Annual Report 2016 - AUB...Annual Report 2016 9 Retail Banking This division covers both...

Annual Report 2016 1

Ahli United Bank2

OVERCOMING ADVERSITYMAKES AUBSTRONGER

In these testing times, it takes a well-defined strategy to achieve sustainable growth; a balanced management approach to deliver core business performance; due diligence to mitigate risk and prudent growth to maintain prime asset quality; underpinned by a deep understanding of operating environments to drive product and service innovation.

In continuing to thrive in adversity, AUB is building increased value for shareholders, forging closer relationships with its customers and business partners, and inspiring excellence among its staff.

The more AUB thrives and prospers, the greater its value, to everyone.

Ahli United Bank4


CONTENTS06 Group Mission Statement

08 AUB Operating Divisions

10 Financial Highlights20 Board of Directors' Report

24 Board of Directors

28 Chairman's Statement

30 Group Chief Executive Officer &Managing Director’s statement

32 Corporate Governance

50 Group Business and Risk Review

56 Group Management Organization Structure

57 Group Management

61 Contact Details

62 Consolidated Financial Statements

126 Pillar III Disclosures - Basel III

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to meet customer needs, providefulfillment and development forour staff and deliver outstandingshareholder value.

Objectives• to maximise shareholder value on a sustainable basis.

• to maintain the highest international standards of corporate governance and regulatory compliance.

• to maintain solid capital adequacy and liquidity ratios.

• to entrench a disciplined risk and cost management culture.

• to develop a cross-cultural meritocratic management structure.

• to optimise staff development through business driven training and profit related incentive.

• to contribute to the social and economic advancement of the communities in which the Group operates.

GROUP MISSION STATEMENT

TO CREATE AN UNRIVALLED ABILITY...


AUB Vision & Strategy• Develop an integrated pan regional financial services group model centered

on commercial & retail banking, private banking, asset management and life insurance with an enhanced Shari’a compliant business contribution.

• Acquire banks and related regulated financial institutions in the Gulf countries (core markets) with minimum targeted 10% market share to be achieved through mergers, acquisitions and organic growth.

• Acquire complementary banking platforms in secondary markets enjoying strong cross border business flows with Gulf countries or with economic structures similar to the Gulf countries.

GROUP MISSION STATEMENT(Continued)

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Corporate BankingThis division covers all the Bank’s capital-intensive activities in riskasset generation and funding regionally and internationally.

• Corporate and Trade Finance

• Commercial Property Finance

• Residential Property Finance

• Acquisition and Structured Finance

• Correspondent Banking

• Shari’a Compliant Banking

Private Banking & Wealth ManagementThis division generally includes all the low capital-intensive sectors of the business, offering wealth management services to individuals and institutions based on performance and a balanced product mix.

• Private Banking and Asset Management

• Real Estate Fund Management

• Shari’a Compliant Banking

AUB OPERATING DIVISIONS


Retail BankingThis division covers both conventional and Shari’a Compliant individual customers’ deposits, loans, overdrafts, credit cards and residential mortgages.

Treasury and InvestmentsThis division provides money market, trading and treasury services and is also responsible for the management of the Group’s funding.

• Money Market Services

• Foreign Exchange Services

• Hedging and Trading Solutions

• Structured Products

• Investment Management

• Shari’a Compliant Treasury Products

Risk ManagementThis division is responsible for the identification, assessment and ongoing control of all material risks that could affect the Group’s business & operations.

• Risk Management

• Legal

• Compliance

AuditThis division is an integral part of the control environment of the Group. The role of audit is to understand the key risks of the Bank and examine and evaluate the adequacy and effectiveness of the system of risk management and internal control in order to identify legal, regulatory or policy shortcomings.

Support ServicesThese divisions provide back end banking services to support ongoing business activities of the Group, as well as supporting the Group’s expansion through mergers and acquisitions.

• Finance

• Strategic Development

• Information Technology

• Operations

• Services

• Human Resources

AUB OPERATING DIVISIONS(Continued)

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FINANCIAL HIGHLIGHTS

Ownership in Group Entities

74.3%

100%

AUBLUAE


FINANCIAL HIGHLIGHTS (Continued)

Net Profit US$ ‘000sUS$ 570,640

Total Loans US$ ‘000sUS$ 18,606,883

Total Assets US$ ‘000sUS$ 31,322,484

Shareholders’ Equity US$ ‘000sUS$ 3,500,827

8Countries

3796Committed employees

141Branches

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NET PROFIT US$ ‘000s

570,640

2016 570,640

2011 310,610

2011 28,329,762

* Net profit excluding exceptional non-recurring gain was US$ 366,464 thousands

2012

2013

2014

2015

335,703

579,374*

482,529

537,248

570,640570,640570,640

TOTAL ASSETS US$ ‘000s

31,322,484

2016 31,322,484

2012

2013

2014

2015

29,872,574

32,651,893

33,444,888

33,965,317



TOTAL LOANS US$ ‘000s

18,606,883

2016 18,606,883

2011 15,495,961

2011 2,537,431

SHAREHOLDERS’ EQUITY US$ ‘000s

3,500,827

2016 3,500,827

2012

2013

2014

2015

15,972,219

17,305,682

18,464,536

19,353,181

2012

2013

2014

2015

2,776,209

3,148,824

3,390,874

3,517,737


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AHLI UNITED BANK B.S.C.

US $ '000s

Dec 16 Dec 15 Dec 14 Dec 13 Dec 12 Dec 11

Net profit* 570,640 537,248 482,529 579,374 335,703 310,610

Total assets 31,322,484 33,965,317 33,444,888 32,651,893 29,872,574 28,329,762

Total loans 18,606,883 19,353,181 18,464,536 17,305,682 15,972,219 15,495,961

Total liabilities 26,782,982 29,605,103 29,614,669 29,086,790 26,711,067 25,418,621

Shareholders' equity 3,500,827 3,517,737 3,390,874 3,148,824 2,776,209 2,537,431

Non-controlling interest 438,675 442,477 439,345 416,279 385,298 373,710

Return on average assets (ROAA) 1.8% 1.7% 1.6% 1.3% 1.3% 1.2%

Return on average equity (ROAE) 15.7% 15.6% 15.2% 13.4% 13.0% 12.7%

Cost to income ratio 27.8% 28.3% 29.2% 30.0% 31.5% 32.4%

Financial leverage 6.8 7.5 7.7 8.2 8.4 8.7

Risk assets ratio** 17.1% 16.7% 15.5% 16.2% 15.6% 16.0%

Net interest margin 2.56% 2.54% 2.40% 2.32% 2.20% 2.10%

Earnings per share (US cents) - basic 8.0 7.7 7.3 9.0 5.2 4.9

Earnings per share (US cents) - diluted 8.0 7.7 7.3 9.0 5.2 4.8

* Attributable to Bank’s equity shareholders ** Under BASEL III from 2015 + Net profit excluding exceptional non-recurring gain related to divested ABQ stake was US$ 366,464 thousands (2013 Total ROAA including gain related to the divested ABQ stake was 2.0%) (2013 Total ROAE including gain related to the divested ABQ stake was 20.1%)


+


PRINCIPAL SUBSIDIARIES

KUWAIT:AHLI UNITED BANK K.S.C.P.

KD '000s


Net profit* 40,348 42,805 47,008 42,459 38,539 31,544

Total assets 3,692,161 3,904,303 3,596,928 3,164,976 2,632,922 2,627,839

Total loans (financing receivables) 2,706,054 2,680,334 2,480,431 2,140,922 1,728,082 1,617,722


Shareholders' equity 385,048 356,158 326,868 309,792 282,809 262,190

Non-controlling interest - 4,677 12,452 13,363 12,572 12,841

Return on average assets 1.0% 1.2% 1.4% 1.5% 1.4% 1.3%

Return on average equity 11.0% 12.7% 15.1% 14.9% 14.5% 12.7%




Earnings per share (KD - fils) 25.9 27.4 30.1 27.2 24.7 20.2

* Attributable to Bank’s equity shareholders ** Under BASEL III from 2014


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UNITED KINGDOM:AHLI UNITED BANK (UK) PLC

US $ '000s


Net profit 32,782 40,328 49,028 41,216 36,376 36,380

Total assets 2,580,972 2,723,683 3,671,428 4,151,944 3,434,061 3,419,561

Total loans 1,170,198 1,292,433 1,414,732 1,597,323 1,609,390 1,767,372







Risk assets ratio* 25.7% 27.4% 19.5% 17.5% 18.9% 17.5%

Earnings per share (US cents) 16.4 20.2 24.5 20.6 18.2 18.2

* Under BASEL III from 2015




IRAQ:COMMERCIAL BANK OF IRAQ P.S.C.

IQD Millions

Dec 16 * Dec 15 * Dec 14 Dec 13 Dec 12 Dec 11

Net profit 7,578 8,109 10,462 10,689 14,310 7,980

Total assets 423,819 414,889 449,273 334,843 293,437 247,446

Total loans 9,904 28,334 23,976 20,230 18,295 12,889

Total liabilities 141,878 140,688 164,888 138,264 150,237 112,261






Risk assets ratio 728.8% 535.8% 760.4% 489.7% 414.5% 566.3%

Earnings per share (IQD - fils) 30.3 32.4 41.8 42.8 57.2 31.9

Based on financial statements under local GAAP, 2016 financial statements based on IFRS. *2016 and 2015 information are subject to approval at Annual General Meeting


Ahli United Bank18


EGYPT:AHLI UNITED BANK (EGYPT) S.A.E.

EGP’ 000s


Net profit* 2,389,921 475,728 365,425 285,846 244,946 195,868

Total assets 42,354,094 30,614,671 24,983,857 19,972,167 15,602,707 12,854,828

Total loans 19,376,811 14,959,474 12,072,608 9,387,495 7,456,483 5,802,342


Shareholders' equity 5,177,254 2,893,243 2,113,922 1,865,685 1,552,780 1,096,322






Earnings per share (EGP) 9.7 2.0 1.7 1.3 1.2 1.1

* Attributable to Bank’s equity shareholders ** Under Basel II from 2012



PRINCIPAL ASSOCIATE

OMANAHLI BANK S.A.O.G

OMR’ 000s


Net profit 29,552 27,727 25,127 23,030 21,743 18,224

Total assets 1,899,654 1,898,265 1,644,811 1,339,485 1,099,230 929,604

Total loans 1,522,106 1,518,052 1,388,871 1,104,917 927,392 768,606

Total liabilities 1,656,706 1,670,982 1,445,281 1,154,590 931,716 809,392






Risk assets ratio* 15.0% 14.5% 14.0% 14.6% 16.9% 17.5%

Earnings per share (Baiza) 20.7 19.5 17.6 16.2 15.3 12.8

* Under Basel III from 2013


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The Directors of Ahli United Bank (“AUB” or the “Bank”) are pleased to submit the Annual Report and accompanying consolidated Financial Statements for the year ended 31 December 2016.

General Operating Environment

Subdued global trade and investment flows and heightened policy uncertainty exacerbated by low average oil prices and a generally weak economic environment marked another difficult year for the world economy. As per the World Bank Group estimate, global growth in 2016 is estimated at a post crisis low of 2.3 percent and is projected to rise to 2.7 percent in 2017. The fall-out of the Brexit vote is expected to continue to unravel in the coming years together with the lingering uncertainty about the course of US economic policy under the new Administration and have an adverse global impact on the short term prospects across many emerging markets and developing economies (EMDEs). While downside risks to growth forecasts remain, fiscal stimulus measures, if implemented, may boost US and global growth prospects.

Growth in the Middle East and North Africa (MENA) is expected to modestly pick up as the average Brent crude price of US$ 45/barrel in 2016 is forecast to rise to a consensus average forecast of US$ 57/barrel subject to maintenance of agreement to production cuts amongst OPEC members and certain non-OPEC producers, without triggering an increased flow of shale oil production. This oil price level represents a substantial improvement since the low of US$ 27.9/barrel on 20 January 2016. Meanwhile, the GCC governments remain focused on reforms, economic diversification measures and fiscal consolidation to mitigate, to some extent, the impact of continuing average low oil prices on their economies. Nevertheless, it is expected that the GCC governments will pursue a fiscal deficit policy to sustain their economies, with a modest rise in capital and infrastructure spending.

Performance Overview

Despite the uncertain global landscape and the continuing economic and security challenges faced in its operating markets, AUB reported another strong performance in 2016, achieving a 6.2% growth in net profit, with core earnings growth sustained. The key business focus was net profit not balance sheet quantum driven. This was achieved through prudent risk taking, effective asset & liability management, including redeployment of liquidity in a prudent and diversified manner, and continuance of AUB’s intelligent spend policy.

The key highlights of performance for 2016 were:

• Consolidated net profit, attributable to the Bank’s equity shareholders, of US$ 570.6 million was attained as against US$ 537.2 million in 2015. The 6.2% rise in net profit was achieved in a continuing weak operating environment together

BOARD OF DIRECTORS’ REPORT

with a decline in average foreign currency translation rates primarily resulting from the weakening of the Egyptian Pound after its floatation and of the Sterling Pound after the Brexit vote during the year.

• Total operating income reached US$ 1,149.0 million, an increase of 5.2% over 2015. Increase in the operating income was broad based and underpinned by a rise in Net Interest Income of US$ 13.5 million (+1.7%) together with fee and commission income increasing by US$ 15.4 million (+9.7%).

• Asset quality was contained at an NPL ratio of 2.3% with a total provisions to impaired loans ratio of 155.6% (2015: 181.9%) maintained at end of the year. At 31 December 2016, specific provision coverage was maintained at 84.9% (2015: 84.6%). Overall cost of risk for 2016 improved to 0.70% of average gross loan book (2015: 0.83%).

• Total Balance Sheet footings decreased by US$ 2.7 billion representing a 7.8% drop to US$ 31.3 billion (2015: US$ 34.0 billion) due to a significant devaluation of the Egyptian Pound contributing US$ 1.7 billion to the decline and the balance reduction reflecting Bank’s effective management of the balance-sheet levels through lower reliance on bank deposits and retirement of marginally profitable loans. Overall, during the year, the focus was on prudent re-deployment of surplus liquidity into yield enhancing sovereign and investment grade bonds and reduction in high cost deposits/ borrowings.

• Intelligent cost spend discipline across all sectors was sustained resulting in an improvement of the cost to income ratio to 27.8% (2015: 28.3%).

• Return on Average Equity increased to 15.7% (2015: 15.6%) while the return on Average Assets increased to 1.8% (2015: 1.7%).

Strategic & Corporate Development

• During March 2016, AUB Group launched its banking operations in Dubai International Financial Centre (DIFC), UAE through Ahli United Bank Limited (AUBL), a 100% subsidiary of AUB. This launch, pursuant to issuance of a Category 1 license issued by the Dubai Financial Services Authority (DFSA), enables AUB Group to offer all corporate banking, private banking, wealth management, trade finance, treasury and cross-border financial products and services to clients based in the UAE as well as in the wider Middle East region on a conventional as well as a Shari’a compliant basis. The expansion into the UAE market is in line with AUB Group’s strategy to develop integrated banking presences in all the Gulf markets and to act as a preferred regional intermediary for its clients particularly in terms of securing their cross border banking needs.


• In October 2016, AUB Kuwait successfully completed a US$ 200 million issue of Additional Tier 1 Perpetual Basel III Compliant Sukuk. The strong demand generated for AUB Kuwait’s Additional Tier 1 Sukuk post the successful fixed income investor meetings in Asia, the Middle East and Europe translated to an oversubscription of the issue by more than three times. This issue represents the second tapping of the hybrid capital market after AUB’s very successful US$ 400 million issue in April 2015. These issues add a new source of cost effective funding to the Bank’s regulatory net worth. The latest issue is a clear indication of the confidence of both local and global investors in the AUB Group’s diversified business model, its robust financial performance, the overall strength of its financial position and credit worthiness.

Recognition

During December 2016, AUB received for the second time the ‘Best Bank in Middle East’ award from the UK based Banker magazine. The Banker, fully owned by the Financial Times (FT) Group, is considered one of the most respected and prestigious international financial magazines in the print media.

From 2016 to-date, AUB Group has been a recipient of a number of prestigious banking awards and includes the following:

• Bank of the Year, Middle East - 2016 awarded by The Banker magazine

• Best Regional Bank, GCC- 2016 awarded by Capital Finance International

• Bank of the Year, Bahrain - 2016 awarded by The Banker magazine

• Best Bank in Bahrain – 2016 awarded by Euromoney

• Best Bank in Bahrain – 2016 awarded by Global Finance

• Best Local Bank in Bahrain – 2016 awarded by Emea Finance magazine

• Best Bank in Bahrain -2016 awarded by Asiamoney

• Private Bank of the Year, Bahrain – 2016 awarded by The Banker and PWM

• Best FX provider in Bahrain – 2017 awarded by Global Finance

• Best Private Bank in Bahrain – 2017 awarded by Global Finance

• Best Trade Finance Provider in Bahrain – 2017 awarded by Global Finance

Directors’ Shareholdings & Remuneration

The number of shares held by directors, senior management and their related parties as at 31 December 2016 is disclosed in the Corporate Governance Report.

For Directors’ fees and related expenses, salaries and other benefits, please refer to Note 25 of the consolidated financial statements.

Appropriations

On the basis of the results of the Bank for the year ended 31 December 2016, the Board of Directors recommends the following appropriations for approval by the shareholders:

• Cash dividend - ordinary shares at 4.5 US cents per share (2015: 4.5 US cents per share) and a bonus issue of one ordinary share for every ten ordinary shares held (2015: bonus of one ordinary share for every twenty ordinary shares held)

• Transfer to statutory reserve of US$ 57.1 million

• Donations of US$ 1.0 million

Conclusion

As the Chairman of the Board, it is my pleasure to thank our shareholders for their continuing confidence in AUB. Our achievements during 2016 were only made possible through the support and trust of our clients, business partners, customers, dedication and professionalism of our staff and guidance of regulators and other related government entities in our operating markets.

While operating challenges remain strong, we start 2017 with focused plans and objectives to advance our regional strategy in a balanced and prudent manner to meet the aspirations of all our stakeholders.

Hamad M. Al-HumaidhiChairman 21 February 2017

BOARD OF DIRECTORS’ REPORT(Continued)

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Ahli United Bank24

BOARD OF DIRECTORS

Chairman since 31 March 2015, holds a Bachelor of Art (Law) degree from University of Kuwait, 1975.

Chairman, Ahli United Bank (UK) plc; Chairman, Ahli United Bank Limited, Dubai; Director General, The Public Institution for Social Security, Kuwait; Chairman, Wafra Intervest Corporation, Kuwait; Chairman, Kuwait Medical City, Kuwait. Formerly: Deputy Director General, The Public Institution for Social Security, Kuwait; Legal Advisor, National Bank of Kuwait; Legal Department Manager, Administration Department Manager, Legal Researcher in Legal Department, The Public Institution for Social Security, Kuwait ; Legal Researcher, The Civil Service Commission.

42 years of experience covering financial services (Social Security) and real estate sectors.

Hamad Mishari Al-Humaidhi (Non-Executive Director)

Chairman and Member of the Executive Committee

Director since, 27 March 2006, holds a Bachelor of Commerce-Finance Major from Kuwait University, 1991.

Deputy Chairman, Ahli United Bank Limited, Dubai; Chairman, Tamdeen Holding Group, Kuwait; Chairman, Tamdeen Shopping Centres Co., Kuwait; Chairman, Tamdeen Bahraini Real Estate Co, Bahrain; Board Member, The Supreme Council for Planning & Development, Kuwait; Honorary Chairman of the Board of Trustees, Arabian Horse Centre (Kuwait State Stud); Formerly: Chairman & CEO, Tamdeen Real Estate Co, Kuwait; Board Member, Fateh Al Khear Holding Co., Kuwait; Board Member of Al Maalem Holding Co, Bahrain; Board Member, Global Omani Development & Investment Co, Oman; Deputy Chairman, Tamdeen Shopping Centre Co, Kuwait ; Board Member, Bank of Kuwait & The Middle East, Kuwait ; Vice Chairman, Tamdeen Investment Co, Kuwait; Board Member, Al Ahli Bank of Kuwait, Kuwait; Board Member, Kuwait National Cinema Co., Kuwait; Board Member, Arab Financial Consulting Co., Kuwait; Former, CEO, Real Estate Investment Fund, Kuwait; Former, Board Member, The Public Warehousing Co., Kuwait. 25 years of experience, covering financial services and real estate sectors.

Mohammad Jassim Al-Marzooq (Non-Executive Director)

Deputy Chairman and Member of the Executive Committee

Director since 29 March 2003, holds a High Diploma in Statistics from the University of Alexandria-Egypt, 1973 and a B.Com from Baghdad University, Iraq, 1969.

Deputy Chairman, Ahli United Bank (UK) plc; Director; Ahli United Bank Limited, Dubai; Chairman, Osool Assets Management Co.; Chairman, Esterad Investment Co.; Deputy Chairman, Solidarity Group Holding Co. and Chairman of the Nomination & Remuneration Committee; Chairman, Al Ahli Real Estate Co. SPC, Bahrain; Board Member, Social Insurance Organisation, Bahrain; Formerly: Director General, Pension Fund Commission; Asst. Undersecretary for Financial Affairs, Ministry of Finance & National Economy; Asst. Undersecretary for Economic Affairs, Ministry of Finance & National Economy; Director of Investment, Central Bank of Bahrain; Vice Chairman and Chairman of Executive Committee, National Bank of Bahrain; Board Member, Bahrain Petroleum Co. (Bapco); Board Member, Gulf International Bank; Board Member, Gulf Investment Corporation, Board Member, Arab Investment Co.; Board Member, General Organization for Social Insurance (GOSI) and Chairman, Audit Committee.

40 years of experience covering financial services and national economic sectors.

Rashed Ismail Al-Meer (Non-Executive Director)

Deputy Chairman and Member of the Executive Committee


BOARD OF DIRECTORS(Continued)

Director since 16 May 2001, holds a B.A. in Law from Kuwait University, 1976.

Director, Commercial Facilities Company, Kuwait; Formerly: Director, Ahli United Bank (Egypt) SAE; Legal Consultant for Director General, The Public Institution for Social Security, (Kuwait);

35 years of experience in the financial services sector (Legal).

Abdulla MH Al-Sumait (Independent Director)

Member of the Audit & Compliance Committee, Nominating Committee and Compensation Committee

Director Since, 25 March 2014, holds a Bachelors Degree in Industrial Systems Engineering from University of Southern California, 1981.

Chairman, Al-Marzouq Company for Import & Export, Kuwait; Board Member, Ahli United Bank (UK) Plc.; Vice Chairman, Rouyah Investment & Leasing Co, Kuwait; Formerly; Chairman, The Kuwaiti Manager Company, Kuwait; Board Member, Kuwait Finance House, Kuwait; Manager Treasury, Gulf Investment Corporation, Kuwait; Asst. Manager-Treasury, National Bank of Kuwait.

34 years of experience covering financial services and real estate sectors.

Adnan Al-Marzouq (Independent Director)

Member of the Executive Committee

Director since 29 March 2003, holds a degree, in Business Administration from Kuwait University, 1993.

Chairman, Ahli United Bank (Egypt) SAE; Chairman, Fluor Kuwait Co. KSC, Kuwait; Board Member, Ahli United Bank Limited, Dubai; Board Member, Tamdeen Real Estate Company KSCC, Kuwait; Formerly: Vice Chairman, Fouad Alghanim & Sons Group of Companies, Kuwait; Chairman, AlGhanaem Industrial Company KSC, Kuwait; Member of the Supervisory Board, Jet Alliance Holding AG, Austria.

27 years of experience covering financial services, manufacturing, trading, real estate and contracting sectors.

Mohammed Fouad Al-Ghanim (Independent Director)

Member of the Executive Committee

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Director since 29 March 2016, holds a Bachelor of Science - Mechanical Engineering, degree from Kuwait University, 1984.

Chairman, Noor Jordan Kuwait Financial Investment Co, Jordan; Vice Chairman, Noor Financial Investment Co. KSCC, Kuwait; Director, Mohammad Saleh Reza Yousuf Behbehani Co. WLL; Director, Behbehani Capital Co. for Selling & Purchasing Shares & Bonds W.L.L, Kuwait. Board Member, Noor Telecommunications Co. KSCC, Kuwait; Board Member, Al-Alfain Printing, Publishing & Distribution Co. KSCC, Kuwait; Board Member, Kuwait Insurance Co. SAK, Kuwait; Board Member, United Beverage Co. KSCC, Kuwait; Former, Board Member, Al Ahli Bank of Kuwait KSCP.

33 years of experience covering financial services, trade, engineering and real estate sectors.

Abdulghani M.S.Y. Behbehani (Independent Director)

Member of the Audit & Compliance Committee and Nominating Committee

Director since, 28 March 2012, holds an Executive Development Program Certificate from Harvard Business School, Boston-USA, 1997, M.A. Public Administration from Carleton University, Ottawa-Canada, 1975, B.A. Economics & Political Science from The University of Western Ontario London- Canada 1972. Director, Ahli United Bank (Egypt) S.A.E., Director, Ahli United Bank K.S.C.P, Kuwait; Director, Ahli United Bank Limited, UAE; Director, KMEFIC, Kuwait; Director, Macquarie Bank India Infrastructure Fund, Singapore & Bombay; Member of the Investment Committee, APIS Growth Fund; Formerly: International Finance Corporation’s (IFC) Director of Investment & Advisory Operations for the MENA region-20 Countries, Pakistan to Morocco; IFC-Deputy Director for Global Industry & Service Investments, Risk Supervisor, Asia, Bank of Nova Scotia.

42 years of experience covering financial services and public finance sectors.

Michael Essex (Independent Director)

Chairman of the Audit & Compliance Committee, Nominating Committee and Compensation Committee

Director Since, 29 March 2016, holds a Master’s Certificate in Project Management from The George Washington University, School of Business, 2009; Certified Investment and Derivatives Auditor, 2009; Certified International Financial Accountant, 2014; Certified Professional Internal Auditor, 2015; Certified Merger & Acquisition Specialist, 2016; Investment Diploma from American University of London, 2009; Bachelor of Political Science from Kuwait University, 1999; Associate’s Certificate in Project Management from The George Washington University, School of Business, 2008.

Financial Advisor to Director General, The Public Institution for Social Security, Kuwait; Board Member, Petro Link Holding Co. (K.S.C.C), Kuwait. Formerly: Advisory Board Member, Markaz Real Estate Fund, Kuwait; Board Member, Al Salmiya Group for Enterprise Development Co. (K.S.C.C), Kuwait; Chairman, United Marketing and Organizing Exhibitions (K.S.C.C), Kuwait; Vice Chairman, Arab Gulf Company for Food & Supermarket (S.A.K.C), Kuwait.

18 years of experience covering financial services, trading, real estate and manufacturing sectors.

Ahmed Ghazi Al-Abduljaleel (Non-Executive Director)

Member of the Audit & Compliance Committee and Nominating Committee



Director since 1 October 2016, holds a Banking Diploma from Institute of Bankers, Dublin, 1970 and certification from The Chartered Institute of Bankers, Kent, 1991.

Financial Service Advisory Board of Price Waterhouse Coopers (PwC); Chairman, The Services Family Ltd, UK; Director, Ahli United Bank (UK) plc; Director, Hirslanden Corniche Ltd. Formerly; Chairman, Allied Irish Banks, Plc; Member of KSA Advisory Board, BAE Systems Plc; Sr. Advisor to Board, HSBC Holding Plc; Group Managing Director & COO, HSBC Holding Plc, London; Chairman: HSBC Middle East Ltd; HSBC Bank Turkey A/S; Arabian Gulf Investments (Far East) Ltd; Director: HSBC Bank Egypt, Bank of Bermuda, HSBC Trinkaus & Burkhardt, Germany; Saudi British Bank, Saudi Arabia; HSBC Holding, Group Management Board.

47 years of experience in the international financial services sector.

David Hodgkinson (Independent Director)

Member of the Audit & Compliance Committee, Nominating Committee and Compensation Committee


Director since 30 July 2000, holds a Masters in Economics (Highest Honors) from the American University, Cairo, 1980, Bachelors in Economics (Highest Honors) from American University, Cairo, 1977 and a General Certificate of Education from London University, 1973.

Group Chief Executive Officer & Managing Director, Ahli United Bank BSC, Bahrain; First Deputy Chairman, Ahli Bank SAOG, Oman; Deputy Chairman, Commercial Bank of Iraq,; Deputy Chairman, United Bank for Commerce & Investment S.A.C. Libya; Deputy Chairman, Middle East Financial Investment Co, Saudi Arabia; Director, Ahli United Bank (UK) Plc; Director, Ahli United Bank KSCP, Kuwait; Director, Ahli United Bank Limited, UAE; Director, Bahrain Association of Banks, Bahrain; Formerly: Deputy Chairman, Ahli United Bank (Egypt), Chief Executive Officer and Director, United Bank of Kuwait PLC, UK; Managing Director, Commercial International Bank (Egypt) SAE; Chairman, Commercial International Investment Company, Egypt; Vice President, Corporate Finance, Morgan Stanley, USA; Assistant Vice President, Arab Banking Corporation, Bahrain; Director, Bahrain Stock Exchange; Director, Kuwait & Middle East Financial Investment Co, Kuwait.

38 years of experience in the financial services sector.

Adel A. El-Labban (Executive Director)

Executive Committee Member

Ahli United Bank28

I am pleased to acknowledge the wide recognition the Bank received from key industry analysts in particular sectors – private banking, trade finance, treasury and cash management – as well as several awards for ‘Best Bank’ at both regional and local levels.


I am pleased to report that AUB continued its robust performance in 2016, maintaining growth in core earnings and operating profit, in the face of significant economic and security challenges in its operating markets.

During the year, a slowdown in global growth was further exacerbated by lower oil prices and adverse regional geo-political concerns. Despite tighter fiscal policy and weaker private sector activity resulting in lower liquidity in the banking system and moderate regional economic growth, AUB was able to sustain an upward trend in its core performance, underlining the Bank’s capacity to respond to challenges and to draw strength from adversity.

The AUB Group recorded net consolidated profit of US$ 570.6 million, representing an increase of 6.2% over the net profit of US$ 537.2 million in 2015. The strong performance for 2016 reflected AUB’s well-managed and resilient business model, based on regional diversification, cross border business flows and selective growth initiatives to increase operating income on a prudent basis.

In pursuing its well-defined strategy of targeted regional expansion, AUB was also successful in extending its geographical reach with the opening of its fully owned subsidiary Ahli United Bank Limited (AUBL) in Dubai International Financial Centre. An important addition to the AUB Group, the new subsidiary has enabled the Bank to offer an extensive range of both conventional and Shari’a compliant products and services to clientele in the UAE as well as in the wider Middle East region.

Local and global investor confidence in AUB’s credentials as a well-managed, successful and creditworthy financial institution was further validated by the successful completion of a US$ 200 million issue of Additional Tier 1 Sukuk arranged by AUB Kuwait. The Sukuk added a new source of funding, further strengthening and diversifying the Bank’s capital base and is the second similar issuance by the AUB Group after AUB BSC’s well received $400 million issue in 2015.

In line with best international practices, the Bank continued to be diligent in adopting and adhering to a strict corporate governance framework. Risk management, compliance and audit resources – human and technical were strengthened to cover new regulatory and accounting requirements.

In November 2016, rating agency Fitch re-affirmed the Bank’s credit rating of ‘BBB+’ with a ‘Stable’ outlook, based on its geographic diversification, sound asset quality, strong shareholder support, and its sustained capacity to generate solid operating profitability in challenging business markets.

For the second time in recent years, The Banker magazine, a member of the Financial Times Group, recognised AUB as ‘Bank of the Year - Middle East 2016’ on account of the Bank’s progress during the past twelve months; not only in terms of strengthening its sound financial position but also in undertaking a wide range of initiatives to support its business strategies. AUB was equally gratified to be also recognised by Capital Finance International (CFI) as ‘Best Regional Bank GCC 2016’.

Looking ahead, regional banks are confronting a more challenging liquidity environment with a rising cost of funds together with growing pressures on asset quality. While operating challenges remain strong, AUB will move forward with purpose and focus in pursuing its regional strategy in a balanced and prudent manner.

As the Chairman of the Board, it is my pleasure to thank our shareholders for their continuing confidence in AUB. The strong performance achieved during 2016 was only made possible through the valued support and trust of our clients, business partners, and customers and by the dedication and professionalism of our team across the AUB Group as well as the guidance of our regulators and other related government entities in our operating markets.

In times of adversity we are strengthened by our commitment to excellence, in all that we do, to achieve our well-defined business strategy and vision and to serve our shareholders and clients.

Hamad M. Al-HumaidhiChairman

CHAIRMAN’S STATEMENT

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In difficult operating environments, AUB reported a net profit of US$ 570.6 million for the year 2016, representing a growth of 6.2% compared to a net profit of US$ 537.2 million in 2015.


In 2016, the global economy grew by 2.3% representing the slowest growth rate since the 2009 financial crisis. Decreasing momentum in global trade, lower commodity prices, weaker investment flows, the rising cost of funding and geo-political uncertainties were key factors contributing to the slowdown. In the Middle East, as a reaction to the sharp decline in oil prices, regional economies were affected by tighter fiscal policy with the introduction of austerity measures which impacted investment budgets and disposable income levels.

In difficult operating environments, AUB reported a net profit of US$ 570.6 million for the year 2016, representing a growth of 6.2% compared to a net profit of US$ 537.2 million in 2015. Despite continued general weakness in the regional and global economies, the robust operating results of AUB were underpinned by prudent risk-taking, effective asset and liability management and judicious cost controls.

Growth was primarily driven by effective net interest margin management coupled with a Group-wide strategy to generate incremental yields from re-balancing existing portfolios within an acceptable risk framework. As a result, Net interest income grew by 1.7% from US$ 814.7 million to US$ 828.2 million. The increase was achieved through re-deployment of funds within a conservative and diversified risk framework. A rise of 9.7% in Fees, commissions & other income to US$ 173.3 million contributed to a 5.2% increase in total operating income which amounted to US$ 1,149.0 million (2015: US$ 1,091.9 million).

The intelligent cost spend discipline, instilled across all AUB Group units, was sustained throughout the year resulting in an improvement of the cost income ratio to 27.8% (2015: 28.3%). In response to weaker market conditions, implementation of a prudent credit strategy, together with early problem recognition and a conservative provisioning approach, enabled the Bank to contain the non-performing loan ratio at 2.3% whilst the specific provision coverage ratio remained at a conservative 84.9%. The total provision coverage ratio was 155.6% excluding significant available tangible collateral.

Key financial indicators continued to improve with overall Return on Average Equity increasing to 15.7% (2015: 15.6%) while the Return on Average Assets rose to 1.8% (2015: 1.7%). As a result, the basic earnings per share were US cents 8.0 for the year ended 31 December 2016 (2015: US cents 7.7). Acknowledging the satisfactory results achieved in 2016, the Board of Directors recommended a distribution comprising a cash dividend of US cents 4.5 per share (2015: US cents 4.5) together with a bonus ordinary share issue of 10% (2015: 5%).

The strong results achieved in 2016 were testament to the success of balance sheet management initiatives to increase operating income and mitigate risk challenges in target markets. During a difficult year, AUB was successful in maintaining the stability and diversity of the

Bank’s funding base, whilst prudently sweating the balance sheet to protect net interest margins. Despite external pressures, the Bank’s strong liquidity position, coupled with stability in its asset and liability structure, enabled the Group to capitalise selectively on opportunities across the region.

In March 2016, the Bank succeeded in expanding its geographic reach further by opening its fully owned subsidiary Ahli United Bank Limited (AUBL) in Dubai International Financial Centre (DIFC), UAE. AUBL is the first bank in the GCC region to receive the Category 1 License from Dubai Financial Services Authority (DFSA). This launch enables AUB to offer corporate banking, private banking, wealth management, trade finance, treasury and cross-border financial products and services to its clients based in the UAE as well as in the wider Middle East region on a conventional as well as a Shari’a compliant basis.

As a result of strong demand from regional, Asian and European investors, a threefold oversubscription and a highly competitive pricing were achieved for the US$ 200 million AUB Kuwait Basel III compliant Additional Tier 1 Sukuk in October 2016. As well as providing a new source of cost effective capital funding, the successful issue reflected regional and global confidence in AUB’s financial performance and creditworthiness.

In December 2016, AUB was honoured for the second time to receive The Banker magazine’s ‘Bank of the Year, Middle East’ award. Industry recognition as a leader in business development initiatives in the GCC and MENA countries.

While market conditions continue to present considerable challenges, the Bank will continue to focus on selective loan growth and prudent deployment of liquidity within a conservative and diversified risk framework until market conditions allow a more aggressive pursuit of balance sheet growth and profitability. Finally, I would like to express my gratitude to the Board of Directors for their continued support and guidance. Sincere thanks are also due to the management and the staff of the AUB Group whose professional approach, commitment to excellence and unstinting hard work have been fundamental in meeting the year’s challenges and in sustaining our growth momentum.

Adel A. El-LabbanGroup Chief Executive Officer & Managing Director

GROUP CHIEF EXECUTIVE OFFICER & MANAGING DIRECTOR’S STATEMENT

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CORPORATE GOVERNANCE

Good Corporate Governance practices are important in creating and sustaining shareholder value and ensuring appropriate disclosure and transparency. The Bank’s Corporate Governance Policy provides the framework for the principles of effective Corporate Governance standards across the AUB Group.

The Board of Directors (the Board) is committed to implementing robust Corporate Governance practices and to continually review and align these practices with international best practices, where appropriate.

The Bank’s management is committed to ensuring that procedures and processes are in place to reflect and support the Board approved Corporate Governance related policies to ensure the highest standards of Corporate Governance throughout the AUB Group.

Shareholder Information

The Bank’s shares are listed on the Bahrain Bourse and the Kuwait Stock Exchange. As at 31 December 2016, the Bank had issued 6,845,289,120 ordinary shares, each with a nominal value of US$0.25. All ordinary shares are fully paid up.

Shareholders are invited by the AUB Chairman to attend the AGM. The AUB Chairman and other Directors attend the AGM and are available to answer any questions.

The Annual General Ordinary and Extraordinary Meetings were held on 29 March 2016.

Ordinary Shareholders as at 31 December 2016 (holding 5% and above)

No. Name/Entity Country of OriginDirect & Indirect

Ownership % Ownership1 Public Institution For Social Security1 Kuwait 1,277,326,048 18.66%

2 Social Insurance Organization Bahrain 691,152,097 10.10%

3 Tamdeen Investment Company Kuwait 557,852,344 8.15%

4 International Finance Corporation2 USA 347,895,526 5.08%

Notes:1. PIFSS shareholding of 18.66% includes Wafra International Investment Co. (1.48%), its related party2. International Finance Corporation shareholding of 5.08% includes IFC Capitalization (Equity) Fund L.P (2.82%), its related party

Distribution of Shares

Table 1- Distribution of Ordinary Shares as at 31 December 2016

Category No. of Shares No. of Shareholders50% and above - -

20% up to less than 50% - -

10% up to less than 20% 1,968,478,145 2

5% up to less than 10% 905,747,870 2

1% up to less than 5% 1,826,183,165 13

Less than 1% 2,144,879,940 3,332

Total 6,845,289,120 3,349


Table 2- Government and Quasi Government Holdings and the Distribution of Ordinary Shares by Nationality

No. Name No. of Shares % of Total Shares1 Kuwaiti Quasi Government 1,277,326,048 18.66%

2 Bahraini Government & Quasi Government 698,132,494 10.20%

3 Qatari Government & Quasi Government 31,086,491 0.46%

4 Others - Government & Quasi Government 5,783,669 0.08%

5 Kuwaiti Individuals and Corporates 3,157,202,478 46.12%

6 Bahraini Individuals and Corporates 1,310,033,087 19.14%

7 Others - Individuals and Corporates 365,724,853 5.34%

Total 6,845,289,120 100%

Board

The Board composition represents an appropriate mix of professional skills and expertise. A general election for Board membership was held on 31 March 2015. The Board periodically reviews its composition and performance as well as the performance of each Director. In compliance with the Central Bank of Bahrain (CBB) Corporate Governance requirements, the Board has outlined its criteria and materiality thresholds for the definition of “Independence” in relation to Directors. The independence criteria are reassessed annually by the Board and for the year 2016, the 11 Directors comprising the Board were classified as follows:

• 6 Independent Directors • 4 Non-Executive Directors• 1 Executive Director

The name and classification of each Director as of 31 December 2016 is set out below:

Directors Classification Hamad Mishari Al-Humaidhi - Chairman Non-Executive

Rashed Al-Meer - Deputy Chairman Non-Executive

Mohammad Al-Marzooq - Deputy Chairman Non-Executive

Abdulla Al-Sumait Independent

Mohammed Fouad Al-Ghanim Independent

Adnan Al-Marzouq Independent

Abdulghani Behbehani Independent

Ahmed Ghazi Al-Abduljaleel Non-Executive

Michael Essex Independent

David Hodgkinson Independent

Adel A. El-Labban Executive

Notes:• Mr. David Hodgkinson was appointed to the Board, effective 1 October 2016.• Mr. Herschel Post resigned from the Board, effective 30 March 2016.• Mr. M. Tareq Sadeq appointed to the Board on 29 March 2016 and resigned from the Board, effective 1 July 2016.

CORPORATE GOVERNANCE(Continued)

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The CBB Rulebook Module HC-1.4.6 recommends that the Chairman of the Board of Directors should be an Independent Director. Although the AUB Chairman was classified as a Non-Executive Director, due to his position as Director General of Public Institution for Social Security, a major shareholder of the Bank, this did not compromise the Bank’s high standards of Corporate Governance as the Bank follows strict policies to manage conflict of interests in Board decisions.

The Role and Responsibilities of the Board of Directors

The Board is responsible to the shareholders for creating and delivering sustainable shareholder value through the prudent management of the Bank’s business.

The Board, as a whole, is collectively responsible to ensure that an effective, comprehensive and transparent Corporate Governance framework is in place. The Board’s role is to:

1. ensure adherence to prevailing laws and regulations and to best business ethics;

2. provide entrepreneurial leadership of the Bank within a framework of prudent and effective controls, which enable risk to be assessed and managed;

3. set the Bank’s strategic aims, ensure that the necessary financial and human resources are in place for the Bank to meet its objectives and review management performance; and

4. set the Bank’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

In carrying out these responsibilities, the Board must ensure that the management strikes an appropriate balance between promoting long term growth and delivering short term objectives and have regard to what is appropriate for the Bank’s business and reputation, the materiality of the financial and other risks inherent in the business and the relative costs and benefits of implementing specific controls.

All Directors must act in good faith and in a way that promotes the success of the Bank for the benefit of its shareholders as a whole. In doing so, each Director, must have regard to the:

1. the likely consequences of any decision in the long term;

2. the interests of the Bank as well as the Bank’s employees and shareholders;

3. the need to foster the Bank’s business relationships with suppliers, customers and others;

4. the impact of the Bank’s operations on the community and the environment;

5. the desirability of the Bank maintaining a reputation for high standards of business conduct; and

6. the need to act fairly as between the members of the Bank.

When carrying out their responsibilities, Directors are required to:

1. act with integrity;

2. act with due skill, care and attention;

3. observe proper standards of market conduct; and

4. deal with the regulatory authorities in an open and co-operative way and must disclose appropriately any information of which the regulator would reasonably expect notice.

Board Meetings and Attendance

The Board is required to meet at least four times per year.

A schedule for the Board’s regular meetings, are agreed annually in advance. Additional meetings may be convened on an ad hoc basis at the invitation of the Chairman or otherwise in accordance with the provisions of the Commercial Companies Law.

All Directors are expected to physically attend all Board and Shareholders meeting, unless there are exceptional circumstances that prevent them from doing so. Directors who cannot physically attend the meeting, may attend by video or telephone conference. Meeting papers are prepared and circulated in advance of Board meetings and include minutes of meetings of Board Committees held since the previous Board meeting.



Board meetings held during 2016 and attendance of each Director are detailed below:

Board of Directors Meetings

Number of Meetings Held: 5

Meeting DatesDirectors 23/02/2016 29/03/2016 10/05/2016 06/09/2016 29/11/2016Hamad Al-Humaidhi

Rashed Al-Meer

Mohammad Al-Marzooq

Abdulla Al-Sumait

Mohammed Al-Ghanim

Adnan Al-Marzouq

Abdulghani Behbehani1 -

Ahmed Ghazi Al-Abduljaleel2 -

Michael Essex

David Hodgkinson3 - - - -

Herschel Post4 - - - -

M. Tareq Sadeq5 - - -

Adel A. El-Labban

Notes:1. Mr. Abdulghani Behbehani was appointed to the Board, effective 29 March 2016.2. Mr. Ahmed Ghazi Al-Abduljaleel was appointed to the Board, effective 29 March 2016.3. Mr. David Hodgkinson was appointed to the Board, effective 1 October 2016.4. Mr. Herschel Post resigned from the Board, effective 30 March 2016.5. Mr. M. Tareq Sadeq was appointed to the Board on 29 March 2016 and resigned from the Board, effective 1 July 2016.

The CBB Rulebook Module HC - 1.3.4 requires individual Directors to attend at least 75% of all Board meetings in a given financial year. During the year all directors have complied with this requirement. The attendance of all Directors at the Board meetings is reported to the CBB on an annual basis.

Election and Termination of Appointment of Directors

Directors are elected for 3-year term. Elections take place in accordance with the Memorandum and Articles of Association of the Bank, the Bahrain Commercial Companies Law and the CBB Rulebook. There is no maximum age limit at which a Director must retire from the Board. Each Director’s term of appointment expires, pursuant to the terms of his Letter of Appointment and/or the provisions of the law.

Induction and Training of Directors

The Bank has an induction programme in place, which is designed for each new Director. The induction programme includes: i) an introductory pack containing, amongst other things, the AUB Group Overview, AUB Group Organisational Chart, Terms of Reference of the Board and Board Committees and key policies; ii) presentations on significant financial, strategic and risk issues; and iii) orientation meetings with key management as may be required. As a standing procedure, all continuing Directors are invited to attend orientation meetings.

Ongoing professional development for Directors was conducted during the year in accordance with the requirements of the TC Module 1.2.1.


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Board Evaluation

Evaluations of the performance of the Board and the performance of each Director, for 2016, were conducted. Applying a scoring methodology proposed by Professional Advisors, rating of “Good” was achieved for the performance of the Board and a rating of “Excellent” was achieved for the performance of each Director, indicating that the views of the majority of the Directors are similar and that the Board is functioning as per its stated role and responsibilities.

Access to Advice and Information

Individual Directors are authorized to obtain independent legal or other professional advice at the Bank’s reasonable expense, whenever they judge this necessary to discharge their responsibilities as Directors.

Non-Executive Directors have access to and are authorised to seek any information they require from any employee. Such access should be coordinated through the Chairman of the Audit and Compliance Committee or the GCEO & MD.

Directors’ and Related Parties’ Interests

No Director has entered into, either directly or indirectly, any material contract with the Bank or any of its subsidiaries, nor does any Director have any material conflict of interest with the Bank.

The Directors are required to declare any conflict of interest or any potential conflict of interest that exists or that Directors become aware of, to the Chairman and Corporate Secretary as soon as they become aware of them. This disclosure must include all relevant material facts.

The Bank has a procedure for dealing with transactions involving Directors and related parties. Any such transaction will require the approval of the Board, with the conflicted Director abstaining.

Note 25 to the audited consolidated financial statements of the AUB Group for the year ended 31 December 2016, sets out the relevant disclosures of related party transaction.

The Terms of Reference of the Board require that all Directors, whether Non-Executive or Executive, should exercise independence in their decision-making and should abstain from any decisions involving any actual or potential conflicts of interest. Should any Director have any doubts with respect to conflicts of interest or potential conflict of interest, the Director is requested to consult the Chairman prior to taking any action that might compromise the Bank.

All Directors and other Approved Persons have declared all of their interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) in writing to the Board.

The number of shares owned by Directors as at 31 December 2016 are as follows:

No. Directors Purchased SoldNo. of Shares as of

31-Dec-2016 1. Hamad Al-Humaidhi - - -

2. Rashed Al-Meer - - 356,672

3. Mohammad Al-Marzooq - - 184,333

4. Abdulla Al-Sumait - - 121,275

5. Mohammed Al-Ghanim - - 561,800

6. Adnan Al-Marzouq - - 127,338

7. Abdulghani Behbehani 210,000 - 210,000

8. Ahmed Ghazi Al-Abduljaleel - - -

9. Michael Essex - - -

10. David Hodgkinson - - -

11. Adel A. El-Labban - - -

Total 1,561,418Percentage 0.02%



The numbers of shares owned by Approved Persons as at 31 December 2016 are as follows:

No. Name Purchased SoldNo. of Shares as of

31-Dec-2016 1. Adel A. El-Labban - - -

2. Keith Gale - - 5,024,630

3. Sanjeev Baijal - - 2,117,043

4. Abdulla Al-Raeesi 1,714,832 - 4,926,933

5. Mustafa Shafqat Anwar - - 548,256

6. Derek Lunt - - -

7. Robert Jones - - -

8. Andre Roos 272,927 100,000 1,205,010

9. Srinivasan Rathinam - - 435,248

10. Ravindranath Ramachandralal Mehra - 100,000 780,124

11. Chandramohan Ganapathy - - -

12. Iman Al-Madani - - -

13. Mahmood Hassan Khursheed - - -

Employment of Relatives

The Bank does not encourage the employment of relatives. However, under exceptional conditions and based on specific requests and needs, the Bank may decide in favour of employing relatives, on a temporary or permanent basis, subject to a comprehensive review and only in cases where there is no conflict of interest or operational risk to the Bank involved. The Board of Directors has approved a policy on the employment of relatives on 19 July 2016 which has established a recruitment committee to review the recruitment requests of relatives of Bank employees of up to the third degree and recommend the hiring of relatives of Approved Persons occupying Controlled Functions to the GCEO & MD. Human Resources discloses to the Board of Directors on an annual basis, the names of all relatives of any Approved Persons occupying Controlled Functions, last disclosed on 19 July 2016.

The recruitment committee reviews the recruitment requests on the following considerations:

• No relatives shall work in the same business unit/department.

• No relatives shall report to each other or allowed to supervise each other.

• No relatives shall work in business units/departments which have a conflict of interest or would create an operational risk for the Bank.

• No relatives shall share a dual signature/ approval in the Bank and have dual access control to any Bank property (Physical & IT).

Material Transactions

In addition to large credit transactions that require Board approval as per the Credit Policy, the Board also approves senior unsecured medium term (greater than 1 year) funding initiatives, strategic investments decisions, as well as any other decisions which have or could have a material financial or reputational impact on the Bank.


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Board Committees

The Board may, where appropriate, delegate certain of its powers to an individual Director or to a Committee comprised of Directors and/or other persons, constituted in the manner most appropriate to those tasks.

The Board has constituted a number of Board Committees, membership of which is drawn from the Directors and to which it has delegated specific responsibilities, through Terms of Reference, which are reviewed and adopted by the Board on an annual basis.

All Board Committee members are expected to attend each Committee meeting unless there are exceptional circumstances that

prevent them from doing so. Members who cannot physically attend the meeting may attend by video or telephone conference.

Each Board Committee has access to independent expert advice at the Bank’s expense.

The Board Committees are each comprised of an appropriate mix of professional skills and expertise. The Chairman of each Board Committee periodically evaluates the performance of the Board Committees and reports the results to the Board. The names of the Committee members and their memberships in the Board Committees and attendance at meetings held during 2016 are detailed below:

Executive Committee Meetings

Total Number of meetings held: 4

Meeting DatesMembers Classification 23/02/2016 10/05/2016 06/09/2016 29/11/2016Hamad Al-Humaidhi- Chairman Non-Executive

Rashed Al-Meer Non-Executive

Mohammad Al-Marzooq Non-Executive

Mohammed Al-Ghanim Independent

Adnan Al-Marzouq1 Independent -Adel A. El-Labban Executive

Notes:1. Mr. Adnan Al-Marzouq was appointed to the Executive committee, effective 29 March 2016.

Audit and Compliance Committee Meetings


Meeting DatesMembers Classification 22/02/2016 09/05/2016 05/09/2016 28/11/2016Michael Essex - Chairman Independent


Adnan Al-Marzouq1 Independent - - -

Abdulghani Behbehani Independent -

Ahmed Ghazi Al-Abduljaleel Independent -

Herschel Post2 Executive - - -

M. Tareq Sadeq3 Independent - - -

David Hodgkinson4 Independent - - -

Notes:1. Mr. Adnan Al-Marzouq was a member of the Audit and Compliance Committee until 29 March 2017.2. Mr. Herschel Post resigned from the Audit and Compliance Committee, effective 30 March 2016.3. Mr. M. Tareq Sadeq was appointed on 29 March 2016 and resigned from the Audit and Compliance Committee, effective 1 July 2016.4. Mr. David Hodgkinson was appointed to the Audit and Compliance Committee, effective 1 October 2016.



Nominating Committee Meetings


Meeting DatesMembers Classification 10/05/2016 28/11/2016Michael Essex - Chairman Independent


Abdulghani Behbehani Independent

Ahmed Ghazi Al-Abduljaleel Non-Executive

M. Tareq Sadeq1 Independent -David Hodgkinson2 Independent -

Notes:1. Mr. M. Tareq Sadeq resigned from the Nominating Committee, effective 1 July 2016.2. Mr. David Hodgkinson was appointed to the Nominating Committee effective 1 October 2016.

Compensation Committee Meetings


Meeting DateMembers Classification 21/01/2016Michael Essex - Chairman Independent


David Hodgkinson1 Independent -

Notes:1. Mr. David Hodgkinson was appointed to the Compensation Committee, effective 1 October 2016.

Audit & Compliance Committee

The Audit and Compliance Committee is combined with the Corporate Governance Committee and assists the Board in discharging its responsibilities relating to the Bank’s accounting, corporate governance and key persons dealings and market abuse practices, internal audit controls, compliance procedures, risk management systems, financial reporting functions and in liaising with the Bank’s external auditors and regulators to ensure compliance with all relevant regulatory requirements and consistency with best market practices.

The Audit and Compliance Committee consists of 5 members, comprising 4 Independent Directors, including the Chairman and 1 Non-Executive Director.

The Compensation Committee has met once in 2016, given that there was not the requisite quorum as a result of the departure of members.

The principal responsibilities of the Board Committees are detailed below:

Executive Committee

The Executive Committee assists the Board in discharging the Board’s responsibilities relating to matters including credit and market risk.

The Executive Committee consists of 6 members, comprising 2 Independent Directors, 3 Non-Executive Directors and 1 Executive Director.


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Compensation Committee

The Compensation Committee provides an efficient mechanism for reviewing the Bank’s compensation arrangements for its staff and Directors and makes recommendations on compensation related matters for the Board’s approval in line with CBB guidelines. The Compensation Committee, amongst other things, sets the remuneration framework for the Bank’s Directors, senior management and staff.

The Compensation Committee consists of 3 members, comprising 3 Independent Directors including the Chairman.

Nominating Committee

The Nominating Committee supports the Corporate Governance regime of the Bank and instills a best practice approach to the matters assigned to its responsibilities, at all times acting within the criteria set by the CBB Rulebook, the relevant sections of the Bahrain Commercial Companies Law and any other applicable legislation, following a fair and balanced approach.

The principal responsibilities of the Nominating Committee include, identifying and recommending to the Board persons qualified to become a Director of the Board, or any other officer of the Bank, as considered appropriate by the Board. The Committee also oversees the Director’s educational activities in the form of a formal induction program and on-going orientation activities and programs.

The Nominating Committee consists of 5 members comprising 4 independent Directors, including the Chairman and 1 Non-Executive Director.

Board Committee Evaluation

Evaluations of the performance of the Board Committees have been conducted. Applying a scoring methodology proposed by Professional Advisors, a rating of “Excellent” was achieved for each of the committees, indicating that the Board Committees continue to operate with a high degree of effectiveness and functioning as per their stated role & responsibilities.

Senior Management:

Names TitleAdel A. El-Labban Group CEO & Managing Director

Sanjeev Baijal Deputy Group CEO - Finance & Strategic Development

Keith Gale Deputy Group CEO - Risk, Legal & Compliance

Abdulla Al-Raeesi Deputy Group CEO - Retail Banking

Shafqat Anwar Deputy Group CEO - Operations & Technology

David O’ Loan1 Deputy Group CEO - Treasury & Investments

Derek Lunt Deputy Group CEO - Corporate Banking

Robert Jones Group Head of Audit

Iman Al-Madani Group Head Human Resources & Development

Sami Tamim2 CEO - Ahli United Bank (UK) P.L.C (Acting)

Richard Groves CEO - Ahli United Bank K.S.C.P

Nevine El-Messeery CEO - Ahli United Bank (Egypt) S.A.E.

Nouri Aldubaysi CEO - Commercial Bank of Iraq P.S.C.

Lloyd Maddock CEO - Ahli Bank S.A.O.G

Ayman El-Gammal CEO -United Bank for Commerce & Investment S.A.L

CB Ganesh CEO – Ahli United Bank Limited

Emanuel Lantzos CEO Al Hilal Life B.S.C. (c ) & Al Hilal Takaful B.S.C. (c )

1. Appointed as a Deputy Group CEO, Treasury & Investments effective 2 January 2017.2. Appointed as an Acting CEO of Ahli United Bank (UK) Plc. Effective 14 January 2017.



Management Committees

The Board has established a management structure with clearly defined roles, responsibilities and reporting lines. The Bank’s management monitors the performance of the Bank and each of its subsidiaries and associates on an ongoing basis and reports this performance to the Board. The monitoring of performance is carried out through a regular assessment of performance trends against budget, and prior periods and peer Banks in each of the markets and collectively through AUB Group committees and sub- committees at the parent bank and its subsidiary / affiliated banks’ level. Specific responsibilities, as explained below, have been delegated to each committee, and the minutes of all management committees are sent to the Audit and Compliance Committee, to assess the effectiveness of these committees.

Group Management Committee

The Group Management Committee is the collective AUB Group management forum providing a formal framework for effective consultation and transparent decision-making by the Group CEO & Managing Director and senior management on cross-organisational matters. Appropriate checks and balances ensure the “four eyes” regulatory requirement is met. The Committee has broad mandate encompassing group wide as well as Bank and unit specific issues as determined by the Group CEO & Managing Director and other members of the committee. It is chaired by the Group CEO & Managing Director and comprises of fourteen other members, including all the Deputy Group CEO’s and the CEO’s of subsidiary and affiliated banks.

Group Asset and Liability Committee

The Group Asset and Liability Committee sets, reviews and manages the liquidity, market risk and funding strategy of the AUB Group and reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by the DGCEO-Treasury & Investment and has eight other members.

Group New Product Committee

The Group New Product Committee reviews and approves new products, processes and services for Private Banking and Wealth Management, treasury, retail, commercial banking and other areas of the AUB Group. The Committee assesses all related reputational, operational, credit, liquidity and market risk, IT, legal, compliance, control, staffing and capital/profit allocation issues related to approving new products. The approval by the Group New Product Committee follows the new product or process

development requirements according to the New Product Approval and Development Procedure. It is chaired by the Group CEO & Managing Director and has eight other members.

Group Information Technology Steering Committee

The Group Information Technology Steering Committee oversees the information technology role, strategy formulation, prioritized implementation and delivery of IT projects of the AUB Group within an acceptable, secure and standardised framework. It recommends the annual IT budget to the Group CEO & Managing Director as part of the annual business planning/budgetary exercise for submission to the Board of Directors for review and final approval. It supervises the implementation of the approved IT annual plan within set deadlines and budgetary/Board approved allocations within the Bank’s overall Capital Expenditure policy. It is chaired by the DGCEO-Retail Banking and comprises of eight other members.

Group Risk Committee

The Group Risk Committee reviews and manages the risk asset policies, approvals, exposures and recoveries related to credit, operational and compliance risks. It acts as a general forum for the discussions of any aspect of risk facing or which could potentially face the Bank or its subsidiaries and affiliates resulting in reputational or financial loss to the AUB Group. It also oversees the operation of the Group Operational Risk Sub-committee and Group Special Assets Sub-committee and the Client On-boarding & AML Sub-committee. It is chaired by the DGCEO-Risk, Legal & Compliance and has four other members.

Group Operational Risk Sub-committee

Group Operational Risk Sub-committee administers the management of operational risk throughout the AUB Group. It is chaired by the DGCEO-Operations & Technology and has nine other members.

Group Investment Committee

The Group Investment Committee approves, reviews and manages AUB Group’s proprietary investment portfolio of bonds, equities and funds. It acts as a general forum for the discussion of any aspect of investment risk faced by AUB or its subsidiary and affiliated banks resulting in financial loss to the Group. It is chaired by the DGCEO Risk, Legal & Compliance and has five other members.


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Management Committee

The Management Committee is the senior collective management forum of the Bank, providing a formal framework for effective consultation and transparent decision-making on organizational matters. Appropriate checks and balances ensure the “four eyes” regulatory requirement is met. The committee operates in a flexible way with a minimum of formality and a broad mandate encompassing both Bank-wide and unit specific issues as determined by the GCEO & Managing Director and its other members in relation to the business of the Bank, as a legal entity. It is chaired by the DGCEO Finance & Strategic Development and has five other members.

AUB Assets and Liability Committee

AUB Assets and Liability Committee sets, reviews and manages the liquidity, market risk and funding strategy of AUB, the parent bank and reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by the DGCEO Treasury & Investment and has eight other members.

Other Governance Measures

In addition to the Board and Management Committee structures, the Board of Directors has approved a number of AUB Group policies to ensure clarity and consistency in the operation of the AUB Group. These policies, which are communicated to staff, include Credit, Anti-money Laundering, Corporate Governance, Personal Account Dealing, Key Persons Dealings, Banking Integrity, Compliance, Legal and Human Resources policies.

Underpinning these policies is the Board approved Group Code of Business Conduct which prescribes standards of ethical business behavior and personal conduct for the Bank’s Directors, its senior management (officers) and its staff.

The Board annually reviews and adopts compensation and related policies and closely monitors the implementation of these policies and processes with respect to the Bank’s staff and Directors. The AUB Compensation Policy provides the remuneration framework for motivating employees and directors with financial motivation to deliver optimum Group performance. The policy aims at rewarding performance by individual contribution within a team oriented approach, remunerating individuals who achieve personal, divisional and Group results and providing a long term incentive to performing staff.

The Banking Integrity Policy, which includes detailed policy and procedures on whistle blowing, is specifically designed to facilitate concerns raised with regard to misconduct occurring within, or associated with, the AUB Group.

The Board has also adopted a Group Communications Policy. This policy sets out the authority of AUB Group employees with respect to the communication of information to third parties in the course and scope of their employment. The Bank has an open policy on communication with its stakeholders, which includes:

(i) The disclosure of all relevant information to stakeholders on a timely basis in a timely manner; and

(ii) The provision of the last five years of financial data on the Bank’s website.

The Bank is at all times mindful of its regulatory and statutory obligations regarding dissemination of information to its stakeholders.

The Bank provides information on all events that merit announcement, either on its website, www.ahliunited.com, Bahrain Bourse, and other forms of publications, such as press releases, the Bank’s annual report and quarterly financial statements, and the Corporate Governance Policy are all published on its website.

As a supporting governance measure, the Board also relies on the ongoing reviews performed by internal and external auditors on the AUB Group’s internal control functions. These reviews are conducted in order to identify any weaknesses, which then enable management to take remedial action.

Compensation Disclosures

Ahli United Bank’s Compensation Policy (the “Policy”) provides the framework for the Bank to attract, retain and motivate employees and directors with financial compensation to deliver optimum personal, functional and Bank performance and reduce the individual’s motivation to take excessive and undue risk. This is delivered through a compensation system consisting of Fixed Compensation for employees and directors and Variable Compensation of short term and long term incentives for performing employees.

The Board of Directors reviews and approves on an annual basis, the HR policy and as its integral part, the Compensation and related policies and closely monitors the implementation and administration of these policies and processes with respect to the Bank’s employees and directors.

The Policy incorporates the mandatory regulations issued by the CBB on Sound Remuneration Practices [HC-5 Remuneration of Approved Persons and Material Risk-Takers], which are applicable to Approved Persons and Material Risk-Takers whose total annual remuneration (including all benefits) is in excess of BD100,000 equivalent. The Policy and related schemes have been approved by the shareholders of the Bank at the Annual General Meeting held on 31 March 2015 and have been applied to performance related employee compensation payments made for each financial year. The salient features of the Bank’s Policy are summarized below:



The Compensation System

The compensation system includes a fixed component (consisting of cash salary, allowances and benefits) that rewards the capacity to hold a role/ position in a satisfactory manner through the employee displaying the required skills and a variable component (consisting of performance related compensation) that aims to reward collective and individual performance, depending on objectives defined at the beginning of the year and conditional on meeting said objectives, according to performance standards and risk parameters defined by the Bank.

The compensation system is based on the Bank’s long and short term performance and matches the full gamut of the Bank’s risks and their timeline. The system links and adjusts compensation with all types of risks in the Bank to reduce the incentive for individuals to take excessive and undue risk. It specifies the proportion of fixed and variable remuneration to be consistent with the Board approved Risk Framework. It defers portions of the variable compensation awards for the financial year 2016 and subsequent years for the designated Approved Persons and Material Risk-Takers of the Bank over a period of 3 years as required by the CBB. It reduces the awarded deferred variable remuneration in case of losses by the Bank and/ or business line during and after the exercise/ vesting period of the deferred variable compensation as a result of malus and clawback arrangements;

The policy also outlines the basis and methodology for arriving at variable compensation, making allocations, implementing risk adjustments to compensation, the framework for compensation of Approved Persons and Material Risk-Takers, conditions for deferral, malus and claw-back clauses, compliance and disclosure requirements. It also establishes the terms of the Mandatory Share Plan (MSP) scheme and the extension of the existing Employee Share Purchase Plan (ESPP) scheme to comply with CBB regulations and deliver deferred variable compensation in equity/ shares. All equity scheme awards being limited so as not to exceed an aggregate 10% of the total issued outstanding ordinary share capital of the Bank, at any given time.

Compensation levels for each grade/ role are determined by industry measurable statistics, relative to size of operations, business needs, cost control and long term business goals which attracts the appropriate talent to the Bank. Compensation is determined through job evaluation, market benchmarks, performance outcome and aligned to long-term value creation and prudent risk-taking. The Bank ensures that compensation is equitable and team oriented, clearly communicated and adjusted for all types of risk, including reputation risk, liquidity risk and costs of capital. Annual performance and compensation reviews are conducted after the end of the financial year and in the first quarter of each year.

Employees are not entitled to any additional compensation from their membership of or attendance at Board or Board Committee meetings as a nominee or representative of the Bank. All such fees are assigned to the Bank.

Role of the Compensation Committee

The Compensation Committee (the “Committee”) is vested by the Board of Directors through its Terms of Reference with the essential responsibility, inter alia, to provide effective oversight and assure governance over the compensation strategy, structure and systems, to ensure that they are properly implemented. Such responsibilities include, but are not limited to, review and oversight of AUB’s compensation and related policies and arrangements for its employees and directors and ensures that any amendments or updates are annually applied to meet the Bank’s objectives and aligned to CBB regulations, the Kingdom of Bahrain Labour Law for the Private Sector (“Labour Law”) and the Bahrain Commercial Companies Law, 2001 (the “Companies Law”), where necessary.

The Chairman and members of the Committee are appointed by the Board from amongst its Directors. The Committee comprises at least 3 members, which should include only Independent Directors or, alternatively, only Non-Executive Directors, of whom a majority are Independent Directors. Committee details and meeting dates in 2016 are reproduced in the Corporate Governance Report in this Annual Report. The aggregate compensation/ fees paid to the Committee members for 2016 amounted to US$10,500 (2015: US$12,000).

The Committee approves the annual aggregate amounts payable under fixed and performance related variable compensation schemes for employees. The Committee reviews and approves any material changes in employee benefits as per market competitive trends and cost considerations and makes recommendations with regard to any other employee matters, as brought before it. The Committee reviews compensation payable to the members of the Board of Directors and makes recommendations to the Board of Directors in this regard in line with applicable regulations.

The Committee reviews and tests at least on an annual basis, the Policy and framework to ensure that compensation arrangements comply with regulations and internal policies and to ensure that the compensation system operates as intended and that effective controls exist through testing of compensation outcomes as per the Bank’s risk framework with any breaches of the risk framework used in the evaluation of malus and/ or clawback clauses on deferred compensation by the Committee.


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Types of Compensation

Compensation for employees includes fixed compensation, benefits and performance related incentives (short-term and long-term variable compensation) in cash or shares each as defined and approved by the Compensation Committee. Compensation for the Board of Directors is explained later in this report.

External Consultants

Consultants were appointed during the year to advise the Bank on revisions to the Policy, if any and alignment to regulations and market best practices including providing consulting advice for the deferred share/ equity-linked schemes.

Compensation of the Board of Directors

The Committee annually reviews the compensation for the Board of Directors and its related Committees to ensure compliance with the CBB Rule Book, within relevant Commercial Companies Law requirements and with the Articles of Association of the Bank.

The Bank is in compliance with the CBB Rule Book High Level Controls Module Article No.5.2.1 (c) requiring that compensation of the Board of Directors is linked to attendance and performance. Board of Directors compensation is 1/3rd pro-rated on the basis of actual attendance of Board and related committee meetings and the remaining 2/3rd of compensation is paid for membership unrelated to attendance.

Compensation for the Board of Directors and its related committees for 2016 have been approved by the shareholders in the Annual General Meeting on 29 March 2017.

The Bank is in compliance with its Articles of Association requiring that total compensation for Directors (excluding sitting fees) is capped at 10% of the Bank’s NPAT for 2016, after all the required deductions outlined in Article 188 of the Bahrain Commercial Companies Law, 2001.

The compensation of Non-Executive Directors in 2016 does not include any performance-related elements such as shares, share options or other deferred stock-related incentive schemes, bonuses or pension benefits, in compliance with the CBB Rule Book High Level Controls Module Article No.5.5.1.

AUB Management Directors (Employees) who represent or are nominated by AUB or of any of its subsidiaries or affiliates on the Boards or their related Committees are excluded from receiving compensation/ fees as per their contractual arrangements. Employees do not receive any additional compensation from their membership of or attendance at Board or related Committee meetings as a nominee or representative of the Bank or for their participation in any management committees.

The designated Approved Persons and Material Risk Takers of the Bank (as all AUB employees) do not take compensation, incentives, performance payments, commission, fees, shares, consideration in kind or other direct benefits of any kind from any projects or investments managed by the Bank or promoted to its customers or potential customers. This applies to all Approved Persons including those appointed as members of the BoD of any special purpose vehicles or other operating companies set up by the Bank for projects or investments.

The authority matrix for compensation approvals are as follows:

Action Approved bya) Approve the Bank’s annual performance bonus pool funding model based on KPI and KRI

adjustments.Compensation Committee

b) Approve the Bank’s annual performance bonus amount pool. Compensation Committee

c) Approve the criteria for performance management and distribution of the Bank’s annual performance bonus.


d) Approve the list of designated “Approved Persons and Material Risk Takers” for the financial year 2016.


e) Approve the performance scores, annual increment and annual performance bonus amounts for the GCEO&MD and his direct reports.


f) Approve the performance scores, annual increment and annual performance bonus amounts for the Group Head of Audit and Group Head of Compliance.

Audit & Compliance Committee and Compensation Committee

g) Approve the aggregate performance scores, annual increment and annual performance bonus amounts for all other bank employees.




All Board of Directors’ and related Committee fees or other terms of compensation (except actual expenses) related to representation as AUB nominated Directors are fully credited to AUB. Directors are reimbursed reasonable and customary expenses for communication, transportation, boarding and lodging as per AUB HR policy.

Variable Compensation (Performance Bonus) Pool and Risk Adjustment Framework

Performance-related variable compensation aims at recognizing and rewarding employee’s contribution beyond their regular job requirements, particularly those contributions that increase Bank’s productivity and profitability in a prudent and sustainable manner. The variable compensation pool is aligned to and accrued based on the Bank’s short or long term financial performance and adjusted for compliance to the risk framework.

The Committee reviews the accrual of the Variable Compensation pool for the Bank and ensures it is based on the overall performance of the Bank and is accrued as a percentage of Net Profit after Tax (the “NPAT”) for the preceding financial year and is in compliance to the risk-adjusted performance as per the Board approved Risk Framework.

The Committee reviews and ensures the framework linking individual performance to the Bank’s performance adjusts the annual accrual of the Variable Compensation pool for the Bank based on achievement of specified Key Performance Indicators (“KPI”) which reflects Bank Performance for FY 2016 and Key Risk Indicators (“KRI”) which reflects the compliance of the Bank as per the Board approved Risk Framework.

KPI’s and KRI’s measure the actual financial and operational performance against budgets and as per the Board approved Risk Framework and may include: Net Profit after Tax (NPAT)/ Return on average assets (ROAA)/ Return on average equity (ROAE) / Cost to income ratio/ Audit ratings/ Non-performing loans (NPL) as % of gross loans and/ or capital adequacy ratio.

The Committee at its discretion may propose to reduce or reduce to nil the bonus accrual for the Bank and each line of business and/ or the allocation pool of accrued bonus to businesses if there is a material reduction in the profitability of the Bank or the individual line of business. The Committee shall use its discretion to determine whether the particular business is incurring losses due to a start-up or turnaround situation, in which case, bonus accrual, allocation and pay-out may be allowed to occur.

The Bank does not provide any form of guaranteed bonus as part of the employment offer or contract to any employee. Severance compensation (except notice period for a maximum period of 3 months) is prohibited except when the Bank provides for it on liquidation of a particular business or on closure of a unit.

The Bank takes formal commitments from employees to not use personal hedging strategies or compensation and liability-related insurance to undermine the risk alignment effects embedded in their compensation arrangements by providing a signed adherence to the prohibitions on hedging.

Variable compensation for employees is payable at the end of the performance (financial) year in the following manner:

Type of Variable Compensation Regulated Roles (Approved Persons and Material Risk Takers) All other employeesCash • 40% for Approved Persons in business lines, direct reports to the GCEO &

MD & material risk takers.

• 50% for Approved Persons in control functions.

• 100% immediate

Equity instruments/ Shares

• 60% for Approved Persons in business lines, direct reports to the GCEO & MD & material risk takers deferred in shares over 3 years.

• 50% for Approved Persons in control functions deferred in shares over 3 years.

• Nil

* Deferred equity instruments/ shares are vested over a 3 year period subject to a minimum retention period of 6 months.


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Compensation of Control Functions

Performance assessment of the Bank’s Approved Persons in the functions of Risk Management, Internal Audit, Operations, Finance, Shari’a review/ audit and AML functions has been discussed by the Committee and measured primarily on the achievement of the objectives and targets of their functions, ensuring their independence from business areas.

The Committee has reviewed and ensured that the performance measures, evaluation and compensation of regulated roles in the control functions of Risk Management, Internal Audit, Operations, Finance and AML functions are evaluated in co-ordination with the Audit and Compliance Committee to ensure independence of their functions/ job roles from business areas. The performance evaluation, fixed and variable compensation proposals for the Group Heads of Audit and Compliance are specifically recommended by the Chairman of the Audit & Compliance Committee and approved by the Committee.

Compensation of Approved Persons and Material Risk Takers

The performance measurement and the compensation arrangements for designated Approved Persons and Material Risk Takers of the Bank for 2016 is reviewed and approved by the Compensation Committee and is subject to periodic change depending on the changes in total individual compensation and/ or to changes in the organizational structure and business model. Variable compensation awarded to individuals holding designated roles in the list are as per the approved compensation policy. The list of designated Approved Persons and Material Risk Takers includes the Group CEO & Managing Director, Direct Reports to the GCEO & MD and other designated Approved Persons. The regulated roles are approved by the Committee based on the position/ responsibility level of the

individual role, the type of business risk undertaken and the material impact of risk exposure based on authority limits for credit and/ or market risk on the Bank’s risk profile and the minimum threshold level of total fixed and variable compensation.

The Committee evaluates the designated Approved Persons and Material Risk-Takers performance as per their agreed performance objectives, Bank and/or business strategy, maintenance and/ or improvement of the Board approved risk profile of the Bank and linked to improvement in the Bank’s profit performance and share-holder return.

The individual allocations of variable compensation components for the designated roles are correlated with the annual individual performance appraisal that takes into account the extent to which quantitative and qualitative objectives have been met. The objectives for these individuals are clearly identified and can be assessed by indicators that are known to the employee. The qualitative objectives are tailored to the individual employee, in relation to the employee’s professional activity and adapted to the position held. These objectives include the quality of risk management, the means and behaviors used to achieve results such as co-operation, teamwork and human resources management. The performance appraisal process and the subsequent performance bonus allocation process is managed and documented by group human resources and its conclusions are submitted for approval to the Committee. The affected individuals are informed that their position is considered regulated and their performance is subject to specific adjustments related to adherence risk and compliance parameters. In addition, the competitive context of the particular job in the market place is taken into account by data from compensation surveys, which benchmark job compensation levels with relevant comparators.

Performance assessment of the Bank’s designated Approved Persons is as per the following framework:

Level Area Group Objectives Function Objectives

Group CEO & Managing Director (Business) 100% -

Approved Persons(Business)

60% 40%(Support)



The above performance framework ensures that adequate focus is employed by personnel on their core objectives with Business Heads being measured for business performance with a majority on group performance and the rest on development of their function, while control and function heads being measured with majority of their objectives on the development of their functions and the rest on group objectives related to their respective responsibilities.

The Committee reviews and approves all fixed and variable compensation including all benefits for the designated Approved Persons and Material Risk Takers in regulated roles of the Bank to ensure that payments made are fair to the individual and the Bank, that failure is not rewarded and that the duty to maximise performance and mitigate loss is fully recognized. The variable compensation awarded to the Approved Persons and Material Risk-Takers is based on the Bank’s short or long term financial performance adjusted for all types of risk, and shall be subject to reduction in case of the Bank’s poor or negative financial performance. The compensation report for the Bank includes the regulated roles for 2016 who are Approved Persons in business lines – 5 (2015: 7), Approved Persons in control functions – 10 (2015: 9) and no other material risk takers. Other employees in Bahrain – 632 (2015: 623) and employees in subsidiaries of the Bank – 2,330 (2015: 2,256).

Awards of deferred variable compensation for the designated Approved Persons and Material Risk Takers of the Bank shall be reduced in case of losses by the Bank and/ or business line during the vesting period of deferred compensation awards as a result of Malus and/or Clawback.

Malus and Clawback Policy

The Bank has adopted a malus policy where deferred variable compensation may be partially reduced or reduced to nil, by the Committee, before the vesting or exercise of any deferred performance bonus is received by an individual employee and a clawback policy where deferred variable compensation may be partially reduced or reduced to nil, by the Compensation Committee, after the vesting or exercise date on specific conditions

which include circumstances where:

a) The annual reports and accounts being materially restated, in an adverse manner, including but not limited to a reduction in profit or diminution of capital and reserves, as a result of the willful or gross negligent conduct of the Participant during the performance period. This excludes any restatement due to a change in accounting policy, in compliance with applicable IFRS and other legal provisions, or to rectify minor errors.

b) The Employee has deliberately misled the Board or the management of the Bank or the market or the Bank’s shareholders regarding the financial performance of the Bank or of any operating unit regarding the returns, operations and risks of the employee’s business or support unit at any time before the vesting/ exercise date.

c) The Employee’s actions have caused harm or may cause potential harm to the good name or reputation of the Bank or of any operating unit or to the participant’s reporting unit.

d) The Employee has been terminated or ceases to be employed by the Bank for causes as under Article 107 of the Bahrain Labour Law or the Bank’s table of gross misconduct. Normal resignation shall not affect the rights of departing employees to receive their rights.

e) The Employee directly or indirectly, solicits, employs, entices away, or endeavours to solicit, employ, or entice away from the Bank or any of its’ operating units, any person who is employed by the Bank or its affiliates;

f) The Employee directly or indirectly, discloses any confidential information of the Bank or its operating units to anyone without prior written approval or uses, exploits or permits the use of such confidential information for any purpose whatsoever;

g) The Employee acts or makes any representations in bad faith contrary to the interests of the Bank.

Details of Compensation Paid to Members of the Board of Directors

Total Value of Compensation for the fiscal year:2016

(Amounts in US$’ 000)2015

(Amounts in US$’ 000)Compensation for Membership of the Board of Directors and related committees 2,069 1,722

Others (Expenses for the Board) 112 113


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Employees

Amounts in US$ 000

2016Fixed Compensation Variable Compensation

Total CompensationUnrestricted cash and allowances

Unrestricted others 1

Cash Deferred Equity Instruments/ Shares2

Approved persons - business lines

3,828 2,195 928 1,392 8,343

Approved persons – control

3,043 1,060 663 758 5,524

Other staff – Bahrain operations

31,595 19,642 8,279 - 59,516

Staff in subsidiaries 80,769 21,796 14,400 - 116,965

Total 119,235 44,693 24,270 2,150 190,348

Amounts in US$ 000

2015Fixed Compensation Variable Compensation

Total CompensationUnrestricted cash and allowances

Unrestricted others 1

Cash Deferred Equity Instruments/ Shares2

Approved persons - business lines

4,191 2,467 950 1,425 9,033

Approved persons – control

2,726 1,549 488 624 5,387

Other staff – Bahrain operations

31,282 18,736 7,713 - 57,731

Staff in subsidiaries 81,775 21,435 13,040 - 116,250

Total 119,974 44,187 22,191 2,049 188,401

1 Others include direct charges such as social security contributions, end of service indemnity accrual charges, life insurance and medical premiums, club memberships, house lease rentals, school fees, vacation air fare, fair value charges for the employee share purchase program and indirect employee expenses such as training, recruitment, Government levies and other costs.

2 Deferred share awards are subject to the malus and clawback policy.

No guaranteed or sign-on bonuses and/ or separation payments have been paid. These tables include employees in service for part of the year.

Deferred Performance Bonus Awards

AwardsCash Shares Others Total

(US$’000) Nos. (US$’000) * (US$’000) (US$’000)Opening balance - 4,349,900 1,806 - 1,806

Awarded during the year - 6,302,207 2,049 - 2,049

Exercised/ Sold during the year - (705,833) (293) - (293)

Risk Adjustments - - - - -

Closing balance - 9,946,274 3,562 - 3,562

* Based on price at award date


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GROUP BUSINESS & RISK REVIEW

Corporate Banking

The continued low oil price gave rise to increasingly challenging economic conditions across the region. As government finances became tighter, liquidity contracted resulting in a slowdown in payments. Conditions were particularly acute in countries that experienced foreign exchange shortages. In Egypt and Oman new regulatory requirements obliged the Bank to refocus loan portfolios to some extent whilst, in Kuwait, reduced activity in equity and real estate markets put pressure on security coverage ratios. It was notable that downgrades in sovereign ratings had some adverse effect on acceptance of risk for some countries in the region and from other parts of the world. Against this backdrop, Corporate Banking worked to achieve increases in pricing across all markets to offset higher funding costs. Continued focus was placed on raising liquidity from corporate clients, leveraging the e-banking platform and increasing cross selling of non-asset products. Pricing increases proved more difficult to implement in countries where relatively well funded banks competed head-to-head for available new business. Cross border investment and trade continued to provide a fertile source of new business across the Group, bolstered by the opening of the Bank’s subsidiary in the Dubai International Financial Centre (DIFC), which facilitated closer relationships with new and existing business in the UAE. New business focus encompassed all market segments, with particular care on taking any new or additional exposure in the real estate and contracting sectors.

In terms of profitability, the overall performance of Corporate Banking was satisfactory. The Bank continued to be successful in acquiring new relationships during the year. Among notable transactions were AUB’s mandated Lead Arranger role in the US$ 2.6 billion acquisition of Americana by Alabbar Enterprises of the UAE and the multiple roles undertaken by AUB in Bahrain’s LNG project financing. Well structured SME portfolios continued to be developed across the region.

With liquidity continuing to remain tight, the Bank will actively seek opportunities to price upwards where appropriate and achievable. In expanding the business, AUB will focus on lending to prime quality corporates, raising liabilities and developing cross selling activities both cross border and cross product.

Going forward, Corporate Banking is well positioned to compete successfully in market conditions that will continue to be challenging. With AUB’s unique range of quality products and services, the Division will continue to attract new business across the region.

Retail Banking

During 2016, AUB continued to focus on expanding the Bank’s retail footprint across the region. The opening of new branches, together with the installation of additional ATMs and cash deposit machines which provided customers with 24/7 access to digital teller services.

AUB’s preeminent regional network, extending across the GCC countries, Egypt, Iraq, Libya and UK, enabled the Bank to offer customers a wealth of local knowledge as well as seamless banking relationships across various entities. In the eight countries where AUB operates, the Bank is well positioned to meet the increasingly cross border banking needs of its clients.

In 2016, AUB’s retail portfolio achieved improved profitability, driven by contributions from CASA deposits, prudent risk management, sustained margins on retail assets, new fee income initiatives and implementation of operating cost efficiencies.

The Bank’s Islamic banking offering, Al Hilal, was expanded further to include new Sharia products and privileged services for premium banking clients. AUB’s retail Islamic presence in Bahrain, Kuwait, Oman, and the UK continued to demonstrate increased growth rates. In remaining a sector of key focus, further investment includes development of the Islamic branches network and planned expansion into Egypt.

During the year, the Bank’s retail product range and service delivery was further strengthened through technology enhancements in e-Banking, mobile banking, B2B, e-payment gateway and point of sale acquiring. With continued focus on growing low cost liabilities and optimising the liability mix, the Bank increased investment in savings products with prizes, like MyHassad, which was enhanced further with a new range of benefits which support client acquisition and portfolio growth.

Treasury

The sustained low oil price continued to present significant challenges for all banks operating in the Gulf countries. Restrictions in the supply of available US$ liquidity placed upward pressure on pricing across the region, particularly in the second half of the year, as the US Federal Reserve moved towards increases in the interest rate. Outside of the GCC countries, the operating environment in Egypt remained fragile, with a system wide shortage of foreign exchange causing friction within the real economy, which led to devaluation of the Egyptian pound.


GROUP BUSINESS & RISK REVIEW(Continued)

During the year, Treasury focused on maintaining the stability and diversity of the Bank’s funding base, whilst applying rigorous controls to the quality and volume of assets booked. Despite external pressures, Treasury was successful in achieving stability in the asset/liability structure of the balance sheet, which was further underlined by a reduction in the use of repo funding and interbank borrowing. This positive performance obviated the need to seek high cost deposits, whilst positioning the Group to capitalise selectively on opportunities across the region.

As a result, Treasury’s earnings were not adversely affected by the higher cost of funds. To the contrary, the strong liquidity position, combined with a greater focus on unlocking value from interest rate hedging of selective assets, enabled Treasury to achieve satisfactory results.

Treasury’s strong performance was further supported by the creation of an active funding desk in AUB Bahrain and the introduction, Group-wide, of funds transfer pricing methodology which facilitated accurate benchmarking of deposit gathering and asset pricing. Focus on G10 currencies and interest rate products together with emphasis on our core competitive advantage in the local and regional currencies also contributed significantly to the Division’s performance.

The Group will continue to introduce more powerful tools to ensure stability in the balance sheet. A focus on raising liabilities from core clients at reasonable cost will mitigate the need to seek expensive or unstable deposits whilst prudent monitoring of asset growth will protect net interest margins. New system enhancements to meet both regulatory compliance and target ratios are being implemented across the Group which, together with active management, will enhance our competitive advantage.

Looking ahead, increasing volatility in financial markets caused by economic and geo-political uncertainties worldwide will create opportunities for Treasury. In generating future growth, we shall continue to focus on selectively targeting those products where AUB has a commercial advantage.

Private Banking & Wealth Management

Unpredictable political events, central bank policy actions and volatile market conditions were key factors in making 2016 another challenging year for the Private Banking industry. Changes in the political leadership of some of the world’s major and emerging market economies, together with reduced oil prices and an increase in the US dollar interest rate, had a significant affect on investment and currency markets.

Among the major asset classes, global high yield bonds delivered optimum returns, followed by commodities and global equities. Both the S&P 500 and the FTSE All Share indices performed well while, in currencies, the US dollar rallied in the second half of the year with the Japanese yen weakening. Apart from US Treasuries that performed poorly, government bonds in U.K. and European markets produced positive returns and emerging market debt benefited generally from falling inflation.

In the face of highly variable market conditions, the Division maintained its focused approach in expanding the wealth management product offering and continuing to provide comprehensive financial solutions to clients. In addition, suitably attractive investment opportunities were delivered to clients that contributed significantly to growth in investment sales volumes. As well as serving the Division’s qualified customers, market coverage was further enhanced through providing investment solutions to client segments within AUB group, including corporate banking, financial institutions, offshore registered legal entities, and semi government entities that maintain excess liquidity.

During 2016 the Division was successful in advancing its objective to build strong long-term relationships with clients. Gaining clients’ trust enabled the Division to capture business opportunities across several products and expand total banking relationships. As a result, sales volumes in 2016 increased by 100 per cent compared with the previous year.

In line with the Division’s strategy to increase regional coverage and be present in key wealth markets, a Private Banking team was established in AUB Limited in the Dubai International Financial Centre to serve the regional markets. A number of new products were introduced that included housing and real estate funds and currency deposits. The Division’s diversified products platform, complemented by the Group cross border marketing initiative, played a key role in attracting new private banking clients and increasing wallet share amongst existing clients. In acknowledging the Bank’s strong performance in the wealth management sector, AUB was named as ‘Best Private Bank in Bahrain’ by a number of leading financial publications.

Going forward, the Division will continue to strengthen the product platform and to guide clients in diversifying their investment portfolios in order to manage market volatility and grow their wealth. Increasing the client base, assets under management and product penetration will remain key priorities. AUB Group’s diverse geographical footprint will continue to provide significant advantage in tapping cross border business and investment flows within the MENA region.

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Information Technology

IT strategy entailed a continued focus on strengthening the Bank’s capability to deliver uniformity of services across the Group, facilitating economies of scale while providing a consistent customer experience throughout AUB’s banking network. During 2016, IT was successful in delivering innovative and secured solutions to support the Bank’s businesses, management processes and security framework aligned to meet customers’ requirements through a diversified network of delivery channels.

The electronic funds transfer system was further enhanced, in compliance with regulatory mandates, enabling customers to perform bill payments in a timely manner across all banking channels. Bill payment features were also added to corporate internet banking services which provide seamless integration with the Bank’s B2B cash management platform. As a result of the Bank’s initiatives to encourage electronic payment processing, the total transaction value through the B2B platform exceeded US$ 3.5 billion for the AUB Group and, of which over US$ 2.0 billion was processed in Bahrain.

Significant progress was achieved in the straight-through processing of SWIFT messaging for clients’ vendor and salary payments, improving operational efficiency for both customers and the Bank. The suite of electronic banking products was further expanded with the implementation of a cash deposit capability across all ATMs and, in streamlining business processes, business workflow automation was launched to facilitate improved processes for corporate credit approval and other business functions. The private banking system was also upgraded with enhanced features and functionalities.

In providing convenience and ease of operation for physically challenged and special needs customers, the Bank rolled out a special programme for branches and ATMs. To assist customers with visual disabilities, voice based tokens on the internet channel were introduced on a pilot basis in Kuwait.

For the core banking system, new enhancements were implemented to improve operational efficiencies and provide better control and monitoring capabilities while the loans system was upgraded to support new customer acquisitions.

As part of the capacity and performance management initiative, the Bank continued to upgrade IT infrastructure for all key systems. 75 per cent virtualisation has now been achieved for Intel based infrastructure at production and DR datacentre facilities. Strengthening the IT based service desk system to handle internal management processes also resulted in significant reductions in paper usage and movement.

In compliance with Central Bank mandates, ATM security and surveillance were enhanced with new anti-skimming devices adding further protection for ATMs. Security enhancements were also implemented on all online banking channels to mitigate the risk of cyber-attack.

Information Security, integral to the IT framework across the Group, remained a key focus area. In compliance with industry best practice, accreditation to the highest standards for payment card security and ISO information security were maintained. Customised training on Information Security was conducted for all end users across the Group. A comprehensive independent Information Security assessment to evaluate the security posture of the Group was undertaken by Group management with subsequent initiatives to further strengthen the information security framework.

In recognising the value and importance of access to management information, AUB Group continued to invest in the enterprise-wide data management solution which, this year, was extended to support the new operations launched in March 2016 through its fully owned Category1 licensed entity - Ahli United Bank Limited (AUBL) - in the Dubai International Financial Centre (DIFC). Furthermore, notable was the development of the data warehousing function that continued to support significant enhancements to financial performance and credit risk modules.

Human Resources

At year-end 2016 the total number of staff across the AUB Group amounted to 3,796, an increase of 2% over the previous year. Comprising 41 di fferent nationalities and, with over one third of the total women, the workforce reflected the Bank’s broadly multi-cultural environment. AUB’s particular strength in recruiting and retaining ta lented professionals was further underlined by the average length of employee service extending to 9 years.

During 2016, HR strategy continued to focus on increasing employee productivity and shareholder value, with a 3% improvement in the revenue per unit of employee cost. Recruitment and selection processes were further strengthened with the inclusion of Assessment Centre testing, which enhanced HR’s capacity to identify requisite abilities and internal successors for key positions. In addition, the Bank’s continued commitment to appoint highly qualified, internationally experienced professionals for senior positions affirmed its reputation as an employer of choice in the region.

In optimising staff performance, the Group HR information system was upgraded with new technology tools. As a result, significant automation was achieved in the processes of performance management, training, succession planning and employee self-service.



Investment in professional development continued to be a key objective, with over 70% of AUB employees registered for training in several countries across the Group. In addition to the introduction of interactive online e-learning platforms, training focused on the development of internal potential leaders, team building and communication skills as well as attainment of internationally accredited certifications in banking and technical proficiencies.

The fourth AUB Credit Academy, which provided participants with a solid grounding in credit and financial analysis, graduated 21 future leaders from across the Group. Succession planning was strengthened further with the successful launch of a Group-wide Talent Development Programme in Bahrain and Kuwait, that tailored in-house leadership programmes for selected employees, preparing them for future roles in senior management. ISO 9001 quality accreditation was successfully renewed by AUB Bahrain and Kuwait whilst, internally, HR Business Partner was introduced to enhance HR alignment with the Bank’s business needs and objectives.

Going forward, increased focus on automating HR processes and improving speed of response will be critical in differentiating AUB in the market for human capital.

Compliance

The Bank has established an independent compliance function. The unit acts as a focal point for all regulatory compliance and for adapting other best practice compliance principles. The Bank continuously strives to improve the level of compliance in all its activities. Anti-money laundering measures form an important area of the compliance function, in addition to areas of corporate governance, disclosure standards, insiders’/key persons trading, conflict of interest, and adherence to best practices.

The Bank has documented appropriate AML and Compliance policies and monitoring programs. These policies and monitoring programs are reviewed and updated annually and approved by the Board of Directors. The Bank’s anti-money laundering measures are regularly audited by the internal auditors who report to the Audit Committee of the Board. The Central Bank performs periodic inspections of the Bank’s compliance with anti-money laundering regulations. Additionally, the Bank’s anti-money laundering measures are audited by independent external auditors every year and their report is submitted to the CBB. The Bank is committed to combating money-laundering and, towards this end, has deployed a risk based automated transaction monitoring system and implemented relevant procedures and controls to facilitate appropriate monitoring and detection mechanism.

Risk Management

Risk management involves the identification, analysis, evaluation, acceptance and management of all financial and non-financial risks that could have a negative impact on the Group’s performance and reputation. The Risk management function provides oversight and advice on the Board approved risk appetite and strategy, development and maintenance of a supportive system for management of risks through procedures and training.

The major risks associated with AUB’s business are credit risk, market risk (which includes foreign exchange, interest rate and equity price risk), liquidity risk, operational risk and reputational risk.

AUB’s risk management policies have been developed to:

• identify and analyse these risks,

• set appropriate risk limits and controls,

• measure, monitor and report the risks against approved limits.

While risks that are inherent in the banking business cannot be completely eliminated, the risk management function aims to effectively manage these risks within the tolerance levels approved by the Board while earning competitive returns commensurate to the degree of risk assumed. Risk is evaluated based on the potential impact on income and capital, taking into consideration changes in political, economic and market conditions, and the idiosyncratic factors that impact the risk exposures.

The risk management function relies on the competence, experience and dedication of its professional staff, sound risk management policies and procedures, and ongoing investment in technology and training.

The Board of Directors approves at least annually the Bank’s key Risk Management policies based on reviews and recommendations of the risk management function and the relevant management committees. The risk management processes are subject to additional scrutiny by independent internal and external auditors, and the Bank’s regulators which help further strengthen the risk management practices.


Ahli United Bank54

The risk management and control process is based on detailed policies and procedures that encompass:

• business line accountability for all risks taken. Each business line is responsible for developing a plan that includes adequate risk/ return parameters, as well as risk acceptance criteria;

• a risk function that understands, monitors and independently controls each risk exposure ensuring that the appropriate approvals are obtained and a uniform risk management standard, including objective risk measurement, has been correctly applied to all risk exposures;

• product and business policies, which are clearly understood, monitored and are in agreement with the overall Board approved risk framework;

• the ongoing assessment of the portfolio against various risk parameters; and

• an integrated limits structure that permits management to monitor, control and assume exposures within approved tolerances.

Credit Risk

Credit risk is the risk of financial loss due to the failure of a counterparty to perform its obligations according to agreed terms. It arises principally from lending, trade finance and treasury activities. The credit process is consistent for all forms of credit risk to a single obligor. Overall exposure is evaluated on an ongoing basis to ensure a broad diversification of credit risk. Potential concentrations by country, product, industry, and risk rating are regularly reviewed to avoid excessive exposure and ensure a broad diversification.

Credit risk within the Group is actively managed by a rigorous process from initiation to approval to disbursement. All day-to-day management is in accordance with well-defined credit policies and procedures (CP&P) that detail all credit approval requirements and are designed to identify at an early stage, exposures which require close monitoring. Specific impairment provisions are made against credit exposures where whole or a portion of the credit is considered doubtful of recovery.

If an asset is assessed to be irrecoverable, a mandatory write-off takes place. This is conducted by a risk management process, which is completely independent in reporting terms from the asset generating departments.

Risk rating of individual counterparties plays an important role in the approval and maintenance of credit limits. The risk rating process ensures that the quality of the credit portfolio of the Bank is maintained at the highest possible level and stays within Board

approved risk limits. The CP&P includes a robust risk rating system developed by a leading international rating agency, which provides a credit rating for each individual credit based on an extensive set of financial and non-financial parameters. This risk rating system is essential for the Bank to progress towards the measurement of Expected Credit Losses in compliance with IFRS 9.

The risk management function categorises the credit portfolio by level of risk to monitor the credit quality and to be able to assess the pricing and aid in the prompt identification of problem exposures. Management of material problem exposures is vested with Special Assets Groups in the respective Group operating entities, all of which report to the Group Risk Management function.

In addition to the Group Risk Management function, credit risk is overseen by the Group Risk Committee (GRC) which is vested with the overall day-to-day responsibility for all matters relating to Group credit risk. The GRC responsibilities include the following:

• formulation and implementation of credit policies and monitoring compliance,

• act as a credit approval authority for credits within its delegated limits,

• recommend to the Executive Committee all policy changes related to credit risk as well as credits falling outside its discretion,

• determine appropriate pricing and security guidelines for all risk asset products,

• review the ongoing risk profile of the Group as a whole and by individual products, business sectors and countries,

• ensure the adequacy of specific and collective impairment provisions and make appropriate recommendations to the Executive Committee.

Market Risk

Market risk is the risk that adverse movements in market risk factors including foreign exchange rates, interest rates, credit spreads, commodity prices and equity prices will reduce the Group’s income or the value of its portfolios.

Given the Group’s ongoing low risk strategy, aggregate market risk levels are low relative to the size of the Bank’s balance sheet. A robust control process incorporating well defined limits is applied to effectively manage market risks and monitor daily position limits and stop losses. The Group utilizes Value-at-Risk (VaR) models to estimate potential losses that may arise from adverse market movements in addition to other quantitative and qualitative risk management techniques.



The Group calculates VaR using a one-day holding period at a confidence level of 99%, which takes into account the actual correlations observed historically between different markets and rates.

Value at Risk

2016 US$ ’000

2015US$ ’000

Average 310 735

Minimum 82 446

Maximum 770 1,307

VaR limits are delegated by the Board to the Group Asset and Liability Committee (GALCO) and sub-delegated to the ALCO of the Group’s subsidiaries.

The Group recognizes that VaR is based on the assumption of normal market conditions and that certain market shocks can result in losses greater than anticipated. Therefore, supplementary risk management techniques such as stress testing form a core part of the Group’s risk control processes.

Liquidity Risk

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. It is measured by estimating the Group’s potential liquidity and funding requirements under different stress scenarios.

The Group’s liquidity management policies and procedures are designed to ensure that funds are available under all circumstances to meet the funding requirements of the Group not only under adverse conditions but at sufficient levels to capitalize on opportunities for business expansion.

Prudent liquidity controls ensure access to liquidity without unexpected cost effects. Liquidity projections based on both normal and stressed scenarios are performed regularly. The control framework also provides for the maintenance of a prudential buffer of liquid, marketable assets and an adequately diversified deposit base in terms of maturity profile and number of counter parties.

The Group Risk Management function continuously monitors liquidity risk and actively manages the balance sheet to control liquidity. The treasury function at each subsidiary manages this risk with monitoring by the Risk Management department and oversight

by its Assets and Liabilities Committee (ALCO). At the Group level, the liquidity risk is managed by the GALCO, which is vested with the overall day-to-day responsibility for all matters relating to Group liquidity.

Operational Risk

Operational Risk is “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.”

Operational risk is managed by the Group Operational Risk Committee (GORC). The Group has adopted an ongoing Operational Risk Self-Assessment (ORSA) process. Assessments are made of the operational risks identified within each function of the Bank and these are reviewed regularly to monitor significant changes and the adequacy of controls. Operational risk loss data is collected and reported to senior management on a regular basis.

The Group’s independent audit function regularly evaluates operational procedures and advises senior management and the Board of any potential problems. Additionally, the Group maintains adequate insurance coverage and business continuity contingency plans utilizing offsite data storage and backup systems. The adequacy of the Bank’s business continuity plans are confirmed by a programme of regular testing with oversight being provided by GORC.


Ahli United Bank56

UBCI Board of Directors

CBIQ Board of Directors

ABO Board ofDirectors

AUBL Board ofDirectors

AUBE Board ofDirectors

AUBUK Board of Directors

AUBK Board ofDirectors

AlHilal Life Board of Directors

CEOAUBK

CEOAlHilal Life

CEOAUBL

CEOAUBUK

CEOABO

CEOAUBE

CEOUBCI

CEOCBIQ

DGCEOTreasury &

Investments

DGCEORetail

Banking

DGCEOFinance &Strategic

Development

Group HeadHuman

Resources &Development

Group HeadAudit

DGCEOCorporateBanking

DGCEOPB & WM

DGCEOOperations

&Technology

DGCEORisk, Legal &Compliance

GroupHead

Compliance

Sharia Compliance

Officer

Group Head Legal & Corporate

Affairs (Corporate Secretary)

NominatingCommittee

CompensationCommittee

AUBBoard ofDirectors

Group CEO &Managing Director

Audit & Compliance Committee

Executive Committee

Sharia Advisory& Supervisory Board

GROUP MANAGEMENT ORGANIZATION STRUCTURE


GROUP MANAGEMENT

Adel A. El-LabbanGroup Chief Executive Officer and Managing Director

Director since 30 July 2000. Holds a Masters in Economics (Highest Honors) from the American University, Cairo, 1980, Bachelors in Economics (Highest Honors) from American University, Cairo, 1977 and a General Certificate of Education from London University, 1973.

Group Chief Executive Officer & Managing Director, Ahli United Bank BSC, Bahrain; First Deputy Chairman, Ahli Bank SAOG, Oman; Deputy Chairman, Commercial Bank of Iraq,; Deputy Chairman, United Bank for Commerce & Investment S.A.C. Libya; Deputy Chairman, Middle East Financial Investment Co., Saudi Arabia; Director, Ahli United Bank (UK) Plc; Director, Ahli United Bank

KSCP, Kuwait; Director, Ahli United Bank Limited, UAE; Director Bahrain Association of Banks, Bahrain; Formerly : Deputy Chairman, Ahli United Bank (Egypt), Chief Executive Officer and Director, United Bank of Kuwait PLC, UK; Managing Director, Commercial International Bank (Egypt) SAE; Chairman, Commercial International Investment Company, Egypt; Vice President, Corporate Finance, Morgan Stanley, USA; Assistant Vice President, Arab Banking Corporation, Bahrain; Director, Bahrain Stock Exchange; Director, Kuwait & Middle East Financial Investment Co, Kuwait.

(Total years of experience: 38 years)

Sanjeev BaijalDeputy Group Chief Executive Officer - Finance and Strategic Development

Chairman Al Hilal Life B.S.C.(c) & Al Hilal Takaful B.S.C.(c), Bahrain; Director, Ahli United Bank K.S.C.P., Kuwait; Director, Ahli Bank S.A.O.G., Oman; Previous experience as Group Head of Finance, Ahli United Bank B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain; Held various positions at Ernst & Young, Bahrain and Price Waterhouse in India; Chartered Global

Management Accountant under Association of International Certified Professional Accountants; Member of the American Institute of Certified Public Accountants (AICPA), and Associate Member of the Institute of Chartered Accountants of India (ACA).


Keith GaleDeputy Group Chief Executive Officer - Risk, Legal and Compliance

Director, Ahli Bank S.A.O.G., Oman; Director, Ahli United Bank K.S.C.P. Kuwait; Director, Ahli United Bank S.A.E., Egypt; Director, Ahli United Bank (UK) P.L.C. Previously Group Head of Risk Management, Ahli United Bank, Bahrain; Former Head of Credit and Risk at ABC International Bank P.L.C.; Former Assistant Vice President, Internal Audit Department, Arab Banking Corporation, Bahrain. Held various positions in the UK with KPMG and Ernst &

Young. Associate Member of the Institute of Chartered Accountants England & Wales (ACA) and holds a BA (Hons) in Accounting and Finance from the University of Lancaster, UK.


Abdulla AlRaeesiDeputy Group Chief Executive Officer – Retail Banking

Director and Member of the Audit and Compliance Committee and Member of Corporate Governance Committee of Ahli United Bank K.S.C.P., Kuwait; Deputy Chairman, Al Hilal Life B.S.C.(c),Bahrain; Deputy Chairman, Al Hilal Takaful B.S.C.(c), Bahrain. Chairman of Ahli United Bank Group IT Steering Committee, Member of Group Assets and Liabilities Committee, Member of Group Management Committee and Member of Group Operation Risk Committee. Former Director, Ahli United Bank (Egypt) S.A.E.; Former Director, International Chamber of Commerce, Bahrain; Former Director, The

Benefit Company, Bahrain. Former Chairman, Ahli Man Investment Committee, Bahrain. Former Vice Chairman, Ahli United Finance Company, Egypt; Former Vice Chairman, Charity Committee of Ahli United Bank B.S.C., Bahrain; Former Head of Business & Technology Consulting Group at Arthur Andersen and Assistant General Manager at Commercial Bank of Qatar. Holds an MBA in Business Administration from the United Kingdom.


Ahli United Bank58

Derek LuntDeputy Group Chief Executive Officer – Corporate Banking

Director, Al Hilal Life B.S.C. (c) & Al Hilal Takaful B.S.C. (c). Previous experience as Regional Chief of Staff, HSBC Bank Middle East; Regional Head of Corporate and International, HSBC Bank Middle East; Deputy Head, International and Strategy, HSBC Bank Middle East; Senior Executive, International, HSBC Europe; Area Director, Milton Keynes, HSBC UK; Head of Trade Services, HSBC Europe; Director, International Trading Division, HSBC Hong Kong; Deputy Head, Consumer Industries, HSBC Corporate and Institutional

Banking, London; Relationship Manager/Director, Consumer Products Team, Midland Bank Corporate and Institutional Banking, London; Various Roles, Forward Trust Group, UK. Holds a BA (Hons) in Human Sciences from St. Catherine’s College, Oxford; Post-graduate – General Management Programme, CEDEP from Insead.


Robert JonesGroup Head – Audit

Former Deputy Chief Executive Officer, Finance, Risk, Operations and Technology at Ahli United Bank (UK) P.L.C., Former Head of Audit for AUB Bahrain, Former Audit Manager in the National Commercial Bank (Saudi Arabia). Has qualified the Information

Systems Audit and Control Association (CISA) and the Institute of Chartered Secretaries & Administrators (ACIS) examinations.


David O’LoanDeputy Group Chief Executive Officer - Treasury and Investments

Former: Group Treasurer for J. Sainsbury Plc, UK; Deputy Group Treasurer, RBS Group, UK; Senior Vice President, Swiss Re Asset Management, Switzerland; Investment Director, Standard Life Investments, UK; Head of Treasury, BGB (Ireland) plc, Ireland; Manager, Citibank N.A, Ireland. Fellow of the Association of

Chartered Certified Accountants, holds a Master of Science degree in Treasury & Investment (Dublin City University) and an MBA from University of Edinburgh.

Total years of experience: 23 years

GROUP MANAGEMENT(Continued)

Shafqat AnwarDeputy Group Chief Executive Officer - Operations and Technology

Director, Ahli Bank S.A.O.G., Oman; Former Director, Ahli United Finance Company, Egypt; Former Director, Ahli United Bank (Egypt) S.A.E.; Former Deputy Chief Executive Officer, Finance, Risk and Operations, Ahli United Bank (Egypt) S.A.E.; Former Group Head of Operations, Ahli United Bank B.S.C., Bahrain; Former Chief Operating Officer, Commercial Bank of Bahrain, Bahrain; Former Chief Operating Officer, Grindlays Bahrain Bank, Bahrain; Former Operations Manager

Gulf, ANZ Grindlays Bank, UAE. Held various management positions with ANZ Banking Group in Bangladesh, the UK, the UAE and Australia. Holds a Master of Business Administration, a Master of Public Administration and a Bachelor of Social Sciences (BSS) with Honours in Public Administration from the University of Dhaka, Bangladesh.



Iman Al-MadaniGroup Head – Human Resources & Development, CGM

Former Group Head of Human Resources & Head of Human Resources, Bank of Kuwait & Middle East (BKME). Former Assistant General Manager Human Resources, Burgan Bank, Kuwait. Certified Corporate Governance Officer (CCGO) from the London Business School. Holds a Bachelor of Science in Mathematics from the

University of Denver, USA and an Associate Degree in Computer Science, Lane College, Oregon State, USA.


Sami Tamim Acting Chief Executive Officer – AUBUK

Former: Deputy CEO – Private Banking and Wealth Management, Ahli United Bank UK; Executive Director, UBS, London; Director, Citibank, UK; Senior Vice President, Couttes Bank, London; Managing Director, Bank of Beirut, UK; Head of Private Banking,

SAMBA, UK. Holds a Bachelor Degree in Economics from the American University of Beirut.

Total years of experience: 32 years


Richard GrovesChief Executive Officer - Ahli United Bank, Kuwait

Former CEO and Board Member of various banks within the HSBC Group including CEO – HSBC Greece, CEO – HSBC Oman and MD – Saudi British Bank (SABB), HSBC’s 40% owned affiliate in Saudi Arabia. Previously working in Hong Kong, Indonesia, Australia, the Philippines, Malaysia and the UK in a variety of investment banking,corporate and transactional roles. Holds a BA (Hons.) in Economic

& Social History from the University of Hull, UK and has completed an Advanced Executive Programme from the Kellogg School of Management, USA.


Nevine El MesseeryChief Executive Officer & Managing Director - Ahli United Bank, Egypt

Director, Ahli United Bank (Egypt) S.A.E. Former General Manager, Corporate Banking at Commercial International Bank (CIB), Egypt, Former Chair of the Credit Committee, Former Chair of the Concession Tariff Committee, Former Member of the ALCO Committee, Former Member of the CIB Life Insurance Company Management Committee. Has held several roles as Chair of the

Board of Directors in several investment companies and subsidiaries of CIB. Former General Manager, Egyptian American Bank (Credit Agricole). Holds a Graduate Degree,Faculty of Commerce from Cairo University, Egypt.


Nouri AldubaysiChief Executive Officer - Commercial Bank of Iraq

Director, Commercial Bank of Iraq P.S.C., Iraq. Former Deputy General Manager, Rasheedi Bank, Iraq. Held senior management positions with Rafidain Bank and Al Rasheed Bank in Iraq. Holds a degree in Accounting from International Institute of Accountancy in Lebanon.


Ahli United Bank60

Lloyd MaddockChief Executive Officer - Ahli Bank S.A.O.G, Oman

Former Deputy Group Chief Executive Officer, Corporate Banking, Ahli United Bank; Former Chief Executive Officer, HSBC Pakistan; Former Chief Executive Officer, HSBC Kuwait; Former Head of Wholesale Credit & Risk, HSBC MENA region, subsequent to working in various senior management roles with HSBC covering

Corporate Banking, Strategy & Risk Management. Holds a Bachelor in Engineering, Civil & Mining Engineering 1990 from the University of Exeter, UK.


Ayman El GammalChief Executive Officer - United Bank for Commerce & Investment, Libya

Former Assistant Managing Director and Head of Investments, National Investment Bank, Egypt, Former Managing Director, Asset Management - Private Equity, NAEEM Holdings, Egypt, Former Managing Director, EFG Hermes Private Equity, Egypt, Former Executive Director, Commercial International Investment Company, Former Assistant General Manager, Commercial International Bank

(CIB), Egypt, former board member in various companies and banks representing employers’ investments. Holds a BA in Business from Cairo University, Egypt.



Emanuel LantzosChief Executive Officer – Al Hilal Life & Al Hilal Takaful

Former General Manager, Nexus Financial Services WLL, Bahrain. Former Director of Retail franchise in the Republic of Ireland. Head of Bancassurance & Investment Fund Sales, Arab National Bank, Riyadh, KSA. Sales Development Manager, Zurich International Life Middle East, KSA. Held various managerial sales positions at

Guardian Royal Exchange, Royal Life and GA Associates. Member of the Chartered Insurance Institute and Associate of Chartered Institute for Securities and Investment. (Total years of experience: 34 years)

CB GaneshChief Executive Officer – Ahli United Bank Limited

Former Deputy CEO – Banking Group, Ahli Bank SAOG, Oman. Former Deputy CEO & Head of Wholesale Banking, ICICI Bank Ltd, North Asia (Hong kong). Former Head of Trade Finance, ICICI Bank Ltd, India; Former Regional Head, Corporate Banking ( South India), ICICI Bank Ltd. Holds Master in Commerce from MK University India.

Holds a Master in Bank Management from Alagappa University in India, EPBM from IIM Culcutta and CAIIB from the Indian Institute of Bankers in India. ( Total years of experience – 26 years)


AHLI UNITED BANK B.S.C.Bldg. 2495, Road 2832Al Seef District 428P.O. Box 2424, ManamaKingdom of BahrainTelephone: +973 17 585 858Facsimile: +973 17 580 569Email: [email protected]

AHLI UNITED BANK (UK) PLC35 Portman Square, London W1H 6LRUnited KingdomTelephone: +44 20 7487 6500Facsimile: +44 20 7487 6808Email: [email protected]

AHLI UNITED BANK K.S.C.P.P.O. Box 71 Safat , 12168, KuwaitTelephone: +965 1802000Facsimile: +965 22461430Email: [email protected]

AHLI UNITED BANK LIMITED1402 Al Fattan Currency HouseTower 2, 14th floorP.O. Box 507055DIFC, Dubai, UAETelephone: +971 4 563 8777Facsimile: +971 4 563 8750Email: [email protected]

COMMERCIAL BANK OF IRAQ P.S.C.Al Sadoon Street, Baghdad, IraqTelephone: +964 7830164484 +964 7818834366Email: [email protected]

AHLI UNITED BANK (EGYPT) S.A.E.81 El-Tesseen Street Sector A, Fifth SettlementCairo, EgyptTelephone: +20 2 22499500 +20 2 22499900 +20 2 22499700Facsimile: +20 2 26135160Email: [email protected]

AHLI BANK S.A.O.G.P.O. Box 545Postal Code 116Mina Al FahalSultanate of OmanTelephone: +968 24577000Facsimile: +968 24568001Email: [email protected]

UNITED BANK FOR COMMERCE & INVESTMENT S.A.L.Gumhouria Street - Mansoura District Tripoli, LibyaTelephone: +218 213345602/3/4Facsimile: +218 213345601Email: [email protected]

AL HILAL LIFE B.S.C. (c)5th Floor, Office 52Bldg 680, Road 2811Al Seef District 428P.O. Box 5832, ManamaKingdom of BahrainTelephone: +973 17 589 800www.alhilal.life

CONTACT DETAILS

Independent auditors’ report to the shareholders of Ahli United Bank B.S.C 64

Consolidated Statement of Income 69

Consolidated Statement of Comprehensive Income 70

Consolidated Balance Sheet 71

Consolidated Statement of Cash Flows 72

Consolidated Statement of Changes in Equity 73

Notes to the Consolidated Financial Statements 76

CONTENTS

CONSOLIDATEDFINANCIALSTATEMENTS31 DECEMBER 2016

Ahli United Bank64

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERSOF AHLI UNITED BANK B.S.C.

Report on the Audit of the Consolidated Financial Statements

Opinion

We have audited the accompanying consolidated financial statements of Ahli United Bank B.S.C. (“the Bank”) and its subsidiaries (together “the Group”), which comprise the consolidated balance sheet as at 31 December 2016, and the consolidated statements of income, comprehensive income, cash flows and changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended 31 December 2016. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements.

Ernst & Young P.O. Box 14014th Floor, South TowerBahrain World Trade CenterManamaKingdom of Bahrain

Tel: +973 1753 5455Fax: +973 1753 [email protected]/menaC.R.No. 6700

65 Annual Report 2016

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERSOF AHLI UNITED BANK B.S.C.Report on the Audit of the Consolidated Financial Statements (Continued)

Key Audit Matters (Continued)

1. Impairment of carrying value of loans and advances

Risk How the key audit matter was addressed in the auditThe Bank exercises significant judgment using subjective assumptions when determining both the timing and the amounts of the impairment provision for loans and advances. Because loans and advances form major portion of the Group’s assets and due to the significance of judgment used in estimating both the specific and collective provisions for loans and advances, this audit area is considered a key audit risk. As at 31 December 2016, the gross loans and advances amounted to US$ 19,304,054 thousand and related impairment provision amounted to US$ 697,171 thousand. The basis of the impairment provision policy is presented in the accounting policies and further analysed in Note 8 to the consolidated financial statements.

We have performed tests of controls over the monitoring process of loans and advances to confirm the operating effectiveness of the key controls in place which identify the impaired loans and advances against which provisions are required. We also performed tests of controls over the rating system adopted by the Group.

Where impairment was individually calculated, we tested a sample of loans and advances to assess whether an event of impairment has been identified timely through performing substantive audit procedures in connection with impairment provisions recognized. We also tested the assumptions and underlining data used by management in estimating the required provisions.

For the collective impairment provision, we obtained an understanding of the methodology used by the Group to determine the collective provisions, assessed the reasonableness of underlying assumptions and sufficiency of the data used by management.

We also assessed whether the financial statement disclosures appropriately reflect the requirements of IFRS.

Refer to the critical accounting estimates and judgements, disclosures of loans and advances and credit risk management on note 3.3(g), note 8 and note 31 to the consolidated financial statements.

2. Impairment of goodwill and intangible assets

Risk How the key audit matter was addressed in the auditGoodwill is allocated to cash generating units (‘CGUs’) for the purpose of impairment testing. Goodwill and Intangible assets impairment testing of ‘CGUs’ relies on estimates of value-in use based on estimated future cash flows. Due to the subjectivity involved in forecasting and discounting of future cash flows and the significance of the Group’s recognised goodwill and Intangible assets (US$ 474,632 thousand) as at 31 December 2016, this audit area is considered a key audit risk. Subjectivity is typically highest for those CGUs where headroom between value-in-use and carrying value is limited and where the value in use is most sensitive to estimates of future cash flows.

Our audit procedures included the assessment of reasonableness of key inputs, such as the discount rates and growth rates, by comparison to externally available industry, economic and financial data and the Group’s own historical data and performance. With the assistance of our own specialists, we assessed the reasonableness of assumptions and methodologies used to forecast value-in-use for those CGUs where significant goodwill was found to be sensitive to changes in those assumptions.

Additionally we considered whether the Group’s disclosures of the application of judgement in estimating CGU cash flows and the sensitivity of the results of those estimates adequately reflect the risks associated with goodwill impairment.

Refer to the critical accounting estimates and judgements and disclosures of goodwill and intangible assets in Note 14, and allocation of goodwill and intangible assets to CGUs in Note 30 to the Consolidated Financial Statements.

Other information included in the Group’s 2016 Annual Report

Other information consists of the information included in the Group’s 2016 Annual Report, other than the consolidated financial statements and our auditor’s report thereon. The Board of Directors is responsible for the other information. Prior to the date of this auditors’ report, we obtained the Board of Directors’ report which forms part of the annual report, and the remaining sections of the annual report are expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

Ahli United Bank66


Other information included in the Group’s 2016 Annual Report (Continued)

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information obtained prior to the date of the auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Board of Directors for the Consolidated Financial Statements

The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

- Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

- Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

- Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors.

- Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.

- Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

- Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.



From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory RequirementsAs required by the Bahrain Commercial Companies Law and (Volume 1) of the Central Bank of Bahrain (CBB) Rule Book, we report that:

a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith;

b) the financial information contained in the Report of the Board of Directors is consistent with the consolidated financial statements;

c) we are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 1 and applicable provisions of Volume 6) and CBB directives, regulations and associated resolutions, rules and procedures of the Bahrain Bourse or the terms of the Bank’s memorandum and articles of association during the year ended 31 December 2016 that might have had a material adverse effect on the business of the Bank or on its consolidated financial position; and

d) satisfactory explanations and information have been provided to us by Management in response to all our requests.

The partner in charge of the audit resulting in this independent auditor’s report is Mr. Ashwani Siotia.

Partner’s registration no: 11721 February 2017 Manama, Kingdom of Bahrain

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS31 December 2016

Ahli United Bank68



Mohammad J. Al-MarzooqDeputy Chairman

Adel A. El-LabbanGroup Chief Executive Officer &

Managing Director

The attached notes 1 to 39 form part of these consolidated financial statements

Note2016

US$ ’0002015

US$ ’000

Interest income 4a 1,319,798 1,191,294

Interest expense 4b 491,566 376,578

Net interest income 828,232 814,716

Fees, commissions and others 5 173,290 157,912

Trading income 6 48,288 31,745

Investment income 72,605 58,527

Share of profit from associates 26,626 29,047

Fees and other income 320,809 277,231

OPERATING INCOME 1,149,041 1,091,947

Net provision for loan losses and others 8f 149,562 164,001

Provision for investments 9 9,279 9,384

Total provisions 158,841 173,385

NET OPERATING INCOME 990,200 918,562

Staff costs 190,348 188,401

Depreciation 22,242 20,379

Other operating expenses 107,185 100,503

OPERATING EXPENSES 319,775 309,283

PROFIT BEFORE TAX 670,425 609,279

Tax expense 22 46,115 42,669

NET PROFIT FOR THE YEAR 624,310 566,610

Net profit attributable to non-controlling interest 53,670 29,362

NET PROFIT ATTRIBUTABLE TO THE OWNERS OF THE BANK 570,640 537,248

EARNINGS PER SHARE ATTRIBUTABLE TO THE OWNERS OF THE BANK FOR THE YEAR:

Basic & diluted earnings per share (US cents) 23 8.0 7.7

CONSOLIDATED STATEMENT OF INCOMEFor the year ended 31 December 2016

Ahli United Bank70


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the year ended 31 December 2016

2016US$ ’000

2015US$ ’000

Net profit for the year 624,310 566,610

Other comprehensive income (OCI)

Items that will not be reclassified to consolidated statement of incomeNet change in fair value of financial assets measured at fair value through OCI 2,683 (7,756)

Net change in pension fund reserve (15,492) 4,732

Net change in property revaluation reserve 113 (876)

Items that may be reclassified subsequently to consolidated statement of incomeForeign currency translation adjustments (309,231) (89,838)

Net change in fair value of cash flow hedges 4,265 (2,957)

Other comprehensive income for the year (317,662) (96,695)

Total comprehensive income for the year 306,648 469,915

Total comprehensive income attributable to non-controlling interest 2,429 11,003

Total comprehensive income attributable to owners of the Bank 304,219 458,912



Mohammad J. Al-MarzooqDeputy Chairman

Adel A. El-LabbanGroup Chief Executive Officer &

Managing Director


Note2016

US$ ’0002015

US$ ’000

ASSETS

Cash and balances with central banks 7a 912,924 1,052,918

Treasury bills and deposits with central banks 7b 2,464,846 2,117,945

Deposits with banks 1,884,493 4,214,899

Loans and advances 8 18,606,883 19,353,181

Non-trading investments 9 5,570,447 5,328,110

Investment in associates 10 326,874 314,828

Investment properties 11 132,021 183,166

Premises and equipment 12 211,209 238,843

Interest receivable and other assets 13 738,155 590,829

Goodwill and other intangible assets 14 474,632 570,598

TOTAL ASSETS 31,322,484 33,965,317

LIABILITIES AND EQUITY

LIABILITIESDeposits from banks 15 3,279,038 4,241,191

Borrowings under repurchase agreements 16 698,228 800,998

Customers’ deposits 17 21,703,358 23,495,227

Interest payable and other liabilities 18 865,376 806,093

Subordinated liabilities 19 236,982 261,594

TOTAL LIABILITIES 26,782,982 29,605,103

EQUITYOrdinary share capital 20 1,711,322 1,623,030

Treasury shares (11,497) (7,309)

Reserves 1,801,002 1,902,016

Equity attributable to the owners 3,500,827 3,517,737

Perpetual Tier 1 Capital Securities 20d 600,000 400,000

Non-controlling interest 438,675 442,477

TOTAL EQUITY 4,539,502 4,360,214

TOTAL LIABILITIES AND EQUITY 31,322,484 33,965,317

CONSOLIDATED BALANCE SHEETAt 31 December 2016

Ahli United Bank72

Note2016

US$ ’0002015

US$ ’000OPERATING ACTIVITIESProfit before tax 670,425 609,279 Adjustments for:Depreciation 22,242 20,379

Investment income (72,605) (58,527)Net provision for loan losses and others 8f 149,562 164,001 Provision for non-trading investments 9 9,279 9,384 Fair Value of ESPP charge 21h 5,224 8,325 Share of profit from associates 10 (26,626) (29,047)

Operating profit before changes in operating assets and liabilities 757,501 723,794 Changes in:

Mandatory reserve deposits with central banks 142,510 (61,219)Treasury bills and deposits with central banks (346,901) 493,140 Deposits with banks 696,363 (216,604)Loans and advances 596,736 (1,052,647)Interest receivable and other assets (147,326) 82,061 Deposits from banks (962,153) (258,481)Borrowings under repurchase agreements (102,770) (100,592)Customers’ deposits (1,791,869) 488,459 Interest payables and other liabilities 17,080 (48,900)

Cash (used in) from operations (1,140,829) 49,011 Income tax paid (25,581) (51,081)

Net cash used in operating activities (1,166,410) (2,070)

INVESTING ACTIVITIESPurchase of non-trading investments (2,749,131) (1,780,962)Proceeds from sale or redemption of non-trading investments 2,562,141 2,324,717 Net decrease in investment properties 51,145 71,324 Net decrease in premises and equipment 5,476 6,904 Dividends received from associates 12,955 -

Net cash (used in) from investing activities (117,414) 621,983

FINANCING ACTIVITIESAdditional investment in subsidiary 2 - (56,611)Proceeds from issue of Perpetual Tier 1 Capital Securities 20d 200,000 400,000 Payment of expenses related to Perpetual Tier 1 Capital Securities (1,351) (2,271)Distribution on Perpetual Tier 1 Capital Securities 21j (27,500) (13,750)Repayment of subordinated liabilities (24,612) (90,052)Dividends and other appropriations paid (287,226) (262,820)Dividends paid to non-controlling interest (5,892) (17,457)Capital increase 14,677 - Purchase of treasury shares (4,188) (3,312)

Net cash used in financing activities (136,092) (46,273)

Net foreign exchange difference (211,611) (56,375)

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,631,527) 517,265

Cash and cash equivalents at 1 January 3,940,640 3,423,375

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 2,309,113 3,940,640 Additional cash flow information:Interest received 1,321,741 1,166,112 Interest paid 452,133 382,542


CONSOLIDATED STATEMENT OF CASH FLOWSFor the year ended 31 December 2016


Attributable to the owners

Reserves

Ordinaryshare

capitalUS$ ’000

Treasury shares

US$ ’000

SharepremiumUS$ ’000

Statutoryreserve

US$ ’000

Retainedearnings

US$ ’000

Proposedappropria-

tionsUS$ ’000

Other reserves

(Note 21(h))

US$ ’000

Totalreserves

US$’000

Perpetual Tier 1

Capital SecuritiesUS$’000

Non-con-trolling

interestUS$’000

TotalUS$’000

Balance at 1 January 2016 1,623,030 (7,309) 739,781 397,792 694,312 294,099 (223,968) 1,902,016 400,000 442,477 4,360,214

Distribution on Perpetual Tier 1

Capital Securities [note 21(j)] - - - - (27,500) - - (27,500) - - (27,500)

Ordinary share dividend paid

[note 21(i)] - - - - 698 (293,099) - (292,401) - - (292,401)

Dividends of subsidiaries - - - - - - - - - (5,892) (5,892)

Donations paid - - - - - (1,000) - (1,000) - - (1,000)

Bonus shares issued 81,417 - - - (81,417) - - (81,417) - - -

Additional shares issued 6,875 - 7,802 - - - - 7,802 - - 14,677

Purchase of treasury shares - (4,188) - - - - - - - - (4,188)

Perpetual Tier 1 Sukuk

issued by a subsidiary [note 20(d)] - - - - - - - - 200,000 - 200,000

Expenses related to Perpetual

Tier 1 Sukuk issued by a subsidiary - - - - (1,012) - - (1,012) - (339) (1,351)

Fair value amortisation of share

based transactions - - - - 17,811 - (12,587) 5,224 - - 5,224

Transfer from OCI reserve - - - - (14,929) - - (14,929) - - (14,929)

Movement in subsidiaries - - - - - - - - - - -

Total comprehensive income

for the year - - - - 570,640 - (266,421) 304,219 - 2,429 306,648

Transfer to statutory reserve

[note 21(c)] - - - 57,064 (57,064) - - - - - -

Proposed dividend on ordinary

shares [note 21(i)] - - - - (309,144) 309,144 - - - - -

Proposed donations - - - - (1,000) 1,000 - - - - -

Balance at 31 December 2016 1,711,322 (11,497) 747,583 454,856 791,395 310,144 (502,976) 1,801,002 600,000 438,675 4,539,502


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2016

Ahli United Bank74

Attributable to the owners

Reserves

Ordinaryshare

capitalUS$ ’000

Treasury shares

US$ ’000

Sharepremium

US$ ’000

Statutoryreserve

US$ ’000

Retainedearnings

US$ ’000

Proposedappropria-

tionsUS$ ’000

Other reserves

(Note 21(h))

US$ ’000

Totalreserves

US$’000

Perpetual Tier 1

Capital SecuritiesUS$’000

Non-con-trolling

interestUS$’000

TotalUS$’000

Balance at 1 January 2015 1,530,471 (3,997) 719,481 344,067 683,357 271,452 (153,957) 1,864,400 - 439,345 3,830,219

Distribution on Perpetual Tier 1

Capital Securities [note 21(j)] - - - - (13,750) - - (13,750) - - (13,750)

Ordinary share dividend paid

[note 21(i)] - - - - 183 (270,452) - (270,269) - - (270,269)

Dividends of subsidiaries - - - - - - - - - (17,457) (17,457)

Donations paid - - - - - (1,000) - (1,000) - - (1,000)

Bonus shares issued 76,524 - - - (76,524) - - (76,524) - - -

Additional shares issued 16,035 - 19,806 - - - - 19,806 - - 35,841

Purchase of treasury shares - (3,312) - - - - - - - - (3,312)

Perpetual Tier 1 Capital

Securities issued [note 20(d)] - - - - - - - - 400,000 - 400,000

Expenses related to Perpetual

Tier 1 Capital Securities issued - - - - (2,271) - - (2,271) - - (2,271)

Transfer of property revaluation

reserve on sale of property - - - - 1,818 - - 1,818 - - 1,818

Fair value amortisation of share

based transactions - - - - - - 8,325 8,325 - - 8,325

Transfer from OCI reserve - - - - (87,925) - - (87,925) - - (87,925)

Movement in subsidiaries - - 494 - - - - 494 - 9,586 10,080

Total comprehensive income

for the year - - - - 537,248 - (78,336) 458,912 - 11,003 469,915

Transfer to statutory reserve

[note 21(c)] - - - 53,725 (53,725) - - - - - -

Proposed dividend on ordinary

shares [note 21(i)] - - - - (293,099) 293,099 - - - - -

Proposed donations - - - - (1,000) 1,000 - - - - -

Balance at 31 December 2015 1,623,030 (7,309) 739,781 397,792 694,312 294,099 (223,968) 1,902,016 400,000 442,477 4,360,214


CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2016

Annual Report 2016Ahli United Bank 75


Ahli United Bank76

1. CORPORATE INFORMATIONThe parent company, Ahli United Bank B.S.C. (“AUB” or “the Bank”) was incorporated in the Kingdom of Bahrain on 31 May 2000 originally as a closed company and changed on 12 July 2000 to a public shareholding company by Amiri Decree number 16/2000. The Bank and its subsidiaries as detailed in note 2 below (collectively known as “the Group”) are engaged in retail, commercial, islamic and investment banking business, global fund management, private banking services and life insurance business through 110 branches, as at 31 December 2016, in the Kingdom of Bahrain (22 branches), the State of Kuwait (38 branches), the Arab Republic of Egypt (37 branches), Republic of Iraq (11 branches), Dubai International Financial Centre (Authorised Firm) and the United Kingdom (1 branch). It also operates through its managed associates in the Sultanate of Oman (20 branches) and Libya (11 branches) with a total network of 31 branches as at 31 December 2016. The Bank operates under a retail banking licence issued by the Central Bank of Bahrain. The Bank’s registered office is located at Building 2495, Road 2832, Al Seef District 428, Kingdom of Bahrain.

The consolidated financial statements for the year ended 31 December 2016 were authorised for issue in accordance with a resolution of the directors dated 21 February 2017.

2. BASIS OF CONSOLIDATIONThe consolidated financial statements comprise the financial statements of the Bank and its controlled subsidiaries as at and for the years ended 31 December 2016 and 2015. The results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control is achieved where the Bank is exposed, or has rights, to variable returns from its involvement from its investee and has the ability to affect those returns through its power over the investee. The Bank re-assesses whether or not it controls an investee if facts and circumstances indicates that there are any change to elements of control. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. Adjustments are made to the consolidated financial statements to bring into line any dissimilar accounting policies that may exist.

All material intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated on consolidation. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities.

The following are the Bank’s principal subsidiaries:

Group’s nominal holdingIncorporation 31 December 31 December

Name in 2016 2015

Ahli United Bank (U.K.) PLC (AUBUK) United Kingdom 100.0% 100.0%

Ahli United Bank K.S.C.P. (AUBK)* State of Kuwait 67.3% 67.3%

Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 85.5% 85.5%

Commercial Bank of Iraq P.S.C. (CBIQ) Republic of Iraq 74.3% 74.3%

Al Hilal Life B.S.C. (c) (AHL) Kingdom of Bahrain 100.0% 100.0%

Al Ahli Real Estate Company S.P.C. (AREC) Kingdom of Bahrain 100.0% 100.0%

Ahli United Bank Limited (AUBL) DIFC - United Arab Emirates 100.0% -

During the year, AUB launched its banking operations in Dubai International Financial Centre (DIFC) under Category-1 licence issued by the Dubai Financial Services Authority on 25 February 2016, through Ahli United Bank Limited (AUBL), a fully owned subsidiary of AUB with an issued paid up capital of USD 25 million. AUBL’s paid up capital was increased to USD 50 million during the third quarter of 2016.

* Effective holding 74.9% (31 December 2015: 74.9%)



2. BASIS OF CONSOLIDATION (continued)Financial information of a subsidiary that has material non-controlling interest is provided below.

Proportion of equity interest held by non-controlling interests are provided below:

Name Country of incorporation31 December

201631 December

2015

Ahli United Bank K.S.C.P. (AUBK) State of Kuwait 25.1% 25.1%

Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 14.5% 14.5%

US$ ’000 US$ ’000

Accumulated non-controlling interest as at: Ahli United Bank K.S.C.P. (AUBK) 330,634 306,054

Ahli United Bank (Egypt) S.A.E. (AUBE) 46,376 68,222

Profit allocated to material non-controlling interest:Ahli United Bank K.S.C.P. (AUBK) 33,484 32,623

Ahli United Bank (Egypt) S.A.E. (AUBE) 22,902 8,067

Summarised financial information of AUBK and AUBE is provided below. The information is based on amounts as reported in consolidated financial statements before inter-company eliminations and adjustments.

31 December 2016

US$ ’000

31 December2015

US$ ’000

Ahli United Bank K.S.C.P. (AUBK)Balance sheet related information of AUBKLoans and advances 8,854,889 8,829,668

Non- trading investments 667,451 458,451

Total assets 12,081,679 12,861,718

Customers’ deposits 10,024,287 10,151,792

Total liabilities 10,623,276 11,673,040

Income statement related information of AUBKTotal operating income 367,036 367,794

Net profit attributable to shareholders 133,352 141,996

Total comprehensive income attributable to shareholders 120,281 139,923

Dividends paid to non-controlling interest 5,892 10,729

Cash flow related information of AUBKNet cash (used in) from operating activities (1,553,163) 926,434


Net cash from (used in) financing activities 175,621 (42,760)


Ahli United Bank78

2. BASIS OF CONSOLIDATION (continued)

31 December 2016

US$ ’000

31 December2015

US$ ’000

Ahli United Bank (Egypt) S.A.E. (AUBE)Balance sheet related information of AUBELoans and advances 1,060,784 1,910,521

Non- trading investments 221,429 401,402

Total assets 2,306,182 3,909,895



Income statement related information of AUBETotal operating income 248,783 154,266

Net profit attributable to shareholders 175,409 61,436

Dividends paid to non-controlling interest - 2,878

Cash flow related information of AUBENet cash from (used in) operating activities 44,306 (82,599)


Net cash (used in) from financing activities (3,499) 40,121

3. ACCOUNTING POLICIES

3.1. Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis as modified for the re-measurement at fair value of freehold land, certain financial instruments (as detailed below in note 3.3(c)) and all derivative financial instruments. In addition, as more fully discussed below in note 3.3(h)(i), carrying values of recognised assets that are designated as hedged items in fair value hedges are adjusted to the extent of the fair value attributable to the risk being hedged. The consolidated financial statements are presented in US Dollars which is the Group’s functional currency and all values are rounded to the nearest thousand (US Dollars thousand) except where otherwise indicated.

Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by International Accounting Standards Board (IASB) and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law.

(A) New Standards and Interpretations issued but not yet effective

The following new Standards and amendments have been issued by the International Accounting Standards Board (IASB) but are not yet mandatory as of 31 December 2016:

- IFRS 9 – Financial Instruments (effective for annual periods beginning on or after 1 January 2018)

The IASB issued IFRS 9 ‘Financial Instruments’ in its final form in July 2014 and is effective for annual periods beginning on or after 1 January 2018 with option to early adopt. IFRS 9 sets out the requirements for recognizing and measuring financial assets, financial liabilities and some contracts to buy or sell non- financial assets, impairment of financial assets and hedge accounting. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement.



3. ACCOUNTING POLICIES (continued)

3.1. Basis of preparation (continued)

Statement of compliance (continued)

(A) New Standards and Interpretations issued but not yet effective (continued)

a. Classification and measurement

During 2012, the Group early adopted phase 1 of IFRS 9 – “Classification and Measurement”.

b. Hedge accounting

IFRS 9 allows entities to continue with the hedge accounting under IAS 39 even when other elements of IFRS become mandatory on 1 January 2018.

c. Impairment of financial assets

IFRS 9 will also fundamentally change the loan loss impairment methodology. The standard will replace IAS 39’s incurred loss approach with a forward-looking expected credit loss (ECL) approach. The Group will be required to record an allowance for ECL for all loans and other debt financial assets not held at FVTPL, together with loan commitments and financial guarantee contracts. The allowance is based on the expected credit losses associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk since origination, in which case, the allowance is based on the probability of default over the life of the asset.

The Group is currently developing a framework to perform an assessment at the end of each reporting period of whether credit risk has increased significantly since initial recognition by considering the change in the risk of default occurring over the remaining life of the financial instrument.

- To calculate ECL, the Group will estimate the risk of a default occurring on the financial instrument during its expected life. ECLs are estimated based on the present value of all cash shortfalls over the remaining expected life of the financial asset, i.e., the difference between: the contractual cash flows that are due to the Group under the contract, and

- the cash flows that the Group expects to receive, discounted at the effective interest rate of the loan.

Under IFRS 9, the Group expects to classify its loans into Stage 1, Stage 2 and Stage 3, based on the applied impairment methodology, as described below:

Stage 1 Performing loans: when loans are first recognised, the Group recognises an allowance based on a 12-month ECL horizon.

Stage 2 Underperforming loans: when a loan shows a significant increase in credit risk, the Group records an allowance for the lifetime ECL.

Stage 3 Impaired loans: the Group recognises the lifetime ECL for these loans. In addition, in Stage 3 the Group recognises interest income on receipt basis.

The Group is in the process of performing a detailed impact assessment.

- IFRS 15 - Revenue from Contracts with customers (effective 1 January 2018).

- IFRS 16 Leases (effective 1 January 2019).

The Group does not expect any significant impact on the Groups’ financial position and results.

(B) New Standards and Interpretations issued and effective

(i) The Group has adopted the following new and amended International Accounting Standards/International Financial Reporting Standards as of 1 January 2016:

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

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

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

The above amendments to IFRSs which are effective for annual accounting periods starting from 1 January 2016 did not have any material impact on the accounting policies, financial position or performance of the Group.


Ahli United Bank80


3.2. Significant accounting judgements and estimates

The preparation of the consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of income, expenses, financial assets, liabilities, the accompanying disclosures and disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

Judgements

Judgements are made in the classification of financial instruments into ‘fair value’ and ‘amortised cost’ based on business model. Further goodwill and intangible assets with indefinite lives have been allocated to cash generating units for impairment testing. Judgements are also made in determination of the objective evidence that a financial asset is impaired.

Business model

In making an assessment of whether a business model’s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to management.

In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows, the Group considers:

• Management’s stated policies and objectives for the portfolio and the operation of those policies in practice;

• Management’s evaluation of the performance of the portfolio;

• Management’s strategy in terms of earning contractual interest revenues or generating capital gains.

EstimatesPension plans

Estimates and assumptions are used in determining the Group’s pension liabilities. The cost of the defined benefit pension plan and the present value of pension obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases.

Going concern

The management has made an assessment of its ability to continue as a going concern and is satisfied that it 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 on the Group’s ability to continue as a going concern. Therefore, the consolidated financial statements continue to be prepared on the going concern basis.

Impairment losses on loans and advances, non-trading investments and other assets

Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing loans, portfolios of performing loans with similar risk characteristics where the risk of default has increased, as well as provisions for non-trading investments and other assets. These are more fully described in note 3.3 (g).

Fair value of financial instruments

Estimates are also made in determining the fair values of financial assets and derivatives that are not quoted in an active market. Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions.

Impairment of goodwill and intangible assets

The Group determines whether Goodwill and Intangibles with indefinite useful lives are impaired at least on an annual basis. Impairment exists when carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The key assumptions and estimates used to determine the recoverable amount for the different CGUs, are disclosed and further explained in note 14.

The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.




3.3. Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements, besides those detailed in note 3.1 are set out below. These policies have been consistently applied to all the years presented.

(a) Investments in associates

Associate companies are companies in which the Group exercises significant influence but does not control. 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 Group classifies an investment as “joint venture” when it is a party to a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Investments in associate companies and joint ventures are accounted for using the equity method. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, and then recognises the loss in the statement of income.

The reporting dates of the associates and the Group are identical and the associates’ accounting policies materially conform to those used by the Group for like transactions and events in similar circumstances. Adjustments are made to the consolidated financial statements to bring into line any dissimilar accounting policies that may exist. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities.

(b) Foreign currency translation

(i) Transactions and balancesTransactions in foreign currencies are initially recorded in the relevant functional currency at the rate of exchange prevailing on the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in “trading income” in the consolidated statement of income.

Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary investments classified as fair value through other comprehensive income (FVTOCI) measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined and the differences are included in other comprehensive income as part of the fair value adjustment of the respective items, unless these items are designated as fair value through profit or loss (FVTPL) or are part of an effective hedging strategy, in which case it is recorded in the consolidated statement of income.

(ii) Group companiesAssets and liabilities of foreign subsidiaries whose functional currency is not US Dollars are translated into US Dollars at the rates of exchange prevailing at the balance sheet date. Income and expense items are translated at average exchange rates prevailing for the reporting period. Any exchange differences arising on translation are included in “foreign exchange translation reserve” forming part of other comprehensive income except to the extent that the translation difference is allocated to the non-controlling interest. On disposal of foreign operations, exchange differences relating thereto and previously recognised in other comprehensive income are recognised in the consolidated statement of income.

(c) Financial instruments

The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are initially recognised at the fair value plus, for an item not recorded at FVTPL, transaction costs that are directly attributable to its acquisition or issue. Premiums and discounts are amortised on a systematic basis to maturity using the effective interest rate method and taken to interest income or interest expense as appropriate.


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3.3. Summary of significant accounting policies (continued)

(c) Financial instruments (continued)

(i) Date of recognitionAll “regular way” purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the timeframe generally established by regulation or convention in the market place.

(ii) Treasury bills and deposits with central banksTreasury bills and deposits with central banks are initially recognised at cost. Premiums and discounts are amortised to their maturity using the effective interest rate method.

(iii) Deposits with banks and other financial institutions and loans and advancesDeposits with banks and other financial institutions and loans and advances are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. Loans with renegotiated terms are loans, the repayment plan of which have been revised as part of ongoing customer relationship to align with change in cash flows of the borrower, in some instances with improved security and with no other concessions. These assets are risk rated in accordance with Group’s policy on internal credit rating as explained in note 31 (c).

After initial recognition, these are subsequently measured at amortised cost using the effective interest rate method, adjusted for effective fair value hedges, less any amounts written off and provision for impairment. The losses arising from impairment of these assets are recognised in the consolidated statement of income in “net provision for loan losses and others” and in an impairment allowance account in the consolidated balance sheet. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortisation is included in “interest income” in the consolidated statement of income.

(iv) Debt instrumentsDebt instruments are measured at amortised cost using the effective interest rate method if:

- the assets are held within a business model whose objective is to hold assets in order to collect contractual cash flows; and

- the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

If either of these two criteria is not met, the financial assets are classified and measured at fair value through the profit or loss (FVTPL). Additionally, even if the financial asset meets the amortised cost criteria the Group may choose at initial recognition to designate the financial asset at FVTPL based on business model.

The Group accounts for any changes in the fair value in the consolidated statement of income for assets classified as “FVTPL”. The change in value is not recognized for assets carried at cost or amortised cost.

(v) Equity investmentsInvestments in equity instruments are classified as FVTPL, unless the Group designates an equity investment that is not held for trading as Fair Value through Other Comprehensive Income (FVTOCI) on initial recognition. At initial recognition, the Group can make irrevocable election on an instrument by instrument basis to designate equity instrument as FVTOCI. If an equity investment is designated as FVTOCI, all gains and losses, except for dividend income, are recognised in other comprehensive income and are not subsequently included in the consolidated statement of income.

(vi) Other financial instrumentsA financial asset is classified as held for trading if: - it has been acquired principally for the purpose of selling in the near term; - on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for

which there is a recent actual pattern of short term profitability; or- it is a derivative and not designated and effective as a hedging instrument or a financial guarantee.

Only financial assets that are measured at amortised cost are tested for impairment.





(c) Financial instruments (continued)

(vii) Derivatives (other than hedging instruments)Changes in fair values of the derivatives held for trading are included in the consolidated statement of income under “trading income”.

Derivatives embedded in other financial instruments are not separated from the host contract and the entire contract is considered in order to determine its classification. These financial instruments are classified as FVTPL and the changes in fair value of the entire hybrid contract are recognised in the consolidated statement of income.

(viii) Deposits and subordinated liabilitiesThese financial liabilities are carried at amortised cost, less amounts repaid.

(d) Derecognition of financial assets and financial liabilities

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

- the rights to receive cash flows from the asset have expired;

- the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; or

- the Group has transferred its rights to receive cash flows from the asset and either (i) has transferred substantially all the risks and rewards of the asset, or (ii) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.

(e) Repurchase agreements

Where investments are sold subject to a commitment to repurchase them at a predetermined price, they remain on the consolidated balance sheet and the consideration received is included in “Borrowings under repurchase agreements”. The difference between the sale price and repurchase price is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method.

(f) Determination of fair value

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 an asset or transfer a liability takes place either in the principal market, or in the absence of a principal market, in the most advantageous market.

The fair value of financial instruments that are quoted in an active market is determined by reference to market bid prices respectively at the close of business on the balance sheet date.

The fair value of liabilities with a demand feature is the amount payable on demand.

The fair value of interest-bearing financial assets and financial liabilities that are not quoted in an active market and are not payable on demand is determined by a discounted cash flow model using the current market interest rates for financial instruments with similar terms and risk characteristics.

For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument that is substantially similar, or is determined using net present valuation techniques. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models.

Investments in funds are stated at net asset values provided by the fund managers.


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(f) Determination of fair value (continued)

The fair value of unquoted derivatives is determined either by discounted cash flows or option-pricing models.

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 assets or liabilities.

For assets and liabilities that are recognised in the consolidated financial statements on a recurring basis, the group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period disclosed in note 34.

(g) Impairment of financial assets

An assessment is made at each balance sheet date to determine whether there is any objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset or a group of financial assets is determined and any impairment loss, based on the net present value of future anticipated cash flows, is recognised in the consolidated statement of income and credited to an allowance account.

Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.

The present value of the estimated future cash flows for loans and other interest bearing financial assets is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

In addition to specific provisions against individually significant financial assets, the Group also makes collective impairment provisions on groups of financial assets, which although not identified as requiring a specific provision, have a greater risk of default than the risk at initial recognition. Financial assets are grouped on the basis of similar credit risk characteristics that are indicative of the debtors’ ability to pay all amounts due according to the contractual terms and the collective impairment provision is estimated for any such group where credit risk characteristics of the group of financial assets has deteriorated. Factors such as any deterioration in country risk, industry, technological obsolescence as well as identified structural weaknesses or deterioration in cash flows are taken into consideration and the amount of the provision is based on the historical loss pattern within each group, adjusted to reflect current economic changes.

Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the ‘provision for loan losses and others’ in the consolidated statement of income.

(h) Hedge accounting

The Group enters into derivative instruments including futures, forwards, swaps and options to manage exposures to interest rate and foreign currency risks, including exposures arising from forecast transactions. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. Derivatives are stated at fair value. Derivatives with positive market values are included in “interest receivable and other assets” and derivatives with negative market values are included in “interest payable and other liabilities” in the consolidated balance sheet.

At inception of the hedge relationship, the Group formally designates and documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, management objectives and strategy for undertaking the hedge. The methods that will be used to assess the effectiveness of the hedging relationship form part of the Group’s documentation.





(h) Hedge accounting (continued)

Also at the inception of the hedge relationship, 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. Hedges are formally assessed at each reporting date. A hedge is regarded as 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 were offset in a range of 80% to 125%. For situations where the hedged item is a forecast transaction, the Group assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated statement of income.

For the purposes of hedge accounting, hedges are classified into two categories: (i) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (ii) cash flow hedges which hedge exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction.

(i) Fair value hedgesFor fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the consolidated statement of income. The hedged item is adjusted for fair value changes relating to the risk being hedged and the difference is recognised in the consolidated statement of income.

If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, the difference between the carrying value of the hedged item on termination and the value at which it would have been carried without being hedged is amortised over the remaining term of the original hedge. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated statement of income.

(ii) Cash flow hedgesFor cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is recognised initially in OCI. The ineffective portion of the fair value of the derivative is recognised immediately in the consolidated statement of income as “trading income”.

The gains or losses on effective cash flow hedges recognised initially in OCI are either transferred to the consolidated statement of income in the period in which the hedged transaction impacts the consolidated statement of income or included in the initial measurement of the related asset or liability.

For hedges which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of the hedging instrument are recognised in the consolidated statement of income for the year.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. In the case of cash flow hedges, the cumulative gain or loss on the hedging instrument recognised in OCI remains in OCI until the forecasted transaction occurs, unless the hedged transaction is no longer expected to occur, in which case the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income for the year.

(i) Offsetting financial instruments

Financial assets and financial liabilities are only offset and the net amount reported in the consolidated balance sheet when there is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis.

(j) Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised:

(i) Interest income and expenseFor all interest bearing financial instruments, interest income or expense is recorded using the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a short period, where appropriate, to the net carrying amount of the financial assets or financial liability. Interest that is 90 days or more overdue is excluded from income. Interest on impaired loans and advances and other financial assets is not recognised in the consolidated statement of income.


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(j) Revenue recognition (continued)

(ii) Fees and commissions incomeCredit origination fees are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party at which time it is recognised immediately. Other fees and commissions income are recognised when earned.

(iii) Dividend incomeDividend income is recognised when the right to receive payment is established.

(k) Business combinations, goodwill and other intangible assets

Business combinations are accounted for using the purchase method of accounting. Assets and liabilities acquired are recognised at the acquisition date fair values with any excess of the cost of acquisition over the net assets acquired being recognised as goodwill. Changes in parent’s ownership interest in a subsidiary that do not result in loss of control are treated as transactions between equity holders and are reported in equity.

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

Intangible assets are measured on initial recognition at their fair values on the date of recognition. Following initial recognition, intangible assets are carried at originally recognised values less any accumulated impairment losses.

Impairment of goodwill and intangible assets with indefinite life is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognised immediately in the consolidated statement of income.

For the purpose of impairment testing, goodwill and intangible assets with indefinite life acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated:

- represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and

- is not larger than a segment based on either the Group’s primary or the Group’s geographic segment reporting format determined in accordance with IFRS 8 Operating Segments.

(l) Premises and equipment

Freehold land is initially recognised at cost. After initial recognition, freehold land is carried at the revalued amount. The revaluation is carried out periodically by independent professional property valuers. Fair value is determined by reference to market-based evidence. The resultant revaluation surplus is recognised, as a separate component under equity. Revaluation deficit, if any, is recognised in the consolidated statement of income, except that a deficit directly offsetting a previously recognised surplus on the same asset is directly offset against the surplus in the revaluation reserve in equity.

Premises and equipment are stated at cost, less accumulated depreciation and impairment.

Depreciation on buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives.





(l) Premises and equipment (continued)

The estimated useful lives of the assets for the calculation of depreciation are as follows:

- Freehold buildings 40 to 50 years

- Leasehold land and buildings Over the lease period

- Other premises and equipment Up to 10 years

(m) Investment property

Land and buildings held for the purpose of capital appreciation or for long term rental yields and not occupied by the Group are classified as investment properties. Investment properties are remeasured at cost less accumulated depreciation (depreciation for buildings based on an estimated useful life of 40 years using the straight line method) and accumulated impairment. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of income in the period of retirement or when sale is completed.

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits, together with those deposits with banks and other financial institutions and treasury bills having an original maturity of three months or less.

(o) Provisions

Provisions are recognised when the Group has a present obligation arising from a past event and the costs to settle the obligation are both probable and able to be reliably estimated.

(p) Employee benefits

Defined benefit pension planPension costs are recognised on a systematic basis so that the costs of providing retirement benefits to employees are evenly matched, so far as possible, to the service lives of the employees concerned. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest) are recognised immediately in OCI.

Defined contribution plansThe Group also operates a defined contribution plan, the costs of which are recognised in the period to which they relate.

(q) Taxes

There is no tax on corporate income in the Kingdom of Bahrain. Taxation on income from foreign entities is provided for in accordance with the fiscal regulations of the countries in which the respective Group entities operate.

Deferred taxation is provided for using the liability method on all temporary differences calculated at the rate at which it is expected to be payable. Deferred tax assets are only recognised if recovery is probable.

(r) Fiduciary assets

Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not incorporated in the consolidated balance sheet.

(s) Non-controlling interests

Non-controlling interests represents the portion of profit or loss and net assets in the subsidiaries not attributable to the Bank’s equity shareholders. Any change in Group’s ownership interest in the subsidiary that does not result in a loss of control is accounted for as an equity transaction.


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(t) Perpetual Tier 1 capital securities

Perpetual Tier 1 capital securities of the Group are recognised under equity in the consolidated balance sheet and the corresponding distribution on those securities are accounted as a debit to retained earnings.

(u) Dividends on ordinary shares

Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank’s shareholders.

Dividends for the period that are approved after the balance sheet date are shown as an appropriation and reported in the consolidated statement of changes in equity, as an event after the balance sheet date.

(v) Treasury shares

Own equity instruments that are acquired are recognised at cost and deducted from equity. Any surplus/deficit arising from the subsequent sale of treasury shares is included in capital reserve under equity.

(w) Employees’ share purchase plan

The Group operates an employees’ share purchase plan for certain eligible employees. The difference between the issue price and the fair value of the shares at the grant date is amortised over the vesting period in the consolidated statement of income with a corresponding effect to equity.

(x) Financial guarantees and loan commitments

In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are contracts that require the Group to make specified payments to reimburse the holders for a loss that is incurred because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions.

Financial guarantees are initially recognised in the consolidated financial statements at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amortised commission and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.

(y) Islamic banking

The Islamic banking activities of the Group are conducted in accordance with Islamic Shari’a principles, as approved by the Shari’a Supervisory Board.

- Earnings prohibited by ShariaThe Islamic operation is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is credited to the charity account where the Islamic operation uses these funds for charitable purposes.

- Commingling of fundsThe funds of Islamic operation are not commingled with the funds of the conventional operations of the Group.

(z) Islamic products

MurabahaAn agreement whereby the Group sells to a customer commodities, real estate and certain other assets at cost plus an agreed profit mark up whereby the Group (seller) informs the purchaser of the price at which the asset had been purchased and also stipulates the amount of profit to be recognized.





(z) Islamic products (continued)

IjaraA lease agreement between the Group (lessor) and the customer (lessee), whereby the Group earns profit by charging rentals on assets leased to customers.

TawarruqA sales agreement whereby a customer buys commodities from the Group on a deferred payment basis and then immediately resells them for cash to a third party.

MudarabaAn agreement between two parties; one of them provides the funds and is called Rab-Ul-Mal and the other provides efforts and expertise and is called the Mudarib and is responsible for investing such funds in a specific enterprise or activity in return for a pre-agreed percentage of the Mudaraba income. In the case of normal loss, the Rab-Ul-Mal would bear the loss of its funds while the Mudarib would bear the loss of its efforts. However, in the case of default, negligence or violation of any of the terms and conditions of the Mudaraba agreement, only the Mudarib would bear the losses. The Group acts as Mudarib when accepting funds from depositors and as Rab-Ul-Mal when investing such funds on a Mudaraba basis.

WakalaAn agreement whereby the Group provides a certain sum of money to an agent who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in the case of default, negligence or violation of any of the terms and conditions of the Wakala.

Istisna’aIstisna’a is a sale contract between a contract owner and a contractor whereby the contractor based on an order from the contract owner undertakes to manufacture or otherwise acquire the subject matter of the contract according to specifications, and sells it to the contract owner for an agreed upon price and method of settlement whether that be in advance, by instalments or deferred to a specific future time.

Revenue recognitionRevenue is recognised on the above Islamic products as follows:

Income from Murabaha, Tawarruq and Istisna’a are recognised on an effective yield basis which is established on the initial recognition of the asset and is not revised subsequently.

Income from Ijara is recognized over the term of the Ijara agreement so as to yield a constant rate of return on the net investment outstanding.

Income (loss) on Mudaraba financing is based on expected results adjusted for actual experience as applicable, while similarly the losses are charged to income.

Estimated income from Wakala is recognised on an accrual basis over the period, adjusted by actual income when received. Losses are accounted for on the date of declaration by the agent.

(aa) Equity of unrestricted investment account holders’ share of profit

The profit computed after taking into account all income and expenses at the end of a financial year is distributed between Equity of unrestricted investment account holders which include Mudaraba depositors and the Group’s shareholders. The share of profit of the Equity of unrestricted investment account holders is calculated on the basis of their daily deposit balances over the year, after reducing the agreed and declared Mudaraba fee.

Equity of unrestricted investment account holders do not bear the expenses relating to non compliance with Shari’a regulations.


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4. NET INTEREST INCOME

(a) INTEREST INCOME

2016US$’000

2015US$’000

Treasury bills 94,682 57,014

Deposits with banks 51,285 51,494

Loans and advances 946,358 875,845

Non-trading investments 227,473 206,941

1,319,798 1,191,294

(b) INTEREST EXPENSE

2016US$’000

2015US$’000

Deposits from banks

(including repurchase agreements) 52,009 36,395

Customers’ deposits 429,629 330,589

Subordinated liabilities 9,928 9,594

491,566 376,578

NET INTEREST INCOME 828,232 814,716

5. FEES AND COMMISSIONS AND OTHERS

2016US$’000

2015US$’000

Fees and commission income

- Transaction banking services 117,217 136,915

- Management, performance and brokerage fees 29,122 22,510

Fees and commission expense (8,568) (6,090)

Others 35,519 4,577

173,290 157,912

Included in ‘management, performance and brokerage fees’ is US$ 9.9 million (2015: US$ 8.1 million) of fee income relating to trust and other fiduciary activities.

6. TRADING INCOME

2016US$’000

2015US$’000

Foreign exchange- customer transactions 41,383 31,471

Proprietary trading 6,905 274

48,288 31,745



7 (a) CASH AND BALANCES WITH CENTRAL BANKS

2016US$’000

2015US$’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 24) 665,894 663,378

Mandatory reserve deposits with central banks 247,030 389,540

912,924 1,052,918

Mandatory reserve deposits are not available for use in day-to-day operations.

7 (b) TREASURY BILLS AND DEPOSITS WITH CENTRAL BANKS

2016US$’000

2015US$’000

Central Bank of Bahrain 151,026 159,023

Central Bank of Kuwait 1,396,752 873,629

Central Bank of Egypt 716,386 854,182

Central Bank of Iraq 163,831 142,206

Bank of England 36,851 88,905

2,464,846 2,117,945

The Deposits with Central Banks and Treasury bills above are funded by the Bank’s subsidiaries operating in the respective countries.

8. LOANS AND ADVANCES

2016 2015

US$ ’000 % US$ ’000 %

a) By industry sectorConsumer/personal 3,003,722 15.6 3,444,123 17.2

Residential mortgage 1,439,689 7.5 1,627,076 8.1

Trading and manufacturing 4,604,115 23.9 4,959,662 24.8

Real estate 5,188,090 26.9 4,846,517 24.2

Banks and other financial institutions 817,111 4.2 1,013,876 5.1

Services 3,709,224 19.2 3,598,305 18.0

Government/public sector 221,186 1.1 245,781 1.2

Others 320,917 1.6 288,753 1.4

19,304,054 100.0 20,024,093 100.0

Less: Specific impairment provision (380,239) (312,013)

Less: Collective impairment provision (316,932) (358,899)

18,606,883 19,353,181


Ahli United Bank92

8. LOANS AND ADVANCES (continued)

2016 2015

US$ ’000 % US$ ’000 %

b) By geographic regionKingdom of Bahrain 3,553,793 18.5 3,597,770 18.0

State of Kuwait 9,824,968 50.9 9,643,982 48.2

Other GCC countries 2,804,696 14.5 2,539,884 12.6

United Kingdom 1,300,502 6.7 1,471,846 7.4

Arab Republic of Egypt 1,431,118 7.4 2,260,565 11.3

Europe (excluding United Kingdom) 88,856 0.5 147,045 0.7

Asia (excluding GCC countries) 241,190 1.2 240,436 1.2

Rest of the world 58,931 0.3 122,565 0.6

19,304,054 100.0 20,024,093 100.0

Less: Specific impairment provision (380,239) (312,013)

Less: Collective impairment provision (316,932) (358,899)

18,606,883 19,353,181

Other GCC countries comprise the members from the Gulf Co-operation Council being the Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates.

Please refer note 31 (c) for disclosure of credit quality of loans and advances.

c) Age analysis of past due but not impaired loans and advances

2016Up to 30 days

US$ ’00031 to 60 days

US$ ’00061 to 89 days

US$ ’000Total

US$ ’000Loans and advances

Retail 65,182 27,256 30,202 122,640 Corporate 19,087 8,714 61,182 88,983

84,269 35,970 91,384 211,623

2015

Up to 30 daysUS$ ’000

31 to 60 daysUS$ ’000

61 to 89 daysUS$ ’000

TotalUS$ ’000

Loans and advances

Retail 112,151 40,180 17,950 170,281

Corporate 28,096 6,129 35,113 69,338

140,247 46,309 53,063 239,619

The past due loans and advances up to 30 days include those that are only past due by a few days. None of the above past due loans are considered to be impaired.



8. LOANS AND ADVANCES (continued)

d) Individually impaired loans and advances

2016 2015

Retail US$ ’000

Corporate US$ ’000

Total US$ ’000

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

Gross impaired loans 33,552 414,552 448,104 32,945 335,865 368,810

Specific impairment provisions (28,586) (351,653) (380,239) (28,130) (283,883) (312,013)

4,966 62,899 67,865 4,815 51,982 56,797

Impaired loan coverage 85.2% 84.8% 84.9% 85.4% 84.5% 84.6%

Gross loans 3,781,435 15,522,619 19,304,054 3,647,083 16,377,010 20,024,093

Impaired loan ratio 0.9% 2.7% 2.3% 0.9% 2.1% 1.8%

The fair value of collateral that the Group holds relating to loans individually determined to be impaired at 31 December 2016 amounts to US$ 443.9 million (31 December 2015: US$ 444.6 million). The collateral consists of cash, securities and properties.

e) Impairment allowance for loans and advances

A reconciliation of the allowance for impairment losses for loans and advances by class is as follows:

2016 2015

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

At 1 January 62,615 608,297 670,912 74,547 546,984 621,531

Add/(Less):

Amounts written off during the year (17,270) (105,675) (122,945) (26,027) (85,296) (111,323)

Charge for the year 23,416 136,801 160,217 18,678 165,666 184,344

Recoveries during the year (4,196) (1,085) (5,281) (3,302) (318) (3,620)

Exchange rate and other adjustments (417) (5,315) (5,732) (1,281) (18,739) (20,020)

At 31 December 64,148 633,023 697,171 62,615 608,297 670,912

f) Net provision for loan losses and others

The net charge for the year for provision for loan losses and others in the consolidated statement of income is determined as follows:

2016US$’000

2015US$’000

Impairment charge for the year on loans and advances (note 8(e)) 160,217 184,344

Recoveries from loans and advances during the year (including from fully provided loans written off in previous years) (21,629) (22,032)

Net charge for others 10,974 1,689

Net provision for loan losses and others 149,562 164,001


Ahli United Bank94

9. NON-TRADING INVESTMENTS

2016Held at

amortised costUS$’000

Held at Fair value

US$’000Total

US$’000Quoted investmentsGCC government bonds and debt securities 855,203 - 855,203 Other government bonds and debt securities 823,052 - 823,052 GCC government entities’ securities 647,828 - 647,828 Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions 1,918,561 - 1,918,561 - issued by corporate bodies 1,088,916 - 1,088,916 Equity - 37,592 37,592 Funds at net asset value - 11,940 11,940

5,333,560 49,532 5,383,092

Unquoted investmentsOther government bonds and debt securities 1,860 - 1,860 Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions 182,834 - 182,834 - issued by corporate bodies 1,558 - 1,558 Equity - 33,025 33,025 Funds at net asset value - 58,312 58,312

186,252 91,337 277,589 Total 5,519,812 140,869 5,660,681 Less: Allowance for impairment (90,234)

5,570,447



9. NON-TRADING INVESTMENTS (continued)

2015

Held at amortised cost

US$’000

Held at Fair value

US$’000Total

US$’000

Quoted investmentsGCC government bonds and debt securities 688,415 - 688,415

Other government bonds and debt securities 942,405 - 942,405

GCC government entities’ securities 475,558 - 475,558

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions 1,812,091 - 1,812,091

- issued by corporate bodies 1,246,588 - 1,246,588

Equity - 40,138 40,138

Funds at net asset value - 16,194 16,194

5,165,057 56,332 5,221,389

Unquoted investmentsOther government bonds and debt securities 1,801 - 1,801

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions 163,450 - 163,450

Equity - 49,043 49,043

Funds at net asset value - 76,526 76,526

165,251 125,569 290,820

Total 5,330,308 181,901 5,512,209

Less: Allowance for impairment (184,099)

5,328,110

The fair value of the non-trading investments held at amortised cost is US$ 5,563.8 million as at 31 December 2016 (31 December 2015: US$ 5,244.2 million) of which US$ 5,377.2 million is classified under level 1 of fair value hierarchy (31 December 2015: US$ 5,080.7 million) and US$ 186.6 million is classified under level 2 of fair value hierarchy (31 December 2015: US$ 163.5 million).

Investment held at fair value include investments amounting to US$ 1.0 million (2015: US$ 3.8 million) which are designated as FVTPL.

Please refer note 31 (c) for disclosure of credit quality of non-trading investments.

The movements in provision for impairment on investments were as follows:

2016US$’000

2015US$’000

At 1 January 184,099 212,241

Add/(Less):

Charge for the year 9,279 9,384

Amounts written off during the year (11,564) (7,693)

Transfer to repossessed assets (26,351) -

Transfer to investment properties (16,798) -

Exchange rate and other adjustments (48,431) (29,833)

At 31 December 90,234 184,099


Ahli United Bank96

10. INVESTMENTS IN ASSOCIATESThe principal associates of the Group are:

Name Country of incorporation Nominal Holding2016 2015

Ahli Bank S.A.O.G. Sultanate of Oman 35.0% 35.0%

United Bank for Commerce and Investment S.A.L. (UBCI) Libya 40.0% 40.0%

Middle East Financial Investment Company (MEFIC) Kingdom of Saudi Arabia 40.0% 40.0%

The summarised financial information of the Group’s associates was as follows:

2016US$ ’000

2015US$ ’000

Assets 5,524,151 5,447,981

Liabilities 4,715,872 4,675,287

Net profit and comprehensive income for the year (Group’s share) 26,626 29,047

Financial information of Ahli Bank S.A.O.G. is provided below. The information is based on amounts as reported in financial statements of Ahli Bank S.A.O.G.

31 December2016

US$ ’000

31 December2015

US$ ’000

Ahli Bank S.A.O.G. Balance sheet related information Loans and advances 3,953,524 3,942,991

Investment securities 458,812 416,452

Total assets 4,934,168 4,930,558



Income statement related information Total operating income 139,148 145,386

Net profit for the year 76,760 72,021

Total comprehensive income 77,703 72,089

Dividends received during the year 12,955 -

Cash flow related informationNet cash (used in) from operating activities (73,857) 202,242

Net cash used in investing activities (15,639) (1,003)

Net cash (used in) from financing activities (32,013) 40,584

The market value of AUB’s investment in Ahli Bank S.A.O.G. based on the price quoted in the Muscat Securities Market is US$ 254.0 million (31 December 2015: US$ 253.9 million).



11. INVESTMENT PROPERTIES These represent properties acquired by the Group and are recognized at cost. As at 31 December 2016, the fair value of the investment properties is US$ 159.3 million (31 December 2015: US$ 219.4 million). Investment properties were valued by independent valuers using significant valuation inputs based on unobservable market data and is classified under level 3 of the fair value hierarchy.

12. PREMISES AND EQUIPMENTThe net book values of the Group’s premises and equipment are:

2016US$ ’000

2015US$ ’000

Freehold land 94,326 96,407

Freehold buildings 25,827 38,599

Leasehold land and buildings 30,098 31,717

IT equipment and others 38,000 50,581

Capital work-in-progress 22,958 21,539

211,209 238,843

Freehold land was revalued by an independent valuer using significant valuation inputs based on unobservable market data and is classified under level 3 of the fair value hierarchy.

13. INTEREST RECEIVABLE AND OTHER ASSETS

2016US$ ’000

2015US$ ’000

Tax assets (note 22) 4,735 2,421

Interest receivable 179,900 181,843

Derivative assets (note 28) 112,945 78,652

Prepayments and others 440,575 327,913

738,155 590,829

Prepayments and others include repossessed assets amounting to US$ 301.8 million (31 December 2015: US$ 181.3 million). Repossessed assets are assets acquired in settlement of debt. These assets are carried at the lower of their repossessed value or their fair value.

14. GOODWILL AND OTHER INTANGIBLE ASSETS

2016 2015

GoodwillUS$’000

Intangible assets

US$’000Total

US$’000GoodwillUS$’000

Intangible assets

US$’000Total

US$’000

At 1 January 458,453 112,145 570,598 476,410 165,529 641,939

Exchange rate and other adjustments (31,892) (64,074) (95,966) (17,957) (53,384) (71,341)

At 31 December 426,561 48,071 474,632 458,453 112,145 570,598


Ahli United Bank98

14. GOODWILL AND OTHER INTANGIBLE ASSETS (continued)

Goodwill:

Goodwill acquired through business combinations has been allocated to the cash-generating units of the acquired entities for impairment testing purposes. The carrying amount of goodwill and intangible assets allocated to each of the cash-generating units is shown under note 30.

Key assumptions used in estimating recoverable amounts of cash-generating units

The recoverable amount of each cash-generating unit’s goodwill is based on value-in-use calculations using cash flow projections from financial budgets approved by the Board of Directors, extrapolated for five year projections using nominal projected Gross Domestic Product growth rate in the respective countries in which they operate. The discount rate applied to cash flow projections represent the cost of capital adjusted for an appropriate risk premium for these business segments. The discount rate used in goodwill impairment testing was 8.5% to 18.0% (2015: 8.5% to 19.0%). The key assumptions used in estimating recoverable amounts of cash generating units were sensitised to test the resilience of value-in-use calculations. On this basis, management believes that reasonable changes in the key assumptions used to determine the recoverable amount of the Group’s cash-generating units will not result in an impairment.

Intangible assets:

Intangible assets comprises primarily the subsidiaries’ banking licenses which have indefinite lives. Based on an annual impairment assessment of the intangible assets, no indications of impairment were identified (2015: US$ 41.2 million). The fair values of a banking license are determined at the time of acquisition by discounting the future expected profits from their acquisition and their projected terminal value.

15. DEPOSITS FROM BANKS

2016US$ ’000

2015US$ ’000

Demand and call 775,224 1,504,428

Time deposits 2,503,814 2,736,763

3,279,038 4,241,191

16. BORROWINGS UNDER REPURCHASE AGREEMENTSThe Group has collateralized borrowing lines of credit with various financial institutions through repurchase arrangements, under which it can borrow up to US$ 4.7 billion (31 December 2015: US$ 4.6 billion). Collateral is provided in the form of investment securities held within the non-trading investments portfolio.

As at 31 December 2016, the borrowings under these agreements were US$ 698.2 million (31 December 2015: US$ 801.0 million) and the fair value of investment securities that had been provided as collateral was US$ 782.9 million (31 December 2015: US$ 874.6 million).

17. CUSTOMERS’ DEPOSITS

2016US$ ’000

2015US$ ’000

Current and call accounts 4,354,547 4,956,006

Saving accounts 2,094,429 2,340,011

Time deposits 15,254,382 16,199,210

21,703,358 23,495,227



18. INTEREST PAYABLE AND OTHER LIABILITIES

2016US$ ’000

2015US$ ’000

Interest payable 161,594 122,161

Accruals 127,040 106,323

Derivative liabilities (note 28) 142,547 153,428

Other credit balances 413,494 395,268

Tax liabilities (note 22) 20,701 28,913

865,376 806,093

Other credit balances mainly includes unearned fees, pension fund and other creditors.

19. SUBORDINATED LIABILITIESThese borrowings are subordinated to the claims of all other creditors of the respective banks.

Maturity2016

US$ ’0002015

US$ ’000

International Finance Corporation (IFC):- Repayable in four (31 December 2015: six) equal semi-annual

installments and falling on each Interest Payment Date falling thereafter up to and including 15 December 2018. 2018 44,444 66,667

- Repayable in four equal semi-annual installments commencing on 15 April 2019 and falling on each Interest Payment Date falling thereafter up to and including 15 October 2020. 2020 165,000 165,000

209,444 231,667

Others:- 10 year subordinated debt repayable at maturity on 20 January

2020 2020 17,997 17,997

- Repayable at maturity 5 years & one day notice 9,541 10,459

- Repaid at maturity 2016 - 1,471

27,538 29,927

236,982 261,594


Ahli United Bank100

20. EQUITY

Ordinary share capital:2016

US$ ’0002015

US$ ’000

(a) Authorised:Share capital

8,000 million shares (2015: 8,000 million shares) of US$ 0.25 each 2,000,000 2,000,000

Available for issuance of ordinary shares and various classes of preference shares

(b) Issued and fully paid:2016

US$ ’0002015

US$ ’000

Ordinary share capital (US$ 0.25 each) 1,711,322 1,623,030

Number of shares (millions) 6,845.3 6,492.1

Number of treasury shares (millions) 16.3 9.4

Movement in ordinary shares

2016 2015

(number in millions)Opening balance as at 1 January 6,492.1 6,121.9

Add: bonus share issue 325.7 306.1

Add: issuance of additional shares (note 20 (c)) 27.5 64.1

Closing balance as at 31 December 6,845.3 6,492.1

(c) Employee Share Purchase Plan and Mandatory Share Plan

The Employee Share Purchase Plan (“ESPP”) was approved by the Board of Directors on 29 March 2005 and authorized by the shareholders at an EGM on 5 October 2004. An extension of the ESPP by authorizing the issuance of 100 million Ordinary Shares (“Shares”) was approved by:

(i) Board of Directors (on 5 November 2014).

(ii) Ministry of Commerce (letter dated 9 March 2015).

(iii) Capital Markets Supervision Directorate of CBB (letter dated 10 March 2015).

(iv) Retail Banking Supervision Directorate of CBB (letters dated 22 February 2015 & 18 March 2015).

(v) Shareholders at Annual General Meeting (on 31 March 2015).

As per the approved ESPP terms, 100 million shares were authorized for issuance to qualifying employees of the AUB Group, in five annual tranches (tranches 9-13) over a period from 2015 to 2019. The prices, timing and sizes of the tranches of the Shares are determined by the Board of Directors, within set parameters. The individual allocations of each tranche will be made at the discretion of the Compensation Committee. In line with the earlier structure, the Shares are issued to the existing ESPP company, Al Mazaya Company B.S.C. (c) [“AMC”] a special purpose entity incorporated on 29 August 2005, to hold the Shares. AMC in turn issues to the ESPP Trustees, for the beneficial ownership of employees, a corresponding number of unsecured and unsubordinated equity linked notes (“Notes”) , each Note representing the economic value of an Ordinary Share, as adjusted by any bonus share issues, dividends and/or rights issues. Notes issued under the scheme are subject to the vesting criteria and conditions, as set out in the ESPP Rules.

Under this scheme, during 2015, the Bank issued 60,000,000 Ordinary Shares at a price of US$ 0.55 per share under Tranche 9, out of which 58,975,000 were allocated to employees. During 2016, the Bank issued 21,200,000 Ordinary Shares at a price of US$ 0.52 per share under Tranche 10 and it was fully allocated to employees. These Notes vest equally over three years from the grant date and as determined by the Compensation Committee.



20. EQUITY (continued)

(c) Employee Share Purchase Plan and Mandatory Share Plan (continued)

Pursuant to the existing shareholders’ approval, the Board of Directors has resolved to issue 18,368,831 Ordinary Shares at a price of US$ 0.48 per share under Tranche 11 to be allocated to employees by the Compensation Committee after obtaining the necessary regulatory approvals.

The same bodies also approved the issuance of up to 50 million of Ordinary Shares for the approved Mandatory Share Plan (“MSP”) to be initially issued as option rights exercisable into AUB ordinary shares, adjustable for any future bonus share distributions, rights issues or other issuances of share equivalents arising from any re-organization, re-classification, stock-split or consolidation of ordinary shares by the Bank. These options were authorised for issuance to employees of the Bank falling within the ambit of Module HC-5.4.2 of the CBB Rulebook, commencing 1 January 2015 to 1 January 2019 in five annual tranches, corresponding to the annual staff compensation cycle. Individual tranche sizes are determined by the Compensation Committee to address annual remuneration of defined employees, within the CBB regulations. The options can be exercised at the grant price of US$ 0.25 per option over a three year service period in the ratio of 50%, 35%, 15% respectively and the options expire within 12 months from end of grant date month.

Under the MSP scheme, during 2015 the Bank issued 4,142,762 shares as part of the 2014 Performance Bonus Deferred Share Awards of which 705,833 options have been exercised till 31 December 2016. During 2016, the Bank issued 6,302,207 shares as part of the 2015 Performance Bonus Deferred Share Awards of which no options have been exercised till 31 December 2016. Under the MSP scheme, the Board of Directors has resolved to issue 6,208,326 shares as part of the 2016 Performance Bonus Deferred Share Awards. These shares are entitled to be adjusted for any bonus share issues and dividend until the rights are exercised under the MSP.

(d) Perpetual Tier 1 Capital Securities

2016US$ ’000

2015US$ ’000

Issued by the Bank (20d(i)) 400,000 400,000

Issued by the subsidiary (20d(ii)) 200,000 -

600,000 400,000

(i) Basel III compliant Additional Tier I Perpetual Capital Securities issued by the Bank during 2015 carries an initial distribution rate of 6.875 percent per annum payable semi annually with a reset after every 5 years. These securities are perpetual, subordinated and unsecured. The Capital Certificates is listed on the Irish Stock Exchange. The Bank can elect to make a distribution at its own discretion. The holders of these securities do not have a right to claim the same and such an event will not be considered an event of default. The securities carry no maturity date and have been classified under equity.

(ii) During the year, Ahli United Bank K.S.C.P, a subsidiary of the Bank, issued a US$ 200 million Basel III compliant Additional Tier 1 Perpetual Capital Securities that bears a profit rate of 5.5%, which are eligible to be classified under equity. The Capital Certificates are subordinated, unsecured and will carry a Periodic Distribution Amount, payable semi-annually in arrears, until the first call date (25 October 2021). The Periodic Distribution Amounts in respect of the Capital Certificates may be cancelled (in whole or in part) at the sole discretion of the issuer on a non-cumulative basis. The Capital Certificates is listed on the Irish Stock Exchange and NASDAQ Dubai. These certificates have no maturity date and are callable (in whole but not in part) at par at the option of the issuer on the first call date and on every distribution payment date thereafter, subject to certain conditions.

21. RESERVES

a) Share premium

The share premium arising on the issue of ordinary and preference shares is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.

b) Capital reserve

As required by the Bahrain Commercial Companies Law, any profit on the sale of treasury stock is transferred to a capital reserve. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.


Ahli United Bank102

21. RESERVES (continued)

c) Statutory reserve

As required by the Bahrain Commercial Companies Law and the Bank’s Articles of Association, 10% of the net profit is transferred to a statutory reserve on an annual basis. The Bank may resolve to discontinue such transfers when the reserve totals 50% of the paid up capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.

d) Property revaluation reserve

The revaluation reserve arising on revaluation of freehold land is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.

e) Foreign exchange translation reserve

It comprises of translation effects arising on consolidation of subsidiaries, non-monetary equity investments and investments in associates.

f) Other comprehensive income reserve (OCI Reserve)

This reserve represents changes in the fair values of equity investments that have been classified as fair value through other comprehensive income.

g) Cash flow hedge reserve

This reserve represents the effective portion of gain or loss on the Group’s cash flow hedging instruments.

h) Movements in other reserves

Cumulative changes

Capitalreserve

US$ ’000

Propertyrevaluation

reserveUS$ ’000

Foreign exchange

translationreserve

US$ ’000

OCIreserve

US$ ’000

Cash flowhedge

reserveUS$ ’000

ESPPreserve

US$ ’000

Pension fund

reserveUS$ ’000

Totalother

reservesUS$ ’000

Balance at 1 January 2016 8,480 36,173 (194,342) (16,568) (28,048) 12,587 (42,250) (223,968)Currency translation adjustments - - (260,826) - - - - (260,826)Transfers to consolidated

statement of income - - - - (540) - - (540)Net fair value movements - - - (9,380) 4,805 - - (4,575)Transfers to retained earnings - - - 14,929 - (17,811) - (2,882)Fair value movements and others - - - - - 5,224 (15,492) (10,268)Revaluation of freehold land - 83 - - - - - 83

Balance at 31 December 2016 8,480 36,256 (455,168) (11,019) (23,783) - (57,742) (502,976)



21. RESERVES (continued)

h) Movements in other reserves (continued)

Cumulative changes

Capitalreserve

US$ ’000

Propertyrevaluation

reserveUS$ ’000

Foreign exchange

translationreserve

US$ ’000

OCIreserve

US$ ’000

Cash flowhedge

reserveUS$ ’000

ESPPreserve

US$ ’000

Pension fund

reserveUS$ ’000

Totalother

reservesUS$ ’000

Balance at 1 January 2015 8,480 37,029 (121,966) (9,689) (25,091) 4,262 (46,982) (153,957)

Currency translation adjustments - - (72,376) - - - - (72,376)

Transfers to consolidated

statement of income - - - - (5,257) - - (5,257)

Net fair value movements - - - (94,804) 2,300 - - (92,504)

Transfers to retained earnings - (1,818) - 87,925 - - - 86,107

Fair value movements and others - - - - - 8,325 4,732 13,057

Revaluation of freehold land - 962 - - - - - 962

Balance at 31 December 2015 8,480 36,173 (194,342) (16,568) (28,048) 12,587 (42,250) (223,968)

Foreign currency translation risk primarily arises from Group’s investments in diverse countries. Assets and liabilities of these subsidiaries are translated into US Dollars at the rates of exchange prevailing at the balance sheet date. Income and expense items are translated at average exchange rates prevailing for the reporting periods. Any exchange differences arising on translation are included in “foreign exchange translation reserve” forming part of other comprehensive income prorated between non-controlling interests and equity owners.

The Group undertakes hedging of such net investment in foreign operation to mitigate any currency risk in a number of ways including borrowing in the underlying currency, structural hedging in the form of holding US Dollar long position to the extent possible and forward contracts.

i) Dividends paid and proposed

2016US$’000

Proposed for approval at the forthcoming Annual General Assembly of Shareholders MeetingCash dividend on the Ordinary shares @ US cents 4.5 per share 309,144Bonus share issue 10%

2015US$’000

Declared and paid during the yearCash dividend on the Ordinary shares @ US cents 4.5 per share (2015:US cents 4.5 per share) 293,099

Bonus share issue (2015: 5%) 5%

j) Distribution on Perpetual Tier 1 capital securities

2016US$’000

2015US$’000

Distribution @ 6.875 percent per annum on the Perpetual

Tier 1 Capital Securities 27,500 13,750


Ahli United Bank104

22. TAXATION

2016US$’000

2015US$’000

Consolidated balance sheet (note 13 and note 18):- Deferred tax asset 4,735 2,421

- Current tax liability (19,410) (28,913)

- Deferred tax liability (1,291) -

(20,701) (28,913)

Consolidated statement of income- Current tax expense on foreign operations 45,192 41,564

- Deferred tax expense on foreign operations 923 1,105

46,115 42,669

The Group’s tax expense includes all direct taxes that are accrued on taxable profits of entities to the authorities in the respective countries of incorporation, in accordance with the tax laws prevailing in those jurisdictions. Consequently, it is not practical to provide a reconciliation between the accounting and taxable profits together with the details of effective tax rates. Tax expense primarily relates to AUBUK and AUBE. Effective tax rate at AUBE is 22.5% (2015: 22.5%) and AUBUK is 20.0% (2015: 20.25%).

23. EARNINGS PER SHAREBasic earnings per share and diluted earnings per share are calculated by dividing the net profit for the year attributable to the Bank’s ordinary equity shareholders less distribution on Perpetual Tier 1 Capital Securities, by the weighted average number of ordinary shares outstanding during the year.

The following reflects the income and share data used in basic and diluted earnings per share computations:

2016US$’000

2015US$’000

Net profit for basic and diluted earnings per share computation

Net profit attributable to Bank’s equity shareholders 570,640 537,248

(Less): Perpetual Tier 1 Capital Securities distribution (note 21(j)) (27,500) (13,750)

Adjusted net profit attributable to Bank’s ordinary equity shareholders for

basic and diluted earnings per share 543,140 523,498

Basic and diluted earnings per share (US cents) 8.0 7.7

Number of shares (in millions) 2016 2015

Weighted average ordinary shares outstanding during the year adjusted for bonus shares 6,821 6,761

Weighted average number of ordinary shares for diluted earnings per share 6,821 6,761



24. CASH AND CASH EQUIVALENTSCash and cash equivalents included in the consolidated statement of cash flows include the following balance sheet amounts:

2016US$ ’000

2015US$ ’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 7(a)) 665,894 663,378

Deposits with Central banks, other banks and financial institutions - with an original maturity of three months or less 1,643,219 3,277,262

2,309,113 3,940,640

25. RELATED PARTY TRANSACTIONSThe Group enters into transactions with major shareholders, associates, directors, senior management and companies which are controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business at arm’s length. All the loans and advances to related parties are performing and are free of any provision for possible loan losses.

The income, expense and the period end balances in respect of related parties included in the consolidated financial statements were as follows:

2016US$ ’000

Senior managementMajor

shareholders AssociatesNon Executive

DirectorsManagement

Directors2 Others TotalInterest income 2,740 2,850 6,451 264 45 12,350 Interest expense 91,913 25 116 51 - 92,105 Fees and commissions 585 1,338 330 4 - 2,257 Deposits with banks - 160,889 - - - 160,889 Loans and advances 110,500 - 151,604 13,055 2,282 277,441 Deposits from banks - 5,692 - - - 5,692 Customers’ deposits1 6,193,804 - 17,536 6,609 32 6,217,981 Subordinated liabilities 218,985 - - - - 218,985 Commitments and contingent liabilities - 144,088 152,331 - - 296,419 Short term employee benefits - - - 11,859 3,174 15,033 End of service benefits - - - 1,743 221 1,964 Directors’ fees and related expenses3 - - 2,181 - - 2,181


Ahli United Bank106

25. RELATED PARTY TRANSACTIONS (continued)

2015

US$ ’000

Senior management

Major shareholders Associates

Non ExecutiveDirectors

ManagementDirectors2 Others Total

Interest income 2,444 2,177 6,379 162 31 11,193

Interest expense 55,633 13 55 74 1 55,776

Fees and commissions 585 2,944 414 6 1 3,950

Deposits with banks - 400,585 - - - 400,585

Loans and advances 110,500 - 169,065 14,795 2,411 296,771

Deposits from banks - 63,895 - - - 63,895

Customers’ deposits1 5,928,974 - 28,632 4,415 158 5,962,179

Subordinated liabilities 242,126 - - - - 242,126

Derivatives assets - 119 - - - 119

Commitments and contingent liabilities - 186,918 144,477 - - 331,395

Short term employee benefits - - - 12,506 2,946 15,452

End of service benefits - - - 1,762 213 1,975

Directors’ fees and related expenses3 - - 1,835 - - 1,835

1 Customers’ deposits include deposits from GCC government-owned institutions amounting to US$ 6,166 million (31 December 2015: US$ 5,899 million).

2 AUB Group Management Directors (Employees) who are appointed by the shareholders of AUB to the AUB Board to represent management or by AUB to the boards of any of its subsidiaries or affiliates or their related committees, are excluded from receiving any additional remuneration for their membership of or attendance at board or related committee meetings as per their contractual arrangements. Accordingly, the short term employee benefits and end of service benefits shown above reflect employment remuneration only.

3 Directors fees and related expenses for 2015 were approved by the shareholders in the annual general meeting on 29 March 2016 and the same for 2016 will be presented for shareholders’ approval at the ensuing annual general meeting in March 2017.

The consolidated income statement includes a fair value amortisation charge of US$ 1.8 million (2015: US$ 2.5 million) relating to share based transactions.

26. EMPLOYEE BENEFITSThe Group operates Defined Benefit and Defined Contribution retirement benefit schemes for its employees in accordance with the local laws and regulations in the countries in which it operates. The costs of providing retirement benefits including current contributions, are charged to the consolidated statement of income.

Defined benefit plans

The charge to the consolidated statement of income on account of end of service benefits for the year amounted to US$ 7,249 thousand (2015: US$ 8,920 thousand). There are no material differences between the carrying amount of the provision for end of service benefits at both 31 December 2016 and 2015 and the amount arising from an actuarial computation thereof.

AUBUK’s defined benefit pension scheme was closed to future service accruals on 31 March 2010. In accordance with the amended IAS-19 Employee Benefits, the Group immediately recognizes the actuarial gains and losses relating to ‘Defined Pension Benefit’ scheme through consolidated statement of changes in equity.

Defined contribution plans

The Group contributed US$ 8,034 thousand (2015: US$ 7,966 thousand) during the year towards defined contribution plans. The Group’s obligations are limited to the amounts contributed to various schemes.



27. MANAGED FUNDSFunds administrated on behalf of customers to which the Group does not have legal title are not included in the consolidated balance sheet. The total market value of all such funds at 31 December 2016 was US$ 3,660.5 million (2015: US$ 3,818.0 million).

28. DERIVATIVESIn the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rates or indices.

Derivatives include financial options, futures and forwards, interest rate swaps and currency swaps, which create rights and obligations that have the effect of transferring between the parties of the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On inception, a derivative financial instrument gives one party a contractual right to exchange financial assets or financial liabilities with another party under conditions that are potentially favourable, or a contractual obligation to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable. However, they generally do not result in a transfer of the underlying primary financial instrument on inception of the contract, nor does such a transfer necessarily take place on maturity of the contract. Some instruments embody both a right and an obligation to make an exchange. Because the terms of the exchange are determined on inception of the derivative instruments, as prices in financial markets change those terms may become either favourable or unfavourable.

The table below shows the net fair values of derivative financial instruments.

2016 2015

Derivativeassets

US$ ’000

DerivativeliabilitiesUS$ ’000

Derivativeassets

US$ ’000

Derivativeliabilities

US$ ’000

Derivatives held for risk management:Interest rate swaps 21,731 15,308 20,978 18,722

Forward foreign exchange contracts 50,787 38,959 36,484 23,512

Options 169 181 238 206

Interest rate futures - - 522 -

Derivatives held as fair value hedges:Interest rate swaps 36,104 60,279 3,878 79,887

Derivatives held as cash flow hedges:Interest rate swaps 2,287 27,666 15,354 31,088

Forward foreign exchange contracts 1,867 154 1,198 13

112,945 142,547 78,652 153,428

Counterparties with whom the Group has entered into forward foreign exchange contracts have placed margin monies representing net fair values of contracts outstanding.

In respect of derivative assets above, the Group has US$ 31.0 million (2015: US$ 26.1 million) of liabilities that can be offset through master netting arrangements. These master netting arrangements create a right of set-off that is enforceable only following an event of default, insolvency or bankruptcy of counterparties or following other predetermined events.


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28. DERIVATIVES (continued)

Cash flow hedges

The time periods in which the hedged cash flows are expected to occur and their impact on the consolidated statement of income is as follows:

3 monthsor less

US$’000

More than3 months

up to 1 yearUS$’000

More than1 year

up to 5 yearsUS$’000

More than 5 years

US$’000 Total

US$’000 At 31 December 2016

Cash outflows from liabilities 534 (3,459) (9,130) (11,728) (23,783)

At 31 December 2015

Cash outflows from liabilities 209 (4,566) (10,905) (12,786) (28,048)

No significant hedge ineffectiveness on cash flow hedges was recognised in 2016 and 2015.

Fair value hedges

The net fair value of interest rate swap held as fair value hedges as at 31 December 2016 is negative US$ 24.2 million (2015: Negative US$ 76.0 million). Gain recognised on the hedged item at 31 December 2016, attributable to the hedged risk is US$ 24.2 million (2015: US$ 76.0 million). These gains and losses are included in “trading income” in the consolidated statement of income during 2016 and 2015 respectively.

Derivatives held for risk management purposes

Most of the Group’s derivative trading activities relate to customer driven transactions as well as positioning and arbitrage. Positioning involves managing positions with the expectation of profiting from favourable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price differentials between markets or products.

Derivatives held for hedging purposes

The Group has adopted a comprehensive system for the measurement and management of risk.

As part of its asset and liability management the Group uses derivatives for hedging purposes in order to reduce its exposure to currency and interest rate movements. This is achieved by hedging specific financial instruments and forecasted transactions, as well as strategic hedging against overall balance sheet exposures.

The Group uses options and currency swaps to hedge against specifically identified currency and equity risks. In addition, the Group uses interest rate swaps and forward rate agreements to hedge against the interest rate risk arising from specifically identified, or a portfolio of, fixed interest rate investments and loans. The Group also uses interest rate swaps to hedge against the cash flow risks arising on certain floating rate deposits. In all such cases the hedging relationship and objective, including details of the hedged item and hedging instrument, are formally documented and the transactions are accounted for as fair value hedges.

Hedging of interest rate risk is also carried out by monitoring the duration of assets and liabilities and entering into interest rate swaps to hedge net interest rate exposures. Since hedging of net positions does not qualify for special hedge accounting, related derivatives are accounted for the same way as trading instruments.



29. COMMITMENTS AND CONTINGENT LIABILITIES

Credit-related commitments

Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances which are designed to meet the requirements of the Group’s customers.

Commitments to extend credit represent contractual commitments to make loans and revolving credits available and generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

Standby letters of credit, guarantees and acceptances (standby facilities) commit the Group to make payments on behalf of customers contingent upon their failure to perform under the terms of the contract. Standby facilities would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at floating rates.

The Group has the following credit related commitments:

2016US$ ’000

2015US$ ’000

Contingent liabilities Guarantees 2,443,017 2,409,041

Acceptances 132,119 128,700

Letters of credit 534,461 600,511

3,109,597 3,138,252

Maturity of contingent liabilities is as follows: - Less than one year 2,302,598 2,261,541

- Over one year 806,999 876,711

3,109,597 3,138,252

Irrevocable commitments:Undrawn loan commitments 1,130,419 1,035,656

Please also refer to note 35 for additional liquidity disclosures.

The Group’s commitments in respect of non-cancellable operating leases were as follows:

2016US$ ’000

2015US$ ’000

Within one year 1,540 1,415

Between one to five years 5,219 201

6,759 1,616

30. SEGMENT INFORMATIONFor management purposes the Group is organised into four major business segments:

Retail banking Principally handling individual customers’ deposit and current accounts, providing consumer loans, residential mortgages, overdrafts, credit cards and fund transfer facilities.

Corporate banking Principally handling loans and other credit facilities, and deposit and current accounts for corporate and institutional customers.

Treasury & investments Principally providing money market, trading and treasury services, as well as management of the Group’s investments and funding.

Private banking Principally servicing high net worth clients through a range of investment products, funds, credit facilities, trusts and alternative investments.


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30. SEGMENT INFORMATION (continued)These segments are the basis on which the Group reports its primary segment information. Transactions between segments are conducted at approximate market rates on an arm’s length basis. Interest is charged/credited to business segments based on a pool rate which approximates the cost of funds.

Segmental information for the year was as follows:

Retailbanking

US$ ’000

Corporatebanking

US$ ’000

Treasury &investments

US$ ’000

Privatebanking

US$ ’000Total

US$ ’000Year ended 31 December 2016:

Net interest income 20,683 586,964 169,452 51,133 828,232 Inter segment interest 169,960 (189,471) 9,175 10,336 - Fees, commissions and others 37,388 99,625 11,552 24,725 173,290 Investment income and trading income 7,786 14,406 122,985 2,342 147,519 OPERATING INCOME 235,817 511,524 313,164 88,536 1,149,041

Net provision for loan losses and others 10,402 142,617 - (3,457) 149,562 Provision for investments - - 9,279 - 9,279

NET OPERATING INCOME 225,415 368,907 303,885 91,993 990,200 Operating expenses 108,567 82,872 97,025 31,311 319,775

PROFIT BEFORE TAX 116,848 286,035 206,860 60,682 670,425 Tax expense 46,115 NET PROFIT FOR THE YEAR 624,310 Less: Attributable to non-controlling interest 53,670

NET PROFIT ATTRIBUTABLE TO THE OWNERS’ OF THE BANK 570,640

Segment assets 3,869,692 14,181,899 9,795,760 1,724,263 29,571,614 Goodwill 153,381 98,599 95,802 78,779 426,561 Other intangible assets 13,043 17,258 15,735 2,035 48,071 Investment in associates 326,874 Unallocated assets 949,364

TOTAL ASSETS 31,322,484

Segment liabilities 5,017,610 4,982,953 13,348,790 2,568,253 25,917,606 Unallocated liabilities 865,376

TOTAL LIABILITIES 26,782,982



30. SEGMENT INFORMATION (continued)Segmental information for the year was as follows:

Retailbanking

US$ ’000

Corporatebanking

US$ ’000

Treasury &investments

US$ ’000

Privatebanking

US$ ’000Total

US$ ’000

Year ended 31 December 2015:

Net interest income 16,555 574,217 174,049 49,895 814,716

Inter segment interest 159,340 (166,960) 2,584 5,036 -

Fees, commissions and others 34,119 88,499 12,113 23,181 157,912

Investment income and trading income 8,197 11,540 99,582 - 119,319

OPERATING INCOME 218,211 507,296 288,328 78,112 1,091,947

Net provision for loan losses and others 9,890 153,928 - 183 164,001

Provision for investments - - 9,384 - 9,384

NET OPERATING INCOME 208,321 353,368 278,944 77,929 918,562

Operating expenses 111,391 74,613 86,997 36,282 309,283

PROFIT BEFORE TAX 96,930 278,755 191,947 41,647 609,279

Tax expense 42,669

NET PROFIT FOR THE YEAR 566,610

Less: Attributable to non-controlling interest 29,362

NET PROFIT ATTRIBUTABLE TO THE OWNERS’ OF THE BANK 537,248

Segment assets 3,753,901 15,128,473 11,549,623 1,818,222 32,250,219

Goodwill 162,186 109,799 105,944 80,524 458,453

Other intangible assets 30,430 40,261 36,707 4,747 112,145

Investment in associates 314,828

Unallocated assets 829,672

TOTAL ASSETS 33,965,317

Segment liabilities 6,172,497 6,101,525 13,864,665 2,660,323 28,799,010

Unallocated liabilities 806,093

TOTAL LIABILITIES 29,605,103

Geographic segmentation

Although the management of the Group is based primarily on business segments, the Group’s geographic segmentation is based on the countries where the Bank and its subsidiaries are incorporated. Thus, the operating income generated by the Bank and its subsidiaries based in the GCC are grouped as “GCC Countries”, while those generated by the Bank’s subsidiaries located outside the GCC region is grouped under “Rest of the World”. Similar segmentation is followed for the distribution of total assets. The following table shows the distribution of the Group’s operating income and total assets by geographical segment:


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30. SEGMENT INFORMATION (continued)

Geographic segmentation (continued)

Operating income Total assets2016

US$ ’0002015

US$ ’0002016

US$ ’0002015

US$ ’000

GCC Countries 844,446 759,379 22,205,097 21,594,697

Rest of the World 304,595 332,568 9,117,387 12,370,620

Total 1,149,041 1,091,947 31,322,484 33,965,317

Net profit from Bahrain onshore operations included above is US$ 80.7 million (2015: US$ 72.1 million) amounting to 14.1% (2015: 13.4%) of the Group’s net profit attributable to owners of the Bank.

RISK MANAGEMENT

31. CREDIT RISKCredit risk is the risk that one party to a financial instrument will fail to discharge a financial obligation and cause the other party to incur a financial loss. In the case of derivatives this is limited to positive fair values. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties.

a) Concentration risk

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location.

The Group manages its credit risk exposure so as to avoid over concentration to a particular sector or geographic location. It also obtains security where appropriate. Guidelines are in place regarding the acceptability of types of collateral and valuation parameters.

The principal collateral types are as follows:

- In the personal sector – cash, mortgages over residential properties and assignments over salary income;

- In the commercial sector – cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees;

- In the commercial real estate sector – charges over the properties being financed; and

- In the financial sector – charges over financial instruments, such as debt securities and equities.

The Group monitors the market value of collateral and requests additional collateral when necessary in accordance with the underlying agreement.

Details of the concentration of the loans and advances by industry sector and geographic region are disclosed in note 8(a) and 8(b) respectively.

Details of the industry sector analysis and the geographical distribution of the assets, liabilities and commitments on behalf of customers are set out in note 32.



31. CREDIT RISK (continued)

b) Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The table below shows the maximum exposure to credit risk for the components of the balance sheet. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements, but after provision for impairment, where applicable.

Gross maximumexposure 2016

US$ ’000

Gross maximumexposure 2015

US$ ’000

Balances with central banks 789,422 959,924

Treasury bills and deposits with central banks 2,464,846 2,117,945

Deposits with banks 1,884,493 4,214,899

Loans and advances 18,606,883 19,353,181

Non-trading investments 5,429,578 5,146,209

Interest receivable and other assets 385,700 400,189

Total 29,560,922 32,192,347

Contingent liabilities 3,109,597 3,138,252

Undrawn loan commitments 1,130,419 1,035,656

Total credit related commitments 4,240,016 4,173,908

Total credit risk exposure 33,800,938 36,366,255

Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

c) Credit quality per class of financial assets

The table below shows distribution of financial assets neither past due nor impaired.

Neither past due nor impairedHigh standard

gradeUS$ ’000

Standard gradeUS$ ’000

TotalUS$ ’000

At 31 December 2016

Balances with central banks 789,422 - 789,422 Treasury bills and deposits with central banks 1,584,629 880,217 2,464,846 Deposits with banks 1,737,861 146,632 1,884,493 Loans and advances

Retail 2,820,992 804,251 3,625,243 Corporate 9,035,773 5,983,311 15,019,084

Non-trading investments 3,893,853 1,625,958 5,519,811 Interest receivable and other assets 210,921 61,834 272,755 Other assets - derivatives 112,945 - 112,945


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31. CREDIT RISK (continued)

c) Credit quality per class of financial assets (continued)

The table below shows distribution of financial assets neither past due nor impaired.

Neither past due nor impaired

High standardgrade

US$ ’000Standard grade

US$ ’000Total

US$ ’000

At 31 December 2015

Balances with central banks 959,924 - 959,924

Treasury bills and deposits with central banks 1,121,557 996,388 2,117,945

Deposits with banks 4,094,618 120,281 4,214,899

Loans and advances

Retail 2,623,005 820,852 3,443,857

Corporate 9,654,922 6,316,885 15,971,807

Non-trading investments 4,137,287 1,193,021 5,330,308

Interest receivable and other assets 260,320 61,217 321,537

Other assets - derivatives 78,652 - 78,652

It is the Group’s policy to maintain consistent internal risk ratings across the credit portfolio. The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Group’s internal credit rating system. This facilitates focused portfolio management of the inherent level of risk across all lines of business. The credit quality ratings disclosed above can be equated to the following risk rating grades:

Credit quality rating Risk rating DefinitionHigh standard Risk rating 1 to 4 Undoubted through to good credit risk

Standard Risk rating 5 to 7 Satisfactory through to adequate credit risk The risk rating system is supported by various financial analytics and qualitative market information for the measurement of counterparty risk.

There are no financial assets which are past due but not impaired as at 31 December 2016 and 2015 other than those disclosed under note 8(c).



32. CONCENTRATION ANALYSISThe distribution of assets, liabilities and commitments on behalf of customers by geographic region and industry sector was as follows:

2016 2015

AssetsUS$ ’000

LiabilitiesUS$ ’000

Contingent liabilities &

commitmentson behalf of

customersUS$ ’000

AssetsUS$ ’000


Contingent liabilities &

commitmentson behalf of

customersUS$ ’000

Geographic region:Kingdom of Bahrain 5,616,371 4,434,613 816,722 5,263,856 4,314,229 800,338

State of Kuwait 11,915,097 15,857,714 1,387,674 11,801,257 17,136,134 1,316,954

Other GCC countries 4,673,629 923,769 303,176 4,529,584 1,255,679 282,567

United Kingdom (UK) 2,206,461 705,767 12,373 2,283,279 576,150 6,836

Arab Republic of Egypt 2,563,112 2,227,158 376,328 3,928,262 3,386,171 513,592

Europe (excluding UK) 794,267 482,179 155,540 1,124,773 610,125 89,645

Asia (excluding GCC) 2,023,920 1,143,035 8,157 1,839,212 1,196,837 53,697

United States of America 633,953 230,878 5,025 2,088,192 292,394 12,582

Rest of the World 895,674 777,869 44,602 1,106,902 837,384 62,041

31,322,484 26,782,982 3,109,597 33,965,317 29,605,103 3,138,252

Industry sector:Banks and other financial

institutions 9,860,992 12,108,621 456,688 11,963,030 13,098,331 444,801

Consumer/personal 2,906,297 5,146,647 8,241 3,366,355 5,733,503 10,415

Residential mortgage 1,423,193 - 214 1,605,203 - 216

Trading and manufacturing 5,163,317 1,371,348 1,181,986 5,441,805 2,279,726 1,186,177

Real estate 5,244,436 367,696 37,884 4,958,517 421,206 108,495

Services 3,676,082 2,420,122 1,212,843 3,697,909 2,463,800 1,105,207

Government/public sector 2,730,631 4,268,673 26,604 2,622,330 4,466,012 108,841

Others 317,536 1,099,875 185,137 310,168 1,142,525 174,100

31,322,484 26,782,982 3,109,597 33,965,317 29,605,103 3,138,252

33. MARKET RISK

Market risk is the risk of potential financial loss that may arise from adverse changes in the value of a financial instrument or portfolio of financial instruments due to movements in interest rates, foreign exchange rates, equity prices, commodity prices and derivatives. This risk arises from asset - liability mismatches, changes that occur in the yield curve, foreign exchange rates and changes in volatilities/implied volatilities in the market value of derivatives. The Group classifies exposures to market risk into either trading or non-trading portfolios. Given the Group’s low risk strategy, aggregate market risk levels are considered low. The Group utilises Value-at-Risk (VaR) models to assist in estimating potential losses that may arise from adverse market movements in addition to non-quantitative risk management techniques. The market risk for the trading portfolio is managed and monitored on a VaR methodology which reflects the inter-dependency between risk variables. Non-trading portfolios are managed and monitored using stop loss limits and other sensitivity analyses. The data given below is representative of the information during the year.


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33. MARKET RISK (continued)

a. Market risk-trading

The Group calculates historical simulation VaR using a one day holding period at a confidence level of 99%, which takes into account the actual correlations observed historically between different markets and rates.

Since VaR is an integral part of the Group’s market risk management, VaR limits have been established for all trading operations and exposures are reviewed daily against the limits by management. Actual outcomes are compared to the VaR model derived predictions on a regular basis as a means of validating the assumptions and parameters used in the VaR calculation.

The table below summarises the risk factor composition of the VaR including the correlative effects intrinsic to the trading book:

Equity priceUS$ ’000

Foreign exchangeUS$ ’000

Interest rateUS$ ’000

Effects of correlation

US$ ’000Total

US$ ’00031 December 2016 - 243 2 0 245 31 December 2015 - 330 170 (0) 500

b. Market risk-non-trading

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments or the future profitability of the Group. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group measures and manages interest rate risk by establishing levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gaps on assets and liabilities are reviewed periodically and hedging strategies are used to reduce the interest rate gaps to within the limits established by the Bank’s Board of Directors.

The impact of a +/- 200bps interest rate shock on assets and liabilities which are carried at fair value and the consequent impact on equity as of 31 December 2016 and 31 December 2015 is as per the following table.

2016 2015

Assets US$ ’000


EquityUS$ ’000

Assets US$ ’000


EquityUS$ ’000

at 200 bps - increase (+) 80,560 (82,384) (1,824) 142,366 (139,828) 2,538

at 200 bps - decrease (-) (80,560) 82,384 1,824 (142,366) 139,828 (2,538)

The following table demonstrates the sensitivity of the Group’s net interest income for the next one year, to a change in interest rates, with all other variables held constant. The sensitivity is based on the floating rate financial assets and financial liabilities held at 31 December 2016 and 31 December 2015 including the effect of hedging instruments.

Sensitivity analysis - Interest rate risk

2016US$ ’000

2015US$ ’000

at 10 bps - increase (+)/decrease (-) +/- 3,713 2,513

at 25 bps - increase (+)/decrease (-) +/- 9,283 6,282

Currency risk

Currency risk is the risk that the functional currency value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The risk management process manages the Group’s exposure to fluctuations in foreign exchange rates (currency risk) through the asset and liability management process. It is the Group’s policy to reduce its exposure to currency fluctuations to acceptable levels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currency position exposures. Positions are monitored periodically and hedging strategies used to ensure positions are maintained within established limits.




b. Market risk-non-trading (continued)

Sensitivity analysis - currency risk

All foreign currency exposures with the exception of investments in subsidiaries and associates are captured as part of the trading book. The risk of the exposures are subject to quantification via a daily VaR calculation, the results of which are disclosed in note 33 (a).

The effect of foreign currency translation on the Group’s investments in subsidiaries and associates are reported under the “foreign exchange translation reserve” under the note 21(h).

Equity price risk

Equity price risk arises from fluctuations in equity indices and prices. The Board has set limits on the amount and type of investments that may be accepted. This is monitored on an ongoing basis by the Group Risk Committee. The non-trading equity price risk exposure arises from the Group’s investment portfolio.

The effect on equity valuations (as a result of a change in the fair value of equity investments held as fair value through other comprehensive income) due to a reasonably possible change in equity indices, with all other variables held constant is as follows:

2016 2015

Market indicesChange in

equity indices %Effect on

OCI US$ ’000Effect on

OCI US$ ’000

Kuwait Stock Exchange +/- 10% +/- 602 1,851

Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant.

34. FAIR VALUE MEASUREMENTThe fair value of financial assets and financial liabilities, other than those disclosed in the table below and in note 9, approximate their carrying values. Please refer note 9 for the fair value of non-trading investments carried at amortised cost.

The Group’s primary medium and long-term financial liabilities are the term debts and subordinated liabilities. The fair values of these financial liabilities are not materially different from their carrying values, since these liabilities are repriced at intervals of three or six months, depending on the terms and conditions of the instrument and the resultant applicable margins approximate the current spreads that would apply for borrowings with similar maturities.

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:-

Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and

Level 3: Techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

2016Level 1

US$ ’000Level 2

US$ ’000Level 3

US$ ’000Total

US$ ’000Equity instruments and funds at fair value 465 126,360 14,044 140,869 Derivative assets - 112,945 - 112,945 Derivative liabilities - (142,547) - (142,547)


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34. FAIR VALUE MEASUREMENT (continued)

2015

Level 1 US$ ’000

Level 2US$ ’000

Level 3US$ ’000

TotalUS$ ’000

Equity instruments and funds at fair value 2,629 149,680 29,592 181,901

Derivative assets - 78,652 - 78,652

Derivative liabilities - (153,428) - (153,428)

During the year 2016 and 2015 there have been no transfers between Levels 1, 2 and 3.

For an explanation of valuation techniques used to value these financial instruments please refer to note 3.3 (f).

The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year.

35. LIQUIDITY RISKLiquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows. Funding risk arises when the necessary liquidity to fund illiquid asset positions cannot be obtained at the expected terms and when required.

The management of the Group’s liquidity and funding is the responsibility of the Group Asset and Liability Committee (GALCO) under the chairmanship of the Deputy Group Chief Executive Officer Treasury and Investments supported by the Group Treasurer, and is responsible for ensuring that all foreseeable funding commitments, including deposit withdrawals, can be met when due, and that wholesale market access is co-ordinated and controlled.

The Group maintains a stable funding base comprising core retail and corporate customer deposits and institutional balances, augmented by wholesale funding and portfolios of highly liquid assets which are diversified by currency and maturity, in order to enable the Group to respond quickly to any unforeseen liquidity requirements.

The Group subsidiaries and affiliates maintain a strong individual liquidity position and manage their liquidity profiles so that cash flows are balanced and funding obligations can be met when due.

Treasury limits are set by the GALCO and allocated as required across the various group entities. Specifically GALCO and the Group Treasurer are responsible for:

- projecting cash flows by major currency under various stress scenarios and considering the level of liquid assets necessary in relation thereto;

- monitoring balance sheet liquidity ratios against internal and regulatory requirements;

- maintaining a diverse range of funding sources with adequate back-up facilities;

- managing the concentration and profile of debt maturities;

- managing contingent liquidity commitment exposures within predetermined caps;

- monitoring depositor concentration in order to avoid undue reliance on large individual depositors and ensure a satisfactory overall funding mix; and

- maintaining liquidity and funding contingency plans. These plans must identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises while minimising adverse long-term implications for the business.



35. LIQUIDITY RISK (continued)The maturity profile of the assets and liabilities at 31 December 2016 given below reflects management’s best estimates of the maturities of assets and liabilities. These have been determined on the basis of the remaining period at the balance sheet date to the contractual or expected maturity date, where relevant. The liquidity profile of customer deposits has been determined on the basis of the effective maturities indicated by the Group’s deposit retention history.

US$ ’000

Up to threemonths

Over threemonths to

one yearAbove1 year Undated Total

ASSETSCash and balances with central banks 912,924 - - - 912,924 Treasury bills and deposits with

central banks 1,318,342 1,146,504 - - 2,464,846 Deposits with banks 1,749,447 84,126 50,920 - 1,884,493 Loans and advances 5,840,882 3,343,177 9,422,824 - 18,606,883 Non-trading investments 533,859 520,504 4,516,084 - 5,570,447 Investment in associates - - - 326,874 326,874 Investment properties - - - 132,021 132,021 Premises and equipment - - - 211,209 211,209 Interest receivable and other assets 185,450 394,773 157,932 - 738,155 Goodwill and other intangible assets - - - 474,632 474,632

Total 10,540,904 5,489,084 14,147,760 1,144,736 31,322,484

LIABILITIES Deposits from banks 3,065,663 213,375 - - 3,279,038 Borrowings under repurchase agreements 322,819 375,409 - - 698,228 Customers’ deposits 6,804,578 4,003,416 10,895,364 - 21,703,358 Interest payable and other liabilities 397,475 275,337 192,564 - 865,376 Subordinated liabilities - 22,222 214,760 - 236,982

Total 10,590,535 4,889,759 11,302,688 - 26,782,982

Net liquidity gap (49,631) 599,325 2,845,072 1,144,736 4,539,502

The Group has collateralized borrowing lines of credit with various financial institutions through repurchase arrangements. Please refer note 16 for further details.


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35. LIQUIDITY RISK (continued)The maturity profile of the assets and liabilities at 31 December 2015 was as follows:

US$ ’000

Up to threemonths

Over threemonths to

one yearAbove1 year Undated Total

ASSETSCash and balances with central banks 1,052,918 - - - 1,052,918

Treasury bills and deposits with

central banks 1,574,172 543,773 - - 2,117,945

Deposits with banks 4,056,374 120,732 37,793 - 4,214,899

Loans and advances 6,261,781 3,086,250 10,005,150 - 19,353,181

Non-trading investments 467,370 568,710 4,292,030 - 5,328,110

Investment in associates - - - 314,828 314,828

Investment properties - - - 183,166 183,166

Premises and equipment - - - 238,843 238,843

Interest receivable and other assets 233,411 231,771 125,647 - 590,829

Goodwill and other intangible assets - - - 570,598 570,598

Total 13,646,026 4,551,236 14,460,620 1,307,435 33,965,317

LIABILITIES Deposits from banks 4,078,572 106,619 56,000 - 4,241,191

Borrowings under repurchase agreements 600,936 200,062 - - 800,998

Customers’ deposits 7,718,014 4,116,573 11,660,640 - 23,495,227

Interest payable and other liabilities 369,926 190,727 245,440 - 806,093

Subordinated liabilities - 23,692 237,902 - 261,594

Total 12,767,448 4,637,673 12,199,982 - 29,605,103

Net liquidity gap 878,578 (86,437) 2,260,638 1,307,435 4,360,214



35. LIQUIDITY RISK (continued)

Analysis of financial liabilities by remaining contractual maturitiesThe table below summarises the maturity profile of the Group’s financial liabilities (including interest) based on contractual undiscounted repayment obligations. However, the Group’s expected cash flows on these instruments vary significantly from this analysis. In particular, customer deposits are expected to maintain stable or increased balances.

US$’ 000

Up to One month

One monthto threemonths

Over threemonths to

one year

Over one year to

five yearsOver five

years TotalAs at 31 December 2016Deposits from banks 1,592,184 1,477,897 214,932 - - 3,285,013 Borrowings under repurchase agreements 14,268 309,076 377,755 - - 701,099 Customers’ deposits 9,952,746 4,275,858 6,601,084 961,866 23,904 21,815,458 Subordinated liabilities - - 22,766 225,323 11,410 259,499

- Total 11,559,198 6,062,831 7,216,537 1,187,189 35,314 26,061,069

- Credit related commitments 18,653 131,414 211,137 671,940 97,275 1,130,419 Derivatives (net) 15,925 9,945 (7,007) (14,158) (34,295) (29,590)

US$’ 000

Up to One month


Over threemonths to

one year

Over one year to

five yearsOver five

years TotalAs at 31 December 2015Deposits from banks 2,594,775 1,486,970 107,036 56,609 - 4,245,390 Borrowings under repurchase agreements 120,018 481,507 200,879 - - 802,404 Customers’ deposits 10,198,749 5,394,822 5,330,208 2,676,927 64,975 23,665,681 Subordinated liabilities - - 24,149 245,003 12,076 281,228

- Total 12,913,542 7,363,299 5,662,272 2,978,539 77,051 28,994,703

- Credit relatedcommitments 8,454 2,714 463,473 499,479 61,536 1,035,656 Derivatives (net) 8,993 (6,502) 25,707 (27,761) (75,767) (75,330)

36. CAPITAL ADEQUACYThe primary objectives of the Group’s capital management policies are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders’ value. Capital adequacy for each of the group companies is also managed separately at individual company level. The Group does not have any significant restrictions on its ability to access or use its assets and settle its liabilities other than any restrictions that may result from the supervisory frameworks within which the banking subsidiaries operate.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

The total capital ratio, calculated in accordance with the capital adequacy guidelines, under Basel III, issued by the Central Bank of Bahrain (“CBB”), for the Group, is disclosed under Pillar III Table 1, which is included in the Annual Report. The minimum capital adequacy ratio as per CBB is 12.5%. The Group’s total capital ratio is 17.1% as of 31 December 2016 (31 December 2015: 16.7%).


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37. DEPOSIT PROTECTION SCHEMECertain customers’ deposits of the Group are covered by deposit protection schemes established by the Central Bank of Bahrain (CBB) and the Financial Services Compensation Scheme, UK.

Bahrain: Customers’ deposits held with the Bank in the Kingdom of Bahrain are covered by the Regulation Protecting Deposits issued by the Central Bank of Bahrain (CBB) in accordance with Resolution No.(34) of 2010. This scheme covers eligible ‘natural persons’ (individuals) up to a maximum of Bahraini Dinar 20,000 as set out by CBB requirements. A periodic contribution as mandated by the CBB is paid by the Bank under this scheme.

UK: Customers’ deposits in AUBUK are covered under the Financial Services Compensation Scheme, up to a limit of GBP 75,000 per customer. No up-front contribution is currently mandated under this scheme and no liability is due unless any member bank of the scheme is unable to meet its depository obligations.

38. ISLAMIC BANKINGThe Group’s Shari’a compliant Islamic banking activities are offered through its fully fledged Islamic Banking subsidiary AUBK and dedicated Islamic banking branches/windows at AUB Bahrain, AUBUK and through its associates Ahli Bank S.A.O.G. and UBCI. The results of its Islamic banking activities is presented below.

BALANCE SHEET AS AT 31 DECEMBER Note2016

US$ ’0002015

US$ ’000

ASSETSCash and balances with central banks 105,519 211,714

Deposits with central banks 1,396,752 873,628

Deposits with banks (a) 732,787 2,028,920

Receivable balances from Islamic financing (b) 10,573,736 10,455,917

Financial investments 778,615 626,193

Investment in associates 40,880 5,869

Investment properties 75,443 97,416

Premises and equipment 103,058 102,070

Profit receivable and other assets 82,094 66,838

TOTAL ASSETS 13,888,884 14,468,565

LIABILITIESDeposits from banks (c) 1,913,217 2,597,039

Customers’ deposits (d) 10,047,383 10,170,760

Profit payable and other liabilities 230,161 208,866

Restricted investment accounts 2,773 3,748

12,193,534 12,980,413

Equity of unrestricted investment account holders 55,199 187,134

TOTAL LIABILITIES AND EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS 12,248,733 13,167,547

TOTAL EQUITY 1,640,151 1,301,018

TOTAL LIABILITIES, EQUITY OF UNRESTRICTED INVESTMENT ACCOUNTHOLDERS AND EQUITY 13,888,884 14,468,565



38. ISLAMIC BANKING (continued)

STATEMENT OF INCOME FOR THE YEAR ENDED 31 DECEMBER Note2016

US$ ’0002015

US$ ’000

Net income from Islamic financing (e) 346,590 353,567

346,590 353,567

Fees and commissions 39,814 32,386

Other operating income 18,770 21,593

Foreign exchange gains 13,239 13,696

OPERATING INCOME 418,413 421,242

Provision for financing receivables and others 113,285 146,412

NET OPERATING INCOME 305,128 274,830

Staff costs 69,148 60,771

Depreciation 8,292 7,381

Other operating expenses 40,196 36,930

OPERATING EXPENSES 117,636 105,082

PROFIT FOR THE YEAR BEFORE TAX 187,492 169,748

Tax expense 6,685 6,158

PROFIT FOR THE YEAR BEFORE THE SHARE OF PROFIT OF EQUITY OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS 180,807 163,590

Less: Share of profit of equity of unrestricted investment account holders 270 338

NET PROFIT FOR THE YEAR 180,537 163,252

Attributable to: Owners of the Bank 151,472 143,662

Non-controlling interest 29,065 19,590

180,537 163,252

Notes

2016US$ ’000

2015US$ ’000

(a) Deposits with banks Murabaha finance with other banks 622,221 745,875

Wakala with banks 70,103 357,929

Current accounts and others 40,463 925,116

732,787 2,028,920


Ahli United Bank124


Notes (continued)

2016US$ ’000

2015US$ ’000

(b) Receivable balances from Islamic financingTawarruq receivables 6,544,634 6,710,924

Murabaha receivables 2,698,429 2,363,007

Ijara receivables 1,718,212 1,711,550

Others 11,184 3,782

Less: Allowance for impairment (398,723) (333,346)

10,573,736 10,455,917

2016US$ ’000

2015US$ ’000

(c) Deposits from banksMurabaha 1,616,778 1,669,016

Wakala 282,866 911,271

Current accounts 13,573 16,752

1,913,217 2,597,039

2016US$ ’000

2015US$ ’000

(d) Customers’ depositsWakala 5,863,449 5,792,476

Murabaha 2,364,822 2,396,368

Mudaraba 822,289 961,949

Current accounts 996,823 1,019,967

10,047,383 10,170,760




Notes (continued)

2016US$ ’000

2015US$ ’000

(e) Net income from Islamic financing Income from Tawarruq 252,218 246,007

Income from Murabaha 171,650 142,683

Income from Ijara 87,771 77,749

Income from Financial Investments 14,718 13,698

Income from Islamic financing 526,357 480,137

Profit expenses on Wakala 106,078 73,660

Profit expenses on Murabaha 62,002 40,971

Profit expenses on Mudaraba 11,687 11,939

Less: Distribution to depositors 179,767 126,570

Net income from Islamic financing 346,590 353,567

39. COMPARATIVE INFORMATIONCertain corresponding figures for 2015 have been reclassified in order to conform to the presentation of financial statements for the current year. Such reclassifications do not affect previously reported net profit or shareholders’ equity.

Introduction to the Central Bank of Bahrain’s Basel III guidelines 128Pillar III quantitative & qualitative disclosures 1291. Capital structure 1302. Group risk governance structure 1303. Credit risk management 1324. Market risk 1435. Liquidity risk and funding management 1466. Operational risk 1467. Information technology risk 1478. Strategic risk 1479. Legal, compliance, regulatory and reputational risks 14710. Environmental risk 147Appendix I - Regulatory capital disclosures 148

CONTENTS

PILLAR III DISCLOSURES - BASEL III 31 DECEMBER 2016

Ahli United Bank128

AHLI UNITED BANK B.S.C.Pillar III Disclosures - Basel III

INTRODUCTION TO THE CENTRAL BANK OF BAHRAIN’S BASEL III GUIDELINES

The Central Bank of Bahrain (CBB) Basel III Guidelines, based upon the Bank of International Settlements (BIS) Revised Framework – ‘International Convergence of Capital Measurement and Capital Standards’, are applicable from 1 January 2015. Basel III is structured around three ‘Pillars’: Pillar I - Minimum Capital Requirements; Pillar II – the Supervisory Review Process and the Internal Capital Adequacy Assessment Process (ICAAP); and Pillar III - Market Discipline.

Group Structure

The public disclosures under this section have been prepared in accordance with the CBB Rules concerning Public Disclosure Module (“PD”), section PD-1: Annual Disclosure Requirements. The disclosures under this section are applicable to Ahli United Bank B.S.C. (the “Bank”), which is the parent bank incorporated in Bahrain. The Bank operates under a retail banking license issued by the CBB. The Bank and its subsidiaries (as detailed under note 2 to the audited consolidated financial statements) are collectively known as the “Group”.

Pillar I – Minimum Capital Requirements

Pillar I deals with the basis for the computation of the regulatory capital adequacy ratio. It defines the calculation of Risk Weighted Assets (RWAs) for credit risk, market risk and operational risk, as well as the derivation of the regulatory capital base. The capital adequacy ratio is then calculated as the ratio of the Bank’s regulatory capital to its total RWAs. All Bahrain incorporated banks are currently required to maintain a minimum capital adequacy ratio of 12.5%. This includes, mandatory Capital Conservation Buffer (CCB) of 2.5%.

The Group ensures that each subsidiary maintains sufficient capital levels for their respective legal and compliance purposes.

Credit risk

Basel III provides two approaches to the calculation of credit risk regulatory capital. The Standardised approach which the Bank has adopted, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties, and groups other counterparties into broad categories and applies standardised risk weightings to these categories.

Market risk

The Bank has adopted the Standardised approach for determining the market risk capital requirement.

Operational risk

Under the Basic Indicator approach (BIA), which the Bank has adopted for operational risk, the regulatory capital requirement for operational risk is calculated by applying a co-efficient of 15 per cent to the average gross income for the preceding three financial years.

Pillar II – The Supervisory Review and Evaluation Process

Pillar II involves the process of supervisory review of a financial institution’s risk management framework and its capital adequacy.

Accordingly, this involves both the Bank and its regulators taking a view on whether additional capital should be held against risks not covered in Pillar I. Part of the Pillar II process is the Internal Capital Adequacy Assessment Process (ICAAP) which is the Bank’s self assessment of risks not captured by Pillar I.

As part of the CBB’s Pillar II guidelines, each bank is required to be individually reviewed and assessed by the CBB with the intention of setting individual minimum capital adequacy ratios. The Bank is currently required to maintain a 12.5 per cent minimum capital adequacy ratio at the Group level.

Pillar III – Market Discipline

The third pillar is related to market discipline and requires the Bank to publish detailed qualitative and quantitative information of its risk management and capital adequacy policies and processes to complement the first two pillars and the associated supervisory review process. The disclosures in this report are in addition to the disclosures set out in the audited consolidated financial statements of the Group for the year ended 31 December 2016.



PILLAR III QUANTITATIVE AND QUALITATIVE DISCLOSURES

For the purpose of computing regulatory minimum capital requirements, the Group follows the rules as laid out under the CBB Rulebook module Capital Adequacy (CA) Module. Accordingly,

a) All subsidiaries as per note 2 to the audited consolidated financial statements are consolidated on a line by line basis in accordance with International Financial Reporting Standards (IFRS). Non-controlling interest arising on consolidation is incorporated under respective tiers of capital as per CBB rules (Subject to Basel III transitional rules)

b) Investments in associates as reported under note 10 to the audited consolidated financial statements are treated as “Significant Investment in financial entities”. They are risk weighted and deducted from Capital as per CBB Basel III guidelines (subject to CBB and Basel III transitional rules)

c) Goodwill and Intangibles (subject to transitional rules) are deducted from Tier 1 capital;

d) Subordinated term debt, as reported under liabilities in the consolidated balance sheet, are reported as part of Tier 2 capital, subject to maximum thresholds and adjusted for remaining life;

e) Collective impairment provisions to the extent of maximum threshold of 1.25% of Credit Risk Weighted Assets are included under Tier 2 capital.

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1. CAPITAL STRUCTURE

TABLE - 1

A. NET AVAILABLE CAPITAL

US$ ’000CET 1 AT 1 Tier 2

NET AVAILABLE CAPITAL 3,349,045 574,064 543,110

TOTAL ELIGIBLE CAPITAL BASE (CET 1 + AT 1 + Tier 2) 4,466,219

RISK WEIGHTED EXPOSURES Credit Risk Weighted Exposures 24,082,344

Market Risk Weighted Exposures 278,900

Operational Risk Weighted Exposures 1,789,913

TOTAL RISK WEIGHTED EXPOSURES 26,151,157

CET 1 & Capital Conversion Buffer (CCB) 12.8%

Tier 1 - Capital Adequacy Ratio (CET 1, AT 1 & CCB) 15.0%

Total - Capital Adequacy Ratio 17.1%

As part of the Basel III implementation, Central Bank of Bahrain (CBB) has revised the public disclosure requirements module [PD Module - Chapter PD-3.1.5A: Quarterly Disclosure Requirements] and incorporated additional disclosure requirements related to regulatory capital. In line with above requirements, the Group has disclosed the regulatory capital reconciliation and other related disclosures in Appendix I which forms part of Pillar III disclosures for the year ended 31 December 2016.

B. CAPITAL ADEQUACY RATIO

As at 31 December 2016, the capital adequacy ratio under Basel III unless mandated otherwise were:

SubsidiariesAhli United

Bank K.S.C.P. (AUBK)

Ahli United Bank (U.K.) PLC

(AUBUK)

Ahli United Bank (Egypt)

S.A.E. (AUBE)*

Commercial Bank of Iraq

P.S.C. (CBIQ)**Tier 1 - Capital Adequacy Ratio 17.0% 24.2% 12.9% 689.7%Total - Capital Adequacy Ratio 18.2% 25.7% 13.6% 728.8%

* under Basel II** under Basel I

2. GROUP RISK GOVERNANCE STRUCTURE

Risk Governance

The Group Board of Directors (BOD) seeks to optimise the Group’s performance by enabling the various Group business units to realize the Group’s business strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters and Group risk policy framework.



2. GROUP RISK GOVERNANCE STRUCTURE (continued)

AUB Group Risk Governance Structure

The above Group committees are set up as part of the Group risk governance structure. The terms of reference for these committees are approved by the Group BOD. Group Audit & Compliance Committee also has oversight over Group Compliance Committee.

AUB Group Management Risk Governance Structure

The Group BOD approves the risk parameters and the Group Risk Committee monitors the Group’s risk profile against these parameters.

The Deputy Group CEO – Risk, Legal and Compliance, under the delegated authority of the Group CEO & MD, supported by the Group Head of Risk Management and the Group Head of Credit Risk has the responsibility for ensuring effective risk management and control. Within Group Risk Management, specialist risk-type heads and their teams are responsible for risk oversight and establishing appropriate risk control frameworks.

AUB GroupBOD

Group Executive Committee

Group Audit & Compliance Committee

Shari’aAdvisory & Supervisory

Board

Group Risk Committee

Group Assets & Liability Committee

Group Operational Risk Committee

Group Chief Executive

Officer & MD

Deputy Group CEO Risk, Legal & Compliance

Group Head of Audit

Group Audit & Compliance Committee

Group Head of Risk Management

Group Head of Legal

Group Head of Credit Risk

Group Head of Compliance

Head of Special Assets

Head of Market Risk

Head of Operational Risk

Head of Credit Risk

Shari’a Compliance Officer

Ahli United Bank132


2. GROUP RISK GOVERNANCE STRUCTURE (continued)

AUB Group Management Risk Governance Structure (continued)

Internal Audit is responsible for the independent review of risk management and the Group’s risk control environment.

The Board and its Executive Committee receive quarterly risk updates including detailed risk exposures analysis reports.

The Board approves all risk policies as well as the Group risk framework on an annual basis.

The Group Audit & Compliance Committee considers the adequacy and effectiveness of the Group risk control framework and receives quarterly updates on any control issues, regulatory and compliance related issues.

Systems and procedures are in place to identify, control and report on all major risks.

3. CREDIT RISK MANAGEMENTCredit risk is the risk of financial loss if a customer or counterparty fails to meet a financial obligation under a contract. It arises principally from lending, trade finance and treasury activities. Credit risk also arises where assets are held in the form of debt securities, the value of which may fall.

The Group has policies and procedures in place to monitor and manage these risks and the Group Risk Management function provides high-level centralized oversight and management of credit risk. The specific responsibilities of Group Risk Management are to:

- Set credit policy and risk appetite for credit risk exposure to specific market sectors;

- Control exposures to sovereign entities, banks and other financial institutions and set risk ratings for individual exposures. Credit and settlement risk limits to counterparties in these sectors are approved and managed by Group Risk Management, to optimize the use of credit availability and avoid risk concentration;

- Control cross-border exposures, through the centralized setting of country limits with sub-limits by maturity and type of business;

- Manage large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography remain within internal and regulatory limits in relation to the Group’s capital base;

- Maintain the Group’s Internal Risk Rating framework;

- Manage watchlisted and criticised asset portfolios and recommend appropriate level of provisioning and write-offs;

- Report to the Group Risk Committee, Audit Committee and the Board of Directors on all relevant aspects of the Group’s credit risk portfolio. Regular reports include detailed analysis of:

- risk concentrations

- corporate and retail portfolio performance

- specific higher-risk portfolio segments, e.g. real estate

- individual large impaired accounts, and details of impairment charges

- country limits, cross-border exposures.

- Specialised management and control of all non-performing assets;

- Manage and direct credit risk management systems initiatives; and

- Interface, for credit-related issues, with external parties including the CBB, rating agencies, investment analysts, etc.

All credit proposals are subjected to a thorough comprehensive risk assessment which examines the customer’s financial condition and trading performance, nature of the business, quality of management and market position. In addition, AUB’s internal risk rating model scores these quantitative and qualitative factors. The credit approval decision is then made and terms and conditions set. Exposure limits are based on the aggregate exposure to the counterparty and any connected entities across the AUB Group. All credit exposures are reviewed at least annually.



3. CREDIT RISK MANAGEMENT (continued)

Counterparty Exposure Classes

The CBB’s capital adequacy framework for the standardised approach to credit risk sets the following counterparty exposure classes and the risk weightings to be applied to determine the risk weighted assets:

Exposure Class Risk Weighting Criteria

Sovereign Portfolio Exposures to governments of GCC (refer table 4 for definition of GCC) member states and their central banks {including International organization and Multilateral Development Banks (MDBs)} are zero % risk weighted. Other sovereign exposures denominated in the relevant domestic currency are also zero % risk weighted. All other sovereign exposures are risk weighted based on their external credit ratings.

Public Sector Entity [PSE] Portfolio

Bahrain PSEs and domestic currency claims on other sovereign PSEs [which are assigned a zero % risk weighting by their own national regulator] are assigned a zero % risk weighting. All other PSEs are risk weighted based on their external credit ratings.

Banks Portfolio Exposures to banks are risk weighted based on their external credit ratings, with a preferential weighting given to short term exposures (i.e. with an original tenor of 3 months or less).

Investment Company Portfolio

Exposures to investment companies which are supervised by the CBB are treated in the same way as exposures to banks but without the preferential short term exposure weighting.

Corporate Portfolio Exposures to corporates are risk weighted based on their external credit rating. Unrated corporates are 100% risk weighted. A number of corporates owned by the Kingdom of Bahrain have been assigned a preferential zero % risk weighting.

Regulatory Retail Portfolio Eligible regulatory retail exposures are risk weighted at 75%.

Residential Property Portfolio

Exposures fully secured by first mortgages on owner occupied residential property are risk weighted between 35%-75% based on applicable regulatory guidance.

Commercial Property Portfolio

Exposures secured by mortgages on commercial real estate are subject to a minimum 100% risk weighting, except where the borrower has an external rating below BB- in which case the rating risk weighting applies.

Equities and Funds Investment Portfolio

Investments in listed equities carry a 100%-250% risk weighting. Unlisted equities are 150%-250% risk weighted.

Investments in funds are risk weighted according to the type of underlying assets.

Past Due Portfolio The unsecured portion of any exposure [other than a residential mortgage loan] that is past due for 90 days or more:

150% risk weighted when specific provisions are less than 20% of the outstanding amount; and

100% risk weighted when specific provisions are greater than 20%.

Holdings of Real Estate All holdings (directly or indirectly) of real estate in the form of real estate companies, subsidiaries or associate companies or other arrangements such as trusts, funds or Real Estate Investment Trusts (REITs) are risk-weighted at 200%. Premises occupied by the bank are weighted at 100%.

Other Assets All other assets not classified above are risk weighted at 100%.

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External Rating Agencies

The Group uses the following external credit assessment institutions (ECAI’s): Moody’s, Standard & Poors and Fitch. The external rating of each ECAI is mapped to the prescribed internal risk rating that in turn produces standard risk weightings.

Basel III Reporting of Credit Risk Exposures

As a result of the methodologies applied credit risk exposures presented under Basel III reporting differs in a number of respects from the exposures reported in the consolidated financial statements.

1. As per the CBB Basel III framework, off balance sheet exposures are converted, by applying a credit conversion factor (CCF), into direct credit exposure equivalents.

2. Under the Basel III capital adequacy framework eligible collateral is applied after applying prescribed haircut, to reduce exposure.

Credit Risk Mitigation

The Group’s first priority when making loans is to establish the borrower’s capacity to repay and not rely principally on security / collateral. Where the customer’s financial standing is strong, facilities may be granted on an unsecured basis, but when necessary collateral is an essential credit risk mitigation.

Acceptable forms of collateral are defined within the Group risk framework and conservative valuation parameters are also pre-set and regularly reviewed to reflect any changes in market conditions. Security structures and legal covenants are also subject to regular review to ensure that they continue to fulfil their intended purpose and remain in line with the CBB’s prescribed minimum requirements set out in their capital adequacy regulations.

The principal collateral types are as follows:

- in the personal sector – cash, mortgages over residential properties and assignments over salary income;

- in the commercial sector – cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees;

- in the commercial real estate sector – charges over the properties being financed; and

- in the financial sector – charges over financial instruments, such as debt securities and equities.

Valuation of Collateral

The type and amount of collateral taken is based upon the credit risk assessment of the borrower. The market or fair value of collateral held is closely monitored and when necessary, top-up requests are made or liquidation is initiated as per the terms of the underlying credit agreements.

Gross Credit Risk Exposures subject to Credit Risk Mitigations (CRM)

The following table details the Group’s gross credit risk exposures before the application of eligible Basel III CRM techniques. The CBB’s Basel III guidelines detail which types of collateral and which issuers of guarantees are eligible for preferential risk weighting. The guidelines also specify the minimum collateral management processes and collateral documentation requirements necessary to achieve eligibility.




TABLE - 2 GROSS CREDIT RISK EXPOSURES

US$ ’000As at

31 December2016

Averagemonthlybalance

Balances with central banks 789,422 1,035,117 Treasury bills and deposits with central banks 2,464,846 2,035,101 Deposits with banks 1,884,493 2,548,915 Loans and advances 18,606,883 18,275,847 Non-trading investments 5,429,578 5,212,129 Interest receivable and other assets 385,700 359,266

TOTAL FUNDED EXPOSURES 29,560,922 29,466,375

Contingent liabilities 3,109,597 3,210,297 Undrawn loan commitments 1,130,419 934,944

TOTAL UNFUNDED EXPOSURES 4,240,016 4,145,241 TOTAL GROSS CREDIT RISK EXPOSURE 33,800,938 33,611,616

The gross credit exposures reported above are as per the consolidated balance sheet as reduced by exposures which do not carry credit risk.

Ahli United Bank136



TABLE - 3 RISK WEIGHTED EXPOSURES

US$ ’000

Grossexposure

Secured byeligible

CRM

Risk weightedexposures after CRM

Capitalrequirement

Claims on sovereigns 4,967,127 - 367,319 45,915 Claims on public sector entities 966,792 - 761,953 95,244 Claims on banks 4,506,531 133,698 1,991,987 248,998 Claims on corporates 18,204,154 1,425,411 16,422,675 2,052,834 Regulatory retail exposures 1,902,416 37,096 1,398,990 174,874 Residential mortgage exposures 1,434,735 - 641,828 80,229 Equity 383,042 - 933,881 116,735 Investments in funds 40,806 - 55,239 6,905 Other exposures 1,155,545 - 1,508,472 188,559

TOTAL 33,561,148 1,596,205 24,082,344 3,010,293

TOTAL CREDIT RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 24,082,344 3,010,293 TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 278,900 34,863 TOTAL OPERATIONAL RISK CAPITAL REQUIREMENT (BASIC INDICATOR APPROACH)* 1,789,913 223,739

TOTAL 26,151,157 3,268,895

* Indicator for operational risk exposure is gross income, adjusted for exceptional items, as per BIA. This approach uses average of adjusted gross income for previous three financial years (USD 954,618 thousands) for operational risk computation.

The gross exposure in the above table represents the on and off balance sheet credit exposures before credit risk mitigations (CRM), determined in accordance with the CBB issued Pillar III guidelines. The off balance sheet exposures are computed using the relevant conversion factors.

Under the CBB Basel III Guidelines, banks may choose between two options when calculating credit risk mitigation capital relief. The simple approach which substitutes the risk weighting of the collateral for the risk weighting of the counterparty or the comprehensive approach whereby the exposure amount is adjusted by the actual value ascribed to the collateral. The Group has selected to use the comprehensive method where collateral is in the form of cash or bonds or equities. The Group uses a range of risk mitigation tools including collateral, guarantees, credit derivatives, netting agreements and financial covenants to reduce credit risk.

The Group has an equity investment in insurance subsidiary, Al Hilal Life B.S.C.(c), which is consolidated at the Group level and its assets are risk weighted as per CBB rules.

Concentration Risk

Refer note 31(a) to the audited consolidated financial statements for definition and policies for management of concentration risk.

As per the CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB’s approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15 per cent of the regulatory capital base. As at 31 December 2016, the Group had no qualifying single obligor exposures in accordance with Central Bank of Bahrain guidelines which exceed 15 percent of the Group’s regulatory capital base.




Geographic Distribution of Gross Credit Exposures

The geographic distribution of credit exposures is monitored on an ongoing basis by Group Risk Management and reported to the Board on a quarterly basis.

The following table details the Group’s geographic distribution of gross credit exposures as at 31 December 2016.

TABLE - 4 GEOGRAPHIC DISTRIBUTION OF GROSS CREDIT EXPOSURES

US$ ’000

Kingdom of Bahrain

State of Kuwait

Other GCC countries *

United Kingdom

Europe (excluding

United Kingdom)

Arab Republic of

Egypt

Asia (excluding

GCC countries)

Rest of the World Total

Balances with central banks 140,225 47,965 - 447,056 - 97,983 56,193 - 789,422

Treasury bills and deposits with central banks 151,026 1,396,752 - 36,851 - 716,386 163,831 - 2,464,846

Deposits with banks 257,792 399,305 185,047 169,172 236,316 32,306 101,554 503,001 1,884,493

Loans and advances 3,472,945 9,402,580 2,719,160 1,286,815 76,578 1,359,711 230,718 58,376 18,606,883

Non-trading investments 883,330 18,563 1,340,505 127,443 454,392 210,075 1,440,229 955,041 5,429,578

Interest receivable and other assets 119,655 74,205 27,667 87,873 22,032 31,852 10,624 11,792 385,700

Total funded exposures 5,024,973 11,339,370 4,272,379 2,155,210 789,318 2,448,313 2,003,149 1,528,210 29,560,922

Contingent liabilities 816,722 1,387,674 303,176 12,373 155,540 376,328 8,157 49,627 3,109,597

Undrawn loan commitments 239,948 88,231 682,037 60,382 12,586 42,492 - 4,743 1,130,419

Total unfunded exposures 1,056,670 1,475,905 985,213 72,755 168,126 418,820 8,157 54,370 4,240,016

TOTAL 6,081,643 12,815,275 5,257,592 2,227,965 957,444 2,867,133 2,011,306 1,582,580 33,800,938

18.0% 37.9% 15.6% 6.6% 2.8% 8.5% 5.9% 4.7% 100.0%

* Other GCC countries are countries which are part of the Gulf Co-operation Council comprising the Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates apart from Kingdom of Bahrain and State of Kuwait which are disclosed separately.

Ahli United Bank138



TABLE - 5 SECTORAL CLASSIFICATION OF GROSS CREDIT EXPOSURES

US$ ’000Funded Unfunded Total %

Balances with central banks 3,254,268 - 3,254,268 9.6Banks and other financial institutions 4,983,743 789,396 5,773,139 17.1Consumer/personal 2,906,297 22,796 2,929,093 8.7Residential mortgage 1,423,193 28,946 1,452,139 4.3Trading and manufacturing 5,163,317 1,540,446 6,703,763 19.8Real estate 5,111,965 155,519 5,267,484 15.6Services 3,670,956 1,227,444 4,898,400 14.5Government/public sector 2,730,631 77,507 2,808,138 8.3Others 316,552 397,962 714,514 2.1

TOTAL 29,560,922 4,240,016 33,800,938 100.0

87.5% 12.5% 100.0%

TABLE - 6 RESIDUAL CONTRACTUAL MATURITY OF GROSS CREDIT EXPOSURES

US$ ’000

Up toone month


Over threemonths to

one year

Over oneyear to

five years

Overfive to

ten years

Over ten to twenty

years

Overtwenty

years TotalBalances with central banks 789,422 - - - - - - 789,422 Treasury bills and deposits with central banks 511,109 807,233 1,146,504 - - - - 2,464,846 Deposits with banks 1,366,861 382,586 84,126 50,920 - - - 1,884,493 Loans and advances 2,340,084 3,500,798 3,343,177 5,066,306 3,323,793 928,181 104,544 18,606,883 Non-trading investments 276,785 256,092 520,504 3,174,463 908,521 262,472 30,741 5,429,578 Interest receivable and other assets 120,458 14,346 92,966 90,281 63,654 3,995 - 385,700

Total funded exposures 5,404,719 4,961,055 5,187,277 8,381,970 4,295,968 1,194,648 135,285 29,560,922

Contingent liabilities 396,519 590,864 1,315,215 752,279 54,720 - - 3,109,597

Undrawn loan commitments 18,653 131,414 211,137 671,940 97,275 - - 1,130,419

Total unfunded exposures 415,172 722,278 1,526,352 1,424,219 151,995 - - 4,240,016 TOTAL 5,819,891 5,683,333 6,713,629 9,806,189 4,447,963 1,194,648 135,285 33,800,938




Impairment Provisions

The Group Risk Committee regularly evaluates the adequacy of the established allowances for impaired loans.

Two types of impairment allowance are in place:

Individually assessed impairment provisions

These are determined by evaluating the exposure to loss, case by case, on all individually significant accounts based upon the following factors:

- aggregate exposure to the customer;

- the viability of the customer’s business model and its capacity to trade successfully out of financial difficulties, generating sufficient cash flow to service debt obligations;

- the amount and timing of expected receipts and recoveries;

- the extent of other creditors’ commitments ranking ahead of, or pari passu with the Bank, and the likelihood of other creditors continuing to support the company;

- the realisable value of security (or other credit mitigations) and likelihood of successful repossession;

- the likely dividend available on liquidation or bankruptcy;

- the likely costs involved in recovering amounts outstanding, and

- when available, the secondary market price of the debt.

Collectively assessed impairment provisions

Impairment is assessed on a collective basis as follows:

Incurred but not yet identified impairment:

Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics. A collective loan loss allowance is calculated to reflect potential impairment losses estimated at the balance sheet date which may be individually identified in the future.

The collective impairment provision is determined based upon:

- historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, risk rating or product segment); and

- judgment as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience.

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TABLE - 7 SECTORAL BREAKDOWN OF IMPAIRED LOANS AND IMPAIRMENT PROVISIONS

US$ ’000

Impaired and past due loans

Specific impairment

provision

*Net specific charge for theyear ended 31

December 2016

Write offduring the

year ended 31 December 2016

Collective impairment

provisionConsumer/personal 72,892 68,186 19,526 19,029 49,164 Trading and manufacturing 109,433 107,216 28,445 98,741 75,313 Real estate 27,975 24,699 557 - 86,475 Residential mortgage 4,241 2,177 - - 24,075 Banks and other financial institutions 4,334 3,705 4,201 4,016 13,623 Services 219,691 164,749 102,687 1,159 59,362 Government/public sector - - - - 3,704 Others 9,538 9,507 1,184 - 5,216

TOTAL 448,104 380,239 156,600 122,945 316,932

*Net specific charge for the year excludes recoveries from fully provided loans written off in prior years.

TABLE - 8 GEOGRAPHICAL DISTRIBUTION OF IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCES

US$ ’000

Kingdom of Bahrain

Stateof Kuwait

Other GCCcountries

UnitedKingdom

Europe(excluding)

UnitedKingdom)

Arab Republic of Egypt

Asia(excluding

GCCcountries)

Rest of theworld Total

Specific impairment provision 45,534 228,398 60,497 6,360 10,000 20,992 8,458 - 380,239 Collective impairment provision 35,314 193,990 25,039 7,327 2,278 50,415 2,014 555 316,932

TOTAL 80,848 422,388 85,536 13,687 12,278 71,407 10,472 555 697,171

TABLE - 9 MOVEMENTS IN IMPAIRMENT PROVISION FOR LOANS AND ADVANCES

US$ ’000Specific Collective

Balance at 1 January 2016 312,013 358,899 Amounts written off during the year (122,945) - Net charge for the year* 156,600 (1,664)Transfers 26,771 (26,771)Exchange rate adjustments / other movements 7,800 (13,532)

Balance at 31 December 2016 380,239 316,932

* Net specific charge for the year excludes recoveries from fully provided loans written off in prior years.




Past Due and Impaired Credit Facilities

As per CBB guidelines, credit facilities are placed on non-accrual status and interest income suspended when either principal or interest is overdue by 90 days whereupon unpaid and accrued interest is reversed from income. Interest on non-accrual facilities is included in income only when received. Credit facilities classified as past due are assessed for impairment in accordance with IFRS guidelines. A specific provision is established where there is objective evidence that a credit facility is impaired.

Impaired credit facilities comprise those facilities where there is objective evidence that the Bank will not collect all amounts due, including both principal and interest. Objective evidence would include:

- a breach of contract, such as default or delinquency in interest or principal payments,

- the granting of a concession that, for economic or legal reasons relating to the borrower’s financial difficulties, would not otherwise be considered,

- indications that it is probable that the borrower will enter bankruptcy or other financial reorganisation,

Refer to notes 8(a) to 8(d) and note 31(c) to the audited consolidated financial statements for the year ended 31 December 2016 for the distribution of the loans and advances portfolio by quality.

Ratings 1 - 4 comprise of corporate facilities demonstrating financial condition, risk factors and capacity to repay that are excellent to good and retail borrowers where cash collateral (or equivalent such as pledged investment funds) has been provided.

Ratings 5 - 7 represents satisfactory risk and includes corporate facilities that require closer monitoring, and retail accounts which are maintained within generally applicable product parameters.

TABLE - 10 PAST DUE AND IMPAIRED LOANS - AGE ANALYSIS

i) By Geographical area US$ ’000Three

months toone year

Oneto three

years

Over threeyears

Total

Kingdom of Bahrain 13,277 32,009 4,152 49,438 State of Kuwait 155,583 108,553 1,963 266,099 Other GCC Countries - 71,173 - 71,173 United Kingdom 8,470 - - 8,470 Europe (excluding United Kingdom) 20,000 - - 20,000 Arab Republic of Egypt 16,747 5,766 1,916 24,429 Asia (excluding GCC countries) - - 8,495 8,495

TOTAL 214,077 217,501 16,526 448,104

47.8% 48.5% 3.7% 100.0%

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TABLE - 10 PAST DUE AND IMPAIRED LOANS - AGE ANALYSIS (continued)

ii) By Sector US$ ’000Three

months toone year

Oneto three

years

Over threeyears

Total

Consumer/personal 27,421 41,151 4,320 72,892 Trading and manufacturing 29,961 78,558 914 109,433 Real estate 27,975 - - 27,975 Residential mortgage 1,915 2,326 - 4,241 Banks and other financial institutions - 4,334 - 4,334 Services 126,134 91,089 2,468 219,691 Others 671 43 8,824 9,538

TOTAL 214,077 217,501 16,526 448,104

47.8% 48.5% 3.7% 100.0%

TABLE - 11 RESTRUCTURED CREDIT FACILITIES

US$ ’000Balance of any restructured credit facilities as at year end 224,287 Loans restructured during the year 134,023

The above restructurings did not have any significant impact on the present or future earnings and were primarily extensions of the loan tenor.

TABLE - 12 COUNTERPARTY CREDIT RISK IN DERIVATIVE TRANSACTIONS

i) Breakdown of the credit exposure US$ ’000

Notionalamount

Grosspositive

fair value

Creditconversion

factorForeign exchange related 5,628,814 52,823 110,111 Interest rate related & options 20,086,432 60,122 103,687

25,715,246 112,945 213,798

Gross positive fair value represents the replacement cost of the derivatives.

US$ ’000ii) Amounts of collateral 16,610

TABLE - 13 RELATED PARTY TRANSACTIONS

Refer note 25 to the audited consolidated financial statements of the Group for the year ended 31 December 2016.



4. MARKET RISKMarket risk is the risk that movements in market risk factors, including foreign exchange rates, interest rates, credit spreads and equity prices will reduce the Group’s income or the value of its portfolios.

Market Risk Management, Measurement and Control Responsibilities

The Board approves the overall market risk appetite and delegates responsibility for providing oversight on the Bank’s market risk exposures and the sub allocation of Board limits to the Group Asset and Liability Committee (GALCO). Group Risk Management is responsible for the market risk control framework and for monitoring compliance with the GALCO limit framework.

The Group separates market risk exposures into either trading or non-trading portfolios. Trading portfolios include those positions arising from market-making, proprietary position-taking and other marked-to-market positions. Non-trading portfolios include positions that arise from the foreign exchange/interest rate management of the Group’s retail and commercial banking assets and liabilities, and financial assets designated as at amortised cost and fair value through other comprehensive income statement.

Each Group operating entity has an independent market risk function which is responsible for measuring market risk exposures in accordance with the Group Trading Book Policy and the Interest Rate Risk in the Banking Book Policy, and monitoring these exposures against prescribed limits.

Market risk reports covering Trading Book risk exposures and profit and loss are published daily to the Bank’s senior management. A risk presentation covering both Trading and Banking Book is also compiled monthly and discussed at the GALCO.

The measurement techniques used to measure and control market risk include:

- Value at Risk (VaR);

- Stress tests; and

- Sensitivities and position size related metrics.

Daily Value at Risk (VaR)

The Group VaR is an estimate of the potential loss which might arise from unfavourable market movements:

VaR Type Sample Size Holding PeriodConfidence

IntervalFrequency of

Calculation“Management” VaR 260 days 1 day 99% Daily

“Regulatory” VaR 260 days 10 day 99% Daily

Daily losses exceeding the VaR figure are likely to occur, on average, once in every 100 business days depending on the confidence interval employed in the VaR calculation (per the above). The Group routinely validates the accuracy of its VaR models by backtesting the actual daily profit and loss results. The actual number of excesses over a given period can be used to gauge how well the models are performing.

Although a useful guide to risk, VaR should always be viewed in the context of its limitations. For example:

- the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;

- the use of a 1-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a 1-day holding period may be insufficient to liquidate or hedge all positions fully;

- the use of a confidence level, by definition, does not take into account losses that might occur beyond the applied level of confidence; and

- VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures.

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4. MARKET RISK (continued)The VaR for the Group was as follows:

US$ ’000Average Minimum Maximum

For the year 2016 310 82 770

TABLE - 14 CAPITAL REQUIREMENTS FOR COMPONENTS OF MARKET RISK

US$ ’000Risk-weighted

exposuresCapital

requirementMaximum

valueMinimum

valueInterest rate risk 188,032 23,504 29,435 20,091 Equity position risk 1,964 246 490 246 Foreign exchange risk 88,568 11,071 12,854 6,910 Options & others 336 42 245 42

TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 278,900 34,863

Interest Rate Risk (non-trading)

Interest rate risk is the risk that the earnings or capital of the Group, or its ability to meet business objectives, will be adversely affected by movements in interest rates. Accepting this risk is a normal part of banking practice and can be an important source of profitability and shareholder value. Changes in interest rates can affect a bank’s earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the Group’s assets, liabilities and off-balance sheet instruments because the present value of future cash flows and / or the cash flows themselves change when interest rates change. The Bank employs a risk management process that maintains interest rate risk within prudent levels.

The Board recognizes that it has responsibility for understanding the nature and the level of interest rate risk taken by the Bank, and has defined a risk framework pertaining to the management of non trading interest rate risk and has identified lines of authority and responsibility for managing interest rate risk exposures.

The Board has delegated the responsibility for the management of interest rate risk to Group Assets Liability Committee (GALCO). GALCO is responsible for setting and monitoring the interest rate risk strategy of the Group, for the implementation of the interest rate risk framework and ensuring that the management process is in place to maintain interest rate risk within prudent levels.

GALCO reviews the interest rate risk framework annually and submits recommendation for changes to the Executive Committee and Board as applicable.

The responsibility for the implementation of the Group’s interest rate risk policies resides with the Group Treasurer. An independent review and measurement of all interest exposure present in the banking book is undertaken by the Group Market Risk team and reported to GALCO on a monthly basis.

Interest rate re-pricing reports are based on each product’s contractual re-pricing characteristics overlaid where appropriate by behavioural adjustments. Behavioural adjustments are derived by an analysis of customer behaviour over time augmented by input from the business units.

The behavioural adjustments are applied mainly for those liabilities with no fixed maturity dates such as current and savings accounts. These adjustments are based on empirical experience, and current account balances are spread over a maximum period of 3 years while savings accounts are spread over a maximum period of 7 years.

Reports detailing the interest rate risk exposure of the Group are reviewed by GALCO and the Board on a regular basis.



4. MARKET RISK (continued)The following table summarizes the re-pricing profiles of the Group’s assets and liabilities as at 31 December 2016.

TABLE - 15 INTEREST RATE RISK

US$’000Less than

threemonths

Threemonths to

one yearOver one

year TotalASSETSTreasury bills and deposits with central banks 1,318,350 1,146,496 - 2,464,846 Deposits with banks 1,860,404 24,089 - 1,884,493 Loans and advances 12,817,218 4,206,182 1,583,483 18,606,883 Non-trading investments 789,694 650,103 3,989,781 5,429,578

16,785,666 6,026,870 5,573,264 28,385,800

LIABILITIESDeposits from banks 3,061,512 214,577 - 3,276,089 Borrowings under repurchase agreements 322,818 375,410 - 698,228 Customers’ deposits 10,211,196 7,899,179 3,521,736 21,632,111 Subordinated liabilities 17,997 218,985 - 236,982

13,613,523 8,708,151 3,521,736 25,843,410

On balance sheet gap 3,172,143 (2,681,281) 2,051,528 Off balance sheet gap (62,428) 2,250,486 (2,188,058)Total interest sensitivity gap 3,109,715 (430,795) (136,530)Cumulative interest sensitivity gap 3,109,715 2,678,920 2,542,390

Interest rate risk sensitivity analysis

The Group’s interest rate risk sensitivity is analyzed in note 33(b) to the consolidated financial statements of the Group for the year ended 31 December 2016.

Equity Risk

Equity risk is the risk of changes in the fair value of an equity instrument. AUB Group is exposed to equity risk on non-trading equity positions that are primarily focused on the GCC stock markets. The Board has set limits on the amount and type of investments that may be made by the Bank. This is monitored on an ongoing basis by the Group Risk Committee with pre approved loss thresholds. The Bank’s equity risk appetite is minimal.

Valuation and accounting policies:

a) Equity investments held for strategic reasons - investments in associates and joint venture

Associated companies are companies in which the Group exerts significant influence but does not control, normally represented by an interest of between 20% and 50% in the voting capital. The Group classifies its investments as joint venture where it is a party to a contractual joint venture agreement. Investments in associated companies and joint ventures are accounted for using the equity method.

Ahli United Bank146



Valuation and accounting policies: (continued)

b) Other equity investments

After initial recognition, equity investments are remeasured at fair value. For investments in equity instruments, where a reasonable estimate of the fair value cannot be determined, the investment is carried at cost less impairment provision.

The fair value of equity instruments that are quoted in an active market is determined by reference to market prices at the close of business on the balance sheet date. For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined using net present valuation techniques.

For accounting policies on equity instruments please refer to note 3.3(c) (v) of the consolidated financial statements.

TABLE - 16 GAINS ON EQUITY INSTRUMENTS

US$ ’000Gains / (loss) recognized in Tier1 Capital (CET1)Unrealized (loss) / gains recognized in the balance sheet (11,019)Realized (loss) / gains recognized in the equity (14,929)

5. LIQUIDITY RISK AND FUNDING MANAGEMENTLiquidity risk and funding management of the Group have been explained in note 35 of audited consolidated financial statements for the year ended 31 December 2016.

Maturity Analysis of Assets and Liabilities

A maturity analysis of cash flows payable by the Group under financial liabilities by remaining contractual maturities at the balance sheet date is shown in note 35 to the audited consolidated financial statements of the Group for the year ended 31 December 2016.

6. OPERATIONAL RISKOperational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events, whether intentional, unintentional or natural. This definition includes legal risk, but excludes strategic and reputational risk. It is an inherent risk faced by all businesses and covers a large number of operational risk events including business interruption and system failures, internal and external fraud, employment practices and workplace safety, customer and business practices, transaction execution and process management, and damage to physical assets.

The Board acknowledges that it has ultimate responsibility for operational risk. Oversight rests with the Group Risk Committee, whilst day to day monitoring is carried out by the Group Operational Risk Committee.

The Operational Risk Management framework has been in place for a number of years and is ingrained in the Group’s culture and processes. The Group has developed a comprehensive ‘Operational Risk Self Assessment’ (ORSA) process.

The Board takes lead in promoting and encouraging a culture of risk awareness and prevention across all areas of the Group. The Group follows a Group Operational Risk Policy approved by the Board. The policy, supported by the Group Operational Risk Framework, aims to ensure that operational risk measures are incorporated into all major aspects of the overall management framework.

The Group Operational Risk Committee is responsible for maintaining an operational risk management framework across the organization. The Committee receives regular reporting on all key operational risk measures. Promptness in resolution of material operational risks identified through Operational Risk Self Assessments and audits are considered as one of the key criteria for performance reviews.

The Group Audit & Compliance Committee assists the Board in ensuring compliance with all regulatory requirements and consistency with best market practices. The Group Audit & Compliance Committee reviews regular reports on all key operational risk measures.

The Group Operational Risk Policy, supported by the Group Operational Risk Framework requires reporting of all material Operational Risk Incidents / Loss Events within a specified period of the occurrence of the event which is followed by an analysis of root cause and its remediation.



6. OPERATIONAL RISK (continued)The Operational Risk Management Policy requires that internal controls are reviewed and enhanced on an ongoing basis in order to mitigate the residual risks identified through the Operational Risk Self Assessments, analysis of operational loss and near miss events and, internal and external audits. In addition, regular reviews of operating procedures also aim to enhance internal controls. The Group’s Human Resources Policy requires that employees are trained regularly so that they are, among others, aware of operational risks and the mitigating controls. The policies require the establishment of appropriate infrastructure and processes for ensuring continuity of business which must be comprehensively and frequently tested for different contingencies.

7. INFORMATION TECHNOLOGY RISKAll computer system developments and operations are centrally controlled and common standard business systems are deployed across the Group wherever possible. Information security is defined through a common ‘AUB Group Information Security framework’ and is executed through various information security processes and controls that support the framework. The Group follows an enterprise wide approach to business continuity to ensure that all identified critical operations, services and systems are recovered in time in the event of a disruption. The Business Continuity Policy is updated annually and the Disaster Recovery and Business Continuity capabilities are each tested at least once a year and critical systems data are continuously replicated at the disaster recovery site.

8. STRATEGIC RISKThe Board supported by Strategic Development Unit and the Group Finance manages strategic risk on an ongoing basis. The Board receives regular performance reports with details of strategic / regulatory issues as they arise.

9. LEGAL, COMPLIANCE, REGULATORY AND REPUTATIONAL RISKSProtecting the Legal, Compliance, Regulatory and Reputational Risks of the Group is of paramount importance and all management and staff are expected to apply highest standards of business conduct and professional ethics at all times.

The Group has a dedicated Legal Department whose role is to identify, and provide analysis and advice on the legal risks.

The department is governed by the Group Legal Policy approved by the Board of Directors, which facilitates the management and control of operational risks from pending legal actions, by performing the following tasks:

- Ensuring compliance with applicable legislation and regulation,- Reviewing and drafting non- standard contracts and related documentation (including amendments to existing contracts) applicable

to the Group,- periodically reviewing the standard contractual documentation of the Bank, and- advising on matters involving legal risk and drafting formal communication relating to legal claims involving the Group.

There are no material litigations / claims against the Group as at 31 December 2016

The Board approved policies, including AUB Group Reputation Risk policy, Communications Policy, Personal Account Dealing Policy, Key Person Dealing Policy, Compliance Policy, Anti Money Laundering policy, Banking Integrity and Whistle Blowing Policy & Procedures and Code of Business conduct policy and such other policies prescribes the required standards of ethical behaviour and personal conduct for all staff (including the Bank’s Directors), and the Board exercises an oversight of these risks through various management functions, including Legal, Risk Management, Compliance, Human Resources and Internal Audit Department.

10. ENVIRONMENTAL RISKThe Group recognizes the importance of environmental and social issues within its risk framework, and has established a Social and Environmental Management System (SEMS) which details the policy, procedures and workflow that will be followed by the Bank and its subsidiaries / affiliates in respect of environmental risk.

The Group continually endeavours to implement effective social and environmental management practices in all its activities, products and services with a focus on the applicable national laws on environmental, health, safety and social issues.

The Group has adopted the Equator Principles (EP), a globally recognized benchmark for managing social and environmental risks in project finance. EP is an arrangement by financial institutions worldwide to adhere to the environmental, health and safety standards while financing projects.

As such the Group will finance projects only when they are expected to be designed, built, operated and maintained in a manner consistent with the applicable national laws.

Ahli United Bank148


APPENDIX I - REGULATORY CAPITAL DISCLOSURESPD 2: Reconciliation of Regulatory Capital

i) Step 1: Disclosure of Balance Sheet under Regulatory scope of Consolidation

There are no differences between the regulatory and accounting consolidation, with both following the line by line consolidation approach as per the IFRS 10 Consolidated Financial Statements without excluding any entity. As mandated by the Central Bank of Bahrain (“CBB”), Loans & Advances and Investments have been grossed up with collective impairment provision, as presented below:

US$ ’000Balance sheet per published financial statements 31,322,484 Collective impairment provision 403,681

Balance sheet as in Regulatory Return 31,726,165

ii) Step 2: Expansion of the Balance Sheet under Regulatory scope of Consolidation

US$ ’000Balance as per

published financial statements

Consolidated PIR data Reference

AssetsCash and balances at central banks 912,924 912,924 Financial assets at fair value through Profit & Loss 982 Treasury bills and deposits with central banks 2,464,846 2,464,846 Deposits with banks 1,884,493 1,884,493 Loans and advances 18,606,883 18,923,815

of which Employee stock incentive program 2,161 2,161 A3 Non-trading investments 5,570,447 5,646,736

of which Significant investment exceeding regulatory threshold 1,998 H1 of which investment NOT exceeding regulatory threshold 5,644,738

Investment properties 132,021 132,021 Prepayments, accrued income and other assets 738,155 747,634

of which Deferred Tax Assets 4,735 G of which MSP 2,146 A4

Investments in associates 326,874 326,874 of which Significant investment exceeding regulatory threshold 13,507 H2 of which Significant investment NOT exceeding regulatory threshold 313,367

Goodwill and intangible assets 474,632 474,632 of which Goodwill 426,561 426,561 E of which other Intangibles (excluding MSRs) 48,071 48,071 F1

Property, plant and equipment 211,209 211,209 of which Software 18,915 F2

TOTAL ASSETS 31,322,484 31,726,165



APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 2: Reconciliation of Regulatory Capital (continued)

ii) Step 2: Expansion of the Balance Sheet under Regulatory scope of Consolidation (continued)

US$ ’000Balance as per

published financial statements

Consolidated PIR data Reference

LiabilitiesDeposits from banks 3,279,038 3,279,038 Customer accounts 21,703,358 21,703,358 Repurchase agreements and other similar secured borrowing 698,228 698,228 Accruals, deferred income and other liabilities 865,376 865,372

of which Deferred Tax Liabilities 1,291 G2 Subordinated liabilities 236,982 236,982

Of which amount eligible for Tier 2 163,063 K Of which amount Ineligible 73,919

TOTAL LIABILITIES 26,782,982 26,782,978

Shareholders’ Equity Paid-in share capital 1,699,825 1,699,825

Of which form part of Common Equity Tier 1 1,699,825 Ordinary Share Capital 1,711,322 A1 Treasury Shares (11,497) A2

Perpetual Tier 1 Capital Securities - AUB Bahrain 400,000 400,000 I Perpetual Tier 1 Capital Securities - AUB Kuwait 200,000 Reserves and Accumulated other comprehensive income 1,801,002 1,801,002

Of which form part of Common Equity Tier 1Retained earnings/(losses) brought forward 587,963 587,963 B Net profit for the current period 570,640 570,640 C1 Share premium 747,583 747,583 C2 Legal reserve 397,792 397,792 C3 General (disclosed) reserves (49,262) (49,262) C4 FX translation adjustment (455,168) (455,168) C5 Unrealized gains and losses from fair valuing equities (11,019) (11,019) C6 Fair value changes of cash flow hedges (23,783) (23,783) C7

Of which form part of Tier 2Fixed assets revaluation reserves 36,256 36,256 M1

Non - controlling interest 438,675 638,675 Of which amount eligible for Common Equity Tier 1 337,304 D Of which amount eligible for Additional Tier 1 174,064 J Of which amount eligible for Tier 2 42,761 L Of which amount Ineligible 84,546

Collective impairment provision 403,681 Of which amount eligible for Tier 2 (Maximum 1.25% of credit RWA) 301,029 M2 Of which amount Ineligible 102,652

TOTAL SHAREHOLDER’S EQUITY 4,539,502 4,943,184

Ahli United Bank150


APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 4: Capital Composition Disclosure Template

US$ ’000Basel III Common disclosure template(For transition period from 1 January 2015 to 31 December 2018)

PIR as on 31 Dec 2016

Amounts Subject To Pre-2015 Treatment Reference

Common Equity Tier 1 capital: instruments and ReservesDirectly issued qualifying common share capital plus related stock surplus 1,695,518 A1+A2-A3-A4 Retained earnings 587,963 B

Accumulated other comprehensive income (and other reserves) 1,176,784 C1+C2+C3+C4+

C5 +C6 +C7 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) 337,304 109,532 D Common Equity Tier 1 capital before regulatory adjustments 3,797,569

Common Equity Tier 1 capital: regulatory adjustmentsGoodwill (net of related tax liability) 426,561 E Other intangibles other than mortgage-servicing rights (net of related tax liability) 26,794 40,192 F1+F2 Deferred tax assets that rely on future profitability excluding those arising from temporary differences (net of related tax liability) 3,444 G1-G2 Cash-flow hedge reserve (23,783) C7 Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 15,508 23,264 H1 + H2 Total regulatory adjustments to Common equity Tier 1 448,524 Common Equity Tier 1 capital (CET1) 3,349,045

Additional Tier 1 capital: instrumentsDirectly issued qualifying Additional Tier 1 instruments plus related stock surplus 400,000 I Additional Tier 1 instruments (and CET1 instruments not included above) issued by subsidiaries and held by third parties (amount allowed in group AT1) 174,064 38,903 J Additional Tier 1 capital before regulatory adjustments 574,064 Total regulatory adjustments to Additional Tier 1 capital - Additional Tier 1 capital (AT1) 574,064

Tier 1 capital (T1 = CET1 + AT1) 3,923,109 Tier 2 capital: instruments and provisionsDirectly issued qualifying Tier 2 instruments plus related stock surplus 163,063 K Tier 2 instruments (and CET1 and AT1 instruments not included above) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 42,761 (21,608) L Provisions & Reserves 337,285 M1+M2 Tier 2 capital before regulatory adjustments 543,110 Total regulatory adjustments to Tier 2 capital - Tier 2 capital (T2) 543,110 Total capital (TC = T1 + T2) 4,466,219



APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 4: Capital Composition Disclosure Template (continued)

RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT 98,352

Of Which: Intangible assets (RW @ 100%) 40,193 Of Which: Significant Investments (RW @ 250%) 58,160

Total risk weighted assets 26,151,157

Capital ratiosCommon Equity Tier 1 (as a percentage of risk weighted assets) 12.8%Tier 1 (as a percentage of risk weighted assets) 15.0%Total capital (as a percentage of risk weighted assets) 17.1%

Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus G-SIB buffer requirement expressed as a percentage of risk weighted assets) 9.0%

Of Which: capital conservation buffer requirement 2.5%Of Which: bank specific countercyclical buffer requirement (N/A) NA Of Which: G-SIB buffer requirement (N/A) NA

National minima (if different from Basel 3)CBB Common Equity Tier 1 minimum ratio (including buffers) 9.0 %CBB Tier 1 minimum ratio (including buffers) 10.5%CBB total capital minimum ratio (including buffers) 12.5%

Amounts below the thresholds for deduction (before risk weighting)Non-significant investments in the capital of other financial entities 70,782 Significant investments in the common stock of financial entities 359,718

Applicable caps on the inclusion of provisions in Tier 2Provisions eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) 403,681 Cap on inclusion of provisions in Tier 2 under standardised approach 301,029

Ahli United Bank152


APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 3: Main features of regulatory capital instruments

1 Issuer Ahli United Bank B.S.C.

Ahli United Bank B.S.C.

Ahli United Bank K.S.C.P.






2 Unique identifier AUBB.BH -

Bahrain Bourses

AUB/818 -

Kuwait Stock

Exchange

ISIN: XS1133289832

/ Perpetual Tier 1

Capital Securities

ISIN:

XS1508651665

/ Perpetual Tier 1

Capital Securities

Series 2011 ISIN:

XS0469091275

2010-1 / Euro

Medium Term Note

Series 2006 Private

Placement

Private

Placement

3 Governing law(s) of the instrument

Laws of Bahrain English Law, except

for the provisions of

subordination which

will be governed by

the Laws of Bahrain

English Law, except

for the provisions of

subordination which

will be governed by

the Laws of Kuwait

English Law English Law, except

for the provisions

of subordination

which will be

governed by the

Laws of Bahrain

English Law English Law English Law

4 Transitional CBB rules

Not applicable Not applicable Not applicable Tier 2 Tier 2 Tier 2 Tier 2 Tier 2

5 Post-transitional CBB rules

Common Equity

Tier 1

Additional Tier 1 Additional Tier 1 NA NA NA NA NA

6 Eligible at solo/group/group & solo

Solo and Group Solo and Group Group Solo and Group Solo and Group Solo and Group Group Group

7 Instrument type Common Equity

Shares

Capital Securities Capital Securities Subordinated

Debt

Subordinated Debt Subordinated

Debt

Subordinated

Debt

Subordinated

Debt8 Amount

recognised in regulatory capital

$1709.7 mn $400.0 mn $164.0 mn $125.1 mn $11.0 mn $17.4 mn $4.4 mn $5.1 mn

9 Par value of instrument (USD)

$0.25 $1000 subject

to minimum of

$200,000

$1000 subject

to minimum of

$200,000

$165.0 mn $1.00 $44.4 mn $4.4 mn $5.1 mn

10 Accounting classification

Shareholders’

equity

Shareholders’ equity Shareholders’ equity Liability –

amortised cost

Liability –

amortised cost

Liability –

amortised cost

Liability –

amortised cost

Liability –

amortised cost11 Original date of

issuance31-May-2000 29-Apr-2015 25-Oct-2016 18-Apr-2011 20-Jan-2010 13-Dec-2006 01-Jul-1996 31-Jan-1985,

30-Apr-198512 Perpetual or dated Perpetual Perpetual Perpetual Dated Dated Dated Perpetual Perpetual13 Original maturity

dateNo Maturity No Maturity No Maturity 15-Oct-2020 20-Jan-2020 15-Dec-2018 No Maturity No Maturity

14 Issuer call subject to prior supervisory approval

NA Yes Yes Yes Yes Yes Yes Yes

15 Optional call date, contingent call dates and redemption amount

NA Call Option: 29-Apr-

2020 at Par/100%;

Tax event at

Par/100%;

Regulatory Capital

Event at 101% (Full

or partial)

Call Option: 25-Oct-

2021 at Par/100%;

Tax event at

Par/100%;

Regulatory Capital

Event at 100% (Full

or partial)

Various financial

& non-financial

Covenants

Early redemption in

case of Tax event;

or various events

of default (Full or

partial )

Various financial

& non-financial

Covenants

NA NA

16 Subsequent call dates, if applicable

NA Every 5 years after 29

April 2020

Every 5 years after

26 Oct 2021

NA NA NA NA NA

17 Fixed or floating dividend/coupon

NA Fixed Fixed Floating Floating Floating Floating Floating

18 Coupon rate and any related index

NA 6.875% 5.500% 6m USD LIBOR

+ 375 bps

3m USD

LIBOR+150 bps

6m USD LIBOR

+ 123 bps

6m USD LIBOR

+ 75 bps

6m USD LIBOR

+ 75 bps

19 Existence of a dividend stopper

NA Yes Yes No No No No No

20 Fully discretionary, partially discretionary or mandatory

Fully

discretionary

Fully discretionary Fully discretionary Mandatory Mandatory Mandatory Mandatory Mandatory



1 Issuer Ahli United Bank B.S.C.


Ahli United Bank K.S.C.P.






21 Existence of step up or other incentive to redeem

No No No No No No No No

22 Noncumulative or cumulative

NA Noncumulative Noncumulative Noncumulative Noncumulative Noncumulative Noncumulative Noncumulative

23 Convertible or non-convertible

NA Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible Non-convertible

24 If convertible, conversion trigger (s)

NA NA NA NA NA NA NA NA

25 If convertible, fully or partially


26 If convertible, conversion rate


27 If convertible, mandatory or optional conversion


28 If convertible, specify instrument type convertible into


29 If convertible, specify issuer of instrument it converts into


30 Write-down feature

NA Yes Yes No No No No No

31 If write-down, write-down trigger(s)

NA Notification by

regulator of Non

viability

without (a) write-

down ; or (b) a public

sector injection of

capital (or equivalent

support)

Notification by

regulator of Non

viability

without (a) write-

down ; or (b) a public

sector injection of

capital (or equivalent

support)

NA NA NA NA NA

32 If write-down, full or partial

NA Fully / Partially Fully / Partially NA NA NA NA NA

33 If write-down, permanent or temporary

NA Permanent Permanent NA NA NA NA NA

34 If temporary write-down, description of write-up mechanism


35 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

Additional Tier 1

Capital Bonds

Subordinated Debts Subordinated Debts All depositors

and creditors

All depositors and

creditors

All depositors

and creditors

All depositors

and creditors

All depositors

and creditors

36 Non-compliant transitioned features

NA No No Yes Yes Yes Yes Yes

37 If yes, specify non-compliant features

NA NA NA Non Viability

Loss Absorbtion

Non Viability Loss

Absorbtion

Non Viability

Loss Absorbtion

Non Viability

Loss Absorbtion

Non Viability

Loss Absorbtion

APPENDIX I - REGULATORY CAPITAL DISCLOSURES (continued)PD 3: Main features of regulatory capital instruments (continued)

Ahli United Bank154


Ahli United Bank156


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