Statement of Compliance with the Code of Corporate ... · Sir Mohammed Anwer Pervez, OBE, HPk Mr. Zameer Mohammed Choudrey Mr. Rizwan Pervez Mr. Haider Zameer Choudrey The independent

Statement of Compliance with the Code of Corporate Governance for the year ended December 31, 2015

This statement is being presented to comply with the Code of Corporate Governance 2012 (the Code) and Rule Book of Pakistan Stock Exchange for the purpose of establishing a framework of good governance, whereby a listed company is managed in compliance with the best practices of corporate governance. United Bank Limited (the Bank) has applied the principles contained in the Code in the following manner:

1. The Bank encourages representation of independent Directors, non-executive Directors and Directors representing minority interests on its Board of Directors. At present the Board includes:

Category Names

Independent Directors

Mr. Amin Uddin Mr. Arshad Ahmad Mir Mr. Zaheer Sajjad Mr. Khalid A. Sherwani

Executive Director Mr. Wajahat Husain, President & CEO

Non-Executive Directors

Sir Mohammed Anwer Pervez, OBE, HPk Mr. Zameer Mohammed Choudrey Mr. Rizwan Pervez Mr. Haider Zameer Choudrey

The independent directors meet the criteria of independence under clause I (b) of the Code.

2. The Directors have confirmed that none of them is serving as

a Director in more than seven listed companies, including the Bank.

3. All the resident Directors of the Bank are registered as

taxpayers and none of them has defaulted in payment of any loan to a banking company, a DFI or an NBFI or, being a member of a stock exchange, has been declared as a defaulter by that stock exchange.

4. No casual vacancy occurred during the year 2015. However,

out of two casual vacancies occurred during 2014 consequent upon the resignation of two government nominee directors, one vacancy was filled. The second casual vacancy is not required to be filled in light of Bank’s decision to keep the composition of Board intact at current level. The decision has also been reported to SECP.

5. The Bank has prepared a "Code of Conduct" and has ensured

that appropriate steps have been taken to disseminate it throughout the Bank along with its supporting policies and procedures.

6. The Board has approved a Vision / Mission Statement, overall

corporate strategy and significant policies of the Bank. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained.

7. All the powers of the Board have been duly exercised and

decisions on material transactions, including the appointment and the determination of remuneration and terms and conditions of employment of the Chief Executive Officer and Non-Executive Directors have been taken by the Board.

8. The meetings of the Board were presided over by the

Chairman.

The Board met at least once in every quarter. Written notices of the Board meetings, along with the agenda and working papers, were circulated at least seven days before the meetings. The minutes of the meetings were appropriately recorded and circulated.

9. The appointments of the President & CEO, Chief Financial

Officer, the Company Secretary and the Head of Internal Audit including their remuneration and terms of employment have been approved by the Board.

10. In compliance with Clause (xi) of the Code, 07 directors have completed the Corporate Governance Leadership Skills program conducted by the Pakistan Institute of Corporate Governance and 02 directors are exempt from the training requirement.

11. The Directors' Report for the year has been prepared in

compliance with the requirements of the Code and fully describes the salient matters required to be disclosed.

12. The financial statements of the Bank were duly endorsed by

the Chief Executive Officer and the Chief Financial Officer before approval of the Board.

13. The Directors, Chief Executive Officer and Executives do not

hold any interest in the shares of the Bank other than as disclosed in the pattern of shareholding, which is part of Directors’ Report.

14. The Bank has complied with all corporate and financial

reporting requirements of the Code. 15. The Board has formed an Audit Committee. It comprises of

three members, all of whom are Non-Executive Directors and Chairman is an independent director.

16. The meetings of the Audit Committee are held at least once

every quarter prior to the approval of interim and final results of the Bank as required by the Code. The terms of reference of the committee have been formulated and advised to the committee for compliance.

17. The Board has also constituted a Human Resource and

Compensation Committee comprising of two non-executive Directors and one executive Director. The Chairman of the committee is an independent director.

18. The Board has set up an effective internal audit function.

Personnel of the Internal Audit department are suitably qualified and experienced for the purpose and are conversant with the policies and procedures of the Bank.

19. The statutory auditors of the Bank have confirmed that they

have been given a satisfactory rating under the Quality Control Review Program of the Institute of Chartered Accountants of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold shares of the Bank and that the firm and all its partners are in compliance with International Federation of Accountants (IFAC) guidelines on Code of Ethics as adopted by the Institute of Chartered Accountants of Pakistan.

20. The statutory auditors or the persons associated with them

have not been appointed to provide other services except in accordance with the listing regulations and the auditors have confirmed that they have observed IFAC guidelines in this regard.

21. The ”Closed Period”, prior to the announcement of

interim/final results, and business decisions, which may materially affect the market price of the Bank’s securities, was determined and intimated to Directors, employees and the stock exchanges.

22. Material price sensitive information has been disseminated

among all market participants at once through the stock exchanges.

23. We confirm that all other material principles enshrined in the

Code have been complied with. For and on behalf of the Board of Directors

Sir Mohammed Anwar Pervez, OBE, HPk Chairman Date: February 17, 2016

UNITED BANK LIMITED

Directors’ Report 2015 P a g e | 1

Directors’ Report to the Members On behalf of the Board of Directors, I am pleased to present to you the 57th Annual Report of United Bank Limited for the year ended December 31, 2015.

Financial Highlights United Bank Limited (UBL) recorded profit after tax of Rs. 25.73 billion, a growth of 17% over the previous year (2014: Rs. 21.93 billion). Earnings per share (EPS) stood at Rs. 21.02 (2014: Rs. 17.91). On a consolidated basis, UBL posted profit after tax of Rs. 27.01 billion with a growth of 12% over 2014.

UBL recorded profit before tax (PBT) of Rs. 42.17 billion, registering a 26% growth in PBT (2014: Rs. 33.40 billion). The Return on Equity for the year improved further to 26% from 24% in 2014. This performance has been delivered through balance sheet expansion, funded by core deposits and actively building a portfolio of high yielding assets. Revenues have grown by 21% contributed by a 24% growth in Net Interest Income and a 14% growth in Non‐Interest Income. Despite expansion across all core businesses, expenses remained well controlled with a 6% increase in comparison to last year. The cost to income ratio reflects the overall improvement in results and was recorded at 39.7% (2014: 45.2%). With a directed focus across recoveries, NPLs were reduced by 13% with an improvement in asset quality levels to 9.4% (2014: 11.2%). The break ‐up value per share has increased from Rs. 102.3 to Rs. 116.1 in 2015, in line with the growth in earnings and a build‐up in surplus arising on revaluation of assets.

The Board is pleased to recommend a final cash dividend of Rs. 4 per share i.e. 40% for the year ended December 31, 2015, bringing the total cash dividend for the year 2015 to 130%.

33.40 21.93

42.17

25.73

PBT PAT2014 2015

Rs. in billions

UNITED BANK LIMITED


Net Interest Income

In 2015, interest margins have remained restricted but steady at 5.62% (2014: 5.75%) despite the discount rate falling to 6.5% from 9.5% at the start of the year, along‐with a higher minimum floor on savings accounts. Net interest income grew by Rs. 10.87 billion to Rs. 55.84 billion, an increase of 24%. Balance sheet expansion was funded by strong growth in core

deposits led by a 15% growth in domestic current accounts. The overall cost of deposits was reduced by 82 bps to close at 3.1% for the year 2015 (2014: 3.9%). Growth in the corporate loan portfolio which produced relatively steady returns despite low credit demand, together with the expansion in the Bank’s high yielding bond portfolio were the main drivers of improved earnings.

Non‐Interest Income

Non‐interest income grew to Rs. 21.99 billion from Rs. 19.30 billion in 2014 and continues to form a large component of the Bank’s core earnings. Built through diversification from fee based services across corporate, retail and Omni as well as market leading positions within treasury and capital markets, revenue contribution stood at 28% (2014: 30%).

Fee, commission and brokerage constitutes 56% of non‐funded income and stood at Rs. 12.20 billion (2014: Rs. 11.40 billion), representing a 7% growth over the previous year. Earnings across trade services maintained their levels despite lower commodity prices. Omni remains one of the largest contributors across the fee base, with major growth in earnings on disbursements under G2P programmes. Home remittance earnings were impacted by lower rebates but offset by growth in volumes across all major corridors. Investment banking fees reached a landmark of Rs. 0.6 billion, with a growth of 78% with active participation in the arrangement and advisory of large public sector projects. Strong growth was witnessed in

19.30

21.99

2014 2015Non Interest Income

Rs. in billions 14%

44.97

55.84

5.75% 5.62%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

‐

10.00

20.00

30.00

40.00

50.00

60.00

2014 2015

Net Interest Income Net Interest Margin

Rs. in billions

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Bancassurance commissions, along with a build‐up in customer mandates generating steady fee and float income from cash management services.

Dividend income grew by 60% to reach Rs. 3.20 billion, generated on a well‐diversified portfolio of high yielding equities. Capital gains increased to Rs. 3.24 billion from Rs. 1.81 billion, representing a 79% growth through active trading within equities, bonds and on the sale of mutual funds. Foreign exchange earnings stood at Rs. 2.27 billion, relatively lower than Rs. 3.02 billion earned last year in view of a more stable exchange rate during 2015.

Provisions and loan losses

Provisions for the year increased to Rs. 3.71 billion from Rs. 1.16 billion. These included general provisions amounting to Rs. 1.96 billion to build reserves at a more prudent level within both domestic and international. The asset quality improved to 9.4% from 11.2% in 2015 with strong cash recoveries in the corporate and special asset management portfolios, along with write offs against legacy NPLs. The overall coverage ratio remains strong at 80.3% as at Dec’15 (Dec’14: 81.2%).

Cost management

Administrative expenses have increased by 6% over the previous year to total Rs. 30.90 billion (2014: Rs. 29.03 billion). Personnel costs and head count levels were well contained. The increases in staff costs were mainly as a result of annual merit increments and market related salary adjustments. Despite the rising costs of utilities and need for alternate energy sources, the overall premises costs were up by 7%. This increase was mainly as a result of lease renewals at market rates across a vast segment of the network this year. A well‐directed plan to cut down excesses across fuel consumption and active monitoring resulted in a 7% decline in “Gas and Electricity” expenses. Variable expenses were up marginally by 2%, with synergies resulting from centralized procurement with more efficient logistics and distribution across the branches. UBL’s cost to income ratio has improved significantly, standing at 39.7% in 2015 (2014: 45.2%). The Bank continues to strive towards greater operational efficiency and building lean and effective support structures while continuously improving service quality levels.

1.16

3.71

0.1%

0.7%

0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%

‐ 0.50 1.00 1.50 2.00 2.50 3.00 3.50

2014 2015

Total Provisions NCL Ratio

Rs. in billions

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Balance Sheet Management

Business expansion continues with the balance sheet size reaching Rs. 1.40 trillion (2014: Rs. 1.11 trillion), an increase of 26% over the previous year, driving overall earnings growth. 2015 has been a landmark year for the Bank as the deposit base crossed Rs. 1.05 trillion (2014: Rs. 895 billion) with an overall growth of 17%. With a highly diversified deposits portfolio with

coverage across both urban and rural areas, the focus remained on generating core deposits through diversified product offerings serving the mass market, mid‐ tier and high net worth customers. The Bank’s distribution channels continued their efforts to acquire “New to Bank” accounts under a well‐structured deposit mobilization programme. Total domestic deposits have grown by 19% in 2015 thus largely funding balance sheet expansion and driving sustainable earnings growth despite a year of margin compression. The domestic CASA ratio remained strong at 84% (2014: 85%) with growth in average current deposits of 15%, resulting in a 97 bps reduction in cost of deposits to 3.4%.

The net loans and advances portfolio grew to Rs. 454.63 billion, a growth of 5% over the previous year (2014: Rs. 434.26 billion). Asset quality considerations continue to direct lending as the corporate loan book sustained 2014 levels, with some growth across the SME segment. The International net advances portfolio grew by 8% to reach Rs. 144.93 billion (2014: Rs. 134.09 billion) with a focus to build on the existing wholesale model with more trade based financing within the GCC.

The investment portfolio increased by 44% totaling Rs. 714.1 billion from Rs. 497.3 billion in 2014. The liquidity is primarily placed in government securities with Rs. 486.9 billion being deployed in Pakistan Investment Bonds with a view to earn stable returns and improving the yields of the earning asset base. The Bank’s equity book grew by 13% over the previous year, built up with a more long term view on positions that can generate stable dividend income. The revaluation surplus on the bond portfolio as at Dec’15 stood at Rs. 19.5 billion (2014: 12.1 billion) and Rs. 6.1 billion on equities (2014: Rs. 5.2 billion).

Strong Capital Ratios

UBL’s capital ratios remained strong as the unconsolidated Tier‐1 CAR was 10.4% with the overall capital adequacy improving to 14.6% on Dec 2015 compared with 10.0% and 13.9% in Dec 2014 respectively. Risk weighted assets have grown by 12.3% over the year in line with credit expansion and larger exposure towards long term investments leading the enhancement in core earnings. The interim dividend payout during the year has been enhanced to Rs. 3.0 per

837 931

58 120

2014 2015Core Deposits Non‐Core Deposits

Rs. in billions

17.4%

UNITED BANK LIMITED


share per quarter while maintaining optimal capital levels. Based on an assessment of future capital requirements in accordance with the applicable Basel III regulations the existing capital structure comfortably supports future growth.

Economy Review

The turnaround within the economy has gained momentum in 2015 creating a more positive view on Pakistan in the opinion of key international donors and rating agencies. The efforts of the government to keep the country’s progress on the IMF program well on track have been the principal factors driving the transition. The decline in oil prices has provided the much needed respite to the foreign exchange reserves position. The issuance of global bonds and an active privatization program continue to drive the projection of Pakistan as a viable long term investment opportunity for international investors. Visible progress on the China Pakistan Economic Corridor (CPEC) this year is a clear indication of on ground developments and much needed activity towards a larger economic goal.

Although the energy sector has remained a key priority for the government, progress has been relatively slower, however in the right direction. In addition to the buildup across alternate energy sources for generation, the government has also been focusing on improving the transmission & distribution network. Lower international oil prices have to some extent been relevant in curtailing circular debt accumulation. The trade deficit during the first half of FY’16 stood at USD 12 billion with a marginal improvement of 1.35% over last year. During the 1H FY’16, exports declined by 14.4% year on year to USD 10.3 billion while imports went down by 7.9% year on year to USD 22.2 billion. Hence the decline in exports has offset the benefit of a lower oil import bill to a large extent. Due to a relatively stagnant trade gap and improvement on services, the current account deficit for 1H FY’16 was reduced to USD 1.3 billion as compared to USD 2.5 billion during the same period last year. Remittances stood at USD 18.7 billion with 18% growth during FY’15 in comparison to FY’14. However the growth of 6.3% during 1H FY’16 against 1H FY’15 reflects some slow down within major remittance corridors.

In addition to better current account performance, the financial account has also supported the country’s reserves position with a net inflow of USD 3.0 billion taking the balance of payments into a surplus of USD 1.5 billion during 1H FY’16 (1H FY’15: USD 0.5 billion). The disbursements under the Extended Fund Facility (EFF) from the IMF continued to support the external account in 2015. The country’s total FX reserves closed the year 2015 at a historical landmark of USD 20.8 billion, a strong growth of 36% over the level of USD 15.3 billion a year ago. After strengthening during 2014, with a 4.6% appreciation, the PKR‐USD exchange rate came under some pressure during the year. Despite the strong balance of payment position, it closed 2015 at a level of Rs. 104.74, with a 4.2% depreciation on a year on year basis.

The fiscal position remains a key concern, as revenue generation remains challenging while expenditures continuing to escalate. In the first half of FY’16 the estimated fiscal deficit

UNITED BANK LIMITED


remained around 2% of GDP, which has mainly been achieved through higher non‐tax revenues. It is imminent that achieving the annual fiscal deficit target of 4.3% during FY’16 would be difficult unless there is an ongoing focus on broadening the tax base.

The average CPI inflation remained in single digits for the fourth consecutive year and at a lower level of around 3% for most part of 2015, as a result of significantly lower commodity prices including oil. Given the lower inflation trajectory along with an improving external account outlook, the State Bank of Pakistan maintained its monetary easing stance and cut its discount rate cumulatively by 300 bps during 2015 to 6.5%. Moreover, the SBP also introduced the new ‘target rate’ at 50 bps below the discount rate (ceiling rate), which currently stands at 6.0%. During the period, the central bank also reduced the width of the interest rate corridor by 50 bps to 200 bps, which has kept floor rate (repo rate) of the corridor at 4.5%. The PLS savings floor rate remains at 50 bps below the repo rate, thus maintaining the overall pressure on banking sector margins.

In addition to declining interest rates, further narrowing of the interest rate corridor has maintained the pressure on the earnings profile in 2015, resulting in banking sector spreads falling to multi‐year low levels this year. With these interest rate dynamics alongside relatively limited credit demand in the market, banks maintained the 2014 strategy of active participation in long dated paper (Pakistan Investment Bond) auctions during 2015.

After posting strong returns for the last three years, 2015 has witnessed a market correction with a drastically lower 2.1% appreciation in the KSE 100 index to 32,816 points as at Dec 31, 2015. The index was impacted by volatility across other regional and global markets resulting in foreign investment outflows. Foreign investors remained net sellers in the market with a net outflow of USD 315.2 million in FPI during 2015 in comparison to a net inflow of USD 382.5 million during 2014. On the other hand, the increase in average daily traded value by 20% to USD 111 million in 2015 reflects the depth within the market to absorb selling pressure and given the improving macros and investor sentiment a potential to rebound next year.

Banking sector deposits gained some momentum, albeit in the last quarter of the year. Despite the overall reduction in the discount rate, demand for private sector credit has remained largely subdued for most of the year. Overall credit to the private sector posted a YoY growth of 9.2% during 2015 mainly as a result of financing in Q4’15, which is slightly higher than the 8.5% growth witnessed in 2014. Large Scale Manufacturing (LSM) also picked up some pace during the latter half of 2015 with 4.4% growth during Jul‐Nov 2015 as compared to 3.1% in Jul‐Nov 2014. Non‐performing loans for the industry remained high at Rs. 630 billion at Sep’15 (Dec 14: Rs. 608.6 billion) while the gross infection ratio stood at 12.5% (Dec’14: 12.3%).

UNITED BANK LIMITED


International

Global growth fell short of expectations in 2015, decelerating to 2.4 % from 2.6 % in 2014. The performance mainly reflected a continued slow‐down in emerging and developing economies amid post‐crisis lows in commodity prices, weaker capital flows and subdued global trade. As per a World Bank report, global growth is projected to edge up in the coming years, but at a slower pace than envisioned in middle of 2015, reaching 2.9% in 2016 and 3.1% in 2017‐18.

Similar to global trends, the state of oil exporting economies, mainly the GCC markets, have also felt pressures which were mainly due to continuous decline in oil prices during 2015. However, countries like the UAE and Qatar, who have successfully diversified in non‐oil sectors and carry a large quantum of sovereign reserves, remain the least affected amongst the GCC nations.

During 2015, UBL International business continued to maintain its significant contribution to the franchise. While maintaining the focus on wholesale banking, the GCC branches recorded modest growth amidst challenging situations. Total assets were led by an increase in fixed income investments, Financial Institutions’ assets and increased corporate exposures.

Considering the changes within the current economic environment of the Gulf economies, UBL remains prudent, with enhanced its due diligence processes on fresh underwritings and more strengthened risk surveillance on the existing credit portfolio. The Bank remained compliant with the applicable regulatory provisioning requirements and continued to carry an adequate coverage ratio. International branches maintained their focus on deepening core deposit relationships in order to fund asset growth.

The Bank continued to play its role as the leader in the home remittances business. Along‐with providing swift remittance services to overseas Pakistanis, UBL launched a formal Non‐Resident Pakistani (NRP) initiative, by way of which oversees Pakistanis can now access banking services in Pakistan through the Bank’s international branches located in all GCC countries.

As per the Bank’s commitment to provide its customers with par excellence banking solutions, UBL International continued to strengthen its information technology infrastructure and service quality levels. In 2015, the USA branch was successfully equipped with one of the most modern anti‐money laundering systems together with migration to the new core banking system. UBL International plans to complete the implementation of this system across the bank in 2016, with all branches interconnected on a single platform.

The Bank has been effective in proactively managing the overall exposure in Yemen and continues to closely monitor the developing situation in the country.

UNITED BANK LIMITED


Subsidiaries & Associates

The Bank’s subsidiaries and associates continued to contribute significantly to the Bank’s consolidated results.

United National Bank Limited (UBL UK) is a 55% owned subsidiary of UBL. UBL UK has witnessed a growth in profits 126% over last year. The main contributors to this growth were capital gains, recoveries in non‐performing loans and gains on sale of non‐banking assets. The core income also continued its growth with a 5% rise in overall net interest income. UBL UK deposits grew by 16% with higher focus on retail deposits, while the deployment of funds remained mainly in investments, with advances remaining relatively flat.

UBL Switzerland AG (USAG) is a wholly owned subsidiary of UBL, the major source of business for USAG is trade and USAG’s profit after tax is higher by 13% over the last year. This growth is mainly driven by rise in trade related fees. Due to delinking of Swiss Franc from Euro during 2015, the NII remained under pressure due to higher swap cost, despite a healthy 7% growth in Gross interest received. The balance sheet continued to grow, mainly driven by higher deposits and borrowings.

UBL Fund Managers Limited, Pakistan (UBLFM) is 98.9% owned subsidiary of UBL and has witnessed a growth in profit of 23% over last year. The funds under management for UBLFM remained at Rs. 61.56 billion, showing a healthy growth of 15% over 2014. The growth in profits is fueled by a rise in fee income. During the year, UBLFM also launched one new fund.

UBL Bank (Tanzania) Limited (UBTL) was established in 2012 and become fully operational from 2013. Over this short period of time, UBTL has not only broken even but has shown a minor profit in 2015. UBTL’s balance sheet continues to grow as the bank is working to expand its operation and is in the process of opening a second branch in Tanzania.

Technology Investment within a growing and evolving technology platform remains one of the corner stones of the Bank’s strategy. Enhancing the customer experience across all banking channels through upgrades within front end systems as well as core banking infrastructure remains an ongoing initiative across the Bank. We continue to evolve our digital strategy in order to remain relevant to ever changing customer needs, in line with the Bank’s “innovation” agenda.

Taking the long term strategic relationship with our technology partners SilverLake (Formerly SunGard) to the next level we have entered into collaboration for sharing of technical specifications on the Bank’s core banking system. This would build internal capacity within the IT function and enhance response levels for modifications as per customer requirements. As part of ongoing enhancement in service level parameters within modules with core banking, the existing Enterprise Banking Suite (EBS) solution was further enhanced to facilitate branches

UNITED BANK LIMITED


in automating their centralized back office processes. We have also recently migrated our computing infrastructure to a fully‐virtualized environment which will, not only lead to operational efficiencies but also lead the way towards private cloud computing for our global operations.

Credit Ratings The credit rating company JCR‐VIS re‐affirmed the Bank’s long‐term entity rating at AA+ while the short term ratings remain at A‐1+ which is the highest rating denoting the greatest certainty of timely payments by a financial institution. All ratings for UBL have been assigned a Stable outlook.

Capital Intelligence (CI), an international credit rating agency, has re‐affirmed UBL’s long‐term and short‐term Foreign Currency ratings at B‐ and B respectively in line with CI’s sovereign ratings for Pakistan. In addition, the Bank’s Financial Strength rating has been re‐affirmed at BB+, with the Outlook reaffirmed at Stable based on the Bank’s strong performance.

Future Outlook The year 2015 was an eventful one for the country’s economy with appreciable improvement in most of the key macro indicators. The challenge now for the government is to make full use of this platform by undertaking structural reforms, together with continuous improvement in the law and order situation. After a sharp decline in oil prices during 2015, the beginning of 2016 has also been bearish for the commodity. Low oil prices will continue to support the country’s balance of payment outlook while also keeping inflation at comfortable levels.

2016 would be critical from the standpoint of China Pakistan Economic Corridor (CPEC), which has the potential to transform the future state of the country’s economy. An improved law and order situation through the ongoing counter‐terrorism operation and progress on the CPEC would largely improve investor confidence and help build a more long term view of Pakistan. These positive developments along with a low interest rate environment, also bodes well for private credit demand which is expected to drive industrial growth next year.

UBL is one of the largest banks in Pakistan that has market leading positions in all core businesses. Our long term strategy is to evolve our leading segments resulting in deeper market access and creating opportunities through new product development. Building strategic international alliances, we are well positioned to play our role in the execution of the CPEC. We shall continue to strengthen our relationships across the public and private sector along with a renewed focus to serve multinationals. Retail Banking remains the corner stone of our business model, where we seek to further enhance deposit market share. We would target widening the scope of our services within rural areas in order to better leverage our network. Gaining ground across the SME and Islamic segments remains a priority as our presence carries a large inherent potential. We shall continue to diversify by investing in markets where we understand our target customers better than others such as in the GCC. Our leadership within the digital space

UNITED BANK LIMITED


through the success of our branchless banking remains a strategic advantage which we aim to elevate to the next level.

We believe in further expanding the scope of banking services in Pakistan in the future. It is our objective to actively contribute to the development of an economy that is seeking its true potential.

Statement under Clause XVI of the Code of Corporate Governance

The Board of Directors is committed to ensuring that the requirements of corporate governance set by the Securities and Exchange Commission of Pakistan are fully met. The Bank has adopted good corporate governance practices and the Directors are pleased to report that:

The financial statements prepared by the management of the Bank present fairly the state of affairs of the Bank, the results of its operations, cash flows and changes in equity.

Proper books of account of the Bank have been maintained.

Appropriate accounting policies have been consistently applied in the preparation of the financial statements, except for the change in accounting policies as described in Note 5. Accounting estimates are based on reasonable and prudent judgment.

International Financial Reporting Standards, as applicable to banks in Pakistan, have been followed in the preparation of the financial statements without any departure therefrom.

The system of internal control in the Bank is sound in design, and is effectively

implemented and monitored. There are no significant doubts regarding the Bank’s ability to continue as a going

concern. There has been no material departure from the best practices of corporate governance.

Performance highlights for the last six years are attached to these unconsolidated

financial statements.

Details of directors’ training programs are given in the statement of compliance with the code of corporate governance.

UNITED BANK LIMITED


The Board has constituted the following three Committees with defined terms of reference:

Board Audit Committee (BAC):

1. Mr. Arshad Ahmad Mir Chairman 2. Mr. Amin Uddin Member 3. Mr. Haider Zameer Choudrey Member

Board Risk and Compliance Committee (BRCC):

1. Mr. Zameer Mohammed Choudrey Chairman 2. Mr. Khalid A. Sherwani Member 3. Mr. Wajahat Husain Member

Human Resource & Compensation Committee (HRCC):

1. Mr. Zaheer Sajjad Chairman 2. Mr. Rizwan Pervez Member 3. Mr. Wajahat Husain Member

The number of Board Committee meetings held during the year and the number of meetings attended by the directors is shown below:

BAC BRCC HRCCNumber of meetings held 4 4 4Number of meetings attended: Mr. Zameer Mohammed Choudrey ‐ 4 ‐Mr. Haider Zameer Choudrey 4 ‐ ‐Mr. Rizwan Pervez ‐ ‐ 4Mr. Amin Uddin 4 ‐ ‐Mr. Arshad Ahmad Mir 4 ‐ ‐Mr. Zaheer Sajjad ‐ ‐ 4Mr. Khalid A. Sherwani ‐ 4 ‐Mr. Wajahat Husain ‐ 4 4

During the year 2015, the Board of Directors dissolved the Special Committee of the Board.

The Bank operates five funded retirement Schemes which are the Provident Fund, Gratuity Fund, Pension Fund, Benevolent Fund, and General Provident Fund.

UNITED BANK LIMITED


The values of the investments of these funds based on their latest audited financial statements as at December 31, 2014 are as follows:

Rupees in ‘000

Employees’ Provident Fund 3,281,274

Employees’ Gratuity Fund 630,912

Staff Pension Fund 2,963,813

Staff General Provident Fund 1,186,873

Officers / Non‐Officers’ Benevolent Fund 876,127

Meetings of the Board

During the year under review, the Board of Directors met seven times. The number of meetings attended by each Director during the year is shown below:

Name of the Director Designation Meetings attended

Sir Mohammed Anwar Pervez, OBE, HPk Chairman 7

Mr. Zameer Mohammed Choudrey Director 7

Mr. Amin Uddin Director 7

Mr. Arshad Ahmad Mir Director 7

Mr. Zaheer Sajjad Director 7

Mr. Haider Zameer Choudrey Director 7

Mr. Rizwan Pervez Director 7

Mr. Khalid A. Sherwani Director 7

Mr. Wajahat Husain President & CEO 7

Pattern of Shareholding

The pattern of shareholding as at December 31, 2015, as required u/s 236 of the Companies

UNITED BANK LIMITED


Ordinance, 1984 and Clause (xvi) of the Code of Corporate Governance is given below:

Shareholders No. of Shares % of Ordinary Shares Bestway Group (BG) 752,406,007 61.46Privatization Commission of Pakistan 1,714 0.00General Public & Others 391,410,020 31.97NIT 758,599 0.06Banks, DFIs & NBFIs 33,616,240 2.75Insurance Companies 18,613,586 1.52Modarabas & Mutual Funds 22,352,467 1.83 International GDRs (non‐voting shares) 5,021,054 0.41TOTAL OUTSTANDING SHARES 1,224,179,687 100.00

The aggregate shares held by the following are:

No. of shares a) Associated Companies, undertakings & related parties ‐ Bestway (Holdings) Limited * 631,728,895 ‐ Bestway Cement Limited 93,649,744

b) NIT ‐ CDC‐Trustee National Investment (Unit) Trust 758,599

c) Modarabas & Mutual Funds ** 22,352,467

d) Public sector companies and corporations 4,106,907e) Banks, DFIs, NBFIs, Insurance Companies 52,229,826f) Directors & CEO *** ‐Sir Mohammed Anwar Pervez, OBE, HPk 12,765,368 ‐Zameer Mohammed Choudrey 2,348,870‐ Haider Zameer Choudrey 2,000,000‐ Rizwan Pervez 44,500 ‐Amin Uddin 2,750 ‐Arshad Ahmad Mir 2,500

‐ Zaheer Sajjad 2,537 ‐ Khalid A. Sherwani 2,500 ‐ Wajahat Husain, President & CEO 367,608

g) ‐ Executives 2,407,557

* The Bank is a subsidiary of Bestway (Holdings) Limited which is incorporated in the United Kingdom

** Name wise detail of Modarabas & Mutual Funds is annexed with Categories of Shareholders.

*** There were no shares held by the spouses or minor children of the Directors and CEO of the Bank.

UNITED BANK LIMITED


Shareholders holding 5% or more voting rights No. of shares % Bestway (Holdings) Limited 631,728,895 51.60 Bestway Cement Limited 93,649,744 7.65

Trades in the shares of UBL carried out by Directors, Executives and their spouses and minor children, as defined in Clause xvi (l) of the Code of Corporate Governance are annexed along with the Pattern of Shareholding.

Risk Management Framework

Risk & Credit Policy Group has the following divisions, headed by senior executives, reporting to the Group Head – Risk and Credit Policy

Credit Policy & Research Credit Risk Management Market, Treasury and FI Risk Management Operational Risk & Basel II International Risk Consumer Credit Policy & Analytics

A Risk Management Committee comprising of heads of all areas of Risk, Business and Credit Administration is responsible for reviewing and undertaking strategic business decisions with a collective view on Credit Risk, Market Risk, Operational Risk and Capital.

The revival of economic growth that started last year has picked up pace during 2015 with visible improvements on several fronts including the external account and contained inflationary pressures. The government to government agreement on the China Pakistan Economic Corridor (CPEC) was also signed during the year and is expected to serve as the largest stimulant for domestic and foreign investment in the future.

During the year, the portfolio was mapped with revisions in the prudential regulations and aligned with the revised SBP guidelines applicable in 2015. While risk mitigation remained a primary focus, a separate Collateral Management Policy was developed in the current year under the guidelines issued by SBP to safeguard the interests of the bank in case of potential defaults. Domestic and International Credit Policy was also reviewed during the year and amended where necessary to enhance risk mitigation. New policy parameters such as ‘maximum borrowing’ guidelines were also introduced. On the consumer finance portfolio, policies and scoring models were reviewed in view of changing market dynamics to maintain quality in asset acquisitions. The Bank engaged in continuous monitoring and proactive management of the existing portfolio to arrest further downgrades and to flag potential problem accounts based on early warning signals throughout the year.

The Bank has maintained its CAR well above prescribed regulatory thresholds throughout the year based on applicable requirements under Basel‐III. The Internal Capital Adequacy

UNITED BANK LIMITED


Assessment Process (ICAAP) Framework has been revised based on the Bank’s 5 year strategic plan.

The market risk function continues to actively monitor portfolio performance in light of the changing dynamics of both domestic and international markets. The function uses sophisticated tools such as sensitivity &/or scenario analyses of portfolio positions in order to assess potential risks resulting from shifts in interest rates.

There were continued efforts to enhance the scope and implement a robust ‘Operational Risk Management Framework’ in order to have a culture of risk awareness with proactive management. Consistent improvements in the operational risk profile and overall control environment remains a key focus across all functions.

Statement of Internal Controls The Board is pleased to endorse the statement made by management relating to Internal Controls over Financial Reporting (ICFR) and also the overall internal controls. The Statement on Internal Controls is included in the Annual Report.

Auditors The present auditors M/S. KPMG Taseer Hadi & Co., Chartered Accountants and M/s. A. F. Ferguson & Co., Chartered Accountants, retire and being eligible, offer themselves for re‐appointment in the forthcoming Annual General Meeting. The Board of Directors, on the recommendation of the Board Audit Committee, recommends M/S. KPMG Taseer Hadi & Co., Chartered Accountants and M/s. A. F. Ferguson & Co., Chartered Accountants, for re‐appointment as auditors of the Bank.

Conclusion In conclusion, I extend my thanks and appreciation to UBL shareholders and customers as well as to my fellow members of the Board of Directors for their continued trust and support. We value the persistent efforts and dedication of our staff. We would also like to express our sincere appreciation to the Government of Pakistan, the State Bank of Pakistan, the Securities & Exchange Commission and other regulatory bodies for their direction and continued support.

For and on behalf of the Board,

Sir Mohammed Anwar Pervez, OBE, HPk

Chairman

Dubai

February 17, 2016

United Bank LimitedUNCONSOLIDATED FINANCIAL STATEMENTS

AS AT DECEMBER 31, 2015

UNCONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2015

Note 2015 2014

ASSETSCash and balances with treasury banks 6 112,011,276 74,687,959 Balances with other banks 7 16,859,118 12,885,121 Lendings to financial institutions 8 29,485,888 21,872,138 Investments 9 714,126,973 497,334,002

AdvancesPerforming 10 445,412,019 424,125,475 Non-performing - net of provision 10 9,218,971 10,138,575

454,630,990 434,264,050

Operating fixed assets 11 32,325,754 30,303,370 Deferred tax asset - net - - Other assets 12 41,210,844 40,067,467

1,400,650,843 1,111,414,107

LIABILITIESBills payable 14 13,391,739 9,553,585 Borrowings 15 163,131,947 53,065,156 Deposits and other accounts 16 1,051,235,170 895,083,053 Subordinated loans - - Liabilities against assets subject to finance lease - - Deferred tax liability - net 17 4,186,406 1,899,345 Other liabilities 18 26,570,106 26,296,516

1,258,515,368 985,897,655

NET ASSETS 142,135,475 125,516,452

REPRESENTED BY:Share capital 19 12,241,798 12,241,798 Reserves 38,402,303 34,130,131 Unappropriated profit 55,222,960 48,217,351

105,867,061 94,589,280

Surplus on revaluation of assets - net of deferred tax 20 36,268,414 30,927,172 142,135,475 125,516,452

CONTINGENCIES AND COMMITMENTS 21

The annexed notes from 1 to 48 and annexures form an integral part of these unconsolidated financial statements.

Wajahat Husain Amin Uddin Zameer Mohammed Choudrey Sir Mohammed Anwar Pervez, OBE, HPkPresident & Director Director ChairmanChief Executive Officer

-------------- (Rupees in '000) --------------

UNCONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED DECEMBER 31, 2015

Note 2015 2014

Mark-up / return / interest earned 23 94,352,931 82,735,467 Mark-up / return / interest expensed 24 38,511,161 37,768,546 Net mark-up / return / interest income 55,841,770 44,966,921

Provision against loans and advances - net 10.3 3,059,895 215,114 Provision against lendings to financial institutions - net 8.7 - 165,744 Provision for diminution in value of investments - net 9.3 411,056 326,966 Bad debts written off directly 10.4 161,229 174,150

3,632,180 881,974 Net mark-up / return / interest income after provisions 52,209,590 44,084,947

Non mark-up / return / interest incomeFee, commission and brokerage income 12,203,210 11,401,658 Dividend income 3,204,850 2,000,649 Income from dealing in foreign currencies 2,270,980 3,016,668 Gain on sale of securities - net 25 3,228,321 1,847,031 Unrealized gain / (loss) on revaluation of investments classified as held for trading 9.4 9,202 (41,248) Other income 26 1,070,444 1,071,289 Total non mark-up / return / interest income 21,987,007 19,296,047

74,196,597 63,380,994

Non mark-up / return / interest expensesAdministrative expenses 27 30,896,159 29,030,374 Other provisions - net 28 78,143 274,172 Workers' Welfare Fund 29 845,507 667,931 Other charges 30 202,103 10,427 Total non mark-up / return / interest expenses 32,021,912 29,982,904 Profit before taxation 42,174,685 33,398,090

Taxation - Current 31 15,042,952 10,743,796 Taxation - Prior 31 1,800,541 356,425 Taxation - Deferred 31 (395,957) 368,308

16,447,536 11,468,529 Profit after taxation 25,727,149 21,929,561

Earnings per share - basic and diluted 32 21.02 17.91



----------- (Rupees) -----------

------- (Rupees in '000) -------

UNCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2015

2015 2014

Profit after taxation 25,727,149 21,929,561

Other comprehensive income:

Items that are not to be reclassified to profit or loss in subsequent periods

Remeasurement loss of defined benefit obligations (438,264) (219,536) Related deferred tax reversal 153,392 76,838

(284,872) (142,698) Items that may be reclassified to profit or loss in subsequent periods

Exchange differences on translation of net investment in foreign branches 1,699,457 (1,747,260)

Amortization of cash flow hedges - 4,963 Related deferred tax charge on cash flow hedges - (1,738)

- 3,225

Other comprehensive income transferred to equity 27,141,734 20,042,828

Items that may be reclassified to profit or loss in subsequent periods

Surplus arising on revaluation of available for sale securities 8,294,461 13,954,243 Related deferred tax charge (2,903,061) (4,883,986)

5,391,400 9,070,257

Total comprehensive income during the year - net of tax 32,533,134 29,113,085



------- (Rupees in '000) -------

UNCONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2015

Note 2015 2014

CASH FLOW FROM OPERATING ACTIVITIESProfit before taxation 42,174,685 33,398,090 Less: Dividend income 3,204,850 2,000,649

38,969,835 31,397,441 Adjustments: Depreciation 1,747,298 1,626,055 Amortization 386,494 420,724 Workers' Welfare Fund 845,507 667,931 Provision for retirement benefits 572,740 543,617 Provision for compensated absences 268,505 428,567 Provision against loans and advances - net 3,059,895 215,114 Provision against lendings to financial institutions - net - 165,744 Provision for diminution in value of investments - net 411,056 326,966 Reversal of provision in respect of investments disposed off during the year (41,569) (41,918) Provision against off balance sheet items 6,279 35,708 Gain on sale of operating fixed assets - net (19,886) (44,032) Bad debts written-off directly 161,229 174,150 Amortization of cash flow hedges - 4,963 Unrealized (gain) / loss on revaluation of investments classified as held for trading (9,202) 41,248 Provision against other assets - net (9,249) 85,364

7,379,097 4,650,201 46,348,932 36,047,642

(Increase) / decrease in operating assets Lendings to financial institutions (7,613,750) 6,797,233 Held for trading securities (3,718,477) (481,359) Advances (23,588,064) (44,186,852) Other assets (excluding advance taxation) (1,909,088) (11,731,997)

(36,829,379) (49,602,975) Increase / (decrease) in operating liabilities Bills payable 3,838,154 (7,037,299) Borrowings 110,066,791 12,491,282 Deposits and other accounts 156,152,117 67,235,315 Other liabilities (excluding current taxation) (845,297) 2,986,518

269,211,765 75,675,816 278,731,318 62,120,483

Payments on account of staff retirement benefits (1,218,518) (1,011,411) Income taxes paid (15,942,496) (11,974,640) Net cash inflow from operating activities 261,570,304 49,134,432

CASH FLOW FROM INVESTING ACTIVITIESNet investment in securities (205,140,318) (59,447,446) Dividend income received 3,199,400 2,037,092 Investment in operating fixed assets (4,210,821) (2,923,018) Sale proceeds from disposal of operating fixed assets 121,449 397,072 Net cash outflow from investing activities (206,030,290) (59,936,300)

NET CASH OUTFLOW FROM FINANCING ACTIVITIESRepayments of subordinated loans - (665,328) Dividends paid (15,942,157) (13,600,686) Net cash outflow from financing activities (15,942,157) (14,266,014) Exchange differences on translation of net investment in foreign branches 1,699,457 (1,747,260)

Increase / (decrease) in cash and cash equivalents 41,297,314 (26,815,142)

Cash and cash equivalents at the beginning of the year 87,573,080 114,388,222 Cash and cash equivalents at the end of the year 33 128,870,394 87,573,080



------- (Rupees in '000) -------

UNCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2015

Exchange translation

reserve

Cash flow hedge

reserve

Balance as at December 31, 2013 12,241,798 19,658,933 14,025,502 (3,225) 42,634,545 88,557,553

Transactions with owners for the year ended December 31, 2014

Final cash dividend - December 31, 2013 declaredsubsequent to the year end at Rs.4.0 per share - - - - (4,896,719) (4,896,719)

Interim cash dividend - March 31, 2014 declaredat Rs.2.5 per share - - - - (3,060,450) (3,060,450)

Interim cash dividend - June 30, 2014 declaredat Rs.2.5 per share - - - - (3,060,450) (3,060,450)

Interim cash dividend - September 30, 2014 declaredat Rs.2.5 per share - - - - (3,060,450) (3,060,450)

- - - - (14,078,069) (14,078,069)

Total comprehensive income for the year ended December 31, 2014

Profit after taxation for the year ended December 31, 2014 - - - - 21,929,561 21,929,561

Other comprehensive income - net of tax - - (1,747,260) 3,225 (142,698) (1,886,733) Total comprehensive income for the year ended December 31, 2014 - - (1,747,260) 3,225 21,786,863 20,042,828

Transfer from surplus on revaluation of fixed assets to unappropriated profit - net of tax - - - - 66,968 66,968

Transfer to statutory reserve - 2,192,956 - - (2,192,956) -

Balance as at December 31, 2014 12,241,798 21,851,889 12,278,242 - 48,217,351 94,589,280

Transactions with owners for the year ended December 31, 2015

Final cash dividend - December 31, 2014 declaredsubsequent to the year end at Rs.4.0 per share - - - - (4,896,719) (4,896,719)

Interim cash dividend - March 31, 2015 declaredat Rs.3.0 per share - - - - (3,672,539) (3,672,539)

Interim cash dividend - June 30, 2015 declaredat Rs.3.0 per share - - - - (3,672,539) (3,672,539)

Interim cash dividend - September 30, 2015 declaredat Rs.3.0 per share - - - - (3,672,539) (3,672,539)

- - - - (15,914,336) (15,914,336)

Total comprehensive income for the year ended December 31, 2015

Profit after taxation for the year ended December 31, 2015 - - - - 25,727,149 25,727,149 Other comprehensive income - net of tax - - 1,699,457 - (284,872) 1,414,585 Total comprehensive income for the year ended December 31, 2015 - - 1,699,457 - 25,442,277 27,141,734

Transfer from surplus on revaluation of fixed assets to unappropriated profit - net of tax - - - - 50,383 50,383

Transfer to statutory reserve - 2,572,715 - - (2,572,715) -

Balance as at December 31, 2015 12,241,798 24,424,604 13,977,699 - 55,222,960 105,867,061

Appropriations recommended by the Board of Directors subsequent to the year ended December 31, 2015 are disclosed in note 46 tothese unconsolidated financial statements.



-------------------------------------------------- (Rupees in '000) -----------------------------------------------

Share capital

Unapprop-riated profit Total

Statutory reserve

Capital reserves

NOTES TO AND FORMING PART OF THE UNCONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2015

1. STATUS AND NATURE OF BUSINESS

2. BASIS OF PRESENTATION

2.1

2.2

3. STATEMENT OF COMPLIANCE

3.1

3.2

3.3

3.4

Standard, Interpretation or Amendment

IFRS 10 - Consolidated Financial Statements - (Amendment)IFRS 11 - Joint Arrangements - (Amendment)

United Bank Limited (the Bank) is a banking company incorporated in Pakistan and is engaged in commercial banking andrelated services. The Bank's registered office and principal office are situated at UBL Building, Jinnah Avenue, Blue Area,Islamabad and at State Life Building No. 1, I. I. Chundrigar Road, Karachi respectively. The Bank operates 1,312(2014: 1,295) branches inside Pakistan including 41 (2014: 24) Islamic Banking branches and 1 (2014: 1) branch inKarachi Export Processing Zone. The Bank also operates 18 (2014: 18) branches outside Pakistan as at December 31,2015. The Bank is a subsidiary of Bestway (Holdings) Limited which is incorporated in the United Kingdom.

In accordance with the directives of the Federal Government regarding the shifting of the banking system to Islamic modes,the State Bank of Pakistan (SBP) has issued various circulars from time to time. Permissible forms of trade-related modesof financing include purchase of goods by banks from their customers and immediate resale to them at appropriate mark-up in price on deferred payment basis. The purchases and sales arising under these arrangements are not reflected inthese unconsolidated financial statements as such, but are restricted to the amount of facility actually utilized and theappropriate portion of mark-up thereon. The Islamic Banking branches of the Bank have complied with the requirements set out under the Islamic Financial Accounting Standards issued by the Institute of Chartered Accountants of Pakistan (ICAP)and notified under the provisions of the Companies Ordinance, 1984.

The SBP, vide BSD Circular letter No. 10, dated August 26, 2002 has deferred the applicability of International AccountingStandard 39, Financial Instruments: Recognition and Measurement and International Accounting Standard 40, InvestmentProperty for banking companies till further instructions. Further, according to the notification of the SECP issued vide SRO411(I)/2008 dated April 28, 2008, IFRS 7, Financial Instruments: Disclosures has not been made applicable for banks.Accordingly, the requirements of these standards have not been considered in the preparation of these unconsolidatedfinancial statements. However, investments have been classified and valued in accordance with the requirements ofvarious circulars issued by the SBP.

These unconsolidated financial statements have been prepared in accordance with approved accounting standards asapplicable in Pakistan, the requirements of the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 andthe directives issued by the Securities and Exchange Commission of Pakistan (SECP) and the SBP. Approved accountingstandards comprise of International Financial Reporting Standards (IFRS) and interpretations issued by the InternationalAccounting Standards Board and Islamic Financial Accounting Standards (IFAS) issued by the ICAP. Wherever therequirements of the Companies Ordinance, 1984, the Banking Companies Ordinance, 1962 or the directives issued by theSECP and the SBP differ with the requirements of IFRS or IFAS, the requirements of the Companies Ordinance, 1984, theBanking Companies Ordinance, 1962 or the said directives prevail.

The Bank's ordinary shares are listed on Pakistan Stock Exchange. Its Global Depository Receipts (GDRs) are on the list ofthe UK Listing Authority and the London Stock Exchange Professional Securities Market. These GDRs are also eligible fortrading on the International Order Book System of the London Stock Exchange. Further, the GDRs constitute an offering inthe United States only to qualified institutional buyers in reliance on Rule 144A under the US Securities Act of 1933 and anoffering outside the United States in reliance on Regulation S.

The following revised standards, amendments and interpretations with respect to the approved accounting standards wouldbe effective from the dates mentioned below against the respective standard or interpretation:

Key financial figures of the Islamic Banking branches are disclosed in note 44 to these unconsolidated financial statements.

These unconsolidated financial statements represent the separate financial statements of the Bank. The consolidatedfinancial statements of the Bank and its subsidiaries are presented separately.

Standards, interpretations and amendments to approved accounting standards that are not yet effective

January 01, 2016

Effective date (annual periodsbeginning on or after)

January 01, 2016

1


Standard, Interpretation or Amendment

IAS 16 - Property, Plant and Equipment - (Amendment)IAS 27 - Separate Financial Statement - (Amendment)IAS 28 - Investments in associates and joint ventures - (Amendment)IAS 38 - Intangible Assets - (Amendment)

Standard or Interpretation

IFRS 9 - Financial Instruments: Classification and Measurement

4. BASIS OF MEASUREMENT

4.1 Accounting convention

4.2 Critical accounting estimates and judgments

i) classification of investments (notes 5.3 and 9)ii)

iii) income taxes (notes 5.7 and 31)iv) staff retirement benefits (notes 5.9 and 35)v) fair value of derivatives (notes 5.14.2 and 18.3)vi) operating fixed assets, revaluation, depreciation and amortization (notes 5.5 and 11)vii) impairment (note 5.6)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IFRS 10 - 'Consolidated Financial Statements'

It replaces the current guidance on consolidation in IAS 27 Consolidated and Separate Financial Statements. Itintroduces a single model of assessing control whereby an investor controls an investee when the investor has thepower to control, exposure to variable returns and the ability to use its power to influence the returns of the investee.

The Bank expects that the adoption of above amendments and interpretations will not affect its financial statements in theperiod of initial application.

IASB Effective date (annual periods beginning on or after)

Effective date (annual periodsbeginning on or after)

January 01, 2016

January 01, 2016

The following new standards have been issued by the IASB, but have not yet been notified by the SECP for application inPakistan.

January 01, 2016January 01, 2016

January 01, 2018

provision against investments (notes 5.3 and 9.3), lendings to financial institutions (note 8.7) and advances (notes 5.4and 10.3)

The preparation of these unconsolidated financial statements in conformity with approved accounting standards requiresmanagement to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities andincome and expenses. It also requires management to exercise judgment in the application of its accounting policies. Theestimates and assumptions are based on historical experience and various other factors that are believed to be reasonableunder the circumstances. These estimates and assumptions are reviewed on an ongoing basis. Revisions to accountingestimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in theperiod of revision and future periods if the revision affects both current and future periods.

These unconsolidated financial statements have been prepared under the historical cost convention except that certainoperating fixed assets have been stated at revalued amounts and certain investments and derivative financial instrumentshave been stated at fair value.

Significant accounting estimates and areas where judgments were made by management in the application of accountingpolicies are as follows:

The accounting policies adopted in the preparation of these unconsolidated financial statements are consistent with thoseof the previous financial year, except for the following standards, which became effective during the year.

2


In light of the above, the application of IFRS 10 did not result in any additional investee being in control of the Bank.

IFRS 13 - 'Fair Value Measurement'

5.1 Cash and cash equivalents

5.2 Lendings to / borrowings from financial institutions

5.2.1 Purchase under resale agreements

5.2.2 Sale under repurchase agreements

5.2.3 Bai Muajjal

5.3 Investments

Held for trading

Held to maturity

The securities sold under Bai Muajjal agreement are derecognised on the date of disposal. Receivable against such sale isrecognised at the agreed sale price. The difference between the sale price and the carrying value on the date of disposal istaken to income on straightline basis.

SECP vide its notification SRO 633 (I)/2014 dated 10 July 2014, adopted IFRS 10 effective from the periods startingfrom 30 June 2014. However, vide its notification SRO 56 (I)/2016 dated 28 January 2016, it has been notified that therequirements of IFRS 10 and section 237 of the Companies Ordinance 1984 will not be applicable with respect to theinvestment in mutual funds established under Trust structure.

It consolidates the guidance on how to measure fair value into one comprehensive standard. It introduces the use ofan exact price, as well as extensive disclosure requirements, particularly the inclusion of non-financial instrumentsinto the fair value hierarchy. The application of IFRS 13 does not have an impact on the unconsolidated financialstatements of the Bank except for certain disclosures as mentioned in note 38.

Securities purchased under agreement to resell (reverse repo) are included in lendings to financial institutions. Thedifferential between the purchase price and the resale price is amortized over the period of the agreement and recorded asincome.

Securities held as collateral are not recognized in the unconsolidated financial statements, unless these are sold to thirdparties, in which case the obligation to return them is recorded at fair value as a trading liability under borrowings fromfinancial institutions.

Securities sold subject to a repurchase agreement (repo) are retained in the unconsolidated financial statements asinvestments and the counterparty liability is included in borrowings from financial institutions. The differential between thesale price and the repurchase price is amortized over the period of the agreement and recorded as an expense.

These are securities which are either acquired for generating a profit from short-term fluctuations in market prices, interestrate movements and dealer's margin, or are securities included in a portfolio in which a pattern of short term profit takingexists.

These are securities with fixed or determinable payments and fixed maturities, in respect of which the Bank has the positiveintent and ability to hold to maturity.

The Bank enters into transactions of reverse repos and repos at contracted rates for a specified period of time. These arerecorded as under:

Cash and cash equivalents for the purpose of the cash flow statement consist of cash and balances with treasury banksand balances with other banks.

Investments of the Bank, other than investments in subsidiaries and associates, are classified as held for trading, held tomaturity and available for sale.

3


Available for sale

Initial measurement

Subsequent measurement

Held for trading

Held to maturity

Available for sale

Investments in Subsidiaries and Associates

Gains and losses on disposal of investments in subsidiaries and associates are included in the profit and loss account.

5.4 Advances

These are investments, other than those in subsidiaries and associates, that do not fall under the held for trading or held tomaturity categories.

These are measured at subsequent reporting dates at fair value. Gains and losses on re-measurement are included in theprofit and loss account.

Provisions for diminution in the value of term finance certificates and Sukuks are made as per the ageing criteria prescribedby the Prudential Regulations issued by the SBP. Provisions for diminution in the value of other securities are made forimpairment, if any.

Advances are stated net of specific and general provisions which are charged to the profit and loss account. Specificprovisions against domestic advances and general provision against domestic loans to small enterprises and consumerloans are determined on the basis of the Prudential Regulations and other directives issued by the SBP. General andspecific provisions pertaining to overseas advances are made in accordance with the requirements of the regulatoryauthorities of the respective countries. If circumstances warrant, the Bank, from time to time, makes general provisionsagainst weaknesses in its portfolio on the basis of management's estimation.

Investments are initially recognized at fair value which, in the case of investments other than held for trading, includestransaction costs associated with the investments. Transaction costs on investments held for trading are expensed asincurred.

Investments in subsidiaries and associates are valued at cost less impairment, if any. A reversal of an impairment loss onsubsidiaries and associates is recognized in the profit and loss account as it arises provided the increased carrying valuedoes not exceed cost.

Unquoted equity securities are valued at the lower of cost and break-up value. The break-up value of these securities iscalculated with reference to the net assets of the investee company as per the latest available audited financial statements.A decline in the carrying value is charged to the profit and loss account. A subsequent increase in the carrying value, uptothe cost of the investment, is credited to the profit and loss account. Investments in other unquoted securities are valued atcost less impairment, if any.

All “regular way” purchases and sales of investments are recognized on the trade date, i.e., the date that the Bank commitsto purchase or sell the investment. Regular way purchases or sales are purchases or sales of investments that requiredelivery of investments within the time frame generally established by regulation or convention in the market place.

Quoted securities classified as available for sale investments are measured at subsequent reporting dates at fair value.Any surplus or deficit arising thereon is kept in a separate account shown in the statement of financial position below equityand is taken to the profit and loss account when realized upon disposal or when the investment is considered to beimpaired.

These are measured at amortized cost using the effective interest rate method, less any impairment loss recognized toreflect irrecoverable amounts.

4


5.5 Operating fixed assets and depreciation

5.5.1 Owned

5.5.2 Leased (Ijarah)

Ijarah income is recognized on an accrual basis.

5.5.3 Intangible assets

Land and buildings are revalued by professionally qualified valuers with sufficient regularity to ensure that their net carryingvalue does not differ materially from their fair value. A surplus arising on revaluation is credited to the surplus onrevaluation of fixed assets account. Any deficit arising on subsequent revaluation of fixed assets is adjusted against thebalance in the above mentioned surplus account as allowed under the provisions of the Companies Ordinance, 1984. Thesurplus on revaluation of fixed assets, to the extent of incremental depreciation, is transferred to unappropriated profit.

Gains and losses on sale of fixed assets are included in the profit and loss account, except that the related surplus onrevaluation of fixed assets (net of deferred tax) is transferred directly to unappropriated profit.

Major renewals and improvements are capitalized and the assets so replaced, if any, are retired. Normal repairs andmaintenance are charged to the profit and loss account as and when incurred.

Intangible assets are stated at cost less accumulated amortization and accumulated impairment losses, if any. The costand the accumulated amortization of intangible assets of foreign branches include exchange differences arising oncurrency translation at the year-end rates of exchange. Amortization is calculated so as to write off the amortizable amountof the assets over their expected useful lives at the rates specified in note 11.3 to these unconsolidated financialstatements. The amortization charge for the year is calculated on a straight line basis after taking into account the residualvalue, if any. The residual values and useful lives are reviewed and adjusted, if appropriate, at each statement of financialposition date. Amortization on additions is charged from the month the asset is available for use. No amortization ischarged in the month of disposal.

Depreciation on additions is charged from the month the asset is available for use. No depreciation is charged in the monthof disposal.

Assets leased out under Ijarah are stated at cost less accumulated depreciation and accumulated impairment losses, ifany. Assets under Ijarah are depreciated over the term of the lease.

Gains and losses on sale of intangible assets are included in the profit and loss account.

The Bank determines write-offs in accordance with the criteria prescribed by the SBP vide BPRD Circular No. 06 datedJune 05, 2007.

Depreciation is calculated so as to write off the depreciable amount of the assets over their expected useful lives at therates specified in note 11.2 to these unconsolidated financial statements. The depreciation charge for the year is calculatedon a straight line basis after taking into account the residual value, if any. The residual values and useful lives are reviewedand adjusted, if appropriate, at each statement of financial position date.

Property and equipment, other than land (which is not depreciated) and capital work-in-progress, are stated at cost orrevalued amount less accumulated depreciation and accumulated impairment losses (if any). Land is carried at revaluedamount less impairment losses while capital work-in-progress is stated at cost less impairment losses. The cost and theaccumulated depreciation of property and equipment of foreign branches include exchange differences arising on currencytranslation at the year-end rates of exchange.

Advances are written off when there is no realistic prospect of recovery. The amount so written off is a book entry and doesnot necessarily prejudice the Bank's right of recovery against the customer.

5


5.6 Impairment

Impairment of available for sale equity investments

Impairment of investments in subsidiaries and associates

Impairment in non-financial assets (excluding deferred tax)

5.7 Taxation

5.7.1 Current

5.7.2 Prior years

5.7.3 Deferred

5.8 Provisions

The carrying amounts of non-financial assets are reviewed at each reporting date for impairment whenever events orchanges in circumstances indicate that the carrying amounts of these assets may not be recoverable. If such indicationexists, and where the carrying value exceeds the estimated recoverable amount, assets are written down to theirrecoverable amount. The resulting impairment loss is charged to the profit and loss account except for an impairment losson revalued assets, which is adjusted against the related revaluation surplus to the extent that the impairment loss does notexceed the revaluation surplus.

Provisions are recognized when the Bank has a legal or constructive obligation as a result of past events which makes itprobable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can bemade.

Provision for current taxation is based on taxable income for the year determined in accordance with the prevailing lawsand at the prevailing rates for taxation on income earned from local as well as foreign operations.

The taxation charge for prior years represents adjustments to the tax charge relating to prior years, arising fromassessments and changes in estimates made during the current year.

Deferred tax assets are recognized only to the extent that it is probable that future taxable profits will be available againstwhich the assets can be utilized.

The Bank considers that a decline in the recoverable value of the investment in a subsidiary or an associate below its costmay be evidence of impairment. Recoverable value is calculated as the higher of fair value less costs to sell and value inuse. An impairment loss is recognized when the recoverable value falls below the carrying value and is charged to the profitand loss account. A subsequent reversal of an impairment loss, upto the cost of the investment in the subsidiary or theassociate, is credited to the profit and loss account.

Available for sale equity investments are impaired when there has been a significant or prolonged decline in their fair valuebelow their cost. The determination of what is significant or prolonged requires judgment. In making this judgment, theBank evaluates, among other factors, the normal volatility in share price.

Deferred tax is recognized using the liability method on all major temporary differences between the amounts attributed toassets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculatedat the rates that are expected to apply to the period when the differences are expected to reverse, based on tax rates thathave been enacted or substantively enacted at the statement of financial position date.

The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to theextent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax assetto be utilized.

The Bank also recognizes a deferred tax asset / liability on the cash flow hedge reserve and on the deficit / surplus on

Documents

Statement of Compliance with the Code of Corporate ... · Sir Mohammed Anwer Pervez, OBE, HPk Mr. Zameer Mohammed Choudrey Mr. Rizwan Pervez Mr. Haider Zameer Choudrey The independent