SUPPLEMENT DATED 22 DECEMBER 2009 TO THE OFFERING CIRCULAR DATED 9 SEPTEMBER 2009 BANQUE SAUDI FRANSI

Transcription

1 SUPPLEMENT DATED 22 DECEMBER 2009 TO THE OFFERING CIRCULAR DATED 9 SEPTEMBER 2009 BANQUE SAUDI FRANSI (incorporated as a joint stock company in the Kingdom of Saudi Arabia) USD 2,000,000,000 Euro Medium Term Note Programme This supplement (the Supplement) to the offering circular (the Offering Circular) dated 9 September 2009 and the supplement dated 9 September 2009 which comprise a base prospectus constitutes a supplementary prospectus for the purposes of Section 87G of the Financial Services and Markets Act 2000 (the FSMA) and is prepared in connection with the Euro Medium Term Note Programme (the Programme) established by Banque Saudi Fransi (the Issuer or BSF). Terms defined in the Offering Circular have the same meaning when used in this Supplement. This Supplement is supplemental to, and should be read in conjunction with, the Offering Circular and the supplement dated 9 September 2009 and any other supplements to the Offering Circular issued by the Issuer. The Issuer accepts responsibility for the information contained in this Supplement. To the best of the knowledge of the Issuer (which has taken all reasonable care to ensure that such is the case) the information contained in this Supplement is in accordance with the facts and does not omit anything likely to affect the import of such information. The purpose of this Supplement is to amend Condition 3 (Negative Pledge) and Condition 18 (Governing Law and Submission to Jurisdiction) to the Notes, outline some recent developments in respect of the Issuer and detail further information in relation to the Issuer's operations and amend the selling restrictions contained within Subscription and Sale. The Supplement will also incorporate by reference the Issuer's reviewed interim condensed consolidated financial statements as at and for the nine month period ended 30 September The risk factors that may affect the Issuer's ability to fulfil its obligations under Notes issued under the Programme have been amended within this Supplement. On 19 October 2009 the Issuer published its reviewed interim condensed consolidated financial statements as at and for the nine month period ended 30 September A copy of those interim financial statements has been filed with the Financial Services Authority and, by virtue of this Supplement, those interim financial statements are incorporated in, and form part of, the Offering Circular. Copies of all documents incorporated by reference in the Offering Circular can be obtained from the Issuer and the Paying Agent in London as described on page 104 of the Offering Circular. If documents which are attached to this Supplement themselves incorporate any information or other documents therein, either expressly or implicitly, such information or other documents will not form part of this Supplement for the purposes of the Prospectus Directive (Directive 2003/71/EC) except where such information or other documents are specifically incorporated by reference or attached to this Supplement.

2 To the extent that there is any inconsistency between (a) any statement in this Supplement or any statement incorporated by reference into the Offering Circular by this Supplement and (b) any other statement in or incorporated by reference in the Offering Circular, the statements in (a) above will prevail. Save as disclosed in this Supplement and any supplement to the Offering Circular previously issued, there has been no other significant new factor, material mistake or inaccuracy relating to information included in the Offering Circular since the publication of the Offering Circular In accordance with section 87Q(4) FSMA investors who have agreed to purchase or subscribe for the Notes before the Supplement is published have the right, exercisable before the end of the period of two working days beginning with the working day after the date on which this Supplement was published, to withdraw their acceptances. This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Offers of Securities Regulations issued by the Capital Market Authority of the Kingdom of Saudi Arabia (the Capital Market Authority). The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective purchasers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities. If you do not understand the contents of this document you should consult an authorised financial adviser. ii

3 CONTENTS Risk Factors... 1 Terms and Conditions of the Notes... 3 Recent Developments - Overview... 7 Kingdom of Saudi Arabia General Information Subscription and Sale iii

4 RISK FACTORS The following risk factors are supplemental and should be read in connection with the Risk Factors within the Offering Circular. The Issuer believes that the following factors may affect its ability to fulfil its obligations under Notes issued under the Programme. All of these factors are contingencies which may or may not occur and the Issuer is not in a position to express a view on the likelihood of any such contingency occurring. In addition, factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme are also described below. The Issuer believes that the factors described below (together with the risk factors described within the Offering Circular) represent the principal risks inherent in investing in Notes issued under the Programme, but the inability of the Issuer to pay profit, principal or other amounts on or in connection with any Notes may occur for other reasons which may not be considered significant risks by the Issuer based on information currently available to it or which it may not currently be able to anticipate. Prospective investors should also read the detailed information set out elsewhere within this Supplement and the Offering Circular and reach their own views prior to making any investment decision. Capitalised terms used herein and not otherwise defined shall bear the meanings ascribed to them in "Terms and Conditions of the Notes" as amended below and contained within the Offering Circular. The risk factor entitled "Governing Law and Enforcement of Judgments" contained on page 11 of the Offering Circular shall be deleted and replaced with the following: Governing Law and Enforcement of Judgments The Notes are expressed to be governed by English law and provide for the jurisdiction of the courts of England, subject only to an option for Noteholders to bring proceedings before The Committee for the Resolution of Securities Disputes established under the Saudi Arabian Capital Market Law (the Committee). Despite this, the courts and judicial committees of the Kingdom of Saudi Arabia (the Kingdom) may not recognise the choice of English law or submission to jurisdiction of English courts. Accordingly, in any proceedings relating to the Notes in the Kingdom, Islamic law (Shari'a), as interpreted in the Kingdom, may be applied by the relevant court or judicial committee. The courts and judicial committees of the Kingdom have the discretion to deny the enforcement of any contractual or other obligations if, in their opinion, the enforcement thereof would be contrary to the principles of Islamic law. The Committee was established pursuant to Article 25 of the Saudi Arabian Capital Market Law and is responsible for the settlement of disputes arising under the Capital Market Law and its implementing regulations. The decisions of the Committee are subject to appeal before an appeal panel (the Appeal Panel) consisting of three members representing the Ministry of Finance, the Ministry of Commerce and Industry and the Bureau of Experts at the Council of Ministers. The decisions of the Appeal Panel are final. The terms and conditions of the Notes give Noteholders an option to bring proceedings relating to the Notes before the Committee. Disputes of a commercial nature in the Kingdom are currently heard before a court called the Grievances Board, which strictly applies Islamic law, although a new law of the judiciary has just been issued and calls 1

5 for the establishment of Commercial Courts in the Kingdom. In addition, the Grievances Board has the exclusive jurisdiction to consider the enforcement of foreign judgments and arbitral awards, supervise insolvency and bankruptcy proceedings of commercial entities and hear claims against Saudi Arabian government bodies. Accordingly, if a judgment from an English court were to be enforced in the Kingdom, it would need to be submitted to the Grievances Board for enforcement. The Grievances Board may, at its discretion, enforce all or any part of a foreign judgment provided that (a) the judgment is not inconsistent with Islamic law and/or Saudi Arabian law, including the general principles of Islamic law and (b) the judgment creditor can demonstrate to the Grievances Board that the courts of the jurisdiction granting the judgment will reciprocally enforce the judgments of the courts and committees of the Kingdom in such foreign jurisdiction. Such reciprocity may be demonstrated by way of the existence of a treaty or protocol between the Kingdom and the relevant jurisdiction or by virtue of a plaintiff providing evidence that the relevant foreign court has recognised and enforced a Saudi judgment on a previous occasion. In the case of an English judgment, there is no relevant treaty and, accordingly, Noteholders seeking to enforce an English judgment might be required to adduce other evidence of such reciprocity. No assurance can be given that investors would be able to meet the requirements of reciprocity of enforcement. In addition, even if Noteholders were able to meet this requirement, they should be aware that if any terms of the Notes (including any provisions relating to the payment of profit) were found to be inconsistent with Islamic law, they would not be enforced by the Grievances Board. See further below under "Enforcement of Profit and Other Provisions". The risk factor entitled "Saudi Companies Law" contained on page 13 of the Offering Circular shall be deemed deleted. 2

6 TERMS AND CONDITIONS OF THE NOTES Condition 3 to the Terms and Conditions (as contained on page 36 of the Offering Circular) shall be deemed deleted and replaced with the following: 3. NEGATIVE PLEDGE 3.1 Negative Pledge So long as any of the Notes remains outstanding, the Issuer shall not, and the Issuer shall procure that none of its Subsidiaries will, create or have outstanding any mortgage, charge, lien, pledge or other security interest (each a Security Interest) (other than a Permitted Security Interest) upon, or with respect to, any of its present or future business, undertaking, assets or revenues (including any uncalled capital) to secure any Relevant Indebtedness (as defined below), unless the Issuer, in the case of the creation of a Security Interest, before or at the same time and, in any other case, promptly, takes any and all action necessary to ensure that: (a) (b) all amounts payable by it under the Notes and the Coupons are secured by the Security Interest equally and rateably with the Relevant Indebtedness; or such other Security Interest or other arrangement (whether or not it includes the giving of a Security Interest) is provided as is approved by an Extraordinary Resolution of the Noteholders. 3.2 Interpretation For the purposes of these Conditions: (a) Permitted Security Interest means a Security Interest upon, or with respect to, any present or future assets or revenues or any part thereof which is created pursuant to: (i) (ii) a "sukuk" or similar Islamic law-based financing arrangement; or any other asset-based financing or like arrangement (including a securitisation transaction), whereby the payment obligations secured by such Security Interest are to be discharged primarily from such assets or revenues, Provided that the aggregate outstanding amount of assets or revenues the subject of such security pursuant to transactions described in (i) and (ii) above shall not at any time exceed in aggregate an amount equal to 15% of the total assets of the Issuer, as evidenced by its most recent audited financial statements (or, if at any time the Issuer prepares consolidated financial statements, its most recent audited consolidated financial statements); (b) Relevant Indebtedness means any Indebtedness in the form of or represented by any bond, note, debenture, debenture stock, loan stock, certificate or other instrument which is for the time being or is intended to be listed, quoted or traded on any stock exchange or any securities market (including, without limitation, any over-the-counter market): 3

7 (i) (ii) denominated, payable or optionally payable in a currency other than Saudi Riyals; and not initially distributed primarily to investors inside the Kingdom; (c) Subsidiary means, in relation to the Issuer, any company (i) in which the Issuer holds a majority of the voting rights or (ii) of which the Issuer is a member and has the right to appoint or remove a majority of the board of directors or (iii) of which the Issuer is a member and controls a majority of the voting rights, and includes any company which is a Subsidiary of a Subsidiary of the Issuer. This Condition 3 applies only to Senior Notes. Condition 18 to the Terms and Conditions (as contained on page 61 of the Offering Circular) shall be deemed deleted and replaced with the following: 18. GOVERNING LAW AND JURISDICTION 18.1 Governing law The Agency Agreement, the Deed of Covenant, the Notes, the Receipts and the Coupons are, and any non-contractual obligations arising therefrom shall be, governed by and construed in accordance with, English law Jurisdiction (a) (b) (c) (d) Subject as provided in this Condition 18.2(b) and (d), the Issuer irrevocably agrees, for the benefit of the Noteholders, the Receiptholders and the Couponholders, that the courts of England are to have exclusive jurisdiction to settle any disputes (a Dispute) which may arise out of or in connection with the Notes, the Receipts and/or the Coupons and accordingly submits to the exclusive jurisdiction of the English courts. Without prejudice to the provisions of this Condition 18.2(a) and (d), any Noteholder may, at its discretion, require all Disputes or any specific Dispute to be settled by the Saudi Arabian Committee for the Resolution of Securities Disputes and the Appeal Panel. The Issuer expressly agrees and consents to this Condition The Issuer waives any objection to the courts of England on the grounds that they are an inconvenient or inappropriate forum. The Noteholders, the Receiptholders and the Couponholders may take any suit, action or proceedings (together referred to as Proceedings) arising out of or in connection with the Notes, the Receipts and the Coupons against the Issuer in any other court of competent jurisdiction and concurrent Proceedings in any number of jurisdictions. The Issuer agrees for the benefit of the Noteholders, the Receiptholders and the Couponholders that, at the option of the Noteholders exercisable by notice in writing to the Issuer, any dispute arising out of or in connection with the Notes (including any question regarding the existence, validity or termination of any of the above) shall be referred to and settled by arbitration (the Arbitration Proceedings and together with Court Proceedings, 4

8 the Proceedings) for final settlement under the arbitration rules of the Rules of the London Court of International Arbitration (the LCIA), which rules are deemed to be incorporated by reference into this Condition 13.8(d) save as supplemented and/or varied by Clause 13.8(e). Following the exercise of such option, any other claim brought by any other party against another party for the same dispute shall be stayed by consent with no order as to costs. (e) The Tribunal will consist of three arbitrators. Each party shall have the right to nominate one arbitrator, provided that if there is more than one claimant party and/or more than one respondent party, the claimant parties shall together nominate one arbitrator and the respondent parties shall together nominate one arbitrator and in such circumstances the parties agree that the disputing parties represent two separate sides for the formation of the arbitral tribunal in accordance with Article 8.1 of the LCIA Rules. The claimant party or parties and the respondent party or parties to the arbitration shall jointly nominate the third arbitrator who shall be the chairman of the arbitral tribunal. In the event that: (i) (ii) (iii) (f) any party or parties to the arbitration fail to appoint an arbitrator within the time limit specified by the LCIA Rules; or the parties fail to jointly nominate the third arbitrator within 40 days after service of the request for arbitration, the LCIA shall proceed to appoint an arbitrator in place of the defaulting party or parties without regard to any late nomination by such defaulting party or parties The seat of any such arbitration shall be London, the procedural law of any reference to arbitration shall be English law and the language of the arbitration shall be English. The decision and award of the arbitrators shall be final and binding and shall be enforceable in any court of competent jurisdiction (g) The parties hereto disapply Sections 45 and 69 of the Arbitration Act (h) The agreement by all the parties to refer all disputes arising out of or in connection with the Notes to Proceedings in accordance with Condition 18.2(b) and 18.2(d) is exclusive such that the Borrower shall not be permitted to bring proceedings in any other court or tribunal other than by way of counterclaim Appointment of Process Agent The Issuer appoints CALYON at its registered office at Broadwalk House, Appold Street, London EC2A 2DA, United Kingdom, as its agent for service of process, and undertakes that, in the event of CALYON ceasing so to act or ceasing to be registered in England, it will appoint another person as its agent for service of process in England in respect of any Proceedings. Nothing herein shall affect the right to serve proceedings in any other manner permitted by law. 5

9 18.4 Other documents The Issuer has in the Agency Agreement and the Deed of Covenant submitted to the jurisdiction of the English courts and appointed an agent for service of process in terms substantially similar to those set out above. 6

10 RECENT DEVELOPMENTS OVERVIEW Financial results as at and for the nine month period ended 30 September 2009 Balance Sheet Evolution As at 30 September 2009, the Issuer's total assets were SAR billion, which represents a decrease by 3.3 per cent. compared with 31 December (SAR billion). On the assets side, the main driver for this reduction was a reduction in the size of the investment portfolio, in which SAR 10 billion of assets came to maturity whereas the net loan portfolio has increased by a mere 0.6 per cent. since 31 December, reflecting the current slowdown of the Saudi economy and the Issuer s prudent approach to risks. On the liabilities side, the total deposit base decreased by 2.8 per cent., mainly driven by a reduction in the Issuer's assets funding needs (interest bearing deposits). While interest bearing deposits have decreased, non interest bearing deposits have increased, resulting in a better mix between non interest bearing deposits and interest bearing deposits and hence a cheaper cost of funding. Therefore, the loan to total funding sources ratio was 85.5 per cent. at the end of September As at 30 September 2009, fixed assets have risen by 3.6 per cent. since 31 December, emphasising the Issuer s continuous expansion of its infrastructure, notably in the retail business segment and the constant upgrade and development of its information technology infrastructure. The Issuer expanded its infrastructure network to offer its customers 77 branches, 317 automated teller machines, and 81 cash acceptance machines as at 30 September On the equity side, in order to cater for future business growth and strengthen its capital adequacy ratios, the Issuer increased its paid-up share capital by 28.6 per cent. in April 2009 to SAR 7.23 billion from SAR billion. This increase was effected by capitalising 72.3 per cent. of the net income for the year results and distributing a dividend in new shares (2 new shares for 7 existing shares). The table below sets out the Issuer's balance sheet as at 30 September 2009, 30 September, 31 December and 31 December 2007: 30 September September 31 December 31 December 2007 (SAR'000) (unaudited) (unaudited) (audited) (audited) ASSETS Cash and balances with SAMA 10,498,140 6,140,813 5,772,857 10,152,190 Due from banks and other financial 6,158,359 3,495,720 4,246,065 3,224,062 institutions Investments, net 17,266,812 27,988,933 27,710,023 22,376,149 Loans and advances, net 81,322,390 79,118,810 80,866,475 59,849,952 Investment in associates 164, , , ,595 Property and equipment, net 611, , , ,318 Other assets 5,694,493 3,489,836 6,501,837 3,503,844 Total assets 121,716, , 011, ,864,761 99,808,110 LIABILITIES AND EQUITY 7

11 Liabilities Due to banks and other financial 5,635,163 15,174,058 8,402,002 8,122,713 institutions Customers' deposits 90,218,738 83,960,638 92,791,281 74,007,251 Other liabilities 5,187,867 3,912,496 5,675,142 4,000,011 Term loans 4,953,806 4,956,638 4,927,200 2,437,500 Total liabilities 105,995, ,003, ,795,625 88,567,475 Equity attributable to equity holders of the Issuer Share capital 7,232,143 5,625,000 5,625,000 5,625,000 Statutory reserves 4,754,195 4,052,780 4,754,195 4,052,780 General reserves 982,857 1,200,000 2,590,000 1,200,000 Other reserves 580,183 (198,176) 295,441 (19,619) Retained earnings 2,152,705 2,302,670 5,872 68, , ,135 Proposed dividends - Total equity attributable to the equity holders of the Issuer 15,702,083 12,982,274 14,047,219 11,240,635 Minority interest 18,610 25,138 21,917 - Total equity 15,720,693 13,007,412 14,069,136 11,240,635 Total liabilities and equity 121,716, ,011, ,864,761 99,808,110 The consolidated financial statements of the Issuer also include the following subsidiaries: Subsidiaries Country of incorporation Fransi Tadawul.... Kingdom of Saudi Arabia CAAM Saudi Fransi... Kingdom of Saudi Arabia Recent Developments Concerning the Income Statements For the nine month period ended 30 September 2009, the Issuer s net income was SAR 2,146.8 million, compared to SAR 2,234 million in the nine months of. Year-on-year for the nine month period ended 30 September 2009, net income has fallen by 3.9 per cent. This reduction follows the trend of the banking sector in Saudi Arabia. The following table sets out the Issuer's income statements for the nine month periods ended 30 September 2009 and 30 September and for the financial years ended 31 December and 31 December 2007: (SAR'000) 30 September 2009 (unaudited) 30 September (unaudited) 31 December (audited) 31 December 2007 (audited) Special commission income 3,168,686 3,742,673 5,298,313 4,934,104 Special commission expense 886,395 1,740,120 2,477,723 2,644,706 Net special commission income 2,282,291 2,002,553 2,820,590 2,289,398 Fee from banking services, net 637, , , ,234 Exchange income, net 137, , , ,968 Income from financial instruments at FVIS, net Trading income, net 166, , , ,627 Dividend income 363 1,790 1,791 3,699 8

12 Gain /(Loss) on non-trading investments, net 8 (106,625) (55,687) - Other operating income 7,356 41,550 49,772 5,539 Total operating income 3,231,716 3,246,390 4,391,641 3,694,465 Salaries and employee related expenses 484, , , ,322 Rent and premises related expenses 72,237 66,519 90,944 76,858 Depreciation and amortization 82,480 62,989 86,940 77,965 Other general and administrative expenses 216, , , ,876 Other operating expenses 1,761 2,021 6,065 5,014 Total operating expenses 856, ,785 1,095, ,035 Impairment charge for credit losses, net 223,547 15,424 94,265 42,011 Impairment of investments 201, ,000 - Income from operating activities 2,151,230 2,234,806 2,791,493 2,704,419 Share in earnings of associates, net (7,704) 1,023 12,443 6,691 Net income for the period 2,143,526 2,235,829 2,803,936 2,711,110 Loss (income) attributable to Minority interest 3,307 (1,498) 1,723 - Net income for the period attributable to equity holders of the 2,146,833 2,234,331 2,805,659 2,711,110 Issuer Weighted average number of outstanding shares 723, , , ,214 Basic and diluted earnings per share for the period (SAR) Total operating income was SAR 3,231.7 million for the nine month period ended 30 September 2009, compared with SAR 3,246.3 million for the nine month period ended 30 September, a decrease of 0.5 per cent. Total operating income was SAR 1,057.1 million for the three month period ended 30 September 2009, compared with SAR 1,136.1 million for the three month period ended 30 September, a decrease of 7 per cent. The following table shows the Issuer's interest income versus non interest income: (SAR 000) 31 December December Variation (%) 9 months period ended 30 September 9 months period ended 30 September 2009 Variation Sep 2009 vs. Sep Interest Income (Net Special Commission Income) Non Interest Income (Banking fees, commissions and foreign exchange) 2,289,398 2,820, % 2,002,553 2,282,291 14% 1,405,067 1,571, % 1,243, , % Total Operating Income 3,694,465 4,391, % 3,246,390 3,231, % Net Interest Income (Net Special Commission Income) The Issuer reported a net special commission income (the equivalent of net interest income) of SAR 9

13 2, million for the nine month period ended 30 September 2009, compared with SAR 2, million for the same period in. This represents an increase of 14 per cent., which reflects the Issuer's successful management of its funding margins and thorough re-pricing exercise of its credit spreads across its business lines. This increase in net special commission income results also from the acquisition of new clients, higher volume transactions, enhanced pricing of newly booked loans and an improved mix between interest bearing deposits and non interest bearing deposits. Net special commission income for the nine month period ended 30 September 2009 was SAR 2,283.3 million, compared with SAR 2,002.5 million for the nine month period ended 30 September, an increase of 13.9 per cent. Non Interest Income (Banking fees, commissions and foreign exchange) For the nine month period ended 30 September 2009, non interest income decreased by 23.7 per cent. to SAR million, as opposed to the nine month period ended 30 September. The following table illustrates the variation in these results: For the nine month period ended Variation (SAR'000) 30 September 30 September 2009 Fee from banking services, net 663, ,637-4% Exchange income, net 174, ,367-21% Trading income, net 469, ,694-64% Dividend income 1, % Gain /(Loss) on non-trading investments, net -106, % Other operating income 41,550 7,356-82% Total 1,243, ,425-24% Fees from banking services were affected by a reduction in the volumes traded on the Saudi Stock Exchange, even though Fransi Tadawul's (the Brokerage arm of BSF) market share has kept growing to reach 10 per cent. at the end of September This reduction was almost compensated by a strong trade finance business, especially import letters of guarantee. The following table shows a breakdown of the Issuer's banking services fees since 31 December 2005: Banking Services Fees Breakdown (SAR 000) month period to 30 September 9 month period to 30 September 2009 CAGR* Share Trading, Fund Management 830,202 1,263, , , , ,698-37% Trade Finance 128, , , , , ,804 12% Project Finance and Advisory 105, , , , , ,408 24% Card Products 38,645 38,750 45,442 96,608 66,716 44,350 4% 10

14 Other 7,289 9,309 45,385 85,220 24,370 14,377 20% * Compounding Annual Growth Rate On the income side, was an exceptional year as high volatility and arbitrage opportunities (tensions about the SAR to US dollar revaluation) provided good opportunities for the Issuer's treasury business. In 2009, the situation was different as there was no volatility and no foreign exchange arbitrage and therefore did not provide opportunities for generating profit in this particular business segment. General Expenses Total operating expenses, including impairment charge for credit losses, have increased by 6.8 per cent., reaching SAR 1, million for the nine month period ended 30 September 2009, compared to SAR 1, million during the same period in. Total operating expenses were SAR million for the three month period ended 30 September 2009, down 17.1 per cent. compared to SAR million for the same period in. Excluding provisions for credit risk, general expenses were higher by 7.4 per cent. in the nine month period ended 30 September 2009 than general expenses in the nine month period ended 30 September. This increase is primarily due to the full year effect of expenses incurred in the second half of, in particular recruitments and new fixed assets (IT systems, newly opened branches) which started to depreciate in the last quarter of. Before depreciation and provisions, operating expenses would be SAR 774 million as at 30 September 2009, compared with SAR 732 million as at 30 September, an increase year on year of 5.7 per cent., which is in line with the inflation rate. Impairment Charge for Credit Losses and Investments The Issuer has closely monitored its credit portfolio (Loans and Advances and Investments) and conservatively undertook SAR million of provisions during the nine month period ended 2009, compared with SAR million for the nine month period ended 30 September (these amounts also include provisions against investments and other financial assets). In, these provisions were mainly geared at covering the Issuer's exposure in structured finance instruments that were held in its investment portfolio. By the end of, 100 per cent. of this exposure, together with a portion of the Issuer's equity portfolio, was provided for (the Issuer's financial statements as at 31 December show a SAR 410 million provision for impairments). As there is no provision requirement for structured finance instruments due to the 100 per cent. provision and no further structured finance investments were made, the provision for impaired investment was nil in 2009, meeting the management plan at the end of. In today s situation, the proprietary investment portfolio is made of Saudi government bonds (65 per cent. of the portfolio) and corporate bonds; the average rating of which is AA-. Credit losses provisions increased during the first nine months of 2009 due to the more challenging economic conditions (the impact of the global economic crisis in Saudi Arabia). This complies with the conservative approach of the Issuer to risk management and its will to adequately cover the level of Non Performing Loans. 11

15 Net Income Net income of SAR million was recorded for the three month period ended 30 September 2009 compared with SAR million for the three month period ended 30 June an increase of 3.3 per cent. - compared with SAR million for the three month period ended 30 September - a decrease of 1.8 per cent. The earnings per share reached SAR 2.97 for the nine month period ended 30 September 2009, compared with SAR 3.09 for the same period in. Key Performance Ratios As at 30 September 2009, the Issuer's net interest margin (defined as net interest revenues / income earning assets) was 2.61 per cent. The Issuer's interest margin has moved between 2.83 per cent. as of 31 December 2006 and 2.61 per cent. as of 30 September The Issuer's net interest margin dropped between 2006 and as a result of long-term Saudi government bonds coming to maturity, the rising cost of liquidity due to the economic downturn, increased competition amongst deposit taking Saudi banks and the significant decrease of SAR interest rates between 2006 and. Notwithstanding the low interest rate market environment, the Issuer was able to maintain a stable net interest margin due to a balanced mix of non-interest bearing deposits and a thorough exercise to re-price loans in the last quarter of. As the majority of the Issuer s lending is short term (with maturities of less than a year), the re-pricing of loans as they roll over should help maintain and enhance its net interest margin. The following table shows the Issuer's net interest income (net special commission income) and its net interest margin (net special commission income margin): 31 December December 9 month period ended 30 September 9 month period ended 30 September 2009 (audited) (audited) (unaudited) (unaudited) Net interest income (SAR'000) 2,289,398 2,820,590 2,002,553 2,282,291 Net interest margin (%) Overall, the reduction in profit growth has been caused by the low interest rate environment and the recent global economic downturn, which has also affected Saudi Arabia. However, the Issuer has maintained the following ratios since 2007: Ratios* 31 December December 9 month period ended 30 September 9 month period ended 30 September 2009 ROAE 26.26% 22.19% 24.60% 19.24% ROAA 3.02% 2.49% 2.70% 2.31% Cost to Income Ratio 25.7% 24.9% 24.5% 26.5% 12

16 CAR 12.21% 11.55% 11.16% 13.15% Tier % 10.97% 10.58% 12.57% (*Ratios have been annualised) Performance Business Segments To report its published financial performance by business activities, the Issuer uses the format imposed by the Central Bank (SAMA). This format (the SAMA Format) applies unilaterally across the financial sector in Saudi Arabia for comparison purposes. The word "segment" refers to regulatory disclosure while "business line" designates an activity run by a business unit or separate legal entity specific to the Issuer's own organisation. The description of the business segments on page 66 of the Offering Circular does not reflect the SAMA Format of the business segments described therein. Accordingly, the classification in the table below is used to provide financial reporting in relation to operations of each business line within the Issuer. The following table below shows the Issuer's internal organisation and the way each of its business line's performance is reported in the SAMA Format (correspondence between the Issuer's internal organisation and business segments as dictated by the SAMA Format): Business Model and Issuer s Internal Organisation Business Segment as per the SAMA Format Business Model Business Lines Reported in Wholesale Banking Corporate Banking Group Corporate Banking Corporate and Institutional Treasury and capital markets Treasury Banking Clients Corporate finance (through the Calyon- Saudi Fransi joint venture) Corporate Banking Commercial Banking Small and Medium Size Establishments Commercial Banking Division Cross selling services delivered through the Issuer's capital market activities, retail banking and specialised subsidiaries Retail Banking Group Corporate Banking Retail Banking Retail, Individual Customers Leasing and consumer financing Retail Banking Wealth Management Private Banking Division Retail Banking High Net Worth Division Retail Banking Investor's Services all customers segments Local and international brokerage, through Fransi Tadawul, a wholly owned subsidiary of the Issuer (consolidated) Asset management through CAAM- Saudi Fransi (consolidated), a joint venture company with Crédit Agricole Asset Management Investment Banking and Brokerage Investment Banking and Brokerage The business segments below are described in a manner consistent with the disclosure within the footnotes to the audited financial statements for the year ended 31 December. A business segment is a group of assets and operations engaged in providing products or services that are subject to the risks and returns that are distinct from those other business segments. 13

17 The following table below shows the Issuer's net income by business segment following the reporting format published in the Issuer's financials statements as at for the nine month period ended 30 September 2009: Business segment Net income (SAR'000) 30 September September 31 December 31 December 2007 (unaudited) (unaudited) (audited) (audited) Retail Banking 421, , , ,100 Corporate Banking 1,171,920 1,100,229 1,351,920 1,118,967 Treasury Banking 492, , , ,758 Investment Banking and Brokerage 57, , , ,285 Total 2,143,526 2,235,829 2,803,936 2,711,110 During the first quarter of 2009, the Issuer modified its internal organisation by separating its commercial banking business (small and medium size establishments) from the Retail Banking group where it used to be included and created a standalone business Line (Commercial Banking). The performance of the Commercial Banking Division is now integrated into the Corporate Banking segment for regulatory reporting purposes. This explains the apparent drop in revenues generated by the Retail Banking business segment in For illustrative purposes, the table below shows the Issuer's net income by business segment, taking into account the migration of the Commercial Banking activities from the Retail Banking segment to the Corporate Banking segment: Business segment 30 September September 31 December 31 December 2007 Net income (SAR'000) (SAR'000) (SAR'000) (SAR'000) Retail Banking 421, , , ,999 Commercial Banking 147, , , ,101 Corporate Banking 1,024, ,747 1,351,920 1,118,967 Investment Banking and Brokerage 57, , , ,285 Treasury 492, , , ,758 Total 2,143,526 2,235,829 2,803,936 2,711,110 The following is a summary explanation of the Issuer's net income per business segment: Retail Banking (an increase of 3.1 per cent. year on year from the nine month period ended 30 September to the nine month period ended 30 September 2009) - Retail Banking s net income (Retail Banking Group and Wealth Management Group) has been affected by the low interest rate environment where the excess of deposits versus assets, invested in risk free instruments, has generated less profit. However, consumer assets, in particular credit cards and personal loans where margins are high, have increased and could offset the lack of revenue derived from the remuneration of Non Interest Deposits. 14

18 Corporate Banking (an increase of 6.52 per cent. year on year from the nine month period ended 30 September to the nine month period ended 30 September 2009) - this segment includes the Corporate Banking Group (large corporate and financial institutions clients) and the Commercial Banking Division (small and medium size establishments) which show respectively a 5 per cent. and an 18.1 per cent. increase in net income. However, the net income has been hampered by new provisions of SAR million against a total reinstatement of provisions for SAR 75.8 million as at 30 September Investment Banking and Brokerage (a decrease of 52.3 per cent. year on year from the nine month period ended 30 September to the nine month period ended 30 September 2009) - this segment includes the Issuer's asset management and brokerage activities. These activities, which are fee based, have been significantly affected by the fall of the stock market index in Saudi Arabia and the lack of volume on the Saudi Stock Exchange experienced since On the brokerage and asset management side, the Issuer generated total gross commissions of SAR 1.5 billion as at 31 December 2006, SAR 589 million as at 31 December 2007, SAR 300 million as at 31 December and SAR million as at 30 September In the meantime the stock market index in Saudi Arabia went down from 20,000 as at 25 February 2006 to 4,800 as at 31 December and 6,322 as at 30 September Daily volumes traded on the Riyadh Stock Market were reduced by 73 per cent. This had an impact on the Issuer's asset management business as customers switched their investments from equity funds to money market funds which generate less profit. Treasury Banking (a decrease of 18.8 per cent. year on year from the nine month period ended 30 September to the nine month period ended 30 September 2009) - this segment includes the capital market activities of the Issuer and the performance of its investment portfolio. provided many opportunities for the Issuer's trading desk to generate profit, taking advantage of the volatility in the interest rate and foreign exchange markets. During the first quarter of, pressure about possible re-evaluation of the SAR versus the US dollar created arbitrage opportunities which significantly boosted the Issuer's trading revenues. However, during the last quarter of, market conditions changed as a result of the economic downturn. In the nine month period ended 30 September 2009, the Issuer's trading income (compared to the nine month period ended 30 September ) decreased by 64 per cent. as the interest rate yield curve was kept at a low level with no volatility and consequently less recourse to risk hedging and less appetite for structured products on the part of the Issuer's sophisticated customers. On the other hand, at the end of, a provision of USD 100 million had to be made in respect of the Issuer's investment portfolio, which mainly comprises bonds (Saudi government and corporate bonds) and amounted to SAR billion as at the end of 2007 (USD 5.97 billion). This provision was made in order to limit further the potential impact of asset deterioration due to the financial crisis. The Issuer's Board of Directors encouraged such provisioning in order to clean up the portfolio from any unwanted credit or liquidity risk and ensure a sound risk profile in the investment portfolio (which is now not exposed to structured finance related risk after the USD 100 million provision made at the end of ). In 2009 the extremely low interest rate environment has penalised the remuneration of excess cash and working capital which attract a zero capital charge under the asset and liability management policy of the Issuer. Cash, Interbank In the Issuer's balance sheet, the "cash and balances with SAMA" and "due from banks and other financial institutions" line items should be read in the context of growing non interest bearing deposits (see below), 15

19 the placement of proceeds resulting from maturing assets (investment portfolio) and compliance with the SAMA liquid asset ratio. SAMA's regulation on asset ratio requires that 20 per cent. of customers' deposits be invested in Saudi government bonds and/or placed in short term deposits (less than or equal to 30 days) on the interbank market or with SAMA. As Saudi government bonds are not issued any more, the Issuer's only option is to deposit cash on the interbank market or with SAMA. The table below shows the position as at 30 September 2009, 31 December and 30 September : Cash and balances with SAMA 30 Sep Dec 30 Sep Variation Sep 2009 / Sep (SAR'000) (unaudited) (audited) (unaudited) 10,498,140 5,772,857 6,140,813 4,357,327 Due from banks and other financial institutions Due to banks and other financial institutions Net Interbank* (Assets Liabilities) (Source: published financial statements) 6,158,359 4,246,065 3,495,720 2,662,639 5,635,163 8,402,002 15,174,058-9,538, ,196 (4,155,937) (11,678,338) 12,201,534 *Net Interbank is calculated as the difference between interbank borrowings and interbank placements. As illustrated by the above table, the Issuer has increased its cash position by SAR 12.2 billion from September to September In December, the Issuer was a net borrower on the interbank market (SAR 4.1 billion); in September 2009, it was a net lender (SAR 523 million). Loans and advances Total portfolio The Issuer's total loan and advances portfolio (net of provisions) increased to SAR 80, million as at 31 December, an increase of 35.1 per cent. from SAR 59, million as at 31 December As at 30 September 2009, the loan and advances portfolio further increased to SAR 81, million, an increase of 2.8 per cent. compared to SAR 79, million as at 30 September. During the first nine months of 2009, the loan portfolio of the Issuer has increased by SAR million, an increase of 0.6 per cent. compared to 31 December. Moreover, loans and advances, as reported in the Issuer's financial statements, do not reflect the actual size of the Issuer's credit portfolio. Taking into account Islamic loans (Musharakahs/Muradabas) reported as investments, total funded credit exposure as at 30 September 2009 is around SAR 85.3 billion. Including non funded facilities, the total credit portfolio is SAR billion. Credit risk weighted assets (as per the Basel II calculation/standardised approach) are SAR billion (source: Issuer's Q17 Series on Capital Adequacy report to SAMA - September 2009). The following table sets out the Issuer s loan portfolio as at 30 September 2009 and and 31 December and 2007:

20 (SAR'000) September 2009 (unaudited) September (unaudited) December (audited) December 2007 (audited) Total Performing loans and advances-gross 81,262,447 79,151,841 80,950,399 60,239,962 Non Performing loans and advances-net 1,038, , , ,510 Total loans and advances 82,300,827 79,928,704 81,714,218 60,675,472 Allowance for impairment of credit losses -978, , , ,520 Loans and advances net 81,322,390 79,118,810 80,866,475 59,849,952 Non Performing Loan (NPL) Ratio 1.26% 0.97% 0.93% 0.72% Coverage Ratio 94% 104% 111% 190% In the nine months period ended 30 September 2009, Corporate Banking created an additional SAR 622 million in loans. Commercial Banking (medium sized establishments) reduced its loan portfolio by SAR 618 million, while Retail Banking increased its loan portfolio by SAR 752 million and Wealth Management reduced its loan portfolio by SAR 301 million. Distribution of Loans by Sector The following table provides a breakdown of the Issuer s total loan and advances portfolio by sector as at 30 September 2009, 30 September, 31 December and 31 December 2007: (SAR'000) As at 30 September 2009 As at 30 September As at 31 December As at 31 December 2007 (unaudited) (unaudited) (audited) (audited) Government and quasi government 1,347,470 1,083,927 1,191,910 1,287,522 Banks and other financial institutions 946,481 1,020,572 1,346,324 1,070,797 Agriculture and fishing 2,392,012 2,259,501 2,103,719 1,372,786 Manufacturing 11,453,552 10,270,386 10,816,985 8,858,072 Mining and quarrying 1,443, , , ,610 Electricity, water, gas and health services 2,292,774 1,490,752 1,687,352 1,107,110 Building and construction 8,288,167 8,689,165 9,172,272 6,411,543 Commerce 17,603,565 17,813,918 19,128,175 14,102,908 Transportation and communication 5,834,027 6,291,934 5,306,417 3,410,757 Services 6,452,120 6,644,847 6,818,631 4,735,839 Consumer loans and credit cards 5,823,309 4,939,807 4,942,544 4,358,904 Others 17,444,948 17,673,683 17,601,733 12,442,104 Total (Net of Provisions) 81,322,390 79,118,810 80,866,475 59,849,952 The Issuer s loan and advances portfolio contains a high proportion of Islamic products. Islamic products have seen a significant increase in the last three years, from SAR 10,474 million as at 31 December 2006 and SAR 17,641 million as at 31 December 2007 to SAR 26,633 million as at 31 December. As at 30 September 2009, the Issuer s Islamic products amounted to SAR 33,967 million. As at 30 September 2009, approximately 19 per cent. of the Issuer's loan and advances portfolio was denominated in foreign currency, of which 14.8 per cent. were denominated in US dollar and 4 per cent. in euro and sterling. The Issuer has implemented risk management methods to mitigate and control these and 17

21 other market risks to which the Issuer is exposed. The Issuer systematically hedges its foreign currency risks on these assets. The following table describes the Issuer's related party lending since 31 December 2006: As at 30 September 2009 As at 31 December As at 31 December 2007 As at 31 December 2006 Related Party Loans (% Loan Portfolio, net) 4% 5% 5% 4% Non Performing to Total Loan Ratio Various factors account for the increase in the Non Performing Loan to Total Loan ratio during the past year (31 December 2006: 1.16 per cent.; 31 December 2007: 0.72 per cent.; 31 December : 0.93 per cent.; 30 September 2009: 1.26 per cent.). The significant decrease from 31 December 2006 to 31 December 2007 is explained by a decision to write off old bad debts fully covered by provisions with no prospect for recovery, the objective of the write-off policy being to avoid unnecessary inflation of the balance sheet. From December to September 2009, a significant part of the increase was due to the decision to downgrade two loans to Non Performing Loan (NPL) status. However, following proactive management and extensive interaction with the client, those two loans are in the process of being restructured and being reinstated in the performing category. The increase in 2009 is explained by the impact of the global credit crisis on Saudi Arabia. However, this does not reflect an overall deterioration in the Issuer's credit portfolio but the impact of a limited number of credit files. Taking into account Islamic loans (which represent a credit risk and are therefore granted based on credit committee approval), the real NPL ratio as at 30 September 2009 for the Issuer was lower than it appears from the Issuer's financials: Total Funded Facilities (on balance sheet): 1.22 per cent. (Islamic loans plus loans and advances) Classification Process for Non Performing Loans The Issuer's asset classification policy mirrors SAMA's directives. Broadly, it follows the day triggers with provisioning requirements of minimum 25 per cent., 50 per cent. and 100 per cent. respectively. Typically, the Issuer's provisioning levels are more conservative than the minimum levels required by law. The Issuer's provisioning policy for consumer credit loans is more conservative with 100 per cent. provisioning achieved between 120 and 270 days (depending on the product). The Issuer s internal grading system for loans, adopted from CALYON, is an 18-grade system. NPLs are recorded in three categories (standard, doubtful, loss) and three corresponding codes (F, Y and Z), depending on the number of days the debt has been overdue: Category Code Days Overdue Minimum Provisions (percentage of net funded exposure) Substandard F 90 25% Doubtful Y % Loss Z % 18