National Commercial Bank (AlAhli Bank): Unaudited Interim Condensed Consolidated Financial Statements - 30 June 2020

Transcription

1. THE NATIONAL COMMERCIAL BANK (A Saudi Joint Stock Company) UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS PERIOD ENDED 30 JUNE 2020 Ernst & Young KPMG Al Fozan & Partners
8. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements 30 June 2020 (UNAUDITED) 1. GENERAL (1.1) Introduction The financial statements comprise of the interim condensed consolidated financial statements of The National Commercial Bank (the Bank) and its subsidiaries (the Group). The National Commercial Bank is a Saudi Joint Stock Company formed pursuant to Cabinet Resolution No. 186 on 22 Dhul Qida 1417H (30 March 1997) and Royal Decree No. M/19 on 23 Dhul Qida 1417H (31 March 1997), approving the Bank’s conversion from a General Partnership to a Saudi Joint Stock Company. The Bank commenced business as a partnership under registration certificate authenticated by a Royal Decree on 28 Rajab 1369H (15 May 1950) and registered under commercial registration number 4030001588 dated on 19 Safar 1418H (26 June 1997). The Bank initiated business in the name of “The National Commercial Bank” under Royal Decree No. 3737 on 20 Rabi Thani 1373H (26 December 1953). The date of 1 July 1997 was determined to be the effective date of the Bank’s conversion from a General Partnership to a Saudi Joint Stock Company. The Bank’s shares have been trading on Saudi Stock Exchange (Tadawul) since 12 November 2014. The Bank announced on 25 June 2020 that it entered into a framework agreement with Samba Financial Group, a bank listed in the Kingdom of Saudi Arabia stock market, in order to begin a reciprocal due diligence process and to negotiate definitive and binding terms of a potential merger of the two banks. The entry into these discussions does not mean that the merger will happen between the two Banks. If the merger is agreed, it will be subject to various conditions including, without limitation, approval at the Extraordinary general assembly of each bank and approval of the Saudi Arabian regulatory authorities. The Bank's Head Office is located at the following address: The National Commercial Bank Head Office King Abdul Aziz Street P.O. Box 3555, Jeddah 21481, Kingdom of Saudi Arabia www.alahli.com The objective of the Group is to provide a full range of banking and investment management services. The Group also provides non-special commission based banking products in compliance with Shariah rules, which are approved and supervised by an independent Shariah Board. (1.2) Group's subsidiaries The details of the Group's significant subsidiaries are as follows: Name of subsidiary 30 June 2020 Ownership % 31 December 2019 30 June 2019 Description NCB Capital Company (NCBC) 100% 99.94% 99.91% A Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia to manage the Bank's investment services and asset management activities. NCB Capital Dubai Inc. (formerly Eastgate Capital Holdings Inc.) 100% 99.94% 99.91% An exempt company with limited liability incorporated in the Cayman Islands to source, structure and invest in private equity and real estate development opportunities across emerging markets. ______________________________________________________________________________________________ 7
9. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 1. GENERAL (continued) (1.2) Group's subsidiaries Name of subsidiaries NCB Capital Real Estate Investment Company (REIC) Türkiye Finans Katılım Bankası A.Ş. (TFKB) 30 June 2020 Ownership % 31 December 2019 30 June 2019 Description 100% 99.94% 99.91% The Company is a special purpose entity registered in the Kingdom of Saudi Arabia. The primary objective of REIC is to hold and register the real estate assets on behalf of real estate funds managed by NCB Capital Company. 67.03% 67.03% 67.03% A participation bank registered in Turkey that collects funds through current accounts, profit sharing accounts and lends funds to consumer and corporate customers, through finance leases and profit/loss sharing partnerships. As at the period end, TFKB fully owns the issued share capital of TF Varlık Kiralama AŞ, (TFVK) and TFKB Varlik Kiralama A.Ş., which are special purpose entities (SPEs) established in connection with issuance of sukuks by TFKB. Real Estate Development Company (REDCO) 100% 100% 100% A Limited Liability Company registered in the Kingdom of Saudi Arabia. REDCO is engaged in keeping and managing title deeds and collateralised real estate properties on behalf of the Bank. Alahli Insurance Service Marketing Company 100% 100% 100% A Limited Liability Company, engaged as an insurance agent for distribution and marketing of Islamic insurance products in Saudi Arabia. Saudi NCB Markets Limited 100% 100% 100% A Limited Liability Company registered in the Cayman Islands, engaged in trading in derivatives and Repos/ Reverse Repos on behalf of the Bank. Eastgate MENA Direct Equity L.P. 100% 100% 100% A private equity fund domiciled in the Cayman Islands and managed by NCB Capital Dubai. The Fund’s investment objective is to generate returns via investments in Shari’ah compliant direct private equity opportunities in high growth businesses in countries within the Middle East and North Africa (MENA). AlAhli Outsourcing Company 100% 100% 100% A Limited Liability Company registered in the Kingdom of Saudi Arabia, engaged in recruitment services within the Kingdom of Saudi Arabia. ______________________________________________________________________________________________ 8
10. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 2. BASIS OF PREPARATION (2.1) Statement of compliance The interim condensed consolidated financial statements of the Group have been prepared; - In accordance with International Accounting Standard 34, “Interim Financial Reporting” (“IAS 34”) that is endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by the Saudi Organization for Certified Public Accountants (SOCPA); and - In compliance with the provisions of Banking Control Law, the Regulations for Companies in the Kingdom of Saudi Arabia and by-laws of the Bank. The interim consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual consolidated financial statements as at 31 December 2019. (2.2) Basis of measurement The consolidated financial statements are prepared and presented under the historical cost convention except for the measurement at fair value of financial assets held at fair value [derivatives, financial assets held at fair value through income statement (FVIS), Fair value through other comprehensive income (FVOCI) - debt instruments and equity instruments] and defined benefit obligation. In addition, financial assets or liabilities that are carried at amortized cost but are hedged in a fair value hedging relationship are carried at fair value to the extent of the risk being hedged. The statement of financial position is broadly in order of liquidity. (2.3) Functional and presentation currency These consolidated financial statements are presented in Saudi Riyals (SAR) which is the Bank's functional currency and have been rounded off to the nearest thousand Saudi Riyals, except as otherwise indicated. (2.4) Basis of consolidation The consolidated financial statements comprise the financial statements of "The National Commercial Bank" and its subsidiaries (see note 1.2). The financial statements of the subsidiaries are prepared for the same reporting year as that of the Bank, using consistent accounting policies. (a) Subsidiaries Subsidiaries are entities which are controlled by the Group. To meet the definition of control, all three of the following criteria must be met: i) the Group has power over an entity; ii) the Group has exposure, or rights, to variable returns from its involvement with the entity; and iii) the Group has the ability to use its power over the entity to affect the amount of the entity’s returns. Subsidiaries are consolidated from the date on which control is transferred to the Bank and cease to be consolidated from the date on which the control is transferred from the Bank. The results of subsidiaries acquired or disposed off during the period, if any, are included in the consolidated statement of income from the date of the acquisition or up to the date of disposal, as appropriate. ______________________________________________________________________________________________ 9
11. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 2. BASIS OF PREPARATION (continued) (2.4) Basis of consolidation (continued) (b) Non-controlling interests Non-controlling interests represent the portion of net income and net assets of subsidiaries not owned, directly or indirectly, by the Bank in its subsidiaries and are presented separately in the consolidated statement of income and within equity in the consolidated statement of financial position, separately from the Bank’s equity. Any losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the noncontrolling interests to have a deficit balance. (c) Associates Associates are enterprises over which the Group exercises significant influence. Investments in associates are initially recognised at cost and subsequently accounted for under the equity method of accounting and are carried in the consolidated statement of financial position at the lower of the equity-accounted or the recoverable amount. Equity-accounted value represents the cost plus post-acquisition changes in the Group's share of net assets of the associate (share of the results, reserves and accumulated gains/losses based on latest available financial statements) less impairment, if any. The previously recognised impairment loss in respect of investment in associate can be reversed through the consolidated statement of income, such that the carrying amount of the investment in the statement of financial position remains at the lower of the equity-accounted (before provision for impairment) or the recoverable amount. On derecognition the difference between the carrying amount of investment in associate and the fair value of the consideration received is recognised in the consolidated statement of income. (d) Transactions eliminated on consolidation Intra-group balances, and income and expenses (except for foreign currency transaction gains or losses) arising from intragroup transactions are eliminated in preparing the consolidated financial statements. (2.5) Impact of changes in accounting treatment Assessment of the fee income recognition on financing and advances During 2019, in light of enhanced interpretative guidance on fee income, the Bank carried out a reassessment of the timing of the recognition of fee received in connection with its financing and advances. Accordingly, the Bank analyzed whether any upfront fee has an integral component of the effective special rate of the corresponding financial asset via consideration of factors such as provision of distinct service or product, presence of a separate performance obligation and related contract costs. As a result, the Bank identified certain fees that were required to be adjusted to the amortised cost of the related financing and advances.The impact of such adjustment in prior periods was determined to be insignificant in relation to the financial statements as a whole. Therefore, the identified fees were adjusted from the carrying value of financing and advances with a corresponding debit to retained earnings as at 1 January 2019, amounting to SAR 1,177 million. Accordingly, the balances for financing and advances as at 30th June 2019 as reported previously have been restated. Adoption of IFRS 16 Effective 1st January 2019, the Group has adopted new standard IFRS 16 “leases”. In accordance with the modified retrospective method of adoption, the Group applied IFRS 16 at the date of initial application with transition impact of SAR 272 million recognized in retained earnings as of 1st January 2019. For further details please refer note 3.3 of the annual consolidated financial statement of the Group for the year ended 31st December 2019. ______________________________________________________________________________________________ 10
12. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 2. BASIS OF PREPARATION (continued) (2.6) Significant accounting policies, estimates and assumptions (a) Significant accounting estimates and assumptions The accounting estimates and assumptions used in the preparation of these interim condensed financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December 2019, except the explained below: Measurement of the expected credit loss allowance In the preparation of the consolidated financial statements management has made certain additional assumptions in the measurement of Expected Credit Loss (ECL). However, in view of the current uncertainty, any future change in the assumptions and key estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future periods. As the situation is rapidly evolving with future uncertainties, management will continue to assess the impact based on prospective developments (refer note 19). (b) Significant accounting policies The accounting policies used in the preparation of these interim condensed financial statements are consistent with those used in the preparation of the annual consolidated financial statements for the year ended 31 December 2019, in addition the Group adopted the following accounting policy: Government grant The Bank recognizes a government grant related to income, if there is a reasonable assurance that it will be received and the Bank will comply with the conditions associated with the grant. The benefit of a government loan at a below-market rate of interest is treated as a government grant related to income. The below-market rate loan is recognised and measured in accordance with IFRS 9 Financial Instruments. The benefit of the below-market rate of interest is measured as the difference between the initial carrying value of the loan determined in accordance with IFRS 9 and the proceeds received. The benefit is accounted for in accordance with IAS 20 Accounting for government grants and disclosure of government assistance. Government grant is recognised in statement of income on a systematic basis over the periods in which the bank recognises related costs for which the grants is intended to compensate. The grant income is only recognised when the beneficiary is the Bank. Where the customer is the beneficiary, the Bank only records the respective receivable and payable amounts. (2.7) Amendments to existing standards Several amendments and interpretations apply for the first time from 1 January 2020, but do not have an impact on the interim condensed consolidated financial statements of the Group. Amendments to IFRS 3: Definition of a Business The amendment to IFRS 3 clarifies that to be considered a business, an integrated set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Furthermore, it clarified that a business can exist without including all of the inputs and processes needed to create outputs. Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform A fundamental review and reform of major interest rate benchmarks is being undertaken globally. The International Accounting Standards Board (“IASB”) is engaged in a two-phase process of amending its guidance to assist in a smoother transition away from IBOR. ______________________________________________________________________________________________ 11
13. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 2. BASIS OF PREPARATION (continued) (2.7) Amendments to existing standards (continued) Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform (continued) Phase (1) - The first phase of amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures focused on hedge accounting issues. The final amendments, issued in September 2019, amended specific hedge accounting requirements to provide relief from the potential effects of the uncertainty caused by IBOR reform. The amendments are effective from 1 January 2020 and are mandatory for all hedge relationships directly affected by IBOR reform. The Bank has adopted these amendments along with the hedging relief for pre-replacement hedges. Phase (2) - The second phase relates to the replacement of benchmark rates with alternative risk-free rates. Currently, there is uncertainty as to the timing and the methods of transition for phase 2. As a result of these uncertainties, IBOR continues to be used as a reference rate in financial markets and is used in the valuation of instruments with maturities that exceed the expected end date for IBOR. Therefore, the Bank believes the current market structure supports the continuation of hedge accounting as at 30 June 2020. Management is running a project on the Bank’s overall transition activities and continues to engage with various stakeholders to support an orderly transition. The project is significant in terms of scale and complexity and will impact products, internal systems and processes. Amendments to IAS 1 and IAS 8: Definition of Material The amendments provide a new definition of material that states “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments clarify that materiality will depend on the nature or magnitude of information, either individually or in combination with other information, in the context of the financial statements. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. Conceptual Framework for Financial Reporting issued on 29 March 2018 The Conceptual Framework is not a standard, and none of the concepts contained therein override the concepts or requirements in any standard. The purpose of the Conceptual Framework is to assist the IASB in developing standards, to help preparers develop consistent accounting policies where there is no applicable standard in place and to assist all parties to understand and interpret the standards. The revised Conceptual Framework includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. ______________________________________________________________________________________________ 12
14. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 3. CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following: Cash and balances with SAMA excluding statutory deposit Due from banks and other financial institutions with original maturity of three months or less Total 4. 30 June 2020 (Unaudited) 31 December 2019 (Audited) 30 June 2019 (Unaudited) SAR ’000 SAR ’000 SAR ’000 16,618,695 25,653,256 12,684,665 6,834,144 7,021,487 2,321,150 ──────── ──────── ──────── 23,452,839 32,674,743 15,005,815 ════════ ════════ ════════ 30 June 2020 (Unaudited) SAR ’000 31 December 2019 (Audited) SAR ’000 30 June 2019 (Unaudited) SAR ’000 8,382,441 8,350,430 7,364,221 71,956,194 60,714,035 54,562,640 INVESTMENTS, NET Held at FVIS Held at FVOCI 65,967,192 Investments held at amortised cost, net ──────── Total 65,012,107 ──────── 64,702,929 ──────── 146,305,827 134,076,572 126,629,790 ════════ ════════ ════════ a) Investments held at amortised cost, net includes investments amounting to SAR 4,728 million (31 December 2019: SAR 4,654 million and 30 June 2019: SAR 6,745 million) which are held under a fair value hedge relationship. As at 30 June 2020, the fair value of these investments amount to SAR 5,890 million (31 December 2019: SAR 5,078 million and 30 June 2019: SAR 7,216 million). b) Investments, net includes securities that are issued by the Ministry of Finance of Saudi Arabia amounting to SAR 73,720 million (31 December 2019: SAR 69,154 million and 30 June 2019: SAR 62,776 million), and also include investment in Sukuks amounting to SAR 27,755 million, (31 December 2019: SAR 19,943 million and 30 June 2019: SAR 23,716 million). c) Dividend income recognized during the six-month period ended 30 June 2020 for FVOCI investments amounts to SAR 50 million (30 June 2019: SAR 47 million). ______________________________________________________________________________________________ 13
15. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 5. FINANCING AND ADVANCES, NET 30 June 2020 (Unaudited) SAR '000 Consumer & Credit Card Corporate International Others Total Performing financing and advances 139,774,437 140,465,619 22,921,459 15,556,711 318,718,226 Non-performing financing and advances 732,013 ──────── 140,506,450 3,684,766 ──────── 144,150,386 1,495,584 ──────── 24,417,043 ──────── 15,556,711 5,912,363 ──────── 324,630,590 (1,619,575) ──────── 138,886,875 (5,516,101) ──────── 138,634,285 (1,126,130) ──────── 23,290,913 (70,213) ──────── 15,486,498 (8,332,019) ──────── 316,298,571 ════════ ════════ ════════ ════════ ════════ Total financing and advances Allowance for financing losses (ECL allowances) Financing and advances, net 31 December 2019 (Audited) SAR '000 Performing financing and advances Non-performing financing and advances Total financing and advances Allowance for financing losses (ECL allowances) Financing and advances, net Consumer & Credit Card Corporate International Others Total 125,026,583 128,954,291 18,884,948 11,455,493 284,321,315 599,336 3,051,590 1,678,469 ─────── 125,625,919 ─────── 132,005,881 ─────── 20,563,417 ─────── 11,455,493 ─────── 289,650,710 (1,658,002) ─────── 123,967,917 (4,623,323) ─────── 127,382,558 (1,039,418) ─────── 19,523,999 (41,207) ─────── 11,414,286 (7,361,950) ─────── 282,288,760 ═══════ ═══════ ═══════ ═══════ ═══════ - 5,329,395 30 June 2019 (Unaudited) SAR '000 Performing financing and advances Non-performing financing and advances Total financing and advances Allowance for financing losses (ECL allowances) Financing and advances, net Consumer & Credit Card Corporate International Others Total 111,669,699 612,840 ─────── 112,282,539 ─────── 133,838,640 3,258,314 ─────── 137,096,954 ─────── 19,999,228 1,170,876 ─────── 21,170,103 ─────── 11,588,095 23,322 ─────── 11,611,418 ─────── 277,095,662 5,065,352 ─────── 282,161,015 ─────── (1,701,113) ─────── 110,581,425 (4,594,895) ─────── 132,502,059 (949,326) ─────── 20,220,777 (85,184) ─────── 11,526,234 (7,330,518) ─────── 274,830,496 ════════ ════════ ════════ ════════ ════════ Other financing and advances include financial institutions. a) Financing and advances, net, include financing products in compliance with Shariah rules mainly Murabaha, Tayseer and Ijara amounting to SAR 268,288 million (31 December 2019: SAR 239,494 million and 30 June 2019: SAR 230,749 million). ______________________________________________________________________________________________ 14
16. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 5. FINANCING AND ADVANCES, NET (continued) b) Movement in loss allowance for financing and advances at amortised cost for the period is as follows: 30 June 2020 (Unaudited) SAR ’000 Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL 12 month credit not credit ECL impaired impaired Balance as at 1 January 2020 Net impairment charge Transfer to stage 1 Transfer to stage 2 Transfer to stage 3 Bad debts written off Foreign currency translation adjustment Balance as at 30 June 2020 1,715,623 238,858 72,436 (63,986) (12,874) (7,502) ──────── 1,942,555 ════════ 1,581,526 562,477 (49,807) 77,563 (136,613) (14,364) ─────── 2,020,782 ═══════ 4,064,801 839,836 (22,629) (13,577) 149,487 (520,789) (128,447) ─────── 4,368,682 ═══════ Total 7,361,950 1,641,171 (520,789) (150,313) ─────── 8,332,019 ═══════ 31 December 2019 (Audited) SAR ’000 Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL 12 month not credit credit impaired ECL impaired 2,566,045 (698,949) 63,750 (125,490) (58,081) (31,652) ─────── 1,715,623 ═══════ Balance as at 1 January 2019 Net impairment charge/(reversal) Transfer to stage 1 Transfer to stage 2 Transfer to stage 3 Bad debts written off Foreign currency translation adjustment Balance as at 31 December 2019 1,097,784 588,380 (43,923) 138,741 (152,811) (46,645) ─────── 1,581,526 ═══════ 3,762,188 2,257,801 (19,827) (13,251) 210,892 (2,068,054) (64,948) ─────── 4,064,801 ═══════ Total 7,426,017 2,147,232 (2,068,054) (143,245) ─────── 7,361,950 ═══════ 30 June 2019 (Unaudited) SAR ’000 Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL 12 month not credit credit impaired ECL impaired 2,566,045 (86,259) 61,536 (58,809) (9,811) (7,026) ─────── 2,465,675 ═══════ Balance as at 1 January 2019 Net impairment charge/(reversal) Transfer to stage 1 Transfer to stage 2 Transfer to stage 3 Bad debts written off Foreign currency translation adjustment Balance as at 30 June 2019 1,097,784 53,126 (41,577) 77,592 (135,137) (11,996) ─────── 1,039,792 ═══════ 3,762,188 895,678 (19,959) (18,783) 144,948 (866,899) (72,121) ─────── 3,825,051 ═══════ Total 7,426,017 862,545 (866,899) (91,144) ─────── 7,330,518 ═══════ ______________________________________________________________________________________________ 15
17. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 6. DERIVATIVES In the ordinary course of business, the Group utilises 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 special commission rate swaps, counterparties generally exchange fixed and floating rate special commission payments in a single currency without exchanging principal. For currency swaps, fixed special commission payments and principal are exchanged in different currencies. For cross-currency special commission rate swaps, principal and fixed and floating special commission payments 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 special 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 special commission rate contracts that call for a cash settlement for the difference between a contracted special commission rate and the market rate on a specified future date, based 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 a 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. (e) Structured derivative products Structured derivative products provide financial solutions to the customers of the Group to manage their risks in respect of foreign exchange, special commission rate and commodity exposures and enhance yields by allowing deployment of excess liquidity within specific risk and return profiles. The majority of the Group's structured derivative transactions are entered on a back-to-back basis with various counterparties. (6.1) Derivatives held for trading purposes Most of the Group’s derivative trading activities are related to sales, positioning and arbitrage. Sales activities involve offering products to customers and banks 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 profiting from price differentials between markets or products. (6.2) Derivatives held for hedging purposes The Group has adopted a comprehensive system for the measurement and management of risk. Part of the risk management process involves managing the Group's exposure to fluctuations in foreign exchange and special commission rates to reduce its exposure to currency and special commission rate risks to acceptable levels as determined by the Board of Directors within the guidelines issued by SAMA. ______________________________________________________________________________________________ 16
18. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 6. DERIVATIVES (continued) (6.2) Derivatives held for hedging purposes (continued) The Board of Directors has established 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 that positions are maintained within the established limits. The Board of Directors has established the level of special commission rate risk by setting limits on special commission rate gaps for stipulated periods. Asset and liability special commission rate gaps are reviewed on a periodic basis and hedging strategies are used to reduce special commission rate gaps within the established limits. As part of its asset and liability management, the Group uses derivatives for hedging purposes in order to adjust its own exposure to currency and special commission rate risks. This is generally achieved by hedging specific transactions as well as strategic hedging against overall 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, such as special commission rate swaps, special commission rate options and futures, forward foreign exchange contracts and currency options. The Group uses special commission rate swaps to hedge against the special commission rate risk arising from specifically identified fixed special commission rate exposures. The Group also uses special 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. The tables below show the positive and negative fair values of derivative financial instruments, together with the 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 end of the period, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Group’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor to market risk. 30 June 2020 (Unaudited) 31 December 2019 (Audited) 30 June 2019 (Unaudited) SAR'000 SAR'000 SAR'000 Positive fair value Negative fair value Notional amount Positive fair value Negative fair value Notional amount Positive fair value Negative fair value Notional amount Held for trading: Special commission rate instruments Forward/Future foreign exchange contracts 8,581,319 (8,246,331) 265,916,714 4,621,626 (4,356,977) 251,474,994 4,459,218 (4,133,385) 237,482,596 323,666 (86,022) 104,229,569 395,879 (92,285) 79,739,479 345,741 (23,282) 60,431,152 Options 50,588 (39,850) 1,020,432 11,292 (12,908) 377,245 11,226 (11,192) 1,306,534 Others - - - - - - - (165) - Held as fair value hedges: Special commission rate instruments Held as cash flow hedges: Special commission rate instruments Total (3,644,385) 11,316,085 114,361 (1,543,746) 11,559,835 307,254 (1,703,110) 17,392,086 195,066 (121,460) 8,579,151 132,881 (75,664) 4,420,104 215,579 (106,124) 5,514,062 ─────── 9,233,341 ═══════ ─────── (12,138,048) ═══════ ─────── ─────── 5,276,039 391,061,951 ═══════ ═══════ ─────── (6,081,580) ═══════ 82,702 ─────── ─────── ─────── 347,571,657 5,339,018 (5,977,258) ═══════ ═══════ ═══════ ______________________________________________________________________________________________ 17 ─────── 322,126,430 ═══════
19. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 7. CUSTOMERS' DEPOSITS Current accounts Savings Time Others Total 30 June 2020 (Unaudited) SAR ’000 31 December 2019 (Audited) SAR ’000 30 June 2019 (Unaudited) SAR ’000 293,695,096 137,823 72,457,076 14,108,492 250,700,137 132,093 239,826,037 126,701 90,023,429 73,440,416 12,533,656 14,045,249 ──────── ──────── 353,389,315 ════════ ──────── 327,438,403 ════════ 30 June 2020 (Unaudited) SAR ’000 31 December 2019 (Audited) SAR ’000 30 June 2019 (Unaudited) SAR ’000 13,194,257 14,211,912 973,681 9,450,761 9,288,895 15,685,172 13,625,511 471,915 304,231 ──────── 25,607,848 ════════ ──────── 23,218,637 ════════ 380,398,487 ════════ International segment customers deposits included in customers' deposits comprise of: Current accounts Time Others ──────── Total 8. 28,379,850 ════════ DEBT SECURITIES ISSUED As at the reporting date, debt securities issued comprise of non-convertible sukuks issued by the Group, carrying profit at fixed rates, with maturities during 2021. Below is a reconciliation of liabilities arising from financing activities: 30 June 2020 (Unaudited) SAR ’000 31 December 2019 (Audited) SAR ’000 30 June 2019 (Unaudited) SAR ’000 Balance at beginning of the period 1,016,101 9,430,907 9,430,907 Debt securities issued 1,312,560 5,312,980 3,293,739 Debt securities payment (1,487,146) (13,244,516) (10,496,491) Foreign currency translation adjustment (145,257) ─────── 696,258 ═══════ (483,270) (363,171) ─────── ─────── 1,016,101 1,864,984 ═══════ ═══════ Debt securities issued: Balance at end of the period ______________________________________________________________________________________________ 18
20. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 9. CREDIT RELATED COMMITMENTS AND CONTINGENCIES Letters of credit Guarantees Acceptances Irrevocable commitments to extend credit Total 30 June 2020 31 December 2019 30 June 2019 (Unaudited) SAR ’000 (Audited) SAR ’000 (Unaudited) SAR ’000 8,425,688 32,638,225 1,404,392 6,824,570 ─────── 49,292,875 ═══════ 8,975,788 33,708,312 1,682,415 9,469,074 ─────── 53,835,589 ═══════ 7,899,143 33,032,320 1,247,683 10,720,584 ─────── 52,899,730 ═══════ 10. SHARE CAPITAL The authorized, issued and fully paid share capital of the Bank consists of 3,000,000,000 shares of SAR 10 each (30 June 2019: 3,000,000,000 shares of SAR 10 each). The capital of the Bank excluding treasury shares consists of 2,990,418,212 shares of SAR 10 each (30 June 2019: 2,991,171,957 shares of SAR 10 each). 11. DIVIDEND On 25 December 2019, the Board of Directors has recommended the distribution of final dividend of SAR 3,600 million (SAR 1.20 per share) and accordingly, was paid in full during April 2020. On 22 December 2018, the Board of Directors has recommended the distribution of final dividend of SAR 3,288 million (SAR 1.10 per share) and accordingly, was paid in full during April 2019. 12. ZAKAT The Bank is calculating Zakat accruals for the period ended 30 June 2020 based on the new Zakat rules for financing activities. Zakat expense is charged to the statement of income and not accounted for as income tax therefore no deferred zakat is calculated. 13. TIER 1 SUKUK During 2020, the Bank through a Shariah compliant arrangement ("the arrangement") issued additional Tier 1 Sukuk (the "Sukuk"), amounting to SAR 4.2 billion. During the same period, the Bank exercised the call option on its existing Tier 1 sukuk amounting to SAR 1 billion. These arrangements were approved by the regulatory authorities and the Board of Directors’ of the Bank. These Sukuks are perpetual securities in respect of which there is no fixed redemption dates and represents an undivided ownership interest of the Sukuk-holders in the Sukuk assets, with each Sakk constituting an unsecured, conditional and subordinated obligation of the Bank classified under equity. However, the Bank shall have the exclusive right to redeem or call the Sukuks in a specific period of time, subject to the terms and conditions stipulated in the Sukuk Agreement. The applicable profit rate on the Sukuks is payable on each periodic distribution date, except upon the occurrence of a non payment event or non-payment election by the Bank, whereby the Bank may at its sole discretion (subject to certain terms and conditions) elect not to make any distributions. Such non-payment event or non-payment election are not considered to be events of default and the amounts not paid thereof shall not be cumulative or compound with any future distributions. ______________________________________________________________________________________________ 19
21. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 14. BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share for the periods ended 30 June 2020 and 30 June 2019 is calculated by dividing the net income attributable to common equity holders of the Bank (adjusted for Tier 1 sukuk costs) for the periods by the weighted average number of shares outstanding during the period. Diluted earnings per share for the periods ended 30 June 2020 and 30 June 2019 is calculated by dividing the fully diluted net income attributable to equity holders of the Bank (adjusted for Tier 1 sukuk costs) for the periods by the weighted average number of outstanding shares. The diluted earnings per share are adjusted with the impact of the employees' share based payment plan. 15. OPERATING SEGMENTS An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group's other components, whose operating results are reviewed regularly by the Group's management. The Group has five reportable segments, as described below, which are the Group's strategic divisions. The strategic divisions offer different products and services, and are managed separately based on the Group's management and internal reporting structure. Retail Provides banking services, including lending and current accounts in addition to products in compliance with Shariah rules which are supervised by the independent Shariah Board, to individuals and private banking customers. Corporate Provides banking services including all conventional credit-related products and financing products in compliance with Shariah rules to small sized businesses, medium and large establishments and companies. Treasury Provides a full range of treasury and correspondent banking products and services, including money market and foreign exchange, to the Group’s clients, in addition to carrying out investment and trading activities (local and international) and managing liquidity risk, market risk and credit risk (related to investments). Capital Market Provides wealth management, asset management, investment banking and shares brokerage services (local, regional and international). International Comprises banking services provided outside Saudi Arabia including TFK. Transactions between the operating segments are recorded as per the Bank and its subsidiaries' transfer pricing system. The supports and Head Office expenses are allocated to segments using activity-based costing. ______________________________________________________________________________________________ 20
22. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 15. OPERATING SEGMENTS (continued) The Group's total assets and liabilities at period end, its operating income and expenses (total and main items) and net income for the period, by operating segments, are as follows: Retail Total assets Total liabilities - Customers' deposits Total operating income from external customers Intersegment operating income (expense) 30 June 2020 (Unaudited) SAR'000 Capital Market International Corporate Treasury Total 169,981,924 234,417,436 224,449,926 145,500,207 127,914,584 125,704,285 202,226,612 87,529,567 1,860,536 2,455,078 302,006 3,890 37,146,213 33,211,195 28,379,850 557,310,034 483,374,788 380,398,487 4,138,354 708,358 2,676,293 (623,012) 1,821,522 (47,486) 470,363 (1,646) 964,471 (36,214) 10,071,003 - Total operating income of which: - Net special commission income - Fee income from banking services, net 4,846,712 2,053,281 1,774,036 468,717 928,257 10,071,003 4,316,440 488,584 1,870,956 183,822 1,024,306 46,033 9,178 455,812 673,931 77,644 7,894,811 1,251,895 Total operating expenses of which: - Depreciation/amortisation of property, equipment and software and ROU - Net impairment charge for expected credit losses 2,158,058 1,232,776 256,845 156,591 641,089 4,445,359 299,822 45,639 31,642 9,498 51,786 438,387 204,678 764,697 (2,299) - 256,960 1,224,036 (14,361) (12,036) (16,781) - 16,342 (26,836) 2,674,293 808,469 1,500,410 312,126 303,510 5,598,808 30 June 2019 (Unaudited) SAR'000 Capital Market Treasury International Total Other non-operating income (expenses), net Net income for the period before Zakat and income tax Total assets Total liabilities - Customers' deposits Retail Corporate 142,613,555 247,412,377 134,980,443 58,202,026 164,660,871 75,296,426 1,766,922 301,275 32,565,729 28,263,792 476,587,520 409,475,896 234,884,215 56,803,577 12,528,040 3,934 23,218,637 327,438,403 Total operating income from external customers Intersegment operating income (expense) 3,640,487 3,245,152 2,018,053 397,643 699,886 10,001,221 986,188 (1,122,118) 184,929 (8) (48,991) Total operating income of which: - Net special commission income - Fee income from banking services, net 4,626,675 2,123,034 2,202,982 397,635 650,895 10,001,221 4,073,117 493,408 1,918,203 205,116 1,092,160 54,035 8,249 360,956 569,779 94,621 7,661,508 1,208,136 Total operating expenses of which: - Depreciation/amortisation of property, equipment and software and ROU - Net impairment charge for expected credit losses 2,322,685 498,665 259,468 153,420 517,897 3,752,135 293,047 41,951 28,006 9,379 54,961 427,344 264,313 38,057 17,057 - 150,639 470,066 (12,195) (10,754) (12,605) 25,171 (10,361) 2,291,795 1,613,615 1,930,909 158,169 6,238,725 Other non-operating income (expenses), net Net income for the period before Zakat and income tax 22 244,237 - ______________________________________________________________________________________________ 21
23. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 16. DETERMINATION OF FAIR VALUE AND FAIR VALUE HIERARCHY 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 takes place either: - In the accessible 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. Fair value information of the Group's financial instruments is analysed below. a. Fair value information for financial instruments at fair value The Group 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; Level 2: quoted prices in active markets for similar assets and liabilities or 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. The following table shows an analysis of financial instruments recorded at fair value by level of the fair value hierarchy. 30 June 2020 (Unaudited) Level 1 SAR'000 Level 2 Level 3 Total Financial assets Derivative financial instruments Financial assets held at FVIS Financial assets held at FVOCI Investments held at amortised cost, net - fair value hedged Total Financial liabilities Derivative financial instruments Total 873,147 44,942,535 9,233,341 5,592,995 26,866,069 1,916,299 147,590 9,233,341 8,382,441 71,956,194 ─────── 45,815,682 ─────── 5,890,389 ─────── 47,582,794 ─────── ─────── 2,063,889 ─────── 5,890,389 ─────── 95,462,365 ─────── ─────── ═══════ 12,138,048 ─────── 12,138,048 ═══════ ─────── ═══════ 12,138,048 ─────── 12,138,048 ═══════ 31 December 2019 (Audited) SAR'000 Level 1 Financial assets Derivative financial instruments Financial assets held at FVIS Financial assets held at FVOCI Investments held at amortised cost, net - fair value hedged Total Financial liabilities Derivative financial instruments Total Level 2 Level 3 Total 1,349,339 40,165,948 5,276,039 5,246,776 20,390,941 1,754,315 157,146 5,276,039 8,350,430 60,714,035 ─────── 41,515,287 ─────── 5,077,768 ─────── 35,991,524 ─────── ─────── 1,911,461 ─────── 5,077,768 ─────── 79,418,272 ─────── ─────── ═══════ 6,081,580 ─────── 6,081,580 ═══════ ─────── ═══════ 6,081,580 ─────── 6,081,580 ═══════ ______________________________________________________________________________________________ 22
24. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 16. DETERMINATION OF FAIR VALUE AND FAIR VALUE HIERARCHY (continued) a. Fair value information for financial instruments at fair value (continued) 30 June 2019 (Unaudited) Level 1 SAR'000 Level 2 Level 3 Total Financial assets Derivative financial instruments Financial assets held at FVIS Financial assets held at FVOCI Investments held at amortised cost, net - Fair value hedged Total Financial liabilities Derivative financial instruments Total 886,791 47,523,668 5,339,018 4,972,553 6,889,493 1,504,877 149,479 5,339,018 7,364,221 54,562,640 ─────── 48,410,459 ─────── 7,215,565 ─────── 24,416,629 ─────── ─────── 1,654,356 ─────── 7,215,565 ─────── 74,481,444 ─────── ─────── ═══════ 5,977,258 ─────── 5,977,258 ═══════ ─────── ═══════ 5,977,258 ─────── 5,977,258 ═══════ b. Fair value information for financial instruments not measured at fair value The fair value of financing and advances, net amounts to SAR 326,880 million (31 December 2019: SAR 290,470 million and 30 June 2019: SAR 289,923 million). The fair values of due from banks and other financial institutions, due to banks and other financial institutions, customers deposits and debt securities issued at 30 June 2020, 31 December 2019 and 30 June 2019 are not materially different from their respective carrying values. c. Valuation technique and significant unobservable inputs for financial instruments at fair value The Group uses various valuation techniques for determination of fair values for financial instruments classified under levels 2 and 3 of the fair value hierarchy. These techniques and the significant unobservable inputs used therein are analysed below. The Group utilises fund manager reports (and appropriate discounts or haircuts where required) for the determination of fair values of private equity funds and hedge funds. The fund manager deploys various techniques (such as discounted cash flow models and multiples method) for the valuation of underlying financial instruments classified under level 2 and 3 of the respective fund's fair value hierarchy. Significant unobservable inputs embedded in the models used by the fund manager include risk adjusted discount rates, marketability and liquidity discounts and control premiums. For the valuation of unquoted debt securities and derivative financial instruments, the Group obtains fair value estimates from reputable third party valuers, who use techniques such as discounted cash flows, option pricing models and other sophisticated models. d. Transfer between Level 1 and Level 2 of the fair value hierarchy There were no transfers between level 1 and level 2 during 30 June 2020 (31 December 2019: Nil and 30 June 2019: Nil). ______________________________________________________________________________________________ 23
25. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 16. DETERMINATION OF FAIR VALUE AND FAIR VALUE HIERARCHY (continued) e. Reconciliation of Level 3 fair values The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values. 30 June 31 December 30 June 2020 (Unaudited) SAR ’000 2019 (Audited) SAR ’000 2019 (Unaudited) SAR ’000 1,911,461 920,695 920,695 237,076 897,208 (143,518) ─────── 1,911,461 ═══════ 288,831 524,104 (78,644) (630) ─────── 1,654,356 ═══════ Movement of level 3 is as follows: Balance at beginning of the period Total gains/(losses) (realized and unrealized) in consolidated statement of income Purchases (Sales) Others Balance at end of the period (190,623) 482,696 (139,645) ─────── 2,063,889 ═══════ ______________________________________________________________________________________________ 24
26. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 17. CAPITAL ADEQUACY The Group's objectives when managing capital are to comply with the capital requirements set by SAMA to safeguard the Group's ability to continue as a going concern and to maintain a strong capital base. The Group monitors the adequacy of its capital using the ratios and weights established by SAMA. These ratios measure capital adequacy by comparing the Group’s eligible capital with its statement of financial position assets, commitments and contingencies and notional amount of derivatives at a weighted amount to reflect their relative credit risk, market risk and operational risk. SAMA requires Banks to hold the minimum level of the regulatory capital and maintain a ratio of total eligible capital to the riskweighted asset at or above the agreed minimum of 8%. Regulatory Capital is computed for Credit, Market and Operational risks which comprise the Pillar 1 minimum capital requirements. SAMA has issued the framework and guidance regarding implementation of the capital reforms under Basel III - which are effective from 1 January 2013. Accordingly, the Group’s consolidated Risk Weighted Assets (RWA), total eligible capital and related ratios on a consolidated group basis are calculated under the Basel III framework. The following table summarizes the Bank's Pillar-1 Risk Weighted Assets, Tier 1 and Tier 2 capital and capital adequacy ratios. Risk Weighted Assets Credit risk Operational risk Market risk Total Pillar-1 - Risk Weighted Assets Core capital (Tier 1) Supplementary capital (Tier 2) Core and supplementary capital (Tier 1 and Tier 2) Capital Adequacy Ratio (Pillar 1):Core capital (Tier 1) Core and supplementary capital (Tier 1 and Tier 2) 30 June 2020 (Unaudited) SAR ’000 31 December 2019 (Audited) SAR ’000 30 June 2019 (Unaudited) SAR ’000 372,048,087 36,297,788 12,461,262 ─────── 420,807,137 ═══════ 337,218,124 36,073,511 17,039,531 ─────── 390,331,166 ═══════ 332,844,588 34,688,148 16,629,043 ─────── 384,161,779 ═══════ 75,672,590 4,198,601 ─────── 79,871,191 ═══════ 70,168,908 3,014,128 ─────── 73,183,036 ═══════ 67,578,800 3,281,595 ─────── 70,860,395 ═══════ 18.0% 19.0% 18.0% 18.7% 17.6% 18.4% Tier 1 capital of the Group comprises share capital, statutory reserve, other reserves, proposed dividend, retained earnings, tier 1 eligible debt securities, foreign currency translation reserve and non-controlling interests less treasury shares, goodwill, intangible assets and other prescribed deductions. Tier 2 capital comprises of eligible debt securities issued and prescribed amounts of eligible portfolio (collective) provisions less prescribed deductions. The Group uses the Standardized approach of Basel III to calculate the Risk-Weighted Assets and required regulatory capital for Pillar -1 (including Credit Risk, Market Risk and Operational Risk). The Group's Risk Management is responsible for ensuring that minimum required Regulatory Capital calculated is compliant with Basel III requirements. Quarterly prudential returns are submitted to SAMA showing the Capital Adequacy Ratio. 18. COMPARATIVE FIGURES Except for the impact of restatement disclosed in note 2.5 certain other prior period figures have been reclassified to conform to current period presentation, which are not material in nature to the financial statements. ______________________________________________________________________________________________ 25
27. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 19. IMPACT OF COVID-19 ON EXPECTED CREDIT LOSSES (“ECL”) AND SAMA PROGRAMS During the period, the World Health Organisation (“WHO”) declared the Coronavirus (“COVID-19”) outbreak as a pandemic in recognition of its rapid spread across the globe. This outbreak has also affected the GCC region including the Kingdom of Saudi Arabia. The Governments all over the world are taking increasingly stringent steps to contain the spread of the virus. Saudi Arabia has implemented closure of borders, released social distancing guidelines and enforced country wide lockdowns and curfews. Oil prices have also witnessed significant volatility during the current period, owing not just to demand issues arising from COVID-19 as the world economies go into lockdown, but also supply issues driven by volume which had predated the pandemic. The oil prices have shown some recovery in late Q2 2020 as oil producing countries cut back production coupled with increasing of demand as countries emerged from lockdowns. The Bank has evaluated the current situation through conducting stress testing scenarios on expected movements of oil prices and its impact on key credit, liquidity, operational, solvency and performance indicators in addition to other risk management practices to manage the potential business disruption due to COVID-19 outbreak that may have on its operations and financial performance. The steps taken by management also include commencing review of credit exposure concentrations at a more granular level such as the economic sectors, regions, country, counterparty etc., collateral protection, timely review and customer credit rating actions and appropriately restructuring loans, where required. These also take into consideration the impacts of government and SAMA support relief programmes. The prevailing economic conditions post lock down, require the Bank to revise certain inputs and assumptions used for the determination of expected credit losses (“ECL”). These primarily revolve around either adjusting macroeconomic factors used by the Bank in the estimation of expected credit losses or revisions to the scenario probabilities currently being used by the Bank in ECL estimation. During the second quarter of 2020, as more reliable data became available the Bank undertook various adjustments and assessments in response to the evolving COVID-19 situation, which resulted in a significant increase in ECL. In addition to the adjustments to the macroeconomic scenario probabilities made in Q1 2020, the Bank revised the forecast of the macroeconomic factors and updated other underlying credit models in Q2 2020. Further, the Bank conducted proactive, forwardlooking, and accelerated credit risk assessment in the wake of COVID-19 situation, which also contributed to higher ECL. Such assessments resulted in multiple actions such as internal rating downgrade of sizable corporate exposures, higher stage 2 flow, higher expected credit loss for certain highly vulnerable segments, etc. The Bank’s ECL model continues to be sensitive to macroeconomic variables and scenario weightings. As with any forecasts, the projections and likelihoods of occurrence are underpinned by significant judgment and uncertainty and therefore, the actual outcomes may be different to those projected. The impact of such uncertain economic environment is judgmental and the Bank will continue to reassess its position and the related impact on a regular basis. Furthermore, management has performed a detailed assessment to ascertain the specific effects of the pandemic and the resultant government and SAMA support measures, such as the repayment holidays and other mitigating packages, have had on the financing portfolio. The Bank has made updates within its ECL model to refine the application of the staging criteria due to SICR on affected customers to be able to differentiate and reflect appropriately in its models: - Customers whose credit quality appear to have deteriorated on a permanent basis and thus the Bank was required to recognise lifetime ECL losses on such exposures; - Customers whose credit quality have either stayed stable (due to the offsetting nature of availing the government programs on offer) or have declined but the decline is deemed to be temporary as the customer may have sound fundamentals to emerge strongly post lockdown. The Bank will continue to individually assess significant corporate exposures as more reliable data becomes available and accordingly determine if any further adjustment in the ECL is required in subsequent reporting periods. The aggregate impact of various COVID-19 related adjustments contributed an additional ECL of SAR 884 million for the six months period ended 30 June 2020. ______________________________________________________________________________________________ 26
28. The National Commercial Bank (A Saudi Joint Stock Company) Notes To The Interim Condensed Consolidated Financial Statements (continued) 30 June 2020 (UNAUDITED) 19. IMPACT OF COVID-19 ON EXPECTED CREDIT LOSSES (“ECL”) AND SAMA PROGRAMS (continued) SAMA programs and initiatives launched In response to COVID-19, SAMA launched the Private Sector Financing Support Program (“PSFSP”) in March 2020 to provide the necessary support to the Micro Small and Medium Enterprises (MSME) as per the definition issued by SAMA via Circular No. 381000064902 dated 16 Jumada II 1438H. The PSFSP encompasses mainly the following programs: • Deferred payments program; • Loan guarantee program; and • Point of sale (“POS”) and e-commerce service fee support program. As part of the deferred payments program, the Bank is required to defer payments for six months on lending facilities to those companies that qualify as MSMEs. The payment reliefs are considered as short-term liquidity support to address the borrower’s potential cash flow issues. The Bank has effected the payment reliefs by deferring the instalments falling due within the period from 14 March 2020 to 14 September 2020 for a period of six months without increasing the facility tenure. The accounting impact of these changes in terms of the credit facilities has been assessed and are treated as per the requirements of IFRS 9 as modification in terms of arrangement. This resulted in the Bank recognising a modification loss of SAR 144 million during 31 March 2020. To give effect to the guidance issued by SAMA during April 2020, the Bank has also deferred MSME customers classified as Stage 2 and some other stage 1 customers which have met the definition of MSME during Q2 2020 for the same period i.e. 14 March 2020 to 14 September 2020. This has resulted in additional modification loss amounting to SAR 105 million which has been recognised during Q2 2020. The modification losses have been presented as part of special commission income. The Bank continues to believe that in the absence of other factors, participation in the deferment programme on its own, is not considered a significant increase in credit risk. During the six months period ended 30 June 2020, SAR 62 million has been recognised in the statement of income relating to unwinding of modification losses. In order to compensate the related cost that the Bank is expected to incur under the SAMA and other public authorities program, the Bank received SAR 3.3 billion of profit free deposit from SAMA during Q1 2020. Management had determined based on the communication from SAMA, that the government grant primarily relates to compensation for the modification loss incurred on the deferral of payments. The benefit of the subsidised funding rate has been accounted for on a systematic basis, in accordance with government grant accounting requirements. This resulted in a total income of SAR 222 million which has been recognised in the statement of income as at 31 March 2020 on a systematic basis. The management has exercised certain judgements in the recognition and measurement of this grant income. During Q2 2020, the Bank has received additional profit free deposits from SAMA amounting to SAR 3.7 billion with a tenure of 36 months. The benefit of the subsidised funding rate has been accounted for on a systematic basis, in accordance with government grant accounting requirements. This resulted in a total income of SAR 230 million, of which SAR 222 million has been recognised on the statement of income as at June 30, 2020 on a systematic basis and the remaining amount deferred. During the six months period ended 30 June, 2020, SAR 25 million has been charged to the statement of income relating to unwinding of the benefit resulted from the grants. As at 30 June 2020, the Group is yet to participate in the loan guarantee programs. Furthermore, during Q2 2020, SAMA has confirmed to the Bank that the POS and e-commerce service fee amounting to SAR 147 million will be reimbursed to the Bank. However, since the ultimate beneficiaries in this case are the customers, therefore, it is not treated as grant income for the bank under IAS 20. ______________________________________________________________________________________________ 27