ANNUAL REPORT 2014

Annual Report 2014

Annual Report 2014

3BankDhofar

His Majesty Sultan Qaboos Bin Said

Annual Report 2014

Annual Report 2014

TABLE OF CONTENTS

Board of Directors report 06

Corporate governance report 16

Management discussion and analysis report 35

Financial highlights of last five years 62

Disclosure requirements underpillar III

of Basel II71

Financial statements for the

year ended December 2014110

Notes to financial statements 2014 117

Maisarah Islamic Banking Services

Annual Report 2013173

6 BankDhofar

Annual Report 2014

The Board of Directors report for the financialyear ended31st December 2014Dear Shareholders,

On behalf of the Board of Directors of Bank Dhofar S.A.O.G., I am pleased to present you the Banks Financial Statements and the Auditors Report for the financial year ended 31st December 2014.

BankDhofar wins Sultan Qaboos Award for Excellence in eGovernmentBest Public Mobile eService Award

7BankDhofar

Annual Report 2014

Omans EconomyThe first half of 2014 witnessed impressive numbers. Budget surplus during first six months of 2014 stood at RO250mn as against a surplus of RO 95.3mn in the corresponding period of 2013 as government revenue increased by 1.7 per cent to RO 7.19bn. As per numbers released during the first three months of 2014, there has been a notable improvement in non- petroleum activities, contributed by increase in activities such as agriculture and fisheries, mining and quarrying, wholesale and retail trade, hotels and restaurants etc. Oman has also one of the lowest inflation rates in the region. The government is continuing with its revenue diversification policies as a part of Vision 2020 programme and is expected to gain from such positive and forward looking policies/initiatives. However, the key risk highlighted is the higher than anticipated decline in oil price during second half of 2014 putting pressure on 2015 Budget . In this connection, Standard & Poors has lowered the outlook to negative for Omans sovereign ratings, but maintains A/A-1 long- and short-term sovereign rating. S&P expects Omans real GDP growth to average 3.6 percent during 2014-17 down from 4 percent estimated in June 2014, as a result of decline in oil price.

TotalAsset

22.6

%

Net& Loans

Advances

18.4

%

CustomerDeposits

22.2

%

NetInterestIncome

15.5

%

Cost toIncomeRatio

46.7

%

NetProfit

RO

40

.5m

illio

n

In its credit analysis report on the Sultanate, Moody's had also affirmed, Oman's A1 rating with a stable outlook reflects the government's healthy financial position and country's robust growth outlook as well as its open trade and investment regime. For 2014 and 2015, Moody's has projected real GDP growth of 3.5 per cent.

Financial overview in 2014The Bank continued to grow in all key areas in the year 2014 and crossed RO 3 billion in Total assets and 2 billion in Net Loans, Advances & Financing to customers, the net Loans, Advances and Financing to customers reached RO 2.25 billion at December 2014, showing a growth of 18.42% from RO 1.90 billion at the end of December 2013. The customer deposits mobilized by the bank achieved a growth of 22.17% from RO 2.03 billion at the end of 2013 to reach RO 2.48 billion at the end of 2014.

The key profitability indicators have also recorded positive growths, as net interest and financing income recording a strong growth of 15.46% reaching RO 76.79 million for the year 2014 compared to RO 66.51 million in 2013. Non-interest and non-financing income such as fees and commission, foreign exchange profit, investment and other income have reached RO 22.06 million in 2014 as compared to RO 23.04 million achieved in the previous year.

The Cost to Income ratio during the year 2014 improved to 46.70% as compared to 50.60% in 2013. The provisions for loan impairment, net of recovery (excluding legal case recovery), during the year 2014 are RO 6.93 million, as against the RO 4.23 million during the previous year 2013 in line with loan growth.

8 BankDhofar

Annual Report 2014

The net profit for the year 2014 achieved by the Bank is RO 40.45 million as against RO 35.41 million, showing an increase of 14.23% year on year, excluding the effect of Legal case write back of RO 26.1 million (before taxes), in 2013. Net profit for 2013 including one-off Legal case recovery is OMR 58.51 million.

Maisarah- Islamic Banking Services Maisarah achieved outstanding results during 2014 in its 2nd year of operations after launch in March 2013. The Islamic Banking Window financial performance reflected strong growth as the total assets increased to RO 191.79 million at December 2014 from RO 50.02 million at the end of 2013, a growth of 3.83 times. The gross financing has grown remarkably by 4.71 times from RO 28.27 million at the end 2013 to reach RO 133.03 million at December 2014. Customer deposits raised by the Maisarah has recorded an impressive growth and increased from RO 3.68 million at the end of 2013 to RO 97.01 million at the end of 2014. The key profitability metrics showed good growth, with net financing income increased to OMR 3.72 million in 2014 compared to RO 0.26 million in 2013, recording 14.31 times growth.

Non-financing income such as fees and commissions, foreign exchange profit, investment income and other income reached RO 0.58 million during 2014 compared to RO 0.09 million in 2013.

Maisarah Islamic Banking Services became profitable in its first full year of operations in 2014, with achieving Net Profits before taxes of OMR 0.23 million for 2014 compared to net loss before taxes of OMR 2.20 million in 2013, which is nine-months operations being the year of launch and includes pre-operating expenses of OMR 0.49 million.

Major dealsMajor deals bagged during the year include Oman Refinery Petrochemicals LLC (ORPC) syndication deal for its Sohar refinery improvement project which was to upgrade the Sohar refinery and also enhance

its output. We participated in the commercial facility tranche to the extent of USD 100 million.

Strategic Initiatives

In September 2014, Bank raised Capital in the form of Tier 2 Sub-ordinated Loan of USD 75 million (RO 28.88 million). In continuation of capital augmentation plan, the Board of Directors in its meeting in December 2014 recommended to raise capital of OMR 115.5 million (USD 300 million) in the form of Tier 1 (including Additional Tier 1 capital) in 2015, subject to Regulatory Approval. Extra-ordinary General Meeting of the Shareholders would be called seeking necessary approvals.

To fund the growth of Banks Islamic Window, the paid up capital of Maisarah Islamic Banking Services has been increased from RO 12.5 million to RO 25 million from the core capital of the Bank.

Corporate Governance

The Bank has fully complied with all directives of the Code of Corporate Governance issued by the Capital Market Authority. The Bank has also assessed and reviewed the internal control procedures of the Bank during the year 2014.

In compliance with Article (101) of the Commercial Companies Law No. 4/1974 and its amendments, the Board of Directors would like to disclose that the total amount received in 2014 as sitting fees was RO 67,000 and the proposed remuneration is RO 133,000, complying with total cap of OMR 200 thousands

Proposed Dividends

The Board of Directors in their meeting held on 27 January 2015 proposed a cash dividend of 10% (2013: 14%) for the year ended 31 December 2014 amounting to RO 13.43 million (2013: RO 16.94 million) and a bonus share issue of 10% (2013: 11%) amounting to 134,324,227 shares (2013: 133,114,093 shares) of RO 0.100 each.

Year 2009 2010 2011 2012 2013

Cash Dividends 15% 12.5% 7% 15% 14%

Bonus Shares 10% 12.5% 20.2%* 10% 11%

*Bonus shares for 2011 was distributed from Share Premium Account

9BankDhofar

Annual Report 2014

Subsequently, Central Bank of Oman in their approval, advised to change the dividend distribution in the form of cash dividend of 5% amounting to RO 6.7 million and a bonus share issue of 15% aggregating to amounting 201,486,332 shares of RO 0.100 each, of the share capital of the bank. A resolution to approve these dividends and the increase in share capital will be presented to the shareholders at the annual general meeting and distributions are subject to shareholders approval. During the year, unclaimed dividend amounting to RO 6,187 (2013: RO 29,171) was transferred to the Investors Trust Fund account as per the guidelines issued by the Capital Market Authority of Oman.

Corporate Social Responsibility (CSR) initiativesCommunity and social awareness campaigns as well as a strong focus on engaging staff are being promoted through various channels and campaigns. External partnerships with the likes of the Environment Society of Oman, Al Noor Association for the Blind, the Oman Charitable Organisation and many others help BankDhofar interact with the community at large on a regular basis, and assess what programs to support. The list this year includes the following: Partnership with Tawasul supporting their Annual

Civil Societys Leaders Dialogue focus on whats next in CSR

Partnership with the Oman Association for the Disabled to provide specialized wheelchairs and medical beds for cerebral palsy patients

Partnership with Dar Al Ataa to provide for families in remote areas during the Holy month of Ramadhan

Partnership with the newly formed Omani Bahja Orphan Society in