 280,186,491 280,186,491 - - 280,186,491 Unquoted equity securities 12 29,630,689 - 29,630,689 - 29,630,689 12 7,537,500 - - 7,537,500 7,537,500 12 783,900 783,900 - - 783,900 12 39,425,648 - - 39,425,648 39,425,648 financial institutions 19 581,694,664 21 15,526,699,743 institutions and central banks 23 392,901,106 Certificates of deposit 24 amortized cost Non-cumulative preferred shares issued by Lebanese banks 4,191,724,107 - - 15,477,923,533 - 15,477,923,533 - 393,425,852 - 393,425,852 750,882,861 17,252,178,374 - 746,511,111 - 746,511,111 - 17,200,226,250 - 17,200,226,250 Valuation techniques, significant unobservable inputs, and sensitivity of the input to fair value The following table gives information about how the fair values of assets and liabilities, are determined (Level 2 and Level 3 fair values) and significant unobservable inputs used: December 31, 2014 Date of Valuation Valuation Technique and Key Inputs Assets At fair value through profit or loss: DCF at a discount rate determined based on the yield curve applicable to Lebanese treasury bonds. 4,191,724,107 Certificates of deposit issued by the Central Bank of Lebanon December 31, 2014 DCF at a discount rate determined based on the yield curve applicable to Lebanese treasury bonds, adjusted for illiquidity. Debt securities issued by companies December 31, 2014 Based on net asset value of recent transactions. DCF at a discount rate determined based on CDS, leverage (if any) and cost of unwinding the transaction. 6 4,109,828,240 - 7 2,565,970,261 - 2,565,993,131 - 2,565,993,131 Deposits with banks and financial institutions 582,365,754 Lebanese government bonds December 31, 2014 357,564,228 280,970,391 29,630,689 46,963,148 357,564,228 Amortized cost Deposits with central banks - Borrowings from banks and financial Convertible preferred shares issued by a Lebanese bank 582,365,754 Customers’ deposits at Cumulative preferred shares issued by a Lebanese bank - Loans and advances to customers 10 6,481,516,008 - 6,536,599,319 - 6,536,599,319 Lebanese Government bonds 12 2,546,898,280 - 2,567,507,218 - 2,567,507,218 Credit linked notes issued by banks December 31, 2014 Central Bank of Lebanon 12 1,801,148,015 - 1,837,731,044 - 1,837,731,044 Unquoted equity securities Debt securities issued by banks 12 30,217,000 - 30,217,000 - 30,217,000 Debt securities issued by companies 12 12,375,331 - 13,021,651 - 13,021,651 Other foreign government bonds 12 456,046,602 425,776,347 - - 425,776,347 Unquoted equity securities December 31, 2014 Not valued. 857,456,509 Cumulative preferred shares issued by a Lebanese Bank December 31, 2014 Management estimate based on unobservable input related to market volatility and liquidity. Non-cumulative preferred shares issued by Lebanese banks December 31, 2014 Management estimate based on unobservable input related to market volatility and liquidity. Certificates of deposit issued by the Assets acquired in satisfaction of loans 15 437,346,385 18,441,346,122 - 857,456,509 425,776,347 18,600,249,979 - - 19,026,026,326 Liabilities measured at: Fair value through profit or loss Not valued. At fair value through other comprehensive income: At amortized cost: Customers’ deposits at fair value through profit or loss December 31, 2014 20 48,627,557 48,627,557 48,627,557 48,627,557 - - 48,627,557 - - 48,627,557 Deposits with central banks December 31, 2014 DCF at a discount rate determined based on the Central Bank primary yield curve and Government bond yield curve. 200 201 INDEPENDENT AUDITORS' REPORT December 31, 2014 December 31, 2013 Date of Valuation Valuation Technique and Key Inputs Deposits with banks and financial institutions December 31, 2014 DCF at a discount rate determined at the rate of a one year interest rate swap. Loans and advances to customers December 31, 2014 DCF at the commercial rate for retail loans and at the rate of a one year interest rate swap. Loans and advances to related parties December 31, 2014 DCF at the commercial rate for retail loans and at the rate of a one year interest rate swap. Lebanese Government bonds December 31, 2014 DCF at a discount rate determined based on the yield curve applicable to Lebanese treasury bonds. Certificates of deposit issued by the DCF at a discount rate determined based on the December 31, 2014 Central Bank of Lebanon yield curve applicable to Lebanese treasury bonds. Certificates of deposit issued by banks December 31, 2014 DCF at a discount rate determined based on the market rate of similar securities. Debt securities issued by banks December 31, 2014 DCF at a discount rate determined based on the market rate of similar bonds. Debt securities issued by companies December 31, 2014 DCF using observable input. Other foreign government bonds December 31, 2014 DCF at a discount rate determined based on the yield curve applicable to treasury bonds. Credit linked notes issued by banks December 31, 2014 DCF at a discount rate determined. Assets acquired in satisfaction of loans December 31, 2014 Valuation made by the Bank’s internal experts. Valuation Technique and Key Inputs At fair value through other comprehensive income: Unquoted equity securities December 31, 2013 Not valued. Cumulative preferred shares issued by December 31, 2013 a Lebanese Bank Management estimate based on unobservable input related to market volatility and liquidity. Non-cumulative preferred shares issued December 31, 2013 by Lebanese banks Management estimate based on unobservable input related to market volatility and liquidity. At amortized cost: Deposits with central banks December 31, 2013 DCF at a discount rate determined based on the Central Bank primary yield curve and Government bond yield curve. Deposits with banks and financial institutions December 31, 2013 DCF at a discount rate determined at the rate of a one year interest rate swap. Loans and advances to customers December 31, 2013 DCF at the commercial rate for retail loans and at the rate of a one year interest rate swap. DCF at a discount rate determined based on the Lebanese Government bonds December 31, 2013 yield curve applicable to Lebanese treasury bonds. Certificates of deposit issued by the December 31, 2013 DCF at a discount rate determined based on the Central Bank of Lebanon yield curve applicable to Lebanese treasury bonds. Debt securities issued by banks December 31, 2013 Liabilities At amortized cost: DCF at a discount rate determined based on the market rate of similar bonds. Debts securities issued by companies December 31, 2013 DCF using observable input. Deposits from banks and financial institutions December 31, 2014 DCF at a discount rate determined at the rate of a one year interest rate swap. Assets acquired in satisfaction of loans December 31, 2013 Valuation made by the Bank’s internal experts. Customers’ deposits at amortized cost December 31, 2014 DCF at a discount rate determined at the rate of a one year interest rate swap. Liabilities Borrowings from banks and financial December 31, 2014 institutions and central banks DCF at a discount rate determined at the rate of a one year interest rate swap. At amortized cost: Certificates of deposit December 31, 2014 DCF at a discount rate determined based on the yield curve applicable to Lebanese Government bonds. Deposits from banks and financial institutions December 31, 2013 DCF at a discount rate determined at the rate of a one year interest rate swap. Customers’ deposits at amortized cost December 31, 2013 DCF at a discount rate determined at the rate of a one year interest rate swap. Borrowings from banks and financial institutions and central banks December 31, 2013 DCF at a discount rate determined at the rate of a one year interest rate swap. Certificates of deposit December 31, 2013 DCF at a discount rate determined based on the yield curve applicable to Lebanese Government bonds. December 31, 2013 Date of Valuation Valuation Technique and Key Inputs Assets There have been no transfers between Level 1 and Level 2 during the period. At fair value through profit or loss: The directors consider that the carrying amounts of loans to banks and reverse repurchase agreements, loans and advances to related parties, customers’ acceptance liability, other assets, related parties’ deposits at amortized cost, acceptances payable and other liabilities approximate their fair values due to the short-term maturities of these instruments. DCF at a discount rate determined based on the Lebanese government bonds December 31, 2013 yield curve applicable to Lebanese treasury bonds. Certificates of deposit issued by the December 31, 2013 Central Bank of Lebanon Debt securities issued by companies DCF at a discount rate determined based on the yield curve applicable to Lebanese treasury bonds, adjusted for illiquidity. December 31, 2013 Based on net asset value or recent transactions. Credit linked notes issued by banks December 31, 2013 DCF at a discount rate determined based on CDS,leverage (if any) and cost of unwinding the transaction. Unquoted equity securities 202 Date of Valuation December 31, 2013 50. APPROVAL OF THE FINANCIAL STATEMENTS Not valued. The financial statements for the year ended December 31, 2014 were approved by the Board of Directors in its meeting held on April 13, 2015. INDEPENDENT AUDITORS' REPORT 203 09 | CORPORATE DIRECTORY CORRESPONDENT BANKS 09 Zarif Branch Kaaki Center, Al-Jazaer Street, Zarif Area, Beirut Tel. & Fax: (961-1) 361802/7/9/12; (961-3) 094724 Branch Manager: Mr. Mohamad Tabsh | CORPORATE DIRECTORY REGION II Area Managers: Mr. Souheil Droubi, Mrs. Nada Kambriss, Mrs. Nada Jisr Airport Branch MAIN BRANCH Clemenceau Branch Bankmed Center, 482 Clemenceau Street Tel. & Fax: (961-1) 373937 Branch Manager: Mr. Sobhi Hammoud REGION I Area Managers: Mr. Anis Younis, Mrs. Nahed Malki, Mr. Mohamad Tabsh Aley Branch Main Road, Anwar David Labib Shehayeb Bldg. Tel. & Fax: (961-5) 558111, 558012/3/4; (961-71) 160100 Branch Manager: Mr. Rabih Khaddaj Bakaata Branch Jdeidet El-Shouf, Bakaata District, Fatayri Bldg. Tel. & Fax: (961-5) 501888, 501861/2/3; (961-3) 760808 Branch Manager: Mr. Wajdi AbdulSamad Beirut Souks Branch Beirut Souks, Weygand Street, Ibn Iraq Square, Jewelry Souk Tel. & Fax: (961-1) 992062/3/4 Branch Manager: Mrs. Nahed Malki Fosh Branch Fosh Street, Beirut Central District Tel. & Fax: (961-1) 976444, 999113; (961-3) 922296, 010788 Branch Manager: Mrs. Nahed Malki Khalde Branch Salem Center, Main Road Tel. & Fax: (961-5) 800703/4/5/6; (961-3) 760004 Branch Manager: Mrs. Nada Abou Fakher Msaitbe Branch Al Hana Bldg., Mar Elias Street Tel. & Fax: (961-1) 819202, 314655, 314658, 314678; (961-3) 760011 Branch Manager: Mrs. Dania Idriss Phoenicia Branch Phoenix Tower, Ain El-Mreisseh Tel. & Fax: (961-1) 369069, 366181; (961-3) 762728 Branch Manager: Mr. Anis Younis Saifi Branch Saifi, Intersection of Gouraud-Damascus Street, Saifi Village II Tel. & Fax: (961-1) 974975, 983533, 983688; (961- 76) 095950 Branch Manager: Mr. Bilal Cheikh Tarik Jdeede Branch 206 Malaab Baladi Square Tel. & Fax: (961-1) 303444, 304861/3, 304871; (961-3) 035251 Branch Manager: Mr. Jamal Sakakini MEA Premises Tel. & Fax: (961-1) 629360/1/2; (961-3) 760026 Branch Manager: Mr. Mohamad Khalil Barbir Branch Chehab Bldg., Intersection of Jamal AbdulNaser Mosque, Corniche Mazraa Tel. & Fax: (961-1) 703320, 307223, 307348; (961-3) 094805 Branch Manager: Mrs. Zeina Chehab Bliss Branch Ras Beirut-Bliss Street Tel. & Fax: (961-1) 364716, 364719, 364721, 377334; (961-70) 665300 Branch Manager: Mr. Samer Sabeh Chiah Branch Hadi Nasrallah Blvd., Ismail Bldg., Chiah Tel. & Fax: (961-1) 551999, 552999, 554999; (961-3) 794945 Branch Manager: Mr. Samer Haidar Hamra Branch Al Nahar Bldg., Banque Du Liban Street Tel. & Fax: (961-1) 344677, 353146/7/8/9; (961-3) 760007 Branch Manager: Mrs. Rana Mehio Jnah Branch Jnah, Nkoula Sorsok Street, Karly Bldg. Tel. & Fax: (961-1) 853444/5/6/7; (961-3) 760020 Branch Manager: Mr. Souheil Droubi Justinian Branch Justinian Center, Justinian Street, Sanayeh Tel. (961-1) 354866; (961-3) 094718; Fax: (961-1) 354474 Branch Manager: Mr. Maher Ladki Koraytem Branch Reda Mroue Bldg., Mme. Curie Street Tel. & Fax: (961-1) 780780, 803160/1/2; (961-3) 760064 Branch Manager: Mrs. Nada Kambriss Makdessi Branch Diab Bldg., Makdessi Street, Ras Beirut Tel. & Fax: (961-1) 346934, 344395, 345146, 346323; (961-3) 288357 Branch Manager: Mrs. Randa Bazazo Mazraa Branch Etoile 2000 Center, Corniche El-Mazraa Tel. & Fax: (961-1) 818166/7/8, 819197/8; (961-3) 760017 Branch Manager: Mrs. Reem Zahabi Movenpick Branch Movenpick Hotel, Rawche Tel. & Fax: (961-1) 799880/1 Officer in Charge: Ms. Zeinab Itani Rafik Hariri International Airport Branch Rafik Hariri International Airport-Beirut Tel. & Fax: (961-1) 628828, 628622/3/4; (961-71) 171151 Branch Manager: Mr. Hassan Barbour 207 CORPORATE DIRECTORY Raouche Branch Salah Shamma Bldg., Shouran Street Tel. & Fax: (961-1) 862696, 808563, 808610/1; (961-3) 760002 Branch Manager: Mrs. Alia Hammoud Sodeco Branch Sodeco Square Tel. & Fax: (961-1) 611444, 397762, 397801, 397855, 397879; (961-3) 760027 Branch Manager: Mr. Talal Khaled Verdun Branch Zainoun & Saab Bldg., Nahr El-Maout Tel. & Fax: (961-1) 892055/9, 891566, 879209; (961-3) 760006 Branch Manager: Mr. Elias Saab Jounieh Branch Haret Sakher, Assaf Bldg., Facing Fouad Chehab Stadium Tel. & Fax: (961-9) 645745, 835480, (961-76) 983963 Branch Manager: Mr. Elias Bou Saba Al-Shuaa Bldg., Rashid Karame Avenue Tel. & Fax: (961-1) 866925/6/7/8/9; (961-3) 760063 Branch Manager: Mrs. Nada Jisr Mansourieh Branch REGION III Sin El-Fil Branch Area Managers: Mr. Georges Hallak, Mr. Assad Khoury, Mr. Robert Prince Ashrafieh Branch Hadife Bldg., Charles Malek Avenue Tel. & Fax: (961-1) 200135/6/7/8/9/40; (961-3) 760001 Branch Manager: Mr. Georges Hallak Burj Hammoud Branch Gold & Jewelry Trade Center, 52 Abboud Street Tel. & Fax: (961-1) 244000, 242608/9/10; (961-3) 760065 Branch Manager: Mr. Assad Khoury Dora Branch Banking Center Bldg., Dora Highway Tel. & Fax: (961-1) 257958/60/61, 240990; (961-3) 095098 Branch Manager: Mr. Kalim Ghazi Hazmieh Branch Latifa Center, New Highway, Mansourieh Main Road Tel. & Fax: (961-4) 534174/5, 531956; (961-3) 099133 Branch Manager: Mrs. Rola Haddad Mashakah Bldg., Saint Rita Street, Sin El-Fil Tel. & Fax: (961-1) 482666, 492733/6; (961-3) 099144 Branch Manager: Mrs. Joelle Nassar Zalka Branch Breezvale Center, Main Road Tel. & Fax: (961-1) 884570/1/2, 884569; (961-3) 760021 Branch Manager: Mr. Edgard AbdulSater Zouk Mkayel Branch Abi Chaker Bldg., Zouk Main Road Tel. & Fax: (961-9) 211116, 211073/5/6; (961-3) 760003 Branch Manager: Mr. Challita Salemeh Zouk Mosbeh Branch Zouk Mosbeh, Al-Masayef Main Road, El-Centro Bldg. Tel. & Fax: (961-9) 219632, 218631/2/4; (961-70) 480853 Branch Manager: Mr. Georges Nasr Tufenkjian Center, Brazilia Street Tel & Fax: (961-5) 450186/7, 452649, 452634; (961-3) 652402 Branch Manager: Mr. Robert Prince REGION V REGION IV Al Mina Branch Area Managers: Mr. Edgard AbdulSater, Mr. Elias Bou Saba, Mr. Elias Mady Broumana Branch Rizk Plaza Tel. & Fax: (961-4) 860995/6/7/9; (961-3) 760023 Branch Manager: Mrs. Liliane Abou Khalil Elissar Branch Elissar, Mazraat Yashouh, Bekfaya Main Road, Gerges Aoun Bldg. Tel. & Fax: (961-4) 922199, 911327, 911534, 911573; (961-70) 445455 Branch Manager: Mrs. Joelle Chamoun Furn El-Chebbak Atallah Freij Bldg., Damascus Road Tel. & Fax: (961-1) 291618/9/21, 292076; (961-3) 760009 Branch Manager: Mr. Joseph Edde Ghazir Branch Center Ghazir 3522, Main Road, Ghazir Highway Tel. & Fax: (961-9) 856688, 853332/4/6; (961-3) 384383 Branch Manager: Mrs Rindala Naddaf Jal El-Dib Branch 208 Jdeideh Branch Jal El-Dib Highway, Abi Khalil Bldg. Tel. & Fax: (961-4) 711222, 718645/6/7; (961-3) 760010 Branch Manager: Mr. Nassib Abou Jawdeh Area Managers: Mr. Samer Raad, Mr. Antoine Eid Al-Bawaba Street, Al-Shiraa Square, Jabado Bldg., Tripoli Tel. & Fax: (961-6) 226700/1/2/3/4; (961-70) 867726 Officer in Charge: Mr. Wassim Moubayed Daher El-Ain Branch Tripoli-Koura Main Road, Daher El-Ain, Al-Ghanem Bldg. Tel. & Fax: (961-6) 418061, 418096, 418062; (961-76) 886556 Branch Manager: Mr. Jad Chalhoub Halba Branch Main Road, Abdallah Bldg., Halba Tel & Fax: (961-6) 694871/2/3; (961-70) 445005 Branch Manager: Mr. Samer Haddara Jbeil Branch Cordahi & Matta Center, Jbeil Tel. & Fax: (961-9) 540195, 546542/3; (961-3) 760014 Branch Manager: Mr. Antoine Eid Kfarsaroun Branch Shammas Bldg., Cedars Street Tel. & Fax: (961-6) 950988, 950957, 952098; (961-3) 099122 Branch Manager: Mrs. Rabab Fadel Meryata Branch 209 Ghourani-Abdelrahman Bldg., Ardeh Main Road, Meryata Tel. & Fax: (961-6) 255254, 255442, (961-3) 996922 Officer in Charge: Mr. Samer AbdelRahman CORPORATE DIRECTORY Minieh Branch Nabatieh Branch Tripoli Branch Sineek Branch REGION VI CYPRUS Regional Manager: Mr. Mazen Sammak Area Manager: Mr. Marwan Hachem Limassol International Highway, Zreika Bldg., Minieh Tel. & Fax: (961-6) 464901/2/3/4; (961-70) 480823 Branch Manager: Mr. Bashar Kaja Al Hana Bldg., Jemmayzat Street Tel. & Fax: (961-6) 440443/7, 442093; (961-3) 760013 Branch Manager: Mr. Samer Raad Saida Branch Riad Chehab Bldg., Riad Solh Street Tel. & Fax: (961-7) 721788, 735119/21; (961-3) 760012 Branch Manager: Mrs. Zahera Shamseddine Main Road, Al-Bayad Quarter, Daher Center Tel. & Fax: (961-7) 767936/7/8/9; (961-71) 177187 Branch Manager: Mrs. Nada Khalifeh Boulevard Maarouf Saad, Bankmed Bldg. Tel. & Fax: (961-7) 728451/2/7,728521; (961-70) 867716 Branch Manager: Mrs. Sahar Bizri 9 Constantinou Paparigopoulou Street, Frema House, CY-3106 Limassol, Cyprus P.O.Box 54232, CY-3722 Limassol, Cyprus Tel: (357) 25817152/3, 25817157, 25817178/9 Mobile: (357) 99 642352 Fax: (357) 25372711 Branch Manager: Mr. Georges Abi Chamoun E-mail: [email protected] Saida Eastern Boulevard Branch Al Misbah Bldg., Jizzine Street, Saida Tel. & Fax: (961-7) 725212, 728744; (961-3) 094868 Branch Manager: Mrs. Sabah Teriaki Shehim Branch Erbil, Iraq Toufic Owaidat Bldg., Shreifeh District, Shehim Tel. & Fax: (961-7) 241005/6/7; (961-3) 094873 Branch Manager: Mr. Imad AbdulRehim Tel: (964) 662101930/40/50/60 - 7508114443/6/7/8/9 Mobile: (964) 7508445462 Deputy Country Manager: Mr. Jean Abboud E-mail: [email protected] Wastani Branch Baghdad Al-Wastani Roundabout, Dr. Nazih Bizri Blvd., Bankmed Bldg. Tel. & Fax: (961-7) 750362/3/4; (961-70) 867789 Branch Manager: Mr. AbdulHamid Awwad Majdelyoun Branch Saida-Jizzine Main Road, Before Zaydanieh Junction, Bankmed Bldg. Tel. & Fax: (961-7) 727102/3 REGION VII Regional Manager: Mr. Ahmad Hammoud Chtaura Branch Al-Jinan Bldg., Main Road Tel. & Fax: (961-8) 542491, 542670, 543145/6/7; (961-3) 760019 Branch Manager: Mr. Mohamad Smeily Zahle Branch Rashid Salim Khoury Bldg., Hoshe Zaraina Blvd. Tel. & Fax: (961-8) 802487, 805777, 812389, 810194, 818500; (961-3) 760015 Branch Manager: Mrs. Samia Ghorra Jib Jinnine Branch Al-Hana Bldg., Jib Jinnine, West Bekaa Tel. & Fax: (961-8) 661503/4/5/6; (961-3) 760025 Branch Manager: Mr. Ibrahim Merhi REGION VIII Regional Manager: Mr. Jihad Bazzi 210 IRAQ Tyre Branch Saab & Fardoun Bldg., Banque Du Liban Street Tel. & Fax: (961-7) 351251, 351151/2; (961-3) 332243 Branch Manager: Mr. Jihad Bazzi Sabeh Kousour Street Bankmed Bldg., Al Karrada, Karrada Dakhil, Baghdad, Iraq Tel: (964) 7704849773/4 - 7809174862/3 Mobile: (964) 7821001402 Branch Manager: Mr. Dureid Saad E-mail: [email protected] Basra July 14th Crossing, Saadi Street Basra, Iraq Mobile: (964) 7714969669 Branch Manager: Mr. Camille S. Bedran E-mail: [email protected] Erbil Bakhtiari Street Bankmed Bldg., Bakhtiari Area, Erbil, Iraq Tel. (964) 662101930 / 40 / 50 / 60 - 7508114443 / 6 / 7 / 8 / 9 Mobile: (964) 7508370333 Branch Manager: Mr. Walid Metlej E-mail: [email protected] United Arab Emirates* Bankmed-Dubai International Financial Center Currency House, Tower 2, Level 28, Unit 2801 P.O. Box: 506933-DIFC Dubai, UAE Tel: (971-4) 3889808 Fax: (971-4) 3889809 Senior Executive Officer: Mr. Chafic Mourad MedSecurities-Dubai International Financial Center Currency House, Tower 2, Level 28, Unit 2804 P.O. Box: 506943-DIFC Dubai, UAE Tel: (971-4) 3889099 Senior Executive Officer: Ms. Gina Arab * Operations launched in March 2015 211 CORPORATE DIRECTORY CORRESPONDENT BANKS COUNTRY CORRESPONDENT BANK COUNTRY CORRESPONDENT BANK AUSTRALIA AUSTRIA BAHRAIN BELGIUM CANADA CHINA DENMARK EGYPT FRANCE GERMANY ITALY JAPAN JORDAN KUWAIT NORWAY OMAN ARAB BANK AUSTRALIA * UNICREDIT BANK AUSTRIA BANK ABC ING BANK * KBC BANK BANK OF MONTREAL* BANK OF CHINA STANDARD CHARTERED BANK* DANSKE BANK * ARAB BANK NATIXIS * UBAF COMMERZBANK * DEUTSCHE BANK * UNICREDIT BANK INTESA SANPAOLO * UNICREDIT THE BANK OF TOKYO-MITSUBISHI UFJ * SUMITOMO MITSUI BANKING CORPORATION ARAB BANK * THE HOUSING BANK FOR TRADE & FINANCE * GULF BANK * NATIONAL BANK OF KUWAIT DNB BANK * BANKMUSCAT QATAR SAUDI ARABIA SOUTH AFRICA SPAIN SRI LANKA SWEDEN SWITZERLAND UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES QATAR NATIONAL BANK * DOHA BANK BANQUE SAUDI FRANSI * RIYAD BANK * SAUDI HOLLANDI BANK * THE NATIONAL COMMERCIAL BANK * THE SAUDI INVESTMENT BANK * THE STANDARD BANK OF SOUTH AFRICA * BANCO DE SABADELL * CAIXABANK PEOPLE'S BANK * NORDEA BANK SVENSKA HANDELSBANKEN * BANKMED (SUISSE) * CREDIT SUISSE * EMIRATES NBD MASHREQBANK * HSBC BANK * BANK OF NEW YORK MELLON * CITIBANK * HSBC BANK USA * JPMORGAN CHASE BANK * STANDARD CHARTERED BANK * * Bankmed maintains NOSTRO account(s) with those banks 212 213 CORRESPONDENT BANKS