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Annual Report 2012

Overview

Introduction 1

Vision, Mission and Values 2

Message from the Board of Directors 3

Summary of Financial Performance 5

Global and Regional Economic Performance and Prospects 6

Board of Directors and Board Committees 11

Business Lines 16

Executive Management 18

Corporate Governance 20

Consolidated Financial Statements

Independent Auditors’ Report to the Shareholders 34

Consolidated Statement of Financial Position 35

Consolidated Statement of Comprehensive Income 36

Consolidated Statement of Changes in Equity 37

Consolidated Statement of Cash Flows 38

Notes to the Consolidated Financial Statements 39

Risk Report 2012 Plus Basel II – Including Pillar 3 Disclosures 64

2012 Annual Report Gulf One Investment Bank B.S.C.(c)1

INTRODUCTIONGulf One Investment Bank B.S.C.(c) , (Gulf One), is a leading knowledge based investment bank focused on providing professional and high-quality infrastructure related investments and opportunities for the MENA region. Opportunities are identified and developed through an independent approach based on knowledge, expert insight and innovative thought, which produces secured, ethical and profitable results for all stakeholders and brings meaningful contributions to society. Gulf One was founded in Manama, Kingdom of Bahrain in 2006 by Dr. Nahed M. Taher, Chief Executive Officer (CEO), and Mr. Ziyad F. Omar, Chief Invest-ment Officer (CIO).

Gulf One’s primary focus is on vital economic sectors including water, power, mining, transport and down-stream petrochemi-cals. Guided by Islamic principles, Gulf One’s products and services offer unique financial solutions custom tailored to unlock and build regional capacity. The Bank’s financial model is based on a complete alignment of interests with investors, demonstrating a transparent, long-term commitment to them.

Gulf One is an independent investment bank and exclusively focuses its core products and services on direct investments and infrastructure development projects. The aim of the Bank is to facilitate sustainable economic development and create wealth and prosperity in the region. With direct investments including transportation, clean energy generation, water treatment, aero-space, technology development and social infrastructure, Gulf One seeks to address the region’s critical needs by being a key catalytic facilitator in the development of domestic capacity infrastructure.

Gulf One’s lines of business comprise of Private Equity, Structured Finance, Advisory and Consultancy services. Gulf One has ex-panded its reach through the opening of offices in the Kingdom of Saudi Arabia (Gulf One Capital Company), the State of Kuwait (Gulf One Economic Consultancy) and Germany (Gulf One GmbH).

Headquartered in the Kingdom of Bahrain, Gulf One operates under a conventional wholesale banking license granted by the Central Bank of Bahrain (CBB), CR 62199, with a paid-up capital of USD 113,888,889.

Incorporation and Principal ActivityGulf One is a Bahraini Bank with limited liability and is incorporated in the Kingdom of Bahrain as a closed company. The Bank is licensed as a wholesale conventional bank by the Central Bank of Bahrain.

The registered office of the Bank is:Bahrain Financial Harbour, 15th Floor, West Tower, P.O. Box 11172, Manama, Kingdom of Bahrain Telephone : +973 17 102555Fax : +973 17 100063

The Bank along with its subsidiaries comprises “the Group” as follows: • Gulf One Capital Company, Saudi Arabia; 100% holding • Manjam Mining Holding SPC, Bahrain; 100% holding • Gulf One Employee Stockholding Company SPC, Bahrain; 100% holding • Gulf One DACH Investments Limited, Cayman Islands; 100% holding • Gulf One Investment Holdings Limited, Cayman Islands; 100% holding • Gulf One Economic Consultancy Co. S.A.K., Kuwait; 100% holding • Gulf One GmbH, Germany. 100% holding

Commercial Registration No. : 62199Website : www.gulf1bank.com Bankers : Ahli United Bank, Standard Chartered BankExternal Auditors : KPMG FakhroInternal Auditors : BDO Jawad HabibRegistrar : Fakhro Karvy Computershare W.L.L.

2012 Annual Report Gulf One Investment Bank B.S.C.(c) 2

VISION, MISSION AND VALUES

Our VisionTo be a leading knowledge-based infrastructure investment bank.

Our MissionTo mobilise local and global capital to accelerate the realisation of infrastructure projects and corporatisation through innovative financial solutions.

Our Fundamental Values • Independence • Alignment of interests for the investor and the bank • Build regional capacity

Gulf One is dedicated to providing exceptional and advanced investment and financial solutions through its knowledge-based approach, highly experienced team, extensive network of relationships across the region, and strong links to international partners.


MESSAGE FROM THE BOARD OF DIRECTORS

Dear Shareholders,Since its inception, Gulf One has focused its efforts on translating its vision and strategy into action. The Bank invested in various infrastructure and industrial sectors that have proven successful. Gulf One has also devised its own approach to value creation from investment selection to value delivery. In retrospect, the Bank now has a robust and proven model, which is ready to deploy into its next phase of growth.

In 2012, the pace of global economic expansion slowed due to the lingering Eurozone crisis and political wrangling over fiscal challenges in the US that weighed down on economic performance around the World. As a result, global real GDP increased by only 3.2% in 2012 compared with 3.9% in the previous year. Global economic outlook is expected to be a bit rosier in 2013 and 2014 as real GDP is projected to increase to 3.5% and 4.1%, respectively, on account of accelerated growth in the emerging economies and policy actions in the US and the Eurozone. Even so, the Eurozone crisis still poses significant downside risks to global economic prospects, as the region continues to grapple with high unemployment, austerity measures, and a weak finan-cial sector. These, along with budget consolidation efforts in the US, are likely to weaken demand for exports from the emerging economies.

The solid economic fundamentals of GCC countries helped cushion the adverse effects of recent external shocks. The overall GCC economy grew by 5.5% in 2012, albeit lower than the 7.5% achieved in the previous year. Growth was largely fuelled by higher oil prices as well as improved business climate which helped to boost private sector activity and non-oil GDP. Economies in the region are expected to grow moderately in the short-run due to projected lower oil prices, but they will remain buoyant and resilient supported by a healthy fiscal position, strong external reserves, and low inflationary pressures. Recently, many GCC countries boosted employment of nationals in the private sector. More progress is needed to reduce the unemployment rate and diversify the regional economy.

For Gulf One, 2012 has been a year of building and strengthening its delivery platform that will carry the Bank well into many years of future performance. Much like its industrial investments, Gulf One has to expand its own investment production capac-ity with increased reliability and sustainability.

The year marks several important milestones for Gulf One and its subsidiaries. In December 2012, Gulf One Capital Company, our Saudi subsidiary, received the regulator’s approval to commence its activities in Investment Management, Client Portfolio Management, Arranging, Advising and Custody. Gulf One Capital Company will cater to Saudi Arabia and focus on delivering solid growth in this fundamentally strong market.

In March 2012, Gulf One GmbH was established in Munich, Germany. Gulf One has invested in the DACH region (Germany, Austria and Switzerland) since 2007. Through its DACH Funds, the Bank has established important partnerships and relation-ships. The Munich office aims to build on the Bank’s presence and to fuel further growth in a region, which has demonstrated its strength and continues to offer opportunities within and in partnership with the rest of the world.

During 2012, Gulf One continued to improve its business processes with focus on its capacity for post acquisition management. The Bank completed its SAP implementation and enhanced its data and communications infrastructure. Gulf One recognises the importance of its capacity and business processes for delivering future growth and for discharging its role in infusing value for its investments.


Early in 2012, the Bank concluded an aircraft leasing transaction involving the purchase and lease of two aircrafts to a reputed European regional carrier. The transaction proved successful. Our Water Sector investment continued its solid growth in both the GCC and Asia. The company has been very successful in capturing long-term Public Private Partnership (PPP) projects that will deliver sustainable value in this vital sector. Our pharmaceuticals investment experienced significant growth while overcom-ing several challenges. During 2012, the company fortified its presence in the manufacture of veterinarian pharmaceuticals and entered into agricultural pesticide products and the manufacturing of bacterial vaccines. Its solid growth is taking the business to new performance heights.

The economic downturn of the Eurozone has had a negative impact on our investment in funds in the DACH region. We are satisfied with the quality and potential performance of our assets and we are taking concrete steps to enhance value for the portfolio companies.

In 2012, Gulf One returned to profitability. The Bank achieved a modest profit and continues on a solid path for improved per-formance. Over the last five years, Gulf One has achieved a cumulative first tier performance in Return on Assets and Equity (ROA and ROE). The Bank currently has USD 450 million of value under its management. Our investment portfolio has performed exceptionally well. Gulf One continues to have zero debt and a capital adequacy ratio scored of 54%, well over the 12% regula-tory minimum.

This strong position combined with its solid portfolio and business processes will propel Gulf One into its next phase of growth. The Bank has a continuing and growing pipeline of projects and investments in healthcare, clean energy, steel industry, trans-portation, mining and power. Gulf One is considering its options for increasing its base to capture its growth opportunities and boost the return to its investors and shareholders.

We recognise that the challenge of growth and success place great demands on our people and appreciate their team effort. We thank our Board members for their guidance and continued support. We acknowledge and appreciate our shareholders and investment partners whose support and synergy continue to contribute to our success.

Mr. Ali H. Alireza Dr. Nahed M. Taher Mr. Ziyad F. Omar Chairman Chief Executive Officer Chief Investment Officer


SUMMARY OF FINANCIAL PERFORMANCE 31 DECEMBER 2008 – 2012The key financial information and ratios from 31 December 2008 – 2012 are summarised as follows:

USD’000KEY FINANCIAL INFORMATION 2012 2011 2010 2009 2008

Earnings

Net Interest Income 872 1,257 1,452 1,728 3,605

Investment Income 7,910 3,828 19,180 12,398 5,200

Income from Investment Banking services 1,076 1,912 4,970 5,008 2,826

Other Income 554 (218) 609 252 28

Operating Expenses 9,700 11,508 16,091 12,885 8,416

Net Income 712 (4,729) 10,120 6,501 3,243

Financial Position Total Assets 130,000 140,839 143,307 124,958 111,240

Loans 6,350 12,104 11,709 3,586 9,069

Investments 91,626 80,256 77,708 56,438 29,081

Total Liabilities 3,933 15,552 6,336 11,331 5,928

Shareholder Equity 126,067 125,287 136,971 113,627 105,312

Financial Ratio’s

ROAE 0.57% (3.61)% 8.08% 6.20% 3.06%

ROAA 0.53% (3.33)% 7.54% 5.66% 2.27%

NIM 2.79% 3.18% 3.12% 2.68% 3.24%

Return on Investments 8.63% 4.77% 24.68% 21.97% 17.88%

Cost to Income 93.16% 169.76% 61.39% 66.47% 72.18%

Capital Shareholder Equity to Total Assets 96.67% 88.96% 95.58% 90.93% 94.67%

Total Liabilities to Shareholder’s Equity 3.12% 12.41% 4.63% 9.97% 5.63%


GLOBAL AND REGIONAL ECONOMIC PERFORMANCE AND PROSPECTS

Four years after the onset of the global financial crisis, the world in 2012 experienced much improved financial conditions, but unfortunately the improvements in the financial system did not fully filter through to the real productive sector as the overall performance of the world economy in that year was less sanguine than in the preceding two years. In fact, in the last quarter of 2012, the global economic landscape was largely dominated by disappointing outturns in major advanced countries with Japan and many economies in Europe, including the UK and Germany, experiencing negative growth at the tail end of the year. The shrinkage in output in these and other developed economies have weighed down considerably on their overall performance for the year compared with the relatively buoyant performance of the emerging and developing economies, thereby reinforc-ing the twin-speed nature of the global economic recovery. While global real gross domestic product (GDP) in 2012 grew by 3.2%, compared with 3.9% in the preceding year, the average real GDP in the developed economies expanded by a mere 1.29% (1.59% in 2011). In contrast, growth in the emerging and developing territories accelerated by 5.3% (6.17% in 2011), as Figure 1 illustrates.

The economic turbulence in the Eurozone was undoubtedly the main risk to global economic recovery since 2010 with consid-erable variation across the regions of the world. The crisis dented the economic performance of both developed and emerging economies but the latter group has managed to weather the storm better than the former group of economies. Similarly, the economic outlook for the emerging economies looks brighter than that for the developed economies, as economic opportu-nities will continue to drift away from the industrialised countries to the emerging economies of Asia and the GCC region. In essence, the emerging economies are forecast to grow at 5.6% and 5.9% in 2013 and 2014, respectively, while the average real GDP growth rate in the advanced economies is projected to grow sluggishly at 1.54% and 2.27%. As a result, the overall global economy is expected to accelerate at 3.62% and 4.15% during the same period (Figure1).

China and India will continue to be the main drivers of the global economy in the coming years while the Eurozone’s recession will persist in 2013 before returning a positive growth path a year later (Figure 2). Continued implementation of a wide range of austerity measures across the Eurozone, coupled with high rates of unemployment and inadequate bank lending to the real sector, are some of the main factors that would hold back the Euro Area from a growth rebound in 2013. Across the Atlantic, the prospects of a political backlash over fiscal challenges in the United States are likely to dent economic growth in 2013, but it is anticipated that policy makers and legislators in the US would eventually reconcile their differences to avert the economy from relapsing into a recessionary mode.

Figure 1: Real GDP Growth Rates (%)

Source: IMF, Gulf One Investment Bank

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Figure 2: Growth Rates of Real GDP in Selected Countries (%)


The GCC Economies

The integration of world economies through the globalisation process means that developments in the international arena will have varied implications for all countries, including those in the GCC region, as the recent global financial crisis and the Eurozone’s ongoing economic woes have shown. In the case of the GCC countries, however, their key economic fundamentals are solid and strong enough to shield them from adverse consequences of temporary external shocks. This explains why the economy of the GCC region, in spite of the indirect effects of the Eurozone economic crisis, grew by 5.5% in 2012 (Figure 3), well above the global average. This aggregate growth rate of the GCC region, however, masks considerable variation across individual countries, as real GDP growth rate in 2012 ranged from 2% in Bahrain to 6.3% in Kuwait (Figure 3). The relatively low growth performance for Bahrain was largely on account of the two years of social instability that disrupted economic activity. Elsewhere in the GCC region growth was largely fuelled by the favourable developments in the international oil market but improved busi-ness climate has also helped to boost private sector investment and non-oil GDP.

Figure 3: Growth Rates of Real GDP in GCC Countries (%)


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Figure 5: Current Account Balances in the GCC Countries (% of GDP)


Over the years, higher oil prices have boosted the external financial position of the GCC countries, resulting in a substantial bal-ance of payments surplus. In the year 2012, current account surplus of the GCC region stood at 22% of regional GDP. Consider-able variation, however, exists between countries in the region, ranging a current account surplus of 9% of GDP in the UAE to 44% of GDP in Kuwait (Figure 5). The expected decline in oil prices in 2013 will not prevent the GCC countries from enjoying healthy current account surpluses, but the size of the surpluses will be reduced. For example, the average current account sur-plus of the GCC region as a whole is expected to shrink to 19% of GDP in 2013, while that for Kuwait will decline to 39% of GDP.

Going forward, economic growth in the GCC region is forecast to moderate further to 3.7% in 2013 before inching up to around 4% by 2014. The regional growth outlook is also mirrored by individual countries where GDP is forecast to expand at a slower pace in 2013 than in the preceding year except in Bahrain which is expected to grow faster as it continues to recover from the aftermath of social and political quagmire. The deceleration in the pace of economic growth in the GCC region in 2013 is predi-cated on a lower crude oil price scenario that anticipates prices to fall below $100 per barrel (Figure 4). Since all GCC countries are heavily dependent on hydrocarbon, the expected decline in oil prices will undermine their income terms of trade and slow down the pace of economic growth in the region to 3.7% in 2013, compared with the 5.5% achieved in 2012.

Figure 4: Trends in International Crude Oil Price

Source: U.S. Energy Information Administration

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Figure 6: Fiscal Balances in the GCC Countries (% of GDP)


Income from oil and gas has also enabled GCC countries not only to execute a wide range of development programmes and projects but also to maintain fiscal surpluses. With the exception of Bahrain, all countries in the region recorded healthy budget surpluses in 2012 (Figure 6) but the magnitude of such surpluses would shrink in 2013 as international crude oil prices decline and the budgetary break-even oil prices go up.

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Unleashing the growth potential of the GCC region

In spite of the favourable macroeconomic and investment climate in the GCC countries, the region faces several demand-side and supply-side challenges. On the demand side, the challenges include a rapidly growing population, rising standards of living, and changing life styles, all of which tend to put substantial pressures on existing infrastructure and resources. For instance, the GCC region has one of the world’s highest population growth rates, averaging 3.2% over the past decade. This trend, which is expected to continue for at least the next decade, has resulted in approximately 40% of the region’s population being under the age of 20 years. Such rapid changes in demographic profiles, along with improvements in living standards, are expected to result in long term demand-side pressures on the region’s infrastructure. These demand-side challenges are confounded by supply-side constraints in the form of inadequate human capital endowments, limited absorptive capacity and less diversified economic structures. Essentially, the relatively low quality of human capital in the region, combined with inadequate institu-tional structures, restricts the absorptive capacity of the GCC economies, and thereby limits the region’s scope for diversification and sustainable growth.


Over the years, these demand and supply challenges have contributed to strong inflationary pressures in the GCC countries, as the region is a major importer of food and consumer durables, posing serious concerns for policy makers, consumers, and inves-tors. But inflation in the region has recently subsided, thanks to the global financial crisis and the Eurozone economic turbulence both of which have weakened global demand and depressed commodity prices. Inflation in the GCC region averaged around 3% in 2012, and all countries in the region recorded single-digit inflation, as opposed to the double-digit inflation that existed in some countries prior to the 2008 global financial crisis. Inflation in the region is, however, forecasted to increase slightly to 3.35% in 2013 due to expected increase in consumer prices in Bahrain, Qatar and the UAE (Figure 7).

Thus, unleashing the economic growth potential of the GCC region will require investment in capacity-based domestic infra-structure to help diversify the regional economies away from hydrocarbons and towards private sector-driven investment that would create jobs, train labour, raise productivity, boost income, and promote sustainable economic growth and welfare. In particular, there is a need for a substantial increase in investment in social infrastructure to upgrade skills and education of citi-zens with a view to enhancing their productivity and income multiplier effects. While providing supportive fiscal and monetary policy measures, governments in the region should continue to focus on broader structural reforms and economic diversifica-tion that will help generate substantial private sector jobs and inclusive growth.

Figure 7: Inflation Rates in the GCC Countries (%)


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BOARD OF DIRECTORS AND BOARD COMMITTEES

Board of Directors

Mr. Ali H. Alireza Chairman, Independent Non-Executive Director 3 years 21 September 2012 0.90%

Mr. Zaki M. A. Farsi Vice Chairman, Independent Non-Executive Director 3 years 21 September 2012 2.70%

Mr. Abdullah A. Ohaly Member, Independent Non-Executive Director 3 years 21 September 2012 0.45%

Dr. Ali H. Al Bahar Member, Independent Non-Executive Director 3 years 21 September 2012 0.23%

Mr. Fahad A. Al-Hoshan * Member, Non-Executive Director 3 years 21 September 2012 5.85%

Mr. Khaled A. Al Duhaim * Member, Independent Non-Executive Director 3 years 21 September 2012 7.20%

Mr. Mohamed H. AlHarasani Member, Independent Non-Executive Director 3 years 21 September 2012 1.58%

Mr. Mutlaq H. Almorished * Member, Independent Non-Executive Director 3 years 21 September 2012 4.50%

Dr. Nahed M. Taher Member, Executive Director 3 years 21 September 2012 2.70%

Mr. Ziyad F. Omar Member, Executive Director 3 years 21 September 2012 2.70%

(*) Representing an institutional shareholding

Executive DirectorsDr. Nahed M. Taher Founder and Chief Executive OfficerMr. Ziyad F. Omar Founder and Chief Investment Officer

Board CommitteesFinance and Investment Committee (FIC)Risk, Audit and Compliance Committee (RACC)Nomination, Remuneration and Governance Committee (NRGC)

Board Committee CompositionFinance and Investment Committee (FIC)Mr. Ali H. Alireza Chairman of the CommitteeMr. Fahad A. Al-Hoshan Committee MemberMr. Mutlaq H. Almorished Committee MemberDr. Nahed M. Taher Committee MemberMr. Ziyad F. Omar Non-voting Committee Member

Risk, Audit and Compliance Committee (RACC)Dr. Ali H. Al Bahar Chairman of the Committee Mr. Abdullah A. Ohaly Committee MemberMr. Khaled A. Al Duhaim Committee MemberMr. Abdullah S. Bakhashab Adviser to the RACC/Non-voting member

Nomination, Remuneration and Governance Committee (NRGC)Mr. Mohamed H. AlHarasani Chairman of the CommitteeMr. Ali H. Alireza Committee MemberMr. Zaki M. Farsi Committee Member

Resignations and AppointmentsDuring the year there were no resignations or appointments to the Board.

Board Term

Start of Term

Percent of Holdings


Mr. Ali H. Alireza - Chairman √ √ √ √ √ √

Mr. Zaki M. Farsi - Vice Chairman √ √ √ × √ √

Dr. Ali H. Al Bahar √ √ √ √ √ √

Mr. Abdullah A. Ohaly √ √ √ √ √ √

Mr. Fahad A. Al Hoshan √ √ √ √ √ √

Mr. Mohammed H. AlHarasani √ √ √ × √ √

Mr. Mutlaq H. Almorished √ √ √ √ √ √

Mr. Khaled A. Al Duhaim √ √ √ √ √ √

Dr. Nahed M. Taher √ √ √ √ √ √

Mr. Ziyad F. Omar √ √ √ √ √ √

Dr. Ali H. Al Bahar - Chairman √ √ √ √ √

Mr. Abdullah A. Ohaly - Member √ √ √ √ √

Mr. Khaled A. Al Duhaim - Member √ √ √

Mr. Abdullah S. Bakhashab - Adviser × √* √ √ √

Mr. Mohammed H. AlHarasani - Chairman √ √*

Mr. Ali H. Alireza – Member √ √

Mr. Zaki M. Farsi - Member √ √*

(*) Attendance by teleconference and circulation

(*) Attendance by teleconference and circulation

Mr. Ali H. Alireza - Chairman √ √

Mr. Fahad A. Al Hoshan – Member √ √

Mr. Mutlaq H. Almorished- Member √ √

Dr. Nahed M. Taher – Member √ √

Mr. Ziyad F. Omar – Non Voting Member √ √

Board and Board Committee AttendanceThe Board must meet a minimum of four times a year. This is a requirement of both the Central Bank of Bahrain as well as a re-quirement of the Bank’s Board Charter. They may meet more frequently in order to discharge their responsibilities.

The meetings dates and attendance of members at the (Annual General Meeting), (Extra Ordinary General Meeting), Board and the Board Sub-Committee meetings for 2012 are depicted in the tables below:

Annual General Meeting, Extra-ordinary General Meeting and Board Meetings

Board Risk, Audit and Compliance Committee Meetings

AGM

30 May. 12Bahrain

27 Feb. 12Bahrain

27 Mar. 12Bahrain

27 Mar. 12Bahrain

EGM

30 May. 12Bahrain

27 Mar. 12Bahrain

30 May. 12Bahrain

29 May. 12Bahrain

27 Mar. 12Bahrain

30 May. 12Bahrain

29 May. 12Bahrain

Board Meetings

05 Aug. 12Teleconference& Circulation

02 Aug. 12Teleconference& Circulation

11 Nov. 12Teleconference& Circulation

31 Oct. 12Teleconference& Circulation

Board of Directors

Committee Members

Committee Members

Committee Members

Board Nomination, Remuneration and Governance Committee Meetings

Board Finance and Investment Committee Meetings


BOARD OF DIRECTORS BIOGRAPHIES

Mr. Ali H. AlirezaChairman, Independent Non-Executive DirectorMr. Alireza has over 26 years of working experience and is the Managing Director of Haji Hussein Alireza & Co. He is also a for-mer member of the Makkah Region Governor’s Council; a Chairman of the Board of the National Computer Systems Company (NATCOM) and Al Wasilah (Hertz) Rent a Car Co. Ltd. He also serves as a member of the Board of SAMBA Financial Group and the Arabian Petroleum Supply Company (APSCO); and is Chairman of the Board of Al Alamiya-RSA Insurance Company in Saudi Ara-bia. Furthermore, Mr. Alireza is a member of the Jeddah Chamber of Commerce and Industry, a Vice Chairman of the Automobile Dealers Committee, a member of the Commercial Committee and National Commercial Committee. He is also a member of the National Automotive Committee in the Saudi Chamber of Commerce. He holds a MBA from Pepperdine University, California and a BA in Business Administration from the University of Southern California, USA.

Mr. Zaki M. FarsiVice Chairman, Independent Non-Executive DirectorMr. Farsi is the Owner and President of Farsi Engineering Consultant Group in Jeddah, Saudi Arabia. He has over 40 years work-ing experience in the field of engineering and urban/infrastructure planning, starting as the head of the city planning office of the western region of Saudi Arabia. Mr. Farsi is also a member of the Projects Development committee and Board member of Tamleek Real Estate Development Company. He is also a Board member of Saudi Ready Mix and serves as a member of various committees such as National Real Estate Committee, Engineering Offices Committee and Real Estate Development Committee in the Jeddah Chamber of Commerce and Industry. He is also a member of the first Board of the Saudi Umran society in Saudi Arabia and was formerly on the Board and Executive Committees of Tehama Advertisement and Public Relations Company, Arab Islamic Bank and Dar Al Fikr Schools of which he is also a Founder. He holds an MSc from the University of California, Berkley and a BSc in Civil Engineering from the San Francisco State University.

Mr. Abdullah A. OhalyIndependent Non-Executive DirectorMr. Ohaly has over 21 years of experience in management and financial control and currently holds the post of President for Eminent Packaging System Co. Bahrain. He was previously a Board member and Managing Director of the Tamimi Group in Saudi Arabia until February 2009, during which he managed the following five companies; Tamimi Catering Co., Tamimi Construction Co., Tamimi Commercial Co., Tamimi Food Co. and Thrust boring Construction Co. Ltd. He was also the Chairman of the Board for Silvertech Middle East, U.A.E. Co. Ltd. until June 2009. Mr Ohaly is a member of the Board of directors for Moya Holding Company B.S.C. and is also a member of the Audit, Compliance and Risk Committee of Gulf Union Insurance Co., Saudi Arabia. Mr. Ohaly holds a MBA in Management from City University – Seattle, and a BA in Management from Seattle University, U.S.A.

Dr. Ali H. Al Bahar Independent Non-Executive DirectorDr. Al Bahar has over 24 years of experience in the Financial Services Industry. He is the General Manager of Kuwait Insurance Company S.A.K. since 1991. He previously served with the National Bank of Kuwait in their International Banking Division from 1987 to 1991. He serves on the Board of Investment and Real Estate Companies and is currently the Board member of Kuwait Reinsurance Company. Dr Al Bahar is also the Chairman of The Union of Insurance Companies. He holds a BSc in Management from the University of Denver, in Colorado- USA and a MS and PhD (Doctorate in Economics of Insurance) from Sunderland University in the UK.


Mr. Fahad A. Al-HoshanNon-Executive DirectorMr. Al-Hoshan is currently the Chairman and CEO for Hoshanco Holding. He has over 17 years of experience in managing various companies under the umbrella of Hoshanco Holding whose portfolio of companies include: Hoshan Investments Co., ASAS Real-Estate Co., Hoshan Pan Gulf Co., Hoshan Direct Sales Co., Hoshan Retail Trading Co., Hoshan Graphic Arts Co., Atlas Manufacturing Co. and Hoshan Shared Service Co. He is also a member of the Middle East Council for The Conference Board and a member of SHOPA (School, Home and Office Products Association), both based in the USA. Mr. Al-Hoshan holds a Bach-elor’s Degree in Business Administration, International Business from the King Saud University in Riyadh, Saudi Arabia and has successfully completed Executive Courses in Strategic Think Tank, Risk Management, Critical Thinking, Mergers and Acquisi-tions, Business Development, Performance Management Systems (BSC) from IMD, Switzerland and The Wharton School of the University of Pennsylvania, USA.

Mr. Khaled A. Al DuhaimIndependent Non-Executive DirectorMr. Al Duhaim has 21 years of working experience in the field of investment banking and is currently a Senior Manager for Inter-national Funds and Portfolio Management in the Asset Management Division of Kuwait Investment Company (KIC) in Kuwait. Mr. Al Duhaim has managed several funds covering a wide range of markets since joining KIC in 1997, including European fixed income portfolios, Japanese and Australian bond markets, Islamic-based accounts, the KIC Global Strategy Funds as well as the Far East Equity and US Equity portfolios; in addition to being responsible for Investment Advisory Services. Prior to this, he was a Portfolio Manager/ Bond Trader in the Portfolio Management department of Kuwait Foreign Trading Contracting and Invest-ment Co. in Kuwait. Mr. Al Duhaim is an Executive Director on the Board of KIC Fund Managers Limited (Guernsey - UK) and KIC Global Strategy Fund Limited (Guernsey - UK); and he also serves as a Board Member of Prime Real Estate Fund in Paris and Economic Group (E.G.) Egypt, Brokerage Company. Mr. Al Duhaim holds a BSc in Accounting from Kuwait University.

Mr. Mohamed H. AlharasaniIndependent Non-Executive DirectorMr. AlHarasani is the Founder and President of Mohamed Harasani Architects and has over 29 years experience in managing the firm since its establishment in 1984, designing and managing the construction of various landmark buildings in the Kingdom of Saudi Arabia. His most recent projects in Saudi Arabia include the Rosewood Corniche Hotel and Almashfa Private Hospital in Jeddah; Maghrabi Eye Hospital and the Arab Bank headquarters building in Riyadh; in addition to several Embassies for the Ministry of Foreign Affairs. In 2010 he formed a professional partnership company with WS Atkins to pursue major infrastructure and engineering projects in the Kingdom of Saudi Arabia, and they are currently involved in providing full design services for the new King Abdulaziz International Airport in Jeddah. Mr. AlHarasani is a member of The Royal Institute of British Architects (RIBA) acting as the RIBA representative in Saudi Arabia as well as being a Board member of the RIBA Gulf Chapter. Mr. AlHarasani also serves on the Board of Awtad Real Estate Company Ltd. He holds a Masters Degree in Architecture from the Bartlett School of Architecture – University College London and a Bachelors Degree in Architecture from Liverpool School of Architecture – Liverpool University, United Kingdom.

Mr. Mutlaq H. AlmorishedIndependent Non-Executive DirectorMr. Almorished has over 30 years experience in the chemical industry and is currently the Executive Vice President of Corporate Finance at Saudi Basic Industries Corporation (SABIC). Prior to his present post, he was Vice President of Metals SBU, VP Shared Services, President of SADAF (Saudi Petrochemical Company) and HADEED (Saudi Iron and Steel Company. In addition, Mr. Almorished sits on the Board of Alinma Tokyo Marine in Riyadh, Saudi Arabia and Aluminium Bahrain (ALBA) in Bahrain. He is Chairman of the Board of YANSAB, SABIC Capital (Holland), Saudi Kayan and Alinma Investment Co. Mr. Almorished holds a MBA from Stanford University, USA; a MSc in Nuclear Engineering from Princeton University, USA and a BSc in Nuclear Physics and Mathematics from the University of Denver, USA.


Dr. Nahed M. Taher Executive Director, Co-Founder and Chief Executive OfficerDr. Taher is a leading economist and executive banker and the first female CEO of a bank in the GCC. Prior to co-founding Gulf One, Dr. Taher served as Chief Economist and Chairman of the Risk and Portfolio Management Committee at The National Commercial Bank (NCB) in Jeddah, Kingdom of Saudi Arabia. Prior to NCB, Dr. Taher held the position of Professor/Head of the Accounting Department at the King Abdul-Aziz University in Jeddah. She has over 16 years of banking, academic and research experience and is also a known personality in the field of International Economics and has presented at numerous Global Eco-nomic Forums around the world. She is a Board member of KAPSARC (King Abdullah Petroleum Studies and Research Center) Energy Research Centre in Saudi Arabia, a member of the Eisenhower Fellowship in Saudi Arabia. She is also a Board Member of IMD (Institute for Management Development) in Switzerland since 2008, a milestone achievement as she is the first member from the Middle East to join the IMD. She was also elected as an advisory Board member of King Abdulaziz University in Jed-dah, Saudi Arabia in 2010. Dr. Taher holds a dual Masters Degree, in International Finance and Financial Economics; and a PhD in Monetary Economics from the University of Lancaster in the United Kingdom.

Mr. Ziyad F. OmarExecutive Director, Co-Founder and Chief Investment OfficerPrior to co-founding Gulf One, Mr. Omar founded a Financial and Management Consulting firm in Saudi Arabia and a business advisory and consulting firm, Compass Consulting in Bahrain, which focused on providing advisory services for large corpora-tions in the GCC. Mr. Omar has over 25 years of regional and international finance and banking experience. He has previously worked with The National Commercial Bank (NCB) in Saudi Arabia, as Country Head of the Corporate Banking Group where his reengineering of NCB’s multi-billion dollar corporate banking portfolio resulted in a significantly improved risk/reward profile. He was also the Chief Financial Officer of Al Faisaliah Group where he created the Group Finance and Corporate Treasury. Mr. Omar also worked in various senior positions at the Saudi American Bank in Jeddah in the Corporate Banking and Structured Finance departments, where he co-pioneered the first securitisation transaction in Saudi Arabia. Prior to returning to Saudi Arabia, he spent five years as a Systems Manager with Equitable Financial Companies (currently AXA) in California, USA. Mr. Omar received his MBA in 1989 and a BA in Mathematics and Computer Science in 1984 from the California State University, Fresno, California, USA.

BOARD COMMITTEES

Mr. Abdullah S. BakhashabAdviser to the Risk, Audit and Compliance CommitteeMr. Bakhashab is the Owner and General Manager of Abdullah S. Bakhashab Est. for Trading and Marketing Services. He has considerable experience in executive management by having occupied leading positions with 12 years working experience with an emphasis in the area of organising sporting events, marketing and sales. He possesses a wide range of skills including, but not limited to, Project Management and Implementation, Public Relations Management, Marketing Services, Data Analysis, and Sales and Accounts Management. Mr. Bakhashab is the Owner and General Manager of AIM Creative Communications Agency, Chairman and CEO of Creative Development Co. Ltd. and Eshehar Co. Ltd (Propaganda Advertising Agency). He is a member of the Minaret Business Organization (MBO) Jeddah Chapter, and Board Member of various organisations such as the Al-Bir Charitable Society for Orphans in Jeddah, the Saudi Arabian Motor Federation in Riyadh and the Al Ittihad Football Club in Jeddah where he is also the Chairman of the Investment Committee. Mr. Bakhashab holds a BA in Accounting from the King Abdulaziz University in Saudi Arabia.


BUSINESS LINES

Investment banking forms the core of Gulf One’s activities. The following provides concise descriptions of the activities and strategies of Gulf One’s main business lines;

Private Equity Private Equity (the Division) is responsible for structuring and managing traditional private equity funds and direct investments.

The Division’s primary geographical focus is the Middle East and North Africa (MENA) region. However, it seeks opportunities globally with a focus on investing in companies with transferrable competitive advantages with a view to bringing them to the MENA region through potential business partnerships.

The target market segment of the Division comprises small to medium sized enterprises. The investments are typically in the range of USD 5 to 15 million which offer significant minority stakes.

The strategy of the Division is to partner with proven management teams to derive value from opportunities for growth. The Division seeks to invest in companies that it believes maintain a sustainable competitive advantage in a particular market and for which the management team has a compelling vision and business strategy.

While evaluating potential investment opportunities, the Division follows several guiding principles: • Proven Management Teams • Sound Business Fundamentals • Prudent Price/Risk Profiles • Well-defined Exit Strategies

Post-investment, the Division provides active contribution to the portfolio companies to enhance shareholder value. The Divi-sion offers its unparalleled experience in capital restructuring, market positioning, operating efficiency improvements, manage-ment optimisation, corporate governance and financial engineering to its portfolio companies.

The key differentiating factor of Gulf One’s Private Equity investment activity is its alignment of interests with investors. This is achieved through Gulf One investing its own propriety capital in all its investment products and ensuring alignment of perfor-mance and rewards. In all phases of investment management, from deal origination to exit, the Bank benefits from its knowl-edge of the regional markets and the extensive network of relationships it enjoys within the region.


Structured FinanceThe Structured Finance Division (SFD) is Gulf One’s structuring and advisory business. SFD provides independent, comprehen-sive, customised and sustainable solutions to address our clients’ needs.

SFD provides an extensive range of regionally relevant, tailored structuring and advisory services, including: • Corporate finance: buy-side and sell-side mergers and acquisition advisory and execution, corporate debt advisory • Structured finance: advising on funding structure and execution • Project finance: advisory on structuring and arrangement of financing for non-recourse greenfield and brownfield infrastruc-ture and industrial projects

• Corporate advisory: advising on the optimal corporate structure

SFD provides comprehensive solutions to its clients and delivers specialist advice on: • Fund raising: debt arrangement, syndication and equity placement • Islamic finance: advisory, structuring and execution of Shari’a compliant facilities • Corporate and financial restructuring: solutions for distressed situations including dealing with creditors • Family group/family office advisory: advisory on optimisation of structure, financing and value creation including corporati-sation and listing

• Project finance: advisory on structuring and arrangement of financing for non-recourse greenfield and brownfield infrastruc-ture projects

SFD’s advice is grounded on the extensive multi-product, multi-market experience of its investment banking professionals in-cluding: • Product expertise encompassing all key investment banking products • Sector expertise across a broad range of infrastructure, industrial and corporate sectors including power, oil and gas, water treatment, industrial manufacturing, petrochemicals, clean energy, transportation and logistics, telecommunications and so-cial infrastructure (health and education)

• Execution expertise based on comprehensive process experience including negotiation and project man agement, coordina-tion and management of other advisors, lawyers and accountants and management of counterparts delivering accelerated execution and closure

• Relationship dedication based on a reputation for long-lasting relationships grounded on the highest standards of discretion, confidentiality and fair dealing and strong relationships with key regional decisionmakers, delivering unique insights and in-depth market understanding

• Superior results as evidenced by a track record of meeting deadlines, successful closures and value creation for our clients

Our professionals are uniquely experienced with successful financing solutions, including merger and acquisition transactions, in geographies including the GCC, Europe, Asia, North America and Australia and encompassing all major corporate, infrastruc-ture, industrial and service sectors. Our market leading capability is further evidenced by our professionals being the recipient of over thirty international deal awards.


EXECUTIVE MANAGEMENT The Bank’s core management team comprises of the following:

Dr. Nahed M. Taher – Board Member, Co-founder and Chief Executive Officer – Executive Director Dr. Taher is a leading economist and executive banker and the first female CEO of a bank in the GCC. Prior to co-founding Gulf One, Dr. Taher served as Chief Economist and Chairman of the Risk and Portfolio Management Committee at The National Commercial Bank (NCB) in Jeddah, Kingdom of Saudi Arabia. Prior to NCB, Dr. Taher held the position of Professor/Head of the Accounting Department at the King Abdul-Aziz University in Jeddah. She has over 16 years of banking, academic and research experience and is also a known personality in the field of International Economics and has presented at numerous Global Eco-nomic Forums around the world. She is a Board member of KAPSARC (King Abdullah Petroleum Studies and Research Center) Energy Research Centre in Saudi Arabia, a member of the Eisenhower Fellowship in Saudi Arabia. She is also a Board Member of IMD (Institute for Management Development) in Switzerland since 2008, a milestone achievement as she is the first member from the Middle East to join the IMD. She was also elected as an advisory Board member of King Abdulaziz University in Jed-dah, Saudi Arabia in 2010. Dr. Taher holds a dual Masters Degree, in International Finance and Financial Economics; and a PhD in Monetary Economics from the University of Lancaster in the United Kingdom.

Dr. Taher has received a number of acclaimed rankings and awards; she was ranked 24th and 23rd by Financial Times of the “Most Powerful Business Women in the World” in 2010 and 2011 respectively and held the 20th position amongst the most powerful Arab Women for year 2011 by CEO Magazine. Dr. Taher also received the “Businesswoman of the Year” award in Saudi Arabia in 2007. She was dubbed the Professorship Award in May 2011 by Lancaster University.

Dr. Taher was appointed as a board member of the International Institute for Management Development (IMD) in Switzerland in 2008, a milestone achievement being the first member from the Middle East to join the IMD board. She was elected as an advisory board member of King Abdulaziz University in Jeddah, Saudi Arabia in 2010. She holds a PhD in Monetary Economics, as well as a dual Masters Degrees in International Finance and Financial Economics from the Lancaster University in the United Kingdom.

Mr. Ziyad F. Omar - Board Member, Co-founder and Chief Investment Officer – Executive DirectorPrior to co-founding Gulf One, Mr. Omar founded a financial and management consulting firm in Saudi Arabia and a business advisory and consulting firm, Compass Consulting Company in Bahrain; both companies focused on providing advisory services for large corporations throughout the GCC. This was born out of Mr. Omar’s conviction of the need for and value of such services, arising from 25 years of regional and international finance and banking experience. Earlier, Mr. Omar worked with The National Commercial Bank (NCB) in Saudi Arabia, as Country Head of the Corporate Banking Group (CBG) where his re-engineering of NCB’s multi-billion dollar corporate banking portfolio resulted in a significantly improved risk/reward profile. He was also Chief Financial Officer (CFO) of Al Faisaliah Group where he created the Group Finance and Corporate Treasury.

Mr. Omar has held a number of senior positions at the Saudi American Bank in Jeddah in Corporate Banking and Structured Fi-nance, where he co-pioneered the first securitisation transaction in Saudi Arabia. Prior to returning to Saudi Arabia, he spent five years as Systems Manager with Equitable Financial Companies (currently AXA) in California, USA. He received his MBA in 1989 and holds a dual Bachelor’s degree in Mathematics – Computer Science in 1984, from California State University, USA.

Mr. P. H. Subramani – Chief Financial Officer Mr. Subramani joined Gulf One in October 2006. He possesses over 26 years of consulting and industry experience in the Middle East which includes over 16 years in senior management positions. Prior to joining Gulf One, Mr. Subramani held various senior management positions at Al Faisaliah Group, one of the largest diversified business groups in Saudi Arabia. From September 1985 to February 1998, he held different positions, including Manager – Consulting with Ernst & Young in Saudi Arabia. His expe-rience includes business valuations, feasibility studies, financial restructuring, corporate finance and treasury, financial reporting, policies and procedures, system implementations and business process improvements. During this period he was appointed as an advisor to the Saudi Arabian Monetary Agency. Mr. Subramani holds a Bachelor’s Degree in Commerce and is also a qualified Chartered Accountant (CA).


Mr. Dean Rowan – Chief Risk Officer Mr. Rowan joined Gulf One in 2005. He has over 25 years’ of extensive experience in risk, treasury and credit. Prior to joining, he worked with Westpac Bank in Australia as Head of Risk, Global Treasury as well as Head of Credit. Mr. Rowan has also worked with Barclays Bank PLC, London as Head of Group Risk, and most recently with The National Commercial Bank (NCB) of Saudi Arabia as the Head of Operational Risk and Basel II. He has over 10 years of experience with Citibank, Australia and Asia Pacific and has previously worked with Lloyds Bank in Australia. He is a Fellow of the Australian Society of Certified Practicing Accountants, a Fel-low of the Taxation and Management Accountants of Australia, a Fellow of the Taxation Institute of Australia, a Fellow of Financial Securities Institute of Australia and a member of the Australian Institute of Company Directors. He is Chairman of the Bahrain Compliance and AML professionals, Regional Director for the Professional Risk Managers International Association and Advisory Board Member of the International Compliance Association, London. Mr. Rowan obtained a Bachelor’s Degree in Commerce from the University of New South Wales, and holds a postgraduate degree in finance from the Securities Institute of Australia.

Dr. Mohammed Adaya Salisu – Chief Economist Dr. Salisu joined Gulf One in 2007. He has over 20 years of extensive experience in Econometrics. Prior to joining, Dr. Salisu was Principal Research Economist at the African Development Bank (AfDB) and a Lecturer in Economics at Lancaster University, UK. Dr. Salisu is an Econometrician by training and has applied econometric techniques to a wide range of research areas in eco-nomics and international business. Throughout his career at the AfDB, Dr. Salisu focused on issues related to infrastructure and trade and produced several briefs and Statements for senior management on topical trade -related and macroeconomic issues, and made significant inputs to the bank’s annual reports. Throughout his professional career, Dr. Salisu provided a wide range of knowledge-based consultancy services to a number of internationally renowned organisations, including the World Bank, the European Commission, the United Nations, and the UK Department of Trade and Industry. Dr. Salisu holds a PhD in Economics from the University of Lancaster, United Kingdom and also both a master’s and bachelor’s degree in Economics from the Uni-versity of Maiduguri, Nigeria.

Mr. Brian Little – Managing Director, Structured Finance DivisionMr. Little joined Gulf One in 2007. He has over 20 years of global investment banking and structured finance experience. Prior to joining Gulf One Brian worked for JPMorgan Chase and Citigroup. He is a senior investment banking practitioner with over thirty years of structured finance experience spanning several complete economic cycles and their related effects on risk and investment value creation. He has comprehensive experience in financial advisory, structuring, distress/restructuring and prin-cipal investment at leading global investment firms in both the emerging and developed markets and across sectors including power, energy, transportation, mining, communications, water and social and greenfield project development and brownfield secondary asset sales/privatisation. Mr. Little holds a bachelor’s degree in economics from University of Sydney, Australia.

Mr. Shibu Nair – Managing Director, Private Equity DivisionMr. Nair joined Gulf One in August 2006. He holds over 10 years of extensive corporate finance and private equity experience in varied industry sectors within GCC and Europe. Prior to joining Gulf One, he was a Principal in the Private Equity and Venture Capital department of Gulf Finance House (GFH), Bahrain. At GFH, he was part of a team that structured private equity deals in excess of US$ 1 billion, primarily in the financial services and telecom sectors. He was also responsible for monitoring the bank’s private equity portfolio. He joined GFH after serving as a Senior Consultant with KPMG Corporate Finance, Bahrain where he gained significant experience in managing and executing Corporate Finance transactions including private equity, mergers and acquisitions, business valuations and restructuring. Mr. Nair has extensive experience in Corporate Finance and Private Equity across a wide range of industries and represents Gulf One on the boards of a number of portfolio companies including Moya Holding Company B.S.C. (c), Moya Asia Limited and Gulf One SME Opportunities Fund Company B.S.C (c). He is also a member of the Investment Committees of Gulf One Buchanan Industrial Technologies Fund I LP, Gulf One Munich Industrial Technologies LP and Gulf One SME Opportunities Fund. Mr. Nair holds a MBA degree from Bharathiar University in India is a rank-holder Certified Public Accountant (CPA) and a Chartered Financial Analyst (CFA) Charter holder.


CORPORATE GOVERNANCE

Gulf One is committed to the highest standards of governance based on embedding the values and behaviours required to ensure transparency, fair dealing and to protect stakeholder interests.

Good corporate governance is not only fundamentally sound for how we manage our business but also assists in building long term, sustainable performance as it is being driven by demands from both the market and the international banking regulators.

The Bank’s corporate governance philosophy and approach should be read in conjunction with the discipline, tools and expo-sures outlined in its Risk Management disclosures.

Framework and Approach to Corporate GovernanceOur approach to corporate governance is based on a set of values and behaviours that underpin everyday activities, ensure transparency and fair dealing, and protects stakeholder interests. This approach includes a commitment to the highest standards of governance, which our Board sees as fundamental to the sustainability of our business and performance. In pursuing this commitment, the Board monitors local and global developments in corporate governance and their implications for the Bank.

Corporate governance is the system by which the Bank is directed and managed. It influences how the objectives of the Bank are set and achieved, how risk is monitored and assessed, and how performance is optimised.

Good corporate governance structures encourage the Bank to create value (through entrepreneurism, innovation, development and exploration) and provide accountability, transparency and control systems commensurate with the risks involved.

Good governance is essential for building and maintaining long term survival and success, so directors have a continuing obli-gation to ensure that not only do they themselves understand and practice it, but that our managers are properly trained in its principles and practical applications.

The corporate governance framework of Gulf One enshrines the concepts of good governance as required by the Central Bank of Bahrain’s Rulebook (in particular the High-Level Controls Module), the Corporate Governance Code, and further, is consistent with international best practices.

The Board Charter serves as a reference point for Board activities and like best practice, develops as the organisation grows with market and regulatory requirements. In addition to the roles and responsibilities, the Board Charter and Board Sub Committee Charters, define the ethical standard for business practices that are to be followed by each Board member. During re-elections of directors as well as periodically, compliance with these standards is assessed by the Board as a whole.


Principles of Good Corporate Governance and Best PracticeThe Bank has articulated ten core principles which underlie good corporate governance in our document entitled “Principles of Good Corporate Governance and Best Practice”.

Good corporate governance principles influence how the objectives of the Bank are set and achieved, how risk is monitored and assessed, and how performance is optimised. It allows the management to create value (through entrepreneurism, innovation, development and exploration) while providing accountability and control systems commensurate with the risks involved. The principles are as follows:

Principle 1 - Lay solid foundations for management and oversight Recognise and publish the respective roles and responsibilities of board and management.

Principle 2 - Structure the board to add value Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

Principle 3 - Promote ethical and responsible decision-making Actively promote ethical and responsible decision-making.

Principle 4 - Safeguard integrity in financial reporting Have a structure to independently verify and safeguard the integrity of the Bank’s financial reporting.

Principle 5 - Make timely and balanced disclosure Promote timely and balanced disclosure of all material matters.

Principle 6 - Respect the rights of shareholdersRespect the rights of shareholders and facilitate the effective exercise of those rights.

Principle 7 - Recognise and manage riskEstablish a sound system of risk oversight and management and internal control.

Principle 8 - Encourage enhanced performanceFairly review and actively encourage enhanced board and management effectiveness.

Principle 9 - Remunerate fairly and responsiblyEnsure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.

Principle 10 - Recognise the legitimate interests of stakeholders Recognise legal and other obligations of all legitimate stakeholders.


Group Structure

The Bank’s Group comprises of it’s head office, subsidiaries and associates located around the globe (GCC, G10 and other coun-tries). Gulf One is represented in various economic sectors such as clean energy generation, investment funds, industrial manu-facturing, oil and gas, water, pharmaceuticals, transport, power, industrial feasibility and consultancy.

Information about the subsidiares and associates comprising Gulf One’s Group is listed below.

Subsidiaries of the Bank

Gulf One Capital Company, Saudi Arabia. 2012: 100% holding 2011: 100% holding

Manjam Mining Holding SPC, Bahrain; 2012: 100% holding 2011: 100% holding

Gulf One Employee Stockholding Company SPC, Bahrain; 2012: 100% holding 2011: 100% holding

Gulf One DACH Investments Limited, Cayman Islands; 2012: 100% holding 2011: 100% holding

Gulf One Investment Holdings Limited, Cayman Islands; 2012: 100% holding 2011: 100% holding

Gulf One Economic Consultancy Co. S.A.K., Kuwait; 2012: 100% holding 2011: 100% holding

Gulf One GmbH, Germany 2012: 100% holding 2011: N/A

Details of SubsidiariesGulf One Capital Company, Saudi Arabia; 2012: 100% ownership 2011: 100% ownershipGulf One Capital was incorporated during 2010, CR number: 4030166510, with a paid up Capital amounting to Saudi Riyal’s 56.25 Million (USD 14.0million). It is licensed by the Capital Market Authority of Saudi Arabia, Authorisation Number; 10149-36, to undertake activities including, Arranging, Advising, Asset Management and Custodial Services.

Manjam Mining Holding SPC, Bahrain; 2012: 100% ownership 2011: 100% ownershipManjam Mining Holding S.P.C. is a single person company incorporated in the Kingdom of Bahrain on 18 June 2009 and regis-tered with the Ministry of Industry & Commerce under Commercial Registration number 72186. The Company’s principal activity is a holding company for a group of commercial or industrial or services companies.

Gulf One Employee Stockholding Company SPC, Bahrain; 2012: 100% ownership 2011: 100% ownershipGulf One Employee Stockholding Company B.S.C. (c) (the Company) is a single person company incorporated in the Kingdom of Bahrain on 10 May 2009 and registered with the Ministry of Industry & Commerce under Commercial Registration number 72187. The Company is a special purpose vehicle formed to manage and administer a share based incentive scheme on behalf of the Bank.

Gulf One DACH Investments Limited, Cayman Islands; 2012: 100% ownership 2011: 100% ownershipGulf One DACH Investments Limited is a Cayman Islands incorporated entity. The Company is a special purpose vehicle formed to own the Bank’s direct investments in DACH Funds.

Gulf One Investment Holdings Limited, Cayman Islands; 2012: 100% ownership 2011: 100% ownershipGulf One Investment Holdings Limited is a Cayman Islands incorporated entity. The Company is a special purpose vehicle formed to own the Bank’s direct investments in Sindicatum Sustainable Resources Group.

Gulf One Economic Consultancy Co. S.A.K., Kuwait 2012: 100% ownership 2011: 100% ownershipGulf One Economic Consultancy Co. S.A.K. is a Kuwait incorporated entity. The Company is formed to oversee advisory business of the Bank in Kuwait.

Gulf One GmbH, Germany 2012: 100% ownership 2011: N/AIn April 2012, Gulf One launched Gulf One GmbH, located on 18 Widenmayerstraße, 80538 Munich, Germany and registered under HRB 197219 with the Munich Commercial Register. Gulf One GmbH, a wholly owned subsidiary of Gulf One and aims to support the management of portfolio companies of Gulf One’s private equity funds and to source new investments and advisory business opportunities for the bank. The new office is supported by Gulf One’s Private Equity, Structured Finance, Advisory and Business Development teams located in offices across the GCC.


Associates of the Bank

Gulf One Buchanan Industrial Technologies Fund I L.P., Cayman Islands; 2012: 24.64% holding 2011: 24.53% holding

Moya Holding Company BSC (C), Bahrain; 2012: 19.21% holding 2011: 24.18% holding

Montajat Veterinary Pharmaceuticals Factory Company, Saudi Arabia; 2012: 23.59% holding 2011: 28.00% holding

Gulf One SME Opportunities Fund, Bahrain; 2012: 27.93% holding 2011: 46.14% holding

Project Feasibility Company BSC (c), Bahrain; 2012: 39.72% holding 2011: 39.72% holding

SCC MENA Holding BSC (c), Bahrain; 2012: 50.00% holding 2011: 50.00% holding

Al Fassel National For General Contracting Co., Saudi Arabia; 2012: 30.00% holding 2011: 30.00% holding

Afex Global Limited, Bermuda; 2012: 22.55% holding 2011: 16.25% holding

Gulf Bridge Shares and Securities One WLL, Bahrain. 2012: 29.63% holding 2011: N/A

Organisational Structure


Role of the Board of Directors

The primary role of the Board of Directors (the Board) is to promote and achieve sustainable performance and long-term growth in shareholder value for the Bank. The Board, whilst delivering sustainable performance, is further responsible to ensure that the interests of other stakeholders are appropriately considered, whilst maintaining high standards of transparency and account-ability.

The Board works together as a team to provide strategic leadership to staff, ensure the organisation’s fitness for purpose, set the values and standards for the bank and ensure sufficient financial and human resources are available.

The Board reserves a formal schedule of matters for its decision to ensure that the direction and control of the Bank rests with the Board. This includes strategic issues and planning, performance reviews, material acquisition and disposal of assets, capital expenditure, authority levels, risk management policies, appointment of auditors and review of the financial statements, financ-ing and borrowing activities including annual operating plans and budgets, ensuring regulatory compliance and reviewing the adequacy and integrity of internal controls.

Board Charter and ResponsibilitiesThe Board has delegated to the CEO, and through the CEO to other senior executives, responsibility for the everyday manage-ment of the business. The scope of and limitations to that delegated authority is clearly documented.

In line with Central Bank of Bahrain’s requirements and the Banks’ Board Charter, the Board meets at least four times a year with a minimum of 75% of directors attending every meeting, or as is required to discharge their responsibilities.

Directors are elected for three-year terms and, in line with Central Bank of Bahrain’s corporate governance standards (HC Mod-ule), a Letter of Appointment is issued to each Director following his election to the Board, confirming his election to the Board of Directors and any Board Subcommittee. Each Director’s Letter of Appointment references the Board Charter and Board Subcom-mittee Charter(s) and supporting framework, including but not limited to:

• Directors Responsibilities; • Legal Obligations; • Board and Subcommittee structure and operation; • Restrictions on a Director’s trading practices; • Ethics and Code of Conduct; • Performance and evaluation of the Board and individual members; Induction process, etc.

Board Structure Combined, the Board has a broad range of relevant financial and other skills, extensive experience and knowledge necessary to guide the business. The Board comprises a majority of independent, non-executive directors who satisfy our criteria for independence. The current Board composition, their skill, experience and expertise, as well as the period of office held by each Director, is set out in the earlier sections of this Annual Report.

Board ElectionCandidates for the Board shall be selected by the Board Nomination, Remuneration and Governance Committee (NRGC), and recommended to the Board of Directors for approval, in accordance with the qualifications approved by the Board; taking into consideration the overall composition and diversity of the Board and areas of expertise that new Board members might be able to offer.

The Board recognises the importance of having clearly accepted the division of power and responsibilities at the head of the Bank to ensure a balance of power and authority. Hence, it is the policy of the Board to keep the role of the Chairman as inde-pendent and non-executive.


Board Membership / Tenure / Induction / PerformancePursuant to the Bank’s Memorandum and Articles of Association, all directors must retire once at least every three (3) years but shall be eligible for re-election.

As part of the Boards due diligence process, before any re-election nomination and also annually, the Board undertakes a review of the effectiveness and performance of its committees and of individual directors.

Newly elected Board members are formally inducted through an induction process carried out by the Board in co-ordination with the Bank’s human resources department. Board members are regularly appraised of all matters related to the Bank through regular correspondence between the executive and the independent, non executive Directors. Details of the Directors are avail-able on the Bank’s website and in earlier sections of this Annual Report.

Board Sub-CommitteesNomination, Remuneration and Governance Committee (NRGC)The role of the NRGC Committee is to oversee matters related to the nomination of new directors, assessment of the perfor-mance and contribution of the Board, its committees and directors, as well as the remuneration of directors and senior man-agement. It leads the performance review of Board and Sub-committees and establishes and approves the Bank’s corporate governance framework and other matters as defined in its Charter.

Highlights of the committee’s charter define the following responsibilities: • function as a nominating committee to identify and review candidates to fill vacancies on the Board of Directors; • evaluate the balance of skills, knowledge and experience on the Board of Directors when evaluating potential candidates to fill vacancies on the Board of Directors;

• approve compensation programs and other incentive plans; • review effectiveness and efficiency of the Bank’s governance framework and supporting policies and procedures; and • review the Bank’s standards of ethics and adherence thereto.

Risk, Audit and Compliance Committee (RACC)The role of the RACC is to assist the Board of Directors in independently ensuring and maintaining oversight of the Bank’s finan-cial reporting systems; internal control and risk management processes; internal and external audit; compliance functions; legal and regulatory requirements; Shari’a rules and principles (where applicable), and other matters as defined in its Charter.

The RACC undertakes a detailed review of the quarterly performance of the Bank in addition to an extensive review of the annual financials prior to approval by the full Board.

Highlights of the committee’s charter define the following responsibilities: • set the risk appetite; • review the adequacy and effectiveness of risk management policies and methodologies; • ensure compliance with all applicable laws and regulations; • review the integrity of the financial reporting; • ensure the independence of the internal audit function; • review the adequacy and effectiveness of accounting and financial controls; and • oversee the selection and compensation of the external auditor for appointment and approval at each Annual General Meet-ing and ensure the external auditor’s independence.


Finance and Investment Committee (FIC)The role of the FIC Committee is to oversee the financial and investment affairs of the Bank. This includes maintaining oversight of financing requirements including raising capital and co-ordination with bankers and other financial advisors, investment management, asset liability management and other matters as defined in its Charter.

Highlights of the committee’s charter define the following responsibilities: • review and recommend the Bank’s financial and investment plans and strategies, including investment objectives, and current and projected financial results of operations;

• review and approve recommendations for investment strategies; • set investment limits; and • evaluate investment, financing and trading decisions and recommend enhancements.

Board sub-committees meet on a regular basis, ensuring the minimum attendance required, to fulfill their responsibilities as outlined in the sub-committee Charter(s).

Board Appointment and TerminationThe Board has delegated the responsibility to the Board Nomination, Remuneration and Governance Committee (NRGC) for matters related to the process and review of applications for board membership. The NRGC shall consider candidates recom-mended by shareholders, management, and by the Board to take into consideration the overall composition and diversity of the Board and areas of expertise that the new Board members might be able to offer.

Each proposal by the Board to the shareholders for election or re-election of a director must be accompanied by a recommen-dation from the Board, a summary of advice of the NRGC, and following specific information: • confirmation that the candidate meets the requirements defined by both the Bahrain Commercial Companies Law and the Central Bank of Bahrain;

• term to be served; • biographical details and professional qualifications; • statement that the Board has determined the criteria of independence of judgment for independent directors have been met; • other directorships held; • other positions which involve significant time commitments; • details of candidate’s relationship with the Bank, as well as with other directors; • any nominated candidate is subject to approval from the Central Bank of Bahrain.

Any shareholder may nominate himself as a candidate for Board membership. Any shareholder nomination should be made in writing to the NRGC at least 15 days prior to the holding of an Ordinary General Meeting to enable the NRGC to complete its review and recommendation to the shareholders.

A director is appointed for the term defined in each director’s letter of appointment, which is normally three (3) years. A director however can be terminated for any breaches of contract etc, after recommendation by the NRGC and approval from the Board.The NRGC further undertakes the assessment of the Board, its committees and directors as well as the remuneration of directors and senior management.

Material Transactions, Significant Board Issues and Conflict of InterestsThe Board is heavily involved in the major decisions undertaken by the Bank. This includes reviewing and approving all invest-ment decisions in excess of USD 1 million, the establishment of new entities or the closure of an entity, impairment of any assets and/or provision, approval of new or changes to bank accounts, opening up of branches, approval of the employee incentive scheme, recommendation for the payment of dividends, CEO and CIO remuneration, Board remuneration, etc.

The Board confirms that during the year there have not been any Conflict of Interests, nor any abstinence of voting, nor were there any significant Board issues during the year which would be considered other than the normal course of business. There were some related party transactions as later detailed. In all Board considerations and decisions, only eligible Board members voted.


Bahrain Corporate Governance StandardsIn line with international best practice and governance standards, the Central Bank of Bahrain continues to improve its corporate governance and disclosure standards. These enhancements are in line with developments in other countries, including the UK and the US and are designed to foster a culture within Bahrain banks, of proactive boards and senior managers who are account-able and responsible for the affairs and performance of their banks.

Included among these corporate governance rules are: • boards of banks must periodically assess their composition and size and, where appropriate, reconstitute themselves by selecting new directors to replace long-standing directors;

• no board member may hold more than one directorship of Bahrain bank licensees within the same license category; • boards must identify their members in the annual report as executive, non-executive and independent non-executive and outline in the annual report their criteria and materiality thresholds for the definition of ‘independence’;

• independent non-executive directors are permitted to meet periodically without executive management present; • formal letters of appointment are to be issued to both senior management and board members, outlining their specific re-sponsibilities and accountabilities;

• at each annual shareholder meeting, the Board is to confirm to shareholders that Board and Board Committee evaluations have been done;

• while proposing any re-election, the chairman of the board must confirm to shareholders that following a formal performance evaluation process, the board nominee’s performance continues to be effective and continues to demonstrate commitment to the role;

• Board terms beyond 6 years (two 3-year terms) must be subject to particularly rigorous review and should take into account the need for progressive refreshing of the board.

The most significant aspect of Bahrain’s Corporate Governance Code is “Comply” or “Explain” requirement on the Board. Therefore at each annual shareholder meeting, the Board must confirm compliance with the corporate governance requirements or ex-plain the extent to which, if applicable, it has varied them or believes that any variance or noncompliance was justified.

Board’s Communication Relationship with Shareholders and StakeholdersThe Board maintains an effective communications policy that enables both the Board and management to communicate ef-fectively with its shareholders, stakeholders and the public generally.

It is the role of the Board to ensure that the Annual General Meeting (AGM) is conducted in an efficient manner and serves as a crucial mechanism in shareholder communications. Key ingredients include the supply of comprehensive timely information to shareholders and the encouragement of active participation in the AGM.

Disclosure and Communication PolicyThe directors and management of the Bank are committed to promoting consistent disclosure practices aimed at accurate, timely and broadly disseminated disclosure of material information about the Bank to the shareholders and the market as required by jurisdictional regulations and best practices. The Bank makes available on its website, the quarterly and annual financial reports, for at least the last three years, as well as printed annual reports to shareholders. This is defined by the Bank’s Corporate Communication Policy and the Group Disclosure and External Communication Policy, in addition to the Central Bank of Bahrain’s, Pillar 3 Disclosure requirements (Public Disclosure Module of the Rulebook).

External AuditThe primary role of external auditors is to express an opinion on whether the Bank’s financial statements are free of material misstatements. This is achieved through a thorough review of the system of internal controls to form such an opinion on the financial statements. In addition to the annual audit, the external auditors conduct quarterly reviews on the systematic process and procedures on which the Bank’s quarterly financial statements are based. These statements are subsequently published in the Bahraini newspapers and posted on the Bank’s website.

The Board has reviewed the role and the performance of the external auditors and approved their reappointment.


Internal AuditThe mission of the internal audit division is to ensure that the Bank’s operations are conducted according to the highest stand-ards by providing an independent, objective assurance function and by advising on best practice. Through a systematic and disciplined approach, internal audit helps the Bank to accomplish its objectives by evaluating and improving the effectiveness of risk management, control and governance processes.

The Group’s Internal Audit function is outsourced to an international firm of Public Accountants. The independent Internal Audi-tors report directly to the Board Risk, Audit and Compliance Committee and use a risk based audit methodology.

The scope of Internal Audit work includes the review of risk management procedures, internal control systems, information systems and governance processes. This work also involves periodic testing of transactions, best practice reviews, special inves-tigations, compliance with regulatory requirements, and measures to help prevent and detect fraud.

To maintain objectivity, the Internal Audit function is not involved in the day-to-day control procedures. Instead, each business unit is responsible for its own internal controls and efficiency.

Code of ConductThe Bank’s Code of Conduct sets out standards on how each and every staff member (including the Board of Directors) should behave with all stakeholders - customers, people, communities, investors and regulators.

It defines how each staff member should have both, an organisational and personal responsibility to up-hold these standards and to act at all times with integrity and honesty in order to protect the Bank’s good name and reputation.

Wherever the Bank operates, each staff member should ensure that the business is conducted in a manner which is compliant with the legal and regulatory requirements of the jurisdiction concerned and with the Board’s desire to be seen as an organisa-tion committed to high standards of integrity in all dealings. It is a condition of employment / engagement, which includes Board Members, to sign a declaration committing to compliance with the Bank’s Code of Conduct.

Compliance with the Code of Conduct is monitored on an on-going basis at the division level and reported to the appropriate levels and to the Board Risk, Audit and Compliance Committee (as required). Compliance by the Board members is monitored by the Nomination, Remuneration and Governance Committee and reported to the Board.

Director IndependenceThe Board regularly assesses the independence of the Directors. Directors are considered to be independent if they are inde-pendent of management and free from any business or other relationship that could materially interfere with, or could reason-ably be perceived to materially interfere with, the exercise of their unfettered and independent judgment. Materiality is assessed on a case-by-case basis by reference to each Director’s individual circumstances rather than by applying general materiality thresholds.

Each Director is expected to disclose any business or other relationship in which they are involved in either directly or as a part-ner, shareholder or officer of a company or other entity that has an interest, or a business, or other relationship with the Bank or a related entity.

The Board considers information about any such interests or relationships, including any related financial or other details, when it assesses the Director’s independence on appointment and on an annual basis. Each Director provides an annual attestation of their interests and independence. The Bank’s “Definition of Independence” is defined as follows:


Directors “Independence” - Criteria and Materiality ThresholdsAn “Independent Director” means a person who, to the satisfaction of the Board Nomination, Remuneration and Governance Committee: • Is not a substantial shareholder, whether legal or beneficial and whether direct or indirect, of the Bank or of a company hold-ing more than five (5%) percent of the Bank’s voting stock or an officer of or other-wise associated directly or indirectly with a shareholder holding more than ten (10%) percent of the Bank’s voting stock;

• Is not a controlling person of the Bank (or member of a group of individuals and/or entities that collectively exercise effec-tive control over the Bank) or such person’s relative by blood line or by law, or a legatee and successor (or any trust or similar arrangement) or the executor, administrator or personal representative of any person described herein who is deceased or legally incompetent;

• Is not employed as an executive of another company where any of the Bank’s executives serve on that company’s Board of Directors

• Is not a principal or employee of a professional adviser to the Bank, and its entities whose billings exceed five (5%) percent of the adviser’s total revenues. A Director who is a principal or employee of a professional adviser will not participate in any consideration of the possible appointment of the professional adviser and will not participate in the provision of any service to the Bank by the professional adviser;

• Has no personal service contracts with the Bank, its related parties, or its senior management; • Has not been employed by the Bank or its related parties in the past three years or been a Director after ceasing to hold any such employment;

• Is not affiliated with a non-profit organisation that receives significant funding from the Bank; • Is not a member of the immediate family of an individual who is, or has been during the past five years, employed by the Bank or its related parties as an Executive Officer;

• Is not, nor in the past five years has been affiliated with or employed by a present or former auditor of the Bank or of a related party; and

• Has no other interest or relationship that could interfere with the Director’s ability to act in the best interests of the Bank and independently of the management.

The Board Nomination, Remuneration and Governance Committee may at its discretion determine that a Director is independ-ent notwithstanding, that not all of the above criteria are satisfied. Correspondingly, the Board Nomination, Remuneration and Governance Committee may also determine that a Board member has lost their independence notwithstanding that they con-tinue in a formal sense to satisfy all of the above criteria.

All the Directors (or the companies they represent) own Gulf One shares, in part to satisfy a requirement under the Bahrain Com-mercial Companies Law that each Director own shares with an aggregate nominal value of not less than BD 10,000 (approxi-mately USD 26,525). In addition, many of the Directors invest in various Gulf One investment products (‘Gulf One Investments’).With reference to the last of the criteria listed above, in determining Director Independence, the Directors have not considered their holding of Gulf One shares or their Gulf One investments as factors that could materially interfere with a Director’s ability to act in an independent manner because their share holding and Gulf One investments are purely passive in nature.

The Board determines the significance of any other contractual or business relationship that a Director has with Gulf One by ref-erence to the extent of the relevant Director’s other contractual and business relationships, and determines that a contractual or business relationship with Gulf One that represents 5% or less of a Director’s net worth or annual income is not significant. In the case, that a Director does have a significant other contractual or business relationship with Gulf One, the Board of Directors have determined that such Director’s demonstrated independence of character; judgment and integrity during his years of service on the Board which will be conclusive of that Director’s independence.


Remuneration and Incentive StructureThe form and amount of director compensation is recommended by the Board and approved by the shareholders at the Annual General Meeting. The Board remuneration policy is in line with the requirements of the Central Bank of Bahrain and the Ministry of Commerce and Industry, and has been approved and adopted by the Board. Board remuneration is separately detailed in the following section.

The compensation policy for the senior management aims to provide competitive compensation packages that will enable the Bank to continue to attract, motivate and retain the high-calibre employees who are key to future success.

The Bank also seeks to foster an entrepreneurial culture through a compensation policy that closely aligns the interests of its senior management and employees with those of its shareholders, clients and investors. Key management compensation programs and Employee Compensation Schemes are monitored and approved by the Board of Directors through the NRGC.

A major part of each member of senior management’s compensation is a performance-based bonus that is based both on the financial performance of the Bank and the individual contribution of the employee. In addition, through its incentive programs, the compensation of senior management is closely linked with the long-term value of the Bank and the success of its investments.Key management personnel of the Bank comprise the Board of Directors and key members of management having authority and responsibility for planning, directing and controlling the activities of the Bank.

Employee Compensation SchemeThe Group operates an Employee Incentive Scheme (the Scheme) whereby employees would be granted share awards and share appreciation units (together the awards) as compensation on commencement of employment and on achievement of perfor-mance targets as per the terms of the Scheme (performance condition). The Scheme is operated through a Special Purpose Entity (the SPE), owned by the Bank. The share awards represent beneficial rights to the Bank’s shares that would be held by the SPE and the share appreciation units entitle the employee to receive cash as determined under the terms of the Scheme. The Bank issued 45,555,555 shares of USD 0.25 each which are held by the SPE and the unvested shares are treated as “Unvested Shares of Employee Incentive Scheme” as part of the statement of equity.

The awards vest to the employees ratably over a 3 year vesting period (service condition). The shares awards granted shall be entitled to dividends received during the vesting period subject to completion of the service condition. In case the employee leaves before satisfying the service conditions, the awards shall be forfeited, and retained by the SPE. The maximum number of shares to be issued under the Scheme is restricted up to a maximum of 30% of the Bank’s capital (i.e. currently 195.24 million ordi-nary shares) at a price to be determined on each grant date in accordance with a pre-determined criterion set out in the Scheme document.


Ali H. Alireza 0.90% 4,100,000 1,025,000 0.90% 4,100,000 1,025,000

Zaki M. A. Farsi 2.70% 12,300,000 3,075,000 2.70% 12,300,000 3,075,000

Abdullah A. Ohaly 0.45% 2,050,000 512,500 0.45% 2,050,000 512,500

Ali H. Al Bahar 0.23% 1,025,000 256,250 0.23% 1,025,000 256,250

Mohamed H. AlHarasani 1.58% 7,175,000 1,793,750 1.58% 7,175,000 1,793,750

Dr. Nahed M. Taher * 4.53% 20,633,334 5,158,333 4.53% 20,633,334 5,158,333

Ziyad F. Omar * 4.53% 20,633,334 5,158,333 4.53% 20,633,334 5,158,333

Brian Little ** 0.62% 2,842,385 710,596 0.62% 2,842,385 710,596

P. H Subramani ** 0.66% 3,019,300 754,825 0.66% 3,019,300 754,825

Shibu Nair ** 0.63% 2,860,400 715,100 0.63% 2,860,400 715,100

Total 16.83% 76,638,753 19,159,687 16.83% 76,638,753 19,159,687

Directors and Senior Management RemunerationThe Board and senior management undertake a vital role in the performance of the Bank. In recognition of their services and contribution, the Board and senior management received the following remuneration:

Executive Directors have not received to date any remuneration in their capacity as Board Directors (either from Gulf One or in capacity of being a Board Director of any Special Purpose Vehicle (SPV) board that they are represented on).

Where fees are payable to any officer of the Bank acting in the capacity as a director on one of the SPV’s, these fees are returned to the Bank.

Directors and Senior Management InterestThe interests of directors and senior management in the ordinary shares of the Bank are set out below:

* include 8,333,334 shares owned through Employee Stock Holding Company vested under employee incentive scheme

** shares owned through Employee Stock Holding Company vested under employee incentive scheme

During the year ended 31 December 2012, there were no changes in the ownership of shares in the Bank by either directors or senior management.

USD Remuneration Category 2012 2011

Board Sitting & Attendance fees 241,000 238,000

Senior Management remuneration 2,794,075 2,457,342

2012 2011

% of totalnumber

of shares

Name % of totalnumber of

shares

Number of shares

Number ofshares

Nominal value

USD

Nominal value

USD


Saudi 311,825,500 77,956,375 68.45%

Bahraini 61,955,555 15,488,889 13.60%

Kuwaiti 42,025,000 10,506,250 9.23%

Bahamas 10,250,000 2,562,500 2.25%

British Virgin Islands 10,250,000 2,562,500 2.25%

Cayman Islands 10,250,000 2,562,500 2.25%

UAE 6,949,500 1,737,375 1.52%

Malaysian 2,050,000 512,500 0.45%

Total 455,555,555 113,888,889 100%

Less than 20% and up to 10% 45,555,555 1 10.00%



Less than 1% 86,981,500 36 19.09%

Total 455,555,555 63 100%

Holding StructureDetails of the holding structure of the Bank by nationality is as follows

Distribution of holding by size of shareholder:

One of the unique strengths of Gulf One is the broad distribution of holding combined with low levels of relative holding either by an individual or an organisation.

Shareholders with shareholdings in excess of 5% of the Bank’s capital as at 31 December 2012 were as follows:

Shareholders Percentage of shareholding

Gulf One Employee Stockholding Company SPC 10.00%

Kuwait Investment Co S.A.K 7.20%

Hoshanco Holding 5.85%

There is no government holding in the Bank.

OwnershipNationality

Category

Nominal Value of shareholding

(USD)

Number ofshareholders

Number of shares

Number of shares

Percentage (%)shareholding

Percentage of total shares


GULF ONE INVESTMENT BANK BSC (c)CONSOLIDATED FINANCIAL STATEMENTS31 DECEMBER 2012

Commercial registration : 62199 (registered with Central Bank of Bahrain as a Wholesale Investment Bank)

Registered Office : 15th Floor, West Tower, Bahrain Financial Harbour, P.O. Box: 11172 Manama, Kingdom of Bahrain Telephone: +973 1710 2555

Directors : Ali H. Alireza, Chairman Zaki M. Farsi, Vice Chairman Abdullah A. Ohaly Dr. Ali H. Al Bahar Fahad A. Al-Hoshan Khaled A. Al Duhaim Mohamed H. AlHarasani Mutlaq H. Almorished Dr. Nahed M. Taher Ziyad F. Omar

Chief Executive Officer : Dr. Nahed M. Taher

Auditors : KPMG Fakhro


INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS Gulf One Investment Bank BSC (c) Manama, Kingdom of Bahrain

Report on the consolidated financial statementsWe have audited the accompanying consolidated financial statements of Gulf One Investment Bank BSC (c) (“the Bank”) and its subsidiaries (together “the Group”), which comprise the consolidated statement of financial position as at 31 December 2012, and the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.

Responsibilities of the board of directors for the consolidated financial statements

The board of directors of the Bank is responsible for the preparation and fair presentation of these consolidated financial state-ments in accordance with International Financial Reporting Standards, and for such internal control as the board of directors de-termines is necessary to enable the preparation of consolidated financial statements that are free from material misstatements, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material mis-statement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal controls relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2012, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.

Report on other legal and regulatory requirementsAs required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (CBB) Rule Book (Volume 1), we report that: the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith; the financial information contained in the Board of Directors’ report is consistent with the consolidated financial statements; we are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 1, applicable provisions of Volume 6 and CBB directives), or the terms of the Bank’s memoran-dum and articles of association having occurred during the year that might have had a material adverse effect on the business of the Bank or on its financial position; and satisfactory explanations and information have been provided to us by the manage-ment in response to all our requests.

Manama, Kingdom of Bahrain28 February 2013

KPMG Fakhro, a registered partnership under Bahrain Law, is a member of KPMG international, a Swiss cooperative.

KPMG Fakhro Audit5th Floor, Chamber of Commerce Building,P.O. Box 710, Manama, Kingdom of Bahrain

CR No: 6220Telephone : +973 17224807Fax: +973 17227443Website: www.kpmg.com.bh


CONSOLIDATED STATEMENT OF FINANCIAL POSITIONas at 31 December 2012 USD

Note 31 December 2012 31 December 2011

ASSETS

Cash and bank balances 5 16,684,719 27,478,440

Loans and advances 6 6,349,648 12,103,883

Investments designated at fair value through profit or loss 7 88,243,321 75,926,962

Equity accounted investees 8 3,382,219 4,329,141

Other assets 9 15,340,152 21,000,344

Total assets 130,000,059 140,838,770

LIABILITIES AND EQUITY

Liabilities

Investors’ funds - 6,383,430

Payables and accrued expenses 10 3,932,727 9,168,312

Total liabilities 3,932,727 15,551,742

Equity

Share capital 11 113,888,889 113,888,889

Unvested shares of employees incentive scheme (1,963,023) (2,020,033)

Share premium 1,696,656 1,686,293

Statutory reserve 2,272,835 2,201,628

Retained earnings 10,171,116 9,530,251

Translation reserve 859 -

Total equity 126,067,332 125,287,028

Total liabilities and equity 130,000,059 140,838,770

The consolidated financial statements, which consist of pages 35 to 63, were approved by the Board of directors on 28 February 2013 and signed on its behalf by:

Ali H. Alireza Dr. Nahed M. TaherChairman Director and Chief Executive Officer

The accompanying notes from 1 to 23 form an integral part of these consolidated financial statements.


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEfor the year ended 31 December 2012 USD

Note 2012 2011

Income from investment banking services 12 1,075,507 1,911,570

Net interest income 13 872,205 1,256,647

Fair value gain on investments designated at fair value

through profit or loss, net 7 6,999,383 3,644,595

Profit on sale of investments 456,410 221,901

Dividend income 281,008 181,320

Share of profit / (loss) of equity accounted investees 8 173,077 (220,064)

Other income / (loss) 554,750 (216,502)

Total income 10,412,340 6,779,467

Staff expenses 14 6,409,469 6,990,386

Premises expenses 796,879 691,173

Other expenses 15 2,493,920 3,826,737

Total expenses 9,700,268 11,508,296

Profit / (loss) for the year 712,072 (4,728,831)

Other comprehensive income

Foreign currency translation differences 859 -

Other comprehensive income for the year 859 -

Total comprehensive income for the year 712,931 (4,728,831)

Ali H. Alireza Dr. Nahed M. TaherChairman Director and Chief Executive Officer



CONSOLIDATED STATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2012

2012 USD

2011 USD

At 1 January

Profit for the year

Other comprehensive income

Total comprehensive income for the year

Shares vested under employees incentive scheme

(note 16)

Transfer to statutory reserve

At 31 December

113,888,889

-

-

-

-

-

113,888,889

(2,020,033)

-

-

-

57,010

-

(1,963,023)

1,686,293

-

-

-

10,363

-

1,696,656

2,201,628

-

-

-

-

71,207

2,272,835

9,530,251

712,072

-

712,072

-

(71,207)

10,171,116

-

-

859

859

-

-

859

125,287,028

712,072

859

712,931

67,373

-

126,067,332

At 1 January

Total comprehensive income for the year

Dividend declared for 2010

Issue of bonus shares

Shares vested under employees incentive

scheme (note 16)

Acquisition of non-controlling

Interest

At 31 December

111,111,111

-

-

2,777,778

-

-

113,888,889

(6,312,694)

-

-

-

4,292,661

-

(2,020,033)

863,715

-

-

-

822,578

-

1,686,293

2,201,628

-

-

-

-

-

2,201,628

19,814,638

(4,728,831)

(2,777,778)

(2,777,778)

-

-

9,530,251

127,678,398

(4,728,831)

(2,777,778)

-

5,115,239

-

125,287,028

9,293,033

-

-

-

-

(9,293,033)

-

136,971,431

(4,728,831)

(2,777,778)

-

5,115,239

(9,293,033)

125,287,028

Unvested shares of

employees incentive

scheme

Unvested shares of

employees incentive

scheme

Share capital

Share capital

Sharepremium

Sharepremium

Statutory reserve

Statutory reserve

Retained earnings

Retained earnings

Total

Translation reserve

Non-controlling

interest(note 1)

Total equity

Total equity

Equity attributable to shareholders of the Bank




CONSOLIDATED STATEMENT OF CASH FLOWSfor the year ended 31 December 2012 USD

Note 2012 2011

OPERATING ACTIVITIES

Receipts from investment banking services 1,984,781 1,746,015

Net interest received 1,810,021 930,479

Receipt of dividend and other income 373,072 268,359

Payment for staff expenses (6,085,958) (6,306,420)

Payment for premises expenses (796,879) (691,173)

Payment for other expenses (2,107,426) (4,646,381)

Loans repaid / (disbursed), net 4,762,360 (68,564)

Cash used in operating activities (60,029) (8,767,685)

INVESTING ACTIVITIES

Purchase of equipment (43,439) (406,501)

Purchase of equity accounted investees 8 - (1,200,600)

Proceeds from sale of equity accounted investees 1,127,000 -

Dividend received from equity accounted investees 399,399 -

Purchase of investments designated at fair value

through profit or loss (2,646,417) (980,420)

Proceeds from sale of investments designated at

fair value through profit or loss 1,688,220 3,290,734

Purchases of non-controlling interests of a subsidiary - (3,804,378)

Advance for purchase of investment - (3,999,762)

Cash generated from / (used in) investing activities 524,763 (7,100,927)

FINANCING ACTIVITIES

Dividends paid - (2,487,909)

Cash used in financing activities - (2,487,909)

Net increase / (decrease) in cash and cash equivalents 464,734 (18,356,521)

Cash and cash equivalents at 1 January 16,219,985 34,576,506

Cash and cash equivalents at 31 December 16,684,719 16,219,985

Cash and banks balances comprise of:

Cash and cash equivalents 16,684,719 16,219,985

Bank balances relating to investors’ funds - 6,383,430

Balances of investee company - 4,875,025

Cash and bank balance at end of the year 16,684,719 27,478,440


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 31 December 2012

1. ACTIVITIESGulf One Investment Bank BSC (c) (“the Bank”) was incorporated on 24 August 2006 as a closed shareholding company in the Kingdom of Bahrain under Commercial Registration No. 62199. The Bank operates as a Wholesale Investment Bank under a license granted by the Central Bank of Bahrain (“CBB”). The principal activities of the Bank include investment advisory services and investment transactions.

Consolidated financial statementsThe consolidated financial statements for the year ended 31 December 2012 comprise the financial statements of the Bank and its subsidiaries (together referred to as “the Group”). Following are the significant subsidiaries of the Bank:

Subsidiaries Percentage Holding Place of Incorporation

Gulf One Investment Holdings Limited 100% Cayman Islands

Gulf One DACH Investments Limited 100% Cayman Islands

Manjam Mining Holding SPC 100% Bahrain

Gulf One Employee Stockholding Company SPC 100% Bahrain

Gulf One Capital Company 100% Saudi Arabia

Gulf One GmbH 100% Germany

As at 31 December 2010, the Group owned 61.54% equity stake in JAO Investment Fund (the “Fund”). In June 2011, the Group acquired additional 38.46% equity stake, which resulted in the Fund, being a wholly owned subsidiary of the Bank. Subsequently, on 31 August 2011, the Fund was liquidated. Accordingly, there are no current period disclosures for non-controlling interests.

2. BASIS OF PREPARATION

(a) Statement of complianceThe consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and in conformity with the requirements of the Bahrain Commercial Company Law 2001.

(b) Basis of measurementThe consolidated financial statements have been prepared under the historical cost basis except for measurement of certain investments at fair value (note 3 (b)).

(c) Basis of consolidation

(i) SubsidiariesSubsidiaries are those enterprises (including special purpose entities) controlled by the Bank. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Subsidiaries are consolidated from the date on which control is transferred to the Group and de-consolidated from the date that control ceases.

Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the secu-ritisation of particular assets, or the execution of a specific borrowing or investment transaction. An SPE is consolidated if, based on an evaluation of the substance of its relationship with the Group and the SPE’s risks and rewards, the Group concludes that it controls the SPE.


The assessment of whether the Group has control over an SPE is carried out at inception and normally no further reassessment of control is carried out in the absence of changes in the structure or terms of the SPE, or additional transactions between the Group and the SPE. Where the Group’s voluntary actions, such as lending amounts in excess of existing liquidity facilities or ex-tending terms beyond those established originally, change the relationship between the Group and an SPE, the Group performs a reassessment of control over the SPE.

The Group in its fiduciary capacity also manages and administers assets held in trust and other investment vehicles on behalf of investors. The financial statements of these entities are not included in these consolidated financial statements except when the Group controls the entity. Information about the Group’s fiduciary assets under management is set out in note 18.

Acquisition accountingAny excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contin-gent liabilities of subsidiary at the date of acquisition is recognised as goodwill, and is disclosed separately under “other assets”. When the excess is negative, a bargain purchase gain is recognised immediately in the consolidated statement of comprehen-sive income.

Loss of controlUpon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in income statement. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or in accordance with the Group’s accounting policy for financial instruments depending on the level of influence retained.

(ii) AssociatesAssociates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exit when the Group holds between 20% and 50% of the voting power of another entity.On initial recognition of an associate, the Group makes an accounting policy choice as to whether the associ-ate shall be equity accounted or designated as at fair value through income statement. The Group makes use of the exemption in IAS 28 – Investment in Associates for venture capital organisation and designates certain of its investment in associates, as ‘investments carried at fair value through income statement’. These investments are managed, evaluated and reported on inter-nally on a fair value basis (refer to note 3 (b)).

If the equity accounting method is chosen for an associate (equity-accounted investee), these are initially recognised at cost and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investees after the date of acquisition. Distributions received from an investees reduce the carrying amount of the investment. Adjustments to the car-rying amount may also be necessary for changes in the investor’s proportionate interest in the investees arising from changes in the investee’s equity. When the Group’s share of losses exceeds its interest in an equity-accounted investees, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the equity-accounted investees.

If the ownership interest in an equity-accounted investee is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in equity is reclassified to income statement where appropriate

(iii) Transactions eliminated on consolidation and equity accountingIntra-group balances and transactions, and any unrealised gains or losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Intra-group gains on transactions between the Group and its equity-accounted investees are eliminated to the extent of the Group’s interest in the investees. Unrealised losses are also eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

The reporting period of the Group’s subsidiaries and equity-accounted investees are identical and their accounting policies conform to those used by the Bank for like transactions and events in similar circumstances. The accounting policies of the sub-sidiaries and equity-accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.


(d) Functional and presentation currencyItems included in the consolidated financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars, which is the Bank’s functional and presentation currency.

Other group components, branches & associatesAssets and liabilities of foreign subsidiaries, are translated into US Dollars at the rates of exchange prevailing at the reporting date. Income and expense items are translated at average exchange rates prevailing for the period. Any exchange differences arising on translation are recognised in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity.

(e) Use of estimates and judgmentsThe preparation of the consolidated financial statements in conformity with the IFRS requires the use of certain critical account-ing estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

(f ) New standards, amendments and interpretations effective from 1 January 2012There were no significant changes to the current accounting policies of the Group as a result of the new standards, amendments and interpretations, which became effective from 1 January 2012. (g) New standards, amendments and interpretations issued but not yet effectiveThe following new standards and interpretations have been issued and are expected to be relevant to the Group but not effec-tive for the year ended 31 December 2012.

IAS 1 (amendment) - Presentation of items of other comprehensive incomeThe amendments to IAS 1 require that an entity present separately the items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met from those that would never be reclassified to profit or loss. The amendment is effective for annual periods beginning on or after 1 July 2012 with an option of early application.

The adoption of this amendment is not expected to have a significant impact on the consolidated financial statements of the Group.

IAS 28 (2011) – Investment in Associates and Joint venturesIAS 28 (2011) supersedes IAS 28 (2008). IAS 28 (2011) makes the following amendments;

• Associates held for sale: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations applies to an investment, or a portion of an investment, in an associate or a joint venture that meets the criteria to be classified as held for sale. For any retained portion of the investment that has not been classified as held for sale, the entity applies the equity method until dis-posal of the portion held for sale. After disposal, any retained interest is accounted for using the equity method if the retained interest continues to be an associate or a joint venture, and

• On cessation of significant influence or joint control, even if an investment in an associate becomes an investment in a joint venture or vice versa, the entity does not re-measure the retained interest.

The standard is effective for annual periods beginning on or after 1 January 2013 and is applied retrospectively.

The adoption of this amendment is not expected to have a significant impact on the consolidated financial statements of the Group.

Amendments to IFRS 7 and IAS 32 on offsetting financial assets and financial liabilities (2011) Disclosures – Offsetting Financial Assets and Financial Liabilities (amendments to IFRS 7) introduces disclosures about the impact of netting arrangements on an entity’s financial position. The amendments are effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods. Based on the new disclosure requirements the Group will have to provide information about what amounts have been offset in the statement of financial position and the nature and extent of rights of set off under master netting arrangements or similar arrangements.


Offsetting Financial Assets and Financial Liabilities (amendments to IAS 32) clarify the offsetting criteria IAS 32 by explaining when an entity currently has a legally enforceable right to set off and when gross settlement is equivalent to net settlement. The amendments are effective for annual periods beginning on or after 1 January 2014 and interim periods within those annual periods. Earlier application is permitted.

The Group does not expect any significant impact on the consolidated financial statements on adoption of this amendment.

IFRS 9 - Financial InstrumentsIFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additions to the standard relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting.

The IFRS 9 (2009) requirements represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to col-lect contractual cash flows, and the asset’s contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held to maturity, available-for-sale and loans and receivables.

For an investment in an equity instrument which is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual share-by-share basis, to present all fair value changes from the investment in other comprehen-sive income. No amount recognised in other comprehensive income would ever be reclassified to profit or loss at a later date. However, dividends on such investments are recognised in profit or loss, rather than other comprehensive income unless they clearly represent a partial recovery of the cost of the investment. Investments in equity instruments in respect of which an entity does not elect to present fair value changes in other comprehensive income would be measured at fair value with changes in fair value recognised in profit or loss.

The standard requires that derivatives embedded in contracts with a host that is a financial asset within the scope of the stand-ard are not separated; instead the hybrid financial instrument is assessed in its entirety as to whether it should be measured at amortised cost or fair value.

IFRS 9 (2010) introduces a new requirement in respect of financial liabilities designated under the fair value option to generally present fair value changes that are attributable to the liability’s credit risk in other comprehensive income rather than in profit or loss. Apart from this change, IFRS 9 (2010) largely carries forward without substantive amendment the guidance on classification and measurement of financial liabilities from IAS 39.

IFRS 9 is effective for annual periods beginning on or after 1 January 2015 with early adoption permitted. The IASB decided to consider making limited amendments to IFRS 9 to address practice and other issues. The Group has commenced the process of evaluating the potential effect of this standard but is awaiting finalisation of the limited amendments before the evaluation can be completed.

Given the nature of the Group’s operations, this standard is not expected to have a significant impact on the Group’s financial statements.

IFRS 10 - Consolidated financial statements and IAS 27 Separate Financial Statements (2011)IFRS 10 introduces a single control model to determine whether an investee should be consolidated. As a result, the Group may need to change its consolidation conclusion in respect of its investees, which may lead to changes in the current accounting for these investees [refer note 2(c) (i)]. The standard is effective for annual periods beginning on or after 1 January 2013.


The IASB published Investment Entities (Amendments to IFRS 10 and IFRS 12), which grants certain relief from consolidation to investment entities. It requires qualifying investment entities to account for investment in controlled investees on a fair value basis. The effective date is annual periods beginning on or after 1 January 2014, but early adoption is permitted to enable align-ment with the adoption of IFRS 10.

The Group is considering the collective implications of the amendments, the impact and timing of its adoption on its consoli-dated financial statements. These amendments are expected to have significant impact on the Group.

IFRS 12 - Disclosures of interests in other entitiesIFRS 12 brings together into a single standard all the disclosure requirements about a Group’s interests in subsidiaries, joint ar-rangements, associates and unconsolidated structured entities. It requires the disclosure of information about the nature, risks and financial effects of these interests.

The standard is effective for annual periods beginning on or after 1 January 2013. The Group is currently assessing the disclosure requirements for interests in subsidiaries and unconsolidated unstructured entities in comparison with existing disclosures.

IFRS 13 - Fair value measurementIFRS 13 provides a single source of guidance on how fair value is measured, and replaces the fair value measurement guidance that is currently dispersed throughout IFRS. Subject to limited exceptions, IFRS 13 is applied when fair value measurements or disclosures are required or permitted by other IFRSs. Although many of the IFRS 13 disclosure requirements regarding financial assets and financial liabilities are already required, the adoption of IFRS 13 will require the Group to provide additional disclo-sures. These include fair value hierarchy disclosures for non-financial assets/liabilities and disclosures on fair value measurements that are categorised in Level 3.

The standard is effective for annual periods beginning on or after 1 January 2013 with an option of early adoption. The Group is considering the implications of the standard, the impact and timing of its adoption.

(h) Early adoption of standardsThe Group did not early adopt new or amended standards/interpretations in 2012.

3. SIGNIFICANT ACCOUNTING POLICIESThe significant accounting policies adopted in the preparation of these consolidated financial statements are set out below. These accounting policies have been consistently applied by the Group and are consistent with those used in the previous year except as described in note 2 (f ) above.

(a) Foreign currenciesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevail-ing at the reporting date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income.

Foreign exchange gains and losses relating to the investments designated at fair value through profit or loss are presented in the consolidated statement of comprehensive income within ‘fair value gains / (losses) on investments designated at fair value through profit or loss’.


(b) Financial assets and liabilities

(i) ClassificationThe Group classifies its financial assets, other than equity accounted investees, as investments at fair value through profit or loss or loans and receivables.

Investments designated at fair value through profit or lossThe Group designates investments at fair value through profit or loss when the investments are managed, evaluated and re-ported internally on a fair value basis in accordance with the Group’s investment strategy. These include investments in associate companies and private equity. [refer note 2 (c) (iii)].

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and that the Group does not intend to sell immediately or in the near term.

Financial liabilities Financial liabilities are classified as liabilities at amortised cost.

(ii) Recognition and measurementAll financial assets (except investment securities) and financial liabilities are recognised on the date at which they are originated. Regular way purchase and sale of investment securities are recognised on the settlement date. Settlement date is the date on which the investment security is delivered to the Group i.e. the date from which the risks and rewards related to the investment security are transferred to the Group.

Investments designated at fair value through profit or lossInvestments designated at fair value through profit or loss are recognised initially at fair value (transaction price). Transaction costs are expensed as incurred in the consolidated statement of comprehensive income. Subsequent to initial recognition, all investments classified at fair value through profit or loss are re-measured to fair value.

Gains and losses arising from a change in the fair value of investments designated at fair value through profit or loss are recog-nised in the consolidated statement of comprehensive income in the period in which they arise.

Loans and receivablesLoans and receivables are recognised initially at fair value. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less provision for impairment.

Financial liabilities at amortised costsFinancial liabilities are initially measured at fair value plus directly attributable transaction costs, and subsequently measured at their amortised cost using the effective interest method.

(iii) De-recognitionThe Group derecognises a financial asset when the contractual rights to the cash flows from the financial assets expire, or when it transfers the rights to receive the contractual cash flows on the financial assets in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.

The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

(iv) Fair value estimationFair 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 at the measurement date.

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.


If a market for a financial instrument is not active or there is no market, the Group establishes fair value using valuation tech-niques. Such valuation techniques may include using recent arm’s length transactions between knowledgeable, willing parties (if available), discounted cash flows or market multiples for similar instruments.

In determining fair valuation, the Group in many instances relies on the financial data of investees and on estimates by the man-agement of the investee companies as to the effect of future developments. Although the Group uses its best judgment, there are inherent limitations in any estimation techniques. The fair value estimates presented herein are not necessarily indicative of an amount the Group could realise in a current transaction. Future confirming events will also affect the estimates of fair value. The effect of such events on the estimates of fair value, including the ultimate liquidation of investments, could be material to the financial statements.

(v) Amortised cost measurementThe amortised costs of a financial assets or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method.

The effective interest rate method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument – or, when ap-propriate, a shorter period – to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

(vi) OffsettingFinancial assets and financial liabilities are set off and the net amount reported in the statement of financial position when, and only when, the Group has a legal right to set off the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by accounting standards, or for gains and losses arising from a group of similar transactions.

(vii) Impairment of financial assetsThe Group assesses at each reporting date whether there is objective evidence that financial assets (except investments des-ignated at fair value through profit or loss) are impaired. A provision for impairment is established where there is objective evidence that the Group will not collect all amounts to be received. Objective evidence that an asset is impaired may include a breach of contract, such as default or delinquency in interest or principal payments, the granting of a concession that, for eco-nomic or legal reasons relating to the borrower’s financial difficulties, would not otherwise be considered, indications that it is probable that the borrower will enter bankruptcy or other financial reorganisation.

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. Losses are recognised in the consolidated statement of com-prehensive income and reflected in an allowance account against the financial asset. If in a subsequent period, the fair value increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in consoli-dated statement of comprehensive income, the impairment loss is reversed through the consolidated statement of compre-hensive income.

Impairment and un-collectability is also measured and recognised on a portfolio basis for a group of loans and advances with similar credit risk characteristics that are not individually identified as impaired, on the basis of estimates of losses that have been incurred but not yet specifically identified within the loans and advances portfolio at the reporting date. (c) Cash and cash equivalentsCash and cash equivalents consist of cash, balances with banks and short term placements with original maturities of 90 days or less from the date of acquisition that are readily convertible to cash, which are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. These exclude restricted cash balances. Cash and cash equivalents are carried at amortised cost.


(d) EquipmentEquipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method to write-off the cost of the assets over their estimated useful lives ranging from 1 to 5 years. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Equipments are included under other assets in the consolidated statement of financial position.

(e) Recoverable project costsIncremental costs that are directly attributable to securing an investment advisory/ management contract are recognised as an asset if they can be identified separately, measured reliably and if it is probable that they will be recovered.

(f ) Impairment of non-financial assets The carrying amount of the Group’s assets or its cash generating unit, other than financial assets carried at amortised cost and investments carried at fair value through profit or loss, are reviewed at each reporting date to determine whether there is any indication of impairment. A cash generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other asset and groups. If any such indication exists, the asset’s recoverable amount is estimated. The recover-able amount of an asset or a cash generating unit is the greater of its value in use or fair value less costs to sell.

In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash generating unit. An impair-ment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the income statement. Impairment losses are reversed only if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount. Separately recognised goodwill is not amortised and is tested annually for impairment and carried at cost less accu-mulated impairment losses. Impairment losses on separately recognised goodwill are not reversed.

(g) Revenue recognitionIncome from investment banking services is recognised when the service is provided and income is earned. This is usually when the Group has performed all significant acts in relation to the service and it is highly probable that the economic benefits from the transaction will flow to the Group.

Placement and arrangement fees are recognised as income when earned. Interest income and expense is recognised on an accrual basis using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash flows through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability.

Dividend income from financial assets at fair value through profit or loss is recognised in the consolidated statement of compre-hensive income within ‘Dividend income’ when the Group’s right to receive payments is established.

(h) Carried interestIn accordance with certain investment management agreements (“IMA”), the Bank, as the Investment Manager, is entitled to receive a share of the realised profits of the investment funds (the Funds), otherwise referred to as the Investment Manager’s carried interest. In accordance with the terms and conditions of the IMA, the carried interest due to the Investment Manager is calculated at each reporting date, taking into account the required performance conditions and distribution arrangements of the Funds as a whole. The change in carried interest due to the Investment Manager during the year is included under ‘Income from investment banking services’ in the consolidated statement of comprehensive income. (Refer to note 12).

Carried interest is calculated based on the fair value of the investments of the Funds as measured at the reporting date. Where the calculation indicates that the performance conditions would have been achieved and distribution arrangements have been met were the investments realised at their fair values, carried interest is accrued. Carried interest is equal to the Investment Man-ager’s hypothetical share of profits. Therefore, based on the calculation described above, the Bank recognises a financial asset of carried interest receivable based on the estimated fair value of the investments in the Funds at the reporting date and will receive its share of realised investment gains at the end of the term of the Funds.


(i) Payables and accrued expensesPayables and accrued expenses are recognised initially at fair value and subsequently stated at amortised cost.

(j) Employees benefits

(i) Defined contribution plan for GCC employeesPensions and other social benefits for GCC employees are covered by the Social Insurance scheme applied in respective country, which is a “defined contribution scheme” in nature under IAS 19 ‘Employee Benefits’, and to which employees and employers contribute monthly on a fixed-percentage-of-salaries basis.

(ii) Defined benefit plan for expatriate employees Expatriate employees on fixed contracts are entitled to leaving indemnities payable under the Bahraini Labour Law, based on length of service and final remuneration. Provision for this unfunded commitment, which is a “defined benefit scheme” in nature, under IAS 19, has been made by calculating the notional liability had all employees left at the reporting date.

(iii) Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A provision is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(iv) Share-based employee incentive schemeThe grant date fair value of equity instruments granted to employees is recognised as an employee expense, with a correspond-ing increase in equity over the period in which the employees become unconditionally entitled to the share awards. The amount recognised as an expense is adjusted to reflect the number of share awards for which the related service and non market per-formance vesting conditions are expected to be met such that the amount ultimately recognised as an expense is based on the number of share awards that do meet the related service and non-market performance conditions at the vesting date.

(k) ProvisionsProvisions are recognised when the Group has a present obligation (legal or constructive) arising from a past event that can be estimated reliably and is probable that an outflow of economic benefits will be required to settle the obligation.

(l) Statutory reserveThe Bahrain Commercial Companies Law 2001 requires that 10 percent of the annual net profit be appropriated to a statutory reserve which is normally distributable only on dissolution. Appropriations may cease when the reserve reaches 50 percent of the paid up share capital.

(m) Financial guarantees Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it in-curs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are recognised initially at their fair value, and the initial fair value is amortised over the life of the financial guarantee. The financial guarantee liability is subsequently carried at the higher of this amortised amount and the present value of any expected payment when a payment under the guarantee has become probable. Recognised financial guarantees are included within other liabilities.

(n) Leases Payments under operating lease are recognised in the consolidated statement of comprehensive income on a straight-line basis over the term of the lease. Lease incentives are recognised as an integral part of the total lease expense, over the term of the lease


(o) Assets under managementThe Group administers and manages assets owned by clients which are not reflected in the consolidated financial statements.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES

The Group makes estimates and assumptions that effect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances.

Judgments

(i) Classification of investmentsIn the process of applying the Group’s accounting policies, management decides on acquisition of an investment whether it should be classified as investments designated at fair value through profit or loss or equity accounted investees or available-for-sale investments. The classification of each investment reflects the management’s intention in relation to each investment and is subject to different accounting treatments based on such classification [refer note 3 (c)].

(ii) Special purpose entitiesThe Group sponsors the formation of special purpose entities (SPE’s) primarily for the purpose of allowing clients to hold invest-ments. The Group does not consolidate SPE’s that it does not have the power to control. In determining whether the Group has the power to control an SPE, judgements are made about the objectives of the SPE’s activities, the Group’s exposure to the risks and rewards, as well as about the Group’s ability to make decisions for its benefits.

Key sources of estimating uncertainty

(i) Fair value of investments not quoted in an active marketThe fair values of securities that are not quoted in an active market are determined by using valuation techniques, primarily earn-ing multiples, discounted cash flows and recent comparable transactions. The models used to determine fair values are validated and periodically reviewed by the Group. The inputs in the earning multiples models include observable data, such as earning multiples of comparable companies to the relevant portfolio company, and unobservable data, such as forecast earnings for the portfolio company. In discounted cash flow models, unobservable inputs are the projected cash flows of the relevant portfolio company and the risk premium for liquidity and credit risk that are incorporated into the discount rate. However, the discount rates used for valuing equity securities are determined based on the risk free rate, expected market premium, country risk pre-mium and systematic risk inherent in each investee company.

Significant judgment is required to be made by the Group in the selection of an approach that would reflect the best measure of fair value of the investments. The choice of the models used for valuation on each reporting period may have a significant impact on the fair value of investments and the amounts reported in the consolidated statement of financial position.

For impact on sensitivity on key variables used as inputs of valuation models, refer note 7.


USD

5. CASH AND BANK BALANCES

31 December 2012 31 December 2011

Cash on hand 3,699 2,763

Balances with banks 4,770,881 3,902,978

Placements with banks 11,910,139 23,572,699

16,684,719 27,478,440

6. LOANS AND ADVANCESLoans and advances primarily comprise short-term financing provided mainly to associate companies. 2012 2011

Gross loans and advances 6,604,476 12,294,573

Individually impaired loans and advances (190,690) (190,690)

Portfolio provision on loans and advances (64,138) -

6,349,648 12,103,883

Unquoted

Investment in associates

Other equity investments

7. INVESTMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS

Investment designated at fair value through profit or loss comprises investments in entities / funds managed by the Group. The main principles, estimates and assumptions adopted to arrive at fair value include estimated future cash flows which have been provided by the management of the investee companies but have been reviewed for reasonableness by the Group and the external valuer. Cash flows have been projected for an initial period of five years or over the project life in certain cases and then a terminal value has been estimated at a growth rate of 1% to 3%. The potential effect of using reasonable possible alternative assumptions for fair valuing the investments designated at fair value through profit or loss are summarised below:

60,492,667

15,434,295

75,926,962

6,955,187

-

6,955,187

(1,638,211)

-

(1,638,211)

9,949,745

(2,950,362)

6,999,383

75,759,388

12,483,933

88,243,321

Additions during the

year

At 1 January 2012

Valuation technique used

Mixed of income and market approach

Discounted cash flow

Key unobservable inputs

EBITDA multiple

Discount rate

Discount rate

Fair value at 31 December

2012

14,152,231

74,091,090

88,243,321

Weighted average

input

7.57

9.40%

14.00%

Reasonable possible shift

+/- (in average input)

+/- 0.5

+/- 0.50%

+/- 0.50%

Increase / (decrease)

in vauation

255,024 / (255,024)

(415,170) / 453,253

(2,725,023) / 3,015,245

Disposals during the

year

Fair value changes

At 31 December

2012


USD

8. EQUITY ACCOUNTED INVESTEESThese comprise investments in associated companies accounted for using equity method.

2012 2011

At 1 January 4,329,141 3,348,605

Acquisition during the year - 1,200,600

Dividend received (399,399) -

Sale during the year (720,600) -

Share of profit / (loss) 173,077 (220,064)

At 31 December 3,382,219 4,329,141

Following is the summarised financial information of equity accounted investees that has been equity accounted not adjusted for the percentage ownership held by the Group: 2012 2011

Total assets 12,784,891 14,487,650

Total liabilities 3,248,483 3,178,159

Total revenues 3,602,004 3,454,274

Total net profit / (losses) 39,479 (170,945)

9. OTHER ASSETS

2012 2011

Accrued carried interest 2,709,586 4,758,745

Recoverable from employees (note 16) 8,790,347 8,716,579

Equipment 822,164 1,340,580

Recoverable project costs 163,031 396,596

Fee receivable 1,863,880 876,246

Accrued interest income 5,036 7,614

Prepayments 302,071 263,117

Receivable from sale of investments - 167,000

Advance towards purchase of investment 66,667 3,999,762

Goodwill on acquisition of a subsidiary 448,490 448,490

Others 168,880 25,615

15,340,152 21,000,344

10. PAYABLES AND ACCRUED EXPENSES

2012 2011

Employee accruals 2,260,648 1,876,389

Board fees payable 564,866 662,000

Payable to an investor - 162,000

Payable to an investee company - 4,875,026

Others, including accounts payable and accrued expenses 1,107,213 1,592,897

3,932,727 9,168,312


USD

11. SHARE CAPITAL

2012 2011

Authorised share capital

4,000,000,000 (2011: 4,000,000,000) shares of USD 0.25 par value 1,000,000,000 1,000,000,000

Issued and fully paid up

455,555,555 (2011: 455,555,555) shares of USD 0.25 par value 113,888,889 113,888,889

During 2011, the Bank had issued 11,111,111 shares for USD 2,777,778 at USD 0.25 per share as share dividends and paid USD 2,777,778 (USD 0.00625 per share) as cash dividends for the year 2010.

12. INCOME FROM INVESTMENT BANKING SERVICES

2012 2011

Income from advisory services 1,103,767 959,740

Placement and structuring fees 493,086 340,147

Income from management of funds 1,619,886 1,306,779

Reversal of carried interest (2,141,232) (695,096)

1,075,507 1,911,570

13. NET INTEREST INCOME

2012 2011

Placements with banks 108,064 466,467

Loans and advances 377,125 791,465

Investments designated at fair value through profit or loss 387,016 -

Total interest income 872,205 1,257,932

Interest on investors’ funds - (1,285)

Total interest expense - (1,285)

Net interest income 872,205 1,256,647

14. STAFF EXPENSES

2012 2011

Salaries and benefits 5,469,923 6,202,302

Social insurance expense 159,533 179,230

End of service benefits 408,942 315,349

Others 371,071 293,505

6,409,469 6,990,386


USD

15. OTHER EXPENSES

2012 2011

Legal and professional fees 699,366 871,217

Transaction costs on acquisition of subsidiary - 552,103

Travel expenses 300,783 210,972

Professional indemnity 153,288 152,716

Communication expenses 163,076 130,504

Depreciation 561,856 657,475

Board fees 123,209 386,000

Portfolio provision on loans and advances 64,138 -

Impairment of recoverable project costs - 287,165

Others 428,204 578,585

2,493,920 3,826,737

16. EMPLOYEE INCENTIVE SCHEMEThe Group operates an Employee Incentive Scheme (the Scheme) whereby employees would be granted share awards and share appreciation units (together the “awards”) as compensation on commencement of employment and on achievement per-formance targets as per the terms of the Scheme (performance condition). The Scheme is operated through a Special purpose entity (the SPE), owned by the Bank. The share awards represent beneficial rights to the Bank’s shares that would be held by the SPE and the share appreciation units entitle the employee to receive cash as determined under the terms of the Scheme. The Bank issued 45,555,555 shares of USD 0.25 each which are held by the SPE and the unvested shares are treated as “Unvested Shares of Employee Incentive Scheme” as part of the statement of equity.

The awards vest to the employees ratably over a 3 year vesting period (service condition). The shares awards granted shall be entitled to dividends received during the vesting period subject to completion of the service condition. In case the employee leaves before satisfying the service conditions, the awards shall be forfeited, and retained by the SPE. The maximum number of shares to be issued under the Scheme is restricted up to a maximum of 30% of the Bank’s capital (i.e. currently 195.24 million ordinary shares) at a price to be determined on each grant date in accordance with a pre-determined criterion set out in the Scheme document.

At 31 December 2012, a total of 40,042,897 share awards (2011: 39,180,849 share awards) were granted at an exercise price of USD 29.5 cents (2011: USD 29.5 cents) per share. The fair value was determined internally by management using a market multiple model. As the share awards were made at its fair value, no additional employee compensation benefits have been recognised.

Out of the total share awards granted, 37,703,464 share awards (2011: 37,473,174 share awards) with a value of USD 11,122,522 (2011: USD 11,054,586) vested to the employees at 31 December 2012 as per the terms of the Scheme. An amount of USD 8,790,347 (2011: USD 8,716,579) is recoverable from employees against vested shares (note 9).

17. CONTINGENT LIABILITYThe Group has issued financial guarantee of USD 2,800,000 (2011: USD 2,800,000) to one of the investee company to secure credit facility arrangements for projects managed by the Group. In the opinion of the management, based on their assessment of expected cash flows from the underlying projects, the financial guarantee is not expected to be drawdown.

18. ASSETS UNDER MANAGEMENTThe Group provides corporate administration, investment management and advisory services to its project companies, which involve the Group making decisions on behalf of such entities. Assets that are held in such capacity are not included in these consolidated financial statements. At the reporting date, the Group had assets under management of USD 243,936,434 (2011: USD 228,299,969). Fees earned from the Group’s asset management activities comprises management fee (including carried interest) and custodial and administration fees (refer note 12).


Assets

Loans and advances

Investments designated at fair value through

profit or loss

Equity accounted investees

Other assets

Income

Income from investment banking services

Net interest income

Fair value gain on investments designated at

fair value through profit or loss

Profit on sale of investments designated at


Dividend income

Share of profit of associates

Other income

Expenses

Staff expenses

Premises expenses

Other expenses

Contingent liabilities

Financial guarantee

During 2012, the Bank has transferred certain of its investments designated at fair value through profit or loss amounting to

USD 7,566,667 to its subsidiary, Gulf One Capital Company.

USD

2,452,595

75,759,388

3,382,219

3,255,555

1,031,150

721,387

9,949,745

456,410

281,008

173,077

85,920

-

-

-

2,800,000

-

-

-

5,952,124

-

-

-

-

-

-

-

2,794,075

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

15,915

153,288

-

2,452,595

75,759,388

3,382,219

9,207,679

1,031,150

721,387

9,949,745

456,410

281,008

173,077

85,920

2,794,075

15,915

153,288

2,800,000

Key management

personnel

Associates2012 Significant shareholders / entities

in which directors are interested

Total

19. RELATED PARTY TRANSACTIONSParties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties include transactions with companies in which pro-moters / directors hold significant interests, associates of the Bank, directors and key management personnel of the Bank. The significant related party balances and transactions included in these consolidated financial statements are as follows:


Assets

Loans and advances

Investments designated at fair value

through profit or loss


Other assets

Income


Net interest income

Fair value gain on investments designated

at fair value through profit or loss



Dividend income

Share of loss of associates

Other income

Expenses

Staff expenses

Premises expenses

Other expenses


Financial guarantee

USD

8,739,350

45,381,562

4,329,141

3,769,913

301,239

797,130

133,487

217,154

181,320

(220,064)

87,039

-

-

-

2,800,000

-

-

-

5,283,667

-

-

-

-

-

-

-

2,457,342

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

15,912

152,716

-

8,739,350

45,381,562

4,329,141

9,053,580

301,239

797,130

133,487

217,154

181,320

(220,064)

87,039

2,457,342

15,912

152,716

2,800,000

Key management

personnel

Associates2011 Significant shareholders / entities

in which directorsare interested

Total


20. FINANCIAL INSTRUMENTS

a) Fair values of financial instrumentsFair value is an amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. The estimated fair values of the Group’s financial instruments are not significantly different from their book values.

b) Classification of financial instrumentsThe classification of financial assets and liabilities by accounting categorisation is as follows:-

USD

USD

Assets

Cash and bank balances

Loans and advances


profit or loss

Other assets

Total financial assets

Liabilities

Payables and accrued expenses

Total financial liabilities

Assets


Loans and advances



Other assets

Total financial assets

Liabilities

Investors’ funds


Total financial liabilities

-

-

88,243,321

-

88,243,321

-

-

-

-

75,926,962

-

75,926,962

-

-

-

16,684,719

6,349,648

-

13,767,427

36,801,794

-

-

27,478,440

12,103,883

-

18,948,157

58,530,480

-

-

-

-

-

-

-

-

-

2,484,894

2,484,894

-

-

-

-

-

6,383,430

7,318,956

13,702,386

16,684,719

6,349,648

88,243,321

13,767,427

125,045,115

2,484,894

2,484,894

27,478,440

12,103,883

75,926,962

18,948,157

134,457,442

6,383,430

7,318,956

13,702,386

Loans and receivables

Loans and receivables

Designated at fair value through

profit or loss

Designated at fair value through

profit or loss

2012

2011

Others at amortised

cost

Others at amortised

cost

Total carrying

value

Total carrying

value


c) Fair value hierarchyThe Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly observable from market data.

Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on market observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted market prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The table below analyses financial instruments, measured at fair value as at the end of the year, by level in the fair value hierarchy into which the fair value measurement is categorized:

USD

The following table analyses the movement in Level 3 financial assets during the year:

Sensitivity analysis of the movement in fair value of the financial instruments in the level 3 category which relates to investments at fair value through profit or loss financial assets is disclosed in note 7.

Investments designated at fair value through profit or loss

At 31 December


At 31 December

At 1 January

Total gains included in consolidated statement of comprehensive income

Purchases during the year

Sales during the year

At 31 December

-

-

-

-

-

-

-

-

88,243,321

88,243,321

75,926,962

75,926,962

75,926,962

7,049,393

6,955,187

(1,688,221)

88,243,321

88,243,321

88,243,321

75,926,962

75,926,962

74,359,869

3,866,496

5,389,185

(7,688,588)

75,926,962

Level 2

Level 2

Level 1

Level 1

2012

2011

Level 3

Level 3

Level 3 2012

Total

Total

Level 3 2011

USD


21. FINANCIAL RISK MANAGEMENT

Introduction and overviewThe Group’s business model is about building earnings growth and one of the main responsibilities of Risk Management is to help manage this growth effectively. To support this, the identification and management of risk remains a high priority and underpins all the business activities. The Group’s approach is built on formal governance processes, one that relies on individual responsibility and collective oversight and by informed, timely reporting. Responsibility for risk resides at all levels of manage-ment, from the Board of Directors down through the organisation to all individuals. Each business manager is accountable for managing risk in their business area, or for measuring and managing the key risks and long term viability of specialised, or structured transactions.

The Group has exposure to the following risks from its use of financial instruments: • Credit risk • Liquidity risk • Market risk • Operational risk

The Group’s exposure to risks and its approach to managing these risks are discussed below;

Risk Management FrameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework: In line with international best practice, the Board established various subcommittees, including the Risk, Audit & Compliance Committee (RACC), Finance & Investment Committee (FIC) and Nomination, Remuneration & Governance Committee (NRGC).

The RACC is responsible for developing and monitoring Group risk management framework, policies. The risk management policies are established to identify and analyse the risks faced by the Bank, to establish appropriate controls, and to monitor risks.

The Bank is also responsive to changing market conditions, such as by achieving compliance with Basel II requirements imple-mented by the Central Bank of Bahrain.

The RACC is also responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for re-viewing the adequacy of the risk management framework in relation to the risks faced by the Bank. This Committee is assisted by Internal Audit to undertake both regular and ad-hoc reviews of controls and procedures.

a) Credit riskInvestment and credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s investment securities, placements with banks, loans and advances and other receivables from projects. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The Group has well defined policies for managing credit risks that ensure that risks are accurately assessed, properly approved and regularly monitored.


USD Maximum credit exposureThe maximum credit risk exposure has been disclosed below:

Individually impaired financial assets represent assets for which there is objective evidence that the Group will not collect all amounts due, including both principal and interest, in accordance with the contractual terms of the obligation.

At 31 December 2012, none of the financial assets were past due (2011: nil). The Group holds collateral in the form of unquoted equity shares, against exposure of USD 3,388,438 (2011: USD 3,364,533). As at 31 December 2012, the outstanding exposure is fully covered by the fair value of the collateral.

Concentration riskConcentration risk arises when a number of counterparties are engaged in similar economic activities or activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be simi-larly affected by changes in economic, political or other conditions. The Group seeks to manage its concentration risk by estab-lishing geographic and industry wise concentration limits. The individual counterparty limits are based on regulatory exposure limits which is set at 15% of the regulatory capital base of the Bank.

Neither past due nor impaired

Portfolio provision on loan

Individually impaired

Gross amount

Allowance for impairment

Carrying amount – Individually impaired

Carrying amount



Gross amount



Carrying amount

16,684,719

-

-

-

-

16,684,719

27,478,440

-

-

-

27,478,440

6,413,786

(64,138)

190,690

(190,690)

-

6,349,648

12,103,883

190,690

(190,690)

-

12,103,883

13,767,427

-

40,000

(40,000)

-

13,767,427

18,948,157

40,000

(40,000)

-

18,948,157



2012

2011

Loans and advances

Loans and advances

Other assets

Other assets


USD The geographical and industry wise distribution of assets and liabilities are set out below:Geographical concentration of all assets and liabilities of the Bank are as follows:

Assets


Loans and advances



Other assets

Total assets

Liabilities


Total liabilities

Assets


Loans and advances



Other assets

Total assets

Liabilities

Investors funds


Total liabilities

16,645,177

4,828,750

36,677,482

3,382,219

12,552,388

74,086,016

3,893,099

3,893,099

27,478,440

11,537,772

29,750,833

4,329,141

11,735,855

84,832,041

6,383,430

9,168,312

15,551,742

39,542

1,520,898

29,041,946

-

2,787,764

33,390,150

39,628

39,628

-

566,111

31,065,024

-

9,261,807

40,892,942

-

-

-

-

-

22,523,893

-

-

22,523,893

-

-

-

-

15,111,105

-

2,682

15,113,787

-

-

-

16,684,719

6,349,648

88,243,321

3,382,219

15,340,152

130,000,059

3,932,727

3,932,727

27,478,440

12,103,883

75,926,962

4,329,141

21,000,344

140,838,770

6,383,430

9,168,312

15,551,742

GCC countries

GCC countries

2012

2011

Europe

Europe

Africa

Africa

Total

Total


USD Sector wise concentration of assets and liabilities are as follows:

Assets

Liabilities

Assets

Liabilities

16,689,754

-

27,478,440

-

27,922,933

-

27,803,319

-

22,523,893

-

15,111,105

-

12,893,630

-

15,356,650

-

130,000,059

3,932,727

140,838,770

15,551,742

49,969,849

3,932,727

55,089,256

15,551,742

Banking & financial services


2012

2011

Power & water

Power & water

Oil & Gas

Oil & Gas

Pharmaceutical

Pharmaceutical

Total

Total

Others

Others

Placements and balances with banks of USD 16,681,020 (2011: USD 27,475,677) are with the rated banks.

b) Liquidity riskLiquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group uses a maturity ladder approach for managing and monitoring the liquidity risk. The Group has placed significant portion of its assets in short term deposits to meet its liquidity requirements. The maturity profile of assets and liabilities is set out below. Other than loans & advances and certain payables, the maturity profile of assets and liabilities have been presented based on their expected time to maturity / settlement.


USD

The financial liabilities of the Bank are short-term in nature and the undiscounted cash flows are not materially different from their carrying amounts.

Assets


Loans and advances


through profit and loss


Other assets

Total assets

Liabilities


Total liabilities

Assets


Loans and advances




Other assets

Total assets

Liabilities

Investors’ funds


Total liabilities

16,684,719

-

-

-

2,023,722

18,708,441

1,652,508

1,652,508

27,478,440

7,632,036

-

-

1,161,872

36,272,348

6,383,430

5,408,192

11,791,622

-

1,504,451

-

-

432,374

1,936,825

407,574

407,574

-

3,905,736

-

-

8,952

3,914,688

-

927,538

927,538

-

4,845,197

-

-

-

4,485,197

-

-

-

566,111

-

-

-

566,111

-

415,262

415,262

16,684,719

6,349,648

88,243,321

3,382,219

15,340,152

130,000,059

3,932,727

3,932,727

27,478,440

12,103,883

75,926,962

4,329,141

21,000,344

140,838,770

6,383,430

9,168,312

15,551,742

-

-

88,243,321

3,382,219

12,884,056

104,509,596

1,872,645

1,872,645

-

-

75,926,962

4,329,141

19,829,520

100,085,623

-

2,417,320

2,417,320

2012

2011

Within 3 months

Within 3 months

4 to 6 months

4 to 6 months

7 months to 1 year

7 months to 1 year

Total

Total

1 Year & above

1 Year & above


c) Market riskMarket risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. The Group does not have a trading portfolio. The Group is affected by market risk on its non-trading portfolio.

Foreign exchange riskForeign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The Group’s exposure to foreign exchange risks is limited as majority of its assets and liabilities are denominated in US dollars or are denominated in currencies which are pegged to the US Dollars. The major foreign exchange risk to the Group is the risk of change in the value of certain investments which are denominated in currencies other than the US dollar. Foreign exchange risk is managed by a continuous assessment of the Group’s open positions and current and expected exchange rate movements. The Group had the following significant exposures denominated in other foreign currencies as of 31 December:

A 2 percent strengthening of the US Dollar against the EUR and a 4 percent strengthening of US Dollar against the GBP at 31 December would have decreased profit or loss by USD 767,389 (2011: USD 960,612). A 2 percent weakening of the US Dollar against the EUR and a 4 percent weakening of US Dollar against the GBP would have had the equal but opposite effect. This analysis assumes that all other variables, in particular interest rates, remain constant.

Interest rate riskInterest rate risk is the risk that the Group’s earnings will be affected as a result of fluctuations in the value of financial instruments due to changes in market interest rates. The Bank’s interest bearing assets are mainly “Short-term placements with banks”, “Loans and advances” and certain “Investments designated at fair value through profit or loss”. The Bank’s exposure to interest rate risk is limited due the relatively short-term nature of these financial assets. Based on the exposure to those financial assets a 50bps fluctuation in the interest rates would result in a USD 90,247 (2011: USD 172,473) variation in profit.

Other price riskThe Group does not have quoted securities that could be affected by price risk.

The Group manages exposure to other price risks of its unquoted investments by actively monitoring the performance of the equity securities. Please refer to note 3 (b) (iv) for accounting policies on fair value measurement of valuation of investments at fair value through profit and loss and note 4 for significant estimates and judgments in relation to key sources of estimating uncertainty on fair value of investments at fair value through profit and loss.

d) Operational riskOperational risk is the risk of loss arising from systems and control failures, fraud and human errors, which can result in financial and reputation loss, and legal and regulatory consequences. The Group manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances, including internal audit and compliance. In addition the Group is committed to recruitment in addition to training of staff.

United Kingdom Pounds (GBP)

Euro (EUR)

Kuwaiti Dinar (KWD)

2011

10,595,691

26,839,218

278,417

2012

8,365,599

21,638,253

161,086

USD Equivalent


22. CAPITAL MANAGEMENTThe Group’s lead regulator, the Central Bank of Bahrain (CBB), sets and monitors capital requirements for the Group as a whole. The capital adequacy ratio has been calculated in accordance with the Basel II and Central Bank of Bahrain guidelines incorporat-ing credit risk, operational risk and market risk.

In applying current capital requirements, the CBB requires the Group to maintain a prescribed minimum ratio of total regulatory capital to total risk-weighted assets. The CBB’s minimum risk asset ratio is 12 per cent compared to a minimum ratio of 8 per cent prescribed by the Basel Committee on Banking Supervision.

The Group’s regulatory capital is analysed into two tiers:-

Tier 1 capital, comprising issued share capital, retained earnings and reserves.Tier 2 capital, comprising interim retained profits reviewed by the external auditors and general provisions held against the future, presently unidentified.

The CBB applies various limits to elements of the capital base. The amount of innovative tier 1 securities cannot exceed 15 per cent of total tier 1 capital; qualifying tier 2 capital cannot exceed tier 1 capital; and qualifying subordinated term finance cannot exceed 50 per cent of tier 1 capital. There also are restrictions on the amount of collective impairment provisions that may be included as part of tier 2 capital. Collective impairment provisions cannot exceed 1.25 per cent of total risk-weighted assets.

Risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures.

The Group’s policy is to at all times maintain a capital adequacy ratio in excess of the minimum required by the CBB. The Group and its individually regulated operations have complied with all externally imposed capital requirements throughout the year. There have been no material changes in the Group’s management of capital during the year.

The Group’s regulatory capital position at 31 December was as follows:

The Group has no Tier 2 capital as at 31 December 2012 and 31 December 2011.

23. COMPARATIVESCertain prior year amounts have been regrouped to confirm to the current year’s presentation. Such regrouping did not affect previously reported profit, comprehensive income or equity.

USD

Capital adequacy

Tier 1 capital

Total equity

Less: Employee incentive scheme funded by Bank

Adjustment to exclude net fair value gains

Adjustment for goodwill

Total Tier 1 capital

Total regulatory capital

Credit risk weighted exposures

Market risk weighted exposures

Operational risk weighted exposures

Total risk weighted exposures

Total regulatory capital expressed as a percentage of total risk weighted exposures

2011

125,287,028

(8,716,579)

(15,067,444)

(448,490)

101,054,515

101,054,515

130,465,772

37,712,402

25,783,125

193,961,299

52.10%

2012

126,067,332

(8,790,347)

(18,673,646)

(448,490)

98,154,849

98,154,849

130,149,602

30,164,938

20,869,635

181,184,175

54.17%


RISK REPORT 2012Basel II - Including Pillar 3 Disclosures

IntroductionAs a critical part of the Bank’s policy in ensuring transparency and full disclosure, the following Risk Report contains the Basel II and Pillar 3 disclosures for the year ended 31 December 2012, and is designed to provide information useful to our shareholders in their interpretation of the Bank’s risk management, risk profile, performance and condition.

This is a requirement of both the Central Bank of Bahrain’s (CBB) Rulebook Volume 1 – Public Disclosure Module, and Basel II, Pillar 3 of the Basel Committee on Banking Supervision’s (BCBS) “International Convergence of Capital Measurement and Capital Standards” (June 2006 edition) (the Basel II Framework) as updated.

The Central Bank of Bahrain’s Rulebook is available at www.cbb.gov.bh.

The Basel II Framework is available at www.bis.org.

This Risk Report discusses the risk management strategies, processes, structures, risk mitigation strategies and their effectiveness. Risks covered include those related to Basel II Pillar 1 (credit risk, market risk, and operational risk) and Pillar 2 (liquidity risk, legal, and all other residual risks).

The disclosures in this Risk Report supplement the disclosures within the Bank’s 2012 Annual Report.

2012 In BriefThe year of 2012 was a year where the global and domestic financial markets showed both signs of improvements, combined with continuing and ongoing volatility, weakness and fragility.

Despite the improvements, the global economic landscape was largely dominated by disappointing results in major advanced countries, with Japan and many economies in Europe, including the UK and Germany, experiencing negative growth at the tail end of the year.

These combined economic contradictions are reflected in the Bank’s performance, with the Bank showing a relatively small profit for the year.

Interestingly, despite the general economic crisis in Europe, the majority of the underlying customers in the Bank’s portfolio in-vestments have been performing exceptionally well, with some posting record growth. This means that the fundamental values of these investments remains strong and should be reflected in the long term valuations.

At this point it is important to repeat and highlight the Bank’s strong financial position. The balance sheet has zero debt: the Bank’s liquidity position continues to be favourable with Cash and Bank Balances at USD 16.6 Million; and with a Capital Ad-equacy Ratio of 54.17% which remains far above the minimum standard of 12% set by the Central Bank of Bahrain. This is a testa-ment to the disciplined and conservative risk management approach, and a demonstration of the Bank’s aim to both protect and deliver long term shareholder value.

In these difficult times, the Central Bank of Bahrain, in co-ordination with other regulators across the region, continued to work to enhance the industry and build resilience in the banking sector.

We are pleased to advise that our affairs have been conducted in accordance with the laws and regulations of the Central Bank of Bahrain, the Bahrain Commercial Companies Law 2001, and other regulatory requirements.


Risk Management PhilosophyWith the global financial economy and markets facing unprecedented challenges, risk management remains a key differen-tiator, one in which Gulf One is well positioned. The key element of the Bank’s risk management philosophy is that, as each business unit translates Gulf One’s strategic vision into specific strategies, objectives and priorities, business management will explicitly address not only business opportunities but also the attendant risks.

The Bank’s approach is built on formal governance processes that rely on individual responsibility, collective oversight and on informed and timely reporting. Responsibility for risk resides at all levels of management, from the Board down through the organisation to all individuals. Each business manager is accountable for managing risk in their business area, or for measuring and managing the key risks and long term viability of specialised, or structured transactions. Effective risk management is all about achieving a balanced approach to risk and reward. Risk management enables us to both increase financial growth op-portunities and mitigate potential loss or damage. It is important to note that both optimisation and mitigation strategies are equally important in the world of risk management.

What constitutes good corporate governance will continue to evolve with the changing circumstances of the Bank and with best practice.

Executive SummaryThe Central Bank of Bahrain acts as both, the central bank and as the regulator for all banks and related financial institutions in the Kingdom of Bahrain.

Gulf One has embraced the international regulatory framework known as Basel II as a comprehensive approach to risk manage-ment and bank supervision, and incorporated these tools and disciplines into our operating businesses. Our goal is to maximise business value by ensuring “best of class” risk management, internal processes and systems, business models, capital strategies and disclosure standards.

Within this regulatory framework, Gulf One adopts the “Standardised Approach” for Credit Risk and Market Risk and the “Basic Indicator Approach” for Operational Risk to determine the overall capital requirement.

The Bank’s capital adequacy requirements are computed on a consolidated basis. As at 31 December 2012, the total risk weighted exposures amounted to USD 181.184 million (2011: USD 193.961 million) and the total regulatory capital amounted to USD 98.155 million (2011: USD 101.055 million). Accordingly, total Capital Adequacy Ratio was 54.17% (2011: 52.10%).

The Bank’s intention is to maintain sufficient capital to meet both regulatory requirements and tactical and strategic require-ments. While the capital ratios currently exceed the minimum capital requirements under the Central Bank of Bahrain’s Basel II framework, when the capital is fully deployed, the Bank aims to hold regulatory capital at a level of 3% above the minimum capital requirements set by the Central Bank. Further, the Bank views transparency as a core responsibility to its stakeholders. In addition to the regulatory Basel II Pillar 3 disclosures, herein are provided details of the risk management and capital adequacy policies and practices, including detailed quantitative information on capital adequacy, and other exposures.

This report should be read in conjunction with the Bank’s Annual Report including the Financial Statements and relevant notes for the year ended 31 December 2012.


Internal AuditInternal Audit provides objective and independent assurance to management and the Board of Directors that internal controls are adequate, effective and sustainable. Internal Audit recommends enhancements to risk management, control and govern-ance processes to address any weaknesses identified.

The Internal Audit Charter, approved by the Board Risk, Audit and Compliance Committee governs our internal audit activity. The Charter defines the roles, objectives, authority and responsibilities of the Function.

Internal Audit reports directly to the Board Risk, Audit and Compliance Committee on a quarterly basis. Internal Audit has adopt-ed a risk based methodology that complies with the International Standards for the Professional Practice of Internal Auditing.Annually, Internal Audit conducts a formal risk assessment of all businesses, from which a comprehensive risk based annual audit plan is derived. The assessment and programme are validated by the executive management and approved by the Board Risk, Audit and Compliance Committee. High risk businesses and processes are audited at least twice annually, with other areas covered at regular intervals based on their risk profiles. There is an ongoing focus on identifying fraud risk as well as auditing technology risks.

Internal Audit proactively reviews its practices and resources for adequacy and appropriateness, to meet the increasingly de-manding corporate governance and regulatory environment. Audit teams comprising well-qualified, experienced staff ensure that the function has the competence to match the diverse requirements. The Internal Audit resources are subject to review by the Board Risk, Audit and Compliance Committee at least once a year.

Significant control weaknesses are reported, in terms of an escalation protocol, to management and if required to the Board Risk, Audit and Compliance Committee. Where rectification is required, procedures and progress are considered and monitored by management. The Board Risk, Audit and Compliance Committee receives a report on significant issues and actions taken by management to enhance related controls. Target dates are assigned to each audit finding and these are closely monitored until the issues are closed.

Incorporation and Principal ActivityGulf One Investment Bank B.S.C. (c) is a Bahraini Bank with limited liability and is incorporated in the Kingdom of Bahrain.

Bankers : Ahli United Bank Standard Chartered BankExternal Auditors : KPMG FakhroInternal Auditors : BDO Jawad HabibRegistrar : Fakhro Karvy Computershare W.L.L.

Consolidated SubsidiariesIn this report, and also in the consolidated financial statements for the year ended 31 December 2012, the Group comprises the Bank and its subsidiaries.

Investment banking forms the core of Gulf One’s activities.Gulf One’s business lines cover the typical core activities of a leading investment bank, with the exception of brokerage, which is not a strategic priority of the Bank.

Please note that in the preparation (full consolidation of subsidiaries and those neither consolidated nor deducted) leading to the Bank’s Annual Financial Report and related risk disclosures, the basis of consolidation between accounting and regulatory purposes is identical i.e. there is no difference. Investments risk weighted for regulatory purposes are described below:


Entity name

Entity name

Country of

incorporation

Country of

incorporation

Entity classification

as per PCD for

consolidated capital

adequacy

Entity classification

as per PCD for

consolidated capital

adequacy

Consolidated basis

Consolidated basis

Solo basis

Solo basis

Subsidiaries

Gulf One Investment Holdings Limited Cayman Islands Commercial Entity Full Consolidation Full Deduction

Gulf One DACH Investment Ltd . Cayman Islands Commercial Entity Full Consolidation Full Deduction

Manjam Mining Holding SPC Kingdom of Bahrain Commercial Entity Full Consolidation Full Deduction

Gulf One SME Opportunities Fund Company BSC (c) Kingdom of Bahrain Commercial Entity Full Consolidation Full Deduction

Gulf One Employee Stockholding Company SPC Kingdom of Bahrain Commercial Entity Full Consolidation Full Deduction

Gulf One Capital Company Kingdom of Saudi Arabia Financial Entity Full Consolidation Full Deduction

Gulf One GmbH Germany Commercial Entity Full Consolidation Full Deduction

Gulf One Economic Consultancy Co. S.A.K. State of Kuwait Commercial Entity Full Consolidation Full Deduction

Associates

Gulf One Buchanan Industrial Technologies Fund I L.P.

(DACH Fund 1)

Gulf One Munich Industrial Technologies L.P.

(DACH Fund 2)

Moya Holding Company B.S.C. (c)

Project Feasibility Company B.S.C. (c )

SCC MENA Holding BSC (c)

Al Fassel National for General Contracting Co

Montajat Veterinary Pharmaceuticals Factory Company

Gulf One SME Opportunities Fund

Gulf Bridge Shares and Securities One WLL

Cayman Islands

Cayman Islands

Kingdom of Bahrain

Kingdom of Bahrain

Kingdom of Bahrain

Kingdom of Saudi Arabia

Kingdom of Saudi Arabia

Kingdom of Bahrain

Kingdom of Bahrain

Commercial Entity

Commercial Entity

Commercial Entity

Commercial Entity

Commercial Entity

Commercial Entity

Commercial Entity

Commercial Entity

Financial Entity

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Risk weighting of

investment exposure

Treatment by the Bank

Treatment by the Bank

Further, there are no restrictions in the transfer of funds or regulatory capital within the Group. The following provides concise descriptions of the activities and strategies of each of Gulf One’s core activities.


Private EquityThe Private Equity Division (PE) is responsible for structuring and managing traditional private equity funds and direct invest-ments.

PE’s primary geographical focus is the Middle East and North Africa (MENA) region. However, it seeks opportunities globally with a focus on investing in companies with transferrable competitive advantages with a view to bringing them to the MENA region through potential business partnerships.

The target market segment of PE comprises small to medium sized enterprises. The investments are typically in the range of USD 5 to 15 million which offer significant minority stakes. The strategy of PE is to partner with proven management teams to derive value from opportunities for growth. PE seeks to invest in companies that it believes maintain a sustainable competitive advantage in a particular market and for which the management team has a compelling vision and business strategy.

Structured FinanceThe Structured Finance Division (SFD) is Gulf One’s structuring and advisory business. SFD provides independent, comprehen-sive, customised and sustainable solutions to address our clients’ needs.

SFD provides an extensive range of regionally relevant, tailored structuring and advisory services, including: • Corporate finance: buy-side and sell-side mergers and acquisition advisory and execution, corporate debt advisory • Structured finance: advising on funding structure and execution • Project finance: advisory on structuring and arrangement of financing for non-recourse greenfield and brownfield infrastruc-ture and industrial projects

• Corporate advisory: advising on the optimal corporate structure

SFD provides comprehensive solutions to its clients and delivers specialist advice on: • Fund raising: debt arrangement, syndication and equity placement • Islamic finance: advisory, structuring and execution of Shari’a compliant facilities • Corporate and financial restructuring: solutions for distressed situations including dealing with creditors • Family group/family office advisory: advisory on optimisation of structure, financing and value creation including corporatisa-tion and listing

• Project finance: advisory on structuring and arrangement of financing for non-recourse greenfield and brownfield infrastruc-ture projects

Corporate GovernanceGulf One is committed to the highest standards of governance based on embedding the values and behaviours required to ensure transparency, fair dealing and to protect stakeholder interests.

Good corporate governance is not only fundamentally sound for how we manage our business but also assists in building long term, sustainable performance as it is being driven by demands from both the market and international banking regulators.Gulf One conducts its business activities under a written corporate governance framework which sets forth the roles and re-sponsibilities of Board members and the senior management. The corporate governance philosophy and approach is exten-sively detailed in the Annual Report which should be read in conjunction with the discipline, tools and exposures outlined in the Risk Management disclosures detailed herein.

The contents of these Basel II and Pillar 3 disclosures and other disclosures herein are in compliance with the High-Level Controls Module (HC Module) and the Public Disclosure Module of the Central Bank of Bahrain’s Rulebook.


Risk GovernanceThe Bank’s Risk Management Governance Framework is based on current best practices designed to advance the development and implementation of modern risk management frameworks and to support innovation and adaptability throughout the or-ganisation. It provides a comprehensive approach to integrate risk management into strategic decision-making by linking the business strategy to the risk strategy, in combination with effective and efficient frameworks, processes and tools to successfully achieve a permanent change through people.

The Board of Directors has the overall responsibility for establishing and maintaining the Bank’s risk culture and to ensure that the risk management framework is effective and efficient. The Risk Management Function continues to develop and manage the risk policy, with internal audit providing independent assurance of adherence to the risk policy and processes. As with all best practice organisations, the first level of responsibility for managing risk lies directly with the business units.

Risk and the Bank’s Business ModelGulf One’s business model is about building earnings growth and one of the main responsibilities of the Risk Management Func-tion is to help manage this growth effectively. To support this, the identification and management of risk remains a high priority and underpins all the business activities. The Group’s approach is built on formal governance processes and relies on individual responsibility, collective oversight and on informed and timely reporting.

To ensure coherence between the strategic risk-taking considerations and the day-to-day decisions on transactions, the Bank has analysed its risk profile, including all the key risk components (along with their overall exposures to the Bank in the form of a pie chart as displayed).

Overall, the Group’s approach is to develop its risk management disciplines to allow it to build sound and less volatile businesses in order to make more informed and risk-adjusted decisions.

The Group believes that a structured and disciplined approach to risk management will ensure that strategic efforts are not diminished through avoidable damages, while maximising opportunities.

Liquidity Risk

Reputational / Governance Risk

Foreign Exchange, Interest Rate, Equity Risk

Concentration Risk

Operational Risk

Compliance Risk

Investment & Credit Risk


Risk Management FrameworkThe Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management frame-work: In line with international best practice, the Board established various sub-committees, including the Board Risk, Audit and Compliance Committee (RACC), Board Finance and Investment Committee (FIC) and the Board Nomination, Remuneration and Governance Committee (NRGC).

In relation to risk management, the RACC is responsible for developing and monitoring the Group’s risk management frame-work/policies. The risk management policies are established to identify and analyse the risks faced by the Group, to establish appropriate controls, and to monitor the risk. The Bank is also responsive to changing market conditions, such as by achieving compliance with Basel II and the Bahrain Corporate Governance Code.

Further the RACC is also responsible for monitoring compliance with the Bank’s risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. This Committee is as-sisted by the Internal Audit and Compliance Function to undertake both regular and ad-hoc reviews of controls and procedures.The Bank has established the Risk Management Function which is headed by the Chief Risk Officer. The day-to-day risk manage-ment responsibilities have been entrusted on to the Risk Management Function which reports directly to the RACC.

The organisational chart in the “Corporate Governance” section of the Annual Report depicts the organisational structure includ-ing the reporting responsibilities within the Risk Management Framework. The Bank’s Group comprises of its subsidiaries. The parent Risk Management Function provides oversight over all the consolidated subsidiaries.

Key RisksThe key risks the Group is subject to are specific to banking risks and those risks arising from the general business environment. The risk management framework encompasses various risks including:

Investment and Credit RiskInvestment and credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Investment and credit risk arises principally from the Group’s investment securities, placements with financial institutions, loans and advances and other receivables from projects. For risk management reporting purposes, the Group considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, country and sector risk). The Group has well defined policies for managing credit risks that ensure that risks are accurately assessed, properly approved and regularly monitored.

As an investment bank, building a credit or loan portfolio is not the primary business model. The Bank does however facilitate transactions which are ultimately to be held by special purpose investment vehicles it creates. In the interim, the Bank may have loans and investments.

Investment opportunities, and resulting assets/loans, have to date been reviewed and recommended by the Board Finance and Investment Committee, and approved by the Board.


Maximum Credit ExposureThe maximum credit risk exposure has been disclosed below:

Individually impaired financial assets represent assets for which there is objective evidence that the Group will not collect all amounts due, including both principal and interest, in accordance with the contractual terms of the obligation.

At 31 December 2012, none of the financial assets were past due (2011: nil). The Group holds collateral in the form of unquoted equity shares, against exposure of USD 3.388 million (2011: USD 3.365 million). As at 31 December 2012, the outstanding expo-sure is fully covered by the fair value of the collateral.

USD’000

USD’000


Portfolio provision on loans


Gross amount



Carrying amount



Gross amount



Carrying amount

16,684

-

-

-

-

16,684

27,478

-

-

-

27,478

13,767

-

40

(40)

-

13,767

18,948

40

(40)

-

18,948

6,413

(64)

190

(190)

-

6,349

12,104

190

(190)

-

12,104

2012

2011



Other assets

Other assets

Loans & advances

Loans & advances


Concentration RiskConcentration risk arises when a number of counterparties are engaged in similar economic activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be simi-larly affected by changes in economic, political or other conditions. The Group seeks to manage its concentration risk by estab-lishing geographic and industry-wide concentration limits. The individual counterparty limits are based on regulatory exposure limits which is set at 15% of the capital base of the Bank. The Bank monitors and manages concentration risk by setting limits on exposures to countries, sectors, products and counterparty groups. Prior to the launch of any new asset product, a product specific transaction approval criterion is set based on a comprehensive risk analysis. Similarly, prudent Board approved limits have been implemented to govern the Group’s investment activities, including exposure to products, nature, tenor, rating, type, features etc.

The geographical and industry wise distribution of assets and liabilities are set out below:


USD ‘ 000

USD ‘ 000

Assets


Loan and Advances



Equity Accounted Investees

Other assets

Total assets

Liabilities


Total liabilities

Assets


Loan and Advances




Other assets

Total assets

Liabilities

Investors’ funds


Total liabilities

16,645

4,829

36,677

3,382

12,553

74,086

3,892

3,892

27,478

11,538

29,751

4,329

11,736

84,832

6,383

9,168

15,551

39

1,522

29,042

-

2,787

33,390

40

40

-

566

31,065

-

9,261

40,892

-

-

-

-

-

22,524

-

-

22,524

-

-

-

-

15,111

-

3

15,114

-

-

-

16,684

6,351

88,243

3,382

15,340

130,000

3,932

3,932

27,478

12,104

75,927

4,329

21,000

140,838

6,383

9,168

15,551

GCC countries

GCC countries

2012

2011

Europe

Europe

Africa

Africa

Total

Total

Africa 17%

Africa 11%

Assets

Assets

Liabilities

Liabilities

Europe 1%

Europe 26%

Europe 29%

GCCCountries

57%

GCCCountries

60%

GCC Countries 99%

GCC Countries 100%


Industry wise concentration of assets and liabilities as at 31 December was as follows:

Placements and balances with banks of USD 16.68 million (2011: USD 27.475 million) are with the rated banks.

USD’ 000

USD’ 000

Assets

Liabilities

Assets

Liabilities

16,690

-

27,478

-

27,923

-

27,803

-

22,524

-

15,111

-

12,894

-

15,357

-

130,000

3,932

140,839

15,551

49,969

3,932

55,090

15,551



2012

2011

Power & water

Power & water

Oil & Gas

Oil & Gas

Pharmaceutical

Pharmaceutical

Total

Total

Others

Others

70

60

50

40

30

20

10

0

Banking and Power & Water Oil & Gas Pharmaceutical Others Financial Services

Liabilities 2011Liabilities 2012Assets 2011Assets 2012

US$ mil


USD’ 000

Liquidity RiskLiquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk also arises from the failure to recognise or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group uses a maturity ladder approach for managing and monitoring liquidity risk. The Group has placed a significant portion of its assets in short-term deposits to meet its liquidity requirements. The maturity profile of assets and liabilities was as follows:

Assets


Loans and advances


profit and loss


Other assets

Total assets

Liabilities


Total liabilities

16,685

-

-

-

2,024

18,709

1,652

1,652

-

1,504

-

-

433

1,937

407

407

-

4,845

-

-

-

4,845

-

-

16,685

6,349

88,243

3,382

15,340

130,000

3,932

3,932

-

-

88,243

3,382

12,884

104,509

1,873

1,873

2012 Within 3 months

4 to 6 months

7 months to 1 year

Total1 Year & above

150

100

50

0

20

10

0

5

0

2

1

0

150

100

50

0

Within 3 Months 4 to 6 Months 7 Months to 1 Year 1 Year & above

Within 3 Months

7 Months to 1 Year

4 to 6 Months

1 Year & above

LiabilitiesAssets

US$ mil

US$ mil

US$ mil

US$ mil

US$ mil


USD’ 000

Assets


Loans and advances




Other assets

Total assets

Liabilities

Investors’ Fund


Total liabilities

27,478

7,632

-

-

1,162

36,272

6,383

5,408

11,791

-

3,906

-

-

9

3,915

-

928

928

-

566

-

-

-

566

-

415

415

27,478

12,104

75,927

4,329

21,001

140,839

6,383

9,168

15,551

-

-

75,927

4,329

19,830

100,086

-

2,417

2,417

2011 Within 3 months

4 to 6 months

7 months to 1 year

Total1 Year & above

The financial liabilities of the Bank are short-term in nature and the undiscounted cash flows are not materially different from their carrying amounts.

150

100

50

0

40

20

0

4

2

0

150

100

50

0

600

400

200

00


Within 3 Months 4 to 6 Months

1 Year & above

LiabilitiesAssets

7 Months to 1 Year

US$ mil

US$ mil

US$ mil

US$ mil

US$’ 000


Market RiskMarket risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

The Bank uses the standardised approach for calculating market risk capital charges for the following market risk components: • Equity exposure risk; • Interest rate exposure risk; and • Foreign currency exposure risk.

For calculating market risk capital the Bank uses the Central Bank of Bahrain’s guidelines in line with the Basel Committee’s “Amendment to the Capital Accord to Incorporate Market Risks” document. The Bank’s market risk capital charge is largely com-posed of foreign currency risk arising from the foreign exchange exposure on private equity investments denominated in GBP and Euros. The Group does not have a trading portfolio. It is affected by market risk on its non-trading portfolio.

The capital requirement for market risk using the Standardised Approach as at 31 December was as follows:

By regulation, the Bank is required to reflect its exposure to market risk separately between trading and non-trading portfolios. The Bank however does not hold any trading portfolios, but it does hold assets and liabilities that are managed on a fair value basis.

All foreign exchange risk is hedged within the parameters of the Board approved risk management policy framework.

USD ‘ 000

USD ‘ 000

Type of Claims

Interest rate position risk

Equities position risk

Foreign exchange position risk

Commodities risk

Options risk

Total

Maximum for the period

Minimum for the period

Type of Claims




Commodities risk

Options risk

Total

Maximum for the period

Minimum for the period

-

-

2,413

-

-

2,413

3,049

2,413

-

-

3,017

-

-

3,017

3,620

3,017

-

-

30,165

-

-

30,165

38,114

30,165

-

-

37,712

-

-

37,712

45,250

37,712

-

-

3,620

-

-

3,620

4,574

3,620

-

-

4,525

-

-

4,525

5,430

4,525

Exposure amount

Exposure amount

2012

2011

Risk weighted exposure


Capital required

Capital required


Foreign Exchange RiskForeign exchange risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group’s exposure to foreign exchange risks is limited as the majority of its assets and liabilities are denominated in US Dollars or are denominated in currencies which are pegged to the US Dollar. The major foreign risk to the Group is the risk of change in the value of certain investments which are denominated in currencies other than the US Dollar. Foreign exchange risk is managed by a continuous assessment of the Group’s open positions and current and expected exchange rate movements. The Group had the following significant investment exposures denominated in other foreign currencies as of 31 December 2012:

A two percent strengthening of the US Dollar against the EUR and a four percent strengthening of the US Dollar against the GBP at 31 December 2012 would have decreased profit by USD 767,389 (2011: USD 960,612). A two percent weakening of the US Dollar against the EUR and a four percent weakening of the US Dollar against the GBP would have had the equal but opposite effect. This analysis assumes that all other variables, in particular interest rates, remain constant.

United Kingdom Pounds (GBP)

Euro (EUR)

Kuwaiti Dinar (KWD)

2011

10,595

26,839

278

2012

8,365

21,638

161

Equivalent USD’000

30

25

20

15

10

5

0

United Kingdom Pounds (GBP) Euro (EUR) Kuwaiti Dinar (KWD)

20112012

US$ mil


Interest Rate RiskInterest rate risk is the risk that the Group’s earnings will be affected as a result of fluctuations in the value of financial instruments due to changes in market interest rates. The Bank’s interest bearing assets are mainly “Short-term placements with banks”, “Loans and advances” and certain “Investments designated at fair value through profit or loss”. The Bank’s exposure to interest rate risk is limited due the relatively short-term nature of these financial assets. Based on the exposure to those financial assets a 50bps fluctuation in the interest rates would result in a USD 90,247 (2011: USD 172,473) variation in profit.

The principal risk to which non-trading portfolios are exposed is to the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group’s financial assets and liabilities to various standard and non-standard interest rate scenarios.

Other Price RiskThe Group does not have quoted securities that could be affected by price risk.The Group manages exposure to other price risks by actively monitoring the performance of the equity securities. Please refer to “Note 3 (b) (iv)” of the consolidated financial statements for accounting policies on fair value measurement of valuation of invest-ments through profit and loss and “Note 4” of the consolidated financial statements for significant estimates and judgments in relation to key sources of estimating uncertainty on fair value of investments through profit and loss.

Operational RiskOperational risk is the risk of loss arising from systems and control failures, fraud and human errors, which can result in financial loss, reputational loss and legal and/or regulatory consequences. The Group manages operational risk through appropriate controls, instituting segregation of duties and internal checks and balances, including validations from Internal Audit and Com-pliance. In addition, the Group is committed to recruitment and training of experienced staff.

The management of operational risk is not new to the Group, however, in line with the growing demand for effective manage-ment of operational risk, a more structured and disciplined approach to managing old risks and new ways to identify and miti-gate risks not previously managed is being adopted. This is being underpinned by the operational risk requirements under the Basel II Capital Accord implemented by the Central Bank of Bahrain.

The Bank has developed and implemented the Operational Risk Management Framework. The Framework comprising the Op-erational Risk Strategy, Risk Appetite, Operational Risk Management Function, policies and procedures, operational risk man-agement tools and systems has been approved by the Board and documented within the “Operational Risk Governance” and “Operational Risk Policy and Procedures” manuals.

The Risk and Control Self Assessment Exercise is undertaken by the divisions on an on-going basis to identify, assess, monitor and report operational risks to various levels within the Group. The Bank has also implemented an operational risk management system which assists in the regular monitoring and management of operational risks including the capturing of near misses and loss events.


One of the many facets of operational risk management is the existence of a Business Continuity Plan “BCP” to ensure that the critical activities are supported in case of an emergency (including discontinuation of outsourcing providers). The BCP has been approved by the Board of Directors and submitted to the Central Bank of Bahrain. During the year, the Bank tested its BCP and reported on the effectiveness and efficiency of the plan to the Board of Directors.

The Bank presently follows the Basic Indicator Approach for assessing the capital requirement for operational risk. Risk Weighted Exposures for operational risk are USD 20.870 million (2011: USD 25.783 million) based on 15% of the average of the gross operat-ing income (excluding profit/loss on Investments held under Available for Sale, Held to Maturity categories and any exceptional items of income) for the last 3 years multiplied by 12.5 (the reciprocal of the 8 percent minimum capital ratio) to arrive at the operational risk-weighted exposure.

USD’ 000

USD’ 000

Basic Indicator Approach


1,670

2,063

20,870

25,783

2,504

3,094

Exposure amount

Exposure amount

2012

2011



Capital required

Capital required


Compliance RiskCompliance risk is the current and prospective risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain products or activities of the Bank’s clients may be ambiguous or untested. This risk exposes the institution to fines, civil/money penalties, payment of damages, and the voiding of contracts. Compliance risk can lead to diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential, and an inability to enforce contracts.

The Bank’s Compliance Function is responsible for implementing the Compliance Policy as approved by the Board of Directors and reports directly to the Board Risk, Audit and Compliance Committee.

The Compliance Function is independent of the day-to-day management of the Group and its responsibilities include the de-velopment of the Compliance Risk Management Framework, developing and implementing the annual risk based compliance plan and programs, keeping abreast of all local and international laws and regulations, advising the Board, senior managers and division heads of the various laws and regulations applicable to the Group, training staff and conducting follow-ups to ensure that the Group is in compliance with applicable regulations.

The Compliance Function is further responsible for ensuring the accurate and timely reporting as required by the regulatory authorities, and acting as the focal point of contact for both the Group and the regulators for any queries and information needs.The Group has implemented a Compliance Risk Management System which assists in the regular monitoring and reporting of regulatory requirements as well as facilitates the management of the compliance testing plan, program, results and the genera-tion of testing and follow-up action reports.

The Money Laundering Reporting Officer and the Deputy Money Laundering Reporting Officer are responsible for ensuring the Bank and the Group are in compliance with the Central Bank’s Financial Crime Module (FC Module). During the year, the Compli-ance Function analysed the adoption of the FC Module requirements by the Group and reported the results to the Board. The External Auditors further reviewed the activities of the Compliance Function as part of their agreed upon procedures engage-ment, as required by the Central Bank of Bahrain.

No fines, penalties or lawsuits were imposed on the Bank during the year and there are no pending lawsuits from previous years nor any potential liabilities.

Legal and Regulatory Risk, Including Anti-Money LaunderingLegal and regulatory risk occurs whenever the bank, a related corporate entity (such as a non-bank subsidiary or affiliate), a trans-action, or a customer is subject to a change in exposure resulting from regulatory, civil or criminal sanctions, or litigation. Strict compliance with all relevant regulations is one of Gulf One’s core values; it is essential to the Group’s reputation.

Legal risks are mitigated through legal counsel review of transactions and documentation, as appropriate. Where possible, the Group uses standard formats for transaction documentation.

To prevent potential association with any money laundering activities, the Group has designed and implemented a comprehen-sive set of policies and procedures. Adherence to the Bank’s policies and procedures is reinforced through periodic staff trainings and internal reviews, as well as internal and external reviews by auditors.

Transaction RiskTransaction risk is the current and prospective risk to earnings and capital arising from fraud, error, and the inability to deliver products or services, maintain a competitive position, and manage information. Risk is inherent in efforts to gain strategic ad-vantage, and in the failure to keep pace with changes in the financial services marketplace. Transaction risk is evident in each product and service offered. Transaction risk encompasses product development and delivery, transaction processing, systems development, computing systems, complexity of products and services, and the internal control environment.


Supporting Policies

Code of ConductSuccessful / robust risk management depends on integrity of behaviour within the organisation. This is reflected in the Bank’s Code of Conduct which sets out the standards that should be adhered to by all staff (Board of Directors, senior management and employees) at all times during the conduct of regular activities and dealings with all external parties including shareholders, stakeholders, investors, customers, the community and regulators.

Wherever the Bank operates, it ensures that its business is conducted in a manner which is compliant with the legal and regula-tory requirements of the jurisdiction concerned, and with the Board’s desire to be seen as an organisation committed to high standards of integrity in all dealings. The Bank seeks to have all staff act at all times with integrity and honesty in order to protect the Bank’s good name and reputation.

Disclosure and Communication PolicyThe Board of Directors and senior management are committed to promoting consistent disclosure practices aimed at accurate, timely and broadly disseminated disclosure of material information to the shareholders and the stakeholders, as required by jurisdictional regulations. The Bank makes available on its website, the quarterly and annual financial reports, as well as printed annual reports to shareholders (as requested). This is defined by the Corporate Communication Policy, the Group Disclosure and External Communication Policies, in addition to the Central Bank of Bahrain’s, Pillar 3 Disclosure requirements.

In a time when expectations for high quality information, reporting and corporate governance have never been greater, Gulf One continues to take a proactive approach to corporate disclosure.

Management Information System ( MIS)MIS is a critical component of the Bank’s risk management strategy as MIS is used to recognise, monitor, measure, limit and man-age risks and supports management’s ability to make informed decisions. This is based on a defined framework of guidelines, policies or practices, standards, and procedures, and is followed in the development, maintenance and use of all MIS to identify risk, establish controls, and provide for an effective review of the systems, including review by audit.

Risk Mitigation It is the Bank’s policy to identify, measure, manage and mitigate the risks within the Board approved risk profile. This may include the use of various netting, hedging or derivative products, as appropriate. As at reporting date, no on or off balance-sheet net-ting, or hedging, or derivates were used. However the Bank has extensive coverage via a Group wide insurance policy as detailed below.

Risk mitigation can also include the use and acceptance of collateral. Collateral is accepted as a mitigation tool, rather than the primary basis upon the acceptance of the exposure. Where collateral is accepted, this is valued regularly as dependant on the collateral.

Insurance PolicyThe Bank has a Group insurance policy which provides extensive coverage including, Directors’ and Officers’ liabilities and Bank-ers Blanket Bond to cover operational and legal risks, Fraud and Computer crime.

Risk LimitsRisk limits are at the heart of risk management policies and processes. The Bank begins by setting maximum exposure limits as a percentage of capital in line with the regulatory mandated limits. Sub-limits are then set by geography, obligor type/credit grade, instrument, tenor, etc.

Overarching risk discipline is maintained by the requirement that the Bank: • Maintains the Basel II capital adequacy ratio in excess of the regulatory required minimum; and • Considers the impact on the Bank’s capital and liquidity position of any major transaction(s) or new business initiatives.


Risk Monitoring and ReportingThe policies and procedures and supporting systems regularly monitor and report risk exposures to the senior management and the Board, to effectively manage the Bank’s risk profile.

The Board of Directors is provided with an extensive board pack which includes quarterly risk reports covering credit, market, liquidity, operational, concentration and other risks, including ICAAP and compliance reports. Similarly, senior management is provided with regular reports on relevant risks.

Capital adequacy and internal capital adequacy assessment reports are provided to senior management on a quarterly basis.

Internal AuditThe Group’s risk management framework is supported by the outsourced Internal Audit Function which provides assurance to the Board that the Bank’s operations are conducted according to the highest standards by providing independent, objective assurance and advising on best practices. This is achieved through a systematic and disciplined approach: by evaluating and improving the effectiveness of risk management, controls and governance processes.

The scope of Internal Audit work includes the review of risk management procedures, internal control systems, information systems and governance processes. This work also involves periodic testing of transactions, best practice reviews, special inves-tigations, appraisals of regulatory requirements, and measures to help prevent and detect fraud.

To ensure independence, the Internal Audit Function reports directly to the Chairman of the Board Risk, Audit and Compliance Committee.

To maintain objectivity, the Internal Audit Function is not involved in the day-to-day control procedures. Instead, each business unit is responsible for its own internal controls and efficiency. The work of the Internal Audit Function has been detailed in the “Internal Audit” section at the beginning of this risk report.

Efficiency of the Risk Management FrameworkThe Risk Management Framework, including all the policies, strategies, risk identification, monitoring and reporting processes are closely supervised by the Risk Management Function and the Board Risk, Audit and Compliance Committee. Given the size and nature of the Bank, the existing framework has served its purpose well during the current reporting period.

The Bank continuously explores best practices undertaken by financial institutions and regulators worldwide and incorporates appropriate enhancements to its processes and internal controls as part of the continuous evaluation of its risk management framework.

Capital ManagementThe Bank’s capital management policies and procedures employ a risk adjusted measure of capital adequacy (Capital Adequacy Ratio or CAR) based on the local regulatory regime as implemented by the Central Bank of Bahrain, in line with the Basel Com-mittee on Banking Supervision’s “International Convergence of Capital Measurement and Capital Standards: A Revised Frame-work” guidelines.

Since January 2008, Central Bank of Bahrain required all Bahrain banking institutions to implement Basel II, which involves calcu-lation of capital charges for market, credit and operational risks. This framework consists of three pillars: Pillar 1Defines the rules for the mathematical calculation of minimum regulatory capital for credit, market, and operational risks. This is supplemented by the Pillar 2 capital add-in.


Pillar 2Describes both the supervisory review process and the requirement for the Bank to carry out an Internal Capital Adequacy As-sessment Process (ICAAP). This is the process for assessing the Bank’s overall capital adequacy in relation to its risk profile, and the Bank’s strategy for maintaining its capital levels under projected and stressed environments. This is overseen by both senior management and the Board.

The capital constraints then reflect the business strategy, risk appetite and the risk limits in relation to the overall risk capacity, capital and the regulatory exposure limits set by the Central Bank of Bahrain.

Pillar 2 risks are measured and quantified using statistical methods supported by qualitative assessments. Potential losses are calculated using assumptions based on consideration of the economic environment in which the Bank operates.

Pillar 3Describes market discipline and sets forth disclosure requirements for risk and capital management for Basel II. These are in ad-dition to the applicable International Financial Reporting Standards (IFRS).

As the Bank has no operating branches outside the Kingdom of Bahrain, it is subject only to the capital requirements of the Cen-tral Bank of Bahrain, which currently requires all financial institutions in Bahrain to maintain a 12.0% Capital Adequacy Ratio. Total capital calculation is the addition of Pillar 1 capital, plus Pillar 2 capital as determined by the ICAAP (detailed later).

In determining its Capital Adequacy Ratio, the Bank calculates risk-adjusted exposures which are then divided by regulatory capital rather than the equity capital appearing in the balance sheet.

Capital CompositionIn implementing the capital requirements, the Central Bank of Bahrain requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted exposures. The Bank’s regulatory capital is analysed into two tiers:

Tier 1 CapitalIncludes ordinary share capital, share premium, statutory reserve, foreign currency, retained earnings including the current year’s profit, the translation reserve and any minority interests after deductions for losses, goodwill and intangible assets, and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.

Tier 2 CapitalComprises interim retained profits reviewed by the external auditors and general provisions held against future, presently uni-dentified contingencies.

The Central Bank of Bahrain applies various limits to elements of the capital base, none of which have any impact on the Bank’s current capital calculation.

These include: • Tier 1 securities cannot exceed 15% of total tier 1 capital; • Qualifying Tier 2 capital cannot exceed Tier 1 capital; • Qualifying subordinated term finance cannot exceed 50 percent of tier 1 capital after deduction of goodwill; • Where total expected loss amount is less than total eligible provisions, the difference is recognised in Tier 2 capital up to a maximum of 0.6% of credit risk-weighted assets. The provisions in excess of 0.6% of credit risk-weighted assets will be deducted from the risk-weighted assets of the related portfolio to which these provisions relate.

Further risk-weighted exposures are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures.

The Bank had no Tier 2 capital as at 31 December 2012 and 31 December 2011.


Capital PolicyThe Bank’s policy is to, at all times, maintain our Capital Adequacy Ratio in excess of the minimum required by the Central Bank of Bahrain. The Bank, and its individually regulated operations, has complied with all externally imposed capital requirements throughout the year and there have been no material changes in the Bank’s management of capital during the year.

It is the Bank’s plan to maintain sufficient capital to meet regulatory, tactical and strategic requirements. The Bank intends to maintain a regulatory capital level 3% above the capital requirements set by the Central Bank.

More importantly, the Bank’s policy is to maintain sufficient capital to sustain investor, creditor and market confidence and to support future development of the business. The impact of the level of capital on return on shareholder’s equity is also consid-ered as is the need to maintain a balance between higher returns that might be possible with greater gearing, and the advan-tages and security afforded by a sound capital position.

This decision framework is contained in the Bank’s comprehensive Internal Capital Adequacy Assessment Process and Capital Plan as outlined below.

The Central Bank of Bahrain sets and monitors capital requirements for the Bank as a whole. The capital adequacy ratio has been calculated in accordance with the Basel II and Central Bank of Bahrain’s guidelines incorporating credit risk, operational risk and market risk.

In applying current capital requirements, the Central Bank of Bahrain requires the Bank to maintain a prescribed minimum ratio of total regulatory capital to total risk-weighted exposures. The minimum risk asset ratio is 12% compared to a minimum ratio of 8% prescribed by the Basel Committee on Banking Supervision.

Risk-weighted exposures are determined according to specified requirements that seek to reflect the varying levels of risk at-tached to assets and off-balance sheet exposures.

The Bank, since its incorporation has maintained the Capital Adequacy Ratio well above the regulatory required minimum. For the last four years, the Capital Adequacy Ratio percentages are displayed in the diagram:

Capital Adequacy Ratio for the last four years

Regulatory CARBank CAR

70%

60%

50%

40%

30%

20%

10%

0%

2009 2010 2011 2012

56.17% 58.50% 52.10% 54.17%

12% 12% 12% 12%


USD’ 000

Capital Adequacy

Tier 1 Capital

Total equity

Less: Employee incentive scheme funded by Bank

Adjustment to exclude net fair value gains

Adjustment for goodwill

Total Tier 1 Capital

Total Regulatory Capital

Credit risk weighted exposures

Market risk weighted exposures

Operational risk weighted exposures

Total Risk Weighted Exposures

Total regulatory capital expressed as a percentage of total risk weighted exposures

2012

126,067

(8,791)

(18,674)

(448)

98,154

98,154

130,149

30,165

20,870

181,184

54.17%

2011

125,287

(8,717)

(15,068)

(448)

101,054

101,054

130,466

37,712

25,783

193,961

52.10%

The Bank’s regulatory capital position at 31 December was as follows:

Internal Capital Adequacy Assessment Process (ICAAP)

The Bank has developed an ICAAP strategy and Capital Plan which undertakes stress tests against the current and projected capital to ensure the Bank has sufficient capital for future stressed requirements, to monitor capital against the plan, and to undertake actions as required.

Capital requirement today for future stress = Capital requirement at stress point, less Capital generated between today and stress point

The ICAAP and Capital Plan includes Board and senior management oversight, monitoring, reporting and internal control re-views, to identify and measure the various risks that are not covered under Pillar 1 risks, and to regularly assess the overall capital adequacy considering the risks and the Bank’s planned business strategies.

Risks not quantifiable by the Pillar 1 process are covered under the Pillar 2 qualitative assessment process in the ICAAP process. The ICAAP process illustratively includes concentration risk, liquidity risk, interest rate risk and other risks. ICAAP keeps in per-spective the Bank’s strategic plans, credit growth expectations, future sources and uses of funds, dividend policy and the impact of all of these on maintaining adequate capital levels. In addition, the ICAAP process also includes stress testing on the Bank’s capital adequacy to determine capital requirement and planning to ensure that the Bank is adequately capitalised in line with the overall risk profile.


Executive Summary of the ICAAP Process

The ICAAP process can be summarised as follows: • Establish the frame of reference of the Bank’s capital and strategy; • Assess capital allocated for risks not fully addressed in Pillar1 and allocate additional capital under Pillar 2; • Stress capital amount for external factors; • Develop Capital Plan - Projected Required Capital and Projected Available Capital; • Assess Capital Plan against capital, post stress tests; and • Monitor Capital against Plan, and take action as required.

Capital Base :

Business Model:

Dividend Policy:

Risk:

Material Risks:

Stress Testing:

Approved by:

Coverage:

As at 31 December 2012, the Bank had a regulatory capital base of USD 98.154 million (2011: USD 101.055 million) used for Capital Adequacy calculation, and a current Capital Adequacy Ratio of 54.17% (2011: USD 52.10%), which was substantially in excess of the Central Bank of Bahrain’s requirements.

The Bank is a licensed wholesale bank, although the business model is that of an investment bank. The Bank does not have a trading portfolio, does not have any proprietary trading, and has a low interest rate risk position.

The Board of Directors has an approved dividend policy which considers the short-term / long-term de-sires of the shareholders and the need for capital for the Bank’s continuous growth requirement. Any proposed dividends are in line with this Dividend Policy, however, are subject to prior approval from the Central Bank of Bahrain.

The Bank has developed its risk management processes based on the Central Bank of Bahrain require-ments and best in class practices.

All material risks have been documented in the Pillar 2 capital calculations. These risks are within the Bank’s risk appetite.

Capital requirements have been stressed and tested.

ICAAP has been prepared by the Risk Management Function in consultation with the CFO and senior management, further reviewed by external consultants and approved by the Board.

Covers the risks involved in the Bank, its subsidiaries and its investment vehicles / SPVs.


Pillar 3 DisclosuresCapital Structure

USD’000

Capital AdequacyThe Bank is well capitalised and in excess of the Central Bank of Bahrain’s requirements.

Capital Adequacy Ratios

Issued and fully paid ordinary shares and perpetual

non-cumulative preference shares

Less: Employee stock incentive program funded by

the bank (outstanding)

Disclosed reserves

Legal / Statutory Reserves

Share premium

Others

Retained profit brought forward

Unrealised gains arising from fair valuing equities

(45% only)

Less:

Goodwill

Tier 1 Capital before PCD deductions

Total available Capital

Net Available Capital

Total Eligible Capital

Tier 2 Tier 3

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

-

- -

Tier 1

113,889

10,753

3,970

2,273

1,697

1

(23,781)

15,278

448

98,155

98,155

98,155

98,155

Tier 2 Tier 3

- -

- -

- -

- -

- -

- -

- -

- -

- -

- -

-

- -

Tier 1

113,889

10,737

3,888

2,202

1,686

-

(17,865)

12,328

448

101,055

101,055

101,055

101,055

2012 2011

Gulf One Investment Bank (Consolidated)

Gulf One Capital Company (Subsidiary)

Gulf One Investment Bank (Consolidated)

54.17%

34.47%

52.10%

54.17%

34.47%

52.10%

Total Capital Ratio

Total Capital Ratio

Tier 1 Capital Ratio

Tier 1 Capital Ratio

2012

2011

Capital ComponentsThe components of this capital structure are as follows:


Credit and Investment RiskThe capital requirement for credit risk using the Standardised Approach as at 31 December was as follows:

USD’000

USD’000

Types of Claims

Cash Items

Claims on Banks

Claims on Corporates

Equities

Other assets

Total

Cash Items

Claims on Banks

Claims on Corporates

Equities

Other assets

Total

-

6,710

13,631

105,710

4,098

130,149

-

5,495

14,904

97,783

12,284

130,466

4

16,681

13,631

70,473

4,098

104,887

3

27,476

14,904

65,189

12,284

119,855

-

805

1,636

12,685

492

15,618

-

659

1,788

11,734

1,474

15,655

Risk weighted exposures


Exposure amounts

Exposure amounts

Capital required

Capital required

2012

Standardised Approach

2011

Standardised Approach

Market Risk The capital requirement for market risk using the Standardised Approach as at 31 December was as follows:

USD’000

USD’000

Types of Claims




Commodities risk

Options risk

Total

Types of Claims




Commodities risk

Options risk

Total

-

-

30,165

-

-

30,165

-

-

37,712

-

-

37,712

-

-

2,413

-

-

2,413

-

-

3,017

-

-

3,017

-

-

3,620

-

-

3,620

-

-

4,525

-

-

4,525



Exposure amounts

Exposure amounts

Capital required

Capital required

2012

2011

Operational RiskThe capital requirement for operational risk using the Basic Indicator Approach as at 31 December was as follows:

USD’000



20,870

25,783

1,670

2,063

2,504

3,094



Exposure amounts

Exposure amounts

Capital required

Capital required

2012

2011


Credit and Investment Risk

Credit StandardsThe Bank has adopted the Central Bank of Bahrain’s, Basel II capital adequacy framework for the standardised approach of credit risk which divides the counterparty exposure into classes. An overview of the counterparty exposure classes and the risk weights used to derive the Risk Weighted Exposures is provided below:

Sovereigns PortfolioThe sovereign portfolio comprises exposures to governments and their respective central banks. The risk weights are zero per-cent for exposures in the relevant domestic currency of the sovereign/central bank, or for any exposures to GCC governments (if the relevant supervisor also allows zero percent risk weightings). Foreign currency claims on other sovereigns are risk weighted based on their external credit ratings.

Certain multilateral development banks as determined by the Central Bank of Bahrain may be included in the sovereign portfolio and treated as exposures with a zero percent risk weighting (as specified in the Rulebook), otherwise based on their external credit ratings.

Public Sector Entities (PSE) PortfolioBahrain PSE’s (those treated as claims on the government of Bahrain by the Central Bank of Bahrain), and domestic currency claims on other PSE’s that are assigned a zero percent risk weight by their respective country regulator are allowed a zero percent risk weight by the Central Bank of Bahrain for computation purposes.

Claims on other (foreign) PSEs (i.e. not having sovereign treatment) denominated and funded in the home currency of the sover-eign are risk weighted as allowed by their home country supervisors, provided the sovereign carries rating BBB- or above. Claims on PSEs with no explicit home country weighting or to PSEs in countries of BB+ sovereign rating and below are subject to ECAI ratings as per the Central Bank of Bahrain guidelines.

Claims on commercial companies owned by governments are risk weighted as normal commercial entities unless they are cov-ered by a government guarantee in which case they may take the risk weight of the concerned government.

Banks’ PortfolioClaims on banks are risk weighted based on their external credit ratings. A preferential risk weighting treatment is available for qualifying short-term exposures to banks in their country of incorporation. Short-term exposures are defined as exposures with an original tenure of three months or less and denominated and funded in the respective domestic currency. The preferential risk weight for short-term claims is allowed on exposures in Bahraini Dinar/US Dollar in the case of Bahraini incorporated banks.

Corporate PortfolioClaims on corporate entities are risk weighted based on their external credit ratings. A 100% risk weight is assigned to exposures to unrated corporate entities.

Equities portfolioThe equities portfolio comprises of unlisted equities and unlisted funds in the banking book. Unlisted equities and funds are risk weighted at 150%.

Other Assets A 100% risk weight is assigned to all “other assets” on the balance sheet.

Past Due ExposuresAll past due loan exposures, irrespective of the categorisation of the exposure, are classified separately under the past due ex-posures asset class. A risk weighting of either 100% or 150% is applied depending on the level of specific provision maintained against the exposure as disclosed under the section entitled “Investment and Credit Risk” earlier in this report (more specifically a rating of 150% is applied when specific provisions are less than 20% of the outstanding amount, and reduced to 100% when specific provisions are greater than 20% of the outstanding amount).

External Credit Assessment Institutions (ECAI)The Bank uses ratings issued by Standard & Poor’s, Moody’s and Fitch to derive the risk weightings under the Central Bank of Bahrain’s, Basel II capital adequacy framework. Where ratings vary between rating agencies, the highest rating from the lowest two ratings is used to represent the rating for regulatory capital adequacy purposes. The Bank uses ECAI for its placements with financial institutions.


The following are gross credit risk exposures considered for Capital Adequacy Ratio calculations.

Credit and Investment Risk DisclosuresThe Group’s credit portfolio as on 31 December was as follows:

USD’000

USD’000

Placements

Investment securities

Loans & advances

Other assets

Total

Placements


Loans & advances

Other assets

Total

* Calculations are based on quarterly average balances

16,685

91,625

6,350

15,340

130,000

27,478

80,256

12,104

21,001

140,839

22,465

89,068

6,885

16,699

135,117

34,149

80,980

12,007

16,601

143,737

Exposure amount

Exposure amount

Average exposure amount*

Average exposure amount*

2012

2011

100

90

80

70

60

50

40

30

20

10

0

90

80

70

60

50

40

30

20

10

0

Placements Investment Securities Loans & Advances Other Assets

Placements Investment Securities Loans & Advances Other Assets

Exposure Amount

Exposure Amount

Average Exposure Amount

Average Exposure Amount

US$ mil

US$ mil


USD ‘000

USD ‘000


Loans & advances


Other assets

Total assets


Loans & advances


Other assets

Total assets

16,645

4,829

40,059

12,553

74,086

27,478

11,538

34,080

11,736

84,832

39

1,522

29,042

2,787

33,390

-

566

31,065

9,262

40,893

-

-

22,524

-

22,524

-

-

15,111

3

15,114

16,684

6,351

91,625

15,340

130,000

27,478

12,104

80,256

21,001

140,839

GCC

GCC

2012

2011

Europe

Europe

Africa

Africa

Total

Total

Geographic Distribution Of ExposuresThe Group’s geographic distribution of the credit portfolio as on 31 December was as follows:

Africa 17%

Africa 11%

2012

2011

Europe 26%

Europe 29%

GCCCountries

57%

GCCCountries

60%


Other Sectors

35%

Pharmaceuticals10%

Power & Water 22%

Oil & Gas 17%Financial

13%

Aviation 3%

USD ‘000

USD ‘000

Manufacturing

Clean Energy

Power & Water

Oil and gas

Financial

Trade

Commercial Real Estate Financing

Government

Media, technology & communication

Aviation

Pharmaceuticals

Other sectors

Total

Manufacturing

Clean Energy

Power and water

Oil and gas

Financial

Trade

Commercial real estate financing

Government

Media, technology and communications

Transport

Other sectors

Total

-

-

-

-

16,685

-

-

-

-

-

-

-

16,685

-

-

-

-

27,478

-

-

-

-

-

-

27,478

-

-

24,535

22,524

-

-

-

-

-

4,377

11,322

28,868

91,626

-

10,585

13,854

15,111

-

-

-

-

721

1,088

38,897

80,256

-

-

3,388

-

-

-

-

-

-

-

1,504

1,457

6,349

-

-

-

-

-

-

-

-

-

1,451

10,653

12,104

-

-

-

-

5

-

-

-

-

-

67

15,268

15,340

-

-

-

-

-

-

-

-

-

-

21,001

21,001

Cash & Cash equivalents

Cash & Cash equivalents

2012

2011



Loans & advances

Loans & advances

Other assets

Other assets

The industry distribution of the credit portfolio as of 31 December was as follows:

The Bank’s unfunded exposure is a financial guarantee of gross and average amount of USD 2.8 million to a pharmaceutical company in the GCC region.

2012

Other Sectors 50.09%

Power & Water 9.84%

Oil & Gas 10.73%

Financial 19.51%

Transport 1.80%

Technology, media and telecommunications

0.51%

Clean Energy 7.52%

2011


Related Party TransactionsFor the Group, related parties include SPV’s and associated companies, including companies that hold clients’ investments (cli-ents’ investment holding companies), and the parent company through which the employees invest in beneficial holding of the Bank’s shares. It also includes major shareholders, directors and senior management of the Bank, their immediate families and entities controlled, jointly controlled or significantly influenced by such parties. Income is earned or expense is incurred in the Group’s transactions with such related parties in the ordinary course of business. The Group’s Board approves the terms and conditions of all related party transactions. As a result, the true nature of the Group’s transactions with these companies is all effectively at arm’s length commercial terms. Related party transactions at arm’s length for the year ended 31 December was as follows:

USD ‘000

Assets

Loans and advances


Equity accounted Investees

Other assets

Income


Net interest income



Profit on sale of investments designated at fair

value through profit or loss

Dividend income

Share of profit of associates

Other Income

Expenses

Staff expenses

Premises expenses

Other expenses


Financial guarantee

2,453

75,759

3,382

3,256

1,031

721

9,950

456

281

173

85

-

-

-

2,800

-

-

-

5,952

-

-

-

-

-

-

-

2,794

-

-

-

2,453

75,759

3,382

9,208

1,031

721

9,950

456

281

173

85

2,794

16

153

2,800

-

-

-

-

-

-

-

-

-

-

-

-

16

153

-

2012 Associates Key management

personnel

TotalSignificant share-holders / entities in which directors are

interested


USD ‘000

Assets

Loans and advances


Equity accounted Investees

Other assets

Income


Net interest income





Dividend income

Share of loss of associates

Other Income

Expenses

Staff expenses

Premises expenses

Other expenses

Contingent Liabilities

Financial guarantee

8,739

45,381

4,329

3,769

301

797

133

217

181

(220)

87

-

-

-

2,800

-

-

-

5,284

-

-

-

-

-

-

-

2,457

-

-

-

8,739

45,381

4,329

9,053

301

797

133

217

181

(220)

87

2,457

15

152

2,800

-

-

-

-

-

-

-

-

-

-

-

-

15

152

-

2011 Associates Key management

personnel

TotalSignificant share-holders / entities in which directors are

interested


Highly Leveraged and other High Risk CounterpartiesThere are no highly leveraged and other high risk counterparty claims.

Large Exposures – ConsolidatedThe consolidated risks of large exposures as at 31 December was as follows:

USD ‘000

USD ‘000

Total large exposures

Total exempted large exposures


Exposures to the directors and their associates

Exposures to the bank’s associates

Exposure to significant shareholders

Total exposures to related parties


Total exempted large exposures


Exposures to the directors and their associates

Exposures to the bank’s associates

Exposure to significant shareholders

Total exposures to related parties

-

10,858

10,858

-

-

-

-

-

23,241

23,241

-

-

-

-

-

-

-

3,895

-

-

3,895

-

-

-

3,895

-

-

3,895

66,948

-

66,948

-

84,850

-

84,850

71,349

-

71,349

-

65,020

-

65,020

2012 Counterparties

2011 Counterparties

Bank

Bank

Other

Other

Corporate

Corporate


Maturity Profile of Credit PortfolioThe maturity profile of the credit portfolio as at 31 December was as follows:

USD ‘000

Within 3 months

3 to 6 months

6 months to 1 year

1 year & above

Total

16,685

-

-

-

16,685

-

-

-

88,243

88,243

2,024

432

-

12,884

15,340

-

1,504

4,845

-

6,349

-

-

-

3,382

3,382

2012

Cash & bank balances

Maturity Band Investments designated at FV


Other assetsLoans & advances

Equity Accounted

Investees

90

80

70

60

50

40

30

20

10

0



Investments designated at FV through Profit or Loss

Loans & advances


Other Assets

US$ mil


USD ‘000

Within 3 months

3 to 6 months

6 months to 1 year

1 year & above

Total

27,478

-

-

-

27,478

-

-

-

75,927

75,927

1,162

9

-

19,830

21,001

7,632

3,906

566

-

12,104

-

-

-

4,329

4,329

2011


Maturity Band Investments designated at FV


Other assetsLoans & advances

Equity Accounted

Investees



Investments designated at FV through Profit or Loss

Loans & advances


Other Assets

80

70

60

50

40

30

20

10

0

US$ mil


Equity Position in The Banking BookStandardised Approach under the Basel framework is used for measuring / managing private equity risk considered part of the banking book.

Equity securities are held as either part of the Bank’s strategic holdings or held with the objective of capital appreciation and re-alising gains on the sale thereof. All equity positions in the banking book are classified as either investments at fair value through profit or loss or investments in associates.

Accounting policies for equity instruments are described in detail in the Financial Statements under “Significant Accounting Policies”.

USD ‘000

USD ‘000

Quoted Equities

Unquoted Equities

Total

Unrealised gains recorded in consolidated retained earnings

45% of unrealised gains recognised under Tier 1 Capital

Quoted Equities

Unquoted Equities

Total

Unrealised gains recorded in consolidated retained earnings

45% of unrealised gains recognised under Tier 1 Capital

-

70,473

70,473

33,952

15,278

-

65,189

65,189

27,395

12,328

-

12,685

12,685

-

-

-

11,734

11,734

-

-

-

105,710

105,710

-

-

-

97,783

97,783

-

-

2012

2011

Gross Exposure

Gross Exposure

Capital requirement

Capital requirement



Past Due, Impaired Loans and RestructuredPast due is defined as those facilities on which amounts due, including both principal and interest, are 90 days or more overdue.Impaired financial assets are those for which there is objective evidence that the Group will not collect all amounts due, includ-ing both principal and interest, in accordance with the contractual terms of the obligation. In such circumstances, a specific provision will be taken upon approval from the CEO, or Board dependant on the size of said provision.

At 31 December 2012, none of the financial assets were past due (2011: nil). The impaired loan of USD 190,690 is to a corporate in the GCC region for which specific provisions have been taken.

The Bank has not restructured any credit facility during the course of the year.

Movement in provision for loans and advances during the year:

USD ‘000

Opening balance at 1 January

Addition during the year

Closing balance at 31 December

Portfolio provision

Opening balance at 1 January

Add: Provision made during the year

Closing balance at 31 December

190

-

190

-

64

64

190

-

190

-

-

-

Specific provision 2012 2011


Interest Rate Risk in The Banking BookThe Bank uses interest rate gap analysis to measure the interest rate sensitivity of its annual earnings due to re-pricing mis-matches between rate sensitive assets, liabilities and derivatives positions. As at 31 December 2012, the Bank did not have any rate sensitive liabilities and derivatives positions.

The interest rate risk management process is supplemented by monitoring the sensitivity of the Bank’s financial assets and li-abilities to interest fluctuations. The Bank’s exposure to interest rate risk is limited due to the relatively short-term nature of these financial assets. Based on the exposure to short-term placements and loans and advances a shock of 200bps increase / decrease in the interest rates would result in USD 360,988 (2011: USD 700,662) variation in profit.

The assets re-pricing profile of various asset categories is set out below:

USD ‘000

On-balance sheet financial

instruments

Assets

Cash and balances with banks

Placements with financial institutions

Loans and advances


Other assets

Total assets

-

-

-

-

-

-

4,771

11,910

-

-

-

16,681

-

-

1,504

-

-

1,504

-

-

1,458

-

-

1,458

-

-

-

2,479

-

-

4

-

3,388

89,146

15,340

110,357

4,775

11,910

6,350

91,625

15,340

130,000

2012 Effective Interest

Up to 3 months

3-6 months

6-12 months

1-5years

More than

5 years

Rate insensitive

Total

-

-

-

-

-

-

Cash and Balances with Banks

Placements with Financial Institutions

Loans & Advances

Investment Securities

Other Assets

90

80

70

60

50

40

30

20

10

0

Upto 3 Months 3 to 6 Months 6 to 12 Months More than 5 years Rate Insensitive

US$mil


Cash and Balances with Banks

Placements with Financial Institutions

Loans & Advances

Investment Securities

Other Assets

80

70

60

50

40

30

20

10

0

Upto 3 Months 6 to 12 Months Rate Insensitive

USD ‘000

On-balance sheet financial

instruments

Assets

Cash and balances with banks

Placements with financial institutions

Loans and advances


Other assets

Total assets

-

-

-

-

-

-

3,902

23,572

7,057

-

-

34,533

-

-

-

-

-

-

-

-

500

-

-

500

-

-

-

-

-

-

-

-

-

-

-

-

3

-

4,546

80,256

21,000

105,805

3,905

23,572

12,103

80,256

21,000

140,838

2011 Effective Interest

Up to 3 months

3-6 months

6-12 months

1-5 years

More than

5 years

Rate insensitive

Total

US$mil


Disclaimer

This Annual Report contains certain forward-looking statements, and such information is based on the beliefs of Gulf One Invest-ment Bank B.S.C. (c), (the Bank), as well as on assumptions made by, and information currently available to the Bank. When used in this Annual Report, the words “anticipate”, “believe” “estimate”, “expect”, “plan”, “intend”, and words or phrases of similar import, are intended to identify forward-looking statements. Such forward-looking statements may include, without limitation, statements relating to the following: Bank plans, strategy, objectives or goals; future economic performance or prospects; specific country, region and worldwide business environment; potential effect on future performance of certain contingencies; and assumptions underlying any such statements. These statements are inherently subject to significant business, economic, competitive, regula-tory and operational uncertainties, contingencies and risks, both specific and general in nature, many of which are beyond the control of the Bank. Any forward-looking statements are speculative in nature, and it can be expected that one or more of the assumptions underlying such statements will prove not to be accurate, and unanticipated events and circumstances may occur. Actual results and events will likely vary from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements, and such variations may be material. Consequently, this Annual Report should not be regarded as a representation by the Bank that the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements will be achieved and should not be relied on. The Bank does not intend to update these forward-looking statements.

The contents of these Basel II, Pillar 3 disclosures and other disclosure requirements (as disclosed in the Annual Report) of Chapter-1.3 of the Public Disclosure Module (PD Module) of the Central Bank of Bahrain’s Rulebook have been reviewed by the external auditors, KPMG Fakhro, based on “Agreed Upon Procedures” as required under Para PD-A.2.4 of the PD Module.

Licensed as a conventional wholesale bank by Central Bank of Bahrain, with commercial registration No. 62199


Gulf One Investment Bank B.S.C.(c)BAHRAIN

15th Floor, West TowerBahrain Financial Harbour PO Box 11172 Kingdom of BahrainTel: +973 1710 2555Fax: +973 1710 0063Website: www.gulf1bank.com

Gulf One Capital Company (Joint Stock)SAUDI ARABIA

Office 5, Beutat Al-Aamal BuildingKing Abdulaziz Road, Shatee DistrictJeddah, 23414-8871 Kingdom of Saudi ArabiaTel: +966 2606 3770Fax:+966 2606 6476

Gulf One Economic Consultancy Company S.A.K.KUWAIT

Al-Murqab, Mazaya tower 29th floor, office No. B1Kuwait CityTel: +965 2225 1300Fax:+965 2225 1301

Gulf One GmbHGERMANY Widenmayerstraße 18D-80538 MunichGermanyTel: +49 89 552983 65Fax:+49 89 552983 69

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