financial statements for the financial year ......saeed mohammed al ghamdi (resigned on 04 march...

AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD. (Incorporated in Malaysia) Company No. 719057-X

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FINANCIAL STATEMENTS FOR THE FINANCIAL

YEAR ENDED 31 DECEMBER 2012

Registered Office

Ground Floor, East Block

Wisma Selangor Dredging

142-B Jalan Ampang

50450 Kuala Lumpur


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Contents Page Directors’ Report 3 Statement by Directors 21 Statutory Declaration 22 Independent Auditors’ Report 23 Report of Shariah Board 25 Statement of Financial Position 26 Statement of Comprehensive Income 27 Statement of Changes in Equity 28 Statement of Cash Flow 29 Summary of Significant Accounting Policies 30 Notes to the Financial Statements 47


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DIRECTORS’ REPORT The Directors hereby submit their report together with the audited financial statements of the Group and of the Bank for the financial year ended 31 December 2012. PRINCIPAL ACTIVITIES The Group and the Bank is principally engaged in Islamic Banking business and the provision of related financial business under the Islamic Banking Act, 1983. The principal activity of the subsidiary is disclosed in Note 10 to the financial statements. There have been no significant changes to these principal activities during the financial year. FINANCIAL RESULTS

Group and Bank

RM’000

Net profit for the financial year 13,828 DIVIDEND No dividend has been paid or declared by the Bank since the end of the previous financial year. The Directors do not recommend the payment of any dividend for the current financial year. RESERVES AND PROVISIONS There were no material transfers to or from reserves or provisions during the financial year. DIRECTORS OF THE BANK The Directors who have held office during the year since the date of the last report are as follows: Abdullah Sulaiman Al Rajhi Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Dato’ Majid Bin Mohamad Suliman Abdulaziz Azzabin Nik Hassan Bin Nik Mohd Amin Waleed Abdullah Al-Mogbel (Appointed on 01 June 2012) Saeed Mohammed Al Ghamdi (Resigned on 04 March 2012) According to the register of Directors’ shareholding, none of the Directors holding office at 31 December 2012 held any shares in the Bank during the financial year.


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DIRECTORS’ REPORT (Continued)

DIRECTORS’ BENEFITS Since the end of the previous financial year, no Director of the Bank has received nor become entitled to receive any benefit (other than directors’ remuneration as disclosed in Note 26 of the financial statements) by reason of a contract made by the Bank or a related corporation with the Director or with a firm of which the Director is a member, or with a company in which the Director has a substantial financial interest. Neither at the end of the financial year, nor at any time during that year, did there subsist any arrangements to which the Bank or its subsidiary is a party whereby Directors might acquire benefits by means of the acquisition of shares in, or debentures of, the Bank or any other body corporate.

ISSUE OF SHARES There were no changes to the authorised issued and paid-up capital of the Bank during the financial year. BAD AND DOUBTFUL FINANCING Before the financial statements of the Group and of the Bank were made out, the Directors took reasonable steps to ascertain that proper actions had been taken in relation to the writing off of bad financing and the making of allowance for doubtful financing and have satisfied themselves that there were no known bad financing and that adequate allowance had been made for doubtful financing. At the date of this report, the Directors are not aware of any circumstances which would render any amount to be written off for bad financing or the amount of the allowance for bad and doubtful financing in the financial statements of the Group and of the Bank, inadequate to any substantial extent. CURRENT ASSETS Before the financial statements of the Group and of the Bank were made out, the Directors took reasonable steps to ensure that any current assets, other than debts and financing, which were unlikely to realise their value as shown in the accounting records in the ordinary course of business, had been written down to an amount which they might be expected so to realise. At the date of this report, the Directors are not aware of any circumstances which would render the values attributed to the current assets in the financial statements of the Group and of the Bank misleading. VALUATION METHODS At the date of this report, the Directors are not aware of any circumstances which have arisen which render adherence to the existing methods of valuation of assets or liabilities of the Group and of the Bank misleading or inappropriate.


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DIRECTORS’ REPORT (Continued) CONTINGENT AND OTHER LIABILITIES At the date of this report, there does not exist: i) any charge on the assets of the Group and of the Bank which has arisen since the end of the financial

year and which secures the liabilities of any other person; or ii) any contingent liability in respect of the Group and of the Bank that has arisen since the end of the

financial year other than in the ordinary course of the banking business. No contingent liability or other liability of the Group and of the Bank has become enforceable, or is likely to become enforceable within the period of twelve months after the end of the financial year which, in the opinion of the Directors, will or may substantially affect the ability of the Group and of the Bank to meet its obligations as and when they fall due CHANGE OF CIRCUMSTANCES At the date of this report, the Directors are not aware of any circumstances not otherwise dealt with in this report or the financial statements of the Group and of the Bank, which would render any amount stated in the financial statements misleading. ITEMS OF UNUSUAL NATURE The results of the operations of the Group and of the Bank for the financial year were not, in the opinion of the Directors, substantially affected by any item, transaction or event of a material and unusual nature. There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors, to affect substantially the results of the operations of the Group and of the Bank for the current financial year in which this report is made. PERFORMANCE OVERVIEW 2012 Key business strategies were executed and proved to be fruitful as the Bank made improvement in 2012. In the year under review, the Bank achieved a healthy balance sheet growth as the total assets increased by 14.1% to RM7.0 billion (2011: RM6.1 billion) and profit before tax stands at RM4.1 million. The Bank re-strategise its focus to be more customer centric, targeting high net worth segments as part of its effort to build quality portfolio. The year 2012 also saw further advancement in the Bank’s effort towards good corporate governance practices to achieve greater transparency, independence and accountability. In this regards, several structural changes were made to achieve a more effective decision making process.


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DIRECTORS’ REPORT (Continued) BUSINESS PLAN AND OUTLOOK FOR 2013 Moving forward to 2013, the Bank anticipates a more challenging environment with greater competition in Malaysia market coming from new players, continuous uncertainty surrounding global economy and tighter regulation. Nevertheless, a more robust strategy has been drawn to strike the right balance between business growth and strong governance. The Bank will strive to grow its business progressively and responsibly. STATEMENT OF CORPORATE GOVERNANCE The Board of Directors of the Bank (“the Board”) recognises the importance of corporate governance as set out in the Malaysian Code on Corporate Governance (“the Code”) in discharging its responsibilities to enhance shareholders’ value and safeguard the interests of other stakeholders towards enhancing business prosperity and corporate accountability. This also means inculcating a culture that seeks to balance conformance requirements with the need to deliver long term strategic success through performance, predicated on entrepreneurship, control and ownership, without comprising personal or corporate ethics and integrity. Although the Bank is not a listed company, the Board has endeavoured to apply the principles and comply with the relevant best practices of corporate governance as set out in the Code. The Bank is also required to comply with BNM’s Guidelines on Corporate Governance for Licensed Islamic Banks “(Revised BNM/GP1-i)”. BOARD OF DIRECTORS (i) Board Composition and Its Roles and Responsibilities At the date of this Annual Report, the Board consists of six (6) Directors of which include three (3)

independent non-executive Directors. The non-executive Directors do not engage in the day to day management of the Bank and do not participate in any business dealings and are not involved in any other relationship with the Bank. This ensures that the independent non-executive Directors remain free from conflict of interest and facilitate them to carry out their roles and responsibilities. The appointment of non-executive Directors facilitates the exercise of independent evaluation in Board deliberations and decision-making, and thus providing the check and balance in the Board.

The Board is responsible for the overall corporate governance, including its strategic direction,

establishing goals for management and monitoring the achievement of these goals. The roles and responsibility of the Chairman and the Chief Executive Officer is clearly separated, which is consistent with the principles of the Revised BNM/GP1-i to institute an appropriate balance of power and authority. The Chairman is responsible for ensuring the effectiveness of the Board as well as representing the Board to the Shareholder.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (i) Board Composition and Its Roles and Responsibilities (Continued)

The Directors, with their different backgrounds and specialisations, collectively bring with them a wide range of experience and expertise. The Chief Executive Officer is responsible for implementing the policies and decisions of the Board, overseeing the operations as well as coordinating the development and implementation of business and corporate strategies. The independent non-executive Directors bring an independent judgment to the decision making of the Board and provide a review and challenge on the performance of the management.

As a principle of good governance, all Directors are subject to re-election at regular intervals. The

Bank’s Articles of Association also provide for the retirement of Directors by rotation and, under Bank Negara Malaysia’s guidelines, all appointment and re-appointment of Directors have to be approved by Bank Negara Malaysia.

(ii) Board of Directors’ Profile

The Directors’ profiles are as follows: Abdullah Sulaiman Al Rajhi Chairman Abdullah Sulaiman Al Rajhi, spearheads the development of the Malaysian Bank’s operation as the Chairman. A member of the well-known Al Rajhi family, upon completion of his Business studies, he had bolstered his academic achievements with training courses at the Wharton School in the United States of America and the Cranfield School of Management in United Kingdom. Abdullah Sulaiman had familiarised himself with various activities and levels of banking operations by assuming various senior responsibilities in the Bank. He is also an avid speaker and advocate Islamic banking principles by participating in many of regional and international financial forums in recent years.

Suliman Abdulaziz Azzabin Non- independent Non-executive Director Suliman has over fifteen years of wide range of experiences in accounting, credit, risk, corporate and policy formulation. He started off his career as a senior accountant at the Saudi Basic Industrial Corporation in Riyadh and is currently the Chief Executive Officer of Al Rajhi Bank, Saudi Arabia. He holds a Bachelor of Administrative Science in Accounting from the King Saud University, Saudi Arabia and a Master in Risk Management from the Southampton University, United Kingdom and was appointed as a director of the Bank with effect from 15 June 2011.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (ii) Board of Directors’ Profile (Continued)

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Independent Non-executive Director Dato’ Dr Nik Norzul Thani was appointed as a Board member of the Bank with effect from 20 December 2006. Dato’ Dr Nik advises clients on a wide range of legal matters covering a range of banking advisory aspects, including Islamic Finance and is currently the President of Zaid Ibrahim & Co., a law firm. Besides being a board member for several other local companies, Dato’ Dr Nik also has several books and articles to his credit.

Dato’ Majid Bin Mohamad Independent Non-executive Director

Dato’ Majid Bin Mohamad was appointed as Al Rajhi Bank Malaysia’s Director effective 18 March 2011. Dato' Majid holds a Bachelor of Arts (Honours) from the University of Malaya Kuala Lumpur and a Masters of Business Administration from Manchester Business School, England. Dato’ Majid has extensive experience in the setting up, regulatory planning and rehabilitation of a wide range of finance and insurance institutions in the industry. Starting out at the Central Bank of Malaysia in 1977, he has held various supervisory roles of influence across key departments, from audit to economics, banking and insurance regulation. Nik Hassan Bin Nik Mohd Amin Independent Non-executive Director

Nik Hassan was appointed to the Board on 12 January 2012. He is an alumnus of University Malaya where he graduated with a Bachelor in Economics. He started his banking career in 1971 with a local commercial bank and has spent more than thirty five years in the banking and financial services sector. Having worked in various senior capacities with the local commercial bank, Nik Hassan has gained invaluable hands on experience in commercial banking, stock broking, factoring and merchant banking.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (ii) Board of Directors’ Profile (Continued)

Waleed Abdullah Al-Mogbel Non- independent Executive Director Waleed Abdullah Al-Mogbel was appointed to the Board as of 1 June 2012. He is also currently the Chief Financial Officer (CFO) of Al Rajhi Bank Saudi Arabia. Based in Riyadh, Waleed has been with Al Rajhi Bank since 1998 and has since then delved into a range of financial positions within the bank. Prior to commencing his current position as the CFO, he was the Head of Budgeting & Management Reporting, with astute knowledge in Accounting, Finance and Auditing. Waleed holds a BA in Accounting from King Saud University, a M Sc in Accounting and Finance from the University of Southampton and a Ph.D. in Accounting and Auditing from Cardiff University.

(iii) Board Meetings Board meetings for the ensuing financial year are scheduled in advance before end of the current

financial year to facilitate the Directors to plan and organise the next year’s Board meetings into their respective schedules.

During the financial year ended 31 December 2012, six (6) Board meetings were held and attendances

by Directors at the board meetings were as follows:

Members No of meetings attended / held

Abdullah Sulaiman Al Rajhi – Chairman Non- independent Non-executive Director

6 / 6

Suliman Abdulaziz Azzabin Non- independent Non-executive Director

6 / 6

Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani Independent Non-executive Director

6 / 6


5 / 6

Nik Hassan Bin Nik Mohd Amin Independent Non-executive Director

6 / 6

Waleed Abdullah Al-Mogbel Non- independent Executive Director

5 / 6

At the Board meetings, the Board reviews various management reports on the business performance of

the Bank and the minutes of meetings of the Board Committees are tabled for review by members of the Board.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (iii) Board Meetings (Continued) Members of the Board shall deliberate and in the process evaluate the potential risks and viability of

business propositions and corporate proposals that have significant impact on the bank’s business or on its financial position.

Board meetings are governed by a structured format agenda and the agenda for each Board meeting

and papers relating to the agenda items are forwarded to all Directors in advance prior to the scheduled Board meetings for their perusal.

Minutes of every Board meeting are circulated to all the Directors for their perusal prior to confirmation

of the minutes at the following Board meeting (iv) Board Committee Board Committees were established to assist the Board in the running of the Bank. The following Board

Committees with their specific terms of reference and functions are as follows: Audit Committee The composition of the Audit Committee and the attendance by members at the Board Committee

meetings held in 2012 are as follows:


Nik Hassan Bin Nik Mohd Amin - Chairman Independent Non-executive Director

6 / 6


5 / 6


6 / 6

Suliman Abdulaziz Azzabin Non- independent Non-executive Director (No longer an Audit Committee Member effective June 2012)

3 / 6

Waleed Abdullah Al-Mogbel Non- independent Non-executive Director (Appointed in June 2012)

4 / 6

The primary function of the Audit Committee is to assist the Board in discharging its responsibilities by

providing independent oversight of the Bank’s financial reporting, the internal control system, the effectiveness of internal audit function and risk management system. The Audit Committee also provides, by way of regular meetings, a line of communication between the Board, the internal and external auditors.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (iv) Board Committee (Continued) Risk Management Committee The composition of the Risk Management Committee and the attendance by members at the Board

Committee meetings held in 2012 are as follows:


Dato’ Majid Bin Mohamad - Chairman Independent Non-executive Director

5 / 6


6 / 6

Suliman Abdulaziz Azzabin Non- independent Non-executive Director

6 / 6

Nik Hassan Nik Mohd Amin Independent Non-executive Director

6 / 6

Waleed Abdullah Al-Mogbel Non-independent Non-executive Director (Appointed in June 2012)

4 / 6

The objectives of the Risk Management Committee are to establish a forum for deliberation and

consideration of risks which the Bank is exposed to in relation to its strategic direction and objectives while overseeing to ensure that the risk management systems, policies and procedures are in place and functioning.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (iv) Board Committee (Continued) Nominating Committee The composition of the Nominating Committee and the attendance by members at the Board



Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Independent Non-executive Director

4 / 4

Abdullah Sulaiman Al Rajhi Non- independent Non-executive Director

4 / 4


3 / 4

Suliman Abdul Aziz Azzabin Non- independent Executive Director

2 / 4

Nik Hassan Bin Nik Mohd Amin Independent Non-executive Director

4 / 4

The responsibilities of the nominating committee is to provide a formal and transparent procedure for

the appointment of Directors and the Chief Executive Officer as well as the assessment of the effectiveness of individual Directors, Board as a whole and performance of Chief Executive Officer and senior management officers.


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DIRECTORS’ REPORT (Continued) BOARD OF DIRECTORS (Continued) (iv) Board Committee (Continued) Remuneration Committee The composition of the Remuneration Committee and the attendance by members at the Board



Dato’ Dr Nik Norzrul Thani Bin Nik Hassan Thani - Chairman Independent Non-executive Director

1 / 1

Abdullah Sulaiman Al Rajhi Non- independent Non-executive Director

1 / 1

Suliman Azzabin Non-independent Non-executive Director

1 / 1

The responsibilities of the Remuneration Committee is to provide for a formal and transparent

procedure for developing the remuneration policy for Directors, Chief Executive Officer and senior management officers and ensuring that the compensation is competitive and consistent with the Islamic Bank’s culture, objective and strategy.

INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES The Malaysian Code on Corporate Governance and Bank Negara Malaysia’s Guidelines on Corporate Governance requires Banks to maintain a sound system of internal controls to safeguard shareholders' investments and the Bank’s assets. Responsibility of the Board The Board recognises the importance of maintaining a sound system of internal control to safeguard shareholders’ investments and the Bank's assets. The Board is also responsible for the Bank’s system of internal controls and its effectiveness. It includes reviewing adequacy and integrity of controls relating to financial, operational, risk management and compliance with applicable laws and regulations. The system is designed to manage the Bank’s risks within an acceptable risk profile and the Board acknowledges that the system, by its nature, can only provide reasonable assurance and not absolute assurance against material misstatement of management and financial information and records or against financial losses or fraud.


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DIRECTORS’ REPORT (Continued) INTERNAL AUDIT AND INTERNAL CONTROL ACTIVITIES (Continued) Key Internal Control Elements The Bank has in place an on-going internal control processes for identifying, evaluating, managing and reporting on the significant risks that may affect the achievement of its business objectives throughout the financial year under review. The key internal controls elements in the process are described below: (i) Clear Line of Responsibilities The management of the Bank is primarily delegated to the Chief Executive Officer and its

Management Committee, whose responsibilities are set by the Board. The management assists the Board in the implementation of the policies and procedures on risk and control by identifying and assessing the risks faced, and in the design, operation and monitoring of suitable internal controls to mitigate and control these risks.

(ii) Risk Management Framework Risk Management Division is established to assist the Board in the development of general risk

policies and procedures, monitor and evaluate material risks that may arise from the Bank’s business activities. The Board with the assistance of the Risk Management Division, has established an enterprise-wide risk management framework that details a holistic risk management governance structure for risk management which balances risks and returns, as well as integrated risk management processes for credit risk, market risk, liquidity risk and operational risk.

(iii) Internal Audit Activities On-going reviews of the internal control system are carried out by the internal auditor to test control

effectiveness in the Bank. Results of such reviews are reported to the Audit Committee. The internal audit activities revolve primarily on areas of priority as identified by risk analysis and in accordance with the annual internal audit plans as approved by the Audit Committee.

(iv) Annual Business Plan A detailed budgeting process is established requiring all key business units in the Bank to prepare

budgets annually which are discussed and approved by the Board. Regular reporting on actual performance against approved budgets is in place and significant variances shall be followed up by the management and to be reported to the Board.

(v) Management Reporting The Board also receives and reviews reports from the management on a regular basis in ensuring the

effectiveness of the Bank’s daily operations and that the Bank’s operations are in accordance with the established goals.

(vi) Policies and Procedures There are policies, procedures and authority limits imposed on the management in respect of the day-

to-day operations. Compliance with internal controls and the relevant laws and regulations are also set out in operations manuals, guidelines and directives which are updated from time to time.


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DIRECTORS’ REPORT (Continued) RISK MANAGEMENT Risk management plays a substantial role in the governance of the Bank as the bank recognises the diversity and complexity of banking operations and the exposure to various kinds of risks mainly on credit risk, market risk, liquidity risk and operational risk. The Bank recognises the importance of an effective risk management and control measures to ensure the Bank’s corporate value, sustained profitability and continued enhancement of shareholder value. A risk conscious corporate culture and pre-emptive actions of employees are also crucial for an effective risk management. The risk conscious corporate culture is met through communication, training, policies, procedures and organisational structures, roles and responsibilities. Overall Risk Management Framework Risk Management Governance Structure and Processes The Bank has established within its risk management framework a holistic risk management governance structure for risk management which balances risks and returns, as well as integrated risk management processes for credit risk, market risk, liquidity risk and operational risk. The risk management governance structure provides clear accountabilities and responsibilities for risk management processes throughout the organisation at the Board level, at the Executive Management level and at the business unit and support unit level. The risk management processes encompass four broad processes, namely risk identification, risk assessment and measurement, risk control and mitigation and risk monitoring. Stress test and scenario analysis serves as an important risk management tool as part of the Bank’s risk assessment process and is used to assess the financial risks and management capability of the Bank to continue to operate effectively under different stressed scenarios. The stress test and scenario analysis will assist the Bank in the following: (a) Evaluating the optimal capitalisation level for the Bank to weather extreme banking scenarios; (b) Understanding the nature and key risk profile of the Bank; (c) Estimating the adequacy or liquidity contingency planning; and (d) Assessing the effectiveness of risk mitigates which are already established. Credit Risk Management Credit risk is defined as the risk of potential losses arising from a customer default or deterioration of the credit standing of a customer with whom the Bank has entered transactions into. The Bank establishes policies and procedures for credit origination, scoring, rating, approval, monitoring, collection and recovery. Credit approval authorities are delegated to committees and individuals in accordance to the risk appetite of the Board. Regular analysis and reporting of risk profile covering credit exposure, movements of non-performing financings (“NPFs”), concentration of credit exposure, adequacy of specific provision for NPFs and capital adequacy is updated to the Management, the Risk Management Committee and the Board.


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DIRECTORS’ REPORT (Continued) RISK MANAGEMENT (Continued) Market Risk Management Market risk is defined as the risk that could incur losses due to changes in the value of assets and liabilities (including off-balance sheet items) caused by fluctuations in the market risk factors such as profit rates and foreign exchange rates. Meanwhile, liquidity risk is defined as the risk of losses arising from funding difficulties to raise the necessary funds, or when it is forced to obtain funds at much higher rates than usual. The Bank establishes policies and procedures for monitoring, reporting and control of market and liquidity risks including setting appropriate management trigger and exposure limits and performing regular stress testing. The Asset and Liability Committee (“ALCO”) is established to monitor, deliberate and make decision on matters related to funding, liquidity as well as asset and liability mismatch risks management. The Bank manages its liquidity in compliance to BNM’s New Liquidity Framework. Regular analysis and reporting of market and liquidity risks profile is updated to the Management, the Risk Management Committee and the Board. Operational Risk Management Operational risk is defined as the risk of loss, whether direct or indirect, to which the Bank is exposed due to inadequacy or failure of processes, procedures, systems or controls and external events. Operational risk, in some form, exists in each of the Bank’s business and support activities and can result in direct and indirect financial loss, regulatory sanctions, customer dissatisfaction and damage to the Bank’s reputation. The management of operational risk is an important priority for the Bank. To mitigate such operational risks, the Bank has developed an operational risk program and essential methodologies that enables identification, measurement, monitoring and reporting of inherent and emerging operational risks. The day-to-day management of operational risk exposures is through the development and maintenance of comprehensive internal controls and procedures based on segregation of duties, independent checks, segmented system access control and multi-tier authorisation processes. An incident reporting process is also established to capture and analyse frauds and control lapses. A periodic self-risk and control assessment is established for business and support units to pre-emptively identify risks and evaluate control effectiveness. Action plans are developed for the control issues identified. In addition, the Bank has established the Business Continuity Plan (“BCP”) to ensure that critical operations are not interrupted so that critical business processes continue with minimal adverse impact on customers, staff and products and services. BCP constitutes an essential component of the Bank’s risk management process by providing a controlled response to potential operational risks that could have a significant impact on the Bank’s critical processes and revenue streams. The Bank’s business continuity plan is to maintain continuous operational viability in the event of natural disasters, systems failures and other types of emergencies. Regular analysis and reporting of operational risk profile is updated to the Management, the Risk Management Committee and the Board.


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DIRECTORS’ REPORT (Continued) RISK MANAGEMENT (Continued) CAPITAL ADEQUACY FRAMEWORK INITIATIVES In line with the Basel II Pillar 1 on minimum capital requirement, the Bank has implemented the Capital Adequacy Framework for Islamic Bank (“CAFIB”) issued by Bank Negara Malaysia (“BNM”) by adopting the following approaches: (a) Credit Risk Charge - Standardised Approach (b) Market Risk Charge - Standardised Approach (c) Operational Risk Charge - Basic Indicator Approach The Bank is developing framework for Internal Capital Adequacy and Assessment process (“ICAAP”). The ICAAP goes one step further in ensuring that the Bank has in place a structured process for assessing the adequacy of its internal capital levels relative to its risk profile and appetite that covers all material risks beyond those specified in Pillar 1. DISCLOSURE OF SHARIAH BOARD The Shariah Board’s main duty and responsibility is to oversee the Bank’s activities and operations, investments and prudent development to ensure compliance with Shariah principles. Shariah Board reports to the Board of Directors. (a) Shariah Board Profiles

The profiles of the Shariah Board members are as follows:

Associate Prof. Dr Saleh Abdullah Al Lheidan Chairman

Dr Salleh holds a PhD and a Masters Degree in Comparative Fiqh (Islamic Law) from Imam Mohammed bin Saud Islamic University in Riyadh, Saudi Arabia. Dr Salleh is presently the General Manager for the Shariah Group of Al Rajhi Bank, Saudi Arabia. At the same time he serves as the Secretariat and also a member of the Shariah Board of Al Rajhi Bank, Saudi Arabia. He currently sits as the Chairman of the Shariah Board of Al Rajhi Bank Malaysia since 2007. Burhanuddin Lukman Deputy Chairman Burhanuddin is currently a lecturer at the Islamic Law Department, Ahmad Ibrahim Kulliyah of Law, International Islamic University, Malaysia. He holds a Masters Degree in Islamic Fiqh from Al-Bayt University, Jordan and a Bachelors Degree in Islamic Shariah from Islamic University of Madinah, Saudi Arabia. He is also a licensed Sharie Lawyer. He is currently serving as the Deputy Chairman of the Shariah Board of Al Rajhi Bank Malaysia since 2007.


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DIRECTORS’ REPORT (Continued) DISCLOSURE OF SHARIAH BOARD (Continued) (a) Shariah Board Profiles (Continued)

Dr Azman Mohd Noor Member Dr Azman bin Mohd Noor holds a PhD in Islamic Studies from the University of Edinburgh, United Kingdom. He also has Masters Degree from the International Islamic University, Malaysia and a graduate of Islamic University of Madinah, Saudi Arabia. Dr Azman has been sitting on the Shariah Board of Al Rajhi Bank Malaysia since 2006. Dr Mohammed Hael Ghilan Al- Madhagi Member Dr Hael holds a PhD in Feqah “Islamic Jurisprudence” from the Saud Islamic University, College of Syaria Islamic Law in Riyadh. He is currently a senior shariah consultant at Al Rajhi Bank, Saudi Arabia and is involved in developing banking products in accordance to Shariah. He has been invited to talk in seminars and was a main speaker at the symposium held by the Journal of Islamic Banking in collaboration with the Islamic World Organisation for Economy and Finance. Dr Zaharuddin Abdul Rahman Member (Resigned on 13 September 2012) Dr Zaharuddin Abdul Rahman holds a Master Degree in Fiqh and Usul Fiqh from University al-Yarmouk, Jordan. A PhD holder in Islamic Studies and Islamic Finance, he obtained his PhD from University of Wales, Lampeter, United Kingdom. He has a vast experience in all Islamic banking products offered by RHB Islamic Bank, Asian Finance Bank and Qatar Islamic Bank and other Middle East Islamic Financial Intermediaries covering deposit products, corporate, consumer financing, treasury products, Islamic Capital Market and Structured Products. He resigned from Shariah Board effective 14 September 2012.

(b) Shariah Board and Its Roles and Responsibilities

The duties and responsibilities of the Shariah Board amongst others are as follows:

(i) To advise the Board of Directors on Shariah matters in order to ensure that the business operations of the Bank comply with the Shariah principles at all times;

(ii) To endorse the Shariah Compliance Manual. The manual specifies the manner in which a

submission or request for advice be made to Shariah Board, the conduct of the Shariah Board’s meeting and the manner of compliance with any Shariah decision;

(iii) To ensure that the Bank complies with Shariah principle in all aspect and to decide

consequential action upon any violation;


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DIRECTORS’ REPORT (Continued) DISCLOSURE OF SHARIAH BOARD (Continued) (b) Shariah Board and Its Roles and Responsibilities (Continued)

(iv) To ensure that the products of the Bank comply with Shariah principles in all aspects, the

Shariah Board must endorse the following;

(a) the terms and conditions contained in the proposal form, contract, agreement or other legal documentation used in executing the transactions; and

(b) the product manual, marketing advertisements, sales illustrations and brochures

used to describe the product.

(v) To provide assistance to related parties such as legal counsel, auditor or consultant on Shariah matters so that compliance with Shariah principles can be assured completely;

(vi) To provide written Shariah opinion and to record any opinion given under the following

circumstances:

(a) where the Bank makes reference to the Shariah Advisory Council (“SAC”) of Bank Negara Malaysia for advice; and

(b) where the Bank submits applications to Bank Negara Malaysia for new products approval in accordance with guidelines on product approval issued by Bank Negara Malaysia.

(vii) To advise on matters to be referred to the SAC for matters which have not been resolved or

endorsed. The Shariah is also expected to assist the SAC on any matters referred by the Bank.

AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD (Incorporated in Malaysia) Company No. 719057-X

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STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012

Group and Bank Note 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 ASSETS Cash and short-term funds 2 1,458,642 1,148,535 1,270,688Deposits and placements with other institutions 3 129,637 35,160 -Securities held-for-trading 4 4,985 4,726 2,493Securities available-for-sale 5 233,830 - -Securities held-to-maturity 6 286,190 824,714 289,459Financing and advances 7 4,289,864 3,671,216 4,034,633Other assets 8 186,560 31,350 26,331Statutory deposits with Bank Negara Malaysia 9 154,154 170,278 39,078Investment properties 11 105,000 104,000 100,549Property and equipment 12 25,565 29,848 38,215Intangible assets 13 39,386 40,743 47,118Deferred tax assets 14 80,443 70,708 38,742Total Assets 6,994,256 6,131,278 5,887,306 LIABILITIES AND SHAREHOLDER’S EQUITY

Liabilities Deposits from customers 15 4,681,142 3,804,816 3,907,946Deposits and placements of banks and other

financial institutions

16 1,378,432

1,571,975 1,222,142Bills and acceptances payable 162,344 16,056 13,682Other liabilities 17 59,528 39,419 48,436Total Liabilities 6,281,446 5,432,266 5,192,206 Shareholder’s equity Share capital 18 1,000,000 1,000,000 1,000,000Reserves (287,190) (300,988) (304,900)Total Shareholder’s Equity 712,810 699,012 695,100 Total Liabilities and Shareholder’s Equity 6,994,256 6,131,278 5,887,306 COMMITMENTS AND CONTINGENCIES 30 1,788,355 1,134,042 1,083,935 CAPITAL ADEQUACY 34 Core capital ratio 11.87% 14.71% 15.46%Risk-weighted capital ratio 13.46% 16.43% 17.13%

The accompanying notes are an integral part of these financial statements.


27

STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012

Group and Bank Note 31 Dec 2012 31 Dec 2011 RM’000 RM’000 Revenue 19 334,524 355,887 Income derived from investment of depositors’ funds and

others

20 297,102 320,772 Income derived from investment of shareholders’ funds 21 37,422 35,115 Allowance for impairment on financing 22 (50,787) (68,908) Other expenses directly attributable to the investment of

the depositors’ funds

(674)

(4,672) Write-back / (impairment loss) on securities 39,884 (3,478) Total distributable income 322,947 278,829 Income attributable to depositors 23 (154,425) (152,363) 168,522 126,466 Personnel expenses 24 (73,384) (66,306)Other overheads and expenditures 25 (91,053) (88,215) Profit / (loss) before zakat and taxation 4,085 (28,055) Zakat - -Taxation 27 9,743 31,967 Net profit for the financial year

13,828

3,912

Other comprehensive income: - Securities available-for-sale 26 -- Transfer to Wakalah reserve (56) -

Total comprehensive income for the financial year 13,798 3,912 Basic earnings per share (sen) 28 1.38 0.39



28

STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012

Non-distributableGroup and Bank

Share Statutory

Securities Accumulatedcapital reserve available-for-sale losses Total

RM’000 RM’000 RM’000 RM’000 RM’000 At 1 January 2012 - as previously stated 1,000,000 - - (243,517) 756,483 - effect of changes in accounting policy - - - (57,471) (57,471) At 1 January 2012 - restated

1,000,000 -

- (300,988)

699,012

Net profit for the financial year - - - - 13,828 13,828 Total comprehensive income for the financial year: - - - Securities available-for-sale - - - 26 - 26 - Transfer to Wakalah reserve - - - (56) (56)

At 31 December 2012 1,000,000 - 26 (287,216) 712,810 At 1 January 2011 - as previously stated 1,000,000 - - (274,638) 725,362 - effect of changes in accounting policy - - - (30,262) (30,262) At 1 January 2011 - restated

1,000,000 -

- (304,900)

695,100

Net profit for the financial year - - - 3,912 3,912

At 31 December 2011 - restated 1,000,000 - - (300,988) 699,012



29

STATEMENT OF CASH FLOW FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012

Group and Bank Note 31 Dec 2012 31 Dec 2011 RM’000 RM’000CASH FLOWS FROM OPERATING ACTIVITIES Profit / (loss) before zakat and taxation 4,085 (28,055)

Adjustments for: Depreciation of property and equipment 9,200 15,151Amortisation of intangible assets 12,652 14,760Allowance for impairment on financing 54,363 68,714Bad debt on financing – Recovered (3,857) (82)Bad debt on financing – Written off 281 276(Write-back) / impairment loss on securities (39,884) 3,478Unrealised gain on revaluation of securities / investment properties (1,259) (4,094)Unrealised gain from foreign exchange translations (1,552) (1,155)

34,029 68,993(Increase) / decrease in Operating Assets Deposits and placements with other institutions (92,925) (34,005)Financing and advances (669,436) 294,510Other assets 419,937 (5,019)Statutory deposits with Bank Negara Malaysia 16,124 (131,200)

Increase / (decrease) in Operating Liabilities Deposits from customers 876,326 (103,130)Deposits and placements of banks and other financial institutions

(193,543)

349,833Bills and acceptances payable 146,288 2,374Other liabilities 20,079 (9,017)Net cash generated from operating activities 556,879 433,339 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (4,917) (6,784)Purchase of intangible asset (11,295) (8,385)Securities held-for-trading - (1,590)Securities available-for-sale (230,560) -Securities held-to-maturity - (538,733)Net cash used in investing activities (246,772) (555,492) NET INCREASE / (DECREASE) IN CASH AND CASH EQUIVALENTS

310,107 (122,153)

Cash and Cash Equivalents as at 1 January 1,148,535 1,270,688 CASH AND CASH EQUIVALENTS AS AT 31 DECEMBER 2 1,458,642 1,148,535



30

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 (Continued)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial

statements are set out below. These policies have been consistently applied to all the financial years presented, unless otherwise stated.

1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS

The financial statements of the Group and the Bank have been prepared under the historical cost convention (unless otherwise indicated) and in accordance with Malaysian Financial Reporting Standards (“MFRS”), International Financial Reporting Standards and comply with the provisions of the Companies Act, 1965.

The financial statements of the Group and the Bank for the year ended 31 December 2012 are the

first set of financial statements prepared in accordance with MFRS, including MFRS 1 ‘First-time adoption of MFRS’. Subject to certain transition elections disclosed in Note 38, the Group and the Bank have consistently applied the same accounting policies in its opening MFRS statements of financial position at 1 January 2011 (transition date) and throughout all years presented, as if these policies had always been in effect. Comparative figures for 2011 in these financial statements have been restated to give effect to these changes. Note 38 discloses the impact of the transition to MFRS on the Group and the Bank’s reported financial position, financial performance and cash flows.

The financial statements have been prepared under the historical cost convention, as modified by

the revaluation of land and buildings, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

The preparation of financial statements in conformity with MFRS requires the use certain critical

accounting estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement and the reported amount of revenues and expenses during the reported period. It also requires Directors to exercise their judgment in the process of applying the Group and the Bank’s accounting policies. Although these estimates are based on the Directors’ best knowledge of current events and actions, actual results may differ. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note B.


31


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

1. BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Continued)

Critical accounting estimates and assumptions used that are significant to the financial statements, and areas involving a higher degree of judgment and complexity are disclosed in Section B.

Standards, amendments to published standards and interpretations to existing standards that are applicable to the Group and the Bank but not yet effective. The Group and the Bank will continue to apply the MFRS Framework. The Group and the Bank shall apply the following new standards, amendments to standards and interpretations.

(i) Financial year beginning on/ after 1 January 2013

MFRS 10 “Consolidated financial statements” (effective from 1 January 2013)

changes the definition of control. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. It establishes control as the basis for determining which entities are consolidated in the consolidated financial statements and sets out the accounting requirements for the preparation of consolidated financial statements. It replaces all the guidance on control and consolidation in MFRS 127 “Consolidated and separate financial statements” and IC Interpretation 112 “Consolidation – special purpose entities”.


32




Standards, amendments to published standards and interpretations to existing standards that are applicable to the Group but not yet effective (Continued)

(i) Financial year beginning on/ after 1 January 2013 (Continued)

• MFRS 13 “Fair value measurement” (effective from 1 January 2013) aims to

improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across MFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards. The enhanced disclosure requirements are similar to those in MFRS 7 “Financial instruments: Disclosures”, but apply to all assets and liabilities measured at fair value, not just financial ones.

• The revised MFRS 127 “Separate financial statements” (effective from 1 January

2013) includes the provisions on separate financial statements that are left after the control provisions of MFRS 127 have been included in the new MFRS 10.

(ii) Financial year beginning on/ after 1 January 2014

• Amendment to MFRS 132 “Financial instruments: Presentation” (effective from 1

January 2014) does not change the current offsetting model in MFRS 132. It clarifies the meaning of ‘currently has a legally enforceable right of set-off’ that the right of set-off must be available today (not contingent on a future event) and legally enforceable for all counterparties in the normal course of business. It clarifies that some gross settlement mechanisms with features that are effectively equivalent to net settlement will satisfy the MFRS 132 offsetting criteria.


33




Standards, amendments to published standards and interpretations to existing standards that are applicable to the Group but not yet effective (Continued)

(iii) Financial year beginning on/ after 1 January 2015

• MFRS 9 “Financial instruments - classification and measurement of financial assets

and financial liabilities” (effective from 1 January 2015) replaces the multiple classification and measurement models in MFRS 139 with a single model that has only two classification categories: amortised cost and fair value. The basis of classification depends on the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

The accounting and presentation for financial liabilities and for de-recognising financial instruments has been relocated from MFRS 139, without change, except for financial liabilities that are designated at fair value through profit or loss (“FVTPL”). Entities with financial liabilities designated at FVTPL recognise changes in the fair value due to changes in the liability’s credit risk directly in other comprehensive income (OCI). There is no subsequent recycling of the amounts in OCI to profit or loss, but accumulated gains or losses may be transferred within equity.

The guidance in MFRS 139 on impairment of financial assets and hedge accounting continues to apply.

MFRS 7 requires disclosures on transition from MFRS 139 to MFRS 9.

The find effects of adoption of above standards, amendments to standards and interpretations are still being asserted by the Bank of the Group.


34



2. SUBSIDIARIES AND BASIS OF CONSOLIDATION

(a) Basis of consolidation

The consolidated financial statements include the financial statements of the Bank and its subsidiary companies made up to the end of the financial year. Subsidiaries are consolidated using the purchase method of accounting. Under the purchase method of accounting, the financial statements of subsidiary companies are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full.

(b) Investment in subsidiaries

Subsidiary companies are those enterprises controlled by the Bank. Control exists when the Bank has the power, directly or indirectly, to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Potential voting rights are considered when assessing control. Investments in subsidiary companies are stated in the Bank’s statement of financial position at cost less any impairment losses. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment. On disposal of such investment, the difference between the net disposal proceeds and the carrying amount is included in income statement.

3. FINANCIAL INSTRUMENTS

Financial instruments are recognised as assets or liabilities when the Group or the Bank becomes a party to the contractual provisions of the financial instruments. The accounting policies on recognition and measurement of financial instruments are disclosed as follows: (a) Financial assets

The Group classifies its financial assets in the following categories: at fair value through profit or loss, financing and advances and held-to-maturity. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification at initial recognition. Regular purchases and sales of financial assets are recognised on the settlement-date, the date that an asset is delivered to or by the Group and the Bank.


35


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3. FINANCIAL INSTRUMENTS (Continued)

(a) Financial assets (Continued)

Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss is initially recognised at fair value and transaction costs are expensed in income statement.

A financial asset is de-recognised when the contractual rights to the cash flows from the financial asset expire or the financial asset is transferred to another party all risks and rewards of ownership. On de-recognition of a financial asset, the difference between carrying amount and the sum of the consideration received (including any new asset obtained less any new liability assumed) and any cumulative gain or loss that had been recognised in equity is recognised in income statement. Financial assets and liabilities are offset and the net amount reported in the financial statement when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. (i) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term.

Financial assets at fair value through profit or loss are subsequently carried at fair value. Changes in fair value of financial assets at fair value through profit or loss, including the effects of currency translation, profit and dividend income are recognised in income statement in the period in which the changes arise.

(ii) Financing and advances

Financing and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

Financing and advances are subsequently carried at amortised cost using the effective profit method.


36




(iii) Financial assets held-to-maturity

Financial assets held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity.

Financial assets held-to-maturity are subsequently carried at amortised cost using the effective profit method less accumulated impairment loss. Any gain or loss is recognised in the income statement when the securities are de-recognised or impaired and through the amortisation process.

If the Group and the Bank sold or reclassified more than an insignificant amount of the securities held-to-maturity portfolio before maturity, the entire category would be tainted and reclassified as securities available-for-sale at fair value. The difference between the carrying value and fair value at the date of reclassification is recognised directly in equity.

Income receivables are now classified into the respective category of financial assets.

(iv) Financial investments available-for-sale

Financial assets at available-for-sale are investment that are not classified as fair value through profit or loss, held-to-maturity or loans and receivables and measured at fair value. Any gain or loss arising from a change in fair value, net of income tax, is recognised directly in equity, except for impairment losses and foreign exchange gains and losses. Until the financial assets at available-for-sale are derecognised or impaired, at which time the cumulative gains or losses previously recognised in equity shall be transferred to the income statement.


37



(b) Financial liabilities

The Group’s and the Bank’s holding in financial liabilities is in financial liabilities at amortised cost. Financial liabilities are initially recognised at fair value plus transaction costs for all financial liabilities not carried at fair value through profit or loss. Financial liabilities are de-recognised when extinguished.

(i) Financial liabilities measured at amortised cost

Financial liabilities measured at amortised cost are deposits from banks or customers and bills and acceptances payable.

Deposits from customers, deposits and placements of banks and financial institutions are stated at placement values.

Bills and acceptances payable represent the Bank’s own bills and acceptances rediscounted and outstanding in the market.

Income payables are now classified into the respective category of financial liabilities.


38


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 4. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditure that is directly attributable to the acquisition of the asset and any other costs directly attributable to bringing the asset to working conditions for its intended use.

Any item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are included in the income statement

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is de-recognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred.

Subsequent to recognition, property and equipment except for assets in progress are stated at cost less accumulated depreciation and any accumulated impairment losses, if any.

Depreciation of the property and equipment is calculated to write down the cost of the property and equipment on a straight line basis over the expected useful lives of the assets concerned. The principal annual rates of depreciation are as follows:

Furniture & fittings and office equipment 10% Renovations 20%

Computer equipment and intangible assets 20% Motor vehicle 20%

Assets in progress are not depreciated as these assets are not available for use.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate at each statement of financial position date.

At each date of statement of financial position, the Bank assess whether there is any indication of impairment. Where an indication of impairment exists, the carrying amount of the asset is written-down immediately to its recoverable amount. See accounting policy Note A 8(b) on impairment of non-financial assets.

5. INVESTMENT PROPERTIES

Investment properties, comprising principally land and office buildings, are held for long term rental yields or for capital appreciation or both, and are not occupied by the Group and the Bank.

Investment properties are stated at fair value, representing open-market value determined annually by external valuers. Fair value is based on active market prices, adjusted, if necessary, for any difference in the nature, location or condition of the specific asset. If this information is not available, the Group and the Bank uses alternative valuation methods such as recent prices of less active markets or discounted cash flow projections. Changes in fair values are recorded in the income statement.


39



5. INVESTMENT PROPERTIES (Continued)

On disposal of an investment property, or when it is permanently withdrawn from use or no future economic benefits are expected from its disposal, it shall be de-recognised. The difference between the net disposal proceeds and the carrying amount is recognised in income statement in the period of the retirement or disposal.

6. INTANGIBLE ASSETS Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortised on a straight-line basis over the estimated economics useful lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each statement of financial position date. Costs associated with maintaining computer software programmes are recognised as an expenses as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Group and the Bank are recognised as intangible assets when the following criteria are met: (i) It is technically feasible to complete the software product so that it will be available for use; (ii) Management intends to complete the software product and use or sell it; (iii) There is an ability to use or sell the software product; (iv) It can be demonstrated how the software product will generate probable future economic

benefits; (v) Adequate technical, financial and other resources to complete the development and to use

or sell the software product are available; and (vi) The expenditure attributable to the software product during its development can be reliably

measured.

Direct attributable costs that can be capitalised as part of the software product include software development employee costs and appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expenses as incurred. Computer software development costs are amortised over their finite useful lives of five years.

7. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and bank balances and short term deposits with banks

and other financial institutions that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value.


40



8. IMPAIRMENT

(a) Financial assets

All financial assets (except for financial assets categorised as fair value through profit or loss and investment in subsidiaries) are assessed at each reporting date whether there is objective evidence of impairment as a result of one or more events having an impact on the estimated future cash flows of the asset. Losses expected as a result of future events, no matter how likely, are not recognised. For an equity instrument, a significant or prolonged decline in the fair value below its cost is an objective evidence of impairment.

An impairment loss in respect of securities held-to-maturity is recognised in income statement and is measured as the difference between the assets’s carrying amount and the present value of estimated cash flows of the asset. The carrying amount of asset is reduced through the use of an allowance account.

The Group and the Bank assesses whether objective evidence of impairment exists individually for financing which are individually significant, and individually or collectively for financing which are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financing, the financing is included in a group of financing with similar credit risk characteristics and collectively assessed for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the financing carrying amount and the present value of the estimated cash flows discounted at the original effective profit rate of financing and advances. The carrying amount of the financing is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. The Group addresses impairment of financing and advances via either individually assessed allowance or collectively assessed allowance. Individual Assessment The Group and the Bank determines the allowance appropriate for each individual significant financing and advances on an individual basis. The allowances are established based primarily on estimates of the realisable value of the collateral to secure the financing and advances and are measured as the difference between the carrying amount of the financing and advances and the present value of the expected future cash flows discounted at original effective profit rate of the financing and advances. All other financing and advances that have been individually evaluated, but not considered to be individually impaired are assessed collectively for impairment.


41


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 8. IMPAIRMENT (Continued)


Collective Assessment Under MFRS 139, collective assessment is performed on financing which are not individually significant based on the incurred loss approach. Financing which are individually assessed and where there is no objective evidence of impairment are also included in the group of financing for collective assessment. These financing are pooled into groups with similar credit risk characteristics and based on the historical loss experience for such assets and collectively assessed for impairment. When a financing is uncollectible, it is written off against the related allowance for financing impairment. Such financing are written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement in impairment charge for credit loss.

(b) Non-financial assets

Non-financial assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Non-financial assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the non-financial asset exceeds its recoverable amount. The recoverable amount is the higher of a non-financial asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there is separately identifiable cash flow (cash generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. The impairment loss is charged to the income statement. Any subsequent increase in recoverable amount is recognised in the income statement.


42


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 8. IMPAIRMENT (Continued)

(c) Impairment loss determination criteria

The criteria that the Group and the Bank uses to determine that there is objective evidence of an impairment loss include: Significant financial difficulty of the issuer or obligor; A breach of contract, such as a default or delinquency in profit or principal

payments; The Bank, for economic or legal reasons relating to the borrower’s financial difficulty,

granting to the borrower a concession that the lender would not otherwise consider; It becomes probable that the borrower will enter bankruptcy or other financial

reorganisation; Disappearance of an active market for that financial asset because of financial difficulties;

or Observable data indicating that there is a measurable decrease in the estimated future

cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:

(i) adverse changes in the payment status of borrowers in the portfolio; and (ii) national or local economic conditions that correlate with defaults on the assets in

the portfolio.

9. PROVISIONS

Provisions are recognised when all of the following conditions have been met: (a) The Group and the Bank has a present legal and constructive obligation as a result of past

events; (b) It is probable that an outflow of reserves will be required to settle the obligation; and

(c) A reliable estimate of the amount can be made.

Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. Where the effect of the time value of money is material, the amount of the provision is the present value of the expenditure expected to be required to settle the obligation.

10. LIABILITIES

Other liabilities are stated at cost which is the fair value of the consideration expected to be paid in future for the goods and services received.


43


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 11. EMPLOYEE BENEFITS

(a) Short term employee benefits

Wages, salaries, bonuses, paid annual leave and non-monetary benefits are accrued in the period in which the associated services are rendered by employees of the Group and the Bank. A provision is recognised for the amount expected to be paid under short term cash bonus or profit-sharing plans if the bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(b) Defined contribution plans A defined contribution plan is a pension plan under which the Bank pays fixed contributions to the national pension scheme, Employees’ Provident Fund (“EPF”). The Group and the Bank’s contributions to defined contribution plans are charged to the income statement in the period to which they relate. Once the contributions have been paid, the Bank has no further payment obligations.

12. CURRENT AND DEFERRED INCOME TAX

Current tax expense is determined according to the tax laws of Malaysia and includes all taxes based upon the taxable profits for the financial year. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets or liabilities and the carrying amount of the asset or liability as reported in the financial statements. It reflects the manner in which the Group and the Bank expects to recover the carrying value of the asset or settle the carrying value of the liability. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences can be utilised.

Deferred tax is determined using tax rate (and tax laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled.

Deferred and income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.


44


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 13. ZAKAT

Zakat represents business zakat payable by the Bank to comply with the principles of Shariah and as approved by the Shariah Advisory Council. The Bank only pays zakat on its business and does not pay zakat on behalf of depositors or shareholders. The zakat provision is borne by the Bank’s Holding Company.

14. FOREIGN CURRENCY TRANSLATION

(a) Functional and presentation currency

The financial statements of each of the Group’s and the Bank’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Ringgit Malaysia, which is the Group’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions or valuations where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transaction and from translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.

15. CONTINGENT LIABILITIES AND ASSETS

The Group and the Bank does not recognise a contingent liability but discloses its existence in the financial statements. A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Group and the Bank or a present obligation that is not recognised because it is not probable that an outflow of resources will be required to settle the obligation. A contingent liability also arises in the extremely rare case where there is a liability that cannot be recognised because it cannot be measured reliably. A contingent asset is a possible asset that arises from past events whose existence will be confirmed by the occurrence or non-occurrences of one or more uncertain future events beyond the control of the Group and the Bank. The Group and the Bank does not recognise contingent assets but discloses its existence where inflows of economic benefits are probable, but not virtually certain.


45


A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 16. INCOME RECOGNITION

Finance income is recognised using the effective profit method (EPR). The EPR is the rate that exactly discounts estimated future cash receipts through the expected life of the financing or, when appropriate, a shorter period to the net carrying amount of the financing. Financing income on financing assets is recognised either on a monthly rest basis or constant rate of return basis. Customer’s account are classified as impaired where repayments are in arrears for more than 3 months from the first day of default for financing.

Income from banking services is recognised as and when the related services are rendered. Fees from advisory and corporate finance activities are recognised net of service taxes and discounts on completion of each stage of the assignment. Other fees and commission on services and facilities extended to customers are recognised on inception of such transactions. Income from Ijarah rental and sukuk is recognised based on contractual agreement.

17. SEGMENT REPORTING

Segment reporting in the financial statements are presented on the same basis as is used by management internally for evaluating operating segment performance and in deciding how to allocate resources to operating segments. Operating segments are distinguishable components of the Bank that engage in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s and the Bank’s other components. An operating segment is evaluated regularly by the Management Committee in deciding how to allocate resources and in assessing performance, and for which discrete financial information is available.

18. ASSETS ACQUIRED UNDER LEASE

Leases in which the Group is a lessee and assumes substantially all the risks and rewards of ownership are classified as finance leases. All other leases in which the Group is a lessee are classified as operating leases. All assets under operating leases are not recognised on the statement of financial position. All lease rentals payable are accounted for on a straight-line basis over the lease term and are charged to the income statement. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised in the income statement in the period the termination takes place.


46

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2012 (Continued) B. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

The preparation of the financial statements involved making certain estimates, assumptions and judgments that affect the accounting policies applied and reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the financial statements in the period in which the estimate is revised and in any future periods affected. Significant areas of estimation, uncertainty and critical judgements used in applying accounting policies that have significant effect on the amount recognised in the financial statements include the following:

(i) Allowance for impairment on financing and advances

The Group and the Bank makes allowance for losses based on an objective evidence of an impairment arising. Whilst management’s judgment is guided by the relevant BNM guidelines, judgment is made about the future and other key factors in respect of the recovery of the financing and advances. Amongst factors considered are the Group’s and the Bank’s aggregate exposure to the borrower, the net realisable value of the underlying collateral value, the viability of the customer’s business model and the capacity to generate sufficient cash flow to service debt obligations and the aggregate amount and ranking of all other creditor claims. The actual amount of the future cash flows and their timing may differ from the estimates used by management and consequently may caused actual losses to differ from the impairment made.

(ii) Impairment assessment of securities

The Group and the Bank assessed whether there is objective evidence of impairment on securities at each reporting date. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the carrying amount and the present value of the estimated cash flows discounted at the original effective yield at the securities held-to-maturity.

(iii) Valuation of investment properties

The measurement of the fair value for investment properties is arrived at by reference to market evidence of transaction prices and physical inspection of the properties and is performed by a professional independent valuer.

(iv) Deferred taxes

Deferred tax assets are measured and recognised based on the tax rates that are expected to apply in the period when the asset is realised. Estimates are made as to the amount of taxable profits in these periods which will enable the deferred tax assets to be realised.


47

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012

1. PRINCIPAL ACTIVITIES AND GENERAL INFORMATION

The Group and the Bank is principally engaged in Islamic banking business which refers generally to the acceptance of deposits and granting of financing under the principles of Shariah as well as the provision of related financial services. The principal activities of the subsidiary are set out in Note 10. There have been no significant changes to these principal activities during the financial year. The Bank is a licensed Islamic Bank under the Islamic Banking Act, 1983, incorporated and domiciled in Malaysia. The registered office of the Bank is located at the Ground Floor, East Block, Wisma Selangor Dredging, 142-B Jalan Ampang, 50450 Kuala Lumpur. The holding company of the Bank is Al Rajhi Banking and Investment Corporation, Saudi Joint Stock Company, a public limited liability company, incorporated in Riyadh on 23 June 1987. The registered office is located at PO Box 28, Riyadh 11411, Kingdom of Saudi Arabia. As at 31 December 2012, the Group and the Bank has 24 (2011: 23) branches and has 548 (2011: 471) full time employees in the Bank at the end of the financial year.

2. CASH AND SHORT TERM FUNDS Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Cash and bank balances with banks and other

financial institutions 4,056 102,771 108,514

Money at call and deposit placements maturing within one month

1,454,586 1,045,764 1,162,174

1,458,642 1,148,535 1,270,688

3. DEPOSITS AND PLACEMENTS WITH OTHER INSTITUTIONS

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Commodity Murabahah 129,637 35,160 -


48

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued)

4. SECURITIES HELD-FOR-TRADING

5. SECURITIES AVAILABLE-FOR-SALE 6. SECURITIES HELD-TO-MATURITY

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000At amortised cost Unquoted :

Islamic private debt securities in Malaysia 286,190 791,018 253,157Islamic private debt securities outside Malaysia - 73,759 71,722 286,190 864,777 324,879 Less: Accumulated impairment loss - (40,063) (35,420)

286,190 824,714 289,459

During the financial year, the Board of Directors had approved the proposed sale of the Villamar Sukuk to the Holding Company at a sale consideration of USD23 million.

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000At fair value Quoted securities: Unit Trust 4,985 4,726 2,493

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000At fair value Bank Negara Malaysia Sukuk 233,830 - -


49

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 7. FINANCING AND ADVANCES

(a) By type Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011At amortised cost RM’000 RM’000 RM’000Term Financing:

Corporate financing 2,547,593 2,264,620 2,570,038Personal financing 996,862 1,008,630 1,263,057Home financing 723,109 444,969 310,423

SME financing 114,795 137,383 127,600Vehicle financing 37,451 2,748 3,554Shop-house financing 23,961 7,073 2,559Charge cards 2,763 3,758 3,616Staff financing - - 12

4,446,534 3,869,181 4,280,859Unearned income (6,284) (372) (545)Gross financing and advances 4,440,250 3,868,809 4,280,314 Less: Allowance for impairment loss - Collective assessment allowance (121,000) (139,893) (114,574) - Individual assessment allowance (29,386) (57,700) (131,107)Total net financing and advances 4,289,864 3,671,216 4,034,633

(b) Financing and advances analysed by contract are as follows: Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Bai’ Bithaman Ajil 4,437,487 3,865,051 4,276,686Qard 2,763 3,758 3,616Others - - 12 4,440,250 3,868,809 4,280,314


50

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 7. FINANCING AND ADVANCES (Continued)

(c) Financing and advances analysed by type of customers are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Domestic non-bank financial institutions 184,870 66,506 33,107Domestic business enterprise 902,407 758,676 1,013,999Individuals 1,742,134 1,435,346 1,549,459Foreign entities 1,610,839 1,608,281 1,683,749 4,440,250 3,868,809 4,280,314

(d) Financing and advances analysed by profit rate sensitivity are as follows: Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000Fixed rate: Corporate financing 1,038,533 755,560 1,061,017 Personal financing 996,862 1,008,630 1,263,057 SME financing 114,795 137,383 127,600 Home financing 26,675 31,631 37,139 Vehicle financing 31,167 2,376 3,009 Charge card 2,763 3,758 3,616 Shop-house financing 1,199 712 730

Staff financing - - 12 Variable rate: Home financing 696,434 413,338 273,284 Shop-house financing 22,762 6,361 1,829

Corporate financing 1,509,060 1,509,060 1,509,021 4,440,250 3,868,809 4,280,314

(e) Financing and advances analysed by maturity structure are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Due within three months 547,796 507,432 354,311More than three months to one year 193,937 88,517 201,967More than one year to five years 1,974,480 485,990 978,009More than five years 1,724,037 2,786,870 2,746,027 4,440,250 3,868,809 4,280,314


51


(f) Financing and advances analysed by economic purpose are as follows: Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Purchase of securities 1,509,060 1,509,060 1,509,021Working capital 1,093,286 738,260 1,078,928Personal use 996,861 1,008,630 1,263,069Purchase of property – residential property 726,018 447,971 310,422Others 50,850 59,098 108,535Purchase of vehicles 31,167 2,376 3,009Purchase of shop-house 26,809 10,132 3,714Construction 3,436 2,013 -Charge card 2,763 3,758 3,616Purchase of commercial complex - 87,511 - 4,440,250 3,868,809 4,280,314

(g) Financing and advances analysed by sectors are as follows: Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Household 1,777,862 1,466,805 1,582,675Telecommunication 1,515,273 1,529,751 1,540,110Wholesale & Retail trade 356,934 144,550 213,202Manufacturing 295,479 256,629 324,801Finance intermediation 184,870 66,506 63,907Transportation 106,510 129,441 173,039Construction 103,279 97,748 157,717Real estate, renting and business activities 60,066 168,757 182,086Electricity, gas and water supply 30,003 759 1,121Agriculture, hunting and related service activities 4,788 407 480Other business 4,773 7,308 11,454Forestry, logging and related services activities 327 - -Hotel & restaurant 86 148 188Research & development - - 29,534 4,440,250 3,868,809 4,280,314


52


(h) Movements in impaired financing and advances Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000 At 1 January 145,415 195,506Impaired during the financial year 49,827 74,965Reclassified as non impaired (10,025) (31,301)Accrued profit 67,994 63,117Recoveries (43,011) (40,070)Write-off (103,964) (116,802) 106,236 145,415 Ratio of gross impaired financing and advances less individual assessment allowance as percentage of net financing and advances 1.8% 2.4%

(i) Movements in the allowances for impaired financing and advances

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Collective assessment allowance At 1 January - as previously stated 56,559 61,688 - effect of adopting MFRS 139 83,334 52,886 At 1 January, as restated 139,893 114,574 Allowance made during the financial year 29,420 56,312 Amount written off (48,313) (30,993) Closing balance 121,000 139,893 As % of total net financing and advances

2.8% 3.8%

Individual assessment allowance At 1 January - as previously stated 97,703 169,189 - reclassification to prior year (40,003) (38,082) At 1 January, as restated 57,700 131,107 Allowance made during the financial year 26,133 14,116 Amount recovered during the financial year (1,190) (1,714) Amount written off (53,257) (85,809) Closing balance 29,386 57,700 As % of total net financing and advances 0.7% 1.6%


53


(j) Impaired financing analysed by geographical distribution are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Malaysia 106,236 145,415 195,506 106,236 145,415 195,506

(k) Impaired financing analysed by economic purpose are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Working capital 45,623 97,830 121,408Personal use 28,020 25,828 31,972Purchase of properties - residential 32,173 20,419 10,129Charge card 404 1,095 895Purchase of transport vehicles 16 243 302Other purpose - - 30,800 106,236 145,415 195,506

(l) Impaired financing analysed by sector are as follows: Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Household 60,613 47,585 43,298Manufacturing 31,771 30,487 7,343Wholesale & retail trade 11,458 12,141 27,820Other business 1,260 1,945 2,617Transportation 622 - -Real estate, renting and business activities 457 - 480Construction 55 53,257 53,614Financial services - - 30,800Research & development - - 29,534 106,236 145,415 195,506


54

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 8. OTHER ASSETS Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Other debtors and deposits 183,273 27,688 20,295Sundry deposits 3,287 2,995 2,812Amount due from holding company - 667 1,529Amount due from fund manager - - 1,590Inventories held for sale - - 105 186,560 31,350 26,331 9. STATUTORY DEPOSITS WITH BANK NEGARA MALAYSIA The non-interest bearing statutory deposits are maintained with Bank Negara Malaysia in compliance

with Section 26(2) (c) of the Central Bank of Malaysia Act 2009, the amounts of which are determined as set percentages to total eligible liabilities.

10. INVESTMENT IN SUBSIDIARY Effective interest

Name Country of

incorporationPrincipal activity 2012 2011 2010

Al Rajhi Nominee (Tempatan) Sdn Bhd

Malaysia Nominee services

100%

100%

100%

* The subsidiary was incorporated with a paid-up share capital of RM2.


55

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 11. INVESTMENT PROPERTIES Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000At valuation At 1 January 104,000 100,549Gain from fair value adjustments 1,000 3,451At 31 December 105,000 104,000

The above valuation was carried out by an independent qualified valuer, Raine & Horne in December 2012 using the Comparison Method of Valuation approach. This method of valuation seeks to determine the value of the properties being valued by comparing and adopting as a yardstick recent transactions and sale evidences involving other similar properties in the vicinity. The following amounts have been reflected in the income statement:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Rental income 6,982 6,068 5,506Direct operating expenses 238 205 319


56

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 12. PROPERTY AND EQUIPMENT

Group and Bank

Renovations Furniture &

fittingsOffice

equipmentComputer

equipment Motor

vehicle Work-in-progress

Total

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’0002012 Cost At 1 January 2012 27,990 2,488 5,695 57,208 - 3,660 97,041Additions 295 139 341 1,867 255 2,020 4,917Reclassification 2,803 - - - - (2,803) - At 31 December 2012 31,088 2,627 6,036 59,075 255 2,877 101,958

Accumulated depreciation

At 1 January 2012 22,735 1,134 2,119 41,205 - - 67,193Charge for the financial

year

2,735

257 579

5,595

34

-

9,200

At 31 December 2012 25,470 1,391 2,698 46,800 34 - 76,393 Net book value At 31 December 2012 5,618 1,236 3,338 12,275 221 2,877 25,565

Group and Bank

Renovations Furniture &

fittingsOffice

equipmentComputer

equipment Motor

vehicle Work-in-progress

Total

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’0002011 Cost At 1 January 2011 27,524 2,295 5,015 46,808 - 8,615 90,257Additions 213 193 680 2,497 - 3,201 6,784Reclassification 253 - - 7,903 - (8,156) - At 31 December 2011 27,990 2,488 5,695 57,208 - 3,660 97,041

Accumulated depreciation

At 1 January 2011 17,770 892 1,588 31,792 - - 52,042Charge for the financial

year

4,965

242 531

9,413

-

-

15,151

At 31 December 2011 22,735 1,134 2,119 41,205 - - 67,193 Net book value At 31 December 2011 5,255 1,354 3,576 16,003 - 3,660 29,848


57

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 13. INTANGIBLE ASSETS

Group and Bank 2012 2011 Computer Work-in- Computer Work-in- software progress Total software progress Total RM’000 RM’000 RM’000 RM’000 RM’000 RM’000Cost At 1 January 83,203 5,622 88,825 67,937 12,503 80,440Additions 553 10,742 11,295 4,833 3,552 8,385Reclassification 4,239 (4,239) - 10,433 (10,433) -At 31 December 87,995 12,125 100,120 83,203 5,622 88,825 Accumulated amortisation At 1 January 48,082 - 48,082 33,322 - 33,322Amortisation for the financial

year 12,652 - 12,652 14,760 - 14,760At 31 December 60,734 - 60,734 48,082 - 48,082 Net Book Value 27,261 12,125 39,386 35,121 5,622 40,743

14. DEFERRED TAX

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities and when the deferred taxes relate to the same authority. The following amounts determined after appropriate offsetting, are shown in the balance sheet.

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000

Deferred tax assets 92,825 79,817 48,655Deferred tax liabilities (12,382) (9,109) (9,913) 80,443 70,708 38,742

The movements in deferred tax assets and liabilities during the financial year comprise the following:

Deferred tax liabilities: Excess of capital

allowances over depreciation

Investment properties

Securities available-for-

sale

TotalGroup and Bank RM’000 RM’000 RM’000 RM’000 At 1 January 2012 (7,932) (1,177) - (9,109)Transfer to income statement (1,941) (1,324) (8) (3,273)At 31 December 2012 (9,873) (2,501) (8) (12,382) At 1 January 2011 (9,599) (314) - (9,913)Transfer to income statement 1,667 (863) - 804 At 31 December 2011 (7,932) (1,177) - (9,109)


58


14. DEFERRED TAX (Continued)

Deferred tax assets:

Provisions

Unutilised losses & unabsorbed capital

allowances TotalGroup and Bank RM’000 RM’000 RM’000

At 1 January 2012 - as previously stated 14,140 79,817 93,957- effect of adopting MFRS139 (14,140) - (14,140)

At 1 January 2012 - restated - 79,817 79,817 Transfer from income statement 6,274 6,734 13,008 At 31 December 2012 6,274 86,551 92,825

At 1 January 2011

- as previously stated 15,458 48,655 64,113- effect of adopting MFRS139 (15,458) - (15,458)

At 1 January 2012 - restated - 48,655 48,655 Transfer from income statement - 31,162 31,162 At 31 December 2011 - 79,817 79,817

15. DEPOSITS FROM CUSTOMERS

(i) By type of deposit Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000Non-Mudharabah Funds Demand deposits 372,388 364,963 300,341Savings deposits 40,670 32,662 34,238Commodity Murabahah 2,946,404 1,755,635 1,202,147Wakalah 913,520 1,300,210 -Others 2,717 204 89 4,275,699 3,453,674 1,536,815Mudharabah Funds General investment deposits 102,641 143,752 2,257,669Saving deposits 112,767 91,328 68,188Demand deposits 190,035 116,062 45,274 4,681,142 3,804,816 3,907,946


59

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 15. DEPOSITS FROM CUSTOMERS (Continued)

(ii) By type of customer Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Business enterprises 1,285,088 1,104,153 2,683,397 Government and statutory bodies 454,601 661,742 657,114 Individuals 278,481 265,893 228,385 Others 2,662,972 1,773,028 339,050 4,681,142 3,804,816 3,907,946

(iii) By maturity structure Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Due within three months 2,929,909 2,349,347 3,074,731 More than three months to one year 1,751,132 1,454,523 831,318 More than one year to five years 101 946 1,897 4,681,142 3,804,816 3,907,946 16. DEPOSITS AND PLACEMENTS OF BANKS AND OTHER FINANCIAL INSTITUTIONS Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Non-Mudharabah Funds Licensed Islamic banks 484,546 823,091 522,020 Licensed financial institutions 893,886 748,884 700,122 1,378,432 1,571,975 1,222,142 17. OTHER LIABILITIES Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Other accruals and payables 58,540 38,573 46,186 Amount due to holding company 857 - - Purification by Shariah 131 846 2,250 59,528 39,419 48,436 Included in purification by Shariah in previous year were charities (“hibah”) received from financial

institutions amounted to RM61,000 and amount set aside for purification by Shariah of RM70,176 which has been excluded from the Bank’s income.

The balance of amount under the purification by Shariah shall be distributed to an approved charity

organisation as approved by the Shariah Board subsequent to year end.


60

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 18. SHARE CAPITAL 31 Dec 2012 31 Dec 2011 RM’000 RM’000Authorised: Ordinary shares of RM1.00 each 1 January / 31 December 1,000,000 1,000,000 Issued and fully paid: Ordinary shares of RM1.00 each 1 January / 31 December 1,000,000 1,000,000

There were no changes to the authorised issued and paid-up capital of the Bank during the financial year.

19. REVENUE

Revenue of the Group and the Bank comprises financing income, fee and commission income and other income as derived from the banking operations.

20. INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Income derived from investment of: (i) General investment deposits 5,043 84,231(ii) Other deposits 292,059 236,541 297,102 320,772

(i) Income derived from investment of general investment deposits

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Finance income and hibah Financing and advances 4,588 80,816Money at call and deposit with financial institutions 455 3,415Total finance income and hibah 5,043 84,231


61

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 20. INCOME DERIVED FROM INVESTMENT OF DEPOSITORS’ FUNDS AND OTHERS (Continued)

(ii) Income derived from investment of other deposits

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000 Finance income and hibah Financing and advances 243,775 198,322 Securities held-to-maturity 8,096 10,691 Securities available-for-sale 3,237 - Money at call and deposit with financial institutions 20,235 18,057 275,343 227,070 Accretion of discount 16,716 9,471 292,059 236,541

21. INCOME DERIVED FROM INVESTMENT OF SHAREHOLDERS’ FUNDS Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Finance income and hibah Money at call and deposit with financial institutions 3,930 3,944Total finance income and hibah 3,930 3,944 Other operating income

- Gain from foreign exchange translations 8,039 6,184 - Rental income 6,982 6,068 - Realised gain on gold 3,386 3,940 - Unrealised gain on revaluation of investment properties 1,000 3,451 - Unrealised gain on revaluation of securities held-for-trading 259 643 - Unrealised gain on revaluation of securities held-to-maturity - 69 - Others 199 779 Other income

- Service charges 8,229 5,999 - Commission received 5,398 4,038 37,422 35,115


62

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 22. ALLOWANCE FOR IMPAIRMENT ON FINANCING Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000

Allowance for impaired financing and advances: (a) Individual assessment allowance

- provided during the financial year 26,133 14,116- written back during the financial year (1,190) (1,714)

(b) Collective assessment allowance

- provided during the financial year 29,420 56,312

(c) Bad debts on financing - recovered (3,857) (82)- written off 281 276

50,787 68,908 23. INCOME ATTRIBUTABLE TO DEPOSITORS Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Deposits from customers - Non-Mudharabah 137,636 104,081- Mudharabah 4,448 26,267 142,084 130,348Deposits and placements of banks and other financial institutions - Non-Mudharabah 12,341 22,015 154,425 152,363


63

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 24. PERSONNEL EXPENSES Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000 Salaries and wages 42,581 39,851Statutory contributions 9,918 8,218Allowance and bonuses 14,204 11,987Others 6,681 6,250 73,384 66,306 25. OTHER OVERHEADS AND EXPENDITURES Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Marketing Advertisement and publicity 10,538 8,107 Establishment Office rental 8,557 7,656 Depreciation of property and equipment 9,200 15,151 Amortisation of intangible assets 12,652 14,760 Electronic data processing expenses 21,313 18,132 Premises 4,472 3,898 Others 403 298 General expenses Auditors’ remuneration - statutory audit fees 110 85 - others 219 253 Takaful and insurance 587 1,093 Professional fees 4,503 3,162 Security Service Charges 2,787 2,071 Communication 2,159 1,889 Transaction and outsourcing fees 6,149 4,568 Printing and stationeries 2,003 2,041 Entertainment 1,465 1,791 Shariah expenses 729 462 Others 3,207 2,798 91,053 88,215


64

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 26. CEO, DIRECTORS AND SHARIAH BOARD MEMBERS’ REMUNERATION

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Chief Executive Officer Salary and other remuneration including

benefits-in-kind 1,118 2,931 1,118 2,931Non-Executive Directors Fees 372 225 1,490 3,156Shariah Board Members 692 292 2,182 3,448

The number of Directors of the Bank whose total remuneration during the financial year fell within the following bands is analysed below:

Number of Directors Group and Bank 31 Dec 2012 31 Dec 2011Chief Executive Officer: RM1,100,000 to RM3,000,000 1 1 1 1Non-Executive Directors: RM50,001 to RM200,000 3 2

3 2 4 3 27. TAXATION

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000Tax expense for the financial year: - Malaysian income tax - - Deferred tax: - Relating to origination of temporary differences

(Note 14)

(9,743)

(31,967) (9,743) (31,967)


65

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 27. TAXATION (Continued)

A reconciliation of income tax expense applicable to profit before tax at the statutory income tax rate to income tax expense at the effective income tax rate of the Bank are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 RM’000 RM’000 Profit / (loss) before zakat and taxation

4,085

(28,055)

Income tax using Malaysian tax rate of 25% (2011: 25%) Tax effects from:

1,021 (7,014)

- expense not deductible for tax purposes 1,262 2,048- income not subjected to tax (388) -- Recognition of previously unrecognised tax losses (11,631) (36,535)- (Under) / over provision in previous years (7) 9,534 (9,743) (31,967) 28. BASIC EARNINGS PER SHARE

The basic earnings per ordinary share is calculated by dividing the Group’s profit after taxation for the financial year by the weighted average number of ordinary shares outstanding during the financial year.

31 Dec 2012 31 Dec 2011 Net profit for the financial year (RM’000) 13,828 3,912Average shares issued during the year (‘000) 1,000,000 1,000,000Basic profit per share (sen) 1.38 0.39

29. SIGNIFICANT RELATED PARTY BALANCES AND TRANSACTIONS

(a) Related parties and relationships

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions, or if one other party controls both.

The related party and their relationship with the Bank are as follows:

Related party Relationship (i) Al Rajhi Banking and Investment

Corporation, Saudi Joint Stock Company, Kingdom of Saudi Arabia

Holding company

(ii) Key Management Personnel

Defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank either directly or indirectly. The key management personnel of the Bank includes all Directors of the Bank and the Management Committee members of the Bank


66

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 29. SIGNIFICANT RELATED PARTY BALANCES AND TRANSACTIONS (Continued) (b) Significant related party transactions and balances are as follows: 31 Dec 2012

Holding Company

Key Management

Personnel RM’000 RM’000Amount due from - Financing and advances - Deposits placements

-

611,576

1,400

-

Amount due to - Current accounts – i - Savings account - i - Deposits placements - Inter-company billings

- -

658,229 857

190 135

- -

Corporate Guarantee 1,508,445 - Yield income from - Financing and advances - Deposits placements

-

1,231

31

-

Income attributable to depositors - Deposits placements

2,060

-

31 Dec 2011

Holding Company

Key Management

Personnel RM’000 RM’000Amount due from Financing and advances

-

36

Amount due to - Current accounts – i - Savings account - i - Deposits placements

- -

136,345

84

199 -

Corporate Guarantee 1,508,445 - Income attributable to depositors - Deposits placements

620

-

The corporate guarantee above is issued by the holding company to the Bank. The corporate guarantee provides security coverage for a corporate financing originated by the Bank for a company incorporated in Kingdom of Saudi Arabia.


67

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 30. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Group made various commitments and incurred certain

contingent liabilities with legal recourse to their customers. No material losses are anticipated as a result of these transactions.

The commitments and contingencies and the related risk-weighted exposures of the Group as at the end of financial year are as follows:

31 Dec 2012 31 Dec 2011 01 Jan 2011

Principal amount

Credit equivalent

amount

Risk weighted

amount

Principal amount

Credit equivalent

amount

Risk weighted

amount

Principal amount

Credit equivalent

amount

Risk weighted

amount Group/Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Direct credit substitute 10 10 10 - - - 20 20 20 Transaction-related

contingent items 98,644 49,322 41,823 110,674 55,336 48,129 147,453 73,727 61,136 Trade-related

contingencies

20,859

4,172

4,093

13,364

2,673

1,951

64,411

12,882

12,179 Irrevocable

commitments to extend credit:

-Maturity not exceeding 465,347 93,069 86,596 431,650 86,330 79,862 382,285 - - one year -Maturity exceeding

one year 1,056,913 524,605 462,096 532,726 266,363 243,783 471,219 - -

Foreign exchange-related contracts

17,243

-

-

10,521

-

-

10,776

-

-

Miscellaneous 129,339 68 68 35,107 123 123 7,771 7 7 1,788,355 671,246 594,686 1,134,042 410,825 373,848 1,083,935 86,636 73,342

* For the current financial year, the Credit Equivalent and Risk Weighted for the Bank are

computed in accordance with BNM’s Capital Adequacy Framework for Islamic Banks (CAFIB): Standardised Approach for Credit and Market Risk, and Basic Indicator Approach for Operational Risk (Basel II) respectively.

31. CAPITAL COMMITMENTS

Capital expenditure pertaining to the Group and the Bank as approved by Directors but not provided for in the financial statements is as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000Authorised and contracted for: Property and equipment

8,846

10,846

8,876


68


32. CREDIT EXPOSURE ARISING FROM CREDIT TRANSACTIONS WITH CONNECTED PARTIES 31 Dec 2012 31 Dec 2011 01 Jan 2011

Outstanding credit exposures with connected parties (RM’000) 5,830 2,089 68,732

Percentage of outstanding credit exposures to connected parties as proportion of capital base

0.8%

0.3%

9.8%

Percentage of outstanding credit exposures to connected parties as proportion of total outstanding credit exposures

0.1%

0.03%

1.1%

The disclosure on Credit Transactions and Exposures with Connected Parties above is presented in accordance with para 9.1 of Bank Negara Malaysia’s revised Guidelines on Credit Transactions and Exposures with Connected Parties, which became effective on 1 January 2008.

Based on these guidelines, a connected party refers to the following:

(i) Directors of the Bank and their close relatives; (ii) Controlling shareholders’ and their close relatives; (iii) Executive officer, being member of management having authority and responsibility for

planning, directing and/or controlling the activities of the Bank, and his close relatives; (iv) Officers who are responsible for or have the authority to appraise and/or approve credit

transactions or review the status of existing credit transactions, either as a member of a committee or individually, and their close relatives;

(v) Firms, partnerships, companies or legal entities which control, or are controlled by any person

listed in (i) to (iv) above, or in which they have an interest, as a director, partner, executive officer, agent or guarantor, and their subsidiaries or entities controlled by them;

(vi) Any person for whom the persons listed in (i) to (iv) above is a guarantor; and (vii) Subsidiary of or an entity controlled by the Bank and its connected parties.

Credit transactions and exposures to connected parties as disclosed above includes the extension of credit facilities and/or off-balance sheet credit exposures such as guarantees, trade-related facilities and loan commitments. It also includes holdings of equities and private debt securities issued by the connected parties. The credit transaction with connected parties above are all transacted on arm’s length basis and on terms and conditions no more favourable than those entered into with other counterparties with similar circumstances and credit worthiness. Due care has been taken to ensure that the credit worthiness of the connected party is not less than that normally required of other persons.


69

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 33. FINANCIAL RISK MANAGEMENT

(a) Overview

The Group’s risk management practice seeks to ensure that adequate financial resources are available for the development of the Group’s businesses whilst managing its key areas of credit, market, liquidity and operational risks. The Group’s overall risk management framework, including the risk governance and the risk management process are set out in the Risk Management section in the Directors Report.

(b) Financial instrument by category The table below provide an analysis of financial instruments categorised as follows:

i. Financing and receivables (FR); ii. Securities held-to-maturity (HTM); iii. Securities held-for-trading (HFT); iv. Securities available-for-sale (AFS); v. Other financial liabilities (Other FL).

Carrying

amount FR HFT AFS

HTM Other FLGroup and Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’00031 Dec 2012 Financial Assets Cash and short term funds 1,545,894 1,545,894 - - - -Deposits and placements

with other institutions

129,637

129,637

-

-

-

-Financing and advances 4,289,864 4,289,864 - - - -Securities held-to-maturity 286,190 - - - 286,190 -Securities held-for-trading 4,985 - 4,985 - - -Securities available-for-sale 233,830 - - 233,830 - -Other assets 186,560 12,489 - - - - 6,676,960 5,977,884 4,985 233,830 286,190 - Financial Liabilities Deposits from customers 4,681,142 - - - 4,681,142Deposits and placements of

banks and other financial institutions 1,378,432 -

- - 1,378,432Bills and acceptances payable

162,344

-

-

-

-

162,344

Other liabilities 59,528 - - - 59,528 6,281,446 - - - 6,281,446


70

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 33. FINANCIAL RISK MANAGEMENT (Continued)

(b) Financial Instrument by category (Continued) Carrying

amount FR HFT

HTM Other FLGroup and Bank RM’000 RM’000 RM’000 RM’000 RM’00031 Dec 2011 Financial Assets Cash and short term funds 1,097,992 1,097,992 Deposits and placements with

other institutions

35,160

35,160

-

-

-Financing and advances 3,671,216 3,671,216 - - -Securities held-to-maturity 824,714 - - 824,714 -Securities held-for-trading 4,726 - 4,726 - -Other assets 31,350 6,312 - - - 5,665,158 4,810,680 4,726 824,714 - Financial Liabilities Deposits from customers 3,804,816 - - - 3,804,816Deposits and placements of


- - 1,571,975Bills and acceptances payable 16,056 16,056Other liabilities 39,419 - - - 39,419 5,432,266 - - - 5,432,266 Carrying

amount FR HFT

HTM Other FLGroup and Bank RM’000 RM’000 RM’000 RM’000 RM’00001 Jan 2011 Financial Assets Cash and short term funds 1,210,303 1,210,303 Financing and advances 4,034,633 4,034,633 - - -Securities held-to-maturity 289,459 - - 289,459 -Securities held-for-trading 2,493 - 2,493 - -Other assets 26,331 26,331 - - - 5,563,219 5,271,267 2,493 289,459 - Financial Liabilities Deposits from customers 3,907,946 - - - 3,907,946Deposits and placements of


- - 1,222,142Bills and acceptances payable 13,682 13,682Other liabilities 48,436 - - - 48,436 5,192,206 - - - 5,192,206


71


(c) Credit Risk Management

(i) Credit Risk management overview

Credit risk is the potential loss of revenue as a result of defaults by borrowers or counterparties through the Group’s and the Bank’s lending, hedging, trading and investing activities. The primary exposure to credit risk arises through its financing and advances as well as financial transactions with counterparties including interbank money market activities and debt securities. The amount of credit exposure is represented by the carrying amounts of the assets in the balance sheet.

The management of credit risk is governed by credit policies and guidelines documenting the lending standards, discretionary power for financing approval, credit risk rating, collateral and valuation, review, and restructuring of problematic and delinquent financing. The management of counterparties are guided by counterparty limit, counterparty ratings, tenure and types of permissible transactions and these are subject to regular review.

(ii) Maximum exposure to credit risk

The maximum exposure to credit risk at the statement of financial position is the amount on the statement of financial position as well as off balance sheet financial instruments, without taking into account of any collateral held or credit enhancements. For contingent liabilities, the maximum exposure to credit risk is the maximum that the Bank would have to pay if the obligations of the instruments issued are called upon. For credit commitments, the maximum exposure to credit risk is the full amount of the undrawn credit facilities granted to customers. The table below shows the maximum exposure to credit risk of the Bank:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Credit risk exposure relating to on-balance sheet assets:

Cash and short term funds 1,545,894 1,097,992 1,210,303 Deposits and placements with other institutions 129,637 35,160 - Financial assets and investments portfolios 525,005 829,440 291,952 Gross financing and advances 4,440,250 3,868,809 4,280,314 Allowance for impairment loss (150,386) (197,593) (245,681) Other assets 12,489 6,312 26,331

6,502,889 5,640,120 5,563,219

Credit risk exposure of off-balance sheet items:

Commitment and contingencies 1,788,355 1,134,042 1,083,935

Total maximum credit risk exposure 8,291,244 6,774,162 6,647,154

The financial effect of collateral (quantification of the extent to which collateral and other credit enhancements mitigate credit risk) held for financing and advances as at 31 December 2012 for the Bank is 21.6% (2011: 20.1%). The financial effect of collateral held for the other financial assets is not significant.


72


(c) Credit Risk Management (Continued)

(iii) Credit Risk Concentration

A concentration of credit risk exists when a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. The Group analysed the credit risk concentration by industry segments and geographic in which the customer is engaged. (a) Credit Risk - Credit Risk Concentration - By Industry Analysis

Government and Central

Banks Financial Services

Transport, Tele-

communication, Education and

Other Business Services

Agricultural, Manufacturing,

Utility, Research &

Development, Wholesale & Retail Trade,

Hotel and Restaurant

Construction & Real Estate

Residential Mortgages

Motor Vehicle

Financing

Other Consumer Financing Total

Group and Bank RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 31 Dec 2012 Short term funds 350,078 1,195,816 - - - - - - 1,545,894 Deposits and placements

with other institutions - 1,857 10,952 116,828 - - - - 129,637

Securities held-for-trading - 4,985 - - - - - - 4,985 Securities available-for-sale - 233,830 - - - - - - 233,830 Securities held-to-maturity - 253,185 - 33,005 - - - - 286,190 Gross financing and

advances - 184,870 1,626,556 687,616 163,345 723,109 31,167 1,023,587 4,440,250

Other assets - - 12,489 - - - - - 12,489 Total 350,078 1,874,543 1,649,997 837,449 163,345 723,109 31,167 1,023,587 6,653,275 31 Dec 2011 Cash and short term funds 715,405 382,588 - - - - - - 1,097,993 Deposits and placements

with other institutions - - 35,160 - - - - - 35,160

Securities held-for-trading - 4,726 - - - - - - 4,726 Securities held-to-maturity 496,396 286,871 - 41,447 - - - - 824,714 Gross financing and

advances

-

66,506

1,666,500

402,492

266,505

444,969

2,376

1,019,461

3,868,809 Other assets - - 6,312 - - - - - 6,312 Total 1,211,801 740,691 1,707,972 443,939 266,505 444,969 2,376 1,019,461 5,837,714

01 Jan 2011 Cash and short term funds 992,772 217,531 - - - - - - 1,210,303 Securities held-for-trading - 2,493 - - - - - - 2,493 Securities held-to-maturity - 289,459 - - - - - - 289,459 Gross financing and

advances

-

63,907

1,713,150

569,324

339,804

310,422

3,009

1,280,698

4,280,314 Other assets - - 26,331 - - - - - 26,331 Total 992,772 573,390 1,739,481 569,324 339,804 310,422 3,009 1,280,698 5,808,900


73



(iii) Credit Risk Concentration (Continued)

(b) Credit Risk - Credit Risk Concentration - By Geographical Analysis Group and Bank Malaysia Saudi Arabia

Other Countries Total

RM’000 RM’000 RM’000 RM’000 31 Dec 2012 Cash and short term funds 843,010 639,197 63,687 1,545,894 Deposits and placements with other institutions 129,637 - - 129,637 Securities held-for-trading 4,985 - - 4,985 Securities available-for-sale 233,830 - - 233,830 Securities held-to-maturity 286,190 - - 286,190 Gross financing and advances 2,901,186 1,509,060 30,004 4,440,250 Other assets 12,489 - - 12,489 Total 4,411,327 2,148,257 93,691 6,653,275 31 Dec 2011 Cash and short term funds 1,045,764 8,146 44,082 1,097,992 Deposits and placements with other institutions 35,160 - - 35,160 Securities held-for-trading 4,726 - - 4,726 Securities held-to-maturity 791,017 33,697 - 824,714 Gross financing and advances 2,359,749 1,509,060 - 3,868,809 Other assets 6,312 - - 6,312 Total 4,242,728 1,550,903 44,082 5,837,713 01 Jan 2011 Cash and short term funds 1,162,174 20,751 27,378 1,210,303 Securities held-for-trading 2,493 - - 2,493 Securities held-to-maturity 253,157 36,302 - 289,459 Gross financing and advances 2,771,254 1,509,060 - 4,280,314 Other assets 26,331 - - 26,331 Total 4,215,409 1,566,113 27,378 5,808,900

(iv) Collateral

The main types of collateral obtained by the Group and the Bank to mitigate credit risk are as follows: • for personal housing financing : mortgages over residential properties • for commercial property financing : charges over the properties being financed • for vehicle financing : charges over the vehicles financed • for other financing : charges over business assets such as premises, inventories, trade receivables or deposits

There are no assets held by the Bank as at 31 December 2012 as a result of taking possession of collaterals held as securities. Repossessed properties are made available for sale in an orderly fashion, with the proceeds used to reduced or repay the outstanding indebtedness. The Bank generally does not occupy the premises repossessed for its business use.


74



(v) Credit quality of financial assets

For the purposes of disclosure relating to MFRS 7, all financial assets are categorized into the following:- - neither past due nor impaired - past due but not impaired - impaired The Bank assesses credit quality of financing and advances using internal rating techniques tailored to the various categories of products and counterparties. These techniques have been developed internally and combine statistical analysis with credit officers’ judgment.

Internal ratings Description - Investment grade Strong(est) credit quality which associated with general

standards of investment grade as per defined by international rating agency such as Standard and Poor’s (S&P), Moody’s, Fitch, and Japan Credit Rating Agency (JCR).

- Non-investment grade Weaker credit quality which associated with general

standards of non-investment grade as per defined by international rating agency such as Standard and Poor’s (S&P), Moody’s, Fitch, and Japan Credit Rating Agency (JCR).

The credit quality of financial assets other than financing and advances are determined based on the ratings of counterparties as defined by Moody’s or equivalent ratings of other international rating agencies as defined below:

- AAA to AA3 - A1 to A3 - Baa1 to Baa3 - P1 to P3 - Non rated


75


(c) Credit Risk Management (Continued) (vi) Credit quality of financial assets – gross financing and advances

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Neither past due nor impaired 4,171,805 3,385,443 3,735,543 Past due but not impaired 162,209 337,951 349,265 Impaired 106,236 145,415 195,506 Gross financing and advances 4,440,250 3,868,809 4,280,314 Less: Collective impairment allowance (121,000) (139,893) (114,574)

Individual impairment allowance (29,386) (57,700) (131,107) Net financing and advances 4,289,864 3,671,216 4,034,633

The ageing of financing and advances as at the end of the financial year are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Current 4,171,805 3,385,443 3,735,543Past due 1-30 days 100,834 193,979 226,027Past due 31-90 days 61,375 143,972 123,238Past due more than 90 days 106,236 145,415 195,506 4,440,250 3,868,809 4,280,314Collective impairment (121,000) (139,893) (114,574)Individual impairments (29,386) (57,700) (131,107)Net financing and advances 4,289,864 3,671,216 4,034,633


76



(vii) Credit quality of financial assets – securities portfolio and other financial assets

Short term funds

Deposits and

placements with other

institutions

Financial assets/

investments portfolios

Other assets

RM’000 RM’000 RM’000 RM’000 31 Dec 2012 Neither past due nor impaired 1,545,894 129,637 525,005 12,489 1,545,894 129,637 525,005 12,489 31 Dec 2011 Neither past due nor impaired 1,097,992 35,160 795,744 6,312 1,097,992 35,160 795,744 6,312 01 Jan 2011 Neither past due nor impaired 1,210,303 - 255,650 26,331 1,210,303 - 255,650 26,331


77



(vii) Credit quality of financial assets – securities portfolio and other financial assets (Continued)

(a) Analysed by rating agency designation are as follows:-

Cash and short term

funds

Deposits and

placements with other

institutions

Financial assets/


Other assets RM’000 RM’000 RM’000 RM’000 31 Dec 2012 AAA to A- 1,543,298 - 487,015 - BBB+ to B- 1,793 - - - Unrated 803 129,637 37,990 12,489 1,545,894 129,637 525,005 12,489 31 Dec 2011 AAA to A- 1,095,611 - 749,570 - BBB+ to B- 1,578 - - - Unrated 803 35,160 79,870 6,312 1,097,992 35,160 829,440 6,312 01 Jan 2011 AAA to A- 1,209,576 - 253,157 - BBB+ to B- 422 - - - Unrated 305 - 38,795 26,331 1,210,303 - 291,952 26,331


78



(viii) Credit quality of impaired financial assets

(a) Impaired financial assets analysed by geographic purpose are as follows:-

Financing & advances

Financial assets /


Total

RM’000 RM’000 31 Dec 2012 Malaysia 106,236 - 106,236 106,236 - 106,236

31 Dec 2011 Malaysia 145,415 - 145,415 Saudi Arabia - 33,696 33,696 145,415 33,696 179,111

01 Jan 2011 Malaysia 195,506 - 195,506 Saudi Arabia - 36,302 36,302 195,506 36,302 231,808


79



(viii) Credit quality of impaired financial assets (Continued)

(b) Impaired financial assets analysed by industry sector are as follows:-

Financing & advances

Financial assets/


Total

31 Dec 2012 RM’000 RM’000 RM’000 Household 60,613 - 60,613 Construction 55 - 55 Manufacturing 31,771 - 31,771 Wholesale & retail trade 11,458 - 11,458 Other business 1,260 - 1,260 Transportation 622 - 622 Real estate, renting and business

activities

457

-

457 106,236 - 106,236

31 Dec 2011 Construction 53,257 - 53,257 Household 47,585 - 47,585 Manufacturing 30,487 - 30,487 Wholesale & retail trade 12,141 - 12,141 Other business 1,945 - 1,945 Financial services - 33,696 73,759 145,415 33,696 219,174

01 Jan 2011 Household 43,298 - 43,298 Construction 53,614 - 53,614 Manufacturing 7,343 - 7,343 Finance services 30,800 36,302 102,522 Research & development 29,534 - 29,534 Wholesale & retail trade 27,820 - 27,820 Other business 2,617 - 3,097 Real estate, renting and business

activities

480

-

- 195,506 36,302 267,228


80



(ix) Reconciliation of allowance

The movements in the allowance for impairment losses of financing and advances during the financial year are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 At 1 January - as previously stated 154,262 230,877 172,432 - effect of adoption of MFRS 139 43,331 14,804 - At 1 January, restated 197,593 245,681 172,432 Impairment loss recognised 55,553 70,428 92,025 Impairment loss reversed (1,190) (1,714) (18,776) Impairment written-off (101,570) (116,802) - At 31 December 150,386 197,593 245,681


81


(d) Market Risk Management

Market risk sensitivity assessment is based on the changes in key variables; such as profit rates while all other variables remain unchanged. The sensitivity factors used are assumptions based on parallel shifts in the key variables and the impact on the re-priced mismatches of assets and liabilities position of the bank as at 31 December 2012.

(i) Profit rate sensitivity analysis

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 Impact on

profit after tax

Impact on

Equity

Impact on profit after tax

Impact on

Equity

Impact on profit

after tax

Impact on

Equity RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 + 25 basis points 6 6 112 112 (795) (795) - 25 basis points (6) (6) (112) (112) 795 795 + 50 basis points 11 11 224 224 (1,591) (1,591) - 50 basis points (11) (11) (224) (224) 1,591 1,591

(ii) Foreign currency sensitivity analysis

The foreign currency sensitivity represents the effect of the appreciation or depreciation of the foreign currency rates on the consolidated currency position, while other variables remain constant.

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 Impact on

profit after tax

Impact on Equity

Impact on profit after tax

Impact on

Equity

Impact on profit after

tax

Impact on Equity

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 + 5% 825 825 (401) (401) (278) (278) - 5% (825) (825) 401 401 278 278


82



(iii) Profit Rate Risk

The Group is exposed to various risks associated with the effects of fluctuations in the prevailing levels of yield/profit rate on its financial position. The rate of return risk is the potential impact of market factors affecting rates on returns in comparison with the expected rates of return for investment account holders. Yield/profit rate is monitored and managed by the ALCO to protect the income of its operations. The assets and liabilities at carrying amount are categorised by the earlier of the next contractual repricing dates and maturity dates as follows:-

Non-trading book

Group and Bank 31 Dec 2012

Up to 1 month

>1-3 months

>3-12

months

1-5

years

> 5

years

Non- profit

sensitive

Trading

book

Total

Effective

profit rate RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % Assets Cash and short term funds 1,454,198 - - - - 4,444 - 1,458,642 2.57 Deposits and placements with

other institutions

27,334

73,790

28,215

-

-

298

-

129,637

1.12 Securities held-for-trading - - - - - - 4,985 4,985 - Securities Available-for-sale - - 230,588 - - 3,242 - 233,830 3.69 Securities held-to-maturity - 33,005 250,000 - - 3,185 - 286,190 2.97 Financing and advances - performing 956,496 227,886 1,699,375 437,486 979,133 33,638 - 4,334,014 6.15 - non performing(1) - - - - - (44,150) - (44,150) Other assets(2) - - - - - 591,108 - 591,108 Total assets 2,438,028 334,681 2,208,178 437,486 979,133 591,765 4,985 6,994,256

Liabilities

Deposits from customers 1,330,465 1,167,755 1,743,891 101 - 438,930 - 4,681,142 2.73 Deposits and placements of banks and other financial institutions

715,000

564,033

90,000

-

-

9,399

-

1,378,432 3.29 Bills and acceptance payable - - - - - 162,344 - 162,344 Other liabilities - - - - - 59,528 - 59,528

Total liabilities 2,045,465 1,731,788 1,833,891 101 - 670,201 - 6,281,446

Shareholders’ fund - - - - - 712,810 - 712,810

Total liabilities and shareholders’ fund

2,045,465 1,731,788 1,833,891 101 - 1,383,011 - 6,994,256

On-balance sheet profit

sensitivity gap 392,563 (1,397,107) 374,287 437,385 979,133 (791,246) 4,985 Off-balance sheet profit

sensitivity gap - - - - - 1,788,355 - Total profit sensitivity gap 392,563 (1,397,107) 374,287 437,385 979,133 997,109 4,985

Note: (1) This is arrived at after deducting the collective and individual impairment allowance from the outstanding gross non

performing financing. (2) Other assets include property and equipment, deferred tax assets and statutory deposits with Bank Negara Malaysia.


83



(iii) Profit Rate Risk (Continued)

Non-trading book


Up to 1 month

>1-3

months

>3-12

months

1-5

years

> 5

years

Non- profit sensitive

Trading

book

Total

Effective

profit rate RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % Assets Cash and short term funds 1,045,000 - - - - 103,535 - 1,148,535 2.96 Deposits and placements with

other institutions

11,280

23,827

53

-

35,160

1.43 Securities held-for-trading - - - - - - 4,726 4,726 - Securities held-to-maturity - 537,844 - 286,870 - - - 824,714 2.90 Financing and advances - performing 386,899 108,187 1,596,120 472,149 1,157,375 2,663 - 3,723,393 6.87 - non performing(1) - - - - - (52,177) - (52,177) Other assets(2) - - - - - 446,927 - 446,927 Total assets 1,443,179 669,858 1,596,120 759,019 1,157,375 501,001 4,726 6,131,278

Liabilities

Deposits from customers 1,028,391 1,308,901 1,050,359 947 - 416,218 - 3,804,816 2.74 Deposits and placements

of banks and other financial institutions

350,000

813,000

393,616

-

-

15,359

-

1,571,975 3.55 Bills and acceptance payable - - - - - 16,056 - 16,056 Other liabilities - - - - - 39,419 - 39,419

Total liabilities 1,378,391 2,121,901 1,443,975 947 - 487,052 - 5,432,266



1,378,391 2,121,901 1,443,975 947 - 1,186,064 - 6,131,278


sensitivity gap 64,788 (1,452,043) 152,145 758,072 1,157,375 (685,063) 4,726 Off-balance sheet profit

sensitivity gap - - - - - 1,134,042 - Total profit sensitivity gap 64,788 (1,452,043) 152,145 758,072 1,157,375 448,979 4,726


performing financing. (2) Other assets include property and equipment, deferred tax assets and statutory deposits with Bank Negara Malaysia


84



(iii) Profit Rate Risk (Continued) Non-trading book

Group and Bank 01 Jan 2011

Up to 1 month

>1-3 months

>3-12 months

1-5 years

> 5 years

Non- profit

sensitive

Trading

book TotalEffective

profit rate

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 % Assets Cash and short term funds 1,161,400 - - - - 109,288 - 1,270,688 2.40 Securities held-for-trading - - - - - 2,493 - 2,493 - Securities held-to-maturity - - - 289,459 - - - 289,459 3.12 Financing and advances - performing 189,842 101,976 1,716,446 791,519 1,275,968 2,734 - 4,078,485 6.90 - non performing(1) - - - - - (43,852) - (43,852) Other assets(2) - - - - - 290,033 - 290,033 Total assets 1,351,242 101,976 1,716,446 1,080,978 1,275,968 360,696 - 5,887,306

Liabilities

Deposits from customers 1,243,880 1,478,233 831,318 1,897 - 352,618 - 3,907,946 2.23 Deposits and placements


375,942

591,200

255,000

-

-

-

-

1,222,142

2.94 Bills and acceptance payable - - - - - 13,682 - 13,682 Other liabilities - - - - - 48,436 - 48,436

Total liabilities 1,619,822 2,069,433 1,086,318 1,897 - 414,736 - 5,192,206


Total liabilities and shareholders’ fund 1,619,822 2,069,433 1,086,318 1,897 - 1,109,836 - 5,887,306


sensitivity gap (268,580) (1,967,457) 630,128 1,079,081 1,275,968 (749,140) Off-balance sheet profit

sensitivity gap - - - - - 1,083,935 Total profit sensitivity gap (268,580) (1,967,457) 630,128 1,079,081 1,275,968 334,795


performing financing. (2) Other assets include property and equipment, and deferred tax assets.


85


33. FINANCIAL RISK MANAGEMENT (Continued)

(e) Operational Risk Management

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This risk is managed through established operational risk management processes, proper monitoring and reporting of the business units’ adherence to established risk policies, procedures and limits by independent control and support units, and oversight provided by the management and the Board. The operational risk management processes encompass appropriate documentation of processes and procedures within the framework of system of internal controls, regular disaster recovery and business continuity planning and simulations, self-compliance audit and internal audit.

(f) Liquidity Risk

Liquidity risk relates to the ability of the Group and of the Bank to maintain sufficient liquid assets to meet financial commitments and obligations when they fall due at a reasonable cost. The Assets and Liabilities Management Committee is the primary party responsible for liquidity management based on guidelines approved by the Risk Management Committee. The management of the liquidity risk is aligned to the New Liquidity Framework issued by Bank Negara Malaysia supplemented by liquidity risk management control and limits and a liquidity stress testing program. Liquidity limits are set for cash flow mismatches. In addition, liquidity trigger limits and concentration ratios are in place to serve as liquidity early warning indicators.

The table below analyses assets and liabilities based on the remaining behavioural maturity based on the requirements of BNM GP8i:


Up to 7 days

>7 days-1 month

>1-3 months

>3-6 months

>6-12 months

> 1year

Total

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Assets Cash and short term funds 604,199 854,443 - - - - 1,458,642 Deposits and placements with other institutions

1,232 26,192 73,926 25,335 2,952 - 129,637

Securities held-for-trading 4,985 - - - - - 4,985 Securities available-for-sale - - - - 233,830 - 233,830 Securities held-to-maturity - - 33,005 - 253,185 - 286,190 Financing and advances 194,235 123,153 229,419 1,606,655 94,282 2,042,120 4,289,864 Statutory deposits with Bank

Negara Malaysia 154,154 - - - - - 154,154

Other assets 161,886 367 1,141 1,055 1,987 270,518 436,954 Total assets 1,120,691 1,004,155 337,491 1,633,045 586,236 2,312,638 6,994,256 Liabilities Deposits from customers 345,000 911,341 1,325,871 724,310 1,059,807 314,813 4,681,142 Deposits and placements


78,220

641,531

568,582

90,099

-

-

1,378,432

Bills and acceptance payable 162,344 - - - - - 162,344 Other liabilities 20,908 11,307 850 13,641 360 12,462 59,528

Total liabilities 606,472 1,564,179 1,895,303 828,050 1,060,167 327,275 6,281,446 Shareholders’ fund - - - - - 712,810 712,810 Total liabilities and

shareholders’ fund 606,472 1,564,179 1,895,303 828,050 1,060,167 1,040,085 6,994,256

Net maturity mismatch 514,219 (560,024) (1,557,812) 804,995 (473,931) 1,272,553


86


(f) Liquidity Risk (Continued)


Up to 7

days

>7 days-1

month

>1-3

months

>3-6

months

>6-12

months

> 1year

Total RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Assets Cash and short term funds 583,327 565,208 - - - - 1,148,535 Deposits and placements with

other institutions

-

11,280

23,880

-

-

-

35,160 Securities held-for-trading 4,726 - - - - - 4,726 Securities held-to-maturity - - 537,844 - - 286,870 824,714 Financing and advances 368,160 29,430 109,706 1,573,748 23,966 1,566,206 3,671,216 Statutory deposits with Bank

Negara Malaysia - - - - - 170,278 170,278

Other assets 24,186 - - - - 252,463 276,649 Total assets 980,399 605,918 671,430 1,573,748 23,966 2,275,817 6,131,278 Liabilities

Deposits from customers 323,813 611,048 1,397,167 649,353 427,844 395,591 3,804,816 Deposits and placements of banks and other financial

institutions

-

355,553

820,638

200,901

194,883

-

1,571,975

Bills and acceptance payable 16,056 - - - - - 16,056 Other liabilities 10,953 - - - - 28,466 39,419

Total liabilities 350,822 966,601 2,217,805 850,254 622,727 424,057 5,432,266

Shareholders’ fund - - - - - 699,012 699,012


350,822 966,601 2,217,805 850,254 622,727 1,123,069 6,131,278

Net maturity mismatch 629,577 (360,683) (1,546,375) 723,494 (598,761) 1,152,748


87




Up to 7

days

>7 days-1

month

>1-3

months

>3-6

months

>6-12

months

> 1year

Total RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Assets Cash and short term funds 1,009,514 261,175 - - - - 1,270,689 Securities held-for-trading 2,493 - - - - - 2,493 Securities held-to-maturity - - - - - 289,459 289,459 Financing and advances 152,900 36,942 101,976 1,597,032 119,426 2,026,357 4,034,633 Statutory deposits with Bank

Negara Malaysia - - - - - 39,078 39,078

Other assets - - - - - 250,954 250,954 Total assets 1,164,907 298,117 101,976 1,597,032 119,426 2,605,848 5,887,306

Liabilities

Deposits from customers 279,163 359,155 962,088 544,032 408,138 1,355,370 3,907,946 Deposits and placements of banks and other financial institutions

140,000

235,942

591,200

255,000

-

-

1,222,142

Bills and acceptance payable 13,682 - - - - - 13,682 Other liabilities - - - - - 48,436 48,436

Total liabilities 432,845 595,097 1,553,288 799,032 408,138 1,403,806 5,192,206

Shareholders’ fund - - - - - 695,100 695,100

Total liabilities and shareholders’ fund 432,845 595,097 1,553,288 799,032 408,138 2,098,906 5,887,306

Net maturity mismatch 732,062 (296,980) (1,451,312) 798,000 (288,712) 506,942


88



The following table presents the cash outflows for the Group’s financial liabilities by remaining contractual maturities on undiscounted basis. The balances in the table below will not agree to the balances reported in the statements of financial position as the table incorporates all contractual cash flows, on an undiscounted basis, relating to both principal and profit payments.


Up to 7

days

>7 days-1

month

>1-3

months

>3-6

months

>6-12

months

> 1year

Total RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Liabilities Deposits from customers 339,957 913,181 1,332,528 735,152 1,081,490 329,906 4,732,214 Deposits and placements


78,246

642,534

571,744

90,943

-

-

1,383,467

Bills and acceptance payable 162,344 - - - - - 162,344 Other liabilities 21,908 11,307 850 13,641 360 12,462 60,528

Total liabilities 602,455 1,567,022 1,905,122 839,736 1,081,850 342,368 6,338,553


Up to 7

days

>7 days-1

month

>1-3

months

>3-6

months

>6-12

months

> 1year

Total RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Liabilities Deposits from customers 323,813 599,768 1,373,287 649,353 427,844 395,379 3,769,444 Deposits and placements


-

355,553

820,638

200,901

194,883

-

1,571,975

Bills and acceptance payable 16,056 - - - - - 16,056 Other liabilities 13,577 - - - - 22,342 35,919

Total liabilities 353,446 955,321 2,193,925 850,254 622,727 417,721 5,393,394


Up to 7

days

>7 days-1

month

>1-3

months

>3-6

months

>6-12

months

> 1year

Total RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Liabilities Deposits from customers 279,163 359,155 962,088 544,032 408,138 1,369,595 3,922,171 Deposits and placements


140,000

235,942

591,200

255,000

-

-

1,222,142

Bills and acceptance payable 13,682 - - - - - 13,682 Other liabilities - - - - - 48,436 48,436

Total liabilities 432,845 595,097 1,553,288 799,032 408,138 1,418,031 5,206,431


89


33. FINANCIAL RISK MANAGEMENT (Continued)

(g) Capital Management Policy Capital risk is defined as the risk that the Group has insufficient capital to provide a sufficient resource to absorb predetermined levels of losses or that the capital structure is inefficient. Capital risk appetite is set by the Board and reported through various metrics that enable the Group to manage capital constraints and shareholder expectations. The Assets and Liabilities Management Committee regularly revise performance against risk appetite. A capital exposure arises where the Group has insufficient regulatory capital resources to support its strategic objectives and plans, and to meet external shareholder requirements and expectations. The Group’s capital management policy is focused on optimising value for shareholders. Capital Management and Basel II The infrastructure implementation that has been completed has already yielded significant benefits to the Group and puts the businesses on an advanced footing to: Enhance our economic capital management; Refine risk based pricing methods for the products and services; and Improve asset quality across the businesses of the Group. The Group continues to develop sustainable capabilities for continuous improvements in the use and adoption of the advanced approaches of the Basel II capital accord. The Bank had obtained BNM’s approval to apply the Standardised Approach for Credit Risk.


90


34. CAPITAL ADEQUACY

With effect from 1 January 2008, the capital adequacy ratios of the Bank are computed in accordance with Bank Negara Malaysia Capital Adequacy Framework for Islamic Banks (‘CAFIB’): Standardised Approach for Credit and Market Risk and Basic Indicator Approach for Operational Risk.

(a) The capital adequacy ratios are as follows:

Group and Bank 31 Dec 2012 31 Dec 2011 01 Jan 2011 RM’000 RM’000 RM’000 Tier-1 capital Paid-up share capital 1,000,000 1,000,000 1,000,000 Accumulated losses (287,190) (300,988) (304,900) 712,810 699,012 695,100 Less: Deferred tax (80,443) (70,708) (38,742) Total Tier-1 capital 632,367 628,304 656,358 Tier-2 capital Collective impairment for impairment loss 84,627 73,417 70,997 Total Tier-2 capital 84,627 73,417 70,997 Capital base 716,994 701,721 727,335

Core capital ratio

11.87%

14.71%

15.46%

Risk-weighted capital ratio 13.46% 16.43% 17.13%

The Bank has applied paragraph 7.2 of the Concept Paper – Risk Weighted Capital Adequacy Framework (Basel II) and CAFIB – Disclosure Requirement (Pillar 3) dated 5 December 2008.


91

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued)

31 Dec 2012 Group and Bank Risk

Gross Net Weighted Capital Exposure Class Exposures Exposures Assets Requirements RM’000 RM’000 RM’000 RM’000 Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 738,061 738,061 - - Banks, Development Financial Institutions &

MDBs 1,449,001 1,449,001 289,800 23,184

Corporate 2,601,560 2,588,798 2,211,533 176,923 Regulatory Retail 1,066,237 1,061,174 795,881 63,670 Residential Real Estate (RRE) Financing 685,457 685,457 324,004 25,920 Other assets 559,768 559,768 520,317 41,625 Defaulted Exposures 50,220 50,015 63,673 5,094 Total for On-Balance Sheet Exposures 7,150,304 7,132,274 4,205,208 336,416 Off-Balance Sheet Exposures Off-balance sheet exposures other than OTC derivatives or credit derivatives

671,246 671,246 594,686 47,575

Total for Off-Balance Sheet Exposures 671,246 671,246 594,686 47,575 Total On and Off-Balance Sheet Exposures 7,821,550 7,803,520 4,799,894 383,991 Large Exposures Risk Requirement - - - - Long Market Risk Position Foreign Currency Risk 131,215 - 131,215 10,497 Operational Risk - - 396,343 31,707 Total RWA and Capital Requirements 5,327,452 426,196


92


31 Dec 2011 Group and Bank Risk Gross Net Weighted Capital Exposure Class Exposures Exposures Assets Requirements RM’000 RM’000 RM’000 RM’000 Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 1,386,508 1,386,508 - - Banks, Development Financial Institutions &

MDBs 635,629 635,629 127,126 10,170

Corporate 2,295,411 2,291,306 1,914,041 153,123 Regulatory Retail 1,041,654 1,032,094 774,071 61,926 Residential Real Estate (RRE) Financing 420,464 420,464 185,874 14,870 Equity Exposure 4,726 4,726 4,726 378 Other assets 319,634 319,634 290,776 23,262 Defaulted Exposures 58,489 57,350 85,336 6,827 Total for On-Balance Sheet Exposures 6,162,515 6,147,711 3,381,950 270,556 Off-Balance Sheet Exposures Off-balance sheet exposures other than OTC derivatives or credit derivatives

410,825 410,825 373,848 29,908

Total for Off-Balance Sheet Exposures 410,825 410,825 373,848 29,908 Total On and Off-Balance Sheet Exposures 6,573,340 6,558,536 3,755,798 300,464 Large Exposures Risk Requirement - - - - Market Risk Long Position Foreign Currency Risk 121,719 - 121,719 9,738 Operational Risk - - 393,205 31,456 Total RWA and Capital Requirements 4,270,722 341,658


93


01 Jan 2011 Group and Bank Risk Gross Net Weighted Capital Exposure Class Exposures Exposures Assets Requirements RM’000 RM’000 RM’000 RM’000 Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 1,051,780 1,051,780 - - Banks, Development Financial Institutions &

MDBs 470,686 470,686 94,138 7,531

Corporate 2,502,043 2,497,330 2,120,075 169,606 Regulatory Retail 1,585,311 1,570,230 1,177,672 94,214 Residential Real Estate (RRE) Financing - - - - Equity Exposure 2,493 2,493 2,493 199 Other assets 288,164 288,164 266,631 21,330 Defaulted Exposures 66,092 64,044 83,761 6,701 Total for On-Balance Sheet Exposures 5,966,569 5,944,727 3,744,770 299,581 Off-Balance Sheet Exposures Off-balance sheet exposures other than OTC derivatives or credit derivatives

86,636 86,636 73,342 5,868

Total for Off-Balance Sheet Exposures 86,636 86,636 73,342 5,868 Total On and Off-Balance Sheet Exposures 6,053,205 6,031,363 3,818,112 305,449 Large Exposures Risk Requirement - - - - Market Risk Long Position Foreign Currency Risk 111,689 - 111,689 8,935 Operational Risk - - 315,424 25,234 Total RWA and Capital Requirements 4,245,225 339,618

AL RAJHI BANKING & INVESTMENT CORPORATION (MALAYSIA) BHD

(Incorporated in Malaysia)

Company No. 719057-X

94

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued) Group and Bank 31 Dec 2012 Exposures after Netting and Credit Risk Mitigation

Sovereigns/Central Banks

Banks, Development Financial Institutions

& MDBs Corporate Regulatory Retail

Residential Real Estate Equity Exposure Other Assets

Total Exposure

Total Risk Weighted

Assets Risk Weights

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Exposures after

Netting & CRM

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Performing Exposures

0% 738,061 - - - - - - - - - - - 39,451 - 777,512 - 20% - - 1,454,407 290,881 - - - - - - - - - - 1,454,407 290,881 35% - - - - - - - - 290,901 101,815 - - - - 290,901 101,815 50% - - - - - - - - 319,957 159,979 - - - - 319,957 159,979 75% - - - - 1,509,059 1,131,795 1,174,555 880,916 225,115 168,836 - - - - 2,908,729 2,181,547 100% - - - - 1,456,637 1,456,637 - - 25,045 25,045 - - 520,317 520,317 2,001,999 2,001,999 150% - - - - - - - - - - - - - - - - Total 738,061 - 1,454,407 290,881 2,965,696 2,588,432 1,174,555 880,916 861,018 455,675 - - 559,768 520,317 7,753,505 4,736,221 Defaulted Exposures

35% - - - - - - - - 2,161 756 - - - - 2,161 756 50% - - - - - - 629 315 704 352 - - - - 1,333 667 100% - - - - - - 1,916 1,916 13,146 13,146 - - - - 15,062 15,062 150% - - - - 21,831 32,747 189 284 9,439 14,157 - - - - 31,459 47,188 Total - - - - 21,831 32,747 2,734 2,515 25,450 28,411 - - - - 50,015 63,673 Total Performing and Defaulted 738,061 - 1,454,407 290,881 2,987,527 2,621,179 1,177,289 883,431 886,468 484,086

-

- 559,768 520,317 7,803,520 4,799,894




95

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued) Group and Bank 31 Dec 2011 Exposures after Netting and Credit Risk Mitigation


Banks, Development Financial Institutions

& MDBs Corporate Regulatory Retail

Residential Real Estate Equity Exposure Other Assets

Total Exposure

Total Risk Weighted

Assets Risk Weights

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Exposures after

Netting & CRM

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Performing Exposures

0% 1,386,508 - - - - - - - - - - - 45,707 - 1,432,215 - 20% - - 636,498 127,300 - - - - - - - - - - 636,498 127,300 35% - - - - - - - - 186,141 65,149 186,141 65,149 50% - - 8,017 4,009 - - - - 224,796 112,398 - - - - 232,813 116,407 75% - - - - 1,509,060 1,131,795 1,087,346 815,510 78,643 58,982 - - - - 2,675,049 2,006,287 100% - - - 1,055,090 1,055,090 - - 4,727 4,727 4,726 4,726 240,230 240,231 1,304,773 1,304,773 150% - - - - - - - - - - - - 33,697 50,546 33,697 50,546 Total 1,386,508 - 644,515 131,308 2,564,150 2,186,885 1,087,346 815,510 494,307 241,256 4,726 4,726 319,634 290,777 6,501,186 3,670,462 Defaulted Exposures

50% - - - - - - 336 168 - - - - - - 336 169 100% - - - - - - 705 705 - - - - - - 705 705 150% - - - - 8,352 12,528 27,537 41,306 20,419 30,629 - - - - 56,309 84,463 Total - - - - 8,352 12,528 28,578 42,179 20,419 30,629 - - - - 57,350 85,337 Total Performing and Defaulted 1,386,508 - 644,515 131,309 2,572,502 2,199,413 1,115,924 857,689 514,726 271,885

4,726

4,726 319,634 290,777 6,558,536 3,755,799




96

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued) Group and Bank 01 Jan 2011 Exposures after Netting and Credit Risk Mitigation


Banks, Development Financial Institutions &

MDBs Corporate Regulatory Retail Equity Exposure Other Assets

Total Exposure

Total Risk Weighted

Assets Risk Weights

Exposures after Netting

& CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets


& CRM

Risk Weighted

Assets


& CRM

Risk Weighted

Assets

Exposures after

Netting & CRM

Risk Weighted

Assets


& CRM

Risk Weighted

Assets

Exposures after

Netting & CRM


& CRM RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Performing Exposures

0% 1,051,780 - - - - - - - - - 39,684 - 1,091,464 - 20% - - 471,380 94,276 - - - - - - - - 471,380 94,276 50% - - 19,951 9,976 - - - - - - - - 19,951 9,976 75% - - - - 1,509,021 1,131,766 1,581,281 1,185,961 - - - - 3,090,302 2,317,727 100% - - - 1,043,249 1,043,249 - - 2,493 2,493 212,179 212,179 1,257,920 1,257,920 150% - - - - - - - - - - 36,301 54,452 36,301 54,452 Total 1,051,780 - 491,331 104,252 2,552,270 2,175,015 1,581,281 1,185,961 2,493 2,493 288,164 266,631 5,967,318 3,734,351 Defaulted Exposures

50% - - - - 11,052 5,526 659 330 - - - - 11,711 5,856 100% - - - - - - 1,190 1,190 - - - - 1,190 1,190 150% - - - - 4,863 7,294 46,281 69,422 - - - - 51,144 76,715 Total - - - - 15,915 12,820 48,130 70,942 - - - - 64,045 83,761 Total Performing and Defaulted 1,051,780 - 491,331 104,252 2,568,185 2,187,835 1,629,411 1,256,903

2,493

2,493 288,164 266,631 6,031,363 3,818,112




97

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued) Group and Bank 31 Dec 2012 Disclosure on Rated Exposures according to Rating by ECAIsExposure Class AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ to B- Below B- Unrated Total

RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 On and Off Balance-Sheet Exposures

Credit Exposure –Standardised Approach

Sovereigns/Central Banks - - - - - - 738,061 - - - - - - 738,061 Banks, Development Financial

Institutions & MDBs 273,283 - 31,085 - 964,266 309 182,869 - 246 - 1,547 - 803 1,454,408

Corporate - - - - 1,509,060 - - - - - - - 1,478,468 2,987,527 Regulatory Retail - - - - - - - - - - - - 1,177,288 1,177,288 Residential Real Estate (RRE) Financing

- - - - - - - - - - - - 886,467 886,467

Other assets - - - - - - - - - - - - 559,768 559,768 Total 273,283 - 31,085 - 2,473,326 309 920,930 - 246 - 1,547 - 4,102,794 7,803,520




98

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued) Group and Bank 31 Dec 2011 Disclosure on Rated Exposures according to Rating by ECAIsExposure Class AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ to B- Below B- Unrated Total



Sovereigns/Central Banks - - - - - - 1,386,508 - - - - - - 1,386,508 Banks, Development Financial

Institutions & MDBs 255,067 - 35,007 4,654 247,406 - 100,000 - - - 1,578 - 803 644,515

Corporate - - - - 1,509,060 - - - - - - - 1,063,442 2,572,502 Regulatory Retail - - - - - - - - - - - - 1,115,925 1,115,925 Residential Real Estate (RRE) Financing

- - - - - - - - - - - - 514,726 514,726

Equity Exposure - - - - - - - - - - - - 4,726 4,726 Other assets - - - - - - - - - - - - 319,634 319,634 Total 255,067 - 35,007 4,654 1,756,466 - 1,486,508 - - - 1,578 - 3,019,256 6,558,536




99

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 34. CAPITAL ADEQUACY (Continued) Group and Bank 01 Jan 2011 Disclosure on Rated Exposures according to Rating by ECAIs Exposure Class AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ to B- Below B- Unrated Total



Sovereigns/Central Banks - - - - - - 1,051,780 - - - - - - 1,051,780 Banks, Development Financial

Institutions & MDBs 254,391 - 10,268 12,114 213,831 - - - - - 422 - 305 491,331

Corporates - - - - 1,509,021 - - - - - - - 1,059,163 2,568,184 Regulatory Retail - - - - - - - - - - - - 1,629,411 1,629,411 Equity Exposure - - - - - - - - - - - - 2,493 2,493 Other Assets - - - - - - - - - - - - 288,164 288,164 Total 254,391 - 10,268 12,114 1,722,852 - 1,051,780 - - - 422 - 2,979,536 6,031,363




100


Group and Bank Disclosure on Credit Risk Mitigation

31 Dec 2012 31 Dec 2011 01 Jan 2011

Exposure Class

Exposures Exposures Exposures Exposures Covered by Exposures Covered by Exposures Covered by

Before CRM Eligible Collateral



RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Credit Risk On-Balance Sheet Exposures Sovereigns/Central Banks 738,061 - 1,386,508 - 1,051,780 - Banks, Development Financial Institutions & MDBs 1,449,001 - 635,629 - 470,686 - Corporate 2,601,560 67,625 2,295,411 47,660 2,502,043 63,496 Regulatory Retail 1,066,237 9,120 1,041,654 20,669 1,585,311 34,729 Residential Real Estate (RRE) Financing 685,457 - 420,464 - - - Equity Exposure - - 4,726 - 2,492 - Other assets 559,768 - 319,634 - 288,164 - Defaulted Exposures 50,220 836 58,489 2,680 66,092 3,788 Total for On-Balance Sheet Exposures 7,150,304 77,581 6,162,515 71,009 5,966,568 102,013 Off-Balance Sheet Exposures Off-balance sheet exposures other than OTC derivatives or credit derivatives

671,246 - 410,825 -

86,637 -

Total for Off-Balance Sheet Exposures 671,246 - 410,825 - 86,637 - Total On and Off-Balance Sheet Exposures 7,821,550 77,581 6,573,340 71,009 6,053,205 102,013




101


Group and Bank Disclosure on Off Balance Sheet and Counterparty Credit Risk

31 Dec 2012 31 Dec 2011 01 Jan 2011

Principal amount

Credit equivalent

amount

Risk weighted

amount

Principal amount

Credit equivalent

amount

Risk weighted

amount

Principal amount

Credit equivalent

amount

Risk weighted

amount RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 RM’000 Direct credit substitutes 10 10 10 - - - 20 20 20 Transaction-related contingent items 98,644 49,322 41,823 110,674 55,336 48,129 147,453 73,727 61,136 Short term self liquidating trade related contingencies 20,859 4,172 4,093 13,364 2,673 1,951 64,411 12,882 12,179 Foreign exchange related contracts - One year or less 17,243 - - 10,521 - - 10,776 - - Credit derivative contracts - One year or less 129,339 68 68 35,107 123 123 7,771 7 7 Other commitments, such as formal standby facilities and

credit lines, with an original maturity of over one year

1,044,074

522,037

460,170

532,726

266,363

243,783

456,873

-

- Other commitments, such as formal standby facilities and

credit lines, with an original maturity up to one year

465,347

93,069

86,596

418,621

84,376

77,908

382,285

-

- Unutilised credit card lines 12,839 2,568 1,926 13,029 1,954 1,954 14,346 - - 1,788,355 671,246 594,686 1,134,042 410,825 373,848 1,083,935 86,636 73,342




102

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 35. SEGMENTAL INFORMATION

Segmental reporting by the Bank was prepared in accordance with MFRS 8 ‘Operating Segments’ (‘MFRS 8’). Following the management approach of MFRS 8, operating segments are reported in a manner consistent with the internal reporting provided to the chief operation decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity.

All inter-segment transactions are conducted on an arm’s length basis and on normal commercial terms not more favourable than those generally available to the public.

The business segment results are prepared based on the Bank’s internal management reporting, which reflect the organisation’s management structure. Internal allocation of costs has been used in preparing the segmental reporting.

The Bank’s business segment can be organised into the following main segments reflecting the Bank’s internal reporting structure: The Bank comprises the following main business segments:

(i) Retail Operations

Retail operations focus on providing product and services to individual customers and small- and medium-sized enterprises. The products and services offered to customers include credit facilities, charge cards, remittance services, deposit collection and investment products.

(ii) Treasury and Capital Market Operations

The treasury and capital market operations are involved in proprietary trading in treasury related products and services such as foreign exchange, money market operations and securities trading. Income from customer trading is reflected under Retail Operations.

(iii) Corporate Investment Banking

Corporate Investment Banking operations provide a full range of financial services to corporate customers as well as small and medium sized enterprises. The products and services offered include long and short term financing such as working capital financing, asset financing, project financing as well as trade financing.




103

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 35. SEGMENTAL INFORMATION (Continued)

Bank Retail

Banking

Treasury & Money Market

Corporate Investment

Banking Total

RM’000 RM’000 RM’000 RM’00031 Dec 2012 Total revenue 153,989 45,900 134,635 334,524 Result Segment result 71,975 71,384 25,837 169,196Unallocated corporate

expenses

(165,111)Profit before zakat and taxation 4,085

Zakat and taxation 9,743

Net loss for the financial year 13,828Other comprehensive income: - Securities available-for-sale 26 - Wakalah transfer to reserve (56)Total comprehensive income for the financial year

13,798

Other information Segment assets 1,818,336 1,702,970 2,510,988 6,032,294Unallocated corporate assets 961,962Total assets 6,994,256 Segment liabilities 1,734,738 4,324,835 - 6,059,573Unallocated corporate liabilities 221,873Total liabilities 6,281,446

Other segment items Capital expenditure 4,391 286 1,284 5,961Unallocated capital expenditure 10,251

16,212 Depreciation 8,473 115 1,187 9,775Unallocated depreciation 12,078 21,853

Other non-cash (income)/expenses 41,367 (39,885) 9,420 10,902




104


Bank Retail

Banking

Treasury & Money

Market


Banking Total

RM’000 RM’000 RM’000 RM’00031 Dec 2011 Total revenue 178,793 137,768 39,326 355,887 Result Segment result 72,976 22,374 35,787 131,137Unallocated corporate

expenses

(159,192)Profit before zakat and taxation (28,055)

Zakat and taxation 31,967

Net profit for the financial year 3,912Other comprehensive income: - Securities available-for-sale -Total comprehensive income for the financial year

3,912

Other information Segment assets 1,531,832 1,308,264 2,185,091 5,025,187Unallocated corporate assets 1,106,091Total assets 6,131,278 Segment liabilities 2,049,181 3,327,610 - 5,376,791Unallocated corporate liabilities

55,475Total liabilities 5,432,266

Other segment items Capital expenditure 719 - - 719Unallocated capital expenditure 14,453

15,172 Depreciation 10,369 350 1,639 12,358Unallocated depreciation 17,554 29,912

Other non-cash (income)/expenses 65,369 (540) 3,539 68,368




105


Bank Retail

Banking

Treasury & Money

Market


Banking Total

RM’000 RM’000 RM’000 RM’00001 Jan 2011 Other information Segment assets 1,671,520 1,269,309 2,417,599 5,358,428Unallocated corporate assets 528,878Total assets 5,887,306 Segment liabilities 2,705,799 2,424,289 - 5,130,088Unallocated corporate liabilities

62,118Total liabilities 5,192,206

Other segment items Capital expenditure 6,698 840 5 7,543Unallocated capital expenditure 16,680

24,223

36. LEASE COMMITMENTS

The Group and the Bank have lease commitments in respect of rented premises and equipment on hire, all of which are classified as operating leases. A summary of the non-cancellable long-term commitments is as follows:-

31 Dec 2012 31 Dec 2011 01 Jan 2011Group and Bank RM’000 RM’000 RM’000 Within one year 1,682 1,872 1,648One year to less than five years 728 2,105 1,602

2,410 3,977 3,250




106


37. FAIR VALUES OF FINANCIAL INSTRUMENTS

(a) Financial instruments measured at fair value Determination of fair value and the fair value hierarchy

Financial instruments comprise financial assets, financial liabilities and items not recognised in the statements of financial position. Fair value is the amount at which a financial asset could be exchanged or a financial liability settled, between knowledgeable and willing parties in an arm’s length transaction. With effective from 1 January 2011, the Group and the Bank adopted the Amendments to FRS 7 which requires disclosures of fair value measurements by level of the following fair value measurement hierarchy:

Level 1 - Quoted prices (unadjusted) 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 for the asset or liability, 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 (unobservable inputs) Comparative figures for the Bank are not presented for 1 January 2011 as allowed by the transitional provision arising from the adoption of Amendment to MFRS 7 “Financial instruments: Disclosures – Improving Disclosures about Financial Instruments”. The following table represents assets and liabilities measured at fair value and classified by level with the following fair value measurement hierarchy:

Group and Bank Fair Value Carrying

amount Level 1 Level 2

Level 3

Total RM’000 RM’000 RM’000 RM’000 RM’000 31 Dec 2012 Financial assets Financial assets held-for-trading - Quoted securities : Unit trust 4,985 4,985 - - 4,985 Financial investments available-for-sale - Bank Negara Malaysia Sukuk 233,830 - 233,830 - 233,830 31 Dec 2011 Financial assets Financial assets held-for-trading - Quoted securities : Unit trust 4,726 4,726 - - 4,726




107


37. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

(a) Financial instruments measured at fair value (Continued)

Determination of fair value and the fair value hierarchy (Continued) Financial instruments are classified as Level 1 if their value is observable in an active market. Such instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted prices is readily available, and the price represents actual and regularly occurring market transactions. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an on-going basis. These would include actively traded listed equities and actively exchange-traded derivatives. Where fair value is determined using unquoted market prices in less active markets or quoted prices for similar assets and liabilities, such instruments are generally classified as Level 2. In cases where quoted prices are generally not available, the Bank then determines fair value based upon valuation techniques that use as inputs, market parameters including but not limited to yield curves, volatilities and foreign exchange rates. The majority of valuation techniques employ only observable market data and so reliability of the fair value measurement is high. These would include certain bonds/sukuks, government bonds, corporate debt securities, repurchase and reverse purchase agreements, financing, derivatives, certain issued notes and the Bank’s over the counter (“OTC”) derivatives. Financial instruments are classified as Level 3 if their valuation incorporates significant inputs that are not based on observable market data (unobservable inputs). Such inputs are generally determined based on observable inputs of a similar nature, historical observations on the level of the input or other analytical techniques. This category includes private equity investments, certain OTC derivatives (requiring complex and unobservable inputs such as correlations and long dated volatilities) and certain bonds/sukuks.

(b) Fair values of financial instruments not carried at fair value

The following table summarises the carrying amounts and the estimated fair values of those financial assets not presented on the Group’s balance sheet at their fair value

31 Dec 2012 31 Dec 2011 01 Jan 2011 Carrying

value Fair

value Carrying

value Fair

value Carrying

value Fair

value RM’000 RM’000 RM’000 RM’000 RM’000 RM’000

Financial assets Financing and advances 4,289,864 3,742,643 3,671,216 3,048,192 4,034,633 3,854,815 Securities held-to-maturity 286,190 280,766 824,714 811,358 289,459 285,604 Financial liabilities Deposits from customers 4,681,142 4,681,138 3,769,656 3,775,407 3,907,946 3,902,660




108

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 37. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

(b) Fair values of financial instruments not carried at fair value (Continued)

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

(i) Cash and short-term funds and deposits and placements with financial institutions

For cash and short term funds and deposits and placements with financial institutions with maturities of less than six months, the carrying value is a reasonable estimate of fair value. For deposits and placements with maturities six months and above, estimated fair value is based on discounted cash flows using prevailing money market profit rates at which similar deposits and placements would be made with financial institutions of similar credit risk and remaining period to maturity.

(ii) Financial investments held-to-maturity

The estimated fair value is generally based on quoted and observable market price. The fair value of securities that are not treated in an active market are determined using valuation techniques which include net present value and discounted cash flow models based on assumptions of market conditions existing at the balance sheet date.

(iii) Financing and advances

For floating rate financing and advances, the carrying value is generally a reasonable estimate of fair value. For fixed rate financing and advances, the fair values are estimated by discounting the estimated future cash flows using prevailing market rates of financing with similar credit risk and maturities. The fair values of impaired fixed rates financing and advances are represented by their carrying value, net of individual impairment being the expected recoverable amount.

(iv) Other assets and liabilities

The carrying value less any estimated impairment allowance for financial assets and liabilities included in “other assets and liabilities” are assumed to approximate their fair values as these items are not materially sensitive to the shift in market profit rates.

(v) Deposits from customers

The fair values of deposits with remaining maturity of less than one year are estimated to approximate their carrying amounts. The fair values of deposits with remaining maturity of more than one year are estimated using discounted cash flows based on market rates for similar deposits from customers.

(vi) Deposits from banks and bills and acceptances payable

The fair values of these financial instruments with remaining maturity of less than one year approximate their carrying amounts due to the relatively short maturity of the financial instruments.




109

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 38. CHANGES IN ACCOUNTING POLICIES

(a) Transition to the MFRS Framework

These financial statements are part of the period covered by the Group's and the Bank's first annual financial statements prepared under the MFRS framework. Accordingly, the Group and the Bank have applied MFRS 1 First-time Adoption of Malaysian Financial Reporting Standards in their transition to the MFRS framework on 1 January 2012. The policy elections made on transition date are listed in the audited financial statements of the Group and the Bank for the financial year ended 31 December 2011. The MFRS did not result in any financial impact to the Group and the Bank other than the financial impact arising from the change in accounting policy on collective assessment allowance and individual assessment allowance, as the accounting policies adopted under the previous FRS framework were already in line with the requirements of the MFRS framework.

The transition to the MFRS framework has resulted in the following changes:

(i) MFRS 139 Financial Instruments: Recognition and Measurement ("MFRS 139") –

Accounting Policy on Collective Assessment Allowance for Loans, Advances and Financing ("financing")

Prior to the transition to MFRS 139, the Bank had maintained their collective assessment allowance at 1.5% of total outstanding financing, net of individual assessment allowance, in line with Bank Negara Malaysia's transitional provisions under its Guidelines on Classification and Impairment Provisions for Financing. Upon the transition to MFRS 139 on 1 January 2012, these transitional provisions, which were allowed under the previous FRS framework, were removed and the Bank has applied the requirements of MFRS 139 in the determination of collective assessment allowance. Under MFRS 139, collective assessment is performed on financing which are not individually significant based on the incurred loss approach. Financing which are individually assessed and where there is no objective evidence of impairment are also included in the group of financing for collective assessment. These financing are pooled into groups with similar credit risk characteristics and based on the historical loss experience for such assets and collectively assessed for impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the financing’s carrying amount and the present value of the estimated cash flows. The carrying amount of the financing is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement.




110

NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2012 (Continued) 38. CHANGES IN ACCOUNTING POLICIES (Continued)

(a) Transition to the MFRS Framework (Continued)

(i) MFRS 139 Financial Instruments: Recognition and Measurement ("MFRS 139") – Accounting Policy on Collective Assessment Allowance for Financing, Advances and Financing ("financing") (Continued)

This change in accounting policy has been accounted for retrospectively and has resulted in an increase in the collective assessment allowance changed in the income statement and to the opening retained profits and opening collective assessment allowance in the statement of financial position. A summary of the financial impact of the change in accounting policy on the financial statements of the Group and the Bank are as follows:

Group and Bank Statement of Financial Position 31 Dec 2011 01 Jan 2011 RM’000 RM’000 Financing and Advances

Collective Assessment Allowance As previously stated 56,559 61,688 Effect of changes in accounting policy 83,334 52,886 As restated 139,893 114,574 Individual Assessment Allowance As previously stated 97,703 169,189 Reclassification to prior year (40,003) (38,082) As restated 57,700 131,107

Deferred Tax Assets

As previously stated 84,848 54,200 Effect of changes in accounting policy (14,140) (15,458) As restated 70,708 38,742

Retained Losses

As previously stated (243,517) (274,638) Effect of changes in accounting policy (57,471) (30,262) As restated (300,988) (304,900)




111


(a) Transition to the MFRS Framework (Continued)

(i) MFRS 139 Financial Instruments: Recognition and Measurement ("MFRS 139") – Accounting Policy on Collective Assessment Allowance for Financing, Advances and Financing ("financing") (Continued)

Group and Bank Income Statement

31 Dec 2011

RM’000 Allowance for Impairment on Financing and Advances

Collective Assessment Allowance As previously stated 27,801 Effect of changes in accounting policy 28,511 As restated 56,312

Individual Assessment Allowance As previously stated 12,386 Effect of changes in accounting policy 16 As restated 12,402

Taxation

As previously stated 30,649 Effect of changes in accounting policy 1,318 As restated 31,967




112


(b) Financial Impact of Changes in Accounting Policies

In the preparation of the Group's and the Bank's opening MFRS statements of financial position, the amounts previously reported in accordance with the previous FRS framework have been adjusted for the financial effects of the adoption of the MFRS framework. A reconciliation of these changes is summarized in the following tables:

(i) Statement of Financial Position

Group and Bank

Under the

FRS

Effect of the

Transition MFRSs

Under the MFRS

Framework MFRS 139 Framework As at 31 December 2011 RM’000 RM’000 RM’000 ASSETS Cash and short-term funds 1,148,535 1,148,535 Deposits and placements with other institutions 35,160 35,160 Securities held-for-trading 4,726 4,726 Securities held-to-maturity 824,714 824,714 Financing and advances 3,714,547 (43,331) 3,671,216 Other assets 31,350 31,350 Statutory deposits with Bank Negara Malaysia 170,278 170,278 Investment in subsidiary - - Investment properties 104,000 104,000 Property and equipment 29,848 29,848 Intangible assets 40,743 40,743 Deferred tax assets 84,848 (14,140) 70,708 Total Assets 6,188,749 6,131,278 LIABILITIES AND SHAREHOLDER’S EQUITY Liabilities Deposits from customers 3,804,816 3,804,816 Deposits and placements of banks and other

financial institutions 1,571,975

1,571,975 Bills and acceptances payable 16,056 16,056 Other liabilities 39,419 39,419 Total Liabilities 5,432,266 5,432,266 Shareholder’s equity Share capital 1,000,000 1,000,000 Reserves (243,517) (57,471) (300,988) Total Shareholder’s Equity 756,483 699,012 Total Liabilities and Shareholder’s Equity 6,188,749 6,131,278 COMMITMENTS AND CONTINGENCIES 1,134,042 1,134,042 CAPITAL ADEQUACY Core capital ratio 15.73% 14.71% Risk-weighted capital ratio 17.05% 16.43%




113


(b) Financial Impact of Changes in Accounting Policies (Continued)

(i) Statement of Financial Position (Continued) Group and Bank

Under theFRS

Effect of the Transition

MFRSs

Under the

MFRS Framework MFRS 139 Framework As at 01 January 2011 RM’000 RM’000 RM’000 ASSETS Cash and short-term funds 1,270,688 1,270,688 Securities held-for-trading 2,493 2,493 Securities held-to-maturity 289,459 289,459 Financing and advances 4,049,437 (14,804) 4,034,633 Other assets 26,331 26,331 Statutory deposits with Bank Negara Malaysia

39,078 39,078

Investment in subsidiary - - Investment properties 100,549 100,549 Property and equipment 38,215 38,215 Intangible assets 47,118 47,118 Deferred tax assets 54,200 (15,458) 38,742 Total Assets 5,917,568 5,887,306 LIABILITIES AND SHAREHOLDER’S EQUITY

Liabilities Deposits from customers 3,907,946 3,907,946 Deposits and placements of banks and

other financial institutions 1,222,142

1,222,142 Bills and acceptances payable 13,682 13,682 Other liabilities 48,436 48,436 Total Liabilities 5,192,206 5,192,206 Shareholder’s equity Share capital 1,000,000 1,000,000 Reserves (274,638) (30,262) (304,900) Total Shareholder’s Equity 725,362 695,100 Total Liabilities and Shareholder’s Equity

5,917,568 5,887,306

COMMITMENTS AND CONTINGENCIES 1,083,935 1,083,935 CAPITAL ADEQUACY Core capital ratio 15.81% 15.37% Risk-weighted capital ratio 17.26% 17.03%




114



(ii) Reconciliation of Income Statement and Statement of Comprehensive Income Group and Bank

Under theFRS

Effect of the

Transition MFRSs

Under the MFRS

Framework MFRS 139 Framework31 Dec 2011 RM’000 RM’000 RM’000 Revenue 355,887 355,887 Income derived from investment of

depositors’ funds and others 320,772

320,772 Income derived from investment of shareholders’ funds

35,115 35,115

Allowance for impairment on financing (40,381) (28,527) (68,908) Other expenses directly attributable to the

investment of the depositors’ funds (4,672)

(4,672) Impairment loss on securities (3,478) (3,478)

Total distributable income 307,356 278,829 Income attributable to depositors (152,363) (152,363)

154,993 126,466 Personnel expenses (66,306) (66,306) Other overheads and expenditures (88,215) (88,215) Profit / (loss) before zakat and taxation 472 (28,055) Zakat - - Taxation 30,649 1,318 31,967 Net profit for the financial period

31,121

3,912

Other comprehensive income: - Securities available-for-sale - -

Total comprehensive income for the financial period

31,121 3,912




115



There is no material differences between the statement of cash flows presented under the MFRSs and the statement of cash flows presented under FRSs.

Capital adequacy The adjustments to the financial statements of the Group and the Bank as a result of the transition to the MFRS framework and the changes in accounting policies, as discussed above, also had consequential effects on the comparative capital adequacy ratios. These are summarised below:

As at 31 December 2011 As at 1 January 2011 As previously

stated As restatedAs previously

stated As restated Group and Bank

Under the FRS

Framework

Under the MFRS

Framework

Under the FRS

Framework

Under the MFRS

Framework Tier 1 capital (RM’000) 671,635 628,304 671,162 656,359Capital base (RM’000) 728,194 701,721 732,850 727,335Tier 1 capital ratio (%) 15.73 14.71 15.81 15.46Risk-weighted capital ratio (%)

17.05

16.43

17.26

17.13

39. APPROVAL OF FINANCIAL STATEMENTS

The financial statements have been approved for issue in accordance with a resolution by the Board of Directors dated 30 April 2013.

financial statements for the financial year ......saeed mohammed al ghamdi (resigned on 04 march...

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