Mashreq bank Annual Report

Mashreq bank Annual Report

Mashreq bank Annual Report 2008 His Highness (Late) Sheikh Zayed Bin Sultan Al Nahyan May his soul rest in eternal paradise His Highness (Late) S...

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Mashreq bank Annual Report 2008

His Highness (Late) Sheikh Zayed Bin Sultan Al Nahyan May his soul rest in eternal paradise

His Highness (Late) Sheikh Maktoum Bin Rashid Al Maktoum May his soul rest in eternal paradise

His Highness Sheikh Khalifa Bin Zayed Al Nahyan President of the United Arab Emirates and Ruler of Abu Dhabi

His Highness Sheikh Mohammed Bin Rashid Al Maktoum Vice President & Prime Minister of the United Arab Emirates and Ruler of Dubai

Contents Board of Directors

1

Chairman’s Report

2

Chief Executive Officer’s Review

6

Worldwide presence

19

Financial Highlights

21

Independent Auditor’s Report

25

Group Financial Statements

27



Consolidated Balance Sheet

28



Consolidated Income Statement

29



Consolidated Statement of Changes in Equity

30



Consolidated Cash Flow Statement

31



Notes to the Consolidated Financial Statements

32

Mashreqbank psc established in 1967 Head Office: P.O. Box 1250, Dubai, United Arab Emirates Tel: 2223333, Telefax: 2226061, Telex: 45429 MSHQHO EM Cable: MASHREQBANK, SWIFT: BOMLAEAD Website: www.mashreqbank.com

Mashreq Annual Report 2008

Board of Directors Chairman Mr. Abdulla Bin Ahmad Al Ghurair

Vice-Chairman Mr. Ali Rashed Ahmad Lootah

Director & Chief Executive Officer H.E. Abdul Aziz Abdulla Al Ghurair

Directors Mr. Mohamed Abdulla Ahmed Al Ghurair Mr. Abdulla Mohamed Ibrahim Obaidalla Mr. Abdul Rahman Saif Ahmad Al Ghurair Mr. Majid Saif Ahmed Al Ghurair



Mashreq Annual Report 2008

Chairman’s Report

Mr. Abdulla Bin Ahmad Al Ghurair Chairman

2008 will go in the annals of history as the most eventful year for the global economy, particularly, the financial services industry. The year started with a cautious optimism but by the third quarter, the scenario had changed drastically. The worsening liquidity crunch and unabated downturn in the property market in the US had triggered

a global financial crisis which swept away many giant financial institutions in its wake. Stock markets the world over recorded their worst ever losses. Commodity prices which had hit an all time high plummeted to new lows impacting the major commodity exporting economies. For most of OECD economies, the looming threat of recession became a



Mashreq Annual Report 2008

reality by the end of the year. Government intervention and support by the regulators became a norm across the markets. Countries which have until recently been the biggest proponent’s of the market economy and the worst critics of government intervention were rescuing their financial institutions by taking equity stakes in them. In short, by end of the year, the global financial landscape had changed forever.

created near panic situation across the world necessitating confidence building measures by Regulators. The Government of UAE responded quickly and announced a general guarantee for all customer deposits and interbank lending within the UAE. Prompt and decisive action by the Ministry of Finance and the UAE Central Bank helped calm down market sentiments and ensured that normal market conditions prevail in the UAE.

The impact of this global meltdown was so severe that the UAE economy which until middle of 2008 had remained relatively unscathed started showing signs of sluggishness across the sectors. As access to international money markets become more restricted, the liquidity in the UAE started drying up and a visible downturn hit the UAE banking sector. The Ministry of Finance took prompt action to rectify the situation and provided stimulus to the economy by providing AED 50 Billion of long-term funding to the UAE banks. The UAE Central Bank allocated AED 50 Billion to inject liquidity in the market by providing repos facility against market securities held by the banks and allowing overdraft against cash reserves held by the banks.

I am pleased to report that in the midst of this unprecedented turmoil, your bank performed well. Net Interest Income went up by 39% and Fee and Other Income excluding Investment Income went up by 19%. Due to the steep decline in securities value and lack of liquidity in the market, investment activities resulted in a net loss of AED 335 Million against a profit of AED 488 Million in 2007. Inspite of a significant swing in the Investment Income, your bank was able to register a growth of 3.5% in Gross Revenue reaching AED 3.98 Billion.

The failure of Lehman Brothers and huge losses reported by large global banks eroded public confidence in the financial institutions and

The operational and control infrastructure built in 2007 to support the planned growth had a full year impact of pushing up costs by 33% to AED 1.9 Billion. The high inflation of 2008 impacted occupancy and administration costs which also contributed to the growth in expenses. Inspite of the market downturn,

our Advances portfolio quality held very well and the cost of credit i.e. net write-offs and specific provisions remained low at 0.8% of average Advances. Further, as in previous years, we added another AED 107 Million to general provisions bringing the total General Provisions to AED 762 Million. This significant amount is held as a cushion to overcome the impact, if any, of the economic downturn. The Net Profit after risk cost, tax and minority interest reached AED 1.64 Billion. The Net Profit as compared to previous year has declined by 13.6%. However, in the economic conditions prevailing in the market and significant decline in the investment revenue, it is an outstanding performance which reflects the intrinsic strength of the bank and excellent health of core banking business. The Total Assets of the bank rose by 6.4% as compared to 2007 and reached AED 93 Billion. The growth in Customer Advances including Islamic Financing was significant at 55.8% to reach AED 55 Billion. Due to tight liquidity conditions, the growth in Customer Deposits was more modest at 6.6%. The unprecedented growth in Advances for the first time pushed Advances to Customer Deposits ratio to 107%. However, Advances to Customer Deposits and Medium Term Loans ratio is at a relatively comfortable level at 97%. The contribution to Shareholders Fund by the current year profit was off-set by negative growth in investment



Mashreq Annual Report 2008

revaluation keeping the growth in the Shareholders Equity to a modest 2%. Due to the increase in risk weighted assets and a relatively flat equity base, the bank’s Capital Adequacy ratio at 14.08% fell below last year’s 17.76% but is still 40% more than the limit prescribed by the UAE Central Bank. Your Board recommends a Cash Dividend of 10%.

UAE Economic Environment The unprecedented growth of the UAE banking sector from 2005 to 2008 period was a reflection of the buoyant economic climate and globalization of the market place. During this period, Customer Deposits of the UAE banking sector went up by Compounded Annual

Growth Rate (CAGR) of 30% whereas Advances grew at a faster pace of 37%. The Loans and Advances in the banking system went up from 81% of GDP in 2005 to 125% of the estimated GDP in 2008. This strong expansion of credit led to an overheating of the economy making it vulnerable to the effects of slowdown in the global economy. Oil prices which peaked in July 2008 at around US $150 a barrel fell to below US $40 a barrel by December on recessionary fears, and will lead to a narrowing of the budget surpluses in the GCC economies. The construction sector which had been the major growth engine during the last few years slowed down significantly. Housing market suffered a major setback with the withdrawal of 2 major mortgage providers. Overall, the demand for residential and commercial real estate

declined sharply. The Dubai Financial Market had its worst year as market index declined by over 70% during the year. Inspite of this economic upheaval, it is estimated that the UAE GDP has grown at a rate of 9-10 percent during 2008 surpassing the AED 800 Billion mark. Looking at the current economic situation and future oil prices, the growth forecast for 2009 range from 0.5% to 2.8%. Notwithstanding the lower oil prices and production cuts, UAE is expected to generate a substantial current account surplus during 2009. The inflation forecast for 2009 at 2.5% is substantially lower than previous years which will be the most important positive development during 2009. A federal level balanced budget for 2009 was approved by the cabinet in October 2008 with a total outlay of AED 42.2 Billion.

IMPORTANT INDICATORS

2004

2005

2006

2007

2008

ADVANCES TO CUSTOMER DEPOSITS

77.0%

66.6%

77.1%

73.2%

106.9%

EQUITY TO TOTAL ASSETS

16.4%

17.8%

14.0%

12.0%

11.5%

RETURN ON AVERAGE SHAREHOLDER’S EQUITY (AFTER-TAX)

17.0%

28.7%

21.5%

22.4%

16.7%

2.5%

4.4%

3.0%

2.6%

1.8%

EFFICIENCY RATIOS

33.1%

25.0%

36.5%

36.6%

47.0%

CAPITAL ADEQUACY RATIO (AS PER CB)

17.9%

19.7%

17.5%

17.8%

14.1%

RETURN ON AVERAGE ASSETS (AFTER-TAX)



Mashreq Annual Report 2008

The proposed increase of 21% in budgeted expenditure for 2009 was well received by the market and seen as a major confidence building measure. The UAE Consolidated Financial Accounts which have registered significant surpluses for the last few years are expected to continue the trend in 2009 albeit at a reduced level. The Abu Dhabi Vision 2030 document was released in early January which was a morale booster. The Government of Abu Dhabi is determined to diversify the economy and reduce oil contribution to GDP from 58% in 2008 to 53% in 2012. During the same period the GDP is expected to grow at 7% CAGR. Other than oil and petrochemicals, nine industry sectors have been identified to form the Emirates’ engines of economic growth and diversification. Investment in oil and petrochemical will continue to be the backbone of the growth. Crude production capacity is to be enhanced to 3.5 Million barrels per day over the next 10 years. Refining capacity is to be tripled from the existing level of 485000 barrels per day. A massive expansion plan has been approved for petrochemicals industry. The Borouge 2 project will be completed by 2010 which will more than triple the ethylene production. Similarly, urea production at Ruwais Fertilizer Company will be increased by 50%. The annual 2009 budget for the emirate of Dubai was approved in the first half of January.

Investment expenditure is projected to grow by 33% to AED 12 Billion. Overall, public spending will increase by 42% to register the first ever deficit of AED 4.2 Billion. According to the Department of Finance, this deficit will be bridged by year-end through government borrowings. The increased spending particularly on infra-structure projects will have a very positive impact on the overall economic climate of Dubai. Despite the gloomy global economic outlook, I can confidently say that the UAE economy will rebound sooner than expected. The banking sector may not see the unprecedented growth of the past few years but will certainly return to normal growth levels after a marginal decline in 2009.

2009 Plans Planning in uncertain times is indeed a challenge. Our strategic plan which was developed last year with certain economic assumptions required a revision in the changed economic climate. With our flexible planning model we keep a close eye on macro and micro economic indicators and adjust our plans to match the market reality. Looking at the current scenario we have planned a modest growth in our revenue next year. Cost Management and Risk Management will be our main focus in 2009. I am happy to say that we had invested well

in risk management capabilities in the past which will ensure that we manage stress within our portfolios within acceptable tolerance limits. Fee based products and services will receive the utmost attention whereas increase in risk assets will be well controlled. Mobilisation of deposits and liability management will be the top priority for 2009. The tight liquidity in the market pushed our liquidity ratios below the target levels in 2008. However, we plan to reverse the situation in 2009. We have made plans to manage this short-term unusual situation without losing sight of our long-term goals. On behalf of the board, I would like to congratulate the CEO and the management team for their contribution in posting an excellent performance in the given difficult conditions. It is due to their commitment and foresight that your bank has virtually been unaffected by the global economic downturn. We would also like to thank the Government of UAE, the Central Bank and our customers for their continued support. Thank you.

Abdulla Bin Ahmad Al Ghurair Chairman



Mashreq Annual Report 2008

Chief Executive Officer’s Review

H.E. Abdul Aziz Abdulla Al Ghurair Chief Executive Officer

The Group profit for fiscal 2008, clouded by the adverse investment climate does not truly reflect the successful inroads made in strategic areas and the strong performance of our core banking business. Corporate banking, Islamic banking, Retail banking and Financial Institutions all had a successful year with sizeable growth in assets and corresponding revenue. Nevertheless, the global credit

crunch and negative sentiments across all markets created some stress in our investment portfolio which brought the Group profitability down to marginally below the previous year’s mark. A revamp of the retail strategy with renewed focus on select customer segments and products resulted in further diversification and enhancement of our market share. Our Corporate and Commercial



Mashreq Annual Report 2008

banking business extended its penetration across all customer segments and product lines, while the Private Banking business was repositioned for growth. During the year, we not only launched Badr Business Centres at select locations across the country but also firmly established Badr as a premium brand for providing Islamic Banking solutions for all business banking needs. Strategic Initiatives for improvement of sales effectiveness and cross-sell were successfully launched, improving productivity and cross sell revenues across businesses and product lines. Risk management system upgrades and induction of highly skilled professionals in the team ensured that our risk management capabilities maintained cutting-edge standards and practices. Our subsidiary, Oman Insurance gained new heights and became the first company in the UAE to reach a premium income of AED 2.10billion growing by 41% over the previous year. The company operates in both General Insurance Segment and the Life & Medical Insurance Segment. Traditionally General Insurance Segment has been predominant in the portfolio of the Company but with the recent growth in Life and Medical Insurance portfolio’s it now constitutes nearly 25% of the overall premium income of the company. The company is also expanding in the region with branches set up in Muscat, Sultanate of Oman and Doha, Qatar during 2008.

Mashreq’s commitment to quality and quest for continuous improvements has always been acknowledged by the market and from time to time recognized through industry awards. During 2008 Mashreq was again named the ‘Best Bank in the UAE’ by Euromoney for the fourth time in the last 16 years. Our management depth and capabilities, high asset quality, diversified business mix and world class risk management capabilities have always been commented favorably by all rating agencies. I am happy to state that in these turbulent times also our foreign currency long-term ratings have been reconfirmed at ‘A2’ by Moody’s Investor Services, ‘A’ by Standard and Poor’s, ‘A+’ by Fitch and ‘A+’ by Capital Intelligence. The ratings outlook for future and financial strength ratings have also been reconfirmed at the current levels.

our core values of openness, transparency, boldness, relationship focus and individual responsibility. Programme Najah has focused the Retail Banking Division on a clear objective to make Mashreq “the most convenient bank in the UAE” by becoming more accessible, faster and by providing an improved range of products and services which customers really value. Through this programme, Mashreq has committed itself to:• Offer the widest choice of how, where and when customers can deal with us • Work quickly and accurately because we respect and value of customer’s time • Offer refreshingly simple and value-for-money products and services • Communicate in an open and easy to understand manner • Welcoming customer feedback and responding promptly to any concerns

Retail Banking The Retail Banking Division made solid progress in 2008. Early in the year, we launched ‘Programme Najah’ (meaning “success” in Arabic), a comprehensive transformation programme with a clear objective to operationalise the Brand Promise to “Open the Way” for our retail customers by providing a more distinctive, hard to copy customer experience based on

To support the programme we designed and built a proprietary “Customer Convenience Model” which allows the Bank to consistently monitor more than 20 key performance metrics. To improve our physical network accessibility, we expanded the Mashreq branch network in the UAE from 47 branches to 60 branches and opened 3 new customer service units. Our ATM and CCDM network was also modernized and expanded.



Mashreq Annual Report 2008

In our Wealth Management business, our Mashreqgold priority banking proposition continued to be well received and we significantly increased our Mashreqgold customer base to more than 9000 priority customers. A strategic partnership with Yes Bank was concluded to offer our NRI Mashreqgold customers a seamless and convenient priority proposition in India through their Mashreqgold Relationship Manager. Our deposit mobilization activities and margins were impacted in the second half of the year by the general tightening of liquidity in the UAE. But we are optimistic that a stabilization of the liquidity environment will allow improved performance in the year ahead. In our Retail Assets business we had a strong year with continued growth in our personal, auto and mortgage loan businesses. Market conditions in the residential property market have become more uncertain; however Mashreq has always positioned itself as a responsible lender and our prudent and disciplined approach to growing our retail asset portfolio will enable us to continue to grow profitably. Our relatively new SME Banking business delivered an outstanding contribution. The business has grown rapidly during the year and enabled Mashreq to become a market leader in the Small and Medium

Enterprise segment in the UAE. As we develop further the embedded advantage of a close relationship between our enlarged branch network and the communities in which those branches operate, we are confident that “SME Banking from Mashreq” will continue to deliver strong growth in the year ahead. In the final quarter of the year a decision was taken to refocus the Osool Finance Company business as a specialized Commercial Vehicle Finance, Leasing and Factoring business and to service the routine needs of our SME customer base only through the Mashreq brand and branch network. Plans have been developed and will be implemented next year to refresh the Osool brand to better reflect its new and specialized focus. The Credit Card business also delivered an outstanding performance with strong volume and revenue growth in the merchant acquiring business and an extremely strong launch of our new Etisalat Mashreq cobranded Credit Card. Mashreq has now become the largest issuer of credit cards in the UAE. As part of our growth strategy, Mashreq signed a Letter of Intent with China Union Pay to acquire and issue China Union Pay branded credit and debit cards for the first time in the UAE. In our International Retail business we established a Greenfield Network of 10 new

branches in Egypt and our plans to develop this important new retail franchise are well advanced. We continued to improve retail business performance in Qatar under a new management team and plans to open from a single branch location in Kuwait as well as expand our retail activity in Bahrain were developed.

Corporate and Investment Banking 2008 has been another spectacular year for the Corporate and Investment Banking Group. The momentum built up over the years continued to expand our franchise and client base, generating good revenue growth. Traditional areas of business, such as contractor and trade finance have continued to perform well, supporting our clients in their expansion and addressing their banking needs. At the same time, we ensured that our clients are provided with our complete product suite including cash management, investment banking, factoring, Islamic products, asset management, foreign exchange, derivatives and other hedging instruments. We made further inroads in Abu Dhabi and Qatar by strengthening our presence and registering robust growth. In parallel, our business finance operation, focusing on the small and middle market segment of



Mashreq Annual Report 2008

the economy, increased their market penetration driven by focused relationship management. Investment banking facilitated client access to debt and equity capital markets. The division saw a strong growth in structured finance and debt syndication business in the first half of the year. The Bank was involved as a mandated lead arranger in 35 deals helping raise debt aggregating to US$ 35.7 billion and established itself as the leading regional bank in syndicated loans originating in Middle East and North Africa. We successfully executed a number of landmark transactions during 2008 as underwriter and book-runner, including US$ 5 billion syndicated facility for Dubai World, AED 3 billion debut syndicated facility for Du (Emirates Integrated Telecommunication) and US$ 2.25 billion term loan facility for Orascom Telecom Holding among others. We further supplemented our loan arranging capabilities during the year by setting up a dedicated facility agency desk. We re-launched our Private Banking offering this year, which caters to meet the ever increasing needs of our clients for more sophisticated investment solutions. This was a result of our investments in human resources, technology & infrastructure for this business. The second half of this year was affected by the global turmoil

in financial markets. Though the impact on regional markets was limited, there was tightening of liquidity available in the market. As a result, mobilization and retention of wholesale deposits became a challenging task. The bank has taken proactive measures to ensure effective management & control of liquidity risk and any possible credit risk. Group strategy is to focus on re-pricing and reduction of our loan book, review and enhancement of our portfolio quality, and strengthening of deposit mobilization efforts.

Financial Institutions Group The year saw Correspondent Banking business grow at a rapid pace utilizing the opportunities available. The objective remains to become the preferred correspondent bank in the region. A focused approach to business and market has been instrumental in meeting our goals with quality service being the key to success. In this respect we have been able to position ourselves as a service provider with cross border execution capabilities. Branches at money centers such as New York, Hong Kong, London and Mumbai continued to offer cross border trade and payment facilities to customers, while representative offices at Karachi and Dhaka maintained close watch over relationships in

those countries. Our Khartoum representative office which was started last year has done well. In short, we have been able to exploit our technological and operational expertise to cover geographical areas even where we do not have a physical presence and plans are in place to extend our network by opening additional offices in the Far East. We are also in the process of implementing a new sophisticated payment system in New York interfaced with CHIPS & FED clearing. The system is under UAT and will be available in early 2009. When implemented it will drastically reduce manual processing and enable us to handle increased volumes and offer a wider range of products to meet customer needs. Our London branch, a member of EBA, and capable of handling Euro & Sterling Payments, joined TARGET II with the first batch of banks in Europe. With enhanced payment capabilities in India through membership of RTGS and NEFT we began handling India remittances from Dubai reducing the turnaround time to one working day. On the Trade side we have introduced the Cash4LC product in the local market offering exporters value for their export documents on presentation thus reducing the length of their cash conversion cycle, reducing their costs and helping them to process more export orders.

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Mashreq Annual Report 2008

Consistent efforts are made to meet regulatory compliance on a global basis. Due diligence was conducted on all banks with whom Mashreq has relationships and continuing efforts were made to further improve KYC systems/applications. Human resource requirements were proactively reviewed to cope with the regulatory changes while regular AML/KYC awareness programme(s) were conducted for staff as well as customers. Our global operations New York, London & Hong Kong have been centralized in Dubai to provide standard product offering, standard delivery time, single point of contact / resolution, customized product offerings and error-free operations together with improved control of branch operations and enhanced disaster recovery arrangements.

Badr Al-Islami Badr Al-Islami was launched in 2007 with the two-pronged corporate objective of opening new markets and providing the Islamic choice to existing Mashreq customers. In Retail business Badr has more than tripled its customer base during 2008, with more than 70% being new customers to the Mashreq group. Corporate business has seen 15% of its revenues coming from existing Mashreq clients opting for Islamic solutions.

In the second year of its operations, our Islamic banking initiatives established the Badr brand firmly and won its first ever Sukuk Advisory (AED 1.1 bn) successfully. Badr continued being a dominant player in Trust accounts, capturing 30% market share in the emirate of Dubai. Badr has been among the first financial institutions to sign up with the land departments of Ras Al Khaimah and Umm Al Quwain for Trust Account management of projects in those emirates. We were successful in leveraging on Mashreq’s wide distribution network through introduction of BBCs (Badr Business Centers) in 13 key Mashreq branches. This ‘firstof-its-kind’ distribution strategy helped in boosting Badr’s Retail business and providing wider distribution and brand coverage at tremendous cost benefit. During the year, Badr Online was launched for Retail & Corporate. It provides internet banking with a host of enquiry & payment facilities for Retail customers. Badr OnlineCorporate was separately launched for Corporate customers. All foundations were laid during 2008, for launch in early 2009 of more Retail products like Shariah complaint Personal finance & Credit cards. Thereby, completing the entire suite of Retail products comprising of Home Finance, Share Finance, Vehicle Finance, Current account, Savings account and Fixed deposits. Badr continued to maintain an attractive cost-income

ratio by leveraging on the existing strengths of Mashreq’s operational infrastructure. Badr’s Shariah Supervisory Board comprising of renowned Islamic scholars continued to provide guidance and monitoring to ensure Shariah compliance for all products and processes. Badr’s focus in 2009 & beyond would be on developing Retail as the dominant business. Importance will be on building the brand name through aggressive advertising and improving customer service through service quality initiatives and technological advancements. Financial forecasts remain aggressive and are aimed at building the Retail business and sustaining the tremendous growth seen in the corporate business.

Treasury and Capital Markets The shock waves of the global credit crunch and the US subprime crisis were already being felt across the global markets but the fall of Lehman brothers started a landslide causing severe collateral damage to world capital markets and financial institutions. The market conditions were so onerous that the global accounting body, IASB came out with an amendment to IAS 39 to enable companies to reclassify securities from trading to different categories. The GCC markets which were relatively unscathed in 2007 came under

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Mashreq Annual Report 2008

tremendous pressure during 2008. The CDS spreads for top Middle Eastern names widened significantly and bond prices collapsed. UAE stock markets lost billions of dirhams in market cap. Recognizing the exceptional stress on valuations in thinly trading markets we reclassified securities from trading to ‘available for sale’ or ‘held to maturity’ category to avoid market volatility. Nevertheless, capital markets turmoil impacted our investment income in 2008 significantly. Customer flow business ranging from plain vanilla products like spot and forward FX to complex derivatives posted strong growth in 2008. The cross sell initiatives launched in 2008 helped to increase the penetration of Capital Market products among our corporate clients. Despite a very difficult year in the global fixed income markets, Mashreq Capital successfully established a secondary bond trading desk which generated major volumes and profits in its first year. A Shariah compliant fixed income fund in the DIFC is scheduled to be launched in 2009 in coordination with Badr-Al-Islami. Mashreq Securities, the equities brokerage arm of Mashreq grew number of trades executed by 22% while overall trading volumes increased by 60% leading to revenue growth of 18% compared to last year.

It increased its online trading market share by 44% whereas its market share of Dubai Financial Market and Abu Dhabi Securities Exchange increased by 11% compared to 2007. Makaseb, the asset management arm of Mashreq in line with its commitment to provide investors with added convenience and flexibility started offering daily dealing on its flagship fund, the Makaseb Emirates Equity Fund and Makaseb Arab Tigers fund. Makaseb also launched the Ireland domiciled fund mirroring its existing Arab Tigers fund. The new Fund will allow European investors access to the dynamic MENA equity markets through an experienced, on the ground regional institution.

Risk Management Mashreq operates within a Risk Management Framework defined by our risk appetite and our ability to manage risk for reward through sound risk management principles and processes followed in all business and product areas. At its core, Risk Management in Mashreq operates independent of, but in partnership with the Business. Within this construct, limits and approval authorities are exercised by risk officers with defined approval authorities which in turn are determined by experience, demonstrated judgment, balance and skills. With Risk cuts across all activities in the bank, we

established a Risk Committee consisting of all the Business Heads and Senior Members of the Risk Organization. The Committee is chaired by the CEO with the Risk Management Head as co-chair. Meetings take place at least quarterly, although ad hoc meetings may be called to discuss specific issues. The mandate of the RC is to develop a firm-wide position on key issues, including policies, portfolio priorities and portfolio direction. During 2008, the bank continued to further refine its risk management processes. The Wholesale Credit Policies of the Bank were updated and revised and have been in effect since November. New policies (covering basic credit and documentation standards and product program requirements) have been introduced, and a Risk Management intranetsite portal established. The rating/scoring models were revalidated, new scoring models were developed (for project finance, commercial real estate, personal and auto loans) and some existing rating models were updated. The bank considers its risk management process to be among the most demanding in its GCC peer group. Mashreq’s portfolio quality, despite the pace of asset growth continues to remain stable and strong. The bank has a conservative policy for early recognition of impairment and for building a sufficient cushion of reserves for non– performing assets.

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Mashreq Annual Report 2008

At Mashreq we assess credit risk through a combination of probability of default, individual analysis, credit structure, and collateral. As part of this, we have developed a sophisticated risk rating/scoring tool to uniformly measure credit risk in its Corporate and Retail portfolios. Statistical techniques are used for estimating default probabilities, for calculating expected loss and for measuring customer and product profitability. While overall risk management is unified and independent for the corporate and retail businesses, the processes for managing Corporate and Retail Risk are distinct and separate. Corporate credit risk is managed through a series of fundamental principles, including a minimum of two signatures for any credit approval (a recommending signature from business and an approving signature from Independent Risk), risk rating standards applicable to every borrower, and adherence to a set of policies covering underwriting, and documentation standards. Since the extension of credit across national borders to customers in foreign locations entails Country Risk, Mashreq has established cross border limits for managing transferability and convertibility risks for all countries that it does business with. These limits are periodically reviewed by Risk Management and approved by the Risk Committee.

Retail credit risk is managed on a product basis with individual extensions of credit subject to approved product parameters. The evaluation of a borrower’s creditworthiness is determined on the basis of statistically validated scoring models, and all lending is carried out within a Retail Credit Policy framework. Mashreq has a well staffed Retail Risk organization that comprises of Policy, Credit Initiation & Compliance, Collection & Recovery, and Fraud Management. We are also in the process of adopting and introducing a set of Market Risk policies along with revised standards for capital market activities. When completed, these policies will complement already existing policies covering our direct and proprietary risk taking activities in the capital markets area. Mashreq recognizes the value and criticality of operational risk and has taken the initiative to set up an independent Operational Risk function under the umbrella of the Risk Management Group to build an operational risk culture across the organization, such that every resource within the Bank recognizes and takes ownership of operational risks inherent in their activities and manages the same in an effective manner. This is under implementation and will be completed in the course of 2009. At Mashreq, we have integrated our various business operations and back office functions,

including Technology, under a Head of Operations, in order to improve operating efficiency and processes; thus reducing operational risk.

Audit, Review & Compliance The Group provides assurance to the Board of Directors, CEO and Senior Management on the adequacy of controls in the Bank and compliance with regulatory requirements, and seeks to improve effectiveness as well as efficiencies through its interaction with all segments of the Bank. Reporting to the Audit Committee of the Board of Directors, the Audit function of the Group is totally independent of both business and support functions; it has the overall responsibility of carrying out independent audits and review of mashreq’s entire Credit process, all the Operating, Functional and Support areas to assess the adequacy and effectiveness of the control framework and the risk mitigation processes and initiatives. It continues to evolve through challenging its methods and by adopting best practices to deal with the changing business activities and complexities, risk profile, dimensions, policies and processes of the Bank. The Compliance arm of the Group provides ongoing critical support in ensuring that the Bank strictly observes all the

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Mashreq Annual Report 2008

regulatory and anti money laundering requirements it is subject to. Mashreq utilizes a world class automated AML transaction monitoring system coupled with a client and payment screening solution that is second to none. In addition the Fraud & Investigations Division provides a clear focus in this area and has acquired state of the art forensic skills. It has also initiated and supported the business in a number of fraud prevention measures. The Group plays a prominent role in its consultative capacity and continually interacts with all the areas of the Bank to help in enhancing the control structure, while maximizing efficiencies and optimizing risk mitigation.

Operations & Technology 2008 has seen Mashreq’s operations group and technology arm Mindscape Information Technology (“MIT”) intensify its focus on advancing its technology, cultivating service awareness and increasing transparency in processing. Successful completion of centralization in 2007 has allowed for these improvements to take effect and has allowed for the operating model to be challenged and further improved by centralizing shared services, automating transactions and reducing operating costs.

Operations group and MIT re-located to Dubai Outsource Zone (“DOZ”) in 2008 creating the perfect platform for both captive and third-party out sourcing operations, delivering mid and high-end services in our core business areas within operations as well as others. The focus continued to be on high volume areas like payments, account opening and credit processing. Major progress was achieved in further centralizing functions to enable quicker credit decisions for credit card and loan processing and account activation, which has raised quality and reduced costs. Progress was made on this initiative through the continued partnership with the Retail groups. In the payments area, the roll out of Image Based Cheques Clearing (“ICCS”) implemented in July 08 along with further automation in inward and outward remittances in addition to salary processing has brought about further benefits to the bank. The true benefit is likely to be realized in the early part of 2009 as processes are stabilized. An imaging and workflow solution (“EDMS”) was launched this year with a number of processes migrated within operations impacting various retail and corporate products. This implementation has facilitated the imaging of applications forms at the frontend with operations acting upon the images to complete the process cycle. Primary benefits gained have been reduced

TAT, better traceability of applications and better controls. Radical technology change has occurred within Mashreq, benefiting clients and all aspects of the bank’s operations. Mashreq’s infrastructure has been refreshed in many key areas. Branch network fully migrated to Multi-Protocol Label Switching (MPLS) technology, thus enabling much-improved levels of availability and extended service. Similarly, the branch network is backed-up fully by Integrated Services Digital Network (ISDN) links that provide highly costeffective resiliency in the unlikely event of disruption within the MPLS network. The primary data centre for the bank has been redeployed to Dubai Internet City (“DIC”) with the Disaster Recovery site located elsewhere. Plans to migrate these sites are well underway, enabling distribution of production and disaster recovery systems across two locations which are interconnected by extremely high speed links with full back-up of all key systems and data, providing Mashreq with the most technologically advanced and secure data centre environment in the Gulf. ATM technology and coverage has been enhanced with the further procurement of ATMs across Dubai and the introduction of 3G technology for improved reliability and

15

Mashreq Annual Report 2008

connectivity at third party locations. The credit card business saw the launch of a new debit and credit card switch technology allowing for increased functionality and availability for our merchants and their customers with all Point of Sale (“POS”) services handled by this new technology. Further benefits will be evident in 2009 as ATMs also upgrade to this technology. In addition to the above the bank has also introduced smarter solutions related to mobile banking, factoring, customer complaint management and call centre workforce management. Within the bank’s internal operations new systems have been introduced in diverse areas such as, video conferencing and operational risk management.

Human Resources We have always considered human capital as most critical resource for the success of the Bank and our HR strategy is therefore integral to the success of our Strategic Plan. Key initiatives which received attention during 2008 included attraction of appropriate talent, effective performance management, market-oriented rewards policies, investment in employee learning and development, and improvement in employee engagement. The strong growth of UAE banking sector during the last 3 years increased demand for quality hires across the industry, leading to fierce competition for a limited pool of talent. Our own employee base also registered a sizeable growth during this period but I am happy to state that we were

able to attract from among the best available resources in the market. In conjunction with the business a set of 14 organizational competencies have been identified that will now be the basis of recruitment, training and performance management. This will ensure a strong and robust value based culture across the organization. As a leading UAE National Bank we take our commitment to Emiratization very seriously. During the year, we again met our target by hiring over 400 Nationals to take our UAE National percentage of the bank to 37%. The bulk of these were new hires where a job specific 3-month training program was structured and included a mix of classroom and on-the-jobtraining. Our dedicated National Development Unit ensured

17

Mashreq Annual Report 2008

that identified employees with potential were provided individual development plans that focused on fast tracking their careers within the organization. Development of our staff was top priority and close to a 1000 different programs were conducted, some internal and some in partnership with leading names such as Securities and Investments Training Institute, Association of Compliance Management, Centre of Business Excellence, Cohen Brown, Development Dimensions International, International faculty of Finance, Steven Covey & Edward De Bono Associates. A four tier leadership development program framework has been instituted in association with leading international development institutes. All newly appointed managers were required to undergo certification on supervisory skills which would help them get the best out of their teams. To understand the voice of the employees and measure and monitor their engagement level better we changed our engagement measurement model and partnered with the Gallup Organization, a leading consulting firm that specializes in employee engagement and used their world renowned Q12 approach. The recommendation based on the initial findings are currently being planned for implementation in 2009.

2009 Outlook 2008 was the first year of our three year strategic plan covering the period 2008-2010 which was developed and adopted in 2007. This plan was developed relying on a forecast of expected growth of the UAE economy at the rate of 20 percent per annum for the next three years. The forecast for the global economy was modest but the overall investment climate was expected to be good. However, as events unfolded during 2008, it belied all forecasts and turned out to be the worst year for the financial services industry in the world. The extent and severity of shock which hit the global financial system could not have been anticipated, and Governments and regulatory authorities in most countries were caught off guard and forced to respond with emergency measures to contain the fall out. Contrary to global forecasts, the UAE economy may not be heading for a recession but certainly for a major slowdown. Lower oil prices, depressed stock markets, and reduced construction activity will all contribute to the decline of economic activity. The grim market conditions indicate that 2009 will be a challenging year for the UAE banking sector. The liquidity crunch is expected to continue for the most part of the year. A slow down in the domestic economy will also

reduce demand for banking services. This changed economic scenario has prompted us to take a critical look at our plan and adjust it to the new market reality. Our focus during the year will be to manage liabilities (deposits) aggressively and assets (loans) conservatively. Liquidity and capital management will be our top priority. Soundness, not revenues growth will be the key theme for Mashreq in 2009 as we invest to further fortify our foundation. This will therefore position us for sustained longterm growth, as the slowdown recedes and new opportunities open up once more. Thank you, Abdul Aziz Abdulla Al Ghurair Chief Executive Officer

18

Mashreq Annual Report 2008

ABU DHABI Abu Dhabi Main Zayed II Al Salam Baniyas Muroor Al Mushrif Khalidiya Musaffah Al Jawazat Al Mina Al Najdah Muroor II AL AIN Al Ain Main Al Ain AIT Al Muwaiji DUBAI Hor Al Anz Dubai Mall Dubai International City Al Murraqabat Al Khaleej Suq Al Kabeer Riqa Khor Dubai Jumeirah Jebel Ali Sheikh Zayed Road Al Ghusais Mall Of The Emirates Al Rashidiya Murooj Dubai Internet City Dubai Health Care City Dubai Marina Port Saeed

Tel 02-6274300  02-6335600 02-6786500 02-5048200 02-4198200 02-4079200 02-6937800 02-5555051 02-6420018 02-6734849 02-6712279 02-6416628

Fax 02-6269550 02-6341939 02-6742482 02-5822115 02-4481821 02-4431717 02-6673883 02-5555052 02-6412799 02-6734840 02-6711004 02-6417904

03-7661176 03-7661178 03-7997400

03-7645602 03-7668896 03-7540570

04-2623100 04-4344113 04-4221313 04-2658400 04-2732699 04-2264176 04-2223333 04-5069229 04-3456444 04-8815355 04-3212572 04-2175100 04-5116805 04-2857008 04-3434452 04-3632030 04-3624760 04-3609944 04-2957556

04-2662887 04-4344103 04-4220372 04-2657449 04-7067722 04-2252912 04-2233785 04-5069293 04-4077696 04-8816628 04-3212574 04-2676347 04-3410073 04-2860373 04-3434793 04-3611091 04-3624759 04-3608843 04-2956043

AL Aweer Zabeel Abu Hail Karama Park Place JBR South Ridge Burjuman SHARJAH King Abdul Aziz Sharjah Main Buhaira Al Khan SHJ Industrial Area Gold Souq (Al Wahda) AJMAN Ajman Main Ajman Grand Station DHAID Dhaid DIBBA Dibba FUJAIRAH Fujairah KALBA Kalba KHORFAKKAN Khorfakkan RAS AL KHAIMAH Al Nakheel Ras Al Khaimah UMM AL QUWAIN Umm Al Quwain

Tel

Fax

04-3333727 04-3340313 04-2173301 04-3360547 04-3296868 04-4242300 04-4286110 04-5097319

04-3333670 04-3342710 04-2699530 04-3367359 04-3296578 04-4233794 04-4221412 04-3967105

06-5077600 06-5684366 06-5743761 06-5770131 06- 5340355 06-5012100

06-5745334 06-5689590 06-5744446 06-5772977 06- 5340188 06-5668599

06-7421133 06-7430300

06-7426690 06-7431133

06-8822899

06-8822416

09-2444230

09-2443831

09-2027224

09-2226860

09-2037315

09-2778950

09-2387226

09-2387189

07-2281695 07-2037216

07-2281880 07-2363620

06-7662880

06-7664948

19

Mashreq Annual Report 2008

AFRICA Egypt Cairo Tel: (202) 5710419 Fax: (202) 5710423 Swift: MSHQ EG CA Down Town Tel: (202) 2791 8556 Fax: (202) 2792 7298 Maadi Tel: (202) - 25160900 Fax: (202) - 25160677 Nasr City Tel: (202) - 24032347 Fax: (202) - 24032346

MIDDLE EAST Bahrain Manama Tel: (973) 210114/211241 Fax: (973) 213516 Qatar Al Rayyan Tel: (974) 4803092, 4803007 Fax: (974) 4803588 C Ring Road Tel: (974) 4249666/37/29 /30/31/32 Fax: (974) 4349647 Doha Branch - HO Tel: (974) 4413213 Fax: (974) 4413880

Ramada Tel: (974) 4328746, 4424765 Fax: (974) 4329288 TV Roundabout Tel: (974) 4888622 Fax: (974) 4867207 ASIA Hong Kong Tel: (852) 2521 938 (852) 2905 5814 Fax: (852) 2521 4289 INDIA Mumbai Tel: (91) 22 66327200 Fax: (91) 22 66301554 Swift: MSHQ IN BB

New Delhi Tel: (91) 11 23350560 Fax: (91) 11 23357143 Swift: MSHQ IN BB EUROPE London Tel: (44) 207 3824000 Fax: (44) 207 2569717 Swift: MSHQ GB 2L Telex: 883429 MSHQLN G AMERICA New York Tel: (1) 212 5458200 Fax: (1) 212 5450918 Swift: MSHQ US 33 Telex: 239881 MSHQ NY

20

Mashreq Annual Report 2008

Financial Highlights

21

Mashreq Annual Report 2008

22

Mashreq Annual Report 2008

23

Mashreq Annual Report 2008

24

Mashreq Annual Report 2008

Independent Auditor’s Report

25

Mashreq Annual Report 2008

Ref.: 7848CFS08-GLOSSARY REPORT-FINAL Independent Auditor’s Report The Shareholders Mashreqbank psc Dubai United Arab Emirates Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of Mashreqbank psc (“the Bank”), a Public Shareholding Company, and its Subsidiaries (collectively “the Group”), which comprise the consolidated balance sheet as of December 31, 2008, and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s 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 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 the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control 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 financial position of Mashreqbank psc and its subsidiaries as of December 31, 2008, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and the Central Bank of the United Arab Emirates requirements. Report on Other Legal and Regulatory Requirements Also, in our opinion, the Bank has maintained proper books of accounts. We obtained all the information and explanations which we considered necessary for our audit and, to the best of our knowledge and belief, there were no contraventions during the year of the UAE Federal Commercial Companies Law No. 8 of 1984, as amended, or of the Bank’s Articles of Association which might have materially affected the financial position of the Bank or its financial performance. Deloitte & Touche (M.E.)



Dubai February 8, 2009

Anis Sadek Partner Registration No. 521

26

Mashreq Annual Report 2008

Group Financial Statements

27

Mashreq Annual Report 2008

Consolidated Balance Sheet As of December 31, 2008





2008

2007



Note

AED’000

Assets Cash and balances with central banks Deposits and balances due from banks Financial assets carried at FVTPL Loans and advances (net) Islamic financing and investment products Non-trading investments Interest receivable and other assets Investment properties Property and equipment



5 6 7 8 9 7 10 11 12

6,289,386 9,077,630 219,776 48,434,274 6,600,704 13,189,058 8,231,536 724,237 476,920

1,712,329 2,471,448 59,836 13,186,571 1,797,088 3,590,813 2,241,093 197,179 129,845

Total assets

93,243,521

25,386,202

87,627,397 23,857,173

Liabilities Deposits and balances due to banks Repurchase agreements with banks Customers’ deposits Islamic customers’ deposits Insurance and life assurance funds Interest payable and other liabilities Medium-term floating rate notes Long-term loans

12,336,491 5,129,883 48,435,538 3,042,027 802,485 7,568,835 5,234,025 11,838

3,358,696 1,396,647 13,186,915 828,213 218,482 2,060,668 1,425,000 3,223

13,397,024 3,834,313 46,133,514 2,153,198 516,895 5,857,323 5,234,025 16,707

3,647,434 1,043,919 12,560,173 586,223 140,728 1,594,696 1,425,000 4,549

82,561,122

22,477,844

77,142,999

21,002,722

13 14 15 16 17 18 19 20

Total liabilities Equity Capital and reserves Issued capital 21(a) Statutory and legal reserves 21(b) General reserve 21(c) Cumulative translation adjustment Investments revaluation reserve Retained earnings Equity attributable to equity holders of the parent Minority interest Total equity Total liabilities and equity

22

US$’000 AED’000 US$’000 Equivalent Equivalent 20,200,123 10,974,141 10,023,141 32,980,680 2,345,269 4,749,018 5,472,924 498,440 383,661

5,499,625 2,987,787 2,728,870 8,979,222 638,516 1,292,953 1,490,042 135,704 104,454

398,549 201,670 84,944 (9,238) (176,867) 2,241,125

1,126,054 599,009 312,000 (2,155) 510,578 7,068,366

306,576 163,085 84,944 (587) 139,009 1,924,412

10,064,693

2,740,183

9,613,852

2,617,439

617,706

168,175

870,546

237,012

10,682,399

2,908,358

10,484,398

2,854,451

93,243,521

25,386,202

87,627,397

23,857,173

1,463,870 740,734 312,000 (33,932) (649,634) 8,231,655

The accompanying notes form an integral part of these consolidated financial statements. The consolidated financial statements on pages 28 to 83 were approved by the Board of Directors on February 8, 2009 and signed on its behalf by:

……………………………. Abdulla Ahmad Al Ghurair Chairman



…………………………….. Abdul Aziz Abdulla Al Ghurair Chief Executive Officer

28

Mashreq Annual Report 2008

Consolidated Income Statement For the year ended December 31, 2008

2008



2007



Note

Interest income Income from Islamic financing and investment products

24

4,563,103

1,242,337

3,949,981

1,075,410

25

228,889

62,317

81,508

22,191

Total interest income and income from Islamic financing and investment products

4,791,992

1,304,654

4,031,489

1,097,601

AED’000

US$’000 AED’000 US$’000 Equivalent Equivalent

Interest expense Distributions to depositors – Islamic products

26 27

(2,632,701) (75,516)

(716,771) (20,560)

(2,788,349) (42,682)

(759,148) (11,620)

Net interest income and income from Islamic products net of distributions to depositors Fee and commission income Fee and commission expenses

28 28

2,083,775 2,617,041 (1,364,271)

567,323

1,200,458

326,833

712,508 (371,432)

1,252,770

341,076

Net fee and commission income



Net investment (loss)/income

29

Other income (net) Operating income General and administrative expenses Allowances for loans and advances and other financial assets Income before income tax Overseas income tax expense Net income for the year

30 31 32

(217,980) 865,373 3,983,938

2,804,829 (1,713,625)

763,634 (466,546)

1,091,204

297,088

(59,347)

873,759

237,887

235,604

685,065

186,515

1,084,656

3,850,486

1,048,323

(1,873,962)

(510,199)

(1,409,787)

(383,824)

(362,362)

(98,656)

(308,385)

(83,960)

1,747,614 (15,545)

475,801 (4,233)

2,132,314 (6,319)

580,539 (1,720)

1,732,069

471,568

2,125,995

578,819

Equity holders of the parent

1,642,830

447,272

1,900,632

517,461

Minority interest

22

89,239 1,732,069

24,296 471,568

225,363 2,125,995

61,358 578,819

Earnings per share

33

AED 11.22

US$ 3.06

AED 12.98

US$ 3.54

Attributed to:

The accompanying notes form an integral part of these consolidated financial statements.

29

30

Mashreq Annual Report 2008

Consolidated Statement of Changes in Equity For the year ended December 31, 2008 Equity attributable Statutory Cumulative Investments to equity Issued and legal General translation revaluation Retained holders of Minority capital reserves reserve adjustment reserve earnings the parent interest At December 31, 2006

AED’000 AED’000 AED’000

AED’000

AED’000

AED’000

AED’000

Total

AED’000 AED’000

866,195

469,453

312,000

(11,449)

184,220

5,557,149

7,377,568

-

-

-

-

326,358

-

326,358

149,521

Overseas entities’ translation adjustment

-

-

-

9,294

-

-

9,294

31

Total income recognised directly in equity

-

-

-

9,294

326,358

-

335,652

149,552

Net income for the year

-

-

-

-

-

1,900,632

1,900,632

225,363 2,125,995

-

-

-

9,294

326,358

1,900,632

2,236,284

374,915 2,611,199

- - 259,859

129,556 - -

- - -

- - -

- - -

(129,556) - (259,859)

-

-

-

-

-

-

-

1,126,054

599,009

312,000

(2,155)

510,578

7,068,366

9,613,852

870,546 10,484,398

-

(1,160,212)

(305,684) (1,465,896)

Net movement on investment revaluation reserve during the year

Total income for the year Transfer to statutory and legal reserves Dividend paid Bonus shares issued Reduction in minorities’ share capital At December 31, 2007

571,395 7,948,963

(44,753)

-

-

-

-

-

-

-

(31,777)

-

-

(31,777)

Total loss recognised directly in equity Net income for the year

- -

- -

- -

(31,777) -

(1,160,212) -

- 1,642,830

(1,191,989) 1,642,830

-

-

-

(31,777) (1,160,212)

1,642,830

450,841

(216,446)

- - 337,816

141,725 - -

- - -

- - -

- - -

(141,725) - (337,816)

- - -

- (35,972) -

-

-

-

-

-

-

-

1,463,870

740,734

312,000

(33,932)

(649,634)

8,231,655

10,064,693

Total income for the year Transfer to statutory and legal reserves Dividend paid Bonus shares issued Reduction in minorities’ share capital At December 31, 2008

The accompanying notes form an integral part of these consolidated financial statements.

9,325 485,204

- - - (31,011) (31,011) -

Net movement on investment revaluation reserve during the year Overseas entities’ translation adjustment

(1,160,212)

475,879

(1)

(44,753)

(31,778)

(305,685) (1,497,674) 89,239 1,732,069

( 422) (

234,395 (35,972) - 422)

617,706 10,682,399

31

Mashreq Annual Report 2008

Consolidated Cash Flow Statement For the year ended December 31, 2008



Cash flows from operating activities Net income for the year Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment Fair value adjustment – FVTPL investments Translation adjustment for the year Allowance for impairment of loans and advances Fair value adjustment – investment property (Gain)/loss on sale of property and equipment Amortization of investments revaluation reserves for reclassified investments Available for sale investments written off Impairment of available for sale

2008 AED’000

1,732,069



2007

US$’000 Equivalent

AED’000

US$’000 Equivalent

471,568

2,125,995

578,819

82,727 192,203 (31,778) 500,174 (152,467) (57,730)

22,523 52,329 (8,652) 136,176 (41,510) (15,717)

20,226 68,612 35,012

5,507 18,680 9,532

67,400 (136) 9,325 462,035 (152,732) 67

18,350 (37) 2,539 125,792 (41,582) 18

- - -

-

(417,507)

(113,669)

Changes in operating assets and liabilities: Increase in deposits with central banks for regulatory purposes (827,898) Decrease/(increase) in bank deposits maturing after three months 1,678,607 Increase in customers’ loans and advances (15,932,539) Increase in Islamic financing and investing products (4,255,435) Increase in interest receivable and other assets (2,759,764) Decrease in financial assets carried at FVTPL 5,638,460 Increase in repurchase agreements with banks 1,295,570 Increase in customers’ deposits 2,302,024 Increase in Islamic customers’ deposits 888,829 Increase in medium-term floating rate notes - Decrease in long-term loans (4,869) (Decrease)/increase in deposits and balances due to banks (1,060,533) Increase in insurance and life assurance funds 285,590 Increase in interest payable and other liabilities 1,709,800

457,013 (4,337,745) (1,158,572) (751,365) 1,535,110 352,728 626,742 241,990 - (1,326) (288,738) 77,754 465,505

(3,792,028) (1,032,406) (4,870,482) (1,326,023) (1,516,255) (412,811) (2,691,119) (732,676) 71,451 19,453 2,548,701 693,902 12,225,279 3,328,418 1,405,308 382,605 1,836,500 500,000 (6,834) (1,861) 7,694,486 2,094,878 142,955 38,921 2,500,451 680,765

Net cash (used in)/provided by operating activities

(8,653,110)

(2,355,869)

17,642,860

Cash flows from investing activities Purchase of property and equipment Proceeds from sale of property and equipment Purchase of non-trading investments, net

(181,922) 63,666 (6,130,414)

(49,530) 17,334 (1,669,048)

(149,880) 1,027 (1,416,114)

(40,806) 280 (385,547)



(6,248,670)

(1,701,244)

(1,564,967)

(426,073)

Cash flows from financing activities Dividend paid to minority Net capital withdrawn by minority

(35,972) (422)

(9,794) (115)

(31,011) (44,753)

(8,443) (12,184)

(36,394)

(9,909)

(75,764)

(20,627)

(14,938,174)

(4,067,022)

16,002,129

Net cash used in investing activities

Net cash used in financing activities



(Decrease)/increase in cash and cash equivalents (Note 35)

(225,401)

The accompanying notes form an integral part of these consolidated financial statements.

4,803,395

4,356,695

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements For the Year ended December 31, 2008 1.

General information



Mashreqbank psc (the “Bank”) was incorporated in the Emirate of Dubai in 1967 under a decree issued by The Ruler of Dubai. The Bank operates through its branches in the United Arab Emirates, Bahrain, Egypt, Hong Kong, India, Qatar, the United Kingdom and the United States of America.



At December 31, 2008, Mashreqbank psc Group (the “Group”) comprises the Bank and the following subsidiaries:

Place of incorporation (or registration) Name of subsidiary and operation

Proportion of Proportion of ownership voting power interest held % %

Osool - a Finance Company (PJSC)

United Arab Emirates

98

98

Oman Insurance Company (PSC)

United Arab Emirates

63.65

63.65

Principal activity Finance company. Insurance company.

Mindscape Information United Arab Emirates 99 99 Software/Application Technology LLC provider. Mashreq Securities LLC Injaz Services FZ LLC

United Arab Emirates

Al-Badr Islamic Finance (PJSC)

United Arab Emirates

100 99.70

99.98 100 99.70

Brokerage. Service provider. Islamic finance company.

Mashreq Capital (DIFC) Limited United Arab Emirates 100 100

Brokerage, asset management & fund management.

Al Yamama Services FZ LLC

United Arab Emirates

100

100

Service provider.

Kingdom of Bahrain

99.90

99.90

Managing funds.

Makaseb Funds Company BSC II

Kingdom of Bahrain

99.90

99.90

Managing funds.

Makaseb Funds Company BSC III**

Kingdom of Bahrain

99.90

99.90

Managing funds.

Bracebridge Limited

British Virgin Islands

*

100

General activities.

Orriston Limited

British Virgin Islands

*

100

General activities.

Makaseb Funds Company BSC



United Arab Emirates

99.98

* **



Bank participation in capital is nominal, however the above subsidiaries are considered to be subsidiaries by virtue of control. Makaseb Funds Company BSC III, Bahrain is under liquidation process.

32

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 2.

Adoption of new and revised International Financial Reporting Standards Standards and interpretations effective in the current year In the current year, the Group has adopted the amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures which are effective from July 1, 2008. The impact of adoption of these amendments has been to expand the disclosures provided in these financial statements regarding the Group’s reclassified financial instruments [see also Note 7(h)]. Three interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) are effective for the current year. These are: IFRIC 11 - IFRS-2: Group Treasury Shares Transactions, IFRIC 12: Service Concession Arrangements and IFRIC 14: IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The adoption of these Interpretations has not led to any changes in the Group’s accounting policies.



Standards and interpretations in issue not yet adopted At the date of authorization of these consolidated financial statements, the following Standards and Interpretations were in issue but not yet effective:



IAS 1

(Revised) Presentation of Financial Statements (effective for accounting periods beginning on or after January 1, 2009);



IAS 16

(Revised) Property, Plant and Equipment (effective for accounting periods beginning on or after January 1, 2009);



IAS 19

(Revised) Employee Benefits (effective for accounting periods beginning on or after January 1, 2009);



IAS 20

(Revised) Government Grants and Disclosure of Government Assistance (effective for accounting periods beginning on or after January 1, 2009);



IAS 23

(Revised) Borrowing Costs (effective for accounting periods beginning on or after January 1, 2009);



IAS 27

(Revised) Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after July 1, 2009);



IAS 28

(Revised) Investments in Associates (effective for accounting periods beginning on or after July 1, 2009);



IAS 29

(Revised) Financial Reporting in Hyperinflationary Economies (effective for accounting periods beginning on or after January 1, 2009);



IAS 31

(Revised) Interests in Joint Ventures (effective for accounting periods beginning on or after July 1, 2009);



IAS 32

(Revised) Financial Instruments: Presentation (effective for accounting periods beginning on or after January 1, 2009);



IAS 36

(Revised) Impairment of Assets (effective for accounting periods beginning on or after January 1, 2009);



IAS 38

(Revised) Intangible Assets (effective for accounting periods beginning on or after January 1, 2009);



IAS 39

(Revised) Financial Instruments: Recognition and Measurement (effective for accounting periods beginning on or after January 1, 2009);



IAS 40

(Revised) Investment Property (effective for accounting periods beginning on or after July 1, 2009);



IAS 41

(Revised) Agriculture (effective for accounting periods beginning on or after July 1, 2009);

33

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 2.

Adoption of new and revised International Financial Reporting Standards (continued) Standards and interpretations in issue not yet adopted (continued)



IFRS 1

(Revised) First-time Adoption of International Financial Reporting Standards (effective for accounting periods beginning on or after January 1, 2009);



IFRS 2

(Revised) Share-based Payment (effective for accounting periods beginning on or after January 1, 2009);



IFRS 3

(Revised) Business Combinations (effective for accounting periods beginning on or after July 1, 2009);



IFRS 5

(Revised) Non-current Assets Held for Sale and Discontinued Operations (effective for accounting periods beginning on or after July 1, 2009);



IFRS 8

Operating Segments (effective for accounting periods beginning on or after January 1, 2009);



IFRIC 13

Customer Loyalty Programmes (effective for accounting periods beginning on or after July 1, 2008);



IFRIC 15

Agreements for the Construction of Real Estate (effective for accounting periods beginning on or after January 1, 2009);



IFRIC 16

Hedges of a Net Investment in a Foreign Operation (effective for accounting periods beginning on or after October 1, 2009); and



IFRIC 17

Distribution of Non-cash assets to owners (effective for accounting periods beginning on or after July 1, 2009).

The management anticipates that the adoption of these Standards and Interpretations will have an impact on the presentation and disclosures of the Group’s consolidated financial statements which relate mainly to the requirement for the presentation of a statement of comprehensive income (Revised IAS 1 - comprehensive revision including presentation of comprehensive income) separately from owner changes in equity and expanded disclosures regarding operating segments (IFRS 8 - operating segments). 3.

Significant accounting policies

(a)                        

Statement of compliance



Basis of preparation

(b)

The consolidated financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRS) and Central Bank of the UAE requirements as related to the measurement and classification of properties acquired in settlement of debts and impairment of loans and advances.

The consolidated financial statements of the Group are prepared under the historical cost convention except for certain financial instruments and investment property which are carried at fair value.

(c)

Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank (its subsidiaries). Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are prepared for the same reporting period as that of the Bank, using consistent accounting policies. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

34

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

Significant accounting policies (continued)



(c)

Basis of consolidation (continued) Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority’s interest in the subsidiary’s equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.



(d)

Derivative financial instruments and hedge accounting The Group uses derivative financial instruments, including forward foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options (both written and purchased) to hedge the related associated risk. Derivative financial instruments are initially measured at cost, being the fair value at contract date, and are subsequently re-measured at fair value. All derivatives are carried at their fair values as assets where the fair values are positive and as liabilities where the fair values are negative. Fair values are generally obtained by reference to quoted market prices, discounted cash flow models and recognized pricing models as appropriate. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognized in the consolidated income statement as they arise. For the purpose of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge the exposure to changes in the fair value of a recognized asset or liability; and (b) cash flow hedges which hedge exposure to variability in cash flows that are either attributable to a particular risk associated with a recognized asset or liability, or a forecasted transaction that will affect future reported net income.





In order to qualify for hedge accounting, it is required that the hedge should be expected to be highly effective, i.e. the changes in fair value or cash flows of the hedging instrument should effectively offset corresponding changes in the hedged item and should be reliably measurable. At inception of the hedge, the risk management objective and strategy is documented including the identification of the hedging instrument, the related hedged item, the nature of risk being hedged, and how the Group will assess the effectiveness of hedging relationship. Subsequently, the hedge is required to be assessed and determined to be an effective hedge on an ongoing basis. Fair value hedge Gains and losses from re-measuring derivatives, which meet the criteria for fair value hedge accounting, to their fair value are recognized in the consolidated income statement. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit or loss from that date. Cash flow hedge In relation to cash flow hedges which meet the criteria for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized initially in other reserves under shareholders’ equity and the ineffective portion, if any, is recognized in the consolidated income statement. For cash flow hedges affecting future transactions, the gains or losses recognized in other reserves, are transferred to the consolidated income statement in the same period in which the hedged transaction affects the consolidated income statement. Where the hedged forecasted transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognized, the associated gains or losses that had previously been recognized in other reserves are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability.

35

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued)



(d)

Derivative financial instruments and hedge accounting (continued) Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point of time, any cumulative gain or loss on the cash flow hedging instrument that was recognized in other reserves is retained in shareholders’ equity until the forecasted transaction occurs. Where the hedged forecasted transaction is no longer expected to occur, the net cumulative gain or loss recognized in equity is transferred to the consolidated income statement for the year. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contract and the host contract is not carried at fair value with unrealized gains or losses reported in the consolidated income statement.

(e)

Revenue recognition Interest income and expense are recognized on a time proportion basis, taking account of the principal outstanding and the rate applicable. Interest income and expense include the amortization of discount or premium using the effective interest rate method. When there is doubt in the collection of the principal or the interest, the recognition of income ceases. Commission and fee income are generally accounted for on the date the transaction arises. Recoveries in respect of loans fully provided are accounted for on a cash receipt basis. Dividend revenue from investments is recognized when the Group’s right to receive payment has been established.



Premiums on general insurance policies are accounted for on the date of writing of policies except premium income on marine cargo policies which is accounted for on the expected date of voyage. Premiums are adjusted for unearned premium.



Premium on life assurance policies are accounted for on the date of writing of policies and on subsequent due dates.



Commissions and other costs directly related to the acquisition and renewal of insurance contracts are charged to the consolidated income statement when incurred.



Foreign currency transactions

(f)

The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in UAE Dirham (AED), which is the functional currency of the Group, and the presentation currency for the consolidated financial statements.



The reporting currency of the Group is the UAE Dirham (AED). However, for presentation purposes only, additional columns for US Dollar equivalent amounts have been presented in the consolidated balance sheet, income statement and cash flow statement and certain notes to the consolidated financial statements using a conversion rate of US$ 1.00 = AED 3.673.



In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

36

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

Significant accounting policies (continued)



(f)



Foreign currency transactions (continued) Exchange differences are recognised in profit or loss in the period in which they arise except for: •

exchange differences which relate to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on foreign currency borrowings;



exchange differences on transactions entered into in order to hedge certain foreign currency risks (see above for hedging accounting policies); and



exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, and which are recognised in the foreign currency translation reserve and recognised in consolidated income statement on disposal of the net investment.



For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are expressed in AED using exchange rates prevailing at the balance sheet date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and recognised in the Group’s foreign currency translation reserve. Such exchange differences are recognised in the consolidated income statement in the period in which the foreign operation is disposed of.



Impairment of tangible assets

(g)

At each balance sheet date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the assets is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized in the income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized in the consolidated income statement, unless the relevant asset is carried at revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(h)



Investment properties Investment properties comprise investments in buildings and freehold land held for capital appreciation and to earn rentals. These are initially stated at cost comprising purchase price and any directly attributable expenditure. For subsequent measurement purposes, the Group has chosen the fair value model as permitted by IAS 40, “Investment property”, under which the investment property is carried at fair value with any revaluation gains or losses recognized in the consolidated income statement.

37

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued) (i)

Property and equipment Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses, except for capital work-in-progress which is carried at cost.



Depreciation is charged so as to write off the cost of assets, other than land and properties under construction, using the straight-line method, over the estimated useful lives of the respective assets, as follows: Years Group buildings 20 - 25 Office equipment (including computers) and vehicles 3 - 5 Furniture, fixtures and computer mainframe hardware 6 - 7 Improvements to freehold properties and others 5 - 10 The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.



One year after property and equipment are fully depreciated, they are maintained at a net book value of one currency unit by setting off accumulated depreciation against cost. Properties in the course of construction are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation of these assets commences when the assets are ready for their intended use.

(j)

Financial assets Investments are recognised and derecognised on the trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs, except for those financial assets classified as at fair value through profit or loss, which are initially measured at fair value. Financial assets are classified into the following specified categories: financial assets as ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity investments’ (HTM), ‘available-for-sale’ (AFS) financial assets and ‘loans and advances’ (L&A) classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest rate basis for debt instruments other than those financial assets designated as at FVTPL. Financial assets at FVTPL Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: •

it has been acquired principally for the purpose of selling in the near future; or

38

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued) Financial assets (continued)

(j)

• it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or • it is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial assets at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss incorporates any dividend or interest earned on the financial asset. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held-to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis. AFS financial assets Non-derivative financial assets held by the Group that are classified as AFS financial assets are stated at fair value. Gains and losses arising from changes in fair value are recognised directly in equity in the investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest rate method and foreign exchange gains and losses on monetary assets, which are recognised directly in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investments revaluation reserve is included in profit or loss for the period. Dividends on AFS equity instruments are recognised in profit or loss when the Group’s right to receive payments is established. The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the balance sheet date. The change in fair value attributable to translation differences that result from a change in amortised cost of the asset is recognised in profit or loss, and other changes are recognised in equity.

Loans and advances



Loans and advances are non-derivative financial assets originated or acquired by the Group with fixed or determinable payments.





All loans and advances are initially measured at cost, being the fair value of the consideration given.



Loans and advances originated or acquired by the Group that are not quoted in an active market and for which fair value has not been hedged, and those that are to be held to maturity, are stated at amortised cost less any amount written off and provisions for impairment. Allowance for impairment is made against loans and advances when their full recovery as per contracted terms is in doubt taking into consideration IFRS requirements for fair value measurement and Central Bank of the UAE guidelines.

39

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued) (j)

Financial assets (continued)



Impairment of financial assets



Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.



For unlisted shares classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.



For all other financial assets, including redeemable notes classified as AFS and finance lease receivables, objective evidence of impairment could include: • • •

significant financial difficulty of the issuer or counterparty; or default or delinquency in interest or principal payments; or it becoming probable that the borrower will enter bankruptcy or financial re-organisation.



The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and advances where the carrying amount is reduced through the use of an allowance account. When advance receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in profit or loss.



With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognized.



In respect of AFS equity securities, any increase in fair value subsequent to an impairment loss is recognized directly in equity.



Impairment of loans and advances Impairment of loans and advances are assessed as follows: (i)

Individually assessed loans

These represent mainly corporate loans which are assessed individually by the Bank’s Credit Risk Unit in order to determine whether there exists any objective evidence that a loan is impaired. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price, if available, or at the fair value of the collateral if the recovery is entirely collateral dependent. Impairment loss is calculated as the difference between the loan’s carrying value and its present value calculated as above.

40

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued) (j)

Financial assets (continued)



Impairment of loans and advances (continued) (ii)



Collectively assessed loans

Impairment losses of collectively assessed loans include the allowances on:

a) Performing commercial and other loans b) Retail loans with common features which are rated on a portfolio basis and where individual loan amounts are not significant. (a) Performing commercial and other loans Where individually assessed loans are evaluated and no evidence of loss is present or has been identified, there may be losses based upon risk rating and expected migrations, product or industry characteristics. Impairment covers losses which may arise from individual performing loans that are impaired at the balance sheet date but were not specifically identified as such until some time in the future. The estimated impairment is calculated by the Group’s management for each identified portfolio as per the requirements of the Central Bank of the UAE and based on historical experience, credit rating and expected migrations in addition to the assessed inherent losses which are reflected by the economic and credit conditions. (b) Retail loans with common features which are rated on a portfolio basis and where individual loan amounts are not significant Impairment of retail loans is calculated by applying a formulaic approach and loans are written off when between 150-180 days past their due date depending on products’ features. (k)

Financial liabilities and equity instruments issued by the Group Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Financial liabilities



Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.



Financial liabilities at FVTPL





Financial liabilities are classified as at FVTPL where the financial liability is either held for trading or it is designated as at FVTPL.



A financial liability is classified as held for trading if:





it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or



it is a derivative that is not designated and effective as hedging instrument.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: •

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise;

41

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued) (k)

Financial liabilities and equity instruments issued by the Group (continued) •

the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or



it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.



Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability.



Other financial liabilities



Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.



The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.



Customers’ deposits

(l)

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.



Customers’ deposits (classified as other liabilities) are initially measured at fair value which is normally consideration received net of directly attributable transaction costs incurred, and subsequently measured at their amortised cost using the effective interest method.



Repurchase transactions

(m)



Securities sold under agreements to repurchase (“repo”) continue to be recognized in the balance sheet and are measured in accordance with the accounting policies for FVTPL or for non-trading investments.



The difference between sale and repurchase price is treated as interest expense and expensed over the life of each agreement.



Insurance Claims

(n)



Claims, comprising amounts payable to contract holders and third parties and related loss adjustment expenses, net of salvage and other recoveries are charged to income as incurred. Provision for incurred but not reported claims is included within additional reserve.



The Group generally estimates its claims based on previous experience. Independent loss adjusters normally estimate property claims. Any difference between the provisions at the balance sheet date and settlements and provisions for the following year is included in the underwriting account for that year.



Liability adequacy test

(o)

At each balance sheet date the Group assesses whether its recognized insurance liabilities are adequate using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its insurance liabilities is inadequate in the light of estimated future cash flows, the entire deficiency is immediately recognized in income and an unexpired risk provision created. The Group does not discount its liability for unpaid claims as substantially all claims are expected to be paid within one year of the balance sheet date.

42

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued)



(p)

Reinsurance The Group cedes insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the outstanding claims provisions and are in accordance with reinsurance contract.



(q)

Employees’ end-of-service indemnity



Provision is made for estimated amounts required to cover employees’ end-of-service indemnity at the balance sheet date as per UAE Labour Law. In the opinion of management, the provision would not have been materially different had it been calculated on an actuarial basis.



Pension and national insurance

(r)



Pension and national insurance contributions for UAE citizens are made by the Group in accordance with Federal Law No.7 of 1999.



Taxes on income

(s)



Where applicable, provision is made for current and deferred taxes arising from the operating results of overseas branches that are operating in taxable jurisdictions.



Offsetting of financial assets and liabilities

(t)



Financial assets and liabilities are offset and reported net in the balance sheet only when there is a legally enforceable right to set off the recognized amounts or when the Group intends to settle on a net basis, or to realize the asset and settle the liability simultaneously.

(u)

De-recognition of financial instruments A financial asset (or a part of a financial asset, or a part of a group of similar financial assets) is derecognized, when the contractual rights to the cash flows from the financial asset expires. In instances where the Group is assessed to have transferred a financial asset, the asset is derecognized if the Group has transferred substantially all the risks and rewards of ownership. Where the Group has neither transferred nor retained substantially all the risks and rewards of ownership, the financial asset is derecognized only if the Group has not retained control of the financial asset. The Group recognizes separately as assets or liabilities any rights and obligations created or retained in the process. A financial liability (or a part of a financial liability) can only be derecognized when it is extinguished, that is when the obligation specified in the contract is either discharged, cancelled or expires.

(v)

Islamic financing and investment products



In addition to the conventional banking, the Group offers its customers certain non-interest based banking products, which are approved by its Shariah Board.



All non-interest based banking products are accounted for in conformity with the accounting policies described in these consolidated financial statements.



(i) The following terms are used in Islamic financing:



Murabaha



An agreement whereby the Group sells to a customer a commodity or an asset, which the Group has purchased and acquired, based on a promise received from the customer to buy the item purchased according to specific terms and conditions. The selling price comprises the cost of the commodity and an agreed profit margin.





43

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 3.

                      Significant accounting policies (continued) (v)



Islamic financing and investment products (continued) (i) The following terms are used in Islamic financing: (continued)



Istissna’a



An agreement between the Group and a customer whereby the Group would sell to the customer a developed property according to agreed upon specifications. The Group would develop the property either on its own or through a subcontractor and then hand it over to the customer on a fixed date at an agreed price.



Ijara



An agreement whereby the Group acting as a lesser, purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for an agreed rent and a specific period that could end by transferring the ownership of the leased asset to the lessee.



Musharaka



An agreement between the Group and a customer to contribute to a certain investment enterprise or the ownership of a certain property ending up with the acquisition by the customer of the full ownership. The profit or loss is shared as per the terms of the agreement.



Mudaraba



An agreement between the Group and a customer whereby the Group would provide a certain amount of funds, which the customer would then invest in a specific enterprise or activity against a specific share in the profit. The customer would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudaraba.



Wakala



An agreement whereby the Group provides a certain sum of money to an agent who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala.



(ii) Revenue recognition



Revenue is recognized on the above Islamic products as follows:



Murabaha



Where the income is quantifiable and contractually determined at the commencement of the contract, income is recognized on a time proportion basis over the period of the contract based on the principal amounts outstanding.



Istissna’a



Istissna’a revenue and the associated profit margin (difference between the cash price to the customer and the Group’s total Istissna’a cost) are accounted for on a time proportion basis.



Ijara



Ijara income is recognized on a time proportion basis over the lease term.



Musharaka



Income is accounted for on the basis of the reducing balance on a time proportion basis that reflects the effective yield on the asset.



Mudaraba



Income on mudaraba financing is recognized on distribution by the mudarib, whereas the losses are charged to income on their declaration by the mudarib.

44

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008                       Significant accounting policies (continued)

3.



Wakala



Estimated income from Wakala is recognized on an accrual basis over the period, adjusted by actual income when received. Losses are accounted for on the date of declaration by the agent.

(w)

Provisions



Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.



The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.



When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. (x)



Operating leases Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease.

4.

Critical accounting judgements and key sources of estimation uncertainty



The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires management to exercise its judgement in the process of applying the Group’s accounting polices, which are described in Note 3. Such estimates, assumptions and judgements are continually evaluated and are based on historical experience and other factors, including obtaining professional advices and expectations of future events that are believed to be reasonable under the circumstances. Significant areas where management has used estimates, assumptions or exercised judgements are as follows: (i)

Impairment of loans The Group’s accounting policy for allowances in relation to impaired loans and advances is described in Note 3(j). Impairment is calculated on the basis of discounted estimated future cash flows or by applying a certain percentage on the performing unclassified loan book based on market trend and historical pattern of defaults. For retail loans impairment is calculated based on formulaic approach depending on past due instalments and payments. The allowance for loan losses is established through charges to income in the form of an allowance for loan loss. Increases and decreases in the allowance due to changes in the measurement of the impaired loans are included in the allowance for loan losses and affect the income statement accordingly. Individually assessed loans



Impairment losses for individually assessed loans are determined by an evaluation of exposure on a case-by-case basis. This procedure is applied to all classified corporate loans and advances which are individually significant accounts or are not subject to, the portfolio-based approach. The following factors are considered when determining impairment losses on individually assessed accounts: 1. The customer’s aggregate borrowings. 2. The customer’s risk rating, i.e. ability to perform profitable business and generate sufficient cash to repay the borrowed amount. 3. The value of the collateral and the probability of successful repossession. 4. The cost involved to recover the debts. The Group’s policy requires regular review of the level of impairment allowances on individual facilities. Impaired loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable.

45

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 4.

Critical accounting judgements and key sources of estimation uncertainty (continued) Collectively assessed loans The management of the Group assesses, based on historical experience and the prevailing economical and credit conditions, the magnitude of loans which may be impaired but not identified as of the balance sheet date. These portfolio allowances are reassessed on a periodical basis and allowances are adjusted accordingly. Collectively assessed allowances are also made in respect of losses incurred in portfolios of retail loans with common features and where individual loan amounts are not significant. Impairment of retail loans is calculated by applying formulaic approach and loans are written off between 150-180 days past their due date based on products features. (ii) Property and equipment The cost of property and equipment is depreciated over the estimated useful life, which is based on expected usage of the asset, expected physical wear and tear, which depends on operational factors. The management has not considered any residual value as it is deemed immaterial. (iii) Fair value of financial instruments The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use only observable data, however areas such as credit risk (both own and counter party), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments. (iv) Impairment of available-for-sale equity investments The Group exercises judgement to consider impairment on the available-for-sale equity investments. This includes the determination of whether a significant or prolonged decline in the fair value below cost has occurred. In addition, the Group also evaluates among other factors, the normal volatility in share price, and the investees net assets, dividend policy, earnings history and other factors affecting fair values. The Group also considers impairment to be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. (v) Derivative financial instruments Subsequent to initial recognition, the fair values of derivative financial instruments measured at fair value are generally obtained by reference to quoted market prices, discounted cash flow models and recognized pricing models as appropriate. When prices are not available, fair values are determined by using valuation techniques which refer to observable market data. These include comparison with similar instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. The main factors which management considers when applying a model are: (a) The likelihood and expected timing of future cash flows on the instrument. These cash flows are usually governed by the terms of the instrument, although management judgment may be required in situations where the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt; and (b) An appropriate discount rate of the instrument. Management determines this rate, based on its assessment of the appropriate spread of the rate for the instrument over the risk-free rate. When valuing instruments by reference to comparable instruments, management takes into account the maturity, structure and rating of the instrument with which the position held is being compared. When valuing instruments on a model basis using the fair value of underlying components, management considers, in addition, the need for adjustments to take account of a number of factors such as bid-offer spread, credit profile, servicing costs of portfolios and model uncertainty.

46

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 5.

Cash and balances with central banks



Cash on hand Balances with central banks: Current accounts and other balances Statutory cash ratio requirements Certificates of deposit/placements with the Central Banks

910,067 2,425,276 2,500,000

1,574,196 1,597,378 16,797,412





6,289,386

20,200,123



The Bank is required to maintain statutory deposits with various Central Banks on demand, time and other deposits as per the statutory requirements.

6.

Deposits and balances due from banks







December 31, 2008 2007 AED ‘000 AED ‘000 454,043

231,137

(a) The analysis of the Group’s deposits and balances due from banks is as follows:



Demand Overnight Time

829,489 603,151 7,644,990





9,077,630

(b)

The above represent deposits and balances due from:



Banks abroad Banks in the UAE





December 31, 2008 2007 AED ‘000 AED ‘000 1,417,089 1,452,975 8,104,077 10,974,141

December 31, 2008 2007 AED ‘000 AED ‘000 8,294,480 783,150

10,206,471 767,670

9,077,630

10,974,141

Deposits and balances due from banks include an amount of AED 582.20 million (2007: AED 13.04 million) being call margins held as collateral against repurchase agreements (Note 14). 7.

Investments

(a) The analysis of the Group’s investments is as follows: Financial assets carried at fair value through profit and loss

December 31, 2008 2007 AED ‘000 AED ‘000

(i)

Held for trading Debt securities Discretionary managed fund Equities Investment funds Other investments

78,990 55,258 4,815 - 17,092





156,155





7,323,222 1,301,249 322,064 1,036,095 40,511 10,023,141

47

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 7.

Investments (continued) (a) The analysis of the Group’s investments is as follows: (continued)

(ii) Investments designated as at FVTPL Equities

Non-trading investments



(i)

2008 AED ‘000

December 31, 2007 AED ‘000

63,621 219,776

10,023,141

Available-for-sale



Debt securities Equities Investment funds Others

1,687,851 2,709,398 - 156,700

3,840,505

4,553,949

(ii) Held-to-maturity Debt securities

9,350,443

196,959



13,190,948







1,354,071 1,561,844 578,298 346,292



Less: Provision for impairment









Total investments

(b) The geographic analysis of investments is as follows:

4,750,908 (1,890)

13,189,058

4,749,018

13,408,834

14,772,159

December 31, 2008 2007 AED ‘000 AED ‘000

UAE 7,790,080 Abroad 5,618,754 13,408,834

(c) The analysis of investments by industry sector is as follows:

(1,890)



2008 AED ‘000

7,898,537 6,873,622 14,772,159

December 31, 2007 AED ‘000

Government and Public Sector 3,674,918 Commercial and Business 441,045 Financial Institutions 8,346,857 Other 946,014 13,408,834

3,243,075 1,569,456 7,170,354 2,789,274 14,772,159

48

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 7.

Investments (continued)

(d)

The movements in the provision for the impairment of investment in securities during the year were as follows: 2008 2007 AED ‘000 AED ‘000



Balance at January 1, Write-back during the year

1,890 -



Balance at December 31,

1,890

(e)

“Held-for-trading” and “Available-for-sale” investments at December 31, 2008 included AED 84.75 million held in the name of “related parties” as nominees for the account and for the benefit of the Group (2007: AED 210.04 million).

(f)

The fair value of investments classified under held-to-maturity amounted to AED 7,733.05 million as of December 31, 2008 (2007: AED 193.57 million).

(g)

The above investments include debt securities aggregating to AED 6,107.427 million (2007: AED 4,531.404) [out of which held-for-trading at fair value of AED Nil (2007: AED 3,960.904 million), available-for-sale at fair value of AED 1,306.520 million (2007: AED 570.500 million) and held to maturity investments of AED 4,800.907 million (2007: AED Nil)] sold under repurchase agreements (“repos”).

(h)

Following the amendments to IAS 39 and IFRS 7, “Reclassification of Financial Assets”, issued by the International Accounting Standards Board (IASB) on October 13, 2008, the Group reclassified certain investments from Held For Trading (“HFT”) to Held To Maturity (“HTM”) and to Available For Sale (“AFS”). The Bank and other subsidiaries identified those assets, eligible under the amendments, for which at July 1, 2008 (in the case of the subsidiary Oman Insurance Company psc at September 30, 2008), it had a clear change of intent to hold for the foreseeable future or until maturity rather than to exit or trade in the short term. Under IAS 39 as amended, the reclassifications were made with effect from July 1, 2008 for the Bank and other subsidiaries and from September 30, 2008 for the subsidiary Oman Insurance Company PSC.





1,890

Moreover, the Group reclassified certain investments available for sale (“AFS”) to investments held to maturity (“HTM”) as permitted by IAS 39. The disclosures below detail the impact of the reclassifications to the Group as of December 31, 2008. Details of the fair values of reclassified investments at date of reclassification (July 1, 2008 and September 30, 2008) and December 31, 2008 are as follows:



The Bank and other subsidiaries



14,286 (12,396)

December 31, 2008

HFT reclassified to HTM HFT reclassified to AFS AFS reclassified to HTM



July 1, 2008

The subsidiary Oman Insurance PSC December 31, 2008

September 30, 2008

AED ‘000

AED ‘000

AED ‘000

AED ‘000

2,475,753 956,160 5,114,610

2,694,124 1,141,043 6,442,856

- 92,109 -

137,535

-

As of the reclassification date, effective interest rates on reclassified investments ranged from 0% to 6%. As result of the reclassification, the effect on net income of the Group for the year ended December 31, 2008 was an increase of AED 428.454 million (net of AED 20.226 million which represents amortization of revaluation losses recognized originally in equity and amortized over the life of the available for sale investments after being reclassified to held to maturity investments) representing a decline in fair value of the concerned investments which has not been recognised in the Consolidated Income Statement.

49

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 8.

Loans and advances (net)

(a) The analysis of the Group’s loans and advances (net) is as follows: December 31, 2008 2007 AED ‘000 AED ‘000 (b)

Loans Overdrafts Credit Cards Others Less: Allowance for impairment

41,023,640 6,304,447 1,964,967 260,029 __________ 49,553,083 (1,118,809)

27,359,922 5,164,711 1,367,155 179,447 __________ 34,071,235 (1,090,555)



48,434,274

32,980,680



The analysis of loans and advances (net) by industry sector is as follows:



2008 AED ‘000

December 31, 2007 AED ‘000



Manufacturing Construction Trade Transport and communication Services Financial institutions Personal Government/public sector Others Less: Allowance for impairment

3,827,464 3,648,212 13,574,319 2,328,397 6,462,675 1,501,173 12,165,643 5,947,823 97,377 __________ 49,553,083 (1,118,809)

3,405,263 2,403,216 7,658,305 1,702,992 3,910,876 729,823 9,091,102 5,151,787 17,871 __________ 34,071,235 (1,090,555)





48,434,274

32,980,680



Loans and advances include AED 1,153 million (2007: AED 377 million) of loans and advances that are past due but not impaired.



(c)

In certain cases, the Group continues to carry classified doubtful debts and delinquent accounts on its books even after making 100% allowance for impairment. Interest is accrued on most of those accounts for litigation purposes only and accordingly not taken to income statement. Accounts are written off only when all legal and other avenues for recovery or settlement are exhausted. The value of loans and advances on which interest is not taken to income, including fully provided accounts, amounted to AED 364 million at December 31, 2008 (2007: AED 383 million).

(d)

The movement in the allowance for impairment of loans and advances during the year was as follows: 2008 AED ‘000



Balance at January 1, Impairment allowance for the year Interest in suspense Amounts written off during the year Recoveries during the year

1,090,555 191,696 50,418 (177,334) (36,526)



Balance at December 31,

1,118,809



2007 AED ‘000 923,854 193,536 37,530 (15,627) (48,738) 1,090,555

50

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 9.

Islamic financing and investment products (a) The analysis of the Group’s Islamic financing and investment products is as follows:

Financing

2008 AED ‘000

December 31, 2007 AED ‘000



Murabaha Ijara



Investing



Musharakah Sukuk and funds Mudaraba Wakala Others

1,433,576 614,190 104,342 343,189 64,865 - - 292,892 47,031 -







1,649,814

1,250,271







6,618,216

2,347,588



3,058,883 1,909,519



4,968,402

Less: Unearned income Provision for impairment

(17,008) (504)



6,600,704



336,118 761,199 1,097,317

(1,825) (494) 2,345,269

(b) The analysis of Islamic financing and investment products by industry sector is as follows: Construction Trade Transport and communication Services Financial institutions Personal Government/public sector Others

2008 AED ‘000



December 31, 2007 AED ‘000

288,771 409,826 252,365 2,384,197 592,028 433,153 1,931,700 326,176







Less: Unearned income Provision for impairment

(17,008) (504)





6,600,704



6,618,216

586,223 752 3,010 485,934 876,214 191,791 203,664 2,347,588 (1,825) (494) 2,345,269



51

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 10. Interest receivable and other assets

2008 AED ‘000

December 31, 2007 AED ‘000



Interest receivable Prepaid interest and expenses Positive fair value of derivatives – Note 40 Acceptances Split foreign exchange agreement Insurance related receivables Credit Card interchange receivables Taxes paid in advance Others

345,446 99,048 2,710,007 1,896,615 1,829,154 814,872 33,949 9,673 492,772

317,208 66,802 2,433,377 1,337,223 553,925 497,293 59,848 33,300 173,948



8,231,536

5,472,924

11.

Investment properties



Interest in buildings and freehold land – at fair value Balance at January 1, Additions during the year Sold during the year Change in fair value during the year Balance at December 31,



2008 AED ‘000



2007 AED ‘000

498,440 73,330 - 152,467

361,739 15,770 (31,801) 152,732

724,237

498,440

The fair value of investment properties for the subsidiaries Osool - A Finance Company (PJSC) and Oman Insurance Company (PSC) as of December 31, 2008 has been arrived at on the basis of a valuation carried out on November 22, 2008 and on December 18, 2008 respectively by independent valuers.

52

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 12.

Property and equipment

Property Furniture, Improvements Property acquired in fixtures, to freehold for own settlement equipment properties use of debts & vehicles and others ________ _________ __________ ____________

Capital work-inprogress _______

Total ________

Cost At December 31, 2006 Additions

AED ‘000

AED ‘000

AED ‘000

AED ‘000

AED ‘000

AED ‘000

162,064

21,551

197,456

131,284

32,166

544,521

3,033

176

44,071

42,223

60,377

149,880

Disposals/write-offs - ________ At December 31, 2007 165,097 Additions 2,179 Disposals/write-offs (7,170) Transfers 159,159 ________ At December 31, 2008 319,265 ________ Accumulated depreciation At December 31, 2006 79,052 Charge for the year 5,769

- ________ 21,727 2 - - ________

(34,456) ________ 207,071 52,539 (63,206) 11,189 ________

(6,704) _______ 166,803 33,937 (14,805) 1,125 _______

- _______ 92,543 93,265 - (171,473) _______

(41,160) ________ 653,241 181,922 (85,181) ________

21,729 ________

207,593 ________

187,060 _______

14,335 _______

749,982 ________

- -

118,103 31,506

45,091 30,125

- -

242,246 67,400

Disposals/write-offs At December 31, 2007 Charge for the year Disposals/write-offs

- ________ 84,821 9,534 (4,925) ________

- ________ - - - ________

(33,442) ________ 116,167 38,303 (62,104) ________

(6,624) _______ 68,592 34,890 (12,216) _______

- _______ - - - _______

(40,066) ________ 269,580 82,727 (79,245) ________

At December 31, 2008

89,430 ________

- ________

92,366 ________

91,266 _______

- _______

273,062 ________

Carrying amount At December 31, 2008 229,835 21,729 115,227 95,794

14,335

476,920

At December 31, 2007

92,543

383,661

80,276

21,727

90,904

98,211

At December 31, 2008, the fair value of properties acquired in settlement of debts was AED 276.60 million (2007: AED 285.24 million).

53

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 13. Deposits and balances due to banks

Time Demand Overnight



The above represent borrowings from:



Banks abroad Banks in the UAE Overseas central banks





2008 AED ‘000





December 31, 2007 AED ‘000

10,527,107 1,326,096 483,288

10,515,527 1,550,649 1,330,848

12,336,491

13,397,024

8,037,405 4,299,086 - 12,336,491

9,095,490 4,300,553 981 13,397,024

Borrowings from banks abroad include an amount of AED 1,836.5 million (US$ 500 million) [2007: AED 1,836.5 million (US$ 500 million)] being a 5 years loan obtained through a syndicate of banks maturing in July 2012. The loan carries a floating rate of interest which is fixed by reference to 3 months LIBOR (2007: 6 months LIBOR) 14.

Repurchase agreements with banks



Repo borrowing

Tenure

Due date

Interest rate



5 year 6 months 6 months 3 months 3 months 6 months 6 months 6 months*

October 2011 June 2008 June 2008 March 2008 June 2008 January 2009 February 2009 January 2009

3 months USD Libor 6 months USD Libor 6 months USD Libor 3 months USD Libor 3 months USD Libor 6 months USD Libor 6 months USD Libor 3% per annum









2008 AED ‘000

December 31, 2007 AED ‘000

183,650 - - - - 1,151,149 1,257,084 2,538,000

183,650 768,032 1,070,763 919,136 892,732 -

5,129,883

3,834,313

* Amount represents a repurchase agreement with the UAE Central Bank.

54

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 15. Customers’ deposits

2008 AED ‘000

Current and other accounts Saving accounts Time deposits

Analysis of economic activities: Government and Public Sector Commercial & Business Personal Financial Institutions Others



11,492,582 841,098 36,101,858

10,506,336 659,141 34,968,037

48,435,538

46,133,514

2008 AED ‘000





December 31, 2007 AED ‘000

December 31, 2007 AED ‘000

9,219,270 25,142,639 11,904,031 1,685,220 484,378

8,564,312 20,393,667 13,302,637 3,730,962 141,936

48,435,538

46,133,514

Customer deposits include an amount of AED 3,444 million received from the Ministry of Finance of the UAE (AED 1,687 million matures in October 2011 and AED 1,757 million matures in November 2013) as part of the liquidity support made available to UAE banks in view of the recent credit crisis. Interest is paid every three months and calculated on prevailing coupon on the United States Treasury benchmark 5 year note plus 120 basis points or 4% which ever is higher. 16. Islamic customers’ deposits

2008 AED ‘000



Current and other accounts Saving accounts Time deposits

139,554 4,087 2,898,386

72,272 1,109 2,079,817





3,042,027

2,153,198

17.

Insurance and life assurance funds



Unearned Life Outstanding premium Additional assurance claims reserve reserve fund

AED’000

AED’000

AED’000

AED’000

December 31, 2007 AED ‘000

December 31, 2008 2007 Total Total AED’000

AED’000



Balance at January 1, Increase

144,561 98,054

277,698 118,544

51,750 35,163

42,886 33,829

516,895 285,590

373,940 142,955



Balance at December 31, 242,615

396,242

86,913

76,715

802,485

516,895



Unearned premium reserve is calculated as a percentage of annual premiums earned, net of reinsurance. Additional reserves are also made for the estimated excess of potential claims and claims incurred but not reported at the balance sheet date.



Life assurance fund is determined by independent actuarial valuation of future policy benefits.

55

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 18. Interest payable and other liabilities Accrued interest payable Negative fair value of derivatives – Note 40 Acceptances Insurance premium collected in advance Accrued expenses Income received in advance – discounted bills Pay orders issued Provision for end-of-service indemnity Credit Card related Provision for taxation Others

2008 AED ‘000

December 31, 2007 AED ‘000

480,744 2,930,729 1,896,615 562,663 537,264 321,156 253,670 128,662 35,062 11,107 411,163

442,334 2,482,251 1,337,223 381,542 376,186 205,985 157,691 104,070 38,610 32,704 298,727

7,568,835

5,857,323





19.

Medium-term floating rate notes



During 2004, the Bank established a Euro Medium Term Note (EMTN) programme for US$ 750 million (AED 2,754.75 million) under fiscal agency agreement dated February 4, 2004. The EMTN programme was increased to US$ 2,000 million (AED 7,346 million) under fiscal agency agreement dated March 21, 2006.

The maturities of the bonds (FRN) issued under the programme are as follows: December 31, 2008 2007 AED ‘000 AED ‘000 Due date Interest rate February 27, 2009 3 months Libor + 0.55% 1,101,900 1,101,900 March 23, 2010 3 months Libor + 0.40% 1,193,725 1,193,725 April 6, 2011 3 months Libor + 0.38% 1,101,900 1,101,900 January 24, 2017 3 months Libor + 0.625% 1,836,500 1,836,500

20.

5,234,025

5,234,025



The US$ 500 Million (AED 1,836 million) tranche issued during January 2007 is a subordinated floating rate note and qualifies for Tier 2 subordinated loan capital for the first 5 years till 2012 and thereafter it will be amortized at the rate of 20% per annum for the next five years until 2017 for capital adequacy calculations. However, FRN is callable in 5 years (i.e. in 2012) if not redeemed on completion of 5 years, there is provision for step up in coupon rate of 0.5% for next 5 years. This subordinated FRN has been approved by UAE Central Bank for recognition of Tier 2 capital. Long-term loans These represent long-term loans provided by the Real Estate Committee of the UAE to refinance real estate loans made by the Group to various UAE citizens, which are included in loans and advances (net).

56

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 21. (a)

Capital and reserves Issued capital



During the year ended December 31, 2008, a proposed bonus share distribution, of 3 shares for each 10 shares was approved by the Board of Directors and ratified by the shareholders at the Annual General Meeting.



As of December 31, 2008, 146,386,994 ordinary shares of AED 10 each (2007: 112,605,380 ordinary shares of AED 10 each) were issued and are fully paid up. (b)



Statutory and legal reserves In accordance with Union Law 10/80 of UAE, 10% of the net income for the year is to be transferred to statutory reserve. Such transfers to reserves may cease when they reach the levels established by the respective regulatory authorities (in the UAE this level is 50% of the issued share capital). The legal reserve relates to the Bank’s foreign operations. Neither the statutory reserve nor the legal reserve is available for distribution.

(c)

General reserve The general reserve is computed pursuant to the Bank’s Articles of Association and can be used for the purposes determined by the Ordinary General Meeting.

22. Minority interest

Balance at January 1, Dividends Share in investments revaluation reserve Share in translation adjustments Share of net income for the year Reduction in minority’s capital



Balance at December 31,

23. Contra accounts and commitments (a) Contra accounts (memoranda) Guarantees Letters of credit

December 31, 2007 AED ‘000

870,546 (35,972) (305,684) (1) 89,239 (422)

571,395 (31,011) 149,521 31 225,363 (44,753)

617,706

870,546

2008 AED ‘000

December 31, 2007 AED ‘000

39,539,729 7,346,914 _________

30,920,961 7,242,966 __________

46,886,643

38,163,927





(b)

Derivative financial instruments (Note 40)

132,743,826

213,069,614

Total contra account and commitments (a + b)

179,630,469

251,233,541





2008 AED ‘000

The outstanding unutilised facilities as at December 31, 2008 amounted to AED 54,085 million (2007: AED 46,210 million), of which amounts committed were AED 4,725 million (2007: AED 4,216 million) and amounts uncommitted were AED 49,360 million (2007: AED 41,994 million).

57

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 23. (c)

Contra accounts and commitments (continued) Contra accounts – maturity profile The maturity profile of the Group’s contra accounts were as follows:

2008

Within 3 months AED’000

Over 3 to 6 months AED’000

Over 6 to 12 months AED’000

Over 1 to 5 years AED’000

Over 5 years AED’000



Total AED’000

Guarantees 10,910,837 20,946,501 Letters of credit 1,966,181 3,314,422

4,541,981 1,760,398

3,111,556 301,666

28,854 4,247

39,539,729 7,346,914



6,302,379

3,413,222

33,101

46,886,643

12,877,018 24,260,923



2007

Within 3 months AED’000

Over 3 to 6 months AED’000

Over 6 to 12 months AED’000

Guarantees Letters of credit

23,609,921 4,289,203

2,216,863 849,599



27,899,124

3,066,462



Over 1 to 5 years AED’000

Over 5 years AED’000

Total AED’000

1,983,095 691,823

2,751,731 1,411,375

359,351 966

30,920,961 7,242,966

2,674,918

4,163,106

360,317

38,163,927



The analysis of commitments and contingencies by geographic region and industry sector is shown in Note 37. (d) Operating lease commitments The future minimum lease payments payable under non-cancellable operating leases where the Group is the lessee are as follows: December 31, 2008 2007 AED ‘000 AED ‘000

Less than 1 year 1 to 5 years Over 5 years

49,271 58,459 149,865

44,826 51,178 153,628



257,595

249,632



24. Interest income

December 31, 2008 2007 AED ‘000 AED ‘000



Loans and advances Banks Non-trading Investments Central Banks

3,120,795 801,002 395,717 245,589

2,599,287 913,873 63,365 373,456





4,563,103

3,949,981



58

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008

25.

Income from Islamic financing and investment products

Financing

December 31, 2008 2007 AED ‘000 AED ‘000



Murabaha Ijara Others Investing

99,356 62,687 1,766 __________ 163,809 __________

8,640 22,020 _________ 30,660 _________

Musharaka Sukuk and Funds Wakala Mudaraba Others

47,142 11,118 4,571 1,413 836 __________ 65,080

26,733 9,817 14,298 - _________ 50,848







26. Interest expense

Customers’ deposits Central Banks Banks Medium term loans

27.

Distribution to depositors – Islamic products

228,889

81,508

December 31, 2008 2007 AED ‘000 AED ‘000 1,515,521 23,072 866,301 227,807

1,827,052 3 656,320 304,974

2,632,701

2,788,349

This represents the share of income allocated due to depositors of the Group. The allocation and distribution to depositors is approved by the Bank’s Sharia Board.



59

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 28.

Net fee and commission income

Fee and commission income Commission income Brokerage and asset management Insurance commission Fees and charges on banking services Credit Card related fee Others Total fee and commission income

1,330,514 46,092 160,388 390,888 538,009 151,150 __________ 2,617,041 __________

1,686,713 40,107 117,039 455,556 413,509 91,905 _________ 2,804,829 _________



Fee and commission expenses Commission expense Brokerage and asset management Insurance commission Credit Card related expenses Others Total fee and commission expenses

861,432 312 206,908 278,005 17,614 __________ 1,364,271 __________

1,356,052 512 145,772 189,853 21,436 _________ 1,713,625 _________



Net fee and commission income

1,252,770

29. Net investment (loss)/income (a)

Financial assets carried at FVTPL

(b)

Net realized investment (loss)/gain Fair value adjustments Interest income Dividends income Non trading investment income



Net realized investment gain Available for sale investments written off Amortization of investments reserves for reclassified investments Dividends income Impairment loss of available for sale investments



Total (a + b)

December 31, 2008 2007 AED ‘000 AED ‘000

1,091,204

December 31, 2008 2007 AED ‘000 AED ‘000

(123,736) (192,203) 117,386 1,121 __________ (197,432) __________

252,767 136 385,846 88 ________ 638,837 ________

34,393 (68,612) (20,226) 68,909 (35,012) __________ (20,548) __________

139,316 95,606 ________ 234,922 ________

(217,980)

873,759

60

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 30. Other income (net)

Fair value adjustments of investment property Income from investment property Foreign exchange gains (net) Insurance underwriting profit Gain/(loss) on sale of property and equipment Rental income from properties Fair value adjustment – derivatives Others





December 31, 2008 2007 AED ‘000 AED ‘000







685,065

865,373

31. General and administrative expenses

152,732 405 161,425 315,249 (67) 5,127 (13,125) 63,319

152,467 366 271,168 424,680 57,730 4,546 (159,938) 114,354

December 31, 2008 2007 AED ‘000 AED ‘000

Salaries and employees related expenses Depreciation on property and equipment Other general and administration expenses

1,094,258 82,727 696,977

828,036 67,400 514,351



1,873,962

1,409,787





Compensation of key management (included above under “salaries and employee related expenses”) comprise salaries, bonuses and other benefits amounting in total to AED 108.813 million (2007: AED 116.090 million) – Note 36.

32.

Allowances for loans and advances and other financial assets

2008

Retail ________

AED’000

Corporate and others Non-specific Total ________ ________ ________ AED’000

AED’000

AED’000

Provision for impaired loans and advances 9,932 74,500 107,264 Provision for/write off of investments and others - 20,077 - Provision for other debtors - 1,152 - Write-off of impaired loans 287,134 115 - Recovery of loans previously written off (104,351) (33,461) - 192,715 62,383 107,264

191,696 20,077 1,152 287,249 (137,812) 362,362

61

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 32.

Allowances for loans and advances and other financial assets (continued)











2007

Retail ________

AED’000

Corporate and others Non-specific Total ________ ________ ________ AED’000

AED’000

AED’000

Provision for impaired loans and advances Provision for/write off of investments and others Provision for other debtors (reversal) Write-off of impaired loans Recovery of loans previously written off

10,640 - - 247,601 (97,607)

82,896 17,815 (8,513) 11,596 (56,043)

100,000 - - - -

193,536 17,815 (8,513) 259,197 (153,650)



160,634

47,751

100,000

308,385

33.

Earnings per share



Earnings per share are calculated by dividing the net profit for the year by the number of shares outstanding during the year as follows:



Net income for the year (AED’000) (Attributed to equity holders of the parent)



Number of ordinary shares outstanding



Earnings per share (AED)



December 31, 2008 2007 1,642,830 _________

1,900,632 _________

146,386,994

146,386,994

11.22

12.98

The number of ordinary shares outstanding as of December 31, 2007 has been adjusted to reflect the bonus shares issued during 2008 [Note 21(a)].

34.

Foreign restricted assets



Net assets equivalent to AED 66,266 million as of December 31, 2008 (2007: AED 76,736 million) maintained by certain branches of the Bank, operating outside the United Arab Emirates, are subject to exchange control regulations of the countries in which these branches operate.

62

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 35.

Cash and cash equivalents



Cash and cash equivalents consist of cash on hand, Central Bank certificates of deposits, balances with banks and money market placements which are maturing within three months from the date of the deposit or placement, as follows: December 31, 2008 2007 AED ‘000 AED ‘000



Cash on hand, current accounts and deposits with Central Banks Deposits and balances due from banks

6,289,386 9,077,630 __________ 15,367,016

Less: Deposits with Central Banks for regulatory purposes (2,425,276)

Less: Deposits maturing after 3 months

Decrease in cash and cash equivalents – 2008 [(a) – (b)] Cash on hand, current accounts and deposits with Central Banks Deposits and balances due from banks

Less: Deposits with Central Banks for regulatory purposes

Less: Deposits maturing after 3 months Increase in cash and cash equivalents – 2007 [(a) – (b)]

20,200,123 10,974,141 __________ 31,174,264 (1,597,378)

(4,670,922) (6,367,894) __________ ___________ 8,270,818 (a) 23,208,992 (b) __________ ___________ (14,938,174) December 31, 2007 2006 AED ‘000 AED ‘000 20,200,123

2,405,688

10,974,141 __________ 31,174,264

8,556,912 __________ 10,962,600

(1,597,378)

(1,179,871)

(6,367,894) __________ 23,208,992 (a) __________

(2,575,866) _________ 7,206,863 (b) _________

16,002,129

63

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 36.

Related party transactions a) Certain “related parties” (such as, directors and major shareholders of the Group and companies of which they are principal owners) are customers of the Group in the ordinary course of business. Transactions with such related parties are made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with unrelated parties. Such related party transactions are disclosed below. Other “related party transactions” is disclosed in Notes 7 and 31 to these consolidated financial statements. b) Related party balances included in the balance sheet are as follows:

Advances to customers

1,404,911 _________

854,140 _________



Deposits from customers

1,958,554 _________

931,563 _________

Letters of credit, guarantees and acceptances

2,053,701 _________

2,169,951 _________

Available for sale investments

84,750 _________

101,000 _________

Investments revaluation reserves in equity

(16,250) _________

_________









c)

December 31, 2008 2007 AED ‘000 AED ‘000

Net income for the year includes related party transactions as follows:



December 31, 2008 2007 AED ‘000 AED ‘000



Interest income

115,571 _________

65,008 _________



Interest expense

43,213 _________

29,097 _________



Other income

112,567 _________

52,434 _________

64

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 37.

Concentrations of assets, liabilities, equity and off balance sheet items



Geographic regions









Assets ________





AED’000

AED’000

AED’000

AED’000



UAE 69,386,824 79,337,201 Other Middle East Countries 12,221,116 6,259,459 O.E.C.D. 4,707,326 6,439,318 Others 6,928,255 1,207,543

36,242,191 2,304,797 5,508,881 2,830,774

60,329,702 12,682,229 5,897,036 8,718,430

70,817,322 30,861,253 7,878,676 1,737,246 6,895,237 3,379,336 2,036,162 2,186,092





46,886,643

87,627,397

87,627,397 38,163,927



Industry Sector

December 31, 2008

December 31, 2007

Liabilities Off Balance and Equity Sheet items Assets ___________ ____________ ________

93,243,521 93,243,521

December 31, 2008

Liabilities Off Balance and Equity Sheet items __________ ___________ AED’000

AED’000

December 31, 2007



Assets ________





AED’000

AED’000

AED’000

AED’000



Government and Public Sector 11,473,467 Commercial & Business 34,261,439 Personal 12,317,720 Financial Institutions 26,026,025 Others 9,164,870 Equity --

9,274,010 30,691,740 12,306,124 25,376,803 4,912,445 10,682,399

66,940 33,186,412 21,159 13,612,069 63 --

8,941,234 22,020,799 8,972,076 40,024,733 7,668,555 --

8,686,841 121,853 21,886,896 33,647,659 13,774,971 21,180 28,734,911 4,266,701 4,059,380 106,534 10,484,398 --





93,243,521 93,243,521

46,886,643

87,627,397

87,627,397 38,163,927

Liabilities Off Balance and Equity Sheet items Assets ___________ ____________ ________

Liabilities Off Balance and Equity Sheet items __________ __________ AED’000

AED’000

65

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 38.

Segmental information

2008



Treasury & Head Office Financial Islamic Capital and Retail Corporate Institutions Banking Markets Insurance Others

Total

AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Net interest income and earnings from Islamic products 1,026,887 687,462 80,394 53,070 4,343 17,138 214,481 2,083,775 Other income 490,478 526,931 176,828 48,327 116,171 621,496 (80,068) 1,900,163 _________ _________ _________ _________ _________ ________ _________ _________ Total operating income 1,517,365 1,214,393 257,222 101,397 120,514 638,634 134,413 3,983,938 _________ _________ _________ _________ _________ ________ _________ General and administrative expenses (1,873,962) Allowances for loans and advances and other financial assets Income before taxes and minority interest Taxation Net income for the year Attributed to: Equity holders of the parent Minority interest

(362,362) _________ 1,747,614 (15,545) _________ 1,732,069 _________ _________ 1,642,830 89,239 _________ 1,732,069 _________ _________



Segment Assets

12,109,791 36,245,019 6,660,729 6,892,383 17,037,300 3,764,204 10,534,095 93,243,521



Segment Liabilities

10,070,100 36,659,400 2,925,000 6,416,494 10,564,800 2,360,016 13,565,312 82,561,122





2007



Treasury & Head Office Financial Islamic Capital and Retail Corporate Institutions Banking Markets Insurance Others AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 AED’000 Net interest income and earnings from Islamic products 796,277 620,484 83,824 37,190 (562,285) 17,971 206,997 Other income 421,674 508,622 129,534 3,349 762,404 738,764 85,681 _________ _________ _________ _________ _________ ________ _________ Total operating income 1,217,951 1,129,106 213,358 40,539 200,119 756,735 292,678 _________ _________ _________ _________ _________ ________ _________ General and administrative expenses Allowances for loans and advances and other financial assets Income before taxes and minority interest Taxation Net income for the year Attributed to: Equity holders of the parent Minority interest

Total AED’000 1,200,458 2,650,028 _________ 3,850,486 (1,409,787) (308,385) _________ 2,132,314 (6,319) _________ 2,125,995 _________ _________ 1,900,632 225,363 _________ 2,125,995 _________ _________



Segment Assets

8,962,632 26,049,346 8,254,899 2,700,200 31,363,300 3,767,182 6,529,838 87,627,397



Segment Liabilities

9,872,700 38,634,121 4,131,800 2,159,127 7,920,400 1,644,512 12,780,339 77,142,999

66

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 39.

Classification of financial assets and liabilities

The table below sets out the Group’s classification of each class of financial assets and liabilities and their carrying amounts as at December 31, 2008: At fair value Other through Available- Loans and Held to amortised Carrying profit & loss __________ for-sale ___________ advances maturity cost amount ____________ ________ __________ ________

AED’000

AED’000

AED’000

AED’000

AED’000

AED’000



- - 219,776 - - - 2,710,007

- - - - - - - 48,434,274 - 6,600,704 3,840,505 - - -

- - - - - 9,348,553 -

6,289,386 9,077,630 - - - - 5,412,808

6,289,386 9,077,630 219,776 48,434,274 6,600,704 13,189,058 8,122,815



2,929,783

3,840,505 55,034,978

9,348,553 20,779,824 91,933,643



Deposits and balances due to banks Repurchase agreements with banks Customers’ deposits Islamic customers’ deposits Insurance and life assurance funds Interest payable and other liabilities Medium-term floating rate notes Long-term loans

- - - - - 2,930,729 - -

- - - - - - - -

- - - - - - - -

- 12,336,491 12,336,491 - 5,129,883 5,129,883 - 48,435,538 48,435,538 - 3,042,027 3,042,027 - 802,485 802,485 - 3,743,180 6,673,909 - 5,234,025 5,234,025 - 11,838 11,838





2,930,729

-

-

- 78,735,467 81,666,196

Cash and balances with central banks Deposits and balances due from banks Financial assets carried at FVTPL Loans and advances (net) Islamic financing and investment products Non-trading investments Interest receivable and other assets

The table below sets out the Group’s classification of each class of financial assets and liabilities and their carrying amounts as at December 31, 2007: At fair value Other through Available- Loans and Held to amortised Carrying profit & loss __________ for-sale ___________ advances ________ maturity __________ cost amount ___________ ________

AED’000

AED’000

AED’000

AED’000

AED’000

AED’000



Cash and balances with central banks Deposits and balances due from banks Financial assets carried at FVTPL Loans and advances (net) Islamic financing and investment products Non-trading investments Interest receivable and other assets

- - 10,023,141 - - - 2,433,377

- - - - - - - 32,980,680 - 2,345,269 4,553,949 - - -

- 20,200,123 20,200,123 - 10,974,141 10,974,141 - - 10,023,141 - - 32,980,680 - - 2,345,269 195,069 - 4,749,018 - 2,939,445 5,372,822





12,456,518

4,553,949 35,325,949

195,069 34,113,709 86,645,194



Deposits and balances due to banks Repurchase agreements with banks Customers’ deposits Islamic customers’ deposits Insurance and life assurance funds Interest payable and other liabilities Medium-term floating rate notes Long-term loans

- - - - - 2,482,251 - -

- - - - - - - -

- - - - - - - -

- 13,397,024 13,397,024 - 3,834,313 3,834,313 - 46,133,514 46,133,514 - 2,153,198 2,153,198 - 516,895 516,895 - 2,754,841 5,237,092 - 5,234,025 5,234,025 - 16,707 16,707





2,482,251

-

-

- 74,040,517 76,522,768

67

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 40.

Derivatives



In the ordinary course of business, the Group utilizes the following derivative financial instruments for both trading and hedging purposes:



Swaps are commitments to exchange one set of cash flows for another. For interest rate swaps, counter-parties generally exchange fixed and floating rate interest payments in a single currency without exchanging principal. For currency swaps, fixed interest payments and principal are exchanged in different currencies. For cross-currency rate swaps, principal, fixed and floating interest payments are exchanged in different currencies.



Forwards and futures are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specified price and date in the future. Forwards are customized contracts transacted in the over-the-counter market. Foreign currency and interest rate futures are transacted in standardized amounts on regulated exchanges and changes in futures contract values are marked to market daily.



Forward rate agreements are similar to interest rate futures, but are individually negotiated. They call for a cash settlement for the difference between a contracted interest rate and the market rate on a specified future date, on a notional principal for an agreed period of time.



Options are contractual agreements under which the seller (writer) grants the purchaser (holder) the right, but not the obligation, to either buy or sell at fixed future date or at any time during a specified period, a specified amount of a currency, commodity or financial instrument at a pre-determined price.



Derivatives held for hedging purposes



The Group deals in derivatives including forward exchange contracts, swaps, options and futures on behalf of its customers. These dealings with and exposure to financial markets are matched by equal and opposite dealings and exposure to corporate customers.



The Group uses forward foreign exchange contracts and currency swaps to hedge against currency risks and interest rate swaps to hedge against the interest rate risk arising from interest rate exposures. In all such cases, the hedging relationship and objective, including details of the hedged items and hedging instrument are formally documented.



The following table shows the positive and negative fair values of derivative financial instruments, together with the notional amounts analyzed by the term to maturity. The notional amounts, which provide an indication of the volumes of the transactions outstanding at the year end, do not necessarily reflect the amounts of future cash flows involved. These notional amounts, therefore, are neither indicative of the Group’s exposure to credit risk, which is generally limited to the positive fair value of the derivatives, nor market risk.

68

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 40.

Derivatives (continued)



Statement of Derivatives as at December 31, 2008



Notional amount by term of maturity

Off-Balance Sheet Financial Instruments

Positive Negative Notional Up to 3 – 6 fair value fair value amount 3 months months

Held for Trading Forward foreign exchange contract Foreign exchange options (bought) Foreign exchange options (sold) Interest rate swaps Cap bought Cap sold Credit default swaps Equity derivatives Futures contracts purchased (Customer) Futures contracts sold (Customer) Futures contracts sold (Bank) Futures contracts purchased (Bank)

AED’000



2,710,007 2,930,729 132,743,826 47,460,403 25,222,081 37,313,850 18,923,892 3,823,600

AED’000 AED’000

Statement of Derivatives as at December 31, 2007









Over 5 years

AED’000 AED’000 AED’000 AED’000 AED’000

922,961 918,985 48,093,534 23,596,051 11,541,882 9,050,102 3,905,499 - 1,033,694 26,644,695 5,647,203 6,826,833 13,692,698 477,961 902,063 - 38,379,114 17,381,622 6,826,833 13,692,698 477,961 830,665 934,970 18,491,898 409,485 25,438 661,619 13,571,756 3,823,600 - 1 62,700 - - - 62,700 - 1 - 62,700 - - - 62,700 10,322 8,703 230,884 - - 18,365 212,519 17,880 8,261 184,875 13,100 1,095 17,884 152,796 - - 14,711 79,534 79,534 - - - - 11,404 - 217,179 126,937 - 90,242 - - 14,711 - 79,534 79,534 - - - - - 11,404 217,179 126,937 - 90,242 - -





6 - 12 1 year months to 5 years







Notional amount by term of maturity

Off-Balance Sheet Financial Instruments

Positive Negative fair value fair value

Notional amount

Up to 3 months

3 – 6 months

6 - 12 months

1 year to 5 years

Over 5 years

Held for Trading

AED’000 AED’000

AED’000

AED’000 AED’000 AED’000 AED’000 AED’000

Forward foreign exchange contract 283,859 269,906 48,562,465 40,835,150 2,200,364 1,009,218 4,517,733 Foreign exchange options (bought) - 1,850,006 76,909,969 14,870,003 26,385,950 27,938,340 7,359,438 356,238 Foreign exchange options (sold) 1,850,005 - 76,909,969 14,870,003 26,385,950 27,938,340 7,359,438 356,238 Interest rate swaps 293,647 348,206 9,690,241 19,274 3,673 199,785 7,608,476 1,859,033 Cap bought - 4 104,500 - - - 104,500 Cap sold 4 - 104,500 - - - 104,500 Credit default swaps 935 3,547 144,782 - - - 122,727 22,055 Equity derivatives - 5,655 15,570 - - - 15,570 Futures contracts purchased (Customer) - 1,640 236,734 154,261 - 65,703 16,770 Futures contracts sold (Customer) 3,287 - 77,075 77,075 - - - Futures contracts sold (Bank) 1,640 - 236,734 154,261 - 65,703 16,770 Futures contracts purchased (Bank) - 3,287 77,075 77,075 - - - -



2,433,377 2,482,251 213,069,614 71,057,102 54,975,937 57,217,089 27,225,922 2,593,564

69

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 41.

Capital management Regulatory capital The Central Bank of the UAE sets and monitors capital requirements for the Group as a whole. The parent company and overseas banking operations are directly supervised by their local regulators. The Central Bank of the UAE adopted Basel One capital regime in 1993. The Bank calculates its Capital Adequacy Ratio in line with guidelines issued by the Central Bank of the UAE. The minimum capital ratio prescribed by the Central Bank is 10% of RWA calculated as per the guidelines issued by them. The Group’s regulatory capital is analysed into two tiers: •

Tier 1 capital, which includes ordinary share capital, share premium, retained earnings, translation reserve and minority interests after deductions for goodwill and intangible assets, if any.



Tier 2 capital, which includes qualifying subordinated liabilities and the element of the fair value reserve (45%) relating to unrealised gains on investments classified as available-for-sale.

Various limits are applied to elements of the capital base. The qualifying tier 2 capital cannot exceed tier 1 capital; and qualifying term subordinated loan capital may not exceed 50 percent of tier 1 capital. The Central Bank of the UAE does not permit collective impairment allowances to be included as part of tier 2 capital. Other deductions from capital include the carrying amounts of investments in subsidiaries that are not included in the regulatory consolidation, investments in the capital of banks and certain other regulatory items. The Tier One Capital must be 6% of RWA and Tier 2 Capital cannot be more than 66.6% of Tier One Capital. The Group’s policy is to maintain a strong capital base so as to maintain market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position. Historically the Group has followed a conservative dividend policy to increase capital from internal resources to meet future growth. To further strengthen the capital base and to ensure effective management of capital, the Group issued in the year ended December 31, 2007 LT-2 bonds which have been approved by the UAE Central bank to be treated as Tier 2 Capital.

70

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 41.

Capital management (continued) The Group and its individually regulated operations have complied with all externally imposed capital requirements throughout the period. There have been no material changes in the Group’s management of capital during the year. The Group’s regulatory capital position at December 31, 2008 was as follows:

Tier 1 capital Ordinary share capital Statutory & Legal Reserve General Reserve Retained earnings Minority interest Cumulative translation adjustment Total Tier 2 capital Asset revaluation reserve Qualifying subordinated liabilities Total

December 31, 2008 2007 AED ‘000 AED ‘000 1,463,870 1,126,054 740,734 599,009 312,000 312,000 8,231,655 7,068,366 734,203 721,025 (33,932) (2,155) __________ _________ 11,448,530 9,824,299 __________ _________ (766,131) 1,836,500 _________ 1,070,369 __________

297,045 1,836,500 _________ 2,133,545 _________

Total capital base 12,518,899 Risk-weighted assets On balance sheet 65,610,336 Off balance sheet 23,301,533

11,957,844

Total risk-weighted assets

67,345,347

Risk asset ratio

88,911,869 14.08%

47,683,537 19,661,810

17.76%

The Central Bank of the UAE has proposed to adopt Basel 2; however, no date has been fixed for implementation. For credit and market risk the Central Bank has issued draft guidelines for the implementation of the Standardised Approach. For operational risk the Central Bank has given the option to use the Basic Indicator Approach or the Standardised Approach. Until Basel 2 implementation date is fixed and relevant guidelines are issued, banks are required to follow Basel I guidelines issued by the Central Bank Capital allocation The allocation of capital between specific operations and activities is, to a large extent, driven by optimisation of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based on the inherent risk it carries. The process of allocating capital to specific operations and activities is undertaken independently of those responsible for the operation, by Finance and Risk Groups, and is subject to review by ALCO as appropriate. Although maximisation of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Group to particular operations or activities, it is not the sole basis used for decision making. Account also is taken of synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Group’s longer term strategic objectives. The Group’s policies in respect of capital management and allocation are reviewed regularly by the Board of Directors.

71

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008

42.

Risk management The Group has set up a strong risk management infrastructure supported by adoption of best practices in the field of risk management to manage and monitor the following major risks arising out of its day to day operations: - - -

Credit Risk Management Market Risk Management Liquidity Risk Management

The Risk Committee, Assets and Liabilities Committee and Investment Committee work under the mandate of the Board of Directors to set up risk limits and manage the overall risk in the Group. These committees approve risk management policies of the Group developed by the Risk Management Group. The Risk Committee has overall responsibility for the oversight of the risk management frame work. It has established detailed policies and procedures in this regard along with senior management committees to ensure adherence to the approved policies and close monitoring of different risks within the Group. In addition to setting the credit policies of the Group, the Risk Committee also establishes industry caps, approves policy exceptions and conducts periodic portfolio reviews to ascertain portfolio quality. The Risk Management Group function is independent of the business and is led by a qualified Risk Management Head, with enterprise-wide responsibility for the function. This Group is responsible for developing credit, market and operational risk policies. Subjective experienced and trained Risk Managers have delegated authority within the risk management framework to approve credit risk transactions and monitor market and operational risk. The Portfolio Management and Risk Analytic Unit within Risk Management Group is responsible for developing and validating or revalidating financial risk models for risk ratings and scoring models, as well as the calculation of Probability of Default (“PD”), Loss Given Default (“LGD”), and Exposure At Default (“EAD”). During the year ended December 31, 2008, the Unit developed new scoring models for project finance, commercial real estate, personal and auto loans, and updated the existing rating model for financial institutions. Management considers that the portfolio quality remains stable and strong. The Group has a progressive risk rating system in place, and a conservative policy for early recognition of impairment and for providing for non– performing assets. As part of its analysis of portfolio pressure points, the Group carries out periodic stress testing to its entire portfolio and takes appropriate action to (i) mitigate risks arising out of specific industries and/or due to global risk events and their implications on the Group’s client base, and (ii) determine portfolio direction and resource allocation accordingly. The Risk Management Group of the Group overseas credit, market and operational risks. Different credit underwriting procedures are followed for commercial and institutional lending, and retail lending, as described below. The Audit, Review and Compliance Group (“ARCG”) is an independent Group which is responsible to review the risk policies, risk exposures and the risk managing and monitoring framework. The Board Audit Committee is assisted by ARCG in this regard. Credit Risk Management Credit risk is the potential for financial loss arising from a borrower’s or counterparty’s inability to meet its obligations. All credit policies are reviewed and approved by the Group’s Risk Committee. Whenever possible, loans are secured by acceptable forms of collateral in order to mitigate credit risk. The Group further limits risk through diversification of its assets by geography and industry sectors. Wholesale credit risk management The Wholesale Risk Management team centrally approves all credit facilities and limits for all corporate, treasury and capital markets, financial institutions and SME clients of the Group. Such approvals are carried out in accordance with the Group’s credit policy as set out in the Wholesale Credit Policy Manual. Periodic policy revisions and updates are posted as Policy Bulletins.

72

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) All credit lines or facilities extended by the Group are granted subject to prior approval pursuant to a set of delegated credit authority limits as recommended by the Risk Management Head inline with the Wholesale Credit Policy, and approved by the Group’s Chief Executive Officer (the”CEO”). At least two signatures are required to approve any credit application. Depending on factors such as the nature of the applicant, magnitude of credit, its risk rating, the client type or a specific policy issue, a third concurring signature may sometimes be required, as defined in the Credit Policy Manual. All credit applications for commercial and institutional lending are subject to the Group’s credit policies, underwriting standards and industry caps (if any) and to regulatory requirements, as applicable from time to time. The Group does not lend to companies operating in industries that are considered by the Group inherently risky and where specialized industry knowledge is required. Limit setting is based on a combination of factors, including a detailed evaluation of each borrower’s creditworthiness based on proven performance, industry, management and financial analysis (both historical and projected), risk rating, and analysis of facilities (tenor & types of facilities, pricing, collateral and support). Credit and Marketing functions are segregated. Furthermore, all credit facilities are independently administered and monitored by the Credit Operations (Administration) Department, which separately reports into Operations & Technology Group. The Group has established cross border country limits for managing transferability and convertibility cross border risks. These limits are regularly reviewed by the Risk Management Group and periodically by the Risk Committee. Individual country limits are set out based on policy terms defining acceptable country credit risk tolerance norms. Such cross border exposure and financial institutions exposure limits for money market and treasury activities are likewise approved as per guidelines set out by the Group’s Wholesale Credit Policy Manual and are monitored by the Credit Operations Department. Periodic reviews are also conducted by the Credit Examination teams from the Audit, Review and Compliance Group and facilities are risk graded based on criterion established in the Credit Policy Manual. Retail credit risk management Retail credit risk is managed on a product basis. Each retail credit application is considered for approval according to a product program, which is devised in accordance with guidelines set out in the product policy approved by the Group’s Risk Committee. The evaluation of a borrower’s creditworthiness is determined on the basis of statistically validated scoring models. All approval authorities are delegated by the Risk Committee or by the Chief Executive Officer (the”CEO”) acting on behalf of the Risk Committee. Different authority levels are specified for approving product programs and exceptions thereto, and individual loans and credits under product programs. Each product program contains detailed credit criteria (such as customer demographics and income eligibility) and regulatory, compliance and documentation requirements, as well as other operating requirements. Credit authority levels range from Level 1 (approval of a credit application meeting all the criteria of an already approved product program) to Level 5 (the highest level where the Risk Committee approval of the specific credit application is necessary). Credit review procedures The Group’s Credit Review Division (the “CRD”) which is part of Audit, Review and Compliance Group, subjects the Group’s risk assets to an independent quality evaluation on a regular basis in conformity with the guidelines of the Central Bank of the UAE and Group’s internal policies in order to assist in the early identification of accrual and potential performance problems. The CRD validates the risk ratings of all commercial and institutional clients, provides an assessment of portfolio risk by product and segment for retail customers and monitors observance of all approved credit policies, guidelines and operating procedures across the Group.

73

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) Loan Classification All commercial and institutional loan facilities of the Group are assigned one of twenty five risk ratings. Nonclassified obligors are those rated from 1 to 22. Obligors at the higher risk end rated 21 and 22 are categorized as “Watch-List”. Classified exposures fall into 4 categories representing escalating degrees of severity. Assets rated 23 and 24 are categorized as “Specially Mentioned” and 25 are categorized as “Substandard”. Doubtful and Loss rated credits are maintained in separate categories, outside the risk rating system. Split classifications may be used when a facility is partially collateralized, where the Loss Given Default (“LGD”) would be different for the collateralized portion of the credit. The Group’s internal rating system, which has been developed using historical loss data and customer behavioral scores, is also continually updated and strengthened in order to provide a statistically validated underpinning to customer ratings consistent with Basel II IRB guidelines. If a credit is overdue for 90 days or more, interest is suspended and is not credited to consolidated income statement. Once a loan is designated as non-accrual, all previously accrued but uncollected interest is reversed and charged against interest income. Interest accruals are no longer recorded as income, and the amortization into income of deferred loan fees ceases. Collections subsequent to a loan being placed on non-accrual status are applied on a cash basis. Specific allowance for impairment of classified assets is made based on recoverability of exposure and the risk ratings of the assets. The Group writes off retail advances once they are between 150 to 180 days past their due date, based on the characteristics of the underlying product. Impaired loans and securities Impaired loans and securities are loans and securities for which the Group determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loans and securities agreements. These loans are graded Doubtful or Loss in the Group’s internal credit risk grading system for wholesale credits. Past due but not impaired loans and securities Past due but not impaired loans and securities are those loans and securities where contractual interest or principal payments are past due, but the Group believes that impairment is not appropriate on the basis of the level of security or collateral available and/or the stage of collection of amounts owed to the Group. Allowances for impairment The Group establishes an allowance for impairment losses that represents its estimate of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment. The Group also complies with International Accounting Standards 39 (IAS 39), in accordance with which it assesses the need for any impairment losses on its loans portfolio by calculating the net present value of the expected future cash flows for each loan or its recoverability based either on collateral value or the market value of the asset where such price is available. As required by Central Bank of the UAE guidelines, the Group takes the higher of the loan loss provisions required under IAS 39 and Central Bank regulations. Write-off policy The Group writes off a loan or security (and any related allowances for impairment losses) when the Group Credit Department determines that the loans or securities are uncollectible in whole or in part. This determination is reached after considering information such as the occurrence of significant changes in the borrower or issuer’s financial position such that the borrower or issuer can no longer pay its obligation in full, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardized loans, charge off decisions generally are based on a product specific past due status. Write-offs are only generally allowed after 3 years from the date of which the asset has been classified as “Loss” or has been charged off. All retail loans, with the exception of personal loans to UAE nationals, are charged off when installments are past due over 150 days. Personal loans to UAE nationals are charged off if installments are past due by 180 days or more.

74

75

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) Set out below is an analysis of the gross and net (of allowances for impairment) amounts of impaired assets by risk grade.

Impaired Substandard Doubtful Loss Gross amount Interest suspended Specific allowance for impairment

Due from banks 2008 2007 AED’000 AED’000

Loans and advances Non trading investments 2008 2007 2008 2007 AED’000 AED’000 AED’000 AED’000

- - - - -

- - - - -

- 10,688 34,171 59,448 134,629 313,001 168,800 383,137 ( 76,228) ( 97,779)

- - - - -



-

- -

- -

(279,801) (338,753) (187,229) ( 53,395)

- -







Past due but not impaired Commercial loans by less than 90 days - Commercial loans beyond 90 days - Past due retail loans beyond 30 days over - -



Neither past due nor impaired Gross amount 9,077,630 Collective allowance for impairment - 9,077,630



Carrying amount



The above allowance for impairment includes allowance for off balance sheet items.

9,077,630



-

330,157

61,770

-

-

-

195,370

-

-

-

- -

627,100 315,567 1,152,627 377,337

- -



10,974,141

48,231,656 33,310,761

13,190,948

4,750,908

- 10,974,141

(762,780) (654,023) 47,468,876 32,656,738

(1,890) 13,189,058

(1,890) 4,749,018

10,974,141

48,434,274 32,980,680

13,189,058

4,749,018



-

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) The credit quality of the portfolio of loans and advances that were neither past due nor impaired as at December 31, 2008 can be assessed by reference to the Group’s standard credit grading system. The following information is based on the system:



December 31, 2008 2007 AED ‘000 AED ‘000

Grade 1 – Low risk Grade 2 – Satisfactory Risk Grade 3 – Fair Risk Grade 4 – Watch List Grade 5 – Substandard but not impaired

18,813,766 22,885,499 4,788,117 1,563,547 180,727

9,784,351 18,981,169 3,270,493 1,123,574 151,174



48,231,656

33,310,761

Collateral against loans and advances to customers is generally held in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at December 31, 2008 neither 2007.

76

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) The table below details the fair value of the collateral as at the date of granting the loan except for the fair value of debt and equity securities collaterals which are updated regularly for fair value and at the balance sheet date:



Loans and advances to customers 2008 2007 AED’000 AED’000 Against individually impaired advances: Property Debt securities Equities Cash Others



Against loans and advances not impaired: Property Debt securities Equities Cash Others





Due from banks 2008 2007 AED’000 AED’000

410,800 - - 9,148 -

57,180 - - 45,876 38,862

- - - - -

- - -

7,367,288 - 2,937,610 2,626,560 2,006,453

8,564,999 45,472 2,781,675 2,646,642 2,815,409

- - - 268,076 -

- - 1,314,523 -

15,357,859

16,996,115

268,076

1,314,523

The distributions by geographical concentration of impaired loans and advances and impairment allowance for credit losses are as follows:

2008

UAE



Impaired loans and advances Impairment allowance for credit losses

2007

Impaired loans and advances Impairment allowance for credit losses





Middle East countries

O.E.C.D

Other countries AED’000

AED’000

Total

AED’000

AED’000

AED’000

91,357

56,190

-

21,253

168,800

246,177

90,385

-

19,467

356,029

UAE



Middle East countries

O.E.C.D

Other countries

Total

AED’000

AED’000

AED’000

AED’000

AED’000

291,580

69,629

-

21,928

383,137

348,209

68,758

-

19,565

436,532

77

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) Market Risk Management Market risk arises from the possibility of losses resulting from unfavorable market movements. Market Risk Management is an independent group that oversees market risk. The primary objectives of Market Risk Management are to: • • • • •

Define and implement policies and procedures regarding market risk Develop a comprehensive market risk limit setting and monitoring capability Perform the necessary market risk analysis Develop robust stress testing analysis Ensure compliance with market risk management regulatory requirements

Market risk is monitored by translating senior management’s risk appetite into proper limits. Proprietary trading for the account of the Group is managed by limits set by the ALCO and/or Investment Committee. The Group classifies exposures to market risk into two distinct measures: a) Trading Risk, and b) Asset Liability Mismatch (ALM) Risk Trading risk is the risk of loss on liquid, trading positions due to adverse market price changes. The Group Market Risk Management uses a wide array of custom techniques, including exposure measures, factor sensitivities, Value-at-Risk (VaR) and Stress Scenarios (What-if-Analysis) to analyze portfolios. The Group uses VaR as a general statistical measure of risk that is used to equate risk across products and aggregate risk on a portfolio basis, from the corporate level down to the individual trading desk. VaR is intended to estimate the potential decline in the value of a position or a portfolio, under normal market conditions, within a defined confidence level (99% in line with Basel), and over a specific time period. The Group uses the Monte Carlo approach, and simulate a large number of asset distributions and re-order the outcomes to determine the percentile VaRs. The Group uses Risk Metrics product to calculate VaR. In 2008, VaR was calculated daily and as of December 31, 2008 the 99% VaR was US$ 4.540 million (2007: US$ 3.412 million). Asset Liability Mismatch (“ALM”) risks is the structural mismatch risk between liquid assets and liabilities on the banking book. Market risk on non-trading or banking positions mainly arises from the interest rate, and foreign currency exposures. Interest Rate Risk Management Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities. The Group uses simulation-modeling tools to measure and monitor interest rate sensitivity. The results are analyzed and monitored by Assets and Liabilities Committee (“ALCO”). Since most of the Group’s assets and liabilities are floating rate, deposits and loans generally reprice simultaneously providing a natural hedge, which reduces interest rate exposure. Moreover, the majority of the Group’s assets and liabilities reprice within one year, thereby further limiting interest rate risk. The impact of 50 basis points sudden movement in benchmark interest rate on net income over a 12 months period as on December 31, 2008 would have been a decrease in net income by 0.03% (in case of decrease of interest rate) and would have been an increase in net income by 0.32% (in case of increase of interest rate) [2007: -1.10% and +0.72%] respectively. The effective interest rate on bank placements and certificates of deposits with central bank was 3.28% (2007: 5.33%), on loans and advances 6.26% (2007: 7.96%), on customer deposits 2.53% (2007: 4.07%) and on bank borrowings 3.59% (2007: 5.12%).

78

79

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) The following table depicts the interest rate sensitivity position and interest rate gap position based on contractual repricing arrangement:

Interest Rate Sensitivity Gap:

Within 3 months

Over 3 to 6 months

Over 6 to 12 months

Over 1 to 5 years



AED’000

AED’000

AED’000

AED’000



Assets



Cash and balances with central banks 3,145,289 Deposits and balances due from banks 3,603,485 Financial assets carried at FVTPL 75,161 Loans and advances (net) 12,069,505 Islamic financing and investment products 2,805,351 Non-trading investments 2,128 Interest receivable and other assets - Investment properties - Property and equipment -



Total assets



Liabilities and equity



Over Non-interest 5 years sensitive AED’000

- - - - 760,557 4,194,258 436,397 58,900 - - - - 4,167,906 18,898,530 11,599,493 1,096,636 263,238 765,345 2,494,290 272,480 179,116 902,727 5,449,312 1,337,513 - - - - - - - - - - - -

AED’000

Total AED’000

3,144,097 6,289,386 24,033 9,077,630 144,615 219,776 602,204 48,434,274 - 6,600,704 5,318,262 13,189,058 8,231,536 8,231,536 724,237 724,237 476,920 476,920

21,700,919

5,370,817 24,760,860 19,979,492 2,765,529 18,665,904 93,243,521

Deposits and balances due to banks Repurchase agreements with banks Customers’ deposits Islamic customers’ deposits Insurance and life assurance funds Interest payable and other liabilities Medium-term floating rate notes Long-term loans Minority interest Equity attributable to equity holders of the parent

9,926,588 5,129,883 27,829,515 2,181,243 - - 5,234,025 - -

1,423,341 - 1,751,688 524,552 - - - - -

33,057 - 3,017,962 68,413 - - - - -

- - 3,995,773 122,649 - - - - -

- 953,505 - - 140,215 11,700,385 - 145,170 - 802,485 - 7,568,835 - - - 11,838 - 617,706

12,336,491 5,129,883 48,435,538 3,042,027 802,485 7,568,835 5,234,025 11,838 617,706

-

-

-

-

- 10,064,693

10,064,693



Total liabilities and equity

50,301,254

3,699,581 3,119,432

4,118,422



On Balance Sheet gap Off Balance Sheet gap

(28,600,335) 1,671,236 21,641,428 15,861,070 2,625,314 (13,198,713) (82,797) 24,793 53,963 4,041 - -

-



Cumulative interest rate sensitivity gap – 2008

(28,683,132) (26,987,103) (5,291,712) 10,573,399 13,198,713

-

-



Cumulative interest rate sensitivity gap – 2007

(15,651,593) (11,633,572) 2,264,484 12,841,501 13,234,979

-

-

140,215 31,864,617 93,243,521

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) Currency Risk Management Currency risk represents the risk of change in the value of financial instruments due to changes in foreign exchange rates. Limits on positions by currencies are monitored. The Group’s exposures on December 31, 2008 are:

U.S. Dollars Qatari Riyals Indian Rupees Pound Sterling Hong Kong Dollar Egyptian Pound Euro Bahrain Dinar Saudi Riyal Japanese Yen Swiss Francs Pakistani Rupees Others

Total 2008 AED’000

Total 2007 AED’000

(2,806,154) 202 52,188 519,365 (367) - (34,846) (489) 187 13,537 (71,425) - 85,054

12,227,833 474,066 (14,357) 46,821 (2,698) (859) (156,358) 50,090 2,845 13,893 1,482 17,576 7,055

10,395,325 (31,422) 72,964 33,802 243 18,639 (9,986) 47,791 (3,910) 3,809 587 22,267 11,583

(2,242,748)

12,667,389

10,561,692

Net spot position AED’000

Forward position AED’000

15,033,987 473,864 (66,545) (472,544) (2,331) (859) (121,512) 50,579 2,658 356 72,907 17,576 (77,999) 14,910,137

The exchange rate of AED against US Dollar is pegged since November 1980 and the Group’s exposure to currency risk is limited to that extent.

80

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) Liquidity Risk Management Liquidity Risk is the risk that the Group’s entities, in various locations and in various currencies, will be unable to meet a financial commitment to a customer, creditor, or investor when due. This is a key franchise risk. Management of liquidity risk The Group’s senior management’s focus on liquidity management is to: • • • •

Understand better the various sources of liquidity risk, particularly under stressed conditions. Develop effective contingency plans. Develop a comprehensive approach to management of liquidity risk to ensure that it is line with the Group’s overall risk appetite. Improve resilience to a sharp decline in market liquidity and to demonstrate that we can survive the closure of one or more funding markets by ensuring that finance can be readily raised from a variety of sources.

Assets and Liabilities Committee (“ALCO”) has a broad range of authority delegated by the Board of Directors to manage the Group’s asset and liability structure and funding strategy. ALCO meets on a monthly basis or more often as circumstances dictate to review liquidity ratios, asset and liability structure, interest rate and foreign exchange exposures, internal and statutory ratio requirements, funding gaps and general domestic and international economic and financial market conditions. ALCO formulates liquidity risk management guidelines for the Group’s operation on the basis of such review. The members of ALCO are the Chief Executive Officer, the Head of Corporate & Investment Banking Group, the Head of Retail Banking, the Head of Treasury & Capital Markets, the Head of Risk Management Group and the Chief Financial Officer of the Group. The Group has historically relied on customer deposits for its funding needs. Over the years, the Group has successfully introduced various cash managed products and retail savings’ schemes which have enabled it to mobilize low cost, broad base deposits. In order to diversify the funding sources, the EMTN program was launched in 2004 under which it has till date raised AED 5.3 Billion in medium-term borrowings. During the year ended December 31, 2007, the Group raised AED 1.8 Billion for 5 years through a syndicated borrowing arrangement. To measure and monitor its liquidity, the Group uses various indicators including regulatory ratio of utilization of funds to stable resources. Other indicators include Advances to Deposits and Stable Funds Ratio, liquid assets to Deposits ratio and Liquid assets to adjusted assets ratio. The Treasury function in the Group is responsible to manage the liquidity and it follows strict guidelines for deployment of liquid assets within each liquidity bucket. Periodic stress tests are performed to ensure the availability of funds during stressed situations. Inter-bank borrowing lines and repo facilities with global banks are part of the contingency funding options maintained by the Treasury. The following table summarizes the maturity profile of Group’s assets and liabilities based on contractual repayment arrangements. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date.

81

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued)



Maturity Profile: The maturity profile of assets and liabilities as at December 31, 2008 were as follows:

Within 3 months

Over 3 to 6 months

Over 6 to 12 months

Over 1 to 5 years

Over 5 years

Total



AED’000

AED’000

AED’000

AED’000

AED’000

AED’000

- 1,505,456 - 4,063,443 655,155 3,487,658 52,962 - 246

- 1,759,968 - 16,461,828 2,494,290 6,324,923 61,628 - 9,379

- 6,289,386 58,891 9,077,630 - 219,776 3,226,447 48,434,274 272,481 6,600,704 2,942,951 13,189,058 1,174 8,231,536 724,237 724,237 466,323 476,920

9,764,920 27,112,016

7,692,504 93,243,521



Assets



Cash and balances with central banks Deposits and balances due from banks Financial assets carried at FVTPL Loans and advances (net) Islamic financing and investment products Non-trading investments Interest receivable and other assets Investment properties Property and equipment

6,289,386 4,406,708 219,776 17,053,920 2,915,658 347,291 5,759,233 - 849

- 1,346,607 - 7,628,636 263,120 86,235 2,356,539 - 123



Total assets

36,992,821

11,681,260



Liabilities and equity



Deposits and balances due to banks 9,043,594 1,423,341 33,056 1,836,500 - 12,336,491 Repurchase agreements with banks 2,408,233 2,538,000 - 183,650 - 5,129,883 Customers’ deposits 39,315,136 1,836,182 3,128,483 4,014,011 141,726 48,435,538 Islamic customers’ deposits 2,317,593 524,552 68,413 122,649 8,820 3,042,027 Insurance and life assurance funds - - 802,485 - - 802,485 Interest payable and other liabilities 5,376,568 1,610,635 387,320 131,433 62,879 7,568,835 Medium-term floating rate notes 1,101,900 - - 2,295,625 1,836,500 5,234,025 Long-term loans - - - - 11,838 11,838 Minority interest - - - - 617,706 617,706 Equity attributable to equity holders of the parent 10,064,693 10,064,693



Total liabilities and equity



Maturity profile as at December 31, 2007:



Total assets Total liabilities and equity

59,563,024

7,932,710

4,419,757

8,583,868 12,744,162 93,243,521

46,156,867 57,019,955

12,223,323 8,184,951

7,836,378 2,897,867

15,938,826 5,472,003 87,627,397 6,254,982 13,269,642 87,627,397

82

Mashreq Annual Report 2008

Notes to the Consolidated Financial Statements (continued) For the Year ended December 31, 2008 42.

Risk management (continued) Fair value of financial instruments



Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties in an arm’s length transaction. As such, differences can arise between book values and the fair value estimates. Underlying the definition of fair value is the presumption that the Group is a going concern without any intention or requirement to materially curtail the scale of its operation or to undertake a transaction on adverse terms.



The Group measures all financial assets and liabilities at amortized cost except for derivatives and trading and non-trading investments which are measured at fair value by reference to either published price quotations in an active market, prices quoted by counterparties or through use of valuation techniques such as discounted cash flow method.



The fair values of deposits and balances due from banks, deposits and balances due to banks, repurchase agreements with banks and customers’ deposits, which are predominantly short term in tenure and issued at market rates, are considered to reasonably approximate their book value.



The Group estimates that the fair value of its loans and advances portfolio is not materially different from its book value since majority of loans and advances carry floating market rates of interest and are frequently re-priced. For loans and advances which are considered impaired, expected cash flow, including anticipated realization of collateral, were discounted using an appropriate rate and considering the time of collection, the net result of which is not materially different from the carrying value.

43.

Fiduciary activities



Assets held by the Group in trust, in a fiduciary and custodial capacity on behalf of its customers, are not included in these consolidated financial statements. These include assets held in a fiduciary capacity for a related party as of December 31, 2008 of AED 784.614 million (2007: AED 546.29 million).

44.

Fund management



Makaseb Funds Company BSC (subsidiary – Note 1) manages a number of equity funds which are not consolidated in these consolidated financial statements. The funds have no recourse to the general assets of the Group; further the Group has no recourse to the assets of the funds.

45.

Comparative figures



Certain amounts for the prior year were reclassified to conform to current year presentation.

83