ANNUAL REPORT 2020

Independent Auditors’ Report

Independent Auditors’ Report on the Audit of the Consolidated Financial Statements to the Shareholders of Al Rajhi Banking and Investment Corporation (A Saudi Joint Stock Company)

Report on the Audit of the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of Al Rajhi Banking and Investment Corporation (the “Bank”) and its subsidiaries (collectively referred to as the “Group”), which comprise the consolidated statement of financial position as at
31 December 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, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2020, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRS”) as endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by the Saudi Organization 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 that are 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 for the current year. 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 key audit 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 financing
As at 31 December 2020, the Group’s gross financing amounted to SAR 323,183.5 million (2019: SAR 256,702.4 million), against which an expected credit loss (“ECL”) allowance of SAR 7,471.3 million (2019: SAR 7,019.6 million) was recorded.

We considered this as a key audit matter, as the determination of ECL involves significant management judgement, and this 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 judgment needed to determine the ECL under the requirements of IFRS 9 – Financial Instruments (“IFRS 9”). The key areas of judgment include:

  1. Categorisation of financing into Stages 1, 2 and 3 based on the identification of:
    1. exposures that have a significant increase in credit risk (“SICR”) since their origination; and
    2. individually impaired/defaulted exposures.
    In accordance with the requirements of IFRS 9, the Group measures ECL based on the credit losses expected to arise over the next twelve months (‘12 month ECL’), unless there has been a significant increase in credit risk since origination or default, in which case, the allowance is based on the ECL expected to arise over the life of the financing (‘Lifetime ECL’).

    The Group has applied judgments to identify and estimate the likelihood of borrowers experiencing SICR, notwithstanding the government support programs that resulted in repayment deferrals to certain segments of counterparties. The repayment deferrals were not deemed to have triggered SICR by themselves in isolation of other factors.
  2. Assumptions used in the ECL model for determining probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), including but not limited to assessment of the financial condition of counterparties, expected future cash flows and developing and incorporating forward looking assumptions, macroeconomic factors and the associated scenarios and expected probabilities.
  3. The need to apply post model overlays using expert credit judgment to reflect all relevant risk factors that might not be captured by the ECL model. The application of these judgments, particularly in light of the global pandemic, have given rise to greater estimation uncertainty around ECL and therefore affected the associated audit risk thereon as at 31 December 2020.
Refer to the summary of significant accounting policy note 3d)5) for the impairment of financial assets; note 2d)i) which contains the disclosure of critical accounting judements, estimates and assumptions relating to impairment losses on financial assets and the impairment assessment methodology used by the Group; note 7-2 which contains the disclosure of impairment against financing; note 27-1a) for details of credit quality analysis and key assumptions and factors considered in determination of ECL; and note 38 for impact of the COVID-19 pandemic on ECL.

  • We obtained and updated our understanding of management’s assessment of the ECL allowance in respect of financing, including the Group’s internal rating model, accounting policy and methodology, as well as any key changes made in light of the COVID-19 pandemic.
  • We compared the Group’s accounting policy and methodology for ECL allowance 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) in relation to:
    • the ECL model (including governance over the model, its validation, approval of key assumptions and post model overlays, if any);
    • 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 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 models and considered these assigned ratings in light of external market conditions and available industry information, in particular with reference to the impacts of the COVID-19 pandemic, and also assessed that these were consistent with the ratings used as inputs 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 default and the identification of individually impaired exposures; and their classification into stages. Further, for a sample of exposures, we assessed the appropriateness of the corresponding staging classification, including customers who were eligible for deferral of instalments under government support programs (with specific focus on customers operating in sectors most affected by the COVID-19 pandemic).
  • We assessed the governance process established by the Group and the qualitative factors considered by the Group when applying any overlays or making any adjustments 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, including IT specialists, to assist us in reviewing ECL model calculations, evaluating inputs and assessing the reasonableness of assumptions used, particularly around macroeconomic variables, macroeconomic scenarios and probability weights.
  • We assessed the adequacy of related disclosures in the consolidated financial statements.

 

SAMA support program and related government grants In response to 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 (“MSMEs”). The PSFSP included the deferred payments program, whereby the Bank deferred the instalments payable by MSMEs falling due during the period from 14 March 2020 to 31 March 2021.

In order to compensate the Bank with respect to the losses incurred in connection with the PSFSP and the liquidity support programme, the Bank has received profit free deposits of varying maturities amounting in aggregate to SAR 8.85 billion. The difference between the fair value of such deposits at initial recognition, determined using market rates of deposits of similar value and tenor, and their face value has been considered as a government grant and accounted for in accordance with International Accounting Standard 20: Government Grants (“IAS 20”).
  • We obtained an understanding of the various programmes and initiatives taken by SAMA during the year ended 31 December 2020 in response to COVID-19, and assessed the objectives of the deposits received by the Group in relation thereto to assess the appropriateness of the application of IAS 20 (and recogntion of government grant) by the Group.
  • We checked the accuracy of the government grants computation (including discount rates used) and assessed the appropriateness of the timing of recognition of the goverment grants by the Group.
  • We assessed the appropriateness of related disclosures in the consolidated financial statements.

We considered the accounting for the deposits received under the SAMA support programme as a key audit matter because:

  1. these deposits represent significant events and material transactions that occurred during the year, and thereby required significant auditors’ attention; and
  2. the recognition and measurement of government grants have involved significant management judgment, including but not limited to:
    1. determining the appropriate discount rate to be used; and
    2. identifying the objective of each individual deposit to determine the timing of recognition of the associated grant.
Refer to the significant accounting policy note 3a to the consolidated financial statements relating to government grant accounting; and note 38 which contains the disclosure of SAMA support programmes and details of the government grants received over the year from SAMA

Other Information included in the Group’s 2020 Annual Report

Management is responsible for the other information. Other information consists of the information included in the Group’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 Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS 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 management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intend to liquidate the Group or to cease operations, or have 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 that are 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 the International Standards on Auditing that are 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 the internal controls relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal controls.
  • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the management.
  • Conclude on the appropriateness of the management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our 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 the Group’s audit. We remain jointly responsible for our audit opinion.

We communicate with those charged with governance regarding, amongst 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 communicate to 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 for the year ended 31 December 2020 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 Group was 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 for the year ended 31 December 2020.

KPMG Al Fozan & Partners
Certified Public Accountants

P. O. Box 92876
Riyadh 11663
Kingdom of Saudi Arabia
Ernst & Young

P. O. Box 2732
Riyadh 11461
Kingdom of Saudi Arabia
Dr. Abdullah Hamad Al Fozan
Certified Public Accountant
License no. 348
Rashid S. Al Rashoud
Certified Public Accountant
License No. 366
29 Jumada Thani 1442H
(11 February 2021)

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