measuring the individual financial
TRANSCRIPT
Measuring the individual financial needs, and providing customized solutions.
Enhancing features and providing superior qual it y ser vices with professionalism and integrity.
Avoiding risk and maintaining strong and solid assets.
Building trust and good relationships with customers and employees, that leads to our mutual success and sustain high performance and growth.
3
TABLE OF CONTENTSTABLE OF CONTENTS
A Message from the Chairman 5
Board of Directors 6
Management 7
Financial Highlights 9
Profile of the Bank 17
Corporate Governance Framework: 19 1. Introduction 2. Governance Framework 3. Composition of the board of directors 4. Committees • At board level • At senior management level 5. Organizational Chart
MEAB Strategy 25
Capital Management: 27 - Evolution of Shareholders’ Equity. - Regulatory Requirements: -Basel III. - ICAAP.
Risk Management: 29 - Risk Management Framework.
Compliance and AML: 31 - Compliance and correspondent banking policy and procedures at MEAB. - Legal Compliance. - FATCA.
Auditors Report & Financial Statements 33 - Balance Sheet - Statement of Comprehensive Income - Statement of Changes in Equity - Statement of Cash Flow - Notes to the Financial Statements
Network 88
Correspondant Banks 89
Awards 91
5
Dear trusted shareholders
Again, we demonstrated our endurance in this challenging global economic en-vironment and I am pleased to report that MEAB performed exceptionally well in 2012. Despite all the challenges, last year was another milestone in our sustain-able growth journey and we successfully accomplished an increase in profitabili-ty, with strong loan growth and record deposits.
Our strategy is the outcome of the shareholders vision to be positioned in the right markets, with the right people, and with the right products and services. We are confident that our strategy is the most suitable one in this volatile market and can position our efforts to continue to grow.
For 2012, MEAB produced an astonishing net profit of LBP 16.6 billion, an in-crease of 11% from LBP 15.1 billion in 2011. Additionally, MEAB produced LBP 109 billion in revenues, an increase of 36.25% from LBP 80 billion in 2011.
MEAB’s strong retail and corporate banking along with the enhanced private and treasury services, significantly strengthened the bank’s balance sheet and contributed in the introduction of new branches, IT platform advancements and better investments in capital assets.
For 2012, MEAB’s total assets reached a record high of LBP 2200 billion, an increase of 22% from previous year. Additionally, customers’ deposits reached LBP 1945 billion by the end of 2012, growing by 37% year over year. As a result of this growth, the bank increased its capital to LBP 122 billion, an increase of 48.7% from LBP 82 billion in 2011, and its total equity reached approximately LBP 138.5 Billion by the end of 2012.
For 2013 and beyond, I assure you that we will remain committed to sustainable growth by expanding our branches network locally and regionally, by the intro-duction of new products and services to help increase our customer base, by strengthening our strategic relationships, and by ensuring compliance with all regulatory requirements including BASEL III.
As we look ahead, I am proud of our achievements and of the decisions we took to advance and to become a leading bank, and I recognize the quality of our shareholders and of our hard working people that differentiates MEAB and serve as a cornerstone of our success and of our future.
KASSEM M. HEJEIJChairman
CHAIRMAN'S LETTERCHAIRMAN'S LETTER
6
MR. KASSEM HEJEIJ Chairman-General Manager
MR. HASSAN HEJEIJ Delegated Director
MR. WISSAM HEJEIJ Member
MR. CHEBIB MOUKALLED Member
MR. CHAFIC KOBEISSI Member
MR. MICHEL CORDAHI* Member
MR. NASRI MALHAMI* Member
ME. MOHAMAD SLIM Legal Consultant
* Assigned in 2013
BOARD OF DIRECTORSBOARD OF DIRECTORS
77
MR. ADNAN YOUSSEF General Manager
MR. ABBAS HEJEIJ Deputy General Manager
MR. AYMAN HODROJ Assistant General Manager
MRS. MARIE –LOUISE AKIKI Assistant General Manager
MRS. AMAL SALEH Treasury & Foreign Relations
MRS. ITAF MOHTI Legal & Debt Recovery
MR. MOHAMAD TANANI Administration
MRS. ELIANE DAURIAT Information Technology
MRS. HIAM NASRALLAH HEJEIJ Human Resources
MRS. DIANA SAID Internal Audit
MR. KARIM MRAD Financial Control and Accounting
MR. HUSSEIN CHEAITO Risk Management
MRS. HALA ATRISSI Credit Administration
MR. BILAL HAMZEH AML Compliance
MRS. CARINE SALEH Trade Finance
MRS. GHINDA HAMDAR Legal Compliance & Procedures
MRS. MONA KHALIL Credit
MISS. AMAL ASSAF Retail
MRS. NORMA BAYDA Branches Management
MR. ANTOUN EL MOSLEH General Coordinator
MR. KHALIL AMHAZ Business Developement
MS. SAWSAN HACHEM Operations
MS. FATIMA HAZIMEH Back Office
MANAGEMENTMANAGEMENT
FINANCIAL HIGHLIGHTSFINANCIAL HIGHLIGHTS
1010
KEY FINANCIAL HISTORICAL HIGHLIGHTS
Balance sheets
LBP in millions
Cash with banks & BDL
Interest earning assets
Other
Total assets
Interest bearing liabilities
Other
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
RoAE
RoAE
2012
33,282
2,128,161
54,585
2,216,028
2,051,103
9,687
2,060,790
155,238
2,216,028
15.35%
0.86%
2009
49,544
810,467
19,828
879,838
800,768
13,514
814,282
65,556
879,838
14.00%
1.00%
2010
49,163
1,146,884
46,135
1,242,181
1,144,214
18,778
1,162,992
79,189
1,242,181
20.30%
1.40%
2011
35,748
1,589,189
40,177
1,665,114
1,532,225
11,965
1,544,190
120,924
1,665,114
15.10%
1.00%
2012 2009
20,850
11,508
760
1,655
8,447
1.70%
-55.20%
40.50%
2010
26,216
-12,320
3,480
-2,698
14,679
1.70%
-47.00%
56.00%
2011
34,596
-16,049
-690
-2,741
15,116
1.60%
-46.40%
43.70%
Income statements
LBP in millions
Total income
Staff, G&A and depreciation
Impairment release (charge) for credit losses
Income tax
Net income
Net interest margin
Cost to income ratio
Net income as a % of total income
39,843
-19,951
-304
-2,929
16,659
1.43%
50.07%
41.81%
1111
2012 2009
300,382
317,019
879,838
752,624
41,000
2010
547,263
297,185
1,242,181
1,021,989
41,000
2011
784,755
292,699
1,664,710
1,414,720
82,000
Main Balance sheets Items
Loans and advances to customers
Investment securities
Total assets
Customer deposits
Share capital
1,273,270
345,972
2,216,028
1,950,590
122,000
500,000
1,000,000
1,500,000
2,000,000
2,500,000
-
2012Million LL
2012Million LL
1212
2012Million LL
2,0004,000
6,0008,000
10,00012,000
14,00016,00018,000
160,000
180,000
2012Million LL
500,000
1,000,000
1,500,000
2,000,000
2,500,000
-
2012Million LL
1313
FIXED ASSETS - NBV
AT 31 DECEMBER 2012, FIXED ASSETS AMOUNTED TO LBP 48,395 MILLION AND WERE PRIMARILY COMPRISED OF BUILDINGS
2009201020112012
4,539
1,575
1,938
22
213
158
8,445
25,326
1,651
1,616
763
194
262
29,812
24,977
2,553
2,063
916
470
168
31,147
LBP in millions
Buildings
Equipment and furniture
Decoration
Work in progress
Installations
Vehicles
Total
39,918
2,889
3,004
1637
873
74
48,395
At 31 December 2012, fixed assets amounted to LBP 48,395 Million and were primarily comprised of buildings (82%).
At 31 December 2012, fixed assets increased by LBP 17,248 Million as the Bank acquired 6 branches that were previousouly leased.
At 31 December 2012, additions included equipment, decoration and furniture following the opening of 2 new branches.
The decrease in 2012 of the vehicles is due to the disposal of one Car.
1414
CUSTOMER DEPOSITS
AT 31 DECEMBER 2012, CUSTOMER DEPOSITS INCREASED BY 37% PRIMARILY AS A RESULT OF AN INCREASING IN THE SAVING DEPOSITS (Y 35%)
The increase in customer deposits over the period under analysis was the result of the Bank’s focus on growing its operations and expand in the market by opening three new branches. At 31 December 2012 and 2011, the Bank witnessed an increase of 37% and 38% respectively.
At 31 December 2012, customer deposits comprised primarily saving deposits (54%) and net credit against debit accounts and cash margins (30%).
The increase in saving deposits by 54% at 31 December 2012 primarily related to the aggressive strategy of the Bank in increasing deposits.
At 31 December 2011, related parties deposits represented 9% of total deposit against 13% at 31 December 2011.
The majority of the Bank;s customer deposits were denominated in FC (76%) at 31 December 2012, against 78% at 31 December 211.
2012
Customer deposits
Deposits 2012
Saving deposits
Net credit against debit accounts & cash margins
Related parties
Sight deposits
Items in course of payment
Term deposits
Accrued interest
LBP in millions
Saving deposits
Net credit against debit accounts & cash margins
Related parties
Sight deposits
Items in course of payment
Term deposits
Accrued interest
Total
2009
360,656
216,003
114,705
50,907
5,972
1,004
3,377
752,624
2010
551,882
225,882
170,503
60,830
3,511
1,491
7,890
1,021,989
2011
782,685
326,584
178,121
108,612
5,700
3,940
9,482
1,415,124
1,058,594
582,387
175,518
104,614
5,812
13,484
10,167
1,950,576
1515
INTEREST STATEMENTS
While the interest income has been increasing over the period under analysis, the return on average interest earning assets has been decreasing due to the increase of loans against cash collateral with a low return
INTEREST STATEMENTS
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
-
Loans and advances to customers
(incl. RPs)
Investment securities
Due from banks and financial
institutions2012
Million LL
Interest income increased from LBP 44,836 Million in 2009 to LBP 98,597 Million in 2012, due to the increase in interest income from loans and advances to customers.
The Bank's strategy over 2009 and 2010 was to increase its investment in loans and decrease its investment in securities. This strategy has been reversed starting 2012 in order to increase the bank securities portfolio.
The increase in interest income from loans and advances to customers in 2012 was due to the increase in the volume of loans at 31 December 2012.
The increase in interest income on investment securities in 2012 was due to the increase of the securities portfolio during 2012 even the yield on the said securities has decreased in 2012 compared to 2011.
The return on average interest earning assets decreased from 5.7% in 2009 to 5.3% in 2012 primarily due to the increase of loans against cash collateral with low return and decrease in the return on investments securities.
2012
LBP in millions
Loans and advances to customers (incl. RPs)
Investment securities
Due from banks and financial institutions
Total
Return on avg interest earning assets
2009
17,480
23,208
4,148
44,836
5.70%
2010
28,975
23,758
1,342
54,075
5.50%
2011
50,274
19,341
1,725
71,340
5.20%
73,688
22,419
2,490
98,597
5.30%
16
INCOME STATEMENTS
In 2011, the net income increased primarily due to an increase in the volume of loans as well as a non-recurring income
2012 2009
44,836
(31,840)
12,996
4,589
(346)
4,243
2,614
997
20,850
760
(5,842)
(4,243)
(1,423)
10,102
(1,655)
8,447
2010
54,075
(37,082)
16,993
6,551
(404)
6,147
2,766
311
26,217
3,480
(6.543)
(4,168)
(1,609)
17,377
(2,698)
14,679
2011
71,340
(49,338)
22,002
7,907
(466)
7,441
2,039
3,112
34,594
(690)
(7,866)
(5,321)
(2,861)
17,858
(2,741)
15,118
98,597
(70,696)
27,901
10,266
(600)
9,666
2,076
200
39,843
(304)
(9,434)
(7,127)
(3,390)
19,588
(2,929)
16,659
LBP in millions
Interest income
Interest expense
Net interest income
Fees and commission income
Fees and commission expense
Net fees and commission income
Net trading income
Other operating income
Total income
Impairment release (charge) for credit losses
Staff costs
General and administrative expenses
Depreciation expense
Profit before income tax
Income tax
Net income
IN 2012, THE BANK'S NET INCOME WAS AFFECTED BY:
An increase in the net interest income primarily due to the significant increase in the volume and the return on loans and advances to customers (generating 70% of the interest income in 2012)
Net fees and commission income increased by LBP 2,598 Million from 2011 to 2012 primarily due to an increase in commissions related to credit facilities.
An increase in staff costs (due to newly recruited senior management and increasing of the Chairman remuneration), general and administrative expeses (due to two newly opened branches and increasing of depreciation (following the acquisition of many locations previously leased).
17
PROFILE OF THE BANKPROFILE OF THE BANK
OVERVIEW:
MEAB SAL was established in 1991 as a family owned commercial bank and registered at the Commercial Court in Baabda under Trade Register No. 58153.
It appears under number 110 in the list of Lebanese banks published by BDL.
Currently, MEAB SAL has a network of eleven branches throughout Lebanon dedicated to provide its valued customers with prime banking services.
STRATEGIC OBJECTIVES:
Objective 1: Equilibrium between Profitability, Risk and Growth
Objective 2: Keep on the Specialization in the corporate segment
Objective 3: Developing SME and Retail portfolios
Objective 4: Geographic Expansion and New Branches
Objective 5: Diversification of Uses of Funds and Sources of Funds
MAJOR LINES OF BUSINESS:
• Retail Banking
• Private Banking
• Commercial Banking
• Correspondent Banking
• Financial Markets
• Insurance services
MEAB VALUES:
• MEAB is an independent trustworthy entity.
• Customers are at the heart of everything we do.
• We are proud to provide quality and value for money.
• Creativity is the cornerstone of our organization.
• We respect each other and celebrate our diversity so that everyone can give the best of themselves.
• The spirit of the body: Working as a team in the bank gives great things.
MEAB VISION:
MEAB s.a.l “MEAB”, a dynamic bank managed by a team of professional bank-ers, looks forward for an internal growth strategy that guarantees its passage from a “boutique bank” to a geographically well expanded bank “banque de proximité” with a strong identity to be an active bank in the Lebanese banking sector. (“Top 15” Group)
18
MEAB MISSION:
MEAB SAL is a growing financial institution with a local and regional orientation, and a commitment to offer the best banking experience to its customers and correspondents, as well as to create value to its shareholders and employees.
MEAB HISTORICAL EVOLUTION:
MEAB ACTION PLAN:
The action plan covering the next 5 years will take into consideration the following:
• 2013-2017: Geographical extension by opening new branches.
• 2013-2014: increase logistics effectiveness (IT, MIS, Communication Channels).
• 2016- 2017: Reinforcement of MEAB position by being in the top 15 banks within the banking sector.
19
CORPORATE GOVERNANCE CORPORATE GOVERNANCE FRAMEWORK FRAMEWORK
1. INTRODUCTION:
MEAB SAL operates under corporate governance policies and practices de-signed to ensure that the Bank’s performance maximizes long-term shareholder value.
MEAB SAL has implemented a Corporate Governance Code, which sets out the Bank’s vision, mission and core values and identifies the rights and responsibili-ties of all concerned parties.
This code was approved by MEAB SAL Board of Directors in November/2012 and it was communicated to the entire Bank’s staff.
The Governance framework of the Bank is outlined in the “Corporate Governance Guidelines” which are published on the Bank’s website at www.meabank.com.
These guidelines hinge on the evolving needs and expectations of depositors, regulators, investors and the market at large.
MEAB SAL believes in, and is dedicated to apply sound Corporate Governance practices, which is considered the basis for its future development.
Therefore, MEAB SAL put into practice a Corporate Governance Framework in line with the dynamic local and international regulatory expectations.
This framework promotes reasonable and clear relationship among the manage-ment team, the Board of Directors, and all stakeholders.
Internally, the Bank constantly reviews and updates policies and procedures to ensure full compliance with regulators and to allocate the duties and responsibil-ities among all concerned parties in the Bank, including directors and managers to collect the rewards of best practice.
Additionally, the Board of Directors has created three committees, namely the Senior Management Committee, the Risk Committee, and the Senior Audit Committee.
These Committees meet regularly to assist the Board in exercising its duties and oversight responsibilities over the Bank.
2. GOVERNANCE FRAMEWORK
MEAB SAL corporate governance structure includes the General Assembly (shareholders); the Board of Directors; various committees; the Chairman; su-pervisory Functions including mainly risk supervision, compliance, audit, remu-neration, and capital management; the External Auditors; Senior Management and the Business units.
MEAB SAL is governed by a Board of Directors composed of 7 members elected by the General Assembly of shareholders. The responsibilities of the Board of Directors are to ensure the proper management of the Bank, guarantee strategic direction, Management supervision and adequate control of the bank, with the vital goal of boosting the long term value of the Bank.
The responsibilities of the Board of Directors are to ensure the proper manage-ment of the Bank, with the objective of adding value to all shareholders, inves-tors, clients, and community in the short, medium, and long terms.
The aim behind such a structure is to provide a well-organized framework for the assignment of responsibilities, accountability and workflows to ensure efficiency and effectiveness in the management decision making process.
20
3. COMPOSITION OF THE BOARD OF DIRECTORS:
MEAB SAL Board of Directors has a sufficient number of executive, non-executive and independent non-executive Board members. The presence of this combination ensures the governance and effectiveness of the Board.
MEAB SAL BOARD MEMBERS
Mr. Kassem HejeijChairman-General Manager (Executive Member)
Mr. Hassan HejeijDelegated Director(Executive Member)
Mr. Wissam HejeijNon-Executive Member
Mr. Chebib MoukalledIndependentNon-Executive Member
Mr. Chafic KobeissiIndependentNon-Executive Member
Mr. Michel Kordahi*IndependentNon-Executive Member
Mr. Nasri Malhami*IndependentNon-Executive Member
All shareholders enjoy all rights conferred upon them by the Lebanese Code of Commerce. The main responsibil-ity of the Board of Directors is to make sure that the bank is properly managed with the aim of adding value to all stakeholders in the short and long terms.
In addition, the Board has the responsibility of approving and overseeing the implementation of the Bank’s objec-tives, as well as ensuring that sufficient and independent controls are in place.
4. COMMITTEES:
• AT BOARD LEVEL
In carrying out its duties, the Board is supported by the Senior Credit Committee, the Risk Committee, and the Senior Audit Committee.
SENIOR CREDIT COMMITTEE:
The Senior Credit Committee is chaired by an executive director, and includes other managers as members. Take its decisions by majority vote. The Committee meets when necessary.
The Committee’s main responsibilities are to approve all credit files above USD/550,000/ (C/V), approve non-per-forming loans classification, review credit policies and procedures.
The Committee has the right to assign any person for the preparation of reports and studies to take the appropriate decisions.
* Assigned in 2013
21
RISK MANAGEMENT COMMITTEE:
The Risk Management Committee is chaired by an independent non-executive director, and includes two other executive members. The Committee meets at least quarterly and when the need arises. The Committee’s responsibilities are to review the bank’s strategy and risk policies before adoption, guarantee the presence of adequate risk management framework, submit periodic reports and provide statistics about the risks faced by the bank, assist the Board of Directors in fulfilling its oversight responsibilities in identifying the Bank’s risks profile vis-a-vis its risk appetite and risk tolerance and assess the Bank’s risk management process and the capital adequacy.
AUDIT COMMITTEE:
The Audit Committee is composed of two independent non-executive Board members and one non-executive member who hold the title of chairman of this committee. The Committee meets on a quarterly basis and when necessary. The Audit Committee’s responsibilities are to assist the Board of Directors in its supervision responsibilities with respect to compliance to supervisory laws and regulations, and the implementation of accounting standards related to financial reporting.
In addition, the Committee supports the Board of Directors in fulfilling its duties and supervisory role, mainly in regard to internal control regulations and proce-dures, supervision of the internal audit’s activities, appointment of external audi-tors and follow up on their activities along with other responsibilities.
Mr. Kassem Hejeij
Mr. Hassan Hejeij
Mr. Wissam Hejeij
Mr. Chebib Moukalled
Mr. Chafic Kobeissi
Senior Credit
Committee
Risk Management
Committee
Member
Member
Chairman
Audit Committee
Member
Member
Chairman
Chairman
AT SENIOR MANAGEMENT LEVEL:
SENIOR MANAGEMENT COMMITTEE:
The Senior Management Committee is composed of 7 members. The Commit-tee meets every 15 days and when necessary. The goal of this Committee is to provide advices to the Board of Directors and executive senior management by raising suggestions and recommendations of matters related to the work of the bank. Moreover, this committee discusses the bank strategy and monitors its execution, reviews the bank’s policies and procedure and approves them along with other responsibilities.
IT SECURITY COMMITTEE:
The IT Security Committee is composed of 6 members. The Committee meets quarterly and when necessary. The goal of this Committee is to agree on the strategy as well as long and short term goals set by the IT department which co-incides with current and future needs. It recommends approvals on purchasing IT hardware and software.
Moreover, it approves IT manager requests regarding any amendments on hard-ware, software, network after testing the request along with other responsibilities.
22
CREDIT AND FOLLOW-UP COMMITTEE:
The Credit and Follow-up Committee is composed of 7 members. The Committee meets weekly to approve all credit files below 550,000 usd. The goal of this Committee is to review applications for loans, analyze all the nec-essary documentation to make the loan decision, properly assess the collateral offered to secure the loan before approving it.
Moreover, it evaluates the borrowers’ financial condition and their ability to repay, sets the appropriate interest rate, reviews exceptions, loan extensions, refinances or any changes to original loan terms. The committee grants loans according to the bank’s policy and procedures within the authority granted to it and in compliance with local laws.
ASSET AND LIABILITY COMMITTEE:
The Asset and Liability Committee is composed of 6 members. The Committee meets monthly and when necessary. The ALCO's primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure.
Moreover, ALCO have responsibility for setting limits concerning the bank investment in the market, discuses pro-posed new financial products offered by the treasury department, approves relationship with correspondents banks, review assets and liabilities pricing and delegate the responsibility of execution daily investment transactions to the head of treasury department within the limits approved by the Board of Directors. Among the factors considered by ALCO are liquidity risk, interest rate risk, operational risk and external events that may affect the bank›s forecast and strategic balance-sheet allocations. The ALCO have regulatory reporting responsibilities.
COMPLIANCE AND ANTI-MONEY LAUNDERING COMMITTEE:
The Compliance and Anti-money Laundering Committee is composed of six members. The Committee meets quar-terly and when necessary. MEAB SAL has established an AML Compliance Committee responsible for overseeing the Bank›s anti-money laundering policies and procedures and their implementation, as well as the application of Law No. 318 – Fighting Money Laundering and BDL Circular 83 regarding Regulations on the Control of Financial and Banking Operations for Fighting Money Laundering, in addition to many SIC circulars. Moreover, the committee is responsible for developing the KYC form, ensures in efficiency of the reports issued by the bank’s systems to guarantee detecting any Money Laundering transactions.
In addition, the committee recommends and supports many seminars to educate the employees on how to discover and fight Money Laundering activities.
PURCHASING COMMITTEE:
The Purchasing Committee is composed of four members. The Committee meets weekly. The goal of this Commit-tee is to study the quotations and offers to purchase equipments, supplies and software for the bank and approve proposals up to USD/10,000/…greater amounts need approval from the Senior Management Committee. More-over, the committee is responsible on the full supervision of equipping the new branches.
HR COMMITTEE:
The HR Committee is composed of six members. The Committee meets every 15 days. The Human Resources Committee is created to oversee the bank's compensation and benefits policies as well as setting the rewards and incentives’ mechanism in the bank.
Moreover, the committee evaluates employees’ performance and reviews the bank’s management succession plan, review performance appraisal procedure and approve it along with other responsibilities.
SMALL LOANS & RETAIL COMMITTEE:
The Small Loans & Retail Committee is composed of three members.
The goal of this Committee is to approve loans up to USD/50,000/ by circulation.
The committee can meet for exception reasons and when necessary.
FIXED ASSETS COMMITTEE:
The Fixed Assets Committee is composed of four members. The Committee meets on a yearly basis and when necessary.
The main goal of this Committee is to study any request for depreciation of fixed assets and approve it after ensuring its inefficiency.
2323
5. ORGANIZATIONAL CHART:
BO
AR
D O
F D
IRE
CT
OR
S
OR
GA
NIZ
ATIO
NA
L C
HA
RT E
XT
ER
NA
L A
UD
IT
INT
ER
NA
L A
UD
ITIT
SE
CU
RIT
Y
AD
VIS
ER
S
DE
PU
TY
GE
NE
RA
L
MA
NA
GE
R
HU
MA
N
RE
SO
UR
CE
S
LE
GA
L
DE
PA
RT
ME
NT
RE
TA
ILIT
BR
AN
CH
MA
NA
GE
ME
NT
TR
AD
E
FIN
AN
CE
CR
ED
IT
DE
PA
RT
ME
NT
OP
ER
AT
ION
TR
EA
SU
RY
PR
IVA
TE
BA
NK
ING
AD
MIN
IST
RAT
ION
LE
GA
L
CO
MP
LIA
NC
E
AC
CO
UN
TIN
G &
FIN
AN
CIA
L
CO
NT
RO
L
CR
ED
IT
AD
MIN
IST
RAT
ION
CO
MP
LIA
NC
E
UN
IT AS
SIS
TA
NT
GE
NE
RA
L
MA
NA
GE
R
AS
SIS
TA
NT
GE
NE
RA
L
MA
NA
GE
R
AS
SIS
TA
NT
GE
NE
RA
L
MA
NA
GE
R
CH
AIR
MA
N
GE
NE
RA
L M
AN
AG
ER
RIS
K D
EP
AR
TM
EN
T
25
MEAB STRATEGYMEAB STRATEGY
MEAB’s strategy aims at building on its acquired strengths tied to a track record of strong growth, good financial standing, large financial flexibility, in an environ-ment of a well established risk culture and corporate governance to pursue its sustainable growth strategy.
Over the past years, the Bank had implemented successfully a business diversi-fication strategy that transformed it from a traditional small sized Lebanese bank in the group gamma to a middle sized bank in the group beta.
MEAB's ultimate objective is to balance between profitability, risk and growth by diversifying its uses and sources of funds while keeping specialized in the corpo-rate segment and developing SME and retail portfolios throughout its geographic expansion.
To be in full compliance with its mission and vision, MEAB is adopting a solid strategy, in order to create value and ensure long-term growth for the bank, its shareholders, its employees and its customers by relying on self-financing from its shareholders by investing profits earned in the bank rather than distributing dividends to contribute to the development of the organization and its expansion while keeping in mind the following core values:
Making clients and their needs a primary focus of our actions; building and sup-porting productive client relationships.
• Having a spirit of honesty and uprightness; keeping commitments and behaving in a steady manner.
• Generating pioneering solutions to deal with work problems and op portunities.
• Providing a culture that attracts, empowers, rewards and provides growth opportunities for employees.
• Maintaining effectiveness and efficiency when experiencing major changes in work tasks or the work environment; adjusting effectively to new work structures.
Based on our 5-Year strategy that aims at expanding our channels for supporting sales, including optimizing existing branches, it is important to have a branch network strategy typically based on the following dimensions: client, product, service, distribution channel, and value offer.
MEAB strategy incorporates opening 10 new branches till the year 2017 to in-crease its market share in the Lebanese territory.
Geographic expansion comes with both significant rewards and certain risks. Nowadays, a well-planned and prioritized geographic expansion strategy is an absolute requirement. It helps in gaining access to new markets and talent pools, and perhaps, most importantly, provides a robust pipeline to fuel the bank with future growth.
MEAB strategy is to enter into new areas that are neglected by others by divid-ing the market into three zones (Urban, Sub Urban, and Rural) to better reach our customer base through products’ customization to their needs and require-ments. Still,
MEAB strategic plan does not ignore main competitive locations (Saida, Tyr, Bei-rut.) to guarantee continuity among all branches in the expansion map planned in the bank strategy.
Furthermore, MEAB SAL geographic expansion is not limited in the Lebanese territory….. MEAB is glad to announce its plan for opening two branches in Iraq. All the necessary efforts are under process to launch Iraq’s branches as soon as possible.
26
27
CAPITAL MANAGEMENT
The financial market crisis emphasized the importance of effective capital plan-ning; thus it is crucial for the survival of MEAB and leads Management to strate-gic decisions.
MEAB’s capital planning process incorporates rigorous, forward-looking stress testing to indicate how much capital might be needed to absorb losses if large shocks occur.
MEAB assesses the risk to which it is exposed together with the risk manage-ment processes, evaluates its capital adequacy, and considers the potential im-pact on earnings and capital from economic downturns.
The center point of capital management at MEAB SAL rests on maintaining an adequate long-term capital position to face all material risks underlying from its various business activity, while taking into consideration regulators’ requirements, and the best international practices in order to create value and ensure a lasting growth for the bank, its shareholders, its employees and its customers.
Management’s goal is to optimize the capital usage while providing support for the bank’s expansion and protecting depositors and shareholders’ interests.
EVOLUTION OF SHAREHOLDERS’ EQUITY:
During 2012, the Bank increased its capital by LBP 40b through a cash injection from shareholder’ s of LBP 17,622 Million; and the capitalization of retained earn-ings and general reserves. At 31 December 2012, the Bank›s capital amounted to LBP122b consisting of 12.2 million shares with a nominal value of LBP10k per share.
REGULATORY REQUIREMENTS:
• BASEL III:
In October 2011, the central bank of Lebanon issued circular requiring banks to report capital ratio following the Basel 3 framework, setting higher capital require-ments to be achieved gradually in phase – in arrangements as described below:
• BASEL III IMPLEMENTATION IN LEBANON:
As of December 31
Minimum common equity (including CB): CET1
Minimum Tier 1 equity (including CB): TIE
Minimum total equity (including CB): TE
(a)
(b)
(c)
5.00%
8.00%
10.00%
6.00%
8.50%
10.50%
7.00%
9.50%
11.50%
8.00%
10.00%
12.00%
2011 2012 2013 2014 2015
At end – December 2012, Basel 3 capital adequacy ratio reached 10.28%, ver-sus a 10% minimum regulatory requirement. Common tier ratio reached 10.28%.
28
CAPITAL ADEQUACY RATIO AS PER BASEL 3:
Dec - 2011
1,024,394
3,577
46,744
9.73%
9.73%
9.73%
9.73%
Risk - weighted assets
Credit risk
Market risk
Operational risk
Core common tier 1 capital
Tier 1 ratio
Tier 2 ratio
Total ratio
Dec - 2012
1,271,606
16,302
59,999
10.28%
10.28%
10.28%
10.28%
Dec - 2011
1,024,394
3,577
46,744
9.73%
9.73%
9.73%
9.73%
• INTERNAL CAPITAL ASSESSMENT PROCESS-ICAAP:
As part of the implementation of pillar 2 of Basel 2 framework, the central bank of Lebanon, in its basic circular no.119 dated July 21, 2008, followed by the banking control commission of Lebanon (BCCL) memorandum 9/2010 dated October 20, 2010 required Lebanese banks to report the internal capital adequacy assessment process (ICAAP) at the start of an assessment set on June 30, 2011.
In 2011, MEAB SAL, aligning with best practice, submitted its consolidated ICAAP report to the central bank of Lebanon.
MEAB SAL focuses on having an adequate Internal Capital Assessment since ICAAP as an important internal initia-tive rather than just a regulatory one.
This is being reflected by the ICAAP becoming a primary part of the Bank’s decision-making process and a vital mean used by Management and the Board for capital management.
Currently, MEAB SAL is reviewing its Internal Capital Adequacy Assessment Process by developing many risk meth-odologies and including more sensitive risk measures to capture risk more sufficiently.
In addition to the quantitative and qualitative methods including various stress testing scenarios already used in the assessment, MEAB SAL is adopting the IRB approach within the internal credit risk calculations in order to better measure the quality and riskiness of the portfolios.
Afterward, ICAAP report will be submitted to Senior Management Committee and the Board of Directors for ap-proval.
29
RISK MANAGEMENTRISK MANAGEMENT
MEAB’s Board of Directors strongly believes that adhering to sound corporate governance and reliable internal governance play a significant role in enhancing the Bank’s performance. Working in such an environment and keeping abreast with the industry’s best practices while encouraging proactive risk initiatives, pos-itively contributes to the effectiveness and efficiency of the Bank’s risk manage-ment activities. One of the main risks we incur arises from extending credit to customers through our trading and lending operations. Beyond credit risk, we are also exposed to a range of other risk types such as market, liquidity, opera-tional, reputational and other risks that are inherent to our strategy, product range and geographical coverage.
The Risk Management Department (RMD) reports directly to the Board of Direc-tors. The latter oversees all risk areas and is ultimately responsible for the Bank’s risk profile, which is discussed regularly by the Board with the head of RMD and the top executives at the Bank. Risk management policies set the risk manage-ment’s framework and are updated annually.
MEAB strives for compliance with local regulatory requirements as well as Ba-sel guidelines. The Bank addresses Pillar 1 of Basel by measuring Generic Risk (Credit and Market Risk) using the standardized approaches, and operational risk using the Basic Indicator Approach. The Bank also addresses Pillar 2 of Basel by developing and maintaining an Internal Capital Adequacy Assessment Process (ICAAP). For the specific risk (IRRBB, Concentrations Risk, Reputational Risk and other Risks)
RISK MANAGEMENT FRAMEWORK:
Effective risk management is fundamental to being able to generate profits con-sistently and sustainably and is thus a central part of the financial and operational management of the Group.
Through our risk management framework, we manage enterprise-wide risks, with the objective of maximizing risk-adjusted returns while remaining within our risk appetite.
As part of this framework, we use a set of principles that describe the risk man-agement culture we wish to sustain:
• Balancing risk and return: risk is taken in support of the requirements of our stakeholders, in line with our strategy and within our risk appetite
• Responsibility: it is the responsibility of all employees to ensure that risk taking is disciplined and focused. We take account of our social responsibilities and our commitments to customers in taking risk to produce a return
• Accountability: risk is taken only within agreed authorities and where there is appropriate infrastructure and resource. All risk taking must be transparent, controlled and reported
• Anticipation: we seek to anticipate future risks and ensure awareness of all known risks
• Competitive advantage: we seek to achieve competitive advantage through efficient and effective risk management and control
• CREDIT RISK MANAGEMENT:
Credit risk is the potential for loss due to the failure of counterparty to meet its obligations to pay the BANK in accordance with agreed terms. Credit exposures
30
arise from both the banking and trading books.
Credit risk is managed through a framework that sets out policies and procedures covering the measurement and management of credit risk. There is a clear segregation of duties between transaction originators in the businesses and approvers in the Risk function. All credit exposure limits are approved within a defined credit approval authority framework. The Group manages its credit exposures following the principle of diversification across products, ge-ographies, client and customer segments.
• MARKET RISK:
We recognize market risk as the potential for loss of earnings or economic value due to adverse changes in finan-cial market rates or prices. Our exposure to market risk arises principally from customer-driven transactions. The objective of our market risk policies and processes is to obtain the best balance of risk and return whilst meeting customers’ requirements.
The primary categories of market risk for MEAB are:
• Interest rate risk: arising from changes in yield curves, credit spreads and implied volatilities on interest rate options.
• Currency exchange rate risk: arising from changes in exchange rates and implied volatilities on foreign exchange options.
• Commodity price risk: arising from changes in commodity prices and commodity option implied volatilities; covering energy, precious metals, base metals and agriculture.
• Equity price risk: arising from changes in the prices of equities, equity indices, equity baskets and implied volatilities on related options.
• LIQUIDITY RISK:
Liquidity risk is the risk that we either do not have sufficient financial resources available to meet our obligations as they fall due, or can only access these financial resources at excessive cost.
It is our policy to maintain adequate liquidity at all times, in all geographic locations and for all currencies, and hence to be in a position to meet obligations as they fall due. We manage liquidity risk both on a short-term and medium-term basis. In the short-term, our focus is on ensuring that the cash flow demands can be met where re-quired. In the medium-term, the focus is on ensuring the balance sheet remains structurally sound and aligned to our strategy.
• OPERATIONAL RISK:
Operational risk is the potential for loss arising from the failure of people, process or technology or the impact of external events. Operational risk exposures are managed through a consistent set of management processes that drive risk identification, assessment, control and monitoring. We seek to control operational risks to ensure that operational losses do not cause material damage to the MEAB’s franchise.
• REPUTATIONAL RISK:
Reputational risk is the potential for damage to the MEAB’s franchise, resulting in loss of earnings or adverse impact on market capitalization as a result of stakeholders taking a negative view of the Group or its actions.
Reputational risk could arise from the failure of the Group to effectively mitigate the risks in its businesses including one or more of credit, liquidity, market, regulatory, legal or other operational risk. Damage to the MEAB’s reputation could cause existing clients to reduce or cease to do business with the Group and prospective clients to be reluctant to do business with MEAB.
All employees are responsible for day-to-day identification and management of reputational risk. These respon-sibilities form part of the MEAB Code of Conduct and are further embedded through values-based performance assessments.
31
COMPLIANCE AND AMLCOMPLIANCE AND AML
COMPLIANCE AND CORRESPONDENT BANKING POLICYAND PROCEDURES AT MEAB:
Since its establishment, MEAB has assured adherence to all the rules and regu-lations issued by our Lebanese regulatory who comply with the provisions of the United States patriot act.
We at MEAB strictly comply with the central bank’s circulars and laws concern-ing money laundry and any terrorist financing activities which was regulated by circular #83 and law #318 both issued since 2001 and followed later by several memos and circulars which we strictly comply with.
Proper application of above circulars is reviewed periodically by our external au-ditors, and reported by them to the central bank of Lebanon regulators rep-resented by(special investigation committee and banking control commission known as SIC and BCCL consequently).
From the beginning, a compliance officer has been appointed for making sure that the policies are strictly applied throughout the bank. He coordinates and supervises officers at each branch who report directly to him.
These employees have been well trained to execute the policies. They attend in-house and out-house workshops and seminars to keep them updated with any new issues.
Before opening any account for a potential client, the following processes are taken into consideration:
1. Based on the submitted documents by the client and before opening any account, we ascertain his/her identity, the beneficiary right owner identity, and the activities. In case of personal accounts, the identity card or pass-port presentation is a must. In case the client is a legal entity, registered documents must be presented regarding their status, registration certifi-cate; the identities of the persons empowered to sign on its behalf, and the identity of its legal representative. In case of the presence of an authorized representative, the original power of attorney or a certified copy plus iden-tification must be presented.
2. Potential blacklisted persons are never accepted as clients. We verify these persons by entering their names on special software for identification.
3. Executing banking operations is denied to non-clients.
4. For each outgoing/incoming transfer, verification of the source of funds and their destination must be presented through reliable documents.
5. In case of any suspicious transaction, a report is sent to the special in-vestigation commission (SIC) at the central bank.
6. A trace of funds transferred for at least five years is kept to facilitate any investigation if needed.
7. A risk-based approach is applied to classify the borrowers and opera-tions according to risk rate. Special precautions are taken against those classified as high-risk.
8. MEAB has established (AML and Risk committees). They are supervised by the GM. Their members include the deputy general manager, risk man-ager, operations manager, and the Branch Management department-head.
Finally, in case of existing client got involved in any suspicion we report directly to the regulators who will instruct about the suitable action that should be taken.
• Any staff member can easily access the above policies.
32
• Employees continuously attend workshops and training sessions on the policies and procedures of AML.
• All the staff members are well aware of the bank secrecy law and any investigation against suspicious client should be acted and treated with total confidentiality.
- LEGAL COMPLIANCE:
An independent compliance function “Legal compliance unit” depending on the central bank circular 128 has been established in MEAB to ensure that the bank constantly manages its regulatory and supervisory risks, that is, the risk that the bank does not comply with applicable laws and regulations or supervisory requirements.
This unit takes the role of compliance from the side of ensuring that the law is not transgressed.
And they focus on legislative compliance as well as contract management in addition to the rest of the legal system that faces Banks.
MEAB SAL thru this unit assign specific responsibilities to the various stakeholders in the bank, which may include appointing legal risk managers, abiding by the regulations of Central Bank and meet the international laws, imple-menting controls to mitigate identified legal risks, monitoring legal risks, and reporting on legal risks.
We establish a framework for managing legal risk, and assigning such responsibility to the legal advisor.
The legal advisor would then act as the bank’s legal risk manager.
The responsibility for the legal compliance unit is considered also to be an aspect of the job of every employee, officer, manager, executive or director of a bank.
It may be advisable to have a person or function overseeing and coordinating the management of legal risk in the bank.
So each area within a bank implemented appropriate controls, including appropriate training interventions. Such controls act as far as possible in order to ensure that identified legal risks are mitigated. These processes should be similar to other risk management processes already implemented by the bank.
According to our internal control process the legal compliance unit monitor and examine the business activities to assist management and the board of directors in understanding whether business is being conducted in accor-dance with the law applicable to that bank ,There are a number of methods available to compliance officers for monitoring and then sending their reports on either an immediate or regular basis to the board of directors, audit and risk committees, senior management and other relevant stakeholders in the bank.
- FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA):
During 2012, MEAB commenced an awareness internal campaign to spread knowledge & information about the Foreign Account Tax Compliance Act (FATCA) that was enacted into USA law since the management already decid-ed to enters into an agreement with the IRS and reports its U.S. customers according to the law items.
In addition MEAB placed an action plan and procedure to:
• Identify U.S. accounts;
• Comply with verification and due diligence procedures;
• Perform annual reporting;
• Deduct and withhold 30% from any pass thru payment made to a recalcitrant account holder or another institution without an FFI agreement; and
• Comply with requests for additional information.
MEAB S.A.L.MEAB S.A.L.AUDITORS’ REPORT AND FINANCIAL STATEMENTS AUDITORS’ REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2012FOR THE YEAR ENDED 31 DECEMBER 2012
35
INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF MEAB S.A.L.
REPORT ON THE FINANCIAL STATEMENTS
We have audited the accompanying financial statements of MEAB S.A.L. (“the Bank”) which comprise the balance sheet as at 31 December 2012 and the statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes.
MANAGEMENT’S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
AUDITORS’ RESPONSIBILITY
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing.
Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
The procedures selected depend on the auditors’ judgment, including the as-sessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the ef-fectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION
In our opinion, the accompanying financial statements present fairly, in all mate-rial respects, the financial position of the Bank as of 31 December 2012, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
PricewaterhouseCoopers Grant Thornton
Beirut, Lebanon17 May 2013
3636
BALANCE SHEET AT 31 DECEMBER 2012
2011
LL Million
2012
LL MillionNotesASSETS
Cash and balances with the central bank
Loans and advances to banks and financial institutions
Loans and advances to customers
Debtors by acceptances
Investment securities:
- Fair value through profit or loss
- Fair value through other comprehensive income
- Amortised cost
Property and equipment
Other assets
Total assets
318,593
218,787
1,267,692
3,508
44,806
37
300,375
48,395
2,647
2,204,840
303,916
243,164
784,535
6,408
72,963
37
219,699
31,146
2,622
1,664,490
5
6
7
8
9
9
9
10
11
Deposits from banks and financial institutions
Deposits from customers
Engagements by acceptances
Other liabilities
Current income tax liabilities
Retirement benefit obligations
Total liabilities
Shareholders’ equity
Share capital
Other reserves
Retained earnings
Total shareholders’ equity
Total equity and liabilities
2011
LL Million
2012
LL MillionNotesLIABILITIES
94,938
1,944,882
3,508
3,035
1,767
1,506
2,049,636
122,000
14,639
18,565
155,204
2,204,840
117,101
1,414,720
6,408
1,898
2,055
1,385
1,543,567
82,000
10,977
27,946
120,923
1,664,490
12
13
8
14
25
15
16
17
The financial statements on pages 3 to 67 were authorised for issue by the Board of Directors on 17 May 2013 and were signed on its behalf by:
3737
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2012
Interest and similar income
Interest and similar expenses
Net interest income
Net impairment loss on
loans and advances to customers
Net interest income after impairment
loss on loans and advances to customers
Fee and commission income
Fee and commission expense
Net fee and commission income
Net gain on financial assets
at fair value through profit or loss
Net gain on financial assets at amortised cost
Personnel expenses
Other operating income
Depreciation charge
Other operating expenses
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Total comprehensive income for the year
2011
LL Million
2012
LL MillionNotes
88,373
(70,696)
17,677
(339)
17,338
10,495
(601)
9,894
11,876
197
(9,333)
235
(3,376)
(7,243)
19,588
(2,929)
16,659
-
16,659
62,804
(49,337)
13,467
(690)
12,777
8,073
(492)
7,581
9,992
441
(7,885)
3,114
(2,834)
(5,329)
17,857
(2,741)
15,116
-
15,116
18
18
22
19
19
20
21
23
10
24
25
3838
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2012
41,000
-
41,000
-
28,616
12,384
82,000
82,000
-
17,622
-
22,378
22,378
122,000
4,953
-
4,953
-
-
-
4,953
4,953
-
-
1,512
-
1,512
6,465
6,028
-
6,028
-
-
(4)
6,024
6,024
-
-
2,150
-
2,150
8,174
12,384
-
12,384
-
-
(12,384)
-
-
-
-
22,378
(22,378)
-
-
3,252
(3,252)
-
-
-
-
-
-
-
-
-
-
-
-
11,572
1,254
12,826
15,116
-
4
27,946
27,946
16,659
-
(26,040)
-
(26,040)
18,565
79,189
(1,998)
77,191
15,116
28,616
-
120,923
120,923
16,659
17,622
-
-
-
155,204
Balance at 31 December 2010
Impact of adopting IFRS
9 (note 2.1.1)
Balance at 1 January 2011
Total comprehensive income
Contributions by owners,
recorded directly in equity:
Cash contribution to capital
increase (note16)
Other transactions:
Transfers for capital increase
(note 16)
Balance at 31 December 2011
Balance at 1 January 2012
Total comprehensive income
Contributions by owners,
recorded directly in equity:
Cash contribution to capital
increase (note16)
Other transactions:
Transfer from retained earnings
Transfer for capital increase
(note 16)
Balance at 31 December 2012
Share
Capital
LL
Million
Legal
reserve
LL
Million
Reserve for
unspecified
banking risks
LL
Million
General
reserve
LL
Million
Retained
earnings
LL
Million
Total
LL
Million
Fair value
reserve
LL
Million
3939
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2012
Cash flows from operating activities
Profit before income tax
Adjustments for non-cash items:
Depreciation charge
Loss on sale of property and equipment
Net impairment loss on loans
and advances to customers
Net unrealised losses on
financial assets at fair value through profit or loss
Net transfer to retirement benefit obligations
Deferred income taxes
Balances with the central bank
Investment securities
at fair value through profit or loss
Investment securities at amortised cost
Loans and advances to banks and financial institutions
Loans and advances to customers
Other assets
Deposits from banks and financial institutions
Deposits from customers
Other liabilities
Income taxes paid
Net cash (used in) generated from operating activities
Cash flow from investing activities
Purchase of property and equipment
Net cash used in investing activities
Cash flow from financing activities
Cash contributions to capital
Net cash generated from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2011
LL Million
2012
LL MillionNotes
19,588
3,376
-
339
180
121
-
23,604
(73,732)
27,977
(80,676)
610
(483,496)
(25)
(22,163)
530,162
1,137
(3,217)
(79,819)
(20,625)
(20,625)
17,622
17,622
(82,822)
359,786
276,964
17,857
2,834
-
690
583
568
(134)
22,398
(41,606)
(71,176)
73,081
(313)
(238,402)
(5)
(5,124)
392,731
77
(2,546)
129,115
(4,168)
(4,168)
28,616
28,616
153,563
206,223
359,786
10
22
20
15
25
10
16
26
26
4040
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2012
1- GENERAL INFORMATION
MEAB S.A.L. (“the Bank”) offers a full range of retail, private and commercial banking activities in addition to insur-ance services and financial consulting to its customers. The Bank’s operations cover all districts in Lebanon.
The Bank was incorporated in Lebanon in 1991 and registered at the Commercial Court in Mount Lebanon under No. 58153. It appears under number 110 in the list of Lebanese banks. The address of its registered office is as follows: P.O. Box: 14-5958, Jnah, Beirut – Lebanon.
2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1 BASIS OF PREPARATION
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The financial statements have been prepared under the historical cost convention, as modified by the revalua-tion of financial assets measured at fair value through profit or loss.
The financial statements comprise the balance sheet, the statement of comprehensive income, the statement of changes in equity, the statement of cash flows and the notes.
The Bank classifies its expenses by the nature of expense method.
The financial statements are presented in Lebanese Pounds, which is the Bank’s functional and presentation currency. The figures shown in the financial statements are stated in millions of Lebanese Pounds (LL million) except when otherwise indicated.
The disclosures on risks from financial instruments are presented in the financial risk management report con-tained in Note 3.
The statement of cash flows shows the changes in cash and cash equivalents arising during the year from operating activities, investing activities and financing activities. Cash and cash equivalents include highly liquid investments. Note 26 shows the components of cash and cash equivalents.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s account-ing policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. The cash flows from operating activities are determined by using the indirect method. Net income is therefore adjusted by non-cash items, such as measurement gains or losses, changes in provisions, as well as changes from receivables and liabilities. In addition, all the income and expense from cash transactions that are attrib-utable to investing or financing activities are eliminated. Interest received or paid is classified as operating cash flows.
The cash flows from investing and financing activities are determined by using the direct method. The Bank’s assignment of the cash flows to operating, investing and financing categories depends on the Bank’s business model (management approach).
2.1.1 CHANGES IN ACCOUNTING POLICY AND DISCLOSURES
(A) CHANGES IN ACCOUNTING POLICY AND DISCLOSURES
In accordance with the requirements of the Banking Control Commission circular number 265 dated 23 Sep-tember 2010, the Bank adopted IFRS 9 “Financial Instruments” from 1 January 2011 as well as the related consequential amendments to other IFRSs. In accordance with the transition provisions of the standard, com-parative figures have not been restated.
4141
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Bank has classified the financial instruments as financial instruments at amortised cost, at fair value through profit or loss and at fair value through other comprehensive income.
The impact of adopting IFRS 9 on the financial statements as at 1 January 2011 was an increase in investment securities of LL 2,350 million, an increase in retained earnings of ”Financial Instruments” LL 1,254 million and a decrease in fair value reserve of LL 3,252 million. For more details, refer to note 9.
(B) AMENDED STANDARDS ADOPTED BY THE BANK
The following standards and their amendments are effective for financial years beginning on or after 1 January 2012 but do not have a material impact on the Bank:
IAS 1 (amendment), ‘Financial statement presentation’ regarding other comprehensive income, (effective from 1 July 2012)The main change resulting from these amendments is a requirement for entities to group items presented in ‘other comprehensive income’ (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments).
IAS 12 (amendment), ‘Income taxes’, (effective from 1 January 2012)The amendment currently requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. (C) STANDARDS, AMENDMENTS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE
The following standards and interpretations have been issued and are effective for accounting periods begin-ning on or after 1 January 2013 or later periods and are expected to be relevant to the Bank:
IAS 19 (amendment), ‘Employee benefits’, (effective from 1 January 2013)These amendments eliminate the corridor approach and calculate finance costs on a net funding basis.The impact of this standard is not expected to be significant on the Bank’s financial statements.
IAS 32 (amendment), ‘Financial instruments: Presentation, on asset and liability offsetting’,(effective from 1 January 2014)These amendments clarify the meaning of ‘currently has a legally enforceable right to set-off’.The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous.The impact of this standard is not expected to be significant on the Bank’s financial statements.
IFRS 7 (amendment), ‘Financial instruments: Disclosures, on asset and liability offsetting’, (effective from 1 January 2013)This amendment includes new disclosures to facilitate comparison between those entities that prepare IFRS financial statements to those that prepare financial statements in accordance with US GAAP. The impact of this standard is not expected to be significant on the Bank’s financial statements.
IFRS 13, ‘Fair value measurement’, (effective from 1 January 2013)The standard aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The impact of this standard is not expected to be significant on the Bank’s financial statements
2.2 FOREIGN CURRENCY TRANSLATION
(A) FUNCTIONAL AND PRESENTATION CURRENCY
Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The financial statements are presented in Lebanese Pounds, which is the Bank’s functional and presentation currency.
4242
(B) TRANSACTIONS AND BALANCES
Foreign currency transactions that are denominated, or that require settlement, in a foreign currency are trans-lated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Monetary items denominated in foreign currency are translated with the closing rate as at the reporting date. Non-monetary items measured at historical cost denominated in a foreign currency are translated with the ex-change rate as at the date of initial recognition; non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rates at the date when the fair value was determined.
Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss.
All foreign exchange gains and losses recognised in the income statement are presented net within the cor-responding item. Foreign exchange gains and losses on other comprehensive income items are presented in other comprehensive income within the corresponding item.
Translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in the carrying amount, except impairment, are recognised in other comprehensive income.
Translation differences on non-monetary financial assets and liabilities, such as equities held at fair value through profit or loss, are recognised in profit or loss as part of the fair value gain or loss.
Translation differences on non-monetary financial assets, such as equities classified at fair value through other comprehensive income, are included in the fair value reserve in equity.
2.3 FINANCIAL ASSETS AND LIABILITIES
In accordance with IFRS 9, all financial assets and liabilities have to be recognised in the balance sheet and measured in accordance with their assigned category.
2.3.1 CLASSIFICATION AND MEASUREMENT
(A) DEBT INVESTMENTS
(i) Financial assets at amortised cost
A debt investment is classified as measured at amortised cost only if both of the following criteria are met: the objective of the Bank’s business model is to hold the asset to collect the contractual cash flows; and the con-tractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.
The nature of any derivatives embedded in the debt investment are considered in determining whether the cash flows of the investment are solely payment of principal and interest on the principal outstanding and are not accounted for separately.
(ii) Financial assets at fair value
If either of the two criteria above are not met, the debt instrument is classified as measured at fair value through profit or loss.
(B) EQUITY INVESTMENTS
All equity investments are measured at fair value. Equity investments that are held for trading are measured at fair value through profit or loss. For all other equity investments, the Bank can make an irrevocable election at initial recognition to recognise changes in fair value through other comprehensive income rather than profit or loss.
4343
(C) RECOGNITION, MEASUREMENT AND RECLASSIFICATION
Regular purchases and sales of financial assets are recognised on the trade date, the date on which the Bank commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Bank has transferred substantially all risks and rewards of ownership.
At initial recognition, the Bank measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.
Transaction costs of financial assets carried at fair value though profit or loss are expensed in the income state-ment.
A gain or loss on a debt investment that is subsequently measured at fair value and is not part of a hedging relationship is recognised in profit or loss and presented in the income statement within “Net gain on financial assets at fair value through profit or loss” in the period in which they arise.
A gain or loss on a debt investment that is subsequently measured at amortised cost and is not part of a hedg-ing relationship is recognised in profit or loss when the financial asset is derecognised or impaired and through the amortisation process using the effective interest rate method.
The Bank subsequently measures all equity investments at fair value. Where the Bank’s management has elect-ed to present unrealised and realised fair value gains and losses on equity investments in other comprehensive income, there is no subsequent recycling of fair value gains and losses to profit or loss. Dividends from such investments continue to be recognised in profit or loss as long as they represent a return on investment.
The Bank is required to reclassify all affected debt investments when and only when its business model for managing those assets changes.
THE CLASSIFICATION IN ACCORDANCE WITH IFRS 9 CAN BE SEEN IN THE TABLE BELOW:
Deposits from customers
Category
(as defined by IFRS 9)
Class
(as determined by the Bank)Subclass
Loans and advances to banks and financial institutions
Loans and advances to customers
Held at
amortised cost
Financial
assets
- Retail
- SME
- Corporate
- Housing
- Secured by
commercial real
estate
Investment securities - debt
instruments
Unlisted and
Listed
At fair value
through profit
or loss
At fair value
through other
comprehensive
income
Investment securities - equity
instruments
Investment securities – debt
instruments
Investment securities- equity
instruments
Unlisted and
Listed
Unlisted
Financial
liabilities
Off balance
sheet
Financial
liabilities at
amortised cost
Loan commitments
Guarantees, letters of credit and other financial facilities
Deposits from banks and financial institutions
4444
2.3.2 FINANCIAL LIABILITIES
The Bank holds financial liabilities at amortised cost. Financial liabilities are derecognised when extinguished.
Financial liabilities measured at amortised cost are deposits from banks and financial institutions, deposits from customers, engagements by acceptances and other liabilities.
The fair values of contingent liabilities and irrevocable loan commitments correspond to their carrying amounts.
2.3.3 DERECOGNITION
Financial assets are derecognised when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised when they have been redeemed or otherwise extinguished.
2.4 DETERMINATION OF FAIR VALUE
For financial instruments traded in active markets, the determination of fair values of financial assets and finan-cial liabilities is based on quoted market prices or dealer price quotations.
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly avail-able from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
If the above criteria are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions.
For all other financial instruments, fair value is determined using valuation techniques. In these techniques, fair values are estimated from observable data in respect of similar financial instruments, using models to estimate the present value of expected future cash flows or other valuation techniques, using inputs (for example, LIBOR yield curve, FX rates, volatilities and counterparty spreads) existing at the dates of the balance sheet.
The Bank uses widely recognised valuation models for determining fair values of non-standardised financial instruments of lower complexity, such as foreign exchange, credit default swaps and unlisted Lebanese trea-sury bills (denominated in Lebanese pounds). For these financial instruments, inputs into models are generally market observable.
In cases when the fair value of unlisted equity instruments cannot be determined reliably, the instruments are carried at cost less impairment.
2.5 OFFSETTING FINANCIAL INSTRUMENTS
Financial assets and liabilities are offset and the net amount is reported in the balance sheet when 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.
Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Bank’s trading activity.
4545
2.6 INTEREST INCOME AND EXPENSE
Interest income and expense for all interest-bearing financial instruments are recognised within “interest and similar income” and “interest and similar charges” in the statement of comprehensive income using the effective interest method.
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the pur-pose of measuring the impairment loss.
2.7 FEE AND COMMISSION INCOME
Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan.
Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-apportionate basis. Asset management fees related to investment funds are rec-ognised rateably over the period in which the service is provided. The same principle is applied for wealth man-agement, and custody services that are continuously provided over an extended period of time.
2.8 DIVIDEND INCOME
Dividends are recognised in the statement of comprehensive income when the Bank’s right to receive payment is established.
2.9 IMPAIRMENT OF FINANCIAL ASSETS
(A) ASSETS AT AMORTISED COST
The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired.
A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:
(i) significant financial difficulty of the issuer or obligor;
(ii) a breach of contract, such as a default or delinquency in interest or principal payments;
(iii) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
(iv) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;
(v) the disappearance of an active market for that financial asset because of financial difficulties; or
(vi) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:
- adverse changes in the payment status of borrowers in the portfolio; and- national or local economic conditions that correlate with defaults on the assets in the portfolio.
4646
The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the periods used vary between three months and 12 months; in exceptional cases, longer periods are warranted.
The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteris-tics and 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 have not been incurred) discounted at the financial asset’s original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. The calculation of the present value of the esti-mated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit 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 rel-evant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist.
When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been de-termined.
Impairment charges relating to Loans and advances to banks and financial institutions and customers are clas-sified in “Loan impairment charges” whilst impairment charges relating to investment securities (measured at amortised cost are classified in “Net gain on sale of financial assets at amortised cost”.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objec-tively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of comprehensive income.
(B) RENEGOTIATED LOANS
Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the asset is considered to be past due and disclosed only if renegotiated again.
2.10 IMPAIRMENT OF NON-FINANCIAL ASSETS
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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 identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
4747
2.11 CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisi-tion, including cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less.
2.12 LEASES
The leases entered into by the Bank, are principally operating leases. Leases in which a significant portion of the risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the profit or loss on a straight-line basis over the period of the lease. The total payments made under operating leases are charged to other operating expenses in the statement of comprehensive income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
2.13 PROPERTY AND EQUIPMENT
Buildings comprise mainly branches and offices. All property and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appro-priate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably.
The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to other operating expenses during the financial period in which they are incurred.
Depreciation of assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Years
Buildings
Installations
Vehicles
Computer equipment
Equipment and furniture
Decoration
20
4
8
5
12 - 13
6 - 7
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
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. (Note 2.10).
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are rec-ognised within ‘other operating income’ in the profit or loss.
4848
2.14 INCOME TAX
(A) CURRENT INCOME TAX
Income tax payable is calculated on the basis of the applicable tax law and is recognised as an expense for the period except to the extent that current tax related to items that are charged or credited in other comprehensive income or directly to equity. In these circumstances, current tax is charged or credited to other comprehensive income or to equity.
The Bank’s profit is subject to a tax rate of 15%. In accordance with article 51 of law number 497/2003, a 5% tax is withheld at source on interest received.
The Bank’s tax charge is determined as the higher of corporate tax and tax on interest income withheld during the year.
(B) DEFERRED INCOME TAX
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the date of the balance sheet and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
2.15 RETIREMENT BENEFIT OBLIGATIONS
The Bank is subscribed to the compulsory defined benefit plan of the national social security fund.
IAS 19 ‘Employee benefits’ requirements:
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service or compensation. The liability recognised in the balance sheet in respect of the defined benefit plan is the present value of the defined benefit obligation at the balance sheet date less contributions to the fund.
The present value of the defined benefit obligation is determined by discounting the estimated future cash out-flows using interest rates of government securities that have terms to maturity approximating the terms of the related pension liability.
Local requirements:
The compulsory defined benefit plan varies according to each employee’s final salary and length of service, subject to the completion of a minimum service period. The provision is calculated based on the difference between total indemnities due and total monthly contributions paid to National Social Security Fund (‘’NSSF’’), End-of-Service Indemnity contributions paid to NSSF represents 8.5 percent of employee benefits.
The difference between the carrying amount of the provision and its value in accordance with IAS 19 ‘Employee benefits’ is not significant. 2.16 PROVISIONS
Provisions for restructuring costs and legal claims are recognised when: the Bank has a present legal or con-structive obligation as a result of past events; it is probable than an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. The Bank does not recognise provisions for future operating losses.
Where there is a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense.
4949
2.17 FINANCIAL GUARANTEE CONTRACTS
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities.
Financial guarantees are initially recognised in the financial statements at fair value on the date the guarantee was given. The fair value of a financial guarantee at the time of signature is zero because all guarantees are agreed on arm’s length terms and the value of the premium agreed corresponds to the value of the guarantee obligation.
No receivable for the future premiums is recognised. Subsequent to initial recognition, the bank’s liabilities un-der such guarantees are measured at the higher of the initial amount, less amortisation of fees recognised in accordance with IAS 18, and the best estimate of the amount required to settle the guarantee. These estimates are determined based on experience of similar transactions and history of past losses, supplemented by the judgement of management.
The fee income earned is recognised on a straight-line basis over the life of the guarantee. Any increase in the liability relating to guarantees is reported in the statement of comprehensive income within other operating expenses.
2.18 SHARE CAPITAL
(A) SHARE ISSUE COSTS
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.
(B) DIVIDENDS ON ORDINARY SHARES
Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Bank’s shareholders.Dividends for the year that are declared after the date of the balance sheet are dealt with in the subsequent events note.
(C) CASH CONTRIBUTIONS TO CAPITAL
Cash contributions for increase of capital are recorded under equity.
2.19 COMPARATIVES
Except when a standard or an interpretation permits or requires otherwise, all amounts are reported or dis-closed with comparative information.
Where IAS 8 applies, comparative figures have been adjusted to conform with changes in presentation in the current year.
5050
3- FINANCIAL RISK MANAGEMENT
The Bank’s business involves taking on risks in a targeted manner and managing them professionally. The core functions of the Bank’s risk management are to identify all key risks for the Bank, measure these risks, manage the risk positions and determine capital allocations.
The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and best market practice.
The Bank’s aim is to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank’s financial performance.
The Bank defines risk as the possibility of losses or profits foregone, which may be caused by internal or external factors.
The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments.
The Bank’s Audit committee is responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank.
The Bank’s Audit committee is assisted in these functions by the internal audit department.
The risks arising from financial instruments to which the Bank is exposed are financial risks, which include credit risk, liquidity risk, market risk and operational risk.
3.1 CREDIT RISK
Credit risk is the risk of suffering financial loss, should any of the Bank’s customers, clients or market counter-parties fail to fulfill their contractual obligations to the Bank.
Credit risk arises mainly from commercial and retail loans and advances, and loan commitments arising from such lending activities, such as financial guarantees, letters of credit, and acceptances.
The Bank is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities.
Credit risk is a major risk for the Bank’s business; management therefore carefully manages its exposure to credit risk. The credit risk management is centralised in the risk management department, which reports to the Board of Directors.
3.1.1 CREDIT RISK MEASUREMENT
(A) LOANS AND ADVANCES
To measure the credit risk of loans and advances to customers, the Bank rates its counterparties based on the rating model as set by the Central Bank of Lebanon (“BDL”) basic circular number 58:
- Normal – the loan is expected to be repaid on a timely and consistent basis;- Special mention – the loan is expected to be repaid but the client’s file is not complete;- Sub-standard – the client has a difficult financial condition and might not be in a position to settle the loan in full;- Doubtful – there is no movement in the clients’ balance; and- Bad – the probability of repayment is low and almost nil.
These credit risk measurements reflect the impairment allowances required under IAS 39, which are based on losses that have been incurred at the balance sheet date (the ‘incurred loss model’).
(B) DEBT SECURITIES
External rating such as Standard & Poor’s (S&P) rating or their equivalents are used by the Asset and Liability Committee (supported by the Treasury department) for managing the credit risk exposures.
5151
3.1.2 RISK LIMIT CONTROL AND MITIGATION POLICIES
The Bank manages, limits and controls concentrations of credit risk wherever they are identified – in particular, to individual counterparties and Banks, and to industries and countries.
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers.
Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when consid-ered necessary.
Limits on the level of credit risk by product, industry sector and country are set by the Board of Directors (in compliance with the requirements of BDL basic circular number 48 and intermediary circular number 311).
The exposure to any one borrower including banks and financial institutions is further restricted by sub-limits covering on and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as spot and forward foreign exchange contracts.
Actual exposures against limits are monitored daily.
Lending limits are reviewed in the light of changing market and economic conditions and periodic credit reviews and assessments of probability of default.
Some other specific control and mitigation measures are outlined below:
(A) COLLATERAL
The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advances, which is a common practice.
The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation.
The principal collateral types for loans and advances are:
- Mortgages over residential properties (housing loans);- Mortgages over commercial properties (commercial loans);- Cash collaterals;- Personal, Bank and public sector guarantees;- Salary domiciliation;- Charges over business assets such as premises, inventory, accounts receivable, commercial bills, machinery, vehicles, trade rights; and- Charges over financial instruments such as debt securities and equities.
Longer-term finance and lending to corporate entities are generally secured.
In addition, the Bank will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured.
(B) MASTER NETTING ARRANGEMENTS
The Bank further restricts its exposure to credit losses by entering into master netting arrangements with coun-terparties with which it undertakes a significant volume of transactions.
Master netting arrangements do not generally result in an offset of balance sheet assets and liabilities, as trans-actions are usually settled on a gross basis.
However, the credit risk associated with favorable contracts is reduced by a master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis.
5252
(C) FINANCIAL COVENANTS (FOR CREDIT RELATED COMMITMENTS AND LOAN BOOKS)
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guar-antees and standby letters of credit carry the same credit risk as loans.
Documentary and commercial letters of credit – which are written undertakings by the Bank on behalf of a cus-tomer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions – are collateralised by the underlying shipments of goods to which they relate in addition to a required cash margin set by the credit committee based on the credit rating of each customer (usually a margin of 15% is blocked in compliance with BDL basic circular number 52) and therefore carry less risk than a direct loan.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is poten-tially 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 customers maintaining specific credit standards.
3.1.3 IMPAIRMENT AND PROVISIONING POLICIES
Impairment allowances are recognised for financial reporting purposes only for losses that have been incurred at the date of the statement of financial position based on objective evidence of impairment (refer to note 2.9).
Accordingly, the internal and external rating systems described in note 3.1.1 are used as indicators for impair-ment. The impairment provision shown in the balance sheet at year-end is derived from each of the five internal rating grades.
However, the majority of the impairment provision comes from the bottom two gradings.
The table below shows the percentage of loans and advances and the associated impairment provision for each of the Bank’s internal rating categories:
1, 2. Normal and Special Mention
3. Sub-Standard
4. Doubtful
5. Bad
2012
Loans
and advances
(%)
97.4%
1.0%
1.1%
0.5%
100%
2012
Impairment
provision
(%)
0.2%
9.2%
97.5%
100%
2011
Loans
and advances
(%)
97.4%
0.3%
1.6%
0.7%
100%
2011
Impairment
provision
(%)
0.1%
33.3%
96.9%
100%
The total impairment constitutes 1.77% (2011 – 2.57%) of the total facilities provided to clients.
5353
3.1.4 MAXIMUM EXPOSURE TO CREDIT RISK BEFORE COLLATERAL HELD OR OTHER CREDIT ENHANCEMENTS
Credit risk exposures relating to on-balance sheet assets are as follows:
Maximum exposure
2012
LL Million
2011
LL Million
310,741
218,787
19,436
35,762
860,558
56,722
295,214
3,508
339,208
2,647
2,142,583
298,074
243,164
14,266
51,941
509,413
44,618
164,297
6,408
286,616
1,948
1,620,745
Assets
Balances with the central bank
Loans and advances to banks and financial institutions
Loans and advances to customers
- Retail loans
- Small and medium size enterprises (SMEs)
- Corporate loans
- Housing loans
- Claims secured by commercial real estate
Debtors by acceptances
Investment securities (debt securities)
Other assets
At 31 December
Credit risk exposures relating to off-balance sheet items are as follows:
Maximum exposure
2012
LL Million
26,244
36,764
6,547
69,555
2011
LL Million
39,787
17,154
1,332
58,273
Letters of guarantee
Letters of credit
Commitments and other credit obligations
Total credit commitments
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2012 and 2011, without taking account of any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet.
As shown above, 16% of the total maximum exposure is derived from investment securities (2011 – 18%); 59% is derived from loans and advances to customers (2011 – 48%) and 15% is derived from balances with the central bank (2011 – 18%).
5454
Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loans and advances portfolio and debt securities based on the following:
- 97.4% of the loans and advances to customers is categorised in the top two grades of the internal rating system (2011 – 97.4%);- Corporate loans, which represent the biggest group in the portfolio of loans, are backed by mortgages and cash collaterals;- 95.6% of loans and advances to customers are considered to be neither past due nor impaired (2011 – 93.6%);- Loans and advances granted to related parties consist of 16.4% (2011 – 18.8%) of the total facilities provided to clients. These loans are backed by cash collaterals, accordingly risk of default is nil, and- 78.1% of the Bank’s debt securities portfolio is allocated to Lebanese treasury bills (2011 – 73.9%), of which 67.9% is denominated in Lebanese Pounds (2011 – 60.8%), Accordingly, the risk of default is considered almost nil.
CONCENTRATION OF RISKS OF FINANCIAL ASSETS WITH CREDIT EXPOSURE
The following table breakdowns the Bank’s credit exposure at their carrying amounts (without taking into ac-count any collateral held on other credit support), as categorised by geographical region as of 31 December 2012. For this table, the Bank has allocated exposures to regions based on the country of use of its funds.
Lebanon
LL
Million
Cyprus
LL
Million
Europe
LL
Million
Africa
LL
Million
Other
countries
LL
Million
Total
LL
Million
310,741
121,539
16,831
34,716
411,785
36,638
239,801
1,468
40,283
300,375
2,648
1,516,825
-
-
-
-
196,035
-
-
-
-
-
-
196,035
-
94,901
434
57
16,084
983
682
922
-
-
-
114,063
-
-
1,764
859
155,716
16,304
50,155
176
-
-
-
224,974
-
2,347
407
130
80,938
2,797
4,576
942
4,523
-
-
96,660
310,741
218,787
19,436
35,762
860,558
56,722
295,214
3,508
44,806
300,375
2,648
2,148,557
Assets
Balances with the central bank
Loans and advances to banks
and financial institutions
Loans and advances to customers
- Retail loans
- Small and medium size enterprises
- Corporate loans
- Housing loans
- Claims secured by commercial
real estate
Debtors by acceptances
Investment securities:
Fair value through
profit or loss
Amortised cost
Other assets
At 31 December 2012
5555
Lebanon
LL
Million
Syria
LL
Million
Europe
LL
Million
Africa
LL
Million
Other
countries
LL
Million
Total
LL
Million
298,074
92,797
12,382
42,511
272,193
28,919
163,907
4,611
62,394
219,699
1,948
1,199,435
-
256
960
557
18,793
-
-
-
-
-
-
20,566
-
104,339
112
792
3,676
1,023
-
-
-
-
-
109,942
-
-
639
7,811
122,893
11,702
390
1,336
-
-
-
144,771
-
45,772
173
270
91,858
2,974
-
461
4,523
-
-
146,031
298,074
243,164
14,266
51,941
509,413
44,618
164,297
6,408
66,917
219,699
1,948
1,620,745
Assets
Balances with the central bank
Loans and advances to banks
and financial institutions
Loans and advances to customers
- Retail loans
- Small and medium size enterprises
- Corporate loans
- Housing loans
- Claims secured by commercial
real estate
Debtors by acceptances
Investment securities:
- Fair value through
profit or loss
- Amortised cost
Other assets
At 31 December 2011
5656
Loans and advances are summarised as follows:
2012 2011Loans and
advances to
Customers
LL Million
Loans and
advances to
banks
LL Million
1,233,479
24,284
32,981
1,290,744
(23,052)
1,267,692
(20,332)
(2,720)
(23,052)
243,164
-
-
243,164
-
243,164
-
-
-
218,787
-
-
218,787
-
218,787
-
-
-
Loans and
advances to
Customers
LL Million
Loans and
advances to
banks
LL Million
753,572
32,916
18,967
805,455
(20,920)
784,535
(19,000)
(1,920)
(20,920)
Neither past due nor impaired
Past due but not impaired
Individually impaired
Gross
Less: allowance
for impairment
Net
Individually impaired
Portfolio allowance
Total
The total impairment charge for loans and advances is LL 23.1 billion (2011 – LL 20.9 billion) of which LL 20.3 billion represent the individually impaired loans and the remaining amount of LL 2.7 billion (2011 – LL 1.9 billion) represents the portfolio allowance. Further information of the impairment allowance for loans and advances to customers is provided in note 7.
During the year ended 31 December 2012, the Bank’s total loans and advances increased by 62% as a result of the expansion of the lending business. However, in order to minimise the potential increase of credit risk ex-posure, the Bank focused more on the business with large corporate enterprises, banks with good credit rating and retail customers providing sufficient collateral.
5757
(A) LOANS AND ADVANCES NEITHER PAST DUE NOR IMPAIRED
The credit quality of the portfolio of loans and advances to customers that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank.
At 31 December 2012
Grades:
1. Normal
2. Special mention
Total
At 31 December 2011
Grades:
1. Normal
2. Special mention
Total
1,192,034
41,445
1,233,479
718,991
34,581
753,572
Retail
loans
LL Million
Housing
loans
LL Million
Corporate
loans
LL Million
Small and
medium size
enterprises
LL Million
Claims
secured by
commercial
real estate
LL Million
Total
LL Million
17,642
1,076
18,718
13,764
1,060
14,824
33,554
641
34,195
41,933
9,695
51,628
801,620
29,140
830,760
460,333
18,115
478,388
55,714
-
55,714
43,516
1,101
44,617
283,504
10,588
294,092
159,445
4,610
164,055
(B) LOANS AND ADVANCES PAST DUE BUT NOT IMPAIRED
Late processing and other administrative delays on the side of the borrower can lead to a financial asset being past due but not impaired. Therefore, loans and advances past due are not usually considered impaired, unless other information is available to indicate the contrary. Gross amount of loans and advances by class to custom-ers that were past due but not impaired were as follows:
At 31 December 2012
Grades:
Past due 90-120days
Past due 120-150 days
Past due above 150 days
Total
Fair Value of collaterals by type:
Real estate mortgages
Retail
loans
LL Million
Housing
loans
LL Million
Corporate
loans
LL Million
Small and
medium size
enterprises
LL Million
Claims
secured by
commercial
real estate
LL Million
Total
LL Million
15
1
45
61
-
-
-
1,316
109
1,425
-
-
5,938
2,005
13,489
21,432
12,959
12,959
-
-
-
-
-
-
692
-
674
1,366
1,087
1,087
6,645
3,322
14,317
24,284
14,046
14,046
5858
At 31 December 2011
Grades:
Past due 90-120days
Past due 120-150 days
Past due above 150 days
Total
Fair Value of collaterals by type:
Real estate mortgages
Cash collateral
Retail
loans
LL Million
Housing
loans
LL Million
Corporate
loans
LL Million
Small and
medium size
enterprises
LL Million
Claims
secured by
commercial
real estate
LL Million
Total
LL Million
-
12
15
27
12
-
12
146
-
249
395
200
-
200
9
-
28,557
28,566
10,180
200
10,380
-
-
-
-
-
-
-
3,446
-
482
3,928
2,093
-
2,093
3,601
12
29,303
32,916
12,485
200
12,685
Upon initial recognition of loans and advances, the fair value of cash collaterals and bank guarantees is their carrying amount, whereas the fair value of real estate is based on the valuations performed by independent appraisers.
(C) LOANS AND ADVANCES INDIVIDUALLY IMPAIRED
At 31 December 2012
Gross Amount
Fair value of collateral
At 31 December 2011
Gross Amount
Fair value of collateral
3,146
1,343
1,604
335
18,125
1,809
7,118
-
1,155
1,056
-
-
7,441
2,407
6,921
6,381
32,981
7,050
18,967
8,296
3,114
435
3,324
1,580
Retail
loans
LL Million
Housing
loans
LL Million
Corporate
loans
LL Million
Small and
medium size
enterprises
LL Million
Claims
secured by
commercial
real estate
LL Million
Total
LL Million
(D) LOANS AND ADVANCES RENEGOTIATED
Restructuring activities include extended payment arrangements, approved external management plans, mod-ification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans.
5959
3.1.6 DEBT SECURITIES AND LOANS AND ADVANCES TO BANKS AND FINANCIAL INSTITUTIONS
The table below presents an analysis of debt securities by rating agency designation at 31 December 2012 and 2011, based on Standard & Poor’s ratings:
-
-
-
44,806
-
44,806
-
-
-
72,963
-
72,963
-
-
-
-
37
37
-
-
-
-
-
-
-
-
-
300,375
-
300,375
-
-
-
219,699
-
219,699
1,666
4,268
603
61,463
150,787
218,787
11,524
36,303
1,210
108,960
85,167
243,164
1,666
4,268
603
406,644
150,824
564,005
11,524
36,303
1,210
401,622
85,167
535,826
At 31 December 2012
From AA-
to AA+
From A- to
A+
From BB-
to BB+
From B- to
B+
Not rated
Total
At 31 December 2011
From AA-
to AA+
From A- to
A+
From BB-
to BB+
From B- to
B+
Not Rated
Total
Fair
value
through
profit
or loss
LL
Million
Fair
Value
through
OCI
LL
Million
Amortised
cost
LL
Million
Loans
and
advances
to banks
LL
Million
Total
LL
Million
Investment securities
6060
3.2 MARKET RISK
The Bank takes on exposure to market risks, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements and changes in the level of volatility of market rates or prices such as interest rates, foreign exchange rates and equity prices. The Bank separates exposures to market risk into either trading or non-trading portfolios.
The market risks arising from trading and non-trading activities are monitored by the Treasury department. Regular reports are submitted to the Board of Directors and members of Asset Liability Committee (“ALCO”).Trading portfolios include those positions arising from market-making transactions where the Bank acts as prin-cipal 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 investment securities.
3.2.1 MARKET RISK MEASUREMENT TECHNIQUES
Effective identification and monitoring of market risk is essential for maintaining stable profit. This is carried out by the Bank’s risk management department. The Bank’s treasury is responsible for managing the exposure within the risk exposure limits set out in the policy as approved by ALCO and the Board of Directors. This policy sets out the nature of the market risks that may be taken along with aggregate risk limits, and stipulates the procedures, instruments and controls to be used in managing market risk. The major measurement techniques used to measure and control market risk are outlined below.
SENSITIVITY ANALYSIS
A technique used to determine how different values of an independent variable will impact a particular de-pendent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond’s price. Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key predictions.
The Bank performs this analysis for each type of market risk to which the Bank is exposed at each reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date. 3.2.2 SENSITIVITY ANALYSIS
If the foreign currency exchange rate increases by 1%, the net effect gain/(loss) is as follows:
2012
Effect on
USD
LL Million
361
Effect on
EUR
LL Million
3
2011
Effect on
USD
LL Million
222
Effect on
EUR
LL Million
18Effect on profit
3.2.3 FOREIGN EXCHANGE RISK
The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its balance sheet and cash flows. The Board of Directors sets limits on the level of exposure by currency as follows:
- Net exposure by currencies should not exceed 1% of Tier I capital.- Gross exposure (in absolute terms) by currencies should not exceed 40% of Tier I capital.
These exposure limits are set out in compliance with the limits set by the BDL (basic circular no. 32) and closely monitored by the Bank’s Treasury department on a daily basis.
The table below summarises the Bank’s exposure to foreign currency exchange rate risk at31 December 2012 and 2011. Included in the table are the Bank’s financial instruments at carrying amounts, categorised by currency.
6161
At 31 December 2012
Assets
Cash and balances with the central bank
Loans and advances to banks and
financial institutions
Loans and advances to customers
Debtors by acceptances
Investment securities:
- Fair value through profit or loss
- Fair value through other
comprehensive income
Amortised cost
Other assets
Total financial assets
Liabilities
Deposits from banks and Financial
institutions
Deposits from customers
Engagements by Acceptances
Other liabilities
Total financial liabilities
Net on-balance sheet position
Credit commitments
LBP
LL Million
USD
LL Million
EUR
LL Million
Other
LL Million
Total
LL Million
61,528
22,100
242,264
-
15,937
20
202,386
39,501
583,736
(705)
(473,862)
-
(1,161)
(475,728)
108,008
10,567
188,220
171,466
832,746
2,503
24,943
17
95,962
(35,851)
1,280,006
(50,212)
(1,222,942)
(2,503)
(1,695)
(1,277,352)
2,654
67,788
68,526
23,396
158,735
1,005
3,926
-
2,027
(272)
257,343
(10,266)
(246,194)
(1,005)
(34)
(257,499)
(156)
29,929
319
1,825
33,947
-
-
-
-
(731)
35,360
(33,755)
(1,884)
-
(145)
(35,784)
(424)
-
318,593
218,787
1,267,692
3,508
44,806
37
300,375
2,647
2,156,445
(94,938)
1,944,882
(3,508)
(3,035)
(2,046,363)
110,082
99,284
6262
At 31 December 2011
Assets
Cash and balances with the central bank
Loans and advances to banks and
financial institutions
Loans and advances to customers
Debtors by acceptances
Investment securities:
- Fair value through profit or loss
- Fair value through other comprehensive income
- Amortised cost
Other assets
Total financial assets
Liabilities
Deposits from banks and Financial
institutions
Deposits from customers
Engagements by Acceptances
Other liabilities
Total financial liabilities
Net on-balance sheet position
Credit commitments
LBP
LL Million
USD
LL Million
EUR
LL Million
Other
LL Million
Total
LL Million
73,247
11,113
123,011
-
51,153
20
113,835
2,361
374,740
(116)
(306,564)
-
(1,187)
(307,867)
66,873
5,063
156,719
130,748
536,748
4,791
17,894
17
102,874
256
950,047
(46,770)
(868,694)
(4,791)
(463)
(920,718)
29,329
36,500
73,809
99,864
88,363
1,617
3,916
-
2,990
5
270,564
(30,322)
(238,185)
(1,617)
(248)
(270,372)
192
15,032
141
1,439
36,413
-
-
-
-
-
37,993
(39,893)
(1,277)
-
-
(41,170)
(3,177)
1,678
303,916
243,164
784,535
6,408
72,963
37
219,699
2,622
1,633,344
(117,101)
(1,414,720)
(6,408)
(1,898)
(1,540,127)
93,217
58,273
3.2.4 INTEREST RATE RISK
Cash flow interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in market interest rates. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce losses in the event that unexpected movements arise. The Board sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily by the Treasury department.
The table below summarises the Bank’s exposure to interest rate risks. It includes the Bank’s financial instru-ments at carrying amounts, categorised by the earlier of contractual repricing (for example for floating rate notes).
6363
95,396
112,081
106,085
-
-
-
2,998
-
316,560
(38,098)
(1,320,928)
-
-
(1,359,026)
(1,042,466)
60,584
-
99,243
-
-
-
11,462
-
171,289
(15,075)
(125,621)
-
-
(140,696)
30,593
64,281
717
729,013
-
-
-
35,892
-
829,903
-
(293,142)
-
-
(293,142)
536,761
-
-
302,895
-
-
-
171,230
-
474,125
-
(87,367)
-
-
(87,367)
386,758
10,188
-
19,057
-
-
-
74,664
-
103,909
-
-
-
-
-
103,909
88,144
105,989
11,399
3,508
44,806
37
4,129
2,647
260,659
(41,765)
(117,824)
(3,508)
(3,035)
(166,132)
94,527
318,593
218,787
1,267,692
3,508
44,806
37
300,375
2,647
2,156,445
(94,938)
(1,944,882)
(3,508)
(3,035)
(2,046,363)
At 31 December 2012
Assets
Cash and balances
with the central bank
Loans and advances to banks
and financial institutions
Loans and advances to customers
Debtors by acceptances
Investment securities:
- Fair value through profit or loss
- Fair value through other
comprehensive income
Amortised cost
Other assets
Total financial assets
Liabilities
Deposits from banks
and financial institutions
Deposits from customers
Engagements by acceptances
Other liabilities
Total financial liabilities
Total interest repricing gap
Up to
1 month
LL
Million
1 - 3
months
LL
Million
3 - 12
months
LL
Million
1 - 5
years
LL
Million
Non
interest
bearing
LL
Million
Total
LL
Million
Over
5 years
LL
Million
6464
249,807
221,933
232,006
2,455
2,502
-
2,000
-
710,703
(109,231)
(692,719)
(2,455)
-
(804,405)
(93,702)
25,628
9,743
46,280
2,658
1,508
-
5,500
-
91,317
-
(408,273)
(2,658)
-
(410,931)
(319,614)
9,045
-
255,866
1,295
30,404
-
33,111
-
329,721
(7,538)
(233,179)
(1,295)
-
(242,012)
87,709
13,568
-
230,909
-
19,981
-
108,858
-
373,316
-
(71,068)
-
-
(71,068)
302,248
-
-
18,357
-
11,329
-
67,725
-
97,411
-
-
-
-
-
97,411
5,868
11,488
1,117
-
7,239
37
2,505
2,622
30,876
(332)
(9,481)
-
(1,898)
(11,711)
19,165
303,916
243,164
784,535
6,408
72,963
37
219,699
2,622
1,633,344
(117,101)
(1,414,720)
(6,408)
(1,898)
(1,540,127)
At 31 December 2011
Assets
Cash and balances
with the central bank
Loans and advances to banks
and financial institutions
Loans and advances to customers
Debtors by acceptances
Investment securities:
- Fair value
through profit or loss
- Fair value through other
comprehensive income
- Amortised cost
Other assets
Total financial assets
Liabilities
Deposits from banks
and financial institutions
Deposits from customers
Engagements by acceptances
Other liabilities
Total financial liabilities
Total interest repricing gap
Up to
1 month
LL
Million
1 - 3
months
LL
Million
3 - 12
months
LL
Million
1 - 5
years
LL
Million
Non
interest
bearing
LL
Million
Total
LL
Million
Over
5 years
LL
Million
6565
3.3 LIQUIDITY RISK
Liquidity risk is the risk that the Bank is unable to meet its obligations when they fall due as a result of customer deposits being withdrawn, cash requirements from contractual commitments, or other cash outflows, such as debt maturities.
Such outflows would deplete available cash resources for client lending, trading activities and investments.
In extreme circumstances, lack of liquidity could result in reductions in the balance sheet and sales of assets, or potentially an inability to fulfill lending commitments.
The risk that the Bank will be unable to do so is inherent in all banking operations and can be affected by a range of institution-specific and market-wide events including, but not limited to merger and acquisition activity, systemic shocks and natural disasters.
3.3.1 LIQUIDITY RISK MANAGEMENT PROCESS
The Bank’s liquidity management process, as carried out within the Bank and monitored by the Treasury de-partment, includes:
- Day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The Bank maintains an active presence in global money markets to enable this to happen;- Maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow;- Monitoring the liquidity ratios of the balance sheet against internal and regulatory requirements (BDL basic circulars number 72, 73, 84, 86 and 87); and- Managing the concentration and profile of debt maturities.
Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month respectively, as these are key periods for liquidity management. The starting point for those projections is an analysis of the contractual maturity of the financial liabilities and the expected collection date of the financial assets (note 3.3.3).
3.3.2 FUNDING APPROACH
Sources of liquidity are regularly set by the Treasury department, while the risk management department and the ALCO monitor those sources to maintain a wide diversification by currency, geography, provider, product and term.
3.3.3 NON-DERIVATIVE FINANCIAL LIABILITIES AND ASSETS HELD FOR MANAGING LIQUIDITY RISK
The table below presents the cash flows payable by the Bank under non-derivative financial liabilities and as-sets held for managing liquidity risk by remaining contractual maturities at the date of the balance sheet. The amounts disclosed in the table are the contractual undiscounted cash flows, whereas the Bank manages the liquidity risk based on a different basis (refer to note 3.3.1), not resulting in a significantly different analysis.
6666
79,863
1,438,752
3,162
734
1,522,511
403,435
109,564
702,200
2,455
267
814,486
491,906
15,075
125,621
214
1,449
142,359
60,740
-
408,273
2,658
1,631
412,562
37,217
-
293,142
132
158
293,432
68,271
7,537
233,179
1,295
-
242,011
39,998
-
87,367
-
694
88,061
15,159
-
71,068
-
-
71,068
33,548
-
-
-
-
-
34,581
-
-
-
-
-
17,375
94,938
1,944,882
3,508
3,035
2,046,363
582,186
117,101
1,414,720
6,408
1,898
1,540,127
620,044
At 31 December 2012
Liabilities
Deposits from banks
and financial institutions
Deposits from customers
Engagements by acceptances
Other liabilities
Total liabilities
(contractual maturity dates)
Assets held for managing liquidity risk
(contractual maturity dates)
At 31 December 2011
Liabilities
Deposits from banks
and financial institutions
Deposits from customers
Engagements by acceptances
Other liabilities
Total liabilities
(contractual maturity date)
Assets held for managing liquidity risk
(contractual maturity dates)
Up to
1 month
LL
Million
1 - 3
months
LL
Million
3 - 12
months
LL
Million
Over
5 years
LL
Million
Total
LL
Million
1 - 5
years
LL
Million
3.3.4 ASSETS HELD FOR MANAGING LIQUIDITY RISK
The Bank holds a diversified portfolio of cash and high-quality liquid securities to support payment obligations and contingent funding in a stressed market environment. The Bank’s assets held for managing liquidity risk comprises:
• Cash and balances with the central bank;• Loans and advances to banks and financial institutions; and • Investment securities measured at fair value through profit or loss.
6767
3.4 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
(A) FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE
The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s balance sheet at their fair value:
Financial assets
Balances with the central bank
Loans and advances to banks and
financial institutions
Loans and advances to customers
Debtors by acceptances
Investment securities:
Amortised cost
Financial liabilities
Deposits from banks and financial institutions
Deposits from customers
Engagements by acceptances
Carrying value Fair value
LL Million
2012
LL Million
2011
LL Million
2012
LL Million
2011
310,741
218,033
1,267,692
3,508
300,375
2,100,349
94,938
1,944,882
3,508
2,043,328
298,074
243,164
784,535
6,408
219,699
1,551,880
117,101
1,414,720
6,408
1,538,229
310,741
218,033
1,292,200
3,508
300,958
2,125,440
94,938
1,938,689
3,508
2,037,135
298,074
243,164
777,395
6,408
225,133
1,550,174
117,101
1,411,974
6,408
1,535,483
(i) Loans and advances to banks and financial institutions and balances with the central bank
The carrying amount of floating rate placements, overnight deposits, items in the course of collection, and cur-rent accounts (i.e. maturity is less than 1 year) is a reasonable approximation of fair value.
The estimated fair value of fixed interest bearing deposits is based on discounted cash flows using prevailing money-market interest rates for debts with similar credit risk and remaining maturity. (ii) Loans and advances to customers
Loans and advances are net of charges for impairment. The estimated fair value of loans and advances rep-resents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value.
The carrying amount of overdrafts and impaired loans is a reasonable approximation of fair value.
(iii) Investment securities
The fair value is based on market prices or broker/dealer price quotations. Where this information is not avail-able, fair value is estimated using quoted market prices for securities with similar credit, maturity, and yield characteristics.
(iv) Deposits from banks and deposits from customers
The estimated fair value of deposits with no stated maturity, which includesnon-interest-bearing deposits, is the amount repayable on demand.
The estimated fair value of fixed interest-bearing deposits is based on discounted cash flows using interest rates for new debts with similar remaining maturity.
6868
(B) FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE
See note 2.4 “Determination of fair value”.
(C) FAIR VALUE HIERARCHY
IFRS 7 requires an entity to classify its financial instruments held at fair value according to a hierarchy that re-flects the significance of observable market inputs. The classification of a financial instrument is based on the lowest level input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are defined below:
- Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges.- Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the majority of the OTC derivative contracts, traded loans issued structured debt. The sources of input parameters like LIBOR yield curve or counterparty credit risk are Bloomberg and Reuters.- Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components.
This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible. 3.4.1 ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
The following table shows the Bank’s financial assets that are measured at fair value analysed by level within the fair value hierarchy.
At 31 December 2012
Financial assets held at fair value through profit or loss:
-Debt securities
-Equity securities at fair value through profit or loss
Equity securities at fair value through other comprehensive
income
Total assets
At 31 December 2011
Financial assets held at fair value through profit or loss:
-Debt securities
-Equity securities at fair value through profit or loss
Equity securities at fair value through other comprehensive
income
Total assets
22,896
3,109
-
26,005
15,764
6,046
-
21,810
15,937
2,864
37
18,838
51,153
-
37
51,190
38,833
5,973
37
44,843
66,917
6,046
37
73,000
Level 1
LL Million
Level 2
LL Million
Total
LL Million
6969
3.5 OPERATIONAL RISK
Operational risk is the risk of loss arising from inadequate or failed internal processes, systems failure, human error, or from external events. When controls fail to perform, it can lead to legal or regulatory implications, or financial /reputational loss.
3.6 CAPITAL MANAGEMENT
The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the Balance sheet, are:
- To comply with the capital requirements set by the regulators of the banking markets where the Bank operates;- To apply mitigation techniques that may help lower the capital requirements;- To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders; and- To maintain a strong capital base to support the development of its business.
Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by BDL, for supervi-sory purposes. The required information is filed with the Authority on a semi-annual basis.
The Bank maintains a ratio of total regulatory capital to its risk-weighted assets (the ‘Basel Ratio’) above a min-imum level agreed with the authority which takes into account the risk profile of the Bank.
The regulatory capital requirements are strictly observed when managing economic capital.
The Bank’s regulatory capital is managed by its Board of Directors and monitored by the Risk Management department.
In accordance with BDL circular no. 43, the Bank’s capital is constituted of the following:
- Tier I capital: common shares, cash contributions (net of goodwill), unspecified banking reserve, legal reserve, retained earnings and reserves created by appropriations of retained earnings (except for real estate revaluation reserve); and- Tier II capital: subordinated loans, revaluation surplus on real estate (as approved by BDL), preferred shares (except non-cumulative) and 50% of the fair value reserve relating to financial assets designated at fair value through other comprehensive income.
Any shortfalls in required provisions for non-performing loans and any violation of the set limit on granting facil-ities to related parties are also deducted from the regulatory capital.
The risk weighted assets are measured using the ‘standardised approach’ (SA) for credit risk. Risk weights are assigned to assets on and off balance sheet items according to their asset class and credit assessment. For the determination of credit assessments, Standard & Poor’s (S&P) rating is used. Any eligible collateral and netting agreements are taken into account for calculating risk-weighted assets.
7070
The Bank’s capital adequacy level according to the requirements of Basel II is as follows:
Tier I Capital
Share capital and cash contributions to capital
Legal reserve
Reserve for unidentified banking risks
Retained earnings
Total regulatory Capital (a)
Risk - weighted assets
Credit risk
Operational risk
Market risk
Total risk - weighted assets (b)
Basel ratio (a)/(b)
2011
LL Million
2012
LL Million
122,000
6,465
8,174
1,906
138,545
1,293,297
59,999
2,852
1,356,148
10.22%
82,000
4,953
6,024
11,572
104,549
1,024,394
46,744
3,577
1,074,715
9.73%
4- CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The Bank’s financial statements and its financial result are influenced by accounting policies, assumptions, esti-mates and management judgment, which necessarily have to be made in the course of preparation of the financial statements.
The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. All estimates and assumptions required in conformity with IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgments are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events.
Accounting policies and management’s judgments for certain items are especially critical for the Bank’s results and financial situation due to their materiality.
(A) IMPAIRMENT LOSSES ON LOANS AND ADVANCES
The Bank reviews its loan portfolios to assess impairment on a quarterly basis. In determining whether an impair-ment loss should be recorded in the statement of comprehensive income, the Bank makes judgments as to whether there is any observable data indicating an impairment trigger followed by measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio.
This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for assets with credit risk characteristics and ob-jective evidence of impairment similar to those in the portfolio when scheduling its future cash flows.
The methodology and assumptions used for estimating both the amount and timing of future cash flows are re-viewed regularly to reduce any differences between loss estimates and actual loss experience.
In addition to the specific impairment provision on individually significant loans and advances, the Bank recognis-es collective impairment provision in respect of loans and advances which have not yet been provided for under specific impairment and for which credit risk progressed since the loans and advances were granted. The amount of provision is determined based on historical losses within each credit rating category. The amount of provision is adjusted regularly to reflect current economical changes.
This credit rating takes into consideration the sovereign risk, economic sector risk, technological downturns, in addition to any specific indicative factors or decrease in future cash flow.
7171
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments where no active market exists or where quoted prices are not otherwise available are determined by using discounted cash flow model. These cash flow models are based on underlying market prices for interest rates. Where market data is not available for all elements of a derivative’s valuation, extrap-olation and interpolation of existing data has been used. These models are validated and periodically reviewed by the financial control department. All models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data however, areas such as credit risk (both own credit risk and counterparty risk), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
Refer to note 3.2.2 for sensitivity information for financial instruments.
5- CASH AND BALANCES WITH THE CENTRAL BANK
Cash in hand
Balances with Central bank of Lebanon other than mandatory reserve deposits
included in cash and cash equivalents (note 26)
Mandatory reserve deposit with the Central Bank of Lebanon (a)
Interest receivable
Current
Non Current
2011
LL Million
2012
LL Million
7,852
53,835
61,687
256,555
351
318,593
308,405
10,188
318,593
5,842
114,900
120,742
183,147
27
303,916
290,348
13,568
303,916
(a) In accordance with BDL regulations, the Bank is required to constitute mandatory reserves in Lebanese Pounds (“LL reserve”) of 15% to 25% of the customers deposit accounts denominated in Lebanese Pounds.
The Bank is also required to constitute mandatory reserves in foreign currency (“FCY reserve”) calculated on the basis of 15% of customers deposit accounts denominated in foreign currency.
Mandatory reserve deposits are not available for use in the Bank’s day-to-day operations. Cash in hand and LL reserves are non-interest bearing. Other money-market placements and FCY reserves bear interest at floating–rates interests.
7272
6- LOANS AND ADVANCES TO BANKS AND FINANCIAL INSTITUTIONS
Items in course of collection
Term deposits with original maturities less than 3 months
Current accounts
Included in cash and cash equivalents (note 26)
Time deposits with a financial institution
Loans and advances to banks and financial institutions
Interest receivable
2011
LL Million
2012
LL Million
10,509
108,534
96,234
215,277
2,700
758
52
218,787
11,429
113,116
114,499
239,044
-
4,061
59
243,164
Loans and advances to banks and financial institutions are current with remaining maturities less than one year.
7- LOANS AND ADVANCES TO CUSTOMERS
Advances against cash collateral
Term loans
Overdrafts
Loans and advances to related parties (note 28)
Direct bills
Discounted bills
Creditors accidentally debtors
Net debit against credit accounts – speculation accounts
Interest receivable
Non-performing loans:
- Substandard
- Doubtful and bad
Gross loans and advances to customers
Less: allowance for impairment
Net loans and advances to customers
Current
Non-current
2011
LL Million
2012
LL Million
361,592
331,075
249,447
208,153
85,788
12,293
6,700
1,466
1,250
13,685
19,295
1,290,744
(23,052)
1,267,692
945,740
321,952
1,267,692
110,113
178,725
263,642
147,654
51,403
13,526
16,506
2,068
283
2,675
18,860
805,455
(20,920)
784,535
535,489
249,046
784,535
7373
The movement of allowance for impairment is summarised as follows:
2012 2011Collective
allowance
for
impairment
LL Million
Specific
allowance
for
impairment
LL Million
Collective
allowance
for
impairment
LL Million
Collective
allowance
for
impairment
LL Million
1,920
800
-
-
-
2,720
1,320
600
-
-
-
1,920
17,259
252
1,696
(165)
(42)
19,000
19,000
71
1,765
(530)
26
20,332
Balance at 1 January
Increase in impairment allowances (note 22)
Unrealised interest
Release of provisions (note 22)
Exchange differences
Balance at 31 December
8- DEBTORS BY ACCEPTANCES
Balance
2012
LL Million
3,508
2011
LL Million
6,408
Debtors by acceptances represent the customers’ liability to the Bank in respect of advances and commercial bills that should be settled by the Bank on their behalf. These acceptances correspond to negotiated deferred payment of import letters of credit. This caption is offset by “Engagements by acceptances” caption classified under liabilities.
All debtors and engagements by acceptances balances are current.
7474
9- INVESTMENT SECURITIES
2011
LL Million
2012
LL Million
3,109
2,864
5,973
18,529
4,367
22,896
15,937
38,833
44,806
20
17
37
164,095
66,862
3,035
66,383
300,375
345,218
34,830
310,388
345,218
3,731
2,315
6,046
11,393
4,371
15,764
51,153
66,917
72,963
20
17
37
77,635
65,135
5,265
71,664
219,699
292,699
113,645
179,054
292,699
Securities at fair value through profit or lossEquity securities:- Listed
- Unlisted
Total equity securities
Debt securities:Listed:
Lebanese Treasury bills - Eurobonds
Debt security linked to credit risk
Unlisted
Lebanese Treasury bills
Total debt securities
Total securities at fair value through profit or loss
Securities at fair value through other comprehensive income
Equity securities – unlisted:
-Participation in Kafalat S.A.L.
-Participation in Panacea Health Club
Total securities at fair value through other comprehensive income
Securities at amortised cost
Debt securities – unlisted
- Lebanese treasury bills
- Certificates of deposit with the Central Bank of Lebanon
- Certificates of deposit with banks and financial institutions
Debt securities – listed
-Lebanese treasury bills
Total securities at amortised cost
Total investment securities
Current
Non-current
7575
At 1 January 2011, the Bank early adopted IFRS 9 (refer to note 2.1) and the impact on the financial statements was as follows:
Lebanese treasury bills
Lebanese treasury bills
Equity securities
Equity securities
Other debt securities
Lebanese treasury bills
Certificates of deposit
Certificates of deposit
Total investment securities
Difference
LL
Million
Book value
IFRS 9
LL
Million
IAS 39
LL
MillionIAS 39 IFRS 9
Classification
51,887
107,006
3,565
37
162,495
4,370
72,531
3,066
75,597
54,723
297,185
51,887
104,656
3,565
37
160,145
4,370
72,531
3,066
75,597
54,723
294,835
-
2,350
-
-
2,350
-
-
-
-
-
2,350
Available for sale
Available for sale
Available for sale
Available for sale
Fair value throughprofit or loss
Held to maturity
Held to maturity
Loans andreceivables
Fair value throughprofit or loss
Amortised cost
Fair value throughprofit or loss
Fair Value throughOCI
Fair value throughprofit or loss
Amortised cost
Amortised cost
Amortised cost
Financial assets
7676
The movement in investment securities may be summarised as follows:
4,370
56,194
6,749
(314)
7,432
-
(1,468)
72,963
-
(33,900)
6,935
-
(152)
(649)
(469)
78
44,806
162,495
(162,495)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
297,185
(2,350)
138,737
(139,446)
24,040
(23,999)
(1,468)
292,699
127,909
(74,541)
9,950
(9,950)
(739)
281
(469)
78
345,218
54,723
(54,723)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
75,597
(75,597)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
234,234
131,988
(139,132)
16,608
(23,999)
-
219,699
127,909
(40,641)
3,015
(9,950
(587)
930
-
-
300,375
-
37
-
-
-
-
-
37
-
-
-
-
-
-
-
-
37
At 1 January 2011
Effect of IFRS 9 adoption
Additions
Disposals
(sale and redemption)
Securities swapped in
Securities swapped out
Net change in fair value
At 31 December 2011
Additions
Disposals (sale and redemption)
Securities swapped in
(note 21)
Securities swapped out
(note 21)
Net change in
unamortised premium/discount
Net change in interest
receivable
Net change in fair value
Difference of exchange
At 31 December 2012
Fair value
through
profit or loss
LL Million
Available
for sale
LL Million
Loans &
Receivables
LL Million
Held-to-
maturity
LL Million
Fair value
through
OCI
LL Million
Total
LL Million
Amortised
cost
LL Million
7777
10- PROPERTY AND EQUIPMENT
Buildings
LL Million
Installations
LL Million
Vehicles
LL Million
Equipment
& furniture
LL Million
Work in
progress
LL Million
Total
LL Million
Decoration
LL Million
28,077
(2,751)
25,326
25,326
1,110
-
(1,459)
24,977
29,187
(4,210)
24,977
851
(657)
194
194
54
380
(158)
470
1,285
(815)
470
380
(118)
262
262
1
-
(95)
168
381
(213)
168
4,483
(2,832)
1,651
1,651
44
1,410
(553)
2,552
5,920
(3,368)
2,552
4,877
(3,260)
1,617
1,617
4
1,011
(569)
2,063
5,892
(3,829)
2,063
763
-
763
763
2,954
(2,801)
-
916
916
-
916
39,431
(9,618)
29,813
29,813
4,167
-
(2,834)
31,146
43,581
(12,435)
31,146
At 1 January 2010
Cost
Accumulated
depreciation
Net book amount
Year ended 31 December 2011
Opening net book amount
Additions
transfers
Depreciation charge
Closing net book amount
At 31 December 2011
Cost
Accumulated
depreciation
Net book amount
Buildings
LL Million
Installations
LL Million
Vehicles
LL Million
Equipment
& furniture
LL Million
Work in
progress
LL Million
Total
LL Million
Decoration
LL Million
24,977
16,678
-
(1,737)
39,918
45,865
(5,947)
39,918
470
676
-
(274)
872
1,961
(1,089)
872
168
1
-
(95)
74
382
(308)
74
2,552
888
79
(629)
2,890
6,887
(3,997)
2,890
2,063
745
837
(641)
3,004
7,474
(4,470)
3,004
916
1,637
(916)
-
1,637
1,637
-
1,637
31,146
20,625
-
(3,376)
48,395
64,206
(15,811)
48,395
Year ended 31 December 2012
Opening net book amount
Additions
Transfers
Depreciation charge
Closing net book amount
At 31 December 2012
Cost
Accumulated depreciation
Net book amount
7878
11- OTHER ASSETS
Blocked deposit at the Lebanese treasury (a)
Due from the national social security fund (b)
Prepaid expences
Other receivables
Current
Non-current
2011
LL Million
2012
LL Million
1,500
577
380
165
2,622
1,122
1,500
2,622
1,500
664
371
112
2,647
1,147
1,500
2,647
(a) The blocked deposit at the Lebanese treasury represents a blocked guarantee under Article 132 of the Code of Money and Credit paid upon the establishment of the Bank. This deposit can only be withdrawn upon liquidation of the Bank.
(b) This caption represents medical expenses paid to the Bank’s employees, which should be reimbursed by the national social security fund.
12- DEPOSITS FROM BANKS AND FINANCIAL INSTITUTIONS
Current deposits
Term deposits
Interest payable
2011
LL Million
2012
LL Million
43,201
51,707
30
94,938
42,931
73,838
30
117,101
All deposits from banks and financial institutions are current.
7979
13- DEPOSITS FROM CUSTOMERS
Term deposits
Saving accounts (a)
Deposits held as collateral (b)
Due to related parties (note 28)
Sight deposits (c)
Items in course of payment
Interest payable
Current
Non - current
a. Saving accountsSaving accounts - term
Saving accounts - sight
b. Deposits held as collateralCash collateral against advances
Margins against speculation accounts,
letters of guarantees and letters of credit
c. Sight depositsCurrent and checking accounts
Debtors accidentally creditors
2011
LL Million
2012
LL Million
632,458
439,621
433,860
319,748
103,216
5,812
10,167
1,944,882
1,857,515
87,367
1,944,882
426,137
13,484
439,621
410,522
23,338
433,860
93,375
9,841
103,216
478,375
308,230
184,811
320,824
107,298
5,700
9,482
1,414,720
1,343,652
71,068
1,414,720
297,667
10,563
308,230
152,054
32,757
184,811
100,829
6,469
107,298
Deposits include coded accounts amounting to LL 306 billion as of 31 December 2012 (2011 - LL 265 billion).
These accounts were opened under the provisions of Article 3 of the Banking Secrecy Law dated 3 September 1956 governing banks in Lebanon. As per the terms of this article, the Bank, under normal conditions, is not permit-ted to disclose the identities of coded account depositors to third parties including its auditors.
8080
14- OTHER LIABILITIES
2011
LL Million
2012
LL Million
Accured expenses
Deferred revenue
Taxes payable
Due to the national social security fund
Other liabilities
1,665
506
410
299
155
3,035
746
503
259
267
123
1,898
Other liabilities are expected to be settled within no more than 12 months of the date of the balance sheet.
15- RETIREMENT BENEFIT OBLIGATIONS
2011
LL Million
2012
LL Million
Balance at 1 January
Charge for the year (note 23)
Benefits paid
Balance at 31 December
1,385
164
(43)
1,506
817
604
(36)
1,385
16- SHARE CAPITAL
At 31 December 2012 the Bank’s share capital consists of 12.2 million issued and fully paid shares with a nominal value of LL 10,000 each.
As per the resolution of the extraordinary General Assembly meeting held on 24 July 2012, the Bank increased its share capital from LL 82 billion to LL 122 billion. The increase was performed through a transfer from other reserves for an amount of LL 22.38 billion and through a cash injection of LL 17.62 billion. The increase was approved by the Central Council of the Central Bank of Lebanon on 7 September 2012.
8181
17- OTHER RESERVES
Interest and similar income
Loans and advances:
- Banks
- Customers
- Related parties (note 28)
Investment securities:
- Amortised cost
Interest and similar expenses
Deposits from banks and financial institutions
Deposits from customers
Deposits from related parties (note 28)
Net interest income
2011
LL Million
2012
LL Million
2,490
68,984
4,704
76,178
12,195
12,195
88,373
(1,725)
(64,564)
(4,407)
(70,696)
17,677
1,724
45,789
4,486
51,999
10,805
10,805
62,804
(2,522)
(42,272)
4,543)
(49,337)
13,467
8282
(A) LEGAL RESERVE
In accordance with the Code of Commerce and Article 132 of the Code of Money and Credit, the Bank is required to transfer 10% of net profit from retained earnings to legal reserve until it reaches one-third of the Bank’s capital. This reserve is not available for distribution to shareholders.
(B) RESERVE FOR UNIDENTIFIED BANKING RISKS
According to the Central Bank of Lebanon basic circular number 50, the Bank is required to appropriate part of its profit to constitute a reserve for unidentified banking risks.
This reserve represents the minimum of 2 per mil of the total denominator of the items specified in article 1 of the Central Bank of Lebanon article number 44.
This reserve should be constituted in Lebanese Pounds and foreign currencies based on the percentage of total risk-weighted assets on and off balance sheet. In addition, this reserve should not be less than 1.25% of the denominator at the end of the tenth financial year (i.e. 31 December 2007) and 2% of the denominator at the end of the twentieth financial year (i.e. 31 December 2017). This reserve is considered part of the Bank’s Tier I capital and is not available for distribution.
The Bank appropriates the reserve for unidentified banking risks from the current year’s net profit.
18- NET INTEREST INCOME
Interest and similar income
Loans and advances:
- Banks
- Customers
- Related parties (note 28)
Investment securities:
- Amortised cost
Interest and similar expenses
Deposits from banks and financial institutions
Deposits from customers
Deposits from related parties (note 28)
Net interest income
2011
LL Million
2012
LL Million
2,490
68,984
4,704
76,178
12,195
12,195
88,373
(1,725)
(64,564)
(4,407)
(70,696)
17,677
1,724
45,789
4,486
51,999
10,805
10,805
62,804
(2,522)
(42,272)
4,543)
(49,337)
13,467
8383
19- NET FEE AND COMMISSION INCOME
Fee and commission income
Credit related fees and commission
Commission on statements of account
Portfolio and other management fees
Commission on checks
Commission on opening and closing of saving accounts
Commission on trading operations
Commission on cash deposits
Commission on swift
Other commissions
Fee and commission expense
Brokerage fees paid
Other commissions
Net fee and commission income
8,082
614
343
270
235
229
168
88
466
10,495
(314)
(287)
(601)
9,894
6,360
236
465
183
131
159
149
58
332
8,073
(345)
(147)
(492)
7,581
20- NET GAIN ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
2012
LL Million
2011
LL Million
Interest income on financial assets
at fair value through profit or loss
Net gains on foreign exchange transactions (a)
Dividend income
Net unrealised losses on financial assets
at fair value through profit or loss
10,224
1,442
390
(180)
11,876
8,536
1,728
311
(583)
9,992
(a) The caption “net gains on foreign exchange transactions” includes gains and losses from the translation of for-eign currency assets and liabilities.
8484
21- NET GAIN ON FINANCIAL ASSETS AT AMORTISED COST
2011
LL Million
2012
LL Million
Gain on sale of financial assets at amortised cost 197 441
During the year ended 31 December 2012, the Bank exchanged Lebanese treasury bills denominated in foreign currencies (“Eurobonds”), having original maturities of 12 March 2013 and 20 June 2013 with a carrying value of LL 9,196 million and LL 754 million respectively, with Eurobonds maturing on 27 January 2023 and 29 November 2027. These transactions resulted in a gain of LL 197 million.
22- NET IMPAIRMENT LOSS ON LOANS AND ADVANCES TO CUSTOMERS
2011
LL Million
2012
LL Million
Provision for loans and advances to customers (note 7)
Write back of provisions (note 7)
Write back of provisions for unrealised interest
Collective provision (note 7)
Write off of provisions
(71)
530
295
(800)
(293)
(339)
(252)
165
52
(600)
(55)
(690)
23- PERSONNEL EXPENSES
2011
LL Million
2012
LL Million
Salaries and wages
Social security costs
Scholarship
Transportation costs
Medical insurance expenses
Retirement benefit obligation - defined benefit plan (note 15)
Training
Other benefits
6,948
942
451
400
249
164
83
96
9,333
5,179
760
379
404
254
604
76
229
7,885
The average number of persons employed by the Bank was 183 (2011 - 165).
8585
24- OTHER OPERATING EXPENSES
2011
LL Million
2012
LL Million
Directors' remuneration (note 28)
Professional fees
Water, electricity and telecommunication expenses
Deposits guarantee premiums
Rent expense
Office supplies and printings
Repairs and maintenance expenses
Cleaning
Security expenses
Capital increase fees
Advertising and promotions
Subscription fees
Municipality tax on premises
Cash transit expenses
Travel and transportation expenses
Other expenses
1,117
1,068
986
707
526
403
348
306
264
260
238
235
111
97
92
485
7,243
480
414
865
513
543
358
342
240
174
267
150
180
120
57
97
529
5,329
25- INCOME TAX EXPENSE
In accordance with article 51 of law number 497/2003, a 5% tax is withheld at source on interest received. The Bank’s tax charge is determined as the higher of corporate tax and tax on interest income withheld during the year. During 2012, the 5% tax withheld on interest received of LL 743 million (2011 – LL 685 million) was lower than the Bank’s corporate income tax of LL 2.9 billion (2011 – LL 2.7 billion).
2011
LL Million
2012
LL Million
Profit before tax
Income tax at statutory rate of 15%
Tax effects of:
Provisions
Net unrealised losses on
financial assets at fair value through profit or loss
Dividend income
Other
Income tax expense
19,588
2,938
240
27
(59)
(217)
2,929
17,857
2,679
95
87
(47)
(73)
2,741
86
The movement in the income tax liability is summarised as follows:
2011
LL Million
2012
LL Million
At 1 January
Provision set up during the year
Settlements
At 31 December
2,055
2,929
(3,217)
1,767
1,860
2,741
(2,546)
2,055
The fiscal years 2011 and 2012 remain subject to examination by the income tax authorities.
26- CASH AND CASH EQUIVALENTS
Cash and balances with the central bank (note 5)
Loans and advances to banks and financial institutions (note 6)
61,687
215,277
276,964
120,742
239,044
359,786
2011
LL Million
2012
LL Million
27- CONTINGENT LIABILITIES AND COMMITMENTS
(A) LEGAL PROCEEDINGS:
There were a number of legal proceedings involving claims by and against the Bank at31 December 2012, which arose in the ordinary course of business. The Bank does not expect the ultimate resolu-tion of any of the proceedings to which Bank is party to have a significantly adverse effect on the financial position of the Bank. Accordingly, no provision has been booked.
(B) COMMITMENTS RELATED TO CREDIT FACILITIES
Commitments related to credit facilities comprise commitments to extend credit facilities, confirmed letters of credit and guarantees to accommodate for the needs of the Bank’s customers. Commitments to extend credit facilities represent contractual agreements to extend loans and credits to be determined automatically. Commitments reg-ularly have set maturity dates or are subject to specific conditions for termination and usually require the payment of commissions. Assuming that the commitments might end before using the funds, total commitments might not represent the future cash flows.
The schedule below presents the off-balance sheet balances of the Bank’s Commitments related to credit facilities:
Letters of guarantee - clients
Confirmed documentary credit - import
Foreign currency forward contracts
31,128
36,764
5
67,897
39,787
17,154
3
56,944
2011
LL Million
2012
LL Million
8787
28- RELATED PARTIES TRANSACTIONS
The Bank engages in banking transactions with related parties in the normal course of business. Transactions with related parties comprise loans, deposits, guarantees and financial commitments.
The volume of related party transactions, outstanding balances at year end, and relating income and expenses for the year are detailed as follows:
(A) LOANS AND ADVANCES TO RELATED PARTIES
2011
LL Million
2012
LL Million
Individuals - Shareholders and close family members
Related companies
Key management personnel
Loans outstanding at year end (note 7)
97,962
108,841
1,350
208,153
79,403
66,727
1,524
147,654
No provisions have been recognised in respect of loans given to related parties (2011 – nil).
Loans and advances to related parties include facilities amounting to LL 206 billion (2011 – LL 142 billion) secured by cash collaterals.
(B) DEPOSITS FROM RELATED PARTIES
2011
LL Million
2012
LL Million
Deposits at year end (note 13) 319,748 320,824
(C) OTHER BALANCES WITH RELATED PARTIES
Letters of guarantee and letters of credit 9,099 3,015
(D) OTHER TRANSACTIONS WITH RELATED PARTIES
- Interest and similar income (note 18)
- Interest and similar charges (note 18)
- Rent expense
- Directors' remuneration (note 24)
4,704
(4,407)
466
1,117
4,486
(4,543)
466
480
During 2012, the Bank purchased several plots of estate number 5228/7 and 3405 /9-10 Chiyah (Chiyah branch), estate number 4394 / B-4 Bir Hassan (Bir Hassan branch), 2055 Nabatieh (Nabatieh branch), 4469 /4 -6-7 Burj Hammoud (Dora branch) and 655 /5-15-24 Dakerman (Saida branch) from the Bank’s shareholders for an amount of LL 17 billion.
8888
NETWORKNETWORK
MAIN BRANCHHejejj Bldg., Adnan El Hakim Str. JnahP.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 1 826740 - Fax: +961 1 841190 / 1Manager: Mr. Mohammad Youssef
VERDUN BRANCHAzar Bldg., Verdun Str.P.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 1 790203 / 4 / 7 / 8 / 9 - Fax: +961 1 790205Manager: Miss Sawsan Hashem
TYR BRANCHEl Roz Bldg., Jounblat RoundaboutP.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 7 345333 - Fax: +961 7 345666Manager: Mr. Chawki Ghandour
CHIAH BRANCHHejeij Bldg., Mouawad EntranceP.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 1 277883 - Fax: +961 1 277634Manager: Mr. Amin Jaber
NABATIEH BRANCHHejejj Bldg., Mahmoud Fakih Str.P.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 7 766222 - Fax: +961 7 769005Manager: Mr. Walid Bdeir
DORA BRANCHMoucarri Center., Dora HighwayP.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 1 266665 / 7 - Fax: +961 1 249052Manager: Mrs. Rola Hajeij Ftouni
BIR HASSAN BRANCHL Wissam Bldg., Al Safarat Str.P.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 1 837612 / 857612 / 827712 - Fax: +961 1 839628Manager: Mr. Kamal Saad
SAIDA BRANCHDandashli Center, Elia Gross RoadP.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 7 723601 / 7 / 8 / 9 - Fax: +961 7 723602Manager: Mrs. Nada Khalife
MAJADEL BRANCHAmin Ayoub Center., Majadel HighwayP.O.Box: 14-5958 Beirut 1105 2080 LebanonTel: +961 7 411100 / 411211 / 411976 / 411916Manager: Mr. Said Hejeij
GHOBEIRYHassan Kanj Str., Assad El Assad Al Nasr 9 Bldg.P.O.Box: 14-5958 Beirut 1105 2080, LebanonTel.: 961 1 543436 / 557438 / 557439 - Fax.: 961 1 543437Manager: Mr. Hassan Mortada
8989
CORRESPONDENTCORRESPONDENTBANKSBANKS
ADDRESS
73, Avenue Des Champs- Elysees75008 Paris - France
38-40 Avenue Des Champs Elysees - 75008 Paris - France
49 - 51 Avenue George V - 75008 Paris – France
BancoSabadell Landscape Bldg - Poligon CanSant Joan - Sena,12 / 08190 San Cugat del Valles
C/ Serrano, 59 - 28006 – Madrid - Spain
Asia Street 60, West Bay - P.O. BOX: 28000, DOHA - QATAR
Rue Montoyer 10 BTE 3 - 1000 Bruxelles - Belgique
Ufficio Assegni Estero - Strada 3 Palazzo B7 It20090 Assago Milanofiori - Italy
Viale Bodio 29B3 - 20158 Milano (MI) – ITALY
Via Quintino Sella,2 - 00187 - P.O. Box: 290 - Roma – Italy
17A Curzon Street - London W1J 5HS - United Kingdom
195 Brompton Road - London SW3 1LZ - United Kingdom
Rue de la Fontaine 1, Case Postale 3069-1211Geneve 3 – Suisse
Quai Des Bergues 11 - Case Postale 1211 - Geneve 1 - Suisse
Jurgen - Pontoplatz 1- 60301 - Frankfurt AM Main - Germany
Grueneburgweg 2 – 60332 - Frankfurt – Germany
Am Hof 2 - A - 1010 Vienna - Austria
level 4, 219-223 Castlereagh Strt. - GPO Box: 4288 SydneyNSW 2000 – Australia
Al Maktoum Street - Al Meedan Tower - P.O. BOX: 4207 - Dubai - U.A.E
Sheikh Ahmed Ben Rached - Al Maktoum Bldg. - 124/110 AlMaktoum Road - Deira - Dubai -U.A.E.
P.O. BOX: 1250 - Dubai - U.A.E.
Al Rashid Center, Al Dahbab St - P.O.Box 1467 - Riyadh 1143.
Buyukdere Cad 129 – Mecidiyekoy- 34394 ISTANBUL - TURKEY
Yakacik Mevkii Adnan Kahveci - Cad No. 139 / 81450Yakacik / Kartal - Istanbul – Turkey
Kucukcsu Cad, Akcakoca Sokak No. 6 - Umraniye 34768 -Istanbul – Turkey
Head Office - 2nd Floor No. 4 Bank of Ceylon Mawatha
608 Al Yarmouk District - Street No. 1 Building No. 20 - Bagdad - Iraq
BANK’S NAME
Bank Audi saradar France - Paris
BLOM Bank France - Paris
Al Khaliji France S.A.
BANCOSABADELL
BMCE Bank International
Al Khaliji Commercial Bank (Al Khaliji) Qsc
Byblos Bank Europe - Brussels
Intesa Sanpaolo SPA - Milano
UniCredito Italiano SPA
Banca UBAE SPA
Bank Of Beirut (UK) Ltd - London
BLOM Bank (France) - London Office
BCP - Banque De Commerce EtDe Placements - Geneva
BNP PARIBAS (Suisse) SA - Geneve
Commerzbank Bank AG - Frankfurt
Bank of Beirut (UK) Ltd - Frankfurt Bran.
Unicredit Bank Austria
Beirut of Sydney
Al Khaliji France S.A. - Dubai
Credit Europe Bank
BLOM Bank (France) – Dubai
Mashreqbank psc
Saudi Hollandi Bank – Riyadh
FINANSBANK A.S. – Istanbul
Turkiye Finans Katilim Bankasi - A.S.
Asya Katilim Bankasi A.S.
Bank Of Ceylon – Colombo
Trade Bank Of Iraq
COUNTRY
France
France
France
Spain
Spain
Qatar
Belgium
Italy
Italy
Italy
U.K.
U.K.
Switzerland
Switzerland
Germany
Germany
Austria
Australia
U.A.E
U.A.E
U.A.E
U.A.E
Saudi Arabia
Turkey
Turkey
Turkey
Srilanka
Iraq
AWARDSAWARDS
9292
9393
