ANNUAL REPORT 2005

Transcription

ANNUAL REPORT 2005

HEAD OFFICE
Batelco Commercial Centre,
P.O Box 350
Manama
Kingdom of Bahrain
Tel: +973 17218686
Fax: +973 17226641
ANNUAL REPORT 2005
MUHARRAQ BRANCH
Site 1127,
Road 10, Block 215
Muharraq
Kingdom of Bahrain
Tel: +973 17348111
Fax: +973 17348120
www.bmi.com.bh
contents
Our Philosophy ___________________
2
2005 Financial Highlights ____________
4
Chairman’s Message _______________
6
Board of Directors’ Profiles ___________
8
Corporate Governance _____________
10
Management Discussion & Analysis ____
16
2005 Financial Statements __________
23
H.H. Shaikh Khalifa
Bin Salman Al Khalifa
H.M. King Hamad
Bin Isa Al Khalifa
H.H. Shaikh Salman
Bin Hamad Al Khalifa
THE PRIME MINISTER OF THE
KINGDOM OF BAHRAIN
THE KING OF BAHRAIN
THE CROWN PRINCE OF THE
KINGDOM OF BAHRAIN AND
COMMANDER-IN-CHIEF OF
THE BAHRAIN DEFENCE FORCE
BMI ANNUAL REPORT 2005
OUR PHILOSOPHY
philosophy
our
our purpose
To provide high quality products and services in the form of Commercial Banking
(Corporate & Retail Banking), Global Trade Services, Islamic Financial Services, Wealth
Management (Private & Investment Banking), and International Operations (Financial
Institutions Group and Structured Finance) to an increasing number of people in selected
markets throughout the MENA region and other emerging markets
To deliver a profitable performance; provide high-quality products and services in competitive
ways - maximizing revenues and minimizing costs.
To deliver a sustainable performance; provide these products and services in a sustainable
way -attracting the best customers, accessing potential markets in which we enjoy their trust
while bringing benefits to everyone concerned; customers, government, competitors, citizens
and communities, thereby generating repeat business.
To deliver a consistent and growing performance; we will invest enough to deliver longterm growth, while balancing this with returns to our shareholders. We understand that quick
growth is unattainable while a slow rate would sacrifice competitive advantage.
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OUR PHILOSOPHY
On January 1st, 2005, the Kingdom of Bahrain awoke to a brand new day, a brand
new year and a brand new Bank: BMI.
Today, just a year later, BankMuscat International B.S.C.(c) is proud to report on a
highly successful first year of operations.
our vision
our mission
To become a dynamic regional bank, providing innovative and unique financial solutions.
We are committed as a team to meet and exceed our customers’ expectations by providing
them the highest quality in financial solutions both conventional and Islamic.
We are empowered with a strong corporate culture, knowledge, skills and the latest
technology to meet our stakeholders’ expectations. We maintain our Integrity, creating and
sharing trust and practicing ethical behavior.
We aim to make a difference in each market we enter and in everything we do.
our creed
BMI, together we make a difference.
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FINANCIAL HIGHLIGHTS
highlights
financial
In BD ‘000
In USD ‘000
Total Assets
248,663
659,584
Total Deposits
220,351
584,485
Net Loans & Advances
176,277
467,578
24,133
64,013
4,092
10,854
18.6%
18.6%
205 fils
54 cents
Shareholders Equity
Net Profit
Return on Equity
Earnings per Share
Return on Equity (%)
12.0%
MARCH’05
13.4%
JUNE’05
16.3%
SEPTEMBER’05
18.6%
DECEMBER’05
Earning per Share (fils)
124
MARCH’05
140
JUNE’05
174
SEPTEMBER’05
205
DECEMBER’05
Net Profit (BD ’000)
612
1,388
2,610
4,092
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MARCH’05
JUNE’05
SEPTEMBER’05
DECEMBER’05
FINANCIAL HIGHLIGHTS
MOODY’S:
“Healthy profitability profile,
characterized by good net
income levels and diversified
revenue streams that belie the
bank’s modest size.”
CAPITAL INTELLIGENCE:
“The Bank continues to make
steady progress at building its
balance sheet and franchise
assisted by supportive
shareholders. Profitability
is now one of BMI’s major
strengths reflecting steady
streams of net interest and
non-interest income”.
Our Credit Ratings
Moody’s
Long term: Baa2
Short term : Prime-2
FSR : D-
Capital Intelligence
Long term : BBB
Short term : A3
FSR: BB+
Standard & Poor’s
Long term : BBB-
Short term : A-3
Financial highlights 31 December 2005
1. Profitability
Return on Average Shareholders’ Funds ____________________________ 18.59 %
Return on Average Assets _______________________________________ 2.16 %
Earnings per Share in BHD _______________________________________ 205 fils
STANDARD AND POOR’S:
“Asset quality indicators
are strong with total
NPL’s representing only
0.74% of total loans by
September 30, 2005. The
ratings on BMI reflect
its adequate risk profile,
well-defined strategy
and satisfactory financial
performance.”
Net Interest Margin ____________________________________________ 2.89 %
Cost to Income ________________________________________________ 47.62 %
2. Capital
Capital Adequacy (BIS Standard) __________________________________ 13.06 %
Shareholders’ Funds/Total Assets _________________________________ 9.71 %
3. Asset Quality
Non-Performing Loans to Total Loans ______________________________ 0.90 %
Loan Loss Provision to Total Non-Performing Loans ____________________ 77.42 %
4. Liquidity
Net Loans to Total Deposits ______________________________________ 79.99 %
Net Loans to Total Assets ________________________________________ 70.89 %
Liquid Assets to Total Deposits ____________________________________ 31.29 %
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CHAIRMAN’S MESSAGE
message
chairman’s
I am delighted to
report that our first
12 months, has been
marked by a series of
steady achievements,
despite some very
serious challenges. We
introduced new products
and services, expanded
our delivery channels and
continued to strengthen
our presence in the
Kingdom of Bahrain.
On January 1st 2005 we established BMI as a locally incorporated
bank. Our performance in our first year has been remarkable. A
sterling achievement, given growing competitiveness in domestic
and regional markets, and the continued volatility of the global
economy over the last twelve months. However, these factors
were offset by the positive growth in the region’s capital markets
and economies due to the dramatic rise in oil prices. The resulting
increase in liquidity provided a boost for investment in new infrastructure and industrial projects in Bahrain and throughout our
operating market.
Bahrain has been recognized as having the freest economy in the
Middle East. This together with the recent Free Trade Agreement
(FTA) with the USA, will further enhance Bahrain’s attractiveness as
a destination for global commerce. In addition, several new banks
are being established in Bahrain. All these developments will add
to the Kingdom’s status as the financial capital of the region and a
thriving, well-regulated business centre.
Financial performance Firstly to our results, which in my view
provides the clearest evidence of the progress we have made.
On any measure, 2005 was an outstanding year for BMI. Our net
profit was BD 4.1 million. Providing a Return on Average Equity of
18.6%, one of the highest reported among the ‘Full Commercial
Banks’ in Bahrain. Earnings per share was at an exceptional 0.205
fils (par value of shares BD 1).
The result has been built on our ability to deliver significant income
growth while holding expense growth. As a result, we have
successfully maintained our cost to income ratio at an industry low
of 47%.
Furthermore, our business lines delivered strong performance
with good earnings growth. Total assets grew by 46.4% since the
beginning of the year to BD 249 million. Loans and advances grew
by an extraordinary 58% to BD 176 million.
Unfortunately it is important to note that in July 2005, BMI
uncovered certain irregularities where one of its traders had
breached his internal limits while trading in DAX index certificates.
In an effort to conceal his losses the trader willfully tampered with
the confirmation and reconciliation processes. The bank has since
terminated the employee, ceased proprietary trading altogether
and amicably resolved the case with the foreign counter-party.
Concurrently, the market risk function has been brought under the
risk management purview. Although BMI had disputed the validity
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CHAIRMAN’S MESSAGE
JANUARY: BIRTH OF BMI
January 1st 2005, the Kingdom of Bahrain awoke to a brand new day, a brand new year and
a brand new bank - BankMuscat International B.S.C.(c) (BMI). Set up as a Full Commercial
Bank, registered and based in the Kingdom of Bahrain and regulated by the Bahrain
Monetary Authority, BMI opened its doors to a bright and confident future.
of the trades, the shareholders (on a pro rata basis) agreed to settle
at an amount of EUR 17 million directly with the counter-party,
reflecting the strong support and commitment of the shareholders
to BMI. The loss therefore has not impacted BMI’s 2005 statement
of income as the amount is deemed to be for the account of the
shareholders.
International Credit Rating We have been assigned an
investment grade rating in the very first year of operations by three
international rating agencies – Moody’s, Capital Intelligence and
Standard & Poor’s. The ratings are recognition of BMI’s consistent
financial performance, strong asset quality and last but not least
the strength of its shareholders. This is an outstanding achievement
from which we draw much confidence.
Strategic direction and achievements We embarked on a
five-year strategic plan to meet our vision to become an innovative
and dynamic regional bank. The main focus in the first year was
to strengthen our position in our domestic market. Despite some
serious challenges, I am pleased with the progress we have made.
Over the last 12 months, BMI has developed into an energetic,
innovative and responsive financial institution with a steadily
growing regional reputation.
Our motto of ‘BMI, together we make a difference’ embodies our
core value of bringing together our employees and our customers to
develop high quality services, financial solutions and products that
are tailored according to our customers’ emerging needs. And the
results in the first year have been remarkable. Consider this:
Two new branches were launched in strategic locations within
Bahrain. One in Sanad and the other in Muharraq bringing the
branch network to three. New ATM machines were installed at these
branches taking our network of ATMs to 5. The ATM network was
then connected to the GCC-Net, providing access to our customers
throughout the GCC region. We successfully launched three new
retail products – Mortgage Loans , Auto Loans, and Credit Cards while
our Al Mazyona savings certificates – BMI’s flagship retail product
aimed at promoting savings - continued to flourish.
In addition, we have also made significant investments to improve
BMI’s e-Channels and introduced our new state-of-the-art IT
systems, Trade Innovation and e-Trade, enabling faster and more
efficient transactions.
Managing Risks and Internal controls Despite our rapid
growth, we have been selective of our growth opportunities, as we
believe that we must make the right choices so that we benefit in
the longer term. With this in mind, in 2005 we invested heavily to
revamp and restructure our risk management and internal control
procedures. In fact one of our key goals for 2006 is to ‘improve
our risk management resilience’. This is an ongoing process where
we will continually assess and manage the risks that affect our
business in accordance with a set of core risk management values.
The approach is to enable risk to be balanced against appropriate
rewards and reflects BMI’s vision and values, objectives and
strategies, and procedures and training.
Looking forward With a positive economic outlook for the coming
year both regionally and in BMI’s domestic market of Bahrain, we
embark upon 2006 with confidence. We anticipate continuing
earnings momentum will come from our many growth and
productivity initiatives that are underway across all business lines.
As a result, your board is again confident that BMI is positioned to
continue to deliver strong outcomes for all its stakeholders into the
coming year.
This confidence is built on the strength and diversity of our people.
The enormous talent and commitment of our staff gives me great
confidence in our continued success, no matter what challenges
may arise in the years ahead.
Word of thanks In conclusion, I wish to place on record the board
of directors’ sincere appreciation for the support and guidance given
by Bahrain Monetary Agency.
I would also like to record my gratitude on behalf of the Board of
Directors and shareholders to their Majesties King Hamad bin Isa Al
Khalifa, the King of Bahrain, and Sultan Qaboos bin Said, the Sultan
of Oman and to their respective governments for their continued
support for BMI.
Finally, what we have achieved is, in the main, due to the unflagging
efforts and dedication of our staff at BMI. I take this opportunity
to express my admiration and appreciation of our staff, with their
enthusiastic support there is nothing we can’t achieve
AbdulMalik bin Abdullah Al-Khalili
Chairman
7
BOARD OF DIRECTORS’ PROFILES
profiles
board of directors
Sheikh AbdulMalik bin
Abdullah Al Khalili
Sheikh Khalid bin
Mustahail Al Mashani
Mr. Salah Saleh
Asheer
CHAIRMAN
DEPUTY CHAIRMAN
DIRECTOR
Mr. Sulaiman bin
Mohamed bin Hamed
Al Yahyai
DIRECTOR
Sheikh Al Khalili is the
Chairman of the Board
of Directors of BMI as
well as Chairman of
the Board of Directors
of BankMuscat S.A.O.G.
Sheikh Al Khalili is also
the Executive President
of the Diwan of the Royal
Court Pension Fund of
the Sultanate of Oman,
a Director of Muscat
National Holding S.A.O.C
and National Investment
Funds Company S.A.O.C.
and Qurum Financial
Services S.A.O.C. Sheikh
Al Khalili is the Chairman
of the Board Business
Strategy Committee of
BMI.
Sheikh Al Khalili holds a
BA in Business Administration.
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Sheikh Al Mashani is
the Deputy Chairman of
of BMI as well as
Deputy Chairman of
Sheikh Al Mashani is
a Director of the Port
Services Corporation of
Al Omaniya Financial
Services
Co.,
DIDIC
and Dhofar Power Co.
Sheikh Al Mashani is the
Chairman of the Board
Credit Committee of
BMI.
Sheikh Al Mashani holds
a Masters degree in
Finance from Oxford
University, U.K.
Mr. Asheer is the Chief
Executive Officer of Premier Group and certain
Bahrain-based privately
held investment companies (together, the
Companies). Mr. Asheer
is an experienced investment banker and has
served as a Director of
several local, regional and
international subsidiaries
and associates of the
above Companies. The
Companies own and
manage a diversified
range of investments
in the financial services
industry among others.
Mr. Asheer is a member
of the Board Audit, Credit
and Business Strategy
Committees of BMI.
Mr. Asheer is a Certified
Public Accountant and
holds a BSc in Accounting
Science.
Mr. Al Yahyai is the
Deputy General Director
of Administration and Finance Audit, Royal Court
Affairs of the Sultanate
of Oman, and Chairman
and Managing Director
of Best Western Muscat
hotel. Mr. Al Yahyai is a
Director on the Board of
BankMuscat S.A.O.G. and
a member of its Board
Credit Committee, and
the Chairman of Oman
Chlorine Co. Mr. Al Yahyai
is the Chairman of the
Board Audit Committee
and a member of the
Board Business Strategy
Committee of BMI.
Mr. Al Yahyai holds an
MBA in Finance from the
University of Wales, U.K.
BOARD OF DIRECTORS’ PROFILES
FEBRUARY: LAUNCHED OUR VISA CREDIT CARD
To help enhance our portfolio of products, we launched
our VISA Credit Card which offered customers a world of
benefits as offered by Visa international.
Mrs. Maha Al Ghunaim
Mr. David Jackson
DIRECTOR
DIRECTOR
Brigadier Saif bin
Ali Al Amri
Mr. Sunder George
Mr. Ahmed Al Abri
DIRECTOR
DIRECTOR
Mr. George is the Deputy
Chief Executive Officer
as well as a Director of
Renaissance
Services
S.A.O.G., and Centurion
Bank of Punjab. Mr.
George is a member
of the Board Business
Strategy Committee of
BMI.
Mr. Al Abri is the Chief
Operating Officer of
BankMuscat
S.A.O.G.
as well as a Director of
Muscat Index Fund, and
Muscat
International
Guaranteed Fund. Mr. Al
Abri is a member of the
Board Credit Committee
of BMI.
DIRECTOR
Mrs. Al Ghunaim is the
Founder, Vice Chairman,
and Managing Director of
Global Investment House.
She currently holds various
positions as member of
the Board of Directors of
National Industries Group
(NIG), Kuwait, member of
the Executive Committee
at NIG, member of the
Financial & Investment
Committee at the Kuwait
Chamber of Commerce &
Industry, and member of
the Practitioner Committee
for the Dubai International
Financial Exchange (DIFX).
Mrs. Al Ghunaim was
previously a member of
the Executive Committee
at United Bank of Kuwait
(UBK). Mrs. Al Ghunaim
is a member of the
Board Audit and Business
Strategy Committees of
BMI.
Mr. Jackson is the Chief
Investment Officer of
Istithmar and currently
serves as a member of
the Board of Directors at
Istithmar Building FZE.,
Souq Residence FZ LLC
and Souq Palm FZ LLC. Mr.
Jackson has held senior
positions in New York and
Asia for Lehman Brothers,
Saks Fifth Avenue and
Marco Polo Partners, LLC.
Mr. Jackson is a member
of the Board Audit, Credit
and Business Strategy
Committees of BMI.
Mr. Jackson holds a MBA
from Yale University, U.S.A
and a Bachelors degree in
Economics from Princeton
University, U.S.A.
Brig. Al Amri is a Defence
Resource Advisor at the
Ministry of Defense of
a Director of BankMuscat
S.A.O.G. and a member
of its Board Credit Committee. Brig. Al Amri
is also an Executive
Director of the Ministry
of Defense Pension Fund
of the Sultanate of Oman,
and a Director of Taageer Finance Co. Brig. Al
Amri is a member of the
Board Credit Committee
of BMI.
Mr. George holds a MBA
from IMD Switzerland,
and is a Fellow of the
Chartered Institute of
Bankers F.C.I.B (London)
and a Certified Associate
Brig. Al Amri is an Arab of the Indian Institute of
Certified Accountant and Bankers C.A.I.I.B (India).
an Accounting Technician,
and he holds a Higher
Diploma in Finance and
Cost Accountancy.
Mr. Al Abri holds
an EMBA – General
Managers’ Program from
Harvard University, U.S.A.
and a MBA from the
University of Lincolnshire
& Humberside, U.K.
Mrs. Al Ghunaim holds
a BSc in Mathematics
from San Francisco State
University, U.S.A.
9
CORPORATE GOVERNANCE
governance
corporate
Our Approach to Corporate Governance At BankMuscat
International B.S.C. (c) (BMI), we believe that good corporate
governance should embody the best practice at the global level
today. From our Board of Directors to our family of employees, we
strive to practice the principles of good corporate governance in
every aspect of our evolution.
In the present environment of increased scrutiny of corporate
behavior, we believe that maintaining the highest standards
of integrity is of paramount importance towards assuring our
stakeholders of our common commitment to make a difference,
as well as being integral to our aspirations of becoming a regional
leader.
The Board of Directors
The Board of Directors of BMI is accountable to its shareholders.
The main roles of the Board are to create value for its shareholders
and provide leadership towards achieving the objectives of all its
stakeholders, whilst ensuring that these duties are discharged in
a transparent and ethical manner. They encompass, but are not
limited to, approving the strategic objectives of BMI and ensuring
that the necessary resources are made available towards achieving
these.
10
In addition, the responsibilities of the Board include:
Setting BMI’s strategy and approving the annual budget;
Reviewing operational and financial performance, and approving
financial reporting and other disclosures;
Evaluating and approving appointments to the Board and
Executive Management;
Ensuring that Board and Executive Management development
and succession plans are in place; and
Ensuring that the BMI’s business is conducted ethically and
transparently.
BMI’s Board comprises of nine non-executive directors, appointed
for a term of three years, which is subject for renewal by a resolution
adopted by the general assembly of shareholders. Nomination and
selection to the Board is representative of the shareholding structure,
and is performed at the general assembly of the shareholders.
The Role of the Chairman The Chairman is a non-executive
director, appointed by the Board. The Chairman’s role includes:
Ensuring that when all Board members take office, they are
fully briefed on the terms of their appointment, their duties and
responsibilities;
MARCH: LAUNCHED MORTGAGE AND AUTO LOANS
In line with our strategy to strengthen our bouquet of products and
services offered, March witnessed the launch of our Mortgage and
Vehicle Loans.
Providing effective leadership in formulating the Board’s
strategy;
Representing the views of the Board to the public;
Ensuring that the Board meets at regular intervals throughout
the year, and that minutes of meetings accurately record
decisions taken and, where appropriate, the views of individual
directors.
BMI Board of Directors
Board of Directors
Designation
Sh. AbdulMalik bin Abdullah Al Khalili
Chairman
Sh. Khalid bin Mustahail Al Mashani
Deputy Chairman
Mr. Salah Saleh Asheer
Director
Mr. Sulaiman bin Mohamed bin Hamed Al Yahyai
Director
Mr. David Jackson
Director
Director
Brigadier Saif bin Ali Al Amri
Director
Mr. Sunder George
Director
Mr. Ahmed Al Abri
Director
The directors’ credentials are detailed in the Board of Directors Profiles
in this report.
The Board meets at least four times in a financial year and such
meetings are summoned by an invitation from the Chairman, or if
requested by any director.
The Board has delegated the following responsibilities to the
Executive Management Committee:
The development and recommendation of strategic plans
for consideration by the Board that reflect the longer term
objectives and priorities established by the Board.
Implementation of the strategies and policies of the bank as
determined by the Board.
Monitoring of the operating and financial results against plans
and budgets;
Monitoring the quality of the investment process against
objectives;
Prioritising the allocation of capital, technical and human
resources;
Monitoring the composition and terms of reference of
management committees; and
Developing and implementing risk management systems.
APRIL: REBRANDED TRADE FINANCE
Our Trade-Services unit was rebranded into Global
Trade Services (GTS) to bring it in line with the
bank’s overall business strategy.
Committees of the Board
There are currently three Board level committees. These are the
Audit, Credit, and Business Strategy Committees. The terms of
reference of the respective committees are set out as follows:
BMI Board of Directors Committees
COMMITTEE
DIRECTOR
ROLE
AUDIT
Chairman
Member
Member
Mr. David Jackson
Member
Sh. Khalid bin Mustahail Al Mashani
Chairman
Member
Mr. David Jackson
Member
Member
Mr. Ahmed Al Abri
Member
Sh. AbdulMalik bin Abdullah Al Khalili
Chairman
Member
Member
Member
Mr. David Jackson
Member
Mr. Sunder George
Member
CREDIT
BUSINESS STRATEGY
Audit Committee of the Board The Audit Committee was
constituted to assist the Board in fulfilling its oversight responsibilities
through the review of the financial reporting process, the systems
of internal control, the audit process and the Bank’s process for
monitoring compliance with the regulatory framework in which it
operates.
Membership and Attendance The audit committee consists of four
directors nominated by the Board. The Chairman of the committee
is appointed by the Board.
12
Frequency of Meetings Audit committee meetings are held once
every quarter. The committee members may request an additional
meeting if they consider it necessary.
Authority The audit committee has unlimited scope of activity
authorized by the Board of directors. The committee receives
risk assessments and an understanding of key control issues
facing the bank from the internal and external auditors as well as
management.
MAY: LAUNCHED OUR 2ND BRANCH IN SANAD
In line with a commitment to bring the bank closer to customers, we
launched our second full service branch in Bahrain.
BMI Board of Directors Committee Meetings Attendance
DIRECTORS
SCHEDULED BOARD MEETINGS
COMMITTEE MEETINGS
Audit
Credit
Bus.Strategy
Sheikh AbdulMalik bin Abdullah Al Khalili
7 (7)
n/a
n/a
5 (5)
Sheikh Khalid bin Mustahail Al Mashani
7 (7)
n/a
2 (2)
n/a
Mr Salah Saleh Asheer
4 (7)
2 (3)
2 (2)
3 (5)
Mr Sulaiman bin Mohamed bin Hamad Al Yahyai
7 (7)
3 (3)
n/a
5 (5)
Mr David Jackson
7 (7)
3 (3)
2 (2)
5 (5)
Mrs Maha Al Ghunaim
5 (7)
2 (3)
n/a
3 (5)
6 (7)
n/a
2 (2)
n/a
Mr Sunder George
7 (7)
n/a
n/a
5 (5)
Mr Ahmed Al Abri
7 (7)
n/a
2 (2)
n/a
Roles and Responsibilities The committee’s specific responsibilities
include:
Evaluating the systems of internal control and whether these are
comprehensively reviewed by the internal and external auditors
and communicated effectively by Executive Management.
Reviewing the activities, structure, competencies
effectiveness of the internal audit function.
and
Reviewing the financial reporting process and significant
accounting and reporting issues, including professional and
regulatory pronouncements and their potential impact on the
financial statements.
Reviewing the unaudited and audited financial statements
in conjunction with the external auditors and management,
to ensure that any necessary adjustments are dealt with
adequately before formal adoption of the accounts.
Reviewing the effectiveness of systems for monitoring
compliance with laws and regulations, and to periodically obtain
updates from management and general counsel regarding
compliance.
Reviewing the proposed scope and approach, independence,
and performance of the external auditors.
Reviewing and updating the terms of reference upon the
directives of the Board.
Board Credit Committee The Board Credit Committee was
constituted to assist the Board in fulfilling its oversight responsibilities
through the formulation and implementation of credit policies in
compliance with laws and regulations, with a view to achieving the
strategic objectives of the bank whilst maintaining a high quality risk
asset portfolio.
The committee also reviews the portfolio of non-performing assets
and provisioning requirements of the bank, and encourages ethical
lending, and integrity and transparency in stakeholder reporting in
relation to risk assets.
Membership and Attendance The board credit committee consists
of five directors nominated by the Board. The Chairman of the committee is appointed by the Board.
Frequency of Meetings Board credit committee meetings are
held once every quarter or more frequently as and when deemed
necessary.
Authority The committee has complete authority to recommend
matters relating to credit and credit risk management policies, in
light of changes to the bank’s operating environment, to the Board.
In addition the committee has the authority to ensure compliance
In the present
environment of
increased scrutiny of
corporate behavior, we
believe that maintaining
the highest standards
of integrity is of
paramount importance
towards assuring our
stakeholders of our
common commitment
to make a difference, as
well as being integral
to our aspirations of
becoming a regional
leader.
with credit policies, communicate with internal and external auditors
to assess the strength of the lending portfolio, consider and approve
extensions to credit facilities above the remit of the management
credit committee on their recommendation.
include:
The ongoing review of credit and credit risk management
policy formulation, in light of the bank’s strategic objectives and
dynamic operating environment.
The review and organization of the necessary critical skills and
other resources towards this, including any relevant external
expertise as and when required.
Ensuring the credit approval process is fair and transparent and
compliant with the policies set by the Board.
Ensuring that the quality of credit assets conforms to the
risk parameters as set by the bank’s credit and credit risk
management policies.
Implementing and monitoring a risk management framework
that reflects the best practices in the industry.
Ensuring an appropriate internal control system covering both
financial and non-financial controls relating to credit matters.
Business Strategy Committee The Business Strategy Committee
was constituted to assist the Board in fulfilling its strategic decision
making responsibilities. The committee reviews the business
initiatives and proposals of Executive Management on behalf of the
Board and recommends suitable courses of action.
Membership and Attendance The members of the Business
Strategy Committee are nominated by the Board. The Chairman of
the committee is appointed by the Board.
Frequency of Meetings Business Strategy Committee meetings
are held once each quarter. The committee members may request
an additional meeting if they consider it necessary.
Authority The Business Strategy Committee is authorized by the
Board to review the strategic initiatives of the bank and thereby
recommend to the Board any suitable course of action and
supporting its decision at the Board level.
14
JUNE: AL MAZYONA SAVING CERTIFICATES PRIZE SCHEME REVISED
We revised our flagship Al Mazyona Saving Certificates prize scheme
in June keeping it in line with our Brand communications - fresh and
inspiring. As part of the revised prize scheme we increased our prizes to
seven weekly prizes, three monthly prizes and one quarterly prize.
Executive Management Committees
Committee
Summary Terms of Reference
Management
To review the overall performance of the functions of the bank in line with the business plan
and operating environment in order to achieve the bank’s objectives as set forth by the Board.
Asset & Liability
To perform overall management of the balance sheet and the strategic management of
risk.
Credit
To ensure the maintenance of high standards of asset quality and growth and the
management of associated risks.
Information Technology
To achieve the Bank’s IT objectives and provide direction in IT initiatives based on needs
driven by business.
include:
Evaluating the effectiveness of existing strategies and their
return to the shareholders.
The periodic review of key risks involved in the organization
and its environment, both internal and external, and to consider
whether these are being adequately addressed.
Reviewing the bank’s International Business proposals in relation
to new market entry, maintaining the bank’s business presence
overseas, and detailed analysis of investment proposals and
acquisitions.
Reviewing the performance of existing business lines, the
introduction of new products and services within and without
existing business lines.
Ensuring compliance with the laws and regulations of the
Bahrain Monetary Agency as well as those of the proposed host
country.
Executive Management Committees
Several Executive Management committees have been constituted
to assist in the affairs of the bank, comprising of various senior
managers. The main committees and their respective summary
terms of reference are set out above.
Communication with Stakeholders
BMI uses all available avenues to communicate with its stakeholders,
in line with the principle of transparency and disclosure that is
integral to good corporate governance. This includes wide use of the
media for the purposes of advertising and providing information on
the bank’s progress. Furthermore BMI’s website www.bmi.com.bh
carries updates of the bank’s progress, and any significant events.
BMI’s quarterly results are published in both Arabic and English
newspapers, and are posted on the bank’s website. Copies of these
releases are available on request.
Professional Profile of the Statutory Auditors
The Board of Directors appointed Ernst & Young Middle East as the
statutory auditors for BMI by a resolution adopted at the first meeting
of the promoters of BankMuscat International (under incorporation)
of November 2004.
Ernst & Young is a professional services organization committed
to providing the highest quality professional accounting, auditing,
taxation and consultancy services, with more than 110,000
personnel worldwide. They provide integrated services to private
enterprises and public agencies in more than 670 cities located in
more than 130 countries.
The Middle East practice of Ernst & Young is an independent
professional firm which has operated in the Middle East region since
1923 and is a member of Ernst & Young Global. During the past 82
years, the firm has evolved to meet the developments within the
area and today their clients are served by 1,700 staff working from
17 offices in 14 Arab countries.
MANAGEMENT DISCUSSION AND ANALYSIS
management
discussion and analysis
Business and Operating Environment
A Brief History On January 1st 2005, BankMuscat International B.S.C.(c) (BMI) was established as a locally incorporated Full Commercial Bank (FCB), registered and based in the
Kingdom of Bahrain and regulated by the Bahrain Monetary Agency (BMA).
Our achievements in the first year have been won amidst growing competitiveness in the
domestic and regional markets. However, buoyant conditions in the regional capital markets
resulting from high oil prices have created overall positive conditions for investment, with
new infrastructure and industrial projects planned in Bahrain and the wider region.
BMI Shareholders
BANKMUSCAT (OMAN)
PREMIER GROUP (BAHRAIN)*
ROYAL COURT AFFAIRS (OMAN)**
ISTITHMAR (UAE)***
GLOBAL INVESTMENT HOUSE (KUWAIT)
* The Premier Group is owned by the Diwan of the Royal Court of the Kingdom of Bahrain.
** The Royal Court Affairs (RCA) is part of the Government of the Sultanate of Oman.
*** Istithmar is the Investment arm of the Government of Dubai
16
JULY: 1ST TIE-UP FOR MORTGAGE LOAN WITH ZAWYE
We signed our first exclusive agreement with Zawye residential towers,
a BD 30 million development segment of Amwaj Plaza and Falcon
properties, paving the way for prospective buyers to get financing
facilities.
We commenced operations with 73 full-time employees at the
beginning of the year and grew to a total of 105 by the close of
2005.
The Regional Market Outlook The regional market performed
exceptionally well in 2005 driven by high liquidity and a real estate
boom. This trend is expected to continue into the first half of 2006.
However, this increased liquidity may also be expected to follow
investment opportunities present in alternative global markets.
There has been a resurgence of IPOs in the regional market on the
back of a bullish secondary market, a trend which we can expect
to continue into 2006.
The political initiatives towards a common market in 2007 with
a view towards a single currency in 2010 should present further
opportunities.
The Local Market Outlook Bahrain has maintained its position
as one of the most forward looking countries in the region and has
taken strides towards further democratic reform with the first public
elections held in 2002.
Bahrain’s GDP is forecast to grow by 6.8% in 2006. Oil prices are
expected to maintain their high levels in 2006, hence no major
concerns are envisaged with regard to oil revenues and the
consequent impact on government expenditure.
Due to relatively low oil resources in Bahrain (oil’s contribution
to the 2004 GDP was 13%), the country has enacted a policy of
economic diversification. At the same time it is important to note
that although the economy is relatively independent of oil, it is
closely interlinked with its neighbouring oil-dependent economies.
Economic diversification in Bahrain is evidenced by growth in the
financial services sector, aluminum production, tourism and other
services sectors. The Bahrain real estate segment is one of the most
dynamic in the region with ongoing projects like Amwaj Island,
Durrat al Bahrain, Riffa Views and the recently proposed Two Seas.
Unlike most of its neighbours (who allow only leasehold possession),
Bahrain allows expatriates freehold possession of property.
The impact of Bahrain signing the Free Trade Agreement (FTA) with the
USA in July 2005 is expected to add impetus to the trade business of the
country, and Bahrain’s lead is being followed by other GCC countries that
are negotiating their own FTA’s with the USA
A number of new initiatives are set to play a significant role in
GLOBAL
TRADE
SERVICES
AUGUST: IMPLEMENTED TRADE INNOVATION IN RECORD 3 MONTHS
GTS launched Trade Innovation system to automate it’s processes.
future development in the Kingdom. The government has been
contemplating labour reforms to tackle growing unemployment
at the same time as it aims to increase Bahrainization. A further
step towards addressing these issues was made this year when the
minimum monthly salary for public service was raised.
The Financial Sector Bahrain continues to be the financial hub
of the region. This position is borne by the number of financial
institutions operating in the country, and the contribution which
the financial services sector makes to GDP, which stood at 24% in
2004.
As Bahrain’s banking industry continues to grow, the BMA is
keeping abreast of developments, with significant steps being
made to boost the country’s insurance sector including Islamic
insurance. While Bahrain is in the regional lead for banking and
insurance, the country’s equities market is lagging behind its GCC
peers on all fronts with development required in the number of
listed companies, market capitalization and trading activity.
The total number of Financial Institutions in Bahrain stands at 366
out of which 190 belong to the banking sector. Among them are
25 commercial banks, 51 offshore banks, 37 investment banks,
32 representative offices, and two specialized banks, while 43 fall
under other categories. Insurance Institutions number 163, while
there are 13 capital market institutions.
Though developing at the macro level, the high number of financial
sector companies offering banking services has resulted in intense
competition with the resulting evidence of thin margins on lending,
in the face of growing interest rates.
It is expected that the increased government expenditure resulting
from higher oil revenues and the upcoming elections in 2006 will
bolster business activity further with a consequential positive impact
on the banking industry. Bahrain’s trade finance business is expected
to rise with the growth in trade activities, and the country’s wealth
management business, driven by regional investors and buoyed by
high regional liquidity, looks set to remain an attractive business
segment in the near future.
One segment that is not expected to grow is the personal loan
segment, which has in the past been the mainstay of banking
– personal loans represented 45% of total loans in 2005.
18
Due to excessive leverage by the general public, the BMA has put
restrictions on lending to this segment, which has resulted in an
immediate deceleration in the growth of the segment this year. But
given the overall economic environment and the youthfulness of
Bahrain’s population - more than 75% of the population is below
40 years of age - this is likely to result only in a short term slowing
down and the long term potential still looks attractive. This growing
young population is technologically savvy and their dependency
on on-line and real time information is of paramount importance,
which presents BMI with opportunities to tap into this segment
through offering e-channels.
An Overview and Outlook of the Banking Industry in Bahrain
Bahrain has a robust and established banking sector that saw
significant growth in 2005. The BMA reported an increase in total
banking assets of 18%, rising to over US $140 billion by the close of
the year. This figure is almost 13 times larger than the GDP.
The BMA reports increasing international investment interest in
regional economies, with Bahrain presenting an attractive location
as a launch pad for regional business activities, as evidenced by the
growth in new entrants to the banking sector.
The Kingdom’s advantages lie in its geographic location; its efficient
regulatory environment; innovation (especially in developments
related to Islamic finance, with the establishment of institutions to
promote the deepening of Islamic financial markets); the availability
of a highly skilled workforce; and reasonable operating costs.
The position of BMI By the close of our first year, our achievements
have been significant: we expanded our presence in our home
market of Bahrain with the launch of two new branches in Sanad
and Muharraq; we reported a Return on Equity of 18.6%; we were
awarded Investment Grade ratings from three international ratings
agencies, and we have developed a strong and consistent brand
identity.
Our products and services have been enhanced with the successful
launch of Mortgage and Auto Loans, the BMI credit card, the GCC
Net ATM Card and the GCC Brokerage Service.
The outlook for BMI in 2006 Looking ahead to 2006, we aim
to consolidate our position in Bahrain with the opening of a further
three branches, bringing the total to six, and we will launch 10
offsite ATM’s in prominent locations around the country.
Our plans for the continuous development of new products and
SEPTEMBER: 2ND EXCLUSIVE MORTGAGE TIE-UP WITH AMWAJ PLAZA
We signed a mortgage loan agreement with the developers of Amwaj
Plaza, paving the way for a strategic alliance. As per the agreement BMI
has exclusivity over disbursing loans to prospective buyers of Amwaj
Plaza.
services will include the launch of e-Channels, Internet Banking,
e-Trade, and enhancing SME banking.
As we move forward, we continue to invest in improving our
infrastructure, ensuring that we develop strong risk management
processes to improve our risk management resilience. This year we
will be implementing our new Risk Management System: BCP/DRC,
in readiness for compliance with the BASEL II accord.
The Opportunities We Face BMI faces a positive macroeconomic scenario resulting from continued high oil prices and
strong liquidity, and we are positioned to take advantage of the
opportunities posed by the deregulation of banking in the region,
along with moves towards the creation of a common market in
2007 and a single currency in 2010.
The high level of liquidity in the market is creating growing
requirements for wealth management, represented by Private &
Investment Banking.
The positive economic climate in the region is predicted to continue
with estimated regional GDP growth forecast at 15% over the
coming five years (at an average 5% to 6% per annum), and the
entire GCC/Arab banking sector stands to reap the benefits of these
healthy conditions. 86 Arab banks currently figure amongst the top
1000 banks globally, and BMI aims to play an active part in the
recent trend towards consolidation in the Arab banking sectors.
New opportunities have also arisen through the potentially large
market for Islamic banking, which is growing rapidly.
environment resulting from geo-political and economic factors,
technological developments and trends in consumer behaviour. While
the introduction of innovative products and brand differentiation
are complex and costly, we are structured to support these activities
and we have embraced the need for real time information, full
automation and integration with web-based technology.
We are preparing for the impact of BASEL II compliance, which will
require that sufficient resources and adequate planning is in place
for implementing the requirements of the accord.
BMI’s Business Units
Despite the increasing competitiveness in our domestic and regional
markets, we reported an excellent performance in our first year.
We consolidated our position in our home market with the opening
of two new branches. Our Return on Equity for the year was at
a remarkable 18.6%, and we were awarded Investment Grade
ratings from three international ratings agencies.
Retail Banking Retail banking has been one of the major growth
areas for BMI this year. Retail Banking assets increased by 29% to
BD 39 million. Savings Accounts increased by 27% to BD 9 million.
One of our key products launched this year - Mortgage Loans - was
well received in the market and was very successful. Furthermore,
the revamping of our flagship product Al Mazyona Saving Certificates
has enhanced our customer base and deposits while enhancing our
visibility and the ‘BMI’ brand in our home market
When one considers the potential impact of the demographic
profile of the region’s population, the banking sector is faced with
a relatively young market of which 60% are under the age of 20.
This technologically savvy youthful segment is having a positive
impact on consumer spending, which presents significant potential
for providing on-line banking and real time information services.
During the year the opening of our two new branches in Sanad and
Muharraq has helped in soliciting customer deposits and enhanced
sales of retail loan products, particularly mortgage loans.
The Challenges We Face BMI is equipped to move swiftly to
meet the challenges faced by the contemporary banking industry.
Corporate Banking Corporate banking exhibited outstanding
growth in 2005. Assets grew by a remarkable 65% to BD 110
million.
We face fierce competition from local, regional and international banks,
with pressures towards consolidation, while at the same time we must
navigate the legal and geo-political risks presented by new markets and
overcome restrictions on expanding into new territories.
BMI will have to tackle the constant change in today’s business
A strong feature was the exceptionally high asset quality maintained
during the year. The assets quality measure in the form of Nonperforming Loans (NPL’s) /Loans remained extremely low at
0.3%.
The retail business growth was accompanied by an increase of
almost 50% in Retail Banking’s staff strength.
OCTOBER: ATM NETWORK CONNECTED TO GCC NET
We successfully connected our ATM’s to the GCC network giving all BMI
ATM card holders access to their money from any ATM machine in the
GCC.
The year 2005 was
marked by a number
of achievements in all
aspects of Corporate
Banking. Corporate
Banking added some
prestigious regional
names to our relationship
list, we have embarked
into regional markets,
entered the international
syndication market, and
we produced a strategic
plan for the future that
will add new dimensions
to our overall activities
and business philosophy.
Financial Institutions Group As a new line of business launched
in June 2005, FIG has demonstrated significant growth potential.
Assets of FIG grew to BD 23 million at the end of the year.
The outlook for FIG is positive, and we are confident that FIG will be
a vital part of BMI’s success in the future.
Private Banking Our Private Banking unit has performed well,
with asset growth of 14% to BD 15.5 million.
We are expecting the GCC brokerage activity, which was launched
in late 2005, to be a major revenue generator in 2006. The GCC
brokerage activity enables BMI’s clients to trade in 6 different
markets using one account.
Islamic Banking Islamic Banking had a rewarding year with
growth in assets reaching 37% to BD 18.5 million.
A new strategy has been implemented for the Islamic Banking
function and in 2006, Islamic Banking will be a major contributor
to our income.
Risk Management
Risk is defined as the combination of severity and frequency of
potential loss over a given time horizon. Risk can be expressed in
the dimensions of potential severity of loss (magnitude of impact)
and potential loss frequency (likelihood of occurrence).
Risk Management is the process by which the bank identifies
key risks, sets consistent understandable risk measures, chooses
which risks to reduce, which to increase and by what means, and
establishes procedures to monitor the resulting risk position. Risk
management is the discipline at the core of every financial institution
and encompasses all the activities that affect its risk profile. It
involves identification, measurement, monitoring and controlling
risks to ensure that optimum value is created for the shareholders
through an optimum return on equity by an appropriate trade-off
between risk and return.
Effective risk management is the cornerstone of capital structure.
The vision of Risk Management is to address all aspects of risk which
the bank may be exposed to. The bank’s risk function is independent
of lines of business and the Head of Risk Management reports to
the Chief Executive with a dotted line reporting to the Board of
Directors. The key role of the Risk Management function at BMI is
20
NOVEMBER: LAUNCHED OUR 3RD BRANCH IN MUHARRAQ
We launched our 3rd full service branch conveniently located in the heart
of the Muharraq commercial centre. This brings the total number of BMI
branches to three.
defining, identifying and reducing risks, and being independent and
objective.
Risk management necessarily involves judgment. The onset of
the Basel II guidelines, scheduled to be implemented in 2007,
has reinforced the necessity for a strong, robust, committed and
focused risk management function.
The bank’s risk policy, as approved by the Board of Directors,
analyses and sets risk limits for credit risk, liquidity risk, market risk
and operational risk.
Credit Risk Management Credit risk is defined as the potential
that the bank’s borrowers or counterparties will fail to meet its
obligations in accordance with the agreed terms. The goal of
credit risk management is to maximize the bank’s risk-adjusted
rate of return by maintaining credit exposures within acceptable
parameters.
The bank has well-defined policies and procedures for identifying,
measuring, monitoring and controlling credit risk in all the bank’s
activities. Credit limits are approved after a thorough assessment
of the credit worthiness of the borrower or counterparty, including
the purpose of and structure of the credit facility, and the source of
repayment. Credit proposals are prepared by lines of business and are
independently reviewed by Risk Management before the approval
of the appropriate approving authority, such as the Management
Credit Committee or Board Credit Committee, is sought. Annual
presentations of the credit portfolio to the Management Credit
Committee are undertaken by individual lines of business, in order
to provide an overview of the bank’s entire credit portfolio.
Sovereign Risk is managed in the same manner as credit risk, i.e.
an assessment is made as to the level of exposure in a country
with which the bank is comfortable, taking into account all relevant
risk factors. Exposures to banks and other financial institutions are
guided by risk limits set for these entities and approved by the
Board of Directors based on various risk factors.
The credit growth, quality and portfolio composition are continuously
monitored to maximize risk adjusted returns and reduce the level
of impairment. The concentration of risk is spread by the setting
of various limits such as the Single Borrower Limit (SBL), country
limits, industry-wise concentrations, sensitive sectoral limits and
individual counterparty limits. These parameters are constantly and
continuously subject to review, and updated accordingly.
The Credit Administration department, with its independent
reporting line, ensures that credit facilities are only released upon
obtaining the requisite approvals and documentation. It also
monitors daily excess of limits, overdues, exceptions, and overdue
reviews, and escalates the same to the relevant credit committee.
All relationships are reviewed annually and non-performing
accounts are reviewed regularly.
The bank adopts a rigorous standard for the identification, monitoring and provisioning of Non-Performing Loans (NPL’s) with a
view to eventual recovery. Every problematic account is reviewed
to evaluate compliance with laid down lending norms, arriving at
an appropriate grade commensurate with the risk and incorporating
the lessons, if any, into the bank’s lending guidelines. The bank
provides for bad and doubtful debts as and when required, in line
with the conservative provisioning norms it has set for itself.
The Remedial Credit Committee meets every month to review all
NPL’s and the level of provisions.
Liquidity Risk Management Liquidity risk is the potential
inability of the bank to meet its maturing obligations to a
counterparty. Liquidity risk management seeks to ensure that the
bank has the ability, under varying scenarios, to fund increases in
assets and meet maturing obligations as they arise. The Treasury
department of the bank is responsible for liquidity management in
the bank, under the guidance and supervision of the management
Asset and Liability Committee (ALCO). The risk policy sets liquidity
limits, targets, and ratios, to aid robust liquidity management.
The bank’s funding sources are well-diversified across funding
types and countries and include customer deposits, certificates of
deposits, and subordinated loans among others. The sources of and
maturities of assets and liabilities are closely monitored to avoid
any undue concentrations and to ensure the robust management of
liquidity risk. Detailed contingency plans to meet liquidity in order
to withstand a bank-specific or market crisis scenario are in place.
These plans are reviewed regularly by ALCO and revised as and
when necessary, to reflect the prevailing market conditions and
operating environment.
Market Risk Management Market risk is the risk of losses due
to movements in financial market variables. The variables include
interest rates, foreign exchange rates, and equities.
DECEMBER: ASSIGNED INVESTMENT GRADE RATINGS
We were assigned investment grade ratings by three reputable ratings
agencies -Moody’s, Capital Intelligence and Standard & Poor’s.
Interest Rate Risk Management Interest Rate Risk is the
risk that the bank’s profitability will be adversely affected by the
changes in interest rates. Interest rate risk arises from the possibility
of changes in interest rates and mismatches or gaps in the amount
of assets and liabilities and off balance sheet items that mature
or are re-priced in a given period. The responsibility for interest
rate risk management rests with the bank’s ALCO. ALCO takes an
integrated view of the interest rate risk across the bank’s products
and lines of business.
Operational Risk Management Operational Risk is the risk of
loss resulting from inadequate or failed internal processes, people,
systems, or from external events and includes legal risk. Business
units have primary responsibility for identifying and managing
operational risks. The bank’s risk policy provides the framework to
identify, assess, monitor, control and report operational risks in a
consistent and comprehensive manner across the bank.
Operational risk is controlled through a series of strong internal
controls and audits, well defined segregation of duties and
reporting lines, detailed operations manuals and standards. Internal
Audit independently reviews the effectiveness of the bank’s
internal control systems, and their ability to minimize the impact
of operational risks.
Internal Control Systems and their Adequacy
Management is fully aware of its responsibilities to the bank’s
depositors and shareholders. A key factor in the fulfillment of these
responsibilities, is the strength of the bank’s operating procedures
and associated internal control systems. These are designed to
22
address several critical issues including the completeness, accuracy
and reliability of the financial information that is used to monitor
and manage the business and the need to provide fast and efficient
services to customers.
The bank addresses these issues by maintaining clearly defined
operating procedures, which are updated as and when necessary
to cope with the growth in the bank’s size and complexity.
The operation of the internal control systems is also reviewed by
the bank’s Internal Audit department, which reports directly to the
Audit Committee of the Board of Directors.
The organization structure and human resources policy of the
bank are designed to ensure that areas of the bank’s operations
are managed and supervised effectively by competent and wellqualified staff.
Outlook
BMI remains committed to its vision of long-term regional growth
and providing superior returns to its stakeholders, employees and
the community in which it operates.
The bank will continue to work towards further strengthening its
position, developing new products and services, and achieving
overall excellence. The positive economic outlook for 2006, both
in our domestic market of Bahrain and the wider region, gives
us confidence in building on what has been a strong start, with
continued growth and productivity initiatives.
FINANCIAL STATEMENTS
AUDITORS’ REPORT TO THE SHAREHOLDERS OF
BANKMUSCAT INTERNATIONAL B.S.C. (c)
We have audited the accompanying balance sheet of BankMuscat International [the Bank] as of 31 December 2005,
and the related statements of income, cash flows and changes in equity for the year then ended. These financial
statements are the responsibility of the Bank’s Board of Directors. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of
31 December 2005 and the results of its operations and its cash flows for the year then ended in accordance with
International Financial Reporting Standards.
We confirm that, in our opinion, proper accounting records have been kept by the Bank and the financial statements,
and the contents of the Report of the Board of Directors relating to these financial statements, are in agreement
therewith. We further report, to the best of our knowledge and belief, that no violations of the Bahrain Commercial
Companies Law, nor of the Bahrain Monetary Agency Law, nor of the memorandum and articles of association of the
Bank have occurred during the year ended 31 December 2005 that might have had a material adverse effect on the
business of the Bank or on its financial position, and that the Bank has complied with the terms of its banking licence.
We obtained all the information and explanations, which we required for the purpose of our audit.
15 February 2006
Manama, Kingdom of Bahrain
25
BALANCE SHEET
31 December 2005
Note
2005
BD ’000
Cash and balances with Bahrain Monetary Agency
4
13,047
Due from banks and financial institutions
5
41,181
Loans and advances
6
176,277
Non-trading investments
7
14,723
Equipment
8
928
Other assets
9
2,507
ASSETS
TOTAL ASSETS
248,663
LIABILITIES AND EQUITY
LIABILITIES
Deposits from banks
79,973
Customers' deposits
140,378
Other liabilities
10
4,179
224,530
TOTAL LIABILITIES
EQUITY
Share capital
11
20,000
Reserves
12
4,133
24,133
TOTAL EQUITY
TOTAL LIABILITIES AND EQUITY
248,663
The financial statements were authorised for issue in accordance with a resolution of the board of directors on 15
February 2006.
Chairman
Chief Executive Officer
The attached notes 1 to 29 form part of these financial statements.
26
Director
INCOME STATEMENT
Year ended 31 December 2005
Note
2005
BD ’000
Interest and similar income
13
9,820
Interest expense and similar charges
14
4,847
NET INTEREST INCOME
Other income
4,973
15
3,259
TOTAL INCOME
8,232
Staff expenses
2,528
Other operating expenses
1,137
Depreciation
8
255
TOTAL COSTS
3,920
NET PROFIT BEFORE PROVISIONS
4,312
Provision for credit losses
6
NET PROFIT
Basic and diluted earnings per ordinary share
220
4,092
22
205 Fils
27
STATEMENT OF CASH FLOWS
Note
2005
BD ’000
OPERATING ACTIVITIES
4,092
Net profit for the year
Adjustment for non-cash items:
21
Foreign currency translation adjustments
Depreciation
8
255
Provision for credit losses
6
220
4,588
Changes in operating assets and liabilities:
(26,057)
Loans and advances
(64,985)
(7,516)
Other assets
(1,609)
Deposits from banks
66,146
Customers' deposits
19,661
Other liabilities
(11,087)
(20,859)
Net cash used in operating activities
INVESTING ACTIVITY
Purchase of equipment
8
(463)
(463)
Net cash used in investing activity
FINANCING ACTIVITY
Share capital issued
20,000
Net cash from financing activity
20,000
DECREASE IN CASH AND CASH EQUIVALENTS
(1,322)
Cash and cash equivalents acquired on 1 January
23
24,561
CASH AND CASH EQUIVALENTS AT 31 DECEMBER
24
23,239
28
11
STATEMENT OF CHANGES IN EQUITY
RESERVES
Cumulative
changes in
Share Statutory
available-forProposed Retained
capital reserve sale investments appropriations earnings
BD ’000 BD ’000
BD ’000
BD ’000 BD ’000
Total
BD ’000
Total
BD ’000
20,000
-
-
-
-
-
20,000
Net movement in cumulative changes
in fair values
-
-
41
-
-
41
41
Net profit for the year
-
-
-
-
4,092
4,092
4,092
Total income/expense for the year
-
-
41
-
4,092
4,133
4,133
Transfer to statutory reserve
-
409
-
-
(409)
-
-
Proposed directors' remuneration
-
-
-
207
(207)
-
-
20,000
409
41
207
3,476
4,133
24,133
Issue of share capital
Balance at 31 December 2005
29
NOTES TO THE FINANCIAL STATEMENTS
31 December 2005
1 ACTIVITIES
BankMuscat International B.S.C. (c) “the Bank”, a closed shareholding company was incorporated on 1 January 2005
when the Bank acquired the Bahrain commercial branch of BankMuscat Oman. The Bank operates under licences issued
by the Bahrain Monetary Agency and is engaged in commercial banking activities through its three branches in Bahrain.
The postal address of the Bank’s registered office is PO Box 350, Manama, Kingdom of Bahrain.
2 SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS)
and in conformity with the regulations of the Bahrain Monetary Agency.
The financial statements are prepared under the historical cost convention as modified for the measurement at fair
value of derivatives and investment securities. The carrying values of recognised assets and liabilities that are
hedged items in fair value hedges, and are otherwise carried at cost, are adjusted to record changes in fair values
attributable to risks that are being hedged.
These are stated at cost, adjusted for effective hedges, less any amounts written off and provision for impairment.
Loans and advances
These are stated at cost, adjusted for effective hedges and stated net of interest suspended, provisions for
impairment and any amounts written off.
These are classified as follows:
- Investments carried at amortised cost
- Available for sale
All investments are initially recognised at cost, being the fair value of the consideration given including directly
attributable transaction costs.
Premiums and discounts on non-trading investments are amortised using the effective interest rate method and
taken to interest income.
Investments carried at amortised cost
Debt instruments which do not meet the definition of held to maturity and which have fixed or determinable
payments but are not quoted in an active market are treated effectively as loans and receivables carried at
amortised cost, (adjusted for effective hedges) less provision for impairment in value.
Available for sale
Other investments are classified “available for sale” and are normally remeasured at fair value, unless fair value
30
31 December 2005
cannot be reliably determined in which case they are measured at cost less impairment. Fair value changes which
are not part of an effective hedging relationship, are reported as a separate component of equity until the
investment is derecognised or the investment is determined to be impaired. On derecognition or impairment the
cumulative gain or loss previously reported as “cumulative changes in fair value” within equity, is included in the
income statement for the period.
That portion of any fair value changes relating to an effective hedging relationship is recognised directly in the
income statement.
Fair values
For investments and derivatives quoted in an active market, fair value is determined by reference to quoted market
prices. Bid prices are used for assets and offer prices are used for liabilities.
For financial instruments, where there is no active market, fair value is normally based on one of the following:
-
recent transactions
-
brokers’ quotes
-
the expected cash flows discounted at current rates applicable for items with similar terms and risk
characteristics
The estimated fair value of deposits with no stated maturity, including non-interest bearing deposits, is the amount
payable on demand.
Premises and equipment
Premises and equipment are initially recorded at cost. Depreciation is provided on a straight-line basis over the
estimated useful lives of all premises and equipment.
Deposits
Deposits from banks and customers’ deposits are carried at cost, less amounts repaid and adjustments for effective
hedges.
Provisions
Provisions are recognised when the Bank has a present obligation (legal or constructive) arising from a past event
and the costs to settle the obligation are both probable and able to be reliably measured.
Derivatives
Derivatives are stated at fair value.
For the purposes of hedge accounting, hedges are classified into two categories:
a) fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability [or an
unrecognised firm commitment]; and
b) cash flow hedges which hedge exposure to variability in cash flows of a recognised asset or liability or a
forecasted transaction.
31
31 December 2005
In relation to effective fair value hedges any gain or loss from remeasuring the hedging instrument to fair value, as
well as related changes in fair value of the item being hedged, are recognised immediately in the income statement.
In relation to cash flow hedges, the gain or loss on the hedging instrument is recognised initially in equity to the
extent that the hedge is effective and either transferred to the income statement in the period in which the hedged
transaction impacts the income statement, or included as part of the cost of the related asset or liability.
For those derivatives which do not qualify for hedge accounting, any gains or losses arising from changes in the fair
value of the hedging instrument are taken directly to the income statement for the period.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, no
longer qualifies for hedge accounting or is revoked by the Bank. For effective fair value hedges of financial
instruments with fixed maturities any adjustment arising from hedge accounting is amortised over the remaining
term to maturity. For effective cash flow hedges, any cumulative gain or loss on the hedging instrument recognised
in equity remains in equity until the hedged transaction occurs. If the hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.
Offsetting
Financial assets and financial liabilities are only offset and the net amount reported in the balance sheet when there
is a legally enforceable right to set off the recognised amounts and the Bank intends to either settle on a net basis,
or to realise the asset and settle the liability simultaneously.
Revenue recognition
Interest income, as well as fees, which are considered an integral part of the effective yield of a financial asset, are
recognised using the effective yield method, unless collectibility is in doubt. The recognition of interest income is
suspended when loans become impaired, such as when overdue by more than 90 days.
Notional interest is recognised on impaired loans and other financial assets based on the rate used to discount future
cash flows to their net present value. Other fees receivable are recognised as the services are provided. Dividend
income is recognised when the right to receive payment is established.
When the Bank enters into an interest rate swap to change interest from fixed to floating the amount of interest
income or expense is adjusted by the net interest on the swap.
Foreign currencies
The financial statements of the Bank are presented in thousands Bahraini Dinars (BD’000) which is the Bank’s
functional currency.
Monetary assets and liabilities in foreign currencies are translated into Bahraini Dinars at rates of exchange
prevailing at the balance sheet date. Any gains or losses are taken to the income statement.
Employees’ end of service benefits
The Bank provides end of service benefits to its non-Bahraini employees. Entitlement to these benefits is usually
32
31 December 2005
based upon the employees’ length of service and the completion of a minimum service period. The expected costs
of these benefits which comprise a defined benefit scheme are accrued over the period of employment based on
the notional amount payable if all employees had left at the balance sheet date.
Bahraini employees are covered by the General Organisation for Social Insurance scheme which comprises a defined
contribution scheme to which employees and the Bank contribute a monthly sum based on fixed percentage of the
salary.
Cash and cash equivalents
Cash and cash equivalents comprise cash and balances with the Bahrain Monetary Agency deposits with banks and
financial institutions with original maturities of less than 90 days and treasury bills.
Impairment of financial assets
An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific
financial asset may be impaired. If such evidence exists, any impairment loss, is recognised in the income statement.
Impairment is calculated as follows:
a) for assets carried at amortised cost, impairment is based on estimated cash flows discounted at the original
effective interest rate;
b) for assets carried at fair value, impairment is the difference between cost and fair value; and
c) for assets carried at cost, impairment is present value of future cash flows discounted at the current market rate
of return for a similar financial asset.
For available for sale equity investments reversal of impairment losses are recorded as increases in cumulative
changes in fair value through equity.
In addition, a provision is made to cover impairment for specific groups of assets where there is a measurable
decrease in estimated future cash flows.
Trade and settlement date accounting
Purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Bank commits to
purchase or sell the asset.
3 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES
Judgements
In the process of applying the Bank’s accounting policies, management has made the following judgements, apart
from those involving estimations, which have the most significant effect on the amounts recognised in the financial
statements:
33
31 December 2005
Classification of investments
Management decides on acquisition of an investment whether it should be classified as held to maturity, amortised
cost or available for sale.
For those deemed to be held to maturity management ensures that the requirements of IAS 39 are met and in
particular the Bank has the intention and ability to hold these to maturity.
Estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet
date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below:
Impairment losses on corporate loans and advances
The Bank reviews its problem loans and advances on a quarterly basis to assess whether a provision for impairment
should be recorded in the income statement. In particular, considerable judgement by management is required in
the estimation of the amount and timing of future cash flows when determining the level of provisions required.
Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment
and uncertainty, and actual results may differ resulting in future changes to such provisions.
Collective impairment provisions on corporate loans and advances
In addition to specific provisions against individually significant loans and advances, the Bank also considers the need
for a collective impairment provision against loans and advances which although not specifically identified as
requiring a specific provision have a greater risk of default than when originally granted. This collective provision is
based on any deterioration in the internal grade of the loan since it was granted. The amount of the provision is based
on the historical loss pattern for loans within each grade and is adjusted to reflect current economic changes.
At present there is no collective impairment provision deemed necessary.
Impairment losses on retail loans
The Bank uses a provisioning matrix for retail loans whereby a specific percentage is created when a retail loan is
overdue more than 90 days. All retail loans overdue for more than 180 days are fully provided.
4 CASH AND BALANCES WITH THE BAHRAIN MONETARY AGENCY
2005
BD ‘000
Cash
Current account with Bahrain Monetary Agency
Deposits with Bahrain Monetary Agency
34
774
2,523
9,750
13,047
31 December 2005
5 DUE FROM BANKS AND FINANCIAL INSTITUTIONS
2005
BD ‘000
Placements
41,181
41,181
6 LOANS AND ADVANCES
2005
BD ‘000
Commercial loans
Syndication loans
Personal Loans
Consumer loans
Overdrafts
Credit cards
Other
Less: Suspended interest
Less: Provision for credit losses
71,107
31,495
50,165
10,911
9,305
348
4,184
177,515
(195)
(1,043)
176,277
The movements in provision for credit losses were as follows:
2005
BD ‘000
Acquired on 1 January
Charge for the year
Recoveries
Amounts written back
927
285
(22)
(43)
Net provision
220
Interest suspended during the year, net
At 31 December
91
1,238
At 31 December 2005 loans and advances on which interest is not being accrued, or is suspended, amounted to
BD 1,600 thousand. Unrecognised interest relating to such loans amounted to BD 195 thousand.
35
31 December 2005
7 NON-TRADING INVESTMENTS
2005
Carried at
amortised
cost
BD ‘000
Available
for sale
BD ‘000
Total
BD ‘000
-
4,401
2,480
4,401
2,480
-
6,881
6,881
Other debt securities
Equities
1,131
-
6,361
350
7,492
350
Total
1,131
1,131
6,711
13,592
7,842
14,723
Equipment
and
computers
BD ‘000
Motor
vehicles
BD ‘000
Total
BD ‘000
705
428
15
35
720
463
1,133
50
1,183
Depreciation:
Provided during the year
243
12
255
At 31 December 2005
243
12
255
890
38
928
Quoted investments
Government debt securities
Other debt securities
Unquoted investments
8 EQUIPMENT
The estimated useful lives of the assets for the calculation of depreciation are as follows:
Equipment
Computers
Motor vehicles
Cost:
Acquired on 1 January 2005
Additions
At 31 December 2005
Net book value:
At 31 December 2005
36
4 to 5 years
4 years
4 years
31 December 2005
9 OTHER ASSETS
2005
BD ‘000
1,829
Interest receivable
Sundry debtors and prepayments
248
Other
430
2,507
10 OTHER LIABILITIES
2005
BD ‘000
Interest payable
1,696
Sundry creditors
773
Staff related accruals
663
1,047
Others
4,179
11 SHARE CAPITAL
The authorised, issued and fully paid share capital as of 31 December 2005 comprised 20,000,000 shares of BD 1 each.
The shareholders at year end were as follows:
BankMuscat S.A.O.G.
Premier Group S.P.C. (Royal Court)
Royal Court Affairs of Oman
Istithmar
Global Investment House
Country of
incorporation
Shareholding
%
2005
BD ‘000
Oman
49
9,800
Bahrain
20
4,000
Oman
11
2,200
UAE
10
2,000
Kuwait
10
2,000
100
20,000
37
31 December 2005
12 STATUTORY RESERVE
As required by Bahrain Commercial Company Law and the Bank’s articles of association, 10% of the net profit for the
year has been transferred to a statutory reserve. The Bank may resolve to discontinue such annual transfers when the
reserve totals fifty percent of paid up share capital. The reserve is not available for distribution, except in circumstances
as stipulated in the Bahrain Commercial Companies Law and following the approval of the Bahrain Monetary Agency.
13 INTEREST AND SIMILAR INCOME
2005
BD ‘000
Loans and advances
8,266
1,243
Non - trading investments
311
9,820
14 INTEREST EXPENSE AND SIMILAR CHARGES
2005
BD ‘000
Deposits from banks
1,357
Customers’ deposits
3,490
4,847
15 OTHER INCOME
2005
BD ‘000
Fee and commission income
Foreign exchange
Others
1,349
470
1,440
3,259
During the year the Bank had a dispute with a counterparty regarding certain unauthorised trading transactions. The
dispute was settled by negotiation at an amount of BD 7.8 million which the shareholders have agreed to settle in
proportion to their shareholding.
38
31 December 2005
16 CREDIT RISK AND CONCENTRATION OF ASSETS, LIABILITIES AND OFF BALANCE SHEET ITEMS
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other
party to incur a financial loss. The Bank manages credit risk by setting limits for individual borrowers, and groups of
borrowers. The Bank also monitors credit exposures, and continually assesses the creditworthiness of
counterparties. In addition, the bank obtains security where appropriate, enters into master netting agreements and
collateral arrangements with counterparties, and limits the duration of exposures.
For details of the composition of the loans and advances portfolio refer note 6.
Credit risk in respect of derivative financial instruments is limited to those with positive fair values, which are
included under other assets. As a result the maximum credit risk, without taking into account the fair value of any
collateral and netting agreements is limited to the amounts on the balance sheet plus commitments to customers
disclosed in note 28.
Concentrations 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 indicate the
relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location.
The distribution of assets, liabilities, and off-balance sheet items by geographic region was as follows:
31 December 2005
Assets
BD ‘000
Liabilities
BD ‘000
Credit
commitments
BD ‘000
133,501
120,011
10,129
GCC Countries
59,943
60,649
4,771
Europe (including Turkey)
23,521
46,137
541
Asia
27,032
18,500
7,863
Americas
1,268
1,263
178
Rest of the world
3,398
2,103
2,342
248,663
248,663
25,824
Geographic region:
Domestic (Kingdom of Bahrain)
17 MARKET RISK
Market risk arises from fluctuations in interest rates, foreign exchange rates and equity prices. The Board has set limits
on the value of risk that may be accepted. This is monitored on a monthly basis by the Asset and Liability Committee.
39
31 December 2005
18 INTEREST RATE RISK
Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair
values of financial instruments. The Bank is exposed to interest rate risk as a result of mismatches of interest rate
repricing of assets and liabilities. The Board has established levels of interest rate risk by setting limits on the interest
rate gaps for stipulated periods.
Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within
established limits.
The Bank’s interest sensitivity position based on contractual repricing arrangements or maturity at 31 December
2005 has been shown in the table below.
Total
BD ‘000
-
3,297
13,047
Up to 1
month
BD ‘000
Up to 3
months
BD ‘000
3 to 6
months
BD ‘000
6 months
to 1 year
BD ‘000
1 to 5
years
BD ‘000
Cash and balances with
Bahrain Monetary Agency
4.22
9,750
-
-
-
-
Due from banks and
financial institutions
1.41
9,433
759
7,539
13,082
10,368
-
-
41,181
Loans and advances
5.10
36,515
19,300
18,291
14,654
40,733
46,784
-
176,277
4.31
-
-
-
-
9,144
5,221
358
14,723
None
-
-
-
-
-
-
928
928
Other assets
None
-
-
-
-
-
-
2,507
2,507
55,698
20,059
25,830
27,736
60,245
52,005
7,090
248,663
Total assets
Deposits from banks
2.20
77,711
2,262
-
-
-
-
-
79,973
2.10
83,402
20,134
5,095
29,361
2,386
-
-
140,378
None
-
-
-
-
-
-
4,179
4,179
161,113
22,396
5,095
29,361
2,386
-
4,179
224,530
On balance sheet gap
(105,415)
(2,337)
20,735
(1,625)
57,859
52,005
2,911
Off balance sheet gap
(13,195)
-
-
13,195
-
-
-
Total interest rate
sensitivity gap
(118,610)
(2,337)
20,735
11,570
57,859
52,005
2,911
Cumulative interest
rate sensitivity gap
(118,610) (120,947) (100,212)
(88,642)
(30,783)
21,222
24,133
Other liabilities
Total liabilities
40
Over 5
years
BD ‘000
Noninterest
bearing
items
BD ‘000
Effective
annual
interest
rate (%)
31 December 2005
The off balance sheet gap represents the net notional amounts of interest rate swaps which are used to manage
the interest rate risk.
19 CURRENCY RISK
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange
rates. The Bank views the Bahraini Dinar as its functional currency. The Board has set limits on positions by currency.
Positions are monitored on a daily basis and hedging strategies used to ensure positions are maintained within
established limits.
The Bank had the following significant net exposures denominated in foreign currencies as of 31 December 2005:
BD ‘000
equivalent
long (short)
Pound Sterling
US Dollar
Euro
Japanese Yen
23
(7,295)
(16)
1
20 LIQUIDITY RISK
Liquidity risk is the risk that the Bank will be unable to meet its liabilities when they fall due. To limit this risk,
management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidity
on a daily basis. The ALCO monitors the maturity profile on an overall basis with ongoing liquidity monitoring by the
Treasury.
The table below summarises the maturity profile of the Bank’s assets and liabilities based on contractual repayment
arrangements and does not take account of the effective maturities.
41
31 December 2005
The maturity profile of the assets and liabilities at 31 December 2005 was as follows:
Up to
1 Month
BD ‘000
1 to 3
months
BD ‘000
3 to 6
months
BD ‘000
6 months
to 1 year
BD ‘000
1 to 5
years
BD ‘000
Over
5 years
BD ‘000
No fixed
maturities
BD ‘000
Total
BD ‘000
13,047
-
-
-
-
-
-
13,047
Due from banks and
financial institutions
9,433
759
7,539
13,082
10,368
-
-
41,181
Loans and advances
36,515
19,300
18,291
14,654
39,602
47,915
-
176,277
-
-
-
-
10,275
4,448
-
14,723
-
-
-
-
-
-
928
928
Other assets
2,507
-
-
-
-
-
-
2,507
Total assets
61,502
20,059
25,830
27,736
60,245
52,363
928
248,663
Deposits from banks
77,711
2,262
-
-
-
-
79,973
83,402
20,134
5,095
29,361
2,386
-
-
140,378
Other liabilities
4,179
-
-
-
-
-
-
4,179
Total liabilities
165,292
22,396
5,095
29,361
2,386
-
-
224,530
Net liquidity gap
(103,790)
(2,337)
20,735
(1,625)
57,859
52,363
928
Cumulative liquidity gap
(103,790) (106,127) (85,392)
(87,017)
(29,158)
23,205
24,133
ASSETS
Cash and balances with
Bahrain Monetary Agency
LIABILITIES
21 FAIR VALUE OF FINANCIAL INSTRUMENTS
With exception of certain available for sale investments carried at cost (see note 7) the estimated fair values of all
other financial assets and financial liabilities are not materially different from their carrying values as stated in the
balance sheet.
42
31 December 2005
22 EARNINGS PER SHARE
Basic earnings per share are calculated by dividing the net profit for the year by the weighted average number of
shares outstanding during the year as follows:
2005
BD'000
4,092
Profit for the year
20,000
Weighted average number of shares outstanding during the year (Thousands)
205
Basic earnings per share (Fils)
No figure for diluted earnings per share has been presented as the Bank has not issued any instruments which would
have an impact on earnings per share when exercised.
23 ACQUISITION OF BUSINESS
On 1 January 2005, the Bank acquired the Bahrain operations of BankMuscat (Bahrain branch).
The assets and liabilities acquired by the Bank and the purchase consideration are set out as follows:
BankMuscat
International
1 January 2005
BD'000
ASSETS
Cash and balances with Bahrain Monetary Agency
Loans and advances
Other assets
2,749
46,744
111,512
7,187
720
898
Total assets acquired
169,810
LIABILITIES
Deposits from banks
Customers' deposits
Other liabilities
13,827
120,717
15,266
Total liabilities acquired
149,810
Net assets acquired
20,000
Total purchase consideration
20,000
Cash flow on acquisition:
Purchase consideration
Cash in acquired business
(20,000)
44,561
Inflow of cash on acquisition
24,561
43
31 December 2005
24 CASH AND CASH EQUIVALENTS
Cash and cash equivalents included in the statement of cash flows comprise the following balance sheet amounts:
2005
BD '000
13,047
10,192
Cash and balances with the Bahrain Monetary Agency
Due from banks with an original maturity of less than ninety days
23,239
25 RELATED PARTY TRANSACTIONS
These are shareholders, directors, senior management and their related concerns. All the loans and advances to
related parties are performing advances and are free of any provision for possible credit losses.
Amounts in respect of related parties included in the financial statements are as follows:
Loans and advances
Interest income
Interest expense
Shareholders
BD '000
Directors
and senior
management
BD '000
2005
BD '000
1,598
56
104
220
20
-
1,818
76
104
In addition, the shareholders absorbed losses arising from an unauthorised deal (Note 15).
Compensation of the key management personnel is as follows:
2005
BD '000
44
Short term employee benefits
End of service benefits
373
32
Total compensation paid to key management personnel
405
31 December 2005
26 CAPITAL ADEQUACY
The risk asset ratio, calculated in accordance with the capital adequacy guidelines approved by the Bahrain
Monetary Agency, for the Bank is as follows:
2005
BD '000
Capital base:
20,000
Tier 1 capital
Tier 2 capital
4,092
24,092
Total capital base (a)
Risk weighted assets (b)
184,441
Capital adequacy (a/b * 100)
13.06%
Minimum requirement
12.00%
27 DERIVATIVES
The table below shows the positive and negative fair values of derivative financial instruments together with the
notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative’s underlying
asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured.
The notional amounts indicate the volume of transactions outstanding at the year end and are neither indicative of
the market risk nor the credit risk.
Notional amounts by term to maturity
31 December 2005
Derivatives held for trading:
Forward foreign exchange contracts
Derivatives held as fair value hedges:
Interest rate swaps
Notional
amount
Total
BD '000
Less than
one year
BD'000
1-5
years
BD '000
Over 5
years
BD '000
104,461
104,415
3,046
-
13,195
13,195
-
-
117,656
117,610
3,046
-
45
31 December 2005
Derivative product types
Forward contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a
specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market.
Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based
on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate
interest payments based on a notional value in a single currency.
Uses of derivatives
The Bank generally deals with customers which are normally laid off with counterparties. The Bank may also take
positions with the expectation of profiting from favourable movements in prices, rates or indices.
The Bank uses interest rate swaps to hedge against interest rate risk arising from specifically identified fixed interest
rate deposits.
28 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 Bank’s customers.
Letters of credit, guarantees (including standby letters of credit) and acceptances commit the Bank to make
payments to third parties on behalf of customers in certain circumstances.
Commitments to extend credit represents contractual commitments to make loans and revolving credits.
Commitments 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.
46
31 December 2005
The Bank has the following credit related commitments:
2005
BD '000
Commitments on behalf of customers:
Acceptances
Letters of credit
Guarantees
5,835
13,009
6,980
25,824
Capital expenditure commitments
Estimated capital expenditure contracted for at the balance sheet date but not provided for:
IT infrastructure development
310
Operating lease commitments
Future minimum lease payments:
Within one year
After one year but not more than five years
215
381
Total operating lease expenditure contracted for at the balance sheet date
596
29 COMPARATIVE FIGURES
The Bank commenced operations on 1 January 2005. This being the first year of operations, no comparatives are
available.
47

ANNUAL REPORT 2005

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