IS OUR PROMISE - Bank of Baroda ( · PDF fileI have the pleasure to present the Bank’s...

COMPANY INFORMATION

Annual Report and Financial Statementsfor the Year Ended 31 December 2014

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Chairman’s Report

Company information

Corporate governance

Report of the Directors

Statement of Directors' responsibilities

Report of the independent auditor

Financial statements:

Statement of profit and loss

Statement of other comprehensive income

Statement of financial position

Statement of changes in equity

Statement of cash flows

Notes: Significant accounting policies

Notes

DEPENDABILIT YIS OUR PROMISE

TABLE OF CONTENTSAnnual Report and Financial Statementsfor the Year Ended 31 December 2014

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CHAIRMAN’S REPORT

Dear Stakeholders,

I have the pleasure to present the Bank’s Annual Audited Report and Financial Statements for the year ended 31st December 2014.

KENYAN ECONOMY

The Kenyan Gross Domestic Product (GDP) is estimated to have expanded by 5.3 per cent in 2014 as compared to a growth of 5.7 per cent in the year 2013. The performance was supported by;

• Increasedgovernmentandprivateconsumption• Lowoilprices• Increaseinexportsofgoodsandservices.• StabilityoftheKenyaShillingagainstmajorcurrencies,despiteaslightdepreciationagainsttheUSdollar.

The expected growth in GDP for the country is 6.9% (revised from initial 6.5%) for the year 2015.

Thecountryexperienceddepressedrainfallduring the lastquarterof2014whileweather forecastpoints toapossibilityof insufficient longrainsin parts of the country. The performance of the agriculture sector is therefore likely to remain close to the 2014 level due to its reliance on rain fed water.Inflationisprojectedtoeasein2015supportedbylowerpricesofoilandelectricity.Improvedexternalenvironmentandasustainedstronginternal demand are likely to fuel growth in many sectors of the economy in the year 2015. Investments in the construction industry is likely to remain robustagainstabackgroundofstableinterestratescoupledwiththeongoinggovernmentinfrastructuralprojectsandtheprivatesector’sresilientparticipation especially in the real estate development. However, the economy is still prone to following challenges:

- Inadequate Government Expenditure- DelayinreleaseoffundsbytheGovernmenttovarioussectorsofeconomy,thusputtingstrainontheoverallfinancialenvironment- Anticipated effects of devolution of the government are still slow- Security concerns - Tourism(oneofthemajorsectorsofeconomy)continuestobeaffected- Inadequate rainfall may affect the Agriculture activity, which continues to be the largest contributor to GDP

On the international scene, the world economy is estimated to have grown by 3.3 per cent in the year 2014. This growth rate is similar to the revised growth of 3.3 per cent in 2013. This low growth was due to persistent weak import demand from advanced economies, slower expansion of global supply chains and shifts in demand towards less import intensive products. The global economic prospects for 2015 are better with world real GDP projectedtogrowat3.5percentintheyear2015subjecttocontinuedrecoveryfromtheglobalfinancialcrisis.Thisisexpectedtoimpactpositivelyon Kenya’s economic growth.

BANKING SECTOR

TheKenyanbankingsectorcomprisedof43commercialbanks,1mortgagefinancecompany,9microfinancebanks,8 representativeofficesofforeignbanks,87foreignexchangebureaus,13moneyremittanceprovidersand2creditreferencebureausasat31stDecember2014.

Thebankingsectorbalancesheetincreasedby19.3percentfromKshs2,732.8billioninDecember2013toKshs3,261.1billioninDecember2014.Themajorcomponentsofthebalancesheetontheassetsidewereloansandadvances,governmentsecuritiesandplacements,whichaccountedfor58.3percent,20.4percentand5.3percentoftotalassets,respectively.

The banking sector gross loans and advances grew from Kshs 1,605.2 billion in December 2013 to Kshs 1,972.1 billion in December 2014 translating to a growth of 22.9 percent. The growth was attributed to increase in lending to personal/households, trade, manufacturing, transport and communication andrealestatesectors.LoansandadvancesnetofprovisionsstoodatKshs1,950.8billioninDecember2014upfromKshs1,589.0billionregisteredin a similar period in 2013.

Deposits from customers which form the main source of funding for the banking sector accounted for 71.5 percent of total funding liabilities. The depositbasegrewby17.7percent fromKshs1,980.2billion inDecember2013 toKshs2,331.6billion inDecember2014mainlysupportedbyaggressive mobilization of deposits by banks, remittances and receipts from exports.

The banking sector registered enhanced capital levels in December 2014 with total shareholders’ funds growing by 22.6 percent from Kshs 431.5 billion in December 2013 to Kshs 529.1 billion in December 2014. Core capital and total capital increased from Kshs 341.9 billion and Kshs 407.5 billiontoKshs422.1billionandKshs508.4billion,respectivelyoverthesameperiod.However,theratiosofcoreandtotalcapitaltototalrisk-weightedassets declined from 19.5 percent and 23.2 percent in December 2013 to 15.9 percent and 19.2 percent, respectively. The decline in capital adequacy ratios was as a result of increase in total risk weighted assets occasioned by the capital charge for market and operational risks that took effect from January 2014.

Thestockofgrossnon-performingloans(NPLs)increasedby32.9percentfromKshs80.6billioninDecember2013toKshs107.1billioninDecember2014.Similarly,theratioofgrossNPLstogrossloansgrewfrom5.0percentinDecember2013to5.4percentinDecember2014.Ontheotherhand,thecoverageratiowhichismeasuredasapercentageofspecificprovisionstototalNPLsdeclinedfrom44.4percentto41.1percentinDecember2014.

Thebankingsectorregisteredagrowthof13.3percentinpre-taxprofits,fromKshs124.3billioninDecember2013toKshs140.9billionasatendofDecember 2014. The annualized return on assets declined to 3.4 percent from 3.6 percent over the same period. Similarly, return on equity decreased to26.6percentfrom28.8percentoverthesameperiod.Totalincomeincreasedby15.8percentfromKshs358.3billioninDecember2013toKshs414.8billioninDecember2014,whiletotalexpensesincreasedby17.1percentfromKshs233.2billioninDecember2013toKshs274.0billionin

Ranjan Dhawan

CHAIRMAN’S REPORT


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CHAIRMAN’S REPORT (continued)

December2014.Interestonloansandadvances,feesandcommissionsandgovernmentsecuritieswerethemajorsourcesofincomeaccountingfor59.2percent,18.8percentand15.1percentoftotalincomerespectively.

The Kenya Banks’ Reference Rate (KBRR) was introduced in July 2014 by the Central Bank of Kenya (CBK). The is now the base rate for lending by commercialbanksandmicrofinancebanksaswellasforpricingmortgageproducts.TheKBRRisreviewedandannouncedbytheCBKaftereverysixmonths.Atitsinceptionon8thJuly,2014theCBKcomputedandsettheKBRRat9.13percent.Itwasreviewedto8.54percenton14thJanuary2015 following a reduction in the 2-month weighted moving average of the 91-day Treasury bill rate.

PERFORMANCE OF THE BANK

TheBank’soperatingincomestoodatKshs2.78billionfortheyearended31stDecember2014comparedtoKshs2.58billioninDecember2013translatingtoanincreaseofKshs0.2billion.Thisreflectsa7.88%growthinoperatingprofitduringtheyear.Duringtheyear2014,DepositsgrewbyKshs6.81billiontostandatKshs48.68Billionon31stDecember2014fromKshs41.88Billionon31stDecember2013,thustranslatingtoagrowthof 16.25% over last year in local currency. Advances grew by Kshs 4.93 billion to stand at Kshs 29.00 billion as at 31st December 2014 from Kshs 24.07 billion as at 31st December 2013, indicating a growth of 20.50% over last year in local currency. Total Business of the Bank grew by Kshs 11.74 billion during the year to stand at Kshs 77.69 Billion as at 31st December 2014 from Kshs 65.94 Billion as at 31st December 2013, showing a growth of 17.80%overlastyear.Thegrowthwasmorethandoubleascomparedtothepreviousyear.TheratioofGrossNPAasapercentageoftotaladvancesstood at 3.67% as at 31st December 2014 compared to a ratio of 2.49% as at December 2013.

AWARDS & ACCOLADES

The report of the Central Bank of Kenya in respect of the 2014 Annual Inspection of our Bank was received and I am pleased to inform that the Bank wasadjudgedasSTRONG.

TheperformanceoftheBankhasbeenadjudgedandacknowledgedbytheIndustryfromtimetotime.InBankingAwards2014(EastAfrica),Bankreceivedtwoawardsfrom“ThinkBusiness”–MostEfficientBank(2ndRunnersUp)&BestBankinKenyaTierII(2ndRunnersUp).

OTHER MAJOR DEVELOPMENTS

• AnewbranchatMeruwasopenedinJune2014.• ThefacilityofSMSalertshasbeenintroducedbyourBank&e-cashreceipthasbeenintroducedtosafeguardtheinterestsofourcustomers.• TheBanksuccessfullyrelocateditsDigoRoadBranchtonewandspaciouspremisesatKizingoareaatMombasaandIamhopefulthatit

would translate to increased business volume.• WorkfortheproposedDiamondPlazabranchinNairobiisalmostcompleteandweexpecttoopenthebranchinJune2015.Thiswillbeour

12th branch.• AspartofImagebuildingunderCorporateSocialResponsibilityactivitiesduringtheyear2014,wedonatedKshs1.00millionto“BeyondZero”

campaignandhadaparticipationof60staffmembersinthe“FirstLadyHalfMarathon”.Wehavealsodonated300blanketstoSalvationArmyThika Primary School for the Blind.

WAY FORWARD

Our emphasis for the current year is mainly to mobilize maximum retail business by aggressively marketing the existing retail products as also to come up with new products to augment our customer base. Of course mobilization of maximum CASA (Current Accounts and Savings Bank Accounts) would be given priority over the term deposits to make the Bank more competitive in the market with regard to pricing as also to have better spread.

WeareintheprocessofimplementationandintroductionofVISAcards.WearecurrentlyfollowingupwithVISAandPaynetforimplementationaspertheprojectplan.Duringtheyear,wealsointendtoforayintomobilebankingasalsoexplorethepossibilityofhavingourownATMs.

Another area of priority and concern is credit monitoring, which we are regularly strengthening by regular follow ups and by taking preventive measures. Assets under stress are regularly discussed under different forums for remedial action and for improvement in the overall health of the credit portfolio.

As part of the Bank’s expansion strategy, a proposal to open a branch on Mombasa Road, Nairobi has already been approved and we hope to commenceoperationbytheendofcurrentfinancialyear.Wearealsoexploringthepossibilityforopeninganewbranchinoneoftheupcountrytowns in near future.

ACKNOWLEDGEMENT

I take this opportunity to thank the Government and the Central Bank of Kenya for continued co-operation and support to our Bank. I also appreciate thepatronage&supportofouresteemedcustomersandthebusinesspartners.Ithankthemanagementandstafffortheirdedication&hardworkwhich resulted in sustained increase in our business and bottom line during the year. I would also like to thank my fellow Directors for their continued support,&timelyguidance.

Welookforwardtoworktowardsmeetingthecustomers’andshareholders’expectationsinthecomingyearandseekyourcontinuedsupportandgood wishes.Thank you.

(RanjanDhawan)Chairman-BankofBaroda(Kenya)Ltd.

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NameRanjan Dhawan

Age60 Years

NationalityIndian

PositionChairman andNon-Executive Director

Date of Appointment24-May-2013

Other DirectorshipsBank of Baroda (India),Bank of Baroda (Tanzania) Ltd. & Bank of Baroda Capital Markets Ltd (India)

QualificationsB.Com, MBA (Finance), ACMA (U.K.), CIA (USA)

Percentage of Shareholding in the bankNone

NameYatish C. Tewari

Age56 Years

NationalityIndian

PositionManaging Director

Date of Appointment07 December 2013

Other DirectorshipsNone

QualificationsB. Sc, JAIIB

Percentage of Shareholdingin the bankOne share held in trust

NameMr. Patrick K. Njoroge

Age48 Years

NationalityKenyan

PositionNon-Executive Director

Date of Appointment18 August 2014

Other DirectorshipsKenya Association of Investments GroupEast Africa Capital Consultants Algorithm LimitedAmalgamated Chama Limited

QualificationsICPAK, ACIB, MBAInsititute of Directors

Percentage of Shareholding in the bank None

NameMr. Rajiv S. Abhyankar

Age59 Years

Nationality Indian


Date of Appointment 13 January 2015

Other Directorships None

Qualifications M. Sc, CAIIB


NamePhilip Burh

Age54 Years

NationalityIndian

PositionDirector (Executive)

Date of Appointment17 March 2014


QualificationsB. A, MBA, JAIIB, Certificate in Information Technology


NameVikram C. Kanji

Age48 Years

NationalityKenyan


Date of Appointment22-Jan-2010

Other DirectorshipsLeadway Investments Ltd -(Executive), Suvila Ltd-(Executive), Mombasa Cements Ltd (Non-Executive),Kontiki Ltd Safari Sumset Ltd.

QualificationsSolicitor (enrolled with Law Society of UK), Advocate of High Court of Kenya, Certified Public Secretary of Kenya

Percentage of Shareholding in the bank during the year None

BOARD OF DIRECTORS

COMPANY INFORMATION

COMPANY INFORMATION


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NameRanjan Dhawan

Age60 Years

NationalityIndian

PositionChairman andNon-Executive Director

Date of Appointment24-May-2013

Other DirectorshipsBank of Baroda (India),Bank of Baroda (Tanzania) Ltd. & Bank of Baroda Capital Markets Ltd (India)

QualificationsB.Com, MBA (Finance), ACMA (U.K.), CIA (USA)


NameYatish C. Tewari

Age56 Years

NationalityIndian

PositionManaging Director

Date of Appointment07 December 2013


QualificationsB. Sc, JAIIB

Percentage of Shareholdingin the bankOne share held in trust

NameMr. Patrick K. Njoroge

Age48 Years

NationalityKenyan


Date of Appointment18 August 2014

Other DirectorshipsKenya Association of Investments GroupEast Africa Capital Consultants Algorithm LimitedAmalgamated Chama Limited

QualificationsICPAK, ACIB, MBAInsititute of Directors


NameMr. Rajiv S. Abhyankar

Age59 Years

Nationality Indian


Date of Appointment 13 January 2015

Other Directorships None

Qualifications M. Sc, CAIIB


NamePhilip Burh

Age54 Years

NationalityIndian

PositionDirector (Executive)

Date of Appointment17 March 2014


QualificationsB. A, MBA, JAIIB, Certificate in Information Technology


NameVikram C. Kanji

Age48 Years

NationalityKenyan


Date of Appointment22-Jan-2010

Other DirectorshipsLeadway Investments Ltd -(Executive), Suvila Ltd-(Executive), Mombasa Cements Ltd (Non-Executive),Kontiki Ltd Safari Sumset Ltd.

QualificationsSolicitor (enrolled with Law Society of UK), Advocate of High Court of Kenya, Certified Public Secretary of Kenya

Percentage of Shareholding in the bank during the year None

BOARD OF DIRECTORS (continued)

COMPANY INFORMATION (continued)

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PRINCIPAL SHAREHOLDERSBankofBaroda–India 86.70%

PRINCIPAL OFFICERS Mr. Yatish C. Tewari - Managing Director Mr.KumarAjaySingh - Head-OperationsMs. Elizabeth Nyambutu - Head - Credit Mr.WinstonSore - Head-InternalAuditMr.SanjayKumarRay - Head-TreasuryMr. Amit Gupta - Head - Risk Management / Compliance Ms.MariaGorettMakokha - Head-Treasury(BackOffice)Mr. Patrick Sila - Head - Finance Mr. Rakesh R. Mehta - Branch Head - Digo Road Branch, Mombasa Mr. Gopal Saxena - Branch Head - Thika Branch Mr. Banambar Behera - Branch Head - Kisumu Branch Mr.RajanPrasad - BranchHead-SaritCentreBranch,NairobiMr. Philip Burh - Branch Head - Industrial Area Branch, Nairobi Mr. Raman Kumar - Branch Head - Eldoret Branch Mr. S. K. Palanivelu - Branch Head - Nakuru Branch Mr.AdityaN.Singh - BranchHead-NairobiMain(Office)BranchMr. Paul M. Kairu - Branch Head - Kakamega Branch Ms.NeelaK.Raj - BranchHead-NyaliBranch,MombasaMr. Elias K. Karanu - Branch Head - Meru Branch REGISTERED OFFICE Baroda House P.O. Box 30033, 00100 NAIROBI - KENYA Telephone:(020)2248402,2248412,2226416 Fax: (020) 316070/310439 E-mail: [email protected]; [email protected] INDEPENDENT AUDITOR PKF Kenya CertifiedPublicAccountants KalamuHouse,GrevilleaGrove,Westlands P.O.Box14077,00800 Telephone: (020) 4270000, (0732) 144000 NAIROBI - KENYA COMPANY SECRETARY Africa Registrars CertifiedPublicSecretariesKenya - Re Towers UpperhillP.O. Box 1243, 00100 NAIROBI - KENYA LEGAL ADVISORS PRINCIPAL VALUERSHamilton,Harrison&Mathews(incorporatingOraro&Co) NjihiaNjoroge&CoA.B.Patel&PatelAdvocates CrystalValuersLimitedMwaura&WachiraAdvocates DatooKithikuLimitedPatel&PatelAdvocates CoralPropertiesLimited

PRINCIPAL CORRESPONDENTS Bank of Baroda - Mumbai, IndiaBankofBaroda - NewYork,U.S.A.BankofBaroda - London,U.K.Bank of Baroda - Brussels, BelgiumBank of Baroda - Durban, South AfricaBank of Baroda - Sydney, AustraliaBank of India - Tokyo, JapanBank of Montreal - Toronto, CanadaUnionBankofSwitzerland - Zurich,Switzerland

Eldoret BranchCharotar Patel Plaza, Moi StreetP.O. Box 1517, 30100ELDORETTelephone: (053) 2063341Fax: (053) 2063540E-mail: [email protected]

Industrial Area Branch, NairobiEnterprise RoadP.O. Box 18269, 00500NAIROBITelephone: (020) 555971/2/3Direct: (020) 555945Fax: (020) 555943E-mail: [email protected]

Sarit Centre Branch, NairobiLower Ground Floor, Sarit CentreP.O. Box 886, 00606Westlands, NAIROBITelephone: (020) 3752590/91Fax: (020) 3752592E-mail: [email protected]

Nakuru BranchVickers House, Kenyatta AvenueP.O. Box 12408, 20100NAKURUTelephone: (051) 2211718Fax: (051) 2211719E-mail: [email protected]

Nyali Branch, MombasaNyali Road, Texas TowersP.O. Box 95450, 80106MOMBASATelephone: (041) 4471103Fax: (041) 4471104E-mail: [email protected]

Nairobi Main (O�ce) BranchBaroda House, 29 Koinange StreetP.O. Box 30033, 00100 NAIROBI Telephone: (020) 2248402/12Fax: (020) 310439 E-mail: [email protected] Digo Road Branch, MombasaPlot No. XXV/61, KIZINGOP.O.Box No. 90260, 80100 MOMBASA Telephone: (041) 224507/8, 2226211Fax: (041) 228607 E-mail: [email protected]

Kisumu Branch Central Square P.O. Box 966, 40100 KISUMU Telephone: (057) 2021768/74, 2020303Fax: (057) 2024375 E-mail: [email protected] Thika Branch Kenyatta Avenue P.O. Box 794, 01000 THIKA Telephone: (067) 22379, 30048Fax: (067) 30048 E-mail: [email protected] Kakamega Branch Kenyatta Avenue P.O. Box 2873 KAKAMEGA Telephone: (020) 2111777 Fax: (056) 31766 E-mail: [email protected]

Meru BranchBrown Rock Building, Njuri Ncheke Street P.O. Box 2762, 60200 MERU Telephone: (064) 2341342 Fax: (064) 30623 E-mail: [email protected]

Baroda House, 29 Koinange StreetP.O. Box 30033, 00100

NAIROBITelephone: (020) 2248402 / 2248412 / 2226416

Fax: (020) 316070/310439E-mail: [email protected]; [email protected]

BRANCH NETWORK

HEAD OFFICE

COMPANY INFORMATION


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Eldoret BranchCharotar Patel Plaza, Moi StreetP.O. Box 1517, 30100ELDORETTelephone: (053) 2063341Fax: (053) 2063540E-mail: [email protected]

Industrial Area Branch, NairobiEnterprise RoadP.O. Box 18269, 00500NAIROBITelephone: (020) 555971/2/3Direct: (020) 555945Fax: (020) 555943E-mail: [email protected]

Sarit Centre Branch, NairobiLower Ground Floor, Sarit CentreP.O. Box 886, 00606Westlands, NAIROBITelephone: (020) 3752590/91Fax: (020) 3752592E-mail: [email protected]

Nakuru BranchVickers House, Kenyatta AvenueP.O. Box 12408, 20100NAKURUTelephone: (051) 2211718Fax: (051) 2211719E-mail: [email protected]

Nyali Branch, MombasaNyali Road, Texas TowersP.O. Box 95450, 80106MOMBASATelephone: (041) 4471103Fax: (041) 4471104E-mail: [email protected]

Nairobi Main (O�ce) BranchBaroda House, 29 Koinange StreetP.O. Box 30033, 00100 NAIROBI Telephone: (020) 2248402/12Fax: (020) 310439 E-mail: [email protected] Digo Road Branch, MombasaPlot No. XXV/61, KIZINGOP.O.Box No. 90260, 80100 MOMBASA Telephone: (041) 224507/8, 2226211Fax: (041) 228607 E-mail: [email protected]

Kisumu Branch Central Square P.O. Box 966, 40100 KISUMU Telephone: (057) 2021768/74, 2020303Fax: (057) 2024375 E-mail: [email protected] Thika Branch Kenyatta Avenue P.O. Box 794, 01000 THIKA Telephone: (067) 22379, 30048Fax: (067) 30048 E-mail: [email protected] Kakamega Branch Kenyatta Avenue P.O. Box 2873 KAKAMEGA Telephone: (020) 2111777 Fax: (056) 31766 E-mail: [email protected]

Meru BranchBrown Rock Building, Njuri Ncheke Street P.O. Box 2762, 60200 MERU Telephone: (064) 2341342 Fax: (064) 30623 E-mail: [email protected]

Baroda House, 29 Koinange StreetP.O. Box 30033, 00100

NAIROBITelephone: (020) 2248402 / 2248412 / 2226416

Fax: (020) 316070/310439E-mail: [email protected]; [email protected]

BRANCH NETWORK

HEAD OFFICE


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Board AuditCommittee

CreditCommittee

Asset and LiabilityCommittee

Composition

Board Risk ManagementCommittee

ExecutiveCommittee

Three Non-Executive Directors

Two Executive and TwoNon-Executive Directors.

Two Executive DirectorsHead CreditHead OperationsHead Treasury Head Treasury (Back Office) Head Risk / ComplianceHead Finance

One Executive Director Three Non-Executive Director

Director ExecutiveHead OperationsHead CreditHead ITHead Treasury Head HR & AdministrationHead Finance

Main function

Strengthening the control environment, financial reporting and auditing function.

Appraisal and approval of credit applications andreviewing credit portfolio.

Monitoring and management of the statement of financial position including liquidity risk, interest rate risk, foreign currency risk and compliance with all statutory requirements.

Ensuring quality, integrity and reliability of the Bank's risk management function.

To act as link between the Board and Management in implementing operational plans, annual budgets and periodic review of operations, strategic plans and identification of opportunities.

Frequency of meetings per Annum (minimum)

Quarterly Quarterly Monthly Quarterly Three times a year

Chairperson

Mr. Patrick K. Njoroge Mr. Patrick K. Njoroge Mr. Yatish C. Tewari Mr. Patrick K. Njoroge Mr. Philip Burh

Members

Mr. Vikram C. KanjiMr. Rajiv S Abhyankar

Mr. Yatish C. TewariMr. Vikram C. KanjiMr. Philip BurhMr. Rajiv S Abhyankar

Ms. Elizabeth NyambutuMr. Kumar Ajay SinghMr. Sanjay Kumar RayMs. Maria G. MakokhaMr. Amit Kumar GuptaMr. Patrick Sila

Mr Vikram C KanjiMr. Rajiv S AbhyankarMr. Yatish C. Tewari

Mr. Kumar Ajay SinghMs. Elizabeth NyambutuMr. Patrick KombeMr. Sanjay Kumar RayMr. Kennedy MachokaMr. Patrick Sila

The Board & management committees as at the date of this report comprise:

BOARD & MANAGEMENT COMMITTEES


CORPORATEGOVERNANCE


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Board AuditCommittee

CreditCommittee

Asset and LiabilityCommittee

Composition

Board Risk ManagementCommittee

ExecutiveCommittee

Three Non-Executive Directors

Two Executive and TwoNon-Executive Directors.

Two Executive DirectorsHead CreditHead OperationsHead Treasury Head Treasury (Back Office) Head Risk / ComplianceHead Finance

One Executive Director Three Non-Executive Director

Director ExecutiveHead OperationsHead CreditHead ITHead Treasury Head HR & AdministrationHead Finance

Main function

Strengthening the control environment, financial reporting and auditing function.

Appraisal and approval of credit applications andreviewing credit portfolio.

Monitoring and management of the statement of financial position including liquidity risk, interest rate risk, foreign currency risk and compliance with all statutory requirements.

Ensuring quality, integrity and reliability of the Bank's risk management function.

To act as link between the Board and Management in implementing operational plans, annual budgets and periodic review of operations, strategic plans and identification of opportunities.

Frequency of meetings per Annum (minimum)

Quarterly Quarterly Monthly Quarterly Three times a year

Chairperson

Mr. Patrick K. Njoroge Mr. Patrick K. Njoroge Mr. Yatish C. Tewari Mr. Patrick K. Njoroge Mr. Philip Burh

Members

Mr. Vikram C. KanjiMr. Rajiv S Abhyankar

Mr. Yatish C. TewariMr. Vikram C. KanjiMr. Philip BurhMr. Rajiv S Abhyankar

Ms. Elizabeth NyambutuMr. Kumar Ajay SinghMr. Sanjay Kumar RayMs. Maria G. MakokhaMr. Amit Kumar GuptaMr. Patrick Sila

Mr Vikram C KanjiMr. Rajiv S AbhyankarMr. Yatish C. Tewari

Mr. Kumar Ajay SinghMs. Elizabeth NyambutuMr. Patrick KombeMr. Sanjay Kumar RayMr. Kennedy MachokaMr. Patrick Sila

CORPORATEGOVERNANCE

The Bank places strong importance on maintaining a sound control environment and applying the highest standards to continue its business integrity and professionalism in all areas of activities. It shall continue its endeavour to enhance shareholders’ value by protecting their interests and defend their rights by ensuring performance at all levels and maximising returns with minimal use of resources in its pursuit of excellence in corporate life. Respective Responsibilities

The shareholders’ role is to appoint the Board of Directors and the external auditors. This role is extended to holding the Boardaccountableandresponsibleforefficientandeffectivegovernance.

The Board of Directors is responsible for the governance of the Bank, and to conduct the business and operations of the Bank with integrity and in accordance with generally accepted corporate practices, in a manner based on transparency, accountability and responsibility.

Board of Directors

The composition of the Board is set out on page 1. The Board is chaired by a Non-Executive Chairman and comprises of the Managing Director (Executive Director), one other Executive Director and three other Non-Executive Directors. All Non-Executive Directors are independent of management. The Board has varied and extensive skills in the areas of banking, business management, accountancy and information communication and technology. The Directors’ responsibilities are set out in the Statement of Directors Responsibilities on page 9. The Directors are responsible for thedevelopmentofinternalfinancialcontrolswhichprovidesafeguardagainstmaterialmis-statementsandfraudandalsoforthefairpresentationofthefinancialstatements.

The Board meets on a quarterly basis and has a formal schedule of matters reserved for discussion. During the year under review, the Board meetings were held on the following dates: - 10 March 2014 - 14 March 2014 - 25 March 2014 - 17 June 2014 -18September2014 - 23 December 2014 The attendance of individual Directors is as follows:

Name of Director Period Meetings held During Meetings their tenure Attended

Mr.RanjanDhawan 01January2014to31December2014 6 4Mr. Yatish C. Tewari 01 January 2014 to 31 December 2014 6 6Mr. Philip Burh 17 March 2014 to 31 December 2014 4 4Mr.PatrickK.Njoroge 18August2014to31December2014 2 2Mr. J. K. Muiruri * 01 January 2014 to 19 September 2014 5 5Mr.VikramC.Kanji 01January2014to31December2014 6 6Mr.V.H.Thatte** 01January2014to01August2014 4 3* Since resigned on 19/09/2014**Sinceresignedon01/08/2014

The Board has appointed various sub-committees to which it has delegated certain responsibilities with the chairperson ofthesub-committeesreportingtotheBoard.Thecompositionofthesub-committeesissetoutonpage8.

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CORPORATEGOVERNANCE(continued)

Board Evaluation

In compliance with the Prudential Guidelines issued by the Central Bank of Kenya and also part of good corporate governance, each member of the Board including the Chairman conducted a peer evaluation exercise for the year 2014. This involved a self review of the Board’s capacity, functionality and effectiveness of performance against its set objectives.ThisenabledtheBoardtoassessitsareasofstrengthsandweaknessandthenknowhowtobalanceitsskills, expertise and knowledge. The Board Performance evaluation covered the following:

(a) The Board Self EvaluationThe Board’s performance during the year was evaluated by each member where members were allowed to give their opinion on how the Board had performed. Members were satisfied that the Board had performed to theirexpectations.

(b) The Director Peer EvaluationA Directors’ Peer evaluation exercise was conducted for each member. Each director was required to give the ratings on the performance of each member of the Board. (c) The Board Chairman’s Evaluation The Board members assessed the Chairman’s performance and noted that the Board managed to achieve its business targets for year 2014 under his Chairmanship. The Chairman was effective during the year. Board Committees

Board Audit Committee

The committee comprises three Non-Executive Directors. The committee meets on a quarterly basis and its functions include:

• Monitoringandstrengtheningtheeffectivenessofmanagementinformationandinternalcontrolsystems.• Reviewoffinancialinformationandimprovingthequalityoffinancialreporting.• Strengthening theeffectivenessof internalandexternalaudit functions,anddeliberatingonsignificant issues

arising from internal and external audits, and inspections carried out by the Bank Supervision Department of Central Bank of Kenya.

• Increasingthestakeholders’confidenceinthecredibilityandstabilityoftheinstitution.• Monitoringinstancesofnon-compliancewiththeInternationalFinancialReportingStandards,applicablelegislation

and the Central Bank of Kenya Prudential Regulations and other pronouncements.

Credit Committee

The committee is chaired by a Non-Executive Director and comprises of the two Executive Directors, two Non-Executive Director and the Head of Credit as convener. It meets at least once in a quarter. The functions of the committee include Credit monitoring, appraisal and approval of credit applications based on limits set by the Board. The committee also monitors and reviews non-performing advances and ensures that adequate loan loss provisions are held against delinquent accounts in accordance with the guidelines issued by the Central Bank of Kenya and International Accounting Standards Board. Board Risk Management Committee The committee, chaired by an Executive Director and comprising various departmental heads, meets on a quarterly basis to ensure quality, integrity and reliability of Risk Management function and programme by way of assisting the Board of Directors in the discharge of duties relating to the corporate accountability, reviewing the integrity of the risk control systems, monitoring external developments relating to the practice of corporate accountability and providing independentandobjectiveoversight.

CORPORATEGOVERNANCE


11

Management Committees Asset and Liability Committee The committee, chaired by the Managing Director, comprising one Director (Executive) and various departmental heads, meetsonamonthlybasistodiscussoperationalissuesandtomonitorandmanagethestatementoffinancialpositionto ensure that adequate resources are available to meet anticipated fund demands and to monitor compliance with all statutory requirements. The committee is also responsible for developing a framework for monitoring the banking risks including operational, liquidity, maturity, interest rate and exchange rate risks. Executive Committee

The committee, chaired by an Executive Director and comprising various departmental heads, meets at least three timesayeartoimplementoperationalplans,annualbudgeting,periodicreviewsofoperations,strategicplans,ALCOstrategies,identificationandmanagementofkeyrisksandopportunities. Directors’ Remuneration

TheremunerationtoallDirectorsisbasedontheresponsibilitiesallocatedtotheDirectors,andissubjecttoregularreview to ensure that it adequately compensates them for the time spent on the affairs of the Bank.

The remuneration paid to the Directors and key management staff is disclosed in note 32 to the financialstatements.

Relationship with Shareholders

The Bank is a private limited liability company with the details of the main shareholder set out on page 2. Shareholders have full access through the Managing Director to all information they require in respect of the Bank and its affairs. In accordance with the guidelines issued by the Central Bank of Kenya, the Bank publishes quarterly accounts in the Kenyan newspapers.

(Mr. Yatish C. Tewari) Managing Director 16th March 2015

CORPORATEGOVERNANCE(continued)

12

REPORT OF THE DIRECTORS

The Directors submit their report and the audited financial statements for the year ended 31 December 2014, inaccordance with Section 22 of the Banking Act and Section 157 of the Kenyan Companies Act, which disclose the state of affairs of the Bank. PRINCIPAL ACTIVITIES TheBankislicensedundertheBankingActandprovidesbanking,financialandrelatedservices. 2014 2013 RESULTS Shs ‘000 Shs ‘000

Profitbeforetax 2,694,608 2,505,027

Tax (477,697) (465,331)

Profitfortheyear 2,216,911 2,039,696

DIVIDEND

TheDirectorsproposeafinaldividendofShs.3.80pershare(2013:Shs.3.60pershare)amountingtoShs.188.05million(2013:Shs.178.14million). DIRECTORS TheDirectorswhoheldofficeduringtheyearandtothedateofthisreportareshownonpage1.In accordance with the Bank’s Articles of Association, no Director is due for retirement by rotation. INDEPENDENT AUDITOR TheBank’sauditor,PKFKenya,hasindicatedwillingnesstocontinueinofficeinaccordancewithSection159(2)oftheKenyanCompaniesAct,subjecttoapprovaloftheCentralBankofKenyainaccordancewithSection24(1)oftheBankingAct(Cap.488).

BY ORDER OF THE BOARD

16th March 2015

REPORT/STATEMENT


13

STATEMENTOFDIRECTORS’RESPONSIBILITIES

TheKenyanCompaniesActrequirestheDirectorstopreparefinancialstatementsforeachfinancialyearwhichgiveatrueandfairviewofthestateofaffairsoftheBankasattheendofthefinancialyearandofitsprofitorlossforthatyear. It also requires the Directors to ensure that the Bank maintains proper accounting records that disclose, with reasonableaccuracy,thefinancialpositionoftheBank.TheDirectorsarealsoresponsibleforsafeguardingtheassetsof the Bank. TheDirectorsacceptresponsibilityforthepreparationandfairpresentationoffinancialstatementsthatarefreefrommaterial misstatement whether due to fraud or error. They also accept responsibility for:

i. Designing, implementing and maintaining such internal control as they determine is necessary to enable the preparationoffinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.

ii. Selecting and applying appropriate accounting policies.iii.Makingaccountingestimatesandjudgementsthatarereasonableinthecircumstances;

TheDirectorsareoftheopinionthatthefinancialstatementsgiveatrueandfairviewofthefinancialpositionoftheBankasat31December2014andof theBank’sfinancialperformanceandcashflows for theyear thenended inaccordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act. Nothing has come to the attention of the Directors to indicate that the Bank will not remain a goingconcern for at least the next twelve months from the date of this statement

Approved by the Board of Directors on 16th March 2015 signed on its behalf by:

DIRECTOR MANAGING DIRECTOR

REPORTOFTHEINDEPENDENTAUDITOR

TO THE MEMBERS OF BANK OF BARODA (KENYA) LIMITED

REPORT ON THE FINANCIAL STATEMENTS

WehaveauditedtheaccompanyingfinancialstatementsofBankofBaroda(Kenya)Limitedsetoutonpages15to55,whichcomprisethestatementoffinancialpositionasat31December2014andthestatementofprofitorloss,statementofothercomprehensiveincome,statementofchangesinequityandstatementofcashflowsfortheyearthenended,andasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation. Directors’ responsibility for the financial statements

TheDirectorsareresponsibleforthepreparationoffinancialstatementsthatgiveatrueandfairviewinaccordancewith International Financial Reporting Standards and the Kenyan Companies Act, and for such internal control as managementdetermines isnecessary toenable thepreparationof financial statements thatare free frommaterialmisstatement, whether due to fraud or error. Auditor’s responsibility

Ourresponsibilityistoexpressanindependentopiniononthesefinancialstatementsbasedonouraudit.Weconductedour audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsare free from material misstatement.

Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthefinancialstatements.Theproceduresselecteddependontheauditor’sjudgement,includingtheassessmentoftheriskofmaterialmisstatementofthefinancialstatements,whetherduetofraudorerror.Inmakingthoseriskassessments,theauditorconsidersinternalcontrolrelevanttotheentity’spreparationandfairpresentationofthefinancialstatementsinorderto 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 presentationofthefinancialstatements.

Webelieve that theaudit evidencewehaveobtained is sufficient andappropriate to providea basis for our auditopinion. Opinion

Inouropinion,theaccompanyingfinancialstatementsgiveatrueandfairviewofthefinancialpositionofBankofBaroda(Kenya)Limitedasat31December2014andofitsfinancialperformanceanditscashflowsfortheyearthenendedinaccordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act. Report on other legal requirements

AsrequiredbytheCompaniesAct(Cap.486)wereporttoyou,basedonouraudit,that:

(i) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;

(ii) in our opinion proper books of account have been kept by the Bank, so far as appears from our examination of those books; and

(iii)theBank’sstatementoffinancialposition,statementofprofitorlossandstatementofothercomprehensiveincomeare in agreement with the books of account.

CertifiedPublicAccountantsPIN NO. P051130467R

NAIROBI: 31st MARCH 2015

The engagement partner responsible for the audit resulting in this independent auditor’s report is CPA Darshan Shah - P/No. 2051.62/15

14

STATEMENTOFPROFITORLOSS

2014 2013 Notes Shs ‘000 Shs ‘000 Interestincome 1 6,807,462 6,085,923

Interest expense 2 (3,431,210) (3,041,539)

NET INTEREST INCOME 3,376,252 3,044,384

Feesandcommissionincome 151,786 163,334

Foreign exchange trading income 79,622 77,635

Other income 3 24,375 34,600

OPERATING INCOME 3,632,035 3,319,953

Increaseinimpairmentlossesonloansandadvances 4 (85,464) (71,511)

Otheroperatingexpenses 5 (851,963) (743,415)

PROFIT BEFORE TAX 2,694,608 2,505,027 Tax charge 6 (477,697) (465,331)

PROFIT FOR THE YEAR 2,216,911 2,039,696

EARNINGS PER SHARE Basicanddiluted(Shs.pershare) 7 44.80 41.22

DIVIDEND Proposedfinaldividendfortheyear 8 188,046 178,149

DIVIDEND PER SHARE (Shs. per share) 8 3.80 3.60 Thenotesonpages21to55formanintegralpartofthesefinancialstatements.

Report of the independent auditor - Pages 14.

FINANCIALSTATEMENTS


15

16STATEMENTOFOTHERCOMPREHENSIVEINCOME

2014 2013 Notes Shs ‘000 Shs ‘000 Profit for the year 2,216,911 2,039,696

Items that may be reclassified subsequently to profit or loss:

Fair value gains and (losses) on available-for-sale financialassets- government securities 255,333 (55,370)-corporatebonds 15 3,958 (4,956)-quotedshares 15 163 (381) Total comprehensive income for the year 2,476,365 1,978,989 Thenotesonpages21to55formanintegralpartofthesefinancialstatements. Report of the independent auditor - Pages 14.

FINANCIALSTATEMENTS


17STATEMENTOFFINANCIALPOSITION

2014 2013 Notes Shs’000 Shs’000 ASSETS Cash Cash in hand 307,935 265,970 Balances with Central Bank of Kenya 9 2,713,519 2,131,439 Governmentsecurities 10 28,480,500 24,251,152Placements with and loans and advances to other banking institutions 11 1,194,965 1,024,391 Other assets 12 377,622 271,336 Loansandadvancestocustomers(net) 13 28,388,852 23,578,559Investment properties 14 23,522 24,141 Investment securities 15 206,162 264,693 Intangibleassets 16 4,896 3,759Propertyandequipment 17 126,928 132,638Deferredtax 18 82,573 73,446Tax recoverable 37,176 - TOTAL ASSETS 61,944,650 52,021,524 LIABILITIES Customerdeposits 19 48,683,189 41,876,522Deposits due to and borrowings from other banking institutions 20 3,036,350 2,112,076 Otherliabilities 21 357,780 363,910Current tax - 99,901

TOTAL LIABILITIES 52,077,319 44,452,409

SHAREHOLDERS’ EQUITY

Sharecapital 22 989,717 989,717Retainedearnings 8,416,924 6,497,900Fairvaluereserve (86,209) (345,944)Statutoryloanlossreserve 358,853 249,293Proposeddividend 8 188,046 178,149

TOTAL SHAREHOLDERS’ EQUITY 9,867,331 7,569,115 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 61,944,650 52,021,524 Thefinancialstatementsonpages15to55wereapprovedandauthorisedforissuebytheBoardofDirectorson16th March 2015 and were signed on its behalf by:

Managing Director Director

Director Thenotesonpages21to55formanintegralpartofthesefinancialstatements. Report of the independent auditor - Pages 14.

18STATEMENTSOFCHANGESINEQUITY

STA

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R

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r -

Pag

es 1

4.

FINANCIALSTATEMENTS


19STATEMENTSOFCHANGESINEQUITY

S

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TS

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T

he n

otes

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page

s 21

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rm a

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f th

ese

finan

cial

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tem

ents

.

Rep

ort o

f th

e in

depe

nden

t aud

itor

- P

ages

14.

20STATEMENTOFCASHFLOWS

2014 2013 Notes Shs ‘000 Shs ‘000 CASH FLOWS FROM OPERATING ACTIVITIESInterestreceipts 6,913,771 6,240,881Interest payments (3,393,104) (3,274,707)Feesandcommissionreceipts 251,958 266,010Paymentstoemployeesandsuppliers (788,046) (727,086)Tax paid (623,901) (255,000) Cash flows from operating activities before changes in operating assets and liabilities 2,360,678 2,250,098 Changes in operating assets and liabilities: - cash reserve ratio 9 (602,917) (266,745)-loansandadvances (4,941,298) (1,729,158)-otherassets (94,405) 101,368-customerdeposits 6,768,561 3,727,226-otherliabilities (16,760) 23,287 NET CASH FROM OPERATING ACTIVITIES 3,473,859 4,106,076

Cash flows from investing activities Purchase of intangible assets 16 (3,495) (226)Purchaseofpropertyandequipment 17 (44,816) (8,592)Purchaseofgovernmentsecurities (5,462,335) (8,191,460)Dividends received 3 793 425 Proceedsfromdisposalofgovernmentsecurities 516,331 689,073Proceedsfrommaturityofgovernmentsecurities 1,813,350 3,213,350Proceedsfrommaturityofinvestmentsecurities 15 60,589 35,588Proceedsfromdisposalofpropertyandequipment - 98

NET CASH (USED IN) INVESTING ACTIVITIES (3,119,583) (4,261,744)

Cash flows from financing activities Dividendpaid (178,149) (168,252)

NET CASH (USED IN) FINANCING ACTIVITIES (178,149) (168,252)

Net (decrease)/increase in cash and cash equivalents 176,127 (323,920)

CASH AND CASH EQUIVALENTS AT START OF THE YEAR 23 (755,198) (431,278)

CASH AND CASH EQUIVALENTS AT END OF THE YEAR 23 (579,071) (755,198) Thenotesonpages21to55formanintegralpartofthesefinancialstatements. Report of the independent auditor - Pages 14.

FINANCIALSTATEMENTS


21NOTES

SIGNIFICANT ACCOUNTING POLICIES

1. GENERAL INFORMATION

BankofBaroda(Kenya)LimitedisincorporatedinKenyaundertheCompaniesActasaprivatelimitedliabilitycompanyandisdomiciledinKenya.TheBankislicensedundertheBankingActandprovidebanking,financialand related services.

The Bank operates 11 branches within Kenya.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Theprincipalaccountingpoliciesadoptedinthepreparationofthesefinancialstatementsaresetoutbelow.Thesepolicies have been consistently applied to all the years presented, unless otherwise stated.

(a) Basis of preparation

The financial statements have been prepared under the historical cost convention, except as indicatedotherwise below and are in accordance with International Financial Reporting Standards (IFRS) as revised by the International Accounting Standards Board (IASB). The historical cost convention is generally based on the fair value of the consideration given in exchange of assets. 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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into when pricing the asset or liability at the measurementdate.Fairvalueformeasurementand/ordisclosurepurposesinthesefinancialstatementsisdetermined on such a basis.

Inaddition,forfinancialreportingpurposes,fairvaluemeasurementsarecategorisedintolevel1,2or3basedonthedegreetowhichtheinputstothefairvaluemeasurementsareobservableandthesignificanceoftheinputs to the fair value measurement in its entirety, which are described as follows: - Level1inputsarequotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilitiesthatthe

entity can access at the measurement date.- Level2inputsareinputs,otherthanquotedpricesincludedwithinLevel1,thatareobservablefortheasset

or liability, either directly or indirectly; and- Level3inputsareunobservableinputsfortheassetorliability.

Going concern TheThefinancialperformanceoftheBankissetoutintheReportoftheDirector’sandinthestatementof

profitorlossandthestatementofothercomprehensiveincome.ThefinancialpositionoftheBankissetoutinthestatementoffinancialposition.Disclosuresinrespectofriskandcapitalmanagementaresetoutinnotes25 to 31.

BasedonthefinancialperformanceandpositionoftheBankanditsriskmanagementpolicies,theDirectorsare of the opinion that the Bank is well placed to continue in business for the foreseeable future and as a result thefinancialstatementsarepreparedonagoingconcernbasis.

New and amended standards adopted by the Bank

ThefollowingnewandrevisedStandardsandInterpretationshavebeenadoptedinthecurrentyear.Unlessotherwisedisclosed, theiradoptionhashadnomaterial impacton theamounts reported in thesefinancialstatements:- Amendments to IFRS2 in respect toShare-basedPayment -The standardamends thedefinitionsof

‘vestingcondition’and ‘marketcondition’anaddsdefinitions for ‘performancecondition’ and ‘servicecondition’.AdoptionofIFRS2hadnomaterialimpactonthefinancialstatementsastheBankdoesnothave Share-based Payments.

22NOTES (continued)

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(a) Basis of preparation (continued)

- Amendments to IFRS 3 in respect to Business Combinations - The standard requires that contingent considerationthatisclassifiedasanassetoraliabilitytobemeasuredatfairvalueateachreportingdatewithgainsandlossesrecognisedinprofitorloss.

Further amendments also clarify that IFRS 3 excludes from its scope the accounting for the formation of ajointarrangementinthefinancialstatementsofthejointarrangementitself.AdoptionofIFRS3hadnomaterialimpactonthefinancialstatements.

- AmendmentstoIFRS10,12andIAS27inrespectofdefinitionofInvestmentEntityandtherequirementsforanentitythatmeetsthisdefinitionnottoconsolidateit’ssubsidiariesbutinsteadmeasurethematfairvaluethroughprofitorloss.

- Amendments to IAS32 -OffsettingFinancialAssets andFinancial Liabilities clarifying themeaning ofcurrent legal enforceable right of set off and simultaneous realisation and settlement.

- AmendmentstoIAS36inrespectofrecoverableamountdisclosuresfornonfinancialassets.

- Amendments to IAS 39 in respect of Novation of Derivatives and Continuation of Hedge Accounting.

- IFRICInterpretation21-LevieswhichdealswithrecognitionofliabilitytopayimposedbyaGovernment.

New standards, amendments and interpretations issued but not effective

AtthedateofauthorisationofthesefinancialstatementsthefollowingStandardsandInterpretationswhichhavenotbeenappliedinthesefinancialstatementswereinissuebutnotyeteffectivefortheyearpresented:

- IFRS5inrespectofguidanceonreclassificationswhichwillbeeffectivefortheaccountingperiodsbeginningon or after 1 July 2016.

- IFRS 9 in respect of Financial Instruments which will be effective for the accounting periods beginning on

orafter1January2018. - IFRS 15 in respect of Revenue from Contracts with Customers which will be effective for accounting periods

beginning on or after 1 January 2017. - AmendmentstoIAS16andIAS38inrespectofClarificationofAcceptableMethodsofDepreciationand

Amortisation which will be effective for accounting periods beginning on or after 1 January 2016.

- AmendmentstoIAS19inrespectofDefinedBenefitPlans:EmployeeContributionswhichwillbeeffectivefor accounting periods beginning on or after 1 July 2014.

- Annual improvements to IFRS’s which will be effective for accounting periods beginning on or after 1 July 2014 as follows:

- IFRS2-Definitionofvestingconditions - IFRS 3 - accounting for contingent consideration in a business combination - IFRS8-Aggregationofoperatingsegmentsandreconciliationoftotalreportablesegmentassetsto

entity’s assets - IFRS 13 - Carrying of short term receivables and payables at invoiced amounts- IAS 16 and IAS 38 - Proportionate restatement of depreciation/amortisation accumulated on

revaluation - IAS 24 - Management fee paid to a management entity- IFRS3-Scopeexclusionsforjointventures- IAS 40 - Application of IAS 40 vs. IFRS 3 on acquisition of investment property

FINANCIALSTATEMENTS


23NOTES (continued)


(b) Critical accounting estimates and judgements

TheBank’s financial statements and its financial results are influenced by its accounting policies and theassumptions,estimatesandjudgementsmadebymanagement.

Theseassumptions,estimatesandjudgementsarecontinuallyevaluatedandarebasedonhistoricalexperienceand other factors, including expectations of future events that are believed to be reasonable

- Key sources of estimation uncertainty Managementhasmadethefollowingestimatesthathaveasignificantriskofresultinginamaterialadjustmentto

thecarryingamountsofassetsandliabilitieswithinthenextfinancialyear:

- Impairment of loans and advances: Critical estimates have been made by the management in arriving at the discounted values of securities in

order to arrive at the impairment charges for non-performing loans and advances. The values of securities are discounted using both the International Financial Reporting Standards and the Prudential Guidelines issuedbytheCentralBankofKenya.ThePrudentialGuidelinesprovideaspecificbasisofdiscountingsecurities whilst discounting according to International Accounting Standard 39 (IAS 39) on ‘Financial Instruments: Recognition and Measurement’ is based on historical experience and other relevant factors, discounted to net present values.

- Useful lives of property and equipment and intangible assets: Management reviews the useful lives and residual values of the items of property and equipment and

intangibleassetsonaregularbasis.Duringthefinancialyear,thedirectorsreviewedtheperiodoverwhichleasehold improvements are amortised to a standard period of 10 years for all the leasehold improvements andnotovertheremainingleaseperiodasitwasbefore.Therewerenoothersignificantchangesintheuseful lives and residual values.

- Significant judgements made by management in applying the Bank’s accounting policies

Managementhasmadethefollowingjudgementsthatareconsideredtohavethemostsignificanteffectonthe

amountsrecognisedinthefinancialstatements:

- Impairment losses on loans and advances: The Bank reviews its loan portfolio to assess the likelihood of impairment on a quarterly basis. In determining

whethera loanoradvance is impaired, themanagementmakes judgementas towhether there isanyevidenceindicatingthatthereisameasurabledecreaseintheestimatedfuturecashflowsexpectedfromthat loan or advance.

Managementusejudgementbasedonhistoricalexperienceforsuchassetswithcreditriskcharacteristicsand as to whether there are any conditions that would indicate potential impairment. The methodology and assumptionsusedforestimatingboththeamountandtimingoffuturecashflowsarereviewedregularlytoreduce any differences between loss estimates and actual loss experience.

- Heldtomaturityfinancialassets: ThedirectorshavereviewedtheBank’sheldtomaturityfinancialassetsinthelightofitscapitalmaintenance

andliquidityrequirementsandhaveconfirmedtheBank’spositiveintentionandabilitytoholdthoseassetsto maturity.

- Non-financialassets: TheBankreviewsitsnonfinancialassetstoassessthelikelihoodofimpairmentonanannualbasis.In

determiningwhethersuchassetsareimpaired,managementmakejudgementsastowhetherthereareany conditions that indicate potential impairment of such assets.

24NOTES (continued)


(b) Critical accounting estimates and judgements (continued)

- Financial assets classified as ‘held-to-maturity’: Inaccordancewith the requirementsof InternationalFinancialReportingStandards theBankclassifiessomefinancialassetsthatareheldtocollectthecontractualcashflowsgeneratedat‘amortisedcost’underthe‘held-to-maturity’category.Thisclassificationrequiressignificantjudgement.Inmakingthisjudgement,theBankevaluatesitsintentionandabilitytoholdsuchassetstocollectthecontractualcashflowstillmaturity.

If theBankwere to fail tohold theseassets tomaturityother thanunderspecificcircumstances, itwouldberequired to reclassify theentire category as ‘fair value throughprofit or loss’ andmeasure theassets at fairvalueinsteadofamortisedcost.Insuchaninstance,fairvaluegainsandlosseswouldberecognisedinprofitorloss.

-Impairmentoffinancialassetsclassifiedatfairvalueonthestatementoffinancialposition:

TheBankdeterminesthatfinancialassetscarriedatfairvalueareimpairedwhentherehasbeenasignificantor prolonged decline in their fair values below its original cost. This determination of what is significant orprolongedrequiressignificantjudgement.Inmakingthisjudgement,theBankevaluatesamongotherfactors,thevolatilityinshareprice.Inaddition,objectiveevidenceofimpairmentmaybedeteriorationinthefinancialhealthof the investee, industryandsectorperformance,changes in technology,andoperationalandfinancingcashflows.

(c) Translation of foreign currencies

- Functional and presentation currency: ItemsincludedinthefinancialstatementsoftheBankaremeasuredusingthecurrencyoftheprimaryeconomic

environment inwhichtheBankoperates(‘thefunctionalcurrency’).Thefinancialstatementsarepresented inKenya Shillings.

- Transactions and balances: Transactions in foreign currencies during the year are converted into Kenya Shillings (the functional currency)

at rates ruling at the transaction dates. Assets and liabilities at the reporting date which are expressed in foreign currencies are translated into Kenya Shillings at rates ruling at that date. The resulting differences from conversion andtranslationaredealtwithinprofitorlossintheyearinwhichtheyarise.

(d) Revenue recognition Revenueisrecognisedonlywhenitisprobablethattheeconomicbenefitsassociatedwiththetransactionwill

flow to theBank.TheBank recognises revenuewhen theamountof revenuecanbe reliablymeasured, it isprobablethatfutureeconomicbenefitswillflowtotheBankandwhenthespecificcriteriahavebeenmetforeachof the Bank’s activities as described below. The amount of revenue is not considered to be reliably measured until all contingencies relating to the transaction have been resolved. The Bank bases its estimates on historical results,takingintoconsiderationthetypeofcustomer,typeoftransactionandspecificsofeacharrangement.

- Interestincomeisrecognisedonanaccrualsbasisintheprofitorlossfortheyearusingtheeffectiveyield on the asset. Interest income includes income from loans and advances, income from placements withloansandadvancestootherbankinginstitutionsandincomefromgovernmentsecurities.Whenfinancialassetsbecomeimpaired, interest incomeisthereafterrecognisedatratesusedtodiscountfuturecashflowsforthepurposesofmeasuringtherecoverableamount.

- Fees and commissions income are recognised at the time of effecting the transaction.

- Foreign exchange trading income is recognised at the time of effecting the transaction. It includes income from spot and forward deals and translated foreign currency assets and liabilities.

FINANCIALSTATEMENTS


25NOTES (continued)


(d) Revenue recognition (continued)- Dividend income is recognised when the shareholders right to receive payment has been

established - Rental income is accrued by reference to time on a straight line basis over the lease term.

(e) Interest expense Interestforallinterest-bearingfinancialliabilitiesisrecognisedwithininterestexpenseinprofitorlossusingthe

effective interest method. Interest expense includes expense incurred on customer deposits, placements and overnight borrowings with

other banking institutions.

(f) Property and equipment

All property and equipment is initially recorded at cost and thereafter stated at historical cost less depreciation. Historical cost comprises expenditure initially incurred to bring the asset to its location and condition ready for its intended use.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate,

onlywhen it isprobable that futureeconomicbenefitsassociatedwith the itemwill flow to theBankand thecost can be reliably measured. The carrying amount of the replaced part is derecognised. All other repairs and maintenancearechargedtoprofitorlossduringthefinancialyearinwhichtheyareincurred.

Buildingsaredepreciatedonastraightlinebasisovertheremainingperiodofthelease.Leaseholdimprovementsare depreciated on a straight line basis over a period of ten years.

Computers and electronic equipment are depreciated on a straight line basis over a period of three years.

Depreciation on all other assets is calculated on a reducing balance basis to write down the cost of each asset to its residual value over its estimated useful life using the following annual rates:

Rate % Motor vehicles 25.00 Furnitureandfittings 12.50

Theassetsresidualvaluesandusefullivesarereviewed,andadjustedifappropriate,attheendofeachreportingperiod.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains or losses on disposal of property and equipment are determined by comparing the proceeds with the carryingamountandaretakenintoaccountindeterminingoperatingprofit.

(g) Investment properties

Investment properties are long-term investments in land and buildings that are not occupied substantially for own use. Investment properties are initially recognised at cost and subsequently stated at historical cost less accumulated depreciation.

Subsequent expenditure on investment properties where such expenditure increases the future economic value

in excess of the original assessed standard of performance is added to the carrying amount of the investment property. All other expenditure is recognised as an expense in the year which it is incurred.

Depreciation is calculated on the straight line basis to write down the cost of the property to its residual value over its estimated useful life of 50 years.

26NOTES (continued)


(g) Investment properties (continued)

Theproperties residualvaluesanduseful livesare reviewed,andadjusted ifappropriate,at theendofeachreporting period.

The properties carrying amounts are written down immediately to their recoverable amount if the carrying amount

is greater than their estimated recoverable amount. Gains or losses on disposal of investment property are determined by comparing the proceeds with the carrying

amountandaretakenintoaccountindeterminingoperatingprofit.

(h) Financial instruments

FinancialassetsandfinancialliabilitiesarerecognisedwhentheBankbecomesapartytothecontractualprovisionsoftheinstrument.Managementdeterminesallclassificationoffinancialassetsatinitialrecognition.

- Financial assets

Financialassetsareinitiallyrecognisedatfairvalueplustransactioncostsforallfinancialassetsnotcarriedat fair value through profit or loss. Financial assets carried at fair value through profit or loss are initiallyrecognisedatfairvalueandtransactioncostsareexpensedinprofitorloss.

TheBank’sfinancialassetsfallintothefollowingcategories:

- Held-to-Maturity: financial assets with fixed or determinable payments and fixed maturity where themanagement have the positive intent and ability to hold to maturity. Subsequent to initial recognition, such assets are carried at amortised cost using the effective interest rate method. Changes in the carrying amount arerecognisedinprofitorloss.

- Available-for-Sale:Available-for-sale:financialassetsthatareheldforanindefiniteperiodoftime,which

may be sold in response to needs for liquidity or changes in interest rate. Subsequent to initial recognition, they arecarriedatfairvaluewithgainsandlossesrecognisedinothercomprehensiveincome,untilthefinancialasset is derecognised or impaired. At this time, the cumulative gain or loss previously recognised in equity is recognised is transferred to retained earnings. Interest calculated using the effective interest method and gains andlossesondisposalofassetsclassifiedasavailable-for-sale’arerecognisedinprofitorloss.Dividendson‘available-for-sale’equityinstrumentsarerecognisedinprofitorlosswhentheentity’srighttoreceivepaymentis established.

- Loans and receivables:financialassetswithfixedordeterminablepaymentsthatarenotquotedinanactive market other than:

-thosethattheentityintendstosellimmediatelyorintheshortterm,whichareclassifiedas‘heldfortrading’,andthosethattheentityuponinitialrecognitiondesignateditas‘fairvaluethroughprofitorloss’; - those that the entity upon initial recognition designates as ‘available-for-sale’; or

- those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

Subsequent to initial recognition, they are carried at amortised cost using the effective interest method. Changes inthecarryingamountarerecognisedintheprofitorloss.

Purchasesandsalesoffinancialassetsarerecognisedonthetradedatei.e.thedateonwhichtheBankcommitsto purchase or sell the asset.

Financialassetsarederecognisedwhentherightstoreceivecashflowsfromtheassetshaveexpiredorhave

been transferred and the Bank has transferred substantially all risks and rewards of ownership.

FINANCIALSTATEMENTS


27NOTES (continued)


(h) Financial instruments (continued)

Gainsandlossesondisposalofinvestmentswhosechangesinfairvaluewereinitiallyrecognisedintheprofitorloss are determined by reference to their carrying amount and are taken into account in determining operating profit.Ondisposalofassetswhosechangesinfairvaluewereinitiallyrecognisedinequity,thegains/lossesarerecognisedinthereserve,wherethefairvalueswereinitiallyrecognised.Anyresultantsurplus/deficitafterthetransfer of the gains/losses are transferred to retained earnings.

TheBankdoesnothaveanyfinancialassetsclassifiedaseither‘heldfortrading’or‘fairvaluethroughprofitor

loss’. Managementclassifiesfinancialassetsasfollows: Cash in hand, balances with Central Bank of Kenya, placements with and loans and advances from other banking

institutions, other assets, tax recoverable and loans and advances to customers are classified as loans andreceivables and are carried at amortised cost.

The portfolio of government securities has been split by bond into the ‘held-to-maturity’ and ‘available-for-sale’

classesoffinancialassets.Thefairvaluesofgovernmentsecuritiesclassifiedasavailableforsalearebasedonthe market prices as at the reporting date.

Investment securities are classified as ‘available-for-sale’ (AFS) financial assets. The fair values of quoted

investmentsandcorporatebondsarebasedoncurrentbidpricesatthereportingdate.Wherefairvaluescannotbe reliably measured (unquoted investments), the Bank carries these investments at cost less provision for impairment.

Wherefinancialassetsarecarriedatfairvalueinthestatementoffinancialposition,managementclassifythefair

valuesoffinancialassetsbasedonthequalitativecharacteristicsofthefairvaluationasatthefinancialyearend.The three hierarchy levels used by management are:

- Level 1:wherefairvaluesarebasedonnon-adjustedquotedpricesinactivemarketsforidenticalfinancialassets.

- Level 2:wherefairvaluesarebasedonadjustedquotedpricesandobservablepricesofsimilarfinancial

assets. - Level 3: where fair values are not based on observable market data.

- Financial liabilities

TheBank’s financial liabilitieswhich includecustomerdeposits,depositsdue tootherbanking institutions,current tax and other liabilities fall into the following category:

- Financial liabilities measured at amortised cost: These are initially measured at fair value and subsequently

measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised as

interestexpenseintheprofitorlossunderfinancecosts. Allfinancial liabilitiesareclassifiedascurrent liabilitiesunless theBankhasanunconditional right todefer

settlement of the liability for at least 12 months after the date of this report. Financial liabilities are derecognised when, and only when, the Bank’s obligations are discharged, cancelled or

expired. Offsetting financial instruments Financialassetsandliabilitiesareoffsetandthenetamountreportedinthestatementoffinancialpositionwhen

there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

28NOTES (continued)


(i) Impairment of financial assets

- Assets carried at amortised cost

TheBankassessesatthedateofthereportwhetherthereisobjectiveevidencethatafinancialassetisimpaired.Afinancialassetisimpairedandimpairmentlossesareincurredonlyifthereisevidenceofimpairmentasaresultof one or more events that occurred after the initial recognition of the asset and that a certain event has an impact ontheestimatedfuturecashflowsofthefinancialasset.

ThecriteriathattheBankusestodeterminethatthereisobjectiveevidenceofanimpairmentlossinclude: •Defaultincontractualpaymentsofprincipalorinterest;

•Cashflowdifficultiesexperiencedbytheborrowerorissuer(forexample,decliningfinancialratios) •Breachofloancovenantsorconditions; •InitiationofBankruptcyproceedings; •Deteriorationoftheborrower’sorissuer’scompetitiveposition; •Deteriorationinthevalueofcollateral;and •Thedisappearanceofanactivemarketforthatfinancialassetbecauseoffinancialdifficulties

- Impairment of loans and advances Loansandadvancesare recognisedwhen cash is advanced to borrowers. Loansandadvancesare initiallyrecognised at fair value and are subsequently carried at amortised cost less provision for impairment losses. Management uses the Prudential Guidelines issued by the Central Bank of Kenya when arriving at impairment provisions(whetherspecificorgeneral).Managementclassifiestheperformanceofeachloanaccountinlinewiththe requirements of these guidelines as follows:

Category Performance guideline for classification of account Normal - Accounts are performing as per the contractual terms, are not in arrears and are operating

within the sanctioned credit limits Watch -Accountsthatareinarrearsand/orexceedthesanctionedlimitforperiodsbetween30to90

days Sub-standard -Accountsthatareinarrearsand/orexceedthesanctionedlimitforperiodsbetween90to180

days Doubtful -Accountsthatareinarrearsand/orexceedthesanctionedlimitforperiodsbetween180to365

days Loss -Accountsthatareinarrearsand/orexceedthesanctionedlimitforperiodsover365days

Aspecificcreditriskprovisionforloanimpairmentisestablishedtoprovideformanagement’sestimateofcreditlossesassoonastherecoveryofanexposureisidentifiedasdoubtful.Inarrivingatsuchprovisions,presentvalue of future expected cash flows, including amounts recoverable from securities, discounted at effectiveinterest rates of loans are taken into account. A general credit risk provision for loan impairment is also provided for in accordance with the requirements of the Prudential Guidelines issued by the Central Bank of Kenya. This ranges from between 1% to 3% of the gross advancesclassifiedasNormalandWatch(perthecategorisationrequiredbytheCentralBankofKenya).Thesegeneral provisions are held on the statutory loan loss reserve under shareholders equity. Where provisions computed in accordance with the Prudential Guidelines exceed those under InternationalAccounting Standard 39 (IAS 39) on ‘Financial Instruments’, the excess is credited to reserves under retained earnings.

FINANCIALSTATEMENTS


29NOTES (continued)


(i) Impairment of financial assets (continued)

The Prudential Guidelines and IAS 39 are used by the Bank to determine when a loan becomes impaired. The Bank first assesseswhether objective evidence of impairment exists individually for financial assets that areindividuallysignificant,and individuallyorcollectively forfinancialassets thatarenot individuallysignificant. IftheBankdeterminesthatnoobjectiveevidenceofimpairmentexistsforanindividuallyassessedfinancialasset,whethersignificantornot,itincludestheassetinagroupoffinancialassetswithsimilarcreditriskcharacteristicsand collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is/or continues to be recognised are not included in a collective assessment of impairment.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that havenot been incurred) discountedat theeffective interest rate and the discounted value of the collateral. The carrying amount of the asset is reduced and theamountofthelossisrecognisedinprofitorloss.

Thecalculationofthepresentvalueoftheestimatedfuturecashflowsofacollateralisedfinancialassetreflectsthecashflowsthatmayresultfromforeclosurelesscostsforobtainingandsellingthecollateral,whetherornotforeclosure is probable. Forthepurposesofacollectiveevaluationof impairment,financialassetsaregroupedonthebasisofsimilarcredit risk characteristics (i.e. on the basis of the Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevanttotheestimationoffuturecashflowsofsuchassetsbybeingindicativeofthedebtors’abilitytopayallamounts due according to the contractual terms of the assets being evaluated.

Historical lossexperience isadjustedon thebasisof currentobservabledata to reflect theeffectsof currentconditions that did not affect the period on which the historical loss experience is based and to remove the effects ofconditionsinthehistoricalperiodthatdonotcurrentlyexist.Estimatesofchangesinfuturecashflowsforgroupsofassetsshouldreflectandbedirectionallyconsistentwithchangesinrelatedobservabledatafromperiodtoperiod (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions usedforestimatingfuturecashflowsarereviewedregularlybytheBanktoreduceanydifferencesbetweenlossestimates and actual loss experience.

Whenaloanisuncollectible,itiswrittenoffagainsttherelatedprovisionforloanimpairment.Suchloansarewrittenoff after all the necessary procedures have been completed and the amount of the loss has been determined.

If,inasubsequentperiod,theamountoftheimpairmentlossdecreasesandthedecreasecanberelatedobjectivelyto an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), thepreviouslyrecognisedimpairmentlossisreversedinprofitorloss.

- Renegotiated loans

Loans thatareeithersubject tocollective impairmentassessmentor individuallysignificantandwhose termshave been renegotiated are considered to be past due. They will continue to be treated as past due unless all past due interest is paid in cash at the time of renegotiation and a sustained record of performance has been maintained.

•Assetsclassifiedatfairvalueonthestatementoffinancialposition

TheBankassessesateachreportingdatewhetherthereisobjectiveevidencethatafinancialassetoragroupoffinancialassetsareimpaired.Inthecaseofequityinvestmentsheldatfairvalueasignificantorprolongeddeclineinthefairvalueofthesecuritybelowitscostisobjectiveevidenceofimpairment. resulting in the recognition of an impairment loss. If any such evidence exists, the cumulative loss (the difference between the acquisition cost andthecurrentfairvalue,lessanyimpairmentlossespreviouslyrecognisedinprofitorloss)iseliminatedfromequityandrecognisedinprofitorloss.Impairmentlossesrecognisedinprofitorlossonequityinstrumentsarenotreversedthroughprofitorloss.

30NOTES (continued)


(j) Impairment of non-financial assets

An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiablecashflows(cash-generatingunits).

Non-financialassetsthatsufferedanimpairmentarereviewedforpossiblereversaloftheimpairmentateach

reporting date. (k) Retirement benefit obligations TheBankoperatesadefinedcontributionpensionschemeforitsemployees,theassetsofwhichareheldina

separate trustee administered guaranteed scheme managed by an insurance company. The pension plan is funded by contributions from the employees and the Bank. The Bank’s contributions are

chargedtoprofitorlossintheyeartowhichtheyrelate.TheBankhasnofurtherpaymentobligationsoncethecontributions have been paid.

TheBankanditsemployeescontributetotheNationalSocialSecurityFund(NSSF),astatutorydefinedcontribution

schemeregisteredundertheNSSFAct.TheBank’scontributionstothedefinedcontributionschemearechargedtoprofitorlossintheyeartowhichtheyrelate.

(l) Employee entitlements

Employee entitlements to gratuity and long service awards are recognised when they accrue to employees. A provision is made for the estimated liability for such entitlements as a result of services rendered by employees up to the date of the reporting period.

The estimated monetary liability for employees’ accrued annual leave entitlement as at the date of this report is

recognised as an expense accrual. m) Intangible assets - Computer software

Computer software programmes are capitalised on the basis of the costs incurred to acquire and bring to use the specificsoftware.Thesecostsareamortisedonastraightlinebasisovertheirusefulliveswhichareestimatedtobe 5 years.

Costs associated with developing or maintaining computer software programmes are recognised as an expense asincurred.CoststhataredirectlyassociatedwiththeacquisitionofidentifiableanduniquesoftwareproductscontrolledbytheBank,andthatwillprobablygenerateeconomicbenefitsexceedingcostsbeyondoneyear,arerecognised as intangible assets.

(n) Accounting for leases The Bank as a lessee:

Leasesofassetswhereasignificantproportionoftherisksandrewardsofownershipareretainedbythelessorareclassifiedasoperatingleases.Paymentsmadeunderoperatingleasesarechargedtoprofitor lossonastraight line basis over the lease period.

The Bank as a lessor: Assets leased to third parties under operating leases are included in investment properties in the statement of

financialposition.

FINANCIALSTATEMENTS


31NOTES (continued)


(o) Taxation Thetaxexpensefortheperiodcomprisescurrentanddeferredtax.Taxisrecognisedintheprofitorlossforthe

year. Current tax Currenttaxisprovidedonthebasisoftheresultsfortheyear,adjustedinaccordancewithtaxlegislation.

Deferred tax Deferred tax is provided using the liability method for all temporary differences arising between the tax bases of

assetsandliabilitiesandtheircarryingvaluesforfinancialreportingpurposes.Currentlyenactedtaxratesareused to determined deferred tax. Deferred tax assets are recognised only to the extent that it is probable that futuretaxableprofitswillbeavailableagainstwhichtemporarydifferencescanbeutilised.

(p) Dividends Proposed dividends are disclosed as a separate component of equity until declared.

Dividends are recognised as a liabilities in the period in which they are approved by the Bank’s shareholders.

(q) Cash and cash equivalents Forthepurposesofthecashflowstatement,cashandcashequivalentscomprisecash,balancesduetoandfrom

other banking institutions, balances with Central Bank of Kenya (excluding cash reserve ratio) and government securities maturing within 91 days from the reporting date.

(r) Contingent liabilities Letters of credit, acceptances, guarantees and performance bonds are accounted for as off balance sheet

transactions and disclosed as contingent liabilities. Estimates of the outcome and of the financial effect ofcontingentliabilitiesismadebythemanagementbasedontheinformationavailableuptothedatethefinancialstatementsareapprovedforissuebytheDirectors.Anyexpectedlossischargedtoprofitorloss.

(s) Foreign exchange forward contracts Foreign exchange forward contracts are marked to market and are carried at their fair value and shown as

commitments.Gainsandlossesonforeignexchangeforwardcontractsaredealtwithonanetbasisinprofitorloss in the year in which they arise.

(t) Share capital Ordinarysharesareclassifiedasequity.

(u) Provisions under other liabilities Provisions under other liabilities are recognised when the Bank has a present legal or constructive obligation,

asaresultofpasteventsanditisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequired to settle the obligation and a reliable estimate of the amount of the obligation can be made.

(v) Statutory loan loss reserve The Prudential Guidelines issued by the Central Bank of Kenya require the Bank to make general provisions

against impairment of loans and advances. These amounts are recognised in the statutory loan loss reserve in shareholders equity. The loan loss reserve is not distributable.

(w) Comparatives Wherenecessary,comparativefigureshavebeenadjustedtoconformwithchangesinpresentationinthecurrent

year.

32NOTES (continued)

2014 20131. INTEREST INCOME Shs’000 Shs’000 Loansandadvancestocustomers 4,074,952 3,754,527 Governmentsecurities 2,640,248 2,247,823 Corporate bonds 26,939 31,195 Depositsandbalancesduefrombankinginstitutions 64,762 51,348 Other income 561 1,030

6,807,462 6,085,923 2. INTEREST EXPENSE Timedeposits 3,310,855 2,937,217 Customerdeposits 78,394 70,509 Depositsandbalancesduetobankinginstitutions 41,961 33,813 3,431,210 3,041,539 3. OTHER INCOME/(LOSSES) Profitondisposalofgovernmentsecurities 3,249 9,134 Rentalincome 19,803 13,443 Dividend income 793 425 Recoveries of advances previously impaired 95 10,764 Miscellaneousincome 435 834

24,375 34,600 4. IMPAIRMENT LOSSES ON LOANS AND ADVANCES Loansandadvancestocustomers: -Additionalprovisions 85,464 71,511

Net increase in impairment provisions 85,464 71,511

5. (a) OTHER OPERATING EXPENSES Staffcosts(Note5(b) 412,868 378,313 Directors’ emoluments: -fees 890 1,010 -other 11,384 10,428 Depreciation of investment properties (Note 14) 619 619 Amortisationofintangibleassets(Note16) 2,358 1,659 Depreciationonpropertyandequipment(Note17) 50,310 35,528 Property and equipment written 71 - Auditors’ remuneration: -currentyear 3,628 3,655 Contribution to Deposit Protection Fund 59,926 51,526 Operatingleaserentals 87,689 72,386 Other operating expenses: - administration 163,444 140,256 -establishment 58,776 48,035

851,963 743,415

FINANCIALSTATEMENTS


33NOTES (continued)

2014 20135. (b) STAFF COSTS Shs ’000 Shs ’000 The following items are included under staff costs: Staff leave 4,657 6,122 Pension costs: - Staff gratuity 24,326 14,400 -Definedcontributionscheme 17,510 16,920 - National Social Security Fund (NSSF) 362 372

6. TAX Currenttax 486,824 473,010 Deferredtax(credit)(Note18) (9,127) (7,679) 477,697 465,331 ThetaxontheBank’sprofitbeforetaxdiffersfromthetheoretical amount that would arise using the basic tax rate as follows: Profitbeforetax 2,694,608 2,505,027 Taxcalculatedatarateof30%(2013:30%) 808,382 751,508 - expenses not deductible for tax purposes 7,266 7,710 -incomenotsubjecttotax (337,951) (293,887) Tax charge 477,697 465,331

7. EARNINGS PER SHARE

Basicearningspershareiscalculatedontheprofitattributabletotheshareholdersandontheweightedaveragenumberofsharesoutstandingduringtheyearadjustedfortheeffectofthebonussharesissuedifany.

2014 2013

Netprofitfortheyearattributabletoshareholders(Shs.‘000) 2,216,911 2,039,696 Adjustedweightedaveragenumberofordinarysharesinissue(‘000) 49,486 49,486

Earningspershare-basicanddiluted(Shs.) 44.80 41.22 There were no potentially dilutive shares outstanding as at 31 December 2014 and 2013. 8. DIVIDEND

Proposeddividendsareaccounted forasaseparatecomponentofequityuntil theyhavebeen ratifiedatanannualgeneralmeeting.Attheforthcomingannualgeneralmeetingafinaldividendinrespectoftheyearended31December2014ofShs.3.80pershare(2013:Shs.3.60)amountingtoShs.188.04million(2013:Shs.178.14million) is to be proposed.

Whereapplicable,paymentofdividendsissubjecttodeductionofwithholdingtaxatarate5%forresidentsand10% for non-residents.

34NOTES (continued)

2014 20139. BALANCES WITH CENTRAL BANK OF KENYA Shs’000 Shs’000 Balances with Central Bank of Kenya -cashreserveratio 2,687,053 2,084,136 - other (Note 23) 26,466 47,303 2,713,519 2,131,439

The cash reserve ratio balance is non interest bearing and is based on the value of customer deposits as adjustedinaccordancewithCentralBankofKenyarequirements.Asat31December2014thecashreserveratiorequirement was 5.25% (2013: 5.25%) of all customer deposits. These funds are not available for the Bank’s day to day operations. 2014 2013

10. GOVERNMENT SECURITIES Shs’000 Shs’000 Treasury bills - ‘held to maturity’ 927,912 19,214 Treasurybonds-‘available-for-sale’ 9,605,169 9,716,280 Treasurybonds-‘heldtomaturity’ 17,947,419 14,515,658 28,480,500 24,251,152 Comprising Maturing within 91 days (Note 23) 927,912 19,214 Maturing after 91 days but within one year 907,007 2,001,614 Maturingwithinonetothreeyears 10,258,463 1,700,022 Maturingafterthreeyears 16,387,118 20,530,302 28,480,500 24,251,152

The fair valuesof thegovernment securities classifiedas ‘available-for-sale’ financial assetsarecategorisedunderLevel1basedontheinformationsetoutinaccountingpolicy(h). 2014 2013

11. PLACEMENT WITH AND LOANS AND ADVANCES TO Shs’000 Shs’000 OTHER BANKING INSTITUTIONS Balances with banking institutions in Kenya 950,200 564,216 Balances with banking institutions abroad 195,495 272,027 Balanceswithparentbank 49,270 188,148 1,194,965 1,024,391 12. OTHER ASSETS IItems in transit 212,342 167,937 Otherreceivablesandprepayments 165,280 103,399 377,622 271,336 13. LOANS AND ADVANCES TO CUSTOMERS a)Loansandadvancestocustomers Loansandoverdrafts 28,639,324 23,859,280 Billsdiscountedandforeignbillspurchases 362,899 208,393 Gross loans and advances to customers (Note 13 (c)) 29,002,223 24,067,673 Suspendedinterest (118,746) (73,205) Provision for impaired loans and advances (Note 13 (b)) (494,625) (415,909) Loans and advances to customers net of provision for impairment (Note 13(d)) 28,388,852 23,578,559

FINANCIALSTATEMENTS


35NOTES (continued)

2014 2013 13. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) Shs ‘000 Shs ‘000 b) Provision for impaired loans and advances - Specific provision Atstartofyear 415,909 359,181

New provisions -Additionalprovisionsduringtheyear 85,464 71,511 - Provision utilised during the year for write off (6,653) (4,019) - Recoveries (95) (10,764) Netdecrease/(increase)inprovisionforimpairment 78,716 56,728 At end of year 494,625 415,909

Loansandadvanceshavebeenwrittendowntotheirrecoverableamount.NonperformingloansandadvancesonwhichprovisionsforimpairmenthavebeenrecognisedamounttoShs.1.064billion(2013:Shs.Shs.598.364million).TheseareincludedinthestatementoffinancialpositionnetofprovisionsatShs.451.255million(2013:Shs.73.205million).IntheopinionoftheDirectors,sufficientsecuritiesareheldtocovertheexposureonsuchloansandadvances.InterestincomeamountingtoShs.118.746million(2013:Shs.73.295million)onimpairedloansandadvanceshasnotbeenrecognisedasthemanagementfeelsnoeconomicbenefitofsuchinterestwillflowtotheBank.

From past experience, the management is of the opinion that 1% provision for normal accounts and 3% provision for watch accounts is adequate to cover any accounts which might become delinquent in the future.

c) Concentration

Economic sector risk concentrations within the loans and advances portfolio are as follows: 2014 2013 Shs ‘000 % Shs ‘000 %

Agriculture 664,413 2.29% 620,055 2.58% Manufacturing 5,909,636 20.38% 6,094,323 25.32% BuildingandConstruction 4,080,658 14.07% 2,945,623 12.24% MiningandQuarrying 819,667 2.83% 617,170 2.56% EnergyandWater 71,335 0.25% 74,609 0.31% Trade 8,375,315 28.88% 7,017,224 29.16% Tourism, Restaurant and Hotels 1,221,567 4.21% 1,051,636 4.37% TransportandCommunication 2,626,915 9.06% 1,225,782 5.09% Real Estate 4,073,790 14.05% 3,753,991 15.60% FinancialServices 91,208 0.31% 55,086 0.23% Social,CommunityandPersonalHouseholds 1,067,719 3.68% 612,174 2.92% 29,002,223 100% 24,067,673 100%

36NOTES (continued)

13. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED) 2014 2013 d) Loans and advances neither past due nor impaired, Shs ‘000 Shs ‘000 past due but not impaired and individually impaired Neitherpastduenorimpaired 24,308,813 23,000,423 Pastduebutnotimpaired 3,628,784 468,885 Individuallyimpaired 1,064,626 598,365

Gross loans and advances to customers 29,002,223 24,067,673 Less:Provisionforimpairedloansandadvancesand suspendedinterest (613,371) (489,114)

Net loans and advances to customers (Note 13(a)) 28,388,852 23,578,559 Theloansandadvancespastduebutnotimpairedareagedbetween30to90days.Loansandadvancesthatareagedpast180daysareconsideredimpaired.

The credit quality of the portfolio of loans and advances that were past due but not impaired can be assessed by reference to the internal rating system adopted by the Bank. The loans and advances past due but not impaired can be analysed as follows: 2014 2013

Shs ‘000 Shs ‘000 Watch 3,628,784 468,885

The fair value of the collateral for loans and advances past due but not impaired is considered adequate. Loans and advances individually impaired

The fair value of the collateral for loans and advances individually impaired is Shs. 451.255 million. Loans and advances renegotiated

Restructuring activities include extended payment arrangements, approved external management plans, modificationanddeferralofpayments.Followingrestructuring,apreviouslyoverduecustomeraccountisresettoa substandard status and managed together with other similar accounts. Restructuring policies and practices are basedonindicatorsorcriteriawhich,inthejudgmentofthecreditcommitteeindicatethatpaymentwillmostlikelycontinue. These policies are kept under continuous review.

Repossessed collateral

As at 31 December 2014 and 2013 the Bank did not hold possession of any repossed collateral held as security.

14. INVESTMENT PROPERTIES 2014 2013 Shs ‘000 Shs ‘000 Cost At start and end of year 30,950 30,950 Depreciation Atstartofyear 6,809 6,190 Charge for the year 619 619 Atendofyear 7,428 6,809 Net book value 23,522 24,141

RentalincomeamountingtoShs.19.80million(2013:Shs.13.44million)withrespecttoinvestmentproperties hasbeenrecognisedinprofitorlossunderotherincome.

FINANCIALSTATEMENTS


37

15. INVESTMENT SECURITIES - ‘AVAILABLE-FOR-SALE’ 2014 2013 Shs ‘000 Shs ‘000 Quoted equity investments: At start of year 2,062 2,443 Fairvalue(loss)/gain 163 (381)

At end of the year 2,225 2,062

Unquoted equity investments: At start and end of year 19,391 19,391 Corporate bonds Atstartofyear 243,240 286,339 Redemption (60,588) (35,587) Interest income for the year 26,939 31,195 Interest income received (29,003) (33,751) Fairvalue(loss) 3,958 (4,956) At end of the year 184,546 243,240

206,162 264,693

ThefairvaluesofthequotedequityinvestmentsandcorporatebondsarecategorisedunderLevel1basedonthe information set out in accounting policy (h).

16. Intangible assets - software 2014 2013 Shs ‘000 Shs ‘000 Cost Atstartofyear 8,296 8,070 Additions 3,495 226 Atendofyear 11,791 8,296

Amortisation Atstartofyear 4,537 2,878 Chargefortheyear 2,358 1,659 Atendofyear 6,895 4,537 Net book value 4,896 3,759

Amortisationcostofintangibleassetsarerecognisedinotheroperatingexpensesinprofitorloss.

NOTES (continued)

38

17. PROPERTY AND EQUIPMENT Year ended 31 December 2014 Computers Furniture Leasehold and electronic Motor and Buildings Improvements equipment vehicles fittings Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Cost Atstartofyear 11,123 104,816 130,112 23,426 105,164 374,641 Additions - 12,118 15,662 4,650 12,386 44,816 Disposals - - (1,478) - (147) (1,625)

Atendofyear 11,123 116,934 144,296 28,076 117,403 417,832 Depreciation Atstartofyear 4,674 66,979 98,640 17,698 54,012 242,003 Chargefortheyear 223 8,359 31,042 2,594 8,092 50,310 Disposals - - (1,365) - (44) (1,409) Atendofyear 4,897 75,338 128,317 20,292 62,060 290,904 Net book value 6,226 41,596 15,979 7,784 55,343 126,928

In the opinion of the directors, there is no impairment in the value of property and equipment. All additions to property and equipment during the year were made on a cash basis. Year ended 31 December 2013 Computers Furniture Leasehold and electronic Motor and Buildings Improvements equipment vehicles fittings Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Cost Atstartofyear 11,123 104,247 124,410 23,426 103,610 366,816 Additions - 569 6,469 - 1,554 8,592 Disposals - - (767) - - (767) Atendofyear 11,123 104,816 130,112 23,426 105,164 374,641 Depreciation Atstartofyear 4,452 53,121 87,048 15,789 46,734 207,144 Chargefortheyear 222 13,858 12,261 1,909 7,278 35,528 Disposals - - (669) - - (669)

Atendofyear 4,674 66,979 98,640 17,698 54,012 242,003 Netbookvalue 6,449 37,837 31,472 5,728 51,152 132,638

NOTES (continued)

19-Customers’deposit-2013&2012???(itshouldbe2014&2013)

FINANCIALSTATEMENTS


39

18. DEFERRED TAX

Deferred tax is calculated on all temporary differences under the liability method using a principal tax rate of 30% (2013: 30%). The movement on the deferred tax account is as follows: 2014 2013

Shs’000 Shs’000 As start of year (73,446) (65,767) Profitorloss(credit)(Note6) (9,127) (7,679) Atendofyear (82,573) (73,446)

Deferredtaxassetsanddeferredtaxcharge/(credit)intheprofitorlossareattributabletothefollowing: Charge/ At start (credit) to At end of year profit or loss of year Shs ‘000 Shs ‘000 Shs ‘000 Propertyandequipment (5,643) (5,937) (11,580) Provision for staff accruals (52,214) (3,190) (55,404) Provision for impairment (13,719) - (13,719) Generalprovision (1,870) - (1,870) (73,446) (9,127) (82,573)

19. CUSTOMER DEPOSITS 2014 2013 Shs ‘000 Shs ‘000

CurrentandSavingsaccounts 8,774,134 8,143,343 Term deposits 39,909,055 33,733,179 48,683,189 41,876,522 Analysis of customer deposits by maturity:

Payablewithin90days 31,400,396 28,282,738 Payableafter90daysandwithinoneyear 14,794,424 13,422,387 Payableafteroneyear 2,488,369 171,397 48,683,189 41,876,522 Concentration: The economic sector concentrations within the customer deposits portfolio were as follows:

2014 2013 Shs’000 % Shs’000 % Nonprofitinstitutionsandindividuals 39,854,223 81.86% 33,707,432 80.49% Privatecompanies 8,621,808 17.71% 7,547,942 18.02% Insurancecompanies 207,158 0.43% 621,148 1.48% 48,683,189 100% 41,876,522 100%

IncludedincustomeraccountsweredepositsofShs.1,818.336million(2013:Shs.1,722.079million)heldascollateral for loans and advances. The fair value of those deposits approximates the carrying amount.

NOTES (continued)

40

20. DEPOSITS DUE TO OTHER BANKING INSTITUTIONS 2014 2013 Shs ‘000 Shs ‘000 Parentbank 91,947 198,301 Foreign banks 2,944,403 1,913,775 3,036,350 2,112,076 21. OTHER LIABILITIES Staffleaveandgratuityaccrual 184,675 174,048 Bills payable 1,946 1,194 Otheraccountspayable 171,159 188,668 357,780 363,910 Other liabilities are expected to be settled within 12 months from the reporting date. No. of ordinary shares Issued and paid up capital

22. SHARE CAPITAL 2014 2013 2014 2013 ‘000 ‘000 Shs ‘000 Shs ‘000 Atstartandendofyear 49,486 49,486 989,717 989,717

The authorised share capital of the company is Shs. 2 billion (2013: Shs. 2 billion) representing 100 million (2013: 100 million) ordinary shares of Shs. 20 each. 23. CASH AND CASH EQUIVALENTS Changes during the Forthepurposesofthestatementofcashflows, 2014 2013 year cash and cash equivalents comprise the following: Shs’000 Shs’000 Shs’000 Cash in hand 307,935 265,970 41,965 Government securities maturing within 91 days aftertheyearend(Note10) 927,912 19,214 908,698 BalanceswithCentralBankofKenya(Note9) 26,466 47,303 (20,837) Placements with and loans and advances from other banking institutions (Note 11) 1,194,965 1,024,391 170,574 Deposits due to other banking institutions (Note 20) (3,036,350) (2,112,076) (924,274) (579,072) (755,198) 176,126

24. OFF BALANCE SHEET FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS

In common with banking business, the Bank conducts business involving acceptances, guarantees, performance bondsandlettersofguarantees.Themajorityofthesefacilitiesareoffsetbycorrespondingobligationsfromthirdparties. 2014 2013 Contingent liabilities Shs’000 Shs’000

Spots 235,709 117,015 Lettersofcredit 1,535,026 1,534,278 Lettersofguarantees 3,745,504 4,759,174 Billssentforcollection 819,425 965,746 6,335,664 7,376,213

NOTES (continued)

FINANCIALSTATEMENTS


41NOTES (continued)

24. OFF BALANCE SHEET FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)

AnacceptanceisanundertakingbyaBanktopayabillofexchangeonaspecifiedduedate.TheBankexpectsmostacceptancestobepresentedandreimbursementbythecustomerisnormallyimmediate.Lettersofcreditcommit the Bank to make payments to third parties on production of credit compliant documents which are subsequently reimbursed by customers.

Guarantees are generally written by a Bank to support the performance of a customer to third parties. The Bank will only be required to meet these obligations in the event of the customers default. Basedontheestimateofthefinancialeffectofthecontingenciesandthecorrespondingobligationsfromthirdparties, no loss is anticipated.

The Bank has open lines of credit facilities with correspondent Banks. Commitments 2014 2013

Shs Shs Undrawnformalstand-byfacilities,creditlines 2,969,370 2,740,594

Commitments to lend are agreements to lend to customers in future subject to certain conditions. Suchcommitmentsarenormallymadeforafixedperiod.TheBankmaywithdrawfromitscontractualobligationfortheundrawn portion of agreed facilities by giving reasonable notice to the customer.

The pending litigation claims relate to cases instituted by third parties against the Bank. Judgement in respect of these cases had not been determined as at 31 December 2014. The directors are of the opinion that no liabilities will crystallise. Capital commitments

There were no capital expenditure contracted as at the reporting date. Operating lease commitments 2014 2013 The future minimum lease payments under non-cancellable Shs’000 Shs’000 operating leases are as follows: -notlaterthan1year 88,257 72,626 -laterthan1yearandnotlaterthan5years 327,785 60,673 416,042 133,299

TheDirectorsareoftheviewthatfuturenetrevenues,fundingandcashflowswillbesufficienttocoverthesecommitments.

25. FINANCIAL RISK MANAGEMENT TheBank’sactivitiesexposes it toavarietyoffinancial risksandthoseactivities involveanalysis,evaluation,acceptanceandmanagementofsomedegreeofriskorcombinationofrisks.Takingriskiscoretothefinancialbusiness, and the operational risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on theBank’sfinancialperformance.

The Bank’s risk management policies are designed to identify and analyse these risks, to set risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date management informationsystems.TheBankregularlyreviewsitsriskmanagementpoliciesandsystemstoreflectchangesinmarkets, products and emerging best practice.

42NOTES (continued)

25. FINANCIAL RISK MANAGEMENT (CONTINUED)

Risk Management function is carried out by the Bank’s Risk Management Department under policies approved bytheBoardofDirectors.TheBank’sRiskManagementDepartmentidentifies,measures,monitorsandcontrolsfinancialrisksinclosecoordinationwithvariousotherdepartmentalheads.TheBankhasBoardapprovedpoliciescoveringspecificareas,suchascreditrisk,marketrisk,liquidityriskandoperationalrisk

The most important types of risk are credit risk, liquidity risk, market risk and operational risk. Market risk includes currency risk, interest rate risk and price risk. (a) Credit risk TheBanktakesonexposuretocreditrisk,whichistheriskthatacustomerwillcauseafinancial lossfortheBankby failing to fulfilacontractualobligation.Credit risk is themost important risk for theBank’sbusiness.Management therefore carefully manages its exposure to credit risk. Credit risk mainly arises from customer loans and advances, credit cards, investing activities and loan commitments (off balance sheet financialinstruments). The credit risk management and control are centralised in credit and treasury departments of the Bank. - Measurement of credit risk

• Loans and advances

Inmeasuringcreditriskofloansandadvancestocustomers,theBankreflectsvariouscomponents. These include:

- the probability of default by the borrower/client on their contractual obligations; - current exposures on the borrower/client and the likely future development, from which the Bank derives the exposure at default; and - the likely recovery ratio on the defaulted obligations.

Thesecreditriskmeasurements,whichreflectexpectedloss,areembeddedintheBank’sdailyoperational management. The operational measurements can be contrasted with impairment allowances required under IAS 39andthebankingActwhicharebasedonlossesthathavebeenincurredatthedateofthestatementoffinancial position rather than expected losses. The Bank assesses the probability of default of individual borrower/client using internal rating internally methods tailored to the various categories of the borrower/client. These have been developed and combine statistical analysiswiththecreditdepartment’sjudgmentandarevalidated,whereappropriate,bycomparisonwithexternally available data. Managementassessesthecreditqualityofthecustomer,takingintoaccounttheirfinancialposition,past experience and other factors. Individual limits are set based on internal or external information in accordance with limits set by the management. The utilisation of credit limits is regularly monitored. Corrective action is taken where necessary.

• Investments

For investments, external ratings in addition to the requirements of the banking Act are used by the Bank for better credit quality and maintain a readily available source to meet the funding requirement at the same time.

FINANCIALSTATEMENTS


43


- Risk limit control and mitigation policies

TheBankmeasures,monitorsandcontrolsconcentrationsofcreditriskwherevertheyareidentified.TheBankstructures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group’s of borrowers, and to industry segments. Such risks are monitored on a continous basis and subjecttoanannualormorefrequentreview,whenconsiderednecessary.Limitsonthelevelof credit risk by product and industry/sector are approved as and when required by the Risk Management Committee.

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

• Collateral The Bank employs a range of policies and practices to mitigate credit risk. The most common one is to obtain collateral for loans and advances to customers. The types of collateral obtained include: •Mortgagesoverproperties;•Chargesoverbusinessassetssuchaslandandbuildings,inventoryandreceivables;•Chargesoverfinancialinstrumentssuchasinvestments. •Depositsplacedunderlien

• Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and letters of credit carry the same credit risk as loans. Letters of credit (which arewrittenundertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to astipulatedamountunderspecifictermsandconditions)arecollateralisedbytheunderlyingshipmentsofgoods to which they relate and therefore carry less risk than a direct advance or loan.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans,guaranteesorlettersofcredit.Withrespecttocreditriskoncommitmentstoextendcredit,theBankispotentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customersmaintaining specific credit standards. The Bankmonitors the term to maturity of creditcommitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

- Impairment and provisioning policies

The Bank’s internal and external systems focus more on credit-quality mapping from the inception of the lending oftheloanoradvance.Incontrast, impairmentprovisionsarerecognisedforfinancialreportingpurposesonlyforlossesthathavebeenincurredatthedateofthestatementoffinancialpositionbasedonobjectiveevidenceof impairment. Theimpairmentprovisionshowninthestatementoffinacialpositionattheyear-endisderivedaftertakingvariousfactors into consideration as described in accounting policy (k). The Bank’s management uses basis under IAS 39 and the Prudential Guidelines to determine the amount of impairment.

NOTES (continued)

44


- Exposure to credit risk Themanagementisconfidentinitsabilitytocontinuetocontrolandsustainminimalexposureofcreditrisktothe Bankresultingfrombothitsloanandadvancesportfolioandotherfinancialassetsbasedonthefollowing:

• Themaximumexposuretocreditriskarisesfromloansandadvancestocustomerswhichform45.86%(2013:45.25%)oftotalfinancialassets;46.02%(2013:46.45%)representsinvestmentsingovernmentsecurities.

• 96.33%(2013:97.51%)oftheloansandadvancesportfolioiscategorisedinthetoptwogrades(NormalandWatch).

• 12.51%(2013:1.95%)oftheloansandadvancesportfolioareconsideredtobepastduebutnotimpaired(note 13).

• Mostofitsloansandadvancestocustomersareperformingasperthecovenantsandthenon-performingones have been provided for. The loans and advances are also secured.

• Cashinhand,balanceswithCentralBankofKenyaandplacementswithotherbankinginstitutionsareheldwithsoundfinancialinstitutions.

• Governmentsecuritiesareconsideredstableinvestmentsastheriskisconsiderednegligible.

• Management considers the historical information available to assess the credit risk on investmentsecurities.

Exposuretothisriskhasbeenquantifiedineachfinancialassetnoteinthefinancialstatementsalongwithanyconcentration of risk.

(b) Market risk Market risk is the risk that changes in the market prices, which includes currency exchange rates, interest rates

andbidprices,willaffectthefairvalueorfuturecashflowsoffinancialinstruments.Marketriskarisesfromopenpositions in interest rates and foreign currencies, both ofwhich are exposed to general and specificmarketmovementsandchangesinthelevelofvolatility.Theobjectivesofmarketriskmanagementistomanageandcontrol market risk exposures within acceptable limits, while optimising on the return on risk. Overall management ofmarketriskrestswiththeAssetsandLiabilityCommittee(ALCO).

The treasurydepartment is responsible for thedevelopmentof detailed riskmanagementpolicies, subject toreviewandapprovalbyALCO,andforthedaytodayimplementationofthesepolicies.

Market risks arise mainly from trading and non-trading activities.

Trading portfolios include those positions arising from market-making transactions where the Bank acts as a principal with clients or with the market.

Non-trading portfolios primarily arise from the interest rate management of the entity’s retail and commercial banking assets and liabilities. Non-trading portfolios also consist of foreign exchange and equity risks arising from the Bank’s available-for-sale investments.

Themajormeasurementtechniquesusedtomeasureandcontrolmarketriskareoutlinedbelow:

NOTES (continued)

FINANCIALSTATEMENTS


45


(b) Market risk (continued)

- ALCO review ALCOmeetsonamonthlybasistoreviewthefollowing:

•AsummaryoftheBank’saggregateexposureonmarketrisk•AsummaryoftheBank’smaturity/repricinggaps•AreportindicatingthattheBankisincompliancewiththeBoard’ssetexposurelimits•Acomparisonofpastforecastorriskestimateswithactualresultstoidentifyanyshortcomings

- Review of the treasury department The Risk Management Department monitors foreign exchange risk in close co-ordination with the Finance Department. Regular reports are prepared by the Finance Department of the Bank. Some of these reports include: •Netovernightpositionsbycurrency •Maturitydistributionbycurrencyoftheassetsandliabilitiesforbothonandoffbalancesheetitems •Outstandingcontracts(ifany)bysettlementdateandcurrency •Totalvaluesofcontracts,spotsandfutures •Aggregatedealinglimits •Exceptionalreportsforexamplelimitsorlineexcesses

(c) Operational risk

Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank’s processes, personnel, technology and infrastructure and from external factors other than credit, market and liquidity risks such as those arising out of legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risk arises from the Bank’s operations and is faced by all other business entities.

TheBankendeavourstomanagetheoperationalriskbycreatingabalancebetweenavoidanceofcostorfinanciallosses and damage to the Bank’s reputation within overall cost effectiveness and to avoid control procedures that restrict creativity and initiative. The key responsibility for development policies and programs to implement the Bank’s operational risk management is with the senior Management of the Bank. The above is achieved by development of overall standards for the Bank to manage the risk in the following areas:

•Segregationofdutiesincludingindependentauthorisationoftransactions •Monitoringandreconciliationoftransactions •Compliancetoregulatoryandlegalrequirement •Documentationofcontrolandprocedure •Assessmentoftheoperationalriskonaperiodicbasistoaddressthedeficienciesobserved,ifany•Reportingofoperationallossesandinitiationofremedialaction •Developmentofcontingencyplans •Givingtrainingtostafftoimprovetheirprofessionalcompetency •Ethicalstandards •Obtaininginsurancewhereverfeasible,asariskmitigationmeasure.

(d) Risk measurement and control

Interest rate, currency, credit, liquidity and other risks are actively monitored by Management to ensure compliance with the Bank’s risk limits. The Bank’s risk limits are assessed regularly to ensure their appropriateness, given its objectivesandstrategiesandcurrentmarketconditions.AvarietyoftechniquesareusedbytheBankinmeasuring the risks inherent in its trading and non-trading positions.

NOTES (continued)

46

26. CURRENCY RISK

The Bank operates wholly within Kenya and its assets and liabilities are reported in the local currency. It conducts trade with Correspondent Banks and takes deposits and lends in other currencies also. The Bank’s currency

position and exposure are managed within the exposure guideline of 10% of the core capital as stipulated by the Central Bank of Kenya. This position is monitored on a daily basis by the Management.

Thesignificantcurrencypositionsaredetailedbelow: AT 31 DECEMBER 2014 US $ GB £ Euros Others Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Assets Cash and Bank balances 12,902 311 733 - 13,946 BalanceswithCentralBankofKenya 17,696 3,805 4,877 87 26,465 Depositsduefromotherbankinginstitutions - 165,309 25,628 53,827 244,764 Loansandadvancestocustomers 3,966,042 137,504 - - 4,103,546 Total assets 3,996,640 306,929 31,238 53,914 4,388,721 Liabilities Customerdeposits 1,187,500 307,819 27,923 - 1,523,242 Deposits due to other banking institutions 2,944,403 - - 91,947 3,036,350 Total liabilities 4,131,903 307,819 27,923 91,947 4,559,592

Net statement of finacial position gap (135,263) (890) 3,315 (38,033) (170,871) Off balance sheet net notionalposition (126,836) - - (54,131) (180,967)

AT 31 DECEMBER 2013 Totalassets 2,780,769 219,153 61,543 202,833 3,264,298 Totalliabilities (2,826,647) (213,426) (55,439) (200,316) (3,295,828) Netbalancesheetpositiongap (45,878) 5,727 6,104 2,517 (31,530)

NOTES (continued)

FINANCIALSTATEMENTS


47

26. CURRENCY RISK (CONTINUED)

Foreign exchange risk sensitivity

Thetablebelowsummarisestheeffectonpost-taxprofithadtheKenyaShillingweakenedby10%againsteachcurrency, with all other variables held constant. If the Kenya shilling strengthened against each currency, the effect would have been the opposite.

Year 2014 US $ GB £ Euros Others Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000Effectonprofit- increase/(decrease) (9,468) (62) 232 (2,662) (11,960) Year 2013 US $ GB £ Euros Others Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000Effectonprofit- increase/(decrease) (3,211) 401 427 176 (2,207)

NOTES (continued)

48

27.

INT

ER

ES

T R

AT

E R

ISK

TheBankisexposedtovariousrisksassociatedwiththeeffectsoffluctuationintheprevailinglevelsofmarketinterestratesonitsfinancialposition

andcashflow

s.Them

anagem

entcloselymonitorstheinterestratetrendstom

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tabl

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ises

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tem

ent

of

fin

anci

al p

osi

tio

n in

tere

st

sen

siti

vity

gap

(1

2,97

2,06

5)

(8,8

19,9

72)

(4,6

45,5

45)

6,41

2,92

0 28

,672

,211

(8

,647

,550

) -

AT

31

DE

CE

MB

ER

201

3

To

tal a

sset

s 14

,565

,517

1,

059,

666

1,93

2,59

3 4,

486,

715

25,2

03,3

67

4,77

3,66

6 52

,021

,524

To

tal l

iabi

litie

s an

d sh

areh

olde

rs' e

quity

26

,249

,141

8,

404,

620

5,01

7,76

7 11

3,73

2 57

,665

12

,178

,599

52

,021

,524

On

bal

ance

sh

eet

inte

rest

sen

siti

vity

gap

(

11,6

83,6

24)

(7,3

44,9

54)

(3,0

85,1

74)

4,37

2,98

3 25

,145

,702

(7

,404

,933

) -

FINANCIALSTATEMENTS


49

27. INTEREST RATE RISK ( CONTINUED) The table below summarises the effective interest rates calculated on a weighted average basis, by majorcurrenciesformonetaryfinancialassetsandliabilities: 2014 2013 Shs. US$ GB£ Euro Shs US $ GB£ Euro

% % % % % % % % Government securities 10.72 - - - 11.55 - - - Placementswithotherbankinginstitutions 8.24 - - - 12.30 - 0.60 - Loansandadvancestocustomers 17.49 7.94 7.34 - 18.94 7.45 7.72 5.66 Customer Deposits 7.79 - - - 7.77 - - - Borrowings from other banking institutions - 1.74 - - - 1.75 - - Interest rate risk sensitivity

At 31 December 2014, if the weighted average interest rates had been 10 percent higher with all other variables heldconstant,post-taxprofitfortheyearwouldhavebeenasfollows: 2014 2013 Shs Shs

Effectoninterestincome-increase 476,522 308,508 Effectoninterestexpense-(increase) (240,185) (284,492) Neteffectonprofitaftertax-increase 236,337 24,016 28. PRICE RISK SENSITIVITY

The Bank is exposed to price risk on quoted shares, corporate bonds and government securities because of investmentsthatareclassifiedonthestatementoffinancialpositionas‘Available-for-sale’. The table below summarises the impact on increase in the market price on the Bank’s equity net of tax. The analysis is based on the assumption that the market prices had increased by 5% with all other variables held constant and all the Banks equity instruments moved according to the historical correlation with the price: Impact on equity 2014 2013 Effectofincrease 489,597 498,079

29. LIQUIDITY RISK

Liquidity risk is the risk that theBank is unable tomeet its paymentobligationsassociatedwith its financialliabilities as they fall due and to replace funds when they are withdrawn.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for Banks ever to be completely matched since business transacted isoftenofuncertaintermsandofdifferenttypes.Anunmatchedpositionpotentiallyenhancesprofitability,butcanalso increase the risk of losses. The maturity of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates.

The Bank does not maintain cash resources to meet all liabilities as they fall due as experience shows that a minimum level of reinvestment of maturing funds can be predicted with high level of certainty. The management has set limits on the minimum portion of maturing funds available to meet such withdrawals and on the level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand.Themanagementreviewsthematurityprofileonaweeklybasisandensuresthatsufficientliquidityismaintained to meet maturing deposits which substantially are generally rolled over into new deposits. The Bank fully complies with the Central Bank of Kenya’s minimum cash reserve ratio (5.25 %) and liquidity ratio (20 %) requirements, with the average liquidity maintained at 60.5% (2013: 60.6%) during the year.

NOTES (continued)

50

29. LIQUIDITY RISK (continued)

NOTES (continued)

The

tabl

e be

low

ana

lyse

s as

sets

and

liab

ilitie

s in

to th

e re

leva

nt m

atur

ity g

roup

ings

bas

ed o

n th

e re

mai

ning

per

iod

at th

e re

port

ing

date

to

the

cont

ract

ual m

atur

ity d

ate.

Up

to

3 -

6 6

- 12

1

- 3

Ove

r

3

mo

nth

m

on

ths

mo

nth

s ye

ars

3 ye

ars

Tota

lA

T 3

1 D

EC

EM

BE

R 2

014

Sh

s'00

0 S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0 S

hs'

000

AS

SE

TS

Cas

h in

han

d 30

7,93

5 -

- -

- 30

7,93

5 B

alan

ces

with

Cen

tral

Ban

k of

Ken

ya

1,90

8,16

3 47

3,78

8 -

330,

472

1,09

6 2,

713,

519

Gov

ernm

ent s

ecur

ities

36

4,40

8 52

2,53

6 20

,063

3,

632,

015

23,9

41,4

78

28,4

80,5

00

Pla

cem

ents

with

and

loan

s an

d ad

vanc

es to

ot

her

bank

ing

inst

itutio

ns

1,19

4,96

5 -

-

-

-

1,1

94,9

65

Oth

er a

sset

s 37

7,62

2 -

- -

- 37

7,62

2 Lo

ans

and

adva

nces

to c

usto

mer

s 16

,391

,764

39

2,91

8 91

6,41

6 3,

812,

847

6,87

4,90

7 28

,388

,852

Inve

stm

ent p

rope

rtie

s -

- -

- 23

,522

23

,522

Oth

er in

vest

men

ts

- -

- -

206,

162

206,

162

Inta

ngib

le a

sset

s -

- -

- 4,

896

4,89

6P

rope

rty

and

equi

pmen

t -

- -

- 12

6,92

8 12

6,92

8D

efer

red

tax

- -

- -

82,5

73

82,5

73Ta

x re

cove

rabl

e -

37

,176

-

- -

37,1

76

Tota

l ass

ets

20,

544,

857

1

,426

,418

9

36,4

79

7,7

75,3

34

31,

261,

562

6

1,94

4,65

0

LIA

BIL

ITIE

S A

ND

SH

AR

EH

OL

DE

RS

' EQ

UIT

Y

Cus

tom

er d

epos

its

31,4

00,3

96

9,21

2,89

0 5,

581,

534

943,

326

1,54

5,04

3 48

,683

,189

Dep

osits

due

to o

ther

ban

king

inst

itutio

ns

3,03

6,35

0 -

- -

- 3,

036,

350

Oth

er li

abili

ties

357,

780

- -

- -

357,

780

Sha

reho

lder

s' e

quity

-

188,

046

(86,

209)

-

9,76

5,49

4 9,

867,

331

Tota

l lia

bili

ties

an

d s

har

eho

lder

s' e

qu

ity

34,7

94,5

26

9,40

0,93

6 5,

495,

325

943,

326

11,3

10,5

37

61,9

44,6

50

Net

liq

uid

ity

gap

(1

4,24

9,66

9)

(7,9

74,5

18)

(4,5

58,8

46)

6,83

2,00

8 19

,951

,025

-

AT

31

DE

CE

MB

ER

201

3

To

tal a

sset

s 16

,832

,325

1,

517,

223

1,98

2,07

6 4,

767,

424

26,9

22,4

76

52,0

21,5

24To

tal l

iabi

litie

s an

d sh

areh

olde

rs' e

quity

30

,758

,724

8,

682,

670

4,67

1,82

3 11

3,73

2 7,

794,

575

52,0

21,5

24

Net

liq

uid

ity

gap

(

13,9

26,3

99)

(7,1

65,4

47)

(2,6

89,7

47)

4,65

3,69

2 19

,127

,901

-

Exp

erie

nce

indi

cate

s th

at c

usto

mer

dep

osits

are

mai

ntai

ned

for

long

er p

erio

ds th

an th

e co

ntra

ctua

l mat

urity

dat

es. T

he d

epos

it ba

se is

co

nsid

ered

to b

e of

a s

tabl

e an

d lo

ng te

rm n

atur

e.

FINANCIALSTATEMENTS


51

30. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES IntheopinionoftheDirectors,thefairvaluesoffinancialassetsandfinancialliabilitiesarenotmateriallydifferent

from their carrying values. 31. CAPITAL MANAGEMENT TheBank’sobjectiveswhenmanagingcapital,whichisabroaderconceptthanthe‘equity’onthefaceofthe

statementoffinancialposition,are: •TocomplywiththecapitalrequirementssetbytheCentralBankofKenya •TosafeguardtheBank’sabilitytocontinueasagoingconcernsothat itcancontinuetoprovidereturnsforshareholdersandbenefitsforotherstakeholders;and

•Tomaintainastrongcapitalbasetosupportthedevelopmentofitsbusiness.

The Bank monitors the adequacy of its capital using ratios established by Central Bank of Kenya. These ratios measure capital adequacy by comparing the Bank’s core capital with total risk-weighted assets plus risk weighed off-balance sheet items, total deposit liabilities and total risk-weighted off balance sheet items.

Credit Risk Weighted Assets

Assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting according to the amount of capital deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50% and 100%) are applied. e.g. cash in hand (domestic and foreign), balances held with Central Bank of Kenya including securities issued by the Government of Kenya have a zero risk weighting, which means that no capital is required to support the holding of these assets. Property, plant and equipment carries a 100% risk weighting. Based on these guidelines it means that they must be supported by capital equal to 100% of the carrying amount.Other asset categories have intermediate weightings.

Off-balance sheet credit related commitments such as guarantees and acceptances, performance bonds, documentary credit etc., are taken into account by applying different categories of credit risk conversion factors, designedtoconverttheseitemsintostatementoffinancialpositionequivalents.Theresultingcreditequivalentamounts are thenweighted for credit risk using the same percentages as for statement of financial positionassets.Core capital (Tier 1) consists of paid-up share capital, retained profits less non-dealing investments.Supplementary capital (Tier 2) includes general provisions and non-dealing investments.

Market Risk Weighted Assets

This is the risk of loss in on and off balance sheet position arising from movement in market prices. These risks pertain to inherent risk related instruments in the trading book, commodities risk throughout the bank, equities risk and foreign exchange risk in the trading and banking books of the bank. Different risk weights are applied as per the Prudential Regulation.

Operational Risk Weighted Assets

This is the risk of loss resulting from inadequate or failed internal process, people or from external events. The operational risk is calculated using theBasic IndicatorApproach.Under this approach the capital charge foroperationalriskisafixedpercentageofaveragepositiveannualgrossincomeoftheinstitutionoverthepastthreeyears. Annual gross income is the sum of net interest income and net non interest income.

NOTES (continued)

52NOTES (continued)

31. CAPITAL MANAGEMENT (CONTINUED) Balance sheet - nominal values Risk weighted amount 2014 2013 2014 2013 Shs’000 Shs’000 Shs’000 Shs’000 Cash in hand 307,935 265,970 - - Balances with Central Bank of Kenya 2,713,519 2,131,439 - - Governmentsecurities 28,480,500 24,251,152 - - Placements with and loans and advances from otherbankinginstitutions 1,194,965 1,024,391 238,993 204,878 Other assets 377,622 271,336 377,622 271,336 Loansandadvancestocustomers 28,388,852 23,578,559 26,088,645 21,503,213 Investment properties 23,522 24,141 23,522 24,141 Other investments 206,162 264,693 206,162 264,693 Intangibleassets 4,896 3,759 4,896 3,759 Propertyandequipment 126,928 132,638 126,928 132,638 Deferredtax 82,573 73,446 82,573 73,446 Tax recoverable 37,176 - 37,176 - Total assets 61,944,650 52,021,524 27,186,517 22,478,104 Off balance sheet positions 6,335,664 7,376,213 4,018,004 4,450,232

TotalRiskWeightedAssets 68,280,314 59,397,737 31,204,521 26,928,336 Less:MarketRiskqualifyingAssets included in above (206,162) (264,693) (206,162) (264,693) AdjustedCreditRiskWeightedAssets 68,074,152 59,133,044 30,998,359 26,663,643

Market Risk

Interestrateriskcapitalcharge 310,502 332,178 3,881,275 4,152,223 Foreignexchangeriskcapitalcharge 991 3,422 12,389 42,783 Commodities risk capital charge - - - - Total market risk capital charge 311,493 335,600 3,893,664 4,195,006 Total market risk weighted assets 3,893,664 4,195,006 3,893,664 4,195,006

Operational risk

Netinterestincome -2013 3,044,384 - - - - 2012 2,147,779 - - - -2011 2,286,130 - - - Net non interest income - 2013 275,569 - - - - 2012 319,357 - - - - 2011 169,361 - - - Grossincome 8,242,580 - - - Average gross income 2,747,527 - 412,129 Total operational risk weighted assets 2,747,527 - 5,151,613 - Total risk weighted assets 74,715,343 - 40,043,636 -

FINANCIALSTATEMENTS


53

31. CAPITAL MANAGEMENT (CONTINUED) Capital 2014 2013 Capital adequacy requirement calculation Shs’000 Shs ‘000 Tier1capital 9,324,068 7,414,171 Tier2capital 358,853 249,293 TotalCapital 9,682,921 7,663,464 Totaldepositliabilities 48,683,189 41,876,522 Risk weighted amounts for loans and advances to customers are stated net of impairment losses. These balances havealsobeenoffsetagainstfixeddepositsandshorttermdepositsplacedbycustomersassecurities.Thereis noborrowerwitheitherfundedornon-fundedfacilities,exceedingtwentyfivepercentofcorecapital. Actual ratios Minimum requirement 2014 2013 2014 2013 % % % % Corecapitaltototalriskweightedassets 23.28 20.90 10.5 10.5 Totalcapitaltototalriskweightedassets 24.18 21.60 14.5 14.5 Corecapitaltodepositliabilities 19.15 17.70 8.0 8.0

32. RELATED PARTY TRANSACTIONS

Included in loans and advances and customer deposits are amounts advanced to/received from certain Directors and companies in which Directors are involved either as shareholders or Directors (related companies). In addition, contingent liabilities (Note 24) include guarantees and letters of credit which have been issued to related companies.

The following transactions were carried out with related parties: 2014 2013 a) Interest received from loans and advances to: Shs’000 Shs’000 Directors Related companies 1,222 3,655 Seniormanagementemployees 162 80 other employees 10,125 9,495 11,509 13,230 b) Interest paid on deposits from: Directors 3,117 1,065 Relatedcompanies 6,794 4,816 Senior management employees 21 35 Other employees 333 251 10,265 6,167 c) Management fees paid Relatedcompanies 41,079 40,086

NOTES (continued)

54

32.

RE

LA

TE

D P

AR

TY

TR

AN

SA

CT

ION

S (

CO

NT

INU

ED

)

NOTES (continued)

Dir

ecto

rsco

mp

anie

sem

plo

yees

emp

loye

esO

ther

S

enio

r m

anag

emen

tR

elat

ed

20

14

2013

20

14

2013

20

14

2013

20

14

2013

d)

Ou

tsta

nd

ing

loan

s an

d a

dva

nce

s S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0 A

t sta

rt o

f yea

r -

- 18

,106

31

,681

2,

128

1,86

1 13

9,79

7 12

5,63

8 A

dvan

ces

durin

g th

e ye

ar

- -

- 7,

130

1,00

0 2,

000

64,5

30

57,4

71

Inte

rest

cha

rged

-

- 1,

222

3,65

4 16

3 80

10

,125

9,

495

Rep

aym

ents

dur

ing

the

year

-

- (1

9,32

8)

(24,

359)

(9

69)

(1,8

13)

(43,

070)

(5

2,80

7)

At e

nd o

f yea

r -

- -

18,1

06

2,32

2 2,

128

171,

382

139,

797

The

loan

s an

d ad

vanc

es to

rel

ated

par

ties

are

perf

orm

ing

.

No

prov

isio

ns h

ave

been

rec

ogni

sed

in r

espe

ct o

f the

loan

s an

d ad

vanc

es to

Dire

ctor

s, r

elat

ed p

artie

s or

sta

ff as

they

are

per

form

ing

wel

l.

20

14

2013

20

14

2013

20

14

2013

20

14

2013

e) D

epo

sits

S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0 S

hs'

000

Sh

s'00

0

At s

tart

of y

ear

52,0

94

11,2

68

117,

674

167,

398

574

1,96

9 39

,924

22

,602

Dep

osits

rec

eive

d du

ring

the

year

10

7,37

7 16

1,09

7 1,

264,

754

1,02

5,95

1 33

,240

22

,131

38

9,56

2 28

,736

Inte

rest

pai

d du

ring

the

year

3,

117

1,06

5 6,

794

4,81

6 21

35

33

3 25

1W

ithdr

awal

s du

ring

the

year

(1

51,9

17)

(121

,336

) (1

,256

,070

) (1

,080

,491

) (3

1,94

9)

(23,

561)

(2

60,3

22)

(11,

665)

At e

nd o

f yea

r 10

,671

52

,094

13

3,15

2 11

7,67

4 1,

886

574

169,

497

39,9

24

D

irec

tors

com

pan

ies

emp

loye

esem

plo

yees

Oth

er

Sen

ior

man

agem

ent

Rel

ated

FINANCIALSTATEMENTS


55NOTES (continued)

32. RELATED PARTY TRANSACTIONS (CONTINUED) f) Undrawn formal stand by facilities, credit lines 2014 2013 and other commitments to lend: Shs’000 Shs’000 Relatedcompanies - 16,648

g) Directors emoluments 2014 2013 Shs’000 Shs’000 -fees 890 1,010 -others 11,384 10,428 12,274 11,438

h) Key management personnel compensation Key management includes the directors and other members of key management. 2014 2013 Shs’000 Shs’000 Short-termemployeebenefits 47,491 42,982 Post-employmentbenefits 2,208 2,063 49,699 45,045 All transactions with related parties were at arms length and at terms and conditions similar to those offered to othermajorcustomers. 33. PRESENTATION CURRENCY ThefinancialstatementsarepresentedintothenearestthousandKenyaShillings(Shs’000).

56Appendix I

SCHEDULEOFOTHEROPERATINGEXPENDITURE 2014 2013 1. STAFF COSTS Shs’000 Shs’000 Leavebenefits 4,657 6,122 Pensionfundcontributions 17,872 17,292 Salariesandwages 307,110 290,986 Fringebenefittax 875 779 Staffandotherexpenses 42,369 30,822 Staff housing 20,663 17,154 Staff medical 19,141 14,906 Stafftraining 181 252 Total staff costs 412,868 378,313 2. ADMINISTRATIVE EXPENSES Advertising 15,579 15,139 Broker commissions - 2,123 Computerexpenses 18,661 13,721 Donationsandfines 2,012 375 Subscriptionsandperiodicals 1,406 4,285 Entertainment 3,721 2,684 Legalandprofessionalfees 59,169 41,841 Miscellaneous 20,651 22,200 Postages,telephones,telexandfax 4,782 5,999 Printing and stationery 12,750 9,576 Secretarial fees 195 177 Insurance 12,721 10,046 Travelling and motor vehicle 11,797 12,090 Total administrative expenses 163,444 140,256 3 OPERATING EXPENSES Electricityandwater 18,381 10,219 Insurance 451 734 Licences 2,654 2,747 Officecleaning 5,395 4,219 Repairsandmaintenance 31,895 30,116 Total operating expenses 58,776 48,035

FINANCIALSTATEMENTS


57Appendix II

SCHEDULEOFOTHEROPERATINGEXPENDITURE

OTHER DISCLOSURES 2014 2013 Kshs “000” Kshs “000” 1 NON-PERFORMING LOANS AND ADVANCES a) GrossNon-performingloansandadvances 1,064,626 598,364b) LessInterestinSuspense 118,746 73,204c) TotalNon-PerformingLoansandAdvances(a-b) 945,880 525,160d) LessLoanLossProvision 494,625 415,909e) NetNon-PerformingLoansandAdvances(c-d) 451,255 109,251f) DiscountedValueofSecurities 451,255 109,251g) Net NPLs Exposure (e-f) - - 2 INSIDER LOANS AND ADVANCES h) Directors,ShareholdersandAssociates - 18,106i) Employees 171,382 141,924j) TotalInsiderLoansandAdvancesandotherfacilities 171,382 160,030 3 OFF-BALANCE SHEET ITEMS a) Lettersofcredit,guarantees,acceptances 5,280,529 6,293,452b) Forwards, swaps and options 235,709 117,015 b) Othercontingentliabilities 819,425 965,746c) TotalContingentLiabilities 6,335,663 7,376,213 4 CAPITAL STRENGTH a) Corecapital 9,324,068 7,414,171b) Minimum Statutory Capital 1,000,000 1,000,000 c) Excess(a-b) 8,324,068 6,414,171d) SupplementaryCapital 358,853 249,293e) TotalCapital(a+d) 9,682,921 7,663,464f) Totalriskweightedassets 40,043,636 35,458,332g) CoreCapital/TotaldepositsLiabilities 19.2% 17.7%h) MinimumstatutoryRatio 8.0% 8.0%i) Excess 11.2% 9.7%j) CoreCapital/totalriskweightedassets 23.3% 20.9%k) Minimum Statutory Ratio 10.5% 10.5%l) Excess(j-k) 12.8% 10.4%m) Total Capital/total risk weighted assets 24.2% 21.6%n) Minimum statutory Ratio 14.5% 14.5%o) Excess (m-n) 9.7% 7.1% 5 LIQUIDITY a) LiquidityRatio 60.5% 60.6%b) Minimum Statutory Ratio 20.0% 20.0%c) Excess (a-b) 40.5% 40.6%

58

Corporate Social Responsibility

Bank donated Kshs 1Million to “Beyond Zero” foundation. Bank Officials and Directors presenting the cheque to

Her Excellency Margaret Kenyatta, 1st Lady, Republic of Kenya recieving the cheque.

Bank donated 300 blankets to S.A. Thika Primary School for the Blind.

Mr. Yatish C. Tewari, Managing Director seen distributing the blankets.

Team Baroda at S.A. Thika Primary School for the Blind, on the occasion of distribution of blankets.

Mr. Yatish C. Tewari, Managing Director recieving the “Most Efficient Bank” award on the occasion of Banking

Awards 2015 organised by Think Business.

Award winning Team Baroda.

Shareholders and Board of Directors of the bank on the occasion of 22nd Annual General Meeting at Nairobi.

Proud Moments

Annual General Meeting 2014

Appendix III - Financial Highlights

4,744 4,936

5,758

7,569

9,867

- 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500 9,000 9,500

10,000

2010 2011 2012 2013 2014

Ksh

s. in

Mill

ion

s

Shareholders' Fund

32,332 36,701

46,138

52,022

61,945

- 5,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 65,000 70,000

2010 2011 2012 2013 2014 K

shs.

in M

illio

ns

Total Assets

25,600 30,264

38,382 41,877

48,683

13,830 19,738 22,353 24,068

29,002

2010 2011 2012 2013 2014

Business Volume _ Kshs. Millions

Deposits Advances

252.76

306.76

359.38 399.66

462.41

- 50

100 150 200 250 300 350 400 450 500

2010 2011 2012 2013 2014

Ksh

s. in

Mill

ion

s

Business Per Employee

1,393 1,364 1,376

2,040 2,217 1,883 1,876

1,675

2,577 2,780

2010 2011 2012 2013 2014

Profitability _ Kshs. Millions

Net Profit Operating Profit

95.86 99.74 116.36

152.95

199.40

- 10 20 30 40 50 60 70 80 90

100 110 120 130 140 150 160 170 180 190 200

2010 2011 2012 2013 2014

Bo

ok

Val

ue

in K

shs.

Book Value Per Share

FINANCIAL STATEMENTS


59

Corporate Social Responsibility

Bank donated Kshs 1Million to “Beyond Zero” foundation. Bank Officials and Directors presenting the cheque to

Her Excellency Margaret Kenyatta, 1st Lady, Republic of Kenya.

Bank donated 300 blankets to S.A. Thika Primary School for the Blind.

Mr. Yatish C. Tewari, Managing Director seen distributing the blankets.

Team Baroda at S.A. Thika Primary School for the Blind, on the occasion of distribution of blankets.

Mr. Yatish C. Tewari, Managing Director recieving the “Most Efficient Bank” award on the occasion of Banking

Awards 2015 organised by Think Business.

Award winning Team Baroda.

Shareholders and Board of Directors of the bank on the occasion of 22nd Annual General Meeting at Nairobi.

Proud Moments

Annual General Meeting 2014

PHOTO GALLERY

60

Opening of Meru Branch

Bank’s 11th branch at Meru opened on 27th June 2014.Hon. Abdul Rahim Dawood (MP, North Imenti

Constituency) cutting the ribbon, while Mr. Yatish C. Tewari, Managing Director, shareholders and members

of staff look on.

Staff members of newly opened Meru branch with Mr. Yatish C. Tewari, Managing Director and

officials of Head Office.

Bank paid tribute to the victims of Westgate attack on its 1st anniversary at Amani Garden, Karura Forest, Nairobi.

Digo Road branch, Mombasa relocated to a new State-of-Art premises at Kizingo Area, Mombasa. Mr Ramesh Kumar, Assistant High Commissioner

India, Mombasa cutting the ribbon while Mr. Yatish C. Tewari, Managing Director and Mr Vikram C. Kanji,

Director look on.

An internal view of the State-of-Art branch premises of Digo Road Branch, Mombasa.

Relocation of Digo Road Branch

Chairman’s Visit

Tribute to Westgate Victims

Mr. Ranjan Dhawan, Chairman, meeting the members of staff at Head Office, Nairobi.

PHOTOGALLERY(continued)

“Te

am

Ba

rod

a”

Tog

eth

er

we

ca

n..

. To

ge

the

r w

e w

ill..

.

FINANCIALSTATEMENTS


61

Opening of Meru Branch

Bank’s 11th branch at Meru opened on 27th June 2014.Hon. Abdul Rahim Dawood (MP, North Imenti

Constituency) cutting the ribbon, while Mr. Yatish C. Tewari, Managing Director, shareholders and members

of staff look on.

Staff members of newly opened Meru branch with Mr. Yatish C. Tewari, Managing Director and

officials of Head Office.

Bank paid tribute to the victims of Westgate attack on its 1st anniversary at Amani Garden, Karura Forest, Nairobi.

Digo Road branch, Mombasa relocated to a new State-of-Art premises at Kizingo Area, Mombasa. Mr Ramesh Kumar, Assistant High Commissioner

India, Mombasa cutting the ribbon while Mr. Yatish C. Tewari, Managing Director and Mr Vikram C. Kanji,

Director look on.

An internal view of the State-of-Art branch premises of Digo Road Branch, Mombasa.

Relocation of Digo Road Branch

Chairman’s Visit

Tribute to Westgate Victims

Mr. Ranjan Dhawan, Chairman, meeting the members of staff at Head Office, Nairobi.

“Te

am

Ba

rod

a”

Tog

eth

er

we

ca

n..

. To

ge

the

r w

e w

ill..

.

62NOTES

IS OUR PROMISE - Bank of Baroda ( · PDF fileI have the pleasure to present the Bank’s...

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