Notes to the Financial Statements - Other Disclosures

59. Contingent Liabilities and Commitments

Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be readily measured as defined in the Sri Lanka Accounting Standard – LKAS 37 on “Provisions, Contingent Liabilities and Contingent Assets”.

To meet the financial needs of customers, the Bank enters into various irrevocable commitments and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to lend. Letters of credit and guarantees commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import or export of goods. Guarantees and standby letters of credit carry a similar credit risk to loans.

Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed unless its occurrence is remote.

Operating lease commitments of the Group (as a lessor and as a lessee) form part of commitments and pending legal claims against the Group form part of contingencies.

Even though these obligations may not be recognised on the Statement of Financial Position, they do contain credit risk and are therefore part of the overall risk of the Bank as disclosed in Note 59.1 to the Financial Statements.

In the normal course of business, the Bank makes various irrevocable commitments and incurs certain contingent liabilities with legal recourse to its customers. Even though these obligations may not be recognised on the date of the Statement of Financial Position, they do contain credit risk and are therefore form part of the overall risk profile of the Bank.

			GROUP		BANK
As at December 31,			2017	2016	2017	2016
	Note		Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Contingencies			438,543,821	365,862,605	438,454,025	365,853,920
Guarantees			64,869,807	33,267,170	64,869,608	33,258,485
Performance bonds			30,604,509	22,553,060	30,601,521	22,553,060
Documentary credits			45,146,266	36,222,394	45,078,313	36,222,394
Other contingencies	59.1		297,923,239	273,819,981	297,904,583	273,819,981
Commitments			126,734,000	132,705,895	126,340,860	132,450,607
Undrawn commitments	59.2		124,977,782	131,628,622	124,594,675	131,381,356
Capital commitments	59.3		1,756,218	1,077,273	1,746,185	1,069,251
Total			565,277,821	498,568,500	564,794,885	498,304,527

60. Net Assets Value per Ordinary Share

	GROUP		BANK
As at December 31,	2017	2016	2017	2016
Amounts used as the numerator:
Total equity attributable to equity holders of the Bank (Rs. ’000)	107,994,800	78,992,310	107,099,360	78,353,664
Number of ordinary shares used as the denominator:
Total number of shares	995,899,302	890,734,540	995,899,302	890,734,540
Net assets value per share (Rs.)	108.44	88.68	107.54	87.97

61. Litigation Against the Bank

Litigation is a common occurrence in the banking industry due to the nature of the business. The Bank has an established protocol for dealing with such legal claims. In respect of pending legal claims where the Bank had already made provisions for possible losses in its Financial Statements or has a realisable security to cover the damages are not included below as the Bank does not expect cash outflows from such claims. However, further adjustments are made to the Financial Statements if necessary on the adverse effects of legal claims based on the professional advice obtained on the certainty of the outcome and also based on a reasonable estimate.

Set out below are the unresolved legal claims against the Bank as at December 31, 2017 for which, adjustments to the Financial Statements have not been made due to the uncertainty of its outcome. In addition, there are cases filed against the Bank that has not been listed here on the basis of non-materiality to operations, aggrieved party had obtained injunctions prior to acquiring the property by the Bank etc.

• Court action has been initiated by a customer in High Court proceeding No. 236/2011/MR, challenging the Bank on transfer of title of a vehicle upon settlement of a lease facility. The Bank had transferred the title of a vehicle in the name of a relative of the customer on the strength of a letter issued by him which is now being disputed. The value of the action is Rs. 3.500 Mn. Plaintiff and the 1st defendant have closed their case. Evidence of an officer of the Bank was led and further trial fixed for March 28, 2018.
• Court action has been initiated by a customer in District Court, Colombo under proceeding No. DMR 3/2014 for Rs. 14.000 Mn. to recover a sum of Rs. 13.063 Mn. including interest on cheques paid with a fraudulent signature. The case which was initially filed at the District Court was later referred to the Commercial High Court under case No. 315/2015/MR. The matter is fixed for trial on June 13, 2018.
• Court action has been initiated in District Court, Colombo under case No. 03034/14/DMR to claim a sum of Rs. 27.870 Mn. being the total amount withdrawn from the Company account with forged signatures by an employee of the company in a number of transactions during a period of two years. Further trial fixed for May 25, 2018.
• Court action has been initiated in District Court, Colombo under proceeding No. DMR/974/2016 to recover a sum of Rs. 26.237 Mn. together with interest as damages incurred by the plaintiff due to the delay by the Bank in refunding the amount with regard to a duplicated telegraphic transfer for USD 25,000. Further trial fixed for May 21, 2018.
• Court action has been initiated in District Court, Colombo under proceeding No. DMR/2274/2015 to recover a sum of Rs. 3.374 Mn. as parking charges and interest thereon due to a dispute over parking facility provided to the Bank. Trial is due on March 29, 2018.
• Court action has been initiated District Court, Kaduwela under proceeding No. 584/L for Rs. 15.000 Mn. and interest thereon in seeking declaration that the plaintiff is the lawful owner of the property mortgaged by her daughter as security for a loan (currently in the past-due section) obtained from the Bank. Replication on February 23, 2018.
• Court action has been initiated by a third party in District Court Colombo under proceeding No. DMR/873/17 to recover a sum of Rs. 15.300 Mn. as damages for accepting three stale cheques amounting to Rs. 2.500 Mn. drawn by the plaintiff and deposited to an account of a customer, which was returned as “Account Closed”. Customer has taken criminal action against the plaintiff in this regard and the latter had initiated action against the Bank successively. Answer by the Bank due on May 8, 2018.
• An appeal was filed by the Bank under proceedings No. HCALT 405/2014 in Provincial High Court of the Eastern Province against the order of the Labour Tribunal for payment of compensation and reinstatement in employment of an outsourced office helper. The office helper too filed a case in Provincial High Court in proceedings No. HCALT 404/2014 refusing compensation and asking for reinstatement. Appeal made by the Bank was dismissed and case filed by outsourced office helper was decided in favour of him. Bank has appealed in the Supreme Court against the judgement of both cases under proceeding No. SC/SPL/LA/220/15 and SC/SPL/LA/221/15. Next hearing of the cases fixed for June 1, 2018.
• Court action has been initiated in Colombo High Court under proceedings No. 112/2005 (1) to claim Rs. 5.584 Mn. and Rs. 10.000 Mn. as damages for disposing of shares owned by the plaintiff which were held under lien to the Bank. Plaintiff alleges that the transaction has taken place without obtaining her consent. Judgement was delivered in favour of the Plaintiff. Bank has appealed in the Supreme Court (Appeal No. 09/2010) against the judgement delivered. Appeal is fixed for argument on May 11, 2018.
• Court action has been initiated by a customer in Colombo High Court under proceedings No. 36/96 (1) to claim a sum of Rs. 183.050 Mn. regarding a forward exchange contract. Judgement was delivered in favour of the Bank dismissing the plaintiff’s action, but the plaintiff has appealed against the judgement in the Supreme Court (Appeal No. 38/2006). Next hearing on February 26, 2018.
• Court action has been initiated in the Commercial High Court of the Western Province under proceedings No. 571/2008/MR to prevent the Bank from exercising the inherent rights of the Bank to set-off a deposit of the plaintiff amounting to USD 15.000 Mn. against a sum due from the plaintiff in terms of a hedging agreement. Commercial High Court issued the judgement in favour of the Bank and dismissed plaintiff’s application for an interim injunction. Presently the case is at the Trial stage. Further trial fixed for March 7, 2018.

62. Maturity Analysis

Group

(i) Remaining contractual period to maturity as at the date of Statement of Financial Position of the assets employed by the Group
is detailed below:

As at December 31,	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Total as at 31.12.2017	Total as at 31.12.2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest earning assets:
Financial assets
Cash and cash equivalents	3,660,584	–	–	–	–	3,660,584	8,291,413
Balances with Central Banks	1,632,454	263,830	–	4,607	–	1,900,891	560,669
Placements with banks	17,633,269	–	–	–	–	17,633,269	11,718,499
Securities purchased under resale agreements	–	–	–	–	–	–	–
Derivative financial assets	–	–	–	–	–	–	–
Other financial instruments – Held for trading	4,096,168	–	–	–	–	4,096,168	4,693,989
Loans and receivables to banks	–	–	–	–	–	–	–
Loans and receivables to other customers	232,293,546	199,536,025	171,769,829	94,461,959	44,382,771	742,444,130	620,129,488
Financial investments – Available for sale	13,224,706	67,787,547	59,124,910	14,229,518	–	154,366,681	159,642,243
Financial investments – Held to maturity	6,966,556	12,785,739	12,885,249	29,661,652	7,066,600	69,365,796	63,626,598
Financial investments – Loans and receivables	2,521,780	5,188,975	16,430,329	24,571,393	–	48,712,477	51,824,026
Total interest earning assets as at 31.12.2017	282,029,063	285,562,116	260,210,317	162,929,129	51,449,371	1,042,179,996
Total interest earning assets as at 31.12.2016	278,177,314	177,445,705	270,732,533	114,198,779	79,932,594		920,486,925
Non-interest earning assets:
Financial assets
Cash and cash equivalents	31,012,840	–	–	–	–	31,012,840	24,632,814
Balances with central banks	26,999,348	14,321,349	783,669	730,063	811,029	43,645,458	43,374,589
Placements with banks	–	–	–	–	–	–	–
Securities purchased under resale agreements	–	–	–	–	–	–	–
Derivative financial assets	959,937	1,374,599	–	–	–	2,334,536	1,052,829
Other financial instruments – Held for trading	314,745	–	–	–	–	314,745	293,809
Loans and receivables to banks	–	–	640,512	–	–	640,512	624,458
Loans and receivables to other customers	–	–	–	–	–	–	–
Financial investments – Available for sale	–	–	–	17,491	529,471	546,962	450,279
Financial investments – Held to maturity	–	–	–	–	–	–	–
Financial investments – Loans and receivables	–	–	–	–	–	–	–
Non-financial assets
Investments in subsidiaries	–	–	–	–	–	–	–
Investments in associates	–	–	–	–	109,844	109,844	108,859
Property, plant and equipment	–	–	–	–	16,317,044	16,317,044	11,569,666
Intangible assets	–	–	–	–	1,251,226	1,251,226	1,132,669
Leasehold property	–	–	–	–	104,516	104,516	105,968
Deferred tax assets	–	–	–	–	–	–	668,150
Other assets	12,335,522	257,173	1,245,002	506,177	3,019,103	17,362,977	16,482,559
Total non-interest earning assets as at 31.12.2017	71,622,392	15,953,121	2,669,183	1,253,731	22,142,233	113,640,660
Total non-interest earning assets as at 31.12.2016	64,361,841	14,616,440	3,826,664	991,974	16,699,730		100,496,649
Total assets – as at 31.12.2017	353,651,455	301,515,237	262,879,500	164,182,860	73,591,604	1,155,820,656
Total assets – as at 31.12.2016	342,539,155	192,062,145	274,559,197	115,190,753	96,632,324		1,020,983,574
Percentage – as at 31.12.2017 (*)	30.60	26.09	22.74	14.20	6.37	100.00
Percentage – as at 31.12.2016 (*)	33.56	18.81	26.89	11.28	9.46		100.00

(*) Total assets of each maturity bucket as a percentage of total assets employed by the Group.

(ii) Remaining contractual period to maturity as at the date of Statement of Financial Position of the liabilities and shareholders’ funds employed by the Group is detailed below:

	Up to 3 months	3 to 12 months	1 to 3 years	3 to 5 years	More than 5 years	Total as at 31.12.2017	Total as at 31.12.2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Interest-bearing liabilities:
Financial liabilities
Due to banks	33,084,091	4,622,936	13,243,490	1,086,634	41,224	52,078,375	67,012,968
Derivative financial liabilities	–	–	–	–	–	–	–
Securities sold under repurchase agreements	35,806,750	10,978,972	2,746,663	–	–	49,532,385	69,628,961
Other financial liabilities – Held for trading	–	–	–	–	–	–	–
Due to other customers/deposits from customers	456,843,445	290,068,614	18,492,159	13,050,450	13,783,280	792,237,948	685,709,264
Other borrowings	657,813	2,091,720	5,021,093	7,503,789	8,511,679	23,786,094	9,270,154
Subordinated liabilities	203,326	314,552	–	9,477,720	15,170,326	25,165,924	24,849,539
Total interest-bearing liabilities as at 31.12.2017	526,595,425	308,076,794	39,503,405	31,118,593	37,506,509	942,800,726
Total interest-bearing liabilities as at 31.12.2016	506,171,295	264,521,678	32,826,512	23,143,483	29,807,918		856,470,886
Non-interest-bearing liabilities:
Financial liabilities
Due to banks	8,166,517	–	–	–	–	8,166,517	4,085,423
Derivative financial liabilities	2,488,462	1,185,570	–	–	4,462	3,678,494	1,515,035
Securities sold under repurchase agreements	–	–	–	–	–	–	–
Other financial liabilities – Held for trading	–	–	–	–	–	–	–
Due to other customers/deposits from customers	65,032,033	–	–	–	–	65,032,033	57,601,349
Other borrowings	–	–	–	–	–	–	–
Subordinated liabilities	–	–	–	–	–	–	–
Non-financial liabilities
Current tax liabilities	857,023	3,345,827	–	–	–	4,202,850	3,464,682
Deferred tax liabilities	472,934	153,861	588,908	261,930	2,087,582	3,565,215	–
Other provisions	–	–	–	–	–	–	1,874
Other liabilities	3,354,484	9,738,767	2,943,111	1,374,896	2,096,857	19,508,115	18,028,902
Equity
Stated capital	–	–	–	–	37,143,541	37,143,541	24,978,003
Statutory reserves	–	–	–	–	6,492,552	6,492,552	5,647,993
Retained earnings	–	–	–	–	5,086,609	5,086,609	4,553,778
Other reserves	–	–	–	–	59,272,098	59,272,098	43,812,536
Non-controlling interest					871,906	871,906	823,113
Total non-interest-bearing liabilities as at 31.12.2017	80,371,453	14,424,025	3,532,019	1,636,826	113,055,607	213,019,930
Total non-interest-bearing liabilities as at 31.12.2016	78,625,428	3,058,595	1,529,112	309,278	80,990,275		164,512,688
Total liabilities and equity – as at 31.12.2017	606,966,878	322,500,819	43,035,424	32,755,419	150,562,116	1,155,820,656
Total liabilities and equity – as at 31.12.2016	584,796,723	267,580,273	34,355,624	23,452,761	110,798,193		1,020,983,574
Percentage – as at 31.12.2017(*)	52.52	27.90	3.72	2.83	13.03	100.00
Percentage – as at 31.12.2016(*)	57.28	26.21	3.36	2.30	10.85		100.00

(*) Total liabilities and shareholders’ funds of each maturity bucket as a percentage of total liabilities and shareholders’ funds employed by the Group.

Bank

Maturity analysis of the assets and liabilities of the Bank is given in Note 69.2.2 on “Financial Risk Review”.

63. Operating Segments

An operating segment is a component of the Group that engages 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 other components, whose operating results are reviewed regularly by the Corporate Management Team headed by the Managing Director/Chief Executive Officer (being the chief operating decision-maker) to make decisions about resources allocated to each segment and assess its performance, and for which discrete financial information is available.

The Group has five strategic divisions which are reportable segments, namely:

Operating segment		Types of products and services offered
Personal banking		Refer section on Key Business Lines Review under Capital Management for details on product portfolio by Business Lines
Corporate banking
International operations
Investment banking
Dealing and treasury

Segment performance is evaluated based on operating profits or losses which, in certain respects, are measured differently from operating profits or losses in the Consolidated Financial Statements. Income taxes are managed on a Group basis and are not allocated to operating segments.

The following table presents the income, profit, asset and liability information on the Group’s strategic business divisions for the year ended December 31, 2017 and comparative figures for the year ended December 31, 2016.

	Personal banking		Corporate banking		International operations		Investment banking		Dealing/treasury		Unallocated/eliminations		Total/consolidated
For the year ended	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
December 31,	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
External operating income:
Net interest income	26,884,392	23,255,124	4,639,252	4,528,344	4,044,558	3,214,891	381,502	1,026,278	1,559,382	(125,417)	2,058,212	1,229,056	39,567,298	33,128,276
Foreign exchange profit	217,330	198,679	699,565	822,894	1,015,851	509,081	–	–	(1,335,721)	795,504	–	–	597,025	2,326,158
Net fee and commission income	6,135,191	4,857,448	1,803,963	1,594,813	934,398	609,430	45,242	23,505	5,672	3,981	–	–	8,924,466	7,089,177
Other income	454,232	779,594	334,100	353,668	125,674	190,003	42,303	8,984	213,662	64,252	514,857	458,138	1,684,828	1,854,639
Total operating income	33,691,145	29,090,845	7,476,880	7,299,719	6,120,481	4,523,405	469,047	1,058,767	442,995	738,320	2,573,069	1,687,194	50,773,617	44,398,250
Impairment loss expenses	(2,471,052)	202,442	564,494	(1,726,375)	(319,356)	(59,393)	–	–	–	–	–	–	(2,225,914)	(1,583,326)
Net operating income	31,220,093	29,293,287	8,041,374	5,573,344	5,801,125	4,464,012	469,047	1,058,767	442,995	738,320	2,573,069	1,687,194	48,547,703	42,814,924
Segment result	16,281,986	14,328,813	5,414,227	4,874,706	4,086,117	3,148,044	287,326	625,923	126,225	(4,086)	(2,919,235)	(2,865,270)	23,276,646	20,108,130
Profit from operations													23,276,646	20,108,130
Share of profit of associates – net of tax													3,678	6,454
Income tax expense													(6,653,817)	(5,648,160)
Non-controlling interest													(20,544)	43,909
Net profit for the year, attributable to equity holders of the parent													16,605,963	14,510,333

 

 

	Personal banking		Corporate banking		International operations		Investment banking		Dealing/treasury		Unallocated/eliminations		Total/consolidated
As at	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
December 31,	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Other information
Segment assets	443,643,154	340,853,854	240,649,838	229,759,156	128,456,896	112,387,766	17,270,623	19,644,842	262,780,975	257,143,130	62,909,326	61,085,967	1,155,710,812	1,020,874,715
Investment in associates	–	–	–	–	–	–	–	–	–	–	109,844	108,859	109,844	108,859
Unallocated assets	–	–	–	–	–	–	–	–	–	–	–	–	–	–
Total assets	443,643,154	340,853,854	240,649,838	229,759,156	128,456,896	112,387,766	17,270,623	19,644,842	262,780,975	257,143,130	63,019,170	61,194,826	1,155,820,656	1,020,983,574
Segment liabilities	690,860,560	601,064,166	151,728,410	145,104,008	103,813,211	86,181,038	17,380,467	12,444,122	75,403,237	92,910,135	7,768,065	3,464,682	1,046,953,950	941,168,151
Unallocated liabilities	–	–	–	–	–	–	–	–	–	–	–	–	–	–
Total liabilities	690,860,560	601,064,166	151,728,410	145,104,008	103,813,211	86,181,038	17,380,467	12,444,122	75,403,237	92,910,135	7,768,065	3,464,682	1,046,953,950	941,168,151

 

 

	Personal banking		Corporate banking		International operations		Investment banking		Dealing/treasury		Unallocated/eliminations		Total/consolidated
For the year ended	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Information on cash flows
Cash flows from operating activities	3,977,097	48,260,328	(7,219,784)	(20,442,140)	322,609	(491,909)	140,802	(40,710)	(191,366)	(21,391,095)	–	–	(2,970,642)	5,894,474
Cash flows from investing activities	–	–	–	–	–	–	3,362,948	1,124,546	–	–	–	–	3,362,948	1,124,546
Cash flows from financing activities	(2,274,217)	(1,298,062)	–	–	–	–	–	–	(88,053)	12,191,770	6,177,191	(3,204,500)	3,814,921	7,689,208
Capital expenditure
Property, plant and equipment													(2,105,701)	(1,468,902)
Intangible assets													(352,329)	(422,175)
Net cash flow generated during the year													1,749,197	12,817,151

64. Related Party Disclosures

The Bank carried out transactions in the ordinary course of business on an arm’s length basis at commercial rates with parties who are defined as Related Parties as per the Sri Lanka Accounting Standard – LKAS 24 – “Related Party Disclosures”, other than, transactions that the Key Management Personnel (KMP) have availed under schemes uniformly applicable to all staff at concessionary rates.

64.1 Parent and ultimate controlling party

The Bank does not have an identifiable parent of its own.

64.2 Key Management Personnel (KMP)

KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity directly
or indirectly.

KMP of the Bank

The Board of Directors of the Bank has been classified as KMP of the Bank.

KMP of the Group

As the Bank is the ultimate parent of the subsidiaries listed out in Note 1.3 to the Financial Statements, the Board of Directors of the Bank has the authority and responsibility for planning, directing and controlling the activities of the Group directly or indirectly. Accordingly, the Board of Directors of the Bank is also KMP of the Group. Therefore, officers who are only Directors of the subsidiaries and not of the Bank have been classified as KMP only for that respective subsidiary.

64.2.1 Transactions with KMP

64.2.2 Transactions, arrangements and agreements involving KMP and their Close Family Members (CFM)

CFM of a KMP are those family members who may be expected to influence, or be influenced by, that KMP in their dealings with the entity. They may include KMP’s domestic partner and children, children of the KMP’s domestic partner and dependants of the KMP or the KMP’s domestic partner. CFM are related parties to the Group/Bank.

64.2.2.1 Statement of Financial Position – Bank

	Year-end balance		Average balance
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	18,890	10,229	9,282	9,462
Credit cards	115	–	427	238
Total	19,005	10,229	9,709	9,700
Liabilities
Deposits	228,579	145,701	167,137	79,474
Securities sold under repurchase agreements	7,844	35,062	30,123	31,198
Debentures	2,000	2,000	2,000	355
Total	238,423	182,763	199,260	111,027

64.2.2.2 Commitments and contingencies – Bank

	Year-end balance		Average balance
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Undrawn facilities	18,035	10,380	13,024	11,716
Total	18,035	10,380	13,024	11,716

64.2.2.3 Direct and indirect accommodation – Bank

	Year-end balance
As at December 31,	2017	2016
	%	%
Direct and indirect accommodation as a % of the Bank’s Regulatory Capital	0.03	0.02

No impairment losses have been recorded against balances outstanding with KMP and CFM.

64.2.2.4 Income Statement

For the Year Ended December 31,			2017	2016
	Note		Rs. ’000	Rs. ’000
Interest income			777	626
Interest expense			17,226	7,747
Other income			–	20
Compensation to KMP	64.2.1.1 & 64.2.1.2		167,021	131,462

64.2.2.5 Share-based transactions of KMP and CFM

As at the year end	2017	2016
Number of ordinary shares held	1,206,569	810,939
Dividends paid (in Rs. ’000)	6,304	4,762
Number of cumulative exercisable options under the Employee Share Option Plan (ESOP) 2008
Tranche II	50,270	98,678
Tranche III	105,695	155,603
Number of cumulative exercisable options under the Employee Share Option Plan (ESOP) 2015
Tranche I	83,416	81,869
Tranche II	85,912	–

64.2.3 Transactions, arrangements and agreements involving entities which are controlled, and/or significantly influenced by the KMP or their CFM

64.2.3.1 Statement of Financial Position

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	3,693,085	266,349	2,220,358	80,967
Credit cards	777	–	596	–
Total	3,693,862	266,349	2,220,954	80,967
Liabilities
Deposits	1,305,617	977,122	986,253	276,411
Securities sold under repurchase agreements	119,000	126,237	74,093	426
Debentures	24,310	24,310	24,310	4,317
Total	1,448,927	1,127,669	1,084,656	281,154

64.2.3.2 Commitments and contingencies

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Guarantees	76,530	71,280	74,055	71,280
Undrawn facilities	354,901	379,266	218,930	279,891
Total	431,431	450,546	292,985	351,171

64.2.3.3 Direct and indirect accommodation

		Year-end balance
		2017	2016
		%	%
Direct and indirect accommodation as a % of the Bank’s Regulatory Capital		3.37	0.69

64.2.3.4 Income Statement

For the year ended December 31,	2017	2016
	Rs. ’000	Rs. ’000
Interest income	233,786	10,451
Interest expense	39,411	9,916
Other income	118	–

64.3 Transactions with group entities

The Group entities include the subsidiaries and the associates of the Bank.

64.3.1 Transactions with subsidiaries

64.3.1.1 Statement of Financial Position

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	841,060	786,000	879,790	564,749
Lease receivables	–	–	–	–
Other receivables	31,439	92,857	62,148	91,727
Impairment for other receivables	–	(55,684)	–	(54,554)
Total	872,499	823,173	941,938	601,922
Liabilities
Deposits	502,575	178,827	120,953	108,269
Securities sold under repurchase agreements	142,550	238,508	202,877	145,944
Other	74,523	20,061	47,292	23,137
Total	719,648	437,396	371,122	277,350

64.3.1.2 Commitments and contingencies

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Letters of credit	–	–	–	1,126
Undrawn facilities	100,000	62,565	84,881	113,165
Total	100,000	62,565	84,881	114,291

64.3.1.3 Direct and indirect accommodation

		Year-end balance
		2017	2016
		%	%
Direct and indirect accommodation as a % of the Bank’s Regulatory Capital		0.79	0.72

64.3.1.4 Income Statement

For the Year Ended December 31,	2017	2016
	Rs. ’000	Rs. ’000
Interest income	143,796	58,002
Interest expense	32,695	26,731
Other income	182,826	103,569
Impairment charges	–	3,306
Expenses	523,214	454,126

64.3.1.5 Other transactions

For the year ended December 31,	2017	2016
	Rs. ’000	Rs. ’000
Payments made to OneZero Company Ltd. in relation to purchase of computer hardware and software	29,738	8,253

64.3.2 Transactions with associates

64.3.2.1 Statement of Financial Position

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	–	–	32	29
Lease receivables	–	–	–	–
Total	–	–	32	29
Liabilities
Deposits	35,468	48,606	19,945	38,967
Securities sold under repurchase agreements	–	–	16,228	–
Total	35,468	48,606	36,173	38,967

64.3.2.2 Commitments and contingencies

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Undrawn facilities	1,000	–	–	–
Total	1,000	–	–	–

64.3.2.3 Direct and indirect accommodation

	Year end Balance
	2017	2016
	%	%
Direct and indirect accommodation as a % of the Bank’s Regulatory Capital	0.00	0.00

64.3.2.4 Income Statement

For the year ended December 31,	2017	2016
	Rs. ’000	Rs. ’000
Interest income	8	7
Interest expense	3,666	3,310
Other income	21,213	22,698
Expenses	71,194	–

64.3.2.5 Other transactions

	2017	2016
Number of ordinary shares of the Bank held by the associates as at the year-end	46,154	4,605
Dividend paid (Rs. ’000)	278	29

64.4 Transactions with other related entities

Other related entities include significant investors (either entities or individuals) that have control, joint control or significant influence,
post-employment benefit plans for the Bank’s employees.

64.4.1 Transactions with the post-employment benefit plans for the employees of the Bank

64.4.1.1 Statement of Financial Position

	Year-end balance		Average balance
	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Assets
Loans and advances	–	–	474	–
Total	–	–	474	–
Liabilities
Deposits	9,427,494	12,681,135	8,452,541	7,615,681
Securities sold under repurchase agreements	–	386,447	83,265	293,317
Total	9,427,494	13,067,582	8,535,806	7,908,998

64.4.1.2 Income Statement

For the year ended December 31,	2017	2016
	Rs. ’000	Rs. ’000
Interest income	114	30
Interest expense	1,075,241	821,179
Contribution made/taxes paid by the Bank	1,005,342	1,007,451

65. Non-Cash Items Included in Profit Before Tax

	GROUP		BANK
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Depreciation of property, plant and equipment	1,185,698	1,093,088	1,097,096	1,022,648
Amortisation of leasehold property	1,452	1,452	942	942
Amortisation of intangible assets	229,764	173,790	209,766	165,903
Impairment losses on loans and advances	2,225,914	1,583,326	1,956,725	1,511,158
Other impairment	–	–	(42,484)	18,656
Contributions to defined benefit plans – Unfunded schemes	288,791	234,262	279,249	227,816
Provision made o/a of leave encashment	79,128	76,193	79,128	76,193
Equity-settled Share-based payments	138,341	206,174	138,341	206,174
Unamortised interest payable o/a subodinated liabilities	12,211	12,210	12,211	12,210
Mark to market on other financial instruments – held for trading	(85,627)	129,562	(85,627)	129,562
Loss on write-off intangible assets	7,241	303	–	303
Effect of exchange rate variances on investment in subsidiaries	–	–	(26,349)	(30,136)
Effect of exchange rate variances on loans and receivables to banks	(16,054)	(23,352)	(16,054)	(23,352)
Effect of exchange rate variances on property, plant and equipment	(168)	(2,024)	882	(2,012)
Effect of exchange rate variances on intangible assets	(3,208)	(553)	429	(540)
Effect of exchange rate variances on defined benefit plans	(7,279)	7,782	(7,279)	7,782
Effect of exchange rate variances on subordinated liabilities	288,750	420,000	288,750	420,000
Net effect of exchange rate variances on net deferred tax liability	995	(4,980)	4,626	(4,979)
Net effect of exchange rate variances on income tax liability	(45,703)	56,937	(45,820)	56,937
Grossed up notional tax and withholding tax credits	(1,985,107)	(1,209,319)	(1,961,769)	(1,206,343)
Total	2,315,139	2,754,851	1,882,763	2,588,922

66. Change in Operating Assets

	GROUP		BANK
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Net (increase)/decrease in derivative financial instruments	(1,281,707)	3,065,340	(1,281,707)	3,065,340
Net (increase)/decrease in balances with central banks	(1,611,091)	(15,714,241)	(928,241)	(15,652,188)
Net (increase)/decrease in placements with banks	(5,914,770)	5,475,040	(5,914,770)	5,475,040
Net (increase)/decrease in securities purchased under resale agreements	–	8,002,100	–	8,002,100
Net (increase)/decrease in other financial assets – Held for trading	683,448	2,556,114	683,448	2,556,114
Net (increase)/decrease in loans and receivables to customers	(124,540,556)	(111,789,686)	(123,385,064)	(109,414,259)
Net (increase)/decrease in financial investments – Available for sale	12,820,870	39,672,872	12,951,296	39,724,256
Financial investments – Held-to-maturity	(5,739,198)	(63,626,598)	(2,581,454)	(60,981,298)
Net (increase)/decrease in financial investments – Loans and receivables	(263,047)	4,815,666	(263,047)	4,815,666
Net (increase)/decrease in other assets	(880,418)	(4,385,542)	(859,996)	(4,346,881)
Total	(126,726,469)	(131,928,935)	(121,579,535)	(126,756,110)

67. Change in Operating Liabilities

	GROUP		BANK
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Net increase/(decrease) in due to banks	(10,853,499)	39,308,995	(10,487,820)	37,289,692
Net increase/(decrease) in derivative financial instruments	2,158,997	(375,735)	2,158,997	(375,735)
Net increase/(decrease) in securities sold under repurchase agreements	(20,096,576)	(42,620,742)	(20,190,702)	(42,517,343)
Net increase/(decrease) in deposits from banks, customers and debt securities issued	113,959,368	119,289,396	110,564,017	115,461,684
Net increase/(decrease) in other borrowings	14,515,940	(715,483)	14,515,940	(715,483)
Net increase/(decrease) in other provisions	(1,874)	–	(1,874)	–
Net increase/(decrease) in other liabilities	583,523	2,236,019	633,847	2,122,523
Net increase/(decrease) in due to subsidiaries	–	–	54,462	(6,151)
Total	100,265,879	117,122,450	97,246,867	111,259,187

68. Operating Leases

68.1 Operating lease commitments (payables)

A number of branches and office premises occupied by the Group are under operating leases. These leases have an average life of three to six years. Lease agreements include clauses to enable upward revision of the rental payments on a periodic basis to reflect market conditions. There are no restrictions placed upon the Group by entering into these leases.

Future minimum rentals payable under non-cancellable operating leases are as follows:

	GROUP		BANK
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Less than one year	937,070	760,677	890,519	707,066
Between one to five years	2,510,540	1,889,163	2,352,812	1,762,161
Over five years	2,186,383	1,066,952	2,076,645	927,007
Total	5,633,993	3,716,792	5,319,976	3,396,234

68.2 Operating lease commitments (receivables)

The Group has entered into operating leases to rent its own properties (mainly consisting of areas not currently occupied by the branches). Lease agreements include clauses to enable upward revision of rental income on a periodic basis to reflect market conditions. These leases have an average life of three to five years. There are no restrictions placed upon the Group by entering into these leases.

Future minimum rentals receivable under non-cancellable operating leases are as follows:

	GROUP		BANK
As at December 31,	2017	2016	2017	2016
	Rs. ’000	Rs. ’000	Rs. ’000	Rs. ’000
Less than one year	6,007	6,042	1,820	3,218
Between one to five years	10,289	12,167	2,440	3,469
Over five years	–	–	–	–
Total	16,296	18,209	4,260	6,687

69. Financial Risk Review

This note presents information about the Bank’s exposure to financial risks and the Bank’s management of capital.

For information on the Bank’s Financial Risk Management Framework
	Introduction
69.1	Credit risk
69.1.1	Credit quality analysis
69.1.2	Impaired loans and receivables and investment in debt securities
69.1.3	Collaterals held
69.1.4	Concentration of credit risk
69.1.5	Exposures to unrated countries
69.2	Liquidity risk
69.2.1	Exposure to liquidity risk
69.2.2	Maturity analysis of financial assets and financial liabilities
69.2.3	Liquidity reserves
69.2.4	Financial assets available to support future funding
69.3	Market risk
69.3.1	Exposure to market risk – Trading and non-trading portfolios
69.3.2	Exposure to interest rate risk – Sensitivity analysis
69.3.3	Exposure to currency risk – Non-trading portfolio
69.3.4	Exposure to equity price risk
69.4	Operational risk
69.5	Capital management and Pillar III disclosures as per Basel III
69.5.1	Regulatory capital
69.5.2	Capital allocation
69.5.3	Pillar III disclosures as per Basel III

Introduction

As a financial intermediary, the Bank is exposed to various types of risks including credit, market, liquidity and operational risks which are inherent in the Bank’s activities. Managing these risks is critical for the sustainability of the Bank and plays a pivotal role in all activities of the Bank. Risk Management function strives to identify potential risks in advance, analyse them and take precautionary steps to mitigate the impact of risk whilst optimising through risk adjusted returns within the risk appetite of the Bank.

Risk Management framework

The overall responsibility and oversight of the Risk Management framework of the Bank is vested with the Board of Directors (BOD). The Board Integrated Risk Management Committee (BIRMC), a mandatory Subcommittee set up by the Board, in turn is entrusted with the development of the Bank’s Risk Management Policies and monitoring of due compliance of same through the Executive Integrated Risk Management Committee (EIRMC).

The Risk Management Policies spell out the risk appetite of the Bank and has incorporated risk exposure limits and controls to monitor adherence to the limits in force. These Policies and Systems are reviewed regularly to reflect the changing market conditions and the products and services offered.

The Bank strives to inculcate a Risk Management Culture through continuous training, work ethics and standards.

Refer Note 3 to the Financial Statements for more information on the Risk Management Framework of the Bank.

Integrated Risk Management Department (IRMD)

Business Units are the Risk Owners and have the primary responsibility for Risk Management. The IRMD acts as the second line of defence in managing the Risk. The IRMD through Chief Risk Officer reports to the BIRMC thus ensuring its independence.

Risk measurement and reporting

The Bank uses robust risk measurement techniques based on the type of risk and industry best practices. The Bank also carries out Stress Testing which is a key aspect of the Internal Capital Adequacy Assessment Process ( ICAAP ) and the Risk Management Framework provides an insight on the impact of extreme, but plausible scenarios on the Bank’s risk profile. The results are reported to the EIRMC and to the BIRMC on a periodic basis.

The Bank establishes policies, limits and thresholds within the Risk appetite. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept (risk appetite). The monitoring and control mechanism therefore, is based on risk appetite of the Bank.