Chairman s Report 8. Management Review Independent Auditor s Report 12. Consolidated Balace Sheet 13. Consolidated Income Statement 14

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3 CONTENT Chairman s Report 8 Management Review 9-11 Independent Auditor s Report 12 Consolidated Balace Sheet 13 Consolidated Income Statement 14 Consolidated Statement of Changes in Equity 15 Consolidated Cash Flow Statement 16 Notes to the Consolidated Financial Statements 17-43

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5 Late Sheikh RASHID BIN AHMED AL-MOALLA

6 His Highness Sheikh SAUD BIN RASHID AL-MOALLA Member of the Supreme Council of the United Arab Emirates & Ruler of Umm Al Qaiwain

7 His Highness Sheikh RASHID BIN SAUD BIN RASHID AL-MOALLA Crown Prince of Umm Al Qaiwain

8 Umm Al Qaiwain Branches NBQ Building (Head Office) King Faisal Street P.O. Box 800 Umm Al Qaiwain Falaj Al Mualla Branch NBQ Building Shaikh Zayed Street P.O. Box Falaj Al Mualla Dubai Branches Dubai Main Branch NBQ Building Khalid Bin Al Waleed Street P.O. Box 9175 Dubai Jabel Ali Branch Jabel Ali Freezone P.O. Box Dubai Deira Branch Opposite Dubai Police Head Quarters Al Ittihad Street P.O. Box 8898 Deira, Dubai Al Awir Branch Ras Al Khor P.O. Box Dubai Al Ghusais Branch Junction of Halab St. and Damascus St., Near Spinneys P.O. Box Dubai Abu Dhabi Branches Abu Dhabi Branch Hamdan Bin Mohammed Street (# 5) P.O. Box 3915 Abu Dhabi Sharjah Branches Sharjah Branch King Faisal Street P.O. Box Sharjah Sharjah Industrial Branch Khansaheb Building Sharjah Industrial Number 10 Third Industrial Street P.O. Box NBQ Kiosk Sharjah Mega Mall P.O. Box Sharjah Ajman Branches City Center Branch Ajman City Center P.O. Box 4133 Ajman Masfout Branch NBQ Building Main Street P.O. Box Masfout, Ajman Fujairah Branch Fujairah Branch Fujairah Insurance Co. Building Hamad Bin Abdulla Road P.O. Box 1444 Fujairah Ras Al Khaimah Branch Ras Al Khaimah Branch Corniche Al Qawasim Road P.O. Box Ras Al Khaimah Mussafah Branch P.O. Box 9770 Abu Dhabi Al Ain Branch Oud Al Touba Street Al Mandoos Roundabout P.O. Box Al Ain Annual Report

9 Board of Directors H.H. Sheikh Saud Bin Rashid Al-Moalla Chairman Mr. Abdulla Ahmad Al Moosa Deputy Chairman Sheikh Nasser Bin Rashid Al-Moalla Managing Director & Chief Executive Officer Mr. Abduljaleel Yousuf Darwish Director Mr. Issa Abdulrahman Ateeq Director Mr. Saeed Nasser Saif Al Talai Director Mr. Marwan Abdulla Hassan Al Rostamani Director Management Sheikh Nasser Bin Rashid Al-Moalla Managing Director & Chief Executive Officer Mr. Ramachandra Iyer Deputy General Manager 7

10 Chairman s Report On behalf of the Board members I am pleased to welcome you all to the 26th annual general meeting and present the annual report of the Board of Directors for the year As you are all aware, 2008 has been a very turbulent year especially for the financial services industry, the aftereffects of which are likely to be felt well into In spite of these adverse events, the Bank achieved an operating profit of AED million in 2008, a 50.5 % increase compared to operating profit of AED257 million in The decline in the valuation of the GCC stock markets resulted in the investment portfolio recording a net fair value loss and impairment provision valuation loss of AED 85.5 million in 2008 ( gain of AED 116 million). Provision for impairment of loans and advances net of recoveries amounted to AED 17.5 million ( AED 39.4 million ) and as a result, the Bank registered a net profit of AED million for the year 2008 ( 2007 AED million) and the earnings per share marginally declined to 22 fils compared to 29 fils in Total assets increased by a significant 60.6 % to AED billion in 2008, compared to AED billion as at end of 2007, while the shareholders funds increased by 61.5 % to AED billion in 2008, as against AED billion in The financial turbulence triggered by the fallout from the U.S. sub-prime mortgage crisis in the summer of 2007, started precipitating further with tightening of monetary and financial conditions and a marked decline in risk appetite. Global market players feel that a slowdown in the global economy will persist for some more time in the foreseeable future. With the fallout spreading worldwide, policy makers, Central Bankers as well as National and International bodies are trying to address the issue with comprehensive and co-ordinated measures aimed at restoring confidence in the financial sector. Domestic liquidity conditions tightened sharply in the last quarter of 2008 on the back of overall market conditions and rapid fall in global stock and commodity prices. The Government of the UAE in conjunction with the Central Bank of the UAE, announced liquidity support facility of AED120 billion to local banks to deal with the liquidity crunch. With oil prices recently softening, and with demand expected to be lower, the speed of rapid economic growth seen locally in the recent past, especially in supporting large project related expenditure is expected to soften. In 2008, the Bank strengthened its Capital base from AED 660 million to AED billion with a 50% bonus share issue followed by 50% rights issue at a premium of AED 1.50 per share. With the shareholders equity now at AED billion, the Capital Adequacy ratio as per Basel II guidelines is 18.5.%, well over the minimum 10% stipulated by the UAE Central Bank. In order to strengthen the equity further and retain profits earned, the Board has recommended a 10% stock dividend and 10 % cash dividend for As a part of its corporate social responsibility, the Bank continues to provide support for the community initiatives and actively participates in the charitable and humanitarian endeavors. I would like to state my appreciation for the ongoing initiatives and support of the UAE Central Bank to regulate the country s financial sector, and for their helpful guidance to NBQ during this year. Equally important has been the steadfast confidence of our shareholders, the loyalty of our customers and business partners; and the dedicated efforts of our management and staff. Together they have contributed to the success of NBQ and continue to provide us with the strength and determination to face all future challenges. SAUD BIN RASHID AL-MOALLA Chairman. 8

11 Management Review Financial overview I am pleased to report that despite 2008 being a very turbulent year for the banking industry globally, NBQ has managed to weather the storm reasonably well and recorded an operating profit of AED million from its core business, registering a 50.5 % increase over the operating profit figure of AED 257 million for Net interest income recorded a healthy growth of 46.9% to AED mn from AED mn in Non-interest income registered an impressive 64% growth to AED mn from AED 82.4 mn in 2007 due to aggressive growth in non fund based business. Operating and general administrative expenses were well contained during the year and the cost to income ratio of 30.4% in 2007 was maintained at the same level in 2008, in spite of increase in staffing levels, investment in technology and administrative costs. Impairment for credit losses on loans portfolio was AED 17.5 mn ( 2007 AED 39.4 mn). Credit quality remained good across our corporate and retail portfolios and the aggregate non performing loans and delinquency trend remains stable with the improvement of NPL ratio to 0.98% in 2008 from 2.75% as at end of Coverage ratio has improved considerably from 93.7% in 2007 to 147% in As a direct consequence of the meltdown of the global equity markets and the GCC markets in particular, the market value of some of our strategic and non-strategic investment securities declined resulting in the unrealized loss of AED 78.8 million and AED 12.4 million on the trading and available for sale securities respectively in 2008 compared to a gain of AED 105 million and loss of AED 14.9 million for the year In normal circumstances, the mark-to-market impact on AFS securities goes through the equity. However due to the substantial decline, as per IFRS, the unrealized loss was considered for impairment and reflected in the income statement. The net profit of AED million for 2008 recorded a 15 % drop compared to the 2007 net profit figure of AED million due to the write downs on Investments. Total assets figures of AED billion at end of 2008 recorded a healthy growth of 60.6 % over the 2007 figure of AED billion, attributable mainly due to the growth in fund based advances figures to AED billion, almost 100% increase compared to the 2007 figure of AED billion. The asset quality remains high in view of prudent risk management which ensured that exposures to substantial risk elements were not booked and the bank did not have any exposures to CDO s, SUVs or any US sub-prime mortgage markets. Investment portfolio increased 43.5% to AED million mainly on account of diversification of our portfolio to interest earning securities, which increased to AED million as at end of 2008 ( 2007 AED 62.7 million) and this has resulted in significant improvement in the yield from these assets. The Bank continued to develop its business in its traditional areas of Retail and Commercial banking which directly contributed to the increase in net interest income and strengthened the profitability. The growth in asset book was matched by a combination of increase in customer deposits portfolio which recorded a 50.5% growth to AED billion ( Dec 2007 AED billion) and increase in medium term inter-bank borrowings to AED billion compared to AED billion as at end of The growth in business was well supported by sharp rise of 61.5% in shareholders equity to AED billion ( 2007 AED billion). Non fund business recorded a healthy 78.8% increase mainly on account of increases in Guarantees business by 71% and forward FX contracts by 94 % which directly contributed to the healthy growth in our fee income. NBQ remains well capitalized with Capital Adequacy ratio of 18.5% as per the Basel II accord, considerably in excess of the minimum requirement of 10% and 8% prescribed respectively by the UAE Central Bank and the Basel Accord. Wholesale Banking The robust growth in the UAE economy, through all round developments in the real estate, leisure, tourism, manufacturing, trade and financial services sectors have been remarkable. The Wholesale Banking Division was fully able to capitalize on this boom. There was substantial growth in the asset base during the year through acquisition of new clients in the Commercial and Corporate Banking arena. This helped in better portfolio diversification and risk profiling apart from securing better spread / yields. The developments in the global economic and financial landscape, in the fourth quarter of 2008 have some tell- tale signs to offer on the lending front as well. Taking cue from the market, going forward, the strategy will be one of selective lending and maintenance of a proactive and close watch on the health of the portfolio. The thrust on maximization of revenue and earnings but through a careful avoidance of the downside risks normally associated with a meltdown in valuations, will continue. 9 Annual Report 2008

12 Management Review (continued) Retail Banking NBQ has an established retail banking business, offering diverse and convenient services to individual customers. Our focus on the customers and our commitment to provide them with superior service and experience has enabled us to gradually expand our market share and grow the business in UAE. We achieved that by expanding our customer base, as well as deepening the relationship with our customers by offering them broader services across the savings and credit products. The variety of loans offered by NBQ has been widely welcomed by customers. Our credit card business also increased, helped in part by innovattive offerings. NBQ was at the forefront of Banks successfully migrating to the EMV technology in NBQ has a full range of Infinite, Platinum, Gold, Classic and Debit Cards incorporating the Chip technology, along with unique prepaid cards and Rateb prepaid cards. NBQ opened two new branches and connected four more ATMs to bring the branch and ATM network to 16 and 32 respectively. We enhanced our alternative delivery channels with Cash and cheque deposit machines in selected branches and plan to extend this service to other branches. A mobile ATM service was introduced during the year to facilitate ATM services to the unbanked and remote areas. In 2008, the Bank successfully implemented the Image Cheque Clearing System as per UAE Central Bank Guidelines. During 2009, we plan to upgrade the facilities at our existing branches with a focused approach on improving the products and services and enhance our market share. Treasury And Investments During the year, domestic liquidity conditions moved from being excessive to tight on the back of overall market conditions and rapid fall in global stock and commodity prices. To improve the liquidity in the market, the UAE Central Bank in conjunction with the UAE Government came up with a series of measures besides cutting the benchmark interest rates :- Drawings against minimum reserves maintained by Banks. Repo window against short term CDs and permissible securities. Long term deposits to banks to improve the liquidity position. Global market players feel that a slowdown in the Global economy will continue for some more time affecting valuations in equity markets and leading to lower interest rate regimes worldwide. Credit And Risk Management Strategic Initiatives Credit and Risk Management function of the Bank is segregated into Front Office, Mid-Office and Back Office functions to avoid conflict of interest in sourcing and approval functions. Front Office sources business & manages overall Customer Relationships. Mid-Office carries out appraisal/approval of all corporate credits, remedial management & portfolio management. Back Office is responsible for centralized credit administration from HO. Wholesale Banking Credit approval is centralized in Committees at HO, Retail Credit approval is product based with powers delegated to various authorities at branches and Head Office. In partnership with a leading software vendor, the Bank is implementing a Credit Risk Solution to enable standardization of credit origination & approval process and assessment of customer ratings. The solution is expected to be operational by the 3rd quarter of The Bank has also entered into partnership with a leading vendor for Retail Loan Origination and Collections solution to streamline and strengthen this activity which is expected to be operational by mid Market Risk Unit of the Bank undertakes the function of ALM and Treasury mid-office. The unit monitors liquidity and interest rate risk with perriodical review by ALCO. The Bank has defined limits for open, intra-day and overnight positions for foreign exchange transactions. Investment Committee of the Bank reviews the strategies and direction of Bank s investments. Policies relating to ALM, Mid-Office and Investment Risk are formalized to examine these in a structured manner. In line with the objective of extending uninterrupted service to the Customers, Operational Risk and IT Departments of the Bank are working on a comprehensive Disaster Recovery/Business Continuity Plan in consultation with reputed Consultants which is expected to be completed and functional in Annual Report

13 Management Review (continued) Credit And Risk Management (Continued) Basel II Implementation The Bank complied with Central Bank norms for Standardised Approach for credit risk and market risk and BIA approach for operational risk in 2007 and The Bank intends to Comply with FIRB by 2011 in line with Central Bank guidelines and has initiated measures in that direction. Internal Audit And Compliance NBQ has a robust and comprehensive internal audit and compliance verification system, which proactively monitors compliance with internal and regulatory compliance requirements. Human Resources The Bank s Human Resource Department was segmented in 2008 to three separate units, HR Operations, Recruitment & Planning and HR Strateegy. This will enable the Bank to give more focus to each respective area. The Bank continued its strategy to enhance skill - sets of its work force through recruitment of experienced and quality resources from both the Local and International Market. We continue with our drive to recruit and train UAE Nationals. The Bank concurs with the new policy of the HR Committee in the Banking sector regarding the employment of Fresh Graduates. This will aid in the retention of resources and ensure that more UAE Nationals are brought into the Banking Sector. Further, the Bank continues to provide new opportunities to UAE nationals with the opening of new branches in the Retail Division. Rating : The Bank is currently rated by the following leading rating agencies. Current ratings are as follows : Rating Agency Financial strength Deposits Outlook Moody s D Baa2/P-2 Stable Fitch BBB+ BBB+/F2 Stable Capital Intelligence BBB+ AA-/A1 Stable We are pleased to note all our ratings carry a stable outlook. Community Relations NBQ, throughout its 26 year history, continually contributes to the social well being of the Emirates in which it does business. The Bank sustained its support to a range of charitable, educational, medical and sporting organizations and events throughout I would like to extend my appreciation and thanks to the Board of Directors for their vision, to our shareholders for their continuous support, to our customers who stay loyal over all these years and to the management team and all the staff for the dedication and commitment. Nasser Bin Rashid Al-Moalla Managing Director & Chief Executive Officer 11

14 Independent Auditor's Report The Shareholders National Bank of Umm AI-Qaiwain (psc) and Subsidiary Umm AI-Qaiwain United Arab Emirates Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of National Bank of Umm Al-Qaiwain (psc) (the 'Bank') and Subsidiary (together the 'Group'), Umm Al-Qaiwain, United Arab Emirates which comprise the consolidated balance sheet as at December 31, 2008, the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparattion and fair presentation of consolidated 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. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumsstances, but not for the purpose of expressing an opinion on the effectiveness of the Group 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 consolidated 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 consolidated financial position of the Group as of December 31, 2008, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements Also, in our opinion, the Group has maintained proper books of account. The information contained in the directors' report relating to the consoliddated financial statements is in agreement with the books. We obtained all the information which we considered necessary for our audit. According to the information available to us, there were no contraventions during the year of the U.A.E. Federal Commercial Companies Law NO.8 of 1984, as amended, U.A.E. Union Law No. 10 of 1980, as amended, or the Articles of Association of the Group which might have materially affected the financial position of the Group or its financial performance. Sharjah February 17,2009 For Deloitte & Touche Saba Y. Sindaha Partner (Registration No. 410) 12

15 Consolidated Balance Sheet At December 31, 2008 (In Thousand Arab Emirates Dirhams) December 31, December 31, Assets Notes Cash and balances with the UAE Central Bank 5 399,740 2,673,011 Due from other banks 6 2,109, ,817 Loans and advances 7 9,848,246 4,929,223 Investment securities 8 554, ,585 Customers acceptances 413, ,115 Property and equipment 9 100, ,516 Other assets ,775 58,784 Total assets 13,542,856 8,429,051 Liabilities Due to other banks 11 2,410,437 1,925,741 Customers deposits 12 6,822,168 4,532,682 Customers acceptances 413, ,115 Other liabilities 13 1,114, ,775 Total liabilities 10,760,708 6,706,313 Shareholders equity Share capital 14 1,320, ,000 Statutory reserve 15 1,019, ,266 General reserve 16 6,440 6,440 Cumulative change in fair values (25,210) 24,045 Retained earnings 461, ,987 Total shareholders equity 2,782,148 1,722,738 Total liabilities and shareholders equity 13,542,856 8,429,051 Commitments and contingent liabilities 17 12,041,641 6,733,724 The accompanying notes form an integral part of these consolidated financial statements. Abdulla Ahmad Al Moosa Deputy Chairman Nasser Bin Rashid AI-Moalla Managing Director and Chief Executive Officer 13 Annual Report 2008

16 Consolidated Income Statement For the year ended December 31, 2008 (In Thousand Arab Emirates Dirhams) Notes December 31, 2008 December 31, 2007 Interest income , ,814 Interest expense 18 ( 162,357 ) (139,260) Net interest income 420, ,554 Fee and commission income 90,978 52,651 Other operating income 19 44,282 29,819 Gross income 556, ,024 Operating expenses 20 (169,521) (112,014) Operating income 386, ,010 Investment (losses)/revenue 21 ( 85,560) 116,172 Provision for impairment of loans and advances net of release 7 ( 17,502) ( 39,412) Profit for the year 283, ,770 Basic earnings per share (in AED) The accompanying notes form an integral part of these consolidated financial statements. Annual Report

17 Consolidated Statement of Changes in Equity For the year ended December 31, 2008 (In Thousand Arab Emirates Dirhams) Share capital Statutory reserve General reserve Cumulative change in fair values Retained earnings Total Balance at December 31, , ,266 6,440 (10,599) 294,217 1,414,324 Profit for the year , ,770 Gain on investment securities available-for-sale recognised directly in equity ,427-24,427 Transfer to profit or loss on sale of investment securities available-for-sale (4,718) - (4,718) Impairment losses on investment securities available-for-sale ,935-14,935 Total recognised income and expenses for the year , , ,414 Bonus shares issued during the year (Note 14) 60, (60,000) - Dividend (60,000) (60,000) 60, (120,000) (60,000) Balance at December 31, , ,266 6,440 24, ,987 1,722,738 Profit for the year , ,665 Loss on investment securities available-for-sale recognised directly in equity (65,756) - (65,756) Impairment losses on investment securities available-for-sale ,406-12,406 Transfer to profit or loss on sale of investment securities available-for-sale ,095-4,095 Total recognised income and expenses for the year (49,255) 283, ,410 Bonus shares issued during the year (Note 14) 330, (330,000) - Rights shares issued during the year (Note 14) 330, , ,000 Balance at December 31, ,320,000 1,019,266 6,440 ( 25,210) 461,652 2,782,148 The accompanying notes form an integral part of these consolidated financial statements. 15

18 Consolidated Cash Flow Statement For the year ended December 31, 2008 (In Thousand Arab Emirates Dirhams) Operating activities Year Ended December 2008 Year Ended December 2007 Profit for the year 283, ,770 Adjustments: Provision for loan impairment - net 17,502 39,412 Depreciation for property and equipment 12,873 11,728 Decrease/(increase) in fair value of investment securities at fair value through profit and loss - held for trading 78,842 (105,070) Loss/(gain) on sale of investment in securities 4,250 (14,774) Impairment losses on investment securities available-for-sale 12,406 14,935 Dividend income (8,471) (11,263) (Profit)/loss on disposal of property and equipment (27) 128 Operating cash flows before movements in working capital 401, ,866 Syndication loans to banks abroad (9,182) ( 27,548) Increase in statutory deposit with the UAE Central Bank (85,279) (52,974) Increase in loans and advances net of provision and amounts written off (4,936,525) (845,588) Increase in other assets (57,991) (11,918) Increase in due to other banks 484,696 1,128,126 Increase in customers deposits 2,289,486 1,900,561 Increase in other liabilities 996,834 29,889 Net cash (used in)/from operating activities (916,921) 2,389,414 Investing activities Purchase of property and equipment (9,485) (10,464) Proceeds from sale of property and equipment Purchase of investment in securities (462,196) (76,059) Proceeds from sale of investment in securities 149, ,550 Dividend received 8,471 11,263 Net cash (used in)/from investing activities (313,894) 104,842 Financing activities Proceeds from rights issue of shares 825,000 - Dividend paid (1,216) (58,921) Cash from/(used in) financing activities 823,784 (58,921) Net (decrease)/increase in cash and cash equivalents (407,031) 2,435,335 Cash and cash equivalents, at the beginning of the year 2,637, ,574 Cash and cash equivalents, at the end of the year (Note 26) 2,230,878 2,637,909 The accompanying notes form an integral part of these consolidated financial statements. 16

19 Notes to the Consolidated Financial Statements For the year ended December 31, General information National Bank of Umm Al-Qaiwain (psc) (the Bank ) is a Public Shareholding Company incorporated in the Emirate of Umm Al-Qaiwain ( UAQ ) in the United Arab Emirates ( UAE ) by Amiri Decree Number (1) on January 5, 1982, issued by His Highness, the Ruler of Umm Al-Qaiwain, and commenced its operations with effect from August 1, The Group comprises National Bank of Umm Al-Qaiwain (psc), Umm Al-Qaiwain, and Twin Towns Marketing Management (L.L.C.), Dubai (see Note 3). The address of the Bank s registered Head Office is P.O. Box 800, Umm Al-Qaiwain, United Arab Emirates. The Bank is engaged in providing retail and corporate banking services through a network of 16 branches in the UAE. 2. Standards and interpretations in issue but not effective At the date of authorisation of these consolidated financial statements, the following Standards and Interpretations were in issue but not yet effective: IAS 1 (Revised) Presentation of Financial Statements (effective for accounting periods beginning on or after January 1, 2009) IAS 16 (Revised) Property, Plant and Equipment (effective for accounting periods beginning on or after January 1, 2009) IAS 19 (Revised) Employee Benefits (effective for accounting periods beginning on or after January 1, 2009) IAS 20 (Revised) Government Grants and Disclosure of Government Assistance (effective for accounting periods beginning on or after January 1,2009) IAS 23 (Revised) Borrowing Costs (effective for accounting periods beginning on or after January1, 2009) IAS 27 (Revised) Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after January 1, 2009) IAS 28 (Revised) Investments in Associates (effective for accounting periods beginning on or after January 1, 2009) IAS 29 (Revised) Financial Reporting in Hyperinflationary Economies (effective for accounting periods beginning on or after January 1, 2009) IAS 31 (Revised) Interest in Joint Ventures (effective for accounting periods beginning on or after January 1, 2009) IAS 32 (Revised) Financial Instruments: Presentation (effective for accounting periods beginning on or after January 1, 2009) IAS 36 (Revised) Impairment of Assets: (effective for accounting periods beginning on or after January 1,2009) IAS 38 (Revised) Intangible Assets (effective for accounting periods beginning on or after January1,2009) IAS 39 (Revised) Financial Instruments: Recognition and Measurement: (effective for accounting periods beginning on or after January 1, 2009) IAS 40 (Revised) Investment Property (effective for accounting periods beginning on or after January 1, 2009) IAS 41 (Revised) Agriculture (effective for accounting periods beginning on or after January 1,2009) IFRS 1 (Revised) First time Adoption of International Financial Reporting Standards (effective for accounting periods beginning on or after January 1,2009) IFRS 2 (Revised) Share-based Payment (effective for accounting periods beginning on or after January 1, 2009) IFRS 3 (Revised) Business Combinations (effective for accounting periods beginning on or after July 1, 2009) IFRS 5 (Revised) Non-current Assets Held for Sale and Discontinued Operations (effective for accounting periods beginning on or after July 1, 2009) IFRS 8 Operating Segments (effective for accounting periods beginning on or after January 1, 2009) IFRIC 13 Customer Loyalty Programmes (effective for accounting periods beginning on or after July 1, 2008) IFRIC 15 Agreements for the Construction of Real Estate (effective for accounting periods beginning on or after January 1, 2009) IFRIC 16 Hedges of a Net Investment in a Foreign Operation (effective for accounting periods beginning on or after October 1, 2008) IFRIC 17 Distribution of Non-cash Assets to Owners (effective for accounting periods beginning on or after July 1, 2009) IFRIC 18 Transfer of Assets from Customers (effective for transfers received on or after July 1, 2009) 17 Annual Report 2008

20 2. Standards and interpretations in issue but not effective (continued) The directors anticipate that all of the above Standards and Interpretations as applicable will be adopted in the Group s financial statements for the period commencing January 1, 2009 or as and when applicable and that the adoption of those Standards and Interpretations will have no material impact on the consolidated financial statements of the Bank in the period of initial application. 3. Significant accounting policies Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments. For the purpose of the consolidated financial statements, the results and financial position of the Bank are expressed in Arab Emirates Dirhams (in thousands), which is the functional currency of the Bank, and the presentation currency for the consolidated financial statements. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements of National Bank of Umm Al-Qaiwain (psc) and Subsidiary (the Group ) incorporate the financial statements of the Bank and entity controlled by the Bank (its Subsidiary). 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 effective date of acquisition or up to the effective date of disposal, as appropriate. All intragroup transactions, balances, income and expenses are eliminated on consolidation. Subsidiary: Details of the Bank s subsidiary as at December 31, 2008 is as follows: Name of subsidiary Proportion of ownership interest Country of incorporation Principal activity Twin Towns Marketing Management (L.L.C.) 99.5% UAE Marketing management The remaining equity in the above subsidiary is held by the Bank beneficially through nominee arrangements. Annual Report

21 3. Significant accounting policies (continued) Financial assets Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. It consists of cash and balances with the UAE Central Bank, due from other banks, loans and advances and customers acceptances. Loans and advances Loans and advances are recognised when cash is advanced to the borrowers and are carried at amortised cost using effective interest rate method. Impairment of loans and advances Individually assessed loans Individually assessed loans represent mainly, corporate and commercial loans which are assessed individually in order to determine whether there exists any objective evidence that a loan is impaired. Loans are classified as impaired as soon as there is doubt about the borrower s ability to meet payment obligations to the Bank in accordance with the original contractual terms. Impaired loans are measured on the basis of the present value of expected future cash flows including collateral if any and the impairment loss is calculated based on the shortfall in the loans carrying value compared to the net present value of future cash flows. Collectively assessed loans Impairment losses of collectively assessed loans include the allowances calculated on: a) Performing loans b) Small value loans with common features, which are not individually significant. Past due but not impaired loans Loans and securities where contractual interest or principal payments are past due but the Bank believes that the assets are not impaired on the basis of the level of security/collateral available and/ or the stage of collection of amounts owed to the Bank. Performing loans The estimated impairment is calculated by the Bank s management for each identified portfolio based on historical experience and the assessed inherent losses which are reflected by the economic and credit conditions. Small value loans with common features, which are not individually significant Small value loans represent mainly credit card dues and other loans which are not individually significant in value. Impairment of such loans is assessed based on ageing analysis of each bucket and impairment losses provided accordingly. Re-ageing policy The Bank has set out its re-ageing policy as part of the Credit Risk Policy. The Bank identifies forward shifting of past due date as re-ageing and complies with the Basel II guidelines on the re-ageing policy. This includes re-ageing criteria separately for normal and delinquent accounts, approval authorities, minimum age of the facility before it is eligible for re-ageing, maximum number of re-ageing per facility etc. Re-ageing is always considered based on reassessment of borrower s repayment capacity due to revised economic conditions. Collateral pending sale The Bank acquires real estate and other collateral in settlement of impaired loans and advances only if immediate sale is not feasible. The Bank s policy is to dispose of any such acquired real estate and other collateral at the earliest. The carrying value of such collateral is the lower of the net realisable value of the loans and advances and the current fair value of such assets at the date of acquisition. Gains or losses on disposal and unrealised losses on revaluation, are recognised in the consolidated income statement. Investment securities The Bank classifies its investment securities in the following categories: financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets. Management determines the classification of the investments at initial recognition. 19

22 3. Significant accounting policies (continued) Financial assets (continued) Investment securities (continued) i) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Financial assets are designated at fair value through profit or loss when certain investments, such as equity investments, are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. ii) Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Where the Bank decides to sell other than an insignificant amount of held-tomaturity assets, the entire category is considered to be tainted and reclassified as available-for-sale. iii) Available-for-sale Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or are not classified as (a) loans and receivables, (b) hold-to-maturity investments or (c) financial assets at fair value through profit or loss. Initial recognition Purchases and sales of financial assets at fair value through profit or loss, held-to-maturity and available-for-sale are recognised on trade date which is the date on which the Bank commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the consolidated income statement. Subsequent measurement Available-for-sale investments and financial assets at fair value through profit or loss are subsequently carried at fair value. Held-to-maturity investments are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the consolidated income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in equity, until the financial asset is derecognised or impaired. Once the available-for-sale financial asset is derecognised or impaired, the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Foreign currency gains and losses arising on available-for-sale monetary financial assets are directly recognised in the consolidated income statement. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. Interest earned whilst holding investment securities is reported as interest income. Dividends on equity instruments are recognised in the consolidated income statement when the Bank s right to receive payment is established. 20

23 3. Significant accounting policies (continued) Financial assets (continued) Investment securities (continued) The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the asset is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the consolidated income statement. Impairment losses recognised in the consolidated income statement on available-for-sale equity instruments are not reversed through the consolidated income statement. Amortised cost of a financial asset/liability is the amount at which the financial asset or financial liability is measured at initial recognition minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount and the maturity amount and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectibility. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Reclassification of investments held for trading to available-for-sale investments During the year, in line with the amendments to IAS 39, the Bank has reclassified part of investments held for trading to available-for-sale investments (see Note 8). Derecognition of financial assets The Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an associated liability for amounts it may have to pay. Financial liabilities and equity instruments Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments issued by the Bank are recorded at the proceeds received, net of direct issue costs. Financial liabilities, including customers deposits, customers acceptances and due to other banks, are initially measured at fair value, net of transaction costs. 21 Annual Report 2008

24 3. Significant accounting policies (continued) Financial liabilities and equity instruments (continued) Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. Derecognition of financial liabilities The Bank derecognises financial liabilities when, and only when, the Bank s obligations are discharged, cancelled or they expire. Property and equipment Property and equipment are stated at historical cost less accumulated depreciation. Depreciation is calculated using the straight line method to write off the cost of such assets to their estimated residual values over their expected useful economic lives as follows: Buildings 20 Computers and equipment 1-5 Furniture and fixtures 5 Leasehold improvements 3-5 Motor vehicles 5 Land is not depreciated, as it is deemed to have an infinite life. Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. Repairs and renewals are charged to the consolidated income statement when the expenditure is incurred. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount, being the higher of the net selling price and value in use. Employees end of service benefits Pension contributions are made in respect of UAE nationals to the UAE General Pension and Social Security Authority in accordance with the UAE Federal Law No (7), 1999 for Pension and Social Security. A provision is made for the full amount of end of service benefits due to the non-uae nationals in accordance with the UAE Labour Law, for their periods of service up to the balance sheet date. This provision is included in other liabilities. Management uses the projected unit credit method to measure the employees end of service benefits payable under the UAE Labour law. Under this method an assessment is made of employee s expected service life with the Bank and the expected basic salary at the date of leaving the service. The expected liability at the date of leaving the service is discounted to its net present value. Provisions Provisions are recognised when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Borrowings Borrowings are recognised initially at fair value net of transaction costs incurred, and are subsequently stated at amortised cost using effective interest rate method. Any difference between proceeds net of transaction costs and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective interest method. Foreign currencies Items included in the consolidated financial statements of the Bank are measured in UAE Dirhams which is the functional currency of the primary economic environment in which the Bank operates. Foreign currency transactions are translated into UAE Dirhams at the rate ruling on the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated into UAE Dirhams at the rates ruling at the balance sheet date. Any resultant gains or losses are accounted for in the consolidated income statement. Derivative instruments Derivative instruments, comprising forward foreign exchange contracts, are initially recognised at fair value on the date on which a derivative contract is entered. All forward foreign exchange contracts are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of the forward foreign exchange contracts are included in foreign exchange trading income in the consolidated income statement. Years Annual Report

25 3. Significant accounting policies (continued) Interest income and expense Interest income and expense are recognised in the consolidated income statement for all financial instruments measured at amortised cost using the effective interest method. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Fees and commission income Commission income earned from the issue of documentary credits and letters of guarantee is recognised on a straight line basis over the period for which the documentary credits and guarantees are issued. Fee income on issue of letters of credit and guarantees is recognised when the underlying transaction is effected. Other fees and commission income, including account servicing fees, placement fees and syndication fees, are recognised as the related services are performed. Operating leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the consolidated income statement on a straight line basis over the shorter of the lease term or the estimated useful life of the asset. Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents include cash on hand, money in current and call accounts and placements with original maturity of less than three months, excluding the minimum reserve deposits required to be maintained with the UAE Central Bank. Segment reporting A segment is a distinguishable component of the Bank that is engaged either in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segments with a majority of revenue earned from services provided to external customers and whose revenue, results or assets are ten percent or more of all the segments, are reported separately. 4. Critical accounting estimates and judgements The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Impairment losses on loans and advances In determining whether an impairment loss should be recorded in the consolidated income statement, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The management believes that based on the review of loans and advances adequate impairment losses were provided in the consolidated financial statements against specific loans and advances and against risks inherent in the portfolio. Management s impairment review was performed taking into consideration international and national economic conditions prevailing in U.A.E. after the third quarter of year Impairment of available-for-sale equity investments The Bank determines that available-for-sale equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgement. In making this judgement, the Bank evaluates among other factors, the normal volatility in share price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The management has considered an amount of AED 12.4 million as impairment loss on available-for-sale investments for the year, based on the analysis of impairment test performed on available-for-sale investments based on conditions prevailing in U.A.E. after the third quarter of Held-to-maturity investments The Bank follows the IAS 39 guidance on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held to maturity. In making this judgement, the Bank evaluates its intention and ability to hold such investments to maturity. If the Bank fails to keep these investments to maturity other than for the specific circumstances - for example, selling an insignificant amount close to maturity - it will be required to reclassify the entire category as available-for-sale. The investments would therefore be measured at fair value and not at amortised cost. 23

26 5. Cash and balances with the UAE Central Bank December 31, Balances with the UAE Central Bank: Current account 39,922 81,110 Certificates of deposit - 2,365,000 Statutory deposit 241, , ,572 2,602,481 Cash in hand 118,168 70, ,740 2,673,011 The statutory deposit with the UAE Central Bank is not available to finance the day to day operations of the Bank. 6. Due from other banks December 31, Term deposits 1,995,693 79,794 Demand deposits 77,095 41,475 Syndicated loans 36,730 27,548 2,109, , Loans and advances December 31, Loans 6,075,101 3,007,363 Overdrafts 2,651,802 1,555,271 Loans against trust receipts 521, ,265 Others 744, ,611 Total loans and advances 9,993,521 5,059,510 Provision for impairment (145,275) (130,287) Net loans and advances 9,848,246 4,929,223 By economic sector Wholesale and retail trade 3,513,631 1,770,823 Real estate and construction 1,578,144 1,151,681 Personal loans and others 1,325, ,327 Manufacturing 572, ,024 Agriculture and allied activities 774 2,157 Transport and communication 153,403 54,714 Financial institutions 249,972 78,125 Services and others 2,599, ,659 9,993,521 5,059,510 24

27 7. Loans and advances (continued) Movement in provision for impairment Against specific loans and advances Against risks inherent in the portfolio Total Total At January 1, 74,777 55, ,287 96,279 Provision made during the year 12,117 27,560 39,677 62,796 Provision released during the year (22,175) - (22,175) (23,384) Written off/ utilised during the year (2,514) - (2,514) (5,404) At December 31, 62,205 83, , ,287 Net charge for provision for impairment Year Ended December 31, 2008 Year Ended December 31, 2007 Provision made during the year 39,677 62,796 Provision released during the year (22,175) (23,384) 17,502 39,412 The non-performing loans as at December 31, 2008 amounted to AED 98.8 million (2007: AED million). Provisions for impairment in relation to such loans amounted to AED 62.2 million as at December 31, 2008 (2007: AED 74.8 million) (see note 30). 8. Investment securities December 31, Securities at fair value through profit or loss held for trading Quoted equity securities - 70,785 Funds placed under management 92, ,272 Securities available-for-sale 92, ,057 Quoted equity securities 68,643 58,760 Unquoted equity securities 7,027 - Quoted debt instruments 7,875 - Securities held-to-maturity 83,545 58,760 Quoted debt instruments 378,413 62, , ,585 Reclassification of investments During the year, the Board of Directors of the Bank has reconsidered its investment strategy and accordingly the Bank adopted the amendments to IAS 39 issued by the International Accounting Standards Board which permits an entity to reclassify, in particular circumstances, investments held for trading for which change in fair value is recognised in the consolidated income statement to available-for-sale investments for which the change in the fair value is recognised under equity as cumulative change in fair values. Accordingly, management has transferred part of investments held for trading effective October 1, 2008, having a fair value of AED 79.3 million to available-for-sale investments as detailed below: 25 Annual Report 2008

28 8. Investment securities (continued) Reclassification of investments (continued) Amount Fair value as of October 1, ,294 Impairment loss recognised on reclassified investments (8,523) Change in fair value (27,095) Fair value of investments reclassified as of December 31, ,676 As a result of the above reclassification, net profit for the year has increased by AED 27.1 million. Movement in investment securities: At the beginning of the year 386, ,523 Purchase of investment securities 462,196 76,059 Sale of investment securities (149,444) (169,494) Net fair value (loss)/gain on investment securities at fair value through profit or loss - held for trading (78,842) 105,070 Net fair value (loss)/gain on investment securities available-for-sale directly recognised in equity (65,756) 24,427 At the end of the year 554, , Property and equipment Computers Furniture Land and and and Leasehold Motor Capital work buildings equipment fixtures improvements vehicles in progress Total Cost At December 31, ,703 37,203 3,254 4,715 1,286 4, ,239 Additions 165 5, ,105 10,464 Disposals - (131) - (308) (648) (329) (1,416) Transfer - 3, ,052 - (4,320) - At December 31, ,868 46,061 4,301 5,478 1,045 2, ,287 Additions - 5, ,198 9,485 Disposals - (512) - - (251) - (763) Transfer - 2, (2,801) - At December 31, ,868 53,714 5,271 6,697 1, ,009 Accumulated depreciation At December 31, ,703 21,344 1,921 2,798 1,013-50,779 Charge for the year 4,170 6, ,728 Eliminated on disposals (128) (608) - (736) At December 31, ,873 27,607 2,376 3, ,771 Charge for the year 4,143 7, ,873 Eliminated on disposals - (512) - - (251) - (763) At December 31, ,016 34,227 2,982 4, ,881 Carrying amount At December 31, ,852 19,487 2,289 2,519 1, ,128 At December 31, ,995 18,454 1,925 2, , ,516 Land and buildings include land costing AED 22.9 million (2007: AED 22.9 million) which is not depreciated. Annual Report

29 10. Other assets December 31, Interest receivable 47,030 22,574 Prepayments and deposits 8,960 9,240 Others 60,785 26, ,775 58, Due to other banks December 31, Term deposits 847, ,617 Demand deposits 2,022 14,099 Other borrowings 1,561,025 1,561,025 2,410,437 1,925,741 By geographical area Within UAE 2,128,479 1,742,044 Outside the UAE 281, ,697 2,410,437 1,925,741 Other borrowings at December 31, 2008 comprise two term loans amounting to USD 150 million and USD 275 million (2007: USD 150 million and USD 275 million) arranged through a syndicate of banks. Both the term loans are unsecured, repayable in full by September 2009 and June 2010 (2007: September 2009 and June 2010) respectively, and carry a floating rate of interest which is linked to 1,3 or 6 months LIBOR at the discretion of the Bank (2007: 1,3 or 6 months LIBOR). The Bank has not defaulted in the repayment of any bank borrowings or on the payment of interest thereon. 12. Customers deposits December 31, Time deposits 5,753,068 3,639,216 Savings deposits 110,110 88,696 Current accounts 805, ,675 Other deposits 153, ,095 6,822,168 4,532,682 All customers deposits are within UAE. 27

30 13. Other liabilities December 31, Accounts payable 69,699 41,870 Interest payable 36,956 28,497 Provision for employees end of service benefits 16,924 14,403 Other staff benefits 3,030 1,570 Other liabilities 987,784 32,435 1,114, ,775 Other liabilities include AED million (equivalent of USD 250 million) received from Global Investment House - Kuwait (GIH) as advance on account of the proposed issue of bond convertible into 330 million shares of AED 1 each at a premium of AED 6.15 per share totaling AED billion, entered through a Memorandum of Understanding (MOU) dated July 16, This amount is included in other liabilities without any interest attached towards it. As of the balance sheet date, the Bank has received a letter from GIH for the cancellation of the above transaction and for refunding the advance of AED million. On legal advice, the Bank has taken the view that GIH request is not valid and that the MOU is a binding sale purchase agreement. Accordingly, the Bank is proceeding for completion of the transaction by seeking the remaining payment due from GIH. Movement in provision for employees end of service benefits At January 1 14,403 6,982 Provision made during the year (Note 22) 3,218 8,249 Payments made during the year (697) (828) At December 31 16,924 14, Share capital At December 31, 2008, the issued and fully paid share capital comprised 1,320 million shares of AED 1 each (December 31, 2007: 660 million shares of AED 1 each). During the year, the share capital of the Bank was increased by AED 660 million (2007: AED 60 million): i) by the issue of 330 million bonus shares of AED 1 each amounting to AED 330 million (2007: AED 60 million). ii) by the issue of 330 million rights shares of AED 1 each amounting to AED 330 million (2007: Nil) at a premium of AED 1.50 per share. Share premium amounting to AED 495 million has been credited to statutory reserve in accordance with Article 203 of the UAE Federal Law No.(8) of 1984, as amended. These issues of shares were approved by the Shareholders at the Annual General Meeting held on March 17, At the Extra Ordinary General Meeting of the Shareholders held on September 25, 2008, the Shareholders approved the issuance of fully convertible bond for AED 2,359,500,000 to Global Investment House, Kuwait, to be converted into 330 million shares of AED 1 each at a premium of AED 6.15 per share. 15. Statutory reserve In accordance with the UAE Federal Law No (8) of 1984, as amended, and the UAE Union Law No. 10 of 1980, as amended, 10% of the profit for the year is transferred to a statutory reserve until such time as the balance in the reserve equals 50% of the paid up share capital. No profit was transferred in the current year to the statutory reserve, as it exceeds 50% of the issued share capital of the Bank. This reserve is not available for distribution. 16. General reserve The Bank maintains a general reserve and the contributions to this reserve are made at the discretion of the Directors. This reserve may be utilised for any purpose to be determined by a resolution of the shareholders of the Bank at an Ordinary General Meeting. 28

31 17. Commitments and contingent liabilities a) The contractual amounts of the Bank s off-balance sheet amounts are as follows: December 31, Guarantees 7,056,594 4,127,546 Letters of credit 879, ,084 Commitments to extend credit 2,465,444 1,277,512 Credit default swaps 183,650 - Interest rate swaps 333,650 - Forward exchange contracts undertaken on behalf of customers 1,122, ,582 12,041,641 6,733,724 By geographical area Within the UAE 11,592,586 6,062,095 Outside the UAE 449, ,629 12,041,641 6,733,724 Guarantees, which represent irrevocable assurances that the Bank will make payment in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Letters of credit are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank, up to a stipulated amount, under specific terms and conditions. These letters of credit are collateralised by the underlying shipments of goods to which they relate and therefore have significantly less risk. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss, though not easy to quantify, is considerably less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. While there is some risk associated with the remainder of commitments, the risk is viewed as modest, since it results firstly from the possibility of the unused portion of loan authorisations being drawn by the customer, and second, from these drawings subsequently not being repaid as due. The Bank monitors the term to maturity of credit commitments because longer term commitments generally have a greater degree of risk than shorter term commitments. Interest Rate Swaps are commitments to exchange one set of cash flows for another. Interest rate risk result in an economic exchange of interest rates (for example, fixed rate for floating rate) or a combination of interest rates and currencies ( i.e., cross currency interest rate swaps). The Group sells credit protection through credit default swaps. Credit default swaps provide protection against the decline in value of a referenced asset as a result of credit events such as default or bankruptcy. It is similar in structure to an option whereby the purchaser pays a premium to the seller of the credit default swap in return for payment related to the deterioration in value of the referenced asset. Forward foreign exchange contracts comprise commitments to purchase foreign currencies on behalf of customers, including undelivered spot transactions. These are done mainly on a back to back basis. b) Capital commitments At December 31, 2008, the Bank has capital commitments of AED 2.3 million (2007: AED 2.2 million). 18. Interest income and expense Interest income Loans and receivables Loans and advances Year Ended ,351 Year Ended ,968 Deposits with the UAE Central Bank 26,900 36,589 Other banks 20,350 13,072 Investment in debt securities 14,744 2, , ,814 Interest expense Financial liabilities at amortised cost Customers deposits 78,757 70,129 Borrowings from other banks 83,600 69, , , Annual Report 2008

32 19. Other operating income Year Ended 2008 Year Ended 2007 Rental income 10,115 7,896 Foreign exchange income net 29,006 20,372 Others 5,161 1,551 44,282 29, Operating expenses Year Ended 2008 Year Ended 2007 Staff costs (Note 22) 78,925 55,513 Occupancy costs 13,637 9,525 Depreciation (Note 9) 12,873 11,728 Loss on disposal of property and equipment Staff benefits (Note 22) 7,818 11,445 Fees and commission expenses 5,199 4,601 Others 51,069 19, , , Investment (losses)/revenue Year Ended 2008 Year Ended 2007 Dividend income a) Investment securities available-for-sale 1,056 1,072 b) Investment securities at fair value through profit and loss - held for trading 7,415 10,191 Fair value (loss)/gain on investment securities at fair value through profit and loss - held for trading (78,842) 105,070 Impairment loss on investment securities available-for-sale (12,406) (14,935) Discount amortised on debt securities 1,467 - Profit/(loss) on sale of investments a) Investment securities available-for-sale (4,050) 12,065 b) Investment securities at fair value through profit and loss - held for trading (200) 2,709 (85,560) 116, Staff costs Year Ended 2008 Year Ended 2007 Staff costs Salaries and allowances 77,717 53,401 Staff training 715 1,620 Housing and medical ,925 55,513 Annual Report

33 22. Staff costs (continued) Year Ended 2008 Year Ended 2007 Staff benefits Pension 2,923 2,182 End of service benefits (Note 13) 3,218 8,249 Others 1,677 1,014 7,818 11, Basic earnings per share The basic earnings per share is calculated by dividing the profit attributable to shareholders by the average number of ordinary shares in issue during the year. In accordance with IAS 33 Earnings per Share, the impact of bonus shares issued has been considered retrospectively while computing the weighted average number of ordinary shares during all periods presented. Year Ended 2008 Year Ended 2007 Profit for the year in AED 283,665, ,770,000 Average number of shares in issue 1,263,268,852 1,148,400,000 Basic earnings per share in AED There were no potentially dilutive shares as at December 31, 2008 and Dividend per share At the Board meeting held on February 17, 2009 the Board of Directors proposed a cash dividend of 10% amounting to AED 132 million and share dividend of 10% amounting to AED 132 million in respect of the year ended December 31, 2008 (2007: cash dividend amounting to Nil and share dividend of 50% amounting to AED 330 million). The above will be accounted for in the financial statements of the Bank in the year ending December 31, This proposal is subject to the approval of the shareholders. 25. Related party transactions The Bank carries out transactions in the ordinary course of business with related parties, defined as shareholders who have a significant equity interest in the Bank, and all Directors of the Bank and companies in which such shareholders and Directors have a significant interest and key management personnel of the Bank. During the year, the Bank entered into the following significant transactions with related parties in the ordinary course of business. Year Ended 2008 Year Ended 2007 Interest income 22,441 11,238 Interest expense Remuneration of key management personnel 5,413 10,638 Other income 3,327 3,427 Directors fees

34 25. Related party transactions (continued) Outstanding balances at the balance sheet date from transactions with related parties are as follows: Year Ended 2008 Year Ended 2007 Loans and advances 813, ,844 Customer deposits 122,212 57,911 Irrevocable commitments and contingent liabilities 217, , Cash and cash equivalents Year Ended 2008 Year Ended 2007 Cash in hand (Note 5) 118,168 70,530 Current account with the UAE Central Bank (Note 5) 39,922 81,110 Certificates of deposit with the UAE Central Bank (Note 5) - 2,365,000 Term and demand deposits with other banks (Note 6) 2,072, ,269 2,230,878 2,637, Business segments The Bank is organised into two main business segments: Retail and corporate banking - wherein retail banking comprises private customer current accounts, savings accounts, deposits, credit and debit cards, customer loans and mortgages and corporate banking involves transactions with corporate bodies including government and public bodies and comprises loans, advances, deposits and trade finance transactions. Treasury and others - incorporating the activities of the dealing room, related money market, foreign exchange transactions with other banks and financial institutions including the UAE Central Bank and operations by the Bank s Head Office as a whole, none of which mutually constitute a separately reportable segment. Transactions between the business segments are on normal commercial terms and conditions. There are no material items of income and expense arising between the business segments. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet items. Primary segment information Retail and corporate banking Treasury and others Total December 31, 2008 Gross income 608, , ,177 Segment result 252,850 24, ,604 Unallocated income 6,061 Profit for the year 283,665 Segment assets 9,964,508 3,478,220 13,442,728 Unallocated assets 100,128 Total assets 13,542,856 Segment liabilities 6,303,787 3,537,772 9,841,559 Unallocated liabilities 919,149 Total liabilities 10,760,708 32

35 27. Business segments (continued) Primary segment information (continued) Retail and corporate banking Treasury and others Total December 31, 2007 Gross income 436, , ,562 Segment result 224, , ,102 Unallocated income 4,668 Profit for the year 333,770 Segment assets 5,112,662 3,212,873 8,325,535 Unallocated assets 103,516 Total assets 8,429,051 Segment liabilities 4,754,319 1,949,880 6,704,199 Unallocated liabilities 2,114 Total liabilities 6,706, Classification and fair value of financial instruments Assets December 31, 2008 Cash and balances with the UAE Central Bank Loans and receivables 399,740 Held-tomaturity - Held for trading - Availablefor-sale - Non-financial instruments - Total 399,740 Due from other banks 2,109, ,109,518 Loans and advances 9,848, ,848,246 Investment securities - 378,413 92,781 83, ,739 Customers acceptances 413, ,710 Property and equipment , ,128 Other assets , ,775 Total assets 12,771, ,413 92,781 83, ,903 13,542,856 December 31, 2007 Cash and balances with the UAE Central Bank 2,673, ,673,011 Due from other banks 148, ,817 Loans and advances 4,929, ,929,223 Investment securities - 62, ,057 58, ,585 Customers acceptances 129, ,115 Property and equipment , ,516 Other assets ,784 58,784 Total assets 7,880,166 62, ,057 58, ,300 8,429, Annual Report 2008

36 28. Classification and fair value of financial instruments (continued) Liabilities December 31, 2008 At amortised cost Non-financial instruments Total Due to other banks 2,410,437-2,410,437 Customers deposits 6,822,168-6,822,168 Customers acceptances 413, ,710 Other liabilities - 1,114,393 1,114,393 Total liabilities 9,646,315 1,114,393 10,760,708 December 31, 2007 Due to other banks 1,925,741-1,925,741 Customers deposits 4,532,682-4,532,682 Customers acceptances 129, ,115 Other liabilities - 118, ,775 Total liabilities 6,587, ,775 6,706,313 The directors consider that the carrying amounts of the financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values. 29. Financial risk management The Bank s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on the Bank s financial performance. Credit risk The Bank assumes credit risk as part of its lending operations, which is identified as the risk that counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Credit exposures arise principally in loans and advances, due from banks and investment securities. There is also credit risk in off-balance sheet financial arrangements such as letters of credit, guarantees and undrawn loan commitments. The credit risk management and control are centralised in the Credit Risk Department with the following objectives: To measure, monitor and mitigate risks both at micro as well as macro level. To facilitate building and sustaining a high quality credit portfolio and minimise losses. Contain non-performing assets through preventive and curative management. To identify early warning signals and initiate timely corrective action. Credit Risk Department has been reorganised to include units for customer rating, remedial management and risk containment. The Bank is in the process of setting up the internal risk rating systems to comply with IRB Foundation norms of Basel II. Remedial management and risk containment units are functioning to prevent accretion of nonperforming assets through timely action and maximise recoveries through vigorous follow-up, classification of delinquent exposures and negotiate compromise proposals, wherever required. Note 30 summarises the Bank s exposure to credit risk. Credit Risk Mitigation Collateral - It is a common practice to obtain collateral securities to safeguard the interest of the Bank in case of default. Such mitigants are backed by proper documentation and legally binding agreements. The most common forms of tangible securities accepted by the Bank are land and building, listed equity shares, fixed deposits under lien, vehicles etc. Other comforts - personal guarantees and corporate guarantees are also taken as comfort, wherever deemed essential. Annual Report

37 29. Financial risk management (continued) Market risk Market risk for the Bank refers to the risk because of which the value of its on or offbalance sheet positions are adversely affected due to movements primarily in interest rates, currency exchange rates and investment prices. Thus the volatility in market level of interest rates, foreign exchange rates and investment prices expose the Bank s earnings and capital to risk. The market risk department of the Bank addresses these risks to the Assets and Liability Committee (ALCO) on a regular basis based on stipulated norms for Asset Liability Management and Investments. The ALCO takes corrective measures as per the Bank s internal market risk policies and strategic business directions. Liquidity risk Liquidity risk is the risk that the Bank will be unable to meet its 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 guard against this risk, management endeavors to diversify funding sources on a continuous basis and manage assets with liquidity in mind. The day-to-day funds management is done at Treasury so as to maintain satisfactory liquid assets. The liquidity position is monitored and reported to top management on a daily basis. The Bank s ALCO has put in place the policies to manage the liquidity risk and monitor the position regularly. Note 31 summarises the Bank s exposure to liquidity risk. Interest rate risk Interest rate risk is the potential that changes in interest rates may adversely affect the value of a financial instrument or portfolio, or the condition of the Bank as a whole. Although interest-rate risk arises in all types of financial instruments, it is most pronounced in debt instruments, derivatives that have debt instruments as their underlying reference asset, and other derivatives whose values are linked to market interest rates. In general, the values of longer-term instruments are often more sensitive to interest-rate changes than the values of shorter-term instruments. A part of interest rate risk can be labelled as yield curve risk, which refers to the imperfect correlation of interest rates of different maturities. The Bank manages its interest rate sensitivity position based on anticipated and actual interest rate movements, in order to maximise net interest income ( NII ). The Bank analyses its interest rate sensitivity position based on the contractual repricing or maturity dates, whichever is earlier, regularly. The impact on the sensitivity position is calculated by way of 50 basis points ( bps ) change in interest rates and resultant effect in the net interest income of the Bank. It is controlled through the limit prescribed for the same. Note 32 summarises the Bank s exposure to interest rate risk. Currency risk The Bank takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in aggregate for both overnight and intra-day positions, which are monitored by the Treasury Department. Note 33 summarises the Bank s exposure to foreign currency exchange risk. Operational risk Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Operational risk is inherent in all business activities and management of this risk is vital to the strategic objective of the Bank. While operational risk cannot be fully eliminated, management endeavours to minimise the losses by ensuring effective infrastructure, controls, systems and individuals are in place throughout the organisation. To accomplish the above objective, the Bank has dedicated operational risk management function, which is proactive in developing and implementing new methodologies for the identification, assessment, monitoring and control of operational risk. The Bank is developing systems and procedures with clear segregation of duties and reporting line to reduce operational risk. Compliance with the guidelines is monitored through robust internal control and comprehensive audit system. The Bank is currently implementing under-noted processes aimed at monitoring and mitigating operational risks. Bottom up approach (Risk and Control Assessment) for identification and assessment of operational risks at all business units. Establishing a centralised database for capturing operational risk losses. Developing a comprehensive Business Contingency and Continuity Plan to anticipate stress situations and mitigate the risk associated with them. 35

38 30. Credit risk Due from Loans Investment in Asset quality and ageing as on December 31, 2008 Impaired Substandard other banks - and advances 31,398 securities - Doubtful - 34,237 - Loss - 33, ,785 - Specific allowance for impairment - (62,205) ,580 - Amount past due but not impaired Past due above 60 days - 111,382 - Past due less than 60 days - 266, ,561 - Neither past due nor impaired 2,109,518 9,517, ,739 Collective allowances for impairment - (83,070) - 2,109,518 9,434, ,739 Carrying amount 2,109,518 9,848, ,739 Asset quality and ageing as on December 31, 2007 Impaired Substandard - 65,238 - Doubtful - 50,373 - Loss - 23, ,965 - Specific allowance for impairment - (74,777) ,188 - Amount past due but not impaired Past due above 60 days - 42,633 - Past due less than 60 days - 41, ,027 - Neither past due nor impaired 148,817 4,836, ,585 Collective allowances for impairment - (55,510) - 148,817 4,781, ,585 Carrying amount 148,817 4,929, ,585 Loans and advances are secured by collaterals amounting to AED 5,175 million (2007: AED 2,194 million). The fair value of collaterals on impaired loans is estimated to AED 60 million (2007 : AED 52 million) 36

39 30. Credit risk (continued) Geographical concentration of assets December 31, 2008 Due from other banks Loans and advances Investment in securities Within U.A.E. 1,998,823 9,803, ,267 Within GCC countries 27,133 44, ,433 Other countries 83, ,109,518 9,848, ,739 December 31, 2007 Within U.A.E. 99,898 4,929,223 69,422 Within GCC countries 17, ,163 Other countries 31, ,817 4,929, ,585 Rated and unrated exposure December 2008 Rated Exposure Unrated Exposure Total Exposure CRM Eligible Collateral Net Exposure after CRM Risk Weighted Assets Claims on banks 2,109,238 66,810 2,176,048 10,689 2,165, ,745 Claims on sovereigns 369, , ,385 - Investment securities 346, , , , ,541 Claims on corporates 328,255 7,775,556 8,103, ,116 7,774,695 7,774,695 Retail exposure - 1,341,859 1,341,859 34,452 1,307,407 1,021,634 Past due loans - 329, ,855 26, , ,356 Other assets 118, , , , ,858 Off balance sheet exposure 945,668 11,509,683 12,455,351 2,976,898 9,478,453 4,040,756 4,217,263 21,450,338 25,667,601 3,377,701 22,289,900 14,192,585 Rated and unrated exposure December 2007 Claims on banks 145, , ,688 42,930 Claims on sovereigns 2,622,742-2,622,742-2,622,742 - Investment securities 63, , , ,757 39,317 Claims on corporates 67,422 3,975,614 4,043, ,700 3,796,336 3,799,106 Retail exposure - 813, ,410 23, , ,015 Past due loans - 108, , , ,817 Other assets 70, , , , ,127 Off balance sheet exposure 338,219 6,770,771 7,108,990 1,841,072 5,267,918 2,179,302 3,308,540 12,152,766 15,461,306 2,111,036 13,350,270 6,982,614 Exposure risk category-wise Risk category 2008 December 31, 2007 Below 100% risk weight 8,776,492 4,785, % risk weight 16,566,467 10,572,381 More than 100% risk weight 324, ,579 25,667,601 15,461, Annual Report 2008

40 31. Liquidity risk Maturity profile Assets Upto 1 month 1 month - 3 months 3 months - 1 year 1 year - 5 years Over 5 years Total December 2008 Cash and balances with the UAE Central Bank 158, , ,740 Due from other banks 1,988,363 6,354 85,417 29,384-2,109,518 Loans and advances 1,278, ,684 1,794,113 5,392, ,514 9,848,246 Investment securities 50, , ,464 98, ,739 Customers acceptances 121, ,628 61,357 79, ,710 Property and equipment ,064 50, ,128 Other assets 46,997-69, ,775 Total 3,643, ,666 2,128,580 6,080, ,403 13,542,856 December 2007 Cash and balances with the UAE Central Bank 1,676, ,000 40, ,371-2,673,011 Due from other banks 66,269 55,000-27, ,817 Loans and advances 605, , ,771 2,864, ,689 4,929,223 Investment securities 97, ,669 47, ,585 Customers acceptances 64,557 32,279 32, ,115 Property and equipment , ,516 Other assets 21,824-36, ,784 Total 2,531,858 1,203,879 1,181,679 3,096, ,205 8,429,051 Liabilities, equity and off balance sheet items December 2008 Due from other banks 71, ,139 1,469,200-2,410,437 Customers deposits 1,740, ,580 1,043,807 3,312, ,822,168 Customers acceptances 121, ,628 61,357 79, ,710 Other liabilities 59,861 52,121 84, ,250-1,114,393 Shareholders equity - 132, ,442-2,345,706 2,782,148 A: Total on balance sheet items 1,992,418 1,061,329 2,363,906 5,779,321 2,345,882 13,542,856 Forward sale 179,937 88, , ,650-1,122,818 Guarantees 594-1, ,376 Unavailed limits 1,191, , , ,623,106 B: Total off balance sheet items 1,371, , , ,650-2,748,300 Grand total [A+B] 3,364,036 1,336,368 3,281,899 5,962,971 2,345,882 16,291,156 December 2007 Due from other banks 14,099 55, ,522 1,561,025-1,925,741 Customers deposits 1,443, , ,361 1,805, ,532,682 Customers acceptances 129, ,115 Other liabilities 44,078 43,948 30, ,775 Shareholders equity - 66, ,232 24,045 1,190,706 1,722,738 A :Total on balance sheet items 1,630, ,932 1,543,864 3,390,753 1,191,178 8,429,051 Forward sale 38,986 61, , ,128 Guarantees 380-1, ,520 Unavailed limits 1,026,498 75, , ,277,512 B: Total off balance sheet items 1,065, , , ,691,160 Grand total [A+B] 2,696, ,396 2,032,696 3,390,753 1,191,178 10,120,211 Annual Report

41 32. Interest rate risk The Bank is exposed to various risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The table below sets out the Bank s assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. At December 31, 2008 Financial assets Less than 3 months From 3 months to 1 year Over 1 year Non-interest bearing Total Cash and balances with the UAE Central bank , ,740 Due from other banks 1,954,352 78,071-77,095 2,109,518 Loans and advances 7,662, ,628 1,447, ,939 9,848,246 Investment securities 309,677 76, , ,739 Customers acceptances , ,710 Total 9,926, ,310 1,447,136 1,190,935 13,325,953 Financial liabilities Due to other banks 2,317,935 90,480-2,022 2,410,437 Customers deposits 1,715, , ,064 3,766,468 6,822,168 Customers acceptances , ,710 Total 4,033, , ,064 4,182,200 9,646,315 On balance sheet interest rate sensitivity gap 5,892,973 (70,142) 848,072 (2,991,265) 3,679,638 At December 31, 2007 Total financial assets 6,296, , , ,847 8,266,751 Total financial liabilities 3,355, ,354 55,506 2,526,835 6,587,538 On balance sheet interest rate sensitivity gap 2,940,960 (57,666) 585,907 (1,789,988) 1,679,213 39

42 32. Interest rate risk (continued) Rate sensitivity analysis At the balance sheet date if interest rates had been 50 bps higher/lower and all the other variables were held constant, the Bank s: Net interest income would have increased/decreased by AED 29 million (2007: AED 13.4 million). Other equity reserves would have decreased/increased by AED 21.5 million (2007: AED 11.9 million). Method and assumptions for sensitivity analysis Interest rate may fluctuate by a reasonable +/- 50 bps. A 50 bps change is used to give a realistic assessment vis-à-vis prevailing interest rates on the balance sheet date. Interest rate change takes place uniformly across all time buckets upto 1 year for net interest income impact. Interest rate change takes place at the mid point of each time bucket. Other parameters remain unchanged. Impact on net interest income upto next 1 year is worked out. For impact on equity, weighted modified duration of Rate Sensitive Assets ( RSA ) and Rate Sensitive Liabilities ( RSL ) for all buckets has been worked out and its net impact calculated. RSA and RSL have been captured based on earlier of the re-pricing or maturity. 33. Currency risk Concentration of assets and liabilities by currency: At December 31, 2008 Financial assets Cash and balances with the UAE Central bank AED 365,746 USD 33,994 Others - Total 399,740 Due from other banks 1,758,130 77, ,616 2,109,518 Loans and advances 9,846,138-2,108 9,848,246 Investment securities 290, , , ,739 Customers acceptances 413, ,710 Total financial assets 12,674, , ,028 13,325,953 Financial liabilities Due to other banks 83,963 2,138, ,453 2,410,437 Customers deposits 6,564,707 21, ,751 6,822,168 Customers acceptances 413, ,710 Total financial liabilities 7,062,380 2,159, ,204 9,646,315 Net balance sheet position 5,611,687 (1,907,873) (24,176) 3,679,638 Off balance sheet position 10,544, , ,679 12,041,641 At December 31, 2007 Total financial assets 7,855, , ,102 8,266,751 Total financial liabilities 4,514,023 1,917, ,790 6,587,538 Net balance sheet position 3,341,545 (1,810,644) 148,312 1,679,213 Off balance sheet position 6,056, , ,866 6,733,724 40

43 33. Currency risk (continued) Rate sensitivity analysis Year 2008 Pegged Currencies US Dollar Foreign currency assets 253,957 Foreign currency liabilities 2,167,740 Net forward purchase/ (sale) 525,239 Net long/ (short) position (1,388,544) Impact on statement of income and equity 27,771 Saudi Riyal 24,627 99,032 97,973 23,568 (471) Bahrain Dinar ( 10) Omani Riyal (5) Qatar Riyal (2) Other Currencies Kuwait Dinar 100, ,234 (10,023) Great British Pound 12,468 25,278 10,590 (2,220) 222 Euro 258, ,880 44,602 1,954 (195) Swiss Frank (11) Japanese Yen 2,830 2, ( 59) Indian Rupee (2) Lankan Rupee (1) Jordanian Dinar (13) Canadian Dollar (30) 653,835 2,595, ,404 (1,262,979) Total impact if foreign currency fluctuates against AED +/-17,171 Year 2007 Pegged Currencies US Dollar 108,221 1,919, ,280 (1,673,631) 33,472 Saudi Riyal 52, ,331 (1,047) Bahrain Dinar 8, ,151 (163) Omani Riyal 15, ,124 (302) Qatar Riyal (7) Other Currencies Kuwait Dinar 194, ,542 (19,454) Great British Pound 1,675 1, (2) Euro 23, , , (4) Swiss Frank (1) Japanese Yen 8,125 8, ( 2) Indian Rupee (1) Lankan Rupee (1) Canadian Dollar (3) 412,586 2,075, ,941 (1,403,003) Total impact if foreign currency fluctuates against AED +/-12,485 Currencies are divided into two categories i) those pegged with USD and ii) all other currencies as on the balance sheet date. Exchange rate fluctuation of 2% in AED against the respective pegged foreign currencies and exchange rate fluctuation of 10% in AED against the respective other foreign currencies have been used to give a realistic assessment as a plausible event. Based on these changes the impact on profit or loss and equity has been worked out. 41 Annual Report 2008

44 34. Equity price risk Sensitivity analysis At the balance sheet date if the equity prices are 10% higher/lower as per the assumptions mentioned below and all the other variables were held constant, the Bank s: Statement of income/equity would have increased/decreased by AED million (2007 : AED 32.4 million). Method and assumptions for sensitivity analysis The sensitivity analysis has been done based on the exposure to equity price risk as at the balance sheet date. As at the balance sheet date if equity prices are 10% higher/lower on the market value uniformly for all equities while all other variables are held constant, the impact on profit or loss and equity has been shown above. A 10% change in equity prices has been used to give a realistic assessment as a plausible event. 35. Capital management Bank s capital management policy is to maintain a strong capital base to support the development and growth of business. Current and future capital requirements are determined on the basis of loan growth expectations for each business unit, expected growth in off-balance sheet facilities, future sources and uses of funds and Bank s future dividend policy. The Bank also ensures compliance with externally imposed capital requirement norms, strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders value. During the year the Bank had complied in full with all external imposed capital requirements. The UAE Central Bank requires the banks in UAE to maintain a ratio of total regulatory capital to the risk weighted assets at or above the agreed minimum of 10%. Capital structure The table below details the regulatory capital resources of the Bank: December 31, Tier 1 Capital Share capital 1,320, ,000 Statutory reserve 1,019, ,266 General reserve 6,440 6,440 Retained earnings 461, ,987 Total Tier 1 2,807,358 1,698,693 Tier 2 Capital Fair value reserve on investment securities available-for-sale (25,210) 10,821 General reserves on unclassified loans and advances to customers 83,070 55,510 Total Tier 2 57,860 66,331 Total Regulatory Capital 2,865,218 1,765,024 Capital adequacy ratios Risk weighted assets : Credit risk-weighted assets 14,192,585 6,982,614 Market risk-weighted assets 620, ,275 Operations risk-weighted assets 706, ,971 Total risk-weighted assets 15,520,024 8,444,860 Annual Report

45 35. Capital management (continued) Capital adequacy ratios (continued) December 31, Capital requirements : Credit risk Claims on banks 471,745 42,930 Investment securities 216,541 39,317 Claims on corporates 7,774,695 3,799,106 Retail exposure 1,021, ,015 Past due loans 452, ,817 Other assets 214, ,127 Off balance sheet exposure 4,040,756 2,179,302 14,192,585 6,982,614 Market risk Foreign exchange risk 104, ,638 Interest rate risk 179,300 - Equity position risk 336, , , ,275 Operations risk 706, ,971 Total capital requirements 15,520,024 8,444,860 December 31, % % Capital adequacy ratio (percent) Tier 1 ratio (Tier 1 capital/total risk weighted assets) Tier 2 ratio (Tier 2 capital/tier 1 capital) Total capital adequacy ratio (total regulatory capital/total risk weighted assets) Minimum capital adequacy ratio required by the UAE Central Bank 10 % 10 % 36. Approval of consolidated financial statements The consolidated financial statements were approved by the Board of Directors and authorised for issue on February 17, Comparative amounts Certain amounts for the prior year were reclassified to conform to current year presentation. 43