Late Sheikh Zayed bin Sultan Al Nahyan. Founder of the U.A.E.

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2 Late Sheikh Zayed bin Sultan Al Nahyan Founder of the U.A.E.

3 H.H. Sheikh Khalifa bin Zayed Al Nahyan President of the U.A.E.

4 H.H. Sheikh Mohammed bin Rashid Al Maktoum U.A.E. Vice-President, Prime Minister & Ruler of Dubai

5 H.H. General Sheikh Mohammed bin Zayed Al Nahyan Abu Dhabi Crown Prince & Deputy Supreme Commander of the U.A.E. Armed Forces

6 Table of Contents Title Page No. Board of Directors 1 UNB Network 2 Chairman s Report 6 Chief Executive Officer s Review 8 Independent Auditors Report 13 Consolidated Financial Statements 14

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8 2 3 UNB NETWORK BRANCHES TELEPHONE NO. FAX NO. BRANCHES TELEPHONE NO. FAX NO. ABU DHABI BRANCHES SHArjah & Northern Emirates BRANCHES 1. Salam Corniche Khalidiya Adgas Al Dhafra Habshan Baniyas City Center Hazzaa Najda Mussafah Muroor Shahama Airport Road Mussafah Industrial AL AIN BRANCHES 1. Sharjah King Abdul Aziz Fujairah Ras Al Khaimah Ajman Dibba, Sharjah Al Buhaira, Sharjah Khorfakkan Kalba PAY OFFICES (AT EMIRATES POST OFFICES) ABU DHABI OUTLETS 1. Bateen Tourist Club Abu Dhabi Central Khalifa Street Al Hili UAE University Al Yahar Al Jebel Roundabout Al Ain Mall SHARJAH & NORTHERN EMIRATES OUTLETS 1. Al Sanaeyah Downtown Ajman Umm Al Quwain Sharjah Central Ras Al Khaimah Central DUBAI BRANCHES 1. Deira Sh. Zayed Road Khalid Bin Walid Street Al Maktoum Jebel Ali Al Bustan Rashidiya Gold & Diamond Park Dubai Health Care City Mirdiff

9 4 5 SUBSIDIARIES UNION BROKERAGE COMPANY (UBC) BRANCHES TELEPHONE NO. 1. Main Office - Abu Dhabi ADX Office Al Dhafra Office Al Ain Office DFM Office Fujairah Office Gold & Diamond Park UNION NATIONAL BANK, EGYPT BRANCHES TELEPHONE NO. 1. Head Office, Cairo (+202) Cairo Branch (+202) Nasr City Branch (+202) El Haram Branch (+202) Salam Branch (+202) Suez Branch (+2062) Port Said Branch (+2066) Assuite Branch (+2088) Al Horrya Branch (+203) Saad Zaghlul Branch (+203) Gleem Branch (+203) San Stifano Branch (+203) Sharm El Sheikh Branch (+2069) Sharm El Sheikh Branch Airport (+2069) AL WIFAQ FINANCE COMPANY BRANCH TELEPHONE NO. 1. Head Office - Abu Dhabi Airport Road

10 6 7 On behalf of the Board of Directors, I am pleased to present to you the consolidated financial statements for the fiscal 2008 for Union National Bank (UNB) Group. The year saw the successful culmination of the nine year Vision covering the period 2000 to 2008 and the third Mission for 2006 to 2008 for the Bank. The UNB Group s profit for 2008 surpassed the previous outturns, setting a new milestone - a commendable performance especially in view of the particularly testing and unprecedented global economic environment. The sound financial performance of the UNB Group for 2008 is based on a combination of factors, the cornerstone of which is to be the best partner for our banking customers. The success of our strategy has been borne by the sustainable growth in business and profits amid the global financial crisis that has had severe consequences on the entire world. Global Economy The global economy is estimated to have experienced a real GDP growth of 2.5% in 2008 significantly lower compared to 3.7% in Over the last few quarters, the reported economic data suggests that this growth is likely to be considerably lower in 2009 with most of the big economies in the world being in deep recession. This economic downturn which started as a result of the US mortgage credit crisis, has led to a significant decline in asset prices, rising insolvencies, choking credit markets and lack of financial trust amongst the intermediaries. Massive liquidity injections, cutting of benchmark interest rates and other direct and indirect measures taken by the various Central Banks and Governments have had a limited impact to restore normalcy in the financial markets and real economy. The financial de-leveraging process which began in 2008 as an aftermath of the US credit crisis, has gathered pace, resulting into muted economic growth before recovery begins, which many economists now expect will only be in Gulf Cooperation Council (GCC) and the UAE Until the third quarter of 2008, the direct impact of the global financial turmoil was quite limited in the GCC region. The prolonged and widespread nature of this global crisis has meant that no continent or country remained unscathed. In addition to the acute decline in asset prices, the sharply reduced global demand has impacted commodity prices, impinging regional economies. The Central Bank of the UAE and the Government has resorted to a number of measures to partly ameliorate the impact of this crisis. Liquidity has been injected in the banking system, depositors confidence has been addressed by providing guarantees and the process of monetary easing has been initiated. The economic situation in the UAE remains quite robust due to diversification efforts and the lower reliance on the hydrocarbon sector. Further, with the significant fiscal surplus at its disposal, the UAE has the ability to withstand any slow-down in its economy. UNB Group In 2008, the Group s endeavour has been to further build on its successful track record in its domestic market in the UAE by investing and growing its core lines of businesses. It is noteworthy that Shari a compliant Islamic financing has emerged as a significant business line since its launch in 2006 and witnessed more than a doubling of business last year. Overseas operations in Egypt, through our subsidiary, were scaled up in a controlled manner as per the business plans. The Group established a Representative Office in Shanghai, China and also received approval from the Qatar Financial Centre Regulatory Authority to set up a branch in the Qatar Financial Centre. Also, Union Brokerage Company, the Bank s brokerage subsidiary, became the first brokerage house in the region to be awarded recognition by NASDAQ, Dubai to act as a General Clearing Member. The UNB Group profit for the fiscal 2008 of AED 1,441.2 million (2007: AED 1,179.4 million), registered an increase of 22.2% for the previous year. The profit attributable to the equity shareholders for the year ended at AED 1,404.8 million (2007: AED 1,168.4 million), was the highest ever - an increase of 20.2% as compared to the outturn for the previous year. It is notable that the operating profit grew by 38.2% to reach AED 1,653.7 million (2007: AED 1,196.5 million) reflecting satisfactory growth in business and asset volumes. The Group s focus on growing its core lines of businesses on a sustainable basis, saw an all round increase in loans and advances in its key lines of businesses, viz. Corporate banking, Shari a compliant Islamic financing and Retail banking. The net loans and advances increased to AED 50.4 billion as at (31 December 2007: AED 37.4 billion) representing a growth of 34.9% over the corresponding figure last year. The last quarter of 2008 saw a visible slow down in the growth of loans and advances as the global financial turmoil started to impact the region given the integrated nature of financial markets and the intertwining of economies. Customer deposits increased to AED 49.5 billion as at (31 December 2007: AED 40.2 billion) - a growth of 23.1% compared to the corresponding figure for The total assets of the Group as at, reached AED 65.2 billion, posting a growth of 17.6% over 31 December 2007 (31 December 2007: AED 55.5 billion). Attributable return on average equity of 19.9% for 2008 (2007: 18.7%) continued to improve with the return on average assets being acceptable at 2.4% for 2008 (2007: 2.4%). The improvement in these key financial metrics shows the resilience of the Group s strategy and business model in the face of extremely challenging and weakening economic environment and business conditions. The Group remains particularly vigilant in detecting early warning signals of any deterioration in the credit quality and taking timely and effective corrective action so that interests of the various stakeholders are adequately protected. A lagging indicator of credit quality, the ratio of non-performing loans to gross loans and advances at 0.7% as at 31 December 2008 (31 December 2007: 0.9%) was satisfactory. The loan loss provision coverage of 170% as at (31 December 2007: 143%) continues to be well above 100%. An important measure of efficiency, the cost to income ratio improved to 27.9% in 2008 (2007: 29.4%), despite inflationary pressures and the ongoing investments in human capital and technology. The Group continues to judiciously invest in infrastructure and its people so as to maintain its competitive edge. The Basel I capital adequacy ratio, as implemented by the Central Bank of the UAE was 11.8% as at (31 December 2007: 15.2%) well above the minimum regulatory requirement of 10% set by the Central Bank. As part of the initiative by the Government of Abu Dhabi to further strengthen the capital position of Abu Dhabi banks, the Bank will in 2009 issue Tier 1 capital notes (the Notes ) to the Government of Abu Dhabi with a principal amount of AED 2 billion. The Notes are non-voting, non-cumulative perpetual securities and are callable subject to certain conditions. In order to support growth in business and to maintain strong capital position, the Board of Directors is pleased to recommend to the shareholders a distribution of cash dividend of 10% (cash dividend of AED 0.1 per share) amounting in aggregate to AED million and a stock dividend of 10 %, i.e. 1 share for every 10 shares held. Future Developments As has been widely reported by many economists and analysts, all indications are that 2009 will pose to be a considerably challenging year with worsening financial markets and deepening recession in many countries. The Group remains well prepared to deal with these extraordinary economic conditions. The Board has recently approved a new Vision for the nine-year period 2009 to 2017 and a medium term Strategy for the Group going forward, the details of which will be unveiled in the early part of The new Strategy will build on our successes to take the UNB Group to newer heights. Appreciations On behalf of the Board of Directors, I would like to thank our valued customers for their continued patronage, the top management and the employees for their unstinted commitment and dedication and to various governmental bodies for their guidance and support. I wish to also acknowledge the contribution of the Central Bank of the UAE in regulating the UAE banking sector. In conclusion, we express our gratitude to the Government of the UAE under the visionary leadership of His Highness Sheikh Khalifa Bin Zayed Al Nahyan, President of the UAE, Ruler of Abu Dhabi Emirate, His Highness Sheikh Mohammed Bin Rashid Al Maktoum, UAE Vice President, Prime Minister and Ruler of Dubai, and His Highness Sheikh Mohammed Bin Zayed Al Nahyan, Abu Dhabi Crown Prince and Deputy Supreme Commander of the UAE Armed Forces as well as Their Highnesses, the Rulers of the various Emirates. Their continuing wisdom, assured leadership and progressive guidance all contribute to the bright outlook, security and opportunities that both the United Arab Emirates and Union National Bank can look forward to. Nahayan Mabarak Al Nahayan Chairman

11 8 9 It gives me great pleasure to present the Review report for 2008, a year which was marked by solid financial and non-financial performance by the Union National Bank (UNB) Group in an extraordinarily challenging global economic environment. Fiscal 2008 would truly go down as a watershed year which saw the global financial crisis inflicting a devastating impact on the world economy, with no country or enterprise being immune from the impact and threatening the very fabric of the modern financial and banking system. The widespread solvency concerns in the latter part of 2008 have triggered a cascading series of bankruptcies, forced mergers and public interventions in many countries which has resulted in a drastic reshaping of the financial landscape. To soften the economic and more importantly the human impact of this financial tsunami, Governments and the Central banks across the globe have taken unprecedented measures and actions aimed at stabilising markets and bolstering confidence by supporting institutions, injecting liquidity, providing capital and taking a variety of novel measures. The integrated nature of the world markets has meant that the region has unavoidably suffered from the contagion effect of this financial crisis. The rapidly developing events in financial markets have led to sharp de-leveraging across the emerging markets with investors being extremely risk-averse, resulting in a sharp decline in asset prices, drying-up of liquidity and a deceleration in credit growth. In the local context, 2008 was also a year of contrast - from robust business volumes, low interest rates and ample liquidity in the first half of the year to a slow-down in business activity, sharply higher interest rates and tight liquidity conditions in the second half of the year. With this as the backdrop, I am pleased to report that your Bank s management under the guidance and direction of the Chairman and the Board of Directors has deftly managed the many challenges in these turbulent and trying times, leveraging every opportunity whilst being keenly conscious of the attendant risks. As a result, the Group has posted satisfactory results for 2008, which I would discuss in detail in the ensuing Financial Review section. It gives me immense satisfaction to report that 2008 saw the successful culmination of the nine-year Vision ( ) during which the Group s net profit increased over twelve-fold. The Mission period saw the Bank morph from a standalone entity to a Group with a multi-entity structure and multi-country presence, focusing on diversification of revenue streams. This strategy has yielded positive results as is evident from the Group s financial performance and key non-financial metrics. We have developed the future Vision, Mission and medium term strategy for the UNB Group. The strategy whilst remaining dynamic to respond to the changes taking place in the market place, would build on the Group s considerable strengths to fulfill stakeholders expectations. Loan and deposit growth, business mix, asset quality, capital position, efficiency and return on average equity and assets have continued to advance in a consistent and sustainable manner. The continued improvement has been driven by customer-centric strategy, building on our strengths in the core lines of businesses and an increasing focus on emerging lines of businesses like Shari a compliant Islamic financing, Private Banking and Wealth Management and the Small and Medium Enterprises (SME) sector. Financial Review The UNB Group posted its highest ever consolidated profit of AED 1,441.2 million for the year ended (2007: AED 1,179.4 million), an increase of 22.2% year-on-year (y-o-y). The profit attributable to the equity shareholders of the Bank recorded an increase of 20.2% to reach AED 1,404.8 million for the year ended 31 December 2008 (2007: AED 1,168.4 million). More notably, the operating profit for the Bank increased y-o-y by 38.2% to AED 1,653.7 million for 2008 (2007: AED 1,196.5 million). This increase was driven by controlled growth in loans and advances, diversified revenue mix, prudent liquidity management, sound asset quality and focus on improving efficiency. All the key business lines, viz. Corporate banking, Islamic financing and Retail banking contributed in the growth of net loans and advances to AED 50.4 billion as at (31 December 2007: AED 37.4 billion), an increase of 34.9% over the corresponding figure last year. In spite of the tight liquidity conditions that prevailed in the last quarter of 2008, customers deposits grew to AED 49.5 billion as at 31 December 2008 (31 December 2007: AED 40.2 billion), registering a 23.1% increase y-o-y, with the loan book being broadly funded from customers deposits. The total assets of the UNB Group increased to AED 65.2 billion as at (31 December 2007: AED 55.5 billion) posting a growth of 17.6% over the same period last year. The attributable return on average equity of 19.9% for 2008 (2007: 18.7%) improved further while the return on average assets remained unchanged at 2.4% for 2008 (2007: 2.4%). The net interest income increased by 37.4% to AED 1,497.7 million for 2008 (2007: AED 1,089.9 million) mainly due to loan growth and margin preservation. Our constant focus to improve the contribution mix of non-interest income to operating income led to an increase in net fee and commission income (+41.7% y-o-y) and foreign exchange income (+36% y-o-y) with the overall non-interest income increasing by 31.7% to AED million for 2008 (2007: AED million). The decline in asset prices has required us to mark down the value of our trading and non-trading investments in accordance with the accounting standards. The pronounced inflationary pressures that persisted for most of 2008 coupled with continued investment in our people, processes and technology to create a platform for long term sustainable growth required us to invest wisely resulting in operating expenses increasing by 28.6% to AED million for 2008 (2007: AED million). The efficiency (cost to income) ratio continued to remain at an enviable level of 27.9% in 2008 (2007: 29.4%). As has been stated in the past, we do

12 10 11 not believe that such a low level of cost to income ratio is sustainable in the medium to long-term. 2,062.5 million. The payout on account of the distribution of the cash dividend will be AED million. One of the foremost risks to the long term performance of a bank is the effective management of credit risk. The UNB Group continues to remain vigilant and alert in managing the asset quality. The ratio of non-performing loans to gross loans and advances was 0.7% as at 31 December 2008 (31 December 2007: 0.9%) with the loan loss coverage at 170% as at (31 December 2007: 143%). In 2008, the UNB Group increased its collective impairment allowance by AED million to AED million as at (31 December 2007: AED million). The consolidated capital adequacy ratio computed in line with the Basel I guidelines as adopted by the Central Bank of the UAE, was 11.8% as at (31 December 2007: 15.2%). As part of the initiative announced by the Government of Abu Dhabi to strengthen the capital position of Abu Dhabi financial institutions, the Bank in 2009, will issue Tier 1 capital notes (the Notes ) to the Government of Abu Dhabi with a principal amount of AED 2 billion. The Notes are non-voting, non-cumulative perpetual securities that are callable only by the Bank subject to certain conditions. Following the issuance of the Notes, the consolidated capital adequacy ratio will improve significantly. The Board of Directors of the Bank have recommended for approval of the shareholders, a cash dividend of AED 0.1 per share (10% of the nominal value of the share of AED 1 each) along with a stock dividend of 1 share for every 10 shares held (10%) for fiscal Post the distribution of the bonus shares the paid-up share capital of the Bank will increase by AED million from AED 1,875 million to AED Corporate Banking Group During the year under review, the Corporate Banking Group (CBG) continued to build upon its strengths in its traditional areas of expertise of contracting finance, trade finance and real estate financing. The Relationship Managers continued to provide exemplary customer service, with enhanced productivity, to deepen ongoing customer relationships. Apart from the all round growth witnessed in the loan book across the major sectors of the economy, a prominent feature within the CBG s achievements for the year was the concerted efforts made in project finance, through both bilateral agreements as well as large ticket syndications, as a Mandated Lead Arranger and as a participant. Apart from being felicitated by the Crown Prince of Abu Dhabi on account of the role the Bank has played in supporting the objectives of the Khalifa Fund for small and medium enterprises at its first anniversary, the CBG launched three new loan products aimed at the growing numbers of SME s within the UAE. International Banking Group The International Banking Group manages the Bank s correspondent banking relationships with financial institutions globally in addition to overseeing the overseas expansion of the Group. As part of the Bank s strategy to selectively having a direct presence in certain target countries, the Bank in 2008, opened a Representative Office in Shanghai, China to facilitate the financing of trade flows between China and the UAE. Also, the Bank secured a Category I license to set-up a branch in Qatar Financial Centre, with the branch permitted to accept deposits and provide and arrange credit facilities to wholesale customers. Union National Bank is the first bank from the UAE and second bank from the region to achieve this unique status. The branch is slated to be operational in Sheikh Nahayan with the CEO inaugurating the UNB Mussafah branch Islamic Banking The Islamic financing window within the Bank complements the Islamic products and services offered by Al Wifaq Finance Company, a majority owned subsidiary of the Bank. This is a relatively new line of business for the UNB Group that was set up in 2006 to partake in the fast growing area of Shari a compliant Islamic financing. Islamic Banking is a significant contributor to the UNB Group s bottom line at the back of robust growth in Islamic financing, which grew by 117.2% to AED 6.1 billion as at (31 December 2007: AED 2.8 billion) while Islamic deposits increased by 64.8% to AED 2.8 billion as at (31 December 2007: AED 1.7 billion). In order to improve the technological capability and enhance customer experience, the Islamic Banking Group successfully implemented a new core banking system that will serve as a common platform across the UNB Group entities. Private Banking and Wealth Management 2008 was a particularly tough year for the private banking business as plummeting asset values led to significant wealth destruction with customers preferring to remain cautious. Despite these challenges, the Private Banking and Wealth Management Division continued to grow its business by increasing its client base as well as its assets under management. The Bank successfully launched its first Islamic fund Al Samaha a Shari a compliant open ended equity fund. At the end of 2008, Union Brokerage Company (UBC), the Bank s brokerage arm, recorded a market share of 2.67% across both the ADX and DFM, compared to 2.59% in 2007 at time where competition intensified. UBC further reinforced its position as one of the top tier brokerage houses in the UAE by becoming a General Clearing Member of NASDAQ Dubai, gaining access to its trading and clearing platforms. It is the first local brokerage firm in the country to achieve this status. Retail Banking Group The Retail Banking Group significantly expanded its business during the year. This was achieved by bringing in new-to-bank customers, improving the cross sales ratio and maintaining a high customer satisfaction score. A number of innovative products and services and unique promotions were offered to attract and retain customers. The Bank s commitment to quality was re-affirmed with second three year renewal of the ISO 9001: 2000 certification by Lloyd s Register Quality Assurance in June Union National Bank, Egypt (UNB-E), the Bank s Egyptian subsidiary, continues to grow its business as per plan. Apart from the satisfactory financial performance, other noteworthy achievements include increasing the available touch points for the customers to conduct their banking transactions in Egypt; implementation of a new core banking software and various other initiatives to enhance the product and service offerings. The CEO receiving an award on the occasion of sponsoring the Women as Global Leaders conference H.E Ahmed Saeed Al Badi inaugurating the revamped UNB Salam Branch, Abu Dhabi

13 12 13 INDEPENDENT AUDITORS REPORT To The Shareholders Of Union National Bank Public Joint Stock Company We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion Mr. Mohammad Nasr Abdeen, CEO of UNB and H.E. Salem Bin Mohammed Al Dhaheri, Chairman of Arkan, at the signing ceremony for a AED 1.04 billion syndicated term loan facility for Arkan The Bank has further expanded its branch distribution network by opening two new branches in 2008, taking the total number of branches to 49 as at. Alternative delivery channels were further augmented by increasing the number of ATM s to reach 130 and increasing the capacity in the call centre. Treasury and Investments The Treasury and Investments Division continues to offer a complete range of treasury products and services to meet the needs of our customers. The global financial markets were severely impacted due to the deepening and widespread credit crisis. The fall in asset prices had a direct effect on the financial performance of the Treasury and Investments Division. As stated earlier in the Report, mark-to-market losses were recognised on trading and non-trading financial instruments during the year. The fourth quarter of 2008 saw a tightening of liquidity in the local market and hardening of customer deposit rates. The Treasury and Investments Division played a pivotal role in managing the liquidity position of the Bank to ensure that sufficient liquidity was available to meet funding requirements of the Bank. Credit Ratings The Bank s consistent credit ratings from the three rating agencies - Capital Intelligence, Fitch Ratings and Moody s, who rate the Bank, reflect its sound asset quality, strong capital adequacy and satisfactory financial performance. In 2008, the credit ratings were affirmed with the outlook being Stable - another testimony to the Bank s financial strength in the prevailing market conditions. Sheikh Nahayan and Mr. Mohammad Nasr Abdeen, CEO of UNB signing an agreement with the Higher Colleges of Technology to establish a UNB Chair of Financial Services at HCT Conclusion Notwithstanding the continuing upheaval in the financial markets, 2008 was another successful year for the UNB Group with sound improvement in key financial indicators. The year also marked the successful accomplishment of the nine year Vision ( ) of the Bank. Year 2009 would see us ushering a new Mission Period as part of the Vision for the future. I take this opportunity to thank our employees for their unequivocal dedication and commitment and our shareholders and customers for their confidence in our ability to create value for them. I would also like to thank the Board of Directors for its direction and stewardship and the various Government agencies for their guidance and support. Mohammad Nasr Abdeen Chief Executive Officer Report on the Financial Statements We have audited the accompanying consolidated financial statements of Union National Bank Public Joint Stock Company ( the Bank ) and its subsidiaries ( the Group ), which comprise the consolidated balance sheet as of and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. The Group s financial statements for the year ended 31 December 2007 were audited by another firm of auditors whose report dated 6 February 2008 expressead an unqualified opinion on those financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the applicable provisions of the articles of association of the Bank and the UAE Commercial Companies Law of 1984 (as amended). This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our 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 we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance 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 auditors judgement, including the assessment 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 preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements We also confirm that, in our opinion, the financial statements include, in all material respects, the applicable requirements of the UAE Commercial Companies Law of 1984 (as amended) and the articles of association of the Bank; proper books of account have been kept by the Bank, and the contents of the Chairman s Report relating to these consolidated financial statements are consistent with the books of account. We have obtained all the information and explanations which we required for the purpose of our audit and, to the best of our knowledge and belief, no violations of the U.A.E. Commercial Companies Law of 1984 (as amended) or the articles of association of the Bank have occurred during the year which would have had a material effect on the business of the Group or on its financial position. Signed by Richard Mitchell Partner Ernst & Young Registration No February 2009 Abu Dhabi

14 14 15 CONSOLIDATED FINANCIAL STATEMENT for the year ended Note US$ 000 US$ 000 Interest income 4 2,814,259 2,772, , ,843 Income from Islamic financing and investment -products 4 322, ,177 87,687 32,447 Total interest income and income from Islamic -financing and investment products 3,136,332 2,891, , ,290 Interest expense 5 (1,566,195) (1,721,767) (426,408) (468,763) Distribution to depositors Islamic financing (72,416) (80,042) (19,716) (21,792) Net interest income and income from Islamic -financing net of distribution to depositors 1,497,721 1,089, , ,735 Net fee and commission income 6 527, , , ,419 Net gain from dealing in foreign currencies 57,124 42,002 15,552 11,435 Net (loss)/gain on trading financial instruments (28,522) 1,726 (7,765) 470 Net (loss)/gain on non-trading financial instruments 7 (151,993) 140,533 (41,381) 38,261 Gain on investment properties ,241-79,020 - Other operating income 8 101,599 47,880 27,661 13,036 Operating income 2,294,029 1,694, , ,356 Staff 9 (412,970) (336,866) (112,434) (91,714) Depreciation 19 (48,980) (38,046) (13,335) (10,358) Other 10 (178,381) (123,146) (48,565) (33,527) Operating expenses (640,331) (498,058) (174,334) (135,599) Operating profit 1,653,698 1,196, , ,757 Impairment loss on financial assets (net) 11 (203,923) (14,136) (55,519) (3,849) Profit before income tax 1,449,775 1,182, , ,908 Income tax expense 28 (8,590) (3,017) (2,339) (821) Profit for the year 1,441,185 1,179, , ,087 Attributable to: Equity shareholders of the Bank 1,404,781 1,168, , ,111 Minority interest 36,404 10,932 9,911 2,976 CONSOLIDATED BALANCE SHEET as at Note US$ 000 US$ 000 Assets Cash and balances with central banks 12 2,108,328 9,827, ,007 2,675,577 Treasury bills 918,426 34, ,048 9,344 Due from banks 13 5,929,871 3,719,765 1,614,449 1,012,732 Trading investments , ,676 31,036 40,750 Loans and advances to customers 15 50,429,317 37,378,599 13,729,735 10,176,586 Non-trading investments 16 2,494,925 2,420, , ,001 Investment properties , ,589 - Other assets 18 2,171,619 1,384, , ,968 Property and equipment , ,589 99,271 76,120 Goodwill , ,266 71,404 71,404 Total Assets 65,225,275 55,456,725 17,758,038 15,098,482 Liabilities and Equity Liabilities Customers deposits 21 49,472,570 40,204,419 13,469,254 10,945,935 Due to banks , , , ,837 Medium term borrowings 23 5,672,023 6,090,341 1,544,248 1,658,138 Other liabilities 24 1,738,948 1,642, , ,182 Total Liabilities 57,529,247 48,752,067 15,662,741 13,273,092 Equity Share capital 25 1,875,000 1,562, , ,402 Legal reserve 26 2,308,283 2,289, , ,353 General reserve 17,555 4,009 4,779 1,092 Retained earnings 3,429,355 2,688, , ,011 Foreign currency translation reserve 14,164 13,461 3,856 3,665 Cumulative changes in fair value (118,104) 8,849 (32,155) 2,409 Total equity attributable to equity shareholders of the Bank 7,526,253 6,567,074 2,049,074 1,787,932 Minority interest 169, ,584 46,223 37,458 Total Equity 7,696,028 6,704,658 2,095,297 1,825,390 Total Liabilities and Equity 65,225,275 55,456,725 17,758,038 15,098,482 These consolidated financial statements were approved and authorised for issue by the Board of Directors on 10 February 2009 and signed on their behalf by: Basic and diluted earnings per share 33 AED 0.75 AED 0.62 US$ 0.20 US$ 0.17 The attached notes 1 to 36 form an integral part of these consolidated financial statements. Nahayan Mabarak Al Nahayan Chairman Mohammad Nasr Abdeen Chief Executive Officer The attached notes 1 to 36 form an integral part of these consolidated financial statements.

15 16 17 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended Foreign currency Cumulative Share Legal General Retained translation changes in Minority Total capital reserve reserve earnings reserve fair value Total interest equity AED January ,562,500 2,289,577 4,009 2,688,678 13,461 8,849 6,567, ,584 6,704,658 Cash dividend paid (Note 25) (312,500) - - (312,500) (300) (312,800) Bonus issue (Note 25) 312, (312,500) Transfer to reserves - 18,706 13,546 (32,252) Zakat (4,338) - - (4,338) - (4,338) Directors remuneration (2,514) - - (2,514) (286) (2,800) Translation adjustment (856) (153) Net losses on available for sale investments (126,953) (126,953) (2,771) (129,724) Total income / (expense) for the year recognised directly in equity (126,953) (126,250) (3,627) (129,877) Profit for the year ,404, ,404,781 36,404 1,441,185 Total income / (loss) for the year ,404, (126,953) 1,278,531 32,777 1,311,308 1,875,000 2,308,283 17,555 3,429,355 14,164 (118,104) 7,526, ,775 7,696,028 1 January ,562,500 2,282,758-2,081, ,927, ,719 6,027,791 Cash dividend paid (546,875) - - (546,875) - (546,875) Transfer to reserves - 6,819 4,009 (10,828) Zakat (1,772) - - (1,772) - (1,772) Directors remuneration (1,400) - - (1,400) - (1,400) Capital contribution ,089 26,089 Translation adjustment ,781-12,781 (179) 12,602 Net gain on available for sale investments ,849 8, ,872 Total income / (expense) for the year recognised directly in equity ,781 8,849 21,630 (156) 21,474 Profit for the year ,168, ,168,419 10,932 1,179,351 Total income for the year ,168,419 12,781 8,849 1,190,049 10,776 1,200, December ,562,500 2,289,577 4,009 2,688,678 13,461 8,849 6,567, ,584 6,704,658 The attached notes 1 to 36 form an integral part of these consolidated financial statements. CONSOLIDATED CASH FLOW STATEMENT for the year ended Note OPERATING ACTIVITIES Profit for the year before income tax 1,449,775 1,182,368 Adjustments for: Depreciation 48,980 38,046 Impairment loss on financial assets (net) 309,463 14,136 Net loss / (gain) on non-trading investments 151,993 (140,533) Gain on investment properties (290,241) - Translation adjustment 703 2,812 Operating profit before changes in operating assets and liabilities 1,670,673 1,096,829 Directors remuneration paid (1,400) (1,400) Income tax 166 (9,757) 1,669,439 1,085,672 Changes in: Trading investments 35,680 78,376 Loans and advances to customers (13,300,119) (9,893,586) Investment properties (141,665) - Other assets (789,761) (489,585) Customers deposits 9,268,151 10,158,340 Due to banks maturing after three months (242,791) 262,730 Other liabilities 107, ,741 Net cash (used in) / from operating activities (3,393,337) 1,707,688 INVESTING ACTIVITIES (Purchase of) / proceeds from property and equipment (net) (134,012) (86,116) (Purchase of) / proceeds from non-trading investments (net) (440,080) (137,448) Net cash used in investing activities (574,092) (223,564) FINANCING ACTIVITIES Dividend paid to equity shareholders (312,500) (546,875) Dividend paid to minority shareholder (300) 26,089 Increase in medium term borrowings - 2,234,900 Repayment of medium term borrowings (418,318) - Net cash (used in) / from financing activities (731,118) 1,714,114 NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (4,698,547) 3,198,238 Cash and cash equivalents at beginning of the year 13,158,511 9,960,273 CASH AND CASH EQUIVALENTS AT END OF THE YEAR 29 8,459,964 13,158,511 The attached notes 1 to 36 form an integral part of these consolidated financial statements.

16 LEGAL STATUS AND PRINCIPAL ACTIVITIES (the Bank ) was incorporated in the Emirate of Abu Dhabi on 29 November 1982 as a Public Joint Stock Company with limited liability under an Emiri Decree and in accordance with UAE Federal Law No (8) of The Bank carries on commercial and investment banking activities through its forty nine branches in the United Arab Emirates. The registered address of the Bank is Post Box No Abu Dhabi, United Arab Emirates. The consolidated financial statements incorporate the financial statements of the Bank and its subsidiaries (the Subsidiaries ) collectively referred to as the Group as follows: Proportion of ownership Year of Country of Name of Subsidiary interest incorporation incorporation Principal activities Union Brokerage LLC ( UBC ) 99.0% 2002 U.A.E. Al Wifaq Finance 79.6% 2006 U.A.E. Company PrJSC ( AWFC ) Union National Bank Egypt 94.9% 1981 Egypt ( UNB-E ), an Egyptian Joint Stock Company 2 BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards ( IFRSs ) and the requirements of the UAE Federal Law No. 8 of 1984 (as amended). The significant accounting policies adopted are as follows and are consistent with those used in the previous year: (a) Basis of preparation The consolidated financial statements are prepared under the historical cost basis except for certain financial instruments and investment properties, which are carried at fair value, and collateral pending sale, which is stated at the lower of the carrying value of the loan settled and the current fair value of the assets in accordance with International Financial Reporting Standards. The consolidated financial statements of the Group are presented in the United Arab Emirates Dirham ( AED ), which is also the functional currency of the Bank, rounded to the nearest thousand, except as indicated. The US Dollar amounts, which are presented in these financial statements have been translated from AED at an exchange rate of US$ 1 = UAE Dirham and have been included for presentation purposes only. (b) Basis of consolidation Broker for customers trading in shares and securities on Dubai Financial Market, Abu Dhabi Securities Exchange and NASDAQ Dubai. Finance company providing Shari a compliant Islamic finance products. Commercial banking related activities through ten branches in Egypt (Refer Note 20). A subsidiary is an entity over which the Bank exercises control, directly or indirectly, to govern the financial and operating policies so as to obtain benefits from its activities. These consolidated financial statements include the operations of the subsidiaries over which the Bank has control. A subsidiary is fully consolidated from the date on which control is transferred to the Bank until the date that control ceases. 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Basis of consolidation (continued) Assets managed or held in trust or in a fiduciary capacity are not treated as assets of the Group and are not consolidated in these consolidated financial statements. The intra-group transactions, balances and unrealised gains on transactions between the Bank and the Subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of impairment of the assets transferred. Accounting policies of the Subsidiaries have been aligned, where necessary, to ensure consistency with the policies adopted by the Bank. (c) Use of estimates and judgments The preparation of financial statements in conformity with International Financial Reporting Standards requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of financial assets and liabilities and the disclosure of contingent liabilities. These judgements, estimates and assumptions also affect the revenue, expenses and provisions as well as fair value changes. These judgments, estimates and assumptions may affect the reported amounts in subsequent financial years. Estimates and judgments are continually evaluated and are based on historical experience and other factors. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows in order to determine the level of impairment provisions required for non-performing loans as well as for non-trading investments. In order to reduce the element of subjectivity, the Group has laid down clear criteria to enable estimation of future cash flows. As estimates are based on judgements, actual results may differ, resulting in future changes in such provisions. Impairment losses on loans and advances The Group reviews its problem loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the income statement. A considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions. Collective impairment provisions on loans and advances In addition to specific provisions against individually significant loans and advances, the Group also makes a collective impairment provision against loans and advances which although not specifically identified as requiring a specific provision have a greater risk of default than when originally granted. The amount of the provision is based on the historical loss pattern for loans and advances and is adjusted to reflect current economic changes. Held to maturity investments The Group follows the guidance of IAS 39: Financial Instruments: Recognition and Measurement on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgments. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for the specific circumstances, it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost. Impairment of goodwill For impairment testing of goodwill, the Group assesses the recoverable amount of cash-generating unit by estimating cash flows that are discounted to their present value by using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

17 SIGNIFICANT ACCOUNTING POLICIES (continued) 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Use of Estimates and Judgments (continued) (d) Financial Instruments (continued) Investment properties (ii) Recognition / De-recognition (continued) The Group hires the services of independent real estate valuers to provide reliable estimates of the market value of investment properties for the purpose of determining fair values as of. Impairment of investments The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgement for which management takes into consideration, amongst other factors, share price volatility and the underlying asset base of the investee companies. (d) (i) Financial Instruments Classification The Group classifies its financial instruments in the following categories: Financial assets and financial liabilities at fair value through profit or loss, loans and receivables, available for sale investments and held to maturity investments. Management determines the classification of financial instruments at the time of initial recognition. Financial assets or financial liabilities at fair value through profit or loss This category has two sub-categories: financial assets or financial liabilities held for trading and those designated at fair value through profit or loss at inception. A financial asset or financial liability is classified as held for trading if acquired principally for the purpose of selling or repurchasing in the short term. The Group has designated financial assets and liabilities at fair value through profit or loss when either the assets and liabilities are managed, evaluated and reported internally on a fair value bases; or the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. Derivatives are also categorised as held for trading unless they are designated hedges. Loans and receivables Loans and advances are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides funds directly to a debtor with no intention of trading the receivable. Financial liabilities are liabilities where the Group has a contractual obligation to deliver cash or another financial asset or exchange financial instruments under conditions that are potentially unfavourable to the Group. Held to maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity and the Group s management has the positive intention and the ability to hold to maturity. Available for sale Non-derivative financial assets that are not classified under any other category of financial assets are classified as available for sale. A financial asset is de-recognised when the contractual rights to the cash flows from the financial asset expires or when it transfers the financial asset. A financial liability is de-recognised when it is extinguished i.e. when the obligation specified in the contract is discharged or cancelled or expires. Financial assets designated at fair value through profit or loss, assets held for trading and assets available for sale that are sold are de-recognised and corresponding receivables from the buyer for the payment are recognised as at the date the Group commits to sell the assets. The Group uses the specific identification method to determine the gain or loss on de-recognition. (iii) Measurement Financial assets and financial liabilities are measured initially at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial assets and financial liabilities. Subsequent to initial recognition, financial assets at fair value through profit or loss are measured at fair value. Gains and losses arising from a change in the fair value of assets at fair value through profit or loss account are recognised directly in the income statement. Financial assets which are classified as available for sale are measured at fair value. Unrealised gains and losses on measurement to fair value of assets are reported as a separate component of equity until the asset is sold or otherwise disposed off, or the asset is determined to be impaired, at which time the cumulative gains or losses previously reported in equity are included in the consolidated income statement. For investments in equity instruments, where a reasonable estimate of the fair value cannot be determined, the investment is carried at cost less impairment allowance, if any. All financial assets or liabilities at amortised cost, loans and advances to customers and held-to-maturity investments are measured at amortised cost, less any reduction for impairment. Amortised cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. (iv) Fair value measurement principles For investments and derivatives quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair values of investments in mutual funds or similar investment vehicles are based on the last net asset value published by the fund manager. For other investments, a reasonable estimate of the fair value is determined by reference to the price of recent market transactions involving such investments, current market value of instruments which are substantially the same, or is based on the expected discounted cash flows. The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount payable on demand. The fair value of forward exchange contracts is calculated by reference to forward exchange rates with similar maturities. The fair value of unquoted investments is determined by reference to discounted cash flows, pricing models, net asset base of investee companies or broker over-the-counter quotes. (ii) Recognition / De-recognition (v) Offsetting financial instruments The Group initially recognises financial assets held for trading, financial assets at fair value through profit or loss, financial assets held to maturity and financial assets available for sale on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are offset and the net amounts reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liability simultaneously. Loans and advances to customers are recognised on the day they are originated. A financial liability is recognised on the date the Group becomes a party to contractual provisions of the instruments.

18 SIGNIFICANT ACCOUNTING POLICIES (continued) 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Impairment (g) Investment properties (i) Financial Assets Loans and advances to customers The recoverable amount of loans and advances to customers is calculated as the present value of the expected future cash flows, discounted at the instrument s original effective interest rate. Short-term balances are not discounted. Loans and advances are presented net of impairment allowances. Specific allowances are made against the carrying amount of loans and advances that are identified as being impaired, based upon regular reviews of outstanding balances to reduce these loans and advances to their recoverable amounts. Portfolio allowances are maintained to reduce the carrying amount of portfolios of similar loans and advances to their estimated recoverable amounts at the balance sheet date. Changes in the allowance account are recognised in the income statement. When a loan is known to be irrecoverable, and all the necessary legal procedures have been completed, the final loss is determined and the loan is written off. If in a subsequent period the amount of an impairment loss decreases, and the decrease can be linked objectively to an event occurring after the write down, the write down or allowance is reversed through the income statement. Held to maturity investments Impairment losses on held to maturity investments carried at amortised cost are measured as the difference between the carrying amount and the present value of estimated cash flows discounted at the original effective interest rate. Impairment losses are recognised in the income statement and reflected in an allowance account against such financial assets. When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the income statement. Investment property is initially measured at cost including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value which represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm s length transaction at the date of valuation. Gains or losses arising from changes in the fair value of investment properties are included in the income statement. Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of retirement or disposal. (h) Property and equipment and depreciation Property and equipment is stated at cost less accumulated depreciation and provisions for impairment. Depreciation is provided on a straight-line basis on all property and equipment, other than freehold land which is determined to have an indefinite life. Where the carrying value of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. Gains and losses on disposal are taken into account in determining net income. The estimated useful lives of the assets for the calculation of depreciation are as follows: Buildings Furniture, equipment and motor vehicles Software Office improvements 5 to 50 years 4 to 10 years 4 to 5 years 4 years Depreciation methods, useful lives and residual values are reassessed at the reporting date. Available for sale investments (i) Collateral pending sale Impairment losses on available for sale investments are recognised by transferring the difference between the acquisition cost and current fair value less any impairment loss on that financial asset previously recognised in income statement out of equity to the income statement. Impairment losses recognised in income statement on equity instruments are not reversed through the income statement. When a subsequent event causes the amount of impairment loss on available-for-sale debt security to decrease, the impairment loss is reversed through income statement. (ii) Non-financial assets The carrying amounts of the Group s assets are reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets, other than goodwill, that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (f) Investment in associates Associates are companies in which the Group exerts significant influence, but not control, over the financial and operating policies, normally represented by an interest between 20% and 50% in the voting capital. Investments in associates are accounted for using the equity method. Non-financial assets acquired in exchange for loans and advances to customers in order to achieve an orderly realisation are recorded as assets held for sale and reported in Other assets. The asset acquired is recorded at the lower of its fair value less costs to sell and the carrying amount of the loan (net of impairment allowance) at the date of exchange. No depreciation is provided in respect of assets held for sale. Any subsequent write-down of the acquired asset to fair value less costs to sell is recorded as an impairment loss and included in the income statement. Any subsequent increase in the fair value less costs to sell, to the extent this does not exceed the cumulative impairment loss, is recognised in the income statement. (j) Zakat Zakat is computed as per the Article and Memorandum of Association of AWFC and is approved by the Company s Fatwa and Sharia Supervisory Board on the following basis: (k) Zakat on shareholders equity is computed on their Zakat pool (shareholders equity less paid up capital, plus employees end of service benefits) and is deducted from retained earnings. Zakat is distributed by a committee appointed by the Board of Directors of AWFC and operating as per the by-law set by AWFC s Board. Zakat on the paid up capital is not included in the Zakat computation and is payable by the shareholders personally. Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of acquisition over the Group s share in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. Subsequently, goodwill is measured at cost less accumulated impairment losses.

19 SIGNIFICANT ACCOUNTING POLICIES (continued) 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Deposits (q) Revenue recognition (continued) All money market and customer deposits are carried at amortised cost. (m) Medium term borrowing Medium term borrowings are initially recognised at their fair value plus transaction costs and subsequently measured at their amortised cost using the effective interest rate method. (n) Due from banks Net gains/(losses) on trading financial instruments include realised gains and losses arising from disposals and unrealised gain and losses due to changes in the fair value of financial assets and liabilities held for trading and dividend income. Dividend income is recognised in the income statement when the entity s right to receive payment is established. Net gains / (losses) on non-trading financial instruments include unrealised gains and losses due to changes in the fair value of financial assets designated at fair value through profit or loss account and recognised gains or losses on financial assets designated at fair value through profit or loss account and financial assets available for sale. Due from banks and other financial institutions are stated at amortised cost less provision for impairment. (r) Taxation (o) Staff terminal and other benefits In compliance with UAE Federal Labour Law, the Bank and its subsidiaries incorporated in the UAE has a termination gratuity benefit scheme for all of its expatriate salaried employees. The Bank and its subsidiaries incorporated in the UAE are a participant in a pension scheme in respect of eligible UAE national employees in compliance with the Abu Dhabi Retirement Pension & Benefits Fund s law. For the subsidiary in the Arab Republic of Egypt, in compliance with the Egyptian Labour Law No. 12 for the year 2003 and The Social Insurance Law No. 79 for the year 1975, the Subsidiary has a termination gratuity benefit scheme covering all of its salaried employees. UNB-E contributes to a pension scheme in respect of the Egyptian employees in compliance with the Egyptian Retirement Pension & Benefits regulations as set by the Egyptian Insurance and Social Welfare Ministry. The Group is not subject to corporate income tax in the United Arab Emirates. Taxation on income from foreign subsidiary is provided in accordance with the applicable tax regulations of the country in which the subsidiary operates. Deferred taxation is provided using the balance sheet method on all temporary differences calculated at the rate at which it is expected to be payable. Deferred tax asset is recognised if recovery is probable. (s) Cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash on hand and balances with the central banks, treasury bills, due from banks and due to banks maturing within three months from the date of acquisition. Obligations for contribution to pension scheme / gratuity scheme are recognised as an expense in income statement on accrual basis. (t) Foreign currencies The Bank and its subsidiaries incorporated in the UAE are participants to the voluntary employee savings scheme (VESS). Employees who are members of VESS contribute a specific percentage of their basic salary and the Bank and its subsidiaries incorporated in the UAE also contribute the matching amount. The Group s share is not payable to the employee unless they complete three years of continuous employment with the Group. The payment made by the Group to the VESS is charged to the income statement on an accrual basis. The assets of the VESS are shown in other assets and the corresponding liabilities are included in other liabilities. (p) Minority interest Minority interests represent the portion of the profit and net assets in subsidiaries not held by the Bank and are presented separately in the consolidated income statement and within equity in the consolidated balance sheet, separately from the Bank shareholders equity. (q) Revenue recognition Interest income and expense is recognised in the income statement as it accrues, taking into account the effective yield of the asset/liability or an applicable floating rate. Interest income and expense includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis. Fees, commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income are recognised as the related services are performed. Foreign currency transactions are recorded at rates of exchange ruling at the value dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into AED at the rates of exchange ruling at the balance sheet date. Any resultant gains and losses are recognised in the income statement. The assets and liabilities of the foreign subsidiary, including goodwill and fair value adjustments arising on acquisition are translated to AED at the exchange rate prevailing on the reporting date. The income and expenses are translated to AED at the average rate during the period. Any translation differences arising are directly recognised in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. (u) Operating lease The leases entered into by the Group are operating leases. The total payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.

20 SIGNIFICANT ACCOUNTING POLICIES (continued) 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (v) Fiduciary assets (z) Islamic financing and investment products definitions and revenue recognition (continued) Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly are not included in these financial statements. (w) Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) which is subject to risks and rewards that are different from those of other segments. The Group s primary format for segment reporting is based on business segments. (x) Financial guarantee Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantee liabilities are initially recognised at their fair value, and the initial fair value is amortised over the life of the financial guarantee. The guarantee liability is subsequently carried at higher of the amortised amount and the present value of any expected payment (when a payment under the guarantee has become probable). Financial guarantee liabilities are included within other liabilities. (y) Repurchase and resale agreements Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are recognised in the balance sheet and are measured in accordance with accounting policies for such securities. The counterparty liability for amounts received under these agreements is classified as a liability. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet and the amounts paid under these agreements are classified as an asset. The difference between the related sale and repurchase prices is treated as interest expense or interest income arising from these transactions, respectively, and is accrued over the period of the agreement. (z) Mudaraba Islamic financing and investment products definitions and revenue recognition A contract whereby the Group provides funds which the customer will invest in a specific enterprise or activity against a specific share in the profit. The customer would bear the loss in case of default, negligence or violations of any of the terms and conditions of the Mudaraba. Estimated profit on Mudaraba financing is recognised on an accrual basis over the period, adjusted by actual profit when declared by the Mudarib, whereas the losses are charged to income on their declaration by the Mudarib. Wakala investment An agreement whereby the Group provides funds to an agent who invests according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakala. Estimated income from Wakala investment is recognised on an accrual basis over the period, adjusted by actual income when declared. Share Murabaha An agreement whereby the Group sells shares to customers, which the Group has purchased and acquired, based on a promise received from the customer to buy the shares purchased according to specific terms and conditions. The selling price comprises the cost of the shares and an agreed profit margin. Where the income is quantifiable, income is recognised on a time proportion basis over the period of the contract based on the principal amounts outstanding, adjusted by actual income when declared. Reverse Murabaha An agreement whereby the customer sells commodities to the Group, which the customer has purchased and acquired, based on a promise received from the Group to buy the purchased commodities according to specific terms and conditions. The selling price comprises the cost of the commodity and an agreed profit margin. Where the expense is quantifiable, expenses are recognised on a time proportion basis over the period of the contract based on the principal amounts outstanding, adjusted by actual income when declared. Wakala deposits An agreement whereby the customer provides funds to the Group, to be invested in Shari a compliant transactions which are expected to generate profit. Estimated expenses from Wakala deposits are recognised on an accrual basis over the period, adjusted by actual expenses when paid. Forward Ijara Forward Ijara is an agreement lease of an asset which is not ready for lease. In this case, an agreement is entered with the customer, who will construct the assets and provide to the Group. Upon construction, the assets will be leased to the customer under Ijara Muntahiya Bil Tamleek. During the construction period, the Group pays to the contractor one payment or multiple payments, the profit will be accrued and received either during the construction period as advance rental payment or paying with the second rental payment after the construction period. Ijara Muntahiya Bil Tamleek Finance Ijara is an agreement whereby the Group purchases an asset and lease it to the customer in return for a specific rent, payable on fixed or variable rental, the right to use a specific asset for a specific period of time. The agreement specifies the leasing party and the amount and timing of rent payment and responsibilities of both parties during the lease period. The customer provides the Group with an undertaking to settle the rental amount as per the agreed schedule. The Group retains the ownership of the assets throughout the lease period. At the end, the Group will sell the leased asset to the customer at nominal value based on sale undertaking by the Group. Income is recognised on an accrual basis adjusted by actual income when received. Home Islamic Finance The Group will buy the property from the developer and then lease it to the customer. The product can be an Ijara Muntahiya Bil Tamleek if the property is ready to lease or Forward Ijara if the property under construction and revenue is recognised as per revenue recognisation criteria for these products. Income is recognised on an accrual basis adjusted by actual income when received.

21 SIGNIFICANT ACCOUNTING POLICIES (continued) 2 SIGNIFICANT ACCOUNTING POLICIES (continued) (z) Islamic financing and investment products definitions and revenue recognition (continued) (ab) New standard not yet adopted (continued) Murabaha Murabaha is a short term financing contract whereby the Group buys a specified asset to sell it to the customer on a deferred payment basis. The customer usually pays on an instalment basis over the period of the contract. The receivable from the customer comprises cost of the goods sold plus an agreed mark up. Income is recognised on an accrual basis adjusted by actual income when received. Mudaraba Investment Mudaraba is a contract between the Group and the customer whereby the Group has funds available for investment and the customer has a certain experience to manage or invest those funds in business. The Group is not involved in the management of the business. The customer would bear the loss in case of default, negligence or violations of any of the terms and conditions of the Mudaraba. Profit is recognised on an accrual basis adjusted by actual when received. Musharaka Investment Musharaka is used to provide venture capital or project finance. The Group and customer contribute towards the capital of the enterprise. Usually a special purpose company or a partnership is established as a vehicle to undertake the Musharaka. Profits are shared according to an agreed ratio but losses are shared according to the capital contributions. Profit is recognised on an accrual basis adjusted by actual when received. (aa) Trade and settlement date accounting Purchases and sales of financial assets are recognised on the trade date, i.e. the date that the Bank commits to purchase or sell the asset. (ab) New standards not yet adopted The following new standard / amendments to standards which were issued upto and are not yet effective for the year ended have not been applied while preparing these consolidated financial statements: IFRS 8 Operating Segments requires entities to provide disclosure in their financial statements related to their operating segments and also about the entity s products and services, the geographical areas in which it operates, and its major customers. Amendment to IAS 1: Presentation of financial statements requires the following disclosures by an entity: all owner changes in equity in a statement of changes in equity. All non-owner changes in equity (i.e. comprehensive income) are required to be presented in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). Components of comprehensive income are not permitted to be presented in the statement of changes in equity; a statement of financial position as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting policy retrospectively or makes a retrospective restatement; reclassification adjustments and income tax relating to each component of other comprehensive income. Reclassification adjustments are the amounts reclassified to profit or loss in the current period that were previously recognised in other comprehensive income. dividends recognised as distributions to owners and related amounts per share in the statement of changes in equity or in the notes. Dividends are distributions to owners in their capacity as owners and the statement of changes in equity presents all owner changes in equity. IFRS 8 and amendment to IAS 1 which becomes mandatory for the Group s 2009 consolidated financial statements will require disclosures with respect to the Group s consolidated financial statements. Amendment to IAS 23: Borrowing Costs related to accounting by an entity of borrowing cost which are directly attributable to the acquisition, construction or production of a qualifying assets as part of the cost of those assets. Amendment to IAS 23 which becomes mandatory for the Group from annual periods beginning on or after 01 January The International Accounting Standards Board made certain amendments to existing standards as part of its first annual improvements project. The effective dates for these amendments vary by standard and most will be applicable to the Group s 2009 consolidated financial statements. The Group does not expect these amendments to have any significant impact on the consolidated financial statements. 3 FINANCIAL RISK MANAGEMENT The Group s activities expose it to a variety of financial risks and those activities involve the identification, evaluation, acceptance and management of risks or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Group s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Group s financial performance. The Group s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up to date information systems. The Group regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice. The key risks are credit, liquidity, market and operational risks. Market risk includes currency, interest rate and other price risk. The Group has established a risk management structure to oversee and manage these risks through various committees which are responsible for making decisions and controlling the risk in relevant areas as follow: Assets and Liability Committee (ALCO) is responsible for monitoring, managing and controlling liquidity, interest rate and foreign exchange risks arising from the Bank s lending, funding and investment activities. Investment Committee (ICO) is responsible for developing the trading and investment strategy and approves specific trading and investment proposal. ICO reviews and updates the trading and investment strategy on a periodic basis. Head Office Credit Committee (HOCC) is responsible for taking credit decisions at the higher end of the risk spectrum, recommending credit policy and the future direction of credit activities in the Bank. Remedial Asset Committee (RAC) is responsible for monitoring the non-performing loan portfolio of the Bank, develops specific and collective impairment policies and proposals to initiate legal action against borrowers of the Bank. Risk Management Committee (RMC) functions to ensure that appropriate and prudent policies, procedures and practices are implemented to manage key risks. As such, RMC reviews the enterprise-wide mechanisms for the measurement, management, reporting and mitigation of all types of risks facing the Bank, and makes appropriate recommendations thereon. In addition, RMC is the primary body for monitoring and managing operational risk. The Bank has a separate Risk Management Division which independently reviews all risk measurement and monitoring policies. The Audit Committee, which is a Board committee assisted by internal audit division, is charged with directly supporting the Board in fulfilling its responsibilities in safeguarding shareholders funds. The Audit Committee provides assurances to the Board that the policies and procedures and the objectives set by the Board, are being complied with. The committee comprises three Board members and the Head of Audit, as its secretary, and meets at least four times a year. In broad terms, the structure enables the establishment of risk management policies, monitoring and review of compliance with those policies. Significant risk issues are escalated to the appropriate committee for information and/or action. In addition, various functions within the Bank are responsible for measuring, managing or monitoring risk in accordance with the decisions of the management committees.

22 FINANCIAL RISK MANAGEMENT (continued) The nature of risks and the approach to managing risks differs fundamentally between the trading and non-trading portfolios. Section (b) below contains risk management information related to the trading activities. (a) Derivative financial instruments The Group enters into a variety of derivative financial instruments for trading and risk management purposes. Derivative financial instruments used by the Group include options, swaps and foreign exchange forward contracts as mentioned in Note 30 of the financial statements. The Group is subject to credit risk arising from the respective counterparties failure to perform. Market risk arises from the possibility of unfavourable movements in interest rates relative to the contractual rates. (b) Trading activities The Group maintains trading positions in a variety of financial instruments and manages the trading activities by type of risk involved and on the basis of the categories of trading instruments held. Credit Risk The Group s credit exposure at the balance sheet date arising from financial instruments held for trading purposes is represented by the fair value of instruments with a positive fair value at that date, as recorded on the balance sheet. The risk that counterparties to trading instruments might default on their obligation is monitored on an ongoing basis. Market Risk All trading instruments are subject to market risk, the risk that future changes in market conditions may make an instrument less valuable. The instruments are recognised at fair value and all changes in market conditions directly affect net trading income. Exposure to market risk is managed in accordance with risk limits set by senior management in response to changing market conditions. 3.1 Credit Risk Credit risk is the risk that financial loss arises from the failure of a customer or counterparty to a financial instrument, to meet its obligations under a contract. It arises principally from lending, trade finance and non-trading investment activities. For risk management purposes, credit risk arising on trading investments is reported as a component of market risk exposure. The Group has policies and procedures dedicated to controlling and monitoring risk from all such activities. The Group s primary exposure to credit risk arises from loans and advances to customers, due from banks and investments. The amount of credit exposure in this regard is represented by the carrying amounts of the assets on the balance sheet. In addition, the Group is exposed to off balance sheet credit risk through commitments to extend credit and guarantees issued (refer note 27). The Group is also exposed to credit risk on other financial assets, including derivative instruments. The current credit exposure in respect of these instruments is equal to the carrying amount of these assets in the balance sheet. 3 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Credit Risk Management Credit risk is actively managed and monitored in accordance with defined credit policies and procedures. The creditworthiness of each counter party is evaluated and appropriate credit limits are established. To reduce individual counterparty credit risk, the Group ensures that, whenever necessary, all loans are secured by acceptable form of collateral. Credit limits are also established for countries, sectors and products to ensure the broad diversification of credit risk and to avoid undue concentration. Established limits and actual levels of exposure are regularly reviewed and updated by management. In addition, the Group s credit review procedures are designed to identify, at an early stage, exposures that require more detailed monitoring and review. The Bank s credit policies and procedures are approved by HOCC which is set out in the Credit Manual. The powers of HOCC are delegated through an authority from the Board of Directors. The HOCC is also charged with the responsibility for monitoring the overall credit quality of the Bank s advances portfolio, setting the level of exposure to individual industry and economic sectors as well as inter-bank and country limits. Diversification is encouraged in order to alleviate concentration risks. All credit lines are approved centrally and, wherever possible, these are secured by acceptable forms of collateral in order to mitigate credit risk. Adequate segregation exists between credit origination, approval, administration / monitoring functions. In addition to the above, the Credit Review Department within Audit Division is charged with the responsibility of conducting periodic reviews of individual accounts to ensure that all necessary internal and regulatory guidelines are being adhered to apart from performing an independent credit quality evaluation. All corporate and commercial facilities are assigned internally developed risk ratings on initial recognition and thereafter reassessed on an annual basis or an earlier date in event of a specific credit default. The Group s risk rating framework consists of ten grades, taking into account the risk of default and the availability of security or other credit risk mitigants. Grades 1 to 5 are assigned to differing level of satisfactory risk. Accounts in grade 6 are internal watch list accounts whereas accounts in grade 7 are in the watch list as per the Central Bank of the UAE. Accounts classified in grades 8 to 10 indicate non-performing status. Accounts classified in grade 1 to 7 are disclosed as neither past due nor impaired except past due amounts which are shown as past due but not impaired. The Group is in the process of implementing a more sophisticated risk rating system based on probability of default and loss given default in compliance with the requirements of Basel II Capital framework. The new system will increasingly allow more granular analysis of risk and trends. Credit Quality The gross carrying amount of financial assets less impairment losses, if any, is as follows: Loans and Due from banks advances to customers Non-trading investments Neither past due nor impaired 5,929,871 3,719,765 50,292,782 37,316,259 2,461,750 2,410,410 Past due but not impaired , , Impaired , , ,500 18,365 Gross carrying amount 5,929,975 3,719,869 51,068,707 37,878,334 2,563,250 2,428,775 Specific impairment allowance (104) (104) (310,473) (290,630) (68,325) (8,264) Collective impairment allowance - - (328,917) (209,105) - - Net carrying amount 5,929,871 3,719,765 50,429,317 37,378,599 2,494,925 2,420,511

23 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Credit Risk Management (continued) 3 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Credit Risk Management (continued) Ageing analysis of past due but not impaired loans Above 120 Total days days days Specific Impairment provision for the corporate portfolio is calculated taking into account expected future cash flows discounted at the original effective interest rate. In the case of retail portfolio, the impairment provisions and write-offs are automated in order to exercise better control over the portfolio. Such provisions commence when retail advances are overdue 90 days and are fully provided for when retail advances are overdue by 150 days. Reversal of individually calculated impairment allowances are recognised whenever the Group has reasonable objective evidence that the established estimate of loss has been reduced. Past due but not impaired loans and advances 219,606 1, , ,605 Impaired 375,320 Total past due and impaired loans and advances 775, December Above 120 Total days days days Past due but not impaired loans and advances - 2, , ,992 Impaired 350,083 Total past due and impaired loans and advances 562,075 There are a variety of reasons as to why certain amounts shown as past due are not regarded as impaired. Unless other information is available to indicate to the contrary, all amounts less than 90 days past due for the retail portfolio and 180 days past due for the corporate portfolio are considered as past due but not impaired. It is also not unusual for short-term trade finance facilities to extend beyond 90 days past due for reasons that do not reflect any concern on the creditworthiness of the counterparty. Collective impairment allowances are reassessed quarterly and charges for new allowances or release from the existing allowances are considered. Write off Impaired corporate accounts and related impairment allowances are written off on a case by case basis either partially or fully when there is no realistic prospect of recovery of these amounts i.e. when all legal avenues for recovery have been exhausted and when the proceeds from the realization of security have been received. Retail loans are written-off after 480 days overdue. Any recovery at a future date from the written-off loans is directly recognised to the income statement as an adjustment to impairment loss charge. Loans with renegotiated terms Restructuring activity is designed to manage customer relationships, maximise collection opportunities and avoid foreclosure or repossession, if possible. Following restructuring, an overdue individual account will normally be reset from delinquent to current status. Restructuring is done based on indications or criteria which, in the opinion of management, evidence the probability that payment will continue. At renegotiated loans amount to AED 70 million (2007: AED 120 million). Analysis of assets which are individually impaired Loans and advances Due from banks to customers Non-trading investments Collateral and other credit enhancements obtained The Group holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held against due from banks and investment securities. Sub standard ,645 83,547 83,135 - Doubtful ,903 57,579-18,365 Loss , ,957 18,365 - Impairment assessment The Group has a defined policy to recognise the impairment allowance , , ,500 18,365 Individually assessed loans are required to be classified as non-performing as soon as there is objective evidence that an impairment loss has been incurred. Objective evidence of impairment includes observable data such as when contractual payment of principal or interest is 90 days overdue or there are known difficulties in the cash flows of counterparties, credit rating downgrades or original terms of the contractual repayment are unable to be met. The Group determines specific impairment on individually assessed loans as well as collective impairment on collectively assessed loans. As per the guidelines of the Central Bank of the UAE, such collaterals are required to be disposed off within a period of three years from the date of acquisition. However, as per the guidelines of the Central Bank of Egypt, all moveable assets acquired are required to be disposed off within a period of one year and immovable assets within a period of five years. Credit Concentration Concentrations of credit risk that arise from financial instruments exist for groups of counterparties having similar economic characteristics, that would cause their ability to meet contractual obligations, affected by changes in economic or other conditions. The major concentrations of credit risk arise by location and type of counter parties or issuers in relation to the Group s investments, loans and advances to customers, due from banks and commitments to extend credit and guarantees issued. Other than the exposure to UAE government entities, which is high in nature, the Group has no significant exposure to any individual customer or counterparty. The Group monitors concentration of credit risk by economic sector and geographic locations.

24 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Exposure to credit risk (continued) 3 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Exposure to credit risk (continued) Analysis of loans and advances by economic sector is as follows: Maximum exposure to credit risk without taking account of any collateral and other credit enhancements Consumer 9,229,090 5,577,205 Trade and Services 7,468,045 5,854,107 Government 6,228,264 8,587,781 Financial Institutions 6,219,039 3,424,192 Real Estate 5,967,073 4,424,445 Construction 5,575,745 3,625,477 Public Sector 4,118,542 2,019,768 Manufacturing 1,237, ,354 Others 5,025,190 3,632,005 Gross loans and advances 51,068,707 37,878,334 Impairment allowance (639,390) (499,735) Loans and advances to customers 50,429,317 37,378,599 Analysis of due from banks and non-trading investments by industry sector is as follows: Due from banks Non-trading investments Government , ,531 Banks 5,929,975 3,719, , ,609 Corporate Sector - - 1,824,678 1,177,635 The table below shows the maximum exposure to credit risk for the components of the balance sheet, including derivatives. The maximum exposure is shown gross, before the effect of mitigation through the use of master netting and collateral agreements. Notes Gross Gross maximum maximum exposure exposure AED 000 AED 000 Balances with central banks 12 1,920,591 9,657,960 Due from banks 13 5,929,871 3,719,765 Loans and advances to customers 15 50,429,317 37,378,599 Non-trading investments 16 1,913,822 1,645,098 Other assets 18 2,039,942 1,256,671 Total 62,233,543 53,658,093 Contingent liabilities 27 32,647,138 26,270,650 Commitments 27 9,890,148 8,694,506 Total 42,537,286 34,965,156 Total credit risk exposure 104,770,829 88,623,249 Where financial instruments are recorded at fair value the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. 5,929,975 3,719,869 2,563,250 2,428,775 Impairment allowance (104) (104) (68,325) (8,264) 5,929,871 3,719,765 2,494,925 2,420,511

25 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Exposure to credit risk (continued) Geographic concentrations of balance sheet items are presented in the table below. GCC (excluding OECD UAE UAE) countries Others Total AED 000 ASSETS Cash and balances with central banks 1,892, ,696 2,108,328 Treasury bills , ,426 Due from banks 5,398,490 8, , ,291 5,929,871 Trading investments 23, ,137 85, ,996 Loans and advances to customers 47,867, , ,164 1,916,644 50,429,317 Non-trading investments 1,300, , , ,683 2,494,925 Investment properties 431, ,906 Other assets 2,045,645 3,964 12, ,744 2,171,619 Goodwill , ,266 Total 58,959, , ,513 4,484,176 64,860,654 LIABILITIES AND EQUITY Customers deposits 45,636, ,333 32,811 3,600,607 49,472,570 Due to banks 309, ,420-5, ,706 Medium term borrowings - - 5,672,023-5,672,023 Other liabilities 1,592, , ,249 1,738,948 Equity 7,671, ,613 7,696,028 Total 55,210, ,030 5,730,704 3,751,447 65,225,275 3 FINANCIAL RISK MANAGEMENT (continued) 3.1 Credit Risk (continued) Exposure to credit risk (continued) 31 December 2007 GCC (excluding OECD UAE UAE) countries Others Total AED 000 ASSETS Cash and balances with central banks 8,908, ,249 9,827,397 Treasury bills ,320 34,320 Due from banks 2,345, , , ,644 3,719,765 Trading investments 1,831 24,044 10, , ,676 Loans and advances to customers 35,808, ,490 14, ,001 37,378,599 Non-trading investments 617, , , ,659 2,420,511 Other assets 1,266,962 4,013 11, ,140 1,384,602 Goodwill , ,266 Total 48,949,349 1,401,980 1,556,765 3,269,042 55,177,136 LIABILITIES AND EQUITY Customers deposits 36,912,238 29,806 44,940 3,217,435 40,204,419 Due to banks 413, ,338 35,318 7, ,807 Medium term borrowings 250,000-5,840,341-6,090,341 Other liabilities 1,245,488 3,806 38, ,710 1,642,500 Equity 6,681, ,194 6,704,658 Total 45,502, ,950 5,959,095 3,602,862 55,456, Liquidity risk Liquidity or funding risk is the risk that the Group will encounter difficulty in meeting all foreseeable funding commitments and deposits withdrawal that may arise. It includes both the risk of being unable to fund assets at appropriate maturities and rates and the risk of being unable to liquidate an asset at a reasonable price and in an appropriate time frame in order to meet the funding requirements. Management of liquidity risk The Group manages liquidity risk by having access to a diverse funding base. Funds are raised using a broad range of instruments including customer deposits, money market deposits, medium term borrowings and capital. The management monitors the maturity profiles to ensure that adequate liquidity is maintained. This enhances funding flexibility, limits dependence on one source of funds and also lowers the cost of funds. ALCO is responsible for review and approval of liquidity policies and procedures. Minimum liquidity ratio limits are set for the Bank and its subsidiary bank. Limits reflect the local marketplace, the diversity of funding sources available, and the concentration risk from large depositors. The Bank and its banking subsidiary monitor liquidity ratio limits set and comply with liquidity ratios prescribed by the local regulators.

26 FINANCIAL RISK MANAGEMENT (continued) 3.2 Liquidity risk (continued) The following table reflects the contractual maturities of assets and liabilities which have been determined on the basis of the remaining period to maturity as at the balance sheet date. It does not take account of the effective maturities as indicated by the Group s deposit retention history and the availability of liquid funds. The maturity profile of assets and liabilities at was as follows, with the Group s financial liabilities at based on contractual undiscounted repayment obligations, including cash flows pertaining to principal repayment and interest payable to maturity: Up to From three From one three months to year to Over Unspecified months one year five years five years maturity Total ASSETS Cash and balances with central banks 2,108, ,108,328 Treasury bills 147, , ,426 Due from banks 5,929, ,929,871 Trading investments 49,574-57,973-6, ,996 Loans and advances to customers 22,305,714 5,285,170 15,222,938 7,615,495-50,429,317 Non-trading investments 469, ,472 1,346, , ,664 2,494,925 Investment properties , ,906 Other assets 566, , , ,171,619 Property and equipment , ,621 Goodwill , ,266 Total 31,576,455 7,056,770 17,845,357 8,009, ,000 65,225,275 LIABILITIES AND EQUITY Customers deposits 37,847,923 7,732,735 4,409, ,990,358 Due to banks 542, , ,600 Medium term borrowings 27, ,020 5,378, ,889,304 Other liabilities 918, , ,062 2,122-1,738,948 Equity ,696,028 7,696,028 Total 39,337,152 9,039,563 9,889,373 2,122 7,696,028 65,964,238 3 FINANCIAL RISK MANAGEMENT (continued) 3.2 Liquidity risk (continued) The maturity profile of assets and liabilities at 31 December 2007 was as follows, with the Group s financial liabilities at 31 December 2007 based on contractual undiscounted repayment obligations, including cash flows pertaining to principal repayment and interest payable to maturity: Up to From three From one three months to year to Over Unspecified months one year five years five years maturity Total ASSETS Cash and balances with central banks 9,391, , ,488 9,827,397 Treasury bills 1,723 32, ,320 Due from banks 3,536, , ,719,765 Trading investments 149, ,676 Loans and advances to customers 16,522,767 6,335,562 7,434,060 7,086,210-37,378,599 Non-trading investments 152, ,181 1,065, , ,999 2,420,511 Other assets 605, ,401 64,916-1,990 1,384,602 Property and equipment , ,589 Goodwill , ,266 Total 30,359,284 7,822,640 8,564,481 7,466,988 1,243,332 55,456,725 LIABILITIES AND EQUITY Customers deposits 33,902,111 5,375,934 1,093, ,283 40,555,703 Due to banks 682, , ,807 Medium term borrowings - 413,034 5,677, ,090,341 Other liabilities 961, ,601 33, ,642,500 Equity ,704,658 6,704,658 Total 35,546,808 6,567,613 6,804,647-6,888,941 55,808, Market risk Market risk is the risk that movement in market risk factors e.g. interest rates, foreign exchange rates, credit spreads and equity prices will affect the Group s income or the value of it s financial instruments. Management of market risk The Group separates it s exposure for market risk purposes into trading and non-trading portfolio. All trading instruments are recognised at fair value, and changes in fair value is directly shown in the income statements. The principal tool used to measure and control market risk for trading portfolio is Value at Risk (VaR). The VaR of a trading portfolio is the estimated loss that will arise on the portfolio over a specified period of time from an adverse market movement with a specified probability. The VaR model used is based mainly on historical simulation. Exposure to market risk is managed in accordance with risk limits set by senior management in response to changing market conditions Interest rate risk Interest rate risk is the risk that arises from timing difference in the maturity and repricing of bank s assets, liabilities and off balance sheet position. Repricing mismatch expose the Group to the unanticipated fluctuations in income or underlying economic value. The Group manages the interest rate risk by monitoring the interest rate mismatch and uses various derivative e.g. interest rate swaps, cross currency interest rate swaps to manage the risk.

27 FINANCIAL RISK MANAGEMENT (continued) 3.3 Market risk (continued) Interest rate risk (continued) The Group s operations are subject to the risk of interest rate fluctuations to the extent that interest-earning assets (including investments) and interest-bearing liabilities mature or reprice at different times or in differing amounts. In the case of floating rate assets and liabilities, the Group is also exposed to basis risk, which is the difference in repricing characteristics of the various floating rate indices, such as the savings rate, or six months LIBOR, etc. The Group proactively manages its interest rate sensitivity position, based on anticipated and actual interest rate movements, in order to maximise net interest income. The Group s interest rate sensitivity positions, based on the contractual repricing or maturity dates, whichever earlier, is as follows: At Up to From three From one Non three months to year to Over interest months one year five years five years bearing Total ASSETS Cash and balances with central banks 127, ,980,442 2,108,328 Treasury bills 147, , ,426 Due from banks 5,703, ,981 5,929,871 Trading investments 21,004-57,973-35, ,996 Loans and advances to customers 40,236,088 4,431,278 2,889,839 2,872,112-50,429,317 Non-trading investments 1,323, , , ,238 2,494,925 Investment properties , ,906 Other assets 13,954 5, ,151,901 2,171,619 Property and equipment , ,621 Goodwill , ,266 Total assets 47,573,006 5,668,660 3,109,123 2,872,112 6,002,374 65,225,275 LIABILITIES AND EQUITY Customers deposits 35,596,901 7,074, ,649-6,324,742 49,472,570 Due to banks 542, , ,706 Medium term borrowings 5,672, ,672,023 Other liabilities ,738,948 1,738,948 Equity ,696,028 7,696,028 Total liabilities and equity 41,811,130 7,177, ,649-15,759,718 65,225,275 Total on balance sheet interest rate sensitivity gap 5,761,876 (1,509,118) 2,632,474 2,872,112 (9,757,344) - Total off balance sheet interest rate sensitivity gap - 3,103,685 (3,103,685) FINANCIAL RISK MANAGEMENT (continued) 3.3 Market Risk (continued) Interest rate risk (continued) At 31 December 2007 Up to From three From one Non three months to year to Over interest months one year five years five years bearing Total ASSETS Cash and balances with central banks 7,887, , ,555,436 9,827,397 Treasury bills 1,723 32, ,320 Due from banks 3,609,992 29, ,255 3,719,765 Trading investments 57, , ,676 Loans and advances to customers 30,095,578 3,211,516 2,086,920 1,984,585-37,378,599 Non-trading investments 881, , , ,590 2,420,511 Other assets 11,201 4,448 24,419-1,344,534 1,384,602 Property and equipment , ,589 Goodwill , ,266 Total assets 42,545,052 4,153,598 2,406,271 1,984,585 4,367,219 55,456,725 LIABILITIES AND EQUITY Customers deposits 28,504,700 4,979, ,748-6,117,455 40,204,419 Due to banks 682, , ,807 Medium term borrowings 6,090, ,090,341 Other liabilities 3, ,639,003 1,642,500 Equity ,704,658 6,704,658 Total liabilities and equity 35,281,301 5,111, ,748-14,461,116 55,456,725 Total on balance sheet interest rate sensitivity gap 7,263,751 (957,962) 1,803,523 1,984,585 (10,093,897) - Total off balance sheet interest rate sensitivity gap - 73,460 (73,460) Cumulative interest rate sensitivity gap 7,263,751 6,379,249 8,109,312 10,093,897 There is no change in the methods and assumptions used in presenting the interest rate sensitivity analysis for year 2008 and year Cumulative interest rate sensitivity gap 5,761,876 7,356,443 6,885,232 9,757,

28 FINANCIAL RISK MANAGEMENT (continued) 3.3 Market risk (continued) Interest rate risk (continued) Interest rate risk is also assessed by measuring the impact of reasonable possible change in interest rate movements. The Group assumes a fluctuation in interest rates of 75 basis points and estimates the following impact on the net interest income for the year and net assets at that date: Net interest Net interest income Equity income Equity Fluctuation in yield 75 bps increase 112,019 (108,479) 183,108 (115,708) 75 bps decrease (97,101) 108,479 (179,942) 115,708 The interest rate sensitivities set out above are illustrative only and employ simplified scenarios. They are based on interest earning assets AED 59,245 million (2007: AED 51,146 million) and interest bearing liabilities of AED 49,466 million (2007: AED 40,996 million). The sensitivity does not incorporate actions that could be taken by management to mitigate the effect of interest rate movements Foreign currency risk The Group is exposed to foreign currency risk through transactions in foreign currencies. The Group s transactional exposures give rise to foreign currency gains and losses that are recognised in the income statement. These exposures comprise the monetary assets and monetary liabilities of the Group that are not denominated in the functional currency of the Bank. The Group ensures that its net foreign currency exposure is kept at an acceptable level by buying and selling foreign currencies at spot rates when appropriate. The following table shows the Group s exposure to foreign currencies: At Net Net long Net cash forward (short) Assets Liabilities position position positions AED FINANCIAL RISK MANAGEMENT (continued) 3.3 Market risk (continued) Foreign currency risk (continued) At 31 December 2007 Net Net long Net cash forward (short) Assets Liabilities position position positions AED 000 US Dollar* 15,585,140 15,594,095 (8,955) (273,359) (282,314) Egyptian Pound 1,936,892 1,281, , ,159 UK Sterling 105, ,439 1,198 (397) 801 Euro 250, ,839 (122,746) 129,327 6,581 Japanese Yen 9,005 8, Saudi Riyal 5,546 3,232 2,314-2,314 Swiss Franc 10, ,343 (162,653) 163, Others 12,880 6,193 6, ,415 17,915,883 17,544, ,083 19, ,580 * The exchange rate of AED is pegged against the US dollar since November 1980; hence the Bank s exposure to currency risk is limited. Market risk is also assessed by measuring the impact of reasonable possible change in exchange rate movements. The below table illustrates the impact on net profit and equity of the Group due to a change in exchange rate by 1%. Net profit Equity Net profit Equity Fluctuation in exchange rate by 1% USD 4,939 4,939 2,820 2,820 EGP 2,510 2,510 6,550 6,550 The foreign exchange sensitivity set out above is for illustrative purposes only and employ a simplified scenario. The sensitivity does not incorporate actions that could be taken by management to mitigate the effect of exchange rate movements. US Dollar* 18,757,571 18,891,660 (134,089) (359,852) (493,941) Egyptian Pound 2,450,489 2,199, , ,116 UK Sterling 66,894 62,650 4,244 (191) 4,053 Euro 458, ,791 (150,629) 155,496 4,867 Japanese Yen (9) 6,393 6,384 Saudi Riyal 72,442 2,499 69,943 (68,509) 1,434 Swiss Franc 1,842 1, Others 21,622 11,331 10, ,430 21,829,421 21,778,020 51,401 (266,524) (215,123)

29 FINANCIAL RISK MANAGEMENT (continued) 3.3 Market risk (continued) Equity price risk Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual stocks. The equity price risk exposure arises from the Group s investment portfolio. The following table estimates the sensitivity to a possible change in equity markets on the Group s consolidated income statement. The sensitivity of the income statement is the effect of the assumed change in the reference equity benchmark on the fair value of investments carried at fair value through the income statement. Assumed level Impact on Impact on of change net income net income % AED 000 AED 000 Investments carried at fair value through the income statement Reference equity benchmarks: UAE equity exchanges 5% 1, Other equity exchanges 5% 1,054 3,145 Net asset value of managed funds 5% 24,251 33,932 The effect on equity (as a result of a change in the fair value of equity instruments held as available for sale at ) due to a reasonably possible change in equity indices, with all other variables held constant, is as follows. Available for sale investments Reference equity benchmarks: UAE equity exchanges 5% 1,800 1,975 Other equity exchanges 5% Prepayment risk Prepayment risk is the risk that the Bank will incur a financial loss because its customers and counterparties repay or request repayment earlier or later than expected, such as fixed rate mortgages when interest rates fall. 3 FINANCIAL RISK MANAGEMENT (continued) 3.4 Operational risk (continued) The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Group standards for the management of operational risks in the following areas: Requirements for appropriate segregation of duties, including the independent authorisation of transactions. Requirements for the reconciliation and monitoring of transactions. Compliance with regulatory and other legal requirements. Documentation of controls and procedures. Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified. Requirements for the reporting of operational losses and proposed remedial action. Development of contingency plans. Training and professional development. Ethical and business standards. Risk mitigation, including insurance where this is effective. Compliance with the Group standards is supported by a programme of periodic reviews undertaken by Internal Audit and results are submitted to the Audit Committee and senior management of the Group. 3.5 Fair value measurement The Group s consolidated financial statements are prepared on a fair value basis for derivative financial instruments, financial assets and liabilities held for trading, available-for-sale investments and financial assets or liabilities designated at fair value through profit or loss, except those for which a reliable measure of fair value is not available. Other financial assets and liabilities are stated at amortised cost or historical cost. These include the held-to-maturity investments, loans and advances to customers, deposits and other balances due from banks, customer deposits, due to banks and medium term borrowings. The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount payable on demand. The value of unquoted investments is determined by reference to discounted cash flows or net asset values of the funds. The effect on profit for one year, assuming 10% of repayable financial instruments were to prepay at the beginning of the year, with all other variables held constant, is estimated at AED 18,004 thousand (2007: AED 48,983 thousand). 3.4 Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all the Group s operations and are faced by all business entities. The Group s objective is to manage operational risks so as to balance the avoidance of financial losses and damage to the Group s reputation with over all cost effectiveness and to avoid control procedures that restrict initiative and creativity.

30 FINANCIAL RISK MANAGEMENT (continued) 3.5 Fair value measurement (continued) The table below sets out the Group s classification of each class of financial assets and liabilities and their carrying amounts as at 31 December 2008 and 31 December 2007: At Designated at fair value Other Held for through Available for Held to Loans and amortised Carrying trading profit or loss sale maturity receivables cost amount AED 000 FINANCIAL ASSETS Cash and balances with central banks ,108,328 2,108,328 Treasury bills , ,426 Due from banks ,929,871 5,929,871 Trading investments 113, ,996 Loans and advances to customers ,429,317 50,429,317 Non-trading investments - 569, ,404 1,506, ,494,925 Investment properties - 431, ,906 Other assets - 9, , ,300 1,242,573 Carrying amount 113,996 1,010, ,404 1,506, ,784 60,100,242 63,669,342 FINANCIAL LIABILITIES Customers deposits ,472,570 49,472,570 Due to banks , ,706 Medium term borrowings ,672,023 5,672,023 Other liabilities - 25, , ,988 3 FINANCIAL RISK MANAGEMENT (continued) 3.5 Fair value measurement (continued) At 31 December 2007 Designated at fair value Other Held for through Available for Held to Loans and amortised Carrying trading profit or loss sale maturity receivables cost amount AED 000 FINANCIAL ASSETS Cash and balances with central banks ,827,397 9,827,397 Treasury bills ,320 34,320 Due from banks ,719,765 3,719,765 Trading investments 149, ,676 Loans and advances to customers ,378,599-37,378,599 Non-trading investments - 857, ,319 1,193, ,420,511 Other assets - 8, , ,601 1,115,820 Carrying amount 149, , ,319 1,193,523 37,839,702 14,228,083 54,646,088 FINANCIAL LIABILITIES Customers deposits - 28, ,175,637 40,204,419 Due to banks , ,807 Medium term borrowings ,090,341 6,090,341 Other liabilities - 38, ,050,590 1,088,963 Carrying amount - 67, ,131,375 48,198,530 Carrying amount - 25, ,756,480 56,782,287

31 INTEREST INCOME 8 OTHER OPERATING INCOME Loans and advances to customers 2,503,430 2,248,144 Due from banks 203, ,621 Investments - Available for sale 11,019 9,174 - Held to maturity 90,093 71,890 - Others 6,568 12,711 Interest income 2,814,259 2,772,540 Income from Islamic financing and investment products 322, ,177 Expense recoveries 43,690 32,211 Rental income 3,431 3,654 Other miscellaneous income 54,478 12,015 9 STAFF 101,599 47,880 The Group s contribution to the pension scheme in respect of UAE national employees amounted to AED 2.5 million (2007: AED 2.8 million). 5 INTEREST EXPENSE 3,136,332 2,891,717 During 2004, the Bank and its subsidiary in the UAE commenced VESS for its employees. Employees contribute a certain fixed percentage of their basic salary to VESS and the Group contributes a matching percentage. The amounts so collected are managed by the Group. An employee is entitled to the Bank s contribution and income thereon upon completion of a continuous period of employment of three years. During the year, the Bank s contribution to VESS amounted to AED 7.2 million (2007: AED 5.4 million). At, the funds managed by the Bank on behalf of the Scheme amounted to AED 44 million (2007: AED 34 million). Customers deposits 1,281,922 1,370,886 Due to banks and medium term borrowings 284, ,881 1,566,195 1,721,767 6 NET FEE AND COMMISSION INCOME Fee and Commission Income Credit related fees 178, ,454 Account service charges 32,730 33,143 Letter of credit and letter of guarantee 137,452 96,506 Brokerage income 43,305 43,304 Others 142,700 99, , ,757 Fee and Commission Expenses Brokerage 3,713 3,850 Others 3,320 2,394 7 NET (LOSS) / GAIN ON NON-TRADING FINANCIAL INSTRUMENTS 7,033 6, , ,513 Financial assets designated at fair value through profit or loss (160,464) 66,537 Recognised gain on investments available for sale 8,471 73,996 An actuarial valuation is not performed on staff terminal and other benefits as the net impact of the discount rate and future salary and benefits level on the present value of the benefits obligation are not expected by management to be significant. 10 OTHER OPERATING EXPENSES Occupancy costs 60,610 44,153 Legal and professional 23,180 9,611 Communication 20,158 15,751 Repairs and maintenance 20,600 18,627 Advertising and promotion 22,707 15,055 Other miscellaneous expenses 31,126 19, IMPAIRMENT LOSS ON FINANCIAL ASSETS (NET) 178, ,146 Impairment Loss: Loans and advances (net of write back) 249,401 61,377 Investments held to maturity 10,101 8,264 Investments available for sale 49, ,462 69,641 Recovery: Loans and advances previously written off (86,054) (29,609) BCCI Group liquidators (19,485) (25,896) 203,923 14,136 (151,993) 140,533

32 CASH AND BALANCES WITH CENTRAL BANKS Cash on hand 187, ,437 Balances with Central Banks Deposits and other balances 394,273 1,251,272 Cash reserve deposits 1,446,434 1,006,688 Certificates of deposit 79,884 7,400,000 Cash reserve deposits are not available for the Bank and its banking subsidiary for day-to-day operations. 13 DUE FROM BANKS 2,108,328 9,827,397 Demand 225,490 79,905 Overnight and short term placements 5,704,381 3,554,294 Loan to a bank - 85,566 5,929,871 3,719,765 Loan to a bank was secured by collaterals having a market value of AED nil as at (31 December 2007: AED 85 million ). 14 TRADING INVESTMENTS Equity instruments 32,863 63,761 Debt instruments 57,961 57,127 Others 23,172 28, LOANS AND ADVANCES TO CUSTOMERS 113, ,676 Term loans 33,473,841 26,089,719 Overdrafts 11,235,358 8,700,645 Islamic financing 6,102,470 2,809,576 Others 257, ,394 51,068,707 37,878,334 Impairment allowance (639,390) (499,735) 15 LOANS AND ADVANCES TO CUSTOMERS (continued) The movements in the impairment allowances during the year are as follows: At 1 January 499, ,947 Charge for the year (net of write back) 249,401 61,377 Amounts written off (109,746) (104,589) At 31 December 639, ,735 At, the balances in accounts classified as impaired amounted to AED 375 million (2007: AED 350 million). In certain cases, the Group continues to carry classified doubtful debts and delinquent accounts on its books even after making 100% allowance for impairment. Interest is accrued where appropriate on these accounts for litigation purposes only. Interest income on impaired loans is recognised in accordance with IAS 39: Financial Instruments: Recognition and Measurement. The notional interest on impaired loans and advances charged during the year amounted to AED 1.5 million (2007: AED 3.6 million). 16 NON-TRADING INVESTMENTS a. Financial assets designated at fair value through profit or loss Government bonds 75, ,470 Externally managed funds 446, ,850 Others 47,090 26, , ,669 b. Available for sale Equities 71,901 89,240 Debt instruments 331, ,105 Others 15,838 9, , ,319 c. Held to maturity US government agency issues - 91,816 Government agencies 95,674 97,411 Eurobonds 535, ,535 Others 893, ,025 1,524,833 1,201,787 Impairment allowance (18,365) (8,264) Fair value of held to maturity investments is AED 1,233 million (2007: AED 1,182 million). 1,506,468 1,193,523 2,494,925 2,420,511 50,429,317 37,378,599

33 NON-TRADING INVESTMENTS (continued) The movement in the impairment allowance is as follows: Held to maturity Available for sale At beginning of the year 8, Impairment charge for the year 10,101 8,264 49,960 - At end of the year 18,365 8,264 49,960 - Impairment allowance on available for sale investments represents the impairment charge provided during the year on a quoted security due to the prolonged and significant decline in its fair value. The impairment loss had been transferred from equity and charged to income statement. 17 INVESTMENT PROPERTIES Investment properties include two plots of land acquired by the Group for lease in Abu Dhabi, UAE during Payment made during 2007 was recognised as advance payment for investment properties. The Group obtained possession of these plots of land during the year and classified these as investment properties as being held to earn rentals and for capital appreciation. Based on valuation conducted by independent professional valuers, the difference between the cost and the fair value was credited to the income statement. The valuations were conducted in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards and the relevant statements of the International Valuation Standards taking into consideration the inherent characteristics, attributes and locality of property to arrive at the fair valuation of the property. The Group also invested in land and properties in Abu Dhabi, UAE. Advance paid on these properties of AED 732,372 thousand is disclosed in Note 18 as Other assets which will be classified as investment properties once significant risks and rewards associated with the properties pass to the Group. 18 OTHER ASSETS 19 PROPERTY AND EQUIPMENT Furniture, Office Capital Freehold equipment improvements work in land and and motor and progress buildings vehicles software Total Cost: At 1 January 55, , , , , ,522 Additions 34,817 48,352 28,758 23, ,541 88,878 Write off / disposal - - (125) (1,777) (1,902) (3,504) At 31 December 90, , , , , ,896 Accumulated Depreciation: At 1 January - 94, ,191 67, , ,031 Provided during the year - 7,183 26,107 15,690 48,980 38,046 Disposals - - (92) (281) (373) (742) At 31 December - 101, ,206 83, , ,335 Provision for impairment - in property value - (1,972) - - (1,972) (1,972) At 31 December 90, ,880 72,159 43, , ,589 The Bank s head office building (cost: AED 67 million) is constructed on land granted to the Bank by the Government of Abu Dhabi, which is recorded at AED nil. Advance payment for investment properties 732,372 66,527 Acceptances 714, ,601 Interest receivable 472, ,979 Collateral pending sale 71,948 57,472 Unsettled brokerage trades 10, ,124 Positive fair value of derivatives (note 30) 9,489 8,116 Investment in associates 5,764 5,764 Deferred tax asset (note 28) - 4,117 Other 154, ,902 Unsettled brokerage trades are regular way purchases and sales of securities for customers which are accounted for on a trade date basis. Investment in associates pertains to 40% ownership stake in Alexandria Medical Services Company by UNB-Egypt. 2,171,619 1,384,602

34 GOODWILL 22 DUE TO BANKS At 1 January 262, ,453 Exchange difference - 9,813 At 31 December 262, ,266 On 21 September 2006, the Group acquired control of UNB-E, which became a subsidiary of the Group and has been consolidated from that date. The acquisition has been initially accounted for using the purchase method of accounting, as required by IFRS 3: Business Combinations based on the fair value of assets and liabilities. The excess of the cost of acquisition over the fair value of the Bank s share of identifiable assets, liabilities and contingent liabilities of UNB-E at the date of acquisition has been accounted as Goodwill. Goodwill is attributable to the significant synergies expected to arise from the development of UNB-E within UNB Group, and those intangibles such as strategically located branch network covering cities in Egypt and workforce in place with local knowledge and experience, which are not recognised separately. Goodwill is stated at cost less any accumulated impairment losses, which are charged to the consolidated statement of income. An impairment test for goodwill is carried out annually or more frequently if events or changes in the circumstances indicate that the carrying value may be impaired. The management carried out an impairment test for goodwill as at based on the assumptions that business of UNB-E will grow in line with the long term forecast. The recoverable amount of Goodwill has been calculated based on the value in use. Value in use was determined by discounting the future cash flows expected to be generated based on actual operating results and the strategic plan in place for the business. A discount rate of 13.4% was used for discounting the cash flows. Based on the computation, there is no impairment of goodwill as at reporting date. 21 CUSTOMERS DEPOSITS Current and other accounts 5,079,083 6,356,638 Saving accounts 556, ,106 Time deposits 40,982,458 31,658,226 Islamic product deposits 2,854,893 1,732,449 Analysis of customers deposits by sector is as follow: 49,472,570 40,204,419 Government 18,685,092 12,232,812 Public Sector 3,030,272 3,629,390 Corporate 18,845,342 17,239,383 Retail 8,911,864 7,102,834 49,472,570 40,204,419 As of, time deposits also include deposits of AED 3,236,134 thousand (2007: AED nil) placed by the U.A.E. Federal Government for up to 5 years which are subject to the Group meeting certain minimum capital ratios and other Central Bank compliance requirements. Demand 8,868 70,317 Overnight and short term placements 3, ,654 Term loans and deposits 633, ,836 Certificate of deposits - 50, MEDIUM TERM BORROWINGS 645, ,807 Syndicated loan 3,673,000 3,673,000 Euro Medium Term Note 1,999,023 2,417,341 5,672,023 6,090,341 The following table shows the maturities of medium term borrowings: Year of maturity , , , ,599,023 1,604, ,673,000 3,673, OTHER LIABILITIES 5,672,023 6,090,341 Acceptances 714, ,601 Interest payable 251, ,185 Staff related provisions 99,136 91,365 Unsettled brokerage trades 10, ,804 Negative fair value of derivatives (Note 30) 11,282 31,026 Others 652, ,519 1,738,948 1,642,500 Unsettled brokerage trades are regular way purchases and sales of securities for customers which are accounted for on a trade date basis. 25 SHARE CAPITAL The authorised, issued and paid up share capital of the Bank is 1,875,000 thousand shares of AED 1 each (2007: 1,562,500 thousand shares of AED 1 each). The directors proposed a cash dividend of AED 0.10 per share (2008: AED 0.20 per share) amounting to AED 187,500 thousand (2008: AED 312,500 thousand) and bonus issue of 187,500 thousand shares of AED 1 each in the Board meeting held on 10 February 2009 (2008: 312,500 thousand shares of AED 1 each).

35 LEGAL RESERVE In accordance with Article 82 of the Union Law No. 10 of 1980, 10% of annual net profit is transferred to a legal reserve until this reserve equals 50% of the paid up share capital. The reserve is not available for distribution. As the legal reserve exceeds 50% of the share capital, no further transfer from the Bank s annual profit has been made. The transfer in the current year is in respect of subsidiaries. At 1 January 2,289,577 2,282,758 Transfer from retained earnings 18,706 6, COMMITMENTS AND CONTINGENCIES (a) Loan and advances commitments 2,308,283 2,289,577 At any time the Group has outstanding commitments to extend credit. These commitments take the form of approved credit facilities. (Restated) Loan and advances commitments 9,591,358 8,616,591 Outstanding loan and advances commitments have commitment periods that do not usually extend beyond a period of one year. (b) Contingencies The Group provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to 2 years. Expirations are not concentrated in any period. The contractual amounts of contingent liabilities are set out in the following table by category. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the balance sheet date if counterparties failed completely to perform as contracted. (Reclassified) Letters of credit 3,943,699 4,469,971 Guarantees 27,344,429 20,299,748 Credit Default Swaps 1,359,010 1,500,931 32,647,138 26,270, COMMITMENTS AND CONTINGENCIES (continued) (b) Contingencies (continued) These commitments and contingent liabilities have off balance-sheet credit risk as only the related fees and provisions for probable losses are recognised in the balance sheet until the commitments are fulfilled or expire. Many of the contingent liabilities and commitments will expire without being advanced in whole or in part. Therefore, the amounts do not represent expected future cash flows. (c) Operating lease commitments Where the Group is a lessee, the future minimum lease payments under non-cancellable operating leases are as follows: Not later than one year 28,852 20,186 Later than one year and not later than five years 31,384 27,741 Later than five years 2,800 10,167 (d) Other commitments 63,036 58,094 Capital commitments 47,070 50,295 Investment commitments 302, , TAXATION 349, ,210 The Group is not liable to any income tax in the UAE as there is no income tax in the UAE for locally incorporated entities. The Group is liable to the income tax in respect of its subsidiary operating in the Arab Republic of Egypt. Balance sheet: Deferred tax asset - 4,117 Deferred tax liability (1,769) (410) Net deferred tax asset (1,769) 3,707 Income statement Current tax expense in respect of UNB-E 8,590 3,017 As at and 31 December 2007, UNB-E is subject to tax at applicable rate of 20% in the Arab Republic of Egypt. For the purpose of determining the tax expense for the year, the accounting profit has been adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense. After giving effect to these adjustments, the average effective tax rate is estimated to be nil due to carry forward tax losses.

36 TAXATION (continued) The deferred tax asset has been recognised at the effective tax rate of Nil (2007: 20%). UNB-E s tax assessments have been completed by the tax authorities up to tax year UNB-E has filed an objection with the tax authorities contesting certain adjustments made by the tax department in its assessment for tax years 1998 to The decision on the objection is awaited. The management is confident that UNB-E will receive favourable decisions on most of the issues contested. The tax assessment in respect of the financial year ended 31 December 2005, 31 December 2006 and 31 December 2007 are yet to be completed by the tax authorities. The Group is responsible for any tax liability that may arise from the outstanding assessments of its subsidiary. Since there is no income tax in the United Arab Emirates, a reconciliation between the accounting profit and the taxable profit has not been presented. 29 CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following balance sheet amounts: Cash and balances with the central banks 2,108,328 9,827,397 Treasury bills 918,426 34,320 Due from banks - Local Banks 5,396,125 2,345,966 - Foreign Banks 533,746 1,373,799 Due to banks (496,661) (422,971) 30 DERIVATIVES 8,459,964 13,158,511 In the ordinary course of business, the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instrument, reference rate or index. The Bank uses the following derivative financial instruments: Derivative product types Forwards are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Swaps are contractual agreements between two parties to exchange interest or foreign currency differentials based on a specific notional amount. For interest rate swaps, counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency. 30 DERIVATIVES (continued) The table below shows the notional amounts and the term to maturity of the derivative instruments. The notional amount is the amount of a derivative s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. At Notional Notional amounts by term to maturity amount Within More than Total 3 months 3-12 months 1-5years 5years AED 000 AED 000 AED 000 AED 000 AED 000 Forward foreign exchange contracts 507, , , Interest rate swaps 6,337,192-73,460 6,190,272 73,460 Options 31,158 23,369 7, Total 6,875, , ,558 6,190,272 73,460 At 31 December 2007 Forward foreign exchange contracts 347,680 56, , ,310 - Interest rate swaps 456,818 55, , ,285 - Options 35,786 22,244 13, Total 840, , , , RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In the case of the Group, related parties, as defined in International Accounting Standard No. 24: Related Party Disclosures, include major shareholders of the Group, directors and key management of the Group and their related entities. Banking transactions are entered into with related parties on terms and conditions approved by either the Group s management and / or Directors. In February 2007, Abu Dhabi Investment Authority transferred its entire shareholding in the Bank to Abu Dhabi Investment Council, an entity formed by Law No. 16 of During the current year, Department of Finance, Abu Dhabi also transferred its entire shareholding in the Bank to Abu Dhabi Investment Council. Consequently, the Government of Abu Dhabi, who holds an aggregate of 50% of the Bank s share capital through indirect holdings, remains the ultimate controlling party of the Group. Options are contractual agreements that convey the right, but not the obligation, to either buy or sell a specific amount of a commodity, foreign currency or financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group only transacts in currency options on behalf of its customers

37 RELATED PARTY TRANSACTIONS (continued) The significant balances included in the consolidated financial statements are as follows: Directors, related entities and key management Major shareholders AED 000 AED 000 Balances as at 31 December Loans and advances 2,570,046 1,294, Customers deposits 67,591 51,037 2,284,550 6,716,727 Commitments and contingencies 339, , ,135 The significant transactions with related parties included in these consolidated financial statements are as follows: Directors, related entities and key management Major shareholders AED 000 AED 000 Interest income 90,677 76, Interest expense 1,112 2,141 59, ,631 Net fee and commission income 5,802 2, Directors remuneration 2,800 1, Salary and benefits 30,945 24, Terminal benefits Impairment loss, recognised in the income statement during the year does not include any impairment charge for loans and advances extended to related parties (2007: Nil). At, there are no impaired loans and advances from the related parties (31 December 2007: Nil). In accordance with the Ministry of Economy and Commerce interpretation of Article 119 of Federal Law No. 8 of 1984 (as amended), Directors remuneration is treated as an appropriation from equity. 32 SEGMENTAL ANALYSIS The Group is organised and managed within two major segments, each representing a strategic business unit offering products and services to different markets: 32 SEGMENTAL ANALYSIS (continued) The following table presents segmental income, net profit and expenses for the year ended and 31 December Commercial Treasury and Commercial Treasury and Banking Investments Total Banking Investments Total Operating income 2,386,199 (92,170) 2,294,029 1,164, ,794 1,694,562 Impairment loss on financial assets (net) 152,040 51, ,923 5,872 8,264 14,136 Profit for the year 1,666,893 (225,708) 1,441, , ,547 1,179,351 Segment depreciation 36,968 12,012 48,980 21,698 16,348 38,046 The following table presents segmental assets and liabilities information as at and 31 December Commercial Treasury and Commercial Treasury and Banking Investments Total Banking Investments Total Segment total assets 44,368,522 20,856,753 65,225,275 32,960,284 22,496,441 55,456,725 Segment total liabilities 43,241,326 14,287,921 57,529,247 35,554,789 13,197,278 48,752,067 The Group mainly operates in two geographic areas which are the United Arab Emirates and the Arab Republic of Egypt. No geographic segment analysis is presented within these consolidated financial statements as the management considers the operations in the Arab Republic of Egypt are not significant. Commercial Banking includes the Group s corporate, retail and Islamic banking activities in two geographic areas. Treasury and Investments includes treasury, investment and capital market related activities of the Group and certain Head Office revenues and costs. Inter segmental transactions are conducted at estimated market rates on an arms length basis. Interest is charged or credited to units and business segments either at contracted or pool rates, both of which approximate the replacement cost of funds. Overheads have been allocated on an appropriate basis.

38 BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share is calculated by dividing the net profit for the year attributable to equity shareholders of the Bank by the weighted average number of shares outstanding during the year as set out below. Net profit for the year attributable to equity shareholders of the Bank (AED 000) 1,404,781 1,168,419 Shares as at 1 January (Thousand) 1,562,500 1,562,500 Effect of bonus shares issued (Thousand) 312, ,500 Weighted average number of shares outstanding during the year (Thousand) 1,875,000 1,875,000 Basic and diluted earnings per share AED 0.75 AED CAPITAL MANAGEMENT Capital measurement and allocation The Central Bank of the UAE is the supervisor of the Bank and, in this capacity, receives information on capital adequacy and sets minimum capital requirements. Banking subsidiary, UNB-E is directly regulated by the Central Bank of Egypt, which sets and monitors it s capital adequacy requirements. As required by the Central Bank of the UAE, the Group is required to maintain a minimum capital adequacy ratio of 10% on a consolidated basis. The Group s regulatory capital consists Tier I and Tier II capital. Tier I capital comprises total equity attributable to equity shareholders of the Bank except cumulative changes in fair value and minority interest less goodwill. Tier II capital comprises eligible revaluation reserve and collective impairment allowance on loans and advances. Capital management The Group s capital resources policy is to maintain its capital base through the diversification of its sources of capital and the efficient allocation of capital. It seeks to maintain at all times a prudent relationship between its total capital, as measured according to the criteria used by Central Bank of the UAE and varied risk of its business. The Bank and its overseas subsidiary have complied with all externally imposed capital requirements throughout all period presented. There have been no material changes in the Group s management of capital during the period. 34 CAPITAL MANAGEMENT (continued) The table below shows the regulatory capital and capital charge calculated in accordance with the guidelines of the Central Bank of the U.A.E. under Basel I and Basel II. Capital Base Tier I Capital Equity attributable to equity shareholders of the Bank 7,526,253 6,558,225 Minority interest 169, ,584 Less: goodwill (262,266) (262,266) 7,433,762 6,433,543 Tier II Capital Eligible cumulative changes in fair value - 3,982 Collective impairment allowance on loans and advances 328, ,917 3,982 Total capital base (a) 7,762,679 6,437,525 Regulatory capital charge calculation under Basel I Capital adequacy risk-weighted assets Risk- Riskweighted weighted equivalent equivalent On-balance sheet items 45,907,196 28,894,711 Off-balance sheet items 19,714,309 13,564,945 Total risk-weighted assets (b) 65,621,505 42,459,656 Capital adequacy ratio {(a)/(b) x 100} 11.8% 15.2% The risk-weighted equivalents for derivative transactions are determined using the current exposure method. A credit conversion factor as determined by the Central Bank of the U.A.E., is applied to the replacement cost of these contracts. The resultant amounts are then risk-weighted according to the classification of the counter-party.

39 64 34 CAPITAL MANAGEMENT (continued) Regulatory Capital Charge Calculation Under Basel II With effect from 1 January 2008, the Group is also required to compute regulatory capital charge as per the provisions of International Convergence of Capital Measurement and Capital Standards A revised framework (more commonly known as the Basel II accord) as adopted by the Central Bank of the UAE. Capital adequacy risk-weighted assets Risk- Riskweighted weighted equivalent equivalent Credit Risk 63,944,325 41,088,268 Market Risk 355, ,708 Operational Risk 2,554,510 2,371,550 Total risk-weighted assets (c) 66,853,929 44,344,526 Capital adequacy ratio {(a)/(c) x 100} 11.6% 14.5% The Group follows standardised approach for its credit portfolios. Group calculates its market risk in its trading portfolios based upon the Group s VaR models. 35 SUBSEQUENT EVENT In February 2009, the Department of Finance, Government of Abu Dhabi proposed to inject additional capital into certain Abu Dhabi financial institutions. Accordingly, and in response to this proposal, the Bank has decided to issue Tier 1 capital notes to the Government of Abu Dhabi, with a principal amount of AED 2 billion (the Notes ). Proposed issuance of these Notes has been approved by the Bank s Board of Directors on 2 February These Notes are subject to certain regulatory approvals and the Bank is in the process of obtaining these approvals. These notes will bear interest at a fixed rate of 6% per annum payable semi-annually in arrears from (and including) the issue date and for a period of five years, and thereafter at a floating rate, reset and payable semi-annually in arrears, reflecting the initial margin above the then prevailing six-month Emirates Interbank Offered Rate (EIBOR). The notes are non-voting, non-cumulative perpetual securities, and are callable subject to certain conditions. 36 COMPARATIVE FIGURES Certain previous year figures have been reclassified in order to conform to the presentation for the current year. Please refer to Notes 27 and 30 for reclassification figures.

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