Banque Saudi Fransi: Consolidated Financial Statements - 31 December 2017

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1. BANQUESAUDIFRANSI CONSOLIDATEDFINANCIALSTATEMENTS FORTHEYEARENDED 31DECEMBER2017
11. BANQUE SAUDI FRANSI CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at December 31 , 2017 and 2016 SAR’ 000 Notes 2017 2016 ASSETS Cash and balances with SAMA Due from banks and other financial institutions Investments, net Positive fair value derivative Loans and advances, net Investment in associates Property and equipment, net Other assets 4 5 6 11 7 8 9 10 Total assets 22,393,237 18,758,295 25,324,895 2,032,823 121,940,394 76,049 736,927 1,666,261 20,344,108 25,338,632 24,074,379 1,741,695 129,457,869 113,220 716,656 1,642,150 192,928,881 203,428,709 2,963,273 150,954,187 1,197,475 2,002,565 4,150,000 4,288,532 158,458,472 1,678,105 6,726,112 2,578,485 161,267,500 173,729,706 12,053,572 12,053,572 982,857 (285,172) 6,628,963 355,237 (127,648) 12,053,572 11,805,933 982,857 (863,584) 5,139,428 647,995 (67,198) 31,661,381 29,699,003 192,928,881 203,428,709 LIABILITIES AND EQUITY Liabilities Due to banks and other financial institutions Customers’ deposits Negative fair value derivative Debt securities and sukuks Other liabilities 12 13 11 14 15 Total liabilities Equity Share capital Statutory reserve General reserve Other reserves Retained earnings Proposed dividend Treasury Shares 16 17 17 18 28 38 Total equity Total liabilities and equity The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 1
12. BANQUE SAUDI FRANSI CONSOLIDATED STATEMENT OF INCOME For the years ended December 31 , 2017 and 2016 SAR’ 000 Notes 2017 2016 6,604,506 1,904,836 5,970,622 1,714,435 4,699,670 4,256,187 1,119,318 356,131 270,837 8,078 27,684 94,489 1,363,990 395,862 200,394 16,024 50,483 116,774 6,576,207 6,399,714 1,384,543 178,819 151,123 560,688 661,113 3,500 112,105 1,392,408 173,589 137,706 433,903 768,374 (20,980) 11,270 Total operating expenses 3,051,891 2,896,270 Net operating income 3,524,316 3,503,444 7,568 6,790 3,531,884 3,510,234 2.94 2.91 Special commission income Special commission expense 20 20 Net special commission income Fees and commission income, net Exchange income, net Trading income, net Dividend income Gains on non trading investments, net Other operating income 21 22 23 24 25 Total operating income Salaries and employee related expenses Rent and premises related expenses Depreciation and amortization Other general and administrative expenses Impairment charge for credit losses, net Impairment charge for investment, net Other operating expenses 30 9 7 26 Share in earnings of associates, net 8 Net income for the year Basic and diluted earnings per share (in SAR) 27 The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 2
13. BANQUE SAUDI FRANSI CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the years ended December 31 , 2017 and 2016 SAR’ 000 Notes Net income for the year 2017 2016 3,531,884 3,510,234 Other comprehensive income (loss): Items that can be recycled back to consolidated statement of income in subsequent periods Available for sale investments Net change in the fair value 18 6,459 14,157 Net amount transferred to consolidated statement of income 18 (27,684) (50,483) Effective portion of change in the fair value 18 813,761 279,876 Net amount transferred to consolidated statement of income 18 (214,124) (12,335) 4,110,296 3,741,449 Cash flow hedge Total comprehensive income for the year The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 3
14. BANQUE SAUDI FRANSI CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the years ended December 31 , 2017 and 2016 Attributable to equity holders of the Bank Other reserves SAR’ 000 Notes General reserve Available for sales investments Retained earnings Cash flow hedges Proposed dividend Share capital Statutory reserve 12,053,572 11,805,933 982,857 5,139,428 31,343 (894,927) 647,995 (67,198) 29,699,003 - - - 3,531,884 - - - - 3,531,884 Treasury Shares Total 2017 Balance at the beginning of the year Total comprehensive income for the year Net Income for the year Net change in the fair value 18 - - - - 6,459 813,761 - - 820,220 Net amount transferred to consolidated statement of income 18 - - - - (27,684) (214,124) - - (241,808) 17 - 247,639 - (247,639) - - - - - - - - (91,047) - - (32,791) - (123,838) Transfer to statutory reserve Zakat liability - - - (207,795) - - (84,838) - (292,633) Interim net dividend for 2017 Tax liability 28 - - - (1,140,631) - - - - (1,140,631) Final dividend paid 2016 28 - - - - - - (530,366) - (530,366) Final proposed dividend for 2017 28 - - - (355,237) - - 355,237 - - Net change in Treasury shares 38 - - - - - - - (60,450) (60,450) 12,053,572 12,053,572 982,857 6,628,963 10,118 (295,290) 355,237 (127,648) 31,661,381 12,053,572 10,928,375 982,857 3,886,042 67,669 (1,162,468) 727,754 - 27,483,801 - - - 3,510,234 - - - - 3,510,234 Balance at the end of the year 2016 Balance at the beginning of the year Total comprehensive income for the year Net Income for the year Net change in the fair value 18 - - - - 14,157 279,876 - - 294,033 Net amount transferred to consolidated statement of income 18 - - - - (50,483) (12,335) - - (62,818) 17 - 877,558 - (877,558) - - - - - - (731,295) Transfer to statutory reserve Interim gross dividend for 2016 28 - - - (731,295) - - - Final dividend paid 2015 28 - - - - - - (727,754) - (727,754) - - - (647,995) - - 647,995 - - - - - - - - - (67,198) (67,198) 12,053,572 11,805,933 982,857 5,139,428 31,343 (894,927) 647,995 (67,198) 29,699,003 Final proposed dividend for 2016 Treasury shares purchased Balance at the end of the year 38 The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 4
15. BANQUE SAUDI FRANSI CONSOLIDATED STATEMENT OF CASH FLOWS For the years ended December 31 , 2017 and 2016 SAR’ 000 Notes 2017 2016 3,531,884 3,510,234 2,189 (27,684) 151,123 (247) 661,113 3,500 (7,568) 604 14,245 (50,483) 137,706 (71) 768,374 (6,790) 1,944 4,314,914 4,375,159 (89,662) 7,662,000 193,566 (11,787,000) 46,866 7,016,133 286,986 33,069 (6,460,018) 1,541,531 Due to banks and other financial institutions Customers’ deposits Other liabilities (1,325,259) (7,504,285) 628,958 2,731,342 16,606,372 (1,848,289) Net cash from operating activities 11,036,651 5,385,732 Proceeds from sale and maturities of non trading investments Purchase of non trading investments Dividend received from subsidiaries Acquisition of property and equipment Proceeds from sale of property and equipment 4,347,322 (5,599,195) (171,537) 390 10,351,194 (6,040,505) 293 (163,471) 309 Net cash (used in ) / from investing activities (1,423,020) 4,147,820 (4,712,500) (71,375) (1,788,626) (67,198) (1,459,049) Net cash used in financing activities (6,572,501) (1,526,247) Increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year 3,041,130 24,674,790 8,007,305 16,667,485 27,715,920 6,632,361 1,991,129 24,674,790 5,603,177 1,430,113 578,412 231,215 OPERATING ACTIVITIES Net income for the year Adjustments to reconcile net income to net cash from / (used in) operating activities Accretion of Premium on non-trading investments, net Gains on non trading investments, net Depreciation and amortization Gains on disposal of property and equipment, net Impairment charge for credit losses, net Impairment charge for Investment Share in earnings from associates, net Change in fair value of financial instruments 9 7 8 Net increase / (decrease) in operating assets: Statutory deposit with SAMA Due from banks and other financial institutions maturing after ninety days from the date of acquisition Investments held as FVIS (trading) Loans and advances, net Other assets 4 Net increase / (decrease) in operating liabilities: INVESTING ACTIVITIES FINANCING ACTIVITIES Repayment of debt securities and sukuks Purchase of treasury shares Dividends paid 28 Cash and cash equivalents at the end of the year Special commission received during the year Special commission paid during the year Supplemental non cash information Net changes in fair value and transfers to consolidated statement of income 29 The accompanying notes 1 to 43 form an integral part of these consolidated financial statements 5
16. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 1 General Banque Saudi Fransi (BSF the Bank) is a Saudi Joint Stock Company established by Royal Decree No. M/23 dated Jumada Al Thani 17, 1397H (corresponding to June 4, 1977). The Bank formally commenced its activities on Muharram 1, 1398H (corresponding to December 11, 1977), by taking over the operations of the Banque de l’Indochine et de Suez in the Kingdom of Saudi Arabia. The Bank operates under Commercial Registration Number. 1010073368 dated Safar 4, 1410H (corresponding to September 5, 1989), through its 86 branches (2016: 86 branches) in the Kingdom of Saudi Arabia, with 3,072 employees (2016: 3,233). The objective of the Bank is to provide a full range of banking services, including Islamic products, which are approved and supervised by an independent Shariah Board. The Bank’s Head Office is located at King Saud Road, P.O. Box 56006, Riyadh 11554, Kingdom of Saudi Arabia. The Bank owns a subsidiary, Saudi Fransi Capital (100% share in equity) engaged in brokerage, asset management and corporate finance business. The Bank owns Saudi Fransi Insurance Agency (SAFIA), Saudi Fransi for Finance Leasing and Sofinco Saudi Fransi having 100% share in equity. The Bank owns 100% (95% direct ownership and 5 % indirect ownership through its subsidiary) share in Sakan Real Estate Financing. These Subsidiaries are incorporated in the Kingdom of Saudi Arabia. The Bank also formed a subsidiary, BSF Markets Limited registered in Cayman Islands having 100% share in equity. The objective of this company is derivative trading and Repo activities. The Bank has investments in associates and owns 27% shareholding in Banque BEMO Saudi Fransi, incorporated in Syria and 32.5% shareholding in Saudi Fransi Corporative Insurance Company (Allianz Saudi Fransi) incorporated in the Kingdom of Saudi Arabia. Sofinco Saudi Fransi’s consumer finance business and related net assets have been transferred to Saudi Fransi for Finance Leasing. The shareholders of the Sofinco Saudi Fransi have agreed to liquidate the company after finalizing the transfer of the assets and liabilities and settlement of all legal obligations. 2 Basis of preparation a) Statement of compliance The consolidated financial statements of the Bank have been prepared; i) in accordance with ‘International Financial Reporting Standards (IFRS) as modified by the Saudi Arabian Monetary Authority (“SAMA”) for the accounting of zakat and income tax’, which requires, adoption of all IFRSs as issued by the International Accounting Standards Board (“IASB”) except for the application of International Accounting Standard (IAS) 12 - “Income Taxes” and IFRIC 21 - “Levies” so far as these relate to zakat and income tax. As per the SAMA Circular no. 381000074519 dated April 11, 2017 and subsequent amendments through certain clarifications relating to the accounting for zakat and income tax (“SAMA Circular”), the Zakat and Income tax are to be accrued on a quarterly basis through shareholders equity under retained earnings. ii) in compliance with the provisions of Banking Control Law, the applicable provisions of Regulations for Companies in the Kingdom of Saudi Arabia and the Article of Association of the Bank. Further, the above SAMA Circular has also repealed the existing Accounting Standards for Commercial Banks, as promulgated by SAMA, and are no longer applicable from January 1, 2017. Refer note 3 (u) for the accounting policy of zakat and income tax and note 28 for the impact of change in the accounting policy resulting from the SAMA Circular. 6
17. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 2 Basis of preparation (continued) b) Basis of measurement and presentation These consolidated financial statements are prepared under the cost /amortized cost convention except for the measurement at fair value of derivatives, available for sale and Fair Value through Income Statement (FVIS) financial instruments. In addition, as explained fully in the related notes, financial assets and liabilities that are hedged in a fair value hedging relationship and otherwise are adjusted to record changes in fair value attributable to the risks that are being hedged. The statement of financial position is stated broadly in order of liquidity. c) Functional and presentation currency These consolidated financial statements are presented in Saudi Arabian Riyals (SAR), which is the Bank’s functional currency. Except as indicated, financial information presented in SAR has been rounded off to the nearest thousands. d) Critical accounting judgments, estimates and assumptions The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting judgments, estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. Such judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors, including obtaining professional advice and expectations of future events that are believed to be reasonable under the circumstances. Significant areas where management has used estimates, assumptions or exercised judgments are as follows: The key assumptions concerning the future and other key sources of estimating uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Bank based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances beyond the control of the Bank. Such changes are reflected in the assumptions when they occur. (i) Impairment for credit losses on loans and advances The Bank reviews its loan portfolio to assess specific impairment on a monthly basis. In determining whether an impairment loss should be recorded, the Bank makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group. Management uses estimates based on historical loss experience for loans with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when estimating its cash flows. The methodology and assumptions used for estimating both the amount and the timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A collective component of the total allowance is established for: - groups of homogeneous loans that are not considered individually significant; and - groups of assets that are individually significant but that were not found to be individually impaired (loss incurred but not reported’ or IBNR). The collective allowance for groups of homogeneous loans is established using statistical methods such as scorecard model to determine the probability of default for non-retail obligors. In assessing the need for collective loss allowance for non retail loans management considers factors such as credit quality as reflected by the internal rating model. The internal rating is in turn based on qualitative parameters (economic environment, market position 7
18. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 2 Basis of preparation (continued) of borrower client, quality of financial statements, management) and quantitative financial ratios (leverage, profitability, debt servicing, and liquidity). The collective provision is the product of EAD * PD*LGD Where EAD = Exposure at default PD = Probability of default LGD = Loss given default The collective impairment model relies on the ratings sourced from the internal rating models and the associated probability of default. The impairment loss on loans and advances is disclosed in more detail in Note 7 and Note 33. (ii) Fair value measurements The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable market data, however areas such as credit risk (both own and counter party), volatilities and correlations require management to make estimates. For example, judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset backed securities. Changes in assumptions about these factors could affect reported fair values of financial instruments. (iii) Impairment of available for sale equity and debt instruments investments The Bank exercises judgment to consider impairment on the available-for-sale equity and debt investments at each reporting date. This includes determination of a significant or prolonged decline in the fair value below its cost related to equity instrument. In assessing whether it is significant, the decline in fair value is evaluated against the original cost of the asset at initial recognition. In assessing whether it is prolonged, the decline is evaluated against the period in which the fair value of the asset has been below its original cost at initial recognition. In making an assessment of whether an investment in debt instruments is impaired, the Group considers the factors such as market’s assessment of creditworthiness as reflected in the bond yields, rating agencies’ assessments of creditworthiness, country’s ability to access the capital markets for new debt issuance and probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness. In making this judgement, the Bank evaluates among other factors, the normal volatility in share/debt price, deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. (iv) Classification of held to maturity investments The Bank follows the guidance or requirement of International Accounting Standard (IAS) 39 “Financial Instruments: Recognition and Measurement” on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity. 8
19. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 2 Basis of preparation (continued) (v) Determination of control over investees The control indicators set out in note 3 (b) are subject to management’s judgements that can have a significant effect in the case of the Group’s interests in investments funds. Investment funds The Group acts as Fund Manager to a number of investment funds. Determining whether the Group controls such an investment fund usually focuses on the assessment of the aggregate economic interests of the Group in the Fund (comprising any carried interests and expected management fees) and the investors’ rights to remove the Fund Manager. As a result the Group has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated these funds. 3 Summary of significant accounting policies The significant accounting policies adopted in the preparation of the consolidated financial statements are set out below. Except for the change in accounting policies resulting from new and amended IFRS and IFRIC guidance, as detailed in note 3 (a) below, the accounting policies adopted in the preparation of these consolidated financial statements are consistent those used in the preparation of the annual consolidated financial statements for the year ended December 31, 2016. a) Change in accounting policies The accounting policies adopted in the preparation of these consolidated financial statements are consistent with those used in the previous year except for the change in accounting policy of Zakat and tax as mentioned below and adoption of the following new standards and other amendments to existing standards and a new interpretation mentioned below which has had no material impact on the consolidated financial statements of the Group on the current period or prior periods and is not expected to have a material effect in future periods: Zakat and Tax The Bank amended its accounting policy relating to zakat and income tax and has started to accrue zakat and income tax on a quarterly basis and charging it to retained earnings in accordance with SAMA guidance on zakat and income tax. Previously, zakat and income tax was deducted from dividends upon payment to the shareholders and was recognized as a liability at that time. The above change in accounting policy did not have material impact on the consolidated financial statements for any of the year presented, and therefore, comparative figures have not been restated. Accordingly, Zakat and income tax relating to prior year i.e. 2016 has been recognized in the statement of changes in shareholders’ in equity for 2017. Amendments to existing standards Amendments to IAS 7, Statement of cash flows on disclosure initiative: Applicable for annual periods beginning on or after 1 January 2017 These amendments introduce an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities. This amendment is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. These adoptions have no material impact on the consolidated financial statements other than certain additional disclosures. 9
20. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) The Bank has chosen not to early adopt the amendments and revisions to the International Financial Reporting Standards which have been published and are mandatory for compliance by the banks for the accounting years beginning on or after January 1, 2018 (please refer note 41). b) Basis of consolidation The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries (the Group) i.e. Saudi Fransi Capital, Saudi Fransi Insurance Agency, Saudi Fransi for Finance Leasing, Sakan real estate financing, Sofinco Saudi Fransi and BSF markets Limited. The financial statements of the subsidiaries are prepared for the same reporting period as that of the Bank, using consistent accounting policies. Reclassifications have been made wherever necessary to the financial statements of the subsidiaries to bring them in line with the Bank’s consolidated financial statements. Subsidiaries are investees controlled by the Bank. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: -Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) -Exposure, or rights, to variable returns from its involvement with the investee, and -The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: -The contractual arrangement with the other vote holders of the investee -Rights arising from other contractual arrangements -The Group’s voting rights and potential voting rights granted by equity instruments such as shares The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. The results of subsidiaries acquired or disposed of during the year, if any, are included in the consolidated statement of income from the effective date of the acquisition or up to the effective date of disposal, as appropriate. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: -Derecognises the assets (including goodwill) and liabilities of the subsidiary -Derecognises the carrying amount of any non-controlling interests -Derecognises the cumulative translation differences recorded in equity -Recognises the fair value of the consideration received -Recognises the fair value of any investment retained -Recognises any surplus or deficit in profit or loss -Reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities. 10
21. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) Balances between the Bank and its subsidiaries including any income and expenses arising from intra-group transactions, are eliminated in preparing these consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (i) List of significant subsidiaries The table below provides details of the significant subsidiaries of the Group Name of the subsidiary Principal place of business Ownership interest 2017 2016 Saudi Fransi Capital Saudi Fransi Insurance Agency Saudi Fransi for Finance Leasing Sakan real estate financing K.S.A K.S.A K.S.A K.S.A 100% 100% 100% 100% 100% 100% 100% 100% Apart from the above subsidiaries, the Bank also owns BSF Markets Limited having 100% share in equity, incorporated in the Cayman Islands. Sofinco Saudi Fransi has no material impact on the Group financial statements. (ii) Significant restriction The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which banking subsidiaries operate. c) Investment in associates Investments in associates are initially recognised at cost and subsequently accounted for under the equity method of accounting. An associate is an entity in which the Bank holds 20% to 50% of the voting power and over which it has significant influence (but not control), over financial and operating policies and which is neither a subsidiary nor a joint venture. Investments in associates are carried in the statement of financial position at cost, plus post-acquisition changes in the Company’s share of net assets of the associate, less any impairment in the value of individual investments. The Bank’s shares of its associates’ post-acquisition profits or losses are recognized in the statement of income, and its share of post-acquisition movements in other comprehensive income is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. d) Settlement and trade date accounting All regular way purchases and sales of financial assets are recognized and derecognized in the consolidated statement of financial position on the settlement date i.e. the date on which the asset is acquired from or delivered to the counter party. The Bank accounts for any change in fair value which is recognized from the trade date. Regular purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or follow convention in the market place. All other financial assets and liabilities are initially recognised on the trade date at which the Bank becomes a party to the contractual provisions of the instrument. 11
22. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) e) Derivatives financial instruments and hedge accounting Derivative financial instruments including forward foreign exchange contracts, commission rate futures, forward rate agreements, currency and commission rate swaps, and currency and commission rate options (both written and purchased) are measured at fair value. All derivatives are carried at their fair value as assets where the fair value is positive and as liabilities where the fair value is negative. Fair values are obtained by reference to quoted market prices, discounted cash flow models and pricing models, as appropriate. The treatment of changes in their fair value depends on their classification into the following categories: (i) Derivatives held for trading Any changes in the fair value of derivatives that are held for trading purposes are taken directly to the consolidated statement of income and are disclosed in trading income. Derivatives held for trading also include those derivatives which do not qualify for hedge accounting (including embedded derivatives). (ii) Embedded derivatives Derivatives embedded in other financial instruments are treated as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at fair value through profit or loss. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the consolidated statement of income. (iii) Hedge accounting The Group designates certain derivatives as hedging instruments in qualifying hedging relationships to manage exposures to interest rate, foreign currency, and credit risks, including exposures arising from highly probable forecast transactions and firm commitments. In order to manage particular risk, the Bank applies hedge accounting for transactions that meet specific criteria. For the purpose of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognized asset or liability, (or assets or liabilities in case of portfolio hedging), or an unrecognised firm commitment or an identified portion of such an asset, liability or firm commitment, that is attributable to a particular risk and could affect the reported net gain or loss; and (b) cash flow hedges which hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability, or to a highly probable forecasted transaction that will affect the reported net gain or loss. In order to qualify for hedge accounting, the hedge should be expected to be highly effective i.e. the changes in fair value or cash flows of the hedging instrument should effectively offset corresponding changes in the hedged item, and should be reliably measurable. At inception of the hedge, the risk management objective and strategy is documented including the identification of the hedging instrument, the related hedged item, the nature of risk being hedged, and how the Bank will assess the effectiveness of the hedging relationship. At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. A formal assessment is undertaken by comparing the hedging instrument’s effectiveness in offsetting the changes in fair value or cash flows attributable to the hedged risk in the hedged item, both at inception and at each quarter end on an ongoing basis. Prospective testing is performed mainly through matching the critical terms of both hedge item and instrument. 12
23. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated were offset by the hedging instrument in a range of 80% to 125% and were expected to achieve such offset in future periods. Hedge ineffectiveness is recognized in the income statement in ‘Net trading income’. For situations where the hedged item is a forecast transaction, the Bank also assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the statement of income. Fair value hedges In relation to fair value hedges, which meet the criteria for hedge accounting, any gain or loss from re-measuring the hedging instruments to fair value is recognized immediately in the consolidated statement of income. The related portion of the hedged item is adjusted against the carrying amount of the hedged item and is recognized in the consolidated statement of income. For hedged items measured at amortised cost, where the fair value hedge of a commission bearing financial instrument ceases to meet the criteria for hedge accounting or is sold, exercised or terminated, the cumulative adjustment to the carrying amount of a hedge item is amortised to the income statement on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case it is recognised in the income statement immediately. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated statement of income. Cash flow hedges In relation to cash flow hedges which meet the criteria for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized directly in other comprehensive income and the ineffective portion, if any, is recognized in the consolidated statement of income. For cash flow hedges affecting future transactions, the gains or losses recognized in other comprehensive income, are transferred to the consolidated statement of income in the same period in which the hedged transaction affects the consolidated statement of income. However, if the Bank expects that all or a portion of a loss recognized in other comprehensive income will not be recovered in one or more future periods, it shall reclassify into the consolidated statement of income as a reclassification adjustment the amount that is not to be recognized. Where the hedged forecasted transaction results in the recognition of a non financial asset or a non financial liability, then at the time that the asset or liability is recognized, the associated gains or losses that had previously been recognized in other comprehensive income are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. Hedge accounting is discontinued when the hedging instrument is expired or sold, terminated or exercised, or no longer qualifies for hedge accounting, or the forecast transaction is no longer expected to occur or the Bank revokes the designation then hedge accounting is discontinued prospectively. At that point of time, any cumulative gain or loss on the cash flow hedging instrument that was recognised in other comprehensive income from the period when the hedge was effective is transferred from equity to consolidated statement of income when the forecasted transaction occurs. Where the hedged forecasted transaction is no longer expected to occur and affects the consolidated statement of income, the net cumulative gain or loss recognised in “other comprehensive income” is transferred immediately to the consolidated statement of income for the year. f) Foreign currencies Transactions in foreign currencies are translated into Saudi Arabian Riyals at exchange rates prevailing at transaction dates. Monetary assets and liabilities denominated in foreign currencies at the year-end are translated into Saudi Arabian Riyals at the rates of exchange prevailing at the reporting date. 13
24. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year adjusted for effective commission rate and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Foreign exchange gains or losses on translation of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of income, except for differences arising on the retranslation of available for sale equity instruments and effective cash flow hedges in foreign currencies. Translation gains or losses on non-monetary items carried at fair value are included as part of the fair value adjustment on investment securities available for sale, unless the non-monetary items have an effective hedging strategy. Realized and unrealized gains or losses on exchange are credited or charged to exchange income or deferred in other comprehensive income for qualifying cash flow hedges and qualifying net investment hedges to the extent hedges are effective. Non-monetary assets and liabilities denominated in foreign currencies measured at fair value are translated using the exchange rate at the date when the fair value is determined. g) Offsetting financial instruments Financial assets and liabilities are offset and reported net in the consolidated statement of financial position when there is a legally enforceable right to set off the recognized amounts, and the Group intends to settle on a net basis or to realize the asset and settle the liability simultaneously. Income and expenses are not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. h) Revenue / expense recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank, and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized. Special commission income and expense Special commission income and expense for all special commission bearing financial instruments, except for those classified as held for trading or designated as at fair value through income statement, (FVIS) are recognized in the consolidated statement of income using the effective commission rate basis. The effective commission rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When calculating the effective commission rate, the Bank estimates future cash flows considering all contractual terms of the financial instrument but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective commission rate and the change in carrying amount is recorded as special commission income or expense. If the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, special commission income continues to be recognised using the original effective yield applied to the new carrying amount. The calculation of the effective yield takes into account all contractual terms of the financial instruments (prepayment, options etc.) and includes all fees and points paid or received transaction costs, and discounts or premiums that are an integral part of the effective special commission rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of financial asset or liability. 14
25. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) Exchange income / loss Exchange income / loss is recognised as discussed in foreign currencies policy above. Fees and commission income Fees and commissions are recognized when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred and, together with the related direct costs, are recognized as an adjustment to the effective yield on the loan. Portfolio and other management advisory and service fees are recognized based on the applicable service contracts, usually on a time-proportionate basis. Fees received on asset management, wealth management, financial planning, custody services and other similar services that are provided over an extended period of time, are recognized over the period when the service is being provided. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense, which relate mainly to transaction and service fees, are expensed as the services are received. Dividend income Dividend income is recognised when the right to receive the income is established. Dividends are reflected as a component of net trading income, net income from FVIS financial instruments or other operating income based on the underlying classification of the equity instrument. Trading income / (loss) Results arising from trading activities include all gains and losses from changes in fair values, related special commission income or expense including dividends for financial assets and financial liabilities held for trading and foreign exchange differences. This includes any ineffectiveness recorded in hedging transactions. Income / (loss) from FVIS financial instruments Net income from FVIS financial instruments relates to financial assets and liabilities designated as FVIS and include all realised and unrealised fair value changes, interest, dividends and foreign exchange differences. i) Sale and repurchase agreements Assets sold with a simultaneous commitment to repurchase at a specified future date (repos), continue to be recognized in the consolidated statement of financial position and are measured in accordance with related accounting policies for investments held as FVIS (held for trading), available for sale, held to maturity and other investments held at amortized cost. The counter-party liability for amounts received under these agreements is included in “Due to banks and other financial institutions” or “Customers’ deposits”, as appropriate. The difference between sale and repurchase price is treated as special commission expense and is accrued over the life of the repo agreement, on an effective yield basis. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos), are not recognized in the consolidated statement of financial position, as the Bank does not obtain control over the assets. Amounts paid under these agreements are included in “Cash and balances with SAMA”, “Due from banks and other financial institutions” or “Loans and advances”, as appropriate. The difference between purchase and resale price is treated as special commission income and is accrued over the life of the reverse repo agreement, on an effective yield basis. 15
26. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) j) Investments All investment securities are initially recognized at fair value and except for investments held at FVIS, include the acquisition costs associated with the investments. Transaction costs, if any, are not added to fair value measurement at initial recognition of investments held at FVIS. Premiums are amortized and discounts are accreted using the effective yield basis and are taken to special commission income. Amortized cost is calculated by taking into account any discount or premium on acquisition. For securities that are traded in organized financial markets, fair value is determined by reference to exchange quoted market bid prices at the close of business on the reporting date without deduction for transaction costs. Fair value of managed assets and investments in mutual funds are determined by reference to declared net assets values which approximate the fair values. For securities where there is no quoted market price, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument which is substantially the same, or is based on the expected cash flows or the underlying net asset base of the security. Where the fair values cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Following initial recognition, subsequent transfers between the various categories of investments are not ordinarily permissible. The subsequent period end reporting values for the various categories of investments are determined as follows: (i) Held as fair value through income statement (FVIS) Investments held as FVIS are classified as either investment held for trading or those designated as fair value through income statement on initial recognition. Investments classified as trading are acquired principally for the purpose of selling or repurchasing in short term or if designated as such by the management in accordance with criteria laid down in IAS 39. After initial recognition, investments at FVIS are measured at fair value and any change in the fair value is recognised in the consolidated statement of income for the year in which it occurs. Transaction costs, if any, are not added to the fair value measurement at initial recognition of FVIS investments. Special commission income, dividend income and gain or loss incurred on financial assets held as FVIS are reflected as trading income or expense in the consolidated statement of income. (ii) Available for sale Available for sale investments are those non-derivative equity and debt securities which are neither classified as Held to maturity investments, loans and receivables nor designated as FVIS, that are intended to be held for an unspecified period of time, which may be sold in response to needs for liquidity or changes in special commission rates, exchange rates or equity prices. Investments which are classified as “available-for-sale” are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at fair value except for unquoted equity securities whose fair value cannot be reliably measured are carried at cost. Unrealised gain or loss arising from a change in an investment’s fair value is recognised in other comprehensive income. On de-recognition, any cumulative gain or loss previously recognized in other comprehensive income is included in the consolidated statement of income. Special commission income is recognised in the consolidated statement of income on an effective yield basis. Dividend income is recognised in the consolidated statement of income when the Bank becomes entitled to the 16
27. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) dividend. Foreign exchange gains or loss on available for sale debt security investments are recognised in the consolidated statement of income. A security held as available for sale may be reclassified to “Other investments held at amortised cost” if it otherwise would have met the definition of “Other investments held at amortized cost” and if the Bank has the intention and ability to hold that financial asset for the foreseeable future or until maturity. (iii) Held to maturity Held to maturity investments are non-derivative financial assets which have fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold up to the maturity, other than those classified as “Other investments held at amortised cost”, are classified as ‘held to maturity’ and which are not designated as at FVIS or AFS. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs and subsequently measured at amortized cost, less provision for impairment in their value. Amortized cost is calculated by taking into account any discount or premium on acquisition using an effective yield basis. Any gain or loss on such investments is recognized in the consolidated statement of income when the investment is de-recognized or impaired. Investments classified as held to maturity cannot ordinarily be sold or reclassified without impacting the Bank’s ability to use this classification and cannot be designated as a hedged item with respect to special commission rate or prepayment risk, reflecting the longer term nature of these investments. (iv) Other investments held at amortized cost Investments with fixed or determinable payments that are not quoted in an active market are classified as ‘other investments held at amortized cost’. Other investments held at amortized cost, where the fair value has not been hedged are stated at amortized cost using the effective yield basis, less provision for impairment. Any gain or loss is recognized in the consolidated statement of income when the investment is derecognized or impaired. k) Loans and advances Loans and advances are non-derivative financial assets originated or acquired by the Bank with fixed or determinable payments. Loans and advances are recognised when cash is advanced to borrowers. They are derecognized when either borrower repays their obligations, or the loans are sold or written off, or substantially all the risks and rewards of ownership are transferred. All loans and advances are initially measured at fair value, plus incremental direct transaction costs and are subsequently measured at amortised cost except when Bank chooses to carry loans as FVIS when the Bank intends to sell immediately or in the near term. Following the initial recognition subsequent transfers between the various categories of loans and advances is not ordinarily permissible. The subsequent period end reporting values for various classes of loans and advances are determined on the basis as set out in the following paragraphs: (i) Available for sale Loans and advances which are not part of a hedging relationship and are available for sale, are subsequently measured at fair value and gains or losses arising from changes in fair value are recognized directly in ‘other reserves’ under shareholders’ equity until the loans or advances are de-recognized or impaired, at which time the cumulative gain or loss previously recognized in other reserves is included in the consolidated statement of income for the year. 17
28. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) (ii) Loans and advances held at amortized cost Loans and advances originated or acquired by the Bank that have not been designated in a fair value hedge, are stated at amortized cost. For loans and advances which are hedged, the related portion of the hedged fair value is adjusted against the carrying amount. For presentation purposes, impairment charge for credit losses is deducted as an allowance from loans and advances. l) Due from banks and other financial institutions Due from banks and other financial institutions are financial assets which include money market placements with fixed or determinable payments and fixed maturities that are not quoted in an active market. Money market placements are not entered into with the intention of immediate or short-term resale. They are initially measured at cost, being the fair value of the consideration given. Following the initial recognition, these are stated at cost less any amount written off and provisions for impairment, if any. m) Impairment of financial assets A financial asset is classified as impaired when there is an objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that such a loss event(s) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. An assessment is made at each reporting date to determine whether there is objective evidence that a financial asset or group of financial assets may be impaired. Objective evidence may include indications that the borrower is experiencing significant financial difficulty, default or delinquency in special commission income or principal payments, the probability that it will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in economic conditions that correlate with defaults. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment losses recognized based on the present value of future anticipated cash flows for changes in its carrying amounts as follows: The Bank considers evidence of impairment for loans and advances and held to maturity investments at both a specific asset and collective level. i) Impairment of available for sale financial assets In the case of debt instruments classified as available for sale, the Bank assesses individually whether there is an objective evidence of impairment based on the same criteria as financial assets carried at amortized cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortized cost and the current fair value, less any impairment loss on that investment previously recognized in the consolidated statement of income. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to credit event occurring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income. 18
29. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) For equity investments held as available-for-sale, a significant or prolonged decline in fair value below its cost represents objective evidence of impairment. The impairment loss cannot be reversed through consolidated statement of income as long as the asset continues to be recognised i.e. any increase in fair value after impairment has been recorded can only be recognised in other comprehensive income. On derecognition, any cumulative gain or loss previously recognised in other comprehensive income is included in the consolidated statement of income for the year. ii) Financial assets carried at amortized cost For financial assets carried at amortized cost, the carrying amount of the asset is adjusted through the use of an allowance account and the amount of the adjustment is included in the consolidated statement of income. A loan is classified as impaired when, in management’s opinion, there has been deterioration in credit quality to the extent that there is no longer reasonable assurance of timely collection of the full amount of principal and special commission income. Impairment charge for credit losses is based upon the management's judgment of the adequacy of the provisions. Such assessment takes into account the composition and volume of the loans and advances, the general economic conditions and the collectability of the outstanding loans and advances. Considerable judgment by management is required in the estimation of the amount and timing of future cash flows when determining the required level of provisions. Such estimates are necessarily based on assumptions about several factors and actual results may differ resulting in future changes in such provisions. Specific provisions are evaluated individually for all different types of loans and advances, whereas additional provisions are evaluated based on collective impairment of loans and advances, and are created for credit losses where there is objective evidence that the unidentified potential losses are present at the reporting date. The amount of the specific provision is the difference between the carrying amount and the estimated recoverable amount. The collective provision is based upon deterioration in the internal credit ratings allocated to the borrower or group of borrowers. These internal grading take into consideration factors such as the current economic condition in which the borrowers operate. Any deterioration in country risk, industry, as well as identified structural weaknesses or deterioration in cash flows. Financial assets are written off only in circumstances where effectively all possible means of recovery have been exhausted, and the amount of the loss has been determined. Once a financial asset has been written down to its estimated recoverable amount, special commission income is thereafter recognized based on the rate of special commission that was used to discount the future cash flows for the purpose of measuring the recoverable amount. When a financial asset is uncollectible, it is written off against the related provision for impairment through allowance for impairment account. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the consolidated statement of income in impairment charge for credit losses. Loans whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. Restructuring policies and practices are based on indicators or criteria which, indicate that payment will most likely continue. The loans continue to be subject to an individual or collective impairment assessment. 19
30. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) n) Other real estate The Bank, in the ordinary course of business, acquires certain real estate against settlement of due loans and advances. Such real estate are considered as assets held for sale and are initially stated at the lower of net realisable value of due loans and advances and the current fair value of the related properties, less any costs to sell (if material). No depreciation is charged on such real estate. Rental income from other real estate is recognised in the consolidated statement of income. Subsequent to initial recognition, any subsequent write down to fair value, less costs to sell, are charged to the consolidated statement of income. Any subsequent revaluation gain in the fair value less costs to sell of these assets to the extent this does not exceed the cumulative write down is recognised in the statement of income. Gains or losses on disposal are recognised in the statement of income. o) Property and equipment Property and equipment are stated at cost and presented net of accumulated depreciation and amortization. Freehold land is not depreciated. The cost of other property and equipment is depreciated and amortized using the straight line method over the estimated useful lives of the assets as follows: Buildings Leasehold improvements Furniture, equipment and vehicles Software programme and automation project 33 years Over the lease period or economic life whichever is shorter 4 to10 years 2 to 5 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of income. p) Financial Liabilities All money market deposits, placements, customers’ deposits and term loans are initially recognized at cost, being the fair value of the consideration received less transaction costs. Subsequently all commission bearing financial liabilities other than those held at FVIS or, where fair values have been hedged, are measured at amortized cost. Amortized cost is calculated by taking into account any discount or premium. Premiums are amortized and discounts are accreted on an effective yield basis to maturity and taken to special commission expense. Financial liabilities for which there is an associated fair value hedge relationship are adjusted for fair value to the extent of the risk being hedged, and the resultant gain or loss is recognized in the consolidated statement of income. For commission bearing financial liabilities carried at amortized cost, any gain or loss is recognized in the consolidated statement of income when derecognized. In the ordinary course of business, the Bank gives financial guarantees, consisting of letter of credit, guarantees and acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value in other liabilities, being the value of the premium received. Subsequent to the initial recognition, the Bank's liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required to settle any financial obligations arising as a result of guarantees. Fee received is recognised in the consolidated statement of income on a straight line basis over the life of the guarantee. 20
31. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) q) Provisions Provisions are recognized when the Group has a present legal or constructive obligation arising from past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the costs to settle the obligation can be reliably measured or estimated. r) Accounting for leases (i) Where the Bank is the lessee Leases entered into by the Bank are all operating leases. Payments made under operating leases are charged to the consolidated statement of 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 recognized as an expense in the period in which termination takes place. (ii) Where the Bank is the lessor When assets are sold under a finance lease including assets under Islamic lease arrangement, the present value of the lease payments is recognized as a receivable and is disclosed under loans and advances. The difference between the gross receivable and the present value of the receivable is recognized as unearned finance income. Lease income is recognized over the term of the lease using the net investment method, which reflects a constant periodic rate of return. s) Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents are defined as those amounts included in cash, balances with SAMA excluding statutory deposit, and due from banks and other financial institutions maturing within ninety days from the date of acquisition. t) De-recognition of financial instruments A financial asset or a part of financial assets, or a part of group of similar financial assets is derecognized when the contractual rights to the cash flows from the financial asset expires and if the Bank has transferred substantially all the risks and rewards of ownership. Where the Bank has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognised only if the Bank has not retained control of the financial asset. The Bank recognises separately as assets or liabilities any rights and obligations created or retained in the process. A financial liability or a part of a financial liability can only be derecognised when it is extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expired. u) Zakat and income tax Zakat is computed on the Saudi shareholders’ share of equity or net income using the basis defined under the Zakat regulations. Income taxes are computed on the foreign shareholders share of net income for the year. Zakat and income tax are accrued on a quarterly basis and charged to retained earnings in accordance with SAMA guidance on zakat and income tax. Previously, zakat and income tax was deducted from dividends upon payment to the shareholders and was recognized as a liability at that time. 21
32. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) v) Investment management, brokerage and corporate finance services The Bank offers investment management, brokerage and corporate finance services to its customers, through its subsidiaries, which include management of certain investment funds in consultation with professional investment advisors and brokerage services. The Bank’s share of these funds is included in the available for sale investments and fees earned are disclosed under related party transactions. Assets held in trust or in a fiduciary capacity are not treated as assets of the subsidiary and accordingly are not included in the consolidated financial statements. w) Non-commission based banking products In addition to the conventional banking, the Bank offers its customers certain non-commission based banking products, which are approved by its Shariah Board, as follows: High level definitions of non-commission based banking products (i) Murabaha is an agreement whereby the Bank sells to a customer a commodity or an asset, which the Bank has purchased and acquired based on a promise received from the customer to buy. The selling price comprises the cost plus an agreed profit margin. (ii) Mudarabah is an agreement between the Bank and a customer whereby the Bank invests in a specific transaction. The Bank is called “rabb-ul-mal” while the management and work is exclusive responsibility of the customer who is called “mudarib”. The profit is shared as per the terms of the agreement but the loss is borne by the Bank. (iii) Ijarah is a an agreement whereby the Bank, acting as a lessor, purchases or constructs an asset for lease according to the customer request (lessee), based on his promise to lease the asset for an agreed rent and specific period that could end by transferring the ownership of the leased asset to the lessee. (iv) Musharaka is an agreement between the Bank and a customer to contribute to a certain investment enterprise or the ownership of a certain property ending up with the acquisition by the customer of the full ownership. The profit or loss is shared as per the terms of the agreement. (v) Tawaraq is a form of Murabaha transactions where the Bank purchases a commodity and sells it to the customer. The customer sells the underlying commodity at spot and uses the proceeds for his financing requirements. All non-commission based banking products other than Mudarabah are included in “loans and advances”, whereas mudarabah is included in “investments”. These non-commission based banking products are accounted for in accordance with IFRS and are in conformity with the accounting policies described in these consolidated financial statements. 22
33. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 3 Summary of significant accounting policies (continued) x) Short term employee benefits Short term employee benefits are measured on an undiscounted basis and are expensed as the related services are provided. A liability is recognized for the amount expected to be paid under short term cash bonus or profit sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. y) End of service benefits Benefits payable to the employees of the Bank at the end of their services are accrued based on actuarial valuation conducted by an independent actuary, taking into accounts the provision of the Saudi Arabian Labor Law. z) Long term Incentive scheme The Long Term Incentives (LTI) plan is appreciation award of BSF share performance to its eligible employees as per Board approved LTI scheme. The criteria of eligible employees will be defined in HRG LTI Policy and procedure. The eligible employees will benefit the appreciation in value of BSF shares over the vesting period. The employees will have the right to receive the positive variation or profit made from any increase in the price of the shares between the Grant Date and Exercise Date as per the eligibility defined in HRG LTI policy document. 4 Cash and balances with SAMA SAR’ 000 2017 2016 Cash on hand Statutory deposit Current account Money market placements with SAMA 975,776 8,635,612 8,849 12,773,000 931,144 8,545,950 14 10,867,000 Total 22,393,237 20,344,108 In accordance with the Banking Control Law and regulations issued by the Saudi Arabian Monetary Authority (SAMA), the Bank is required to maintain statutory deposit with SAMA at stipulated percentages of its demand, saving, time and other deposits, calculated at the end of each month. The statutory deposit with SAMA is not available to finance the Bank’s day-to-day operations and therefore is not part of cash and cash equivalents. 5 Due from banks and other financial institutions SAR’ 000 2017 2016 Current accounts Money market placements 1,259,346 17,498,949 1,120,530 24,218,102 Total 18,758,295 25,338,632 23
34. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 5 Due from banks and other financial institutions (continued) The credit quality of due from banks and other financial institutions is managed using reputable external credit rating agencies. The table below shows the credit quality by class SAR’ 000 2017 2016 Investment grade (credit rating AAA to BBB) Non-investment grade (credit rating below BBB) Unrated 18,568,555 189,018 722 25,148,432 189,482 718 Total 18,758,295 25,338,632 Investment grade includes due from banks and other financial institutions having credit exposure equivalent to Standard and Poor’s rating of AAA to BBB. 24
35. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 6 Investments, net a) These comprise the following: SAR’ 000 2017 International Domestic Total 2016 International Domestic Total i) Held as FVIS Fixed rate securities Floating rate securities 3,036 112,434 15,220 112,434 18,256 44,690 6,006 126,860 - 171,550 6,006 Held as FVIS 3,036 127,654 130,690 50,696 126,860 177,556 Fixed rate securities Floating rate securities Equities Other 625,860 4,594,604 5,885 2,541,839 411,357 34,540 - 1,037,217 4,594,604 40,425 2,541,839 158,320 2,389,802 194,877 3,155,323 1,214,958 56,501 31,773 375,083 1,373,278 2,446,303 226,650 3,530,406 Available for sale 7,768,188 445,897 8,214,085 5,898,322 1,678,315 7,576,637 Fixed rate securities Other - - - 75,821 - - 75,821 - Held to maturity - - - 75,821 - 75,821 Fixed rate securities Floating rate notes 13,503,273 3,476,847 187,500 13,503,273 3,664,347 11,957,250 4,287,115 187,500 11,957,250 4,474,615 Other investments held at amortized cost, gross 16,980,120 187,500 17,167,620 16,244,365 187,500 16,431,865 ii) Available for sale (AFS) iii) Held to maturity iv) Other investments held at amortized cost, net Allowance for impairment Other investments held at amortized cost, net - (187,500) (187,500) - (187,500) (187,500) 16,980,120 - 16,980,120 16,244,365 - 16,244,365 Investments, net 24,751,344 573,551 25,324,895 22,269,204 1,805,175 24,074,379 Investments held as FVIS represent investments held for trading and include Islamic securities (Sukuk) of SAR 90 million (2016: SAR 72 million). Available for sale investments include Islamic securities (Sukuk) of SAR 5,009 million (2016: SAR 2,800 million). 25
36. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 6 Investments, net (continued) b) The analysis of the composition of investments is as follows: SAR’ 000 Quoted 2017 Unquoted Total Fixed rate securities Floating rate securities / notes Equities Other 1,992,350 536,994 33,243 7,056 2,569,643 12,660,574 7,740,213 7,182 2,534,783 22,942,752 - Allowance for impairment Investments, net 2,569,643 Quoted 2016 Unquoted Total 14,652,924 8,277,207 40,425 2,541,839 25,512,395 1,544,829 268,916 190,662 9,188 2,013,595 12,033,070 6,658,008 35,988 3,521,218 22,248,284 13,577,899 6,926,924 226,650 3,530,406 24,261,879 (187,500) (187,500) - (187,500) (187,500) 22,755,252 25,324,895 2,013,595 22,060,784 24,074,379 Other investment includes Mudarabah SAR 2,535 million (2016: SAR 3,146 million). Unquoted investments include Saudi Government Bonds of SAR 12,420 million (2016: SAR 11,793 million). Unquoted equity shares of SAR 7 million (2016: SAR 36 million) which are carried at cost, as their fair value cannot be reliably measured, are also included under equities available for sale. c) The analysis of unrealized gains and losses and the fair values of held to maturity investments and other investments held at amortized cost, are as follows: SAR’ 000 2017 Gross Gross Carrying unrealized unrealized losses gains value Carrying value Fair Value 2016 Gross Gross unrealized unrealized losses gains Fair Value i) Held to maturity Fixed rate securities - - - - 75,821 86 - 75,907 Total - - - - 75,821 86 - 75,907 Fixed rate securities Floating rate notes Allowance for impairment 13,503,273 3,664,347 1,348 6,521 (196,870) 13,307,751 11,957,250 (5,362) 3,665,506 4,474,615 750 (187,500) - Total 16,980,120 7,869 ii) Other investments held at amortized cost - (187,500) (187,500) - (202,232) 16,785,757 16,244,365 750 (122,478) 11,834,772 (12,437) 4,462,928 - (187,500) (134,915) 16,110,200 The fair value of the fixed rate securities disclosed above is considered as level 2 for fair value hierarchy disclosure purpose. 26
37. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 6 Investments, net (continued) d) The analysis of investments by counterparty is as follows: SAR’ 000 2017 2016 Government and quasi government Corporate Banks and other financial institutions Other 19,587,569 5,056,421 672,953 7,952 16,015,787 6,058,050 1,991,354 9,188 Total 25,324,895 24,074,379 e) i) Credit risk exposure on investments SAR’ 000 2017 Saudi government and guaranteed bonds 17,522,944 15,537,768 951,875 1,907,744 6,850,076 6,628,867 25,324,895 24,074,379 Investment grade Unrated Total 2016 Saudi government bonds comprise Saudi government development and guaranteed bonds. Investment grade includes investments having credit exposure equivalent to Standard and Poor’s rating of AAA to BBB. Unrated investments include local equities, foreign equities, funds and Mudarabah SAR 2,582 million (2016: SAR 3,757 million). ii) Credit risk exposure on investments 2017 SAR’ 000 Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Total 2016 2017 Investment grade 2016 Unrated 130,690 1,364,009 177,556 1,756,131 6,850,076 5,820,506 - 75,821 - - 16,980,120 15,436,004 - 808,361 18,474,819 17,445,512 6,850,076 6,628,867 27
38. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 6 Investments, net (continued) f) Movement of allowance for impairment of investments and other assets: SAR’ 000 Balance at the beginning of the year Provided during the year Recoveries during the year Written off during the year Balance at the end of the year 28 2017 2016 341,338 3,500 344,838 449,147 (34,851) (72,958) 341,338
39. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 7 Loans and advances, net a) Loans and advances are classified as follows: Loans and advances held at amortised cost 2017 Overdraft & Commercial loans SAR’ 000 Performing loans and advances - gross Non performing loans and advances, net Total loans and advances Allowance for impairment Loans and advances held at amortised cost, net Credit Cards Consumer Loans Total 109,827,075 494,050 11,621,667 121,942,792 3,198,613 55,955 167,473 3,422,041 113,025,688 550,005 11,789,140 125,364,833 (3,088,685) (71,022) (264,732) (3,424,439) 109,937,003 478,983 11,524,408 121,940,394 2016 Overdraft & Commercial loans SAR’ 000 Performing loans and advances- gross Non-performing loans and advances, net Total loans and advances Allowance for impairment Loans and advances held at amortised cost, net 29 Credit Cards Consumer Loans Total 119,253,027 515,372 10,987,324 130,755,723 1,509,645 51,321 145,931 1,706,897 120,762,672 566,693 11,133,255 132,462,620 (2,674,118) (74,216) (256,417) (3,004,751) 118,088,554 492,477 10,876,838 129,457,869
40. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 7 Loans and advances, net (Continued) b) Movement in allowance for impairment of credit losses are classified as follows: i) Movement in allowance for impairment of credit losses 2017 Overdraft & Commercial loans Credit Cards Consumer Loans 2,674,118 74,216 256,417 3,004,751 Provided during the year 475,029 34,300 100,031 609,360 Written off during the year (2,091) (27,005) (49,176) (78,272) (58,371) (10,489) (42,540) (111,400) 3,088,685 71,022 264,732 3,424,439 SAR’ 000 Balance at beginning of the year Recoveries of amounts previously provided Balance at the end of the year Total 2016 Overdraft & Commercial loans Credit Cards Consumer Loans Total 2,006,676 34,813 297,457 2,338,946 Provided during the year 735,178 76,172 83,417 894,767 Written off during the year (1,502) (27,673) (73,394) (102,569) (66,234) (9,096) (51,063) (126,393) 2,674,118 74,216 256,417 3,004,751 SAR’ 000 Balance at beginning of the year Recoveries of amounts previously provided Balance at the end of the year ii) Impairment charge for credit losses: SAR’ 000 2017 2016 Provided during the year on loan and advances Provided during the year on off statement of financial position Recoveries of amounts previously provided 609,360 163,153 (111,400) 894,767 (126,393) Impairment charge for credit losses 661,113 768,374 The allowance for impairment includes SAR 1,418 million (2016: SAR 1,413 million) evaluated on a collective impairment basis. Non performing loans and advances are disclosed net of accumulated special commission in suspense of SAR 401 million (2016: SAR 245 million). 30
41. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 7 Loans and advances, net (continued) iii) Movement of collective impairment provision: SAR’ 000 2017 2016 Balance at the beginning of the year Provided during the year, net 1,413,475 4,466 1,312,609 100,866 Balance at the end of the year 1,417,941 1,413,475 c) Credit quality of loans and advances (i) Neither past due nor impaired SAR’ 000 2017 Overdraft & Commercial loans Credit Cards Consumer Loans Total Very strong quality including sovereign (A+ to B ) 20,024,043 4,930 174 20,029,147 Good quality (C+ to C) 37,569,903 17,220 3,306 37,590,429 Satisfactory quality (C- to E +) 41,633,426 398,113 10,735,374 52,766,913 9,813,658 1,920 44,391 9,859,969 109,041,030 422,183 10,783,245 120,246,458 Special mention (E to E -) Total 2016 SAR’ 000 Overdraft & Commercial loans Credit Cards Consumer Loans Total Very strong quality including sovereign (A+ to B ) 29,248,297 10,662 249 29,259,208 Good quality (C+ to C) 41,014,167 16,090 3,715 41,033,972 Satisfactory quality (C- to E +) 42,476,163 416,841 10,195,617 53,088,621 6,043,364 1,992 45,068 6,090,424 118,781,991 445,585 10,244,649 129,472,225 Special mention (E to E -) Total 31
42. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 7 Loans and advances, net (continued) Very strong quality: Capitalization, earnings, financial strength, liquidity, management, market reputation and repayment ability are excellent. Good quality: Capitalization, earnings, financial strength, liquidity, management, market reputation and repayment ability are good. Satisfactory quality: Facilities require regular monitoring due to financial risk factors. Ability to repay remains at a satisfactory level. Special mention: Facilities require close attention of management due to deterioration in the borrowers’ financial condition. However, repayment is currently protected. (ii) Ageing of loans and advances (past due but not impaired) SAR’ 000 2017 Overdraft & Commercial loans Credit Cards Consumer Loans Total From 1 day to 30 days 321,645 51,801 663,625 1,037,071 From 31 days to 90 days 411,344 20,066 174,797 606,207 From 91 days to 180 days 50,096 - - 50,096 2,960 - - 2,960 786,045 71,867 838,422 1,696,334 More than 180 days Total SAR’ 000 2016 Overdraft & Commercial loans Credit Cards Consumer Loans Total From 1 day to 30 days 234,849 53,312 576,892 865,053 From 31 days to 90 days 121,295 16,475 165,783 303,553 From 91 days to 180 days 15,328 - - 15,328 More than 180 days 99,564 - - 99,564 471,036 69,787 742,675 1,283,498 Total 32
43. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 7 Loans and advances, net (continued) (iii) Economic sector risk concentrations for the loans and advances and allowance for impairment losses are as follows: SAR’ 000 Performing Non Performing, net 4,668,498 3,865,112 1,791,433 20,483,027 2,809,250 9,874,352 11,467,925 26,924,177 4,429,200 12,542,862 12,115,717 10,971,239 3,389 21,594 520,974 21,684 931,899 791,543 18,198 360,894 223,428 528,438 121,942,792 3,422,041 4,596,347 4,026,266 1,733,754 22,086,517 4,080,686 8,796,705 12,805,310 26,971,314 7,199,578 13,320,905 11,502,696 13,635,645 17,226 81,646 4,949 694,934 375,590 12,036 286,907 197,252 36,357 130,755,723 1,706,897 Allowance for impairment losses Loans and advances, net 2017 Government and quasi Government Banks and other financial institutions Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumer loans and credit cards Others Total (27,566) (15,609) (465,177) (20,325) (20,608) (1,187,947) (759,965) (74,459) (360,108) (335,754) (156,921) (3,424,439) 4,668,498 3,840,935 1,797,418 20,538,824 2,788,925 9,875,428 11,211,877 26,955,755 4,372,939 12,543,648 12,003,391 11,342,756 121,940,394 2016 Government and quasi Government Banks and other financial institutions Agriculture and fishing Manufacturing Mining and quarrying Electricity, water, gas and health services Building and construction Commerce Transportation and communication Services Consumer loans and credit cards Others Total (41,175) (14,374) (407,388) (5,669) (29,415) (1,039,816) (473,594) (86,111) (324,790) (330,633) (251,786) (3,004,751) 4,596,347 3,985,091 1,736,606 21,760,775 4,075,017 8,772,239 12,460,428 26,873,310 7,125,503 13,283,022 11,369,315 13,420,216 129,457,869 Loans and advances include Islamic related products of SAR 70,574 million (2016: SAR 76,186 million). d) Collateral The Bank in the ordinary course of lending activities holds collaterals as security to mitigate credit risk in the loans and advances. These collaterals include time, demand and other cash deposits, financial guarantees, local and international equities, real estate and other fixed assets. The collaterals are held mainly against commercial and consumer loans and are managed against the relevant exposures at their net realizable values. 33
44. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 7 Loans and advances, net (continued) e) Loans and advances include finance lease receivables, which are analyzed as follows: SAR’ 000 2017 2016 Gross receivable from finance leases: Less than 1 year 1 to 5 years More than 5 years Unearned future finance income on finance lease Net receivable from finance leases 8 837,645 2,840,302 7,468,441 (756,228) 992,019 2,614,118 7,733,001 (676,861) 10,390,160 10,662,277 2017 2016 Investment in associates SAR’ 000 Opening balance 113,220 7,568 (44,739) 106,430 6,790 - Closing balance 76,049 113,220 Share of earnings Transferred to held for sale and others Investment in associates represents 27% shareholding in interest in the Banque BEMO Saudi Fransi (2016: 27%) and 32.5% shareholding in Saudi Fransi Cooperative Insurance Company (Allianz Saudi Fransi) (2016: 32.5% incorporated in the Kingdom of Saudi Arabia. The bank has signed a share sale and purchase agreement with Allianz Europe BV on 25 October 2017 for the sale of 3.7 million shares in Allianz Saudi Fransi Cooperative Insurance Company which represents 18.5% of (ASF) shares (which represents 57% of BSF shares in ASF) at a price of SAR 22 per share and an overall consideration of SAR 81.4 million. However the transaction has not been executed during the year due to certain regulatory approval. The Bank’s share of Banque Bemo Saudi Fransi and Allianz Saudi Fransi financial statements: SAR’ 000 Banque Bemo Saudi Fransi Syria 2017 2016 Total assets 582,951 Total liabilities Allianz Saudi Fransi 2017 2016 459,444 652,661 648,276 518,655 403,831 563,739 570,877 Total equity 64,296 55,613 88,922 77,399 Total income 20,064 15,527 223,696 174,860 Total expenses 14,177 11,417 212,348 166,920 34
45. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 9 Property and equipment, net SAR’ 000 Furniture, Leasehold equipment improvements and vehicles Land and buildings Computer and Soft ware 2017 Total 2016 Total Cost 689,882 90,050 505,866 397,666 1,683,464 1,593,816 33,334 21,522 33,320 83,361 171,537 163,471 (832) (28,881) (9,352) (60,182) (99,247) (73,823) 722,384 82,691 529,834 420,845 1,755,754 1,683,464 289,496 14,524 417,852 244,936 966,808 902,687 22,910 28,906 25,368 73,939 151,123 137,706 (832) (27,738) (9,164) (61,370) (99,104) (73,585) Balance at the end of the year 311,574 15,692 434,056 257,505 1,018,827 966,808 Net book value as at December 31, 2017 410,810 66,999 95,778 163,340 736,927 Net book value as at December 31, 2016 400,386 75,526 88,014 152,730 Balance at the beginning of the year Additions during the year Disposals and retirements during the year Balance at the end of the year Accumulated depreciation and amortization Balance at the beginning of the year Depreciation and Amortization charge for the year Disposals and retirements 716,656 Leasehold improvements as at December 31, 2017 include work in progress amounting to SAR 10 million (2016: SAR 28 million). 10 Other assets SAR’ 000 Accounts receivable Other real estate Investment in associate classified as held for sale Others Total 35 2017 2016 506,355 504,830 44,736 610,340 605,156 464,830 572,164 1,666,261 1,642,150
46. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 11 Derivatives In the ordinary course of business, the Bank utilizes the following derivative financial instruments for both trading and hedging purposes: a) Swaps Swaps are commitments to exchange one set of cash flows for another. For commission rate swaps, counterparties generally exchange fixed and floating rate commission payments in a single currency without exchanging principal. For currency rate swaps, fixed and floating commission payments and principal are exchanged in different currencies. b) Forwards and futures Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specified price and date in the future. Forwards are customized contracts transacted in the over the counter market. Foreign currency and commission rate futures are transacted in standardized amounts on regulated exchanges and changes in futures contract values are settled daily. c) Forward rate agreements Forward rate agreements are individually negotiated commission rate contracts that call for a cash settlement for the difference between a contracted commission rate and the market rate on a specified future date, on a notional principal for an agreed period of time. d) Options Options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, to either buy or sell at fixed future date or at any time during a specified period, a specified amount of a currency, commodity or financial instrument at a pre-determined price. Held for trading purposes Most of the Bank’s derivative trading activities relate to sales, positioning and arbitrage. Sales activities involve offering products to customers, Banks and other financial institutions in order, inter alia, to enable them to transfer, modify or reduce current and future risks. Positioning involves managing market risk positions with the expectation of profiting from favorable movements in prices, rates or indices. Arbitrage involves identifying, with the expectation of profiting from price differentials between markets or products. The bank also holds structured derivative which are fully back to back in accordance with the bank’s risk management strategy. Held for hedging purposes The Bank has adopted a comprehensive system for the measurement and the management of risk. Part of the risk management process involves managing the Bank’s exposure to fluctuations in foreign exchange and commission rates to reduce its exposure to currency and commission rate risks to an acceptable level as determined by the Board of Directors in accordance with the guidelines issued by SAMA. The Board of Directors has established the levels of currency risk by setting limits on counterparty and currency position exposures. Positions are monitored on a daily basis and hedging strategies are used to ensure positions are maintained within the established limits. The Board of Directors has also established the level of commission rate risk by setting commission rate sensitivity limits. Commission rate exposure in terms of the sensitivity is reviewed on a periodic basis and hedging strategies are used to reduce the exposure within the established limits. 36
47. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 11 Derivatives (Continued) As part of its asset and liability management the Bank uses derivatives for hedging purposes in order to adjust its own exposure to currency and commission rate risks. This is generally achieved by hedging specific transactions as well as strategic hedging against overall consolidated statement of financial position exposures. Strategic hedging does not qualify for special hedge accounting and the related derivatives are accounted for as held for trading. The Bank uses forward foreign exchange contracts and currency rate swaps to hedge against specifically identified currency risks. In addition, the Bank uses commission rate swaps and commission rate futures to hedge against the commission rate risk arising from specifically identified fixed commission rate exposures. The Bank also uses commission rate swaps to hedge against the cash flow risk arising on certain floating rate exposures. In all such cases, the hedging relationship and objective, including details of the hedged items and hedging instrument are formally documented and the transactions are accounted for as fair value or cash flow hedges. Cash flow hedges The Bank is exposed to variability in future special commission income cash flows on non-trading assets and liabilities which bear variable commission rate. The Bank uses commission rate swaps as cash flow hedges of these commission rate risks. Also, as a result of firm commitments in foreign currencies, such as its issued foreign currency debt, the Bank is exposed to foreign exchange and commission rate risks which are hedged with cross currency commission rate swaps. Below is the schedule indicating as at 31 December, the periods when the hedged cash flows are expected to occur and when they are expected to affect profit or loss: SAR’ 000 Within 1 year 1-3 years 3-5 years Over 5 years Cash inflows (assets) 1,727,325 2,378,178 1,015,121 8,988 Cash out flows (liabilities) (1,458,764) (2,240,539) (869,608) (3,002) Net cash inflow / (outflow) 268,561 137,639 145,513 5,986 Cash inflows (assets) 1,497,342 2,133,499 606,060 28,141 Cash out flows (liabilities) (1,443,960) (2,402,927) (550,593) (33,649) Net cash inflow / (outflow) 53,382 (269,428) 55,467 (5,508) 2017 2016 The net gain on cash flow hedges transferred to the consolidated statement of income during the year was as follows: SAR’ 000 2017 2016 Special commission income 1,670,843 1,594,971 Special commission expense Net gain on cash flow hedges transferred to consolidated statement of (1,456,719) (1,582,636) 214,124 12,335 income The tables below show the positive and negative fair values of derivative financial instruments held, together with their notional amounts analyzed by the term to maturity and monthly average. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year end, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Bank’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor to market risk. 37
48. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 11 Derivatives (Continued) Notional amounts by term to maturity Derivative financial instruments Positive fair value Negative fair value Notional amount total 1,096,044 963,302 56,613 Within 3 months 3-12 months 1-5 years Over 5 years Monthly average 181,680,691 18,090,670 30,301,066 106,336,115 26,952,840 174,242,542 47,454 75,712,040 2,625,000 9,020,750 48,665,115 15,401,175 74,211,419 - - 750,000 750,000 - - - 1,125,000 207,326 50,908 49,999,337 24,131,110 13,653,549 12,214,678 - 51,406,362 Currency options 6,158 6,158 2,636,084 1,250,158 725,926 660,000 - 9579,315 Others 15,889 15,889 640,021 106,513 8,158 525,350 - 936,173 - 1,608 264,000 - 264,000 - - 967,125 650,793 112,156 73,058,082 3,875,000 13,393,750 55,489,332 300,000 72,907,493 Total 2,032,823 1,197,475 384,740,255 50,828,451 67,367,199 223,890,590 42,654,015 385,375,429 Derivative financial instruments Positive fair value Negative fair value SAR’ 000 2017 Held for trading Commission rate swaps Commission rate futures and options Forward rate agreements Forward foreign exchange contracts Held as fair value hedges Commission rate swaps Held as cash flow hedges Commission rate swaps Notional amounts by term to maturity SAR’ 000 Notional amount total Within 3 months 3-12 months 1-5 years Over 5 years Monthly average 2016 Held for trading Commission rate swaps 968,787 774,571 159,744,832 10,246,915 18,841,829 113,643,221 17,012,867 159,343,342 11,574 25,098 70,206,099 1,189,947 7,078,307 59,000,770 2,937,075 74,515,925 - - - - - - - 83,833 334,087 261,526 52,424,564 20,693,217 20,982,292 10,749,055 - 56,722,645 Currency options 93,133 93,133 20,166,633 5,912,104 11,974,866 2,279,663 - 35,026,847 Others 42,358 42,358 1,316,557 526,957 219,250 570,350 - 1,820,086 786 4,719 3,076,500 - 2,812,500 264,000 - 3,076,500 290,970 476,700 74,607,678 2,400,000 14,037,500 57,328,178 842,000 76,826,804 1,741,695 1,678,105 381,542,863 40,969,140 75,946,544 243,835,237 20,791,942 407,415,982 Commission rate futures and options Forward rate agreements Forward foreign exchange contracts Held as fair value hedges Commission rate swaps Held as cash flow hedges Commission rate swaps Total 38
49. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 11 Derivatives (Continued) The table below shows a summary of hedged items, the nature of the risk being hedged, the hedging instrument and its fair value. SAR’ 000 Description of hedged items Fair value Cost Risk Hedging instrument Positive Negative fair value fair value 2017 262,316 Fixed commission rate loans Floating commission rate investments 5,454,226 68,142,247 Floating commission rate loans 2016 267,396 Fixed commission rate loans Fixed commission rate debt securities 2,812,690 and sukuk Floating commission rate investments 5,389,588 69,245,113 Floating commission rate loans 264,000 5,380,832 67,677,250 Fair value Commission rate swap Cash flow Commission rate swap Cash flow Commission rate swap 77,038 573,755 1,608 3,644 108,512 264,000 2,812,500 Fair value Commission rate swap Fair value Commission rate swap 786 4,719 - 5,388,928 69,218,750 Cash flow Commission rate swap Cash flow Commission rate swap 24,680 266,290 24,020 452,680 The net (losses) /gains on the hedging instruments for fair value hedge are SAR -2 million (2016: SAR -4 million). The net (losses) /gains on the hedged item attributable to the hedged risk are SAR -2 million (2016: SAR 4 million). Approximately 74% (2016: 72%) of the net positive fair values of the Bank’s derivatives are entered into with financial institutions and less than 11% (2016: 17%) of the net positive fair values of the derivatives are with any single counterpart group at the reporting date. The derivative activities are mainly carried out under Bank’s treasury banking segment. The Bank has posted SAR 142 million (2016: SAR 106 million) and received SAR 455 million (2016: SAR 7 million) collaterals under CSA agreements and EMIR. 12 Due to banks and other financial institutions 2017 SAR’ 000 2016 Current accounts Money market deposits 395,837 2,567,436 261,496 4,027,036 Total 2,963,273 4,288,532 2017 2016 81,474,079 518,928 64,627,605 4,333,575 88,525,872 618,883 65,672,408 3,641,309 150,954,187 158,458,472 13 Customers’ deposits SAR’ 000 Demand Saving Time Other Total Other customers’ deposits include SAR 2,576 million (2016: SAR 2,027 million) related to margins held for irrevocable commitments. Time deposits include Islamic related products of SAR 24,405 million (2016: SAR 18,934 million). 39
50. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 13 Customers’ deposits (Continued) Customers’ deposits include foreign currency deposits as follows: SAR’ 000 2017 2016 Demand Saving Time Other 8,283,003 17,958 14,580,592 1,358,273 9,423,524 25,137 12,576,746 628,652 Total 24,239,826 22,654,059 14 Debt securities and Sukuks During the year, medium term Sharia compliant sukuk of USD 750 million issued in May 2012 was matured and fully settled. In addition, the Bank also settled the unsecured subordinated sukuk of SAR 1,900 million issued in December 2012 .This has been done in line with the early settlement option to repay the unsecured subordinated sukuk after 5 years, subject to prior approval of SAMA and terms and conditions of the agreement. The Bank also issued a privately placed SAR 2,000 million unsecured subordinated sukuk in June 2014 for a period of 10 years. The sukuk carries effective special commission income at three months’ SIBOR plus 140 basis point. The sukuk is settled through Tadawul depository system. However, the Bank has an option to repay the unsecured subordinated sukuk after 5 years, subject to prior approval of SAMA and terms and conditions of the agreement. 15 Other liabilities SAR’ 000 2017 2016 Accounts payable and accrued expenses Others 2,608,464 1,541,536 1,670,427 908,058 Total 4,150,000 2,578,485 16 Share capital The authorised, issued and fully paid share capital of the Bank consists of 1,205 million shares of SAR 10 each (December 31, 2016: 1,205 million shares of SAR 10 each). The ownership of the Bank’s share capital is as follows: 2017 (%) 2016 (%) 2017 Saudi shareholders Credit Agricole Corporate and Investment Bank (CA-CIB) 85.1 14.9 68.9 31.1 10,256,251 1,797,321 8,303,572 3,750,000 Total 100 100 12,053,572 12,053,572 SAR’ 000 2016 During the year (corresponding to 20/09/2017), Credit Agricole Corporate and Investment Bank (CA-CIB) sold its share ownership of 16.2% of the share capital of the Bank to the Kingdom Holding Company. 40
51. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 17 Statutory and general reserve In accordance with Saudi Arabian Banking Control Law and the Articles of Association of the Bank, a minimum of 25% of the annual net income is required to be transferred to a statutory reserve until this reserve equals the paid up capital of the Bank. An amount of SAR 248 million (2016: SAR 878 million) has been transferred from the retained earnings to statutory reserve during the year. This reserve is not available for distribution. The Bank had appropriated SAR 983 million to general reserve from retained earnings in the prior years. 18 Other reserves Cash flow hedges SAR’ 000 Available for sale investments Total 2017 Balance at beginning of the year (894,927) 31,343 (863,584) Net change in fair value Transfer to consolidated statement of income 813,761 (214,124) 6,459 (27,684) 820,220 (241,808) Net movement during the year Balance at the end of the year 599,637 (295,290) (21,225) 10,118 578,412 (285,172) (1,162,468) 67,669 (1,094,799) 279,876 (12,335) 267,541 (894,927) 14,157 (50,483) (36,326) 31,343 294,033 (62,818) 231,215 (863,584) 2016 Balance at beginning of the year Net change in fair value Transfer to consolidated statement of income Net movement during the year Balance at the end of the year Other reserves represent the net unrealized revaluation gains / (losses) of cash flow hedges and available for sale investments. These reserves are not available for distribution. Transfer to consolidated statement of income from available for sale reserve represents, gains and losses on disposal of available for sale investments amounting to SAR 28 million (2016: SAR 50 million). 41
52. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 19 Commitments and contingencies a) Legal proceedings As at December 31, 2017 there were 48 (2016: 37) legal proceedings outstanding against the Bank. No material provision has been made as the related professional legal advice indicates that it is unlikely that any significant loss will arise. b) Capital commitments As at December 31, 2017 the Bank had capital commitments of SAR 65 million (2016: SAR 174 million) in respect of buildings and equipment purchases. c) Credit related commitments and contingencies The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrecoverable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans and advances. Documentary letters of credit which are written undertakings by the Bank on behalf of a customer authorizing a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are generally collateralized by the underlying shipments of goods to which they relate and therefore have significantly less risk. Cash requirements under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement. Acceptances comprise undertakings by the Bank to pay bills of exchange drawn on customers. The Bank expects most acceptances to be presented before being reimbursed by the customers. Commitments to extend credit represent unused portion of authorizations to extend credit, principally in the form of loans and advances, guarantees and letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of loss, which cannot readily be quantified, is expected to be considerably less than the total unused commitment as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The total outstanding commitments to extend credit do not necessarily represent future cash requirements, as many of these commitments could expire or terminate without being funded. 42
53. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 19 Commitments and contingencies (continued) i) The contractual maturity structure for the Bank’s commitments and contingencies is as follows: SAR’ 000 2017 Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit Within 3 months 3-12 months 1-5 years Over 5 years Total 4,154,493 9,945,646 1,778,499 34,850 3,433,853 24,116,841 704,370 1,222,442 672,385 10,346,446 58,241 1,306,067 365,821 195,603 8,260,731 44,774,754 2,541,110 2,758,962 Total 15,913,488 29,477,506 12,383,139 561,424 58,335,557 2016 Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit 3,972,208 10,108,390 1,566,848 847,412 2,424,974 24,715,582 1,050,312 2,077,590 1,114,300 12,709,701 73,962 1,143,830 340,513 271,670 7,511,482 47,874,186 2,691,122 4,340,502 Total 16,494,858 30,268,458 15,041,793 612,183 62,417,292 The outstanding unused portion of non-firm commitments which can be revoked unilaterally at any time by the Bank as at December 31, 2017 is SAR 128,143 million (2016: SAR 127,834 million). ii) The analysis of commitments and contingencies by counterparty is as follows: SAR’ 000 2017 2016 Government and quasi government Corporate Banks and other financial institutions Other 36,805 52,093,022 6,042,423 163,307 94,321 55,149,941 7,030,257 142,773 Total 58,335,557 62,417,292 d) Operating lease commitments The future minimum lease payments under non-cancelable operating leases where the Bank is the lessee are as follows: 2017 2016 Less than 1 year 1 to 5 years Over 5 years 21,575 131,007 203,013 21,201 119,889 235,803 Total 355,595 376,893 SAR’ 000 43
54. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 20 Special commission income and expense SAR’ 000 2017 2016 274,795 1,101 399,872 216,962 3,896 366,014 Due from banks and other financial institutions Loans and advances 675,768 566,584 5,362,154 586,872 301,077 5,082,673 Total 6,604,506 5,970,622 Due to banks and other financial institutions Customers’ deposits Debt securities and sukuks 33,498 1,717,472 153,866 34,703 1,475,146 204,586 Total 1,904,836 1,714,435 2017 2016 267,261 395,533 325,377 268,367 165,625 278,300 471,687 446,151 268,140 159,295 1,422,163 1,623,573 Fees and commission expense - Share trading and brokerage - Card products - Other banking services 52,161 228,462 22,222 39,300 212,870 7,413 Total fees and commission expense 302,845 259,583 1,119,318 1,363,990 2017 2016 Investments- held as FVIS (trading), net Derivatives, net 9,958 260,879 6,916 193,478 Total 270,837 200,394 Special commission income Investments – Available for sale – Held to maturity – Other investments held at amortized cost Special commission expense 21 Fees and commission income, net SAR’ 000 Fees and commission income - Share trading, brokerage, fund management and corporate finance - Trade finance - Project finance and advisory and corporate loans - Card products - Other banking services Total fees and commission income Fees and commission income, net 22 Trading income, net SAR’ 000 44
55. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 23 Dividend income SAR’ 000 2017 2016 8,078 16,024 2017 2016 27,684 50,483 2017 2016 Gains on disposal of property and equipment Reversal of provision on other assets Recoveries of written off loans Other 368 92,867 1,254 159 13,871 92,714 10,030 Total 94,489 116,774 2017 2016 112 92,280 19,713 88 11,182 112,105 11,270 Available for sale investments- Equities 24 Gains on non-trading investments, net SAR’ 000 Available for sale- realized gain 25 Other operating income SAR’ 000 26 Other operating expenses SAR’ 000 Loss on disposal of property and equipment Reinstatement of customer liabilities Other Total 27 Basic and diluted earnings per share Basic and diluted earnings per share for the years ended December 31, 2017 and 2016 are calculated on a weighted average basis by dividing the net income for the year by 1,200 million shares after excluding treasury shares consists of 6.0 million shares as of 31 December 2017 (31 December 2016: 3.1 milllion shares). 28 Gross dividend, zakat and income tax The Board of Directors has proposed final net dividend of SAR 355 million (2016: SAR 530 million) i.e. SAR 0.35 (2016: SAR 0.50) net per share for the year which is subject to the approval of the shareholders at the Annual General Assembly Meeting and the regulatory agencies. The Board of Directors has declared interim gross dividend of SAR 1,141 million (2016: SAR 731 million) i.e.SAR 1.05 (2016: SAR 0.55) net per share. Total gross dividend to 45
56. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 28 Gross dividend, zakat and income tax (continued) Saudi shareholders was SAR 1,312 million (2016: SAR 950 million) and total dividend to foreign shareholders was SAR 483 million (2016: SAR 429 million). Gross dividend 2017 2016 Interim dividend Final proposed gross dividend 1,324,464 470,247 731,295 647,995 Total 1,794,711 1,379,290 SAR’ 000 The zakat and income tax, attributable to Saudi and foreign shareholders are as follows: i) Zakat Zakat attributable to the Saudi shareholders for the year amounted approximately to SAR 91 million (2016: SAR 80 million) which will be deducted from their share of dividend. The Bank has filed its Zakat and Income Tax returns with the General Authority for Zakat and Tax (GAZT) and paid Zakat and Income Tax for financial years up to and including the year 2016 and has received the assessments for the years up to 2013 in which the GAZT raised additional demands aggregating to SAR 1,712 million for the years up to 2013. These additional demands include SAR 1,595 million on account of “disallowance of long-term investments and the addition of long term borrowings to the Zakat base by the GAZT”. The basis for the additional Zakat liability for the years 2005 to 2009 has been contested by the Bank before Board of Grievances (BOG) and for the years 2010 to 2013 will be contested by the Bank before the Preliminary Appeal Committee (PAC). Management is confident of a favourable outcome on the aforementioned appeals and has therefore not made any provisions in respect of the above. The assessments for the years 2014 to 2016 are yet to be raised by the GAZT. However, if long-term investments are disallowed and long-term borrowings added to the Zakat base, in line with the assessments finalized by GAZT for the years referred to above, it would result in significant additional zakat exposure to the bank which remains an industry wide issue and disclosure of which might affect the bank’s position in this matter. ii) Income tax Income tax payable in respect of foreign shareholder – CA-CIB’s current year’s share of income tax is approximately SAR 208 million (2016: SAR 218 million) which will be deducted from their share of dividend. The change in the accounting policy for zakat and income tax ,as mentioned in note 3(a), has the following impacts on the line items of statements of financial position and changes in shareholders' equity: SAR’ 000 Dec 31, 2017 Consolidated Statement of changes in equity Retained earnings Proposed dividend Consolidated statement of financial position Other Liabilities Zakat for the year Tax for the year 91,047 207,795 32,791 84,838 123,838 292,633 Total 298,842 117,629 416,471 46
57. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 29 Cash and cash equivalents Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: SAR’ 000 2017 2016 Cash and balances with SAMA excluding statutory deposit (note 4) Due from banks and other financial institutions maturing within ninety days from the date of acquisition 13,757,625 11,798,158 13,958,295 12,876,632 Total 27,715,920 24,674,790 Due from banks and other financial institutions maturing after ninety days from the date of acquisition were SAR 4,800,000 (2016: SAR 12,462,000) 30 Employees compensation practices SAR’ 000 Categories of employees Senior executives Employees engaged in risk taking activities Employees engaged in control functions Other employees Total 2017 Number of employees Fixed compensation Total compensation Forms of payment 19 38,970 21,235 60,205 Cash 385 211,859 71,429 283,288 Cash 418 2,250 135,102 454,004 24,819 49,891 159,921 503,895 Cash Cash 3,072 839,935 167,374 1,007,309 SAR’ 000 Categories of employees Variable compensation 2016 Number of employees Senior executives Employees engaged in risk taking activities Employees engaged in control functions Other employees Fixed compensation Variable compensation Total compensation Forms of payment 20 40,354 58,478 98,832 Cash 385 213,210 87,494 300,704 Cash 389 2,439 130,842 462,788 36,953 61,487 167,795 524,275 Cash Cash Total 3,233 847,194 Number of employees represents only the closing balance. 244,412 1,091,606 SAR’ 000 2017 2016 Total compensation paid Accrued variable compensation Other employee related costs 1,007,309 20,575 356,659 1,091,606 300,802 Total salaries and employee related costs 1,384,543 1,392,408 47
58. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 30 Employees compensation practices (continued) There are certain benefits paid to employees under various schemes that are recorded under special commission and fee expenses. Senior executives: This comprises senior management having responsibility and authority for formulating strategies, directing and controlling the activities of the Bank including MD. Employees engaged in risk taking activities: This comprises managerial staff within the business lines (Corporate, Retail, Treasury and Investment banking and Brokerage), who are responsible for executing and implementing the business strategy on behalf of the Bank. This includes those involved in recommending and evaluating credit limits and credit worthiness, pricing of loans, undertaking and executing business proposals, treasury dealing activities, investment management and brokerage services. Employees engaged in control functions: This refers to employees working in divisions that are not involved in risk taking activities but engaged in review functions (Risk Management, Compliance, Corporate Governance, Legal, Internal Audit, Finance and Accounting). These functions are fully independent from risk taking units. Other employees: This includes all other employees of the Bank, excluding those already reported under the above categories. Governance of Compensation The Board of Directors of BSF, through the Nomination and Compensation Committee (NCCOM) is responsible for the overall design and oversight of the compensation and performance management system. NCCOM: Terms of Reference a. Overseeing the compensation system’s design and operation on behalf of the Board of Directors; b. Preparing the Compensation Policy and placing it before the Board for approval; c. Periodically reviewing the Compensation Policy on its own or when advised by the Board, and making recommendations to the Board for amending/updating the Policy; d. Periodically evaluating the adequacy and effectiveness of the Compensation Policy to ensure that its stated objectives are achieved; e. Evaluating practices by which compensation is paid for potential future revenues whose timing and likelihood remain uncertain; f. Making recommendations to the Board on the level and composition of remuneration of key executives of the Bank. The key executives for this purpose will include all those executives whose appointment is subject to no objection by SAMA; g. Determination of bonus pool based on risk-adjusted profit of the Bank for payment of performance bonus; h. Reviewing compliance of the Compensation Policy with these Rules and the FSB principles and Standards; i. Performing any other related tasks to comply with the regulatory requirements. j. Considering the suitability of candidates for membership of the Board in accordance with the Articles of Association and approved policies and standards; k. Undertaking an annual review of the requirement of suitable skills and qualifications for the membership of the Board; l. Recommending to the Board criteria for the composition of the Board and its Committees, including the number of Board members, and independence of directors; m. Conducting an annual evaluation of the independent status of each candidate proposed for election at the General Assembly meeting and reporting the results of such evaluation to the Board; 48
59. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 30 Employees compensation practices (continued) n. Satisfying itself to the Board and its committees, as applicable, are in compliance with all regulatory requirements, including its composition; o. Assisting the Board in reviewing the adequacy of the succession planning process and oversee its implementation; p. Reviewing the performance and making recommendations to the Board regarding the compensation of the Senior Management of BSF; q. Reviewing and assessing the adequacy of this Charter every three years and submitting this Charter and any amendments to the Board for approval; r. Conducting self-evaluation to assess the Committee’s contribution and effectiveness in fulfilling its mandate and present it to the Board every three years. Salient Features of BSF Compensation Policy Operating in Saudi Arabia the sole Middle Eastern country member of the G20, BSF Management working closely with the Board of Directors’ has an ingrained culture and track record of running prudent compensation policy during periods of both prosperity and financial crisis. BSF follows strict governance-orientated compensation practices. BSF compensation system is designed to promote meritocracy, control excessive risk-taking and ensures effective risk management. The compensation policy as recently amended by the NCCOM and approved by the Board, conforms to compensation related corporate governance and supports the SAMA rules and Financial Stability Board (FSB) guidelines. It is structured to meet challenges i.e. attracting, retaining and motivating highly skilled staff, recognizing that: a) BSF success heavily depends on the talents and efforts of highly skilled individuals; b) Competition within the Kingdom and the Gulf’s financial services industry for qualified talents has often been intense. In line with the Saudi banking industry practices, BSF uses a mix of fixed and variable compensation. The former is driven by job size, responsibility, supply and jobs’ relative worth in the market. The latter is driven by performance thus payment is based on meeting pre-agreed targets. The fixed compensation package is composed of base salary, allowances and fringe benefits. As a standard practice in the Kingdom, the fixed income is driven by a base pay that is regularly benchmarked and compared with competition to ensure competitiveness. As per Saudi banking industry practice, BSF pays a Performance Bonus, the variable component. As a form of incentive, the Bonus Pool is set by Management and NCCOM working closely with Chief Risk Officer, Chief Financial Officer and Human Resources Manager based on the year’s performance or net profit adjusted to the full range of identifiable risks. BSF as part of its reward philosophy aims on the perfect blend of benefits that is externally competitive to retain, motivate and engage. A level playing field has always been an important consideration in our reward strategy. BSF has designed its compensation structure with prudence. Variable pay deferral, for instance, is generally a sound way to encourage long-term commitment. But doing so when most banks, both in the country and in the region are still paying one-time in cash, requires a degree of caution. Allocation of Bonus to Groups and Divisions is based on Key Performance Indicator (KPI) target achievements. Distribution of bonus to individual employees is based on review of performance by respective supervisors measured in terms of meeting the KPI target. The Bank has implemented deferral bonus policy in the form of cash in 2017 related to annual performance bonus for employees those occupying SAMA no objection required position and those with performance bonus value above defined threshold. Bonuses of all these employees will be subject to deferral over a three year period. 49
60. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 31 Employee benefit obligation General description Benefits payable to the employees of the Bank at the end of their services are accrued based on actuarial valuation conducted by an independent actuary, taking into accounts the provision of the Saudi Arabian Labor Law. The actuarial gains/losses for the year ended 31 December 2017, are not material to the consolidated financial statements taken as a whole. movement in the obligation during the year based on its present value are as follows SAR’ 000 2017 Defined benefit obligation at the beginning of the year Current service cost Interest cost Benefits paid Unrecognized actuarial loss / (gain) 427,113 40,643 14,973 (22,576) (9,559) Defined benefit obligation at the end of the year 450,594 2017 SAR’ 000 Charge /(reversal) for the year Current service cost Interest cost 40,643 14,973 Total 55,616 Principal actuarial assumptions (in respect of the employee benefit scheme) Discount rate Expected rate of salary increase Normal retirement age 2017 3.6% p.a 5% p.a 60 years Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in the region. 50
61. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 31 Employee benefit obligation (continued) Sensitivity of actuarial assumptions The table below illustrates the sensitivity of the Defined Benefit Obligation valuation as at December 31, 2017 to the discount rate (3.6%), salary escalation rate (5%), withdrawal assumptions and mortality rates. 2017 SAR’ 000 Investment return – decrease by 0.5% Future salary growth – increase by 0.5% Retirement age – increase by one year 469,992 469,630 454,194 51
62. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 32 Operating segments Operating segments are identified on the basis of internal reports about components of the Bank that are regularly reviewed by the Bank’s Board of Directors in its function as chief decision maker in order to allocate resources to the segments and to assess its performance. Transactions between operating segments are approved by the management as per agreed terms and are reported according to the Bank’s internal transfer pricing policy. These terms are in line with normal commercial terms and conditions. The revenue from external parties report to the Board is measured in a manner consistent with that in the consolidated statement of income. There have been no changes to the basis of segmentation or the measurement basis for the segment profit or loss since December 31, 2016. The Bank’s primary business is conducted in the Kingdom of Saudi Arabia. a) The Bank’s reportable segments under IFRS 8 are as follows: Retail Banking – incorporates private and small establishment customers' demand accounts, overdrafts, loans, saving accounts, deposits, credit and debit cards, consumer loans, certain forex products and auto leasing. Corporate Banking – incorporates corporate and medium establishment customers’ demand accounts, deposits, overdrafts, loans and other credit facilities and derivative products. Treasury – incorporates treasury services, trading activities, investment securities, money market, Bank’s funding operations and derivative products. Investment banking and brokerage – Investment management services and asset management activities related to dealing, managing, arranging, advising and custody of securities, retail investments products, corporate finance and international and local shares brokerage services and insurance. Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit as included in the internal management reports that are reviewed by chief decision maker. Segment profit is used to measure performance as the management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. The Bank’s total assets and liabilities as at December 31, 2017 and 2016, its total operating income and expenses, share in earnings / (losses) of associates and its net income attributable to equity holders of the Bank for the years then ended by operating segments, are as follows: 52
63. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 32 Operating segments (continued) SAR’ 000 Retail banking Corporate banking Treasury Investment banking and brokerage Total 2017 Total assets Investment in associates Total liabilities 17,791,035 71,996,172 107,093,458 80,341,090 66,836,088 76,049 7,844,173 1,208,300 1,086,065 192,928,881 76,049 161,267,500 Total operating income Share in earnings of associates, net Total operating expenses Net income for the year 1,552,810 1,303,663 249,147 3,000,580 1,107,058 1,893,522 1,759,041 7,568 473,696 1,292,913 263,776 167,474 96,302 6,576,207 7,568 3,051,891 3,531,884 Results Net special commission income Fees and commission income, net Exchange income, net Trading income, net Inter-segment revenue Impairment charges for credit losses, net Depreciation and amortization 1,226,589 184,158 49,240 856,573 134,080 82,220 2,272,168 725,513 2,812 145,755 527,033 45,443 1,153,686 (6,902) 304,079 270,837 (1,002,328) 18,653 47,227 216,549 4,807 4,699,670 1,119,318 356,131 270,837 661,113 151,123 16,500,468 82,875,331 116,504,685 76,460,015 69,346,485 113,220 13,449,698 1,077,071 944,662 203,428,709 113,220 173,729,706 Total operating income Share in earnings of associates, net Total operating expenses Net income for the year 1,491,064 1,189,306 301,758 3,102,854 1,286,645 1,816,209 1,530,734 6,790 246,307 1,291,217 275,062 174,012 101,050 6,399,714 6,790 2,896,270 3,510,234 Results Net special commission income Fees and commission income, net Exchange income, net Trading income, net Inter-segment revenue Impairment charges for credit losses, net Depreciation and amortization 1,175,587 173,251 52,232 817,742 79,514 77,747 2,160,985 937,734 1,390 72,447 688,860 37,499 883,317 14,242 342,240 200,394 (890,189) 16,709 36,298 238,763 5,751 4,256,187 1,363,990 395,862 200,394 768,374 137,706 2016 Total assets Investment in associates Total liabilities 53
64. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 32 Operating segments (continued) b) The Bank’s credit exposure by operating segments is as follows: SAR’ 000 Retail banking Corporate banking Treasury Investment banking and brokerage 16,516,953 240,130 - 106,941,988 32,286,295 - 62,918,538 8,127,552 1,139,615 - 187,517,094 32,526,425 8,127,552 15,322,009 168,960 - 116,360,153 34,132,696 - 65,712,316 4,049,377 1,002,586 - 198,397,064 34,301,656 4,049,377 Total 2017 Statement of financial position assets Commitments and contingencies Derivatives 2016 Statement of financial position assets Commitments and contingencies Derivatives Credit exposure comprises the carrying value of consolidated statement of financial position assets excluding cash, property and equipment, positive fair value of derivative, other assets and credit equivalent value of commitments, contingencies and derivatives. The credit equivalent value of commitments, contingencies and derivatives are calculated as per SAMA guidelines. 33 Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and will cause the other party to incur a financial loss. Credit exposures arise principally in lending activities that lead to loans and advances, and investing activities. There is also credit risk on credit related commitments and contingencies and derivatives. The Bank attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and by continually assessing the creditworthiness of counterparties. The Bank’s risk management policies are designed to identify and to set appropriate risk limits and to monitor the risks and adherence to limits. The Bank’s credit risk for derivatives represents the potential cost to replace the derivative contracts if counterparties fail to fulfill their obligation, and to control the level of credit risk taken, the Bank assesses counterparties using the same techniques as for its lending activities. Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations of credit risk indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographical location. The Bank seeks to manage its credit risk exposure through diversification of lending activities to ensure that there is no undue concentration of risks with individuals or groups of customers in specific locations or business. It also takes security when appropriate. The Bank also seeks additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. 54
65. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 33 Credit risk (continued) Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The Bank regularly reviews its risk management policies and systems to reflect changes in markets products and emerging best practice. On an ongoing basis, the Bank continues to improve its organization and resources in order to achieve strict, prudent and exhaustive risk management. Credit granting is done through a credit committee approach. There are multiple credit committees with delegated authority for credit approval with the highest committee being the Executive Committee of the Board. The delegation to the credit committees is through a risk metric dependent on requested quantum of credit facilities and the credit risk rating. The credit granting due diligence process in the Bank is governed by the tenets in the Credit Policy approved by the Board Risk Committee. Credit risk management function under the Chief Risk Officer is independent of the Business Lines and has the responsibility of providing risk opinions on credit requests received from business lines to credit committees as part of credit granting due diligence and ongoing monitoring of the credit portfolio. The Credit Policy lays down credit underwriting standards through the risk acceptance criteria for different sections of the Banking book. The risk acceptance criteria are approved by the Board Risk Committee. The risk acceptance criteria in turn have to broadly conform to the approved risk appetite statement of the Bank. In order to avoid sectorial credit concentrations and achieve diversification of the loan portfolio the Credit Policy lays down economic sector caps for sectors. The sectorial exposures are reviewed and monitored at regular intervals. Credit risk assessment is done through the in house credit risk rating system. The Corporate credit risk rating system has 7 investment grades, 6 non-investment grades and three default grades. All credit risk ratings are subject to annual review and credit risk ratings are refreshed at yearly intervals. The final credit risk rating that is assigned to a borrower is the one that is approved by the delegated Credit Committee. There are various rating methodologies for different sections of the Banking book. The Bank has a close monitoring mechanism to review the credit quality and rating migrations and periodical reports are submitted to the Board Risk Committee. The Bank gives utmost importance to the ability of the obligors to service debt from their core business generated cash flows. Collateral is never the principal rationale for granting credit. However collateral is taken as a risk mitigant and as a secondary means of repayment for perceived weakness in credit quality. Accepted collaterals are valued at periodical intervals and reviewed for marketability and enforcement. The Bank reviews its loan portfolios to assess Specific Provisions for impaired credits on a quarterly basis. The quantum of Specific Provisions set up is based on the difference between carrying amount of the loan and the estimated recoverable amount. The debt securities included in the investment portfolio are mainly sovereign risk. For analysis of investments by counterparty and the details of the composition of investments, and loans and advances, refer to notes 6 and 7, respectively. Information on credit risk relating to derivative instruments is provided in note 11 and for commitments and contingencies in note 19. 55
66. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 33 Credit risk (continued) Geographical concentration a) The distribution by geographical region for major categories of assets, liabilities, commitments and contingencies and credit exposure accounts is as follows: SAR’ 000 2017 Assets Cash and balances with SAMA Cash in hand Balances with SAMA Due from banks and other financial institutions Current account Money market placements Investments, net Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Investment in associates Positive fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Loans and advances, net Over draft and commercial loans Credit cards Consumer loans Property and equipment, net Other assets Total assets Saudi Arabia GCC & Middle East Total Other Countries North America Europe 913,623 21,417,461 6,451 - 27,051 - 28,651 - - 975,776 21,417,461 9,180,343 248,680 4,924,038 325,613 2,906,945 668,250 - 16,803 487,623 1,259,346 17,498,949 3,037 7,768,188 - 127,653 383,703 - 62,194 - - - 130,690 8,214,085 - 16,980,120 - - - - 16,980,120 33,854 42,195 - - - 76,049 292,800 82,339 173,312 60,270 870,349 494,227 4,220 - 41,349 13,957 1,382,030 650,793 108,369,117 478,952 11,524,408 736,927 1,536,235 543,803 - 530,156 130,026 - 493,927 31 - 109,937,003 478,983 11,524,408 736,927 1,666,261 179,317,404 6,510,105 5,346,561 701,121 1,053,690 192,928,881 56
67. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 33 Credit risk (continued) SAR’ 000 Saudi Arabia GCC & Middle East Europe North America Other Countries Total 2017 Liabilities Due to banks and other financial institutions Current accounts Money market deposits Customers’ deposits Demand Time Saving Other Negative fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Debt securities and sukuks Other liabilities Commitments and contingencies Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit Total Maximum Credit exposure (stated at credit equivalent amounts) Derivatives Held for trading Held as fair value hedges Held as cash flow hedges Total Commitments and contingencies Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit Total 5 1,576,289 261,924 991,147 107,628 - 23,448 - 2,832 - 395,837 2,567,436 81,236,614 62,391,484 518,928 4,325,772 120,115 2,160,910 4,237 12,624 75,211 1,314 3,465 - 101,261 2,252 81,474,079 64,627,605 518,928 4,333,575 462,774 9,240 2,002,565 3,709,804 156,233,475 100,599 13,773 35,370 3,688,075 515,740 1,608 88,551 220,812 1,023,488 141,413 168,326 4,598 592 42,601 154,136 1,083,711 1,608 112,156 2,002,565 4,150,000 161,267,500 7,916,855 39,100,071 2,432,507 199,893 770,921 6204 95,456 3,939,683 25,965 346,816 - 48,527 617,263 76,434 8,260,731 44,774,754 2,541,110 2,677,962 - 81,000 - - 2,758,962 52,127,395 977,018 4,142,104 346,816 742,224 58,335,557 2,495,061 199,640 2,694,701 580,803 104,506 685,309 2,412,927 455 735,677 3,149,059 1,012,997 244,624 1,257,621 340,862 340,862 6,842,650 455 1,284,447 8,127,552 3,276,677 22,748,597 2,432,507 39,979 412,636 6,205 19,091 2,000,234 25,964 179,938 - 9,705 326,915 76,434 3,345,452 25,668,320 2,541,110 931,043 - 40,500 - - 971,543 29,388,824 458,820 2,085,789 179,938 413,054 32,526,425 57
68. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 33 Credit risk (continued) SAR’ 000 Saudi Arabia GCC & Middle East North America Europe Other Countries Total 2016 Assets Cash and balances with SAMA Cash in hand Balances with SAMA Due from banks and other financial institutions Current account Money market placements Investments, net Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Investment in associates Positive fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Loans and advances, net Over draft and commercial loans Credit cards Consumer loans Property and equipment, net Other assets Total assets 879,181 19,412,964 2,737 - 30,077 - 19,149 - - 931,144 19,412,964 16,901,462 147,024 4,395,228 150,252 2,921,412 779,498 - 43,756 - 1,120,530 24,218,102 50,696 5,898,322 75,821 126,860 1,260,703 - 417,612 - - - 177,556 7,576,637 75,821 16,244,365 - - - - 16,244,365 71,025 42,195 - - - 113,220 429,583 40,207 246,747 22,248 773,609 786 228,515 - - 1,449,939 786 290,970 116,387,080 492,293 10,876,838 715,515 1,535,986 601,082 20 1,141 11,738 555,775 67,425 27,001 544,617 164 - 118,088,554 492,477 10,876,838 716,656 1,642,150 190,011,338 6,857,723 5,145,463 825,648 588,537 203,428,709 58
69. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 33 Credit risk (continued) SAR’ 000 Saudi Arabia GCC & Middle East Europe North America Other Countries Total 1,062,706 178,792 2,964,330 50,760 - 28,978 - 2,966 - 261,496 4,027,036 88,378,323 63,642,540 618,868 3,630,328 56,088 2,029,213 15 220 8,879 89 1,361 - 82,582 566 9,400 88,525,872 65,672,408 618,883 3,641,309 445,575 39,407 3,905,163 2,578,485 126,156 61,110 - 624,765 4,719 376,183 2,820,949 - 190 - - 1,196,686 4,719 476,700 6,726,112 2,578,485 164,301,395 5,415,924 3,887,705 29,168 95,514 173,729,706 7,188,616 41,141,063 2,614,339 231,463 1,142,892 37,662 21,913 4,247,867 626 11,765 428,841 - 57,725 913,523 38,495 7,511,482 47,874,186 2,691,122 4,261,002 - 79,500 - - 4,340,502 55,205,020 1,412,017 4,349,906 440,606 1,009,743 62,417,292 1,272,382 67,732 1,340,114 623,312 51,730 675,042 1,193,615 2,106 356,126 1,551,847 367,054 112,652 479,706 2,668 2,668 3,459,031 2,106 588,240 4,049,377 3,019,411 23,830,025 2,614,339 46,293 809,444 5,751 4,305 2,084,075 626 2,431 194,254 - 11,545 362,700 70,405 3,083,985 27,280,498 2,691,121 1,230,152 - 15,900 - - 1,246,052 30,693,927 861,488 2,104,906 196,685 444,650 34,301,656 2016 Liabilities Due to banks and other financial institutions Current accounts Money market deposits Customers’ deposits Demand Time Saving Other Negative fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Debt securities and sukuks Other liabilities Total Commitments and contingencies Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit Total Maximum Credit exposure (stated at credit equivalent amounts) Derivatives Held for trading Held as fair value hedges Held as cash flow hedges Total Commitments and contingencies Letters of credit Letters of guarantee Acceptances Irrevocable commitments to extend credit Total 59
70. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 33 Credit risk (continued) Credit equivalent amounts reflect the amounts that result from translating the Bank’s credit related commitments and contingencies and derivatives liabilities into the risk equivalent of loans using credit conversion factors prescribed by SAMA. Credit conversion factor is meant to capture the potential credit risk related to the exercise of the commitment. b) The distribution by geographical concentration of non - performing loans and advances and impairment for credit losses are as follows: 2017 2016 Non performing, net Allowance for impairment of credit losses Non performing, net Allowance for impairment of credit losses Kingdom of Saudi Arabia Others 3,418,652 3,389 3,421,050 3,389 1,706,897 - 3,004,751 - Total 3,422,041 3,424,439 1,706,897 3,004,751 SAR ‘ 000 Allowance for impairment of credit losses includes specific and collective provisions. 34 Market risk Market Risk is the risk that the fair value or future cash flows of the financial instruments will fluctuate due to changes in market variables such as Interest rates, Foreign Exchange rates and Equity prices. The Bank classifies Market Risk exposures into either Trading or non-trading or Banking Book. Market Risk within Trading & Banking Book is managed and monitored using various indicators such as Value at Risk, Stress Testing and Sensitivities analysis. a) Market risk -Trading book The Board has set limits for the acceptable level of risks in managing the Trading Book. In order to manage the Market Risk in Trading Book, the Bank applies on a daily basis a VAR methodology in order to assess the Market Risk positions held and also to estimate the potential economic loss based on a set of assumptions and changes in market conditions. A VAR methodology estimates the potential negative change in market value of a portfolio at a given confidence level and over a specified time horizon. The Bank uses simulation models to assess the possible changes in the market value of the trading book based on historical data. VAR models are usually designed to measure the market risk in a normal market environment and therefore the use of VAR has limitations because it is based on historical correlations and volatilities in market prices and assumes that the future movements will follow a statistical distribution. The VAR that the Bank measures is an estimate, using a confidence level of 99% of the potential loss that is not expected to be exceeded if the current market positions were to be held unchanged for one day. The use of 99% confidence level depicts that within a one-day horizon, losses exceeding VAR figure should occur, on average, not more than once every hundred days. A specific process of VAR back testing is in this regard performed on a daily basis. The VAR represents the risk of portfolios at the close of a business day, and it does not account for any losses that may occur beyond the defined confidence interval. The actual trading results however, may differ from the VAR calculations and, in particular, the calculation does not provide a meaningful indication of profits and losses in stressed market conditions. 60
71. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) To overcome the VAR limitations mentioned above, the Bank also carries out Stress tests of its portfolio to simulate conditions outside normal confidence intervals. The potential losses occurring under Stress test conditions are reported regularly to the Bank's ALM and Market Risk committees for their review. The Bank’s VaR related information for the year ended December 31, 2017 and 2016 are follows: SAR ‘ 000 Foreign exchange rate Special commission rate risk Overall Trading 2017 VaR as at December 31, 2017 Average VaR for 2017 Maximum VaR for 2017 Minimum VaR for 2017 174 108 583 9 5,345 4,357 6,878 1,903 5,291 4,355 6,907 1,907 37 164 1,024 6 4,666 5,364 7,735 3,019 4,651 5,367 7,731 3,043 2016 VaR as at December 31, 2016 Average VaR for 2016 Maximum VaR for 2016 Minimum VaR for 2016 Overall Trading VaR incorporates compensation effect of positions coming from realized P&L in foreign currencies. b) Market risk non- trading book Market risk on non-trading book mainly arises from the special commission rate, foreign currency exposures and equity price changes. i) Special commission rate risk Special commission rate risk arises from the possibility that the changes in special commission rates will affect either the fair values or the future cash flows of the financial instruments. The Board has established special commission rate gap limits for stipulated periods. The Bank monitors positions daily and uses hedging strategies to ensure maintenance of positions within the established gap limits. The following table depicts the sensitivity to a reasonable possible change in special commission rates, with other variables held constant, on the Bank’s consolidated statement of income or equity. The sensitivity of the special commission income is the effect of the assumed changes in special commission rates with a lowest level at 0%, on the net special commission income for one year, based on the floating rate non-trading financial assets and financial liabilities held as at December 31, 2017, including the effect of hedging instruments. The sensitivity of equity is calculated by revaluing the fixed rate available for sale financial assets, including the effect of any associated hedges as at December 31, 2017 for the effect of assumed changes in special commission rate. The sensitivity of equity is analyzed by maturity of the asset or swap. All the banking book exposures are monitored and analyzed in currency concentrations and relevant sensitivities are disclosed in SAR thousands. 61
72. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) SAR’ 000 2017 Currency BPS change Sensitivity of special commission income Sensitivity of Equity 6 months or less Over 6 month to 1 year Over 1 year to 5 years Total Over 5 years USD +100 -100 17,732 (19,636) (183) 183 (381) 381 (5,851) 5,851 - (6,415) 6,415 SAR +100 -100 41,252 (42,242) (9,628) 9,628 (7,158) 7,158 (193,899) 193,899 (30,822) 30,822 (241,507) 241,507 SAR’ 000 Currency 2016 BPS change Sensitivity of special commission income Sensitivity of Equity 6 months or less Over 1 year to 5 years Over 6 months to 1 year Total Over 5 years USD +100 -100 38,710 (49,851) (470) 470 (528) 528 (542) 542 - (1,540) 1,540 SAR +100 -100 72,699 (56,135) (4,493) 4,493 (5,204) 5,204 (159,083) 159,083 (89,921) 89,921 (258,701) 258,701 Special commission rate sensitivity of assets, liabilities and derivatives The Bank manages exposure to the effects of various risks associated with fluctuations in the prevailing levels of market special commission rates on its financial position and cash flows. The Board sets limits on the level of mismatch of special commission rate re-pricing that may be undertaken, which is monitored daily by the Bank’s Treasury. The table below summarises the Bank’s exposure to special commission rate risks. Included in the table are the Bank’s financial instruments at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. The Bank is exposed to special commission rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and derivative instruments that mature or re-price in a given period. The Bank manages this risk by matching the re-pricing of assets and liabilities through risk management strategies. 62
73. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years Non commission Total 2017 Assets Cash and balances with SAMA Cash in hand Balances with SAMA Due from banks and other financial institutions Current account Money market placements Investments, net Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Investment in associates Positive fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Loans and advances, net Credit cards Consumer loans Over draft and commercial loans Property and equipment, net Other assets Total assets 12,773,000 - - - 975,776 8,644,461 975,776 21,417,461 16,698,949 800,000 - - 1,259,346 - 1,259,346 17,498,949 62,980 1,121,049 3,560,619 60,150 3,856,024 - 7,560 3,129,838 11,331,751 59,694 2,087,750 47,480 - 130,690 8,214,085 16,980,120 - - - - 76,049 76,049 - - - - 1,382,030 650,793 1,382,030 650,793 455,716 131,960 58,272,950 513,855 21,391,527 8,473,312 13,626,503 2,331,839 15,327,189 23,267 73,442 1,318,834 478,983 11,524,408 109,937,003 - - - - 736,927 1,666,261 736,927 1,666,261 93,077,223 26,621,556 36,568,964 19,806,472 16,854,666 192,928,881 63
74. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years Non commission Total Liabilities and shareholders’ equity Due to banks and other financial institutions Current accounts Money market deposits Customers’ deposits Demand Saving Time Other Debt securities and sukuks Negative fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity commission rate sensitivity - On statement of financial position commission rate sensitivity - Off statement of financial position Total commission rate sensitivity gap Cumulative commission rate sensitivity gap 2,567,436 - - - 395,837 - 395,837 2,567,436 8,262,185 42,987,039 2,002,565 21,235,202 - 252,800 - - 73,211,894 518,928 152,564 4,333,575 - 81,474,079 518,928 64,627,605 4,333,575 2,002,565 - - - - 1,083,711 1,608 112,156 4,150,000 1,083,711 1,608 112,156 4,150,000 - - - - 31,661,381 31,661,381 55,819,225 21,235,202 252,800 - 115,621,654 192,928,881 37,257,998 5,386,354 36,316,164 19,806,472 (58,790,489) 7,512,250 50,900,397 377,842 (21,532,491) 12,898,604 87,216,561 20,184,314 (98,766,988) (21,532,491) (8,633,887) 78,582,674 98,766,988 - 64 (98,766,988)
75. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years Non commission Total 2016 Assets Cash and balances with SAMA Cash in hand Balances with SAMA 10,867,000 - - - 931,144 8,545,964 931,144 19,412,964 Due from banks and other financial institutions Current account Money market placements 13,156,102 11,062,000 - - 1,120,530 - 1,120,530 24,218,102 41,035 1,227,296 824 3,848,962 78,109 2,020,001 74,997 512,744 54,696 3,718,419 6,050,000 3,716 5,832,659 610,921 - 177,556 7,576,637 75,821 16,244,365 - - - - 113,220 113,220 - - - - 1,449,939 786 290,970 1,449,939 786 290,970 470,756 213,818 58,941,888 436,436 20,137,186 6,642,452 17,414,327 3,528,240 21,557,145 21,721 55,892 38,008 492,477 10,876,838 118,088,554 - - - - 716,656 1,642,150 716,656 1,642,150 88,767,681 34,321,473 33,879,894 30,921,760 15,537,901 203,428,709 Investments, net Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Investment in associates Positive fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Loans and advances, net Credit cards Consumer loans Over draft and commercial loans Property and equipment, net Other assets Total assets 65
76. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years Non commission Total Liabilities and shareholders’ equity Due to banks and other financial institutions Current accounts Money market deposits Customers’ deposits Demand Saving Time Other Debt securities and sukuks Negative fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity commission rate sensitivity - On statement of financial position commission rate sensitivity - Off statement of financial position Total commission rate sensitivity gap Cumulative commission rate sensitivity gap 3,889,536 137,500 - - 261,496 - 261,496 4,027,036 8,245,578 40,379,162 3,913,422 21,266,853 2,812,690 3,461,586 - - 80,280,294 618,883 564,807 3,641,309 - 88,525,872 618,883 65,672,408 3,641,309 6,726,112 - - - - 1,196,686 4,719 476,700 2,578,485 1,196,686 4,719 476,700 2,578,485 - - - - 29,699,003 29,699,003 56,427,698 24,217,043 3,461,586 - 119,322,382 203,428,709 32,339,983 10,104,430 30,418,308 30,921,760 (69,228,961) 14,672,369 53,661,454 895,138 (36,888,978) 24,776,799 84,079,762 31,816,898 (103,784,481) (36,888,978) (12,112,179) 71,967,583 103,784,481 - 66 (103,784,481)
77. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) Net gap between derivative financial instruments represents the net notional amounts of these financial instruments, which are used to manage the special commission rate risk. The effective special commission rate (effective yield) of a monetary financial instrument is the rate that, when used in a present value calculation, results in the carrying amount of the instrument. The rate is a historical rate for a fixed rate instrument carried at amortized cost and a current market rate for a floating rate instrument or an instrument carried at fair value. ii) Currency Risk Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. The Board has set limits on positions by currencies, which are monitored daily, and hedging strategies are also used to ensure that positions are maintained within the limits. The table below shows the currencies to which the Bank has a significant exposure as at December 31, 2017 and 2016 on its non-trading monetary assets and liabilities and forecasted cash flows. The analysis calculates the effect of reasonable possible movement of the currency rate against SAR, with all other variables held constant, on the consolidated statement of income (due to the fair value of the currency sensitive non-trading monetary assets and liabilities) and equity (due to change in fair value of commission rate swaps used as cash flow hedges). A positive effect shows a potential increase in the consolidated statement of income or equity; whereas a negative effect shows a potential net reduction in the consolidated statement of income or equity. SAR’ 000 Currency Exposures 2017 Change in Currency Rate in % 2016 Effect on Net Income Change in Currency Rate in % Effect on Equity Effect on Net Income Effect on Equity USD +5 (1,622) 344 +5 (13,210) 616 EUR -3 (7) - -3 30 - There is no material impact on equity and net income due to change in other foreign currencies. iii) Currency position The Bank manages exposure to effects of fluctuations in prevailing foreign currency exchange rates on its financial position and cash flows. The Board of Directors sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. At the end of the year, the Bank had the following significant net exposures denominated in foreign currencies: 2017 (Short) / long SAR’ 000 2016 Long US Dollar Euro Pound Sterling Other 94,434 245 (2,160) (7,398) (93,841) (988) (276) 13,486 Total 85,121 (81,619) 67
78. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 34 Market risk (continued) iv) Equity Price Risk Equity price risk refers to the risk of decrease in fair values of equities in the Bank’s non-trading investment portfolio as a result of reasonable possible changes in levels of equity indices and the value of individual stocks. The effect on the Bank’s equity investments held as available for sale due to reasonable possible change in equity indices, with all other variables held constant is as follows: SAR’ 000 Market Indices 2017 Change in equity Price % 2016 Effect on market value Change in equity Price % Effect on market value Tadawul - - +5 11,086 Tadawul - - -5 (11,086) There is no material impact on market value due to change in prices of listed international securities. 35 Liquidity risk Liquidity risk is the risk that the Bank will be unable to meet its net funding requirements. Liquidity risk can be caused by market disruptions or credit downgrades, which may cause certain sources of funding to become unavailable immediately. To mitigate this risk, management has diversified funding sources and assets are managed with liquidity in mind, maintaining an appropriate balance of cash, cash equivalents, and readily marketable securities. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports cover the liquidity position of both the Bank and operating subsidiaries. A summary report, including any exceptions and remedial action taken, is submitted regularly to ALCO. In accordance with the Banking Control Law and the Regulations issued by SAMA, the Bank maintains a statutory deposit with SAMA equal to 7% of total customers’ demand deposits, and 4% of due to banks and other financial institutions (excluding balances due to SAMA and non-resident foreign currency deposits), saving deposits, time deposits, margins of letters of credit and guarantee, excluding all type of repo deposits. In addition to the statutory deposit, the Bank also maintains liquid reserves of not less than 20% of its deposit liabilities, in the form of cash, Saudi Government securities or assets which can be converted into cash within a period not exceeding 30 days. The Bank can also raise additional funds through repo facilities available with SAMA against its holding of Saudi Government securities up to 75% of the nominal value of securities. a) Maturity analysis of assets and liabilities The table below summarizes the maturity profile of the Bank’s assets and liabilities. The expected maturities of assets and liabilities have been determined on the basis of the remaining period at the reporting date to the contractual maturity date and do not take into account the effective maturities as indicated by the Bank’s deposit retention history. Management monitors the maturity profile to ensure that adequate liquidity is maintained. For presentation purposes all demand, saving and other deposit balances have been shown in no fixed maturity. 68
79. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 35 Liquidity risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 2017 Assets Cash and balances with SAMA Cash in hand Balances with SAMA Due from banks and other financial institutions Current account Money market placements Investments, net Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Investment in associates 12,773,000 - - - 975,776 8,644,461 975,776 21,417,461 16,698,949 800,000 - - 1,259,346 - 1,259,346 17,498,949 44,822 267,945 - 60,150 588,364 - 25,718 4,596,708 - 2,713,588 - 47,480 - 130,690 8,214,085 - 90,617 - - 11,731,753 - 5,157,750 - 76,049 16,980,120 76,049 - - - - 1,382,030 650,793 1,382,030 650,793 Positive fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Loans and advances, net Credit cards Consumer loans Over draft and commercial loans Property and equipment, net Other assets 455,716 131,960 39,917,438 - - - - 513,855 16,377,743 - 8,473,312 27,498,460 - 2,331,839 24,082,894 - 23,267 73,442 2,060,468 736,927 1,666,261 478,983 11,524,408 109,937,003 736,927 1,666,261 Total assets 70,380,447 18,340,112 52,325,951 34,286,071 17,596,300 192,928,881 69
80. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 35 Liquidity risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 2017 Liabilities and shareholders’ equity Due to banks and other financial institutions Current accounts Money market deposits Customers’ deposits Demand Saving Time Other Negative fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Debt securities and sukuks Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity 2,567,436 - - - 395,837 - 395,837 2,567,436 41,049,485 - 13,223,460 - 6,702,096 - 3,500,000 - 81,474,079 518,928 152,564 4,333,575 81,474,079 518,928 64,627,605 4,333,575 2,565 - - - 2,000,000 - 1,083,711 1,608 112,156 4,150,000 31,661,381 1,083,711 1,608 112,156 2,002,565 4,150,000 31,661,381 43,619,486 13,223,460 6,702,096 5,500,000 123,883,839 192,928,881 70
81. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 35 Liquidity risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 2016 Assets Cash and balances with SAMA Cash in hand Balances with SAMA Due from banks and other financial institutions Current account Money market placements Investments, net Held as FVIS Available for sale Held to maturity Other investments held at amortised cost Investment in associates 10,867,000 - - - 931,144 8,545,964 931,144 19,412,964 13,156,102 11,062,000 - - 1,120,530 - 1,120,530 24,218,102 35,029 392,074 824 84,115 593,951 74,997 54,696 4,942,733 - 3,716 1,036,958 - 610,921 - 177,556 7,576,637 75,821 90,779 - - 6,908,928 - 9,244,658 - 113,220 16,244,365 113,220 1,449,939 786 290,970 1,449,939 786 290,970 Positive fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Loans and advances, net Credit cards Consumer loans Over draft and commercial loans Property and equipment, net Other assets - - - - 470,756 213,818 48,447,985 - 436,436 18,635,903 - 6,642,452 23,082,186 - 3,528,240 26,669,320 - 21,721 55,892 1,253,160 716,656 1,642,150 492,477 10,876,838 118,088,554 716,656 1,642,150 Total assets 73,674,367 30,887,402 41,630,995 40,482,892 16,753,053 203,428,709 71
82. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 35 Liquidity risk (continued) SAR’ 000 Within 3 months 3-12 months 1-5 years Over 5 years No fixed maturity Total 2016 Liabilities and shareholders’ equity Due to banks and other financial institutions Current accounts Money market deposits Customers’ deposits Demand Saving Time Other Negative fair value of derivatives Held for trading Held as fair value hedges Held as cash flow hedges Debt securities and sukuks Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity 3,889,300 137,736 - - 261,496 - 261,496 4,027,036 39,308,288 - 15,538,382 - 9,260,931 - 1,000,000 - 88,525,872 618,883 564,807 3,641,309 88,525,872 618,883 65,672,408 3,641,309 13,422 2,812,690 1,900,000 2,000,000 - - - - 1,196,686 4,719 476,700 2,578,485 29,699,003 1,196,686 4,719 476,700 6,726,112 2,578,485 29,699,003 43,211,010 18,488,808 11,160,931 3,000,000 127,567,960 203,428,709 72
83. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 35 Liquidity risk (continued) b) Analysis of financial liabilities by remaining contractual maturities The table below summarizes the maturity profile of the Bank's financial liabilities as at December 31, 2017 and 2016 based on contractual undiscounted repayment obligations. As special commission payments up to contractual maturity are included in the table, totals do not match with the consolidated statement of financial position. The contractual maturities of liabilities have been determined based on the remaining period at the reporting date to the contractual maturity date and do not take into account the effective expected maturities. The Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank's deposit retention history. SAR’ 000 Within 3 months 3-12 months 1-5 years No fixed maturity Over 5 years Total 2017 Due to banks and other financial institutions current accounts money market deposits Customers’ deposits Demand Saving Time Other Debt securities and Sukuks 2,573,084 - - - 395,837 - 395,837 2,573,084 41,237,829 18,513 13,509,280 - 6,770,432 - 3,534,844 2,000,000 81,474,079 518,928 152,564 4,333,575 - 81,474,079 518,928 65,204,949 4,333,575 2,018,513 Total 43,829,426 13,509,280 6,770,432 5,534,844 86,874,983 156,518,965 3,890,749 137,736 - - 261,496 - 261,496 4,028,485 25,233,628 30,045,484 9,557,186 1,023,150 - 2,854,132 2,089,274 2,153,180 88,525,872 618,883 564,807 3,641,309 - 88,525,872 618,883 66,424,255 3,641,309 7,096,586 29,124,377 33,037,352 11,646,460 3,176,330 93,612,367 170,596,886 2016 Due to banks and other financial institutions current accounts money market deposits Customers’ deposits Demand Saving Time Other Debt securities and Sukuks Total 73
84. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 36 Fair values of financial assets and liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Valuation models Valuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which market observable prices exist. Assumptions and inputs used in valuation techniques include risk-free and benchmark interest rates, credit spreads and other premium used in estimating discount rates, bond and equity prices and foreign currency exchange rates. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The Bank uses widely recognized valuation models for determining the fair value of common and simpler financial instruments. Observable prices or model inputs are usually available in the market for listed debt and equity securities, exchangetraded derivatives and simple over-the-counter derivatives such as interest rate swaps. Availability of observable market prices and model inputs reduces the need for management judgment and estimation and also reduces the uncertainty associated with determining fair values. Availability of observable market prices and inputs varies depending on the products and markets and is prone to changes based on specific events and general conditions in the financial markets. Valuation models that employ significant unobservable inputs require a higher degree of management judgment and estimation in the determination of fair value. Management judgment and estimation are usually required for selection of the appropriate valuation model to be used, determination of expected future cash flows on the financial instrument being valued, determination of the probability of counterparty default and prepayments and selection of appropriate discount rates. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties; to the extent that the Bank believes that a third party market participant would take them into account in pricing a transaction. Fair values aims also to reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank and the counterparty where appropriate. Valuation Framework The Bank has an established control framework with respect to the measurement of fair values. This framework includes a Market Risk Department, which is independent of Front Office management and reports to the Chief Risk Officer, and which has overall responsibility for independently verifying the results of trading and investment operations and all significant fair value measurements. Specific controls include: - verification of observable pricing; - re-performance of model valuations; - a review and approval process for new models and changes to models involving Risk Division; - back-testing of models against observed market transactions and analysis and investigation of significant daily valuation movements When third party information, such as broker quotes or pricing services, is used to measure fair value, Market Risk Department assesses and documents the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS. This includes: 74
85. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 36 Fair values of financial assets and liabilities (continued) -verifying that the broker or pricing service is approved by the Bank for use in pricing the relevant type of financial instrument; -understanding how the fair value has been arrived at and the extent to which it represents actual market transactions; -when prices for similar instruments are used to measure fair value, how these prices have been adjusted to reflect the characteristics of the instrument subject to measurement; and -if a number of quotes for the same financial instrument have been obtained, then how fair value has been determined using those quotes Any significant valuation issue is reported at a regular frequency (in addition to whenever deemed necessary) to the Bank Market Risk Committee in order to take appropriate actions accordingly. Determination of fair value and fair value hierarchy The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments: Level 1: quoted prices in active markets for the same instrument (i.e. without modification or repackaging) Level 2: quoted prices in active markets for similar assets and liabilities or other valuation techniques for which all significant inputs are based on observable market data: and Level 3: valuation techniques for which any significant input is not based on observable market data. 75
86. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 36 Fair values of financial assets and liabilities (continued) SAR’ 000 Level 1 Level 2 Level 3 Total 2017 Financial assets Derivative financial instruments - 2,032,823 - 2,032,823 Financial investments designated at FVIS (trading) -Fixed rate securities -Floating rate securities 112,434 15,220 3,036 - 112,434 18,256 Total 127,654 3,036 - 130,690 Financial investments available for sale -Fixed rate securities -Floating rate securities -Equity -Others 1,037,217 - 4,594,604 7,056 40,425 2,534,783 1,037,217 4,594,604 40,425 2,541,839 Total 1,037,217 4,601,660 2,575,208 8,214,085 Total 1,164,871 6,637,519 2,575,208 10,377,598 - 1,197,475 - 1,197,475 - 1,197,475 - 1,197,475 - 1,741,695 - 1,741,695 Financial investments designated at FVIS (trading) -Fixed rate securities -Floating rate securities 171,550 - 6,006 - 171,550 6,006 Total 171,550 6,006 - 177,556 Financial investments available for sale -Fixed rate securities -Floating rate securities -Equity -Others 1,373,278 56,502 190,666 9,188 2,389,801 375,083 35,984 3,146,135 1,373,278 2,446,303 226,650 3,530,406 Total 1,629,634 2,764,884 3,182,119 7,576,637 Total 1,801,184 4,512,585 3,182,119 9,495,888 - 1,678,105 - 1,678,105 - 1,678,105 - 1,678,105 Financial Liabilities Derivative financial instruments negative fair value Total 2016 Financial assets Derivative financial instruments Financial Liabilities Derivative financial instruments negative fair value Total 76
87. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 36 Fair values of financial assets and liabilities (continued) Financial investments available for sale include Mudarabah SAR 2,535 million (2016: SAR 3,146 million) which are classified as level 3. This mudarabah investment is valued based on discounted cash flow models, which incorporate assumptions regarding an appropriate credit spread. During the year there have been no transfers in between level 1, level 2 and level 3. The following table shows a reconciliation from the beginning balances to the ending balances for the fair value measurements in Level 3 of the fair value hierarchy: Financial investments classified as available for sale (AFS) SAR’ 000 2017 Balance at the beginning of the year Issues and purchase Settlements and sale Change in the value Balance at the end of the year 2016 3,182,119 953,786 (1,566,951) 6,254 2,772,186 1,596,000 (1,182,965) (3,102) 2,575,208 3,182,119 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: -In the principal market for the asset or liability, or -In the absence of a principal market, in the most advantageous accessible market for the asset or liability The fair values of on-statement of financial position financial instruments, except for held to maturity and other financial instruments held at amortized cost are not significantly different from the carrying values included in the consolidated financial statements. The fair values of loans and advances, commission bearing customers’ deposits, debt securities, due from and due to banks which are carried at amortized cost, are not significantly different from the carrying values included in the consolidated financial statements, since the current market commission rates for similar financial instruments are not significantly different from the contracted rates, and due to the short duration of due from and due to banks. The estimated fair values of the held to maturity investments and other investments held at amortized cost are based on quoted market prices when available or pricing models when used in the case of certain fixed rate bonds. Consequently, differences can arise between carrying values and fair value estimates. The fair values of these investments are disclosed in note 6. The fair values of derivatives are based on the quoted market prices when available or by using the appropriate valuation technique. Derivative products valued using a valuation technique with market observable inputs are mainly commission rate swaps and options, currency swaps and forward foreign exchange contracts. The most frequently applied valuation techniques include forward pricing and swap models, using present value calculations. The models incorporate various inputs including foreign exchange spot and forward rates and commission rate curves. Other investments in level 2 are valued based on market observable date including broker rates etc. The fair values of investments held at amortized cost are SAR 16,786 million (December 31, 2016: 16,110 million against carrying value of SAR 16,980 million (December 31, 2016: 16,244 million) and fair values of investments held to maturity are SAR Nil million (December 31, 2016: 75.91 million) compared to its carrying value of SAR Nil million (December 31, 2016: 75.82 million). 77
88. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 36 Fair values of financial assets and liabilities (continued) The fair values of commission bearing customers’ deposits, debt securities, due from and due to banks and other financial institutions which are carried at amortized cost, are not significantly different from the carrying values included in the consolidated financial statements, since the current market commission rates for similar financial instruments are not significantly different from the contracted rates, and due to the short duration of due from and due to banks and other financial institutions. An active market for these instruments is not available and the Bank intends to realize the carrying value of these financial instruments through settlement with the counter party at the time of their respective maturities. The estimated fair values of the held to maturity investments and other investments held at amortized cost are based on quoted market prices when available or pricing models when used in the case of certain fixed rate bonds. Consequently, differences can arise between carrying values and fair value estimates. The fair values of derivatives are based on the quoted market prices when available or by using the appropriate valuation technique. Financial investments available for sale comprise Mudarabah SAR 2,535 million (December 31, 2016: SAR 3,146 million) which is classified as level 3 The fair value of Mudarabah is derived on discounted cash flow method using current yield curve after adjusting internal credit spread. The Bank uses the discounted cash flow method using current yield curve to arrive at the fair value of loans and advances after adjusting internal credit spread which is SAR 123,602 million (December 31, 2016: SAR 131,632 million). The carrying values of those loans and advances are SAR 121,940 million (December 31, 2016: SAR 129,458 million) 37 Related party transactions and balances In the ordinary course of its activities, the Bank transacts business with related parties. In the opinion of the management and the Board, the related party transactions are carried out on an arm’s length basis. The related party transactions are governed by limits set by the Banking Control Law and Regulations issued by SAMA. The balances as at December 31, 2017 and 2016 resulting from such transactions included in the consolidated financial statements are as follows: SAR’ 000 2017 2016 CA-CIB Group Due from banks and other financial institutions and other assets Due to banks and other financial institutions and other liabilities Derivatives at fair value, net Commitments and contingencies 185,060 91,647 88,933 1,416,998 1,184,495 15,566 58,356 1,853,255 76,049 7,993 142,501 1,600 113,220 7,714 100,617 300 Loans and advances Customers’ deposits Derivatives at fair value, net Commitments and contingencies 7,184,902 9,810,397 12,308 1,418,750 6,275,305 6,375,320 56,325 2,197,365 Bank’s mutual funds Derivatives at fair value, net Customers’ deposits 683 4,672,706 5,987,449 Associates Investments Due to banks and other financial institutions Customers’ deposits Commitments and contingencies Directors, auditors, senior management ,other major shareholders’ and their affiliates 78
89. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 37 Related party transactions and balances (continued) Other major shareholders represent shareholdings excluding the foreign shareholder of more than 5% of the Bank’s share capital. Income and expenses pertaining to transactions with related parties included in the consolidated financial statements are as follows: SAR’ 000 2017 2016 Special commission income -CA-CIB group -Directors, auditors, senior management, other major shareholders’ and their affiliates -Associates 9,785 7,346 279,584 - 230,242 6 Total Special commission income 289,369 237,594 403 213,111 1,024 232,301 Special commission expense -CA-CIB group -Directors, auditors, senior management, other major shareholders’ and their affiliates -Associates -Bank’s mutual funds Total Special commission expense Fees ,commission income and others, net Directors’ fees Other general and administrative expenses 390 1,815 215,719 62,178 4,449 996 299 507 234,131 25,783 3,906 614 The total amount of salaries and employee related benefits to senior management personnel are as follows. SAR’ 000 2017 2016 Short term benefit Long term benefit (deferral bonus) Long term incentive plan Termination benefit 60,205 9,880 10,925 14,427 98,832 - Total 95,437 98,832 The senior management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. 79
90. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 38 Treasury Shares During quarter three 2016, the Bank initiated a plan to acquire treasury shares as authorised by the Board under its Long Term Incentive (LTI) plan which will grant the appreciation award of the Bank share performance to eligible employees as per LTI plan. The eligible employees will benefit from the appreciation in value of the Bank shares over the vesting period. The LTI plan has been commenced on grant date. The Bank settles the appreciation value of the share performance in equity. The significant features of this plan are as follows: Nature of Plan Long Term Incentive Plan Number of outstanding plans Grant date Maturity date Grant price -SAR Vesting period 1 02 July 2017 01 January 2019 23.096 1.5 years Employees remain in service and meets required service criteria Appreciation in Equity Black-Sholes 31.836 Vesting conditions Method of settlement Valuation model Fair value per share on grant date-SAR The share performance will be granted under a service condition along with market condition associated with them. The total amount of expense recognized in these consolidated financial statements in respect of the above share appreciation equity based payment plans for the period is SAR 10.9 million (2016: SAR nil million). Value of the shares as of 31 Dec 2017 SAR 119 Mio (at the grant date SAR 191 Mio) Number of shares granted for appreciation calculation on the grant date Forfeited Shares Number of shares allocated for appreciation calculation as of 31-12-2017 6,000,000 2,250,000 3,750,000 39 Capital adequacy The Bank’s objectives when managing capital are, to comply with the capital requirements set by SAMA; to safeguard the Bank’s ability to continue as a going concern; and to maintain a strong capital base. Capital adequacy and the use of regulatory capital are monitored daily by the Bank’s management. The Bank monitors the adequacy of its capital using ratios established by SAMA. These ratios measure capital adequacy by comparing the Bank’s eligible capital with its statement of financial position assets, commitments and notional amount of derivatives at a weighted amount to reflect their relative risk. SAMA requires holding the minimum level of the regulatory capital of and maintaining a ratio of total regulatory capital to the risk-weighted asset (RWA) at or above the agreed minimum of 8%. SAMA has issued the framework and guidance regarding implementation of the capital reforms under Basel III which are effective from January 1, 2013. Accordingly, the Group’s consolidated Risk Weighted Assets (RWA), total capital and related ratios on a consolidated group basis, calculated under the Basel III framework. The RWAs, total capital and related ratios as at December 31, 2017 and 2016 are calculated using the framework and the methodologies defined under the Basel III framework. 80
91. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 39 Capital adequacy (continued) SAR’ 000 2017 2016 Credit Risk RWA Operational Risk RWA Market Risk RWA 167,323,175 12,222,300 2,542,165 176,255,171 11,660,390 3,901,349 Total RWA 182,087,640 191,816,910 Tier I Capital Tier II Capital 31,897,613 3,417,941 30,235,959 3,869,475 Total Tier I & II Capital 35,315,554 34,105,434 Capital Adequacy Ratio % Tier I ratio Tier I + Tier II ratio 17.52% 19.39% 15.76% 17.78% 40 Investment management, brokerage and corporate finance services The Bank offers investment services to its customers through its subsidiary, which include management of certain investment funds in consultation with professional investment advisors as well as brokerage services.Income from the subsidiaries is included in the consolidated statement of income under fees and commission income, net. Determining whether the Bank controls such an investment fund usually depends on the assessment of the aggregate economic interests of the Bank in the Fund (comprising of its investments, any carried profit and expected management fees) and the investors’ rights to remove the Fund Manager. As a result of the above assessment, the Bank has concluded that it acts as an agent for the investors in all cases, and therefore has not consolidated these funds. However, the Bank’s share of these funds is included in the available for sale investments and fees earned are disclosed under related party transactions. The value of the mutual funds and other private investment portfolio managed by the Bank through its subsidiary was SAR 4,187 million (2016: SAR 4,015 million).The Bank through its subsidiary offers Islamic investment management services to its customers, which include management of certain investment funds in consultation with professional investment advisors, having net asset values as of December 31, 2017 totalling SAR 2,880 million (2016: SAR 2,815 million). 81
92. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 41 Prospective changes in International Financial Reporting Framework The Bank has chosen not to early adopt the following amendments to existing standards and newly issued standards but not yet effective for the Bank’s accounting years beginning on or after 1 January 2018 and is currently assessing their impact. Following is a brief on the new IFRS and amendments to IFRS effective for annual periods beginning on or after 1 January 2018. ‐ IFRS 15 - “Revenue from contracts with customers”, applicable for the annual periods beginning on or after 1 January 2018. The new standard presents a five-step model to determine when to recognize revenue, and at what amount. The application of this standard will have a significant impact on how and when you recognize revenue, with new estimates and judgments, and the possibility of revenue recognition being accelerated or deferred. ‐ Amendments to IFRS 2 -- “Share-based Payment”, applicable for the period beginning on or after 1 January 2018. The amendments cover classification and measurement of three accounting areas, first, measurement of cashsettled share-based payments, second, classification of share-based payments settled net of tax withholdings, and third, accounting for a modification of a share-based payment from cash-settled to equity-settled. ‐ IFRS 16 – “Leases”, applicable for the period beginning on or after 1 January 2019. The new standard eliminates the current dual accounting model for lessees under IAS 17, which distinguishes between on-balance sheet finance leases and off-balance sheet operating leases. Instead, IFRS 16 proposes on-balance sheet accounting model. ‐ IFRS 9 Financial Instruments will be effective from 1 January 2018 and will replace IAS 39 by building models using internal and external experts. The Group will recognize loss allowances based on Expected Credit Loss (ECL) considering forward-looking information. Setting framework with detailed policies and controls including roles and responsibilities will be implemented. The below summarized the implementation strategy and expected impact on the consolidated financial statements Implementation and Impact Analysis of IFRS-9 Implementation strategy In July 2014, the IASB issued IFRS 9 Financial Instruments, the standard that replaces IAS 39 Financial Instruments: Recognition and Measurement effective from 1 January 2018, with early adoption permitted. The Bank considers implementing IFRS 9 as a significant project and therefore has set up a multidisciplinary implementation team with members from its Credit risk and Modeling, Finance, IT, Operations and other respective businesses to achieve a successful and robust implementation. The project is managed by the Chief Financial Officer and the Chief Risk Officer. Classification and measurement The classification and measurement of financial assets (except equity instruments) will depend on how these are managed (the entity’s business model) and their contractual cash flow characteristics. These factors determine whether the financial assets are measured at amortised cost, fair value through other comprehensive income (‘FVOCI’) or fair value through profit or loss (‘FVTPL’). For equity instruments that are not held for trading, the bank may irrevocably elect to designate them as FVOCI, with no subsequent reclassification of gains or losses to the income statement. This election is made on an investment-by-investment basis. The majority of the bank’s debt instruments that are currently classified as available for sale (AFS) will satisfy the conditions for classification as at fair value through other comprehensive income (FVOCI) and hence there will be no change in the accounting for these assets except for new impairment requirements. Equity investments currently measured at FVTPL will continue to be measured on the same basis under IFRS 9. 82
93. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 41 Prospective changes in International Financial Reporting Framework ( continued) The majority of financial assets that are classified as loans and receivables and are measured at amortised cost under IAS 39 are expected to be measured at amortised cost under IFRS 9 as well. instruments that are classified as AFS under IAS 39 may, under IFRS 9, be measured at amortised cost, FVOCI or FVTPL, depending on particular circumstances. Under IFRS 9, the accounting for financial liabilities will largely remain similar to IAS 39, except for the treatment of gains or losses arising from an entity’s own credit risk relating to liabilities designated at FVTPL. The de-recognition rules have been transferred from IAS 39 and have not been changed. The Bank therefore does not expect any material impact on its financial liabilities and the de-recognition accounting policy. Impairment The Bank will recognize impairment allowances based on a forward looking Expected Credit Loss (ECL) approach on financial assets that are not measured via FVTPL. This mainly include financing, investments that are measured at amortised cost or at FVOCI (other than equity investments), interbank placements, financial guarantees, lease receivables and credit commitments. No impairment loss will be recognised on equity investments. The key inputs into the measurement of ECL are the term structure of the following variables:  Probability of default (PD)  Loss given default (LGD)  Exposure at default (EAD) The above parameters are generally derived from internally developed statistical models, other historical data and are adjusted for forward looking information. The Bank will categorize its financial assets into following three stages in accordance with IFRS 9 methodology: • Stage 1: Performing assets: Financial asset(s) that have not significantly deteriorated in credit quality since origination. The impairment allowance will be recorded based on 12 months ECL. Stage 2: Underperforming assets: Financial asset(s) that have significantly deteriorated in credit quality since origination. This credit quality assessment is made by comparing the remaining lifetime PD as at reporting date with the remaining lifetime PD point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations). The impairment allowance will be recorded based on lifetime ECL. • Stage 3: Impaired assets: For Financial asset(s) that are impaired, the Bank will recognise the impairment allowance based on lifetime ECL. The Bank will also consider the forward-looking information in its assessment of significant deterioration in credit risk since origination as well as the measurement of ECLs. The forward-looking information will include the elements such as macroeconomic factors (e.g., unemployment, GDP growth, inflation, profit rates and house prices) and economic forecasts obtained through internal and external sources. To evaluate a range of possible outcomes, the Bank intends to formulate various scenarios. For each scenario, the Bank will derive an ECL and apply a probability weighted approach to determine the impairment allowance in accordance with the accounting standards requirements. The bank is now ready to implement IFRS-9 after due validation by the external consultant. Hedge accounting The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. However, they do not explicitly address macro hedge accounting strategies, which are particularly important for banks. As a result, IFRS 9 allows an accounting policy choice to continue to apply hedge accounting requirements of IAS 39 instead of the requirements of IFRS 9. Based on the analysis performed to date, the bank expects to exercise the accounting policy choice to continue IAS 39 hedge accounting requirements. Overall expected impact 83
94. BANQUE SAUDI FRANSI NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31 , 2017 and 2016 _______________________________________________________________________________________________ 41 Prospective changes in International Financial Reporting Framework ( continued) The bank has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of IFRS 9 on 1 January 2018:     According to transitional provisions for initial application of IFRS 9, the bank is allowed to recognize any difference between previous carrying amount under IAS 39 and the carrying amount at the beginning of the annual reporting period that includes the date of initial application in opening retained earnings. Accordingly, the overall impact on equity and the aggregated carrying value of relevant financial assets is estimated to be 2% to 3% and 0.3% to 0.5% respectively on the date of initial application arising due to application of expected credit loss model as against Incurred loss model; Furthermore and as a result, the bank’s Tier 1 ratio will be impacted primarily from potential increase in credit impairment provisions. Based on the balances as at 31 December 2017, the day 1 impact of IFRS 9 (applicable from 1 January 2018) would be an estimated reduction of approximately 0.06% to 0.10% in Total Capital (Tier I + Tier II ratio) Adequacy Ratio. Further, the key impacts worth highlighting are as follows: o Certain investments, amounting to SAR Nil, that do not meet the criteria to be classified either as at FVOCI or at amortized cost will have to be reclassified to financial assets at FVTPL. Related fair value gains of SR Nil will have to be transferred from available for sale (AFS) financial assets reserve to retained earnings on 1 January 2018. o Gains or losses realized on the sale of equity instruments classified as FVOCI will no longer be transferred to profit or loss, During the year ended 31 December 2017, SAR Nil gains were recognised in profit or loss in relation to the disposal of AFS financial assets. The new standard also introduces extended disclosure requirements and changes in presentation. These are expected to change the nature and extent of the bank’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. Governance and controls The Governance structure and controls are currently under implementation in line with the IFRS-9 Guidance document applicable to Saudi banks. These Guidelines call for establishing a Board approved Governance framework with detailed policies and controls, including clear roles and responsibilities. Caveat: The estimated decrease in shareholders’ equity includes the impact of both balance sheet classification and measurement changes and the increase to credit impairment provisions compared to those applied at 31 December 2017 under IAS 39. The assessment above is a point in time estimate and is not a forecast. The actual effect of the implementation of IFRS 9 on the Bank could vary significantly from this estimate. The Bank continues to refine models, methodologies and controls, and monitor developments in regulatory rule making in advance of IFRS 9 adoption on 1 January 2018. 42 Comparative figures Certain prior period figures have been reclassified to conform to the current period’s presentation. 43 Board of Directors approval The consolidated financial statements were approved by the Board of Directors on 27 February, 2018 corresponding to 11 Jamad Al Thaany 1439H. 84