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Zanaco 2012 annual report
 

Zanaco 2012 annual report

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Zambia National Commercial Bank PLC annual report for the year ended 31 December 2012

Zambia National Commercial Bank PLC annual report for the year ended 31 December 2012

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    Zanaco 2012 annual report Zanaco 2012 annual report Presentation Transcript

    • Zanaco. Big.Strong. Reliable. 2012 Annual Report
    • Vision. Mission. Values. History.VisionTo be Zambia’s leading, preferred, admired, and Netherlands. Subsequently, RFID sold a 3.41% stake to Lizarainnovative bank that should provide to each of our Investments Limited (a nominee of the Zambia Nationalchosen customer segments a fair deal as we also Farmers Union, ZNFU followed by the Bank’s Initial Public Of-strive to Bank the Unbanked. fering in 2008 and Employee Share Ownership Programme (ESOP).Mission  To be the number one bank in each of our chosen The Bank remains majority-owned by Zambians and thus issegments with a special focus on Government, considered “citizen owned”.Food and Agriculture and Retail Banking through  appropriate technology and distribution channels The relationship with Rabobank enables Zanaco to benefitand with empowered and motivated staff. from technical assistance and best practices in various areasValues of banking.• Excellence  • Teamwork Our Customers• Integrity Our customers are fully representative of Zambia as a whole;• Respect from Government to the private sector, from multinationals• Pride to SMEs, from industrial and agriculture, and from civil servants to the private sector. Reaching out to the Un-Strategy 2011 - 15 banked, Zanaco can truly be considered the People’s Bank.1. Banking the Unbanked, by doubling the number As a citizen owned bank, we take pride in serving Zambiansof Retail and Corporate Customers by 2015; of all walks of life, with fair pricing for our services.  2. Growing the agricultural client base of Zanaco Our Peopleeven further, and targeting to become the premier Most of our 1,019 staff members are also shareholders inagriculture financier in Zambia; Zanaco and, together with their families, have a direct interest and stake in the long-term success of the Bank.3. Developing the Small and Medium-sized They are empowered, motivated and committed to makeEnterprise market , ensuring that entrepreneurs a difference.have the correct training and access to financial  services; and Ownership Structure Post-Initial Public Offering4. Naturing and further developing the The current ownership structure of Zanaco is as follows:relationship with the Government of the Republicof Zambia (GRZ). GRZ remains a significant DETAILS % shareholder, but also a very important client toZanaco, and we will continue to provide Rabo Financial Institutions Development B.V (RFID) 45.59value - added services to all GRZ stakeholders. Public                                                                                          26.00HistoryZambia National Commercial Bank Plc (“Zanaco”)was established in 1969 to service the financial Government of the Republic of Zambia (GRZ)              25.00needs of the Zambian economy and it has sinceevolved into a leading bank nationwide. Lizara Investments Limited (a nominee of ZNFU)  3.41 In 2007, GRZ sold a 49% stake in the Bank to Total 100.00Rabo Financial Institutions Development  B.V(RFID), a subsidiary of the Cooperatieve CentraleRaiffeisen-Boerenleenbank (Rabobank) of the
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Contents02 Financial Highlights 10 Directors’ Report The Directors submit their report, together with the audited financial statements for the year ended 31 December 2012, which disclose the results for the year and the state of affairs for the Bank as at that date. 12 Statement of Corporate Governance03 Board of Directors As Zambia National Commercial Bank Plc, we remain committed to the highest standards of corporate governance.  This is central to the continued strong performance of the business in a manner which is sustainable in the long term, and to maintaining the confidence of investors. For us, good governance is about managing the business effectively and responsibly in a way which is transparent and shows accountability.06 Chairman’s Report 21 Directors’ Responsibility Section 164(6) of the Companies Act, 1994 (as It is with great pleasure that I present this over- amended) requires the Directors to prepare financial statements for each financial year which give a true view on the performance of Zambia’s leading and fair view of the state of affairs of the Bank and of bank – the Zambia National Commercial Bank the profit or loss for that period. Plc., or ZANACO. The Annual Report for the year 2012 demonstrates that we continued to solidify our status as a leading player in the Zambian 22 Auditor’s Report Deloitte. To the members of Zambia National Commercial Bank economy as evidenced by the stable financial Plc. We have audited the accompanying financial results of the Bank and our continued growth. statements of Zambia National Commercial Bank Plc, which comprise the statement of financial position as at 31 December 2012, the statement of profit or08 Managing Director’s Report I am delighted to report on the Bank’s year of suc- loss and other comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended, and a summary of significant cess. The year 2012 was our 43rd year in existence and can be described as a very encouraging year accounting policies and other explanatory information. for the Bank, staff, customers, investors and Zambia 23 as a whole. Financial Statements 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 1
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Highlights2 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012 Board Of Directors From left to right Top • Bruce Dick - Chairman • Chintu Y. Mulendema - Vice Chairman Middle • Gertrude M. Akapelwa-Ehueni (Mrs) - Chairperson Human Resources & Compensation Committee • Guy H. Robinson - Non-Executive Director • Frederikus Weenig- Chairman Loans Review Committee Bottom • Martyn H. Schouten - Managing Director2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 3
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Promoting sustainable Board Of DirectorsdevelopmentZanaco’s CSRseeks to promotesustainabledevelopment ofthe communities inwhich the Bankoperates, not justfor the present,but for futuregenerations.24 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. This paper is environmentally friendly. 2012 Annual Report 2012 nnual
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Executive Management TeamFrom left to rightTop• Hamish Chipungu - Director Internal Audit• Martyn H. Schouten - Managing Director• Edward Mutale - Director FinanceMiddle• Ngenda Nyambe - Director Treasury & Investments• Chimango Chikwanda - Director Human Resources• Ignatius Mwanza - Director Corporate Banking• Sonny Katowa - Director Corporate SupportBottom• Arjan Poels - Director Retail Banking• Suzyo Ngandu - Bank Secretary• Tom Borghols - Director Risk Management 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 5
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Chairman’s Report It is with great pleasure that I present this overview on the Product at 7.3% compared with 6.8% in 2011. This was largely performance of Zambia’s leading bank – the Zambia National driven by agriculture, construction, manufacturing, transport, Commercial Bank Plc., or ZANACO. The Annual Report for the year mining, storage and communications. Zambia’s economic pros- 2012 demonstrates that we continued to solidify our status as pects are underpinned by an expected robust domestic perfor- a leading player in the Zambian economy, as evidenced by the mance driven by the agriculture, mining, construction and tourism stable financial results of the Bank and our continued growth. With sectors. 63 branches, 121 Zanaco Xpress outlets and 9 agencies nation- wide, ZANACO progressively delivers on its vision to be Zambia’s Corporate Social Responsibility bank of choice. As part of our continued strategy to “Bank the Unbanked”, ZANACO once again reached more than 10,500 people directly through Performance financial education activities aimed at children, SMEs, farmers, The 2012 financial year saw the Bank increasing its Profit After Tax youth and members of staff. During 2012, the Bank also extended from ZMK 120,513 million to ZMK 156,088 million. The customer its programme to include health issues, with a focus on the growth rate rose to 32 % during this time, a significant provision of clean drinking water, environmental support and improvement on the 22 % achieved the year before. ZANACO occasional donations to meet various community needs. Five now has more than 617,000 customers countrywide, ranging from communities were serviced, with over 2,190 community members private individuals to small-scale farmers, to SMEs, local and benefiting from the projects. These included Da Gama School for international Corporate customers, multilateral organizations and the disabled, Twamutambula orphanage and Mweembe Health to the Government of the Republic of Zambia. Through out all this, Post, amongst others. ZANACO is proud to have remained “the People’s Bank” since its founding in 1969. Another CSR initiative adopted during the year was the Young Women’s Christian Association (YWCA) where the Bank made a The advances portfolio has once again seen positive growth and donation towards an improved service provision. The Manage- has increased to ZMK 2.6 billion - a 40% improvement on the ment and staff at ZANACO strongly believe that all women deserve previous year. This reaffirms ZANACO as being one of the country’s to live in a gender-based violence-free society. However, when leading lenders. The review and reduction of operational costs such unfortunate incidents do occur, women have the right to were effected as per our plans established last year. Costs continue appropriate safety, counselling and material support. We were to be under control and in line with business growth, while they honoured to support the YWCA as they provide these critical are scheduled to reduce gradually in the coming years. services, and we continue to look forward to a society free of gender-based violence. Economic Prospects The Zambian economy continued on a sustained growth path in Our CSR strategy also acknowledges that, as the reigning 2012. Preliminary figures place the real growth in Gross Domestic champions of Africa, Zambia is a proud football nation. Not only6 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012does this sport play an important role for recreation, it also successes firmly under our belt, our commitment to targeting the In closing, I would like to once again commend theencourages good mental and physical health while promot- two-thirds of Zambia’s population that remains ‘Unbanked’ has truly Management and Staff of the Bank for their dedication to buildinging team work and more inclusive social behaviour. At been reignited, while our widespread and growing national network on the successes of the previous years while continuing to workZANACO, we are playing our part to offer the children of ensures that we remain the bank that is best positioned to do so. towards strengthening the areas that need attention. ZANACOZambia, particularly in underprivileged communities, the op- remains committed to its long-term vision of transforming into aportunity to benefit from the sport and have since donated Board of Directors more customer and service-centric organisation and we look for-400 soccer balls though Play Soccer Zambia to kick-start In an unprecedented move, the Board engaged an external consul- ward to working towards that goal as we embark on yet anotheran active young society. We firmly believe that all children tant to undertake a Board Self-evaluation Effectiveness Review. This new year.should be given equal opportunities in order to succeed in clearly demonstrated the Board’s willingness to be introspective inlife and that through CSR and other support, they can grow its approach to assessing its own performance. The Board engagedinto thriving and productive citizens. in both formal and informal interactions during the course of the Bruce Dick year which helped to foster good relationships and create unity of ChairmanAchievements purpose.We are extremely proud to once again be the recipients ofthe Best Bank in Zambia Award, an accolade bestowed on us Future Prospectsby Euromoney for the 2nd year time in a row for consistently We are more positive than ever about the future prospects of thereported increases in profitability and lending since Bank. Our resolve to be a positive force in the growth of the ZambianZANACO’s privatisation in 2007. This was a great honour for economy remains unchanged and our positive reputation amongstus and a validation of our mission to be Zambia’s number our partners and customers bodes well for the coming months asone bank. In this same light, receiving the Best Corporate we continue to work towards increasing our distribution networkGovernance Award from the Lusaka Stock Exchange, also for and customer base.the 2nd time in a row, was an additional feather in our capand a welcome token of recognition for the hard work and As we aim to reach our 1,000,000 customer target by 2015, wededication that goes into ensuring that we remain the stead- will continue to expand our distribution channels and offer cost-fast and reliable banking partner that we are. We are very effective financial services to the ‘Unbanked’. We will also continueproud and committed to ensuring that there is full disclosure investing in innovative technological solutions to further harnessand that market-leading governance procedures are always opportunities in the field of mobile telephone banking, while at thein place. same time building on the successes of our existing strategic partnerships. Our unique position in being able to offer financialAnother positive result is that ZANACO’s growth has also led services to all existing districts remains a critical factor in our futureto a soaring market capitalisation: the Bank’s market capital growth and prosperity and we will look to strengthening this featuregrew by more than 65% in 2011, truly cementing our leading of our operations as we continue to move forward.standing in the Zambian banking industry. With all of these 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 7
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Managing Director’s Report I am delighted to report on the Bank’s year of success. The year 2012 winning the FAZ/MTN Super Division Premier League Cup, thereby was our 43rd year in existence and can be described as a very qualifying for the Confederation For African Football (CAF) encouraging year for the Bank, staff, customers, investors and tournament 2013. Zambia as a whole. Economic Overview Our results of ZMK 238 billion Profit Before Tax shows an attractive ZANACO became the best capitalised Bank in Zambia by being the ZMK 53 billion increase over 2011, continuing the sustained and first bank to meet the new minimum capitalisation requirements of meaningful improvement in financial results over the past 5 years. the Bank of Zambia. Not only did ZANACO meet the new capital requirements for local banks (up from USD 2.5 Million to US$20 Our continued strong financial performance ensured that we Million), it also surpassed the significantly higher new minimum delivered consistently against our goals, reconfirming our capital requirements for foreign banks (US$100 Million), even though commitment to truly being “The People’s Bank” in Zambia. it is majority owned by Zambians. We remained firmly committed to our primary goal to Bank the Unbanked and we delivered this year again on our long-term Other significant economic highlights introduced by the promise. This is our pledge. This is what we mean to Zambia. Government included the: In late 2011, the Government of the Republic of Zambia announced • Introduction of the Bank of Zambia Policy Rate - The Policy Rate was an official Inquiry into the sale of 49% of ZANACO shares plus initially set at 9% but closed the year at 9.25%. Bank lending rates management rights to Rabobank of the Netherlands in 2007. must be benchmarked against the Policy Rate, rather than against individual Bank Base Rates. Overall, bank lending rates have Management and staff cooperated fully during this investigation. continued to drop consistently across the board for all customer The outcome of this inquiry was not available at the time of print. types during the year. • Introduction of Statutory Instrument No. 33 in May 2012, Recognition prohibiting the use of foreign currency in domestic transactions Our commitments to quality were demonstrated by back-to-back in order to reinforce the Kwacha as the country’s legal tender. awards by Euromoney for being the `Best Bank in Zambia 2012’ and The Kwacha appreciated significantly against the US Dollar in by the Lusaka Stock Exchange for `Best Corporate Governance’. the period immediately after this event to reach a year high of ZANACO received both awards in 2012 for its outstanding ZMK 4,840; it closed the year at ZMK 5,235 to the US Dollar. performance in 2011, while it received the same awards in 2011 for an equally excellent performance in 2010. The Bankers Association Performance of Zambia also recognised ZANACO for its `Excellence in Banking During the year, we concentrated on being active in all segments of the Unbanked’ and its ‘Financial Literacy Programme’. We are proud the Zambian economy. We focused on SMEs both in terms of train- of this local and international recognition, and we will continue to ing as well as offering a broad array of fundamental banking services. strive to exceed these high quality standards. We continued to focus on Government as our largest stakeholder. As a citizen-owned Bank we have an obligation to our shareholders The spirit of the country was dominated by football both at the start to sustain our financial results. We remain true to this promise and and the close of the year. We kick-started the year with the are delighted to see an increasing volume of Government business Chipolopolo Boys bringing home the Africa Cup of Nations (AFCON) being committed on a regular basis. 2012 trophy. We closed the year with the ZANACO Football Club8 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012In 2012, we invested heavily in reviewing and refining our our operational challenges continue to reduce and although I Corporate Social Responsibilityproducts in line with our customers’ needs. We ran a very believe we have taken the first important steps towards As part of our continued strategy to ‘Bank the Unbanked’ throughpopular campaign to “Invest in Zambia” by reducing our customer service improvement, we recognise that we have many financial fitness education in 2012, the Bank reached more thancompetitive interest rates even further for a limited period of more milestones to meet. 10,500 children, SMEs, farmers, youth and members of staff. Duringtime. This interest rate reduction attracted a large number this time, the Bank also extended its CSR programme to includeof scheme loan applications and contributed to the growth On the back of this, we have invested heavily in our Business health matters, with a focus on the provision of clean drinking water,of advances by 40% compared with 10% in 2011. Alongside Efficiency Programme (BEP) to improve our processes and therefore environmental support and occasional donations to meet variousthis, we continue to make impressive improvements to our our customer service. The specialised BEP team started to critically community needs.Non Performing Loans which are 3% better than the market analyse the key processes in the Bank, including card issuance,average. loan processing and payments processing. These key areas were In addition to this, the Bank started the journey to sensitizing staff identified as imperative to making business easier for our customers on environmental health, with the aim of providing a sustainableDistribution and to closing the gaps on our internal processes, thereby enhanc- green working environment in the near future. As the leading bankZANACO is proud to have more than 617,000 customers and ing security, reducing costs and further improving the customer in Zambia, we understand our responsibility to demonstrate thehas firmly positioned itself as the largest bank network in experience. We expect the main changes to start bearing fruit in the way forward within our communities.Zambia with 63 existing branches. We opened 4 new outlets fourth quarter of 2013.at Acacia Park, Levy Junction and Crossroads in Lusaka and Outlook for 2013Jacaranda Mall in Ndola. Our mobile truck continued operat- We certainly understand that, today, quality service and ease of We are positive about the coming year. Our Business Efficiencying in the Kabwata, Chelstone and Chilenje areas of Lusaka, doing business is what makes all the difference for customers. Progamme will take centre stage in embedding our focus for 2013whilst our Zanaco Xpress operations, supported by our 9 As such, ZANACO acknowledged the constructive feedback and on Service Improvement, Operating Efficiency, Governance, Controlagencies, served customers in a further 130 locations nation- rewarded 10 customers for their contribution towards our service and Customer Growth.wide. This is by far the largest branch footprint in the country. improvement efforts.We will continue to expand our outreach by investing in 2012 was a very fruitful year for ZANACO and, as always, suchmobile telephone functionality, ensuring that customers have Our People achievements cannot be executed without the direction of thea wide range of affordable and practical banking services Our enhanced communication efforts to and from our staff and Board of Directors and the support of Management and Staff. I offerthrough their mobile phones. customers provided more platforms for clear and transparent them all my gratitude and continued support for the coming years communication. This took place through the Intranet, the website and I look forward to working with both the ZANACO team and ourCustomer Service and face-to-face gatherings so as to communicate the short, valued customers in ensuring that 2013 will continue to see theOur growing customer base means that we have to improve medium and long term strategies of the Bank. Bank go from strength to strength.the ways in which we serve our diverse array of customers. Westarted to strategically address queues by deploying Customer ZANACO is increasingly well positioned as an attractive and fairService Representatives in all the branches, whilst at the same employer of choice, which is evident from the results of the Stafftime monitoring all the branches for customer service level Engagement Survey results. The Bank also embarked on its first ever Martyn H. Schoutenimprovements. The Bank also undertook its second Customer Customer Service Awards where efforts made by staff to improve Managing DirectorSatisfaction Survey, a first full mystery shopping exercise as service both internally and externally were recognised. This waswell as to hold focus group sessions to gather feedback from coupled with other team building activities and interactions suchcustomers, to measure and then act on this feedback. The as Long Service Awards, an inter-departmental football league andBank also increased operating hours in selected branch and several events to celebrate our distinguished awards.the Call Centre in response to customer requests. Meanwhile, 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 9
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Directors’ ReportThe Directors submit their report, together with the audited financial statements for the year ended 31 December 2012, which discloses the results for the year and the state of affairs for the Bank as at that date.PRINCIPAL ACTIVITIESThe Bank is engaged in the business of commercial banking and the provision of related services. The Bank has continued with its network expansion programme during the year.SHARE CAPITALThere were changes in the authorised and issued share capital during the year with the former increasing from K15,000 million to K100,000 million and the latter increasing from K11,550 million to K86,625 million by the issue of bonusshares of 13 to 2.RESULTS AND DIVIDENDThe net profit for the year of K156,088 million has been transferred to retained earnings.  The Bank paid dividends during the year amounting to K32,340 million in respect of 2011 profit.The Board has recommended a final dividend of K42,013 million for the year ended 31 December 2012.DIRECTORSThe Directors who held office during the year and to the date of this report were: Mr B Dick - ChairmanMr C Y Mulendema - Vice ChairmanMr M H Schouten - Managing Director Mrs G M Akapelwa Ehueni - Non-Executive DirectorMr G Robinson - Non-Executive DirectorMr F Weenig - Non-Executive Director  NUMBER OF EMPLOYEES AND REMUNERATIONThe total remuneration of employees during the year amounted to K235,725 million  (2011: K 207,550 million) and the average number of employees for each month of the year was as follows: Month Number Month Number January 919 July 992February 945 August 985March 961 September 980April 961 October 980May 989 November 1,007June 986 December 1,019The Bank has policies and procedures to safeguard the occupational health, safety and welfare of its employees.GIFTS AND DONATIONSDuring the year, the Bank made donations of K2,709 million (2011: K1,934 million) to charitable organisations and events.PROPERTY, PLANT AND EQUIPMENTThe Bank purchased property and equipment amounting to K61,527 million (2011: K64,762 million) during the year. In the opinion of the Directors, the recoverable amount of property, plant and equipment isnot less than the carrying value. 10 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012RESEARCH AND DEVELOPMENTThe Bank did not incur any research and development costs for the year 2012 (2011: Nil).RELATED PARTY TRANSACTIONSRelated party transactions are disclosed in Note 32 to the financial statements.DIRECTORS’ EMOLUMENTS AND INTERESTSDirectors’ emoluments and interests are disclosed in Note 32 to the financial statements.PROHIBITED BORROWINGS OR LENDINGThere were no prohibited borrowings or lendings as defined under Sections 72 and 73 of the Banking and Financial Services Act, 1994 (as amended).RISK MANAGEMENT AND CONTROLThe Bank, through its normal operations, is exposed to a number of risks, the most significant of which are credit, market, operational and liquidity risks. The Bank’s risk management objectives, policies and strat-egies are disclosed in Note 4 of the financial statements.COMPLIANCE FUNCTIONThe Bank has a compliance function which has the responsibility to monitor compliance with regulatory requirements and the various internal control processes and procedures.SIGNIFICANT EVENTAs reported in the last Directors’ Report contained in the 31 December, 2011, Financial Statements, the Commission of Inquiry appointed by the Republic of Zambia (GRZ) completed its hearings and receiving ofsubmissions on 9th February 2012. In line with the Bank’s highest Standard of Corporate Governance Practice, Management fully cooperated with the Government Commission of inquiry.As at the reporting date, the announcement of the findings and recommendations of the Commission of Inquiry had not been made public.KNOW YOUR CUSTOMER (KYC) AND ANTI-MONEY LAUNDERING (AML) POLICIESThe Bank has adopted Know Your Customer (KYC) and Anti-Money Laundering (AML) policies and complies with current legislation in these areas.AUDITORSThe Bank’s auditors, Messrs Deloitte, indicated their willingness to continue in office. A resolution proposing their reappointment and authorising the Directors to fix their remuneration will be put forward at theAnnual General Meeting.By order of the Board.MRS. S. NG’ANDUSECRETARYDate: 23 February 2013 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 11
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Statement of Corporate GovernanceIntroduction fields of business to ensure that the debate on matters of strategy, experience. Please refer to the Directors’ Report for a list of the policy and performance is robust, informed and constructive.  Directors who held office in the year under review. As Zambia National Commercial Bank Plc, we remain Furthermore, the roles of the Chairman and Managing Director do  committed to the highest standards of corporate gover- not vest in one person. To ensure transparency, the activities of the Board are documentednance.  This is central to the continued strong performance   and planned. Although the Board has ultimate responsibility forof the business in a manner which is sustainable in the long The Board structure is such that no one individual or group domi- the success of the Bank, this is managed on a delegated basis.term, and to maintaining the confidence of investors. For us, nates the decision making process. There is a schedule of matters The Board appoints the Chief Executive Officer and monitors hisgood governance is about managing the business effectively reserved for the entire Board’s approval and a clear delegation of or her performance in leading the Bank and providing operationaland responsibly in a way which is transparent and shows authority to the Managing Director and other senior executives and performance management in delivering the strategy.accountability. within the Bank for specific matters.  A procedure exists for the  determination of matters arising between scheduled meetings. The Chairman, with assistance from the Chief Executive Officer andOn the following pages, we set out our approach to corpo-   Company Secretary, is responsible for ensuring that Directors arerate governance, which includes the policies and structures There are established procedures in existence for planning and supplied with information in a timely manner to enable them tothat we have put in place. This is an effort to ensure that our capital expenditure, making of investments, information, reporting  discharge their duties.reporting on governance matters is clear, concise and well systems and for monitoring the Bank’s business and performance.   structured.   The Chief Executive Officer provides a regular report to the Board Newly appointed Directors are not only scrutinised and subjected that includes information on operational matters, the operatingOur corporate governance procedures are aligned to to a fit and proper test by the Bank of Zambia, but are also sub- environment, strategic development, corporate social respon-international practices and structures to ensure proper jected to a final approval by shareholders at the Annual General sibility, human resources and stakeholder relations. Our Boardchecks and balances. The Bank is fully in compliance with the Meeting. The Company’s Articles of Association provide that, on a composition remained intact, with the experience and expertise ofrequirements of the Banking Act, Companies Act and rotation basis, one third of the Directors resign every year and, if the Board members having been brought to bear.Securities Act and it has adopted the LuSE eligible, they can then offer themselves up for re-election.Corporate Governance Guidelines and the BOZ Guidelines In an unprecedented move, the Board engaged an externalon Corporate Governance. In line with accepted best practice, all Directors are subjected to consultant to undertake a Board evaluation. This clearly demon-  re-election at regular intervals. Board Members are also exposed to strated the Board’s willingness to be introspective in its approachBoard Performance continuous learning through various initiatives. to assessing its own performance. The Board enganged in both   formal and informal interactions during the course of the year,The Board is responsible for the long-term success of the The Chairman and Managing Director, in consultation with the which helped to foster good relationships and create unity ofcompany.  Bank Secretary, agree on the agenda for Board meetings, but all purpose. Board Members are entitled to raise other matters.  The ChairmanThe Board of Directors retains full and effective control of the ensures that all Board Members are properly briefed on all issues Equitable Treatment of Minority ShareholdersBank and monitors the Executive Management team. The arising from the Board meetings. It is the responsibility of theBoard is also responsible for the Bank’s direction, policies and Executive Management to ensure that the Board is supplied with The corporate governance framework of the Bank ensures thatstrategies and all investment and divestment decisions. It information in a timely manner and of quality appropriate enough equitable treatment of shareholders, including minority sharehold-also ensures that the Bank meets its responsibilities towards to enable it to carry out its duties. ers, is achieved by:all its stakeholders and that it is prudently managed against  the major risks inherent in general business dynamics.  The Board, which comprises five Non-Executive Directors and the • Ensuring that the Board adopts a shareholders’ perspective  Managing Director, are confident that they have the knowledge, when making decisions and ensuring minority interests areIn this respect, the Board makes key decisions to ensure talent and experience to lead a listed Bank. The Non-Executive protectedthat it retains proper direction and control of the Bank. The Directors are independent of Management and exercise their • Improving communications and interactions betweenDirectors bring in experience and expertise from their own independent judgement with their in-depth knowledge and minority shareholders, Board Members and Management 12 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012• Appointment of Directors is subjected to the final processes to identify, evaluate and manage risk so that Directors able measures of  assurance in respect of the above mentioned approval of all shareholders, including minority have visibility of the major risks. objectives. shareholders, at the Annual General Meeting Internal auditors monitor the operations of the internal controls• Ensuring the minority shareholders are duly accorded The Bank has developed a system of internal controls that encom- and report to Management and the Audit Committee on their with their three basic rights:- passes the policies, processes, tasks and behaviours that seek to findings and recommendations. All critical Information Technology o The right to seek information facilitate the effective and efficient operation of the Bank. (IT) is backed up and the Bank has put in place well documented o The right to voice an opinion business continuity and disaster tolerant procedures for all mission o The right to seek redress The Internal Audit team independently reviews the risk critical operations and systems. identification procedures and control processes implementedManagement Team by Management.  It provides objective assurance of the opera- The procedures are tested periodically and the Board is of the tion and validity of the systems of internal control through a opinion that they meet the acceptable criteria.  Our Executive Management Team remained dynamic. The programme of cyclical reviews, making recommendations for busi-  team provided leadership and direction for the organisation.  ness and control improvements as required. Financial ReportingRespective members of the Executive Team participatedin various industry initiatives such as those initiated by the The Bank also developed policies and procedures to drive con- The Directors accept final responsibility for the preparation of theBankers Association of Zambia (BAZ) and its Committees. sistency and clarity on how risks are managed and subsequently annual financial statements which fairly present: reported.  During the year under review, the Frauds Policy and theSuccession planning also forms part of the responsibility Market Risk Policy were approved by the Board. •  the financial position of the Bank as at the end of the year underof Senior Management to ensure that there is continuity in   review, andthe organization.  The Team conducted a Staff Engagement The Board accepts final responsibility for the risk management •  the financial results of operations as well as the cash flows forSurvey, while the Senior Team visited Branches within the and internal control systems of the Bank. It is the responsibility that period.network. of Management to ensure that adequate internal financial and    operational control systems are  developed and maintained on an The responsibility for compiling the annual financial statementsRisk Management and Control on-going basis in order to provide reasonable assurance was delegated to Management. The external auditors report on regarding: whether the annual financial statements are fairly presented.The Board continued to manage both risks and controls in   The Directors are satisfied that during the year under review:the organization.  The Board regularly reviewed the effective- •  effectiveness and efficiency of operationsness of the Bank’s system of risk management and internal •  safeguarding of the Bank’s assets (including information) •  adequate accounting records were maintainedcontrol processes, including financial, operational and com- •  compliance with applicable laws, regulations and supervisory •  an effective system of internal control and risk managementpliance controls and risk management systems. requirements monitored by Management was maintained •  reliability of accounting records •  appropriate accounting policies supported by reasonable andTo this end, the Credit Policy, which was last reviewed in •  business sustainability under normal as well as adverse prudent judgments and estimates were used consistently, and2008, was amended to include, among other things, set conditions, and •  the financial statements were compiled in accordance withguidelines on credit risk acceptability.  The policy was also •  responsible behaviour towards all stakeholders. International Financial Reporting Standards approved by ZICA, thecondensed to make it more concise and user friendly to our Banking and Financial Services and the Zambian Companies Act,staff. The Risk Appetite Statement was also adopted by the  The efficiency of internal control systems is dependent on their the Securities Act, and the Stock Exchange Listing Rules.Board in November 2012. compliance with prescribed measures. There is always a risk of staff   non-compliance with such measures.  Consequently, even a strict The Directors are also satisfied that no material event has occurredFor the Board, a key requirement is that the Bank has robust and efficient internal control system can provide no more reason- between the financial year-end and the date of this report. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 13
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Statement of Corporate GovernanceThe Board met on a quarterly basis throughout the year. The attendance by the Directors during the year was as follows:  Director’s Name                            2012                                                            February            May                        September            November Mr B Dick                      -  NED         a                  a                  a                  a Mr C Y Mulendema                    - NED                  a a a   a Mrs G M Akapelwa-Ehueni -  NED   a a a  a Mr G Robinson                           -  NED                   a a a   a Mr F Weenig           -  NED                  a a a a Mr M H Schouten                      -  ED a a a a*NED - Non-Executive Director*ED - Executive DirectorDirectors’ CompensationThe disclosure of Directors’ fees and remunerations is made in Note 32 of the financial statements. The Directors do not have any shares in the Bank and are not entitled to share options. Directors’ fees and anyamendments are approved by shareholders at the Annual General Meeting. Board Evaluation The Board engaged an external third party to review the effectiveness of the Board in line with accepted best practice. The review sought to identify specific areas in need of improvement or strengthening,while the recommendations for any actions to be taken where discussed by the entire Board. The review and evaluation include, among other things, the assessments of the Board’s: • performance against its objectives at the beginning of the year • effectiveness with respect to the Bank’s strategic direction • responsiveness to shareholders and stakeholders’ concerns • maintenance and implementation of the Board’s governance principles • access to and review of information from Management and the quality of such information • review of the composition and diversity of the skills and exposure of the Board, and  • continuous professional development for Board members.  14 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Board CommitteesIn order to enable it to discharge its executive functions, the Board has established four principal standing Committees, each governed by written terms of reference defining the frequency ofmeetings, power and duties, and reporting obligations. These Committees continuously evaluate the progress made towards meeting the Bank’s overall objectives, in addition to ensuring the efficient andeffective management of the entire Bank’s core functions. A Non-Executive Director chairs each of the four Committees. The said committees are Audit, Loans Review, Credit and Human Resources andCompensation.Audit and Risk CommitteeThe Audit and Risk Committee is chaired by a Non-Executive Director and consists of two other Non-Executive Directors. The Committee meets at least four times per year to evaluate, amongst other things,accounting practices, the internal control systems and the auditing and financial reporting. Its tasks include evaluating critical risk areas identified with the help of Management, as well as reporting on these tothe Board. The Committee operates under a formal charter approved by the Board and the Committee Members have unlimited access to all information. Certain members of Management including the ManagingDirector are invited to attend and give feedback at Committee meetings. The Audit Committee also recommends to the Board the remuneration of the external auditors. The Committee also holds separatemeetings with the Director of Internal Audit and the external auditors when required, in order to ensure that matters are considered without undue influence. The attendance by the Directors during the year was as follows:  Director’s Name                                                                        2012                                                                        Feb                        May                        September            November Mr C Y Mulendema -  NED                       a            a       a              a Mr B Dick                                    -  NED                        a            a       a              a Mrs G M Akapelwa-Ehueni -  NED a            a       a              a*NED - Non-Executive DirectorLoans Review CommitteeThe Loans Review Committee is chaired by a Non-Executive Director and consists of two Non-Executive Directors and one Executive Director, who is also the Chief Executive Officer of the Bank. On a quarterlybasis, the Committee reviews the collectability of the Bank’s lending portfolio by not only ensuring adherence to statutory and regulatory requirements, but also ensuring that lending practices and proceduresare in line with the credit policy of the Bank, including on matters relating to provisions and allowances for impairment. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 15
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Statement of Corporate GovernanceThe attendance by the Directors during the year was as follows:   Director’s Name                                                                        2012                                                                                   February            May                        September            November Mr F Weenig -  NED    a            a       a                           a Mr C Y Mulendema -  NED     a            a       a              a Mr M H Schouten   -  ED    a            a       a              a Mr B Dick                                 -  NED                       a            a       a              a*NED - Non-Executive Director*ED - Executive DirectorCredit CommitteeThe Credit Committee is chaired by a Non-Executive Director and consists of two other Non-Executive Directors and one Executive Director, who is also the Chief Executive Officer of the Bank. Certain membersof the Executive Management Committee attend by invitation. The Credit Committee supervises the effective implementation of credit and risk management policies and ensures the enhancement of theBank’s credit risk management systems and processes, in line with best practices in loan rating/credits, risk modelling, loan pricing and strategic loan management, including the identification and control ofthe concentration of risk. The Credit Committee also approves credits with values beyond the mandate of Management.The attendance by the Directors during the year was as follows:  Director’s Name                                                                        2012                                                                                   February            May                        September            November Mr B Dick                                                     -  NED                      a              a       a              a Mrs G M Akapelwa-Ehueni                  -  NED                      a              a       a              a Mr G  Robinson              -  NED                      a              a       a              a Mr M H Schouten                                    -  ED                         a              a       a              a*NED - Non-Executive Director*ED - Executive DirectorHuman Resources and Compensation CommitteeThe Committee provides oversight over the remuneration and compensation for Senior Management and key personnel in the Bank, so as to retain and motivate staff to perform at the level of quality required.Currently, the Bank participates annually in local market surveys and those focusing on the rest of Africa in order to ensure market related salaries are paid and that market related trends are also followed whenchanges are made to employee benefits. The remuneration of all managerial staff in the Bank is also linked to their individual performance. The attendance by the Directors during the year was as follows:  Director’s Name                                                                        2012                                                                                   February            May                        September            November Mrs G M Akapelwa-Ehueni                  -  NED                       a              a       a              a Mr G Robinson                                           -  NED                       a              a       a                               a Mr C Y Mulendema                                  -  NED                       a              a       a                               a Mr M H  Schouten                              -  ED                          a              a       a              a*NED - Non-Executive Director*ED - Executive Director     16 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Code of ConductThe purpose of the Code of Conduct is to regulate the required standards of corporate behaviour by which the Bank is judged in all and its operations. Therefore, the Code of Conduct stipulates the standardsby which individuals within the Bank are judged. The objectives of the code are:• integrity                                                                                          • staff interest and gifts                                                                • conduct of business / communication with customers                         • duty to supervise• skill, care and diligence• customer due diligence / know your customer• conflict of interestMembers of staff as well as agents are being subjected to continued training on the contents of the Code of Conduct to enable them to understand and appreciate these important guidelines, which controltheir conduct in their daily activities as Bank employees.In 2012, we introduced a formal procedure requesting Board Members and Management to fill out a Declaration of Interest Form on an annual basis. Directors have a continuing duty to update any changesin these interests at each Board meeting. Bank SecretaryThe Board appoints the Bank Secretary and all Board Members have access to the services of the Bank Secretary. Where necessary, the Board may seek independent professional advice on some matters.The Bank Secretary ensures the following: •  annual calendar for Board meetings is circulated to all Board Members after approval•  adequate information is provided to all the Members prior to commencement of the Board and sub-committee meetings•  culture of Good Corporate Governance is promoted•  liaison with Securities and Exchange Commission (SEC), the Lusaka Stock Exchange (LuSE) and Patents and Companies Registration Agency (PACRA)•  statutory registers are maintained•  key liaison for investors and contact point forshareholders, and•  Board is updated on relevant statutory amendments and developments. External AuditThe external auditors are responsible for reporting on whether the financial statements are fairly presented in accordance with International Financial Reporting Standards and in the manner required by theZambian Companies Act and the Banking and Financial Services Act. Consultation occurs between external and internal auditors to effect an efficient audit process. The external auditors consider all the reports issued by the Internal Audit Department and which are dulysupplied to them by the Bank. Internal  AuditInternal audit is an independent, objective assurance and consulting activity designed to add value to the Bank as well as to improve its operations. It helps the Bank accomplish its objectives by bringing asystematic and disciplined approach to evaluating and improving risk management, control and governance processes.  2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 17
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Statement of Corporate GovernanceInternal audit plans are prepared using a risk assessment model that ensures audit resources are directed towards high risk areas of the Bank. The plan is developed in consultation with Management and approved by theAudit Committee to ensure independence of the audit function, the Director Internal Audit functionally reports to the Audit Committee and administratively to the Managing Director.The internal audit function is governed by the Internal Audit Charter which defines the purpose, authority and responsibility of the internal audit function. The Internal Audit Charter is reviewed and updated to meet bestinternational practices at least once a year.Compliance FunctionThe Bank has set up an independent Compliance Function, guided by the Compliance Charter, which defines the fundamental principles, roles and responsibilities of the Compliance Functions within the Bank, as well as itsrelationship with Executive Management, the Board of Directors and the business and operational functions. The Charter further stipulates the mission of the Compliance Function, which is to promote, monitor and safeguardthe integrity of the Bank.The Charter will be updated from time to time to reflect the legal and regulatory evolution which shall be communicated to all staff. The Board of Directors is responsible for formally approving the compliance policy set by theExecutive Management. The efficiency and implementation of the policy will be evaluated on a quarterly basis by means of a status report provided by the Executive Management to the Board. The Compliance Function alsoindependently reports to the Board Audit and Risk Committee material compliance issues in the Bank through the Compliance Quarterly Report to enable the Board to appreciate the level of compliance risk and to solicit fortheir timely guidance. The objectives of the Independent Compliance Function are to:•  identify and evaluate the compliance risks within the Bank•  organise, co-ordinate and structure compliance related controls•  control and monitor all measures taken to mitigate compliance risks•  report to the Executive Management and the Board of Directors as appropriate, and•  act as the compliance advisor  within the Bank. The Compliance Function and Compliance Monitoring programme are subject to an independent review by both an internal and external audit for the appropriateness of the policies and implementation. Anti-Money Laundering PolicyThe Bank has enhanced its Anti-Money Laundering procedures by gaining access to an internationally reported database for people and entities who are reported to be involved in money laundering and terrorist financingactivities. This is an important control measure that ensures that the Bank only deals with customers and counter-parties with high integrity.Following the introduction of Anti-Money Laundering directives in 2009 by the Securities and Exchange Commission, the Bank has further endeavoured to ensure that all the requirements of the directives are met. The trainingof staff on Anti-Money Laundering matters is an on going critical activity of the Bank which is designed to transfer sufficient knowledge to all members of staff.Whistle BlowingThe Whistle Blowing Policy is intended  to make it easier for members of staff, consultants and other service providers to report irregularities in good faith without needing to fear that those actions may have adverse conse-quences for them. The Whistle Blowing Policy is a key element in demonstrating the Bank’s commitment to the highest possible standard of transparency, integrity, probity and accountability in its operations with all stakeholders. Protecting the integrity and reputation of the Bank requires the active support of all members of staff who, in most cases, are the first to notice and who are required to report incidents of suspected fraud,corruption, collusion and coercion and other serious infringements of the rules and policies in force at the Bank.By creating an environment of trust and maximum protection for members of staff through this policy, the Bank wants to encourage them to co-operate in full. The policy has put in place arrangements that ensure thatmembers of staff who report irregularities in good faith are afforded the utmost confidentiality and the greatest degree of protection against any retaliations or reprisals, whether actual or threatened, as a result of their whistleblowing. In this regard, the Whistle Blowing Policy was revised and approved by the Board in the year under review to reflect the enhanced procedures for reporting malpractice through the Trusted Person. 18 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Stakeholder CommunicationThe Bank continued to engage with its key stakeholders using various channels.  This included the following:         •  Annual General Meeting which affords the Minority Shareholders the opportunity to interact with Board and Management         •  Investor Relations presentations for both Domestic and International Institutional Investors as well as one on one meetings with representatives of various Fund Managers, and         •  Online Investor Relations Portal through which both existing and potential investors can access information and have access to Management.To underscore the governance principles of disseminating timely and relevant information, all presentations made are uploaded on our website.In addition, we have put in place an Insider Trading Policy which ensures that the release of Price Sensitive Information is properly managed, and particularly prohibits the Board, employees  and their related parties from tradingduring restricted periods i.e. “closed windows”. Environmental and Social Management PolicyCompliance with Legislation on Environmental and Social aspects of business are increasingly becoming focal measurement point for Good Governance. Our approach as a Bank has been to develop and implement innovativemonitoring and screening processes that adhere to both our internal guidelines and the Zambian Environmental Laws.Alongside the environmental laws, the Bank has developed a detailed environmental assessment screening process which is an integral part of loan origination and appraisal processes. Broadly, the process is categorized inthree parts: • Category A – Projects with potential significant adverse social or environmental impacts • Category B – Projects with potential limited adverse social or environmental impacts • Category C – Projects with minimal or no significant social or environmental impactsAs a good corporate citizen, ZANACO intends to actively work towards the realization of sustainable development. Through our business activities and services, the Bank will support environmental conservation efforts withinits operational scope as well as those in the service supply chain in order to contribute to the realization of sustainable development in Zambia.The Bank is committed to raising staff awareness on environmental issues and sustainable development and encourages staff observance of the following at the workplace: • Prevent pollution by reducing, reusing and recycling materials and goods purchased • Encourage energy saving, reduce water consumption, and promote good housekeeping practices • Improve and maintain the quality of the working environment within the Bank and all our branches/affiliates (internal air quality, water quality, waste management, paper use, energy use, etc).Basel IIThe implementation of the International convergence of Capital Measurement and Capital Standards also known as Basel II has started in earnest following the issuing by Bank of Zambia of draft regulations for Credit risk, Op-eration risk and Market risk under Pillar 1. Basel II will apply to all Banks operating in Zambia and the implementation process is expected to be completed by December 2013.Zambia National Commercial Bank has structures and resources in place which will ensure full implementation and compliance of the Basel II requirements in line with guidelines issued by Central Bank.Corporate Social Responsibility (CSR)Financial Fitness:ZANACO’s major CSR strategy focuses on equipping citizens with personal final management skills through the Financial Fitness Programme to help them make informed judgements and take effective actions regarding thecurrent and future use of money. The target audience for the Financial Fitness Programme comprises children through the school system, youths through colleges, adults through the media and business groups (farmers andSMEs) through trainings and partnership with membership organisations such as the Zambia National Farmers Union. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 19
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Statement of Corporate GovernanceFinancial Fitness 2012 achievementsTarget group Number of people reached in 2012 Number of people reached from 2009Children 6,500 18,900Youths and students 2,000 2,000SMEs 1,072 4,072Farmers 1,024 1,931Members of staff 46 1,074General adult population Radio station coverage TV, Radio, print media coverageWater supportZANACO recognises the importance of health to society in general and is focusing on water and sanitation support to communities. Water is life and clean water is important for healthy living, including theprevention of water borne diseases. This component of CSR was introduced in 2012 with 5 communities currently being serviced and over 2,190 community members benefiting. One organisation was sup-ported with sanitation improvement.Benefiting communities include:Name of community District1. Da Gamma School for the disabled children Luanshya2. Twamutambula Orphanage Chisamba3. Mweemba Health Post Mazabuka4. Tafelasoni Basic School Chipata5. Sacha Village Lundazi6. University of Zambia LusakaPartnerships and DonationsZANACO rolls out some of the CSR initiatives through strategic partnerships and donations to meet various community needs. Below are some initiatives supported:• In recognition of the growing concern around gender-based violence, ZANACO made a donation to YWCA to equip them for service provision. We believe that women need to live in a gender-based violence free society. Where such unfortunate incidences occur, women have the right to appropriate safety, counselling and material support as provided by YWCA. We look forward to a gender based violence free society.• As the reigning champions of Africa, Zambia is a proud football nation. Sport plays an important role in the lives of children and encourages good health and fitness. At ZANACO, we are playing out part and have donated 400 soccer balls to kick-start an active young society, especially in underprivileged areas. We believe that all children should be given an equal opportunity to succeed.At ZANACO we remain committed to giving back to our society. Zanaco Football Club Zanaco remains the proud sponsor of the Sensational Zanaco Football Club. The club continues to perform very well in the Zambian Super League and recorded its sixth top title of the league by winning the 2012 MTN/FAZ Premier League. The club will represent Zambia in the Orange Confederation for African Football (CAF) League in 2013. Prior to this, the Bank won 20 We have a responsible role to and 2009. The Club’s brilliant performance during friendly. 2012 nnual Report the Super League in 2003, 2005, 2006, 2008, play in sustaining the environment: This paper is environmentallythe year resulted in the selection of six players who represented Zambia in the 2012 Zone Six games hosted by Zambia.
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Directors’ ResponsibilitySTATEMENT OF RESPONSIBILITY FOR ANNUAL FINANCIAL STATEMENTSSection 164(6) of the Companies Act, 1994 (as amended) requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Bank and of the profitor loss for that period.The Directors are responsible for the maintenance of adequate accounting records and the preparation and integrity of the annual financial statements and related information. The Independent external auditors,Messers Deloitte, have audited the annual financial statements and their report is shown on page 23.The Directors are also responsible for the systems of internal control. These are designed to provide reasonable, but not absolute, assurance as to the reliability of the financial statements and to adequately safe-guard, verify and maintain accountability for assets and to prevent and detect material misstatements. The systems are implemented and monitored by suitably trained personnel with an appropriate segregationof authority and duties. Nothing has come to the attention of the Directors to indicate that any material breakdown in the functioning of these controls, procedures and systems has occurred during the year underreview.In the opinion of the Directors:• the profit and loss account is drawn up so as to give a true and fair view of the profit of the Bank for the financial year ended 31 December 2012;• the statement of financial position is drawn up so as to give a true and fair view of the state of affairs of the Bank as at 31 December 2012;• there are reasonable grounds to believe that the Bank will be able to pay its debts as and when they fall due; and• the financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and in the manner required by the Companies Act, 1994 (as amended) and the Banking and Financial Services Act,1994 (as amended). Director Director Director Secretary 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 21
    • Deloitte. ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Independent Auditor’s ReportTo the members of Zambia National Commercial Bank PlcWe have audited the accompanying financial statements of Zambia National Commercial Bank Plc, which comprise the statement of financial position as at 31 December 2012, the statement of profit or lossand other comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatoryinformation.Directors’ responsibility for the financial statementsThe Directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and in the manner required by the Bankingand Financial Services Act, 1994 (as amended), and the Companies Act, 1994 (as amended), and for such internal control as Management determines is necessary to enable the preparation of financial state-ments that are free from material misstatement, whether due to fraud or error.Auditor’s responsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that wecomply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s prep-aration and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectivenessof the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluatingthe overall presentation of the financial statements.We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.OpinionIn our opinion, the financial statements give a true and fair view of the financial position of Zambia National Commercial Bank Plc as at 31 December 2012, and of its financial performance and cash flows forthe year then ended in accordance with International Financial Reporting Standards, and in the manner required by the Banking and Financial Services Act, 1994 (as amended) and the Companies Act, 1994(as amended).Report on other legal requirementsThe Companies Act, 1994 (as amended) under section 173 (3) requires that in carrying out our audit, we consider and report to you on the following matter. We confirm that, in our opinion, the accountingand other records and registers have been properly kept in accordance with the Act.In accordance with section 64 (2) of the Banking and Financial Services Act, 1994 (as amended), we report that in our opinion:• The Bank made available all the necessary information to enable us to comply with the requirements of this Act, and• The Bank complied with the provisions of this Act and the regulations, guidelines and prescriptions of this Act.DELOITTE & TOUCHEC. CHUNGUPARTNERDate: 23 February 2013 22 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsSTATEMENT OF PROFIT OR LOSSfor the year ended 31 December 2012 Notes 2012 2011 K’million K’millionInterest income 5 550,876 453,533Interest expense 6 (88,926) (60,139)Net interest income 461,950 393,394Impairment losses on loans and advances 16 (243) (19,852)Net interest income after loans impairment charges 461,707 373,542Net fee and commission income 7 222,293 200,998Foreign exchange income 16,070 23,692Other operating income 8 14,254 7,958 30,324 31,650Total income 714,324 606,190Operating expenses 9 (476,044) (421,252)Profit before income tax 238,280 184,938Income tax expense 11 (82,192) (64,425)Profit for the year 156,088 120,513Dividend proposed/paid 12 42,013 32,340Proposed/paid dividend per share (Kwacha) 12 4,85 28Diluted/Basic earnings per share (Kwacha) 34 18.02 104.34 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 23
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsSTATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOMEfor the year ended 31 December 2012 Notes 2012 2011 K’million K’millionProfit for the year 156,088 120,513Other comprehensive income, net of income taxItems that may be reclassified subsequently to profit or lossNet gains on available-for-sale financial assets 15 813 5,347Net reclassification adjustment for realised net (losses)gains on available-for-sale financial assets 29 (5,347) 1,276 (4,534) 6,623Items that will not be reclassified subsquently to profit or lossGain on revaluation of properties - 27,293Deferred tax arising on gain on revaluation of properties 171 (8,537)Surplus (deficit) on defined benefit plan 24 11,327 (7,259) 11,498 11,497Other comprehesive income for the year, net of income tax 6,964 18,120Total comprehensive income for the year 163,052 138,633 24 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012STATEMENT OF FINANCIAL POSITIONat 31 December 2012 2012 2011 Notes K’ million K’ millionASSETSCash and balances with Bank of Zambia 13 470,772 512,896Balances with other banks 14 364,860 404,741Withholding tax recoverable 11 34,957 29,505Investment securities– available-for-sale 15 660,738 807,272– held-to-maturity 15 1,283,537 752,007Loans and advances to customers 16 2,639,161 1,890,736Non-current assets held for sale 17 236 1,077Property and equipment 17 242,129 229,140Other assets 19 115,665 90,247Total assets 5,812,055 4,717,621LIABILITIESCustomer deposits 20 4,314,918 3,412,319Deposits from other banks 21 22,347 1,246Deferred income tax liabilities 18 31,229 33,425Current tax liabilities 11 20,461 28,930Other liabilities 23 200,298 110,445Provisions for liabilities and charges 24 15,354 37,509Borrowed funds 25 494,065 511,076Total liabilities 5,098,672 4,134,950EQUITYShare capital 26 86,625 11,550Share premium 26 2,622 77,697Statutory reserve 27 86,625 11,550General banking reserves 28 109,416 105,687Revaluation reserves 29 57,264 63,577Retained earnings 370,831 312,610Total equity 713,383 582,671Total equity and liabilities 5,812,055 4,717,621The financial statements on pages 23 to 82 were approved for issue by the Board of Directors on 20th Feburary 2013 and signed on its behalf.Director Director Director Secretary 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 25
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsSTATEMENT OF CHANGES IN EQUITYfor the year ended 31 December 2012 Banking Share Share Statutory general Revaluation Retained capital premium reserve reserve reserves earnings Total K’million K’million K’million K’million K’million K’million K’millionBalance at 1 January 2011 11,550 77,697 11,550 75,584 39,452 260,545 476,378Profit for the year - - - - - 120,513 120,513Other comprehensive income, net of taxes:Revaluation surplus - - - - 27,293 - 27,293Net gain on available-for-sale financial assets - - - - 5,347 - 5,347Deferred tax on revalued properties - - - - (8,537) - (8,537)Net reclassification adjustment for realised net losson available-for-sale financial assets - - - - 1,276 - 1,276Transfer of revaluation after disposal - - - - (1,254) 1,254 -Deficit on employee retirement benefit plan (Note 24) - - - - - (7,259) (7,259)Total comprehensive income - - - - 24,125 114,508 138,633General reserve transfer - - - 30,103 - (30,103) -Transactions with owners:Dividend paid - - - - - (32,340) (32,340)Balance at 31 December 2011 11,550 77,697 11,550 105,687 63,577 312,610 582,671 26 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012STATEMENT OF CHANGES IN EQUITY (CONTINUED)for the year ended 31 December 2012 Banking Share Share Statutory general Revaluation Retained capital premium reserve reserve reserves earnings Total K’million K’million K’million K’million K’million K’million K’millionAt 1 January 2012 11,550 77,697 11,550 105,687 63,577 312,610 582,671Profit for the year - - - - - 156,088 156,088Other comprehensive income, net of taxes:Net gain on available-for-sale financial assets - - - - 813 - 813Deferred tax on revalued properties - - - - 171 - 171Net reclassification adjustment for realised net - - - - - - -loss on available-for-sale financial assets - - - - (5,347) - (5,347)Transfer of revaluation surplus after disposal - - - - (415) 415 -Transfer of excess depreciation - - - - (2,361) 2,361 -Deferred tax on excess deprecation - - - - 826 (826) -Surplus on employee retirement benefit plan (Note 24) - - - - - 11,327 11,327Total comprehensive income - - - - (6,313) 169,365 163,052General reserve transfer - - - 3,729 - (3,729) -Transfer to paid share capital 75,075 (75,075) - - - - -Transfer to paid statutory reserve fund 75,075 (75,075) -Transactions with owners: - Dividend paid - - - - - (32,340) (32,340)Balance at 31 December 2012 86,625 2,622 86,625 109,416 57,264 370,831 713,383 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 27
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsSTATEMENT OF CASH FLOWSfor the year ended 31 December 2012 2012 2011 Notes K’ million K’ millionCash flows from operating activitiesInterest income 5 550,876 453,533Interest expense 6 (88,926) (60,139)Net fee and commission receipts 7  222,293 200,998Net exchange gains on borrowings 25 7,749 17,732Foreign currency dealings and other income 30,324 31,651Gain on disposal on non-current assets held-for-sale (193) (421)Revaluation loss - 2,906Assets written off 9,096 -Expenditure 9,16 (476,287) (441,104)Depreciation 17 39,442 26,664Cash flows from operating activities before changes in operating assets and liabilities 294,374 231,820Changes in operating assets and liabilities:- loans and advances (748,425) (165,232)- statutory deposits (42,921) 35,734- other assets (25,418) 1,568- customer deposits 902,599 821,077- other liabilities 79,025 (48,285)- government securities (495,197) (519,467)(Cash used in) generated from operations (330,337) 125,395Income tax paid 11 (98,138) (67,418)Net cash (used in) generated from operating activities (428,475) 57,977Purchase of property and equipment 17 (61,527) (64,762)Proceeds from sale of property and equipment 1,034 2,629Net cash used in investing activities (60,493) (62,133)Cash flows from financing activitiesProceeds from borrowings 25 23,950 375,125Repayment of borrowings 25 (48,710) (43,675)Dividends paid (32,340) (32,340)Net cash (used in) generated by financing activities (57,100) 299,110Net (decrease)/increase in cash and cash equivalents (251,694) 526,774Cash and cash equivalents at start of year 891,661 364,887Cash and cash equivalents at end of year 31 639,967 891,661 28 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTSfor the year ended 31 December 20121. General informationThe Bank is incorporated in Zambia under the Companies Act, 1994 (as amended) as a limited liability company, and is domiciled in Zambia. The address of its registered office is:Plot 2118-2121P.O. Box 33611Cairo RoadLusakaThe Bank’s principal activities are the provision of Commercial Banking and related services to the general public.2. Summary of significant accounting policiesThe principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented.2.1 Statement of compliance and basis of preparationThe financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”). The measurement basis applied is the historical cost basis, except for certain properties and financialinstruments that are measured at revalued amounts or fair values as indicated in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.2.2 Interest income and expenseInterest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within ‘interest income’ or‘interest expense’ in profit or loss using the effective interest method.The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effectiveinterest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount ofthe financial asset or financial liability. The calculation of the effective interest rate includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transactioncosts and all other premiums or discounts.Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest that was used to discount the future cashflows for the purpose of measuring the impairment loss.2.3 Fees and commission incomeFees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related directcosts) and recognised as an adjustment to the effective interest rate on the loan. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 29
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements2.4 Translation of foreign currencies(i) Functional and presentationItems included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the ``functional currency”). The financial statements are presented inKwacha (“K”) which is the Bank’s functional currency.(ii) Transaction and balancesForeign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement ofsuch transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss account. Monetary items carried at fairvalue that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items denominated in foreign currency are not retranslated.Exchange differences are recognised in profit or loss in the year in which they arise.2.5 Financial assetsFinancial assets and liabilities are recognised when the Bank becomes a party to the contractual provisions of the instruments. Financial assets and financial liabilities are initially measured at fair value. Transactioncosts that are directly attributed to acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted fromthe fair value of the financial assets or financial liabilities as appropriate, on initial recognition. Transaction costs directly attributed to the acquisition of financial assets or financial liabilities at fair value through profitand loss (FVTPL) are recognised immediately in the profit or loss. The Bank classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans, advances and receivables;held-to-maturity financial assets; and available-for-sale assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular waypurchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the timeframe established by regulation or convention in the marketplace. Management determines the appropriate classification of its financial assets at initial recognition.(i) Loans, advances and receivablesLoans, advances and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including bank balances and cash) aremeasured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition ofinterest would be immaterial.(ii) Held-to maturityHeld-to-maturity assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that Management has the positive intention and ability to hold to maturity. Were the Bank to sellmore than an insignificant amount of held-to-maturity assets, the entire category would have to be reclassified as available- for-sale. Subsequent to initial recognition, held to maturity investments are measured atamortised cost using the effective interest rate method less any impairment. 30 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012(iii) AvailableFor-SaleAFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.The Bank also has investments in unlisted shares that are not traded in an active market but that are also classified as AFS financial assets and stated at fair value at the end of each reporting period (because theDirectors consider that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates (see below), interest income calculatedusing the effective interest method and dividends on AFS equity investments are recognised in profit or loss. Other changes in the carrying amount of available-for-sale financial assets are recognised in othercomprehensive income and accumulated under the heading of investments revaluation reserve. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumu-lated in the investments revaluation reserve is reclassified to profit or loss.Dividends on AFS equity instruments are recognised in profit or loss when the Bank’s right to receive the dividends is established.AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such un-quoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.2.6 Impairment of financial assetsThe Bank assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairmentlosses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact onthe estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:(a) significant financial difficulty of the issuer or obligor;(b) a breach of contract, such as a default or delinquency in interest or principal payments;(c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;(d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;(e) the disappearance of an active market for that financial asset because of financial difficulties; or(f ) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease can not yet be identified with the individual financial assets in the portfolio, including: - 1) adverse changes in the payment status of borrowers in the portfolio, and 2) national or local economic conditions that correlate with defaults on the assets in the portfolio.The estimated period between a loss occurring and its identification is determined by Management for each identified portfolio. In general, the periods used vary between 3 months and 6 months.Assets carried at amortised costThe Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 31
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsAssets carried at amortised cost (Continued)significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similarcredit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in acollective assessment of impairment.If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount andthe present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial instrument’s original effective interest rate. The carrying amount of the assetis reduced through the use of an allowance account and the amount of the loss is recognised in profit or loss account. If a loan or held-to-maturity asset has a variable interest rate, the discount rate for measuringany impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument’s fair value using an observablemarket price.The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral,whether or not foreclosure is probable.For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Bank’s grading process that considers asset type, in-dustry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of thedebtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for as-sets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the periodon which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss hasbeen determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in profit or loss.If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in thedebtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in profit or loss.Assets carried at fair valueIn the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If anysuch evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial assetpreviously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in profit or loss on equity instruments are not reversed through profit or loss. If, in asubsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profitor loss, the impairment loss is reversed through profit or loss account.Renegotiated loansLoans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subse-quent years, the renegotiated terms apply in determining whether the asset is considered to be past due. 32 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 20122.7 Derecognition of financial assetsThe Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of theasset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the assetand an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognise the financial asset andalso recognises a collateralised borrowing for the proceeds received.On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had beenrecognised in other comprehensive income and accumulated in equity is recognised in profit or loss.On derecognition of a financial asset other than in its entirety (e.g. when the Bank retains an option to repurchase part of a transferred asset), the Bank allocates the previous carrying amount of the financialasset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The differencebetween the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that hadbeen recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues tobe recognised and the part that is no longer recognised on the basis of the relative fair values of those parts.2.8 Property, Plant and Equipment(i) Recognition and MeasurementAll property, plant and equipment except buildings is stated at historical cost. Items of property plant and equipment are subsequently measured at cost less accumulated depreciation and accumulated impair-ment losses and property is subsequently measured at fair value less accumulated depreciation.Buildings are stated in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent impairment losses.It is the Banks policy to perform revaluations with regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period.The revaluation differences are credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease previouslyrecognized as an expense, in which case it should be recognized as income. A decrease as a result of a revaluation is recognized as an expense to the extent that it exceeds any amount previously credited to therevaluation surplus relating to the same asset.When a revalued asset is disposed off, any revaluation surplus is transferred directly to retained earnings.Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to a workingcondition for their intended use. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.When parts of an item of property, plant and equipment have different useful lives, they are componentized as separate items of property, plant and equipment.Capital work in progress relates to items of property, plant and equipment that are under construction and are yet to be commissioned for use. Work in progress is measured at the cost incurred in relation to theconstruction up to the reporting date. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 33
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements2.8 Property, Plant and Equipment (Continued)The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment, and is recognizednet within other operating income.(ii) Subsequent costsThe cost of replacing a component of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the componentwill flow to the Bank and its cost can be measured reliably. The carrying amount of the replaced component is derecognized. The costs of the day-to-day servicing of property, plant and equipment are recognizedin profit or loss as incurred.(iii) DepreciationDepreciation is based on the cost of the asset less its residue value. Components of individual assets are assessed and, if a component has a useful life that is different from the remainder of that asset, that compo-nent is depreciated separately.Capital work in progress is not depreciated.Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful life of each component of an item of property, plant and equipment.The estimated useful lives are as follows:Buildings 2% - 50 yearsFixtures, fittings and equipment 20% - 5 yearsMotor vehicles 20% - 5 yearsThe assets’ residual values, depreciation methods and useful lives are reviewed, and adjusted if appropriate, at each reporting date.The Bank assesses at each reporting date whether there is any indication that any item of property, plant and equipment is impaired. If any such indication exists, the Bank estimates the recoverable amount of therelevant assets. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to selland value in use. For the purposes of assessing impairment, assets are banked at the lowest levels for which there are separately identifiable cash flows (cash-generating units).2.9 TaxationIncome tax expense represents the sum of the tax currently payable and deferred tax.The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in profit or loss because it excludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. The Bank’s liability for current tax is calculated using tax rates that have been enacted by the reporting date.Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax 34 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 20122.9 Taxation (Continued)liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible tempo-rary differences can be utilised.The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset tobe recovered.Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to profit or loss, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is also dealt with in equity.Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation author-ity and the Bank intends to settle its current tax assets and liabilities on a net basis.2.10 Non-current assets held for saleNon-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediatelybefore classification as held for sale, the assets, or components of a disposal group, are re-measured in accordance with the Bank’s accounting policies.Non-current assets classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell.Any impairment loss on a disposal group is allocated to remaining assets and liabilities. Impairment losses on initial classification as held for sale and subsequent gains or losses on re-measurements are recognizedin profit or loss.2.11 Employee benefits(i) Retirement benefit obligationsThe Bank operates a defined benefit scheme for non-fixed term contracted employees. The Bank and all its employees also contribute to the National Pension Scheme, which is a defined contribution scheme.A defined contribution plan is a retirement benefit plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations to pay further contributions if thefund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a retirement benefit plan that is not a definedcontribution plan.The assets of all schemes are held in separate trustee administered funds, which are funded by contributions from both the Bank and employees.The Bank’s contributions to the defined contribution schemes are charged to profit or loss in the year in which they fall due.The liability recognised in the statement of financial position in respect of defined benefit plan is the present value of the defined benefit obligation at reporting date less the fair value of plan assets, together withadjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The presentvalue of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 35
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements2.11 Employee benefits (Continued)benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are chargedor credited to profit or loss over the employees’ expected average remaining working lives.Past-service costs are recognised immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In thiscase, the past-service costs are amortised on a straight-line basis over the vesting period.(ii) Other entitlementsThe estimated monetary liability for employees’ accrued annual leave entitlement at reporting date is recognised as an expense accrual.2.12 BorrowingsBorrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any differ-ence between proceeds net of transaction costs and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method.2.13 Borrowing costsBorrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale,are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.All other borrowing costs are recognised in profit or loss in the year in which they are incurred.2.14 Financial liabilities and equityClassification as debt or equityDebt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual agreement.Financial liabilitiesFinancial liabilities are classified as borrowed funds, other payables, other liabilities and amounts due to related parties.Borrowed funds, other payables and other liabilities are initially measured at fair value and are subsequently measured at amortised cost using the effective interest method.The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactlydiscounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.36 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 20122.14 Financial liabilities and equity (Continued)Equity instrumentsAn equity instrument is any contract that evidences a residual interest in the assets of the Bank after deducting all of its liabilities. Equity instruments are recorded at proceeds received, net of direct issue costs.Derecognition of financial liabilitiesThe Bank derecognises financial liabilities when, and only when, the Bank’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised andthe consideration paid and payable is recognised in profit or loss.2.15 OffsettingFinancial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention tosettle on a net basis, or realise the asset and settle the liability simultaneously.2.16 Sale and repurchase agreementsSecurities sold subject to repurchase agreements (‘repos’) are classified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral; thecounterparty liability is included in amounts due to other banks, deposits from banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) arerecorded as loans and advances to other 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 effectiveinterest method. Securities lent to counterparties are also retained in the financial statements.2.17 Share capitalOrdinary shares are classified as ‘share capital’ in equity. Any premium received over and above the par value of the shares is classified as ‘share premium’ in equity.2.18 Dividends payableDividends on ordinary shares are charged to equity in the period in which they are declared. Proposed dividends are not recognised as a liability until declared.2.19 Fiduciary activitiesThe Bank commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets andincome arising thereon are excluded from these financial statements, as they are not assets of the Bank.2.20 Acceptances and letters of creditAcceptances and letters of credit are accounted for as off-statement of financial position transactions and disclosed as contingent liabilities. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 37
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements2.21 ProvisionsProvisions recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and theamount has been reliably estimated. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into accountthe risks and uncertainties surrounding the obligation.The Bank recognises no provisions for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class ofobligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and therisks specific to the obligation.2.22 Segment reportingOperating segments are reported in a manner consistent with the internal reporting to the Executive Management Committee. The Executive Management Committee allocates resources to and assesses the perfor-mance of the operating segments of an entity. The Executive Management Committee is the Bank’s key management making body.All transactions between business segments are conducted on an arm’s length basis, with intra-segment revenue and cost being eliminated in head office. Income and expenses directly associated with each segmentare included in determining business segment performance.2.23 Application of new and revised International Financial Reporting Standards (IFRSs)(i) New and revised IFRSs affecting amounts reportedThe following new and revised IFRSs have been applied in the current year. There has been no impact on the amounts reported in these financial statements. Details of other new and revised IFRSs applied in thesefinancial statements that have had no material effect on the financial statements are set out in section 2.23 (iii) below:(ii) New and revised IFRSs affecting presentation and disclosures only“Amendments to IAS 1 The amendments introduce new terminology for the statement of comprehensive income. The amendments to IAS 1 retain the option to present profit or loss and otherPresentation of Items of Other comprehensive income in either a single statement or in two separate but consecutive statements. However, the amendments to IAS 1 require items of otherComprehensive Income” comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will not reclassified subsequently to profit or loss and (b) items that maybe reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same – the amendments do not change the option to present items of other comprehensive income either before tax or net of tax. The Bank has applied the amendments to IAS 1 presentation of items of other comprehensive income. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modified to reflect the changes(iii) New and revised IFRSs applied with no material effect on the consolidated financial statementsThe following new and revised IFRSs have also been adopted in these financial statements. The application of these new and revised IFRSs has not had any material impact on the amounts reported for the current 38 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 20122.23 Application of new and revised International Financial Reporting Standards (IFRSs) (Continued)(iii) New and revised IFRSs applied with no material effect on the consolidated financial statements (Continued)and prior years but may affect the accounting for future transactions or arrangements.Amendments to IFRS 7 The amendments increase the disclosure requirements for transactions involving the transfer of financial assets in order to provide greater transparency around riskDisclosures – Transfer of exposures when financial assets are transferred.Financial AssetsImprovements to IFRSs issued in 2011 Except for the amendments to IAS 1 described earlier in section 2.23 (iii), the application of Improvements to IFRSs issued in 2011 has not had any material effect on amounts reported in the financial statements.(iv) New and revised IFRSs in issue but not yet effectiveThe Bank has not applied the following new and revised IFRSs that have been issued but are not yet effective:IFRS 9 Financial Instruments3IFRS 13 Fair Value Measurement1IAS 19 (as revised in 2011) IAS 19 (as revised in 2011) Employee Benefits1Amendments to IFRS 9 and IFRS 7 Mandatory effective date of IFRS 9 and Transition Disclosures3Amendments to IAS 32 Offsetting financial assets and financial liabilities2Amendments to IFRSs Annual improvements to IFRSs 2009-2011 cycle exept for the amendments to IAS 111 Effective for annual periods beginning on or after 1 January 2013.2 Effective for annual periods beginning on or after 1 January 2014.3 Effective for annual periods beginning on or after 1 January 2015.IFRS 9 issued in November 2009 introduces new requirements for the classification and measurement of financial assets. IFRS 9 amended in October 2010 includes the requirements for the classification and mea-surement of financial liabilities and for derecognition.Key requirements of IFRS 9 are described as follows:IFRS 9 requires all recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement to be subsequently measured at amortised cost or fair value. Specifically, debtinvestments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principaloutstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair values at the end of subsequentaccounting periods.IFRS 9 is effective for annual periods beginning on or after 1 January 2015, with earlier application permitted. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 39
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements2.23 Application of new and revised International Financial Reporting Standards (IFRSs) (Continued)(iv) New and revised IFRSs in issue but not yet effective (Continued)The Directors anticipate that IFRS 9 will be adopted in the Bank’s financial statements for the annual period beginning 1 January 2015 and that the application of IFRS 9 may have significant impact on amountsreported in respect of the Bank’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of that effect until a detailed review has been completed.IFRS 13 is effective for annual periods beginning on or after 1 January 2013, with earlier application permitted.The Directors anticipate that IFRS 13 will be adopted in the Bank’s financial statements for the annual period beginning 1 January 2013 and that the application of the new Standard may affect the amounts reportedin the financial statements and result in more extensive disclosures in the financial statements.IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The Standard defines fair value, establishes a framework for measuring fair value, andrequires disclosures about fair value measurements. The scope of IFRS 13 is broad; it applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair valuemeasurements and disclosures about fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the current Standards.For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only under IFRS 7 Financial Instruments: Disclosures will be extendedby IFRS 13 to cover all assets and liabilities within its scope.The Annual Improvements to IFRSs 2009 – 2011 Cycle include a number of amendments to various IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2013. Amendments toIFRSs include:• Amendments to IAS 16 Property, Plant and Equipment; and• Amendments to IAS 32 Financial Instruments: Presentation.The amendments to IAS 16 clarify that spare parts, stand-by equipment and servicing equipment should be classified as property, plant and equipment when they meet the definition of property, plant and equip-ment in IAS 16 and as inventory otherwise. The Directors do not anticipate that the amendments to IAS 16 will have a significant effect on the Bank’s financial statements.The amendments to IAS 32 clarify that income tax relating to distributions to holders of an equity instrument and to transaction costs of an equity transaction should be accounted for in accordance with IAS 12Income Taxes. The Directors anticipate that the amendments to IAS 32 will have no significant impact on the Bank’s financial statements.The amendments to IAS 32 clarify existing application issues relating to the offset of financial assets and financial liabilities requirements. Specifically, the amendments clarify the meaning of currently has a legallyenforceable right of set-off and simultaneous realisation and settlement.The amendments to IFRS 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable masternetting agreement or similar arrangement.The amendments to IFRS 7 are effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods. The disclosures should be provided retrospectively for all compara-tive periods. However, the amendments to IAS 32 are not effective until annual periods beginning on or after 1 January 2014, with retrospective application required.The Directors anticipate that the application of these amendments to IAS 32 and IFRS 7 may result in more disclosures being made with regard to offsetting financial assets and financial liabilities in the future. 40 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 20122.23 Application of new and revised International Financial Reporting Standards (IFRSs) (Continued)(iv) New and revised IFRSs in issue but not yet effective (Continued)The amendments to IAS 19 change the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and planassets. The amendments require the recognition of changes in defined benefit obligations and in fair value of plan assets when they occur, and hence eliminate the ‘corridor approach’ permitted under the previousversion of IAS 19 and accelerate the recognition of past service costs. The amendments require all actuarial gains and losses to be recognised immediately through other comprehensive income in order for the netpension asset or liability recognised in the statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previousversion of IAS 19 are replaced with a ‘net-interest’ amount, which is calculated by applying the discount rate to the net defined benefit liability or asset.3 Critical accounting estimates and judgements in applying accounting policiesIn the application of the Bank’s accounting policies, the Directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liablilibilities that are not readily apparent fromother sources. The estimates and associated assumptions are based on historical expereince and other factors that are considered to be relevant. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or inthe period of the revision and future periods if the revision affects both current and furture periods.(a) Impairment losses on loans and advancesThe Bank reviews its loan portfolios to assess impairment at least on a monthly basis. In determining whether an impairment loss should be recorded in profit or loss, the Bank makes judgements as to whether there isany observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidencemay include observable data indicating that there has been an adverse change in the payment status of borrowers in a Bank, or national or local economic conditions that correlate with defaults on assets in the Bank.Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. Themethodology 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 experience.(b) Fair value of financial instrumentsThe fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (for example, models) are used to determine fair values, they arevalidated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual dataand comparative market prices. To the extent practicable, models use only observable data. However, areas such as credit risk (both own and counterparty), volatilities and correlations require Management to makeestimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For example to the extent that Management used a tightening of 2 basis points in the yield rate, thefair values would be estimated at K657,609 millions as compared to their reported fair values of K660,738 millions at 31 December 2012.(c) Held-to-maturity financial assetsThe Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturing as held-to-maturity. This classification requires significant judgement. Inmaking this judgement, the Bank evaluates its intention and ability to hold such assets to maturity. If the Bank fails to keep these assets to maturity other than for the specific circumstances – for example, selling an insig-nificant amount close to maturity – it will be required to classify the entire class as available-for-sale. The assets are currently measured at amortised cost. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 41
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements4 Financial risk managementThe Bank’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk, credit risk and liquidity risk). Those activities involve the analysis, evaluation, acceptance and manage-ment of some degree of risk or combination of risks. Taking risk is core to the Bank’s business, and the financial risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve anappropriate balance between risk and return and minimise potential adverse effects on its financial performance.Risk management is carried out by the Risk Directorate under policies approved by the Executive Management Committee and Board of Directors. Risk Directorate identifies evaluates and hedges financial risksin close cooperation with the operating units. In carrying out these functions, Risk Directorate is guided by policies contained in the Credit policy document, Business Lending standards, Environmental and Socialpolicy, Scheme Loans Policy and Premier Loans Policies.(a) Credit riskThe Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the Bank by failing to pay amounts in full when due. Credit risk is the most important risk for the Bank’s busi-ness: Management therefore carefully manages the exposure to credit risk. Credit exposures arise principally in lending and investment activities. There is also credit risk in off-statement of financial position financialinstruments, such as loan commitments and guarantees. Credit risk management and control are centralised in the Risk Directorate which reports regularly to the Board of Directors.(i) Credit risk measurement(a) Loans and advances (including commitments and guarantees)The estimation of credit exposure is complex and requires the use of processes and procedures that will limit the likelihood of default on the loans in the Bank’s portfolio. The assessment of credit risk of a portfolio ofassets entails analysis of various risk aspects and a decision made on whether the risk is bankable. The risks assessed include Business, Financial, Market, Management, Security, Structural and Industry.The Loan Portfolio of the Bank is segregated into seven rating classes. Internal ratings 2-Standard Loan has no arrears 3-Satisfactory risk Loan has arrears over 1 day but less than 29 days 4-Watch risk Loan has arrears over 30 days but less than 59 days 5-Unacceptable Loan has arrears over 60 days but less than 89 days 50-Sub-standard Loan has arrears over 90 days but less than 119 days 51-Doubtful Loan has arrears over 120 days but less than 179 days 52-Loss Loan has arrears over 180 days(b) Risk limit and mitigation policiesThe Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower and to industry segments. Such risks are monitored on a revolving basis andsubject to annual or more frequent review. 42 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 20124 Financial risk management (Continued)(b) Risk limit and mitigation policies (Continued)The exposure to any one borrower including banks is further restricted by sub-limits covering on and off statement of financial position exposures.For example;1) There is a single name credit exposure limit of 25% of the regulatory capital.2) Clean and secured counterparty limits apply for money market operations conducted by the Treasury Division.(c) CollateralThe Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Bank implements guidelines onthe acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are: • Mortgages over residential properties. • Charges over business assets such as premises, inventory and accounts receivable. • Charges over financial instruments such as debt instruments. • Cash cover. • Longer-term finance and lending to corporate entities are generally secured. • Certain personal credit facilities are generally unsecured.(i) Credit risk measurement(d) Lending limitCredit risk exposure is managed as part of overall lending limits with customers, together with potential exposures from market movements.Settlement risk arises in any situation where a payment in cash or securities is made in the expectation of a corresponding receipt in cash or securities. Daily settlement limits are established for each counterparty tocover the aggregate of all settlement risk arising from the Bank’s market transactions on any single day.(e) Credit related commitmentsThe primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will makepayments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank onbehalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relateand therefore carry less risk than a direct borrowing. 2012 Annual Report We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 43
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial Statements4 Financial risk management (Continued)(e) Credit related commitments (Continued)Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bankis potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit arecontingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit riskthan shorter-term commitments.(ii) Impairment and provisioning policiesThe impairment allowance shown in the statement of financial position at year end is derived from each of the seven internal rating grades. The following table shows the percentage of the Bank’s on Statement ofFinancial Position credit related obligations. 44 We have a responsible role to play in sustaining the environment: this paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2012 4 Financial risk management (Continued) (ii) Impairment and provisioning policies (Continued) 2012 2011 Rating Credit Impairment Credit Impairment exposure allowance exposure allowance % % % % 2 Standard 68 9 75 6 3 Satisfactory Risk 21 3  6 2 4 Watch risk 3 4  2 1 5 Unacceptable 2 10  7 4 50 Sub-Standard 1 7  1 4 51 Doubtful 1 5  1 5 52 Loss 4 62 8 78 100 100 100 100 Maximum exposure to credit risk before collateral held 2012 2011 K’ million K’ million Balances with Bank of Zambia 470,772 512,896 Balances with other banks 364,860 404,741 Loans and advances to customers 2,639,161 1,890,736 Investment securities: - available-for-sale 660,738 807,272 - held-to-maturity 1,283,537 752,007 Other assets 115,665 90,247 Credit risk exposures relating to off-statement of financial position items: - Acceptances and letters of credit 496,210 435,437 - Guarantee and performance bonds 17,216 65,575 - Commitments to lend 190,050 145,001 6,238,209 5,103,912 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 45
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2012 and 2011, without taking account of any collateral held or other credit enhancements attached. For on-statement of financial position assets, the exposures set out above are based on carrying amounts as reported in the statement of financial position. As shown above, 48% of the total maximum exposure is derived from loans and advances to banks and customers (2011: 47%).(ii) Impairment and provisioning policies Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan and advances portfolio and debt securities based on the following: · the Bank exercises stringent controls over the granting of new loans. · 68% (2011: 78%) of the loans and advances portfolio are neither past due nor impaired. ·  63% (2011: 56%) of the loans and advances portfolio are backed by collateral. ·  100% (2011:100%) of the investments in securities are government securities. Financial assets that are past due or impaired Loans and advances are summarised as follows: 2012 2011 K’ million K’ million Neither past due nor impaired 1,836,204 1,544,562 Past due but not impaired 778,705 288,285 Individually impaired 70,790 146,542 Gross 2,685,699 1,979,389 Less: allowance for impairment (Note 16) (46,538) (88,653) Net 2,639,161 1,890,736 No other financial assets are either past due or impaired. Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank: Standard 1,836,204 1,544,562 46 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) Loans and advances past due but not impaired Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. The gross amounts of loans and advances that were past due but not impaired were as follows: 2012 2011 K’ million K’ million Past due up to 30 days 76,416 33,493 Past due 31 – 60 days 492,081 34,969 Past due 61 – 90 days 113,842 101,757 Over 90 days 96,366 118,066 Total 778,705 288,285 Fair value of collateral held 1,994,356 1,520,067 Loans and advances individually impaired Of the total gross amount of impaired loans, the following amounts have been individually assessed: 2012 2011 K million K million Individually assessed impaired loans and advances - corporate 20,050 65,569 - retail 50,740 80,973 70,790 146,542 Fair value of collateral held 50,420 88,1982012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 47
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued)(a) Credit risk(ii) Impairment and provisioning policies Loans and advances renegotiated Restructuring activities include extended payment arrangements, approved external management plans, modifications and deferral of payments. Restructuring policies and practices are based on indicators or criteria that, in the judgement of local Management, indicate that payment will most likely continue. These policies are kept under continuous review. Restructuring is most commonly applied to term loans – in particular, customer finance loans. In majority cases restructuring results in the asset continuing to be impaired. Renegotiated loans that would otherwise be past due or impaired totalled K30,142 million (2011: K152,253 million).(b) Concentration of risk Industry sector risk concentration were as follows for on and off statement of financial position. 2012 Financials Manufacturing Transport & Wholesale & Agriculture Other Individuals Total communication retail trade industries K’million K’million K’million K’million K’million K’million K’million K’million Loans and advances customers 14,342 236,409 57,324 122,135 976,091 602,209 630,651 2,639,161 Investment securities: - held-to-maturity 1,283,537 - - - - - - 1,283,537 - available-for-sale 660,738 - - - - - - 660,738 Other assets 115,665 - - - - - - 115,665 At 31 December 2011 2,074,282 236,409 57,324 122,135 976,091 602,209 630,651 4,699,101 48 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) Credit risk exposures relating to off-statement of financial position items: 2012 Financials Manufacturing Transport & Wholesale & Agriculture Other Individuals Total communication retail trade industries K’million K’million K’million K’million K’million K’million K’million K’million Credit risk exposures relating to off-balance items: Acceptances and letters of credit - 787 3,980 2,153 - 488,872 418 496,210 Guarantee and performance bonds 10,910 - 7 592 2,378 3,329 - 17,216 Commitments to lend - 79,937 4,500 12,405 79,356 13,852 - 190,050 10,910 80,724 8,487 15,150 81,734 506,053 418 703,476 At 31 December 2012 2,085,192 317,133 65,811 137,285 1,057,825 1,108,262 631,069 5,402,577 2011 Financials Manufacturing Transport & Wholesale & Agriculture Other Individuals Total communication retail trade industries K’million K’million K’million K’million K’million K’million K’million K’million Loans and advances 18,278 173,792 61,693 108,472 597,700 369,239 561,562 1,890,736 Investment securities: - available-for-sale 807,272 - - - - - - 807,272 - held-to-maturity 752,007 - - - - - - 752,007 Other assets 90,247 - - - - - - 90,247 1,667,804 173,792 61,693 108,472 597,700 369,239 561,562 3,540,2622012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 49
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) Credit risk exposures relating to off-statement of financial position items: 2011 Financials Manufacturing Transport & Wholesale & Agriculture Other Individuals Total communication retail trade industries K’million K’million K’million K’million K’million K’million K’million K’million Acceptances and letters of credit - 1,048 - 2,054 - 432,335 - 435,437 Guarantee and performance bonds 10,762 10 - 3,607 45,837 - 5,359 65,575 Commitments to lend 6,000 21,725 13,163 20,510 64,549 19,054 - 145,001 16,762 22,783 13,163 26,171 110,386 451,389 5,359 646,013 31 December 2011 1,684,566 196,575 74,856 134,643 708,086 820,628 566,921 4,186,275(c) Liquidity risk Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they are withdrawn. The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, and calls on cash settled contingencies. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank of Zambia requires that the Bank maintain a cash reserve ratio. In addition, the Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The Treasury Department monitors liquidity ratios on a daily basis. The table below presents the undiscounted cash flows payable by the Bank under financial liabilities by the remaining contractual maturities at the statement of financial position date and from financial assets by expected maturity dates. 50 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) At 31 December 2012 Up to 12 1-3 3-5 Over 5 months years years years Total K’million K’million K’million K’million K’million Liabilities Deposits from banks 22,347 - - - 22,347 Deposits due to customers 4,311,418 3,500 - - 4,314,918 Borrowed funds 51,589 297,991 129,153 15,332 494,065 Other liabilities 200,298 - - - 200,298 Total financial liabilities 4,585,652 301,491 129,153 15,332 5,031,628 Assets Cash and Balances with Bank of Zambia 470,772 - - - 470,772 Balances with other Banks 364,860 - - - 364,860 Loans and advances to customers 27,833 1,348,781 882,404 426,681 2,685,699 Investment in securities 956,503 658,705 322,032 7,035 1,944,275 Other assets 115,901 - - - 115,901 1,935,869 2,007,486 1,204,436 433,716 5,581,507 At 31 December 2011 Liabilities Deposits from banks 1,246 - - - 1,246 Deposits due to customers 3,402,319 10,000 - - 3,412,319 Borrowed funds 47,690 335,260 123,854 4,272 511,076 Other liabilities 110,445 - - - 110,445 Total financial liabilities 3,561,700 345,260 123,854 4,272 4,035,0862012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 51
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) At 31 December 2011 Up to 12 1-3 3-5 Over 5 months years years years Total K’million K’million K’million K’million K’million Assets Cash and Balances with Bank of Zambia 512,896 - - - 512,896 Balances with other Banks 404,741 - - - 404,741 Loans and advances to customers 688,096 525,287 478,978 287,028 1,979,389 Investment in securities 1,053,454 340,306 145,079 20,440 1,559,279 Other assets 64,352 - 25,895 - 90,247 Total financial assets 2,723,539 865,593 649,952 307,468 4,546,552(d) Market risk Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fair value or future cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to general and specific market movements and changes in the level of volatility. The objective of market risk managment is to manage and control market risk exposures within acceptable limits, while optimising the return on risk. Overall responsibility for managing market risk rests with the Assets and Liabilities Committee (ALCO).(e) Currency risk The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December 2012. Included in the table are the Bank’s financial instruments, categorised by currency.52 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) At 31 December 2012 USD GBP Euro Total K’million K’million K’million K’million Assets Cash and Balances with Bank of Zambia 13,251 610 1,000 14,861 Balances with other Banks 333,827 2,800 - 336,627 Loans and advances to customers 637,549 - - 637,549 Other financial assets 791 212 20,440 21,443 Total financial assets 985,418 3,622 21,440 1,010,480 Liabilities Deposits from banks - 1,381 5,299 6,680 Customer deposits 329,334 - - 329,334 Borrowed fund 494,065 - - 494,065 Other liabilities 74,934 2,079 - 77,013 Total financial liabilities 898,333 3,460 5,299 907,092 Net position 87,085 162 16,141 103,388 At 31 December 2011 Financial assets 993,711 2,527 21,340 1,017,578 Financial liabilities (1,002,952) (2,763) (20,349) (1,026,064) Net position (9,241) (236) 991 (8,486) 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 53
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued)(f) Interest rate risk The Bank is exposed to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Board of Directors sets limits on the level of mismatch of interest rate re-pricing that may be undertaken, which is monitored daily. The table below summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. The Bank does not bear any interest rate risk on off statement of financial position items. At 31 December 2012 Up to 12 1-3 3-5 Over 5 months years years years Total K’million K’million K’million K’million K’million Assets Balances with other Banks 15,585 - - - 15,585 Loans and advances to customers 15,173 1,270,380 876,645 476,963 2,639,161 Investment in securities 956,503 658,705 322,032 7,035 1,944,275 Total financial assets 987,261 1,929,085 1,198,677 483,998 4,599,021 Liabilities Deposits from Banks 22,347 - - - 22,347 Deposits from customers 4,311,418 3,500 - - 4,314,918 Borrowed funds 51,589 297,991 129,153 15,332 494,065 Total financial liabilities 4,385,354 301,491 129,153 15,332 4,831,330 Interest re-pricing gap (3,398,093) 1,627,594 1,069,524 468,666 (232,309) 54 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) At 31 December 2011 Up to 12 1-3 3-5 Over 5 months years years years Total K’million K’million K’million K’million K’million Total financial assets 1,846,120 851,420 621,093 304,632 3,623,265 Total financial liabilities (2,090,407) (304,191) (193,058) (4,641) (2,592,297) Total interest repricing gap (244,287) 547,229 428,035 299,991 1,030,968 The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of uncertain terms and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates.(g) Fair values of financial assets and liabilities The fair value of held-to-maturity investment securities at 31 December 2012 is estimated at K1,283,537 million (2011: K752,007 million). The fair values of the Bank’s other financial assets and liabilities approximate the respective carrying amounts, due to the generally short periods to contractual re-pricing or maturity dates as set out above. Fair values are based on discounted cash flows using a discount rates based upon the yield rates on similar financial assets at the Statement of Financial Position date. Fair value hierarchy IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuations techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank market assumptions. The two types of inputs have created the following fair value hierarchy: • Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Lusaka Stock Exchange) • Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). • Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unob servable components. This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations where possible. 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 55
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20124 Financial risk management (Continued) 31 December 2012 Level 1 Level 2 Level 3 Total K’ millions K’ millions K’ millions K’ millions Available-for-sale financial assets - 660,738 - 660,738 31 December 2011 Available-for-sale financial assets - 806,772 - 806,772(h) Capital management Capital management is a key contributor to shareholder value. The Bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the statement of financial positions, are: • to comply with the capital requirements set by the Banking and Financial Services Act, 1994 (as amended); • to safeguard the Bank’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; • to maintain a strong capital base to support the development of its business; • to allocate capital to businesses using risk-based capital allocation, to support the Bank’s strategic objectives, including optimising returns on shareholder and regulatory capital and • maintain the dividend policy and dividend declarations of the Bank while taking into consideration shareholder and regulatory expectations. Capital adequacy and use of regulatory capital are monitored regularly by Management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of Zambia on a monthly basis. Regulatory capital The Bank manages its capital base to achieve a prudent balance between maintaining capital levels to support business growth, maintaining depositor and creditor confidence, and providing competitive returns to shareholders. The Bank of Zambia requires each local bank to: (a) hold the minimum level of regulatory capital of K104,000 million; (b) maintain a ratio of total regulatory capital to the risk-weighted assets plus risk-weighted off-statement of financial position assets (the ‘Basel ratio’) at or above the required minimum of 10% (c) maintain primary or tier 1 capital of not less than 5% of total risk weighted assets (d) maintain primary or tier 1 capital of not less than 5% of total risk weighted assets; and (e) maintain total capital of not less than 10% of risk-weighted assets plus risk-weighted off-statement of financial position items. 56 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 2012 Regulatory capital (Continued) Regulatory capital adequacy is measured through two risk-based ratios: • Tier 1 capital (primary capital): common shareholders’ equity, qualifying preferred shares and minority interests in the equity of subsidiaries that are less than wholly owned. • Tier 2 capital (secondary capital): qualifying preferred shares, 40% of revaluation reserves, subordinated term debt or loan stock with a minimum original term of maturity of over five years (subject to a straight-line amortisation during the last five years leaving no more than 20% of the original amount outstanding in the final year before redemption) and other capital instruments which the Bank of Zambia may allow. The maximum amount of secondary capital is limited to 100% of primary capital. Risk-weighted assets are determined on a granular basis by using risk weights calculated from internally derived risk parameters within the regulatory requirements. The risk weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of – and reflecting an estimate of the credit risk associated with – each asset and counterparty. A similar treatment is adopted for off-Statement of financial position exposure, with some adjustments to reflect the more contingent nature of the potential losses. The table below summarises the composition of regulatory capital and the ratios of the Bank at 31 December: 2012 2011 K’ million K’ million Tier 1 capital 528,844 391,361 Tier 1 + Tier 2 capital 559,531 423,159 Risk-weighted assets On-balance sheet 2,859,618 2,118,259 Off-balance sheet 128,776 218,912 Total risk-weighted assets 2,988,394 2,337,171 Regulatory ratios Tier 1 (Regulatory minimum – 5%) 18% 17% Tier 1 + Tier 2 (Regulatory minimum – 10%) 19% 18%5 Interest income arising from: Loans and advances 322,973 322,368 Government and other securities 224,227 123,878 Cash and short term funds 2,110 4,234 Banks 1,566 3,053 550,876 453,533 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 57
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012 Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20125 Interest income (Continued) Interest income recognised on impaired financial assets was K638 million (2011: K nil million)6 Interest expense 2012 2011 K’miilion K’miilion Arising on: Customer deposits 63,716 47,099 Deposits by banks 25,210 12,857 Other - 183 88,926 60,1397 Net fees and commission income Others 100,206 84,583 Account maintenance fees 44,114 52,143 ATM issuer fee 33,335 27,785 Payflex 14,457 10,894 Arrangement and commitment fees 13,817 16,725 Letters of credit commissions 12,803 3,907 Commission on encashment of salary cheques 5,129 5,315 223,861 201,352 Fees and commission expenses (1,568) (354) 222,293 200,9988 Other operating income Gain on disposal of property and equipment 193 421 Technical assistant grant - 2,064 Gain on disposal of investment 7,710 - Sundary operating income 6,351 5,473 14,254 7,958 58 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 20129 Expenses by nature The following items are included within operating expenses: 2012 2011 K’miilion K’miilion Employee benefits expense (Note10) 235,725 207,550 Depreciation of property and equipment (Note 17) 39,442 26,664 Donations 2,709 1,934 Directors’ remuneration 1,639 1,293 Auditors’ remuneration 550 589 Others 195,979 183,222 476,044 421,25210 Employee benefits expense The following items are included within employee benefits expense: Salaries and allowances 215,390 188,186 National pension scheme contributions 5,761 5,008 Retirement benefit contribution (defined benefit scheme) (Note 22) 14,574 14,356 235,725 207,55011 Income tax expense Current tax 83,979 72,779 Over provision on tax in prior year 238 (5,171) Deferred tax (Note 18) (2,025) (3,183) 82,192 64,425 Withholding tax recoverable movement in the statement of financial position At beginning of year (29,505) (49,946) Recoveries offset against tax liability 28,178 42,703 Withholding tax suffered during the year (33,630) (22,262) At end of year (34,957) (29,505)2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 59
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201211 Income tax expense (Continued) 2012 2011 K’miilion K’miilion The movement during the year in the tax accounts is as follows: Tax payable at the beginning of the year 28,930 61,319 Payable in respect of the year 84,217 67,608 Tax paid during the year (64,508) (45,156) Reversal of prior year over provision - (12,138) WHT tax recoveries in respect of prior years (28,178) (42,703) Tax payable at the year end 20,461 28,930 The tax on the Bank’s profit before income tax differs from the theoretical amount that would arise using the statutory income tax rate as follows: Profit before income tax 238,280 184,938 Tax calculated at the statutory income tax rate of 35% (2011: 40%) 83,398 73,975 Tax effect of: Bank of Zambia impairment (1,120) (10,828) Overprovision of tax in prior year 238 (5,171) Income taxed separately - (14) Deferred tax income resulting from reduction in of tax rate - (3,555) Expenses not deductible for tax purposes (324) 10,018 Income tax expense 82,192 64,42512 Dividends per share The dividend paid in the year 2012 amounted to K32,340 million in respect of the year ended 31 December 2011 representing K28.00 per share. The Board has recommended a dividend amounting to K42,013million (4.85 per share) for the year ended 31 December 2012. Payment of dividends is subject to withholding tax (WHT) at the rate of 15% for resident and non-resident shareholders. However, where there is a double tax treaty, the WHT will be subject to the rates in the treaty. Furthermore the WHT is taxed at zero percent for individuals because the Bank is listed on the Lusaka Stock Exchange. 60 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2012 13 Cash and balances with Bank of Zambia 2012 2011 K’ million K’ million Cash in hand 134,768 133,842 Balances with Bank of Zambia 336,004 379,054 470,772 512,896 14 Balances with other banks Items in course of collection 10,354 13,192 Placements with other banks 15,585 173,750 Current balances with other Banks 25,939 186,942 Loans and advances to other banks 338,921 217,799 364,860 404,741 15 Investment securities Securities available-for-sale Government securities – at fair value - Maturing within 90 days of the date of acquisition 515 106,182 - Maturing after 90 days of the date of acquisition 660,223 700,590 - Equity Investment - 500 Total securities available-for-sale 660,738 807,272 Securities held-to-maturity Government securities – at amortised cost - Maturing after 90 days of the date of acquisition 1,283,537 752,007 Total investment securities 1,944,275 1,559,279 Current 1,579,415 1,053,454 Non-current 364,860 505,825 1,944,275 1,559,279 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 61
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 2012The movement in investment securities available-for-sale may be summarised as follows: Available-for-sale Held to maturity Total K’million K’million K’million At January 2011 343,460 612,792 956,252 Additions 801,925 209,925 1,011,850 Disposals (redemption) (343,460) (69,505) (412,965) Loss from changes in fair value/amortisation 5,347 (1,205) 4,142 Balance at end of year 807,272 752,007 1,559,279 At January 2012 807,272 752,007 1,559,279 Additions 659,925 745,024 1,404,949 Disposals (redemption) (807,272) (210,748) (1,018,020) Gain/(loss) from changes in fair value/amortisation 813 (2,746) (1,933) Balance at end of year 660,738 1,283,537 1,944,27516 Loans and advances to customers 2012 2011 K ‘million K’ million Overdrafts 500,287 406,006 Personal loans 857,879 686,442 Mortgages 115,352 83,556 Commercial loans 1,154,413 760,022 Others 57,768 43,363 Gross loans and advances 2,685,699 1,979,389 Less: Provision for impairment of loans and advances - Individually assessed (36,913) (80,376) - Collectively assessed (9,625) (8,277) (46,538) (88,653) 2,639,161 1,890,73662 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) for the year ended 31 December 2012 16 Loans and advances to customers (Continued) 2012 2011 K ‘million K’ million Current 470,772 714,904 Non - current 2,168,389 1,175,832 2,639,161 1,890,736 Movements in provisions for impairment of loans and advances are as follows: Personal Commercial Personal Commercial Total overdrafts overdraft loans loans K’ million K’ million K’ million K’ million K’ million At 1 January 2011 5,127 56,889 30,682 44,015 136,713 Provision for loan impairment 1,561 3,302 7,897 7,092 19,852 Write- offs - (35,109) (711) (32,092) (67,912) At 31 December 2011 6,688 25,082 37,868 19,015 88,653 Net impairment charge 1,561 3,302 7,897 7,092 19,852 At 1 January 2012 6,688 25,082 37,868 19,015 88,653 Provision for loan impairment 2,344 3,311 (1,436) (3,976) 243 Write-offs - (13,946) (19,609) (8,803) (42,358) At 31 December 2012 9,032 14,447 16,823 6,236 46,538 Net impairment charge 2,344 3,311 (1,436) (3,976) 243 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 63
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201216 Loans and advances to customers (Continued) All impaired loans have been written down to their estimated recoverable amount. The aggregate carrying amount of impaired loans at 31 December 2012 was K70.7billion (2011: K146.5 billion).17 Property and equipment Building at Motor Vehicle Fixture, fittings WIP Total revalued amount and equipment Cost or valuation K’ million K’ million K’ million K’ million K’ million Balance at 1 January 2011 94,634 12,439 147,877 27,678 282,628 Additions 17,202 1,232 39,066 7,262 64,762 Eliminated on reclassified as held for sale (1,189) - - - (1,189) Disposals (2,401) - - - (2,401) Revaluation increase 18,417 - - - 18,417 Balance at 31 December 2011 126,663 13,671 186,943 34,940 362,217 Additions 9,209 920 60,174 (8,776) 61,527 Write-offs - - (27,338) (1,247) (28,585) Balance at 31 December 2012 135,872 14,591 219,779 24,917 395,159 Accumulated depreciation and impairment Balance at 1 January 2011 6,303 9,566 96,821 - 112,690 Eliminated on disposal of assets (192) - - - (192) Eliminated on reclassification as held for sale (112) - - - (112) Charge for year 41 1,377 25,246 - 26,664 Write back (5,973) - - - (5,973) Balance at 31 December 2011 67 10,943 122,067 - 133,077 Charge for year 2,735 955 35,752 - 39,442 Eliminated on write-offs - - (19,489) (19,489)64 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 2012 Building at Motor Vehicle Fixture, fittings WIP Total revalued amount and equipment Cost or valuation (Continued) K’ million K’ million K’ million K’ million K’ million Balance at 31 December 2012 2,802 11,898 138,330 - 153,030 Carrying amount At 31 December 2011 126,596 2,728 64,876 34,940 229,140 At 31 December 2012 133,070 2,693 81,449 24,917 242,129 An independent valuation of the Bank’s buildings was performed by Messer’s Mak Associates Consulting to determine the fair value of the building as at 31 December 2011 and 31 December 2010. The valuation which conforms to Royal Institute of Chartered Surveyors’ Appraisal and Valuation Manual valuation standards as determined by reference to IAS 16 – Property, Plant and Equipment. Had the Bank buildings (other than Bank building classified as held for sale) been measured on historical cost basis, their carrying amount would be as follows: In accordance with section 193 of the Companies Act (as amended), 1994 the Register of Land and Buildings is available for inspection by members and their duly authorised agents at the Registered Records Office of the Bank. 2012 2011 K’ million K’ million Cost 35,300 26,103 Accumulated depreciation (2,200) (1,500) Net book amount 33,100 24,603 Non-current assets held for sale The movement is as follows: Reclassified from property and equipment 1,077 1,077 Disposals (841) - At end of year 236 1,077 As at the reporting date, the Bank had not yet disposed of properties with carrying value of K236 million. The Bank continues to seek buyers for these properties. 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 65
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201218 Deferred income tax Deferred income tax is calculated using the enacted income tax rate of 35% (2011: 40%). The movement on the deferred income account tax is as follows: 2012 2011 K’ million K’ million At start of year (33,425) (28,071) Credit to profit or loss (note 11) 2,025 3,183 Credit/(Charge) to equity 171 (8,537) At end of year (31,229) (33,425) The deferred income tax liability, deferred income tax credit to profit or loss , and deferred income tax to equity are attributable to the following items: At beginning Charged Charged At end of year to P/L to equity of year Year ended 31 December 2011 K’ million K’ million K’ million K’ million Deferred income tax liabilities Property and equipment (28,287) 2,236 (8,537) (34,588) (28,287) 2,236 (8,537) (34,588) Deferred income tax assets Other temporary differences 216 947 - 1,163 Net deferred income tax liability (28,071) 3,183 (8,537) (33,425) Year ended 31 December 2012 Deferred income tax liabilities Property and equipment (34,588) 1,903 171 (32,514) Deferred income tax assets Other temporary differences 1,163 122 - 1,285 Net deferred income tax liability (33,425) 2,025 171 (31,229) 66 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201219 Other assets 2012 2011 K’ million K’ million Other receivables 36,236 34,000 Visa Pos Acquirer 9,889 5,796 Staff loans mark to market (Note 32) 50,071 25,895 Premiums paid in advance 2,449 4,241 Prepayment 8,962 3,712 Investment Zambia Electronic Clearing House 307 307 Others 7,751 16,296 115,665 90,247 Current 105,776 70,339 Non-current 9,889 19,908 115,665 90,247 The investment in Zambia Electronic Clearing House Limited (“ZECHL”) represents the Bank’s contribution to its set up costs for the establishment of the National Switch to enhance ZECHL functionality, more specifically to support electronic point of sale transactions to help minimise cash based transactions and their attendant costs and risks. The principal activity of ZECHL is the electronic clearing of cheques and direct debits and credits in Zambia for its member banks. The ZECHL is funded by contributions from member banks. As there is no reliable measure of the fair value of this investment, it is carried at cost, and regularly reviewed for impairment at each reporting date.20 Customer deposits 2012 2011 K’ million K’ million Current and demand deposits 2,268,102 1,544,598 Savings accounts 1,386,401 1,010,926 Fixed deposit accounts 660,415 856,795 4,314,918 3,412,319 Current 4,311,418 3,402,319 Non-current 3,500 10,000 4,314,918 3,412,31921 Deposits from other banks Deposits 6,840 4 Items in course of collection 15,507 1,242 22,347 1,2462012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 67
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201222 Retirement benefit obligations 2012 2011 K’ million K’ million Reconciliation of funded status Present value of obligations (132,609) (129,632) Fair value of plan assets 129,336 115,030 Deficit (3,273) (14,602) Unrecognised losses 19,686 53,459 Prepaid pension cost 16,413 38,857 Asset ceiling restriction 3,273 (34,229) Prepaid pension cost after asset ceiling restriction 19,686 4,628 Changes in the present value of defined benefit obligation over the year At start of year 129,632 97,913 Current service cost 15,667 9,202 Interest cost 19,445 15,177 Actuarial gains/(losses) (12,311) 31,170 Benefits paid (19,823) (23,830) At end of year 132,610 129,632 Changes in the fair value of the plan assets during the year At start of year 123,472 113,819 Expected return on plan assets 17,254 17,073 Actuarial losses (13,428) (12,570) Employer contributions 14,574 14,356 Employee contributions 7,287 7,316 Adjustment for outstanding contribution - (1,135) Benefits paid (19,823) (23,830) At end of year 129,336 115,029 68 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201222 Retirement benefit obligations (Continued) Plan assets comprise: 2012 2012 2011 2011 K’ million % K’ million % Equity instruments 40,085 31 35,130 31 Debt instruments 23,275 18 21,660 19 Property 53,016 41 46,080 40 Other 12,962 10 12,159 10 129,338 100 115,029 100 The expected return on plan assets is determined by considering the expected returns available on the assets underlying the investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the statement of financial position date. Expected returns on equity and property investments reflect long-term real rates of return experienced in the respective markets. Benefit cost in the profit and loss for period ended 31 December 2012 2012 2011 K’ million K’ million Service cost 15,667 9,202 Contributions (7,287) (7,316) Interest cost 19,445 15,177 Expected return on assets (17,255) (17,073) Recognition of gains - (394) Change in asset ceiling restriction (2,886) 30,507 Profit and loss (expense) credit 7,684 30,103 Reconciliation of prepaid pension cost At start of year 13,070 20,375 Less pension expense during the year (7,684) (30,103) Plus employer contributions during the year 14,574 14,356 At year end 19,960 4,6282012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 69
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201222 Retirement benefit obligations (Continued) In line with the provision of IAS 19, the above asset on the defined benefit pension scheme has not been recognised since it is uncertain that any benefit will be available in the future. The principal actuarial assumptions used were as follows: Plan assets comprise: 2012 2011 - discount rate 15% 15% - expected rate of return on scheme assets 15% 15% - future salary increases 11% 11% - future pension increases 8% 8% Four year summary: 2012 2011 2010 2009 K’ million K’ million K’ million K’ million Present value of defined benefit obligation (132,608) (129,632) (97,913) (86,382) Fair value of plan assets 129,336 115,030 113,819 103,144 Deficit/(surplus) in the plan (3,272) (14,602) 15,906 16,76223 Other liabilities 2012 2011 K’ million K’ million Bills payable 1,455 1,636 Accrued expenses 67,109 49,509 Statutory payments 11,379 11,051 Visa transactions payable 28,690 10,022 Advance Loan repayment 33,948 19,149 Deferred arrangement fees 5,889 3,402 Incoming swifts transfers 30,746 - Sundry payables 21,082 15,676 200,298 110,445 Current 200,298 110,445 Non-current - - 200,298 110,445 70 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201224 Provisions for liabilities and charges Retirement Benefit Provisions for Total Obligation Legal Claims K’ million K’ million K’ million At 1 January 2011 34,194 10,628 44,822 Provision 1,371 1,100 2,471 Reclassification 4,700 - 4,700 Payment (21,074) (669) (21,743) Increase in defined benefit obligation 7,259 - 7,259 At 31 December 2011 26,450 11,059 37,509 At 1 January 2012 26,450 11,059 37,509 Provision 60 500 560 Payment (11,388) - (11,388) Decrease in defined benefit obligation (11,327) - (11,327) At 31 December 2012 3,795 11,559 15,35425 Borrowed funds 2012 2011 K’ million K’ million Financierings-Maatschappij Voor Ontiwikkelingslanden (FMO) 159,097 179,375 International Financing corporations (IFC) 129,875 128,122 Societe de Promotion et de Participation pour la Cooporation Economique (PROPARCO) 159,097 179,375 African Development Bank (ADB) 45,996 24,204 494,065 511,076 The movement during the period was as follows: Opening balance 511,076 161,894 Repayments during the year (48,710) (43,675) Additions 23,950 375,125 Exchange losses 7,749 17,732 Closing balance 494,065 511,0762012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 71
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201225 Borrowed funds (Continued) 2012 2011 Repayable as follows; K’ million K’ million 1-12 months 51,589 47,690 1-3 years 297,991 335,260 3-5 years 129,153 123,854 Above 5 years 15,332 4,272 494,065 511,076 The Bank obtained a foreign currency facility of USD$25 million from Nederlandse Financierings-Maatschappij Voor Ontiwikkelingslanden N.V (FMO) and Societe de Promotion et de Participation pour la Cooporation Economique (PROPARCO) in the year ended 31 December 2008 and secured a further $10 million and USD$50 million in 2009 and 2011 respectively. During the year 2010 and 2011, the Bank secured further amounts of USD$5 million and USD$50 million from African development Bank (ADB) and International Financing corporations (IFC) respectively. Under the terms of the FMO and PROPARCO loan, the Bank is required to observe inter alia, the following financial covenants: Covenants - Capital adequacy ratio: Minimum 10% - Open loan exposure ratio: not to exceed 25% - Related party lending ratio: not to exceed 20% - Net interest margin: Minimum 2% - Cost to income ratio: not exceed 70% after 2010 The only financial covenant to be observed under the terms of the ADB Loan is as follow: - Capital adequacy ratio: Minimum 10% Under the terms of the IFC loan, the Bank is required to observe inter-alia, the following covenants: Covenants - Capital adequacy ratio: Minimum 12% - Equity to asset ratio not less than 5% - Economic Group exposure ratio not more than 25% - Aggregate Large exposure ratio of not more than 400% - Related party exposure ratio of not more than 15% - Open credit exposure ratio of not more than 25%72 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201225 Borrowed funds (Continued) Covenants - Fixed assets plus equity investment ratio of not more than 35% - Aggregate foreign exchange exposure of not more than 25% - Single Currency Foreign Exchange Risk Ratio of not more 10% - Interest rate risk ratio of not more than 10% - Aggregate interest rate risk ratio of not more than 20% - Foreign Currency Maturity Gap of at least -150% - Aggregate negative maturity gap ratio of not less than -300% - Single industry exposure ratio of not more than 30%26 Share capital Number of shares Ordinary shares Share premium (millions) K’ million K’ million Balance at 31 December 2011 1,155 11,550 77,697 Balance at 31 December 2012 8,625 86,625 2,622 During the year, the Bank raised its authorised share capital from K11,550 million to K86,625 million in compliance with the Bank of Zambia minimum capital requirements announced on 30 January 2012. On 30 March, 2012 the Bank made a bonus issue of shares of 13 to 2 to the current shareholders out of share premium. The total authorised number of ordinary shares is 10,000 million (2011: 1,500 million) with a par value of K10 per share. 8,663 (2011: 1,155) million shares are issued and fully paid. Below is the shareholding structure 2012 2011 % % RABOBANK 45.59 45.59 Ministry of finnace and National planning (GRZ) 25.00 25.00 National Pension Scheme Authourity 8.91 8.91 LIZARA Investement (as nominies for ZNFU) 3.41 3.41 Africa Life Financial Services (AFLIFE managed funds) 3.04 3.01 Public Service Pension Fund 2.76 2.50 Mukuba Pension Trust Fund 2.27 2.20 Others 9.02 9.38 Total 100.00 100.00 The Shareholders with a holding of above 2% have been shown seperately and those with less 2% have been included in others.2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 73
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201227 Statutory reserve 2012 2011 K’ million K’ million At end of year 11,550 11,550 Transfer from retained earnings 75,075 - At end of year 86,625 11,550 The regulatory reserve represents an appropriation from retained earnings to comply with SI 182 of 195.28 General Banking Reserves 2012 2011 K’ million K’ million Balance brought forward 105,687 75,584 Transfer from retained earnings 3,729 30,103 At end of year 109,416 105,687 The balance in the general banking reserve represents the excess of impairment provisions determined in accordance with the Central Bank of Zambia Prudential Regulations over the impairment provisions recognised in accordance with (IFRS). Where the IFRS impairment exceeds the Central Bank provisioning, a reversal is done from general banking reserves to revenue reserves. 74 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 201229 Revaluation reserves Property and equipment 2012 2011 K’ million K’ million At begning of year 58,230 40,728 Transfer of excess depreciation (2,361) - Revaluation surplus - 27,293 Deferred tax on revaluation (note 18) - (8,537) Deferred tax on excess depreciation 826 - Transfer of revaluation after disposal (415) (1,254) At end of year 56,280 58,230 Available for sale financial assets At start of year 5,347 (1,276) Net (loss)/gain from changes in fair value (5,347) 5,347 Net gain/(loss) transferred to profit and loss account 813 1,276 At end of year 813 5,347 Total revaluation reserves Property and equipment 56,280 58,230 Available – for-sale-Investment 813 5,347 Deferred tax on revalued properties 171 - At end of year 57,264 63,57730 Off statement of financial position, financial instruments, contingent liabilities and commitments In common with other banks, the Bank conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties.2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 75
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201230 Off statement of financial position, financial instruments, contingent liabilities and commitments (Continued) 2012 2011 K’ million K’ million Contingent liabilities Acceptances and letters of credit 496,210 435,437 Guarantees and performance bonds 17,216 65,575 513,426 501,012 Nature of contingent liabilities An acceptance is an undertaking by a bank to pay a bill of exchange drawn on a customer. The Bank expects most acceptances to be presented, and reimbursement by the customer is normally immediate. Letters of credit commit the Bank to make payments to third parties, on production of documents, which are subsequently reimbursed by customers. Guarantees are generally written by a bank to support performance by a customer to third parties. The Bank will only be required to meet these obligations in the event of the customer’s default. During the ordinary course of business the Bank is subject to threatened or actual legal proceedings. All such material cases are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Bank incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to Management’s best estimate of the amount required to settle the obligation at the relevant report date. In some cases, it will not be possible to form a view, either because the facts are unclear or because further time is needed to properly assess the merits of the case. Provisions for litigation-related expenses totalled K11,559 million on 31 December 2012 (See Note 24). Other commitments 2012 2011 K’ million K’ million Undrawn stand-by facilities, credit lines and other commitments to lend 190,050 145,001 Nature of commitments Commitments to lend are agreements to lend to a customer in future subject to certain conditions. Such commitments are normally made for a fixed period. The Bank may withdraw from its contractual obligation for the undrawn portion of agreed overdraft limits by giving reasonable notice to the customer. 76 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201231 Analysis of cash and cash equivalents as shown in the statement cash flows statement 2012 2011 K’ million K’ million Cash and Balances with Bank of Zambia (Note 13) 470,772 512,896 Less: Statutory deposits requirement (see below) (173,833) (130,912) Government and other securities (Note 15) 515 106,182 297,454 488,166 Balances with other banks (Note 14) 364,860 404,741 Amounts due to Banking Institutions (Note 21) (22,347) (1,246) 639,967 891,661 For the purposes of the statement of cash flow, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with the Central Bank, Treasury bills and other eligible bills, and amounts due from other banks. Cash and cash equivalents exclude the cash reserve requirement held with the Bank of Zambia. Banks are required to maintain a prescribed minimum cash balance with the Bank of Zambia that is not available to finance the Bank’s day-to-day activities. The amount is determined as 8% of the average outstanding customer deposits over a cash reserve cycle period of one week.32 Related party transactions The Bank’s major shareholder is Rabo International Advisory Services (RIAS) BV a subsidiary of Cooperation Raiffeisen – Boerenleenbank CV (Rabobank) incorporated in The Netherlands. There are no other companies which are related to Zambia National Commercial Bank Plc, listed on the Lusaka Stock Exchange. The Government of the Republic of Zambia hold a 25% interest in the Bank. In the normal course of business, current accounts are operated and placings of foreign currencies are made with Rabobank at market rates (arms length). (a) Placement with shareholder 2012 2011 K’ million K’ million Placement to Rabobank - 66,625 Interest Income 15 232012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 77
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201232 Related party transactions (Continued) (b) Loans to Directors 2012 2011 K’ million K’ million Loans and advances to companies controlled by Directors 54 30 (c) Shareholder’s guarantee During the year under review, the Government guanteed the K400 billion advance (d) Employee loans At 31 December 2012, advances to employees amounted to K221,082 million (2011: K168,159 million). 2012 2011 K’ million K’ million Employee loans recoverable 221,082 168,159 Employee loans benefit at market value (50,071) (25,895) 171,011 142,264 Movement is staff loan benefit 25,895 19,908 Current year fair value 31,320 13,288 57,215 33,196 Amortisation to profit or loss (7,144) (7,301) 50,071 25,895 Employee loans and advances are offered on concessionary rates. House, car and personal development loans are enhanced by collateral of landed property, and in the case of a car loan, the vehicle registration certificate is endorsed with the Bank as absolute owner. Where staff loans are issued to members of staff at concessionary rates, fair value is calculated based on market rates. This will result in the long term staff loans benefit as shown above.78 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201232 Related party transactions (Continued) The prevailing interest rates on staff loans were as follows: 2012 2011 % % House 8 12 Personal loan 12 13 Car loan 8 12 Personal Development loan 12 15 2012 2011 K ‘million K’ million Interest income earned on staff loans 18,953 16,313 Provisions on loans given to related parties - - (e) Deposits from Directors Deposits from Directors - - (f) Key management personnel compensation Salaries and other short-term employment benefits 33,910 23,991 (g) Management fees paid to Rabo International Advisory Services (RIAS) 6,500 6,558 Fees are computed on the basis of the Management contract (h) Directors’ remuneration Sitting allowances 1,639 1,293 (i) Shareholder deposits Deposits 1,263,551 585,285 Interest expense incurred 5,564 1,1722012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 79
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201233 Segment reporting Following the management approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to the Executive Management Committee (the chief operating decision maker), which is responsible for allocating resources to the reportable segments and assesses its performance. All operating segments used by the Bank meet the definition of a reportable segment under IFRS 8. The Bank has two main business segments: · Retail Banking - incorporating private banking services, private customer current accounts, savings, deposits, investment savings products, safe custody, credit and debit cards, consumer loans and mortgages. · Corporate Banking - incorporating direct debit facilities, current accounts, deposits, overdrafts, loans and other credit facilities and foreign currency. Other Bank operations comprise treasury management, and credit and computer services, none of which constitute a separate reportable segment and business activities. As the Bank segment operations are all financial, with a majority of revenues deriving from interest and the Executive Management Committee relying primarily on net interest revenues to assess the performance of the segment, the total interest income for all reportable segments is presented on a net basis. The Bank’s management reporting is based on a measure of operating profit comprising net interest income, loan impairment charge, net fee and commission income and other income. The information provided about each segment is based on the internal reports about segment profit or loss, which are regularly reviewed by the Executive Management Committee. Business segments - Corporate Banking - Retail Banking80 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201233 Segment reporting (Continued) Business segments as at 31 December 2012 Corporate Banking Retail Banking Consolidated K’ million K’ million K’ million Net interest income 321,356 140,594 461,950 Net fee and commission income 79,255 143,038 222,293 Other operating income 30,324 - 30,324 Total income 430,935 283,632 714,567 Business segments as at 31 December 2012 Corporate Banking Retail Banking Consolidated K’ million K’ million K’ million Net interest income 259,030 134,364 393,394 Net fee and commission income 105,444 95,554 200,998 Other operating income 23,736 7,914 31,650 Total income 388,210 237,832 626,04234 Earnings per share Basic earnings per share is calculated by dividing the profit after tax attributed to equity holders of the Bank by weighted average number of shares in issue during the year. 2012 2011 K’ million K’ million Profit attributable to equity holders 156,088 120,513 Weighted number of ordinary shares in issue (thousands) 8,663 1,155 Basic/diluted earnings per share 18.02 104.34 There are no potentially dilutive shares, hence diluted earnings per share is the same as the basic earnings per share. 2012 Annual Report We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 81
    • ANNUAL REPORT AND FINANCIAL STATEMENTS | FOR THE YEAR ENDED 31 DECEMBER 2012Financial StatementsNOTES TO THE FINANCIAL STATEMENTS (CONTINUED)for the year ended 31 December 201235 Events after the reporting date The Government of the Republic of Zambia issued the Re-denomination of Currency Act, No. 8 of 2012. The re-denomination of the existing currency was to be done by dividing the nominal value of the existing currency by a multiplicand of one thousand so that one thousand Kwacha would yield a face value of one Kwacha. The Bank of Zambia issued a pronouncement under circular CB Circular No. 15/2012 that the rebased currency would become legal tender on 1 January, 2013. Consequently, the Bank of Zambia distributed the rebased currency to all commercial banks in the country in readiness for the launch of the currency rebasing programme. On 31 December 2012, the Bank received the new rebased currency amounting to ZMW163,302,550; equivalent to the old currency of K163,302,550,000 maintained off statement of financial position. ZMW2.5 million of the new rebased currency could not be accounted for during the transition, post-reporting date period. As at the date of these financial statements, the matter is still under investgation by both Management and the relevant Authorities 82 We have a responsible role to play in sustaining the environment: This paper is environmentally friendly. 2012 Annual Report
    • 5 Year Financial Trends STATEMENT OF PROFIT OR LOSS DETAILS 2012 2011 2010 2009 2008 K’m K’m K’m K’m K’m Interest income 550,876 453,533 368,023 363,553 280,398 Interest expenses (88,926) (60,139) (43,828) (38,053) (19,652) Net interest income 461,950 393,394 324,195 325,500 260,746 Commission and others 252,617 232,648 244,088 171,166 138,511 Operating income 714,567 626,042 568,283 496,666 399,257 Operating expenses (476,044) (421,252) (361,624) (305,038) (280,976) Impairment (243) (19,852) (34,364) (65,620) (32,231) Profit before tax 238,280 184,938 172,295 126,008 86,050 Tax charge (82,192) (64,425) (59,785) (46,664) (34,065) Profit for the year 156,088 120,513 112,510 79,344 51,985 STATEMENT OF FINANCIAL POSITION ASSETS 2012 2011 2010 2009 2008 K’m K’m K’m K’m K’m Cash and balances with Bank of Zambia 470,772 512,896 404,031 624,840 774,674 Balances with other banks 364,860 404,741 122,034 218,656 316,282 Investment in securities 1,944,275 1,558,779 956,252 822,693 634,403 Loans and advances to customers 2,639,161 1,890,736 1,725,504 1,162,564 1,000,953 Property and equipment 242,129 229,140 169,938 139,581 128,148 Investment properties - - - 11,812 14,480 Other assets 150,858 121,329 142,261 59,309 45,916 Total assets 5,812,055 4,717,621 3,520,020 3,039,455 2,914,856 LIABILITIES Customer deposits 4,314,918 3,412,319 2,591,242 2,292,358 2,325,203 Deposits from other banks 22,347 1,246 24,278 3,642 4,914 Borrowed funds 494,065 511,076 161,894 164,870 120,009 Other liabilities 267,342 210,309 266,228 182,908 142,449 Total liabilities 5,098,672 4,134,950 3,043,642 2,643,778 2,592,575 Equity Share capital 86,625 11,550 11,550 11,550 11,550 Reserves 626,758 571,121 464,828 384,127 310,731 Total equity and liabilities 713,383 582,671 476,378 395,677 322,281 Total 5,812,055 4,717,621 3,520,020 3,039,455 2,914,856
    • BRANCH / AGENCY CONTACT DETAILS LUSAKA PROVINCE UNZA AGENCY CENTRAL PROVINCE LIVINGSTONE BUSINESS CENTRE Tel: 294939 Tel: 321901/321903 AVONDALE BRANCH Fax: 294939 CHISAMBA BRANCH Fax: 320182/320006 Tel: 282749/281056 Tel: 212115/212697 Fax: 282462 WOODLANDS BRANCH Fax: 212115 LIVINGSTONE AIRPORT AGENCY Tel: 261835/261848 TEL: 321901-2 /321903 CAIRO ROAD BUSINESS CENTRE Fax: 261840 CHISAMBA AGENCY Tel: 228167/8/9 Tel: 611245 MAAMBA BRANCH Fax: 225186 COPPERBELT PROVINCE Tel: 78109/78122 KABWE BUSINESS CENTRE Fax: 78144 CIVIC CENTRE BRANCH CHINGOLA BRANCH Tel: 222051/222053 Tel: 253052/254624 Tel:311588/311216 Fax: 221603 MAZABUKA BRANCH Fax: 252761 Fax: 313891 Tel: 30050/30109 KAPIRI MPOSHI BRANCH Fax: 30072 CALL CENTRE KITWE BUSINESS CENTRE Tel: 271083/271084 5000 (MTN & AIRTEL) Tel: 21816/ 221344/ Fax: 271154 MONZE BRANCH Tel:1238881 226061 Fax: 224508 Tel: 50565/50411 E-mail:callcenter@zanaco.co.zm MKUSHI BRANCH Fax: 50227 KITWE INDUSTRIAL Tel: 362316/362352 EASYBANKING CENTRE BRANCH Fax: 362201 NAMWALA BRANCH Tel: 221325 Tel: 214196/214173 Tel: 60048/60026 Fax: 221320 Fax: 215727 NORTHERN PROVINCE Fax: 60090 FINDECO HOUSE BRANCH LUANSHYA BRANCH KASAMA BRANCH SIAVONGA BRANCH Tel: 228239/228239 Tel: 511570/511580 Tel: 222149/221770/221009 Tel: 511062/511379/511118 Fax: 221368 Fax: 510560 Fax: 221085 Fax: 511226 KAFUE BRANCH MUFULIRA BRANCH LUAPULA PROVINCE EASTERN PROVINCE Tel: 311601/311273 Tel: 412788/41066/410003 Fax: 311603 Fax: 411432 KAWAMBWA BRANCH CHIPATA BRANCH Tel: 960205/960041 Tel: 221478/222229 LUSAKA AIRPORT AGENCY MASALA AGENCY Fax: 960041 Fax: 221777 TEL: 271280 Tel: 660035 MANSA BRANCH CHADIZA AGENCY LUSAKA BUSINESS CENTRE NDOLA AIRPORT AGENCY Tel: 821711/821712/821351 Tel: 221005/221478 Tel: 221174/221042/221422 Tel: 612554 Fax: 821730 Fax: 232393 LUNDAZI BRANCH NDOLA BUSINESS CENTRE NCHELENGE AGENCY Tel: 480365/6/7 LUSAKA CENTRE BRANCH Tel: 610601/613849 Tel: 960205/960041 Fax: 480076 Tel: 227882/229173/221034 Fax: 612280 Fax: 221725/237807 MUCHINGA PROVINCE PETAUKE BRANCH NDOLA INDUSTRIAL Tel: 71365/71301 LUSAKA CITY MARKET BRANCH MPIKA BRANCH Fax: 71322 Tel: 286398 / 286399 / 286400 Tel: 650805-8/650424 Tel: 370620/370199 Fax: 286390 Fax: 650425 Fax: 370251 MFUWE BRANCH Tel: 45047/45038/45087 MANDA HILL BRANCH NDOLA WEST BRANCH MPIKA AGENCY Fax: 45038 Tel: 255524/255525 Tel: 610745/613885 Tel: 370357 Fax: 255528 Fax: 617758 WESTERN PROVINCE SOUTHERN PROVINCE MINISTRY OF FINANCE AGENCY NORTH WESTERN MONGU BRANCH Tel: 251815 / 255634 PROVINCE CHIRUNDU BRANCH Tel: 221144/221203 Tel: 515073/515065 Fax: 221224 NORTHMEAD BRANCH KASEMPA AGENCY Fax: 515093 Tel: 294936/294949/294955 Tel: 0974 479331 SENANGA BRANCH Fax: 294933 CHOMA BRANCH Tel: 230129/230130 SOLWEZI BRANCH Tel:20252/20292/20439 Fax: 222339 PREMIUM HOUSE BRANCH Tel: 821148/821535 Fax: 220309, Telex: ZA 24605 Tel: 227122/227117 Fax: 821976 Fax: 225179 KAZUNGULA AGENCY Cell: 0955 660079
    • HEAD OFFICE CONTACTS OUR PRODUCTS
    • We are proud to announce that Zanaco has been recognised as theBest bank in Zambia for the second year running. We have all ourstaff, customers and investors to thank for helping us achieve thisincredibly important accolade. With our wide coverage of 63 branchesand presence in 74 disctricts of Zambia, we continually strive to staytrue to our promise...Big. Stong. Reliable.Zanaco...The Best Bank in Zambia - Euromoney awards.