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Annual Report
2020

  • RIYAD BANK ANNUAL REPORT 2020
  • THE CORE OF OUR BUSINESS
  • FOOTSTEPS ON A JOURNEY
  • CHAIRMANS MESSAGE
  • GLOBAL AND LOCAL ECONOMY OVERVIEW
  • STRATEGY AND OBJECTIVES
  • MANAGEMENT DISCUSSION AND ANALYSIS
  • STEWARDSHIP
  • FINANCIAL REPORTS - CONSOLIDATED
  • CORPORATE INFORMATION

    • Independent Auditors’ Report

    to the Shareholders of Riyad Bank

    (A Saudi Joint Stock Company)

    Report on the audit of the consolidated financial statements

    Opinion

    We have audited the consolidated financial statements of Riyad Bank (the “Bank”) and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statement of financial position as at December 31, 2020, and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in shareholders’ equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

    In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2020, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”) as endorsed in the Kingdom of Saudi Arabia (“KSA”) and other standards and pronouncements as endorsed by the Saudi Organisation for Certified Public Accountants (SOCPA) (collectively referred to as “IFRS as endorsed in KSA”).

    Basis for Opinion

    We conducted our audit in accordance with International Standards on Auditing as endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the professional code of conduct
    and ethics, as endorsed in the Kingdom of Saudi Arabia, that are relevant to our audit of the consolidated financial statements, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

    Key Audit Matters

    Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, a description of how our audit addressed the matter is provided in that context:

    Key audit matter How our audit addressed the key audit matter
    Expected credit loss allowance against loans and advances As at 31 December 2020, the gross loans and advances of the Group were SAR 195.9 billion against which an expected credit loss (“ECL”) allowance of SAR 4.5 billion was maintained. We considered ECL allowance against loans and advances as a key audit matter, as the determination of ECL involves significant management judgement and has a material impact on the consolidated financial statements of the Group. Moreover, the COVID-19 pandemic has resulted in heightened uncertainty regarding the economic outlook in particular and hence has increased the levels of judgement needed to determine the ECL. The key areas of judgement include:
    • We obtained and updated our understanding of management’s assessment of ECL allowance against loans and advances including the Group’s internal rating model, accounting policy, model methodology including any key adjustments made in light of the COVID-19 pandemic.
    • We compared the Group’s accounting policy for ECL allowance and the ECL methodology with the requirements of IFRS 9.
    • We assessed the design and implementation, and tested the operating effectiveness of the key controls (including relevant IT general and application controls) over:
    • the ECL model including governance over the model and its validation including approval of key assumptions and management overlays, if any;
    1. Categorisation of loans into Stages 1, 2 and 3 based on the identification of:
      1. exposures with a significant increase in credit risk (“SICR”) since their origination; and
      2. individually impaired/defaulted exposures.
      The Group has applied additional judgements to identify and estimate the likelihood of borrowers that may have experienced SICR notwithstanding the various government support programs that resulted in deferrals to certain counterparties. The deferrals were not deemed to have triggered SICR by themselves.
    2. Assumptions used in the ECL model for determining probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”) include but are not limited to an assessment of the financial condition of the counterparty, expected future cash flows and developing and incorporating forward looking assumptions, macroeconomic factors and the associated scenarios and expected probabilities weightages.
    3. The need to apply management overlays using expert credit judgement to reflect all relevant risk factors that might not be captured by the ECL model.
    Application of these judgements, particularly in light of the global pandemic, have given rise to greater estimation uncertainty and the associated audit risk around ECL calculations as at 31 December 2020. Refer to the summary of significant accounting policy note 3 (e) for the impairment of financial assets; note 2 (d) (i) which contains the disclosure of critical accounting judgements, estimates and assumptions relating to impairment losses on financial assets and the impairment assessment methodology used by the Group; note 8 which contains the disclosure of impairment against loans and advances; and note 30.3 for details of credit quality analysis and key assumptions and factors considered in determination of ECL.

    SAMA support program and related government grant
    In response to the COVID-19 pandemic, the Saudi Central Bank (SAMA) launched a number of initiatives including the liquidity support programme for banks and the Private Sector Financing Support Program (“PSFSP”). The PSFSP was launched in March 2020 to provide the necessary support to the Micro Small and Medium Enterprises (“MSME”). The PSFSP included deferred payments program whereby the Bank deferred the instalment payable by MSMEs during a period from 14 March 2020 to 31 March 2021.

    In order to compensate the Group with respect to the losses incurred in connection with the above PSFSP, and the liquidity support programme, the Group has received various interest/profit free deposits of varying maturities. The difference between market value of deposits calculated using market rates of deposits of similar size and tenure and the interest/profit free deposits has been considered as a government grant and accounted for in accordance with the International Accounting Standard 20: Government Grants (“IAS 20”).
    • the classification of borrowers into various stages and timely identification of SICR and the determination of default/individually impaired exposures;
    • the IT systems and applications underpinning the ECL model; and
    • the integrity of data inputs into the ECL model.
    • For a sample of customers, we assessed:
    • the internal ratings determined by management based on the Group’s internal rating model and considered them in light of external market conditions and available industry information.
      In particular, we considered the impact of the COVID-19 pandemic and also assessed that
      these internal ratings were in line with the ratings used as input in the ECL model;
    • the staging as identified by management; and
    • management’s computations for ECL.
    • We assessed the appropriateness of the Group’s criteria for the determination of SICR and identification of “default” or “individually impaired” exposures; and their classification into stages. Further, for a sample of exposures, we assessed the appropriateness of the staging classification of the Group’s loan portfolio including for customers who were eligible for deferral
      of installments under government support programs with specific focus on customers operating in sectors most affected by the COVID-19 pandemic.
    • We assessed the governance process implemented and the qualitative factors considered by the Group when applying any management overlays or making any adjustment to the output from the ECL model, due to, data or model limitations or otherwise.
    • We assessed the reasonableness of the underlying assumptions used by the Group in the ECL model including forward looking assumptions keeping in view the uncertainty and volatility in economic scenarios
      due to the COVID-19 pandemic.
    • We tested the completeness and accuracy of data underpinning the ECL calculations as at 31 December 2020.
    • Where relevant, we involved our specialists to assist us in reviewing model calculations, evaluating interrelated inputs and assessing reasonableness of assumptions used in ECL model particularly around macroeconomic variables, forecasted macroeconomic scenarios and probability weights and of assumptions used in management overlays.
    • We assessed the adequacy of disclosures in the consolidated financial statements.
    We obtained an understanding of the various programs and initiatives taken by SAMA and assessed the objectives of the various deposits received by the Group in order to assess whether the IAS 20 criteria were met for government grant recognition.
    As of 31 December 2020, the Bank has received SR 26.2 billion under the various SAMA support programs. We considered the accounting treatment of the SAMA support programme and government grant as a key audit matter because:
    1. These represent significant events and material transactions that occurred during the period and thereby required significant auditors’ attention; and
    2. the recognition and measurement of the government grant involved significant management judgement including but not limited to:
      • determining the appropriate discount rate to be used to calculate the grant income on the deposit; and
      • identifying the objective of each individual deposit to determine the timing of recognition of the grant.
    Refer to the significant accounting policy note 3 (g) to the consolidated financial statements relating to government grant accounting, note 2 (d) (vi) which contains the disclosure of critical accounting judgements, estimates and assumptions relating to government grant recognition and note 38 which contains the disclosure of SAMA support programs and details of the government grant received over the year from SAMA.

    Fees from banking services
    The Group charges, and recognises, administrative fees upfront to borrowers on loan financing. All such fees are an integral part of generating an involvement with the resulting financial instrument and therefore, all such fees should be considered in making an adjustment to the effective yield and such adjustment should be recognised within Special Commission Income.

    However, due to the large volume of transactions with mostly individually insignificant fee amounts, management has historically used certain assumptions and judgments in relation to the recognition of such fees which are recorded within “Fee and Commission Income, net”. During the year, management implemented changes to their processes for future transactions so as to defer such fees on each transaction and recognise them either as an adjustment to the effective yield or on straight line basis.

    We considered this as a key audit matter since the use of management assumptions and judgments could result in material over / understatement of the Group’s profitability.

    Refer to the notes 3 (h) to the consolidated financial statements related to accounting policies for special commission income and note 2 (d) (v) which contains the disclosure of critical accounting judgements, estimates and assumptions relating to the fee income.     		We obtained the details of the deposit amounts received during the year by the Group.

    We assessed the reasonableness of the relevant discount rate used for the computation of government grant.

    We tested the accuracy of the government grant computation and assessed the basis for the timing of recognition of the government grant being at a point in time or over a period thereby matching the expense/ related costs for which the government grant was intended to compensate.

    We assessed the disclosures included by management in the consolidated financial statements in relation to government grant as required by IAS 20.

    We performed the following procedures:
    • We evaluated the assumptions and judgments used by management for recognizing the administrative fees charged upfront to the borrowers.
    • We obtained management’s assessment of the impact of the use of assumptions and judgments and:
      • on a sample basis, traced the historical and current year data used by management in their assessment to the underlying accounting records;
      • considered the impact of the changes in processes on management’s assessment; and
      • assessed the impact on the recognition of fee and commission income and special commission income.

     

    Other Information included in the Bank’s 2020 Annual Report

    The Board of Directors of the Bank (the “Directors”) are responsible for the other information. The other information consists of the information included in the Bank’s 2020 annual report, other than the consolidated financial statements and our auditors’ report thereon. The annual report is expected to be made available to us after the date of this auditors’ report.

    Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

    In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

    When we read the other information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

    Responsibilities of the Directors and Those Charged with Governance for the Consolidated Financial Statements

    The Directors are responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the IFRSs as endorsed in KSA, the applicable requirements of the Regulations for Companies, the Banking Control Law in the Kingdom of Saudi Arabia and the Bank’s By-laws, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

    In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

    Those charged with governance are responsible for overseeing the Group’s financial reporting process.

    Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

    Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing as endorsed in the Kingdom of Saudi Arabia, will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

    As part of an audit in accordance with International Standards on Auditing as endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

    • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
    • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
    • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.
    • Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.
    • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
    • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

    We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

    We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

    From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

    Report on other legal and regulatory requirements

    Based on the information that has been made available to us, nothing has come to our attention that causes us to believe that the Bank is not in compliance, in all material respects, with the applicable requirements of the Regulations for Companies, the Banking Control Law in the Kingdom of Saudi Arabia and the Bank’s By-laws in so far as they affect the preparation and presentation of the consolidated financial statements.

    Ernst & Young & Co. (Certified Public Accountants)
    P. O. Box 2732
    Riyadh 11461
    Kingdom of Saudi Arabia

    PricewaterhouseCoopers
    P. O. Box 8282
    Riyadh 11482
    Kingdom of Saudi Arabia

    Waleed G. Tawfiq
    Certified Public Accountant
    License No. 437

    Mufaddal A. Ali
    Certified Public Accountant
    License No. 447

    12 Rajab 1442H
    (24 February 2021)

     

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