Burgan Bank July 2008

Transcription

1 Burgan Bank July 2008 Capital Intelligence (Cyprus) Ltd., Oasis Complex, Block E, Gladstone Street, P.O. Box 53585, CY 3303 Limassol, Cyprus, Telephone: , Facsimile: Web site:

2 Bank Report Burgan Bank Kuwait July 2008

3 Capital Intelligence Ltd Oasis Complex, Block E, Gladstone Street PO Box CY 3303 Limassol Cyprus Telephone: Facsimile: Web site: A Capital Intelligence rating is not a recommendation to purchase, sell, or hold a security of the institution, inasmuch as it does not comment as to market price or suitability for a particular investor. Reproducing or distributing this publication without the publisher s consent is prohibited. Information has been obtained by Capital Intelligence from sources believed to be reliable. However, because of the possibility of human or mechanical error by our source, Capital Intelligence, or others, Capital Intelligence does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any error or omissions or for the results obtained from use of such information. Copyright Capital Intelligence Limited 2008 Contact: Don Kahrs Tel: don.kahrs@ciratings.com Zafer M. Diab Tel: zafer.diab@ciratings.com

4 Ref: KW0307BR/07-08 RATINGS BURGAN BANK SAK Kuwait July 2008 FINANCIAL HIGHLIGHTS Current Last Changed From Date Sovereign Long-Term: AA- A+ Apr 07 Short-Term: A1+ A1 Apr 07 Outlook Stable Foreign Currency Long-Term: A- BBB+ Apr 06 Short-Term: A2 - - Financial Strength A- BBB Apr 06 Support Outlook Foreign Currency Stable Positive Apr 05 Financial Strength Stable Positive Apr 06 USD (mn) KWD (mn) USD KWD KWD KWD Total Assets 10,431 2,848 2,210 1,890 Net Loans 5,734 1,566 1, Total Deposits* 8,720 2,381 1,827 1,528 Total Capital 1, Gross Income Net Income Exchange Rate: USD/KWD *Customer + Interbank % NPL / Gross Loans LLR / NPL Capital Adequacy Ratio Net Loans / Stable Funds Interest Differential Cost / Income ROAA RATINGS DRIVERS Supporting the Rating Best asset quality ratios in peer group Sound capital position Effective cost control and increasing profitability Strong management team Supportive and financially sound majority shareholder Constraining the Rating Tightening liquidity Margin pressures due to increased competition in the limited domestic market Decision to acquire regional banks may pose integration challenges RATING RATIONALE Burgan Bank s (BB) financial profile continued to strengthen in 2007 as evidenced by both its steadily improving profitability and enhanced asset quality. The Bank delivered a record net profit last year (as well as record quarterly earnings the first three months of 2008), generating the second highest ROAA in its peer group. In addition, BB achieved the best loan asset quality ratios in the Kuwaiti banking sector. While the Bank s liquidity tightened in concert with that of the domestic banking industry, all of BB s key liquidity ratios remained within comfortable parameters. BB s capital adequacy remained sound. The Bank benefits from a financially strong, supportive and well-regarded majority shareholder. In a recently announced development, the Bank has agreed to acquire four MENA region banking units from its KIPCO Group sister bank, Bahrain-based United Gulf Bank. Upon completion, which is subject to regulatory approvals, this transaction will transform the Bank from a purely domestic player into one of the most geographically diversified Kuwaiti-controlled commercial banks within the greater MENA region. And while BB should reap material long-term financial benefits through this acquisition, the successful integration of these new businesses into the Bank s existing franchise may pose considerable challenges to BB s management team. 1

5 Based on the above, CI affirms the Bank s Foreign Currency Long-Term rating of A- and its Foreign Currency Short-Term rating of A2. The Bank s Financial Strength rating is also affirmed at A-. Support rating remains at 3 and the Outlook for all ratings remains Stable. BANK HISTORY AND STRATEGIES Bank History Burgan Bank (BB) commenced operations in In 1997 the Bank was privatised with the Kuwait Projects Company Holding K.S.C. (the KIPCO Group) obtaining control. During 2007 KIPCO increased its ownership interest in BB from 33.87% to its current level of 50.24%, cementing BB s status as a core member of the KIPCO Group. The only other shareholder with an interest above 5% is Wafra International Investment Company. The KIPCO Group is one of the largest diversified holding companies in the MENA region with assets in excess of USD21 billion under its control. The Group has substantial ownership interests in a portfolio of over fifty companies across twenty-one countries. KIPCO s main business sectors are financial services and media, but it is also active in real estate investment and development, industry, healthcare and management consulting. In May 2008, the Bank announced that it had agreed to buy United Gulf Bank s (UGB) holdings in four MENA region financial institutions for total consideration of USD725mn. The Bank will finance this transaction through the issue of KWD200mn (USD732.6mn) of new Tier 1 equity capital. This transaction is supported by KIPCO, the parent company of both BB and UGB, and follows extensive due diligence by BB and its external advisers on how to best implement the Bank s strategy for regional expansion. The proposed transaction, for which BB has received regulatory approval from the authorities in Kuwait, Bahrain and Jordan, but awaits final approval from the authorities in Iraq, Algeria and Tunisia, will allow BB to become one of the most geographically diversified Kuwaiti-controlled commercial banks within the MENA region. More specifically, the deal entails BB acquiring UGB s 43.86% interest in Amman-based Jordan Kuwait Bank, 76.56% stake in Tunis International Bank, 60.00% holding of Algeria Gulf Bank and 45.31% interest in Bank of Baghdad. This is in addition to the BB holding of 7.13% interest in Jordan Kuwait bank, 10% interest in Tunis International Bank and its intention to purchase an additional 5.3% interest in Bank of Baghdad. On receipt of all regulatory approvals and completion of the transaction, BB will have more than 50% interest in all the four Banks. The largest asset in this acquisition is the stake in Jordan Kuwait Bank, which accounts for approximately three-quarters of the total assets to be acquired by the Bank in this transaction. BB plans to complete this transaction during Q3/Q and consolidate these entities into its balance sheet by end In total, BB will be acquiring over KWD1.0 billion (USD3.7 billion) of regional banking assets in this transaction, of which Jordan Kuwait Bank (JKB) accounts for approximately KWD750mn (USD2.8 billion). With BB projected to have a post-transaction balance sheet of KWD4.7 billion, JKB itself will account for roughly 15% of BB s new total asset base. CI s review of JKB s end 2007 audited financial statements reveals that its financial profile is sound and characterised by very good loan asset quality, satisfactory capital adequacy and profitability as well as acceptable liquidity. Therefore, BB s overall post-transaction financial profile promises to remain sound. The purchase of holdings in these four banks is the first step in BB s concerted regional expansion strategy with the Bank s management also considering entering additional regional markets such as Egypt, Syria and the United Arab Emirates. From a KIPCO Group strategic point of view, this transaction is structured and designed to transfer UGB s commercial banking assets to BB to allow UGB to concentrate on its core investment banking and asset management activities, while at the same time jump-start BB s regional expansion. 2

6 Current Business Model On the back of its forthcoming acquisition of United Gulf Bank s holdings in four regional banks, BB s traditional domestic business model is set to be fundamentally transformed. Nevertheless the Bank s very well established domestic banking franchise provides a stable foundation to support its growing regional operations. The Bank will continue to focus on developing its three main business segments both domestically and regionally: Retail/consumer banking Through its domestic network of twenty two branches, which is supplemented by over one hundred ATM s, provide of a range of current and savings accounts, private banking services, investment and insurance products, consumer and housing loans as well as debit and credit cards. Commercial/corporate banking Offer a variety of wholesale current accounts and investment products, commercial loans and overdraft facilities as well as syndicated lending operations. Treasury/investment banking Conduct money market and foreign exchange trading activities, fund management as well as a range of investment banking services. Principal Business Strategies Along with initial expansion into the MENA region through the forthcoming acquisition of United Gulf Bank s holdings in four regional banks, BB s stated business strategies include the following ongoing initiatives: Develop private banking franchise by offering more diversified and innovative set of investment products and services Enhance the depth and breadth of Treasury operations Expand regional syndicated lending activity Continue to expand domestic retail banking franchise through the opening of new branches and development of enhanced product and service delivery platforms and channels Explore additional regional opportunities in markets such as Egypt, Syria and the United Arab Emirates as well as other select North African markets SIGNIFICANT RECENT EVENTS / ISSUES / DEVELOPMENTS The Central Bank of Kuwait (CBK) has issued two important circulars recently, which will impact the performance of the Kuwaiti banking sector, as follows: Retail lending In response to rapid growth in consumer lending in 2007 and with effect from 30 March 2008, the CBK issued new retail lending guidelines designed to tighten regulatory measures applicable to new consumer loans, as follows: Reduction of maximum interest margin above the discount rate from 4% p.a. to 3% pa. Prohibition of banks from granting consumer loans with monthly repayments that exceed 40% of a borrower s monthly salary; previously the cap was set at 50% of a borrower s monthly salary. In addition, the cap for loans to pensioners was lowered from 50% to 30%. Amendment of method of charging interest by fixing the interest rate for five years from the date of the loan. After five years the interest rate is subject to review, but cannot be adjusted by more than 2% pa. As per the previous policy, the interest rate on a retail loan was changed whenever the discount rate was adjusted. Abolition of upfront fees on consumer loans. 3

7 Revision of instructions on Basel II capital adequacy ratio The CBK issued revised instructions, with effect from 30 June 2008, regarding the calculation of capital adequacy ratios as follows: Increase of the risk weighting for consumer loans, housing loans and debit balances on credit cards from 75% to 100%, while maintaining the 75% risk-weighting on loans of less than KWD250,000 granted to SMEs. Risk-weighting of 150% to be applied on credit facilities granted by banks to finance real estate activity (with the exception of mortgage lending for private housing) and credit facilities granted to finance the purchase of shares. Interim profits shall be excluded from the calculation of the Tier II component of a bank s capital base. KEY FINANCIAL ISSUES The 2007 financial statements of BB have been prepared by management in accordance with International Financial Reporting Standards (IFRS) as adopted for use in Kuwait. Ernst & Young and PricewaterhouseCoopers have jointly audited the Bank s financial statements in accordance with International Standards on Auditing and have issued an unqualified co-opinion. FINANCIAL PERFORMANCE FYE 2007 Profitability After three years of solid year-on-year growth, and in large part due to margin compression, net interest income fell Following a strong 42.0% increase in 2006, BB s interest income advanced in 2007 by a still solid 29.2% to KWD167.7mn (USD614.3mn) on the back of significant increases in both net loans and advances as well as deposits with banks. However, interest expense climbed by a substantial 52.5% to KWD116.6mn (USD427.1mn), causing the Bank s net interest income to decline marginally by 4.3% to KWD51.1mn (USD187.2mn). Due to changes in regulatory measures concerning retail lending as detailed earlier, BB was required to give-up KWD10.6mn (USD38.8mn) being the present value of future interest income cash flow Breakdown of Income KWDmn 5% 4% 2.7% 3.0% 3% 2.3% 1.6% 2% 1% 0% Non Interest Income Net Interest ROAA Lowest interest differential in its peer group In common with its peer group, BB s funding cost has been drifting upward over the last four years and reached an above peer group average of 5.39% in 2007; an increase of 103 basis points from As BB could only manage to improve its interest on earnings assets ratio by 32 basis points to 6.95% in 2007, the Bank s interest differential fell materially to a sector-low 1.56% versus 2.27% in Growth in non-interest income jumps driven by strong gains in dealing securities income and foreign exchange trading income In aggregate, BB s non-interest income climbed by 59.6% to KWD54.6mn (USD199.9mn) and accounted for a substantial 51.6% (2006: 39.0%) of the Bank s gross income, representing the second highest percentage contribution in the conventional Kuwaiti commercial bank peer group. 4

8 The Bank experienced a 14.5% decline in net fees and commissions income to KWD17.1mn (USD62.6mn) in 2007 as the Central Bank of Kuwait restricted banks from collecting certain fees related to retail lending operations. This drop, along with the 83.9% decline in other income to KWD868,000 (USD3.2mn), was easily offset by a substantial gain in dealing securities income, which surged by 965.8% to KWD27.4mn (KWD100.3mn). This increase resulted from the Bank s decision to dispose of non-strategic holdings of securities. The Bank also benefited from a more than eight-fold jump to KWD23.9mn (USD87.5mn) in net mark-to-market gains derived from the Bank s portfolio of AFS investments. In addition, BB s foreign exchange trading income more than doubled in 2007 to KWD4.4mn (USD16.0mn), while dividend income rose by a more moderate 15.3% to KWD4.9mn (USD17.9mn). Gross income registers slower, but still solid growth Driven by the big jump in non-interest income, BB generated a 20.7% growth in gross income to KWD105.7mn (USD387.1mn) in This compares to growth of 25.8% in 2006 and 28.8% in BB pushed its cost-to-income ratio down again, but it remained slightly above the peer group average For the fourth year running, the Bank achieved an improved operating expenses to gross income ratio. While operating expenses increased by 17.5% to KWD28.0mn (USD102.4mn) in 2007, BB s cost-to-income ratio improved to a wholly satisfactory 26.5% from 27.2% in 2006, 29.7% in 2005 and 32.6% in This compared reasonably well to a peer group cost-to-income ratio of 25.3% in Staff costs, which accounted for the bulk (45.2%) of total operating expenses, rose by a modest 6.5% demonstrating the Bank s ongoing disciplined approach to cost control Expenses & Cost-Income Ratios KWDmn 35% 32.6% 29.7% 27.2% 26.5% 30% 27.4% 25% 25.6% 25.3% 23.7% 20% 15% 10% Operating Expenses Cost-Income Ratio Peer Group Provision for impairment of loans and advances plummeted Reflecting the very sound underlying quality of BB s loan and investment asset portfolios, BB s provision for doubtful debt charge plunged by 95.7% to an immaterial KWD264,000 (USD967,000) in This low risk provisioning charge accounted for an extremely slim 0.34% of operating profit. BB posted record net profit, while ROAA maintained its upward momentum After taxes, BB s net profit in 2007 rose by a solid 34.3% to reach KWD74.8mn (USD274.1mn). The Bank has posted net profit growth ranging from 31.5% to 45.3% per annum in each year since 2004 demonstrating the underlying sustainability of BB s profitability. In addition, this fine performance improved the Bank s ROAA to 2.96% in 2007 from 2.72% in 2006, representing the second highest return in the conventional Kuwaiti commercial bank sector last year. BALANCE SHEET Assets In 2007 BB s total assets grew at the fastest pace over the last four years Following relatively moderate growth of 17.0% in 2006, the Bank s total asset base expanded by healthy 28.8% during the year to stand at KWD2.85 billion (USD10.43 billion) at end With the Kuwaiti banking sector having increased its aggregate assets base by the somewhat quicker pace of 36.7% in 2007, BB s market share of total banking assets slipped to a still fifth place ranking of 7.2% versus 7.6% at end The Bank s balance sheet growth was led by robust increases in net loans and advances as well as deposits placed with other bank counterparties. 5

9 Net loans and advances continued to comprise a growing and majority proportion of BB s total asset base The pie-chart to right depicts the Bank s asset composition at end Notable variances over the year include net loans at 55.0% versus 50.1% at end 2006 and total liquid assets at 15.7% versus 19.6% at end Asset Composition at end 2007 Marketable Securities 2% Net Loans 54% Clearly illustrating the Bank s historic focus on its home market, BB s total asset base remained heavily skewed towards domestic exposure at end 2007 At end 2007 BB s total asset base was comprised of 82.6% Kuwaiti exposure with the balance of 17.4% defined by the Bank as international risk, which in the main represents other Middle Eastern and European exposure. This position was virtually unchanged from a year earlier when domestic risk accounted for 82.8% and international exposure accounted for 17.2% of the Bank s total asset base. However, it is important to note that the Bank s geographic risk profile will be materially altered when BB finalizes its acquisition of Bahrain-based United Gulf Bank s holdings in Algeria Gulf Bank, Bank of Baghdad, Jordan Kuwait Bank and Tunis International Bank during the course of This proposed transaction, once finalised, will position BB to become one of the most geographically diversified Kuwaiti commercial banks with a clear focus on the MENA region. Static growth in total liquid assets The Bank s portfolio of total liquid assets increased by a modest 3.2% to KWD445.9mn (USD1.6 billion) in Kuwaiti government securities, which accounted for 97.3% of total liquid assets, increased by 11.5% to KWD433.7mn (USD1.6 billion) at end Deposits with banks were up, while holdings of marketable securities dwindled further Total deposits with banks grew by 28.8% to KWD655mn (USD2.4 billion) at end 2007, while the Bank s portfolio of marketable securities continued to be relatively modest and fell by 13.0% to KWD51.5mn (USD188.7mn). Net loans and advances experienced sharp growth Driven by robust growth in corporate lending, BB s net loan portfolio expanded by 41.4% in 2007 to KWD1.57 billion (USD5.73 billion). This pace of loan growth was faster than that of the sector and led to the Bank increasing its market share of lending to 6.7% from 6.0% a year earlier. Nevertheless the Bank remained the fifth largest lender in the Kuwaiti market. Gross Loans by Segment Exposure* KWDmn Interbank Deposits 23% Liquid Assets 15% Amount % Amount % Other Assets 6% % Change Banks (10.5) Sovereigns Corporates , Retail Total Gross Loans 1, , As can be seen in the table above, BB grew its corporate loan portfolio aggressively in As a result, gross loan exposure to the corporate segment, which expanded sharply by 63.6%, accounted for nearly three-quarters of total gross loans at end 2007.The Bank also grew its retail loan portfolio in 2007, but at 6

10 a slower rate than its corporate loan book, which caused retail loan exposure to fall in proportionate terms to less than one-fifth of total gross loans at end The Bank s ten largest loan exposures accounted for 14% of total gross loans and advances at end 2007 (end 2006: 17%). Therefore, no undue concentrations of loan exposure would appear to exist in the Bank s loan portfolio. Loan asset quality improved even further in 2007 The Bank has reduced its NPL portfolio in absolute money terms in three of the last four years and has driven its NPL / gross loan ratio down in each of the last four years. With NPLs falling by 26.3% to KWD25.3mn (USD92.6mn) at end 2007 and the net loan portfolio advancing by 41.4% in 2007, the Bank was able to improve its NPL / gross loans ratio to a sector-best 1.56%. Moreover, the Bank s loan loss reserve / gross loans coverage ratio improved to a by far and away peer group-best 223.8%. 6% 4% 2% 0% NPLs and Provision Cover 5.5% 300% 223.8% 250% 3.4% 164.8% 200% 3.0% 150% 84.5% 130.8% 1.6% 100% 50% NPL/Gross Loans LLR/NPLs In concert with its peers, BB s liquidity ratios tightened in 2007, but remained at wholly comfortable levels During 2007 BB s total customer deposits rose by a healthy 26.8% to KWD1.65 billion (USD6.0 billion). This led to a slight increase in the Bank s market share of customer deposits to 7.2% at end 2007 (end 2006: 7.1%). The Bank s top twenty non-bank depositors, half of which were Kuwaiti government agencies, accounted for 58.1% of total customer deposits at end Taken together, total customer deposits and (due from) interbank deposits increased by a brisk 30.3% to KWD2.4 billion (USD8.7 billion) and funded a slightly higher 83.6% of BB s balance sheet at end 2007 versus 82.7% a year earlier. As is the case with the Bank s larger domestic rivals, BB has been increasingly reliant upon interbank deposits as a source of funding with interbank deposits funding a significant 25.7% of the Bank s balance sheet at end 2007 versus 23.8% at end It should be noted that the Bank was the fourth largest net taker of interbank deposits at end 2007 with a net debit position of KWD76.9mn (USD281mn). While this is not a source of real concern at this stage, the Bank should take action not to become overly reliant on this potentially volatile class of funding. In October 2004 the Bank raised a five-year USD157.5mn syndicated loan, which carries an interest rate of LIBOR plus 0.375%. This facility matures in October With loan growth outstripping that of customer deposits, BB s liquidity ratios tightened during 2007; total net loans to customer deposits ratio climbed to 95.0% from 85.2% at end 2006, while its net loans to stable funds ratio rose to 77.3% from 68.5% at end In BB s favour, both of these ratios at end 2007 were slightly below the peer group average. Also reflecting BB s relatively favourable liquidity position at end 2007, the Bank s liquid asset ratio of 38.7% and quasi-liquid asset ratio of 40.5% were both materially higher than the respective peer group averages. 7

11 Capital adequacy remained sound The Bank maintained a sound and steady capital adequacy ratio of 16.58% at end 2007 (end 2006: 16.48%) as calculated in accordance with Basel II requirements. The Bank s Tier 1 CAR stood at a strong 14.9% at end While BB s CAR was below the peer group average of 18.32%, it was well above the Central Bank of Kuwait s proscribed minimum requirement of 12%. In absolute terms, the Bank s total capital increased by a solid 35.0% during 2007 to KWD351.1mn (USD1.3 billion). BB did not carry any qualifying Tier II subordinated long-term debt on its balance sheet at end Current Year Update (Q1 2008) Capital Composition & Adequacy KWDmn 20% 17.8% 18.4% 16.5% 16.6% 15% 10% 5% Reserves & Other Paid Up Capital CAR KWDmn Q % Total Assets 3,237 2, Net Loans 1,503 1, NPLs Customer Deposits 1,770 1, Total Regulatory Capital % Q NPL / Gross Loans LLR / NPL Capital Adequacy Ratio Net Loans / Stable Funds Interest Differential Cost To Income ROAA * *Annualized KWD 000s Q Q % Net Interest Income 12,861 12, Non Interest Income 23,502 24,158 (2.7) Gross Income 36,363 36,631 (0.7) Operating Expenses 6,842 8,162 (16.2) Operating Profit 29,521 28, Provision Charges 3,854 5,169 (25.4) Gross Profit 25,667 23, Income Tax 1, Net Profit 24,557 22, Profit and Loss BB turned in record quarterly results in the first three months of 2008 with net profit of KWD24.6mn, up by 9.0% compared to the corresponding period a year earlier. While gross income dipped by 0.7% to KWD36.4mn, strict expense control, which forced operating expenses down by 16.2%, and significantly lower impairment charges served to enhance the Bank s bottom line results. Balance Sheet The Bank grew its balance sheet by a respectable 13.7% to KWD3.2 billion at end-march Net loans registered 5.8% growth, while total customer deposits rose by a faster 7.3%. This will have benefited the Bank s liquidity position at end-march Ratios The Bank s good performance in 1Q 2008 boosted its annualised ROAA to a healthy 3.16%. Profitability was underpinned by tight cost control as BB drove its cost-to-income ratio down to a very satisfactory 18.81%. While BB s NPL / gross loan ratio inched up to 1.67% and its LLR / NPL coverage ratio slipped to 174.0%, both of these loan asset quality indicators remained wholly satisfactory. 8

12 BB s liquidity profile was enhanced during the first three months of 2008 as its net loans to stable funds ratio improved to a more comfortable 70.36% from 77.31% at end The Bank s CAR declined to 15.12% at end-march, but with a strong Tier 1 CAR of 12.60%, BB s capital adequacy remained sound. 9

13 BURGAN BANK SAK PERFORMANCE RATIOS 17-Jul-2008 KW03 External Audit AUD AUD AUD AUD 12/ / / /2004 A. SIZE FACTORS 1. Total Assets (USD 000) 10,430,565 7,644,029 6,471,616 5,900, Total Capital (USD 000) 1,286, , , ,187 B. ASSET QUALITY 3. Total Assets Growth Rate (Year on Year %) Loan-Loss Reserve to Gross Loans (%) Non-Performing Loans to Gross Loans (%) Loan-Loss Reserve to Non-Performing Loans (%) Unprovided Non-Performing Loans to Free Capital (%) Loan-Loss Provision Charge on Gross Loans (%) Reserve for Dimin. of Investments to Total Investments (%) 10. Related Party Loans to Total Capital (%) Total Contingents on Total Assets (%) C. CAPITAL ADEQUACY 12. CI Risk Asset Ratio (%) Estimated BIS Risk Asset Ratio (%) Estimated BIS RAR on Tier One Capital (%) Actual Risk Asset Ratio to Local Standards (%) * Internal Capital Generation (%) Total Capital Growth Rate (Year on Year %) Total Capital to Total Assets (%) Total Capital to Gross Loans (%) Free Capital Funds (KWD 000) 333, , , , Estimated BIS RAR Shortfall (KWD 000) Risk Weighted Assets on Total Footings (%) D. LIQUIDITY 23. Net Loans to Total Deposits (%) Net Loans to Total Customer Deposits (%) Net Loans to Stable Funds (%) Customer Deposits to Total Deposits (%) Liquid Asset Ratio (%) Quasi-Liquid Asset Ratio (%) FX Currency Assets to FX Currency Liabilities (%) 30. FX Currency Loans to FX Currency Deposits (%) 31. Interbank Assets to Interbank Liabilities (%) Net Interbank Assets (KWD 000) -76,934-17,818 93,713 28,812 E. PROFITABILITY 33. Return on Average Assets (%) Return on Average Equity (%) Underlying Profits on Average Assets (%) Underlying Profits on Average Equity (%) Funding Cost (%) Interest on Average Earning Assets (%) Interest Differential (%) Non-Interest Income to Gross Income (%) Operating Expenses to Gross Income (%) Operating Profit Growth Rate (%) Operating Profit on Average Assets (%) Risk Provisioning Charge to Operating Profit (%) Dividend Payout Ratio (%) RATES Exchange Rate (Units per USD) Inflation Rate (%) Imputed Interest Rate on Free Capital (%) (Discount Rate) NOTES: ¹ The Bank's investments in its own shares amounted to KWD 0.29 mn in 2007,(KWD 29.0mn in 2006, KWD 18.5mn: 2005, 2004: KWD 10.1mn). In all cases, the value of these shares are netted against capital. * 2005 RAR is on Basle II basis.

14 BALANCE SHEET - ASSETS (KWD 000) RISK External Audit 12/2007 AUD AUD AUD AUD Growth (%) Breakdown (%) WGHT USD / / / / / / / / / / / /2004 LIQUID ASSETS: 0% Cash & 7 Day 42,941 11,723 29,378 27,768 22, % Central Bank 1, , , % Treasury Bills , % Government Securities 1,588, , , , , % Other - Govt Debt Bonds ,063 61, , TOTAL LIQUID ASSETS 1,633, , , , , DEPOSITS WITH BANKS: % Short - Up to 1 Year 2,399, , , , , % Short - Bankers' CD's 100% Non - OECD Medium Term TOTAL DEPOSITS WITH BANKS 2,399, , , , , % MARKETABLE SECURITIES 188,674 51,508 59,224 54,663 48, LOANS AND ADVANCES: 20% Government Guaranteed 50% First Mortgage Loans 100% Bills Disc. & Short Term 4,264,340 1,164, , , , % Medium/Long Term 1,584, , , , , % Other - Loans to Banks 100% Non-Performing Loans 92,637 25,290 34,294 33,994 48, % Loan-Loss Reserve -207,296-56,592-56,503-44,412-40, NET LOANS AND ADVANCES 5,734,386 1,565,489 1,107, , , % UNQUOTED INVESTMENTS 214,791 58,638 48,448 39,089 35, % NON-FINANCIAL SUBS & AFFILS. FINANCIAL SUBS & AFFILIATES % FIXED ASSETS 65,216 17,804 18,062 18,602 20, % OTHER ASSETS 194,234 53,026 36,063 23,600 18, TOTAL ASSETS 10,430,565 2,847,547 2,210,215 1,889,712 1,738, CONTINGENT ACCOUNTS: 100% Fin. Gtees/SLCs/Acceptances 1,351, , , , , % Bid & Performance Bonds 764, , ,203 92,078 72, % LCs/Bank & Govt Guarantees 551, ,615 85,830 48,477 52, % Bonding for Banks & Govts 5% IR Swaps/Bank & Govt LCs TOTAL CONTINGENT ACCOUNTS 2,668, , , , , TOTAL FOOTINGS 13,098,661 3,575,938 2,800,229 2,299,533 2,157, RISK WEIGHTED ASSETS 9,039,368 2,467,750 1,896,666 1,567,716 1,448, BALANCE SHEET - LIABILITIES (KWD 000) USD / / / / / / / / / / / /2004 INTERBANK LIABILITIES: Current & 7 Day Short - Within One Year 2,681, , , , , Other - After One Year TOTAL INTERBANK LIABILITIES 2,681, , , , , CUSTOMER DEPOSITS: Demand 220, , , Savings 87,206 68,973 59, Time 6,038,595 1,648, , , , Other - Certificates of Deposit 63,000 26,487 25, TOTAL CUSTOMER DEPOSITS 6,038,595 1,648,538 1,300,382 1,191,645 1,073, OFFICIAL DEPOSITS TOTAL DEPOSITS + INTERBANK 8,720,321 2,380,650 1,826,895 1,527,922 1,369, OTHER LIABILITIES 266,516 72,759 47,626 38,500 42, MEDIUM/LONG TERM LIABILITIES 157,502 42,998 75,540 75, , TIER TWO CAPITAL: Asset Revaluation Reserve 79,326 21,656 31,353 31,858 18, Hybrid Capital Instruments Subordinated Term Debt TOTAL TIER TWO CAPITAL 79,326 21,656 31,353 31,858 18, TIER ONE CAPITAL: Paid Up Capital ¹ 314,150 85,763 57,021 67,503 75, Minority Interests Reserves 892, , , , , TOTAL TIER ONE CAPITAL 1,206, , , , , TOTAL CAPITAL 1,286, , , , , TOTAL LIABILITIES AND CAPITAL 10,430,565 2,847,547 2,210,215 1,889,712 1,738, PROFIT AND LOSS ACCOUNT (KWD 000) Growth (%) % of Average Total Assets USD / / / / / / / / / / / /2004 Interest Income 614, , ,862 91,446 74, Interest Expense -427, ,600-76,468-48,269-41, Net Interest 187,227 51,113 53,394 43,177 32, Fees and Commissions 62,597 17,089 19,988 13,287 13, FX Trading Income 15,982 4,363 2,024 1,459 1, Dealing Securities Income 100,289 27,379 2,569 5,728 3, Other Investment Income 17,864 4,877 4,229 4,693 2, Other Income 3, ,382 1, , Non Interest Income 199,912 54,576 34,192 26,458 21, GROSS INCOME 387, ,689 87,586 69,635 54, Administrative Expenses 93,483 25,521 21,528 18,222 14, Depreciation 8,905 2,431 2,261 2,472 2, Other Expenses OPERATING EXPENSES 102,388 27,952 23,789 20,694 17, OPERATING PROFIT 284,751 77,737 63,797 48,941 36, Provisions for Doubtful Debts ,124-4,076-2, <<<< Prov. for Dimin. of Investments ,113-3, GROSS PROFIT (or -LOSS) 283,784 77,473 57,668 43,752 30, Extraordinary Items Tax & Equivalent -9,725-2,655-1,940-1, NET PROFIT (or -LOSS) 274,058 74,818 55,728 42,384 29, Transfers/Adjustments 134,648 36, ,570 9,340 11, APPROPRIATION: Minority Interests Bonus Shares Issued , Dividends 145,187 39,636 32,194 34,400 21, Movement in Reserves 263,520 71,941 23,841 21,554 13, TOTAL 408, ,577 56,035 55,954 38, BURGAN BANK SAK 17-Jul-08

15 RATIO FORMULAE A. Size Factors 1. TOTAL ASSETS (USD 000) 2. TOTAL CAPITAL (USD 000) B. Asset Quality Ratios 3. TOTAL ASSETS GROWTH RATE (YEAR ON YEAR %) 4. LOAN-LOSS RESERVE TO GROSS LOANS (%) 5. NON-PERFORMING LOANS TO GROSS LOANS (%) 6. LOAN-LOSS RESERVE TO NON-PERFORMING LOANS (%) 7. UNPROVIDED NON-PERFORMING LOANS TO FREE CAPITAL (%) 8. LOAN-LOSS PROVISION CHARGE ON GROSS LOANS (%) 9. RESERVE FOR DIMINUTION OF INVESTMENTS TO TOTAL INVESTMENTS (%) 10. RELATED PARTY LOANS TO TOTAL CAPITAL (%) 11. TOTAL CONTINGENTS ON TOTAL ASSETS (%) C. Capital Adequacy Ratios 12. CI RISK ASSET RATIO (%) 13. ESTIMATED BIS RISK ASSET RATIO (%) 14. ESTIMATED BIS RAR ON TIER ONE CAPITAL (%). (CURRENT YEAR TOTAL ASSETS - LAST YEAR TOTAL ASSETS) X 100 LAST YEAR TOTAL ASSETS LOAN-LOSS RESERVE X 100 GROSS LOANS NON-PERFORMING LOANS X 100 GROSS LOANS LOAN-LOSS RESERVE X 100 NON-PERFORMING LOANS NON-PERFORMING LOANS - LOAN LOSS RESERVE X 100 FREE CAPITAL PROVISIONS FOR DOUBTFUL DEBTS CHARGE X 100 GROSS LOANS RESERVE FOR DIMINUTION OF INVESTMENTS X 100 TOTAL INVESTMENTS RELATED PARTY LOANS X 100 TIER ONE + TIER TWO CAPITAL TOTAL CONTINGENTS X 100 TOTAL ASSETS FREE CAPITAL FUNDS X 100 RISK WEIGHTED ASSETS - NON-FINANCIAL SUBS. - FIXED ASSETS (TOTAL CAPITAL - FINANCIAL SUBSIDIARIES) X 100 RISK WEIGHTED ASSETS TIER ONE CAPITAL - FINANCIAL SUBSIDIARIES X 100 RISK WEIGHTED ASSETS 15. ACTUAL RISK ASSET RATIO TO LOCAL STANDARDS (%) AS REPORTED BY LOCAL CENTRAL OR COMMERCIAL BANKS 16. INTERNAL CAPITAL GENERATION (%). 17. TOTAL CAPITAL GROWTH RATE (YEAR ON YEAR %) 18. TOTAL CAPITAL TO TOTAL ASSETS (%) 19. TOTAL CAPITAL TO GROSS LOANS (%) (NET PROFIT - DIVIDENDS -EXTRAORDINARY ITEMS) X 100 TIER ONE CAPITAL (CURRENT YEAR TOTAL CAPITAL - LAST YEAR TOTAL CAPITAL) X 100 LAST YEAR TOTAL CAPITAL TOTAL CAPITAL X 100 TOTAL ASSETS TOTAL CAPITAL X 100 GROSS LOANS 20. FREE CAPITAL FUNDS (LOCAL CURRENCY) TOTAL CAPITAL - FINANCIAL & NON FINANCIAL SUBSIDIARIES - FIXED ASSETS 21. ESTIMATED BIS RAR SHORTFALL (LOCAL CURRENCY) 22. RISK WEIGHTED ASSETS ON TOTAL FOOTINGS (%) D. Liquidity Ratios 23. NET LOANS TO TOTAL DEPOSITS (%) 24. NET LOANS TO TOTAL CUSTOMER DEPOSITS (%) 25. NET LOANS TO STABLE FUNDS (%) 26. CUSTOMER DEPOSITS TO TOTAL DEPOSITS (%) 27. LIQUID ASSET RATIO (%) 28. QUASI-LIQUID ASSET RATIO (%) 29. FOREIGN CURRENCY ASSETS TO FOREIGN CURRENCY LIABILITIES (%) 30. FOREIGN CURRENCY LOANS TO FOREIGN CURRENCY DEPOSITS (%) 31. INTERBANK ASSETS TO INTERBANK LIABILITIES (%) IF BIS RISK ASSET RATIO IS LESS THAN 8% (0.08 X RISK WEIGHTED ASSETS) - (TOTAL CAPITAL - FINANCIAL SUBSIDIARIES) RISK WEIGHTED ASSETS X 100 TOTAL FOOTINGS NET LOANS X 100 TOTAL CUSTOMER DEPOSITS & INTERBANK NET LOANS X 100 TOTAL CUSTOMER DEPOSITS NET LOANS X 100 STABLE FUNDS TOTAL CUSTOMER DEPOSITS X 100 TOTAL DEPOSITS & INTERBANK (TOTAL LIQUID ASSETS + TOTAL DEPOSITS WITH BANKS) X 100 TOTAL ASSETS QUASI-LIQUID ASSETS X 100 TOTAL ASSETS FOREIGN CURRENCY ASSETS X 100 FOREIGN CURRENCY LIABILITIES FOREIGN CURRENCY LOANS X 100 FOREIGN CURRENCY BORROWINGS + FOREIGN CURRENCY DEPOSITS TOTAL DEPOSITS WITH BANKS X 100 TOTAL INTERBANK LIABILITIES 32. NET INTERBANK ASSETS (LOCAL CURRENCY) TOTAL DEPOSITS WITH BANKS - TOTAL INTERBANK LIABILITIES

16 E. Profitability Ratios 33. RETURN ON AVERAGE ASSETS (%) 34. RETURN ON AVERAGE EQUITY (%) 35. UNDERLYING PROFITS ON AVERAGE ASSETS (%) 36. UNDERLYING PROFITS ON AVERAGE EQUITY (%) 37. FUNDING COST (%) 38. INTEREST ON AVERAGE EARNING ASSETS (%) NET PROFIT (or LOSS) X 100 AVERAGE TOTAL ASSETS NET PROFIT (or LOSS) X 100 AVERAGE TIER ONE CAPITAL +AVERAGE REVALUATION RESERVE (OPERATING PROFIT - INTEREST ON AVERAGE FREE CAPITAL) X 100 AVERAGE TOTAL ASSETS (OPERATING PROFIT - INTEREST ON AVERAGE FREE CAPITAL) X 100 AVERAGE TIER ONE CAPITAL + AVERAGE REVALUATION RESERVE INTEREST EXPENSE X 100 AVERAGE TOTAL DEPOSITS & INTERBANK+AVERAGE MEDIUM/LONG TERM LIABILITIES+AVERAGE HYBRID CAPITAL INSTRUMENTS+AVERAGE SUBORDINATED TERM DEBT INTEREST INCOME X 100 AVERAGE CASH & 7 DAY+AVERAGE T-BILLS+AVERAGE GOVERNMENT SECURITIES+AVERAGE OTHER LIQUID ASSETS+AVERAGE TOTAL DEPOSITS WITH BANKS+AVERAGE MARKETABLE SECURITIES+AVERAGE NET LOANS 39. INTEREST DIFFERENTIAL (%) INTEREST ON AVERAGE EARNING ASSETS (%) - FUNDING COST (%) 40. NON-INTEREST INCOME TO GROSS INCOME (%) 41. OPERATING EXPENSES TO GROSS INCOME (%) 42. OPERATING PROFIT GROWTH RATE (YEAR ON YEAR %) 43. OPERATING PROFIT ON AVERAGE ASSETS (%) 44. RISK PROVISIONING CHARGE TO OPERATING PROFIT (%) 45. DIVIDEND PAYOUT RATIO (%) Definitions FREE CAPITAL:- STABLE FUNDS:- QUASI LIQUID ASSETS:- (GROSS INCOME - NET INTEREST) X 100 GROSS INCOME OPERATING EXPENSES X 100 GROSS INCOME (CURRENT YEAR OPERATING PROFIT - LAST YEAR OPERATING PROFIT) X 100 LAST YEAR OPERATING PROFIT OPERATING PROFIT X 100 AVERAGE TOTAL ASSETS PROV. CHARGE FOR DOUBTFUL DEBTS & DIM. OF INVESTMENTS X 100 OPERATING PROFIT DIVIDENDS X 100 NET PROFIT (or LOSS) FREE CAPITAL FUNDS - TIER TWO CAPITAL TOTAL CUSTOMER DEPOSITS + OFFICIAL DEPOSITS + MEDIUM/LONG TERM LIABILITIES + FREE CAPITAL FUNDS. TOTAL LIQUID ASSETS + TOTAL DEPOSITS WITH BANKS + MARKETABLE SECURITIES. TOTAL INVESTMENTS:- MARKETABLE SECURITIES + UNQUOTED INVESTMENTS + NON-FINANCIAL SUBSIDIARIES & AFFILIATES + FINANCIAL SUBSIDIARIES & AFFILIATES. RISK WEIGHTED ASSETS:- WEIGHTED TOTAL OF ASSETS APPLYING THE FOLLOWING PERCENTAGES:- 100% Non-OECD medium term deposits, marketable securities, bills discounted & short term loans, medium/long term loans, other loans, non-performing loans, loan-loss provisions, unquoted investments, non-financial subsidiaries & affiliates, fixed assets, other assets, financial guarantees / standby LCs / acceptances. 50% First mortgage loans, bid & performance bonds. 20% Government securities, other liquid assets, up to 1 year deposits with banks, short/other deposits with banks, government guaranteed / collateralised loans, LCs / bank & government guarantees. 10% T-Bills, bonding for banks & governments. 5% Interest rate swaps/bank & government LCs. GROSS LOANS:- EQUITY:- GOVERNMENT GUARANTEED, FIRST MORTGAGE LOANS, BILLS DISC. & SHORT TERM, MEDIUM/LONG TERM LOANS, OTHER LOANS, NON- PERFORMING LOANS. TIER ONE CAPITAL + ASSET REVALUATION RESERVE

17 RATINGS DEFINITIONS Foreign and Local Currency Ratings Foreign currency ratings refer to an entity's ability and willingness to meet its foreign currency denominated financial obligations as they come due. Foreign currency ratings take into account the likelihood of a government imposing restrictions on the conversion of local currency to foreign currency or on the transfer of foreign currency to residents and nonresidents. Local currency ratings for non-sovereign issuers are an opinion of an entity's ability and willingness to meet all of its financial obligations on a timely basis, regardless of the currency in which those obligations are denominated and absent transfer and convertibility restrictions. Both foreign currency and local currency ratings are internationally comparable assessments. Foreign and local currency ratings take into account the economic, financial and country risks that may affect creditworthiness as well as the likelihood that an entity would receive external support in the event of financial difficulties. Ratings assigned to banks and corporates are generally not higher than the local and foreign currency ratings assigned by CI to the relevant sovereign government. However, it may be possible for an issuer with particular strengths and attributes such as inherent financial strength, geographically diversified cash flow, substantial foreign assets, and guaranteed external support, to be rated above the sovereign. The following rating scale applies to both foreign currency and local currency ratings. Short-term ratings assess the time period up to one year. Long-Term Issuer Ratings AAA AA A BBB Investment Grade The highest credit quality. Exceptional capacity for timely fulfilment of financial obligations and most unlikely to be affected by any foreseeable adversity. Extremely strong financial condition and very positive non-financial factors. Very high credit quality. Very strong capacity for timely fulfilment of financial obligations. Unlikely to have repayment problems over the long term and unquestioned over the short and medium terms. Adverse changes in business, economic and financial conditions are unlikely to affect the institution significantly. High credit quality. Strong capacity for timely fulfilment of financial obligations. Possesses many favourable credit characteristics but may be slightly vulnerable to adverse changes in business, economic and financial conditions. Good credit quality. Satisfactory capacity for timely fulfilment of financial obligations. Acceptable credit characteristics but some vulnerability to adverse changes in business, economic and financial conditions. Medium grade credit characteristics and the lowest investment grade category. BB Speculative Grade Speculative credit quality. Capacity for timely fulfilment of financial obligations is vulnerable to adverse changes in internal or external circumstances. Financial and/or non-financial factors do not provide significant safeguard and the possibility of investment risk may develop. Rev. 01/06/2006

18 B C RS SD D Significant credit risk. Capacity for timely fulfilment of financial obligations is very vulnerable to adverse changes in internal or external circumstances. Financial and/or non-financial factors provide weak protection; high probability for investment risk exists. Substantial credit risk is apparent and the likelihood of default is high. Considerable uncertainty as to the timely repayment of financial obligations. Credit is of poor standing with financial and/or non-financial factors providing little protection. Regulatory supervision. The obligor is under the regulatory supervision of the authorities due to its weak financial condition. The likelihood of default is extremely high without continued external support. Selective default. The obligor has failed to service one or more financial obligations but CI believes that the default will be restricted in scope and that the obligor will continue honouring other financial commitments in a timely manner. The obligor has defaulted on all, or nearly all, of its financial obligations. Short-Term Issuer Ratings A1 A2 A3 B C RS SD D Investment Grade Superior credit quality. Highest capacity for timely repayment of short-term financial obligations that is extremely unlikely to be affected by unexpected adversities. Institutions with a particularly strong credit profile have a "+" affixed to the rating. Very strong capacity for timely repayment but may be affected slightly by unexpected adversities. Strong capacity for timely repayment that may be affected by unexpected adversities. Speculative Grade Adequate capacity for timely repayment that could be seriously affected by unexpected adversities. Inadequate capacity for timely repayment if unexpected adversities are encountered in the short term. Regulatory supervision. The obligor is under the regulatory supervision of the authorities due to its weak financial condition. The likelihood of default is extremely high without continued external support. Selective default. The obligor has failed to service one or more financial obligations but CI believes that the default will be restricted in scope and that the obligor will continue honouring other financial commitments in a timely manner. The obligor has defaulted on all, or nearly all, of its financial obligations. Capital Intelligence appends "+" and "-" signs to foreign and local currency long term ratings in the categories from "AA" to "C" to indicate that the strength of a particular bank is, respectively, slightly greater or less than that of similarly rated peers. Outlook - expectations of improvement, no change or deterioration in a rating over the 12 months following its publication are denoted Positive, Stable or Negative. Qualified - in cases where data and/or co-operation are such that it is not possible to formulate ratings to CI's high standards of robustness and reliability the letter "q" is appended to the ratings. Rev. 01/06/2006