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
The attached notes 1 to 24 form an integral part of these consolidated financial statements.
5
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2012
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
The attached notes 1 to 24 form an integral part of these consolidated financial statements.
6
Consolidated Statement of Changes in Shareholders’ Equity
For the year ended 31 December 2012
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
The attached notes 1 to 24 form an integral part of these consolidated financial statements.
7
Consolidated Statement of Changes in Shareholders’ Equity (Continued)
For the year ended 31 December 2012
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
Share based compensation
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
The attached notes 1 to 24 form an integral part of these consolidated financial statements.
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
At 31 December 2012
11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
13
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
14
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
15
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
16
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
17
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
18
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
19
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
20
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Share based compensation
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
Notes to the Consolidated Financial Statements
At 31 December 2012
21
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
22
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
23
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
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:
Derivative financial instuments:
- Forward swaps/foreign exchange
contracts - 1,627 - 1,627
- Interest rate swaps - 479 - 479
- Options - 1,570 - 1,570
BURGAN BANK GROUP
Notes to the Consolidated Financial Statements
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
Derivative financial instuments:
- Forward swaps/foreign exchange
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 liabilities
Financial liabilites at fair value
through profit or loss:
Derivative financial instuments:
- Forward swaps/foreign exchange
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
Notes to the Consolidated Financial Statements
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
Notes to the Consolidated Financial Statements
At 31 December 2012
39
23. RISK MANAGEMENT (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
40
23. RISK MANAGEMENT (continued)
A. CREDIT RISK (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
41
23. RISK MANAGEMENT (continued)
A. CREDIT RISK (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
42
23. RISK MANAGEMENT (continued)
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
Notes to the Consolidated Financial Statements
At 31 December 2012
43
23. RISK MANAGEMENT (continued)
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
Financial liabilities
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
Financial liabilities
Due to banks 273,735 3,588 14,587 - 291,910
Due to other financial institutions 228,183 39,409 208,331 184,184 660,107
Deposits from customers 2,053,625 330,844 311,943 123,116 2,819,528
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
Notes to the Consolidated Financial Statements
At 31 December 2012
44
23. RISK MANAGEMENT (continued)
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
Due to other financial institutions 172,121 87,631 234,236 219,265 713,253
Deposits from customers 3,029,964 347,753 345,959 171,440 3,895,116
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
Notes to the Consolidated Financial Statements
At 31 December 2012
45
23. RISK MANAGEMENT (continued)
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
Due to other financial institutions 227,847 39,168 205,516 178,002 650,533
Deposits from customers 2,041,699 328,257 307,407 118,416 2,795,779
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
Notes to the Consolidated Financial Statements
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.