Annual Review 2014 - Burgan

Annual Review 2014

driven by you

1

Burgan Bank S.A.KP.O. Box 5389 Safat 12170State of KuwaitTelephone: +965 2298 8000Fax: +965 2298 8419www.burgan.com

The KIPCO Group is one of the biggest holding companies in the Middle East and North Africa, with consolidated assets of US$ 32 billion as at 31 December 2014. The Group has significant ownership interests in over 60 companies operating across 24 countries. The group’s main business sectors are financial services, media, real estate and manufacturing. Through its core companies, subsidiaries and affiliates, KIPCO also has interests in the education and medical sectors.

Contents

3 Welcome Message

4 Executive Summary

6 Financial Highlights

8 Chairman’s Statement

10 GCEO’s Statement

14 Review of the Year – Kuwait Operation

16 Corporate Social Responsibility Report

22 Corporate Governance and Disclosures

34 Management Team

40 Financial Review

Dar al-Athar al-Islamiyyah, one of Kuwait’s leading cultural organizations, was created to manage activities related to The al-Sabah Collection. The collection includes one of the world’s finest assemblages of arts from the Islamic world. The collection consists of over 30,000 priceless objects, including manuscripts, scientific instruments, carpets, fabrics, jewelry, ceramics, ivory, metalwork and glass from countries such as Spain, India, China and Iran.

This year, the annual reports of KIPCO Group companies each feature a different key ivory artifact from The al-Sabah Collection. The images used within the reports reflect KIPCO’s commitment to protecting and promoting Kuwait’s heritage, while helping to build the nation’s future.

The item pictured here (LNS 7 I) is a lathe-turned and carved elephant ivory box with silver mounts, probably made in Granada, Spain during the 8th century AH /14th century CE. The image is reproduced with the kind permission of The al-Sabah Collection, Dar al-Athar al-Islamiyyah.

2

H.H. Sheikh SabahAl-Ahmad Al-Jaber Al-SabahAmir of the State of Kuwait

H.H. Sheikh NawafAl-Ahmad Al-Jaber Al-SabahCrown Prince of the State of Kuwait

3

Welcome to our Annual Review for the year 2014, a year which solidified our position as a diverse group with a clear cut strategic advantage and sound vision; traits that enabled the Group to continue to build on its previous performances and to further advance its reach in terms of network, services, products, and most importantly in reputation. 2014 has been closed as another ribbon of solid performance despite a complex and less favorable operating environment.

Throughout the year, we had to adapt to severely changing conditions that resulted from political pressures, economic reform or stagnation, and social unrest. As the world changes and powers shift, the business environments are the first to be affected. The resilient model of the Group allowed it to absorb global and regional pressures and to maintain its growing position as a diverse and solid rising financial powerhouse in the Middle East, North Africa and Turkey (MENAT).

The Group delivered on its promises a growth of 207% net profit year on year with an increase of 9% in operating profit before provisions were registered in 2014. As the board and executive management increase their support and push for smart execution of different initiatives across the spectrum of operations and regions, the Group manages to swiftly adapt and further grow in size, operations, and performance.

During 2014, the Group’s performance was recognized both on a regional and international level by highly regarded organizations. On a Group level the bank was

awarded MENA Bank of the Year by “ACQ” and Best Banking Group in Kuwait by World Finance while its operations nailed the International Diamond award for Quality from Business initiatives Directions. The Bank largest division, Corporate Banking was awarded Best Cash Management by Asia Banking and Finance Magazine, while its growing Retail Banking arm was awarded Best Domestic Retail Bank of the year by the same entity. Our strong Private Banking division which recently started its international offices was awarded Best Private Bank in Kuwait for the fourth consecutive year by Capital Finance International. In addition, our young team of Investor Relations won Best Investor Relations award by World Finance; a first in Kuwait. In line with our commitment to high standards in corporate governance and transparency, the Group was awarded the Governance Excellence award by GCC Governance Conference.

Burgan Bank Group’s performance reflects its high commitment to all its stakeholders; shareholders, customers, communities, and employees. The Group aims at achieving calculated and smart growth through excellence, high standards of achievements, and sound flexible strategies. Supported by a strong talented team of banking professionals, Burgan Bank Group is well poised for future success and growth.

We assure the explanations in the report are approved by the board of directors and are comprehensive and based on the published financial statements of the bank and the management’s vision.

Burgan Bank Group

Welcome to our Annual Review for the year 2014

Members of the Burgan Bank Group

driven by you

4

Burgan BankEstablished in 1977, Burgan Bank is the youngest commercial Bank and second largest by assets in Kuwait. The Banking Group is known for its leading position and distinct offering in the corporate, private and financial institutions sectors, as well as having a growing retail bank customer base.

Burgan Bank has five majority owned subsidiaries, which include Gulf Bank Algeria - AGB (Algeria), Bank of Baghdad - BOB (Iraq and Lebanon), Jordan Kuwait Bank - JKB (Jordan, Palestine and Cyprus), Tunis International Bank - TIB (Tunisia), and Burgan Bank - Turkey, (collectively known as the “Burgan Bank Group”).

Key Highlights in 2014

• Solid Operating performance with high adaptability to external pressures.

•Enhanced Risk Position; both asset quality and coverage ratio improving year on year.

•Optimal capital levels under Basel III, supporting calculated growth plans.

•Sustained operating performance with healthy future indication of sound growth.

• Internationalization of businesses under an ongoing Group synergies plan.

•All business lines continue to grow within trajectory beating market and acquiring more market share with profitability.

Burgan Bank 2014 ratings

Rating agency Rating highlights

Standard & Poor’s BBB+ / A2 (Long / Short Term)

Moody’s Bank Deposit Rating A3 / P-2

Capital Intelligence Foreign Currency A- / A2 (Long / Short Term)

Executive Summary 2014

5

Stemming from its resilient business model, Burgan Bank Group developed a flexible strategic approach to deal with increasingly unstable operating environments. As the need for adaptability and resilience to shocks arises, the Group took it upon itself to continue increasing its shareholder value despite whatever comes along the way. 2014, counts as another milestone in this strategic approach, proving that sound execution of strategies pays off with returns for all stakeholders; Shareholders, customers, communities and employees. In 2014, the Group managed to grow consistently within its promises; smartly, tactically, and in most beating competition.

Yet again, we fulfilled on our promises generating tangible results and enabling us to draw a yet clearer trajectory resulting from a track record of consistent and solid performance. The Group was able to enhance its international position during 2014, building on synergies, creating innovative solutions, adding on capabilities and definitely building a performance culture.

During 2014 the Group implemented an optimized new capital plan that puts the Group in compliance with Basel III requirements and to support its further growth plan; a plan that yielded more than KD300 million in proceeds. The plan included the issuance of AT1 bonds in 3Q-2014 -the first of its kind in Kuwait and worth USD500 million; closed through a robust demand from local and international investors which reflected their trust in the Group’s performance and prospects. In addition to the AT1bond issuance, Burgan Bank Grouphas successfully raised capital through a rights issue with the total proceeds of KD102.6 million. The Group has adequate

and efficient capitalization levels combined with improved asset quality and liquidity and the risk to return architecture has played an efficient role in managing and shaping its growth; its balance sheet remains healthy with sound liquidity levels at 30% and with Capital Adequacy ratio at 13.5% as the end of December 31, 2014.

The Group’s performance remains solid with operating income surging to KD 275.7 million registering a growth of 9% while operating profits before provisions soared to register KD 153.5 million also reflecting a growth of 9% year on year. Sustainable growth inertia and diversification of revenue streams are the main characteristics that describe the Group’s performance and direction in the upcoming period.

Burgan Bank Group remains on the right trajectory with all leading indicators pointing in the right direction. During 2015, the Group will continue to push for smart growth, eyeing opportunities and unleashing potential, and focusing on business growth and synchronization within its members whilst operating under sound and heightened levels of international governance and transparency principles.

The 2014 Annual Report provides shareholders with an overview of the Group’s financial and business performance highlights as well as financials and disclosures.

A copy of the annual report can be obtained from www.burgan.com, or also, if you would prefer to receive a printed copy of the annual report, please contact us on +965 2298 8000 or send an email to [email protected]

Return on Tangible Equity(Excluding additional provisions)

+ 28.5%

Return on Opening Equity(before additional provisions, excluding perpetual debt cost)

+ 18.2%+Operating Profit Growth

9.1% +Adjusted Net Profit(Excluding additional provisions)

19.3%

6

Compared to last year, Operating income grew by 9% from KD253.6 million to KD 275.7 million while Operating Profits before provisions soared to register KD 153.5 million also reflecting a growth of 9%. The Group’s net profit for the year 2014 reported at KD 61.8 million while earning per share (EPS) reported at 37.6 Fils.

The strong operating performance during the financial year 2014 amid the complexity in the regional and global operating environment, delivered a continuous solid growth in all business lines translated in profitable market share gains in core market, quality top line earnings and faster than market credit growth. Net interest income grew by 12% while net fees and commission grew by 9% compared to last year. Loans and Advances were up to KD4.4 billion while customers deposits grew to KD4.7 billion registering annual growth of 11% and one percent respectively.

Asset quality improved in 2014 as our non- performing assets (net of collaterals) to gross facilities reduced to 1.5% while coverage ratio (net of collateral) increased to reach 278%. In 2014 we initiated our capital optimization plan that yielded more than KD300 million in proceeds to adjust for Basel 3 requirements and to further support our growth plans. Our Capital Adequacy ratio stands at 13.5% at the end of December 2014 under Basel 3.

The consolidated financials encompass the results of the Group’s operations in Kuwait, and its share from its regional subsidiaries, namely Jordan Kuwait Bank, Gulf Bank Algeria, Burgan Bank – Turkey, Bank of Baghdad, Tunis International Bank, in which Burgan Bank owns a majority stake. Burgan Bank Group has grown in 2014 and has one of the largest regional branch networks with 235 branches across Kuwait, Turkey, Jordan, Algeria, Iraq, Tunis, Lebanon and Palestine.

Financial Highlights

Consolidated balance sheet KD 000’s 2010 2011 2012 2013 2014

Cash and cash equivalents 624,939 567,352 787,468 1,004,290 1,040,563Treasury bills and bonds with CBK and others 466,969 419,079 483,588 583,647 629,819Investment securities 132,578 148,585 311,021 421,402 484,942Total assets 4,147,461 4,551,772 5,972,938 7,154,751 7,751,424Total liabilities 3,608,837 3,986,063 5,353,107 6,534,924 6,795,537Shareholders’ Equity 420,427 447,288 490,725 475,458 660,841

Consolidated Income Statement KD 000’s

Net interest income 106,849 104,577 118,940 165,435 185,538Net fee and commission income 32,623 38,114 38,143 44,623 48,589Operating income 164,873 163,381 190,116 253,559 275,711Operating profit before provision 99,614 101,962 118,934 140,723 153,537Net profit attributable to shareholders 4,655 50,562 55,600 20,102 61,758

Earnings per share (in fils) 3.4 33.7 36.0 12.0 37.6

During 2014, a solid operating and financial performance continues reflecting a faster than market growth almost in all indicators and mirroring the soundness of Burgan Bank’s resilient business model.

7

+Loans and advances(Year on year growth)

11%+Net interest income(Year on year growth)

12%

100

10

102

11

119

12

Shar

eho

lder

s’ e

qu

ity

– K

D m

illio

ns 420

10

447

11

491

12

Tota

l rev

enu

es –

KD

mill

ion

s

165

10

163

11

190

12

Ass

ets

– K

D b

illio

ns

4.1

10

4.6

11

6

12

141

13

475

13

661

14

254

13

276

14

7.2

13

7.7

14

Op

erat

ing

pro

fit

– K

D m

illio

ns

(Bef

ore

pro

visi

on

s)

154

14

8

Dear shareholder,

As the year comes to an end, Burgan Bank Group proudly folds another successful chapter of the Group’s journey. The year 2014, has been registered in the records as yet another celebrated year where the Group has not only met the objectives but also grown in performance, and as culture that nurtures knowledge, innovation, professionalism, and sustainability.

Chairman’s Statement

In 2014, Burgan Bank Group maintained a pioneering position in the way it operates across all levels. The group continues to apply innovative solutions across all operations ensuring that high performance is not just a target but a way of life, a culture, and an instilled belief. The group managed to consistently grow, registering a 9% growth in revenues year on year.

Our loans and deposits grew by 11% and 1% year on year. We have also managed to continue improving our asset quality reflected by improving NPA and NPA coverage ratios. Our market position has also improved with a high operating performance against peers translated into an increased market share in Kuwait that stands at 14% in loans, 15% in revenues, and 19% in net income.

The group solid performance was also recognizable by international bodies. During 2014, Burgan Bank Group won “Best Banking Group in Kuwait” by World Finance, “Best Investor relations in GCC” by World Finance, “Best Cash Management” by Asian Banking and Finance, “Best Domestic Retail bank” by Asian Banking and Finance magazine, “Best Private Bank in Kuwait” by CFI Capital Finance International, and “The Eurostar for Quality” by Business Initiative Directions.

We are continuing to reap the benefits of diversifying into faster growing markets; our international operations now contribute to 53% of group’s revenue. Our Brand position continues to be on the rise and now is regarded as one of the strongest banking brands in the region.

To sustain this high performance and to comply with the new Basel 3 requirements, we have opted for an innovative capital optimization plan that yielded more than KD300 million in proceeds. The plan included beside other activities, the issuance of AT1 bonds in 3Q-2014 -the first of its kind in Kuwait- worth USD500 million; closed through a robust demand from local and international investors which reflected their trust in our performance and prospects. In addition to the AT1bond issuance, we have successfully raised capital through a rights issue with the total proceeds of KD102.6 million. The process was oversubscribed by our existing shareholders which is also considered as a reflection of their trust in Burgan Bank Group.

Financial year and performance Executive Summary - Pages 4 - 6

Summary on new/halted activities at end of year

Review of the Year - Kuwait Operations. Pages 14 - 15

Summary of events following financial year

Group Chief Executive Officer Statement - Pages 10 -12

Summary of financial indicators Financial Highlights - Pages 6 - 7

Recommended Dividends payout as per the agenda of Annual General Assembly

Consolidated Financial Statements - Note 18 in Page 92

Board of Directors Remuneration Governance & Disclosure Report - Page 28

Summary on Stock Option Scheme N/A

The 2014 Annual Report includes the following disclosure clause as they are considered inclusive to this Report:

9

Corporate Social Responsibility Burgan Bank Group focuses and believes in its Corporate Social Responsibility as form of giving back, not just to its communities but to all stakeholders. The diligent, consistent, and continuous efforts that we put collectively definitely reflect this commitment. We take pride in our programs and activities and we ensure that high standards of social responsibility are applied across all spectrums. Corporate Social responsibility is a commitment which we reaffirm every year as we consider our community an important part of our existence and a reflection of ourselves and thus we celebrate our success through giving back.

Our support and high commitment to giving back to our communities stems from our corporate values of trust, progression, excellence, and commitment; values which are reflected in the way we conduct business as well.

I am proud of our efforts during 2014 and in general. Our aim of contributing to our social, economic, and educational development and to that of being an active member of our communities is achieved year on year as we continue to build on our work and achieve our ultimate aim of sustainable development.

On behalf of the board, I would like to extend my warmest gratitude to you, our shareholders, and to the hard work and contribution exerted by our employees as well as to the executive management team for their leadership and prudent execution of our strategy. We expect nothing less from a body of talented, experienced, and dedicated professionals.

Best Regards,

Majed E. al-Ajeel Chairman of the Board

Board of Directors

Mr Majed E. Al AjeelChairman

Mr Mohammed A. Al BisherVice Chairman

H.E. Abdul Kareem A. Al KabaritiBoard Member

Mr Faisal M. Al RadwanBoard Member

Mr Masaud M. J. HayatBoard Member

Mr Samer S. KhanachetBoard Member

Mr Sadoun Abdulla AliBoard Member

Mr Pinak P. MaitraBoard Member

Mr Abdul Salam M. Al BaharBoard Member

“We are continuing to reap the benefits of diversifying into faster growing markets.”

10

Dear Shareholders,

The financial year 2014 can be described as a year of optimization and alignment to new regulations. Burgan Bank group continued to reap the benefits of its resilient business model, its performance culture and its focused execution. The Group managed to achieve projections and aims set at the end of 2013 despite the escalation of numerous unfavorable operating conditions that 2014 witnessed.

GCEO’s Statement

Burgan Bank Group’s solid performance delivered a faster than market growth almost on all indicators amid a backdrop of markets volatility, regulation changes and geopolitical pressures. With oil prices plummeting, EU zone at risk of deflation and the intensifying geopolitical turmoil in the region, all casting its shadow on GCC economies and resulting in a growth slowdown, Burgan Bank Group’s resilient business model has been put into a test and has proven successful.

For the 2014 financial year, the Group’s operating income grew faster than the market as it registered a 9% year-on-year growth reaching KD 275.7 million versus an average growth of local conventional peers of 3% whilst operating profit before provisions grew as well by 9% year-on-year reaching KD153.5 million with peers averaging a growth of 3% as well. Reported net income reached KD 61.8 million and earning per share reached Fils 37.6.

Having said that, I would like as the CEO of the group to share with you some reflections that I believe it will give you as a shareholder a better picture of the underlying results of our resilient business model and performance levers:

• Profitability: The group’s underlying earnings (earnings excluding provisions adjustments) for the past three years have been growing steadily and consistently year-on-year. This growth was mainly realized through a smart growth in balance sheet leading to high quality top line earnings, pragmatic focus on efficiencies across the board and our genuine care of customers. The Group’s underlying net income stood at KD 72.9 million in 2012, KD 72.7 million in 2013 and KD 86.7 million before perpetual cost in 2014. This solid performance translated in improved underlying returns to shareholders. Return on opening equity (before additional provisions), stood at 16.3% in 2012, 14.8% in 2013 and 18.2% in 2014 (excluding perpetual debt cost). While returns on tangible equity, also excluding precautionary provisions, reached 26.5% in 2012, 23.3% in 2013, 28.5% in 2014.

11

• Asset Quality: The asset quality and since the beginning of our turnaround in 2011 has significantly improved reflecting a sound risk management culture that is fully integrated within our growth strategy and that enables us to strike the risk/reward balance. Our Non-performing Assets, net of collateral, to gross facilities stands at 1.5% while our coverage ratio stands at 131% and at 278% net of collateral.

• Capital Optimization: By December 31, 2014, the new regulations regarding capital requirements became effective. The impact to adapting to the new regulatory requirements led us to reconfigure our funding structure. The group’s continuous capital optimization planning has enabled us to support regulations especially those under Basel 3. Our capital plan to deal with the regulations affecting us in 2015 went into action since 2012 as the Group introduced the first local currency debt instrument (subordinated debt) and the biggest in terms of tenor and size. In 2014, the group also introduced the first hybrid instrument (AT1 bonds) in the Gulf to be issued by a commercial bank. In addition, the Group sold treasury shares in 2014, had rights issuance in 2014, as well as risk-weighted assets optimization. Tapping the capital markets locally and internationally with innovative instruments that were well received by the investment community.

• Diversifications: The group’s diversification benefits are evident through the increasing contribution of the international operations to the group’s earnings and balance sheet growth. International operations contribute 51.7% as reported to the group’s net interest income, 52.6% to the group’s non-interest income and 44.4% as reported of group’s assets. All of our subsidiaries are profitable despite the regional challenges making Burgan Bank as the most international Kuwaiti Bank.

• Management: We enjoy the benefits of one of the most stable management teams. The diversified pool of talents in the Group has enabled us to institute a performance culture that is delivering such consistent and solid growth through a focused execution and simple organization structure yielding agility and speed.

With this reflection that sets the context of our resilient business model and what it offers as a strong foundation for future growth, I would like to share with you the 2014 highlights of each operation:

Kuwait Operations:

In 2013, we have aimed to grow our market share in the core market with profitability. In 2014, we have managed to do that as we grew by 6% in loans in line with our strategy of optimizing our funding sources while we maintained a high liquidity ratio of 30.4%. In addition, our market share grew to 15% in revenues and 19% in net income despite the stagnant local economy due to the slow implementation of development plans and the drop in oil prices. This growth has been achieved by enhancing our existing product suite, the introduction of new products, packages and services, the focus on a rigorous sales culture and the continuous improvement in customer experience across all touch points. All business lines of Kuwait’s operations are profitable and continue receiving international recognition by renowned organizations such as “Best Corporate Bank” by World Finance, “Best Private Bank” by CFI, “Best Retail Bank by Asian Banking and finance review, “Best Cash Management” by “Asian Banking & Finance”.

International Operations:

As the most diversified commercial bank in Kuwait, Burgan Bank Group with a network distributed over 7 countries through five subsidiaries and a branch network of 235 branches, our franchises are on track and are steadily growing despite geopolitical, economic and regulatory pressures.

In Turkey, the turnaround of the franchise that we have aimed for once we acquired our subsidiarity has been achieved and Burgan Bank Turkey now is on right trajectory. During 2014, The Turkish operation grew its revenue and operating profit by 21.4% to reach KD 45.4 million and by 120.5% to reach KD12.6 million respectively. Loans grew by 31.7% to KD889 million and total deposits grew by 35.5% to KD 841 million. Burgan Bank Turkey is considered as one of the main growth engines of the group going forward.

”Tapping the capital markets locally and internationally with innovative instruments that were well received by the investment community”.

12

In Jordan, Jordan Kuwait Bank managed to achieve positive milestones during 2014 despite the increased instability in neighboring countries and the influx of refugees that cast its shadow on the local economy. Jordan Kuwait Bank managed to increase its loan book by 2.2% to reach KD 538 million while growing its total deposits by 6.1% to reach KD778 million and increasing revenue by 6.7% reaching KD 53.8 million. Also, Jordan Kuwait Bank has managed to introduce significant improvements to its technology and operations infrastructure such as the successful launch of its new Core Banking System, the renovation of branches and the expansion of its ATM network.

In Algeria, Gulf Bank Algeria was able to maintain a steady growth despite slowing economic performance due to lower FDIs and falling energy prices. During 2014, the Bank grew at a rate that is faster than the market and faster than the bank’s expenses despite, in addition to the economic conditions, the KD10.7 million in forgone revenues in 2014 that resulted from regulatory changes. Gulf Bank Algeria grew its loans by 15% reaching KD 332 million and its total deposits by 19.6% reaching KD 451 million. Revenues grew by 36.4% after regulatory change adjustment in FY 2013 reaching KD37.2 million and operating profit grew by 48.6% after regulatory change adjustment in FY 2013 reaching KD21.3 million. Leading indicators suggest that Gulf Bank Algeria together with Kuwait and Turkish operations remains as the group’s main growth engines.

In Iraq, during 2014, Bank of Baghdad has opted for a defensive strategy amid the security turmoil that Iraq is witnessing clubbed with the declining oil output and prices. With a balance sheet that is mainly placed in government securities and a small loan portfolio, asset quality remains in comfortable position. During 2014, Bank of Baghdad Revenues stood at KD14.3 million and operating profit stood at KD 7.6 million.

In Tunisia, Tunis International bank managed during 2014 to grow its loan book to KD 8.4 Million and total deposits to KD 123 million. Revenues stood at KD 6 million while operating profit reached KD3.8 million.

As the financial year 2014 has ended, I would like to close my letter with the following considerations that may help anticipate the way forward:

• ThestrongfoundationofBurganBankGrouphas delivered consistent financial performance, attractive returns to shareholders and improved market position. A foundation that is led by a stable, experienced and diverse management team.

• Aprudent,soundrisk/returnbalanceapproachhasenabled us to pursue a selective growth focus, apply a disciplined credit approval process, and continue improve our asset quality.

• Ourimprovedcustomeracquisition,geographicdiversification and Burgan Bank Kuwait capabilities are our levers for future growth.

Sincerely,

Eduardo Eguren Group Chief Executive Officer

“During 2014, the Bank grew at a rate that is faster than the market and faster than the bank’s expenses.

14

Review of the Year – Kuwait Operations

Corporate Banking Group

Corporate Banking, the biggest contributor to Kuwait’s operations, remains a powerful driving force in Kuwait operations. During 2014, the Corporate Banking team continued to expand its performance during stagnant local operating conditions and in an already saturated and highly competitive market. A high focus on sales and services culture has enabled the Corporate Banking Group to expand its client base earning a strong credit growth of 13% compared to 2013 with asset quality improving as Corporate NPAs were reduced by 3% year on year.

Corporate Banking has financed projects worth KD 900 million during the year. These projects are under various sectors and activities such as construction, maintenance, infrastructure, services, oil, marine and real estate development.

Corporate Banking continues to remain the largest contributor achieving 78% in performance of Kuwait for 2014. In addition, the Corporate Banking group has engaged locally and internationally across all sectors. Cash Management under Corporate Banking Group won the ‘Best Domestic Cash Management bank of the year’ award from Asian Banking and Finance’s Wholesale Banking Awards 2014.

Financial Institutions: The Financial Institution Division activities during 2014 continued to focus on increasing and enhancing core business portfolios in syndicated loan participation and trading, trade finance, banking and other financial institutions transactions. Underlying net profit from Financial Institution Division grew by 32% year on year through better risk appetite management.

Loan Syndications and Trading: Additional assets sourced in primary and secondary of nearly US$50 million were added to the loan portfolio and included new markets such as Azerbaijan, Panama and a Trans-national African Institution, where Burgan Bank participated as a mandated lead arranger in primary syndication. Bilateral Loans amounting to US$140M were extended for a further period.

Banking: Additional unfunded trade risk participations of over US$600 million were added to the portfolio on South East Asia, Indian Sub-continent, GCC and Turkey. Financial Institution Division also assisted subsidiary banks in Iraq and Turkey with Trade issuances and supported secondary risk of Group Banks in addition to providing leads for Guarantee issuances into network countries. During the year, the Division arranged facilities for more than 250 Banks globally thus enhancing Burgan Bank’s transactional abilities in Treasury, Trade Finance and Correspondence Banking.

Non-Banking Financial Institutions: Participated in syndications favoring the Oil & Gas sector, both locally and abroad, in addition to granting new facilities for the Investment and Insurance sectors in Kuwait. the division is also concentrating on new liabilities to improve liquidity profile of Burgan Bank.

Private Banking Group

Our highly successful award-winning Private Banking Group, under its new management, is being internationalized with a vision. As the division launched its international arm with the launch of the International Desk initially for Turkey and then across the Group, its services become more integrated within the Group members and grow not just in its offering but also to adhere to an international standard of wealth management and Private banking services. As its services grow in complexity, the team’s capability has also been elevated to include specialized relationship managers and investment consultants, a high added value to the already diverse and professional team of driven relationship managers. In 2014, Private Banking’s combined asset/liability book has reached almost KD 1 Billion, with a net contribution of KD14.7m in net profits. Loans grew by 27%. Achievements across the Private Banking operations were recognized as they were awarded the Best Private Banking in Kuwait for the fourth consecutive year by Capital Finance International.

Kuwait operations remained on a growth momentum, acquiring higher market share with profitability, outperforming previous years, and utilizing opportunities both locally in Kuwait and within the Group.

15

Treasury

The Treasury Group has performed well during 2014, working through subsidiary syndication and inter-group initiatives providing interest rate, currency and liquidity management. Treasury is enhancing its products and services line to provide competitive edge to its clients. The Treasury Group has launched a new FX platform which elevated the level of services offered to clients and opened a doorway of potential opportunities within the Group and to its client base as well. With reference to its Money Market, the Group has managed to add clients in both local and international markets through providing attractive products and services.

Investments

In the Investments Group, Burgan Equity Fund has generated a 3.63% alpha over the KSE Weighted Index in 2014. The Burgan Equity Fund was recognised by Zawya Reuters as a top performer among local equity funds. The success of the fund is attributable to its successful asset management strategy combined with efficient liquidity management. In addition to the Asset Management function, the Investment Group also contributes to Burgan Bank Group by continuing to generate good performance from managing a diversified proprietary investment portfolio consisting of various asset classes and defined sub portfolios with acceptable risk/reward targets in line with the Bank’s investment philosophy.

Retail Banking Group

One cannot exclude the noticeability rising Retail Banking Group. The Group’s 2013 revamp has paid off during 2014, as the business grew by 10% in terms of credit growth, contributing 17% of revenues to Kuwait’s operations. 2014 was a year of concentrated activities for Retail banking which led to growth in customer acquisition at over 10%. The group has been awarded as “the best domestic retail bank of the year” by Asian banking and Finance magazine for the second consecutive year. The brand has been also shortlisted and recognized as a top retail banking brand for customer satisfaction by the annual “service hero survey” in recognition of its efforts in delivering exceptional services to our customers. Some of our product offerings went through enhancements in 2014 to provide our clients with competitive and attractive packages. The credit cards product line witnessed a new addition to its portfolio through the launch of the Qatar airways cobranded card which was marked as another milestone for retail banking due to its innovative features and the competitiveness of its benefits in comparison to other cobranded cards in the market. Retail banking has also gone through many process enhancements to its services in terms of efficiency of processes, speed, and delivery to customers and exclusive service offerings. In terms of services, the call center, Customer Relationship management CRM systems have also witnessed massive technological and process improvements with an elevated customer service focus in mind. The Retail Banking group continued to grow its asset book sensibly by forging new connection with new segments such as the SME which is growing steadily as well as the expansion of its presence in retail outlets.

16

Corporate Social Responsibility – 2014 Report

Solid Governance

Burgan Bank’s resilient execution of the group strategy and successful business model has continued to yield good performance across the markets in which it operates from. Backed by a committed workforce, leading financial indicators still point to the right direction and continue to position the Group for smart growth.

Investor Relations - Shafafiya 2014 – ‘Promoting Corporate Fairness, Transparency and Accountability’

Burgan Bank held its annual Al Shafafiya Investor’s forum following the bank’s annual general assembly meetings, in which members of the board presented Burgan Bank’s financial earnings report for the year ended December 31, 2013 and agreed to a payout of 7 fils as cash dividends while also distributing bonus shares of 7% to registered shareholders .

The strong operating performance during the financial year 2013 delivered a continuous solid underlying growth in all business lines. Given 2013’s financial and economic uncertainty, the group managed to maintain its strength and significantly improve underlying profitability, asset quality, liquidity and market position.

The Shafafiya Forum is an annual event that is held amongst Kuwait Projects Company’s (KIPCO) subsidiaries, and reflects a strong corporate governance practice, which promotes corporate fairness, transparency and accountability. The forum provides an ideal gate to discuss financial reports and outlook as well as market predictions openly with shareholders.

Investor Relations Award - ‘A Sound Corporate Governance Philosophy’

Portraying Burgan Bank’s transparency strategy is a crucial element to continue its significant performance. In 2014, Burgan Bank won the ‘Best Investor Relations in GCC’ award from World Finance, one of the world’s leading financial publications. The recognition paid tribute to the bank’s role within the Gulf realm for its excellence and contribution to accelerate the development of the region. The award resembles the bank’s healthy and evolving investor relations discipline and its continuous efforts to advocating efficient capital markets and best practices.

Awards - ‘Translating Goals into Global Achievements’

Excellence is one of the Bank’s four key values and Burgan Bank continually strives to maintain the highest standards in the industry.

2014 was a fruitful year of accomplishments for the bank as a group on both a local and regional front. The bank won several prominent awards such as the “Best Domestic Retail Bank of the Year” award from the Asian Banking and Finance Magazine, for the second consecutive year, “Best Private Bank in Kuwait” award by Capital Finance International, for the third consecutive year, the prestigious “International Diamond Star for Quality” award from Business Initiative Directions (BID), for the second consecutive year. The bank also won the coveted ‘Best Domestic Cash Management Bank of the Year” award from the Asian Banking and Finance Magazine’s Wholesale Banking Awards 2014.

Furthermore, Brand Finance, an affiliate of the prestigious international financial publication “The Banker” had re-affirmed Burgan Bank brand rating as AA with a positive outlook and declared Burgan Bank has the highest rated banking brand in Kuwait. The bank witnessed an increase in its total brand value which stood at USD 234 million compared to $199 million in 2013. Burgan Bank’s brand ranking has jumped 43 positions in the top 500 banking brands worldwide.

Burgan Bank’s overall approach to Corporate Social Responsibility (CSR) begins with a key element; that, as a Kuwaiti company, its brand name, values and work ethics should be on par with the necessities of the Kuwaiti society and with those of the people who rely on the bank.

Awards Ceremony

17

Burgan Bank is strongly committed to the maintenance of a solid Corporate Governance structure practice and framework.

The Bank’s Board has a responsibility to protect and enhance the value of the Group in the interests of both shareholders and the Group. The Board is the overall and final body for all decision-making within the Bank. The governance practice at Burgan Bank has been designed to ensure that the bank is effectively managed and that financial industry standards and the Kuwait Stock Exchange and Central Bank statutory obligations are met.

Highlighting the bank’s efforts in maintaining a solid Corporate Governance strategy and strong capabilities in adhering to modernized governance systems, Burgan Bank won the first “Excellence in Governance” award during the 2014 GCC Governance Conference. The award signified the bank’s implementation of and compliance with corporate governance principles throughout its operations and among its subsidiaries.

Since 2007, Burgan Bank has been recognized by the Hawkamah Institute for Corporate Governance as one of the leading banks in the MENA region for the implementation of best practice corporate governance methodologies.

Performance Culture - ‘Human Capital. Our Most Valuable Asset’

Burgan Bank strives to create a culture that not only nourishes employee’s expertise, but is also customer focused, collaborative and growth oriented. This culture is an integral part of daily work and a key component in recruitment, selection, learning and development and the performance evaluation of our employees.

Burgan Bank’s human capital is its most valuable asset. The bank aims to build a competitive advantage by enabling employees to realize their potential and that of their teams and to nurture and aid the growth of potential leaders. For that, the bank offers a range of initiatives to develop employees and strengthen its workforce capability.

Town Hall Gathering - ‘Acknowledging Success within’

Maintaining a solid internal communication strategy is crucial to the bank’s growth plans. The bank’s overall approach in investing in its internal audiences is backed by the aim of nurturing a culture of open dialogue, harnessing skills, and creating credible proud brand ambassadors.

Burgan Bank held its yearly gathering event at the Salwa Sabah Al Ahmad Al Sabah hall and was attended by Burgan Bank’s Chairman, Mr. Majed Essa Al-Ajeel, Group CEO, Mr. Eduardo Eguren, staff members, senior executive management, as well as representatives from the Bank’s regional subsidiaries.

Employees were engaged by receiving latest updates on the key highlights of the bank’s performance over the course of the year 2013 from the Group CEO along with key highlights on the way forward. Burgan Bank’s Chairman commended the employees on transforming the youngest local commercial bank to an active overseas operator.

Burgan Bank Group currently boasts of a wide network that spans over eight countries with 235 branches, all of which are the driving force of the bank’s business.

Driven From Within Leadership Certificate Program

In efforts of leading, supporting, and inspiring teams to achieve business goals, Burgan Bank launched the ‘Driven from Within’ Leadership for Supervisors Certificate training program specially customized to meet Burgan Bank employees’ requirements in cooperation with American University of Kuwait’s Center of Continuing Education. The 2 –week leadership development program catered to 40 Burgan Bank mid-level managers and supervisors.

The Annual Al Shafafiya Investors forum Town Hall Gathering

18

Employees Induction Program - ‘Engraving in - depth Banking Knowledge’

As part of its corporate strategy, Burgan Bank has forever been committed to hone new recruits’ skills through several training programs to continue building excellent service quality. The bank organized an induction program for a new batch of recruits, which was designed by the bank’s Human Resources and Development department to help new employees gain valuable insights of the functionality of each division in the bank. The training program underlined some of the important topics in relation with the banking industry like risk management, selling skills, Burgan Bank’s products and services, Burgan Loans (Credit Policy), Foreign Exchange and Money Market in addition to developing interpersonal skills when dealing with the general public.

As a leading financial institution, Burgan Bank will continue attracting and retaining national cadre in the private sector, by investing to develop employees’ skills.

Stakeholders Affairs

Burgan Bank’s support to the wider community is of utmost importance across its daily work. As one of the leading local as well as regional financial institutions, the Bank caters for different segments in the society to be able to tell their unheard stories and showcase their creative talents.

International Women’s Day - ‘Honoring National talent’

As part of Burgan Bank’s long standing social responsibility framework, every year, the bank looks forward to honoring women from different fields who have invested in the overall development of Kuwait and forged the way for others to join in the country’s economic and cultural efforts. To that effect, Burgan Bank celebrated International Women’s day at the Chairman’s Club to honor women of different statures for their unique contributions as a whole.

Representing this special occasion amongst the Burgan Bank staff and Kuwait Projects Company (KIPCO) personnel were Al-Sheikha Shaikha Al-Abdallah Al-Sabah, Chairperson/Honorary President of Kuwaiti Handicapped Sports Club for the Disabled and Mrs. Dalal Al-Ghanim, General Manager of the Chairman’s Club.

‘BuBa kids account Girgean Celebration - ‘Sharing the blissful spirits of a Holy Month’

This year, Burgan Bank celebrated the joyful mood of Girgean with its young BuBa kids account during a one day Girgean celebration which was held at the Discovery. The event witnessed a large turnout by children and their families who enjoyed a wide array of fun-filled activities. As an integral part of Ramadan and Kuwaiti culture, Burgan Bank was keen to organize its Girgean event to keep children entertained. During the event, the bank distributed sweets and chocolates, while children enjoyed interactive activities, entertainment shows and competitions.

‘BuBa National Day Photography competition - ‘Encouraging creativity within young talents’

In celebration of Kuwait’s National and Liberation days, Burgan Bank held a nationwide photography competition to showcase creativity and originality in spirit of the joyful days. The competition gathered all the BuBa kids account holders to take pictures that express the celebration of the National and Liberation days.

KIPCO Media Dinner - ‘Demonstration of gratitude to an integral stakeholder’

As part of its Media Relations activities and by its belief in the importance of the Media role in Society, KIPCO hosted a media gathering and dinner in 2014 on behalf of its operating companies to thank the media and acknowledge their efforts, support and role in the society.

Driven From Within Leadership Certificate Program

International Women’s Day

19

The media event was attended by the local media. Burgan Bank as a subsidiary of KIPCO was represented by its Corporate Communications team and maintains an on-going dialogue with both local and regional media. Apart from which the bank conducted periodical visits to publication houses to gain an in-depth understanding and thank the local media landscape.

Corporate Citizenship

Burgan Bank’s overall approach to social responsibility begins with a key element; that, as a Kuwaiti company, its brand name, values, and work ethics should be on par with the necessities of the Kuwaiti society and with those of the people who rely on the Bank.

Kuwait Cancer Control Center Contribution - ‘Making a lasting difference in people’s lives’

Due to the alarming number of cancer patients in Kuwait and corresponding demand for high quality information about varied cancer illnesses, Burgan Bank financed the production of 41 cancer brochures developed by KCCC experts in collaboration with the Princess Margaret Cancer Centre, Toronto, for KCCC patients. With an ongoing objective to make a lasting difference in people’s lives, the bank provided descriptive and educational brochures for its visitors and patients that contain treatment phases and therapies for the different types of cancers, diets to follow, doctor’s appointment reviews, details about the center and its operations and other information. The bank visited the KCCC premises to view the brochure displays. The displays have been set up in KCC buildings, including Hussain Makki Juma Center for Specialized Surgery, Sheikha Badriya Al Sabah Medical Oncology Building, Faisal Sultan Ibn Issa Diagnostic Imaging Center, and Yacoub Behbehani Laboratory Building and Bone Marrow Transplantation Center.

Supporting the Kuwait Association for the Care of Children in Hospital’s activities - ‘A long-standing Humanitarian Commitment’

Burgan Bank reiterated its commitment to the community by rendering its support to the Kuwait Association for Care of Children in Hospitals (KACCH). This is an ongoing commitment which is now in its 13th year. Supporting healthcare initiatives has been an integral part of Burgan Bank’s Corporate Social Responsibility framework and

Corporate Citizenship program, Burgan Bank is proud to be a benefactor towards such leading medical projects, and KAACH’s humane initiatives.

Burgan Bank is a firm believer of creating a lasting difference, thus, over the past 12 years; Burgan Bank maintained its contributions to support the development of healthcare within pediatric facilities at various health institutions. By doing so, Burgan Bank is assuring that children and their families are receiving fundamental treatments to recover from fatal and terminal illnesses.

Blood Donation Drive - ‘A philanthropic obligation’

Burgan Bank organized a Blood Donation drive at its headquarters for its own employees. The Blood Donation drive in partnership with the Blood Bank in Kuwait took place under the theme of “You too can save a life”, and was aimed at raising awareness on the need for blood and the difference it can make in people’s lives plus shed the light on the importance of donating blood all year long to support the Blood Bank.

The Great British Week - ‘Strengthening multicultural and economic ties’

With an overall objective of highlighting the bilateral relationship between Kuwait and the United Kingdom, Burgan Bank provided a silver sponsorship of the Great British Week campaign and golden sponsorship of the campaign’s British Lecture series that took place at in Kuwait. The event aimed at attracting high profile business leaders, high-net worth Kuwaitis to invest and do business in the UK as well as encourage potential students to study there.

The Great British Week sought to bring the essence of trade and culture to the Kuwaiti public by featuring events from fashion, celebrations of food, sport, British film, business networking lectures and a showcase of British technology.

Supporting the Kuwait Association for the Care of Children in HospitalsKIPCO Media Dinner

20

Indian Doctors Forum - ‘Supporting Innovation to find Creative and Sustainable Solutions’

For the third year running, Burgan Bank provided its main sponsorship of the annual Indian Doctors Forum Mega Cultural Event in launching their new IDF Health Guide. The bank’s support reflected its mission to educate the public on the rising progress in the field of advanced medicine. Additionally, the health guide was published with a fundamental theme entitled ‘Imaging – The Eye of Medicine’. The event was held under the patronage of His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, and was attended by Deputy Minister of Amiri Diwan Affairs Sheikh Ali Al-Jarrah Al-Sabah as well as the Indian Ambassador, Burgan Bank received a token of appreciation during the event for the bank’s annual support of in publishing the annual health guide.

12th International Jewelry Exhibition

Burgan Bank is constantly committed to providing support to associations which continuously promote trade and commerce activities across the country while also drawing attention to local, regional and international culture and business tourism. For this reason, the bank sponsored the 12th Jewelry Exhibition for the sixth year has shown great success. As part of its continued commitment to provide ease and convenience, the bank facilitated various financial services for visitors at the exhibition to ease the shopping process for the visitors. The bank also worked closely with the General Administration of Customs to process customs collection to provide convenience to international exhibitors.

The Nelson Mandela Cricket Cup - ‘Empowering National Pride’

As part of its social responsibility towards a wholesome development of its youth, Burgan Bank sponsored the Nelson Mandela Cricket Cup for youth development, which was hosted by the South African Embassy, in collaboration with Kuwait Cricket, the official governing body of cricket in the State of Kuwait. This initiative was taken to further develop cricket in Kuwait among Kuwaiti youth, and to provide a rewarding avenue for the youth to develop individually and collectively, through this sport. Since cricket is one of the fastest developing sports in Kuwait, Kuwait’s participation at the Asian Games is a historic event, given the fact that Kuwait is the first Arab nation to achieve this milestone.

Ramadan Girgean visits - ‘Encouraging the Spirit of Giving’

Every year Burgan Bank hosts community events during the Holy Month of Ramadan that aim at nurturing a spirit of peace while giving back to the community as well as to those in need. During Ramadan 2014 the bank focused on hosting a range of Girgean themed events for Kuwaiti children and their families in a number of venues.

Ramadan Girgean visitsBlood Donation Drive

Burgan Bank honorary ceremony by the Indian Doctors Forum 2013

21

Burgan Bank’s representatives took part in the visits by distributing Girgean gift bags to young patients and their families while providing a fun-packed day of activities. The bank’s visits covered the Kuwait Disabled Sports Club, Kuwait Center of Mental Health, The Kuwaiti Society for Guardians of the Disabled, Palliative Care Center, Ministry of Social Affairs and Labor, Abeer 2 Center, and the Kuwait Cancer Control Center.

‘The 8th annual Kuwait Times photography competition - ‘Magnifying the rising creative talents’

Reflecting its keenness in supporting local talents, Burgan Bank sponsored the 8th annual Kuwait Times photography competition themed ‘Action in Kuwait’, aimed at capturing movement through photography.

The nationwide competition united all the professionals and aspiring photographers who submitted their innovative works on the country’s environment, natural landscapes and everyday tasks. The initiative that was open for all ages and races and not restricted to only professional photographers provided a mutual platform that enabled an equal opportunity to exhibit individual talent.

‘Universities Art Competition - ‘Enriching the Kuwaiti arts culture’

Organized by Al Argana Hotel and Resorts and in collaboration with the UNDP, Burgan Bank sponsored the ‘Universities Art Competition’ exhibition which was themed ‘The Power of Life’. The bank’s participation came in line with its corporate social responsibility strategy to support the local youth’s advancements as well as to shed light on their gifted skills. The art competition allowed students to showcase their creative masterpieces and gave them the opportunity to be recognized for their outstanding illustrations and capabilities. It gives Burgan Bank great pride in supporting similar initiatives which shed the light on youth’s creative demonstration. The bank will continue to foster national capabilities through similar events to reinforce its leading position as a strong ally for the development of the Kuwaiti youth.

The 8th annual Kuwait Times photography competition

Universities Art Competition

22

Corporate Governance and Disclosures

The following outlines the key aspects of the Bank’s corporate governance framework. The Board has consistently placed great importance on good corporate governance practices of the Bank, which it believes is vital to the Bank’s well-being.

The Board has adopted a comprehensive framework of Corporate Governance Guidelines, designed to properly balance performance and conformance. This enables the Bank to undertake, in an effective manner, the prudent risk-taking activities which are the basis of its business.

Board of Directors

The Bank is steered by an effective and unitary Board which assumes responsibility for its leadership and control and is collectively responsible for promoting Bank’s long-term success by directing and supervising its affairs. The Directors are responsible for ensuring that the Board makes decisions objectively in fulfilling the Bank’s public and corporate responsibilities.

The Board shall have overall responsibility for the Bank, including approving and overseeing the implementation of the Bank’s strategic objectives, risk strategy, corporate governance and corporate values. The Board shall also be responsible for providing oversight of the Executive Management. The board understands that sound governance practices are fundamental to earning the trust of stakeholders, which is critical to sustaining performance and preserving shareholder value. The board members’ collective experience and expertise provide a balanced mix of attributes for it to fulfill its duties and responsibilities.

Separation of roles of the Chairman and Group Chief Executive Officer

The roles of chairman and Group Chief Executive Officer continue to be substantively different and separated. The chairman is a non-executive director charged with leading the board, ensuring its effective functioning and setting its agenda, in consultation with the Group Chief Executive Officer and the directors. His duties include facilitating dialogue at board meetings, ensuring proper functioning of the executive management, and setting the board’s annual work plan.

Board Composition

The Board comprises of non-executive Directors, as elected by the General Assembly, and will ensure independence in actions and decisions at all times. The Board shall comprise of sufficient number of members to allow it to form the required number of Board Sub-Committees.

Election and renewal of the Board membership shall be done in compliance with the applicable rules and regulations. The changes related to the number of Board members of the Bank shall be suitably reflected through amendments in the Articles of Association to correspond to the implementation of the rules, regulations and instructions.

Each member of the Board shall serve a term of three years, at the end of which the Board shall be formed again and it shall be permissible to appoint the members whose term has expired.

The Board is structured to ensure that the directors provide the Group with the appropriate balance of skills, experience and knowledge as well as independence.

Induction and professional development

The Board adopts a formal induction program to familiarise with the Bank’s operations and activities.

The Board is conscious of its obligations to regulators and shareholders and is committed to ongoing training, professional development and attendance at relevant conferences and seminars. Only by continuing to keep abreast of issues that have an impact on the business can the Board fulfill its responsibilities.

Board Meetings

The Board holds at least (6) meetings annually with one meeting at least on quarterly basis upon an invitation from the Chairman, the Board also holds meetings if requested by at least three of its members, the Board meeting shall be valid only if attended by the majority of the Board members, board meetings could be held using the modern communication means, during 2014, Board held (12*) meetings. The following table shows the Board Members attendance of the Board of Directors meetings, the table shows a high degree of commitment of each member in attending the Board of Directors’ meetings:

Good corporate governance remains integral to the way the group operates. We are committed to operating in a correct, principled and commercially astute manner and staying accountable to our stakeholders. We hold the view that transparency and accountability are essential for our group to thrive and succeed in the short, medium and long term.

Information presented in this Corporate Governance Report is shown as of Dec. 31, 2014.

23

Board Members No. of meetings attended (2014)

1 Mr. Majed E. Al Ajeel 12

2 Mr. Mohammed A. Al Bisher 11

3 H.E. Abdul Kareem A. Al Kabariti 9

4 Mr. Faisal M. Al Radwan 12

5 Mr. Masaud M. J. Hayat 11

6 Mr. Samer S. Khanachet 12

7 Mr. Sadoun Abdulla Ali 12

8 Mr. Pinak P. Maitra 11

9 Mr. AbdulSalam M. Al Bahar 12

* out of which (4) by circulation.

Burgan Bank Board comprises of (9) Non-Executive members, the following paragraphs show information on the current members of the Board for the current term (2013 - 2015) who were elected members of the Board for this term with effect from April 1, 2013. The information includes the year in which they were born, the year in which their term as Board Members expires, their qualifications and their principal business activities outside our Bank.

1 Mr. Majed E. Al Ajeel (Chairman)

Year of Birth 1953

Appointed 2013

Term expires 2015

Has been with Burgan Bank since 2007

Studied in The United States of America

University Catholic University of America

Degree Bachelors - Science in Architecture

Masters in Planning

Graduated in Bachelors - 1977 Masters - 1978

Past Positions (date and details) • ViceChairmanandCEO-UnitedProjectsCo.

(from 12/04/2010 - 03/07/2012)• ChairmanandCEO-UnitedProjectsCo.

(27/10/2004 - 12/04/2010) • BoardMember-KuwaitandMiddleEastFinancial

Investment Company (1984 - 1986)

• BoardMember-KuwaitRealEstateInvestmentConsortium (1985 - 1992)

• BoardMember-InternationalLeasingandInvestment Co. (1999 - 2003)

• ManagingDirector-KuwaitFinanceandInvestmentCompany (KFIC) (2002 - 2004)

• BoardMember-BurganBank(1998-2004)Current Positions • BoardMember-BurganBank(2007-present)• DeputyChairman-KuwaitBankingAssociation• BoardMember-InstituteofBankingStudies• BoardMember-BurganBankTurkey• BoardMember-FIMBank-Malta• BoardMember-UnitedProjectsCo.

2 Mr. Mohammed A. Al Bisher (Vice Chairman)

Year of Birth 1948

Appointed 2013

Term expires 2015


Studied in Kuwait

University Kuwait University

Degree Bachelors - Economics and Political Science

Graduated in 1971

Past Positions (date and details) • BoardMember-JordanKuwaitBank

(1981 - 1989).• BoardMember-KuwaitInternationalInvestment

Company (1983-2000)• BoardMember-KuwaitClearingCompany

(1986 - 1992)

Current Positions• BoardMember-BurganBank(2010-present)• DirectorandPartnerofAbdulrahmanAl-Bisherand

Zaid Al- Kazemi Group• DirectorofAl-BisherSon›sGroupforGeneral

Trading and Contracting• DirectorofEtemadcoExchangeCompany.• DirectorandPartnerofInternationalOpticsKuwait• ChairmanofLeoWitterGmbH(Jewellery

and Precious Mineral Kuwait).• ServesasaRepresentativeforATAInvestment

Company ( Turkey) and Partner of a group of Saudi Arabia Companies.

24

3 H.E. Abdul Kareem A. Al Kabariti

Year of Birth 1949

Appointed 2013

Term expires 2015



University St. Edwards University

Degree Bachelors - Business and Finance

Graduated in 1973

Past Positions (date and details)• MemberoftheJordanianSenate,Headofthe

Economics and Finance Committee (2005 - 2007)• MemberoftheJordanianSenate,FirstDeputytothe

Speaker (2000 - 2002)• ChiefoftheRoyalCourt,(1999-2000)• MemberoftheEleventhandtheTwelfthJordanian

Parliaments (1989 - 1993) and (1993 - 1997) / Head of the Economics and Finance Committee (1993 - 1995)

• PrimeMinister,MinisterofForeignAffairsandMinister of Defense (1996 - 1997)

• MinisterofForeignAffairs(1995-1996)• MinisterofLabor(1991-1993)• MinisterofTourism(1989-1991)

Current Positions• BoardMember-BurganBank-(2004-Present)• ChairmanoftheBoardofTrustees,Al-Ahliyya

Amman University• Chairman,UnitedFinancialInvestmentsCompany.• Chairman,AlgeriaGulfBank-Algeria• BoardMember,JordanDairyCompany• Chairman,JordanKuwaitBank-Jordan

4 Mr. Faisal M. Al Radwan

Year of Birth 1944

Appointed 2013

Term expires 2015


Studied in Egypt - Cairo

University Cairo University

Degree Bachelors - Commerce and Business Administration

Graduated in 1970

Past Positions (date and details)• DeputyGeneralManager-NationalBank

of Kuwait (1978 - 1980)• GeneralManager-NationalBankofKuwait(1980-1983)• DeputyChiefExecutiveOfficer-National

Bank of Kuwait (1983 - 1993)• BoardMember-BankofBahrainandKuwait

(1986 to march 1994) • ViceChairman-BankofBahrainandKuwait

(1991-1994)• BoardMember-BankofOmanBahrainandKuwait

(1990 - 1994)

• BoardMember-BurganBank(2001-2003)• ViceChairmanandManagingDirector-BurganBank

(2003 - 2004)

Current Positions• BoardMember-BurganBank(2010-present)• ViceChairman-BurganBankTurkey

5 Mr. Masaud M. J. Hayat

Year of Birth 1953

Appointed 2013

Term expires 2015


Studied in Kuwait

University Kuwait University

Degree Bachelors - Commerce and Business Administration

Diploma - Institute of Banking Studies

Graduated in Bachelors - 1973 Diploma - 1975

Past Positions (date and details)• Al-AhliBankofKuwait-(April1974-Dec.1996)

I. Operation and Local / International Credit 1974II. Deputy Chief General Manager 1992III. Advisor to the Board of Director 1993

• BoardMember(BIAT)Tunis(1989-1995)• BoardMember-BankofBahrainandKuwait

(1986 - 1988 and from 1991 to 1995)• BoardMemberIndustrialInvestmentCo.

(1993 - 2001)• BoardMemberGulfInsuranceCo.(1997-2001)• BoardMemberUnitedFisheriesCo.(1997-2001)• BoardMemberTheInternationalInvestor

(2005 - 2009)• ChairmanKAMCO(1998-2010)• ManagingDirectorUnitedGulfBank

(1997 - 2009)• BoardMemberWataniyaAlgeria(1997-2009)• ChairmanUnitedGulfFinancialServicesCo.

(1997 - 2009)• BoardMemberandBoardSecretaryUnion

of Investment Companies (1997 - 2009)• ManagingDirector-BurganBank-(2009-2010)

Current Positions• BoardMember-BurganBank(2013-Present)• CEO-BankingSector-KuwaitProjectsCo.“Holding”• ChairmanUnitedGulfBank-Bahrain• Chairman-TunisInternationalBank-Tunis• BoardMemberJordanKuwaitBank-Jordan• DeputyChairman-AlgeriaGulfBank-Algeria• DeputyChairman-BankofBaghdad• DeputyChairman-FIMBank-Malta• ViceChairman-NorthAfricaHoldingCo.• ViceChairman-TheRoyalCapitalGroup

- Abu Dhabi• ChairmanSyriaGulfBank-Syria• BoardMember-KAMCO• BoardMember-MashareaAlKhair

25

6 Mr. Samer S. Khanachet

Year of Birth 1951

Appointed 2013

Term expires 2015



University Massachusetts Institute of Technology

Harvard University

Degree Masters - Business Administration (Harvard)

Bachelors - Science - Chemical Engineering and Science Management

Graduated in Bachelors - 1973 Masters - 1975

Past Positions (date and details)• 1975-1980TheIndustrialBankofKuwait

i. Financial Analyst ii. Senior Financial Analyst iii. Assistant Manager

• DeputyCEO-SharjahGroup(1980-1990)• GeneralManager-KIPCO(1990-1995)• CEO-UnitedGulfManagement(1991-2007)• GCOO-KIPCO(2008-Present)

Current Positions• BoardMember-BurganBank(2011-Present)• BoardMember-UnitedGulfBank-Bahrain• ChairmanoftheBoard-TAKAUDSavingandPensions• BoardMember-UnitedRealEstateCo.• MemberofCorporationDevelopmentCommittee

- Massachusetts Institute of Technology

7 Mr. Sadoun Abdulla Ali

Year of Birth 1961

Appointed 2013

Term expires 2015



University Ashland University

Degree Bachelors - Management of Financial and Accounting Services

Graduated in 1988

Past Positions (date and details)• BoardMember-BankofKuwaitandthe

Middle East (2003 - 2004)• ExecutiveManagement-HeadofAccountingand

Financial Group - KIPCO (1997 - 2006)• GeneralManager-KAMCO(2006-2008)• ChiefExecutiveOfficer-KAMCO(2008-2010)• ManagingDirectorandChiefExecutiveOfficer

- KAMCO (2010 - 2012)

Current Positions• BoardMember-BurganBank(2004-Present)• BoardMember-BankofBaghdad• ViceChairmanandChiefExecutiveOfficer-Qurain

Petrochemical Company• BoardMember-UnitedIndustriesCompany• BoardMember-AdvancedTechnologyCompany• Chairman-UnitedOilProjectsCompany

8 Mr. Pinak P. Maitra

Year of Birth 1958

Appointed 2013

Term expires 2015


Studied in India

University Osmania University

Degree Bachelors - Commerce

Graduated in 1979

Past Positions (date and details)• VicePresident-FinancialControlandPlanning

- United Gulf Bank - Bahrain, (June - 1988 - October 1988)

• AssistantVicePresidentofPlanningandFinancialControl - KIPCO (1988 - 1990)

• VicePresident,FinancialController-United Gulf Management Inc. (1991 - 1996)

Current Positions• BoardMember-BurganBank(2010-Present)• GroupChiefFinancialOfficer-KIPCO(1996-Present)• BoardMember-OSN(PantherMediaGroupLimited)

(2009 - Present)• BoardMember-PulsarKnowledgeCenter(2003-Present)

26

9 Mr. AbdulSalam M. Al Bahar

Year of Birth 1965

Appointed in Burgan 2013

Term expires 2015



University Fairleigh Dickinson University

Degree Bachelors - Science - Electrical Engineering

Graduated in 1988

Past Positions (date and details)• BoardMember-TunisInternationalBank

(1997 - 1999)• BoardMember-BahrainMiddleEastBank

(1998 - 1999)• BoardMember-WataniyaTelecom

(1998 - 2007)• BoardMember-KuwaitCateringCompany

(1997 - 1999)• ChairmanoftheBoard-KuwaitCateringCo.

(1999 - 2001)• BoardMember-KuwaitCateringCompany

(2001 - 2003)• BoardMember-TamdeenGroup(2003-2006)• BoardMember-WataniyaAirways

(2006 -2007)• ChairmanandManagingDirector-WataniyaAirways

(2007 - 2011)• ExecutiveManagement-Companies

Financing - KIPCO -(1995 - 2007)• GeneralManager-OverLandRealEstateCompany

(2012 - 2014)Current Positions• BoardMember-BurganBank-(2004-Present)• BoardMember-UnitedIndustriesCompany

(2012 - Present) • BoardMember-UnitedNetworksCo. (2014 - Present)• FinancialAdvisor-OverLandRealEstateCompany

(2014 - Present)

Delegation of authority

The board retains effective control through its governance framework that provides for delegation of authority. In discharging its duties, the Board delegates some authorities to relevant Board Sub-Committees with clearly defined mandates and authorities, although the board retains its accountability.

Board Sub-Committees facilitate the discharge of Board responsibilities and provide in-depth focus on specific areas. Each Committee has a mandate, which the board reviews at least annually. Each mandate sets out the role, responsibilities, scope of authority, composition, terms of reference and procedures.

Board Sub-Committees

The Board has established the following Board Sub-Committees in order to enhance its supervision effectiveness over operations of the Bank, each committee member’s expertise, skills and background was considered while forming the committees to assure the best supervision of the committee over the bank’s operation according to each committee responsibilities.

Board Corporate Governance Committee (BCGC):

The BCGC shall essentially be responsible for assisting the Board in setting the Bank’s corporate governance policies and following-up on its execution and periodic review to ensure its effectiveness.

BCGC held (5*) meetings during 2014.

BCGC Members No. of meetings attended (2014)

Mr. Majed E. Al Ajeel 5

Mr. Mohammed A. Al Bisher 5

Mr. Faisal M. Al Radwan 5

Mr. Masaud M. J. Hayat 5

* out of which (1) by circulation

Board Nomination and Remuneration Committee (BNRC)

The BNRC shall be responsible for presenting recommendations to the Board regarding nomination to the Board’s membership, review of Board structure on an annual basis, undertake performance evaluation of the overall Board and the performance of each member on annual basis, and developing Bank-wide reward policy in line with applicable laws and regulations. In addition, BNRC shall be responsible for appointment of the senior positions of the Executive Management, ensuring that these positions are occupied by qualified employees along with setting performance standards and succession plans.

BNRC held (4) meetings during 2014.

27

BNRC Members No. of meetings attended (2014)


Mr. Samer S. Khanachet 4

Mr. AbdulSalam M. Al Bahar 4

Board Audit Committee (BAC)

The BAC shall be responsible for setting and overseeing the sufficiency of internal control and audit functions of the Bank, along with ensuring compliance with applicable laws, policies, instructions and code of business conduct and ethics.

BAC held (9*) meetings during 2014.

BAC Members No. of meetings attended (2014)

H.E. Abdul Kareem A. Al Kabariti 9

Mr. Sadoun Abdulla Ali 9

Mr. Pinak P. Maitra 9

Mr. Mazen Essam Hawa (Advisor) 6


Board Risk Committee (BRC)

The BRC shall be responsible for providing review and report to the Board on the current and future risk strategy and tolerance along with supervising implementation of this strategy by the Executive Management. The BRC shall ensure existence of effective systems for risk management and independence of these functions.

BRC held (6) meetings during 2014.

BRC Members No. of meetings attended (2014)

Mr. Sadoun Abdulla Ali 6

Mr. Mohammed A. Al Bisher 6

Mr. Pinak P. Maitra 6

Board Executive Committee (BEXCO)

The BEXCO shall be responsible for directing and monitoring the Executive Management of the Bank in execution of the strategic plan as approved by the Board of Directors and other daily operations of the Bank.

Board and Management Investment Committee (BMIC)

The (BIMC) a sub-committee of BEXCO, shall provide an oversight on the Bank’s investment activities and make decisions within its delegated authorities.

BEXCO held (11*) meetings during 2014.

BEXCO Members No. of meetings attended (2014)







Board Credit Committee (BCC)

The BCC shall act as the focal point in the credit activity of the Bank and shall consider and grant approval on behalf of the Board.

Board Credit Recovery Committee (BCRC), a subcommittee of the BCC, shall provide an oversight on the Bank’s credit recovery and make decisions within its delegated authorities.

BCC held (50*) meetings during 2014.

BCC Members No. of meetings attended (2014)







Accomplished tasks

During the year 2014 and in light of each committee’s responsibilities and authorities, Board Committees - supported by respective committee members’ skills and background- have handled all assigned tasks effectively which helped the Board enhancing the control and supervision effectiveness over operations of the Bank.

Board Secretary

The board secretary ensures the flow of information to enable the board to be aware of its duties and helps the board on discharging its responsibilities effectively and continuously, the Board Secretary keeps the board abreast of relevant changes in legislation and governance best practices.

28

The Board Secretary verifies that the new board members have obtained the required induction program and follow-up with the concerned department in the bank to verify that it has provided the required training programs to the board members.

To enable the board to function effectively, all directors have full and timely access to information that may be relevant in the proper discharge of their duties. This includes information such as corporate announcements, investor communications and other developments that may affect the Bank and its operations.

Ms. Madiha Bouftain was appointed Board Secretary on Apr. 2013, Ms. Madiha spent 14 years at Burgan in various roles. In her last role, she served as a Manager - Board Affairs responsible for:

1. Ensuring the effective functioning of the board by providing support to the Chairman, the Vice Chairman and the Board Members.

2. Being focal point for all communication related to Board and Board Committee meetings, and coordinates between Board of Directors and Bank Management.

3. The custody of all Board related records.

Ms. Madiha served as Manager - Board Affairs from Jan. 2005 and is, therefore, well experienced.

Board Members Remuneration

Information on Board Members Remuneration is disclosed in the “Income Statement” as well as in the notes to the financial statement “ Note 20 - Transactions with related parties” in the Annual Financials.

The Proposed Board of Directors’ remuneration for 2014 amounted KD 390,000. The remuneration amount for the Board membership in addition to the Committees’ services remuneration were disclosed in the Financial Statements.

Related Party Transactions

For information on related party transactions please refer to Note 20 “Related Party Transactions” in the Annual Financials.

Code of Conduct

Burgan Bank’s Code of Conduct describes the values and minimum standards for ethical business conduct that we expect all of our employees to follow. These values and standards govern employee interactions with our clients, competitors, business partners, government and regulatory authorities, and shareholders, as well as with other employees. In addition, it forms the cornerstone of our policies, which provide guidance on compliance with applicable laws and regulations. Burgan Bank’s directors, executive management and employees are committed to the highest degree of adherence to the code of conduct policies.

The current version of Burgan Bank’s Code of Business Conduct and Ethics is available on our website www.burgan.com

Conflicts of Interest

In accordance with the CBK corporate governance instructions and the Meeting Guidelines for Board and Committees, Directors are required to disclose to the Board any interest they may have that might cause a conflict of interest. Any Director with a material personal interest in a matter being considered by the Board shall not attend nor vote on the matter being considered.

Bank’s Code of Conduct listed some cases that represent examples of potential conflicts of interest.

Relations with investors

The Chairman is responsible for ensuring effective communication with shareholders. The Bank communicates with shareholders through the Annual Report and Accounts and by providing information in advance of the Annual General Meeting.

Compliance with the CBK instructions on the Rules and Regulations of Corporate Governance in Kuwaiti Banks

(Declaration of Conformity 2014)

The Declaration of Conformity is pursuant to CBK instructions No. (2/RB/RBA/284/2012) on the Rules and Regulations of Corporate Governance in Kuwaiti Banks issued on June 20, 2012. The Board of Directors stated that Burgan Bank has complied and will continue to comply with the CBK instructions on the Rules and Regulations of Corporate Governance in Kuwaiti Banks. Since then, Burgan Bank has complied with the recommendations of the “Corporate Governance Instructions” in its version dated June 20, 2012.

Burgan Bank has done all the necessary amendments to its policies to be in line with the CBK instructions aiming for implementing sound corporate governance practices, the Bank has formed the required Board Committees to enhance its supervision effectiveness over operations of the Bank, and updated the Corporate Governance manual to reflect the governance measures adopted by the Bank. The current version of the manual is available on the Bank’s website www.burgan.com.

Furthermore, as disclosure is considered an effective tool to influence companies’ behaviour and protect investors, the Bank has adopted a disclosure and transparency policy that serves shareholders, depositors, and stakeholders. By the disclosure and transparency policy, the bank commits itself to an accurate and timely disclosure for any critical information related to the Bank.

29

Compliance Group

Compliance Group rehearses the employed independence decisively, to carry out a road map of functions to ensure the bank’s integrity and emphasize corporate standards of transparency before all regulators. It is of high Compliance duties to ensure guidance on the appropriate implementation of compliance laws, rules and regulations through policies and procedures. The steadily performance is customary to avoid any legal or regulatory sanctions, financial or reputational losses, due to any abrupt compliance failure to all pertinent laws, regulations and banking standards of good practice. The Compliance Group has been successful in bringing up stringent Compliance Culture within BB Group and proactively plays a significant role in implementing and monitoring the bank’s compliance program in a healthy system. Exercising independent judgments accurately and equally to avoid any emerging conflict of interests in opposition to bank’s objectives and goals, without compromising on core business ethics and values.

Compliance group is outfitted with a qualified and empowered team that are trained to complete the assigned tasks. The Compliance Team will benchmark and endeavor to adhere to best practices in all areas.

Internal Audit

Group Internal audit provides an independent, objective assurance and consulting activity designed to add value and improve the Bank’s operations. It helps the Bank accomplish its objectives by bringing a systematic, disciplined risk based approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

The Group Chief Internal Auditor reports functionally to the Board Audit Committee and administratively to the Group Chief Executive Officer.

Audit reports are produced summarizing the results from each performed audit which are distributed to the responsible heads of the auditable departments/units. These reports provide evidence to support the annual evaluation of the overall operating effectiveness of the internal control environment.

The Executive Management is responsible for ensuring that recommendations made by the Internal Audit department are implemented within appropriate and agreed time lines.

However, any internal control system can only provide reasonable, but not absolute assurance that the objectives of that control system are met. Further, the design of a control system must reflect the fact that there are resources constraints, and that the benefits of controls must be considered relative to their costs.

As a result of the above evaluation, it can be concluded that the internal control environment is appropriately designed and operating effectively as of 31st December 2014.

Report on Internal Control Systems

A system of effective internal controls is a critical component of bank management which ensures availability of sound banking operations. It allows the objectives of the Bank to be met, whilst maintaining reliable financial and managerial reporting, compliance with laws and regulations and reduce the risk of unexpected losses or damage to the Bank’s reputation.

However, there may be some inherent limitations of internal control variable components (people, systems, methods and processes etc). Hence, no institution can ever provide an absolute assurance.

The Board of Directors has the ultimate responsibility for the Bank’s Internal Control System, and it discharges its duties in this area by:

• Providingoversightactivitiesthroughtheboardandmanagement committees; and

• Ensuringthatexecutivemanagementimplementseffective systems of controls identification, assessment and implementation, through the Internal Control Department (ICD). This is achieved through assurance that,

• Bank’sbusinessismanagedefficiently and profitably;

• Bank’sfinancialreportingisaccurate,transparentand reliable; and

• Bankcomplieswithlawsandregulationsandallinternal principles.

Internal Controls at the Bank are integrated into operating processes, either automated or manual. Automated controls are embedded in the IT systems employed and are often complemented by the manual controls. Data quality on initial entry into systems is ensured by control measures such as the dual-control principle, authority matrices, segregation of duties and by certain measures taken by the Management.

Governance measures have been implemented to ensure sufficient controls over all. The Bank’s Quality Assurance team (Organization and Methods (O&M)) under the umbrella of Operations Strategic Development (OSD) effectively monitors the system processes. It also ensure the maintenance and update of the Bank’s ISO:9001:2008 Quality Assurance certification.

ICD supports the Bank’s key internal control activities, some of these are highlighted below:

• LiaisewithO&MascustodianoftheBankwiderelevant policies and procedures, and ensure respective function’s update these documents.

30

• Allmajorbankingdecisionsarediscussed,approvedand supervised through management and Board committees, created for the respective purposes and to protect the safety and quality of the Bank’s interest. The purpose, composition, operations and the responsibilities for each of these individual management and board committees are documented in their respective charters and approved by the Board of Directors.

• ICDprepareconsolidatedreportstotheSeniorExecutive Management, as provided by both internal and external assurance providers. As mandated by GCEO, ICD reviews, assesses, monitors execution by management and guide management to enhance the overall internal control environment.

• TheBankestablishedBusinessContinuityProgramwhich develops effective recovery strategies for the identified threats to the Bank. It provides assurance to the Bank that key operations would continue in case of any major disruption to banking operations (as per approved triggers).

• TheBankestablishedBranchControlUnitforeffectiveand efficient monitoring of the branch operations.

• TheBankensuresstrictcomplianceandreportingaccording to the applicable Anti Money Laundering and Counter Terrorism Financing rules and regulations, as applicable by CBK rules and regulations. Findings and mitigating actions are reported to the Chairman on a quarterly basis.

• Greatattentionispaidtothereportsissuedbytheinternal and external assurance providers, where the identified issues are taken into consideration and mitigating actions are taken at the earliest possible time. Appropriate follow up is conducted in order to ensure the commencement of action plan and mitigation of risks.

• InaccordancewithCBKrequirementsonevaluationofinternal controls system within the Bank, the Bank has conducted an annual review of the internal control systems by an independent external audit firm. The opinion furnished by the external auditor in the Internal Control Review (ICR) for December 2013, does not refer to any significant control deficiency. The ICR report was discussed and reviewed by the Board of Directors. A copy of ICR opinion letter is attached in Appendix 1 at the end of this Report.

Based on the evaluations conducted by the Executive Management and Board of Directors during the year, there are no critical control deficiencies identified which may need to be reported in the Annual Financial Statements for the year ended 31 December 2014.

Risk Management

The Bank has set up a Risk Management Group headed by the Group Chief Risk Officer who reports directly to the Board Risk Committee, in order to ensure the independence of the function. The Risk Management Group does not have any business targets in terms of either levels of business or income/profits to be achieved, with a view to ensuring its objectivity in analysing the various risks. The mission of the Group is to identify, measure and control various risks and report to the top management of the Bank on the effects and, where possible, mitigations. The board reviews and provides guidance regarding the alignment of banks strategy with risk appetite and the internal risk-management structure. The Bank has a well-documented Risk and Disclosure Policy that classifies the risks faced by it in its day-to-day activities into certain families of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks using appropriate metrics to analyse and evaluate the extracted data. Among the families of risks are:

i. Credit Risk which includes default risk of clients and counterparties

ii. Market Risk which includes interest rate, foreign exchange and equity risks

iii. Operational Risk which includes risks due to operational failures

The Risk Management Group is organised into, among others, three departments each responsible for one of the above three families, viz. the Credit Risk, Market Risk and Operational Risk departments who together ensures the effectiveness of managing banks risk portfolio taking into consideration all internal and external economic changes that might affect bank’s stability and growth. In addition to that, Risk Management Group confirms that each director and group head is aware of the size of risks faced by the bank through timely distribution of reports to the board and to the related committees in order to disseminate risk management culture within the bank and across subsidiaries.

Majority of the subsidiaries, have an independent risk management function reporting directly to the respective CEOs, as per their respective regulatory guidelines, with a dotted line reporting to GCRO. These Risk functions are organised into, among others, three sections responsible for the three families of risks stated above. Among the subsidiaries, JKB and BBT have already put in place an independent Risk Management function and developed an ICAAP process with the due approval of its Board of Directors, taking into account the applicable rules of their respective central banks. Since the regulations in other jurisdictions do not mandate this as yet, the Bank will, in due course, assist the subsidiaries to develop their own ICAAP policies, suited to their requirements. In the meanwhile, the ICAAP is applied by the Bank at the consolidated as well at the subsidiary wise level of assets and liabilities.

31

***Shareholder Composition

Main shareholders who own 5% or more of the Bank’s shares (2014 and 2013)

Shareholder Nationality No. of Shares % No. of Shares %

31/12/2014 31/12/2013

Kuwait Projects Company Kuwaiti 821,772,773 42.10 663,022,819 40.87 Holding K.S.C. (Closed)

United Gulf Bank B.S.C. Bahraini 331,855,114 17.00 275,821,614 17.00

Public Institution for Social Security Kuwaiti 143,334,553 7.34 116,587,451 7.19

Human Resources and Development

Remuneration Policy

The remuneration policy aims at enabling the Group to attract, retain, motivate and reward qualified workforce while ensuring fairness and consistency as well as being appropriately risk balanced. The policy reflects the Groups objectives for good corporate governance as well as sustained and long term value creation for all stakeholders. The Remuneration policies and practices form part of the Group’s overall obligation to have robust governance arrangements in place.

Employees are entitled to different remuneration components targeting appropriate and balanced remuneration package based on the employee job grade taking into consideration the employees skills, experience, and his role in the Bank as well as market practice.

The remuneration components consist of all forms of payments or benefits in exchange for the services provided by the employee and can be divided into:

• Fixedremunerationbasedonemployeejob role and market

• Variableremunerationdependingon employee performance

Variable remuneration may be paid in cash and may be subject to a vesting or deferral period. Remuneration amounts are based on the bonus pools approved by the Board for the purpose of rewarding employee performance. The total amount of performance related remuneration is based on a combination of the assessment of the overall results of the Bank, of the performance of the business unit and of the individual concerned. When assessing individual performance, financial and non‐financial targets and metrics are taken into account.

The payout of the variable remuneration may be deferred -as approved by the Board annually in line with the approved policy over a period of time not exceeding three years. The variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the Bank as a whole, and justified according to the performance of the Bank, the business unit and the individual concerned.

The Board Nominations and Remuneration Committee (BNRC) is responsible for presenting recommendations to the Board on the Bank-wide reward policy in line with applicable laws and regulations. The composition and responsibility of BNRC is further detailed under the Board Sub-Committees section of the Corporate Governance Report.

32

Tel: +965 2242 6999Fax: +965 2240 1666www.bdo.com.kw

Al Johara Tower, 6th FloorKhaled Ben Al Waleed Street, SharqP.O. Box 25578, Safat 13116Kuwait

The Board of Directors Burgan Bank S.A.K.P P.O. Box 5389, Safat 12170 State of Kuwait 19 June, 2014 Dear Sirs, Report on Accounting and other Records and Internal Control Systems In accordance with our letter of engagement dated 20 February 2014, we have examined the accounting and other records and internal control systems of Burgan Bank S.A.K.P (‘the Bank’) and the following subsidiaries of the Bank (hereafter collectively referred to as the “Group”) fot the year ended 31 December 2013:

• JordanKuwaitBank

• BurganBankA.S–Turkey

• GulfBankAlgeria

• TunisInternationalBank

• BankofBaghdad

• CorporateGovernance

• GeneralControlEnvironment

• GroupInvestmentBankingandTreasury

• RetailBankingGroup

• PrivateBankingGroup

• GroupCorporateCommunication

• BankingGroup

• OperationsGroup

• GroupHumanResourcesandDevelopment

• LegalDivision

• GroupComplianceDepartment

• MarketingManagement

• GroupInternalAudit

• Anti-moneyLaundering

• GroupRiskManagement

• Clients’ComplaintsUnit

• InternalControlUnit

• GroupStrategicBusinessDevelopment

• InformationTechnologyGroup

• GroupstrategicFinancialPlanningand Control Group

• InternationalOperationsOffice

• FinancialSecuritiesActivities

• ConfidentialityofCustomer’sInformation

We covered the following areas of the Bank:

BDO Al Nisf & Partners is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of

independent member firms.

Appendix 1

33

Our examination has been carried out as per the requirement of the Central Bank of Kuwait (CBK) circular dated 11 February 2014 considering the requirements contained in the Manual of General Directives issues by the CBK on 14m November 1996, Pillar IV of the corporate governance instructions in respect of risk management and internal controls issues by the CBK on 20 June 2012. Instructions dated 23 July 2013 concerning anti money laundering and combating financing of terrorism, instructions dated 9 February 2012 regarding confidentiality of customer’s information and financial securities activities of the Group. As members of the Board of Directors of the Bank, you are responsible for establishing and maintain adequate accounting and other records and internal control systems, taking into consideration the expected benefits and relative costs of establishing such systems. The objective of this report is to provide reasonable, but not absolute, assurance on the extent to which the adopted procedures and systems are adequate to safeguard the assets against loss from unauthorized use or disposition; the key risks are properly monitored and evaluated; that transactions are executed in accordance with established authorization procedures and are recorded properly; and to enable you to conduct the business in a prudent manner. Because of inherent limitations and internal control system, errors or irregularities may nevertheless occur and not be detected. Also, projection of any evaluation of the systems to the future periods in subject to the risk that management information and control procedure may become inadequate because of changes in conditions or that the degree of compliance with those procedures may deteriorate. With the exception of the matters set out in the report submitter to the Board of Directors of the Bank, and having regard to the nature of volumes of the Group’s operations, during the year ended 31 December 2013, and the materiality and risk ration of our findings, in our opinion:

a) the accounting and other records and internal control systems of the Group were established and maintained in accordance with the requirements of the Manual of General Directives issues by the CBK on 11 November 1996 and letter issued by the CBK on 11 February 2014,

b) the findings raised in the examination and assessment of the internal controls do not have an impact on the fair presentation of the financial statements of the Group for the year ended 31 December 2013, and

c) the actions agreed by the Group to address the findings referred in the report, including previous years’ findings, are satisfactory.

Yours faithfully,

Qais M. Al Nisf Licence No. 38 “A” BDO Al Nisf & Partners

BDO Al Nisf & Partners is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of

independent member firms.

34

Management Team

Qualifications and Experience of the Bank’s CEO, his Deputies and Assistants

CEO’s Deputies and Assistants

Eduardo Eguren Group Chief Executive Officer

Raed Al Haqhaq Chief Banking Officer

Adrian Gostuski Group Chief Operating Officer

Mr. Gostuski joined Burgan Bank in 2011. As the Group Chief Operating Officer, Mr. Gostuski is responsible for leading the group’s operational areas of finance, legal, banking operations and technology. Mr. Adrian Gostuski is a banking professional with over 36 years of experience. He has solid international experience, both in Developed Economies and Emerging Markets, with expertise in Finance, Investment Management and M&A. He has diverse experiences as CFO and in Senior Executive positions for Operations, Technology, Treasury and Equity Funds. Prior to joining Burgan Bank, Mr. Gostuski has worked at Barclays - London, and Citigroup for over 23 years in various capacities of which the last seven years were in the capacity of CFO in Mexico and Singapore.

Mr. Gostuski is a Certified Public Accountant (CPA) from Buenos Aires University, Argentina and also holds a Masters in Business Administration in Strategic Planning from ESEADE, Buenos Aires, Argentina.

Mr. Raed Al Haqhaq joined Burgan Bank in 2000 and held senior roles in Corporate Banking. He was General Manager- Corporate Banking from 2005 before moving into the role of Chief Banking Officer in 2008. Mr. Al Haqhaq is presently heading the Banking Group with direct responsibility for the development and growth of the bank’s corporate banking portfolio, development of new and expansion of existing business relationships. He is also responsible for managing the Bank’s relationship with Financial Institutions across a wide range of geographical regions. Mr. Al Haqhaq has over 20 years’ local and international experience in corporate and investment banking. Mr. Al Haqhaq began his career at the Kuwait Investment Authority and then moved to the International Investment Group.

Mr. Al Haqhaq is a graduate of California State University, Sacramento, USA with a Bachelor of Science degree majoring in Strategic Management.

Mr. Eguren was appointed as the Group Chief Executive Officer of Burgan Bank in September 2010. Mr. Eguren has over 30 years’ experience in global corporate, retail and commercial banking across five continents. Prior to joining Burgan Bank, Mr. Eguren was the CEO for the Global Commercial Banking Operations for Barclays Bank in the United Kingdom. From 1984-2007, Mr. Eguren held senior management positions at Citigroup, Citibank, Citi including Chief Financial Officer and Chief Operating Officer covering the businesses including corporate and retail banking, asset management, insurance and pension funds in Latin America, Europe, Asia, North America and Africa. He has extensive experience in developing, implementing and driving forward strategies for a number of global banks and initiating inorganic growth opportunities in Emerging Markets.

Mr. Eguren is a Chartered Accountant-Bachelor of Administration from Montevideo University, Uruguay.

35

Robbert Johannes Rijik Voogt Group Chief Private Banking Officer

Robert James Frost Group Chief Investment Banking and Treasury Officer

Mr. Menon joined Burgan Bank in 2005. Mr. Menon is responsible for development and delivery of the retail banking strategy ensuring that operational, customer service, business development, risk management and profit targets are met. He manages the overall retail branch network as well as Alternative delivery channels, Marketing and Retail Credit. Mr. Menon has over 29 years of experience in Banking. Prior to his current role, he has lead the Operations function at the bank in the capacity of Chief Operations Officer for 9 years. He has also held senior management roles at Qatar National Bank prior to joining Burgan bank and worked in organisations such as BNP Paribas, Standard Chartered Bank and HDFC Bank.

Mr. Menon holds a Master’s degree in Business Management and Bachelor of Science from University of Bombay, India.

Mr. Voogt has been assigned to this role since 2014. He will be responsible for the growth of the Private Banking business and portfolio for Burgan bank at the Group level covering Kuwait as well as the subsidiaries. Mr. Voogt has solid experience of over 23 years , of which 20 years are in Private Banking. He has held senior level positions in reputed Private Banking organizations like EmiratesNBD, Mees Pierson and Merrill Lynch in Europe, Middle East and Far East regions. Prior to joining Burgan Bank, he was Group Head at CIMB Private Banking, Malaysia.

Mr. Voogt holds a Bachelor’s degree in Business from Nyenride Business University, Netherland.

Mr. Al Zouman joined Burgan Bank in 2000 as Head of Risk Management, before moving into the role of Chief Financial Officer in 2003. He is mainly responsible for the strategic planning of the finance activities for the Group to support the Bank corporate strategy and to ensure the development and implementation of financial guidelines, controls and reporting procedures to support management in the achievement of profitable business plans.

Mr. Al Zouman has over 26 years’ experience working in Kuwait and international markets in financial management - with a particular emphasis on accounting and auditing. Prior to joining Burgan Bank, Mr. Al-Zouman held senior financial management roles with Ernst & Young in Kuwait and in the United States.

Mr. Al Zouman is a Certified Public Accountant (CPA) from the State of New Hampshire, USA, and also holds a Bachelor’s degree in Computer Science from Kuwait University.

Mr. Frost joined the bank in 2014. Mr. Frost will be providing strategic leadership and financial expertise within the Treasury and Investment Banking functions. He will be responsible for developing a unified and robust strategy to achieve the financial goals objectives across all the Burgan Bank Group subsidiaries.

Mr. Frost has acquired over 20 years of experience in global financial markets with Macquarie Bank Ltd. where he held the position of Executive Director and Global Head of Capital Management for the Macquarie Securities Group. In this role, he was responsible for the development, implementation and management of all of the Group’s treasury requirements, which included FX and interest rate risk management and trading, liquidity and funding, repo refinancing and collateral management. Mr. Frost’s area of accountability spanned more than 20 financial markets across the globe.

Mr. Frost holds a Bachelor’s Degree in Economics and a Bachelor’s degree in Science (Mathematics) from the University of Queensland, Australia.

Venkatakrishnan Menon Chief Retail Banking Officer

Khalid Fahad Al Zouman Group Chief Financial Officer

36

Mahmoud Ezzat Chief Legal Counsel

Hanan Mohamed Metwalli Group Head of Compliance

Mrs. Metwalli joined Burgan Bank in 1988 and has been with the Bank for over 24 years holding a number of positions for 16 years in the credit department, Corporate banking and Risk Management Groups. Mrs. Metwalli has been assigned as the Head of Compliance since 2006 and is responsible for monitoring the implementation and application of strategies, action plans and policies in accordance with the principles and guidelines issued by the Basel Committee and different regulators to ensure regulatory compliance of the group represented by the Central Bank of Kuwait, Kuwait Stock Exchange, Capital Markets Authority and other regulatory bodies. Prior to joining Burgan Bank, Mrs. Metwalli has 11 years of experience in various roles at Al Ahli Bank of Kuwait, Commercial Bank of Kuwait and Gulf Bank.

Mrs. Metwalli holds a Bachelor’s degree of Commerce (Accounting) from the University of Alexandria - Egypt, and holds the degree of a Certified Compliance Officer (CCO) from American Academy of Financial Management (AAFM).

Amr El-Kasaby Group Chief Internal Auditor

Steven Lee Reece Group Chief Risk Officer

Mr. Reece joined the bank in 2013 as Group Chief Risk Officer, Mr. Reece is responsible for leading Burgan Groups risk strategy and policy, identifying appropriate risk limits and necessary control areas for products, services and procedures to meet the Bank’s business objectives. He will direct the planning, implementation and administration of the Bank’s risk management and loss prevention programs, policies and procedures. Mr. Reece has 34 years of experience of which 25 years were with Citibank. He is an experienced banking professional with strong technical understanding of overall risk functions. He has global experience working in UK, Europe, Asia and also the Middle East.

Mr. Reece holds a Bachelor’s degree in Philosophy from the East Carolina University, USA

Mr. Ezzat joined the bank in the year 2000 as a Legal Advisor and was subsequently assigned as Chief Legal Counsel. Mr. Ezzat’s team is responsible for providing comprehensive legal support for the bank’s wide range of corporate and commercial activities as well as legal matters concerning business development, contract management, litigation, employment law, collection and debt recovery.

Mr. Ezzat has over 23 years’ of experience as a Lawyer, having played a pivotal role within the sector, both within financial institutions and law firms. He was chosen as one of the key individuals to further develop the economic and commercial legislations in Kuwait with his most recent contribution being the drafting of the Companies Law in Kuwait which aimed at developing the country’s business environment, and encouraging robust investment opportunities by providing more flexible legislations.

Mr. Ezzat holds a Bachelor’s degree of Law from University of Cairo, Egypt.

Mr. El Kasaby joined Burgan Bank in 2007. As the Group Chief Internal Auditor, Mr. El Kasaby is responsible for leading the internal audit function for the Burgan Bank Group. Mr. El Kasaby has over 26 years’ experience in auditing and accounting, and he has led audit engagements across a broad cross section of industries including banking, trading, investment management, manufacturing, automotive and oil and gas while in Ernst & Young. Prior to joining Burgan Bank, Mr. El Kasaby was Deputy Manager of Internal Audit, Acting Chief Internal Auditor for Kuwait Finance House.

Mr. El Kasaby is a Certified Public Accountant (CPA) from State of Oregon, USA, in addition to holding a Bachelor’s degree of Commerce in Accounting and Auditing from Kuwait University. Mr. El Kasaby is also a Certified Fraud Examiner (CFE) and Certified Internal Control Auditor (CICA).

37

Bashir Jaber Group Head of Corporate Communications

Mr. Jaber joined Burgan Bank in 2006. As the Group Head of Corporate Communications, Mr. Jaber is responsible for managing Burgan Bank’s corporate marketing which includes investor relations, brand management, relationship management, external communications and corporate social responsibility. Mr. Jaber has over 13 years of experience and prior to joining Burgan Bank, Mr. Jaber held various positions globally at Ogilvy and Mather Worldwide - an international advertising, marketing and public relations group.

Mr. Jaber holds a Bachelor’s degree in Advertising and Marketing from Notre Dame University, Lebanon, plus a post graduate diploma in Business Administration from University of Leicester in the United Kingdom.

Halah El-Sherbini Group Chief Human Resources and Development Officer

Fahad Mohammed Al Menayes Chief Information Technology Officer

Ghassan Bani Al Marjeh Chief Operations Officer

Mr. Al Marjeh joined the bank in 2014. Mr. Al Marjeh is responsible for the planning, implementation and administration of the Bank’s operational and support functions such as Operations Strategic Development, General Services, Branch Operations and Centralized Banking Operations to achieve the Bank’s strategic business objectives. Mr. Al Marjeh has over 32 years of experience in Banking. His career spans various positions in the operations arena in organisations like National Bank of Kuwait, Gulf Bank, Burgan Bank and Commercial Bank of Qatar. Prior to re-joining Burgan bank, Ghassan had moved to Warba Bank to handle the role of Deputy Chief Operations Officer.

Mr. Al Marjeh holds Bachelor of Arts from University of Damascus, Syria in addition to a Diploma in Banking Operations and Information Technology, Vanderbilt University, USA.

Ms. El Sherbini joined Burgan Bank in 2011. Ms. El Sherbini is responsible for leading the development of group strategies to build the capabilities and skills of Burgan Bank group staff, so that the Bank can deliver its business objectives and aspirations. Ms. El Sherbini has over 19 years’ experience and prior to joining Burgan Bank, Ms. El Sherbini was the Head of Human Resources at Ahli United Bank and Citibank Kuwait and also held various leadership roles at Gulf Bank and National Bank of Kuwait.

Ms. El Sherbini is a graduate of Alexandria University, Egypt with a Bachelor’s degree in English Literature and holds a Professional in Human Resources (PHR) Certificate from Society for Human Resource Management (SHRM) Ms. El Sherbini is a Certified Professional Trainer from Arab Bankers Association and a Certified Assessor from SHL.

Mr. Al Menayes joined Burgan Bank in 2012 as Head of IT Operations. Mr. Al Menayes is handling the responsibility of the Bank’s Information Technology department. He will lead and reinforce the bank’s strategic direction and leadership in terms of technology functions. Mr. Al Menayes has over 18 years of experience in Information Technology field mainly at Al Ahli Bank of Kuwait and Burgan Bank.

Mr. Al Menayes holds a Master’s degree of Science in Software Engineering and a Bachelor’s degree in Computer Science and Math from MonmouthUniversity, USA.

38

Remuneration disclosure by Employee Category

Category No. of employees

Annual Remuneration Packages

Fixed Variable ** Total Remuneration

Group – 1: CEO and his deputies and assistants and the main executive managers whose appointment is subject to the approval of supervisory parties (Senior Management)

17 2,253,335 1,074,810 3,328,145

Group – 2: Financial Risk and Control responsibilities 4 241,430 82,125 323,555

Group – 3: Material Risk Takers 8 513,453 159,165 672,618

Grand Total 29 3,008,218 1,316,100 4,324,318

**Notes: All remunerations are paid in cash. Variable remuneration is on estimate basis for 2014.

Remuneration for five of the major executives who received the highest remuneration from the Bank, in addition to all the functions as required by the Corporate Governance guidelines (as a group): KD 2,394,851

Elyas Naser Group Head of Strategic Business Department and Chief of Staff

Anil Sunal Head of International Operations Office

Mr. Naser joined Burgan Bank in 2011 as Head of Group Special Projects with the Group Operations Office and then moved to Head of Strategic Business Department and Chief of Staff in 2013. Mr. Naser is responsible for maximising value of assets, through strategic planning of investment activities and managing post acquisition activities. These entail leading the process of evaluating and structuring of mergers and acquisitions, investments and financing-related opportunities and focusing on synergies across the group. Prior to joining Burgan Bank, Mr. Naser worked with various financial organisations in the region including HSBC, Central Bank of Bahrain and United Gulf Bank for over 10 years.

Mr. Naser holds a Bachelor’s degree in Banking and Finance from the University of Bahrain.

Mr. Sunal has been with Burgan Bank since 1993 having worked for 9 years in Corporate Banking Group and then moving to Strategic Financial Planning Group where he was appointed as Head- Management Information in 2004. Mr. Sunal is handling the role of Head of International Operations Office since 2012. Prior to joining Burgan Bank Mr. Sunal has 19 years of experience. Mr. Sunal is responsible for monitoring the performance of the Bank’s subsidiaries on Financial, Risk, Regulatory, Control and other critical aspects and issues. He also coordinates with the Banks Board Members in the Subsidiaries for alignment with the Banks group wide policies and strategies.

Mr. Sunal holds a Bachelor’s degree in Science and a degree in Law from Karnataka University, India.

39

Group Chief Executive O�cer (GCEO)

Shareholder’s Assembly

Board of Directors

Board Corporate Governance Committee

(BCGC)

Board Credit Committee

(BCC)

Board AuditCommittee

(BAC)

Board Executive Committee

(BEXCO)

Board Risk Committee

(BRC)

Board Nomination & Remuneration

Committee (BNRC)

Board & Management

Investment Committee (BMIC)

Board Credit Recovery

Committee(BCRC)

Board Secretariat

Group Internal Audit (GIA)

External Audit

Burgan Bank, Kuwait

Board Committee

Group Level

Subsidiaries

Chairman of the Board

Anti Money Laundering

(AML)

Group Risk Management

(GRM)

Group Compliance Department

(GCD)

Group Strategic Business

Development (GSBD)

Group Human Resources &

Development (GHRD)

Group Corporate Communication

(GCCD)

Group Operations O�ce (GOO)

Group Private Banking (GPB)

Legal Department

(LD)

Group Strategic Financial Planning

& Control (GSFP&C)

GroupInformation Technology

(GIT)

OperationsO�ce(OO)

Financial Institution

Department (FID)

Client Complaints Unit

(CCU)

Banking Group(BG)

Retail Banking Group(RBG)

Group InternationalOperations

O�ce(GIOO)

Group Investment Banking

& Treasury (GIBT)

Jordan Kuwait Bank

(Jordan)

Algeria Gulf Bank (Algeria)

Tunis International

Bank (Tunisia)

Bank of Baghdad

(Iraq)

Burgan Bank (Turkey)

Corporate Governance structure

40

1. Introduction

In June 2014, Central Bank of Kuwait (CBK) issued directives on the adoption of the Capital Adequacy Standards (Basel III) under the Basel Committee framework applicable to licensed banks in Kuwait, effectively replacing and superseding the earlier requirements under the circular issued in 2005 Basel framework (Basel II). These instructions cover comprehensively the calculation of the Capital to Risk Assets Ratio (CRAR) under Pillar 1 of Basel III, the supervisory oversight under Pillar 2, the disclosure of information under Pillar 3, and additional liquidity and leverage controls. Given below are the necessary disclosures pertaining to the Bank’s Capital Structure, Risk Management objectives and policies, information relating to the Credit Exposure, Credit Risk Mitigation, Market Risk, Operational Risk, and additional Capital Disclosure Requirements as required under the CBK Basel 3 regulations. In arriving at the CRAR, in accordance with the regulations, the standardised approach has been used for the computation of the Risk Weighted Assets (RWA).

2. Subsidiaries And Significant Investments

i. The CBK regulations apply to:

Burgan Bank S.A.K

ii. Basis of Consolidation

The Bank has five subsidiaries as on 31st Dec. 2014. These are the following commercial banking entities acquired during the years 2008 – 2012 whose financials are consolidated in the Bank’s financial statements.

Comments have been made, where appropriate, in regard to the approach and process in these subsidiaries. The practices in all the group entities are not uniform due to banking practices and regulatory requirements in the respective countries of operation. However, a level of harmonization has already been put in place for the purpose of meaningful consolidation of the financial position and performance and reporting in accordance with Basel III. Also, under an ongoing process of post-acquisition integration, international best practices as are applicable and practical in the region have been identified and are being implemented in all the entities.

iii. Restriction/Impediments on Fund Transfer

Transfer of funds or regulatory capital within the group entities is subject to the applicable rules and regulations in the respective jurisdictions. While some of the countries of incorporation of the subsidiaries have liberalized foreign exchange regimes others have exchange control regulations governing cross-border transfer of funds. Any transfer of regulatory capital among the group entities is subject to the applicable laws and regulations and the receipt of necessary approvals from the respective authorities.

3. Capital Structure

i. Main features of Capital Instruments

The Bank’s paid up capital entirely consists of ordinary shares which have proportionate voting rights. These are listed on the Kuwait Stock Exchange and are actively traded thereon.

As at 31 December 2014, the share capital comprised of 1,951,770,627 issued and fully paid equity shares of 100 fils each and the bank’s capital structure was as follows:

Burgan Bank Subsidiaries

Name Country of incorporation

Paid-up Capital

Effective holding %

Date of becoming a subsidiary

Jordan Kuwait Bank (JKB)

Jordan Jordanian Dinars 100 million

51.19% 10 Jul 2008

Gulf Bank Algeria (GBA)

Algeria Algerian Dinars 10 billion

91.13% 30 Apr 2009

Bank of Baghdad (BOB)

Iraq Iraqi Dinars 250 billion

51.79% 10 Jan 2010

Tunis International Bank (TIB)

Tunisia United States Dollars 50 million

86.70% 27 Jun 2010

Burgan Bank – Turkey

Turkey Turkish Lira 900 million

99.26% 21 Dec 2012

Burgan Bank S.A.K.P.Basel III - Pillar III qualitative andquantitative disclosures

Pillar 3 disclosures for the full 2014 year

41

4. Capital Adequacy

i. Bank’s Approach to Capital Adequacy Assessment

The Bank has in place a system under which the capital adequacy of the Bank as well as the CRAR are being calculated at regular intervals, based on the CBK circular instructions dated 24/06/2014. Based on this system, the CRAR of the Bank has been above the required threshold of 12% during the year 2014.

The Bank also has in place a policy for Internal Capital Adequacy Assessment Process (ICAAP) that is compliant with the CBK instructions in regard to Pillar 2 of Basel III and has been duly approved by its Board of Directors during the year. The ICAAP policy covers additional risks apart from the three risks viz. Credit Market and Operational risks covered under Pillar 1 and assesses additional capital requirements for these additional risks over and above the minimum level stipulated by the CBK. A copy of this policy document has also been sent to CBK for their information and records. Additionally, the Bank also conducts a stress test which calculates the effect on its profits and CRAR in cases of stress, based on certain scenarios.

The Bank takes into account the CRAR calculations in respect of all its future business plans so as to ensure that, at all times, the level of its eligible capital is sufficient to meet the expected increase in business and particularly the level of RWAs. The Bank takes into consideration developments locally and in the region, the expected changes in the banking environment and the fact that the CRAR prescribed by the regulators is considerably above the international norm of 8% as recommended by the Basel Committee while examining the level of capital that it would like to maintain. The Board also takes into consideration other relevant factors such as the Bank’s future business plans, the new areas of business under examination and the nature of the attendant risks etc. The Bank has in place a well-documented Internal Capital Adequacy Assessment Process (ICAAP) Policy which takes into consideration additional risks beyond the three risks covered under Pillar 1 of Basel III. This policy has been developed to fully comply with the CBK regulations on Pillar 2 of Basel III. The internal assessment process for capital requirements is carried out periodically by the bank taking into account not only its position for the time being but also the future business plans.

The Bank has put in place a system that will enable it to compute the CRAR under the applicable CBK instructions at such periodic intervals as may be deemed necessary, taking into account all the necessary details of its asset portfolio including Credit Risk Mitigation (CRM) techniques, the factors that give rise to market risk as also the capital necessary for operational risks. The internal budgetary and performance measurement systems of the Bank take into account the impact of the future growth and performance of its various business groups on the capital allocated to each such business group. It is the intention of the Bank, in due course, to develop a system that will allocate an economic capital to each business group based on its risk profile such that performance measurement is related to the return on the economic capital deployed in the concerned business group.

As regards the subsidiaries, the respective banking regulations in regard to capital adequacy are different in each of the jurisdictions. While the authorities in Turkey have mandated the application of the Basel III recommendations as adapted to suit the respective local requirements, others, viz., Iraq and Tunisia are yet to finalize the regulations in this regard. Where Basel III rules have been applied in any of the subsidiaries, this has been done using the standardised Approach.

The relevant CBK regulations on Basel III have however been applied for the consolidated financial position of the Bank and its subsidiaries.

Capital Structure Of The BankKD’000s

Share capital 195,177

Share premium 210,559

Statutory reserve 59,916

Voluntary reserve 60,294

Treasury shares reserve 45,082

Investments revaluation reserve 4,912

Foreign currency translation reserve (19,043)

Other disclosed reserves 1,118

Retained earnings 112,401

Eligible minority interest in consolidated subsidiaries

43,211

Less: Regulatory adjustments

- Treasury shares - Goodwill - Other intangibles- Proposed dividends

(9,575)(90,455)(78,036)(28,983)

COMMON EQUITY TIER 1 (CET1) CAPITAL 506,578


7,626

Perpetual Tier 1 capital securities 144,025

ADDITIONAL TIER 1 (AT1) CAPITAL 151,651

T I E R 1 CAPITAL (CET1 + AT1) 658,229


10,167

General provision subject to 1.25% of the credit RWA’s

62,251

T I E R 2 CAPITAL 72,418

TOTAL ELIGIBLE CAPITAL 730,647

42

driven by you

The CET1, Tier1 and total capital ratio of the banking subsidiaries were as follows:

5. Risk Management

The Bank has set up a Risk Management Group headed by the Group Chief Risk Officer who reports directly to the Board Risk Committee, in order to ensure the independence of the function. The Risk Management Group does not have any business targets in terms of either levels of business or income/profits to be achieved, with a view to ensuring its objectivity in analyzing the various risks. The mission of the Group is to identify, measure and control various risks and report to the top management of the Bank on the effects and, where possible, mitigations. The Bank has a well-documented Risk and Disclosure Policy that classifies the risks faced by it in its day-to-day activities into certain families of risks and accordingly specific responsibilities have been given

to various officers for the identification, measurement, control and reporting of these identified families of risks. Among the families of risks are:

i. Credit Risk which includes default risk of clients and counterparties

ii. Market Risk which includes interest rate, foreign exchange and equity risks

iii. Operational Risk which includes risks due to operational failures

The Risk Management Group is organised into, among others, three departments each responsible for one of the above three families, viz. the Credit Risk, Market Risk and Operational Risk departments.

Majority of the subsidiaries, have an independent risk management function reporting directly to the respective Board Risk Committees, as per CBK corporate governance requirements, with a dotted line reporting to GCRO. These Risk functions are organised into, among others, three sections responsible for the three families of risks stated above. Among the subsidiaries, JKB and BBT have already put in place an ICAAP process with the due approval of its Board of Directors, taking into account the applicable rules of their respective central banks. Since the regulations in other jurisdictions do not mandate this as yet, the Bank will, in due course, assist the subsidiaries to develop their own ICAAP processes, suited to their requirements. In the meanwhile, the ICAAP is applied by the Bank at the consolidated as well at the subsidiary wise level of assets and liabilities.

A. Credit risk

i. Strategies and Processes

The Bank has a well-documented Credit Policy that complies with CBK regulations and describes the appetite of the Bank for assumption of risks in its various business groups viz. the Corporate Banking, Private Banking, Retail Banking and Financial Institutions groups. The Credit Policy has been developed by the Risk Management Group in consultation with the business groups and under the guidance and approval of the Board.

All the business groups are required to market for business and present credit proposals in accordance with the general and specific guidelines stated in the Credit Policy. Subject to the guidelines of the Policy, each business group may draw up its own business strategy, which is deliberated at the Executive Committee of the Bank and approved by the Board Executive Committee. The Policy also defines the types of products that the various business groups can market to their clients and counterparties. Any new product is required to undergo a specific validation process before its launch.

Capital Requirement For Each Standard PortfolioKD’000s

Claims on sovereigns 9,393

Claims on public sector entities 12,795

Claims on banks 46,775

Claims on corporates 310,210

Regulatory retail exposures 68,180

RHL Eligible for 35% RW 504

Past due exposures 5,886

Other exposures 143,867

Total 597,610

Less: General provision in excess of 1.25% of RWA’s

(15,072)

Total Credit risk weighted exposure 582,538

Market risk exposure under Standardised approach

5,752

Operational risk exposure 61,104

Total Capital Requirement 649,394

Capital Adequacy Ratio (%) 13.50%

T I E R 1 Capital Ratio (%) 12.16%

Common Equity Tier 1 Ratio (%) 9.36%

SubsidiaryBanks

CET 1* TIER 1* Total Capital ratio*

Jordan Kuwait Bank (JKB)

19.04% 19.04% 19.85%

Gulf Bank Algeria (GBA)

12.02% 12.02% 13.08%

Bank of Baghdad (BOB)

47.35% 47.35% 48.00%

Tunis International Bank (TIB)

19.91% 19.91% 20.75%

Burgan Bank – Turkey

15.90% 15.90% 17.03%

* Ratios computed under Basel III regulations as adopted in the state of Kuwait.

43

The Bank’s subsidiaries also have their respective credit policies that govern the grant of credit facilities to clients segmented suitably, based on the market in their respective business areas. Subject to the respective local business environments and the specific requirements applicable in each jurisdiction, the policies of the subsidiaries have a similar coverage.

ii. Structure and Organisation

The Credit Risk Department is headed by Head of Credit Risk and has independent teams that are respectively responsible for Credit Risk Analysis and Credit Control. The Credit Risk Analysis function is responsible for making independent risk analysis and appraisal of credit proposals that are marketed by the business groups. This department gives its independent views/recommendations on credit proposals brought to it by the Relationship Managers of the various business groups. These proposals are then further processed in accordance with the delegation of powers approved by the Board. The Bank’s structure of delegation of powers envisages that a credit approval requires, in addition to the recommendation of the concerned business group, an independent enabling opinion of an official of the Risk Management Group at an appropriate level. This ensures that the approval process has an in-built mechanism of checks and balances with the concurrence of an independent functionary before a credit proposal can be approved. To be noted that under the new Corporate Governance Code, Risk Management personnel do not have any signing power or approving authority, but can give their independent opinion on the proposal.

The subsidiaries are in the process of setting up similar structures and organisations, subject of course to their respective local conditions and business environments. While JKB, TIB and BBT already have similar organisations in place, as regards the other two subsidiaries, in view of their business environment with less number of large corporate exposures and higher exposures to retail and small and medium business entities, the organisation is being made to adapt to the local requirements.

iii. Scope and Nature of Reporting Systems

After the approval of the credit proposal, the Credit Control unit of the Credit department is entrusted with the responsibility of checking that the conditions precedent for the draw-down of the credit facilities as approved are fulfilled before the facilities are made available to the client/counterparty. This unit, which is independent of the Credit Risk Analysis unit of the Department, also follows up on the conduct of the accounts by the client/counterparty in accordance with the terms of approval and reports any irregularities for necessary corrective action. This unit is also responsible to ensure that the relevant details for measurement of the risk and allocation of the appropriate risk weights to the exposures are made available in the system or otherwise, so that the computation of the RWAs can be made appropriately.

Since the Bank is at present required to follow the Standardised Approach for calculation of the RWAs, the internal ratings ascribed by the Bank for the obligors are not used in the process. However, bearing in mind the future needs of the Bank in the event of application of the more advanced methods, the Bank has in place an internal credit rating system, Burgan Credit Rating (BCR).

It is perceived that BCR has reached the end of its product life cycle and hence to keep pace with the changing business environment BB has initiated the process of implementing Moody’s Obligor Risk Rating system. It is expected to be fully functional by Q4-2015.

All the credit proposals approved under delegated authorities are reported with relevant details to the Board Credit Committee at regular intervals.

The subsidiaries will also have similar set up for the credit process after credit approval.

iv. Hedges and Mitigants

The Credit Policy of the Bank, while outlining the risk appetite as regards credit risk, has also laid down guidelines for mitigating risks in terms of availability of credit enhancements and/or collaterals to support the exposure, the coverage ratio of collateral value to the loan to be granted, the threshold levels for top-up of security and liquidation. The policy and procedures of the Bank also lay down the required methods and intervals for valuation of the different collaterals so as to determine the necessity for top-up by the client and/or procedure for liquidation. Since there are limited avenues for other types of hedges such as Credit Default Swaps etc. in the Kuwaiti banking environment, the chief mitigants considered are eligible collaterals and/or guarantee of acceptable third parties.

The collaterals accepted by the bank normally consist of cash in the form of deposits with the Bank, shares, bonds and units of mutual funds, various forms of real estate such as vacant lands, residential and commercial buildings, projects under construction etc. The scope to obtain any other type of collateral such as movables etc. is limited since the law does not recognize a hypothecation charge or a chattel mortgage. For the purposes of credit risk mitigation, only such of the collaterals that are permitted by the CBK and where the conditions stipulated are fully met are considered.

As regards shares, bonds etc., the Bank fulfills the stipulated regulatory requirements for their periodic valuation, application of haircuts etc. In regard to real estate assets, the Bank has employed independent, professional and govt. recognized evaluators who are required to assess the value of the collateral before they are accepted as security. As per the CBK rules, the Bank seeks two valuation reports. The periodicity of the valuation is again in line with the regulatory requirements.

44

driven by you

The amount of a secured facility that a borrower can avail of is based on the valuation of security, after applying the necessary ratios on the same, in terms of the conditions of approval.

The respective credit policies of the subsidiaries also define the collaterals acceptable for their respective credit facilities with the ratios for coverage, top-up and liquidation. However, unlike the laws of Kuwait, the laws in the jurisdictions of the subsidiaries permit hypothecation of immovable properties of clients in favor of a bank and where this is permitted, such collateral is also obtained, subject to the conditions stipulated in the respective legal provisions. Based on their respective local regulatory requirements and banking practices, the collaterals are valued by independent sources.

B. Market Risk

The primary objective of Burgan Bank‘s market risk management function is to provide a coherent policy and operating framework for a strong Bank-wide management of market risk and liquidity risk.

i. Strategies and Processes

The operations of the Bank’s Treasury and Investment Banking Group give rise to the market risks assumed by the Bank. The Bank has a well-defined and CBK compliant Treasury, liquidity and investment Policies that outlines its risk appetite in regard to undertaking transactions that result in exposures to market risk. Being a specialized area that requires particular knowledge of the market and various products and players therein, these policy documents are prepared by the Treasury and Investment Banking Group with inputs/concurrence from the Risk Management, under the guidance and approval of the Board. These Policies covers rules concerning the positions that the Bank assumes in the course of its trading in foreign exchange, equities and fixed-income securities as also the interest rate risk positions of its banking book in terms of mismatches in maturity and/or re-pricing periods.

The strategies that the Treasury Group plans to adopt during the coming year are decided on the basis of market forecasts that are made at the time of preparation of the annual budget. These are, on an ongoing basis, discussed at the Asset Liability Committee (ALCO) meetings and corrective actions, if any, are decided at these meetings. These meetings are chaired by the Chief Executive Officer and are convened by the Market Risk Controller in the Risk Management Group. The ALCO discusses and deliberates on all aspects of market and liquidity risks.

Liquidity management policy and limits ensure that liquidity is maintained at sufficient levels to support operations and meet payment demands even under stressed conditions that might arise with a sudden change in the market environment. The Bank has also in place a comprehensive stress testing policy and liquidity contingency funding plan.

The subsidiaries have their respective well defined ALCO and Market Risk policies with a similar content of topics, but suited to their respective business environments. These policies have been framed with due consideration for the respective local regulations that have an effect on the market and liquidity risks assumed by each of them. The respective Board of Directors of each subsidiary approves the market risk appetite, in terms of limits, for market risks including foreign currency risk, interest rate risk and equity risk. These limits are based on notional amount, stop-loss, sensitivity and/or VaR (Value at Risk).

The Treasury group, in consultation with the Risk Management, lays down the various limits and rules under which the members of the Treasury Dealing Room are allowed to take up positions. These limits are approved by the Board Executive Committee and where so required under the regulations, also by CBK. These limits relate to intra-day and overnight positions as well as positions under different maturity buckets, counterparty exposure limits, stop-loss levels etc. While the adherence of these limits is monitored by the Head- Investment Banking and Treasury (“IBT”), they are also independently monitored by Middle Office and the Market Risk unit whose reporting lines are independent of Treasury and Investment Banking Group. The Market Risk unit’s office is located in the dealing room but reports to the Group Chief Risk Officer. The Market Risk Controller reports relevant information on the treasury and investment activities of the Bank including the various positions taken by the Treasury and Investment Banking Group to the Group Chief Risk Officer on a daily basis or more frequently if necessary.

While quantifying market risks, the Bank considers risks arising out of movements in interest rates (for each of the currencies in which it holds positions), foreign exchange and price of trading investments. As stated earlier, the Bank does not assume positions in commodities. Based on the composition of the risk assets that give rise to these risks, the bank applies internal rules to determine the value at risk. These are in line with the applicable regulatory guidelines and are considered commensurate with the positions assumed by the bank from time to time. These positions are marked to market at regular intervals as prescribed by the regulatory guidelines and these valuations are independently computed/ verified by the Middle Office of the Bank. Middle Office has no reporting relationship to the Front Office that assumes and manages these positions.

As regards the subsidiaries, as stated above, the operations in the area of foreign exchange trading are governed by the applicable local regulations for each of them. These banks also have various regulatory limits on their dealing activities and open positions. These banks however have their back office/middle office functions with reporting lines outside the front office. The Market Risk section under the Risk Management monitors the market risks arising from all treasury activities including investments.

45

ii. Structure and Organisation

a. Scope and Nature of Reporting Systems

The Bank has in place systems that allow independent, on-line monitoring of the intra-day positions from outside the dealing room. This system also enables the Market Risk Controller to monitor the activities of the various members of the Treasury Dealing Room simultaneously as the dealing transactions are made. Daily Risk Report is provided to Senior Management that covers the trading activity and liquidity ratios. Stress testing for interest rate risk, foreign exchange risk and liquidity risk is conducted on a regular basis and results are presented to ALCO for review. Detailed market risk reviews are submitted to the Board Risk Committee on a quarterly basis. The reviews highlight major changes in the Bank‘s market and liquidity risk profiles as well as compositions of the investments portfolio.

b. Hedges and Mitigants

A major part of the banking and trading books of the Bank is in Kuwaiti Dinars (KD’s), the other important currencies being the internationally actively traded currencies. Due to the limited scope for hedging interest rate positions in KD’s arising from a limited range of hedging products, the Bank enters into, where reasonably possible, variable interest rate transactions structured to enable it to minimize maturity/re-pricing mismatches. As regards the other currencies, the open positions taken by the Bank are within pre-set limits and tenors for the respective currency. The Bank also makes use of interest rate and currency swaps to hedge its interest rate and currency positions in foreign currencies. The Bank normally makes use of derivatives for hedging purposes and also meets the requests of its clients for derivative products on a fully matched basis. However, the Bank only deals in or offers to its clients, simple derivatives such as forward foreign exchange contracts and does not handle the more sophisticated derivatives including structured derivatives.

As regards the subsidiaries, with the exception of BBT other entities do not actively take proprietary trading positions The range of products offered by them to their clients is also limited, due to the market environment and where applicable, exchange control regulations.

BBT deals in foreign exchange derivatives and interest rate derivatives to cover client needs on a back to back basis as well as for proprietary activities. BBT also uses Interest rate swaps mainly with an aim to keep the interest rate risks in its banking book within limits. All derivatives activities are regulated through limits approved by the BOD and monitored through bank systems.

C. Operational Risk

a. Strategies and Processes

The Operational Risk Department is controlled by the Head of Operational Risk , who reports to the Group Chief Risk Officer. This department oversees the operational procedures and controls with a view to identifying the areas

of weakness in the operating procedures and processes of the various operating departments of the Bank and correcting them from time to time. The Risk and Disclosure Policy of the Bank classifies the various areas of operational risks and identifies specific officers who are primarily responsible for rectifying these risks. Thus, for example, the rectification of legal risks falls under the direct responsibility of the Chief Legal Officer whereas the rectification of Information Technology (IT) risks falls under the responsibility of the Chief Information Technology Officer.

The specific procedural guidelines for all departments under the Operations Group are overseen by the Head of Operational Risk who also collates various incidents that give rise to operational risks, an actual or potential loss situation.

For the purpose of separation of the functions of IT development/operations from IT Security, Head of Operational Risk is also responsible to independently ensure the adequacy and effectiveness of IT security systems and procedures. These include both internal and external IT security measures. While a similar organisation is available in some of the subsidiaries, others are in the process of setting up such an organisation. However, the IT Security function is separate from the IT development/operations.

The Bank has a robust and well defined Business Continuity Program, which comprises of policies and procedures with clearly defined roles, responsibilities and ownership for Crisis Management, Emergency Response, Business Recovery and IT Disaster Recovery Planning. The Bank’s BCP steering committee, represented by the senior executive Management of the Bank, approves and oversees the annual BCP strategy and road map. Burgan Bank’s Business Continuity Management Program is designed to ensure the continuity of bank’s critical businesses at a minimum loss, in case of a disaster and a emergency that may impact the bank or a national event and may shutdown the whole country or part of it in case of any eventuality. Burgan Bank has a dedicated Disaster Recovery and Business Continuity Recovery site within Kuwait, which would be active in case some parts and specific areas in Kuwait are impacted. To respond to a country wide shut down a fully operational data back-up site and a Crisis Command Centre outside Kuwait is functional. Should any contingency arises, the key pre-identified bank staff would relocate locally or internationally to render crucial services to the esteemed clients and partners during a crisis/disaster. Regular drills and tests are conducted to cover all aspects of the Business Continuity Plan. Some of the subsidiaries have documented their business continuity and recovery plans; others are in the process of formulating and implementing the same.

b. Structure and Organisation

The various operational functions of the Bank come under the Operations Group headed by the Chief Operating Officer (COO) who oversees the day-to-day operational and support functions. In order to ensure the

46

driven by you

independence of the various operating departments, the COO reports to the Group Chief Operating Officer (GCOO) who in turn directly reports to the Chief Executive Officer. Also, the processing of the various transactions is governed by Standard Operating Procedures (SOPs) laid down for each of the operating departments with the necessary inputs/concurrence from, among others, Head of Operational Risk.

Such an organisation with an independent head of operations reporting to the respective chief executive officers is in place in the subsidiaries also.

c. Scope and Nature of Reporting Systems

As regards the scope and nature of risk reporting in this area, the Bank has laid down a Risk and Control Self-assessment program as well as Internal Control Charts (ICCs) that are required to be submitted by the various functionaries with differing periodicities. These are required to be submitted to specified supervisors who conduct the necessary follow up in regard to exceptions and ensure corrective action. The ICCs cover all the branches and operating departments in the head office.

The subsidiaries are in the process of introducing ICCs with suitable modifications to suit their respective local needs. Also, some of the subsidiaries have in place a Risk and Control Self-assessment covering several functions.

d. Hedges and Mitigants

The Bank has set up an Incident Management System (IMS) under which various incidents of operational risks are noted and registered with all the relevant details. These incidents may relate to either actual or potential loss resulting from an operational failure or dysfunction, either due to external or internal causes. These incidents are analyzed to effect necessary changes in the SOPs so as to enhance the operational controls and to eliminate or minimize the operational loss. These incidents are, at appropriate intervals, reported to the top management of the Bank and the appropriate Board Committee.

The Bank has also developed Risk Dashboards in some of its operational areas which serve to provide a snapshot of the concerned units in regard to the operational risks in these operating units.

These tools, viz. the Risk Dashboards and IMS are also in the process of being implemented in the subsidiaries.

6. Credit Exposures

i. Definition of Past Due and Impaired Assets

In regard to income recognition, asset classification and provisioning requirements, the Bank, as a matter of policy, follows the relevant regulations of CBK. Where considered appropriate for reasons of prudence, a more conservative policy is followed in regard to the amounts of loan loss provisions than those calculated by using the norms laid down in these regulations. The Bank considers an asset or an exposure to be impaired if, in its opinion, the realizable

value of the asset or the exposure is less than the value at which it is carried in the books of the Bank before it considers the necessity of making a specific provision for the same. As defined under the regulations of CBK, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Bank towards payment of the interest or the principal or a part thereof on the date on which such payment is due. Thus, if a client is required to pay interest at monthly rests and if the interest is not paid upon its debit to the account on the first day of the following month, the loan is considered to be past due. Similarly, if the principal amount of the loan or an installment thereof is not paid on the day it falls due for payment under the contract entered into by the client with the Bank, such loan is considered as past due from the next day. However, as is the international practice in the banking industry and as laid down under the CBK regulations, an exposure is considered as non-performing if it continues to remain past due for more than 90 days. In respect of retail banking loans, an asset is considered as non-performing if more than 3 installments remain unpaid. In all such cases, the exposure will be considered to be impaired.

The subsidiaries also apply such prudent policies which are in line with the relevant regulations in their respective jurisdictions. Additionally, the subsidiaries also follow the rules laid down by their respective regulatory authorities.

ii. Approaches for Specific and General Provisions

As required under the CBK regulations, the Bank maintains two types of loan loss reserves. On the Bank’s exposure to non-bank clients and counterparties which are not covered by collateral in the form of cash or demand/term deposits with the Bank, the Bank was required to maintain a general provision of 2% of the outstanding exposure, both on and off-balance sheet. If the exposure to a third party is covered by the guarantee of a bank that is rated below ‘A’, in such cases also, the Bank was required to maintain a general provision of 2% of the outstanding exposure.

However, with effect from 12.03.07, the CBK amended these rules and banks in Kuwait are, after that date, required to maintain only 1% (instead of 2%) general reserve in respect of cash exposures and 0.5% for non-cash exposures. The past level of general provisions as of 31.12.2006 however cannot be reversed unless, under special circumstances, CBK approval is obtained for the same. The Bank has not reversed any past provision in this regard. Out of the general provision so maintained, a sum equal to 1.25% of the RWA in the case of on-balance sheet exposures and after the application of Credit Conversion Factors and Risk Weights for off-balance sheet exposures is considered to be part of the Tier 2 capital of the Bank and the remaining amount is given the same treatment for the purpose of CRAR as if it was a specific provision, i.e., it is reduced from the RWA of the Bank.

In regard to impaired assets, the Bank determines the necessary level of specific provision in terms of the norms laid down under the CBK regulations. These regulations

47

Credit Risk Exposure KD’000s

Gross credit exposure

Gross average credit exposure*

Funded Unfunded Funded Unfunded

Claims on sovereigns

1,305,347 18,599 1,208,032 9,340

Claims on public sector entities

130,617 16,239 116,617 21,825

Claims on banks 1,080,254 801,436 1,155,411 320,688

Claims on corporates

2,721,516 2,059,229 2,216,596 1,834,706

Cash items 188,710 - 164,342 -

Regulatory retail exposures

612,317 56,774 584,479 53,344

RHL Eligible for 35% RW

19,715 – 15,243 –

Past due exposures

117,475 3,045 129,359 2,390

Other exposures 1,580,405 19,202 1,572,318 22,639

Total 7,756,356 2,974,524 7,162,397 2,273,932

* Average exposure represents daily average outstanding except in the case of past due exposures, which show quarterly averages since the classification of past due exposures is done quarterly.

require the Bank to make a provision of at least 20% of the value of the exposure (net of the value of eligible collateral as defined therein) if it remains past due for more than 90 days but less than 180 days, 50% if the period of past due is more than 180 days but less than 1 year and 100% if the past due period exceeds 1 year. However, based on the circumstances of a particular exposure, if and when the Bank considers it necessary, a higher level of provisioning is made even if these default periods are not attained.

In all cases of non-performing exposures, the Bank does not recognize any accrued income. Interest/commission on such exposure is recognized as income only on actual receipt.

The Loan Review and Provisioning Committee of the Bank examines, at monthly intervals, all the delinquent accounts to determine if a specific provision needs to be made for any particular account. The Committee is chaired by the Chief Executive Officer or in his absence, by the GCOO to ensure an objective assessment of the concerned exposure without taking into consideration the performance of the Bank or its profits/profitability.

The subsidiaries follow their respective applicable regulations in regard to impaired assets and provisioning requirements. However, at the time of consolidation of the accounts, The Bank applies the CBK rules in regard to provisioning on the consolidated basis. Any shortfall arising on account of the difference between the respective regulatory requirements of a subsidiary and the CBK regulatory requirements are covered by the Bank at the consolidated level.

iii. Credit Risk Management Policy

In regard to the credit portfolio of the Bank, the Credit Policy, as stated earlier, defines the risk appetite of the Bank. The Bank gives, in addition to the financial position of the client/counterparty, due consideration to the sector of activity of the client/counterparty, the exposure of the Bank to the group to which the client/counterparty belongs, the quantum of exposure vis-à-vis the capital funds of the Bank, the country of origin of the main cash flow of the client/counterparty, the nature of credit facilities, their purpose and the source of repayment and any other considerations that are essential for the credit assessment. The availability or otherwise of acceptable collateral, the standing and reputation of the client/counterparty, market reports, the exposures assumed by other banks on the same client/counterparty etc. are some of the considerations that are examined before approving credit facilities. As a rule, all credit exposures are reviewed at least once in a year. In the case of locally incorporated unlisted companies and partnerships with limited liability, the personal guarantees of the main promoters of the enterprise are normally also required.

Since the Bank is at present required to follow the Standardised Approach for credit risk, it does not follow any statistical methods to estimate either the probability of default or exposure at default or loss given default. Based on the public ratings given to the clients/counterparties by recognized and approved External Credit Assessment Institutions (ECAIs), the exposures are risk weighted in accordance with the CBK regulations.

iv. ECAIs and Mapping Process

An exercise to map these ratings to the exposure of the Bank where applicable is carried out. Where a general issuer rating is available, the same is used for the relevant exposure of the rated client/counterparty. Where only an issue rating is available, if the rated issue has comparable characteristics to the Bank’s exposure both in terms of the tenor and other features such as availability of credit enhancement etc. such rating is considered. CBK at present considers Moody’s, Standard and Poor’s and Fitch as the Approved ECAIs and only those clients/counterparties who have a solicited rating from one or more of these ECAIs, are considered to be rated. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated.

48

Geographic Distribution Of Gross Credit ExposuresKD’000s

Kuwait Jordan Algeria Iraq Tunisia Turkey Other Middle East

Europe Rest of the world

Total

Claims on sovereigns 417,089 365,977 150,176 186,685 – 175,310 27,344 1,365 – 1,323,946


20,205 112,840 – – – – 13,811 – – 146,856

Claims on banks 241,921 14,501 281 48,865 25,108 66,003 626,436 556,283 302,292 1,881,690

Claims on corporates 2,279,943 476,882 543,279 111,605 9,492 1,256,004 47,206 25,321 31,013 4,780,745

Cash items 70,223 16,076 50,451 42,426 312 3,444 1,363 500 3,915 188,710


394,476 54,541 37,656 27,548 184 154,635 – 50 1 669,091

RHL Eligible for 35% RW – 19,715 – – – – – – – 19,715

Past due exposures 71,030 12,350 9,079 13,152 418 9,315 5,176 – – 120,520

Other exposures 1,184,098 93,101 50,979 41,015 1,888 75,176 37,718 16,960 98,672 1,599,607

Total 4,678,985 1,165,983 841,901 471,296 37,402 1,739,887 759,054 600,479 435,893 10,730,880

Gross Credit Risk Exposures By Residual Contractual Maturity KD’000s

Up to 3 months

3 to 6 months

6 to 12 months

Over 12 months

Total

Claims on sovereigns

570,105 133,221 133,388 487,232 1,323,946


48,734 – – 98,122 146,856

Claims on banks

1,137,514 220,856 221,330 301,990 1,881,690


1,123,548 553,046 842,873 2,261,278 4,780,745

Cash items 188,710 – – – 188,710


72,323 35,513 48,200 513,055 669,091

RHL Eligible for 35% RW

– – – 19,715 19,715

Past due exposures

120,520 – – – 120,520

Other exposures

234,361 76,506 218,473 1,070,267 1,599,607

Total 3,495,815 1,019,142 1,464,264 4,751,659 10,730,880

Impaired Loans And Provisions By Standard Portfolio KD’000s

Impaired loans (net of suspended

interest and collateral)

Total provision

Specific provision charge / charge off

(-)

Claims on banks 1,903 6,141 431


53,105 209,830 34,747


19,912 24,190 4,764

Other exposures - 14,136 3,971

Total 74,920 254,297 43,913

Geographic Distribution Of Impaired Loans (Net)KD’000s

Kuwait Jordan Algeria Iraq Tunisia Turkey Other Middle East

Europe Rest of the world

Total

Claims on banks – – – – – – 1,903 – – 1,903

Claims on corporates 6,692 25,301 5,100 2,615 342 12,710 345 – – 53,105


14,479 1,913 576 2,761 – 183 – – – 19,912

Total 21,171 27,214 5,676 5,376 342 12,893 2,248 – – 74,920

Reconciliation Of Changes In Provisions KD’000s

Funded Unfunded Total

Provisions as on 1 January 2014 216,073 16,413 232,486

Exchange adjustment (957) (115) (1,072)

Amounts written off (38,419) – (38,419)

Charge to statement of income 59,981 1,321 61,302

Provisions as on 31 December 2014 236,678 17,619 254,297

driven by you

49

7. Counterparty Credit Risk

i. Objective and Policies

The primary objective of counterparty credit risk management function is to effectively identify, measure and manage all derivatives related counterparty exposures through regular review of counterparty limits and daily monitoring of exposures vs. limits.

ii. Strategies and Process

All derivative limits for counterparties are approved by Board Credit Committee or its delegated authority. With regard to non-banking customers, derivative products are mainly offered only to selective large corporate customers with a demonstrated need to employ these products to manage the financial risks in their businesses.

iii. Structure and Organisation

Treasury Group manages day-to-day counterparty exposures for derivatives within the limits set by the Board Credit Committee. Middle Office monitors and controls the exposures independently so that the exposures remain within the approved limits.

iv. Scope and Nature of Risk Measurement and Reporting Systems

Capital charge for Over the Counter (OTC) derivative products is calculated using the current exposure method (“CEM”). Under this method exposure is calculated, applying CBK recommended add-on factors and positive mark-to-market of the transactions.

As regards the subsidiaries, with the exception of BBT, other entities do not actively deal in derivative transactions. BBT also has similar objectives, policies, strategies, processes, structure and organisation but customized to local market environment and regulations. Starting from November 2014, BBT also uses CEM to calculate capital charge on its OTC derivative products.

8. Credit Securitization

The Bank does not conduct any securitization activities.

9. Credit Risk Mitigation (CRM)

The main CRM techniques applied by the Bank are based on eligible collaterals. Cases where the guarantee of a better-rated client/counterparty is obtained for exposures to a lower rated client/counterparty are few, mainly due to the limited number of Kuwaiti and other regional corporates for which ratings by approved ECAIs are available. In cases where specific pledge or blocking of deposits is available, on and off- balance sheet netting is also used to mitigate client risks.

i. On and Off-Balance Sheet Netting

The generic legal documents that the Bank obtains from its clients normally include a clause that permits the Bank to offset the client’s dues to the Bank against the Bank’s

dues to the client. Thus, if the same legal entity that has obtained credit facilities from the Bank also maintains credit balances in its accounts, the Bank would normally have the legal right to set off the credit balances against its dues. In respect of some counterparty banks, there are specific agreements that provide for netting on and/or off-balance sheet exposures. Additionally, in specific cases, the Bank approves credit facilities to a client against pledge/block of his deposits to cover the whole or part of his dues.

For the purposes of computation of CRAR (also for calculation of general provisions), as a prudential measure, the Bank does not take into account the general lien available to it under the generic documentation but only considers cases where specific pledge/block of deposits is in place.

ii. Collateral Policy

It is the Bank’s endeavour to obtain acceptable collateral cover for its exposures as far as commercially practicable. The collateral normally consists of real estate properties, shares listed in Kuwait and other leading stock exchanges, other traded and untraded securities such as bonds, mutual funds etc. In some cases, in order to ensure the promoter’s commitment, the Bank also obtains other forms of collateral such as unlisted shares/securities etc. but these securities of course are not considered for CRM purposes. While the Bank will be willing to accept other eligible collaterals as defined by the CBK such as gold, eligible debt instruments etc. these are not generally offered by clients/counterparties to the Bank. Accordingly, the eligible collateral predominantly consists of shares listed and traded on the recognized stock exchanges which form part of their respective main indices and eligible real estates as per CBK rules.

Under Kuwaiti laws, the repossession and enforcement of a mortgage on the primary residence of a borrower is not permitted except under specific conditions. The bulk of the residential mortgage loans of the Bank in its Retail Banking Group are therefore not considered to be collateralized by the primary residence, even though mortgage documents are obtained from some of the clients.

Only in some cases, where the legal conditions for enforcement are fulfilled, these are considered to be retail exposures collateralized by residential mortgages and are applied the relevant weight.

However, as regards the subsidiaries, the respective local laws do not pose any constraints on enforcement of the mortgage on the primary residence and hence these constraints do not apply in their cases.

iii. Main Types of Collateral

The Credit Policy of the Bank defines the types of collateral that are acceptable and the collateral coverage ratio, which is the ratio of the value of the collateral to the exposure, for each type of acceptable collateral. The policy also stipulates that the terms of credit facilities should stipulate

50

a top-up level. If the value of collateral falls to a level where the actual coverage available breaches the top-up level, the client is required to either lodge additional collateral or reduce his outstanding dues accordingly. If the client fails to do either of these and the value of collateral falls further, the terms also stipulate a liquidation threshold, which is the level of coverage at which the Bank may proceed to liquidate the collateral to realize its dues. These various ratios, after approval, are monitored independently by the Credit Control unit and reported to the concerned business group for follow up with the client.

iv. Collateral Valuation and Management

The Bank follows a system under which the collateral valuation is independently verified. In respect of real estate accepted as collateral, the valuation is done on an annual basis by two independent valuers, one by a valuer approved by Central Bank of Kuwait and another by a registered valuer approved by the Bank and the average of two values being considered for risk mitigation. In respect of shares and other securities listed on the Kuwait Stock Exchange, the valuation is computed daily, based on the prices declared by the Stock Exchange at the end of the day. The valuation of other collateral such as unlisted shares is done on such bases as may be considered appropriate, on a case-by-case basis. The valuation process is handled by the Credit Control unit of the Bank with no involvement of the concerned business group who are kept informed of the value of client collateral.

v. Guarantees for Credit Enhancement

As stated earlier, there are very few cases where guarantee of a better-rated entity is obtained for the exposure to a lower rated entity. In these cases, where the rating is given by an approved ECAI, the guarantor’s rating is substituted in place of the rating of the borrower, for the purpose of computation of RWAs. Where the guarantor and/or the borrower are/is not rated by an approved ECAI, the Bank uses its internal assessment to determine the acceptability of the guarantee but for the purpose of computation of RWA, this has no effect.

vi. Concentration

The Bank makes an endeavor to avoid concentration of collateral as far as possible. To this intent, when collateral in the form of listed shares is accepted, the year-to-date daily traded volumes of the concerned share and the average number of trades are examined and these are, among other points, taken into consideration in making a decision to accept the collateral and stipulating the concerned threshold ratios stated above, viz. coverage ratio, top-up ratio and liquidation ratio. The Bank classifies listed shares into various categories based on the liquidity and volatility of the concerned share, derived from the data available with the Kuwait Stock Exchange. The ratios stated above would vary depending on the classification of the shares.

10. Market Risk For Trading Portfolio, Foreign Exchange And Commodities Exposures

The Bank applies the Standardised Approach for computing the market risk on its trading portfolio and at present does not use the Internal Model Approach (IMA). Under the Standardised Approach, the risk exposure is quantified according to the levels stipulated by CBK.

50

Net Credit Exposure After Risk Mitigation And Credit Conversion Factor

KD’000s

Before CRM CRM Net Exposure

Claims on sovereigns 1,320,789 299 1,320,490


133,876 43 133,833

Claims on banks – Rated 726,710 17 726,693

Claims on banks – Unrated 390,338 – 390,338

Claims on corporates 3,193,211 601,401 2,591,810

Cash items 188,710 – 188,710

Regulatory retail exposures 633,393 32,331 601,062

RHL Eligible for 35% RW 19,715 7,721 11,994

Past due exposures 118,699 61,519 57,180

Other exposures 1,590,343 623,854 966,489

Total 8,315,784 1,327,185 6,988,599

Exposure covered by eligible collateral and guarantee

KD’000s

Covered by:

Exposure after CCF, net of Suspended

Interest

Financial collateral after application of

haircuts as stipulated by CBK

Claims on sovereigns 1,320,789 299


133,876 43

Claims on banks 1,117,048 17

Claims on corporates 3,193,211 601,401

Cash items 188,710 –


633,393 32,331

RHL Eligible for 35% RW 19,715 7,721

Past due exposures 118,699 61,519

Other exposures 1,590,343 623,854

Total 8,315,784 1,327,185

Capital Requirement for Market Risk KD’000s

Equity position risk 550

Foreign exchange risk 2,493

Interest rate position risk 713

Options 79

Total 3,835

driven by you

51

11. Operational Risk

As stipulated by CBK, the Bank uses the Standardised Approach for computation of Operational Risk and the capital required for the same. Out of the eight business lines defined by CBK, the Bank’s operations are confined only to five, and the Bank does not presently operate in Corporate Finance, Agency Services and Retail Brokerage. For the remaining business lines, the Bank uses the stipulated beta factors. Additionally, as stated earlier, the Bank has put in place an Incident Management System to track operational risk incidents and eventually, the system is expected to assist the Bank develop a more advanced approach for operational risk, if and when this is approved or mandated by the authorities. Also, the Bank uses ICCs as a control tool in respect of operational risks. The risk dashboards give a view of the areas of operational risk to the senior management of the Bank and the Board.

The subsidiaries which are under Basel II apply the Basic Indicator Approach for computing operational risk under their respective local regulations. However, during the consolidation process, the operational risks are considered under the Standardised Approach where the activities of the subsidiaries are considered under the various business lines as stipulated under the CBK regulations on Basel II calculations.

12. Equity Position In The Banking Book

i. Classification of Investments

The Bank consolidates the assets and liabilities of its five subsidiaries, viz. Bank of Baghdad, Gulf Algeria Bank, Jordan Kuwait Bank, Tunis International Bank and Burgan Bank Turkey. The Bank’s investments are classified as either ‘Available for Sale’, ‘Held to Maturity’, ‘At fair value through income statement’ or ‘Held for Trading’. Investments in equities that are acquired principally for the purpose of selling in the short term or, if they are managed and their performance is evaluated on reliable fair value basis in accordance with the documented investment strategy, are classified as at fair value through income statement and all other investments are classified as available for sale. The Bank has an Investment Policy that outlines the type of investments, the accounting requirements, the risk appetite for investments etc.

ii. Accounting Policy and Valuation Methodology

The accounting policies concerning investments and their valuation methodologies are described in detail under the “Summary of Significant Accounting Policies” elsewhere in this Annual Report. During the year 2014, there has been no significant change in these policies and methodologies.

The Bank’s Investment Committee examines proposals for investments that come from the Investment Department which is under the Head- IBT. The Committee deliberates on these proposals before sending them for the final decision of the Board Executive Committee. The Investment Committee also takes a view on appropriate classification of the concerned investment, based on the Bank’s objective in making the investment.

As regards the subsidiaries, they also have their respective investment policies on the above lines, which of course, are in line with their applicable regulatory requirements.

13. Interest Rate Risk In The Banking Book (IRRBB)

The interest rate risk on the banking book arises due to maturity/re-pricing mismatches of the assets and liabilities in the banking book. For the purpose of monitoring such interest rate risk, the Bank has in place a system that tracks the residual contractual maturities of all its interest bearing assets and liabilities as also their re-pricing periods. From such data, a cash flow is prepared showing the relevant mismatches in re-pricing periods, classified into various maturity buckets. The interest rate cash flow disregards any non-interest bearing assets and liabilities since they do not affect the IRRBB.

All non-maturity deposits are considered repayable on demand and are accordingly placed in the overnight maturity bucket as required under CBK regulations. Due to this prescription in the CBK rules that the banks must follow, all non-maturity deposits are assumed to be re-priced the next day, instead of their placement in buckets based on a behavioral/trend analysis of such deposits. Certain details related to IRRBB are prepared and presented at the monthly meetings of the ALCO, which also deliberates in the matter.

Investments KD’000s

Publicly traded* Privately held

Equities 84,333 102,173

Fixed income instruments 194,352 15,796

Any other investments 19,783 68,505

Total 298,468 186,474

*The Bank does not have any publicly traded investments whose fair value as disclosed in the financial statements is materially different from publicly quoted values.

Capital requirement by equity groupingsKD’000s

Investments available for sale 40,185

Investments held to maturity 6,368

Investments designated through profit and loss 12,061

Investments held for trading 1,431

Investment in associates 4,631

Total 64,676

Realised gains/(losses) recorded in the income statement

4,686

Unrealised gains/(losses) recognised in the shareholder’s equity

4,912

5252

For an even 25/50/100 basis point shock along the yield curve, net interest income for one year (from Jan. to Dec. 2014) including derivatives is affected as shown below:

The mid-year interest rate sensitivity analysis conducted by the Bank indicated that for an even increase in interest rates by 100 basis points (1%) the annual interest income of the Bank would have gone up by 14% whereas an even reduction in interest rates by the same level would have resulted in a reduction of net interest income by 14%. Since the banking book is predominantly in KD’s, this exercise is conducted on the consolidated book. This analysis is now being conducted at monthly intervals. As of 30 September, the Group’s net interest income for next 1 year would reduce by USD 2.13M 100 bps parallel increase in interest rates in JOD and USD 4M for increase in TRY rates. Corresponding increase in net interest income for the Group is expected for 100 Bps parallel decline in interest rates both for JOD and TRY currencies. This impact is mainly emanating from the respective subsidiaries which use these currencies as their operating currency.

As regards the subsidiaries, with the exception of BBT, other entities do not actively deal in derivative transactions. Starting from November 2014, BBT also uses CEM to calculate capital charge on its OTC derivative products.

As regards the subsidiaries, with the exception of BOB other entities calculate IRRBB with similar methodology and concepts but with different assumptions due to prevailing market environment at subsidiary level and where applicable, respective regulations governing IRRBB.

14. Remuneration Practices

Remuneration Governance

The Board Nominations and Remuneration Committee (BNRC) is responsible for presenting recommendations to the Board regarding nomination to the Board’s membership, review of Board structure on an annual basis, undertake performance evaluation of the overall Board and the performance of each member on annual basis, and

developing Bank-wide reward policy in line with applicable laws and regulations. In addition, BNRC is responsible for appointment of the senior positions of the Executive Management, ensuring that these positions are occupied by qualified employees along with setting performance standards and succession plans.

There were 4 meetings held during the year by the BNRC.

The Committee comprises of 3 Board members and operates as per the guidelines provided under the CG manual and the ‘Board/ Committee Meeting Guidelines. In addition, specifically for the BNRC composition, the Chairman of the Board is not be a member of the BNRC.

Board members are compensated for overall committee services as disclosed on the notes to the financial statements.

The Bank has engaged during the year consultants such as Hay and Mclagan. Hay consultants were engaged to review and update the grade andcompensation structure of the Bank. Mclagan were engaged to provide and survey the market compensation within the Kuwait banking sector.

The scope of this policy covers Burgan bank and its subsidiaries where the regulatory requirements of the subsidiaries in the countries they operate are not in conflict with the remuneration policy.

For the purposes of the disclosures the Bank has identified the CEO and his deputies who directly responsible for the governance and management of the Bank, and the Material risk takers- are all the roles (not covered in the above category) whose activities, individually or collectively, have a significant impact on the Banks financial performance and stability/soundness.

Remuneration Policy

The remuneration policy aims at enabling the Group to attract, retain, motivate and reward qualified workforce while ensuring fairness and consistency as well as being appropriately risk balanced. The policy reflects the Groups objectives for good corporate governance as well as sustained and long term value creation for all stakeholders. The Remuneration policies and practices form part of the Group’s overall obligation to have robust governance arrangements in place.

Employees are entitled to different remuneration components targeting appropriate and balanced remuneration package based on the employee job grade taking into consideration the employees skills, experience, his role in the Bank as well as market practice.

The remuneration components consist of all forms of payments or benefits in exchange for the services provided by the employee and can be divided into:

• Fixedremunerationbasedonemployeejob role and market

• Variableremunerationdependingonemployeeperformance- mainly in the form of cash bonuses, both deferred and non-deferred

40,00045,000

50,000

35,00030,000

20,00025,000

15,00010,000

85,00090,000

95,000

80,00075,000

65,00070,000

60,00055,000

5,000

(5,000)

(10,000)

(15,000)

–

50%

55%

45%

40%

30%

25%

35%

20%

15%

KD 0

00

Down 100 Down 50 Down 25 BB Consolidated Up 25 Up 50 Up 100

68,745 73,677 75,944 79,515 83,289 87,056 94,737

(10,770) (5,838) (3,571) – 3,774 7,541 15,222

-14% -7% -4% 0% 5% 9% 19%

Net Int. Inc. Forecast Earnings at Risk Earnings at Risk %

10%

0%

-5%

5%

-10%

-15%

Impact of interest rate change on earnings

driven by you

53

Employees are eligible to variable remuneration applicable to their position. Variable remuneration is in the form of cash bonus for Variable remuneration may be paid in cash and may be subject to a vesting or deferral period. Remuneration amounts are based on the bonus pools approved by the Board for the purpose of rewarding employee performance. The total amount of performance related remuneration is based on a combination of the assessment of the overall results of the Bank and of the performance of the business unit and of the individual concerned. When assessing individual performance, key financial and non‐financial targets and metrics are taken into account.

The payout of the variable remuneration is paid in cash for most of our employees. The variable remuneration is deferred for the CEO and Group Executives-as approved by the Board annually in line with the approved policy over a period of time not exceeding three years.

The variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the Bank as a whole, and justified according to the performance of the Bank, the business unit and the individual concerned.

Employees engaged in control functions are independent from the business units they oversee, have appropriate authority, and are remunerated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control. The remuneration of the senior officers in the Internal Audit Risk management, and Compliance functions is directly overseen by the respective committees to whom they report (i.e. BAC, BRC and BCGC respectively).

The Remuneration policy was approved in June 2013 and is scheduled for review in early 2015.

Remuneration and risk management

The general remuneration policy is aimed at the alignment of remuneration with prudent risk taking. The long-term strategy will include the overall business strategy and quantified risk tolerance levels with a multi-year horizon, as well as other values such as compliance culture, ethics, behavior towards customers, measures to mitigate conflicts of interest.

The remuneration practices are carefully managed within our risk appetite as laid out by the Board taking into account all key risks-financial, operational as well as compliance. The Bank ensures that the remuneration is designed and implemented to include, in particular,

1. a proper balance of variable to fixed remuneration,

2. the measurement of performance as well as the structure and,

3. the risk adjustment of the variable remuneration.

The assessment of the performance-based components of remuneration are based on longer-term performance as outlined in the Long Range Plan (LRP) and take into

account the outstanding risks associated with the performance. Variable remuneration is decided based on the individual performance against KPI’s set at the beginning of the performance year and the risk appetite.

In order to minimize incentives for excessive risk-taking, variable remuneration will constitute a balanced proportion of total remuneration. Having a fully-flexible policy on variable remuneration provides that all rewards may be reduced as a result of negative performance or even adjusted to zero in cases of risk management issues. There are no material changes in these measures over the past year.

Linking performance and remuneration

The banks remuneration practices are linked to both short term and long term performance goals. Key financial and non-financial performance measures are aligned to the Bank’s business strategy. Performance based remuneration is based on the bonus pools allocated by the BNRC/Board for the purpose of rewarding employee performance. The rewards are based on the bank’s overall performance, department/group performance and individual contribution thereof. The senior management team’s performance is measured through balanced scorecard which reviews the key performance areas of Customer focus, financial performance, process improvement and people management. All other employees in the bank have annual performance appraisals assessing financial and non-financial objectives based on their roles.

Risk being a key factor in determining the sustainability of long term performance the deferral of remuneration is essential to improving risk alignment in the remuneration package. The deferral of remuneration currently applies to identified staff such as the CEO and Executive management team.

1. Deferral Amount: a portion of the variable remuneration component not exceeding 40%, should be deferred over an appropriate period of time as defined in point 2 below.

2. Deferral Period: the deferred portion of the variable remuneration should be spread over a period not exceeding three years, and is to be aligned with the nature of the business, its risks and the activities of the member of staff in question. The actual payment of variable remuneration is spread over a period which takes account of the underlying business cycle of the Bank and its business risks

3. The deferral portion and percentage may be adjusted in accordance with the level of seniority or responsibility of the person remunerated.

5454

The deferral schedule is defined by different components:

a) the time horizon of the deferral,

b) the proportion of the variable remuneration that is being deferred,

c) the speed at which the deferred remuneration vests (vesting process) and

d) the time span from accrual until the payment of the first deferred amount;

e) the form of the deferred variable remuneration

The Bank will differentiate the deferral schedules by varying these five components.

Claw back

The variable remuneration, including the deferred portion, is paid or vests only if it is sustainable according to the financial situation of the Bank as a whole, and justified according to the performance of the Bank, the business unit and the individual concerned.

The claw-back applies to identified staff such as the CEO and Executive management team.

Clawback would necessitate that the executive pays back an amount already received under a cash bonus award following receipt of the cash either due to the fact that the performance of the business had been overstated at the time the payment was made; or the recipient was, at the time the payment was made, in serious breach of his employment contract and/ or bank’s policy or breach of regulatory issues, which resulted in declining financial performance of the Bank.

The clawback will be applicable even after the severance of the employment relationship for a period of one year from the award of the variable remuneration and the Bank will follow the legal recourse available to it for the recovery.

The Board shall, in all appropriate circumstances, require reimbursement of any annual incentive payment or long-term incentive payment to an executive officer where:

1) the payment was predicated upon achieving certain financial results that were subsequently the subject of a substantial restatement of the Bank’s published financial statements;

2) the Board determines the executive engaged in intentional misconduct that caused or substantially caused the need for the substantial restatement; and

3) a lower payment would have been made to the executive based upon the restated financial results.

In each such instance, the Bank will, to the extent practicable, seek to recover from the individual executive the amount by which the individual executive’s incentive payments for the relevant period exceeded the lower payment that would have been made based on the restated financial results.

Total number of Senior management for 2014 is 17.

Total number of Material risk takers for 2014 is 12.

B) Deferred cash remuneration outstanding as of end of the year (Salary and Bonus) relating to performance of 2013 amounted to KD 519,302.

C) Deferred remuneration paid during the year amounted to KD 169,575.

D) Summary of remunerations (salary and awards) for senior managers and material risk-takers for the 2014 financial year

Senior Management Material Risk Takers

Total amount in KD

Unrestricted Deferred Unrestricted Deferred

Variable cash remuneration

740,329 334,481 217,161 24,129

Fixed cash remuneration

2,253,335 - 754,883 -

A) Awards for senior managers and material risk-takers paid during the year (related to performance of 2013)

Senior Management Material Risk Takers

Number of Employees

Total amount in KD

Number of Employees

Total amount in KD

Variable Awards paid during the year*:

Cash 17 559,610 12 136,063

Fixed Awards granted during the year:

Cash 3 212,400 - -

Total awards paid during the year(variable and fixed)

772,010 136,063

Employees who received Sign on Awards during the year

1 120,000 - -

End of Service termination benefits paid during the year

- - - -

* represents 3.8% of total employees Variable and Fixed awards are only in the form of Cash awards

driven by you

55

15. Overview And Conclusion

It is considered by the Board and Management of the Bank that, as at the end of 2014, the institution has in place a management, control and evaluation system that is:

• Responsivetopresentbusinessenvironment,thebank’s growth plans and the attendant risks,

• Compliantbothwithhistoricregulatoryinstructionsand in conformity with Basel III driven requirements detailed by CBK in their June 2014 instruction document and further enhancements to the same issued from time to time including the detailed additions on Pillar 2 matters, and

• Meetsgenerallyacceptedinternationalriskmanagement standards for a financial institution of the size and complexity of the Bank.

The Bank also appoints an independent audit firm other than its external auditors, to examine the internal control systems in the Bank and its subsidiaries and to point out any deficiencies that may give rise to risks. This is being done in fulfilment of the CBK regulations and a copy of these reports along with the steps taken to correct any deficiencies is presented to the Board Audit Committee and also to CBK. This provides additional comfort regarding the checks and balances in place in the Bank and its subsidiaries.

The Bank now has in place relevant policies and detailed procedures for all its major departments/functions aimed to achieve full operational conformity with the policies set out in this section in an integrated and cost efficient manner. In this regard,

• Detailedoperatingproceduresareinplaceinrespectof all major functions and the concerned staff members may refer to them as and when necessary so as to ensure their compliance.

• InternalControlChartsofdifferentperiodicitiesarein place in all its major functions that enable the respective supervisory employees to follow and exercise control over the aspects covered by these charts.

• TheBank’sITsecurityandcontrolstructurehasbeeneffectively functioning and is certified under an international information security certification.

• Anindependentinternalauditfunctionhasregularboard approved audit plans to audit the various areas of the bank and present their findings and the responses of the audited departments including the steps taken to address audit observations.

The Bank Management will continue to review the policies and procedures on an ongoing basis periodically for necessary and appropriate enhancements, and present them for approval by Board Committees and/or the Board itself as required by the Bank’s Governance structure and, where applicable, CBK guidance.

5656

1. Common Disclosure Template - Composition of Regulatory Capital

Common Equity Tier 1 capital: instruments and reserves

1 Directly issued qualifying common share capital plus related stock surplus 405,736

2 Retained earnings 83,418

3 Accumulated other comprehensive income (and other reserves) 152,279

4 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies) -

5 Common share capital issued by subsidiaries and held by third parties (minority interest) 43,211

6 Common Equity Tier 1 capital before regulatory adjustments 684,644

Common Equity Tier 1 capital: regulatory adjustments

7 Prudential valuation adjustments -

8 Goodwill (net of related tax liability) 90,455

9 Other intangibles other than mortgage-servicing rights (net of related tax liability) 78,036

10 Deferred tax assets excluding those arising from temporary differences (net of related tax liability) -

11 Cash flow hedge reserve -

12 Shortfall of provisions to expected losses (based on Internal Models Approach, if applied) -

13 Securitisation gain on sale -

14 Gains and losses due to changes in own credit risk on fair valued liabilities -

15 Defined benefit pension fund net assets -

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet) 9,575

17 Reciprocal cross holdings in common equity of banks, Fis and insurance entities -

18 Investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions , where the bank does not own more than 10% of the issued capital (amount above 10% threshold of bank’s CET1 capital)

-

19 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)

-

20 Mortgage servicing rights (amount above 10% threshold of bank’s CET1 capital) -

21 Deferred tax assets arising from temporary differences (amount above 10% threshold, net of related tax liability) -

22 Amount exceeding the 15% threshold -

23 of which: significant investments in the common stock of financials -

24 of which: mortgage servicing rights -

25 of which: deferred tax assets arising from temporary differences -

26 National specific regulatory adjustments -

27 Regulatory adjustments applied to Common Equity Tier 1 due to insufficient Additional Tier 1 and Tier 2 to cover deductions -

28 Total regulatory adjustments to Common Equity Tier 1 178,066

29 Common Equity Tier 1 capital (CET1) 506,578

Additional Tier 1 capital: instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 144,025

31 of which: classified as equity under applicable accounting standards 144,025

32 of which: classified as liabilities under applicable accounting standards -

33 Directly issued capital instruments subject to phase out from Additional Tier 1 -

34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

7,626

35 of which: instruments issued by subsidiaries subject to phase out -

36 Additional Tier 1 capital before regulatory adjustments 151,651

Additional Tier 1 capital: regulatory adjustments

37 Investments in own Additional Tier 1 instruments -

38 Reciprocal cross holdings in Additional Tier 1 instruments -


-

40 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions

-

16. Additional Capital Disclosure Requirements

1. Common Disclosure Template - Composition of Regulatory CapitalAll amounts are in KD’000s

driven by you

57

1. Common Disclosure Template - Composition of Regulatory Capital (continue)


42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 to cover deductions -

43 Total regulatory adjustments to Additional Tier 1 capital -

44 Additional Tier 1 capital (AT1) 151,651

45 Tier 1 capital (T1 = CET1 + AT1) 658,229

Tier 2 capital: instruments and provisions

46 Directly issued qualifying Tier 2 instruments plus related stock surplus -

47 Directly issued capital instruments subject to phase out from Tier 2 -

48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

10,167

49 of which: instruments issued by subsidiaries subject to phase out -

50 General provisions included in Tier 2 capital 62,251

51 Tier 2 capital before regulatory adjustments 72,418

Tier 2 capital: regulatory adjustments

52 Investments in own Tier 2 instruments -

53 Reciprocal cross holdings in Tier 2 instruments -


-

55 Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions

-


57 Total regulatory adjustments to Tier 2 capital -

58 Tier 2 capital (T2) 72,418

59 Total capital (TC = T1 + T2) 730,647

60 Total risk-weighted assets 5,411,616

Capital ratios and buffers

61 Common Equity Tier 1 (as percentage of risk-weighted assets) 9.4%

62 Tier 1 (as percentage of risk-weighted assets) 12.2%

63 Total capital (as percentage of risk-weighted assets) 13.5%

64 Institution specific buffer requirement (minimum CET1 requirement plus capital conservation buffer plus countercyclical buffer requirements plus D-SIB buffer requirement, expressed as a percentage of risk-weighted assets)

-

65 of which: capital conservation buffer requirement 2.5%

66 of which: bank specific countercyclical buffer requirement -

67 of which: DSIB buffer requirement -

68 Common Equity Tier 1 available to meet buffers (as percentage of risk-weighted assets) 3.4%

National minima

69 Kuwait Common Equity Tier 1 minimum ratio 8.5%

70 National Tier 1 minimum ratio 10.0%

71 National total capital minimum ratio excluding CCY and DSIB buffers 12.0%

Amounts below the thresholds for deduction (before risk weighting)

72 Non-significant investments in the capital of other financials -

73 Significant investments in the common stock of financials -

74 Mortgage servicing rights (net of related tax liability) -

75 Deferred tax assets arising from temporary differences (net of related tax liability) -

Applicable caps on the inclusion of allowances in Tier 2

76 Provision eligible for inclusion in Tier 2 in respect of exposures subject to standardised approach (prior to application of cap) 187,853

77 Cap on inclusion of allowances in Tier 2 under standardised approach 62,251

78 Provision eligible for inclusion in Tier 2 in respect of exposures subject to internal ratings-based approach (prior to application of cap) -

79 Cap on inclusion of allowances in Tier 2 under internal ratings-based approach

All amounts are in KD’000s

5858

2. Reconciliations requirement:

The basis for the scope of consolidation for accounting and regulatory purposes is consistent for the Group. In order to provide a full reconciliation of all regulatory capital elements to the balance sheet in the audited financial statements, a three step approach has been mandated under the Pillar 3 disclosures section of the CBK Basel III framework.

Below table provides the comparison (Step1) of the balance sheet published in the consolidated financial statement and the balance sheet under the regulatory scope of consolidation. Lines have been expanded and referenced with letters (Step 2) to display the relevant items of the regulatory capital.

Item Balance sheet as in published financial statements

Under regulatory scope of consolidation

Reference

31-Dec-14 31-Dec-14

Assets

Cash and cash equivalents 1,040,563 1,040,563

Treasury bills and bonds with CBK and others

629,819 629,819

Due from banks and other financial institutions

689,819 689,819

Loans and advances to customers

4,386,466 4,386,466

of which General Provisions (netted above) capped for Tier 2 inclusion

62,251 62,251 a

Investment securities 484,942 484,942

of which goodwill in investment in associate

1,737 1,737 b

Other assets 259,495 259,495

Property and equipment 93,566 93,566

Intangible assets 166,754 166,754

of which goodwill 88,718 88,718 c

of which other intangibles 78,036 78,036 d

Total assets 7,751,424 7,751,424

Liabilities

Due to banks 801,178 801,178

Due to other financial institutions

825,250 825,250

Customers deposits 4,708,331 4,708,331

Other borrowed funds 226,644 226,644

Other liabilities 234,134 234,134

Total liabilities 6,795,537 6,795,537

Item Balance sheet as in published financial statements

Under regulatory scope of consolidation

Reference

31-Dec-14 31-Dec-14

Shareholders’ Equity

Share capital 195,177 195,177 e

Share premium 210,559 210,559 f

Treasury shares (9,575) (9,575) g

Statutory reserve 59,916 59,916 h

Voluntary reserve 60,294 60,294 i

Treasury shares reserve 45,082 45,082 j

Investment revaluation reserve

4,912 4,912 k

Share based compensation reserve

564 564 l

Foreign currency translation reserve

(19,043) (19,043) m

Other reserves 554 554 n

Retained earnings 112,401 112,401 o

of which proposed dividend

(28,983) (28,983) p

Equity attributable to shareholders of the Bank

660,841 660,841

Perpetual Tier 1 capital securities

144,025 144,025 q

Non-controlling interests 151,021 151,021

of which Limited Recognition eligible as CET1 Capital

43,211 43,211 r

of which Limited Recognition eligible as AT1 Capital

7,626 7,626 s

of which Limited Recognition eligible as Tier 2 Capital

10,167 10,167 t

Total equity 955,887 955,887

Total liabilities and equity 7,751,424 7,751,424



driven by you

59

Relevant Row Number in Common Disclosure Template

Common Equity Tier 1 capital: instruments and reserves Component of regulatory capital

Source based on reference letters of the balance sheet from step 2

1 Directly issued qualifying common share capital plus related stock surplus 405,736 e+f

2 Retained earnings 83,418 o+p

3 Accumulated other comprehensive income (and other reserves) 152,279 h+i+j+k+l+m+n

5 Common share capital issued by subsidiaries and held by third parties (minority interest) 43,211 r

6 Common Equity Tier 1 capital before regulatory adjustments 684,644

Common Equity Tier 1 capital : regulatory adjustments

8 Goodwill (net of related tax liability) 90,455 b+c

9 Other intangibles other than mortgage-servicing rights (net of related tax liability) 78,036 d

16 Investments in own shares (if not already netted off paid-in capital on reported balance sheet)

9,575 g

28 Total regulatory adjustments to Common Equity Tier 1 178,066

29 Common Equity Tier 1 capital (CET1) 506,578

Additional Tier 1 capital : instruments

30 Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 144,025 q

31 of which: classified as equity under applicable accounting standards 144,025 q

34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

7,626 s

36 Additional Tier 1 capital before regulatory adjustments 151,651

Additional Tier 1 capital : regulatory adjustments

44 Additional Tier 1 capital (AT1) 151,651

45 Tier 1 capital (T1 = CET1 + AT1) 658,229

Tier 2 capital : instruments and provisions

48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

10,167 t

50 General Provisions included in Tier 2 Capital 62,251 a

51 Tier 2 capital before regulatory adjustments 72,418

Tier 2 capital: regulatory adjustments

58 Tier 2 capital (T2) 72,418

59 Total capital (TC = T1 + T2) 730,647

Below table provides the relevant lines under Common Disclosure Template - Composition of Regulatory Capital with cross references to the letters in above table, thereby reconciling (Step 3) the components of regulatory capital to the published balance sheet.


6060

1 Issuer BURGAN TIER 1 FINANCING LIMITED

2 Unique identifier (eg CUSIP, ISIN or Bloomberg identifier for private placement) XS1106874198

3 Governing law(s) of the instrument WHOLE INSTRUMENT- ENGLISH LAW; SUBORDINATION PROVISION - DIFC LAW

Regulatory treatment

4 Type of Capital (CET1, AT1 or T2) AT1

5 Eligible at solo/group/group and solo Group and Solo

6 Instrument type (types to be specified by each jurisdiction) Sub-ordinated debt

7 Amount recognised in regulatory capital USD 500,000 thousand

8 Par value of instrument 100

9 Accounting classification Equity

10 Original date of issuance 30/09/2014

11 Perpetual or dated Perpetual

12 Original maturity date No Maturity

13 Issuer call subject to prior supervisory approval Yes

14 Optional call date, contingent call dates and redemption amount Optional Call Date: 30/09/2019 ; Regulatory event (full or partial disqualification) or tax event call: principal + accrued interest

15 Subsequent call dates, if applicable Quarterly

Coupons / dividends

16 Fixed or floating dividend/coupon Fixed for every 5-year period; at the end of every 5 year period, resets to the prevailing 5 year mid-swap rate plus margin

17 Coupon rate and any related index 7.25%; 5-year USD mid-swap

18 Existence of a dividend stopper Yes

19 Fully discretionary, partially discretionary or mandatory Mandatory

20 Existence of step up or other incentive to redeem No

21 Noncumulative or cumulative Non-cumulative

22 Convertible or non-convertible Non-convertible

23 If convertible, conversion trigger (s) N/A

24 If convertible, fully or partially N/A

25 If convertible, conversion rate N/A

26 If convertible, mandatory or optional conversion N/A

27 If convertible, specify instrument type convertible into N/A

28 If convertible, specify issuer of instrument it converts into N/A

29 Write-down feature Yes

30 If write-down, write-down trigger(s) Determination by regulator that the bank will be non-viable without a write-down

31 If write-down, full or partial Can be partial or full

32 If write-down, permanent or temporary Permanent

33 If temporary write-down, description of write-up mechanism N/A

34 Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument)

Perpetual Tier 1 securities are immediately junior to subordinated notes and subordinated bonds which are not considered eligible capital securities in accordance with Basel III guidelines issued by the CBK.

35 Non-compliant transitioned features None

36 If yes, specify non-compliant features N/A

3. Disclosure for main features of regulatory capital instruments:

driven by you

61

4. Financial leverage ratio:

Below table provides the reconciliation of the balance sheet assets from the published financial statement with total exposure amount in the calculation of leverage ratio.

Summary comparison of accounting assets vs leverage ratio exposure measure:

Item KD’000s

1 Total consolidated assets as per published financial statements 7,751,424

2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation

(168,491)

3 Adjustment for fiduciary assets recognized on the balance sheet pursuant to the operative accounting framework but excluded from the leverage ratio exposure measure

-

4 Adjustments for derivative financial instruments 28,742

5 Adjustment for securities financing transactions (i.e. repos and similar secured lending) -

6 Adjustment for off-balance sheet items (i.e. conversion to credit equivalent amounts of off-balance sheet exposures) 530,684

7 Other adjustments -

Leverage ratio exposure 8,142,360

Leverage ratio common disclosure template:

Item KD’000s

On-balance sheet exposures

1 On-balance sheet items (excluding derivatives and SFTs, but including collateral) 7,751,424

2 (Asset amounts deducted in determining Basel III Tier 1 capital) (168,491)

3 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2) 7,582,933

Derivative exposures

4 Replacement cost associated with all derivatives transactions (ie net of eligible cash variation margin) 12,144

5 Add-on amounts for PFE associated with all derivatives transactions 16,598

6 Gross-up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative accounting framework

-

7 (Deductions of receivables assets for cash variation margin provided in derivatives transactions) -

8 (Exempted CCP leg of client-cleared trade exposures) -

9 Adjusted effective notional amount of written credit derivatives -

10 (Adjusted effective notional offsets and add-on deductions for written credit derivatives) -

11 Total derivative exposures (sum of lines 4 to 10) 28,742

Securities financing transaction exposures

12 Gross SFT assets (with no recognition of netting), after adjusting for sale accounting transactions -

13 (Netted amounts of cash payables and cash receivables of gross SFT assets) -

14 CCR exposure for SFT assets -

15 Agent transaction exposures -

16 Total securities financing transaction exposures (sum of lines 12 to 15) -

Other off-balance sheet exposures

17 Off-balance sheet exposure at gross notional amount 1,956,222

18 (Adjustments for conversion to credit equivalent amounts) (1,425,538)

19 Off-balance sheet items (sum of lines 17 and 18) 530,684

Capital and total exposures

20 Tier 1 capital 658,229

21 Total exposures (sum of lines 3, 11, 16 and 19) 8,142,260

Leverage ratio

22 Basel III leverage ratio 8.1%

62

Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Burgan Bank S.A.K.P. (the “Bank”) and its subsidiaries (collectively “the Group”), which comprise the consolidated statement of financial position as at 31 December 2014 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal controls relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2014, and its financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted for use by the State of Kuwait.

Report on Other Legal and Regulatory Requirements Furthermore, in our opinion proper books of account have been kept by the Bank and the consolidated financial statements, together with the contents of the report of the Bank’s Board of Directors relating to these consolidated financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the consolidated financial statements incorporate all information that is required by the Capital Adequacy Regulations and Financial Leverage Ratio Regulations issued by the Central Bank of Kuwait (“CBK”) as stipulated in CBK Circular Nos. 2/RB, RBA/336/2014 dated 24 June 2014 and 2/BS/342/2014 dated 21 October 2014 respectively, the Companies Law No 25 of 2012, as amended and its executive regulation, and by the Bank’s Memorandum of Incorporation and Articles of Association, as amended, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of the Capital Adequacy Regulations and Financial Leverage Ratio Regulations issued by the CBK as stipulated in CBK Circular Nos. 2/RB, RBA /336/2014 dated 24 June 2014 and 2/BS/342/2014 dated 21 October 2014 respectively, the Companies Law No 25 of 2012, as amended and its executive regulation, or of the Bank’s Memorandum of Incorporation and Articles of Association, as amended, have occurred during the year ended 31 December 2014 that might have had a material effect on the business of the Bank or on its financial position.

We further report that, during the course of our audit, we have not become aware of any violations of the provisions of Law No. 32 of 1968, as amended, concerning currency, the CBK and the organisation of banking business, and its related regulations during the year ended 31 December 2014 that might have had a material effect on the business of the Bank or on its financial position.

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF BURGAN BANK S.A.K.P.

Waleed A. Al Osaimi Bader A. Al WazzanLicence No. 68 A Licence No. 62 AErnst & Young Deloitte & Touche(Al Aiban, Al Osaimi & Partners) (Al-Wazzan & Co.)

23 February 2015Kuwait

BURGAN BANK GROUP

The attached notes 1 to 27 form an integral part of these consolidated financial statements. 3

Consolidated Statement of Financial Position As at 31 December 2014 2014 2013 Notes KD 000’s KD 000’s ASSETS Cash and cash equivalents 3 1,040,563 1,004,290 Treasury bills and bonds with CBK and others 629,819 583,647 Due from banks and other financial institutions 4 689,819 700,083 Loans and advances to customers 5 4,386,466 3,954,848 Investment securities 6 484,942 421,402 Other assets 7 259,495 238,138 Property and equipment 93,566 81,378 Intangible assets 8 166,754 170,965

───────── ───────── TOTAL ASSETS 7,751,424 7,154,751

═════════ ═════════

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES Due to banks 801,178 568,561 Due to other financial institutions 825,250 880,492 Deposits from customers 4,708,331 4,640,084 Other borrowed funds 10 226,644 227,597 Other liabilities 11 234,134 218,190

───────── ───────── TOTAL LIABILITIES 6,795,537 6,534,924

───────── ───────── EQUITY Share capital 12 195,177 162,222 Share premium 12 210,559 129,559 Treasury shares 12 (9,575) (37,683) Statutory reserve 12 59,916 53,480 Voluntary reserve 12 60,294 53,858 Treasury shares reserve 12 45,082 36,554 Investment revaluation reserve 4,912 7,047 Share based compensation reserve 564 564 Foreign currency translation reserve (19,043) (17,372) Other reserves 554 554 Retained earnings 112,401 86,675

───────── ───────── Total equity attributable to the equity holders of the Bank 660,841 475,458 Perpetual Tier 1 capital securities 12 144,025 - Non-controlling interests 151,021 144,369

───────── ───────── TOTAL EQUITY 955,887 619,827

───────── ───────── TOTAL LIABILITIES AND EQUITY 7,751,424 7,154,751

═════════ ═════════ ___________________________ ________________________ Khalid Al Zouman Eduardo Eguren Linsen Group Chief Financial Officer Group Chief Executive Officer ___________________________ Majed Essa Al Ajeel Chairman of the Board

63

The attached notes 1 to 24 form an integral part of these consolidated financial statement.

64

BURGAN BANK GROUP


Consolidated Income Statement For the year ended 31 December 2014

2014 2013 Notes KD 000’s KD 000’s Interest income 13 305,056 270,375 Interest expense 14 (119,518) (104,940)

───────── ───────── Net interest income 185,538 165,435

Fee and commission income 15 53,784 48,124 Fee and commission expense (5,195) (3,501)

───────── ───────── Net fee and comission income 48,589 44,623

Net gain from foreign currencies 7,251 18,664 Net investment income 16 16,272 11,266 Dividend income 1,894 2,937 Other income 5 16,167 10,634

───────── ───────── Operating income 275,711 253,559 Staff expenses (58,538) (53,598) Other expenses (63,636) (59,238)

───────── ───────── Operating profit before provision 153,537 140,723 Provision for impairment of loans and advances 5 (61,302) (89,913) Impairment of investment securities (2,079) (2,963)

───────── ───────── Profit before taxation and board of directors' renumeration 90,156 47,847

Taxation 17 (17,361) (15,692) Board of directors' remuneration (90) (90)

───────── ───────── Profit for the year 72,705 32,065

═════════ ═════════ Attributable to: Equity holders of the Bank 61,758 20,102 Non-controlling interests 10,947 11,963

───────── ───────── 72,705 32,065 ═════════ ═════════ Fils Fils

Basic and diluted earnings per share - attributable to the equity holders of the Bank 18

37.6

12.0

═════════ ═════════


65

BURGAN BANK GROUP


Consolidated Statement of Comprehensive Income For the year ended 31 December 2014

2014 2013 KD 000’s KD 000’s Profit for the year 72,705 32,065

───────── ───────── Other comprehensive income Other comprehensive income to be reclassified to profit or loss in subsequent periods:

Financial assets available for sale: Net change in fair value (2,053) (1,582) Net transfer to consolidated income statement (1,373) (1,773) Foreign currency translation adjustment 2,227 (15,117)

───────── ───────── Other comprehensive loss for the year (1,199) (18,472)

───────── ───────── Total comprehensive income for the year 71,506 13,593

═════════ ═════════ Attributable to: Equity holders of the Bank 57,952 439 Non-controlling interests 13,554 13,154

───────── ───────── 71,506 13,593 ═════════ ═════════


BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

7 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

6

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity

For

the

year

end

ed 3

1 D

ecem

ber

2014

Attr

ibut

able

to e

quity

hol

ders

of t

he B

ank

Shar

e ca

pita

l K

D 0

00’s

Shar

e pr

emiu

m

KD

000

’s

Trea

sury

sh

ares

K

D 0

00’s

Stat

utor

y re

serv

e K

D 0

00’s

Volu

ntar

y re

serv

e K

D 0

00’s

Trea

sury

sh

ares

re

serv

e K

D 0

00’s

Inve

stm

ent

reva

luat

ion

rese

rve

KD

000

’s Sh

are

base

d co

mpe

nsat

ion

rese

rve

KD

000

’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e K

D 0

00’s

Oth

er

rese

rves

K

D 0

00’s

Reta

ined

ea

rnin

gs

KD

000

’s

Tota

l K

D 0

00’s

Perp

etua

l Ti

er 1

ca

pita

l se

curit

ies

KD

000

’s

Non

- co

ntro

lling

in

tere

sts

KD

000

’s To

tal e

quity

K

D 0

00’s

B

alan

ce a

t 1 Ja

nuar

y 20

14

162,

222

129,

559

(37,

683)

53

,480

53

,858

36

,554

7,

047

564

(17,

372)

55

4 86

,675

47

5,45

8 -

14

4,36

9 61

9,82

7 Pr

ofit

for t

he y

ear

-

-

-

-

-

-

-

-

-

-

61,

758

6

1,75

8

-

10,

947

7

2,70

5

Oth

er c

ompr

ehen

sive

(los

s)

inc

ome

-

-

-

-

-

-

(2,1

35)

-

(1,6

71)

-

-

(3,8

06)

-

2,6

07

(1,1

99)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

(2

,135

) -

(1

,671

) -

6

1,75

8

57,

952

-

1

3,55

4

71,

506

Tr

ansf

er to

rese

rves

-

-

-

6

,436

6

,436

-

-

-

-

-

(1

2,87

2)

-

-

-

-

Bon

us sh

ares

issu

ed (n

ote

12)

11,

355

-

-

-

-

-

-

-

-

-

(1

1,35

5)

-

-

-

-

Rig

hts s

hare

s iss

ued

(not

e 12

) 2

1,60

0

81,

000

-

-

-

-

-

-

-

-

-

1

02,6

00

-

-

102

,600

Sh

are

capi

tal i

ncre

ase

in a

s

ubsid

iary

-

-

-

-

-

-

-

-

-

-

-

-

-

3

12

312

C

ash

divi

dend

pai

d (n

ote

12)

-

-

-

-

-

-

-

-

-

-

(10,

783)

(1

0,78

3)

-

-

(10,

783)

C

ash

divi

dend

pai

d to

non

c

ontro

lling

inte

rest

s -

-

-

-

-

-

-

-

-

-

-

-

-

(7

,214

) (7

,214

) Pu

rcha

se o

f tre

asur

y sh

ares

-

-

(1

4,24

8)

-

-

-

-

-

-

-

-

(14,

248)

-

-

(1

4,24

8)

Sale

of t

reas

ury

shar

es

-

-

42,

356

-

-

8

,528

-

-

-

-

-

5

0,88

4

-

-

50,

884

Pr

ocee

ds fr

om is

sue

of p

erpe

tual

T

ier1

cap

ital s

ecur

ities

(not

e 12

) -

-

-

-

-

-

-

-

-

-

-

-

1

44,0

25

-

144

,025

Pe

rpet

ual T

ier1

cap

ital s

ecur

ities

i

ssua

nce

cost

(not

e 12

) -

-

-

-

-

-

-

-

-

-

(1

,022

) (1

,022

) -

-

(1

,022

)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Bal

ance

at 3

1 D

ecem

ber

2014

1

95,1

77

210

,559

(9

,575

) 5

9,91

6

60,

294

4

5,08

2

4,9

12

564

(1

9,04

3)

554

1

12,4

01

660

,841

1

44,0

25

151

,021

9

55,8

87

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

66

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

t.

BU

RG

AN

BA

NK

GR

OU

P

The

atta

ched

not

es 1

to 2

7 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

ts.

7

Con

solid

ated

Sta

tem

ent o

f Cha

nges

in S

hare

hold

ers’

Equ

ity (C

ontin

ued)

Fo

r th

e ye

ar e

nded

31

Dec

embe

r 20

14

Attr

ibut

able

to e

quity

hol

ders

of t

he B

ank

Shar

e ca

pita

l K

D 0

00’s

Shar

e pr

emiu

m

KD

000

’s

Trea

sury

sh

ares

K

D 0

00’s

Stat

utor

y re

serv

e K

D 0

00’s

Volu

ntar

y re

serv

e K

D 0

00’s

Trea

sury

sh

ares

re

serv

e K

D 0

00’s

Inve

stm

ent

reva

luat

ion

rese

rve

KD

000

’s

Shar

e ba

sed

com

pens

atio

n re

serv

e K

D 0

00’s

Fore

ign

curr

ency

tr

ansl

atio

n re

serv

e K

D 0

00’s

Oth

er

rese

rves

K

D 0

00’s

Reta

ined

ea

rnin

gs

KD

000

’s

Tota

l K

D 0

00’s

Non

- co

ntro

lling

in

tere

sts

KD

000

’s

Tota

l equ

ity

KD

000

’s

B

alan

ce a

t 1 Ja

nuar

y 20

13

154

,497

1

29,5

59

(36,

688)

5

1,41

4

51,

792

3

6,55

4

11,

091

5

64

(1,7

53)

554

9

3,14

1

490

,725

1

29,1

06

619

,831

Pr

ofit

for t

he y

ear

-

-

-

-

-

-

-

-

-

-

20,

102

2

0,10

2

11,

963

3

2,06

5

Oth

er c

ompr

ehen

sive

(los

s)

inc

ome

-

-

-

-

-

-

(4,0

44)

-

(15,

619)

-

-

(1

9,66

3)

1,1

91

(18,

472)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Tota

l com

preh

ensi

ve in

com

e -

-

-

-

-

-

(4

,044

) -

(1

5,61

9)

-

20,

102

4

39

13,

154

1

3,59

3

Tran

sfer

to re

serv

es

-

-

-

2,0

66

2,0

66

-

-

-

-

-

(4,1

32)

-

-

-

Shar

e ca

pita

l inc

reas

e in

a

sub

sidia

ry

-

-

-

-

-

-

-

-

-

-

-

-

6,0

92

6,0

92

Bon

us sh

ares

issu

ed (n

ote

12)

7,7

25

-

-

-

-

-

-

-

-

-

(7,7

25)

-

-

-

Cas

h di

vide

nd (n

ote

12)

-

-

-

-

-

-

-

-

-

-

(14,

711)

(1

4,71

1)

-

(14,

711)

C

ash

divi

dend

pai

d to

non

- c

ontro

lling

inte

rest

s -

-

-

-

-

-

-

-

-

-

-

-

(3

,983

) (3

,983

) Pu

rcha

se o

f tre

asur

y sh

ares

-

-

(9

95)

-

-

-

-

-

-

-

-

(995

) -

(9

95)

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

───────

Bal

ance

at 3

1 D

ecem

ber 2

013

162

,222

1

29,5

59

(37,

683)

5

3,48

0

53,

858

3

6,55

4

7,0

47

564

(1

7,37

2)

554

8

6,67

5

475

,458

1

44,3

69

619

,827

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

═══════

67

The

atta

ched

not

es 1

to 2

4 fo

rm a

n in

tegr

al p

art o

f the

se c

onso

lidat

ed fi

nanc

ial s

tate

men

t.

BURGAN BANK GROUP


Consolidated Statement of Cash Flows Year ended 31 December 2014

2014 2013 Notes KD 000’s KD 000’s Operating activities Profit before taxation and board of directors' remuneration 90,156 47,847 Adjustments: Net investment income 16 (16,272) (11,266) Provision for impairment of loans and advances 61,302 89,913 Provision for impairment of investment securities 2,079 2,963 Dividend income (1,894) (2,937) Depreciation and amortisation 15,134 13,857

───────── ───────── Operating profit before changes in operating assets and liabilities 150,505 140,377 Changes in operating assets and liabilities: Treasury bills and bonds with CBK and others (46,172) (100,059) Due from banks and other financial institutions 9,930 (112,204) Loans and advances to customers (492,586) (647,024) Other assets (21,357) (81,008) Due to banks 232,617 256,927 Due to other financial institutions (55,242) 167,239 Deposits from customers 68,247 744,968 Other liabilities 13,860 17,684 Taxation paid (15,367) (17,395)

───────── ───────── Net cash (used in) from operating activities (155,565) 369,505

───────── ───────── Investing activities Purchase of investment securities (791,670) (1,103,693) Proceeds from sale of investment securities 738,897 998,260 Purchase of property and equipment (20,392) (19,175) Dividends received 1,894 2,937

───────── ───────── Net cash used in investing activities (71,271) (121,671)

───────── ───────── Financing activities Other borrowed funds (953) (3,388) Proceeds from share capital increase 12 102,600 - Proceeds from share capital increase in a subsidiary 1 312 6,092 Purchase of treasury shares (14,248) (995) Sale of treasury shares 50,884 - Proceeds from issue of perpetual Tier 1 capital securities 12 144,025 - Perpetual Tier 1 capital securities issuance cost 12 (1,022) - Cash dividend paid to equity holders of the Bank 12 (10,783) (14,711) Cash dividend paid to non-controlling interests (7,214) (3,983)

───────── ───────── Net cash from (used in) financing activities 263,601 (16,985)

───────── ───────── Net increase in cash and cash equivalents 36,765 230,849 Effect of foreign currency translation (492) (14,027) Cash and cash equivalents at 1 January 1,004,290 787,468

───────── ───────── Cash and cash equivalents at 31 December 3 1,040,563 1,004,290

═════════ ═════════ Additional cash flow information: Interest received 309,020 258,415 Interest paid 131,175 93,277

═════════ ═════════

68


BURGAN BANK GROUP

Notes to the Consolidated Financial Statements At 31 December 2014

9

1. INCORPORATION AND PRINCIPAL ACTIVITIES Burgan Bank S.A.K.P. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a bank with the Central Bank of Kuwait (“CBK”). The Bank’s registered address is P.O. Box 5389, Safat 12170, State of Kuwait. The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year ended 31 December 2014 were authorised for issue in accordance with a resolution of the Board of Directors on 23 February 2015 and are issued subject to the approval of the Annual General Assembly of the shareholders of the Bank. The Annual General Assembly of the Shareholders has the power to amend these consolidated financial statements after issuance. The principal activities of the Group are explained in note 19. The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company”). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements are prepared under the historical cost convention, except for financial assets classified as fair value through profit or loss, certain financial assets classified as available for sale and derivative financial instruments that are measured at fair value. The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional currency, rounded to the nearest thousand except when otherwise stated. Statement of compliance The consolidated financial statements of the Group have been prepared in accordance with the regulations of the State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”) except for International Accounting Standards (“IAS”) 39: Financial Instruments: Recognition and Measurement requirement for collective provision, which has been replaced by the CBK’s requirement for a minimum general provision as described under the accounting policies for impairment of financial assets. Changes in accounting policies and disclosures The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in the previous financial year, except for the adoption of the following new standards and interpretations effective as of 1 January 2014. Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) These amendments are effective for annual periods beginning on or after 1 January 2014 provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under IFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. This amendment is not relevant to the Group, since the Bank does not qualify to be an investment entity under IFRS 10. IAS 32: Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amendment) These amendments are effective for annual periods beginning on or after 1 January 2014 and clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendment has not resulted in any impact on the financial position or performance of the Group. IAS 36: Impairmentof Assets - Recoverable Amount Disclosures for Non-Financial Assets (Amendment) These amendments remove the unintended consequences of IFRS 13 on the disclosures required under IAS 36.In addition, these amendments require disclosure of the recoverable amounts for the assets or CGUs for which impairment loss has been recognised or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after 1 January 2014 with earlier application permitted, provided IFRS 13 is also applied. Though these amendments have not resulted in any additional disclosures currently, the same would continue to be considered for future disclosures.

69

BURGAN BANK GROUP


10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Changes in accounting policies and disclosures (continued) IAS 39: Novation of Derivatives and Continuation of Hedge Accounting (Amendment) These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after 1 January 2014. These amendments have not resulted in any impact on the financial position or performance of the Group. IFRIC 21: Levies IFRIC 21 clarifies that an entity recognises a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. Retrospective application is required for IFRIC 21. This interpretation has no impact on the Group as it has applied the recognition principles under IAS 37 Provisions, Contingent Liabilities and Contingent Assets consistent with the requirements of IFRIC 21 in prior years. Other amendments to IFRSs which are effective for annual accounting period starting from 1 January 2014 did not have any material impact on the accounting policies, financial position or performance of the Group. New and revised IASB Standards, but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below. The Group intends to adopt those standards when they become effective. IFRS 9: Financial Instruments: 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 a permission 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. This standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The adoption of this standard will have an effect on the classification and measurement of Group's financial assets but is not expected to have a significant impact on the classification and measurement of financial liabilities. The Group is in the process of quantifying the impact of this standard on the Group's financial statements, when adopted. IFRS 15 – Revenue from Contracts with customers IFRS 15 was issued by IASB on 28 May 2014 is effective for annual periods beginning on or after 1 January 2017. IFRS 15 supersedes IAS 11 – Construction Contracts and IAS 18 – Revenue along with related IFRIC 13, IFRIC 18 and SIC 31 from the effective date. This new standard would remove inconsistencies and weaknesses in previous revenue recognition requirements, provide a more robust framework for addressing revenue issues and improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The Group is in the process of evaluating the effect of IFRS 15 on the Group and do not expect any significant impact on adoption of this standard. Amendments to IAS 19 Defined Benefit Plans: Employee Contributions IAS 19 requires an entity to consider contributions from employees or third parties when accounting for defined benefit plans. Where the contributions are linked to service, they should be attributed to periods of service as anegative benefit. These amendments clarify that, if the amount of the contributions is independent of thenumber of years of service, an entity is permitted to recognise such contributions as a reduction in the servicecost in the period in which the service is rendered, instead of allocating the contributions to the periods ofservice. This amendment is effective for annual periods beginning on or after 1 July 2014. It is not expectedthat this amendment would be relevant to the Group, since none of the entities within the Group has defined benefit plans with contributions from employees or third parties. Annual improvements for 2010-2012 and 2011-2013 cycle which are effective from 1 July 2014 are not expected to have a material impact on the Group. Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries (investees which are controlled by the Bank). Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:

70

BURGAN BANK GROUP


11

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Basis of consolidation (continued) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the

investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the Group’s consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. The subsidiaries of the Group are as follows:

Name of company

Principal activities

Country of incorporation

Effective interest as at 31 December

2014


2013 Jordan Kuwait Bank P.S.C. (“JKB”) Banking Jordan 51.19% 51.19% Algeria Gulf Bank S.P.A. (“AGB”) Banking Algeria 91.13% 91.13% Bank of Baghdad P.J.S.C. (“BoB”) Banking Iraq 51.79% 51.79% Tunis International Bank S.A (“TIB”) Banking Tunisia 86.70% 86.70% Burgan Bank A.S. (“BBT”) Banking Turkey 99.26% 99.26%

Held through JKB United Financial Investments Company Brokerage Jordan 25.70% 25.70% Ejara Leasing Company Leasing Jordan 51.19% 51.19%

Held through BoB Baghdad Brokerage Company Banking Iraq 51.79% 51.79% Held through BBT

Burgan Finansal Kiralama A.S

Leasing Turkey 99.26% 99.26% Burgan Yatirim Menkul Degerler A.S. Brokerage Turkey 99.26% 99.26% Burgan Portfoy Yonetimi A.S. Asset Management Turkey 99.26% 99.26%

71

BURGAN BANK GROUP


12

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Basis of consolidation (continued)

Name of company




2014


2013 Structured entity (“SPVs”) treated as a subsidiary

Burgan Tier 1 Financing Limited Special purpose

entity Dubai 100% - Financial instruments Classification of financial instruments The Group classifies financial instruments as at "fair value through profit or loss", "loans and receivables", "available for sale", "held to maturity" and “financial liabilities at amortised cost”. Management determines the appropriate classification of each instrument at initial recognition. Recognition/de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement date accounting. Changes in fair value between the trade date and settlement date are recognised in the consolidated income statement or in OCI in accordance with the policy applicable to the related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations or conventions in the market place. A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive cash flows from the asset have expired; or the Group has transferred its rights to receive cash flows from the assets or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated income statement. Measurement All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets at fair value through profit or loss are recognised in the consolidated income statement. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or buying in the near term. Changes in fair value are recognised in net investment income. Interest earned is accrued in interest income, using the effective interest rate (EIR), while dividend income is recorded under operating income, in the consolidated income statement, when the right to receive the payment has been established. Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is evaluated on reliable fair value basis in accordance with documented investment strategy. After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all changes in fair value recognised in the consolidated income statement. Derivative instruments are categorised as held for trading unless they are designated as hedging instruments.

72

BURGAN BANK GROUP


13

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial instruments (continued) Financial assets held to maturity Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Group has the positive intention and ability to hold to maturity. After initial recognition, held to maturity financial assets are carried at amortised cost using the EIR method, less impairment losses, if any. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Loans and receivables These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active market. These are subsequently measured at amortised cost using the effective yield method adjusted for impairment losses, if any. Treasury bills and bonds with CBK and others, due from banks and OFIs, and loans and advances to customers are classified as “loans and receivables”. Financial assets available for sale Financial assets available for sale include equity and debt securities. Equity investments classified as available for sale are those that do not qualify to be classified as loans and receivables, held to maturity or at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time that may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. These are subsequently measured at fair value with gains and losses being recognised as other comprehensive income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the financial assets are determined to be impaired at which time the cumulative gains and losses previously reported as OCI in equity are transferred to the consolidated income statement. Financial assets whose fair value cannot be reliably measured are carried at cost less impairment losses, if any. Financial liabilities at amortised cost These financial liabilities are subsequently measured at amortised cost using the EIR. “Due to banks”, “due to other financial institutions (“OFI”)”, “deposit from customers”, “other borrowed funds”, and “other liabilities” are classified as “financial liabilities at amortised cost”. Financial guarantees In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. The premium received is amortised in the consolidated income statement in 'fee and commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently measured as a higher of the amount initially recognised less amortisation or the value of any financial obligation that may arise as a result of financial guarantee. Any increase in the liability relating to financial guarantees is recorded in the consolidated income statement. Derivative financial instruments The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks. Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a cash flow hedge of a recognised asset or liability, the Group accounts for them using hedge accounting principles, provided certain criteria are met. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair value of the derivative contract are taken directly to the consolidated income statement.

73

BURGAN BANK GROUP


14

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Hedge accounting For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; and (b) cash flow hedges, when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or a foreign currency risk in an unrecognised firm commitment. When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also document its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows attributable to the hedge risk. The Group discontinues hedge accounting when the following criteria are met:

a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge; b) the hedging instrument expires, or is sold, terminated, or exercised; c) the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable.

Fair value hedges The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded in the consolidated income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the consolidated income statement over the period to maturity of the previously designated hedge relationship using the EIR. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated income statement. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in consolidated income statement. Cash flow hedges For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow hedge is recognised initially in OCI, and transferred to the consolidated income statement in the periods when the hedged transaction affects consolidated income statement. Any ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the consolidated income statement. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income and is recognised when the hedged forecast transaction is ulimately recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is immediately transferred to the consolidated income statement. Fair value measurement The Group measures financial instruments, such as, derivatives, investment securities etc., at each balance sheet date. Also, fair values of financial instruments measured atamortised cost are disclosed in note 23. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible to by the Group.

74

BURGAN BANK GROUP


15

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Fair value measurement (continued) The fair value of an asset or a liability is measured using the assumptions that market participants would usewhen pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fairvalue measurement as a whole: Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value

measurement is directly or indirectly observable Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value

measurement is unobservable For financial instruments quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts or similar investment vehicles are based on the last published net assets value. For unquoted financial instruments fair value is determined by reference to the market value of a similar investment, discounted cash flows, other appropriate valuation models or brokers’ quotes. For financial instruments carried at amortised cost, the fair value is estimated by discounting future cash flows at the current market rate of return for similar financial instruments. For investments in equity instruments, where a reasonable estimate of fair value cannot be determined, the investment is carried at cost. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing 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. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Amortised cost This is computed using the effective interest method less any allowance for impairment. The calculation takes into account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of the effective interest rate. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position, if there is a currently enforceable legal right to offset and intends to settle on a net basis, to realise the asset and settle the liability simultaneously. Assets pending sale The Group occasionally acquires non-monetary assets in settlement of certain financing receivables and loans and advances. Such assets are stated at the lower of the carrying value of the related financing receivables and loans and advances and the current fair value. Gains or losses on disposal, and revaluation losses, are recognised in the consolidated income statement.

75

BURGAN BANK GROUP


16

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of financial assets The Group assesses at each reporting date whether there is an objective evidence that a specific financial asset or a group of financial assets are impaired. A financial asset or a group of financial assets is deemed to be impaired, if and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a specific financial asset or a group of financial assets classified as loans and receivables are impaired includes whether any payment of principal or interest is overdue by more than 90 days or there are any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial difficulty has arisen, deterioration in the value of collateral etc. The Group assess whether objective evidence of impairment exists on an individual basis for each individually significant asset and collectively for others not deemed individually significant except for financial assets classified as due from banks and financial institutions and loans and receivables where minimum general provision as per CBK’s instructions is followed. The impairment loss for financial assets classified as loans and receivables is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows including amounts recoverable from collateral and guarantees, discounted at the financial asset’s original effective interest rate. If the financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. For debt instruments classified as available-for-sale, the Group assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets classified as loans and receivables. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the consolidated income statement. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to a credit event occurring after the impairment loss was recognised in the consolidated income statement, the impairment loss is reversed through the consolidated income statement. In the case of equity instruments classified as ‘available for sale’, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any evidence of impairment exists, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement, is recognised in the consolidated income statement. Subsequent increases in fair value of such available for sale equity instruments are not reversed through the consolidated income statement. For non-equity financial assets, the carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent period, 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. In addition, in accordance with CBK instructions, a minimum general provision is made on all applicable credit facilities (net of certain categories of collateral) that are not provided for specifically. Financial assets are written off when there is no realistic prospect of recovery. Renegotiated loans In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. When the terms and conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur.

76

BURGAN BANK GROUP


17

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Repurchase and reverse repurchase agreements Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are not derecognised in the consolidated statement of financial position as the Group retains substaintially all the risks and rewards of ownership. The corresponding cash received is recognised in the consolidated statement of financial position as an asset with a corresponding obligation to return it, including the accrued interest as a liability, reflecting the transaction’s economic substance as loan to the Group. The difference between the sale and repurchase price is treated as interest expense using the effective interest rate method. Conversely, assets purchased with a corresponding commitment to resell at a specified future date at an agreed price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under these agreements are treated as interest earning assets and the difference between the purchase and resale price treated as interest income using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprises of cash in hand and in current account with banks and OFIs and balances with CBK and due from banks and OFIs with original maturities not exceeding thirty days from acquisition date. Investment in associate The Group’s investment in its associate is accounted for using the equity method. An associate is an entity in which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. Under the equity method, the investment in associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated income statement reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the other comprehensive income of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The Group’s share of profit of an associate is shown on the face of the consolidated income statement. This is the profit attributable to equity holders of the associate and therefore is profit after tax and non-controlling interest in the subsidiaries of the associate. The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in its associate. The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the consolidated income statement. Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognised in consolidated income statement. Property and equipment Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each asset on a straight line basis to their residual values over its estimated useful life. Freehold land is stated at cost less impairment losses.

77

BURGAN BANK GROUP


18

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property and equipment (continued) The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings 20 to 35 years Furniture and equipment 4 to 11 years Motor vehicles 3 to 7 years Computers 5 years When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any gain or loss resulting from their disposal is recognised in the consolidated income statement. The carrying amounts of property and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets are written down to their recoverable amounts and the impairment loss is recognised in the consolidated income statement. Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of property and equipment. All other expenditure is recognised in the consolidated income statement as the expense is incurred. Intangible assets Intangible assets represent separately identifiable non-monetary assets without physical substance arising from business combinations. Intangible assets are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed as finite. Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each financial position date. Changes in the expected useful economic life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the consolidated income statement under “other expenses” consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets over their estimated useful economic lives as follows: Banking license 10 to 30 years Customer relationships and core deposits 5 to 10 years Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement when the asset is derecognised. A previously recognisedimpairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised.

Leases

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.

Group as a lessee Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight-line basis over the lease term. Contingent rental payable is recognised as an expense in the period in which they are incurred.

78

BURGAN BANK GROUP


19

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Leases (continued) Group as a lessor Leases where the Group does not transfer substantially all of the risk and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. Business combinations and goodwill A business combination is the bringing together of separate entities or businesses into one reporting entity as a result of one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of accounting is used to account for business combinations. Under this method, the acquirer recognises, separately from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at the acquisition date. The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed in the period in which they are incurred. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income statement. It is then considered in the determination of goodwill. Goodwill arising in a business combination is recognised as of the acquisition date as the excess of :

a) the aggregate of the consideration transferred, the amount of any non-controlling interests in the acquiree measured at fair value or at the non-controlling interest’s proportionate share of the acquiree’s

b) identifiable net assets and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree; over

c) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured at their fair values.

If the aggregate consideration transferred is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in consolidated income statement. Goodwill is allocated to each of the Group’s cash-generating units or for groups of cash-generating units and is tested annually for impairment and is assesssed regularly whether there is any indication of impairment. Goodwill impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates. The recoverable value is the higher of the fair value less costs to sell and its value in use of the cash-generating unit, which is the net present value of estimated future cash flows expected from such cash-generating unit. If the recoverable amount of cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent period. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operations within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. End of service indemnity Provision is made for amounts payable to employees under the Kuwait Labour Law, employee contracts and respective applicable laws in the countries where the subsidiaries operate. This liability, which is unfunded, represents the amount payable to each employee as a result of involuntary termination on the reporting date. This basis is considered to be a reliable approximation of the present value of the final obligation. Treasury shares The Bank’s holding in its own shares is stated at acquisition cost and is recognised in shareholders’ equity. Treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are credited to a separate account in equity, “treasury shares reserve”, which is not distributable.

79

BURGAN BANK GROUP


20

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Treasury shares (continued) Any realised losses are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost per share without affecting the total cost of treasury shares. Share based compensation The Group operates an equity settled share based compensation plan. The cost of share based compensation transactions with employees is measured by reference to the fair value at the date on which they are granted. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or shares on the date of grant using the Black Scholes model. Measurement inputs include share price on grant date, exercise price, volatility, risk free interest rate and expected dividend yield. At each reporting date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the consolidated income statement, with a corresponding adjustment to equity. Other reserve Other reserve is used to record the effect of changes in ownership interest in subsidiaries, without loss of control. Revenue recognition Interest and similar income and expense Interest income and expense are recognised in the consolidated income statement for all financial instruments measured at amortised cost, interest bearing assets classified as available-for-sale and financial instruments designated at fair value through profit or loss using effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, a shorter period, when appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, all fees and points paid or received between parties to the contract, transaction costs and all other premiums or discounts are considered, but not future credit losses. Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the amount of interest income or expense is adjusted by the net interest on the effective portion of the swap. All fees paid or recieved 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. Fee and commission income Fee and commission earned for the provision of services over a period of time are accrued over that period. These fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an adjustment to the effective interest rate on loan. Dividend income Dividend income is recognised when the right to receive payment is established. Foreign currency Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded at the spot rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange ruling at the reporting date. Any resultant gains or losses are recognised in the consolidated income statement.

80

BURGAN BANK GROUP


21

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Foreign currency (continued) Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to respective entity’s functional currency at the foreign exchange rates ruling on the dates that the values were determined. In case of non-monetary assets whose change in fair values are recognised directly in OCI, foreign exchange differences are recognised directly in OCI and for non-monetary assets whose change in fair value are recognised directly in the consolidated income statement, foreign exchange differences are recognised in the consolidated income statement. As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation currency (KD) at the rate of exchange ruling on the reporting date, and their income statements are translated at the average exchange rates for the year. Exchange differences arising on translation are taken directly to OCI. On disposal of a foreign subsidiary, the deferred cumulative amount recognised in OCI relating to that particular subsidiary is recognised in the consolidated income statement. Any goodwill or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are treated as assets and liabilities of the respective subsidiaries and translated at the rate of exchange ruling on the reporting date. Taxation National Labour Support Tax (NLST) The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are subjected to NLST have been deducted from the profit for the year. Kuwait Foundation for the Advancement of Sciences (KFAS) The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’ remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the contribution. Zakat Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the Ministry of Finance resolution No. 58/2007 effective from 10 December 2007. Taxation on overseas subsidiaries Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to the prevailing laws, regulations and instructions of the countries where these subsidiaries operate. Income tax payable on taxable profit (‘current tax’) is recognised as an expense in the period in which the profits arise in accordance with the fiscal regulations of the respective countries in which the Group operates. Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Deferred tax assets and liabilities are measured using tax rates and applicable legislation at the reporting date.

81

BURGAN BANK GROUP


22

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Segment information A segment is a distinguishable component of the Group that engages in business activities from which it earns revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources and assess performance. Operating segments exhibiting similar economic characteristics, product and services, class of customers where appropriate are aggregated and reported as reportable segments. Contingencies Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of economic benefit is probable.

Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the possibility of an outflow of resources embodying economic benefit is remote. Fiduciary assets Assets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the Group and accordingly are not included in the consolidated statement of financial position. Significant accounting judgments, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the 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. Judgments In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements:

Classification of financial assets On acquisition of financial assets, management decides whether it should be classified as investments at fair value through profit or loss or investments available for sale or loans and receivables or held to maturity.

Impairment of financial assets available for sale The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. In making this judgement, the Group evaluates, among other factors, historical share price movements and duration and extent to which the fair value of an investment is less than its cost.

Deferred tax assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits will be available against which the losses can be utilised. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies. Estimation uncertainty and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use or fair value less cost to sell of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

82

BURGAN BANK GROUP


23

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Estimation uncertainty and assumptions (continued) Fair values of assets and liabilities including intangible assets Considerable judgement by management is required in the estimation of the fair value of the assets including intangible assets with finite useful life, liabilities and contingent liabilities acquired. Impairment losses on loans and advances The Group reviews its loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the consolidated income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility.Any changes in these estimates and assumptions as well as the use of different, but equally reasonable estimates and assumptions may have an impact on carrying amounts of loans and receivables and investments available for sale. 3. CASH AND CASH EQUIVALENTS

2014

KD 000’s 2013

KD 000’s Cash on hand and in current account with banks and OFIs 688,052 556,136 Balances with the CBK 372 144 Due from banks and OFIs maturing within thirty days 352,139 448,010

───────── ───────── 1,040,563 1,004,290 ═════════ ═════════

4. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

2014

KD 000’s 2013

KD 000’s Loans and advances - Banks 212,865 203,939 - OFIs 98,020 105,198 ────────── ────────── 310,885 309,137 ────────── ────────── Placements with banks 459,824 471,502

────────── ────────── Gross due from banks and OFIs 770,709 780,639 Provision for impairment (note 5) (80,890) (80,556)

────────── ────────── 689,819 700,083 ══════════ ══════════

5. LOANS AND ADVANCES TO CUSTOMERS a) Balances

2014

KD 000’s 2013

KD 000’s Corporate 3,988,338 3,574,448 Retail 553,916 515,917

───────── ───────── Gross loans and advances to customers 4,542,254 4,090,365 Provision for impairment (155,788) (135,517)

───────── ───────── 4,386,466 3,954,848 ═════════ ═════════

83

BURGAN BANK GROUP


24

5. LOANS AND ADVANCES TO CUSTOMERS (continued) b) Provision for impairment

Banks

and OFIs Corporate Retail Total KD 000's KD 000's KD 000's KD 000's At 1 January 2014 80,792 130,379 21,315 232,486 Exchange adjustment (22) (1,123) 73 (1,072) Amounts written off - (38,239) (180) (38,419) Charged to income statement 120 58,200 2,982 61,302 ───────── ───────── ───────── ───────── At 31 December 2014 80,890 149,217 24,190 254,297 ═════════ ═════════ ═════════ ═════════

At 1 January 2013 58,548 122,986 22,226 203,760 Exchange adjustment - (5,739) (423) (6,162) Amounts written off (16,631) (38,199) (195) (55,025) Charged to income statement 38,875 51,331 (293) 89,913 ───────── ───────── ───────── ───────── At 31 December 2013 80,792 130,379 21,315 232,486 ═════════ ═════════ ═════════ ═════════ The provision for impairment includes KD 17,619 thousand (31 December 2013: KD 16,413thousand), being provision for non-cash facilities reported under other liabilities (note 11), of which KD Nil (31 December 2013: KD 236thousand) relates to OFI’s. The impairment provision for credit facilities complies in all material respects with the specific provision requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of certain restricted categories of collateral during the reporting period. The general provision as of 31 December 2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154 thousand and is retained as a general provision until further directive from the CBK. Interest income on impaired loans and advances is immaterial. During the year the Group recovered KD 8,532 thousand (2013: KD 2,055 thousand) from customers whose balances were written off and recorded the same under Other income in the consolidated income statement. The analysis of the provision for impairment based on specific and general provision is as follows:

2014

KD 000’s 2013

KD 000’s Specific provision 66,444 60,567 General provision 187,853 171,919

───────── ───────── 254,297 232,486 ═════════ ═════════

Non-performing loans to customers:

2014

KD 000’s 2013

KD 000’s Loans and advances to customers 175,272 173,660 Provisions 57,778 52,824 Collaterals 102,603 97,723

84

BURGAN BANK GROUP


25

6. INVESTMENT SECURITIES

2014

KD 000’s 2013

KD 000’s Financial assets at fair value through profit or loss Investments held for trading Debt securities - Quoted investments 8,007 12,143 Equity securities - Quoted investments 936 4,132

Investments designated at fair value through profit or loss Equity securities - Quoted 420 471 - Unquoted 21,560 - Managed funds 78,460 69,281

────────── ────────── Total financial assetsat fair value through profit or loss 109,383 86,027

────────── ──────────

Financial assets available for sale Debt securities - Quoted 133,280 180,220 - Unquoted 15,796 26,144

────────── ────────── 149,076 206,364 ────────── ──────────

Equity securities - Quoted 76,378 18,812 - Unquoted 79,868 81,100

────────── ────────── 156,246 99,912 ────────── ──────────

Total financial assets available for sale 305,322 306,276 ────────── ──────────

Financial assets held to maturity Debt securities - Quoted 53,065 20,923 - Unquoted - 8

────────── ────────── Total financial assets held to maturity 53,065 20,931

────────── ────────── Investment in associates 17,172 8,168

────────── ────────── Total investment securities 484,942 421,402

══════════ ══════════ Associates of the Group:

Name of company




2014


2013

FIMBank P.L.C. (“FIMBank”) International

Trade Finance Malta 19.7% 19.5% Middle East Payment Services Co. (“MEPS”)

Credit Card & ATM Services Jordan 29.6% -

First Real Estate Investment Company K.S.C. (Closed) (“FREICO”)

Investing in Real Estate Kuwait 19.8% -

During the year, the Group acquired an additional equity interest in MEPSand accounted the same as investment in an associate at the Group level. The Group also participated in the rights issue of FIMBank p.l.c., which resulted in change in the Group’s effective equity interest.

85

BURGAN BANK GROUP


26

6. INVESTMENT SECURITIES (continued) Further, during the year, the Group commenced to exercise significant influence over FREICO and therefore accounted the same as an investment in an associate. Carrying value of associates is as follows:

2014 2013 KD 000’s KD 000’s

FIMBank 10,889 8,168 MEPS 1,877 - FREICO 4,406 - Summarised financial information of associates is as follows:

2014 2013 KD 000’s KD 000’s

Net result (1,396) (1,006) Other comprehensive income 1,747 (651) 7. OTHER ASSETS

2014

KD 000’s 2013

KD 000’s Accrued interest receivable 55,565 59,529 Prepaid expenses 6,117 5,612 Assets pending sale * 88,060 49,484 Deferred tax assets 7,847 6,791 Taxation paid in advance 5,255 5,085 Sundry debtors 38,755 61,613 Other balances 57,896 50,024

────────── ────────── 259,495 238,138 ══════════ ══════════

* The fair value of real estate assets included in assets pending for sale are based on valuations performed by an accredited independent valuers by using market comparable method.As the significant valuation inputs used are based on unobservable market data these are classified under level 3 fair value hierarchy.However, the impact on the consolidated income statement would be immaterial if the relevant risk variables used to fair value were altered by 5%. 8. INTANGIBLE ASSETS

Goodwill KD 000’s

Other intangible assets

KD 000’s

Total

KD 000’s Cost At 1 January 2014 86,050 113,892 199,942 Exchange adjustment 2,668 51 2,719

────── ────── ────── At 31 December 2014 88,718 113,943 202,661

══════ ══════ ══════

Amortisation At 1 January 2014 - 28,977 28,977 Charge for the year - 6,930 6,930

────── ────── ────── At 31 December 2014 - 35,907 35,907

══════ ══════ ══════ Net book value At 31 December 2013 86,050 84,915 170,965 ══════ ══════ ══════ At 31 December 2014 88,718 78,036 166,754

══════ ══════ ══════

86

BURGAN BANK GROUP


27

8. INTANGIBLE ASSETS (continued) The carrying amounts of goodwill and other intangible assets allocated to each CGU are as follows:

Goodwill KD 000’s

Other intangible assets

KD 000’s Total

KD 000’s

Banking license

Customer relationship

Core customer deposits Total

JKB 72,748 37,313 4,023 920 42,256 115,004 AGB 4,340 12,714 810 97 13,621 17,961 BoB 6,592 6,140 - - 6,140 12,732 TIB 5,038 8,965 - 7 8,972 14,010 BBT - - 6,257 790 7,047 7,047

────── ────── ────── ────── ────── ────── At 31 December 2014 88,718 65,132 11,090 1,814 78,036 166,754

══════ ══════ ══════ ══════ ══════ ══════ JKB 70,132 38,303 5,094 1,164 44,561 114,693 AGB 4,709 14,644 1,093 132 15,869 20,578 BoB 6,357 6,972 142 93 7,207 13,564 TIB 4,852 9,123 - 21 9,144 13,996 BBT - - 7,223 911 8,134 8,134

────── ────── ────── ────── ────── ────── At 31 December 2013 86,050 69,042 13,552 2,321 84,915 170,965

══════ ══════ ══════ ══════ ══════ ══════ Impairment testing of goodwill The carrying value of goodwill is tested for impairment on an annual basis (or more frequently if evidence exists that goodwill might be impaired) by estimating the recoverable amount of the cash-generating unit ("CGU") to which these items are allocated using value-in-use calculations unless fair value based on active market price is higher than the carrying value of the CGU. The value in use calculations use pre-tax cash flow projections based on financial budgets approved by management over a five years period and a relevant terminal growth rate of 4% to 7% (31 December 2013: 4% to 7%). These cash flows were then discounted using a pre-tax discount rate of 15% to 30% (31 December 2013: 15% to 30%) to derive a net present value which is compared to the carrying value. The discount rate used is pre-tax and reflects specific risks relating to the relevant CGU. The recoverable amounts are either higher or approximates the carrying value of goodwill. The Group has also performed a sensitivity analysis by varying these input factors by a reasonable possible margin. Based on such analysis, there are no indications that goodwill is impaired considering the level of judgments and estimations used. 9. MATERIAL PARTLY-OWNED SUBSIDIARIES The management of the Bank has concluded that JKB and BoBaresubsidiaries which have non-controlling interests that are material to the Group. The information relating to non-controlling interests to BB Group is as follows: JKB BoB 2014 2013 2014 2013 KD 000’s KD 000’s KD 000’s KD 000’s Accumulated balances 104,322 98,006 37,968 37,481 Profit attributable 8,059 7,806 2,248 2,988 Dividends 3,856 3,872 3,208 - The summarised financial information of these subsidiaries as of 31 December 2014 is provided below. This information is based on amounts before inter-company eliminations.

87

BURGAN BANK GROUP


28

9. MATERIAL PARTLY-OWNED SUBSIDIARIES (continued) Summaried income statement: JKB BoB 2014 2013 2014 2013 KD 000’s KD 000’s KD 000’s KD 000’s Operating income 53,776 50,422 14,341 15,630 Operating expense (19,556) (16,438) (6,704) (7,088) Operating profit before provision 34,220 33,984 7,637 8,542 Profit for the year 19,194 18,802 6,121 6,779 Total comprehensive income 17,141 20,300 6,293 6,827

Summarised statement of financial position: JKB BoB 2014 2013 2014 2013 KD 000’s KD 000’s KD 000’s KD 000’s Loans and advances to customers 537,711 526,253 61,991 52,510 Customer deposits 723,757 664,837 354,633 351,016 Total assets 1,074,024 1,009,982 435,713 433,782 Total liabilities 902,763 853,747 363,104 364,126 Total equity 171,261 156,235 72,609 69,656 Net cash flows(used) from - operating activities

(37,660)

43,053

23,145

39,203

- investment activities 10,236 15,703 (339) (1,517) - financing activities (8,260) (8,074) (6,930) 12,636 Net increase in cash and cash equivalents during the year

(35,684)

50,682

15,876

50,322

10. OTHER BORROWED FUNDS

Effective

interest rate 2014

KD 000’s 2013

KD 000’s Subordinated notes* 8.125% 114,161 109,692 Subordinated bonds (Fixed tranch) 5.650% 40,747 40,703 Subordinated bonds (Floating tranch capped at 6.650%)** CBK +3.9% 58,394 58,331 Other borrowings – subsidiaries 0.66% - 3.71% 13,342 18,871

────────── ────────── 226,644 227,597 ══════════ ══════════

* In 2010, Burgan Finance No. 1 (Jersey) Limited (incorporated with limited liability under the laws of the Jersey), a special purpose entity established by the Bank, had issued US$ 400 million 7.875 per cent subordinated notes due 2020 (the “Notes”) at a discounted price of 98.3 per cent of the principal amount. ** In 2012, the Bank issued KD 100 million bonds due 2022 (the “Subordinated bonds”) at the principal amount. The Subordinated bonds and Notesare callable in whole, or, in part, at the option of the Bank after 5 years from the date of the issuance (subject to certain conditions being satisfied and prior approval of the CBK).

88

BURGAN BANK GROUP


29

11. OTHER LIABILITIES

2014

KD 000’s 2013

KD 000’s Accrued interest payable 34,116 45,773 Staff benefits 15,054 13,448 Provision for non-cash credit facilities (note 5) 17,619 16,413 Clearing cheques and balances 53,668 38,472 Income received in advance 11,332 7,238 Other payable and accruals 43,039 29,929 Deferred tax liabilities 1,271 1,045 Taxation payable 17,494 16,795 Other balances 40,541 49,077

────────── ────────── 234,134 218,190 ══════════ ══════════

12. EQUITY AND RESERVES a) At the extra ordinary general meeting of the shareholders held on 31 March 2014, the shareholders approved

to amend article (6) of the Bank’s Memorandum of Incorporation and article (5) of the Articles of Association, to increase the authorised share capital of the Bank to 2,500,000,000 shares of 100 fils each after obtaining regulatory approvals. The issued and fully paid up share capital of the Bank comprises 1,951,770,627 shares (31 December 2013: 1,622,215,539) of 100 fils each.

b) On 31 March 2014, the annual general assembly approved the distribution of cash dividend of 7 fils per share

for the year ended 31 December 2013 (for the year ended 31 December 2012: 10 fils) to the Bank’s shareholders on record at the date of general assembly and stock dividend of 7% for the year ended 31 December 2013(for the year ended 31 December 2012: 5%) to the Bank’s shareholders on record at the date of regulatory approval for distribution of bonus shares. This resulted in an increase in the number of issued shares by 113,555,088 shares and share capital by KD 11,355 thousand.

c) Capital Increase

During the year, after obtaining necessary approvals, the bank increased its share capital through the issuance of rights issue of 216,000,000 shares, each with a nominal value of 100 fils and share premium of 375 fils. The rights issue has been fully subscribed resulting in an increase in share capital of KD 21,600 thousand and share premium of KD 81,000 thousand.

d) The share premium and treasury shares reserve are not available for distribution. The Companies Law and the

Bank’s articles of association require that 10% of the profit for the year attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited to the amount required to enable the payment of dividend of 5% of share capital in years when accumulated profits are not sufficient for the payment of a dividend of that amount.

e) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year

attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this reserve.

f) Treasury shares

2014 2013 Number of shares held 19,586,964 79,392,917

══════════ ══════════ Percentage of shares held 1.00% 4.89% ══════════ ══════════ Cost KD 000’s 9,575 37,683

══════════ ══════════ Market value KD 000’s 9,402 43,666

══════════ ══════════ Weighted average market value per share (fils) 538 574

══════════ ══════════

89

BURGAN BANK GROUP


30

12. EQUITY AND RESERVES (continued)

The balance in the treasury share reserve account is not available for distribution. An amount equal to the cost of treasury shares is not available for distribution from general reserve throughout the holding period of these treasury shares.

g) Proposed dividends

The Board of Directors has recommended to distribute cash dividend of 15 fils per share (2013: 7 fils) and 5% bonus shares (2013: 7%) for the financial year ended 31 December 2014. Subject to being approved at the annual general assembly ("AGM") of the shareholders, the cash dividend and bonus shares shall be payable to shareholders registered in the Bank's records as of the AGM date.

h) Perpetual Tier 1 Capital Securities

On 30 September, 2014, the Bank through Burgan Tier 1 Financing Limited (a newly incorporated special purpose company with limited liability in the Dubai International Financial Centre) (“Issuer”) issued Perpetual Tier 1 Capital Securities (the “Tier 1 securities”), amounting to USD 500,000 thousand.

The Tier 1securities are unconditionally and irrevocably guaranteed by the Bank and constitute direct, unconditional, subordinated and unsecured obligations of the Issuer and are classified as equity in accordance with IAS 32: Financial Instruments – Classification. The Tier 1 securities do not have a maturity date. They are redeemable by the Bank at its discretion after 30 September 2019 (the “First Call Date”) or on any interest payment date thereafter subject to the prior consent of the regulatory authority.

The Tier 1 securities bear interest on their nominal amount from the issue date to the first call date at a fixed annual rate of 7.25%. Thereafter the interest rate will be reset at five year intervals. Interest will be payable semi-annually in arrears and treated as a deduction from equity.

The Bank at its sole discretion may elect not to distribute interest and this is not considered an event of default. If the Bank does not pay interest on the Tier 1 securities, on a scheduled interest payement date (for whatever reason), then the Bank must not make any other distribution or payment on or with respect to its other shares that rank equally with or junior to the Tier 1 securities (other than pro-rata distributions or payments on shares that rank equally with Tier 1 securities) unless and until it has paid two consecutive interest payments in full on the Tier 1 securities.

13. INTEREST INCOME

2014

KD 000’s 2013

KD 000’s Loans and advances to customers 255,341 224,485 Due from banks and other financial institutuions 22,723 20,194 Treasury bills and bonds 20,832 20,499 Investment securities 6,032 5,140 Others 128 57 ────────── ────────── 305,056 270,375 ══════════ ══════════

14. INTEREST EXPENSE

2014

KD 000’s 2013

KD 000’s Deposits from customers 78,591 70,837 Due to banks 7,672 3,440 Due to other financial institutuions 15,803 14,428 Other borrowed funds 16,150 15,319 Others 1,302 916 ────────── ────────── 119,518 104,940 ══════════ ══════════

90

BURGAN BANK GROUP


31

15. FEE AND COMMISSION INCOME Fee and commission income includes KD 1,085 thousand (31 December 2013: KD 1,090 thousand) being fee income related to fiduciary activities. 16. NET INVESTMENT INCOME

2014

KD 000’s 2013

KD 000’s Financial assets at fair value through profit or loss: – net gain on investments held for trading 2,879 662 – net gain on investments designated at fair value through profit or loss 10,332 6,451

───────── ───────── 13,211 7,113

Net gain from financial assets available for sale 3,297 4,579 Share of result from associates (236) (426)

───────── ───────── 16,272 11,266 ═════════ ═════════

17. TAXATION

2014

KD 000’s 2013

KD 000’s NLST 1,304 288 KFAS 453 90 Zakat 454 87 Taxation arising from overseas subidiaries 15,150 15,227

────────── ────────── 17,361 15,692 ══════════ ══════════

Components of taxation arising from overseas subsidiaries are as follows:

2014

KD 000’s 2013

KD 000’s Current tax 16,295 17,180 Deferred tax (1,145) (1,953)

────────── ────────── 15,150 15,227 ══════════ ══════════

The tax rate applicable to the taxable subsidiary companies is in the range of 15% to 30%(2013: 15% to 30%) whereas the effective income tax rate for the year ended 31 December 2014 is in the range of 15% to 30%(2013: 15% to 30%). For the purpose of determining the taxable results for the year, the accounting profit of the overseas subsidiary companies were adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense. The adjustments are based on the current understanding of the existing laws, regulations and practices of each overseas subsidiary companies jurisdiction. Deferred tax assets / liabilities are part of other assets / liabilities in the consolidated statement of financial position.

91

BURGAN BANK GROUP


32

18. EARNINGS PER SHARE Basic and diluted earnings per share is computed by dividing the profit for the year attributable to equity holders of the Bank by the weighted average number of shares outstanding during the year less treasury shares. The computation of basic and diluted earnings per share is as follows: 2014 2013 KD 000’s KD 000’s (Restated)

Profit for the year attribuitable to equity holders of the Bank 61,758 20,102 ══════════ ══════════ Shares Shares

Weighted average number of outstanding shares, net of treasury shares 1,641,681,086 1,669,214,704 ────────── ──────────

Basic and diluted earnings per share (fils) 37.6 12.0 ══════════ ══════════ The basic and diluted earnings per share for the year ending 31 Decembe 2014 have been adjusted to take account of the bonus shares and the rights shares issued in 2014. 19. SEGMENT INFORMATION For management purposes, the Group organises its operations by geographic territory in the first instance, primarily Domestic and International. All operations outside Kuwait are classified as International. Within its domestic operations, the Group is organised into the following business segments.

Corporate banking: provides comprehensive product and services to corporate customers and financial institutions including lending, deposits, trade services, foreign exchange, advisory services and others.

Private and retail banking: provides wide range of products and services to retail and private bank customers including loans, deposits, credit and debit cards, foreign exchange, and others.

Treasury, investment bankingand others: includes treasury asset liability and liquidity management, investment services and management, fund management and any residual of transfer pricing. It also provides products and services to banks including money markets, lending, deposits, foreign exchange and others.

Executive Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on segment result after provisions which in certain respects are measured differently from operating profit or loss in the consolidated financial statements.

92

93

BU

RG

AN

BA

NK

GR

OU

P N

otes

to th

e C

onso

lidat

ed F

inan

cial

Sta

tem

ents

A

t 31

Dec

embe

r 20

14

33

19.

SEG

MEN

T IN

FOR

MA

TIO

N (c

ontin

ued)

Th

e ta

ble

belo

w p

rese

nts i

ncom

e an

d re

sults

and

cer

tain

ass

ets a

nd li

abili

ties i

nfor

mat

ion

rega

rdin

g th

e G

roup

’s o

pera

ting

segm

ents

.

Kuwa

it O

pera

tions

In

tern

atio

nal

Ope

ratio

ns

Una

lloca

ted

Intra

grou

p Tr

ansa

ctio

ns

Gro

up

Corp

orat

e ba

nkin

g KD

000

’s

Reta

il an

d Pr

ivat

e ba

nkin

g KD

000

’s

Trea

sury

and

in

vestm

ent b

anki

ng

KD 0

00’s

To

tal

KD 0

00's

KD 0

00's

KD 0

00's

Tota

l KD

000

’s

31 D

ecem

ber 2

014

Net

inte

rest

inco

me

52,

408

3

4,38

8

2,8

70

89,

666

9

5,87

2

-

185

,538

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ Se

gmen

t ope

ratin

g in

com

e 7

0,32

3

41,

479

3

5,16

2

146

,964

1

46,2

24

(17,

477)

2

75,7

11

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Dep

reci

atio

n an

d am

ortis

atio

n (6

24)

(1,3

89)

(489

) (2

,502

) (5

,657

) (6

,975

) (1

5,13

4)

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Segm

ent r

esul

t bef

ore

prov

isio

ns

61,

661

2

5,71

5

30,

890

1

18,2

66

67,

714

(2

4,45

2)

161

,528

Pr

ovis

ion

for

impa

irmen

t of

loan

s and

adv

ance

s (1

6,74

6)

(7,4

97)

(1,1

61)

(25,

404)

(2

1,79

0)

892

(4

6,30

2)

Prov

isio

n fo

r im

pairm

ent o

f inv

estm

ent s

ecur

ities

-

-

(3

52)

(352

) (1

,727

) -

(2

,079

)

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ Se

gmen

t res

ult a

fter p

rovi

sion

s 4

4,91

5

18,

218

2

9,37

7

92,

510

4

4,19

7

(23,

560)

1

13,1

47

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Una

lloca

ted

expe

nses

(7,9

91)

(7,9

91)

Una

lloca

ted

prov

isio

ns

(1

5,00

0)

(15,

000)

──

────

───

────

────

─ ──

────

───

────

────

─ Pr

ofit

for t

he y

ear b

efor

e ta

xatio

n

69,

519

4

4,19

7

(23,

560)

9

0,15

6

════

════

═ ══

════

═══

════

════

═ ══

════

═══

Tota

l ass

ets

1,7

86,4

46

1,0

84,7

79

2,0

01,2

72

4,8

72,4

97

3,4

40,4

36

(561

,509

) 7

,751

,424

════

════

═ ══

════

═══

════

════

═ ══

════

═══

════

════

═ ══

════

═══

════

════

═ To

tal l

iabi

litie

s 7

52,2

14

810

,071

2

,541

,673

4

,103

,958

2

,977

,553

(2

85,9

74)

6,7

95,5

37

══

════

═══

════

════

═ ══

════

═══

════

════

═ ══

════

═══

════

════

═ ══

════

═══

94

BU

RG

AN

BA

NK

GR

OU

P N

otes

to th

e C

onso

lidat

ed F

inan

cial

Sta

tem

ents

A

t 31

Dec

embe

r 20

14

34

19.

SEG

MEN

T IN

FOR

MA

TIO

N (c

ontin

ued)

Kuwa

it O

pera

tions

In

tern

atio

nal

Ope

ratio

ns

Una

lloca

ted

Intra

grou

p Tr

ansa

ctio

ns

Gro

up

Corp

orat

e ba

nkin

g KD

000

’s

Reta

il an

d Pr

ivat

e ba

nkin

g KD

000

’s

Trea

sury

and

in

vestm

ent b

anki

ng

KD 0

00’s

To

tal

KD 0

00's

KD 0

00's

KD 0

00's

Tota

l KD

000

’s

31 D

ecem

ber 2

013

Net

inte

rest

inco

me

54,

641

3

2,82

1

(3,7

92)

83,

670

8

1,76

5

-

165

,435

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ Se

gmen

t ope

ratin

g in

com

e 7

0,72

1

37,

715

1

7,10

7

125

,543

1

38,4

12

(10,

396)

2

53,5

59

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Dep

reci

atio

n an

d am

ortis

atio

n (4

11)

(1,5

33)

(278

) (2

,222

) (4

,660

) (6

,975

) (1

3,85

7)

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Segm

ent r

esul

t bef

ore

prov

isio

ns

61,

028

2

1,96

2

13,

474

9

6,46

4

67,

975

(1

7,37

1)

147

,068

Pr

ovis

ion

for

impa

irmen

t of

loan

s and

adv

ance

s (1

7,90

6)

(23,

280)

-

(4

1,18

6)

(17,

963)

5

67

(58,

582)

Pr

ovis

ion

for i

mpa

irmen

t of i

nves

tmen

t sec

uriti

es

-

-

(1,5

92)

(1,5

92)

(1,3

71)

-

(2,9

63)

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Segm

ent r

esul

t afte

r pro

visi

ons

43,

122

(1

,318

) 1

1,88

2

53,

686

4

8,64

1

(16,

804)

8

5,52

3

──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

────

────

─ ──

────

───

Una

lloca

ted

expe

nses

(6,3

45)

(6,3

45)

Una

lloca

ted

prov

isio

ns

(3

1,33

1)

(31,

331)

──

────

───

────

────

─ ──

────

───

────

────

─ Pr

ofit

for t

he y

ear b

efor

e ta

xatio

n

16,

010

4

8,64

1

(16,

804)

4

7,84

7

════

════

═ ══

════

═══

════

════

═ ══

════

═══

Tota

l ass

ets

1,7

61,3

68

1,0

50,7

16

1,8

12,6

63

4,6

24,7

47

3,0

62,4

65

(532

,461

) 7

,154

,751

════

════

═ ══

════

═══

════

════

═ ══

════

═══

════

════

═ ══

════

═══

════

════

═ To

tal l

iabi

litie

s 6

97,8

00

829

,587

2

,653

,966

4

,181

,353

2

,659

,422

(3

05,8

51)

6,5

34,9

24

══

════

═══

════

════

═ ══

════

═══

════

════

═ ══

════

═══

════

════

═ ══

════

═══

95

BURGAN BANK GROUP


35

20. TRANSACTIONS WITH RELATED PARTIES The Group has entered into transactions with certain related parties (parent company, directors and key management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties) who were customers of the Group during the year.The “Others” column in the table below mainly represent transactions with other related parties that are either controlled or significantly influenced by the parent company.The terms of these transactions are substantially on the same commercial basis as approved by the Group’s management, including collateral. Lending to Board Members and their related parties is secured by tangible collateral in accordance with regulations of Central Bank of Kuwait.The outstanding balances and transactions are as follows:

Parent company KD 000's

Associate KD 000's

Others KD 000's

2014 KD 000s

2013 KD 000s

Due from banks and OFIs - 45,384 150,998 196,382 183,260 Loans and advances to customers - - 775,636 775,636 635,178 Investment securities 52,844 - 24,907 77,751 41,152 Investment securities managed by a related party - -

62,966 62,966 61,055

Due to banks - 7,117 13,665 20,782 23,681 Due to other financial institutions - - 23,015 23,015 26,282 Deposits from customers 9,357 - 27,356 36,713 50,529 Commitments, contingent liabilities

and derivatives

Letters of credit - - 36 36 97 Letters of guarantee - - 14,369 14,369 11,185 Derivative financial instruments - - 35,996 35,996 12,175

Transactions Interest income - 976 24,401 25,377 19,126 Interest expense 382 - 112 494 713 Fee and commission income 7 - 949 956 1,024 Fee and commission expense - - 712 712 255 Dividend income 192 - 559 751 565 Other expense - - 2,798 2,798 1,100

No. of Board members

or executive staff 2014

KD 000’s

2013

KD 000’s Board members Loans and advances to customers 4 3,528 3,128 Deposits from customers 8 781 1,245

Executive staff Loans and advances to customers 23 822 639 Deposits from customers 46 2,599 2,186 Letters of guarantee 1 1 1

BURGAN BANK GROUP


36

20. TRANSACTIONS WITH RELATED PARTIES (continued) Key management compensation Remuneration paid or payable in relation to “key management” (deemed for this purpose to comprise Directors in relation to their committee service, the Chief Executive Officer and other Senior Officers), was as follows:

2014 2013 KD 000’s KD 000’s Short term employee benefits – including salary and bonus 6,569 5,575 Accrual for end of service indemnity 1,044 640 Accrual for cost of long term incentive rights 379 603 Accrual for committee services 300 300 ───────── ───────── 8,292 7,118

═════════ ═════════ 21. COMMITMENTS AND CONTINGENT LIABILITIES

2014

KD 000’s 2013

KD 000’s Acceptances 64,254 59,447 Letters of credit 379,014 434,126 Letters of guarantee 787,200 714,844 Undrawn lines of credit 670,952 245,744 Other commitments 54,802 49,376

────────── ────────── 1,956,222 1,503,537 ══════════ ══════════

The primary purpose of these instruments is to ensure that funds are available to customers as required. Acceptances, standby letters of credit and guarantees, which represent irrevocable assurances that the Group will make payments in the event that the customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are undertaken by the Group on behalf of the customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Undrawn lines of credit represent unused portions of authorisations to extend cash credit. With respect to credit risk on undrawn lines of credit, the Group is potentially exposed to loss in an amount equal to the total unused lines. However, the likely amount of loss is less than the total unused lines since most of these lines will expire or terminate without being funded. The Group makes available to its customers guarantees which may require that the Group makes payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs. Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to similar risks to loans and these are mitigated by the same control processes and policies. 22. DERIVATIVE FINANCIAL INSTRUMENTS In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. Derivatives are carried at fair value. Positive fair value represents the cost of replacing all derivative transactions with a fair value in the Groups’ favour had the rights and obligations arising from that derivative instrument been closed in an orderly market transaction at the reporting date. Credit risk in respect of derivative financial instruments is limited to the positive fair value of instruments. Negative fair value represents the cost to the Groups’ counter parties of replacing all their transactions with the Group. The Group deals in forward foreign exchange contracts, swaps and options for customers and to manage its foreign currency positions and cash flows.

96

BURGAN BANK GROUP


37

22. DERIVATIVE FINANCIAL INSTRUMENTS (continued) The table below shows the fair value of derivative financial instruments, recorded as assets or liabilities, together with their notional amounts analysed by the terms of maturity. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk. The credit risk exposure is managed as part of the overall borrowers lending limits, together with potential exposures from market movements. Derivatives held for trading Derivative transactions for customers and derivatives used for hedging purpose but which do not meet the qualifying criteria for hedge accounting are classified as ‘Derivatives held for trading’. The risk exposures on account of derivative transactions for customers are covered by entering in to similar transactions with counter parties or by other risk mitigating transactions. Forward foreign exchange contracts Forward foreign exchange contracts are contractual agreements to either buy or sell a specified currency, at a specific price and date in the future, and are customised contracts transacted in the over-the-counter market. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specified amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group purchases and sells options through regulated exchanges and in the over–the–counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed–upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. Options written by the Group provide the purchaser the opportunity to purchase from or sell to the Group the underlying asset at an agreed–upon value either on or before the expiration of the option. Swaps Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index. Interest rate swaps relate to contracts taken out by the Bank with OFIs in which the Group either receives or pays a floating rate of interest, respectively, in return for paying or receiving a fixed rate of interest. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In a currency swap, the Group pays a specified amount in one currency and receives a specified amount in another currency. Currency swaps are mostly gross–settled. Notional amount

31 December 2014 Positive fair

value Negative fair

value Within 1

year Over 1 year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 6,363 (9,902)

705,533 - 705,533

Interest rate swaps 4,362 (670) 33,079 197,212 230,291 Options 2,945 (2,907) 139,791 36,875 176,666 ────────── ────────── ────────── ────────── ────────── 13,670 (13,479) 878,403 234,087 1,112,490 ────────── ────────── ────────── ────────── ──────────

97

BURGAN BANK GROUP


38

22. DERIVATIVE FINANCIAL INSTRUMENTS (continued) Notional amount

31 December 2013 Positive fair

value Negative fair

value Within 1

year Over 1 year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s Derivatives held for trading: (non-qualifying hedges) Forward swaps/ foreign exchange contracts 8,019 (3,264)

375,950 389 376,339

Interest rate swaps 2,032 (266) 14,673 93,766 108,439 Options 14,172 (14,118) 423,858 20,163 444,021 ────────── ────────── ────────── ────────── ────────── 24,223 (17,648) 814,481 114,318 928,799 ────────── ────────── ────────── ────────── ────────── 23. FAIR VALUE MEASUREMENT Fair value of all financial instruments is not materially different from their carrying values. For financial assets and financial liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts without a specific maturity and variable rate financial instruments. The fair value of investment securities is categorised as per the policy on fair value measurement in Note 2. Movement in level 3 is mainly on account of purchases and change in fair value. During the year, an increase of KD 4,441thousand (2013: increase KD 251 thousand) was recorded in the other comprehensive income representing change in fair value. There were no material transfers between the levels during the year. The impact on the consolidated statement of financial position or the consolidated statment of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5%. Debt securities included under level 3 consists of unquoted corporate bonds issued by banks and financial institutions. The fair values of these bonds are estimated using discounted cash flow method using credit spread (ranging from 1% to 3%). Equities and other securities included in this category mainly include strategic equity investments and managed funds which are not traded in an active market. The fair values of these investments are estimated by using valuation techniques that are appropriate in the circumstances. Valuation techniques include discounted cash flow models, observable market information of comparable companies, recent transaction information and net asset values. Significant unobservable inputs used in valuation techniques mainly include discount rate, terminal growth rate, revenue, profit estimates and market multiples such as price to book and price to earnings. Given the diverse nature of these investments, it is not practical to disclose a range of significant unobservable inputs. Other financial assets and liabilities are carried at amortised cost and the carrying values are not materially different from their fair values as most of these assets and liabilities are of short term maturities or are repriced immediately based on market movement in interest rates. Fair values of remaining financial assets and liabilities carried at amortised cost are estimated using valuation techniques incorporating certain assumptions such as credit spreads that are appropriate in the circumstances. The impact on the consolidated statement of financial position or the consolidated income statement or the consolidated statment of shareholders’ equity would be immaterial if the relevant risk variables used for fair value estimations to fair value the unquoted securities were altered by 5%.

98

99

BU

RG

AN

BA

NK

GR

OU

P N

otes

to th

e C

onso

lidat

ed F

inan

cial

Sta

tem

ents

A

t 31

Dec

embe

r 20

14

39

23.

FA

IR V

ALU

E M

EASU

RE

MEN

T (c

ontin

ued)

Fa

ir va

lue

mea

sure

men

t hie

rarc

hy fo

r fin

anci

al a

sset

s and

fina

ncia

l lia

bilit

ies t

hat a

re c

arrie

d at

fair

valu

e is

as f

ollo

ws:

31D

ecem

ber 2

014

31

Dec

embe

r 201

3

Leve

l 1

Leve

l 2

Leve

l 3

Tota

l

Leve

l 1

Leve

l 2

Leve

l 3

Tota

l

KD 0

00’s

KD

000

’s

KD 0

00’s

KD

000

’s

KD

000

’s

KD 0

00’s

KD

000

’s

KD 0

00’s

Fi

nanc

ial a

sset

s

Fin

anci

al a

sset

s at f

air v

alue

thro

ugh

prof

it or

lo

ss:

Fi

nanc

ial a

sset

s hel

d fo

r tra

ding

:

Eq

uity

secu

ritie

s

936

-

-

9

36

4,

132

-

-

4,13

2

Deb

t sec

uriti

es

8,0

07

-

-

8,0

07

12

,143

-

-

12

,143

Der

ivat

ive

finan

cial

inst

rum

ents

:

- Fo

rwar

d sw

aps/

fore

ign

exch

ange

con

tract

s -

6

,363

-

6

,363

-

8,01

9 -

8,

019

- In

tere

st ra

te sw

aps

-

4,3

62

-

4,3

62

-

2,

032

-

2,03

2 -

Opt

ions

-

2

,945

-

2

,945

-

14,1

72

-

14,1

72

Fina

ncia

l ass

ets d

esig

nate

d at

fair

valu

e th

roug

h pr

ofit

or lo

ss:

Equi

ty se

curit

ies

420

21,5

60

21,9

80

47

1 -

-

47

1

Man

aged

fund

s 15

,494

-

62

,966

78

,460

8,17

2 -

61

,109

69

,281

F

inan

cial

ass

ets a

vaila

ble

for s

ale:

Eq

uity

secu

ritie

s 7

6,37

8

-

79,

868

1

56,2

46

18

,812

-

81

,100

99

,912

Deb

t sec

uriti

es

133

,280

-

1

5,79

6

149

,076

180,

220

-

26,1

44

206,

364

Fina

ncia

l lia

bilit

ies

Fi

nanc

ial l

iabi

litie

s at f

air v

alue

t

hrou

gh p

rofit

or l

oss:

D

eriv

ativ

e fin

anci

al in

stru

men

ts:

Forw

ard

swap

s/fo

reig

n ex

chan

ge c

ontra

cts

-

9,90

2 -

9,

902

-

3,26

4 -

3,26

4 In

tere

st ra

te sw

aps

-

670

-

670

-

26

6 -

26

6 O

ptio

ns

-

2,90

7 -

2,

907

-

14

,118

-

14

,118

BURGAN BANK GROUP


40

24. FIDUCIARY ASSETS The Group manages investment funds on behalf of customers with net asset value of KD 76,801thousand (31 December 2013: KD 83,067 thousand). 25. RISK MANAGEMENT INTRODUCTION Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept, with additional emphasis on selected geographic and industrial sectors. In addition, the Group monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. The operations of certain subsidiaries are also subject to regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the banking and insurance companies to meet unforeseen liabilities as these arise. As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures resulting from changes in interest rates and foreign currency transactions. The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level of seniority within the Group. The Group classifies the risks faced as part of its day to day activities into certain categories of risks and accordingly specific responsibilities have been given to various officers for the identification, measurement, control and reporting of these identified families of risks. The categories of risks are:

A. Risks arising from financial instruments: i. Credit risk which includes default risk of clients and counterparties ii. Market risk which includes interest rate, foreign exchange and equity price risks and iii. Liquidity risk

B. Other risks i. Operational risk which includes risks due to operational failures

A. CREDIT RISK Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are approved by the Board or each subsidiary board. The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. The Group has a well-documented credit policy that complies with CBK regulations and defines the appetite of the Group for assumption of risks in its various business groups. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in the consolidated statement of financial position.

100

BURGAN BANK GROUP


41

25. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) Maximum exposure to credit risk: The table below shows the maximum exposure to credit risk across financial assets before taking into consideration the effect of any collateral and other credit enhancements i.e. credit risk mitigation.

2014

KD 000’s 2013

KD 000’s Cash and cash equivalents 873,665 887,935 Treasury bills and bonds with CBK and others 629,819 583,647 Due from banks and other financial institutions 689,819 700,083 Loans and advances to customers 4,386,466 3,954,848 Investments securities 210,148 239,438 Other assets 55,565 59,529

───────── ───────── Total 6,845,482 6,425,480

───────── ───────── Commitments and contingent liabilities 1,956,222 1,503,537

───────── ───────── Maximum credit risk exposure before consideration of credit risk mitigation 8,801,704 7,929,017

═════════ ═════════ The exposures set above, are based on net carrying amounts as reported in the consolidated statement of financial position, except for commitments and contingent liabilities. Collateral and Credit risk mitigation techniques The amount, type and valuation of collateral are based on guidelines specified in the risk management framework. The main types of collaterals accepted include real estate and marketable securities. The revaluation and custody of collaterals are performed independent of the business units. The main credit risk mitigation techniques applied by the Group are based on eligible collaterals. The Group’s management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of the collateral at regular intervals in line with regulatory guidelines. For further details regarding the Group’s use of credit risk mitigation techniques, and collateral policy, refer to Basel III – Pillar 3 Disclosures under the risk management section of the annual report. Credit risk concentration The top 10 largest exposures outstanding as a percentage of gross loans and advances to customers at 31 December 2014 is 18% (31 December 2013: 18%). The concentration across classes within loans and advances to customers, which form part of the significant portion of assets subject to credit risk, is given in note 5.

101

BURGAN BANK GROUP


42

25. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following geographic regions: 2014 2013

Assets

KD 000s

Commitments and contingent

liabilities KD 000s

Total KD 000s

Assets KD 000s

Commitments and contingent

liabilities KD 000s

Total KD 000s

Kuwait 3,068,093 1,096,317 4,164,410 3,080,854 690,427 3,771,281 Jordan 765,878 201,454 967,332 719,527 162,692 882,219 Algeria 480,500 255,077 735,577 427,327 273,144 700,471 Iraq 283,468 106,188 389,656 292,794 63,577 356,371 Tunisia 39,324 2,337 41,661 33,005 2,545 35,550 Turkey 1,178,431 213,528 1,391,959 966,336 232,121 1,198,457 Other middle east 497,024 2,943 499,967 477,816 4,913 482,729 Europe 224,989 23,580 248,569 222,993 21,905 244,898 Rest of the world 307,775 54,798 362,573 204,828 52,213 257,041

─────── ─────── ─────── ─────── ─────── ─────── 6,845,482 1,956,222 8,801,704 6,425,480 1,503,537 7,929,017 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral held or credit enhancements can be analysed by the following industry sectors:

2014

KD 000’s 2013

KD 000’s

Industry sector Sovereign 1,288,451 1,208,430 Banking 1,100,176 1,271,936 Investment 183,314 104,451 Trade and commerce 1,087,038 1,032,803 Real estate 1,181,876 1,061,098 Personal 1,212,861 1,017,472 Manufacturing 841,613 729,813 Construction 713,850 589,751 Others 1,192,525 913,263

───────── ───────── 8,801,704 7,929,017 ═════════ ═════════

Credit quality per class of financial assets The credit quality of financial assets are summarised by reference to public ratings given to the clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs) namely Moody’s, Standard and Poor’s and Fitch. Based on the rating systems as declared by the ECAIs, the ratings are classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into account and in such cases, the client/counterparty is not considered as unrated. For further details regarding the Group’s credit risk management policy please refer to Basel III – Pillar 3 Disclosures under the risk management section of the annual report.

102

BURGAN BANK GROUP


43

25. RISK MANAGEMENT (continued) A. CREDIT RISK (continued)

a) Financial assets neither past due nor impaired

2014 Rated Unrated Total

Investment

grade Non investment

grade KD 000’s KD 000’s KD 000’s KD 000’s Sovereigns 738,191 - 438,301 1,176,492 Banks and OFIs 640,157 23,102 353,569 1,016,828 Corporates 97,791 1,931 3,488,478 3,588,200 Retail - - 487,697 487,697 Other credit exposures 57,530 18,569 189,614 265,713 ─────── ─────── ─────── ───────

1,533,669 43,602 4,957,659 6,534,930 ═══════ ═══════ ═══════ ═══════

2013 Rated Unrated Total

Investment grade Non investment

grade KD 000’s KD 000’s KD 000’s KD 000’s Sovereigns 847,308 - 222,879 1,070,187 Banks and OFIs 816,725 70,705 335,764 1,223,194 Corporates - - 3,223,405 3,223,405 Retail - - 462,825 462,825 Other credit exposures 43,026 20,463 114,004 177,493 ─────── ─────── ─────── ───────

1,707,059 91,168 4,358,877 6,157,104 ═══════ ═══════ ═══════ ═══════ b) Financial assets past due but not impaired For credit risk related exposures, a past due exposure is considered to be one where the client or counterparty has failed to meet his contractual obligation to the Group towards payment of the interest or the principal or a part thereof on the date on which such payment is due.

2014 2013

1 to 45 days

45 to 90 days Total

1 to 45 days

45 to 90 days Total

KD000's KD 000's KD 000's KD 000's KD 000's KD 000's Banks and OFIs - - - - - - Corporates 143,754 22,547 166,301 121,941 4,659 126,600 Retail 15,035 11,739 26,774 11,703 9,479 21,182

─────── ─────── ─────── ─────── ─────── ─────── 158,789 34,286 193,075 133,644 14,138 147,782 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

Fair value of collateral held* 101,752 2,181 103,933 116,392 5 116,397 *Fair value of collateral stated above is to the extent of the outstanding exposure.

103

BURGAN BANK GROUP


44

25. RISK MANAGEMENT (continued) A. CREDIT RISK (continued) c) Impaired financial assets The Group considers an asset to be impaired if the realisable value of the asset is less than the value at which it is carried in the books of the Group before it considers the necessity of making a specific provision for the same.

2014 2013

Total Provision

Fair value of collateral

held* Total Provision

Fair value of collateral

held* KD 000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs 2,251 2,268 - 2,244 2,486 - Corporates 146,017 45,011 93,257 154,252 44,986 91,124 Retail 29,255 12,767 9,346 19,408 7,838 6,599

─────── ─────── ─────── ─────── ─────── ─────── 177,523 60,046 102,603 175,904 55,310 97,723 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

*Fair value of collateral stated above is to the extent of the outstanding exposure. B. MARKET RISK Market risk is the risk that the value of an asset will fluctuate as a result of changes in market variables such as interest rates, foreign exchange rates, and equity prices, whether those changes are caused by factors specific to the individual investment or its issuer or factors affecting all financial assets traded in the market. Market risk is managed on the basis of pre-determined asset allocations across various asset categories, diversification of assets in terms of geographical distribution and industry concentration, a continuous appraisal of market conditions and trends and management’s estimate of long and short term changes in fair value. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the fair value or cash flows of the financial instruments. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. This arises 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 manages this risk by matching the repricing of assets and liabilities through risk management strategies. The Group is exposed to interest rate risk on its interest bearing assets and liabilities (treasury bills and bonds with CBK and others, due from banks and OFIs, loans and advances to customers, due to banks, due to OFIs, deposits from customers and other borrowed funds). The table below summarises the effect on net interest income as a result of the changes in interest rate:

2014 2013 KD 000’s KD 000’s Increase in interest rate "Basis Points" 50 5,594 5,576 100 11,328 11,163

Decrease in interest rate “Basis Points” 50 (3,893) (5,677) 100 (6,882) (11,364) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily.

104

BURGAN BANK GROUP


45

25. RISK MANAGEMENT (continued) B. MARKET RISK (continued) Currency risk (continued) The table below analyses the effect on profit and equity of an assumed 5% strengthening in value of the currency rate against the Kuwaiti Dinar from levels applicable at the year end, with all other variables held constant. A negative amount in the table reflects a potential net reduction in profit or equity, where as a positive amount reflects a net potential increase. 2014 2013 1Currency % Change in

currency rate

Effect on profit

KD 000’s

Effect on equity

KD 000’s

Effect on profit

KD 000’s

Effect on equity

KD 000’s

Jordanian Dinar +5 780 13,924 471 13,829 Algerian Dinar +5 334 3,929 460 3,899 Iraqi Dinar +5 155 4,112 169 4,283 Turkish Lira +5 63 6,171 (65) 4,354 US Dollar +5 630 2,910 1,624 2,311 Others +5 549 - 186 - Equity price risk Equity price risk is the risk that the fair values of equities will fluctuate as a result of changes in the level of equity indices or the value of individual share prices. Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. The majority of the Group’s quoted investments are listed on the regional Stock Exchanges. The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material implication over the Group’s profit or other comprehensive income for a 5% fluctuation in major stock exchanges. Prepayment risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when interest rate fall. The fixed rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers the effect of prepayment on net interest income is not material after taking in to account the effect of any prepayment penalties.

105

BURGAN BANK GROUP


46

25. RISK MANAGEMENT (continued) C. LIQUIDITY RISK Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan draw downs, guarantees. To limit this risk, the Group manages assets with liquidity in mind and monitors liquidity on a daily basis. The table below shows an analysis of financial liabilities and contingent liabilities and commitments based on the remaining undiscounted contractual maturities:

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 31 December 2014 Financial liabilities Due to banks 518,217 163,555 129,902 8,755 820,429 Due to other financial institutions 288,756 107,326 216,613 222,988 835,683 Deposits from customers 3,901,988 486,271 293,846 47,905 4,730,010 Other borrowed funds 2,306 4,291 9,819 314,914 331,330 Other liabilities* 198,872 14,233 19,032 1,997 234,134 ───────── ───────── ───────── ───────── ───────── 4,910,139 775,676 669,212 596,559 6,951,586 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and

commitments 666,534 348,102 475,078 466,508 1,956,222 ═════════ ═════════ ═════════ ═════════ ═════════ 31 December 2013 Financial liabilities Due to banks 411,234 87,307 69,016 4,853 572,410 Due to other financial institutions 238,594 139,939 485,257 23,271 887,061 Deposits from customers 3,440,854 610,575 574,657 48,240 4,674,326 Other borrowed funds 2,221 5,296 9,732 323,307 340,556 Other liabilities* 86,422 15,685 17,839 98,244 218,190 ───────── ───────── ───────── ───────── ───────── 4,179,325 858,802 1,156,501 497,915 6,692,543 ═════════ ═════════ ═════════ ═════════ ═════════ Contingent liabilities and

commitments 704,639 309,211 218,942 270,745 1,503,537 ═════════ ═════════ ═════════ ═════════ ═════════ * Other liabilities include negative fair value of derivative financial liabilities (note 22). The table below summarises the maturity profile of the Group’s assets and liabilities. The maturities of assets and liabilities have been determined according to when they are expected to be recovered or settled. The maturity profile for financial assets at fair value through profit or loss and financial assets available for sale is determined based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the maturities shown below since borrowers may have the right to prepay obligations with or without prepayment penalties.

106

BURGAN BANK GROUP


47

25. RISK MANAGEMENT (continued) C. LIQUIDITY RISK (continued)

Up to 3 months KD 000s

3 – 6 months KD 000s

6 – 12 months KD 000s

More than 12 months KD 000s

Total

KD 000s 31 December 2014 ASSETS Cash and cash equivalents 1,040,563 - - - 1,040,563 Treasury bills and bonds with CBK and others 263,240 120,318 74,252 172,009 629,819 Due from banks and other financial institutions 391,568 149,870 112,364 36,017 689,819 Loans and advances to customers 1,404,819 417,758 524,218 2,039,671 4,386,466 Investment securities 84,526 16,235 33,228 350,953 484,942 Other assets 57,745 2,910 3,447 195,393 259,495 Property and equipment - - - 93,566 93,566 Intangible assets - - - 166,754 166,754 ──────── ──────── ──────── ──────── ──────── Total assets 3,242,461 707,091 747,509 3,054,363 7,751,424

════════ ════════ ════════ ════════ ════════ LIABILITIES AND EQUITY Due to banks 515,694 162,673 118,575 4,236 801,178 Due to other financial institutions 288,524 106,769 213,767 216,190 825,250 Deposits from customers 3,894,921 481,569 288,816 43,025 4,708,331 Other borrowed funds - 1,368 2,294 222,982 226,644 Other liabilities 198,872 14,233 19,032 1,997 234,134 Equity - - - 955,887 955,887 ──────── ──────── ──────── ──────── ──────── Total liabilities and equity 4,898,011 766,612 642,484 1,444,317 7,751,424

════════ ════════ ════════ ════════ ════════ Net liquidity gap (1,655,550) (59,521) 105,025 1,610,046 - ════════ ════════ ════════ ════════ ════════ 31 December 2013 ASSETS Cash and cash equivalents 1,004,290 - - - 1,004,290 Treasury bills and bonds with CBK and others 256,989 127,993 83,663 115,002 583,647 Due from banks and other financial institutions 338,659 148,831 170,351 42,242 700,083 Loans and advances to customers 1,436,956 333,933 367,066 1,816,893 3,954,848 Investment securities 44,721 3,309 41,159 332,213 421,402 Other assets 77,650 4,463 6,105 149,920 238,138 Property and equipment - - - 81,378 81,378 Intangible assets - - - 170,965 170,965 ──────── ──────── ──────── ──────── ──────── Total assets 3,159,265 618,529 668,344 2,708,613 7,154,751

════════ ════════ ════════ ════════ ════════ LIABILITIES AND EQUITY Due to banks 407,988 87,038 68,728 4,807 568,561 Due to other financial institutions 238,453 139,658 479,574 22,807 880,492 Deposits from customers 3,424,601 603,080 567,779 44,624 4,640,084 Other borrowed funds - 2,415 2,415 222,767 227,597 Other liabilities 86,422 15,685 17,839 98,244 218,190 Equity - - - 619,827 619,827 ──────── ──────── ──────── ──────── ──────── Total liabilities and equity 4,157,464 847,876 1,136,335 1,013,076 7,154,751

════════ ════════ ════════ ════════ ════════ Net liquidity gap (998,199) (229,347) (467,991) 1,695,537 - ════════ ════════ ════════ ════════ ════════

107

BURGAN BANK GROUP


48

25. RISK MANAGEMENT (continued) D. OPERATIONAL RISK Operational risk is the risk of loss arising from the failures in operational process, people and system that supports operational processes. The Group has a set of policies and procedures, which are approved by the Board of Directors and are applied to identify, assess and supervise operational risk in addition to other types of risks relating to the banking and financial activities of the Group. Operational risk is managed by Risk management. Risk management ensures compliance with policies and procedures to identify, assess, supervise and monitor operational risk as part of overall Global risk management. 26. CAPITAL MANAGEMENT The primary objectives of the Group's capital management policy are to ensure that the group complies with regulatory capital requirements and that the group maintains strong credit ratings and health capital ratios in order to support its business and maximize shareholder value. Capital adequacy, financial leverage and the use of various levels of regulatory capital are monitored regularly by the Group’s management and are governed by guidelines of Basel Committee on Banking Supervision as adopted by the CBK. The Group’s regulatory capital and capital adequacy ratios,calculated under Basel III in accordance with CBK Circular number 2/RB, RBA/A336/2014 dated 24 June 2014, are as shown below: 2014 KD 000s Risk weighted assets 5,411,616

═════════ Total capital required 649,394

═════════

Common Equity Tier 1 (CET1) capital 506,578 Additional Tier 1 (AT1) capital 151,651 Tier 2 capital 72,418

───────── Total eligible capital 730,647

═════════ CET1 capital adequacy ratio 9.4% Tier 1 capital adequacy ratio 12.2% Total capital adequacy ratio 13.5% For the year ended 31 December 2013, the Group’s regulatory capital and capital adequacy ratios shown below were calculated in accordance with CBK Circular number 2/BS/184/2005 dated 21 December 2005, as amended. 2013 KD 000s Risk weighted assets 4,806,916

═════════ Total capital required 576,830

═════════

Capital available Tier 1 capital 474,365 Tier 2 capital 266,300

───────── Total capital 740,665

═════════ Tier 1 capital adequacy ratio 9.9% Total capital adequacy ratio 15.4%

108

BURGAN BANK GROUP


49

26. CAPITAL MANAGEMENT (continued) The Group’s financial leverage ratio for the year ended 31 December 2014, is calculated in accordance with CBK circular number 2/BS/ 342/2014 dated 21 October 2014, is shown below: 2014 KD 000s Tier 1 capital 658,229

═════════ Total exposure 8,142,360

═════════

Leverage ratio 8.1% ═════════

27. FAMILY SUPPORT FUND During the previous year, CBK issued its Circular No. 2/RB,RBA,RS/306/2013 to all local banks and investment companies regarding formation of Family Support Fund (the “Fund”) under Law No. 104/2013. The Fund has been established to purchase outstanding balance of instalment and consumer loans (the ‘loans’) from the Bank as on 12 June 2013 for loans granted before 30 March 2008. As at 31 December 2014, the Bank has recorded loans amounting to KD 29,253thousand in memorandum account (off-balance sheet) as it continues to manage them on behalf of the Fund.

109

110

How to obtain our 2014 Financial Statements:

• Shareholders attending our General Assembly meeting will be provided with a draft printed copy of the Financial Statement for their approval.

• Shareholders can request a printed copy of the Financial Statement to be sent to them by courier seven days before the advertised date of the General Assembly. Please call +965 2298 8000 to arrange this.

• Shareholders can request a copy of the Financial Statement to be sent to them by email seven days before the advertised date of the General Assembly. Please send an email request to [email protected] to arrange this.

• Shareholders can download a PDF copy of the Financial Statements seven days before the advertised date of the General Assembly from our company website – www.burgan.com

For further information on our 2013 Financial Statement, please telephone +965 2298 8000.

A member of the KIPCO Group

driven by you

111

Burgan Bank S.A.KP.O. Box 5389 Safat 12170State of KuwaitTelephone: +965 2298 8000Fax: +965 2298 8419www.burgan.com

driven by you

LNS 7 I, Copyright ©, The al-Sabah Collection, Dar al-Athar al-Islamiyyah, Kuwait

Shareholders attending our General Assembly meeting will be provided with a draft printed copy of the Financial Statements for their approval. Shareholders can request a printed copy of the Financial Statements to be sent to them by courier seven days before the advertised date of the General Assembly; please call +965 2298 8000 to arrange this.

Shareholders can request a copy of the Financial Statements to be sent to them by email seven days before the advertised date of the General Assembly; please contact [email protected] to arrange this.

Shareholders can download a PDF copy of the Financial Statements seven days before the advertised date of the General Assembly from our company website – www.burgan.com

How to obtain our 2014 Financial Statements:

For further information on our 2014 Financial Statements or for extra copies of this Review, please telephone +965 2298 8000

P.O. Box 5389, Safat 12170, Kuwait, Tel: +965 2298 8000 Fax: +965 2298 8419www.burgan.com

This year, the annual reports of KIPCO Group companies each feature a key ivory artifact from Dar al-Athar al-Islamiyyah - one of the world’s finest collections of Islamic art. These images are reproduced with the kind permission of the Dar al-Athar al-Islamiyyah.

Annual Review 2014 - Burgan

Documents

Transcript of Annual Review 2014 - Burgan