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2017

Board of Directors & Financial Statements

بسـم اهلل الرحمـن الرحيـم

5

King Salman Bin Abdulaziz Al SaudCustodian of the Two Holy Mosques

His Royal Highness PrinceMohammed Bin Salman Bin Abdulaziz Al-Saud

Crown Prince, Deputy Prime MinisterAnd Minister of Defense

6

Gentlemen: Shareholders of Banque Saudi Fransi

Greetings,

Banque Saudi Fransi (BSF) Board members are pleased to present their annual report for the fiscal year 2017.

Banque Saudi Fransi is a Saudi Joint Stock Company established by Royal Decree No. M/23 dated Jumada II 17, 1397H (correspond-ing to June 4, 1977), after taking over the operations of the Banque de l’Indochine et de Suez in the Kingdom of Saudi Arabia. The Bank formally commenced its activities on Muharram 1, 1398H (corresponding to December 11, 1977). It 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, issuing bonds and all kinds of Islamic products and services, 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 banks operate mainly in the Kingdom of Saudi Arabia through the following main activities:

A. Retail Banking:incorporates customers’ demand accounts, accounts of private companies and emerging institutions, overdrafts, loans, saving ac-counts, deposits, credit and debit cards, consumer loans, foreign currency transactions and auto leasing.

B. Corporate Banking:incorporates corporate and medium establishment customers’ demand accounts, deposits, overdrafts, loans and other credit facilities and derivative products.

C. Treasury:incorporates treasury services, trading activities, investment securities, money market, Bank’s funding operations and derivative products.

D. 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.

Net income for the 2017 financial year amounted to SAR 3,532 million compared to SAR 3,510 million in 2016, an increase of 0.63%. Net Income increased due to higher Total Operating Income which is increased by 2.75% from SAR 6,400 million in 2016 to SAR 6,576 million in the current financial year.

This increase in Total Operating Income was primarily due to higher Net Special Commission Income and Trading Income which was partially offset by a reduction in Fee and Commission Income, Exchange Income, Dividend Income, Gains on Non-Trading Investments as well as Other Operating Income.

Net special commission income increased by 10.43% to SAR 4,700 million compared to SAR 4,256 million in the previous year.

Total operating expenses for the 2017 financial year amounted to SAR 3,052 million compared to SAR 2,896 million in 2016 with an increase of 5.37%. The increase in Total operating expenses is due to higher Other General and Administrative Expenses, Rent & Premises Related Expenses, Depreciation, Impairment Charges for Investments and Other Operating Expenses which was partially offset by decrease in Impairment charge for Credit losses and Employee Related Expenses.

Total Assets as of year ended December 31, 2017 amounted to SAR 192,929 million against SAR 203,429 million for the previous year with a decrease of 5.16%. Investments as of year ended December 31, 2017 amounted to SAR 25,325 million against SAR 24,074 million for the previous year with an increase of 5.2%. Loan and Advances Portfolio as of year ended December 31, 2017 amounted to SAR 121,940 million against SAR 129,458 million for the previous year with a decrease of 5.81%. Customers Deposits as of year ended December 31, 2017 amounted to SAR 150,954 million against SAR 158,458million for the previous year with a decrease of 4.74%.

Further in this report, information regarding Board’s structure, highlights and activities during 2017 is provided below.

BOARD OF DIRECTORREPORT

7

(1) Names of members of Board of Directors, committees, executive management, their current and previous positions, qualifications and experiences:(A) Board of Directors Members:

1

Name Mr. Sulaiman Al Gwaiz

Current Positions Governor of General Organization for Social Insurance

Previous Positions

Executive Vice President of Riyad Bank 2002-2013.

Head of Retail and Corporate Banking at Riyad Bank 1994-2002.

Director of Central Region, Riyadh Bank 1992-1994.

Head of Public Sector and Commercial Sector, Saudi American Bank SAMBA, 1986-1992

Qualifications Bachelor of Business Administration, University of Portland, 1981

2

Name Mr. Abdulrahman Al Rashed

Current Positions

Executive partner at Rashed Al-Abd Al-Rahman Al-Rashed Company

Chairman of Dammam Hotels Company Board of Directors

Chairman of UNICOIL– Universal Metal Coating Company Board of Directors

Previous Positions

Qualifications Bachelor of Business Administration, Department of Finance, University of Seattle, 1985

3

Name Mr. Mousa Al Omran

Current Positions- CEO of Omran AlOmran Co. Ltd.- Managing Director of Western Bakeries Company

Previous Positions

Qualifications MBA- University of St. Edward, Austin 1994

4

Name Dr. Khaled Mutabagani

Current Positions Pediatric Surgery Consultant- Jeddah National Hospital

Previous Positions- Pediatric Surgery Consultant, King Faisal Specialist Hospital, Jeddah, 2000-2001

- Assistant Professor, King Abdulaziz University, Jeddah, 2000-2002

Qualifications Ph.D- Physiology- Ohio State University 1999

8

5

Name Mr. Ammar Al AlKhodairy

Current Positions- Acting Managing Director– Banque Saudi Fransi from 15/11/2017 to 15/02/2018

- Managing Director - Amwal Al Khaleej Commercial Investment Co. Ltd

Previous Positions- Director of Central region, Banque Saudi Fransi, 2001-2004

- Chairman of Gulf International Bank 2000-2001

Qualifications Master of Engineering Management, George Washington University, 1984

6

Name Mr. Mazin Al Rumaih

Current Positions CEO- Future Generation Investment Company

Previous Positions- Member of the Board of Capital Market Authority 2009-2014

- General Manager & Chief Executive Officer - Samba Capital & Investment Management Company (Samba capital) 2008-2009

Qualifications Bachelor of Accounting and Financial Management – University of Buckingham 1992

7

Name Mr. Bader Al Issa

Current Positions- Chief Financial Officer of Asilah Investment Company

- CEO of Amias Holdings

Previous Positions

Investment Portfolio Manager - HSBC Saudi Arabia Limited 2006-2008

- Financial and Marketing Analyst - SABIC America, Houston, Texas 2002-2004

- Financial Analyst - JP Morgan, London 2001-2002


8

Name Mr. Jacques Prost

Current Positions Executive Vice President, Crédit Agricole Corporate & Investment.

Previous Positions Head of Project Finance – SFI - 2011-2013

Qualifications Bachelor of Finance - University of Paris Dauphine 1988

9

Name Mr. Ryan Fayez *

Current Positions CEO of Savola Group

Previous Positions

- Managing Director and Senior Country Officer- JPMorgan Chase N.A Riyadh Branch (SAMA licensed) 2013-2016

- Chief Executive Officer - JP Morgan Saudi Arabia Limited 2012-2013

- CEO- Goldman Sachs ,Saudi Arabia 2009-2012.

- Executive Director - Goldman Sachs Global, London 2007-2009

Qualifications Bachelor of Mechanical Engineering - Massachusetts Institute of Technology (MIT) 2001

9

10

Name Mr. Patrice couvegnes **

Current Positions -

Previous Positions

- Managing Director - Banque Saudi Fransi 2011-2017

- CEO- credit Agricole – CIB, for Asia 2008-2011

Qualifications Ph.D. in Economics- University of Paris, 1974

11

Name Mr. Sebastien Belhoul ***

Current Positions Head of Corporate Development – Credit Agricole CIB, France

Previous PositionsStrategy Department - Managing Director- Newedge Group France Jan 2013-Oct 2013.

- Global Equity Derivatives - Chief Operating Officer – Credit Agricole CIB France.

Qualifications Master of Management, HEC Paris, France 1996

* Appointed as a member of the Board of Directors as of 17/12/2017, and the appointment will be presented in the first meeting of the General Assembly for approval.

** His membership has been terminated from the Board of Directors and its committees as of 30/11/2017.*** Resigned from the membership of the Board as of 27/07/2017.

10

(B) Committees’ Members(1/B) Executive Committee:

1

Name Mr. Sulaiman Al Gwaiz

Current Positions Governor of General Organization for Social Insurance.

Previous Positions

- Executive Vice President of Riyad Bank 2002-2013.

- Head of Retail and Corporate Banking at Riyad Bank 1994-2002.

- Director of Central Region, Riyadh Bank 1992-1994.

- Head of Public Sector and Commercial Sector, Saudi American Bank SAMBA, 1986-1992.

Qualifications Bachelor of Business Administration, University of Portland, 1981.

2


Current Positions

Executive partner at Rashed Al-Abd Al-Rahman Al-Rashed Company.

- Chairman of Dammam Hotels Company Board of Directors.

- Chairman of UNICOIL – Universal Metal Coating Company Board of Directors

Previous Positions -

Qualifications Bachelor of Business Administration, Department of Finance, University of Seattle, 1985.

3


Current Positions- CEO of Omran AlOmran Co. Ltd.

- Managing Director of Western Bakeries Company



4


Current Positions- Acting Managing Director– Banque Saudi Fransi from 15/11/2017 to 15/02/2018.

- Managing Director- Amwal Al Khaleej Commercial Investment Co. Ltd

Previous Positions- Director of Central region, Banque Saudi Fransi, 2001-2004.

- Chairman of Gulf International Bank 2000-2001.

Qualifications Master of Engineering Management, George Washington University,

5


Current Positions CEO - Future Generation Investment Company.

Previous Positions- Member of the Board of Capital Market Authority 2009-2014.

- General Manager & Chief Executive Officer- Samba Capital & Investment Management Company (Samba capital) 2008-2009

Qualifications Bachelor of Accounting and Financial Management– University of Buckingham 1992.

11

6

Name Mr. Jacques Prost

Current Positions Executive Vice President, Crédit Agricole Corporate & Investment.

Previous Positions Head of Project Finance– SFI- 2011-2013

Qualifications Bachelor of Finance- University of Paris Dauphine 1988

7



Previous Positions

- Managing Director and Senior Country Officer - JPMorgan Chase N.A Riyadh Branch (SAMA licensed) 2013-2016.

- Chief Executive Officer - JP Morgan Saudi Arabia Limited 2012-2013.

- CEO- Goldman Sachs, Saudi Arabia 2009-2012.

- Executive Director - Goldman Sachs Global, London 2007-2009.

Qualifications Bachelor of Mechanical Engineering- Massachusetts Institute of Technology (MIT) 2001.

8

Name Mr. Patrice Couvegnes **

Current Positions -

Previous Positions



- CEO- Goldman Sachs, Saudi Arabia 2009-2012.


Qualifications Ph.D. in Economics- University of Paris, 1974.

* Appointed as a member of the Board of Directors as of 17/12/2017** His membership has been terminated from the Board of Directors and its committees as of 30/11/2017.

12

(2/B) Audit Committee:

1


Current Positions- Chief Financial Officer of Asilah Investment Company.


Previous Positions

nvestment Portfolio Manager - HSBC Saudi Arabia Limited 2006-2008


- Financial Analyst - JP MorganQualifications MBA- Rice University 2006

2

Name Mr. Eid Al ShammaryCurrent Positions Chief Executive Officer of Ithraa Capital

Previous Positions

- Deputy General Manager of Al Seef Investment Company 2007-2008

- Financial and administrative consultant at Eid Al-Shamri for financial and administrative consulting office

- CEO of Inmaia for Real estate and Tourism Development and Investment

Qualifications- Bachelor of Science in Industrial Management, King Fahad University of Petroleum and Minerals 1989

- Public accounting CPA, USA, Colorado 1992

3

Name Dr. Muhammad Ali EkhwanCurrent Positions -

Previous Positions- Advisor to the Minister of Labor 2010-2015

- Vice President, Savola Group for M & A 2004-2009

Qualifications- Ph.D. in Engineering-Economic Systems, Stanford University 1985.

- Master of Operations Research - Stanford University 1976

4

Name Mr. Arnaud ChubinCurrent Positions Head of Internal Audit Worldwide for Credit Agricole Corporate & InvestmentPrevious Positions Senior Country Officer for UK– Credit Agricole CIB 2010-2016.Qualifications MBA-ESSEC Business– France 1977

5

Name Mr. Ammar Al AlKhodairy*

Current Positions- Acting Managing Director– Banque Saudi Fransi from 15/11/2017 to 15/02/2018.

- Managing Director- Amwal Al Khaleej Commercial Investment Co. Ltd

Previous Positions- Director of Central region, Banque Saudi Fransi, 2001-2004.

- Chairman of Gulf International Bank 2000-2001.

Qualifications Master of Engineering Management, George Washington University,

* Resigned from the Audit Committee in 15/11/2017 until the completion of assigning him as Managing Director and re- appointing him as chairman of Audit Committee after obtaining the necessary approvals from the relevant regulatory and supervisory authorities. The Board of Directors of the Bank confirms that in the event of reappointment of Mr. Ammar Al-AlKhodairy as Chairman of the Audit Committee, he will not review or participate in any discussions concerning the work he oversaw during the period of his assignment as Managing Director.

13

*(3/B) Nominations and Remunerations Committee:

1


Current Positions

- Execuitive partner at Rashed Al-Abd Al-Rahman Al-Rashed Company

- Chairman of Dammam Hotels Company Board of Directors

- Chairman of UNICOIL– Universal Metal Coating Company Board of Directors



2


Current Positions- CEO of Omran AlOmran Co. Ltd.- Managing Director of Western Bakeries Company

Previous Positions


3

Name Dr. Khaled Mutabagani

Current Positions Pediatric Surgery Consultant- Jeddah National Hospital

Previous Positions- Pediatric Surgery Consultant, King Faisal Specialist Hospital, Jeddah, 2000-2001

- Assistant Professor, King Abdulaziz University, Jeddah, 2000-2002

Qualifications Ph.D- Physiology- Ohio State University 1999

4

Name Dr. Mansour AlMansour

Current Positions Vice President for Finance and Operating, King Abdullah Center for Petroleum Studies and Research 2016

Previous Positions- Deputy General Manager- Human Resources Development Fund (HRDF) 2014-2016

- Vice President of Human Resources and Administration at Arabian Pipes Company 2006-2014

Qualifications- Ph.D, Applied Linguistics- Ball State University, USA 2004.

- Master of Human Resources - University of Missouri, USA 1997

5

Name Ms. Ivana Bonnet *

Current Positions Senior Country Officer– CACIB Milan.

Previous Positions Human Resources Regional Director for Credit Agricole Corporate & Investment Paris 2007-2014

Qualifications Bachelor of Political Science and International Relations -Institute des Etudes Politiques- Paris France 1981

* Submitted resignation from the Committee for personal reasons on 22/12/2017 and was accepted as of 28/12/2017.

14

(4/B) Risk Committee:

1


Current Positions- Chief Financial Officer of Asilah Investment Company


Previous Positions

Investment Portfolio Manager - HSBC Saudi Arabia Limited 2006-2008


- Financial Analyst- JP Morgan, London 2001-2002


2




Previous Positions

investment Portfolio Manager - HSBC Saudi Arabia Limited 2006-2008


- Financial Analyst - JP Morgan

Qualifications MBA- Rice University 2006

3



Previous Positions


- Chief Executive Officer- JP Morgan Saudi Arabia Limited 2012-2013


- Executive Director- Goldman Sachs Global, London 2007-2009

Qualifications Bachelor of Mechanical Engineering- Massachusetts Institute of Technology (MIT) 2001

15

4

Name Mr. Jean-François Ballay

Current Positions Director of risk management at Credit Agricole Corporate and Investment Paris

Previous PositionsGlobal & EMEA Head of Dept. Optimization & Distribution- CA-CIB Executive Commit-tee Member 2012-2016.

Global & EMEA Head of GLSG 2009-2012.

Qualifications-Master of Economics, University of Lumière Lyon, 1987

-Master of Banking and Finance- University of Lumière Lyon, 1988

5


Current Positions -

Previous Positions-Managing Director- Banque Saudi Fransi 2011-2017

- CEO- Credit Agricole CIB for Asia 2008-2011

Qualifications Ph.D. in Economics, University of Paris 1974

6

Name Mr. Sebastien Belhoul ***

Current Positions Head of Corporate Development– Credit Agricole CIB - France.

Previous Positions- Strategy Department- Managing Director- Newedge Group France Jan 2013-Oct 2013.

- Global Equity Derivatives- Chief Operating Officer – Credit Agricole CIB- France.

Qualifications Master of Management, HEC Paris, France, 1996

* Appointed as a member of the Committee as of 17/12/2017.** His membership has been terminated from the Board of Directors and the its committees as of 30/11/2017.*** Resigned from the Board membership as of 27/07/2017.

16

(5/B) Donations and Social Contributions Committee:

1


Current Positions

- Execuitive partner at Rashed Al-Abd Al-Rahman Al-Rashed Company

- Chairman of Dammam Hotels Company Board of Directors

- Chairman of UNICOIL– Universal Metal Coating Company Board of Directors



2




Previous Positions

investment Portfolio Manager - HSBC Saudi Arabia Limited 2006-2008


- Financial Analyst - JP Morgan

Qualifications MBA- Rice University 2006

3



Previous Positions


- Chief Executive Officer - JP Morgan Saudi Arabia Limited 2012-2013


- Executive Director - Goldman Sachs Global, London 2007-2009

Qualifications Bachelor of Mechanical Engineering - Massachusetts Institute of Technology (MIT) 2001

4


Current Positions -

Previous Positions



- CEO - Goldman Sachs, Saudi Arabia 2009-2012.


Qualifications Ph.D. in Economics - University of Paris, 1974.

* Appointed as a member of the Committee as of 17/12/2017.** His membership has been terminated from the Board of Directors and its committees as of 30/11/2017.

17

(C) Executive Management:

1


Current Positions Acting Managing Director

Previous Positions Chairman of Audit Committee and member of the Board

Qualifications Master

Experiences Executive Director and Board Member of several companies

2

Name Mr. Mazin AlTamimi

Current Positions Senior Executive Director for Business Sector

Previous Positions Regional Manager of Western Region

Qualifications Bachelor

Experiences 30 years of experience in several positions at the bank

3

Name Mr. Adel Mallawi

Current Positions Chief Financial Officer

Previous Positions Head of Global Markets Group


Experiences 24 years of experience in treasury, global and financial markets

4

Name Mr. Thamir Yousef

Current Positions Chief Operations Officer

Previous Positions Head of Information Systems Group


Experiences 23 years of experience in IT and Operations

5

Name Mr. Muneer Khayat

Current Positions Chief Human Capital Officer

Previous Positions Vice President of Human Resources Group


Experiences 17 years of experience in human resources and retail banking

18

(2) Names of companies in which the member of bank’s Board of Directors is a member of its current and previous Boards or from its directors:

Member’s name

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

curre

nt B

oard

of D

irect

ors

or fr

om th

eir d

irect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

prev

ious

Boa

rd o

f Dire

c-to

rs o

r fro

m it

s di

rect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

1 Sulaiman Al Gwaiz

Mobily Inside the Kingdom

Listed Joint stock Company

Royal Sun Insurance Co. (ME)

Inside the Kingdom

Joint stock company

(Maaden ) Saudi Ara-bian Mining Company

Inside the Kingdom

Listed Joint stock

Company

AJIL financial ser-vices company

Inside the Kingdom

Joint stock company

Saudi Industrial Investment Group

Inside the Kingdom

Listed Joint Stock Company

Mastercard Interna-tional (MEA)

Inside the Kingdom

Joint stock company

Hassana Investment Company

Inside the Kingdom

Closed joint stock company

2 Abdulrahman Al Rashed

Rashed Abdulrahman Al Rashed Company

Inside the Kingdom

General partner-ship

SAUDIA Saudi Airlines

Inside the Kingdom

Joint stock company

Abdulaziz Rashed Al Rashed Company

Inside the Kingdom

A limited liability company

Prince Sultan Rehabilitation Center- PSRC

Inside the Kingdom Association

Beit Al Tawazun Company

Inside the Kingdom


Chamber of Com-merce & Industry- Eastern Province

Inside the Kingdom

Govern-mental

Al Awael Holding Inside the Kingdom


Crystal Ice Factory Inside the Kingdom Institution

Alyamama Investment Company

Inside the Kingdom


UNICOIL– Univer-sal Metal Coating Company

Inside the Kingdom


Dammam Hotels Company Ltd.

Inside the Kingdom


Ettifaq Club Inside the Kingdom Sport club

3 Mousa Al Omran

Almarai Inside the Kingdom

Listed Joint Stock Company Savola Group Inside the

Kingdom


Omran Al Omran Company

Inside the Kingdom

Closed Joint Stock Company

Western Bakeries Company

Inside the Kingdom

19

Member’s name

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

curre

nt B

oard

of D

irect

ors

or fr

om th

eir d

irect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

prev

ious

Boa

rd o

f Dire

c-to

rs o

r fro

m it

s di

rect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

4 Ammar Al AlKhodairy

Ateba’acom Com-pany

Inside the Kingdom


Al Tayyar Travel Group

Inside the Kingdom


Amwal Al Khaleej Commercial Invest-ment Company

Inside the Kingdom


Arabian Shield Co-operative Insurance Company

Inside the Kingdom


Al Amwal AlKhaleejiah Company

Inside the Kingdom


Mobile Telecommu-nications Company Saudi Arabia (Zain)

Inside the Kingdom


Al - Latifia Company for plastic nets

Inside the Kingdom

A limited liability company Savola Group Inside the

Kingdom


Global Company for Downstream Industries

Inside the Kingdom


Herfy Food Services Company

Inside the Kingdom


Zuhoor Al Reef Company

Inside the Kingdom


Kingdom Holding Company

Inside the Kingdom


U- Mark Inside the Kingdom


Allianz Saudi Fransi Cooperative Insur-ance

Inside the Kingdom


5 Mazin Al Rumaih

Future Generation for Investments

Inside the Kingdom


Capital Market Authority

Inside the Kingdom

Govern-mental body

Sulaiman Al Habeeb Medical Group

Inside the Kingdom


Samba Capital & Investment Manage-ment Company

Inside the Kingdom


Saudi Fransi Capital Inside the Kingdom


HSBC Saudi Arabia Limited

Inside the Kingdom


Sada Company Inside the Kingdom


Al Yammamh Steel Company

Inside the Kingdom


Food concepts Ltd. Inside the Kingdom


20

Member’s name Na

mes

of c

ompa

nies

in

whic

h th

e Bo

ard’

s m

em-

ber i

s a

mem

ber o

f its

cu

rrent

Boa

rd o

f Dire

ctor

s or

from

thei

r dire

ctor

s

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

prev

ious

Boa

rd o

f Dire

c-to

rs o

r fro

m it

s di

rect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

6 Bader Al Issa

Asilah for Investment Inside the Kingdom

Closed joint stock company Saudi Fransi Capital Inside the

Kingdom


Savola Group Inside the Kingdom


Kinan International for Real Estate Develop-ment Company

Inside the Kingdom

Closed Joint stock company

United Sugar Com-pany

Inside the Kingdom


Afia International Company

Inside the Kingdom


Savola Foods Inside the Kingdom


Dur Hospitality Company

Inside the Kingdom


Amias Holdings Inside the Kingdom


Panda Retail Com-pany

Inside the Kingdom


Ajyad Knowledge

CompanyInside the Kingdom




21

Member’s name

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

curre

nt B

oard

of D

irect

ors

or fr

om th

eir d

irect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

Nam

es o

f com

pani

es in

wh

ich

the

Boar

d’s

mem

-be

r is

a m

embe

r of i

ts

prev

ious

Boa

rd o

f Dire

c-to

rs o

r fro

m it

s di

rect

ors

Insid

e th

e Ki

ngdo

m\

Outs

ide

the

King

dom

Lega

l Ent

ity

7 Rayan Fayez

Savola Group Inside the Kingdom


JPMorgan Chase N.A Riyadh Branch (SAMA licensed) Riyadh Branch

Inside the Kingdom


Saudi Agricultural & Livestock Investment Company (SALIC)

Inside the Kingdom


JPMorgan Saudi Arabia Limited

Inside the Kingdom

A lim-ited liability company

Kinan International Real Estate Develop-ment Company

Inside the Kingdom

Closed Joint stock company Savola foods Inside the

Kingdom

Closed Joint stock company

Knowledge Economic City

Inside the Kingdom

Listed joint stock company

Saudi Stock Ex-change (Tadawul)

Inside the Kingdom




Hassana Investment Company

Inside the Kingdom


Herfy for food services

Inside the Kingdom


Panda Retail com-pany

Inside the Kingdom


Human Resources Development Fund (HRDF)

Inside the Kindgom

Saudizing jobs in private sector

8 Jacques Prost

CACIB FranceOutside the King-dom

Joint stock company

CREDIT AGRICOLE INDOSUEZ MILAN ITALIE

Outside the Kingdom

joint stock company

Credit Agricole Pay-ment Service

Outside the King-dom

Joint stock company

CREDIT AGRICOLE SUISSE

Outside the Kingdom

joint stock company

FIA NET EUROPEOutside the King-dom

Joint stock company

CREDIT AGRICOLE CIB ZAO RUSSIA

Outside the Kingdom

joint stock company

CREDIT AGRICOLE CIB CHINA

Outside the Kingdom

joint stock company

IMMOFI CACIB Outside the Kingdom

joint stock company

CREDIT AGRICOLE IMMOBILIER

Outside the Kingdom

joint stock company

22

(3) Composition of the Board of Directors and the classification of its members:

Member’s name Position Membership classification

1 Sulaiman Al Qwaiz Chairman Non-executive

2 Abdulrahman Al Rashed Vice chairman Non-executive

3 Mousa Al Omran Member Independent

4 Dr. Khaled Mutabagani Member Independent

5 Ammar Al Khodairy* Member Independent

6 Mazin Al Rumaih Member Non- executive

7 Bader Al Issa Member Independent

8 Rayan Fayez Member Executive

9 Jacques Prost Member Non-executive

10 Vacant

* Assigned to the position of Managing Director to facilitate the bank’s work as of 15/11/2017 until the new Managing Director takes over his duties.

(4) Brief description of the functions and tasks of committees:The Board of Directors of Banque Saudi Fransi has formed five committees for three-years period from 01/01/2016 to 31/12/2018, they are: the Executive Committee, the Audit Committee, the Nominations and Remunerations Committee, the Risk Committee and the Donations and Social Contributions Committee. These committees have their powers under their own regulations. These committees are as follows:

23

(4/A) Executive Committee:The powers of the Board of Directors shall be exercised in following-up and management of the Bank’s business and affairs by an authority from the Board. The Committee consists of (7) members and held (7) meetings during the year 2017 with an attendance rate of 88%, and the Corporate Secretary of the Bank acts as the Secretary of this Committee. The following are the members of the Com-mittee and its meetings during the year 2017:

Name Type of Membership

Number of Meetings (7) Meetings

Firs

t Mee

ting

21/0

2/20

17

Seco

nd M

eet-

ing

30/0

3/20

17

Third

Mee

ting

20/0

4/20

17

Four

th M

eetin

g 06

/06/

2017

Fifth

Mee

ting

28/0

9/20

17

Sixt

h M

eetin

g 15

/11/

2017

Seve

nth

Mee

t-in

g 13

/12/

2017

1 Sulaiman Al Qwaiz Chairman

2 Abdulrahman Al Rahsed Member

3 Mousa AlOmran Member

4 Ammar AlKhodairy Member

5 Mazin Al Rumaih Member

6 Jacques Prost Member

7 Rayan Fayez* Member - - - - - - -

8 Patrice couvegnes** Member -

* Appointed as a member of the Committee as of 17/12/2017.** His membership has been terminated from the Board of Directors and its committees as of 30/11/2017

The committee’s main responsibilities include but not limited to:

• Taking timely decisions on issues on which a delay may have an adverse impact on the reputation and work of the Bank. Decisions requiring Board’s approval or approval of the other committees will not be made by this Committee.

• Making decision related to the appointment or termination of consultants in matters relating to the development of strategies and policies, as well as to negotiate and approve consultants’ fees on such matters.

• Studying and taking decisions on the transactions of related parties within the powers specified in the approved “delegation of authorities table”, and making recommendations to the Board of Directors regarding transactions that exceed the limits of the com-mittee’s powers (in accordance with the delegation of authority table ).

• Approving loans and credit facilities for Banque Saudi Fransi’s customers as per the bank’s approved delegation of authorities table, in line with SAMA rules and regulations on loans and credit facilities.

• Reviewing the periodic reports of management performance and making recommendations to the Board of Directors thereon.• Reviewing the annual budgets, plans and material differences in the budget (if any) before submitting them to the Board for review.• Requesting periodic reports from the Audit Committee and Risk Committee on the results and any updates related to risks, their

evaluation and plans to process them.• Critically assessing business strategies and plans.• Monitoring and measuring the long term objectives set by the Board.• Reviewing and making recommendations to the Board with respect to the governance documents, such as the Articles of Association.• Reviewing budget and spending as proposed by the Business Lines and Support Divisions and sending it to the Board for its

review and approval.

24

(4/B) Audit Committee:In the meeting held on 20/04/2017, the General Assembly approved the formation of the Audit Committee and the determination of the tasks and controls of its work along with annual remunerations and allowances of its members in accordance with the Companies Law for the current session ending on 31/12/2018. The committee consists of (5) members, presided by a member of the Board and four non-executive members. The members of the Audit Committee have high academic qualifications and high professional experiences, including knowledge of accounting standards and the ability to read financial reports, in addition to understanding the laws and regula-tions issued by the competent authorities. The Audit Committee held (7) meetings during the year 2017 with an attendance rate of 91%. The Corporate Secretary of the Bank acts as the Secretary of this Committee. The following are the members of the Committee and its meetings during the 2017:

Name Type of membership

Number of Meetings (7) meetings

Firs

t Mee

ting

19/0

2/20

17

Seco

nd M

eetin

g 19

/04/

2017

Third

Mee

ting

24/0

6/20

17

Four

th M

eetin

g 20

/09/

2017

Fifth

Mee

ting

23/1

0/20

17

Sixt

h M

eetin

g 11

/12/

2017

Seve

nth

Mee

ting

21/1

2/20

17

1 Bader Al Issa Chairman

2 Eid Al Shammry (from outside the Board) Member

3 Dr. Muhammad Ali Ekhwan from outside the Board) Member

4 Arnaud Chubin (from outside the Board)

Member

5 Ammar Al AlKhodairy* Member -

* He resigned from the Audit Committee as of 15/11/2017 until the completion of his assignment as Managing Director and re-appointing him as Chairman of the Audit Committee after obtaining the necessary approvals from the relevant regulatory and supervisory authorities. The Board of Directors of the Bank confirms that in the event of the reappointment of Mr. Ammar AlKhodairy as Chairman of Audit Committee, he will not review or participate in any discussions concerning the work he oversaw during the period of assigning him as the Managing Director.

25

The Audit Committee members assist Bank’s Board of Directors in fulfilling its oversight responsibility relating to:• The integrity of BSF’s financial statements. • The overall financial reporting and disclosure controls process within BSF.• The system of internal accounting and financial controls across BSF.• The system of internal controls over the operations of BSF.• The internal audit functions over BSF (including Internal Audit charter, plans, activities, and reporting)• The annual independent external audit of BSF financial statements. • Oversee the effectiveness of the system for monitoring compliance with laws and regulations.• Monitoring significant risks or exposures across the Bank and steps taken to minimize such risks.• Overseeing and evaluating the performance of BSF’s external auditors, including a review and evaluation of the external auditors’

qualifications and independency, in addition to the engagement partner, and the concurring partner.• Review the audit plan proposed by external auditors, its scope and approach that includes coordination of audit effort with internal

audit.• Review internal audit plans and activities including review and approval of a risk based internal audit plan and internal audit perfor-

mance assessment.

(4/C) Nominations and Remunerations Committee:The Committee shall be composed of five members of Board of Directors and other specialists. Executive members shall attend the meetings of the Committee permanently as observers. The Committee shall comply with a worklist relating to recommendations of the Board regarding appointment of Board members, assessing the skills of Board members and senior executives periodically along with reviewing the structure or composition of the Board. In addition, work to ensure the independency of independent members of the Board, oversee the succession process and identify the system of incentives and remunerations for members of Board, its committees and officials of executive management. The term of the Committee is three years. By a resolution of the Board of Directors, members’ term at the committee can be extended or nominate others for another three years. The Committee held (6) meetings during 2017 with an attendance rate of 93%. The Corporate Secretary of the Bank acts as the Secretary of this Committee. The following are the mem-bers of the Committee and its meetings during the year 2017:

Name Type of membership

Number of meetings (6) meetings

Firs

t Mee

ting

21/0

2/20

17

Seco

nd M

eetin

g 19

/04/

2017

Third

Mee

ting

12/0

6/20

17

Four

th M

eetin

g 27

/09/

2017

Fifth

Mee

ting

16/1

1/20

17

Sixt

h M

eetin

g 12

/12/

2017

1 Abdulrahman Al Rashed Chairman

2 Mousa Al Omran Member

3 Khaled Mutabagani Member

4 Mansour Al Mansour Member

5 Ivana Bonnet* Member

* Submitted her resignation from the Committee for personal reasons on 22/12/2017 and was accepted as of 28/12/2017.

26

Functions of the Committee include but are not limited to:

• Oversee the design and execution of Bank’s remunerations system and policy on behalf of the Board of Directors, and their regu-lar review and presentation to the Board of Directors for final approval.

• Evaluate the practices under which remunerations are disbursed for potential revenues, which their timing or likelihood of occur-rence remain uncertain.

• Present recommendations to the Board on the level and structure of compensation of key executives of the Bank, featuring, to this end, executives whose appointment is subject to obtaining ‘No Objection’ from SAMA.

• Determine the total value of remunerations depending on the risk-adjusted earnings of the Bank for payment of performance bonuses.

• Review the compliance of the remunerations policy with the regulatory rules and with the principles and standards of the Finan-cial Stability Board (FSB).

• Identify weaknesses and strengths of the BOD and make recommendations regarding changes that can be made in this respect.• Review candidate files for membership of the BOD to assess their competence and ability to serve as members of the BOD and

the extent of their independency, and make recommendations to the BOD through the Secretariat General for final approval prior to presentation to competent authorities.

• Study of applications to run for leadership positions and determine their relevance to the actual needs of the Bank in this regard in collaboration with the Human Resources Department. The Committee shall also review the contracts of senior staff before their termination and recommend their renewal or replacement to the Board of Directors, which in turn authorizes the senior manage-ment to take a final decision thereto.

(4/D) Risk Committee:The Risk Committee consists of five members, members of the Board of Directors and other specialists. The committee held (4) meetings during 2017 with attendance rate of 80%. The Corporate Secretary of the Bank acts as the Secretary of this Committee. The following are members and meetings of the Committee during 2017:

Name Type of Membership

Number of Meetings (6) Meetings

Firs

t Mee

ting

19/2

/201

7

Seco

nd M

eetin

g19

/4/2

017

Third

Mee

ting

27/9

/201

7

Four

th M

eetin

g10

/12/

2017

1 Mazin Al Rumaih Chairman

2 Bader Al Issa Member

3 Rayan Fayez* Member - - - -

4 Jean-François Ballay Member

5 Patrice couvegnes** Member -

6 Sebastien Belhoul*** Member

* Appointed as a member of the Committee as of 17/12/2017.** His membership has been terminated from the Board of Directors and its committees as of 30/11/2017.*** Resigned from the membership of the Board as of 27/07/2017.

27

Major duties and responsibilities of the Risk Committee include the following:

• Provide recommendations on public policies and general guidelines on the extent of Bank ability to take risk to enable the adminis-tration to develop specific plans for each business unit/risk category.

• Review and follow-up risks encountered by the Bank within the context of ability to take risks as approved by the Board;• Ensure the safety of the process of internal capital adequacy.• Review, deliberate and make recommendations on the practices of risk management and guidance on the strategies adopted by

the Risk Department.• Ensure the adequacy and effectiveness of risk levels at the Bank, in terms of collecting information on risks, analysis and assess-

ment of risks in addition to benefit from the results of competitive advantages of the Bank.• Set up risk measurement methodologies at the enterprise level in order to measure and evaluate risk management strategy to

ensure that it copes with regulatory, operational and legal updates as well as the stated business objectives of Bank; consider and provide responses to the proposals of the Managing Director and make notes thereon, if needed, regarding the impact of the risks associated with any strategic decision which may be considered by the Bank; and reporting to the BOD when strategies being considered by the Managing Director involve a possibility (though weak) that the Bank would go beyond acceptable risk limits.

• Ensure approval of all changes to the risk policies as stated in the Bank Delegation of Authorities system.• Provide appropriate advice to the management about fulfilling its responsibilities with respect to risk management; submit periodic

(semi-annual) reports to the BOD regarding the following matters or if the threat reaches an unacceptable level. Reporting to the Board of Directors on risks that exceeded acceptable levels even after they are reinstated to acceptable levels. The Risk Committee is also responsible for monitoring credit risk activities in addition to the function of credit risk management in general. The Commit-tee is also in charge of the following tasks related to credit risk management to ensure the implementation of credit risk policies and strategies approved by the Board and the Executive Committee; to follow-up the credit risk of the Bank in general, and to ensure compliance with the limits of the approved risk by a committee of the Board and the Executive Committee; provide information for the formulation of Credit Policy of the Bank, especially those related to credit risk including, for example, setting up the standards for the provision of credit proposals, financial rules, and classification criteria and standards.

• Provide suitable recommendations to the Executive Committee on matters related to delegating authority to approve the credit, and the hedging limits on large credit operations, criteria for loan guarantees, portfolio management, mechanism of loan review, risk concentrations, monitoring and evaluation of the risks and prices of loans, and earmarking of provisions as needed; handling any other issues related to credit risk management; review the Committee’s charter on a periodic basis, at least once a year, and recom-mend to the BOD regarding any amendments as necessary; lay down an annual plan and timetable for the Committee’s activities for next year, including periodic meetings of the Committee and meetings with the management, and other activities in light of the Committee’s roles and responsibilities as specified in its charter.

28

(4/E) Donations and Social Contribution CommitteeThe Board of Directors of Banque Saudi Fransi is keen to support the largest possible segment of society in all fields. The committee consists of three (3) members, and the Bank’s Corporate Secretary shall act as a Secretary for this committee. The Committee held one meeting in 2017 with an attendance rate of 100%. The committee’s members and the meeting attendance record during 2017 are as follows:

Name MembershipNumber of meetings one meeting

23/05/2017

1 Mr. Abdulrahman Rashed Al Rashed Chairman

2 Mr. Bader Abdullah Al Issa Member

3 Mr. Ryan Muhammed Fayez* Member -

4 Mr. Patrice Couvegnes ** Member

* Appointed as a member of the Committee starting from 17/12/2017.** His membership has been terminated from the Board of Directors and its committees from the 30/11/2017.

The tasks of the Donations and Social Contribution Committee include the following:• Representing and assisting the Board of Directors in overseeing the review of recommendations and the credentials of the contribu-

tions submitted by the members for consideration.• Selecting charities which the Bank is interested to set up partnerships on an annual basis.• Objectively, identifying the needs of charitable partnerships.• Providing means of communication between members of the BOD and selected charities concerning the Committee’ activities.• Contribute to the BSF vision and strategic plan by ensuring that the BSF social contribution strategy is perfectly implemented and

supporting the social contribution objectives at the highest level.• Protecting, enhancing and developing the status of the BSF with related parties along with follow up the performance of BSF social

contributions.

(5) The Board’s Members, Members of Committees and Executive Management Remunerations:The members of the Board of Directors shall receive a certain remuneration to be provided to each member based on his performance and the number of meetings he attends, in accordance with the recommendations of the Nomination and Remuneration Committee, companies law and regulations and controls issued by the Capital Market Authority and Saudi Arabian Monetary Authority. Emphasiz-ing on the absence of any differences between the approved remunerations and what has been approved by the Board of Directors based on the recommendations of the Nominations and Remuneration Committee. Remunerations and compensations of Directors, committee members and executive management are as follows:

29

The Board’s Members Remuneration (by thousand Riyals)

Fixed Remunerations Variable RemunerationsCe

rtain

am

ount

Allo

wanc

e fo

r atte

ndin

g Bo

ard’

s se

ssio

ns

Tota

l for

atte

ndin

g co

mm

ittee

s’ s

essio

ns

Bene

fits

in k

inds

A st

atem

ent o

f wha

t mem

bers

of t

he B

oard

hav

e re

ceive

d as

wor

kers

, adm

inist

rativ

e or

as

a re

turn

for

tech

nica

l, ad

min

istra

tive

or c

onsu

lting

wor

k

The

rem

uner

atio

n of

the

Chai

rman

of t

he B

oard

, the

M

anag

ing

Dire

ctor

or t

he S

ecre

tary

if h

e is

a m

embe

r

Tota

l

Perc

enta

ge o

f pro

fits

Perio

dic

rem

uner

atio

ns

Shor

t-ter

m in

cent

ive p

lans

Long

-term

ince

ntive

pla

n

Gran

ted

shar

es (t

he v

alue

mus

t be

inse

rted)

Tota

l

Leav

ing

inde

mni

ty

Sum

tota

l

Expe

nses

allo

wanc

es

First: independent members:

Mousa Al Omran 420 21 33 - - - 474 - - - - - - - - -

Dr. Khaled Mutabagani 420 18 18 - - - 456 - - - - - - - - -

Bader Al Issa 420 24 36 - - - 480 - - - - - - - - -

Ammar Al AlKhodairy 420 24 36 - - - 480 - - - - - - - - -

5- Rayan Fayez* - - - - - - - - - - - - - - - -

Total 1,680 87 123 - - - 1,890 - - - - - - - - -

Second: non-executive members:

Sulaimna Al Qwaiz 420 24 21 - - - 465 - - - - - - - - -

Abdulrahman Al Rashed 420 18 36 - - - 474 - - - - - - - - -

Mazin Al Romaih 420 21 30 - - - 471 - - - - - - - - -

Jacques Prost 420 21 18 - - - 459 - - - - - - - - -

Sebastien Pailhole** 245 12 6 - - - 263 - - - - - - - - -

Total 1,925 96 111 - - - 2,132 - - - - - - - - -

Third: executive members:

Patrice Couvegnes ** 385 15 27 - - - 427 - - - - - - - - -

Total 385 15 27 - - - 427 - - - - - - - - -

* Appointed as a member of the Board of Directors effective from 17/12/2017.

** Resigning from the Board’s membership from 27/07/2017.

*** His membership has been terminated from the Board of Directors and its committees starting from 30/11/2017.

30

Remunerations of five senior executives including the managing director and chief financial officer (by thousand Riyals)

Fixed Remunerations Variable Remunerations

End

of s

ervic

e pa

ymen

t

Tota

l of t

he E

xecu

tives

’ rem

uner

a-tio

ns fo

r the

Boa

rd, i

f any

Sum

tota

l

Sala

ries

allo

wanc

es

In-k

ind

bene

fits

tota

l

Perio

dic

allo

wanc

es

Profi

ts

Shor

t-ter

m in

cent

ive p

lans

Long

-term

ince

ntive

pla

n

Gran

ted

shar

es (t

he v

alue

m

ust b

e in

serte

d)

Tota

l

8,379 4,554 300 13,233 - - 13,879 - - 13,879 - 427 27,539

Remuneration of Senior Executives whose appointment requires the Saudi Arabian Monetary Authority non-objection (by thousand Riyals)

Fixed Remunerations Variable Remunerations

End

of s

ervic

e pa

ymen

t

Tota

l of t

he E

xecu

tives

’ rem

uner

a-tio

ns fo

r the

Boa

rd, i

f any

Sum

tota

l

Sala

ries

allo

wanc

es

In-k

ind

bene

fits

tota

l

Perio

dic

allo

wanc

es

Profi

ts

Shor

t-ter

m in

cent

ive p

lans

Long

-term

ince

ntive

pla

n

Gran

ted

shar

es (t

he v

alue

m

ust b

e in

serte

d)

Tota

l

27,171 11,799 975 39,945 - - 26,235 - - 4,356 - 427 70,963

Directors’ remunerations for any executive, technical, administrative or advisory work or positions

Name of BOD member Position Principles and mechanisms for taking the decision

Amou

nt fo

r wh

ole

perio

d (b

y th

ousa

nd

Riya

ls)

Mr. Ammar Al AlKhodairyActing Managing Director

Based on the recommendation of the Nominations and Remunerations Committee, and in light of the transitional period that the Bank has undergone as a result of the termination of the former Managing Director, the Board of Directors has decided to assign Mr. Ammar Al Khudairy as a Managing Director for three months from 15/11/2017 to 15/02/2018 after obtaining the approval from Saudi Arabian Monetary Authority. The appropriate remuneration was determined as per the recommendation of the Nominations and Remunerations Committee and the Board’s decision, compared to the remunerations of such positions in labor market and banking sector.

1,200

31

Committees’ members remunerations

Fixed remunerations (except attending ses-

sions allowance)Allowance for attend-

ing sessions Total Notes

Audit Committee Members

Bader Alissa 21 21

Eid Alshamri 100 18 118

Mohammad Ikhwan 100 21 121

Arnod Chapin 100 21 121 Has resigned the full amount of the remuneration

Amaar Alkhudairi* 15 15

Total 300 96 396

Nomination and Remuneration Committee Members

Abdulrahman Alrashed 18 18

Mousa Alomran 15 15

Dr.Khaled Mutabagani 18 18

Mansour Almansour 100 18 118

Ivana Bonnet** 100 15 115

Total 200 84 284

Risk Committee Members

Mazin Alrumaih 9 9

Bader Alissa 12 12

François Palay 100 12 112 Has resigned the full amount of the remuneration

Patrice Couvegnes*** 9 9

Ryan Fayez

Sebastien Pailhole***** 6 6

Total 100 48 148

Executive Committee Members

Suliman AlGwaiz 21 21


Mousa Alomran 18 18

Ammar Alkhudairi 21 21

Mazin Alrumaih 21 21

Jacques Prost 18 18

Ryan Fayez ****


Total 129 129

32

Donations and Social Contribution Committee Members


Bader Alissa 3 3

Ryan Fayez


Total 9 9

*He resigned from the Audit Committee as of 15/12/2017 until the completion of his assignment as the Managing Director and to be appointed again as the Chairman of Audit Committee after obtaining the necessary approvals from the relevant regulatory and supervi-sory bodies. The Board of Directors of the Bank confirms that in the event of the reappointment of Mr. Ammar Al-Khudairi as Chairman of the Audit Committee, he will not review or participate in any discussions concerning the businesses he supervised during his assign-ment period to execute the tasks and responsibilities of the Managing Director.

** She resigned from the Committee for personal reasons on 22/12/2017 and her resignation was accepted as of 28/12/2017.*** His membership has been terminated from the Board of Directors and its Committees as of 30/11/2017.**** He was appointed as a member of the Committee starting from 17/12/2017.***** He resigned from the Board and its committees as of 27/07/2017.

(6) Sanctions and Violations Issued against the Bank:(A) SAMA’s disciplinary resolutions:

The violation

2017

Number of disciplinary resolutions

Total amounts of fines in SAR How to process it and avoid reoccurrence

Violating SAMA’s supervi-sory instructions

21 93,938,518 The level of control and procedures necessary to ensure compliance with the instructions issued by the regulatory

authorities have been increased and to ensure that such violations will not occurred

Violating SAMA’s instruc-tions related to perfor-

mance level of ATM’s and POS’s

1 102,563 Failures are under process, increasing the operational performance, avoiding reoccurrence

Violating SAMA’s instruc-tions related to due

diligence in the field of anti-money laundering

and combating terrorism finance

1 490,000

Review all procedures and policies in this regard and implement important reforms to ensure that the causes of such violations do

not occur

Total 23 94,531,081

(B) Other Penal Decisions:

penalty, sanction, precautionary measure or preventive terms Reasons of violations The entity which imposed

the violationHow to process it and avoid

reoccurrence

Financial penalty 17,934.88 SAR Related to work period of one advisor

General Organization for Social Insurance

Ensure the implementation of followed regulations for social insurance policies

33

(7) The results of the annual audit of the effectiveness of the internal control procedures, and the opinion of the Audit Committee on the efficiency of the internal control system:Internal Control FrameworkThe Board of Directors is responsible for internal control framework. It considered as the framework for basic policies and procedures that are approved by the Board to provide effective internal control within the Bank for risk management within defined risk limits. This framework can provide reasonable assurance about the effectiveness and efficiency of controls within the Bank.

The Banque Saudi Fransi Management takes the responsibility to implement and review the effectiveness of internal controls approved by the Board, and it takes this comprehensive framework as per SAMA guidelines. This internal controls system (follows the Three lines of defense concept) begins with Bank’s management that defines the roles and responsibilities of the Board of Directors and its sub-committees in addition to the management committees which support the Board of Directors in monitoring and addressing key risks associated with strategy, financial performance, technology, asset and liability management, credit, operations, legal, regulatory, and information security.

Rigorous and integrated efforts are made by all of the Bank’s business lines to improve the efficiency and effectiveness of the internal control environment at process levels, through continuous reviews and consistent and integrated procedures, to prevent and rectify control deficiencies along with correct it.

The control process starts with each business in the Bank (First line of defense), under the supervision of senior executive manage-ment, that is entrusted with the responsibility to oversee rectification of control deficiencies identified by its own risk and control self-assessment process and by other control functions (Second line of defense) such as: Compliance and Risk management, Human Resources Department and Finance Department. Then the role of Internal and external auditors (Third line of defense) who act as as-surance function to the Board of directors.

Internal AuditThe Internal Audit Department acts as a “third line of defense” and provides independent assurance to senior management and the Board of Directors through the Audit Committee of the Board. Its role is based on the philosophy of providing added value to improve the Bank’s operations and provides advisory services for various functions at the Bank upon request.

The Internal Audit Division was established by the Audit Committee, which defines the responsibilities of this Division and approves it as part of its supervisory role. The CEO is reporting to Audit, functionally.

The scope of internal audit includes, but is not limited to, examining and evaluating the efficiency and effectiveness of risk manage-ment, internal control and governance, as well as the quality of performance in implementing the responsibilities to achieve the Bank’s strategic objectives and goals.

The Internal Audit Division has full and unrestricted access to all Bank systems, records, physical assets and personnel involved in the execution of any work, but is under strict responsibility toward the confidentiality and protection of records and information. This year, the director of the internal audit department was replaced aiming to increase its effectiveness in performing the supervisory role assigned to it.

34

ComplianceCompliance is an independent function which reports functionally to the Board Audit Committee. It assists BSF’s Board of Directors and Senior Executive Management in their efforts to establish a robust compliance culture. Compliance Division works closely with the regulators and carries out compliance assessments, reviews, monitoring and reporting on non-compliant matters and gross violations of the rules and instructions of SAMA to Board of Directors and Audit Committee through quarterly reports. In addition, it performs monitoring and reporting of suspicious activities relating to money laundering and terrorist financing. It works for the promotion of Compliance awareness by various methods. Furthermore, it works with all stakeholders to ensure complete adherence with Compli-ance laws, rules and regulations. The Compliance Division is subject to periodic and independent review by the Internal Audit function. The director of compliance division has also been replaced this year to improve its ability in performing its tasks.

Risk ManagementThe Bank’s internal control framework has been designed to provide reasonable assurance to the Board, on the management of risks to achieve the Bank’s strategic objectives. Management has adopted Internal Controls integrated framework as recommended by SAMA through its Internal Controls guidelines.

Based on the results of the ongoing evaluation of internal controls carried out by the management during the year, the Management considers that the Bank’s existing control system is adequately designed, operating effectively and monitored consistently. Neverthe-less, the Management continuously endeavors to enhance and further strengthen the internal control system of the Bank.

Results of the Review of Internal Controls EffectivenessThe Audit Committee reviews the effectiveness of the internal control system and informs the Board of the steps taken in this regard. It also submits an inclusive annual report to the Board to assist it in its review of the effectiveness of the internal control system. Fol-lowing the Audit Committee’s review of the Bank’s internal control procedure reports, most important of which is the Internal Audit and Risk Management reports and after meetings with the respective heads of these functions to discuss the contents of their reports and the performance of their sectors, the Committee conveys its conclusion to the Board whether the Bank’s internal control cycle reflects the effectiveness of its internal control procedures and that it is in continued development to meet changing business needs and developments. This has been announced in (Tadawul) dated 21/01/1439 H corresponding to 11/10/2017 and the further announcement on 05/03 /1439 H corresponding to 23/11/2017 of finding some officials who went beyond the powers granted to them in a number of operations related to employees’ incentives. The bank has taken corrective measures, including conducting a full and detailed investigation to ascertain the violations that have been committed and clarifying the deficiencies and persons behind that. The violators are being prosecuted for the recovery of what was unjustly disbursed. A comprehensive review of the concerned departments was conducted. Accordingly, the compliance and internal audit departments have been restructured and recruiting appropriate leaders to increase the efficiency and quality of internal control as mentioned in paragraphs 7 (b) and (c) above.

Regarding the accounting policies applied in the Bank, the Audit Committee continually discusses the impact of instructions issued by SAMA and other regulatory authorities and any changes in the Bank’s accounting policies and International Financial Reporting Standards (IFRS) with the Bank’s officials and periodically with the External Auditors to ensure its implementation in compliance with said instructions.

Board’s Committees:The Board has formed a number of committees, each with its own functions. These committees are composed of members of the Board of Directors and independent members from outside the Board. These committees supervise the effectiveness of internal control framework and business development.

35

(8) Social contributions and initiatives:The activities of the Bank in the field of social contributions have received special support from the Board of Directors and the Execu-tive Management. In this regard, the Bank contributed during the year to the following activities:

• International Childhood Cancer Day:Organizing a special event for children with cancer on the International Childhood Cancer Day in collaboration with King Fahad Medical City (KFMC). More than 50 children enjoyed the event leaving positive feedback.

• The Ninth National Forum and Exhibition for Small Family Businesses:The Bank participated in the Ninth National Forum and Exhibition for Small Family Businesses, which features the most important Saudi homemade goods such as clothes, accessories, perfumes, and various food types. Around 300 families participated in the forum, which aims to strengthen and activate the role of Small Family Businesses in Medina.

• Supporting “I Can” program :BSF collaborated with leading charitable associations (Efada Center for Down Syndrome) to support the “I Can” program aiming at enabling children with Down syndrome to lead normal lives within the community. This program played an important role in helping the families of children with Down syndrome by explaining to parents about the syndrome, answering many questions, and provid-ing more than 250 free consultations.

• Saudi-American Healthcare Forum:BSF sponsored the Saudi-American Health Care Forum as part of the bank focus on the health sector. This event is the first of its kind in this sector, which aims to develop health care through exchanging knowledge, benefitting from the best practices and experiments in the global health care field, and transferring state-of-the-art health care technologies to the Kingdom. The forum included various programs, workshops, lectures, and discussions related to health care.

• “Jarf” Exhibition in Collaboration with Wmdah:BSF supported “Jarf” Exhibition, an art exhibition that was held at Princess Nourah bint Abdulrahman University in collaboration with (Wmdah ArtSpace). The exhibition showcased graphic design and digital media projects and creations made by more than 2000 graduates.

• Supporting the training program for orphans:The program aiming to contribute in educating Saudi competencies from orphans by launching “Let’s be part of their future” program which is an integrated training and development program to train orphan students during the end of the school year. This training provides by highly experienced coaches in collaboration with the Charitable Society for the Care of Orphans (Ensan) and BSF Academy.

36

(9) A statement of the dates of the General Assemblies of shareholders held during the last fiscal year and the names of the Board of Directors members attending these assemblies:

Name of the member

Number of meetings (2)

First meeting22/02/2017

Second meeting30/03/2017

1 Suliman AlGwaiz

2 Abdulrahman Alrashed

3 Bader Alissa

4 Ammar Alkhudairi

5 Mazin Alrumaih

6 Patrice Couvegnes

7 Jacques Prost

8 Sebastien Pailhole

(10) Description of the main types of activities of the Bank and its subsidiaries:The bank’s main activities are as follows:

a. Retail Banking:incorporates private and establishment customers’ demand accounts, overdraft, loans, saving accounts, deposits, credit and debit cards, ATM cards, consumer loans, certain forex products and auto leasing.

b. Corporate Banking:incorporates corporate and medium establishment customers’ demand accounts, deposits, overdrafts, loans and other credit facilities and derivative products.

c. Treasury:incorporates treasury services, speculation, investment in securities, money market, Bank’s funding operations and derivative products.

d. Investment banking and brokerage:Investment management services and asset management activities related to trading, managing, arranging, advising and custody of securities, retail investments products, corporate finance and international and local shares brokerage services and insurance.

The impact of these major activities on the size of the Bank and its contribution to the results is as follows:

Activity Type Activity’s revenues (thousand Riyal) Percentage

Retail Banking 249,147 7%

Corporate Banking 1,893,522 53%

Treasury 1,292,913 37%

Investment banking and brokerage 96,302 3%

Total 3,531,884 100%

37

The main activities of subsidiaries and their impact on the size of the Bank’s business and its contribution to the results are as follows:

Subsidiary Its activity Its revenues (thousand Riyal) Percentage

Saudi Fransi Capital (SFC)Acts as principal and agent. and undertake, manage, arrange, advise and file in securi-

ties trading.96,303 2.73%

Saudi Fransi Financing and Leasing

Leasing and Financing of assets of vehicles(Cars, motorcycles, trucks), heavy equip-

ment and machinery. As well as buying and registering these assets.

66,274 1.88%

(11) Bank’s important plans and decisions:A- Important decisions:1. The decision of the foreign partner (Credit Agricole Corporation & Investment) on 20/09/2017, which resulted in a significant

change in the ownership percentage of main shareholders of the Bank as a result of selling part of its share in the bank’s capital by 16.2% to Kingdom Holding Company. Thus, reducing its ownership in the bank from 31.11% to 14.91%. The transaction was announced on Tadawul website at the time. This decision is specific to the foreign bank as the owner of the shares, and the Bank has no role in it and there is no material impact on the bank or its operations as a result of this decision.

2. The Bank signed a buy-sell agreement with Allianz Europe BV on October 25, 2017 to sell 3.7 million shares of Banque Saudi Fransi’s shares in Allianz Saudi Fransi Cooperative Insurance Company, representing 18.5% of Allianz Saudi Fransi Cooperative Insurance Company’s capital, and 57% of the shares held by Banque Saudi Fransi in Allianz Saudi Fransi Cooperative Insurance Company, 22 Saudi Riyals per share, and a total amount of SR 81.4 million. The deal was not implemented during the year due to pending regulatory approvals.

After completing the transaction, Banque Saudi Fransi will remain a strategic shareholder in Allianz Saudi Fransi Cooperative Insurance Company and will continue to support its activities and growth. The financial impact of the transaction is expected to start from the financial period subsequent to completion of the transaction and the transaction proceeds will be added to the Bank’s comprehensive income statement. The transaction was concluded as a result of the Bank’s desire to enable Allianz Group to strengthen its commit-ment to develop its operations in the Kingdom of Saudi Arabia. This decision was announced on Tadawul website at the time.

B- Future Plans:The bank’s Medium Term Plan (MTP) covering 2018-2020 has been revised from the original MTP 2017~2019 endorsed by the Board of Directors in December 2016, to reflect current market trends. This MTP takes into account the dramatic changes impacting Saudi Arabia’s economic environment since the end of the commodities super-cycle in 2015. BSF believes that the weaker economic envi-ronment will continue weighing on the financial profiles of banks in Saudi Arabia in 2018 and 2019. On the positive side, we expect a progressive increase in interest rates which will improve the Bank investments’ yield.

The strategic guidelines set by the current MTP focus on efficiency and profitability considering that revenues will be under pressure from weaker lending volumes expectations. Defensive action plans on activities and productivity has been introduced while maintaining a stable investment plan to support BSF’s long-term competiveness. The MTP takes into account market and regulatory developments aiming to ensure a sustainable development of the Bank over the medium and long run.

38

C- StrategyBSF has developed a client-centered strategy aiming at ensuring a well-balanced contribution to the net profit of the Bank from its different business lines.

BSF has been historically geared toward Corporates holding a leading position in the Corporate Banking sector. The Bank’s objective is to strengthen this position through relationship excellence and systematic cross-selling. Corporate Banking will maintain its strong market share in terms of assets and further increase its presence in the infrastructure finance sector. Corporate Banking will also be a key driver in the effort to develop a comprehensive and mutually beneficial relationship with BSF’s Corporate Clients offering large scope of products and services.

BSF is also committed to continue developing its Retail Banking activities and growing its Wealth Management franchise to position itself as a reference Bank on the middle and upper segments. Consumer loans increased by 4% in 2017, supported by the on-going Retail Transformation Plan.

Specific effort has been put in place to significantly accelerate the level of activity in capital markets, treasury and investment banking areas which are a natural complement to the Corporate Banking business.

In a still low interest rate environment, BSF is giving strong emphasis on the deployment of its assets and a higher contribution of its fee based businesses through systematic cross-selling implementation.

Finally, BSF maintains a tight risk management developing its risk culture across the Bank. This approach has allowed BSF to keep cost of risk under control over the years. Such principles remain at the heart of the BSF model.

D- Economic environmentAccording to the International Monetary Fund, the Saudi economy contracted by 0.7 percent in 2017 compared to growth of 1.6 percent year-on-year in 2016. The government of Saudi Arabia unveiled in December 2017 its largest expansionary budget, with total expenditures worth SAR 978 billion (USD 261 billion) for the year 2018, up by 6% compared to estimated SAR 926 billion (USD 247 billion) in 2017. In nominal terms this represents SAR 52 billion (USD 14 billion) increase versus 2017. The budget indicates that capital expenditure (“CAPEX”) will record SAR 205 billion (USD 55 billion) or 21% of total expenditures, rising by 14% compared to 2017 to finance the projects of Vision 2030 programs and develop the infrastructure to spur economic growth as well as boosting employment. Also, separately, a total of SR133 billion will be invested by the Public Investment Fund (PIF) and the National Development Fund (NDF) in capital spending during the year, although this amount will not be funded through the 2018 budget. Total capital spending from the government, PIF and NDF will amount to SAR 338 billion (USD 90 billion) in 2018.

It is projected that most of the macroeconomic indicators in 2018 will improve, driven by a budget that focuses on expansion of capital expenditure and economic reforms. The Ministry of Finance expects a GDP growth rate of 2.7% in 2018, the IMF is forecasting a GDP expansion of 1.6% this year and 2.2% in 2019.

The Bank expects that the expansionary budget together with off-budget spending through the Public Investment Fund and the Na-tional Development Fund will support Saudi banks’ credit growth in 2018, which will benefit their profitability. The Bank believes that in 2018 loan growth to the private sector will recover gradually but will remain at a low single digit.

As for the interest rate environment, current market consensus is for a progressive increase by three or four hikes in 2018 by the U.S. Federal Reserve after three consecutive hikes of 0.25% in 2017. The prospect of further Saudi interest hikes should progressively enhance the revenues of the bank’s net interest income, with rising yield on both the loans and investments portfolios.

The U.S. Energy Information Administration (“EIA”) in its February 2018 Short-Term Energy Outlook forecasts Brent crude oil to average USD 60 per barrel in 2018, slightly higher than the USD 54 per barrel averaged in 2017. BSF assumes that a stabilization of oil prices at an average USD 60 is positive for the banking system from a funding and liquidity perspective.

As reiterated by SAMA on many occasions, BSF does not foresee Saudi Arabia abandoning its peg to the US dollar.

39

(12) Risk related information:A-Risk Appetite framework:The Risk Appetite framework of the Bank is approved by the Board of Directors, and the Risk Appetite statement is reviewed by the Board of Directors at annual intervals. Its objective is to set the tone from the top in giving risk policy directions to the bank’s manage-ment and providing business lines with guidance regarding the risk profile that the bank is prepared to accept.

By way of risk management limits of the various risk parameters with defined tolerances are articulated covering a range of parameters from solvency, capital adequacy, credit quality, credit concentration, market risk, operational risk and liquidity management.

The Group Chief Risk Officer monitors adherence to the approved risk appetite statement. Deviations, if any, from the acceptable tolerance bands are flagged off for further action by Senior Management. At quarterly intervals, the Executive Committee of the Board reviews the actual position of the risk indicators vis-a-vis the laid down parameters.

B-Credit Risk Management:The Bank aims to maintain a well-diversified and healthy credit portfolio through the mechanism of credit policy guidelines, and limits of concentration of different bank’s business lines.

The target customers and credit risk acceptance criteria emerge from the confluence of presentations of risk strategies by business line heads, reviewed by Risk Management and approved by the Board Risk Committee.

The credit granting and approval process is performed through credit committees with differing levels of credit approval delegation, and the Credit Risk Department being entrusted with the responsibility of providing independent risk opinions on the credit requests emanating from the business lines.

The decision making in the credit committees of the bank is aided by internal credit rating models developed and maintained for differ-ent segments of the banking book and subject to re-validation at periodical intervals.

C -Market Risk Management: Concerning Market Risk monitoring, the bank has clearly defined policies & procedures related to market risk activity, as well as a comprehensive set of market risk limits (together with loss alerts) which are reviewed at least annually, and independently monitored on a daily basis by a dedicated Market Risk department.

In order to manage the market risk in trading book, the bank applies on a daily basis a VaR (Value-at-Risk) methodology in order to as-sess the market risk positions held and also uses stress scenarios to estimate the potential economic loss based on a set of assump-tions and changes in market conditions.

D-Operational Risk Management:

40

Operational risk management and permanent control aim to effectively manage and limit operational risks and controls to all Bank operations.

The loss and accident management have been enhanced to ensure full coverage and timely incident and loss reporting through the “Operational Risk Management System”.

The risk control and self-evaluation system is implemented on the operations to ensure coverage in all BSF departments. Risk rat-ings are subject to validity of operational risk and permanent control procedures. The risk control and self-evaluation system is also enhanced by specific evaluations, which also cover the outsourcing for major activities, fraud risk assessment, branch control audit, case-based assessments, and data compilation. The second level of controls was identified in all bank’s departments. Implementing and regularly reporting and monitoring key risk indicators for all areas, and report and monitor which on regular basis. Furthermore, agreed on work plans to be ready for any violations and monitor which via Processing Management. Operational risk management and permanent control represent operational risk to the business sector, and support operation during its internal control committee sessions. The ”Risk Profile“ provides a comprehensive overview of exposure to related risks, which are compiled and presented to the Internal control Committee, periodically.

The coverage of Operational risk and permanent control also extend to IT service evaluations and change management, reflecting the emphasis on digital banking and technical risks in the Bank’s operations.

Operational risk management and permanent control are involved in enhancing the Bank’s operational risk culture by creating aware-ness through academic training programs and workshops.

E-International Financial Reporting Standards (IFRS):In line with SAMA’s requirement for banks to implement IFRS 9 regulation by 1st January 2018 under the leadership of the Chief Finance Officer with the assistance of Risk Management and IT department, BSF has continued the work to acknowledge the required policies and operations for IFRS 9.

The implementation efforts covered the following:

• Classification, measurements, and reports, which include business model assessment, (SPPI), process for approving new products, application and disclosure requirements.

• Decreasing in capital, adjustment to credit policies and procedures, development and standardization of models, and calculation and documentation of expected credit loss

• Implement information technology to enhance front office management and other system improvements, enrich the data store, prepare the data and data store area, implement the 9 IFRS (Seller’s Work Plan) solution, calculate the expected credit loss and loss in addition to disclosure requirements

• A technology system for IFRS 9 (provider from a service provider) has been implemented. To calculate expected loss of (ECL), the system addresses the relevant data from the Bank’s systems and associates them with the relevant inputs in calculating the expected losses, the (PD), the (LGD) and (EAD)

• The Bank has prepared macroeconomic regression models for its loan portfolio using macroeconomic variables in the Kingdom of Saudi Arabia and has been prepared in the expected credit loss engine IFRS 9. “The engine allows for the calculation of expected credit losses and provisions for the full portfolio, including the ability to reduce transactions level.

• In order to promote a culture of risk awareness of business people in relation to the IFRS 9 regulations in the Bank, programs for a group of business relations and risk managers have been conducted. The awareness program covers the basic concepts of the IFRS 9 Regulations, Tier 1 concepts, expected credit loss factors, and the obvious increase in credit risk for Tier 2 classification. The adoption of IFRS 9 is expected to provide further support for credit and control standards within the Bank.

41

13. BSF Credit ratings

Ratings Standard & Poor’s Ratings Services Moody’s Investors Service Fitch Ratings

Long-term ratings BBB+ A1 A-

Short-term ratings A-2 P-1 F2

Outlook / Review Stable Stable Stable

Last published credit opinion 31/10/2017 22/10/2017 03/11/2017

14. Bank’s assets, liabilities and financial results for the last five years:

SAR 000 2017 2016 2015 2014 2013

Total assets 192,928,881 203,428,709 183,724,281 188,776,903 170,056,674

Investments and investments in associates, net 25,400,944 24,187,599 28,524,948 45,201,350 34,465,143

Loans and advances, net 121,940,394 129,457,869 123,769,457 116,540,684 111,306,904

Total liabilities 161,267,500 173,729,706 156,240,480 162,305,566 146,840,043

Customers’ deposits 150,954,187 158,458,472 141,852,100 145,275,245 131,601,187

Total equity 31,661,381 29,699,003 27,483,801 26,471,337 23,216,631

Total operating income 6,576,207 6,399,714 6,291,498 5,786,036 5,052,535

Total operating expenses 3,051,891 2,896,270 2,262,415 2,270,494 2,650,283

Share in earnings/(losses) of as-sociates, net 7,568 6,790 7,361 799 3,323

Net income 3,531,884 3,510,234 4,036,444 3,516,341 2,405,575

Net special commission income 4,699,670 4,256,187 4,055,279 3,816,976 3,363,303

Fees from banking services, net 1,119,318 1,363,990 1,327,521 1,291,650 1,149,565

Impairment charge for credit losses, net 661,113 768,374 180,901 320,934 957,420

Salaries and employees related expenses 1,384,543 1,392,408 1,249,079 1,062,105 952,546

Number of employees 3,072 3,233 3,207 3,085 2,988

42

Financial Highlights for the last 5 years

Total Liabilities(SAR-in Million)

2013 2014 2015 2016 2017

130,000

140,000

150,000

160,000

170,000

180,000

161,268

173,730

156,240

162,306

146,840

Net Income(SAR-in Million)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013 2014 2015 2016 2017

3,5323,510

4,036

3,516

2,406

2013 2014 2015 2016 2017

5,000

10,000

15,000

20,000

25,000

30,000

35,00031,661

29,69927,48426,471

23,217

Total Equity(SAR-in Million)

0

Total Assets(SAR-in Million)

2013 2014 2015 2016 2017

150,000

160,000

170,000

180,000

190,000

200,000

210,000

192,929

203,429

183,724188,777

170,057

Total Loans & Advances(SAR-in Million)

2013 2014 2015 2016 2017

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

121,940

129,458

123,769

111,307

116,541

2013 2014 2015 2016 2017

0

50,000

100,000

150,000

200,000

150,954158,458

141,852145,275

131,601

Customers’ Deposits(SAR-in Million)

Total Liabilities(SAR-in Million)

2013 2014 2015 2016 2017

130,000

140,000

150,000

160,000

170,000

180,000

161,268

173,730

156,240

162,306

146,840

Net Income(SAR-in Million)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2013 2014 2015 2016 2017

3,5323,510

4,036

3,516

2,406

2013 2014 2015 2016 2017

5,000

10,000

15,000

20,000

25,000

30,000

35,00031,661

29,69927,48426,471

23,217

Total Equity(SAR-in Million)

0

Total Assets(SAR-in Million)

2013 2014 2015 2016 2017

150,000

160,000

170,000

180,000

190,000

200,000

210,000

192,929

203,429

183,724188,777

170,057

Total Loans & Advances(SAR-in Million)

2013 2014 2015 2016 2017

100,000

105,000

110,000

115,000

120,000

125,000

130,000

135,000

121,940

129,458

123,769

111,307

116,541

2013 2014 2015 2016 2017

0

50,000

100,000

150,000

200,000

150,954158,458

141,852145,275

131,601

Customers’ Deposits(SAR-in Million)

43

(15) Geographical analysis of the total revenues of the Bank and its subsidiaries:The following is a table showing income per province (Eastern, Western, Central, HO and affiliates) for 2017.

BSF & Other Affiliates

Western Eastern Central Head Office Total

Total Income 1,164,756 1,059,613 1,824,429 2,271,200 6,319,998

Total Expenses (before provisions) (209,767) (165,174) (219,261) (1,625,602) (2,219,804)

Provisions (156,072) (196,932) (239,678) (71,931) (664,613)

Net Income 798,917 697,507 1,365,490 573,667 3,435,581

SFC


Total Income 10,903 18,130 55,250 179,494 263,777

Total Expenses (before provisions) (1,930) (4,400) (3,530) (157,614) (167,474)

Provisions - - - - -

Net Income 8,973 13,730 51,720 21,879 96,303

BSF Group


Total Income 1,175,659 1,077,743 1,879,679 2,450,694 6,583,775

Total Expenses (before provisions) (211,697) (169,574) (222,791) (1,783,216) (2,387,278)

Provisions (156,072) (196,932) (239,678) (71,931) (664,613)

Net Income 807,890 711,237 1,417,210 595,547 3,531,884

44

(16) A clarification of any significant differences in operating results compared to the previous year results or any forecast announced by the Bank:(16/A) CONSOLIDATED STATEMENT OF INCOME For the years ended December 31, 2017 and 2016

SAR 000 2017 2016

Special commission income 6,604,506 5,970,622

Special commission expense 1,904,836 1,714,435

Net special commission income 4,699,670 4,256,187

Fees and commission income, net 1,119,318 1,363,990

Exchange income, net 356,131 395,862

Trading income, net 270,837 200,394

Dividend income 8,078 16,024

Gains on non-trading investments, net 27,684 50,483

Other operating income 94,489 116,774

Total operating income 6,576,207 6,399,714

Salaries and employee related expenses 1,384,543 1,392,408

Rent and premises related expenses 178,819 173,589

Depreciation and amortization 151,123 137,706

Other general and administrative expenses 560,688 433,903

Impairment charge for credit losses, net 661,113 768,374

Impairment charge for investment, net 3,500 (20,980)

Other operating expenses 112,105 11,270

Total operating expenses 3,051,891 2,896,270

Net operating income 3,524,316 3,503,444

Share in earnings of associates, net 7,568 6,790

Net income for the year 3,531,884 3,510,234

Basic and diluted earnings per share (in SAR) 2.94 2.91

45

(16/B) Summary of financial results is as follows:

SAR Mio 31-12-17 31-12-16 changes %

Net Income 3,532 3,510 22 0.63%

Total Operating Income 6,576 6,400 167 2.75%

Net Special Commission Income 4,700 4,256 444 10.43%

Assets 192,929 203,429 -10,500 -5.16%

Investments 25,325 24,074 1,251 5.20%

Loans and Advances Portfolio 121,940 129,458 -7,518 -5.81%

Customer Deposits 150,954 158,458 -7,504 -4.74%

Earnings per share 2.94 2.91 0.03 1.03 %

(17) Clarification of any difference from the approved accounting standards by the Saudi Organiza-tion for Certified Public Accountants:The consolidated financial statements of the Bank have been prepared;

1. 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 Ac-counting 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.

2. In compliance with the provisions of Banking Control Law, the applicable provisions of Regulations for Companies in the King-dom 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 is no longer applicable from January 1, 2017.

46

(18) Subsidiaries

Name of Company Capital

Owne

rshi

p %

Activity

The

mai

n Co

untry

for i

ts

oper

atio

ns

The

Coun

try

wher

e it

was

esta

blish

ed

Saudi Fransi Capital (SFC) SAR 500millions 100

Acts as principal and agent. and undertake, manage, arrange, advise and file in securities

trading.KSA KSA

Saudi Fransi Financing and Leasing SAR 500

millions 100

Leasing and Financing of assets of vehicles (Cars, motorcycles, trucks), heavy equipment

and machinery. As well as buying and registering these

KSA KSA

SAKAN Real Estate Financing Company SAR 500

Thousands 100

Financing real estates and lands through Mu-rabaha and leasing products, buying lands and real estates, and making investments on behalf

of the company.

KSA KSA

Saudi Fransi Insurance Agency SAR 500 100 Insurance brokerage services. KSA KSA

BSF also owns 10.9% of Saudi Credit Information Co. (Simah) share capital amounting (SAR 20 million).

Moreover, it owns shares in the capital of Saudi Financial Support Services Company “SANID” (previously known as: Saudi Traveler Checks Co.), the owned shares consists 5% of the company share capital amounting (SAR 25 Million). The bank also invested in Saudi Co for Registration of Finance which is under incorporation. In addition, it also has shares in the Saudi Stock Registration Company, which currently is under liquidation after having been transferred with all its assets and liabilities to the Capital Market Authority and Tadawul.

All the above – mentioned companies exist and are established in KSA.

Moreover, the bank has established BSF Markets Limited Co, a limited liability company, 100% owned by Banque Saudi Fransi, with an authorized capital of 50,000 US dollars (around 187,500 Saudi Riyal), in Cayman islands. The company’s specialty is trading deriva-tives and repo activities.

The Bank also has investment in associate companies, it owns 27% of the share capital of “Bemo Saudi Fransi”, a joint stock company incorporated in Syria with a capital of SAR 242.2 million. The Bank commenced business on 01/04/2004. BSF also owns 10.33% of the share capital of “Bemo Lebanon Bank”, duly incorporated on 01/08/2003, in Beirut– Lebanon, with a capital of SAR 157.2 million. Currently, all regulatory and contractual formalities are being followed to conclude the sale of BSF share in BBSF-Syria, and Bemo Lebanon as announced on 26/11/2011 through Tadawul , which stated that the Board of Directors of BSF had unanimously adopted a resolution to sell its 27% share holdings in Banque Bemo Saudi Fransi- Syria, and its 10.33% share holdings in Bemo Lebanon. BSF has not been represented in the Board of Directors of both BBSF- Syria and Bemo Lebanon effective 26/11/2011. BSF major partners in Bemo Lebanon, have been duly informed of this decision.

BSF also owns 6,500,000 out of 20,000,000 total shares of Allianz Saudi Fransi, which represent 32.5% of the share capital amounting (SAR 200 million).

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 22 SAR per share and an overall consideration of 81.4 million SAR. However the transaction has not been executed during the year due to certain regulatory approval.

*The financial results of Allianz & Sakan are not substantial, the assets and liabilities and other subsidiaries are not material, and have not been disclosed; the same applies to BSF affiliates such as SIMAH, Saudi Financial Support Services Company “SANID” (formerly known as Saudi Traveler Cheques.”STCC”) and Sofinco which its consumer finance business and related net assets were transferred to Saudi Fransi Financing and Leasing, where Sofinco shareholders agreed to liquidate the company after completing the transfer of assets and liabilities and the settlement of all legal obligations.

47

(19) Details of shares and debt instruments issued for each subsidiary:a. There is no debt instruments issued by the subsidiaries.

b. The loans provided by BSF to its subsidiaries:The following table shows the outstanding loans as of 31-12-2017 provided by BSF to its subsidiaries:

Name of the subsidiary SAR 000

Saudi Fransi Capital* 1,032,535

Saudi Fransi Leasing** 1,905,000

Saudi Fransi Capital has an overdraft facility and Saudi Fransi leasing has short term loan from BSF. There is no any other loan out-standing for subsidiaries except the above loans provided by BSF.

*The loans details of Saudi Fransi Capital:

Name of the subsidiary 2017 2016

Opening balance of loan 893,373 1,369,172

Proceeds from loans 1,965,687 475,799

Repayment of loans 1,826,525 951,598

Closing balance of loans 1,032,535 893,373

**The loans details of Saudi Fransi for Finance Leasing:

Name of the subsidiary 2017 2016

Opening balance of loan 1,550,000 1,130,000

Proceeds from loans 580,000 730,000

Repayment of loans 225,000 310,000

Closing balance of loans 1,905,000 1,550,000

48

(20) Description of the Bank’s dividend distribution policy:Cash distribution of dividends by the Bank depends on several factors including assumptions and recommendations of the Board of Directors, based on financial position of the Bank, results of the Bank’s operations, current capital adequacy and prospective financial position of the Bank and liquidity requirements in the short and medium term considering the Bank’s expansion plans and projects.

The distribution of the annual net profit, after deducting all expenses and other costs, taking the necessary precautions for doubtful debts, investment losses and contingent liabilities as deemed appropriate by the Board in compliance with the provisions of the Bank-ing Control Law, as follows:

1. The amounts required to pay zakat assessed on the Saudi shareholders and the tax assessed on foreign shareholders are calculated in accordance with the applicable laws and regulations in the Kingdom of Saudi Arabia. The Bank shall pay these amounts to the competent authorities. The zakat paid on behalf of Saudi shareholders will be deducted from their share in the net profit, and the tax paid on behalf of non-Saudis shareholders will likewise be deducted from their share of the net profit.

2. A minimum of 25% of the net profits remaining after the deduction of zakat and tax as stated above in paragraph (1), shall be transferred to the statutory reserve until the mentioned reserve is equal, at least, to the paid-up capital.

3. From the remaining profits, after the deduction of the statutory reserve, Zakat and tax, a minimum of 5% of the paid-up capital shall be allocated to the Saudi and non-Saudi shareholders to be distributed prorate to the value of paid-up shares of Saudi and non-Saudi shareholders, as recommended by the Board and decided by the General Assembly. If the remaining profits accruing to any Saudi or non-Saudi shareholder is found to be insufficient to pay such dividends to the respective shareholders, such shareholders shall not have the right to demand such distribution from the following year/s’ profits. Moreover, the General As-sembly shall not be entitled to distribute any dividends that exceed the limit duly recommended by the Board.

4. The remaining profits after the allocation of the amounts mentioned in the aforementioned paragraphs (1), (2), (3), shall be used as recommended by the Board and determined by the General Assembly.

5. The subscription ratio of each Saudi and non-Saudi shareholders must be maintained upon calculation of the allocations needed for the statutory reserve and other reserves from net profits (after zakat and tax). The two shareholding groups shall contribute to those reserves as per their percentage in the capital, and their contributions will be deducted from their shares in the net profits.

6. Cash dividends shall be distributed to shareholders at the place and time determined by the Board of Directors in accordance with applicable regulations.

7. Board may decide not to distribute cash dividends and use such dividends in the settlement of debts, obligations, or commit-ments of shareholders to the Bank.

8. The Bank may distribute interim dividends for its shareholders semiannually or quarterly, after satisfying the necessary require-ments stipulated in the Articles of Association.

9. Shareholders must be informed of this policy during the General Assembly meeting.

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 million shares).

49

Total dividends: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 entities. 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 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).

Dividends distributed during the year Proposed dividends ratio at the end of the

year 2017Total dividends of 201704/05/2017

(final for the year 2016)27/07/2017

(interim for 2017

The amount SAR 000 530,366 1,140,631 355,237 1,495,868

Percentage 38.31% 54.09% 24.96% 42.35%

(21) A description of any interest in the voting shares belonging to persons (other than members of the Bank’s Board of Directors and senior executives and their relatives) who notified the Bank of these rights and any change in these rights during the last fiscal year:

A description of any interest in the voting shares belonging to persons (other than members of the Bank’s Board of Directors and senior executives and their relatives) who notified the Bank of these rights

Seria

l

Beneficiary name Number of shares at the beginning of the year

Number of shares at the end of the year Net change Change percent-

age

1 Credit Agricole Corporate & Investment 375,000,000 179,732,139 (195,267,861) (52.07)%

2 Kingdom Holding Com-pany* - 195,267,861 195,267,861 100%

* starting from 20/09/2017.

During the year, a change occurred in the ownership of the main shareholders of the Bank, which resulted from the sale by (Credit Agricole Corporate and Investment) on 20/09/2017 a portion of its share in the Bank’s capital which is 16.2% to the Kingdom Holding Company. Its ownership percentage decreased from 31.11% to 14.91%, the ownership of Kingdom Holding Company is 16.2% of the Bank’s capital. The following table shows the changes in the ownership ratio of the Bank’s principal shareholders:

Main shareholders of the bank’s capital as of 31/12/2017

Seria

l

shar

ehol

der

Num

ber o

f sha

res

at th

e be

ginn

ing

of

the

year

Owne

rshi

p at

the

begi

nnin

g of

the

year

Num

ber o

f sha

res

at

the

end

of th

e ye

ar

Owne

rshi

p at

the

end

of th

e ye

ar

Net c

hang

e

Chan

ge p

erce

ntag

e

1 Kingdom Holding Company*

- 0.00 % 195,267,861 16.20 % 195,267,861 100%

2 Credit Agricole Corpo-rate and Investment*

375,000,000 31.11 % 179,732,139 14.91 % -195,267,861 (52.07)%

3 General Organization for Social Insurance

160,195,361 13.29 % 160,195,361 13.29 % 0 -

4 Rashed A. Al Rashed & Sons Co

118,488,534 9.83 % 118,488,534 9.83 % 0 -

* starting from 20/09/2017.

50

(22) A description of any interest, contractual securities and subscription rights belong to the members of the Board of Directors and senior executives and their relatives in the shares or debt instruments of the Bank or any of its subsidiaries, and any change in such interest or rights during the last fiscal year:

A description of any interest, contractual securities and subscription rights belong to the members of the Board of Directors and their relatives in the shares or debt instruments of the Bank

Seria

l Name of the person who has an interest, contractual securities or

subscription rights

Beginning of the year End of the year

Net c

hang

e

Chan

ge p

erce

ntag

e

Num

ber o

f sh

ares

Debt

in

stru

men

ts

Num

ber o

f sh

ares

Debt

in

stru

men

ts

1 Abdulrahman Alrashid 2,666 - 312,685 - 310,019 11,629%

2 Relatives of Abdulrahman Alrashid 290,356 - 387,528 - 97,172 33%

3 Mousa Alomran 647,860 - 647,860 - - -

4 Relatives of Mousa Alomran 22,504,062 - 22,504,062 - - -

5 Khaled Mutabagani 59,624 - 59,624 - - -

6 Relatives of Khaled Mutabagani 16,767,181 - 16,750,181 - (17,000) -

7 Ammar Alkhudairi 1,000 - 1,000 - - -

8 Mazin Alrumaih 3,000 - 6,000 - 3,000 100%

9 Bader Alissa 1,000 - 1,000 - - -

A description of any interest, contractual securities and subscription rights belong to the senior executives and their relatives in the shares or debt instruments of the Bank

Serial The beneficiary name

Beginning of the year End of the year

Net c

hang

e

Chan

ge p

erce

ntag

e

Num

ber o

f sha

res

Debt

inst

rum

ents

Num

ber o

f sha

res

Debt

inst

rum

ents

1 Relatives of Mazin Altamimi 1,259,050 - 1,259,050 - - -

51

(23) The information related to any loans on the BankA. There is no loans on the bank.

B. Debt instruments and Sukuks. 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 ap-proval of SAMA and terms and conditions of the agreement.

Repayment of debt instruments: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.

C. There is no convertible debt instruments, contractual securities and subscription rights and similar rights issued or granted by the Bank and its subsidiaries during the fiscal year.

D. There is no converting or subscription rights under convertible debt instruments, contractual securities, notes of subscription rights or similar rights issued or granted by the Bank during the fiscal year.

E. There is no redemption, purchase or cancellation by the Bank of any redeemable debt instruments.

(24) Number the Board of Directors meetings held during the last fiscal year, the dates, and atten-dance record of each meeting, mentioning the names of attendees:

Number of meetings (8)

Nam

e of

the

mem

ber

Firs

t mee

ting

22/0

2/20

17

Seco

nd m

eet -

ing

30/0

3/20

17

Third

mee

ting

20/0

4/20

17

Four

th m

eetin

g18

/06/

2017

Fifth

mee

ting

28/0

9 /2

017

Sixt

h m

eetin

g07

/10/

2017

Seve

nth

mee

t -in

g 14

/11/

2017

Eigh

th m

eetin

g13

/12/

2017

Tota

l

1-Suliman AlGwaiz 8

2- Abdulrahman Alrashed 6

3- Mosa Alomran 7

4- Dr. Khaled Mutabagani 6

5- Ammar Alkhudairi 8

6- Mazin Alrumaih 7

7- Bader Alissa 8

8- Patrice Couvegnes* 5

9- Jacques Prost 7

10- Sebastien Pailhole** 4

*His membership of the Board of Directors and its committees was terminated as of 30/11/2017.

** He resigned from the Board of Directors as of 27/07/2017.

52

(25) Number of bank’s requests of shareholders register and reasons:

Number of bank’s requests of shareholders register Request date Request reasons

1 31/12/2017 The end of the fiscal year2017

2 12/12/2017 Follow up the shareholders records




6 28/09/2017 Third quarter 2017




10 18/07/2017 Profit file


12 22/06/2017 Second quarter 2017



15 23/05/2017 General Assembly


17 20/04/2017 Profit file

18 20/04/2017 General Assembly


20 31/03/2017 First quarter 2017




53

(26) A description of any transaction between the Bank and a relevant partyThe bank during its normal course of business deals with relevant parties. The management and the Board of Directors consider that transactions with related parties have been made on the same terms with other parties. Transactions with related parties are subject to the ratios stipulated in the Banking Control Law and the instructions issued by the Saudi Arabian Monetary Authority. The balances resulting from these transactions as of 31 December 2017 and 2016 which included in the consolidated financial statements are as follows:

SAR 000 2017 2016

CA-CIB Group

Balances with banks, other financial institutions and other assets 185,060 1,184,495

Balances with banks, other financial institutions and other liabilities 91,647 15,566

Derivatives fair value, net 88,933 58,356

Commitments and contingencies 1,416,998 1,853,255

Affiliates

Investments 76,049 113,220

Balances for other banks and financial institutions 7,993 7,714

Customers’ deposits 142,501 100,617

Commitments and contingencies 1,600 300

Directors, senior executives, auditors, other main shareholders and their affiliates

Loans and advances 7,184,902 6,275,305

Customers’ deposits 9,810,397 6,375,320

Derivatives fair value, net 12,308 56,325


The bank’s investment funds

Derivatives fair value, net 683 -


54

Main shareholders represent ownership of more than 5% of the Bank’s capital, excluding non-Saudi shareholders. The following table shows the income and expenses of transactions with related parties included in the consolidated financial statements:

SAR 000 2017 2016

Special commission income

CA-CIB Group 9,785 7,346

Directors, senior executives, auditors, other main shareholders and their affiliates 279,584 230,242

Affiliates - 6

Total special commission income 289,369 237,594

Special commission expenses

CA-CIB Group 403 1,024

Directors, senior executives, auditors, other main shareholders and their affiliates 213,111 232,301

Affiliates 390 299

The bank’s investment funds 1,815 507

Total of special commission expenses 215,719 234,131

Fees, commission income and others, net 62,178 25,783

Directors’ fees 4,449 3,906

Other general and administrative expenses 996 614

55

(27) Contracts and business of which the Bank is a party or which include an interest of a member of the Board of Directors of the Bank or of its senior executives or any person related to any of them.

The

natu

re o

f bu

sines

s or

co

ntra

ct

The

amou

nt

of b

usin

ess

or

cont

ract

Star

t dat

e of

the

cont

ract

End

date

of t

he

cont

ract

Cont

ract

sta

tus

The name of BOD’s mem-ber/ Senior executives or

any person related to them

1 Rent a residential villa 247,000 18/01/2017 17/01/2018

Active, with no renewal at the end of the

contract

Active, with no renewal at the end of the contract

Active, will be ended on 01/08/2018

Active, will be ended on 28/02/2018

Was ended on 30/11/2017Was ended on 14/08/2017

ActiveActive

2 Rent a residential villa 269,000 01/04/2015 31/03/2018Active, will

be ended on 01/08/2018

3 Rent a residential villa 261,250 01/09/2017 31/08/2018Active, will

be ended on 28/02/2018

4 Rent a residential villa 237,500 01/06/2015 31/05/2018 Was ended on 30/11/2017

5 Rent a residential villa 285,000 15/08/2016 14/08/2018 Was ended on 14/08/2017

6 Rent a residential villa 270,500 15/08/2017 14/08/2018 Active

7 Rent a location for ATM 43,000 01/12/2010 30/11/2020 Active

The location is related to the Kingdom Holding Company (major shareholders in the

bank’s capital)

8 Providing communications services

2,471,844

Contracts and multiple services, based on requests from the Bank’s business sectors, such as text

messaging services for customers, the Internet and others

Mr. Suliman Abdulrahman Al Gwaiz, a board member in

Mobily


The owner/ Mr.Abdullah Salman AlDossari as he is the father of Mr. Faisal Abdullah AlDossari (head of branch

network)


The owner/ Arab Markets Co. Ltd, Euromarche/ Mr. Ammer Othman (wealth management

director)

11 Rent a location for ATM 40,000 01/06/2001 31/05/2020 Active The owner/ Dr. Khalid Muta-baqani (a board member in

the bank)

56

(28) Resign any remuneration or profits by the Bank’s board of director’s members, senior execu-tives or shareholders:• There is no arrangements or agreement of which a board member or senior executive resign any remuneration or compensation.• There is no arrangements or agreement of which a shareholder resigns any rights in the profits.

(29) A statement of the value of the statutory payments due and payable for zakat, taxes, fees or any other entitlements that have not been paid by the end of the annual financial period, with a brief description along with mentioning the reasons thereof:

Statement 2017

Repaid Due amount

Zakat * 91,000

Tax** 208,000

General Organization for Social Insurance 94,79 0,363.47 -

Costs of visas and passports 473587 -

Fees of labor office 30900 -

*ZakatZakat 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 favorable 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.

**Income taxIncome 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.

(30) A statement of the value of any investments or reserves created for the benefit of the Bank’s employees:Takaful Alghad for employees

The Bank is keen to motivate its employees by providing incentive and programs that enhance their confidence and loyalty to the Bank. The following is a statement (Takaful Alghad for employees) and the movement obtained during 2017:

SAR Employee’s share Bank’s share Total

The balance in the beginning of 2017 48,993,855.00 38,457,847.00 87,451,702.00

Additional amount during 2017 10,574,234.00 8,591,101.00 19,165,335.00

The recovered amount during 2017 (14,169,664.00) (6,321,893.00) (20,491,557.00)

The balance at the end of 2017 45,398,425.00 40,727,055.00 86,125,480.00

57

(31) Board of Directors confirmations:Banque Saudi Fransi’s Board of Directors affirms the following:

• The accounting records have been prepared correctly.• The internal control system has been properly prepared and implemented effectively.• There is no doubt about the Bank’s ability to continue its activity.

Transactions with related parties and information relating to any contracts or business to which the Bank is a party have been disclosed or if it has a main interest for any of the Chairman and members of the Board of Directors of the Bank or the Chief Executive Officer or the Finance Manager or any person directly related to any of them, in disclosure (37) of transactions with related parties in the consoli-dated financial statements, and articles 26 and 27 of this report.

(32) Auditors’ reservations to the financial statements:The audit report did not contain reservations to the annual financial statements.

(33) Board of Directors’ recommendations to change auditors:The Board of Directors did not recommend that auditors shall be changed before the end of their appointment period, and there was no conflict between the recommendations of the Committee and the decisions of the Board of Directors.

(34) Disclosing the details of treasury shares held by the Bank, and details on the uses of these shares:During quarter three 2016, the Bank initiated a plan to acquire treasury shares as authorized by the Board under its Long Term Incen-tive (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 1

Grant date 02 July 2017

Maturity date 01 January 2019

Grant price -SAR 23.096

Vesting period 1.5 years

Vesting condition Employees remain in service and meets required service criteria

Method of settlement Appreciation in Equity

Valuation model Black-Sholes

Fair value per share on grant date-SAR 31.836

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: NIL SAR). 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 6,000,000

Forfeited Shares 2,250,000

Number of shares allocated for appreciation calculation as of 31-12-2017 3,750,000

58

(35) Disclosure related to Micro, Small & Medium Enterprises:1. Qualitative Disclosures:The bank established the SME Sector in 2014 in the belief of the importance of this sector and the provision of the best financing solu-tions and facilities to the owners of these establishments. This sector includes more than 40 employees in three regional departments and each region has a manager who supervises the progress of the work plan and reports to the Director of the small and medium enterprises sector.

The SME sector is a separate sector in its work from the Bank’s various departments. The Director of Sector reports to the Head of Business Banking Group.

The Bank also serves all its customers in the small and medium enterprises category in the three major cities in the Kingdom and receives customer requests to provide services to them from all branches operating in the Kingdom in all cities and regions.

The Bank is currently redefining the small and medium enterprises as stated in SAMA Circular No. 391000007761 dated 22/01/1439. The bank will fully disclose, according to the definition of SAMA mentioned in Circular No. 381000094106 and dated 06/09/1438, dur-ing the period set by SAMA.

Number of training days for employees 314

Number of training days for customers -

The bank received the prize Most Improved SME Bank by CPI in 2015.

2. Quantitative Disclosures*

As at 31 December 2017 As at 31 December 2016

Small Medium Total Small Medium Total

Loans to MSMEs– on balance sheet (SAR millions) 709 1,487 2,196 486 1,052 1,538

Loans to MSMEs– off balance sheet (SAR millions) 716 1,117 1,833 369 748 1,118

On balance sheet loans to MSMEs as a percentage of total on balance sheet loans 0.6% 0.9% 1.5% 0.3% 0.6% 0.8%

Off balance sheet loans to MSMEs as a percentage of total off balance sheet loans 1.2% 1.9% 3.1% 0.6% 1.2% 1.8%

Number of loans (on and off balance sheet) 1,754 512 2,266 1,655 425 2,080

Number of customers (financing requesters) 916 121 1,037 900 120 1,020

Number of loans guaranteed by Kafalah program 78 78 69 69

Amount of loans guaranteed by Kafalah program 87 87 89 89

* SAMA definition for small and medium enterprises stated in circular no. 381000064902 for 2017 and previous years is not applied on the abovementioned data. It will be applied as of 2018.

59

(36) The ethical principles and professional standards for the Bank’s employees:The laws and regulations of the Bank include controls and rules governing the course of work, of which any person who represents the Bank directly or indirectly shall comply with, including:

A - Behavior and general ethics and professional standards:• Rules at work (e.g. complying with working hours).• Report actual and potential violations (e.g. fraud or attempted fraud).• Confidentiality of information such as (customer information).• Avoid conflicts of interest including the provision and acceptance of gifts and business transactions to related parties.• Use internal useful information (personal investments).• Compliance with anti-money laundering policy (reporting suspicious activities).• Protecting the Bank’s assets.• Correct records and financial reports.• Harassment and intimidation.• Safe workplace and free of prohibitions.• Justice.• Appropriate products and investments offered to customers.

B- Acceptable Use Policies for Computer Services - Email - Internet:

Professional standards:• Treat others the way you wish to be treated.• Being responsible for individual actions.• Perform personal and work related activities in accordance with applicable laws and regulations.• Being straightforward in all business issues.

Compliance with the ethical principles and professional standards by the employees of the Bank and its representatives shall be a duty of employment and official order to be complied with. Failure to take such measures shall result in disciplinary proceedings which may reach the termination of service in accordance with article 80 paragraph (2) of Labor Law and based on the Bank’s work regulations. Violating such regulations is considered a violation of general laws, which may expose the employee and the bank to a penalty.

Sanctions shall be applied in consultation with the concerned department, legal department and the human resources group. The as-sessment of the penalty shall be related to the circumstances associated with the violation.

C- Financial rewards and incentives:In the system of financial rewards and incentive policy, the Bank adopts pioneering practices based on justice, transparency, internal justice and external competitiveness. These systems ensure that the performance of the bank, departments and employees are linked, in addition to protecting the Bank from unexpected material risks.

(37) communicating with shareholders:In accordance with the instructions issued by the regulatory and supervisory authorities, the Bank ensures that shareholders fully exercise their rights and urges them to actively participate and submit their inquiries during the general assemblies. A telephone number and e-mail is also posted on the bank’s home page to receive calls and inquiries from shareholders. The bank will publish any significant changes in the bank on Tadawul website as per the issued instructions in this regard.

60

(38) Governance:The Bank complies with all regulations and instructions issued by regulatory authorities, such as the main principles of governance in banks operating in Saudi Arabia issued by the Saudi Arabian Monetary Authority, the Corporate Governance Regulations issued by the Capital Market Authority, and the Companies Law issued by the Ministry of Commerce and Investment. The bank updates the Gover-nance Manual as well as its policies and procedures in accordance with these Regulations and any updates or instructions issued on governance.

- The paragraphs that have not been implemented from the Corporate Governance Regulations issued by the CMA are as follows:

Number of Article/ para-graph Text of the article/ paragraph Reasons behind not implementing the

article

1 Paragraph (1) article (61)

Preparing a clear policy for the remunerations of the Board members and its committees

and the Executive Management, and presenting such policy to the Board in preparation

for approval by the General Assembly, provided that such policy follows standards that

linked to performance, and disclosing and ensuring the implementation of such policy.

The Bank was not able to obtain the approval of the General Assembly to approve this policy due to the short time remaining for the applica-tion of this paragraph at that time. The Board approved this policy on 13/12/2017 and the

deadline for the implementation of the regula-tion was on 31/12/2017.

This policy will be presented to the next Gen-eral Assembly for approval.

2 Paragraph (4) article (50) The number of members of a committee shall not be less than three or more than five.

Is applied to all committees except for the Executive Committee (seven members). The

Board decided to reduce the number of mem-bers to five members and is under implementa-

tion.

In conclusion, the Board of Directors of Banque Saudi Fransi expresses its sincere thanks and appreciation to the Custodian of the Two Holy Mosques, His Royal Highness the Crown Prince, and to our wise government.

We thank the Ministry of Finance, the Ministry of Commerce and Investment, the Saudi Arabian Monetary Authority and the Capital Market Authority for their support and continuous support towards raising the level of banking services.

It also thanks the shareholders and the customers for their trust. The Board also thanks all employees of the Bank for their sincere efforts.

61

KPMG Al Fozan & Partners Certified Public Accountants

Independent Auditors’ Report on the Audit of the Consolidated Financial Statements

To the Shareholders of Banque Saudi Fransi (A Saudi Joint Stock Company)

OpinionWe have audited the consolidated financial statements of Banque Saudi Fransi (the “Bank”) and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated state-ment of income, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”) as modified by Saudi Arabian Monetary Authority (“SAMA”) for the accounting of zakat and income tax.

Basis for OpinionWe conducted our audit in accordance with International Standards on Auditing (“ISAs”) that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidat-ed Financial Statements section of our report. We are independent of the Group in accordance with the professional code of conduct and ethics that are endorsed in the Kingdom of Saudi Arabia, that are relevant to our audit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit MattersKey audit matters are those matters that, in our professional judgment, were of the most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial state-ments as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each key audit matter, a description of how our audit addressed the matter is set out below:

IndependentAuditors’ Report

62

The key audit matter How the matter was addressed in our audit

Impairment of loans and advancesAt 31 December 2017, the gross loans and advances amounted to Saudi Riyals 125.365 million against which an impairment provision of Saudi Riyals 3,424 mil-lion was maintained. This includes impairment provision against specific loans and advances and collective impairment for corporate and retail loans recorded on a portfolio basis through the use of models.

We considered this as a key audit matter as the Bank makes complex and subjec-tive judgments and makes assumptions to determine the impairment and the timing of recognition of such impairment.

In particular, the determination of impairment against loans and advances in-cludes:

• The identification of impairment events and methods and judgments used to calculate the impairment against specific corporate loans and advances;

• The use of assumptions underlying the calculation of collective impairment for portfolios of loans and advances, and the use of the models to make those calculations; and

• An assessment of the Bank’s exposure to certain industries affected by eco-nomic conditions.

Refer to the significant accounting policies note 3m(ii) to the consolidated financial statements, note 2d(i) which contains the disclosure of significant accounting esti-mates relating to impairment against loans and advances and impairment assess-ment methodology used by the Bank and note 7 which contains the disclosure of impairment against loans and advances.

We assessed the design and implementa-tion, and tested the operating effectiveness of the key controls over management’s pro-cesses for establishing and monitoring both specific and collective impairment.

We tested a sample of loans and advances (including loans that had not been identified by management as potentially impaired) to form our own assessment as to whether im-pairment events had occurred and to assess whether impairment had been identified, appropriately measured and recorded in a timely manner.

We also selected a sample of loans for industries adversely affected by the current economic conditions to evaluate manage-ment’s impairment assessment for such loans and advances.

Where impairment was individually deter-mined for specific loans and advances, we tested the assumptions underlying the impairment calculation including forecasted future cash flows, discount rates and the estimated recovery from any underlying collateral, etc.

For the collective impairment models used by the Bank, we tested:

• The extracts of historical data from underly-ing systems.

• The assumptions used by management including probability of default, loss given default analysis and delinquency analysis used in the models; and

• The mathematical calculations within the models.


63


Fees and commission incomeIn connection with granting loans / facilities, the Bank charges transaction and service fees. Such fees are to be deferred and amortized over the lives of the respective loans / facilities within the consolidated statement of income. However, due to the volume of transactions, such fees, up to a certain threshold, are recog-nized upfront based on certain judgments and assumptions.

We considered this as a key audit matter since the use of management judgments and assumptions could impact fees and commission income and Special com-mission income.

Refer to the significant accounting policies note 3(h) to the consolidated financial statements.

We assessed the design and implementation and tested the operating effectiveness of the key controls over the setting of assumptions and judgments and their application.

We obtained the management’s assessment of the impact of the use of assumptions and judgments on fees and commission income and:

• Traced the data and information used by the management to the source documents.

• Assessed management’s estimation of the impact of the use of assumptions and judgments on the recognition of fee and commission income.

Valuation of DerivativesThe Bank has entered into commission rate swaps (CRS), forward foreign ex-change contracts and certain structured derivative contracts. Such derivatives are recorded at fair value within the consolidated financial statements. CRS, forward foreign exchange contracts and structured derivative contracts are over the coun-ter (OTC) derivatives, and hence, the valuation of these contracts is subjective as it takes into account a number of assumptions and model calibrations.

The majority of these derivatives are held for trading, however, the Bank utilizes certain CRS for cash flow hedge accounting purposes in the consolidated financial statements for hedging the cash flow risks. An inappropriate valuation of derivatives could have a material impact on the consolidated financial statements and in the case of cash flow hedge may result in an ineffectiveness in hedge and thus impact the hedge accounting.

We considered this as key audit matter as there is complexity and subjectivity involved in determining the value of such contract.

Refer to the significant accounting policies note 3(e) to the consolidated financial statements, and note 11 and 36, which explains the derivative positions and the valuation methodology respectively, used by the Bank.

We assessed the design and implementa-tion, and tested the operating effectiveness of the key controls over management’s pro-cesses for valuation of derivatives including the testing of relevant controls covering the fair valuation process for derivatives.

We selected a sample of derivatives and:

• Tested the accuracy of the particulars of the derivatives by comparing the terms and conditions with relevant agreements and deal confirmations;

• Checked the accuracy and appropriate-ness of the key inputs to the valuation models; and

• Involved our valuation specialists to perform an independent valuation of the derivatives and compared the results with management’s valuation methodology.


64


Valuation of available for sale investmentsAvailable for sale investments comprise a portfolio of debt, equity securities and other investments. These instruments are measured at fair value with the corre-sponding fair value changes recognized in other comprehensive income. The fair value of available for sale investments which are not traded in an active market is determined through the application of valuation techniques which often involve the exercise of judgment by the management and the use of assumptions and estimates.Estimation uncertainty exists for those instruments not traded in an active market and where the internal modelling techniques use: • significant observable valuation inputs (i.e. level 2 investments) and • significant unobservable valuation inputs (i.e. level 3 instruments).Estimation uncertainty is particularly high for level 3 instruments.In the Bank’s accounting policies, the management has described the key sources of estimation involved in determining the valuation of level 2 and level 3 financial instruments and in particular when the fair value is established using valuation techniques due to the instrument’s complexity or due to the lack of availability of market based data.The valuation of the Bank’s available for sale investments in level 2 and 3 catego-ries was considered a key audit matter given the degree of complexity involved in valuing these financial instruments and the significance of the judgment and estimates made by the management.Refer to the significant accounting policies note 3(j)to the consolidated financial statements, notes 36 which explains the investment valuation methodology used by the Bank and note 2(d)(ii) which explains critical judgments and estimates.

We assessed the design and implementation and tested the operating effectiveness of the key controls over management’s processes for performing valuation of investments classified as available for sale which are not traded in an active market.

We performed an assessment of the methodology and appropriateness of the valuation models and inputs used to value available for sale investments.

We tested the valuation of a sample of available for sale investments not traded in an active market. As part of these audit procedures, we assessed key inputs used in the valuation such as the expected cash flows, risk free rates and credit spreads by benchmarking them with external data.

Impairment of investmentsAs at 31 December 2017, the Bank had investments (excluding fair value through income statement investments - FVIS) i.e. available for sale investments, held to maturity and other investments held at amortised cost (refer to note 6 for details of these investments). These investments significantly include corporate bonds and sukuks which are subject to the risk of impairment in value due to either adverse market situations and / or liquidity constraints faced by the issuers.

For debt instruments such as corporate bonds and sukuks, generally the manage-ment considers them to be impaired when there is evidence of a deterioration in the financial health of the investee, industry or sector performance, changes in technology and operational and financing cash flows.

We considered this as a key audit matter since the assessment of impairment requires significant judgment by management and the potential impact of impair-ment could be material to the consolidated financial statements.

Refer to note 3(m) of the consolidated financial statements for the accounting policy relating to the impairment of non-trading investments, note 2 (d) (iii) for the critical accounting estimates and judgments, and notes 33 and 34 for the disclo-sures of credit and market risks respectively.

We assessed the design and implementation and tested the operating effectiveness of the key controls over management’s processes for identifying any defaults on corporate bonds / sukuk.

We, on a sample basis, assessed the credit-worthiness of counter parties and cash flows from the instrument to consider any defaults based on the terms and conditions of the issuance of these bonds/sukuks.


65


ZakatThe Bank files its zakat return with the General Authority of Zakat and Tax (“GAZT”) on an annual basis. The GAZT has issued assessment orders for the years from 2005 up to 2013, which resulted in significant additional zakat exposure amounting to Saudi Riyals 1,712 million. The significant additional zakat exposure resulted mainly due to disallowance of certain 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).

Assessments for the years 2014 to 2016 are yet to be raised. However, in line with the assessments finalized by the GAZT for the years 2005 to 2013, if long-term investments are disallowed and long-term borrowings is added to the Zakat base this would result in an additional zakat exposure. The amount of the potential additional zakat exposure is not disclosed in the consolidated financial statements as management believes that this might affect the Bank’s position in this matter.

The management makes judgments about the incidence and quantum of zakat liabilities (which are subject to the future outcome of assessments by the GAZT) and based on such assessments, the management is confident of a favourable outcome of the appeal process as referred to above.

We considered this as a key audit matter as it involves significant management estimation and assessments and the additional exposure could be material to the consolidated financial statements.

Refer to note 3(u) for the accounting policy relating to Zakat and Income taxes and provisions, and note 28 for the related disclosures for Zakat and tax.

We reviewed the correspondences between the Bank and the GAZT and the Bank’s zakat / tax advisors.

We examined the matters in dispute, used our knowledge of zakat regulations and involved our zakat specialists to assess available evidence and considered whether additional provision is required.

We held meetings with those charged with governance and executive management of the Bank to obtain an update on the Zakat matter and the results of their interactions with the relevant authorities.

We also assessed the appropriateness of the disclosures, in light of the facts and circum-stances of the Bank.


66


Deposit Incentive SchemeIn order to increase the Bank’s deposit base, a number of deposit incentive schemes were launched by the Bank from time to time. The incentive under the scheme was reported in the consolidated financial statements as part of special commission expense on deposits and fee expenses. During the current year, certain matters were observed in relation to an incentive scheme of the Bank, indicating weaknesses in governance around approval and payment of incentives. Payments of incentives were primarily concentrated with few individuals.

On identification of these matters, the Board of Directors (the Board) decided to suspend the relevant incentive scheme (the scheme), made changes to key man-agement personnel and appointed an external consultant to carry out a detailed review of payments made under the scheme. On completion of the consultant’s work, the Board also decided to extend the scope of consultant’s work to include the review of other incentive schemes and to assess the overall control environ-ment of the Bank. The Board has reviewed the consultant’s findings up to the date of approval of consolidated financial statements and has concluded that no adjustments are required to the consolidated financial statements. The consul-tant’s final report is pending.

Saudi Arabian Monetary Authority (SAMA) has carried out a review of the matter and penalized the Bank for certain violations with respect to this scheme including governance issues and the SAMA rules of compensation practices. The Bank has paid the amount of penalty.

We considered this as a key audit matter in view of the potential impact on the consolidated financial statements of this scheme. Related amounts are included in Special commission and fee expenses and related party transactions and bal-ances (note 37).

We held meetings with those charged with governance, executive management, internal audit, compliance team and Bank’s consul-tant to understand the nature and operation of relevant incentive schemes.

We involved our specialist in assessing the appropriateness of the scope of work of the Bank’s consultant. We considered the status of the ongoing investigations and the findings identified so far by the consultant to assess the matters identified and their po-tential impact on the consolidated financial statements.

We also evaluated the objectivity, inde-pendence and competence of the Bank’s external consultant for the work performed on the scheme.

We obtained a list of relevant incentive schemes operated by the Bank during the year and assessed their impact on the con-solidated financial statements.

We assessed the basis for the Board’s con-clusions that no adjustments are required to the consolidated financial statements.

We obtained the communication received from SAMA imposing the penalty and checked that the penalty imposed has been appropriately recorded in the consolidated financial statements.

We considered the appropriateness of re-lated disclosure in the consolidated financial statements.


67

Other InformationThe Board of Directors of the Bank (the Directors) are responsible for the other information. The other information comprises of the information included in the annual report, but does not include the consolidated financial statements and our auditors’ report thereon. The annual report is expected to be made available to us after the date of this auditors’ report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assur-ance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

When we read the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the mat-ter to those charged with governance.

Responsibilities of Directors and Those Charged with Governance for the Consolidated Financial StatementsThe Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the IFRSs as modified by SAMA for the accounting of zakat and income tax, the Banking Control Law in the Kingdom of Saudi Arabia, the applicable requirements of the Regulations for Companies, and the Bank’s Articles of Association, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstate-ment, whether due to fraud or error.

In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Direc-tors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial StatementsOur objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from mate-rial misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing as en-dorsed in the Kingdom of Saudi Arabia, will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with International Standards on Auditing as endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, de-sign and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.

• Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.


68

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain jointly responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit of Banque Saudi Fransi and its subsidiaries.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our indepen-dence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circum-stances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on other legal and regulatory requirementsBased on the information that has been made available to us, nothing has come to our attention that causes us to believe that the Bank is not in compliance, in all material respects, with the applicable requirements of the Regulations for Companies, the Banking Control Law in the Kingdom of Saudi Arabia and the Bank’s Articles of Association in so far as they affect the preparation and presen-tation of the consolidated financial statements.

PricewaterhouseCoopersP O Box 8282, Riyadh 11482Kingdom of Saudi Arabia

KPMG Al Fozan & PartnersP O Box 92876, Riyadh 11663Kingdom of Saudi Arabi

Bader I, BenmoharebCertified Public AccountLicence Number 471

Abdullah Hamed Al FozanCertified Public AccountLicence Number 348

March 07, 2018 (corresponding to 19 Jumada’II 1439H)


69

SAR 000 Notes 2017 2016

ASSETS

Cash and balances with SAMA 4 22,393,237 20,344,108

Due from banks and other financial institutions 5 18,758,295 25,338,632

Investments, net 6 25,324,895 24,074,379

Positive fair value derivative 11 2,032,823 1,741,695

Loans and advances, net 7 121,940,394 129,457,869

Investment in associates 8 76,049 113,220

Property and equipment, net 9 736,927 716,656

Other assets 10 1,666,261 1,642,150

Total assets 192,928,881 203,428,709

LIABILITIES AND EQUITY

Liabilities

Due to banks and other financial institutions 12 2,963,273 4,288,532

Customers’ deposits 13 150,954,187 158,458,472

Negative fair value derivative 11 1,197,475 1,678,105

Debt securities and sukuks 14 2,002,565 6,726,112

Other liabilities 15 4,150,000 2,578,485

Total Liabilities 161,267,500 173,729,706

Equity

Share capital 16 12,053,572 12,053,572

Statutory reserve 17 12,053,572 11,805,933

General reserve 17 982,857 982,857

Other reserves 18 (285,172) (863,584)

Retained earnings 6,628,963 5,139,428

Proposed dividend 28 355,237 647,995

Treasury Shares 38 (127,648) (67,198)

Total equity 31,661,381 29,699,003

Total liabilities and equity 192,928,881 203,428,709

The accompanying notes 1 to 43 form an integral part of these consolidated financial statements

BANQUE SAUDI FRANSICONSOLIDATED STATEMENT OF FINANCIAL POSITIONAs at December 31, 2017 and 2016

70

SAR 000 Notes 2017 2016

Special commission income 20 6,604,506 5,970,622

Special commission expense 20 1,904,836 1,714,435

Net special commission income 4,699,670 4,256,187

Fees and commission income, net 21 1,119,318 1,363,990

Exchange income, net 356,131 395,862

Trading income, net 22 270,837 200,394

Dividend income 23 8,078 16,024

Gains on non trading investments, net 24 27,684 50,483

Other operating income 25 94,489 116,774

Total operating income 6,576,207 6,399,714

Salaries and employee related expenses 30 1,384,543 1,392,408

Rent and premises related expenses 178,819 173,589

Depreciation and amortization 9 151,123 137,706

Other general and administrative expenses 560,688 433,903

Impairment charge for credit losses, net 7 661,113 768,374

Impairment charge for investment, net 3,500 (20,980)

Other operating expenses 26 112,105 11,270

Total operating expenses 3,051,891 2,896,270

Net operating income 3,524,316 3,503,444

Share in earnings of associates, net 8 7,568 6,790


Basic and diluted earnings per share (in SAR) 27 2.94 2.91


BANQUE SAUDI FRANSICONSOLIDATED STATEMENT OF INCOMEFor the years ended December 31, 2017 and 2016

71

SAR 000 Notes 2017 2016


Other comprehensive income (loss):Items that can be recycled back to consolidated statement of income in subsequent periods

Available for sale investmentsNet change in the fair value

18 6,459 14,157

Net amount transferred to consolidated statement of income 18 (27,684) (50,483)

Cash flow hedgeEffective 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)

Total comprehensive income for the year 4,110,296 3,741,449


BANQUE SAUDI FRANSICONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFor the years ended December 31, 2017 and 2016

72

Attri

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ders

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BANQUE SAUDI FRANSICONSOLIDATED STATEMENT OF CASH FLOWSFor the years ended December 31, 2017 and 2016

73

BANQUE SAUDI FRANSICONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the years ended December 31, 2017 and 2016

SAR 000 Notes 2017 2016

OPERATING ACTIVITIESNet income for the year 3,531,884 3,510,234Accretion of Premium on non-trading investments, net 2,189 14,245Gains on non trading investments, net (27,684) (50,483)Depreciation and amortization 9 151,123 137,706Gains on disposal of property and equipment, net (247) (71)Impairment charge for credit losses, net 7 661,113 768,374Impairment charge for Investment 3,500 -Share in earnings from associates, net 8 (7,568) (6,790)Change in fair value of financial instruments 604 1,944Net increase / (decrease) in operating assets: 4,314,914 4,375,159Statutory deposit with SAMA 4 (89,662) 193,566Due from banks and other financial institutions maturing after ninety days from the date of acquisition 7,662,000 (11,787,000)

Investments held as FVIS (trading) 46,866 33,069Loans and advances, net 7,016,133 (6,460,018)Other assets 286,986 1,541,531Net increase / (decrease) in operating liabilities:Due to banks and other financial institutions (1,325,259) 2,731,342Customers’ deposits (7,504,285) 16,606,372Other liabilities 628,958 (1,848,289)Net cash from operating activities 11,036,651 5,385,732INVESTING ACTIVITIESProceeds from sale and maturities of non trading investments 4,347,322 10,351,194Purchase of non trading investments (5,599,195) (6,040,505)Dividend received from subsidiaries - 293Acquisition of property and equipment (171,537) (163,471)Proceeds from sale of property and equipment 390 309Net cash (used in ) / from investing activities (1,423,020) 4,147,820FINANCING ACTIVITIES Repayment of debt securities and sukuks (4,712,500) - Purchase of treasury shares (71,375) (67,198) Dividends paid 28 (1,788,626) (1,459,049)Net cash used in financing activities (6,572,501) (1,526,247)Increase in cash and cash equivalents 3,041,130 8,007,305Cash and cash equivalents at the beginning of the year 24,674,790 16,667,485Cash and cash equivalents at the end of the year 29 27,715,920 24,674,790Special commission received during the year 6,632,361 5,603,177Special commission paid during the year 1,991,129 1,430,113Supplemental non cash informationNet changes in fair value and transfers to consolidated statement of income 578,412 231,215


74

BANQUE SAUDI FRANSINOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFor the years ended December 31, 2017 and 2016

1. GeneralBanque Saudi Fransi (BSF the Bank) is a Saudi Joint Stock Company established by Royal Decree No. M/23 dated Jumada II 17, 1397H (corresponding to June 4, 1977). The Bank formally commenced its activities on Muharram 1, 1398H (corresponding to De-cember 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 liabili-ties and settlement of all legal obligations.

2. Basis of preparationA. Statement of complianceThe 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 Account-ing 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.

B. Basis of measurement and presentationThese 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.

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2. Basis of preparation (continued)

C. Functional and presentation currencyThese 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 assumptionsThe 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 signifi-cant 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 deter-mine the probability of default for non-retail obligors. In assessing the need for collective loss allowance for non retail loans manage-ment 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 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.

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2. Basis of preparation (continued)

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 creditwor-thiness, 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 finan-cial 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.

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 fundsThe 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.

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3. Summary of significant accounting policiesThe 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 ac-counting 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 policiesThe 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 TaxThe 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 standardsAmendments 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.

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 to note 41).

B. Basis of consolidationThe 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 re-turns 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.

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3. Summary of significant accounting policies (continued)

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 cir-cumstances 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:

• Derecognizes the assets (including goodwill) and liabilities of the subsidiary• Derecognizes the carrying amount of any non-controlling interests• Derecognizes the cumulative translation differences recorded in equity• Recognizes the fair value of the consideration received• Recognizes the fair value of any investment retained• Recognizes 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.Balances between the Bank and its subsidiaries including any income and expenses arising from intra-group transactions, are elimi-nated 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 businessOwnership interest

2017 2016

Saudi Fransi Capital K.S.A 100% 100%

Saudi Fransi Insurance Agency K.S.A 100% 100%

Saudi Fransi for Finance Leasing K.S.A 100% 100%

Sakan real estate financing K.S.A 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.

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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 result-ing from the supervisory frameworks within which banking subsidiaries operate.

C. Investment in associatesInvestments 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 accountingAll regular way purchases and sales of financial assets are recognized and derecognized in the consolidated statement of financial po-sition 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.

E. Derivatives financial instruments and hedge accountingDerivative financial instruments including forward foreign exchange contracts, commission rate futures, forward rate agreements, cur-rency 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 attribut-able 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.

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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 measur-able. 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 prospec-tive 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.

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 instru-ments 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 trans-action 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 account-ing 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.

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F. Foreign currenciesTransactions in foreign currencies are translated into Saudi Arabian Riyals at exchange rates prevailing at transaction dates. Mon-etary 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.

The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the begin-ning 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 instrumentsFinancial 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 recognitionRevenue 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 expenseSpecial 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 consid-ering 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.

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Exchange income / lossExchange income / loss is recognised as discussed in foreign currencies policy above.

Fees and commission incomeFees 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 incomeDividend income is recognised when the right to receive the income is established. Dividends are reflected as a component of net trad-ing 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 instrumentsNet 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 agreementsAssets 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 agree-ments 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.

J. InvestmentsAll 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 invest-ments 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

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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 state-ment 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. Spe-cial 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 con-solidated 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 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 clas-sification 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.

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K. Loans and advancesLoans 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 obliga-tions, 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 permis-sible. 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.

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 institutionsDue 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 inten-tion 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 assetsA 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 dif-ficulty, 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 col-lective 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.

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If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to credit event oc-curring after the impairment loss was recognized in the consolidated statement of income, the impairment loss is reversed through the consolidated statement of income.

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 compre-hensive 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 car-rying 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 occur-ring 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 poli-cies 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.

N. Other real estateThe 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 cu-mulative write down is recognised in the statement of income. Gains or losses on disposal are recognised in the statement of income.

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O. Property and equipmentProperty 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 33 years

Leasehold improvements Over the lease period or economic life whichever is shorter

Furniture, equipment and vehicles 4 to10 years

Software programme and automation project 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 LiabilitiesAll 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 liabili-ties 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.

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 leasesi. 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.

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S. Cash and cash equivalentsFor 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 instrumentsA 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 derecog-nised only if the Bank has not retained control of the financial asset. The Bank Recognizes 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 taxZakat i 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 recog-nized as a liability at that time.

V. Investment management, brokerage and corporate finance servicesThe 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 transac-tions.

Assets held in trust or in a fiduciary capacity are not treated as assets of the subsidiary and accordingly are not included in the consoli-dated financial statements.

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Non-commission based banking products

In addition to the conventional banking, the Bank offers its customers certain non-commission based banking products, which are ap-proved by its Shariah Board, as follows:

High level definitions of non-commission based banking productsi. 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 owner-ship 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 cus-tomer 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.

W. Short term employee benefitsShort 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 pres-ent 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.

X. End of service benefitsBenefits 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.

Y. Long term Incentive schemeThe 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.

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4. Cash and balances with SAMA

SAR 000 2017 2016

Cash on hand 975,776 931,144

Statutory deposit 8,635,612 8,545,950

Current account 8,849 14

Money market placements with SAMA 12,773,000 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 account 1,259,346 1,120,530

Money market placements 17,498,949 24,218,102

Total 18,758,295 25,338,632

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) 18,568,555 25,148,432

Non-investment grade (credit rating below BBB) 189,018 189,482

Unrated 722 718

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.

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6. Investments, netA. These comprise the following:

2017 2016

SAR 000 Domestic International Total Domestic International Total

i) Held as FVIS

Fixed rate securities - 112,434 112,434 44,690 126,860 171,550

Floating rate securities 3,036 15,220 18,256 6,006 - 6,006

Held as FVIS 3,036 127,654 130,690 50,696 126,860 177,556

ii) Available for sale (AFS)

Fixed rate securities 625,860 411,357 1,037,217 158,320 1,214,958 1,373,278

Floating rate securities 4,594,604 - 4,594,604 2,389,802 56,501 2,446,303

Equities 5,885 34,540 40,425 194,877 31,773 226,650

Other 2,541,839 - 2,541,839 3,155,323 375,083 3,530,406

Available for sale 7,768,188 445,897 8,214,085 5,898,322 1,678,315 7,576,637

iii) Held to maturity

Fixed rate securities - - - 75,821 - 75,821

Other - - - - - -

Held to maturity - - - 75,821 - 75,821

iv) Other investments held at amortized cost, net

Fixed rate securities 13,503,273 - 13,503,273 11,957,250 - 11,957,250

Floating rate notes 3,476,847 187,500 3,664,347 4,287,115 187,500 4,474,615

Other investments held at amor-tized cost, gross 16,980,120 187,500 17,167,620 16,244,365 187,500 16,431,865

Allowance for impairment - (187,500) (187,500) - (187,500) (187,500)

Other investments held at amor-tized cost, net 16,980,120 - 16,980,120 16,244,365 - 16,244,365

Investments, net 24,751,344 573,551 25,324,895 2,269,204 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).

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6. Investments, net (continued)

B. The analysis of the composition of investments is as follows:

SAR 0002017 2016

Quoted Unquoted Total Quoted Unquoted Total

Fixed rate securities 1,992,350 12,660,574 14,652,924 1,544,829 12,033,070 13,577,899

Floating rate securities / notes 536,994 7,740,213 8,277,207 268,916 6,658,008 6,926,924

Equities 33,243 7,182 40,425 190,662 35,988 226,650

Other 7,056 2,534,783 2,541,839 9,188 3,521,218 3,530,406

2,569,643 22,942,752 25,512,395 2,013,595 22,248,284 24,261,879

Allowance for impairment - (187,500) (187,500) - (187,500) (187,500)

Investments, net 2,569,643 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 mea-sured, 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 2016

Carry

ing

valu

e

Gros

sun

real

ized

gain

s

Gros

s un

real

ized

loss

es

Fair

Valu

e

Carry

ing

valu

e

Gros

sun

reali

zed

gains

Gros

s un

real

ized

loss

es

Fair

Valu

ei) Held to maturity

Fixed rate securities - - - - 75,821 86 - 75,907

Total - - - - 75,821 86 - 75,907

ii) Other investments held at amortized cost

Fixed rate securities 13,503,273 1,348 (196,870) 13,307,751 11,957,250 - (122,478) 11,834,772

Floating rate notes 3,664,347 6,521 (5,362) 3,665,506 4,474,615 750 (12,437) 4,462,928

Allowance for impair-ment (187,500) - - (187,500) (187,500) - - (187,500)

Total 16,980,120 7,869 (202,232) 16,785,757 16,244,365 750 (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.

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D. The analysis of investments by counterparty is as follows:

SAR 000 2017 2016

Government and quasi government 19,587,569 16,015,787

Corporate 5,056,421 6,058,050

Banks and other financial institutions 672,953 1,991,354

Other 7,952 9,188

Total 25,324,895 24,074,379

E. i) Credit risk exposure on investments

SAR 000 2017 2016

Saudi government and guaranteed bonds 17,522,944 15,537,768

Investment grade 951,875 1,907,744

Unrated 6,850,076 6,628,867

Total 25,324,895 24,074,379

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

SAR 0002017 2016 2017 2016

Investment grade Unrated

Held as FVIS 130,690 177,556 - -

Available for sale 1,364,009 1,756,131 6,850,076 5,820,506

Held to maturity - 75,821 - -

Other investments held at amortised cost 16,980,120 15,436,004 - 808,361

Total 18,474,819 17,445,512 6,850,076 6,628,867

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F. Movement of allowance for impairment of investments and other assets:

SAR 000 2017 2016

Balance at the beginning of the year 341,338 449,147

Provided during the year 3,500 -

Recoveries during the year - (34,851)

Written off during the year - (72,958)

Balance at the end of the year 344,838 341,338

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7. Loans and advances, netA. Loans and advances are classified as follows:Loans and advances held at amortised cost

SAR 000

2017

Overdraft & Com-mercial loans Credit Cards Consumer

Loans Total

Performing loans and advances - gross 109,827,075 494,050 11,621,667 121,942,792

Non performing loans and advances, net 3,198,613 55,955 167,473 3,422,041

Total loans and advances 113,025,688 550,005 11,789,140 125,364,833

Allowance for impairment (3,088,685) (71,022) (264,732) (3,424,439)

Loans and advances held at amortised cost, net 109,937,003 478,983 11,524,408 121,940,394

SAR 0002016

Overdraft &Commercial loans Credit Cards Consumer

Loans Total

Performing loans and advances - gross 119,253,027 515,372 10,987,324 130,755,723

Non performing loans and advances, net 1,509,645 51,321 145,931 1,706,897

Total loans and advances 120,762,672 566,693 11,133,255 132,462,620

Allowance for impairment (2,674,118) (74,216) (256,417) (3,004,751)

Loans and advances held at amortised cost, net 118,088,554 492,477 10,876,838 129,457,869

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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

SAR 000

2017


Loans Total

Balance at beginning of the year 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)

Recoveries of amounts previously provided (58,371) (10,489) (42,540) (111,400)

Balance at the end of the year 3,088,685 71,022 264,732 3,424,439

SAR 000

2016

Overdraft &Commercial loans Credit Cards Consumer

Loans Total

Balance at beginning of the year 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)

Recoveries of amounts previously provided (66,234) (9,096) (51,063) (126,393)

Balance at the end of the year 2,674,118 74,216 256,417 3,004,751

ii. Impairment charge for credit losses:

SAR 000 2017 2016

Provided during the year on loan and advances 609,360 894,767

Provided during the year on off statement of financial position 163,153 -

Recoveries of amounts previously provided (111,400) (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).

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iii. Movement of collective impairment provision:

SAR 000 2017 2016

Balance at the beginning of the year 1,413,475 1,312,609

Provided during the year, net 4,466 100,866

Balance at the end of the year 1,417,941 1,413,475

C. Credit quality of loans and advancesi. Neither past due nor impaired

SAR 000

2017


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

Special mention (E to E -) 9,813,658 1,920 44,391 9,859,969

Total 109,041,030 422,183 10,783,245 120,246,458

SAR 000

2016


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

Special mention (E to E -) 6,043,364 1,992 45,068 6,090,424

Total 118,781,991 445,585 10,244,649 129,472,225

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.

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ii. Ageing of loans and advances (past due but not impaired)

SAR 000

2017


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

More than 180 days 2,960 - - 2,960

Total 786,045 71,867 838,422 1,696,334

SAR 000

2016

Overdraft & Com-mercial 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

Total 471,036 69,787 742,675 1,283,498

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iii. Economic sector risk concentrations for the loans and advances and allowance for impairment losses are as follows:

SAR 000 Performing Non Performing, net

Allowance forimpairment losses

Loans andadvances, net

2017

Government and quasi Government 4,668,498 - - 4,668,498

Banks and other financial institutions 3,865,112 3,389 (27,566) 3,840,935

Agriculture and fishing 1,791,433 21,594 (15,609) 1,797,418

Manufacturing 20,483,027 520,974 (465,177) 20,538,824

Mining and quarrying 2,809,250 - (20,325) 2,788,925

Electricity, water, gas and health services 9,874,352 21,684 (20,608) 9,875,428

Building and construction 11,467,925 931,899 (1,187,947) 11,211,877

Commerce 26,924,177 791,543 (759,965) 26,955,755

Transportation and communication 4,429,200 18,198 (74,459) 4,372,939

Services 12,542,862 360,894 (360,108) 12,543,648

Consumer loans and credit cards 12,115,717 223,428 (335,754) 12,003,391

Others 10,971,239 528,438 (156,921) 11,342,756

Total 121,942,792 3,422,041 (3,424,439) 121,940,394

2016

Government and quasi Government 4,596,347 - - 4,596,347

Banks and other financial institutions 4,026,266 - (41,175) 3,985,091

Agriculture and fishing 1,733,754 17,226 (14,374) 1,736,606

Manufacturing 22,086,517 81,646 (407,388) 21,760,775

Mining and quarrying 4,080,686 - (5,669) 4,075,017

Electricity, water, gas and health services 8,796,705 4,949 (29,415) 8,772,239

Building and construction 12,805,310 694,934 (1,039,816) 12,460,428

Commerce 26,971,314 375,590 (473,594) 26,873,310

Transportation and communication 7,199,578 12,036 (86,111) 7,125,503

Services 13,320,905 286,907 (324,790) 13,283,022

Consumer loans and credit cards 11,502,696 197,252 (330,633) 11,369,315

Others 13,635,645 36,357 (251,786) 13,420,216

Total 130,755,723 1,706,897 (3,004,751) 129,457,869

Loans and advances include Islamic related products of SAR 70,574 million (2016: SAR 76,186 million).

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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.

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 837,645 992,019

1 to 5 years 2,840,302 2,614,118

More than 5 years 7,468,441 7,733,001

Unearned future finance income on finance lease (756,228) (676,861)

Net receivable from finance leases 10,390,160 10,662,277

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8. Investment in associates

SAR 000 2017 2016

Opening balance 113,220 106,430

Share of earnings 7,568 6,790

Transferred to held for sale and others (44,739) -

Closing balance 76,049 113,220

Investment in associates represents 27% shareholding in interest in the Banque BEMO Saudi Fransi (2016: 27%) and 32.5% share-holding 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 Allianz Saudi Fransi

2017 2016 2017 2016

Total assets 582,951 459,444 652,661 648,276

Total liabilities 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

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9. Property and equipment, net

SAR 000 Land and buildings

Leasehold im-provements

Furniture, equipment

and vehicles

Computer and Soft

ware

2017

Total2016Total

Cost

Balance at the beginning of the year 689,882 90,050 505,866 397,666 1,683,464 1,593,816

Additions during the year 33,334 21,522 33,320 83,361 171,537 163,471

Disposals and retirements during the year (832) (28,881) (9,352) (60,182) (99,247) (73,823)

Balance at the end of the year 722,384 82,691 529,834 420,845 1,755,754 1,683,464

Accumulated depreciation and amor-tization

Balance at the beginning of the year 289,496 14,524 417,852 244,936 966,808 902,687

Depreciation and Amortization

charge for the year22,910 28,906 25,368 73,939 151,123 137,706

Disposals and retirements (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 88,014 152,730 716,656

Leasehold improvements as at December 31, 2017 include work in progress amounting to SAR 10 million (2016: SAR 28 million).

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10. Other assets

SAR 000 2017 2016

Accounts receivable 506,355 605,156

Other real estate 504,830 464,830

Investment in associate classified as held for sale 44,736 -

Others 610,340 572,164

Total 1,666,261 1,642,150

11. DerivativesIn the ordinary course of business, the Bank utilizes the following derivative financial instruments for both trading and hedging pur-poses:

A. SwapsSwaps are commitments to exchange one set of cash flows for another. For commission rate swaps, counterparties generally ex-change 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 futuresForwards 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 agreementsForward rate agreements are individually negotiated commission rate contracts that call for a cash settlement for the difference be-tween a contracted commission rate and the market rate on a specified future date, on a notional principal for an agreed period of time.

D. OptionsOptions 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 purposesMost 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 purposesThe 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 posi-tion 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.

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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 vari-able 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 com-mission 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 years2017Cash inflows (assets) 1,727,325 2,378,178 1,015,121 8,988Cash out flows (liabilities) (1,458,764) (2,240,539) (869,608) (3,002)Net cash inflow / (outflow) 268,561 137,639 145,513 5,9862016Cash 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)

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 (1,456,719) (1,582,636)

Net gain on cash flow hedges transferred to consolidated statement of income 214,124 12,335

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.

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Notional amounts by term to maturity

Derivative financialinstruments

SAR 000 Posit

ive

fair

valu

e

Nega

tive

fair

valu

e

Notio

nal

amou

nt

tota

l

With

in3

mon

ths

3-12

m

onth

s

1-5

year

s

Over

5

year

s

Mon

thly

aver

age

2017Held for tradingCommission rate swaps 1,096,044 963,302 181,680,691 18,090,670 30,301,066 106,336,115 26,952,840 174,242,542

Commission rate futures and options 56,613 47,454 75,712,040 2,625,000 9,020,750 48,665,115 15,401,175 74,211,419

Forward rate agreements - - 750,000 750,000 - - - 1,125,000

Forward foreign exchange contracts 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

Held as fair value hedges

Commission rate swaps - 1,608 264,000 - 264,000 - - 967,125

Held as cash flow hedges

Commission rate swaps 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



SAR 000 Posit

ive

fair

valu

e

Nega

tive

fair

valu

e

Notio

nal

amou

nt

tota

l

With

in3

mon

ths

3-12

m

onth

s

1-5

year

s

Over

5

year

s

Mon

thly

aver

age

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

Commission rate futures and options

11,574 25,098 70,206,099 1,189,947 7,078,307 59,000,770 2,937,075 74,515,925

Forward rate agreements - - - - - - - 83,833

Forward foreign exchange contracts

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

Held as fair value hedges

Commission rate swaps 786 4,719 3,076,500 - 2,812,500 264,000 - 3,076,500

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SAR 000 Posit

ive

fair

valu

e

Nega

tive

fair

valu

e

Notio

nal

amou

nt

tota

l

With

in3

mon

ths

3-12

m

onth

s

1-5

year

s

Over

5

year

s

Mon

thly

aver

age

Held as cash flow hedges

Commission rate swaps 290,970 476,700 74,607,678 2,400,000 14,037,500 57,328,178 842,000 76,826,804

Total 1,741,695 1,678,105 381,542,863 40,969,140 75,946,544 243,835,237 20,791,942 407,415,982

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 fair

valueNegative fair

value

2017

Fixed commission rate loans 262,316 264,000 Fair value Commission rate swap - 1,608

Floating commission rate investments 5,454,226 5,380,832 Cash flow Commission rate swap 77,038 3,644

Floating commission rate loans 68,142,247 67,677,250 Cash flow Commission rate swap 573,755 108,512

2016

Fixed commission rate loans 267,396 264,000 Fair value Commission rate swap - 4,719

Fixed commission rate debt securities and sukuk 2,812,690 2,812,500 Fair value Commission rate swap 786 -

Floating commission rate investments 5,389,588 5,388,928 Cash flow Commission rate swap 24,680 24,020

Floating commission rate loans 69,245,113 69,218,750 Cash flow Commission rate swap 266,290 452,680

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.

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12. Due to banks and other financial institutions

SAR 000 2017 2016

Current accounts 395,837 261,496

Money market deposits 2,567,436 4,027,036

Total 2,963,273 4,288,532

13. Customers’ deposits

SAR 000 2017 2016

Demand 81,474,079 88,525,872

Saving 518,928 618,883

Time 64,627,605 65,672,408

Other 4,333,575 3,641,309

Total 150,954,187 158,458,472

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).Customers’ deposits include foreign currency deposits as follows:

SAR 000 2017 2016

Demand 8,283,003 9,423,524

Saving 17,958 25,137

Time 14,580,592 12,576,746

Other 1,358,273 628,652

Total 24,239,826 22,654,059

14. Debt securities and SukuksDuring 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 ap-proval of SAMA and terms and conditions of the agreement.

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15. Other liabilities

SAR 000 2017 2016

Accounts payable and accrued expenses 2,608,464 1,670,427

Others 1,541,536 908,058

Total 4,150,000 2,578,485

16. Share capitalThe 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:

SAR 000 2017 (%) 2016 (%) 2017 2016

Saudi shareholders 85.1 68.9 10,256,251 8,303,572

Credit Agricole Corporate and Investment Bank (CA-CIB) 14.9 31.1 1,797,321 3,750,000

Total 100 100 12,053,572 12,053,572

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.

17. Statutory and general reserveIn 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.

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18. Other reserves

SAR 000 Cash flow hedges Available for sale investments Total

2017

Balance at beginning of the year (894,927) 31,343 (863,584)

Net change in fair value 813,761 6,459 820,220

Transfer to consolidated statement of income (214,124) (27,684) (241,808)

Net movement during the year 599,637 (21,225) 578,412

Balance at the end of the year (295,290) 10,118 (285,172)

2016

Balance at beginning of the year (1,162,468) 67,669 (1,094,799)

Net change in fair value 279,876 14,157 294,033

Transfer to consolidated statement of income (12,335) (50,483) (62,818)

Net movement during the year 267,541 (36,326) 231,215

Balance at the end of the year (894,927) 31,343 (863,584)

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).

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19. Commitments and contingenciesA. Legal proceedingsAs 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 commitmentsAs 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 contingenciesThe 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 ship-ments 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 ad-vances, 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.

i. The contractual maturity structure for the Bank’s commitments and contingencies is as follows:

SAR 000 Within3 months 3-12 months 1-5 years Over 5 years Total

2017Letters of credit 4,154,493 3,433,853 672,385 - 8,260,731

Letters of guarantee 9,945,646 24,116,841 10,346,446 365,821 44,774,754

Acceptances 1,778,499 704,370 58,241 - 2,541,110

Irrevocable commitments to extend credit 34,850 1,222,442 1,306,067 195,603 2,758,962

Total 15,913,488 29,477,506 12,383,139 561,424 58,335,557

2016Letters of credit 3,972,208 2,424,974 1,114,300 - 7,511,482

Letters of guarantee 10,108,390 24,715,582 12,709,701 340,513 47,874,186

Acceptances 1,566,848 1,050,312 73,962 - 2,691,122

Irrevocable commitments to extend credit 847,412 2,077,590 1,143,830 271,670 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).

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19. Commitments and contingencies (continued)

The analysis of commitments and contingencies by counterparty is as follows:

SAR 000 2017 2016

Government and quasi government 36,805 94,321

Corporate 52,093,022 55,149,941

Banks and other financial institutions 6,042,423 7,030,257

Other 163,307 142,773

Total 58,335,557 62,417,292

D. Operating lease commitmentsThe future minimum lease payments under non-cancelable operating leases where the Bank is the lessee are as follows:

SAR 000 2017 2016

Less than 1 year 21,575 21,201

1 to 5 years 131,007 119,889

Over 5 years 203,013 235,803

Total 355,595 376,893

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20. Special commission income and expense

SAR 000 2017 2016


Investments

• Available for sale 274,795 216,962

• Held to maturity 1,101 3,896

• Other investments held at amortized cost 399,872 366,014

675,768 586,872

Due from banks and other financial institutions 566,584 301,077

Loans and advances 5,362,154 5,082,673

Total 6,604,506 5,970,622

Special commission expense

Due to banks and other financial institutions 33,498 34,703


Debt securities and sukuks 153,866 204,586

Total 1,904,836 1,714,435

21. Fees and commission income, net

SAR 000 2017 2016

Fees and commission income

• Share trading, brokerage, fund management and corporate finance 267,261 278,300

• Trade finance 395,533 471,687

• Project finance and advisory and corporate loans 325,377 446,151

• Card products 268,367 268,140

• Other banking services 165,625 159,295

Total fees and commission income 1,422,163 1,623,573

Fees and commission expense

• Share trading and brokerage 52,161 39,300

• Card products 228,462 212,870

• Other banking services 22,222 7,413

Total fees and commission expense 302,845 259,583

Fees and commission income, net 1,119,318 1,363,990

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22. Trading income, net

SAR 000 2017 2016

Investments- held as FVIS (trading), net 9,958 6,916

Derivatives, net 260,879 193,478

Total 270,837 200,394

23. Dividend income

SAR 000 2017 2016

Available for sale investments- Equities 8,078 16,024

24. Gains on non-trading investments, net

SAR 000 2017 2016

Available for sale- realized gain 27,684 50,483

25. Other operating income

SAR 000 2017 2016

Gains on disposal of property and equipment 368 159

Reversal of provision on other assets - 13,871

Recoveries of written off loans 92,867 92,714

Other 1,254 10,030

Total 94,489 116,774

26. Other operating expenses

SAR 000 2017 2016

Loss on disposal of property and equipment 112 88

Reinstatement of customer liabilities 92,280 -

Other 19,713 11,182

Total 112,105 11,270

27. Basic and diluted earnings per shareBasic 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).

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28. Gross dividend, zakat and income taxThe 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 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).

SAR 000 2017 2016

Interim dividend 1,324,464 731,295

Final proposed gross dividend 470,247 647,995

Total 1,794,711 1,379,290

The zakat and income tax, attributable to Saudi and foreign shareholders are as follows:

i. ZakatZakat 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 Griev-ances (BOG) and for the years 2010 to 2013 will be contested by the Bank before the Preliminary Appeal Committee (PAC). Manage-ment 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.

Income taxIncome 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 Consolidated statement of financial position

Retained earnings Proposed dividend Other Liabilities

Zakat for the year 91,047 32,791 123,838

Tax for the year 207,795 84,838 292,633

Total 298,842 117,629 416,471

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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) 13,757,625 11,798,158

Due from banks and other financial institutions maturing within ninety days from the date of acquisition 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 2017

Categories of employees Number of employees

Fixed compen-sation

Variable compen-sation

Total compensa-tion

Forms of pay-ment

Senior executives 19 38,970 21,235 60,205 Cash

Employees engaged in risk taking activities 385 211,859 71,429 283,288 Cash

Employees engaged in control functions 418 135,102 24,819 159,921 Cash

Other employees 2,250 454,004 49,891 503,895 Cash

Total 3,072 839,935 167,374 1,007,309

SAR 000 2016

Categories of employees Number of em-ployees

Fixed compensa-tion

Variable compen-sation

Total compensa-tion Forms of payment

Senior executives 20 40,354 58,478 98,832 CashEmployees engaged in risk

taking activities385 213,210 87,494 300,704 Cash

Employees engaged in control functions 389 130,842 36,953 167,795 Cash

Other employees 2,439 462,788 61,487 524,275 Cash

Total 3,233 847,194 244,412 1,091,606

Number of employees represents only the closing balance.

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30. Employees compensation practices (continued)

SAR 000 2017 2016

Total compensation paid 1,007,309 1,091,606

Accrued variable compensation 20,575 -

Other employee related costs 356,659 300,802

Total salaries and employee related costs 1,384,543 1,392,408

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 recommend-ing 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 Man-agement, 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.

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NCCOM: Terms of Referencea. 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 ap-proved 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;

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 PolicyOperating 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.

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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 Man-ager 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.

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31. Employee benefit obligationGeneral descriptionBenefits 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 427,113

Current service cost 40,643

Interest cost 14,973

Benefits paid (22,576)

Unrecognized actuarial loss / (gain) (9,559)

Defined benefit obligation at the end of the year 450,594

SAR 000 2017

Charge /(reversal) for the year

Current service cost 40,643

Interest cost 14,973

Total 55,616

Principal actuarial assumptions (in respect of the employee benefit scheme) 2017

Discount rate 3.6% p.a

Expected rate of salary increase 5% p.a

Normal retirement age 60 years

Assumptions regarding future mortality are set based on actuarial advice in accordance with the published statistics and experience in the region.

Sensitivity of actuarial assumptionsThe 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.

SAR 000 2017

Investment return – decrease by 0.5% 469,992

Future salary growth – increase by 0.5% 469,630

Retirement age – increase by one year 454,194

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32. Operating segmentsOperating 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, manag-ing, 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 perfor-mance 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:

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32. Operating segments (continued)

SAR 000 Retail banking Corporate banking Treasury

Investment banking and brokerage

Total

2017

Total assets 17,791,035 107,093,458 66,836,088 1,208,300 192,928,881

Investment in associates - - 76,049 - 76,049

Total liabilities 71,996,172 80,341,090 7,844,173 1,086,065 161,267,500

Total operating income 1,552,810 3,000,580 1,759,041 263,776 6,576,207

Share in earnings of associates, net - - 7,568 - 7,568

Total operating expenses 1,303,663 1,107,058 473,696 167,474 3,051,891

Net income for the year 249,147 1,893,522 1,292,913 96,302 3,531,884

Results

Net special commission income 1,226,589 2,272,168 1,153,686 47,227 4,699,670

Fees and commission income, net 184,158 25,513 (6,902) 216,549 1,119,318

Exchange income, net 49,240 2,812 304,079 - 356,131

Trading income, net - - 270,837 - 270,837

Inter-segment revenue 856,573 145,755 (1,002,328) - -

Impairment charges for credit losses, net 134,080 - - - 661,113

Depreciation and amortization 82,220 45,443 18,653 4,807 151,123

2016

Total assets 16,500,468 116,504,685 69,346,485 1,077,071 203,428,709

Investment in associates - - 113,220 - 113,220

Total liabilities 82,875,331 76,460,015 13,449,698 944,662 173,729,706

Total operating income 1,491,064 3,102,854 1,530,734 275,062 6,399,714

Share in earnings of associates, net - - 6,790 - 6,790

Total operating expenses 1,189,306 1,286,645 246,307 174,012 2,896,270

Net income for the year 301,758 1,816,209 1,291,217 101,050 3,510,234

Results

Net special commission income 1,175,587 2,160,985 883,317 36,298 4,256,187

Fees and commission income, net 173,251 937,734 14,242 238,763 1,363,990

Exchange income, net 52,232 1,390 342,240 - 395,862

Trading income, net - - 200,394 - 200,394

Inter-segment revenue 817,742 72,447 (890,189) - -

Impairment charges for credit losses, net 79,514 688,860 - - 768,374

Depreciation and amortization 77,747 37,499 16,709 5,751 137,706

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32. Operating segments (continued)

B. The Bank’s credit exposure by operating segments is as follows:

SAR 000 Retailbanking

Corporate banking Treasury

Investment banking and brokerage

Total

2017

Statement of financial position assets 16,516,953 106,941,988 62,918,538 1,139,615 187,517,094

Commitments and contingencies 240,130 32,286,295 - - 32,526,425

Derivatives - - 8,127,552 - 8,127,552

2016

Statement of financial position assets 15,322,009 116,360,153 65,712,316 1,002,586 198,397,064

Commitments and contingencies 168,960 34,132,696 - - 34,301,656

Derivatives - - 4,049,377 - 4,049,377

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.

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33. Credit riskCredit 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 af-fected 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 con-centration 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.

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 prac-tice.

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 com-mittees 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 provid-ing 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 con-form 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. Col-lateral 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 marketabil-ity and enforcement.

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33. Credit risk (continued)

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 relat-ing to derivative instruments is provided in note 11 and for commitments and contingencies in note 19.

Geographical concentration

A. The distribution by geographical region for major categories of assets, liabilities, commitments and contingen-cies and credit exposure accounts is as follows:

SAR 000 Saudi Arabia GCC & Middle East Europe North

AmericaOther

Countries Total

2017

Assets Cash and balances with SAMA

Cash in hand 913,623 6,451 27,051 28,651 - 975,776

Balances with SAMA 21,417,461 - - - - 21,417,461Due from banks and other financial institutionsCurrent account - 248,680 325,613 668,250 16,803 1,259,346

Money market placements 9,180,343 4,924,038 2,906,945 - 487,623 17,498,949

Investments, net

Held as FVIS 3,037 127,653 - - - 130,690

Available for sale 7,768,188 383,703 62,194 - - 8,214,085

Held to maturity - - - - - -

Other investments held at amortised cost 16,980,120 - - - - 16,980,120

Investment in associates 33,854 42,195 - - - 76,049

Positive fair value of derivatives

Held for trading 292,800 173,312 870,349 4,220 41,349 1,382,030

Held as fair value hedges - - - - - -

Held as cash flow hedges 82,339 60,270 494,227 - 13,957 650,793

Loans and advances, net

Over draft and commercial loans 108,369,117 543,803 530,156 - 493,927 109,937,003

Credit cards 478,952 - - - 31 478,983

Consumer loans 11,524,408 - - - - 11,524,408

Property and equipment, net 736,927 - - - - 736,927

Other assets 1,536,235 - 130,026 - - 1,666,261

Total assets 179,317,404 6,510,105 5,346,561 701,121 1,053,690 192,928,881

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SAR 000 Saudi Arabia

GCC & Middle East Europe

North

AmericaOther Coun-

tries Total

2017LiabilitiesDue to banks and other financial institutionsCurrent accounts 5 261,924 107,628 23,448 2,832 395,837Money market deposits 1,576,289 991,147 - - - 2,567,436Customers’ depositsDemand 81,236,614 120,115 12,624 3,465 101,261 81,474,079Time 62,391,484 2,160,910 75,211 - - 64,627,605Saving 518,928 - - - - 518,928Other 4,325,772 4,237 1,314 - 2,252 4,333,575Negative fair value of derivatives

Held for trading 462,774 100,599 515,740 - 4,598 1,083,711Held as fair value hedges - - 1,608 - - 1,608Held as cash flow hedges 9,240 13,773 88,551 - 592 112,156Debt securities and sukuks 2,002,565 - - - - 2,002,565Other liabilities 3,709,804 35,370 220,812 141,413 42,601 4,150,000Total 156,233,475 3,688,075 1,023,488 168,326 154,136 161,267,500Commitments and contingencies

Letters of credit 7,916,855 199,893 95,456 - 48,527 8,260,731Letters of guarantee 39,100,071 770,921 3,939,683 346,816 617,263 44,774,754Acceptances 2,432,507 6204 25,965 - 76,434 2,541,110

Irrevocable commitments to extend credit 2,677,962 - 81,000 - - 2,758,962

Total 52,127,395 977,018 4,142,104 346,816 742,224 58,335,557Maximum Credit exposure (stated at credit equivalent amounts)

DerivativesHeld for trading 2,495,061 580,803 2,412,927 1,012,997 340,862 6,842,650 Held as fair value hedges - - 455 - - 455Held as cash flow hedges 199,640 104,506 735,677 244,624 - 1,284,447

Total 2,694,701 685,309 3,149,059 1,257,621 340,862 8,127,552Commitments and contingencies

Letters of credit 3,276,677 39,979 19,091 - 9,705 3,345,452Letters of guarantee 22,748,597 412,636 2,000,234 179,938 326,915 25,668,320

Acceptances 2,432,507 6,205 25,964 - 76,434 2,541,110

Irrevocable commitments to extend credit 931,043 - 40,500 - - 971,543

Total 29,388,824 458,820 2,085,789 179,938 413,054 32,526,425

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SAR 000 Saudi Arabia GCC & Middle East Europe North

AmericaOther Coun-

tries Total

2016

Assets

Cash and balances with SAMA

Cash in hand 879,181 2,737 30,077 19,149 - 931,144

Balances with SAMA 19,412,964 - - - - 19,412,964

Due from banks and other financial institutions

Current account - 147,024 150,252 779,498 43,756 1,120,530

Money market placements 16,901,462 4,395,228 2,921,412 - - 24,218,102

Investments, net

Held as FVIS 50,696 126,860 - - - 177,556

Available for sale 5,898,322 1,260,703 417,612 - 7,576,637

Held to maturity 75,821 - - - - 75,821

Other investments held at amortised cost

16,244,365 - - - - 16,244,365

Investment in associates 71,025 42,195 - - - 113,220


Held for trading 429,583 246,747 773,609 - - 1,449,939

Held as fair value hedges - - 786 - - 786

Held as cash flow hedges 40,207 22,248 228,515 - - 290,970


Over draft and commercial loans 116,387,080 601,082 555,775 - 544,617 118,088,554

Credit cards 492,293 20 - - 164 492,477

Consumer loans 10,876,838 - - - - 10,876,838

Property and equipment, net 715,515 1,141 - - - 716,656

Other assets 1,535,986 11,738 67,425 27,001 - 1,642,150

Total assets 190,011,338 6,857,723 5,145,463 825,648 588,537 203,428,709

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SAR 000 Saudi Arabia GCC &Middle East Europe North

AmericaOther

Countries Total

2016LiabilitiesDue to banks and other financial institu-tionsCurrent accounts - 178,792 50,760 28,978 2,966 261,496Money market deposits 1,062,706 2,964,330 - - - 4,027,036Customers’ depositsDemand 88,378,323 56,088 8,879 - 82,582 88,525,872Time 63,642,540 2,029,213 89 - 566 65,672,408Saving 618,868 15 - - - 618,883Other 3,630,328 220 1,361 - 9,400 3,641,309Negative fair value of derivativesHeld for trading 445,575 126,156 624,765 190 - 1,196,686Held as fair value hedges - - 4,719 - - 4,719Held as cash flow hedges 39,407 61,110 376,183 - - 476,700Debt securities and sukuks 3,905,163 - 2,820,949 - - 6,726,112Other liabilities 2,578,485 - - - - 2,578,485Total 164,301,395 5,415,924 3,887,705 29,168 95,514 173,729,706Commitments and contingenciesLetters of credit 7,188,616 231,463 21,913 11,765 57,725 7,511,482Letters of guarantee 41,141,063 1,142,892 4,247,867 428,841 913,523 47,874,186Acceptances 2,614,339 37,662 626 - 38,495 2,691,122Irrevocable commitments to extend credit

4,261,002 - 79,500 - - 4,340,502

Total 55,205,020 1,412,017 4,349,906 440,606 1,009,743 62,417,292Maximum Credit exposure (stated at credit equivalent amounts)

DerivativesHeld for trading 1,272,382 623,312 1,193,615 367,054 2,668 3,459,031

Held as fair value hedges - - 2,106 - - 2,106

Held as cash flow hedges 67,732 51,730 356,126 112,652 - 588,240

Total 1,340,114 675,042 1,551,847 479,706 2,668 4,049,377

Commitments and contingenciesLetters of credit 3,019,411 46,293 4,305 2,431 11,545 3,083,985

Letters of guarantee 23,830,025 809,444 2,084,075 194,254 362,700 27,280,498

Acceptances 2,614,339 5,751 626 - 70,405 2,691,121

Irrevocable commitments to extend credit 1,230,152 - 15,900 - - 1,246,052

Total 30,693,927 861,488 2,104,906 196,685 444,650 34,301,656

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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:

SAR 000 2017 2016

Non performing, netAllowance for

impairment of credit losses

Non performing, netAllowance for

impairment of credit losses

Kingdom of Saudi Arabia 3,418,652 3,421,050 1,706,897 3,004,751

Others 3,389 3,389 - -

Total 3,422,041 3,424,439 1,706,897 3,004,751

Allowance for impairment of credit losses includes specific and collective provisions.

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34. Market riskMarket Risk is the risk that the fair value or future cash flows of the financial instruments will fluctuate due to changes in market vari-ables 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 bookThe 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 speci-fied 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 move-ments 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 calcula-tion does not provide a meaningful indication of profits and losses in stressed market conditions.

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 Foreignexchange rate

Special commissionrate risk

OverallTrading

2017VaR as at December 31, 2017 174 5,345 5,291

Average VaR for 2017 108 4,357 4,355

Maximum VaR for 2017 583 6,878 6,907

Minimum VaR for 2017 9 1,903 1,907

2016VaR as at December 31, 2016 37 4,666 4,651

Average VaR for 2016 164 5,364 5,367

Maximum VaR for 2016 1,024 7,735 7,731

Minimum VaR for 2016 6 3,019 3,043

Overall Trading VaR incorporates compensation effect of positions coming from realized P&L in foreign currencies.

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34. Market risk (continued)

B. Market risk non- trading bookMarket 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 con-stant, 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 in-struments. 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.

SAR 000 2017

Currency BPS changeSensitivity of

specialcommission

incomeSensitivity of Equity Total

6 monthsor less

Over 6 month to 1 year

Over 1 year to5 years

Over5 years

USD +100 17,732 (183) (381) (5,851) - (6,415)

-100 (19,636) 183 381 5,851 - 6,415

SAR +100 41,252 (9,628) (7,158) (193,899) (30,822) (241,507)

-100 (42,242) 9,628 7,158 193,899 30,822 241,507

SAR 000 2016

Currency BPS changeSensitivity of

specialcommission

incomeSensitivity of Equity Total

6 monthsor less

Over 6 month to 1 year

Over 1 year to5 years

Over5 years

USD +100 38,710 (470) (528) (542) - (1,540)

-100 (49,851) 470 528 542 - 1,540

SAR +100 72,699 (4,493) (5,204) (159,083) (89,921) (258,701)

-100 (56,135) 4,493 5,204 159,083 89,921 258,701

Special commission rate sensitivity of assets, liabilities and derivativesThe 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 instru-ments 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.

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SAR 000 Within 3 months 3-12 months 1-5 years Over 5 years Non com-

mission Total

2017

Assets


Cash in hand - - - - 975,776 975,776

Balances with SAMA 12,773,000 - - - 8,644,461 21,417,461


Current account - - - - 1,259,346 1,259,346

Money market placements 16,698,949 800,000 - - - 17,498,949

Investments, net

Held as FVIS 62,980 60,150 7,560 - - 130,690

Available for sale 1,121,049 3,856,024 3,129,838 59,694 47,480 8,214,085


Other investments held at amortised cost 3,560,619 - 11,331,751 2,087,750 - 16,980,120

Investment in associates - - - - 76,049 76,049


Held for trading - - - - 1,382,030 1,382,030


Held as cash flow hedges - - - - 650,793 650,793


Over draft and commercial loans 455,716 - - - 23,267 478,983

Credit cards 131,960 513,855 8,473,312 2,331,839 73,442 11,524,408

Consumer loans 58,272,950 21,391,527 13,626,503 15,327,189 1,318,834 109,937,003

Property and equipment, net - - - - 736,927 736,927

Other assets - - - - 1,666,261 1,666,261

Total assets 93,077,223 26,621,556 36,568,964 19,806,472 16,854,666 192,928,881

131



SAR 000 Within 3 months 3-12 months 1-5 years Over 5 years Non commis-

sion Total

Liabilities and shareholders’ equity

Due to banks and other financial institutionst

Current accounts - - - - 395,837 395,837

Money market deposits 2,567,436 - - - - 2,567,436

Customers’ deposits

Demand 8,262,185 - - - 73,211,894 81,474,079

Saving - - - - 518,928 518,928

Time 42,987,039 21,235,202 252,800 - 152,564 64,627,605

Other - - - - 4,333,575 4,333,575

Debt securities and sukuks 2,002,565 - - - - 2,002,565

Negative fair value of derivatives

Held for trading - - - - 1,083,711 1,083,711

Held as fair value hedges - - - - 1,608 1,608


Other liabilities - - - - 4,150,000 4,150,000

Shareholders’ equity - - - - 31,661,381 31,661,381

Total liabilities and shareholders’ equity 55,819,225 21,235,202 252,800 - 115,621,654 192,928,881

commission rate sensitivity

- On statement of financial position 37,257,998 5,386,354 36,316,164 19,806,472 (98,766,988)


- Off statement of financial position (58,790,489) 7,512,250 50,900,397 377,842

Total commission rate sensitivity gap (21,532,491) 12,898,604 87,216,561 20,184,314 (98,766,988)

Cumulative commission rate sensitivity gap (21,532,491) (8,633,887) 78,582,674 98,766,988 -

132



SAR 000 Within 3 months 3-12 months 1-5 years Over 5 years Non com-

mission Total

2016

Assets


Cash in hand - - - - 931,144 931,144



Current account - - - - 1,120,530 1,120,530

Money market placements 13,156,102 11,062,000 - - - 24,218,102

Investments, net

Held as FVIS 41,035 78,109 54,696 3,716 - 177,556

Available for sale 1,227,296 2,020,001 3,718,419 - 610,921 7,576,637

Held to maturity 824 74,997 - - - 75,821

Other investments held at amortised cost

3,848,962 512,744 6,050,000 5,832,659 - 16,244,365



Held for trading - - - - 1,449,939 1,449,939

Held as fair value hedges - - - - 786 786



Credit cards 470,756 - - - 21,721 492,477

Consumer loans 213,818 436,436 6,642,452 3,528,240 55,892 10,876,838

Over draft and commercial loans 58,941,888 20,137,186 17,414,327 21,557,145 38,008 118,088,554


Other assets - - - - 1,642,150 1,642,150

Total assets 88,767,681 34,321,473 33,879,894 30,921,760 15,537,901 203,428,709

133



SAR 000 Within 3 months 3-12 months 1-5 years Over 5 years Non commis-

sion Total




Money market deposits 3,889,536 137,500 - - - 4,027,036


Demand 8,245,578 - - - 80,280,294 88,525,872

Saving - - - - 618,883 618,883

Time 40,379,162 21,266,853 3,461,586 - 564,807 65,672,408

Other - - - - 3,641,309 3,641,309

Debt securities and sukuks 3,913,422 2,812,690 - - - 6,726,112


Held for trading - - - - 1,196,686 1,196,686





Total liabilities and shareholders’ equity 56,427,698 24,217,043 3,461,586 - 119,322,382 203,428,709


- On statement of financial position 32,339,983 10,104,430 30,418,308 30,921,760 (103,784,481)


- Off statement of financial position (69,228,961) 14,672,369 53,661,454 895,138

Total commission rate sensitivity gap (36,888,978) 24,776,799 84,079,762 31,816,898 (103,784,481)

Cumulative commission rate sensitiv-ity gap

(36,888,978) (12,112,179) 71,967,583 103,784,481

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.

134



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 2017 2016

Currency Exposures

Change in Cur-rency Rate in %

Effect on Net Income

Effect on Equity

Change in Cur-rency Rate in %

Effect on Net Income

Effect onEquity

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 curren-cies:

SAR 000 2017 2016

US Dollar 94,434 (93,841)

Euro 245 (988)

Pound Sterling (2,160) (276)

Other (7,398) 13,486

Other 85,121 (81,619)

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 2017 2016

MarketIndices

Change in Currency Rate in % 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.

135


35. Liquidity riskLiquidity 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 nor-mal 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 liabilitiesThe 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 en-sure that adequate liquidity is maintained. For presentation purposes all demand, saving and other deposit balances have been shown in no fixed maturity.

136


35. Liquidity risk (continued)

SAR 000Within 3

months

3-12

months

1-5

years

Over 5

years

No fixed

maturityTotal

2017

Assets


Cash in hand - - - - 975,776 975,776



Current account - - - - 1,259,346 1,259,346

Money market placements 16,698,949 800,000 - - - 17,498,949

Investments, net

Held as FVIS 44,822 60,150 25,718 - - 130,690

Available for sale 267,945 588,364 4,596,708 2,713,588 47,480 8,214,085


Other investments held at amortised cost 90,617 - 11,731,753 5,157,750 - 16,980,120



Held for trading - - - - 1,382,030 1,382,030




Credit cards 455,716 - 23,267 478,983

Consumer loans 131,960 513,855 8,473,312 2,331,839 73,442 11,524,408

Over draft and commercial loans 39,917,438 16,377,743 27,498,460 24,082,894 2,060,468 109,937,003


Other assets - - - - 1,666,261 1,666,261

Total assets 70,380,447 18,340,112 52,325,951 34,286,071 17,596,300 192,928,881

137



SAR 000 Within 3 months 3-12 months 1-5 years Over 5

yearsNo fixed ma-

turity Total

2017




Money market deposits 2,567,436 - - - - 2,567,436


Demand - - - - 81,474,079 81,474,079

Saving - - - - 518,928 518,928

Time 41,049,485 13,223,460 6,702,096 3,500,000 152,564 64,627,605

Other - - - - 4,333,575 4,333,575


Held for trading - - - - 1,083,711 1,083,711



Debt securities and sukuks 2,565 - - 2,000,000 - 2,002,565



Total liabilities and shareholders’ equity 43,619,486 13,223,460 6,702,096 5,500,000 123,883,839 192,928,881

138



SAR 000 Within 3 months 3-12 months 1-5 years Over 5 years No fixed

maturity Total

2016

Assets


Cash in hand - - - - 931,144 931,144



Current account - - - - 1,120,530 1,120,530

Money market placements 13,156,102 11,062,000 - - - 24,218,102

Investments, net

Held as FVIS 35,029 84,115 54,696 3,716 - 177,556

Available for sale 392,074 593,951 4,942,733 1,036,958 610,921 7,576,637

Held to maturity 824 74,997 - - - 75,821

Other investments held at amor-tised cost 90,779 - 6,908,928 9,244,658 - 16,244,365



Held for trading - - - - 1,449,939 1,449,939

Held as fair value hedges - - - - 786 786

Held as cash flow hedges - - - 290,970 290,970


Credit cards 470,756 21,721 492,477

Consumer loans 213,818 436,436 6,642,452 3,528,240 55,892 10,876,838

Over draft and commercial loans 48,447,985 18,635,903 23,082,186 26,669,320 1,253,160 118,088,554


Other assets - - - - 1,642,150 1,642,150

Total assets 73,674,367 30,887,402 41,630,995 40,482,892 16,753,053 203,428,709

139



SAR 000Within 3

months

3-12

months

1-5

years

Over 5

years

No fixed

maturityTotal

2016




Money market deposits 3,889,300 137,736 - - - 4,027,036


Demand - - - - 88,525,872 88,525,872

Saving - - - - 618,883 618,883

Time 39,308,288 15,538,382 9,260,931 1,000,000 564,807 65,672,408

Other - - - - 3,641,309 3,641,309


Held for trading - - - - 1,196,686 1,196,686



Debt securities and sukuks 13,422 2,812,690 1,900,000 2,000,000 - 6,726,112

Other liabilities 2,578,485 2,578,485


Total liabilities and shareholders’ equity

43,211,010 18,488,808 11,160,931 3,000,000 127,567,960 203,428,709

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B. Analysis of financial liabilities by remaining contractual maturitiesThe table below summarizes the maturity profile of the Bank’s financial liabilities as at December 31, 2017 and 2016 based on contrac-tual 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 ma-turities. 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 000Within 3

months

3-12

months

1-5

years

Over 5

years

No fixed

maturityTotal

2017

Due to banks and other financial institutionscurrent accounts - - - - 395,837 395,837

money market deposits 2,573,084 - - - - 2,573,084


Demand - - - - 81,474,079 81,474,079

Saving - - - - 518,928 518,928

Time 41,237,829 13,509,280 6,770,432 3,534,844 152,564 65,204,949

Other - - - - 4,333,575 4,333,575

Debt securities and Sukuks 18,513 - - 2,000,000 - 2,018,513

Total 43,829,426 13,509,280 6,770,432 5,534,844 86,874,983 156,518,965

2016

Due to banks and other financial institutions

current accounts - - - - 261,496 261,496

money market deposits 3,890,749 137,736 - - - 4,028,485


Demand - - - - 88,525,872 88,525,872

Saving - - - - 618,883 618,883

Time 25,233,628 30,045,484 9,557,186 1,023,150 564,807 66,424,255

Other 3,641,309 3,641,309

Debt securities and Sukuks - 2,854,132 2,089,274 2,153,180 - 7,096,586

Total 29,124,377 33,037,352 11,646,460 3,176,330 93,612,367 170,596,886

141


36. Fair values of financial assets and liabilities (continued)

36. Fair values of financial assets and liabilitiesFair 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 modelsValuation techniques include net present value and discounted cash flow models, comparison with similar instruments for which mar-ket 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, exchange-traded 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. Availabil-ity 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 FrameworkThe 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 responsi-bility 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 move-

ments.

142



When third party information, such as broker quotes or pricing services, is used to measure fair value, Market Risk Department as-sesses and documents the evidence obtained from the third parties to support the conclusion that such valuations meet the require-ments of IFRS. This includes:

• 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 characteris-

tics 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 hierarchyThe 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.

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 112,434 - - 112,434

• Floating rate securities 15,220 3,036 - 18,256

Total 127,654 3,036 - 130,690

Financial investments available for sale

• Fixed rate securities 1,037,217 - - 1,037,217

• Floating rate securities - 4,594,604 - 4,594,604

• Equity - - 40,425 40,425

• Others - 7,056 2,534,783 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

Financial Liabilities

Derivative financial instruments negative fair value - 1,197,475 - 1,197,475

Total - 1,197,475 1,197,475

143



SAR 000 Level 1 Level 2 Level 3 Total

2016

Financial assets

Derivative financial instruments - 1,741,695 - 1,741,695

Financial investments designated at FVIS (trading)

• Fixed rate securities 171,550 - - 171,550

• Floating rate securities - 6,006 - 6,006

Total 171,550 6,006 - 177,556

Financial investments available for sale

• Fixed rate securities 1,373,278 - - 1,373,278

• Floating rate securities 56,502 2,389,801 - 2,446,303

• Equity 190,666 - 35,984 226,650

• Others 9,188 375,083 3,146,135 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

Financial Liabilities

Derivative financial instruments negative fair value - 1,678,105 - 1,678,105

Total - 1,678,105 - 1,678,105

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 appropri-ate 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 2016

Balance at the beginning of the year 3,182,119 2,772,186

Issues and purchase 953,786 1,596,000

Settlements and sale (1,566,951) (1,182,965)

Change in the value 6,254 (3,102)

Balance at the end of the year 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

144



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 deriva-

tives 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 (Decem-

ber 31, 2016: 75.91 million) compared to its carrying value of SAR Nil million (December 31, 2016: 75.82 million).

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 state-

ments, 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 instru-

ments 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 avail-

able 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 (Decem-

ber 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).

145


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 2016CA-CIB GroupDue from banks and other financial institutions and other assets 185,060 1,184,495

Due to banks and other financial institutions and other liabilities 91,647 15,566

Derivatives at fair value, net 88,933 58,356


AssociatesInvestments 76,049 113,220

Due to banks and other financial institutions 7,993 7,714

Customers’ deposits 142,501 100,617

Commitments and contingencies 1,600 300

Directors, auditors, senior management ,other major shareholders’ and their affiliatesLoans and advances 7,184,902 6,275,305


Derivatives at fair value, net 12,308 56,325


Bank’s mutual fundsDerivatives at fair value, net 683 -


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:

146


37. Related party transactions and balances (continued)

SAR 000 2017 2016


• CA-CIB group 9,785 7,346

• Directors, auditors, senior management, other major shareholders’ and their affiliates 279,584 230,242

• Associates - 6

Total Special commission income 289,369 237,594

Special commission expense

• CA-CIB group 403 1,024

• Directors, auditors, senior management, other major shareholders’ and their affiliates 213,111 232,301

• Associates 390 299

• Bank’s mutual funds 1,815 507

Total Special commission expense 215,719 234,131

Fees ,commission income and others, net 62,178 25,783

Directors’ fees 4,449 3,906

Other general and administrative expenses 996 614

The total amount of salaries and employee related benefits to senior management personnel are as follows:

SAR 000 2017 2016

Short term benefit 60,205 98,832

Long term benefit (deferral bonus) 9,880 -

Long term incentive plan 10,925 -

Termination benefit 14,427 -

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.

147


38. Treasury SharesDuring quarter three 2016, the Bank initiated a plan to acquire treasury shares as authorised by the Board under its Long Term Incen-tive (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 1

Grant date 02 July 2017

Maturity date 01 January 2019

Grant price -SAR 23.096

Vesting period 1.5 years

Vesting conditions Employees remain in service and meets required service criteria

Method of settlement Appreciation in Equity

Valuation model Black-Sholes

Fair value per share on grant date-SAR 31.836

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 6,000,000

Forfeited Shares 2,250,000

Number of shares allocated for appreciation calculation as of 31-12-2017 3,750,000

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39. Capital adequacyThe 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 consoli-dated 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 methodolo-gies defined under the Basel III framework.

SAR 000 2017 2016

Credit Risk RWA 167,323,175 176,255,171

Operational Risk RWA 12,222,300 11,660,390

Market Risk RWA 2,542,165 3,901,349

Total RWA 182,087,640 191,816,910

Tier I Capital 31,897,613 30,235,959

Tier II Capital 3,417,941 3,869,475

Total Tier I & II Capital 35,315,554 34,105,434

Capital Adequacy Ratio %

Tier I ratio 17.52% 15.76%

Tier I + Tier II ratio 19.39% 17.78%

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40. Investment management, brokerage and corporate finance servicesThe 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 mil-lion (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).

41. Prospective changes in International Financial Reporting FrameworkThe Bank has chosen not to early adopt the following amendments to existing standards and newly issued standards but not yet effec-tive 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 pos-sibility 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 amend-ments cover classification and measurement of three accounting areas, first, measurement of cash-settled 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 in-formation. 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 strategyIn 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 measurementThe 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 instru-ments 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.

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The majority of the bank’s debt instruments that are currently classified as available for sale (AFS) will satisfy the conditions for clas-sification 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.

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.

ImpairmentThe 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 method-ology:

• Stage 1: Performing assets: Financial asset(s) that have not significantly deteriorated in credit quality since origination. The impair-ment 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 expecta-tions). 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.

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Hedge accountingThe 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 ac-counting requirements.

Overall expected impactThe bank has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of IFRS 9 on 1 Janu-ary 2018:

• According to transitional provisions for initial application of IFRS 9, the bank is allowed to recognize any difference between previ-ous 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 provi-sions.

• Based on the balances as at 31 December 2017, the day 1 impact of IFRS 9 (applicable from 1 January 2018) would be an esti-mated 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:

◊ 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.

◊ 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 signifi-cantly 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 figuresCertain prior period figures have been reclassified to conform to the current period’s presentation.

43. Board of Directors approvalThe consolidated financial statements were approved by the Board of Directors on 27 February, 2018 corresponding to 11 Jamad II 1439H.

King Saud Road • P,O,Box 56006 Riyadh 11554 • Tel: +966 11 289 9999 • Fax: +966 11 404 2311 • Kingdom of Saudi ArabiaPublished by: Banque Saudi Fransi

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