AUDI SARADAR GROUP ANNUAL REPORT BANK AUDI sal. Global Reports LLC

Transcription

1 BANK AUDI sal AUDI SARADAR GROUP ANNUAL REPORT 2006

2 BEYOND BORDERS

3 Beyond the Map At Bank Audi, we are expanding beyond borders, generously exporting our know-how, while gaining local insight in return. Because we believe that the best solutions emerge when you pool together your resources and realize that everyone has something to offer. For us, every country is a wealth of inspiration.

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5 Exporting Know-How The same professionalism that has propelled Lebanese designers to the forefront of international couture podiums, has also allowed Bank Audi to stand out in the world s banking arena. Image courtesy of Elie Saab

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7 TABLE OF CONTENTS

8 Table of Contents Financial Highlights Statement of the Chairman and the Chief Executive Officer Corporate Governance Corporate Governance Framework Changes to the Board Composition during the Year 2006 Composition of the Board of Directors of Bank Audi sal - Audi Saradar Group Biographies of Board Members Management of Bank Audi sal - Audi Saradar Group Management Discussion and Analysis of Financial Conditions and Operations in 2006 Basis of Presentation 1. STRATEGIC DEVELOPMENT AND OUTLOOK 1.1. The Group s Growth and Expansion Background 1.2. The Bank s Cross-Border Expansion Strategy 2. THE GROUP S PERFORMANCE IN DOMESTIC ACTIVITY Economic and Banking Environment Market Background Relative Positioning 2.2. FOREIGN ACTIVITY Major Developments at the Level of European Banks Major Developments at the Level of North African Banks Major Developments at the Level of Near Eastern Banks Other Developments (Middle East) 2.3. CONSOLIDATED FINANCIAL PERFORMANCE Financial Standing Asset Quality Capital Adequacy Profitability Preparations for Basel II 2.4. NON FINANCIAL DEVELOPMENTS Human Resources Development IT and Systems Development Excerpts from the Ordinary General Assembly of Shareholders Consolidated Financial Statements Auditors Report Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Cash Flow Consolidated Statement of Changes in Equity 8

9 Notes to the Consolidated Financial Statements Notes Index Notes Shareholders Information Group High Level Chart Organization Chart Corporate Structure Management Bank Audi sal - Management Audi Saradar Investment Bank sal - Board of Directors and Management Audi Saradar Private Bank sal - Board of Directors and Management Banque Audi (Suisse) sa - Board of Directors and Management Bank Audi Saradar France sa - Board of Directors and Management Bank Audi sal - Jordan Branches - Management Bank Audi Syria sa - Board of Directors, Management and Central Departments Audi Saudi Arabia - Board of Directors and Management Bank Audi sae (Egypt) - Board of Directors and Management National Bank of Sudan - Board of Directors and Management Bank Audi llc (Qatar) - Board of Directors and Management Bank Audi sal Abu Dhabi Representative Office - Management Addresses Lebanon. Bank Audi sal Audi Saradar Group. Audi Saradar Investment Bank sal. Audi Saradar Private Bank sal Libano Arabe Insurance sal Syrian Arab Insurance sa Switzerland - Banque Audi (Suisse) sa France - Bank Audi Saradar France sa Jordan - Bank Audi sal Jordan Branches Syria - Bank Audi Syria sa Egypt - Bank Audi sae Saudi Arabia - Audi Saudi Arabia Qatar - Bank Audi llc United Arab Emirates - Bank Audi sal Abu Dhabi Representative Office Sudan - National Bank of Sudan 9

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11 Attention to Detail The unsurpassed craftsmanship that characterizes the making of the finest Swiss watches reflects the valuable attention to detail which has marked Bank Audi s excellent service at all times.

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13 FINANCIAL HIGHLIGHTS

14 Financial Highlights Charts ASSET GROWTH US$ million CAGRs % 14,171 10,481 11,479 5,153 7, NET EARNINGS GROWTH US$ million CAGRs % EARNINGS PER COMMON SHARE US$ million CAGRs % Basic Diluted 14

15 Bank Audi sal: Selected Financial Data CAGRs US$ million and % Assets 5,153 7,097 10,481 11,479 14, % Loans to customers 1,317 1,376 2,166 2,468 3, % Customers deposits 4,238 5,997 8,798 9,889 11, % Shareholders equity , % Net earnings % Number of branches % Number of staff 1,356 1,482 2,188 2,302 2, % Liquidity and asset quality Liquid assets/deposits 81.49% 88.63% 88.15% 84.66% 85.50% Loans to deposits 31.09% 22.94% 24.62% 24.96% 27.31% Net doubtful loans/gross loans 3.62% 2.85% 2.85% 1.06% 1.24% Loan loss reserves/gross doubtful loans 69.79% 69.91% 63.98% 80.62% 78.62% Net doubtful loans/equity 12.03% 9.14% 9.36% 2.88% 0.55% Capital adequacy Average equity to assets 7.57% 7.35% 6.62% 7.52% 10.34% Tier one/rwas 15.71% 17.00% 15.51% 17.11% 26.11% Tier two/rwas 2.89% 2.88% 0.94% 1.96% 1.09% Total capital ratio 18.60% 19.88% 16.45% 19.07% 27.20% Profitability Cost to income 56.36% 53.90% 61.62% 56.20% 51.68% ROAA 0.85% 0.89% 0.82% 0.96% 1.28% ROACE 10.53% 13.10% 12.70% 14.92% 13.59% Share Data Common shares outstanding 18,899,358 18,899,358 22,766,240 22,766,240 32,766,240 Preferred shares outstanding 4,000,000 4,000,000 6,400,000 7,650,000 7,650,000 Net dividends on common share (in US$ million) Net dividends on preferred shares (in US$ million) Payout ratio 77% 69% 79% 67% 66% Basic common earnings per share (in US$) Diluted common earnings per share (in US$)

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17 STATEMENT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER

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19 Statement of the Chairman and the Chief Executive Officer Within the challenging domestic and regional environments that characterized the year 2006, Bank Audi sal - Audi Saradar Group was able to report a very good financial performance. Our Bank s total assets grew by 23.5% in 2006, its footings by 21.9%, its deposits by 19.8% and its equity by 78.2%. The Bank s strong franchises in retail, corporate and private banking were further enhanced, as shown by the number of retail accounts, the diversity of products, the size of our corporate lending portfolio and the volume of assets under management. In 2006, Bank Audi successfully closed the largest scale capital increase ever in the Lebanese banking sector, raising its equity by US$ 600 million to reach US$ 1.7 billion, the equivalent of 30% of the consolidated equity of all Lebanese banks. The newly raised funds were assigned to finance the regional expansion of the Bank, which gained significant ground in the past year, with the opening of subsidiaries in a number of new markets in the Middle East and North Africa. Domestically, a restructuring of the local branch network was undertaken, within a widespread Branch Specialization Project aiming at streamlining operations in Lebanon, and with branches restructured into three main groups: Retail and Personal banking branches, Commercial branches and Corporate branches. Throughout 2006, corporate governance has been at the core of our Board s concerns with the implementation of a comprehensive corporate governance enhancement program derived with the support of Nestor Advisors Ltd., a leading London-based firm specializing in Corporate Governance and Board consulting. In application of the program, the Board of Directors adopted comprehensive governance guidelines and a set of charters aligned on international best practices. Among other results of the program, an Executive Committee, an Audit Committee and a Corporate Governance and Remuneration Committee were formed by the Board, and a chart of authorities and delegations was adopted. The Bank s statutes were also modified to allow for unrestricted trading on the Bank s shares with all its shares now listed on the Beirut Stock Exchange. The Bank also granted, in 2006 the first allocation of its new employee stock option plan, covering 3.2 million shares, allocated to 1,801 employees, out of a total of 5 million shares authorized by the General Assembly of Shareholders, in the aim of aligning shareholders and employees interests by creating added incentives for the Bank s staff to permanently improve Bank Audi s performances. More generally, the Bank was able, in 2006, to considerably reinforce its domestic franchise and its market positioning in Lebanon, to significantly enhance the activity of its foreign entities in the Near East and Europe, and to expand its reach to new captive markets in a rapidly growing Middle Eastern region at large. DOMESTIC ACTIVITY The year 2006 was a year of acute economic volatility for Lebanon. The economy was achieving a good first half performance until the mid-year trend reversal, that resulted, on an annual basis, in its worst performance for more than 15 years. Real growth is estimated to have witnessed a net contraction of 5% in full-year 2006, as a result of the July-August events. The economy actually reported a combined effect of stagnation and inflation. A year of rising inflation was observed, with a 7% rate for 2006, the highest in a decade, mainly fueled by adverse war supply effects. Monetary conditions yet remained under control in a relatively difficult year. The Central Bank s foreign assets closed the year at US$ 13 billion, the equivalent of 80% of the Lebanese Pound Money Supply. At the banking sector level, a remarkable resilience was once again reported. Notwithstanding the slight decline of most banking aggregates during the period of summer crisis, all major balance sheet and income statement items managed to record a satisfactory performance over the twelve-month period. Assets, deposits, loans, and shareholders equity all reported a solid growth year-on-year. Banks assets grew by a healthy 8.3% in 2006 to reach LL 114,840 billion (US$ 76,179 million), i.e. an increase of LL 8,825 billion (US$ 5,851 million) over the year, despite a 2.0% drop registered over the third quarter as a direct consequence of the July-August hostilities. Banks profitability was also on the rise, as a result of the banks sustained efforts to control the cost of deposits and operating expenses. 19

20 Within this environment, Bank Audi performed well in It consolidated and strengthened its domestic market weight, as witnessed by the significant improvement in its various market share indicators. Indeed, the significant year-on-year growth in Bank Audi s deposits at a higher pace than that of the banking sector (19.8% versus 6.5% respectively yearon-year) reinforced the Bank s share of the domestic deposits market, which reached 19.52% at the end of 2006, against 17.35% at the end of As such, Bank Audi accounted for 52.8% of the total growth in deposits in the Lebanese banking sector. This performance clearly reflected on the domestic positioning relative to peers, with Bank Audi ranking first by volume of deposits for the first time in Lebanon, after reporting a deposit growth outpacing that of all direct peers. The Bank also ranked first by total loans and by shareholders equity, and second by assets and by net profits. CROSS-BORDER EXPANSION In 2006, the Bank boosted its foreign activity: It reinforced its activity in France and Switzerland, expanded its franchises in Jordan and Syria, and opened new subsidiaries in Egypt, Sudan and Saudi Arabia. It also obtained licenses to open a representative office in Abu Dhabi and to own and operate a commercial and private bank in the Qatar Financial Center. In France, a new commercial action plan was adopted by the Board of Bank Audi Saradar France, targeting an increased coverage of the Middle Eastern customer base in Europe and of European corporations involved in the Middle East. Similarly, the consolidation of the international private banking activity at the level of the Group allowed to set ambitious objectives for Banque Audi (Suisse) and the Private Banking division of the Group which should ensure, in a three-year horizon, a doubling of the level of assets under management with a higher contribution of this business line to the consolidated earnings of the Group. In Jordan, our network closed a good year in 2006, reinforcing its local positioning and surpassing in size foreign banks that have been present in Jordan for a much longer period of time. In addition, the Jordanian network brought a positive contribution to the 2006 consolidated results of the Group, which came earlier than initially anticipated. In parallel, Bank Audi Syria closed the year 2006 with assets exceeding those of peers, in relative terms, for a first year of activity. The expansion of the Syrian network was launched and should continue in 2007, covering the majority of Syrian territories, and dedicated to commercial, retail and corporate banking activities. In Egypt, Bank Audi sae closed its first calendar year on a positive note regarding its forthcoming growth potential: The restructuring of the newly acquired bank was finalized, its general management appointed, its business plan clearly defined, and its 2007 strategy set with ambitious objectives including building up a network of 50 branches offering universal banking services. In order to support this ambitious plan, the Group decided to raise the capital of Bank Audi sae, in March 2007, by an additional US$ 100 million to reach US$ 200 million. In parallel, the National Bank of Sudan (75% owned by our Bank since September 2006) finalized the restructuring of its Sudanese network of 17 branches to launch a dynamic action plan in a market that seems very promising. It is worth mentioning as well that the Bank has officially launched the activities of its investment company in Saudi Arabia, covering a large spectrum of services including corporate finance, brokerage, asset management, private equity and wealth management. The Bank was also awarded a license from the Qatar Financial Center, with commercial and private banking activities expected to be launched before the end of The prospecting for other regional markets is also underway, with some expected to gain ground on the Bank s radar screen in the year to come. At a five-year horizon, the ultimate objective of our regional expansion remains to position the Group among the 10 largest Arab banks, with a balanced breakdown of assets and earnings over business lines and markets. Achieving this objective would, in our opinion, significantly reinforce our overall immunity. 20

21 CONSOLIDATED FINANCIAL PERFORMANCE Consolidated assets of the Group reached US$ 14.2 billion at the end of 2006 and US$ 19.1 billion when including fiduciary deposits, security accounts and assets under management. The 23.5% growth in assets was mainly driven by customers deposits which grew by 19.8% in 2006, i.e. the equivalent of LL 2,953 billion (US$ 1,959 million). The growth in assets and deposits was not realized at the detriment of the financial standing of the Group. The growth in assets in 2006 was used to the extent of 65.3% in liquid assets. As such, the ratio of overall liquidity rose to 89.7% of deposits in December 2006, a very high level by regional and international standards. At the level of asset quality, a slight deterioration was reported since the third quarter, yet offset by significant provisioning efforts. The ratio of net doubtful loans to gross loans rose from 1.06% in 2005 to 1.24% in Although this reflects the effects of the July-August events and their impact on the loan quality of the Lebanese banking industry, the impact on Bank Audi was relatively limited because of a contained Lebanese exposure by the Bank. As a matter of fact, out of a consolidated loan portfolio of US$ 3.2 billion, the net exposure on Lebanon amounts to US$ 1.1 billion only. At the capitalization level, the Bank s shareholders equity reached LL 2,561 billion (US$ 1,699 million) at the end of 2006, the highest capitalization level in the industry. It actually grew by LL 1,123 billion (US$ 745 million) in 2006, hence a growth of 78.2%, during the year, following the large-scale capital increase closed in April of last year. The Bank s long term funding as a percentage of its aggregate loan portfolio consequently rose from 42.8% in 2005 to 55.6% in 2006, underlining a significant improvement in financial flexibility. At the same date, the Tier one ratio rose to 26.1%, a very high ratio by regional and international standards, outlining a significant coverage of third party risks by the Bank s own funds. On the profitability front, the Bank s performance proved noteworthy with its net profits growing by 55.1% year-on-year to reach LL billion (US$ million). The Bank s return on average assets rose from 0.96% in 2005 to 1.28% in 2006 and return on average common equity reached in parallel 13.59% in In conclusion, we are glad to note that our appreciation of the Bank s accomplishments is shared by the international business community and are proud to have obtained the Euromoney Best Bank in Lebanon award, for the sixth time, acknowledging that the Bank had an excellent year across all its business areas. We are also grateful to our shareholders, whose trust and loyalty were essential factors of our achievements. We are equally grateful to our staff whose dedication and enthusiasm remain essential pillars of our success. Raymond W. Audi Chairman and General Manager Samir N. Hanna Group Chief Executive Officer 21

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23 Unique Culture Like the cities of France, which are known for their distinguished culture, Bank Audi has developed a unique work culture and philosophy that accompanies its expansion path.

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25 CORPORATE GOVERNANCE

26 (1) Euromoney 2007 Best Bank Award went to Bank Audi for its significant growth potential, its wide range of products and services, its prominent role in the consolidation of the domestic banking industry and its pioneering role in the regional expansion of leading Lebanese banks Euromoney June

27 Corporate Governance Framework In November 2005, Bank Audi carried out a full assessment of its Corporate Governance framework by the International Finance Corporation with the assistance of Nestor Advisors (NeAd), a leading London based consultant specializing in Corporate Governance and Board Consulting. The purpose of the assessment was to identify strengths and weaknesses and obtain detailed concrete recommendations to align the Bank to global best practice standards. The review was completed and a set of recommendations were produced, all of which were adopted by the Bank, which embarked on an ambitious program of corporate governance enhancement. In application of the program, major Corporate Governance reforms took place in 2006, as the Board and the management showed a strong determination to enhance the Bank s Governance, in harmony with a local, regional and international drive of awareness by regulators, rating agencies, researchers, and by the investors at large. Good corporate governance is seen by Bank Audi, indisputably, as a value creator. IN 2006 The Board of Directors adopted a comprehensive set of Corporate Governance Guidelines to promote continuity, consistency and effectiveness in the way the Board operates and governs the Bank. The Guidelines are based on international best practice and brought significant changes to the Board functioning, notably enhancing its structure and expertise, its risk based approach to supervision, its amplified direct control of audit and audit matters, and its approach to remuneration and succession. The Board recognized the importance of establishing independent Board Committees, notably to handle Audit, Governance and Remuneration matters and to ensure there are Credit and Risk committees at the highest levels in place. It also recognized the need to ensure that all Directors are fully aware of their considerable duties and responsibilities as Directors, notably in the areas of risk management oversight and regulatory compliance. The Guidelines are published on the Bank s website; A Group Executive Committee was created by the Board to support the Board in carrying out its duties, to support the CEO in the day-to-day running of the Bank and in guiding the Group and to develop and implement business policies for the Bank and issue guidance for the Group within the strategy approved by the Board; New terms of reference were adopted for the consolidation of all finance, strategic planning and investor communication functions under a Group Chief Financial Officer, accountable to the Board and its Executive Committee; A Chart of authorities and delegations was adopted, that improves clarity of responsibility and roles; The Board adopted a Charter of an Audit Committee whose purpose 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 of the Bank and the Group; (ii) the integrity of the Bank s financial statements and the reliability of disclosures to stockholders; (iii) the appointment, remuneration, qualifications, independence, and effectiveness of the outside auditor; and (iv) the independence and effectiveness of the internal audit function. The Audit Committee was formed in February 2007 and is now discharging its duties in accordance with its Charter. The Board also resolved to create an empowered and independent Board-level Corporate Governance and Remuneration Committee to assist the Board in maintaining an effective institutional and corporate governance framework, an optimal board composition, effective board processes and structure; and a set of values and incentives for executives and employees that is focused on performance, and promotes integrity, fairness, loyalty and meritocracy. The Charter of the said Committee was adopted in November 2006 and the Committee was formed in February It is now discharging its duties in accordance with its Charter. The Bank s statutes have been modified to allow for unrestricted trading on its shares (save for restrictions imposed by regulation or by law) with all its Common shares now listed on the Beirut Stock Exchange (since October 2006). Other reforms have been introduced, with a view to align the Bank s Corporate Governance Framework to the international best practice, notably covering the Disclosure issues, the reorganization of the Compliance Function, the creation of a Corporate Secretary function and others. As a Bank whose pioneering role in the regional expansion is being recognized by major industry specialists (1), and with its shareholders base continuously expanding, Bank Audi is committed to remain at the forefront of sound Corporate Governance enhancement in the region, as part of its commitment to perpetuate itself as a successful corporation. 27

28 Changes to the Board Composition during the Year 2006 During the year 2006, the following persons resigned as Board Members: Mr. Georges W. Audi (was appointed by the Board as Honorary Chairman for Life) Mr. Fady G. Amatoury (retained his executive duty in the Group) Mr. Jean L. Cheval (was appointed Advisor to the Board) The following members were elected by the shareholders, on June 1, 2006, in replacement of the resigning members: Mr. Maurice H. Sayde; EFG Hermes Holding Co. sae (represented by Mr. Yasser El Mallawany); and EFG Hermes Advisory Inc. (represented by Mr. Hassan Heikal) Mr. Farid F. Lahoud was appointed Secretary of the Board, succeeding Mr. Gaby G. Kassis who has assumed other responsibilities as General Manager and member of the Group Executive Committee and as Vice Chairman and Managing Director of Bank Audi sae in Egypt. 28

29 Composition of the Board of Directors of Bank Audi sal - Audi Saradar Group Honorary Chairman Board Of Directors Chairman Members Secretary of the Board Mr. Georges W. Audi Mr. Raymond W. Audi Mr. Samir N. Hanna Mr. Marc J. Audi Dr. Freddie C. Baz Dr. Imad I. Itani Mr. Mario J. Saradar Sheikha Suad H. Al-Homaizi Sheikha Mariam N. Al-Sabbah Dr. Marwan M. Ghandour Mr. Maurice H. Sayde EFG-Hermes Holding Co. sae represented by Mr. Yasser S. El Mallawany EFG-Hermes Advisory Inc. represented by Mr. Hassan M. Heikal Mr. Farid F. Lahoud Member of the Executive Committee Member of the Corporate Governance and Remuneration Committee Member of the Audit Committee Advisors to the Board Legal Advisors Auditors Dr. Georges A. Achi Mr. André O. Bérard (until April 18, 2007) Mr. Jean L. Cheval (until April 18, 2007) Dr. Carlos J. Ghosn Mr. Abdallah I. Al Hobayb Mr. Said T. Khoury Mr. Ali Ghassan A. Merhebi Mr. Sayer B. Al Sayer Law Offices of Ramzi Joreige & Partners Semaan, Gholam & Co. Ernst & Young 29

30 Biographies of Board Members Raymond W. AUDI Chairman of the Board and General Manager Age: 74 Lebanon Director since February 1962 Chairman since March 1998 Term expires at the 2010 Annual General Assembly of Shareholders Chairman of the Corporate Governance and Remuneration Committee Raymond Audi 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 centenarian family business. He played an active role, since then, in leading the Bank through prosperous times and through challenges to its current status of a widely recognized leading Lebanese and regional bank. He has served as President of the Association of Banks in Lebanon in 1994 and has been chairing the Board of Directors of Bank Audi since Raymond Audi is the recipient of several honors and awards, the most recent being, in June 2006, the Euromoney Award for Outstanding Contribution to the Development of Financial Services in the Middle East, and in July 2007, an Honorary Doctorate in Humane Letters from the Lebanese American University. Samir N. HANNA General Manager, Group Chief Executive Officer Age: 62 Lebanon Director since August 1990 Term expires at the 2010 Annual General Assembly of Shareholders Executive Director Chairman of the Group Executive Committee Samir Hanna started his banking career in Banque Audi sal (now Bank Audi sal - Audi Saradar Group) in January He held positions across several departments of the Bank, in Lebanon, before moving to the United Arab Emirates in 1975, where he was appointed General Manager of a joint venture bank in which Bank Audi participated. He relocated to Lebanon in 1982 and was appointed General Manager of the Bank in In the early 1990s, he initiated and managed the restructuring and expansion strategy of the Bank, transforming it into a local banking powerhouse that offers universal banking products and services. He currently serves as the Chief Executive Officer of the Group and, as such, is leading the development of the Group to become a leading regional financial institution. Marc J. AUDI General Manager, Country Manager Lebanon Age: 49 Lebanon Director since March 1996 Term expires at the 2010 Annual General Assembly of Shareholders Executive Director Member of the Group Executive Committee Marc Audi started his banking career in Banque Audi (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. Marc Audi served as General Manager of Banque Audi (Suisse), the Private Banking arm of the Audi Group of Banks, until 2005, and has been General Manager of Bank Audi sal - Audi Saradar Group since 2004, where he currently is the Lebanon Country Manager. Marc Audi holds a Masters of Business Administration from the University of Paris IX - Dauphine. 30

31 Freddie C. BAZ General Manager, Group Chief Financial Officer and Strategy Director Age: 54 Lebanon Director since March 1996 Term expires at the 2010 Annual General Assembly of Shareholders Executive Director Deputy Chairman of the Group Executive Committee 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 Bank Audi sal - Audi Saradar Group, 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. Freddie Baz is also 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 Degree PhD in Economics from the University of Paris I (Panthéon - Sorbonne). Imad I. ITANI General Manager, Head of Retail Banking Age: 45 Lebanon Director since June 2002 Term expires at the 2010 Annual General Assembly of Shareholders Executive Director Member of the Group Executive Committee Throughout his career, 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. In 1997, he joined the Bank 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 Bank s Board of Directors. He was later appointed General Manager. Imad Itani is also the Chairman of the Bank s new Sudanese Islamic banking subsidiary acquired within the context of the Bank s regional expansion, in addition to his responsibilities as Group Head of Retail and Islamic Banking. Imad Itani holds a PhD in Economics from the University of Chicago. Mario J. SARADAR General Manager, Head of Private Banking Age: 39 Lebanon Director since August 2004 Term expires at the 2010 Annual General Assembly of Shareholders Executive Director Member of the Group Executive Committee Mario Saradar is Chairman and General Manager of Audi Saradar Private Bank sal and Banque Audi (Suisse) sa and other affiliated companies of the Group. He is also the Chairman and General Manager of Capital Outsourcing, a 75% subsidiary of the Bank, established in the Dubai International Financial Center and specializing in IT and Business Processing outsourcing. Mario Saradar is a General Manager of Bank Audi sal - Audi Saradar Group and heads the Group s Private Banking activity. Mario Saradar was elected several times as 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 Organization). Mario Saradar 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 University College of London. 31

32 Board Member Age: 64 Kuwait Director since February 1962 Term expires at the 2010 Annual General Assembly of Shareholders Non-Executive Director 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 major founders of the Bank. Sheikha Suad Al Homaizi chairs the Commercial Kuwaiti Company Hamad Saleh Al Homaizi, owner of 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 sal - Audi Saradar Group since February Suad H. AL HOMAIZI Board Member Age: 58 Kuwait Director since March 2001 Term expires at the 2010 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 widow of late Sheikh Ali Sabah Al Salem Al Sabbah, son of the former Prince of Kuwait and who held several ministerial positions in Kuwait, notably the Ministry of Interior. Sheikh Nasser Al Sabbah is one of the major founders of the Bank. Sheikha Mariam Al Sabbah is member of the Board of Directors of several Kuwaiti companies. She is member of the Board of Directors of Bank Audi sal - Audi Saradar Group since March Mariam N. AL SABBAH Marwan M. GHANDOUR Board Member Age: 63 Lebanon Director since March 2000 Term expires at the 2010 Annual General Assembly of Shareholders Non-Executive Director Member of the Audit Committee Member of the Corporate Governance and Remuneration Committee Marwan Ghandour 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 IMF, the World Bank and the BIS. Since 1994, Marwan Ghandour has been Chairman and General Manager of Lebanon Invest sal, a leading financial services group in the region. He was elected member of the Board of Directors of Bank Audi sal - Audi Saradar Group in 2000, and Chairman of the Board of Directors of Audi Saradar Investment Bank sal, a fully-owned subsidiary of Bank Audi sal - Audi Saradar Group in Marwan Ghandour holds a PhD in Economics (Econometrics) from the University of Illinois (Post- Doctorate research at Stanford University). 32

33 Maurice H. SAYDE Board Member Age: 66 Lebanon Director since June 2006 Term expires at the 2010 Annual General Assembly of Shareholders Non-Executive Director Chairman of the Audit Committee Maurice Sayde is a prominent Lebanese Banker, a previous member of the Lebanese Banking Control Commission and a previous member of the Higher Banking Commission of the Lebanese Central Bank. He started his banking career in 1962 at the Banque de Syrie et du Liban where he remained until 1966, when he joined the Banking Control Commission. He moved to the Credit Libanais sal in 1970 and was appointed its General Manager in He remained in this position until his appointment, in 1990, as member of the Banking Control Commission and member of the Higher Banking Commission of the Lebanese Central Bank. He occupied these positions until Since then, he has acted as Group Advisor to the Audi Group, notably on Corporate Risk Management. He was elected member of the Board of Directors of the Bank in June Yasser El MALLAWANY Representing EFG-Hermes Holding Company on the Board of Directors of Bank Audi sal - Audi Saradar Group Age: 46 Egypt Director since June 2006 Term expires at the 2010 Annual General Assembly of Shareholders Non-Executive Director Member of the Audit Committee Yasser El Mallawany began his career with Commercial International Bank, formerly Chase National Bank, and acted as General Manager of the Corporate Banking division for 16 years. He is now Chairman and CEO of EFG-Hermes Holding Company. He is also Chairman and/ or member of the Boards of several private and public institutions. He has played a major role in the consolidation of the investment banking sector in Egypt, facilitating the emergence of EFG-Hermes as one of the Arab region s most prominent investment banks. Yasser El Mallawany holds a Bachelor s degree in Accounting from Cairo University. About EFG Hermes Holding sae EFG-Hermes is a leading Arab world s investment banking firm active in securities brokerage, asset management, investment banking, private equity and research. Established in 1984, EFG-Hermes is the largest securities broker on the Cairo and Alexandria Stock Exchange. Since 1997, EFG-Hermes has raised equity of approximately US$ 10 billion for its clients and advised on more than US$ 16 billion worth of M&A transactions. The firm advised major international clients such as Nestlé, Kraft Foods, American Express, Pepsi Co., Heineken, Vodafone, CEMEX, and others. It has also advised multiple governments across the Arab World. EFG-Hermes has offices across Egypt, the UAE and the Kingdom of Saudi Arabia, and is in the process of opening an office in Qatar Financial Center. 33

34 Hassan HEIKAL Representing EFG-Hermes Advisory Inc. on the Board of Directors of Bank Audi sal - Audi Saradar Group Age: 40 Egypt Director since June 2006 Term expires at the 2010 Annual General Assembly of Shareholders Non-Executive Director Member of the Corporate Governance and Remuneration Committee Hassan Heikal is Co-Chairman and CEO of EFG-Hermes Holding Company. He joined EFG-Hermes in 1995 from Goldman Sachs, where he served in the Corporate Finance Division on the telecommunications team. He has been the driving force behind the growth of EFG- Hermes regionally, in particular in relation to the firm s investment banking franchise. Under his leadership, the group has advised international leading clients. Hassan Heikal holds a BSc from the Faculty of Economics and Political Science, Cairo University. About EFG-Hermes Advisory Inc. EFG-Hermes Advisory Inc. is a fully-owned subsidiary of EFG-Hermes Holding sae. 34

35 Management of Bank Audi sal - Audi Saradar Group Mr. Raymond W. Audi Chairman, General Manager Group Executive Committee Mr. Samir N. Hanna Group Chief Executive Officer - General Manager Dr. Freddie C. Baz Group Chief Financial Officer & Strategy Director - General Manager Mr. Marc J. Audi Country Manager Lebanon - General Manager Dr. Imad I. Itani Head of Retail Banking - General Manager Mr. Chahdan Jebeyli (1) Group Chief Legal and Compliance Officer Mr. Gaby G. Kassis Country Manager Egypt - General Manager Mr. Ramzi N. Saliba Head of Corporate Banking - General Manager Mr. Elia S. Samaha (1) Head of Regional Expansion - General Manager Mr. Mario J. Saradar Head of Private Banking - General Manager (1) Appointed in

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37 Adding Value Tourists visit Jordan in search of the therapeutic elements found in its mineral-rich waters, turning the Dead Sea into a thriving area. Likewise, Bank Audi has been striving to contribute positively to every country it has a presence in.

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39 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND OPERATIONS IN 2006

40 Management Discussion and Analysis of Financial Conditions and Operations for Bank Audi sal - Audi Saradar Group in 2006 BASIS OF PRESENTATION The analysis that follows highlights the consolidated performance of Bank Audi sal - Audi Saradar Group in The analysis is based on the audited consolidated financial statements of the Bank as at and for the years ended December 31, 2005 and December 31, Unless otherwise indicated, all figures are expressed in Lebanese Pounds. US Dollar amounts are translated from Lebanese Pounds at the closing rate of exchange published by the Central Bank at the relevant date, which was LL 1, as of each of December 31, 2006 and December 31, References to banks operating in Lebanon or to the banking sector are to the 54 commercial banks in Lebanon as consolidated by the Central Bank of Lebanon, and references to the Bank s peer group are to the Alpha Bank Group consisting of the 11 banks with total deposits in excess of US$ 2.0 billion each, as determined by Bankdata Financial Services WLL (publishers of Bilanbanques). Banking sector information is derived from Central Bank statistics, Bankdata Financial Services WLL and the Bank s internal sources. Following the official closing on March 31, 2006 of the acquisition by Bank Audi sal - Audi Saradar Group of the Egyptian Cairo Far East Bank sae which became a wholly-owned subsidiary under the name of Bank Audi sae, the Bank published since March 2006 consolidated financial statements including its Egyptian subsidiary. As per international accounting standards, the consolidation covers the P&L account for the second, third and fourth quarters of the year. The National Bank of Sudan was also fully consolidated since October 2006, with the consolidated profit and loss figures including that of National Bank of Sudan for the fourth quarter of the year only. The analysis that follows starts with the major strategic directions at Bank Audi sal - Audi Saradar Group, to be followed by the analysis of financial conditions and results of operations of the Group in the year Strategic Development and Outlook 1.1. THE GROUP S GROWTH AND EXPANSION BACKGROUND The Bank s consolidated performance in 2006 falls within its broad strategic orientations over the past few years: a significant expansion and growth trend and a successful diversification of activities. Bank Audi engaged in a huge restructuring site, consisting of widening its network, developing its IT and electronic banking infrastructures, and diversifying its activities towards retail banking, private banking, investment banking, bancassurance and capital market activities. In this aim, the Bank has significantly developed its human capital, reinforced its management systems and strengthened its financial flexibility. Bank Audi has indeed significantly reinforced its human resources. Currently, around 64% of its total staff count, of 2,886 employees, are university graduates operating within an advanced ICT environment. The Bank implemented a flexible organization structure based on country/business matrix model within the context of strong control and compliance policies. The adoption of a high-caliber organization structure allowed the Bank to optimize productivity and efficiency by rationalizing cross-functional processes in parallel with rapid growth and expansion policy. The Bank abides by very strict corporate governance guidelines. It was the first banking institution in the Middle East to cooperate with the International Finance Corporation, in association with the London-based Nestors Advisors for the adoption of best corporate governance practices. The Bank s Board of Directors has subsequently approved comprehensive corporate governance guidelines and functional charters which govern the Bank s activities. In addition, the Bank resolved this year to set up, for the first time in the region, an employee stock option plan aiming at aligning shareholders and employees interests. 40

41 A considerable reinforcement of financial flexibility was registered in parallel. The Bank actually accessed international markets nine times since its issuing in 1995, and for the first time in the Middle Eastern region, Global Depository receipts currently listed on the London Stock Exchange. The Bank lately reinforced significantly its capital base through a large scale capital increase, with the issuance of 10 million common shares raising shareholders equity to US$ 1,699 million, the equivalent of 29.37% of the consolidated equity of the Lebanese banking sector as at end-december Within this context, the Bank s franchise was significantly bolstered, raising the Bank s asset market share from 8.8% in 2001 to 18.6% in Over the period, the Bank was able to realize a yearly average growth in assets of 25.4%, which corresponds to three times the average of the sector, and an average growth in net earnings of 36.7%, equivalent to 2.5 times the average of the sector. The Bank has accordingly reached its preset objectives: Ensuring a growth in assets and earnings exceeding by far the average of the Lebanese and regional banking industries and that of direct peers. BANK AUDI sal: ASSETS GROWTH US$ Billion CAGR % Assets AUMs 41

42 BANK AUDI sal: EARNINGS GROWTH US$ Billion CAGR % A better breakdown over the different income sources, ensuring a share of 37% of non-interest income to net financial income in 2006, rising from 28% in As a result of the Bank s restructuring and expansion program over the last years, the Bank has diversified its range of products and services to cover all the activities traditionally carried out by a universal bank. In particular, the Bank now benefits from: A strong franchise in commercial banking activities, with a diversified loan portfolio comprising top enterprises in Lebanon, in addition to a number of prime corporates in the Middle East and North Africa region. A leading position in domestic and regional capital market activities, as evidenced by an average annual trading of US$ 4.2 billion mainly on local equity and fixed income papers. A significant investment expertise supported by wide research activities, with close to US$ 3 billion of mandates in Lebanon and the region. A strong franchise in retail banking, with a mix of 74 retail products and services sold in all countries of presence. A leadership position in private banking, with deposits over US$ 1 million each comprising 36% of the Bank s total customers deposits and assets under management, fiduciary deposits and custody accounts aggregating US$ 4.9 billion as at end-december Within such a context, the Bank has reinforced its domestic and regional positioning. As at end-december 2006, Bank Audi sal improved its rankings among banks operating in Lebanon and in the region. At the domestic level, the Bank now ranks first in Lebanon for most major ranking criteria (deposits, loans and shareholders equity). At the regional level, the Bank is now positioned among the top twenty five Arab banks according to all criteria. Actually, all the largest regional banks reported a drop in their relative market shares during the period when compared to Bank Audi sal. Subsequent to significant organic and inorganic expansion, the domestic assets of Bank Audi sal now represent more than 49% of Lebanon s GDP, ensuring a regional dimension for the Group. The large size of the Bank, relative to that of the country s economy, has made cross-border expansion a growing must, providing a promising outlook for the Bank s development at large. 42

43 1.2. THE BANK S CROSS-BORDER EXPANSION STRATEGY Following the successful diversification of its business lines, the Bank has been looking at a regional diversification by market of presence. Out of US$ 19.1 billion of total footings (assets and assets under management), the Bank has 70% in Lebanon and 30% abroad. It targets, in a medium term time horizon, a balanced activity between Lebanon and its affiliates abroad. The new strategy can be summarized by the strengthening of its domestic franchise and the enhancement of cross border activity in high value added markets. At the domestic level, the new strategic orientations revolve around the following: further consolidating the Bank s retail franchise strengthening the Bank s corporate business relationships developing private banking towards asset management. At the international level, the new strategy consists of further: consolidating the Bank s presence in the MENA region, strengthening the Bank s existing coverage of the diaspora in West Africa, Australia and Latin America. France Switzerland Algeria Tunisia Syria Lebanon Egypt Jordan Iraq Iran Saudi Arabia Qatar U.A.E. Sudan Yemen Actual Presence Immediate Targets In other words, the Bank s cross-border expansion scheme aims at reaching a wide geographic spread and at benefiting from the provision of financial services to Arab diasporas and citizens in the places where they are most concentrated. It is actually within this context that the Bank s regional expansion policy has recently gained ground in three main regions in the Middle East and North Africa area, namely: the Levant region, the North Africa region and the GCC region. 43

44 The Bank s strategic expansion to the Levant region falls within the context of important economic growth prospects and strong banking growth potential. The region has an underdeveloped status with significantly underutilized capacities apt to translate into a significant inward transfer of capital and technologies leading to a gradual improvement in per capita income. Such economic characteristics are apt to translate into a significant growth potential for banking activity, driven by the current weakness in banking coverage and by the rising needs for commercial and retail products and services. The Bank s successful expansion to Jordan and Syria lies within this perspective. The Bank s expansion to the North Africa region falls within the context of important oil and water resources in that region, a literate and active society, a low cost labor force and relatively weak regulatory barriers. These countries have improving political risks, a big export potential, with economic diversification supporting favorable growth perspectives. Within this context, the region is believed to have a strong banking growth potential, driven by the current underdeveloped banking status, the large retail banking potential and the significant needs for universal banking services. The Bank s successful expansion to Egypt and Sudan, as well as the current attempt to expand in the Maghreb, lie within this perspective. The Bank s expansion to the GCC region aims at benefiting from the strong Gulf economies, with their significant ties to regional countries in general and to Lebanon in particular. GCC countries are benefiting from very high liquidity, a strong repatriation of off-shore savings, along with rising oil prices generating significant real GDP growth and improved economic prospects. Such a region undeniably has a strong banking growth potential, driven by the significant capital market development needs on one hand, and the growing potential for corporate banking and project finance on the other hand. The coverage of GCC markets entails an expansion to a number of countries. One of the most enticing GCC markets for the Bank is Saudi Arabia, given the depths of the market, in addition to the traditional strong ties that exist between Lebanon and Saudi Arabia in general, and between Bank Audi and a large base of Saudi investors and businessmen in particular. Following the obtainment of a license in May 2006 from the Saudi Capital Market Authority, the Bank launched its investment company, Audi Saudi Arabia, early Moreover, the Bank has already been granted a license in the Qatar Financial Center, encompassing the provision of project finance, private wealth management, bancassurance, Islamic finance, and a wide range of private as well as corporate and investment banking services. The establishment process is currently in its final stages, with the official launch planned for the fourth quarter of In parallel, the Bank was granted a license for a representative office in Abu Dhabi to cover the Emirate market that enjoys a very strong economic outlook. Finally, the prospection for new markets with high potential is now in progress, with new markets gaining ground on Bank Audi s radar screen. The expansion of the Bank to all these countries is a key prerequisite for its regional positioning, with the aim of firmly integrating the restricted Group of leading regional banks. With a special focus on KSA, Egypt and Algeria which represent more than 40% of the MENA population and GDP, and on the back of a leading position in Lebanon with US$ 11 billion of domestic assets, the new regional entity would represent one of the strongest and fastest growing financial institutions in the Middle East and North Africa. The new arising entity would have the size, the management depths, the range of products and customer base that would give it the right market positioning, allowing it to play a dominant role in the region at large. 2. The Group s Performance in 2006 The year 2006 was a very particular but fruitful year for Bank Audi. It was characterized on one hand by a domestic activity somehow impacted by the adverse events in Lebanon, and on the other hand by an acceleration of the Bank s regional development through new regional implementations. It is thus becoming evident that the regional expansion offset reversal trends in the domestic market. Proof of that is the fact that 67.4% of the growth in consolidated activity was generated by foreign entities in 2006, a clear witness of the importance to reinforce and develop even further the regional dimension of the Bank, which extended over five new entities in 2006: The acquisition of an Egyptian bank in March, the granting of a license in Saudi Arabia for an investment company in May, the acquisition of 75% of a Sudanese bank in July, the granting of a license at Qatar Financial Center in December, and the 44

45 granting of a license for a representative office in Abu Dhabi in September. The Bank is currently present in eight countries in the Middle East, accounting for 47% of the Arab population and 54% of the Arab GDP. Within this environment, assets grew by 23.5% in 2006, footings by 21.9%, deposits by 19.8% and equity by 78.2%. Over the period, the Bank realized an average growth in assets of 25.4% and in net profits of 36.7%, which corresponds to more than double the average of the first six regional Arab banks. In parallel, the basic earnings per common share reported a CAGR of 29% over the past five years. Bank Audi s significant growth in earnings per common share (basic) was reported, despite a dilution by 42% in the number of shares between 2001 and 2006 as a result of four capital increases. The analysis that follows examines successively as at end-december 2006: The main characteristics of the domestic activity The major highlights of the activity of our affiliates abroad The consolidated financial standing of the Bank DOMESTIC ACTIVITY ECONOMIC AND BANKING ENVIRONMENT The year 2006 was a year of acute economic volatility. The economy was witnessing a good first half performance before a trend reversal took place in mid-year to display on an annual basis its worst performance in more than 15 years. At the image of the rapidly changing political climate, real growth is estimated to have witnessed a net contraction of 5% in the full-year 2006 (IMF), as a result of adverse politico-economic conditions. The political situation was in fact governed in the first half of the year by the National Debate taking place, with a quasi absence of significant security drifts. In the second half of the year, the situation was mostly governed by the July-August war, followed by the assassination of the Minister of Industry and the resignation of six ministers from the Cabinet in November, in addition to the accentuating domestic political crisis by year-end, with the significant demonstrations organized by the opposition against the government in December. The economy has actually reported a combined effect of stagnation and inflation. A year of rising inflation was observed, with a 7% rate for 2006, the highest in a decade, fueled mainly by adverse war supply effects, thus leading to a situation of stagflation. The quantity theory of money confirms the contractionary environment. The growth in Money Supply by 7.8% year-on-year was offset by a decline in the velocity of money by 8.0%, which, within the context of the said inflation, clearly led to a negative output growth. The contraction in velocity, a clear reflection of a sluggish aggregate demand performance, was realized within the context of a decline in cleared checks by 3.5% in 2006 relative to 2005, in addition to the rise in the average deposit base by 5.2% over the same period. Monetary conditions remained under control in a relatively difficult year. The Central Bank s foreign assets closed the year at US$ 13 billion, the equivalent of 80% of the Lebanese Pound Money Supply. The Bank managed to replenish its reserves through different means. It benefited from a significant Arab support during the war period, translating into long term deposits at BDL. It raised significant subscriptions in foreign currency CDs on behalf of domestic banks. It also benefited at times from an easing of monetary pressures, leading to an excess of foreign currency trading surpluses on the foreign exchange market. At the capital markets level, the year reported significant volatility as well. The Lebanese equity market reported a rise of 17.9% in the first half of 2006 (after a rise of 99% in 2005), but followed by a drop of 18.6% in the second half, to register an overall drop of 4% year-on-year. The Lebanese Eurobonds which were on demand in the first half-year reported some sell-offs in the second half, leading to an expansion in the average spread from 216 basis points in 2005 to 300 basis points in At the banking sector level, a remarkable resilience was once again reported in a very difficult year. Notwithstanding the slight decline of most banking aggregates during the period of summer crisis, all major balance sheet and income statement aggregates managed to record a satisfactory performance over the twelve-month period, mainly supported by the strong 45

46 activity growth of the first half of the year. Assets, deposits, loans, and especially shareholders equity all reported a solid growth year-on-year. Banks assets grew by a healthy 8.3% in 2006 to reach LL 114,840 billion (US$ 76,179 million), i.e. a progression of LL 8,825 billion (US$ 5,851 million) over the year, in spite of accusing a 2.0% drop over the third quarter of the year, as a direct consequence of the July-August hostilities. Banks profitability was also on the rise, as a result of the efforts for controlling the cost of deposits and operating expenses in a year relatively difficult. As per Bankdata Financial Services WLL, the consolidated profits of banks operating in Lebanon reported a rise by 30.5% in 2006 relative to It was driven by net interest income which rose by 29.8% and non-interest income which rose by 21.4%, offsetting the growth in general operating expenses of 16.3%. It is important to mention that the growth in banks net profits this year is an extension of the three-year positive earnings growth trend reported since 2002, following half a decade of net yearly contractions in banks bottom lines. The banks profitability is increasingly providing a strong support to their cross-border expansion efforts, which have been relatively intensified since the beginning of the year. 46

47 Lebanon s Major Economic Indicators Variation 2006/ Volume % Agriculture and industry Agricultural exports (US$ million) % Industrial exports (US$ million) 1,782 2, % Imports of industrial equipments (US$ million) % Construction Construction permits (square meters) 8,254,353 9,145, , % Construction cost index (%) -1.0% 18.0% 19.0% Trade and services Imports (US$ million) 9,339 9, % Number of ships at the Port 2,230 1, % Number of containers at the Port 127, ,978-7, % Merchandise at the Port (tons) 4,475,506 4,227, , % Planes at the Airport 38,197 32,980-5, % Number of passengers at the Airport 3,179,753 2,739, , % Number of tourists 1,139,524 1,062,635-76, % Public finance Gross domestic debt (LL billion) 29,141 30,204 1, % Foreign debt (US$ million) 19,156 20,349 1, % Total gross debt (US$ million) 38,486 40,385 1, % Expenditures (LL billion) 10,203 11,877 1, % o.w debt service (LL billion) 3,534 4,557 1, % Revenues (LL billion) 7,405 7, % Deficit (LL billion) Surplus (-) deficit (+) 2,798 4,582 1, % Primary balance (LL billion) Surplus (-) deficit (+) % Monetary situation Price index (Inflation rate in LL) -0.4% 7.0% 7.4% Velocity % Cleared checks (US$ million) 33,650 32,488-1, % BDL gross reserves (US$ million) 10,180 10, % BDL foreign assets (US$ million) 11,657 12,975 1, % BDL foreign assets/money supply LL 71.7% 83.3% 11.6% Banking activity Var: Total assets (LL billion) 3,828 8,825 4, % % change in assets 3.7% 8.3% 4.6% Var: Total deposits (LL billion) 3,215 5,588 2, % % change in deposits 3.9% 6.5% 2.6% Var: Total credits (LL billion) 744 2,419 1, % % change in credits 2.9% 9.3% 6.4% Foreign trade and balance of payments Import (US$ million) 9,339 9, % Exports (US$ million) 1,524 2, % Trade deficit (US$ million) 7,815 7, % Gross inflows of capital (US$ million) 8,562 9,909 1, % Balance of payments (US$ million) 747 2,795 2, % Source: Ministry of Finance, Central Bank of Lebanon and the concerned public and private organisms. 47

48 Principal Activity Indicators of Lebanese Banks Variation 2006/2005 US$ million Volume % Total assets 70,325 76,179 5, % Investment capital 4,253 5,783 1, % Investment capital / total assets 6.0% 7.6% 1.5% Net liquid assets in LL 29,087 39,106 10, % Net liquid assets in FC 18,025 11,907-6, % Total net liquid assets 47,112 51,012 3, % Treasury bills in LL 8,363 9,979 1, % Treasury bills in FC 9,307 10,674 1, % Total Treasury bills 17,671 20,653 2, % Credits to customers in LL 2,857 3, % Credits to customers in FC 14,462 15,759 1, % Total credits to customers 17,319 18,924 1, % Credits in FC/total credits 126.5% 126.1% -0.3% Customers deposits in LL 15,311 14, % Customers deposits in FC 41,675 46,256 4, % Total customers deposits 56,986 60,693 3, % Deposits in FC/total deposits 73.1% 76.2% 3.1% Net liquid assets in LL/deposits in LL 190.0% 270.9% 80.9% Net liquid assets/deposits 54.8% 55.8% 0.9% Net liquid assets in FC/deposits in FC 43.2% 25.7% -17.5% Tbs. in LL/deposits in LL 54.6% 69.1% 14.5% Tbs. in FC/deposits in FC 22.3% 23.1% 0.7% Tbs./deposits 31.0% 34.0% 3.0% Loans in LL/deposits in LL 18.7% 21.9% 3.3% Loans in FC/deposits in FC 34.7% 34.1% -0.6% Loans/deposits 30.4% 31.2% 0.8% MARKET BACKGROUND Bank Audi sal - Audi Saradar Group performed significantly well in It consolidated its market background, as witnessed by the significant improvement in its market shares on the domestic market. By end-december 2006, the Bank held an 18.6% share in assets, a 19.5% share in deposits, a 17.1% share in loans, and a 29.4% share in the total equity of the sector. Indeed, the significant growth in Bank Audi s deposits at a higher pace than that of the banking sector in 2006 (19.8% and 6.5% respectively year-on-year) reinforced the Bank s market positioning. The Bank s consolidated deposit market share bears witness to an enhancement of its positioning in the market place, reaching 19.52% at end-december 2006, against 17.35% at end-december As such, Bank Audi accounted for 52.8% of the total growth in deposits in the Lebanese banking sector. In Lebanese Pounds, the Bank s market share dropped by 1.90%, moving from 16.37% to 14.47%. In foreign currency, it grew by 3.38%, moving from 17.71% to 21.10%.

49 In a year of rising dollarization, the Bank actually reported a more significant rise in the share of its foreign currency deposits, relative to that of the sector. The Bank s deposits dollarization ratio rose by 7.7%, moving from 74.7% in 2005 to 82.4% in 2006, while the same ratio for the sector rose by 3.1%, moving from 73.1% in 2005 to 76.2% in Growth and Market Shares Bank Audi sal Balance sheet and earnings data (LL million) Dec-05 Dec-06 Dec-05 Dec-06 Assets 17,304,351 21,362, ,014, ,839,957 Loans and discounts 3,720,066 4,877,082 26,108,827 28,527,721 Customers deposits 14,906,942 17,859,545 85,906,227 91,494,069 Shareholders equity 1,437,348 2,560,709 6,410,744 8,717,724 Bank Audi sal Growth (%) Dec-05 Dec-06 Dec-05 Dec-06 Assets 9.52% 23.45% 3.75% 8.32% Loans and discounts 13.92% 31.10% 2.94% 9.26% Customers deposits 12.39% 19.81% 3.89% 6.50% Shareholders equity 36.73% 78.16% 10.37% 35.99% Sector Sector Bank Audi sal Market share (%) Dec-05 Dec-06 Sector Assets 16.32% 18.60% Loans and discounts 14.25% 17.10% Customers deposits 17.35% 19.52% Shareholders equity 22.42% 29.37% RELATIVE POSITIONING The Bank s performance clearly reflected on its domestic positioning relative to peers. The Bank ranked first in deposits for the first time in Lebanon, after reporting a deposit growth outpacing that of all direct peers. The Bank also ranked first in loans and shareholders equity, and second in assets and profits, slightly below the first bank. In fact, Bank Audi s assets grew by 23.5% in 2006, against 19.3% and 9.1% for its two direct peers. Such a growth is in line with the performance of the last five years, during which Bank Audi s assets grew by 25.4%, against 17.7% and 12% respectively for its direct peers. Bank Audi benefited from the most universal domestic bank profile among peers, capitalizing on the largest branch network in the Lebanese banking sector (with 78 domestic branches) and the largest range of products and services. 49

50 2.2. FOREIGN ACTIVITY The Group s foreign activity reported a positive evolution in In fact, 22.3% of the Group s consolidated assets were generated from abroad. Adjusted to assets booked in Lebanon but allocated to foreign parties and to investments to foreign entities, this share rises to 31%. In parallel, assets under management and fiduciary deposits booked outside Lebanon represented 53.9% of the total. Still, the share of profits generated outside Lebanon remains insignificant, though building up steadily, as a result of the time lag between the operating expenses of the newly established green fields operations and the targeted revenues. Yet, prospects are interesting, with 2007 forecasts suggesting a share of 14% of the latter in the Group s net profits, increasing by 7-8% per annum thereafter MAJOR DEVELOPMENTS AT THE LEVEL OF EUROPEAN BANKS Bank Audi Saradar France is one of the largest Near Eastern banks in France, with total assets of US$ 909 million at end-december A new commercial action plan was adopted by the Board in 2006 with, as objective, an exhaustive coverage of the Middle Eastern customers base in Europe and of European corporates involved in the Middle East. The dynamization of this activity, in addition to the launching of private banking activities, should ensure to the French affiliate a return equivalent to or above the cost of capital in France. Similarly, the consolidation of the private banking activity at the level of the Group allowed us to set ambitious objectives for Banque Audi (Suisse) in particular, and for the private banking business in general, which should ensure, in a threeyear horizon, doubling the level of assets under management with an increased contribution of this business line to the consolidated net profits of the Group. Banque Audi (Suisse) is already the largest Lebanese bank outside Lebanon and the second largest Arab bank in Switzerland, with US$ 2.6 billion of assets under management as at end-december MAJOR DEVELOPMENTS AT THE LEVEL OF NORTH AFRICAN BANKS In March 2006, the Bank closed the acquisition of close to 100% of an Egyptian Bank, the Cairo Far East Bank sae, that became Bank Audi sae and ensures a solid footprint in Egypt. During 2006, Bank Audi sae s shareholders equity was subsequently raised to US$ 100 million, and the Bank closed its first year on a very positive note regarding its forthcoming growth potential. Its total assets reached close to US$ 1 billion at end-december In parallel, the restructuring of the Bank was finalized, its general management appointed, and a business plan clearly defined, aiming at establishing a network of 50 branches starting In order to support this ambitious plan, the mother company has decided, on March 20, 2007, to raise the shareholders equity of Bank Audi sae by another US$ 100 million, to reach US$ 200 million. Moreover, in September 2006, Bank Audi acquired 75% of the National Bank of Sudan, through the participation in the Sudanese bank s increase in capital to US$ 72 million. This investment serves the Bank s objective to enter the Sudanese market in an efficient and cost effective way. At end-december 2006, total assets reached US$ 128 million. Today, the restructuring of its 17-branch network is finalized and the forthcoming action plan aims at building close to US$ 1 billion of assets in a medium term horizon with very interesting return perspectives MAJOR DEVELOPMENTS AT THE LEVEL OF NEAR EASTERN BANKS The Bank s network in Jordan closed a good year 2006, reinforcing its local positioning and outpacing in size foreign banks that have been present in Jordan for a much longer period of time. Total assets reached US$ 457 million at end-december In addition, the network ensured, in 2006, a positive contribution to the consolidated results of the Group, prior to the preset target. Within this perspective, the 2007 budget envisages a significant increase in the network s contribution to consolidated earnings. 50

51 In parallel, Bank Audi Syria closed the year 2006 ensuring assets superior to those of peers in relative terms for a first year of activity. Its total assets reached US$ 351 million at end-december 2006, with a positive bottom line contribution since mid-year The expansion of the network was launched and should continue in 2007, to reach a targeted network of 20 operating branches covering the majority of Syrian territories, and dedicated to commercial, retail and corporate banking activities OTHER DEVELOPMENTS (MIDDLE EAST) In May 2006, an investment company license was granted by the Saudi Capital Market Authority to Audi Saudi Arabia. Bank Audi contributed to 70% of Audi Saudi Arabia s capital, with the remaining 30% owned by prominent Saudi individuals and business groups. Audi Saudi Arabia launched its activities in February 2007 and will be backed by the investment banking resources of the mother company. It will be offering corporate finance, brokerage, asset management, private equity and wealth management services. The Bank was also granted a license to operate in the Qatar Financial Center in December QFC is designed to attract international financial services, such as project finance, private wealth management, bancassurance, Islamic finance and a wide range of private as well as corporate and investment banking services. Through its presence in QFC, the Bank intends to have a parallel coverage of Qatar and the GCC market. In addition, the Bank acquired an authorization for a representative office in the United Arab Emirates in 2006, which it launched early in The prospecting for other captive regional markets is underway, with implementation possibilities within a foreseeable time horizon. Through its cross-border expansion policy, the Bank aims at building a true full fledged regional bank at the service of the Arab nationals and economies, with a significant positioning among the largest banks of the Middle East and North Africa region CONSOLIDATED FINANCIAL PERFORMANCE A growth in assets by 23.5% was reported in 2006, mainly driven by foreign entities, bearing witness to a rapid growth in the latter. The strategy of the Group, through its regional expansion, consists of attaining, in a 5-year horizon, a more balanced breakdown of assets and profits between Lebanon and abroad. Consolidated assets reached US$ 14.2 billion and US$ 19.1 billion when including fiduciary deposits, security accounts and assets under management. The growth in assets was mainly driven by customers deposits which grew by 19.8% in 2006, i.e. the equivalent of LL 2,953 billion (US$ 1,959 million). In fact, customers deposits rose from LL 14,907 billion (US$ 9,889 million) in 2005 to LL 17,860 billion (US$ 11,847 million) in Similarly to assets, 74% of the growth in the Group s deposits comes from the foreign affiliates which are consolidating and reinforcing their positioning in the new markets of presence FINANCIAL STANDING The growth in assets and profits (respectively 23.5% and 55.1% year-on-year) was not realized at the detriment of the financial standing of the Group. The growth in assets in 2006 was used to the extent of 65.3% in liquid assets. As such, the ratio of overall liquidity rose to 85.5% of deposits, a very high level by regional and international standards. At the mirror image of liquidity, the ratio of loans to deposits reported 27.3% at end-december 2006, against 25.0% at end-december Primary liquidity in foreign currency (cash and deposits in banks, Eurobonds excluded) reached US$ 5.1 billion, the equivalent of 54.7% of customers foreign currency deposits. Primary liquidity is accounted for by deposits at BDL, representing 20.6% of customers deposits in foreign currency, and by deposits in OECD banks, representing 34.1% of customers deposits in foreign currency. It is worth mentioning that the ratio of loans in foreign currency to deposits in foreign currency stabilized at around 31.5% in

52 Liquidity and Cash Management Dec-05 Dec-06 LL million and % LL FC Total LL FC Total Treasury uses 4,023,733 8,596,626 12,620,360 3,540,209 11,729,994 15,270,203 o.w. BDL 2,446,676 2,649,820 5,096,496 2,340,602 3,173,873 5,514,475 o.w. Tbs and sovereign bonds 1,432,777 1,898,893 3,331,669 1,127,695 3,096,712 4,224,407 o.w. private bonds - 743, , , ,236 o.w. foreign banks 144,281 3,304,547 3,448,828 71,912 4,780,173 4,852,085 Treasury resources 148, , ,855 31, , ,017 Lending position 3,874,763 8,309,741 12,184,504 3,508,937 11,448,248 14,957,185 Assets 4,657,213 12,647,138 17,304,351 4,153,420 17,209,365 21,362,784 Loans 251,413 3,468,654 3,720, ,287 4,637,795 4,877,082 Customers deposits 3,777,752 11,129,191 14,906,942 3,148,359 14,711,186 17,859,545 Loans to assets 5.4% 27.4% 21.5% 5.8% 26.9% 22.8% Loans to deposits 6.7% 31.2% 25.0% 7.6% 31.5% 27.3% Liquid assets to assets 86.4% 68.0% 72.9% 85.2% 68.2% 71.5% Liquid assets to deposits 106.5% 77.2% 84.7% 112.4% 79.7% 85.5% Net liquid assets to deposits 102.6% 74.7% 81.7% 111.5% 77.8% 83.7% Sovereign bonds/deposits 37.9% 17.1% 22.3% 35.8% 21.1% 23.7% Sovereign + BDL/deposits 102.7% 40.9% 56.5% 110.2% 42.6% 54.5% The Bank has slightly increased its net exposure on the sovereign in foreign currency within the context of attractive buying opportunities during the war period, the latter moving from US$ 1,260 million at end-december 2005 to US$ 1,723 million at end-december Those figures represent Bank Audi s exposure net of bonds which risks have been ceded to customers. As a result of the very significant growth in FC deposits, the exposure as a percentage of customers deposits in foreign currency rose from 17.4% in 2005 to 18.5% in As a percentage of shareholders equity, the ratio yet drops from 132.1% in 2005 to 101.4% in Management is looking to significantly decrease its sovereign exposure in foreign currency over the next couple of years. At the LL liquidity side, the following was observed: total liquid assets in LL, which represented 106.5% of LL deposits in 2005, represented 112.4% of LL deposits in The ratio of loans in LL to deposits in LL rose from 6.7% in 2005 to 7.6% in The ratio of Cash and Central Bank in LL as a percentage of customers deposits in LL rose from 64.8% in 2005 to 74.3% in In parallel, a slight decline in the ratio of LL Tbs to LL deposits was reported, the latter declining from 37.9% in 2005 to 35.8% in The Bank was holding an LL Tbs portfolio of LL 1,128 billion (US$ 748 million) at end-december 2006, against a portfolio of LL 1,433 billion (US$ 950 million) at end-december

53 Long Term Borrowings and Equity Dec-05 Dec-06 LL million and % LL FC Total LL FC Total Certificates of deposits 0 153, , , ,148 Shareholders equity 669, ,012 1,437, ,459 1,648,250 2,560,709 Long term liabilities 669, ,159 1,590, ,459 1,801,397 2,713,857 Total liabilities 4,726,212 12,578,139 17,304,351 4,274,647 17,088,138 21,362,784 Net loans 251,413 3,468,654 3,720, ,287 4,637,795 4,877,082 Long term liabilities/total liabilities 14.2% 7.3% 9.2% 21.3% 10.5% 12.7% Long term liabilities/net loans 266.2% 26.6% 42.8% 381.3% 38.8% 55.6% It is important to mention that the share of LL Treasury bills in the liquid assets in LL of the Group is the lowest among peers, and this to the advantage of CDs and deposits at the BDL. In fact, the Bank considers that the latter represents a better asset class than the local Tbs. Interest earning assets, as a percentage of total assets, slightly decreased from 94.4% as at end-december 2005 to 94.3% as at end-december The decrease is mainly due to a slight rise in non-interest earning assets from 5.6% of total assets at end-december 2005 to 5.7% at end-december Within this context, the breakdown of interest earning assets suggests that Cash and Central Bank represented 25.8% of total assets, against 29.5% in the year before, and bonds and financial instruments with fixed income reached 3.2% in 2006 against 4.3% in 2005, yet offset by a rise in the share of Lebanese Treasury bills and other government bills from 19.3% in 2005 to 19.8% in 2006, banks and financial institutions which rose from 19.9% to 22.7%, and loans and advances to customers which increased from 21.5% to 22.8%. The breakdown of non-interest earning assets reveals that the increase is mainly due to an increase in the share of the goodwill which rose from 0.6% in 2005 to 1.0% in 2006, offsetting the slight decreases witnessed at the level of all other components of non-interest earning assets. Interest Earning Assets Dec-05 Dec-06 LL million and % Volume Structure Volume Structure Cash and Central Banks 5,096, % 5,514, % Lebanese Treasury bills and other government bills 3,331, % 4,224, % Bonds and financial instruments with fixed income 743, % 679, % Banks and financial institutions 3,448, % 4,852, % Loans and advances to customers 3,720, % 4,877, % Total interest earning assets 16,340, % 20,147, % Total assets 17,304, % 21,362, % 53

54 Non Interest Earning Assets Dec-05 Dec-06 LL million and % Volume Structure Volume Structure Investments 7, % 21, % Marketable securities 212, % 229, % Bank acceptances 129, % 136, % Tangible fixed assets 383, % 460, % Intangible fixed assets 12, % 12, % Other assets % 1, % Regularization accounts 118, % 137, % Goodwill 99, % 216, % Total non interest earning assets 963, % 1,215, % Total assets 17,304, % 21,362, % Interest bearing liabilities, as a percentage of total liabilities, decreased from 90.3% as at end-december 2005 to 86.4% as at end-december 2006, as a result of an increase in non interest bearing liabilities from 9.7% at end-december 2005 to 13.6% at end-december The large scale capital increase closed in April 2006 translated into an increase in the share of shareholders equity as a percentage of total liabilities from 7.4% at end-december 2005 to 10.8% at end-december In parallel, the decrease in interest bearing liabilities is revealed at the level of banks and financial institutions whose share decreased from 2.4% at end-december 2005 to 1.3% at end-december 2006, and customers deposits whose share decreased from 86.1% of total liabilities to 83.6% over the same period. Interest Bearing Liabilities Dec-05 Dec-06 LL million and % Volume Structure Volume Structure Central Banks 27, % 27, % Banks and financial institutions 408, % 285, % Deposits from customers 14,906, % 17,859, % Engagements by acceptances 129, % 136, % Liabilities under financial instruments 153, % 153, % Total interest bearing liabilities 15,625, % 18,462, % Total liabilities and equity 17,304, % 21,362, % 54

55 Non Interest Bearing Liabilities Dec-05 Dec-06 LL million and % Volume Structure Volume Structure Other liabilities 168, % 228, % Regularization accounts 46, % 66, % Provisions for risks and charges 26, % 44, % Shareholders equity 1,277, % 2,313, % Net income for the year 159, % 247, % Total non interest bearing liabilities 1,679, % 2,900, % Total liabilities and equity 17,304, % 21,362, % The breakdown of liabilities by currency shows a decrease in the LL share, as a percentage of total liabilities, from 27.3% as at end-december 2005 to 20.0% as at end-december 2006, reflecting the shift from deposits in LL to deposits in foreign currencies. Over the same period, assets denominated in LL, as a percentage of total assets, decreased from 26.9% in 2005 to 19.4% in These movements are in line with the dollarization trend observed in 2006 within the context of currency conversions to the benefit of foreign currency over the year. In absolute terms, at end-december 2006, the Bank had a long FX positive standing at LL billion against a long position of LL 69 billion at end-december Breakdown of Assets and Liabilities by Currency Dec-05 Change% Dec-06 Change% Assets LL 26.9% -3.7% 19.4% -7.5% FC 73.1% 3.7% 80.6% 7.5% Liabilities LL 27.3% -3.6% 20.0% -7.3% FC 72.7% 3.6% 80.0% 7.3% FC Position Long Long FC 0.40% 0.57% The year 2006 reported slight changes in the uses/resources maturity gap analysis. The ratio of the average life of uses to that of resources increased from 36.4 times to 48.5 times. Indeed, as at end-december 2006, 150% of resources maturing in less than a year are covered by uses of similar maturity against 185% at end-december

56 Breakdown of Uses and Resources by Maturity 1 to 3 Months 1 to Resources (LL million) < 1 Month 3 Months to 1 Year 1 to 5 Years > 5 Years Total December 05 5,700, ,266 1,651,942 7,132,977 1,847,976 17,304,351 December 06 7,253,816 1,526,874 3,403,736 5,727,355 3,451,004 21,362,785 1 to 3 Months 1 to Uses (LL million) < 1 Month 3 Months to 1 Year 1 to 5 Years > 5 Years Total December 05 12,651,427 1,547,873 1,200, ,944 1,478,597 17,304,351 December 06 14,225,861 1,607,898 2,401, ,885 2,450,870 21,362,785 Gap analysis 1 to 3 Months 1 to (Cumulative in %) < 1 Month 3 Months to 1 Year 1 to 5 Years > 5 Years Total December % % % % % % December % % % % % % ASSET QUALITY The analysis of the loan portfolio (including acceptances and loan loss reserves) by economic sector, by customer base, by number of borrowers and by risk bracket reveals the following: The transportation and communication sector had the lion s share with 17.8% of total loans at end-december 2006, followed by individuals with 16.1%, manufacturing industries with 11.7%, wholesale trade with 11.4% and construction with 10.6%. All other sectors had shares of less than 10% of total loans in In the classification, a facility is categorized as individual according to the purpose of the facility, and not to the nature of the borrower. Out of the LL 845 billion to individuals, LL 192 billion are from Geneva (Lombard loans), and LL 560 millions for retail of which LL 122 million are covered to a large extent by cash collateral. 56

57 Breakdown of Credit Portfolio by Economic Sector Description LL million and % Utilization % Transportation and communication 933, % Individuals, private bank and retail 844, % Manufacturing industries 613, % Wholesale trade 598, % Construction (developers and contractors) 554, % Real estate services 459, % Retail trade 365, % Hotels and restaurants 208, % Financial intermediaries 160, % Other associations 144, % Electricity, gas and water 118, % Educational services 74, % Extractive industry 65, % Social and health services 49, % Agriculture 35, % Public administration 11, % Overseas organizations 9, % Households employing personnel 5, % Total 5,253, % 2006 Breakdown of Credit Portfolio by Customer Base Description LL million and % Utilization % Small & medium-sized institutions 1,580, % Corporate clients 2,420, % Individuals 1,253, % Total 5,253, % 2006 The analysis of the loan portfolio by customer base suggests that 46.1% of total loans were accounted for by corporate clients at end-december 2006, followed by small and medium-sized institutions with 30.1%, and sole proprietorships with 23.9% of the total. The analysis of the loan portfolio by maturity suggests that short term facilities account for 55.5% of the total, followed by long term facilities with 30.2% and medium term facilities with 14.4%. Short term facilities are those that mature within one year of their extension, medium term facilities have maturities between one and three years, and long term facilities have maturities greater than three years. 57

58 Breakdown of Credit Portfolio by Maturity Description 2006 LL million and % Utilization % Short term facilities 2,915, % Medium term facilities 754, % Long term facilities 1,584, % Total 5,253, % The analysis of the loan portfolio net of cash collaterals by country risk reveals that the LL 3.7 billion portfolio is broken down over LL 1.7 billion of non-lebanese exposure and LL 1.6 billion of Lebanese exposure, with the remaining LL 327 million being accounted for by substandard and doubtful loans. With respect to asset quality, a slight deterioration was reported since the third quarter of 2006, yet offset by significant provisioning efforts. Indeed, the quality of the loan portfolio of Lebanese banks was adversely affected by Lebanon s July-August events, as the banks managements downgraded some regular loans to substandard and doubtful loans, and consequently took the required additional loan loss provisions. Net doubtful loans and net substandard loans rose from LL 73.6 billion (US$ 48.8 million) at end-december 2005 to LL 86.5 billion (US$ 57.4 million) at end-december As a percentage of gross loans, the ratio of net doubtful loans and substandard loans improved from 1.89% of gross loans at end-december 2005 to 1.69% at end-december The ratio of net doubtful loans to gross loans yet rose from 1.06% in 2005 to 1.24% in 2006, reflecting the effects of the July-August events and their impact on the loan quality of the Lebanese banking industry in general. The ratio of loan loss reserves on doubtful stood at 78.6%, close to last year s level standing at 80.6%. The Bank s significant provisioning effort adds to a high level of collateralization. As such, as at end-december 2006, close to 30% of consolidated net loans are covered by cash collateral, notwithstanding the existence of other types of guarantees such as real estate mortgages, pledges of corporate shares and/or Treasury notes and personal guarantees. Asset quality ratios look even more contained within the context of a significant reinforcement in shareholders equity during the year. The ratio of net substandard loans to total shareholders equity dropped from 2.24% at end-december 2005 to 0.89% at end-december The ratio of net doubtful loans to total shareholders equity dropped from 2.88% to 2.49% over the same period. The aggregate ratio of net substandard loans and doubtful loans to total shareholders equity dropped from 5.12% at end-december 2005 to 3.38% at end-december

59 Substandard & Doubtful Loans Dec-06/ LL million and % Dec-05 Dec-06 Dec-05 Regular loans 3,646,443 4,790,625 39,052 Gross substandard loans 43,034 28,368-14,666 o.w. net substandard loans 32,159 22,769-9,391 o.w. interest in suspense 10,875 5,599-5,275 Gross doutful loans 213, ,886 83,937 Net doutful loans 41,464 63,688 22,224 LLRs 172, ,198 61,713 o.w. capital 113, ,469 51,600 o.w. interest in suspense 58,616 68,729 10,113 Gross substandard and doubtful loans 256, ,253 69,271 Gross loans 3,903,425 5,116,879 1,213,453 Total LLRs 183, ,797 56,438 o.w. capital 113, ,469 51,600 o.w. interest in suspense 69,490 74,328 4,838 Gross substandard and doubtful loans to gross loans 6.58% 6.38% -0.21% LLRs to gross loans 4.70% 4.69% -0.01% LLRs to SLs and doubtful loans 71.35% 73.50% 2.15% Net DLs and SLs in volume 73,624 86,457 12,833 Net SLs as a % of gross loans 0.82% 0.44% -0.38% Net DLs as a % of gross loans 1.06% 1.24% 0.18% Shareholders equity 1,437,348 2,560,709 1,123,361 Net DLs as a % of equity 2.88% 2.49% -0.40% Net DLs and SLs as a % of equity 5.12% 3.38% -1.75% CAPITAL ADEQUACY At end-december 2006, the Bank s shareholders equity reached LL 2,561 billion (US$ 1,699 million), the highest capitalization level in the industry. It actually grew by LL 1,123 billion (US$ 745 million) in 2006, the equivalent of 78.2% during the year. Out of total shareholders equity, 64.4% is accounted for by foreign currency, while 35.6% is accounted for by Lebanese Pounds. The Bank s long term funding as a percentage of its aggregate loan portfolio consequently rose from 42.8% in 2005 to 55.6% in 2006, underlining a significant improvement in financial flexibility. It is worth recalling that on April 28, 2006, the Bank had closed a US$ 600 million capital increase in shareholders equity through the issue of 10 million new common shares. The issue, at the price of US$ 60 per share, is broken down over two trenches: a first trench of 7,553,248 million shares allocated to EFG-Hermes Holding Co. sae and covering US$ 453 million, and a second trench of 2,446,752 shares suscribed by existing shareholders within the scope of a right issue, with a total of US$ 147 million. Bank Audi s shareholders equity, by far the largest among Lebanese banks, now represents around 30% of the consolidated equity of the Lebanese banking sector, according to year-end 2006 figures. At the same date, risk weighted assets reported LL 8,114 billion. Tier I capital reached LL 1,997 billion and Tier II capital recorded LL 88 billion. Accordingly, the capital adequacy ratio as at end-december 2006 registered 24.61% based on Tier I capital and 1.09% based on Tier II capital, 59

60 which implies that the overall ratio is 25.69%. Assuming the capital adequacy ratio is recalculated including the profits for the year net of dividend distribution, it reached 26.11% based on Tier I capital and 1.09% based on a Tier II capital, or a total capital ratio of 27.20%, a very high ratio by regional and international standards, outlining a significant coverage of third party risks by the Bank s own funds. Capital Adequacy Ratio LL million and % Dec-05 Dec-06 Risk weighted assets 6,501,501 8,114,344 Tier one capital 1,033,006 1,996,597 Tier two capital 127,252 88,126 Total capital 1,160,258 2,084,723 Tier one capital ratio 15.89% 24.61% Tier Two capital ratio 1.96% 1.09% Total capital ratio 17.85% 25.69% Profits 159, ,415 Dividends 79, ,090 Tier one capital ratio (profits net of dividend included) 17.12% 26.11% Tier Two capital ratio 1.96% 1.09% Total capital ratio 19.08% 27.20% PROFITABILITY On the profitability front, the Bank s performance proved to be quite significant over the year. The Bank s unaudited net profits grew by 55.1% year-on-year to reach LL billion (US$ million). Adjusted to the extraordinary expenses related to the stock option plan amounting to LL 17.9 billion (US$ 11.9 million), Bank Audi s net profits would reach LL billion (US$ 176 million). This growth consolidates the observed trend in earnings growth since 2001, bringing up the CAGRs of net profits for the period at Bank Audi to 36.7%. 60

61 Factors Affecting Increase in Net Profits Dec-06/ LL million and % Dec-05 Dec-06 Dec-05 Average assets 16,552,204 19,333, % ROAA 0.96% 1.28% 0.32% Net profits 159, , % Increase in average assets 3,303,060 2,781, % Improvement in operating conditions 0.15% 0.32% 0.17% Increase in net profits 51,443 87, % Of which Size effect 31,835 35,594 Price effect 19,608 52,290 The year-on-year analysis reveals that the increase in consolidated earnings resulted from an increase in net financial income by LL billion (US$ 121 million) and an increase in the cost base by LL 94.7 billion (US$ 63 million). The rise in net financial income is broken down over net interest income, rising by LL billion (US$ 83 million) year-on-year (43.4%) and non interest income, growing by LL 57.3 billion (US$ 38 million) year-on-year (30.8%). Within the context of a rise in average assets by 16.8%, the Bank reported an increase in interest margin by 36 basis points, moving from 2.05% in December 2005 to 2.4% in December 2006, leading to a corollary rise in spread by 33 basis points and moving from 1.93% to 2.27%. The latter is attributed to the Bank s control over its cost of deposits, in addition to the generation of positive spreads on the primary liquidity in foreign currency, following the negative carry observed in the past few years, which is a general trend in Lebanese banking. In parallel, the Bank s increase in the cost base is due to a rise of LL 67.9 billion (US$ 45 million) in general operating expenses, LL 8.6 billion (US$ 6 million) in provisions on financial fixed assets, and of LL 18.2 billion (US$ 12 million) in income taxes year-on-year. Out of the total rise in general operating expenses, 39% is attributed to staff expenses, 26% is tied to the Employee Stock Option Plan Expense, 7% is due to amortization charges (bearing in mind that out of the amortization charge, there is a charge of US$ 4 million related to real estate acquired in settlement of debt), while the remaining 27% is accounted for by other operating expenses. General Operating Expenses Dec-05 Dec-06 Dec-06/Dec-05 LL million and % Volume Structure Volume Structure Volume Structure Staff expenses 146, % 173, % 26, % Employees stock options expense as per IFRS % 17, % 17, % Other operating expenses 107, % 126, % 18, % Depreciation 29, % 34, % 4, % Total 284, % 334, % 49, % 61

62 The diversification of domestic activities, in addition to the regional expansion strategy, generated a more even breakdown of net financial income over interest margin and non interest income. In fact, the latter reaches 37.2% of total income. Beyond the fact that such a level is largely superior to the average of direct peers, it significantly reinforces the global immunity of income with respect to adverse interest rate evolutions, which actually explains the significance of the observed average annual income growth over the past five years. As a result of the above mentioned performances, the Bank s return ratios were on the rise in the year The Bank s return on average assets rose from 0.96% in 2005 to 1.28% in The rise in the return on average assets is due to both an improvement in asset utilization from 2.87% to 3.40% and an improvement in operating margin from 33.62% to 37.65%. Components of ROAA & ROAE Dec-06/ In % Dec-05 Dec-06 Dec-05 Revenues 3.07% 3.49% 0.42% - Expenses 1.72% 1.82% 0.10% = Pre-tax, pre-credit cost income 1.35% 1.67% 0.32% - Credit cost 0.19% 0.13% -0.06% = Pre-tax income 1.16% 1.54% 0.38% - Income tax 0.19% 0.26% 0.07% = After tax income 0.96% 1.28% 0.32% Dec-06/ Components of ROAE Dec-05 Dec-06 Dec-05 (ROAE = OM x AU x 1/CS x 1/OR x CC x BF) OM = Operating margin (pre-tax net income/revenues) 37.74% 44.12% 6.39% AU = Asset utilization (revenues/average assets) 3.07% 3.49% 0.42% CS = Capital structure (avg equity/avg assets) 7.52% 10.34% 2.82% OR = Overhead ratio (expenses/revenues) 56.03% 52.22% -3.81% CC = Credit costs (credit costs/revenues) 6.23% 3.66% -2.58% BF = Balancing factor (expenses/credit costs) 8.99% 14.28% 5.35% Pre-tax net income/avg equity 15.40% 14.89% -0.51% Income tax/avg equity 2.58% 2.52% -0.06% After-tax net income/avg equity 12.82% 12.38% -0.44% After-tax net income/avg common equity 14.92% 13.59% -1.33% In parallel, the Bank s return on average common equity reached 13.59% in 2006, despite the significant equity dilution following the US$ 600 million capital increase closed in April. It is worth recalling that the Bank s equity to assets ratio reached on average 10.34% at end-december 2006, against 7.52% at end-december

63 It was normal that the continuing efforts to control general operating expenses within the context of an increase in the Bank s income result in an improvement in efficiency ratios. As a matter of fact, the cost to income ratio fell to 51.7% in 2006, against 56.2% in 2005 (49.2% when adjusted for the exceptional charge on stock options), i.e. a significant improvement of 4.5% over the year. These performances translated into a basic common earnings per share of US$ 4.72 (rising by 23.2% relative to last year), despite the capital dilution, as a result of the issue of 10 million new common shares following the new capital increase. Adjusted to the Stock Option Plan expense, diluted earnings per common shares recorded US$ 4.54, i.e. an increase of 32.8% with respect to Common book value per share reached US$ (rising by 47.3% relative to end-2005). Common Shares Performance Dec-06/ US$ thousands Dec-05 Dec-06 Dec-05 Share price (in US$) Number of outstanding shares 30,416,240 40,416,240 10,000,000 Number of ordinary shares 22,766,240 32,766,240 10,000,000 Treasury stock 51, ,921 72,058 Diluted potential ordinary shares from ESOP - 1,161,548 1,161,548 Weighted average number of common shares 22,571,211 29,228,543 6,657,332 Number of preferred shares 7,650,000 7,650,000 - Shareholders equity 953,465 1,698, ,182 Common equity (Group share) 623,430 1,319, ,825 Preferred equity 285, ,000 - Common book value per share (in US$) Net income for the year (Group share) 104, ,562 58,713 Less: Distribution to preferred shares 18,450 25,638 7,188 Common earnings 86, ,925 51,525 Basic earnings per common share (in US$) Diluted earnings per common share (in US$) Market capitalization 1,362,559 1,833, ,712 Market value added 739, , ,113 Market value added/market capitalization 54.2% 28.0% % Price to common book value (in US$) Price to common earnings (in US$) Price to assets 11.9% 12.9%

64 PREPARATIONS FOR BASEL II The Bank is preparing for Basel II implementation. It is worth mentioning that Lebanese regulatory authorities have published an initial series of circulars for Basel II preparation and have announced January 1, 2008 as the date when the Basel II Capital Accord will enter into effect in Lebanon. Bank Audi will be applying the standardized comprehensive approach for the computation of the regulatory capital charge for credit and market risk, and the basic indicator or the standardized approach for operational risk. The Bank has been doing quarterly quantitative impact studies since September 2006, both for pillar 1 and potential adjustments as part as pillar 2. Capital adequacy under Basel II including such adjustments remains well above the regulatory level of 8%. On the other hand, the Bank is preparing for more advanced computation methods. In the first half of 2007, it started rating customers using a third party expert system (Moody s MRA) and collecting default and recovery data in order to prepare for the IRB approach to compute capital consumed by credit risk. Since 2005, it has also been collecting operational loss data with a view to apply the AMA approach to compute the capital charge for operational risk. In both cases, a data sharing framework among Lebanese banks would go a long way towards helping banks that wish to qualify for such methods to apply them. As part of pillar 2, the Bank is institutionalizing capital consumption (also moving towards better estimates of economic capital in parallel to the regulatory measurements of Basel II) and return on risk-adjusted capital as a metric central to decision-making. Moreover, and within the scope of best practice corporate governance, the Bank is further reinforcing its risk management department to operate independently according to formal policies. Reports to the Board of Directors include a comprehensive review - both qualitative and quantitative - of all classes of risk. For pillar 3, starting 2008, the Bank is expected to disclose at the very least the full set of applicable tables mandated by the Basel II Capital Accord. In fact, Bank Audi already discloses a significant amount of risk-related information, both in annual reports and to certain constituencies such as risk rating agencies, and believes that a more transparent environment will be beneficial to all banks in the sector, in that it will reduce the risk premium investors and depositors currently demand to compensate them for what they see as imperfect information currently disclosed by Lebanese banks. For this reason, Bank Audi views good risk management in general and Basel II in particular as a tremendous opportunity to gain credibility and competitiveness in capital markets, thus reducing its cost of capital and improving its growth prospects NON-FINANCIAL DEVELOPMENTS HUMAN RESOURCES DEVELOPMENT The prosperity of an organization lies in the ability and dedication of its workforce. To that effect, Human Resources (HR) not only play an integral role in organizational success, but also assume the position of a strategic partner in achieving business activities. With the need for human capital to align with the expansion strategy of the Bank, HR at Bank Audi are taking on the vital role of developing the workforce and implementing state-of-the-art systems, in close coordination with business line, departmental and subsidiary heads at the corporate level. HR are committed to act as the crucial element of the strategy they ought to be, for their role in the selection, motivation and growth of human capital. To this end, new HR achievements were recorded, several development projects were introduced and other practices initiated in previous years were continued. At the level of recruitment and selection processes, local and international recruitment is being made carefully. In addition to the standard hiring process, Bank Audi has managed to become a pioneer in its implementation of Personality Tests, Leadership Tests and Competency Based Interviews (CBI) to enhance the efficiency and quality of its selection process. Through its challenging work environment, the Bank is increasingly attracting young, ambitious and talented employees. The number of university graduates now exceeds 64% of the total active workforce.

65 EVOLUTION OF THE NUMBER OF EMPLOYEES 3,000 2,500 2,914 2,000 2,278 1,903 1,500 1,000 1,021 1,174 1,259 1, STAFF DISTRIBUTION BY EDUCATION PhDs MBA, DEA, Eng. & equiv. MSC BSC Technical diplomas & equiv. Baccalaureate School 0% 10% 20% 30% 40% 50% Dec-05 Dec-06 65

66 At the level of training and development, HR have dedicated themselves to involving employees in learning activities that aim to continuously increase the Bank s intellectual capital. The year 2006 was a year of active training and development for Bank Audi. It witnessed the provision of more than 284,000 individual training hours broken down as such: 122,540 rotational on-the-job training 110,445 student internship 51,232 technical and behavioral training activities Languages 10.6% IT 3.6% Banking Finance and Economic Education 45.2% Managerial & Organizational Behavior 26.3% BREAKDOWN OF INDIVIDUAL TRAINING HOURS IN 2006 Retail Banking 14% Technical and behavioral training activities on offer involved 85% of the workforce, versus 69% in In addition to technical training, emphasis was put on developing staff management skills and organizational behavior. For example, special training programs were designed and delivered to provide employees with potential and performance enhancing skills. These include: The New Employees Training Program (NETP) which integrates new employees and helps them quickly adapt and succeed in their newly assigned jobs. The Talent Management Program (TMP) which develops especially promising talents through a fast track training program. The Specialized Credit Training Program (SCTP) which readies a pool of technically capable credit officers through a fast track program. The Managerial Development Program (MDP) which readies line managers at large. In line with reinforcing the importance of education and self development, the Bank is providing its employees with both local and international educational/professional certification sponsorship programs. In 2006, a total of 61 employees were sponsored (over and above the 33 existing sponsorships from previous years), adding up to a total of 94 outstanding educational sponsorships. In addition, the Bank sponsored 15 promising employees to attend specialized programs at INSEAD in Fontainebleau - France. Bank Audi is committed to retain its employees by helping them grow and develop their full potential. To this end, by following up actively on their career progress, the Employee Relations Department has taken on the crucial role of assisting employees and providing them with opportunities for career mobility and advancement in the form of transfers, promotions or international assignments. In 2006, the number of employee promotions reached 284 versus 165 in Moreover, the number of employee transfers rose by 61% relative to the year before. In line with offering support to all 66

67 employees, frequent field visits and constant employee follow-up have been implemented, and the process of identifying high-potential and high-value employees is currently being initiated. Along with Bank Audi s regional expansion strategy rose the urgent need for HR to maintain a proactive role in aligning all HR efforts in individual countries with our corporate HR mission and strategy. For this purpose, the Overseas Operations Unit was created to extend HR support where needed, and coordinate the implementation of HR projects or products outside Lebanon. Over the past couple of years, HR have been working on developing proper systems and work processes to better face the major challenges arising from today s evolving business environment: The development and implementation of a systematic process for a comparative evaluation of jobs within the Bank has been instigated. The ultimate aim of such a project, which is dependent on job descriptions and job evaluations, is to design a salary grading matrix that allows the Bank to review its salaries and ensure consistency and competitiveness with the market. The Performance Management system has been introduced with the intention of aligning employee goals with the Bank s objectives. It is used to reinforce individual accountability for meeting set goals and to evaluate individual and organizational performance results. The Balanced Scorecard is being developed as a means to translate HR departmental goals into action, focusing on key result areas and key performance indicators. To ensure efficiency and, ultimately, success of such new systems, HR is in the process of implementing the state of the art PeopleSoft HR management program. This new electronic tool, which currently supports millions of employees worldwide, aims to serve as the sole reference for all HR related data. It provides quick reply, quality of information and simplification of processes IT AND SYSTEMS DEVELOPMENT Bank Audi s IT and systems development moved in lockstep with the business to address the challenges facing the industry and the Bank at large. Bank Audi s IT division has successfully implemented a wide range of business applications and a flexible infrastructure providing the capacity to innovate in business models that map to strategic goals. In order to achieve what we call dynamic synchronization with the business demands, the IT division has developed and successfully implemented a variety of products supporting the business lines locally and internationally. Also, analytical applications have been implemented in order to monitor the performance of the products and to measure the profitability of the offered services. More recently, IT implemented a Risk Advisor system for the analysis and risk rating of business borrowers, combining the financial reporting and forecasting capabilities with an expert system to provide an in-depth analysis of credit risk. It is currently in the process of implementing an advanced anti-money laundering monitoring tool for the prevention and detection of money-laundering activities, and for dynamic segmentation of the clientele. Bank Audi s IT is constantly developing and implementing new and enhanced modules related to its Enterprise Resources Planning (ERP) system and Trade Finance system. In addition, Bank Audi s IT played a major role in the Bank s cross-border expansion which has covered so far, in addition to Paris and Switzerland, seven other countries: Jordan, Syria, Egypt, Sudan, Saudi Arabia, Abu Dhabi, and Qatar. IT has equipped its international branches and sister banks with the same technology as in Lebanon and has implemented systems and internally developed processes capable of supporting various business lines such as Retail, Private, Corporate and Investment Banking/Brokerage. 67

68 Following the building of Bank Audi s data warehouse, the Bank purchased CRM products and has been implementing a broad range of sophisticated on-line analytical processing and reporting tools, and analytical and event-based marketing systems. The Bank started launching its sales incentive models (back-end and front-end) starting the first quarter of Moreover, the conversion of the Bank s ATMs in Lebanon to an Electronic Funds Transfer (EFT) switch and the implementation of the latter in Jordan, Syria, and Egypt to drive their ATMs allowed the setup of international traffic (transactions) to be routed to Visa and MasterCard through Lebanon. In order to better manage the Bank s ever growing human resources, the Bank purchased a Human Resources Management Solution and is currently in the process of implementing phase I of the project, to be launched during Bank Audi s IT did not only work on facilitating the execution of business processes, but also provided a flexible and technologically advanced infrastructure. This required the restructuring of the Bank s wide area network WAN, setting up new environments, establishing a virtual private network (VPN) between Lebanon and all the Bank s affiliates, in addition to systems and databases upgrades. Throughout its operations, IT played a main role in guarding the inviolability of the systems architecture and security. Systems availability and security have always been a top priority for IT. Backup and recovery, network and systems security procedures are considered a fundamental and crucial element within the overall automation strategy. The Bank s critical systems have an up-to-date replicated environment which can be accessed immediately as and when needed. In addition, IT has implemented a disaster recovery site in Lebanon, hosting the main banking applications to ensure the business continuity in case of disaster, while the same is now being implemented abroad at the level of the Bank s affiliates. 68

69 69

70 2005

71 Nurturing Economy The importance of agriculture in the Syrian economy makes simple crops, such as barley, a most valuable asset. Bank Audi has deeply explored each new country it operates in, playing an important role in supporting local economies.

72

73 EXCERPTS FROM THE ORDINARY GENERAL ASSEMBLY OF SHAREHOLDERS

74

75 Excerpts from the Books of Minutes of the Ordinary General Assembly of Shareholders of Bank Audi sal Audi Saradar Group (1) April 18, 2007 April 18, 2007 Resolution No 1 Resolution No 2 The Ordinary General Assembly of Shareholders of the Bank approved the accounts as at December 31, 2006 (1), as well as the profit and loss account for the year then ended, and granted the required clearance to the Board of Directors for their management of the Bank in The Ordinary General Assembly of Shareholders of the Bank decided on the appropriation of the profits of Bank Audi sal Audi Saradar Group for the year 2006 as follows: LL Thousands LL Thousands Net Profits for the year 2006 (1) 194,662,211 Less: Appropriation of 10% to the legal reserve 19,466, ,195,990 Appropriation for general banking risks Lebanon branches: 16,000,000 Jordan branches: 1,500,000 17,500,000 Net profits available for distribution 157,695,990 Less: Distribution to series A preferred shares of US$ 3 per share at the exchange rate of LL 1, per US$ 10,854,000 Distribution to series C preferred shares of US$ per share at the exchange rate of LL 1, per US$ 13,190,625 Distribution to series D preferred shares of US$ 7.75 per share at the exchange rate of LL 1, per US$ 14,603,906 38,648,531 Net profits available for distribution to holders of common shares 119,047,459 Less: Dividend of LL 2, per common share to holders of 32,766,240 common shares 86,441,437 Transfer to General Reserves 22,000,000 Profits carried forward to ,606,022 Resolution No 3 In line with the preceding resolution, the Ordinary General Assembly of Shareholders of the Bank announced a series A preferred shares distribution of US$ 3 per share, a series C preferred shares distribution of US$ per share, a series D preferred shares distribution of US$ 7.75 per share and a dividend to common shares of LL 2, per share, all subject to the withholding of distribution tax, and resolved that all distributions and dividends shall be payable starting April 25, 2007, for the holders of shares as at April 18, 2007 inclusive (last trading date) as per the records of Midclear sal. (1) Examination of the accounts on a Standalone Basis 75

76

77 CONSOLIDATED FINANCIAL STATEMENTS

78 Independent Auditors Report to the Shareholders of Bank Audi sal - Audi Saradar Group We have audited the accompanying consolidated financial statements of Bank Audi sal Audi Saradar Group (the Bank) and its subsidiaries (the Group), which comprise the consolidated balance sheet as of 31 December 2006 and the consolidated income statement, consolidated cash flow statement and consolidated statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes. DIRECTORS RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. AUDITORS RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2006 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Ernst & Young Semaan, Gholam & Co 29 March 2007 Beirut, Lebanon

79 Consolidated Income Statement 31 December Notes LL (000) LL (000) Interest and similar income 1,248,216, ,149,482 Lebanese and other governmental Treasury bills and bonds 297,778, ,690,101 Deposits and similar accounts with banks and financial institutions 580,088, ,807,072 Bonds and financial instruments with fixed income 57,519,222 41,719,054 Loans and advances to customers 296,922, ,595,368 Loans and advances to related parties 13,577,938 9,910,775 Other interest and similar income 2,329,292 12,427,112 Interest expense and similar charges (809,809,757) (675,039,524) Deposits and similar accounts from banks and financial institutions (16,172,220) (37,114,881) Deposits from customers and other creditor balances (758,103,797) (610,853,787) Deposits from related parties (18,199,160) (3,114,974) Certificates of deposits (16,205,625) (16,205,625) Other interest and similar charges (1,128,955) (7,750,257) Net provisions less recoveries on doubtful loans (24,670,489) (31,646,911) Provisions for loans and advances (41,755,944) (59,154,977) Recovery of provisions for loans and advances 17,085,455 27,508,066 Net interest income 413,736, ,463,047 Revenues from shares, securities and financial assets with variable income 12,758,923 6,887,010 Net commissions 105,975,041 96,988,889 Commissions received 142,158, ,166,566 Commissions paid (36,183,879) (18,177,677) Profit from financial operations 150,196,434 87,317,390 Profit from trading and non-trading investments 33,188,421 12,348,957 Profit on foreign exchange operations 27,064,022 27,640,739 Profit on financial instruments 89,943,991 47,327,694 Loss on financial operations (26,233,086) (13,085,860) Loss on trading and non-trading investments (2,477,182) (2,763,669) Loss on foreign exchange operations (9,341,439) (6,171,912) Loss on financial instruments (14,414,465) (4,150,279) Net profit from financial operations 123,963,348 74,231,530 Other operating income 19,936,920 18,042,177 Other operating expenses (7,830,123) (4,749,156) General and administrative expenses (317,812,438) (254,790,099) Salaries, wages and related charges 34 (173,372,578) (146,817,502) General operating expenses 35 (126,512,720) (107,972,597) Employees share - based payments 36 (17,927,140) - Depreciation and amortization 38 (34,537,176) (29,666,430) (Provisions) recoveries on investments and contingencies (7,049,437) 1,553,122 Income from investments under equity method , ,558 Other expense, net (12,167,076) (6,276,274) Profit before tax 297,715, ,594,374 Income tax expense 21 (50,300,456) (32,063,133) Net profit for the year ,414, ,531,241 Attributable to: Equity holders of the parent 246,569, ,060,267 Minority interest 844,754 1,470, ,414, ,531,241 Basic Earnings per common share Diluted Earnings per common share

80 Consolidated Balance Sheet 31 December Notes LL (000) LL (000) ASSETS Cash and balances with Central Banks 4 5,514,475,295 5,096,495,881 Lebanese and other governmental bills and bonds 5 4,224,406,857 3,331,669,355 Bonds and financial assets with fixed income 6 679,235, ,366,661 Shares, securities and financial assets with variable income 7 229,212, ,587,564 Banks and financial institutions 8 4,852,084,964 3,448,827,772 Loans and advances to customers (1) 9 4,877,081,929 3,720,066,473 Bank acceptances ,994, ,184,218 Investments under equity method 11 21,381,942 7,152,453 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) ,259, ,996,560 Intangible assets 13 12,211,111 12,213,402 Other assets 14 1,960, ,133 Regularization accounts and other debit balances ,119, ,468,000 Goodwill ,361,043 99,329,885 Total assets 21,362,784,391 17,304,351,357 (1) After deduction of: Provision for doubtful and bad loans 9 165,468, ,868,342 Unrealized interest on: Sub-standard loans 5,599,140 10,874,604 Doubtful and bad loans 68,729,152 58,615,861 74,328,292 69,490, ,796, ,358,807 OFF-BALANCE SHEET ITEMS Signature commitments received ,886,923 60,113,354 Engagements on term financial instruments ,317, ,250,459 Engagements received from customers 42 2,284,125,510 2,265,957,578 Fiduciary assets and assets under management 41 4,264,506,141 3,586,437,308 Assets under custody 41 3,155,185,382 2,726,532,959 Forward and swap currency operations ,467, ,211,214 Bad debts fully provided for 269,229, ,040,882

81 Consolidated Balance Sheet 31 December 2006 LIABILITIES AND EQUITY Notes LL (000) LL (000) Liabilities Due to Bank of Lebanon 17 27,702,076 27,725,603 Banks and financial institutions ,315, ,129,754 Customers deposits 19 17,859,545,423 14,906,942,325 Engagements by acceptances ,994, ,184,218 Liabilities under financial instruments ,147, ,147,545 Other liabilities ,015, ,386,021 Regularization accounts and other credit balances 22 66,582,376 46,872,365 Provisions for risks and charges 23 44,773,168 26,615,679 Total liabilities 18,802,075,140 15,867,003,510 Equity attributable to equity holders of the parent Share capital and cash contribution to capital ,748, ,748,525 Revaluation variance accepted in the supplementary capital 25 18,599,623 18,599,623 Reserves for general banking risks 26 80,928,740 65,121,968 Reserves, premiums and equity differences 27 1,526,596, ,391,464 Employees share based payments 36 17,927,140 - Treasury GDR s 28 (11,763,237) (4,661,617) Retained earnings 31,928,371 2,358,521 Net results of the financial period - profit 246,569, ,060,267 Cumulative changes in fair value 29 69,526, ,652,696 2,457,062,187 1,397,271,447 Minority interest ,647,064 40,076,400 Total Equity 2,560,709,251 1,437,347,847 TOTAL LIABILITIES AND EQUITY 21,362,784,391 17,304,351,357 OFF-BALANCE SHEET ITEMS Financing commitments ,995, ,353,815 Bank guarantees ,097, ,223,685 Other engagements - 190,228 Engagements on term financial instruments 42 29,454,469 29,171,470 Fiduciary assets and assets under management 41 4,264,506,141 3,586,437,308 Assets under custody 41 3,155,185,382 2,726,532,959 Forward and swap currency operations ,254, ,556,090 81

82 Consolidated Statement of Cash Flow Year-ended 31 December Notes LL (000) LL (000) OPERATING ACTIVITIES Profit before tax 296,870, ,123,400 Adjustments for: Depreciation and amortization 38 29,026,191 28,220,161 Provision for fixed assets acquired in settlement of debt 38 5,510,985 1,446,269 Provision for risks and charges 5,238,796 1,518,090 Provision for impairment of participations 3,445,421 3,262,850 Gain on investments under equity method (740,966) (670,484) Loss (gain) on sale of properties acquired in settlement of debt 136,688 (1,372,331) Write back of provision for risks and charges (536,458) (1,377,295) Provision for employees end of service benefits 34 3,501,809 2,629,747 Provisions for doubtful loans 41,755,944 59,154,977 Recoveries of provision for doubtful loans (17,085,455) (27,508,066) Employees share based payments 36 17,927,140 - Release of reserve for general banking risks - (229,174) Operating profit before changes in operating assets and liabilities 385,050, ,198,144 Deposits with the Central Banks, banks and financial institutions maturing in more than 3 months 209,474, ,671,062 Loans and advances to customers (1,193,632,648) (496,939,189) Lebanese Treasury bills trading (434,875,665) (10,382,937) Bonds and financial assets with fixed income - trading 34,898,231 1,231,395 Shares, securities and financial assets with variable income - trading (19,979,546) (16,976,119) Other assets (967,556) (83,539) Regularization and other debit accounts 26,169,231 (26,852,199) Customers deposits 2,952,603,098 1,643,521,563 Other liabilities 38,694,319 26,630,659 Regularization and other credit accounts 19,710,011 (7,529,919) Minority interest 63,570,664 5,807,721 Cash from operations 2,080,714,858 1,630,296,642 Employees end-of-service benefits (paid) recovered 23 (831,107) (880,398) Taxation paid 21 (29,365,759) (27,431,400) Provisions for contingencies and charges paid 23 (72,015) - Net cash from operating activities 2,050,445,977 1,601,984,844 INVESTING ACTIVITIES Bank of Lebanon certificates of deposit other than trading (115,259,161) (507,632,063) Lebanese Treasury bills - other than trading (475,475,072) (177,894,134) Bonds and financial assets with fixed income - other than trading 29,149,348 (126,427,254) Shares, securities and financial assets with variable income - other than trading (21,520,165) 2,111,918 Investments and related loans - (35,229,167) Purchase of tangible and intangible fixed assets (101,128,490) (26,238,856) Investments and related loans under equity method (13,488,523) - Proceeds from sale of properties acquired in settlement debt 7,651,457 2,224,101 Cost of business combinations 3 (148,833,011) - Net cash used in investing activities (838,903,617) (869,085,455) FINANCING ACTIVITIES Settlement of BDL soft loan (23,527) (30,239,763) Increase in share capital ,000,000 12,500,000 Issue premium on capital increase ,207, ,937,500 Proceeds from sale of GDRs (8,417,236) 20,714,059 Distribution of dividends 31 (79,293,536) (61,712,597) Net cash from financing activities 816,473, ,199,199 Effect of exchange rate changes 10,250,106 6,814,417 INCREASE IN CASH AND CASH EQUIVALENTS 2,038,266, ,913,005 Cash and cash equivalents at 1 January 3,927,689,186 3,070,776,181 CASH AND CASH EQUIVALENTS AT 31 DECEMBER 32 5,965,955,292 3,927,689,186

83

84 Consolidated Statement of Changes in Equity Attributable to Equity Holders of the Parent Cash Reserve for Profit for Share Contribution Revaluation General Legal General the Year Capital of Capital Reserve Banking Risks Reserve Reserve LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) Balance at 1 January ,608, ,662,400 72,586,125 18,599,623 56,549,342 54,961,067 8,084,388 Differences arising on translation of the operating assets and liabilities of subsidiaries Net movement in cumulative changes in fair values Total income and expense for the year recognised directly in equity Net profit for the year ,060, Total income and expense for the year 158,060, Appropriation of 2004 profits (45,896,045) ,841,474 9,368,549 22,809,853 Distribution of dividends Preferred shares A (10,900,800) Preferred shares C (13,247,500) Ordinary shares (37,564,296) Issuance of preferred D shares - 12,500, Transfer from reserve for general banking risks (601,552) - - Absorption of subsidiary s income (1,244,520) Minority share of capital relating to consolidated Minority share of reserves (6,666) - (1,241,517) Treasury GDR transactions Difference of exchange (660,630) (418,048) (4,053,359) Balance at 31 December ,060, ,162,400 72,586,125 18,599,623 65,121,968 63,911,568 24,354,845 Differences arising on translation of the operating assets and liabilities of subsidiaries Net movement in cumulative changes in fair values Total income and expense for the year - recognised directly in equity Net profit for the year ,569, Total income and expense for the year 246,569, Appropriation of 2005 profits (78,766,731) ,159,130 15,292,018 36,112,508 Distribution of dividends Preferred shares A (10,854,000) Preferred shares C (13,190,625) Preferred shares D (3,768,750) Ordinary shares (51,480,161) Issuance of ordinary shares - 100,000, Transfer from reserve for general banking risks ,428,143 (26,928,771) Transfer from retained earnings ,555 - Entities under equity method (400,832) Absorption of subsidiaries income Minority share of capital relating to consolidated subsidiaries Minority share of reserves (7,999) - 378,246 Employees share-based payments Entities deconsolidated in (78,781) 7,708,223 Entities consolidated in ,297,575 - (1,405,165) Treasury GDR transactions Difference of exchange ,066 1,220,732 (4,829,763) Balance at 31 December ,569, ,162,400 72,586,125 18,599,623 80,928,740 91,089,235 34,989,291 The attached notes 1 to 52 form part of these financial statements. 84

85 Year-ended 31 December 2006 Issue Reserves Reserve for Gain on Sale Cumulative and Merger Appropriated to Translation of Treasury Treasury Change in Retained Employees Minority Total Premium Capital Increase Difference GDR GDR Fair Value Earnings Share-Based Interest Equity LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) Payments LL (000) LL (000) 374,689,813-17,497,631 17,430,678 (11,487,394) 40,400, ,620,644 1,051,203, (16,424,161) (16,424,161) ,252, ,252, (16,424,161) ,252, ,828, ,470, ,531, (16,424,161) ,252, ,470, ,359,503-1,105, ,770, (10,900,800) (13,247,500) (37,564,296) 175,937, ,437, (601,552) (479,955) (1,724,475) ,164,904 35,164, (51,650) - 1,299, ,888,282 6,825, ,714, (360,690) - - (5,492,727) 550,627,313 1,105,308 1,073,470 31,318,960 (4,661,617) 108,652,696 2,358,521-40,076,400 1,437,347, ,501, ,501, (39,126,543) (39,126,543) ,501, (39,126,543) (25,625,472) , ,414, ,501, (39,126,543) , ,789, ,203, (10,854,000) (13,190,625) (3,768,750) (51,480,161) 804,207, ,207, ,500, (315,555) (400,832) (1,470,975) (1,470,975) ,219,329 63,219, (1,347,802) - 977, ,927,140-17,927, ,629, (107,590) (1,315,616) (7,101,620) (8,417,236) ,529,504-1 (1,721,460) 1,354,835,252 1,105,308 14,574,541 30,003,344 (11,763,237) 69,526,153 31,928,371 17,927, ,647,064 2,560,709,251 85

86 2006

87 Managing Investment Needs As a solid bank with the means to invest and grow capital, Bank Audi s strategy parallels the Saudi people s efforts to diversify their economy and wisely invest in new projects.

88

89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

90 Notes Index Corporate Information 2. Significant Accounting Policies 3. Business Combinations 4. Cash and Balances with Central Banks 5. Lebanese and Other Governmental Bills and Bonds 6. Bonds and Financial Assets with Fixed Income 7. Shares, Securities and Financial Assets with Variable Income 8. Banks and Financial Institutions 9. Loans and Advances to Customers 10. Bank Acceptances 11. Investments under Equity Method 12. Property, Plant, and Equipment 13. Intangible Assets 14. Other Assets 15. Regularization Accounts and Other Debit Balances 16. Goodwill 17. Due to Bank of Lebanon 18. Banks and Financial Institutions 19. Customers Deposits 20. Liabilities under Financial Instruments 21. Other Liabilities 22. Regularization Accounts and Other Credit Balances 23. Provisions for Risks and Charges 24. Share Capital and Cash Contribution to Capital 25. Revaluation Variance Accepted in the Supplementary Capital 26. Reserves for General Banking Risks 27. Reserves, Premiums and Equity Differences 28. Treasury GDRs 29. Cumulative Changes in Fair Value 30. Minority Interest 31. Paid and Proposed Dividends 32. Cash and Cash Equivalents 33. Net Income for the Year 34. Salaries and Related Expenses 35. General Operating Expenses 36. Share-based Payments 37. Earnings per Share 38. Depreciation and Amortization 39. Related Party Transactions 40. Fair Value of Financial Instruments 41. Fiduciary Deposits, Assets under Management and Custody Accounts 42. Commitments, Contingencies and Off-Balance Sheet Items 90

91 Derivatives 44. Credit Risk and Concentration of Assets, Liabilities and Off-Balance Sheet Items 45. Interest Rate Risk 46. Market Risk 47. Currency Risk 48. Liquidity Risk 49. Equity Price Risk 50. Segmental Information 51. Legal Proceedings 52. Subsequent Events 91

92 Notes to the Consolidated Financial Statements 31 December 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, together with its affiliated banks and subsidiaries, provides a full range of commercial, investment and private banking activities through its headquarters as well as its 78 branches in Lebanon and its presence in France, Switzerland, Jordan, Syria, Sudan, Egypt and Saudi Arabia. The consolidated financial statements were authorized for issue in accordance with the Board of Directors resolution on 29 March Significant Accounting Policies BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and regulations of the Bank of Lebanon and the Banking Control Commission. The consolidated financial statements have been prepared under the historical cost convention modified for the measurement at fair value of derivatives and investment securities other than held to maturity investments and for the revaluation of freehold buildings as accepted by the Bank of Lebanon under the provisions of law no 282 dated 30 December The accounting policies used in the preparation of the consolidated financial statements are consistent with those used in the previous year. The consolidated financial statements have been presented in thousands of Lebanese Lira (LL 000) which is the functional and presentation currency of the Bank. NEW AND AMENDED STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE Amendments to IAS 1 Presentation of Financial Statements concerning Capital Disclosures were issued by the IASB in August They are required to be applied for periods beginning on or after 1 January When effective, these amendments will require disclosures of information enabling evaluation of the Group s objectives, policies and processes for managing capital. IFRS 7 Financial Instruments Disclosures was issued by the IASB in August 2005, becoming effective for periods beginning on or after 1 January The new standard will require additional disclosure of the significance of financial instruments for the Group s financial position and performances and information about exposure to risks arising from financial instruments. IFRS 8 Operating Segments was issued by the IASB in November 2006, becoming effective for periods commencing on or after 1 January The new standard may require changes in the way the Group discloses information about its operating segments. BASIS OF CONSOLIDATION The consolidated financial statements comprise the financial statements of Bank Audi sal Audi Saradar Group and its controlled subsidiaries drawn up to 31 December each year. The financial statements of subsidiaries are prepared for the same reporting year as the Bank, using consistent accounting policies. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full.

93 Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Bank has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of acquisition or up to the date of disposal, as appropriate. Minority interests represent the portion of profit or loss and net assets not owned, directly or indirectly, by the Group, and are presented separately in the income statement and within the equity in the consolidated balance sheet, separately from parent shareholders equity. Acquisitions of minority interests are accounted for using the parent entity extension method, whereby the difference between the consideration and the fair value of the share of the net assets acquired is recognized as goodwill. If the cost of acquisition is below the fair values of the identifiable net assets acquired (i.e. a discount on acquisition) the difference is recognized directly in the income statement in the year of acquisition. The consolidated financial statements include the financial statements of Bank Audi sal Audi Saradar Group and the subsidiaries (the Group) listed in the following table: 93

94 Percentage of Ownership Bank Audi Saradar France sa (1) % % Audi Saradar Investment Bank sal 99.00% 99.00% Audi Saradar Private Bank sal % % Banque Audi (Suisse) sa % % Bank Audi Syria sa (2) 47.00% 47.00% National Bank of Sudan 75.00% - Bank Audi sae (Egypt) 99.99% - Audi Saudi Arabia 70.00% - Libano Arabe sal 90.75% 91.00% Libaco sal 98.00% 98.00% Audi Insurance Services sal 97.00% 97.00% Audi Services sal 99.00% 99.00% Infi Gamma Holding sal % % Infi Alfa Holding sal 99.40% 99.40% Lebanon Invest sal % % Lebanon Invest Jersey % % Lebanon Invest Asset Management sal % % Linea Real Estate sal 99.80% 99.80% Ridea Real Estate sal 99.80% 99.80% Beryte - Holding sa (liquidated) % Banaudi International Holding sa % % Beryte BV % % Beryte NV % % Saradar Investment House sal 99.00% 99.00% Agence Saradar d Assurances sal 99.00% 98.00% Orion Système sal (Holding) 99.00% 99.00% Arcane Technologie sarl (liquidated) % Arcane Technologie M.E. sal 99.00% 98.47% Conseil et Gestion Immobilière sal 98.00% % Société Libanaise de Factoring sal 99.00% 99.00% Clover Building sal 99.00% 99.00% Compagnie de Construction Immobilière sal (deconsolidated) % The Consultant House sal (liquidated) % Assist Banque sal (under liquidation) 99.00% 99.00% Saradar Equity sal (Holding) % % Logistix sal % % LSBI (Capital Outsourcing sa) % - Dora Real Estate sal 50.00% - (1) During 2005, Banque Audi (France) sa and Banque Saradar France sa merged under the name Bank Audi Saradar France sa. (2) Bank Audi sal Audi Saradar Group established Bank Audi Syria sa whose share capital amounts to SYP (000) 2,500,000 and retained de facto control on it. 94

95 Country of Principal Functional Participation Incorporation Activity Currency Direct France Banking EUR Direct Lebanon Banking (Investment) LL Direct Lebanon Banking (Private) LL Through Banaudi International Holding sa Suisse Banking CHF Direct & through ASIB & Lebanon Invest sal Syria Banking SYP Direct Sudan Banking SDD Direct & through ASIB & ASPB Egypt Banking EGP Direct Saudi Arabia Financial SAR Through Audi Saradar Investment Bank sal Lebanon Insurance LL Through Libano Arabe sal Lebanon Real Estate LL Direct & through Audi Saradar Investment Bank sal Lebanon Services LL Direct Lebanon Services LL Direct & through Audi Saradar Investment Bank sal Lebanon Investment LL Through Infi Gamma Holding sal Lebanon Investment LL Direct Lebanon Financial LL Direct England Financial USD Direct Lebanon Investment LL Direct Lebanon Real Estate LL Direct Lebanon Real Estate LL Direct Luxembourg Investment CHF Direct & through ASIB Luxembourg Investment CHF Through Banaudi International Holding sa Netherlands Investment EUR Through Banaudi International Holding sa Curaçao Investment CHF Through Audi Saradar Private Bank sal Lebanon Financial Institution LL Direct and through Saradar Investment House sal Lebanon Insurance Brokerage LL Through Saradar Equity sal (Holding) Lebanon Investment USD Through Saradar Equity sal (Holding) France IT EUR Through Saradar Equity sal (Holding) Lebanon IT LL Through Audi Saradar Private Bank sal Lebanon Real Estate LL Through Audi Saradar Private Bank sal Lebanon Factoring LL Through Audi Saradar Private Bank sal Lebanon Real Estate LL Lebanon Construction Management LL Through Saradar Investment House sal Lebanon Consultancy LL Through Audi Saradar Private Bank sal Lebanon LL Through Audi Saradar Private Bank sal Lebanon Investment LL Through Audi Saradar Private Bank sal Lebanon IT & Back Office Support LL Through Saradar Equity sal (Holding) France IT EUR Through ASIB Lebanon Real Estate LL 95

96 BUSINESS COMBINATIONS AND GOODWILL Business combinations are accounted for using the purchase method of accounting. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities but excluding future restructuring) of the acquired business at fair value. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. If the cost of acquisition is less than the fair values of the identifiable net assets acquired, the discount on acquisition is recognized directly in the income statement in the year of acquisition. Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. 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, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and unamortized goodwill is recognized in the income statement. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods. DERECOGNITION OF FINANCIAL ASSETS A financial asset (in whole or in part) is derecognized either (a) when the Group has transferred substantially all the risks and rewards of ownership or (b) when it has neither transferred nor retained substantially all the risks and rewards of the assets but has transferred control over the asset or a proportion of the asset. TRADING INVESTMENTS These are initially recognised at cost and subsequently remeasured at fair value. All related realised and unrealised gains or losses are included in the income statement. Interest earned or dividends received are included in interest and similar income and revenues from shares and financial assets with variable income respectively. NON-TRADING INVESTMENTS These are classified as follows: Held to maturity Available for sale Investments carried at fair value through profit or loss Investments carried at amortised cost (loans and receivables) All investments are initially recognised at cost, being the fair value of the consideration given including directly attributable transaction costs. Premiums and discounts on non-trading investments (excluding those carried at fair value through income statement) are amortised using the effective interest rate method and taken to interest income. 96

97 HELD TO MATURITY Investments classified as held to maturity have fixed or determinable payments and fixed maturities and are intended to be held to maturity. They are carried at amortised cost using the effective interest method, less provision for impairment in value. AVAILABLE FOR SALE Available-for-sale financial investments are those investments which are designated as such or do not qualify to be classified as designated at fair value through profit or loss, held-to-maturity or loans and receivables. After initial recognition, investments which are classified available for sale are normally remeasured at fair value, unless fair value cannot be reliably determined, in which case they are measured at cost less impairment. Fair value changes which are not part of an effective hedging relationship, are reported as a separate component of equity until the investment is derecognised or the investment is determined to be impaired. On derecognition or impairment, the cumulative gain or loss previously reported as cumulative changes in fair value within equity is included in the income statement for the period. That portion of any fair value changes relating to an effective hedging relationship is recognised directly in the income statement. INVESTMENTS CARRIED AT FAIR VALUE THROUGH PROFIT OR LOSS Investments are classified as fair value through profit or loss account if the fair value of the investment can be reliably measured and the classification as fair value through profit or loss account is as per the documented strategy of the Group. Investments classified as Investments at fair value through profit or loss upon initial recognition are remeasured at fair value with all changes in fair value being recorded in the income statement. INVESTMENTS CARRIED AT AMORTISED COST Debt instruments which do not meet the definition of held to maturity and which have fixed or determinable payments but are not quoted in an active market are treated effectively as loans and receivables carried at amortised cost less provision for impairment in value. DUE FROM BANKS AND OTHER MONEY MARKET PLACEMENTS These are stated at cost, adjusted for effective hedges, less any amounts written off and provision for impairment. LOANS AND ADVANCES TO CUSTOMERS Loans and advances are stated at fair value of consideration given, net of suspended interest, provisions for doubtful debts, any amounts written off, and allowance for impairment. FAIR VALUES For investments and derivatives quoted in an active market, fair value is determined by reference to quoted market prices. Bid prices are used for assets and offer prices are used for liabilities. The fair value of investments in mutual funds, unit trusts, or similar investment vehicles are based on the last published bid price. For financial instruments where there is no active market, fair value is normally based on one of the following: Recent transactions Brokers quotes The expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics Option pricing models The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount payable on demand. 97

98 INVESTMENTS IN ASSOCIATES The Group s investments in associates are accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried in the balance sheet at cost plus post-acquisition changes in the Group s share of net assets of the associate. Losses in excess of the cost of the investment in an associate are recognized when the Group has incurred obligations on its behalf. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortized. The income statement reflects the Group s share of the results of operations of the associate. Where there has been a change recognized directly in the equity of the associate, the Group recognizes its share of any changes and discloses this, when applicable, in the statement of changes in equity. Unrealized profits and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. The reporting dates of the associate and the Group are identical and the associate s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. LIABILITIES UNDER FINANCIAL INSTRUMENTS CERTIFICATES OF DEPOSIT The certificates of deposit issued by the Bank are recorded in their foreign currency nominal value in addition to the relating interest accrued till the balance sheet date. DEPOSITS All money market and customers deposits are carried at cost less amounts repaid. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are initially recorded at cost less accumulated depreciation and any impairment in value, except for the freehold properties that were revalued in 1994 in accordance with the provisions of law No 282 dated 30 December 1993, and with the approval of the Bank of Lebanon. Depreciation is provided on a straight line basis on all tangible fixed assets. The rates of depreciation are based upon the following estimated useful lives: Buildings Installations and fixtures Motor vehicles Office equipment and computers Office machinery and furniture 40 to 50 years 5 to 11 years 5 to 7 years 5 to 11 years 5 to 11 years The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it increases future economic benefits of the related item of tangible fixed assets. All other expenditure is recognised in the income statement as the expense is incurred. 98

99 INTANGIBLE ASSETS Intangible assets include the value of computer software and key money. 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 any accumulated impairment losses. Intangible assets with finite lives are amortised over the useful economic 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 income statement in the expense category consistent with the function of the intangible asset. 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 5 years 70 years COLLATERAL PENDING SALE The Group occasionally acquires real estate in settlement of certain loans and advances. Such real estate is stated at the lower of the net realizable value of the related loans and advances and the current fair value of such assets based on the instructions of the Control Commissions. Gains or losses on disposal, and revaluation losses, are recognized in the consolidated income statement. TAXATION Taxation is provided for in accordance with fiscal regulations laws that are effective in the countries where the Bank, its branches and subsidiaries operate. LEBANON The provision for income tax is recorded on the basis of filing income tax returns after adjustments related to income tax regulations. The Bank s profits from operations in Lebanon are subject to a tax rate of 15% from which 5% tax on interest received on Lebanese Treasury bills and eurobonds should be deducted to determine the amount payable according to Law no. 497/2003 dated 30 January Dividends are subject to a flat ten per cent tax, reducible to five per cent provided that the company is listed on the Beirut Stock Exchange or any other international stock exchange. Holding companies are subject to a special progressive tax not exceeding LL 5,000,000 per annum. Holding companies are exempt from tax on dividends. OUTSIDE LEBANON The provision for income tax for the affiliated banks and companies is recorded according to prevailing regulations in the countries of incorporation. Deferred income tax is provided using the liability method on temporary differences at the balance sheet date. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is 99

100 realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Current tax and deferred tax relating to items recognized directly in equity are also recognized in equity and not in the income statement. The carrying amount of deferred tax assets is reviewed at each balance sheet 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 utilized. 100 PROVISION FOR RISKS AND CHARGES Provisions are recognised when the Group has a present obligation (legal or constructive) arising from a past event and the costs to settle the obligation are both probable and can be reliably measured. EMPLOYEES END-OF-SERVICE BENEFIT For the Bank and its subsidiaries operating in Lebanon, end-of-service benefit subscriptions paid and due to the National Social Security Fund (NSSF) are calculated on the basis of 8.5% of the staff salaries. The final end-of-service benefits due to employees after completing 20 years of service, at the retirement age, or if the employee permanently leaves employment, are calculated based on the last monthly salary multiplied by the number of years of service. The Bank and its subsidiaries in Lebanon are liable to pay to the NSSF the difference between the subscriptions paid and the final end-of-service benefits due to employees. The Bank provides for end-of-service benefits on that basis. End-of-service benefits of foreign branches and subsidiaries are accrued for in accordance with the laws and regulations of the respective countries in which the branches and subsidiaries operate. SHARE-BASED PAYMENT TRANSACTIONS (STOCK OPTION PLAN FOR ORDINARY SHARES) 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. The cost of equity-settled transactions 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 charge or credit for a period is recorded in Personnel expenses and represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition which are treated as vesting irrespective of whether or not the market conditions is satisfied, provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised in Personnel expenses 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. 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.

101 The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. TREASURY SHARES Own equity instruments which are acquired (Treasury shares) are deducted from equity and are accounted for at weighted average cost. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group s own equity instruments. DERIVATIVES Derivatives are stated at fair value. For the purposes of hedge accounting, hedges are classified into three categories: Fair value hedges which hedge the exposure to changes in the fair value of a recognised asset or liability; Cash flow hedges which hedge exposure to variability in cash flows of a recognised asset or liability or a forecasted transaction; and Hedges of the net investment in a foreign subsidiary. In relation to effective fair value hedges, any gain or loss from remeasuring the hedging instrument to fair value, as well as related changes in fair value of the item being hedged, are recognised immediately in the income statement. In relation to effective cash flow hedges the gain or loss on the hedging instrument is recognised initially in equity and either transferred to the income statement the period in which the hedged transaction impacts the income statement, or included as part of the cost of the related asset or liability. In relation to effective hedges of the net investment in a foreign subsidiary, any gain or loss from remeasuring the hedging instrument to fair value, as well as related changes in fair value of the net investment in a foreign subsidiary, are recognized immediately in equity and are transferred to the income statement once the investment is sold. For those hedges which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of the hedging instrument are taken directly to the income statement for the period. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, no longer qualifies for hedge accounting or is revoked by the Bank. For effective fair value hedges of financial instruments with fixed maturities, any adjustment arising from hedge accounting is amortised over the remaining term to maturity. For effective cash flow hedges, any cumulative gain or loss on the hedging instrument recognised in equity remains in equity until the hedged transaction occurs. If the hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement. Certain derivatives embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through the income statement. These embedded derivatives are measured at fair value with the changes in fair value recognised in the income statement. FIDUCIARY ASSETS AND ASSETS UNDER MANAGEMENT Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and accordingly are recorded as offbalance sheet items. OFF-BALANCE SHEET ITEMS Off-balance sheet balances include commitments which may take place in the Group s normal operations such as commitments for loan granting, letters of guarantees, and letters of credit, without deducting the margins collected and related to these commitments. 101

102 OFFSETTING Financial assets and financial liabilities are offset and the net amount is reported in the balance sheet only when there is a legally enforceable right to set off the recognised amounts and the Group intends to either settle on a net basis or to realise the asset and settle the liability simultaneously. REVENUE RECOGNITION Interest income and fees which are considered an integral part of the effective yield of a financial asset, are recognised using the effective yield method. The recognition of interest income is suspended when loans become impaired. Notional interest is recognised on impaired loans and other financial assets based on the rate used to discount future cash flows to their net present value. Loan commitments fees are recognized when received, other fees receivable are recognised as the services are provided. Dividend income is recognised when the right to receive payment is established. 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 prorata temporis 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 and claims reserve are not considered adequate to cover future claims arising on these premiums, a premium deficiency reserve is created. FOREIGN CURRENCIES The consolidated financial statements are presented in Lebanese Lira which is the Bank s functional and 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. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transactions. TRANSLATION OF FOREIGN CURRENCY TRANSACTIONS Transactions in foreign currencies are initially recorded in the functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Lebanese Lira or other functional currencies at rates of exchange prevailing at the balance sheet date. Any gains or losses are taken to the consolidated income statement. Translation gains or losses on non-monetary items carried at fair value are included in equity as part of the fair value adjustment on securities available-for-sale, unless part of an effective hedging strategy. TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN ENTITIES The assets and liabilities of foreign branches and subsidiaries are not deemed an integral part of the head office s operations and are translated at rates of exchange ruling at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Any exchange differences are taken directly to a foreign currency translation adjustment reserve. 102

103 The table presents the exchange rates of major currencies used to translate assets, liabilities and statement of income items of foreign branches and subsidiaries: Year-end Average Year-end Average Rate LL Rate LL Rate LL Rate LL US Dollar 1, , , , Euro 1, , , , Swiss Franc 1, , , ,212,.25 Syrian Lira Jordanian Dinar 2, , , , Egyptian Pound Sudanese Dinar Saudi Riyal CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise balances with maturities of a period of three months from the date of acquisition including: cash and balances with the Central Banks, deposits with banks and financial institutions, deposits due to banks and financial institutions, and Treasury bills. IMPAIRMENT AND UNCOLLECTIBILITY OF FINANCIAL ASSETS An assessment is made at each balance sheet date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the income statement. Impairment is determined as follows: For assets carried at amortised cost, impairment is based on estimated cash flows discounted at the original effective interest rate; For assets carried at fair value, impairment is the difference between cost and fair value; For assets carried at cost, impairment is present value of future cash flows discounted at the current market rate of return for a similar financial asset. For available for sale equity investments, reversal of impairment losses are recorded as increases in cumulative changes in fair value through equity. In addition, a provision is made to cover impairment for specific groups of assets where there is a measurable decrease in estimated future cash flows. TRADE AND SETTLEMENT DATE ACCOUNTING All regular way purchases and sales of financial assets are recognized on the trade date, i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulations. 103

104 REPURCHASE AND RESALE AGREEMENTS Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) continue to be recognized in the balance sheet. Amounts received under these agreements are treated as liabilities and the difference between the sale and the repurchase price is treated as interest expense using the effective yield method. Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognized in the balance sheet. Amounts paid under these agreements are treated as assets and the difference between the purchase and resale price is treated as interest income using the effective yield method. JUDGEMENTS SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES In the process of applying the Bank s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements: Classif ication of Investments Management decides on acquisition of an investment whether it should be classified as held to maturity, held for trading, carried at fair value through profit or loss account, or available for sale. For those deemed to be held to maturity, Management ensures that the requirements of IAS 39 are met and in particular the Group has the intention and ability to hold these to maturity. The Group classifies investments as trading if they are acquired primarily for the purpose of making a short term profit by the dealers. Classification of investments as fair value through profit or loss account depends on how management monitors the performance of these investments. When they are not classified as held for trading but have readily available reliable fair values and the changes in fair values are reported as part of profit or loss in the management accounts, they are classified as fair value through profit or loss. All other investments are classified as available for sale or loans and receivables. Impairment of Investments The Group treats available for sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires considerable judgement. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities. ESTIMATION UNCERTAINTY The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: Expenses Related to Stock Option Plan for Ordinary Shares Some of the inputs used in the valuation model cannot be obtained from organized financial markets and accordingly have to be estimated or calculated from available information. The use of other estimates, assumptions, or models results in a different valuation which in its turn results in a different cost for the stock option plan. 104

105 Impairment Losses on Loans and Advances The Group reviews its problematic loans and advances on a quarterly basis to assess whether a provision for impairment should be recorded in the income statement. In particular, considerable judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgement and uncertainty, and actual results may differ resulting in future changes to such provisions. Collective Impairment Provisions on Loans and Advances In addition to specific provisions against individually significant loans and advances, the Group also makes a collective impairment provision against loans and advances which, although not specifically identified as requiring a specific provision, have a greater risk of default than when originally granted. This collective provision is based on any deterioration in the internal grade of the loan since it was granted. The amount of the provision is based on the historical loss pattern for loans within each grade and is adjusted to reflect current economic changes. These internal gradings take into consideration factors such as any deterioration in country risk, industry, technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows. Valuation of Unquoted Equity Investments Valuation of unquoted equity investments is normally based on one of the following: Recent arm s length market transactions; Current fair value of another instrument that is substantially the same; The expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or other valuation models. The determination of the cash flows and discount factors for unquoted equity investments requires significant estimation. There are a number of investments where this estimation cannot be reliably determined, and as a result these investments are carried at cost. The Group calibrates the valuation techniques periodically and tests these for validity using either prices from observable current market transactions for the same instrument or other available observable market data. Impairment of Goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. 3. Business Combinations Based on the decision of the Board of Directors dated 25 November 2005, the Bank closed, in March 2006, the acquisition of the share capital of Cairo Far East Bank sae (CFEB) at USD per share. The Bank obtained the approval for this acquisition from the Central Bank of Egypt on 30 January 2006, and the approval of the Central Bank of Lebanon on 13 February The fair value of the identifiable assets and liabilities acquired and goodwill arising as at the date of the acquisition were as follows: 105

106 Cairo Far East Bank Fair Value Recognized Carrying Value on Acquisition 2006 LL (000) 2006 LL (000) Assets Cash and cash equivalents 31,655,561 31,655,561 Due from banks/loans and advances to customers 41,466,541 39,764,851 Financial investments available for sale 4,713,341 4,713,341 Property and equipment 28,613,418 1,400,348 Other assets 2,117,813 2,117,813 Total assets 108,566,674 79,651,914 Liabilities Due to banks 1,312,750 1,312,750 Customers deposits 70,161,056 70,161,056 Other liabilities 4,825,502 7,848,948 Total liabilities 76,299,308 79,322,754 Fair value of net assets 32,267,366 Goodwill arising on acquisition (Note 16) 109,698,423 Cost of acquisition 141,965,789 Furthermore, based on the decision of the Board of Directors in their meeting dated 11 May 2006, the Bank subscribed on 30 September 2006 in 75% of the share capital of National Bank of Sudan (NBS) which amounted to SDD 15 billion (LL (000) 106,650,000). The Bank obtained the approval for this acquisition of the Central Bank of Sudan on 14 June 2006 and the approval of the Central Bank of Lebanon on 20 July The value of net assets and goodwill generated at the date of the acquisition were as follows: National Bank of Sudan LL (000) Adjusted equity 9,544,556 Revaluation of property and equipment 5,580,829 Capital paid in by the Bank 79,987,500 Capital paid in by other investors 2,133,000 Adjusted value of net assets 97,245,885 Bank s share of net assets (75%) 72,934,414 Goodwill arising on acquisition (Note 16) 7,053,086 Cost of acquisition 79,987,500

107 The main activity of both banks is retail and commercial banking. Cairo Far National Bank East Bank of Sudan Total LL (000) LL (000) LL (000) Net cash acquired with the subsidiaries (45,795,586) (27,324,692) (73,120,278) Cash paid 141,965,789 79,987, ,953,289 Net cash outflow 96,170,203 52,662, ,833,011 From the date of acquisition CFEB and NBS have contributed to LL 71 million in income and LL 67 million in loss, respectively, to the net profit of the Bank. If combination had taken place at the beginning of the year, the net income for the year would have been LL 352 million higher (income of LL 395 million for CFEB and loss of LL 43 million for NBS). 4. Cash and Balances with Central Banks LL (000) LL (000) Cash on hand 91,528,548 75,815,684 Central Banks: Time deposits 1,785,463,458 1,670,466,365 Certificates of deposit loans and receivables 2,537,755,056 2,575,389,697 Certificates of deposit held to maturity 169,451,312 31,909,018 Certificates of deposit available for sale 15,351,508 - Current accounts 558,304, ,762,434 Accrued interest on time deposits 16,985,247 10,438,755 Accrued interest on certificates of deposit 339,635, ,713,928 5,514,475,295 5,096,495,881 Included in certificates of deposit-loans and receivables is the credit balance of the premiums and excess funds amounting to LL 49,000,894 thousand as of 31 December 2006 (2005: LL 58,350,849 thousand) received as a result of the swap with the Bank of Lebanon of Treasury bills and certificates of deposit for the same instruments with longer maturities. 107

108 The Bank of Lebanon regulations stipulate that commercial banks operating in Lebanon are required to deposit a compulsory reserve in local currency representing 15% to 25% of their deposits in Lebanese Pounds and in foreign currency representing 15% of their deposits in foreign currencies. Foreign subsidiaries are also subject to obligatory reserve requirements with varying percentages, according to the banking rules and regulations of the countries in which they are located. The following table summarizes the Bank s placements in Central Banks available against the compulsory reserves as of 31 December: CV LL (000) LL (000) Total LL (000) Cash deposits at Central Banks current accounts 1,371,846, ,824,683 1,705,671,399 1,637,858,644 Cash deposits at Central Banks time deposits 242,309,559 7,128, ,437,738 1,614,156, ,952,862 1,955,109,137 1,637,858,644 CERTIFICATES OF DEPOSIT Certificates of deposit have the following maturities as of 31 December 2006: Nominal Value Maturity LL (000) Certificates of deposit Central Bank of Jordan ,451,312 Certificates of deposit Central Bank of Sudan ,432,244 Certificates of deposit Central Bank of Egypt ,050,400 Certificates of deposit Central Bank of Lebanon ,501,000 Certificates of deposit Central Bank of Lebanon ,215,000,000 Certificates of deposit Central Bank of Lebanon ,587,526 2,767,022,

109 Valuation of certificates of deposit at 31 December 2006: Nominal Value Book Value Fair Value LL (000) LL (000) LL (000) Held to maturity 169,451, ,451, ,451,312 Loans and receivables 2,582,127,825 2,537,755,056 2,624,354,837 Available for sale 15,443,345 15,351,508 15,351,808 2,767,022,482 2,722,557,876 2,809,157,957 Accrued interest receivable - 339,635, ,635,611 2,767,022,482 3,062,193,487 3,148,793,568 Valuation of certificates of deposit at 31 December 2005: Nominal Value Book Value Fair Value LL (000) LL (000) LL (000) Held to maturity 31,909,018 31,909,018 31,909,018 Loans and receivables 2,634,616,075 2,575,389,697 2,810,142,926 2,666,525,093 2,607,298,715 2,842,051,944 Accrued interest receivable - 256,713, ,713,928 2,666,525,093 2,864,012,643 3,098,765,

110 5. Lebanese and Other Governmental Bills and Bonds LL (000) LL (000) Treasury bills and other government bills - held to maturity 54,833,895 61,941,048 Treasury bills and other government bills - available for sale 1,198,239,245 1,413,299,433 Treasury bills and other government bills - held for trading 490, ,860 Eurobonds - held to maturity 344,141, ,331,840 Eurobonds - available for sale 1,897,335,864 1,256,309,204 Eurobonds - held for trading 640,529, ,707,008 Accrued interest receivable 88,835,803 48,642,962 4,224,406,857 3,331,669,355 Lebanese Treasury bills include an amount of LL (000) 29,454,469 (2005: LL (000) 29,171,470) representing Treasury bills deposited as a guarantee against soft loans granted by the Bank of Lebanon amounting to LL (000) 27,400,000 (2005: LL (000) 27,400,000) relating to the acquisition of Orient Credit Bank sal (Note 17). Valuation of the Lebanese Treasury bills and other governmental bills and bonds portfolio at 31 December 2006: Nominal Value Book Value Fair Value LL (000) LL (000) LL (000) Held to maturity 395,222, ,975, ,486,543 Available for sale 3,304,414,282 3,095,575,109 3,095,986,229 Held for trading 794,620, ,020, ,019,906 4,494,256,960 4,135,571,054 4,133,492,678 Accrued interest receivable - 88,835,803 88,835,803 4,494,256,960 4,224,406,857 4,222,328,

111 Valuation of the Lebanese Treasury bills and other governmental bills and bonds portfolio at 31 December 2005: Nominal Value Book Value Fair Value LL (000) LL (000) LL (000) Held to maturity 402,725, ,272, ,007,466 Available for sale 2,661,798,449 2,669,608,637 2,669,750,465 Held for trading 200,160, ,144, ,160,271 3,264,684,008 3,283,026,393 3,295,918,202 Accrued interest receivable - 48,642,962 48,642,962 3,264,684,008 3,331,669,355 3,344,561,164 The portfolio of Lebanese Treasury bills and other governmental bills and bonds have the following maturities as of 31 December 2006: Maturing Nominal Value In LL (000) ,539, ,078,040, ,410, ,480, ,774, ,150, ,984, ,140, ,233, ,826,325, ,177,662 4,494,256,

112 6. Bonds and Financial Assets with Fixed Income LL (000) LL (000) Bonds and financial instruments - held to maturity 9,184,646 9,666,610 Bonds and financial instruments - loans and receivables 628,605, ,610,416 Bonds and financial instruments - available for sale 29,732, ,063,096 Bonds and financial instruments - held for trading - 34,898,231 Accrued interest receivable 11,713,086 14,128, ,235, ,366,661 The carrying value of bonds and financial assets with fixed income at 31 December is detailed as follows: US $ US $ Bonds Lebanese banks and financial institutions 178,399, ,572,752 Bonds Foreign banks and financial institutions 240,699, ,037,657 Bonds Private sector 23,702,404 41,129,792 Accrued interest 7,769,874 9,372, ,570, ,112,213 LL (000) 679,235, ,366,

113 Valuation of bonds and financial assets with fixed income at 31 December 2006: Nominal Value Book Value Fair Value LL (000) LL (000) LL (000) Held to maturity 9,203,864 9,184,646 9,269,247 Loans and receivables 626,645, ,605, ,366,672 Available for sale 30,674,912 29,732,483 29,732, ,524, ,522, ,368,402 Accrued interest receivable - 11,713,086 11,713, ,524, ,235, ,081,488 Valuation of bonds and financial assets with fixed income at 31 December 2005: Nominal Value Book Value Fair Value LL (000) LL (000) LL (000) Held to maturity 9,671,067 9,666,610 10,162,564 Loans and receivables 581,255, ,610, ,066,104 Available for sale 101,128, ,063, ,063,096 Held for trading 33,963,975 34,898,231 34,898, ,018, ,238, ,189,995 Accrued interest receivable - 14,128,308 14,128, ,018, ,366, ,318,

114 7. Shares, Securities and Financial Assets with Variable Income LL (000) LL (000) Shares - available for sale 192,766, ,788,237 Shares - held for trading 44,559,426 24,579, ,326, ,368,117 Add: related loans 4,652,114 4,254,944 Less: provision for impairment (12,766,232) (7,035,497) 229,212, ,587, No. of Shares No. of Shares or Units LL (000) or Units LL (000) Available for sale: Saradar Equity Europe 11,634 2,419,066 12,121 2,282,308 Interaudi Bank New York ,928 10,728,770 Banque de L Habitat sal 517,599 4,358, ,599 4,358,835 UBS Warrant 6,813 3,029,826 6,813 1,899,450 AZA Holding sal 49,900 89,707,877 49, ,034,299 Delta Food and Beverage Holding sal 2,200 3,924,624 2,200 3,924,624 Globalcom Holding sal 4,900 7,386,750 4,900 7,386,750 SNA Holding (Bermuda) class A - - 2,009,823 6,483,790 SOFIL 53,916 2,285,314 53,916 2,285,314 Solicar sal 222,221 1,507, ,221 1,507,492 L I Venture (Holding) sal 2, ,934 2, ,935 Arab Trade Financing Program 210 1,280, ,114,532 Saraya Aqaba Project 1,500,000 3,189,345 1,500,000 3,191,820 Phoenicia Aer Rianta sal 16,354 28,694,692 16,345 27,925,923 Liban Lait sal 3,268 3,282,946 3,268 3,282,946 Lebanese Commuting Co sal 40,350 1,588,337 40,350 1,588,337 BNP 10 year Range 1,050,000 1,563,163 1,050,000 1,564,527 Goldman Sachs International Aman 2 (A) - 2,730,220-1,754,730 EFG Hermes Holding sae 871,103 9,199, BBAC 5% NCP preferred shares A 1,200,000 18,090, Morgan Stanley and Co International LTD - 1,187, Other shares - 6,943,632 6,075, ,766, ,788,237

115 No. of Shares No. of Shares or Units LL (000) or Units LL (000) Held for trading: BLOM GDR 16,099 1,399,121 64,119 6,427,822 Fransabank sal 17, ,326 1,473 45,747 Solidere GDR 15, , ,232 9,337,958 ABC (nominal) 8, ,283 8, ,955 ABC (bearer) 34, ,773 48,082 1,195,980 Casino du Liban 3,906 1,589,840 2, ,249 Solidere A and B 212,260 5,167, ,139 4,837,378 Byblos Bank sal 30,485 81,601 83, ,940 SODIC 900,000 31,980, Other shares 1,739,134 1,049,851 44,559,426 24,579, LL (000) LL (000) Related loans: Liban Lait sal 4,394,004 3,996,834 Lebanese Commuting Co. sal 113, ,088 Delta Food and Beverage Holding sal 145, ,022 4,652,114 4,254,944 Provision for impairment (12,766,232) (7,035,497) 229,212, ,587,564 Available for sale investments include unquoted investments in the amount of LL (000) 81,955,139 (2005: LL (000) 62,831,821) that are stated at cost due to the unpredictable nature of future cash flows and the lack of suitable other methods for valuing these investments reliably. 115

116 8. Banks and Financial Institutions LL (000) LL (000) Current accounts Current accounts 511,296, ,665,110 Checks for collection 102,534, ,292, ,831, ,957,845 Time deposits Term deposits 4,217,620,871 2,903,773,983 Accrued interest 20,632,915 5,095,944 4,238,253,786 2,908,869,927 4,852,084,964 3,448,827,772 Breakdown by geographic location: LL (000) % LL (000) % Lebanon 267,553, ,013, Organization for Economic Co-operation and Development (O.E.C.D.) member countries 3,714,380, ,719,104, Saudi Arabia 122,576, ,243, Other countries 726,941, ,370, ,831,452, ,443,731, Accrued interest 20,632,915-5,095,944-4,852,084, ,448,827,

117 9. Loans and Advances to Customers LL (000) LL (000) Commercial loans Current accounts and bills 2,155,593,739 1,868,222,775 Medium and long-term loans 1,766,730,653 1,115,785,663 Loans to public entities 15,670,812 7,592,197 3,937,995,204 2,991,600,635 Sub-standard loans 28,367,709 41,685,447 Unrealized interest (5,146,882) (10,318,771) 3,961,216,031 3,022,967,311 Other loans Retail loans 316,712, ,416,792 Lombard loans 261,593, ,528,990 Advances to staff 22,038,324 20,501,374 Sub-standard loans 876,335 1,348,378 Unrealized interest (452,258) (555,833) Provisions for retail loans (2,540,403) (1,965,795) 598,228, ,273,906 Overdraft accounts 14,684,808 57,806,013 Net debtor accounts against creditor and cash margin accounts 775, ,693 Advances to related parties (Note 39) 238,489, ,802,811 Doubtful and bad loans: Doubtful and bad loans 296,692, ,982,539 Provision for doubtful and bad loans (162,928,106) (111,902,547) Unrealized interest (68,729,152) (58,615,861) Interest received in advance (1,347,567) (1,555,392) 63,687,970 39,908,739 4,877,081,929 3,720,066,473 Denominated as follows: Local currency in thousands of LL 239,287, ,412,504 Foreign currency in US$ 3,076,480,653 2,300,931,323 Percentage of loans and advances to total assets 22.83% 21.50% Percentage of doubtful loans to gross loans (before considering provisions and unrealized interest) 5.80% 5.43%

118 Breakdown by economic sector: LL (000) LL (000) Agriculture 34,563,763 17,451,918 Manufacturing 788,661, ,970,498 Construction 556,701, ,615,054 Trade and related activities 2,176,581,162 1,580,906,882 Real estate 246,543, ,757,862 Finance 163,117, ,633,466 Housing loans 148,529, ,468,395 Other loans including retail loans 762,382, ,262,398 4,877,081,929 3,720,066,473 Breakdown by geographic location of borrowers as of 31 December: LL (000) LL (000) Lebanon 2,946,644,072 3,049,385,196 Organization for Economic Co-operation and Development (O.E.C.D.) member countries 269,475, ,387,622 Saudi Arabia 438,875, ,067,306 Other countries 1,210,294, ,989,402 Accrued interest 11,791,924 5,236,947 4,877,081,929 3,720,066,

119 The movement of the provision for doubtful loans is summarized as follows: LL (000) LL (000) Balance at 1 January 113,868, ,053,135 Add: Provision set up for the year 41,216,843 59,073,655 Provision from entities consolidated in ,642,057 - Transfer from reserve for general banking risks 27, ,378 Difference on exchange on provisions 145, ,571 69,032,762 60,364,604 Less: Loans written off during the year 8,108,139 13,145,185 Bad loans transferred to off-balance sheet accounts - 24,662,200 Provisions no more required (released) 8,264,981 22,742,012 Difference on exchange on provision in FC 891,079 - Transfer to provision for risks and charges 168,396-17,432,595 60,549,397 Balance at 31 December 165,468, ,868,342 Total provision for doubtful loans allocated to the statement of income is as follows: LL (000) LL (000) Provision set up for the year 41,216,843 59,073,655 Direct write off of loans 539,101 81,322 41,755,944 59,154,

120 The movement of unrealized interest is summarized as follows: LL (000) LL (000) Balance at 1 January 69,490,465 75,984,171 Add: Unrealized interest applied on non-performing loans 18,953,578 19,787,918 Unrealized interest from entities consolidated in ,356 - Difference of exchange 370,674-19,454,608 19,787,918 Less: Transfer to provision for doubtful loans 1,235,238 - Unrealized interest written off 9,798,024 15,508,821 Unrealized interest on loans transferred to off-balance sheet 1,846,700 6,192,698 Interest released to profit and loss account 1,736,819 4,376,054 Difference on exchange - 204,051 14,616,781 26,281,624 Balance at 31 December 74,328,292 69,490,465 As required by Bank of Lebanon regulations, doubtful loans fulfilling certain conditions have been transferred to offbalance sheet, together with the related provisions and unrealized interest. The recoveries of provision for doubtful loans allocated to the statement of income is as follows: LL (000) LL (000) Provisions no more required 8,264,981 22,742,012 Release of unrealized interest 7,788,178 4,376,054 Recoveries from loans written off 1,032, ,000 17,085,455 27,508,

121 The balances of unrealized interest and provision for doubtful loans as at 31 December 2006 are allocated as follows: Total C/V LL (000) LL (000) LL (000) Unrealized interest for substandard loans 41,306 5,557,834 5,599,140 Unrealized interest for doubtful or bad loans 1,368,518 67,360,634 68,729,152 Total unrealized interest 1,409,824 72,918,468 74,328,292 Provision for doubtful loans 30,736, ,731, ,468,509 The classification of loans and advances as of 31 December 2006 is as follows: Gross Unrealized Net Balance Interest Provisions Balance LL (000) LL (000) LL (000) LL (000) Loans: Good 4,646,363, ,646,363,942 Watch 145,925,516 - (2,540,403) 143,385,113 4,792,289,458 - (2,540,403) 4,789,749,055 Substandard 29,244,044 (5,599,140) - 23,644,904 Doubtful 206,538,632 (57,831,126) (88,045,598) 60,661,908 Bad 88,806,596 (10,898,026) (74,882,508) 3,026, ,589,272 (74,328,292) (162,928,106) 87,332,874 5,116,878,730 (74,328,292) (165,468,509) 4,877,081,

122 The classification of loans and advances as of 31 December 2005 was as follows: Gross Unrealized Net Balance Interest Provisions Balance LL (000) LL (000) LL (000) LL (000) Loans: Good 3,540,112, ,540,112,916 Watch 108,296,000 - (1,965,795) 106,330,205 3,648,408,916 - (1,965,795) 3,646,443,121 Substandard 43,033,825 (10,874,604) - 32,159,221 Doubtful 173,803,606 (55,253,740) (77,041,800) 41,508,066 Bad 38,178,933 (3,362,121) (34,860,747) (43,935) 255,016,364 (69,490,465) (111,902,547) 73,623,352 3,903,425,280 (69,490,465) (113,868,342) 3,720,066, Bank Acceptances LL (000) LL (000) Term letters of credit payable by the Group on behalf of its customers 136,994, ,184,218 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 balance sheet for the same amount. 122

123 11. Investments under Equity Method Ownership Country of No. of No. of % Incorporation Shares LL (000) Shares LL (000) Assurex sal Lebanon 47,230 4,132,689 47,230 3,951,054 Eagle One Real Estate Investment Company (Holding) sal Lebanon 141,995 2,140, ,995 2,053,982 The Investment House sal Lebanon 3, ,717 3, ,495 Property House sal Lebanon 9, ,636 9, ,636 LSBI - France , ,922 Trust International Company for Marketing and e-commerce Jordan 100, , Syrian Arab Insurance Syria 990,000 14,711, ,489,578 7,260,089 Provision for impairment (107,636) (107,636) 21,381,942 7,152,453 During 2006, the Bank participated in the establishment of Syrian Arab Insurance and acquired 49.5% of its share capital. The necessary approvals of the company s establishment were granted on 4 April 2006 by the Syrian authorities and on 15 May 2006 by the Bank of Lebanon. The Bank does not have economic control over Syrian Arab Insurance. The Bank s investments accounted for under the equity method are not listed on a public exchange. The following table illustrates the summarized financial information of these investments: LL (000) LL (000) Share of associates balance sheets Current assets 21,728,786 7,206,660 Non-current assets 6,959,433 6,133,605 Current liabilities (4,171,157) (3,419,493) Non-current liabilities (3,135,120) (2,768,319) Net assets 21,381,942 7,152,453 Share of associates revenues and profits Revenues 6,021,721 9,415,860 Profit for the year 740, ,558

124 12. Property, Plant and Equipment Installations Motor Buildings and Fixtures Vehicles LL (000) LL (000) LL (000) Cost or revaluation: Balance at 1 January ,583,681 68,438,966 1,524,528 Entities consolidated in ,375,917 1,352, ,462 Additions during the year 8,551,438 5,948,268 1,029,306 Transfers 3,426, ,149 - Fully depreciated fixed assets written-off - (6,096,797) (34,067) Disposals (761,001) (3,172,279) (343,903) Foreign exchange difference (7,811) 320,470 16,044 Adjustment 1,290,075 1,340,296 11, December ,458,447 68,238,746 2,815,468 Depreciation: Balance at 1 January ,048,207 47,779, ,006 Entities consolidated in , , ,914 Depreciation charge for the year 6,882,215 7,506, ,490 Transfers - (85,351) - Fully depreciated fixed assets written-off - (6,096,797) (34,067) Disposals (630,365) (2,828,842) (235,998) Foreign exchange difference 126, ,358 22,885 Adjustment 45, ,312 (57,430) 31 December ,750,244 47,971,677 1,195,800 Net Book Value: At 31 December ,708,203 20,267,069 1,619,668 At 31 December ,535,474 20,659, ,522 (1) During 1995, certain tangible fixed assets were revalued to their fair market value according to applicable Lebanese laws. The original cost and accumulated depreciation of revaluated assets were substituted by the revaluated amount. The revaluation difference amounting to LL (000) 18,599,623 was booked as revaluation variance accepted in the supplementary capital under shareholders equity (Note 25). 124

125 Office Equipment Office Properties Acquired and Computer Machinery in Settlement Advances on Hardware and Furniture Other Assets of Debt Acquisitions Total LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) 53,210,451 51,644,538 6,324,433 59,311,338 14,363, ,400,983 2,405,936 1,568, ,512 1,449,626-39,098,275 7,442,893 9,267, ,597 10,497,076 43,250,797 86,569, , ,176 (45,408) - (17,243,741) (12,479,431) - (206,216) (6,337,080) (1,226,055) (1,676,103) (761,973) (8,407,162) (157,912) (16,506,388) 269, ,849 83, , ,016 1,259,785 96,320 37, , ,171,856 62,597,143 61,645,814 6,911,778 62,976,489 40,533, ,177,093 35,322,551 22,510,713 4,839,879 (80,037) - 141,404,423 1,228, , , ,850,408 6,120,288 5,093,601 23, ,832, ,563 (9,299) (29,212) - - (9,299) - (206,216) (6,337,080) (1,024,299) (1,025,486) (245,138) - - (5,990,128) 222,558 92, ,696 59,564-1,441, ,050 41,984,455 26,866,006 5,169,676 (20,473) - 159,917,385 20,612,688 34,779,808 1,742,102 62,996,962 40,533, ,259,708 17,887,900 29,133,825 1,484,554 59,391,375 14,363, ,996,560 (2) According to the circulars issued by the Bank of Lebanon, a provision against properties acquired in settlement of debt amounting to LL (000) 9,038,868 (2005: LL (000) 4,162,478) was booked under provisions for risks and charges (Note 23). 125

126 13. Intangible Assets Key Computer Advances on Money Software Acquisitions Total LL (000) LL (000) LL (000) LL (000) Cost: Balance at 1 January ,443,362 24,653,955-27,097,317 Entities consolidated in ,004 39, ,778 Additions - 3,235,144 95,573 3,330,717 Disposals - (1,214,897) - (1,214,897) Reclassifications - 181, ,974 Foreign exchange difference 154, , ,894 At 31 December ,598,073 27,131, ,347 29,864,783 Amortization: Balance at 1 January ,883,915-14,883,915 Entities consolidated in ,562-28,562 Amortization charge for the year 30,739 3,798,036-3,828,775 Disposals - (1,117,511) - (1,117,511) Foreign exchange difference ,740-29,931 At 31 December ,930 17,622,742-17,653,672 Net book value: At 31 December ,567,143 9,508, ,347 12,211,111 At 31 December ,443,362 9,770,040-12,213,402 Key money is the amount paid by Bank Audi Syria sa to the owner of the leased office premises. 126

127 14. Other Assets LL (000) LL (000) Fiscal Stamps 920, ,590 Bullion and commemorative coins 871, ,543 Others 168,916-1,960, , Regularization Accounts and Other Debit Balances LL (000) LL (000) Debtors accounts related to insurance operations 9,701,793 12,107,870 Reinsurers share in technical provisions 6,972,493 6,394,972 Prepaid charges and deferred acquisition cost 13,993,463 10,804,138 Tax regularization account 16,390,286 11,683,666 Card memberships and credit card regularization accounts 11,011,900 9,777,023 Advances to staff 1,687,739 4,465,599 Hospitalization and medical care under collection 3,115,027 2,385,898 Tax paid in advance on Treasury bills and certificates of deposits 2,359,447 1,336,192 Advances on investments 40,514,391 36,540,760 Consolidation differences 3,781,459 3,347,302 Miscellaneous loans 3,155,142 2,988,278 Miscellaneous debtors and other debit accounts 24,435,930 16,636, ,119, ,468,

128 Credit card regularization accounts represent as at 31 December 2006 and 2005 the amounts due from international credit card companies in addition to security deposits placed with these companies. Tax regularization account includes taxes at a rate of 5% on realized interest on Treasury bills and other financial instruments with fixed income. The Bank nets off this balance against income tax due (Note 21). Miscellaneous loans represent facilities made by the Group to real estate entities operating in France. In its meeting dated 11 August 2005, the Board of Directors resolved to subscribe in 70% of the share capital of Al Mashrek Bank, Baghdad - Iraq. In this regard, advances on investments at 31 December 2006 include an amount of US$ 24,137,931 (LL (000) 36,387,931) and US$ 489,224 (LL (000) 737,505) representing the amount deposited at Dar Al Salam Investment Bank and the amount paid to certain founding shareholders, respectively, of Al Mashrek Bank, Baghdad - Iraq as per the minutes of understanding signed with these shareholders on 18 January Goodwill The carrying amount of goodwill allocated to each of the cash-generating units is as follows: Lebanon Switzerland Egypt Sudan Others Total LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) At 1 January ,715,410 42,913, ,701,451 99,329,885 Additions ,698,423 7,053, ,751,509 Effect of liquidating Beryte Holding - (696,533) (696,533) Exchange adjustment - 976, ,182 At 31 December ,715,410 43,192, ,698,423 7,053,086 1,701, ,361,043 During 2006 there was no impairment of goodwill (2005: nil). Impairment testing in this respect is performed on an annual basis by comparing the recoverable amount of the cash generating units (CGUs) determined at 31 December 2006 to their carrying amounts based on value in use calculation. That calculation uses management estimates and nominal cash flow projections covering a five-year period which is then extrapolated in perpetuity using a nominal terminal growth rate based on industry research, the position of the units in the sector in which they operate, and their growth prospects. The cost of capital assigned to an individual CGU and used to discount its future cash flows can have a significant effect on its valuation. The cost of capital 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. These variables are established on the basis of industry research. Management judgment is required in estimating the future cash flows of the CGUs. These values are sensitive cash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding the term sustainable 128

129 pattern of cash flows thereafter. While the acceptable range within which underlying assumption can be applied is governed by the requirement for resulting forecasts to be compared with actual performance as verifiable economic data in future years, the cash flow forecasts necessarily and appropriately reflect management view of future business prospects. 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 balance sheets any intangible assets with indefinite lives, other than goodwill. Goodwill at Discount Terminal 31 December 2006 Rate Growth Rate LL (000) % % Cash Generating Unit Commercial and Private Banking - Lebanon 54,715, Private Banking - Switzerland 43,192, ,908,083 At 31 December 2006, aggregate goodwill of LL(000) 1,701,451 had been allocated to CGUs that were not considered individually significant. 17. Due to Bank of Lebanon LL (000) LL (000) Loan granted to Bank Audi sal following the merger with Orient Credit Bank sal, maturing on 8 January ,400,000 27,400,000 Accrued interest 302, ,603 27,702,076 27,725,603 The above loan was granted by the Bank of Lebanon upon the acquisition of the assets and liabilities of Orient Credit Bank sal. The loan will be settled after eight years commencing on 8 January 1999 and is subject to an interest rate of 7.758% for 129

130 the first two years and to an interest rate equivalent to the one year yield on Lebanese Treasury bills less 7.28%, provided it is not less than the equivalent of 60% of the nominal interest rate on the one year Lebanese Treasury bills. Interest is paid on a quarterly basis. The funds should be used only for subscription in two years Lebanese Treasury bills during the first two years and for subscription in one year Treasury bills starting from the third year. These Treasury bills are pledged in favour of the Bank of Lebanon as a guarantee for the settlement of the soft loan (Notes 5 and 42). 18. Banks and Financial Institutions LL (000) LL (000) Current accounts 184,190, ,861,428 Term deposits 100,574, ,386,129 Accrued interest 550,529 1,882, ,315, ,129,754 Breakdown according to geographic location as of 31 December 2006: LL (000) % LL (000) % Lebanon 85,900, ,444, Organization for Economic Co-operation and Development (O.E.C.D.) member countries 104,820, ,320, Saudi Arabia 5,271, ,772, Other countries 88,772, ,710, ,764, ,247, Accrued interest 550,529-1,882, ,315, ,129,

131 19. Customers Deposits LL (000) LL (000) Sight deposits 2,174,798,173 1,612,351,706 Time deposits 7,232,880,432 5,806,946,494 Saving accounts 6,792,933,247 6,584,480,362 Credit accounts and cash margins against debit accounts 746,541, ,117,902 Related parties accounts 912,391,773 90,045,861 17,859,545,423 14,906,942,325 Deposits from customers are broken down as follows: Equivalent to Equivalent to FC in USD LL (000) FC in USD LL (000) Sight deposits Public sector 12,450,805 9,939,578 9,656,013 18,165,690 Private sector 1,147,854, ,572, ,996, ,806,929 Payment orders 93,604,876 9,075,781 41,947,783 9,335,331 Accrued interest 28,408,124 8,115,817 17,975,739 11,827,394 Time deposits Public sector 30,072, ,322,319 39,032, ,847,021 Term deposits 3,960,587, ,973,397 2,874,536, ,296,453 Other blocked accounts 359,105, ,313, ,733,940 37,809,532 Saving accounts Sight 91,599,724 17,515,229 77,243,549 18,649,350 Term 2,957,601,415 2,178,747,300 2,630,401,270 2,484,056,447 Credit accounts and cash margins against debit accounts 475,323,650 29,991, ,805,630 56,645,914 Related parties accounts 602,056,153 4,792,123 54,218,402 8,311,618 9,758,664,280 3,148,359,023 7,382,547,691 3,777,751,

132 Customers deposits in Lebanese banks include coded deposit accounts amounting to LL (000) 229,708,515 at 31 December 2006 (2005: LL (000) 239,784,717) which are subject to the provisions of article 3 of the Banking Secrecy Law dated 3 September Liabilities under Financial Instruments LL (000) LL (000) Certificates of deposit 150,750, ,750,000 Accrued interest 2,397,545 2,397, ,147, ,147,545 During the year 2000, Audi Saradar Investment Bank sal issued certificates of deposit for an amount of US$ 100,000,000 bearing an interest rate of % payable semi-annually and maturing on 9 May Other Liabilities LL (000) LL (000) Margins on letters of credit (Note a) 44,137,110 40,225,304 Social security dues 1,876,624 1,819,154 Operational taxes (Note b) 14,927,621 10,378,337 Income tax payable (Note c) 49,317,391 29,561,941 Debt on uncalled participation (Note d) 6,541,600 6,541,600 Credit balances of factoring clients 16,285,500 13,565,280 Accounts payable on acquisition of premises 1,861,261 4,017,488 Provisions for technical reserves related to the insurance business 80,418,668 56,754,451 Performance linked fees 4,938,884 - Other margins 128,587 1,239,390 Other accounts payable 7,581,790 4,283, ,015, ,386,021

133 a. MARGINS ON LETTERS OF CREDIT Outstanding documentary credits as at 31 December 2006 amounted to LL (000) 225,995,144 (2005: LL (000) 213,353,815) with corresponding margins totaling LL (000) 44,137,110 (2005: LL (000) 40,225,304). b. OPERATIONAL TAXES LL (000) LL (000) Taxes on salaries 2,010,145 1,668,403 Non resident taxes 1,869,165 1,089,400 Tax collectable from customers 963, ,726 Value added tax 265, ,255 Taxes on insurance operations 1,126,086 1,240,241 Tax on interest 3,463,985 2,918,410 Tax on bonus and other payments 4,030,868 2,391,445 Other taxes 1,198, ,457 14,927,621 10,378,337

134 c. INCOME TAX PAYABLE The movement of income taxes is summarised as follows: LL (000) LL (000) Balance at 1 January 29,561,941 25,250,766 Add: Provision for the year 50,300,456 30,519,990 Tax on revaluation of shares - 1,543,143 50,300,456 32,063,133 Less: Taxes paid during current year on banks and subsidiaries profits related to prior years 29,123,596 17,112,717 Taxes on interest received upon BDL swap - 9,487,217 Taxes paid related to prior years fiscal revision of the Group - 455,750 Other taxes paid 242, ,716 Transfer to provisions for risks and charges 1,189,456 - Difference of exchange (10,209) 320,558 30,545,006 27,751,958 Balance at 31 December 49,317,391 29,561,941 Income tax expense of the parent company was provided for in accordance with Lebanese fiscal regulations. The tax rates applicable to the subsidiaries vary from 15% to 40% (2005: 15% to 40%) in accordance with the income tax laws of the countries where the subsidiaries operate. For the purpose of determining the taxable results of the subsidiaries for the year, the accounting results (loss or profit) have been adjusted for tax purposes. Adjustments for tax purposes include items relating to both income and expense and are based on the current understanding of the existing tax laws and regulations and tax practices of the countries where the subsidiaries operate. 134

135 The relationship between taxable profit (banks in Lebanon) and accounting profit is as follows: LL (000) LL (000) Net income before tax 259,660, ,124,645 Less: Revenues previously subject to tax (32,820,960) (21,911,580) 226,839, ,213,065 Add: Non tax deductible charges 63,362,992 33,525,753 Income subject to taxes 290,202, ,738,818 Tax due at the rate of 15% 43,530,390 26,510,823 Additional taxes for local and foreign entities 6,770,066 5,552,310 Income tax expense 50,300,456 32,063,133 d. DEBT ON UNCALLED PARTICIPATION This caption includes an amount of LL (000) 6,541,600 (2005: LL (000) 6,541,600) representing the uncalled capital of Phoenicia Aer Rianta sal. 22. Regularization Accounts and Other Credit Balances LL (000) LL (000) Accrued expenses 23,376,699 18,442,898 Consolidation differences 9,648,022 4,898,709 Employee accrued benefits 22,152,842 14,663,660 Reinsurers and brokers accounts 5,592,220 5,568,237 Unearned commissions and premiums on financial instruments 4,344,279 1,407,462 Miscellaneous suppliers and other credit accounts 1,468,314 1,891,399 66,582,376 46,872,

136 23. Provisions for Risks and Charges LL (000) LL (000) Provision for risks and charges (Note a) 11,214,929 5,494,590 Provision for end-of-service indemnities (Note b) 22,059,516 16,326,512 Provision for properties acquired in settlement of debt (Note c) 9,038,868 4,162,478 Provision for foreign currency fluctuation 329, ,114 Provision for credit card balances 665, ,411 Other provisions 1,465, ,574 44,773,168 26,615,679 a. PROVISION FOR RISKS AND CHARGES LL (000) LL (000) Provision for risks due to engagements by signature 1,384,487 1,986,985 Provision for insurance risk 2,839,197 3,397,453 General provision for contingent liabilities 1,720,147 - Provision for legal claims 4,113,193 - Other provisions 1,157, ,152 11,214,929 5,494,

137 Movement in provision for risks and charges is as follows: LL (000) LL (000) Balance at 1 January 5,494,590 5,423,027 Add: Provision from entities consolidated in ,902,194 - Provided during the year 3,206,192 1,518,090 Difference of exchange 204,848-6,313,234 1,518,090 Less: Paid during the year 72,015 - Provision written back 520,880 1,041,729 Difference of exchange - 404, ,895 1,446,527 Balance at 31 December 11,214,929 5,494,590 b. PROVISION FOR END-OF-SERVICE INDEMNITIES Movement in the provision for end-of-service indemnities is as follows: LL (000) LL (000) Balance at 1 January 16,326,512 14,927,909 Add: Provided during the year 3,501,809 2,629,747 Provision from entities consolidated in ,129,424-6,631,233 2,629,747 Less: Paid during the year 831,107 1,066,605 Indemnities transferred to other entities 11,818 15,180 Provision no more required - 335,566 Advances (made) reimbursed 55,304 (186,207) 898,229 1,231,144 Balance at 31 December 22,059,516 16,326,512

138 c. PROVISION FOR PROPERTIES ACQUIRED IN SETTLEMENT OF DEBT In application of the Lebanese Banking Control Commission regulations, the Bank booked a provision in order to write down the value of properties acquired in settlement of debt. The movement in the provision is as follows: LL (000) LL (000) Balance at 1 January 4,162,478 2,716,209 Charge for the year 5,510,985 1,446,269 Disposal during the year (619,017) - Provision no more required (15,578) - Balance at 31 December 9,038,868 4,162, Share Capital and Cash Contribution to Capital LL (000) LL (000) Share capital (Note a) 404,162, ,162,400 Cash contribution to capital (Note b) 72,586,125 72,586, ,748, ,748, a. SHARE CAPITAL Based on the decision of the Extraordinary General Assembly of shareholders dated 27 April 2002, the Bank increased its capital from LL (000) 37,798,716 to LL (000) 45,798,716 which represents a LL (000) 8,000,000 increase divided into 2,400,000 preferred class A shares and 1,600,000 preferred class B shares based on the following terms:

139 Preferred shares class A Number of shares: 2,400,000 Share s issue price: USD 25 Share s nominal value: LL 2,000 (subsequently increased to LL 10,000) Issue premium: Calculated in USD as the difference between USD 25 and the counter value of the par value per share (LL 2,000) based on the exchange rate ruling on the first day of subscription. Benefits: Annual dividends of USD 3 per share, non cumulative. Preferred shares class B Number of shares: 1,600,000 Share s issue price: USD 25 Share s nominal value: LL 2,000 (subsequently increased to LL 10,000) Issue premium: Calculated in USD as the difference between USD 25 and the counter value of the par value per share (LL 2,000) based on the exchange rate ruling on the first day of subscription. Benefits: Transfer to common shares: Annual dividends of USD 1.5 per share, non cumulative. Shareholders have the right to transfer preferred shares to common shares during the 30 day period following the Ordinary General Assembly that approves the financial statements for the year At the end of the fifth year from the Board meeting which validates the capital increase (17 June 2002) the preferred class B shares are obligatorily transferred to common shares based on the provisions of law 308/2001. Conversion equation: USD 25 Book value per share * 1.2 Under no occasion will a class B preferred share be transferred to more than 2.36 common shares. Based on the decision of the Extraordinary General Assembly of shareholders dated 7 April 2004, the Bank increased its capital from LL(000) 45,798,716 to LL(000) 53,798,716 through issuing 4 million preferred class C shares according to the following terms: Preferred shares class C Number of shares: 4,000,000 Share s issue price: USD 25 Share s nominal value: LL 2,000 (subsequently increased to LL 10,000) Issue premium: Calculated in USD as the difference between USD 25 and the counter value of the par value per share (LL 2,000) converted at the exchange rate ruling on the first day of subscription. Benefits: Annual dividends of USD per share, non cumulative. The Extraordinary General Assembly of the preferred class B shareholders, dated 31 May 2004 decided to convert all class B preferred shares to common shares. Accordingly, the Extraordinary General Assembly of shareholders dated 4 June 2004 approved the decision taken by the Board of Directors to convert 1,600,000 preferred class B shares to 1,817,920 common shares. The nominal value of the 217,920 additional shares amounting to LL(000) 435,840 was transferred from the general reserve account to the capital account. 139

140 In the Extraordinary General Assembly of shareholders dated 29 April 2004, the shareholders resolved to increase the Bank s capital by LL(000) 4,097,924 through issuing 2,048,962 ordinary shares. The issue premium in excess of par paid by shareholders amounted to US$ 56,817,863 (LL(000) 85,652,928). The Extraordinary General Assembly of shareholders dated 14 July 2004 approved this increase and accordingly, the Bank s capital as of that date amounted to LL(000) 58,332,480 comprised of 29,166,240 shares with a nominal value of LL 2,000 each. The Extraordinary General Assembly of shareholders dated 24 August 2004 decided to increase the par value of the Bank s shares from LL 2,000 to LL 10,000 by transferring LL(000) 318,371 from the reserve appropriated to capital increase, LL(000) 159,194,924 from the general reserve, LL(000) 22,616,625 from the common shares issue premium and LL(000) 51,200,000 from the preferred shares issue premium to the capital account. This increase in capital was validated by the Extraordinary General Assembly held on 6 December Accordingly, the Bank s capital became LL(000) 291,662,400 comprised of 22,766,240 common shares and 6,400,000 preferred shares of LL 10,000 each fully paid. The Bank of Lebanon approved the par value increase on 18 October The Extraordinary General Assembly of shareholders held on 5 September 2005 decided to increase the share capital of the Bank by LL(000) 12,500,000 through issuing 1,250,000 preferred class D shares with a par value of LL 10,000 per share. Preferred shares class D Number of shares: 1,250,000 Share s issue price: USD 100 Share s nominal value: LL 10,000 Issue premium: Calculated in USD as the difference between USD 100 and the counter value of the par value per share (LL 10,000) based on the exchange rate ruling on the first day of subscription. Benefits: Annual dividends of USD 7.75 per share, non cumulative (USD 2 for the year 2005). This increase in share capital was validated by the Extraordinary General Assembly of shareholders dated 17 November Accordingly, the capital of the Bank as of 31 December 2005 became LL (000) 304,162,400 comprised of 22,766,240 common shares and 7,650,000 preferred shares of LL 10,000 each fully paid. The Extraordinary General Assembly of shareholders dated 2 February 2006 resolved to increase the Bank s capital from LL (000) 304,162,400 to LL (000) 404,162,400 through issuing 10 million common shares of which 7,553,248 shares will be appropriated to the financial group EFG-Hermes Holding whereas common shareholders will have the pre-emptive right to subscribe to the remaining 2,446,752 shares. The issue price was set at USD 60 per share and the issue premium (being the difference between USD 60 and par of LL 10,000) amounted to LL (000) 804,207,939 (Note 27). The increase in share capital was validated by the Extraordinary General Assembly of shareholders dated 28 April Accordingly the capital of the Bank as of 31 December was comprised of the following: Number Number of Shares LL (000) of Shares LL (000) Common shares 32,766, ,662,400 22,766, ,662,400 Preferred shares ( A, C & D ) 7,650,000 76,500,000 7,650,000 76,500,000 40,416, ,162,400 30,416, ,162,

141 Common shares are listed on the Beirut Stock Exchange as follows: Percentage of Share Capital Number of Shares Ordinary shares 57.10% 23,078,708 Global depository receipts 23.97% 9,687, % 32,766,240 b. 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 US$ 48,150,000 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. 25. Revaluation Variance Accepted in the Supplementary Capital During the year 1995, the Bank revalued certain real estate properties based on the provisions of law number 282 dated 30 December 1993 and decree number 5451 dated 26 July The revaluation differences amounted to LL (000) 16,599,623 and were approved by the Ministry of Finance. Another LL(000) 2,000,000 relate to the revaluation of the assets of a subsidiary in The department of income tax considers revaluation of real estates as cost of the real estate and depreciation is calculated on this amount. 141

142 26. Reserves for General Banking Risks LL (000) LL (000) Bank Audi sal Audi Saradar Group 66,295,836 54,537,733 Audi Saradar Investment Bank sal 6,960,599 5,722,188 Bank Audi Saradar France sa 2,501,913 1,305,626 Banque Audi (Suisse) sa 3,249,021 2,796,635 Audi Saradar Private Bank sal 1,921, ,786 80,928,740 65,121,968 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 off-balance sheet accounts based on rates specified by the Bank of Lebanon to cover general banking risks. The consolidated ratio should not be less than 1.25 percent of these risks at the end of ten years (2007) and 2 percent at the end of twenty years (2017). This reserve cannot be distributed as dividends and is denominated in Lebanese Lira and foreign currencies based on the denomination of the risk weighted assets and off-balance sheet accounts. 27. Reserves, Premiums and Equity Differences LL (000) LL (000) Legal reserve (Note a) 91,089,235 63,911,568 General reserves 34,989,291 24,277,675 Reserve appropriated to capital increase 1,105,308 1,105,308 Reserve for translation difference 14,574,541 1,073,470 Issue and merger premiums (Note b) 1,354,835, ,627,313 Gain on sale of Treasury GDR (Note c) 30,003,344 31,318,960 Difference on exchange - 77,170 1,526,596, ,391,

143 a. 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. This reserve is not available for dividend distribution. During 2006, the parent entity and different subsidiaries transferred to legal reserve the amount required by the laws applicable in the countries in which they operate. b. ISSUE AND MERGER PREMIUMS LL (000) LL (000) Common shares issue premium 965,445, ,237,159 Preferred shares issue premium 353,383, ,383,703 Merger premium Lebanon Invest Holding sal 36,006,451 36,006,451 1,354,835, ,627,313 The increase in the common shares issue premium is due to the issuance of 10 million common shares where the issue premium amounted to LL (000) 804,207,939 (Note 24) as of 31 December c. GAIN ON SALE OF TREASURY GDR These gains arise from the purchase and sale of Global Depository Receipts owned by the Bank. Based on the applicable regulations, the Bank does not have the right to distribute these gains. The net loss arising from the trade of Treasury GDRs amounted to LL (000) 1,315,616 for the year-ended 31 December 2006 (2005: gain LL (000) 13,888,282). 28. Treasury GDRs LL (000) LL (000) Cost of Treasury GDRs 11,763,237 4,661,617 11,763,237 4,661,

144 The Bank proceeds directly or through its subsidiaries in buying its own GDRs. As of 31 December 2006, the Bank had 123,921 (2005: 51,863) GDRs at a total cost of USD 7,803,142 (2005: USD 3,092,283). The weighted average number of outstanding common shares during the year amounted to 29,232,753 shares (2005: 22,571,211). 29. Cumulative Changes in Fair Value LL (000) LL (000) Unrealized gain (loss) resulting from recording investments at fair value: Available for sale - Lebanese Treasury bills 22,920,814 12,694,289 Available for sale - Lebanese government Eurobonds (21,986,809) 5,852,951 Available for sale - shares, securities and other financial assets with variable income 69,709,635 91,139,456 Available for sale - bonds and other financial assets with fixed income (1,117,487) (1,034,000) 69,526, ,652, Minority Interest LL (000) LL (000) Capital 100,569,015 37,349,686 Reserves, premiums and equity differences 833,843 1,204,090 Profit for the year 844,754 1,470,974 Retained earnings 1,399,452 51, ,647,064 40,076,

145 31. Paid and Proposed Dividends According to the resolutions of the General Assembly meetings held during the years 2006 and 2005, dividends paid and related to the years 2005 and 2004, respectively, were as follows: LL (000) LL (000) Preferred shares Class A : LL 4,523 per share (2005: LL 4,542 per share) 10,854,000 10,900,800 Preferred shares Class C : LL 3,298 per share (2005: LL 3,112 per share) 13,190,625 13,247,500 Preferred shares Class D LL 3,015 per share 3,768,750 - Common shares: LL 2,261 per share (2005: LL 1,650 per share) 51,480,161 37,564,296 79,293,536 61,712,596 In their meeting held on 29 March 2007, the Board of Directors proposed the distribution of dividends for the year 2006 as follows: Distribution Number per Share Total of Shares LL (000) LL (000) Common shares 32,766, ,441,437 Preferred shares Class A 2,400, ,854,000 Preferred shares Class C 4,000, ,190,625 Preferred shares Class D 1,250, ,603, ,089,

146 32. Cash and Cash Equivalents Cash and cash equivalents as at 31 December includes the following: LL (000) LL (000) Cash and balances with Central Banks 1,539,837, ,468,075 Placements with banks and other financial institutions 4,689,323,218 3,375,688,787 Placements of banks and other financial institutions (263,205,046) (352,467,676) Cash and cash equivalents at year-end 5,965,955,292 3,927,689, Net Income for the Year The statement of income for 2006 and 2005, including minority interest, is summarized as follows: Change LL (000) LL (000) LL (000) Interest income 253,066,927 1,248,216, ,149,482 Interest expenses and similar charges (134,770,233) (809,809,757) (675,039,524) Net provisions less recoveries on doubtful loans 6,976,422 (24,670,489) (31,646,911) Revenues shares, securities and financial assets with variable income 5,871,913 12,758,923 6,887,010 Net commissions 8,986, ,975,041 96,988,889 Net profit from financial operations 49,731, ,963,348 74,231,530 Other operating income 1,894,743 19,936,920 18,042,177 Other operating expenses (3,080,967) (7,830,123) (4,749,156) General and administrative expenses (63,022,339) (317,812,438) (254,790,099) Depreciation and amortisation (4,870,746) (34,537,176) (29,666,430) Recoveries (provisions) on investments and contingencies (8,602,559) (7,049,437) 1,553,122 Income from investment under equity method (169,592) 740, ,558 Other income (expense), net (5,890,802) (12,167,076) (6,276,274) Profit before tax 106,120, ,715, ,594,374 Income tax expense (18,237,323) (50,300,456) (32,063,133) Net profit for the year 87,883, ,414, ,531,241 Equity holders of the parent 88,509, ,569, ,060,267 Minority interests (626,220) 844,754 1,470,974

147 34. Salaries and Related Expenses LL (000) LL (000) Salaries and wages 124,831, ,671,265 Social security contributions 18,581,451 16,647,311 Provision for staff end-of-service indemnities 3,501,809 2,629,747 Scholarships 5,270,428 7,467,148 Other allowances 21,187,464 16,402, ,372, ,817, General Operating Expenses LL (000) LL (000) Board of Directors fees 475, ,251 Taxes and similar disbursements 7,249,663 6,142,010 Premium for guarantee of deposits 7,350,711 6,371,598 Rental and related maintenance charges 12,455,662 11,562,045 Legal, audit and consulting fees 11,791,562 11,642,898 Mail and telecommunication 10,093,289 8,833,626 Maintenance, repairs and utilities 9,203,423 5,048,444 Travel and entertainment 6,519,678 5,089,802 Insurance premiums 3,487,919 1,857,320 Advertising fees 11,382,959 11,968,251 Printing and supplies 4,378,802 4,910,740 Gifts 1,305,377 1,237,233 Social aids 2,761,722 3,840,607 Subscription and contributions 3,381,974 2,879,181 Fuel and consumables 3,619,515 4,024,334 Special rewards 15,468,531 10,871,437 Outsourcing fees 1,210,344 2,228,330 Other expenses 14,376,536 9,071, ,512, ,972,597

148 36. Share-based Payments According to the Extraordinary General Assembly dated 2 February 2006, the Board of Directors was authorized to issue to all or certain of the individuals specified in law number 2001/308 stock options to subscribe in up to 5,000,000 ordinary shares of the Bank s capital. As part of the initial phase of the stock option plan, the Board of Directors resolved on 24 April 2006 to grant 3,200,000 stock options. Furthermore, on 26 April 2006 the Board of Directors specified the names of the beneficiaries and the number of rights that will be granted to each of them along with the related terms and conditions. On 6 May 2006, the Central Bank of Lebanon approved the share-based payment plan whereby the Bank can grant to all or certain of the individuals specified in article 3 of the law number 308 dated 3 April 2001 stock options, thus granting these individuals the right to subscribe in 3,200,000 ordinary shares of the Bank s capital at $ and according to the terms and conditions specified by the Board of Directors. These stock options vest over a period of four years and as of the end of each year from the grant date. In addition, the Board of Directors has the right to set targets related to certain percentage increases in the consolidated earnings per share as a condition precedent to the vesting of a certain number of granted options. The exercise price for each option was set at USD The options are exercisable over a period of 2 years only from the date they are vested. 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 adjusted by adding back the cost of this share-based payments plan and before deducting the preferred shares dividends. The growth in earnings 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 26 April 2007, 2008, 2009, and 2010, respectively. At any vesting date, in case 50% of the targeted growth was achieved, then 50% of the options will vest. In case 50% to 100% of the targeted growth was achieved, then a proportionate percentage of stock 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. 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 inputs to the model used in the valuation of the stock option expenses at grant date: Dividend yield 5% Weighted risk-free rate 5.7% Expected volatility 12.1% Expected life of the option 4 years Historical volatility 12.1% Fair value per share USD

149 The expected life of the option is based on historical data and is not necessarily indicative of exercise patterns that may 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 LL (000) 17,927,140 for the year ended 31 December This cost was accounted for under General and Administrative Expenses in the Income Statement and under Reserve for Share-Based Payments in Shareholders Equity. 37. Earnings per Share LL (000) LL (000) Net profit for the year 246,569, ,060,267 Dividends payable to preferred shareholders Preferred shares A 10,854,000 10,854,000 Preferred shares C 13,190,625 13,190,625 Preferred shares D 14,603,906 3,768,750 Profit available to ordinary shareholders 207,921, ,246,892 Weighted average number of common shares outstanding 29,232,753 22,571,211 Basic earnings per share Weighted average number of common shares after dilutive effect of stock option plan 30,342,175 22,571,211 Diluted earnings per share Diluted earnings per share has been calculated for the year 2006 after taking into consideration the dilutive effect of shares to be issued amounting to 1,109,422 shares as part of the Bank s share-based payment plan (Note 36). The number of shares issued has been calculated at the balance sheet date for the purpose of calculating diluted earnings per share based on the realization of accomplishment conditions as if the accomplishment date is the current balance sheet date. 149

150 38. Depreciation and Amortization LL (000) LL (000) Property, plant and equipment 25,832,012 24,803,777 Intangible fixed assets 3,828,775 3,416,384 Properties acquired in settlement of debt 5,510,985 1,446,269 Write-back of provision on assets acquired in settlement of debt (634,596) - 34,537,176 29,666, Related Party Transactions The Group enters into transactions with major related parties (shareholders, directors, senior management and companies having common directors with the Bank, and financial institutions which are affiliates and subsidiaries) in the ordinary course of business at commercial interest and commission rates. The terms and conditions of these transactions were approved by management. All the loans and advances to related parties are performing advances and are free of any provision for possible credit losses. The year-end debit and credit balances in respect of related parties as of 31 December 2006 and 2005, as well as interest income and expense for the years 2006 and 2005 are as follows: LL (000) LL (000) Loans and advances 238,489, ,802,811 against cash collateral 130,816,682 51,765,580 against real guarantees 78,563,574 55,496,288 Indirect facilities 4,483,530 3,345,735 Commitments 5,804,362 - Deposits 912,391,773 90,045,861 Interest income on loans 13,577,938 9,910,775 Interest expense on deposits 18,199,160 3,114,

151 During 2006, options were granted to executive directors over 1,250,000 ordinary shares subject to the terms and conditions set out in Note 36. The cost of these share-based payments amounted to LL (000) 7,002,789 for the year ended 31 December Salaries, bonuses, and other benefits paid to executive directors amounted to LL (000) 28,907,044 (2005: LL (000) 20,460,827). 40. Fair Value of Financial Instruments The table below sets out the estimated carrying values and fair values of financial assets and liabilities Fair Value Book Value Difference LL (000) LL (000) LL (000) Financial assets Cash and balances with Central Banks 5,601,075,376 5,514,475,295 86,600,081 Lebanese and other governmental Treasury bills and bonds 4,222,328,481 4,224,406,857 (2,078,376) Bonds and financial assets with fixed income 668,081, ,235,595 (11,154,107) Shares, securities and financial assets with variable income 229,212, ,212,033 - Banks and financial institutions 4,852,084,964 4,852,084,964 - Loans and advances to customers 4,877,081,929 4,877,081,929-20,449,864,271 20,376,496,673 73,367, Fair Value Book Value Difference LL (000) LL (000) LL (000) Financial liabilities Due to Central Banks 27,702,076 27,702,076 - Banks and financial institutions 285,315, ,315,361 - Customers deposits 17,859,545,423 17,859,545,423 - Liabilities under financial instruments 166,715, ,147,545 13,567,500 18,339,277,905 18,325,710,405 13,567,

152 41. Fiduciary Deposits, Assets under Management and Custody Accounts LL (000) LL (000) Bills for collection 58,137,067 25,492,111 Shares and securities under custody 3,097,048,315 2,701,040,848 3,155,185,382 2,726,532,959 Fiduciary accounts and assets under management 4,264,506,141 3,586,437,308 Fiduciary accounts include notes, checks, policies, Treasury bills/bonds, shares and documents for collection held by the Group to the order of third parties. 42. Commitments, Contingencies and Off-Balance Sheet Items Credit-Related Commitments Credit-related commitments include commitments to extend credit, standby letters of credit, guarantees and acceptances which are designed to meet customer requirements. Letters of credit, guarantees (including standby letters of credit) and acceptances commit the Bank and its subsidiaries to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Standby letters of credit, guarantees and acceptances commit the Bank and its subsidiaries to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Standby letters of credit, which are included under guarantees, would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at a floating rate. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates, or other termination clauses and usually includes payment of fees. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. 152

153 The Bank has the following credit-related commitments: LL (000) LL (000) Commitments in favor of customers: Letters of credit 225,995, ,353,815 Letters of guarantee 874,097, ,223,685 1,100,092, ,577,500 Acceptances (balance sheet items) 136,994, ,184,218 Other off-balance sheet items: 1,237,087, ,761,718 Bank guarantees submitted by customers 124,886,923 60,113,354 Engagements on term financial instruments 29,454,469 29,171,470 The amount of LL(000) 29,454,469 (2005: LL(000) 29,171,470) represents the value of Lebanese Treasury bills owned by the Bank and pledged as a collateral against the loan granted by the Bank of Lebanon amounting to LL(000) 27,400,000 as of 31 December 2006 (2005: LL (000) 27,400,000) (Note 17). Engagements on Term Financial Instruments LL (000) LL (000) Options (OTC) 388,317, ,250, ,317, ,250,

154 Engagements Received from Customers LL (000) LL (000) Real estate mortgages 1,126,934,061 1,126,766,562 Shares and securities 695,779, ,538,041 Key money 2,412,500 16,135,771 Vehicles 14,070,058 15,645,146 Bank accounts given as cash collateral 196,611, ,733,669 Other guarantees 248,317, ,138,389 2,284,125,510 2,265,957, Derivatives In the ordinary course of business the Group enters into various types of transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more underlying financial instrument, reference rate or index. Derivative financial instruments include forwards, futures, swaps and options. The Group holds or issues derivative financial instruments for hedging purposes that are primarily related to the customers operations. The table below shows 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 amount represents the volume of transactions at the end of the year and are indicative of neither the market nor credit risks. 154

155 31 December 2006: Notional Amounts by Term to Maturity Positive Negative Notional Fair Fair Amount Within Over Value Value Total 3 Months Months Years 5 Years LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) Derivatives held for trading Currency swaps 2,784,584 3,811, ,508, ,684, ,823, Forward foreign exchange contracts 4,410,746 3,988, ,624, ,397,784 61,227, Currency options (OTC) 4,410,746 4,410, ,157, ,920, ,236, Derivatives held as fair value hedges Forward foreign exchange contracts 432,834 41, ,121,349 94,756,489 6,364, Currency options (OTC) 33,303-3,157,581-3,157, December 2005: Notional Amounts by Term to Maturity Positive Negative Notional Fair Fair Amount Within Over Value Value Total 3 Months Months Years 5 Years LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) Derivatives held for trading Currency swaps 2,287,157 2,813, ,438, ,096, ,341, Currency options (OTC) 3,005,617 3,005, ,399,070 56,375,498 48,023, Derivatives held as fair value hedges Forward foreign exchange contracts 1,273,909 4,403, ,117, ,324,805 79,792, Currency options (OTC) 266,988-10,851,389 2,712,847 8,138, As of 31 December 2006, the Bank has positions in the following types of derivatives: FORWARDS Forward contracts are contractual agreements to buy or sell currencies or commodities at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. 155

156 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. 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. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR TRADING PURPOSES Most of the Bank s derivative trading activities relate to deals with customers which are normally laid off with counterparties. Also included under this heading are any derivatives which do not meet IAS 39 hedging requirements. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED 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 risk. This is achieved by hedging specific financial instruments, portfolios of fixed rate financial instruments and forecast transactions as well as strategic hedging against overall balance sheet exposures. Hedges entered into by the Bank which provide economic hedges but do not meet the hedge accounting criteria are treated as derivatives held for trading purposes. Credit risk from financial derivatives arise from the inability of one of the parties to fulfil its contractual obligations and it would be limited to the positive fair value of financial derivatives for the Group. 44. Credit Risk and Concentration of Assets, Liabilities and Off-Balance Sheet Items Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Board manages credit risk by setting limits for individual borrowers, and groups of borrowers and for geographical and industry segments. The Group also monitors credit exposures, and continually assesses the creditworthiness of counterparties. In addition, the Group obtains security where appropriate, enters into master netting agreements and collateral arrangements with counterparties, and limits the duration of exposures. For details of the composition of the loans and advances portfolio refer to Note 9. Credit risk in respect of derivative financial instruments is limited to those with positive fair values, which are included under other assets. As a result the maximum credit risk, without taking into account the fair value of any collateral and netting agreements, is limited to the amounts on the balance sheet plus commitments to customers disclosed in Note 42. Concentrations arise when a number of counterparties are engaged in similar business activities, or 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 or other conditions. Concentrations indicate the relative sensitivity of the Group s performance to developments affecting a particular industry or geographic location. In order to manage credit risk, the Group diversifies its credit activities to avoid an undesired concentration of risk to individuals or groups of individuals in the same industry or geographical region. The Group takes collaterals wherever appropriate. 156

157 The distribution of assets, liabilities, and off-balance sheet items by geographic region as of 31 December 2006 was as follows: Liabilities and Assets Shareholders Equity LL (000) LL (000) Geographic region: Lebanon 13,363,822,496 15,293,017,445 Other Middle East 3,231,957,362 4,011,468,999 Europe 3,721,436, ,884,340 Asia 82,515, ,502,472 North America 188,877, ,249,025 Rest of the world 774,175, ,662,110 21,362,784,391 21,362,784, Interest Rate Risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Group is exposed to interest rate risk as a result of mismatches of interest rate repricing of assets and liabilities. The Board has established levels of interest rate risk by setting limits on the interest rate gaps for stipulated periods. Positions are monitored on a daily basis by management and hedging strategies are used to ensure that positions are maintained within established limits. The effective interest rate (effective yield) for a financial instruments is the rate that if used to determine the present value of the instrument would give the book value of the instruments. The historical cost is used to price the instrument with fixed income that is presented net of amortization and the current market price is used to price the instrument with a floating rate or the instrument that is presented at fair value. The Group s interest sensitivity position based on contractual repricing arrangements has been 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. 157

158 The interest sensitivity position based on contractual repricing arrangements at 31 December 2006 was as follows (amounts in LL million): Non Interest Up to 1 to 3 3 Months 1 to Over Bearing Items 1 Month Months to 1 Year 5 Years 5 Years Total Assets Cash and balances with Central Banks 852, , , ,689 2,286, ,994 5,514,475 Lebanese and other governmental bills and bonds 88,835 28,851 47, ,700 1,975,075 1,527,695 4,224,407 Bonds and financial assets with fixed income 21,588 10,445 37,472 42, , , ,236 Shares, securities and financial assets with variable income 229, ,212 Banks and financial institutions 107,340 4,103, , ,704 17,050-4,852,085 Loans and advances to customers 91,524 1,509, ,619 1,328, , ,993 4,877,082 Bank acceptances 136, ,994 Investments under equity method 21, ,382 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) 460, ,260 Intangible assets 12, ,211 Other assets 1, ,961 Regularization accounts and other debit balances 100,731-36, ,119 Goodwill 216, ,361 Total assets 2,340,750 6,375,759 1,622,050 3,042,336 5,477,359 2,504,531 21,362,785 Liabilities and Equity Due to Bank of Lebanon , ,702 Banks and financial institutions 10, ,975 47,708 11,649-10, ,315 Customers deposits 450,359 13,254,418 1,466,712 2,249, ,298-17,859,546 Engagements by acceptances 136, ,994 Liabilities under financial instruments 2, , ,148 Other liabilities 228, ,015 Regularization accounts and other credit balances 66, ,582 Provision for risks and charges 44, ,773 Share capital and cash contribution to capital 476, ,749 Revaluation variance accepted in the supplementary capital 18, ,600 Reserves for general banking risks 80, ,929 Reserves, premiums and equity differences 1,526, ,526,598 Employees share based payments 17, ,927 Less: Treasury GDRs (11,763) (11,763) Retained earnings 31, ,928 Net result of the financial period - profit 246, ,569 Minority share 103, ,647 Cumulative changes in fair value 69, ,526 Total liabilities and equity 3,500,901 13,486,793 1,514,420 2,261, ,048 10,215 21,362,785 Interest rate sensitivity gap (1,160,151) (7,111,034) 107, ,928 4,888,311 2,494,316 Cumulative gap (1,160,151) (8,271,185) (8,163,555) (7,382,627) (2,494,316) -

159 The interest sensitivity position based on contractual repricing arrangements at 31 December 2005 was as follows (amounts in LL million): Non Interest Up to 1 to 3 3 Months 1 to Over Bearing Items 1 Month Months to 1 Year 5 Years 5 Years Total Assets Cash and balances with Central Banks 732, , , ,712 3,217, ,856 5,096,496 Lebanese and other governmental bills and bonds 47, ,279 98, ,413 2,446, ,917 3,331,669 Bonds and financial assets with fixed income 12, ,765 69, ,230 63, ,367 Shares, securities and financial assets with variable income 207, , ,587 Banks and financial institutions 171,068 2,977, ,508 50,665 8,517-3,448,828 Loans and advances to customers 56,235 1,405, , , , ,717 3,720,066 Bank acceptances 129, ,184 Investments under equity method 7, ,152 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) 383, ,996 Intangible assets 12, ,214 Other assets Regularization accounts and other debit balances 81,927-36, ,468 Goodwill 99, ,330 Total assets 1,942,099 4,875,711 1,123,077 1,381,387 6,874,024 1,108,053 17,304,351 Liabilities and Equity Due to Bank of Lebanon ,400 27,726 Banks and financial institutions 5, , ,340 44,838 2,127 8, ,130 Customers deposits 120,945 12,562,487 1,199, , ,173-14,906,942 Engagements by acceptances 129, ,184 Liabilities under financial instruments 2, , ,148 Other liabilities 168, ,386 Regularization accounts and other credit balances 46, ,872 Provision for risks and charges 26, ,615 Share capital and cash contribution to capital 376, ,749 Revaluation variance accepted in the supplementary capital 18, ,600 Reserves for general banking risks 65, ,122 Reserves, premiums and equity differences 672, ,392 Less: Treasury GDRs (4,662) (4,662) Retained earnings 2, ,359 Net result of the financial period - profit 158, ,060 Minority share 40, ,076 Cumulative changes in fair value 108, ,652 Total liabilities and equity 1,937,716 12,922,028 1,338, , ,300 35,792 17,304,351 Total interest rate sensitivity gap 4,383 (8,046,317) (214,958) 526,907 6,657,724 1,072,261 Cumulative gap 4,383 (8,041,934) (8,256,892) (7,729,985) (1,072,261) -

160 46. Market Risk Market risk arises from fluctuations in interest rates, foreign exchange rates and equity prices. The Board of Directors has set limits on the value of risk that may be accepted. This is monitored by the asset and liability committee on a monthly basis. 47. Currency Risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group views the Lebanese Pound as its functional currency. The Board has set limits on positions by currency. Positions are monitored constantly and hedging strategies used to ensure positions are maintained within established limits. Breakdown of assets and liabilities by currency as at 31 December 2006: CV of Foreign Currencies LL (000) in LL (000) Total Assets Cash and balances with Central Banks 2,340,602,180 3,173,873,115 5,514,475,295 Lebanese and other governmental bills and bonds 1,127,694,510 3,096,712,347 4,224,406,857 Bonds and financial assets with fixed income - 679,235, ,235,595 Shares, securities and financial assets with variable income 8,199, ,012, ,212,033 Banks and financial institutions 71,912,341 4,780,172,623 4,852,084,964 Loans and advances to customers 239,287,344 4,637,794,585 4,877,081,929 Bank acceptances - 136,994, ,994,155 Investments under equity method 4,358,546 17,023,396 21,381,942 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) 284,965, ,294, ,259,708 Intangible assets 5,828,078 6,383,033 12,211,111 Other assets 1,390, ,196 1,960,689 Regularization accounts and other debit balances 35,343, ,775, ,119,070 Goodwill 33,838, ,522, ,361,043 Total assets 4,153,419,551 17,209,364,840 21,362,784,391 Liabilities and equity Due to Bank of Lebanon 27,702,076-27,702,076 Banks and financial institutions 3,570, ,745, ,315,361 Customers deposits 3,148,359,023 14,711,186,400 17,859,545,423 Engagements by acceptances - 136,994, ,994,155 Liabilities under financial instruments - 153,147, ,147,545 Other liabilities 140,021,256 87,993, ,015,036 Regularization accounts and other credit balances 10,789,046 55,793,330 66,582,376 Provision for risks and charges 31,745,808 13,027,360 44,773,168 Share capital and cash contribution to capital 404,162,400 72,586, ,748,525 Revaluation variance accepted in the supplementary capital 18,599,623-18,599,623 Reserves for general banking risks 26,885,228 54,043,512 80,928,740 Reserves, premiums and equity differences 219,339,224 1,307,257,747 1,526,596,971 Employees share based payments - 17,927,140 17,927,140 Less: Treasury GDRs (1,239,210) (10,524,027) (11,763,237) Retained earnings 5,310,308 26,618,063 31,928,371 Net result of the financial period-profit 212,465,440 34,104, ,569,901 Cumulative changes in fair value 22,919,871 46,606,282 69,526,153 Minority share 4,016,496 99,630, ,647,064 Total liabilities and equity 4,274,646,636 17,088,137,755 21,362,784,391

161 Breakdown of assets and liabilities by currency as at 31 December 2005: CV of Foreign Currencies LL (000) in LL (000) Total Assets Cash and balances with Central Banks 2,446,675,527 2,649,820,354 5,096,495,881 Lebanese and other governmental bills and bonds 1,432,776,556 1,898,892,799 3,331,669,355 Bonds and financial assets with fixed income - 743,366, ,366,661 Shares, securities and financial assets with variable income 9,491, ,095, ,587,564 Banks and financial institutions 144,281,269 3,304,546,503 3,448,827,772 Loans and advances to customers 251,412,504 3,468,653,969 3,720,066,473 Bank acceptances - 129,184, ,184,218 Investments under equity method 3,951,054 3,201,399 7,152,453 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) 296,154,934 87,841, ,996,560 Intangible assets 6,760,052 5,453,350 12,213,402 Other assets 805, , ,133 Regularization accounts and other debit balances 31,065,099 87,402, ,468,000 Goodwill 33,838,327 65,491,558 99,329,885 Total assets 4,657,212,903 12,647,138,454 17,304,351,357 Liabilities and equity Due to Bank of Lebanon 27,725,603-27,725,603 Banks and financial institutions 121,244, ,884, ,129,754 Customers deposits 3,777,751,679 11,129,190,646 14,906,942,325 Engagements by acceptances - 129,184, ,184,218 Liabilities under financial instruments - 153,147, ,147,545 Other liabilities 97,850,775 70,535, ,386,022 Regularization accounts and other credit balances 9,840,570 37,031,795 46,872,365 Provision for risks and charges 22,462,510 4,153,168 26,615,678 Share capital and cash contribution to capital 304,162,400 72,586, ,748,525 Revaluation variance accepted in the supplementary capital 18,599,623-18,599,623 Reserves for general banking risks 24,040,266 41,081,702 65,121,968 Reserves, premiums and equity differences 159,707, ,684, ,391,464 Less: Treasury GDRs (518,630) (4,142,987) (4,661,617) Retained earnings (957,204) 3,315,725 2,358,521 Net result of the financial period - profit 148,858,701 9,201, ,060,267 Cumulative changes in fair value 12,693,346 95,959, ,652,696 Minority share 2,750,617 37,325,783 40,076,400 Total liabilities and equity 4,726,212,111 12,578,139,246 17,304,351, Liquidity Risk Liquidity risk is the risk that the Group will be unable to meet its net liabilities when they fall due. Liquidity risk can be caused by market disruptions or credit downgrades which may cause certain sources of funding to dry up immediately. To limit this risk, management has arranged diversified funding sources, manages assets with liquidity in mind, and monitors liquidity on a daily basis. In addition, the Bank maintains a statutory deposit with the Central Banks as described in Note

162 The table below summarises the maturity profile of the Group s assets and liabilities based on contractual repayment arrangements. The contractual maturities of assets and liabilities have been determined on the basis of the remaining period at the balance sheet date to the contractual maturity date and do not take into account the effective maturities as indicated by the deposit retention history and the availability of liquid funds. The maturity profile is monitored by management to ensure adequate liquidity is maintained. The maturity profile of the assets and liabilities at the year-end are based on contractual repayment arrangement. The maturity profile of the assets and liabilities at 31 December 2006 was as follows (amounts in LL million): Up to 1 to 3 3 Months 1 to Over 1 Month Months to 1 Year 5 Years 5 Years Total Assets Cash and balances with Central Banks 1,236, ,199 1,251,849 2,452, ,995 5,514,475 Lebanese and other governmental bills and bonds 31,777 48, ,098 2,010,804 1,569,362 4,224,407 Bonds and financial assets with fixed income 18,203 4,683 43, , , ,236 Shares, securities and financial assets with variable income 53, , ,212 Banks and financial institutions 4,210, , ,704 17,058-4,852,085 Loans and advances to customers 1,590, ,404 1,342, , ,740 4,877,082 Bank acceptances 67,188 51,121 18, ,994 Investments under equity method ,382 21,382 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) , ,260 Intangible assets ,211 12,211 Other assets 1, ,961 Regularization accounts and other debit balances 43,535 54,129 37, , ,119 Goodwill , ,361 Total assets 7,253,816 1,526,874 3,403,736 5,727,355 3,451,004 21,362,785 Liabilities and equity Due to Bank of Lebanon 27, ,702 Banks and financial institutions 215,497 47,708 11,895-10, ,315 Customers deposits 13,675,372 1,479,553 2,259, ,547-17,859,546 Engagements by acceptances 67,188 51,121 18, ,994 Liabilities under financial instruments - - 2, , ,148 Other liabilities 50,044 17,329 80,374 80, ,015 Regularization accounts and other credit balances 42,392 12,187 12, ,582 Provision for risks and charges 7, ,260 44,773 Shareholders equity 140,454-16,861-2,403,395 2,560,710 Total liabilities and equity 14,225,861 1,607,898 2,401, ,885 2,450,870 21,362,785 Liquidity gap (6,972,045) (81,024) 1,002,465 5,050,470 1,000,134 Cumulative gap (6,972,045) (7,053,069) (6,050,604) (1,000,134) - 162

163 The maturity profile of the assets and liabilities at 31 December 2005 were as follows (amounts in LL million): Up to 1 to 3 3 Months 1 to Over 1 Month Months to 1 Year 5 Years 5 Years Total Assets Cash and balances with Central Banks 781, , ,854 3,426, ,856 5,096,496 Lebanese and other governmental bills and bonds 168,706 99, ,065 2,479, ,291 3,331,669 Bonds and financial assets with fixed income 1,774 16,648 73, ,900 94, ,367 Shares, securities and financial assets with variable income 31,267-1,169 13, , ,587 Banks and financial institutions 3,148, ,551 64,622 8,517-3,448,828 Loans and advances to customers 1,509, , , , ,718 3,720,066 Bank acceptances 27,642 25,672 73,830 2, ,184 Investments under equity ,152 7,152 Property, plant and equipment (including revaluation reserve approved by the Central Bank of Lebanon) , , ,996 Intangible assets ,214 12,214 Other assets Regularization accounts and other debit balances 30,903 10,422 39, , ,468 Goodwill ,330 99,330 Total assets 5,700, ,266 1,651,942 7,132,977 1,847,976 17,304,351 Liabilities and equity Due to Bank of Lebanon ,400-27,726 Banks and financial institutions 214, ,400 45,143 2,127 8, ,130 Customers deposits 12,333,678 1,369, , ,659-14,906,942 Engagements by acceptances 27,642 25,672 73,830 2, ,184 Liabilities under financial instruments - - 2, , ,148 Other liabilities 65,728 7,878 88, , ,386 Regularization accounts and other credit balances 9,685 5,983 30, ,872 Provision for risks and charges ,315 26,615 Shareholders equity ,437,348 1,437,348 Total liabilities and equity 12,651,427 1,547,873 1,200, ,944 1,478,597 17,304,351 Net liquidity gap (6,951,237) (576,607) 451,432 6,707, ,379 Cumulative gap (6,951,237) (7,527,844) (7,076,412) (369,379) Equity Price Risk Equity price risk arises from the change in fair values of equity investments. The Group manages this risk through diversification of investments in terms of geographical distribution and industry concentration. 50. Segmental Information The Group operates in two geographic markets: Lebanon, which is designated as domestic, and the remainder of the Middle East and Europe, which is designated as international. The following table shows the distribution of the Group s gross income, total assets and capital expenditures by geographical segment:

164 Domestic International Total LL (000) LL (000) LL (000) LL (000) LL (000) LL (000) Net interest received 372,596, ,329,203 48,223,336 22,236, ,819, ,565,759 Net commissions 74,169,610 72,695,513 31,805,431 24,293, ,975,041 96,988,889 Revenues from shares and financial assets with variable income 12,464,132 6,887, ,791-12,758,923 6,887,010 Net profit from financial operations 103,054,188 62,557,826 20,909,160 11,673, ,963,348 74,231,530 Other operating income 19,926,292 17,617,278 10, ,899 19,936,920 18,042,177 Income from investments under equity method 716, ,558 24, , ,558 Gross income 582,926, ,997, ,268,246 58,628, ,195, ,625,923 Operating expenses and amortization and depreciation (294,000,775) (238,882,767) (66,178,960) (50,322,918) (360,179,735) (289,205,685) Net provisions less recoveries on financial fixed assets (7,049,437) 960, ,786 (7,049,437) 1,553,122 Net provisions less recoveries on off-balance sheet items (7,083,654) (6,102,712) - - (7,083,654) (6,102,712) Other expenses, net (11,436,569) (10,778,332) (730,507) 4,502,058 (12,167,076) (6,276,274) Profit before income tax 263,356, ,193,913 34,358,779 13,400, ,715, ,594,374 Total assets 13,363,822,496 12,538,489,473 7,998,961,895 4,765,861,884 21,362,784,391 17,304,351,357 Total liabilities and equity 15,293,017,445 13,496,973,553 6,069,766,946 3,807,377,804 21,362,784,391 17,304,351,357 Capital expenditures 41,603,826 81,925,041 48,295,984 13,782,108 89,899,810 95,707,149 The Group s major business segment is banking. Insurance activities represent 1% of profit before income tax and 0.82% of total assets. 51. Legal Proceedings Due to the nature of its business, the Group is a defendant in various legal proceedings. Management, after review with its legal counsel of all such pending actions and proceedings, considers that the aggregate liability or loss, if any, resulting from an adverse determination would not have a material effect on the financial position of the Group. 52. Subsequent Events In its meeting held on 29 March 2007, the Bank s Board of Directors authorized its Chairman and the Chief Executive Officer to study and reassess the Bank s previous decision about establishing a bank in Iraq and to take the necessary decision including liquidation or withdrawal from the Iraqi market. In the above mentioned meeting, the Board of Directors resolved to call all the preferred class A shares. 164

165 165

166 2006

167 Constant Quality Egypt s unwavering talent for cinema has held a special place in the homes of millions in the Arab world for one hundred years, and proved to be an inspiration to Bank Audi, where excellent performance is a top priority.

168

169 SHAREHOLDERS INFORMATION

170 170

171 Ownership of Common Shares (1) Information as at May 31, 2007 Shareholders/Groups of Shareholders Nationality % of Common Shares (2) Deutsche Bank Trust Company Americas (3) United States of America 30.00% EFG - Hermes Holding Company sae (4) Egypt 23.05% Audi Family Lebanon 7.08% Holding Saradar sal Lebanon 7.03% Al Homaizi Family Kuwait 6.50% Al Sabbah Family Kuwait 5.93% Sheikh Dhiab Bin Zayed AlNehayan United Arab Emirates 5.34% Other shareholders (5) 15.07% Total shareholding (6) % (1) Above 5% of total common shares. (2) Excluding preferred shares: as at the date hereof, Bank Audi s total Share Capital consists of 32,766,240 Common (or Ordinary) Shares and 7,650,000 Preferred Shares. For more information on the Bank s Capital, refer to the Consolidated Financial Statements herein. (3) As at the date hereof, Deutsche Bank Trust Company Americas holds 9,829,902 Common Shares represented by Global Depositary Receipts («GDRs») listed on the London Stock Exchange and on the Beirut Stock Exchange. (4) In 2006, 7,553,248 common shares were issued at a price of US$ 60 per share, representing a subscription price of approximately US$ 453 million, and were allocated to EFG-Hermes Holding Co. sae pursuant to the terms of a memorandum of understanding and investment agreement entered into between Bank Audi and EFG-Hermes. EFG-Hermes Holding Co, a Cairo headquartered company, is a leading investment bank in the MENA region. (5) 248 other holders of Common Shares. (6) All the common shares of the Bank are listed on the Beirut Stock Exchange. In 2006, the issuance of 5 million common shares was authorized by the Bank s general assembly of shareholders pursuant to the adoption of an employee stock option plan. Stock Options representing 3,200,000 shares were actually granted by the Board of Directors, in April 2006, to 1801 employees and are expected to become exercisable over a period of four years, partially subject to certain performance criteria. 171

172 2006

173 Dedication It takes the dedication of a large part of the Sudanese population to grow gum trees and harness their revenue. The same dedication can be found in all Bank Audi employees, serving clients throughout its local and international network.

174

175 GROUP HIGH LEVEL CHART

176

177 Group High Level Chart EXTERNAL AUDITORS EXTERNAL SOLICITORS CORPORATE SECRETARIAT SHAREHOLDERS BOARD OF DIRECTORS BOARD COMMITTEES CHAIRMAN AUDIT COMMITTEE CORPORATE GOVERNANCE & REMUNERATION COMMITTEE EXECUTIVE COMMITTEE CHIEF EXECUTIVE OFFICER PRIVATE BANKING REGIONAL EXPANSION RETAIL & E-BANKING ISLAMIC BANKING CORPORATE BANKING INVESTMENT BANKING INSURANCE GROUP BUSINESS LINES STANDING MANAGEMENT COMMITTEES CREDIT COMMITTEE ASSET LIABILITY COMMITTEE INVESTMENT COMMITTEE REAL ESTATE COMMITTEE ANTI-MONEY LAUNDERING COMMITTEE DISCLOSURE COMMITTEE GROUP SUPPORT FUNCTIONS RISK MANAGEMENT INTERNAL AUDIT LEGAL & COMPLIANCE FINANCE OPERATIONS GROUP GEOGRAPHICAL PRESENCE LEBANON FRANCE EGYPT KINGDOM OF SAUDI ARABIA BANK AUDI sal BANK AUDI SARADAR FRANCE sa BANK AUDI sae AUDI SAUDI ARABIA AUDI SARADAR INVESTMENT BANK sal SWITZERLAND SUDAN UAE AUDI SARADAR PRIVATE BANK sal BANQUE AUDI (SUISSE) sa NATIONAL BANK OF SUDAN BANK AUDI sal ABU DHABI REPRESENTATIVE OFFICE LIBANO ARABE INSURANCE sal QATAR JORDAN BANK AUDI llc BANK AUDI sal - JORDAN BRANCHES SYRIA BANK AUDI SYRIA sa BANKING SYRIAN ARAB INSURANCE sa INSURANCE & BROKERAGE 177

178

179 ORGANIZATION CHART

180 Bank Audi sal - Audi Saradar Group Organization Chart STRATEGY DIRECTOR & GROUP CFO FREDDIE BAZ BOARD OF DIRECTORS CHAIRMAN OF THE BOARD RAYMOND AUDI GROUP CEO SAMIR HANNA AUDIT COMMITTEE GROUP EXECUTIVE COMMITTEE CORPORATE GOVERNANCE & REMUNERATION COMMITTEE OFFICE OF THE CEO 180

181 GROUP INTERNAL AUDIT CORPORATE SECRETARIAT BUDGETING FINANCE CORPORATE ACCOUNTING & FINANCIAL CONTROLS MIS STRATEGIC PLANNING & DEVELOPMENT RESEARCH GROUP PRIVATE BANKING MARIO SARADAR PRIVATE BANKING SUBSIDIARIES GROUP PRIVATE BANKING ACTIVITIES GROUP CORPORATE BANKING RAMZI SALIBA CORPORATE LENDING LOAN RECOVERY & RESTRUCTURING GROUP RETAIL BANKING IMAD ITANI ISLAMIC BANKING IMAD ITANI REGIONAL EXPANSION ELIA SAMAHA COUNTRY MANAGEMENT GABY KASSIS PRODUCT DEVELOPMENT DISTRIBUTION CHANNELS NATIONAL BANK OF SUDAN GROUP FINANCIAL INSTITUTIONS & CORRESPONDENT BANKING GROUP BUSINESS DEVELOPMENT BANK AUDI sae (EGYPT) RETAIL BANKING LEBANON COUNTRY MANAGEMENT LEBANON MARC AUDI CORPORATE NETWORK MANAGEMENT COMMERCIAL NETWORK MANAGEMENT RETAIL NETWORK MANAGEMENT HOUSING LOANS OVERSEAS CREDIT GROUP RISK MANAGEMENT CREDIT OPERATIONS MARKETS COMMUNICATIONS TREASURY & CAPITAL MARKETS ELECTRONIC BANKING & CARDS SERVICES OPERATIONS INFORMATION SECURITY (CISBC) TRADE FINANCE BRANCH NETWORK OPERATIONS GROUP SUPPORT FUNCTIONS SYSTEMS AND PROCEDURES HUMAN RESOURCES INFORMATION TECHNOLOGY ADMINISTRATION REAL ESTATE & ENGINEERING GROUP LEGAL & COMPLIANCE CHAHDAN JEBEYLI COMPLIANCE ANTI-MONEY LAUNDERING INTERNAL SOLICITORS

182

183 CORPORATE STRUCTURE

184 Corporate Structure BANAUDI INTERNATIONAL HOLDING SA 99.99% % BERYTE INTERNATIONAL N.V % BANK AUDI SARADAR FRANCE sa 99.01% CLOVER BUILDING sal 99.99% AUDI SARADAR PRIVATE BANK sal 47.60% EAGLE ONE REIC (HOLDING) sal % BANK AUDI llc (Qatar) 99.50% SOLIFAC sal 99.99% BANK AUDI sae (Egypt) 99.80% LOGISTIX sal 70.00% AUDI SAUDI ARABIA 99.98% SARADAR EQUITY (HOLDING) sal BANK AUDI sal-audi SARADAR GROUP 99.99% 41.00% 75.00% 98.67% 47.00% AUDI SARADAR INVESTMENT BANK sal 3.00% BANK AUDI SYRIA sa NATIONAL BANK OF SUDAN ASA sal AUDI INSURANCE SERVICES sal 3.00% 98.75% 90.75% 99.96% SARADAR INVESTMENT HOUSE sal LIBANO ARABE sal INFI GAMMA HOLDINGS sal 99.99% LEBANON INVEST sal % 99.67% LEBANON INVEST ASSET MANAGEMENT sal 99.80% FONCIERE LINEA sal 99.80% FONCIERE RIDEA sal 50.00% 99.00% AUDI SERVICES sal

185 BERYTE BV % % BANQUE AUDI (SUISSE) sa 99.91% EAGLE ONE THIRD INVESTMENT CO % EAGLE ONE FOURTH INVESTMENT CO % EAGLE ONE FIFTH INVESTMENT CO % 34.01% 99.00% CGI sal PROPERTY HOUSE sal (under liquidation) ORION SYSTEM sal HOLDING 99.88% % EAGLE MANAGEMENT sal CAPITAL OUTSOURCING (FRANCE) sa 99.70% ARCANE TECHNOLOGIE ME sarl 99.40% INFI ALPHA HOLDING sal BANKING SERVICES HOLDING REAL ESTATE SOFTWARE FINANCE - INVESTMENT - CONSULTANCY INVESTMENT INSURANCE & BROKERAGE

186 2006

187 A Leader Qatar s natural wealth of resources is matched only by its determination to succeed, making it one of the world s fastest growing economies. Bank Audi s competitive drive runs just as strong, combining strong resources with the power to grow.

188

189 MANAGEMENT

190 Bank Audi sal OFFICE OF THE CEO Mr. Michel E. Aramouni Mrs. Jocelyne A. Jalkh Assistant General Manager Assistant General Manager Management * CORPORATE NETWORK Mrs. Wafaa S. Daouk Mr. Salam G. Nadda Mrs. Ghina M. Dandan Assistant General Manager Network Manager Corporate Banking Assistant General Manager Network Manager Corporate Banking Central Manager Network Manager Corporate Banking COMMERCIAL NETWORK Mr. Hani A. Bidawi Mrs. Najla E. Haddad Mr. Rabih E. Berbery Mr. Kamal S. Tabbara Senior Manager Network Manager Commercial Banking Central Manager Network Manager Commercial Banking Manager Network Manager Commercial Banking Manager Network Manager Commercial Banking RETAIL NETWORK Mr. Marwan O. Arakji Mr. Pierre Y. Harfouche Central Manager Network Manager Retail & Personal Banking Central Manager Network Manager Retail & Personal Banking BUSINESS DEVELOPMENT Mr. Joseph I. Kesrouani Mr. Joseph T. Gholam Dr. Ghassan C. Ayache Mr. Mohamad R. Jisr Assistant General Manager Consultant Advisor Advisor Business Development CENTRAL DEPARTMENTS Mr. Georges Y. Azar Mr. Yacoub G. Nadda Mrs. Suzanne A. Bacha Dr. Marwan S. Barakat Mrs. Dany L. Baz Mrs. Randa T. Bdeir Mr. Nabil E. Chaya Advisor Branch Network Advisor Housing & Personnel Loans Senior Manager Human Resources Senior Manager Research Senior Manager Retail Banking Senior Manager Electronic Banking & Cards Services Senior Manager Treasury & Capital Markets 190

191 Mr. Elie J. Kamar Mr. Naoum J. Moukarzel Mr. Rachid E. Romanos Mr. Mounir R. Tabet Mr. Antoine G. Bou-Farah Mr. Georges J. Boustany Mr. Abdel Salam E. Chebaro Mr. Khalil I. Debs Mr. Salah K. Labaki Mr. Elie A. Nahas Mr. Hassan A. Saleh Mr. Joseph G. Chaya Mr. Naim H. Hakim Mr. Emile N. Shalala Ms. Nadine F. Abi-Saab Paul N. Azar, Esq. Senior Manager Credit Risk Management Senior Manager Information Technology Senior Manager Overseas Credit Risk Management Senior Manager Accounting Central Manager Group Internal Audit Central Manager Recovery & Restructuring Central Manager Trade Finance Central Manager Corporate Lending Central Manager Central Operations Central Manager Real Estate & Engineering Central Manager Group Retail Manager Administrative Manager MIS Manager Foreign Exchange & Treasury Assistant Manager Communications Internal Solicitor FINANCIAL INSTITUTIONS & CORRESPONDENT BANKING Mr. Khalil G. Geagea Mr. Joseph A. Nader Mrs. Nada G. Abi Nader Senior Manager Group Financial Institutions & Correspondent Banking Tel: (961-1) Fax: (961-1) Central Manager Tel: (961-1) Fax: (961-1) Assistant Manager Tel: (961-1) Fax: (961-1) BRANCH NETWORK & PRIVATE SALES Mr. John E. Arida Manager Tel: (961-1) Fax: (961-1) * Continued from page

192 Audi Saradar Investment Bank sal Board of Directors Dr. Marwan M. Ghandour Chairman & General Manager Mr. Nabil N. Akkari Member Mr. Ali I. Ghandour Member Mr. Abdallah I. Al Hobayb Member Mr. Sami F. Khoury Member (resigned as of ) Mr. Ramzi N. Saliba Member & Secretary of the Board Mr. Mario J. Saradar Member Bank Audi sal - Audi Saradar Group Member Mr. Moufid J. Farra Mr. Maysara K. Sukkar Management Dr. Marwan M. Ghandour Mr. Ramzi N. Saliba Advisor to the Board Advisor to the Board Chairman & General Manager General Manager Mr. Nabil E. Chaya Senior Manager Head of Capital Markets Mr. Khalil I. Debs Central Manager Head of Corporate Banking Mr. Fadi M. Chehade Manager Head of Corporate Credit Administration Mr. Noel J. Hakim Manager Head of Unit Mrs. Bassima G. Harb Manager Head of Unit Mr. Mohammad N. Hallak Manager Finance & Accounting Department 192

193 Audi Saradar Private Bank sal Board of Directors Mr. Mario J. Saradar Mr. Abdo I. Jeffy Mr. Fady G. Amatoury Mr. Marc J. Audi Dr. Joe A. Debbané Bank Audi sal - Audi Saradar Group Management Mr. Mario J. Saradar Mr. Fady G. Amatoury Mr. Toufic R. Aouad Mr. Pierre G. Naggear Mr. Emile P. Albina Mrs. Martine S. Hochar Mrs. Nada M. Rizk Ms. Nada M. Safa Ms. Aline S. Karam Mrs. Eugénie E. Rizkallah Mrs. Marie G. Touma Chairman Vice-Chairman Member Member Member Member General Manager General Manager Assistant General Manager Assistant General Manager Executive Manager Executive Manager Regional Manager Regional Manager Manager Head of Operations & Organization Manager Head of Internal Control Manager Head of Credit Unit 193

194 Banque Audi (Suisse) sa Board of Directors Mr. Mario Saradar Mr. Dominique Rochat Chairman Vice-Chairman Mr. Raymond W. Audi Member Mr. Marc Audi Member Mr. Pierre de Blonay Member Mr. Michel Cartillier Member Mr. Benoît Chappuis Member Mr. Jean-Pierre Jacquemoud Member (as of February 2007) Mr. Pierre Respinger Member Management Mr. Istvan Nagy Mrs. Christiane Audi Mr. Ibrahim Abdelnour Mr. Elie Baz Mr. Fouad Hakim Mr. Christopher Johnson Mr. Raja Abdallah Mrs. Véronique Baudelet Mr. Erich Fischer Mrs. Theresia Kienler Mr. Wolfram Pietsch Mr. Marco Rastaldi General Manager Deputy General Manager Manager Manager Manager Manager Deputy Manager Deputy Manager Deputy Manager Deputy Manager Deputy Manager Deputy Manager 194

195 Bank Audi Saradar France sa Board of Directors Mr. Samir N. Hanna Mr. Luc H. Debieuvre Mrs. Shérine R. Audi Mr. Raymond W. Audi Dr. Freddie C. Baz Mr. Ramzi N. Saliba Mr. Mario J. Saradar Mr. Pierre A. Souleil Bank Audi sal - Audi Saradar Group Management Mr. Samir N. Hanna Mr. Luc H. Debieuvre Mrs. Shérine R. Audi Mr. Emile G. Ghazi Mr. Michel K. Mehanna Mr. Alexandre G. Moujaes Chairman Member & General Manager Member & Deputy General Manager Member Member Member Member Member Member represented by Mr. Maurice H. Saydé Chairman General Manager Deputy General Manager Manager Head of Corporate Banking Manager Head of Operations & Trade Finance Manager Head of Private Banking 195

196 Bank Audi sal Jordan Branches Management Mr. Yousef A. Ensour General Manager Mr. Samer I. Al Aloul Deputy General Manager Corporate & Commercial Banking Mr. Fadi V. Saade Assistant General Manager Retail Banking & Branch Network Mr. Nader O. Gammouh Mr. Mohammad S. Bader Mr. Rami R. Kilani Mr. Ayman S. Al-Badri Ms. Haya N. Khammash Mr. Mohammad A. Momani Senior Manager Operations Head of Consumer Lending Head of Information Technology Chief Financial Officer Treasurer Compliance & Information Security 196

197 Bank Audi Syria sa Board of Directors Dr. Georges A. Achi Mr. Bassel S. Hamwi Dr. Ahmad M. Abboud Mr. Raymond W. Audi Dr. Freddie C. Baz Mr. Samir N. Hanna Mr. Adnan N. Takla Mr. Mohamed Said Z. Zaim Mrs. Rana T. Zein Mr. Abdulateef A. Al-Rajihi Mrs. Nada N. Assaad Mrs. Yasmina R. Azhari Chairman Deputy Chairman & General Manager Member Member Member Member Member Member Member Advisor to the Board Advisor to the Board Advisor to the Board Management Mr. Bassel S. Hamwi Mr. Antoine G. El-Zyr General Manager Deputy General Manager Central Departments Mr. Mahmoud A. Al-Kurdy Mr. Jean E. Homsi Mr. Elie N. Kanaan Mr. Mohannad S. Kandil Mr. Fady A. Obeid Mr. Elie Y. Risha Mr. Jamil R. Shocair Mr. Gilbert N. Ghosn Rawia V. Osta, Esq. Mr. Georges H. Yazbeck Chief Financial Officer Head of Engineering Department Head of Risk Management Department Head of Infrastructure & Operations Head of Retail, Marketing & Sales Department Head of Operations & Correspondent Banking Head of Credit Management Department Foreign Exchange Dealer & Treasurer Internal Solicitor Senior Auditor 197

198 Audi Saudi Arabia Board of Directors Mr. Abdallah I. Al-Hobayb Chairman H.R.H. Prince Mohamad Bin Khaled Al-Faisal Member Dr. Freddie C. Baz Member Dr. Marwan M. Ghandour Member Mr. Samir N. Hanna Member Mr. Sulaiman A. Al-Muhaidib Member Mr. Bassam A. Yammine (resigned on 31/08/07) Member Mr. Abdallah I. Saade (elected on 16/09/07) Member Management Mr. Samir N. Hanna (as of 16/09/07) Mr. Bechara T. Raad Mr. Ammar H. Bakheet Mr. Abdallah I. Saade Mr. Saud A. Al-Saleh Mr. Ahmed H. Mandora Mr. Adnan K. Al-Rumaihi Chief Executive Officer* Chief Operating Officer Head of Asset Management Head of Corporate Finance Head of Brokerage Senior Manager Private Banking Advisor to the Chairman 198 *Position previously held by Mr. Bassam A. Yammine who resigned on 31/08/07

199 Bank Audi sae (Egypt) Board of Directors Mr. Hatem A. Sadek Mr. Gaby G. Kassis Chairman & Managing Director Vice-Chairman & Managing Director Mr. Raymond W. Audi Member (2) Dr. Freddie C. Baz Member (2) Dr. Marwan M. Ghandour Member (1) Mr. Samir N. Hanna Member Mr. Ramzi N. Saliba Member Dr. Mokhtar A. Khattab Member (2) Mr. Elia S. Samaha Member (as of April 29, 2007) (1) Chairman of the Audit Committee (2) Members of the Audit Committee Mr. Yehia K. Youssef Management Mr. Hatem A. Sadek Mr. Gaby G. Kassis Secretary of the Board Chairman & Managing Director Vice-Chairman & Managing Director Mr. Yehia K. Youssef Senior General Manager Chief Operating & Compliance Officer Mr. Amr M. Atallah Senior General Manager Head of Retail Banking Mr. Hany A. Abd Elsalam Mr. Jihad E. Helw Mr. Ashraf K. Nour Eldin Mrs. Azza A. Abd Elwahab Mr. Tarek M. El Kholy Deputy General Manager Deputy General Manager Deputy General Manager Assistant General Manager Senior General Manager Head of Risk Management Mr. Mohamed Hatem I. Hassan Assistant General Manager Head of Operational Risk Mr. Mohamed M. Bedier Assistant General Manager Head of Market Risk Mr. Afdal E. Naguib Assistant General Manager Head of Credit & Investment Risk Mr. Mohamed A. Masri Mr. Assem K. Awwad General Manager Head of Corporate Banking Assistant General Manager Team Leader Cairo I 199

200 Mr. Ehab R. Abou-Ali Mr. Tamer A. Mostafa Mrs. Karima M. Mohie Eldin Mr. Khaled G. Abdel Meguid Mr. Tarek M. Abdou Mr. Hatem R. El Habash Mrs. Mounia H. Dadanian Senior Relationship Manager Senior Relationship Manager Relationship Manager Assistant General Manager Team Leader Alexandria Senior Relationship Manager Alexandria Unit Head Regional Business Relationship Officer Mr. Osama Y. Alsharif General Manager Head of Human Resources Mr. Paul G. Asmar General Manager Head of Administration & Engineering Mr. Mohamed A. El Ahwany General Manager Head of Legal Affairs Mr. Tamer M. Ghazaleh General Manager Chief Financial Officer Mr. Hani F. Issac General Manager Head of Financial Institutions Mr. Mohamed R. Latif Mrs. Amani A. Shams El Din Executive Manager Senior Relationship Manager General Manager Head of Operations Mr. Amr Y. El Kelish Assistant General Manager Acting Head of Treasury Mr. Amr A. Gamali Assistant General Manager Fixed Income Mr. Hesham S. Mabrouk Assistant General Manager Head of Information Technology Ms. Heba M. Gaballa Senior Manager Head of Communication 200

201 National Bank of Sudan Board of Directors Dr. Imad I. Itani Mr. Samir N. Hanna Mr. Abdo I. Jeffy Mr. Hashim H. Malik Mr. Ahmad B. El Nefeidi Mr. Hatem A. Sadek Mr. Ramzi N. Saliba Mr. Fawzi I. Wasfi Mr. Moawia A. Mohamad Ali Chairman Member Member Member Member Member Member Member Secretary of the Board Management Mr. Charbel T. Moubarak General Manager (as of May 2007) Mr. Moawia A. Mohamad Ali Deputy General Manager Mr. Samir H. Diab Assistant General Manager Branch Network Support Mr. Jihad A. Hichi Mr. Raffy A. Karamanian Mr. Maher H. Abdul Karim Mr. Mohamad A. Al Hajj Mr. Mohamad B. Hassan Manager Operations Manager Retail Banking, Marketing & Sales Head of Trade Finance Head of Accounting Head of Information Technology Ms. Sandra H. Shakkour Compliance (as of June 2007) 201

202 Bank Audi llc (Qatar) Board of Directors Mr. Raymond W. Audi Mr. Fady G. Amatoury Dr. Ghassan C. Ayache Mr. Abdo I. Jeffy Mr. Ramzi N. Saliba Mr. Elia S. Samaha Mr. Mario J. Saradar Chairman Member Member Member Member Member Member Management Mr. Fady G. Amatoury Mr. Saad A. El Zein General Manager Deputy General Manager 202

203 Bank Audi sal Abu Dhabi Representative Office Management Mr. Abdo I. Jeffy Mr. Elie A. Jeffy Chief Representative Deputy Chief Representative 203

204 2006

205 Vision With vision nothing is the same. Like Abu Dhabi s plan to raise an innovative Formula 1 circuit on the island of Bani Yas, Bank Audi s forward thinking has ensured its continuous expansion towards all-new territories.