#1emiratesnbd.com Emirates NBD INSPIRED BY A GLORIOUS PAST ASPIRING FOR A REMARKABLE FUTURE 7 عام الخمسين YEAR OF THE FIFTIETH إ ع م UAE EMIRATES NBD BANK PJSC GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021#2EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 GROUP CONSOLIDATED FINANCIAL STATEMENTS Contents Page 1-3 Directors' report Independent auditors' report on the Group consolidated financial statements 4-9 Group consolidated statement of financial position 10 Group consolidated income statement 11 Group consolidated statement of comprehensive income 12 Group consolidated statement of cash flows 13 Group consolidated statement of changes in equity 14-15 Notes to the Group consolidated financial statements 16-128 بنك الإمارات دبي الوطني Emirates NBD#3DIRECTORS' REPORT The Directors have pleasure in presenting their report together with the audited consolidated financial statements of Emirates NBD Bank P.J.S.C. ("the Bank") and its subsidiaries (collectively known as "the Group") for the year ended 31 December 2021. The Bank was incorporated in the United Arab Emirates (the UAE) on 16 July 2007, pursuant to the approval from the Central Bank of the UAE on 3 July 2007 to grant the Bank a banking license. Basis of Preparation of Financial Statements The Group consolidated financial statements have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and applicable requirements of the laws of the UAE. Financial Commentary The Group reported a consolidated profit (attributable to equity holders) of AED 9,298 million for the year 2021, which represent an increase of 34 percent over 2020. The Group has continued to focus on: Maintaining strong capital, liquidity and funding positions; Delivering long term sustainable value for shareholders; Growing international operations; Maintaining a strong risk oversight whilst effectively managing cost of risk; Investment in people with a focus on developing and deploying National talent in key senior and executive positions; Investment in IT transformation with a focus on innovation, analytics and digitalisation; Continued operational resilience in providing full banking services during the global pandemic. The diversified balance sheet and solid capital base remains a core strength of the Group. The Group used this strength to support its customers, empowering them to benefit from the growing economy as Expo 2020 Dubai began. This strength is reflected in Moody's recent affirmation of Emirates NBD's ratings and improved 'Stable' Outlook, combined with the upgrade in DenizBank's credit ratings. International expansion continues with additional branches in the Kingdom of Saudi Arabia, approval for further branches in India and strong results in Turkey. The Group continues to diversify with 38% of income now coming from international operations. Interest rates remain at record low levels, yet underlying business momentum is strong coupled with effective cost management and a significant reduction in the cost of risk reflecting improved business sentiment. The Group's strong results demonstrate financial resiliency and the success of its diversified business model. The Group's balance sheet strengthened with further improvements in deposit mix, credit quality, capital and liquidity. Emirates NBD continues to support businesses and customers recovering from the global pandemic, while investing in its digital platform and its international network to drive future growth. The outlook for the UAE economy is positive, with Expo 2020 Dubai predicted to boost domestic demand and the easing of travel restrictions in key markets expected to support the recovery in tourism and hospitality. The UAE economy has remained open thanks to the speed and success of the UAE's vaccination programme. With most of the population fully vaccinated, and with one of the highest testing rates globally, the UAE continues to be a safe and attractive destination for residents and visitors. Group adjusted Earnings per Share was AED 1.38 (2020: AED 1.00). The Group achieved a return on average tangible equity of 12.8 percent (2020: 9.5 percent) and a return on average total assets of 1.3 percent (2020: 1.0 percent). Equity and Note Holders' Funds Total equity and note holders' funds as at the end of 2021 stands at AED 83,580 million (2020: AED 84,618 million). Proposed Appropriations The Directors also propose the following appropriations from retained earnings: Retained earnings as at 1 January 2021 Group profit for the year (attributable to equity holders) Other comprehensive income/(loss) for the year Retained earnings available for appropriation (a) 2020 Cash dividend paid during 2021 (b) Interest on Tier 1 Capital Notes (c) Directors' fees for 2021 (d) Zakat Balance of retained earnings as at 31 December 2021 Board and Board Committee meetings during 2021 Emirates NBD Board of Directors H.H. Shaikh Ahmad Bin Saeed Al Maktoum Mr. Hesham Abdulla Al Qassim Mr. Salem Mohammed Obaidalla Mr. Hussain Hassan Mirza Al Sayegh Mr. Buti Obaid Buti Al Mulla Mr. Shoaib Mir Hashim Khoory Mr. Mohamed Hamad Obaid Khamis Al Shehi H.E. Mohamed Hadi Ahmad Al Hussaini Mr. Ali Humaid Ali Al Owais Total Number of Emirates NBD Board Meetings: 6 Emirates NBD Board Executive Committee Mr. Hesham Abdulla Al Qassim Mr. Shoaib Mir Hashem Khoory Mr. Mohamed Hamad Obaid Al Shehi H.E. Mohamed Hadi Ahmed Al Hussaini Mr. Ali Humaid Ali Al Owais Total Number of Meetings: 20 Emirates NBD Board Audit Committee Mr. Hussain Hassan Mirza Al Sayegh Mr. Shoaib Mir Hashem Khoory Mr. Mohamed Hamad Obaid Al Shehi H.E. Mohamed Hadi Ahmed Al Hussaini Mr. Salem Mohammed Obaidalla Total Number of Meetings: 5 Chairman Vice Chairman Director Director Director Director Director Director Director AED million 47,014.8 9,297.5 (34.9) 56,277.4 (2,524.3) (592.2) (31.0) (41.7) 53,088.2 Chairman of the Committee Member Member Member Member Chairman of the Committee Member Member Member (Resigned on 27.9.2021) Member 1 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 2 بنك الإمارات دبي الوطني Emirates NBD#4Emirates NBD Board Nomination & Remuneration Committee Mr. Buti Obaid Buti Al Mulla Mr. Mohamed Hamad Obaid Al Shehi H.E. Mohamed Hadi Ahmad Al Hussaini Mr. Ali Humaid Ali Al Owais Mr. Hesham Abdulla Al Qassim Total Number of Meetings: 4 Emirates NBD Board Risk Committee Mr. Hesham Abdulla Al Qassim Mr. Hussain Hassan Mirza Al Sayegh Mr. Buti Obaid Buti Al Mulla Mr. Ali Humaid Ali Al Owais Mr. Salem Mohammed Obaidalla Total Number of Meetings: 4 Emirates NBD Board Credit and Investment Committee Mr. Hesham Abdulla Al Qassim Mr. Shoaib Mir Hashem Khoory H.E. Mohamed Hadi Ahmad Al Hussaini Mr. Ali Humaid Ali Al Owais Mr. Salem Mohammed Obaidalla Total Number of Meetings: 48 Auditors: Chairman of the Committee Member Member (Resigned on 27.9.2021) Member Member (Appointed on 27.9.2021) Chairman of the Committee Member Member Member Member Chairman of the Committee Member Member Member Member Deloitte and Touche (M.E.) were appointed as auditors of the Emirates NBD Group for the 2021 financial year at the Annual General Meeting held on 24 February 2021. On behalf of the Board Chairman Dubai, UAE 25 January 2022 INDEPENDENT AUDITORS' REPORT The Shareholders Emirates NBD Bank PJSC Dubai United Arab Emirates Report on the Audit of the Consolidated Financial Statements Opinion We have audited the consolidated financial statements of Emirates NBD Bank PJSC (the "Bank") and its subsidiaries (together the "Group"), Dubai, United Arab Emirates which comprise the consolidated statement of financial position as at 31 December 2021, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group, as at 31 December 2021, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards ("IFRSS"). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (the "IESBA Code") together with the other ethical requirements that are relevant to our audit of the Group's consolidated financial statements in the United Arab Emirates and we have fulfilled our other ethical responsibilities. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Our audit approach Loan loss impairments - Estimation uncertainty with respect to expected credit losses for loan and advances to customers The assessment of the Bank's determination of We have gained an understanding of the loan origination impairment allowances for loans and advances to process, credit risk management process and the customers require management to make judgements estimation process of determining impairment allowances over the staging of financial assets and measurement for loans and advances to customers and tested the of the Expected Credit Loss (ECL). The audit was operating effectiveness of relevant controls within these focused on this matter due to the materiality of processes. the loans and advances to customers (representing 61.4% of total assets) and the complexity of the On a sample basis, we selected individual loans and judgements, assumptions and estimates used in performed a detailed credit review and challenged the the ECL models. Refer to Note 7 to the consolidated Bank's identification of SICR (Stage 2), the assessment financial statements for the accounting policy and of credit-impaired classification (Stage 3) and whether Note 46 for the credit risk disclosure. relevant impairment events had been identified in a timely manner. We challenged the assumptions underlying the impairment allowance calculation, such as estimated future cash flows, collateral valuations and estimates of recovery. We evaluated controls over approval, accuracy and completeness of impairment allowances and governance controls, including assessing 3 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 4 بنك الإمارات دبي الوطني Emirates NBD#5INDEPENDENT AUDITORS' REPORT (CONTINUED) To the Shareholders of Emirates NBD Bank PJSC (continued) Key audit matters (continued) Key audit matter Our audit approach Loan loss impairments - Estimation uncertainty with respect to expected credit losses for loan and advances to customers (continued) The material portion of the non-retail portfolio of loans key management and committee meetings that form part and advances is assessed individually for the significant of the approval process for loan impairment allowances. increase in credit risk (SICR) or credit impairment and the related measurement of ECL. This requires We evaluated key assumptions such as thresholds used management to capture all qualitative and quantitative to determine SICR and forward-looking macroeconomic reasonable and supportable forward-looking scenarios including the related weighting. information while assessing SICR, or while assessing credit-impaired criteria for the exposure. Management For loans tested collectively, we evaluated controls over judgement may also be involved in manual staging the modelling process, including model inputs, monitoring, movements in accordance with the Bank's policies and validation and approval. We challenged key assumptions, the requirements of IFRS 9 Financial Instruments. inspected the calculation methodology and traced a sample back to source data. The measurement of ECL amounts for retail and non- retail exposures classified as Stage 1 and Stage 2 are We tested the IT application used in the credit impairment carried out by the models with limited manual process and verified the integrity of data used as input to intervention. It is important that models (PD, LGD, EAD the models including the transfer of data between source and macroeconomic adjustments) are valid throughout systems and the impairment models. We evaluated the reporting period and are subject to a validation system-based and manual controls over the recognition process by an independent reviewer. and measurement of impairment allowances. We evaluated other post model adjustments and management overlays in order to assess the reasonableness of these adjustments. We further assessed the reasonableness of forward-looking information incorporated into the impairment calculations by involving our specialists to challenge the multiple economic scenarios chosen and weighting applied to capture non-linear losses. The Bank performed an independent validation of the PD and LGD models including macro-economic model during the reporting period. We considered the process of this independent validation of the models and its impact on the results of the impairment estimate. Finally, we have updated our assessment of the methodology and framework designed and implemented by the Bank as to whether the impairment models outcomes and stage allocations appear reasonable and reflective of the forecasts used by the Bank to determine future economic conditions at the reporting date. INDEPENDENT AUDITORS' REPORT (CONTINUED) To the Shareholders of Emirates NBD Bank PJSC (continued) Key audit matters (continued) Key audit matter IT systems and controls over financial reporting Our audit approach We identified IT systems and controls over financial We obtained an understanding of the applications reporting as an area of focus due to the extensive relevant to financial reporting and the infrastructure volume and variety of transactions which are processed supporting these applications. daily by the Bank and rely on the effective operation of automated. Moreover, the Bank completed the We tested IT general controls relevant to the identified migration of its core banking systems and consolidated automated controls and Information Produced by the multiple systems into a single core banking platform Entity (IPEs) covering access security, program changes, during the reporting period. There is a risk that data center and network operations. automated accounting procedures and related internal controls are not accurately designed and operating We examined certain Information Produced by the effectively. In particular, the incorporated relevant Entity (IPES) used in the financial reports from relevant controls are essential to address the potential risk for applications and key controls over their report logics as fraud and error as a result of change to applications or well as preparation and maintenance. underlying data. Key audit matter Concentration of related party balances Related party assets as at 31 December 2021 are disclosed in Note 39 to these consolidated financial statements with the description of the accounting policy disclosed in Note 7. We focused on this area as significant management judgement is required to determine the disclosures required under IFRS 7 Financial Instruments: Disclosures and IAS 24 Related Party Disclosures with regards to significant credit risk concentrations and related party disclosures. We performed testing on the key automated controls on significant IT systems relevant to business processes. We tested the interfaces between the identified systems in order to determine if information is being transmitted in an accurate and complete manner. . Our audit approach . . IFRS 7 requires that specific information be disclosed for each type of risk arising from financial instruments. These include qualitative disclosures around how exposures arise and how they are. measured and managed, summary quantitative data about an entity's exposure to each type of risk, and ⚫ information about an entity's credit risk exposure, including significant credit risk concentrations. In addition, for government-controlled entities such as Emirates NBD Bank PJSC, disclosure is required under IAS 24 Related Party Disclosures of a qualitative or quantitative indication of the extent of transactions with the government or related entities. Our audit procedures included: Obtaining from those charged with governance and management information identifying all known related parties. Evaluating and testing of key controls over the identification and monitoring of related party transactions. Evaluating and testing of key controls over the initial recording and monitoring of loans. Reviewing minutes of board meetings and management meetings to determine if there were any related party transactions of which we were previously unaware. Confirming the balance in writing from the relevant related party. Vouching individual related party transactions on a sample basis to supporting documentation. Evaluating the adequacy of the disclosures by assessing whether a reasonable user of the consolidated financial statements could understand the exposure of the Bank to concentration and related risks, and by considering the ability of such a user to reasonably estimate the extent of transactions with the parent of the majority shareholder, including the income arising from the balance due from them, based on the disclosures provided. 5 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 9 بنك الإمارات دبي الوطني Emirates NBD#6INDEPENDENT AUDITORS' REPORT (CONTINUED) To the Shareholders of Emirates NBD Bank PJSC (continued) Other information The Board of Directors is responsible for the other information. The other information comprises the annual report of the Group. We obtained the Board of Directors' report of the annual report prior to the date of this auditor's report, and the remaining information of the annual report is expected to be made available to us after that date. The other information does not include the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance or conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the remaining information of the annual report of the Group, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS and their preparation in compliance with applicable provisions of UAE Federal Law No. (2) of 2015, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. INDEPENDENT AUDITORS' REPORT (CONTINUED) To the Shareholders of Emirates NBD Bank PJSC (continued) Auditor's Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAS, we exercise professional judgement and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than the one resulting from error, as fraud may involve collusion, forgery, intentional omission, misrepresentations, or the override of internal controls. Obtain an understanding of internal controls relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal controls. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 7 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 8 بنك الإمارات دبي الوطني Emirates NBD#7INDEPENDENT AUDITORS' REPORT (CONTINUED) To the Shareholders of Emirates NBD Bank PJSC (continued) Auditor's Responsibilities for the Audit of the Consolidated Financial Statements (continued) We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Group's Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law and regulations preclude public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal And Regulatory Requirements As required by the UAE Federal Law No. (2) of 2015, we report that, for the year ended 31 December 2021 • We have obtained all the information we considered necessary for the purposes of our audit; • • The consolidated financial statements have been prepared and comply, in all material respects, with the applicable provisions of the UAE Federal Law No. (2) of 2015 (as amended); The Bank has maintained proper books of account; The financial information included in the Directors' report is consistent with the books of account and records of the Bank; ⚫ Note 11 to the consolidated financial statements discloses the Bank's purchases or investments in shares during the year ended 31 December 2021; Note 39 to the consolidated financial statements discloses material related party transactions and the terms under which they were conducted and principles of managing conflict of interest; ⚫ Based on the information that has been made available to us nothing has come to our attention which causes us to believe that the Bank has contravened during the year ended 31 December 2021 any of the applicable provisions of the UAE Federal Law No. (2) of 2015 (as amended) or of its Articles of Association which would materially affect its activities or its financial position as at 31 December 2021; and • Note 48 to the consolidated financial statements of the Group discloses social contributions made during the year ended 31 December 2021. Further, as required by UAE Federal Law No. (14) of 2018, we report that we have obtained all the information and explanations we considered necessary for the purpose of our audit. Deloitte & Touche (M.E.) GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 ASSETS Cash and deposits with Central Bank Due from banks Investment securities Loans and receivables Positive fair value of derivatives Customer acceptances Property and equipment Goodwill and intangibles Other assets TOTAL ASSETS LIABILITIES Due to banks Customer deposits Debt issued and other borrowed funds Sukuk payable Negative fair value of derivatives Customer acceptances Other liabilities TOTAL LIABILITIES EQUITY Issued capital Treasury shares Tier I capital notes Share premium reserve Legal and statutory reserve Other reserves Fair value reserve Currency translation reserve Retained earnings TOTAL EQUITY ATTRIBUTABLE TO EQUITY AND NOTE HOLDERS OF THE GROUP Non-controlling interest TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 2021 Notes 9 AED 000 70,753,613 2020 AED 000 100,841,896 10 45,343,248 34,997,680 11 106,156,886 72,695,287 12 422,272,390 443,541,469 35 10,658,925 13,697,399 38 11,343,522 8,837,724 3,747,621 4,080,042 11 14 5,981,491 6,313,171 15 11,178,922 687,436,618 13,082,805 698,087,473 678038 2 16 17 43,755,207 456,483,888 51,672,068 464,197,034 18 19 63,387,228 3,672,500 54,662,670 5,510,933 35 9,186,321 10,775,231 20 11,343,522 16,028,263 603,856,929 8,837,724 17,813,715 613,469,375 21 21 222222 6,316,598 (46,175) 9,128,652 6,316,598 (46,175) 10,379,786 17,954,164 17,954,164 23 3,158,299 3,158,299 23 2,945,393 2,945,393 23 (725,815) 476,692 23 (8,299,265) 53,088,213 83,520,064 (3,607,673) 47,014,778 84,591,862 59,625 26,236 83,579,689 687,436,618 84,618,098 698,087,473 Akbar Ahmad Registration No. 1141 25 January 2022 Dubai United Arab Emirates 9 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 10 The attached notes 1 to 50 form an integral part of these Group consolidated financial statements. The independent auditors' report on the Group consolidated financial statements is set out on pages 4 to 9. Chairman Vice Chairman # Chief Executive Officer بنك الإمارات دبي الوطني Emirates NBD#8GROUP CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2021 GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 2021 Notes AED 000 2020 AED 000 Interest and similar income Interest and similar expense Net interest income Income from Islamic financing and investment products 24 23,663,509 25,228,101 24 (8,929,717) (9,191,762) Group profit for the year after tax 2021 AED 000 9,305,970 2020 AED 000 6,965,169 14,733,792 16,036,339 Other comprehensive income 25 2,822,009 2,789,375 Distribution on Islamic deposits and profit paid to Sukuk holders Net income from Islamic financing and investment products Net interest income and income from Islamic financing and investment products net of distribution to depositors Fee and commission income 26 (631,241) (1,338,514) Items that will not be reclassified subsequently to the income statement: Actuarial gains/(losses) on retirement benefit obligations (34,939) (52,397) 2,190,768 1,450,861 Movement in fair value reserve (equity instruments): - Net change in fair value (23,547) (468,848) 16,924,560 17,487,200 Fee and commission expense Net fee and commission income Net gain on trading securities Other operating income Total operating income General and administrative expenses 6,475,045 (2,639,234) 5,626,623 (1,972,060) 27 29 282 3,835,811 3,654,563 Items that may be reclassified subsequently to the income statement: Cost of hedging for forward element of a forward and currency basis spread excluded from hedge effectiveness testing: 28 150,818 2,910,461 23,821,650 23,210,708 30 (7,991,521) (7,856,307) Operating profit before impairment 15,830,129 15,354,401 180,044 1,888,901 Net changes in the cost of hedging Cash flow hedges: Effective portion of changes in fair value Fair value reserve (debt instruments): - Net change in fair value (179,138) (13,776) - (333,459) 509,082 Net impairment loss on financial assets 31 (5,898,857) (7,936,109) - Net amount transferred to income statement Operating profit after impairment 9,931,272 7,418,292 - Related deferred tax Share of profit of associate and (loss) on its disposal 15 Group profit for the year before tax (21,137) 9,910,135 12,173 7,430,465 Taxation charge Group profit for the year after tax (604,165) 9,305,970 (465,296) 6,965,169 Other comprehensive income for the year Total comprehensive income for the year (644,244) 423,587 (182,728) (71,795) 160,609 (33,042) Currency translation reserve (4,720,325) (1,864,182) Hedge of a net investment in foreign operations 28,733 (36,755) (5,929,038) 3,376,932 (1,608,126) 5,357,043 Attributable to: Equity holders of the Group Non-controlling interest Group profit for the year after tax Earnings per share 34 9,297,537 8,433 9,305,970 6,959,545 5,624 Attributable to: Equity holders of the Group 6,965,169 Non-controlling interest 1.38 1.00 Total comprehensive income for the year 3,368,499 8,433 5,351,419 5,624 3,376,932 5,357,043 The attached notes 1 to 50 form an integral part of these Group consolidated financial statements. The independent auditors' report on the Group consolidated financial statements is set out on pages 4 to 9. The attached notes 1 to 50 form an integral part of these Group consolidated financial statements. The independent auditors' report on the Group consolidated financial statements is set out on pages 4 to 9. 11 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 12 بنك الإمارات دبي الوطني Emirates NBD#9FINANCING ACTIVITIES Issuance of Tier I capital notes Issuance of debt issued and other borrowed funds Repayment of debt issued and other borrowed funds. Repayment of sukuk borrowing GROUP CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 OPERATING ACTIVITIES Group profit before tax for the year 9,910,135 7,430,465 Adjustment for non-cash items (refer Note 42) 9,630,164 10,237,009 Operating profit before changes in operating assets and liabilities 19,540,299 17,667,474 (Increase)/decrease in interest free statutory deposits (2,232,450) 7,033,996 (Increase)/decrease in certificate of deposits with Central Banks maturing after three months 30,500,000 100,000 (Increase)/decrease in amounts due from banks maturing after three months (2,688,268) (2,740,567) Increase/(decrease) in amounts due to banks maturing after three months (5,955,285) 7,868,678 (Increase)/decrease in other assets (4,613,877) (482,443) Increase/(decrease) in other liabilities (6,593,024) (3,118,476) (Increase)/decrease in positive fair value of derivatives 2,554,609 (6,095,348) Increase/(decrease) in negative fair value of derivatives (1,588,910) Increase/(decrease) in customer deposits (Increase)/decrease in loans and receivables Net cash flows generated from/(used in) operations (7,713,146) 15,034,219 36,244,167 5,210,012 (7,983,797) (13,986,983) 3,472,546 Taxes paid (689,186) Net cash flows generated from/(used in) operating activities 35,554,981 (388,641) 3,083,905 INVESTING ACTIVITIES (Increase)/decrease in investment securities Disposal of subsidiary (refer note 49) (34,076,787) 546,725 (18,087,312) (Increase)/decrease of investment properties (Increase)/decrease of property and equipment (448,261) (747,232) Dividend income received Disposal of associate 18,742 105,393 22,059 Net cash flows generated from/(used in) investing activities (33,854,188) (18,812,485) Repayment of Tier I capital notes Interest on Tier I capital notes Dividends paid Issuance of Sukuk Net cash flows generated from/(used in) financing activities Increase in cash and cash equivalents (refer Note 42) The attached notes 1 to 50 form an integral part of these Group consolidated financial statements. The independent auditors' report on the Group consolidated financial statements is set out on pages 4 to 9. 13 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 14 25,636,942 (13,313,409) (3,672,500) 2,748,866 (4,000,000) (592,233) (2,524,278) 1,836,250 6,119,638 7,820,431 18,264,098 (13,487,491) 1,836,250 2,747,764 (1,836,250) (651,088) (2,524,278) 4,349,005 (11,379,575) 2021 AED 000 2020 AED 000 Non- Total controlling interest Group Total AED 000 84,591,862 9,297,537 AED 000 AED 000 9,305,970 26,236 84,618,098 8,433 ATTRIBUTABLE TO EQUITY AND NOTE HOLDERS OF THE GROUP Share premium reserve (a) AED 000 ------------ 17,954,164 statutory AED 000 reserve (c) Legal and ----------- 3,158,299 Other reserves (c) AED 000 2,945,393 Fair value reserve (c) AED 000 476,692 Currency translation reserve (c) AED 000 ----------------- (3,607,673) Retained earnings AED 000 ---------------- 47,014,778 9,297,537 GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 Tier I capital notes (b) AED 000 10,379,786 Issued capital (a) Treasury shares AED 000 AED 000 -------------------- Balance as at 1 January 2021 6,316,598 (46,175) Tier I capital notes issued during the year (Note 22) 2,748,866 Profit for the year Other comprehensive income for the year Tier I capital notes redeemed during (4,000,000) (5,929,038) 2,748,866 2,748,866 (1,202,507) (4,691,592) (34,939) (5,929,038) Increase in non-controlling interest Dividends paid* Directors' fees (refer Note 32) Zakat -------- Balance as at 31 December 2021 6,316,598 (46,175) 9,128,652 17,954,164 3,158,299 the year (Note 22) Interest on Tier 1 capital notes (592,233) (4,000,000) (592,233) 24,956 (31,000) (41,652) (2,524,278) (2,524,278) (31,000) (592,233) (4,000,000) 24,956 (31,000) (2,524,278) 53,088,213 (41,652) 83,520,064 (41,652) ----------- 59,625 83,579,689 ---------- 2,945,393 (725,815) (8,299,265) The independent auditors' report on the Group consolidated financial statements is set out on pages 4 to 9. The attached notes 1 to 50 form an integral part of these Group consolidated financial statements. *Dividend paid is net of the amount attributable to treasury shares. Notes: (a) For further details refer to Note 21 (b) For further details refer to Note 22 (c) For further details refer to Note 23 بنك الإمارات دبي الوطني Emirates NBD#1015 ATTRIBUTABLE TO EQUITY AND NOTE HOLDERS OF THE GROUP GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 (1,608,126) 2,747,764 Issued capital (a) AED 000 Treasury Tier I capital shares AED 000 notes (b) AED 000 ............. EMPPY_______ Balance as at 1 January 2020 6,316,598 (46,175) 9,468,272 Share premium reserve (a) AED 000 17,954,164 reserve (c) Legal and statutory AED 000 Currency Non- 3,158,299 Other AED 000 2,945,393 reserves (c) Fair value AED 000 reserve (c) translation reserve (c) Retained earnings AED 000 AED 000 ............. ------------- 131,484 (1,706,736) 43,375,416 Profit for the year 6,959,545 Total AED 000 81,596,715 6,959,545 controlling interest Group Total AED 000 AED 000 10,146 81,606,861 5,624 6,965,169 Other comprehensive income for the year Tier I capital notes issued during the year (Note 22) 2,747,764 Tier I capital notes redeemed during the year (Note 22) (1,836,250) EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 Interest on Tier 1 capital notes Increase in non-controlling interest Dividends paid* Directors' fees (refer Note 32) 6,316,598 (46,175) ------- 10,379,786 17,954,164 ____ ...------------- 3,158,299 The independent auditors' report on the Group consolidated financial statements is set out on pages 4 to 9. The attached notes 1 to 50 form an integral part of these Group consolidated financial statements. Zakat Balance as at 31 December 2020 16 Notes: (a) For further details refer to Note 21 (b) For further details refer to Note 22 (c) For further details refer to Note 23 بنك الإمارات دبي الوطني Emirates NBD 345,208 (1,900,937) (52,397) (1,608,126) 2,747,764 (1,836,250) (651,088) (651,088) - 10,466 (2,524,278) (31,000) (61,420) (2,524,278) .------------ 47,014,778 (31,000) (61,420) --------------- 84,591,862 26,236 (1,836,250) (651,088) 10,466 (2,524,278) (31,000) (61,420) .--------------- 84,618,098 2,945,393 476,692 (3,607,673) ------------- NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 1 2 3 CORPORATE INFORMATION Emirates NBD Bank PJSC (the "Bank") was incorporated in the United Arab Emirates on 16 July 2007 consequent to the merger between Emirates Bank International PJSC ("EBI") and National Bank of Dubai PJSC ("NBD"), under the Commercial Companies Law (Federal Law Number 8 of 1984 as amended) as a Public Joint Stock Company. The consolidated financial statements for the year ended 31 December 2021 comprise the financial statements of the Bank and its subsidiaries (together referred to as the "Group"). The Bank is listed on the Dubai Financial Market (TICKER: "EMIRATESNBD"). The Group's principal business activities are corporate and institutional banking, retail banking, treasury and Islamic banking. The Bank's website is www.emiratesnbd.com. For details of activities of subsidiaries, refer to Note 37. The registered address of the Bank is Post Box 777, Dubai, United Arab Emirates ("UAE"). The parent company of the Group is Investment Corporation of Dubai, a company in which the Government of Dubai is the majority shareholder. BASIS OF ACCOUNTING Statement of Compliance The Group consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSS) issued by the International Accounting Standards Board (IASB) and applicable requirements of the laws of the UAE. The principal accounting policies adopted in the preparation of the Group consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. FUNCTIONAL AND PRESENTATION CURRENCY The presentation currency of the consolidated financial statements is the United Arab Emirates Dirham (AED). The functional currency for a significant proportion of the Group's assets, liabilities, income and expenses is also AED. However, certain subsidiaries have functional currencies other than AED and AED is their presentation currency.#11NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 4 BASIS OF MEASUREMENT 5 The Group consolidated financial statements have been prepared under the historical cost basis except for the following: Derivative financial instruments are measured at fair value; Financial instruments classified as trading and at fair value through profit or loss (FVTPL) are measured at fair value; Financial assets at fair value through other comprehensive income are measured at fair value; and Recognised assets and liabilities that are hedged are measured at fair value in respect of the risk that is hedged. The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group's accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the Group consolidated financial statements are disclosed in Note 5. USE OF JUDGEMENTS AND ESTIMATES The preparation of the Group consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amount of financial assets and liabilities and the resultant allowances for impairment and fair values. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowances required for impaired loans and receivables as well as allowances for impairment provision for unquoted investment securities. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Significant items where the use of estimates and judgements are required are outlined below: (i) Financial Instruments Judgements made in applying accounting policies that have most significant effects on the amounts recognised in the consolidated financial statements for the year ended 31 December 2021 pertain to: Classification of financial assets: assessment of business model within which the assets are held and assessment of whether the contractual terms of the financial assets are solely payment of principal and interest of the principal amount outstanding. Calculation of expected credit loss (ECL): Assumptions and estimation uncertainties that have a significant impact on ECL for the year ended 31 December 2021. The impact is mainly driven by inputs, assumptions and techniques used for ECL calculation under IFRS 9 methodology. Inputs, assumptions and techniques used for ECL calculation Key concepts that have the most significant impact and require a high level of judgement, as considered by the Group while determining the ECL, are: Assessment of Significant Increase in Credit Risk ("SICR") The assessment of a significant increase in credit risk is done on a relative basis. To assess whether the 5 USE OF JUDGEMENTS AND ESTIMATES (CONTINUED) (i) Financial Instruments (continued) Inputs, assumptions and techniques used for ECL calculation (continued) Assessment of Significant Increase in Credit Risk (continued) credit risk on a financial asset has increased significantly since origination, the Group compares the risk of default occurring over the expected life of the financial asset at the reporting date to the corresponding risk of default at origination, using key risk indicators that are used in the Group's existing risk management processes. The Group's assessment of significant increases in credit risk is being performed at least quarterly for each individual exposure based on three factors. If any of the following factors indicates that a significant increase in credit risk has occurred, the instrument will be moved from Stage 1 to Stage 2: 1. The Group has established thresholds for significant increase in credit risk based on movement in Probability of Default relative to initial recognition. 2. Additional qualitative reviews have been performed to assess the staging results and make adjustments, as necessary, to better reflect the positions which have significantly increased in risk. 3. IFRS 9 contains a rebuttable presumption that instruments which are 30 days past due have experienced a significant increase in credit risk. Movements between Stage 2 and Stage 3 are based on whether financial assets are credit-impaired as at the reporting date. The determination of credit-impairment is based on individual assessment of financial assets for objective evidence of impairment. The Group reviews its loans and receivables portfolio and Islamic financing receivables to assess impairment on a regular basis. In determining whether an impairment loss should be recorded in the consolidated income statement, the Group makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the contractual future cash flows from a loan or homogenous group of loans and receivables or Islamic financing receivables. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss. Assessment of Significant Increase in Credit Risk (Covid-19) The Group continues to assess borrowers for other indicators of unlikeliness to pay, taking into consideration the underlying cause of any financial difficulty and whether it is likely to be temporary as a result of Covid-19 or long term. The Group continues to support its impacted customers through a program of payment relief that was initiated in 2020 by deferring interest/principal due. These payment reliefs are considered as short-term liquidity support to address borrower cash flow issues. The Group believes that the extension of payment reliefs does not automatically trigger SICR where the impact on customer's business is expected to be short term. For all other customers, the Group continues to consider severity and extent of potential Covid-19 impact on economic sector and future outlook, cash flow and financial strength, agility and change in risk profile along with the past track record in determining SICR. As per the disclosure requirements of the Central Bank of UAE (CBUAE) in the context of Covid-19, for the UAE operations, the Group has divided its customers benefitting from payment deferrals into two groups 17 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 18 بنك الإمارات دبي الوطني Emirates NBD#12NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 5 USE OF JUDGEMENTS AND ESTIMATES (CONTINUED) (i) Financial Instruments (continued) Inputs, assumptions and techniques used for ECL calculation (continued) Assessment of Significant Increase in Credit Risk (Covid-19) (continued) (Group 1 and Group 2). Customers not expected to face substantial changes in their credit worthiness, beyond liquidity issues caused by Covid-19 crisis, are categorised in Group 1. Customers expected to face substantial changes in their credit worthiness, in addition to liquidity issues that will be addressed by payment deferrals are categorized in Group 2. Customers expected to be significantly impacted by Covid-19 in the long term and that are expected to face substantial deterioration in their credit worthiness have been migrated to Stage 2 and categorised in Group 2. In exceptional circumstances, Stage 3 migration may have also been triggered where a customer's business, income streams and interest servicing capacity were expected to be permanently impaired. Such customers have also been categorised in Group 2. The accounting impact of the extension/restructuring of credit facilities due to Covid-19 has been assessed and has been treated as per the requirements of IFRS 9 for modification of terms of arrangement. Macroeconomic Factors, Forward Looking Information (FLI) and Multiple Scenarios The measurement of ECL for each stage and the assessment of significant increases in credit risk considers information about past events and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. The estimation and application of forward-looking information requires significant judgment based on the macroeconomic variables (or changes in macroeconomic variables) such as occupancy rates, oil prices, housing price index and GDP (where applicable), that are closely correlated with credit losses in the relevant portfolio and represent the underlying causal effects of changes in these economic conditions. Each macroeconomic scenario used in the Group's ECL calculation will have projected forecasts of the relevant macroeconomic variables. The Group estimation of ECL in Stage 1 and Stage 2 is a discounted probability-weighted estimate that considers a minimum of three future macroeconomic scenarios. These scenarios are based on macroeconomic forecasts published by external experts. If conditions warrant additional downside scenarios may also be considered. Probability weights attached to these scenarios are updated on a quarterly basis (if required). All scenarios considered are applied to all portfolios subject to ECL with the same probabilities. In some instances the inputs and models used for calculating ECLS may not always capture all characteristics of the market at the date of the consolidated financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material. Such cases are subjected to the Group's governance process for oversight. Sensitivity assessment due to movement in each macroeconomic variable and the respective weights under the three scenarios is periodically assessed by the Group. 5 USE OF JUDGEMENTS AND ESTIMATES (CONTINUED) (i) Financial Instruments (continued) Inputs, assumptions and techniques used for ECL calculation (continued) Macroeconomic Factors, Forward Looking Information (FLI) and Multiple Scenarios (continued) The table below summarises key macroeconomic indicators included in the economic scenarios for respective operating regions relevant to their markets on 31 December 2021 for the years ending 2021 to 2025: UAE Base Scenario Upside Scenario 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 2021 Downside Scenario 2022 2023 2024 2025 Oil Price USD 70 70 64 GDP - Change % Imports - AED 2.1 3.3 2.5 64 66 2.6 2.7 70 2.1 73 69 70 7.9 5.1 2.4 72 2.2 70 44 46 53 56 1135 1231 1285 1348 1415 1135 1314 1434 1521 1601 1135 1077 2.1 (6.5) (2.0) 4.2 5.3 1061 1121 1208 in Bn KSA Oil GDP- SAR in Trn 1.00 Unemployment - % 1.05 1.07 1.09 12.1 12.8 12.7 12.6 1.11 1.00 1.09 1.10 1.13 1.16 12.6 12.1 12.6 12.4 12.4 12.4 Turkey 1.00 0.96 0.93 0.96 1.01 12.1 13.8 13.9 13.6 13.4 Real GDP - Growth % Unemployment -% 6.3 0.9 (1.6) 4.6 12.0 12.5 14.0 12.8 6.7 (1.3) 5.4 4.8 11.8 13.0 12.5 11.5 5.8 (0.6) (4.7) 4.0 12.1 13.2 15.8 14.0 Macroeconomic Factors, Forward Looking Information (FLI) and Multiple Scenarios (Covid-19) In light of the current uncertain economic environment, the Group continued to assess a range of possible macro-economic scenarios and associated weights, and analysed their impact on ECL estimates for the year 2021 using baseline, upside and downside scenarios with 40%-30%-30% weightings respectively with the exception of Turkey that uses 50%-25% -25%. The Group also applied portfolio-level ECL adjustments to corporate exposures based upon affected sectors, as well as to retail customers availing deferrals based upon employment status and level of salary inflows. The Group continues to assess individually significant exposures for any adverse movements due to Covid-19. As with any economic forecasts, the projections and likelihoods of the occurrence are subject to inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Definition of default The definition of default used in the measurement of ECL and the assessment to determine movement between stages is consistent with the definition of default used for internal credit risk management purposes. IFRS 9 does not define default, but contains a rebuttable presumption that default has occurred when an exposure is greater than 90 days past due. 19 19 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 20 20 بنك الإمارات دبي الوطني Emirates NBD#13NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 5 USE OF JUDGEMENTS AND ESTIMATES (CONTINUED) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 5 USE OF JUDGEMENTS AND ESTIMATES (CONTINUED) (i) Financial instruments (continued) Inputs, assumptions and techniques used for ECL calculation (continued) Macroeconomic Factors, Forward Looking Information (FLI) and Multiple Scenarios (Covid-19) (continued) Expected Life When measuring ECL, the Group must consider the maximum contractual period over which it is exposed to credit risk. All applicable contractual terms are considered when determining the expected life, including prepayment options and extension and rollover options. For certain revolving credit facilities that do not have a fixed maturity, the expected life is estimated based on the period over which the Group is exposed to credit risk and where the credit losses would not be mitigated by management actions. Governance In addition to the existing risk management framework, the Group has established an internal Committee to provide oversight to the IFRS 9 impairment process. The Committee is comprised of senior representatives from Finance, Risk Management, Internal Audit and Business teams and are responsible for reviewing and approving key inputs and assumptions used in the Group ECL estimates. It also assesses the appropriateness of the overall allowance results to be included in the Group consolidated financial statements. (ii) Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from quoted prices, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable market data where possible, but where this is not possible, a degree of judgement is required in establishing fair values. The judgements include consideration of liquidity and model inputs such as correlation and volatility for longer dated derivatives. Fair values are subject to a control framework designed to ensure that they are either determined or validated, by a function independent of the risk taker. (iii) Impairment of goodwill On an annual basis, the Group determines whether goodwill is impaired. This requires an estimation of the recoverable amount using value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. (iv) Impairment loss on investment in associates and jointly controlled entities Management reviews its share of investments in associates and jointly controlled entities to assess impairment on a regular basis. In determining the assessment, management compares the recoverable amount with the carrying value of the investment. Estimating recoverable amount using value in use requires the Group to make an estimate of the expected future cash flows from the associates and jointly controlled entities and choosing a suitable discount rate in order to calculate the present value of those cash flows. 6 (v) Contingent liability arising from litigations Due to the nature of its operations, the Group may be involved in litigations arising in the ordinary course of business. Provision for contingent liabilities arising from litigations is based on the probability of outflow of economic resources and reliability of estimating such outflow. Such matters are subject to many uncertainties and the outcome of individual matters is not predictable with assurance. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are applied prospectively. CHANGES IN ACCOUNTING POLICIES The Group has consistently applied the accounting policies as set out in Note 7 to all periods presented in these consolidated financial statements, except for the following accounting policies which are applicable from 1 January 2021: IBOR TRANSITION (INTEREST RATE BENCHMARK REFORMS) Effective from 1 January 2021, the Group implemented Phase 2 of the Interest Rate Benchmark Reform -Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16. The areas impacted by the amendments include application of practical expedient for accounting for modifications to financial instruments that are measured at other than fair value through profit or loss when transactions are updated for the new Risk Free Rate (RFR) rates (will not result in derecognition), relief on changes to hedge designations and hedge documentation (a change to hedge designations and hedge documentation required by IBOR reform would not result in discontinuation of hedge accounting) and providing disclosures that enable users to understand nature and extent of risks arising from interest rate benchmark reform to which the Group is exposed and how it manages those risks. The amendments are applied retrospectively with no restatement required for prior periods. During 2020, the Group implemented Phase 1 of the Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16), which provided relief on hedge accounting requirements for those hedges existing before the IBOR replacement. The Group's exposure to hedging instruments (Interest Rate Swaps and Cross-Currency Swaps) and hedged items maturing from the year 2021 onwards which are in scope of Phase 1 amendments include Fair Value Hedges with notional values of USD 1.35 billion on the receiving leg and USD 4 billion on the paying leg; and Cash Flow Hedges with notional values of USD 0.8 billion on the receiving leg. Under the Phase 1 amendments the Group determined that: . Hedge accounting relationships will continue: for cash flow hedges of IBOR cash flows despite the uncertainty about the timing and amount of the hedged cash flows due to the interest rate benchmark reform; The Group will not discontinue hedge accounting due to the application of practical expedient The Group will retain the cumulative gain or loss in the cash flow hedge reserve for designated IBOR cash flow hedges that are subject to the interest rate benchmark reform even though there is uncertainty arising from the interest rate benchmark reform with respect to the timing and amount of the cash flows of the hedged items. 21 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 22 22 بنك الإمارات دبي الوطني Emirates NBD#14NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 6 CHANGES IN ACCOUNTING POLICIES (CONTINUED) IBOR TRANSITION (INTEREST RATE BENCHMARK REFORMS) (CONTINUED) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES The Group will continue to apply the Phase 1 amendments to IFRS 9 until the uncertainty arising from the interest rate benchmark reform with respect to the timing and the amount of the underlying cash flows to which the Group is exposed to ends. The Group expects this uncertainty will continue until the Group's contracts that reference IBORS are amended to specify the date on which the interest rate benchmark will be replaced. As a result of the Phase 2 amendments in 2021: When the contractual terms of non-derivative financial instruments have been amended as a direct consequence of the interest rate benchmark reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis (i.e. the basis immediately preceding the change), the Group changes the basis for determining the contractual cash flows prospectively by revising the effective interest rate updated to reflect the change in an interest rate benchmark from IBOR to Risk Free Rate (RFR) without adjusting the carrying amount. If additional changes are made, which are not economically equivalent, the applicable requirements of IFRS 9 are applied to the additional changes. When changes are made to the hedging instruments, hedged item and hedged risk, as a result of the interest rate benchmark reform which are economically equivalent, the Group updates the hedge documentation without discontinuing the hedging relationship. The Group is primarily exposed to GBP and USD LIBOR which are subject to the interest rate benchmark reform. The exposures arise on derivatives and non-derivative financial assets and liabilities. The Group has cash flow and fair value relationships affected by the interest rate benchmark reform. Hedged items include issued GBP and USD fixed rate debt and advances to and deposits from customers linked to USD and GBP LIBOR. Hedging instruments include IBOR-linked interest rate swaps and cross- currency swap. For risks arising from interest rate benchmark reform please refer note 46 (w). Summary of transition The table below shows the Group's exposure at the year end to significant IBORS subject to reform that have yet to transition to RFRs. These exposures will remain outstanding until the IBOR ceases and will therefore transition in future. The table below excludes the exposures that will expire before the transition. 31 December 2021 in AED Million LIBOR USD (1 month) LIBOR USD (3 months) LIBOR USD (6 months) LIBOR USD (12 months) LIBOR GBP (1 month) LIBOR GBP (3 months) LIBOR GBP (6 months) Cross Currency swaps Cross Currency USD Cross Currency GBP Non-derivative financial assets-carrying value Non-derivative financial liabilities-carrying value 10,535 276 25,380 7,765 20,294 35 Derivatives Nominal amount 16,035 255,289 18,465 63 76 147 5,620 113 245 20,431 2,978 The Group has consistently applied the following accounting policies to all periods presented in these Group consolidated financial statements, except for the changes explained in Note 6. (a) Principles of Consolidation (i) Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The list of the Group's subsidiary companies is shown in Note 37. Basis of Consolidation The Group consolidated financial statements comprise the financial statements of the Bank and its subsidiaries as at the end of the reporting period. The financial statements of the subsidiaries used in the preparation of the Group consolidated financial statements are prepared for the same reporting date as the Bank with the exception of Emirates NBD Capital PSC, an insignificant subsidiary, whose year-end is 31 March and hence the Group uses their reviewed 12 months accounts as at 31 December. Consistent accounting policies are applied to like transactions and events in similar circumstances. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra- group transactions are eliminated. Business combinations are accounted for by applying the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date, fair value of assets transferred by group, liability incurred, and equity interest issued by the group in exchange for control of the acquiree. Identifiable assets acquired and liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. Acquisition-related costs are recognised as expenses in the periods in which the costs are incurred and the services are received. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. During the year 2021, the Group started offering SONIA linked contracts as a replacement of GBP LIBOR. GBP LIBOR discontinued from 1 January 2022. USD LIBOR will discontinue from 30 June 2023. 23 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 24 بنك الإمارات دبي الوطني Emirates NBD#15NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Principles of Consolidation (continued) (i) Subsidiaries (continued) Basis of Consolidation (continued) Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with IFRS 9 in profit or loss. If the contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity. In business combinations achieved in stages, previously held equity interests in the acquiree are restated to fair value at the acquisition date and any corresponding gain or loss is recognised in profit or loss. The Group elects for each individual business combination, whether non-controlling interest in the acquiree (if any) is recognised on the acquisition date at fair value, or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. Any excess of the sum of the fair value of the consideration transferred in the business combination, the amount of non-controlling interest in the acquiree (if any), and the fair value of the Group's previously held equity interest in the acquiree (if any), over the net fair value of the acquiree's identifiable assets and liabilities is recorded as goodwill. The accounting policy for goodwill is set out in Note 7 (r) (i). In instances where the latter amount exceeds the former, the excess is recognised as gain on bargain purchase in profit or loss on the acquisition date. Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or in accordance with the Group's accounting policy for financial instruments depending on the level of influence retained. (ii) Special Purpose Entities Special Purpose Entities (SPEs) are entities that are created to accomplish a well-defined objective such as the securitisation of particular assets, or the execution of a specific borrowing or lending transaction. An SPE is consolidated if the Group is exposed to variable returns from its involvement in the SPE and has the ability to affect those returns through its power over the SPE based on an evaluation of the substance of its relationship with the Group. The following circumstances may indicate a relationship in which, in substance, the Group controls and consequently consolidates an SPE: a. The Group has power over the SPE; b. The Group has exposure to, or rights, to variable returns from its involvement with the SPE; and The Group has the ability to use its power over the SPE to affect the amount of the Group's returns. C. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Principles of Consolidation (continued) (ii) Special Purpose Entities (continued) The assessment of whether the Group has control over an SPE is carried out at inception and reassessed at each period end date or if there are changes in the structure/terms of additional transactions between the group and the SPE. Information about the Group's securitisation activities is set out in Note 13. (iii) Fund Management The Group manages and administers funds on behalf of investors. The financial statements of these funds are not included in these consolidated financial statements. Information about the Group's fund management activity is set out in Note 44. (iv) Fiduciary activities Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in these Group consolidated financial statements. Income earned by the Group from its fiduciary activities is recognised in accordance with the accounting policies on fee and commission income. (v) Transactions with non-controlling interests Non-controlling interest represents the equity in subsidiaries not attributable, directly or indirectly, to owners of the Bank and is presented separately in the Group consolidated statement of comprehensive income and within equity in the Group consolidated balance sheet, separately from equity attributable to owners of the Bank. Changes in the Group's ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. In such circumstances, the carrying amounts of the controlling and non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiary. Any difference between the amount by which the non-controlling interest is adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Group. (vi) Associates Associates are the entities over which the Group has significant influence but not control, generally accompanying a shareholding of over 20% of the voting rights, not being a subsidiary or a joint venture. An associate is equity accounted for from the date the Group obtains significant influence until the date the Group ceases to have significant influence over the associate. Under the equity method, the investment in associate is measured in the balance sheet at cost plus post-acquisition changes in the Group's share of net assets of the associate. 25 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 26 بنك الإمارات دبي الوطني Emirates NBD#16NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (a) Principles of Consolidation (continued) (vi) Associates (continued) The profit or loss reflects the share of the results of operations of the associates. Where there has been a change recognised in other comprehensive income by the associates, the Group recognises its share of such changes in other comprehensive income. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associates. The Group's share of the profit or loss of its associates is shown on the face of the consolidated income statement. When the Group's share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group's investment in its associates. The Group determines at each balance sheet date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the profit or loss. The financial statements of the associates are prepared as of the same reporting date as for the Group. Where necessary, adjustments are made in the Group consolidated financial statements to align the accounting policies of the Associates in line with those of the Group. Upon loss of significant influence over the associate, the Group measures any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the aggregate of the retained investment and proceeds from disposal is recognised in profit or loss. (b) Foreign Currencies Monetary items denominated in foreign currencies are retranslated at the rates prevailing at the reporting date. The resulting gain/loss on monetary items is taken to the 'Other operating income' in the consolidated income statement. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. In the Group consolidated financial statements, assets and liabilities in foreign operations are translated into AED at rates of exchange ruling at the reporting date, and the resulting gains and losses are taken to the currency translation reserve. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Foreign Currencies (continued) Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the exchange rate at the reporting date. Forward exchange contracts are valued at market rates applicable to their respective maturities. Exchange differences arising from the translation of the net investment in overseas operations are taken directly to currency translation reserve. Foreign currency differences arising on translation are generally recognised in profit or loss. However, foreign currency differences arising from the translation of qualifying cash flow hedges to the extent that the hedge is effective, are recognised in Other comprehensive income (OCI). (c) Interest Effective Interest Rate Interest income and expense are recognised in profit or loss using the effective interest method. The 'effective interest rate' is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument to: the gross carrying amount of the financial asset; or the amortised cost of the financial liability. When calculating the effective interest rate for financial instruments other than credit-impaired assets, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not ECL. For credit-impaired financial assets, a credit-adjusted effective interest rate is calculated using estimated future cash flows including ECL. Amortised Cost The 'amortised cost' of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation of the difference between the initial amount and the maturity amount using the effective interest method and, for financial assets, adjusted for any loss allowance. Gross Carrying Amount The 'gross carrying amount of a financial asset' is the amortised cost of a financial asset before adjusting any loss allowance. 27 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 28 بنك الإمارات دبي الوطني Emirates NBD#17NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Interest (continued) Calculation of Interest Income and Expense In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit-impaired) or to the amortised cost of the liability. However, for financial assets that have become credit-impaired subsequent to initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost (as explained above) of the financial asset. If the financial asset is no longer credit-impaired, then the calculation of interest income reverts to the gross carrying amount (as explained above). For the financial assets that were credit-impaired on initial recognition, interest income is calculated by applying the credit-adjusted effective interest rate to the amortised cost (as explained above) of the financial asset. The calculation of interest income does not revert to a gross carrying amount (as explained above), even if the credit risk of the asset improves. Presentation Interest income and expense presented in the consolidated income statement include: Interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis; Interest on debt instruments measured at FVOCI calculated on an effective interest basis; The effective portion of fair value changes in qualifying hedging derivatives designated in cash flow hedges of variability in interest cash flows, in the same period as the hedged cash flows affect interest income/expense; and The effective portion of fair value changes in qualifying hedging derivatives designated in fair value hedges of interest rate risk. (d) Fees and Commission Fee income, which is not an integral part of the effective interest rate of a financial instrument, is earned from a diverse range of services provided by the Group to its customers, and are accounted for in accordance with IFRS 15 'Revenue from Contracts with Customers'. Under the IFRS 15, fee income is measured by the Group based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control over a product or service to a customer. Fee income is accounted for as follows: Income earned on the execution of a significant act is recognised as revenue when the act is completed (for example, fees arising from negotiating, or participating in the negotiation of a transaction for a third-party, such as an arrangement for the acquisition of shares or other securities); Income earned from the provision of services is recognised as revenue as the services are provided (for example, asset management, portfolio and other management advisory and service fees); and Other fees and commission income and expense are recognised as the related services are performed or received. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) Fees and Commission (continued) Fee income which forms an integral part of the effective interest rate of a financial instrument is recognised as an adjustment to the effective interest rate (for example, certain loan commitment fees) and recorded in 'Interest income'. (e) Net Trading Income 'Net trading income' comprises gains less losses to trading assets and liabilities, and includes all fair value changes, dividends and foreign exchange differences. (f) Dividend Income Dividend income is recognised when the Group's right to receive the dividend is established. Property Related Income Property related income includes rental income, which is recognised on a straight-line basis over the term of the lease. (h) Leases Under IFRS 16, the Group recognises a right-of-use asset and a lease liability at lease commencement for all leases, except for short term leases and leases of low value assets. The Group initially measures the right-of-use asset at cost and subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The Group initially measures the lease liability at the present value of the future lease payments discounted using the discount rate implicit in the lease. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. The Group has elected to apply the expedient allowed by IFRS 16 on its general requirements to short- term leases (i.e. one that does not include a purchase option and has a lease term at commencement date of 12 months or less) and leases of low value assets. For this the Group recognises the lease payments associated with those leases as an expense on a straight-line basis over the lease term or another systematic basis if that basis is representative of the pattern of the lessee's benefits, similar to the current accounting for operating leases. The Group has presented right of use assets within 'Property and equipment' and lease liabilities within 'Other liabilities' in the consolidated statement of financial position. Where the Group leases out its investment property, the Group has classified these as operating leases. 29 29 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 30 بنك الإمارات دبي الوطني Emirates NBD#18NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) Income Taxes and Deferred Taxation The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Bank and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be settled with the tax authorities. Deferred tax is accounted for using the asset and liability method. Deferred tax assets and liabilities are recognised for the full tax consequences of all temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Recognition of deferred tax assets are, however, restricted to the extent that it is probable that sufficient taxable profits will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured using tax rates that are expected to apply to the period in which the asset is expected to be realised or the liability is expected to be settled. Deferred tax assets are reviewed periodically to reduce the carrying amount by the extent to which it is no longer probable that sufficient taxable profits will be available to utilise the differences. Deferred tax assets and liabilities are off set when there is a legally enforceable right to set off current tax asset against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and current tax liabilities on a net basis. (j) Financial Assets and Financial Liabilities (i) Classification of Financial Assets and Financial Liabilities On initial recognition, a financial asset is classified as measured: at amortised cost, FVOCI or FVTPL. A financial asset is measured at amortised cost if it meets both the following conditions and is not designated as at FVTPL: The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt instrument is measured at FVOCI only if it meets both of the following conditions and is not designated as at FVTPL: . The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (i) Classification of Financial Assets and Financial Liabilities (continued) On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in other comprehensive income (OCI). This election is made on an investment-by-investment basis. All other financial assets are classified as measured at FVTPL. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. (ii) Recognition and Initial Measurement The Group initially recognises loans and receivables, Islamic financing receivables, deposits, debts and sukuks issued on the date on which they are originated or acquired. All other financial instruments (including regular-way purchases and sales of financial assets) are recognised on the trade date, which is the date on which the Group becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue. Business Model Assessment: The Group makes an assessment of the objective of a business model in which an asset is held at a portfolio level as this best reflects the way the business is managed and information is provided to management. The information considered includes: • The stated policies and objectives for the portfolio and the operation of those policies in practice. In particular, whether management's strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets; How the performance of the portfolio is evaluated and reported to the Group's management; The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; How managers of the business are compensated - e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about the future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group's stated objective for managing the financial assets is achieved and how cash flows are realised. Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets. 31 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 32 بنك الإمارات دبي الوطني Emirates NBD#19NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (ii) Recognition and Initial Measurement (continued) Assessment whether contractual cash flows are solely payments of principal and interest: For the purposes of this assessment, 'principal' is defined as the fair value of the financial asset on initial recognition. 'Interest' is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are solely payments of principal and interest, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Group considers: . Contingent events that would change the amount and timing of cash flows; Leverage features; Prepayment and extension terms; Terms that limit the Group's claim to cash flows from specified assets (e.g. non-recourse asset arrangements); and Features that modify consideration of the time value of money - e.g. periodical reset of interest rate. See note on investment securities, loans and receivable and cash and cash equivalents for further details. The Group classifies its financial liabilities, other than financial guarantees and loan commitments, as measured at amortised cost or FVTPL. The Group classifies financial liabilities as held for trading when they have issued primarily for short term profit making through trading activities or form part of a portfolio of financial instruments that are managed together for which there is evidence of a recent pattern of short-term profit taking. Gains and losses arising from changes in fair values are included in the consolidated income statement in the year in which they arise. Reclassifications: Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Group changes its business model for managing financial assets. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (iii) Impairment • • • • The Group recognises loss allowances for ECL on the following financial instruments that are not measured at FVTPL: • Financial assets that are debt instruments; Financial guarantee contracts issued; and Loan commitments issued. No impairment loss is recognised on equity investments. The Group measures loss allowances at an amount equal to lifetime ECL, except for the financial instruments on which credit risk has not increased significantly since their initial recognition. 12-month ECL are the portion of life time ECL that result from default events on a financial instrument that are possible within the 12 months after reporting date. Measurement of ECL ECL are probability-weighted estimate of credit losses. They are measured as follows: Financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive); Financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows; Undrawn loan commitments: as the present value of the difference between the contractual cash flows that are due to the Group if the commitment is drawn down and the cash flows that the Group expects to receive; and Financial guarantee contracts: the expected payments to reimburse the holder less any amounts that the Group expects to recover. Restructured Financial Assets If the terms of a financial asset are renegotiated or modified or an existing financial asset is replaced with a new one due to financial difficulties of the borrower, then an assessment is made of whether the financial asset should be derecognized and ECL are measured as follows: If the expected restructuring will not result in derecognition of the existing asset, then the expected cash flows arising from the modified financial asset are included in calculating the cash shortfalls from the existing asset. If the expected restructuring will result in derecognition of the existing asset, then the expected fair value of the new asset is treated as the final cash flow from the existing financial asset at the time of its derecognition. This amount is included in calculating the cash shortfalls from the existing financial asset. The cash shortfalls are discounted from the expected date of derecognition to the reporting date using the original effective interest rate of the existing financial asset. 33 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 34 بنك الإمارات دبي الوطني Emirates NBD#20NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (iii) Impairment (continued) • . • . Credit-impaired Financial Assets At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt financial assets carried at FVOCI are credit-impaired. A financial asset is 'credit-impaired' when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Evidence that a financial asset is credit-impaired includes the following observable data: Significant financial difficulty of the borrower or issuer; A breach of contract such as a default or past due event; The restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; It is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or The disappearance of an active market for a security because of financial difficulties. Purchased or Originated Credit-impaired Assets (POCI) POCI assets are financial assets that are credit-impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest income is subsequently recognised based on a credit adjusted EIR. Lifetime ECLS are only recognised or released to the extent that there is a subsequent change in the credit risk. Revolving Facilities The Group's product offering includes a variety of corporate and retail overdraft and credit cards facilities, in which the Group has the right to cancel and/or reduce the facilities at a short notice. The Group does not limit its exposure to credit losses to the contractual notice period, but, instead calculates ECL over a period that reflects the Group's expectations of the customer behaviour, its likelihood of default and the Group's future risk mitigation procedures, which could include reducing or cancelling the facilities. Based on past experience and the Group's expectations, the period over which the Group calculates ECLS for these products, is estimated based on the period over which the Group is exposed to credit risk and where the credit losses would not be mitigated by management actions. Write-off Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Group has exhausted all legal and remedial efforts to recover from the customers. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (iv) Financial Guarantees and Loan Commitments Financial guarantees are contracts that require the Group to make specified payments to reimburse the holders for a loss they incur because a specified debtor fails to make payment when due, in accordance with the terms of a debt instrument. The financial guarantee liability is carried at amortised cost when payment under the contract has become probable. 'Loans commitments' are firm irrevocable commitments to provide credit under pre-specified terms and conditions. Financial guarantees issued or irrevocable commitments to provide credit are initially measured at fair value and their initial fair value is amortised over the life of the guarantee or the commitment. Subsequently, they are measured at the higher of this amortised amount and the amount of loss allowance. (v) Foreign Currencies Foreign currency differences arising on translation are generally recognized in profit or loss. However, foreign currency differences arising from the translation of equity investments in respect of which an election has been made to present subsequent changes in fair value in OCI are recognised through OCI. (vi) Loans and Receivable 'Loans and receivables' caption in the consolidated statement of financial position include: • Loans and receivables measured at amortised cost: they are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method and are presented net of expected credit losses; and Loans and receivables measured at FVTPL or designated as at FVTPL: these are measured at fair value with changes recognised immediately in profit or loss, if applicable. When the Group purchases a financial asset and simultaneously enters into an agreement to resell the asset (or a substantially similar asset) at a fixed price on a future date (reverse repo or stock borrowing), the arrangement is accounted for as a loan or advance or due from banks, and the underlying asset is not recognised in the Group's financial statements. (vii) Investment Securities The 'investment securities' caption in the consolidated statement of financial position includes: • • Debt investment securities measured at amortised cost: these are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method; Debt and equity investment securities measured at FVTPL or designated as at FVTPL: these are at fair value with changes recognised immediately in profit or loss; 35 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 36 .. Debt securities measured at FVOCI; and . Equity investment securities designated as FVOCI. بنك الإمارات دبي الوطني Emirates NBD#21NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (vii) Investment Securities (continued) For debt securities measured at FVOCI, gains and losses are recognised in OCI, except for the following, which are recognised in profit or loss in the same manner as for financial assets measured at amortised cost. . Interest revenue using the effective interest method; ECL and reversals; and Foreign exchange gains and losses. When a debt security measured at FVOCI is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss. The Group elects to present in OCI changes in the fair value of certain investments in equity instruments that are not held for trading. The election is made on an instrument-by-instrument basis on initial recognition and is irrevocable. Gains and losses on such equity instruments are never reclassified to profit or loss and no impairment is recognised in profit or loss. Dividends are recognised in profit or loss unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised in OCI. Cumulative gains and losses on equity instruments recognised in OCI are transferred to retained earnings on disposal of an investment. (viii) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expires, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of the ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards or ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI is recognised in profit or loss. Any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as FVOCI is not recognised in profit or loss account on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability. The Group enters into transactions whereby it transfers assets recognised on its consolidated statement of financial position but retains either all or substantially all of the risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not derecognised. Examples of such transactions are securities lending and sale-and-repurchase transactions. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (vii) Derecognition (continued) In transactions in which the Group neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. (ix) Modification of Financial Assets and Financial Liabilities If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value. If the cash flows of the modified asset carried at amortised cost are not substantially different, then the modification does not result in derecognition of the financial asset. In this case, the Group recalculates the gross carrying amount of the financial asset and recognises the amount arising from adjusting the gross carrying amount as modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, then the gain or loss is presented together with impairment losses. In other cases, it is presented as interest income. The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss. (x) Offsetting Financial assets and financial liabilities are offset and the net amount presented in the Group consolidated statement of financial position when, and only when, the Group currently has legally enforceable rights to set off amounts and it intends either to settle them on a net basis or through realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as in the Group's trading activities. (xi) Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal market at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: 37 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 38 . In the principal market for the asset or liability; or . In the absence of principal market, in the most advantageous market for the asset and liabilities. بنك الإمارات دبي الوطني Emirates NBD#22NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Financial Assets and Financial Liabilities (continued) (xi) Fair Value Measurement (continued) If an asset or a liability measured at fair value has a 'Bid' price and an 'Ask' price, then the Group measures assets and long positions at a 'Bid' price and liabilities and short positions at an 'Ask' price. The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. Fair value is applicable to both financial and non-financial instruments. (xii) Designated at FVTPL At initial recognition, the Group has designated certain financial assets as at FVTPL because this designation eliminates or significantly reduces an accounting mismatch, which would otherwise rise. The Group has designated certain financial liabilities as at FVTPL in either of the following circumstances: (a) The liabilities are managed, evaluated and reported internally on a fair value basis; or (b) The designation eliminates or significantly reduces an accounting mismatch which would otherwise arise. A description of the basis of each designation is set out in relevant notes for the asset or liability class. (xiii) Sale and Repurchase Agreements Securities sold subject to repurchase agreements (repos') are disclosed in the notes to the Group consolidated financial statements when the transferee has the right by contract or custom to sell or re-pledge the collateral; the counterparty liability is included as a separate deposit. Securities purchased under agreements to resell ('reverse repos") are recorded as loans and receivables to either banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. (k) Cash and Cash Equivalents 'Cash and cash equivalents' include notes and coins on hand, unrestricted balances held with Central Banks and highly liquid financial assets with original maturities of three months or less from the date of acquisition that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the consolidated statement of financial position. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (1) Trading Assets and Liabilities Trading assets are those assets and liabilities that the Group acquires or incurs principally for the purpose of selling or repurchasing in the near term, or holds as part of a portfolio that is managed together for short-term profit or position taking. Trading assets and liabilities are initially recognised and subsequently measured at fair value in the consolidated statement of financial position, with transaction costs recognised in profit or loss. All changes in fair value are recognised as part of net trading income in profit or loss. (m) Derivatives held for risk management purposes and hedge accounting The Group follows a hedge accounting model that aligns hedge accounting more closely with risk management. The model measures hedge effectiveness through an objectives-based test that focuses on the economic relationship between the hedged item and the hedging instrument, and the effect of credit risk on that economic relationship. The Group also performs rebalancing of hedging relationships, whereby, if a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio under IFRS 9, but the risk management objective for that designated hedging relationship remains the same, the Group shall adjust the hedge ratio of the hedging relationship so that it meets the qualifying criteria again. Gains and losses arising from changes in the fair value of derivatives that are not the hedging instrument in a qualifying hedge are recognised as they arise in profit or loss. Gains and losses are recorded in 'income from trading activities' except for gains and losses on those derivatives that are managed together with financial instruments designated at fair value; these gains and losses are included in 'other operating income'. Hedging instruments include futures, forwards, options and swaps in the interest rate and foreign exchange markets. The Group utilises these instruments to satisfy the requirements of its customers, for proprietary trading purposes and to hedge its own exposure to interest rates and currency risk. Where there is a hedging relationship between a derivative instrument and a related item being hedged, the hedging instrument is measured at fair value, with any resultant gains and losses being accounted as set out below. The fair value of derivative hedging instruments is calculated in the same way as the fair value of financial instruments. The method of recognising the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: • • Hedges of the exposure to changes in fair value of recognised assets or liabilities or firm commitments (fair value hedge); Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a forecasted transaction (cash flow hedge); or Hedge of net investment in a foreign operation. 39 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 40 40 بنك الإمارات دبي الوطني Emirates NBD#23NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Derivatives Held for Risk Management Purposes and Hedge Accounting (continued) An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, it is not specific to a party to the contract. A derivative that is attached to a financial instrument, but is contractually transferable independently of that instrument, or has a different counterparty from that instrument, is not an embedded derivative, but a separate financial instrument. Hedge accounting is used for derivatives designated in this way provided certain criteria are met. (i) Fair Value Hedge When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss together with changes in the fair value of the hedged item that are attributable to the hedged risk. If the hedging derivative expires or is sold, terminated, or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. Any adjustment up to that point to a hedged item for which the effective interest method is used, is amortised to profit or loss as part of the recalculated effective interest rate of the item over its remaining life. (ii) Cash Flow Hedge When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of derivative is recognised in other comprehensive income within 'Cash flow hedges fair value gains/(losses)'. Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the consolidated income statement. The accumulated gains and losses recognised in other comprehensive income are reclassified to the consolidated income statement in the periods in which the hedged item will affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income are removed from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting or the hedge designation is revoked, then hedge accounting is discontinued prospectively, any cumulative gain or loss recognised in other comprehensive income at that time remains in equity until the forecast transaction is eventually recognised in the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income is immediately reclassified to the consolidated income statement. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Derivatives Held for Risk Management Purposes and Hedge Accounting (continued) (iii) Net Investment Hedges When a derivative instrument or a non-derivative financial liability is designated as the hedging instrument in a hedge of a net investment in a foreign operation, the effective portion of changes in the fair value of the hedging instrument is recognised in other comprehensive income and accumulated in the translation reserve. Any ineffective portion of the changes in the fair value of the derivative is recognised immediately in consolidated income statement. The amount recognised in other comprehensive income is reclassified to the consolidated income statement as an adjustment on disposal of the foreign operation. (iv) Derivatives that do not Qualify for Hedge Accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in the consolidated income statement. (v) Embedded Derivatives Derivatives embedded in financial assets, liabilities and non-financial host contacts, are treated as separate derivatives and recorded at fair value if they meet the definition of a derivative, their economic characteristics and risks are not closely related to those of the host contract, and the host contract is not itself held for trading or designated at FVPL. The embedded derivatives separated from the host are carried at fair value in the trading portfolio with changes in fair value recognised in the consolidated income statement. (n) Islamic Financing Receivables Islamic financing receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These products are carried at amortised cost less impairment. (i) Definitions The following terms are used in Islamic financing: Murabaha An agreement whereby the Group sells to a customer a commodity, which the Group has purchased and acquired, based on a promise received from the customer to buy the item purchased according to specific terms and conditions. The selling price comprises the cost of the commodity and an agreed profit margin. Istisna'a An agreement between the Group and a customer whereby the Group would sell to the customer a developed property according to agreed upon specifications. The Group would develop the property either on its own or through a subcontractor and then hand it over to the customer on a fixed date at an agreed price. 41 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 42 42 بنك الإمارات دبي الوطني Emirates NBD#24NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) Islamic Financing Receivables (continued) Ijara An agreement, whereby the Group (lessor) leases an asset to a customer (lessee), for a specific period and against certain rent installments. Ijara ends by transferring the ownership of the asset to the lessee at the end of the Ijara agreement pursuant to a sale undertaking granted by the Group. Mudaraba An agreement between two parties; wherein one of them provides the funds and is called Rab-Ul- Mal and the other provides efforts and expertise and is called the Mudarib and he is responsible for investing such funds in a specific enterprise or activity in return for a pre-agreed percentage of the Mudaraba income. In case of normal loss; the Rab-Ul-Mal would bear the loss of his funds while the Mudarib would bear the loss of his efforts. However, in case of default, negligence or violation of any of the terms and conditions of the Mudaraba agreement, only the Mudarib would bear the losses. The Group may act as Mudarib when accepting funds from depositors and as Rab-Ul-Mal when investing such funds on a Mudaraba basis. Wakala An agreement whereby the Group provides a certain sum of money to an agent who invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. Revenue Recognition Revenue is recognised on the above Islamic products as follows: Murabaha The profit is quantifiable and contractually determined at the commencement of the contract. Profit is recognised on a time proportion basis over the life of the contract using an effective profit method on the balance outstanding. Istisna'a İstisna'a revenue and the associated profit margin (difference between the cash price to the customer and the bank's total Istisna'a cost) are accounted for on a time proportion basis. Ijara Income from ljara is recognised on an accrual basis over the period of the contract. Mudaraba Income on Mudaraba financing is recognised on distribution by the Mudarib, whereas the losses are charged to the consolidated income statement on their declaration by the Mudarib. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) Islamic Financing Receivables (continued) (ii) Revenue Recognition (continued) Wakala Estimated income from Wakala is recognised on a time proportion basis over the period, adjusted by actual income when received. Losses are accounted for on the date of declaration by the agent. (o) Inventory Properties acquired in settlement of debt are held as inventory and are stated at lower of cost or net realisable value. Directly attributable costs incurred in the acquisition of inventory is included as part of cost of the inventory. Net realisable value is the estimated selling price in the ordinary course of the business, based on market prices at the reporting date. (p) Property, Equipment and Depreciation Property and equipment are stated at cost less accumulated depreciation and accumulated impairment if any. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. Subsequent costs are included in the asset's carrying amount or are 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. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Freehold land and fixed assets not commissioned are not depreciated. The estimated useful life of fixed assets for the Group is as follows: Freehold premises Freehold improvements Leasehold improvements Furniture, fixtures and office equipment Computer hardware and software Core banking software Motor vehicles 25-60 years 10 years 7 years 5 years 4-5 years 5-7 years 3-5 years Assets are depreciated on a straight-line basis over their estimated useful lives as given above. Fixed assets not commissioned are stated at cost. When commissioned, they are transferred to the appropriate property and equipment category and depreciated in accordance with the Group's policies. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the Group consolidated income statement. 43 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 44 بنك الإمارات دبي الوطني Emirates NBD#2545 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) Investment Properties The Group holds certain properties as investments to earn rental income, for capital appreciation, or both. Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and accumulated impairment (if any). Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the consolidated income statement in 'other operating income' in the year of retirement or disposal. Transfers to and from investment properties are made only when there is a change in use based on the business model. (r) Intangible Assets (i) Goodwill Goodwill arises on the acquisition of subsidiaries. Goodwill on Acquisitions Goodwill acquired in a business combination represents the excess of the cost of the business combination over the Group's interest in the net fair value of the identifiable net assets, including intangibles, liabilities and contingent liabilities of the acquiree. When the excess is negative (bargain purchase), it is recognised immediately in the Group consolidated income statement. Measurement Goodwill is initially measured at cost. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. The cash-generating unit to which goodwill has been allocated is tested for impairment annually and whenever there is an indication that the cash-generating unit may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised in the consolidated income statement. Impairment losses recognised for goodwill are not reversed in subsequent periods. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (r) Intangible Assets (continued) (i) Goodwill (continued) Measurement (continued) Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss of disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operations disposed of and the portion of the cash-generating unit retained. (ii) Capitalised Software Software acquired by the Group is stated at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation is recognised in the Group consolidated income statement on a straight-line basis over the estimated useful life of the software, from the date that it is available for use. (iii) Other Intangible Assets Intangibles acquired separately are measured on initial recognition at cost. The cost of the intangibles acquired in a business combination is at fair value as at the date of acquisition. Following initial recognition, intangibles are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible asset are assessed to be either finite or indefinite. Intangibles with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangibles may be impaired. The amortisation period and amortisation method for intangibles with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in an accounting estimate. The amortisation expense on intangibles with finite lives is recognised in the Group consolidated income statement in the expense category consistent with the function of the intangibles. (s) Impairment of Non-financial Assets The carrying amounts of the Group's non-financial assets are reviewed periodically to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. A cash generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in the consolidated income statement. Impairment losses recognised in respect of cash generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of other assets in the unit (group or units) on a pro rata basis. EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 46 46 بنك الإمارات دبي الوطني Emirates NBD#26NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) Impairment of Non-financial Assets (continued) The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. (t) Deposits, Debts and Sukuks Issued Deposits, debts and sukuks issued are the main sources of funding for the Group. Deposits, debts and sukuks issued are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. (u) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. (V) Employee Benefits (i) Pension Obligations The Group operates a pension scheme in respect of eligible UAE national employees in compliance with the UAE Federal Law on Pensions and Social Security. Arrangements for benefits for overseas employees is made in accordance with local regulations and customs. Full provision is made for all accrued benefits. The Group also pays contributions to trustee administered funds on a contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. (ii) Termination Gratuity Benefit Scheme In compliance with UAE labour law, the Group has a termination gratuity benefit scheme covering all of its expatriate salaried employees who have been employed with the Group for more than one year. The provision for gratuity is recorded through the consolidated income statement. The present value of the gratuity obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost/(income) for gratuities include the discount rate. Any changes in these assumptions will impact the carrying amount of gratuity obligations. The value of the gratuity obligations is based on the report submitted by an independent actuarial firm. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (w) Dividend on Shares Dividends on shares are recognised as a liability and deducted from equity when they are approved by the Group's shareholders in the Annual General Meeting. (x) Share Capital and Reserves (i) Perpetual Bonds The Group classifies capital instruments as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The Group's perpetual bonds are not redeemable by holders and bear an entitlement to distributions that is non-cumulative and at the discretion of the board of directors. Accordingly, they are presented as a component of issued capital within equity. Distributions thereon are recognised in equity. Related income tax is accounted for in accordance with IAS 12 - Income taxes. (ii) Share Issue Costs Incremental costs that are directly attributable to the issue of an equity instrument are deducted from the initial measurement of the equity instruments. (y) Earnings Per Share The Group presents basic and diluted Earnings Per Share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders (further adjusted for interest expense on Tier I capital notes) of the Group by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all diluted potential ordinary shares, if any. (z) Operating Segments For management purposes, the Group is organised into operating segments based on their products, services and certain subsidiaries which are independently managed by the respective segment managers responsible for the performance of the segments under their charge. The segment managers report directly to the management of the Group who regularly review the segment results in order to allocate resources to the segments and to assess the segment performance. Additional disclosures on each of these segments are shown in Note 36. 17 47 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 48 ထ بنك الإمارات دبي الوطني Emirates NBD#27NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 7 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (aa) Related Parties A party is considered to be related to the Group if: (a) The party, directly or indirectly through one or more intermediaries: • . Controls, is controlled by, or is under common control with, the Group; Has an interest in the Group that gives it significant influence over the Group; or Has joint control over the Group; (b) The party is an associate; (c) The party is a jointly controlled entity; (d) The party is a member of the key management personnel of the Group; (e) The party is a close member of the family of any individual referred to in (a) or (d); (f) The party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (d) or (e); or (g) The party is a post-employment benefit plan for the benefit of the employees of the Group, or of any entity that is a related party of the Group. (ab) Revenue Recognition Revenue is recognised when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Group also operates a rewards programme which allows customers to accumulate points when they purchase products on the Group's credit cards. The points can then be redeemed for shopping rewards, cash back or air miles, subject to a minimum number of points being obtained. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 CASH AND DEPOSITS WITH CENTRAL BANKS 9 2021 Cash AED 000 6,023,245 2020 AED 000 4,488,333 Statutory and other deposits with Central Banks 45,176,256 Interest-bearing placements with Central Banks 203,074 Murabahas and interest-bearing certificates of deposits with 19,353,171 42,942,928 218,096 53,195,536 Central Banks Less: Expected credit losses (2,133) 70,753,613 (2,997) 100,841,896 The reserve requirements which are kept with the Central Banks of the countries in which the Group operates are not available for use in the Group's day to day operations and cannot be withdrawn without the approval of the relevant Central Bank. The level of reserves required changes periodically in accordance with the directives of the respective Central Banks. Murabahas and certificates of deposits with Central Banks amounting to AED Nil (2020: AED 5,150 million) were collateralised for the purpose of obtaining Zero Cost Funding from the CBUAE amounting to AED Nil (2020: AED 5,058 million) presented under 'Due to banks'. 10 DUE FROM BANKS 31 December 2021 Total AED 000 39,104,426 6,291,563 Time loans Overnight, call and short notice Local (UAE) AED 000 4,751,682 83,247 4,834,929 Foreign AED 000 34,352,744 6,208,316 40,561,060 45,395,989 (52,741) 45,343,248 Gross due from banks Less: Expected credit losses 8 STANDARDS ISSUED BUT NOT YET ADOPTED Certain new standards (IFRS 17 "Insurance Contracts"), amendments to standards and interpretations (annual improvements to IFRS, amendments to IFRS 3, IFRS 4, IAS 1, IAS 8, IAS 12 and IAS 37) are not yet effective for the year ended 31 December 2021, with the Group not opting for early adoption. The Group anticipates that these new standards, interpretations and amendments will be adopted in the Group's consolidated financial statements as and when they are applicable and adoption of these new standards, interpretations and amendments may have no material impact on the consolidated financial statements of Group in the period of initial application. 31 December 2020 Time loans Overnight, call and short notice Gross due from banks Less: Expected credit losses Local (UAE) AED 000 3,089,380 216,770 3,306,150 27,387,759 Foreign AED 000 Total AED 000 30,477,139 4,424,333 4,641,103 31,812,092 35,118,242 (120,562) The average yield on these placements was 0.75% p.a. (2020: 1.69% p.a.). 34,997,680 49 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 50 بنك الإمارات دبي الوطني Emirates NBD#28NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 11 INVESTMENT SECURITIES 31 December 2021 Domestic* AED 000 Regional** AED 000 International*** AED 000 Total AED 000 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 11 INVESTMENT SECURITIES (CONTINUED) 31 December 2020 Domestic* AED 000 Regional** AED 000 International*** AED 000 Total AED 000 TRADING SECURITIES MEASURED AT FVTPL Government Bonds 1,000,906 876,759 Corporate Bonds 207,487 146,810 61,900 33,517 Equity 156,687 1,939,565 387,814 156,687 TRADING SECURITIES MEASURED AT FVTPL Government Bonds Corporate Bonds 370,832 1,133,655 2,195,355 978,181 457,835 648,545 3,024,022 2,760,381 Equity Others 1,208,393 1,023,569 8,294 260,398 8,294 2,492,360 Others 1,504,487 3,173,536 108,608 2,891 1,217,879 108,608 2,891 5,895,902 DESIGNATED AS AT FVTPL DESIGNATED AS AT FVTPL Equity Others 41,135 2,267 43,402 118,505 4,441 122,946 1,776 84,027 85,803 161,416 90,735 252,151 Equity Others 44,635 543 45,178 112,397 3,041 115,438 43,222 75,529 118,751 200,254 79,113 279,367 MEASURED AT AMORTISED MEASURED AT AMORTISED COST COST Government Bonds 51,427,892 Corporate Bonds 2,505,241 53,933,133 21,887,432 971,605 22,859,037 7,605,506 1,584,718 9,190,224 80,920,830 5,061,564 85,982,394 Government Bonds Corporate Bonds Less: Expected credit losses 12,791,415 2,130,368 14,921,783 20,801,015 1,288,540 22,089,555 12,026,255 562,324 12,588,579 (17,364) 85,965,030 Less: Expected credit losses MEASURED AT FVOCI - DEBT 45,618,685 3,981,232 49,599,917 (22,394) 49,577,523 INSTRUMENTS MEASURED AT FVOCI - DEBT Government Bonds Corporate Bonds 3,845,219 3,845,219 2,545,951 932,724 3,478,675 8,373,459 10,919,410 INSTRUMENTS 1,211,388 9,584,847 5,989,331 16,908,741 Government Bonds Corporate Bonds Less: Expected credit losses (23,053) 16,885,688 3,247,792 3,247,792 1,685,804 641,219 2,327,023 10,162,174 745,619 10,907,793 11,847,978 4,634,630 Less: Expected credit losses MEASURED AT FVOCI - 16,482,608 (30,690) 16,451,918 EQUITY INSTRUMENTS Equity Gross Investment securities 97,241 97,241 59,127,388 63,606 63,606 27,547,833 400,810 400,810 19,522,082 561,657 Net Investment securities 561,657 106,197,303 106,156,886 MEASURED AT FVOCI - EQUITY INSTRUMENTS Equity 1,715 1,715 54,708 54,708 434,154 434,154 Gross Investment securities 19,720,955 27,760,260 25,267,156 490,577 490,577 72,748,371 Net Investment securities 72,695,287 *Domestic: These are securities issued within the UAE. **Regional: These are securities issued within the Middle East. ***International: These are securities issued outside the Middle East region. Investment securities with a carrying value of AED Nil (2020: AED 184 million) were collateralised for the purpose of obtaining Zero Cost Funding from the CBUAE amounting to AED Nil (2020: AED 184 million) presented under 'Due to banks'. *Domestic: These are securities issued within the UAE. **Regional: These are securities issued within the Middle East excluding the UAE. ***International: These are securities issued outside the Middle East region. 51 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 52 بنك الإمارات دبي الوطني Emirates NBD#29NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 12 LOANS AND RECEIVABLES 13 2021 AED 000 2020 AED 000 (a) By Type Gross loans and receivables 459,457,866 478,526,280 Less: Expected credit losses (37,185,476) (34,984,811) 422,272,390 443,541,469 At Amortised Cost Overdrafts 2021 AED 000 141,178,599 2020 AED 000 147,606,488 Time loans 227,088,997 244,809,965 Loans against trust receipts 9,236,631 7,915,401 Bills discounted 3,892,605 Credit card receivables 13,353,455 Gross loans - conventional 394,750,287 3,594,752 12,842,426 416,769,032 Murabaha Ijara Wakala Istisna'a Credit cards receivable Others 41,489,900 20,862,452 975,081 873,178 39,841,875 20,263,477 454,006 1,141,483 Less: Deferred income 1,646,713 675,088 (1,814,833) 1,483,910 293,847 (1,721,350) Gross Islamic financing receivables 64,707,579 61,757,248 Gross loans and receivables 459,457,866 478,526,280 Total of credit impaired loans and receivables 29,159,717 29,817,914 2021 AED 000 2020 AED 000 (b) By Business Units Corporate and Institutional banking Retail banking AED 000 AED 000 314,574,572 341,275,968 107,697,818 102,265,501 422,272,390 443,541,469 Corporate ljara assets amounting to AED 2.3 billion (2020: AED 4.6 billion) and Murabaha assets amounting to AED Nil (2020: AED 0.2 billion) were securitised for the purpose of issuance of Sukuk liability (refer Note 19 and 13 b). Expected credit losses on Loans and receivables have been disclosed in further detail in Note 46 (I). 53 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 54 54 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 LOANS SECURITISATION (a) (b) Incorporation of Emirates NBD Asset Finance Companies in Ireland and Cayman Islands for asset securitisation As at 31 December 2021, the corporate loans and receivables balance transferred to ENBD Asset Finance Company No.1 Designated Activity Company (DAC) and ENBD Asset Finance Company No. 2 Limited is AED 918 million (2020: AED 918 million) and the associated liability secured by these assets and included under debt issued and other borrowed funds is AED 918 million (2020: AED 918 million). The principal activity of these companies is to purchase portfolio of loans through issuance of notes. Since the Group is exposed to variable returns from its involvement in the SPES and has the ability to affect those returns through its power over the SPES, these SPEs are consolidated in compliance with IFRS 10. Securitisation of Islamic Financing Receivables The Group transferred certain identified ljara and Murabaha assets totalling to AED 3.7 billion (the "co-owned assets") of its Subsidiary, Emirates Islamic Bank, to EIB Sukuk Company Limited - (the "Issuer"), a special purpose vehicle formed for the issuance of these sukuk. This medium term finance is carried at amortised cost. As at 31 December 2021 the total outstanding sukuk payable is AED 3.7 billion (2020: AED 5.5 billion). In substance, the co-owned assets remain in control of the Group; accordingly these assets continue to be recognised by the Group. In case of any default, the Group has provided an undertaking to make good all losses to the sukuk holders. The assets are in the control of the Group and shall continue to be serviced by the Group. بنك الإمارات دبي الوطني Emirates NBD#30NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 14 GOODWILL AND INTANGIBLES NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 14 GOODWILL AND INTANGIBLES (CONTINUED) Goodwill Intangibles on Acquisition 31 December 2021 AED 000 Banking license AED 000 Customer Core deposit relationships intangibles Brands AED 000 AED 000 AED 000 Total AED 000 Cost Balance as at 1 January 5,561,714 163,079 471,438 895,473 279,370 7,371,074 Foreign exchange (38) (102) (25,260) (18,611) (124,373) (168,384) movement* 5,561,676 162,977 446,178 876,862 154,997 7,202,690 Less: Amortisation and 163,296 Impairment Testing of Goodwill The goodwill acquired through business combinations with indefinite life is reviewed annually for impairment by comparing the recoverable amount based on value-in-use calculations for cash generating units (CGUS) to which goodwill has been allocated with its carrying value. The goodwill has been allocated to four cash-generating units: Corporate and Institutional banking Retail banking and Wealth Management Global Markets and Treasury Emirates NBD Egypt S.A.E. Key Assumptions used in Impairment Testing for Goodwill The recoverable amount of the cash-generating units has been determined based on a value in use calculation, using cash flow projections covering a five-year period and by applying a terminal growth rate thereafter. The calculation of value in use in the cash-generating units is most sensitive to the following assumptions: impairment Balance as at 1 January 4,903 290,691 762,309 1,057,903 Amortisation and 94,024 69,272 impairment for the year Balance as at 31 December 4,903 384,715 831,581 Interest margins; Net Goodwill and Intangibles . 5,556,773 162,977 61,463 45,281 154,997 Discount rates; 5,981,491 . Market share during the projection period; 1,221,199 31 December 2020 Cost 5,561,714 163,079 471,438 895,473 279,370 7,371,074 Less: Amortisation and impairment 4,903 290,691 762,309 1,057,903 Net Goodwill and 5,556,811 163,079 180,747 133,164 279,370 6,313,171 Intangibles *Foreign exchange movement relates to translation of acquired Goodwill and intangibles pertaining to Emirates NBD Egypt and DenizBank using the period end exchange rate. The goodwill and intangibles were acquired through business combinations. Goodwill and brands have indefinite life and are reviewed annually for impairment. Projected growth rates used to extrapolate cash flows beyond the projection period; Current local Gross Domestic Product ("GDP"); and Local inflation rates. Interest Margins Interest margins are based on prevailing market rates at the start of the budget period. These are changed over the budget period for anticipated market conditions. Discount Rates Discount rates reflect management's estimate of return on capital employed ("ROCE") required in each business. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. Discount rates are calculated by using the Weighted Average Cost of Capital ("WACC"). 55 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 56 بنك الإمارات دبي الوطني Emirates NBD#31NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 14 GOODWILL AND INTANGIBLES (CONTINUED) Projected Growth Rate, GDP and Local Inflation Rates Assumptions are based on published industry research. The recoverable amount of goodwill of CGUS, determined on the basis of value in use calculation, uses cash flow projections covering a five year period, with an appropriate terminal growth rate applied thereafter. The forecast cash flows have been discounted using the WACC (4.23% for UAE and 21.88% for Egypt) in the jurisdiction where the CGU operates. A one percentage point change in the discount rate or the terminal growth rate would reduce the recoverable amount of the CGUS as mentioned in the table below: Recoverable amount Cash Generating Units (CGUS) Goodwill allocated to CGUS One percentage change in (AED million) discount rate (AED million) 60,138 Corporate and Institutional banking 3,589 193,185 One percentage change in terminal growth rate (AED million) 55,174 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 15 OTHER ASSETS 2021 Accrued interest receivable AED 000 3,107,720 Islamic profit receivable 187,898 2020 AED 000 4,784,330 129,884 Prepayments and other advances 837,789 909,724 Sundry debtors and other receivables 1,938,780 3,046,706 Inventory 1,529,478 1,266,689 Deferred tax asset 929,142 882,845 Investments in associates* 201,628 Investment properties 440,351 584,724 Others 2,207,764 1,276,275 11,178,922 13,082,805 *During the year, the Group disposed its entire holding 36.72% in National General Insurance Company (P.J.S.C) for a net consideration of AED 179 million. Retail banking and Wealth 1,700 198,537 61,804 56,702 16 DUE TO BANKS Management Global Markets and 206 96,725 30,110 27,625 Treasury Emirates NBD 62 2,653 136 68 Egypt S.A.E Based on the current impairment assessment, goodwill is not impaired as at 31 December 2021. Intangibles Acquired intangibles are recognised at their "fair value" upon initial recognition. The specific criteria which needs to be satisfied for an intangible asset to be recognised separately from goodwill in an acquisition is that the intangible asset must be clearly identifiable, in that it either; Be separable, that is, be capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or Arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. Intangibles excluding banking license and brand are amortised using the straight-line method over the useful life of the asset, which is estimated to be between 3 and 11 years. If an indication of impairment arises, the recoverable amount is estimated and an impairment loss is recognised if the recoverable amount is lower than the carrying amount. The banking license and brand has an indefinite life and is tested for impairment annually. For impairment testing purposes, the banking license and brand are allocated to the relevant cash generating unit. Based on the current assessment, banking license and brand is not impaired as at 31 December 2021. Demand and call deposits Balances with correspondent banks Repurchase agreements with banks* Time and other deposits The interest incurred on the above averaged 1.14% p.a. (2020: 1.83% p.a). 2021 AED 000 2020 AED 000 1,982,456 4,075,248 1,311,937 1,154,569 2,364,908 5,988,940 38,095,906 43,755,207 40,453,311 51,672,068 *This includes Zero Cost Funding obtained from the CBUAE under its 'Targeted Economic Support Scheme (TESS)' program amounting to AED Nil (2020: AED 5,242 million) which was fully utilised to provide payment relief to the impacted customers. 57 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 58 بنك الإمارات دبي الوطني Emirates NBD#32NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 17 CUSTOMER DEPOSITS 59 (a) By Type Demand, call and short notice Time Savings Others (b) By Business Units Corporate and Institutional banking and Treasury Retail banking 2021 AED 000 216,604,708 166,428,337 2020 AED 000 185,134,537 215,270,129 63,671,856 9,778,987 56,743,192 7,049,176 456,483,888 464,197,034 2021 AED 000 2020 AED 000 199,292,439 211,960,138 257,191,449 252,236,896 456,483,888 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 18 DEBT ISSUED AND OTHER BORROWED FUNDS Medium term note programme Term loans from banks Borrowings raised from loan securitisations 2021 AED 000 54,560,648 2020 AED 000 46,408,605 6,405,566 7,335,940 2,421,014 918,125 63,387,228 54,662,670 Some of the Debts issued and other borrowed funds have been hedged for cash flow and fair value risks and amount to AED 27,937 million (2020: AED 25,187 million). For details of hedging instruments please refer to Note 35. 464,197,034 Included in the above customer deposits are Islamic deposits totalling to AED 67,190 million (2020: 86,678 million) The interest incurred and profit distribution to depositors on the above deposits averaged 1.33% p.a (2020: 1.52% p.a.). Balance as at 1 January New issues Repayments Other movements* Balance at end of year EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 60 60 2021 AED 000 54,662,670 25,636,942 (13,313,409) (3,598,975) 2020 AED 000 49,317,315 18,264,098 (13,487,491) 568,748 63,387,228 54,662,670 *Represents exchange rate and fair value movements on debts issued in foreign currency. The Group hedges the foreign currency risk on public issuances through derivative financial instruments. As at 31 December 2021, the outstanding medium term borrowings totalling AED 63,387 million (2020: AED 54,663 million) is falling due as below: 2021 AED millions 2020 AED millions 2021 2022 2023 2024 2025 Beyond 2025 13,396 12,640 10,347 7,398 3,235 10,145 2,374 7,098 6,721 26,106 18,590 63,387 54,663 The interest rate paid on the above averaged 3.41% p.a in 2021 (2020: 3.32% p.a). بنك الإمارات دبي الوطني Emirates NBD#33NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 19 SUKUK PAYABLE NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 22 TIER I CAPITAL NOTES Balance as at 1 January New issues Repayments Other movements Balance at end of year The Group has issued a number of regulatory Tier 1 capital notes with details mentioned in the table below. The notes are perpetual, subordinated and unsecured. The Group can elect not to pay a coupon at its own discretion. Note holders will not have a right to claim the coupon and such event will not be considered an event of default. The notes carry no maturity date and have been classified as equity. 2021 AED 000 5,510,933 1,836,250 2020 AED 000 3,679,921 1,836,250 (3,672,500) (2,183) 3,672,500 (5,238) 5,510,933 Issuance Month/Year May 2021 July 2020 During the year, the Group repaid Sukuk amounting to AED 3,673 million on maturity. As at 31 December 2021, the outstanding Sukuk payable totalling AED 3,673 million (31 December 2020: AED 5,511 million) is falling due as follows: March 2019 Issued Amount USD 750 million (AED 2.75 billion) USD 750 million (AED 2.75 billion) USD 1 billion (AED 3.67 billion) Coupon Rate Fixed interest rate with a reset after six years Fixed interest rate with a reset after six years Fixed interest rate with a reset after six years During the year, the Group has exercised its option to call back Tier 1 capital notes amounting to AED 4 billion issued in 2009. 2021 2020 AED million AED million 2021 2025 3,675 23 RESERVES 1,836 1,836 2026 1,837 3,673 5,511 The profit rate paid on the above averaged 2.58% p.a in 2021 (2020: 3.27% p.a). 20 OTHER LIABILITIES Accrued interest payable Profit payable to Islamic depositors Managers' cheques Trade and other payables Staff related liabilities Provision for taxation (refer Note 33) Others 2020 AED 000 2,951,170 Legal and statutory reserves In accordance with the Bank's Articles of Association, and in compliance with Decretal Federal Law No. (14) of 2018, a minimum of 10% of profit should be transferred to a non-distributable legal and statutory reserve until such time as this reserve equals 50% of the Bank's issued capital. Since the legal and statutory reserve is equal to 50% of the Bank's issued capital, profit was not appropriated to the legal and statutory reserve during the year. Other reserve 10% of the profit is also transferable to a non-distributable regular reserve until such time as this reserve equals 10% of the Bank's issued capital. Since the regular reserve is equal to 10% of the Bank's issued capital, profit was not appropriated to the regular reserve during the year. 2021 AED 000 1,783,235 109,477 1,509,281 4,369,047 89,488 1,482,690 4,172,156 1,405,347 1,326,558 226,940 6,624,936 16,028,263 311,961 7,479,692 17,813,715 Legal and statutory reserve AED 000 3,158,299 Regular reserve AED 000 631,660 Other reserves AED 000 2,313,733 Total AED 000 6,103,692 21 ISSUED CAPITAL AND SHARE PREMIUM RESERVE Authorised, issued and fully paid: 6,316,598,253 ordinary shares of AED 1 each (2020: 6,316,598,253 ordinary shares). At the forthcoming Annual General Meeting, the Group is proposing a cash dividend of AED 0.50 per share for the year (2020: AED 0.40 per share) amounting to AED 3,158 million (2020: AED 2,527 million). At 1 January 2021 Transfer from retained earnings* At 31 December 2021 3,158,299 631,660 2,313,733 6,103,692 *Prior year comparatives are shown in the consolidated statement of changes in equity. 61 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 62 62 بنك الإمارات دبي الوطني Emirates NBD#3463 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 23 RESERVES (CONTINUED) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 25 INCOME FROM ISLAMIC FINANCING AND INVESTMENT PRODUCTS Fair value reserve Fair value reserve includes the net change in fair value of FVOCI financial assets and the net effective portion of changes in fair value of cash flow hedges. Currency translation reserve Currency translation reserve represents the exchange differences arising from re-translating the opening net investment in foreign operations. Murabaha Ijara Istisna'a Others 2021 AED 000 1,273,602 2020 AED 000 1,358,502 595,960 695,626 40,199 48,041 912,248 687,206 2,822,009 2,789,375 24 NET INTEREST INCOME 26 DISTRIBUTION ON ISLAMIC DEPOSITS AND PROFIT PAID TO SUKUK HOLDERS 2021 AED 000 2020 AED 000 Interest and similar income Loans and receivables to customers Loans and receivables to banks Distribution to depositors 20,682,642 21,815,102 Profit paid to sukuk holders 544,387 1,181,785 2021 AED 000 2020 AED 000 537,834 1,202,568 93,407 135,946 631,241 1,338,514 Investment securities at FVOCI 1,140,994 943,310 Investment securities at amortised cost 975,134 1,140,980 Trading securities and designated at FVTPL investment securities 148,034 116,849 Others 172,318 Total interest income 23,663,509 30,075 25,228,101 Interest and similar expense Distribution on Islamic deposits represents the share of income between depositors and equity holders. The allocation and distribution to depositors is approved by the Internal Shari'ah Supervision Committee of the Group and the Islamic banking subsidiary respectively. Profit paid to sukuk holders represents the distribution of returns received in respect of leased assets transferred to the EIB Sukuk Company Limited which was specifically formed for this transaction. Deposits from customers Borrowings from banks and financial institutions (5,702,153) (639,311) (5,959,148) 27 NET FEE AND COMMISSION INCOME Debt issued and other borrowed funds (2,408,283) (916,690) (2,103,703) Others Total interest expense (179,970) (8,929,717) (212,221) (9,191,762) Net interest income 2021 AED 000 2020 Commission income on Trade finance products/services Fee income* 14,733,792 16,036,339 Brokerage fees Portfolio and other management fees Total fee and commission income Fee and commission expense 831,195 5,304,812 62,474 276,564 6,475,045 (2,639,234) 3,835,811 AED 000 817,001 4,631,953 34,124 143,545 5,626,623 (1,972,060) 3,654,563 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 64 64 *This also includes fee related to asset management, earned by the Group on trust and fiduciary activities in which the Bank holds or invests assets on behalf of its customers. بنك الإمارات دبي الوطني Emirates NBD#3565 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 28 NET GAIN ON TRADING SECURITIES Realised gain/(loss) on trading securities Unrealised gain/(loss) on trading securities 29 OTHER OPERATING INCOME NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 31 NET IMPAIRMENT LOSS ON FINANCIAL ASSETS The charge to the income statement for the net impairment loss on financial assets is made up as follows: 2021 2020 AED 000 AED 000 2021 AED 000 2020 AED 000 164,528 211,643 (13,710) (31,599) Net impairment of cash and deposits with central bank Net impairment of due from banks/other assets (878) 122 23,166 123,349 150,818 180,044 Net impairment of investment securities (12,481) 22,955 Net impairment of loans and receivables (refer note 46 I) 6,234,860 7,875,539 Net impairment of unfunded exposures 64,678 Bad debt written off/(recovery) - net (410,488) 5,898,857 70,914 (156,770) 7,936,109 2021 2020 AED 000 AED 000 Dividend income on equity investment measured at FVOCI Dividend income on equity investments measured at FVTPL Gain from sale of debt investment securities measured at FVOCI Gain/(loss) from investment securities designated at fair value through profit or loss 1,604 5,228 17,138 16,831 32 32 182,728 71,795 12,282 Rental income 27,921 (314,973) 32,618 33 Gain/(loss) on sale of properties (investment properties / inventories) (3,063) Foreign exchange income/(loss)* (3,011,929) (34) 1,855,252 Derivative income/(loss) 34 4,740,191 (82,617) Other income (net)** 943,589 304,801 2,910,461 1,888,901 *Foreign exchange income/(loss) comprises trading and translation gain/(loss) and gain/(loss) on dealings with customers. **Includes gain on sale of Dubai Bank (P.J.S.C) amounting to AED 0.3 billion. 30 GENERAL AND ADMINISTRATIVE EXPENSES DIRECTOR'S FEES This comprises of fees payable to the Director's of the Group of AED 31 million (2020: AED 31 million). TAXATION At 31 December 2021 provisions for tax primarily relates to overseas branch operations and subsidiaries amounting to AED 227 million (2020: AED 312 million) (refer Note 20). EARNINGS PER SHARE The Group presents basic and diluted Earnings Per Share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders (further adjusted for interest expense on Tier I capital notes) of the Group by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all diluted potential ordinary shares, if any. 2021 2020 Staff cost Occupancy cost AED 000 4,565,721 AED 000 Profit for the year attributable to equity holders 4,616,680 Deduct: Interest on Tier 1 capital notes 275,830 321,071 Net profit attributable to equity holders Equipment and supplies 197,258 220,854 Information technology cost 361,392 312,638 Weighted average number of equity shares in issue ('000) Earnings per share* (AED) Communication cost 267,563 265,037 *The diluted and basic EPS were the same at the year end. Service, legal and professional fees 282,528 224,881 Marketing related expenses 162,317 165,251 Depreciation 780,682 840,285 Amortisation of intangibles 163,296 163,296 Others 934,934 726,314 7,991,521 7,856,307 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 66 99 2021 AED 000 2020 AED 000 9,297,537 6,959,545 (592,233) (651,088) 8,705,304 6,308,457 6,310,696 6,310,696 1.38 1.00 بنك الإمارات دبي الوطني Emirates NBD#36NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 35 A. Derivatives held for risk management The table below shows the positive and negative fair values of derivative financial instruments, together with the notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative's underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year-end and are neither indicative of the market risk nor credit risk. 31 December 2021 notional amounts by term to maturity DERIVATIVES 67 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 68 Positive fair value AED 000 Negative fair value AED 000 Notional amount Within 3 months AED 000 AED 000 Over 3 months to 1 year AED 000 Over 1 year to 3 years AED 000 Over 3 years to 5 years AED 000 Over 5 years AED 000 Derivatives held for trading: Forward foreign exchange contracts Foreign exchange options Interest rate swaps/caps Commodity options 2,142,481 37,110 7,914,734 38,693 10,133,018 (1,458,166) (19,760) (6,449,639) 269,347,059 1,893,060 484,834,455 (38,708) 1,020,200 (7,966,273) 757,094,774 161,826,589 1,059,083 45,455,049 186,344 208,527,065 77,373,217 24,824,851 4,862,058 460,344 345,905 80,667,671 648,764 159,035,557 161,496 141,775,625 185,092 166,947,064 10,210 126,784,706 316,366 90,151,404 131,656,974 90,928,114 Derivatives held as cash flow hedges: Interest rate swaps 238,462 (121,895) 29,221,176 6,218,187 7,308,105 4,769,661 8,217,356 2,707,867 Derivatives held as fair value hedges: Interest rate swaps 287,445 (1,088,283) 30,004,652 1,382,532 412,667 5,325,231 6,776,742 16,107,480 Derivatives held as hedge of a net investment in foreign operations: Forward foreign exchange contracts Total 10,658,925 (9,870) (9,186,321) 452,876 816,773,478 216,127,784 452,876 167,209,205 177,041,956 146,651,072 109,743,461 Hedging instruments are issued to hedge against interest rate and foreign exchange risks pertaining to hedged items. Hedged items include certain Loans and receivables amounting to AED 13,569 million (note 12), Investment securities amounting to AED 5,897 million (note 11), customer deposits amounting to AED 11,823 million (note 17) and Debt issued and borrowed funds amounting to AED 27,937 million (note 18). All the hedges were determined to be effective as on 31 December 2021. The hedged forecast cash flows which are expected to occur over the future years and are expected to affect profit or loss are insignificant. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 35 DERIVATIVES (CONTINUED) A. Derivatives held for risk management (continued) 31 December 2020 notional amounts by term to maturity Derivatives held for trading: Positive Negative fair value AED 000 fair value AED 000 Notional amount AED 000 Within 3 months AED 000 Over 3 months Over 1 year Over 3 years to 1 year AED 000 to 3 years AED 000 to 5 years Over 5 years AED 000 AED 000 Forward foreign exchange contracts 1,824,632 Foreign exchange options 23,029 Interest rate swaps/caps 9,854,841 Commodity options 18,117 11,720,619 (1,435,225) 284,477,968 (28,850) 5,000,963 (8,343,567) 437,154,696 (18,508) 1,052,878 (9,826,150) 727,686,505 185,325,169 3,807,260 43,250,310 74,488 232,457,227 68,300,374 25,946,875 436,641 276,106 84,381,622 119,865,584 508,469 469,921 153,627,106 146,558,486 103,716,966 91,326,720 4,533,446 64,878 99,118,642 372,104 416,078 90,538,538 Derivatives held as cash flow hedges: Interest rate swaps 549,448 (106,004) 40,741,351 7,806,808 13,797,719 8,169,901 6,003,404 4,963,519 Derivatives held as fair value hedges: Interest rate swaps 1,427,332 (804,474) 26,699,467 35,620 615,838 4,814,034 5,365,134 15,868,841 بنك الإمارات دبي الوطني Emirates NBD Derivatives held as hedge of a net investment in foreign operations: Forward foreign exchange contracts Total (38,603) 520,792 13,697,399 (10,775,231) 795,648,115 240,299,655 520,792 168,561,455 159,542,421 115,085,504 112,159,080 Hedging instruments are issued to hedge against interest rate and foreign exchange risks pertaining to hedged items. Hedged items include certain Loans and receivables amounting to AED 12,805 million (note 12), Investment securities amounting to AED 6,486 million (note 11), customer deposits amounting to AED 21,907 million (note 17) and Debt issued and borrowed funds amounting to AED 25,187 million (note 18). All the hedges were determined to be effective as on 31 December 2020. The hedged forecast cash flows which are expected to occur over the future years and are expected to affect profit or loss are insignificant.#37NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 35 DERIVATIVES (CONTINUED) A. Derivatives held for risk management (continued) Derivative Product Types Forwards are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency. For currency swaps, the underlying amounts are exchanged in different currencies. Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. Derivative Related Credit Risk Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive fair value of instruments that are favourable to the Group and potential future fluctuations. The majority of the fair value of favourable contracts (and therefore credit risk) is exposure to financial institutions. All credit exposure is managed under approved facilities, and in many cases are collateralised under Credit Support Annex (CSA). The Group takes a Credit Value Adjustment (CVA) on outstanding derivative transactions. The methodology for CVA calculation relies on three components: the probability of default of the counterparty, the expected positive exposure and the recovery rate. CVA is computed on all asset classes including Foreign Exchange, Interest Rates and Commodities. Derivatives Held or Issued for Trading Purposes Most of the Group's derivative trading activities relate to sales and position coverage. Sales activities involve offering products to customers at competitive prices in order to enable them to transfer, modify or reduce current and expected risks. Interest rate derivatives trading is conducted under Board approved limits. Derivatives Held or Issued for Hedging Purposes As part of its asset and liability management, the Group uses derivatives for hedging purposes in order to reduce its exposure to currency and interest rate risks. This is achieved by hedging specific financial instruments and forecasted transactions as well as strategic hedging against overall balance sheet exposures. The Group designates its derivatives held or issued for hedging purposes as: Fair value hedges: Hedges of the fair value of recognised assets or liabilities or firm commitments; Cash flow hedges: Hedges of highly probable future cash flows attributable to a recognised asset or liability, or a highly probable forecast transaction; and Net investment hedges: Hedges of net investments in foreign operations. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 35 DERIVATIVES (CONTINUED) A. Derivatives held for risk management (continued) Further, in terms of the hedging transactions carried out by the Group, the Group documents: At the inception of the transaction, the relationship between hedging instruments and hedged items, the risk being hedged and the Group's risk management objective and strategy for undertaking a hedge transaction. The manner in which effectiveness will be measured throughout the life of the hedge relationship. The Group's assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Hedge effectiveness is measured by the Group on a prospective basis at inception, as well as retrospectively (where applicable) and prospectively over the term of the hedge relationship. Sources of ineffectiveness in hedge accounting include the impact of derivative related credit risk on the valuation of the hedging derivative and hedged item. To mitigate this credit risk, the Group executes hedging derivatives with high quality counterparties and the majority of the Group's hedging derivatives are collateralised. Fair Value Hedges: The Group uses interest rate swaps to hedge against changes in value of investment securities due to interest rate movements. These are designated by the Group as fair value hedges and, therefore the fair value hedge accounting is applied to hedge movements in the value of fixed interest rate assets and liabilities subject to interest rate risk, as well as assets and liabilities subject to foreign exchange risk. Subsequent to initial designation, changes in the fair value of derivatives designated as fair value hedges are accounted for in the 'other operating income', along with any changes in the fair value of the hedged asset or liability attributable to the hedged risk. Cash Flow Hedges: The Group uses interest rate swaps and forward rate agreements to hedge against the cash flow risks arising on certain floating rate customer deposits and medium-term borrowings. Interest rate swaps are also used to hedge against the cash flow risks arising on certain floating rate loans and receivables. These are designated by the Group as cash flow hedges, and, as such, the Group applies cash flow hedge accounting to hedge the variability in highly probable forecast future cash flows attributable to interest rate risk on variable rate assets and liabilities, and assets and liabilities subject to foreign exchange risk. The effective portion of changes in the fair value of derivatives designated as cash flow hedges are recognised in the fair value reserve within equity. Any gain or loss relating to the ineffective portion is recognised immediately in the Group consolidated income statement. 69 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 70 بنك الإمارات دبي الوطني Emirates NBD#38NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 35 36 DERIVATIVES (CONTINUED) A. Derivatives held for risk management (continued) Net Investment Hedges: Net investment hedging instruments often consist of derivatives such as forward rate which are accounted for in the same manner as cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in the foreign currency translation reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in the Group consolidated income statement. OPERATING SEGMENTS The Group is organised into the following main businesses: (a) Corporate and Institutional banking represents current and savings accounts, customer deposits, overdrafts, trade finance and term loans for government, corporate customers, investment banking, Islamic products under ENBD Islamic and structured financing primarily in the UAE, Egypt and KSA; (b) Retail banking and Wealth Management represents retail loans and deposits, private banking and wealth management, equity broking services, asset management and consumer financing primarily in the UAE, Egypt and KSA; (c) Global Markets and Treasury activities comprise of managing the Group's portfolio of investments, funds management and interbank treasury operations primarily in the UAE, Egypt and KSA; (d) Islamic banking activities represent the income and fees earned and expenses paid by the Islamic banking subsidiaries; (e) DenizBank is considered as a separate operating segment; and (f) Other operations of the Group include Tanfeeth, property management, operations and support functions. 71 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 72 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 31 December 2021 Net interest income and income from Islamic products net of distribution to depositors Net fees, commission and other income Total operating income/(loss) General and administrative expenses Net impairment loss on financial assets Share of profit of associate and loss on its disposal and Wealth Management Corporate and Retail banking banking Institutional AED 000 AED 000 Islamic banking AED 000 ------------ DenizBank AED 000 --------------- 4,199,243 5,518,032 1,464,281 2,527,172 ---------- 1,711,189 686,806 ---------------- 5,272,441 1,770,038 ------------------ 5,663,524 8,045,204 (541,257) (2,035,267) (2,238,878) (565,731) 7,938 2,397,995 (1,191,100) (383,810) 7,042,479 (2,212,750) (2,716,672) 36 OPERATING SEGMENTS (CONTINUED) Taxation charge 37,289 Group profit/(loss) for the year Segment Assets Segment Liabilities and Equity 3,124,289 301,695,302 185,785,664 (41,961) 5,198,634 66,235,113 179,366,620 (71,708) (283,259) 145,602,347 23,285,818 (469,847) 823,085 63,463,244 54,878,900 1,643,210 108,914,256 100,504,660 بنك الإمارات دبي الوطني Emirates NBD#39NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 36 OPERATING SEGMENTS (CONTINUED) 31 December 2020 Net interest income and income from Islamic products net of distribution to depositors Net fees, commission and other income Total operating income/(loss) General and administrative expenses Share of profit of associate and loss on its Net impairment loss on financial assets Taxation charge disposal Group profit/(loss) for the year Segment Assets Segment Liabilities and Equity 73 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 74 37 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 SUBSIDIARIES The direct subsidiaries of the Group are as follows: As at 31 December 2021 Subsidiaries: Group % Share holding Nature of business Country of incorporation 1 Buzz Contact Centre Solutions LLC 100 2 DenizBank Anonim Sirketi 100 Call centre management services Dubai, U.A.E. Banking Turkey 3 Emirates Funds LLC 100 Asset management Dubai, U.A.E. 4 Emirates Funds Managers (Jersey) Limited 100 Asset management Jersey, England 5 Emirates Islamic Bank PJSC 99.9 Islamic banking Dubai, U.A.E. 6 Emirates Money Consumer Finance LLC 100 Consumer finance Dubai, U.A.E. 7 Emirates NBD Asset Management Limited 100 Asset management Dubai, U.A.E. 8 Emirates NBD Capital (KSA) LLC 100 Investment services KSA 9 Emirates NBD Capital PSC 100 Investment services Dubai, U.A.E. 10 Emirates NBD Egypt S.A.E. 100 Banking Egypt Medium term borrowing and 11 Emirates NBD Global Funding Limited 100 money market transactions 12 Emirates NBD Properties LLC 100 Real estate management Cayman Islands Dubai, U.A.E. 13 Emirates NBD Securities LLC 100 Brokerage services Dubai, U.A.E. 14 Emirates NBD Trust Company (Jersey) Limited 100 Trust administration services Jersey, England 15 ENBD London Branch Nominee Company 100 Asset management England 16 Tanfeeth LLC 100 Shared services organisation Dubai, U.A.E. 17 The Emirates National Dubai Real Estate Company LLC 100 Nominee company for mortgage business KSA Names Other entities consolidated by the Group based on an assessment of control are as follows: Nature of business 1 Group tranche of Emblem Finance Company No. 2 Limited SPE for asset securitisation 2 Emirates NBD Global Markets Limited SPE for funding purpose 3 ENBD Asset Finance Company No.1 DAC (under liquidation) 4 ENBD Asset Finance Company No.2 Limited 5 Emirates NBD Tier 1 Limited 6 Emirates NBD 2014 Tier 1 Limited 7 EIB Sukuk Company Limited 8 El Funding Limited SPE for asset securitisation SPE for asset securitisation SPE for funding purpose SPE for funding purpose SPE for asset securitisation SPE for asset securitisation بنك الإمارات دبي الوطني Emirates NBD#40NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 38 COMMITMENTS AND CONTINGENCIES (a) At 31 December 2021, the Group's commitments and contingencies are as follows: NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 39 RELATED PARTY TRANSACTIONS Letters of credit Guarantees Liability on risk participations Irrevocable loan commitments* 2021 AED 000 19,545,126 56,705,248 218,757 39,998,828 116,467,959 2020 AED 000 10,731,079 58,473,299 113,037 33,506,436 102,823,851 *Irrevocable loan commitments represent a contractual commitment to permit draw downs on a facility within a defined period subject to conditions precedent and termination clauses. Since commitments may expire without being drawn down, and as conditions precedent to draw down have to be fulfilled the total contract amounts do not necessarily represent exact future cash requirements. As at 31 December 2021 ECL on unfunded exposures amounted to AED 472 million (2020: AED 598 million) in Stage 1 with exposure of AED 88,952 million (2020: AED 80,262 million) and AED 160 million (2020: AED 104 million) in Stage 2 with exposure of AED 6,807 million (2020: AED 6,670 million). Unfunded exposure includes guarantees, standby letter of credits and irrevocable loan commitments. (b) Acceptance Under IFRS 9, acceptances are recognised on balance sheet with a corresponding liability. Accordingly, there is no off-balance sheet commitment for acceptances. (c) Capital Commitments The Group has commitments as at 31 December 2021 for branch refurbishments and automation projects of AED 531 million (2020: AED 699 million). Emirates NBD Group is partly owned by Investment Corporation of Dubai (55.75%), a company in which the Government of Dubai is the majority shareholder. Deposits from and loans to government related entities, other than those that have been individually disclosed, amount to 5% (2020: 6%) and 6% (2020: 5%) respectively, of the total deposits and loans of the Group. These entities are independently run business entities, and all financial dealings with the Group are on normal commercial terms. The Group has also entered into transactions with certain other related parties who are non government related entities. Such transactions were also made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with third parties and do not involve more than a normal amount of risk. Related party balances and transactions are carried out on normal commercial terms and are as follows: Loans and receivables: To majority shareholder of the parent To parent To directors and related companies Customer and Islamic deposits: From majority shareholder of the parent From parent From associates 148,117,393 1,273,898 872,993 150,264,284 2021 AED 000 2020 AED 000 157,723,504 1,487,463 850,367 160,061,334 2021 AED 000 2020 AED 000 5,367,019 1,967,593 4,423,770 1,797,459 90,675 7,334,612 6,311,904 75 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 76 بنك الإمارات دبي الوطني Emirates NBD#41NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 39 RELATED PARTY TRANSACTIONS (CONTINUED) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 40 GEOGRAPHICAL DISTRIBUTION OF ASSETS AND LIABILITIES The Group's financial position, before taking into account any collateral held or other credit enhancement, can be analysed by the following regions: 2021 2020 Investment in Government of Dubai bonds AED 000 6,481,084 AED 000 6,474,854 UAE Commitments to associates 78,877 Payments made to associates 99 14,754 31 December 2021 ASSETS AED 000 Other GCC AED 000 International AED 000 Total AED 000 Payments made to other related parties 17,967 20,871 Cash and deposits with Central Bank 42,244,298 Fees received in respect of funds managed by the Group 18,034 13,812 Due from banks Directors sitting fee 16,808 16,836 Investment securities 4,834,929 59,127,388 4,146,128 24,363,187 70,753,613 12,248,650 28,259,669 45,343,248 20,175,549 26,853,949 106,156,886 Loans and receivables 328,037,488 12,498,961 81,735,941 422,272,390 Key management compensation: Positive fair value of derivatives Short term employment benefits Post-employment benefits 83,189 95,858 1,540 1,435 84,729 97,293 Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. Customer acceptances 2,200,217 9,648,628 Property and equipment Goodwill and Intangibles 2,287,472 5,495,529 143,170 92,737 80,854 Other Assets TOTAL ASSETS 4,815,549 458,691,498 8,315,538 10,658,925 1,602,157 1,379,295 485,962 5,981,491 212,028 6,151,345 11,178,922 49,598,077 179,147,043 687,436,618 11,343,522 3,747,621 77 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 78 LIABILITIES Due to Bank Customer deposits 11,443,506 305,108,929 9,114,975 23,196,726 43,755,207 34,000,997 117,373,962 456,483,888 Debt issued and other borrowed funds 63,387,228 63,387,228 Sukuk Payable 3,672,500 3,672,500 Negative fair value of derivatives 1,251,465 Customer acceptances 9,648,628 Other liabilities 10,327,023 209,085 92,737 424,355 Total equity 83,579,689 TOTAL LIABILITIES AND EQUITY Geographical distribution of letters of credit and guarantees 425,031,740 46,149,314 16,028,263 83,579,689 43,842,149 218,562,729 687,436,618 5,306,499 24,794,561 76,250,374 7,725,771 1,602,157 5,276,885 9,186,321 11,343,522 31 December 2020 Geographical distribution of assets 455,260,985 Geographical distribution of 412,568,691 45,053,317 197,773,171 698,087,473 49,190,448 236,328,334 698,087,473 liabilities and equity Geographical distribution of letters of credit and guarantees 39,168,388 5,005,808 25,030,182 69,204,378 بنك الإمارات دبي الوطني Emirates NBD#4279 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 41 80 FINANCIAL ASSETS AND LIABILITIES A. Classification of financial assets and financial liabilities The table below sets out the Group's classification of each class of financial assets and liabilities, and their carrying values. 31 December 2021 Trading securities at FVTPL Designated at FVTPL AED 000 AED 000 FVOCI-debt instruments AED 000 FVOCI-equity instruments AED 000 Amortised cost AED 000 Hedging instruments Total carrying AED 000 value* AED 000 70,753,613 45,343,248 70,753,613 45,343,248 2,492,360 252,151 16,885,688 561,657 85,965,030 422,272,390 106,156,886 422,272,390 525,907 10,658,925 12,625,378 252,151 16,885,688 561,657 18,785,684 643,119,965 18,785,684 525,907 673,970,746 Financial assets Cash and deposits with Central Banks Due from banks Investment securities Loans and receivables Positive fair value of derivatives 10,133,018 Others Financial liabilities Due to banks Customer deposits Debt issued and other borrowed funds Sukuk payable Negative fair value of derivatives Others 7,966,273 7,966,273 43,755,207 43,755,207 456,483,888 456,483,888 63,387,228 63,387,228 3,672,500 3,672,500 1,220,048 27,371,785 594,670,608 1,220,048 9,186,321 27,371,785 603,856,929 *The carrying values of the financial assets and liabilities (that are not stated at fair value) are not significantly different to their fair values. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 41 FINANCIAL ASSETS AND LIABILITIES (CONTINUED) A. Classification of financial assets and financial liabilities (continued) 31 December 2020 Financial assets بنك الإمارات دبي الوطني Emirates NBD Cash and deposits with Central Banks Trading securities Designated at FVTPL at FVTPL AED 000 AED 000 FVOCI-debt instruments AED 000 FVOCI-equity instruments Amortised cost AED 000 AED 000 Hedging instruments AED 000 Total carrying value* AED 000 100,841,896 5,895,902 279,367 16,451,918 490,577 34,997,680 49,577,523 443,541,469 100,841,896 34,997,680 72,695,287 443,541,469 1,976,780 13,697,399 17,616,521 279,367 16,451,918 490,577 18,074,919 647,033,487 1,976,780 18,074,919 683,848,650 Due from banks Investment securities Loans and receivables Positive fair value of derivatives Others 11,720,619 Financial liabilities Due to banks Customer deposits Debt issued and other borrowed funds Sukuk payable Negative fair value of derivatives Others 9,826,150 9,826,150 51,672,068 51,672,068 464,197,034 54,662,670 5,510,933 464,197,034 54,662,670 5,510,933 949,081 10,775,231 26,651,439 602,694,144 26,651,439 949,081 613,469,375 * The carrying values of the financial assets and liabilities (that are not stated at fair value) are not significantly different to their fair values.#43NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 41 FINANCIAL ASSETS AND LIABILITIES (CONTINUED) B. Fair value of financial instruments The table below analyses financial instruments measured at fair value on a recurring basis. The different levels in the fair value hierarchy have been defined as follows: Level 1: quoted prices (unadjusted) in principal markets for identified assets or liabilities. Level 2: valuation using inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices). Level 3: valuation using inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 41 FINANCIAL ASSETS AND LIABILITIES (CONTINUED) B. Fair value of financial instruments (continued) The following table shows a reconciliation from the beginning balances to the ending balances for the fair value measurements in Level 3 of the fair value hierarchy. 31 December 2021 Investment securities Trading securities at FVTPL Trading securities at FVTPL AED 000 Balance as at 1 January 2021 Designated at FVTPL AED 000 161,928 FVOCI- debt instruments AED 000 Level 1 AED 000 Level 2 AED 000 Level 3 AED 000 Total AED 000 Total gains or losses: (8,843) Government Bonds 1,939,565 Corporate Bonds 387,814 Equity 156,687 Others 8,294 2,492,360 FVOCI debt instruments Government Bonds 10,903,144 16,266 1,939,565 387,814 156,687 8,294 --------- 2,492,360 10,919,410 in profit or loss in other comprehensive income Purchases Issues Settlements and other adjustments FVOCI- equity instruments AED 000 Total AED 000 5,765 167,693 (222) 95,526 (8,843) (222) 95,526 (726) (121) (847) Transfers into Level 3 Corporate Bonds 5,989,331 Transfers out of Level 3 ---------- 16,892,475 16,266 5,989,331 16,908,741 Balance as at 31 December 2021 152,359 100,948 253,307 FVOCI - equity instruments 459,840 869 100,948 561,657 Designated at FVTPL Corporate Bonds Equity Others Positive fair value of derivatives Derivatives held for trading Derivatives held as cash flow hedges: Interest rate swaps Derivatives held as fair value hedges: Interest rate swaps 9,782 90,010 99,792 151,634 725 152,359 161,416 90,735 252,151 10,133,018 10,133,018 238,462 238,462 287,445 287,445 Derivatives held as hedge of a net investment in foreign operations: Forward foreign exchange contracts 10,658,925 10,658,925 Negative fair value of derivatives Derivatives held for trading (7,966,273) (7,966,273) Derivatives held as cash flow hedges: Interest rate swaps (121,895) (121,895) Derivatives held as fair value hedges: Interest rate swaps (1,088,283) (1,088,283) Derivatives held as hedge of a net investment in foreign operations: Forward foreign exchange contracts 19,944,467 (9,870) (9,186,321) 1,489,739 (9,870) (9,186,321) 253,307 21,687,513 81 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 82 بنك الإمارات دبي الوطني Emirates NBD#4483 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 41 FINANCIAL ASSETS AND LIABILITIES (CONTINUED) B. Fair value of financial instruments (continued) 31 December 2020 Level 1 AED 000 Level 2 AED 000 AED 000 Level 3 Total AED 000 Investment securities Trading securities at FVTPL Government Bonds 3,024,022 Corporate Bonds Equity 2,760,381 108,608 Others 2,891 5,895,902 3,024,022 2,760,381 108,608 2,891 5,895,902 FVOCI debt instruments Government Bonds 11,831,792 16,186 11,847,978 Corporate Bonds 4,562,585 72,045 16,394,377 88,231 4,634,630 16,482,608 FVOCI equity instruments 483,941 871 5,765 490,577 Designated at FVTPL Corporate Bonds Equity Others Positive fair value of derivatives Derivatives held for trading Derivatives held as cash flow hedges: NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 41 FINANCIAL ASSETS AND LIABILITIES (CONTINUED) B. Fair value of financial instruments (continued) The following table shows a reconciliation from the beginning balances to the ending balances for the fair value measurements in Level 3 of the fair value hierarchy. Trading securities at FVTPL AED 000 Balance as at 1 January 2020 Designated at FVTPL AED 000 525,669 Total gains or losses: - in profit or loss (367,699) - in other comprehensive income Purchases Issues Settlements and other adjustments Transfers into Level 3 Transfers out of Level 3 Balance as 40,941 76,498 117,439 159,313 2,615 161,928 200,254 79,113 279,367 at 31 December 2020 11,720,619 11,720,619 549,448 549,448 1,427,332 1,427,332 Interest rate swaps Derivatives held as fair value hedges: Interest rate swaps Derivatives held as hedge of a net investment in foreign operations: Forward foreign exchange contracts 13,697,399 13,697,399 Negative fair value of derivatives Derivatives held for trading (9,826,150) (9,826,150) Derivatives held as cash flow hedges: Interest rate swaps (106,004) (106,004) Derivatives held as fair value hedges: Interest rate swaps (804,474) (804,474) Derivatives held as hedge of a net investment in foreign operations: Forward foreign exchange contracts (38,603) 22,891,659 (10,775,231) 3,011,270 (38,603) (10,775,231) 167,693 26,070,622 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 84 4,515 (557) 161,928 FVOCI- debt instruments AED 000 FVOCI- equity instruments AED 000 5,343 TOTAL AED 000 531,012 422 (367,699) 422 4,515 (557) 5,765 167,693 The fair value of financial instruments classified as level 3 are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by the prices from observable current market transactions in the same instrument and are not based on observable market data. The Group employs valuation techniques, depending on the instrument type and available market data. For example, in the absence of active market, an investment's fair value is estimated on the basis of an analysis of the investee's financial position and results, risk profile and other factors. Favourable and unfavourable changes in the value of financial instruments are determined on the basis of changes in the value of the instruments as a result of varying the levels of the unobservable parameters, quantification of which is judgemental. There have been no transfers between Level 1 and Level 2 during the years ended 31 December 2021 and 31 December 2020. بنك الإمارات دبي الوطني Emirates NBD#4585 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 42 NOTES TO THE GROUP CONSOLIDATED CASH FLOW STATEMENT 2021 AED 000 2020 AED 000 (a) Analysis of changes in cash and cash equivalent during the year Balance at beginning of year 20,911,912 Net cash inflow/(outflow) Balance at end of year (b) Analysis of cash and cash equivalents Cash and deposits with Central Banks Due from banks Due to banks Less: deposits with Central Banks for regulatory purposes Less: certificates of deposits/placements with Central Banks maturing after three months 32,291,487 7,820,431 (11,379,575) 28,732,343 20,911,912 70,753,613 45,343,248 (43,755,207) (51,672,068) 72,341,654 84,167,508 (45,176,256) (42,942,928) 100,841,896 34,997,680 Less: amounts due from banks maturing after three months Add: amounts due to banks maturing after three months (3,000,000) (23,450,016) 28,016,961 28,732,343 (33,500,000) (20,784,914) 33,972,246 20,911,912 (c) Adjustment for non-cash items Impairment loss/(reversal) on cash and deposits with central banks (878) Impairment loss on loans and receivables 6,234,860 122 7,875,539 Impairment loss/(reversal) on investment securities (12,481) 22,955 Impairment loss on unfunded exposures 64,678 70,914 Impairment loss/(reversal) on due from banks/other assets 23,166 123,349 Amortisation of fair value 130,209 123,015 Premium/(discount) on Investment securities (63,176) (4,087) Unrealised foreign exchange loss/(gain) 4,194,239 (763,131) Depreciation of property and equipment/investment property 800,969 856,895 Share of (profit)/loss of associates and loss on its disposal 21,137 (12,173) Unrealised (gain)/loss on investments Dividend income on equity investments Unrealised gain or loss on FV Hedged item Loss/(gain) on sale of properties (investment properties/inventories) Amortisation of intangibles Gain on disposal of a subsidiary 935 (18,742) (1,581,806) 342,319 (22,059) 1,460,021 3,063 163,296 34 163,296 (329,305) 9,630,164 10,237,009 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 86 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 43 CAPITAL MANAGEMENT AND ALLOCATION The CBUAE supervises the Group on a consolidated basis, and therefore receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Effective from 2017, the capital is computed at a Group level using the Basel III framework of the Basel Committee on Banking Supervision (Basel Committee), after applying the amendments advised by the CBUAE, within national discretion. The Basel III framework, like Basel II, is structured around three pillars: minimum capital requirements, supervisory review process and market discipline. Minimum Capital Requirements The CBUAE issued Basel III capital regulations, which came into effect from 1 February 2017 introducing minimum capital requirements at three levels, namely Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Total Capital. Additional capital buffers (Capital Conservation Buffer (CCB) and Countercyclical Capital Buffer (CCYB) - maximum up to 2.5% for each buffer) introduced over and above the minimum CET1 requirement of 7%. For 2021, as per the TESS standards, until June 2022, CCB is required to be kept at 1% of the Capital base. CCyB is not in effect and is not required to be kept for 2021. Over and above additional capital buffers, the Group as a Domestic Systematically Important Bank (D-SIB) is required to keep an additional D-SIB buffer of 1.5% of the Capital base, however this requirement is exempt as per the TESS standards until June 2022. Regulatory Capital The Group's capital base is divided into three main categories, namely CET1, AT1 and Tier 2 (T2), depending on their characteristics. CET1 capital is the highest quality form of capital, comprising share capital, share premium, legal, statutory and other reserves, fair value reserve, retained earnings, non-controlling interest after deductions for goodwill and intangibles and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes under CBUAE guidelines. AT1 capital comprises eligible non-common equity capital instruments. T2 capital comprises qualifying subordinated debt, and undisclosed reserve. بنك الإمارات دبي الوطني Emirates NBD#46NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 43 CAPITAL MANAGEMENT AND ALLOCATION (CONTINUED) The capital overview as per Basel III framework is given below: 2021 AED 000 2020 AED 000 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 43 CAPITAL MANAGEMENT AND ALLOCATION (CONTINUED) The capital adequacy ratios as per Basel III capital regulation are given below: 2021 AED 000 2020 AED 000 Available capital Common equity tier 1 capital Tier 1 capital Total eligible capital Risk-weighted assets Credit risk Market risk Operational risk 67,463,976 76,592,628 81,504,429 Common Equity Tier 1 (CET1) Capital 67,134,947 77,514,733 82,434,262 Share Capital 6,316,598 6,316,598 Share premium account 17,954,164 17,954,164 Eligible reserves (2,921,388) 2,710,530 392,944,100 10,945,304 393,562,281 Transitional arrangement: Partial addback of IFRS 9 ECL impact to 14,600,122 CET1 2,469,467 42,492,456 38,291,452 Retained earnings 53,088,213 2,002,738 47,014,778 Total risk-weighted assets 446,381,860 446,453,855 Dividend expected/proposed (3,158,299) (2,526,639) 2021 2020 Eligible amount of non-controlling interest 55,018 22,124 Capital Ratio CET1 capital before the regulatory adjustments and threshold deduction 73,803,773 73,494,293 a. Total capital ratio for consolidated Group 18.26% 18.46% b. Tier 1 ratio only for consolidated Group 17.16% 17.36% Less: Regulatory deductions (6,339,797) (6,359,346) c. CET1 ratio only for consolidated Group 15.11% 15.04% Total CET1 capital after the regulatory adjustments and threshold deduction 67,463,976 67,134,947 Total CET1 capital after transitional arrangement for deductions (CET1) (A) 67,463,976 67,134,947 Additional Tier 1 (AT1) Capital Eligible AT1 capital 9,128,652 10,379,786 Other AT1 Capital (e.g. Share premium, non-controlling interest) Total AT1 capital 9,128,652 Total AT1 capital after transitional arrangements (AT1) (B) 9,128,652 10,379,786 10,379,786 Tier 2 (T2) Capital Tier 2 Instruments e.g. subordinated loan Other Tier 2 capital (including General Provisions, etc.) Total T2 Capital 4,911,801 4,919,529 4,911,801 4,919,529 Total T2 capital after transitional arrangements (T2) (C) 4,911,801 4,919,529 Total Regulatory Capital (A+B+C) 81,504,429 82,434,262 87 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 88 بنك الإمارات دبي الوطني Emirates NBD#47NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 44 FUND MANAGEMENT The Group manages a number of funds which are not consolidated in the financial statements. The funds have no recourse to the general assets of the Group and further the Group has no recourse to the assets of the funds. Third party funds managed by the Group were AED 24,171 million at 31 December 2021 (2020: AED 20,754 million). 45 ASSETS HELD IN FIDUCIARY CAPACITY 46 The Group holds assets in a fiduciary capacity and provides custodian services for some of its customers. The underlying assets held in a custodial or fiduciary capacity are excluded from the Group consolidated financial statements. RISK MANAGEMENT The primary risks to the Group arise from extending credit to corporate and institutional banking and retail banking customers. The Group is also exposed to a range of other risk types such as market, operational, liquidity, compliance, reputational, country, market conduct and legal that drive the direction of its risk management strategy, product range and risk diversification strategies. Group Risk Management Framework (GRMF): The GRMF enables the Group to manage group-wide risks with the objective of maximising returns while adhering to our risk appetite. The Group uses three lines of defence model to support its approach to risk management by clarifying responsibility, encouraging collaboration, and enabling efficient coordination of risk and control activities. The three lines of defence are summarised below: Business units: Required to ensure the effective management of risks within the scope of their direct organisational responsibilities. All employees within the business units are sufficiently trained and have access to appropriate tools to ensure risk-taking is controlled. Each business unit primarily owns the risk that it underwrites and is equally responsible for designing and implementing necessary controls to mitigate risks emanating from its activities. Risk control units: Responsible for implementing policies and procedures, monitoring risks taken to ensure all risks are within the Group's risk appetite. Appropriate controls are designed and implemented with adequate reporting in place to anticipate future risks and improve the level of preparedness across the management chain. Group Internal Audit: Provides independent assurance and reports its findings to all relevant management and governance bodies, accountable line managers, relevant oversight function and committee(s) of the Board. A. Risk governance The risk governance structure of the group ensures central oversight and control with clear accountability for and ownership of risk. 46 RISK MANAGEMENT (CONTINUED) A. Risk governance (continued) The Board of Directors (the Board) has the ultimate responsibility for setting the Group's risk appetite and for the establishment and oversight of the Group's risk management framework. This is managed through a number of committees; namely Board Risk Committee (BRC), Board Credit & Investment Committee (BCIC) and Board Audit Committee (BAC). The management level committees also actively manage risk particularly the Group Risk Committee (GRC), Management Credit Committee (MCC), Management Investment Committee (MIC), Retail Credit Committee (RCC) and Group Asset Liability Management Committee (Group ALCO). BRC comprises of members of the Board and is responsible for risk oversight responsibilities of the Board with regards to risk governance, risk appetite and the risk management framework. The BRC receives reports on risk management including our portfolio trends, policies and standards, stress testing, liquidity and capital adequacy and is authorised to investigate or seek any information relating to any activity within its terms of reference. BCIC supports Board to manage the credit and investment portfolio of the bank and is responsible for approval of credit and investment decisions above the MCC and MIC's authority. It oversees the execution of the Group's credit risk management and reviews the credit profile of material portfolios to ensure that it is aligned with business strategy and risk appetite. The primary role BAC is to have oversight and review of financial, audit and internal control issues as well as oversee the independence and performance of group's external and internal auditors. MCC is management level committee which carries out credit lending decisions including but not limited to approval and renewal of credit facilities, review and monitor portfolio performance in line with the credit risk strategy, decisions on debt settlement, provisioning write off and amendments to pricing, grades and waiver. The role of the MIC is to support the Board in the management of the Investment Portfolios of the Group to ensure they conform to the strategic vision of the same and support the Board in monitoring and reporting the performance of these portfolios. The Group ALCO is responsible for balance sheet management and quality of the funding plan as well as the management of capital and the establishment of, and compliance with, policies relating to balance sheet management, including management of our liquidity, capital adequacy and structural foreign exchange and interest rate risk. The committee also approves the contingency funding plan as well as the funds transfer pricing among other things. The GRC is responsible for the management of all risks other than those delegated to MCC, MIC and Group ALCO and ensures the effective management of risk throughout the Group in support of the Group's business strategy and the Group's risk appetite. The committee approves risk policies and analytical models to ensure effective management of credit, market, operational, business continuity and reputational, compliance, legal, market conduct and other risks confronting the Group. 89 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 90 90 B. The risk function The GRMF is managed by the Group Risk management function (Group Risk). The function is independent of the business (origination, trading and sales functions) to ensure that the necessary balance in risk/ return decisions is not compromised by pressures for better results in terms of revenues and to ensure transparency of decisions in accordance with group standards and policies. بنك الإمارات دبي الوطني Emirates NBD#48NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) B. The risk function (continued) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) Group Risk assists in controlling and actively managing the Group's overall risk profile. The role of the function is: To ensure the risk management framework is effectively communicated and implemented across the Group and is appropriate to the Group's activities; To exercise direct ownership for various risk types including but not limited to credit, market, country, operational, reputational risks; To ensure that the Group's business strategies, risk policies, procedures and methodologies are consistent with the Group's risk appetite; To ensure the integrity of the Group's risk/return decisions guaranteeing their transparency; To ensure that appropriate risk management architecture and systems are developed and implemented. C. Risk appetite The Group Risk Appetite Statement (Group RAS) is an articulation of the risk that the Group would be willing to accept, underwrite and/or be exposed to in the normal course of its business conduct. The Group RAS is a critical component and extension of the GRMF. It is a mechanism used by the Group to proactively establish and subsequently monitor the Group's risk profile using a set of pre-defined key risk metrics and respective thresholds. D Credit risk Credit risk is the risk of financial loss, should any of the Group's customers, clients or market counterparties fail to fulfil their contractual obligation to the Group. Credit risk arises mainly from interbank, corporate and institutional banking and retail banking loans and advances, and loan commitments arising from such lending activities, but can also arise from credit enhancement provided, such as credit derivatives (credit default swaps), financial guarantees, letter of credit, endorsement and acceptances. The Group is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its trading activities ("trading exposures") including non-equity trading portfolio assets and derivatives as well as settlement balances with market counterparties and reverse repurchase agreements. Credit risk management The Group's approach to credit risk management is based on the foundation of independence and integrity of risk management. This is ensured through a well-defined and robust organisation structure duly supported by various risk committees, forums, systems, policies, procedures and processes providing a strong risk infrastructure and management framework. The Group's credit policy focuses on the core credit principles, lending guidelines and parameters, control and monitoring requirements, problem loan identification, management of high-risk counterparties and provisioning. Standard procedures specific to businesses are in place to manage various types of risks across different business segments, products and portfolios. Portfolio performance is periodically measured against RAS parameters and breaches if any are actioned by the Group's Executive Committee. Credit risk management (continued) Corporate and Institutional Banking, Business Banking and Private Banking credit risk management: Credit facilities are granted based on the detailed credit risk assessment of the counterparty. The assessment considers amongst other things the purpose of the facility, sources of re-payment, prevailing and potential macro-economic factors, industry trends, customers' credit worthiness and standing within the industry. The credit facility administration process is undertaken by an independent function to ensure proper execution of all credit approvals, maintenance of documentation and proactive controls over maturities, expiry of limits and collaterals. Operations are managed by independent units responsible for processing transactions in line with credit approvals and standard operating guidelines. Management of Early Alert (EA), Watch List (WL) & Impaired Non-Performing Loans (NPL) - The Group has a well-defined process for identification of EA, WL & NPL accounts and dealing with them effectively. There are policies which govern credit grading of EA, WL & NPL accounts and impairment, in line with IFRS and regulatory guidelines. Retail banking credit risk management: The Group has a structured management framework for retail banking risk management. The framework enables the Group in identification and evaluation of the significance of all credit risks that the Group faces, which may have an adverse material impact on its financial position. In the retail banking portfolio, losses stem from outright default due to inability or unwillingness of a customer to meet commitments in relation to lending transactions. The Group's provisioning policy, which is in line with the IFRS and the regulatory guidelines, allows the Group to prudently recognise impairment on its retail portfolios. Model risk management and independent validation The Group has utilised models in many of its financial and business activities from underwriting a credit facility to reporting expected loss under the IFRS9 accounting standards. To manage the model risks, the Group has implemented the Group Model Governance Framework (the Framework). The Framework is a group wide policy and is applicable to models in all entities and subsidiaries of the Group. According to the Framework, all internally or externally (vendor based) developed risk quantification models that directly affect the financial reporting, including Expected Loss (EL), Lifetime Expected Loss (LEL) and Regulatory requirements require independent validation. 91 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 92 22 بنك الإمارات دبي الوطني Emirates NBD#49NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) Credit risk management (continued) Model risk management and independent validation (continued) The Framework establishes a systematic approach to manage the development, validation, approval, implementation and on-going use of the models. It sets out an effective management structure with clearly defined roles and responsibilities, policies and controls for managing model risk. The Framework is reviewed on a regular basis to ensure it meets regulatory standards and international practices. Any major change to the Framework must be approved by the Board of Directors or the BRC. The Group has an independent Group Model Validation (GMV) function that performs independent model validation. It provides Fit-for-Purpose (FFP), Conditional Approval (CA) or Not Fit-for-Purpose (NFFP) recommendation for the BRC or an appropriately delegated authority to approve the use of the new risk quantification/valuation models. In addition to new model validation, the validation function also evaluates the performance of existing models through an annual validation process. The independency of the team enables it to serve as an effective second line of defence for the bank. Credit approving authorities BCIC has delegated credit approving authorities to the MCC, MIC, RCC and members of senior management to facilitate and effectively manage the business. However, BCIC has retained the ultimate authority to approve credits beyond MCC authority. Credit risk measurement The estimation of credit risk for risk management purpose is complex and requires use of models, as the exposure varies with changes in market condition, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further estimations as to the likelihood of defaults occurring and of the associated loss ratios. The Group measures credit risk using PD, EAD and LGD. This is similar to the approach used for the purpose of measuring ECL under IFRS 9. Credit risk grading The Group uses internal credit risk grading that reflects its assessment of the probability of default of individual counterparties. The Group uses internal rating models tailored to various categories of counterparty. Borrower and loan specific information collected at the time of facility application (such as disposable income, and level of collateral for retail exposure; and turnover and industry type considerations which may not be captured as part of the other data inputs into the model. The credit grades are calibrated, such that the risk of default increases exponentially at each higher risk grade. For example, the difference in the PD between a 1A and 2A rating grade is lower than the difference in the PD between a 3A and 4A rating grade. Credit risk measurement (continued) The following are additional considerations for each type of portfolio held by the Group: Retail: After the date of initial recognition, for retail business, the payment behaviour of the borrower is monitored on a periodic basis to develop a behavioural score. Any other known information about the borrower which impacts their credit worthiness such as: unemployment and previous delinquency history is also incorporated into the behaviour score. This score is mapped to a PD. Corporate and Institutional Banking, Business Banking and Private Banking: Ratings are determined at the borrower level for these segments. A relationship manager incorporates any updated or new information/credit assessment into the credit system on an ongoing basis. In addition, the relationship manager also updates information about the credit worthiness of the borrower every year from sources such as public financial statements. This will determine the updated internal credit rating and PD. Treasury: For debt securities in the Treasury portfolio, external rating agency credit grades are used. These published grades are continuously monitored and updated. The PDS associated with each grade are determined based on realised default rates over the prior 12 months, as published by the rating agency. The Group's rating method comprises 24 rating levels for instruments not in default (1 to 24) and 4 default classes (25 to 28). The Group's internal rating scale are mapped with external ratings. The master scale assigns each rating category a specified range of probabilities of default, which is stable over time. The rating models are reviewed for recalibration so that they reflect the latest projections in the light of all actually observed defaults. ECL Measurement IFRS 9 outlines a 'three-stage' model for impairment based on changes in credit-quality since initial recognition as summarised below: A financial instrument that is not credit-impaired on initial recognised is classified in stage 1 and has its credit risk continuously monitored by the Group. If a significant increase in credit risk ('SICR) since initial recognition is identified, the financial instrument is moved to 'Stage 2' but is not yet deemed to be credit-impaired. If the financial instrument is credit-impaired, the financial instrument is then moved to Stage 3. Financial instrument in stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on a lifetime basis. ECL is measured after factoring forward-looking information. ECL on Purchase or originated credit-impaired financial assets is measured on a lifetime basis. 93 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 94 بنك الإمارات دبي الوطني Emirates NBD#50NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) Credit risk measurement (continued) Significant Increase in Credit Risk The Group considers a financial instrument to have experienced a significant increase in credit risk when one or more of the following quantitative, qualitative or backstop criteria have been met: Quantitative criteria: Corporate and Institutional Banking, Business Banking and Private Banking: Significant increase in credit risk is measured by comparing the risk of default estimated at origination with the risk of default at reporting date. Retail: Thresholds have been set for each portfolio based on historical default rates. Facilities exceeding the threshold are considered for significant increase in credit risk. Qualitative criteria: The Group also considers in its assessment of significant increase in credit risk, various qualitative factors like significant adverse changes in business, extension of term granted, actual and expected forbearance or restructuring, early sign of cash flows and liquidity problems. Backstop: A backstop is applied, and the financial instrument considered to have experienced a significant increase in credit risk if the borrower is more than 30 days past due on its contractual payments. Definition of default and credit-impaired assets The Group defines a financial instrument as in default, which is fully aligned with definition of credit-impaired, when it meets one or more of the following criteria: Quantitative: The borrower is more than 90 days past due on its contractual payments. Qualitative: The borrower meets unlikeliness to pay criteria, which indicates the borrower is in significant financial difficulty. These are instances like long-term forbearance, borrower is insolvent, borrower is entering bankruptcy etc. Credit risk measurement (continued) Curing The Group continues to monitor such financial instruments for a minimum probationary period of 12 months to confirm if the risk of default has decreased sufficiently before upgrading such exposure from Lifetime ECL (Stage 2) to 12 months ECL (Stage 1). The Group is observing a probationary period of a minimum of 3 installments (for repayments which are on a quarterly basis or shorter) and 12 months (in cases where installments are on a longer frequency than quarterly) after the restructuring, before upgrading such exposure from Stage 3 to 2. Measuring ECL- Explanations of input, assumptions and estimation techniques ECL inputs (PD, EAD and LGD) are adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in earlier year) on annual basis. This effectively calculates an ECL for each future year, which is then discounted back to the reporting date and summed. The discount rate used in ECL computation is the original effective interest rate or an approximation thereof. The Lifetime PDs are determined based on maturity profile. The maturity profile looks at how defaults develop on a portfolio throughout the remaining life of the loans. The maturity profile is based on historical observed data. The EADS are determined based on the expected payment profile, which varies by product type. For amortising products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over the 12 months and lifetime basis. This is also adjusted for any overpayments made by the borrower. For revolving products, the EAD is predicted by taking current drawn balance and adding a credit conversion factor which allows for the expected drawdown of the remaining limit by the time of default. LGDs are computed at facility level. This is dependent upon information such as exposure, collateral, business segment characteristics and macro-economic outlook. Forward looking economic information is also included in determining the 12 month and lifetime PD, EAD and LGD. 95 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 96 بنك الإمارات دبي الوطني Emirates NBD#51NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) 46 RISK MANAGEMENT (CONTINUED) D. Credit Risk (continued) Credit risk measurement (continued) Forward-looking information incorporated in the ECL model The assessment of SICR and the calculation of ECL both incorporate forward-looking information. The Group has performed historical analysis and identified key economic variables impacting credit risk and ECL for each portfolio. These economic variables and their associated impact on PD, EAD and LGD vary by financial instrument. Expert judgement has also been applied in this process. Forecast of these economic variables (the "base, upside and downside economic scenario along with scenario weighting") are obtained externally on a quarterly basis. The impact of these economic variables on the PD, EAD and LGD has been determined by performing statistical analysis to understand the impact changes in these variables have had historically on default rates and on the components of LGD and EAD. As with any economic forecasts, the projections and likelihoods of the occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. Credit Risk Monitoring Corporate and Institutional Banking, Business Banking and Private Banking: the Group's exposures are continuously monitored through a system of triggers and early warning signals. These are supplemented by monitoring of account conduct, assessment of collateral and market intelligence and early alerts. Early Alert accounts are identified based on oversight, vigilance and risk triggers. Account strategy and action plans on these accounts are regularly monitored and discussed in the Early Alert Committee meetings. Additionally, for IFRS 9 ECL computation, credit exposures are monitored and reported as per IFRS 9 requirements. Stage migrations, any exceptions to SICR criteria, other credit and impairment related matters are reviewed and approved by IFRS 9 Governance Forum. Retail banking: risks of the Group's loan portfolio are continuously assessed and monitored on the basis of exceptions, management information reports and returns generated by the business and credit units. Credit risk is also monitored on an ongoing basis with formal monthly and quarterly reporting to ensure that senior management is aware of shifts in the credit quality of the portfolio along with changing external factors. Credit risk measurement (continued) Group credit risk mitigation strategy The Group operates within prudential exposure ceilings set by the Board in line with UAE Central Bank guidelines. There are well laid out processes for exception management and escalation. The Group has adopted measures to diversify the exposures to various sectors. Diversification is achieved by limiting concentration through setting customer, industry and geographical limits. The risk transfer in the form of syndicated loans, risk participation agreements with other banks, credit default swaps and sale of loans are globally accepted practices followed by the Group, where appropriate, to limit its exposure. Collateral management Collaterals and guarantees are effectively used as mitigating tools by the Group. The quality of collateral is continuously monitored and assessed, and the Group seeks to ensure enforceability of the collateral. Major categories of collaterals include cash/fixed deposits, inventories, shares, guarantees (corporate, bank and personal guarantees), immovable properties, receivables, gold and vehicles. Collaterals are revalued regularly as per the Group's credit policy. In addition, ad hoc valuations are also carried out depending on the nature of collateral and general economic condition. This enables the Group to assess the fair market value of the collateral and ensure that risks are appropriately managed. Security structures and legal covenants are also subject to regular review. Please refer to Pillar 3 disclosures for additional information on collaterals. Write offs Loans and debt securities in corporate and institutional banking are written off (either partially or in full) when there is no realistic prospect of recovery. This is generally the case when the Group has exhausted all legal and remedial efforts to recover from the customers. However, financial assets that are written off could still be subject to enforcement activities in order to comply with the Group's procedures for recovery of amounts due. Non-performing consumer loans, except for mortgage facilities and home financing, are written off at 181 days past due. All receivables remain active on the loan management system for recovery and any legal strategy the Group may deem fit to use. 97 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 98 بنك الإمارات دبي الوطني Emirates NBD#52NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) 46 RISK MANAGEMENT (CONTINUED) E. Analysis by economic activity for assets: F. Classification of investment securities as per their external ratings The Group monitors concentrations of credit risk by economic activity sector. The analysis by economic activity is as follows: As of 31 December 2021 2021 2020 Ratings AED 000 AED 000 Trading securities at FVTPL AED 000 Loans and Others Receivables Manufacturing 20,508,463 1,197,001 Loans and Receivables 21,784,553 AAA Designated at FVTPL AED 000 1,777 FVOCI-debt instruments AED 000 FVOCI-equity instruments AED 000 Amortised Others AA- to AA+ 777,667 A- to A+ 1,134,004 315,837 Construction 16,110,888 340,839 17,878,802 363,901 Lower than A- 641,437 Unrated 401,082 4,441 245,933 770,629 3,058,561 12,222,749 856,802 cost AED 000 2,634,781 53,040,210 Total AED 000 2,636,558 54,944,843 9,170,187 12,544,585 1,663 559,994 14,441,570 6,695,646 27,311,860 8,759,457 Trade 32,717,137 141,749 31,031,972 50,444 Less: Transport and communication 12,892,388 1,166,102 Services 12,078,563 993,310 Sovereign 152,416,647 93,779,805 Personal 98,184,765 Real estate 49,337,859 43,402 Hotels and restaurants 11,723,275 13,398,550 16,867,387 161,170,804 91,727,537 56,180,802 14,919,257 746,580 1,686,744 60,490,685 Expected (23,053) (17,364) (40,417) Credit Loss 2,492,360 252,151 16,885,688 561,657 85,965,030 106,156,886 Of which issued by: 543 Management of companies and enterprises 12,689,036 11,403,480 Financial institutions and investment companies 20,903,075 52,895,984 Agriculture 5,825,162 Others Total Assets 15,885,441 461,272,699 1,035,100 151,593,292 Less: Deferred Income Less: Expected credit loss (1,814,833) (37,185,476) 422,272,390 (93,158) 151,500,134 18,894,422 8,579,836 16,410,228 480,247,630 (1,721,350) (34,984,811) 443,541,469 42,488,518 1,463,159 108,068,241 Governments Public sector enterprises Private sector and others Less: Expected Credit Loss Trading securities at FVTPL AED 000 1,939,565 244,309 Designated at FVTPL AED 000 FVOCI-debt instruments AED 000 10,919,410 FVOCI-equity instruments AED 000 Amortised 4,545,196 74 cost AED 000 80,920,830 4,222,523 Total AED 000 93,779,805 9,012,102 308,486 252,151 1,444,135 561,583 839,041 3,405,396 (23,053) (17,364) (40,417) 2,492,360 252,151 16,885,688 561,657 85,965,030 106,156,886 (173,646) 107,894,595 Others includes due from banks, investment securities and investments in associates. 99 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 100 بنك الإمارات دبي الوطني Emirates NBD#53101 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) F. Classification of investment securities as per their external ratings (continued) As of 31 December 2020 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) G. Risk gross maximum exposure: The table below shows the gross maximum exposure to credit risk for the components of the Group consolidated statement of financial position, including derivatives. The maximum exposure is shown gross, before the effect of use of master netting and collateral agreements. Ratings Trading securities at FVTPL Designated at FVTPL AED 000 AAA AED 000 2,282 AA- to AA+ 1,244,140 A- to A+ 1,275,914 Lower than A- 2,731,698 Unrated 644,150 3,041 274,044 FVOCI- debt instruments AED 000 48,185 1,537,340 3,327,011 11,229,881 340,191 FVOCI- equity instruments AED 000 Amortised cost Total 2021 2020 AED 000 4,092,770 AED 000 4,143,237 AED 000 AED 000 14,507,857 17,289,337 871 16,851,056 21,454,852 801 7,692,034 21,657,455 Deposits with Central Banks Due from banks 64,730,368 96,353,563 45,343,248 34,997,680 488,905 6,456,200 8,203,490 Investment securities 105,178,097 71,813,844 Less: Expected (30,690) Credit Loss 5,895,902 279,367 16,451,918 490,577 (22,394) 49,577,523 (53,084) 72,695,287 Loans and receivables 422,272,390 443,541,469 Positive fair value of derivatives 10,658,925 13,697,399 Of which issued by: Customer acceptances 11,343,522 8,837,724 Trading securities at Designated Ratings FVTPL at FVTPL AED 000 AED 000 Governments 3,024,022 FVOCI- debt instruments AED 000 11,847,978 FVOCI- equity instruments AED 000 Amortised cost Public sector 2,442,923 3,237,837 74 AED 000 45,618,685 2,876,280 Total AED 000 60,490,685 Total (A) 659,526,550 669,241,679 Contingent liabilities 76,469,131 69,317,415 Irrevocable loan commitments 39,998,828 33,506,436 8,557,114 Total (B) 116,467,959 102,823,851 enterprises Private sector and 428,957 279,367 1,396,793 490,503 1,104,952 3,700,572 Total credit risk exposure (A + B) 775,994,509 772,065,530 others Less: Expected Credit Loss 5,895,902 279,367 (30,690) 16,451,918 490,577 (22,394) 49,577,523 (53,084) 72,695,287 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 102 بنك الإمارات دبي الوطني Emirates NBD#54103 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) H. Credit quality analysis: NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) H. Credit quality analysis (continued): AED 000 12-month ECL 31 December 2021 The following table sets out information about the credit quality of financial assets measured at amortised cost. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. Lifetime ECL not credit-impaired Lifetime ECL credit-impaired AED 000 12-month ECL 31 December 2020 Balance at 1 January Lifetime ECL not credit-impaired Lifetime ECL credit-impaired Total 416,351,562 24,280,407 26,024,453 466,656,422 Total Transfers from stage 1 (12,209,451) 9,540,767 2,668,684 Balance at 1 January 421,733,474 26,974,892 29,817,914 478,526,280 Transfers from stage 2 5,277,043 (8,287,282) 3,010,239 Transfers from stage 1 (14,752,093) 14,209,710 542,383 Transfers from stage 3 7,849 263,033 (270,882) Transfers from stage 2 3,425,263 (7,547,987) 4,122,724 New financial assets, net of 12,306,471 1,177,967 482,130 13,966,568 repayments and others Transfers from stage 3 360,866 New financial assets, net of (11,385,847) (2,720,129) (360,866) (3,715,562) Amounts written off during the year (2,096,710) (2,096,710) (17,821,538) Total gross loans and repayments and others 421,733,474 26,974,892 29,817,914 478,526,280 receivables* Amounts written off during the year (1,246,876) (1,246,876) Expected credit losses (4,612,683) (5,697,198) (24,674,930) (34,984,811) Total gross loans and 399,020,797 31,277,352 29,159,717 459,457,866 receivables* Carrying amount 417,120,791 21,277,694 5,142,984 443,541,469 Expected credit losses (3,847,334) (6,929,276) (26,408,866) (37,185,476) Carrying amount 395,173,463 24,348,076 2,750,851 422,272,390 By business units Corporate Banking Retail Banking By business units Corporate Banking 294,532,676 26,350,574 26,035,691 Retail Banking 104,488,121 4,926,778 3,124,026 346,918,941 112,538,925 Total gross loans and receivables Total gross loans and receivables 399,020,797 31,277,352 29,159,717 459,457,866 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 104 320,533,697 19,089,439 25,748,073 365,371,209 101,199,777 7,885,453 4,069,841 113,155,071 421,733,474 26,974,892 29,817,914 478,526,280 The stage 1 and stage 2 are performing loans having grades 1a- 4f while stage 3 and POCI are non-performing loans having grades 5a- 5d. Corporate and Institutional banking - Performing includes AED 3,470 million (2020: AED 4,314 million) for exposure against watchlist customers. *The credit-impaired loans and receivables of AED 29,160 million (2020: AED 29,818 million) comprises of AED 28,138 million (2020: AED 27,759 million) credit-impaired loans and receivables and AED 1,022 million (2020: AED 2,059 million) classified as POCI acquired at fair value. بنك الإمارات دبي الوطني Emirates NBD#55NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) I. Amounts arising from ECL NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) J. Covid-19 and Expected Credit Loss (ECL) Loans and receivables Total 34,984,811 AED 000 12-month ECL 31 December 2021 Balance at 1 January 4,612,683 Lifetime ECL not credit- impaired 5,697,198 Transfers from stage 1 (392,354) Transfers from stage 2 559,417 Transfers from stage 3 368,971 (2,118,652) 77,741 Allowances for impairment made (687,483) 3,710,592 Lifetime ECL credit- impaired 24,674,930 23,383 1,559,235 (77,741) 4,256,550 7,279,659 during the year Write back/recoveries made (1,044,799) (1,044,799) during the year Amounts written off during the (1,246,876) year Exchange and other adjustments Closing Balance (244,929) 3,847,334 (806,574) 6,929,276 (1,735,816) 26,408,866 (1,246,876) (2,787,319) 37,185,476 AED 000 12-month ECL 31 December 2020 Lifetime ECL not credit- impaired Lifetime ECL credit- impaired Total Balance at 1 January 4,675,729 3,631,414 20,919,252 29,226,395 Transfers from stage 1 (252,932) Transfers from stage 2 506,562 Transfers from stage 3 1,473 212,367 (1,692,522) 93,552 Allowances for impairment made during the year (339,591) 3,145,012 40,565 1,185,960 (95,025) 5,655,053 8,460,474 (584,935) (584,935) the year 21,442 4,612,683 307,375 5,697,198 (2,096,710) (349,230) 24,674,930 (2,096,710) (20,413) 34,984,811 Write back/recoveries made during Amounts written off during the year Exchange and other adjustments Closing Balance The contractual amount outstanding on loans and receivables which were written off during the year, and are still subject to enforcement activity amounted to AED 1,247 million (2020: AED 2,097 million). Novel coronavirus (Covid-19) continues to disrupt businesses and economic activity in 2021. In response, governments and central banks extended economic support and relief measures (including payment deferrals) launched last year to lessen the impact on individuals and corporates. In determination of 2021 ECL, the Group has considered potential impact caused by Covid-19 pandemic (based upon available information) and taken into account economic support and relief measures of governments and central banks. The Group has also considered the notices issued by the Central Bank of UAE with regards to the Targeted Economic Support Scheme (TESS)' and Treatment of IFRS9 Expected Credit Loss in the context of Covid-19 crisis' as well as the guidance issued by the International Accounting Standards Board (IASB). The Group has a dedicated IFRS 9 governance process established to review and approve IFRS 9 Stage migrations, management overlays to ECL estimates, and macro-economic scenarios and weightings. Significant Increase in Credit Risk (SICR) Under IFRS 9, loans are required to be moved from Stage 1 to Stage 2 if and only if they have been the subject of SICR since origination. SICR occurs when there has been a significant increase in risk of default. The Group continues to assess borrowers for other indicators of unlikeliness to pay, taking into consideration the underlying cause of any financial difficulty and whether it is likely to be temporary as a result of Covid-19 or long term. The Group continues to support its impacted customers through a program of payment relief that was initiated in 2020 by deferring interest/principal due. These payment reliefs are considered as short-term liquidity support to address borrower cash flow issues. The Group believes that availing payment reliefs does not automatically trigger SICR where the impact on customer's business is expected to be short term. For all other customers, the Group continues to consider severity and extent of potential Covid-19 impact on economic sector and future outlook, cash flow and financial strength, agility and change in risk profile along with the past track record in determining SICR. The accounting impact of the extension of credit facilities due to Covid-19 has been assessed and has been treated as per the requirements of IFRS 9 for modification of terms of arrangement. Forward Looking Information The Group has assessed the macro-economic scenarios and associated weights and analysed their impact on 2021 ECL estimates. Accordingly, updated MEVS were used with the associated weights remaining unchanged from those used at year end 2020. The Group has also applied portfolio-level ECL adjustments to retail customers availing deferrals based upon employment status and level of salary inflows. The Group continues to assess individually significant exposures for any adverse movements due to Covid-19. As with any economic forecasts, the projections and likelihoods of the occurrence are subject to inherent uncertainty and therefore the actual outcomes may be significantly different to those projected. 105 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 106 بنك الإمارات دبي الوطني Emirates NBD#56107 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) K. Deferral amount and outstanding balances of UAE customers NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) L. Impairment reserve under the CBUAE guidance During 2020, the Group drew AED 6,906 million of Zero Cost Funding under the CBUAE TESS program and repaid the full amount as at 31 December 2021. As at 31 December 2021, the total deferrals provided to customers was AED 10,700 million out of which AED 8,221 million has been repaid till date resulting in active deferrals amounting to AED 2,479 million. Total outstanding exposure of the customers availing deferrals amounts to AED 47,358 million. No active deferrals relate to TESS program. Analysis of customers benefiting from payment deferrals Deferral amount and outstanding balances of UAE customers 31 December 2021 Loans and receivables The CBUAE issued its IFRS 9 guidance on 30 April 2018 via notice no. CBUAE/BSD/2018/458 addressing various implementation challenges and practical implications for Banks adopting IFRS 9 in the UAE ("the guidance"). Pursuant to clause 6.4 of the guidance, the reconciliation between general and specific provision under Circular 28/2010 of CBUAE and IFRS 9 is as follows: 2021 AED 000 2020 AED 000 Impairment reserve: General General provisions under Circular 28/2010 of CBUAE Less: Stage 1 and Stage 2 provisions under IFRS 9 General provision transferred to the impairment reserve* 5,894,162 (10,776,610) 5,903,434 (10,309,881) AED 000 Corporate and Institutional banking Stage 1 Stage 2 Stage 3 Group 1 Group 2 Number of deferral customers Payments deferred /accounts Exposures Expected Credit Losses 764,360 459 6,733,711 25,768,643 74 1,690,585 7,603,974 3,014,883 31 523,497 2,842,448 1,896,116 564 8,947,793 36,215,065 5,675,359 Impairment reserve: Specific Specific provisions under Circular 28/2010 of CBUAE Less: Stage 3 provisions under IFRS 9 Specific provision transferred to the impairment reserve* Total provision transferred to the impairment reserve 26,130,203 (26,408,866) 24,377,584 (24,674,930) *In the case where provisions under IFRS 9 exceed provisions under CBUAE, no amount shall be transferred to the impairment reserve. M. Market Risk 478 86 564 7,041,108 1,906,685 8,947,793 27,381,521 1,653,556 8,833,544 4,021,803 36,215,065 5,675,359 Retail banking and Wealth Management Stage 1 120,465 Stage 2 Stage 3 9,968 26 130,459 1,446,054 267,602 38,950 1,752,606 10,269,306 320,608 644,179 154,904 229,403 104,099 11,142,888 579,611 Group 1 120,835 Group 2 9,624 130,459 1,478,258 274,348 1,752,606 10,353,791 343,957 789,097 11,142,888 235,654 579,611 Total 131,023 10,700,399 47,357,953 6,254,970 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 108 Market risk is the risk that the value of financial instruments in the Group's books - with the inclusion of some other financial assets and liabilities could produce a loss because of changes in future market conditions. The Group takes on Market Risks in the pursuit of its strategic and business objectives. The Group predominantly pursues opportunities in the market that exposes itself to the following categories of market risk which are actively managed and monitored: 1. Interest Rate Risk: Losses in value due to changes in the level, slope and curvature of yield curves, the volatility of interest rates and changes in credit spreads; 2. FX Risk: Losses in value due to exposures to changes in spot prices, forward prices and volatilities of currency rates; 3. Credit Spread Risk: Losses in the value due to change in credit spreads driven by associated credit risk of the security issuer/underlying; 4. Commodity Price Risk: Losses in value due to exposures to changes in spot prices, forward prices and volatilities of commodities such as petrochemicals, base and precious metals, and food stocks. بنك الإمارات دبي الوطني Emirates NBD#57NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) M. Market Risk (continued) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) M. Market Risk (continued) Respective portfolio managers are accountable for managing market risk within the approved limits. These managers have extensive knowledge of markets and products, their risk exposures and of the financial instruments available to hedge their exposures. The Group's risk exposures to market risk are segregated into Trading and Banking Books. The Trading Book include those financial instruments held with trading intent arising from market-making, position-taking and other so designated financial instruments accounted for at fair value daily. The Banking Book include financial instruments not held with trading intent that arise from the management of Interest Rate risk and FX risk from the Group's retail and corporate and institutional banking assets and liabilities, and other financial investments designated as either FVOCI or Amortised Cost. Market risk oversight and management process As part of the Group's enterprise-wide risk management framework, an extensive governance process is applied to the market risk taking activities. This governance framework includes, inter alia: . . Approval by the Board Risk Committee and Group Asset-Liability Committee of a set of risk limits with appropriate monitoring, reporting and limits excesses' escalation procedures; Independent valuation of financial instruments in the Trading Book and measurement of market risk; A comprehensive set of policies, procedures and limits; and Monitoring a wide range of risk metrics appropriate for the respective trading activities such as risk sensitivities, Gross and Net open positions, Value-at-Risk (VaR) and stop-loss limits. Market risk oversight and management process (continued) The Group uses appropriate and independently validated market standard models for the revaluation and risk measurement of its linear and non-linear financial products and receives regular market information from independent market data providers in order to measure and monitor market risk. Details of allocation of assets and liabilities subject to market risk between trading and non-trading portfolios are as follows: Assets subject to market risk Cash and deposits with Central Banks Due from banks Loans and receivables Investment securities AED 000 31 December 2021 Market risk measure Trading portfolio AED 000 Non-trading portfolio AED 000 70,753,613 45,343,248 422,272,390 106,156,886 70,753,613 45,343,248 422,272,390 2,492,360 103,664,526 109 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 110 Investments in associates Positive fair value of derivatives 10,658,925 10,133,018 525,907 Liabilities subject to market risk Due to banks 43,755,207 43,755,207 Customer deposits 456,483,888 456,483,888 Debt issued and other borrowed funds 63,387,228 63,387,228 Sukuk payable 3,672,500 3,672,500 Negative fair value of derivatives 9,186,321 7,966,273 1,220,048 بنك الإمارات دبي الوطني Emirates NBD#58NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) M. Market Risk (continued) Market risk oversight and management process (continued) 31 December 2020 Market risk measure Assets subject to market risk Cash and deposits with Central Banks Due from banks Loans and receivables Investment securities Investments in associates Positive fair value of derivatives AED 000 Trading portfolio AED 000 Non-trading portfolio AED 000 100,841,896 34,997,680 443,541,469 72,695,287 5,895,902 201,628 100,841,896 34,997,680 443,541,469 66,799,385 201,628 13,697,399 11,720,619 1,976,780 Liabilities subject to market risk Due to banks 51,672,068 Customer deposits 464,197,034 Debt issued and other borrowed funds 54,662,670 Sukuk payable 5,510,933 Negative fair value of derivatives 10,775,231 9,826,150 51,672,068 464,197,034 54,662,670 5,510,933 949,081 The impact of sensitivity analysis on foreign exchange risk and equity price risk on the income statement and other comprehensive income is immaterial. 111 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 112 46 RISK MANAGEMENT (CONTINUED) M. Market Risk (continued) Trading book oversight by Group Market & Treasury Credit Risk (MTCR) MTCR monitors the limits' utilisation in the Trading Book of the Group on a daily basis through a multi-layered Limit Monitoring System which uses independently sourced data and reports from the GM&T IT systems. Depending on the trading exposure and as appropriate, MTCR uses appropriate metrics including: 1. Non statistical metrics: Interest rate sensitivity, (DV01/PV01), FX sensitivity (FX01), Net open/Net Gross outstanding positions, Maximum notional and tenor measures, Derivatives' Greek sensitivities (Delta, Gamma, Vega), and Stop Loss limits; 2. Statistical metrics: Value-at-Risk (VaR), by Desk as well as total for the whole Trading Book. The Group is not significantly exposed to structural FX Risk - which is a component of market risk - since the majority of the assets and liabilities of the Group are denominated predominately in either AED or in USD- pegged currencies from other GCC countries. Value-at-Risk To better capture the multi-dimensional aspects of market risk, the Group's primary market risk metric is a statistical one, Value-at-Risk, which is used for short-term risk holding periods. VaR metrics are calculated daily for the specific Trading Desk, such as Interest Rate Desk VaR, Foreign Exchange Desk VaR and overall Trading Book VaR. The Group's year-end VaR numbers reported below have been calculated using the following parameters: Statistical level of confidence: 99% Holding period: 1 business day Methodology: Full Revaluation, Historical Simulation using over 2 years of historical market data 2021 AED 000 2020 AED 000 Average Maximum Minimum Actual* Average Maximum Minimum Actual* By Trading desk Interest rate risk Foreign exchange risk Credit trading risk 15,780 25,764 7,968 9,066 6,505 12,637 3,449 11,921 3,124 13,735 923 2,792 2,258 10,394 257 2,703 3,801 8,134 1,579 1,750 3,105 7,627 559 5,589 Total 17,007 29,354 7,218 9,283 8,017 14,714 4,378 12,890 *Note that the sum of asset class VaR metrics does not add up to the reported Total VaR metric due to diversification and cross correlation effects. بنك الإمارات دبي الوطني Emirates NBD#59NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) M. Market Risk (continued) 46 RISK MANAGEMENT (CONTINUED) N. Operational Risk (continued) Value-at-risk (continued) Major currency-wise open positions of the Group are as follows: U.S. Dollar (USD) Oman Riyal (OMR) Euro (EUR) Saudi Riyal (SAR) Turkish Lira (TRY) Egyptian Pound (EGP) Bahraini Dinar (BHD) Indian Rupee (INR) N. Operational Risk 2021 Long/(Short) AED 000 204,537 (79,601) 943,525 2020 Long/(Short) AED 000 (2,067,219) (273,127) 1,735,894 (604,108) 1,394 37,702 (159,089) 155,969 (682,897) 4,146 288,466 (258,688) 157,788 Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events. This definition includes legal risks (described as exposure to fines, penalties and punitive damages resulting from supervisory actions, as well as private settlements), regulatory risks, and the risk arising from change initiatives. Operational Risk Governance Framework The Group applies a three line of defence model for operational risk management. The business and support units form the first line of defence. They have the primary responsibility and accountability for identifying operational risk in their areas and to promptly mitigate any issues. The Group Operational Risk function as the second line of defence, provide consistent and standardised methods and tools to business and support functions for managing operational risk. The Group Operational Risk unit monitors the risk management process and compliance to the operational risk policies and procedures. It conducts independent analysis of the operational risk exposure and the bank's mitigating strategies. The Group's Internal Audit as the third line of defence, provides independent assurance to the Board of Directors. Operational Risk Management Process The Group has set up the Group Operational Risk function within Group Risk to establish the framework and governance structure set out in the operational risk policy. The risk management process comprises mainly of the below elements, Risk Assessment Risk Monitoring and Review Risk Treatment Operational Risk Management Process (continued) This function develops and implements the methods for the identification, assessment and monitoring of Operational Risk throughout the Group and provides regular and comprehensive reporting on operational risks to senior management. The function supports business and other support units to monitor and manage their individual operational risks. Furthermore, the Group Operational Risk function also provides analysis and reports on operational risks to management committees (Board Risk Committee, Group Risk Committee, Local Risk Committee), and to the CBUAE as per regulations, guidelines/circulars and conducts independent oversight and monitoring of risks and mitigating measures. Insurance Management The Group obtains comprehensive and tailored insurance cover to protect the Group against unexpected and unforeseeable losses. Insurance cover is obtained from high rated insurance companies in the international reinsurance market. The requirements for insurance are reviewed periodically and the insurance cover is aligned to changes of the Group's risk exposure. Fraud Management The Board and Management are determined to build and maintain a credible defense to the threat posed by fraud. In line with the evolving banking technologies and digital landscape, management has recognised the need for greater focus on anti-fraud capabilities of the Group. As such the bank is continuously investing into advanced systems and controls for the interdiction of frauds perpetrated against the bank. The bank has increased monitoring and enhanced detective controls to manage fraud risks, which arise from new technologies and new methods of banking. The Group has a specialised Fraud Prevention and Investigation (FP&I) team which focuses on investigation of fraud attempts against the bank, spreading fraud awareness to stakeholders, identification and mitigation of fraud risks. The team has independent reporting to Board Risk Committee. The Group has policies and procedures in place to ensure compliance with prevailing legislation and limit risk, including the risk of fraud. Whistleblowing The Group is committed to the highest standards of openness, integrity and accountability in the delivery of its services. Whilst the Group has instituted a wide range of rules, regulations, procedures and codes of practice to deliver on its commitments, fraud, malpractice, abuse and/or wrongdoing may unfortunately occur. As such, the Group as part of 'Whistleblowers Policy', provides the platform to employees for reporting of malpractices. The policy is designed to encourage employees to report suspected internal fraud and other breaches, through specified channels, while safeguarding the employee from retribution. Risk Reporting 113 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 114 بنك الإمارات دبي الوطني Emirates NBD#60NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) N. Operational Risk (continued) Cyber Security Management NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) 0. Liquidity Risk (continued) The Group considers Information and related processes, systems, and networks as an important and valuable asset. These assets are required to be protected to ensure their confidentiality, availability and integrity at all times. The Group has established a comprehensive cyber security framework based on three line of defence model. The framework ensures the Group is resilient to sustain cyber security threats in an evolving and increasingly complex digital environment. Business Continuity Management Business Continuity Management (BCM) is defined as a holistic management process that identifies potential threats to an organsation and the impacts to business operations that those threats, if realised, might cause, and which provides a framework for building organisational resilience with the capability for an effective response that safeguards the interests of its key stakeholders, reputation, brand and value-creating activities. The business continuity process across the Group is based on the international standard ISO22301:2012 (E). The BRC is responsible for providing oversight and strategy for Business Continuity Management. Business and support units are responsible to ensure appropriate Business Continuity Plans are in place and tested for their respective areas. The effectiveness of the Business Continuity Plans is monitored independently by Group Operational Risk. O. Liquidity Risk Liquidity Risk refers to the inability of the Group to fund an increase in assets and meet obligations as they become due (Structural Funding Risk), or the inability to convert assets into cash at reasonable prices (Market Liquidity Risk). The risk arises from mismatches in the amount and timings of cash flows. Objectives and Governance structure The objective of the Group's liquidity and funding management framework is to ensure that all foreseeable funding commitments (under both normal and stressed conditions) can be met when due, and that access to the wholesale markets is coordinated and cost effective. To this end, the Group maintains a diversified funding base comprising core retail and corporate customer deposits and institutional balances. This is augmented with wholesale funding and portfolios of highly liquid assets diversified by currency and maturity which are held to enable the Group to respond quickly and smoothly to unforeseen liquidity requirements. Policies and Procedures Specifically, liquidity and funding management process includes: Projecting cash flows under various stress scenarios and considering the level of liquid assets necessary in relation thereto; Mis-match analysis between assets and liabilities for different periods with a focus on shorter time frames. These gap reports are based on contractual cash flow, retention and decay assumptions for non-maturing assets and liabilities and potential liquidity demand through undrawn commitments; Monitoring balance sheet liquidity and advances to deposits ratios against internal and regulatory requirements; Maintaining a diverse range of funding sources with back-up facilities; Managing the concentration and profile of debt maturities; Maintaining debt financing plans; Monitoring customer depositor concentration in order to avoid undue reliance on large individual depositors and ensure a satisfactory overall funding mix; and Maintaining liquidity and funding contingency plans. These plans identify early indicators of distress conditions and describe actions to be taken in the event of difficulties arising from systemic or other crisis, while minimising adverse long-term implications for the business. 115 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 116 بنك الإمارات دبي الوطني Emirates NBD#61117 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Within 3 months AED 000 Over 3 months to 1 year AED 000 Over 1 year to 3 Over 3 years to Undated and years AED 000 5 years Over 5 years AED 000 AED 000 The table below summarises the maturity profile of the Group's assets and liabilities based on their carrying value: 46 RISK MANAGEMENT (CONTINUED) P. Maturity analysis of assets and liabilities Total AED 000 ASSETS Cash and deposits with Central bank 66,201,858 4,551,755 70,753,613 Due from banks 30,877,869 11,963,699 Investment Securities 33,744,853 21,993,734 Loans and Receivable 203,296,817 46,955,260 Positive fair value of derivatives 2,043,446 1,270,422 1,248,007 12,623,195 89,692,282 2,569,133 318,230 10,415,639 43,900,598 935,443 27,379,465 38,427,433 45,343,248 106,156,886 422,272,390 1,924,787 2,851,137 10,658,925 Customer acceptances 11,343,522 11,343,522 Property and Equipment 3,747,621 3,747,621 Goodwill and Intangibles 5,981,491 5,981,491 Other Assets TOTAL ASSETS 6,072,183 353,580,548 335,000 87,069,870 4,771,739 106,132,617 56,559,254 84,094,329 11,178,922 687,436,618 31 December 2021 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 118 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) P. Maturity analysis of assets and liabilities (continued) 31 December 2021 Within 3 months Over 3 months Over 1 year to 3 Over 3 years to Undated and AED 000 to 1 year AED 000 years AED 000 5 years AED 000 Over 5 years AED 000 Total AED 000 LIABILITIES Due to banks Customer deposits 21,657,597 14,324,641 6,753,038 376,251,400 Debt issued and other borrowed funds 5,362,193 69,173,892 7,278,320 7,292,793 17,543,288 Sukuk Payable Negative fair value of derivatives Customer acceptances Other liabilities 1,316,873 11,343,522 3,524,992 1,304,732 2,059,237 721,572 3,256,415 13,316,470 3,672,500 1,468,846 298,359 509,388 19,886,957 43,755,207 456,483,888 63,387,228 3,672,500 3,036,633 9,186,321 11,343,522 5,878,327 Total equity TOTAL LIABILITIES AND EQUITY 419,456,577 97,959,912 33,648,356 22,435,803 6,624,944 83,579,689 113,935,970 16,028,263 83,579,689 687,436,618 OFF BALANCE SHEET Letters of credit and guarantees 30,515,789 26,059,123 7,503,410 3,436,055 8,735,997 76,250,374 بنك الإمارات دبي الوطني Emirates NBD ASSETS 348,722,716 LIABILITIES AND EQUITY 411,161,461 OFF BALANCE SHEET ITEMS 28,892,649 85,472,655 112,362,264 20,557,314 83,104,895 38,400,506 8,896,108 82,112,202 20,743,857 804,956 98,675,005 115,419,385 10,053,351 698,087,473 698,087,473 69,204,378 31 December 2020#62NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The table below summarises the maturity profile of the Group's financial liabilities at 31 December 2021 based on contractual undiscounted repayment obligations. Repayments which are subject to notice are treated as if notice was given immediately. However, the Group expects that many customers will not request repayment on the earliest date, the Group could be required to pay and the table does not reflect the expected cash flows indicated by the Group's deposit retention history. Carrying Gross nominal amount As at 31 December 2021 AED 000 outflows Within 3 months AED 000 AED 000 Over 3 months to 1 year AED 000 Over 1 year to 3 years Over 3 years to AED 000 5 years AED 000 Over 5 years AED 000 46 RISK MANAGEMENT (CONTINUED) Q. Analysis of financial liabilities by remaining contractual maturities 119 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 Due to banks Customer deposits 43,755,207 (45,282,934) (22,759,954) 456,483,888 (458,311,230) (376,859,622) (14,532,555) (6,924,132) (730,189) (336,104) (69,768,775) (7,751,496) (3,416,544) (514,793) Debt issued and other borrowed funds Sukuk payable 63,387,228 3,672,500 (72,399,645) 567,298,823 Letters of credit and guarantees Irrevocable loan commitments (5,842,868) (3,986,873) (17,945) (579,980,682) (405,480,389) 76,250,374 (76,250,374) (30,515,789) 39,998,828 (39,998,828) (15,623,032) (8,277,178) (54,831) (92,633,339) (26,059,123) (11,923,883) (20,732,266) (145,750) (7,503,410) (11,127,355) (15,086,570) (22,460,763) (35,553,644) (23,001,650) (23,311,660) (3,436,055) (465,712) (3,768,347) (8,735,997) (858,846) Financial liabilities 120 46 RISK MANAGEMENT (CONTINUED) Q. Analysis of financial liabilities by remaining contractual maturities (continued) Carrying Gross nominal Within 3 Over 3 months Over 1 year to Over 3 years to As at 31 December 2020 amount outflows months AED 000 AED 000 AED 000 to 1 year AED 000 3 years AED 000 5 years AED 000 Over 5 years AED 000 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Financial liabilities Due to banks Customer deposits 51,672,068 (52,709,201) (23,612,403) 464,197,034 (466,284,972) (372,502,213) (15,133,712) (9,534,696) (75,918,239) Debt issued and other borrowed funds Sukuk payable 54,662,670 5,510,933 576,042,705 Letters of credit and 69,204,378 guarantees Irrevocable loan 33,506,436 (64,538,113) (5,726,239) (589,258,525) (69,204,378) (33,506,436) (1,841,542) (40,908) (397,997,066) (28,892,649) (13,472,660) (13,712,800) (3,721,776) (108,486,527) (20,557,314) (13,408,543) (13,655,389) (15,997,014) (68,148) (39,255,247) (8,896,108) (6,501,605) (4,146,227) (3,707,182) (11,076,141) (282,163) (501,949) (21,910,616) (1,895,407) (20,824,957) (22,694,728) (804,956) (5,860) (10,053,351) (117,768) commitments بنك الإمارات دبي الوطني Emirates NBD#6346 RISK MANAGEMENT (CONTINUED) R. Interest rate risk in the banking book NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Interest Rate Risk in the Banking Book (IRRBB) is defined as the exposure of the non-trading products of the Group to interest rates. Non-trading portfolios include all banking book positions that arise from the interest rate on the Group's retail and corporate and institutional banking assets and liabilities, and financial investments designated as FVOCI and amortised cost/held to maturity. IRRBB arises principally from mismatches between the future yields on assets and their funding costs, as a result of interest rate changes. In order to manage this risk optimally, IRRBB in non-trading portfolios is transferred to Group Treasury under the supervision of the Group ALCO, through Funds Transfer Pricing (FTP) Systems. Group ALCO is required to regularly monitor all such interest rate risk positions to ensure they comply with interest rate risk limits. For measuring overall interest sensitivity in the banking book, the Group conducts stress tests by simulating parallel shifts to the yield curve(s) ranging from 50 basis points to 200 basis points, and assessing the corresponding impact on its Net Interest Income. Amount AED 000 Rates Up 200 bps 17,659,482 Base Case 14,651,672 Rates Down 200 bps 14,240,910 As at 31 December 2021 (378,899) The interest rate sensitivities set out in the table above are based on a set scenario i.e. the projections above assume that interest rates of all maturities move by the same amount and, therefore, do not reflect the potential effect on net interest income of some rates changing while others remain unchanged. The projections also make the assumption that all positions run to maturity. This effect does not incorporate actions that would be taken by Group Treasury or in the business units to mitigate the impact of this interest rate risk. In practice, Group Treasury seeks proactively to change the interest rate risk profile to minimise losses and optimise net revenues. 121 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 122 Variance AED 000 AED 000 3,007,810 18,947,846 16,521,436 (410,762) 16,142,537 As at 31 December 2020 Amount Variance AED 000 2,426,410 NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) S. Interest rate repricing analysis* 31 December 2021 ASSETS Cash and deposits with Central Bank Due from banks Investment securities Loans and receivables Positive fair value of derivatives Customer acceptances Property and equipment 119,568,860 ------------------ ---------------------- 267,677,314 -------------- 44,791,318 *Represents when the interest rate will be repriced for each class of assets and liabilities. Goodwill and Intangibles Other assets TOTAL ASSETS بنك الإمارات دبي الوطني Emirates NBD ---------------------- 32,563,020 Total AED 000 70,753,613 45,343,248 106,156,886 422,272,390 10,658,925 11,343,522 3,747,621 5,981,491 ---------- 120,465,381 11,178,922 ---------------- 687,436,618#64NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) S. Interest rate repricing analysis* (continued) 31 December 2021 Over 6 Less than 1 month AED 000 Over 1 month to 3 months AED 000 year AED 000 months to 1 13,832,630 8,276,237 9,937,151 156,485,278 49,068,468 43,127,897 2,385,810 20,569,253 3,625,762 --------------- TOTAL LIABILITIES AND EQUITY 172,703,718 77,913,958 56,690,810 ON BALANCE SHEET GAP 94,973,596 41,654,902 (24,127,790) INTEREST RATE SENSITIVITY GAP - 2021 OFF BALANCE SHEET GAP (3,071,260) (18,336,930) 715,008 91,902,336 CUMULATIVE PROFIT RATE SENSITIVITY CUMULATIVE PROFIT RATE SENSITIVITY GAP - 2021 GAP - 2020 *Represents when the interest rate will be repriced for each class of assets and liabilities. 91,902,336 23,317,972 115,220,308 99,264,676 102,970,064 110,880,631 (23,412,782) 107,198,117 88,675,568 LIABILITIES AND EQUITY Due to banks Customer deposits Debt issued and other borrowed funds Sukuk payable Negative fair value of derivatives Customer acceptances Other liabilities Total equity 123 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 124 V. U. T. 46 RISK MANAGEMENT (CONTINUED) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Reputational Risk Reputational risk is the risk of potential loss of earnings and future revenue, loss in market value or lack of liquidity supply due to deterioration of reputation. It also includes the threat to the brand value of a financial institution. Reputational risk can arise as a consequence of failures with a strong negative perception amongst clients, shareholders, creditors or the public. The Group has measures to ensure a positive perception of the Group and that overall risk management ensures appropriate management of reputational risk. ICAAP and Stress-Testing: Stress testing is an integral part of the Group's risk management process. It includes scenario analysis and is conducted regularly. In particular, the ICAAP (a group-wide exercise spanning risk types) is performed annually. On top of this, additional stress tests are carried out in response to microeconomic and macroeconomic conditions or portfolio and branch/subsidiary level. Every stress test is documented and the results are discussed at the EXCO level and approved by the GRC and the BRC. Stress testing alerts senior management to the Group's potential vulnerability to exceptional but plausible adverse events. As such, stress testing enables us to assess capital adequacy and identify potentially risky portfolio segments as well as inherent systematic risks. This then allows us to develop the right contingency plans, exit strategies and mitigating actions beforehand. Regulatory/Compliance Risk Regulatory/Compliance risk is the risk of reputational and/or financial losses due to the failure to comply with applicable laws, regulations or sanctions. The Group has an independent Compliance function, with the necessary mandate and authority to enforce and monitor compliance on a Group wide basis. This includes compliance with the applicable laws and regulations across the various jurisdictions where the Group operates as well as those of the USD/EU clearing centres. Compliance policies covering key areas such as Sanctions, Anti Money Laundering (AML), Counter Terrorist Financing (CTF), Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) are applicable Group wide and are supplemented where necessary to address any unique local requirements. These policies are supported by automated screening and monitoring systems and associated investigation teams to help comply with the Sanctions, AML, CTF, FATCA and CRS requirements. Independent Compliance Monitoring is undertaken to provide assurance over the effectiveness of controls. Mandatory Compliance Training is provided to all relevant staff both at onboarding and periodically thereafter to help ensure that key requirements are complied with. بنك الإمارات دبي الوطني Emirates NBD#65NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) W. IBOR transition X. NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) Internal Audit's role in overall risk management (continued) The key risks for the Group arising from the IBOR transition are: Conduct risk: The transition to alternative benchmark rates could result in the risk of market or customer misconduct, which may lead to customer complaints, regulatory sanctions or reputational impact. This includes the risk of misleading clients, market abuse (including insider dealing and market manipulation), anti- competitive practices, both during and after transition (such as collusion and information sharing) and risks arising from conflicts of interest. The Group has in place strong project governance to oversee the transition to ensure this risk is mitigated. Pricing risk: The transition to alternative benchmark rates and the discontinuation of interest rate benchmarks may impact the pricing mechanisms used by the Group. New RFR based pricing models have been developed for financial instruments. Interest rate basis risk: If the bilateral negotiations with the Group's counterparties are not successfully concluded before the cessation of IBORS, there are significant uncertainties with regard to the interest rate that would apply. This gives rise to additional interest rate risk that was not anticipated when the contracts were entered into and is not captured by our interest rate risk management strategy. The Group is working closely with all counterparties to avoid this from occurring. Liquidity risk: There are fundamental differences between IBORS and the various alternative benchmark rates which the Group will be adopting. IBORS are forward looking term rates published for a period at the beginning of that period and include an inter-bank credit spread, whereas alternative benchmark rates are typically risk free overnight rates published at the end of the overnight period, with no embedded credit spread. These differences will result in additional uncertainty regarding floating rate interest payments which will require additional liquidity management. The Group's liquidity risk management policy has been updated to ensure sufficient liquid resources to accommodate unexpected increases in overnight rates. Management is running a project on the Group's transition activities and continues to engage with various stakeholders to support an orderly transition and to mitigate the risks resulting from the transition. The project is significant in terms of scale and complexity and will impact products, internal systems and processes. Internal Audit's role in overall risk management Group Internal Audit is an independent appraisal function established by the Board of Directors to examine and evaluate the activities of the Group including all aspects of the Group Risk Management. The department is organisationally independent of all other functions in the bank. The unit is headed by the Group Chief Audit Officer, who is accountable to the Board of Directors through the Board Audit Committee. The primary objectives of Group Internal Audit is to provide assurance on risks to which the Group's businesses are exposed, evaluate the adequacy and effectiveness of financial/operating controls and the Corporate Governance environment, assess the extent to which assets are accounted for and safeguarded from losses and conduct follow-up activities to assess and report on the degree to which management has addressed risks and compliance with action plans previously agreed. X. Y. The unit's mission is achieved through a risk based annual audit plan approved by the Board Audit Committee. A formal report is prepared at the end of each quarter which includes a summary of audit activity completed during the period and an update on the status of previously reported matters for Board Audit Committee attention. The Board Audit Committee reviews and approves Group Internal Audit's plans and resources, and evaluates the effectiveness of the Internal Audit function. External advisers also periodically conduct an assessment of the function. Risk management framework and processes at Group entities In establishing risk management policies & processes at the Group entities level, due consideration is given to the entities' specific regulatory environment. Z. Risk Management at DenizBank The Group has put in place strategic risk controls to oversee the existing risk management practices currently in place at DenizBank. The risk management framework is governed by the following policies: Credit Risk Policy Concentration Risk Policy Model Risk Policy Liquidity Risk Policy Structural Interest Rate Risk Policy Market Risk Policy Exchange Rate Risk Policy Operational Risk Policy Reputation Risk Policy Country Risk Policy Compliance Risk Policy Tax Risk Policy All of these policies govern the following areas of risk: Credit Risk The Group has added an additional layer of supervision over and above the credit risk policies in force at DenizBank, this supervisory layer is conditional to exceptional approvals for substantial exposures. From a reporting standpoint all exposures (irrespective of materiality) are periodically reported to the Group by DenizBank for internal alignment within the Group. For calculation of credit risk-weighted assets DenizBank complies with BRSA's and Basel II standards. While for Pillar II DenizBank calculates the annual general stress tests in accordance with its plans and scenarios that are compliant with Basel II's credit risk internal assessment methods. 125 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 126 بنك الإمارات دبي الوطني Emirates NBD#66NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) Z. Risk Management at DenizBank (continued) NOTES TO THE GROUP CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 46 RISK MANAGEMENT (CONTINUED) Z. Risk Management at DenizBank (continued) Credit Risk (continued) The quantitative risk management disclosures comply with TFRS (Turkish Financial Reporting Standards) that are aligned to the IFRS (International Financial Reporting Standards) standards including IFRS 9 followed by the Group. . Both on and off balance sheet instruments that are material to TFRS/IFRS 9 expected credit loss calculation are considered in the financial statements Models exist for PD, EAD and LGD that have long term calibrations and forward looking scenarios to adjust for economic assumptions New or re-structured processes of TFRS/IFRS 9 are advanced and complex in nature in order to ensure high quality implementation Estimations, assumptions and scenarios used in expected credit losses are fairly complex Complex and comprehensive disclosures are published in line with TFRS/IFRS 9 requirements Enterprise Risk Management DenizBank specifies its limiting setting, monitoring and reporting process in its risk appetite statement. It also includes the process of phased limit lists and prescribes the remediation actions in cases where the limit exceeds the limit in each phase. The document encompassing these policies are reviewed every year, and are approved by Board of Directors (BOD). Market Risk All trading activities related to money and capital markets are in accordance with the internally recognised measure of Value at Risk (VAR) method, which is also used by the Group to gauge changing market conditions. These VaR analysis are adequately supported by scenario analysis and stress tests. Structural Interest Rate Risk and Foreign Exchange Risk 47 48 Operational Risk Events that trigger operational risks are recorded along with the causes and impacts on specific functions and mitigation measures are taken to prevent reoccurrences of such events in the future. Events that are either frequent or significant are discussed within the relevant committees that include Audit and impacted departments. Business Continuity Plan is kept up to date and testing of these plans are done periodically Concerned risk teams are working to ensure comprehensive alignment in different spheres of risk keeping in view the local and European regulatory requirements. As part of this process policies and procedures are being reviewed for any necessary alignment with Group. LEGAL PROCEEDINGS Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Group has proper controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Group makes adjustments to account for any adverse effects which the claims may have on its financial standing. Based on the information available, no material adverse impact on the financial position of the Group is expected to arise from legal claims as at 31 December 2021 other than to the extent already provided, hence no additional provision for any claim needs to be made in these financial statements. SOCIAL CONTRIBUTIONS The social contributions (including donations and charity) made during the year amount to AED 57.7 million (2020: AED 89.9 million). 49 DISPOSAL OF DUBAI BANK (P.J.S.C) Interest rate and foreign exchange (FX) risks are monitored closely with the use of the metrics defined within the risk limit framework and managed as per the rules defined by BoD. DenizBank makes use of hedging transactions for risk mitigation where necessary. Liquidity Risk Liquidity adequacy is actively monitored as per the rules defined by BoD. The liquidity adequacy and the reserve opportunities are tested periodically against worst case scenarios and other scenarios, all of these assumptions are documented for traceability. 127 EMIRATES NBD BANK PJSC - GROUP CONSOLIDATED FINANCIAL STATEMENTS - FOR THE YEAR ENDED 31 DECEMBER 2021 128 50 During the year, the Group sold a controlling interest in Dubai Bank (P.J.S.C) to Eradah Capital (L.L.C.). The carrying value of Dubai Bank's total assets was AED 0.36 billion. The retained interest of 10% has been fair valued and recorded accordingly in the Group consolidated financial statements. COMPARATIVE AMOUNTS Certain prior year comparatives have been reclassified wherever necessary to conform to the presentation adopted in the current year. بنك الإمارات دبي الوطني Emirates NBD