annual report annual report 2012

Transcription

1 annual report annual report

2 table of contents Financial Highlights 6 Statement of the Chairman and the Chief Executive Officer 8 Corporate Governance Corporate Governance Framework Composition of the Board of Directors Biographies of Board s 16 Management of Bank Audi sal - Audi Saradar Group 22 Management Discussion and Analysis Introduction Strategy Economic Environment Domestic Operating Environment Operating Environment in the MENA Region Operating Environment in Turkey Operating Environment in West Europe Activity and Performance Analysis Business Overview in Balance Sheet Management Results of Operations Analysis by Business Segments Capital Management Dividend Policy Risk Management Investor Relations Investor Relations Activity in Bank Audi's Stock Research Coverage Deployed Resources Operations Information Technology Human Resources Corporate Social Responsibility 75 General Assembly Excerpts 78 Consolidated Financial Statements 80 Auditors Report 81 Consolidated Income Statement 82 Consolidated Statement of Comprehensive Income 83 Consolidated Statement of Financial Position 84 Consolidated Cash Flow Statement 85 Consolidated Statement of Changes in Equity 86 Notes to the Consolidated Financial Statements 88 Notes' Index 89 Notes 90 Shareholding Structure 208 Corporate Structure 209 Group High Level Chart 210 Organisation Chart 211 Management 214 Bank Audi sal - Audi Saradar Group 214 Management of Bank Audi sal - Audi Saradar Group (continued) 214 Country Management Lebanon 216 Audi Saradar Investment Bank sal 217 Audi Saradar Private Bank sal 218 Banque Audi (Suisse) sa 219 Bank Audi Saradar France sa 220 Bank Audi sal - Jordan Branches 221 Bank Audi Syria sa 222 Bank Audi sae (Egypt) 223 Arabeya Online Brokerage (Egypt) 228 National Bank of Sudan 229 Audi Capital (KSA) cjsc 230 Bank Audi LLC (Qatar) 231 Audi Capital Gestion sam (Monaco) 232 Odeabank A.Ş. 233 Addresses 234 Lebanon 234 Bank Audi sal - Audi Saradar Group 234 Audi Saradar Investment Bank sal 238 Audi Saradar Private Bank sal 238 Switzerland Banque Audi (Suisse) sa 238 France Bank Audi Saradar France sa 238 Jordan Bank Audi sal - Jordan Branches 238 Syria Bank Audi Syria sa 239 Egypt 241 Bank Audi sae 241 Arabeya Online Brokerage 243 Sudan National Bank of Sudan 243 Saudi Arabia Audi Capital (KSA) cjsc 243 Qatar Bank Audi LLC 243 Monaco Audi Capital Gestion sam 243 Turkey Odeabank A.Ş. 244 United Arab Emirates Bank Audi sal - Abu Dhabi Representative Office

3 gulf Bank Audi enjoys firm coverage of private and corporate banking markets in the Gulf region. The Bank offers its GCC clients high quality trading and advisory services, in addition to discretionary portfolio and asset management services, and increasingly caters to the financing needs of businesses and corporates. 4 5

4 financial highlights Assets (USD Million) Net Earnings (USD Million) Bank Audi sal: Selected Financial Data (USD Million) CAGR 12.6% CAGR 13.9% Earnings per Common Share Growth (USD) CAGR 13.8% Diluted Basic CAGR Assets 17,320 20,385 26,486 28,688 28,737 31, % Loans to customers 4,708 6,129 6,747 8,548 8,594 10, % Customers' deposits 14,299 17,337 22,985 24,848 24,798 26, % Shareholders' equity 1,824 1,966 2,193 2,420 2,357 2, % Net earnings % Number of branches % Number of staff 3,872 4,291 4,388 4,838 4,808 5, % Liquidity and asset quality Liquid assets/deposits 82.86% 77.39% 82.10% 77.25% 77.20% 74.51% Loans/Deposits 32.93% 35.35% 29.35% 34.40% 34.66% 38.91% Net doubtful loans/gross loans (excluding collective provisions) 0.91% 0.60% 0.93% 0.61% 0.66% 0.64% Loan loss provisions/gross doubtful loans (excluding collective provisions) 81.20% 80.35% 72.36% 72.61% 77.16% 76.26% Net doubtful loans/equity 2.17% 1.06% 1.11% -0.34% 2.50% 2.57% Collective provisions/net loans 0.72% 1.17% 1.06% Capital adequacy Equity/Assets 10.53% 9.64% 8.28% 8.44% 8.20% 8.55% Capital adequacy as per BASEL II requirement 12.68% 12.84% 11.93% 11.42% 10.69% 11.79% Profitability Cost to income 55.89% 54.91% 48.41% 47.28% 44.71% 45.96% ROAA 1.27% 1.26% 1.23% 1.28% 1.27% 1.32% ROACE 12.25% 13.30% 14.77% 16.02% 16.73% 16.49% Share data Common shares outstanding 329,023, ,893, ,189, ,477, ,439, ,749, % Preferred shares outstanding 52,500,000 12,500,000 12,500,000 13,750,000 13,750,000 15,250, % Net dividends on common shares (in USD million) % Net dividends on preferred shares (in USD million) % Payout ratio 42% 40% 45% 44% 43% 42% 0.00% Basic common earnings per share (in USD) % Diluted common earnings per share (in USD) % Share price (in USD) % Market capitalisation (in USD) 2,303,162 1,777,848 2,856,772 3,136,294 1,970,841 2,150, % 6 7

5 statement of the chairman and the chief executive officer The Bank s achievements and results for confirm once again the Group s ability to sustain its growth track record in an atypical surrounding environment, while pursuing its expansionary strategy to new captive markets of interest. Those achievements actually represent additional acknowledgements of Bank Audi s highly differentiated and innovative profile: a bank that has the best universal banking profile among peers, a bank that benefits from a strong proven expertise in cross-border expansion, a bank that enjoys firm risk management philosophies combined with best Corporate Governance practices, thorough Management vision and wise strategic planning systems, and a bank that has the most diversified shareholders base gathering around its historical shareholders large regional investors and international institutional investors. Bank Audi sal - Audi Saradar Group was indeed able, in, to considerably differentiate itself by performing favourably in the most difficult operating conditions, and even embarking on lucrative expansion. The Bank managed to sustain positive assets and earnings growth (respectively at 8.9% and 5% in ), improve its risk coverage, and reinforce its financial standing across all entities both domestic and abroad. In details, the Bank s consolidated assets rose by USD 2.6 billion during the year to reach USD 31.3 billion at end-december and USD 39.8 billion when accounting for fiduciary deposits, security accounts and assets under management. The growth in assets was in particular owed to customers deposits which grew by 8.1% in, i.e. the equivalent of USD 2 billion, moving from USD 24.8 billion at end-december to USD 26.8 billion at end-december. The rise in consolidated assets was translated into a growth of 22% at the level of the consolidated lending portfolio (the equivalent of USD 1.9 billion), for the latter to reach USD 10.5 billion at end-december, and which contributed to a steady increase in the loan-to-deposit ratio from 34.7% to 39.1% over the period. Lending growth was coupled with a strengthening of the lending portfolio quality through the allocation of additional net provisions worth USD 121 million during. collective provisions reached USD 111 million at end-december, the equivalent of 1.1% of the consolidated net loans portfolio, while loan loss provisions stood at USD 221 million, translating in a coverage of doubtful loans by specific provisions of 76.3%. In parallel, the gross doubtful loans to gross loans ratio improved, reaching 2.68% at end-december, while net doubtful loans accounted for a mere 0.63% of gross loans. The growth in assets was not realised at the detriment of the Group s financial standing, as 23.1% of the total growth in assets during was used to increase primary liquidity which reached USD 13.1 billion and represented 49% of customers deposits. In parallel, the Bank continued to enjoy sound capital adequacy ratio with a Basel III ratio of around 11.6%, versus a 10% minimum regulatory requirement. As to profitability, Bank Audi s net earnings grew by 5% over the year, moving from USD 365 million in to USD 384 million in. Based on such results, the Bank s profitability ratios improved, with the return on average assets reporting 1.28% and the return on average common equity amounting to 16.6% over the year. The most significant development of the past year was the launch of Odeabank A.Ş., the fully owned Turkish subsidiary of Bank Audi sal - Audi Saradar Group, on the beginning of November. Odeabank, the first foreign bank to be granted an operating license by the Banking Regulatory and Supervisory Agency in 14 years, obtained its license in September. In only two months time, the Bank managed to open 6 branches, attract over 1,500 customers and build customers deposits of over USD 1.4 billion, which translated into assets of over USD 2 billion (USD 4.3 billion at end- March 2013). Odeabank s achievements in such a small period of time underscore the pertinent investment the Bank made. Over the medium term, Turkey would constitute one of the development pillars of the Group, together with Lebanon and Egypt. Odeabank s biggest advantage is a young, dynamic, ambitious, success-oriented team and a continuous search for perfection, with the purpose of reaching top level customer satisfaction. To achieve that, the Bank has equipped all its branches with top-of-the-range technologies in a way to enhance quick quality service, and has opted for recruiting the most experienced and specialised personnel in the sector. Following the expansion to Turkey, the Group is now present in 12 different countries. Over and above its historic and dominant presence in Lebanon and Europe (France, Switzerland, and recently Monaco), the Group is now present in Jordan, Syria, Egypt, Sudan, Saudi Arabia, Qatar, Turkey and the United Arab Emirates through a representative office. Bank Audi has in parallel reinforced its universal banking profile, offering a full range of Commercial and Corporate Banking, Retail and Individual Banking, Online Brokerage services, Private Banking, Investment Banking, Capital Market activities, in addition to Insurance activities. In particular, Bank Audi benefits today from the following leaderships: A strong franchise in Commercial Banking activities, with a diversified loan portfolio covering top corporates from Lebanon, the MENA region and Turkey. By end-december, the Bank had a corporate and commercial loan portfolio of USD 7.6 billion, by far the largest among Lebanese banks. Bank Audi was able to sustain its lead presence in Project and Structured Finance by extending new loans covering a variety of sectors including fertilizer production, oil and gas, retail and commercial development, construction and contracting, real estate, cement, steel, hotels, airlines, and insurance. A strong franchise in Retail Banking, with a wide spectrum of 145 retail products and services covering bancassurance, credit card and internet banking, offered in all countries where Bank Audi operates. Retail activity is supported by an 80-branch domestic network, which is the largest in Lebanon and an 82-branch network in the MENA region and Turkey built in four years of average activity. The Retail cross-selling per customer reached 4.55 products as at end-december, versus 4.40 in. The Bank s market penetration in terms of customers reached 25% in, ranking first among competitors, versus 23% in, supported by the best brand image in the domestic market. A leading position in Private Banking, servicing the needs of high net-worth individuals through its subsidiaries. Bank Audi s Private Banking arm is represented by Banque Audi (Suisse) sa (the second largest Arab bank in Switzerland) and Audi Saradar Private Bank sal (the only 100% Private banking subsidiary in Lebanon), along with Bank Audi LLC (Qatar) and Audi Capital (KSA), accounting together for over USD 8.4 billion of assets under management at end-december, by far the largest portfolio managed by a Lebanese banking group and which compares competitively with portfolios managed by leading banks in the GCC. 8 9

6 A leading position in domestic and regional Capital Markets activities, with strong market-making activities in Lebanon, Saudi Arabia and Egypt. Over the past year, market-making activities on Lebanese and GCC fixed income instruments strengthened across the Group, reporting a turnover of around USD 10.3 billion in, broken down over USD 2 billion on Lebanese Treasury bills, USD 5.8 billion on Lebanese sovereign bonds, and USD 2.5 billion on GCC fixed income instruments. On the equity front, Bank Audi is an active leading intermediary on the Beirut Stock Exchange, with a 34.3% market share in total trading value in. T h e B a n k a c c o m p a n i e d s u c h b u s i n e s s accomplishments with an adequate development of its support functions. In, Bank Audi s IT supported the Bank s growth plans by launching new applications, kick-starting the transformation program and completing the set-up of Odeabank s IT organisation. In addition to the aforementioned initiatives, Bank Audi s IT worked on enhancing its operational efficiencies by optimising utilisation of resources and ensuring transparent monitoring of capital consumption. Last but not least, Bank Audi s IT heightened importance has been given to enhancing the existing security measures and emphasising business continuity. In parallel, the year was marked by significant achievements by Human Resources (HR), crowned by the launching of the Training Academy, a long-awaited milestone that required extensive planning, research and preparation. Bank Audi s Human Resources continuously strive to enhance and adopt new approaches, methods and practices to maintain and reaffirm the Bank s position in the region as an employer of choice and a market leader in the HR field. In parallel, Bank Audi s Corporate Social Responsibility (CSR) function was selected by ISO through Libnor the Lebanese Standards Institution attached to the Ministry of Industry as the first pilot organisation within the banking sector to implement ISO Social Responsibility guidelines. On the back of all such performances, Bank Audi looks at the future with faith and optimism. The Bank believes there are many opportunities at the horizon and that it is very well placed to grasp them. Such a conviction is based on the fact that the Bank is very well staffed (74% of its staff being university graduates against a global average of 37%), benefitting from a Management-driven profile, a very strong Corporate Governance, and an extensive vision when it comes to strategy with a deeper sense of expanding, growing and developing further. Bank Audi s strategic orientations, going ahead, revolve around consolidating and strengthening our domestic leadership, growing our entities in Turkey and MENA, expanding to new captive foreign markets, and investing in all necessary support infrastructure, all in the aim of positioning our Group in the inner circle of major regional players at large. As a matter of fact, such business objectives can only translate into significant value added to our shareholders, which we believe have been gratefully supporting our strategic orientations and our development plans. In closing, we would like to express our gratitude to all our colleagues for their motivation, professionalism, and permanent support of our objectives, amidst the most atypical circumstances surrounding us. It is our unscathed eagerness to always innovate, outgrow and move ahead that continuously makes Bank Audi s differentiation. Sincerely, Raymond W. Audi Chairman and General Manager Samir N. Hanna Group Chief Executive Officer 10 11

7 corporate governance I. Corporate Governance Framework Introduction During the year, the Board of Directors continued to give sound Corporate Governance a particular importance. It carried out a comprehensive review of key Governance practices and introduced a number of modifications (including to its Governance Guidelines as well as to the Charters of its Audit and Risk Committees) that are aimed at enhancing Governance practices generally and at aligning them with the dynamic local and international regulatory expectations. It also acted on the recommendations of its committees that substantially discharged all of their responsibilities. Particularly salient Governance-related achievements include the carrying out of a formal assessment of the Board s compliance with its Corporate Governance guidelines and with the applicable regulations (yielding a satisfactory outcome), as well as the adoption of a formal Board evaluation process and an implementation plan, in line with best Governance practices. At the level of the Group, the year also witnessed important Governance-related developments with the material addition of Odeabank A.Ş. to the Group Governance framework (while preserving local regulatory requirements) and with a number of enhancements that were brought to other local and foreign subsidiaries Governance frameworks. Governance Framework Bank Audi is governed by a Board of Directors consisting of up to 12 members (currently 11) elected by the General Assembly of shareholders for a term of 3 years. The responsibility of the Board is to ensure strategic direction, Management supervision and adequate control of the company, with the ultimate goal of increasing the long term value of the Bank. Bank Audi s Governance framework and that of its major banking subsidiaries encompass a number of policies, charters, and terms of reference that shape the Group s Governance framework over a wide range of issues including risk supervision, compliance, audit, remuneration, evaluation, succession planning, ethics and conduct, budgeting, and capital management. Clear lines of responsibility and accountability are in place throughout the organisation with a continuous chain of supervision for the Group as a whole, including effective channels of communication of the Group Executive Committee s guidance and core group strategy. Strategic objectives setting corporate values and promoting high standards of conduct have been established and widely communicated throughout the Group, providing appropriate incentives to ensure professional behaviour. The Bank s Corporate Governance Guidelines are accessible on the Bank s website at The Board is supported in carrying out its duties by the Group Audit Committee, the Corporate Governance and Remuneration Committee, the Board Group Risk Committee and the Group Executive Committee. The mission of the Group Audit Committee is to assist the Board in fulfilling its oversight responsibilities as regards (i) the adequacy of accounting and financial reporting policies, internal control and the compliance system; (ii) the integrity of the financial statements and the reliability of disclosures; (iii) the appointment, remuneration, qualifications, independence and effectiveness of the external auditors; and (iv) the independence and effectiveness of the internal audit function (1). The mission of the Corporate Governance and Remuneration Committee is to assist the Board in maintaining an effective institutional Governance framework for the Group, an optimal Board composition, effective Board process and structure, and a set of values and incentives for executives and employees that are focused on performance and promote integrity, fairness, loyalty and meritocracy. The mission of the Group Risk Committee is to assist the Board in discharging its risk-related responsibilities. The Committee is expected to (i) consider and recommend the Group s risk policies and risk appetite to the Board, (ii) monitor the Group s risk profile for all types of risks, and (iii) oversee the Management framework of the aforementioned risks and assess its effectiveness. The mission of the Group Executive Committee is to develop and implement business policies for the Bank and to issue guidance for the Group within the strategy approved by the Board. The Group Executive Committee also supports the Group Chief Executive Officer in the day-to-day running of the Bank and in guiding the Group. 2. Composition of the Board of Directors s of the Board of Directors serving throughout the year were elected by a resolution of the Ordinary General Assembly of shareholders held on April 12, 2010 for a term expiring on the date of the annual Ordinary General Assembly meeting of April 8, 2013 that examined the accounts and activity of the year. The Ordinary General Assembly held on April 8, 2013, has re-elected the same Directors for a new three-year term expiring on the date of the annual Ordinary General Assembly meeting (expected to be held in April 2016) that will examine the accounts and activity of the year The Board of Directors currently comprises the following Directors (2) (see table on next page): (1) It is not the duty of the Audit Committee to plan or to conduct audits or make specific determinations that the Bank s statements and disclosures are complete and accurate, nor is it its duty to assure compliance with laws, regulations and the Bank s Code of Ethics and Conduct. These are the responsibilities of Management and of external auditors. (2) Listed according to their dates of appointment (beyond the Group CEO)

8 s Independent of Group Sharia Supervisory Board Dr. Abdulsattar A. Abu Ghudda (Chair) (as per the Corporate Dr. Mohamed A. Elgari the Bank s of Governance Corporate the Group and of the of the Sheikh Nizam M. Yaqoobi Governance Executive Remuneration Group Audit Board Group Risk Dr. Khaled R. Al Fakih Guidelines (3) ) Committee Committee Committee Committee H.E. Mr. Raymond W. Audi Chairman Dr. Marwan M. Ghandour Vice-chairman Mr. Samir N. Hanna Sheikha Suad H. Al Homaizi Mr. Marc J. Audi Chair Chair Chair (until August ) Legal Advisors Auditors Law Offices of Ramzi Joreige & Partners Semaan, Gholam & Co. Ernst and Young Dr. Freddie C. Baz Sheikha Mariam N. Al Sabbah Dr. Imad I. Itani Deputy Chair (since August ) Mr. Mario J. Saradar Mr. Abdullah I. Al Hobayb (since May ) Dr. Khalil M. Bitar Mr. Youssef A. Nasr (until November ) Chair (until November ) Secretary of the Board Mr. Farid F. Lahoud Corporate Secretary The Board is advised, for Audit Committee matters, by Mr. Maurice H. Sayde (who served as a member of the Board and Chairman of its Group Audit Committee from June 2, 2006 until July 18, 2008). (3) Definition of Director independence as per the Bank s Governance Guidelines (summary): In order to be considered independent Director by the Board, a Director should have no relationship with the Bank that would interfere with the exercise of independent judgment in carrying out responsibilities as a Director. Such a relationship should be assumed to exist when a Director (him/her self or in conjunction with affiliates): is occupying, or has recently occupied an executive function in the Bank or the Group; is providing, or has recently provided advisory services to the Executive Management; is a major shareholder (i.e. owns, directly or indirectly, more than 5% of outstanding Audi common stock), or is a relative of a major shareholder; has, or has recently had a business relationship with any of the Senior Executives or with a major shareholder; is the beneficiary of credit facilities granted by the Bank; is a significant client or supplier of the Bank; has been, over the 3 years preceding his appointment, a partner or an employee of the Bank s external auditor; is a partner with the Bank in any material joint venture. In addition to the above, the Board of Directors is satisfied with the ability of the independent Directors to exercise sound judgment after fair consideration of all relevant information and views without undue influence from Management or inappropriate outside interests. Changes to the Board of Directors during the Years and 2013 to Date: (i) Dr. Georges A. Achi (88), who had been member of the Board of Directors since August 2008 (and previously a member of the Board from 1998 until 2004), resolved to retire from his function as member of the Board of Directors on April 10,, after long years of highly valuable contributions to the Bank and to its Board. (ii) Mr. Youssef A. Nasr, who was elected as a member of the Board in replacement of Dr. Georges A. Achi, resigned in November (iii) The Ordinary General Assembly of shareholders of Bank Audi sal - Audi Saradar Group convened on April 8, 2013, and resolved to re-elect the current Directors for a new three-year mandate. (iv) The newly elected Board convened following the General Assembly of shareholders and resolved, amongst other things, to re-elect H.E. Mr. Raymond W. Audi as Chairman of the Board General Manager, and Dr. Marwan M. Ghandour as Vice-chairman of the Board for the new Board s term

9 3. Biographies of Board s Raymond W. AUDI Samir N. HANNA Chairman of the Board and General Manager Age: 80 Lebanon Director since February 1962 Term expires at the 2016 Annual General Assembly of shareholders Chairman of the Corporate Governance and Remuneration Committee Raymond Audi acts as Chairman of the Board of Directors and General Manager since December He had also served as Chairman of the Board of Directors and General Manager from 1998 through 2008, resigning from this position when he was appointed Minister of the Displaced in the Lebanese government. Mr. Audi resumed his position as Chairman of the Board of Directors effective December 22, He started his banking career in 1962, when, together with his brothers and with prominent Kuwaiti businessmen, he founded Banque Audi sal (now Bank Audi sal - Audi Saradar Group), building on a successful long-standing family business. Raymond Audi has played an active role in leading Bank Audi through both prosperous and challenging times to its current status as a widely recognised leading Lebanese and regional bank. He served as President of the Association of Banks in Lebanon in Raymond Audi is the recipient of several honours and awards, including, in July 2007, an Honorary Doctorate in Humane Letters from the Lebanese American University. General Manager Group Chief Executive Officer Age: 68 Lebanon Director since August 1990 Term expires at the 2016 Annual General Assembly of shareholders Executive Director Chairman of the Group Executive Committee of the Group Risk Committee (until August ) Samir Hanna joined Bank Audi sal - Audi Saradar Group (previously Banque Audi sal) in January He held several managerial and executive positions across various departments of the Bank. He was appointed General Manager of Bank Audi in 1986 and member of its Board of Directors in In the early 1990s, he initiated and managed the restructuring and expansion strategy of Bank Audi, transforming it into a strong banking powerhouse offering universal banking products and services including Corporate, Commercial, Retail, Investment and Private Banking. He grew the Bank to its current position as the largest bank in Lebanon (and among the top 20 Arab banking groups), with presence in 12 countries, consolidated assets exceeding USD 31 billion, consolidated deposits exceeding USD 26 billion, and group staff headcount exceeding 5,000 employees. Samir Hanna is also the Chairman of Odeabank A.Ş. in Turkey and a member of the Board of Directors of several affiliates of Bank Audi. He currently serves as the Group Chief Executive Officer and the Chairman of the Group Executive Committee, and heads all aspects of the Bank s Executive Management. Marwan M. GHANDOUR Suad H. AL HOMAIZI Marwan Ghandour is an independent member of the Board of Directors since March 2000 and the Vice-chairman of the Board of Directors since December He is a previous Vice-governor of the Central Bank of Lebanon. He held this position between January 1990 and August 1993, with primary responsibilities in the area of monetary policy. During this period, he was also a member of the Higher Banking Commission and various other government committees involved in economic policy. In this capacity, he liaised with various international institutions such as the International Monetary Fund (IMF), the World Bank and the Bank for International Settlements (BIS). Sheikha Suad Al Homaizi is the widow of late Sheikh Jaber Al Sabbah, a prominent figure of the ruling family of Kuwait. She is one of the founders of the Bank. Sheikha Suad Al Homaizi serves as Chairman of the Commercial Kuwaiti Company Hamad Saleh Al Homaizi which owns international licenses for pharmaceutical products and is a member of the Board of Directors of several other Kuwaiti companies. She is a member of the Board of Directors of Bank Audi since February Vice-chairman of the Board Age: 69 Lebanon Director since March 2000 Term expires at the 2016 Annual General Assembly of shareholders Non-executive Director Chairman of the Group Audit Committee of the Board Group Risk Committee of the Corporate Governance and Remuneration Committee From 1995 until July, Marwan Ghandour served as Chairman and General Manager of Lebanon Invest sal, a leading financial services group in the region whose holding company merged with Bank Audi in He also served as Chairman of the Board of Directors of Audi Saradar Investment Bank sal, a fully owned subsidiary of Bank Audi, from 2005 until December. He was elected Chairman of the Board of Directors of Banque Audi (Suisse) sa in March and Vice-chairman of the Board of Directors of Odeabank A.Ş. in Turkey in June. He also serves as member of the Board of Directors of several affiliates of Bank Audi. Marwan Ghandour holds a PhD in Economics (Econometrics) from the University of Illinois (Post-doctorate research at Stanford University). Board Age: 70 Kuwait Director since February 1962 Term expires at the 2016 Annual General Assembly of shareholders Non-executive Director 16 17

10 Marc J. AUDI Mariam N. AL SABBAH General Manager Country Manager Lebanon Age: 55 Lebanon Director since March 1996 Term expires at the 2016 Annual General Assembly of shareholders Executive Director of the Group Executive Committee Marc Audi started his banking career at Banque Audi (France) sa (now Bank Audi Saradar France sa) in He then moved to Banque Audi California where he was appointed Director and Executive Vice-president. He later came back to Lebanon to join Banque Audi sal (now Bank Audi sal - Audi Saradar Group) in 1993, and was appointed member of its Board of Directors in He held executive responsibilities successively in Commercial Lending and Capital Markets divisions. Marc Audi served as General Manager of Banque Audi (Suisse), the Private Banking arm of the Audi Group of Banks until 2005, and remains a member of its Board of Directors. He also serves as member of the Board of Directors of several affiliates of Bank Audi, and has been General Manager of the Bank since 2004, where he currently acts as the Lebanon Country Manager. Marc Audi holds a Master s of Business Administration from the University of Paris IX Dauphine. Board Age: 64 Kuwait Director since March 2001 Term expires at the 2016 Annual General Assembly of shareholders Non-executive Director Sheikha Mariam Al Sabbah is the daughter of late Sheikh Nasser Sabah Al Nasser Al Sabbah and the widow of late Sheikh Ali Sabah Al Salem Al Sabbah who was the son of the former Prince of Kuwait and who held several ministerial positions in Kuwait, notably the Ministry of Interior. Sheikh Nasser Al Sabbah was one of the founders of Bank Audi. Sheikha Mariam Al Sabbah is a member of the Board of Directors of several Kuwaiti companies. She is a member of the Board of Directors of Bank Audi since March Freddie C. BAZ Imad I. ITANI General Manager Group Chief Financial Officer and Strategy Director Age: 60 Lebanon Director since March 1996 Term expires at the 2016 Annual General Assembly of shareholders Executive Director Deputy Chairman of the Group Executive Committee of the Group Risk Committee (since August ) Freddie Baz joined the Bank in 1991 as advisor to the Chairman and founded the Secretariat for Planning and Development at the Bank. As the Group Chief Financial Officer and Strategy Director of the Bank, he now has overall authority over the finance and accounting, MIS and budgeting functions throughout the Group, and is responsible for the development of the Group strategy. He is also the Chairman of the Board of Directors of Bank Audi Saradar France sa, a fully owned subsidiary of Bank Audi, and is a member of the Board of Directors of several affiliates of Bank Audi. Furthermore, Freddie Baz is the Managing Director of Bankdata Financial Services WLL which publishes Bilanbanques, the only reference in Lebanon that provides an extensive structural analysis of all banks located in Lebanon. Freddie Baz holds a State PhD degree in Economics from the University of Paris I (Panthéon Sorbonne). General Manager Head of Group Retail Banking Age: 51 Lebanon Director since June 2002 Term expires at the 2016 Annual General Assembly of shareholders Executive Director of the Group Executive Committee Prior to joining the Bank, Imad Itani held several key positions in Corporate Finance for major energy companies in Canada. In parallel, he taught Economics and Finance to graduate students at the American University of Beirut. He joined Bank Audi in 1997 and headed the team that successfully launched the Bank s Retail business line, today a major pillar of the Bank s innovative and leading position. In 2002, Imad Itani was appointed Deputy General Manager and member of the Board of Directors. He was later appointed General Manager. Imad Itani is also the Chairman of the Bank s Sudanese Islamic Banking subsidiary, acquired within the context of the Bank s regional expansion, the Chairman of Audi Saradar Investment Bank sal, a fully owned subsidiary of Bank Audi, and a member of the Board of Directors of Odeabank A.Ş. in Turkey, in addition to his responsibilities as Head of Group Retail Banking and Head of Group Islamic Banking. Imad Itani holds a PhD in Economics from the University of Chicago

11 Mario J. SARADAR Khalil M. BITAR Board Age: 45 Lebanon Director since August 2004 Term expires at the 2016 Annual General Assembly of shareholders Non-executive Director of the Group Audit Committee (since May ) Abdullah I. AL HOBAYB Mario Saradar was appointed in September 1992 Chairman CEO of Banque Saradar, leading it through several successful strategic transformations, notably opening its capital to prime shareholders including the International Finance Corporation in 1998 and Natcan Holdings International Ltd (subsidiary of the National Bank of Canada) in In 2004, he led Banque Saradar to a merger/acquisition with Bank Audi, following which he was elected member of the Board of Directors of Bank Audi sal - Audi Saradar Group and appointed General Manager, heading all the Private Banking activities of the Group and chairing the Boards of the Private Banking subsidiaries. In August 2010, having determined that he had fulfilled his mission to perfect the merger between Banque Audi sal and Banque Saradar sal that now form one fully integrated entity, and having led the Private Banking arm of the Group for more than 6 years to reach a remarkable size and profitability, he resolved, in coordination with the Chairman and the CEO, to gradually relinquish his executive duties within the Group in order to embark on new separate private business ventures, while remaining a non-executive member of the Board of Directors. Mario Saradar was elected several times member of the Board of the Association of Banks in Lebanon, and is currently member of the International Chamber of Commerce, the RDCL (Rassemblement des Dirigeants et des Chefs d entreprises Libanais) and the YPO (Young Presidents Organisation). He holds a DESS ( Diplôme d Etudes Supérieures Spécialisées ) in Financial Instruments from the Institut des Techniques de Marché de Paris and a BSc in Economics from the University College of London. Board Age: 70 Lebanon Director since April 2010 Term expires at the 2016 Annual General Assembly of shareholders Non-executive Director Chairman of the Board Group Risk Committee Khalil Bitar is a current Professor of Physics and a former Dean of the Faculty of Arts and Sciences of the American University of Beirut (AUB). He held this last position from 1997 until 2009, playing an instrumental role in advocating AUB s strengths and regional position as the premier center for higher education, and in re-establishing its PhD programs. Throughout his career, he held several academic and administrative positions, including Associate Director of the Supercomputer Computations Research Institute Florida State University (between the years 1994 and 1997) and visiting Professor at leading academic institutes in Europe and North America (including the European Organisation for Nuclear Research in Geneva, the International Centre for Theoretical Physics in Italy, The Institute for Advanced Study in New Jersey, the Fermi National Accelerator Laboratory (Fermilab) in Illinois, the University of Illinois, Brookhaven National Lab. in New York, the Max Planck Institute in Munich, and the Rockefeller University in New York). He also served two mandates as member of The Institute for Advanced Study in Princeton, New Jersey, between 1968 and Khalil Bitar is also a member of the Board of Directors of Audi Saradar Private Bank sal and Audi Saradar Investment Bank sal, and Chairman of their respective Risk Committees. Khalil Bitar holds a Bachelor of Science degree in Physics from the American University of Beirut, a Master s of Science degree in Physics, and a PhD in Theoretical Physics from Yale University in the United States. Abdullah Al Hobayb is the Chairman of Audi Capital (KSA) (an Investment Banking subsidiary of Bank Audi, incorporated in the Kingdom of Saudi Arabia) and a member of the Board of Directors of Bank Audi sae in Egypt and Odeabank A.Ş. in Turkey. He also was an advisor to the previous Board of Directors of Bank Audi. He is the Chairman of several leading companies in Saudi Arabia, comprising ABB Saudi Arabia (a leader in power and automation technologies), General Lighting Company Ltd (one of the largest manufacturers in the Middle East lighting industry), Ink Products Company Ltd (manufacturer of industrial ink) and United Industrial Investments Company Ltd (a leading paint manufacturing company). Board Age: 70 Saudi Arabia Abdullah Al Hobayb holds a Master s degree in Electrical Engineering from Karlsruhe University in Germany. Director since April 2010 Term expires at the 2016 Annual General Assembly of shareholders Non-executive Director of the Corporate Governance and Remuneration Committee of the Group Audit Committee 20 21

12 Management of Bank Audi sal - Audi Saradar Group H.E. Mr. Raymond W. Audi Chairman General Manager Group Executive Committee Executive Directors (Voting s) Chair Mr. Samir N. Hanna General Manager Group Chief Executive Officer Vice-chair Dr. Freddie C. Baz General Manager Group Chief Financial Officer & Strategy Director Mr. Marc J. Audi General Manager Country Manager Lebanon Dr. Imad I. Itani General Manager Head of Group Retail Banking Non-directors (Non-voting s) Mr. Chahdan E. Jebeyli General Manager Group Chief Legal & Compliance Officer Mr. Adel N. Satel General Manager Group Chief Risk Officer Standing Management Committees Asset-Liability Committee Credit Committee Information Technology Committee Voting Chair Mr. Samir N. Hanna (1) Mr. Samir N. Hanna (1) Mr. Samir N. Hanna (1) Executive Vice-chair Dr. Freddie C. Baz (1) Mr. Elia S. Samaha Mr. Danny N. Dagher Mr. Marc J. Audi (1) Dr. Imad I. Itani (1) Dr. Imad I. Itani (1) Mr. Michel E. Aramouni Mr. Marc J. Audi (1) Mr. Naoum J. Moukarzel Mr. Elia S. Samaha Mr. Khalil I. Debs Mr. Hassan A. Saleh Mr. Elie J. Kamar Mr. Elie J. Kamar Mr. Tamer M. Ghazaleh Mr. Ibrahim M. Salibi Mr. Marwan O. Arakji Non-voting Mr. Adel N. Satel Mr. Adel N. Satel Permanent Invitees Dr. Marwan S. Barakat Mrs. Bassima G. Harb Mr. Yehia K. Youssef Mr. Khalil G. Geagea Mr. Jamil R. Shocair Mr. Antoine G. Boufarah Mr. Tamer M. Ghazaleh Mr. Adel N. Satel Mr. Naim H. Hakim (Continued on Page 214) (1) of the Group Executive Committee

13 levant Bank Audi s wide presence throughout the Levant enables it to be at the forefront of universal banking services providers in the region. The Bank s resilient performances in a tough regional operating environment bears witness to its high flexibility and strong financial standing in the face of political and economic developments

14 management discussion and analysis 1. Introduction Bank Audi sal - Audi Saradar Group ( Bank Audi ) is a full fledged bank with operations in Lebanon, Europe, the Middle East and North Africa region, and Turkey. Founded in 1830 in Lebanon and incorporated in its present form in 1962 as a private joint stock company with limited liability ( société anonyme libanaise ), Bank Audi offers universal banking products and services covering Corporate, Commercial, Individual and Private Banking services to a diversified client base, mainly in the MENA region and Turkey. It ranks first among Lebanese banks as per major banking aggregates and stands among the top Arab banking groups. In addition to its historic presence in Lebanon, Switzerland and France, it is present in Jordan, Egypt, Syria, Sudan, Saudi Arabia, Qatar, Abu Dhabi (through a representative office), Monaco and Turkey. The dicussion and analysis that follows covers the consolidated performance of Bank Audi in, based on the audited consolidated financial statements of the Bank as at and for the fiscal years ended December 31, and December 31,. Terms such as Bank Audi, the Bank or the Group refer to Bank Audi sal and its consolidated subsidiaries, principally Audi Saradar Private Bank sal, Audi Saradar Investment Bank sal, Banque Audi (Suisse) sa, Bank Audi Saradar France sa, Bank Audi sam (Monaco) (now Audi Capital Gestion sam), Bank Audi sal - Jordan Branches, Bank Audi Syria sa, Bank Audi sae (Egypt), National Bank of Sudan, Audi Capital (KSA) cjsc, Bank Audi LLC (Qatar), Arabeya Online Brokerage (AoLb) and Odeabank A.Ş. (Turkey). All figures are expressed in US Dollars ( USD ), unless specifically otherwise stated. US Dollar amounts are translated from Lebanese Pounds at the closing rate of exchange published by the Central Bank of Lebanon (1,507.5 as of each of December 31, and December 31, ). All references to the Lebanese banking sector are to the 53 commercial banks operating in Lebanon as published by the Central Bank of Lebanon ( BDL ). All references to the Bank s peer group in Lebanon are to the Alpha Bank Group consisting of 13 banks with total deposits in excess of USD 2.0 billion each, as determined by Bankdata Financial Services WLL (publishers of Bilanbanques). All references to the Bank s peer group in the MENA region are to the top regional Arab banking groups as compiled by the Bank s Research department. Lebanon s economic and banking data are derived from the International Monetary Fund, the Central Bank of Lebanon, various Lebanese governmental entities and the Bank s internal sources. The region s economic and banking data are derived from the International Monetary Fund, the Economist Intelligence Unit, Bloomberg, the region s central banks and the Bank s internal sources. This discussion and analysis starts with an overview of the Bank s strategy, followed by a review of the operating environment and a comparative analysis of the Group s financial conditions and results of operations for the periods ended December 31, and December 31,. An overview of risk management comes next, followed by an extensive coverage of share information and dividend policy, investor relations, resources deployed, and Corporate Social Responsibility. 2. Strategy The year was yet another differentiating year for Bank Audi sal - Audi Saradar Group, confirming once again the Group's ability to sustain its strong growth track record and reinforce its financial standing, despite difficult operating conditions and even embarking on lucrative expansion. Performance wise, Bank Audi managed to sustain positive assets and earnings growth in (respectively at 8.9% and 5%), improve risk coverage with the allocation of USD 121 million of net loan loss provisions as a result of the unstable operating environment in some countries of presence and reinforce the financial standing across all entities, both domestic and abroad. Business wise, the Bank succeeded in obtaining the first license in Turkey since 14 years, an achievement which underlines its capacity to develop, expand and diversify, even in the most atypical operating environments witnessed in decades. Those achievements represent additional a c k n o w l e d g e m e n t s o f B a n k A u d i s h i g h l y d i f f e r e n t i a t e d a n d i n n o v a t i v e p r o f i l e, characterised by: 26 27

15 A universal banking profile with core businesses focusing on Commercial and Corporate Banking, Retail and Individual Banking and Private Banking; A wide regional footprint, present in 12 countries (namely Lebanon, Syria, Jordan, Egypt, Sudan, Saudi Arabia, Qatar, France, Switzerland, Monaco and newly in Turkey) through 11 banks, 1 investment company, 1 asset management company and 1 brokerage company; A strong proven expertise in cross-border expansion; A two-digit growth track record, robust financial standing and large financial flexibility; Firm risk management philosophies combined with best Corporate Governance practices, thorough Management vision and wise strategic planning systems; The most diversified shareholder base gathering around its historical shareholders large regional investors and international institutional investors. Despite the changes in the operating conditions in the Bank s markets of presence, the fundamentals of the diversification strategy launched more than a decade ago have not changed and the Bank continues to adapt to arising challenges and opportunities, mitigating the impact of the former and managing transitions. In this context, Management remains committed to the expansion strategy, while the objective is still focused on capitalising on the important cross-border flows between the Near East, the Middle East, North Africa and Turkey, in the aim of developing a fully integrated pan regional group by business lines and countries of presence, ranking in the inner circle of large regional players. The strategy over the coming period would be focused on shaping the Group as a large Levant bank with Lebanon, Turkey and Egypt constituting the main development pillars. The development for the coming five years will evolve around the following channels: Consolidating and strengthening its leadership in Lebanon (the home market), with a particular focus on the improvement of the overall efficiency and a greater generation of productivity gains; Strengthening the market background and positioning in Egypt, which, despite the persisting uncertainties, remains a core growth market by virtue of scale and abundant resources triggering self-sustained economic and financial growth prospects; The implementation of the business plan in Turkey and the mobilisation of all group resources to that end; Leveraging the existing footprints in the GCC to shore up Private Banking. In executing this large Levant bank strategy, the Bank remains committed to levy all required resources and invest at pace to consolidate its various business lines, while building long-lasting relationships with customers. 3. Economic Environment 3.1. Domestic Operating Environment The past year was characterised by a slowdown in the Lebanese economy, amidst domestic political bickering and regional spillover effects in the realms of investment, trade and tourism, the IMF having estimated Lebanon s real GDP growth at 2% for full-year. While the wait-and-see attitude governing investors amidst uncertainties continues to delay major investment decisions, consumption managed to report a relative resilience, partly supported by the favourable incoming of Lebanese expatriates and the spending of Syrian refugees. Lebanon s sluggish aggregate demand actually led to a growth in imports of 5.6% driven both by price effects and quantity effects. In parallel, exports rose by 5.1% over the year, driven by maritime exports as land exports continued to contract amidst the security escalation in Syria. As such, a growth of 5.7% in Lebanon s trade deficit in added to the 15.9% rise reported in the previous year. With the totality of inflows unable to fully offset the country s trade deficit, further pressures were reported on the balance of payments that recorded a deficit of USD 1.5 billion in, after a circa USD 2 billion deficit in full-year. At the monetary level, a relaxed mood governed the foreign exchange market throughout the past year. The year s net activity was more to the favour of the Lebanese Pound in, as there were more conversions from foreign currencies to Lebanese Pounds than Lebanon's Major Economic Indicators (USD Million) Within this environment, the Lebanese banking sector witnessed in a year of satisfactory activity growth in a challenging operating environment characterised by persistently narrow banking margins in a prolonged low interest rate environment globally, growing provisioning requirements amidst regional uncertainties and a weaker fee income generation capacity in a slow economic growth context. Banks activity managed to pull out an 8.0% year-on-year growth throughout, with total assets reaching USD billion at end-december. the opposite since the beginning of the year, with the Central Bank s foreign assets reaching a high of USD 35.7 billion at its end. Change Macroeconomy GDP 39,707 42, % Real GDP growth (%) 5.2% 2.0% -3.2% GDP per capita (USD) 10,032 10, % Monetary sector Var M3 5,085 6, % Velocity % Cleared checks 72,103 71, % Average CPI inflation (%) 5.7% 5.7% 0.0% Public sector Gross domestic debt 32,730 33, % Foreign debt 20,927 24, % gross debt 53,657 57, % Gross debt/gdp (%) 135% 136% 0.8% Deficit 2,341 2, % Deficit/GDP (%) 5.9% 6.3% 0.4% External sector Imports 20,158 21, % Exports 4,265 4, % Trade deficit 15,893 16, % Gross financial inflows 13,897 15, % Balance of payments -1,996-1, % Sources: Ministry of Finance, Central Bank of Lebanon, the concerned public and private organisms, Bank Audi, s Research department. Bank deposits, a traditional growth driver for the sector at large, registered a similar 8.0% yearly increase, moving from USD billion at end-december to a new high of USD billion at end-december. The USD 9.3 billion in additional deposits at Lebanese banks proved 9.1% higher than the growth achieved over the previous year. In parallel, Lebanese banks saw a 10.4% increase in lending activity last year, with loans to the private sector reaching a new high of USD 43.5 billion at end-december and 28 29

16 progressing at a pace almost similar to that of, with a USD 4.1 billion increase in lending volumes during. Last but not least, Lebanese banks profitability continues to be weighed down by a tight spread environment adding to slower fee income generation and growing provisioning requirements within the context of regional security developments. On the overall, such downward pressures on banks revenue base offset the quantity-effect tied to satisfactory lending activity growth and, as per the latest available statistics, the sector reported a mere 0.6% decline in domestic net profits on a yearly basis in. Lebanon's Banking Sector Activity Indicators (USD Million) Change Growth 12/11 Assets 140, ,883 11, % Equity 10,720 12,642 1, % Deposits 115, ,998 9, % o.w. in LBP 39,433 43,977 4, % o.w. in FC 76,281 81,021 4, % Loans 39,375 43,452 4, % o.w. in LBP 8,510 9,726 1, % o.w. in FC 30,865 33,726 2, % Deposit dollarization ratio (%) 65.9% 64.8% -1.1% -1.1% Loan dollarization ratio (%) 78.4% 77.6% -0.8% -0.8% Loans/Deposits (%) 34.0% 34.8% 0.7% 0.7% Deposits/Assets (%) 82.3% 82.3% 0.0% 0.0% Equity/Assets (%) 7.6% 8.3% 0.7% 0.7% Sources: Central Bank of Lebanon, Bank Audi, s Research department Operating Environment in the MENA Region At the regional level, the operating environments were varying in the different markets of presence of the Bank in the region, namely in the Near East, in North Africa and in the GCC. First, economic conditions of the Middle East and North Africa region were mixed during the year. Most of the region s oil exporting countries have been growing at healthy rates, while oil importers faced subdued economic performances. The region s oil exporters are indeed set to post a solid real GDP growth of 6.5% in, supported by expansionary fiscal policies and accommodative monetary conditions. For the other regional economies, ongoing political transitions are weighing on growth. They have witnessed a marked decline in exports in, tourism arrivals are recovering only slowly and foreign direct investment inflows remain subdued, all generating a mild growth of about 2% per annum. In parallel, at the banking sectors level, the sound USD 151 billion deposit growth in in the MENA region (61% above previous year s level) and the satisfactory USD 98 billion of MENA loan growth are mainly driven by oil exporters, while oil importers barely saw their deposit and loan bases growing. Not less importantly, the latter s net banking profitability remained under pressure within the context of relatively tough operating conditions in their respective economies, underlined by narrowing net interest margins, growing provisioning requirements and slow fee income growth generation at large

17 Banking Sector in the MENA Region Activity Indicators (USD Million) Assets Change % Regional countries of presence Egypt % Jordan % Lebanon % Qatar % Saudi Arabia % Sudan % Syria % United Arab Emirates % Other countries in Arab MENA Algeria % Bahrain % Kuwait % Libya % Morocco % Oman % Tunisia % Yemen % Arab MENA 2, , % Sources: central banks, Thomson Reuters, Bank Audi, s Research department. Figures in italic are the latest available. GDP reported a growth of 2.0% in, while Egypt s inflation rate dropped to a single digit rate of 8.7% in. But Egypt s financial vulnerabilities have risen owing to a decline in international reserves and an increase in the fiscal deficit. International reserves closed the year at USD 15.0 billion at end-, reporting a yearly decline of USD 3.1 billion after the drastic decline of the previous year. At the banking sector level, activity has been more or less faring well in a relatively cloudy economic environment, bearing witness to a relative resilience on the overall. Bank assets increased by 9.9% between end- and end-november compared with a nil growth a year earlier. While operating conditions are still tough, banks net profits underwent a relative recovery as the economy emerged gradually from the wider conflicts it had witnessed in. Turkey Main Macro and Banking Aggregates (USD Million) 3.3. Operating Environment in Turkey In Turkey, where Bank Audi launched its operations in the second half-year, economic imbalances are unwinding after two years of rapid growth. The economy has cooled off on the back of slower domestic demand, with real GDP growth forecast by the IMF at 3% in. The Turkish banking sector witnessed a satisfactory activity growth in a year of slowing down domestic economic performances and amidst global sluggishness driven by European neighbours fiscal demise. deposits grew in parallel by 18.6% in. The healthy progression in bank lending this year triggered a favourable quantity effect, amid slightly lower funding costs, thus boosting banks net interest income, despite the relatively tight margin environment. The solid rise in banks core revenues managed to offset sluggish fee income generation, rising expenses and higher special provisions for non-performing loans, thus leading to a 15% rise in net profits in. The main regional markets where Bank Audi has substantial presence besides Lebanon are Jordan, Syria and Egypt. In Jordan, a combination of a fragile economy coupled with spillover fears from conflict-stricken countries have curtailed economic activity, with the most significant impact felt on agriculture and mining and quarrying. Still, real GDP growth reported 3.0% in, from 2.6% in, as per IMF estimates. The economy has mainly benefited from the low base effect in the first half of this year, mainly in the category of trade, restaurants, and hotels. Within this environment, consolidated assets of domestic banks rose slightly by 4.4% between end- and end-. Deposits and credit facilities grew by 2.6% and 12.6% over the same period, respectively. Listed Jordanian banks reported a 16.4% rise in profits in the first nine months of, mainly supported by quantity effects stemming from new lending volumes that offset to a certain extent tighter interest margins. In Syria, the impact of the strife was heavily felt on the economy which has been bearing the brunt of an exodus of businesses and the depletion of its pre-war enterprise base. As widespread security drifts practically depleted economic activity throughout Syria, the country s real GDP contracted by 15.2% in, following another decline of 3.4% in, as per the same source. Within this environment, listed banks activity reported a decline in September relative to end-. Customers deposits edged down by 22.5% in USD terms. Net loans and advances dropped by 35.4% from end-, within the context of weakened economic activity. Listed banks net profits contracted during the first nine months of by 35.6% year-on-year in USD terms. Throughout, the Egyptian economy has witnessed a slow recovery from a relatively low base in the previous year. As the local macro environment has been slightly better than that seen in, real Change Nominal GDP % Real GDP growth 8.5% 3.0% -5.5% Population % GDP per capita 10,522 10, % Domestic banks assets % Domestic banks deposits % Domestic banks loans % Domestic banks equity % Domestic banks net profits % Sources: IMF, Central Bank of Turkey, Bank Audi, s Research department

18 3.4. Operating Environment in West Europe West Europe witnessed challenging conditions during the year, with stalling growth and recession threats coupled with sluggish external demand from key trading partners and lingering uncertainties regarding sovereign fiscal and debt woes weighing on both consumer and investor sentiment and, accordingly, private sector demand. Governments continued to adopt fiscal restraint policies throughout the year amid worries about the sustainability of public finances which, though practically proceeding according to set plans, have exerted additional downward pressures on economic activity in West Europe. Amidst such an environment, labour market conditions remain tight and unemployment levels at or near peaks. The financial system continues to display some signs of sluggishness which warranted rather difficult borrowing conditions across the region in a period of continued banking sector deleveraging. Bank lending actually remained more or less sluggish and appetite for risk dampened by prevailing economic and financial uncertainties. As a result, the somewhat muted quantity effect, adding to persistently tight margins in an extended low interest rate environment, slow fee income generation capacity and provisioning requirements, weighed on banking sector profitability throughout the year. 4. Activity and Performance Analysis 4.1. Business Overview in In, Bank Audi sal - Audi Saradar Group was again able to differentiate itself by performing favourably in the most difficult operating conditions, and even embarking on lucrative expansion. The Bank managed to sustain positive assets and earnings growth (respectively at 8.9% and 5%), improve risk coverage and reinforce the financial standing across all entities, both domestic and abroad. A detailed performance analysis of the operations in highlights that it was driven by opposite trends as follows: A positive activity growth in Lebanon, consolidating the Bank s leading position in the domestic market, while still sustaining the margin focus policy to improve yields on the various asset classes; A positive activity growth in Egypt, which despite the persisting political uncertainties prevailing in the country, led the contribution of regional entities to consolidated assets and earnings, along with Odeabank; The launch of Odeabank in Turkey on November 1, which achieved, in two months of activities, noticeable preliminary results, driving consolidated assets growth. The banking activities in Turkey are expected to constitute one of the main pillars of growth for the Group in the coming years; Continuing asset contraction in Syria still facing instability, offsetting to a large extent deposits and lending growth registered in other entities; Strengthening the Bank s asset quality and resilience in the face of spillover effects of regional developments by maintaining a conservative risk strategy at group level, resulting in the allocation of USD 121 million in net loan loss provisions, in abidance with the most rigorous precautionary management policies; Reinforcement of the revenue generation capacity in almost all entities, reaching USD 1.1 billion in (or a growth by 11.6%), coupled with improved efficiency levels; The significant currency depreciation in Sudan and Syria and, to a lesser extent, in Egypt. In addition, four non-operating events also impacted the performance of Bank Audi in as follows: On June 27,, Bank Audi sold 81% of its majority stake in LIA insurance sal, with Management s sole driver being to disinvest from the underwriting insurance business following more and more restrictive regulatory constraints on insurance companies owned by banking institutions, particularly at the level of capital adequacy ratio computations. As of this date, the results of LIA Insurance were deconsolidated from the Group financial statements, and USD 42 million of net profits from the sale were accounted for in discontinued operations as per IFRS. The sale purchase agreement included an option for the buyer to buy the remaining 19% at end-may As a result of the sale, Bank Audi revalued its remaining 17% stake in LIA Insurance sal at fair value through P&L as per IFRS; On July 26,, the Executive Committee resolved to liquidate Bank Audi sam (Monaco) and replace it with a more efficient financial company, Audi Capital Gestion, to be an affiliate of Banque Audi (Suisse). Accordingly, the results of Bank Audi sam were deconsolidated and accounted for in discontinued operations, along with USD 6.6 million of goodwill impairment and related liquidation costs; Meanwhile, on September 28,, Odeabank A.Ş., the Bank s fully-owned subsidiary in Turkey, obtained a license to operate from the Banking Regulation and Supervisory Authority, after completing all necessary establishment procedures. This comes after the Bank was granted, on October 27,, the first permission to establish a banking subsidiary in Turkey in 14 years; In addition, Management decided, in December, following the revision of the business plan of Arabeya Online in light of the recent adverse Balance Sheet (USD Million) development in Egypt, to write off USD 14 million of goodwill impairment on its investment Balance Sheet Management The evolution of the Group s balance sheet in primarily reflects the business opportunities, as well as the strength of the customer franchise. It also highlights Management s overall risk appetite amid the prevailing challenging environment. Consolidated assets rose by USD 2.6 billion during the year to reach USD 31.3 billion at end-december and USD 39.7 billion when accounting for fiduciary deposits, security accounts and assets under management. The below table shows the evolution of Bank Audi s financial position at end-december, as compared to end-december. Dec-11 Dec-12 Vol. % Primary liquidity 8,957 9, % Portfolio securities 10,186 10, % Loans to customers 8,594 10,428 1, % Other assets % Fixed assets % Assets = Liabilities 28,737 31,302 2, % Bank deposits 757 1, % Customers deposits 24,798 26,805 2, % Other liabilities % Shareholders' equity (profit included) 2,357 2, % AUMs + fid. dep. + cust. acc. 7,928 8, % Assets + AUMS 36,665 39,749 3, % Breakdown between Lebanon and Abroad Dec-11 Dec-12 Change assets Lebanon 72.0% 67.6% -4.4% Abroad 28.0% 32.4% 4.4% deposits Lebanon 75.1% 72.9% -2.2% Abroad 24.9% 27.1% 2.2% loans Lebanon 62.7% 59.2% -3.5% Abroad 37.3% 40.8% 3.5% 34 35

19 Sources of assets growth remained well distributed by geography and by business lines. Despite the contraction of assets of Bank Audi Syria by an additional half a billion US Dollars in (to reach by end-december 32% of the end-2010 level), the rise in consolidated assets stems in particular from Odeabank in Turkey which achieved, in two months, through a network of 6 branches and 398 employees, USD 1.4 billion in deposits and USD 966 million in loans, translating into USD 2 billion in assets. This achievement is to be added to an assets growth at the level of Bank Audi Lebanon and Bank Audi Egypt by respectively USD 990 million and USD 445 million, amidst varying performances at the level of other entities. Despite the decrease in the contribution of the Syrian entity to consolidated assets, the significant increase in the contribution of the newly launched Odeabank and in that of the Egyptian entity totally offset the Evolution of Assets and Net Earnings in Egypt, Syria and Turkey (USD Million) increase in the contribution of Lebanese entities. At end-december, Lebanese entities accounted for 67.6% of consolidated assets (versus 72% at end-december ), while MENA entities accounted for 18.1% (versus 19.9% at end-december ), and the Turkish entity accounted for 6.5%. Within the context of almost similar contribution of European entities to consolidated assets, the share of entities abroad rose from 28.0% at end-december to 32.4% at end-december. The Bank s objective continues to revolve around reaching a balanced distribution of assets and profits over the different entities in Lebanon and abroad over the medium term. The table below presents a summary of the evolution of activity highlights of Bank Audi (Egypt), Bank Audi Syria and Odeabank at end-december, as compared to end-december. BAEGY BASY Odeabank Dec-11 Dec-12 Change % Dec-11 Dec-12 Change % Dec-12 Balance sheet data Assets 2,979 3, % 1, % 2,029 Deposits 2,621 2, % % 1,404 Loans 1,315 1, % % 966 Equity % % 297 Cumulative LCs % % 2 Outstanding LGs % % 48 Earnings data Net interest income % % Non-interest income % % 16.8 = income % % General operating expenses % % 35.0 = Operating profits % % Requested LLPs as per credit policy in compliance with IFRS % % -- - Income tax % % -0.1 = Net recurrent profits % % Collective provisions and/or general banking risk provisions as per Management s decision, abiding by strict precautionary policies % % = Net profits Funding Sources The Bank s core funding resources come principally from stable retail and individual clients, while corporate and commercial customers deposits constitute supplementary sources of funding. Within that scope, balance sheet growth in was largely driven by a growth in customers deposits reported in most entities, with the exception of Bank Audi Syria. Consolidated customers deposits grew by 8.1% in, the equivalent of USD 2 billion, moving from USD 24.8 billion at end-december to USD 26.8 billion at end-december. A flow analysis of consolidated deposits by quarters reveals that the USD 2 billion increase results from a contraction in the first quarter by USD 409 million, followed by increases by USD 318 million, USD 170 million and USD 1,928 million successively in the second, third and fourth quarters. By entity, the USD 2 billion increase reflects increases by USD 1,404 million in Turkey, USD 912 million in Lebanese entities, and USD 184 million in European entities, offsetting a decrease by USD 493 million in entities in the MENA region. Within deposit increases in Bank Audi (Qatar) and Bank Audi (Egypt) by respectively USD 18 million and USD 21 million, the contraction in the MENA region is accounted principally by Bank Audi Syria (-USD 454 million) witnessing deposits outflows driven by the prevailing political turmoil and by Management s policy to reduce size and exposure to Syria. Deposits of Bank Audi (Jordan) decreased by USD 36 million, while those of National Bank of Sudan decreased by USD 43 million. Adjusting to the non-recurrent money market flows, Bank Audi (Egypt) succeeded in to increase its individual and retail deposits base by USD 192 million, a noticeable achievement, particularly in view of the fierce market competition on deposits among banks and between banks and the sovereign, as depositors increasingly placed their savings in in higher yielding local Treasury bills. In parallel, assets under management in Egypt made principally of securities held for customers, which at maturity could constitute a source of deposits, increased by USD 83 million, reaching USD 1,120 million at end-december. In Lebanon, the USD 912 million increase represents an increase by USD 1,165 million in Group Audi Lebanon and a drop by USD 253 million reported at Audi Saradar Private Bank. Relative to a deposits increase by USD 9.3 billion in commercial banks in Lebanon, Bank Audi would have achieved a share in the increase by 11.2%, a level below its 14.4% market share in its domestic market, reflecting the margin focus strategy adopted by Management since A detailed analysis by currency reveals that Lebanese Pounds deposits at Group Audi Lebanon accounted for a mere 4.7% of the total increase in the sector (increasing by USD 215 million), while deposits in foreign currencies rose by USD 973 million, representing 20.2% of the sector s increase. Adjusted to the USD 383 million one-off deposit withdrawals reported in February and April and the issuance of the USD 150 million of Series F preferred shares in May sold in the network, deposits in foreign currencies would have increased by USD 1,493 billion, representing an adjusted share in the sector s increase of 31.5%. On the overall, the domestic market share of Group Audi Lebanon contracted slightly to 14.4% at end-december, from 14.5% at end-december. In parallel, the dollarization ratio of Group Audi Lebanon moved from 70.5% to 71.2% over the same period, while the dollarization rate in commercial banks in Lebanon reached 64.8% at end-december, from 65.9% at end-december. Evolution of Dollarization Rate Audi Lebanon Lebanese banking sector

20 Nonetheless, on a consolidated basis, Bank Audi achieved the highest increase in deposits among direct peers in, translating in a deposit differential in excess of USD 6.3 billion with the second ranked bank. Deposits growth in was well balanced across different types, with growth in time and saving deposits contributing to 60.2% of the increase. At end-december, time deposits represented 74.0% of total deposits, followed by 16.1% for sight deposits, 4.3% for saving deposits, 1.7% for related parties deposits and 3.9% for other deposits. This is to be compared to 78.4%, 15.2%, 1.5%, 0.8% and 4.1% respectively at end-december, underscoring a stable mix of deposits Asset Utilisation (Balance Sheet Allocation) The analysis of the financial position at end-december demonstrates that the Group continues to sustain a strong balance sheet, highly liquid, diversified and conservative. Consolidated customers deposits continue to represent, at end-december, 85.6% of total liabilities, while primary liquidity accounted for 49.1% of total deposits and the loans to deposits ratio stood at 38.9% at the same date, displaying our ample capacity to grow loans while continuing to optimise liquidity management. Assets Breakdown Liabilities Breakdown Breakdown of Customers' Deposits by Type (USD Million) Change Volume Structure Volume Structure Volume Structure Deposits from customers 24, % 26, % 2, % Sight deposits 3, % 4, % % Time deposits 19, % 19, % % Saving accounts % 1, % % Related parties accounts % % % Margins and others deposits 1, % 1, % % 33% 3% 8% 33% 6% 31% 86% In parallel, funding sources also reinforced with deposits from banks increasing year-on-year by USD 560 million, from USD 757 million at end-december to USD 1,317 million at end-december, principally in Bank Audi (Egypt) benefiting from repo agreement extended by the Central Bank of Egypt and allowing for arbitrage opportunities. Porfolio securities Bank placements Net loans Other assets Although the asset liability management at Bank Audi favours placements in activities with the highest positive impact on the Group s profitability, balance sheet allocation is determined by specific limits set internally based on Management s risk appetite and underlying volumes. Covering lending, placements with financial institutions and investment in portfolio securities, these limits are applied by all entities over and above the abidance to local regulations requirements. As per the Group s Corporate Governance guidelines (Article 2.8.), limits are subject to annual review by the Board of Directors. Meanwhile, Management may submit on an ad hoc basis to the Board of Directors for approval, changes in the limits in response to changing business or market conditions. On a day-to-day basis, the responsibility of monitoring the limits lies within the Group s Credit Risk department. Customers deposits Other liabilities Shareholders equity In what follows, we analyse the evolution of the various assets classes and their respective key indicators at end-december relative to end-december. Consolidated Loan Portfolio Consolidated loans to customers rose in by 21.3%, the equivalent of USD 1.8 billion, moving from USD 8.6 billion at end-december to USD 10.4 billion at end-december. Consolidated loans flows in stem from USD 1,964 million of new loans to new customers (of which USD 966 million at Odeabank), USD 1,738 million of loan increases to existing customers offsetting USD 635 million of loan reimbursements and USD 1,233 million of decreases in existing facilities during the year. Driven by a stronger growth in loans to customers than in customers deposits, the loan-to-deposit 38 39

21 ratio increased steadily over the same period from 34.7% to 38.9%. By geography, loans in newly launched Odeabank led the increase with USD 966 million, ahead of loans granted to the Lebanese private sector increasing by USD 873 million and loans in European entities increasing by USD 86 million, offsetting decreases in loans booked in Lebanon and granted to regional corporates by USD 93 million, within the context of stable loans in MENA entities. The loan book of Bank Audi (Egypt) resumed its growth despite the persisting uncertainties in the country, increasing by USD 212 million, within an increase in lending by USD 38 million in Bank Audi (Jordan) and USD 32 million in Bank Audi (Qatar). These increases were totally offset by the additional USD 253 million contraction of the loan book in Bank Audi Syria, reaching, at end-december, USD 270 million, of which USD 38 million in foreign currencies and USD 232 million denominated in Syrian Pounds. A detailed dynamic analysis of loans flows in Syria reveals that the USD 253 million drop results to the extent of USD 126 million from the depreciation of Syrian Pounds versus the USD, with the remaining USD 127 million accounted for by collected loans. At end-december, the loan portfolio of Bank Audi Syria represented 2.6% of the total portfolio, down from 6.1% a year ago. In parallel, the size of the overall exposure to Egypt and Lebanon remains almost stable, at respectively 14.6% and 59.2%, while the new loan portfolio in Turkey accounted for 9% of the total. The following analysis covers the breakdown of the consolidated loan portfolio by customer type, economic sector, maturity, collaterals and currency. Loan Breakdown by Customer Type At end-december, the consolidated loan portfolio was broken down over 56% corporate loans, 17% loans to SMEs, 14% consumer loans and 13% Individual and Private Banking loans, Breakdown of Net Loans and Advances by Type of Customer in 14% 19% as compared to a split of respectively 53% 19%, 14% and 14% at end-december. A detailed analysis of loans flows in reflects that corporate loans accounted for 71.5% of the increase in the consolidated portfolio, mainly driven by the growth in Turkey, followed by 12% for sole proprietorship and Private Banking loans, 12.2% consumer loans and 4.3% for loans to SMEs. Breakdown of Net Loans and Advances by Type of Customer in 14% 17% Breakdown of Net Loans and Advances by Booking Entity in Breakdown of Net Loans and Advances by Booking Entity in 13% 13% 20% 15% 53% 56% 37% 10% 41% 9% SME Corporate clients Sole proprietorships and B/S Private Banking Consumer loans SME Corporate clients Sole proprietorships and B/S Private Banking Consumer loans 33% Loans booked in Lebanon for non-residents Cash collaterals and bank guarantees against Lebanese risk Net Lebanese risk Loans booked in foreign subsidiaries 35% Loans booked in Lebanon for non-residents Cash collaterals and bank guarantees against Lebanese risk Net Lebanese risk Loans booked in foreign subsidiaries Loan Breakdown by Economic Sector The concentration of the loan portfolio by economic sector remains within BOD s approved concentration limits relative to each of the loan portfolio and consolidated equity. At end-december, the largest concentration by sector was to manufacturing industries (18%), financial intermediaries (15.1%), trade (14.1%), consumer loans (13.8%), and real estate services and developers (13.6%), a structure almost similar to that at end-december

22 Breakdown of Net Loans and Advances by Economic Sector in 8% 3% 17% Breakdown of Net Loans and Advances by Economic Sector in 7% 5% 18% Loan Breakdown by Currency The charts below highlight the breakdown of the loan portfolio by currency. Although USD remains the dominant currency at end-december standing at 55.7%, its share has decreased by 6.8% from 62.5% at end-december, reflecting the direct impact of the launch of the new subsidiary in Turkey with 60% of its loans denominated in Turkish Lira, 5% in Euros and the remaining in USD. In parallel, the share of loans denominated in Lebanese Pounds increased from 8.7% to 9.5%, underscoring the increased lending activity in Lebanese Pounds, focusing on government-subsidised LBP-denominated loans (mainly housing loans). 12% 14% 14% 17% 14% 15% Breakdown of Net Loans and Advances by Currency in Breakdown of Net Loans and Advances by Currency in Manufacturing industries Financial intermediaries Trade Consumer loans 14% 15% RE services and developers Others Transportation and comm. Contractors Loan Breakdown by Maturity In parallel, the consolidated loan portfolio also has a similar maturity profile as that at end-december. Short-term facilities, with maturities of less than one year reflecting mainly working capital financings to customers, accounted for 51.4% of the consolidated loan portfolio, while long-term loans accounted for 36.5% of the portfolio as a result of the lengthening maturity of both retail Manufacturing industries Financial intermediaries Trade Consumer loans 14% 14% RE services and developers Others Transportation and comm. Contractors and corporate loans, supported by subsidy programs backed by the Ministry of Finance and the Central Bank of Lebanon. The maturity profile of the Turkish portfolio structured toward short-term facilities (57% maturing in less than one year), with the remaining being medium-term facilities, offset the growing contribution of subsidised long term retail and corporate loans. USD EUR LBP EGP 9% 11% 8% 5% 4%1% 62% SYP JOD TRY Other USD EUR LBP EGP 11% 9% 4% 2% 10% 6% 2% SYP JOD TRY Other 56% Breakdown of Net Loans and Advances by Maturity in Breakdown of Net Loans and Advances by Maturity in Loan Breakdown by Collateral Notwithstanding the fact that lending decisions rely primarily on the availability and sustainability of cash flows as a first source of repayment, Bank Audi s loan portfolio remains adequately collateralised. At end-december, secured loans represented more than 44.5% of total loan portfolio. Loans covered by personal guarantees represented 17.1% of the portfolio as compared to 19.4% at end-december. 36% 37% 52% 51% 12% 12% Short-term facilities Medium-term facilities Long-term facilities Short-term facilities Medium-term facilities Long-term facilities 42 43

23 Breakdown of Net Loans and Advances by Collaterals in 35% 19% Cash co. and bank guarantee Real estate mortgage Securities (bonds and shares) 18% 12% 15% Personal guarantee Unsecured Off-balance Sheet Flows As a result of the political and economic turmoil, the Bank s trade finance activities have generally declined over the period. Outstanding letters of credit decreased by 8.6% in to USD 235 million at end-december from USD 257 million at end-december, while outstanding letters of guarantee decreased by 13.5% in to USD 1,534 million at end-december from USD 1,773 million at end-december. Asset Quality Lending growth was coupled with a strengthening of the lending portfolio quality through the allocation of additional net provisions amounting to USD 121 million in, most of which in the form of collective provisions. collective provisions reached USD 111 million at end-december, the equivalent of 1.1% of the consolidated net loans portfolio, broken down over USD 59 million in Lebanese entities (of which USD 18 million earmarked for Syria), Breakdown of Net Loans and Advances by Collaterals in 38% Cash co. and bank guarantee Real estate mortgage Securities (bonds and shares) 17% 18% 10% 17% Personal guarantee Unsecured USD 3 million in entities in Europe, USD 10 million in Bank Audi (Egypt), USD 31 million in Bank Audi Syria and USD 8 million in Bank Audi (Jordan). In parallel, specific provisions reached USD 182 million, broken down over principally USD 91 million in Lebanese entities (of which USD 28 million of unallocated provisions), USD 18 million in entities in Europe, USD 28 million in Bank Audi (Egypt), USD 18 million in Bank Audi Syria and USD 26 million in Bank Audi (Jordan). When adjusting to interest in suspense on doubtful loans, loan loss reserves stood at USD 221 million, translating in doubtful loans coverage by specific provisions of 76.3%. In parallel, the gross doubtful loans to gross loans ratio improved, moving from 2.9% at end-december to 2.7% at end-december, while net doubtful loans stabilised at 0.64% of gross loans, a relatively low level, especially given the uncertain regional conditions, particularly in Syria. Asset Quality (USD Million) Dec-11 Dec-12 Change Gross NPLs o.w. Corporate o.w. Retail Gross SLs Net loans 8, , ,834.2 o.w. Corporate 7, , ,708.3 o.w. Retail Specific provisions o.w. Corporate o.w. Retail Collective provisions o.w. Corporate o.w. Retail Gross NPLs/Gross loans 2.90% 2.70% -0.21% o.w. Corporate 2.73% 2.53% -0.21% o.w. Retail 4.39% 4.28% -0.11% Net DLs/Gross loans 0.66% 0.64% -0.02% o.w. Corporate 0.67% 0.63% -0.05% o.w. Retail 0.58% 0.78% 0.20% Coverage (specific) 77.16% 76.26% -0.90% o.w. Corporate 75.41% 75.26% -0.15% o.w. Retail 86.83% 81.84% -4.99% Collective prov./net loans 1.17% 1.06% -0.11% o.w. Corporate 1.00% 0.91% -0.09% o.w. Retail 2.70% 2.51% -0.19% In absolute terms, Bank Audi s gross doubtful loans moved from USD 258 million at end-december to USD 290 million at end-december, reflecting an increase by USD 32 million, broken down geographically principally over USD 22.4 million in Bank Audi Syria, USD 13.7 million in Bank Audi (Jordan), USD 8.3 million in Bank Audi Saradar France, offsetting a decrease by USD 9.7 million in Bank Audi (Egypt), and USD 5.6 million in Group Audi Lebanon. By business segments, corporate doubtful loans increased by USD 27.2 million and retail doubtful loans by USD 4.5 million over the same period. A detailed analysis of the evolution of asset quality indicators in Egypt revealed an improvement in spite of the persisting uncertainties. Gross doubtful loans to gross loans ratio moved from 3.2% at end-december to 2.2% at end-december, while the coverage on those loans by specific provisions rose from 60.1% to 83.8%. In absolute terms, gross doubtful loans decreased by USD 9.7 million, reaching USD 33.9 million at end-december, while provision coverage on those loans increased by USD 2.2 million. As a result, net doubtful loans that are predominantly covered by real guarantees contracted by USD 11.9 million to USD 5.5 million, while collective provisions reached USD 10 million, representing 0.65% of net loans

24 Evolution of Asset Quality in Egypt and Syria (USD Million) Breakdown of Placements with Banks by Region in Breakdown of Placements with Banks by Rating in BAEGY BASY Dec-11 Dec-12 Change % Dec-11 Dec-12 Change % Gross DLs/Gross loans 3.2% 2.2% -1.0% 5.6% 16.6% 11.0% LLRs on DLs/DLs (excluding real guarantees) 60.1% 83.8% 23.7% 52.5% 39.3% -13.2% Gross DLs % % LLRs on DLs % % Net DLs (predominantly covered by real guarantees) % % Collective provisions % % 14% 1% 14% 6% 5% 6% 45% Opposite trends were reported in Syria witnessing significant deterioration in the operating environment, impacting asset quality of Bank Audi Syria. Gross doubtful loans to gross loans ratio leaped from 5.6% at end-december to 16.6% at end-december, as a result of Management s voluntary shrinkage of the gross loan portfolio within an increase in gross doubtful loans by USD 22.4 million. The latter increase was met by an increase in specific provisions by USD 4.7 million and in collective provisions by USD 11.7 million. At end-december, gross doubtful loans reached USD 53.4 million, covered by USD 21 million of specific provisions and USD 31 million of collective Breakdown of Liquidity at End-December provisions. Subsequently, doubtful loans coverage by specific and collective provisions represented at the same date 97% and would exceed 115% when including real guarantees. Changes in Primary Liquidity 23.2% of the total growth in assets during was used to increase broad primary liquidity (composed of placement with banks, placements with BDL and BDL CDs), the equivalent of USD 595 million, reaching USD 13.2 billion at end-december and representing 49.1% of customers deposits. The table below highlights the breakdown of primary liquidity by type and currency. LBP USD EUR SYP EGP TRY JOD Others Central banks 3,268 4, ,607 o.w. Reserves requirements 301 2, ,878 o.w. Cash deposits 1,054 1, ,399 o.w. BDL's certificates of deposits 1,913 1,417 3,330 Placement with banks 66 2, ,543 liquidity 3,334 7,462 1, ,150 Relative to end-december, broad primary liquidity increased by 4.7%, from USD 12.6 billion to USD 13.2 billion, with the composition remaining broadly unchanged, except for the USD 0.5 billion new reverse repo transactions booked in in Odeabank. Subsequently, primary liquidity remains mainly concentrated on placements with central banks, although their share has dropped year-on-year from 74.6% to 73.1%. Bank placements, including money market (MM) deposits, nostros and short-term loan participations and reverse repo balances, accounted for the remaining 26.9% (up from 25.4% in ). MM placements and nostros with banks, representing USD 3.0 billion or 23% of primary liquidity at end-december, are mostly placed with highly-rated and financially sound banks, mainly based in low risk OECD and GCC countries characterised by high levels of solvency and financial and monetary stability. 83% of these placements are held in banks rated A3 or better. The charts below show the breakdown of money market placements held as at end- by ratings and geographic location. MENA G10 countries Other Europe Other 71% Exposures to banks are continuously monitored by the Risk Management department, in close coordination with the Group Financial Institutions and Correspondent Banking department (Group FI). Regular portfolio reviews are conducted throughout the year to assess the Bank s risk profiles and ensure that related positions remain within the overall risk appetite of the Group. During these reviews, specific attention is paid to concentration risk levels to ensure that these remain well under control. Changes in Portfolio Securities (USD Million) Aaa to Aa3 A1 to A3 Baa1 to Baa3 Ba1 to Ba3 Not rated Changes in Portfolio Securities The size of the consolidated portfolio securities stabilised in, reaching, at end-december, USD 10,153 million versus USD 10,186 million the previous year. A detailed flow analysis reveals a structural shift with a decrease in Lebanese exposure, namely BDL certificates of deposits, by USD 268 million, Lebanese Eurobonds by USD 157 million, and other Lebanese securities by USD 115 million, more than matched by an increase in other non-lebanese Treasury securities by USD 492 million (from USD 2,079 million to USD 2,571 million), mainly originating in Egypt, benefitting from increasing yields on local Treasuries. Change LBP cv FC LBP cv FC LBP cv FC BDL certificates of deposits 2,228 1,370 3,598 1,913 1,417 3, Net Lebanese Treasury bills & Eurobonds 2, ,037 2, , Risk-ceded Lebanese Eurobonds 1,073 1, Other non-lebanese governmental securities 1,466 1,466 1,853 1, Equity instruments Other Lebanese securities Other non-lebanese securities ,373 5,813 10,186 4,219 5,934 10, % 46 47

25 Lebanese Bond Portfolio At end-december, Bank Audi s exposure to Lebanese sovereign Eurobonds in foreign currency stood at USD 1,679 million, of which USD 971 million of bonds whose risk has been ceded to customers, thus leading to a net exposure of USD 708 million, representing 7.0% of the Bank s total securities portfolio and 3.5% of adjusted foreign currency denominated customers deposits. Non-Lebanese Securities In parallel, the international securities portfolio stabilised in, reaching, at end-december, USD 2,571 million broken down over USD 1,853 million of non-lebanese governmental securities and USD 718 million of other international fixed income securities. Well diversified across sectors, placements in these securities are skewed towards highly-rated financial institutions, which accounted, at end-december, for 60% of the total international bond portfolio, while corporate issuers accounted for 25% and sovereign names for 15% of the total. The relatively high concentration on banks is mitigated by good issuer diversification and relatively short tenor maturities (under 2 years), making these investments somewhat similar to ordinary placements with banks in terms of implied risk profile and market risk exposure. In terms of geographical allocation, 40% of non- Lebanese governmental securities relate to issuers domiciled in developed markets (mostly G10), 51% in GCC markets, and a relatively low 9% in other emerging markets. The portfolio does not include any direct exposure to Greece, Ireland, Italy, Portugal or Spain, while the direct exposure to the rest of the Euro zone is immaterial, representing less than 2% of consolidated loans portfolio at end-december. The charts below show the breakdown of the international bond portfolio by geographical location and by ratings. The international fixed income portfolio enjoys a high average rating, with 89% of the total being invested in issues rated AA- or better. The portfolio is also characterised by a good level of diversification, with the highest single issuer position representing 11% of the total portfolio and the second largest representing 6%, whilst the remaining positions do not exceed individually 4% of the portfolio size. The top exposure at end-december relates to an A rated issue Results of Operations Net earnings of Bank Audi sal grew by 5% in, moving from USD 365 million in to USD 384 million. Adjusting to net profits from discontinued operations stemming from the sale of LIA Insurance sal and the liquidation of Bank Audi sam (Monaco), Bank Audi s net earnings would have reported an almost flat growth (0.5%), moving from USD 359 million in to USD 361 million in. Operating profits before provisions and taxes rose by 7.7% over the year and by 10.6% when including profits from discontinued operations. The Group s income stream continues to be well diversified. With the exception of Syria facing significantly tough operating conditions, all entities delivered positive growth and our newly launched entity in Turkey broke even 2 months after the official operations launch. The contribution of entities abroad to consolidated net earnings improved by 11.6% from 11.8% to 23.4%, principally justified by the zero contribution of the Egyptian subsidiary to net profits, following Management s allocation of all profits in those entities to collective provisions at a consolidated level as a precautionary measure against the prevailing adverse development. The table below presents an overview of Bank Audi s consolidated financial results in as compared to : Non-Lebanese Bonds Allocation by Zone in 51% 9% 40% Non-Lebanese Bonds Allocation by Rating in 65% 9% 2% 24% Income Statement (USD Million) Dec-11 Dec-12 Vol. % Interest income (1) % Non-interest income % income , % Operating expenses % -Loans loss provisions % -Net other provisions Tax % = cost % = Profit before % + Results of discontinued operations % = Profits after tax and discontinued operation % Cost to income 44.7% 46.0% 1.3% (1) Includes interest revenues from financial assets or liabilities at fair value through P&L. Developed markets GCC Emerging markets BBB to BBB+ NR AA- to AAA A- to A

26 Breakdown between Lebanon and Abroad Change income Lebanon 65.4% 63.5% -1.9% Abroad 34.6% 36.5% 1.9% expenses Lebanon 53.3% 60.4% 7.1% Abroad 46.7% 39.6% -7.1% Net income (2) Lebanon 88.2% 76.6% -11.6% Abroad 11.8% 23.4% 11.6% (2) Includes profits from discontinued operations. This growth in net earnings from operations results from an 11.6% increase in total income and a 16.3% rise in general operating expenses, justified to a large extent by the launch of the Turkish entity. The contribution of entities abroad to total revenues increased slightly from 34.6% in to 36.5% in. On the opposite, their share in consolidated expenses decreased by 7.1% from 46.7% to 39.6% over the same period. The increase in revenues by USD million is split over a USD 48.7 million increase in interest income (8.9%) and a USD 65.4 million increase in non-interest income (14.9%). Evolution of Interest Income The increase in interest income is attributed to a price effect reflected by the widening of the spread by 14 basis points, as well as a volume effect with average assets increasing by 1.47%. A weighted contribution by entity in reveals that Bank Audi (Egypt) led the widening of the spread by contributing 12 basis points within the context of a contribution by 2 basis points in each Lebanon and Jordan and 4 basis points from Odeabank, offsetting a negative contribution from Bank Audi Syria by 6 basis points, justified by the tough operating conditions in the country. Spread Evolution (USD Million) FY-11 FY-12 12/11 Net interest income Yield on assets 4.84% 5.11% 0.27% Cost of funds 2.93% 3.06% 0.13% Spread 1.91% 2.05% 0.14% On the backdrop of tough operating conditions in Lebanon in, weighed down by persisting low international reference rates impacting yields on primary liquidity and increased market competition with tightening yields on portfolio securities, interest income at Group Audi Lebanon, representing 57.1% of the consolidated interest income, grew by a mere 3.5%, the equivalent of USD 12 million, mainly driven by a quantity effect. By currency, the increase in interest income is broken down over a USD 4.9 million increase in the interest income denominated in Lebanese Pounds and an increase in the interest margin denominated in foreign currencies by USD 6.6 million. The improvement in interest margin in LBP reflects primary a price effect, with the spread in LBP moving from 2.17% in to 2.21% in. The expansion of the spread is mainly attributed to 50 51

27 a decrease in the cost of deposits by a further 17 basis points, amid renewal of maturing TBs at lower yields. The improvement in interest margin in LBP is also driven by increased lending in LBP, focusing on government-subsidised LBP-denominated loans (mainly housing loans). In parallel, the improvement in interest margin in FC is attributed almost entirely to a quantity effect, with average assets in foreign currencies increasing by USD 514 million within stable spread underscoring heightening competition in the marketplace. Evolution of Non-interest Income The increase in non-interest income by USD 65.4 million is broken down over a USD 6.9 increase in net commissions, a USD 34.4 million increase in net gains from portfolio securities, a USD 41.2 million of net gains on profits from foreign exchange (amid USD 57 million of gains in resulting from the revaluation of the structural position in Bank Audi Syria (USD 19 million) and the operational positions in Bank Audi (Sudan) (USD 29 million) and Odeabank (USD 12 million)), with the remaining decrease accounted for by other operating income. By activity, the USD 65.4 million stem from increases in all business lines of the Group, with the exception of Commercial and Corporate Banking posting a contraction by USD 8.1 million justified by lower trade finance and syndication revenue within the context of the tough regional operating conditions. Subsequently, non-interest income (excluding profits from discontinued operations) represented in 44.7% of total income (44.3% in ) and 1.61% of total assets (1.52%) in. The table below presents a segmental breakdown of non-interest income by markets and business lines. Non-Interest Income (USD Million) Change Lebanon Europe Turkey MENA Lebanon Europe Turkey MENA Lebanon Europe Turkey MENA Commercial and Corporate Banking o.w. Lending operations o.w. Syndication fees o.w. Trade finance o.w. Other banking operations o.w. Foreign exchange Private Banking o.w. Brokerage and custody o.w. Fiduciary operations o.w. Other banking operations o.w. Foreign exchange Retail and Personal Banking o.w. Lending operations o.w. Retail products o.w. Other banking operations o.w. Foreign exchange Treasury and Capital Markets o.w. Dividends o.w. Trading/Sale of financial instruments o.w. Revaluation Other non-interest income o.w. Insurance o.w. Outsourcing o.w. Investment Banking o.w. Foreign exchange o.w. Other non-interest Income

28 Evolution of General Operating Expenses General operating expenses increased year-on-year by 16.3%, the equivalent of USD 72.5 million, broken down over USD 20.5 million of additional staff expenses, USD 32.7 million of other operating expenses and USD 19.3 million of depreciation, of which a one-time USD 14 million goodwill impairment on the Bank s investment in AoLB, as prescribed by the revision of the company s business plan in view of the persisting uncertainties in Egypt. By geography, the increase in general operating expenses is broken down over USD 70.2 million in Lebanese entities and USD 35 million of direct cost booked in Odeabank, totally offsetting a contraction by USD 30.1 million and USD 2.7 million, respectively in entities in the MENA region and in Europe. While the decrease in the MENA entities is principally justified by the depreciation of the currency in Syria and Sudan and by the deconsolidation of Capital Outsourcing, the drop in entities in Europe reflects the deconsolidation of Bank Audi sam (Monaco). The increase in expenses in Lebanon is principally justified by the high cost of living adjustment on salaries and non-recurrent expenses tied principally to the establishment cost of Odeabank booked in Beirut (USD 9.8 million). Adjusting to all non-recurrent flows and to Odeabank, the increase in recurrent consolidated general operating expenses in relative to reaches USD 17 million (3.8%). Adjusted to only Odeabank s cost, general operating expenses would have increased by 6.3%. Subsequently, the cost-to-income ratio (including profits from discontinued operations) moves from 44.7% in to 46.0% in and 43.2% when excluding operating expenses in Turkey which mainly consisted of non-recurring expenses attributed to the launch of activities. The table below presents a segmental breakdown of consolidated general operating expenses by type and region. Evolution of Loan Loss Provision Charges Within the tough economic conditions prevailing in several countries of presence of the Group, Bank Audi allocated in USD 121 million of net loan loss provisions, as compared to USD 91.3 million in. By entity, net loan loss provision charge is broken down over USD 60.9 million in Lebanese entities, USD 28.6 million in Syria, USD 16.6 million in Bank Audi (Egypt), USD 6.2 million in Bank Audi Saradar France, USD 7.7 million in Bank Audi (Jordan) and USD 1 million in Bank Audi (Sudan). Evolution of Income Tax Income tax increased in from USD 92.5 million in to USD million in, translating in an increase in effective tax rate from 20.5% to 22.1% over the same period. The evolution of the effective tax rate highlights changing profits mix and increased up-front taxes on interest received on the investment portfolio in Egypt. Net Profits from Discontinued Operations In, Bank Audi reports USD 22.4 million of net profits from discontinued operations, reflecting USD 42.4 million of net profits arising from the sale of 81% of the Bank s majority stake in LIA Insurance Company and a net loss of USD 19.9 million from the liquidation of Bank Audi sam (Monaco) described earlier. The latter represent USD 5.6 million of operating losses in the first nine months of until liquidation date, and USD 6.5 million of goodwill impairment charges, with the remaining accounted for by liquidation expenses. Breakdown of General Operating Expenses by Geoghraphy (USD Million) Change Lebanon Europe Turkey MENA Lebanon Europe Turkey MENA Lebanon Europe Turkey MENA Staff expenses Other operating expenses Depreciation At the time of the sale, assets of LIA Insurance were USD 298 million (USD 289 million at end-december ) and were deconsolidated from the Group s financial position starting end-june. Assets of Bank Audi sam (Monaco) were USD 148 million (USD 202 million at end-december ) and were deconsolidated starting end-september. As addressed above, Bank Audi sam (Monaco) was spanned off into a more efficient financial company named Audi Capital Gestion sam. Key Performance Metrics Key Performance Metrics Management measures and evaluates the performance of the consolidated operations and each business unit using a number of financial metrics. The ultimate goal continues to be maximising shareholders return through achieving a return on average common equity at a premium of the weighted average cost of equity of the banks. The table below highlights in details the evolution of the component of return on average common equity in. Change Spread 1.91% 2.05% 0.14% + Non-interest income/aa 1.54% 1.80% 0.26% = Asset utilisation 3.46% 3.85% 0.40% x Net operating margin 36.77% 34.14% -2.64% o.w. Cost to income 44.71% 45.96% 1.25% o.w. Provisions 9.20% 10.78% 1.58% o.w. Tax cost 9.32% 9.12% -0.20% = ROAA 1.27% 1.32% 0.04% x Leverage = ROAE 15.29% 15.18% -0.11% ROACE 16.39% 16.49% 0.10% On a backdrop of a higher increase in revenues than in average assets, Bank Audi s consolidated spread expanded by 14 basis points, coupled with an improvement in non-interest income to average assets ratio by 26 basis points, boosting the asset utilisation ratio by 40 basis points to 3.85%. The interaction of the asset utilisation ratio with a deteriorating net operation margin (from 36.77% in to 34.14% in ) resulted in a slight improvement in the Bank s profitability ratios, with the return on average assets reporting 1.32% and the return on average common equity amounting to 16.49%. Earnings per Share Bank Audi s basic common earnings per share reached USD 1.01, as compared to USD 1.0 in, reflecting a growth of 1.2%. Similarly, the diluted common earnings per share reached USD 1.01 in, as compared to USD 1.0 in, a growth of 1.3%. Basic earnings per share are calculated based on the weighted number of common shares actually issued and net profits after tax including profits from discontinued operations. The table below represents the evolution of Bank Audi s common earnings per share including net profits from discontinued operations over the past 5 years

29 Earnings per Common Share Growth (USD) Diluted Basic Analysis by Business Segments Bank Audi is managed on the basis of a cross-sectional organisation matrix of business lines and markets, reflecting the following four major business segments: Corporate and Commercial Banking, Retail and Individual Banking, Private Banking and Treasury and Capital Markets activities. Those business segments are determined based on the products and services provided, or the type of customers served, and constitute the basis for Management s evaluation of financial results. Results of each business segment are intended to reflect the performance of each business line, namely in terms of total assets and total revenues. Senior Management sets the business segment reporting methodology which is approved by the Group Executive Committee. A detailed description of the business segment reporting methodology is provided in Note 4 of the Consolidated Financial Statements. The performance of the four principal business segments of Bank Audi in is discussed and analysed in what follows: Corporate and Commercial Banking Bank Audi provides integrated Corporate and Commercial Banking solutions, with a coverage span entailing the Middle East, GCC, Africa and Europe through its established headquarters in Lebanon and its entities operating in Turkey, Egypt, Syria, Jordan, CAGR 13.8% Saudi Arabia, Qatar, Sudan, France and Switzerland. Despite the continuing challenging economic and political conditions prevailing in several key markets that triggered a slowdown in new lending in some markets and a decrease in exposure in other markets, Bank Audi still managed to achieve a double-digit growth of its consolidated corporate and commercial loan portfolio in (22.4%). This growth was the outcome of a strategy followed by the Corporate and Commercial Banking department to stay close to customers during those challenging times by providing them with suitable solutions across our network, deepening relationships with them. In parallel, the Bank continued, throughout, to leverage its crossroad position in the Near East Levant region, taking advantage of the increasing cross-border trade flows opportunities within the various markets of presence. Corporate and Commercial Banking activities were further reinforced with the launch of Odeabank in Turkey, one of Europe s fastest-growing economies. Bank Audi is currently focused on expanding its corporate regional franchise to include top tier Turkish clients by developing a sustainable and long-lasting franchise serving not only customers borrowing needs, but also their trade finance, advisory, cash management and Treasury needs, all of which are opportunities to grow the Bank s profits and deposit base. The Bank s value proposition revolves around differentiating our services while enhancing the Turkish-Arab commercial activities, fostering greater cooperation, financially and operationally, between our Arab and Turkish client base. This expansion consolidates the Group s aim to become the core corporate and commercial bank for the Levant to pan regional clients. The Corporate and Commercial Banking team at Bank Audi is committed to build scale in local markets, particularly in Lebanon and Egypt, which have shown great resilience in light of the regional difficulties. In Syria, the Bank s strategy will continue to hinge around significantly reducing the exposure to the country, while preserving the network, whereas in France, Jordan and Qatar, the corporate portfolio is set for a moderate growth. assets generated by the corporate and commercial segment reached USD 8,125 million at end-december, up 24.8% relative to end-december (USD 6,510 million). The substantial growth in net asset reflects the rapid but solid expansion, through Odeabank, into the Turkish market. Bank Audi was also able to sustain its presence in the fields of project and structured finance by extending new loans covering a variety of sectors including fertilizer production, oil and gas, retail and commercial development, construction and contracting, real estate, cement, steel, hotels, airlines and insurance. Subsequently, Bank Audi continues to be the largest commercial and corporate lender in the Lebanese sector, with a corporate and commercial loan portfolio standing at USD 7.6 billion at end-december, a level almost equivalent to the consolidated portfolio of its immediate peers. LCs openings during moved from USD 2,121 million in to USD 1,795 million in, contracting by 15.4% and reflecting subdued trade finance activity as a result of the recent unrest in the MENA region. Notwithstanding, the increased trade finance activity of the Turkish operations in the first months of 2013 is offsetting all this decrease, leaving a net growth. Based on the above, the corporate and commercial business generated total revenues of USD 258 million in, as compared to USD 248 million in, corresponding to a growth by 3.8%. The USD 10 million increase in total revenues is mainly attributed to a USD 13 million increase in interest income, driven by an improvement in spread following the re-pricing of loans, along with a decrease in non-interest income of USD 3 million. Retail and Individual Banking Retail and Individual Banking bestow a wide spectrum of innovative products and services covering consumer lending, accounts offering, bancassurance, credit cards, internet banking and mobile banking, through a network of more than 150 branches and 309 advanced ATMs servicing the growing needs of a clientele base counting more than half a million clients in a seamless manner. Consumers today, evolving towards a different set of needs encompassing digital innovation and mobile technology, drove a complete transformation in the way people bank, translating into changes in the retail strategy. To that end, several initiatives were undertaken in, as follows: Rapid implementation of the Turkish entity which was geared up from a retail standpoint with a platform supporting a wide variety of innovative features and functionalities, in addition to a full-fledged quantitative and qualitative market assessment process covering customer needs and competition monitoring on products and channels; Revamping the Online Banking gateway, adding new functionalities, while supporting the ever growing traffic. The improved channel promises to offer customers unlimited possibilities to fulfil their banking needs in the most efficient, intuitive and secure way through a state-of-the-art platform that will be rolled out throughout 2013; Enhancing the retail approach from the typical product-based where retail offering was universal to all clients to customer-centric approach where specific retail products are created for a specific segment of customers matching their profile. This segmentation helped increase customers satisfaction and create loyalty. Under this transformation, the role of the branches moved from 56 57

30 being transaction-oriented to advice-oriented. The introduction of the following technologies supported the transformation: - Novo: the first interactive banking channel in the region enabling customers to navigate on multi-touch screen, applying for loans, and getting the assistance of advisors through video conferencing. - Smart ATMs: a new generation of ATMs makes it possible to fully automate all cash transactions in the branch. Bank Audi owns more than 60 smart ATMs. - E-banking: in line with granting customers the most efficient tools to manage their funds from the comfort of their house, mobile banking remains one of the most popular channels with growing potential. At Bank Audi, audimobile and Pin-Pay applications both strive in this direction. - Customer relationship management: providing branch staff with access to a CRM solution which is fully-integrated with their day-to-day work environment and makes it easy to translate centralised marketing campaigns into successful customer interactions will be critical in enabling them to manage the customer experience and to drive sales. Introducing a range of market consumer lending products and third party instalment loans, as well as a host of innovative high tech retail products and services developed in association with leading partners. Entities leverage on the group resources to anticipate and answer the needs of an increasingly demanding customer base, while ensuring product diversification, pricing optimisation and risk mitigation; Introducing Islamic products in Egypt on the backdrop of an increasing demand combining the traditional Islamic values with the technology and innovation that characterise the best of modern banking. Driven by the above developments, the consolidated consumer lending portfolio registered a steady growth throughout by 18.4%, reaching USD 1.4 billion at end-december, with total housing loans exceeding USD 582 million, followed by personal loans with USD 419 million, car loans with USD 227 million and credit cards with USD 194 million. Bank Audi s market share in retail lending in Lebanon increased from 6.84% in to 8.27% as at end-december. The consumer lending portfolio reported a 40% increase, mainly driven by home loan growth which registered a 57.9% growth. Personal loans and car loans grew respectively by 28.0% and 20.7% over the year. The Retail cross-selling per customer as at end-december reached 4.55 products, versus 4.40 in. The Bank s market penetration in terms of customers reached 25% in, ranking first among competitors, versus 23% in, supported by the best brand image in the domestic market. Based on the above, the retail business generated total revenues of USD 198 million in as compared to USD 175 million in, corresponding to a growth by 13.0%. The USD 23 million increase in total revenues is mainly attributed to a USD 6 million increase in interest income driven by an improvement in spread following the re-pricing of loans, along with a increase in non-interest income of USD 17 million. Private Banking and Wealth Management Bank Audi benefits from a leading position in Private Banking, servicing the needs of high networth individuals through its subsidiaries. Bank Audi s Private Banking business line comprises Banque Audi (Suisse) sa, Audi Saradar Private Bank sal, Bank Audi LLC (Qatar), Audi Capital (KSA) cjsc and Audi Capital Gestion sam (Monaco). Despite continuing adverse operating conditions in Europe and the recent issues regarding bank secrecy and tax reporting, consolidated assets under management of Bank Audi stood at USD 8.4 billion at end-december, by far the largest portfolio managed by a Lebanese banking group and which compares competitively with portfolios managed by leading banks in the GCC. The Private Banking activity in turned total revenues of USD 33 million, growing by 48.4% relative to. A clearer definition of the Group s Private Banking perimeter (4 booking centres and 4 sales antennas) was achieved in in parallel to an acceleration of the convergence of the different teams that compose the Private Banking family; unified front offices allowing clients to book in the entity best suited for their needs, and an investment office offering discretionary, advisory and execution only services globally and regionally under a unified set of best practices are becoming the norm. Leveraging its regional footprint and strong brand and making Switzerland, where it has been operating for 36 years the center of excellence of its Private Banking and wealth management activities, will enable the Private Banking business line to become an ever increasing key growth driver in the Group in 2013 and beyond. Treasury and Capital Markets Bank Audi s capital market activities encompass Investment banking (market-making, research, advisory and corporate finance), asset management and securities services. The Bank is leveraging its regional scale to develop further its securities services and brokerage platform, consolidating the business towards increased intra-group synergies. In Lebanon, Bank Audi stays a major market-making player, accounting by itself for a 34.3% market share on the Beirut Stock Exchange in. The Bank also has a dominant share of the Lebanese Eurobond and Treasury notes markets, with an annual turnover of USD 8.3 billion in. Bank Audi is also notably active in equities and fixed income markets of Saudi Arabia and Egypt where the Bank reported a turnover of USD 2.5 billion in. Those activities in Lebanon and the MENA region are supported by an extensive fixed income research coverage. In, Bank Audi established an institutional fixed income desk aiming at developing and maintaining new and existing institutional coverage of Lebanese securities. This marketing effort for Lebanese risk comes in a current global environment where fund managers are searching for high yield rather than high rating investment solutions, which makes the Lebanese high Beta bonds particularly attractive. In parallel, the Bank s asset management, corporate finance and advisory businesses are currently focused on the Saudi Arabian market and are also supported by extensive equity research coverage. In line with the consolidated position, assets of the Treasury and capital market activities posted a contraction, decreasing from USD 16,752 million at end-december to USD 16,460 million at end-december. Still, total revenues of this business segment reported a growth of 21.7%, moving from USD 447 million in to USD 544 million in Capital Management Capital management at Bank Audi focuses on sustaining a long-term capital position sufficient to cover all material risks underlying from its various business activity and report a well-capitalised status, while considering the requirements of regulators, rating agencies, depositors and shareholders and the Group s internal capital ratio targets set in our business plans. Management s goal is to optimise the capital usage while providing support for the expansion of business segments and entities, benefiting from arising inorganic growth opportunities and protecting depositors and shareholders interests. Changes in shareholders equity, net earnings of the year and dividends policies are inter-linked with the preservation of capital strength. Evolution of Shareholders Equity Consolidated shareholders equity increased by USD 320 million, representing the issuance of USD 150 million Series F preferred shares in May and USD 201 million of internal capital generation in, within the context of a decrease in minority shares by USD 29 million. Shareholders equity moved from USD 2,357 million at end-december to USD 2,677 million at end-december, almost entirely composed of Tier 1 capital. Tier 1 capital rose from USD 2,286 million at end-december to USD 2,606 million at end-december, while Tier 2 capital remained stable at USD 71 million over the same period. With the stock of preferred equity representing USD 400 million at end-december, as compared to USD 250 million at end-december, core Tier 1 equity would have moved from USD 2,036 million at end-december to USD 2,206 million at end-december. As a percentage of consolidated assets, consolidated shareholders equity represented 8.6% at end-december, as compared to 8.2% at end-december

31 Regulatory Requirements Basel III (2.5.) In October, the Central Bank of Lebanon issued a circular requiring banks to report capital ratio following the Basel III framework, setting higher capital requirements to be achieved gradually in phase-in arrangements, as described below: BASEL III Implementation in Lebanon: Phase-in Arrangements As of December Minimum common equity (including CB): CETl (a) 5.0% 6.0% 7.0% 8.0% Minimum Tier 1 equity (including CB): TIE (b) 8.0% 8.5% 9.5% 10.0% Minimum total equity (including CB): TE (c) 10.0% 10.5% 11.5% 12.0% Since January 1,, Management started to rely on the Basel III requirements before making any decision affecting capital strength outlook, although it has been computing it on an indicative basis starting At end-december, Basel III capital adequacy ratio reached 11.79%, versus a 10% minimum regulatory requirement. Common Tier 1 ratio reached 9.45% Capital Adequacy Ratio as per BASEL III (USD Million) (9% at end-december ), while additional Tier 1 reached 2.1% (1.4% at end-december ). Relative to end-december (10.7%), the 110 basis points change in the capital adequacy ratio is accounted for by internal generation (33 basis points), the LIA insurance divesture (47 basis points), the issuance of the USD 150 million of Series F preferred shares (83 basis points), offsetting the increase in risk-weighted assets consuming additional 53 basis points. Dec-11 Dec-12 Change Risk-weighted assets 18,131 18, o.w. Credit risk 16,408 17, o.w. Market risk o.w. Operational risk 1,310 1, Core common Tier 1 capital 1,644 1, (including profits after dividend distribution) Tier 1 ratio 10.45% 11.56% 1.11% Tier 2 ratio 0.24% 0.23% -0.01% ratio 10.69% 11.79% 1.10% Regulatory Requirements ICAAP As part of the implementation of Pillar 2 of Basel II framework, the Central Bank of Lebanon, in its basic Circular No. 119 dated July 21, 2008, followed by the Banking Control Commission of Lebanon (BCCL) Memorandum 9/2010 dated October 20, 2010, required Lebanese banks to report the Internal Capital Adequacy Assessment Process (ICAAP) at the start of an assessment parallel run period set on June 30,. In, Bank Audi, aligning with best practice, submitted its consolidated ICAAP report to the Central Bank of Lebanon, after it was challenged by the Group Executive Committee and the Board Group Risk Committee and approved by the Board of Directors. During, the Bank submitted to Senior Management and the Board of Directors the second Internal Capital Adequacy Assessment Process (ICAAP) report. The Bank views the ICAAP as an important internal initiative rather than just a regulatory one by calculating both regulatory and economic capital. This is being reflected by the ICAAP becoming an integral part of the Bank s decision-making process and an essential tool used by Management and the Board for capital planning. It also acts as an important exercise that drives the Bank to develop and better use risk measurement techniques. Building on the approaches used within the ICAAP submission, Equity Metrics (USD 000's) the Bank further developed and refined various risk methodologies and included more sensitive risk measures able to capture risk more adequately. The assessment was based on quantitative and qualitative methods. In preparation for moving towards more advanced methods in the Basel framework, the Bank adopted the Foundation-IRB approach within the internal credit risk capital charges calculations for certain asset classes in order to better capture the quality and riskiness of the portfolios. The ICAAP was conducted for the Group on a consolidated basis and on an individual basis for some material entities to ensure that stand alone capital is appropriate. The result of the ICAAP shows that, when taking all relevant and material risks to the Bank, including various stress testing scenarios, Bank Audi s capital adequacy ratio remained well above the minimum requirement. Common Book per Share In addition to the regulatory ratios mentioned earlier, Management, investors and analysts use the common book per share as a measure to assess capital adequacy. Common equity represents total equity less minority shares less preferred shares. Common equity per share is based on the outstanding number of common shares net of Treasury stocks. The table below presents the evolution of common equity per share between end-december and end-december. Dec-11 Dec-12 Change Percent Shareholders' equity 2,356,981 2,677, , % - Minority shares 93,646 64,238-29, % = Shareholders' equity group share 2,263,335 2,613, , % - Preferred stock (including dividends) 267, , , % = Common shareholders' equity 1,996,148 2,189, , % Outstanding number of shares (net of Treasury stock) 340,942, ,851,669 6,909, % Common book per share % Share price at December % P/Common book % 60 61

32 Common equity per share of Bank Audi increased from USD 5.85 at end-december to USD 6.3 at end-december. Accordingly, on the basis of a price of USD 6.09 at end-december, the common share is traded at 1 times the common book value, versus an average of 2 times for regional and emerging markets. 5. Dividend Policy Since 1996, it has been the policy of the Board of Directors of the Bank to recommend the distribution to holders of common shares of a dividend payment of at least 30% of after-tax profits in each year, subject to the approval of the Bank s shareholders and to the availability of distributable net income for the year. As per the Bank s by-laws and applicable Lebanese law, the annual net profits shall be distributed in the following order of priority: To legal reserve, in amounts equivalent to 10% of the net profits after tax that will be transferred each year until such reserve reaches one-third of the Bank s share capital. The legal reserve is distributable only upon the liquidation of the Bank; To payment of Series F, E and D preferred shares dividends, as approved by the Ordinary General Meeting; To general or special reserves and/or to profits to be carried forward; as per Banque du Liban s Decision 7129, the Bank is required to set aside a minimum of 0.2% and a maximum of 0.3% of the Bank s risk-weighted assets as a reserve for Consolidated Payout Ratio (1) unspecified banking risks, which forms an integral part of the Bank s Tier I Capital. The aggregate of this reserve should be equivalent to 1.25% of risk-weighted assets within 10 years from Decision 7129 s issuance and 2.0% of risk-weighted assets within 20 years. In addition, the Bank is required to establish a special reserve for properties acquired in satisfaction of debts and not liquidated within the required delays, and the balance; To holders of common shares. The common dividends distributions are made annually on the dates specified by the General Meeting. Under Lebanese law, dividends not claimed within five years of the date of payment become barred by statute of limitations; half of these unclaimed dividends revert to the Bank, while the balance is paid over to the Lebanese government. The table below highlights the dividends distribution practices at Bank Audi for the 2007 exercise till that of. During its meeting held on April 10,, the Ordinary General Assembly resolved the payment of dividends on preferred shares of respectively USD 7.75, USD 6, USD 4 respectively per Series D, E and F preferred shares, and a common dividend per share of LBP 603 (before the 5% withholding tax) (USD 0.4). dividends paid for the exercise represented 42.4% of net earnings in. On the basis of a share price of listed shares and GDRs of respectively USD 6.25 and USD 6.50 as at March 12,, the dividend yield reached 6.4% for listed shares and 6.2% for GDRs. In USD '000s Common earnings 181, , , , , ,420 Dividends on common shares 65,805 77, , , , ,420 Dividends per common shares (USD) Payout ratio on common shares 36.2% 35.1% 43.1% 41.0% 40.1% 38.7% Dividends on preferred shares 18,437 18,437 9,687 14,687 17,188 23,188 dividends 84,242 95, , , , ,608 Net earnings 200, , , , , ,608 payout ratio 42.1% 40.1% 45.0% 43.5% 42.9% 42.4% (1) Adjusted to the 10:1 stock split approved by the Extraordinary General assembly held on 02/03/2010, and the Central Bank of Lebanon on 21/04/2010, and in effect since 24/05/ Risk Management The main theme for was for the Bank to continue moving towards advanced approaches and adopt the best practices in Risk Management. This was achieved while maintaining the formalisation process and the alignment of the risk management framework across our entities. A concerted effort was made to get our Turkish subsidiary, Odeabank, up to speed with Group risk-aligned charter and policies and to put in place a solid foundation for the Turkish risk practices, in line with local regulations. In addition, the Bank developed a risk training academy to be launched in the coming year, compounded between core risk courses developed and delivered in-house and an online solution with sessions scheduled in a classroom setting. A training policy was put in place based on various principles and guidelines. The purpose of the Risk Academy includes strengthening awareness of risk management and fostering Bank Audi s risk culture. From a strategic perspective, the Bank s risk management objectives are to: Accompany the business in its growth and support Management in the implementation of the Bank s strategy; Preserve and contribute to the enhancement of the Bank s financial strength by ensuring that risks and rewards are properly balanced and by minimising the impact of undesirable events on capital and profits; Formulate the risk appetite which determines the risk boundaries within which Management operates; Constantly monitor the risk profile to ensure that the Bank is operating within set risk appetite and limits. The Bank s achievement of these objectives rests on four pillars: i- Risk Governance: ensuring a clear and effective organisational structure with proper accountability and responsibility at the Management and Board levels as it relates to risk; ii- Risk Institutionalisation through risk appetite setting, Internal Capital Adequacy Assessment Process (ICAAP), and policies and procedures; iii- Risk Infrastructure, with state-of-the-art IT systems that enable better data aggregation, monitoring and reporting; iv- Risk Methodologies using the most appropriate and advanced measurement techniques to assess risk. Risk Governance The Risk division at Bank Audi operates independently from the business and provides oversight on risk management and controls. The Risk function is headed by the Chief Risk Officer who is a non-voting member of the Executive Committee and reports directly to the Chief Executive Officer. The Chief Risk Officer has access to the Board of Directors through the Board Group Risk Committee. The Bank s Group Risk division is composed of the following functions: Corporate Credit Risk Counterparty Credit Risk Retail Risk Market Risk Operational Risk Risk Integration and Analytics Corporate Information Security and Business Continuity Risk Infrastructure Bank Audi has defined the following key guiding principles that underpin its approach to risk management, which include: - Bank Audi s risk management responsibilities follow a three-line of defence structure: the first being the business lines; the second being Risk and Compliance; and the third line of defence being Internal Audit and external auditors; - Risks are properly disclosed to various internal and external stakeholders in a transparent, systematic, structured, timely and accurate manner, in order to allow various stakeholders to make prompt and informed decisions; - The Risk function is independent from business lines and decision-makers, yet supports them in making informed choices and distinguishing among alternative courses of action. The responsibilities of Bank Audi s Board of Directors with regards to risk management are to ensure that 62 63

33 the risk management framework is designed in a way to enhance and facilitate the Bank s ability to pursue its strategic objectives, while ensuring that no excessive risk is taken beyond its approved risk appetite and tolerance. Mainly conducted through the Board Group Risk Committee (BGRC) which met on a quarterly basis during, the Board of Directors responsibilities also include setting the risk appetite, approving and reviewing the risk framework and policies, and reviewing and following up on the development of the risk function. This year, Board risk committees were set up in most entities in an effort to further enhance the Bank s risk governance and overall risk coverage of the Group. Monitor, Review & Improve Risk Institutionalisation Risk Charter Strategy & Risk Appetite Governance & Infrastructure Risk Management Process The Risk Charter is a Board-approved set of guiding principles underpinning the responsibilities, authority and functioning of risk management across Bank Audi. The purpose of the Charter is to set out consistent and unified Risk Management practices across the Group by defining the mission, scope, principles, risk management framework, risk management process, internal governance, as well as roles and responsibilities of the Risk function designed to support the Bank s strategic objectives. The following chart depicts the key components of Group Audi s risk management framework: Risk Identification Risk Measurement Risk Monitoring Risk Mitigation & Control Risk Reporting & Consultation People & Culture Systems & Risk Architecture Monitor, Review & Improve Committee and Board of Directors depending on the materiality and relevance of the stress test at hand. The Bank continuously monitors areas of concerns to probe for vulnerabilities within the loan portfolio. This practice was especially accentuated during given the political situation in Syria and Egypt, where regular stress tests were conducted on liquidity, asset quality and currency devaluation. Risk Infrastructure Group Risk and Group Finance have maintained their joint effort towards a strategic project aiming at creating an analytical and reporting platform for the Group from a unified set of data. This project, named Integrated Finance and Risk Management (IFRM) framework, will allow data aggregation to be made in a meaningful manner with a timely, consistent and consolidated view of enterprise data. It will also allow the Bank to rely on advanced analytical tools as part of its decision-making process. The Bank is moving forward with the various phases of the IFRM. In the meantime, it is running on tactical projects to address its risk-reporting requirements and risk aggregation. Risk Methodologies independent risk assessment that identifies the key risks, as well as the return, on a risk-adjusted basis within the underlying transaction. At Bank Audi, the major sources of credit risk within the Bank stem from sovereign, financial institutions, corporate, commercial and retail exposures. Measurement is performed to effectively assess the probability of risk occurrence and to make assumptions as to their potential severity. During, the rating models for SMEs have been rolled out. One model was aimed at SMEs with reliable financial statements, while the other targeted SMEs with less reliable financial statements. Moreover, the Bank initiated one additional modelling workshop to design and implement a fully-integrated internal rating model for project finance and to refine the existing generic corporate model. In an effort to optimise the use of capital, the Bank has incorporated a Risk Adjusted Performance Measurement (RAPM) as part of its credit approval process to ensure a proper risk and return balance on any transaction, while contributing to shareholder value. The Bank s effort to enhance the retail empirical and expert scorecards was initiated in. The coming year will see the design and roll-out of several scorecards within the retail entities of the Group. Risk Appetite The risk appetite, which is set on an annual basis, is meant to provide the boundaries within which business lines operate. The setting of the risk appetite at Bank Audi is a result of a formal dialogue between Group Risk, business lines, Senior Management and the Board Group Risk Committee. The risk appetite, which is approved by the Board of Directors, is expressed in both qualitative and quantitative statements. The latter include a set of metrics covering risk appetite or targets, tolerances and limits. The Bank maintains constant communication of the risk appetite to business lines and monitors the risk profile to ensure that it always remains within the Board of Directors approved limits. Stress Testing Stress testing is used by Bank Audi to measure the Bank s vulnerability to exceptional but plausible events. Bank Audi has formalised stress testing within a Board of Director-approved document and conducts regular stress testing for material risks to which it is exposed and resulting from both on and off-balance sheet transactions. Considered as an integral part of the ICAAP, stress tests results also feed into the yearly capital planning and budgeting process. The selection of stress testing scenarios is the result of discussion between Group Risk, Group Finance and business lines, in consultation with the Group Research department. The results are reported to the Group Executive Committee, Board Group Risk Bank Audi has taken a strategic decision to move toward advanced approaches in risk management, which require both competent quantitative skills and adequate analytical tools. The Bank has made several efforts to strengthen the framework around model validation by adopting best practices for the development, calibration, validation and maintenance of various risk-related models. Such models will not only allow a better quantification of risk, but also support the business in its decision-making process. Credit Risk Management Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to discharge their contractual obligations. The credit risk culture is embedded within every person taking a commercial decision at Bank Audi. Each commercial transaction is accompanied with an Measurement models and related assumptions are routinely subject to internal model review, empirical validation and benchmarking, with the goal of ensuring that the Bank s risk estimates are reasonable and reflective of the risk of the underlying positions. Liquidity Risk Management Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. Liquidity risk can manifest in the following two forms: Funding liquidity risk is the risk that the Bank s financial condition is adversely affected as a result of its inability to meet both expected and unexpected current and future cash flow and collateral needs in a timely and cost-efficient manner; 64 65

34 Market liquidity risk is the risk that the Bank cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption ultimately leading to loss The Bank addresses these risks in two distinct environments: Normal conditions where the Bank must satisfy daily liquidity needs (flows) and the liquidity risk associated with those needs (e.g. in conjunction with expanding product or business mix, settlement, deposit/loan growth, etc.); Stressed conditions where the Bank is facing liquidity strains due to idiosyncratic or systemic conditions and may invoke the Contingency Funding Plan (CFP) as a result. Liquidity Adequacy Management considers the Bank s liquidity position to be strong, based on its liquidity metrics as of December 31,, and believes that the Bank s funding capacity is sufficient to meet its on and off-balance sheet obligations. The Bank s funding strategy is intended to ensure sufficient liquidity and diversity of funding sources to meet actual and contingent liabilities through both normal and stress periods. The Bank s primary sources of funding include a stable customer deposit base constituting 84% of its funding (liabilities + equity), which was USD 26.4 billion at December 31,, rising by USD 1.7 billion from. Nearly 76% of deposits are Retail/Personal Banking accounts, whereas about 24% are corporate/sme. The large Retail/Personal Banking base emphasises the Bank s reliance on sources of funding that are considered to be the most stable, as evidenced by their treatment under the recent Basel III Liquidity Standards (not in effect yet, but approved in final form by the Basel Committee). The Bank s consolidated short-term liquidity ratios (defined as net current accounts and maturing placements with central banks plus banks and financial institutions relative to maturing deposits over 1-month and 3-month horizons) are at healthy levels. For example, the 1-month ratio is nearly 28%. The Bank maintains pools of liquid unencumbered securities and short-term placements. It also actively monitors the availability of funding across various geographic regions and in various currencies. Its ability to generate funding from a range of sources in a variety of geographic locations and in a range of tenors is intended to enhance financial flexibility and limit funding concentration risk. In Syria, additional measures are in place to further strengthen liquidity adequacy compared with normal periods. The 1-month liquidity ratio (as defined above) stands at nearly 48% for Bank Audi Syria. Measures taken include daily or intraday monitoring of cash note availability, scale-down of lending activity, and maintenance of short-term liquid assets (placements with their respective central banks or bank counterparts). Contact and reporting to parent Senior Management, Treasury and Market Risk functions are maintained on a regular basis. In terms of governance, the process is designed to ensure that its liquidity position remains strong at both entity and parent levels. The Asset-Liability Committee (ALCO) formulates and oversees the execution of the Bank s liquidity policy (which essentially lays down the Bank s liquidity management strategy). The liquidity risk policy for identifying, measuring, monitoring, and reporting liquidity risk, and the contingency funding plan are recommended by Risk Management, reviewed by ALCO, approved by the Executive Committee, and finally ratified by the Board of Directors. Measurement, monitoring and reporting are performed for the most part by either Treasury or Risk Management, each of which inform and may escalate to ALCO based on key risk indicators and both regulatory and internal limits. Treasury is responsible for executing the Bank s liquidity policy, as well as maintaining the Bank s liquidity risk profile according to ALCO directives, all within the risk appetite set by the Board of Directors. The parent bank s Treasury and Capital Markets division communicates with entity Treasury departments to ensure adequate liquidity conditions at the Group level. Monitoring and setting of risk appetite for liquidity occur independently for each entity. Given the Bank s operating environment, the Bank monitors liquidity adequacy in each currency separately, especially for significant currency positions. The Bank employs a variety of metrics to monitor and manage liquidity. One set of analyses used by the Bank relates to the timing of liquidity sources versus liquidity uses (eg. liquidity gap analysis). A second set of analyses focuses on ratios of funding and liquid assets/ collateral (e.g., measurements of the Bank s reliance on short-term unsecured funding as a percentage of total liabilities, as well as analyses of the relationship of short-term unsecured funding to highly-liquid assets, the loans-to-deposits ratio, and other balance sheet measures). The Bank performs liquidity stress tests as part of its liquidity monitoring. The purpose is to ensure sufficient liquidity for the Bank under both idiosyncratic and systemic market stress conditions. These stress tests are produced for the parent and major bank subsidiaries. Liquidity management at the parent level takes into account regulatory restrictions that limit the extent to which bank subsidiaries may extend credit to the parent and vice versa, and to other non-bank subsidiaries. Although considered as a source of available liquidity, the Bank does not view borrowing capacity at central bank discount windows in the jurisdictions it operates in as a primary source of funding, but rather as a secondary one. In addition, the Bank holds high-quality, marketable securities available to raise liquidity, such as corporate and sovereign debt securities. Market Risk Management Market risk is defined as the potential loss in both on and off-balance sheet positions resulting from movements in market risk factors, such as foreign exchange rates, interest rates and equity prices. The Bank has a very low tolerance to market risk stemming from changes in equity prices and foreign exchange rates. Its main exposure to changes in FX rates stems from its structural FX position resulting from its equity investments in banking subsidiaries in currencies that cannot be hedged against. This leaves interest rate risk in the banking book (IRRBB) as the main contributor to market risk. IRRBB Interest rate risk in the banking book arises out of the Bank s interest-sensitive asset, liability and derivative positions. The mismatch in the repricing dates of these positions creates interest rate risk for the Bank which is inherent in its banking activities. The sensitivity of net interest income for major currencies is listed below at the consolidated group level

35 Sensitivity of Net Interest Income () Change (Basis Points) Increase Decrease EUR ± 25 2, USD ± 50 21,050-21,050 LBP ± It is important to note that interest rates on assets do not change in tandem with liability rates. The stickiness of customer deposit rates in Lebanon, an observed phenomenon in the Lebanese market, has been incorporated in the above table. It has been quantified for the Lebanese USD customer deposit market whereby a relationship between changes in deposit rates has proven statistically reliable and reflects historical behaviour. For LBP, the estimated relationship is based on relatively recent history, which Management believes is more relevant in the current economic environment. The relationship, along with Senior Management s view of current market dynamics, is incorporated for customers deposits in Lebanese entities only, whereas other entities are calculated on purely contractual terms. It is worth noting that the relationship does not incorporate the lag in the response of deposit rate changes to changes in market rates. The interest rate risk profile of the Bank is within acceptable bounds. The negative impact of a fall in USD interest rates, as indicated above, constitutes less than 2.3% of net interest income for the Group. Given the prevailing low interest rate environment in USD, the Bank views a falling rate scenario as unlikely. Operational Risk Management Operational risk is the risk of loss arising from system failure, human error, fraud or external events. Operational risk exists in all activities and can materialise in various ways such as errors, frauds, or business interruptions that can result in direct and indirect lost income, such as reputational damage. At Bank Audi, the primary responsibility for the management of operational risk resides in the business. To monitor and control operational risk so as to maintain it within Board-approved risk tolerances, operational risks are assessed on a regular basis by evaluating the effectiveness of the control design against risk scenarios mapped to internal risk registries and implementing corrective actions where needed. These internal risk registries are mapped to seven standardised categories used for reporting to Management and to the Board of Directors: internal and external fraud, employment practices and workplace safety, clients, products and business practices, damage to physical assets, business disruption and system failures, and execution, delivery and process management. In addition, a system of incident reporting and a set of risk indicators together help confront ex-ante risk assessments to reality and improve controls before a situation develops into lost income exceeding tolerances. The Bank has recently been in the process of rolling out a special purpose operational risk management tool which closely mirrors the methodologies it had already developed internally. This tool is designed to ensure a more efficient group-wide implementation of the operational risk policy. As an additional layer of mitigation against operational events, the Bank purchases comprehensive insurance coverage from highly-rated reinsurers. This coverage is purchased wherever economically feasible and includes coverage against political violence, strikes, riots and terrorism in some countries that experienced unrest in. Notwithstanding its efforts to control operational risks, Bank Audi does incur unexpected operational losses, in particular as the sum of losses incurred below the insurance deductible, losses that are neither insured nor so predictable as to be priced, as well as setbacks to budgeted revenue (lost income). When these happen, they are escalated to the relevant Manager or Management committee and followed up for possible recoveries and process improvements. The Bank complies with the qualifying standards of Basel II s standardised approach (Paragraph 663 of the Basel II Capital Accord) and has tested, documented and discussed with regulatory authorities the mapping necessary to calculate the capital charge according to the standardised approach. Currently, however, the Bank applies the basic indicator approach for the calculation of its capital charge for operational risk. Finally, the operational risk framework is audited yearly, as per regulatory requirements and standard industry practice. 7. Investor Relations 7.1. Investor Relations Activity in Within the current political uncertainties in several markets of presence of the Group, the investor Participation in Equity Conferences/ Non-deal Roadshows relations activity in revolved around maintaining the investment community, investors and sell-side analysts informed of current status and outlook of the Group, highlighting the strategies adopted by Management in the face of these developments, managing the underlying risks and sustaining the Group s performance. Henceforth, communication with the institutional investor community was focused on ensuring they have a good knowledge of the Group s strategy going forward, have confidence in the opportunities and rewards what a diversified institution like Bank Audi has to offer. To that end, Bank Audi participated in in 7 equity conferences, fulfilling 68 meetings with 60 institutional investment companies, represented by 73 fund managers based principally in the United States, the United Kingdom and the MENA region, but also South East Asia, Australia and Eastern Europe. While somehow underscoring the limited equity institutional investors appetite prevailing in as a result of global and regional woes, Bank Audi s investor relations activity in reflects only an extension of the Bank s long-standing track record since The table below illustrates Bank Audi s participation since 2005 in equity conferences highlighting Management s commitment to Investor Relations: Equity conferences Number of meetings ,006 Number of companies met Number of portfolio managers met ,225 Company/Equity conferences Meeting/Company Portfolio manager/company

36 Several site visits were also scheduled for institutional investors that were not able to secure meetings during the equity conferences and for those investors interested in visiting the corporate head office to complement their knowledge on Bank Audi. The sell-side and buy side communities were also constantly updated through mass mails dispatched on regular basis, with the Bank s quarterly earnings releases and related corporate actions, as well as through constant updates of the Investor Bank Audi's Stock Coverage Management was always keen on providing all necessary resources for in-house meetings or conference calls with the sell-side community, and to answer all information requests in a transparent, effective and timely manner, in full compliance with the Bank s disclosure policy. 8. Deployed Resources 8.1. Operations In, the Bank s operations Management focused on developing its operating model, ensuring a high service quality, while introducing new technologies and guaranteeing a high level of security. In line with the above, operations Management at Bank Audi concentrated its efforts on: Continuing to develop the current operating model by deploying the concept of personal bankers. The objective behind this new structure is to move from a product-centric approach towards a bank revolving around customer centricity. To that end, a restructuring plan has been put in place through the creation of Commercial Business Centres throughout Relations webpage (including the Investor Relations presentation) on a quarterly basis Bank Audi's Stock Research Coverage Since 2010, several London-based banks and regional financial institutions initiated coverage of Bank Audi s stock. The table below lists institutions that cover the Bank s stock till April : Institutions Country Analyst Initiation Date EFG Hermes Egypt Elena Sanchez-Cabezudo Jan-06 FFA Private Bank sal Lebanon Nadim Kabbara Oct-09 Beltone Financial Egypt David Mikhail Dec-09 HSBC United Kingdom Shirin Panicker Feb-10 Deutsche Bank United Kingdom Rahul Shah Nov-10 Arqaam Capital United Arab Emirates Jaap Meijer Feb-12 Lebanon, spinning off credit as a focused business and offering our Relationship Managers a unique professional environment, while allowing to cater to our clients needs and using a pro-active approach with a competitive response time; Upgrading the quality of the service through the introduction of a comprehensive quality program comprised of mystery shopping, phone calls to clients and branch visits. This program was coupled up with prizes and incentives offered to the best branches on a monthly basis and communicated to the whole bank. In addition, key performance indicators have been put in place to measure the operational front liners performance which helped the assessment of additional recruitment needs and resources' re-allocation. Academic trainings were also delivered to keep the branch staff updated with the most recent regulatory and compliance frameworks; Enhancing our alternative delivery channels to meet the new technology challenges. This led to the deployment of the Novo concept, as well as the Cash and Cheque deposit services on the Bank s ATMs around the country. Late, a teller drive-through concept was also implemented to complete the enhancement of our alternative channels. All the above goes in line with the Bank s strategy to alleviate traffic on the traditional delivery channels (branches) by re-directing clients to alternative channels where they can now perform all kinds of operations within the self-service initiative. Improving the Bank s performance and efficiency by an internal restructuring of the key operational departments, automating processes reengineering workflows to reduce turnaround time, and incorporating new systems to meet with the current operational challenges and workload. Insuring business continuity to respond to any unforeseen situation which might affect the Bank s operations. A disaster recovery site has been launched and a contingency business plan prepared and communicated to concerned parties. The disaster recovery site can respond to any system failure or incidents generated by local turmoil Information Technology In, Bank Audi s IT supported the Bank s growth plans by launching new applications, kick-starting the transformation program and completing the set-up of Odeabank s IT organisation, in addition to enhancing its operational efficiencies by optimising efficient utilisation of resources and ensuring transparent monitoring of capital consumption. A heightened importance was also given to enhancing the existing security measures and emphasising business continuity. 1. New Applications In, Bank Audi launched several new applications: 1) Cash and Cheque deposit functionality on the largest ATM network in Lebanon; 2) Capital Market Module on the new Treasury platform (Murex); 3) Operational Risk Management system; 4) Internal Branch Mailing System that automates and tracks the internal mail between branches and departments; and 5) Visa Business Debit that allows companies to manage their everyday expenses (e.g. limits) and cash flow through a convenient and secure payment card, as an alternative to cash and cheques, and also gives business owners full control over their staff expenses through profiling and blocking balance inquiry function. 2. Transformation Program Bank Audi also kicked-off its IT transformation Program in where it will replace most of its legacy systems with state-of-the-art products and technologies. To get the most of this transformation, Bank Audi is implementing a best-in-class middleware solution that seamlessly integrates different business applications through service-enabled back-end applications via the middleware. Bank Audi is accomplishing this through a robust environment of web services for fast integration and re-use of functionality across multiple applications and legacy systems. The middleware is the first step for proper and futurist IT architecture. Oracle Service Bus (Middleware) was selected and procured in, and went live early in Odeabank IT Implementation Bank Audi expanded to Turkey and set up a greenfield bank (Odeabank). Bank Audi's IT team led the selection of two key local IT strategic partners (InterTech and Probil) for the core banking systems and infrastructure support. The team worked side by side with the providers and Bank Audi business team members in setting up the core banking system and third party applications, configured Odea competitive products, established complete policies and procedures, set up a business continuity centre and disaster recovery, and ensured compliance with the local banking regulators (BRSA). In addition, Bank Audi s IT team completed the set-up of Odeabank s IT organisation by recruiting a local team to support the business and the growth of Odeabank. Bank Audi s IT is currently supporting Odeabank in the implementation of its Treasury platform (Murex). 4. Operational Efficiencies Internal Organisation Bank Audi s IT team initiated an internal restructuring of the infrastructure unit with an aim to transform it into a service-oriented department. The Infrastructure unit was split in two: an Operations team with dedicated resources for daily operational work, and a Support and Infrastructure team tasked with project fulfilment

37 As for enhancing its technical capabilities to support the transformation, Bank Audi s IT (a) created two new functions within the Solution Delivery unit, Software Quality Control (Testing) and Integration to better serve the Bank in terms of operational efficiency and project delivery, (b) extensively trained SDM professionals, and (c) upsized the Architecture unit and hired external consultants to assist in designing the target architecture. Resource Efficiency Bank Audi s IT worked on enhancing its resource efficiency which is key to ensuring on-time delivery of the project pipeline. For that reason, transparency and planning were stressed by enforcing employees use of vendor-based tools such as EPM and Time Sheet. This, coupled with the enhanced visibility on project pipeline generated by the newly structured budget process, enabled Senior Management to better forecast the human capital required to deliver. These tools provided IT Management with visibility of demand versus supply, and helped in the expansion of the IT Organisation from 117 to 139 employees to cover the various projects of the Group. Transparent Capital Monitoring Bank Audi s IT and Finance department designed a new IT budget process to enhance transparency on actual spendings and properly allocate costs between IT and business. In addition, the new process ensures clear procurement planning, improved vendor management, and a better understanding of resource needs. The Bank also strengthened strategic partnership with suppliers such as HP, Oracle, IBM, and Cisco. Bank Audi s IT CAPEX increased by 74% to reach USD 27.4 million in. This increase is mainly due to the establishment of a new disaster recovery centre in Kfour, a data centre in Plaza, the launch of the Transformation Program, and the purchase of the Oracle Unlimited License Agreement. OPEX exhibited a slight increase of 6% and amounted to USD 12.5 million in. 5. Security and Business Continuity In response to the existing global security threats, Bank Audi s IT formulated a comprehensive security plan with a USD 2 million approved budget. The objective is to enhance the Bank s network security by placing internal firewalls and intrusion/threat prevention systems, to improve the information system security by hardening the different IT components based on best practices, and to increase the Bank s internal advanced threat detection capabilities by implementing new monitoring tools. In addition, the Bank pressed on with the design and construction of the disaster recovery centre, in line with Tier III classification as per Uptime Institute Standards (appropriate for companies that support clients 24x7 in multiple time zones) and the migration to a new data centre in the head office (Bank Audi Plaza). 9. Human Resources HR Developments The year was marked by significant achievements by Human Resources (HR), crowned by the launching of the Training Academy, a long-awaited milestone that required extensive planning, research and preparation. Areas around Recruitment and Selection, Training and Development, Relationship Management, and Corporate Social Responsibility also had a considerable share of the annual accomplishments. Recruitment and Selection efforts during resulted in the engagement of 185 new employees from diverse backgrounds. In addition, the Student Internship Program welcomed 455 local and international students (undergraduates/graduates) from top ranking universities who were offered the opportunity to gain knowledge about banking operations and to have a general understanding of the Bank s corporate culture. Furthermore, and in line with our continuous efforts to build bridges with graduates from prestigious international universities, was concluded with two prominent events: 1) the 6th Harvard Arab Weekend organised by the MENA Club of Harvard Business School in Boston, and 2) a lunch gathering at the Bank s headquarters for Lebanese students from top American, British and French universities. These events presented a significant occasion to meet high-performing students and discuss their career/internship opportunities at the Bank. On the level of Relationship Management, HR experts maintained strong rapport with stakeholders in branches and head office departments through continuous field visits and follow-up. 440 employees were transferred/promoted within the Bank, and presented with opportunities to advance in their careers. As stated above, was characterised by the creation of a Training Academy (TA) at Bank Audi, which covers various programs targeting the development of branch employees. Accordingly, all branch employees were presented with the Career Progression Program which defines requirements for the development of their professional abilities and career advancement (including educational background, years of experience, performance levels, skills and competencies). The program provides a range of soft/technical courses designed for each function/level within the banking field. One-on-one meetings were held with each employee to hand over training passports as a road map to guide them through the path for advancement in each field. As a result, witnessed the completion of 18 sessions offered to 445 registered employees. Within the same scope, the TA also targets branch managers/assistant branch managers through the Corporate Academy whereby the latter are invited to a weekend retreat aiming at the enhancement of their technical/general knowledge in the financial sector and during which internal experts from different fields (such as Finance, Economic Research, Audit, HR, etc.) conduct informative and interactive sessions with the audience. also witnessed the implementation of major phases of the Talent Management and Succession Planning system at the Bank, whereby employees were categorised on the basis of performance and potential using the 9-box grid methodology. Furthermore, career progression plans and retention strategies were developed for identified high-potential individuals/future leaders. In the case of the Group Risk Management department, a succession plan was also mapped for key/critical risk positions, paving the way for the future development of a comprehensive workforce succession plan covering all branches/departments. Bank Audi is continuously delivering valuable trainings and promoting professional development to its human capital, which encompasses all types of facilitated learning opportunities, ranging from training activities and coursework to development activities and programs. In, a total of 180,700 training and internship hours were delivered to the Bank s employees, in addition to 125,370 on-the-job training hours. A total of 7 employees were enrolled in special training programs, including the Individual Development Program and Specialised Credit Training Program, aiming at preparing potentials and high performers for present and future opportunities, in alignment with their career progression plan. Training and Development Activities Training in 16% 4% 8% 11% 5% 3% Banking Finance & Economy Information Technology Languages Legal, Compliance, AML, Fraud 13% 26% 14% Managerial & Organisational Behaviour Retail & CRM Risk Management Specialisation field 72 73

38 In addition, while aiming at giving equal opportunities to all qualified employees, Bank Audi continues to encourage personal development and improve the quality of work through the Educational Sponsorship Initiatives. In, 46 employees were selected and sponsored to pursue their higher education through 12 local and 2 international Masters programs, 14 banking-related studies, and 18 specialised certifications. BDL Certifications Lebanese Financial Regulations CAMS Financial Derivatives Risk in Financial Services Investments & Risks International Introduction to Investments Global Securities In compliance with the Central Bank s regulations, employees are continuously enrolled in specific certifications related to regulatory banking functions. As such, Bank Audi remains the market leader in achieving BDL certification requirements. The following table summarises the cumulative figures for certified employees: 26.0% 47.0% 76.0% 77.0% 81.0% 92.0% 95.0% On another note, at the international level, HR contributed to the global expansion strategy by setting up the HR function of the Bank s greenfield operation in Turkey, Odeabank. HR business partners carried out several missions over a period of six months, covering main HR areas, resulting in the hiring of 43 employees, and developing major HR policies and practices, as per local regulations and culture. 10. Corporate Social Responsibility At Bank Audi, accepting social responsibility in all markets of presence is an integral part of the conduct of business. To that end, Management devised to create a Corporate Social Responsibility (CSR) unit empowered with the necessary resources to implement our sustainability strategy and execute CSR actions. As a recognition of its practices, the Corporate Social Responsibility (CSR) unit of Bank Audi was selected by ISO (International Organisation for Standardisation) through Libnor (the Lebanese Standards Institution attached to the Ministry of Industry) as the first pilot organisation within the banking sector to implement the ISO Social Responsibility guidelines, with the aim of being recognised as such with a high level of commitment and accountability. The core subjects of this affiliation encompass organisational governance, human rights, labour practices, the environment, fair operating practices, consumer issues, and community involvement and development. The project aims at: The five-year collaboration agreement Bank Audi signed with BADER Young Entrepreneurs Program to support growing businesses and empower future entrepreneurs and the business community as a whole. This project sustains our belief in the value of human capital and the endeavour to boost entrepreneurship and innovation within our core business; Sustaining the Conscientious Driver campaign intended to increase awareness on road safety by observing the United Nations Decade of Action for Road Safety, and pursuing the signing of pledges for this mission; Containing our carbon footprint on the environment by implementing a paper recycling program within our branches, in addition to 3 collection hubs for plastic, tin, paper and batteries within our head office, and creating internal awareness on safe-keeping our environment; Fulfilling various fund-raising requests for public, private, medical, welfare and humanitarian purposes; Promoting various other activities involving sports, health orientations, employee wellness, etc. A separate CSR report is published as an appendix to this one, which elaborates the Bank s activities in this area and measures its impact precisely. Sustaining the Bank s position as the largest employer in the Lebanese private sector and as a non-discriminatory and equal opportunity employer; Reinforcing its ability to attract and retain employees and maintain their morale, commitment and productivity efficiency, as well as further engage employees in volunteering; Ensuring healthy ecosystems, social equity, and good organisational governance through our sphere of influence, especially through our supply chain. Several CSR initiatives have so far been implemented in that regards, such as: 74 75

39 turkey Bank Audi extended its leading role to the wider region by launching its operations in Turkey in late, building on the strong historic ties between Turkey and the Arab world on the back of significant flows of people, capital and goods. Through its newly established subsidiary, Odeabank, the Group started servicing the growing middle corporate segment, offering corporate and trade finance services, while aiming to gradually develop a value added retail franchise

40 general assembly excerpts April 8, 2013 Resolution No. 1 Resolution No. 2 The Ordinary General Assembly of shareholders of the Bank approved the Bank s accounts, in particular the balance sheet and the profit and loss statement as at and for the year ended on December 31,, and granted full discharge to the Chairman and members of the Board of Directors in respect of their management of the Bank s activities during the year. The Ordinary General Assembly of shareholders of the Bank resolved to appropriate the stand alone profits of Bank Audi sal - Audi Saradar Group for the year as follows: Amounts in 000s of LBP Net profits for the year * 435,987,869 Less: Appropriation of 10% to the legal reserve 43,598, ,389,082 Appropriation for general banking risks o.w. Lebanon branches: 55,000,000 Less: Transfer to reserves appropriated to capital increase resulting from the liquidation of fixed assets acquired in settlement of debt Transfer to the reserves for fixed assets earmarked for liquidation and acquired in settlement of debt 1,263, ,389,082 Net profits available for distribution 336,125,641 Add: Transfer from previous retained earnings 28,267, ,431,651 Less: Unrealised profits from revaluation of financial instruments classified at fair value - not distributable in accordance with 20,961,919 Circular No. 270 issued by the Banking Control Commission Less: Distribution to holders of 12,500,000 series D preferred shares on the basis of USD per share at the exchange rate of LBP 1, per USD 14,603,906 - Distribution to holders of 1,250,000 series E preferred 11,306,250 shares on the basis of USD 6.00 per share at the exchange rate of LBP 1, per USD Distribution to holders of 1,500,000 series F preferred shares 9,045,000 on the basis of USD 4.00 per share at the exchange rate of LBP 1, per USD Net profits available for distribution to holders of common shares 308,476,495 Less: Dividends to holders of 348,550,907 common shares on the basis of LBP 603 per common share 210,176,197 Net profits after distribution 98,300,298 Less: Transfer to general reserves 0 Profits carried forward to 2013 o.w. Lebanon branches: 98,300,298 Resolution No. 3 In line with the preceding resolution, the Ordinary General Assembly of shareholders of the Bank announced a series D preferred shares distribution of USD per share, a series E preferred shares distribution of USD 6.00 per share, a series F preferred shares distribution of USD 4.00 per share, and a dividend to common shares of LBP 603 per share, all subject to the withholding of distribution tax, and resolved that all distributions and dividends will be paid starting April 10, 2013 to the holders of shares on record as at April 5, 2013 ( record date ) as per records of Midclear sal. * On a stand alone basis

41 consolidated financial statements 80 81

42 Consolidated Income Statement For the Year Ended December 31, (Restated)* Notes Continuing operations Interest and similar income 4 2,208,509 2,056,972 Interest and similar expense 5 (1,344,819) (1,268,750) Net interest income 863, ,222 Fee and commission income 6 330, ,952 Fee and commission expense 7 (51,197) (50,060) Net fee and commission income 279, ,892 Net gain on financial assets at fair value through profit or loss 8 197, ,171 Net gain on sale of financial assets at amortised cost 9 265, ,014 Revenues from financial assets at fair value through other comprehensive income 27 30,245 27,720 Net gain on sale of subsidiaries and associates 10-2,024 Other operating income 11 22,251 48,638 operating income 1,658,819 1,482,681 Net credit losses 12 (182,585) (137,659) Net operating income 1,476,234 1,345,022 Personnel expenses 13 (411,746) (380,856) Depreciation of property and equipment 29 (46,088) (38,796) Amortisation of intangible assets 30 (7,663) (7,045) Impairment of goodwill 33 (21,167) - Other operating expenses 14 (291,959) (242,679) operating expenses (778,623) (669,376) Operating profit 697, ,646 Share of profit of associates under equity method 551 5,133 Net gain on disposal of fixed assets Profit before tax from continuing operations 699, ,166 Income tax 15 (154,537) (139,514) Profit after tax from continuing operations 544, ,652 Discontinued operations Profit from discontinued operations, net of tax 16 33,814 8,899 Profit for the period 578, ,551 Attributable to: Equity holders of the Bank: 564, ,239 Profit for the year from continuing operations 531, ,798 Profit for the year from discontinued operations 33,318 7,441 Non-controlling interests: 13,552 6,312 Profit for the year from continuing operations 13,056 4,854 Profit for the year from discontinued operations 496 1, , ,551 Earnings per share: LBP LBP Basic earnings per share 1,527 1,510 Diluted earnings per share 1,526 1,507 Basic earnings per share from continuing operations 1,431 1,488 Diluted earnings per share from continuing operations 1,430 1,485 Consolidated Statement of Comprehensive Income For the Year Ended December 31, Notes Profit for the year from continuing operations 544, ,652 Discontinued operations 33,814 8,899 Profit for the year 578, ,551 Other comprehensive income (loss) Exchange differences on translation of foreign operations (126,143) (50,362) Net loss/gain on hedge of net investments (3,589) 4, (129,732) (46,237) Net unrealised loss on financial assets at fair value through other comprehensive income 5,613 (29,481) Net deferred income taxes (9,667) (232) 48 (4,054) (29,713) Other comprehensive loss for the year, net of tax 48 (133,786) (75,950) comprehensive income for the year, net of tax 444, ,601 Attributable to: Equity holders of the Bank 430, ,289 Non-controlling interest 13,552 6, , ,601 * Restated for the effect of separate presentation of profit from discontinued operations and earnings per share information

43 Consolidated Statement of Financial Position As at December 31, Notes Assets Cash and balances with central banks 18 9,462,380 8,703,354 Due from banks and financial institutions 19 4,280,978 4,562,602 Loans to banks and financial institutions and reverse repurchase agreements 20 1,060, ,084 Financial assets given as collateral 21-17,424 Derivative financial instruments 22 51,046 82,209 Financial assets at fair value through profit or loss , ,926 Loans and advances to customers at amortised cost 24 15,416,403 12,692,177 Loans and advances to related parties at amortised cost , ,666 Debtors by acceptances 182, ,819 Financial assets at amortised cost 26 14,549,116 14,307,303 Financial assets at fair value through other comprehensive income , ,984 Investments in associates 28 34,230 43,099 Property and equipment , ,550 Intangible assets 30 49,600 13,508 Non-current assets held for sale 31 50,054 26,379 Other assets , ,171 Goodwill , ,431 assets 47,187,469 43,320,686 Liabilities Due to central banks , ,394 Due to banks and financial institutions 35 1,171,174 1,007,558 Due to banks under repurchase agreements ,487 - Derivative financial instruments 22 56,042 58,246 Customers deposits at amortised cost 36 39,718,890 37,097,210 Deposits from related parties at amortised cost , ,297 Engagements by acceptances 182, ,819 Other liabilities , ,087 Provisions for risks and charges 39 95,096 72,925 Non-current liabilities held for sale 31 14,799 - liabilities 43,151,277 39,767,536 Shareholders equity Group share Share capital Common shares , ,197 Share capital Preferred shares 40 19,124 17,243 Issue premium Common shares , ,846 Issue premium Preferred shares , ,633 Cash contribution to capital 42 72,586 72,586 Non-distributable reserves , ,360 Distributable reserves , ,215 Treasury shares 47 (20,245) (103,912) Retained earnings 328, ,515 Other components of equity 48 (66,579) 21,056 Result of the year 564, ,239 3,939,354 3,411,978 Non-controlling interest 49 96, ,172 shareholders equity 4,036,192 3,553,150 liabilities and shareholders equity 47,187,469 43,320,686 Consolidated Cash Flow Statement For the Year Ended December 31, Notes Operating activities Profit before tax from continuing operations 699, ,166 Profit before tax from discontinued operations 45,581 10,624 Adjustments to reconcile profit before tax to net cash flows: Non-cash: Depreciation and amortisation 29 & 30 55,180 47,380 Impairment of assets acquired in settlement of debt reversed 31 (4) (602) Net gain on financial instruments at amortised cost 9 (265,812) (220,930) Provisions for loans and advances , ,436 Recoveries of provision for loans and advances 12 (19,628) (36,776) Share of net profit of associates (551) (5,133) Net gain on disposal of assets acquired in settlement of debt 11 (8,297) (5,433) Net gain on sale or disposal of fixed assets (850) (230) Provision for risks and charges 39 24,856 4,448 Write-back of provisions for risks and charges 39 (7) (4,639) Provision for impairment of financial instruments Provision for end of service benefits 39 12,826 10,303 Employees share-based payments expense Gain on sale of subsidiaries and associates 10 & 16 (48,622) (2,024) Gain on revaluation due to loss of control 16 (20,439) - Impairment of goodwill 33 31,088 - Effect of entities deconsolidated during the year (47,753) - 658, ,630 Working capital adjustments: Balances with the central banks, banks and financial institutions maturing in more than 3 months (314,259) (1,990,470) Change in derivatives and financial assets held for trading 342, ,092 Change in financial assets given as collateral 17,424 (17,424) Change in loans and advances to customers and related parties (2,923,486) (198,120) Change in other assets 220,171 (50,316) Change in deposits from customers and related parties 2,704,245 (75,584) Change in other liabilities (300,357) (187,518) Proceeds from sale of assets obtained in settlement of debt 19,068 9,140 Change in non-controlling interest (44,334) (36,278) Cash from (used in) operations 379,493 (1,741,848) Provisions for risks and charges paid 39 (3,997) (4,075) End of service benefits paid 39 (2,908) (1,834) Taxation paid 15 (131,373) (121,485) Net cash flows from (used in) operating activities 241,215 (1,869,242) Investing activities Change in financial assets other than trading 21, ,609 Purchase of property and equipment and intangibles 29 & 30 (182,499) (65,301) Investments under equity method and related loans 9,420 (7,222) Cash collected from sale of property and equipment and intangibles 18,635 1,927 Proceeds from sale of associates and subsidiaries ,212 20,880 Net cash flows from investing activities ,893 Financing activities Issuance of preferred shares series F ,125 - Increase in share capital and issue premium from stock options exercise 1,748 4,395 Distribution of dividends 40 (236,179) (230,813) Treasury GDR transactions 59,083 (67,942) Net cash flows from (used in) financing activities 50,777 (294,360) Increase (decrease) in cash and cash equivalents 292,536 (1,632,709) Net foreign exchange difference 186 6,846 Cash and cash equivalents at January 1 5,299,740 6,925,603 Cash and cash equivalents at December ,592,462 5,299,740 Operational cash flows from interest and dividends Interest paid (1,316,918) (1,288,577) Interest received 2,228,143 2,092,214 Dividends received 30,418 30,

44 Consolidated Statement of Changes in Equity For the Year Ended December 31, Attributable to the equity holders of the Bank Share Capital Common Shares Share Capital Preferred Shares Issue Premium Common Shares Issue Premium Preferred Shares Cash Contribution to Capital Nondistributable Reserves Distributable Reserves Treasury Shares Retained Earnings Other Components of Equity Result of the Year Noncontrolling Interest Shareholders Equity Balance at January 1, 438,197 17, , ,633 72, , ,215 (103,912) 328,515 21, ,239 3,411, ,172 3,553,150 Net profits for the year , ,737 13, ,289 Other comprehensive income (133,786) - (133,786) - (133,786) comprehensive income (133,786) 564, ,951 13, ,503 Appropriation of profits ,284 1, ,828 - (307,617) Distribution of dividends on ordinary shares (210,712) (210,269) - (210,269) Distribution of dividends on preferred shares (25,910) (25,910) - (25,910) Issue of preferred shares - 1, , , ,124 Employees' share-based payments 389-1, (587) - - (2,247) - - (1,085) - (1,085) Entities deconsolidated during the year (8,219) (19,637) - 24, (2,746) - (2,746) Entities under equity method (723) - - (723) - (723) Treasury shares transactions (24,583) - 83, ,084-59,084 Non-controlling interest share of capital (12,840) (12,840) Non-controlling interest share of reserves (138) (4,308) - 5,682 43,810-45,046 (45,046) - Reserve for share option agreements , ,844 6,844 Transfer between reserves , ,781 - (200,788) 1, Other movements (212) Balance at December 31, 438,586 19, , ,876 72, , ,406 (20,245) 328,223 (66,579) 564,737 3,939,354 96,838 4,036,192 Balance at January 1, before early adoption of IFRS 9 436,990 17, , ,633 72, , ,597 (37,163) 209, , ,556 3,471, ,450 3,648,735 Effect of IFRS 9 early adoption (5,666) (101,875) - (107,541) - (107,541) Balance at January 1, after early adoption of IFRS 9 436,990 17, , ,633 72, , ,597 (37,163) 203,875 93, ,556 3,363, ,450 3,541,194 Net profits for the year , ,239 6, ,551 Other comprehensive income (75,950) - (75,950) - (75,950) comprehensive income (75,950) 544, ,289 6, ,601 Appropriation of 2010 profits ,469 18, ,452 - (277,743) Distribution of dividends on ordinary shares (208,671) (208,671) - (208,671) Distribution of dividends on preferred shares (22,142) (22,142) - (22,142) Employees' share-based payments 1,207-4, (1,720) ,395-4,395 Entities deconsolidated during the year (348) (4,739) - 2,886 1,140 - (1,061) - (1,061) Entities under equity method Treasury shares transactions (1,193) (66,749) (67,942) - (67,942) Non-controlling interest share of capital (41,145) (41,145) Non-controlling interest share of reserves (7,395) (2,295) - 11,810 (675) - 1,445 (1,445) - Reserve for share option agreements (126,992) (126,992) - (126,992) Transfer between reserves ,628 (10,187) - (2,043) 2, Other movements (59) Balance at December 31, 438,197 17, , ,633 72, , ,215 (103,912) 328,515 21, ,239 3,411, ,172 3,553,

45 notes to the consolidated financial statements at December 31, Notes' Index I. Corporate Information Accounting Policies Segment Reporting Interest and Similar Income Interest and Similar Expense Fee and Commission Income Fee and Commission Expense Net Gain Financial Assets at Fair Value through Profit or Loss Net Gain on Sale of Financial Assets at Amortised Cost Net Gain on Sale of Subsidiaries and Associates Other Operating Income Net Credit Losses Personnel Expenses Other Operating Expenses Income Tax Profit from Discontinued Operations Earnings per Share Cash and Balances with Central Banks Due from Banks and Financial Institutions Loans to Banks and Financial Institutions and Reverse Repurchase Agreements Financial Assets Given as Collateral Derivative Financial Instruments Financial Assets at Fair Value through Profit or Loss Loans and Advances to Customers at Amortised Cost Loans and Advances to Related Parties at Amortised Cost Financial Assets at Amortised Cost Financial Assets at Fair Value through Other Comprehensive Income Investments in Associates Property and Equipment Intangible Fixed Assets Non-current Assets Held for Sale Other Assets Goodwill Due to Central Banks Due to Banks and Financial Institutions Customers Deposits at Amortised Cost Deposits from Related Parties at Amortised Cost Other Liabilities Provisions for Risks and Charges Share Capital Issue Premiums Cash Contribution to Capital Non-distributable Reserves Distributable Reserves Proposed Dividends Share-based Payments Treasury Shares Other Components of Equity Non-controlling Interest Cash and Cash Equivalents Fair Value of Financial Instruments Contingent Liabilities, Commitments and Leasing Arrangements Assets under Management Related-party Transactions Risk Management Credit Risk Market Risk Liquidity Risk Operational Risk Capital Management

46 I. Corporate Information Bank Audi sal - Audi Saradar Group (the Bank) is a Lebanese joint stock company registered since 1962 in Lebanon under No at the Register of Commerce and under No. 56 on the banks list at the Bank of Lebanon. The Bank s head office is located in Bank Audi Plaza, Omar Daouk Street, Beirut, Lebanon. The Bank s shares are listed on the Beirut Stock Exchange and London SEAQ. The Bank, together with its affiliated banks and subsidiaries (collectively the Group ), provides a full range of Retail, Commercial, Investment and Private Banking activities through its headquarters, as well as its branches in Lebanon and its presence in Europe, the Middle East and North Africa. During, the Group started its operations in Turkey under its newly established subsidiary, Odeabank. Besides, the Group decided to discontinue its banking operations through Bank Audi Monaco sam pursuant to the decision of the General Assembly of Bank Audi Monaco dated July 27,. The consolidated financial statements were authorised for issue in accordance with the Board of Directors resolution on March 21, Accounting Policies 2.1. Basis of Preparation The consolidated financial statements have been prepared on a historical cost basis except for: a) the restatement of certain tangible real estate properties in Lebanon according to the provisions of Law No. 282 dated December 30, 1993, and b) the measurement at fair value of derivative financial instruments, financial assets at fair value through profit or loss and financial assets at fair value through other comprehensive income. The carrying values of recognised assets and liabilities that are hedged items in fair value hedges, and otherwise carried at amortised cost, are adjusted to record changes in fair value attributable to the risks that are being hedged. The consolidated financial statements are presented in Lebanese Pounds (LBP) and all values are rounded to the nearest million, except when otherwise indicated. Statement of Compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and the regulations of the Central Bank of Lebanon and the Banking Control Commission (BCC). Presentation of Financial Statements The Group presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within one year after the statement of financial position date (current) and more than one year after the statement of financial position date (non-current) is presented in the Risk Management notes. Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore the related assets and liabilities are presented gross in the consolidated statement of financial position. Income and expense will not be offset in the Consolidated Income Statement unless required or permitted by any accounting standard or interpretation, as specifically disclosed in the accounting policies of the Group. Basis of Consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at December 31,. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Non-controlling interest represents the portion of profit or loss and net assets of subsidiaries not owned, directly or indirectly by the Bank. Non-controlling interests are presented separately in the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, and within Equity in the Consolidated Statement of Financial Position, but separate from Parent Shareholders Equity. Losses within a subsidiary are attributed to the Non-controlling Interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: Derecognises the assets (including goodwill) and liabilities of the subsidiary; Derecognises the carrying amount of any non-controlling interest; Derecognises the cumulative translation differences, recorded in equity; Recognises the fair value of the consideration received; Recognises the fair value of any investment retained; Recognises any surplus or deficit in profit or loss; Reclassifies the parent s share of components previously recognised in Other Comprehensive Income to Profit or Loss or Retained Earnings, as appropriate. Where the Group loses control of a subsidiary, such that the former subsidiary becomes an associate accounted for under the equity method, the effect is that the Group's interest in the former subsidiary (associate) is reported: Using the equity method from the date on which control is lost in the current reporting period; and Using full consolidation for any earlier part of the current reporting period, and of any earlier reporting period, during which the associate was controlled Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year, except for the following new and amended IFRS effective as of January 1, : IFRS 7 Financial Instruments: Disclosures Enhanced Derecognition Disclosure Requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group s financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about the entity s continuing involvement in derecognised assets to enable the users to evaluate the nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning on or after July 1,. The Group does not have any assets with these characteristics so there has been no effect on the presentation of its financial statements Early Adoption of Phase I of IFRS 9 In compliance with Circular 265 of the Lebanese Banking Control Commission issued on September 23, 2010, the Group adopted, effective January 1,, Phase I of IFRS 9, as issued in November 2009 and reissued in October 2010 and related consequential amendments to other International Financial Reporting Standards. The effective application date stipulated by the Standard is annual periods beginning on or after January 1, The initial application date of this standard with respect to the Group is January 1,, in accordance with the transitional provisions of the standard. Phase I of IFRS 9 addresses the classification and measurement of financial assets and financial liabilities. IAS 39 is still being followed for impairment of financial assets and hedge accounting, as these will be covered when the IASB completes phases 2 and 3 of IFRS

47 The Group did not restate comparative information as permitted by the transitional provisions of IFRS 9 and has recognised impact of early adoption of IFRS 9 as at January 1,, in the opening retained earnings and other components of equity as of that date. The schedule below summarises the new classification and amendments to the Group financial statements Financial Assets Held for Trading 2.4. Standards Issued but not yet Effective Standards issued but not yet effective up to the date of issuance of the Group s financial statements are listed below. This listing of standards and interpretations issued are those that the Group reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Group intends to adopt these standards when they become effective. as at January 1, following the early adoption of IFRS 9 which resulted in adjustment to the opening retained earnings and cumulative changes in fair value of financial instruments designated at fair value through other comprehensive income as at January 1, : Available for Sale Financial Instruments Financial Assets Classified as Loans and Receivables Financial Instruments Held to Maturity Carrying value as at December 31, 2010 according to IAS 39 1,009,099 7,677,662 7,011, ,031 15,913,314 Reclassification following early adoption of IFRS 9: Financial instruments reclassified to fair value through profit or loss: Debt securities 782,159 5, , ,560 Equity instruments 74,588 32, ,985 Debt securities reclassified at amortised cost 138,994 7,260,479 6,872, ,031 14,486,861 Equity instruments reclassified to fair value through other comprehensive income 6, , ,009 reclassified 1,002,034 7,554,073 7,010, ,031 15,781,415 Effect on opening cumulative fair value changes on financial instruments designated at fair value through other comprehensive income - (126,233) - - (126,233) Less: deferred taxes - 16, ,437 Effect of previous amendments to - IAS 39 7, ,921 Effect on opening cumulative fair value - changes on financial instruments at fair value through other comprehensive income, net (101,875) - - (101,875) Effect on opening retained earnings (7,065) 2,644 (1,245) - (5,666) IAS 1 Financial Statement Presentation Presentation of Items of Other Comprehensive Income (OCI) The amendments to IAS 1 change the grouping of items presented in OCI. Items that could be reclassified (or recycled ) to profit or loss at a future point in time (for example net gain on hedge of net investment, exchange differences on translation of foreign operations, and net movement on cash flow hedges) would be presented separately from items that will never be reclassified (for example actuarial gains and losses on defined benefit plans, revaluation of land and buildings, and net loss or gain on financial assets at fair value through OCI). The amendment affects presentation only and has no impact on the Group s financial position or performance. The amendment becomes effective for annual periods beginning on or after July 1,. IAS 19 Employee Benefits (Revised) The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The Group is currently assessing the impact that this standard will have on the financial position and performance, but based on the preliminary analyses, no material impact is expected. These amendments become effective for annual periods beginning on or after January 1, IAS 28 Investments in Associates and Joint Ventures (as revised in ) As a consequence of the new IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities, IAS 28 Investments in Associates has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures, in addition to associates. The revised standard is not expected to impact the Group s financial position or performance and becomes effective for annual periods beginning on or after January 1, IAS 32 Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32 These amendments clarify the meaning of currently has a legally enforceable right to set-off. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Group s financial position or performance and become effective for annual periods beginning on or after January 1, IFRS 7 Disclosures Offsetting Financial Assets and Financial Liabilities Amendments to IFRS 7 These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g. collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32 Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group s financial position or performance and become effective for annual periods beginning on or after January 1, IFRS 10 Consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require Management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. The Group is currently assessing the impact that this standard will have on its financial position and performance. This standard becomes effective for annual periods beginning on or after January 1, IFRS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-Controlled Entities Non-monetary Contributions by Venturers. IFRS 11 removes the option to account for jointly-controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. IFRS 11 is not expected to impact the Group s financial position or performance and becomes effective for annual periods beginning on or after January 1, IFRS 12 Disclosure of Involvement with Other Entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are 92 93

48 also required, but have no impact on the Group s financial position or performance. This standard becomes effective for annual periods beginning on or after January 1, IFRS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. This standard will require the Group to review its fair value measurement policies across all asset and liabilities classes. The Group is currently assessing the impact that this standard will have on the financial position and performance, but based on the preliminary analyses, no material impact is expected. This standard becomes effective for annual periods beginning on or after January 1, Annual Improvements May These improvements will not have an impact on the Group, but include: IAS 1 Presentation of Financial Statements This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period. IAS 32 Financial Instruments Presentation This improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. IAS 34 Interim Financial Reporting The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures. These improvements are effective for annual periods beginning on or after January 1, Summary of Significant Accounting Policies Foreign Currency Translation The consolidated financial statements are presented in Lebanese Lira which is the Group s presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. (i) Transactions and Balances Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the date of the statement of financial position. All differences are taken to Net Gain on Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement. 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. The gain or loss arising on retranslation of non-monetary items is treated in line with the recognition of gain or loss on change in fair value of the item (i.e. translation differences on items whose fair value gain or loss is recognised in Other Comprehensive Income or Profit or Loss is also recognised in Other Comprehensive Income or Profit or Loss respectively). Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. (ii) Group Companies On consolidation, the assets and liabilities of subsidiaries and overseas branches are translated into the Bank s presentation currency at the rate of exchange as at the reporting date, and their income statements are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the Consolidated Income Statement. Financial Instruments Classification and Measurement (i) Date of Recognition All financial assets and liabilities are initially recognised on the trade date, i.e. the date that the Group becomes a party to the contractual provisions of the instrument. This includes regular way trades : purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place. (ii) Classification and Measurement of Financial Instruments a. Financial Assets The classification of financial assets depends on the basis of each entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. Assets are initially measured at fair value plus, in the case of a Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operations and translated at closing rate. The table below presents the exchange rates of the currencies used to translate assets, liabilities and statement of income items of foreign branches and subsidiaries: Year-end Rate Average Rate Year-end Rate Average Rate LBP LBP LBP LBP US Dollar 1, , , , Euro 1, , , , Swiss Franc 1, , , , Syrian Lira Turkish Lira Jordanian Dinar 2, , , , Egyptian Pound Sudanese Dinar Saudi Riyal Qatari Riyal financial asset not at fair value through profit or loss, particular transaction costs. Assets are subsequently measured at amortised cost or fair value. An entity may, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. An entity is required to disclose such financial assets separately from those mandatorily measured at fair value. Financial Assets at Amortised Cost Debt instruments are subsequently measured at amortised cost less any impairment loss (except for debt instruments that are designated at fair value through profit or loss upon initial recognition) if they meet the following two conditions: 94 95

49 The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and The contractual terms of the instrument give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. These financial assets are initially recognised at cost, being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly attributed to the acquisition are also included in the cost of investment. After initial measurement, these financial assets are measured at amortised cost using the effective interest rate method (EIR), less allowance for impairment. Amortised cost is calculated by taking into account any discount of premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortisation is included in Interest and Similar Income in the Income Statement. The losses arising from impairment are recognised in the Income Statement in Impairment Losses on Other Financial Assets. Although the objective of an entity's business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity's business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur. However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows. If the objective of the entity's business model for managing those financial assets changes, the entity is required to reclassify financial assets. Gains and losses arising from the derecognition of financial assets measured at amortised cost are reflected under Net Gain on Sale of Financial Assets at Amortised Cost in the Consolidated Income Statement. Balances with Central Banks, Due from Banks and Financial Institutions, and Loans and Advances to Customers and Related Parties at Amortised Cost After initial measurement, Balances with Central Banks, Due from Banks and Financial Institutions, and Loans and Advances to Customers and Related Parties are subsequently measured at amortised cost using the EIR, less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in Interest and Similar Income in the Consolidated Income Statement. The losses arising from impairment are recognised in the Consolidated Income Statement in Net Credit Losses. Financial Assets at Fair Value through Profit or Loss Included in this category are those debt instruments that do not meet the conditions in Financial Assets at Amortised Cost above, debt instruments designated at fair value through profit or loss upon initial recognition, and equity instruments at fair value through profit or loss. Debt Instruments at Fair Value through Profit or Loss These financial assets are recorded in the Consolidated Statement of Financial Position at fair value. Changes in fair value and interest income are recorded under Net Gain on Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement, showing separately those related to financial assets designated at fair value upon initial recognition from those mandatorily measured at fair value. Gains and losses arising from the derecognition of debt instruments and other financial assets at fair value through profit or loss are also reflected under Net Gain on Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement, showing separately those related to financial assets designated at fair value upon initial recognition from those mandatorily measured at fair value. Equity Instruments at Fair Value through Profit or Loss Investments in equity instruments are classified at fair value through profit or loss, unless the Group designates at initial recognition an investment that is not held for trading as at fair value through other comprehensive income. These financial assets are recorded in the Consolidated Statement of Financial Position at fair value. Changes in fair value and dividend income are recorded under Net Gain on Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement. Gains and losses arising from the derecognition of equity instruments at fair value through profit or loss are also reflected under Net Gain from Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement. Financial Assets at Fair Value through Other Comprehensive Income Investments in equity instruments designated at initial recognition as not held for trading are classified at fair value through other comprehensive income. These financial assets are initially measured at fair value plus transaction costs. Subsequently, they are measured at fair value, with gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated under equity. The cumulative gain or loss will not be reclassified to the consolidated income statement on disposal of the investments. Dividends on these investments are recognised under Revenue from Financial Assets at Fair Value through Other Comprehensive Income in the Consolidated Income Statement when the Group s right to receive payment of dividend is established in accordance with IAS 18: Revenue, unless the dividends clearly represent a recovery of part of the cost of the investment. b. Financial Liabilities Liabilities are initially measured at fair value plus, in the case of a financial liability not at fair value through profit or loss, particular transaction costs. Liabilities are subsequently measured at amortised cost or fair value. The Group classifies all financial liabilities as subsequently measured at amortised cost using the effective interest method, except for: Financial liabilities at fair value through profit or loss (including derivatives); Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies; Financial guarantee contracts and commitments to provide a loan at a below-market interest rate which, after initial recognition, are subsequently measured at the higher of the amount determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with IAS 18 Revenue. The Group may, at initial recognition, irrevocably designate a financial liability as measured at fair value through profit or loss when: Doing so results in more relevant information, because it either eliminates or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an accounting mismatch ) that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases; or A group of financial liabilities or financial assets and financial liabilities is managed and its performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the Group is provided internally on that basis to the Group's key Management personnel. The amount of changes in fair value of a financial liability designated at fair value through profit or loss at initial recognition that is attributable to changes in credit risk of that liability is recognised in Other Comprehensive Income, unless such recognition would create an accounting mismatch in the Consolidated Income Statement. Changes in fair value attributable to changes in credit risk are not reclassified to Consolidated Income Statement. Debt Issued and Other Borrowed Funds and Subordinated Notes Financial instruments issued by the Group, which are not designated at fair value through profit or loss, are classified as liabilities where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash 96 97

50 or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. After initial measurement, debt issued and other borrowings and subordinated notes are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate method. A compound financial instrument which contains both a liability and an equity component is separated at the issue date. A portion of the net proceeds of the instrument is allocated to the debt component on the date of issue based on its fair value (which is generally determined based on the quoted market prices for similar debt instruments). The equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the debt component. The value of any derivative features (such as a call option) embedded in the compound financial instrument other than the equity component is included in the debt component. Due to Central Banks, Banks and Financial Institutions and Customers and Related Parties Deposits After initial measurement, due to banks and financial institutions, customers and related parties deposits are measured at amortised cost less amounts repaid using the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate method. c. Derivatives Recorded at Fair Value through Profit or Loss The Group uses derivatives such as interest rate swaps and futures, credit default swaps, cross currency swaps, forward foreign exchange contracts and options on interest rates, foreign currencies and equities. Derivatives are recorded at fair value and carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised in Net Gain on Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement. An embedded derivative is separated from the host and accounted for as a derivative if, and only if: (a) The hybrid contract contains a host that is not an asset within the scope of IFRS 9; (b) The economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host; (c) A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (d) The hybrid contract is not measured at fair value with changes in fair value recognised in Profit or Loss. (iii) Day 1 Profit or Loss When the transaction price differs from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable markets, the Group immediately recognises the difference between the transaction price and fair value (a Day 1 profit or loss) in the Consolidated Income Statement. In cases where fair value is determined using data which is not observable, the difference between the transaction price and model value is only recognised in the Consolidated Income Statement when the inputs become observable, or when the instrument is derecognised. (iv) Reclassification of Financial Assets The Group reclassifies financial assets if the objective of the business model for managing those financial assets changes. Such changes are expected to be very infrequent. Such changes are determined by the Group s Senior Management as a result of external or internal changes when significant to the Group s operations and demonstrable to external parties. If financial assets are reclassified, the reclassification is applied prospectively from the reclassification date, which is the first day of the first reporting period following the change in business model that results in the reclassification of financial assets. Any previously recognised gains, losses or interest are not restated. If a financial asset is reclassified so that it is measured at fair value, its fair value is determined at the reclassification date. Any gain or loss arising from a difference between the previous carrying amount and fair value is recognised in Profit or Loss. If a financial asset is reclassified so that it is measured at amortised cost, its fair value at the reclassification date becomes its new carrying amount. Derecognition of Financial Assets and Financial Liabilities (i) Financial Assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired; The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either: - The Group has transferred substantially all the risks and rewards of the asset, or - The Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group s continuing involvement in the asset. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. (ii) Financial Liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in the Consolidated Income Statement. Repurchase and Reverse Repurchase Agreements Securities sold under agreements to repurchase at a specified future date are not derecognised from the Consolidated Statement of Financial Position as the Group retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the Consolidated Statement of Financial Position as an asset with a corresponding obligation to return it, including accrued interest as a liability within Cash Collateral on Securities Lent and Repurchase Agreements, reflecting the transaction s economic substances as a loan to the Group. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the EIR. When the counterparty has the right to sell or repledge the securities, the Group reclassifies those securities in its Statement of Financial Position to Financial Assets Given as Collateral. Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the Consolidated Statement of Financial Position. The consideration paid, including accrued interest, is recorded in the Consolidated Statement of Financial Position within Cash Collateral on Securities Borrowed and Reverse Purchase Agreements, reflecting the transaction s economic substance as a loan by the Group. The difference between the purchase and resale prices is recorded in Net Interest Income and is accrued over the life of the agreement using the EIR. If securities purchased under Agreement to Resell are subsequently sold to third parties, the obligation 98 99

51 to return the securities is recorded as a short sale within Financial Liabilities at Fair Value through Profit or Loss and measured at fair value with any gains or losses included in Net Gain on Financial Instruments at Fair Value through Profit or Loss in the Consolidated Income Statement. Determination of Fair Value The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction cost. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models and other relevant valuation models. Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Group s best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, credit and debit valuation adjustments, liquidity spread and limitations in the models, credit models and other relevant valuation models. Also, profit or loss calculated when such financial instruments are first recorded ( Day 1 profit or loss) is deferred and recognised only when the inputs become observable or on derecognition of the instrument. Impairment of Financial Assets The Group assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganisation default or delinquency in interest or principal payments, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (i) Financial Assets at Amortised Cost For financial assets carried at amortised cost (such as due from banks and financial institutions, debt instruments at amortised cost, loans and advances to customers and related parties), the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Consolidated Income Statement. Loans, together with the associated allowance, are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the Net Credit Losses in the Consolidated Income Statement. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs of obtaining and selling the collateral, whether or not the foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Group s internal credit grading system that considers credit risk characteristics such as asset type, industry, geographical location, collateral type, past-due status and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (ii) Renegotiated Loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. (iii) Collateral Repossessed The Group occasionally acquires properties in settlement of loans and advances. Upon initial recognition, those assets are measured at fair value as approved by the regulatory authorities. Subsequently, these properties are measured at the lower of carrying value or net realisable value. Upon sale of repossessed assets, any gain or loss realised is recognised in the Consolidated Income Statement under Other Operating Income or Other Operating Expenses. Gains resulting from the sale of repossessed assets are transferred to Reserves for Capital Increase in the following financial year. Hedge Accounting The Group makes use of derivative instruments to manage exposures to interest rate, foreign currency and credit risks, including exposures arising from forecast transactions and firm commitments. In order to manage particular risks, the Group applies hedge accounting for transactions which meet the specified criteria. At inception of the hedge relationship, the Group formally documents the relationship between the hedged item and the hedging instrument, including the nature of the risk, the objective and strategy for undertaking the hedge, and the method that will be used to assess the effectiveness of the hedging relationship

52 At each hedge effectiveness assessment date, a hedge relationship must be expected to be highly effective on a prospective basis and demonstrate that it was effective (retrospective effectiveness) for the designated period in order to qualify for hedge accounting. A formal assessment is undertaken to ensure the hedging instrument is expected to be highly effective in offsetting the designated risk in the hedged item, both at inception and at each quarter end on an ongoing basis. A hedge is expected to be highly effective if the changes in fair value or cash flows attributable to the hedged risk during the period for which the hedge is designated are expected to offset in a range of 80% to 125% and are expected to achieve such offset in future periods. Hedge ineffectiveness is recognised in the Consolidated Income Statement in Net Gain (Loss) from Financial Instruments at Fair Value through Profit or Loss. For situations where that hedged item is a forecast transaction, the Group also assesses whether the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect the consolidated income statement. (i) Fair Value Hedges For designated and qualifying fair value hedges, the change in the fair value of a hedging derivative is recognised in the Consolidated Income Statement. Meanwhile, the change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in Net Gain on Financial Assets at Fair Value through Profit or Loss in the Consolidated Income Statement. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. For hedged items recorded at amortised cost, the difference between the carrying value of the hedged item on termination and the face value is amortised over the remaining term of the original hedge using the effective interest rate. If the hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the Consolidated Income Statement. (ii) Cash Flow Hedges For designated and qualifying cash flow hedges, the effective portion of the gain or loss on the hedging instrument is initially recognised directly in equity in the Cash Flow Hedge reserve. The ineffective portion of the gain or loss on the hedging instrument is recognised immediately in the Consolidated Income Statement. When the forecast transaction subsequently results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in the other comprehensive income are removed from the reserve and included in the initial cost of the asset or liability. When the hedged cash flow affects the Consolidated Income Statement, the gain or loss on the hedging instrument is recorded in the corresponding income or expense line of the consolidated income statement. When a hedging instrument expires, or is sold, terminated, exercised, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the hedged forecast transaction is ultimately recognised in the Consolidated Income Statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the Consolidated Income Statement. (iii) Hedge of a Net Investment Hedges of net investments in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the Consolidated Income Statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the Consolidated Income Statement. Leasing The determination of whether an arrangement is a lease, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as a Lessee Leases which do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the Consolidated Income Statement on a straight line basis over the lease term. Contingent rental payables are recognised as an expense in the period in which they are incurred. Group as a Lessor Leases where the Group does not transfer substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. Recognition of Income and Expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. (i) Interest and Similar Income and Expense For all financial instruments measured at amortised cost, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in the carrying amount is recorded as Interest and Similar Income for financial assets and Interest and Similar Expense for financial liabilities. Once the recorded value of a financial asset on a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (ii) Fee and Commission Income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: Fee Income Earned from Services that are Provided over a Certain Period of Time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit-related fees are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis. Fee Income from Providing Transaction Services Fee arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, are recognised on completion of the underlying transaction. Fee or components of fee that are linked to a certain performance are recognised after fulfilling the corresponding criteria. (iii) Dividend Income Dividend income is recognised when the right to receive the payment is established

53 (iv) Net Gain on Financial Assets at Fair Value through Profit or Loss Results arising from financial assets at fair value through profit or loss, include all gains and losses from changes in fair value and related income or expense and dividends for financial assets at fair value through profit or loss. This includes any ineffectiveness recorded in hedging transactions. This caption also includes the results arising from trading activities including all gains and losses from changes in fair value and related income or expense and dividends for financial assets held for trading. (v) Insurance Revenue For the insurance subsidiary, net premiums and accessories (gross premiums) are taken to income over the terms of the policies to which they relate using the prorate temporise method for non-marine business and 25% of gross premiums for marine business. Unearned premiums reserve represents the portion of the gross premiums written relating to the unexpired period of coverage. If the unearned premiums reserve is not considered adequate to cover future claims arising on these premiums a premium deficiency reserve is created. Cash and Cash Equivalents Cash and cash equivalents as referred to in the cash flow statement comprise balances with original maturities of a period of three months or less including: cash and balances with central banks, deposits with banks and financial institutions, and deposits due to banks and financial institutions. Property and Equipment Property and equipment is stated at cost excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment in value. Such cost includes the cost of replacing part of the property and equipment. When significant parts of property and equipment are required to be replaced at intervals, the Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the equipment as a replacement if the recognition criteria are satisfied. All other repair and maintenance costs are recognised in the Consolidated Income Statement as incurred. The present value of the expected cost for the decommissioning of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate and treated as changes in accounting estimates. Depreciation is calculated using the straight line method to write down the cost of property and equipment to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: Buildings Installations and fixtures Motor vehicles Office equipment and computer hardware Office machinery and furniture 40 to 50 years 5 to 11 years 5 to 7 years 5 to 11 years 5 to 11 years Property and equipment is derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in Net Gain on Disposal of Fixed Assets in the year the asset is derecognised. The asset s residual lives and methods of depreciation are reviewed at each financial year-end and adjusted prospectively if applicable. Non-current Assets Held for Sale and Discontinued Operations Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition, Management has committed to the sale, and the sale is expected to have been completed within one year from the date of classification. In the Consolidated Statement of Comprehensive Income of the reporting period, and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when the Bank retains a non-controlling interest in the subsidiary after the sale. The resulting profit or loss (after taxes) is reported separately in the Statement of Comprehensive Income. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group measures the non-controlling interest in the acquiree at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in Administrative Expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the Consolidated Income Statement. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised either in Profit or Loss or as a change to Other Comprehensive Income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in Profit or Loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Intangible Fixed Assets An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Group. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite of indefinite. Intangible assets with finite lives are amortised over the useful economic

54 life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the Consolidated Income Statement. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows: Computer software Key money Others Impairment of Non-financial Assets 5 years 70 years 7 to 10 years The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use. Where the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the Consolidated Income Statement. Impairment losses relating to goodwill cannot be reversed in future periods. Provisions for Risks and Charges Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the Consolidated Income Statement net of any reimbursement. Employees End of Service Benefits The Group provides retirement benefits obligation to its employees under defined benefit plans. The cost of providing these benefits is determined using actuarial valuation which involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Those assumptions are unbiased and mutually compatible. The rate used to discount estimated cash flows should be determined by reference to the market yields at the date of the Statement of Financial Position on high quality corporate bonds. If the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognised immediately as income or expense. The portion recognised in the total comprehensive income is the excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits need not to be recognised. The amount recognised in the balance sheet is the present value of the defined obligation adjusted for unrecognised actuarial gains and losses and unrecognised past service cost and reduced by the fair value of plan assets at the date of the Statement of Financial Position. Taxes Taxes are provided for in accordance with regulations and laws that are effective in the countries where the Group operates. (i) Current Tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date. (ii) Deferred Tax Deferred tax is provided on temporary differences at the Statement of Financial Position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; In respect of taxable temporary differences associated with investments in subsidiaries and associates, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except: Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; In respect of deductible temporary differences associated with investments in subsidiaries and associates, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and not in the Consolidated Income Statement. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority

55 Assets under Management and Assets Held in Custody and under Administration The Group provides custody and administration services that result in the holding or investing of assets on behalf of its clients. Assets held in trust, under management or under custody or under administration, are not treated as assets of the Group and, accordingly, are recorded as off-balance sheet items. Dividends on Ordinary Shares Dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the Bank s shareholders. Interim dividends are deducted from equity when they are declared and no longer at the discretion of the Bank. Dividends for the year that are approved after the reporting date are disclosed as an event after the reporting date. Treasury Shares Own equity instruments of the Bank which are acquired by it or by any of its subsidiaries (Treasury shares) are deducted from equity and accounted for at weighted average cost. Consideration paid or received on the purchase sale, issue or cancellation of the Bank s own equity instruments is recognised directly in equity. No gain or loss is recognised in the Consolidated Income Statement on the purchase, sale, issue or cancellation of the Bank s own equity instruments. When the Group holds own equity instruments on behalf of its clients, those holdings are not included in the Group s Consolidated Statement of Financial Position. Contracts on own shares that require physical settlement of a fixed number of own shares for a fixed consideration are classified as equity and added to or deducted from equity. Contracts on own shares that require net cash settlement or provide a choice of settlement are classified as trading instruments and changes in the fair value are reported in the Consolidated Income Statement. Financial Guarantees In the ordinary course of business, the Group gives financial guarantees consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements (within Other Liabilities ) at fair value, being the premium received. Subsequent to initial recognition, the Group s liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortisation recognised in the Consolidated Income Statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the Consolidated Income Statement. The premium received is recognised in the Consolidated Income Statement on a straight line basis over the life of the guarantee. Customers Acceptances Customers acceptances represent term documentary credits which the Group has committed to settle on behalf of its clients against commitments by those clients (acceptances). The commitments resulting from these acceptances are stated as a liability in the Statement of Financial Position for the same amount. Share-based Payments Plan Employees (including Senior Executives) of the Bank receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments (equity-settled transactions). The cost of equity-settled transactions is measured by reference to the fair value at the date on which they are granted and is recognised together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting date). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Bank s best estimate of the number of equity instruments that will ultimately vest. The income statement expense or credit for a period is recorded under Personnel Expenses and represents the movement in cumulative expense recognised as at the beginning and end of that period. Where the terms of an equity-settled award are modified, the minimum expense is recognised in Personnel Expenses in the Consolidated Income Statement as if the terms had not been modified. An additional expense is recognised for any modification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where any equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. This includes any award where non-investing conditions within the control of either the entity or the counterparty are not met. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per common share Significant Accounting Judgments and Estimates In the process of applying the Group s accounting policies, Management has made the following judgments, apart from those involving estimations, which have the most significant effect in the amounts recognised in the financial statements: Going Concern The Group s Management has made an assessment of the Group s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, Management is not aware of any material uncertainties that may cast significant doubt upon the Group s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. Fair Value of Financial Instruments Where the fair values of financial assets and financial liabilities recorded on the Statement of Financial Position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs such as volatility for longer dated derivatives and discount rates, prepayment rates and default rate assumptions for asset-backed securities. Impairment Losses on Loans and Advances The Group reviews its individually significant loans and advances at each statement of financial position date to assess whether an impairment loss should be recorded in the Consolidated Income Statement. In particular, judgment by Management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Group makes judgments about the borrower s financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality,

56 levels of arrears, credit utilisation, loan to collateral ratios, etc.), concentrations of risks and economic data (including levels of unemployment, real estate price indices, country risk and the performance of different individual groups). Deferred Tax Assets Deferred tax assets are recognised in respect of tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits, together with future tax planning strategies. Business Model In making an assessment whether a business model s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to Management. However, in some circumstances, it may not be clear whether a particular activity involves one business model with some infrequent asset sales or whether the anticipated sales indicate that there are two different business models. In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows, the Group considers: Contractual Cash Flows of Financial Assets The Group exercises judgment in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and interest on the principal outstanding, and so, may qualify for amortised cost measurement. In making the assessment, the Group considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage. Consolidation of Special Purpose Entities (SPEs) The Bank sponsors the formation of SPEs which may or may not be directly or indirectly owned subsidiaries. The Bank consolidates those SPEs it controls. In assessing and determining if the Bank controls SPEs, judgment is exercised to determine whether the activities of the SPE are being conducted on behalf of the Bank to obtain benefits from the SPE s operation; whether the Bank has the decision-making powers to control or to obtain control of the SPE or its assets; whether the Bank has rights to obtain the majority of the benefits of the SPE s activities; and whether the Bank retains the majority of the risks related to the SPE or its assets in order to obtain benefits from its activities. Pensions Obligation 3. Segment Reporting Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segments are evaluated based on net operating income. Income taxes and depreciation are managed on a group basis and are not allocated to operating segments. Interest income is reported net, since Management monitors net interest income not the gross income and expense amounts. Net interest income is allocated to the business segment based on the assumption that all positions are funded or invested via a central funding unit. An internal Funds Transfer Pricing (FTP) mechanism was implemented between operating segments. The assets and liabilities that are reported in the segments are net from inter-segments assets and liabilities since they constitute the basis of Management s measures of the segments assets and liabilities and the basis of the allocation of resources between segments. a) Business Segments The Group operates in four main business segments which are Corporate and Commercial Banking, Treasury and Capital Markets, Retail and Personal Banking, and Group Functions and Head Office. Corporate and Commercial Banking Treasury and Capital Markets Provides Treasury services including transactions in money and capital markets for the Group s customers, manages investment and trading transactions (locally and internationally), and manages liquidity and market risks. This segment also offers Investment Banking and brokerage services, and manages the Group s own portfolio of stocks, bonds, and other financial instruments. Group Functions and Head Office Consists of capital and strategic investments, exceptional profits and losses, as well as operating results of subsidiaries which offer non-banking services. Transfer prices between operating segments are on an arm s length basis in a manner similar to transactions with third parties. Management s stated policies and objectives for the portfolio and the operation of those policies in practice; How Management evaluates the performance of the portfolio; Whether Management s strategy focuses on earning contractual interest revenues; The degree of frequency of any expected asset sales; The reason for any asset sales; and Whether assets that are sold are held for an extended period of time relative to their contractual maturity. The cost of the defined benefit pension plan is determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Provides diverse products and services to the corporate and commercial customers including loans, deposits, trade finance, exchange of foreign currencies, as well as all regular Corporate and Commercial Banking activities. Retail and Personal Banking Provides individual customers deposits and consumer loans, overdrafts, credit cards, and funds transfer facilities, as well as all regular Retail and Private Banking activities

57 The following table presents net operating income, total assets and total liabilities and shareholders equity of the Group s business segments. Corporate and Commercial Banking Retail and Personal Banking Treasury and Capital Markets Group Functions and Head Office Net interest income 272, , ,505 52, ,690 Non-interest income Net fee and commission income 112, ,524 22,331 5, ,365 Foreign exchange operations 4,231 20, , ,399 Financial operations 20 8, ,441 30, ,114 Other operating income 43 8, ,274 22,251 non-interest income 116, , ,286 48, ,129 external operating income 388, , , ,855 1,658,819 Net credit losses (136,351) (46,184) (50) - (182,585) Net external operating income 252, , , ,855 1,476,234 Share of profit or loss of associates Investments in associates ,230 34,230 assets 12,248,359 5,413,046 24,813,627 4,712,437 47,187,469 liabilities and shareholders equity 8,577,415 32,378,828 1,766,123 4,465,103 47,187,469 Capital expenditures - 2, , ,673 b) Geographical Segments The Group operates in three geographical segments: Lebanon; Middle East, North Africa and Turkey (MENAT); and Europe. As such, it is subject to different risks and returns. The following tables show the distribution of the Group s external net operating Lebanon income, assets and liabilities, and shareholders equity allocated based on the location of the subsidiaries reporting the results or advancing the funds. Transactions between segments are carried at market prices and within pure trading conditions. MENAT Europe Net interest income 526, ,667 47, ,690 Non-interest income Net fee and commission income 155,343 78,214 45, ,365 Foreign exchange operations 18, ,511 17, ,399 Financial operations 333,298 10,380 10, ,114 Other operating income 19,770 1,349 1,132 22,251 non-interest income 526, ,454 75, ,129 external operating income 1,052, , ,943 1,658,819 Net credit losses (123,405) (49,874) (9,306) (182,585) Net external operating income 929, , ,637 1,476,234 Capital expenditures 83,194 98,042 1, ,673 assets 33,868,338 9,890,071 3,429,060 47,187,469 liabilities and shareholders equity 34,129,524 9,827,239 3,230,706 47,187,469 Corporate and Commercial Banking Retail and Personal Banking Treasury and Capital Markets Group Functions and Head Office Net interest income 253, , ,217 54, ,222 Non-interest income Net fee and commission income 116, ,107 30,734 9, ,892 Foreign exchange operations 3,623 24,467 48,796 (84) 76,802 Financial operations - 7, ,512 28, ,127 Other operating income 978 3, ,486 48,638 non-interest income 121, , ,232 81, ,459 external operating income 374, , , ,082 1,482,681 Net credit losses (114,823) (22,836) - - (137,659) Net external operating income 259, , , ,082 1,345,022 Share of profit or loss of associates ,133 5,133 Investments in associates ,099 43,099 assets 9,814,067 4,660,599 25,253,300 3,592,720 43,320,686 liabilities and shareholders equity 8,951,327 29,174, ,630 4,280,646 43,320,686 Capital expenditures - 1, ,406 65,300 Lebanon MENAT Europe Net interest income 501, ,316 48, ,222 Non-interest income Net fee and commission income 148,135 78,747 42, ,892 Foreign exchange operations 17,665 37,051 22,086 76,802 Financial operations 294,928 3,860 1, ,127 Other operating income 28,806 5,134 14,698 48,638 non-interest income 489, ,792 80, ,459 external operating income 991, , ,396 1,482,681 Net credit losses (15,907) (117,406) (4,346) (137,659) Net external operating income 975, , ,050 1,345,022 Capital expenditures 50,102 10,168 5,030 65,300 assets 31,566,706 8,621,701 3,132,279 43,320,686 liabilities and shareholders equity 32,674,178 7,496,310 3,150,198 43,320,

58 4. Interest and Similar Income The components of Interest and Similar Income from Financial Assets Classified at Amortised Cost are detailed as follows: 5. Interest and Similar Expense Balances with central banks 278, ,226 Due from banks and financial institutions 49,828 49,269 Loans and advances to customers at amortised cost 890, ,286 Loans and advances to related parties at amortised cost 19,902 17,132 Financial assets classified at amortised cost 967,550 1,007,687 Other interest income 1, ,208,509 2,056,972 Lebanese sovereign 678, ,126 Other sovereign 249, ,351 Private sector and other securities 38,665 50, ,550 1,007,687 Due to central banks 41,216 7,740 Due to banks and financial institutions 31,350 22,341 Customers deposits at amortised cost 1,243,161 1,226,869 Deposits from related parties at amortised cost 26,117 10,592 Other interest expense 2,975 1,208 1,344,819 1,268, Fee and Commission Income 7. Fee and Commission Expense Commercial Banking income 66,704 59,343 Credit-related fees and commissions 47,452 42,524 Brokerage and custody income 53,212 51,659 Trust and fiduciary activities 5,130 5,470 Trade finance income 49,586 59,373 Electronic Banking 75,045 68,161 Insurance brokerage income 2,797 2,453 Corporate finance fees 25,854 25,815 Other fees and commissions 4,782 4, , ,952 Commercial Banking expenses 5,221 4,846 Insurance brokerage fees Brokerage and custody fees 7,755 8,861 Electronic Banking 35,387 34,313 Other fees and commissions 2,448 1,782 51,197 50,060 Due to Central Banks include interest expense on repurchase agreements amounting to LBP 1,787 million for the year ended December 31, (: nil)

59 8. Net Gain Financial Assets at Fair Value through Profit or Loss Trading Income (Loss) Trading Gain on Financial Assets at Fair Value through Profit or Loss includes the results of trading in the above classes of securities, as well as the result of the change in their fair values. Foreign Exchange Income includes gains and losses from spot and forward currency contracts and the revaluation of the daily open trading position. Interest Income Trading Income (Loss) Interest Income a) Net gain on financial instruments Lebanese sovereign and Central Bank of Lebanon Certificates of deposits (89) Treasury bills 10,169 16,629 26,798 2,300 25,090 27,390 Eurobonds 5,247 12,202 17,449 4,967 6,250 11,217 15,327 29,047 44,374 7,270 31,340 38,610 Other sovereign Treasury bills Other governmental securities (25) Eurobonds Private sector and other securities Banks and financial institutions debt instruments 693 7,079 7,772 1,863 7,979 9,842 Corporate debt instruments 1,114 2,073 3, Structured products 8-8 (12) - (12) Mutual funds 2,657-2,657 1,138-1,138 Equity instruments (5,671) - (5,671) 4,909 9,152 14,061 (2,476) 8,756 6,280 b) Other trading income Derivatives (1,320) - (1,320) 1,670-1,670 Foreign exchange 139, ,399 76,802-76,802 Dividends ,262-2, , ,252 80,734-80, ,035 38, ,456 85,783 40, ,171 For the year ended December 31,, derivatives include a loss of LBP 4,126 million (: LBP 1,608 million) representing the change in fair value of the credit default swaps related to the Lebanese sovereign risk and embedded in some of the Bank s deposits, as discussed in Note 36 to these Consolidated Financial Statements. 9. Net Gain on Sale of Financial Assets at Amortised Cost The Group derecognises some debt instruments classified at amortised cost due to the following reasons: Deterioration of the credit rating below the ceiling allowed in the Group s investment policy; Liquidity gap and yield management; Gains During December, the Bank discounted long-term placements at the Central Bank of Lebanon originally maturing on April 1, 2016, which resulted in a gain of USD 32 million (equivalent to LBP 47,548 million). Swap of certificates of deposits by the Lebanese Central Bank; Currency risk management as a result of change in the currency base of deposits; or Liquidity for capital expenditures. The schedule below details the gains and losses arising from the derecognition of these financial assets: Losses Net Gains Losses Net Lebanese sovereign and Central Bank of Lebanon Central Bank s certificates of deposits 160,268 (172) 160,096 98,694 (20) 98,674 Bank placements 47,548-47, Treasury bills 12,033 (1,959) 10,074 15,171 (471) 14,700 Eurobonds 29,559 (171) 29,388 83,237 (112) 83, ,408 (2,302) 247, ,102 (603) 196,499 Other sovereign Treasury bills 3,479 (10) 3,469 1,197 (7) 1,190 Other governmental securities 2,969-2,969 - (666) (666) Eurobonds 1,139-1, ,587 (10) 7,577 1,602 (673) 929 Private sector and other securities Banks and financial institutions debt instruments - (6) (6) 12,873 (2,534) 10,339 Corporate and other debt instruments 5,796 (1,096) 4,700 9,383-9,383 Structured products 6,556 (121) 6,435 3,864-3,864 12,352 (1,223) 11,129 26,120 (2,534) 23, ,347 (3,535) 265, ,824 (3,810) 221,

60 10. Net Gain on Sale of Subsidiaries and Associates During December, Capital Outsourcing Limited (Dubai) exchanged a liability due to a related party amounting to the equivalent of LBP 5,276 million in US Dollars for 50% ownership in the company through the issuance of new shares. This was treated as a deemed disposal by the Group whereby its ownership dropped from 75% to 37.5% as of December 31,. The investment was recognised at its fair value under Investments in Associates. The loss from the sale amounted to LBP 161 million for the year ended December 31,. During December, the Group sold its 49% stake in Globalcom Holding sal, an associate, for a total consideration equivalent to LBP 13,567 million in US Dollars, in addition to 33% of future dividends up to end of year The gain from the sale amounted to LBP 4,236 million for the year ended December 31,. 11. Other Operating Income Revenues from Non-core Activities substantially represent the revenues generated by Capital Outsourcing Limited (Dubai) in in the amount of LBP 29,205 million from providing Information Technology services. During June, the Executive Committee of the Bank approved the sale of the Bank s investment in Arabian Opportunities Fund ( AOF ) and the sale was completed before year-end. The loss from the sale amounted to LBP 2,547 million for the year ended December 31,. During June, the Group sold to a related party 79 shares of the share capital of Conseil et Gestion Immobilière sal ( CGI ) representing 79% of its share capital for a total consideration equivalent to LBP 7,312 million in US Dollars. The gain from the sale amounted to LBP 1 million for the year ended December 31,. As such, the Group s ownership as of December 31, dropped to 19% and the investment was recorded under Financial Assets at Fair Value through Other Comprehensive Income. Other gains in the amount of LBP 495 million resulted from the liquidation of Orion Systems sal and the sale of Safwa Fund, which was previously consolidated by Audi Capital (KSA), a subsidiary. Revenues from non-core activities - 30,532 Income from disposal of assets acquired against debts 8,297 5,433 Net provision recoveries (Note 39) 7 2,909 Other income 13,947 9,764 22,251 48,638 During, the Group entered into profit-sharing agreements under which it became entitled to 30% of CGI s profits for a period of 5 years ending during the second quarter of 2016, and 33% of Globalcom Holding sal s profits up to December 31, The Group s share of these profits for the year amounted to LBP 5,907 million (: LBP 411 million). 12. Net Credit Losses Charges for the year 13. Personnel Expenses Loans and advances to customers at amortised cost (Note 24) 201, ,435 Loans directly written off Impairment of financial instruments , ,435 Recoveries for the year Loans and advances to customers Impairment allowance recovered (Note 24) (11,636) (22,022) Unrealised interest recovered (Note 24) (2,082) (2,335) Recoveries of debts previously written off (5,877) (12,419) Recoveries for the year Banks and financial institutions Impairment allowance recovered (33) - (19,628) (36,776) 182, ,659 Salaries and related benefits 328, ,232 Social security contributions 33,023 32,340 End of service benefits (Note 39) 12,826 10,217 Transportation 12,179 10,252 Schooling 6,241 6,129 Medical expenses 4,489 3,600 Food and beverage 4,227 4,054 Training and seminars 4,173 5,075 Share-based payments (Note 46) - 40 Other staff expenses 5,849 5, , ,

61

62 14. Other Operating Expenses Operating leases 29,371 26,409 Professional fees 27,116 26,138 Executive Management bonuses 26,381 24,120 Advertising fees 22,742 21,834 Taxes and similar disbursements 19,258 13,532 Outsourcing services 16,935 9,873 Premium for guarantee of deposits 16,315 16,144 Information Technology 14,619 10,423 Donations and social aids 13,552 2,073 Provisions for risks and charges (Note 39) 13,088 4,388 Travel and related expenses 12,240 10,886 Telephone and mail 10,380 12,978 Electricity, water and fuel 8,310 8,434 Maintenance 7,692 6,467 Insurance premiums 7,617 8,078 Facilities services 6,363 6,224 Subscription to communication services 6,116 5,485 Office supplies 5,806 5,342 Receptions and gifts 4,457 3,729 Credit cards expenses 3,654 2,543 Board of Directors fees 3,643 3,388 Regulatory charges 3,448 2,644 Documentation and miscellaneous subscriptions 2,379 2,155 Others 10,477 9, , , Income Tax The components of income tax expense for the year ended December 31 are detailed as follows: The tax rates applicable to the parent and subsidiaries vary from 0% to 40% in accordance with the income tax laws of the countries where the Group operates. For the purpose of determining the taxable results of the subsidiaries for the year, the accounting results have been adjusted for tax purposes. Such adjustments include items relating Current tax Current income tax 151, ,170 Adjustment in respect of current income tax of prior years 756 6,805 Other taxes treated as income tax 11,811 3, , ,012 Deferred tax Relating to origination and reversal of temporary differences (9,282) (3,498) 154, ,514 to both income and expense and are based on the current understanding of the existing tax laws and regulations and tax practices. The relationship between taxable profit and accounting profit is as follows: Balance Tax Balance Tax Accounting profit before tax 699, , , ,175 Add: Non-deductible expenses 112,707 16,906 79,660 11,949 Non-deductible provisions 194,127 29,119 71,675 10,751 Other non-deductibles 10,067 1,510 6,809 1, ,901 47, ,144 23,722 Less: Revenues previously subject to tax 29,542 4,431 34,423 5,163 Provision recoveries previously subject to tax 4, ,466 2,320 Provisions write-off previously subject to tax , Exempted revenues 189,884 28,483 30,472 4,571 Unrealised gains on financial instruments 21,100 3,165 1, Other deductibles 79,147 11,872 25,118 3, ,520 48, ,625 17,044 Impact subject to tax 691, , , ,853 Impact of differently taxed profits 47,543 24,317 Tax due 151, ,170 Effective income tax rate 21.63% 19.55%

63 The movement of current tax liabilities during the year is as follows: Balance at January 1 86,756 65,185 Charges for the year 163, ,012 Transfers (1,144) , ,052 Less taxes paid: Current year tax liability * 68,315 67,473 Prior years tax liabilities 57,834 53,048 Foreign exchange difference 5, , ,481 Balance at December ,058 86, Profit from Discontinued Operations During May, the Bank entered into a Sale and Purchase Agreement through which it sold 81% (926,437 shares) of its investment in LIA Insurance sal ( LIA ), the insurance arm of the Group. Consideration received amounted to USD 89 million (equivalent to LBP 133 billion) in cash. The business of LIA Insurance sal was included in the Group Functions and Head Office business segment and Lebanon geographic segment. The cash flows generated by the sale of the discontinued operation during have been considered in the Consolidated Statement of Cash Flows as part of the investing activities. On July 26,, the Directors of Banaudi Holding Limited, sole shareholder of Bank Audi sam, decided to cease the activities of the subsidiary bank and to liquidate it and withdraw its banking license. Bank Audi sam exercised banking activities in Monaco under banking license provided by Autorité de Contrôle Prudentiel. The cessation of activities involves restitution of the assets of the clients, transfer of credit in process, and cancellation of all arrangements concluded with the external services providers. The results of LIA Insurance sal and Bank Audi sam are as follows: * Represents taxes paid on interest received from Treasury bills and central banks certificates of deposits. Deferred taxes recorded in the consolidated statement of financial position result from the following items: Deferred Tax Assets Deferred Tax Liabilities Provisions 3,731 (1,292) Impairment allowance for loans and advances 13,794 - Fair value of financial instruments ,508 Carried forward taxable losses 1,282 - Difference in depreciation rates - 3,962 Other temporary differences ,629 13,340 Deferred Tax Assets Deferred Tax Liabilities Provisions 6,117 (495) Fair value of financial instruments (125) 169 Carried forward taxable losses 1,282 - Difference in depreciation rates - 1,921 Other temporary differences ,632 1,753 Bank Audi sam LIA Insurance sal Bank Audi sam LIA Insurance sal Interest and similar income 3,467 8,870 12,337 4,717 18,705 23,422 Interest and similar expense (1,874) (15) (1,889) (1,980) (41) (2,021) Net interest income 1,593 8,855 10,448 2,737 18,664 21,401 Fee and commission income 813 8,620 9, ,088 21,007 Fee and commission expense (429) (4,889) (5,318) (440) (9,600) (10,040) Net fee and commission income 384 3,731 4, ,488 10,967 Other operating income ,333 operating income 2,056 12,920 14,976 3,640 30,061 33,701 operating expenses (16,146) (6,342) (22,488) (11,709) (11,368) (23,077) Operating (loss) profit (14,090) 6,578 (7,512) (8,069) 18,693 10,624 Non-operating expenses (6,046) - (6,046) Tax attributable to operating profit - (793) (793) - (1,725) (1,725) Loss for the period from discontinued operations (20,136) 5,785 (14,351) (8,069) 16,968 8,899 (Loss) gain recognised from fair value remeasurement (9,922) 20,439 10, Tax attributable to fair value remeasurement - (3,065) (3,065) (Loss) gain on disposal - 48,621 48, Tax attributable to gain on disposal - (7,908) (7,908) (30,058) 63,872 33,814 (8,069) 16,968 8,899 Cash inflow from sale: consideration received 133,212 Cash included as cash and cash equivalents on January 1 in the Cash Flow statements (14,506) 118,706 Earnings per share: LBP LBP Basic, from discontinued operations Diluted, from discontinued operations

64 After remeasurement to fair value, the remaining investment in LIA Insurance sal amounted to LBP 32,199 million and was classified under Financial Assets at Fair Value through Other Comprehensive Income. 17. Earnings per Share Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated by the same manner after adding to the weighted average number of common shares outstanding the weighted average number of dilutive shares that would have been issued pursuant to the Bank s share-based payments plan. The number of shares issued has been calculated at the date of the statement of financial position for the purpose of calculating diluted earnings per share based on the realisation of accomplishment conditions as if the accomplishment date is the current statement of financial position date. The following table shows the income and share data used to calculate basic and diluted earnings per share: Obligatory Reserves In accordance with the Central Bank of Lebanon s rules and regulations, banks operating in Lebanon are required to deposit with the Central Bank of Lebanon an obligatory reserve calculated on the basis of 25% of sight commitments and 15% of term commitments denominated in Lebanese Pounds. This is not applicable for investment banks which are exempted from obligatory reserve requirements on commitments denominated in Lebanese Pounds. Additionally, all banks operating in Lebanon are required to deposit with the Central Bank of Lebanon interest-bearing placements representing 15% of total deposits in foreign currencies, regardless of nature. Subsidiary banks operating in foreign countries are also subject to obligatory reserve requirements determined based on the banking rules and regulations of the countries in which they operate. Compulsory reserve deposits are not available for use in the Bank s day-to-day operations. The following table summarises the Group s placements in central banks available against the compulsory reserves as of December 31: There were no transactions involving common shares or potential common shares between the reporting date and the date of the completion of these 18. Cash and Balances with Central Banks Profit attributable to equity holders of the Bank 564, ,239 Less: dividends attributable to preferred shares (34,955) (25,910) Profit available to holders of ordinary shares 529, ,329 Weighted average number of shares outstanding 346,903, ,334,701 Weighted average number of common shares outstanding after dilutive effect of share-based payments 347,048, ,036,106 Basic earnings per share 1,527 1,510 Diluted earnings per share 1,526 1,507 consolidated financial statements which would require the restatement of earnings per share. Cash on hand 249, ,110 Central Bank of Lebanon Current accounts 541, ,068 Time deposits 7,287,985 6,420,737 Accrued interest 53,382 59,587 7,882,754 7,160,392 Other central banks Current accounts 845, ,368 Time deposits 484, ,356 Accrued interest ,330,279 1,264,852 9,462,380 8,703, Due from Banks and Financial Institutions The movement of the impairment allowance was as follows: Placements in Lebanese Pounds 453, ,151 Placements in foreign currencies 3,885,816 3,723,652 4,338,840 4,337,803 Current accounts 1,582,867 1,230,400 Time deposits 2,493,183 3,080,621 Checks for collection 171, ,363 Other amounts due 34,080 89,172 Accrued interest 397 5,074 Less: impairment allowance (998) (1,028) 4,280,978 4,562,602 Balance at January 1 1,028 1,031 Recoveries (33) - Foreign exchange difference 3 (3) 998 1,

65 20. Loans to Banks and Financial Institutions and Reverse Repurchase Agreements 21. Financial Assets Given as Collateral 22. Derivative Financial Instruments The tables below show the positive and negative fair values of derivative financial instruments, together with the notional amounts analysed by the term to maturity. 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. The notional amounts indicate the volume of transactions outstanding at year-end and are indicative of neither the market risk nor the credit risk. Credit risk in respect of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligations and is limited to the positive market value of instruments that are favourable to the Group. Loans and advances 272, ,556 Reverse repurchase agreements 787,087 - Accrued interest ,060, ,084 Due from banks - 16,975 Due from other counterparties ,424 December 31, Positive Fair Value Negative Fair Value Notional Amount Within 3 Months Notional Amount by Term to Maturity 3 to12 Months 1 to 5 Years Over 5 Years Derivatives held for trading Forward foreign exchange contracts 7,218 4,992 72,825 46,796 26, Forward precious metals contracts ,545 9,045 1, Currency swaps 15,293 15,842 2,449,196 2,201, , Precious metals swaps ,204 35,374 6, Currency options 25,449 25,557 2,122, ,125 1,403, Indices swaps and options ,544-76, Credit default swaps 2, ,442, , ,169 15,625-51,045 47,294 6,215,814 3,791,557 2,408,632 15,625 - Derivatives held to hedge net investments in foreign operations Forward foreign exchange contracts ,036 40, Currency swaps - 8, ,968 51, , , ,004 91, , Derivatives used as cash flows hedge Interest rate swaps 1-30,128-4,844 25,284-51,046 56,042 6,453,946 3,883,275 2,529,762 40,909 - December 31, Positive Fair Value Negative Fair Value Notional Amount Within 3 Months Notional Amount by Term to Maturity 3 to12 Months 1 to 5 Years Over 5 Years Derivatives held for trading Forward foreign exchange contracts 6,598 3, , ,338 52, Forward precious metals contracts ,940 9,970 9, Precious metals swaps 1, ,374 25,371 1, Currency swaps 11,623 15,289 1,687,318 1,652,309 35, Currency options 39,239 39,238 1,958, ,480 1,067, Indices swaps and options ,182 21, Credit default swaps 5,636-1,616,854 1,484,200 77,503 55,151 - Equity options 290-8, ,576 5,330 65,649 58,246 5,803,900 4,496,850 1,242,993 58,727 5,330 Derivatives held to hedge net investments in foreign operations Currency swaps 16, , , ,209 58,246 5,968,458 4,496,850 1,407,551 58,727 5,330 The Group has positions in the following types of derivatives:

66 Derivative Financial Instruments Held for Trading Purposes Most of the Group s derivative trading activities relate to deals with customers which are normally offset by transactions with other counterparties. Also included under this heading are any derivatives entered into for risk management purposes which do not meet the IAS 39 hedge accounting criteria. Derivative Financial Instruments Held for Hedging Purposes As part of its asset and liability management, the Bank uses derivatives for hedging purposes in order to reduce its exposure to credit and market risks. This is achieved by hedging specific financial instruments, portfolios of fixed rate financial instruments and forecast transaction, as well as strategic hedging against overall financial position exposures. During, the Bank renewed its currency swap contracts designated to hedge the net investment in its subsidiaries in Cyprus and France. The notional amount of these contracts amounted to LBP 167,968 million as of December 31, (: LBP 164,558). In order to maintain the effectiveness of the hedge, the Group entered into forward contracts with a notional amount of LBP 40,036 million to reduce the hedged amount. The negative fair value of these contracts amounted to LBP 8,748 million (: positive fair value of LBP 16,560) and was transferred to Foreign Currency Translation Reserve in equity to offset gains on translation of the net investment in the subsidiaries. No ineffectiveness from hedges of net investments in foreign operations was recognised in profit or loss during the year. Forwards and Futures Forwards and futures contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. Options Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or to sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. Swaps Swaps are contractual agreements between two parties to exchange movements in interest or foreign currency rates, as well as the contracted upon amounts for currency swaps. In a currency swap, the Bank pays a specified amount in one currency and receives a specified amount in another currency. Currency swaps are mostly gross-settled. A Credit Default Swap (CDS) is a credit derivative between two counterparties, whereby they isolate the credit risk of at least one third party and trade it. Under the agreement, one party makes periodic payments to the other and receives the promise of a payoff if the third party defaults. The former party receives credit protection and is said to be the buyer, while the other party provides credit protection and is said to be the seller. The third party is known as the reference entity. The notional amount of credit default swaps represents the carrying value of certain time deposits held by the Group as of December 31, and (Note 36). 23. Financial Assets at Fair Value through Profit or Loss The classification of the above instruments according to the type of interest is as follows: During, the Group acquired, through its two wholly-owned subsidiaries, Banque Audi (Suisse) and Beryte International NV, a European real estate mortgage loan extended to Wel 1: Euro Elysee II real estate fund. The loan is fully secured by first mortgage deeds against properties in Germany. Lebanese sovereign and Central Bank of Lebanon Central Bank's certificates of deposits 11,268 - Treasury bills 124, ,941 Eurobonds 232, , , ,940 Other sovereign Eurobonds 1, Private sector and other securities Banks and financial institutions debt instruments 2, ,522 Loans and advances to customers 75,555 - Corporate debt instruments 10,340 15,520 Structured products - 1,882 Mutual funds 49,010 48,653 Equity instruments 3,212 3, , , , ,926 Fixed interest Lebanese sovereign and Central Bank of Lebanon 368, ,940 Other sovereign 1, Private sector and other securities 88, , , ,304 Non-interest bearing Private sector and other securities 52,221 53, , ,926 This loan matures in September 2014, with option to extend by one year. It is remunerated at a fixed interest rate of 4.75% per annum on the face amount

67 24. Loans and Advances to Customers at Amortised Cost Corporate SME Retail and Personal Banking Public Sector Overdraft accounts 2,408, , ,556 65,560 3,872,924 Loans 7,403,071 1,681,182 2,695,458 56,264 11,835,975 Discounted bills and commercial paper 111,132 58,440 24,609 15, ,431 9,922,853 2,503,780 3,354, ,074 15,918,330 Impairment allowance (308,129) (28,540) (101,342) (3,732) (441,743) Unrealised interest (40,403) (4,424) (15,357) - (60,184) 9,574,321 2,470,816 3,237, ,342 15,416,403 Retail and Corporate SME Personal Banking Public Sector Balance at January 1 89,858 67,536 79,364 1, ,820 Add: Charges for the year (Note 12) 118,050 5,071 46,830 4, ,435 Transfers (178) Less: Recoveries (Note 12) (10,063) (6,920) (4,106) (933) (22,022) Write-offs (190) (8,286) (3,141) - (11,617) Foreign exchange difference (6,082) (928) (3,294) (38) (10,342) Balance at December ,395 56, ,780 4, ,538 Individual impairment 97,538 40,730 78, ,015 Collective impairment 93,857 16,058 37,033 4, , ,395 56, ,780 4, ,538 Corporate The breakdown and movement of the impairment allowance during the year are as follows: SME Retail and Personal Banking Public Sector Overdraft accounts 2,123, , , ,401,860 Loans 5,792,815 1,167,612 2,377, ,130 9,499,608 Discounted bills and commercial paper 136,708 74,716 26,522 20, ,687 8,053,190 2,005,741 2,917, ,511 13,160,155 Impairment allowance (191,395) (56,788) (115,780) (4,575) (368,538) Unrealised interest (37,512) (30,888) (31,040) - (99,440) 7,824,283 1,918,065 2,770, ,936 12,692,177 Corporate SME Retail and Personal Banking Public Sector Balance at January 1 191,395 56, ,780 4, ,538 Add: Charges for the year (Note 12) 150,832 7,018 41,306 2, ,900 Transfers 4,726 (4,726) 363 (582) (219) Less: Recoveries (Note 12) (4,000) (2,879) (3,914) (843) (11,636) Write-offs (20,684) (27,728) (45,976) - (94,388) Foreign exchange difference (14,140) 67 (6,217) (2,162) (22,452) Balance at December ,129 28, ,342 3, ,743 Individual impairment 196,703 14,284 61,917 2, ,091 Collective impairment 111,426 14,256 39,425 1, , ,129 28, ,342 3, ,743 The movement of unrealised interest during the year is as follows: Corporate SME Retail and Personal Banking Balance at January 1 37,512 30,888 31,040 99,440 Add: Unrealised interest applied on non-performing loans 20,948 3,643 8,648 33,239 Less: Unrealised interest written off (16,993) (28,954) (23,394) (69,341) Unrealised interest recovered (Note 12) (587) (746) (749) (2,082) Foreign exchange difference (477) (407) (188) (1,072) Balance at December 31 40,403 4,424 15,357 60,184 Corporate SME Retail and Personal Banking Balance at January 1 21,592 28,470 26,476 76,538 Add: Unrealised interest applied on non-performing loans 17,104 5,280 5,905 28,289 Less: Unrealised interest written off (103) (2,112) (473) (2,688) Unrealised interest recovered (Note 12) (767) (710) (858) (2,335) Foreign exchange difference (314) (40) (10) (364) Balance at December 31 37,512 30,888 31,040 99,

68 In accordance with the Banking Control Commission Circular No. 240, bad loans and related provisions and unrealised interest which fulfil certain requirements have been transferred to off-balance sheet accounts. The gross balance of these loans amounted to LBP 163,729 million as of December 31, (: LBP 14,305 million). Besides, amounts recovered from off-balance sheet accounts during amounted to LBP 5,877 million (: LBP 12,419 million). The distribution by economic sector of loans and advances to customers at amortised cost is as follows: Manufacturing industries 3,091,234 2,167,091 Individuals excluding housing 2,528,147 2,276,419 Wholesale and retail trade 2,278,118 1,843,934 Financial services and brokerage 1,671,096 1,502,606 Real estate services 1,222, ,883 Construction 1,142,268 1,038,408 Transportation and warehousing 1,134, ,876 Individuals housing 1,030, ,001 Hotels and restaurants 451, ,125 Electricity, gas, water and telecommunication 304, ,352 Professional services 292, ,013 Agriculture 129,501 53,764 Extractive industry 19,784 31,902 Public administration 3,194 3,535 Regional and international organisations 802 2,048 Others 117,285 98,220 15,416,403 12,692, Loans and Advances to Related Parties at Amortised Cost The distribution by economic sector of loans and advances to related parties at amortised cost is as follows: Corporate SME Retail and Personal Banking Overdraft accounts - 187,284 38, ,943 Loans 8,172-70,396 78,568 8, , , ,511 Corporate SME Retail and Personal Banking Overdraft accounts - 169,166 37, ,002 Loans 8,295 1,076 47,293 56,664 8, ,242 85, ,666 Construction 177, ,979 Individuals excluding housing 66,339 57,593 Real estate services 36,865 29,020 Individuals housing 21,957 7,945 Hotels and restaurants 2,104 1,103 Financial services and brokerage Others , ,

69 26. Financial Assets at Amortised Cost Lebanese sovereign and Central Bank of Lebanon Central Bank s certificates of deposits 5,008,977 5,423,957 Treasury bills 3,379,072 2,823,032 Eurobonds 2,222,422 2,750,853 Other sovereign 10,610,471 10,997,842 Treasury bills 2,425,358 1,716,371 Eurobonds 121, ,673 Other governmental securities 244, ,543 Private sector and other securities 2,791,510 2,209,587 Banks and financial institutions debt instruments 853, ,692 Corporate debt instruments 299, ,451 Loans related to investments in equity instruments ,154,200 1,107,625 14,556,181 14,315,054 Less: impairment allowance (7,065) (7,751) 14,549,116 14,307, Financial Assets at Fair Value through Other Comprehensive Income The Group classified the following instruments at fair value through other comprehensive income as it intends to hold them for strategic reasons. The tables below list those equity instruments and dividends received: Numbers of Shares Fair Value Dividends AZA Holding SAL 49, ,371 6,110 LIA Insurance sal (Note 16) 217,063 32,199 9 BankMed SAL 7.75% series 1 preferred shares 100,000 15,075 1,168 Visa NC Class C 63,438 14, Phoenicia Aer Rianta Co. SAL 16,354 10,729 15,076 Banque de l Habitat SAL 502,599 10, Solidere International Limited 58,083 6, Liban Lait SAL 8,500 5,232 - Saraya Aqaba Real Estate Development 1,965,396 3,015 2,156 Master Card Inc Class B 3,814 2,778 4 Kafa Holding SAL 3,268 2,049 - Kafalat 3,800 1,628 - International Payment Network SAL 6,496 1, Arab Trade Finance Program 122 1,366 - Abdel Wahab 618 Holding SAL 232 1,272 - Fransabank SAL 28,923 1, Societe ABC SAL (bearer) 41,093 1, D.F. Arem, Media Ltd ,843 Kayan 150, C-Mobile Group Holding Ltd 5,487, Other equity instruments 9,047 3, ,793 30,245 The classification of the above instruments according to the type of interest is as follows: Fixed interest Lebanese sovereign and Central Bank of Lebanon 10,610,471 10,997,842 Other sovereign 2,757,698 2,209,587 Private sector and other securities 1,130,621 1,063,302 Variable interest 14,498,790 14,270,731 Private sector and other securities 16,370 36,429 Other sovereign 33,813 - Loans related to investments in equity instruments ,326 36,572 14,549,116 14,307,303 Numbers of Shares Fair Value Dividends AZA Holding SAL 49, ,186 6,037 BBAC 8.25% N-CP preferred shares series A 1,200,000 18,090 1,493 BankMed SAL 7.75% series 1 preferred shares 100,000 15,075 1,168 C-Mobile Group Holding Ltd 5,487,273 12,795 - Phoenicia Aer Rianta Co SAL 16,354 10,729 14,820 Visa NC Class C 63,364 9, Liban Lait SAL 8,500 5,232 - Solidere International Limited 58,083 7,005 - Banque de l Habitat SAL 517,599 4, Saraya Aqaba Real Estate Development 1,965,396 4,179 - Kafa Holding SAL 3,268 2,049 - Blom Bank SAL GDR 167,900 1, Fransabank SAL 28,923 1, Arab Trade Finance Program 122 1,280 2 Abdel Wahab 618 Holding SAL 232 1,272 - Kayan 150,000 1,049 - Societe ABC SAL (bearer) 41,093 1, D.F. Arem Media Ltd ,260 Other equity instruments 8,856 1, ,984 27,720 During, the Group realised a gain of LBP 1,416 million (: LBP 679 million) in equity reserves upon disposal of financial assets at fair value through other comprehensive income

70 28. Investments in Associates Country of Incorporation Ownership % During, Pinpay increased its share capital in cash by an amount equal to LBP 1,500 million representing 10,000 new shares, in addition to LBP 200,010 issue premium per share, conferring equal rights to the shareholders as the existing shares. The share capital of PinPay after the capital increase amounts to LBP 3,000 million. The Bank did Cost Ownership % Cost Investments Assurex sal Lebanon , ,555 Syrian Arab Insurance sal Syria , ,929 Pinpay sal Lebanon Capital Outsourcing Ltd (Dubai) UAE , ,958 16,153 23,090 Related loans Capital Outsourcing Ltd (Dubai) UAE 18,077 20,009 34,230 43,099 Share of associates statement of financial position not subscribe in the capital increase and, as a result, its ownership percentage was diluted. The Bank s investments accounted for under the equity method are not listed on public exchanges. The following table illustrates the summarised financial information of these investments: Current assets 23,516 41,362 Non-current assets 11,647 6,280 Current liabilities (4,936) (6,686) Non-current liabilities (18,159) (21,473) Net assets 12,068 19,483 Share of associates' revenues and profits Revenues 6,348 23,886 Share of profits for the year 551 5, Property and Equipment Land and Buildings Land and Buildings Installations and Fixture Installations and Fixture Motor Vehicles Motor Vehicles Office Equipment and Computer Hardware Office Equipment and Computer Hardware Office Machinery and Furniture Office Machinery and Furniture Other Fixed Assets Other Fixed Assets Cost or revaluation: At January 1, 436, ,600 4, ,493 92,389 16, ,780 Entities deconsolidated during the year (7,283) (1,056) (91) (1,043) (316) (69) (9,858) Additions 40,496 48, ,086 15,177 1, ,566 Disposals (19,886) (5,520) (513) (2,195) (3,498) - (31,612) Transfers to non-current assets held for sale (32,303) (77) (189) (445) (90) (23) (33,127) Other transfers (29) (88) (88) Foreign exchange difference (9,440) (6,178) (346) (2,763) (4,032) (443) (23,202) At December 31, 407, ,666 3, ,162 99,601 16, ,459 Depreciation: At January 1, 69,712 97,629 2,222 69,425 52,225 10, ,230 Entities deconsolidated during the year (576) (647) (46) (894) (269) (51) (2,483) Charge for continuing operations 8,421 16, ,508 7, ,088 Charge for discontinued operations ,429 Disposals (3,541) (4,811) (283) (2,050) (3,142) - (13,827) Transfers to non-current assets held for sale (2,076) (14) (23) (105) (79) - (2,297) Other transfers (9) - - Foreign exchange difference (1,219) (2,163) (208) (2,043) (1,836) 78 (7,391) At December 31, 70, ,865 2,087 77,223 54,841 11, ,749 Net book value: At December 31, 337,017 88,801 1,430 50,939 44,760 5, ,710 Cost or revaluation: At January 1, 439, ,985 4,351 92,094 87,766 15, ,845 Entities deconsolidated during the year - (4,148) (60) (4,851) (502) - (9,561) Additions 3,086 23, ,963 8,763 1,342 57,923 Disposals (1,932) (634) (668) (2,509) (265) (10) (6,018) Transfers (563) - - Foreign exchange difference (4,639) (4,839) (127) (1,692) (2,810) (302) (14,409) At December 31, 436, ,600 4, ,493 92,389 16, ,780 Depreciation: At January 1, 61,853 88,114 2,286 65,904 47,547 9, ,916 Entities deconsolidated during the year - (1,212) (60) (2,696) (291) (20) (4,279) Charge for continuing operations 8,546 12, ,244 6, ,796 Charge for discontinued operations Disposals (564) (522) (502) (2,479) (249) (4) (4,320) Transfers (374) - - Foreign exchange difference (335) (1,668) (80) (985) (1,353) (111) (4,532) At December 31, 69,712 97,629 2,222 69,425 52,225 10, ,230 Net book value: At December 31, 366,451 61,971 1,882 35,068 40,164 6, ,

71 30. Intangible Fixed Assets Cost: Key Money Key Money Computer Software Computer Software Existing Technology Existing Technology Customer Relationships Customer Relationships Other Other Cost: At January 1, 5,021 47, ,959 Entities deconsolidated during the year - (1,104) (1,104) Additions 38 45, ,108 Disposals - (276) (276) Transfers to non-current assets held for sale (1) (160) (161) Foreign exchange difference (656) (1,028) (1,682) At December 31, 4,402 91, ,844 Amortisation: At January 1, , ,451 Entities deconsolidated during the year - (943) (943) Charge for the year 28 7, ,663 Disposals - (276) (276) Transfers to non-current assets held for sale (1) (147) (148) Foreign exchange difference 1,317 (820) At December 31, 2,235 43, ,244 Net book value: At December 31, 2,167 47, ,600 At January 1, 3,879 54,177 2,542 5,738 1,183 67,519 Entities deconsolidated during the year - (10,881) (2,542) (5,738) (1,183) (20,344) Additions 1,868 5,509 7,377 Disposals (102) (130) (232) Foreign exchange difference (624) (737) (1,361) At December 31, 5,021 47, ,959 Amortisation: At January 1, , , ,051 Entities deconsolidated during the year - (7,136) (704) (1,590) (154) (9,584) Charge for the year 39 6, ,045 Charge for discontinued operations Disposals (102) (130) (232) Foreign exchange difference (86) (633) (719) At December 31, , ,451 Net book value: At December 31, 4,130 9, , Non-current Assets Held for Sale The Group occasionally takes possession of properties in settlement of loans and advances. The Group is in the process of selling these properties which are, as such, included in Non-current Assets Held for Sale. Gains or losses on disposal and revaluation losses are Properties Acquired in Settlement of Debts recognised in the Consolidated Income Statement for the year. Besides, as at December 31,, the Bank continued to recognise in its financial statements the assets and liabilities from three subsidiaries which represent non-core businesses. Management expects to complete the sale of these disposal groups during Investments Acquired in Settlement of Debts Other Disposal Groups Cost: At January 1, 27, ,001 Additions Transfers ,941 35,195 Disposals (11,025) - - (11,025) Foreign exchange difference (698) - - (698) At December 31, 15,743-34,941 50,684 Impairment: At January 1, Reversal due to disposals (4) - - (4) Foreign exchange difference At December 31, Net book value: At December 31, 15,113-34,941 50,054 Properties Acquired in Settlement of Debts Investments Acquired in Settlement of Debts Other Disposal Groups Cost: At January 1, 30, ,493 Additions 4, ,468 Transfers (806) (15) 706 (115) Disposals (2,886) - (706) (3,592) Adjustment (3,723) - - (3,723) Foreign exchange difference (530) - - (530) At December 31, 27, ,001 Impairment: At January 1, 1, ,239 Reversal due to disposals (602) - - (602) Foreign exchange difference (15) - - (15) At December 31, Net book value: At December 31, 26, ,

72 The major classes of assets and liabilities of the entities classified as held for sale as at December 31, are as follows: There is no cumulative income or expenses in Other Comprehensive Income relating to assets held for sale. 32. Other Assets Agence Saradar d Assurances sal Clover Building sal Eagle One Third Investment Company sal Assets Intangible fixed assets Property and equipment , ,830 Other assets 3, ,098 4,967 29, ,941 Liabilities Other liabilities 3,634 11, ,799 3,634 11, , Goodwill Lebanon Switzerland Egypt Sudan United States Monaco Others Cost: At January 1, 54,716 45, ,216 5,587-9,846 2, ,431 Entities deconsolidated during the year (1,996) (1,996) Impairment Continuing operations - - (21,167) (21,167) Impairment Discontinued operations (9,922) - (9,922) Foreign exchange difference - 1,667 (4,150) (3,087) - 76 (6) (5,500) At December 31, 54,716 46, ,899 2, ,846 Cost: Lebanon Switzerland Egypt Sudan United States Monaco Others At January 1, 54,716 45, ,824 5,652 8,128 10,093 3, ,204 Entities deconsolidated during the year (8,128) - - (8,128) Foreign exchange difference - (44) (5,608) (65) - (247) (1,681) (7,645) At December 31, 54,716 45, ,216 5,587-9,846 2, ,431 Advances on acquisition of tangible fixed assets 67,819 69,932 Advances on acquisition of intangible fixed assets 6,460 13,794 Prepaid charges 36,194 50,480 Reinsurers shares in technical provisions - 20,566 Electronic cards and regularisation accounts 21,790 19,181 Trade receivables related to non-banking operations 2,345 17,038 Advances to staff 8,124 14,849 Hospitalisation and medical care under collection 14,980 11,920 Advances on investments 7,123 7,837 Deferred tax assets (Note 15) 19,629 7,632 Interest and commissions to be received 3,225 5,445 Funds management fees 3,152 3,737 Consolidation differences - 2,860 Fiscal stamps, bullions and commemorative coins 1,672 1,606 Management and advisory fees receivable Miscellaneous debtors and other debtor accounts 45,155 40, , ,171 For the purpose of impairment testing, goodwill is allocated to the Cash-generating Units (CGUs) which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The cost of equity assigned to an individual CGU and used to discount its future cash flows can have a significant effect on its valuation. The cost of equity percentage is generally derived from an appropriate capital asset pricing model, which itself depends on inputs reflecting a number of financial and economic variables including the risk rate in the country concerned and a premium to reflect the inherent risk of the business being evaluated. Management judgment is required in estimating the future cash flows of the CGUs. These values are sensitive to cash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding the term sustainable pattern of cash flows thereafter. While the acceptable range within which underlying assumptions can be applied is governed by the requirement for resulting forecasts to be compared with actual performance and verifiable economic data in future years, the cash flow forecasts necessarily and appropriately reflect Management s view of future business prospects. The online brokerage CGU in Egypt (Arabeya Online) is a separate legal entity performing brokerage activities to its customers and is reported under Retail and Personal Banking business segment and MENA geographic segment. Due to the adverse events currently witnessed in Egypt, the volume of trading activities has drastically dropped in that market and, accordingly, the earnings of this CGU were significantly affected. As a result, an impairment loss on goodwill amounting to USD 14 million (equivalent to LBP 21,167 million) has been recognised during the year ended December 31, (: nil). The recoverable amount of this cash-generating unit is its value in use. Pursuant to Management's decision to discontinue its banking operations carried through Bank Audi sam (Monaco), the goodwill attributable to that Private Banking CGU was deemed to be impaired by effect of discontinuing the operations. The Group's activities in Monaco were included in the Retail and

73 Personal Banking business segment and Europe geographic segment. The net results of Bank Audi sam were included under Profit from Discontinued Operations in the Income Statement for the years ended December 31, and. The following CGUs include in their carrying value goodwill that is a significant proportion of total goodwill reported by the Group. These CGUs do not carry on their statement of financial position any intangible assets with indefinite lives, other than goodwill. The following schedule shows the discount and terminal growth rates used for CGUs subject to impairment testing. Discount Rate % Terminal Growth Rate % Discount Rate % Terminal Growth Rate % Cash-generating units Commercial and Private Banking Lebanon Private Banking Switzerland Commercial Banking Egypt Commercial Banking Sudan Private Banking Monaco Online Brokerage Egypt Due to Banks and Financial Institutions The commitments arising from bank facilities received are disclosed in Note 52 to these Consolidated Financial Statements. Current accounts 180, ,920 Term loans 512, ,000 Time deposits 475, ,311 Accrued interest 2,770 2,327 1,171,174 1,007,558 Repurchase agreements 681,487-1,852,661 1,007,558 During the last quarter of, the Group entered into repurchase agreements against pledging Treasury bills as collateral. The terms of these agreements are as follows: At December 31,, aggregate goodwill of LBP million 2,002 was allocated to CGUs that were not considered individually significant. The key assumptions described above may change as economic and market conditions change. The 34. Due to Central Banks Group estimates that reasonably possible changes in these assumptions are not expected to cause the recoverable amount of either unit to decline below the carrying amount. Jordan Egypt Central banks 126, , ,310 Other banks - 440, , , , ,487 Carrying value of collateral 127, , ,139 Interest expense 1,787 3,364 5,151 Annual interest rate 4.25% 9.75% % Maturity date December 6, 2013 Between January 2 and February 25, 2013 Subsidised loan 132, ,612 Accrued interest , ,394 During 2009, the Bank signed a credit agreement with the Central Bank of Lebanon based on the provisions of article 102 of the Code of Money and Credit. The purpose of this loan is to finance subsidised loans. Interest expense on the loan amounted to LBP 4,797 million and LBP 6,341 million for the years ended December 31, and, respectively

74 36. Customers Deposits at Amortised Cost Corporate and SME Time deposits include special deposits amounting to LBP 1,442,219 million as at December 31, (: LBP 1,616,854 million) that pay a preferential (simple) interest rate. The principal is settled at maturity according to the full discretion of the Bank either in cash or in Lebanese government Eurobonds Retail and Personal Banking Public Sector Other Sight deposits 1,830,807 4,632,182 42, ,506,111 Time deposits 5,286,250 24,369, ,110 2,434 29,904,175 Saving accounts 11,366 1,720, ,731,845 Certificates of deposits 9, , ,291 Margins on LC s and LG s 286,492 58, ,424 Other margins 66, , ,211 Other deposits 72,224 82, ,833 7,563,002 31,864, ,685 3,000 39,718,890 Deposits pledged as collateral 3,586,547 Corporate and SME Retail and Personal Banking Public Sector Other Sight deposits 1,564,690 4,065,442 39,299 1,165 5,670,596 Time deposits 6,648,552 22,435, , ,295,954 Saving accounts 104, , ,374 Certificates of deposits 648,130 18, ,427 Margins on LC s and LG s 345,378 63, ,063 Other margins 148, , ,678 Other deposits 72, , ,118 9,531,893 27,312, ,695 1,192 37,097,210 Deposits pledged as collateral 3,247,424 denominated in US Dollars and having the same nominal amount. As these deposits are linked to the credit risk of the Lebanese Republic, the Bank separated the embedded derivative and accounted for it at fair value through profit or loss. 37. Deposits from Related Parties at Amortised Cost 38. Other Liabilities Corporate and SME Retail and Personal Banking Sight deposits 21, , ,626 Time deposits 304, , ,281 Saving accounts - 1,268 1,268 Other deposits and margin accounts 6, , , , ,101 Deposits pledged as collateral 66,557 Corporate and SME Retail and Personal Banking Sight deposits 32, ,185 Time deposits 235,128 15, ,371 Saving accounts Other deposits and margin accounts , ,840 17, ,297 Deposits pledged as collateral 56,732 Current tax liabilities (Note 15) 118,058 86,756 Accrued expenses 59,545 52,484 Miscellaneous suppliers and other payables 58,803 23,736 Credit balances of factoring clients 56,740 72,218 Operational taxes 32,620 32,766 Employee accrued benefits 29,195 24,594 Unearned commissions and premiums 12,267 14,847 Deferred tax liabilities (Note 15) 13,340 1,753 Electronic cards and regularisation accounts 6,493 5,554 Social security dues 6,258 5,749 Consolidation difference 2,054 - Due to National Institute for Guarantee of Deposits 1, Provisions for technical reserves related to insurance operations - 312,968 Reinsurers and brokers accounts - 8,270 Liabilities on revaluation of share option agreements (Note 44) - 185,858 Other credit balances 12,162 4, , ,

75 39. Provisions for Risks and Charges a) Provisions for Risks and Charges The movement of provision for risks and charges is as follows: Provisions for risks and charges (a) 38,571 24,523 End of service benefits (b) 56,525 48,402 95,096 72,925 Provision for contingencies 19,510 18,638 Provision for insurance risks - 1,718 Provision for legal claims 1,723 1,539 Provision for bonus 11,818 - Other provisions 5,520 2,628 38,571 24,523 Balance at January 1 24,523 27,044 Add: Charge for operating expenses (Note 14) 13,088 4,388 Charge for personnel expenses 11,767 - Transfer from other liabilities - 1,928 24,855 6,316 Less: Paid during the year 3,997 4,075 Net provisions recoveries Continued operations (Note 11) 7 2,909 Net provisions recoveries Discontinued operations Entities deconsolidated during the year 2,019 - Transfer to other liabilities 3,981 - Foreign exchange difference 803 1,103 10,807 8,837 Balance at December 31 38,571 24,523 b) End of Service Benefits The movement of provision for staff retirement benefit obligation is as follows: The amount provided during the year is as follows: Defined Benefit Plan Other Retirement Obligations Balance at January 1, 40,861 7,541 48,402 Charge for the year (Note 13) 9,778 3,048 12,826 Transfer from deconsolidated entities Paid during the year (1,366) (1,542) (2,908) Transfer to non-current assets held for sale (502) - (502) Deconsolidated entities (977) - (977) Foreign exchange difference (430) - (430) Balance at December 31, 47,478 9,047 56,525 Balance at January 1, 36,746 4,194 40,940 Charge for the year (Note 13) 6,668 3,549 10,217 Charge for the year Discontinued operations Paid during the year (1,632) (202) (1,834) Provision no more required (979) - (979) Foreign exchange difference (28) - (28) Balance at December 31, 40,861 7,541 48,402 Current service cost 6,736 6,077 Interest on obligation 4,475 4,002 Expected return on plan assets (1,636) (1,602) Other termination benefits 3,048 3,549 Gain on curtailments and settlements - (1,809) Net actuarial losses recognised during the year charge for the year 12,826 10,

76 The key assumptions used in the calculation of retirement benefit obligation are as follows: Economic assumptions The share capital of Bank Audi sal - Audi Saradar Group as at December 31 is as follows: Discount rate (p.a.) 2.15% % 2.90% % Salary increase (p.a.) 2.50% - 8% 2.50% % Interest rate credited to account balance 2.50% - 6 % 3.00% % Demographic assumptions Retirement Pre-termination mortality None None Pre-termination turnover rates (age related with average of) 2.00% % 2.00% % 40. Share Capital Stock Exchange listing Number of Shares Number of Shares Ordinary shares Beirut 247,731, , ,358, ,695 Global depository receipts London SEAQ and Beirut 102,017, , ,081, , ,749, , ,439, ,197 Preferred shares series D Beirut 12,500,000 15,675 12,500,000 15,675 Preferred shares series E Beirut 1,250,000 1,568 1,250,000 1,568 Preferred shares series F Beirut 1,500,000 1, ,250,000 19,124 13,750,000 17, ,999, , ,189, ,440 Number of shares: 1,250,000. Share s issue price: USD 100. Share s nominal value: LBP 1,225 (later became LBP 1,254 upon increasing the nominal value). Issue premium: calculated in USD as the difference between USD 100 and the counter value of the par value per share based on the exchange rate at the underwriting dates. Benefits: annual dividends of USD 6 per share, non-cumulative. Repurchase right: the Bank has the right to purchase the shares in 5 years after issuance, as well as to call them off by that date. Pursuant to the resolution of the Extraordinary General Assembly held on September 5, 2005, the Bank issued 1,250,000 preferred shares series D according to the following terms: Number of shares: 12,500,000 (after the stock split). Share s issue price: USD 100. Share s nominal value: LBP 10,000 (subsequently increased to LBP 12,250 due to the increase of the share s nominal value). Issue premium : calculated in USD as the difference between USD 100 and the counter value of the par value per share (LBP 10,000). Benefits: annual dividends of USD 7.75 per share, non-cumulative. Repurchase right: the Bank has the right to purchase the shares in 5 years after issuance, as well as to call them off by that date. During, 1,936,221 common shares were transferred to Global Depository Receipts (: 6,393,576 shares). In accordance with the resolution of the Extraordinary General Assembly of shareholders held on June 22,, the Bank increased the share capital by LBP 389 million by issuing 309,260 common shares at the nominal value of LBP 1,254 per share, entirely designated for options holders who exercised their rights (: increased the share capital by LBP 1,207 million by issuing 962,830 common shares at the nominal value of LBP 1,254 per share). Paid Dividends In accordance with the resolution of the General Assembly of shareholders held on April 10,, dividends were distributed as follows: Pursuant to the resolution of the Extraordinary General Assembly of shareholders held on April 10,, the Bank issued preferred shares series F under the following terms: Number of shares: 1,500,000. Share s issue price: USD 100. Share s nominal value: LBP 1,254. Issue premium: calculated in USD as the difference between USD 100 and the counter value of the par value per share based on the exchange rate at the underwriting dates. Benefits: annual dividends of USD 6 per share, non-cumulative (exceptional for the fiscal year was set to USD 4 per share). Repurchase right: the Bank has the right to purchase the shares in 5 years after issuance, as well as to call them off by that date. Pursuant to the resolution of the Extraordinary General Assembly of shareholders held on March 2, 2010, the Bank issued 1,250,000 preferred shares series E according to the following terms:

77 In accordance with the resolution of the General Assembly of shareholders held on April 4,, dividends were distributed as follows: Number of Shares Distribution per Share LBP Preferred shares series D 12,500,000 1,168 14,604 Preferred shares series E 1,250,000 9,045 11,306 Common shares and Global Depository Receipts 349,439, , ,622 Number of Shares Distribution per Share LBP Preferred shares series D 12,500,000 1,168 14,604 Preferred shares series E 1,250,000 6,030 7,538 Common shares and Global Depository Receipts 346,055, , , Cash Contribution to Capital In previous years, agreements were entered between the Bank and its shareholders whereby the shareholders granted cash contributions to the Bank amounting to LBP 72,586 million (USD 48,150,000) as at December 31, and subject to the following conditions: These contributions will remain placed as a fixed deposit as long as the Bank performs banking activities; If the Bank incurs losses and has to reconstitute its capital, these contributions may be used to cover the losses if needed; The shareholders have the right to use these contributions to settle their share in any increase of capital; No interest is due on the above contributions; The above cash contributions are considered as part of Tier I capital for the purpose of determining the Bank s capital adequacy ratio; and The right to these cash contributions is for the present and future shareholders of the Bank. 41. Issue Premiums Issue premium Common shares 659, ,846 Issue premium Preferred shares 583, ,633 1,243,082 1,017,479 The movements on the issue and merger premiums are detailed as follows as at December 31, and : The increase in common shares issue premium due to the issuance of 309,260 common shares pursuant to the exercise of stock options (Note 40). The subscribers paid the difference between USD and the nominal amount per share based on the exchange rates at the exercise dates. Besides, an amount of LBP 587 million was transferred from the employees share-based payments reserve to the issue premium of subscribed shares (Note 46). The increase in the issue premium of preferred shares for the year ended December 31, amounting to LBP 224,243 million resulted from the issuance of 1,500,000 preferred shares series F (Note 40). In, the increase in common shares issue premium was due to the issuance of 962,830 common shares pursuant to the exercise of stock options. The subscribers paid the difference between USD and the nominal amount per share based on the exchange rates at the exercise dates for 708,610 shares and the difference between USD and the nominal amount per share based on the exchange rates at the exercise dates for 254,220 shares. An amount of LBP 1,720 million was transferred from the employees share-based payments reserve to the issue premium of subscribed shares (Note 46)

78 43. Non-distributable Reserves Legal Reserve Reserves Appropriated for Capital Increase Gain on Sale of Treasury Shares Reserve for General Banking Risks Employees' Share-based Payments Reserve for Foreclosed Assets Other Reserves Balance at January 1, 286,273 33,453 47, , , ,360 Appropriation of profits 57,901 11,174-63, ,284 Distribution of dividends on ordinary shares Employees share-based payments (587) - - (587) Entities deconsolidated during the year (8,219) (8,219) Treasury shares transactions - - (24,583) (24,583) Non-controlling interest share of reserves (137) (1) (138) Transfers between reserves 1, ,223 - (1,626) 5,840 12,086 Other movements (212) (212) At December 31, 337,255 44,626 22, ,899-3,725 5, ,434 Legal Reserve Reserves Appropriated for Capital Increase Gain on Sale of Treasury Shares Reserve for General Banking Risks Employees' Share-based Payments Reserve for Foreclosed Assets Other Reserves Balance at January 1, 229,167 12,602 48, ,423 2,307 4, ,550 Appropriation of 2010 profits 59,872 14,361-72, ,469 Employees share-based payments (1,720) - - (1,720) Entities deconsolidated during the year (348) (348) Treasury shares transactions - - (1,193) (1,193) Non-controlling interest share of reserves (2,418) - - (4,977) (7,395) Transfers between reserves - 6,490-3,316 - (178) - 9,628 Other movements At December 31, 286,273 33,453 47, , , ,360 Legal Reserve The Lebanese Commercial Law and the Bank s articles of association stipulate that 10% of the net annual profits be transferred to legal reserve. In addition, subsidiaries and branches are also subject to legal reserve requirements based on the rules and regulations of the countries in which they operate. This reserve is not available for dividend distribution. The Bank and different subsidiaries transferred to legal reserve an amount of LBP 57,901 million (: LBP 59,872 million) as required by the laws applicable in the countries in which they operate. Reserves Appropriated for Capital Increase The Bank and the subsidiaries transferred LBP 11,174 million from profits (: LBP 14,361 million) to reserves appropriated for capital increase. This amount represents the net gain on the disposal of fixed assets acquired in settlement of debt, in addition to reserves on recovered provisions for doubtful loans and debts previously written off, whenever recoveries exceed booked allowances. Gain on Sale of Treasury Shares These gains arise from the Global Depository Receipts (GDRs) owned by the Group. Based on the applicable regulations, the Bank does not have the right to distribute these gains. The net loss arising from the Treasury GDRs amounted to LBP 24,583 million for the year ended December 31, (: LBP 1,193 million). Reserves for General Banking Risks According to the Bank of Lebanon s regulations, banks are required to appropriate from their annual net profit a minimum of 0.2 percent and a maximum of 0.3 percent of total risk-weighted assets and offbalance sheet accounts based on rates specified by the Central Bank of Lebanon to cover general banking risks. The consolidated ratio should not be less than 1.25 percent of these risks by the year 2017 and 2 percent by the year This reserve is part of the Group s equity and is not available for distribution. Reserve for Foreclosed Assets The reserve for foreclosed assets represents appropriation against assets acquired in settlement of debt in accordance with the circulars of the Lebanese Banking Control Commission. Appropriations against assets acquired in settlement of debt shall be transferred to unrestricted reserves upon the disposal of the related assets. Other Reserves In accordance with decision 362 of the Council of Money and Credit of Syria, unrealised accumulated foreign exchange profits from the revaluation of the structural position in foreign currency maintained by the subsidiary bank in Syria are non-distributable

79 44. Distributable Reserves Reserve for Share Option Agreements General Reserves During January 2010, the Bank entered into share option agreements with two structured investment vehicles (SIVs) who undertook the issuance of 5% callable notes exchangeable into shares of the Bank and maturing on July 19, 2013 (the Series 1 notes). The nominal value of the issued notes amounted to USD 355 million. The share option agreement provides the Bank with the right but not the obligation, in its sole discretion, to purchase or cause to be purchased, all or any part of the shares held by the SIVs. The share option agreements also cause the purchase, subject to all necessary approvals Reserve for Share Option Agreements Other Reserves Balance at January 1, 567,742 (185,858) (1,669) 380,215 Appropriation of profits 1, ,505 Entities deconsolidated during the year (19,637) - - (19,637) Non-controlling interest share of reserves (4,308) - - (4,308) Reserves for share option agreements - 6,844-6,844 Transfers between reserves 7, , ,781 Other movements Balance at December 31, 553,075 - (1,669) 551,406 General Reserves Reserve for Share Option Agreements Other Reserves Balance at January 1, 566,218 (58,866) (1,755) 505,597 Appropriation of 2010 profits 18, ,822 Entities deconsolidated during the year (4,825) - 86 (4,739) Non-controlling interest share of reserves (2,295) - - (2,295) Reserves for share option agreements - (126,992) - (126,992) Transfers between reserves (10,187) - - (10,187) Other movements Balance at December 31, 567,742 (185,858) (1,669) 380,215 and authorisations or procure the purchase of all or part of the Bank s shares to fund the cash reserves of the SIVs in case they were insufficient to pay their obligations when they fall due. During, the Bank settled an amount of LBP 179,014 million to finance the cash reserves of the SIVs pursuant to their early redemption of the Series 1 notes. Besides, the SIVs issued new Series 2 notes with a nominal amount of USD 205 million exchangeable into shares of the Bank, bearing 5% annual interest and maturing on May 11, The Series 2 notes are subject to terms and conditions similar to those described above which used to be applicable to the Series 1 notes. 45. Proposed Dividends In its meeting held on March 21,, the Board of Directors of Bank Audi sal - Audi Saradar Group resolved to propose to the annual Ordinary General Assembly the distribution of dividends of LBP 603 per common share and GDR which amounts to LBP 210,194 million in total, after deductions made on Treasury shares held on the date of record. Proposed dividends related to preferred shares amounted to LBP 34,955 million. These dividends are subject to the General Assembly s approval. 46. Share-based Payments According to the Extraordinary General Assembly dated February 2, 2006, the Board of Directors was authorised to initiate a stock option plan and to issue, in accordance with Law 308/2001, up to 5,000,000 common shares of the Bank s capital. As part of the initial phase of the stock option plan, the Board of Directors resolved, on April 24, 2006, to grant 3,200,000 stock options. Furthermore, on April 26, 2006, the Board of Directors specified the names of the beneficiaries and the number of rights that will be granted to each, along with the related terms and conditions. On May 6, 2006, the Central Bank of Lebanon approved the share-based payment plan whereby the Bank can grant stock options to all or certain individuals specified in Article 3 of Law No. 308 dated April 3, As a result, the individuals referred to above were granted the right to subscribe in 3,200,000 common shares of the Bank s capital. These stock options are vested over a period of four years and upon completion of each year from the grant date. The Board of Directors can set certain growth targets to be achieved in its consolidated earnings per share for the options to be vested. The exercise price for each option was set at USD (USD after the stock split). The options are exercisable over a period of 2 years from the vesting date. The Board of Directors also resolved that the vesting of one-half of the granted options is not contingent on any conditions or target achievement. As such, these options become exercisable after specified periods of time, regardless of achieving any earnings thresholds. The other half will vest and become exercisable only if the Bank achieves certain growth targets in its adjusted consolidated earnings per share. For this purpose, the determination of the consolidated earnings per share will be based on the consolidated net income of the Group, less the amount paid in dividends in respect of preferred shares and adding back the expenses relating to the share-based payment plan. The growth in earnings per share is measured at each year in which these options vest against the earnings achieved at the end of the fiscal year preceding the grant date and was set at 10%, 20%, 30% and 40% to be achieved at year-end 2006, 2007, 2008, and 2009, respectively. At any vesting date, in case 50% of the targeted growth was achieved, 50% of the performance options will vest. In case 50% to 100% of the targeted growth was achieved, a proportionate percentage of performance options will vest. However, in case less than 50% of the targeted growth was achieved, then no stock options vest. The non-achievement of the target leads to rolling forward the vesting date to the next year. In case the targeted growth rates were not achieved by the end of the fourth year from the grant date, the remaining unvested options will be cancelled

80 Based on the above, the vested and exercised stock options are as follows: Date Vested Number of Stock Options April 26, ,394 April 26, ,765 April 26, ,667 April 26, 2010 (after the stock split) 6,929,340 The fair value of the options was determined at the grant date by using the Black-Scholes Model after taking into consideration the terms and conditions according to which these options were granted. The following table illustrates the model inputs used: Dividend yield 5% Expected volatility 12.1% Historical volatility 12.1% Weighted risk-free rate 5.7% Expected life of the option 4 years Fair value per share USD 39 The expected life of the option is based on historical data and is not necessarily indicative of the exercise patterns that may actually occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options grants were incorporated into the measurement of fair values. In its meeting dated May 10, 2007, the Board of Directors was notified that 218,424 options related to 100 beneficiaries were nullified. Furthermore, the Board of Directors resolved to grant 170,112 new stock options to 31 beneficiaries, in connection with the 5,000,000 stock-option plan. These stock options vest as follows: 90,000 stock options over a period of four years; 80,112 stock options over a period of three Date Exercised Number of Stock Options September 3, 2007 (136,069) July 8, 2008 (1,230,442) July 27, 2009 (220,848) October 1, 2010 (after the stock split) (11,717,760 ) July 27, (708,610) June 22, (309,260) years (50% during 2008; 25% during 2009 and 25% during 2010). The exercise price for each option was set at USD (USD after stock split). The options are exercisable over a period of 1 or 2 years from the vesting date. The Board of Directors also resolved that the vesting of one-half of the 90,000 granted options is not contingent on any condition or target achievement. As such, these options become exercisable after specified periods of time, regardless of achieving any earnings thresholds. The other half will vest and become exercisable only if the Group achieves certain growth targets in its adjusted consolidated earnings per share against the adjusted earnings per share for the Group s fiscal year immediately preceding the date of grant (2006). Regarding the 80,112 granted options, the Board of Directors resolved that the vesting of 62.5% of these options is not contingent on any conditions or target achievement; whereas the remaining 37.5% is related to the Group s achievement of certain growth targets in its adjusted consolidated earnings per share on each year during the vesting period, against the adjusted earnings per share for the Group s fiscal year ending on December 31, Based on the above, the vested and exercised stock options are as follows: Targets were set as follows: 90,000 stock options: The growth in earnings per share is measured at each year in which these options vest against the earnings achieved at the end of the fiscal year preceding the grant date (2006) and was set at 10%, 20%, 30% and 40% to be achieved at year-end 2007, 2008, 2009, and 2010, respectively. 80,112 stock options: The growth in earnings per share is measured at each year in which these options vest against the earnings achieved at the end of the fiscal year 2005 and was set at 20%, 30% and 40% to be achieved at year-end 2007, 2008, and 2009, respectively. At any vesting date, in case 50% to 100% of the target was achieved, then a proportionate percentage of performance options will vest. However, in case less than 50% of the targeted growth was achieved, then no performance options vest. The non-achievement of the target leads to rolling forward the vesting date to the next year. In case the targeted growth rates were not achieved by the end of the last year, the remaining unvested performance options will be cancelled. The fair value of the options was determined by using the Black-Scholes Model after taking into consideration the terms and conditions according to which these options were granted. The following table illustrates the model inputs used: Dividend yield 3.96% Expected volatility 20% Historical volatility 20% Weighted risk-free rate 5.7% Expected life of the option 3 or 4 years Fair value per share USD 53 The expected life of the option is based on historical data and is not necessarily indicative of exercise patterns that may actually occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of options grants were incorporated into the measurement of fair values. The cost of share-based payments amounted to LBP 40 million for the year ended December 31,. This cost was accounted for under Personnel Expenses in the Consolidated Income Statement and under Reserve for Share-based Payments in Shareholders Equity (Note 13). The following table illustrates the movement in share-based payments reserve for the year ended December 31: Vested Exercised Date Number of Stock Options Date Number of Stock Options April 26, ,960 April 26, ,258 April 26, 2010 (after the stock split) 346,860 July 8, 2008 (56,638) July 27, 2009 (8,704) October 1, 2010 (after the stock split) (599,700) July 25, (254,220)

81 The following table illustrates the movement in stock options granted for the year ended December 31: 47. Treasury Shares Balance at January ,308 Cost of share-based payments (Note 13) - 40 Less: Stock options nullified (unrealised) Stock options exercised 480 1,665 Balance at December Number of Stock Options Weighted Average Price USD Number of Stock Options Weighted Average Price USD Number of shares at January 1 363, ,387, Stock options nullified (unrealised) (54,400) 2.72 (60,680) 2.86 Stock options exercised (Note 41) (309,260) 2.72 (962,830) 3.07 Number of shares at December , Number of GDRs Cost Balance at January 1 8,497, ,912 Purchase of Treasury shares 8,364,532 75,213 Sale of Treasury shares (14,964,396) (158,880) Balance at December 31 1,897,535 20, Other Components of Equity Reserve for Real Estate Revaluation Reserve for Real Estate Revaluation Cumulative Changes in Fair Value Foreign Currency Translation Reserve Balance at January 1, 20,375 87,228 (86,547) 21,056 Other comprehensive income - (4,054) (129,732) (133,786) Entities deconsolidated during the year Non-controlling interest share of reserves ,680 43,810 Transfers between reserves - 3,226 (1,305) 1,921 Balance at December 31, 20,375 86,805 (173,759) (66,579) Reserve for Real Estate Revaluation Cumulative Changes in Fair Value Foreign Currency Translation Reserve Balance at January 1, 18, ,524 (40,310) 195,814 Effect of IFRS 9 early adoption - (101,875) - (101,875) Other comprehensive income - (29,713) (46,237) (75,950) Entities deconsolidated during the year - 1,140-1,140 Non-controlling interest share of reserves (544) (131) - (675) Transfers between reserves 2, ,602 Balance at December 31, 20,375 87,228 (86,547) 21,056 Cumulative Changes in Fair Value Number of GDRs Cost Balance at January 1 2,891,629 37,163 Purchase of Treasury shares 6,674,434 80,054 Sale of Treasury shares (1,068,664) (13,305) Balance at December 31 8,497, ,912 During the year 1995, the Bank revalued certain real estate properties based on the provisions of Law No. 282 dated December 30, 1993 and Decree No dated July 26, The revaluation differences amounted to LBP 16,600 million. Another LBP 2,000 million relate to the revaluation of some of the Bank s assets in 1994 and LBP 2,319 is due to the reclassification of real estate revaluation differences made during by the National Bank of Sudan. The cumulative changes as at December 31, represent the fair value differences from the revaluation of financial assets measured at fair value through other comprehensive income. The movement of the cumulative changes in fair value is as follows:

82 49. Non-controlling Interest Change in Fair Value Deferred Tax Net Balance at January 1, 87,522 (294) 87,228 Other comprehensive income 5,613 (9,667) (4,054) Entities deconsolidated during the year Non-controlling interest share of reserves Transfers between reserves 3,226-3,226 Balance at December 31, 96,766 (9,961) 86,805 Balance at January 1, 235,466 (17,942) 217,524 Effect of IFRS 9 early adoption (119,755) 17,880 (101,875) Other comprehensive income (29,481) (232) (29,713) Entities deconsolidated during the year 1,140-1,140 Non-controlling interest share of reserves (131) - (131) Transfers between reserves Balance at December 31, 87,522 (294) 87, Fair Value of Financial Instruments The following describes the methodologies and assumptions used to determine the fair values of the financial instruments which are not recorded at fair value in the financial statements. Assets for Which Fair Value Approximates Carrying Value For financial assets and financial liabilities that are liquid or have a short-term maturity (less than three months), the Group assumed that the carrying values approximate the fair values. This assumption is also applied to demand deposits which have no specific maturity and financial instruments with variable rates. Fixed Rate Financial Instruments for similar financial instruments. The estimated fair value of fixed interest-bearing deposits is based on discounted cash flows using prevailing market interest rates for debts with similar credit risk and maturity. The fair value of quoted debt instruments is determined based on quoted market prices. For those debt instruments where quoted market prices are not available, a discounted cash flow model is used with the discount rate being the current market yield to maturity. Fair Value of Loans and Advances In order to compute the fair value of loans and advances to customers, the Group considers that these loans will mature in principal and interest at the first day in which interest is repriced. These future cash flows have been discounted using the appropriate benchmark rate at the statement of financial position date for the remaining term to maturity plus the appropriate risk premium of the customer. 50. Cash and Cash Equivalents Capital 118, ,141 Capital reserves 21,380 16,935 Retained earnings 6,781 12,461 Profit for the year 13,552 6,312 Other components of equity (63,488) (19,677) 96, ,172 Cash and balances with central banks 2,160,406 1,576,501 Due from banks and financial institutions 4,025,200 4,317,250 Loans to banks and financial institutions and reverse repurchase agreements 819,808 46,145 Due to banks and financial institutions (731,465) (640,156) Due to banks under repurchase agreements (681,487) - 5,592,462 5,299,740 The fair value of fixed rate financial assets and liabilities carried at amortised cost is estimated by comparing market interest rates when they were first recognised with current market rates offered The fair value of financial instruments that are carried at amortised cost as of December 31, is as follows: Fair Value Book Value Unrealised Gain (Loss) Financial assets Cash and balances with central banks 9,462,172 9,462,380 (208) Due from banks and financial institutions 4,281,096 4,280, Loans to banks and financial institutions and reverse repurchase agreements 1,060,265 1,060,267 (2) Loans and advances to customers at amortised cost 15,497,755 15,416,403 81,352 Loans and advances to related parties at amortised cost 305, , Financial assets at amortised cost 14,694,614 14,549, ,498 45,300,942 45,073, ,287 Financial liabilities Due to central banks 133, ,108 - Due to banks and financial institutions 1,171,265 1,171,174 (91) Due to banks under agreements 681, ,487 - Customers deposits at amortised cost 39,725,231 39,718,890 (6,341) Deposits from related parties at amortised cost 690, ,101 (1,249) 42,401,441 42,393,760 (7,681)

83 The breakdown by major class of financial assets is as follows: Fair Value Book Value Unrealised Gain (Loss) Net loans and advances to customers at amortised cost Corporate 9,610,690 9,574,321 36,369 SME 2,487,608 2,470,816 16,792 Retail and Personal Banking 3,266,118 3,237,924 28,194 Public sector 133, ,342 (3) 15,497,755 15,416,403 81,352 Net loans and advances to related parties at amortised cost Corporate 8,172 8,172 - SME 187, ,284 - Retail and Personal Banking 109, , , , Financial assets classified at amortised cost Lebanese sovereign and Central Bank 10,731,384 10,610, ,913 Other sovereign 2,811,325 2,791,510 19,815 Private sector and other securities 1,151,762 1,146,992 4,770 Loans related to other comprehensive income investments ,694,614 14,549, ,498 The breakdown by major class of financial assets is as follows: Fair Value Book Value Unrealised Gain (Loss) Net loans and advances to customers at amortised cost Corporate 7,852,715 7,824,283 28,432 SME 1,938,255 1,918,065 20,190 Retail and Personal Banking 2,791,676 2,770,893 20,783 Public sector 178, ,936-12,761,582 12,692,177 69,405 Net loans and advances to related parties at amortised cost Corporate 8,313 8, SME 170, ,242 - Retail and Personal Banking 85,499 85, , , Financial assets classified at amortised cost Lebanese sovereign and Central Bank 11,285,928 10,997, ,086 Other sovereign 2,163,162 2,209,587 (46,425) Private sector and other securities 1,098,658 1,099,731 (1,073) Loans related to other comprehensive income investments ,547,891 14,307, ,588 The fair value of financial instruments that are carried at amortised cost as of December 31, is as follows: The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable market data, either directly or indirectly. Fair Value Book Value Unrealised Gain (Loss) Financial assets Cash and balances with central banks 8,703,068 8,703,354 (286) Due from banks and financial institutions 4,549,159 4,562,602 (13,443) Loans to banks and financial institutions and reverse repurchase agreements 218, ,084 (778) Financial assets given as collateral 17,424 17,424 - Loans and advances to customers at amortised cost 12,761,582 12,692,177 69,405 Loans and advances to related parties at amortised cost 264, , Financial assets at amortised cost 14,547,891 14,307, ,588 41,061,484 40,765, ,874 Financial liabilities Due to central banks 133, ,394 (52) Due to banks and financial institutions 1,007,724 1,007,558 (166) Due to banks under repurchase agreements Customers deposits at amortised cost 37,097,811 37,097,210 (601) Deposits from related parties at amortised cost 285, ,297 (231) 38,524,509 38,523,459 (1,050) Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; The following table shows an analysis of financial instruments recorded at fair value by fair value hierarchy at December 31:

84 Level 1 Level 2 Financial assets Derivative financial assets 43,815 7,231 51,046 Financial assets at fair value through profit or loss Lebanese sovereign Central Bank s certificates of deposits ,676 11,268 Treasury bills - 124, ,843 Eurobonds 232, ,410 Other sovereign Eurobonds 1,615-1,615 Private sector and other securities Banks and financial institutions debt instruments 617 1,787 2,404 Corporate debt instruments 10, ,340 Loans and advances to customers at amortised cost - 75,555 75,555 Investment and mutual funds 30,810 18,200 49,010 Equity instruments 3,212-3, , , ,657 Financial assets designated at fair value through other comprehensive income Private sector and other securities Equity instruments 4, , ,793 4, , ,793 Financial liabilitites Derivative financial liabilities 51,462 4,580 56,042 Level 1 Level 2 Financial assets Derivative financial assets 59,069 23,140 82,209 Financial assets at fair value through profit or loss Lebanese sovereign Treasury bills , ,941 Eurobonds 158, ,999 Other sovereign Eurobonds Private sector and other securities Banks and financial institutions debt instruments 88,758 44, ,522 Corporate debt instruments 15,520-15,520 Structured products 1, ,882 Investment and mutual funds 30,878 17,775 48,653 Equity instruments 3,087-3, , , , Contingent Liabilities, Commitments and Leasing Arrangements Credit-related Commitments and Contingent Liabilities To meet the financial needs of customers, the Group enters into various commitments, guarantees and other contingent liabilities, which are mainly credit-related instruments including both financial and non-financial guarantees and commitments to extend credit. Even though these obligations may not be recognised on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group. The table below discloses the nominal principal amounts of credit-related commitments and contingent liabilities. Nominal principal amounts represent the amount at risk should the contracts be fully drawn upon and clients default. As a significant portion of guarantees and commitments is expected to expire without being withdrawn, the total of the nominal principal amount is not indicative of future liquidity requirements. Banks Customers Guarantees and contingent liabilities Financial guarantees 314,140 1,099,601 1,413,741 Other guarantees 76, , , ,904 1,921,292 2,312,196 Commitments Documentary credits - 353, ,763 Undrawn credit lines - 3,508,070 3,508,070-3,861,833 3,861,833 Banks Customers Guarantees and contingent liabilities Financial guarantees 274,500 1,359,604 1,634,104 Other guarantees 144, ,998 1,039, ,780 2,254,602 2,673,382 Commitments Documentary credits - 387, ,781 Undrawn credit lines - 3,527,229 3,527,229-3,915,010 3,915,010 Financial assets designated at fair value through other comprehensive income Private sector and other securities Equity instruments 5, , ,984 5, , ,984 Financial liabilitites Derivative financial liabilities 51,248 6,999 58,247 The Group did not transfer any amount between Level 1 and Level 2 during the year ended December 31,. Guarantees Guarantees are given as security to support the performance of a customer to third parties. The main types of guarantees provided are: Financial guarantees given to banks and financial institutions on behalf of customers to secure loans, overdrafts, and other banking facilities; and Other guarantees are contracts that have similar factures to the financial guarantee contracts but fail to meet the strict definition of a financial guarantee contract under IFRS. These mainly include performance and tender guarantees

85 Documentary Credits Documentary credits commit the Group to make payments to third parties, on production of documents, which are usually reimbursed immediately by customers. Undrawn Credit Lines Undrawn credit lines and other commitments to lend are agreements to lend a customer in the future, subject to certain conditions. Such commitments are either made for a fixed period, or have no specific maturity, but are cancellable by the lender subject to notice requirements. Legal Claims Litigation is a common occurrence in the banking industry due to the nature of the business. The Group has an established protocol for dealing with such legal claims. Once professional advice has been obtained and the amount of damages reasonably estimated, the Group makes adjustments to account for any adverse effects which the claims may have on its financial standing. At year-end, the Group had several unresolved legal claims. Based on advice from legal counsel, Management believes that legal claims will not result in any material financial loss to the Group. Operating Lease and Capital Expenditure Commitments Capital expenditure commitments 13,421 13,247 Operating lease commitments Group as lessee 50,838 63,774 Within one year 12,663 12,446 One to five years 32,617 41,900 More than five years 5,558 9,428 64,259 77,021 Commitments Resulting from Credit Facilities The Bank has the following commitments resulting from the credit facilities received from non-resident financial institutions: The net past due loans (after the deduction of provisions) should not exceed 5 percent of the net credit facilities granted; The provision for past due loans which includes specific and collective provisions and unrealised interest should not fall below 70 percent of the past due loans; The net doubtful loans should not exceed 20 percent of the Tier 1 capital; Sustaining a liquidity ratio exceeding 115 percent; Sustaining a capital adequacy exceeding the minimum ratio as per the regulations applied by the Central Bank of Lebanon and the requirements of the Basel agreements to the extent it is applied by the Central Bank of Lebanon. Other Commitments and Contingencies Financial assets at amortised cost include Lebanese government Treasury bills amounting to LBP 133,714 million (: same) pledged to the Central Bank of Lebanon against credit facilities. They also include Jordanian and Egyptian Treasury bills amounting to LBP 695,139 million pledged against repurchase agreements (Note 35). The Extraordinary General Assembly, in its meeting held on June 22,, decided to acquire 29,500 shares in Dawra Real Estate Company sal representing 98.33% of its total shares for the amount of USD 3 million. The sale contract was signed on November 5, with LIA Insurance sal. The Bank obtained the approval for the purchase transaction from the Central Bank of Lebanon on January 29,

86 The Board of Directors of the Bank decided, in its meeting held on August 22,, to acquire 30% of Elite Insurance and Reinsurance Brokers for an amount not exceeding USD 4.5 million. The Bank obtained the approval of the purchase transaction from the Central Bank of Lebanon on November 20,. The investment transaction is pending on the approval of the Saudi regulatory authorities. The Bank s books in Lebanon remain subject to the review of the tax authorities for the period from January 1, 2008 to December 31, and the review of the National Social Security Fund (NSSF) for the period from September 30, to December 31,. In addition, the subsidiaries books and records are subject to review by the tax and social security authorities in the countries in which they operate. Management believes that adequate provisions were recorded against possible review results to the extent that they can be reliably estimated. During, Syria, one of the significant credit markets of the Group, witnessed a period of political and civil unrest, together with adverse events which can affect the economic environment of future periods. As part of its collective provisioning process, Management performed a stress test on the loan portfolio exposed to the Syrian market risks and, as a result, the necessary provisions were booked. The Group s Management continues to monitor its loan portfolio and evaluate the impact of these events during. 53. Assets under Management Assets under management include client assets managed or deposited with the Group. For the most part, the clients decide how these assets are to be invested. Related-party balances included in the Group s Income Statement are as follows for the year ended December 31: Subsidiaries Loans and advances 304, ,666 Of which: granted to key Management personnel 33,207 17,431 Indirect facilities 3,957 2,807 Deposits 467,122 63,319 Cash collateral received against loans 221, ,978 Interest income on loans 19,902 17,132 Interest expense on deposits 26,117 10,592 Assets under management 11,274,636 10,522, 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 operation decisions, or one other party controls both. The definition includes subsidiaries, associates, key Management personnel and their close family members, as well as entities controlled or jointly controlled by them. Key Management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. At the level of the Group, key Management personnel includes the Chairman of the Board and members of the Group Executive Committee. Loans to related parties (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with others, and (c) did not involve more than a normal risk of collectability or present other unfavourable features. Related-party balances included in the Group s Statement of Financial Position are as follows as of December 31: Transactions between the Bank and its subsidiaries meet the definition of related-party transactions. However, where these are eliminated on consolidation, they are not disclosed in the Group s financial statements. The following table shows information related to the significant subsidiaries of the Bank. Percentage of Ownership Country of Principal Functional Incorporation Activity Currency Bank Audi Saradar France sa % % France Banking (Commercial) EUR Audi Saradar Investment Bank sal (ASIB) % % Lebanon Banking (Investment) LBP Audi Saradar Private Bank sal (ASPB) % % Lebanon Banking (Private) LBP Banque Audi (Suisse) sa % % Switzerland Banking (Private) CHF Bank Audi Syria sa* 47.00% 47.00% Syria Banking (Commercial) SYP National Bank of Sudan 76.56% 76.56% Sudan Banking (Commercial) SDD Bank Audi sae (Egypt) % % Egypt Banking (Commercial) EGP Audi Capital (KSA) 99.99% 99.99% Saudi Arabia Financial services SAR Bank Audi LLC Qatar % % Qatar Banking services USD Société Libanaise de Factoring sal 90.85% 91.00% Lebanon Factoring LBP Odeabank sa % - Turkey Banking (Commercial) TRY LIA Insurance sal % Lebanon Insurance LBP Infi Gamma Holding sal 99.97% 99.97% Lebanon Investment USD * Bank Audi sal - Audi Saradar Group established Bank Audi Syria sa, signed a technical assistance agreement, and retained de facto control over it

87 Associates The Group provides banking services to its associates and to entities under common directorships. As such, loans, overdrafts, interest and non-interest bearing deposits and current accounts are provided to these entities, as well as other services. These transactions are conducted on the same terms as third-party transactions. Summarised financial information for the Group s associates is set out in Note 28 to these financial statements. Interest income on loans Short-term benefits comprise of salaries, bonuses, profit-sharing, attendance fees and other benefits. During, key Management personnel exercised 225,350 options. granted to associates amounted to LBP 920 million (: LBP 231 million). Key Management Personnel remuneration awarded to key Management personnel represents the awards made to individuals that have been approved by the Board Remuneration Committee as part of the latest pay round decisions. Figures are provided for the period that individuals met the definition of key Management personnel. Short-term benefits 43,703 42,702 Post-employment benefits Risk Management As a growing financial institution with operations on three continents, the Group is faced with a constantly changing array of business risks, some of which are: Credit risk: the risk of default or deterioration in the ability of a borrower to repay a loan. Market risk: the risk of loss in balance sheet and off-balance sheet positions arising from movements in market prices. Movements in market prices include changes in interest rates (including credit spreads), exchange rates and equity prices. Liquidity risk: the risk that the Bank cannot meet its financial obligations when they come due in a timely manner and at reasonable cost. Operational risk: the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Other risks faced by the Group include concentration risk, reputation risk, legal risk and business/ strategic risk. Risks are managed through a process of ongoing identification, measurement and monitoring, mitigating and control, while being subject to risk limits and procedural controls. Risk management is important for the continuous profitability and solvency of the Group, and every employee is tasked with the prudent management of risks within the parameters of his or her responsibilities. Governance Board of Directors The Board of Directors (the Board) is ultimately responsible for identifying and setting the level of tolerable risks to which the Group is exposed, and as such, defines the risk appetite for the Group. In addition, the Board approves policies and procedures related to all types of risks. Periodic reporting is made to the Board on existing and emerging risks in the Group. A number of Management committees and departments are also responsible for various levels of risk management, as set out below. Board Group Risk Committee The role of the Board s Group Risk Committee (BGRC) is to oversee the risk management framework and assess its effectiveness, review and recommend to the Board the group risk policies and risk appetite, monitor the group risk profile, review stress tests scenarios and results, and provide access for the Group Chief Risk Officer (CRO) to the Board. The members of the BGRC are the Group Chief Financial Officer and Strategy Director (CFO) and two Nonexecutive Directors. The BGRC meets at least every quarter in the presence of the CRO. Executive Committee The mandate of the Group Executive Committee is to support the Board in the implementation of its strategy, to support the Group CEO in the day-to-day management of the Group, and to develop and implement business policies for the Group and issue guidance for the Group within the strategy approved by the Board. The Executive Committee is involved in drafting and submitting to the Board the risk policy and risk tolerances and appetite. Executive Committee members include the Group CEO, Group Chief Risk Officer (CRO), Group CFO & Strategy Director and a number of Board members and Senior Managers. Asset Liability Committee The Asset Liability Committee (ALCO) is a Management committee responsible in part for managing market risk exposures, liquidity, funding needs and contingencies. It is the responsibility of this committee to set up strategies for managing market risk exposures and ensuring that Treasury implements those strategies so that exposures are managed within approved limits and in a manner consistent with the risk policy and limits approved by the Board. Internal Audit All risk management processes are independently audited by the Internal Audit department at least annually. This includes the examination of both the adequacy and effectiveness of risk control procedures. Internal Audit discusses the results of its assessments with Management and reports its findings and recommendations to the Audit Committee of the Board. Group Risk Division The Group Risk Division (GRD) is a function independent of business lines and headed by the Group s CRO. The Division has the responsibility to ensure that risks are properly identified, measured, monitored, and reported to heads of business lines, Senior Management, ALCO, the Board Group Risk Committee and the Board. In addition, GRD works closely with Senior Management to assist in ensuring proper controls are set up in order to mitigate various operational risks. GRD has the responsibility to set policies and procedures at the Group level for its final adoption at each entity within the Group. In addition, GRD is in charge of monitoring risks across the Group and aggregating such risks. From time to time, GRD provides technical support for the various entities within the Group in their effort to develop the local risk function within the parameters set at the Group level. Local Risk Management Functions Local risk management functions vary in size depending on local needs and any additional need in human resources is met by GRD. The roles of local risk managers are to comply with GRD policies, to assess risks using a blend of methodologies developed at the Group level and others sometimes more attuned to their local circumstances, to provide an independent opinion on risks, to report on them to their Senior Management and to their Board of Directors, and to adapt to local needs and regulations. Risk Monitoring and Control The primary drivers behind monitoring and controlling risks are the Risk Appetite and Limits established by the Board. These limits reflect the business strategy and market environment of the Group, as well as the level of risks that the Group is willing to tolerate. Risk Appetite and Limits are formalised in a document which is reviewed by the Executive Committee and the Board Group Risk Committee and approved by the Board. The Risk Appetite and Limits comprise limits to various types of risk which the Bank is exposed to. Information independently compiled from all business lines and risk-taking units is examined and processed in order to identify and measure the risk profile. The results are reported and presented on a regular basis to Management and to the Board

88 56. Credit Risk Credit risk is the risk that the Group will incur a loss because its customers or counterparties fail to discharge their contractual obligations. Credit risk appetites and strategies are set at the Group level by the Board and are communicated to Senior Management, which, in turn, formulates credit policies and procedures in line with these strategies. These policies are approved by the Executive Committee and the Board and are reviewed on an annual basis. Credit Limits The Group controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentration, and by monitoring exposures in relation to such limits. These limits are set for the following classes of assets: Financial Institutions Percentage floors and absolute limits are set on the Group s deposits that should be placed with highly-rated financial institutions. Sovereign Exposure and Other Financial Instruments Limits are placed on sovereign exposures and other financial instruments according to ratings of the instruments and risk appetite of the Group as determined by the Board mainly for foreign currency-denominated issues. Loans and Advances to Customers Initiation Initiation of the credit facilities is done by the business originating function which is shared between branches and the Corporate and Commercial departments. Analysis Credit analysis is performed within the business originating function and is reviewed independently by the Credit Risk Management department, which, in turn, prepares a written opinion about the credit facilities and submits it to the respective credit committees. Approval Credit committees are exclusively responsible for the approval of facilities per obligor and geographical entity up to the limit assigned to them. The Group has various levels of credit-approving authorities, depending on the nature and limit of the requested facilities, namely: The Board of Directors; The Executive Committee; Other credit committees, depending on the limit and region. Once approved by the Credit Committee, facilities are disbursed when all requirements set by the respective committee are met and documents intended as security are reviewed and verified by the Credit Administration function. Monitoring department which is responsible for formulating a workout strategy, in coordination with the Legal and Compliance department. Credit committees are responsible for approving these workout strategies. Provisioning Policy In the normal course of business, some loans may become unrecoverable. Such loans would then be required to be partially or fully written off, after taking into consideration the following guidelines: a) The loan is written off with proper approval when: All efforts to recover the bad debt have failed; The borrower s bankruptcy or inability to repay is established; Legal remedies have proved to be futile and/or cost prohibitive. b) Requests for write-offs are to be submitted to the Remedial Committee for approval. Approved write-offs are notified to the Executive Committee and then to the Board. As part of the conservative approach to sustain the quality of the Group s loan portfolio, an evaluation of loan loss provisions is made on a quarterly basis. As such, all adversely classified accounts are reviewed on a quarterly basis (earlier if need be) and the Recovery and Restructuring department makes recommendations for specific provisions against the accounts. These recommendations are submitted to the Remedial Committee for approval before they are implemented. In this regard, mainly for tax reasons, specific approval from the regulatory authority might be necessary depending on the regulatory environment of the concerned entity. Management of Risk Concentration Credit concentrations arise when a number of counterparties are engaged in similar business activities in the same geographic region or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political and other conditions. Concentrations indicate the relative sensitivity of the Group s performance to developments affecting a particular industry or geographical location. Similarly for liquidity, concentration is measured with respect to the source and type of funding. In order to avoid excessive concentrations of risk, the Group s Risk Appetite and Limits document includes specific guidelines and limits to maintain a diversified funding and portfolio, including Board-approved measures in line with the pillar two requirements. Credit-related Commitments Risks The Group makes available to its customers guarantees which may require payments on their behalf. Such payments are collected from customers based on the terms of the letter of credit. They expose the Group to risks similar to loans and these are mitigated by the same control processes and policies. Where financial instruments are recorded at fair value, the amounts shown below 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. The Group sets limits per country, economic sector, tenor of the loan, rating, and group of obligors among others in order to avoid significant risk concentrations. Credit Granting and Monitoring Processes The Group has set clearly established processes related to loan origination, documentation and maintenance of extensions of credits. The Group maintains continuous monitoring in the quality of its portfolio. Timely reports are sent to the Executive Committee and to the Board detailing credit risk profile including Group follow-up accounts, large exposures, risk ratings and concentration by industry, geography and group of obligors. Recovery and Restructuring The Group assesses impaired loans by evaluating the exposure to loss on a case by case basis. They are directly managed by the Recovery and Restructuring Besides, impairment is assessed on a collective basis for loans that are not individually impaired. Derivative Financial Instruments Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the statement of financial position. In the case of credit derivatives, the Group is also exposed to or protected from the risk of default of the underlying entity referred by the derivative

89 Analysis to Maximum Exposure to Credit Risk and Collateral and Other Credit Enhancements The following table shows the maximum exposure to credit risk by class of financial asset. It further shows the total fair value of collateral, capped to the maximum exposure to which it relates and the net exposure to credit risk. Maximum Exposure Cash Collateral and Margins Securities Guarantees Received from Banks and Financial Institutions Cash and balances with central banks 9,213, ,213,033 Due from banks and financial institutions 4,280, , ,279,829 Loans to banks and financial institutions and reverse repurchase agreements 1,060, , ,801 Derivative financial instruments 48, ,707 Financial assets at fair value through profit or loss 458, ,435 Loans and advances to customers at amortised cost 15,416,403 2,593,801 1,750, ,700 2,919, ,665 13,727 7,119,326 Corporate 9,574,321 1,184,225 1,491, ,781 1,400, , ,826,362 SME 2,470, ,548 20,226 82, , ,354 13,109 1,323,008 Retail and Personal Banking 3,237, , ,522 7,794 1,120, , ,614 Public sector 133, ,342 Loans and advances to related parties at amortised cost 304, , ,705 1,314-47,288 Debtors by acceptances 182,715 17, ,378 9, ,253 Financial assets at amortised cost 14,549, ,463,553 13,085,563 Contingent liabilities 1,767, ,060 9,507 35,712 86,694 3, ,441,222 Letters of credit 353,763 52, ,260 2, ,577 Letters of guarantee given to banks and financial institutions 314,140 43,586-13, ,705 Letters of guarantee given to customers 1,099,601 95,166 9,507 21,773 78, ,940 47,281,669 3,024,723 2,546, ,037 3,047, ,234 1,477,284 36,114,457 Guarantees received from banks, financial institutions and customers Utilised collateral 3,024,723 2,546, ,037 3,047, ,234-9,689,928 Surplus of collateral before undrawn credit lines 628, ,724 53, ,893 1,905,166-3,838,067 3,653,105 3,166, ,939 3,678,224 2,582,400-13,527,995 Real Estate Other Guarantees Netting Agreements Net Credit Exposure The surplus of collateral mentioned above is presented before offsetting additional credit commitments given to customers amounting to LBP 3,508,070 million as at December 31,

90 Maximum Exposure Cash Collateral and Margins Securities Guarantees Received from Banks and Financial Institutions Cash and balances with central banks 8,425, ,425,244 Due from banks and financial institutions 4,562, ,562,602 Loans to banks and financial institutions and reverse repurchase agreements 219, ,084 Financial assets given as collateral 17, ,424 Derivative financial instruments 76, ,573 Financial assets at fair value through profit or loss 772, ,186 Loans and advances to customers at amortised cost 12,692,177 2,208,033 1,529, ,858 2,362, ,451 4,611 5,471,161 Corporate loans 7,824, ,174 1,257, ,830 1,008, , ,865,163 SME loans 1,918, ,184 76,638 66, , ,639 2, ,772 Retail loans and Personal Banking 2,770, , ,914 15, ,701 77,890 2, ,290 Public sector 178, ,936 Loans and advances to related parties at amortised cost 263, , , ,126 Debtors by acceptances 280,819 30,361 1,110 34,261 17,499 4, ,613 Financial assets at amortised cost 14,307, ,657,474 12,649,829 Contingent liabilities 2,021, ,077 7,748 27,842 18, , ,493,414 Letters of credit 387,781 81, ,692 15, ,732 Letters of guarantee given to banks and financial institutions 274,500 52,492-3, ,907 Letters of guarantee given to customers 1,359, ,845 6,973 24,354 13, , ,775 43,638,963 2,803,449 1,538, ,349 2,414, ,711 1,662,185 33,905,256 Guarantees received from banks, financial institutions and customers Utilised collateral 2,803,449 1,538, ,349 2,414, ,711-8,071,522 Surplus of collateral before undrawn credit lines 500, ,153 61, ,614 2,177,599-4,284,671 3,304,157 2,228, ,946 3,268,981 3,041,310-12,356,193 Real Estate Other Guarantees Netting Agreements Net Credit Exposure The surplus of collateral mentioned above is presented before offsetting additional credit commitments given to customers amounting to LBP 3,527,229 million as at December 31,

91 Analysis to Maximum Exposure to Credit Risk and Collateral and Other Credit Enhancements Collateral and Other Credit Enhancements The amount and type of collateral required depend on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses. The main types of collateral obtained are as follows: Securities: the balances shown above represent the fair value of the securities. Letters of Credit/Guarantees: the Group holds, in some cases, guarantees, letters of credit and similar instruments from banks and financial institutions which enable it to claim settlement in the event of default on the part of the counterparty. The balances shown represent the notional amount of these types of guarantees held by the Group. Real Estate (Commercial and Residential): the Group holds, in some cases, a first degree mortgage over residential property (for housing loans) and commercial property (for commercial loans). The value shown above reflects the fair value of the property limited to the related mortgaged amount. Netting Agreements: the Group makes use of netting agreements where there is a legally enforceable right to offset in the event of counterparty default, and where as a result there is a net exposure for credit risk. However, there is no intention to settle these balances on a net basis under normal circumstances, and they do not qualify for offset. The amounts above represent available netting agreements in the event of default of the counterparty. This includes netting agreements for loans and advances to customers and financial assets at amortised cost. In addition, derivatives may also be settled net when there is a netting agreement in place, providing for this in the event of default, reducing the Group s exposure to counterparties on derivative asset positions. The reduction in risk is the amount of liability held. In addition to the above, the Group also obtains guarantees from parent companies for loans to their subsidiaries, personal guarantees for loans to companies owned by individuals, second degree mortgages, and assignments of insurance or bills proceeds and revenues, which are not reflected in the above table. Renegotiated Loans Restructuring activity aims to manage customer relationships, maximise collection opportunities and, if possible, avoid foreclosure or repossession. Such activities include extended payment arrangements, deferring foreclosure, modification, loan rewrites and/or deferral of payments pending a change in circumstances. Restructuring policies and practices are based on indicators or criteria which, in the judgment of local Management, indicate that repayment will probably continue. The application of these policies varies according to the nature of the market and the type of the facility. Corporate 181, ,264 SME 11,203 14,544 Retail and Personal Banking 1, , ,040 Credit Rating System The Group assesses the quality of its credit portfolio using the following credit rating methods: (i) External ratings from approved credit rating agencies for financial institutions, financial assets and large corporate borrowers; (ii) Expert-judgment models which take into consideration financial factors as well as non-financial factors such as observations on Management quality, operating environment and company standing. In addition to the existing corporate model, two SME models have been designed and rolled out in. The Bank has also initiated the design of a Project Finance model to complement the existing models and accurately rate and rank-order Project Finance obligors; (iii) Scorecards for retail borrowers which help in assessing their creditworthiness, evaluating potential risk, and reaching a final credit decision; (iv) Supervisory ratings, comprising six main categories: (a) Regular includes borrowers demonstrating good to excellent financial condition, risk factors, and capacity to repay. These loans demonstrate regular and timely payment of dues, adequacy of cash flows, timely presentation of financial statements, and sufficient collateral/guarantee when required; (b) Follow-up represents a lack of Neither Past Due nor Impaired documentation related to a borrower s activity, an inconsistency between facilities type and related conditions; (c) Follow-up and regularisation includes credit-worthy borrowers requiring close monitoring without being impaired. These loans might be showing weaknesses; insufficient or inadequate cash flows; highly leveraged; deterioration in economic sector or country where the facility is used; loan rescheduling more than once since initiation; or excess utilisation above limit; (d) Substandard loans include borrowers with incapacity to repay from identified cash flows. Also included under this category are loans where full repayments suppose the liquidation of assets/collateral or those with recurrent late payments and financial difficulties; (e) Doubtful loans where full repayment is questioned even after asset liquidation of collateral. It also includes loans stagnating for over 6 months and debtors who are unable to repay restructured loans; finally, (f) Bad loans with no or little expected inflows from business or assets. This category also includes borrowers who witness significant delays and are insolvent. Credit Quality The table below shows the credit quality by class of asset for all financial assets exposed to credit risk, based on the Group s internal credit rating system. The amounts presented are gross of impairment allowances. Past Due but not Impaired Past Due and Impaired Substandard Doubtful and Bad Cash and balances with central banks 9,213, ,213,033 Due from banks and financial institutions 4,280, ,281,976 Loans to banks and financial institutions and reverse repurchase agreements 1,060, ,060,267 Derivative financial instruments 48, ,707 Financial assets at fair value through profit or loss 458, ,435 Loans and advances to customers at amortised cost 15,072, ,484 17, ,234 15,918,330 Loans and advances to related parties at amortised cost 304, ,511 Financial assets at amortised cost 14,547, ,352 14,556,181 44,986, ,484 17, ,584 45,841,440 Loans and advances: Corporate 9,358, ,450 12, ,895 9,931,025 SME 2,639,902 28,772 1,761 20,629 2,691,064 Retail and Personal Banking 3,246, ,262 3,122 95,124 3,463,678 Public sector 132, , ,074 15,377, ,484 17, ,234 16,222,

92 Neither Past Due nor Impaired The aging analysis of past due but not impaired loans and advances to customers at amortised cost as at December 31 are as follows: Past Due but not Impaired Past Due and Impaired Substandard Doubtful and Bad Cash and balances with central banks 8,425, ,425,244 Due from banks and financial institutions 4,562, ,370 4,563,630 Loans to banks and financial institutions and reverse repurchase agreements 219, ,084 Financial assets given as collateral 17, ,424 Derivative financial instruments 76,573-76,573 Financial assets at fair value through profit or loss 771, ,333 Loans and advances to customers at amortised cost 12,248, , , ,401 13,160,155 Loans and advances to related parties at amortised cost 263, ,666 Financial assets at amortised cost 14,306, ,969 14,315,054 40,889, , , ,740 41,812,163 Loans and advances: Corporate 7,538, , , ,695 8,061,485 SME 2,052,885 43,687 2,348 77,063 2,175,983 Retail and Personal Banking 2,737, ,509 7, ,643 3,002,842 Public sector 183, ,511 12,511, , , ,401 13,423,821 Less than 30 Days 31 to 60 Days 61 to 90 Days More than 90 Days Corporate 32,992 76,609 6, , ,450 SME 3,701 8,190 1,527 15,354 28,772 Retail and Personal Banking 51,435 27,305 19,382 21, ,262 88, ,104 27, , ,484 The classification of loans and advances to customers and related parties at amortised cost as in accordance with the ratings of the Central Bank of Lebanon Circular 58 is as follows: Gross Balance Unrealised Interest Impairment Allowances Net Balance Regular 14,501, ,501,112 Follow-up 228, ,875 Follow-up and regularisation 1,037, ,037,870 Substandard 17,750 (1,835) - 15,915 Doubtful 220,530 (28,388) (112,097) 80,045 Bad 216,704 (29,961) (162,994) 23,749 16,222,841 (60,184) (275,091) 15,887,566 Collective impairment - - (166,652) (166,652) 16,222,841 (60,184) (441,743) 15,720,914 Gross Balance Unrealised Interest Impairment Allowances Net Balance Regular 11,903, ,903,653 Follow-up 154, ,795 Follow-up and regularisation 842, ,558 Substandard 133,414 (15,988) - 117,426 Doubtful 157,860 (30,070) (60,082) 67,708 Bad 231,541 (53,382) (156,933) 21,226 13,423,821 (99,440) (217,015) 13,107,366 Collective impairment - - (151,523) (151,523) 13,423,821 (99,440) (368,538) 12,955,843 Less than 30 Days 31 to 60 Days 61 to 90 Days More than 90 Days Corporate 58,246 51,204 23,734 79, ,114 SME 7,148 6,571 7,501 22,466 43,686 Retail and Personal Banking 73,651 23,988 19,911 14, , ,045 81,763 51, , ,

93 The classification of the Group's financial instruments and balances due from banks and financial institutions as per international ratings is as follows: AAA to AA- Sovereign and Central Banks A+ to BBB- BB+ to B- Unrated AAA to AA- A+ to BBB- Non-sovereign BB+ to B- Cash and balances with central banks 449, ,480 8,395,262 28,925 9,213, ,213,033 Due from banks and financial institutions ,180,968 2,624, , ,191 4,280,978 4,280,978 Loans to banks and financial institutions and reverse repurchase agreements ,480 91,185 76,602 1,060,267 1,060,267 Financial assets at fair value through profit or loss 1, , ,135 82,605 3,905 1, , ,435 Financial assets at amortised cost 146,431 79,124 13,142,614 33,813 13,401, , , ,797 35,982 1,147,134 14,549, , ,604 21,906,397 62,738 22,985,150 1,386,736 4,360, , ,777 6,576,679 29,561,829 Unrated Grand AAA to AA- Sovereign and Central Banks A+ to BBB- BB+ to B- Unrated AAA to AA- A+ to BBB- Non-sovereign BB+ to B- Cash and balances with central banks 309,977 19,632 8,095,636-8,425, ,425,245 Due from banks and financial institutions ,728,964 1,231, , ,048 4,562,602 4,562,602 Loans to banks and financial institutions and reverse repurchase agreements ,337 56,979 60, , ,084 Financial assets given as collateral , ,424 17,424 Financial assets at fair value through profit or loss , ,262 15, , , ,333 Financial assets at amortised cost 224,189 16,407 12,966,833-13,207, , , ,517 56,072 1,099,874 14,307, ,488 36,039 21,683,409-22,253,936 3,147,791 1,768, , ,337 6,049,055 28,302,991 Unrated Grand

94 The Group controls credit risk by setting credit limits on the amount of risk it is willing to accept by geographic location. The distribution of financial assets by geographic region as of December 31 is as follows: Lebanon Turkey MENA Europe North America Asia Rest of Africa Rest of the World Cash and balances with central banks 8,038, , , , ,462,380 Due from banks and financial institutions 226, , ,362 2,764, ,939 51,767-6,845 4,280,978 Loans to banks and financial institutions and reverse repurchase agreements 54, ,618-27, ,060,267 Derivative financial instruments 13, ,463 35, ,046 Financial assets at fair value through profit or loss 373,742-40,778 92,697 3, ,657 Loans and advances to customers at amortised cost 6,985,775 1,466,330 5,695, ,863 61,016 20, , ,357 15,416,403 Loans and advances to related parties at amortised cost 268,787-34,517 1, ,511 Debtors by acceptances 107,164-27,957 12,065 4,466 1,522 24,124 5, ,715 Financial assets at amortised cost 10,751,890 65,860 3,197, ,871 28, ,326-63,788 14,549,116 Financial assets at fair value through other comprehensive income 218,602-8,891 1,306 16, ,793 27,038,644 3,125,878 10,357,554 4,074, , , , ,850 46,063,866 Lebanon Turkey MENA Europe North America Asia Rest of Africa Rest of the World Cash and balances with central banks 7,319,870-1,051, , ,703,354 Due from banks and financial institutions 304, ,128 3,123, , , ,133 4,562,602 Loans to banks and financial institutions and reverse repurchase agreements 56,127 56,630 79,146 27, ,084 Financial assets given as collateral 8, , ,424 Derivative financial instruments 8,890-2,485 66, ,483 1,751 1,000 82,209 Financial assets at fair value through profit or loss 758,754-49,584 15, ,926 Loans and advances to customers at amortised cost 5,635,084-5,714, ,248 3,920 14, ,400 91,624 12,692,177 Loans and advances to related parties at amortised cost 228,752-34, ,666 Debtors by acceptances 114, ,269 1, ,304 8, ,819 Financial assets at amortised cost 11,119,357-2,560, , , ,682-18,831 14,307,303 Financial assets at fair value through other comprehensive income 186,972-13,199 1,142 9, , ,984 25,741,537 56,630 9,980,903 4,756, , , , ,821 42,176,

95 57. Market Risk Market risk is defined as the potential loss in both on-balance sheet and off-balance sheet positions resulting from movements in market risk factors such as foreign exchange rates, interest rates and equity prices. The Market Risk unit s responsibilities are to identify, measure, report, and monitor all potential and actual market risks to which the Group is exposed. The purpose is to introduce transparency around the Treasury, investment portfolio, and asset and liability risk profile through consistent and comprehensive risk measurements, aggregation, management and analysis. Policies are set and limits monitored in order to ensure the avoidance of large, unexpected losses and the consequent impact on the Group s safety and soundness. Tools developed in-house by a centralised unit of specialists offer a holistic view of risk exposures and are customised to meet the requirements of all end users (Group Risk, Senior Management, business lines and Legal Compliance). Stress scenarios now include the various manifestations of the credit crisis, such as increased volatilities and correlations, and widening of credit spreads. A. Currency Risk Foreign exchange (or currency) risk is the risk that the value of a portfolio will fall as a result of changes in foreign exchange rates. The major sources of this type of market risk are imperfect correlations in the movements of currency prices and fluctuations in interest rates. Therefore, exchange rates and relevant interest rates are acknowledged as distinct risk factors. The Central Bank of Lebanon allows the Bank to maintain a currency exchange position, receivable or payable, that does not exceed at any time 1% of total net equity on condition that the global currency exchange position does not exceed 40% of total net equity. This is subject to the Bank s commitment to comply in a timely and consistent manner with the required solvency rate. In addition to regulatory limits, the Board has set limits on positions by currency. These positions are monitored constantly to ensure they are maintained within established limits. The following tables present the breakdown of assets and liabilities by currency: LBP USD GBP EUR TRY Other Assets Cash and balances with central banks 2,042,183 5,329,506 4,942 1,027, , ,279 9,462,380 Due from banks and financial institutions 45,840 2,666, , , , ,532 4,280,978 Loans to banks and financial institutions and reverse repurchase agreements 53, ,069-78, ,087-1,060,267 Derivative financial instruments - 13,301 3,646 21,278 2,387 10,434 51,046 Financial assets at fair value through profit or loss 135, ,473-83,619-22, ,657 Loans and advances to customers at amortised cost 1,333,523 9,098, ,923 1,268, ,502 2,851,045 15,416,403 Loans and advances to related parties at amortised cost 27, , ,429-2, ,511 Debtors by acceptances - 128,111 1,320 44,042-9, ,715 Financial assets at amortised cost 6,252,800 5,417, ,955 65,860 2,626,849 14,549,116 Financial assets at fair value through other comprehensive income 52, ,260-9,483-7, ,793 Investments in associates 3,553 22, ,174 34,230 Non-current assets held for sale 1,738 44, ,706 50,054 Property and equipment 292, ,130 34, , ,710 Intangible fixed assets 28, ,147 14,964 5,012 49,600 Other assets 66,104 59, ,545 22,588 76, ,163 Goodwill - 54,715 - (463) - 168, ,846 assets 10,335,650 23,694, ,184 3,455,785 2,071,255 7,300,750 47,187,469 Liabilities and shareholders equity Due to central banks 133, ,108 Due to banks and financial institutions 17, ,118 2,135 81, ,493 1,171,174 Due to banks under repurchase agreements , ,487 Derivative financial instruments - 11,995 3,805 31,034-9,208 56,042 Customers deposits at amortised cost 7,998,960 21,596, ,718 3,118,954 1,801,847 4,815,953 39,718,890 Deposits from related parties at amortised cost 81, ,710 1,698 12,203-75, ,101 Engagements by acceptances - 128,111 1,320 44,042-9, ,715 Other liabilities 131, , ,383 20, , ,865 Provisions for risks and charges 61,943 4,627-1,238 11,818 15,470 95,096 Non-current liabilities held for sale , ,799 Shareholders equity 1,266,855 2,494,678-85, ,912 4,036,192 liabilities and shareholders equity 9,692,083 25,696, ,115 3,390,394 1,833,958 6,178,120 47,187,

96 The Group s Exposure to Currency Risk LBP USD The Group is subject to currency risk on financial assets and liabilities that are listed in currencies other than the Lebanese Pounds. Most of these financial assets and liabilities are listed in US Dollars or Euros. The table below shows the currencies to which the Group had significant exposure at December 31 on its non-trading monetary assets and liabilities and its forecast cash flows. The numbers represent the GBP EUR TRY Other Assets Cash and balances with central banks 1,499,579 5,316,465 3, ,600-1,090,207 8,703,354 Due from banks and financial institutions 25,740 2,730, ,054 1,011, ,952 4,562,602 Loans to banks and financial institutions and reverse repurchase agreements 55, ,946-43,829-4, ,084 Financial assets given as collateral - 17, ,424 Derivative financial instruments ,818 6,670 47,877-12,901 82,209 Financial assets at fair value through profit or loss 461, ,453 3,035 23,083-24, ,926 Loans and advances to customers at amortised cost 1,125,205 7,689, ,375 1,021,162-2,734,957 12,692,177 Loans and advances to related parties at amortised cost 31, , ,293-2, ,666 Debtors by acceptances - 198,578 1,329 66,436-14, ,819 Financial assets at amortised cost 6,181,869 5,613, ,833-2,071,165 14,307,303 Financial assets at fair value through other comprehensive income 11, , , ,984 Investments in associates 3,555 20, ,887 43,099 Non-current assets held for sale , ,246 26,379 Property and equipment 284,725 16,841-3, , ,550 Intangible fixed assets 5, ,319-5,824 13,508 Other assets 89, , ,465-83, ,171 Goodwill ,715-7, , ,431 assets 9,778,764 22,657, ,302 3,473,427-7,153,977 43,320,686 Liabilities and shareholders equity Due to central banks 133, ,394 Due to banks and financial institutions 30, ,892 13, , ,081 1,007,558 Derivative financial instruments - 9,478 7,669 31,287-9,812 58,246 Customers deposits at amortised cost 7,749,829 20,541, ,941 3,102,042-5,316,495 37,097,210 Deposits from related parties at amortised cost 30, ,835 1,395 5,236-85, ,297 Engagements by acceptances - 198,578 1,329 66,436-14, ,819 Other liabilities 133, , ,527-87, ,087 Provisions for risks and charges 52,687 8, ,085 72,925 Shareholders equity 1,863,211 1,137,909-74, ,878 3,553,150 liabilities and shareholders equity 9,993,763 23,352, ,675 3,396,841-6,165,676 43,320,686 effect of a reasonably possible movement of the currency rate against the Lebanese Pound, with all other variables held constant, first on the income statement (due to the potential change in fair value of currency sensitive non-trading monetary assets and liabilities) and equity (due to the impact of currency translation gains/losses of consolidated subsidiaries and the change in fair value of currency swaps used to hedge net investment in foreign subsidiaries). A negative amount reflects a potential net reduction in income or equity, while a positive amount reflects a net potential increase. Currency B. Interest Rate Risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair value of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate repricing of assets and liabilities. Positions are monitored on a daily basis by Management and, whenever possible, hedging strategies are used to ensure positions are maintained within established limits. Interest Rate Sensitivity Increase in Currency Rate % Effect on Profit Before Tax The table below shows the sensitivity of interest income and shareholders equity to reasonably possible parallel changes in interest rates, all other variables being held constant. The impact of interest rate changes on net interest income is due to assumed changes in interest paid and received on floating rate financial assets and liabilities, and to the reinvestment or refunding of fixed rated financial assets and liabilities at the Effect on Equity Effect on Profit Before Tax Effect on Equity USD 1% (1,579) 6,183 3,760 4,435 EUR 1% (61) 1,297 (1,575) 2,974 GBP 1% (75) (594) (1,104) (418) EGP 1% - 3,676-2,982 SYP 1% (814) 507 TRY 1% - 1, Change in Basis Points Increase assumed rates. The result includes the effect of hedging instruments and assets and liabilities held at December 31, and. The change in interest income is calculated over a 1-year period. The impact also incorporates the fact that some monetary items do not immediately respond to changes in interest rates and are not passed through in full, reflecting sticky interest rate behaviour. The pass-through rate and lag in response time are estimated based on historical statistical analysis and are reflected in the outcome. There is no direct effect for the change in interest rates on equity pursuant to the early adoption of IFRS9 in whereby no debt instruments can be classified at fair value through other comprehensive income. The effect of any future associated hedges made by the Group is not accounted for. The sensitivity of equity was calculated for an increase in basis points whereby a similar decrease has an equal and offsetting effect. Sensitivity of Net Interest Income Decrease Increase Decrease LBP ± 100 2,381 17,249 (30,187) 108 USD ± 50 11,151 (9,644) 17,169 2,350 EUR ± 25 1,581 (1,512) 740 (340)

97 The Group s interest sensitivity position based on contractual repricing arrangements is shown in the table below. The expected repricing and maturity dates may differ significantly from the contractual dates, particularly with regard to the maturity of customer demand deposits. Up to 1 Month 1 to 3 Months Assets Cash and balances with central banks 2,633,792 3,341,484 1,661,602 7,636,878 42,979 14,687 57,666 1,767,836 9,462,380 Due from banks and financial institutions 3,521,048 97,851 11,846 3,630, ,184 4,280,978 Loans to banks and financial institutions and reverse repurchase agreements 864,624 47, ,352 1,059, ,060,267 Derivative financial instruments 11,293 4,799 22,202 38,294 9, ,993 2,759 51,046 Financial assets at fair value through profit or loss 32,931 45,839 34, , , , ,060 55, ,657 Loans and advances to customers at amortised cost 3,455,179 4,492,166 3,562,551 11,509,896 2,895, ,391 3,738, ,583 15,416,403 Loans and advances to related parties at amortised cost 232,003 49,556 1, ,066 7,736 2,356 10,092 11, ,511 Debtors by acceptances 54,430 46,154 50, , , ,715 Financial assets at amortised cost 180, ,489 3,246,365 3,868,715 8,472,648 1,989,826 10,462, ,927 14,549,116 Financial assets at fair value through other comprehensive income , ,793 Investments in associates 18, , ,692 34,230 Non-current assets held for sale ,054 50,054 Property and equipment , ,710 Intangible fixed assets ,600 49,600 Other assets , ,163 Goodwill , ,846 assets 11,004,699 8,566,876 8,738,214 28,309,789 11,657,731 2,963,907 14,621,638 4,256,042 47,187,469 Liabilities and shareholders equity Due to central banks , , ,108 Due to banks and financial institutions 482, , ,876 1,077, ,321 1,171,174 Due to banks under repurchase agreements 392, , , ,487 Derivative financial instruments 10,438 7,871 26,121 44,430 9,357-9,357 2,255 56,042 Customers deposits at amortised cost 21,501,121 6,849,744 4,124,497 32,475, ,245 9, ,440 6,273,088 39,718,890 Deposits from related parties at amortised cost 182, ,166 11, , ,354 33, , , ,101 Engagements by acceptances 54,430 46,154 50, , , ,715 Other liabilities 85,884 1, , , ,865 Provisions for risks and charges ,096 95,096 Non-current liabilities held for sale ,799 14,799 Shareholders equity ,036,192 4,036,192 liabilities and shareholders equity 22,709,428 7,517,020 4,755,561 34,982,009 1,082,956 42,306 1,125,262 11,080,198 47,187,469 Interest rate sensitivity gap (11,704,729) 1,049,856 3,982,653 10,574,775 2,921,601 (6,824,156) Cumulative gap (11,704,729) (10,654,873) (6,672,220) 3,902,555 6,824,156-3 Months to 1 Year Less than 1 Year 1 to 5 Years Over 5 Years More than 1 Year Non-interest Bearing

98 Up to 1 Month 1 to 3 Months Assets Cash and balances with central banks 2,301,569 3,214,723 1,110,882 6,627, ,685 16, ,042 1,719,138 8,703,354 Due from banks and financial institutions 3,350, ,324 52,936 3,613,105 4, , ,059 4,562,602 Loans to banks and financial institutions and reverse repurchase agreements 85,247 26,159 78, , , ,084 Financials assets given as collateral 5,057 12,359-17, ,424 Derivative financial instruments 4,712 2,707 19,031 26, ,450 82,209 Financial assets at fair value through profit or loss , ,183 94, , ,657 63, ,926 Loans and advances to customers at amortised cost 1,920,182 4,398,110 2,144,476 8,462,768 2,605, ,046 3,180,817 1,048,592 12,692,177 Loans and advances to related parties at amortised cost 211,550 33,727 1, ,158 5,289 1,027 6,316 10, ,666 Debtors by acceptances 165,171 5,257 38, , , ,819 Financial assets at amortised cost 329, ,643 2,858,166 3,390,621 8,511,100 2,399,327 10,910,427 6,255 14,307,303 Financial assets at fair value through other comprehensive income , ,984 Investments in associates ,099 43,099 Non-current assets held for sale ,379 26,379 Property and equipment , ,550 Intangible fixed assets ,508 13,508 Other assets , ,171 Goodwill , ,431 assets 8,374,172 8,105,556 6,832,071 23,311,799 11,562,095 3,129,911 14,692,006 5,316,881 43,320,686 Liabilities and shareholders equity Due to central banks , , ,394 Due to banks and financial institutions 579,951 83, , , ,195 1,007,558 Derivative financial instruments 6, , ,247 58,246 Customers deposits at amortised cost 21,913,037 6,145,381 2,601,204 30,659, ,210 13, ,433 5,596,155 37,097,210 Deposits from related parties at amortised cost 181,527 12,468 42, , , ,297 Engagements by acceptances 161, , , , ,819 Other liabilities 84, , ,940 38, , , , ,087 Provisions for risks and charges ,925 72,925 Shareholders equity ,553,150 3,553,150 liabilities and shareholders equity 22,926,171 6,242,492 3,169,438 32,338, , ,591 1,036,523 9,946,062 43,320,686 Interest rate sensitivity gap (14,551,999) 1,863,064 3,662,633 10,695,163 2,960,320 (4,629,181) Cumulative gap (14,551,999) (12,688,935) (9,026,302) 1,668,861 4,629,181-3 Months to 1 Year Less than 1 Year 1 to 5 Years Over 5 Years More than 1 Year Non-interest Bearing

99 C. Prepayment Risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected, such as fixed rate mortgages when interest rates fall. Market risks that lead to prepayments are not material with respect to the markets where the Group operates. Accordingly, the Group considers prepayment risk on net profits as not material after considering any penalties arising from prepayments. D. Equity Price Risk Equity price risk is the risk that the value of a portfolio will fall as a result of a change in stock prices. Risk factors underlying this type of market risk are a whole range of various equity (and index) prices corresponding to different markets (and currencies/maturities) in which the Group holds equity-related positions. The Group sets tight limits on equity exposures and the types of equity instruments that traders are allowed to take positions in. Nevertheless, depending on the complexity of financial instruments, equity risk is measured in first cash terms, such as the market value of a stock/index position, and also in price sensitivities, such as sensitivity of the value of a portfolio to changes in the underlying asset price. These measures are applied to an individual position and/or to a portfolio of equities. 58. Liquidity Risk Liquidity risk is defined as the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Group might be unable to meet its payment obligations when they fall due under both normal and stress circumstances. To limit this risk, Management has arranged diversified funding sources in addition to its core deposit base, and adopted a policy of managing assets with liquidity in mind and of monitoring future cash flows and liquidity on a daily basis. The Group has developed internal control processes and contingency plans for managing liquidity risk. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Group maintains a portfolio of marketable and diverse assets that can be liquidated in the event of an unforeseen interruption of cash flow. In addition, the Group maintains statutory deposits with central banks. As per Lebanese banking regulations, the Bank must retain obligatory reserves with the Central Bank of Lebanon calculated on the basis of 25% of the sight deposits and 15% of term deposits denominated in Lebanese Pounds, in addition to interest-bearing placements equivalent to 15% of all deposits in foreign currencies, regardless of their nature. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to the market in general, and specifically to the Group. The Group maintains a solid ratio of highly liquid net assets in foreign currencies to deposits and commitments in foreign currencies, taking market conditions into consideration. Regulatory Ratios and Limits In accordance with the Central Bank of Lebanon circulars, the ratio of net liquid assets to deposits in foreign currencies should not be less than 10%. The net liquid assets consist of cash and all balances with the Central Bank of Lebanon (excluding reserve requirements), certificates of deposits issued by the Central Bank of Lebanon irrespective of their maturities and deposits due from other banks that mature within one year, less deposits due to the Central Bank of Lebanon and deposits due to banks that mature within one year. Deposits are composed of total customers deposits (excluding blocked accounts) and due from financial institutions, irrespective of their maturities, and all certificates of deposits and acceptances and other debt instruments issued by the Group and loans from the public sector that mature within one year. The Group stresses the importance of customers deposits as source of funds to finance its lending activities. This is monitored by using the advances to deposits ratio, which compares loans and advances to customers as a percentage of clients deposits. Year-end Maximum Minimum Average Analysis of Financial Assets and Liabilities by Remaining Contractual Maturities The table below summarises the maturity profile of the Group s financial assets and liabilities as of December 31 based on contractual undiscounted cash flows. The contractual maturities have been determined based on the period remaining to reach maturity as per the Less than 1 Month Loans to Deposits % % statement of financial position actual commitments. Repayments which are subject to notice are treated as if notice were to be given immediately. Concerning deposits, the Group expects that many customers will not request repayment on the earliest date the Group could be required to pay. The table does not reflect the expected cash flows indicated by the Group s deposit retention history. 1 to 3 Months 3 to 12 Months 1 to 5 Years Over 5 Years Financial assets: Cash and balances with central banks 3,371, ,231 1,213,563 3,667,931 2,369,729 10,844,044 Due from banks and financial institutions 4,223,885 88,754 11, ,324,422 Loans to banks and financial institutions and reverse repurchase agreements 816,257 3, ,438-80,391 1,087,646 Derivative financial instruments 16,140 4,564 20,395 9,947-51,046 Financial assets at fair value through profit or loss 115, , , , ,810 Loans and advances to customers at amortised cost 3,272,618 1,611,583 3,270,397 7,001, ,292 16,108,672 Loans and advances to related parties at amortised cost 251,225 33,927 9,419 6,842 5, ,488 Debtors by acceptances 64,971 57,498 55,450 4, ,715 Financial assets at amortised cost 1,034, ,221 4,362,753 9,585,939 2,144,651 17,476,147 financial assets 13,167,226 2,369,663 9,156,322 20,560,921 5,748,858 51,002,990 Financial liabilities: Due to central banks , ,820 Due to banks and financial institutions 595, , , , ,386 1,326,491 Due to banks under repurchase agreements 466, , ,487 Derivative financial instruments 15,370 5,506 25,809 9,357-56,042 Customers deposits at amortised cost 28,175,881 7,055,421 4,272,165 1,145,780 10,716 40,659,963 Deposits from related parties at amortised cost 217, ,538 12, , , ,725 Engagements by acceptances 57,481 64,988 55,450 4, ,715 financial liabilities 29,528,575 7,660,919 4,611,860 1,597, ,034 43,809,

100 Less than 1 Month The table below shows the contractual expiry by maturity of the Group s contingent liabilities and commitments. Each undrawn loan commitment is included in the time band containing the earliest 1 to 3 Months 3 to 12 Months 1 to 5 Years Over 5 Years Financial assets: Cash and balances with central banks 2,525, , ,498 5,359,703 1,418,639 9,979,707 Due from banks and financial institutions 4,399,661 91,466 67,357 4, ,562,922 Loans to banks and financial institutions and reverse repurchase agreements 33,626 16, ,291-87, ,743 Financial assets given as collateral 15,672 1, ,681 Derivative financial instruments 5,418 40,207 36, ,209 Financial assets measured at fair value 8,231 7, , , , ,423 Loans and advances to customers at amortised cost 3,410,722 1,409,460 1,954,430 5,333,251 1,337,437 13,445,300 Loans and advances to related parties at amortised cost 215,626 33,399 9,006 5,158 3, ,123 Debtors by acceptances 102,699 98,859 79, ,820 Financial assets at amortised cost 405, ,563 3,686,717 9,741,400 2,660,187 16,786,539 financial assets 11,123,294 2,136,611 7,033,760 20,579,711 5,687,091 46,560,467 Financial liabilities: Due to central banks , ,540 Due to banks and financial institutions 627,711 67,978 49, , ,085 1,101,199 Derivative financial instruments 7,055 35,159 16, ,246 Customers deposits at amortised cost 27,604,649 6,173,561 2,671, ,264 14,074 37,361,137 Deposits from related parties at amortised cost 67,128 14,308 44, ,133 30, ,302 Engagements by acceptances 102,698 98,858 79, ,819 financial liabilities 28,410,023 6,389,864 2,860,793 1,399, ,158 39,283,243 date it can be drawn down. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called. Maturity Analysis of Assets and Liabilities On Demand The table below summarises the maturity profile of the Group s assets and liabilities. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period Less than 3 Months 3 to 12 Months 1 to 5 Years Over 5 Years Financial guarantees 56, , ,915 30,529 71,359 1,413,741 Other guarantees 898, ,455 Documentary credits 2, ,501 62,950 9, ,763 Undrawn credit lines 3,309,318 50, ,635 25, ,508,070 4,266,654 1,158, ,500 65,062 71,405 6,174,029 On Demand Less than 3 Months 3 to 12 Months 1 to 5 Years Over 5 Years Financial guarantees 95,531 1,210, ,510 32, ,730 1,634,104 Other guarantees 1,039, ,039,278 Documentary credits 7, ,975 72,087 15, ,781 Undrawn credit lines 3,014, ,677 23, ,905 17,928 3,527,229 4,156,169 1,663, , , ,658 6,588,392 at the statement of financial position date to the contractual maturity date and do 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 is monitored by Management to ensure adequate liquidity is maintained

101 The maturity profile of the assets and liabilities at December 31, is as follows: Less than 1 Month 1 to 3 Months 3 Months to 1 Year Less than 1 Year 1 to 5 Years Over 5 Years More than 1 Year Amount without Maturity Assets Cash and balances with central banks 3,318, ,094 1,207,780 4,746,929 3,376,570 1,338,881 4,715,451-9,462,380 Due from banks and financial institutions 4,206,838 62,357 11,734 4,280, ,280,978 Loans to banks and financial institutions and reverse repurchase agreements 816,321 3, ,479 1,006,351-53,916 53,916-1,060,267 Derivative financial instruments 16,140 4,564 20,395 41,099 9,947-9,947-51,046 Financial assets at fair value through profit or loss 33,346 45,532 34, , , , ,187 52, ,657 Loans and advances to customers at amortised cost 2,656,962 1,873,999 3,255,051 7,786,012 6,727, ,342 7,625,794 4,597 15,416,403 Loans and advances to related parties at amortised cost 249,846 33,927 10, ,574 7,756 2,181 9, ,511 Debtors by acceptances 64,971 57,498 55, ,919 4,796-4, ,715 Financial assets at amortised cost 175, ,279 3,330,402 3,689,149 8,650,287 2,209,680 10,859,967-14,549,116 Financial assets at fair value through other comprehensive income , ,793 Investments in associates ,545-18,545 15,685 34,230 Non-current assets held for sale ,054 50,054 Property and equipment , ,710 Intangible fixed assets ,600 49,600 Other assets 125,924 19,031 23, ,511 10, ,695 58, ,163 Goodwill , ,846 assets 11,663,871 2,504,832 8,136,018 22,304,721 19,037,433 4,616,851 23,654,284 1,228,464 47,187,469 Liabilities and shareholders equity Due to central banks , , ,108 Due to banks and financial institutions 523, , ,789 1,039, ,090 15, ,173-1,171,174 Due to banks under repurchase agreements 392, , , ,487 Derivative financial instruments 15,370 5,506 25,809 46,685 9,357-9,357-56,042 Customers deposits at amortised cost 27,244,497 7,108,325 4,391,195 38,744, ,150 9, ,873-39,718,890 Deposits from related parties at amortised cost 211, ,472 16, , ,136 33, , ,101 Engagements by acceptances 57,481 64,988 55, ,919 4,796-4, ,715 Other liabilities 229,713 52,666 64, ,338 1, ,397 60, ,865 Provision for risks and charges ,499 95,096 Non-current liabilities held for sale ,799 14,799 Shareholders equity ,036,192 4,036,192 liabilities and shareholders equity 28,675,387 7,896,160 4,832,937 41,404,484 1,519,446 57,919 1,577,365 4,205,620 47,187,469 Liquidity gap (17,011,516) (5,391,328) 3,303,081 17,517,987 4,558,932 (2,977,156) Cumulative gap (17,011,516) (22,402,844) (19,099,763) (1,581,776) 2,977,

102 The maturity profile of the assets and liabilities at December 31, is as follows: Less than 1 Month 1 to 3 Months 3 Months to 1 Year Less than 1 Year 1 to 5 Years Over 5 Years More than 1 Year Amount without Maturity Assets Cash and balances with central banks 2,466, , ,151 3,138,306 4,792, ,098 5,565,048-8,703,354 Due from banks and financial institutions 4,400,687 91,208 66,269 4,558,164 4, ,438-4,562,602 Loans to banks and financial institutions and reverse repurchase agreements 33,588 16, , ,350-55,734 55, ,084 Financial assets given as collateral 15,578 1, , ,424 Derivative financial instruments 5,418 40,207 36,283 81, ,209 Financial assets at fair value through profit or loss 6,428 4, , ,140 95, , ,193 52, ,926 Loans and advances to customers at amortised cost 3,356,714 1,378,898 1,872,507 6,608,119 4,954,365 1,125,926 6,080,291 3,767 12,692,177 Loans and advances to related parties at amortised cost 214,409 33,476 9, ,339 5,300 1,027 6, ,666 Debtors by acceptances 102,699 98,858 79, , ,819 Financial assets at amortised cost 333, ,115 2,867,886 3,395,929 8,542,124 2,369,250 10,911,374-14,307,303 Financial assets at fair value through other comprehensive income , ,984 Investments in associates ,099 43,099 Non-current assets held for sale ,379 26,379 Property and equipment , ,550 Intangible fixed assets ,508 13,508 Other assets 29,690 13,514 66, ,310 9,792 1,374 11, , ,171 Goodwill , ,431 assets 10,965,780 2,017,423 6,165,556 19,148,759 18,404,358 4,463,563 22,867,921 1,304,006 43,320,686 Liabilities and shareholders equity Due to central banks , , ,394 Due to banks and financial institutions 624,625 66,623 38, , , , ,276-1,007,558 Derivative financial instruments 7,055 35,159 16,032 58, ,246 Customers deposits at amortised cost 27,501,168 6,126,130 2,628,342 36,255, ,346 13, ,570-37,097,210 Deposits from related parties at amortised cost 55,402 13,667 46, , , , ,297 Engagements by acceptances 102,699 98,859 79, , ,819 Other liabilities 124,131 39, , , , , ,802 61, ,087 Provisions for risks and charges ,925 72,925 Shareholders equity ,553,150 3,553,150 liabilities and shareholders equity 28,415,080 6,380,136 3,032,320 37,827,536 1,501, ,543 1,805,760 3,687,390 43,320,686 Liquidity gap (17,449,300) (4,362,713) 3,133,236 16,903,141 4,159,020 (2,383,384) Cumulative gap (17,449,300) (21,812,013) (18,678,777) (1,775,636) 2,383,

103 59. Operational Risk Operational risk is the risk of loss arising from system failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The operational risk management framework is implemented by an independent Operational Risk Management team, in coordination with other essential elements of the Group s control framework, such as Internal Audit or Corporate Information Security and Business Continuity. Central to this framework are tried-and-tested principles such as redundancy of mission-critical systems, segregation of duties, strict authorisation procedures, daily reconciliation, risk management responsibility at the operational level, and the requirement to be able to price and value independently any proposed transaction. Incidents are reported, analysed and fed into a risk map also originating from other sources such as control self-assessments, key risk indicators or audit reports. This risk map is then used as a tool to follow up on outstanding issues and as the basis for reporting operational risk to Management and to the Board. Insurance coverage is used as an external mitigant and is commensurate with activity, both in terms of volume and characteristics. 60. Capital Management By maintaining an actively managed capital base, the Group s objectives are to cover risks inherent in the business, to retain sufficient financial strength and flexibility to support new business growth, and to meet national and international regulatory capital requirements at all times. The adequacy of the Group s capital is monitored using, among other measures, the rules and ratios established by the Central Bank of Lebanon. These ratios measure capital adequacy by comparing the Group s eligible capital with its statement of financial position assets and off-balance sheet commitments at a weighted amount to reflect their relative risk. To satisfy Basel III capital requirements, the Central Bank of Lebanon requires maintaining a ratio of total regulatory capital to risk-weighted assets at or above 12% to be achieved in The limit of the common equity Tier 1 ratio is expected to increase to 8%, the Tier 1 ratio to 10% and the total capital ratio to 12% by the end of The first step of this increase was due by the end of. Each banking subsidiary is directly regulated by its local banking supervisor which sets and monitors its capital adequacy requirements. In addition, Bank Audi sal - Audi Saradar Group monitors capital adequacy at the Group level. Risk-weighted assets: Credit risk 25,670,611 24,734,378 Market risk 653, ,866 Operational risk 2,251,204 1,974,927 risk-weighted assets 28,575,683 27,332,171 The capital base as per Basel II requirements as of December 31 (including profit for the year less proposed dividends) is as follows: The capital adequacy ratio as of December 31 (including profit for the year less proposed dividends) is as follows: Capital adequacy Tier % 10.45% Capital adequacy capital 11.79% 10.69% Tier 1 capital consists of share capital, share premium, reserves, retained earnings including current year profit less proposed dividends, foreign currency translation losses, gross unrealised losses from financial instruments at fair value through other comprehensive income and corresponding amounts of non-controlling interest. Tier 2 capital consists of revaluation variance recognised in the complementary equity, subordinated loans, preferred shares, a percentage of foreign currency translation gains, a percentage of gross unrealised gains from financial instruments at fair value through other The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment Tier 1 capital 3,302,459 2,855,238 Tier 2 capital 65,885 65,235 capital 3,368,344 2,920,473 comprehensive income and corresponding amounts of non-controlling interest. Certain adjustments are made to IFRS based results, reserves, retained earnings, preferred shares, subordinated loans and non-controlling interests, as prescribed by the Central Bank of Lebanon and the Banking Control Commission. In accordance with the Central Bank of Lebanon's main Circular No. 44, the Group should maintain the following minimum required capital adequacy ratio for the years ended December 31, and thereafter: Tier 1 Capital Ratio Capital Ratio Year ended December 31, 8.0 % 10.0 % Year ended December 31, % 10.5 % Year ended December 31, % 11.5 % Year ended December 31, % 12.0 % to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. However, they are under constant scrutiny of the Board

104 europe Through its presence in France, Switzerland and Monaco, Bank Audi provides commercial banking, private banking and wealth management services. The steady activity of the Bank s European subsidiaries represents a testimony to a solid banking heritage that stands the test of time

105 shareholding structure corporate structure The major subsidiaries of Bank Audi sal - Audi Saradar Group as at 31/03/2013 are: The following table sets out the composition of the holders of common shares (5) as at March 31, 2013: % Banaudi Holding ltd % Audi Capital Gestion sam Shareholders/Groups of Shareholders Country (Ultimate Economic Ownership) Percentage Ownership (1) of the Number of Common Shares Issued and Outstanding Audi Family (2) Lebanon 7.0% % 99.99% Banaudi International Holding ltd* Bank Audi Saradar France sa % Banque Audi (Suisse) sa* Al Homaizi Family (2) Kuwait 6.1% Saradar Family (2) Lebanon 5.8% 99.99% Audi Saradar Private Bank sal 90.85% SOLIFAC sal Sheikh Dhiab Bin Zayed Al Nehayan United Arab Emirates 5.1% Investment Finance Opportunities Ltd. Lebanon 4.9% % Bank Audi LLC (Qatar)* Middle East Opportunities For Structured Finance Ltd. Lebanon 4.9% Al Sabbah Family (2) Kuwait 4.8% Investment and Business Holding sal (3) Lebanon 3.9% % Bank Audi sae (Egypt)* MAL Investment One Holding sal (3) Lebanon 3.9% Al Hobayb Family (2) Kingdom of Saudi Arabia 2.7% Bank Audi sal - Audi Saradar Group 99.69% Odeabank A.Ş.* El Khoury Family Lebanon 2.5% Executives and employees (6) 5.1% 99.99% Audi Capital (KSA) cjsc* Others 14.1% Deutsche Bank Trust Company Americas (4) 29.2% shareholding 100.0% 47.00% Bank Audi Syria sa* 99.99% Audi Capital (Syria) LLC 76.56% National Bank of Sudan 99.99% Audi Saradar Investment Bank sal 99.98% Infi Gamma Holding sal* 90.00% Arabeya Online Brokerage* (1) Percentage ownership figures represent common shares owned by the named shareholders and are expressed as a percentage of the total number of common shares issued and outstanding. As at the date hereof, the Bank (and its affiliates) is the custodian of shares and/or GDRs representing % of the Bank s common shares. (2) The Audi Family, Al Homaizi Family, Saradar Family, Al Sabbah Family and Al Hobayb Family include the following members of the Board: (i) Raymond Wadih Audi and Marc Jean Audi, (ii) Suad Hamad Al Saleh Al Homaizi, (iii) Mario Joseph Saradar, (iv) Mariam Nasser Sabbah Al Nasser Al Sabbah, and (v) Abdallah Al Hobayb, respectively. (3) The ultimate beneficial owners of Investment and Business Holding sal and of MAL Investment One Holding sal are members of the Mikati Family. * Represents the economic ownership of the Bank with direct and/or indirect ownership through subsidiaries. ** Audi Capital Gestion sam replaces Bank Audi sam - Audi Saradar Group (please refer to Page 232). Banking Holding Factoring Financial intermediation/brokerage (4) As at the date hereof, Deutsche Bank Trust Company Americas, in its capacity as depositary under the Bank s GDR Program, owned 102,017,651 common shares represented by GDRs. (5) As at March 31, 2013, the total number of common shares is 349,749,204. (6) Excluding members of the Audi Family accounted for in a separate row appearing above

106 group high level chart organisation chart External auditors External solicitors Corporate Secretariat Shareholders Board of Directors Board Committees BOARD of DIRECTORS CHAIRMAN of the BOARD Raymond W. Audi GROUP CHIEF ExECUTIVE OFFICER Samir N. Hanna GROUP private banking Philippe R. Sednaoui Head of Group Private Banking GROUP corporate banking Private Banking Retail Banking Cards & e-payment Solutions Islamic Banking Corporate Banking Investment Banking GROUP BUSINESS LINES Chairman Chief Executive Officer Executive Committee STANDING MANAGEMENT COMMITTEES Asset Liability Committee Credit Committee Information Technology Committee Financial Institutions Committee Anti-money Laundering Committee Disclosure Committee Real Estate Committee Corporate Social Responsibility Committee Audit Committee GROUP SUPPORT FUNCTIONS Corporate Governance & Remuneration Committee Regional Expansion Risk Management Internal Audit Legal & Compliance Finance Operations Risk Committee GROUP ExECUTIVE COMMITTEE GROUP AUDIT COMMITTEE CORPORATE GOVERNANCE & REMUNERATION COMMITTEE GROUP RISK COMMITTEE VICE-CHAIRMAN OF the board Marwan M. Ghandour Khalil I. Debs Head of Group Corporate Banking GROUP retail banking Imad I. Itani Head of Group Retail Banking GROUP CARDS & e-payment SOLUTIONS Randa T. Bdeir Head of Group Cards & e-payment Solutions GROUP islamic BANKING Imad I. Itani Head of Group Islamic Banking Group geographical presence GROUP RISK LEBANON FRANCE EGYPT KINGDOM of SAUDI ARABIA Adel N. Satel Group Chief Risk Officer Bank Audi sal - Audi Saradar Group Audi Saradar Investment Bank sal Audi Saradar Private Bank sal JORDAN Bank Audi sal - Jordan Branches SYRIA Bank Audi Saradar France sa MONACO Audi Capital Gestion sam* SWITZERLAND Banque Audi (Suisse) sa TURKEY Bank Audi sae Arabeya Online Brokerage SUDAN National Bank of Sudan Audi Capital (KSA) cjsc UAE Bank Audi sal - Abu Dhabi Representative Office QATAR Bank Audi LLC GROUP legal & compliance Chahdan E. Jebeyli Group Chief Legal & Compliance Officer GROUP INFORMATION management Danny N. Dagher Acting Group Chief Information Officer Bank Audi Syria sa Audi Capital (Syria) LLC Odeabank A.Ş. STRATEGY director & group CHIEF FINANCIAL officer Freddie C. Baz GROUP FINANCE Tamer M. Ghazaleh Assistant Group CFO * Audi Capital Gestion sam replaces Bank Audi sam - Audi Saradar Group (please refer to Page 232). Banking Other financial services (Insurance, Brokerage, Investments etc.)

107 north africa Beyond the temporary atypical conditions that the North Africa region is witnessing, the medium term outlook looks brighter, namely at the level of political governance, economic efficiency and corollary demand for financial services, offering the financial sector in general and Bank Audi in particular a core under-banked market with potentially rapid growth opportunities

108 management Bank Audi sal - Audi Saradar Group Management of Bank Audi sal - Audi Saradar Group (Continued from Page 22) Mr. Gaby G. Kassis General Manager Mr. Elia S. Samaha General Manager Group Chief Credit Officer Mr. Joseph I. Kesrouani Assistant General Manager Head of Business Development South America & Africa Office of the CEO Mr. Michel E. Aramouni Assistant General Manager Group Capital Markets Mrs. Jocelyne A. Jalkh Assistant General Manager Head of the CEO s Office Mr. Naoum J. Moukarzel Information Technology Advisors Mr. Georges Y. Azar Advisor Mr. Yacoub G. Nadda Advisor Central Departments Mr. Mahmoud M. Majzoub Head of Group Internal Audit Mr. Elie A. Nahas Head of Group Real Estate & Engineering Mr. Mounir R. Tabet Head of Group Finance Infrastructure & Technical Support Group Financial Institutions & Correspondent Banking Mr. Khalil G. Geagea Group Head of Financial Institutions & Correspondent Banking Tel: (961-1) Fax: (961-1) khalil.geagea@banqueaudi.com Mr. Joseph A. Nader Deputy Group Head of Financial Institutions & Correspondent Banking Tel: (961-1) Fax: (961-1) joseph.nader@banqueaudi.com Investor Relations Ms. Sana M. Sabra Investor Relations Tel: (961-1) Fax: (961-1) E- mail: sana.sabra@banqueaudi.com Mr. Chahdan E. Jebeyli Mr. Adel N. Satel Dr. Marwan S. Barakat Mrs. Randa T. Bdeir Mr. Danny N. Dagher Mr. Khalil I. Debs Mr. Tamer M. Ghazaleh Mr. Marwan O. Arakji Mr. Georges J. Boustany Mr. Abdul-Salam E. Chebaro Mrs. Bassima G. Harb Mr. Elie J. Kamar Mr. Farid F. Lahoud General Manager Group Chief Legal & Compliance Officer General Manager Group Chief Risk Officer Assistant General Manager Group Chief Economist & Head of Research Assistant General Manager Head of Group Cards & e-payment Solutions Assistant General Manager Acting Group Chief Information Officer Assistant General Manager Group Head Corporate Banking Assistant General Manager Assistant Group Chief Financial Officer Deputy Head of Group Retail Banking Head of Group Remedial Management Head of Group Trade Finance Head of Regional Corporate Banking & Structured Finance Head of Group Corporate Review & MIS Group Corporate Secretary

109 Bank Audi sal - Audi Saradar Group Country Management Lebanon Audi Saradar Investment Bank sal Mr. Marc J. Audi General Manager Country Manager Board of Directors Branches Network Management Mrs. Wafaa S. Daouk Assistant General Manager Network Manager Verdun Corporate branch Dr. Imad I. ITANI Chairman & General Manager of the Audit Committee of the Risk Committee Mr. Salam G. Nadda Assistant General Manager Network Manager Ashrafieh SOFIL Corporate branch Mr. Michel E. ARAMOUNI Mrs. Ghina M. Dandan Mr. Rabih E. Berbery Mr. Hani A. Bidawi Mr. Pierre Y. Harfouche Mr. Kamal S. Tabbara Mr. Abdo M. Abi-Nader Mrs. Lina T. Cherif Network Manager Bab Idriss Corporate branch Network Manager Network Manager Network Manager Network Manager Regional Manager Regional Manager Dr. Khalil M. BITAR Mr. Khalil I. DEBS Mr. Georges S. DOUMITH Mr. Rami S. JISR Mr. Farid F. LAHOUD Bank Audi sal - Audi Saradar Group Chair Chair Mr. Michel R. Geammal Regional Manager Operations Mrs. Marie-Josette A. AFTIMOS Secretary of the Board Mr. Hassan A. Saleh Assistant General Manager Chief Operating Officer Management Central Departments Dr. Imad I. ITANI Chairman & General Manager Mr. Bechara J. Khachan Assistant General Manager Head of Human Resources Mr. Ibrahim M. Salibi Assistant General Manager Head of Corporate & Commercial Banking Mr. Rami S. JISR General Manager Mr. Ramzy S. Abouezzeddine Mrs. Grace E. Eid Mr. Mahmoud A. Kurdy Head of Marketing & Communications Head of Retail Banking Chief Financial Officer Advisors Mrs. Najla E. Haddad Advisor

110 Audi Saradar Private Bank sal Board of Directors Banque Audi (Suisse) sa Board of Directors Mr. Fady G. AMATOURY Chairman of the Audit Committee of the Risk Committee H.E. Mr. Raymond AUDI Honorary Chairman of the Audit Committee of the Remuneration Commitee Mr. Toufic R. AOUAD Dr. Marwan GHANDOUR Chairman Dr. Khalil M. BITAR Mrs. Wafaa S. DAOUK Chair Mr. Dominique ROCHAT Mr. Marc AUDI Vice-chairman (Chair until December ) Dr. Joe A. DEBBANE Mr. Georges S. DOUMITH Chair Dr. Freddie BAZ Mr. Pierre DE BLONAY Mr. Salam G. NADDA Mr. Istvan I. NAGY Mr. Michel CARTILLIER Mr. Samir HANNA (Chair since January 2013) Bank Audi sal - Audi Saradar Group Mr. Jean-Pierre JACQUEMOUD Management Mr. Pierre RESPINGER Chair Mr. Fady G. AMATOURY Chairman & General Manager Management Mr. Toufic R. AOUAD General Manager Mr. Philippe SEDNAOUI General Manager Chief Executive Officer Mrs. Martine S. HOCHAR Assistant General Manager Mrs. Christiane AUDI Deputy General Manager Head of Private Banking Mrs. Samira E. HARB-ABOURJAILY Executive Manager Mr. Michel NASSIF Deputy General Manager Chief Investment Officer Mrs. Nada M. RIZK Ms. Nada M. SAFA Executive Manager Executive Manager Mr. Ibrahim ABDELNOUR Mr. Ali AZIZ Manager Senior Private Banker Manager Senior Private Banker Mr. Fadi S. CHABO Mrs. Dima I. JAROUDI Mr. Maher A. RAHAM Mrs. Lina H. UTHMAN Mr. Ahmad A. YOUNES Regional Manager Regional Manager Regional Manager Regional Manager Regional Manager Mr. Elie BAZ Mrs. Mireille GAVARD Mr. Fouad HAKIM Mr. Christopher JOHNSON Mr. Wolfram PIETSCH Manager Head of Forex & Treasury Manager Corporate Secretary, Head of Legal & Compliance Manager Senior Private Banker Manager Chief Financial Officer Manager Head of Operations & IT Mr. Hani A. ZURUB Regional Manager Mrs. Rania S. ABOU EL-OULA NAHRY Head of Legal & Compliance Mrs. Aline S. KARAM Manager Head of Operations & Organisation Mrs. Eugenie E. RIZKALLAH Manager Head of Internal Control Mrs. Marie G. TOUMA Manager Head of Credit

111 Bank Audi Saradar France sa Board of Directors Bank Audi sal - Jordan Branches Management of the Executive Credit Committee of the Audit Committee Mr. Yousef A. ENSOUR Mr. Samer I. AL ALOUL General Manager Deputy General Manager Corporate & Commercial Banking Dr. Freddie C. BAZ Mrs. Sherine R. AUDI H.E. Mr. Raymond W. AUDI Mr. Maurice H. SAYDE Mr. Pierre A. SOULEIL Bank Audi sal - Audi Saradar Group (represented by Mr. Samir N. HANNA) Chairman & General Manager Management Mrs. Sherine R. AUDI Mr. Noel J. HAKIM General Manager Deputy General Manager Mr. Emile G. GHAZI Assistant General Manager Head of Corporate Banking

112 Bank Audi Syria sa Board of Directors Bank Audi sae (Egypt) Board of Directors Dr. Georges A. ACHI Chairman of the Risk Committee of the Nomination & Remuneration Committee of the Corporate Governance Committee Chair of the Audit Committee of the Executive Committee of the Corporate Governance, Nomination and Remuneration Committee of the Risk Committee of the High Credit Committee of the Audit Committee Dr. Ahmad M. ABBOUD H.E. Mr. Raymond W. AUDI Dr. Freddie C. BAZ Deputy Chairman Mr. Hatem A. SADEK Mrs. Fatma I. LOTFY Chairman & Managing Director Chair Chair Deputy Chairman & Managing Director Mr. Bassel S. HAMWI Mr. Samir N. HANNA Mr. Yehia K. YOUSSEF & Deputy Managing Director Mr. Elia S. SAMAHA H.E. Mr. Raymond W. AUDI Mr. Adnan N. TAKLA Mrs. Rana T. ZEIN Chair Chair Chair Dr. Freddie C. BAZ Chair Advisors to the Board Mr. Abdulateef A. AL-RAJIHI Dr. Marwan M. GHANDOUR Mr. Samir N. HANNA Chair Chair Mrs. Nada N. ASSAAD Mrs. Yasmina R. AZHARI Mr. Mohamed Said Z. ZAIM Mr. Abdullah I. AL HOBAYB Mr. Maurice H. SAYDE Management Mr. Bassel S. HAMWI Chief Executive Officer Dr. Mohamed E. TAYMOUR Mr. Antoine G. EL-ZYR Deputy General Manager Mr. Ahmed F. IBRAHIM Secretary of the Board Mr. Abdulrahman M. AL-ABRASH Mr. Jamil R. SHOCAIR Assistant General Manager Chief Financial Officer Assistant General Manager Head of Corporate Banking Division Management Mr. Hatem A. SADEK Chairman & Managing Director Mrs. Fatma I. LOTFY Deputy Chairman & Managing Director Mr. Yehia K. YOUSSEF Deputy Managing Director

113

114 Business Lines Mr. Assem K. AWWAD Mr. Mohamed L. AHMED Mr. Mostafa A. GAMAL Mr. Mohamed R. LATIF Mr. Ihab E. DORRA Mrs. Maha A. HASSAN Mr. Khaled F. EL DAFRAWY Mr. Walid M. HASSOUNA Mr. Maroun A. AOUAD Senior General Manager Head of Corporate Banking General Manager Head of Branch Network General Manager Head of Treasury & Capital Markets General Manager Head of Financial Institutions & Correspondent Banking Deputy General Manager Acting as Head of Retail Banking Deputy General Manager Head of Mortgage Deputy General Manager Head of Small & Medium Enterprises Deputy General Manager Head of Islamic Banking Assistant General Manager Head of Global Transaction Services Support Functions Mr. Mohamed M. BEDIER (1) Mrs. Amany A. SHAMS EL-DIN (1) Mr. Hesham S. MABROUK Mr. Walid K. EL-WATANY Mr. Ahmed F. IBRAHIM Ms. Heba M. GABALLA Mr. Mohamed N. SHALABY Mrs. Samar A. HOBEIKA Senior General Manager Chief Financial Officer Senior General Manager Chief Operating Officer General Manager Chief Information Officer General Manager Head of Human Resources Deputy General Manager Head of Strategic Support Assistant General Manager Head of Communications Senior Manager Head of Project Management Office Manager Head of Quality Assurance & Market Research Risk Function Mr. Afdal E. NAGUIB (1) Mr. Bassel E. KELADA Senior General Manager Chief Risk Officer Deputy General Manager Head of Retail Credit Control Functions Mr. Mohamed A. EL GUEZIRY Mr. Hesham F. RAGAB Mr. Ali M. AMER Mr. Ahmed M. KAMEL General Manager Head of Internal Audit Senior Legal Council Assistant General Manager Head of Compliance Executive Manager Head of Corporate Information Security & Business Continuity (1) of the Executive Committee