The consistent increase in AUB’s prof it underlines · The consistent increase in AUB’s prof it underlines ... 51 Contact details ... ** 2014 under BASEL III as mandated by the

The consistent increase in AUB’s prof it underlines the success and viability of the Bank’s core regional business model, based on diversified and selective growth in operating income, proactive risk management and continuous focus on developing cross border opportunities.

Ahli United Bank

04 Group mission statement05 AUB operating divisions06 Financial highlights14 Board of Directors' report18 Board of Directors 20 Chairman's statement22 Group Chief Executive Officer & Managing Director’s statement26 Corporate governance42 Group business and risk review48 Group organisation49 Group management51 Contact details53 Consolidated financial statements107 Pillar III disclosures - Basel II

Contents

Ahli United Bank

GROUP MISSION STATEMENT

To create an unrivalled ability to meet customer needs, provide fulf illment and development for our staff and deliver outstanding shareholder value.

Objectives

• to maximize shareholder value on a sustainable basis.

• to maintain the highest international standards of corporate governance and regulatory compliance.

• to maintain solid capital adequacy and liquidity ratios.

• to entrench a disciplined risk and cost management culture.

• to develop a cross-cultural meritocratic management structure.

• to optimise staff development through business driven training and profit related incentive.

• to contribute to the social and economic advancement of the communities in which the Group operates.

AUB Vision & Strategy

• Develop an integrated pan regional financial services group model centered on commercial & retail banking, private banking, asset management and life insurance with an enhanced Shari’a compliant business contribution.

• Acquire banks and related regulated financial institutions in the Gulf countries (core markets) with minimum targeted 10% market share to be achieved through mergers, acquisitions and organic growth.

• Acquire complementary banking platforms in secondary markets enjoying strong cross border business flows with Gulf countries or with economic structures similar to the Gulf countries.

4

Ahli United Bank

AUB OPERATING DIVISIONS

Risk Management

This division is responsible for the identification, assessment and ongoing control of all material risks that could affect the Group’s business & operations.

• Risk Management

• Legal

• Compliance

Audit

This division is an integral part of the control environment of the Group. The role of audit is to understand the key risks of the Bank and examine and evaluate the adequacy and effectiveness of the system of risk management and internal control in order to identify legal, regulatory or policy shortcomings.

Support Services

These divisions provide back end banking services to support on-going business activities of the Group, as well as supporting the Group’s expansion through mergers and acquisitions.

• Finance

• Strategic Development

• Information Technology

• Operations

• Services

• Human Resources

Corporate Banking

This division covers all the Bank’s capital-intensive activities in risk asset generation and funding regionally and internationally.

• Corporate and Trade Finance

• Commercial Property Finance

• Residential Property Finance

• Acquisition and Structured Finance

• Correspondent Banking

• Shari'a Compliant Banking

Private Banking & Wealth Management

This division generally includes all the low capital-intensive sectors of the business, offering wealth management services to individuals and institutions based on performance and a balanced product mix.

• Private Banking and Asset Management

• Real Estate Fund Management

• Shari'a Compliant Banking

Retail Banking

This division covers both conventional and Shari'a Compliant individual customers’ deposits, loans, overdrafts, credit cards and residential mortgages.

Treasury and Investments

This division provides money market, trading and treasury services and is also responsible for the management of the Group’s funding. • Money Market Services

• Foreign Exchange Services

• Hedging and Trading Solutions

• Structured Products

• Investment Management

• Shari’a Compliant Treasury Products

Annual Report2014

Ahli United Bank

5

FINANCIAL HIGHLIGHTS

6

Ahli United Bank

CONSOLIDATED PERFORMANCE SUMMARY

AHLI UNITED BANK B.S.C.

US$ '000

Dec 14 Dec 13 Dec 12 Dec 11 Dec 10

Net profit* 482,529 579,374 335,703 310,610 265,499

Total assets 33,444,888 32,651,893 29,872,574 28,329,762 26,457,461

Total loans 18,464,536 17,305,682 15,972,219 15,495,961 14,477,713

Total liabilities 29,614,669 29,086,790 26,711,067 25,418,621 23,705,286

Shareholders' equity 3,390,874 3,148,824 2,776,209 2,537,431 2,392,181

Non-controlling interest 439,345 416,279 385,298 373,710 359,994

Return on average assets (ROAA) 1.6% 1.3% 1.3% 1.2% 1.2%

Return on average equity (ROAE) 15.2% 13.4% 13.0% 12.7% 12.0%

Cost to income ratio 29.7% 30.0% 31.5% 32.4% 33.6%

Financial leverage 7.7 8.2 8.4 8.7 8.6

Risk assets ratio** 15.5% 16.2% 15.6% 16.0% 14.1%

Net interest margin 2.40% 2.32% 2.20% 2.10% 2.30%

Earnings per share (US cents) - basic 8.0 10.0 5.8 5.4 4.7

Earnings per share (US cents) - diluted 8.0 9.9 5.7 5.3 4.7

* Attributable to Bank's equity shareholders

+ Net profit excluding exceptional non-recurring gain related to divested ABQ stake was US$ 366,464 thousands

(2013 Total ROAA including gain related to the divested ABQ stake was 2.0%)

(2013 Total ROAE including gain related to the divested ABQ stake was 20.1%)

** Under BASEL II

+

Annual Report2014

Ahli United Bank

7

PRINCIPAL SUBSIDIARIES

KUWAIT: AHLI UNITED BANK K.S.C.P.

KD' 000s


Net profit* 47,008 42,459 38,539 31,544 27,444

Total assets 3,596,928 3,164,976 2,632,922 2,627,839 2,454,337

Total loans (financing receivables) 2,480,431 2,140,922 1,728,082 1,617,722 1,609,986


Shareholders' equity 326,868 309,792 282,809 262,190 245,679

Non-controlling interest 12,452 13,363 12,572 12,841 19,616

Return on average assets 1.4% 1.5% 1.4% 1.3% 1.1%

Return on average equity 15.1% 14.9% 14.5% 12.7% 12.2%



Risk assets ratio ** 16.3% 19.2% 19.7% 21.3% 18.8%

Earnings per share (fils) 36.5 32.9 29.9 24.5 21.3


** 2014 under BASEL III as mandated by the Central Bank of Kuwait

8

Ahli United Bank


UNITED KINGDOM:AHLI UNITED BANK (UK) PLC

US$ '000s


Net profit 49,028 41,216 36,376 36,380 20,760

Total assets 3,671,428 4,151,944 3,434,061 3,419,561 2,718,253

Total loans 1,414,732 1,597,323 1,609,390 1,767,372 1,560,955







Risk assets ratio* 19.5% 17.5% 18.9% 17.5% 15.3%

Earnings per share (US cents) 24.5 20.6 18.2 18.2 10.4

* Under BASEL II

Annual Report2014

Ahli United Bank

9


IRAQ:COMMERCIAL BANK OF IRAQ P.S.C.

IQD Millions

Dec 14 * Dec 13 Dec 12 Dec 11 Dec 10

Net profit 10,462 10,689 14,310 7,980 13,934

Total assets 449,273 334,843 293,437 247,446 204,164

Total loans 23,976 20,230 18,291 12,889 13,845

Total liabilities 164,888 138,264 150,237 112,261 109,625






Risk assets ratio 760.4% 489.7% 414.5% 566.3% 577.4%

Earnings per share (fils) 69.7 85.5 125.2 83.4 180.6

Based on financial statements under local GAAP.

* 2014 information are subject to approval at Annual General Meeting

10

Ahli United Bank


EGYPT:AHLI UNITED BANK (EGYPT) S.A.E.

EGP' 000s


Net profit * 365,425 285,846 244,946 195,868 164,348

Total assets 24,983,857 19,972,167 15,602,707 12,854,828 10,012,348

Total loans 12,072,608 9,387,495 7,456,483 5,802,342 5,443,987


Shareholders' equity 2,113,922 1,865,685 1,552,780 1,096,322 1,017,506





Risk assets ratio ** 12.4% 13.7% 14.6% 13.1% 14.0%

Earnings per share (EGP) 2.2 1.7 1.7 1.8 1.5


** Under Basel II from 2012

Annual Report2014

Ahli United Bank

11

PRINCIPAL ASSOCIATE

OMAN:AHLI BANK S.A.O.G.

OMR' 000s


Net profit 25,127 23,030 21,743 18,224 14,100

Total assets 1,644,811 1,339,485 1,099,230 929,604 805,594

Total loans 1,388,871 1,104,917 927,392 768,606 656,413

Total liabilities 1,445,281 1,154,590 931,716 809,392 703,488






Risk assets ratio * 14.0% 14.6% 16.9% 17.5% 19.7%

Earnings per share (Baiza) 19.4 17.8 18.3 16.7 12.9

* Basel II until 2012 and under Basel III from 2013

12

Ahli United Bank

PRINCIPAL ASSOCIATE

Ahli United Bank

BOARD OF DIRECTORS' REPORT

Consolidated net profit, attributable to the Bank’s equity shareholders, of US$ 482.5 million as against US$ 579.4 million in 2013. 2013 net profit included a non-recurring gain of US$ 212.9 million realized on Bank’s divestment of its 29.4% stake in Ahli Bank, Qatar (ABQ), which was reported only in the 2013 result.

Excluding this item, the growth in the recurring operating profit of the Bank was 31.7% over the comparable result in 2013.

Total operating income crossed the US$ 1 billion mark for the first time since Bank’s inception in 2000 with an increase of 8.7% over 2013 to reach US$ 1,041.3 million. Increase in the operating income was broad based and underpinned by a rise in Net Interest Income of US$ 50.1 million (+7.0%) and fees and other income increasing by US$ 32.9 million (+13.4%).

•

•

The Directors of Ahli United Bank (“AUB” or the “Bank”) are pleased to submit the Annual Report and accompanying consolidated Financial Statements for the year ended 31 December 2014.

General Operating Environment

The global economic environment in 2014 remained sluggish with an IMF global world economy growth rate of 3.3% in line with 2013 while emerging market and developing economies achieved a growth rate of 4.4%, lower than the 4.7% reported in 2013.

This continued weakness has been due to adverse geo-political and security situations and to a slow-down in major emerging markets like China which recorded a lower growth rate of 7.4% from 7.7% in 2013. Given the lukewarm investment sentiment coupled with an excessive oil supply market led to a sharp decline in oil prices of circa 60% since June 2014 which remain sustained to date. Oil exporting countries, if current situation persists, will face a need to review fiscal spend and/or drawdown on resources with related economic ramifications. While in the near term oil importing economies will benefit from the low oil prices, this advantage is expected to be partially offset by diminished expectations about the growth prospects for developed and emerging economies resulting in lower projected FDI flows in the medium term particularly for regional MENA economies dependent on GCC investment and employment opportunities. Considerable downside risks therefore continue to exist on the international and regional fronts arising from both geo-political and economic risks. This is reflected in the revised lower IMF 2015 growth forecast for the world at 3.5% (2016:3.7%) while the World Bank has forecasted a smaller world GDP growth rate at 3.0% with a marginal improvement to 3.3% in 2016.

Performance Overview

Despite the continuing global uncertainties and continuing operating challenges faced in its main markets, AUB achieved another record performance in 2014, a 31.7% growth in the operating profits, clearly validating the success and viability of its core business model based on product and market diversification.

The key highlights of its performance were:

•

•

Asset quality improved with the NPL ratio reducing to 2.0% (2013: 2.3%). The Group’s coverage ratio of total provisions to impaired loans increased to 159.4% at the end of the year (2013: 155.5%). Specific provision coverage stood at 83.8% at 31 December 2014 compared to 86.1% in 2013.

Total assets increased by 2.4% to US$ 33.4 billion (2013: US$ 32.7 billion) contributed by:

The Loans and Advances portfolio which increased by6.7% to US$ 18.5 billion (2013: US$ 17.3 billion).

The Non-trading Investments portfolio grew by 4.4% to reach US$ 5.8 billion as part of ongoing balance sheet management, effective deployment of liquidity with a view to optimizing yields and complying with regulatory liquidity regimes.

i)

ii)

•

•

•

•

•

•

•

Customers’ deposits were up by 4.4% to US$ 23.0 billion (2013: US$ 22.0 billion) to fund the balanced growth in loans and advances.

As part of its funding strategy, the Bank reduced its higher cost borrowings under re-purchase agreements by US$ 369.5 million to US$ 901.6 million as outstanding at 31 December 2014 (US$ 1,271.1 million at 31 December 2013).

Continuous focused cost management and higher operating income resulted in an improvement of the operating cost to income ratio during the year to 29.7% (2013: 30.0%).

Excluding the non-recurring gain related to the divested ABQ stake, operating return on Average Equity increased to 15.2% (2013: 13.4%) and the operating return on Average Assets increased to 1.6% (2013: 1.3%).

Strategic & Corporate Development

In November 2014, IFC converted US$ 100 million of its Optionally Convertible Subordinated Debt held in AUB into 118,609,884 AUB ordinary shares at an effective conversion price of US 84.31 cents. Post conversion, IFC along with the IFC Capitalization Fund, hold a 5.2% shareholding in AUB. IFC’s decision to exercise the conversion option represents a vote of confidence in AUB’s strong underlying financial and operational fundamentals.

Recognition

AUB Group has been a recipient of a number of prestigious banking awards during the year and includes the following:

Best Regional Bank – GCC in 2014 by Capital Financial International

Best Emerging Market Bank in Bahrain – 2014 awarded by Global Finance

14

Ahli United Bank

BOARD OF DIRECTORS' REPORT

Best Foreign Exchange Provider in Bahrain – 2015 awarded by Global Finance

Best Bank in Bahrain – 2014 awarded by Euromoney

Best Local Private Bank, Bahrain – 2014 awarded by Euromoney

Bank of the Year, Bahrain - 2014 awarded by The Banker magazine

Best Local Bank in Bahrain – 2014 awarded by Emea Finance magazine

Private Bank of the Year, Bahrain – 2014 awarded by The Banker and PWM

AUB Kuwait: Islamic Bank of the Year –2014 by The Banker magazine

AUB Kuwait: Private Bank of the year – 2014 by The Banker and PWM.

Directors’ Shareholdings & Remuneration

The number of shares held by directors, senior management and their related parties as at 31 December 2014 is disclosed in the Corporate Governance Report.

For Directors’ fees, allowances, expenses, salaries and remuneration please refer to Note 25 of the financial statements

Appropriations

On the basis of the results of the Bank for the year ended 31 December 2014, the Board of Directors recommends the following appropriations of the Bank’s net profit of US$ 482,529 thousands for approval by the shareholders:

•

•

•

•

•

•

•

•

US$ ’000

Net profit attributable to Bank’s equity shareholders 482,529

Transfer to statutory reserve 48,253

Proposed cash dividend – ordinary shares at US cents 4.5 per share

270,452

Proposed donations 1,000

Transfer to retained earnings 162,824

Conclusion

In my capacity as the Chairman of the Board, it is my pleasure to thank our shareholders for their continuing support and confidence reposed in AUB. Our achievements during 2014 were only made possible through the support and trust of our clients, business partners and customers and the dedication, professionalism and resilience of our staff as well as the guidance of our regulators.

While operating challenges remain, we start 2015 with clear plans and goals to improve on our past performances and we will continue to strive to meet the aspirations of all our stakeholders.

Mohammad J. Al-MarzooqChairman (acting)

22 February 2015

15Annual Report2014

Ahli United Bank

Ahli United Bank

Ahli United Bank

BOARD OF DIRECTORS

Hamad M. Al-Humaidhi Chairman of the Board and Executive Committee;Non-Executive Director

Chairman since 31 March 2015, holds a Bachelor of Art (Law) degree from University of Kuwait, 1975.Director General, The Public Institution for Social Security, Kuwait; Chairman & CEO, Wafra Intervest Corporation; Chairman, Ahli United Bank (UK) PLC; Chairman, Kuwait Medical City, Kuwait. Former Deputy General, The Public Institution for Social Security, Kuwait ; Former Legal Advisor, National Bank of Kuwait; Former Legal Department Manager, Administration Department Manager, Legal Researcher in Legal Department, The Public Institution for Social Security, Kuwait ; Former, Legal Researcher, The Civil Service Commission.

Mohammad Jassim Al-Marzooq Deputy Chairman and Member of the Executive Committee;Non-Executive Director

Director since, 27 March 2006, holds a Bachelor of Commerce (Finance Major) from Kuwait University, 1991. CEO, Tamdeen Real Estate Co. Kuwait; Chairman, Tamdeen Shopping Centre, Kuwait; Chairman, Tamdeen Bahraini Real Estate Co, Bahrain; Chairman, Trustees Bait Al Arab (Kuwait State Stud), Kuwait; Board Member, Fateh Al Khear Holding Co., Kuwait ; Board Member, The Supreme Council for Planning & Development, Kuwait; Former Chairman of Tamdeen Real Estate Co, Kuwait; Former Board Member of Al Maalem Holding Co, Bahrain; Former Board Member of Global Omani Development & Investment Co, Oman ; Former, Deputy Chairman, Tamdeen Shopping Centre Co, Kuwait ; Former Board Member, Bank of Kuwait & The Middle East, Kuwait ; Former , Vice Chairman, Tamdeen Investment Co, Kuwait; Former, Board Member, Al Ahli Bank of Kuwait, Kuwait; Former, Board Member, Kuwait National Cinema Co., Kuwait; Former Board Member, Arab Financial Consulting Co., Kuwait; Former, Chief of Executive Staff, Real Estate Investment Fund, Kuwait; Former, Board Member, The Public Warehousing Co., Kuwait ;

Rashed Ismail Al-MeerDeputy Chairman and Member of the Executive Committee;Non-Executive Director

Director since 29 March 2003, holds a High Diploma in Statistics from the University of Alexandria-Egypt, 1973 and a B.Com from Baghdad University, Iraq, 1969.Director, Ahli United Bank (UK) PLC; Chairman, Osool Assets Management Co.; Chairman, Esterad Investment Co.; Deputy Chairman of the Board of Directors, Solidarity Group Holding Co.; Director, Social Insurance Organisation, Director , Al Ahli Real Estate Co. S.P.C.; Former, Chairman, Former, Director General, Pension Fund Commission; Former, Asst. Undersecretary for Financial Affairs, Ministry of Finance & National Economy; Former, Asst. Undersecretary for Economic Affairs, Ministry of Finance & National Economy; Former, Director of Investment; Various Positions, Central Bank of Bahrain; Former, Head of Statistics Section, Ministry of Health.

Hamad M. Al-Humaidhi

Mohammad Jassim Al-Marzooq

Adnan Al-Marzouq

Mohammed Saleh Behbehani

Rashed Ismail Al-Meer

Mohammed Saleh BehbehaniMember of the Compensation Committee;Independent Director

Director since 30 July 2000. Partner & President, Mohammad Saleh & Reza Yousuf Behbehani Co; Partner, Mohammad Saleh Behbehani & Co. W.L.L; Partner, Behbehani Bros., W.L.L, Bahrain; President, Shereen Real Estate Co.; Chairman, Maersk Logistics Co.W.L.L.; Chairman, Kuwait Insurance Co. S.A.K; Partner & President, Behbehani Jeep Motors Co. W.L.L.; Partner & President, Shereen Investment Co; Partner & President, Shereen Motor Co.W.L.L; President, Behbehani Automall Co. W.L.L; Partner, Al Mulla & Behbehani Motor Co. W.L.L; Vice Chairman, United Beverage Co; Chairman, Maersk Kuwait Co. W.L.L; Board & Executive Committee Member, Ahli United Bank K.S.C; Former Director, Purchase & Imports, Public Works Dept., Govt. of Kuwait; Former Deputy. Chairman, Al Ahli Bank of Kuwait K.S.C.; Former Board Member, Ahli United Bank (UK) PLC; Former Director, Swiss Kuwaiti Bank.; Former Director, UBAF (Hong Kong) Limited.

Adnan Al-MarzouqMember of the Audit & Compliance Committee and Nominating Committee; Independent Director

Director Since, 25 March 2014. Holds a Bachelors Degree in Industrial Systems Engineering from University of Southern California, 1981.Managing Director, Al-Marzouq Company for Import & Export, Kuwait; Board Member, Ahli United Bank (UK) PLC. Vice Chairman, Rouyah Investment & Leasing Co, Kuwait; Formerly: Chairman, The Kuwaiti Manager Company, Kuwait; Board Member, Kuwait Finance House, Kuwait; Manager Treasury, Gulf Investment Corporation, Kuwait ; Asst. Manager-Treasury, National Bank of Kuwait.

18

Ahli United Bank

BOARD OF DIRECTORS

Mohammed Fouad Al-Ghanim

Abdulla MH Al-Sumait

Herschel Post Lama Al-Dakheel

Adel A. El-Labban

Michael Essex

Mohammed Fouad Al-GhanimMember of the Executive Committee;Independent Director

Director since 29 March 2003, holds a degree in Business Administration from Kuwait University, 1993. Vice Chairman & CEO Fouad Alghanim & Sons Group of Companies, Kuwait; Member of the Board of Directors, Tamdeen Real Estate Company KSCC, Kuwait; Chairman, Fluor Kuwait Co. K.S.C., Kuwait Former, Chairman, AlGhanaem Industrial Company K.S.C., Kuwait; Former, Member of the Supervisory Board, Jet Alliance Holding AG, Austria.

Abdulla MH Al-SumaitMember of the Audit & Compliance Committee and Nominating Committee ;Independent Director

Director since 16 May 2001, holds a B.A. in Law from Kuwait University, 1976. Director, Kuwait Commercial Facilities Company; Director, Ahli United Bank (Egypt) SAE. Former, Legal Consultant for Director General, The Public Institution for Social Security, (Kuwait);

Michael Essex Member of the Audit & Compliance Committee, Nominating Committee and Compensation Committee; Independent Director

Director since, 28 March 2012, holds an Executive Development Program Certificate from Harvard Business School, Boston-USA, 1997, M.A. Public Administration from Carleton University, Ottawa-Canada, 1975, B.A. Economics & Political Science from The University of Western Ontario London- Canada 1972. Member of the Investment Committee, APIS Growth Fund; Director, Macquarie Bank India Infrastructure Fund; Formerly, International Finance Corporation’s Director of Investment & Advisory Operations for the MENA region- 20 Countries, Pakistan to Morocco; IFC-Deputy Director for Global Industry & Service Investments and Senior Risk Supervisor for Asia, Bank of Nova Scotia.

Herschel PostChairman of the Audit & Compliance Committee, Nominating Committee and Compensation Committee;Independent Director

Chairman of the Audit & Compliance Committee, Nominating Committee and Compensation Committee Director since 25 December 2001, holds a Financial Advisers Certificate from The Chartered Institute of Bankers, 2000, a B.A. & M.A. (Rhodes Scholar) from Oxford University 1984, L.L.B from Harvard Law School, 1966 and a Bachelor of Arts from Yale University, 1961. Director and Chairman of the Audit Committee, Ahli United Bank (UK) PLC; Director and Chairman of the Audit Committee, Ahli United Bank (Egypt) SAE.; Director and Chairman of the Audit Committee, Ahli United Bank K.S.C., Kuwait; Director and Chairman of the Audit Committee, Kuwait & Middle East Financial Investment Company (KMEFIC); Chairman , Almazaya Co.; Director and Chairman of the Audit Committee, Threadneedle Asset Management Holdings S.A.R.L.; Former Director, Investors Capital Trust PLC; Former Director, Program Planning Professionals Inc.; Former Director Christie’s International PLC; Trustee, Earthwatch Institute (Europe). Former Deputy Chairman of the London Stock Exchange; Former CEO and Deputy Chairman, Coutts & Co.; Former Chief Operating officer, Lehman Brothers International Ltd.; Former Director, Euroclearance System Ltd, Director & Chairman of Audit Committee, Euroclear UK & Ireland PLC.

Lama Al-DakheelMember of the Audit & Compliance Committee and Nominating Committee; Non-Executive Director

Director since, 31 March 2015. Holds a Bachelors Degree in Finance & Business Administration, Kuwait University, 1995. Manager, Direct Investment Department, The Public Institution for Social Security, Kuwait; Former, Supervisor and Analyst Direct Investment Department, The Public Institution for Social Security, Kuwait

Adel A. El-LabbanExecutive Committee Member;Executive Director

Director since 30 July 2000. Holds a Masters in Economics (Highest Honors) from the American University, Cairo, 1980, Bachelors in Economics (Highest Honors) from American University, Cairo, 1977. Group Chief Executive Officer & Managing Director, Ahli United Bank BSC, Bahrain; Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank K.S.C., Kuwait; Deputy Chairman, Ahli United Bank (Egypt) SAE, Egypt; First Deputy Chairman, Ahli Bank SAOG, Oman; Deputy Chairman, Commercial Bank of Iraq,; Deputy Chairman, United Bank for Commerce & Investment S.A.C. Libya; Director Bahrain Association of Banks, Bahrain; Former Chief Executive Officer and Director of the United Bank of Kuwait PLC, UK; Former Managing Director, Commercial International Bank (Egypt) SAE; Former Chairman, Commercial International Investment Company, Egypt; Former Vice President, Corporate Finance, Morgan Stanley, USA; Former Assistant Vice President, Arab Banking Corporation, Bahrain.

19Annual Report2014

Ahli United Bank

CHAIRMAN'S STATEMENT

With clear plans to develop on existing initiatives, I am confident in the Group’s proven and tested capabilities to achieve sustainable growth and to continue meeting the aspirations of all stakeholders.

20

Ahli United Bank

CHAIRMAN'S STATEMENT

I am pleased to report that 2014 was another year of record

operating profitability and strong business performance for AUB

across all fronts. Notable success and significant progress was

achieved across the Group’s businesses and operations, clearly

demonstrating its ability to deliver sustainable growth, despite

varying degrees of uncertainty and volatility in market conditions

in its markets.

In the global economy, significant divergences were apparent

with the US showing signs of economic revival, China’s growth rate

slowing down while the Eurozone and Japan struggled to avoid

stagnation. The continued low level of oil prices, which fell by circa

60% in the latter half of the year, will impact oil exporting countries

including the GCC economies going forward, depending on the

duration and intensity of such a drop and will assist MENA oil

importing countries in reducing their balance of trade deficits.

In these challenging conditions, AUB reported a net profit of

US$ 482.5 million for the year 2014 attributable to a strong

multi-platform financial performance based on its prudent and

diversified business model. The growth in the operating profit of

the Bank represented a 31.7% growth over the comparable result

in 2013, excluding the exceptional non-recurring gain of US$ 212.9

million from its Qatari affiliate bank sale included in the previous

year’s profit of US$ 579.4 million.

The consistent increase in AUB’s operating profit underlined the

success and viability of the Bank’s core regional business model

based on diversified and selective growth in operating income,

proactive risk management, supported by an effective control

framework and continuous focus on developing cross border

opportunities while maintaining its intelligent spend culture.

A major milestone was reached with total operating income

surpassing the US$ 1 billion mark for the first time.

As a result, earnings per share were US cents 8.0 for the year ended

31 December 2014 (2013: US cents 10.0). Given the excellent

results achieved, the Board of Directors has recommended a cash

dividend of US cents 4.5 per share (2013: US cents 4.5) together

with a bonus ordinary share issue of 5% (2013: 5%).

During the year, confidence in AUB’s financial and operational

fundamentals was further demonstrated by IFC’s decision to

convert its optionally convertible subordinated debt into AUB

ordinary shares, which, together with the IFC Capitalisation Fund,

increased IFC’s share holding in AUB to 5.2%.

It was gratifying to note that AUB’s market leadership and superior

performance levels continued to achieve wider recognition among

key analysts in the banking industry. In 2014 no less than ten top

awards were received for pre-eminence in particular sectors –

private banking, Islamic banking, and foreign exchange – as well as

awards for ‘best bank’ at both the regional and country levels.

Looking ahead, with economic and socio-political uncertainty

expected to persist, AUB will remain focused on pursuing its

strategy of regional expansion while seeking opportunities to

develop cross border business. With clear plans to develop on

existing initiatives, I am confident in the Group’s proven and

tested capabilities to achieve sustainable growth and to continue

meeting the aspirations of all stakeholders.

Finally, it is my pleasure to thank our shareholders for their

continued support and confidence in AUB. What has been

achieved in 2014 would not have been possible without the

support and trust of our valued customers and business partners

and the firm commitment, dedication and hard work of the staff

as well as the guidance of our regulators.

Hamad M. Al-Humaidhi Chairman

Annual Report2014

21

Ahli United Bank

GROUP CHIEF EXECUTIVE OFFICER &MANAGING DIRECTOR'S STATEMENT

As testament to the Bank’s capacity to achieve sustainable growth, total operating income exceeded US$ 1 billion for the first time since the Bank’s inception in 2000.

22

Ahli United Bank

GROUP CHIEF EXECUTIVE OFFICER &MANAGING DIRECTOR'S STATEMENT

Despite prevailing global uncertainties and continuing operating

challenges in its major markets, AUB delivered another record

performance in 2014. The Bank’s net profit attributable to its equity

shareholders increased by 31.7% to US$ 482.5 million for the year

2014 compared with US$ 366.5 million in 2013. The overall 2013

net profit of US$ 579.4 million included an exceptional non-

recurring gain of US$ 212.9 million from the sale of a 29.4% stake

in its Qatari affiliate. The increase in the 2014 operating profit

reflected AUB’s strong underlying business fundamentals together

with its effective control framework and resilient business model.

As testament to the Bank’s capacity to achieve sustainable growth,

total operating income exceeded US$ 1 billion for the first time

since the Bank’s inception in 2000, rising by 8.7% to US$ 1,041.3

million compared with US$ 958.0 million in 2013. The surge in

operating income was largely driven by a 7.0% increase in Net

Interest Income to US$ 763.3 million, resulting from higher lending

volumes as well as prudent deployment of liquidity in non-trading

investments within a conservative risk framework complemented

by focused liability cost management. Fees and other income

grew by 13.4% from US$ 245.1 million to US$ 278.0 million. The

increased operating income together with a disciplined cost

culture aligned to “intelligent spend” on business and control

needs across the AUB Group further improved the operating cost

to income ratio to 29.7% from 30.0% in 2013.

The Group’s total assets grew by 2.4% amounting to US$ 33.4

billion at 31 December 2014 from US$ 32.7 billion at year end 2013.

The increase in total assets was due primarily to a 6.7% growth in

the loans and advances portfolio to US$ 18.5 billion (31 December

2013: US$ 17.3 billion). The non-trading investments portfolio

rose by 4.4% to US$ 5.8 billion reflecting vigilant balance sheet

management and pursuit of asset profitability and diversified

opportunities as well as effective liquidity deployment to comply

with regulatory liquidity requirements.

Balanced credit growth was underpinned by a 4.4% increase in

customer deposits totalling US$ 23.0 billion (31 December 2013:

US$ 22.0 billion). As part of its funding strategy, the Bank was

successful in reducing higher cost borrowings under repurchase

agreements by US$ 369.5 million. The asset quality of the Group

continued to improve with the non-performing loan ratio

reducing to 2.0% at year end 2014 compared with 2.3% for the

prior year. The total provision coverage ratio, inclusive of collective

impairment provisions, was 159.4% at year end 2014 (2013: 155.5%)

and specific provision coverage stood at 83.8% compared with

86.1% in 2013.

Further improvement was also notable in key financial indicators

with the return on average equity increasing to 15.2% (2013:

13.4%) and return on average assets rising to 1.6% (2013: 1.3%),

adjusted for the exceptional non-recurring item credited in 2013.

During the year, AUB made significant progress in developing

cross-border trade finance business among the Group’s operating

countries, in increasing share of wallet from existing customers

and in securing significant new clients. Notable success was also

achieved in expanding the B2B platform for corporate customers,

providing a one-stop solution for cash management including

payments, collections and reconciliations. In continuing to

strengthen the Group’s corporate responsibilities, various ‘green’

initiatives were adopted to conserve natural resources as practical

steps to deliver on AUB's responsibilities as a signatory to the

Equator Principles, a global benchmark for managing social and

environmental risks in project finance.

Finally, I would like to express my gratitude to the Board of

Directors for their active support and guidance. My sincere thanks

are also due to all my colleagues, the management and the staff

of the AUB Group, whose professionalism, commitment and

hard work have been fundamental in achieving another year of

excellent performance and sustainable growth.

Adel A. El-LabbanGroup Chief Executive Officer & Managing Director

23Annual Report2014

Ahli United Bank

CORPORATE GOVERNANCE

Good Corporate Governance practices are important in creating

and sustaining shareholder value and ensuring appropriate

disclosure and transparency. The Bank’s Corporate Governance

Policy provides the framework for the principles of effective

Corporate Governance standards across the AUB Group.

The Board of Directors is committed to implementing robust

Corporate Governance practices and to continually review and

align these practices with international best practices, where

appropriate.

The Bank’s management are committed to ensuring that procedures

and processes are in place to reflect and support the Board approved

Corporate Governance practices to ensure the highest standards of

Corporate Governance throughout the AUB Group.

Shareholder Information

The Bank’s shares are listed on the Bahrain Bourse and the Kuwait

Stock Exchange. As at 31 December 2014, the Bank had issued

6,121,883,913 ordinary shares, each with a nominal value of $ 0.25.

All ordinary shares are fully paid up.

The Annual General Ordinary and Extraordinary Meetings were

held on 25 March 2014.

Ordinary Shareholders as at 31 December 2014 (holding 5% and above)

NameCountryof origin

No. of shares

% of Total

Shares

Public Institution For Social Security

Kuwait 1,158,572,382 18.93%

Social Insurance Organization

Bahrain 611,400,548 9.99%

Tamdeen Investment Company

Kuwait 466,526,017 7.62%

Sh. Salim Al-Nasser Al-Sabah

Kuwait 333,835,556 5.45%

International Finance Corporation

USA 315,551,499 5.16%

Distribution of Shares

Table -1 Distribution of Ordinary Shares as at 31 December 2014

Category No of shares

% of Total

Shares

50% and above - -

20% up to less than 50% - -

10% up to less than 20% 1,158,572,382 18.93%

5% up to less than 10% 1,727,313,620 28.22%

1% up to less than 5% 1,307,346,327 21.35%

Less than 1% 1,928,651,584 31.50%

Total 6,121,883,913 100.0%

Table- 2 Government Holdings and the distribution of Ordinary

Shares by Nationality

No. Name No. of Shares

% of Total

shares

1Kuwait Quasi Government

1,158,572,382 18.93%

2Bahrain Quasi Government

617,731,976 10.09%

3Qatar Quasi Government

94,898,026 1.55%

4Kuwait Individuals and Corporates

2,898,969,067 47.35%

5Bahrain Individuals and Corporates

975,453,311 15.93%

6 Others 376,259,151 6.15%

Total 6,121,883,913 100%

26

Ahli United Bank


Notes :1. Fahad Al-Rajaan - Resigned effective 22 January 2015.2. Mohammad Al-Marzooq - Appointed as a Deputy Chairman on 19 February 2014 and Acting Chairman on 22 January 2015.3. Turki Bin Mohamed Al-Khater – Term of Directorship ceased on 31 March 2015 following Director elections4. Adnan Al-Marzouq - Appointed on 25 March 2014.

In compliance with the Central Bank of Bahrain (CBB) Corporate Governance requirements, the Board of Directors has outlined its criteria and materiality thresholds for the definition of “Independence” in relation to Directors. The independence criteria are reassessed annually by the Board and for the year 2014, the 11 Directors comprising the Board were classified as follows:

• 7 Independent Directors• 3Non-ExecutiveDirectors• 1ExecutiveDirector

The Role and Responsibilities of the Board of Directors

The Board is responsible to shareholders for creating and delivering sustainable shareholder value through the prudent management of the Bank’s business. The Board, as a whole, is collectively responsible to ensure that an effective, comprehensive and transparent corporate governance framework is in place. The Board’s role is to:

1. ensure adherence to prevailing laws and regulations and to best business ethics; 2. provide entrepreneurial leadership of the Bank within a framework of prudent and effective controls, which enable all types of relevant risks to be assessed and managed; 3. set the Bank’s strategic goals, ensure that the necessary

financial and human resources are in place for the Bank to meet its objectives and review management performance; and 4. set the Bank’s values and standards and ensure that its obligations to its shareholders and others are understood and met. In carrying out these responsibilities, the Board must ensure that management strikes an appropriate balance between promoting long term growth and delivering short term objectives and have regard to what is appropriate for the Bank’s business and reputation, the materiality of the financial and other risks inherent in the business and the relative costs and benefits of implementing specific controls.

All Directors must act in the way they consider, in good faith, would be the most likely to promote the success of the Bank for the benefit of its shareholders as a whole. In doing so, each director, must have regard (among other matters) to the:

1. likely consequences of any decision in the long term; 2. interests of the Bank's employees and shareholders; 3. need to foster the Bank's business relationships with suppliers, customers and others; 4. impact of the Bank's operations on the community and the environment; 5. desirability of the Bank maintaining a reputation for high standards of business conduct and ethics; and 6. need to act fairly as between the shareholders of the Bank.

When carrying out their responsibilities, Directors must 1. act with integrity; 2. act with due skill, care and attention; 3. observe proper standards of market conduct; 4. deal with the regulatory authorities in an open and co-operative way and must disclose appropriately any information of which the regulator would reasonably expect notice.

Board

The Board composition represents an appropriate mix of professional skills and expertise. The current Board of Directors was elected at the Annual General Meeting held on 28 March 2012 for a period of three years. The Board periodically reviews its composition and performance as well as the performance of each Director. The name and classification of each Director as of 31 December 2014 is listed below:

Directors Classification

Fahad Al-Rajaan Chairman 1 Independent

Rashed Ismail Al-Meer - Deputy Chairman Non-Executive

Mohammad Jassim Al-Marzooq – Deputy Chairman 2 Non-Executive

Mohammed Saleh Behbehani Independent

Mohammed Fouad Al-Ghanim Independent

Abdulla MH Al-Sumait Non-Executive

Turki Bin Mohamed Al-Khater 3 Independent

Herschel Post Independent

Michael Essex Independent

Adnan Al-Marzouq 4 Independent

Adel A. El-Labban Executive

(continued)

Annual Report2014

Ahli United Bank

27


Board Meetings and Attendance

The Board is required to meet at least four times per year.

The Board convenes upon the invitation of the Chairman or upon the request of at least two Directors. All Directors are expected to attend each meeting, unless there are exceptional circumstances that prevent them from doing so.

A summary of the Board meetings held during 2014 and attendance of each Director are detailed below:

Members’ Names No. ofMeetings

Meeting Dates

MeetingsAttended

Fahad Al-Rajaan - Chairman 4

Rashed Ismail Al-Meer 5

Mohammad Jassim Al-Marzooq 3

Mohammed Saleh Behbehani 2

Mohammed Fouad Al-Ghanim 19 Feb 2014 4

Abdulla MH Al-Sumait 25 Mar 2014 5

Turki Bin Mohamed Al-Khater 5 14 May 2014 2

Herschel Post 17 Sept 2014 4

Michael Essex 3 Dec 2014 5

Adnan Al-Marzouq 1

Adel A. El-Labban 5

The CBB Rulebook module HC – 1.3.4 requires individual board members to attend at least 75% of all board meetings in a given financial year. During the year, all directors, except four have attended at least 75% of all Board meetings in the year. The Directors in question have, on each occasion provided their prior explanations for not attending the Board meetings, which indicated that their absence was reasonable and justified. The attendance of all Directors at the Board meetings is reported to the CBB on an annual basis.

Meeting papers are prepared and circulated in advance of meetings and include minutes of meetings of Board Committees held since the previous Board meeting.

Election and Termination of Appointment of Directors Directors are elected for a 3 year term. Elections take place in accordance with the Memorandum and Articles of the Bank, the Bahrain Commercial Companies Law and the CBB Rulebook. There is no maximum age limit at which a Director must retire from the Board. Each Director’s membership shall terminate upon the expiry of his term, pursuant to the terms of his Letter of Appointment and/or the provisions of the law.

Induction and Training of Directors

The Bank has an induction programme in place which is designed for each new Director to ensure his contribution to the Board from the beginning of his term. The induction programme includes: i) an introductory pack containing, amongst other things, the Group Overview, Group Organisational Chart, Terms of Reference of the Board and Board Committees and key policies; ii) presentations

on significant financial, strategic and risk issues; and iii) orientation meetings with key management as may be required. As a standing procedure, all continuing Directors are invited to attend orientation meetings.

Ongoing professional development for Directors was conducted during the year.

Board Evaluation

Evaluations of the performance of the Board and the performance of each Director, for 2014, were conducted. Applying a scoring methodology proposed by Ernst & Young, rating of “Good” was achieved for the performance of the Board and a rating of “Excellent” was achieved for the performance of each director, indicating that the views of the majority of the Directors are similar and that the Board is functioning as per its stated role and responsibilities.

Directors’ and Related Parties’ Interests

No Director has entered into, either directly or indirectly, any material contract with the Bank or any of its subsidiaries, nor does any Director have any material conflict of interest with the Bank. The Directors are required to declare any conflict of interest or any potential conflict of interest that exists or that Directors become aware of, to the Chairman and Corporate Secretary as soon as they become aware of them. This disclosure must include all relevant material facts.

The Bank has a procedure for dealing with transactions involving Directors and related parties. Any such transaction will require the approval of the Board, excluding the conflicted Director(s).

(continued)

28

Ahli United Bank


Refer note 25 to the audited consolidated financial statements of the Group for the year ended 31 December 2014 for related party transactions disclosures.

The Terms of Reference of the Board require that all Directors, whether Non-Executive or Executive, should exercise independence in their decision-making and should abstain from any decisions involving any actual or potential conflicts of interest. Should any Director have any doubts with respect to conflicts of interest or potential conflict of interest, the Director should consult the Chairman prior to taking any action that might compromise the Bank.

No Name Purchases Sales No. of shares as of 31-Dec-2014

1 Fahad Al-Rajaan1 - - 181,744

2 Rashed Ismail Al-Meer - - 323,513

3 Mohammad Jassim Al-Marzooq - - 167,197

4 Hershel Post - - -

5 Mohammed Saleh Behbehani 8,325,687 - 164,118,387

6 Mohammad Fouad Al-Ghanim - - 509,570

7 Abdullah MH Al-Sumait - - -

8 Turki Bin Mohamed Al-Khater2 - - -

9 Michael Essex - - -

10 Adnan Al Marzouq 115,500 - 115,500

11 Adel A.El-Labban - - -

Total 165,415,911

Percentage 2.70%

Note : 1. Fahad Al Rajan - Resigned on 22 January 2015.

2. Turki Bin Mohamed Al-Khater - Term of Directorship ceased on 31 March 2015 following Director elections.

As at 31 December 2014, the Directors also held 44,177,565 convertible notes (2013: 68,232,928 convertible notes) that are subject to vesting and other criteria.

All Directors and other Approved Persons have declared all of their interests in other enterprises or activities (whether as a shareholder of above 5% of the voting capital of a company, a manager, or other form of significant participation) in writing to the Board.

The number of shares owned directly and indirectly by Directors as at 31 December 2014 are as follows:

(continued)

Annual Report2014

Ahli United Bank

29


The numbers of shares owned by Senior Management as at 31 December 2014 are as follows:

No Name Purchases SalesNo of shares as of

31-Dec-2014

1 Adel A. El-Labban - - -

2 Sanjeev Baijal - - 1,920,221

3 Keith Gale 1,179,110 - 4,557,488

4 Shafqat Anwar - 200,000 497,285

5 Abdulla Al-Raeesi 1,054,736 1,772,020 1,604,736

6 Sawsan Abulhassan 1,783,264 1,465,265 1,300,105

7 Amr Gadallah - - -

8 Robert Jones - - -

9 Iman Al-Madani - - 10,993

10 James Forster - - -

11 Nevine El-Messeery - - -

12 Nouri Aldubaysi - - -

13 Lloyd Maddock - - -

14 Ayman El-Gammal - - -

As at 31 December 2014, senior management held 11,526,312 convertible notes (2013: 9,885,885 convertible notes) that are subject to vesting and other criteria.

Material Transactions Besides large credit transactions that require Board approval as per the Credit Policy, the Board also approves senior unsecured medium term (greater than 1 year) funding initiatives, strategic investments decisions, as well as any other decisions which have or could have a material financial or reputational impact on the Bank.

Board Committee

The Board may, where appropriate, delegate certain of its powers to an individual Director or to a Committee of Directors and other persons, constituted in the manner most appropriate to those tasks.

The Board has constituted a number of Board Committees, membership of which is drawn from the Directors and to which it has delegated specific responsibilities, through Terms of Reference which are reviewed and adopted by the Board on an annual basis.

All Board Committee members are expected to attend each Committee meeting unless there are exceptional circumstances that prevent them from doing so.

Each Board Committee has access to independent expert advice at the Bank’s expense.

(continued)

30

Ahli United Bank


Notes:

1. Mohammed Al-Ghanim was appointed as an Executive Committee member on 19 February 2014.2. Mohammed Al-Ghanim resigned from Audit & Compliance Committee on 19 February 2014. 3. Adnan Al-Marzouq was appointed as a member of Audit & Compliance Committee and Nominating Committee on 25 March 2014.

The principal Board Committees are:

Executive Committee

The Executive Committee assists the Board in discharging the Board’s responsibilities relating to, amongst other things, credit and market risk.

The Executive Committee consists of 5 members comprising 2 Independent, 2 Non-Executive Directors and 1 Executive Director, the Group CEO & Managing Director.

The Board Committees are each composed of an appropriate mix of professional skills and expertise. The Board periodically evaluates the performance of the Board Committees. The names of the Committee members and their memberships in the Board Committees and attendance at meetings held during 2014 are detailed below:

Board Committees Members Classification No. of Meetings Meeting Dates Meetings

attended

Executive Committee

Fahad Al-Rajaan - Chairman Independent

4

19 Feb 2014 14 May 2014 17 Sept 2014 3 Dec 2014

3

Rashed Ismail Al-Meer Non-Executive 4

Mohammad Jassim Al- Marzooq Non-Executive 2

Mohammed Al-Ghanim1 Independent 4

Adel A. El-Labban Executive 4

Audit and Compliance Committee

Herschel Post - Chairman Independent

4

19 Feb 2014 20 May 2014 17 Sept 2014 2 Dec 2014

4

Mohammed Fouad Al-Ghanim2 Independent 1

Abdulla MH Al-Sumait Non- Executive 4

Turki Bin Mohamed Al-Khater Independent 2

Adnan Al-Marzouq 3 Independent 2

Michael Essex Independent 4

Compensation Committee

Fahad Al-Rajaan- Chairman Independent

220 Jan 14

2 Dec 14

2

Herschel Post Independent 2

Mohammed Saleh Behbehani Independent 2

Nominating Committee

Herschel Post - Chairman Independent

2

16 Sep 14

3 Dec 14

2

Abdulla MH Al-Sumait Non- Executive 2

Turki Bin Mohamed Al-Khater Independent 0

Adnan Al-Marzouq3 Independent 1

Michael Essex Independent 2

Audit & Compliance Committee

The Audit and Compliance Committee is combined with the Corporate Governance Committee and assists the Board in discharging its responsibilities relating to the Bank’s accounting, corporate governance and key persons dealings and market abuse practices, internal audit controls, compliance procedures, risk management systems, financial reporting functions and in liaising with the Bank’s external auditors and regulators to ensure compliance with all relevant regulatory requirements and consistency with best market practices.

The Audit and Compliance Committee consists of 5 members comprising 4 Independent Directors, including the Chairman and 1 Non-executive Director.


The Compensation Committee provides an efficient mechanism for reviewing the Bank’s compensation arrangements for its staff and Directors and making recommendations for the Board’s own approval in line with CBB guidelines. The Compensation Committee, amongst other things, sets the remuneration framework for the Bank’s Directors, senior management and staff.

The Compensation Committee consists of 3 members comprising 3 Independent Directors including the Chairman.

(continued)

31Annual Report2014

Ahli United Bank


Senior Management

Names Title

Adel A. El-Labban Group CEO & Managing Director

Sanjeev Baijal Deputy Group CEO - Finance & Strategic Development

Keith Gale Deputy Group CEO - Risk, Legal & Compliance

Shafqat Anwar Deputy Group CEO - Operations & Technology

Abdulla Al-Raeesi Deputy Group CEO - Retail Banking

Sawsan Abulhassan Deputy Group CEO - Private Banking & Wealth Management

Amr Gadallah Deputy Group CEO - Treasury & Investments

Robert Jones Group Head of Audit

Iman Al-Madani Group Head Human Resources & Development

James Forster CEO - Ahli United Bank (UK) P.L.C

Nevine El-Messeery CEO - Ahli United Bank (Egypt) S.A.E.

Nouri Aldubaysi CEO - Commercial Bank of Iraq P.S.C.

Lloyd Maddock CEO - Ahli Bank S.A.O.G

Ayman El-Gammal CEO -United Bank for Commerce & Investment S.A.C

The CBB Rulebook Module HC-5.3.1A requires the Chairman of the Compensation Committee to be independent of risk taking function or Committees. During 2014, the Chairman of Compensation Committee was also the Chairman of the Executive Committee. Following the resignation of the Chairman of these Committees and the reconstitution of the Board Committees pursuant to Board elections to be held in March 2015, the bank will be in compliance with this requirement.

Nominating Committee

The Nominating Committee supports the Corporate Governance regime of the Bank and instills a best practice approach to the matters assigned to its responsibilities, at all times acting within the criteria set by the CBB Rulebook, the relevant sections of the Bahrain Commercial Companies Law and any other applicable legislation, following a fair and balanced approach.

The principal responsibilities of the Nominating Committee include, identifying and recommending to the Board persons qualified to become a Director of the Board, or any other officer of the Bank, as considered appropriate by the Board. The Committee also oversees the Director’s educational activities in the form of a formal induction program and on-going orientation activities and programs.

The Nominating Committee consists of 5 members comprising 4 independent Directors, including the Chairman and 1 Non-Executive Director.

Board Committee Evaluation

Evaluations of the performance of the Board Committees have been conducted. Applying a scoring methodology proposed by Ernst &Young, a rating of “Excellent” was achieved for each, indicating that the Board Committees continue to operate with a high degree of effectiveness.

(continued)

32

Ahli United Bank

Ahli United Bank

CORPORATE GOVERNANCE(continued)

Management Committees

The Board of Directors has established a management structure with clearly defined roles, responsibilities and reporting lines. The Bank’s management monitors the performance of the Bank and each of its subsidiaries and associates on an ongoing basis and reports this performance to the Board. The monitoring of performance is carried out through a regular assessment of performance trends against budget, and prior periods and peer Banks in each of the markets and collectively through AUB Group committees and sub committees at the parent bank and its subsidiary / affiliated banks’ level. Specific responsibilities as explained below, have been delegated to each committee, and the minutes of all management committees are sent to the Audit and Compliance Committee, that assesses the effectiveness of these committees.

Group Management Committee

The Group Management Committee is the collective AUB Group management forum providing a formal framework for effective consultation and transparent decision-making by the Group CEO & Managing Director and senior management on cross-organisational matters. Appropriate checks and balances ensure the “four eyes” regulatory requirement is met. The Committee has broad mandate encompassing group wide as well as Bank and unit specific issues as determined by the Group CEO & Managing Director and other members of the committee. It is chaired by the Group CEO & Managing Director and comprises of thirteen other members, including all Deputy Group CEO’s and CEO’s of subsidiary and affiliated banks.

Group Asset and Liability Committee

The Group Asset and Liability Committee sets, reviews and manages the liquidity, market risk and funding strategy of the AUB Group and reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by the DGCEO-Treasury & Investment and has eight other members.

Group New Product Committee

The Group New Product Committee reviews and approves new products, processes and services for wealth management, treasury, retail, commercial banking and other areas of the AUB Group. The committee assesses all related reputational, operational, credit, liquidity and market risk, IT, legal, compliance, control, staffing and capital/profit allocation issues related to approving new products. The approval by the Group New Product Committee follows the new product or process development requirements according to the New Product Approval and Development Procedure. It is chaired by DGCEO-Private Banking & Wealth Management and has seven other members.

Group Information Technology Steering Committee

The Group Information Technology Steering Committee oversees the information technology role, strategy formulation, prioritized implementation and delivery of IT projects of the AUB Group within an acceptable, secure and standardised framework. It

recommends the annual IT budget to the Group CEO & Managing Director as part of the annual business planning/budgetary exercise for submission to the Board of Directors for review and final approval. It supervises the implementation of the approved IT annual plan within set deadlines and budgetary/Board approved allocations within the Bank’s overall capital expenditure policy. It is chaired by the DGCEO-Retail Banking and comprises of seven other members.

Group Risk Committee

The Group Risk Committee reviews and manages the risk asset policies, approvals, exposures and recoveries related to credit, operational and compliance risks. It acts as a general forum for the discussions of any aspect of risk facing or which could potentially face the Bank or its subsidiaries and affiliates resulting in reputational or financial loss to the AUB Group. It also oversees the operation of the Group Operational Risk Sub-Committee and Group Special Assets Sub-Committee. It is chaired by the DGCEO-Risk, Legal & Compliance and has four other members.

Group Operational Risk Sub-Committee

Group Operational Risk Sub-Committee administers the management of operational risk throughout the AUB Group. It is chaired by the DGCEO-Operations & Technology and has eight other members.

Group Special Assets Sub-Committee The Group Special Assets Sub-Committee is responsible for the management of the criticized and non-performing assets of the Bank. It has responsibility for monitoring accounts downgraded to watch list and criticized asset status and ensuring that a focused and disciplined recovery strategy is adopted to maximize recoveries. It is chaired by DGCEO Risk, Legal & Compliance and has seven other members.

Management Committee

The Management Committee is the senior collective management forum of the Bank, providing a formal framework for effective consultation and transparent decision-making on organizational matters. Appropriate checks and balances ensure the “four eyes” regulatory requirement is met. The committee operates in a flexible way with a minimum of formality and a broad mandate encompassing both Bank-wide and unit specific issues as determined by the GCEO & Managing Director and its other members in relation to the business of the Bank, as a legal entity. It is chaired by the DGCEO Finance & Strategic Development and has seven other members.

AUB Asset and Liability Committee

AUB Asset and Liability Committee sets, reviews and manages the liquidity, market risk and funding strategy of AUB, the parent bank reviews and allocates capacity on the balance sheet to achieve targeted return on capital, return on asset and liquidity ratios. It is chaired by Group Head of Treasury and has eight other members.

34

Ahli United Bank


Other Governance Measures

In addition to the Board and Management Committee structures, the Board of Directors has approved a number of AUB Group policies to ensure clarity and consistency in the operation of the AUB Group. These policies, which are communicated to staff, include Credit, Anti-money Laundering, Corporate Governance, Personal Account Dealing, Key Persons Dealings, Banking Integrity, Compliance, Legal and Human Resources policies.

Underpinning these policies is the Board approved Group Code of Business Conduct which prescribes standards of ethical business behavior and personal conduct for the Bank’s Directors, its senior management (officers) and its staff.

The Board of Directors of Ahli United Bank B.S.C. (BoD) annually reviews and adopts compensation and related policies and closely monitors the implementation of these policies and processes with respect to the Bank’s staff and Directors. The AUB Compensation Policy provides the remuneration framework for motivating employees and directors with financial motivation to deliver optimum Group performance. The policy aims at rewarding performance by individual contribution within a team oriented approach, remunerating individuals who achieve personal, divisional and Group results and providing a long term incentive to performing staff.

The Banking Integrity Policy, which includes detailed policy and procedures on whistle blowing is specifically designed to facilitate concerns raised with regard to misconduct occurring within, or associated with, the AUB Group.

The Board has also adopted a Group Communications Policy. This policy sets out the authority of AUB Group employees with respect to the communication of information to third parties in the course and scope of their employment. The Bank has an open policy on communication with its stakeholders, which includes: (i) The disclosure of all relevant information to stakeholders on a timely basis in a timely manner; and

(ii) The provision of at least the last three years of financial data on the bank’s website.

Shareholders are invited by the AUB Chairman to attend the AGM. The AUB Chairman and other Directors attend the AGM and are available to answer any questions. The Bank is at all times mindful of its regulatory and statutory obligations regarding dissemination of information to its stakeholders.

The Bank provides information on all events that merit announcement, either on it’s website, www.ahliunited.com, Bahrain Bourse, and other forms of publications, such as press releases, the Bank’s annual report and quarterly financial statements, and the Corporate Governance Policy are all published on it’s website.

As a supporting governance measure, the Board also relies on the ongoing reviews performed by internal and external auditors on the AUB Group’s internal control functions. These reviews are conducted in order to identify any weaknesses, which then enable management to take remedial action.

Compensation disclosures

Ahli United Bank's Compensation Policy (the "Policy") provides the framework for the Bank to attract, retain and motivate employees and directors with financial compensation to deliver optimum personal, functional and Bank performance and reduce the individual's motivation to take excessive and undue risk. This is delivered through a compensation system consisting of Fixed Compensation for employees and directors and Variable Compensation of short term and long term incentives for performing employees.

The Board of Directors reviews and approves on an annual basis, the HR policy and as its integral part, the Compensation and related policies and closely monitors the implementation and administration of these policies and processes with respect to the Bank's employees and directors.

The CBB has issued mandatory regulations relating to Sound Remuneration Practices through an amendment to its rulebook [HC-5 Remuneration of Approved Persons and Material Risk-Takers], effective 1 July 2014 applicable to Approved Persons and Material Risk-Takers of the Bank whose total annual remuneration (including all benefits) is in excess of BD100,000 equivalent. As advised by the CBB, the revisions in the Policy and related schemes have been approved by the shareholders of the Bank in their Annual General Meeting on 31 March 2015 and applied to performance related employee compensation payments made for the financial year 2014. The salient features of the Bank's Policy including the key changes are summarized below:

The Compensation System

The compensation system includes a fixed component (consisting of cash salary, allowances and benefits) that rewards the capacity to hold a role/ position in a satisfactory manner through the employee displaying the required skills and, a variable component (consisting of performance related compensation) that aims to reward collective and individual performance, depending on objectives defined at the beginning of the year and conditional on meeting said objectives, according to performance standards and risk parameters defined by the Bank.

The Compensation system is based on the Bank’s long and short term performance and matches the full gamut of the Bank’s risks and their timeline. The system links and adjusts compensation with all types of risks in the Bank to reduce the incentive for individuals to take excessive and undue risk. It specifies the proportion of fixed and variable remuneration to be consistent with the Board approved Risk Framework. It defers portions of the variable compensation awards for 2014 and subsequent years for the designated Approved Persons and Material Risk-Takers of the Bank over a period of 3 years as required by the CBB. It reduces the awarded deferred variable remuneration in case of losses by the Bank and/ or business line during and after the exercise/ vesting period of the deferred variable compensation as a result of malus and clawback arrangements.

The policy also outlines the basis and methodology for arriving at variable compensation, making allocations, implementing risk adjustments to compensation, the framework for compensation of Approved Persons and Material Risk-Takers, conditions for

(continued)

Annual Report2014

Ahli United Bank

35


deferral malus and claw-back clauses, compliance and disclosure requirements. It also establishes the terms of the Mandatory Share Plan (MSP) scheme and the extension of the existing Employee Share Purchase Plan (ESPP) scheme to comply with CBB regulations and deliver deferred variable compensation in equity/ shares. All equity schemes awards being limited so as not to exceed an aggregate 10% of the total issued outstanding ordinary share capital of the Bank, at any given time.

Compensation levels for each grade/ role are determined by industry measurable statistics, relative to size of operations, business needs, cost control and long term business goals which attracts the appropriate talent to the Bank. Compensation is determined through job evaluation, market benchmarks, performance outcome and aligned to long-term value creation and prudent risk-taking. The Bank ensures that compensation is equitable and team oriented, clearly communicated and adjusted for all types of risk, including reputation risk, liquidity risk and costs of capital. Annual performance and compensation reviews are conducted in March of each year. Employees are not entitled to any additional compensation from their membership of or attendance at Board or Board Committee meetings as a nominee or representative of the Bank. All such fees are assigned to the Bank.

Role of the Compensation Committee

The Compensation Committee (the "Committee") is vested by the Board of Directors through its Terms of Reference with the essential responsibility, inter alia, to provide effective oversight and assure governance over the compensation strategy, structure and systems, to ensure that they are properly implemented. Such responsibilities include, but are not limited to, review and oversight of AUB's compensation and related policies and arrangements for its employees and directors and ensures that any amendments or

updates are annually applied to meet the Bank’s objectives and aligned to CBB regulations, the Kingdom of Bahrain Labour Law for the Private Sector ("Labour Law") and the Bahrain Commercial Companies Law, 2001 (the "Companies Law") , where necessary.

The Chairman and members of the Committee are appointed by the Board from amongst its Directors. The Committee comprises at least 3 members, which should include only Independent Directors or, alternatively, only Non-Executive Directors, of whom a majority are Independent Directors. The Chairman may appoint an alternate member in case of absence of a member. Committee details and meeting dates in 2014 are reproduced in the Corporate Governance Report in this Annual Report. The aggregate compensation/ fees paid to Committee members for 2014 amounted to US$ 12,000.

The Committee approves the annual aggregate amounts payable under fixed and performance related variable compensation schemes for employees. The Committee reviews and approves any material changes in employee benefits as per market competitive trends and cost considerations and makes recommendations with regard to any other employee matters, as brought before it. The Committee reviews compensation payable to the members of the Board of Directors and makes recommendations to the Board of Directors in this regard in line with applicable regulations.

The Committee reviews and tests at least on an annual basis, the Policy and framework to ensure that compensation arrangements comply with regulations and internal policies and to ensure that the compensation system operates as intended and that effective controls exist through testing of compensation outcomes as per the Bank’s risk framework with any breaches of the risk framework used in the evaluation of malus and/ or clawback clauses on deferred compensation by the Committee.

The authority matrix for compensation approvals are as follows:

Action Recommended by Approved by

a) Approve the Bank's annual performance bonus pool funding model based on KPI and KPI and KRI adjustments.

Group Head of HR&DCompensation

Committee

b) Approve the Bank's annual performance bonus amount pool. Group Head of HR&DCompensation

Committee

c) Approve the criteria for performance management and distribution of the Bank's annual performance bonus.


Committee

d) Approve the list of designated "Approved Persons and Material Risk Takers" for previous financial year.


Committee

e) Approve the performance scores, annual increment and annual performance bonus amounts for the GCEO & MD and his direct reports.

Group Head of HR&D (except self )


f ) Approve the performance scores, annual increment and annual performance bonus amounts for the Group Head of Audit and Group Head of Compliance

Audit & Compliance Committee


g) Approve the aggregate performance scores, annual increment and annual performance bonus amounts for all other bank employees.


Committee

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Types of Compensation

Compensation for employees includes fixed compensation, benefits and performance related incentives (short-term and long-term variable compensation) in cash or shares each as defined and approved by the Compensation Committee. Compensation for the Board of Directors is explained later in this report.

External Consultants

Consultants were appointed during the year to advise the Bank on revisions to the Policy and alignment to the new regulations and market best practices including providing consulting advice for the deferred share/ equity-linked schemes.

Compensation of the Board of Directors

The Compensation Committee periodically reviews the compensation for the Board of Directors and its related Committees to ensure compliance with the CBB Rule Book, within the relevant Commercial Companies Law requirements and with the Articles of Association of the Bank. The Bank is in compliance with the CBB Rule Book High Level Controls Module Article No.5.2.1 (c) requiring that compensation of the Board of Directors is linked to attendance and performance with members of the Board of Directors being paid 1/3rd of their total compensation pro-rated on the basis of actual attendance of meetings and the remaining 2/3rd paid for membership unrelated to attendance. Compensation for the Board of Directors and its related committees for 2014 has been approved by the shareholders in the Annual General Meeting on 31 March 2015. The Bank is in compliance with its Articles of Association requiring that total compensation for Directors (excluding sitting fees) is capped at 10% of the Bank's NPAT for 2014, after all the required deductions outlined in Article 188 of the Bahrain Commercial Companies Law, 2001. The compensation of Non-Executive Directors in 2014 does not include any performance-related elements such as shares, share options or other deferred stock-related incentive schemes, bonuses or pension benefits, in compliance with the CBB Rule Book High Level Controls Module Article No.5.5.1. AUB Management Directors who represent or are nominated by AUB or of any of its subsidiaries or affiliates on the Boards or their related Committees are excluded from the compensation/ fees structure as per their contractual arrangements. All Board of Directors' and related Committee fees or other terms of remuneration (except actual expenses) related to representation as AUB nominated Directors are fully credited to AUB. Directors are reimbursed reasonable and customary expenses for communication, transportation, boarding and lodging as per AUB HR policy.

Variable Compensation (Performance Bonus) Pool and Risk Adjustment

Performance-related variable compensation aims at recognizing and rewarding employee’s contribution beyond their regular job requirements, particularly those contributions that increase Bank's productivity and profitability. Performance-related pay could be paid for positive employee performance and/or Bank’s performance. The variable compensation pool is aligned to and

due based on the Bank’s short or long term financial performance, and is subject to reduction in case of the Bank’s poor or negative financial performance.

The Compensation Committee reviews the accrual of the Variable Compensation pool for the Bank and ensures it is based on the overall performance of the Bank and is accrued as a percentage of Net Profit after Tax (the "NPAT") for the preceding financial year and aligned to risk-adjusted performance (credit, liquidity, operational and reputational risk limits formed after considering the full range of current and potential risks as per the Board approved Risk Framework) and the payment of which has no material impact on the capital adequacy ratio of the Bank (Present and Future) taking into consideration the cost of capital to support the overall risk profile of the Bank; and the subsequent allocations from the pool.Accrual and deferral of variable compensation does not oblige the bank to pay the variable remuneration, particularly when the anticipated outcome has not materialized or the bank's financial position does not support such payments.

The Committee at its discretion may propose to reduce or reduce to nil the bonus accrual for the Bank and each line of business and/ or the allocation pool of accrued bonus to businesses if there is a material reduction in the profitability of the Bank or the individual line of business. The Committee shall use its discretion to determine whether the particular business is incurring losses due to a start-up or turnaround situation, in which case, bonus accrual, allocation and pay-out may be allowed to occur.

HR operates a managed bonus accrual model that adjusts annual bonus accrual rates for the Bank based on achievement of specified Key Performance Indicators ("KPI") and Key Risk Indicators ("KRI"), based on which the Compensation Committee reviews the adjustment of the overall bonus pool and allocations. KPI’s measuring the financial and operational performance against business strategy and capital consumption adjust the variable compensation pool and may include all or some factors like: Improvement in Net Profit after Tax, Gross Operating Income, Return on Average Equity, Total Assets and/ or Liabilities, Cost to Income ratio and/ or Capital Adequacy. KRI's measured against compliance to the Bank’s risk framework to adjust the variable compensation pool and may include the prudent management of Credit Market, Liquidity, Operational Risk and Environmental & Social Risk incurred by the bank in the pursuit of its different commercial operations and may include all or some factors like: Audit ratings, Avoidance of regulatory penalties, External ratings, Reduction in non-performing loans, Improvement of provision coverage, Minimum regulatory capital requirements.

The Bank does not provide any form of guaranteed bonus as part of the employment offer or contract to any employee. Severance compensation (except notice period for a maximum period of 3 months) is prohibited except when the Bank provides for it on liquidation of a particular business or on closure of a unit.

Employees have committed to not use personal hedging strategies or compensation and liability-related insurance to undermine the risk alignment effects embedded in their compensation arrangements and provide a signed adherence to the prohibitions on hedging.

(continued)

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Compensation of Control Functions

Performance assessment of the Bank's Approved Persons in Risk Management, Internal Audit, Operations, Finance, Shari'a review/ audit and AML functions has been measured primarily on the achievement of the objectives and targets of their functions, ensuring their independence from business areas.

The Compensation Committee has ensured that the performance measures, evaluation and compensation of regulated roles in the control functions of Risk Management, Internal Audit, Operations, Finance and AML functions are evaluated in co-ordination with the Audit and Compliance Committee to ensure independence of their functions/ job roles from business areas. The fixed and variable compensation proposals for the Group Heads of Audit and Compliance are specifically recommended by the Chairman of the Audit & Compliance Committee.

Compensation of Approved Persons and Material Risk Takers

The performance measurement and the compensation arrangements for designated Approved Persons and Material Risk Takers of the Bank for 2014 is reviewed and approved by the Compensation Committee and is subject to periodic change depending on the changes in total individual compensation and/ or to changes in the organizational structure and business model. The regulations have been applied to the variable compensation awarded to individuals holding these roles in the list. The list of designated Approved Persons and Material Risk-Takers includes the GCEO & MD, Direct Reports to the GCEO & MD and Heads of Qualifying Functions. The regulated roles are based on the level of the individual role and the material impact it has on the Bank's risk profile and the type of risk of the activity. The Committee evaluates the designated Approved Persons and Material Risk-Takers performance as per their agreed performance objectives, Bank and/or business strategy, maintenance and/ or improvement of the Board approved risk profile of the Bank and linked to improvement in the Bank's profit performance and share-holder return. Performance assessment of the Bank's designated Approved Persons is as per the following framework:

Level Area Group Objectives Function Objectives

Group CEO & MD (Business) 100% -

Deputy Group CEOs(Business) 60% 40%

(Control & Support) 40% 60%

Group Heads(Business) 60% 40%

(Control & Support) 40% 60%

The above performance framework ensures that adequate focus is employed by personnel on their core objectives with Business Heads being measured for business performance with a majority on group performance and the rest on development of their function, while control and function heads were measured on a majority of their objectives on the development of their functions and the rest on group objectives related to their respective responsibilities.

•

••

•

Variable compensation for employees is payable at the end of the performance year in the following manner:

Type of Variable Compensation Regulated Roles (Approved Persons and Material Risk Takers) All other employees

Cash

40% for Approved Persons in business lines, direct reports to the GCEO &MD & material risk takers.

50% for Approved Persons in control functions.

100% immediate

Equity instuments/ Shares

60% for Approved Persons in business lines, direct reports to the GCEO & MD & material risk takers deferred in shares over 3 years.

50% for Approved Persons in control functions deferred in shares over 3 years.

Nil

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38


The Compensation Committee reviews and approves all fixed and variable compensation including all benefits for the designated Approved Persons and Material Risk-Takers in regulated roles of the Bank to ensure that payments made are fair to the individual and the Bank, that failure is not rewarded and that the duty to maximize performance and mitigate loss is fully recognized. The variable compensation awarded to the Approved Persons and Material Risk-Takers is based on the Bank’s short or long term financial performance adjusted for all types of risk, and shall be subject to reduction in case of the Bank’s poor or negative financial performance. The compensation report for the Bank includes the regulated roles for 2014 who are Approved Persons in business lines - 7 (2013: 7), Approved Persons in control functions - 9 (2013: 9) and no other material risk takers. Other employees in Bahrain - 608 (2013: 598) and employees in subsidiaries of the Bank - 2,046 (2013: 1,979).

Awards of deferred variable compensation for the designated Approved Persons and Material Risk-Takers of the Bank shall be reduced in case of losses by the Bank and/ or business line during the vesting period of deferred compensation awards as a result of Malus and/or Clawback.

The annual reports and accounts being materially restated, in an adverse manner, including but not limited to a reduction in profit or diminution of capital and reserves, as a result of the wilful or gross negligent conduct of the Participant.

The Employee has deliberately misled the Board or the management of the Bank or the market or the Bank's shareholders regarding the financial performance of the Bank or of any operating unit regarding the returns, operations and risks of the Employee's business or support unit at any time before the Vesting/ Exercise Date.

The Employee's actions have caused harm or may cause potential harm to the good name or reputation of the Bank or of any operating unit or to the Participant's reporting unit.

The Employee has been terminated or ceases to be employed by the Bank for causes as under Article 107 of the Bahrain Labour Law or the Bank's table of gross misconduct. Normal resignation shall not affect the rights of departing employees to receive their rights.

a.

b.

c.

d.

Malus and Clawback Policy

The Bank has adopted a malus policy where deferred variable compensation may be partially reduced or reduced to nil, by the Committee, before Vesting or Exercise and a clawback policy where deferred variable compensation may be partially reduced or reduced to nil, as decided by the Compensation Committee, after the Vesting or Exercise Date on specific conditions which include circumstances where:

(continued)

Details of Compensation Paid

• Members of the Board of Directors

Total Value of Compensation for the fiscal year

2014 US$’ 000

2013 US$’ 000

Compensation for Membership of the Board of Directors and related committees

1,632 1,730

Others (Expenses for the Board) 92 78

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39

• Employees

2014 2013

US$ 000

Fixed Compensation Variable Compensation

Total Compensation

Total Compensation

Unrestricted cash and allowances

Unrestricted Others1

UnrestrictedCash

Deferred -shares / equity linked

instruments 2

Approved persons - business lines 3,937 3,598 794 1,191 9,520 7,403

Approved persons – control functions 2,681 759 480 615 4,535 4,629

Other staff – Bahrain operations 29,856 12,353 6,770 - 48,979 48,818

Staff in subsidiaries 74,175 23,440 10,994 - 108,609 101,182

110,649 40,150 19,038 1,806 171,643 162,032

Note:

1. Others include direct charges such as social security contributions, end of service indemnity accrual charges, life insurance and medical premiums, club memberships, house lease rentals, school fees, vacation air fare, fair value charges for the employee share purchase program and indirect employee expenses such as training, recruitment, Government levies and other costs.

2. Deferred share awards are subject to the malus and clawback policy.

No guaranteed or sign-on bonuses and/ or separation payments have been paid in 2014. These tables include employees in service for part of the year.


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GROUP BUSINESS & RISK REVIEW

Corporate Banking

Market conditions continued to be challenging in a number of regional geographies during 2014, which affected growth in corporate banking assets and liabilities. In a demanding business environment, the division proactively pursued accretion of high grade credits in order to maintain the quality of incremental assets acquired during the year. Off balance sheet and trade finance products remained a key focus for enhancing fee income and, in continuing to manage down higher cost liabilities, the division was successful in stabilising net interest margins and achieving the targeted cost efficiency ratio.

Corporate Banking continued to be strategically structured to deliver premium services to SMEs and specialized industry groups, with particular focus on enhancing relationships with local, regional corporates and government entities. The unit selectively sought out project finance opportunities and syndication transactions to enhance profitability and profile across the region and was equally successful in acquiring operating accounts and liability business from its corporate clients.

Cross-border business was pursued aggressively while cross-selling with the treasury and private banking departments resulted in increased foreign exchange and fee based revenues. The ongoing implementation of business-to-business integration and internet banking solutions continued across the AUB Group, leading to enhanced transaction volumes and low cost liability growth. Going forward, the prospects for domestic growth are expected to be constrained by high volatility in oil prices and local socio-political developments. Cross-border financing, Islamic banking and trade finance remain core activities and will continue to support the expansion of the Bank’s corporate relationships throughout the region.

Whilst net loan growth is expected to be moderate in 2015, profitability is forecasted to remain stable, due to the continued focus on low cost liabilities, increased fee based activities and lower impairment charges.

Retail Banking AUB has established a leading retail presence with over 136 branches across 7 markets, supported by a commanding ATM network and comprehensive e-channel services. The strong regional network spanning the GCC, Egypt, Iraq, Libya and UK offers customers a wealth of local knowledge, experience and support across these markets. AUB has successfully leveraged this network under MyGlobal to provide regional cross border banking services. MyGlobal clients are empowered to access AUB network and services from any location and are supported by dedicated relationship managers with in depth local knowledge in the various markets.

During 2014, AUB continued to strengthen its roots of sustainable growth, introducing innovative consumer and mortgage finance products to maintain asset growth momentum. The Bank has partnered with the Social Housing Project in Bahrain to provide mortgage finance linked to subsidies which is targeted to generate significant growth in the mortgage book. In recognition of future challenges to retail lending across the region, lending operations were reviewed to identify avenues that would ensure sustained growth going forward. The introduction of new products and services at competitive rates, employing fixed and variable rate structures, has enabled AUB to maintain growth momentum in the asset portfolio.

The Bank's strong position in low cost liabilities was further consolidated in 2014 mainly through its flagship product MyHassad Savings. This market-leading offering continued to support the largest prize pool in the region and has enabled AUB to further improve its household penetration market share and cross sell opportunities.

Focus on progressive technology enhancements remained imperative in delivering the highest levels of customer service. Significant developments during the year included the rollout of an advanced mobile banking application for IOS and Android smart phones and enhanced functionality for AUB’s Global online trading platform, the first ever online trading solution launched by a regional bank in the Middle East. The Bank also initiated implementation of an advanced front-end branch banking system which will further enhance branch service as well as operational capability, cost efficiency and controls. The new system, incorporating advanced CRM capabilities, provides AUB front office staff with a 360 degree view of customer relationship and customer profitability, improving both customer service and cross sell capability.

Islamic Banking operations were further expanded to include Oman where the full range of Shari'a compliant banking products and services was launched through a network of 7 dedicated Islamic branches. The Bank also rolled out the first Islamic product in Libya for the auto finance market and continued to strengthen its well established presence and product range in Bahrain, Kuwait and the United Kingdom.

Other important new initiatives in Retail Banking included expansion in the Bank’s Premium Banking unit, distribution of general insurance products through the branch network with alliance partners, as well as development of payroll products and new B2B initiatives. Additional growth in Point of Sale (POS) services also enabled AUB to target new clients for floats and fee income.

Treasury

2014 presented yet another year of unprecedented challenges in the markets, with Central Banks' policies continuing to focus on providing excess liquidity and maintaining historic low levels of interest rates. Market focus, which in the first six months was

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GROUP BUSINESS & RISK REVIEW

consumed by problems that precipitated banks into restructuring balance sheets and liquidity management, shifted latterly to be directed more on the US Federal Reserve's Quantitative Easing exit plan and the near term affects of potential future US interest rate increases.

In difficult market conditions, Treasury strategy continued to prioritize broadening AUB’s liability base and further reducing the dependence on wholesale funding. Proactive and cost effective management of the liability base enabled both Bahrain and the Group to maintain prudent levels of liquidity throughout the year, meeting all of our financial obligations while continuing to remain a net provider of funds to the wholesale market. Improving the Bank’s net interest margin was the primary driver for most of the year, reducing high cost deposit rates to levels more in line with the Bank’s profit targets.

Market volumes continued to decline throughout most of 2014, mainly due to the continued global slowdown and ongoing effects of Central Banks' interventions. However, AUB market share remained secure, with the Bank able to offer clients very competitive pricing in an exceptionally difficult trading environment. As a result, Treasury was successful in meeting its 2014 trading budget, taking advantage of various trends which developed mid-year in both the foreign exchange and interest rate markets. It was testament to the Bank's performance that AUB was again named as Best Foreign Exchange Provider in Bahrain for the ninth consecutive year.

Going forward, changes in the regulatory environment will be a determining factor in the near term on how the markets conduct business. Increased focus on counterparty risk and collateral management will drive major banks into rationalising credit policies and a move towards a full clearing system for derivative trades is seen as inevitable. Market volatility will persist, continuing to dominate the global trading environment which will present Treasury with many opportunities to increase profitability by deploying non-balance sheet products and enable the Bank to market both technical and professional skills to corporate and retail customers. As international trading activity and global economic conditions improve, market volumes are forecast to increase in 2015. AUB's preeminent presence in the MENA region positions the Bank strongly to capitalize on a recovery in global financial markets. Treasury strategy will continue to focus on client driven activity and fee based income to enhance profitability and support the Group's sustainable growth.

Private Banking & Wealth Management

2014 proved to be a challenging year for the private banking industry which experienced significant turbulence across the investment spectrum, with relatively stable market conditions preceding high volatility in the fourth quarter.

Most notably, equities in developed markets outperformed other asset classes, backed by positive US data and improving economic conditions, resulting in the US Federal Reserve concluding the QE programme. In the Eurozone, a divided mandate on full scale QE implementation undermined recovery which was further compromised by political developments arising from the Russia-Ukraine confrontation. Most surprisingly, the oil price fell by more than 50% in the second half of the year, eroding much of the gains made in Middle Eastern markets. These challenging conditions were further accentuated by a more restrictive regulatory regime.

Against this backdrop, the Division continued to focus on offering superior portfolio management services to clients based on their risk profiling, and on enhancing product platforms for both conventional and Shari'a compliant structured and third party offerings as well as developing customised products for clients.

The Division was successful in achieving its objectives with the enhancement of the total relationship approach to the client base. Significant progress was also achieved in several key areas. Assets under management increased across the different investments portfolios for individual and institutional clients. Investors' appetite for direct property investment continued to be stimulated in the residential and commercial UK markets with financing provided through AUBUK. Growth in the fixed income portfolio was successfully facilitated backed by client demand for income generating portfolios and, overall, new client acquisitions increased.

In meeting the increasing challenge from market dislocations, the Division invested resources in strengthening the product platform by providing wider options with the flexibility to switch across different asset allocation themes, in line with market movements, and by adapting to an open architecture facilitating future product development.

In addition, enhancements to research and risk profiling further strengthened the relationship management process, enabling the Division to demonstrate the primary duty of care towards our clients.

During the year Real Estate Fund Management was successful in launching and closing UK commerical and US residential sector funds, both targeted to provide stable income yield. The third party fund platform was further strengthened with the inclusion of regional and global asset portfolios offering both conventional and Shari'a investment opportunities. In support of client requirements for customised investment solutions, the established structured product platform was adapted for open architecture and additional bond and sukuk offerings were provided in line with new issuances.

Acknowledgement of the quality, performance and development of AUB's Private Banking continued to be widely acclaimed by the world's leading financial publications - FT Global, Euromoney and The Banker - which collectively commended AUB with three Best Private Banking awards.

(continued)

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Looking ahead, the strategy for Group Private Banking will focus on growing the client base through new acquisitions and upgrading the current base together with enhanced cross border activities. Key factors to promote sustainable growth include: adding creative products in line with client expectations to manage volatility; enhancing the investment proposition to suit wider asset allocation models and improving the systems capability to facilitate direct client access to their portfolios and, internally, enable better relationship management by Private Banking staff.

Information Technology The Information Technology division maintained close alignment to the Group’s business strategies by delivering customer focused, innovative and secured solutions. During 2014, IT strategy continued to focus on standardization of services applied uniformly across the Group, wherever possible, to achieve the benefits associated with economies of scale while providing a consistent customer experience irrespective of location within the AUB banking network. In the retail sector, the successful launch of a mobile banking app for retail customers, covering both Android and iPhone platforms, provided customers with an enriched user experience for conducting banking business ‘on the move’, within a robust security framework. Retail internet banking services were also enhanced with updated screens as well as new functionality to support additional bill payments with a corresponding collection facility for utility companies.

Significant progress was achieved in the straight-through processing of SWIFT messaging for clients’ vendor and salary payments, improving operational efficiency for the customers and the Bank alike. In addition, the suite of electronic banking products available to the customer base was further expanded with an internet portal enabling electronic initiation and tracking of trade finance business for clients. For Private Banking clients, enhanced risk profiling tools along with enriched portfolio reporting was implemented and a new Visa credit card product was launched for Islamic banking clients. In recognising the value and importance of access to management information, AUB Group continued to invest in the enterprise-wide data warehousing solution as the single integrated source of consolidated data, supporting significant enhancements to financial performance and credit risk modules. New modules and core banking enhancements were implemented that adhere to relevant compliance and regulatory frameworks while system enhancements were developed to support social housing loans.

Deriving maximum value from IT infrastructure investments remained a key priority. Adopting virtualisation and cluster technologies enabled the Bank to deliver proficient processing capabilities across all critical business applications and services. New and advanced server storage and processing power

enhancements were also achieved to support incremental demands for capacity and growth.

A major strategic focus for the year was placed on the consolidation, cost efficiency and integration of complementary processes, through an improved network infrastructure and server virtualisation program. Significant rationalisation was attained on the intra-group communications network with specific emphasis on network security to pro-actively detect and realign defences against complex external threats. With an increasing number of business applications being integrated into the IT infrastructure, priority was placed on improving load balancing to ensure minimum redundancy across the server infrastructure. In sustaining the highest levels of information security and customer confidentiality, the Bank achieved accreditation to the latest ISO and payment card industry security standards while information leakage prevention and monitoring controls were further strengthened across customer end-point usage, network traffic and data storage.

Among significant benefits derived from the successful rollout of the business-to business (B2B) platform was the seamless, straight-through processing capability of banking transactions, eliminating redundant administrative paper work. All customers, retail and corporate, are now actively encouraged to enable electronic statement generation, further reducing paper consumption and enhancing the Bank’s green credentials. Migrating physical servers to virtual machines and consolidating the server requirement also resulted in lowering energy consumption and cooling needs, reducing the Bank’s carbon footprint. Moving forward, a major initiative was launched to develop a front end system that assists customer facing staff with servicing and managing customer relationships in a more dynamic and holistic manner. The new system is scheduled for phased implementation across Group entities during the next two years.

Human Resources

At year-end 2014, a total of 3,416 permanent staff demonstrated the stature, diversity and growth of the AUB organisation. Representing 45 different nationalities employed across 7 countries, total staff, of whom one third was female, increased 3.35% over the prior year.

The Human Resource function continued to invest in initiatives to select, develop and enhance the skill sets of able and qualified employees, empowering them with the skills, knowledge and experience to drive current and future business performance. Staff productivity, as measured by revenue per unit of employee cost, increased by more than 25% on a Group-wide basis compared to the previous year, validating effective deployment of the Bank's human resources to enhance shareholder value. In developing an organization-wide culture based on performance and meritocracy, particular attention was directed on compliance

GROUP BUSINESS & RISK REVIEW(continued)

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Ahli United Bank

with new regulatory requirements in the competency-based selection, evaluation and rewarding of employees, aligned to further strengthening the Bank’s capital base and maintaining a conservative risk profile. Successful implementation of the Group career development program continued to identify exceptional individuals and formulate plans that develop their capabilities to occupy key business and control roles.

In total, 923 individual training programs were conducted across the Group in 2014, a 8.5 % increase compared to the prior year, amounting to almost 35,000 hours of training. The second edition of the Group credit academy program was successfully completed with 20 graduates joining designated postings across the Group. Oversight mechanisms and people management policies continued to be reviewed and aligned with corporate governance guidelines set by regulators while a centralised Group HR infrastructure and ongoing streamlining of processes was leveraged to reduce resourcing costs. In optimising business technology, specific programs were conducted for key business units in partnership with IT to increase the utilisation of new technology applications and improve productivity.

The Bank's responsibility and commitment to its social and economic environments was further underlined through financial support for accredited societies, charities and NGOs by funding youth scholarships, various development projects, and donations to the local community. The e-services footprint has been extended across the group by enabling e-salary services to our staff in AUB Egypt, replacing the traditional paper pay slip, asserted the Group's green credentials and good corporate citizenship.

Going forward, HR strategy will be shaped by alignment to regulatory changes, increased pressure for localisation, higher customer expectations and a changing customer structure. Training will focus on supporting technology investment and strengthening leadership capabilities. New initiatives will include the introduction of the Group treasury school providing a comprehensive understanding of treasury activities to include back office and operations and empowered to award the ACI dealing certificate.

In the face of heightened competition, increased customer demand and regulatory complexity, AUB's talent management strategy will focus on sourcing and developing the requisite skills to innovate and offer new products to our customers and effectively manage processes. In the GCC, AUB's prominence as a preferred employer for professionals with the required specialised skills, qualifications and regional expertise will be commensurate with sustaining business growth.

Risk Management

Risk management involves the identification, analysis, evaluation, acceptance and management of all financial and non-financial risks that could have a negative impact on the Group’s performance and reputation. The Risk management function provides an

oversight and advice on the Board sanctioned risk appetite and strategy, development and maintenance of a supportive system for management of risks through procedures and training. The major risks associated with AUB’s business are credit risk, market risk (which includes foreign exchange, interest rate and equity price risk), liquidity risk, operational risk and reputational risk. AUB’s risk management policies have been developed to:

• identify and analyse these risks,

• set appropriate risk limits and controls,

• monitor the risks and adherence to limits.

While risks that are embedded in the banking business cannot be completely eliminated, the risk management function aims to effectively manage these risks with the objective of earning competitive returns over the degree of assumed risk. Risk is evaluated based on the potential impact on income and asset value, taking into consideration changes in political, economic and market conditions, and the creditworthiness of the Bank’s clients.

The risk management function relies on the competence, experience and dedication of its professional staff, sound risk management policies and procedures, and ongoing investment in technology and training.

The Board of Directors and senior management are involved in the establishment of all risk policies and processes and the periodic oversight and guidance of the risk management function. The Board of Directors reviews and approves at least annually the Bank’s key Risk Management policies. The Risk Management processes are subject to additional scrutiny by independent internal and external auditors, and the Bank’s regulators which help further strengthen the risk management practices.

The risk management and control process is based on detailed policies and procedures that encompass:

• business line accountability for all risks taken. Each business line is responsible for developing a plan that includes adequate risk/return parameters, as well as risk acceptance criteria;

• a credit function that understands, monitors and independently controls each credit relationship ensuring that the appropriate approvals are obtained and a uniform risk management standard, including objective risk ratings, has been correctly assigned to each and every credit relationship;

• product and business policies, which are clearly understood, monitored and are in agreement with the overall credit policy and the Board approved risk framework;


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45

• the ongoing assessment of portfolio credit risk and approval of new products; and

• an integrated limits structure that permits management to control exposures and monitor the assumption of risk against predetermined approved tolerances. The Board of Directors establishes global limits for each major type of risk which are sub allocated to individual business units.

Credit Risk

Credit risk is the risk of financial loss due to the failure of a counter party to perform its obligations according to agreed terms. It arises principally from lending, trade finance and treasury activities. The credit process is consistent for all forms of credit risk to a single obligor. Overall exposure is evaluated on an ongoing basis to ensure a broad diversification of credit risk. Potential concentrations by country, product, industry, and risk grade are regularly reviewed to avoid excessive exposure and ensure a broad diversification.

Credit risk within the Group is actively managed by a rigorous process from initiation to approval to disbursement. All day-to-day management is in accordance with well-defined credit policies and procedures (CP&P) that detail all credit approval requirements and are designed to identify at an early stage exposures which require more detailed review and closer monitoring. Specific impairment provisions are made against credit exposures where whole or a portion of the credit is considered doubtful of recovery. If an asset is considered unrecoverable, a mandatory write-off takes place. This is conducted by a risk management process, which is completely independent in reporting terms from the asset generating departments.

Risk rating of individual counterparties plays an important role in the approval and maintenance of credit limits. The risk rating process ensures that the quality of the credit portfolio of the Bank is maintained at the highest possible level and stays within board approved risk limits. The CP&P includes a robust risk rating system developed by a leading international rating agency, which provides a credit rating for each individual credit based on an extensive set of financial and non-financial parameters. This risk rating system is essential for the Bank to progress towards Basel II’s more advanced requirements.

The risk management function stratifies the credit portfolio by level of risk to monitor the credit quality and to be able to assess the pricing and aid in the prompt identification of problem exposures. Management of material problem exposures is vested with Special Assets Groups in the respective Group operating entities, all of which report to the Group Risk Management area. All exposures are subject to quarterly and in certain cases monthly reviews.

In addition to the Group Risk Management function, credit risk is overseen by the Group Risk Committee (GRC) which is vested with the overall day-to-day responsibility for all matters relating to group credit risk. Its responsibilities include the following:

• formulating and implementation of credit policies and monitoring compliance,

• acts as a credit approval body for credits within its delegated authority,

• recommends to the Executive Committee all policy issue changes related to credit risk as well as credits falling outside its discretion,

• determines appropriate pricing and security guidelines for all risk asset products,

• reviews the ongoing risk profile of the Group as a whole and by individual products, business sectors and countries,

• ensures the adequacy of specific and collective impairment provisions and makes appropriate recommendations to the Executive Committee.

Market Risk

Market risk is the risk that adverse movements in market risk factors including foreign exchange rates, interest rates, credit spreads, commodity prices and equity prices will reduce the Bank’s income or the value of its portfolios.

Given the Group’s ongoing low risk strategy, aggregate market risk levels are low relative to the size of the Bank’s balance sheet. A robust control process incorporating well defined limits is applied to effectively manage market risks and monitor daily position limits and stop losses. The Group utilizes Value-at-Risk (VaR) models to estimate potential losses that may arise from adverse market movements in addition to other quantitative and non-quantitative risk management techniques.

The Group calculates VaR using a one-day holding period at a confidence level of 95%, which takes into account the actual correlations observed historically between different markets and rates.

Value at Risk

2014US$ ’000

2013US$ ’000

Average 0.83 1.00

Minimum 0.31 0.42

Maximum 1.77 1.64

VaR limits are delegated by the Board to the Group Asset and Liability Committee (GALCO) and sub-delegated to the Group’s subsidiary ALCO.

The Group recognizes that VaR is based on the assumption of normal market conditions and that certain market shocks can result in losses greater than anticipated. Therefore, supplementary


46

Ahli United Bank

risk management techniques such as stress testing form a core part of the Group’s risk control processes.

Liquidity Risk

Liquidity risk is the risk of being unable to meet the Bank’s cash commitments without having to raise funds at unreasonable prices or sell assets on a forced basis. It is measured by estimating the Group’s potential liquidity and funding requirements under different stress scenarios.

The Group’s liquidity management policies and procedures are designed to ensure that funds are available under all circumstances to meet the funding requirements of the Group not only under adverse conditions but at sufficient levels to capitalize on opportunities for business expansion.

Prudent liquidity controls ensure access to liquidity without unexpected cost effects. Liquidity projections based on both normal and stressed scenarios are performed regularly. The control framework also provides for the maintenance of a prudential buffer of liquid, marketable assets and an adequately diversified deposit base in terms of maturity profile and number of counter parties.

The Group Risk Management function continuously monitors liquidity risk and actively manages the balance sheet to control liquidity. At each subsidiary, the respective treasury function manages this risk with monitoring by the Risk Management department and jurisdiction of its Assets and Liabilities Committee (ALCO). At the Group level liquidity risk is managed by the Group Assets and Liabilities Committee (GALCO), which is vested with the overall day-to-day responsibility for all matters relating to Group liquidity.

Operational Risk

Operational Risk is “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.”

Operational risk is managed by the Group Operational Risk Committee (GORC). The Group has adopted an ongoing Operational Risk Self-Assessment (ORSA) process. Assessments are made of the operational risks facing each function within the Bank and these are reviewed regularly to monitor significant changes and the adequacy of controls. Operational risk loss data is collected and reported to senior management on a regular basis.

During the year, the CBB imposed a financial penalty of BD 50 for one un-cleaned account information submitted to BCRB.

The Group’s independent audit function regularly evaluates operational procedures and advises senior management and the Board of any potential problems. Additionally, the Group maintains adequate insurance coverage and business continuity contingency plans utilizing offsite data storage and backup systems. The adequacy of the Bank’s business continuity plans are confirmed by a programme of regular testing with oversight being provided by GORC.


Annual Report2014

Ahli United Bank

47

GROUP ORGANISATION

48

Ahli United Bank

Adel A. El-LabbanGroup Chief Executive Officer and Managing Director

Director since 30 July 2000. Holds a Masters in Economics (Highest Honors) from the American University, Cairo, 1980, Bachelors in Economics (Highest Honors) from American University, Cairo, 1977. Group Chief Executive Officer & Managing Director, Ahli United Bank BSC, Bahrain; Director, Ahli United Bank (UK) PLC; Director, Ahli United Bank KSC, Kuwait; Deputy Chairman, Ahli United Bank (Egypt) SAE, Egypt; First Deputy Chairman, Ahli Bank SAOG, Oman; Deputy Chairman, Commercial Bank of Iraq, ; Deputy Chairman, United Bank for Commerce & Investment S.A.C. Libya;, Director Bahrain Association of Banks, Bahrain; Former Chief Executive Officer and Director of the United Bank of Kuwait PLC, UK; Former Managing Director, Commercial International Bank of Egypt; Former Chairman, Commercial International Investment Company, Egypt; Former Vice President, Corporate Finance, Morgan Stanley, USA; Former Assistant Vice President, Arab Banking Corporation, Bahrain.

(Total years of experience: 36 years)

Sanjeev BaijalDeputy Group Chief Executive Officer - Finance and Strategic Development

Deputy Chairman Legal and General Gulf B.S.C.(c) & Legal and General Gulf Takaful B.S.C.(c), Bahrain; Director, Ahli United Bank K.S.C.P., Kuwait; Director, Ahli Bank S.A.O.G., Oman; Previous experience as Group Head of Finance, Ahli United Bank B.S.C., Bahrain; Financial Controller, Al-Ahli Commercial Bank, Bahrain; Held various positions at Ernst & Young, Bahrain and Price Waterhouse in India; Chartered Global Management Accountant under Association of International Certified Professional Accountants; Member of the American Institute of Certified Public Accountants (AICPA), and Associate Member of the Institute of Chartered Accountants of India (ACA).


Keith GaleDeputy Group Chief Executive Officer - Risk, Legal and Compliance

Director, Ahli United Bank K.S.C.P. Kuwait; Director, Ahli United Bank S.A.E, Egypt; Director, Ahli Bank S.A.O.G., Oman; Previously Group Head of Risk Management, Ahli United Bank, Bahrain; Former Head of Credit and Risk at ABC International Bank PLC; Former Assistant Vice President, Internal Audit Department, Arab Banking Corporation, Bahrain. Held various positions in the UK with KPMG and Ernst & Young. Associate Member of the Institute of Chartered Accountants England & Wales (ACA) and holds a BA (Hons) in Accounting and Finance from the University of Lancaster, UK.


GROUP MANAGEMENT

Shafqat AnwarDeputy Group Chief Executive Officer - Operations and Technology

Director, Ahli Bank S.A.O.G., Oman; Former Director, Ahli United Finance Company, Egypt; Former Director, Ahli United Bank (Egypt) S.A.E.; Former Deputy Chief Executive Officer, Finance, Risk and Operations, Ahli United Bank (Egypt) S.A.E.; Former Group Head of Operations, Ahli United Bank B.S.C., Bahrain; Former Chief Operating Officer, Commercial Bank of Bahrain, Bahrain; Former Chief Operating Officer, Grindlays Bahrain Bank, Bahrain; Former Operations Manager Gulf, ANZ Grindlays Bank, UAE. Held various management positions with ANZ Banking Group in Bangladesh, the UK, the UAE and Australia. Holds a Master of Business Administration, a Master of Public Administration and a Bachelor of Social Sciences (BSS) with Honours in Public Administration from the University of Dhaka, Bangladesh.


Abdulla Al-RaeesiDeputy Group Chief Executive Officer - Retail Banking

Deputy Chairman, Ahli United Finance Company, Egypt; Director, Legal and General Gulf B.S.C.(c) & Legal & General Takaful B.S.C.(c), Bahrain since March 2009; Former Director, International Chamber of Commerce, Bahrain; Former: Director, Benefit Company, Bahrain; Chairman of AUB Group IT Steering Committee, Deputy Chief Executive Officer Retail Banking, Ahli United Bank B.S.C., Bahrain, AGM & Head of Delivery Channels, Commercial Bank of Qatar, Qatar; AGM, Support Group, Doha Bank, Qatar; Head of Business & Technology Consulting Group, Arthur Andersen. Holds an MBA in Business Administration from the United Kingdom.


Sawsan AbulhassanDeputy Group Chief Executive Officer - Private Banking and Wealth Management

Director, Ahli United Bank PLC, UK; Director, AUB Nominees Ltd.; Director, Securities & Investment Company (SICO), Bahrain; Director, The Family Bank, Bahrain; Previously with Citibank N.A. Bahrain, Resident Vice President, Wealth Management and Distribution; and Head of Wealth Management, Standard Chartered Bank, Bahrain. Holds an MBA in Finance (with distinction) and a B.Sc. in Management from the University of Bahrain.


Annual Report2014

Ahli United Bank

49

GROUP MANAGEMENT

Amr GadallahDeputy Group Chief Executive Officer – Treasury and Investments

Former Senior Vice President and Group Treasurer Arab Banking Corporation Bahrain , Former Director ABC Islamic Bank , ABC Investments Jordan , ABC Securities Bahrain and ABC Securities Egypt . Holds BA (Honors) and MA in Economics from American University in Cairo.

(Total Years of experience: 31 years)

Robert JonesGroup Head - Audit

Former Deputy Chief Executive Officer, Finance, Risk, Operations and Technology at Ahli United Bank (UK) PLC, Former Head of Audit for AUB Bahrain, Former Audit Manager in the National Commercial Bank (Saudi Arabia). Has qualified the Information Systems Audit and Control Association (CISA) and the Institute of Chartered Secretaries & Administrators (ACIS) examinations.


Iman Al-MadaniGroup Head – Human Resources & Development, CGM

Former Group Head of Human Resources & Head of Human Resources, Bank of Kuwait & Middle East (BKME). Former Assistant General Manager Human Resources, Burgan Bank, Kuwait. Certified Corporate Governance Officer (CCGO) from the London Business School. Holds a Bachelor of Science in Mathematics from the University of Denver, USA and an Associate Degree in Computer Science, Lane College, Oregon State, USA.


James ForsterChief Executive Officer at Ahli United Bank, UK

Director, Ahli United Bank (UK) PLC. Former Deputy Chief Executive Officer, Corporate Banking & Treasury, Ahli United Bank (UK) PLC, Former Head of Structured Finance, Ahli United Bank (UK) PLC, Former Group Head of Leveraged Finance (Execution), The Fuji Bank Limited, UK. Completed education from Haileybury College, Hertfordshire, UK and Foundation Course in Chartered Accountancy from City of London Polytechnic.


Nevine El MesseeryChief Executive Officer at Ahli United Bank, Egypt

Director, Ahli United Bank (Egypt) S.A.E. Former General Manager, Corporate Banking at Commercial International Bank (CIB), Egypt, Former Chairman of the Credit Committee, Former Chair of the Concession Tariff Committee, Former Member of the ALCO Committee, Former Member of the CIB Life Insurance Company Management Committee. Has held several roles as Chair of the Board of Directors in several investment companies and subsidiaries of CIB. Former General Manager, Egyptian American Bank (Credit Agricole). Holds a Graduate Degree, Faculty of Commerce from Cairo University, Egypt.


Nouri AldubaysiChief Executive Officer at Commercial Bank of Iraq

Director, Commercial Bank of Iraq P.S.C., Iraq. Former Deputy General Manager, Rasheedi Bank, Iraq. Held senior management positions with Rafidain Bank and Al Rasheed Bank in Iraq. Holds a degree in Accounting from International Institute of Accountancy in Lebanon


Lloyd MaddockChief Executive Officer at Ahli Bank S.A.O.G, Oman

Former Deputy Group Chief Executive Officer, Corporate Banking, Ahli United Bank; Former Chief Executive Officer, HSBC Pakistan; Former Chief Executive Officer, HSBC Kuwait; Former Head of Wholesale Credit & Risk, HSBC MENA region, subsequent to working in various senior management roles with HSBC covering Corporate Banking, Strategy & Risk Management. Holds a Bachelor in Engineering (Honours) Civil & Mining Engineering 1990 from the University of Exeter, UK.


Ayman El GammalChief Executive Officer at United Bank for Commerce & Investment, Libya

Director, United Bank for Commerce & Investment S.A.C., Libya. Former Assistant Managing Director and Head of Investments, National Investment Bank, Egypt, Former Managing Director, Asset Management - Private Equity, NAEEM Holdings, Egypt, Former Managing Director, EFG Hermes Private Equity, Egypt, Former Executive Director, Commercial International Investment Company, Former Assistant General Manager, Commercial International Bank (CIB), Egypt, former board member in various companies and banks representing employers’ investments . Holds a BA in Business from Cairo University, Egypt.


(continued)

50

Ahli United Bank

AHLI UNITED BANK B.S.C.Bldg. 2495, Road 2832Al Seef District 428P.O. Box 2424, ManamaKingdom of BahrainTelephone : +973 17 585 858Facsimile : +973 17 580 569Email: [email protected]

AHLI UNITED BANK (UK) PLC35 Portman Square, London W1H 6LRUnited KingdomTelephone : +44 20 7487 6500Facsimile : +44 20 7487 6808Email: [email protected]

AHLI UNITED BANK K.S.C.P.P.O. Box 71 Safat , 12168, KuwaitTelephone : +965 1802000Facsimile : +965 22461430Email: [email protected]

COMMERCIAL BANK OF IRAQ P.S.C.Al Sadoon Street, Baghdad, IraqTelephone : +964 17 405 583Telephone : +973 17 566 468/9Facsimile : +964 17 184 312

AHLI UNITED BANK (EGYPT) S.A.E.81 Ninety StreetSector A, Fifth Settlement, New CairoP.O. Box 413Cairo, EgyptTelephone : +20 2 26149500 : +20 2 26149600 : +20 2 26149700Facsimile : +20 2 26135160Email: [email protected]

CONTACT DETAILS

AHLI BANK S.A.O.G.P.O. Box 545Postal Code 116Mina Al FahalSultanate of OmanTelephone : +968 24577000Facsimile : +968 24568001Email: [email protected]

UNITED BANK FOR COMMERCE & INVESTMENT S.A.C.Gumhouria Street - Mansoura AreaTripoli, LibyaTelephone : +00218 213345602/3/4Facsimile : +00218 213345601Email: [email protected]

KUWAIT AND MIDDLE EASTFINANCIAL INVESTMENT COMPANY K.S.C.P.P.O. Box 819, Safat 13009, KuwaitTelephone : +965 22255000Facsimile : +965 22252564Email: [email protected]

Annual Report2014

Ahli United Bank

51

Ahli United Bank

CONSOLIDATED FINANCIAL STATEMENTS31 December 2014

Independent auditors' report to the shareholders 54Consolidated Statement of Income 55Consolidated Statement of Comprehensive Income 56Consolidated Balance Sheet 57Consolidated Statement of Cash Flows 58Consolidated Statement of Changes in Equity 59Notes to the Consolidated Financial Statements 61

Ahli United Bank

Report on the consolidated financial statementsWe have audited the accompanying consolidated financial statements of Ahli United Bank B.S.C. ("the Bank") and its subsidiaries ("the

Group"), which comprise the consolidated balance sheet as at 31 December 2014, and the related consolidated statements of income,

comprehensive income, cash flows and changes in equity for the year then ended, and a summary of significant accounting policies and

other explanatory information.

Board of Directors' responsibility for the consolidated financial statementsThe Bank's Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance

with International Financial Reporting Standards, and for such internal control as the Board of Directors determines is necessary to enable

the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in

accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial

statements. The procedures selected depend on the auditors’ judgement, 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

the Board of Directors, 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.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as

at 31 December 2014 and its consolidated financial performance and its cash flows for the year then ended in accordance with International

Financial Reporting Standards.

Report on other regulatory requirementsAs required by the Bahrain Commercial Companies Law and the Central Bank of Bahrain (CBB) Rule Book (Volume 1), we report that:

a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith; and

b) the financial information contained in the Report of the Board of Directors is consistent with the consolidated financial statements.

We are not aware of any violations of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law,

the CBB Rule Book (Volume 1 and applicable provisions of Volume 6) and CBB directives, regulations and associated resolutions, rules and

procedures of the Bahrain Bourse or the terms of the Bank’s memorandum and articles of association during the year ended 31 December

2014 that might have had a material adverse effect on the business of the Bank or on its financial position. Satisfactory explanations and

information have been provided to us by management in response to all our requests.

Partner's registration no: 11722 February 2015Manama, Kingdom of Bahrain.

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS OF AHLI UNITED BANK B.S.C.

54

Ahli United Bank

2014 2013

Note US$ ’000 US$ ’000

Interest income 4a 1,180,503 1,093,547

Interest expense 4b 417,247 380,298

Net interest income 763,256 713,249

Fees and commissions 5 147,227 141,138

Trading income 6 35,204 34,901

Net gains on investments 37,724 18,271

Share of profit from associates and joint venture 10 24,362 28,086

Other operating income 33,495 22,684

Fees and other income 278,012 245,080

OPERATING INCOME 1,041,268 958,329

Net provision for loan losses and others 8f 132,180 157,358

Provision for investments 9 18,430 59,321

Total provisions 150,610 216,679

NET OPERATING INCOME 890,658 741,650

Staff costs 171,643 162,032

Depreciation and impairment 28,673 26,807

Other operating expenses 108,854 98,815

OPERATING EXPENSES 309,170 287,654

Gain on sale of investment held for sale 10 - 212,910

PROFIT BEFORE TAX 581,488 666,906

Tax expense 22 50,234 42,663

NET PROFIT 531,254 624,243

NET PROFIT ATTRIBUTABLE TO:

OWNERS OF THE BANK 482,529 579,374

Owners of the Bank before gain on sale of investment held for sale 482,529 366,464

Gain on sale of investment held for sale - 212,910

NON-CONTROLLING INTEREST 48,725 44,869

NET PROFIT 531,254 624,243

EARNINGS PER SHARE ATTRIBUTABLE TO THE

OWNERS OF THE BANK FOR THE YEAR:

Basic earnings per share (US cents) 23 8.0 10.0

Diluted earnings per share (US cents) 23 8.0 9.9

For the year ended 31 December 2014

CONSOLIDATED STATEMENT OF INCOME

The attached notes 1 to 39 form part of these consolidated financial statements

Adel A. El-LabbanGroup Chief Executive Officer

& Managing Director


Rashed Al-MeerDeputy Chairman

Annual Report2014

Ahli United Bank

55


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


2014US$ ’000

2013US$ ’000

Net profit for the year 531,254 624,243

Other comprehensive income (OCI)

Items that will not be reclassified to consolidated statement of income

Net change in fair value of financial assets measured at fair value through OCI (32,176) 3,424

Net change in pension fund reserve (18,255) 6,595

Revaluation of freehold land 640 11,444

Items that may be reclassified subsequently to consolidated statement of income

Foreign currency translation adjustments (62,527) (42,312)

Net change in fair value of cash flow hedges (19,079) 2,271

Other comprehensive income for the year (131,397) (18,578)

Total comprehensive income for the year 399,857 605,665

Total comprehensive income attributable to:

Owners of the Bank 368,165 563,377

Non-controlling interest 31,692 42,288

399,857 605,665

56

Ahli United Bank

Note2014

US$ ’0002013

US$ ’000

ASSETS

Cash and balances with central banks 7a 649,212 820,296

Treasury bills and deposits with central banks 7b 2,611,085 2,587,534

Deposits with banks 3,823,517 4,409,068

Loans and advances 8 18,464,536 17,305,682

Non-trading investments 9 5,771,902 5,527,973

Investment in associates and joint venture 10 288,315 302,258

Investment properties 11 254,490 201,146

Premises and equipment 12 267,002 274,696

Interest receivable and other assets 13 672,890 560,854

Goodwill and other intangible assets 14 641,939 662,386

TOTAL ASSETS 33,444,888 32,651,893

LIABILITIES AND EQUITY

LIABILITIES

Deposits from banks 15 4,499,672 4,366,757

Borrowings under repurchase agreements 16 901,590 1,271,111

Customers’ deposits 17 23,006,768 22,028,457

Interest payable and other liabilities 18 854,993 778,260

Subordinated liabilities 19 351,646 642,205

TOTAL LIABILITIES 29,614,669 29,086,790

EQUITY

Ordinary share capital 20 1,530,471 1,415,570

Treasury shares (3,997) (20,710)

Preference share capital 20 - 12,500

Reserves 1,864,400 1,741,464

Equity attributable to the owners of the Bank 3,390,874 3,148,824


TOTAL EQUITY 3,830,219 3,565,103

TOTAL LIABILITIES AND EQUITY 33,444,888 32,651,893

At 31 December 2014

CONSOLIDATED BALANCE SHEET


Adel A. El-LabbanGroup Chief Executive Officer

& Managing Director


Rashed Al-MeerDeputy Chairman

Annual Report2014

Ahli United Bank

57


CONSOLIDATED STATEMENT OF CASH FLOWS


Note2014

US$ ’0002013

US$ ’000

OPERATING ACTIVITIES

Profit before tax 581,488 666,906

Adjustments for:

Depreciation and impairment 28,673 26,807

Net gains on investments (37,724) (18,271)

Gain / income relating to investment held for sale 10 - (212,910)

Net provision for loan losses and others 8f 132,180 157,358

Provision for non-trading investments 9 18,430 59,321

Gain on subordinated debt disposal - (4,601)

Share of profit from associates and joint venture 10 (24,362) (28,086)

Operating profit before changes in operating assets and liabilities 698,685 646,524

Changes in:

Mandatory reserve deposits with central banks (64,940) (40,921)

Treasury bills and deposits with central banks (23,551) (601,298)

Deposits with banks 70,244 48,247

Loans and advances (1,200,780) (1,469,299)

Interest receivable and other assets (112,036) (75,488)

Deposits from banks 132,915 (239,885)

Borrowings under repurchase agreements (369,521) (590,246)

Customers’ deposits 978,311 3,258,713

Interest payable and other liabilities 78,491 (32,308)

Cash from operations 187,818 904,039

Income tax paid (39,674) (30,934)

Net cash from operating activities 148,144 873,105

INVESTING ACTIVITIES

Net increase in non-trading investments (1,534,102) (997,475)

Proceeds from sale or redemption of non-trading investments 1,263,167 646,696

Proceeds from sale of investment held for sale - 616,055

Net increase in investment properties (58,463) (29,348)

Net increase in premises and equipment (15,220) (23,229)

Dividends received from associates 9,124 5,471

Net cash (used in) from investing activities (335,494) 218,170

FINANCING ACTIVITIES

Additional investment in subsidiaries (54,506) (33,088)

Proceeds from issue of preference shares - 27,000

Buy back/repayment of subordinated liabilities (190,559) (40,073)

Dividends and other appropriations paid (252,246) (211,837)

Dividends paid to non-controlling interest (20,856) (19,864)

Sale (purchase) of treasury shares - net 16,713 (20,710)

Net cash used in financing activities (501,454) (298,572)

Foreign currency translation adjustments (62,527) (42,312)

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (751,331) 750,391

Cash and cash equivalents at 1 January 4,174,706 3,424,315

CASH AND CASH EQUIVALENTS AT 31 DECEMBER 24 3,423,375 4,174,706

58

Ahli United Bank

For the year ended 31 December 2014CONSOLIDATED STATEMENT OF CHANGES IN EQUITY


Attributable to the owners of the Bank

Reserves

Ordinaryshare

capitalUS$ ’000

Preferenceshare

capitalUS$’000

Treasuryshares

US$ ’000

SharepremiumUS$ ’000

Statutoryreserve

US$ ’000

RetainedearningsUS$ ’000

Proposedappro-

priationsUS$ ’000

Otherreserves

(Note 21(h))US$ ’000

Totalreserves

US$ ’000

Non-controlling

interestUS$ ’000

TotalUS$’000

Balance at 1 January 2014

1,415,570 12,500 (20,710) 648,169 295,814 592,001 255,713 (50,233) 1,741,464 416,279 3,565,103

Mandatorily Convertible Preference shares dividend paid

(note 21(i))

- - - - - - (3,217) - (3,217) - (3,217)

Ordinary share dividend paid (note 21(i))

- - - - - - (251,496) - (251,496) - (251,496)

Dividends of subsidiaries

- - - - - - - - - (20,856) (20,856)

Donations paid - - - - - - (1,000) - (1,000) - (1,000)

Bonus shares issued 71,468 - - - - (71,468) - - (71,468) - -

Purchase of treasury shares

- - (4,620) - - - - - - - (4,620)

Arising on additional acquisitions in a

subsidiary - - - 2,245 - - - - 2,245 12,230 14,475

Ordinary shares issued on conversion of Class B preference shares (note 20(c))

13,781 (12,500) - (1,281) - - - - (1,281) - -

Ordinary shares issued on conversion of convertible subdebt (note 20(e))

29,652 - - 70,348 - - - - 70,348 - 100,000

Fair value amortisation

of share based transactions

- - - - - - - 4,262 4,262 - 4,262

Sale of treasury shares

- - 21,333 - - - - 6,378 6,378 - 27,711

Total comprehensive income for the year

- - - - - 482,529 - (114,364) 368,165 31,692 399,857

Transfer to statutory reserve (note 21(c))

- - - - 48,253 (48,253) - - - - -

Proposed dividend on ordinary shares (note 21(i))

- - - - - (270,452) 270,452 - - - -

Proposed donations - - - - - (1,000) 1,000 - - - -

Balance at 31 December 2014

1,530,471 - (3,997) 719,481 344,067 683,357 271,452 (153,957) 1,864,400 439,345 3,830,219

59Annual Report2014

Ahli United Bank

For the year ended 31 December 2014CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Attributable to the owners of the Bank

Reserves

Ordinaryshare

capitalUS$ ’000

Preferenceshare

capitalUS$’000

Treasuryshares

US$ ’000

SharepremiumUS$ ’000

Statutoryreserve

US$ ’000

RetainedearningsUS$ ’000

Proposedappro-

priationsUS$ ’000

Otherreserves

(Note 21(h))US$ ’000

Totalreserves

US$ ’000

Non-controlling

interestUS$ ’000

TotalUS$’000

Balance at 1 January 2013

1,303,164 125,000 - 540,508 237,877 390,693 214,880 (35,913) 1,348,045 385,298 3,161,507

Mandatorily Convertible Preference shares dividend paid

(note 21(i))

- - - - - - (4,538) - (4,538) - (4,538)

Ordinary share dividend paid (note 21(i))

- - - - - - (209,342) - (209,342) - (209,342)

Dividends of subsidiaries

- - - - - - - - - (19,864) (19,864)

Donations paid - - - - - - (1,000) - (1,000) - (1,000)

Bonus shares issued 65,419 - - - - (65,419) - - (65,419) - -

Transferred on sale of FVOCI investments

(note 21(h))

- - - - - 1003 - - 1,003 - 1,003

Arising on additional acquisitions in a

subsidiary - - - 685 - - - - 685 9,430 10,115

Other equity movements of a subsidiary

- - - - - - - - - (873) (873)

Ordinary shares issued on conversion of mandatorily convertible preference shares (note 20(d))

41,762 (125,000) - 83,238 - - - - 83,238 - -

Issue of Class B preference shares (note 20(c))

- 12,500 - 14,500 - - - - 14,500 - 27,000

Treasury shares 5,225 - (20,710) 9,238 - - - 1,677 10,915 - (4,570)

Total comprehensive income for the year

- - - - - 579,374 - (15,997) 563,377 42,288 605,665

Transfer to statutory reserve (note 21(c))

- - - - 57,937 (57,937) - - - - -

Proposed dividend on IFC Capitalization (Equity) Fund L.P. preference shares (note 21(i))

- - - - - (3,217) 3.217 - - - -

Proposed dividend on ordinary shares

(note 21(i)) - - - - - (251,496) 251,496 - - - -

Proposed donations - - - - - (1,000) 1,000 - - - -

Balance at 31 December 2013

1,415,570 12,500 (20,710) 648,169 295,814 592,001 255,713 (50,233) 1,741,464 416,279 3,565,103


60

Ahli United Bank

31 December 2014

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. CORPORATE INFORMATION

The parent company, Ahli United Bank B.S.C. (AUB or the Bank) was incorporated in the Kingdom of Bahrain on 31 May 2000 originally as a closed company and changed on 12 July 2000 to a public shareholding company by Amiri Decree number 16/2000. The Bank and its subsidiaries as detailed in note 2 below (collectively known as the Group) are engaged in retail, commercial, islamic and investment banking business, global fund management and private banking services through 104 branches, as at 31 December 2014, in the Kingdom of Bahrain (21 branches), the State of Kuwait (37 branches), the Arab Republic of Egypt (34 branches), Republic of Iraq (10 branches) and the United Kingdom (2 branches). It also operates through its managed associates in the Sultanate of Oman (19 branches) and Libya (12 branches) with a total network of 31 branches as at 31 December 2014. The Bank operates under a retail banking licence issued by the Central Bank of Bahrain. The Bank's registered office is located at Building 2495, Road 2832, Al Seef District 428, Kingdom of Bahrain.

The consolidated financial statements for the year ended 31 December 2014 were authorised for issue in accordance with a resolution of the directors dated 22 February 2015.

2. BASIS OF CONSOLIDATION

The consolidated financial statements comprise the financial statements of the Bank and its controlled subsidiaries as at and for the years ended 31 December 2014 and 2013. The results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Control is achieved where the Bank is exposed, or has rights, to variable returns from its involvement from its investee and has the ability to affect those returns through its power over the investee. The Bank re-assesses whether or not it controls an investee if facts and circumstances indicates that there are any change to elements of control. The financial statements of the subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. Adjustments are made to the consolidated financial statements to bring into line any dissimilar accounting policies that may exist.

All material intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated on consolidation. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities.

The following are the Bank's principal subsidiaries:

Group's nominal holding

NameCountry of

incorporation31 December

201431 December

2013

Ahli United Bank (U.K.) PLC (AUBUK) United Kingdom 100.0% 100.0%

Ahli United Bank K.S.C.P. (AUBK) State of Kuwait 74.9% 74.9%

Kuwait and Middle East Financial Investment Co. K.S.C.P. (closed) (KMEFIC), a subsidiary of AUBK*

State of Kuwait 75.3% 75.3%

Ahli United Bank (Egypt) S.A.E. (AUBE) Arab Republic of Egypt 85.4% 85.4%

Commercial Bank of Iraq P.S.C. (CBIQ) Republic of Iraq 74.3% 71.3%

* Adjusted for subsidiary's holdings

Financial information of a subsidiary that has material non-controlling interest is provided below and information pertaining to other subsidiaries have been published in the Bank's annual report under the section of principal subsidiaries.

Proportion of equity interest held by non-controlling interests are provided below:

NameCountry of

incorporation31 December

201431 December

2013

Ahli United Bank K.S.C.P. (AUBK) State of Kuwait 25.1% 25.1%

US$ '000 US$ '000

Accumulated non-controlling interest as at: Ahli United Bank K.S.C.P. (AUBK)

295,153 288,821

Profit allocated to material non-controlling interest:Ahli United Bank K.S.C.P. (AUBK)

40,958 36,301

Summarised financial information of AUBK is provided below. The information is based on amounts as reported in consolidated financial statements of AUBK before inter-company eliminations and adjustments.

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31 December 2014


2. BASIS OF CONSOLIDATION (continued)

31 December2014

US$ ’000

31 December2013

US$ ’000

Ahli United Bank K.S.C.P. (AUBK)

Balance sheet related information of AUBK

Loans and advances 8,476,917 7,590,845

Non-trading investments 515,803 244,728

Total assets 12,292,565 11,221,728

Customers' deposits 9,894,998 7,420,965

Total liabilities 11,132,930 10,075,945

Income statement related information of AUBK

Total operating income 354,925 347,972


Total comprehensive income 138,925 165,525

Dividends paid to non-controlling interest 20,856 17,178

Cash flow related information of AUBK

Net cash (used in) from operating activities (17,873) 533,911

Net cash used in investing activities (300,168) (61,153)

Net cash used in financing activities (82,218) (67,597)

3. ACCOUNTING POLICIES

3.1 Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis as modified for the re-measurement at fair value of freehold land, certain financial instruments (as detailed below in note 3.3(c)) and all derivative financial instruments. In addition, as more fully discussed below in note 3.3(h)(i), carrying values of recognised assets that are designated as hedged items in fair value hedges are adjusted to the extent of the fair value attributable to the risk being hedged. The consolidated financial statements are presented in US Dollars which is the Group's functional currency and all values are rounded to the nearest thousand (US Dollars thousand) except where otherwise indicated.

Statement of complianceThe consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by International Accounting Standards Board (IASB) and in conformity with the Bahrain Commercial Companies Law and the Central Bank of Bahrain and Financial Institutions Law.

(A) New Standards and Interpretations issued but not yet effectiveThe following new Standards and amendments have been issued by the International Accounting Standards Board (IASB) but are not yet mandatory as of 31 December 2014:

- IFRS 15 - Revenue from Contracts with customers (effective 1 January 2017). - IFRS 9 – Financial Instruments (effective for annual periods beginning on or after 1 January 2018) During 2012, the Group early adopted phase 1 of IFRS 9 – “Classification and Measurement”. It is currently evaluating the impact of IFRS 15 and the Impairment and Hedge accounting sections of IFRS 9 which were issued in 2014.

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3. ACCOUNTING POLICIES (continued)

3.1 Basis of preparation (continued)

(B) New Standards and Interpretations issued and effective (i) The Group has adopted the following new and amended International Accounting Standards/International Financial Reporting Standards as of 1 January 2014: - Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) - IAS 32 – Financial Instruments: Presentation - Offsetting Financial Assets and Financial liabilities (Amendment) - IAS 36 – Impairment of Assets - Recoverable Amount Disclosures for Non-Financial Assets (Amendment) - IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting (Amendment) The above amendments to IFRSs which are effective for annual accounting periods starting from 1 January 2014 did not have any material impact on the accounting policies, financial position or performance of the Group.

3.2 Significant accounting judgements and estimates The preparation of the consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of income, expenses, financial assets, liabilities, the accompanying disclosures and disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Judgements Judgements are made in the classification of financial instruments into 'fair value' and 'amortised cost' based on business model. Further goodwill and intangible assets with indefinite lives have been allocated to cash generating units for impairment testing. Judgements are also made in determination of the objective evidence that a financial asset is impaired. Business model In making an assessment of whether a business model’s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to management. In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows, the Group considers: • Management’sstatedpoliciesandobjectivesfortheportfolioandtheoperationofthosepoliciesinpractice;• Management'sevaluationoftheperformanceoftheportfolio;• Management’sstrategyintermsofearningcontractualinterestrevenuesorgeneratingcapitalgains. Estimates Pension plans Estimates and assumptions are used in determining the Group's pension liabilities. The cost of the defined benefit pension plan and other post-employment medical benefits and the present value of pension obligations are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Impairment losses on loans and advances, non-trading investments and other assets Estimates are made regarding the amount and timing of future cash flows when measuring the level of provisions required for non-performing loans, portfolios of performing loans with similar risk characteristics where the risk of default has increased, as well as provisions for non-trading investments and other assets. These are more fully described in note 3.3 (g).

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3.2 Significant accounting judgements and estimates (continued)

Fair value of financial instruments Estimates are also made in determining the fair values of financial assets and derivatives that are not quoted in an active market. Such estimates are necessarily based on assumptions about several factors involving varying degrees of uncertainty and actual results may differ resulting in future changes in such provisions. Impairment of goodwill and intangible assets Impairment exists when carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The key assumptions used to determine the recoverable amount for the different CGUs, are disclosed and further explained in note 14. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. 3.3 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements, besides those detailed in note 3.1 are set out below. These policies have been consistently applied to all the years presented. (a) Investments in associates and joint venture Associate companies are companies in which the Group exercises significant influence but does not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The Group classifies an investment as "joint venture" when it is a party to a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Investments in associate companies and joint ventures are accounted for using the equity method. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, and then recognises the loss in the statement of income. The reporting dates of the associates and joint venture and the Group are identical and the associates' and joint venture's accounting policies materially conform to those used by the Group for like transactions and events in similar circumstances. Adjustments are made to the consolidated financial statements to bring into line any dissimilar accounting policies that may exist. The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities. (b) Foreign currency translation

(i) Transactions and balances Transactions in foreign currencies are initially recorded in the relevant functional currency at the rate of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the rate of exchange ruling at the balance sheet date. Any resulting exchange differences are included in "trading income" in the consolidated statement of income.

Non-monetary assets and liabilities that are measured at historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary investments classified as fair value through other comprehensive income (FVTOCI) measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined and the differences are included in other comprehensive income as part of the fair value adjustment of the respective items, unless these items are designated as fair value through profit or loss (FVTPL) or are part of an effective hedging strategy, in which case it is recorded in the consolidated statement of income.

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3.3 Summary of significant accounting policies (continued)

(b) Foreign currency translation (continued)

(ii) Group companies

Assets and liabilities of foreign subsidiaries whose functional currency is not US Dollars are translated into US Dollars at the rates of exchange prevailing at the balance sheet date. Income and expense items are translated at average exchange rates prevailing for the reporting period. Any exchange differences arising on translation are included in “foreign exchange translation reserve” forming part of other comprehensive income except to the extent that the translation difference is allocated to the non-controlling interest. On disposal of foreign operations, exchange differences relating thereto and previously recognised in other comprehensive income are recognised in the consolidated statement of income. (c) Financial instruments The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are initially recognised at the fair value plus, for an item not recorded at FVTPL, transaction costs that are directly attributable to its acquisition or issue. Premiums and discounts are amortised on a systematic basis to maturity using the effective interest rate method and taken to interest income or interest expense as appropriate. (i) Date of recognition All “regular way” purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the Group receives or delivers the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the timeframe generally established by regulation or convention in the market place. (ii) Treasury bills and deposits with central banks Treasury bills and deposits with central banks are initially recognised at cost. Premiums and discounts are amortised to their maturity using the effective interest rate method.

(iii) Deposits with banks and other financial institutions and loans and advances Deposits with banks and other financial institutions and loans and advances are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. After initial recognition, these are subsequently measured at amortised cost using the effective interest rate method, adjusted for effective fair value hedges, less any amounts written off and provision for impairment. The losses arising from impairment of these assets are recognised in the consolidated statement of income in "provision for loan losses and others" and in an impairment allowance account in the consolidated balance sheet. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortisation is included in "interest income" in the consolidated statement of income. (iv) Debt instruments Debt instruments are measured at amortised cost using the effective interest rate method if: - the assets are held within a business model whose objective is to hold assets in order to collect contractual cash flows; and - the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If either of these two criteria is not met, the financial assets are classified and measured at fair value through the profit or loss (FVTPL). Additionally, even if the financial asset meets the amortised cost criteria the Group may choose at initial recognition to designate the financial asset at FVTPL based on business model.

The Group accounts for any changes in the fair value in the consolidated statement of income for assets classified as "FVTPL". The change in value is not recognized for assets carried at cost or amortised cost.

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(c) Financial instruments (continued) (v) Equity investments Investments in equity instruments are classified as FVTPL, unless the Group designates an equity investment that is not held for trading as Fair Value through Other Comprehensive Income (FVTOCI) on initial recognition. At initial recognition, the Group can make irrevocable election on an instrument by instrument basis to designate equity instrument as FVTOCI. If an equity investment is designated as FVTOCI, all gains and losses, except for dividend income, are recognised in other comprehensive income and are not subsequently included in the consolidated statement of income. (vi) Other financial instruments A financial asset is classified as held for trading if: - it has been acquired principally for the purpose of selling in the near term; - on initial recognition it is part of a portfolio of identified financial instruments that are managed together and for which there is a recent actual pattern of short term profitability; or - it is a derivative and not designated and effective as a hedging instrument or a financial guarantee. Only financial assets that are measured at amortised cost are tested for impairment. (vii) Derivatives (other than hedging instruments) Changes in fair values of the derivatives held for trading are included in the consolidated statement of income under "trading income". Derivatives embedded in other financial instruments are not separated from the host contract and the entire contract is considered in order to determine its classification. These financial instruments are classified as FVTPL and the changes in fair value of the entire hybrid contract are recognised in the consolidated statement of income.

(viii) Deposits and subordinated liabilities These financial liabilities are carried at amortised cost, less amounts repaid. (d) Derecognition of financial assets and financial liabilities A financial asset (or where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where: - the rights to receive cash flows from the asset have expired; - the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement; or - the Group has transferred its rights to receive cash flows from the asset and either (i) has transferred substantially all the risks and rewards of the asset, or (ii) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. (e) Repurchase agreements Where investments are sold subject to a commitment to repurchase them at a predetermined price, they remain on the consolidated balance sheet and the consideration received is included in “Borrowings under repurchase agreements”. The difference between the sale price and repurchase price is treated as interest expense and is accrued over the life of the agreement using the effective interest rate method.

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(f) Determination of fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell an asset or transfer a liability takes place either in the principal market, or in the absence of a principal market, in the most advantageous market. The fair value of financial instruments that are quoted in an active market is determined by reference to market bid prices respectively at the close of business on the balance sheet date. The fair value of liabilities with a demand feature is the amount payable on demand. The fair value of interest-bearing financial assets and financial liabilities that are not quoted in an active market and are not payable on demand is determined by a discounted cash flow model using the current market interest rates for financial instruments with similar terms and risk characteristics. For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined by reference to the current market value of another instrument that is substantially similar, or is determined using net present valuation techniques. Equity securities and funds classified under level 3 are valued based on discounted cash flows and dividend discount models. The significant inputs for valuation of equity securities classified under level 3 are annual growth rate of cash flows and discount rates and for funds it is the illiquidity discount. Lower growth rate and higher discount rate, illiquidity discount will result in a lower fair value. The impact on the consolidated statement of financial position or the consolidated statement of shareholders’ equity would be immaterial if the relevant risk variables used to fair value the unquoted securities were altered by 5 per cent. There was no material changes in the valuation techniques used for the purpose of measuring fair value of investment securities as compared to the previous year.

Investments in funds are stated at net asset values provided by the fund managers. The fair value of unquoted derivatives is determined either by discounted cash flows or option-pricing models. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the assets or liabilities. For assets and liabilities that are recognised in the financial statements on a recurring basis, the group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period disclosed in note 34. (g) Impairment of financial assets

An assessment is made at each balance sheet date to determine whether there is any objective evidence that a specific financial asset or a group of financial assets may be impaired. If such evidence exists, the estimated recoverable amount of that asset or a group of financial assets is determined and any impairment loss, based on the net present value of future anticipated cash flows, is recognised in the consolidated statement of income and credited to an allowance account. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group.

The present value of the estimated future cash flows for loans and other interest bearing financial assets is discounted at the financial asset's original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. In addition to specific provisions against individually significant financial assets, the Group also makes collective impairment provisions on groups of financial assets, which although not identified as requiring a specific provision, have a greater risk of default than the risk at initial recognition. Financial assets are grouped on the basis of similar credit risk characteristics that are indicative of the debtors’ ability to pay all amounts due according to the contractual terms and the collective impairment provision is estimated for any such group where credit risk characteristics of the group of financial assets has deteriorated. Factors such as any deterioration in country risk, industry, technological obsolescence as well as identified structural weaknesses or deterioration in cash flows are taken into consideration and the amount of the provision is based on the historical loss pattern within each group, adjusted to reflect current economic changes.

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(g) Impairment of financial assets (continued) Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to the 'provision for loan losses and others' in the consolidated statement of income. (h) Hedge accounting

The Group enters into derivative instruments including futures, forwards, swaps and options to manage exposures to interest rate and foreign currency risks, including exposures arising from forecast transactions. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. Derivatives are stated at fair value. Derivatives with positive market values are included in "Interest receivable and other assets" and derivatives with negative market values are included in "interest payable and other liabilities" in the consolidated balance sheet. At inception of the hedge relationship, the Group formally designates and documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, management objectives and strategy for undertaking the hedge. The methods that will be used to assess the effectiveness of the hedging relationship form part of the Group's documentation. Also at the inception of the hedge relationship, a formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item. Hedges are formally assessed at each reporting date. A hedge is regarded as highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated were offset in a range of 80% to 125%. For situations where the hedged item is a forecast transaction, the Group assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated statement of income.

For the purposes of hedge accounting, hedges are classified into two categories: (i) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; and (ii) cash flow hedges which hedge exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. (i) Fair value hedges For fair value hedges which meet the conditions for hedge accounting, any gain or loss from remeasuring the hedging instrument at fair value is recognised immediately in the consolidated statement of income. The hedged item is adjusted for fair value changes relating to the risk being hedged and the difference is recognised in the consolidated statement of income. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, the difference between the carrying value of the hedged item on termination and the value at which it would have been carried without being hedged is amortised over the remaining term of the original hedge. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the consolidated statement of income.

(ii) Cash flow hedges For cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument which is determined to be an effective hedge is recognised initially in OCI. The ineffective portion of the fair value of the derivative is recognised immediately in the consolidated statement of income as "trading income". The gains or losses on effective cash flow hedges recognised initially in OCI are either transferred to the consolidated statement of income in the period in which the hedged transaction impacts the consolidated statement of income or included in the initial measurement of the related asset or liability.

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3.3 Summary of significant accounting policies (continued) (h) Hedge accounting (continued) (ii) Cash flow hedges (continued) For hedges which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of the hedging instrument are recognised in the consolidated statement of income for the year. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. In the case of cash flow hedges, the cumulative gain or loss on the hedging instrument recognised in OCI remains in OCI until the forecasted transaction occurs, unless the hedged transaction is no longer expected to occur, in which case the net cumulative gain or loss recognised in equity is transferred to the consolidated statement of income for the year. (i) Offsetting financial instruments Financial assets and financial liabilities are only offset and the net amount reported in the consolidated balance sheet when there is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis. (j) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Interest income and expense For all interest bearing financial instruments, interest income or expense is recorded using the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a short period, where appropriate, to the net carrying amount of the financial assets or financial liability. Interest that is 90 days or more overdue is excluded from income. Interest on impaired loans and advances and other financial assets is not recognised in the consolidated statement of income. (ii) Fees and commissions income Credit origination fees are treated as an integral part of the effective interest rate of financial instruments and are recognised over their lives, except when the underlying risk is sold to a third party at which time it is recognised immediately. Other fees and commissions income are recognised when earned. (iii) Dividend income Dividend income is recognised when the right to receive payment is established. (k) Business combinations, goodwill and other intangible assets Business combinations are accounted for using the purchase method of accounting. Assets and liabilities acquired are recognised at the acquisition date fair values with any excess of the cost of acquisition over the net assets acquired being recognised as goodwill. Changes in parent's ownership interest in a subsidiary that do not result in loss of control are treated as transactions between equity holders and are reported in equity.

Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Intangible assets are measured on initial recognition at their fair values on the date of recognition. Following initial recognition, intangible assets are carried at originally recognised values less any accumulated impairment losses.

Impairment of goodwill and intangible assets with indefinite life is determined by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount, an impairment loss is recognised immediately in the consolidated statement of income.

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3.3 Summary of significant accounting policies (continued) (k) Business combinations, goodwill and other intangible assets (continued)

For the purpose of impairment testing, goodwill and intangible assets with indefinite life acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated: - represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and - is not larger than a segment based on either the Group’s primary or the Group's geographic segment reporting format determined in accordance with IFRS 8 Operating Segments. (l) Premises and equipment Freehold land is initially recognised at cost. After initial recognition, freehold land is carried at the revalued amount. The revaluation is carried out periodically by independent professional property valuers. Fair value is determined by reference to market-based evidence. The resultant revaluation surplus is recognised, as a separate component under equity. Revaluation deficit, if any, is recognised in the consolidated statement of income, except that a deficit directly offsetting a previously recognised surplus on the same asset is directly offset against the surplus in the revaluation reserve in equity. Premises and equipment are stated at cost, less accumulated depreciation and impairment. Depreciation on buildings and other premises and equipment is provided on a straight-line basis over their estimated useful lives. The estimated useful lives of the assets for the calculation of depreciation are as follows: - Freehold buildings 40 to 50 years - Leasehold land and buildings Over the lease period - Other premises and equipment Up to 10 years (m) Investment property Land and buildings held for the purpose of capital appreciation or for long term rental yields and not occupied by the Group is classified as investment properties. Investment properties are measured at cost less accumulated depreciation (depreciation for buildings based on an estimated useful life of 30-40 years using the straight line method) and accumulated impairment. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated statement of income in the period of retirement or when sale is completed.

(n) Cash and cash equivalents

Cash and cash equivalents comprise cash and balances with central banks, excluding mandatory reserve deposits, together with those deposits with banks and other financial institutions and treasury bills having an original maturity of three months or less. (o) Provisions Provisions are recognised when the Group has a present obligation arising from a past event and the costs to settle the obligation are both probable and able to be reliably estimated.

(p) Employee benefits Defined benefit pension planPension costs are recognised on a systematic basis so that the costs of providing retirement benefits to employees are evenly matched, so far as possible, to the service lives of the employees concerned. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest) are recognised immediately in OCI.

Defined contribution plans The Group also operates a defined contribution plan, the costs of which are recognised in the period to which they relate.

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(q) Taxes

There is no tax on corporate income in the Kingdom of Bahrain. Taxation on income from foreign entities is provided for in accordance with the fiscal regulations of the countries in which the respective Group entities operate. Deferred taxation is provided for using the liability method on all temporary differences calculated at the rate at which it is expected to be payable. Deferred tax assets are only recognised if recovery is probable. (r) Fiduciary assets Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not incorporated in the consolidated balance sheet. (s) Non-controlling interests Non-controlling interests represents the portion of profit or loss and net assets in the subsidiaries not attributable to the Bank’s equity shareholders. Any change in Group's ownership interest in the subsidiary that does not result in a loss of control is accounted for as an equity transaction. (t) Mandatory convertible preference shares Mandatory convertible preference shares which carry a mandatory coupon, and are convertible to equities at a future date, are recognised under equity in the consolidated balance sheet. The corresponding dividends on those shares are accounted as appropriation of profits for the corresponding year. (u) Dividends on ordinary shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank's shareholders. Dividends for the period that are approved after the balance sheet date are shown as an appropriation and reported in the consolidated statement of changes in equity, as an event after the balance sheet date. (v) Employees' share purchase plan The Group operates an employees' share purchase plan for certain eligible employees. The difference between the issue price and the fair value of the shares at the grant date is amortised over the vesting period in the consolidated statement of income with a corresponding effect to equity.

(w) Financial guarantees and loan commitments In the ordinary course of business, the Group gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are contracts that require the Group to make specified payments to reimburse the holders for a loss that is incurred because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions. Financial guarantees are initially recognised in the consolidated financial statements at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequent to initial recognition, the Group's liability under each guarantee is measured at the higher of the amortised commission and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee.

(x) Islamic banking The Islamic banking activities of the group are conducted in accordance with Islamic Shari'a principles, as approved by the Shari’a Supervisory Board. The financial statements extracts relating to these activities are prepared in accordance with the Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), IFRS and Central Bank of Bahrain regulations, as applicable.

- Earnings prohibited by Shari'a The Islamic operation is committed to avoid recognising any income generated from non-Islamic sources. Accordingly, all non-Islamic income is credited to the charity account where the Islamic operation uses these funds for charitable purposes. - Commingling of funds The funds of Islamic operation are not commingled with the funds of the conventional operations of the Bank.

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(y) Islamic products Murabaha An agreement whereby the Group sells to a customer commodities, real estate and certain other assets at cost plus an agreed profit mark up whereby the Group (seller) informs the purchaser of the price at which the asset had been purchased and also stipulates the amount of profit to be recognized.

Ijara A lease agreement between the Group (lessor) and the customer (lessee), whereby the Group earns profit by charging rentals on assets leased to customers. TawarruqA sales agreement whereby a customer buys commodities from the Group on a deferred payment basis and then immediately resells them for cash to a third party. Mudaraba An agreement between two parties; one of them provides the funds and is called Rab-Ul-Mal and the other provides efforts and expertise and is called the Mudarib and is responsible for investing such funds in a specific enterprise or activity in return for a pre-agreed percentage of the Mudaraba income. In the case of normal loss, the Rab-Ul-Mal would bear the loss of its funds while the Mudarib would bear the loss of its efforts. However, in the case of default, negligence or violation of any of the terms and conditions of the Mudaraba agreement, only the Mudarib would bear the losses. The Group acts as Mudarib when accepting funds from depositors and as Rab-Ul-Mal when investing such funds on a Mudaraba basis.

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 the case of default, negligence or violation of any of the terms and conditions of the Wakala. Istisna’a Istisna’a is a sale contract between a contract owner and a contractor whereby the contractor based on an order from the contract owner undertakes to manufacture or otherwise acquire the subject matter of the contract according to specifications, and sells it to the contract owner for an agreed upon price and method of settlement whether that be in advance, by instalments or deferred to a specific future time.

Revenue recognitionRevenue is recognised on the above Islamic products as follows: Income from Murabaha, Tawarruq and Istisna’a are recognised on an effective yield basis which is established on the initial recognition of the asset and is not revised subsequently.

Income from Ijara is recognized over the term of the Ijara agreement so as to yield a constant rate of return on the net investment outstanding. Income (loss) on Mudaraba financing is based on expected results adjusted for actual experience as applicable, while similarly the losses are charged to income. Estimated income from Wakala is recognised 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. (z) Unrestricted investment accounts' share of profit The profit computed after taking into account all income and expenses at the end of a financial year is distributed between unrestricted investment account holders which include Mudaraba depositors and the Bank's shareholders. The share of profit of the unrestricted account holders is calculated on the basis of their daily deposit balances over the year, after reducing the agreed and declared Mudaraba fee. Unrestricted investment account holders do not bear the expenses relating to non compliance with Shari'a regulations.

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4. NET INTEREST INCOME

(a) INTEREST INCOME

2014US$’000

2013US$’000

Treasury bills 60,131 38,875

Deposits with banks and other financial institutions 43,276 54,708

Loans and advances 838,528 774,130

Non-trading investments 238,568 225,834

1,180,503 1,093,547

(b) INTEREST EXPENSE

2014US$’000

2013US$’000

Deposits from banks and other financial institutions

(including repurchase agreements) 64,373 80,368

Customers' deposits 339,189 286,392

Subordinated liabilities 13,685 13,538

417,247 380,298

NET INTEREST INCOME 763,256 713,249

5. FEES AND COMMISSIONS

2014US$’000

2013US$’000

Fees and commission income

- Transaction banking services 130,101 119,556

- Management, performance and brokerage fees 23,595 26,965

Fees and commission expense (6,469) (5,383)

147,227 141,138

Included in 'management, performance and brokerage fees' is US$ 9.1 million (2013: US$ 9.3 million) of fee income relating to trust and other fiduciary activities.

6. TRADING INCOME

2014US$’000

2013US$’000

Foreign exchange 34,414 32,123

Other trading activities 790 2,778

35,204 34,901

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7(a). CASH AND BALANCES WITH CENTRAL BANKS

2014US$’000

2013US$’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 24) 320,890 556,914

Mandatory reserve deposits with central banks 328,322 263,382

649,212 820,296

Mandatory reserve deposits are not available for use in day-to-day operations.

7(b). TREASURY BILLS AND DEPOSITS WITH CENTRAL BANKS

2014US$’000

2013US$’000

Central Bank of Bahrain 355,177 410,884

Central Bank of Kuwait 1,180,167 1,338,778

Central Bank of Egypt 464,866 373,274

Central Bank of Iraq 249,675 176,178

Bank of England 211,224 288,420

US Treasury bills 149,976 -

2,611,085 2,587,534

The Deposits with Central Banks and Treasury bills above, other than the U.S. Treasury bills, are denominated and funded in local currencies by the Bank's subsidiaries operating in the respective countries.

8. LOANS AND ADVANCES

2014 2013

US$ ’000 % US$ ’000 %

a) By industry sector

Consumer/personal 3,570,697 18.7 3,714,874 20.7

Residential mortgage 1,746,918 9.1 1,895,617 10.6

Trading and manufacturing 4,272,999 22.4 3,937,762 21.9

Real estate 4,731,155 24.8 3,760,264 21.0

Banks and other financial institutions 1,056,714 5.5 858,758 4.8

Services 3,180,786 16.7 3,246,126 18.1

Government/public sector 269,060 1.4 381,464 2.1

Others 257,738 1.4 148,543 0.8

19,086,067 100.0 17,943,408 100.0

Less: Specific impairment provision (326,770) (353,092)

Less: Collective impairment provision (294,761) (284,634)

18,464,536 17,305,682

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8. LOANS AND ADVANCES (continued)

2014 2013

US$ ’000 % US$ ’000 %

b) By geographic region

Kingdom of Bahrain 3,320,036 17.4 3,282,724 18.3

State of Kuwait 9,195,216 48.2 8,350,052 46.5

Other GCC countries 2,192,643 11.5 2,044,449 11.4

United Kingdom 1,724,087 9.0 1,943,119 10.8

Arab Republic of Egypt 2,091,052 11.0 1,859,043 10.4

Europe (excluding United Kingdom) 164,427 0.8 161,429 0.9

Asia (excluding GCC countries) 279,147 1.5 207,550 1.2

Rest of the world 119,459 0.6 95,042 0.5

19,086,067 100.0 17,943,408 100.0

Less: Specific impairment provision (326,770) (353,092)

Less: Collective impairment provision (294,761) (284,634)

18,464,536 17,305,682

Other GCC countries comprise the members from the Gulf Co-operation Council being the Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates.

Please refer note 31 (c) for disclosure of credit quality of loans and advances.

c) Age analysis of past due but not impaired loans and advances

2014

Up to 30 daysUS$ ’000

31 to 60 daysUS$ ’000

61 to 89 daysUS$ ’000

Total US$ ’000

Loans and advances

Retail 63,132 27,949 7,822 98,903

Corporate 52,116 21,328 40,839 114,283

115,248 49,277 48,661 213,186

2013

Up to 30 daysUS$ ’000

31 to 60 daysUS$ ’000

61 to 89 daysUS$ ’000

Total US$ ’000

Loans and advances

Retail 117,815 29,819 20,242 167,876

Corporate 72,246 14,388 24,379 111,013

190,061 44,207 44,621 278,889

The past due loans and advances up to 30 days include those that are only past due by a few days. None of the above past due loans are considered to be impaired.

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8. LOANS AND ADVANCES (continued)

d) Individually impaired loans and advances

2014 2013

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

Gross impaired loans 48,114 341,827 389,941 34,370 375,742 410,112

Specific impairment provisions (40,897) (285,873) (326,770) (28,629) (324,463) (353,092)

7,217 55,954 63,171 5,741 51,279 57,020

Impaired loan coverage 85.0% 83.6% 83.8% 83.3% 86.4% 86.1%

Gross loans 3,162,143 15,923,924 19,086,067 2,938,380 15,005,028 17,943,408

Impaired loan ratio 1.5% 2.1% 2.0% 1.2% 2.5% 2.3%

The fair value of collateral that the Group holds relating to loans individually determined to be impaired at 31 December 2014 amounts to US$ 484.2 million (2013: US$ 240.8 million). The collateral consists of cash, securities and properties.

e) Impairment allowance for loans and advances

A reconciliation of the allowance for impairment losses for loans and advances by class is as follows:

2014 2013

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

RetailUS$ ’000

CorporateUS$ ’000

TotalUS$ ’000

At 1 January 60,248 577,478 637,726 100,785 463,909 564,694

Add/(Less):

Amounts written off during the year (12,172) (222,762) (234,934) (62,518) (17,693) (80,211)

Charge for the year 26,913 210,670 237,583 29,334 137,847 167,181

Recoveries during the year (4,479) (7,154) (11,633) (8,363) (5,974) (14,337)

Exchange rate and other adjustments 4,037 (11,248) (7,211) 1,010 (611) 399

At 31 December 74,547 546,984 621,531 60,248 577,478 637,726

f) Net provision for loan losses and others

The net charge for the year for provision for loan losses and others in the consolidated statement of income is determined as follows:

2014 US$ ’000

2013US$ ’000

Impairment charge for the year on loans and advances (note 8(e)) 237,583 167,181

Recoveries from loans and advances during the year

(including from fully provided loans written off in previous years) (103,645) (31,345)

Net (recovery) charge for others (1,758) 21,522

Net provision for loan losses and others 132,180 157,358

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9. NON-TRADING INVESTMENTS

2014

Held at amortised cost

US$’000

Held at Fair value

US$’000Total

US$’000

Quoted investments

GCC government bonds and debt securities 387,083 - 387,083

Other government bonds and debt securities 1,163,644 - 1,163,644

GCC government entities' securities 467,710 - 467,710

Floating rate notes and certificates of deposit:

- issued by banks and other financial institutions 2,376,951 - 2,376,951

- issued by corporate bodies 847,762 - 847,762

Equity shares - 56,215 56,215

Funds at net asset value - 37,041 37,041

5,243,150 93,256 5,336,406

Unquoted investments



- issued by banks and other financial institutions 102,658 - 102,658

Equity shares - 132,437 132,437


362,420 285,317 647,737

Total 5,605,570 378,573 5,984,143

Less: Allowance for impairment (212,241)

5,771,902

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9. NON-TRADING INVESTMENTS (continued)

2013

Held at amortised cost

US$’000

Held at Fair value

US$’000Total

US$’000

Quoted investments


Other government bonds and debt securities 889,769 - 889,769



- issued by banks and other financial institutions 2,087,831 15,262 2,103,093

- issued by corporate bodies 804,601 - 804,601

Equity shares - 98,801 98,801


4,959,156 180,635 5,139,791

Unquoted investments




- issued by banks and other financial institutions 53,050 - 53,050

Equity shares - 155,552 155,552


313,682 298,283 611,965

Total 5,272,838 478,918 5,751,756

Less: Allowance for impairment (223,783)

5,527,973

The fair value of the non-trading investments held at amortised cost is US$ 5,646.1 million as at 31 December 2014 (31 December 2013: US$ 5,378.9 million) of which US$ 5,269.0 million is classified under level 1 of fair value hierarchy (31 December 2013: US$ 5,033.8 million) and US$ 377.1 million is classified under level 2 of fair value hierarchy (31 December 2013: US$ 345.1 million).

Investment held at fair value include investments amounting to US$ 9,119 thousand (2013: US$ 79,163 thousand) which are designated as Fair Value Through Profit or Loss.

Please refer note 31 (c) for disclosure of credit quality of non-trading investments.

The movements in provision for impairment on investments were as follows:

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9. NON-TRADING INVESTMENTS (continued)

2014 US$ ’000

2013US$ ’000

At 1 January 223,783 168,637

Add/(Less):

Charge for the year 18,430 59,321

Amounts written off during the year - (6,617)

Exchange rate and other adjustments (29,972) 2,442

At 31 December 212,241 223,783

10. INVESTMENTS IN ASSOCIATES AND JOINT VENTURE

The principal associates and joint venture of the Group are:

a) Associates

Holding

Name Country of incorporation 2014 2013

Ahli Bank S.A.O.G. Sultanate of Oman 35.0% 35.0%

United Bank for Commerce and Investment S.A.L. (UBCI) Libya 40.0% 40.0%

During the year ended 31 December 2013, the Bank divested its diluted stake of 29.4% in Ahli Bank Qatar (ABQ) to the Qatar Foundation for Education, Science and Community Development at a price of QR 60 per share, generating a net non-recurring profit of US$ 212.9 million.

b) Joint venture

Holding

Name Country of incorporation 2014 2013

Legal and General Gulf B.S.C. (c)* Kingdom of Bahrain 50.0% 50.0%

* Provides conventional and takaful life and health insurance.

The summarised financial information of the Group’s associates and joint venture including Ahli Bank S.A.O.G. was as follows:

2014US$ ’000

2013US$ ’000

Assets 4,715,286 3,897,656

Liabilities 4,103,343 3,321,838

Net profit and comprehensive income for the year (Group's share) 24,362 28,086

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10. INVESTMENTS IN ASSOCIATES AND JOINT VENTURE (continued)

Financial information of Ahli Bank S.A.O.G. is provided below. The information is based on amounts as reported in financial statements of Ahli Bank S.A.O.G.

31 December2014

US$ ’000

31 December2013

US$ ’000

Ahli Bank S.A.O.G.

Balance sheet related information


Investments & securities 359,026 209,371

Total assets 4,272,237 3,479,181

Customers' deposits 2,795,298 2,480,662

Total liabilities 3,753,977 2,998,934

Income statement related information

Total operating income 134,108 121,040


Total comprehensive income 62,634 60,776

Dividends received during the year 8,617 5,471

Cash flow related information

Net cash (used in) from operating activities (202,331) 180,525

Net cash from (used in) investing activities 12,605 (28,312)

Net cash from (used in) financing activities 49,730 29,369

The market value of AUB's investment in Ahli Bank S.A.O.G. based on the price quoted in the Muscat Securities Market is US$ 288.5 million (31 December 2013: US$ 213.7 million).

11. INVESTMENT PROPERTIES

This represents properties acquired by the Group and are recognized at cost. As at 31 December 2014, the fair value of the investment properties is US$ 360.4 million (2013: US$ 277.8 million). Investment properties were revalued by independent valuers using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy.

12. PREMISES AND EQUIPMENT

The net book values of the Group’s premises and equipment are:

2014US$ ’000

2013US$ ’000

Freehold land 124,531 127,087

Freehold buildings 40,766 41,625

Leasehold land and buildings 34,062 38,085

IT equipment and others 50,359 52,021

Capital work-in-progress 17,284 15,878

267,002 274,696

Freehold land was revalued by an independent valuer using significant valuation inputs based on observable market data and is classified under level 2 of the fair value hierarchy.

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13. INTEREST RECEIVABLE AND OTHER ASSETS

2014US$ ’000

2013US$ ’000

Tax assets (note 22) 5,477 3,864

Interest receivable 156,660 176,864

Derivative assets (note 28) 218,983 110,914

Prepayments and others 291,770 269,212

672,890 560,854

Prepayments and others include repossessed assets amounting to US$ 181.6 million (31 December 2013: US$ 187.5 million). Repossessed assets are assets acquired in settlement of debts. These assets are carried at the lower of their repossessed value or the carrying value of the original secured asset.

14. GOODWILL AND OTHER INTANGIBLE ASSETS

2014 2013

GoodwillUS$'000

Intangible assets

US$'000Total

US$'000GoodwillUS$'000

Intangible assets

US$ ’000Total

US$ ’000

At 1 January 491,513 170,873 662,386 497,548 182,374 679,922

Exchange rate and other adjustments (15,103) (5,344) (20,447) (6,035) (11,501) (17,536)

At 31 December 476,410 165,529 641,939 491,513 170,873 662,386

Goodwill: Goodwill acquired through business combinations has been allocated to the cash-generating units of the acquired entities for impairment testing purposes. The carrying amount of goodwill and intangible assets allocated to each of the cash-generating units is shown under note 30. Key assumptions used in estimating recoverable amounts of cash-generating units

The recoverable amount of each cash-generating unit’s goodwill is based on value-in-use calculations using cash flow projections from financial budgets approved by the Board of Directors, extrapolated for five year projections using nominal projected Gross Domestic Product growth rate in the respective countries in which they operate. The discount rate applied to cash flow projections represent the cost of capital adjusted for an appropriate risk premium for these business segments. The discount rate used in goodwill impairment testing was 8.8% to 18.6% (2013: 10.1% to 16.1%). The key assumptions used in estimating recoverable amounts of cash generating units were sensitised to test the resilience of value-in-use calculations. On this basis, management believes that reasonable changes in the key assumptions used to determine the recoverable amount of the Group's cash-generating units will not result in an impairment.

Intangible assets:

Intangible assets comprise primarily the Group's banking licenses which have indefinite lives. Based on an annual impairment assessment of the intangible assets, no indications of impairment were identified. The fair value of a banking license is determined at the time of acquisition by discounting the future expected profits from its acquisition and its projected terminal value.

15. DEPOSITS FROM BANKS

2014US$ ’000

2013US$ ’000

Demand and call 1,506,524 1,790,763

Time deposits 2,993,148 2,575,994

4,499,672 4,366,757

16. BORROWINGS UNDER REPURCHASE AGREEMENTS

The Group has collateralized borrowing lines of credit with various financial institutions through Global Master Repurchase Agreements (GMRA), under which it can borrow up to US$ 2.4 billion (31 December 2013: US$ 2.4 billion). Collateral is provided in the form of investment grade securities held within the non-trading investments portfolio. As at 31 December 2014, the borrowings under these agreements were US$ 901.6 million (31 December 2013: US$ 1,271 million) and the fair value of investment securities that had been provided as collateral was US$ 1,001 million (2013: US$ 1,338 million).

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17. CUSTOMERS' DEPOSITS

2014US$ ’000

2013US$ ’000

Current and call accounts 4,465,812 4,874,611

Saving accounts 2,292,850 2,031,014

Time deposits 16,248,106 15,122,832

23,006,768 22,028,457

18. INTEREST PAYABLE AND OTHER LIABILITIES

2014US$ ’000

2013US$ ’000

Accruals 103,897 110,586

Interest payable 128,125 120,549

Derivative liabilities (note 28) 270,384 218,202

Other credit balances 315,261 296,829

Tax liabilities (note 22) 37,326 32,094

854,993 778,260

19. SUBORDINATED LIABILITIES

These borrowings are subordinated to the claims of all other creditors of the respective banks.

Maturity2014

US$ ’0002013

US$ ’000

International Finance Corporation (IFC):

- Repayable in remaining eight equal semi-annual installments and falling on each Interest Payment Date falling thereafter up to and including 15 December 2018.*(2013: Convertible into ordinary

shares at the holder's option at the rate of US 88.53 cents per share between the third and eighth anniversary ending on 17 November 2014)

2018 88,889 200,000

- Repayable in four equal semi-annual installments commencing on 15 April 2019 and falling on each Interest Payment Date falling thereafter up to and including 15 October 2020.

2020 165,000 165,000

253,889 365,000

Others:

- Non-convertible portion (50%) of Class A non-cumulative preference shares ** 2015 - 179,068

- Issuer option to redeem after 2 December 2010 subject to one month notice. 2015 67,528 67,528

- 10 year subordinated debt repayable at maturity 2020 17,997 17,997

- Repayable at maturity5 years & one

day notice10,724 11,058

- Repayable at maturity 2016 1,508 1,554

97,757 277,205

351,646 642,205

* During the year, in accordance with the terms of the convertible subordinated debt agreement with IFC, US$ 100 million of convertible subordinated debt were converted into ordinary shares at the rate of US 84.31 cents (118,609,884 shares).

** During the year, in accordance with the terms of the Class A non-cumulative preference share issue, the residual outstanding (representing the non-convertible subordinated debt portion with original maturity of 1 January 2015) as of the record date 5 February 2014, has been redeemed.

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20. SHARE CAPITAL

(a) Authorised :

2014US$ ’000

2013US$ ’000

- Share capital

8,000 million shares (2013: 8,000 million shares) of US$ 0.25 each 2,000,000 2,000,000

Available for issuance of ordinary shares and various classes of preference shares

(b) Issued and fully paid:

2014US$ ’000

2013US$ ’000

(i) Ordinary share capital (US$ 0.25 each) 1,530,471 1,415,570

Number of shares (millions) 6,121.9 5,662.2

Movement in ordinary shares 2014 2013

(number in millions)

Opening balance as at 1 January 5,662.2 5,233.5

Add: issuance of shares upon conversion of Class B preference shares 55.1 -

Add: bonus share issue 286.0 261.7

Add: issuance of shares upon conversion of IFC mandatory convertible preference shares (note 20 (d)) - 167.0

Add: issuance of shares upon conversion of IFC subordinated debt (note 19)/(note 20 (e)) 118.6 -

Closing balance as at 31 December 6,121.9 5,662.2

2014US$ ’000

2013US$ ’000

(ii) Class B preference shares (US$ 0.25 each) - 12,500

Number of shares (millions) (refer note 20 (c)) - 50.0

Movement in class B preference shares 2014 2013


Opening balance as at 1 January 50.0 -

(Converted)/issued during the year (50.0) 50.0

Closing balance as at 31 December - 50.0

Movement in IFC Mandatory Convertible preference shares 2014 2013


Opening balance as at 1 January - 500.0

Less: Conversion to ordinary shares (note 20 (d)) - (500.0)

Closing balance as at 31 December - -

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20. SHARE CAPITAL (continued)

(c) Issue of Class B preference shares During 2013, following the recommendation of the Board of Directors and Extraordinary General Assembly and regulatory approvals, the Bank issued 50.0 million Class B non-cumulative fully convertible preference shares at US$ 0.54 per share. These shares are mandatorily convertible into ordinary shares, as adjusted for any bonus share issues, at the discretion of the Board of Directors. The fair value, estimated as of the grant date, was US$ 0.68 per share. Accordingly, on 1 January 2014, the 50.0 million Class B non-cumulative fully convertible preference shares were converted to 55.1 million ordinary shares.

(d) On 9 October 2013, in accordance with the terms of Mandatorily Convertible Preference Shares (MCPS) invested by International Finance Corporation Capitalization (Equity) Fund (“IFC Fund”), the MCPS were converted into the Bank's common shares at an effective conversion price of US 74.83 cents per share, translating into 167,045,454 common shares. (e) During 2014, in accordance with the terms of the convertible subordinated debt agreement with IFC, US$ 100 million of convertible subordinated debt were converted into ordinary shares at the rate of US 84.31 cents (118,609,884 shares). Upon conversion, the IFC together with IFC Capitalisation (Equity) Fund had a 5.16% shareholding in the Bank.

21. RESERVES a) Share premium

The share premium arising on the issue of ordinary and preference shares is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. b) Capital reserve As required by the Bahrain Commercial Companies Law, any profit on the sale of treasury stock is transferred to a capital reserve. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. c) Statutory reserve

As required by the Bahrain Commercial Companies Law and the Bank’s Articles of Association, 10% of the net profit is transferred to statutory reserve on an annual basis. The Bank may resolve to discontinue such transfers when the reserve totals 50% of the paid up capital. The reserve is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law.

d) Property revaluation reserve

The revaluation reserve arising on revaluation of freehold land is not distributable except in such circumstances as stipulated in the Bahrain Commercial Companies Law. e) Foreign exchange translation reserve

It comprises of translation effects arising on consolidation of subsidiaries, non-monetary equity investments and investments in associates. f ) Other comprehensive income reserve (OCI Reserve)

This reserve represents changes in the fair values of equity investments that have been classified as fair value through other comprehensive income. g) Cash flow hedge reserve

This reserve represents the effective portion of gain or loss on the Group's cash flow hedging instruments.

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21. RESERVES (continued)

h) Movements in other reserves

Cumulative changes

Capitalreserve

US$ ’000

Propertyrevaluation

reserveUS$ ’000

Foreignexchange

translationreserve

US$ ’000

OCIreserve

US$ ’000

Cash flowhedge

reserveUS$ ’000

ESPPreserve

US$ ’000

Pension fund

reserveUS$ ’000

Totalother

reservesUS$ ’000

Balance at 1 January 2014 2,102 36,497 (74,507) 20,414 (6,012) - (28,727) (50,233)

Currency translation adjustments

- - (47,459) - - - - (47,459)

Transfers to consolidated statement of income

- - - - 582 - - 582

Sale of treasury shares 6,378 - - - - - - 6,378

Net fair value movements during the year

- - - (30,103) (19,661) - - (49,764)

Fair value movements during the year

- - - - - 4,262 (18,255) (13,993)

Revaluation of freehold land - 532 - - - - - 532

Balance at 31 December 2014 8,480 37,029 (121,966) (9,689) (25,091) 4,262 (46,982) (153,957)

Cumulative changes

Capitalreserve

US$ ’000

Propertyrevaluation

reserveUS$ ’000

Foreign exchange

translationreserve

US$ ’000

OCIreserve

US$ ’000

Cash flowhedge

reserveUS$ ’000

ESPPreserve

US$ ’000

Pension fund

reserveUS$ ’000

Totalother

reservesUS$ ’000

Balance at 1 January 2013 425 26,737 (36,248) 16,778 (8,283) - (35,322) (35,913)

Currency translation adjustments

- - (38,259) - - - - (38,259)

Transfers to consolidated statement of income

- - - - 95 - - 95

Transfers to retained earnings

- - - (1,003) - - - (1,003)

Sale of treasury shares 1,677 - - - - - - 1,677

Net fair value movements during the year

- - - 4,639 2,176 - - 6,815

Fair value movements during the year

- - - - - - 6,595 6,595

Revaluation of freehold land - 9,760 - - - - - 9,760

Balance at 31 December 2013 2,102 36,497 (74,507) 20,414 (6,012) - (28,727) (50,233)

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21. RESERVES (continued)

i) Dividends paid and proposed

2014US$’000

Proposed for approval at the forthcoming Annual General Assembly of Shareholders Meeting

Cash dividend on the Ordinary shares @ US cents 4.5 per share 270,452

Bonus share issue 5%

2013US$’000

Declared and paid during the year

Cash dividend on IFC Capitalization (Equity) Fund L.P Preference shares (2013: US$ 4.5 million) 3,217

Cash dividend on the Ordinary shares @ US cents 4.5 per share (2013: US cents 4.0 per share) 251,496

Bonus share issue (2013: 5%) 5%

22. TAXATION

2014US$’000

2013US$’000

Consolidated balance sheet (note 13 and note 18):

- Current tax asset 889 1,954

- Deferred tax asset 4,588 1,910

- Current tax liability (37,326) (32,094)

(31,849) (28,230)

Consolidated statement of income

- Current tax expense on foreign operations 50,086 44,526

- Deferred tax expense (income) on foreign operations 148 (1,863)

50,234 42,663

The Group's tax expense includes all direct taxes that are accrued and paid on taxable profits of entities to the authorities in the respective countries of incorporation, in accordance with the tax laws prevailing in those jurisdictions. Consequently, it is not practical to provide a reconciliation between the accounting and taxable profits together with the details of effective tax rates. Tax expense primarily relates to AUBUK, AUBE, AUBK and CBIQ. Effective tax rate at AUBE is 30 % (2013: 25%) and AUBUK is 21.5% (2013: 24.5%).

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23. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the net profit for the year attributable to the Bank’s ordinary equity shareholders less preference share divi-dends, by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to the Bank's ordinary equity shareholders by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of preference shares into ordinary shares.

The following reflects the income and share data used in basic and diluted earnings per share computations :

2014US$’000

2013US$’000

Net profit for basic earnings per share computation

Net profit attributable to Bank's equity shareholders 482,529 579,374

(Less): IFC mandatorily convertible preference shares dividend (note 21(i)) - (3,217)

Adjusted net profit attributable to Bank's ordinary equity shareholders for basic earnings per share 482,529 576,157

Basic earnings per share (US cents) 8.0 10.0

Net profit for diluted earnings per share computation

Adjusted net profit attributable to Bank's ordinary equity shareholders for diluted earnings per share (before preference share dividend)

482,529 579,374

Diluted earnings per share (US cents) 8.0 9.9

The basic earnings per share for 2013 without the non-recurring profit on sale of stake in Ahli Bank Qatar was US 6.3 cents per share.

Number of shares (in millions)

2014 2013

Weighted average ordinary shares outstanding during the period adjusted for bonus shares 6,013 5,778

Net weighted average number of ordinary shares for basic earnings per share 6,013 5,778

Add: Effect of dilution – Class B preference shares - 55

Weighted average number of ordinary shares for diluted earnings per share 6,013 5,833

24. CASH AND CASH EQUIVALENTS

Cash and cash equivalents included in the consolidated statement of cash flows include the following balance sheet amounts:

2014US$ ’000

2013US$ ’000

Cash and balances with central banks, excluding mandatory reserve deposits (note 7(a)) 320,890 556,914

Deposits with Central banks, other banks and financial institutions - with an original maturity of three months or less

3,102,485 3,617,792

3,423,375 4,174,706

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25. RELATED PARTY TRANSACTIONS

The Group enters into transactions with major shareholders, associates, directors, senior management and companies which are controlled, jointly controlled or significantly influenced by such parties in the ordinary course of business at arm's length. All the loans and advances to related parties are performing and are free of any provision for possible loan losses.

The income, expense and the period end balances in respect of related parties included in the consolidated financial statements were as follows:

2014

US$ ’000

Majorshareholders Associates

Directorsand senior

management Total

Interest income - 1,211 8,083 9,294

Interest expense 57,087 43 50 57,180

Fees and commissions - 1,527 19 1,546

Deposits with banks - 448,038 - 448,038

Loans and advances - - 201,315 201,315

Deposits from banks - 15,241 - 15,241

Customers’ deposits 5,620,379 7,501 45,340 5,673,220

Subordinated liabilities 10,725 - - 10,725

Derivative assets - 96 - 96

Commitments and contingent liabilities - 64,738 178,818 243,556

Short term employee benefits - - 17,226 17,226

End of service benefits - - 2,567 2,567

Directors' fees & related expenses - - 1,724 1,724

2013

US$ ’000

Majorshareholders Associates

Directorsand senior

management Total

Interest income - 142 7,703 7,845

Interest expense 65,977 101 315 66,393

Fees and commissions - 1,579 - 1,579

Deposits with banks - 107,826 - 107,826

Loans and advances - - 208,477 208,477

Deposits from banks - 27,143 - 27,143

Customers’ deposits 6,283,042 1,319 36,941 6,321,302

Subordinated liabilities 11,058 - - 11,058

Derivative assets - 120 - 120

Commitments and contingent liabilities - 38,018 108,454 146,472

Short term employee benefits - - 16,364 16,364

End of service benefits - - 2,270 2,270

Directors' fees & related expenses - - 1,808 1,808

Customers’ deposits include deposits from GCC government-owned institutions amounting to US$ 5,616 million (31 December 2013: US$ 6,278 million).

The consolidated income statement includes a fair value amortisation charge of US$ 2.1 million (2013: Nil ) relating to share based transactions for key management personnel.

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26. EMPLOYEE BENEFITS

The Group operates Defined Benefit and Defined Contribution retirement benefit schemes for its employees in accordance with the local laws and regulations in the countries in which it operates. The costs of providing retirement benefits including current contributions, are charged to the consolidated statement of income.

Defined benefit plansThe charge to the consolidated statement of income on account of end of service benefits for the year amounted to US$ 9,081 thousand (2013: US$ 8,319 thousand). There are no material differences between the carrying amount of the provision for end of service benefits at both 31 December 2014 and 2013 and the amount arising from an actuarial computation thereof.

AUBUK's defined benefit pension scheme was closed to future service accruals on 31 March 2010. The Group adopted the amended Standard- IAS-19 Employee Benefits issued by the IASB in 2011. In accordance with the amended Standard, the Group immediately recognized the actuarial gains and losses relating to 'Defined Pension Benefit' scheme through consolidated statement of changes in equity.

Defined contribution plansThe Group contributed US$ 7,256 thousand (2013: US$ 6,495 thousand) during the year towards defined contribution plans. The Group’s obligations are limited to the amounts contributed to various schemes.

27. MANAGED FUNDS

Funds administrated on behalf of customers to which the Group does not have legal title are not included in the consolidated balance sheet. The total market value of all such funds at 31 December 2014 was US$ 4,163 million (2013: US$ 4,277 million).

28. DERIVATIVES

In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instruments, reference rates or indices.

Derivatives include financial options, futures and forwards, interest rate swaps and currency swaps, which create rights and obligations that have the effect of transferring between the parties of the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On inception, a derivative financial instrument gives one party a contractual right to exchange financial assets or financial liabilities with another party under conditions that are potential favourable, or a contractual obligation to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable. However, they generally do not result in a transfer of the underlying primary financial instrument on inception of the contract, nor does such a transfer necessarily take place on maturity of the contract. Some instruments embody both a right and an obligation to make an exchange. Because the terms of the exchange are determined on inception of the derivative instruments, as prices in financial markets change those terms may become either favourable or unfavourable.

The table below shows the net fair values of derivative financial instruments.

2014 2013

Derivativeassets

US$ ’000

DerivativeliabilitiesUS$ ’000

Derivativeassets

US$ ’000

DerivativeliabilitiesUS$ ’000

Derivatives held for risk management:

Interest rate swaps 13,065 16,609 18,656 17,613

Forward foreign exchange contracts 136,546 85,615 14,585 36,450

Forward rate agreements 913 672 1,414 396

Options 33,495 31,397 6,217 6,464

Interest rate futures 1,621 1,554 21 582

Derivatives held as fair value hedges:

Interest rate swaps 8,553 87,784 70,021 150,685

Derivatives held as cash flow hedges:

Interest rate swaps 18,810 46,725 - 6,012

Forward foreign exchange contracts 5,980 28 - -

218,983 270,384 110,914 218,202

Counterparties with whom the bank has entered into forward foreign exchange contracts have placed margin monies representing net fair values of contracts outstanding.

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28. DERIVATIVES (continued)

In respect of derivative assets above, the Group has US$ 81.1 million (2013: US$ 78.2 million) of liabilities that can be offset through master netting arrangements. These master netting arrangements create a right of set-off that is enforceable only following an event of default, insolvency or bankruptcy of counterparties or following other predetermined events.

Cash flow hedgesThe time periods in which the hedged cash flows are expected to occur and their impact on the consolidated statement of income is as follows:

3 monthsor less

US$ ’000

More than3 months

up to 1 yearUS$ ’000

More than1 year

up to 5 yearsUS$ ’000

More than 5 years

US$ ’000 Total

US$ ’000

At 31 December 2014

Cash outflows from liabilities 3,042 7,775 10,906 48,640 70,363

At 31 December 2013

Cash outflows from liabilities 1,114 915 11,226 - 13,255

No hedge ineffectiveness on cash flow hedges was recognised in 2014 and 2013.

Fair value hedgesThe net fair value of interest rate swap held as fair value hedges as at 31 December 2014 is negative US$ 79.2 million (2013 : Negative US$ 80.7 million). Gain recognised on the hedged item at 31 December 2014, attributable to the hedged risk is US$ 79.2 million (2013 : US$ 80.7 million). These gains and losses are included in "trading income" in the consolidated statement of income during 2014 and 2013.

Derivatives held for risk management purposesMost of the Group’s derivative trading activities relate to customer driven transactions as well as positioning and arbitrage. Positioning involves managing positions with the expectation of profiting from favourable movements in prices, rates or indices. Arbitrage involves identifying and profiting from price differentials between markets or products.

Derivatives held for hedging purposesThe Group has adopted a comprehensive system for the measurement and management of risk.

As part of its asset and liability management the Group uses derivatives for hedging purposes in order to reduce its exposure to currency and interest rate movements. This is achieved by hedging specific financial instruments and forecasted transactions, as well as strategic hedging against overall balance sheet exposures.

The Group uses options and currency swaps to hedge against specifically identified currency and equity risks. In addition, the Group uses interest rate swaps and forward rate agreements to hedge against the interest rate risk arising from specifically identified, or a portfolio of, fixed interest rate investments and loans. The Group also uses interest rate swaps to hedge against the cash flow risks arising on certain floating rate deposits. In all such cases the hedging relationship and objective, including details of the hedged item and hedging instrument, are formally documented and the transactions are accounted for as fair value hedges.

Hedging of interest rate risk is also carried out by monitoring the duration of assets and liabilities and entering into interest rate swaps to hedge net interest rate exposures. Since hedging of net positions does not qualify for special hedge accounting, related derivatives are accounted for the same way as trading instruments.

29. COMMITMENTS AND CONTINGENT LIABILITIES

Credit-related commitments

Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances which are designed to meet the requirements of the Group’s customers.

Commitments to extend credit represent contractual commitments to make loans and revolving credits available and generally have fixed expiration dates or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

Standby letters of credit, guarantees and acceptances (standby facilities) commit the Group to make payments on behalf of customers contingent upon their failure to perform under the terms of the contract. Standby facilities would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at floating rates.

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29. COMMITMENTS AND CONTINGENT LIABILITIES (continued)

Credit-related commitments (continued)

The Group has the following credit related commitments:

2014US$ ’000

2013US$ ’000

Contingent liabilities

Guarantees 1,991,159 1,860,647

Acceptances 173,430 121,298

Letters of credit 922,808 914,167

3,087,397 2,896,112

Maturity of contingent liabilities is as follows:

- Less than one year 2,220,777 1,814,862

- Over one year 866,620 1,081,250

3,087,397 2,896,112

Irrevocable commitments:

Undrawn loan commitments 720,628 532,356

Please also refer to note 35 for additional liquidity disclosures.

The Group’s commitments in respect of non-cancellable operating leases were as follows:

2014US$ ’000

2013US$ ’000

Within one year 1,938 2,040

Between one to five years 1,646 3,467

3,584 5,507

30. SEGMENT INFORMATION

For management purposes the Group is organised into four major business segments:

Retail banking Principally handling individual customers’ deposit and current accounts, providing consumer loans, residential mortgages, overdrafts, credit cards and fund transfer facilities.

Corporate banking Principally handling loans and other credit facilities, and deposit and current accounts for corporate and institutional customers.

Treasury & investments Principally providing money market, trading and treasury services, as well as management of the Group’s investments and funding.

Private banking Principally servicing high net worth clients through a range of investment products, funds, credit facilities, trusts and alternative investments.

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30. SEGMENT INFORMATION (continued)

These segments are the basis on which the Group reports its primary segment information. Transactions between segments are conducted at approximate market rates on an arms length basis. Interest is charged/credited to business segments based on a pool rate which approximates the cost of funds.

Segmental information for the year was as follows:

RetailbankingUS$ ’000

CorporatebankingUS$ ’000

Treasury &investments

US$ ’000

PrivatebankingUS$ ’000

TotalUS$ ’000

Year ended 31 December 2014:

Net interest income 155,038 307,634 248,807 51,777 763,256

Fees and commissions 34,105 83,482 7,336 22,304 147,227

Share of profits from associates and joint venture 7,255 9,696 7,411 - 24,362

Other operating income 2,003 15,329 88,979 112 106,423

OPERATING INCOME 198,401 416,141 352,533 74,193 1,041,268

Net provision for loan losses and others 5,276 124,660 - 2,244 132,180

Provision for investments - - 18,430 - 18,430

NET OPERATING INCOME 193,125 291,481 334,103 71,949 890,658

Operating expenses 111,761 68,136 90,740 38,533 309,170

PROFIT BEFORE TAX 81,364 223,345 243,363 33,416 581,488

Tax expense 50,234

NET PROFIT FOR THE YEAR 531,254

Less : Attributable to non-controlling interest 48,725

NET PROFIT ATTRIBUTABLE TO THE OWNERS' OF THE BANK 482,529

Segment assets 3,619,641 14,183,737 11,895,337 1,876,027 31,574,742

Goodwill 167,856 114,778 110,287 83,489 476,410

Other intangible assets 47,422 44,090 61,984 12,033 165,529

Investment in associates and joint venture 288,315

Unallocated assets 939,892

TOTAL ASSETS 33,444,888

Segment liabilities 5,685,485 5,393,421 14,327,175 3,353,595 28,759,676

Unallocated liabilities 854,993

TOTAL LIABILITIES 29,614,669

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RetailbankingUS$ ’000

CorporatebankingUS$ ’000

Treasury &investments

US$ ’000

PrivatebankingUS$ ’000

TotalUS$ ’000

Year ended 31 December 2013:

Net interest income 130,199 309,564 224,543 48,943 713,249

Fees and commissions 33,438 70,114 14,490 23,096 141,138

Share of profits from associates and joint venture 5,766 8,668 13,652 - 28,086

Other operating income 969 11,688 63,147 52 75,856

OPERATING INCOME 170,372 400,034 315,832 72,091 958,329

Net provision for loan losses and others 3,994 150,954 - 2,410 157,358

Provision for investments - - 59,321 - 59,321

NET OPERATING INCOME 166,378 249,080 256,511 69,681 741,650

Operating expenses 95,868 67,456 87,785 36,545 287,654

PROFIT BEFORE GAIN ON SALE OF INVESTMENT HELD FOR SALE 70,510 181,624 168,726 33,136 453,996

Gain on sale of investment held for sale 212,910

PROFIT BEFORE TAX 666,906

Tax expense 42,663

NET PROFIT FOR THE YEAR 624,243

Less : Attributable to non-controlling interest 44,869

NET PROFIT ATTRIBUTABLE TO THE OWNERS' OF THE BANK 579,374

Segment assets 3,388,687 13,200,372 12,390,375 1,872,265 30,851,699

Goodwill 172,826 118,734 113,526 86,427 491,513

Other intangible assets 48,966 45,434 64,026 12,447 170,873

Investment in associates and joint venture 302,258

Unallocated assets 835,550

TOTAL ASSETS 32,651,893

Segment liabilities 5,277,870 4,388,045 15,646,962 2,995,653 28,308,530

Unallocated liabilities 778,260

TOTAL LIABILITIES 29,086,790

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Geographic segmentation

Although the management of the Group is based primarily on business segments, the Group's geographic segmentation is based on the countries where the Bank and its subsidiaries are incorporated. Thus, the operating income generated by the Bank and its subsidiaries based in the GCC are grouped as "GCC Countries", while those generated by the Bank's subsidiaries located outside the GCC region is grouped under "Rest of the World". Similar segmentation is followed for the distribution of total assets. The following table shows the distribution of the Group’s operating income and total assets by geographical segment:

Operating income Total assets

2014US$ ’000

2013US$ ’000

2014US$ ’000

2013US$ ’000

GCC Countries 778,325 736,607 21,705,083 20,567,912

Rest of the World 262,943 221,722 11,739,805 12,083,981

Total 1,041,268 958,329 33,444,888 32,651,893

Net profit from Bahrain onshore operations included above is US$ 62.6 million (2013: US$ 48.5 million) amounting to 13.0% (2013: 13.2%) of the Group's net profit attributable to owners of the Bank before gain on sale of investment held for sale.

RISK MANAGEMENT

31. CREDIT RISK

Credit risk is the risk that one party to a financial instrument will fail to discharge a financial obligation and cause the other party to incur a financial loss. In the case of derivatives this is limited to positive fair values. The Group attempts to control credit risk by monitoring credit exposures, limiting transactions with specific counterparties, and continually assessing the creditworthiness of counterparties.

a) Concentration risk

Concentrations of credit risk arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions.

Concentrations of credit risk indicate the relative sensitivity of the Group’s performance to developments affecting a particular industry or geographic location.

The Group manages its credit risk exposure so as to avoid over concentration to a particular sector or geographic location. It also obtains security where appropriate. Guidelines are in place regarding the acceptability of types of collateral and valuation parameters.

The principal collateral types are as follows:

- In the personal sector – cash, mortgages over residential properties and assignments over salary income;

- In the commercial sector – cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees;

- In the commercial real estate sector – charges over the properties being financed; and

- In the financial sector – charges over financial instruments, such as debt securities and equities.

The Group monitors the market value of collateral and requests additional collateral when necessary in accordance with the underlying agreement. Details of the concentration of the loans and advances by industry sector and geographic region are disclosed in note 8(a) and 8(b) respectively.

Details of the industry sector analysis and the geographical distribution of the assets, liabilities and commitments on behalf of customers are set out in note 32.

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31. CREDIT RISK (continued)

b) Maximum exposure to credit risk without taking account of any collateral and other credit enhancements

The table below shows the maximum exposure to credit risk for the components of the balance sheet. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements, but after provision for impairment where applicable.

Grossmaximum

exposure2014

US$ ’000

Grossmaximumexposure

2013US$ ’000

Balances with central banks 526,277 699,442

Treasury bills and deposits with central banks 2,611,085 2,587,534



Non-trading investments 5,393,329 5,049,055

Interest receivable and other assets 471,735 356,339

Total 31,290,479 30,407,120

Contingent liabilities 3,087,397 2,896,112


Total credit related commitments 3,808,025 3,428,468

Total credit risk exposure 35,098,504 33,835,588

Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values.

c) Credit quality per class of financial assets

The table below shows distribution of financial assets neither past due nor impaired.

Neither past due nor impaired

High standard

grade US$ ’000

Standardgrade

US$ ’000Total

US$ ’000

At 31 December 2014

Balances with central banks 526,277 - 526,277

Treasury bills and deposits with central banks 2,361,410 249,675 2,611,085

Deposits with banks 3,602,694 220,823 3,823,517

Loans and advances

Retail 540,393 2,474,733 3,015,126

Corporate 10,029,854 5,437,960 15,467,814

Non trading investments 4,991,576 613,994 5,605,570

Interest receivable and other assets 144,547 108,205 252,752

Other assets - derivatives 218,983 - 218,983

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31. CREDIT RISK (continued)

c) Credit quality per class of financial assets (continued)

The table below shows distribution of financial assets neither past due nor impaired.

Neither past due nor impaired

High standard

grade US$ ’000

Standardgrade

US$ ’000Total

US$ ’000

At 31 December 2013

Balances with central banks 699,442 - 699,442

Treasury bills and deposits with central banks 2,411,356 176,178 2,587,534

Deposits with banks 4,109,399 299,669 4,409,068

Loans and advances

Retail 528,029 2,208,105 2,736,134

Corporate 9,275,760 5,242,512 14,518,272

Non trading investments 5,068,184 204,654 5,272,838

Interest receivable and other assets 139,448 105,977 245,425

Other assets - derivatives 110,914 - 110,914

It is the Group's policy to maintain consistent internal risk ratings across the credit portfolio. The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the Group’s internal credit rating system. This facilitates focused portfolio management of the inherent level of risk across all lines of business. The credit quality ratings disclosed above can be equated to the following risk rating grades:

Credit quality rating Risk rating DefinitionHigh standard Risk rating 1 to 4 Undoubted through to good credit risk Standard Risk rating 5 to 7 Satisfactory through to adequate credit risk

The risk rating system is supported by various financial analytics and qualitative market information for the measurement of counterparty risk.

There are no financial assets which are past due but not impaired as at 31 December 2014 and 2013 other than those disclosed under note 8(c).

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32. CONCENTRATION ANALYSIS

The distribution of assets, liabilities and commitments on behalf of customers by geographic region and industry sector was as follows:

2014 2013

AssetsUS$ ’000

LiabilitiesUS$ ’000

Contingent liabilities &

commitmentson behalf of

customersUS$ ’000

AssetsUS$ ’000

LiabilitiesUS$ ’000

Contingent liabilities &

commitmentson behalf of

customersUS$ ’000

Geographic region:

Kingdom of Bahrain 5,171,915 3,963,028 772,031 5,150,106 4,854,057 566,255

State of Kuwait 11,886,243 15,962,208 1,305,605 11,033,493 15,458,327 1,069,520

Other GCC countries 4,646,925 2,450,818 437,089 4,384,313 2,502,625 603,061

United Kingdom (UK) 2,661,603 885,419 52,720 3,162,247 1,084,860 6,445

Arab Republic of Egypt 3,761,073 3,136,401 401,980 3,376,180 2,445,830 545,815

Europe (excluding UK) 1,655,800 490,134 41,300 2,233,450 129,176 33,044

Asia (excluding GCC) 2,282,468 1,417,404 21,685 1,231,474 1,537,388 32,037

United States of America 767,638 414,218 16,986 1,534,110 471,003 28,767

Rest of the World 611,223 895,039 38,001 546,520 603,524 11,168

33,444,888 29,614,669 3,087,397 32,651,893 29,086,790 2,896,112

Industry sector:

Banks and other financial institutions 12,604,115 12,953,697 407,361 12,866,213 12,850,477 476,534

Consumer/personal 3,430,805 5,984,584 10,949 3,644,407 5,377,937 14,035

Residential mortgage 1,717,425 - 750 1,864,406 - 1,280

Trading and manufacturing 4,585,362 2,439,286 1,168,875 4,285,216 2,649,755 935,951

Real estate 4,924,536 482,685 67,756 3,865,264 457,360 30,649

Services 3,201,599 1,636,033 1,057,000 3,270,200 1,025,767 996,797

Government/public sector 2,704,465 5,038,437 234,792 2,760,243 5,377,978 363,976

Others 276,581 1,079,947 139,914 95,944 1,347,516 76,890

33,444,888 29,614,669 3,087,397 32,651,893 29,086,790 2,896,112

33. MARKET RISK

Market risk is the risk of potential financial loss that may arise from adverse changes in the value of a financial instrument or portfolio of financial instruments due to movements in interest rates, foreign exchange rates, equity prices, commodity prices and derivatives. This risk arises from asset - liability mismatches, changes that occur in the yield curve, foreign exchange rates and changes in volatilities/implied volatilities in the market value of derivatives. The Group classifies exposures to market risk into either trading or non-trading portfolios. Given the Group's low risk strategy, aggregate market risk levels are considered low. The Group utilises Value-at-Risk (VaR) models to assist in estimating potential losses that may arise from adverse market movements in addition to non-quantitative risk management techniques. The market risk for the trading portfolio is managed and monitored on a VaR methodology which reflects the inter-dependency between risk variables. Non-trading portfolios are managed and monitored using stop loss limits and other sensitivity analyses. The data given below is representative of the information during the year.

a. Market risk-trading

The Group calculates Historical Simulation VaR using a one day holding period at a confidence level of 95%, which takes into account the actual correlations observed historically between different markets and rates.

Since VaR is an integral part of the Group's market risk management, VaR limits have been established for all trading operations and exposures are reviewed daily against the limits by management. Actual outcomes are compared to the VaR model derived predictions on a regular basis as a means of validating the assumptions and parameters used in the VaR calculation.

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33. MARKET RISK (continued)

a. Market risk-trading (continued)

The table below summarises the risk factor composition of the VaR including the correlative effects intrinsic to the trading book:

Equity priceUS$ ’000

Foreign exchange

US$ ’000

Interestrate

US$ ’000

Effects of correlation

US$ ’000Total

US$ ’000

31 December 2014 99 421 150 1 671

31 December 2013 1,061 146 61 1 1,269

b. Market risk-non-trading

Interest rate riskInterest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments or the future profitability of the Group. The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group measures and manages interest rate risk by establishing levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Interest rate gaps on assets and liabilities are reviewed on a weekly basis and hedging strategies are used to reduce the interest rate gaps to within the limits established by the Bank's Board of Directors.

The following table demonstrates the sensitivity of the Group's net interest income for the next one year, to a change in interest rates, with all other variables held constant. The sensitivity is based on the floating rate financial assets and financial liabilities held at 31 December 2014 and 31 December 2013 including the effect of hedging instruments.

Sensitivity analysis - interest rate risk

2014US$ ’000

2013US$ ’000

at 10 bps - increase (+)/decrease (-) +/- 2,724 1,944

at 25 bps - increase (+)/decrease (-) +/- 6,810 4,860

Currency riskCurrency risk is the risk that the functional currency value of a financial instrument will fluctuate due to changes in foreign exchange rates.

The risk management process manages the Group’s exposure to fluctuations in foreign exchange rates (currency risk) through the asset and liability management process. It is the Group’s policy to reduce its exposure to currency fluctuations to acceptable levels as determined by the Board of Directors. The Board has established levels of currency risk by setting limits on currency position exposures. Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within established limits.

Sensitivity analysis - currency riskAll foreign currency exposures with the exception of investments in subsidiaries and associates are captured as part of the trading book. The risk of the exposures are subject to quantification via a daily VaR calculation, the results of which are disclosed in note 33 (a).

The effect of foreign currency translation on the Group's investments in subsidiaries and associates are reported under the "foreign exchange translation reserve" under the note 21(h).

Equity price riskEquity price risk arises from fluctuations in equity indices and prices. The Board has set limits on the amount and type of investments that may be accepted. This is monitored on an ongoing basis by the Group Risk Committee. The non-trading equity price risk exposure arises from the Group's investment portfolio.

The effect on equity (as a result of a change in the fair value of equity investments held as fair value through other comprehensive income) due to a reasonablypossible change in equity indices, with all other variables held constant is as follows:

2014 2013

Market indices

Change in equity

indices %Effect on OCI

US$ ’000Effect on OCI

US$ ’000

Kuwait Stock Exchange +/-10 % +/- 2,857 3,349

Sensitivity to equity price movements will be on a symmetric basis, as financial instruments giving rise to non-symmetric movements are not significant.

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34. FAIR VALUE MEASUREMENT

The fair value of financial assets and financial liabilities, other than those disclosed in the table below and in note 9, approximate their carrying values. Please refer note 9 for the fair value of non-trading investments carried at amortised cost.

The Group's primary medium and long-term financial liabilities are the term debts and subordinated liabilities. The fair values of these financial liabilities are not materially different from their carrying values, since these liabilities are repriced at intervals of three or six months, depending on the terms and conditions of the instrument and the resultant applicable margins approximate the current spreads that would apply for borrowings with similar maturities.

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

Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: Other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

2014

Level 1US$ ’000

Level 2US$ ’000

Level 3US$ ’000

TotalUS$ ’000

Financial assets at Fair value 52,907 257,938 67,728 378,573

Derivative assets 162,546 56,437 - 218,983

Derivative liabilities (100,857) (169,527) - (270,384)

2013

Level 1US$ ’000

Level 2US$ ’000

Level 3US$ ’000

TotalUS$ ’000

Financial assets at Fair value 91,963 315,201 71,754 478,918

Derivative assets 14,606 96,308 - 110,914

Derivative liabilities (37,032) (181,170) - (218,202)

During the year 2014 and 2013 there have been no transfers between Levels 1, 2 and 3.For an explanation of valuation techniques used to value these financial instruments please refer to note 3.3 (f ).

35. LIQUIDITY RISK

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows. Funding risk arises when the necessary liquidity to fund illiquid asset positions cannot be obtained at the expected terms and when required.

The management of the Group’s liquidity and funding management is the responsibility of the Group Asset and Liability Committee (GALCO) under the chairmanship of the Deputy Group Chief Executive Officer Treasury and Investments supported by the Group Treasurer, and is responsible for ensuring that all foreseeable funding commitments, including deposit withdrawals, can be met when due, and that wholesale market access is co-ordinated and controlled.

The Group maintains a stable funding base comprising core retail and corporate customer deposits and institutional balances, augmented by wholesale funding and portfolios of highly liquid assets which are diversified by currency and maturity, in order to enable the Group to respond quickly to any unforeseen liquidity requirements.

The Group subsidiaries and affiliates maintain a strong individual liquidity position and manage their liquidity profiles so that cash flows are balanced and funding obligations can be met when due.

Treasury limits are set by the GALCO and allocated as required across the various group entities. Specifically GALCO and the Group Treasurer are responsible for:

- projecting cash flows by major currency under various stress scenarios and considering the level of liquid assets necessary in relation thereto;- monitoring balance sheet liquidity ratios against internal and regulatory requirements;- maintaining a diverse range of funding sources with adequate back-up facilities;- managing the concentration and profile of debt maturities;- managing contingent liquidity commitment exposures within predetermined caps;- monitoring depositor concentration in order to avoid undue reliance on large individual depositors and ensure a satisfactory overall funding mix; and- maintaining liquidity and funding contingency plans. These plans must identify early indicators of stress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crises while minimising adverse long-term implications for the business.

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35. LIQUIDITY RISK (continued)

The maturity profile of the assets and liabilities at 31 December 2014 given below reflects management's best estimates of the maturities of assets and lia-bilities. These have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date, except in the case of customer deposits. The liquidity profile of customer deposits has been determined on the basis of the effective maturities indicated by the Group’s deposit retention history.

US$ '000

Lessthan

1 yearAbove1 year Undated Total

ASSETS

Cash and balances with central banks 649,212 - - 649,212

Treasury bills and deposits with central banks 2,611,085 - - 2,611,085

Deposits with banks 3,679,810 143,707 - 3,823,517

Loans and advances 8,816,320 9,648,216 - 18,464,536

Non-trading investments 1,389,006 4,382,896 - 5,771,902

Investment in associates and joint venture - - 288,315 288,315

Investment properties - - 254,490 254,490

Premises and equipment - - 267,002 267,002

Interest receivable and other assets 553,919 118,971 - 672,890

Goodwill and other intangible assets - - 641,939 641,939

Total 17,699,352 14,293,790 1,451,746 33,444,888

LIABILITIES

Deposits from banks 4,461,172 38,500 - 4,499,672

Borrowings under repurchase agreements 860,941 40,649 - 901,590

Customers’ deposits 12,015,183 10,991,585 - 23,006,768

Interest payable and other liabilities 554,702 300,291 - 854,993

Subordinated liabilities 67,528 284,118 - 351,646

Total 17,959,526 11,655,143 - 29,614,669

Net liquidity gap (260,174) 2,638,647 1,451,746 3,830,219

The Group has collateralized borrowing lines of credit with various financial institutions through Global Master Repurchase Agreements (GMRA), under which it can borrow up to US$ 2.4 billion (31 December 2013: US$ 2.4 billion). Please refer note 16 for further details.

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The maturity profile of the assets and liabilities at 31 December 2013 was as follows:

US$' 000

Lessthan

1 yearAbove1 year Undated Total

ASSETS

Cash and balances with central banks 820,296 - - 820,296

Treasury bills and deposits with central banks 2,587,534 - - 2,587,534


Loans and advances 7,987,474 9,318,208 - 17,305,682

Non-trading investments 944,370 4,583,603 - 5,527,973

Investment in associates and joint venture - - 302,258 302,258

Investment properties - - 201,146 201,146

Premises and equipment - - 274,696 274,696

Interest receivable and other assets 438,688 122,166 - 560,854

Goodwill and other intangible assets - - 662,386 662,386

Total 16,905,351 14,306,056 1,440,486 32,651,893

LIABILITIES


Borrowings under repurchase agreements 1,230,462 40,649 - 1,271,111

Customers’ deposits 11,775,910 10,252,547 - 22,028,457

Interest payable and other liabilities 565,988 212,272 - 778,260


Total 18,055,185 11,031,605 - 29,086,790

Net liquidity gap (1,149,834) 3,274,451 1,440,486 3,565,103

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Analysis of financial liabilities by remaining contractual maturities

The table below summarises the maturity profile of the Group's financial liabilities (including interest) based on contractual undiscounted repayment obligations. However, the Group's expected cash flows on these instruments vary significantly from this analysis. In particular, customer deposits are expected to maintain stable or increased balances.

US$' 000

Up toOne month

One monthto threemonths

Over threemonths to

one year

Over one year to

five yearsOver five

years Total

As at 31 December 2014

Deposits from banks 2,673,581 1,433,130 357,949 38,990 - 4,503,650

Borrowings under repurchase agreements 236,018 625,442 - 41,075 - 902,535

Customers’ deposits 9,622,995 4,924,192 6,721,351 1,467,409 351,005 23,086,952

Subordinated liabilities - - 68,683 96,579 220,221 385,483

Total 12,532,594 6,982,764 7,147,983 1,644,053 571,226 28,878,620

Credit related commitments 90,920 110,190 389,378 119,088 11,052 720,628

Derivatives (net) 14,710 54,505 (51,133) (57,303) 93,029 53,808

US$' 000

Up toOne month


Over threemonths to

one year

Over one year to

five yearsOver five

years Total

As at 31 December 2013

Deposits from banks 3,509,058 431,008 367,585 64,034 - 4,371,685

Borrowings under repurchase agreements 870,282 345,829 15,267 41,316 - 1,272,694

Customers’ deposits 10,239,031 4,323,982 3,970,864 3,676,297 - 22,210,174

Subordinated liabilities - 179,689 - 283,080 214,246 677,015

Total 14,618,371 5,280,508 4,353,716 4,064,727 214,246 28,531,568

Credit related commitments 13,852 16,666 332,900 153,503 15,435 532,356

Derivatives (net) 2,602 14,026 20,172 33,396 37,302 107,498

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36. CAPITAL ADEQUACY

The primary objectives of the Group's capital management policies are to ensure that the Group complies with externally imposed capital requirements and that the Group maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders' value. Capital adequacy for each of the group companies is also managed separately at individual company level. The Group does not have any significant restrictions on its ability to access or use its assets and settle its liabilities other than any restrictions that may result from the supervisory frameworks within which the banking subsidiaries operate.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

The risk asset ratio, calculated in accordance with the capital adequacy guidelines, under Basel II, issued by the Central Bank of Bahrain ("CBB"), for the Group, is disclosed under Pillar III Table 1, which is included in the Annual Report. The minimum capital adequacy ratio as per CBB is 12.0%. The Group's risk asset ratio is 15.5% as of 31 December 2014 (31 December 2013: 16.2%).

37. DEPOSIT PROTECTION SCHEME

Certain customers’ deposits of the Group are covered by deposit protection schemes established by the Central Bank of Bahrain (CBB) and the Financial Services Compensation Scheme, UK.

Bahrain : Customers' deposits held with the Bank in the Kingdom of Bahrain are covered by the Regulation Protecting Deposits and Unrestricted Investment Accounts issued by the Central Bank of Bahrain (CBB) in accordance with Resolution No.(34) of 2010. A periodic contribution as mandated by the CBB is paid by the Bank under this scheme.

UK : Customers' deposits in AUBUK are covered under the Financial Services Compensation Scheme, up to a limit of GBP 85,000 per customer. No up-front contribution is currently mandated under this scheme and no liability is due unless any member bank of the scheme is unable to meet its depository obligations.

38. ISLAMIC BANKING

The Group's Shari'a compliant Islamic banking activities are offered through its fully fledged Islamic Banking subsidiary AUBK and Islamic banking windows at AUB Bahrain and AUBUK. The results of its Islamic banking activity, which is included in the consolidated financial statements, is presented below.

Balance sheet as at 31 December

Note2014

US$ ’0002013

US$ ’000

ASSETS

Cash and balances with central banks 84,506 292,803

Deposits with central banks 1,180,167 1,338,778

Deposits with banks (a) 1,605,978 1,479,323

Receivable balances from Islamic financing activities (b) 10,308,062 8,770,100

Financial investments 579,066 378,927

Investment properties 109,283 117,072

Premises and equipment 130,526 135,791

Profit receivable and other assets 54,789 63,089

TOTAL ASSETS 14,052,377 12,575,883

LIABILITIES

Deposits from banks (c) 2,099,278 2,478,516

Customers' deposits (d) 9,908,966 8,531,510

Profit payable and other liabilities 166,592 99,558

Restricted investment accounts 5,158 6,755

12,179,994 11,116,339

Unrestricted investment accounts (URIA) 609,583 352,591

TOTAL LIABILITIES AND URIA 12,789,577 11,468,930

TOTAL EQUITY 1,262,800 1,106,953

TOTAL LIABILITIES, URIA AND EQUITY 14,052,377 12,575,883

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38. ISLAMIC BANKING (continued)

Statement of income for the year ended 31 December

Note2014

US$ ’0002013

US$ ’000

Net income from Islamic financing activities (e) 325,551 306,236

325,551 306,236

Fees and commissions 30,778 28,276

Other operating income 20,079 11,887

Foreign exchange gains 14,925 14,451

OPERATING INCOME 391,333 360,850

Provision for impairment 64,725 82,794

NET OPERATING INCOME 326,608 278,056

Staff costs 60,289 57,743

Depreciation 12,348 9,132

Other operating expenses 37,566 31,079

OPERATING EXPENSES 110,203 97,954

PROFIT FOR THE YEAR BEFORE TAX 216,405 180,102

Tax expense 7,610 6,884

PROFIT FOR THE YEAR BEFORE THE SHARE OF PROFIT OF UNRESTRICTED INVESTMENT ACCOUNT HOLDERS 208,795 173,218

Less : Share of profit of unrestricted investment account holders 791 1,298

NET PROFIT FOR THE YEAR 208,004 171,920

Attributable to:

Owners of the Bank 166,399 136,043


208,004 171,920

Notes

2014US$ ’000

2013US$ ’000

(a) Deposits with banks

Murabaha finance with other banks 861,460 793,228

Wakala with banks 404,067 335,946

Current accounts and others 340,451 350,149

1,605,978 1,479,323

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Notes (continued)

2014US$ ’000

2013US$ ’000

(b) Receivable balances from Islamic financing activities

Tawarruq receivables 6,607,555 6,277,568

Murabaha receivables 2,432,509 1,737,255

Ijara receivables 1,561,282 1,015,576

Others 10,436 49,776

Less: Allowance for impairment (303,720) (310,075)

10,308,062 8,770,100

2014US$ ’000

2013US$ ’000

(c) Deposits from banks

Murabaha 1,370,242 1,359,966

Wakala 712,908 1,046,713

Current accounts 16,128 71,837

2,099,278 2,478,516

2014US$ ’000

2013US$ ’000

(d) Customers' deposits

Wakala 5,318,256 4,620,341

Mudaraba 1,031,260 930,864

Current accounts 1,211,910 997,373

Murabaha 2,347,540 1,982,932

9,908,966 8,531,510

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Notes (continued)

2014US$ ’000

2013US$ ’000

(e) Net income from Islamic financing activities

Income from Tawarruq 247,970 241,034

Income from Murabaha 134,361 104,950

Income from Ijara 69,618 42,966

Income from Financial Investments 12,051 13,277

Income from Islamic financing activities 464,000 402,227

Profit expenses on Murabaha 52,325 37,721

Profit expenses on Wakala 72,220 43,859

Profit expenses on Mudaraba 13,904 14,411

Less: Distribution to depositors 138,449 95,991

Net income from Islamic financing activities 325,551 306,236

39. COMPARATIVE INFORMATION

Certain corresponding figures for 2013 have been reclassified in order to conform to the presentation of financial statements for the current year. Such reclassifications do not affect previously reported net profit or shareholders' equity.

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Pillar III DisclosuresBasel II31 December 2014

Introduction to the Central Bank of Bahrain's Basel II guidelines 108Pillar III quantitative & qualitative disclosures 1081. Capital structure 1092 . Group risk governance structure 1103 . Credit risk management 1114. Market risk 1205. Liquidity risk and funding management 1236. Operational risk 1237. Information technology risk 1238. Strategic risk 1239. Legal, compliance, regulatory and reputational risks 123 10. Environmental risk 123

Ahli United Bank

INTRODUCTION TO THE CENTRAL BANK OF BAHRAIN’S BASEL II GUIDELINES

The Central Bank of Bahrain (CBB) Basel II Guidelines, based upon the Bank of International Settlements (BIS) Revised Framework – ‘International Convergence of Capital Measurement and Capital Standards’, were introduced on 1 January 2008. Basel II is structured around three ‘Pillars’: Pillar I - Minimum Capital Requirements; Pillar II – the Supervisory Review Process and the Internal Capital Adequacy Assessment Process (ICAAP); and Pillar III - Market Discipline.

Group Structure

The public disclosures under this section have been prepared in accordance with the CBB Rules concerning Public Disclosure Module ("PD"), section PD-1: Annual Disclosure Requirements. The disclosures under this section are applicable to Ahli United Bank B.S.C. (the "Bank"), which is the parent bank incorporated in Bahrain. The Bank operates under a retail banking license issued by the CBB. The Bank and its subsidiaries (as detailed under note 2 to the audited consolidated financial statements) are collectively known as the "Group".

Pillar I – Minimum Capital Requirements

Pillar I deals with the basis for the computation of the regulatory capital adequacy ratio. It defines the calculation of Risk Weighted Assets (RWAs) for credit risk, market risk and operational risk, as well as the derivation of the regulatory capital base. The capital adequacy ratio is then calculated as the ratio of the Bank’s regulatory capital to its total RWAs. All Bahrain incorporated banks are currently required to maintain a minimum capital adequacy ratio of 12%. In addition, the CBB requires banks to maintain an additional 0.5% buffer above the minimum capital adequacy ratio.

The Group ensures that each subsidiary maintains sufficient capital levels for their respective legal and compliance purposes.

Credit risk

Basel II provides three approaches to the calculation of credit risk regulatory capital. The Standardised approach which the Bank has adopted, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties, and groups other counterparties into broad categories and applies standardised risk weightings to these categories.

Market risk

The Bank has adopted the Standardised approach for determining the market risk capital requirement.

Operational risk

Under the Basic Indicator approach, which the Bank has adopted for operational risk, the regulatory capital requirement for operational risk is calculated by applying a co-efficient of 15 per cent to the average gross income for the preceding three financial years.

Pillar II – The Supervisory Review and Evaluation Process

Pillar II involves the process of supervisory review of a financial institution’s risk management framework and its capital adequacy.

Accordingly, this involves both the Bank and its regulators taking a view on whether additional capital should be held against risks not covered in Pillar I. Part of the Pillar II process is the Internal Capital Adequacy Assessment Process (ICAAP) which is the Bank’s self assessment of risks not captured by Pillar I.

As part of the CBB’s Pillar II guidelines, each bank is required to be individually reviewed and assessed by the CBB with the intention of setting individual minimum capital adequacy ratios. The Bank is currently required to maintain a 12 per cent minimum capital adequacy ratio at group level.

Pillar III – Market Discipline

The third pillar is related to market discipline and requires the Bank to publish detailed qualitative and quantitative information of its risk management and capital adequacy policies and processes to complement the first two pillars and the associated supervisory review process. The disclosures in this report are in addition to the disclosures set out in the audited consolidated financial statements of the Group for the year ended 31 December 2014.

PILLAR III QUANTITATIVE & QUALITATIVE DISCLOSURES

For the purpose of computing regulatory minimum capital requirements, the Group follows the rules as laid out under the CBB Rulebook module PCD: Prudential Consolidation and Deduction Requirements, PCD-1 and PCD-2 and the Capital Adequacy (CA) Module. Accordingly,

a) All subsidiaries as per note 2 to the audited consolidated financial statements are consolidated on a line by line basis in accordance with International Financial Reporting Standards (IFRS). Non-controlling interest arising on consolidation is reported as part of Tier 1 capital; b) Investments in associates as reported under note 10 to the audited consolidated financial statements are pro-rata consolidated for the purpose of regulatory minimum capital requirements and capital deducted from Tier 1 and 2. The prorated capital is included under Tier 1 and Tier 2 respectively as aggregation; c) Goodwill is deducted from Tier 1 capital; d) Subordinated term debts, as reported under liabilities in the consolidated balance sheet, are reported as part of Tier 2 capital, subject to maximum thresholds and adjusted for remaining life;

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108

PILLAR III QUANTITATIVE & QUALITATIVE DISCLOSURES (continued) e) Unrealized gains arising from fair valuing equities is reported only to the extent of 45%;

f ) Property revaluation reserve is included under Tier 2 capital to the extent of 45%; and g) Collective impairment provisions to the extent of maximum threshold of 1.25% of Credit Risk Weighted Assets are included under Tier 2 capital.

1. CAPITAL STRUCTURE

TABLE - 1 US$ ’000

A. NET AVAILABLE CAPITAL Tier 1 Tier 2

Paid-up share capital 1,526,474

Less: Loans against Employee Stock Purchase Plan (4,898)

Reserves:

Share premium 719,481

Capital reserve 8,480

Statutory reserve 295,814

Others (168,948)

Retained earnings 520,533

Minority interest in the equity of subsidiaries 439,345

Less: Goodwill (476,410)

Less: Unrealized gross losses arising from fair valuing equities (684)

Current year profit 482,529

Asset revaluation reserve-property, plant and equipment (45% only) 16,663

Unrealized gains arising from fair valuing equities (45% only) 7,780

Collective impairment provisions 261,290

Eligible subordinated term debt 277,026

TOTAL CAPITAL BEFORE REGULATORY DEDUCTIONS 2,859,187 1,045,288

Less: Regulatory deductions:

Material holdings of equities 144,157 144,157

2,715,030 901,131

Add: Proportionate aggregation 208,011 25,383

NET AVAILABLE CAPITAL 2,923,041 926,514

TOTAL ELIGIBLE CAPITAL BASE (Tier 1 + Tier 2) 3,849,555

RISK WEIGHTED EXPOSURES

Credit Risk Weighted Exposures 22,269,256

Market Risk Weighted Exposures 947,225

Operational Risk Weighted Exposures 1,615,893

TOTAL RISK WEIGHTED EXPOSURES 24,832,374

Tier 1 - Capital Adequacy Ratio 11.8%

Total - Capital Adequacy Ratio 15.5%

The terms and conditions and main features of the capital instruments listed above as part of the Tier 1 and Tier 2 capital are explained in note 19, 20 and note 21 to the audited consolidated financial statements of the Group for the year ended 31 December 2014.


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1. CAPITAL STRUCTURE (continued)

B. CAPITAL ADEQUACY RATIO

As at 31 December 2014, the capital adequacy ratio under Basel II of the Group’s significant subsidiaries were:

Subsidiaries

Ahli United BankK.S.C.P(AUBK)

Ahli United Bank (U.K.) P.L.C.

(AUBUK)

Ahli United Bank (Egypt) S.A.E.

(AUBE)

Tier 1 - Capital Adequacy Ratio 17.0% 15.7% 11.0%

Total - Capital Adequacy Ratio 18.7% 19.5% 12.4%

2. GROUP RISK GOVERNANCE STRUCTURE

Risk Governance

The Group Board seeks to optimise the Bank’s performance by enabling the various group business units to realize the Group’s business strategy and meet agreed business performance targets by operating within the agreed capital and risk parameters and Group risk policy framework.

AUB Group Risk Governance Structure

The above group committees are set up as part of the group risk governance structure. The terms of reference for these committees are approved by the Board. Group Audit & Compliance Committee also has oversight over Group Compliance Committee.

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2. GROUP RISK GOVERNANCE STRUCTURE (continued)

The Board approves the risk parameters and the Group Risk Committee monitors the Group’s risk profile against these parameters.

The Deputy Group CEO – Risk, Legal and Compliance, under the delegated authority of the Group CEO & MD, supported by the Group Head of Risk Management and the Group Head of Credit Risk has responsibility for ensuring effective risk management and control. Within Group Risk Management, specialist risk-type heads and their teams are responsible for risk oversight and establishing appropriate risk control frameworks.

Internal Audit is responsible for the independent review of risk management and the Group’s risk control environment.

The Board and its Executive Committee receive quarterly risk updates including detailed risk exposures analysis reports.

The Board approves all risk policies as well as the Group risk framework on an annual basis.

The Group Audit & Compliance Committee considers the adequacy and effectiveness of the Group risk control framework and receives quarterly updates on any control issues, regulatory and compliance related issues.

Systems and procedures are in place to identify, control and report on all major risks.

3. CREDIT RISK MANAGEMENT

Credit risk is the risk of financial loss if a customer or counterparty fails to meet a financial obligation under a contract. It arises principally from lending, trade finance and treasury activities. Credit risk also arises where assets are held in the form of debt securities, the value of which may fall.

The Group has policies and procedures in place to monitor and manage these risks and the Group Risk Management function provides high-level centralized oversight and management of credit risk. The specific responsibilities of Group Risk Management are to:

- Set credit policy and risk appetite for credit risk exposure to specific market sectors;

- Control exposures to sovereign entities, banks and other financial institutions and set risk ratings for individual exposures. Credit and settlement risk limits to counterparties in these sectors are approved and managed by Group Risk Management, to optimize the use of credit availability and avoid risk concentration;

- Control cross-border exposures, through the centralized setting of country limits with sub-limits by maturity and type of business;

- Manage large credit exposures, ensuring that concentrations of exposure by counterparty, sector or geography remain within internal and regulatory limits in relation to the Group’s capital base;

- Maintain the Group’s Internal Risk Rating framework;

- Manage watchlisted and criticised asset portfolios and recommend appropriate level of provisioning and write-offs;

- Report to the Group Risk Committee, Audit Committee and the Board of Directors on all relevant aspects of the Group’s credit risk portfolio. Regular reports include detailed analysis of:

- risk concentrations - corporate and retail portfolio performance - specific higher-risk portfolio segments, e.g. real estate - individual large impaired accounts, and details of impairment charges - country limits, cross-border exposures.

- Specialised management and control of all non-performing assets;

- Manage and direct credit risk management systems initiatives; and

- Interface, for credit-related issues, with external parties including the CBB, rating agencies, investment analysts, etc.

All credit proposals are subjected to a thorough comprehensive risk assessment which examines the customer’s financial condition and trading performance, nature of the business, quality of management and market position. In addition, AUB's internal risk rating model scores these quantitative and qualitative factors. The credit approval decision is then made and terms and conditions set. Exposure limits are based on the aggregate exposure to the counterparty and any connected entities across the AUB Group. All credit exposures are reviewed at least annually.


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3. CREDIT RISK MANAGEMENT (continued)

Counterparty Exposure Classes

The CBB’s capital adequacy framework for the standardised approach to credit risk sets the following counterparty exposure classes and the risk weightings to be applied to determine the risk weighted assets:

Exposure Class Risk Weighting Criteria

Sovereign Portfolio Exposures to governments of GCC (refer table 4 for definition of GCC) member states and their central banks are zero % risk weighted. Other sovereign exposures denominated in the relevant domestic currency are also zero % risk weighted. All other sovereign exposures are risk weighted based on their external credit ratings.

Public Sector Entity [PSE] Portfolio Bahrain PSEs and domestic currency claims on other PSEs [which are assigned a zero % risk weighting by their own national regulator] are assigned a zero % risk weighting. Other PSEs are risk weighted based on their external credit ratings.

Banks Portfolio Exposures to banks are risk weighted based on their external credit ratings, with a preferential weighting given to short term exposures (i.e. with an original tenor of 3 months or less).

Investment Company Portfolio Exposures to investment companies which are supervised by the CBB are treated in the same way as exposures to banks but without the preferential short term exposure weighting.

Other exposures will be treated as a corporate exposure for risk weighting purposes.

Corporate Portfolio Exposures to corporates are risk weighted based on their external credit rating. Unrated corporates are 100% risk weighted. A number of corporates owned by the Kingdom of Bahrain have been assigned a preferential zero % risk weighting.

Regulatory Retail Portfolio Eligible regulatory retail exposures are risk weighted at 75%.

Residential Property Portfolio Exposures fully secured by first mortgages on owner occupied residential property are risk weighted between 35%-100% based on applicable regulatory guidance.

Commercial Property Portfolio Exposures secured by mortgages on commercial real estate are subject to a minimum 100% risk weighting, except where the borrower has an external rating below BB- in which case the rating risk weighting applies.

Equities and Funds Investment Portfolio Investments in listed equities carry a 100% risk weighting. Unlisted equities are 150% risk weighted.

Investments in rated instruments are risk weighted according to their external rating and treated as a corporate exposure. If not rated the investment is treated as an equity investment and risk weighted 100% for listed and 150% for others.

Past Due Portfolio The unsecured portion of any exposure [other than a residential mortgage loan] that is past due for 90 days or more:

150% risk weighted when specific provisions are less than 20% of the outstanding amount; and

100% risk weighted when specific provisions are greater than 20%.

Holdings of Real Estate All holdings (directly or indirectly) of real estate in the form of real estate companies, subsidiaries or associate companies or other arrangements such as trusts, funds or Real Estate Investment Trusts (REITs) are risk-weighted at 200%. Premises occupied by the bank are weighted at 100%.

Other Assets All other assets not classified above are risk weighted at 100%

External Rating Agencies

The Group uses the following external credit assessment institutions (ECAI’s): Moody’s, Standard & Poors and Fitch. The external rating of each ECAI is mapped to the prescribed internal risk rating that in turn produces standard risk weightings.


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Basel II Reporting of Credit Risk Exposures

As a result of the methodologies applied credit risk exposures presented under Basel II reporting differs in a number of respects from the exposures reported in the consolidated financial statements.

1. As per the CBB Basel II framework, off balance sheet exposures are converted, by applying a credit conversion factor (CCF), into direct credit exposure equivalents.

2. Under the Basel II capital adequacy framework eligible collateral is applied to reduce exposure.

Credit Risk Mitigation

The Group’s first priority when making loans is to establish the borrower’s capacity to repay and not rely principally on security / collateral. Where the customer’s financial standing is strong facilities may be granted on an unsecured basis, but when necessary collateral is an essential credit risk mitigations.

Acceptable forms of collateral are defined within the Group risk framework and conservative valuation parameters are also pre-set and regularly reviewed to reflect any changes in market conditions. Security structures and legal covenants are also subject to regular review to ensure that they continue to fulfill their intended purpose and remain in line with the CBB's prescribed minimum requirements set out in their capital adequacy regulations.

The principal collateral types are as follows:

- in the personal sector – cash, mortgages over residential properties and assignments over salary income;

- in the commercial sector – cash, charges over business assets such as premises, inventories, receivables, debt securities and bank guarantees;

- in the commercial real estate sector – charges over the properties being financed; and

- In the financial sector – charges over financial instruments, such as debt securities and equities.

Valuation of Collateral

The type and amount of collateral taken is based upon the credit risk assessment of the borrower. The market or fair value of collateral held is closely monitored and when necessary, top-up requests are made or liquidation is initiated as per the terms of the underlying credit agreements.

Gross Credit Risk Exposures subject to Credit Risk Mitigations (CRM)

The following table details the Group's gross credit risk exposures before the application of eligible Basel II CRM techniques. The CBB’s Basel II guidelines detail which types of collateral and which issuers of guarantees are eligible for preferential risk weighting. The guidelines also specify the minimum collateral management processes and collateral documentation requirements necessary to achieve eligibility.

TABLE - 2 GROSS CREDIT RISK EXPOSURES

US$ ’000

As at 31 December

2014

Averagemonthlybalance

Balances with central banks 526,277 640,520

Treasury bills and deposits with central banks 2,611,085 2,429,503



Non-trading investments 5,393,329 5,293,731

Interest receivable and other assets 471,735 403,086

TOTAL FUNDED EXPOSURES 31,290,479 30,966,912

Contingent liabilities 3,087,397 3,034,629


TOTAL UNFUNDED EXPOSURES 3,808,025 3,577,394

TOTAL CREDIT RISK EXPOSURE 35,098,504 34,544,306

The gross credit exposures reported above are as per the consolidated balance sheet as reduced by exposures which do not carry credit risk.


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TABLE - 3 RISK WEIGHTED EXPOSURES

US$ ’000

Grossexposure

Secured byeligible

CRM

Risk weightedexposuresafter CRM

Capitalrequirement

Claims on sovereigns 4,756,078 - 138,056 16,567

Claims on public sector entities 639,546 - 593,092 71,171

Claims on banks 7,011,021 167,122 2,468,351 296,202

Claims on corporates 17,093,827 2,785,938 13,801,432 1,656,172

Regulatory retail exposures 1,922,271 122,889 1,349,536 161,944

Residential retail exposures 1,373,592 - 480,757 57,691

Equity - Listed 52,436 - 52,436 6,292

Equity - Unlisted 132,295 - 198,442 23,813

Investments in funds 168,167 - 233,730 28,048

Other exposures 1,383,856 63,170 1,587,364 190,484

TOTAL 34,533,089 3,139,119 20,903,196 2,508,384

Add: Proportionate aggregation 1,366,060 163,927

TOTAL CREDIT RISK CAPITAL REQUIREMENT(STANDARDISED APPROACH) 22,269,256 2,672,311

TOTAL MARKET RISK CAPITAL REQUIREMENT(STANDARDISED APPROACH) 947,225 113,667

TOTAL OPERATIONAL RISK CAPITAL REQUIREMENT (BASIC INDICATOR APPROACH) 1,615,893 193,907

TOTAL 24,832,374 2,979,885

The gross exposure in the above table represents the on and off balance sheet credit exposures before credit risks mitigations (CRM), determined in accordance with the CBB issued Pillar III guidelines. The off balance sheet exposures are computed using the relevant conversion factors.

Under the CBB Basel II Guidelines, banks may choose between two options when calculating credit risk mitigation capital relief. The simple approach which substitutes the risk weighting of the collateral for the risk weighting of the counterparty or the comprehensive approach whereby the exposure amount is adjusted by the actual value ascribed to the collateral. The Group has selected to use the comprehensive method where collateral is in the form of cash or bonds or equities. The Group uses a range of risk mitigation tools including collateral, guarantees, credit derivatives, netting agreements and financial covenants to reduce credit risk.

Concentration Risk

Refer note 31(a) to the audited consolidated financial statements for definition and policies for management of concentration risk.

As per the CBB’s single obligor regulations, banks incorporated in Bahrain are required to obtain the CBB’s approval for any planned exposure to a single counterparty, or group of connected counterparties, exceeding 15 per cent of the regulatory capital base. As at 31 December 2014, the Group had no qualifying single obligor exposures in accordance with Central Bank of Bahrain guidelines which exceed 15 percent of the Group’s regulatory capital base.

Geographic Distribution of Gross Credit Exposures

The geographic distribution of credit exposures is monitored on an ongoing basis by Group Risk Management and reported to the Board on a quarterly basis.


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The following table details the Group's geographic distribution of gross credit exposures as at 31 December 2014.

TABLE - 4 GEOGRAPHIC DISTRIBUTION OF GROSS CREDIT EXPOSURES

US$ ’000

Kingdom of Bahrain

State of Kuwait

Other GCC countries *

United Kingdom

Europe (excluding

United Kingdom)

Arab Republic of Egypt

Asia (excluding

GCC countries)

Rest of the World Total

Balances with central banks

155,124 28,848 - 1,213 - 290,417 50,675 - 526,277

Treasury bills and deposits with central banks

355,177 1,180,168 - 211,224 - 464,866 249,675 149,975 2,611,085

Deposits with banks

81,987 972,124 831,336 358,680 730,871 52,923 300,288 495,308 3,823,517

Loans and advances

3,235,548 8,787,809 2,172,534 1,715,334 159,885 2,007,107 268,023 118,296 18,464,536

Non-trading investments

573,519 - 1,348,703 179,513 690,534 619,412 1,387,481 594,167 5,393,329

Interest receivable and other assets

225,992 40,059 1,793 74,202 73,878 46,874 1,653 7,284 471,735

Total funded exposures

4,627,347 11,009,008 4,354,366 2,540,166 1,655,168 3,481,599 2,257,795 1,365,030 31,290,479

Contingent liabilities

772,031 1,305,605 437,089 52,720 41,300 401,980 21,685 54,987 3,087,397

Undrawn loan commitments

66,416 132,301 198,273 83,722 16,655 217,123 2,333 3,805 720,628

Total unfunded exposures

838,447 1,437,906 635,362 136,442 57,955 619,103 24,018 58,792 3,808,025

TOTAL 5,465,794 12,446,914 4,989,728 2,676,608 1,713,123 4,100,702 2,281,813 1,423,822 35,098,504

15.6% 35.5% 14.2% 7.6% 4.9% 11.7% 6.5% 4.0% 100.0%

* Other GCC countries are countries which are part of the Gulf Co-operation Council comprising the Sultanate of Oman, State of Qatar, Kingdom of Saudi Arabia and the United Arab Emirates apart from Kingdom of Bahrain and State of Kuwait which are disclosed separately.

TABLE - 5 SECTORAL CLASSIFICATION OF GROSS CREDIT EXPOSURES

US$ ’000

Funded Unfunded Total %

Balances with central banks 3,137,362 - 3,137,362 8.9

Banks and other financial institutions 7,626,493 477,141 8,103,634 23.2

Consumer/personal 3,430,805 14,041 3,444,846 9.8

Residential mortgage 1,717,425 28,427 1,745,852 5.0

Trading and manufacturing 4,585,362 1,351,705 5,937,067 16.9

Real estate 4,644,398 146,325 4,790,723 13.6

Services 3,199,816 1,399,697 4,599,513 13.1

Government/public sector 2,704,465 235,939 2,940,404 8.4

Others 244,353 154,750 399,103 1.1

TOTAL 31,290,479 3,808,025 35,098,504 100.0

89.2% 10.8% 100.0%


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TABLE - 6 RESIDUAL CONTRACTUAL MATURITY OF GROSS CREDIT EXPOSURES

US$ ’000

Up toone month


Over threemonths to

one year

Over oneyear to

five years

Overfive to

ten years

Over ten to twenty

years

Overtwenty

years Total

Balances with central banks

526,277 - - - - - - 526,277

Treasury bills and deposits with central banks

861,979 722,302 1,026,804 - - - - 2,611,085

Deposits with banks 3,053,904 400,514 225,392 143,707 - - - 3,823,517

Loans and advances 3,587,196 3,040,489 2,188,635 5,108,832 3,431,756 942,710 164,918 18,464,536

Non-trading investments 210,457 231,445 891,076 2,861,742 886,913 237,006 74,690 5,393,329

Interest receivable and other assets

64,156 162,985 132,069 71,396 41,129 - - 471,735

Total funded exposures 8,303,969 4,557,735 4,463,976 8,185,677 4,359,798 1,179,716 239,608 31,290,479

Contingent liabilities 534,571 503,851 1,182,355 853,411 13,209 - - 3,087,397

Undrawn loan commitments

90,920 110,190 378,329 130,137 11,052 - - 720,628

Total unfunded exposures

625,491 614,041 1,560,684 983,548 24,261 - - 3,808,025

TOTAL 8,929,460 5,171,776 6,024,660 9,169,225 4,384,059 1,179,716 239,608 35,098,504

Impairment Provisions

The Group Risk Committee regularly evaluates the adequacy of the established allowances for impaired loans

Two types of impairment allowance are in place:

Individually assessed impairment provisions

These are determined by evaluating the exposure to loss, case by case, on all individually significant accounts based upon the following factors:

- aggregate exposure to the customer;- the viability of the customer’s business model and its capacity to trade successfully out of financial difficulties, generating sufficient cash flow to service debt obligations;- the amount and timing of expected receipts and recoveries;- the extent of other creditors’ commitments ranking ahead of, or pari passu with the Bank, and the likelihood of other creditors continuing to support the company;- the realisable value of security (or other credit mitigations) and likelihood of successful repossession;- the likely dividend available on liquidation or bankruptcy;- the likely costs involved in recovering amounts outstanding, and- when available, the secondary market price of the debt.

Collectively assessed impairment provisions

Impairment is assessed on a collective basis as follows:

Incurred but not yet identified impairment

Individually assessed loans for which no evidence of impairment has been specifically identified on an individual basis are grouped together according to their credit risk characteristics. A collective loan loss allowance is calculated to reflect potential impairment losses estimated at the balance sheet date which may be individually identified in the future.

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Incurred but not yet identified impairment (continued)

The collective impairment provision is determined based upon:

- historical loss experience in portfolios of similar credit risk characteristics (for example, by industry sector, risk rating or product segment); and

- judgment as to whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience.

TABLE - 7 SECTORAL BREAKDOWN OF IMPAIRED LOANS AND IMPAIRMENT PROVISIONS

US$ ’000

Impaired and past due loans

Specific impairment

provision

*Net specific chargefor the

year ended 31 December 2014

Write offduring the

year ended 31 December 2014

Collective impairment

provision

Consumer/personal 87,092 84,268 86,480 71,646 55,624

Trading and manufacturing 113,473 106,051 80,686 74,640 66,482

Real estate 12,977 11,457 397 8,298 75,300

Residential mortgage 6,538 1,648 147 - 27,845

Banks and other financial institutions 33,868 32,341 9,157 15,413 16,343

Services 123,390 81,584 24,511 64,800 44,912

Government/public sector - - - - 4,293

Others 12,603 9,421 2,306 137 3,962

TOTAL 389,941 326,770 203,684 234,934 294,761

*Net specific charge for the year excludes recoveries from fully provided loans written off in prior years.

TABLE - 8 GEOGRAPHICAL DISTRIBUTION OF IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCES

US$ ’000

Kingdom ofBahrain

State ofKuwait

OtherGCC

countriesUnited

Kingdom

Europe(excluding

UnitedKingdom)

Arab Republicof Egypt

Asia(excluding

GCCcountries)

Rest of theworld Total

Specific impairment provision 55,965 216,652 - 570 - 45,032 8,551 - 326,770

Collective impairment provision

28,523 190,756 20,110 8,183 4,542 38,913 2,572 1,162 294,761

TOTAL 84,488 407,408 20,110 8,753 4,542 83,945 11,123 1,162 621,531

TABLE - 9 MOVEMENT IN IMPAIRMENT PROVISION FOR LOANS AND ADVANCES

US$ '000

TOTAL

Specific Collective

Balance at 1 January 2014 353,091 284,634

Amounts written off during the year (234,934) -

Net charge for the year* 203,684 22,266

Exchange rate adjustments / other movements 4,929 (12,139)

Balance at 31 December 2014 326,770 294,761

*Net specific charge for the year excludes recoveries from fully provided loans written off in prior years.


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Past Due and Impaired Credit Facilities As per CBB guidelines, credit facilities are placed on non-accrual status and interest income suspended when either principal or interest is overdue by 90 days whereupon unpaid and accrued interest is reversed from income. Interest on non-accrual facilities is included in income only when received. Credit facilities classified as past due are assessed for impairment in accordance with IFRS guidelines. A specific provision is established where there is objective evidence that a credit facility is impaired. Impaired credit facilities comprise those facilities where there is objective evidence that the Bank will not collect all amounts due, including both principal and interest. Objective evidence would include: - a breach of contract, such as default or delinquency in interest or principal payments, - the granting of a concession that, for economic or legal reasons relating to the borrower’s financial difficulties, would not otherwise be considered, - indications that it is probable that the borrower will enter bankruptcy or other financial reorganisation, Refer to notes 8(a) to 8(d) and note 31(c) to the audited consolidated financial statements for the year ended 31 December 2014 for the distribution of the loans and advances portfolio by quality. Ratings 1 - 4 comprise of corporate facilities demonstrating financial condition, risk factors and capacity to repay that are excellent to good and retail borrowers where cash collateral [or equivalent such as pledged investment funds] has been provided. Ratings 5 - 7 represents satisfactory risk and includes corporate facilities that require closer monitoring, and retail accounts which are maintained within generally applicable product parameters.

TABLE - 10 PAST DUE AND IMPAIRED LOANS - AGE ANALYSIS

i) By Geographical area

US$ '000

Threemonths to

one year

Oneto three

years

Overthreeyears Total

Kingdom of Bahrain 8,783 46,692 7,413 62,888

State of Kuwait 189,707 33,928 45,514 269,149

Other GCC Countries - - - -

United Kingdom 1,900 - - 1,900

Arab Republic of Egypt 18,252 11,753 17,569 47,574

Asia (excluding GCC countries) - - 8,430 8,430

TOTAL 218,642 92,373 78,926 389,941

56.1% 23.7% 20.2% 100.0%

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TABLE - 10 PAST DUE AND IMPAIRED LOANS - AGE ANALYSIS (continued)

ii) By Sector

US$ '000

Threemonths to

one year

Oneto three

years

Overthreeyears Total

Consumer/personal 21,975 46,489 18,629 87,093

Trading and manufacturing 85,846 13,986 13,641 113,473

Real estate 1,900 5,439 5,638 12,977

Residential mortgage 3,766 2,773 - 6,539

Banks and other financial institutions 6,291 1,945 25,631 33,867

Services 97,775 21,585 4,030 123,390

Others 1,089 156 11,357 12,602

TOTAL 218,642 92,373 78,926 389,941

56.1% 23.7% 20.2% 100.0%

TABLE - 11 RESTRUCTURED CREDIT FACILITIES

US$ '000

Balance of any restructured credit facilities as at year end 199,194

Loans restructured during the year 37,157

The above restructurings did not have any significant impact on the present or future earnings and were primarily extensions of the loan tenor

TABLE - 12 COUNTERPARTY CREDIT RISK IN DERIVATIVE TRANSACTIONS

i) Breakdown of the credit exposure

US$ '000

Notionalamount

Grosspositive

fair value

Creditconversion

factor

Foreign exchange related 8,941,764 142,526 231,317

Options & Interest rate related 50,414,026 76,457 144,074

Derivatives credit exposure 59,355,790 218,983 375,391

Gross positive fair value represents the replacement cost of the derivatives.

US$ '000

ii) Amounts of collateral 41,035

TABLE - 13 RELATED PARTY TRANSACTIONS

Refer note 25 to the audited consolidated financial statements of the Group for the year ended 31 December 2014.

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4. MARKET RISK

Market risk is the risk that movements in market risk factors, including foreign exchange rates, interest rates, credit spreads and equity prices will reduce the Group’s income or the value of its portfolios.

Market Risk Management, Measurement and Control Responsibilities

The Board approves the overall market risk appetite and delegates responsibility for providing oversight on the Bank's market risk exposures and the sub allocation of Board limits to the Group Asset and Liability Committee (GALCO). Group Risk Management is responsible for the market risk control framework and for monitoring compliance with the GALCO limit framework.

The Group separates market risk exposures into either trading or non-trading portfolios. Trading portfolios include those positions arising from market-making, proprietary position-taking and other marked-to-market positions. Non-trading portfolios include positions that arise from the foreign exchange/interest rate management of the Group’s retail and commercial banking assets and liabilities, and financial assets designated as at amortised cost and fair value through other comprehensive income statement.

Each Group operating entity has an independent market risk function which is responsible for measuring market risk exposures in accordance with the Group Trading Book Policy and the Interest Rate Risk in the Banking Book Policy, and monitoring these exposures against prescribed limits.

Market risk reports covering Trading Book risk exposures and profit and loss are published daily to the Bank’s senior management. A risk presentation covering both Trading and Banking Book is also compiled monthly and discussed at the GALCO.

The measurement techniques used to measure and control market risk include:

- Value at Risk (VaR); and - Stress tests- Sensitivities and position size related metrics

Daily Value at Risk (VaR)

The Group VaR is an estimate of the potential loss which might arise from unfavourable market movements:

VaR Type Sample Size

Holding Period

Confidence Interval

Frequency of Calculation

“Management” VaR 260 1 day 95% Daily

“Regulatory” VaR 260 10 days 99% Daily

Daily losses exceeding the VaR figure are likely to occur, on average, either once or five times in every 100 business days depending on the confidence interval employed in the VaR calculation (per the above). The Group routinely validates the accuracy of its VaR models by back testing the actual daily profit and loss results. The actual number of excesses over a given period can be used to gauge how well the models are performing.

Although a useful guide to risk, VaR should always be viewed in the context of its limitations. For example:

- the use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in nature;- the use of a 1-day holding period assumes that all positions can be liquidated or hedged in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a 1-day holding period may be insufficient to liquidate or hedge all positions fully;- the use of a confidence level, by definition, does not take into account losses that might occur beyond the applied level of confidence; and- VaR is calculated on the basis of exposures outstanding at the close of business and therefore does not necessarily reflect intra-day exposures.

The VaR for the Group was as follows:

US$ '000

Average Minimum Maximum

For the year 2014 826 310 1,768


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TABLE - 14 CAPITAL REQUIREMENTS FOR COMPONENTS OF MARKET RISK

US$ ’000

Risk-weightedexposures

Capital requirement

Maximumvalue

Minimumvalue

Interest rate risk 547,275 65,673 65,673 27,118

Equity position risk 18,265 2,192 22,525 2,192

Foreign exchange risk 204,245 24,509 24,509 8,750

Options 111,747 13,410 13,410 2,224

TOTAL MARKET RISK CAPITAL REQUIREMENT BEFORE PROPORTIONATE AGGREGATION OF ASSOCIATES 881,532 105,784

Add : Proportionate aggregation 65,693 7,883 9,398 7,883

TOTAL MARKET RISK CAPITAL REQUIREMENT (STANDARDISED APPROACH) 947,225 113,667

Interest Rate Risk (non-trading)

Interest rate risk is the risk that the earnings or capital of the Group, or its ability to meet business objectives, will be adversely affected by movements in interest rates. Accepting this risk is a normal part of banking practice and can be an important source of profitability and shareholder value. Changes in interest rates can affect a bank's earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the Group's assets, liabilities and off-balance sheet instruments because the present value of future cash flows and/ or the cash flows themselves change when interest rates change. The Bank employs a risk management process that maintains interest rate risk within prudent levels.

The Board recognizes that it has responsibility for understanding the nature and the level of interest rate risk taken by the Bank, and has defined a risk framework pertaining to the management of non trading interest rate risk and has identified lines of authority and responsibility for managing interest rate risk exposures.

The Board has delegated the responsibility for the management of interest rate risk to Group Asset & Liability Committee (GALCO). GALCO is responsible for setting and monitoring the interest rate risk strategy of the Group, for the implementation of the interest rate risk framework and ensuring that the management process is in place to maintain interest rate risk within prudent levels.

GALCO reviews the interest rate risk framework annually and submits recommendations for changes to the Executive Committee and Board as applicable.

The responsibility for the implementation of the Bank’s interest rate risk policies resides with the Group Treasurer. An independent review of all interest exposure present in the Banking Book is undertaken by the Group Market Risk team and communicated to GALCO on a monthly basis.

Interest rate re-pricing reports are based on each product's contractual re-pricing characteristics overlaid where appropriate by behavioral adjustments. Behavioral adjustments are derived by an analysis of customer behavior over time augmented by input from the business units.

Reports detailing the interest rate risk exposure of the Bank are reviewed by GALCO and the Board on a regular basis.


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The following table summarizes the re-pricing profiles of the Group’s assets and liabilities as at 31 December 2014.

TABLE - 15 INTEREST RATE RISK

US$'000

Less thanthree

months

Threemonths to

one yearOver one

year Total

ASSETS

Treasury bills and deposits with central banks 1,487,705 1,123,380 - 2,611,085


Loans and advances 13,947,814 3,086,627 1,427,100 18,461,541

Non-trading investments 735,891 1,108,915 3,548,523 5,393,329

19,421,170 5,668,726 4,975,623 30,065,519

LIABILITIES


Borrowings under repurchase agreements 860,941 40,649 - 901,590

Customers' deposits 14,384,183 5,887,117 1,364,312 21,635,612


19,388,997 6,617,342 1,364,312 27,370,651

On balance sheet gap 32,173 (948,616) 3,611,311

Off balance sheet gap 3,266,425 (214,748) (3,051,677)

Total interest sensitivity gap 3,298,598 (1,163,364) 559,634

Cumulative interest sensitivity gap 3,298,598 2,135,234 2,694,868

Interest rate risk sensitivity analysis

The Group’s interest rate risk sensitivity is analyzed in note 33(a) to the consolidated financial statements of the Group for the year ended 31 December 2014. Further, as noted in note 3.1 of the consolidated financial statements, since most of the assets and liabilities of the Group are carried at amortized cost, a movement of 200 bps will not materially impact the Group’s assets, liabilities and capital.

Equity RiskEquity risk is the risk of changes in the fair value of an equity instrument. AUB Group is exposed to equity risk on non-trading equity positions that are primarily focused on the GCC stock markets. The Board has set limits on the amount and type of investments that may be made by the Bank. This is monitored on an ongoing basis by the Group Risk Committee with pre approved loss thresholds. The Bank's equity risk appetite is minimal.

Valuation and accounting policies:

a) Equity investments held for strategic reasons - investments in associates and joint venture

Associated companies are companies in which the Group exerts significant influence but does not control, normally represented by an interest of between 20% and 50% in the voting capital. The Group classifies its investments as joint venture where it is a party to a contractual joint venture agreement. Invest-ments in associated companies and joint ventures are accounted for using the equity method.

b) Other equity investments

After initial recognition, equity investments are remeasured at fair value. For investments in equity instruments, where a reasonable estimate of the fair value cannot be determined, the investment is carried at cost less impairment provision.

The fair value of equity instruments that are quoted in an active market is determined by reference to market prices at the close of business on the balance sheet date. For equity investments that are not quoted in an active market, a reasonable estimate of the fair value is determined using net present valuation techniques.


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For accounting policies on equity instruments please refer to note 3.3(c) (v) of the consolidated financial statements.

TABLE - 16 GAINS ON EQUITY INSTRUMENTS

US$ ’000

Unrealized (loss) gains recognized in the balance sheet:

- Tier one (eligible portion) (684)

- Tier two (eligible portion) 7,780

5. LIQUIDITY RISK AND FUNDING MANAGEMENT

Liquidity risk and funding management of the Group have been explained in note 35 of audited consolidated financial statements for the year ended 31 December 2014.

Maturity Analysis of Assets and Liabilities

A maturity analysis of cash flows payable by the Group under financial liabilities by remaining contractual maturities at the balance sheet date is shown in note 35 to the audited consolidated financial statements of the Group for the year ended 31 December 2014.

6. OPERATIONAL RISK

Operational risk is the risk of loss arising from inadequate or failed internal processes, people and systems or from external events, whether intentional, unintentional or natural. This definition includes legal risk, but excludes strategic and reputational risk. It is an inherent risk faced by all businesses and covers a large number of operational risk events including business interruption and systems failures, internal and external fraud, employment practices and workplace safety, customer and business practices, transaction execution and process management, and damage to physical assets.

The Board acknowledges that it has ultimate responsibility for operational risk. Oversight rests with the Group Risk Committee, whilst day to day monitoring is carried out by the Group Operational Risk Committee. The Board has approved the operational risk framework and reviews it annually.

The operational risk management framework has been in place for a number of years and is ingrained in the Bank’s culture and processes. The Bank has developed a comprehensive 'operational risk self assessment' (ORSA) process.

7. INFORMATION TECHNOLOGY RISK

All computer system developments and operations are centrally controlled and common standard business systems are deployed across the Group wherever possible. Information security is defined through a common ‘AUB Group Information Security framework’ and is executed through various information security processes and controls that support the framework. The Group follows an enterprise wide approach to business continuity to ensure that all identified critical operations, services and systems are recovered in time in the event of a disruption. The Business Continuity Policy is updated annually and the Disaster Recovery and Business Continuity capabilities are each tested at least once a year and critical systems data are continuously replicated at the disaster recovery site.

8. STRATEGIC RISK

The Board supported by Strategic Development Unit and the Group Finance manages strategic risk on an ongoing basis. The Board receives regular performance reports with details of strategic / regulatory issues as they arise.

9. LEGAL, COMPLIANCE, REGULATORY AND REPUTATIONAL RISKS

Protecting the Legal, Compliance, Regulatory and Reputational Risks of the Group is of paramount importance and all management and staff are expected to apply highest standards of business conduct and professional ethics at all times.

The Board approved policies, including AUB Group Reputation Risk policy, Communications Policy, Personal Account Dealing Policy, Compliance Policy, Anti Money Laundering policy, Banking Integrity Policy and Code of Business conduct policy, prescribes the required standards of ethical behavior and personal conduct for all staff (including the Bank’s Directors), and the Board exercises an oversight of these risks through various management functions, including Legal, Risk Management, Compliance, Human Resources and Internal Audit Department.

10. ENVIRONMENTAL RISK

The Bank recognizes the importance of environmental and social issues within its risk framework, and has established a Social and Environmental Management System (SEMS) which details the policy, procedures and workflow that will be followed by the Bank and its subsidiaries / affiliates in respect of environmental risk.

The Bank continually endeavours to implement effective social and environmental management practices in all its activities, products and services with a focus on the applicable national laws on environmental, health, safety and social issues.

The Bank has adopted the Equator Principles (EP), a globally recognized benchmark for managing social and environmental risks in project finance. EP is an arrangement by financial institutions worldwide to adhere to the environmental, health and safety standards while financing projects.

As such the Bank will finance projects only when they are expected to be designed, built, operated and maintained in a manner consistent with the applicable national laws.


Annual Report2014

Ahli United Bank

123

Ahli United Bank B.S.C.Building 2495, Road 2832, Al-Seef District

P.O. Box 2424, Manama, Kingdom of BahrainTelephone: +973 17 585 858, Facsimile: +973 17 580 569

Email: [email protected], www.ahliunited.com

Documents

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