consolidated financial statements 31 december 2012 · burgan bank group notes to the consolidated...

BURGAN BANK GROUP CONSOLIDATED FINANCIAL STATEMENTS

31 DECEMBER 2012

BURGAN BANK GROUP

The attached notes 1 to 24 form an integral part of these consolidated financial statements.

4

Consolidated Income Statement

For the year ended 31 December 2012

2012 2011

Notes KD 000’s KD 000’s

Interest income 190,903 166,601

Interest expense (71,963) (62,024) ───────── ─────────

Net interest income 118,940 104,577

Fee and commission income 13 41,046 40,872

Fee and commission expense (2,903) (2,758) ───────── ─────────

Net fee and comission income 38,143 38,114

Net gain from foreign currencies 17,554 7,754

Net investment income 14 2,017 6,239

Dividend income 2,211 1,636

Other income 11,251 5,061 ───────── ─────────

Operating income 190,116 163,381

Staff expenses (32,379) (28,036)

Other expenses (38,803) (33,383) ───────── ─────────

Operating profit before provision 118,934 101,962

Provision for impairment of loans and advances 5 (36,093) (29,122)

Provision for impairment of investment securities (4,021) (4,525) ───────── ─────────

Profit before taxation and board of directors' renumeration 78,820 68,315

Taxation 15 (15,984) (10,649)

Board of directors' remuneration (90) (90) ───────── ─────────

Profit for the year 62,746 57,576 ═════════ ═════════

Attributable to:

Equity holders of the Bank 55,600 50,562

Non controlling interests 7,146 7,014 ───────── ─────────

62,746 57,576 ═════════ ═════════

Fils Fils

Basic and diluted earnings per share - attributable to the equity

holders of the Bank 16

37.8

33.7 ═════════ ═════════

BURGAN BANK GROUP


5

Consolidated Statement of Comprehensive Income


2012 2011

KD 000’s KD 000’s

Profit for the year 62,746 57,576 ───────── ─────────

Other comprehensive income (loss)

Financial assets available for sale:

Net change in fair value 3,308 (2,961)

Net transfer to consolidated income statement 2,975 (721)

Foreign currency translation adjustment 1,102 (5,831) ───────── ─────────

Other comprehensive income (loss) for the year 7,385 (9,513) ───────── ─────────

Total comprehensive income for the year 70,131 48,063 ═════════ ═════════

Attributable to:

Equity holders of the Bank 61,039 43,581

Non controlling interests 9,092 4,482 ───────── ─────────

70,131 48,063 ═════════ ═════════

BURGAN BANK GROUP


6

Consolidated Statement of Changes in Shareholders’ Equity


Attributable to equity holders of the Bank

Share

capital

KD 000’s

Share

premium

KD 000’s

Treasury

shares

KD 000’s

Statutory

reserve

KD 000’s

Voluntary

reserve

KD 000’s

Treasury

shares

reserve

KD 000’s

Investment

revaluation

reserve

KD 000’s

Share based

compensatio

n reserve

KD 000’s

Foreign

currency

translation

reserve

KD 000’s

Other

reserves

KD 000’s

Retained

earnings

KD 000’s

Total

KD 000’s

Non

controlling

interests

KD 000’s

Total equity

KD 000’s

Balance at 1 January 2012 147,140 129,559 (33,139) 45,625 46,003 36,552 5,846 561 (1,912) 554 70,499 447,288 118,421 565,709

Profit for the year - - - - - - - - - - 55,600 55,600 7,146 62,746

Other comprehensive income - - - - - - 5,245 - 194 - - 5,439 1,946 7,385 ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ───────

Total comprehensive income - - - - - - 5,245 - 194 - 55,600 61,039 9,092 70,131

Transfer to reserves - - - 5,789 5,789 - - - - - (11,578) - - -

Share capital increase in a

subsidiary - - - - - - - - - - - - 4,920 4,920

Bonus shares issued (note 12) 7,357 - - - - - - - - - (7,357) - - -

Cash dividend (note 12)

- - - - - - - - - - (14,023) (14,023) - (14,023) Cash dividend paid to non

controlling interests - - - - - - - - - - - - (4,130) (4,130) Purchase of treasury shares - - (3,553) - - - - - - - - (3,553) - (3,553)

Sale of treasury shares - - 4 - - 2 - - - - - 6 - 6

Acquistion of subsidiary (note 9) - - - - - - - - - - - - 830 830

Share based compensation

expense - - - - - - - 3 - - - 3 - 3 ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ───────

Balance at 31 December 2012 154,497 129,559 (36,688) 51,414 51,792 36,554 11,091 564 (1,718) 554 93,141 490,760 129,133 619,893 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

BURGAN BANK GROUP


7

Consolidated Statement of Changes in Shareholders’ Equity (Continued)


Attributable to equity holders of the Bank

Share

capital

KD 000’s

Share

premium

KD 000’s

Treasury

shares

KD 000’s

Statutory

reserve

KD 000’s

Voluntary

reserve

KD 000’s

Treasury

shares

reserve

KD 000’s

Investment

revaluation

reserve

KD 000’s

Share based

compensatio

n reserve

KD 000’s

Foreign

currency

translation

reserve

KD 000’s

Other

reserves

KD 000’s

Retained

earnings

KD 000’s

Total

KD 000’s

Non

controlling

interests

KD 000’s

Total equity

KD 000’s

Balance at 1 January 2011 140,133 129,559 (16,401) 40,365 40,743 36,567 8,732 549 2,183 533 37,464 420,427 118,197 538,624

Profit for the year - - - - - - - - - - 50,562 50,562 7,014 57,576

Other comprehensive loss - - - - - - (2,886) - (4,095) - - (6,981) (2,532) (9,513) ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ───────

Total comprehensive (loss)

income - - - - - - (2,886) - (4,095) - 50,562 43,581 4,482 48,063

Transfer to reserves - - - 5,260 5,260 - - - - - (10,520) - - -

Bonus shares issued (note

12) 7,007 - - - - - - - - - (7,007) - - -

Cash dividend paid to non

controlling interests - - - - - - - - - - - - (4,218) (4,218)

Purchase of non controlling

interests - - - - - - - - - 21 - 21 (40) (19)

Purchase of treasury shares - - (16,783) - - - - - - - - (16,783) - (16,783)

Sale of treasury shares - - 45 - - (15) - - - - - 30 - 30


expense - - - - - - - 12 - - - 12 - 12 ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ─────── ───────

Balance at 31 December

2011 147,140 129,559 (33,139) 45,625 46,003 36,552 5,846 561 (1,912) 554 70,499 447,288 118,421 565,709 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

BURGAN BANK GROUP


8

Consolidated Statement of Cash Flows

Year ended 31 December 2012

2012 2011

Notes KD 000’s KD 000’s

Operating activities

Profit before taxation and board of directors' remuneration 78,820 68,315

Adjustments:

Net investment income 14 (2,017) (6,239)

Provision for impairment of loans and advances 36,093 29,122

Provision for impairment of investment securities 4,021 4,525

Dividend income (2,211) (1,636)

Depreciation and amortisation 10,952 11,283

Share based compensation expense 3 12 ───────── ─────────

Operating profit before changes in operating assets and liabilities 125,661 105,382

Changes in operating assets and liabilities:

Treasury bills and bonds with CBK and others (64,509) 47,890

Due from banks and other financial institutions 236,060 (368,621)

Loans and advances to customers (655,230) (134,577)

Other assets (29,654) (28,255)

Due to banks (11,447) (11,683)

Other borrowed funds 26 (674)

Due to other financial institutions 62,368 142,328

Deposits from customers 592,865 230,953

Other liabilities 9,490 15,164

Taxation paid (11,934) (9,064) ───────── ─────────

Net cash from (used in) operating activities 253,696 (11,157) ───────── ─────────

Investing activities

Purchase of investment securities (182,830) (42,853)

Proceeds from sale of investment securities 91,122 24,859

Purchase of property and equipment (16,953) (4,950)

Dividends received 2,211 1,636

Acquisition of subsidiary, net of cash acquired 9 (10,181) - ───────── ─────────

Net cash used in investing activities (116,631) (21,308) ───────── ─────────

Financing activities

Proceeds from issuance of long term subordinated bonds 100,000 -

Repayment of other borrowed funds - (537)

Proceeds from share capital increase 4,920 -

Purchase of treasury shares (3,553) (16,783)

Sale of treasury shares 6 30

Cash dividend paid to equity holders of the Bank 12 (14,023) -

Cash dividend paid to non controlling interests (4,130) (4,218) ───────── ─────────

Net cash from (used in) financing activities 83,220 (21,508) ───────── ─────────

Net increase (decrease) in cash and cash equivalents 220,285 (53,973)

Effect of foreign currency translation (169) (3,614)

Cash and cash equivalents at 1 January 567,352 624,939 ───────── ─────────

Cash and cash equivalents at 31 December 3 787,468 567,352 ═════════ ═════════

Additional cash flow information:

Interest received 169,561 164,982

Interest paid 58,486 60,124 ═════════ ═════════

BURGAN BANK GROUP

Notes to the Consolidated Financial Statements

At 31 December 2012

9

1. INCORPORATION AND PRINCIPAL ACTIVITIES

Burgan Bank S.A.K. ("the Bank”) is a public shareholding company incorporated in the State of Kuwait by Amiri

Decree dated 27 December 1975 listed on the Kuwait Stock Exchange and is registered as a Bank with the Central

Bank of Kuwait (“CBK”). The Bank’s registered address is P.O. Box 5389, Safat 12170, State of Kuwait.

The consolidated financial statements of the Bank and its subsidiaries (collectively “the Group”) for the year

ended 31 December 2012 were authorised for issue in accordance with a resolution of the Board of Directors on

27 January 2013 and are issued subject to the approval of the Ordinary General Assembly of the shareholders’ of

the Bank. The Ordinary General Assembly of the Shareholders has the power to amend these consolidated

financial statements after issuance.

The principal activities of the Group are explained in note 17.

The Bank is a subsidiary of Kuwait Projects Company Holding K.S.C. ("the Parent Company”).

"The Companies Law issued on 26 November 2012 by Decree Law no 25 of 2012 (the “Companies Law”), which

was published in the Official Gazette on 29 November 2012, cancelled the Commercial Companies Law No 15 of

1960. According to article 2 of the Decree, the Bank has a period of 6 months from 29 November 2012 to

regularize its affairs in accordance with the Companies Law."

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The consolidated financial statements are prepared under the historical cost convention, except for financial assets

classified as fair value through profit or loss, certain financial assets classified as available for sale and derivative

financial instruments that are measured at fair value.

The consolidated financial statements are presented in Kuwaiti Dinars (KD), which is the Bank's functional

currency rounded to the nearest thousand except when otherwise stated.

Statement of compliance

The consolidated financial statements of the Group have been prepared in accordance with the regulations of the

State of Kuwait for financial services institutions regulated by the CBK. These regulations require adoption of all

International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board

(“IASB”) except for International Accounting Standards (“IAS”) 39: Financial Instruments: Recognition and

Measurement requirement for collective provision, which has been replaced by the CBK’s requirement for a

minimum general provision as described under the accounting policies for impairment of financial assets.

Changes in accounting policies and disclosures

The accounting policies used in the preparation of these consolidated financial statements are consistent with

those used in the previous financial year, except for the adoption of the following amendments to IFRS effective

as of 1 January 2012:

IFRS 7 Financial Instruments: Disclosures — Enhanced Derecognition Disclosure Requirements

(effective 1 July 2011)

IAS 12 Income Taxes – Recovery of Underlying Assets (effective 1 January 2012)

The adoption of the standards or interpretations is described below:

IFRS 7 Financial Instruments: Disclosures — Enhanced Derecognition Disclosure Requirements (effective 1 July

2011)

The amendment requires additional disclosure about financial assets that have been transferred but not

derecognised to enable the user of the Group’s financial statements to understand the relationship with those

assets that have not been derecognised and their associated liabilities. In addition, the amendment requires

disclosures about the entity’s continuing involvement in derecognised assets to enable the users to evaluate the

nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning

on or after 1 July 2011. The Group does not have any assets with these characteristics so there has been no effect

on the presentation of its consolidated financial statements.

BURGAN BANK GROUP


At 31 December 2012

10

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Changes in accounting policies and disclosures (continued)

IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets (effective 1 January 2012)

The amendment clarified the determination of deferred tax on investment property measured at fair value and

introduces a rebuttable presumption that deferred tax on investment property measured using the fair value

model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. It

includes the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model

in IAS 16 should always be measured on a sale basis. The amendment is effective for annual periods beginning on

or after 1 January 2012 and has no effect on the Group’s financial position, performance or its disclosures.

Standards issued but not yet effective

The following IASB Standards have been issued/amended but are not yet mandatory, and have not been adopted

by the Group:

IFRS 7 Disclosures — Offsetting Financial Assets and Financial Liabilities — Amendments to IFRS 7

(effective 1 January 2013)

IFRS 9 Financial Instruments: Classification and Measurement (effective 1 January 2015)

IFRS 10 Consolidated Financial Statements (effective 1 January 2013)

IFRS 11 Joint Arrangements (effective 1 January 2013)

IFRS 12 Disclosure of Involvement with Other Entities (effective 1 January 2013)

IFRS 13 Fair Value Measurement (effective 1 January 2013)

IAS 1 Financial Statement Presentation – Presentation of Items of Other Comprehensive Income

(effective 1 July 2012)

IAS 19 Employee Benefits (Revised) (effective 1 January 2013)

IAS 27 Separate Financial Statements (as revised in 2011) (effective 1 January 2013)

IAS 28 Investments in associates and Joint Ventures (as revised in 2011) (effective 1 January 2013)

IAS 32 Offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32 (effective 1

January 2014)

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective 1 January 2013)

The major changes are as follows:

IFRS 7 Disclosures — Offsetting Financial Assets and Financial Liabilities — Amendments to IFRS 7

These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g.,

collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect

of netting arrangements on an entity’s financial position. The new disclosures are required for all recognised

financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The

disclosures also apply to recognised financial instruments that are subject to an enforceable master netting

arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These

amendments will not impact the Group’s financial position or performance and become effective for annual

periods beginning on or after 1 January 2013.

IFRS 9 ‘Financial Instruments’: Classification and Measurement

The standard was issued in November 2009 and becomes effective for annual years beginning on or after 1

January 2015. IFRS 9 improves the ability of the users of the financial statement to assess the amount, timing and

uncertainty of future cash flows of the entity by replacing many financial instrument classification categories,

measurement and associated impairment methods. The application of IFRS 9 will result in amendments and

additional disclosures relating to financial instruments and associated risks.

BURGAN BANK GROUP


At 31 December 2012

11


Standards issued but not yet effective (continued)

IFRS 10 Consolidated Financial Statements

IFRS 10, which will be effective 1 January 2013, replaces the consolidation guidance in IAS 27 Consolidated and

Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities by introducing a single

consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an

entity is controlled through voting rights of investors or through other contractual arrangements as is common in

special purpose entities). Under IFRS 10, control is based on whether an investor has 1) power over the investee;

2) exposure or rights, to variable returns from its involvement with the investee; and 3) the ability to use its power

over the investee to affect the amount of the returns.

IFRS 11 Joint Arrangements

IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary

Contributions by Venturers. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using

proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using

the equity method. These amendments will not impact the Group’s financial position or performance and become

effective for annual periods beginning on or after 1 January 2013.

IFRS 12 Disclosure of Interests in Other Entities

IFRS 12, which will be effective 1 January 2013, requires enhanced disclosures about both consolidated entities

and unconsolidated entities in which an entity has involvement. The objective of IFRS 12 is to require information

so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and

liabilities, risk exposures arising from involvements with unconsolidated structured entities and non-controlling

interest holders' involvement in the activities of consolidated entities.

IFRS 13 Fair Value Measurement

IFRS 13, which will be effective 1 January 2013, replaces the guidance on fair value measurement in existing

IFRS accounting literature with a single standard. IFRS 13 defines fair value, provides guidance on how to

determine fair value and requires disclosures about fair value measurements. However, IFRS 13 does not change

the requirements regarding which items should be measured or disclosed at fair value.

IAS 1 Financial Statement Presentation:

The amendments to IAS 1 change the grouping of items presented in other comprehensive income. Items that

could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or

settlement) would be presented separately from items that will never be reclassified. The amendment becomes

effective for annual periods beginning on or after 1 July 2012.

IAS 19 Employee Benefits (Revised)

Amended standard is effective for annual periods beginning on or after 1 January 2013, with earlier application

permitted. With very few exceptions retrospective application is required. Numerous changes or clarifications are

made under the amended standard. Among these numerous amendments, the most important changes are

removing the corridor mechanism and making the distinction between short-term and other long-term employee

benefits based on expected timing of settlement rather than employee entitlement. These amendments are not

expected to impact the Group’s financial position or performance.

IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)

As a consequence of the new IFRS 11 Joint Arrangements, and IFRS 12 Disclosure of Interests in Other Entities,

IAS 28 Investments in Associates, has been renamed IAS 28 Investments in Associates and Joint Ventures, and

describes the application of the equity method to investments in joint ventures in addition to associates. The

revised standard becomes effective for annual periods beginning on or after 1 January 2013.

IAS 32 Offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32

These amendments clarify the meaning of “currently has a legally enforceable right to set-off”. The amendments

also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house

systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected

to impact the Group’s financial position or performance and become effective for annual periods beginning on or

after 1 January 2014.

BURGAN BANK GROUP


At 31 December 2012

12


Standards issued but not yet effective (continued) The application of the above standards/amendemnts is not expected to have a material impact on the financial

position or performance of the Group as and when they become effective or early adopted, except for IFRS 9 and

IFRS 13 which will result in amendments and/or additional disclosures relating to classification, measurement and

associated risks of financial instruments. Adoption of other IASB Standards/amendments will not have a material

effect on the consolidated financial position or the consolidated financial performance of the Group.

Basis of consolidation

The consolidated financial statements comprise the financial statements of the Bank and its subsidiaries including

special purpose entities. The financial statements of the subsidiaries are prepared for the same reporting year as

the Bank, using consistent accounting policies. All material inter-group balances and transactions, including inter-

group profits and losses and unrealised profits and losses are eliminated on consolidation.

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be

consolidated from the date that control ceases. Control is achieved where the Bank has the power to govern the

financial and operating policies of an entity so as to obtain benefits from its activities. The results of the

subsidiaries acquired or disposed off during the year are included in the consolidated income statement from the

date of acquisition or up to the date of disposal, as appropriate.

Non controlling interests represents the equity in the subsidiaries not attributable directly or indirectly to the

equity holders of the Bank. Equity and net income attributable to non controlling interests are shown separately in

the consolidated statement of financial position, consolidated income statement, consolidated statement of

comprehensive income and consolidated statement of changes in shareholders’ equity.

Losses within a subsidiary are attributed to the non controlling interests even if that results in a deficit balance.

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity

transaction. If the Group loses control over a subsidiary, it:

Derecognises the assets (including goodwill) and liabilities of the subsidiary

Derecognises the carrying amount of any non controlling interest

Derecognises the cumulative translation differences, recorded in equity

Recognises the fair value of the consideration received

Recognises the fair value of any investment retained

Recognises any surplus or deficit in the income statement

Reclassifies the Group’s share of components previously recognised in other comprehensive income to

income statement or retained earnings, as appropriate.

The subsidiaries of the Group are as follows:

Name of company

Country of

incorporation

Effective

interest as at

31 December

2012

Effective

interest as at

31 December

2011

Jordan Kuwait Bank P.S.C. (“JKB”) Jordan 51.19% 51.19%

Algeria Gulf Bank S.P.A. (“AGB”) Algeria 91.13% 91.13%

Bank of Baghdad P.J.S.C. (“BoB”) Iraq 51.79% 51.79%

Tunis International Bank S.A (“TIB”) Tunisia 86.70% 86.70%

Eurobank Tekfen (“ET”) Turkey 99.26% -

Held through JKB

United Financial Investments Company Jordan 25.70% 25.70%

Ejara Leasing Company Jordan 51.19% 51.19%

Held through BoB

Baghdad Brokerage Company Iraq 51.79% 51.79%

Held through ET

EFG Finansal Kiralama A.S. Turkey 99.25% -

EFG İstanbul Equities Menkul Degerler A.S Turkey 99.25% -

Held through EFG İstanbul Equities Menkul Degerler A.S

EFG İstanbul Portfoy Yonetimi A.S. Turkey 99.25% -

BURGAN BANK GROUP


At 31 December 2012

13


Financial instruments

Classification of financial instruments

The Group classifies financial instruments as at "fair value through profit or loss", "loans and receivables",

"available for sale", "held to maturity" and "financial liabilities other than at fair value through profit or loss".

Management determines the appropriate classification of each instrument at initial recognition.

Recognition/de-recognition A financial asset or a financial liability is recognised when the Group becomes a party to the contractual

provisions of the instrument. All regular way purchase and sale of financial assets are recognised using settlement

date accounting. Changes in fair value between the trade date and settlement date are recognised in the

consolidated income statement or in other comprehensive income in accordance with the policy applicable to the

related instrument. Regular way purchases or sales are purchases or sales of financial assets that require delivery

of assets within the time frame generally established by regulations or conventions in the market place.

A financial asset (in whole or in part) is derecognised either when: the contractual rights to receive the cash flows

from the asset have expired; the Group has transferred its right to receive cash flows from the assets or has

assumed an obligation to pay them in full without material delay to a third party under a ‘pass through’

arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has

transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained

substantially all the risks and rewards of the asset, but has transferred control of the asset. Where the Group has

transferred its right to receive cash flows from an asset and has neither transferred nor retained substantially all the

risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the

Group’s continuing involvement in the asset.

A financial liability is derecognised when the obligation specified in the contract is discharged, cancelled or

expired. When an existing financial liability is replaced by another from the same lender on substantially different

terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated

as the derecognition of the original liability and the recognition of a new liability. The difference in the respective

carrying amounts is recognised in the consolidated income statement.

Measurement

All financial assets or financial liabilities are initially measured at fair value. Transaction costs are added only for

those financial instruments not measured at fair value through profit or loss. Transaction costs on financial assets

at fair value through profit or loss are recognised in the consolidated income statement.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets

designated upon initial recognition as at fair value through profit or loss. Financial assets are classified as held for

trading if they are acquired for the purpose of selling or buying in the near term. Changes in fair value are

recognised in net investment income. Interest earned is accrued in interest income, using the effective interest rate

(EIR), while dividend income is recorded under operating income, in the consolidated income statement, when the

right to the payment has been established.

Financial assets are designated as at fair value through profit or loss, if they are managed and their performance is

evaluated on reliable fair value basis in accordance with documented investment strategy.

After initial recognition financial assets at fair value through profit or loss are remeasured at fair value with all

changes in fair value recognised in the consolidated income statement.

Derivative instruments are categorised as held for trading unless they are designated as hedging instruments.

Financial assets held to maturity

Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to

maturity when the Group has the positive intention and ability to hold to maturity.

After initial recognition, held to maturity financial assets are carried at amortised cost using the effective interest

rate method, less impairment losses, if any. The calculation takes into account any premium or discount on

acquisition and includes transaction costs and fees that are an integral part of the effective interest rate.

BURGAN BANK GROUP


At 31 December 2012

14


Financial instruments (continued)

Measurement (continued)

Loans and receivables

These are non-derivative financial assets having fixed or determinable payments that are not quoted in an active

market. These are subsequently measured at amortised cost using the effective yield method adjusted for

impairment losses, if any.

Treasury bills and bonds with CBK and others, due from banks and other financial institutions (“OFIs”), and loans

and advances to customers are classified as “loans and receivables”.

Financial assets available for sale

Financial assets available for sale include equity and debt securities. Equity investments classified as available for

sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss.

Debt securities in this category are those which are intended to be held for an indefinite period of time that may be

sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices.

These are subsequently measured at fair value with gains and losses being recognised as other comprehensive

income in the equity as "investment revaluation reserve" until the financial assets are derecognised or until the

financial assets are determined to be impaired at which time the cumulative gains and losses previously reported

as other comprehensive income in equity are transferred to the consolidated income statement. Financial assets

whose fair value cannot be reliably measured are carried at cost less impairment losses, if any.

Financial liabilities other than at fair value through profit or loss

These are subsequently measured at amortised cost using the effective interest rate. Due to banks, Due to other

financial institutions, Deposit from customers, Other borrowed funds, and Other liabilities are classified as

“financial liabilities other than at fair value through profit or loss”.

Other borrowed funds

Financial instruments issued by the Bank that are not designated at fair value through profit or loss, are classified

under ‘other borrowed funds’, where the substance of the contractual arrangement results in the Bank having an

obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by

the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.

After initial measurement, other borrowings are subsequently measured at amortised cost using the EIR.

Financial guarantees

In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees

and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the

premium received. The premium received is amortised in the consolidated income statement in 'fee and

commission income' on a straight line basis over the life of the guarantee. The guarantee liability is subsequently

measured as a higher of the amount initially recognised less amortisation or the value of any financial obligation

that may arise as a result of financial guarantee. Any increase in the liability relating to financial guarantees is

recorded in the consolidated income statement.

Derivative financial instruments

The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit

risks including exposures arising from forecast transactions.

Where derivative contracts are entered into by specifically designating such contracts as a fair value hedge or a

cash flow hedge of a recognised asset or liability, the Group accounts for them using hedge accounting principles,

provided certain criteria are met. Derivatives are carried as financial assets when the fair value is positive and as

financial liabilities when the fair value is negative.

For derivative contracts that do not qualify for hedge accounting, any gains or losses arising from changes in fair

value of the derivative contract are taken directly to the consolidated income statement.

BURGAN BANK GROUP


At 31 December 2012

15


Derivative financial instruments (continued)

Hedge accounting For the purposes 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 recognised asset or liability; and (b) cash flow hedges, which hedge

exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised

asset or liability or a highly probable forecast transaction.

When a financial instrument is designated as a hedge, the Group formally documents the relationship between the

hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the

various hedging transactions. The Group also document its assessment, both at hedge inception and on an ongoing

basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in

fair values or cash flows of hedged items.

The Group discontinues hedge accounting when the following criteria are not met:

a) it is determined that the hedging instrument is not, or has ceased to be, highly effective as a hedge;

b) the hedging instrument expires, or is sold, terminated, or exercised;

c) the hedged item matures or is sold or repaid; or

d) a forecast transaction is no longer deemed highly probable.

Fair value hedges

The changes in fair value of the hedging instrument that qualify and is designated as fair value hedge is recorded

in the consolidated income statement, together with changes in the fair value of the hedged asset or liability that

are attributable to the hedged risk.

If the hedge accounting is discontinued, the fair value adjustment to the hedged item is amortised to the

consolidated income statement over the period to maturity of the previously designated hedge relationship using

the effective interest method.

If the hedged item is derecognised, the unamortised fair value is recognised immediately in the consolidated

income statement.

Cash flow hedges

For qualifying cash flow hedges, the fair value gain or loss associated with the effective portion of the cash flow

hedge is recognised initially in other comprehensive income, and transferred to the consolidated income statement

in the periods when the hedged transaction affects consolidated income statement. Any ineffective portion of the

gain or loss on the hedging instrument is recognised immediately in the consolidated income statement.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting,

any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive

income and is recognised when the hedged forecast transaction is ulimately recognised in the consolidated income

statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was

recognised in other comprehensive income is immediately transferred to the consolidated income statement.

Fair value of financial instruments

The fair value of financial instruments traded in active markets is based on their quoted market price (bid price

for assets and ask price for liabilities) without any deduction for transaction costs. For financial instruments not

traded in active markets, a reasonable estimate of fair value is determined by reference to the current fair value of

another instrument that is substantially the same; recent arm’s length market transactions; discounted cash flow

analysis; or other valuation techniques commonly used by market participants.

An analysis of fair values of financial instruments and further details as to how they are measured are provided in

note 21.

Amortised cost

This is computed using the effective interest method less any allowance for impairment. The calculation takes into

account any premium or discount on acquisition and includes transaction costs and fees that are an integral part of

the effective interest rate.

BURGAN BANK GROUP


At 31 December 2012

16


Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of

financial position, when the Bank has a legally enforceable right to offset and intends to settle either on a net basis

or to realise the asset and settle the liability simultaneously.

Assets pending sale

The Group occasionally acquires non-monetary assets in settlement of certain financing receivables and loans and

advances. Such assets are stated at the lower of the carrying value of the related financing receivables and loans

and advances and the current fair value. Gains or losses on disposal, and revaluation losses, are recognised in the

consolidated income statement.

Impairment of financial assets

The Group assesses at each reporting date whether there is objective evidence that a specific financial asset or a

group of financial assets are impaired. A financial asset or a group of financial assets is deemed to be impaired, if

and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the

initial recognition of the asset and that loss event (or events) has an impact on the estimated future cash flows of

the financial asset or group of financial assets that can be reliably estimated.

Objective evidence that a specific financial asset or a group of financial assets classified as loans and receivables

are impaired includes whether any payment of principal or interest is overdue by more than 90 days or there are

any known difficulties in the cash flows including the sustainability of the counterparty’s business plan, credit

rating downgrades, breach of original terms of the contract, its ability to improve performance once a financial

difficulty has arisen, deterioration in the value of collateral etc. The Group assess whether objective evidence of

impairment exists on an individual basis for each individually significant asset and collectively for others not

deemed individually significant.

The impairment loss for financial assets classified as loans and receivables is measured as the difference between

the asset’s carrying amount and the present value of estimated future cash flows including amounts recoverable

from collateral and guarantees, discounted at the financial asset’s original effective interest rate. If the financial

asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective

interest rate determined under the contract. The carrying amount of the asset is reduced through the use of an

allowance account and the amount of the loss is recognised in the consolidated income statement.

For debt instruments classified as available-for-sale, the Group assesses individually whether there is objective

evidence of impairment based on the same criteria as financial assets classified as loans and receivables. However,

the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost

and the current fair value, less any impairment loss on that investment previously recognised in the consolidated

income statement. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be

objectively related to a credit event occurring after the impairment loss was recognised in the consolidated income

statement, the impairment loss is reversed through the consolidated income statement.

In the case of equity instruments classified as ‘available for sale’, a significant or prolonged decline in the fair

value of the security below its cost is considered in determining whether the assets are impaired. If any evidence

of impairment exists, the cumulative loss measured as the difference between the acquisition cost and the current

fair value, less any impairment loss on that financial asset previously recognised in the consolidated income

statement, is recognised in the consolidated income statement. Subsequent increases in fair value of such available

for sale equity instruments are not reversed through the consolidated income statement.

For non equity financial assets, the carrying amount of the asset is reduced through the use of an allowance

account and the amount of the loss is recognised in the consolidated income statement. If, in a subsequent period,

the amount of the estimated impairment loss increases or decreases because of an event occurring after the

impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the

allowance account.

In addition, in accordance with CBK instructions, a minimum general provision is made on all applicable credit

facilities (net of certain categories of collateral) that are not provided for specifically.

Financial assets are written off when there is no realistic prospect of recovery.

BURGAN BANK GROUP


At 31 December 2012

17


Renegotiated loans

In the event of a default, the Group seeks to restructure loans rather than take possession of collateral. This may

involve extending the payment arrangements and the agreement of new loan conditions. When the terms and

conditions of these loans are renegotiated, the terms and conditions of the new contractual arrangement apply in

determining whether these loans remain past due. Management continually reviews renegotiated loans to ensure

that all criteria are met and that future payments are likely to occur. The loan continues to be subject to an

individual or collective impairment assessment calculated using the loan’s original EIR.

Repurchase and reverse repurchase agreements

Assets sold with a simultaneous commitment to repurchase at a specified future date at an agreed price (repos) are

not derecognised in the consolidated statement of financial position as the Group retains substaintially all the risks

and rewards of ownership. The cash received is recognised in the consolidated statement of financial position as

an asset with a corresponding obligation to return it including the accrued interest as a liability, reflecting the

transaction’s economic substance as loan to the Group. The difference between the sale and repurchase price is

treated as interest expense using the effective interest rate method.

Conversely, assets purchased with a corresponding commitment to resell at a specified future date at an agreed

price (reverse repos) are not recognised in the consolidated statement of financial position. Amounts paid under

these agreements are treated as interest earning assets and the difference between the purchase and resale price

treated as interest income using the effective interest rate method.

Cash and cash equivalents

Cash and cash equivalents comprises of cash in hand and in current account with banks and OFIs and balances

with CBK and due from banks and OFIs with original maturities not exceeding thirty days from acquisition date.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation is

provided on all premises and equipment, other than freehold land, at rates calculated to write off the cost of each

asset on a straight line basis over its estimated useful life. Freehold land is stated at cost less impairment losses.

The estimated useful lives of the assets for the calculation of depreciation are as follows:

Buildings 20 to 35 years

Furniture and equipment 4 to 11 years

Motor vehicles 3 to 7 years

Computers 5 years

When assets are sold or retired, their cost and accumulated depreciation are eliminated from the accounts and any

gain or loss resulting from their disposal is recognised in the consolidated income statement.

The carrying amounts of property and equipment are reviewed at each reporting date to determine whether there is

any indication of impairment. If any such indication exists, the assets are written down to their recoverable

amounts and the impairment loss is recognised in the consolidated income statement.

Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately

is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent

expenditure is capitalised only when it increases future economic benefits of the related item of property and

equipment. All other expenditure is recognised in the consolidated income statement as the expense is incurred.

Intangible assets

Intangible assets represent separately identifiable non-monetary assets without physical substance arising from

business combinations. Intangible assets are measured on initial recognition at cost. The cost of intangible assets

acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition,

intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

BURGAN BANK GROUP


At 31 December 2012

18


Intangible assets (continued) The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life, as mentioned below, and assessed

for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period

and the amortisation method for an intangible asset with a finite useful economic life is reviewed at least at each

financial position date. Changes in the expected useful economic life or the expected pattern of consumption of

future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as

appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets

with finite lives is recognised in the consolidated income statement under “other expenses” consistent with the

function of the intangible asset.

Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their

residual values over their estimated useful economic lives as follows:

Banking license 10 to 30 years

Customer relationships and core deposits 5 to 10 years

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net

disposal proceeds and the carrying amount of the asset and are recognised in the consolidated income statement

when the asset is derecognised.

Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement

at inception date: whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the

arrangement conveys a right to use the asset.

Group as a lessee

Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the

leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated

income statement on a straight-line basis over the lease term. Contingent rental payable is recognised as an

expense in the period in which they are incurred.

Group as a lessor

Leases where the Group does not transfer substantially all of the risk and benefits of ownership of the asset are

classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying

amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents

are recognised as revenue in the period in which they are earned.

BURGAN BANK GROUP


At 31 December 2012

19


Business combinations and goodwill

A business combination is the bringing together of separate entities or businesses into one reporting entity as a

result of one entity, the acquirer, obtaining control of one or more other businesses. The acquisition method of

accounting is used to account for business combinations. Under this method, the acquirer recognises, separately

from goodwill, identifiable assets acquired, liabilities assumed and any non-controlling interests in the acquiree at

the acquisition date.

The identifiable assets acquired and the liabilities assumed at the acquisition date are measured at fair values. For

each business combination, the acquirer measures the non-controlling interests in the acquiree at the proportionate

share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed in the period in which they

are incurred.

If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held

equity interest in the acquiree is remeasured to fair value at the acquisition date through the consolidated income

statement.

Goodwill arising in a business combination is recognised as of the acquisition date as the excess of :

a) the aggregate of the consideration transferred, the fair value of any non-controlling interests in the

acquiree measured at the non controlling interest’s proportionate share of the acquiree’s identifiable net

assets and the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree;

over

b) the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed

measured at their fair values.

If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is

recognised in consolidated income statement.

Goodwill is allocated to each of the Group’s cash-generating units or for groups of cash generating units and is

tested annually for impairment and is assesssed regularly whether there is any indication of impairment. Goodwill

impairment is determined by assessing the recoverable amount of cash-generating unit to which goodwill relates.

The recoverable value is the value in use of the cash-generating unit, which is the net present value of estimated

future cash flows expected from such cash-generating unit. If the recoverable amount of cash generating unit is

less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of

any goodwill allocated to the unit and then to the other assets of the unit prorated on the basis of the carrying

amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in the subsequent

period.

Where goodwill forms part of a cash-generating unit (group of cash generating units) and part of the operations

within that unit is disposed off, the goodwill associated with the operation disposed off is included in the carrying

amount of the operation when determining the gain or loss on disposal of the operation.

End of service indemnity

Provision is made for amounts payable to employees under the Kuwait Labour Law, employee contracts and

respective applicable laws in the countries where the subsidiaries operate. This liability, which is unfunded,

represents the amount payable to each employee as a result of involuntary termination on the reporting date.

BURGAN BANK GROUP


At 31 December 2012

20


Treasury shares

The Bank’s holding in its own shares is stated at acquisition cost and is recognised in shareholders’ equity.

Treasury shares are accounted for using the cost method. Under this method, the weighted average cost of the

shares reacquired is charged to a contra account in the equity. When the treasury shares are reissued, gains are

credited to a separate account in equity, “treasury shares reserve”, which is not distributable. Any realised losses

are charged to the same account to the extent of the credit balance on that account. Any excess losses are charged

to retained earnings then to the voluntary reserve and statutory reserve. Gains realised subsequently on the sale of

treasury shares are first used to offset any previously recorded losses in the order of reserves, retained earnings

and the treasury shares reserve account. These shares are not entitled to any cash dividend that the Bank may

propose. The issue of bonus shares increases the number of shares proportionately and reduces the average cost

per share without affecting the total cost of treasury shares.


The Bank operates an equity settled share based compensation plan. The cost of share based compensation

transactions with employees is measured by reference to the fair value at the date on which they are granted. The

total amount to be expensed over the vesting period is determined by reference to the fair value of the options or

shares on the date of grant using the Black Scholes model. Measurement inputs include share price on

measurement date, exercise price, volatility, risk free interest rate and expected dividend yield. At each reporting

date, the Group revises its estimates of the number of options that are expected to become exercisable. It

recognises the impact of the revision of original estimates, if any, in the consolidated income statement, with a

corresponding adjustment to equity.

Other reserve

Other reserve is used to record the effect of changes in ownership interest in subsidiaries, without loss of control.

Revenue recognition

Interest and similar income and expense

Interest income and expense are recognised in the consolidated income statement for all financial instruments

measured at amortised cost, interest bearing assets classified as available-for-sale and financial instruments

designated at fair value through profit or loss using effective interest rate method. The effective interest rate is the

rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, a

shorter period, when appropriate, to the net carrying amount of the financial asset or financial liability. When

calculating the effective interest rate, all fees and points paid or received between parties to the contract,

transaction costs and all other premiums or discounts are considered, but not future credit losses.

Once a financial instrument is impaired, interest is thereafter recognised using the rate of interest used to discount

the future cash flows for the purpose of measuring the impairment loss.

When the Group enters into an interest rate swap to change interest from fixed to floating (or vice versa) the

amount of interest income or expense is adjusted by the net interest on the swap. Credit origination fees are treated

as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except

when the underlying risk is sold to a third party, at which time it is recognised immediately.

Fee and commission income

Fee and commission earned for the provision of services over a period of time are accrued over that period. These

fee include credit related fee and other management fees. Loan commitment fee and originating fee that are an

integral part of the effective interest rate of a loan are recognised (together with any incremental cost) as an

adjustment to the effective interest rate on loan.

Dividend income

Dividend income is recognised when the right to receive payment is established.

BURGAN BANK GROUP


At 31 December 2012

21


Foreign currency

Each entity in the Group determines its own functional currency and items included in the financial statements of

each entity are measured using that functional currency.

Transactions in foreign currencies are initially recorded at the spot rate ruling at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange

ruling at the reporting date. Any resultant gains or losses are recognised in the consolidated income statement.

Non-monetary assets and liabilities in foreign currencies that are stated at fair value are translated to respective

entity’s functional currency at the foreign exchange rates ruling on the dates that the values were determined. In

case of non-monetary assets whose change in fair values are recognised directly in other comprehensive income,

foreign exchange differences are recognised directly in other comprehensive income and for non-monetary assets

whose change in fair value are recognised directly in the consolidated income statement, foreign exchange

differences are recognised in the consolidated income statement.

As at the reporting date, the assets and liabilities of subsidiaries are translated into the Bank’s presentation

currency (KD) at the rate of exchange ruling on the reporting date, and their income statements are translated at

the average exchange rates for the year. Exchange differences arising on translation are taken directly to other

comprehensive income. On disposal of a foreign subsidiary, the deferred cumulative amount recognised in other

comprehensive income relating to that particular subsidiary is recognised in the consolidated income statement.

Any goodwill or fair value adjustments to the carrying amounts of assets and liabilities arising on acquisition are

treated as assets and liabilities of the respective subsidiaries and translated at the rate of exchange ruling on the

reporting date.

Taxation

National Labour Support Tax (NLST)

The Bank calculates the NLST in accordance with Law No. 19 of 2000 and the Ministry of Finance Resolutions

No. 24 of 2006 at 2.5% of taxable profit for the year. As per law, cash dividends from listed companies which are

subjected to NLST have been deducted from the profit for the year.

Kuwait Foundation for the Advancement of Sciences (KFAS)

The Bank calculates the contribution to KFAS at 1% of profit for the year, in accordance with the modified

calculation based on the Foundation’s Board of Directors resolution, which states that the Board of Directors’

remuneration and transfer to statutory reserve should be excluded from profit for the year when determining the

contribution.

Zakat

Contribution to Zakat is calculated at 1% of the profit of the Bank in accordance with Law No. 46 of 2006 and the

Ministry of Finance resolution No. 58/2007 effective from 10 December 2007.

Taxation on overseas subsidiaries

Taxation on overseas subsidiaries is calculated on the basis of the tax rates applicable and prescribed according to

the prevailing laws, regulations and instructions of the countries where these subsidiaries operate. Income tax

payable on taxable profit (‘current tax’) is recognised as an expense in the period in which the profits arise in

accordance with the fiscal regulations of the respective countries in which the Group operates. Deferred tax assets

are recognised for deductible temporary differences, carry forward of unused tax credits and unused tax losses, to

the extent it is probable that future taxable profits will be available to utilise this. Deferred tax liabilities are

recognised for taxable temporary differences. Deferred tax assets and liabilities are measured using tax rates and

applicable legislation at the reporting date.

Segment information

A segment is a distinguishable component of the Group that engages in business activities from which it earns

revenue and incurs costs. The operating segments are used by the management of the Bank to allocate resources

and assess performance. Operating segments exhibiting similar economic characteristics, product and services,

class of customers where appropriate are aggregated and reported as reportable segments.

BURGAN BANK GROUP


At 31 December 2012

22


Contingencies

Contingent assets are not recognised in the consolidated financial statements, but are disclosed when an inflow of

economic benefit is probable.

Contingent liabilities are not recognised in the consolidated financial statements, but are disclosed unless the

possibility of an outflow of resources embodying economic benefit is remote.

Fiduciary assets

Assets and related deposits held in trust or in a fiduciary capacity are not treated as assets or liabilities of the

Group and accordingly are not included in the consolidated statement of financial position.

Significant accounting judgments, estimates and assumptions

The preparation of the Group’s consolidated financial statements requires management to make judgements,

estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the

accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions

and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or

liabilities affected in future periods.

Judgements In the process of applying the Group’s accounting policies, management has made the following judgements,

apart from those involving estimations, which have the most significant effect on the amounts recognised in the

consolidated financial statements:

Classification of financial assets

On acquisition of financial assets, management decides whether it should be classified as investments at fair value

through profit or loss or investments available for sale or loans and receivables.

Impairment of financial assets available for sale

The Group treats available for sale equity investments as impaired when there has been a significant or prolonged

decline in the fair value below its cost or where other objective evidence of impairment exists. The determination

of what is “significant” or “prolonged” requires considerable judgement. In making this judgement, the Group

evaluates, among other factors, historical share price movements and duration and extent to which the fair value of

an investment is less than its cost

Deferred tax assets

Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that future taxable profits

will be available against which the losses can be utilised. Judgment is required to determine the amount of

deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together

with future tax planning strategies.

Estimation uncertainty and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date,

that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within

the next financial year are discussed below. The Group 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 Group. Such changes are reflected in the assumptions when they occur:

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the

value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires

the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose

a suitable discount rate in order to calculate the present value of those cash flows.

Fair values of assets and liabilities including intangible assets

Considerable judgement by management is required in the estimation of the fair value of the assets including

intangible assets with finite useful life, liabilities and contingent liabilities acquired.

Impairment losses on loans and advances

The Group reviews its loans and advances on a quarterly basis to assess whether a provision for impairment

should be recorded in the consolidated income statement. In particular, considerable judgement by management is

required in the estimation of the amount and timing of future cash flows when determining the level of provisions

required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of

judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.

BURGAN BANK GROUP


At 31 December 2012

23


Significant accounting judgments, estimates and assumptions (continued)

Estimation uncertainty and assumptions (continued)

Valuation of unquoted equity investments and derivatives

Fair valuation of unquoted equity investments and derivatives is normally based on one of the following:

recent arm’s length market transactions;

current fair value of another instrument that is substantially the same;

the expected cash flows discounted at current rates applicable for items with similar terms and risk

characteristics and

other valuation models.

The determination of the cash flows and discount factors for unquoted equity financial assets requires significant

estimation.

3. CASH AND CASH EQUIVALENTS

2012

KD 000’s

2011

KD 000’s

Cash on hand and in current account with banks and OFIs 400,172 329,234

Balances with the CBK 807 776

Due from banks and OFIs maturing within thirty days 386,489 237,342 ───────── ─────────

787,468 567,352 ═════════ ═════════

4. DUE FROM BANKS AND OTHER FINANCIAL INSTITUTIONS

2012

KD 000’s

2011

KD 000’s

Banks 524,522 659,361

OFIs 144,583 245,968 ────────── ──────────

Less: 669,105 905,329

Provision for impairment (note 5) (58,325) (62,153) ────────── ──────────

610,780 843,176 ══════════ ══════════

5. LOANS AND ADVANCES TO CUSTOMERS

a) Balances

2012

KD 000’s

2011

KD 000’s

Corporate 3,052,462 1,920,440

Retail 445,592 427,316 ───────── ─────────

Less: 3,498,054 2,347,756

Provision for impairment (113,648) (95,408) ───────── ─────────

3,384,406 2,252,348 ═════════ ═════════

BURGAN BANK GROUP


At 31 December 2012

24

5. LOANS AND ADVANCES TO CUSTOMERS (continued)

b) Provision for impairment

Banks

and OFIs Corporate Retail Total

KD 000's KD 000's KD 000's KD 000's

At 1 January 2012 62,177 83,360 30,815 176,352

On acquisition of a subsidiary - 24,507 668 25,175

Exchange adjustment 42 (17) 32 57

Amounts written off (18,585) (9,190) (15,533) (43,308)

Charged to income statement 14,914 19,522 1,657 36,093 ───────── ───────── ───────── ─────────

At 31 December 2012 58,548 118,182 17,639 194,369 ═════════ ═════════ ═════════ ═════════

Banks

and OFIs Corporate Retail Total

KD 000's KD 000's KD 000's KD 000's

At 1 January 2011 51,077 90,780 30,531 172,388

Exchange adjustment (26) (430) (49) (505)

Amounts written off (873) (22,918) (862) (24,653)

Charged to income statement 11,999 15,928 1,195 29,122 ───────── ───────── ───────── ─────────

At 31 December 2011 62,177 83,360 30,815 176,352 ═════════ ═════════ ═════════ ═════════

Provision for impairment includes KD 22,396 thousand (31 December 2011: KD 18,791 thousand) including

provision on OFI’s amounting to KD 223 thousand (31 December 2011: KD 24 thousand), being provision for

non-cash facilities reported under other liabilities (note 11)

The impairment provision for credit facilities complies in all material respects with the specific provision

requirements of the CBK and IFRS. In March 2007, the CBK issued a circular amending the basis of making

minimum general provisions on facilities changing the rate from 2% to 1% for cash facilities and 0.5% for non

cash facilities. The revised rates are applied effective from 1 January 2007 on the net increase in facilities, net of

certain restricted categories of collateral during the reporting period. The general provision as of 31 December

2006 in excess of the present 1% for cash facilities and 0.5% for non cash facilities amounts to KD 16,154

thousand and is retained as a general provision until further directive from the CBK. Interest income on impaired

loans and advances is immaterial.

The analysis of the provision for impairment based on specific and general provision is as follows:

2012

KD 000’s

2011

KD 000’s

Specific provision 63,630 87,114

General provision 130,739 89,238 ───────── ─────────

194,369 176,352 ═════════ ═════════

Non-performing loans to customers:

2012

KD 000’s

2011

KD 000’s

Loans and advances to customers 247,294 270,364

Provisions 52,433 52,593

Collaterals 180,786 197,614

BURGAN BANK GROUP


At 31 December 2012

25

6. INVESTMENT SECURITIES

2012

KD 000’s

2011

KD 000’s

Financial assets at fair value through profit or loss

Investments held for trading

Debt securities

- Quoted investments 14,780 -

Equity securities

- Quoted investments 2,318 1,674

Investments designated at fair value through profit or loss

- Managed funds 60,922 -

────────── ──────────

Total financial assets at fair value through profit or loss 78,020 1,674 ────────── ──────────

Financial assets available for sale

Debt securities

- Quoted 114,882 40,781

- Unquoted 22,300 23,125 ────────── ──────────

137,182 63,906 ────────── ──────────

Equity securities

- Quoted 22,108 21,140

- Unquoted 59,905 54,273 ────────── ──────────

82,013 75,413 ────────── ──────────

Total financial assets available for sale 219,195 139,319 ────────── ──────────

Financial assets held to maturity

Debt securities

- Quoted 13,806 7,584

- Unquoted - 8 ────────── ──────────

Total financial assets held to maturity 13,806 7,592 ────────── ──────────

Total investment securities 311,021 148,585 ══════════ ══════════

All unquoted available for sale investments are recorded at fair value except for investments with a carrying value

of KD Nil (31 December 2011: KD 13,977 thousand), which are recorded at cost since fair value cannot be

reliably estimated.

7. OTHER ASSETS

2012

KD 000’s

2011

KD 000’s

Accrued interest receivable 47,569 26,227

Others * 106,487 73,309 ────────── ──────────

154,056 99,536 ══════════ ══════════

* The balance at 31 December 2012 includes assets pending sale amounting to KD 34,930 thousand (31

December 2011: KD 15,900 thousand) acquired in respect of part settlement of loans.

BURGAN BANK GROUP


At 31 December 2012

26

8. INTANGIBLE ASSETS

Goodwill

KD 000’s

Other

intangible

assets

KD 000’s

Total

KD 000’s

Cost

At 1 January 2012 85,027 103,720 188,747

Addition (note 9) - 8,995 8,995

Exchange adjustment 706 565 1,271

────── ────── ──────

At 31 December 2012 85,733 113,280 199,013

══════ ══════ ══════

Accumulated amortisation

At 1 January 2012 - 16,226 16,226

Charge for the year - 5,821 5,821

────── ────── ──────

At 31 December 2012 - 22,047 22,047

══════ ══════ ══════

Net book value

At 31 December 2011 85,027 87,494 172,521

══════ ══════ ══════

At 31 December 2012 85,733 91,233 176,966

══════ ══════ ══════

The carrying amount of other intangible assets represents banking license KD 72,695 thousand, customer

relationship KD 16,747 thousand and core customer deposits KD 1,791 thousand. (31 December 2011: banking

license KD 76,206 thousand, customer relationship KD 9,132 thousand and core customer deposits KD 2,156

thousand).

Impairment testing of goodwill

The carrying value of goodwill is tested for impairment on an annual basis (or more frequently if evidence exists

that goodwill might be impaired) by estimating the recoverable amount of the cash generating unit ("CGU") to

which these items are allocated using value-in-use calculations. The carrying amount of intangible assets allocated

to each CGU is disclosed under note 17. These calculations use pre-tax cash flow projections based on financial

budgets approved by management over a five years period and a relevant terminal growth rate of 4% to 7% (31

December 2011: 4% to 7%). These cash flows were then discounted using a pre-tax discount rate of 11% to 17%

31 December 2011: 11% to 17%) to derive a net present value which is compared to the carrying value. The

discount rate used is pre-tax and reflects specific risks relating to the relevant CGU. The Group has also

performed a sensitivity analysis by varying these input factors by a reasonable possible margin. Based on such

analysis, there are no indications that goodwill is impaired.

9. BUSINESS COMBINATION

On 21 December 2012, the Bank acquired equity interest of 99.26% in Eurobank Tekfen and the entity has

become subsidiary of the Group and has been consolidated from the date of exercise of control.

The consideration for the acquisition was paid based on the preliminary closing date Net Asset Value (“NAV”) as

of the closing date. Under the terms of the Share Purchase Agreement, a payment constituting an adjustment to the

consideration shall be made after the agreement or determination of the closing accounts NAV within a specified

timeframe. The consideration payable is subject to adjustments based on the outcome of the above.

Eurobank Tekfen is incorporated in Turkey and is operating under the supervision of Banking Regulation and

Supervision Agency (BRSA). The main activity of Eurobank Tekfen is Banking and related financial operations

in Turkey.

BURGAN BANK GROUP


At 31 December 2012

27

9. BUSINESS COMBINATION (continued)

Eurobank Tekfen has been consolidated based on the provisional values assigned to the identifiable assets and

liabilities as on the acquisition date and the management is in the process of determining the fair values of assets

acquired and liabilities assumed.

The Bank believes that with a wider footprint in the region, there are synergies arising from economies of scale

and leverage of operational excellence.

The consideration paid and the provisional values of the assets acquired and liabilities assumed, are equivalent to

their carrying values (other than intangible assets – see below), at the acquisition date, as well as the non

controlling interest’s proportionate share of the acquiree’s identifiable net assets in Eurobank Tekfen, are

summarised as follows:

Total

KD 000’s

Assets

Cash and cash equivalents 89,169

Loans and advances to customers 516,585

Investment securities 71,056

Other assets 24,866

Property and equipment 7,402

Other intangible assets (note 8) * 8,995 ─────── 718,073 ─────── Liabilities

Due to banks 49,234

Due to other financial institutions 352

Deposits from customers 506,472

Other borrowed funds 23,095

Other liabilities 26,738

─────── 605,891

─────── Net assets acquired 112,182

═══════

Consideration settled in cash 99,350

Consideration payable 7,395

Non controlling interests in the acquiree 830

─────── 107,575

Net assets acquired (112,182)

─────── Gain on bargain purchase** (4,607)

═══════

Consideration settled in cash (99,350)

Cash and cash equivalents in the subsidiary acquired 89,169

─────── Cash outflow on acquisition (10,181) ═══════

* Other intangible assets of ET represents customer relationship which has been assigned a provisional value. The

Bank is in the process of identification of other intangible assets and these are subject to change on the completion

of PPA exercise.

** Gain on bargain purchase of KD 4,607 thousand has been recognised in the consolidated income statement

under “Other income”.

BURGAN BANK GROUP


At 31 December 2012

28

9. BUSINESS COMBINATION (continued)

The gross amounts due under loans and advances is KD 538,715 thousand, of which KD 22,130 thousand is

expected to be uncollectible.

The consolidated income statement of the Group for the year ended 31 December 2012 does not include results of

the bank since it was acquired only on 21 December 2012 and the results for the period from the date of

acquisition upto 31 December 2012 is not material to the Group.

Had the acquisition of Eurobank Tekfen taken place at the beginning of the year, the operating income of the

Group for the period would have been increased by KD 40,924 thousand amounting to a total of KD 231,040

thousand and the profit attributable to the equity holders of the Bank would have been increased by KD 2,496

thousand amounting to a total of KD 58,096 thousand.

10. OTHER BORROWED FUNDS

Effective

interest rate

2012

KD 000’s

2011

KD 000’s

Subordinated notes* 8.125% 109,084 107,864

Subordinated bonds (Fixed tranch)** 5.650% 40,580 -

Subordinated bonds (Floating tranch capped at 6.650%)** CBK +3.9% 58,380 -

Other borrowings – subsidiaries 0.66% - 3.71% 22,941 - ────────── ──────────

230,985 107,864 ══════════ ══════════

* In 2010, Burgan Finance No. 1 (Jersey) Limited (incorporated with limited liability under the laws of the

Jersey), a special purpose entity established by the Bank, has issued US$ 400 million 7.875 per cent subordinated

notes due 2020 (the “Notes”) at a discounted price of 98.3 per cent of the principal amount. The Notes meet the

requirements to be treated as Tier II eligible capital under Basel II regulations issued by the CBK.

** During the year, the Bank issued KD 100 million bonds due 2022 (the “Subordinated bonds”) at the the

principal amount. The Bonds meet the requirements to be treated as Tier II eligible capital under Basel II

regulations issued by the CBK. The bonds are callable in whole, or, in part, at the option of the Bank after 5 years

from the date of the issuance (subject to certain conditions being satisfied and prior approval of the CBK) .

11. OTHER LIABILITIES

2012

KD 000’s

2011

KD 000’s

Accrued interest payable 34,110 20,633

Staff benefits 13,362 9,335

Provision for non-cash credit facilities (note 5) 22,396 18,791

Other balances 135,935 91,524 ────────── ──────────

205,803 140,283 ══════════ ══════════

BURGAN BANK GROUP


At 31 December 2012

29

12. EQUITY AND RESERVES

a) The authorised, issued and fully paid up share capital of the Bank comprises 1,544,967,180 shares (31

December 2011: 1,471,397,310 shares) of 100 fils each.

At the annual general meeting of the shareholders held on 12 March 2012, 5% bonus shares (2011: 5%

bonus shares) for the year ended 31 December 2011 was approved and issued. This resulted in an

increase in the number of authorised and issued shares by 73,569,870 shares (2011: 70,066,544 shares)

and share capital by KD 7,357 thousand (2011: KD 7,007 thousand).

b) The share premium and treasury shares reserve are not available for distribution.

c) The Commercial Companies Law and the Bank’s articles of association require that 10% of the profit for

the year attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS

and Zakat be transferred annually to statutory reserve. The Bank may resolve to discontinue such annual

transfers when the reserve equals 50% of paid up share capital. Distribution of statutory reserve is limited

to the amount required to enable the payment of dividend of 5% of share capital in years when

accumulated profits are not sufficient for the payment of a dividend of that amount.

d) The articles of association of the Bank requires an amount of not less than 10% of the profit for the year

attributable to equity holders of the Bank before Board of Directors remuneration, NLST, KFAS and

Zakat be transferred annually to the voluntary reserve. There is no restriction on distribution of this

reserve.

e) Treasury shares

2012 2011

Number of shares held 73,910,548 62,759,847 ══════════ ══════════

Percentage of shares held 4.78% 4.27% ══════════ ══════════

Market value KD 000’s 38,433 29,183 ══════════ ══════════

f) Proposed dividends

The Board of Directors has recommended to distribute cash dividend of 10 fils per share (2011: 10 fils)

and 5% bonus shares (2011: 5%) for the financial year ended 31 December 2012. Subject to being

approved at the annual general meeting ("AGM") of the shareholders, the cash dividend and bonus shares

shall be payable to shareholders registered in the Bank's records as of the AGM date.

13. FEE AND COMMISSION INCOME

Fee and commission income includes KD 1,063 thousand (31 December 2011: KD 1,124 thousand) being fee

income related to fiduciary activities.

14. NET INVESTMENT INCOME

2012

KD 000’s

2011

KD 000’s

Financial assets at fair value through profit or loss:

– net gain (loss) on investments held for trading 3 (298)

– net gain on investments designated at fair value through profit or

loss 1,151 -

───────── ─────────

1,154 (298)

Net gain from financial assets available for sale 863 6,537 ───────── ─────────

2,017 6,239 ═════════ ═════════

BURGAN BANK GROUP


At 31 December 2012

30

15. TAXATION

2012

KD 000’s

2011

KD 000’s

NLST 1,262 1,124

KFAS 443 389

Zakat 498 438

Taxation arising from overseas subidiaries 13,781 8,698 ────────── ──────────

15,984 10,649 ══════════ ══════════

Components of taxation arising from overseas subsidiary companies are as follows:

2012

KD 000’s

2011

KD 000’s

Current tax 15,085 10,576

Deferred tax (1,304) (1,878) ────────── ──────────

13,781 8,698 ══════════ ══════════

The tax rate applicable to the taxable subsidiary companies is in the range of 15% to 30% (2011: 15% to30%)

whereas the effective income tax rate for the year ended 31 December 2012 is in the range of 15% to 30% (2011:

15% to 30%). For the purpose of determining the taxable results for the year, the accounting profit of the overseas

subsidiary companies were adjusted for tax purposes. Adjustments for tax purposes include items relating to both

income and expense. The adjustments are based on the current understanding of the existing laws, regulations and

practices of each overseas subsidiary companies jurisdiction.

Deferred tax assets / liabilities are part of other assets / liabilities in the consolidated financial statements.

16. EARNINGS PER SHARE

Basic and diluted earnings per share is computed by dividing the profit for the year attributable to equity holders

of the Bank by the weighted average number of shares outstanding during the year less treasury shares.

The computation of basic and diluted earnings per share is as follows:

2012 2011

KD 000’s KD 000’s

(Restated)

Profit for the year attribuitable to equity holders of the Bank 55,600 50,562 ══════════ ══════════

Shares Shares

Weighted average number of outstanding shares, net of treasury shares 1,472,460,791 1,502,455,956 ────────── ──────────

Basic and diluted earnings per share (fils) 37.8 33.7 ══════════ ══════════

The basic and diluted earnings per share for the comparative year presented have been restated for the effect of

bonus shares issued on 12th

March 2012 (note 12).

BURGAN BANK GROUP


At 31 December 2012

31

17. SEGMENT INFORMATION

For management purposes, the Group organises its operations by geographic territory in the first instance,

primarily Domestic and International. All operations outside Kuwait are classified as International. Within its

domestic operations, the Group is organised into the following business segments.

Banking: incorporating private customer current account business current and savings accounts, deposits,

investment products, credit and debit cards, consumer and housing loans overdrafts, commercial loans

and other credit facilities

Treasury and investment banking: incorporating money market, foreign exchange, Treasury bills and

bonds and Central bank bonds, investments and fund management.

Executive Management monitors the operating results of its business units separately for the purpose of making

decisions about resource allocation and performance assessment. Segment performance is evaluated based on

segment result after provisions which in certain respects is measured differently from operating profit or loss in

the consolidated financial statements.

The table below presents income and results and certain assets and liabilities information regarding the Group’s

operating segments.

Kuwait Operations

International

Operations Group

Banking

KD 000’s

Treasury and

investment

banking

KD 000’s

Total

KD 000's

KD 000's

Total

KD 000’s

31 December 2012

Net interest income 55,710 8,447 64,157 54,783 118,940 ───────── ───────── ───────── ───────── ───────── Segment operating income 72,731 25,503 98,234 91,882 190,116 ───────── ───────── ───────── ───────── ───────── Depreciation and amortisation (1,576) (945) (2,521) (8,431) (10,952) ───────── ───────── ───────── ───────── ───────── Segment result before provisions 59,108 23,083 82,191 52,151 134,342

Provision for impairment of loans and

advances (4,414) (15,200) (19,614) (16,479) (36,093)

Provision for impairment of investment

securities - (12) (12) (4,009) (4,021) ───────── ───────── ───────── ───────── ───────── Segment result after provisions 54,694 7,871 62,565 31,663 94,228 ───────── ───────── ───────── ───────── ───────── Unallocated expenses (15,408) - (15,408) ───────── ───────── ───────── Profit for the year before taxation 47,157 31,663 78,820 ───────── ───────── ═════════

Total assets 2,091,002 1,275,208 3,366,210 2,610,474 5,976,684 ═════════ ═════════ ═════════ ═════════ ═════════ Total liabilities 1,691,919 1,679,086 3,371,005 1,985,786 5,356,791 ═════════ ═════════ ═════════ ═════════ ═════════ Intangible assets - - - 176,966 176,966 ═════════ ═════════ ═════════ ═════════ ═════════

BURGAN BANK GROUP


At 31 December 2012

32

17. SEGMENT INFORMATION (continued)

Kuwait Operations

International

Operations Group

Banking

KD 000’s

Treasury and

investment

banking

KD 000’s

Total

KD 000's

KD 000's

Total

KD 000’s

31 December 2011

Net interest income 49,910 7,965 57,875 46,702 104,577 ───────── ───────── ───────── ───────── ─────────

Segment operating income 67,713 19,979 87,692 75,689 163,381 ───────── ───────── ───────── ───────── ─────────

Depreciation and amortisation expenses (2,308) (361) (2,669) (8,614) (11,283) ───────── ───────── ───────── ───────── ─────────

Segment result before provisions 55,593 18,084 73,677 43,899 117,576

Write back of (provision for)

impairment of loans and advances 104 (11,941) (11,837) (17,285) (29,122)

(Provision for) write back of

impairment of investment securities - (4,630) (4,630) 105 (4,525) ───────── ───────── ───────── ───────── ─────────

Segment result after provisions 55,697 1,513 57,210 26,719 83,929 ───────── ───────── ───────── ───────── ─────────

Unallocated expenses (15,614) - (15,614) ───────── ───────── ─────────

Profit for the year before taxation 41,596 26,719 68,315 ───────── ───────── ═════════

Total assets 1,651,228 1,287,726 2,938,954 1,612,818 4,551,772 ═════════ ═════════ ═════════ ═════════ ═════════

Total liabilities 1,087,093 1,744,721 2,831,814 1,154,249 3,986,063 ═════════ ═════════ ═════════ ═════════ ═════════

Intangible assets - - - 172,521 172,521 ═════════ ═════════ ═════════ ═════════ ═════════

18. TRANSACTIONS WITH RELATED PARTIES

The Group has entered into transactions with certain related parties (parent company, directors and key

management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such

parties) who were customers of the Group during the year. The “Others” column in the table below mainly

represent transactions with entities that are either controlled or significantly influenced by the parent company.

The terms of these transactions are approved by the Group’s management. The balances and transactions are as

follows:

BURGAN BANK GROUP


At 31 December 2012

33

18. TRANSACTIONS WITH RELATED PARTIES (continued)

Parent

company

KD 000's

Others

KD 000's

2012

KD 000s

2011

KD 000s

Due from banks and other financial institutions - 106,926 106,926 216,103

Loans and advances to customers - 322,092 322,092 163,045

Investment securities 4,147 36,614 40,761 41,507

Investment securities managed by a related party* - 64,705 64,705 5,175

Due to banks - 7,177 7,177 2,949

Due to other financial institutions - 25,121 25,121 36,330

Deposits from customers 3,543 50,046 53,589 51,020

Contingent liabilities and commitments

Letters of credit - 1,706 1,706 1,536

Letters of guarantee - 8,018 8,018 11,349

Transactions

Interest income 85 19,073 19,158 15,167

Interest expense 715 688 1,403 1,633

Fee and commission income 30 2,402 2,432 1,154

Fee and commission expense - 294 294 235

Dividend income 87 334 421 968

No. of Board members or

executive staff

2012

KD 000’s

2011

KD 000’s

Board members

Loans and advances to customers 1 450 300

Deposits from customers 8 1,581 1,833

Executive staff

Loans and advances to customers 18 478 335

Deposits from customers 34 1,383 1,360

Letters of guarantee 1 1 1

* During the year the Bank acquired a Private Equity Portfolio from a related party for KD 59,120 thousand.

Key management compensation

Remuneration paid or accrued in relation to “key management” (deemed for this purpose to comprise Directors in

relation to their committee service, the Chief Executive Officer and other Senior Officers) was as follows:

2012 2011

KD 000’s KD 000’s

Short term employee benefits – including salary and bonus 3,637 3,062

Accrual for end of service indemnity 348 374

Accrual for cost of long term incentive rights 493 290 ───────── ───────── 4,478 3,726

═════════ ═════════

BURGAN BANK GROUP


At 31 December 2012

34

19. COMMITMENTS AND CONTINGENT LIABILITIES

2012

KD 000’s

2011

KD 000’s

Acceptances 46,077 33,369

Letters of credit 379,150 246,929

Letters of guarantee 684,127 538,421

Undrawn lines of credit 216,284 168,634

Other commitments 53,935 - ────────── ──────────

1,379,573 987,353 ══════════ ══════════

The primary purpose of these instruments is to ensure that funds are available to customers as required.

Acceptances, standby letters of credit and guarantees, which represent irrevocable assurances that the Group will

make payments in the event that the customer cannot meet its obligations to third parties, carry the same credit risk

as loans. Documentary and commercial letters of credit, which are undertaken by the Group on behalf of the

customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and

conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less

risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend cash credit. With respect to

credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the

total unused commitments. However, the likely amount of loss is less than the total unused commitments since

most of these commitments will expire or terminate without being funded.

The Group makes available to its customers guarantees which may require that the Group makes payments on

their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose

the Group to similar risks to loans and these are mitigated by the same control processes and policies.

20. DERIVATIVE FINANCIAL INSTRUMENTS

In the ordinary course of business the Group enters into various types of transactions that involve derivative

financial instruments.

Derivatives are carried at fair value. Positive fair value represents the cost of replacing all derivative transactions

with a fair value in the Groups’ favour had the rights and obligations arising from that derivative instrument been

closed in an orderly market transaction at the reporting date. Credit risk in respect of derivative financial

instruments is limited to the positive fair value of instruments. Negative fair value represents the cost to the

Groups’ counter parties of replacing all their transactions with the Group.

The Group deals in forward foreign exchange contracts, swaps and options for customers and to manage its

foreign currency positions and cash flows.

The table below shows the fair value of derivative financial instruments, recorded as assets or liabilities, together

with their notional amounts analysed by the terms of maturity. The notional amount, recorded gross, is the amount

of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of

derivatives are measured. The notional amounts indicate the volume of transactions outstanding at the year end

and are indicative of neither the market risk nor the credit risk. The credit risk exposure is managed as part of the

overall borrowers lending limits, together with potential exposures from market movements.

Derivatives held for trading Derivative transactions for customers and derivatives used for hedging purpose but which do not meet the

qualifying criteria for hedge accounting are classified as ‘Derivatives held for trading’. The risk exposures on

account of derivative transactions for customers are covered by entering in to similar transactions with counter

parties or by other risk mitigating transactions.

BURGAN BANK GROUP


At 31 December 2012

35

20. DERIVATIVE FINANCIAL INSTRUMENTS (continued)

Forward foreign exchange contracts

Forward foreign exchange contracts are contractual agreements to either buy or sell a specified currency, at a

specific price and date in the future, and are customised contracts transacted in the over-the-counter market.

Options

Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or

sell a specified amount of a financial instrument at a fixed price, either at a fixed future date or at any time within

a specified period.

The Group purchases and sells options through regulated exchanges and in the over–the–counter markets. Options

purchased by the Bank provide the Group with the opportunity to purchase (call options) or sell (put options) the

underlying asset at an agreed–upon value either on or before the expiration of the option. The Group is exposed to

credit risk on purchased options only to the extent of their carrying amount, which is their fair value.

Options written by the Group provide the purchaser the opportunity to purchase from or sell to the Bank the

underlying asset at an agreed–upon value either on or before the expiration of the option.

Swaps

Swaps are contractual agreements between two parties to exchange streams of payments over time based on

specified notional amounts, in relation to movements in a specified underlying index such as an interest rate,

foreign currency rate or equity index.

Interest rate swaps relate to contracts taken out by the Bank with other financial institutions in which the Group

either receives or pays a floating rate of interest, respectively, in return for paying or receiving a fixed rate of

interest. The payment flows are usually netted against each other, with the difference being paid by one party to

the other.

In a currency swap, the Group pays a specified amount in one currency and receives a specified amount in another

currency. Currency swaps are mostly gross–settled.

Notional amount

31 December 2012

Positive fair

value

Negative fair

value

Within 1

year

Over 1

year Total KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s

Derivatives held for trading:

(non-qualifying hedges)

Forward swaps/ foreign exchange

contracts 1,048 (1,627)

131,850 1,034 132,884

Interest rate swaps 812 (479) 7,366 40,664 48,030

Options 1,570 (1,570) 223,339 12,941 236,280 ═════════ ═════════ ═════════ ═════════ ═════════

Notional amount

31 December 2011

Positive fair

value

Negative fair

value

Within 1

year

Over 1

year Total

KD 000’s KD 000’s KD 000’s KD 000’s KD 000’s

Derivatives held for trading:

(non-qualifying hedges)

Forward swaps/ foreign exchange

contracts 105 (56) 21,447 - 21,447 ═════════ ═════════ ═════════ ═════════ ═════════

BURGAN BANK GROUP


At 31 December 2012

36

21. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable,

willing parties in an arm’s length transaction. Financial instruments comprise of financial assets and financial

liabilities.

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by

valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are

observable, either directly or indirectly; and

Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based on

observable market data.

Fair values of all financial instruments, except for certain available for sale investments which are carried at cost

less impairment (Note 6) are not materially different from their carrying values. For financial assets and financial

liabilities that are liquid or having a short-term maturity (less than three months) it is assumed that the carrying

amounts approximate to their fair value. This assumption is also applied to demand deposits, savings accounts

without a specific maturity and variable rate financial instruments.

At 31 December 2012 Level 1 Level 2 Level 3 Total

KD ′000 KD ′000 KD ′000 KD ′000

Financial assets

Financial assets at fair value through

profit or loss:

Financial assets held for trading :

Equity securities 2,318 - - 2,318

Debt securities 14,780 - - 14,780

Derivative financial instuments:

- Forward swaps/foreign exchange

contracts - 1,048 - 1,048

- Interest rate swaps - 812 - 812

- Options - 1,570 - 1,570

Financial assets designated at fair value

through profit or loss :

Managed funds 4,503 - 56,419 60,922

Financial assets available for sale :

Equity securities 22,108 59,905 - 82,013

Debt securities 114,882 - 22,300 137,182

Financial liabilities

Financial liabilites at fair value

through profit or loss:



contracts - 1,627 - 1,627

- Interest rate swaps - 479 - 479

- Options - 1,570 - 1,570

BURGAN BANK GROUP


At 31 December 2012

37

21. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

At 31 December 2011 Level 1 Level 2 Level 3 Total

KD ′000 KD ′000 KD ′000 KD ′000

Financial assets

Financial assets at fair value through

profit or loss:

Financial assets held for trading :

Derivative financial assets

Equity securities 1,674 - - 1,674



contracts - 105 - 105

Financial assets available for sale :

Equity securities 21,140 40,296 - 61,436

Debt securities 40,781 - 23,125 63,906


Financial liabilites at fair value

through profit or loss:



contracts - 56 - 56

During the year ended 31 December 2012, there were no transfer between level 1, level 2 and level 3.

22. FIDUCIARY ASSETS

The Group manages investment funds on behalf of customers with net asset value of KD 94,003 thousand (31

December 2011: KD 90,993 thousand).

23. RISK MANAGEMENT

INTRODUCTION

Monitoring and controlling risks is primarily performed based on limits established by the Group. These limits

reflect the business strategy and market environment of the Group as well as the level of risk that the Group is

willing to accept, with additional emphasis on selected geographic and industrial sectors. In addition, the Group

monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk

types and activities.

The operations of certain subsidiaries are also subject to regulatory requirements within the jurisdictions where it

operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain

restrictive provisions (e.g. capital adequacy) to minimise the risk of default and insolvency on the part of the

banking and insurance companies to meet unforeseen liabilities as these arise.

As part of its overall risk management, the Group uses derivatives and other instruments to manage exposures

resulting from changes in interest rates and foreign currency transactions.

The risk profile is assessed before entering into hedge transactions, which are authorised by the appropriate level

of seniority within the Group.

BURGAN BANK GROUP


At 31 December 2012

38

23. RISK MANAGEMENT (continued)

A. CREDIT RISK

The Group classifies the risks faced as part of its day to day activities into certain categories of risks and

accordingly specific responsibilities have been given to various officers for the identification, measurement,

control and reporting of these identified families of risks. The categories of risks are:

A. Risks arising from financial instruments:

i. Credit risk which includes default risk of clients and counterparties

ii. Market risk which includes interest rate, foreign exchange and equity price risks and

iii. Liquidity risk

B. Other risks

i. Operational risk which includes risks due to operational failures

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. The Group structures the

levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or

group of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and

are subject to regular review. Limits on the level of credit risk by product, industry sector and by country are

approved by the Board.

The exposure to any one borrower, including Banks and OFIs is further restricted by sub limits covering items on

statement of financial position and commitments and contingent liabilities exposures and daily delivery risk limits

in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are

monitored daily. The Group has a well documented credit policy that complies with CBK regulations and defines

the appetite of the Group for assumption of risks in its various business groups.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to

meet interest and capital repayment obligations and by changing lending limits where appropriate. Exposure to

credit risk is also managed in part by obtaining collateral and corporate and personal guarantees.

Credit risk arising from derivative financial instruments is limited to those with positive fair values, recorded in

the consolidated statement of financial position.

Maximum exposure to credit risk:

The table below shows the maximum exposure to credit risk across financial assets before and after taking into

consideration the effect of any collateral and other credit enhancements i.e. credit risk mitigation.

2012

KD 000’s

2011

KD 000’s

Cash and cash equivalents 714,194 487,836

Treasury bills and bonds with CBK and others 483,588 419,079

Due from banks and other financial institutions 610,780 843,176

Loans and advances to customers 3,384,406 2,252,348

Investments securities 165,768 71,498

Other assets 47,569 26,227 ───────── ─────────

Total 5,406,305 4,100,164 ───────── ─────────

Commitments and contingent liabilities 1,379,573 987,353 ───────── ─────────

Maximum credit risk exposure before consideration of credit risk mitigation 6,785,878 5,087,517 ═════════ ═════════

The exposures set above, are based on net carrying amounts as reported in the consolidated statement of financial

position, except for commitments and contingent liabilities.

BURGAN BANK GROUP


At 31 December 2012

39


A. CREDIT RISK (continued)

Collateral and Credit risk mitigation techniques

The amount, type and valuation of collateral are based on guidelines specified in the risk management framework.

The main types of collaterals accepted include real estate and marketable securities. The revaluation and custody

of collaterals are performed independent of the business units.

The main credit risk mitigation techniques applied by the Group are based on eligible collaterals. The Group’s

management monitors the market value of collateral, requests additional collateral in accordance with the

underlying agreement, and monitors the market value of the collateral at regular intervals in line with regulatory

guidelines.

For further details regarding the Group’s use of credit risk mitigation techniques, and collateral policy, refer to

Basel II – Pillar 3 Disclosures (Item 7) under the risk management section of the annual report.

Credit risk concentration The top 10 largest exposures outstanding as a percentage of gross loans and advances to customers at 31

December 2012 is 16% (31 December 2011: 17%).

The concentration across classes within loans and advances to customers, which form the significant portion of

assets subject to credit risk, is given in note 5.

The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral

held or credit enhancements can be analysed by the following geographic regions:

2012 2011

Assets

KD 000s

Commitments

and contingent

liabilities

KD 000s

Total

KD 000s

Assets

KD 000s

Commitments

and contingent

liabilities

KD 000s

Total

KD 000s

Kuwait 2,813,321 629,960 3,443,281 2,350,388 630,018 2,980,406

Other middle east 1,094,284 182,094 1,276,378 1,034,357 179,904 1,214,261

Europe 898,068 266,189 1,164,257 174,443 12,548 186,991

Rest of world 600,632 301,330 901,962 540,976 164,883 705,859

─────── ─────── ─────── ─────── ─────── ─────── 5,406,305 1,379,573 6,785,878 4,100,164 987,353 5,087,517

═══════ ═══════ ═══════ ═══════ ═══════ ═══════

The Group’s financial assets and commitments and contingent liabilities, before taking into account any collateral

held or credit enhancements can be analysed by the following industry sectors:

2012

KD 000’s

2011

KD 000’s

Industry sector

Sovereign 955,358 601,658

Banking 1,048,470 1,058,181

Investment 205,717 225,098

Trade and commerce 799,005 565,953

Real estate 747,061 675,291

Personal 894,265 768,722

Manufacturing 470,332 313,326

Construction 540,843 370,124

Others 1,124,827 509,164 ───────── ─────────

6,785,878 5,087,517 ═════════ ═════════

BURGAN BANK GROUP


At 31 December 2012

40



Credit quality per class of financial assets

The credit quality of financial assets are summarised by reference to public ratings given to the

clients/counterparties by recognised and approved External Credit Assessment Institutions (ECAIs) namely

Moody’s, Standard and Poor’s and Fitch. Based on the rating systems as declared by the ECAIs, the ratings are

classified into Investment Grade and Non-Investment Grade ratings. Those who are not rated by any of these

three ECAIs are considered to be unrated. In order to ensure that the ratings are not considered selectively, if a

current rating from one of these ECAIs available in respect of any client/counterparty, it is always taken into

account and in such cases, the client/counterparty is not considered as unrated.

For further details regarding the Group’s credit risk management policy please refer to Basel II – Pillar 3

Disclosures (Item 6-iii) under the risk management section of the annual report.

a) Financial assets neither past due nor impaired

2012

Rated Unrated Total

Investment

grade

Non investment

grade

KD 000’s KD 000’s KD 000’s KD 000’s

Sovereigns 530,739 - 282,782 813,521

Banks and OFIs 608,414 54,813 331,349 994,576

Corporates - 3,823 2,617,107 2,620,930

Retail - 778 396,452 397,230

Other credit exposures - - 213,339 213,339 ─────── ─────── ─────── ───────

1,139,153 59,414 3,841,029 5,039,596 ═══════ ═══════ ═══════ ═══════

2011

Rated Unrated Total

Investment

grade

Non investment

grade

KD 000’s KD 000’s KD 000’s KD 000’s

Sovereigns 498,555 - 103,103 601,658

Banks and OFIs 560,332 196,534 343,588 1,100,454

Corporates - - 1,554,022 1,554,022

Retail - - 372,702 372,702

Other credit exposures - - 97,725 97,725 ─────── ─────── ─────── ─────── 1,058,887 196,534 2,471,140 3,726,561 ═══════ ═══════ ═══════ ═══════

b) Financial assets past due but not impaired

For credit risk related exposures, a past due exposure is considered to be one where the client or counterparty has

failed to meet his contractual obligation to the Group towards payment of the interest or the principal or a part

thereof on the date on which such payment is due.

2012 2011

1 to 45

days

45 to 90

days Total

1 to 45

days

45 to 90

days Total

KD000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs - - - - - -

Corporates 118,195 28,523 146,718 82,552 6,726 89,278

Retail 12,456 12,211 24,667 9,999 8,576 18,575 ─────── ─────── ─────── ─────── ─────── ───────

130,651 40,734 171,385 92,551 15,302 107,853 ═══════ ═══════ ═══════ ═══════ ═══════ ═══════

Fair value of collateral held 51,529 1,549 53,078 69,399 727 70,126

BURGAN BANK GROUP


At 31 December 2012

41



Credit quality per class of financial assets (continued)

c) Impaired financial assets

The Group considers an asset to be impaired if the realisable value of the asset is less than the value at which it is

carried in the books of the Group before it considers the necessity of making a specific provision for the same.

2012 2011

Total Provision

Fair value of

collateral

held Total Provision

Fair value of

collateral

held

KD 000's KD 000's KD 000's KD 000's KD 000's KD 000's

Banks and OFIs 2,298 1,835 - 73,356 25,377 18,259

Corporates 235,729 48,836 175,715 244,023 34,828 191,743

Retail 11,565 3,597 5,071 26,341 17,765 5,871 ────── ────── ────── ────── ────── ──────

249,592 54,268 180,786 343,720 77,970 215,873 ══════ ══════ ══════ ══════ ══════ ══════

B. MARKET RISK

Market risk is the risk that the value of an asset will fluctuate as a result of changes in market variables such as

interest rates, foreign exchange rates, and equity prices, whether those changes are caused by factors specific to

the individual investment or its issuer or factors affecting all financial assets traded in the market.

Market risk is managed on the basis of pre-determined asset allocations across various asset categories,

diversification of assets in terms of geographical distribution and industry concentration, a continuous appraisal of

market conditions and trends and management’s estimate of long and short term changes in fair value.

Interest rate risk

Interest rate risk arises from the possibility that changes in interest rates will affect the fair value or cash flows of

the financial instruments. The Group takes on exposure to the effects of fluctuations in the prevailing levels of

market interest rates on its financial position and cash flows. This arises as a result of mismatches or gaps in the

amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The

Group manages this risk by matching the repricing of assets and liabilities through risk management strategies.

The Group is exposed to interest rate risk on its interest bearing assets and liabilities (treasury bills and bonds with

CBK and others, due from banks and other financial institutions, loans and advances to customers, due to banks,

due to other financial institutions, deposits from customers and other borrowed funds).

The table below summarises the effect on net interest income as a result of the changes in interest rate:

2012 2011

KD 000’s KD 000’s

Increase in interest rate "Basis Points"

50 3,854 3,451

100 7,727 6,434

Decrease in interest rate “Basis Points”

50 (2,920) (3,262)

100 (6,002) (6,192)

BURGAN BANK GROUP


At 31 December 2012

42


B. MARKET RISK (continued)

Currency risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange

rates. The Group takes on exposure to effects of fluctuations in the prevailing 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.

The Group had the following net exposures in foreign currencies:

2012 2011

KD 000’s KD 000’s

Long/(short) Long/(short)

US Dollar 13,642 (14,234)

Euro 68 191

Japenese Yen (5) (10)

Saudi Riyal 189 552

UAE Dirham 637 904

Others 510 4,483

The Group conducts multiple sensitivity analysis scenarios on regular intervals in order to assess the potential impact

of any major fluctuation in exchange rates of major currencies against the KD or functional currency of the entity

within the Group. Based on the results of the analysis conducted there are no material implication over the Group’s

foreign exchange income or other comprehensive income for a 1% fluctuation in the major currencies exchange rates.

Equity price risk

Equity price risk is the risk that the fair values of equities will fluctuate as a result of changes in the level of equity

indices or the value of individual share prices. Equity price risk arises from the change in fair values of equity

investments. The Group manages this risk through diversification of investments in terms of geographical

distribution and industry concentration. The majority of the Group’s quoted investments are listed on the regional

Stock Exchanges.

The Group conducts sensitivity analysis on regular intervals in order to assess the potential impact of any major

changes in fair value of equity instruments. Based on the results of the analysis conducted there are no material

implication over the Group’s profit or other comprehensive income for a 1% fluctuation in major stock exchanges.

Prepayment risk

Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties

repay or request repayment earlier than expected, such as fixed rate mortgages when interest rate fall. The fixed

rate assets of the Group are not significant compared to the total assets. Moreover, other market conditions

causing prepayment is not significant in the markets in which the Group operates. Therefore the Group considers

the effect of prepayment on net interest income is not material after taking in to account the effect of any

prepayment penalties.

BURGAN BANK GROUP


At 31 December 2012

43


C. LIQUIDITY RISK

Liquidity risk is the risk that the Group will be unable to meet its liabilities when they fall due. The Group is

exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits,

loan draw downs, guarantees. To limit this risk, the Group manages assets with liquidity in mind and monitors

liquidity on a daily basis.

The table below shows an analysis of financial liabilities and contingent liabilities and commitments based on the

remaining undiscounted contractual maturities:

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 2012


Due to banks 270,137 38,338 11,387 10,676 330,538

Due to other financial institutions 172,199 88,171 238,145 226,965 725,480

Deposits from customers 3,093,337 353,881 357,136 176,814 3,981,168

Other borrowed funds - 9,821 9,804 341,226 360,851

Other liabilities* 71,950 28,100 53,184 52,569 205,803 ───────── ───────── ───────── ───────── ─────────

3,607,623 518,311 669,656 808,250 5,603,840 ═════════ ═════════ ═════════ ═════════ ═════════

Contingent liabilities and

commitments 626,430 166,300 272,338 314,505 1,379,573 ═════════ ═════════ ═════════ ═════════ ═════════

Up to 3 months

KD 000’s

3 – 6 months

KD 000’s

6 – 12 months

KD 000’s

More than 12 months KD 000’s

Total

KD 000’s 2011


Due to banks 273,735 3,588 14,587 - 291,910



Other borrowed funds 2,194 - 4,387 179,155 185,736

Other liabilities* 121,683 8,891 4,398 5,311 140,283 ───────── ───────── ───────── ───────── ─────────

2,679,420 382,732 543,646 491,766 4,097,564 ═════════ ═════════ ═════════ ═════════ ═════════

Contingent liabilities and

commitments 446,998 138,950 244,736 156,669 987,353 ═════════ ═════════ ═════════ ═════════ ═════════

* Other liabilities includes negative fair value of derivative financial liabilities (note 20).

BURGAN BANK GROUP


At 31 December 2012

44


C. LIQUIDITY RISK (continued)

The table below summarises the maturity profile of the Group’s assets and liabilities. The maturities of assets and

liabilities have been determined according to when they are expected to be recovered or settled. The maturity

profile for financial assets at fair value through profit or loss and financial assets available for sale is determined

based on management's estimate of liquidation of those financial assets. The actual maturities may differ from the

maturities shown below since borrowers may have the right to prepay obligations with or without prepayment

penalties.

Up to 3

months

KD 000s

3 – 6

months

KD 000s

6 – 12

months

KD 000s

More than

12 months

KD 000s

Total

KD 000s

2012

ASSETS

Cash and cash equivalents 787,468 - - - 787,468

Treasury bills and bonds with CBK and

others 241,521 124,749 79,793 37,525 483,588

Due from banks and other financial

institutions 370,526 92,185 59,911 88,158 610,780

Loans and advances to customers 1,164,216 388,634 339,256 1,492,300 3,384,406

Investment securities 120,998 3,406 3,978 182,639 311,021

Other assets 70,714 27,229 2,111 54,002 154,056

Property and equipment - - - 68,399 68,399

Intangible assets - - - 176,966 176,966 ──────── ──────── ──────── ──────── ────────

Total assets 2,755,443 636,203 485,049 2,099,989 5,976,684 ════════ ════════ ════════ ════════ ════════

LIABILITIES AND EQUITY

Due to banks 253,334 37,795 10,743 9,762 311,634



Other borrowed funds - 2,338 2,338 226,309 230,985

Other liabilities 71,950 28,100 53,184 52,569 205,803

Equity - - - 619,893 619,893 ──────── ──────── ──────── ──────── ────────

Total liabilities and equity 3,527,369 503,617 646,460 1,299,238 5,976,684 ════════ ════════ ════════ ════════ ════════

Net liquidity gap (771,926) 132,586 (161,411) 800,751 - ════════ ════════ ════════ ════════ ════════

BURGAN BANK GROUP


At 31 December 2012

45


C. LIQUIDITY RISK (continued)

Up to 3

months

KD 000s

3 – 6

months

KD 000s

6 – 12

months

KD 000s

More than

12 months

KD 000s

Total

KD 000s

2011

ASSETS

Cash and cash equivalents 567,352 - - - 567,352

Treasury bills and bonds with CBK and

others 163,513 126,510 91,818 37,238 419,079

Due from banks and other financial

institutions 422,213 110,271 89,472 221,220 843,176

Loans and advances to customers 810,629 313,936 294,963 832,820 2,252,348

Investment securities 17,489 3,350 4,897 122,849 148,585

Other assets 74,873 5,866 2,394 16,403 99,536

Property and equipment - - - 49,175 49,175

Intangible assets - - - 172,521 172,521 ──────── ──────── ──────── ──────── ────────

Total assets 2,056,069 559,933 483,544 1,452,226 4,551,772 ════════ ════════ ════════ ════════ ════════

LIABILITIES AND EQUITY

Due to banks 273,541 3,585 14,478 - 291,604



Other borrowed funds - - - 107,864 107,864

Other liabilities 121,683 8,891 4,398 5,311 140,283

Equity - - - 565,709 565,709 ──────── ──────── ──────── ──────── ────────

Total liabilities and equity 2,664,770 379,901 531,799 975,302 4,551,772 ════════ ════════ ════════ ════════ ════════

Net liquidity gap (608,701) 180,032 (48,255) 476,924 - ════════ ════════ ════════ ════════ ════════

D. OPERATIONAL RISK

Operational risk is the risk of loss arising from the failures in operational process, people and system that supports

operational processes. The Group has a set of policies and procedures, which are approved by the Board of

Directors and are applied to identify, assess and supervise operational risk in addition to other types of

risks relating to the banking and financial activities of the Group. Operational risk is managed by Risk

management. Risk management ensures compliance with policies and procedures to identify, assess, supervise

and monitor operational risk as part of overall Global risk management.

The Operational Risk management function of the Group is in line with the CBK instructions dated 14

November 1996, concerning the general guidelines for internal controls and the instructions dated 13 October

2003, regarding the sound practices for managing and supervising operational risks in banks.

24. CAPITAL MANAGEMENT

The primary objectives of the Group's capital management policy are to ensure that the group complies with

regulatory capital requirements and that the group maintains strong credit ratings and health capital ratios in order

to support its business and maximise shareholder value.

Capital adequacy and the use of regulatory capital are monitored regularly by the Group’s management and are

governed by guidelines of Basel Committee on Banking Supervision as adopted by the CBK.

BURGAN BANK GROUP


At 31 December 2012

46

24. CAPITAL MANAGEMENT (continued)

The Group’s regulatory capital and capital adequacy ratios are shown below:

2012 2011

KD 000s KD 000s

Risk weighted assets 4,003,762 2,985,083 ═════════ ═════════

Capital required 480,451 358,211 ═════════ ═════════

Capital available

Tier 1 capital 479,986 439,456

Tier 2 capital 261,894 146,475 ───────── ─────────

Total capital 741,880 585,931 ═════════ ═════════

Tier 1 capital adequacy ratio 12.0% 14.7%

Total capital adequacy ratio 18.5% 19.6%

Regulatory capital consists of Tier 1 capital, which comprises share capital, disclosed reserves and non-controlling

interests less treasury shares and goodwill. The other component of regulatory capital is Tier 2 capital, which

includes subordinated long term debt, available for sale reserve and general provisions. Certain adjustments are

made to regulatory capital as per CBK.

The disclosures relating to the Capital Adequacy Regulations issued by CBK as stipulated in CBK Circular

number 2/BS/184/2005 dated 21 December 2005, are included under the ‘Basel II – Pillar 3 discloures’ section of

the annual report.

consolidated financial statements 31 december 2012 · burgan bank group notes to the consolidated...

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